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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 20-F

|  |                                                                                                                                     
|- | ------------------------------------------------------------------------------------------------------------------------------------
|T | ANNUAL REPORT PURSUANT TO
  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the
  fiscal year ended December 31, 2006

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, 6145
|                                                             |  | 
|(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: 27,764,287 common shares
as of December 31, 2006

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


Yes £ No T


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 £ No T


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 T No £


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.


|                           |                    |                       
|-------------------------- | ------------------ | ----------------------
|£Large Accelerated
  Filer | £Accelerated Filer | TNon-Accelerated Filer

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


Item 17 T Item
18 £


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 £ No T


- 1 -

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TABLE OF CONTENTS

|         |          |                                                                               |     
|-------- | -------- | ----------------------------------------------------------------------------- | ----
|         |          |                                                                               | Page
|         |          | Glossary of Terms                                                             | 3   
|Part I   |          |                                                                               |     
|         | Item 1   | Identity of Directors, Senior Management
  and Advisers                       | 6   
|         | Item 2   | Offer Statistics and Expected Timetable                                       | 6   
|         | Item 3   | Key Information                                                               | 6   
|         | Item 4   | Information on the Company                                                    | 15  
|         | Item 4A  | Unresolved Staff Comments                                                     | 31  
|         | Item 5   | Operating and Financial Review and
  Prospects                                | 31  
|         | Item 6   | Directors, Senior Management and Employees                                    | 40  
|         | Item 7   | Major Shareholders and Related Party
  Transactions                           | 49  
|         | Item 8   | Financial Information                                                         | 50  
|         | Item 9   | The Offer and Listing                                                         | 51  
|         | Item 10  | Additional Information                                                        | 52  
|         | Item 11  | Quantitative and Qualitative Disclosures
  About Market Risk                  | 64  
|         | Item 12  | Description of Securities other than
  Equity Securities                      | 66  
|Part II  |          |                                                                               |     
|         | Item 13  | Defaults, Dividend Arrearages and
  Delinquencies                             | 66  
|         | Item 14  | Material Modification to the Rights of
  Security Holders and Use of Proceeds | 66  
|         | Item 15  | Controls and Procedures                                                       | 66  
|         | Item 16  | Reserved                                                                      | 67  
|         | Item 16A | Audit Committee Financial Expert                                              | 67  
|         | Item 16B | Code of Ethics                                                                | 68  
|         | Item 16C | Principal Accountant Fees and Services                                        | 68  
|         | Item 16D | Exemptions from the Listing Standards for
  Audit Committee                   | 68  
|         | Item 16E | Purchases of Equity Securities by the
  Issuer and Affiliated Purchasers      | 68  
|Part III |          |                                                                               |     
|         | Item 17  | Financial Statements                                                          | 69  
|         | Item 18  | Financial Statements                                                          | 69  
|         | Item 19  | Exhibits                                                                      | 69  
|         |          |                                                                               |     
|         |          | Signatures                                                                    | 71  
|         |          | Financial Statements                                                          | 73  
|         |          | Index to Exhibits                                                             | 107 

- 2 -

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GLOSSARY OF TERMS

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

Austral Pacific or
Companyrefers 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 subsidiaries.

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

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

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

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

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

Depletionis the reduction in petroleum
reserves due to production.

Developmentrefers 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.

Discoveryis 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 Wellis a well drilled in a prospect
without knowledge of the underlying sedimentary rock or the contents of the
underlying rock.

Farm-InorFarm-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.

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

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

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

GAAPrefers to generally accepted
accounting principles.

Geologyis 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.

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

Joint Ventureor JV refers to a standard form of participation in petroleum
exploration, via unincorporated joint arrangements between a number of industry
participants, with one party operating the permit (i.e. managing the
operations) on behalf of all the participants, and Joint Venturers has a
corresponding meaning.

NZSXrefers 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.

- 3 -

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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 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;

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

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

Permitor Licence is 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.

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

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

PRLis 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.

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

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

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

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

Royaltyis 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 owner of the royalty.

Seismic Surveyrefers to a geophysical technique
using low frequency sound waves to determine the 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-Vis 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.

- 4 -

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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    | Cubic feet   | 35.494     
|Bbls            | Cubic metres | 0.159      
|Cubic metres    | Bbls oil     | 6.290      
|Feet            | Metres       | 0.305      
|Metres          | Feet         | 3.281      
|Miles           | Kilometres   | 1.609      
|Kilometres      | Miles        | 0.621      
|Acres           | Hectares     | 0.405      
|Hectares        | Acres        | 2.471      

PRESENTATION OF INFORMATION

Austral Pacific Energy Ltd. conducts
its operations directly and through subsidiaries. The term Austral Pacific or
Company as used herein refers, unless the context otherwise requires, to
Austral Pacific Energy Ltd. and its consolidated subsidiaries. Unless otherwise specified, all dollar amounts
described herein are in United States currency. All references to daily
production are before royalty, 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.

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.

- 5 -

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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,
2006, 2005, 2004, 2003 and 2002 is derived from the audited consolidated
financial statements of Austral Pacific. The audited consolidated financial
statements of Austral Pacific for the years ended December 31, 2006 and 2005
are included in this Filing.  The
selected historical financial data for the years ended December 31, 2004, 2003
and 2002 is also presented in the table below. Such financial information:

|  |                                                                                                                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | is derived from audited financial statements of Austral
  Pacific that are not included in this Filing;                                                                                                             
|  |                                                                                                                                                                                                                     
| | should be read in conjunction with Austral Pacifics
  consolidated financial statements and the notes thereto (Item 17) and the
  Operating and Financial Review and Prospects (Item 5) elsewhere in this
  Filing;
|  |                                                                                                                                                                                                                     
| | have been restated for the retroactive application of
  successful efforts accounting policy (Item 17  Note 4 of the 2006
  Consolidated Financial Statements).                                                    

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 Filing are also
prepared under Canadian GAAP. Included within these consolidated financial
statements in Note 27 is information about the significant differences between
Canadian and US GAAP.

- 6 -

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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 Statement of Operations DataAmounts in
accordance with Canadian GAAP


|                                                                     |  |  |  | Year Ended December 31
2006 |         | Year Ended December 31 2005
(restated)(1) |  | Year Ended December 31 2004
(restated)(1) |        | Year Ended December 31 2003
(restated)(1) |  | Year Ended December 31 2002
(restated)(1)
|-------------------------------------------------------------------- |  |  |  | --------------------------- | ------- | ----------------------------------------- |  | ----------------------------------------- | ------ | ----------------------------------------- |  | -----------------------------------------
|Oil and gas
sales                                                    |  |  |  |                             | 912     |                                           |  |                                           | 1,779  |                                           |  |                                          
|Gain on
license sales                                                |  |  |  |                             |        |                                           |  |                                           |       |                                           |  |                                          
|Royalties                                                            |  |  |  |                             | (41     | )                                         |  |                                           | (75    | )                                         |  |                                          
|Production
costs                                                     |  |  |  |                             | (485    | )                                         |  |                                           | (848   | )                                         |  |                                          
|Accretion
expense                                                    |  |  |  |                             | (46     | )                                         |  |                                           | (18    | )                                         |  |                                          
|General and
administrative expense andoperating lease/rental expense |  |  |  |                             | (4,130  | )                                         |  |                                           | (3,635 | )                                         |  |                                          
|FX
(loss)/gain                                                       |  |  |  |                             | (1,974  | )                                         |  |                                           | (791   | )                                         |  |                                          
|Amortisation                                                         |  |  |  |                             | (107    | )                                         |  |                                           | (51    | )                                         |  |                                          
|Depletion                                                            |  |  |  |                             | (347    | )                                         |  |                                           | (62    | )                                         |  |                                          
|Derivative
Loss                                                      |  |  |  |                             | (456    | )                                         |  |                                           |       |                                           |  |                                          
|Debt Financing
expense                                               |  |  |  |                             | (12     | )                                         |  |                                           |       |                                           |  |                                          
|Interest
expense                                                     |  |  |  |                             | (30     | )                                         |  |                                           |       |                                           |  |                                          
|Litigation
costs and settlement                                      |  |  |  |                             |        |                                           |  |                                           |       |                                           |  |                                          
|Impairment of
oil and gas properties                                 |  |  |  |                             | (8,172  | )                                         |  |                                           | (3,704 | )                                         |  |                                          
|Net loss for
the year before other income                            |  |  |  |                             | (14,888 | )                                         |  |                                           | (7,405 | )                                         |  |                                          
|Other
Income                                                         |  |  |  |                             | 437     |                                           |  |                                           | 544    |                                           |  |                                          
|Joint Venture
recoveries                                             |  |  |  |                             | 1,044   |                                           |  |                                           | 1,093  |                                           |  |                                          
|Loss before
income taxes                                             |  |  |  |                             | (13,407 | )                                         |  |                                           | (5,768 | )                                         |  |                                          
|Income
taxes                                                         |  |  |  |                             |        |                                           |  |                                           |       |                                           |  |                                          
|Loss for the year                                                    |  |  |  |                             | (13,407 | )                                         |  |                                           | (5,768 | )                                         |  |                                          
|Loss per share basic and diluted                                     |  |  |  |                             | (0.57   | )                                         |  |                                           | (0.30  | )                                         |  |                                          
|Dividends declared per share                                         |  |  |  |                             |        |                                           |  |                                           |       |                                           |  |                                          

|(1) |  | As restated - refer to note 4 of the Consolidated Financial
Statements (item 17)
|--- |  | --------------------------------------------------------------------------------



Amounts in accordance with US GAAP


|General and
administrative expense        |  |  |  |  | (4,982  | ) |  |  | (3,318 | ) |  |  | (788   | ) |  |  | (852   | ) |  |  | (600   | )
|----------------------------------------- |  |  |  |  | ------- | - |  |  | ------ | - |  |  | ------ | - |  |  | ------ | - |  |  | ------ | -
|Interest
expense                          |  |  |  |  | (30     | ) |  |  | 0      |   |  |  | (29    | ) |  |  | (53    | ) |  |  |       |  
|Beneficial
conversion expense             |  |  |  |  |        |   |  |  |       |   |  |  | (226   | ) |  |  |       |   |  |  |       |  
|Common stock
and warrant issuance expense |  |  |  |  |        |   |  |  |       |   |  |  |       |   |  |  |       |   |  |  | (779   | )
|Compensation
expense - Series A warrants  |  |  |  |  |        |   |  |  |       |   |  |  |       |   |  |  | (260   | ) |  |  |       |  
|NZ tradable
warrants realised gain/(loss) |  |  |  |  |        |   |  |  | 99     |   |  |  | (3,476 | ) |  |  |       |   |  |  |       |  
|Net loss for
the year before other income |  |  |  |  | (13,611 | ) |  |  | (6,147 | ) |  |  | (8,670 | ) |  |  | (2,135 | ) |  |  | (3,862 | )
|Loss for the year                         |  |  |  |  | (13,174 | ) |  |  | (5,603 | ) |  |  | (8,344 | ) |  |  | (2,124 | ) |  |  | (3,833 | )
|Loss per share
basic and diluted          |  |  |  |  | (0.56   | ) |  |  | (0.29  | ) |  |  | (0.61  | ) |  |  | (0.27  | ) |  |  | (0.56  | )

- 7 -

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Selected Balance Sheet DataAmounts in accordance with
Canadian GAAP


|                                       |  |  |  | As at December 31 2006 |         | As at December 31 2005 (restated)(1) |  | As at December 31 2004 (restated)(1) |         | As at December 31 2003 (restated)(1) |  | As at December 31 2002 (restated)(1)
|-------------------------------------- |  |  |  | ---------------------- | ------- | ------------------------------------ |  | ------------------------------------ | ------- | ------------------------------------ |  | ------------------------------------
|Working capital (2)                    |  |  |  |                        | (1,480  | )                                    |  |                                      | 14,837  |                                      |  |                                     
|Current
Assets                         |  |  |  |                        | 9,749   |                                      |  |                                      | 16,779  |                                      |  |                                     
|Due from
Related Parties               |  |  |  |                        |        |                                      |  |                                      |        |                                      |  |                                     
|Restricted
cash                        |  |  |  |                        | 3,000   |                                      |  |                                      |        |                                      |  |                                     
|Investments                            |  |  |  |                        | 137     |                                      |  |                                      | 84      |                                      |  |                                     
|Held for sale
asset                    |  |  |  |                        | 235     |                                      |  |                                      |        |                                      |  |                                     
|Oil and gas
properties                 |  |  |  |                        | 20,160  |                                      |  |                                      | 2,973   |                                      |  |                                     
|Property &
Equipment                   |  |  |  |                        | 694     |                                      |  |                                      | 540     |                                      |  |                                     
|Deferred
offering costs                |  |  |  |                        |        |                                      |  |                                      |        |                                      |  |                                     
|Goodwill                               |  |  |  |                        | 2,019   |                                      |  |                                      |         |                                      |  |                                     
|Total assets                           |  |  |  |                        | 35,994  |                                      |  |                                      | 20,376  |                                      |  |                                     
|                                       |  |  |  |                        |         |                                      |  |                                      |         |                                      |  |                                     
|Current liabilities                    |  |  |  |                        | 11,230  |                                      |  |                                      | 1,942   |                                      |  |                                     
|                                       |  |  |  |                        |         |                                      |  |                                      |         |                                      |  |                                     
|Long-term
liabilities                  |  |  |  |                        | 12,668  |                                      |  |                                      | 1,593   |                                      |  |                                     
|Share
Capital                          |  |  |  |                        | 50,046  |                                      |  |                                      | 43,499  |                                      |  |                                     
|Contributed
surplus                    |  |  |  |                        | 1,545   |                                      |  |                                      | 1,024   |                                      |  |                                     
|Share purchase
warrants reserve        |  |  |  |                        | 1,541   |                                      |  |                                      | 0       |                                      |  |                                     
|Accumulated
other comprehensive income |  |  |  |                        | 53      |                                      |  |                                      | 0       |                                      |  |                                     
|Accumulated deficit                    |  |  |  |                        | (41,089 | )                                    |  |                                      | (27,682 | )                                    |  |                                     
|Shareholders equity                   |  |  |  |                        | 12,096  |                                      |  |                                      | 16,841  |                                      |  |                                     

|(1) |  | As restated - refer to note 4 of the consolidated financial
statements
|--- |  | ----------------------------------------------------------------------

|(2) |  | Current Assets less current liabilities
|--- |  | ---------------------------------------



Amounts in accordance with US GAAP


|                                       |  |  |  |  |         |   |  |  |         |   |  |  |         |   |  |  |         |   |  |  |         |  
|-------------------------------------- |  |  |  |  | ------- | - |  |  | ------- | - |  |  | ------- | - |  |  | ------- | - |  |  | ------- | -
|Current Assets                         |  |  |  |  | 9,749   |   |  |  | 16,779  |   |  |  | 12,234  |   |  |  | 3,381   |   |  |  | 2,158   |  
|                                       |  |  |  |  |         |   |  |  |         |   |  |  |         |   |  |  |         |   |  |  |         |  
|Total assets                           |  |  |  |  | 35,994  |   |  |  | 20,376  |   |  |  | 13,014  |   |  |  | 6,166   |   |  |  | 5,609   |  
|                                       |  |  |  |  |         |   |  |  |         |   |  |  |         |   |  |  |         |   |  |  |         |  
|Current liabilities                    |  |  |  |  | 11,230  |   |  |  | 1,989   |   |  |  | 449     |   |  |  | 1,504   |   |  |  | 384     |  
|                                       |  |  |  |  |         |   |  |  |         |   |  |  |         |   |  |  |         |   |  |  |         |  
|Long-term liabilities                  |  |  |  |  | 12,668  |   |  |  | 1,593   |   |  |  | 2,442   |   |  |  | 1,105   |   |  |  | 0       |  
|                                      
|Paid in
capital                        |  |  |  |  | 59,365  |   |  |  | 50,942  |   |  |  | 38,669  |   |  |  | 23,758  |   |  |  | 23,301  |  
|Accumulated
other comprehensive income |  |  |  |  | 53      |   |  |  | 0       |   |  |  | 0       |   |  |  | 0       |   |  |  | 0       |  
|Accumulated deficit                    |  |  |  |  | (47,322 | ) |  |  | (34,148 | ) |  |  | (28,546 | ) |  |  | (20,201 | ) |  |  | (18,076 | )
|Shareholders equity                   |  |  |  |  | 12,096  |   |  |  | 16,794  |   |  |  | 10,123  |   |  |  | 3,557   |   |  |  | 5,225   |  

|B. |  | Capitalization and indebtedness
|-- |  | -------------------------------



Not applicable


|C. |  | Reasons for the offer and use of proceeds
|-- |  | -----------------------------------------



Not applicable


- 8 -

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|   |             
|-- | ------------
|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 reserve 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 exploited. A future increase in the Companys reserves
will depend not only on the Companys ability to develop its present
properties, but also on its ability to select and acquire suitable producing
properties or prospects. 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.

Noassurance can be
given 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 the Cheal Field

The Company is currently undertaking
the development of the Cheal Field, as more particularly described below under
Item 4 of this Report.  This planned
development is subject to risks and uncertainties involved in the development
of oil and gas production facilities.
The occurrence of these risks may adversely impact on the commercial
viability of the project as the revenues from the project may be less than
anticipated and the capital and operating costs may be greater than
anticipated.  The risks to revenue
includethe development wells not producing predicted rates
of oil and gas production, decreases in the market prices of oil and gas, and
increased storage and transportation costs.

Accordingly,
investors are cautioned that the development of the Cheal Field may not
generate the returns forecasted by the Company.

Operating Hazards and Environmental Liabilities

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 declines
of reservoirs, blow-outs, cratering, sour gas releases, fires and spills, premature decline of reservoirs, the
invasion of water into producing formations,insufficient
storage or transportation capacity or other geological and mechanical
conditions.  While close well
supervision and effective maintenance operations can contribute to maximizing
production rates and recoveries over time, production delays and 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.

Although
the Company is pro-active in its approach to environmental concerns, and
procedures are in place to ensure care is taken in the day-to-day management of
the Companys oil and gas properties, all phases of the

- 9 -

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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.  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.

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.

Oil and Natural Gas Markets

The
operations and earnings of the Company and its subsidiaries are also 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, which could result in a reduction in the volumes
produced by the Company. Any material decline in prices could result in a
reduction of the Companys net production revenue.  Managementmight also elect not to produce from certain wells at
lower prices.  All of these factors
could result in a material decrease in the Companys net production revenue
causing a reduction in its oil and gas acquisition and development activities.

Managementhas 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.

Competition

The
oil and gas industry is highly competitive.
The Companys competitors for the acquisition, exploration, production
and development of oil and natural gas properties, and for capital to finance
such activities, include companies that have greater financial and personnel
resources available to them than the Company.

The
Company actively competes for prospect acquisitions, exploration permits and
licences, and skilled industry personnel with a substantial number of other oil
and gas companies, many of which have significantly greater financial 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.

Funding Requirements

Oil exploration involves a high
degree of technical and commercial risk and is characterized by a continuous
need for fresh capital.  Managementseeks to
minimise and spread this risk by joint-venturing oil exploration projects with other
companies and participating in properties exhibiting a range of risk profiles
to reduce its

- 10 -

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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 joint
venturing of projects, 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.  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 share issues or farm-out
agreements or to renegotiate 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.

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 managementmay elect, in certain circumstances,
not to obtain insurance to deal with specific risks due to the high premiums
associated with such insurance or 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.

Uncertainty of Reserves Figures

Estimates of production
expenditures, revenues and reserves will likely vary from actual, and these
variances may be material.  Estimates of
oil and gas reserves are interpreted from geological, petrophysical and reservoir
engineering data.  Such interpretations
are inherently uncertain, as are the projections of future rates of production
and timing of development expenditures.
The accuracy of the reserves estimates is a function of the quality of
available data, engineering and geological interpretation and judgment.  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.

No Assurance of Earnings

The Company currently has one oil
and gas property nearing the production stage.
The Company has an accumulated deficit from its historical operating
results and there is no assurance that the business of the Company will be
profitable in the future. Managementcannot 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
explorationists, there is likely to be some difficulty in finding immediate
replacements of suitable calibre.

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Risks Relating to Papua New Guinea

Some of the Companys oil and gas
interests are located in Papua New Guinea, which may
be considered to bea developing countryand hence has a higher risk
than New Zealand of becoming politically and/or economically unstable or which
could become politically and economically unstable in the future. Such
instability is outside the Companys control.Exploration and development activities inpolitically
or economically unstable countriesmay 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, governmental regulation and the risk of actions by lawless
factions, any of which could adversely affect the economics of exploration or
development projects.

Any changes in regulations or shifts
in political condition are beyond the control of the Company and may adversely
affect its business. Infrastructure development in Papua New Guinea is
limited.  In addition, the Companys
properties are located in remote areas, which may prove difficult 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.

Currency Fluctuations and Foreign Exchange

The practice of the Company 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. Papua
New Guinea, in which the Company operates, may impose foreign exchange
restrictions that may materially affect the Companys financial position and
results of operations in that country.

The Company has established a policy
to hedge its exposure to foreign currency exchange rate risk. See also Item
5.A.3  Foreign Currency Fluctuations.

Regulatory Requirements

The current and future operations of
the Company, including development activities and commencement of production on
its properties, require permits 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, restrictions on the withdrawal of capital from a
country in which the Company is operating, taxes, labour standards,
occupational health, waste disposal, toxic substances, land use, environmental
protection and other matters.

The Companys operations require
licences, permits and renewals of these from various governmental
authorities.  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, except as referred in under
Title
Matters.  The Company also
believes that it 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.

Failure to comply with all
applicable laws, regulations and licence 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.
Parties engaged in oil and gas operations may be required to compensate
those suffering loss or damage by reason of such activities and may have civil
or criminal fines or penalties imposed for violations of applicable laws or
regulations.  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 or reduction in levels of production at
producing properties or require abandonment or delays in development of new
properties.

Management
believes that the Companys operations comply with all applicable legislation
and regulations and

- 12 -

---



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.

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.

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, except PRL 4, over which the Department of
Petroleum and Energy in Papua New Guinea has issued a Notice to Show Cause
which potentially could result in the cancellation of that licence. However,
the Company believes that all work required to maintain the licence has been
done and an application for extension has been lodged.  However, no assurance can be given that this
application will be granted and the Companys entitlement to PRL 4 extended.
Further, no assurance can be given that applicable governments will not revoke,
or significantly alter the conditions of, any other 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 and other similar agreements
which can give rise to interpretive disputes 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 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.

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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 approvals in certain events). The Companys Board of
Directors may issue some of such shares to acquire further capital in order to
carry out its intended operations or expand its current operations, or to
provide additional financing in the future. 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 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 0.37% of issued share capital) to whom it has transferred an
interest in a Papua New Guinea exploration licence under a farm-out
arrangement. The Chief Executive Officer of Rift Oil plc is the spouse of the
Companys former Chief Executive Officer, Dave Bennett, who is now a director
of TAG and of Rift.

The Companys chairman, Mr. 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
both companies. 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.

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.

Classification as a Passive Foreign Investment Company

Management
believes the
Company is a Passive Foreign Investment Company (PFIC), as that term is
defined in Section 1297 of the Internal Revenue Code of 1986, as amended, and
believes it will be a PFIC for, at least, the following fiscal year.
Consequently, this classification may result in adverse tax consequences for
U.S. holders of the Companys shares. For an explanation of these effects on
taxation, see Item 10.E - Taxation. U.S. shareholders and prospective holders
of the Companys shares are also encouraged to consult their own tax advisers.

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|        |                             
|------- | ----------------------------
|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. It changed its name from Indo-Pacific
Energy Ltd on December 31, 2003. The Company was incorporated on July 31, 1979
under the name Pryme Energy Resources Ltd. under the Company Act (British
Columbia, Canada), and has operated continuously since that time.

The Company has been legally
domiciled in British Columbia, Canada, since October 2006 and operates as a corporation
under the Business Corporations Act (British Columbia)
which replaced the Company Act (British Columbia) in 2004. The Company had been 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) from that
time. In early 2006, the Board of Directors of the Company resolved to propose
the return of the Companys incorporation to British Columbia to the annual
meeting of shareholders in May 2006.At that meeting,
on May 2, 2006, theproposal to return the Companys incorporation to British Columbia,
which included the adoption of new Articles and the authorization of a class of
preferred shares, was approved. In September 2006, the Board of Directors resolved
to implement the proposal and on October 16, 2006 the
Company was continued out of the jurisdiction of the Yukon Territory and into
British Columbia.

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) 495 0888

The Company has no agent in the
United States.

Important Events

During
fiscal 2006 and up to May 31, 2007, the Companys business has changed by the
occurrence of the following important events:

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
related parties.

Mr.
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.
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, has been
appointed with effect from June 11, 2007.

In
December 2006, the Company secured a $23 million loan facility for a term of 4
years at commercial lending rates. The loan is arranged and underwritten by
Investec Bank (Australia) Limited. The principal purposes of the loan facility
were to fund the acquisition of Arrowhead Energy Limited (described below) and
to meet ongoing costs associated with the development of the Cheal field. Under
the loan agreement, 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, 2007, none of the 2.5 million warrants
had been exercised.

In
October 2006, the Company signed an agreement to acquire all of the shares of
Arrowhead Energy Limited,

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a
privately held New Zealand-incorporated company with interests in the permits
over the Cheal and Kahili fields, in which the Company also holds interests.
This transaction was settled on December 22, 2006. The net consideration for
the transaction was $12 million (refer to Exhibit 4.6 and Item 17  Note  5 in the 2006 Financial Statements).

On
October 18, 2006, the Company raised $6.5 million by the issue of 5,007,000
shares at $1.30 each in a share placement. The placement closed, and the shares
were issued, on November 20, 2006. The principal purpose of the placement was
to fund the initial payment for the acquisition of Arrowhead Energy Limited,
but also raised additional funds to be used for development of the Cheal field.
A significant proportion of this financing was placed with related parties.

In
February 2006, the Company finalised an agreement to acquire interests in nine
onshore New Zealand permits. The Company already held an interest in seven of
the permit areas. The cash outlay was approximately $0.85 million and was met
from existing cash resources on settlement in July 2006.

Principal Capital
Expenditures & Divestitures

During the last 3 fiscal years and
up to May 31, 2007, 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 2006 and early 2007:

|  |                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | Acquiring all the shares in Arrowhead Energy Limited, with
  its interests in PEP 38738-01, PMP 38156 (Cheal) and PMP 38153 (Kahili), in
  December 2006;
|  |                                                                                                                                                          
| | Commencement of construction of production facilities and
  development drilling in relation to the Cheal field (PMP 38156; $5,227,506);                 
|  |                                                                                                                                                          
| | 3D seismic survey over the Cheal and Cardiff fields and
  surrounding areas (PEP 38738-01, PEP 38738-02, PMP 38156);                                     
|  |                                                                                                                                                          
| | Drilling of Douglas-1 well (PPL 235) and further seismic
  survey in that licence area (total of $2,939,096 spent in PNG, primarily on
  PPL 235);       
|  |                                                                                                                                                          
| | Drilling of Heaphy (PEP 38746; $811,298), Supplejack (PEP
  38741; $391,953), Supplejack South (PEP 38765; $279,136) and Ratanui (PEP
  38741) wells;    
|  |                                                                                                                                                          
| | Acquiring interests in the nine onshore permits of Tap New
  Zealand Pty Ltd.                                                                            

During 2007, material expenditures
will primarily be related to:

|  |                                                                                                                                 
|- | --------------------------------------------------------------------------------------------------------------------------------
| | completion of the Cheal production facilities;                                                                                  
|  |                                                                                                                                 
| | drilling of a Kahili-2 well (PMP 38153);                                                                                        
|  |                                                                                                                                 
| | appraisal of the K3E sands in the Cardiff (PMP 38156)
  field and (if warranted) planning for development;                      
|  |                                                                                                                                 
| | planning for commercialization of the Douglas (PPL 235)
  and Stanley (PRL 4) discoveries;                                      
|  |                                                                                                                                 
| | development of a programme for the exploration and
  exploitation of the Mt Messenger formation in the greater Cheal area; and
|  |                                                                                                                                 
| | preparing to drill the Waitoriki prospect (PEP 38741) in
  early 2008.                                                          

These, and the expenditures and divestitures
currently in progress, are further detailed in Item 4.D  Property, Plants and
Equipment.

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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, 2007.

B.
Business Overview

|   |                     
|-- | --------------------
|1. | Nature of Operations

Austral
Pacific Energy Ltd. and its subsidiaries are actively involved in the
exploration for, and development, production and acquisition of, natural gas
and petroleum interests in New Zealand and 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 merging with or acquiring suitable targets if the
opportunity arises.  Austral attempts to
maintain good relationships with industry, political and institutional bodies.  These relationships can assist Austral with
the process of obtaining new oil and gas business opportunities and generating
future growth for the Company.

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. The Company 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.

Austral
has acquired a range of exploration interests, however Australs exploration
strategy is to continue to focus on minimizing financial exposure of the
Company to this type of investment, through effective property portfolio
management techniques including industry farm outs and judicious acquisitions
and relinquishments.

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

The Company currently holds varying
net interests equivalent to approximately 0.58 million acres of exploration and
mining permits in New Zealand (gross 0.62 million acres) and 0.82 million acres
of exploration and retention licences in Papua New Guinea (gross 2.0 million
acres). Previously, the Company also had interests in Australia. The Companys
current properties and the Companys interests in the joint ventures related to
them are summarized as follows:

|            |                             |                     |                           |            |                         
|----------- | --------------------------- | ------------------- | ------------------------- | ---------- | ------------------------
|Country     | Name                        | Permit
  Number     | Ownership
  Interest ((%) | Area (km2) | Exploration/ Development
|            |                             |                     |                           |            |                         
|New Zealand | Kahili                      | PMP 38153           | 85.00                     | 5.99       | Development             
|            |                             |                     |                           |            |                         
|New Zealand | Cheal
  (Shallow)           | PMP 38156
  Shallow | 69.50                     | 30.3       | Development             
|            |                             |                     |                           |            |                         
|New Zealand | Cheal
  (Deep)              | PMP 38156
  Deep    | 25.10                     |            | Development             
|           
|New Zealand | Greater
  Cheal
  (Shallow) | PEP 38738-01        | 69.50                     | 46.51      | Exploration             
|            |                             |                     |                           |            |                         
|New Zealand | Greater
  Cheal
  (Deep)    | PEP 38738-02        | 25.10                     |            | Exploration             

- 17 -

---



|                 |                                  |           |        |        |            
|---------------- | -------------------------------- | --------- | ------ | ------ | -----------
|New Zealand      | Supplejack,
  Ratanui, Waitoriki | PEP 38741 | 55.00  | 12.7   | Exploration
|                 |                                  |           |        |        |            
|New Zealand      |                                  | PEP 38745 | 16.67  | 50.5   | Exploration
|                 |                                  |           |        |        |            
|New Zealand      | Heaphy                           | PEP 38746 | 83.33  | 79.3   | Exploration
|                 |                                  |           |        |        |            
|New Zealand      |                                  | PEP 38748 | 66.66  | 64.2   | Exploration
|                 |                                  |           |        |        |            
|New Zealand      | Supplejack
  South               | PEP 38765 | 61.67  | 12.7   | Exploration
|                 |                                  |           |        |        |            
|New Zealand      | DUrville
  Island               | PEP 38524 | 100.00 | 2187.0 | Exploration
|                 |                                  |           |        |        |            
|Papua New Guinea | Douglas                          | PPL 235   | 35.00  | 2910.0 | Exploration
|                 |                                  |           |        |        |            
|Papua New Guinea |                                  | PPL 261   | 50.00  | 4200.0 | Exploration
|                 |                                  |           |        |        |            
|Papua New Guinea | Stanley                          | PRL 4     | 28.92  | 340.0  | Retention  
|                 |                                  |           |        |        |            
|Papua New Guinea | Ketu,
  Elevala                  | PRL 5     | 10.712 | 770.0  | Retention  

Where its share of a property is
less than 100%, it is because the Company holds its interests through a joint
venture with one or more industry participants. The 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.

The Companys policy is to acquire
interests, and, where possible, to manage its risk exposure by farming-out to,
or joint venturing property interests with, other industry participants.

The Company sells oil and gas from
producing or pre-producing properties in which it holds an interest.

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.

In
2005 the Company recognised proved reserves in respect to the Cheal oil field
discovery. That
independent reserves evaluators report also summarized the resource potential
of the Cardiff structure, but as hydrocarbons had not at that time, nor as at
December 31, 2006, been flow-tested from Cardiff-2A in a controlled and
sustained manner, no reserves have been assigned to Cardiff. During 2005 and
2006, the Company soldall oil from its production
testing of Cheal and Cardiff fields at world parity prices (less costs, fees
and royalties).

The
Cheal joint venture has suspended production at various times during 2005 and
2006 in order to re-develop the field and optimise field production. Gas was flared to atmosphere(in
compliance with consent conditions)but has now been linked to electricity generation
equipment which is used to generate electricity on-site at Cheal. Any power
surplusto site requirements is sold into the national
electricity grid system.

Development
of the Cheal field commenced in August 2006. This construction programme is
proceeding as

- 18 -

---



planned,
with first permanent production now due to commence in Q3 2007.  Simultaneous production from testing
operations occurred from July to December 2006 and re-started after balance
date in February 2007, from new development wells drilled in December 2006.
(Refer to Item 5.D below).

The
Cardiff-2A well produced 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-2 was undertaken during 2006, but results were inconclusive.

Supplejack-1
drilled in 2005 was originally considered to have future economic potential.
That was dependent upon the drilling of further wells in the near
vicinity.  The Supplejack-1 well was
completed but not production tested, awaiting re-assessment of its future
following the drilling of the Ratanui well.The Company drilled Ratanui-1 in February 2007.
Although the target Mt Messenger and Upper Moki Formation sands were
intersected over several intervals in the well, wireline log interpretation and
associated seismic mapping did not indicate economic hydrocarbons. As a result,
Ratanui-1 was plugged and abandoned. Unless other joint venture parties are
interested in exploitingSupplejack-1, the well is
likely to be plugged and abandoned in the near future.

The Douglas-1 exploration well in
PPL 235 in Papua New Guinea (in which Austral Pacific holds a 35% interest and
was the operator) was drilled during Q2 2006. It was determined to be a gas
discovery and suspended while further studies 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 (refer to Item
4.D).

|   |                  
|-- | -----------------
|2. | Principal Markets

In 2005 and 2006, the Company sold
virtually all of its oil production to Swift Energy NZ Limited (a subsidiary of
Swift Energy Ltd). In 2004, the Company also sold some production to Energy
Infrastructure Limited acting through its agent Shell (Petroleum Mining)
Company Limited. Details of revenues, by geographic region and by category, are
included in Item 4.D  Property, Plants and Equipment.

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. The Company did not sell any gas in 2005 or 2006. All gas produced
was associated with production testing and was flared to atmosphere in
compliance with consent conditions or used for on-site electricity generation.

|   |                                  
|-- | ---------------------------------
|3. | Seasonality of Companys business

The Companys business is 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.

|   |              
|-- | -------------
|4. | Raw materials

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 in Item 4.B.2 & 3)
affects the Companys revenue, rather than its expenses.

|   |                   
|-- | ------------------
|5. | Marketing channels

As the Companys oil and gas are
sold under single contracts, different marketing channels are not currently

- 19 -

---



required.

|   |                                             
|-- | --------------------------------------------
|6. | Dependence on patents or licences, contracts

The Company is not dependent upon
any significant patents or licences, except that most of the plant at the
Companys new production station at the Cheal field (PMP 38156) was designed specifically for the
production station. 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. All
instrumentation is covered by patents.

Managementis negotiating to secure long-term oil and gas sales contracts for production
from the Cheal field. The proposed arrangements will be a whole field
contract, and as the Companys only production contracts, the Companys revenue
will substantially depend on such contracts. There can be no assurance that
production from other fields will develop.

|   |                               
|-- | ------------------------------
|7. | Companys competitive position

The
oil and gas industry is highly competitive.
The Companys competitors for the acquisition, exploration, production
and development of oil and natural gas properties, and for capital to finance
such activities, include companies that have greater financial and personnel
resources available to them than the Company.

The
Company actively competes for prospect acquisitions, exploration permits and
licences, and skilled industry personnel with a substantial number of other oil
and gas companies, many of which have significantly greater financial 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.

The
Company strives to be competitive by utilising current technologies to enhance exploitation,
development and operational activities.

|   |                                           
|-- | ------------------------------------------
|8. | Material effects of government regulations

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 hazardous substances,
environmental effects, health and safety, land access, permit conditions, and
those regulations which relate to all companies operating in the relevant
jurisdictions such as corporate governance, taxation, employment laws.  The effects of those regulations are
detailed in Item 3.D  Risk Factors, and in Item 4.D  Property, Plant and
Equipment. Such regulations do not in general have a material effect on the
Companys business, and do not affect the Companys business in a manner
different from the effects on other companies competing in the same industry.

C.
Organizational Structure

The Company (a Canadian company listed on the AMEX in the
U.S., TSX-V in Canada and NZSX in New Zealand) is the parent company of, and
conducts its operations through, several wholly owned subsidiaries, (and one
35%-owned company), as set out below. Substantially all of the Companys
exploration and development activities are conducted jointly with third parties
under joint venture agreements.

- 20 -

---



|                                                |  |                               |  |                                           |  |                               |  
|----------------------------------------------- |  | ----------------------------- |  | ----------------------------------------- |  | ----------------------------- | -
|Subsidiary Companies                            |  | Jurisdiction of Incorporation |  | Business of Subsidiary                    |  | % of 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                           |  | New Zealand                   |  | Non
  trading company                     |  | 100                           | %
|                                                |  |                               |  |                                           |  |                               |  
|Kanuka
  Energy Limited                         |  | New Zealand                   |  | Oil
  and gas exploration and production  |  | 100                           | %
|                                                |  |                               |  |                                           |  |                               |  
|Arrowhead
  Energy Limited (1)                  |  | New Zealand                   |  | Oil
  and gas exploration and production  |  | 100                           | %
|                                                |  |                               |  |                                           |  |                               |  
|Odyssey
  International Pty Limited(3)          |  | Australia                     |  | Non
  trading company                     |  | 100                           | %
|                                                |  |                               |  |                                           |  |                               |  
|Indo-Pacific
  Energy Australia Pty Limited (3) |  | Australia                     |  | Non
  trading company                     |  | 100                           | %
|                                                |  |                               |  |                                           |  |                               |  
|Trans-Orient
  Petroleum (Aust) Pty Limited (3) |  | Australia                     |  | Non
  trading company                     |  | 100                           | %
|                                                |  |                               |  |                                           |  |                               |  
|ZOCA
  96-16 Pty Limited (3)                    |  | Australia                     |  | Non
  trading company                     |  | 100                           | %
|                                                |  |                               |  |                                           |  |                               |  
|Austral
  Pacific Energy (PNG) Limited (2)      |  | Papua New Guinea              |  | Oil
  and gas exploration and development |  | 100                           | %
|                                                |  |                               |  |                                           |  |                               |  
|(4)                                             |  |                               |  |                                           |  |                               |  
|                                                |  |                               |  |                                           |  |                               |  
|Other:                                          |  |                               |  |                                           |  |                               |  
|                                                |  |                               |  |                                           |  |                               |  
|Coral
  Sea Drilling Limited                    |  | Papua New Guinea              |  | Non
  trading company                     |  | 35                            | %

|    |                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Acquisition completed
  December 22, 2006.                                                                                                                                                                                          
|   
|(2) | Name changed from
  Trans-Orient Petroleum (PNG) Limited on November 16, 2006.                                                                                                                                                      
|   
|(3) | Voluntary de-registration
  will be sought in the near future for the four Australian companies.                                                                                                                                    
|   
|(4) | 12 shelf companies (named
  Austral Pacific NZ No.[number] Limited) were incorporated in
  New Zealand in late March 2007, all wholly owned by Austral Pacific Energy
  (NZ) Limited. These are all currently non-trading companies.

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 requirements in
Australia and PNG that one director must be a resident of the relevant host
country.

D. Property, Plant and Equipment

The Companys major operations and principal
activities are in the oil and gas exploration and production business. The
Company has operated in three countries in the past three years: New Zealand,
Australia (including the Zone of Cooperation Area A between Australia and East
Timor), and Papua New Guinea.  The
Company also owns a 35% share in a drilling rig, acquired for drilling the
Douglas well in Papua New Guinea. Other than this asset and its petroleum
properties, the Company has previously only held minor office assets for the
purpose of operating the business, and some oilfield equipment and materials.
During 2006, the development of the Cheal field production facilities
commenced. As at May 31, 2007, these assets were not yet completed.

As at May 31, 2007, the Company holds the following
percentage interests via joint ventures in
government issued permits or licences in the jurisdictions of New
Zealand and Papua New Guinea, which permits or licences authorise prospecting
and exploration for hydrocarbons:

- 21 -

---



|                                    |  | %     
|----------------------------------- |  | ------
|New
  Zealand                       |  |       
|*PMP 38153 (Kahili) 1,3             |  | 85.00 
|*PMP
  38156 Shallow (Cheal) 2,3    |  | 69.50 
|*PMP
  38156 Deep (Cardiff) 2,      |  | 25.10 
|*PEP 38738 01  Exploration 3       |  | 69.50 
|*PEP 38738 02  Exploration         |  | 25.10 
|*PEP 38741  Exploration1           |  | 55.00 
|PEP 38745  Exploration1            |  | 16.67 
|*PEP 38746  Exploration 1          |  | 83.33 
|*PEP 38748  Exploration 1          |  | 66.66 
|*PEP 38765  Exploration 1          |  | 61.67 
|*PEP 38524  Exploration            |  | 100.00
|                                    |  |       
|Papua
  New Guinea                  |  |       
|PPL 235  Exploration (Douglas)     |  | 35.00 
|PPL 261  Exploration 4             |  | 50.00 
|*PRL 4  Retention (Stanley) 5      |  | 28.92 
|PRL 5  Retention (Ketu, Elevala) 9 |  | 10.712

* The Company is the operator
of these permits.

|    |                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Due to an assignment of interest by one party, the
  Company increased/obtained its percentage interest, effective March 2006.                 
|   
|(2) | A new permit was granted to the Company, effective
  July 2006.                                                                                
|   
|(3) | Due to the acquisition of Arrowhead Energy Ltd in
  December 2006, the Company increased its percentage interest effective from
  October 2006.
|   
|(4) | A new licence was granted to the Company, effective
  November 2006.                                                                           
|   
|(5) | Numerous small events led to an overall increase in
  the Companys percentage interest during 2006.                                           

During 2006, a number of
minor New Zealand permits were surrendered or assigned to continuing parties,
after an analysis of the Companys prospects inventory and going forward plans.

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

At May 31, 2007, the
Company had no encumbrances, liens or mortgages on the properties, except for:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|- | 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, to
  secure performance of the Company under the gas prepayment agreement referred
  to at Note 19(a), of the Consolidated Financial Statements (Item 17);                                                                                                                                                                                    
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|- | a security interest
  granted by Arrowhead Energy Limited, a company acquired on December 22, 2006
  to NGC New Zealand Limited (now called Vector Gas Limited) over Arrowheads
  33% interest in PMP 38156 and its 25% interest in PMP 38153, to secure
  Arrowheads performance under the gas prepayment agreement referred to at
  Note 19(b), of the Consolidated Financial Statements (Item 17);                                                                                                               
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|- | a security interest
  granted to Investec (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 2.1.1) 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.

General

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

- 22 -

---



Regulatory Regime

The general rules
applicable to the Companys permits and licences granted in New Zealand and
Papua New Guinea are as follows:

NEW ZEALAND

Unless otherwise indicated, petroleum exploration
permits granted in New Zealand provide for the 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.
Permit holders can apply for changes to the committed work programs for
the permits under certain circumstances.
Any production permits granted will be for a term of up to 40 years from
the date of issue.  The New Zealand
government has reserved a royalty of the greater of 5% of net sales revenue or
20% of accounting profits from the sale of petroleum products, except for any
discovery made between June 30, 2004 and December 31, 2009, for which the
royalty will be the greater of 1% of the net sales revenue from any natural gas
and 5% of the net sales revenues from any oil or 15 to 20% of accounting
profits from the sale of petroleum products.

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 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 a 2% royalty to project landowners and 2% royalty to the government.
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

The Company is pro-active in its approach to environmental concerns.
Procedures are in place to ensure care is taken in the day-to-day management of
the Companys oil and gas properties. However, 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.  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 declines of
reservoirs, blow-outs, cratering, sour gas releases, fires and spills, premature
decline of reservoirs, the invasion of water into producing formations, insufficient storage or
transportation capacity or other geological and mechanical conditions.  While close well supervision and effective
maintenance operations can contribute to maximizing production rates and
recoveries over time, production delays and 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, it may, in

- 23 -

---



the future, be
subject to liability for environmental offences of which it is presently
unaware.

Principal Properties

The Companys significant individual properties, their
locations, capital expenditure over the last 3 fiscal years, development plans,
and nature of the Companys interests are set out below. 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.

Except for the Cheal and
Cardiff (PMP 38156) and Kahili (PMP 38153) properties in New Zealand, the
Companys properties in New Zealand are exploration permits. The Elevala and
Ketu (PRL 5) and Stanley (PRL 4) discoveries in Papua New Guinea are not
proven, and are held in retention licences for further appraisal. The Douglas
discovery in PPL 235 in Papua New Guinea 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 and Kaimiro fields. All these fields are
currently in production for other owners.

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

- 24 -

---



(MAP)

- 25 -

---



Cheal (Shallow) and Cardiff (Deep) Fields 
PMP 38156 and PEP 38738 (38738-01  69.5% (Shallow); 38738-02  25.1% (Deep))

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.

Cheal Field (Shallow)

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.  Cheal-A4 was deviated from
the Cheal-A site during October 2004 to intersect the Mt Messenger reservoir
300m (1,000 feet) southeast of Cheal-A3X; and Mt Messenger oil pay was again
intersected. Extended production testing of the Cheal-A3X and Cheal-A4 wells
was undertaken in 2005 enabling the Company to sell 31,041 barrels (Company
share) of oil in 2005. The extended testing demonstrated that the wells were
capable of stable flow rates. Data also showed that the two wells were not in
pressure communication with each other. In December 2005 the joint venture
agreed to cease production testing of the Cheal wells in order to agree a field
development plan that would maximise production and value from the field.

Extended production testing 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; 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. 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.

The development plan includes the construction of production facilities
having an initial capacity of 2,000 barrels of oil per day and 3 million cubic
feet of gas per day, located at the Cheal A site, receiving, processing and
handling raw production from up to ten development wells located at 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.

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

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 suspended, awaiting further
testing.

Construction of the
production facilities is expected to be mechanically complete in the second
quarter of 2007 and first production due in Q3 2007. Negotiation of commercial
arrangements for the transportation, storage, processing and sale of both crude
oil and gas production are underway. Production
approaching a target rate of 1,900 barrels per day (100%; Company share 69.5%)
is expected to be achieved by the end of Q3 2007.

Cardiff Field (Deep)

Funding of the
Cardiff-2 well by way of farm-out agreement was negotiated in 2004. This
negotiation resulted in separate joint ventures being established for
exploration of the shallower petroleum deposits, such as the Cheal prospect,
(represented by PEP 38738-01) and of the deeper deposits, such as the Cardiff
prospect (represented by PEP 38738-02). The Cardiff-2 appraisal well was
spudded in October 2004, to test various gas bearing Kapuni Formation
sandstones intersected below 4,000m (13,000 feet) in Cardiff-1, drilled in
1991. Cardiff-2 reached a target depth of 4,895m (16,060 feet) in late December
2004; and obtained encouraging geological and electric log data across the
Kapuni reservoir intervals. However, Cardiff-2 had to be abandoned

- 26 -

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due to
problems encountered during setting 7 casing over the Kapuni Formation.

A Cardiff-2A well
was deviated out of the Cardiff-2 borehole, and drilled (with one sidetrack) to
a depth of 4,931m (16,178 feet), and successfully logged and cased in
preparation for production testing as Cardiff-2A ST1. Three test zones within
the Kapuni formation were hydraulically fractured and perforated in 2005. 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 next step is to secure a definitive test of the bottom zone, the K3E
reservoir interval. In preparation for this, 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 the optimum testing programme for the K3E interval.
Additional desk-top and simulation studies have also been undertaken during the
fiscal year. The Company is currently preparing to workover the Cardiff-2A well
in preparation for testing the K3E zone.

Kahili Field
PMP 38153 (85%)

Kahili-1A was directionally drilled to test an up-dip
location in October 2002, but the target sands were found to be faulted out in
this well bore.  The Kahili-1B sidetrack
well was drilled in November 2002, and encountered a 115 feet gross hydrocarbon
column in the Tariki sandstone.  On the
basis of this discovery, a mining permit (PMP 38153) was granted in September
2004. The Kahili-1B well was subsequently developed and produced briefly from
August 2004 to November 2004. Underperformance of the well resulted in it being
suspended in November 2004.

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 suggests that Kahili contains considerable updip potential
and is to be tested by drilling a new well, Kahili 2, planned to be drilled in
the second half of 2007, which if successful is expected to generate
immediate revenues, as production facilities are already on-site.

The Company increased its interest in the Kahili field in Q1 2006 by
purchasing 15% from Tap New Zealand and in Q4 2006 a further 25% was acquired
through the share purchase of Arrowhead Energy Limited, leading to a total
holding of 85% by 2006 year end.

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

Other New Zealand Exploration
Operations

The Company participated in
the Heaphy-1 (PEP 38746) exploration well in onshore Taranaki, New Zealand
during the first quarter of 2006. The well was drilled to a depth of 1,450m
(4,760 feet) and encountered good reservoir quality sandstones at the predicted
target levels. However, due to the absence of any significant hydrocarbon
indications, the decision was made to plug and abandon the well.

A survey to acquire 483 kilometres of 2D seismic within the offshore
Canterbury permit PEP 38258 was undertaken in Q2 2006. The data was processed
and interpreted, and the prospectivity within the permit, particularly that of
the Whaler prospect, was assessed using the results of the survey together with
the results of the nearby, unsuccessful Cutter exploration well drilled by
another joint venture in late 2006. The results were not as promising as
originally anticipated, and the Company surrendered this permit in early 2007.

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 Pacific to undertake seismic reprocessing,
acquire aeromagnetic data and complete either a 2D or 3D seismic survey by 1
April 2008. Preparations for this

- 27 -

---



programme are underway.

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.

Papua
New Guinea

The following figure shows the locations of the
Companys permits in Papua New Guinea:

(MAP)

- 28 -

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Douglas Field  PPL 235
(35%)

The Company was awarded this licence in August 2003.
PPL 235 covers most of the prospective part of the acreage previously held
under PPL 192 and PPL 215.

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 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 to Papua New Guinea at a cost of approximately $4 million (100%
cost). Drilling of the Douglas well commenced early April and drilling was completed in May 2006 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.

The drilling and wireline logging results have been fully evaluated and the
conclusion drawn is that the Douglas well appears to be a gas discovery with a
significant gas resource of potentially several hundred billion cubic feet
contained in a large structure with a maximum area of over 40 square
kilometres. The discovery is also expected to serve to lower the exploration
risk for other identified prospects and leads in the licence.

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. A Memorandum of Understanding was signed in
March 2007 to evaluate a proposal to supply gas to an Australian company via
pipeline. The joint venture parties will now further assess the implementation of
commercialisation of the Douglas gas discovery.

Following up on the Douglas well, a 2D seismic survey was undertaken
within PPL 235. The data acquired confirmed drilling
locations on the northern sector of the Douglas Gas Field and has also
confirmed the nearby Puk Puk prospect as being a valid exploration drilling
target. Further specialised seismic processing is now being conducted to
identify if it can be used to predict the presence of hydrocarbons in other
prospects and leads with the PPL 235 area.

The Company operated this licence
during the drilling phase, but
transferred operatorship to its joint venture participant, Rift Oil plc (65%
interest), in Q3 2006, pursuant to the original farm-in deal with Rift.

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

Stanley Prospect  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.

The joint venture parties
are currently assessing the technical and commercial viability of producing and
selling Stanley gas for power generation in the Western Province of Papua New
Guinea with the Ok Tedi copper mine, located some 90 kilometres from the
Stanley gas field, being the principal customer.

In March 2006, the former Operator, Santos Limited,
received a Notice to Show Cause from the Papua New Guinea Minister of Petroleum
and Energy purporting that the work commitments and the extension requirements
of the PRL had not been met. The Notice requested a written submission on the
points raised. Failure to satisfy the Minister on the issues raised could
result in cancellation of the licence. As the new Operator, the Company has
answered all queries from the Department of Petroleum and Energy as they have
arisen, and is hopeful that the licence will be renewed in the near future. Delays have continued to occur in this

- 29 -

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process. The Company remains
committed to the potential of this area, and is vigorously pursuing the
extension.

Reserves

As at December 31, 2006,
the Company had recognised proven hydrocarbon reserves in respect of the Cheal
discovery, which reserves are classified as Undeveloped. The Cardiff 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.

During the 2004 fiscal year,
Kahili reserves were classified as Proven Developed reserves following
the completion of field development work and commencement of production.
However, by 2004 year end, all Kahili reserves were written off, based on an
independent report by Sproule International Limited.

In the 2005 fiscal year, an independent assessment of
the Cheal discovery by Sproule International Limited in April 2005 and updated
as at the end of 2005 was completed, under which  Sproule assigned 0.580 million barrels (Company share) of Proven
Undeveloped Oil 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-2A 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 barrels
(Company share 1.142 million barrels) of Proven Undeveloped Oil Reserves to the
Cheal Field (refer Exhibit 15.1).

|                                                     |                                                                 |                         |                         |  |                         |  |                        |  |                         |  |                       
|---------------------------------------------------- | --------------------------------------------------------------- | ----------------------- | ----------------------- |  | ----------------------- |  | ---------------------- |  | ----------------------- |  | ----------------------
|                                                     | Reserves, Working Interest Before Royalties -
  constant prices
|                                                     |                                                                
|                                                     | As at December 31, 2006                                         | As at December 31, 2005 | As at December 31, 2004
|                                                     | Oil & Liquids
  (MBbls)                                         |                         | Natural
  Gas
  (MMcf)  |  | Oil & Liquids
  (MBbls) |  | Natural
  Gas
  (MMcf) |  | Oil & Liquids
  (MBbls) |  | Natural
  Gas
  (MMcf)
|                                                     |                                                                 |                         |                         |  |                         |  |                        |  |                         |  |                       
|                                                     |                                                                 |                         |                         |  |                         |  |                        |  |                         |  |                       
|Proven                                               |                                                                 |                         |                         |  |                         |  |                        |  |                         |  |                       
|New Zealand:                                         |                                                                 |                         |                         |  |                         |  |                        |  |                         |  |                       
|Cheal-undeveloped                                    | 1,037                                                           |                         | 629                     |  | 517                     |  | 378                    |  |                        |  |                      
|Total proven                                         | 1,037                                                           |                         | 629                     |  | 517                     |  | 378                    |  | 0                       |  | 0                     
|                                                     |                                                                 |                         |                         |  |                         | 
|Standardized Measure of Undiscounted Net Cash Flows:

|                                             |         |         |         |   |  
|-------------------------------------------- | ------- | ------- | ------- | - | -
|                                             | US$000 | US$000 | US$000
|                                             |         |         |         |  
|New Zealand:                                 |         |         |         |   |  
|Revenue                                      | 60,943  |         | 30,598  |   | 
|Less future production and development costs | (25,654 | )       | (9,689  | ) | 
|Net Revenue                                  | 35,289  |         | 20,909  |   | 
|Less Taxes                                   |        |         |        |   | 
|Net income                                   | 35,289  |         | 20,909  |   | 
|Discounted at 10%                            | (9,529  | )       | (6,818  | ) | 
|Standardized Measure                         | 25,760  |         | 14,091  |   | 

The main differences between the reported Reserves at
December 31, 2005 and 2004 are the de-recognised Kahili reserves in 2004
following field performance, an independent assessment of reserves and the
recognition of reserves relating to the Cheal field in 2005. In 2006, the changes to the reserves estimates can be
attributed to:

| |                   |                                                                                                                                                                                                                                     
| | ----------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) Discoveries   | Four additional wells
  were drilled in the Cheal Oil Field  Cheal-B1, B2, B3 and B4;                                                                                                                                              
| |                   |                                                                                                                                                                                                                                     
| | (ii) 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
| |                   |                                                                                                                                                                                                                                     
| | (iii) Production  | A total of 28,352 bbls of
  oil (100 percent) was produced in 2006.                                                                                                                                                                 

|                                                     |                                                                                      
|---------------------------------------------------- | -------------------------------------------------------------------------------------
|The
  Companys reserves disclosures 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                       

- 30 -

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(refer to Exhibit 4.4) report on the Companys reserves as at the 2006
fiscal year, and production to end 2006.

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.

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
are calculated on an annual basis as the greater of 5% of net sales revenue or
15% to 20% of adjusted accounting profits from the sale of petroleum products.
The amount (and percentage) of royalty attributable to the reserves is unable
to be precisely calculated, and therefore reserves are quoted before royalties.

The December 31, 2006 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 does not necessarily result in an estimate of the fair market value
of the Companys oil and natural gas properties.

The undiscounted and discounted future net cash flows
as at December 31, 2006, 2005 and 2004 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

|            |  |                   |        |                   |  |                   |  |               |        |                 |  |               |  |  |       |  |  |       | 
|----------- |  | ----------------- | ------ | ----------------- |  | ----------------- |  | ------------- | ------ | --------------- |  | ------------- |  |  | ----- |  |  | ----- | 
|            |  | Year Ended        |        | Year Ended        |  | Year Ended        | 
|            |  | December 31, 2006 |        | December 31, 2005 |  | December 31, 2004 | 
|            |  |                   |        |                   |  |                   | 
|            |  | Oil
  & Liquids   |        | Natural
  Gas     |  | Oil
  & Liquids   |  | Natural
  Gas |        | Oil
  & Liquids |  | Natural
  Gas | 
|            |  | (Bbls)            |        | (MMcf)            |  | (Bbls)            |  | (MMcf)        |        | (Bbls)          |  | (MMcf)        | 
|            |  |                   |        |                   |  |                   |  |               |        |                 |  |               | 
|Sales:      |  |                   |        |                   |  |                   |  |               |        |                 |  |               |  |  |       |  |  |       | 
|New Zealand |  |                   | 15,147 |                   |  |                  |  |               | 31,228 |                 |  |              |  |  | 4,935 |  |  | 0.064 | 

2006 and 2005 production was substantially from the
Cheal onshore field in New Zealand.

|               |                                               
|-------------- | ----------------------------------------------
|ITEM 4A.       | UNRESOLVED STAFF COMMENTS                     
|               |                                               
|Not applicable
|               |                                               
|ITEM 5.        | OPERATING AND FINANCIAL REVIEW AND
  PROSPECTS

The following explanation is managements opinion of:

(a)     the factors that have
affected the Companys 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, 2006 and 2005, and for the years ended December 31, 2006, 2005 and
2004; and

(b)     managements
assessment of factors and trends which are anticipated to have a material effect
on the Companys financial conditions and operating results in future periods.

The consolidated financial statements have been
prepared in accordance with Canadian GAAP. Information relating to the nature
and effects of significant differences to US GAAP is provided in Item 17 (Note
27). All dollar values are expressed in U.S. dollars, unless otherwise stated.
All references to daily production are before royalty (as discussed in Item 4.D 
Property, Plant and Equipment  Reserves), unless stated otherwise.

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A. Operating Results

Summary

The Company is in the exploration, production testing
or evaluation stage on a number of its oil and gas properties. The Company has
reported a 2006 loss of $13,406,828 (under US GAAP  loss of $13,174,161)
compared to a restated net loss of $5,767,933 in the December 2005 year
(restated 2004: $4,628,056). Total losses incurred from incorporation to
December 31, 2006 are $41,088,663 (under US GAAP  total losses of
$47,322,577).

The Companys operating and
financial highlights for the year ended December 31, 2006 include the
following:

|  |                                                                                                                                                     
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | early revenue from
  production testing at the Cheal field;                                                                                         
|  |                                                                                                                                                     
| | the grant of a mining
  permit over the Cheal and Cardiff fields;                                                                                   
|  |                                                                                                                                                     
| | development of permanent
  production facilities for Cheal field are well underway;                                                                 
|  |                                                                                                                                                     
| | the Douglas discovery in
  PNG for which commercialisation possibilities are now being assessed, along
  with other stranded gas in PNG;          
|  |                                                                                                                                                     
| | establishment of a
  US$23million debt facility;                                                                                                    
|  |                                                                                                                                                     
| | increases in percentage
  interests held in key fields, by acquisition of permits from Tap New Zealand,
  and of shares in Arrowhead Energy Limited;
|  |                                                                                                                                                     
| | significant personnel
  changes and organizational consolidation.                                                                                   

In December 2006 test production from the Cheal oil
field was halted, having re-started in July 2006. This decision was made by the
joint venture participants in order to undertake construction of permanent
production facilities. Test production was re-commenced in February 2007 from
the new Cheal B development wells. The development plan anticipates initial
permanent production estimated at 1200 barrels per day (Company share 834
barrels) from Q3 2007 and then to approach a target rate of 1900 barrels per
day (company share 1,320) by the end of Q3 2007.

During 2006, the Cardiff joint venture parties have
been examining options for the development of the Cardiff field following a
planned work over and testing of the Cardiff-2 well in the second half of 2007.

Oil production revenues are and will remain subject to
international prices, based in US$. The company has crude oil forward sales
contracts in place for the period July 2007 to December 2010 with an average
price of US$65.10 per barrel. Since oil sales are priced in US$, 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.

1. Discussion of Material Changes

Production
income and expenses

Gross oil revenue was $911,931 for the year ended
December 31, 2006 compared with $1,779,454 for the year ended December 31,
2005. (2004: $212,458). The decrease in revenue from 2005 was attributable to a
16,081 barrel decrease in production. The decrease was primarily attributable
to the Cheal oil field being shut in for January to July 2006 as the Joint
Venture participants discussed development options.

Oil sales volume decreased to 15,147 barrels compared
to 31,228 barrels in 2005 (2004: 4,935 barrels).  A total of 14,450 barrels (2005: 31,041 barrels) were sold from
the Companys interest in the Cheal field. 697 barrels were sold from the
Companys interests in the Cardiff oil field compared to 187 barrels from the
Companys interests in PEP 38738-02 (Cardiff field) and PMP 38153 (Kahili
field) in 2004. The selling price increased from an average of $56.98 per
barrel in 2005 to $62.35 per barrel in 2006 (2004: $38.67 per barrel).

There were no natural gas production revenues in 2006
and 2005 (2004: $145,443). The Company has not sold any natural gas since
production ceased from the Kahili field (PMP 38153) in November 2004.

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Direct production costs and royalties were $526,346
versus $923,104 in 2005 (2004: $82,583). Depletion charges of $347,206
(restated 2005: $61,979, 2004: $84,864) were recorded in respect to the Companys
New Zealand property cost pool consistent with the successful efforts
accounting policy (Item 17  Note 4 of the Consolidated Financial Statements).

The Companys gross profits may be materially affected
by any changes in exchange rates between (in particular) the US and New Zealand
dollars, in oil prices and in gas prices.
See Item 3.D  Risk Factors  Oil and Gas Prices, Item 5.A.3  Foreign
Currency Fluctuations and Item 5.D  Trend Information.

Expenses

General and administrative expenses increased from
$3,609,531 in 2005 to $4,072,555 in 2006 (2004: $1,831,137). Expenses relating
to professional services contributed significantly to the increase. Baseline
salaries increased in 2006 but these were offset by the one-off settlement
agreement reached with the former Chief Executive Officer in 2005, thereby the
overall year on year change was minimal. Cost recoveries decreased slightly to
$1,043,666 compared to $1,093,417 in 2005 (2004: $930,673). 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.

Administrative expenses included wages and benefits of
$1,265,042 (2005: $1,238,588, 2004: $605,069). Audit, legal and professional
services totaled $1,204,568 and listing fees and shareholder communications
expenses totaled $197,993.

Stock compensation in 2006 was $533,935 compared to
$673,711 in 2005 (2004: credit of $11,450). This was calculated using a
Black-Scholes valuation method (Item 17  Note 15(c) of the Consolidated
Financial Statements).

The 2006 results included a charge for Oil and Gas
property impairments of $8,171,981 compared to a restated 2005 charge of
$3,703,774 (restated 2004: $4,197,820). Effective 2006 the company voluntarily
changed its method of accounting for oil and gas properties from the full
cost method to successful efforts method.
The change in accounting policy has been applied retroactively and prior
years figures have been restated (Item 17  Note 4 of the Consolidated
Financial Statements).

Interest
Income

Interest income of $437,279 (2005: $460,411; 2004;
$326,012) was earned on surplus cash balances. Interest earned has decreased in
line with the decreased cash balances on deposit throughout the year when
compared to previous years.

Interest
Expense

In December 2006 the Company entered into a project
loan facility with Investec Bank (Australia) and the first drawdown was made on
December 22, 2006.  The interest expense
in 2006 was $29,933 (2005: $163; 2004: $28,698).

Capital
Expenditure

Oil and Gas Property expenditure for the 2006 year
totaled $25,705,840 (2005: $6,119,897; 2004: $2,395,754). Major expenditures
were incurred on the following activities:

| |                |                                                         
| | -------------- | --------------------------------------------------------
| | - PEP 38738-01 | Cheal production testing and development of
  facilities
| | - PMP 38156(S) | Cheal production testing and development of
  facilities
| | - PMP 38153    | Kahili site preparation and long lead items             
| | - PEP 38258    | Offshore Canterbury seismic program                     
| | - PEP 38716    | Oru site rehabilitation                                 
| | - PEP 38736    | Taranaki seismic program                                
| | - PEP 38738-02 | Cardiff-2A seismic and well testing                     
| | - PEP 38741    | Supplejack-1 well testing                               
| | - PEP 38746    | Heaphy drilling                                         
| | - PEP 38753    | Taranaki Seismic program                                
| | - PEP 38765    | Supplejack South well testing                           

- 33 -

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For detailed 2006 expenditure, see Item 4.B.

2. 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.

3. Foreign Currency Fluctuations

The Company holds cash in both NZ dollars and US
dollars. The amount held in each currency will fluctuate according to
operational requirements. Surplus cash is held primarily in US dollars. The
Company receives oil revenues in US dollars and incurs expenses and petroleum
property expenditures primarily in NZ and US dollars. At times when currencies
other than US or New Zealand dollars may be required, the Company will utilize
the spot foreign exchange market to meet these requirements.

During 2006 and up to the end of May 2007, 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 January
1, 2006  to May 31, 2007 is 0.5951 and
0.7480 respectively.The Companys policy is to selectively
hedge exposure to foreign currency exchange rate risk but management currently
does not have any foreign currency hedges in place. As the Company receives US
dollars from its oil sales and has some expenses payable in US dollars, it has
to some degree a natural hedge. Gas sales contracts that the Company has
entered into are denominated in New Zealand dollars and sales revenue will be
used to meet New Zealand dollar expenses. Until sales revenues are achieved,
all non US dollar expenditure is financed through the conversion of US dollars
on the spot foreign exchange market.

4. Government Regimes

See Item 3.D  Risk Factors  Regulatory Requirements,
Item 4.B.8  Material effects of government regulations, 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 Companys audited 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 estimates involve more judgment than others:

Oil
and Gas Properties

The Company follows the
successful efforts method of accounting for oil and gas exploration and
development activities.  Under this
method, acquisition costs of properties are capitalized. Exploratory drilling
costs are initially capitalized and costs relating to wells subsequently
determined to be unsuccessful are charged to earnings. Exploratory drilling
costs related to exploratory wells in an area that requires major capital
expenditures are carried as an asset, provided that i) there have been
sufficient oil and gas reserves found to justify completion as a producing well
if the required capital expenditure is made, and ii) drilling of additional
exploratory wells is underway or firmly planned for the near future. Other
exploration costs are charged to earnings. All development costs are
capitalized. For mining activities, property acquisition and development costs
are capitalized.

Capitalized costs, together
with estimated future capital costs associated with proved reserves, are
depleted and depreciated using the unit of production method based on estimated
gross proved reserves of petroleum and natural gas as determined by independent
engineers.  For purposes of this
calculation, reserves and production are converted to equivalent units of
petroleum based on relative energy content of six thousand

- 34 -

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cubic feet of
natural gas to one barrel of petroleum.

The Company
had $347,206 (2005 restated: $61,979, 2004 restated:$84,864) of depletion
relating to its proven property cost pool and $8,171,981 (2005:$3,703,774
(restated), 2004: $4,197,820 (restated)) of write downs in the year ended
December 31, 2006.Oil and Gas Revenue
Recognition

Sales or
dispositions of oil and gas properties are credited to the respective cost
centers and a gain or loss is recognized when all properties in a cost centre
have been disposed of, unless such sale or disposition significantly alters the
relationship between capitalized costs and proved reserves of oil and gas
attributable to the cost center.

Asset Retirement
Obligations

The Company
has obligations to plug and abandon petroleum and natural gas wells, and
restore the respective properties, at the end of their useful lives. The
calculation of these obligations requires estimates to be made in respect to
variables such as the future date when the costs will be incurred and the
future costs of undertaking the work. The total provision for these obligations
at December 31, 2006 was $1,065,559 (2005: $337,075, 2004: $156,575).

Stock Options

The Company
has recognized stock based compensation expense based on the following:

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 of the options.

A stock option compensation expense of $533,935 (2005: 673,711
expense,;2004: cost recovery of $11,450) was recorded in the financial
statements for the 2006 year. Further details are discussed in Item 5.A.1 
Discussion of Material Changes  Expenses
above.

Long Term Debt

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 and the first drawdown of $15,738,000 was made on December
22, 2006. Interest on the facility is variable based upon the London Interbank
Offered Rate (LIBOR) plus a margin dependent upon the tranche of the loan.

As part of the
term facility, 2,500,000 share purchase warrants were issued to the lender. The
warrants have a life of 2 years from December 21, 2006 and an exercise price of
$2.11. The fair value of the warrants was estimated at $1,676,000 and this is
excluded from the non-current term liability balance in the Consolidated
Balance Sheets.

A summary of
the accounting treatment of the debt raising is as follows:

|                         |  |         |           |             |   |            |   |   |            |  
|------------------------ |  | ------- | --------- | ----------- | - | ---------- | - | - | ---------- | -
|                         |  | Current |           | Non-current |   | Total      |  
|                         |  |         |           |             |   |            |  
|Balance
  outstanding    |  | $       | 6,550,000 |             | $ | 9,188,000  |   | $ | 15,738,000 |  
|Fair value
  of warrants |  |         |          |             | $ | (1,676,000 | ) | $ | (1,676,000 | )
|Prepaid
  expenses       |  | $       | (283,056  | )           | $ | (849,166   | ) | $ | (1,132,222 | )
|Reported balance         |  | $       | 6,266,944 |             | $ | 6,662,834  |   | $ | 12,929,778 |  

Refer to Item
17  Note 20 of the consolidated Financial Statements for further details.

Acquisition of
Arrowhead

On December
22, 2006 the Company completed the acquisition of the issued and outstanding
shares of Arrowhead Energy Ltd. 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,

- 35 -

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all identifiable assets and liabilities are recognized at their fair
value at acquisition date. The fair value does not take into consideration any
future intentions by the Company.

Financial
Instruments

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 the Company is not exposed to
significant interest, currency or credit risks arising from these financial
instruments. The fair value of long tem debt is calculated based on the present
value of future principal and interest cash flows, discounted at the market
rate of interest at 31 December 2006.

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.

Goodwill

All business
combinations are accounted for using the purchase method. Goodwill is
recognized on acquisitions of subsidiaries or purchase of business assets and
represents the excess of the acquisition cost over the fair value of the
acquired net assets. It is stated at cost less accumulated impairment losses
and tested annually for impairment.

Changes in
Accounting Standards

The Company
voluntarily changed its method of accounting for oil and gas properties from
the full cost method to the successful efforts method. The change in
accounting policy has been applied retroactively and prior years figures have
been restated. In applying this change the Company has applied:

|  |                                              
|- | ---------------------------------------------
|- | CICA HB
  section 1506  Accounting changes

The Company
has prospectively adopted, effective January 1, 2006, the following:

|  |                                                                          
|- | -------------------------------------------------------------------------
|- | 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                                          
|- | CICA HB
  section 3865 Hedges                                          

B. Liquidity and
Capital Resources

1. 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 from temporary production
facilities. The Company expects to go into long-term production of the Cheal
field upon commissioning of the permanent facilities in Q3 2007.

Discussions
which may in due course lead to further funding arrangements are underway
regarding the Companys assets in New Zealand and Papua New Guinea. These
discussions are in line with standard

- 36 -

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ongoing
business practice; and as at the date of this Report none have been finalized.

Cash and Working
Capital

At December
31, 2006 the Company had cash and short-term deposits of $7,144,943 (excluding
restricted cash of $3,000,000) compared to $15,339,906 at December 31, 2005
(2004: $11,187,924). Working capital as at December 31, 2006 was $1,480,287
deficit versus $14,837,152 surplus for December 31, 2005 (2004: $11,832,438
surplus). The reversal in the Companys year end cash and working capital
position is attributable to the continued development of the Cheal oil field
and a portion of the loan facility, used to finance the Cheal oil field, been
repayable within 12 months of year end.

The Company
considers it can meet all obligatory work requirements out of existing funds,
future revenue and raising additional capital (refer to Item 5.B.3 Capital
Commitments) although it is likely to seek to raise additional capital for
other exploration activities. As part of its ongoing exploration portfolio
management the Company continually assesses its equity holding in permits and
may elect to farm-out portions of certain commitments. Discussions which may in
due course lead to further funding arrangements are underway regarding the
Companys assets in New Zealand and Papua New Guinea. These discussions are in line
with standard ongoing business practice; and as at the date of this report none
have been finalized.

Cash Used in
Operating Activities

The Company
used cash of $1,429,378 in operating activities during the year ended December
31, 2006 compared to cash used in operating activities of $932,612 in 2005:
(2004; cash used of $65,065).

On December
22, 2006 the Company completed the acquisition of the issued and outstanding
shares of Arrowhead Energy Ltd for a total consideration of NZ$17,137,109
(US$12,081,662)

A total of
$486,890 was used for purchases of property and equipment compared to $430,223
in 2005 (2003: $162,894) and $13,624,178 was expended on the Companys
exploration activities versus $6,119,897 for the year ended December 31, 2005
(2004: $2,395,754).

No cash was
provided from the sale of licences or permits for the years ended December 31,
2006, 2005 and 2004.

Cash Generated by
Financing Activities

Financing
activities raised $21,004,087 (net of costs) for the year ended December 31,
2006 compared to $10,803,109 for 2005 and $11,625,433 for 2004. The funds
raised were from financing activities as follows:

| |   |                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | fund raising in New Zealand and overseas raised $6,509,100
  (before costs of $89,096) through the issue of 5 million common shares (refer
  to Item 4 A 4 above for further discussion);
| |   |                                                                                                                                                                                          
| |  | the
  draw down of $15,738,000 from the loan facility (before costs of $1,279,731).                                                                                                      

As at December
31, 2005 there were 2,000,000 warrants outstanding. These warrants related to
the October 2005 share placement. These warrants expired in October 2006
without been exercised.

No amounts
were due or payable to related parties at December 31, 2006 (2005: Nil; 2004:
Nil).

The net effect
of the above noted transactions was a decrease of cash of $5,173,809 for the
year ended December 31, 2006 compared to an increase of $3,825,148 for the 2005
year (2004: increase of $9,092,074).

After year
end, the Company raised $3.2 million by way of a private equity placement.

Loan Facility

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
and the first drawdown of $15,738,000 was made on December 22, 2006. As at May
31, 2007 the Company had drawn down a further $3.262 million of the loan
facility.

- 37 -

---



Interest on
the facility is variable based upon the London Interbank Offered Rate (LIBOR)
plus a margin dependent upon the tranche of the loan (refer Item 11).

The term of
the facility is 4 years. The Company has established a Debt Service Reserve
Account which has been funded with $3,000,000.

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. Refer to para 2. Financial Instruments, Treasury
Activities below.

As at December
31, 2006 security for the facility 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 2.1.1). 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.

Throughout the
term of the project loan facility the Company must continue to meet certain
covenants.

As part of the
loan facility, 2,500,000 share purchase warrants were issued to the lender. The
warrants have a life of 2 years from December 21, 2006 and an exercise price of
$2.11. As at May 31, 2007, none of these warrants had not been exercised.

The Companys
cash available to it decreased to $2,404,664 at the end of May 2007. The
decrease was attributable to cash used on oil and gas property expenditure and
operational costs. Revenue of $2,094,169 was generated in the five months to
May 2007 from the production of oil in the Cheal oil field. In May 2007, the
Company drew down a further $3,262,000 available from the loan facility.

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, 2006.

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. One acquisition entered into during the 2006 fiscal
year (purchase of nine permits in New Zealand), included, as well as the making
of certain cash payments and the requirement to meet the obligations of each
permit to a larger extent than previously, the grant to the seller of
royalties, over production (if any) from those permits.

Restrictions on
Transfers of Funds

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 of the Austral Pacific Energy (NZ) Limited which has restrictions on
its ability to make distributions to the Company in connection to the Investec
loan facility (see Exhibit 2.1.1).

2. Financial
Instruments, Treasury Activities

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 over 2004, 2005 and 2006 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

- 38 -

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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 para 1 above).

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. 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.

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 has no instruments in place for foreign exchange hedging purposes.

As at May 31,
2007, the Company has no binding agreements with management, investors,
shareholders or anyone else respecting additional financing.

3. Capital
Commitments

At December 31
2006, the Company had the following material capital commitments for the year
ending December 31, 2007:

|                    |  |                                                                 |  |            |  |                                  
|------------------- |  | --------------------------------------------------------------- |  | ---------- |  | ---------------------------------
|Property            |  | Work description                                                |  | US$        |  | Source of financing              
|                    |  |                                                                 |  |            |  |                                  
|PMP38156S (Cheal)   |  | Existing well testing,
  pipeline, facilities and commissioning |  | 13,218,932 |  | Working capital, debt
  facility.
|PMP38156D (Cardiff) |  | Well workover and K3E test                                      |  | 1,737,904  |  | Working capital                  
|PEP38741 (Ratanui)  |  | Drill well                                                      |  | 733,470    |  | Working capital                  
|                    |  | Drilling inventory                                              |  | 1,819,027  |  | Working capital                  
|                    |  |                                                                 |  |            |  |                                  
|                    |  | Total                                                           |  | 17,509,334 |  |                                  

As at May 31,
2007 these commitments had changed. Major updated commitments to December 31,
2007 are as follows:

|                    |  |                                                                 |  |           |  |                                  
|------------------- |  | --------------------------------------------------------------- |  | --------- |  | ---------------------------------
|Property            |  | Work description                                                |  | US$       |  | Source of financing              
|                    |  |                                                                 |  |           |  |                                  
|PMP38156S (Cheal)   |  | Existing well testing,
  pipeline, facilities and commissioning |  | 8,036,075 |  | Working capital, debt
  facility.
|                    |  |                                                                 |  |           |  |                                  
|PMP38156D (Cardiff) |  | Well workover and K3E
  interval zone test                      |  | 799,040   |  | Working capital                  
|                    |  |                                                                 |  |           |  |                                  
|                    |  | Total                                                           |  | 8,835,115 |  |                                  

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
2007:

|                     |  |                   |  |           |  |                    
|-------------------- |  | ----------------- |  | --------- |  | -------------------
|Property             |  | Work description  |  | US$       |  | Source of financing
|                     |  |                   |  |           |  |                    
|PMP 38153
  (Kahili) |  | Well
  (Kahili-2) |  | 2,816,257 |  | Working
  capital  

In addition to
the above planned significant expenditures for the period May 31 to December
31, 2007, the Company anticipates expenditures on geology and geophysics desk
and field studies in various permits as work plans are further developed.
Commitments beyond the 2007 fiscal year are summarized in Item 5.F  Tabular
Disclosure of Contractual Obligations, and are subject to joint venture participants
(including the

- 39 -

---



Company)
deciding that the relevant permit is sufficiently prospective to commit to the
forthcoming permit year and the work programme specified for that year.

For the five
months to May 31, 2007, the Company has funded its projects from working
capital, private placement, draw down on loan facility, revenue from test
production, interest 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
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
does not invest in research and development activities, except 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 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

Nil

F. Tabular
Disclosure of Contractual Obligations

As at December
31, 2006, the Company has the following contractual obligations:

|                                         |  |                              |            |                    |  |            |  |           |            |                 |  |         |  |  |         | 
|---------------------------------------- |  | ---------------------------- | ---------- | ------------------ |  | ---------- |  | --------- | ---------- | --------------- |  | ------- |  |  | ------- | 
|                                         |  | Payments Due by Period (US$) |           
|                                         |  |                              |           
|Contractual
  and
  Other Obligations    |  | Total                        |            | Less than 1
  year |  | 1-3 years  |  | 4-5 years |            | After 5
  Years | 
|                                         |  |                              |            |                    |  |            |  |           |            |                 | 
|Operating
  leases                       |  |                              | 637,054    |                    |  | 132,118    |  |           | 248,961    |                 |  | 236,849 |  |  | 19,126  | 
|                                         |  |                              |            |                    |  |            |  |           |            |                 |  |         |  |  |         | 
|Loan
  facility (1) (4)                  |  |                              | 17,636,449 |                    |  | 7,526,084  |  |           | 10,110,365 |                 |  |        |  |  |        | 
|                                         |  |                              |            |                    |  |            |  |           |            |                 |  |         |  |  |         | 
|Joint
  venture commitments(2)           |  |                              | 19,369,150 |                    |  | 19,369,150 |  |           |           |                 |  |        |  |  |        | 
|                                         |  |                              |            |                    |  |            |  |           |            |                 |  |         |  |  |         | 
|Other
  obligations (3)                  |  |                              | 3,377,768  |                    |  | 1,047,108  |  |           | 1,629,940  |                 |  | 598,434 |  |  | 102,286 | 
|                                         |  |                              |            |                    |  |            |  |           |            |                 |  |         |  |  |         | 
|Total
  contractual or other obligations |  |                              | 41,020,421 |                    |  | 28,074,460 |  |           | 11,989,266 |                 |  | 835,283 |  |  | 121,412 | 

|    |                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Refer Note 20 in the 2006
  Consolidated Financial Statements (Item 17).                                                                                                                                                                                                                                                                                         
|(2) | 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.
|(3) | Other obligations is in
  respect to prepaid gas revenue.                                                                                                                                                                                                                                                                                                        
|(4) | Balance consists of loan
  principal and interest.                                                                                                                                                                                                                                                                                                               

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, 2006 up to May 31, 2007.

|        |                                           
|------- | ------------------------------------------
|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 are as follows:

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Directors

|                  |  |                         |  |                 |  |                                     
|----------------- |  | ----------------------- |  | --------------- |  | ------------------------------------
|Name              |  | Residence               |  | Date of Birth   |  | Position(s) Held                    
|                  |  |                         |  |                 |  |                                     
|Ronald
  Bertuzzi |  | Vancouver,              |  | Aug 7, 1937     |  | Director                            
|                  |  | B.C., Canada            |  |                 |  |                                     
|Douglas
  Ellenor |  | Surrey,                 |  | Jul 9, 1943     |  | Director                            
|                  |  | B.C., Canada            |  |                 |  |                                     
|Peter Hill        |  | Boston, MA              |  | Mar 6, 1947     |  | Director                            
|                  |  | USA                     |  |                 |  |                                     
|Thompson
  Jewell |  | Calgary, AB             |  | Sept 19,
  1950 |  | Chief
  Executive Officer (1),      
|                  |  | Canada                  |  |                 |  | President (1),
  Director (1)       
|David Newman      |  | Paraparaumu
  Beach,    |  | Jul 23, 1943    |  | Director,
  Chairman of the Board   
|                  |  | New Zealand             |  |                 |  |                                     
|                  |  |                         |  |                 |  |                                     
|Officers          |  |                         |  |                 |  |                                     
|                  |  |                         |  |                 |  |                                     
|Name              |  | Residence               |  | Date of Birth   |  | Position Held                       
|                  |  |                         |  |                 |  |                                     
|Derek
  Gardiner  |  | Perth, WAAustralia      |  | Feb 9, 1960     |  | Chief
  Financial Officer (2)       
|Joseph
  Johnston |  | Wellington,             |  | Mar 4, 1960     |  | Petroleum
  Engineering Manager     
|                  |  | New Zealand             |  |                 |  |                                     
|David
  McKeogh   |  | Wellington,
New Zealand |  | May 17, 1977    |  | Acting Chief
  Financial Officer (2)
|Carey Mills       |  | Wellington,             |  | Oct 19, 1961    |  | Exploration
  Manager               
|                  |  | New Zealand             |  |                 |  |                                     
|Warren
  Player   |  | Wellington,             |  | Mar 5, 1963     |  | Manager,
  Joint Venture and        
|                  |  | New Zealand             |  |                 |  | Government
  Relations (3)          
|Jeanette
  Watson |  | Wellington,             |  | Jul 27, 1963    |  | Corporate
  Secretary               
|                  |  | New Zealand             |  |                 |  |                                     

(1) Mr. Jewell was appointed
as CEO and President of the Company on May 1, 2007, and elected as a director
of the Company on May 4, 2007.

(2) Mr. McKeogh was appointed
as acting CFO, contracted from a major accounting firm, on the resignation of
the former CFO in February 2007. Mr. Gardiner has been appointed as CFO with
effect from June 11, 2007, but as at the date of this filing, has not taken up
his post.

(3) Appointed May 15, 2006.

DIRECTORS

Mr. Ronald Bertuzzi

Mr. Bertuzzi
was a member of the Board of Directors from October 2, 1992 to October 30, 1996
and was reappointed in March 1998. Mr. Bertuzzi received a Bachelor of
Economics from the University of British Columbia in 1965 and has worked in the
medical sales and product development industries since that time. He has now
retired but for the 10 years previous, Mr. Bertuzzi was a sales manager with El
Rad Services of Vancouver, B.C. in Canada.

Mr. Bertuzzi
is a past member of the Board and a past President of Gondwana Energy Ltd. and
is a past member of the Board of AMG Oil Ltd.

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 36 years experience in the exploration and production (E&P)
industry, spending 25 years with the Royal Dutch/Shell Group in Australasia,

- 41 -

---



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 recently listed 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.

Dr. Peter Hill

Dr. Hill was
appointed to the Board with effect from January 1, 2006. He holds a B.S. 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 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 thirty 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.

Mr. Jewell has
held a variety of technical and senior executive roles in previous positions
with Amoco (1977-1999) and Santos (2000-2004). Most recently he has been
responsible for the strategic planning and execution of building an offshore
exploration business in Australia and prior to that was responsible for a $100
million per year exploration and appraisal budget of Amoco in the Deep Water
Gulf of Mexico. Thompson was also the President of Amoco Oman.

Mr. David Newman

Mr. Newman was
appointed to the Board in September 2003. Mr. Newman 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.

OFFICERS

Mr. Derek Gardiner 
Chief Financial Officer

Mr. Gardiner
has been appointed as the Companys new Chief Financial Officer, with effect
from June 11, 2007. Mr Gardiner 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 industry since 1987
where he has held senior planning and finance roles for Shell in New Zealand,
Brunei, Malaysia and Australia.

- 42 -

---



Mr. Gardiner
will join 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. David McKeogh 
acting Chief Financial Officer

Mr. McKeogh
holds a B.B.S (Hons) from Waterford Institute of Technology in Ireland and is a
member of the Institute of Chartered Accountants in Ireland. He is an audit
manager with PricewaterhouseCoopers Wellington and has worked in both its Irish
and US firms. Mr. McKeogh was seconded to the Company in February 2007 until a
permanent CFO was appointed.

Mr. Carey Mills 
Exploration Manager

Mr. Mills
graduated from Victoria University of Wellington with an M.Sc. (Hons) in
Geology in 1988. Prior to joining Austral Pacific, 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. 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 
Company 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.

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, 2006:

- 43 -

---



SUMMARY
COMPENSATION TABLE

|                     |  |                  |  |                                     |  |            |  |       |  |             
|-------------------- |  | ---------------- |  | ----------------------------------- |  | ---------- |  | ----- |  | ------------
|                     |  | Compensation (3) |  | Options granted over Securities (4)
|Director/Officer     |  | Salary           |  | Other                               |  | Number     |  | Price |  | Expiry      
|                     |  |                  |  |                                     |  |            |  |       |  |             
|Ronald
  Bertuzzi    |  | Nil              |  | (5)                                 |  | Nil        |  | N/a   |  | N/a         
|Douglas
  Ellenor    |  | Nil              |  | (5)                                 |  | 60,000     |  | (4)   |  | Jan 1, 2011 
|Peter Hill           |  | Nil              |  | (5)                                 |  | 60,000     |  | (4)   |  | Jan 1, 2011 
|David Newman         |  | Nil              |  | $1,750 (5)
  (7)                    |  | Nil        |  | N/a   |  | N/a         
|Richard
  Webber (1) |  | $184,731         |  | Nil                                 |  | 400,000    |  | (4)   |  | Jan 31, 2011
|David
  Bennett      |  | Nil              |  | (5)                                 |  | 750,000(6) |  | $1.20 |  | Feb 2, 2008 
|Garth
  Johnson      |  | Nil              |  | $4,701 (5) (7)                      |  | Nil        |  | N/a   |  | N/a         
|Peter Tapper         |  | Nil              |  | (5)                                 |  | Nil        |  | N/a   |  | N/a         
|                     |  |                  |  |                                     |  |            |  |       |  |             
|Joseph
  Johnston    |  | $190,776         |  | Nil                                 |  | Nil        |  | N/a   |  | N/a         
|Bruce
  McGregor     |  | $131,727         |  | Nil                                 |  | Nil        |  | N/a   |  | N/a         
|Carey Mills          |  | $148,512         |  | Nil                                 |  | Nil        |  | N/a   |  | N/a         
|Warren
  Player (2)  |  | (8)              |  |                                     |  | Nil        |  | N/a   |  | N/a         
|Jeanette
  Watson    |  | (8)              |  |                                     |  | Nil        |  | N/a   |  | N/a         

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Appointed as CEO from
  February 7, 2006. Resigned on April 30, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(2) | Appointed from May 15, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(3) | Officers (other than the
  CEO) 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
  2006 as compensation. See discussion of option terms and information on
  applicable exercise prices in Item 6.E  Share Ownership.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(5) | Directors fees are not
  required by the Companys home jurisdiction to be disclosed individually. See
  aggregate figure below under Compensation of Directors and Managers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(6) | 600,000 options previously
  granted to Dr. Bennett were extended in July 2005 for 2 further years,
  subject to shareholder approval. The exercise price of such options was
  increased from $1.00 to $1.10 for the first year, and $1.20 for the second
  year. In December 2005, 150,000 of 300,000 performance options held by Dr.
  Bennett were agreed vested and 150,000 were agreed to be cancelled, subject
  to shareholder approval. These changes would normally be treated as new
  grants, but as the variations were subject to shareholder approval, they were
  not exercisable until shareholder approval was received, and all such options
  were agreed, after balance date, to be cancelled and replaced by a new grant
  of 750,000 2-year options, immediately vested, exercisable at $1.20 each.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(7) | Aggregate value realised
  upon exercise of incentive stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(8) | Managers salaries are not
  required by the Companys home jurisdiction to be disclosed, except for those
  of Named Executive Officers. See aggregate figure below under Compensation
  of Directors and Managers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

Compensation of
Directors and Managers

In fiscal
2006, the Remuneration Committee agreed that the following remuneration will be
paid to directors with effect from January 1, 2006:

|                                         |                                    
|---------------------------------------- | -----------------------------------
|annual base
  fee directors              | $16,000 per
  annum                
|chairmans
  fee                         | $25,500 per
  annum                
|audit
  committee chairman               | $10,000 per
  annum                
|audit
  committee member                 | $2,500 per
  annum                 
|remuneration
  committee chairman        | $5,000 per
  annum                 
|remuneration
  committee member          | $1,500 per
  annum                 
|directors
  option grant on appointment | 60,000
  shares (5 years at market)
|annual
  option grant                    | 20,000
  shares (5 years at market)

No annual
grants of options to directors were made under this new regime in the 2006
fiscal year. The first annual grant of options to directors is scheduled to be
made in August 2007.

- 44 -

---



In fiscal 2006, the directors received a total of
$124,000. 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 2006,
the aggregate amount paid for this special assignment was $54,923.

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 fiscal 2006, members of senior management received
a total of $822,891. Senior management employees are entitled to participate in
the Employee Performance Bonus Scheme introduced in fiscal 2006, as discussed
in Item 6.E below. No awards were made under this Scheme in fiscal 2006.

No pension, retirement or similar benefits are paid or
payable to members of the Board or senior management.

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.

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 May 31, 2007:

DIRECTORS

|                 |  |                  |  |                    
|---------------- |  | ---------------- |  | -------------------
|Name of Director |  | Period in Office |  | Committees         
|                 |  |                  |  |                    
|Ronald Bertuzzi  |  | 9 years          |  | Audit              
|Douglas Ellenor  |  | 1 1⁄2 years        |  | Audit, Remuneration
|Thompson Jewell  |  | 1 month          |  |                    
|Peter Hill       |  | 1 1⁄2 years        |  | Audit, Remuneration
|David Newman     |  | 3 1⁄2 years        |  | Audit, Remuneration

OFFICERS

|                                   |  |                   
|---------------------------------- |  | ------------------
|Name of
  Officer                  |  | Period in
  Office
|                                   |  |                   
|Thompson Jewell, CEO               |  | 1 month           
|David McKeogh, acting CFO          |  | 3 months          
|Jeanette Watson, Company Secretary |  | 7 1⁄2 years         
|Carey Mills, Exploration Manager   |  | 1 1⁄2 years         

- 45 -

---



|                                                                 |  |                   
|---------------------------------------------------------------- |  | ------------------
|Name of
  Officer                                                |  | Period in
  Office
|                                                                 |  |                   
|Joseph Johnston, Petroleum Engineering Manager                   |  | 1 1⁄2 years         
|Warren Player, Manager, Joint Venture and Government
  Relations |  | 1 year            

|   |                             
|-- | ----------------------------
|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 Audit and Remuneration Committees

See table in Item 6.C.1  Term of Office for current
Audit and Remuneration Committee members as at May 31, 2007.

The Board adopted an Audit Committee Charter on April
24, 2004 (later reviewed and amended, current version dated January 2007)
governing the conduct of the Audit 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 (later reviewed and amended, current version dated
December 2006). Directors and officers remuneration must be considered by the
remuneration committee. The remuneration committee also reviews the Companys
general remuneration strategy, approves grants of incentive stock options to
management and other service providers under the criteria of the 2006 Share
Option Plan, the remuneration strategy and the options policy adopted by the
Board. Any variation from the policy or the Plan rules, and all options granted
to directors, must be approved by the disinterested directors of the full
Board.

The Board has adopted a Director Nominations Committee
Charter, but has not established a separate committee for this purpose. The
independent directors of the Board act in this capacity. The Board nominates
directors 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:

- 46 -

---



|                               |  |             |  |            |  |      | 
|------------------------------ |  | ----------- |  | ---------- |  | ---- | 
|Office                         |  | 2006        |  | 2005       |  | 2004 | 
|                               |  |             |  |            |  |      | 
|Wellington, New Zealand        |  | 14 FT; 5 PT |  | 8 FT, 1 PT |  | 7 FT | 
|New Plymouth, New Zealand      |  | 1 PT        |  | 1 PT       |  | 0    | 
|Port Moresby, Papua New Guinea |  | 0           |  | 2 PT       |  | 0    | 

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 accounting and/or operational
supervisory staff.

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

E. Share Ownership

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

As at May 31, 2007:

|                 |  |                          |         |                                 |      |        |  |       |         |        |   |      |  |  |              | 
|---------------- |  | ------------------------ | ------- | ------------------------------- | ---- | ------ |  | ----- | ------- | ------ | - | ---- |  |  | ------------ | 
|                 |  | Beneficial
Ownership (1) |         | Securities
held under Option(3) |     
|Director/Officer |  | Number                   |         | %                               |      | Number |  | Price |         | Expiry |  
|                 |  |                          |         |                                 |      |        |  |       |         |        |  
|Ronald Bertuzzi  |  |                          | 48,900  |                                 | 0.16 |        |  |       | Nil     |        |   |      |  |  |              | 
|Douglas Ellenor  |  |                          | 70,000  |                                 | 0.23 |        |  |       | 60,000  |        |   | (4)  |  |  | Jan 1, 2011  | 
|Peter Hill       |  |                          | 329,400 |                                 | 1.08 |        |  |       | 60,000  |        |   | (4)  |  |  | Jan 1, 2011  | 
|Thompson Jewell  |  |                          | 0       |                                 | 0.0  |        |  |       | 400,000 |        | $ | 1.14 |  |  | May 1, 2012  | 
|David Newman     |  |                          | 55,000  |                                 | 0.18 |        |  |       | 12,500  |        | $ | 1.25 |  |  | Oct 15, 2008 | 
|                 |  |                          |         |                                 |      |        |  |       |         |        |   |      |  |  |              | 
|Joseph Johnston  |  |                          | 35,334  |                                 | 0.12 |        |  |       | 100,000 |        | $ | 1.90 |  |  | Dec 1, 2010  | 
|David McKeogh    |  |                          | (2)     |                                 |      |        |  |       | Nil     |        |   |      |  |  |              | 
|Carey Mills      |  |                          | 39,334  |                                 | 0.13 |        |  |       | 100,000 |        | $ | 1.90 |  |  | Dec 1, 2010  | 
|Warren Player    |  |                          | (2)     |                                 |      |        |  |       | Nil     |        |   |      |  |  |              | 
|Jeanette Watson  |  |                          | (2)     |                                 |      |        |  |       | Nil     |        |   |      |  |  |              | 

|    |                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 May 31, 2007.                                                                                                                                                                                              
|    |                                                                                                                                                                                                                  
|(4) | See table under section
  Stock Options for discussion of option terms, vesting and exercise price
  details.                                                                                                  

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.

The Board of Directors of the Company proposed to the
May 2, 2006 annual meeting of shareholders to adopt

- 47 -

---



a new share option plan, which plan was duly approved
and adopted by the shareholders at that meeting (New Plan). 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 occur in 3 equal amounts
over 18 months. The New Plan was attached as Exhibit 4.7 to the Companys Form
20-F for the year ended December 31, 2005, filed in June 2006. As a rolling
number option plan, it is required to be approved by the Companys shareholders
at each annual meeting.

Stock options granted before the 2004 Plan was put in
place (of which there are now only 42,500 outstanding) were issued at exercise
prices determined by the Board of Directors, with options vesting over 18
months. These options are non-transferable and non-assignable with a term of 5
years, terminating 45 days after the optionee ceases to be associated with the
Company.

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.

In fiscal 2006:

| |   |                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a total of 90,834 shares were issued pursuant to
  exercises of incentive stock options, all at an exercise price of $1.25 and
  all exercised by directors or former directors of the Company;
| |   |                                                                                                                                                                                                
| |  | no exercises of options by employees of the Company
  occurred;                                                                                                                                
| |   |                                                                                                                                                                                                
| |  | 900,000 options were cancelled and replaced by a new
  grant of 750,000 options (see table below);                                                                                             
| |   |                                                                                                                                                                                                
| |  | 72,666 options lapsed unvested upon cessation of
  involvement with the Company;                                                                                                               
| |   |                                                                                                                                                                                                
| |  | 69,000 vested options lapsed unexercised upon
  cessation of involvement with the Company; and                                                                                                 
| |   |                                                                                                                                                                                                
| |  | 1,280,000 new incentive stock options were granted
  to directors and employees. All but 10,000 of those options were granted to
  directors, managers or former directors, as follows:        

|                  |  |                              |  |               |  |                      |  |                |                                                     |  |  |                                            | 
|----------------- |  | ---------------------------- |  | ------------- |  | -------------------- |  | -------------- | --------------------------------------------------- |  |  | ------------------------------------------ | 
|Name              |  | Number of 
  Options Granted |  | Expiry
  Date |  | Exercise 
  Price(s) |  | Vesting
  Date |                                                    
|                  |  |                              |  |               |  |                      |  |                |                                                    
|Douglas Ellenor   |  | 60,000                       |  |               |  | Jan 1, 2011          |  |                | 20,000 @ $1.80
  20,000 @ $2.00
  20,000 @ $2.50    |  |  | Jan 1, 2007
  Jan 1, 2008
  Jan 1, 2009    | 
|Peter Hill        |  | 60,000                       |  |               |  | Jan 1, 2011          |  |                | 20,000 @ $1.80
  20,000 @ $2.00
  20,000 @ $2.50    |  |  | Jan 1, 2007
  Jan 1, 2008
  Jan 1, 2009    | 
|Richard Webber    |  | 400,000                      |  |               |  | Jan 31, 2011         |  |                | 200,000 @ $1.50
  100,000 @ $2.00
  100,000 @ $2.50 |  |  | Jan 31, 2007
  Jan 31, 2008
  Jan 31, 2009 | 
|David Bennett (1) |  | 750,000                      |  |               |  | Feb 2, 2008          |  |                | $ 1.20                                              |  |  | Feb 2, 2006                                | 

|    |                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Ceased to be a director
  effective May 2, 2006, but remains a consultant to the Company therefore
  remains eligible to exercise such options.

After December 31, 2006 up to May 31, 2007:

| |   |                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 200,000 shares were issued pursuant to exercises of
  incentive stock options, all at an exercise price of $1.25 and all exercised
  by a former director of the Company;
| |   |                                                                                                                                                                          
| |  | no options were exercised by employees of the
  Company;                                                                                                                 
| |   |                                                                                                                                                                          
| |  | 266,666 options lapsed unvested upon cessation of
  involvement with the Company;                                                                                        
| |   |                                                                                                                                                                          
| |  | 33,334 vested options lapsed unexercised upon
  cessation of involvement with the Company; and                                                                           
| |   |                                                                                                                                                                          
| |  | 400,000 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, which includes annual grants of
options to all employees and directors. All annual grants will be made on the
same day (being the date of that years Annual General Meeting of the Company),
and the same exercise price will apply, calculated as a 5-trading day average
of the then-current market price. The number of options to be granted to each
employee is linked to their salary band (being a basic method of assessing the
employees ability to

- 48 -

---



influence the Companys long-term performance) and to
the number of outstanding options within the Option Plan. As set out above
(Item 6.B  Compensation), directors will be entitled to receive 20,000 options
annually. All other terms of the options granted will be as specified by the
option plan adopted at that AGM.

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

A. Major shareholders

|   |                                                                     
|-- | --------------------------------------------------------------------
|1. | Beneficial holders of more than five percent of
  outstanding shares

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 Common Stock and rights to acquire stock within 60
days, are listed below (as of May 31, 2007):

|                                                      |  |                       |  |                    |       |  | 
|----------------------------------------------------- |  | --------------------- |  | ------------------ | ----- |  | 
|Beneficial Owner                                      |  | Number of
  Shares(3) |  | Percent of
  Class |      
|                                                      |  |                       |  |                    |      
|Infratil Gas Limited 
  Wellington, New Zealand       |  | 6,044,100             |  |                    | 19.84 |  | 
|Mr. P Loretto (1)Vancouver, B.C.,Canada               |  | 3,675,190             |  |                    | 12.06 |  | 
|Trans-Orient Petroleum Ltd. (2)Vancouver, B.C.,Canada |  | 3,110,240             |  |                    | 10.21 |  | 

|    |                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Loretto is the
  President, CEO and a director of Trans-Orient Petroleum Ltd. Mr. Loretto is
  also a principal shareholder of Trans-Orient Petroleum Ltd. 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 in the
  United States.                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                              
|(3) | As reported in public
  filings.                                                                                                                                                                                                                                                             

To the knowledge of the Company, the only 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 more than 5% of the capital of the Company during 2004
  and its subsequent sale of securities to hold less than 5% by end 2005; and               
|  |                                                                                                                                                                                                                             
|- | the acquisition by Infratil Gas Limited of more than
  5% of the capital of the Company during 2005, and the subsequent increase of
  its holding in October 2006 to 17.88% and further acquisition in May 2007 to
  19.84%.

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

|   |                          
|-- | -------------------------
|2. | Host country shareholders

To the knowledge of Management, as at May 31, 2007,
4,204,550 common shares were held by 958 registered shareholders in the United
States.

|   |                         
|-- | ------------------------
|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.

Mr. Peter Loretto, a resident of Canada, directly and
via his controlling position in Trans-Orient Petroleum Ltd, controls a 12.06%
shareholding in the Company.

Infratil Gas Limited controls a 19.84% shareholding in
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

- 49 -

---



a change of control of the Company.

B. Related party transactions

During 2006 up to May 31, 2007, the following related
party transactions occurred:

Directors received a total remuneration of $124,000
during 2006 (2005: $57,721; 2004:$58,954) and total remuneration of $29,750
during the five months to May 31, 2007;

The Company paid DLJ Management, which employed Garth
Johnson, a former director, $1,500 (2005:$18,000; 2004: $18,000) for financial
services provided during the period prior to his resignation as a director on
January 31, 2006;

The Company paid Lang Michener LLP in which Bernie
Zinkhofer, a former director, is a partner, $42,538 (2005: $66,470; 2004:
$81,771) for legal services (2005 and 2004: legal and directorial services);

The Company paid Peter Hill, a director, $54,923 for
consultancy services to Dec 31, 2006 and a further $3,000 to January 31, 2007;

The Company paid $25,221 (2005: $36,524; 2004:
$37,553) in rent to a trust of which Dave Bennett, the former Chief Executive
Officer of the Company, is a trustee. The Company also paid Dr Bennett $95,695
for consultancy services provided during the period subsequent to his
resignation on 30 December 2005;

A subsidiary of the Company owns 1,495,660 shares,
approximately 0.4% of issued shares (2005: 180,200 shares, approximately 0.5%
of issued shares) in Rift Oil PLC. The Company incurred $87,189(2005:
$5,110; 2004: Nil) in respect to consultancy services provided by Rift.

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.

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.

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, 2006 and 2005 and for the years ended December 31,
2006, 2005 and 2004 are provided under PART III of this Annual Report under
Item 17  Financial Statements.

Legal
Proceedings

There are no material legal proceedings to which the
Company is subject or which are anticipated or threatened. Previously, the
Company was subject to proceedings as detailed in Note 14(b) to the Companys
2006 Financial Statements (Item 17).

Dividends

The Company has never paid dividends to shareholders
nor is there a policy in place to do so. All cash-flow derived by the Company
is re-invested in oil and gas exploration, development and associated costs.

- 50 -

---



B. Significant Changes

No significant changes material to the Companys
business have occurred since the date of the annual financial statements,
except as disclosed in this Annual 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,
2006:

|     |  |                 |  |           |  |             |  |           |  |              |  |           |  |             |  |           | 
|---- |  | --------------- |  | --------- |  | ----------- |  | --------- |  | ------------ |  | --------- |  | ----------- |  | --------- | 
|Year |  | OTCBB (1)(2)(5) |  | OTCBB     |  | NZSX (2)(3) |  | NZSX      |  | TSX-V (2)(4) |  | TSX-V     |  | AMEX (2)(5) |  | AMEX      | 
|     |  |                 |  |           |  |             |  |           |  |              |  |           |  |             |  |           | 
|     |  | High            |  | Low       |  | High        |  | Low       |  | High         |  | Low       |  | High        |  | Low       | 
|     |  |                 |  |           |  |             |  |           |  |              |  |           |  |             |  |           | 
|     |  |                 |  |           |  |             |  |           |  |              |  |           |  |             |  |           | 
|2002 |  | 1.50            |  | 0.63      |  | No trades   |  | No trades |  | No trades    |  | No trades |  | No trades   |  | No trades | 
|2003 |  | 1.55            |  | 0.35      |  | No trades   |  | No trades |  | No trades    |  | No trades |  | No trades   |  | No trades | 
|2004 |  | 3.40            |  | 1.30      |  | 3.28        |  | 1.35      |  | 3.38         |  | 1.32      |  | No trades   |  | No trades | 
|2005 |  | 3.80            |  | 2.70      |  | 3.56        |  | 1.84      |  | 3.77         |  | 1.39      |  | 3.47        |  | 1.63      | 
|2006 |  | No trades       |  | No trades |  | 2.56        |  | 1.28      |  | 3.02         |  | 1.18      |  | 3.02        |  | 1.11      | 

Summary trading for the two most recently competed
fiscal periods ending December 31, 2006 and the subsequent period, for full
quarters:

|              |  |                |  |           |  |             |  |      |  |              |  |       |  |             |  |           | 
|------------- |  | -------------- |  | --------- |  | ----------- |  | ---- |  | ------------ |  | ----- |  | ----------- |  | --------- | 
|Year/
Quarter |  | OTCBB(1)(2)(5) |  | OTCBB     |  | NZSX (2)(3) |  | NZSX |  | TSX-V (2)(4) |  | TSX-V |  | AMEX (2)(5) |  | AMEX      | 
|              |  |                |  |           |  |             |  |      |  |              |  |       |  |             |  |           | 
|              |  | High           |  | Low       |  | High        |  | Low  |  | High         |  | Low   |  | High        |  | Low       | 
|              |  |                |  |           |  |             |  |      |  |              |  |       |  |             |  |           | 
|              |  |                |  |           |  |             |  |      |  |              |  |       |  |             |  |           | 
|2005          |  |                |  |           |  |             |  |      |  |              |  |       |  |             |  |           | 
|Quarter 1     |  | 3.80           |  | 2.70      |  | 3.56        |  | 2.87 |  | 3.77         |  | 2.64  |  | No trades   |  | No trades | 
|Quarter 2     |  | 3.30           |  | 2.85      |  | 3.26        |  | 2.72 |  | 3.51         |  | 2.25  |  | 3.47        |  | 2.30      | 
|Quarter 3     |  | No trades      |  | No trades |  | 3.20        |  | 2.58 |  | 3.37         |  | 2.36  |  | 3.26        |  | 2.36      | 
|Quarter 4     |  | No trades      |  | No trades |  | 2.88        |  | 1.84 |  | 3.00         |  | 1.59  |  | 2.90        |  | 1.63      | 
|2006          |  |                |  |           |  |             |  |      |  |              |  |       |  |             |  |           | 
|Quarter 1     |  | No trades      |  | No trades |  | 2.05        |  | 1.52 |  | 1.97         |  | 1.33  |  | 1.90        |  | 1.35      | 
|Quarter 2     |  | No trades      |  | No trades |  | 2.56        |  | 1.46 |  | 3.02         |  | 1.21  |  | 3.02        |  | 1.21      | 
|Quarter 3     |  | No trades      |  | No trades |  | 1.65        |  | 1.28 |  | 1.69         |  | 1.15  |  | 1.73        |  | 1.11      | 
|Quarter 4     |  | No trades      |  | No trades |  | 2.04        |  | 1.43 |  | 1.99         |  | 1.17  |  | 2.01        |  | 1.36      | 
|2007          |  |                |  |           |  |             |  |      |  |              |  |       |  |             |  |           | 
|Quarter 1     |  | No trades      |  | No trades |  | 2.05        |  | 1.61 |  | 1.89         |  | 0.97  |  | 1.83        |  | 1.21      | 

Summary trading for the six most recently completed
months ending May 31, 2007:

|         |  |  |             |  |  |      |  |  |              |  |  |       |  |  |             |  |  |      | 
|-------- |  |  | ----------- |  |  | ---- |  |  | ------------ |  |  | ----- |  |  | ----------- |  |  | ---- | 
|         |  |  | NZSX (2)(3) |  |  | NZSX |  |  | TSX-V (2)(4) |  |  | TSX-V |  |  | AMEX (2)(5) |  |  | AMEX | 
|         |  |  |             |  |  |      |  |  |              |  |  |       |  |  |             |  |  |      | 
|Month    |  |  | High        |  |  | Low  |  |  | High         |  |  | Low   |  |  | High        |  |  | Low  | 
|         |  |  |             |  |  |      |  |  |              |  |  |       |  |  |             |  |  |      | 
|Dec 2006 |  |  | 2.04        |  |  | 1.70 |  |  | 1.99         |  |  | 1.64  |  |  | 2.01        |  |  | 1.65 | 
|Jan 2007 |  |  | 2.05        |  |  | 1.77 |  |  | 1.89         |  |  | 1.54  |  |  | 1.82        |  |  | 1.52 | 
|Feb 2007 |  |  | 1.97        |  |  | 1.77 |  |  | 1.76         |  |  | 1.51  |  |  | 1.83        |  |  | 1.44 | 
|Mar 2007 |  |  | 1.84        |  |  | 1.61 |  |  | 1.49         |  |  | 0.97  |  |  | 1.47        |  |  | 1.21 | 
|Apr 2007 |  |  | 1.67        |  |  | 1.59 |  |  | 1.40         |  |  | 1.06  |  |  | 1.32        |  |  | 1.06 | 
|May 2007 |  |  | 1.51        |  |  | 1.38 |  |  | 1.12         |  |  | .90   |  |  | 1.18        |  |  | 1.00 | 

|    |                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | OTCBB quotations may
  reflect interdealer prices, without retail markup, markdown or commission and
  may not necessarily reflect actual transactions.

- 51 -

---



|    |                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | OTCBB quotes are from
  www.amex.com. All TSX-V, AMEX and NZSX (listed) prices are from
  www.finance.yahoo.com. All NZSE Unlisted trades prices are from
  www.directbroking.co.nz. Quoted prices are closing prices.
|    |                                                                                                                                                                                                                       
|(3) | The Company was listed on
  the NZSXs unlisted market board until the end of 2003. From January 6, 2004,
  the Company was quoted on the NZSX main board.                                                            
|    |                                                                                                                                                                                                                       
|(4) | The Company listed on the
  TSX-V from January 2, 2004.                                                                                                                                                               
|    |                                                                                                                                                                                                                       
|(5) | The Company listed on the
  AMEX from April 18, 2005, and de-listed from the OTC-BB at that time.                                                                                                                     

B. Plan of Distribution

Not applicable

C. Markets

The Company listed under the symbol APX on the
Toronto Stock Exchange  Venture Exchange (TSX-V) from January 2, 2004 and the
New Zealand Stock Exchange (NZSX) from January 5, 2004, and, from April 18,
2005, on the American Stock Exchange (AMEX) under the symbol AEN.

D., E. & F.Not applicable

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

A. Share Capital

Not applicable

B. Corporate Charter Documents

As noted in Item 4.A, the Company was continued into
the jurisdiction of the Province of British Columbia, Canada in October 2006,
which continuation (from the Yukon Territory, Canada) included the adoption of
new Articles of the Company (Exhibit 1.3), as approved by the shareholders at
the annual and special meeting of the Company held on May 2, 2006. Notice of
Articles (also part of Exhibit 1.3) was filed with the British Columbia
Registrar of Companies, and such Articles 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 (as Exhibit 99.11) on April 10, 2006.

|   |                                         
|-- | ----------------------------------------
|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

Generally

(a) 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.

- 52 -

---



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 varied

The 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 May 31, 2007, there were 30,464,287 common shares and no preferred
shares issued and outstanding.

Voting

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

The preferred Shares have the right to vote on the
same basis as the common shares, one vote per share.

(a) dividend rights

The 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.

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(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;

 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 of 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.

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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 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.

|   |                                                                                    
|-- | -----------------------------------------------------------------------------------
|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 as a foreign reporting issuer in the U.S.A.

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 proxy circular sent out for an annual meeting or special meeting, the names
of

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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.

|    |                                 
|--- | --------------------------------
|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 not entered into, nor remains subject
to, any material contracts in the two years prior to May 31, 2007 which can
reasonably be regarded as being out of 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), other
than the following contracts:

|                                     |  |              |  |                                                                         |  |                                                                                                                                                 
|------------------------------------ |  | ------------ |  | ----------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|Document                             |  | Date         |  | Parties                                                                 |  | Particulars                                                                                                                                     
|                                     |  |              |  |                                                                         |  |                                                                                                                                                 
|Form of Stock Option Agreement       |  | Oct 15, 2002 |  | various employees, directors, and consultants;
  Austral                |  | Provides for the terms of stock option grants for
  grants made before adoption of the 2004 and 2006 Stock Option Plans; also
  refer Item 6.E.2
|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                                 
|Settlement Agreement                 |  | Dec 30, 2005 |  | DJ Bennett;
  Austral                                                   |  | Records termination payment and option variations
  upon resignation of CEO                                                                     
|Variation of Settlement Agreement    |  | Feb 2, 2006  |  | DJ Bennett;
  Austral                                                   |  | Varies option variations made in Settlement
  Agreement, by cancelling all previous options and granting 750,000 vested
  2-year options        
|Stock Option Plan                    |  | Mar 3, 2006  |  |                                                                         |  | Stock Option Plan and grants thereunder pursuant to
  which 1,622,500 shares were reserved for issuance as at December 2006                     
|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                                                                                 

- 56 -

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|                                   |  |                                    |  |                                                                            |  |                                                                                                                                                 
|---------------------------------- |  | ---------------------------------- |  | -------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|Document                           |  | Date                               |  | Parties                                                                    |  | Particulars                                                                                                                                     
|                                   |  |                                    |  |                                                                            |  |                                                                                                                                                 
|Gas Pre-Payment and Sale Agreement |  | Feb 4, 2004                        |  | NGC Energy
  International Resource Management Corporation (IRM)           |  | NGC lent IRM NZ$2.5 million for the right to
  purchase Kahili and Cheal gas at an agreed price                                                 
|Asset Sale Agreement               |  | Oct 23, 2005                       |  | International Resource Management Corporation (IRM)
  Arrowhead Energy Ltd |  | Purchase by Arrowhead Energy of Cheal and Kahili
  assets from IRM, including transfer of obligations under Gas Pre-Payment
  Agreement (Feb 04)
|US$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                                                    
|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.                                     
|                                   |  |                                    |  |                                                                            |  |                                                                                                                                                 
|Offer of Employment, and variation |  | Apr 23, 2007
  Varied May 24, 2007 |  | Austral;
  T B Jewell                                                      |  | Letter offering employment as CEO .and specifying
  material terms                                                                              

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 Act for 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 Act will 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.

The Investment
Act generally 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 Act and 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 Act if 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

- 57 -

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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 Act if 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$281
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
Act governing 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 and regulations 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 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 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

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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. Under the Treaty, the rate of withholding tax on
dividends paid to a 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 prescribed 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 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

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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).

Subject to the
Passive Foreign Investment Company discussion 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 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

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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

Subject to the
Passive Foreign Investment Company discussion below, 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

A U.S. Holder
who holds stock in a foreign corporation during any year in which such
corporation qualifies as a passive foreign investment company (PFIC) is
subject to U.S. federal income taxation of that foreign corporation under one of
two alternative tax methods at the election of each such U.S. Holder.

Section 1297
of the Code defines a PFIC as a foreign (non-U.S.) corporation, if for any
taxable year, either (i) 75% or more of its gross income is passive
income, which includes but is not limited to interest, dividends and certain
rents and royalties or (ii) the average percentage, by value (or, if the
company is a controlled foreign corporation or makes an election, adjusted tax
basis), of its assets that produce or are held for the production of passive
income is 50% or more. The Company believes that it is presently a PFIC.

As a PFIC,
each U. S. Holders income or gain with respect to a disposition or deemed
disposition of the Companys shares or a distribution payable on such shares
will generally be subject to tax at the highest marginal rates applicable to
ordinary income and certain interest charges discussed below, unless the U.S.
Holder has timely made a qualified electing fund election or a
mark-to-market election for those shares. A U.S. Holder who elects in a
timely manner to treat the Company as a Qualified Electing Fund (QEF), as
defined in the Code, (an Electing U.S. Holder) will be subject, under Section
1293 of the Code, to current federal income tax for any taxable year in which
the Companys qualifies as a PFIC on his pro-rata share of the Companys (i)
net capital gain (the excess of net long-term capital gain over net
short-term capital loss), which will be taxed as long-term capital gain to the
Electing U.S. Holder and (ii) ordinary earnings (the excess of earnings and
profits over net capital gain), which will be taxed as ordinary income to the
Electing U.S. Holder, in each case, for the U.S. Holders taxable year in which
(or with which) the Company taxable year ends, regardless of whether such
amounts are actually distributed. A U.S. Holders tax basis in the common
shares will be increased by such amount that is included in income but not
distributed.

A QEF election
also allows the Electing U.S. Holder to (i) generally treat any gain realized
on the disposition of his common shares (or deemed to be realized on the pledge
of his common shares) as capital gain; (ii) treat

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his share of
the Companys net capital gain, if any, as long-term capital gain instead of
ordinary income, and (iii) either avoid interest charges resulting from PFIC
status altogether (see discussion of interest charge below), or make an annual
election, subject to certain limitations, to defer payment of current taxes on
his share of the Companys annual realized net capital gain and ordinary
earnings subject, however, to an interest charge. If the Electing U.S. Holder
is not a corporation, such an interest charge would be treated as nondeductible
personal interest.

The procedure
a U.S. Holder must comply with in making a timely QEF election will depend on
whether the year of the election is the first year in the U.S. Holders holding
period in which the Company is a PFIC. If the U.S. Holder makes a QEF election
in such first year, (sometimes referred to as a Pedigreed QEF Election), then
the U.S. Holder may make the QEF election by simply filing the appropriate
documents at the time the U.S. Holder files its tax return for such first year.
If, however, the Company qualified as a PFIC in a prior year, then in addition
to filing documents, the U.S. Holder may also elect to recognize as an excess
distribution (i) under the rules of Section 1291 (discussed below), any gain
that he would otherwise recognize if the U.S. Holder sold his stock on the
application date or (ii) if the Company is a controlled foreign corporation
(CFC), the Holders pro rata share of the corporations earnings and profits.
(But see Elimination of Overlap Between Subpart F Rules and PFIC Provisions).
Either the deemed sale election or the deemed dividend election will result in
the U.S. Holder being deemed to have made a timely QEF election.

With respect
to a situation in which a Pedigreed QEF election is made, if the Company no
longer qualifies as a PFIC in a subsequent year, normal Code rules and not the
PFIC rules will apply.

If a U.S.
Holder has not made a QEF Election at any time (a Non-electing U.S. Holder),
then special taxation rules under Section 1291 of the Code will apply to (i)
gains realized on the disposition (or deemed to be realized by reason of a
pledge) of his common shares and (ii) certain excess distributions, as
specially defined, by the Company.

A Non-electing
U.S. Holder generally would be required to pro-rate all gains realized on the
disposition of his common shares and all excess distributions over the entire
holding period for the common shares. All gains or excess distributions
allocated to prior years of the U.S. Holder (other than years prior to the
first taxable year of the Company during such U.S. Holders holding period and
beginning after January 1, 1987 for which it was a PFIC) would be taxed at the
highest marginal tax rate for each such prior year applicable to ordinary
income. The Non-electing U.S. Holder also would be liable for interest on the
foregoing tax liability for each such prior year calculated as if such
liability had been due with respect to each such prior year. A Non-electing,
non-corporate U.S. Holder must treat this interest charge as personal interest
which, as discussed above, is wholly non-deductible. The balance of the gain or
the excess distribution will be treated as ordinary income in the year of the
disposition or distribution, and no interest charge will be incurred with
respect to such balance.

If the Company
is a PFIC for any taxable year during which a Non-electing U.S. Holder holds
common shares, then the Company will continue to be treated as a PFIC with
respect to such common shares, even if it is no longer by definition a PFIC. A
Non-electing U.S. Holder may terminate this deemed PFIC status by electing to
recognize gain (which will be taxed under the rules discussed above for
Non-Electing U.S. Holders) as if such common shares had been sold on the last
day of the last taxable year for which it was a PFIC.

Under Section
1291(f) of the Code, the Department of the Treasury has issued proposed
regulations that would treat as taxable certain transfers of PFIC stock by
Non-electing U.S. Holders that are generally not otherwise taxed, such as
gifts, exchanges pursuant to corporate reorganizations, and transfers at death.

If a U.S.
Holder makes a QEF Election that is not a Pedigreed Election (i.e., it is made
after the first year during which the Company is a PFIC and the U.S. Holder
holds shares of the Company) (a Non-Pedigreed Election), the QEF rules apply
prospectively but do not apply to years prior to the year in which the QEF
first becomes effective. U.S. Holders are encouraged to consult their tax
advisors regarding the specific consequences of making a Non-Pedigreed QEF
Election.

Certain
special, generally adverse, rules will apply with respect to the common shares
while the Company is a PFIC whether or not it is treated as a QEF. For example
under Section 1298(b)(6) of the Code, a U.S. Holder who uses PFIC stock as
security for a loan (including a margin loan) will, except as may be provided
in regulations, be treated as having made a taxable disposition of such stock.

Mark-to-Market
Election for PFIC Stock

A U.S. Holder
of a PFIC may make a mark-to-market election with respect to the stock of the
PFIC if such

- 62 -

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stock is
marketable as defined below. This provision is designed to provide a current
inclusion provision for persons that are Non-Electing Holders. Under the election,
any excess of the fair market value of the PFIC stock at the close of the tax
year over the Holders adjusted basis in the stock is included in the Holders
income. The Holder may deduct any excess of the adjusted basis of the PFIC
stock over its fair market value at the close of the tax year. However,
deductions are limited to the net mark-to-market gains on the stock that the
Holder included in income in prior tax years, or so called unreversed
inclusions.

For purposes
of the election, PFIC stock is marketable if it is regularly traded on
(1) a national securities exchange that is registered with the Securities
and Exchange Commission (SEC), (2) the national market system
established under Section 11A of the Securities Exchange Act of 1934, or
(3) an exchange or market that the IRS determines has rules sufficient to
ensure that the market price represents legitimate and sound fair market value.

A Holders
adjusted basis of PFIC stock is increased by the income recognized under the
mark-to-market election and decreased by the deductions allowed under the
election. If a U.S. Holder owns PFIC stock indirectly through a foreign entity,
the basis adjustments apply to the basis of the PFIC stock in the hands of the
foreign entity for the purpose of applying the PFIC rules to the tax treatment
of the U.S. owner. Similar basis adjustments are made to the basis of the
property through which the U.S. persons hold the PFIC stock.

Income
recognized under the mark-to-market election and gain on the sale of PFIC stock
with respect to which an election is made is treated as ordinary income.
Deductions allowed under the election and loss on the sale of PFIC with respect
to which an election is made, to the extent that the amount of loss does not
exceed the net mark-to-market gains previously included, are treated as
ordinary losses. The U.S. or foreign source of any income or losses is
determined as if the amount were a gain or loss from the sale of stock in the
PFIC.

If PFIC stock
is owned by a controlled foreign corporation (CFC), the CFC is treated as a
U.S. person that may make the mark-to-market election. Amounts includable in
the CFCs income under the election are treated as foreign personal holding
company income, and deductions are allocable to foreign personal holding
company income. A CFC is a foreign corporation in which more than 50% of the
voting power of all classes of stock or the total value of the stock is owned,
directly or indirectly, by U.S. Holders, each of whom own 10% or more of the
total combined voting power.

The above
provisions apply to tax years of U.S. persons beginning after December 31,
1997, and to tax years of foreign corporations ending with or within such tax
years of U.S. persons.

The rules of
Code Section 1291 applicable to nonqualified funds generally do not apply to a
U.S. Holder for tax years for which a mark-to-market election is in effect. If
Code Section 1291 is applied and a mark-to-market election was in effect for
any prior tax year, the U.S. Holders holding period for the PFIC stock is
treated as beginning immediately after the last tax year of the election.
However, if a taxpayer makes a mark-to-market election for PFIC stock that is a
nonqualified fund after the beginning of a taxpayers holding period for such
stock, a coordination rule applies to ensure that the taxpayer does not avoid
the interest charge with respect to amounts attributable to periods before the
election.

The foregoing
discussion is based on currently effective provisions of the Code, existing and
proposed regulations thereunder, and current administrative rulings and court
decisions, all of which are subject to change. Any such change could affect the
validity of this discussion. In addition, the implementation of certain aspects
of the PFIC rules requires the issuance of regulations which in many instances
have not been promulgated and which may have retroactive effect. There can be
no assurance that any of these proposals will be enacted or promulgated, and if
so, the form they will take or the effect that they may have on this
discussion. Accordingly, and due to the complexity of the PFIC rules, U.S.
Holders of the Company are strongly urged to consult their own tax advisors
concerning the impact of these rules on their investment in the Company.

F. Dividends and
paying agents

Not applicable

G. Statement by
experts

Not applicable

- 63 -

---



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 that may give rise to interest rate exposure (see Note
19(a) of the Companys 2006 Consolidated Financial Statements at Item 17, and
Exhibit 4.2.1). 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
19(b) of the 2006 Consolidated Financial Statements, and Exhibits 4.2.2 and
4.2.3). 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 2.1.1).
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%). At December 31, 2006 a total
  drawdown of $10,738,000 had been made from the Senior tranche. Total
  drawdowns under the Senior tranche are restricted to $13,000,000 until the
  finalisation of certain project contracts;
| |       |                                                                                                                                                                                                                                                                                                                                                                     
| | (ii)  | $5,000,000
  Junior tranche. The interest rate prior to project completion is LIBOR plus
  4.00% (post completion LIBOR plus 3.5%). 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 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

- 64 -

---



these investments.

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, 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.3
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, 2006 the Company had entered into a series of put options and
forward sales contracts for the future sale of crude oil produced from the
Cheal oil field. 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, 2006 the Company
had entered into a series of put options and forward sales contracts for the
future sale of crude oil produced from the Cheal oil field. The contracts were
entered into in connection with the raising of long term debt (refer to Item 5
and Exhibit 2.1.1). As the put options and forward sales contracts hedge
commodity price against the Brent Crude Futures Contract and the Companys oil
sales are in TAPIS, 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 $455,685 net reduction in the
fair value of the derivative instruments has been recognised in the Statements
of Operations and Deficit in the current period. The current portion of the
change in fair value has been included within Accounts Receivable/Payable.

The Companys
outstanding contracts for derivative instruments, and the related fair values
at December 31, 2006 were as follows:

|                          |  |                      |         |                 |  |                                |  |                                         |       |  |  |          |  
|------------------------- |  | -------------------- | ------- | --------------- |  | ------------------------------ |  | --------------------------------------- | ----- |  |  | -------- | -
|                          |  | 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 | )

The loss is
categorized by current $75,781 and non-current $590,320. The put options for
April to June 2007 have since been closed out, in April 2007.

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 derivative in its entirety. Accordingly, warrants
with a stated exercise price in New Zealand dollars are considered derivatives
for the purposes of US GAAP. There were no New Zealand dollar share purchase
warrants outstanding at December 31, 2005 or 2006.

- 65 -

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

Not applicable

PART II

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

None

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

A. Material Modifications to Defining
Instruments

The Companys
Articles, which are the primary instrument defining the rights of the holders
of the Companys securities, replaced the Companys previous Articles and
By-laws, upon the continuation of the Company from the jurisdiction of the
Yukon to British Columbia, Canada. See Item 10.A for a discussion of changes to
security holders rights arising from that change in defining instrument.

B, C, D, E

Not applicable

|         |                        
|-------- | -----------------------
|ITEM 15. | CONTROLS AND PROCEDURES

The Company is
aware of the importance of maintaining controls and procedures and is
continuously improving its controls and procedures. As the Company is not an
accelerated filer under SEC definitions, beginning with the Companys fiscal
year ending December 31, 2007, Section 404 of the U.S. Sarbanes-Oxley Act 2002
(Section 404) will require the Company to include an internal control report
from management with the annual report on Form 20-F. The internal control
report must contain (1) a statement of managements responsibility for
establishing and maintaining adequate internal control over financial reporting
for the Company, (2) a statement identifying the framework used by management
to conduct the required evaluation of the effectiveness of the Companys
internal controls over financial reporting, (3) managements assessment of the
effectiveness of the Companys internal controls over financial reporting as of
the end of the most recent fiscal year, including a statement as to whether or
not the Companys internal controls over financial reporting are effective and
(4) from fiscal years ending on or after December 15, 2008 a statement that the
Companys independent auditors have issued an attestation report on
managements assessment of the internal controls over financial reporting and
the effectiveness of those controls.

Evaluation of Disclosure Controls and
Procedures

The Companys
Chief Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of the Companys disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of December 31, 2006, have
concluded that the Companys disclosure controls and procedures were adequate
and effective for recording, processing, summarizing and reporting the material
information we are required to disclose in the reports we file or submit under
the Exchange Act, within the time periods specified in the rules and forms of
the SEC.

However in
connection with the audit of the Companys 2006 fiscal year consolidated
financial statements the Companys independent auditors notified the Company
that they had identified an issue which constituted a weakness in relation to
accounting for specific non routine transactions. This issue related to the
application of specific technical accounting requirements and the work papers
supporting the accounting treatment.

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. The Company
has moved to remediate this weakness during 2007 through the following new and
continued remediation:

|  |                                                                                        
|- | ---------------------------------------------------------------------------------------
| | recruitment
  of an additional experienced accountant to supplement existing staff; and
|  |                                                                                        
| | clearly
  defining the roles and responsibilities of the internal accounting staff; and

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|  |                                                                                                                                                                                                                    
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | engagement
  of external accounting advisors to inform the company of developments in
  accounting standards and to provide assistance on the application of specific
  technical requirements where necessary; and
|  |                                                                                                                                                                                                                    
| | training of
  staff to address the lack of sufficient knowledge and experience among the
  internal personnel regarding the application of specific technical
  requirements.                                      

As required by
Section 302(a) of the Sarbanes-Oxley Act of 2002, the Companys Chief Executive
Officer and Chief Financial Officer are required to make certifications related
to the information in this Report. As part of such certification, the Chief
Executive Officer and Chief Financial Officer must certify that they are
responsible for establishing and maintaining disclosure controls and procedures
to ensure that material information with respect to the Company is made known
to them and that they have evaluated the effectiveness of the Companys
disclosure controls and procedures as of December 31, 2006. Disclosure controls
and procedures are intended to ensure that information required to be disclosed
by the Company in its annual report is recorded, processed, summarized and
reported within the time periods required. The Company has adopted or
formalized such controls and procedures as it believes are necessary and
consistent with its business and internal management and supervisory practices.

Completed Remediation Action to Address 2005
Material Weaknesses

In connection
with the audit of the Companys 2005 fiscal year financial statements the
Companys independent auditors notified the Company that they had identified
two issues which constitute material weaknesses. These material weaknesses
comprised:

|  |                                                                                                            
|- | -----------------------------------------------------------------------------------------------------------
| | inadequate
  controls over the cut off processes, resulting in a number of post-closing
  adjustments; and,
|  |                                                                                                            
| | application
  of full cost accounting principles, resulting in post-closing adjustments.                   

In addition,
in the course of preparing the Canadian to United States GAAP reconciliation
the Company became aware that at 31 December 2005 it had not correctly
accounted for stock compensation expense under Canadian GAAP. The error arose
as a result of an interpretation of stock based accounting standards such that
a stock option grant made in February 2006, which was disclosed in the Canadian
GAAP financial statements by way of a note, should have been accounted for as
an adjustable subsequent event. Accordingly, the December 2005 financial
statements prepared under Canadian GAAP have been restated to account for this.

Under the
supervision of the Board of Directors, the Company continues to work towards
remediating the material weakness identified during 2005, through a combination
of the following initiatives:

|  |                                                                                                                                           
|- | ------------------------------------------------------------------------------------------------------------------------------------------
| | appointment
  of two directors new to the Company with extensive experience in the oil and
  gas exploration industry and oversight roles;
|  |                                                                                                                                           
| | improving
  the integration and use of the accounting system to capture data in a timely
  manner;                                        
|  |                                                                                                                                           
| | recruitment
  of an additional experienced accountant to assist in the development of
  accounting processes and reporting;               
|  |                                                                                                                                           
| | clearly
  defining the roles and responsibilities of the internal accounting staff and,                                                   
|  |                                                                                                                                           
| | training of
  staff to address knowledge and information gaps.                                                                            

Changes in Internal Control over Financial
Reporting

Other than
noted above, there have been no significant changes in our internal control
over financial reporting that occurred during the period covered by this annual
report that have materially affected, or that are reasonably likely to
materially affect, our internal control over financial reporting.

|          |                                 
|--------- | --------------------------------
|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 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
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

- 67 -

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and Chairman of Infratil Limited, the parent company of Infratil Gas
Limited, a greater than 10% shareholder of the Company, and as chairman of the
Company is deemed to be an executive officer of the Company under Canadian
rules, 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 both companies. 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. However, to comply with the spirit of NZSX Rules, he is treated by
the Company as not independent for the purposes of audit committee membership,
and an additional independent audit committee member (Dr. Ellenor) was
appointed from January 24, 2006.

|          |               
|--------- | --------------
|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. 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. The Code of Ethics is also
filed as an exhibit to this annual report as Exhibit 11.1.

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

|                             |  |                                                |         |                                                |     |         | 
|---------------------------- |  | ---------------------------------------------- | ------- | ---------------------------------------------- | --- | ------- | 
|Principal Accountant Service |  | For the fiscal year ended 
  December 31, 2006 |         | For the fiscal year ended 
  December 31, 2005 |    
|                             |  |                                                |         |                                                |    
|Audit Fees                   |  | $                                              | 261,797 |                                                | $   | 259,972 | 
|Audit
  Related Services     |  | $                                              | 15,560  |                                                | $   | 23,204  | 
|Tax Fees                     |  | $                                              | 38,870  |                                                | Nil |        
|All Other Fees               |  | Nil                                            |         | Nil                                            |    

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

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

None

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

None.

PART III

- 68 -

---



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

INDEX
TO FINANCIAL STATEMENTS

|                                                             |  |  |      | 
|------------------------------------------------------------ |  |  | ---- | 
|                                                             |  |  | Page | 
|                                                             |  |  |      | 
|Report of
  Independent Registered Public Accounting Firm    |  |  | 72   | 
|Consolidated
  Balance Sheets                                |  |  | 74   | 
|Consolidated
  Statements of Operations and Deficit          |  |  | 75   | 
|Consolidated
  Statements of Changes in Stockholders Equity |  |  | 76   | 
|Consolidated
  Statements of Cash Flows                      |  |  | 78   | 
|Notes to the
  Consolidated Financial Statements             |  |  | 79   | 

|         |                     
|-------- | --------------------
|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)      
|2.1.1             |  | US$ Cash Advance Agreement                  |  | Dec 21, 2006 |  | Investec Bank (Australia) Ltd;various
  Austral companies                  |  | (7)      
|2.1.2             |  | Warrant Agreement                           |  | Dec 21, 2006 |  | Investec Bank(Australia) Ltd;
  Austral                                    |  | (7)      
|4.1               |  | Form of Stock Option Agreement              |  | Oct 15, 2002 |  | various employees, directors, and consultants;
  Austral                   |  | (2)      
|4.2.1             |  | Gas Pre-payment and Option Agreement        |  | Apr 2, 2003  |  | NGC Energy;
  Austral                                                      |  | (1)      
|4.2.2             |  | Gas Pre-Payment and Sale Agreement          |  | Feb 4, 2004  |  | NGC EnergyInternational Resource Management Corporation (IRM)              |  | (7)      
|4.2.3             |  | Asset Sale Agreement                        |  | Oct 23, 2005 |  | International Resource Management Corporation (IRM)
  Arrowhead Energy Ltd |  | (7)      
|4.3               |  | Stock Option Plan                           |  | Mar 3, 2006  |  |                                                                            |  | (4)      

- 69 -

---



|                  |  |                                                                                                                                                                                                |  |              |  |                                                                         |  |          
|----------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | ----------------------------------------------------------------------- |  | ---------
|Exhibit Reference |  | Document                                                                                                                                                                                       |  | Date         |  | Parties                                                                 |  | Reference
|                  |  |                                                                                                                                                                                                |  |              |  |                                                                         |  |          
|4.4.1             |  | Form of Unit Subscription Agreement                                                                                                                                                            |  | Oct 18, 2006 |  | Austral and various purchasers of the Units                             |  | (7)      
|4.4.2             |  | Form of Unit Subscription Agreement                                                                                                                                                            |  | Mar 30, 2007 |  | Austral and various purchasers of the Units                             |  | (7)      
|4.5.1             |  | Settlement Agreement                                                                                                                                                                           |  | Dec 30, 2005 |  | DJ Bennett;
  Austral                                                   |  | (3)      
|4.5.2             |  | Variation of Settlement Agreement                                                                                                                                                              |  | Feb 2, 2006  |  | DJ Bennett;
  Austral                                                   |  | (3)      
|4.6               |  | Share Sale Agreement                                                                                                                                                                           |  | Oct 18, 2006 |  | Shareholders of Arrowhead Energy Ltd;
  Austral Pacific Energy (NZ) Ltd |  | (7)      
|4.7.1             |  | Offer of Employment                                                                                                                                                                            |  | Apr 23, 2007 |  | Austral;
  T B Jewell                                                   |  | (7)      
|4.7.2             |  | Variation to offer of employment                                                                                                                                                               |  | May 24, 2007 |  | Austral;
  T B Jewell                                                   |  | (7)      
|8                 |  | List of
  Subsidiaries of the Company                                                                                                                                                          |  | May 31, 2007 |  |                                                                         |  | (7)      
|11                |  | Code of
  Ethics                                                                                                                                                                               |  | Dec 19, 2006 |  |                                                                         |  | (7)      
|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)         
|15.1              |  | Evaluation
  of the Petroleum & Natural Gas Reserves of Austral Pacific Energy Ltd                                                                                                             |  | Dec 31, 2006 |  | Sproule International Limited                                           |  | (6)      

|    |                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------
|(1) | Incorporated
  by reference as previously included in our Form 20-F filed for the year ended
  December 31, 2004.
|    |                                                                                                                  
|(2) | Incorporated
  by reference as previously included in our Form 20-F filed for the year ended
  December 31, 2002.
|    |                                                                                                                  
|(3) | Incorporated
  by reference as previously included in our Form 20-F filed for the year ended
  December 31, 2005.
|    |                                                                                                                  
|(4) | Incorporated
  by reference as previously included in our Form 20-F filed for the year ended
  December 31, 2003.
|    |                                                                                                                  
|(5) | Incorporated by reference as previously included in a Form 6-K filed
  October 26, 2006.                         

- 70 -

---



|    |                                                                                      
|--- | -------------------------------------------------------------------------------------
|(6) | Incorporated by reference as previously included in a Form 6-K filed
  April 3, 2007.
|    |                                                                                      
|(7) | Filed as an exhibit to this Annual Report on Form 20-F.                              

SIGNATURES

The Company
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
  13, 2007 | By:                           | T Jewell                           
|                      |                              
|                      | Name:                         | Thompson
  Jewell                   
|                      |                               |                                     
|                      | Title:                        | Chief
  Executive Officer, President

- 71 -

---



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, 2006 and 2005, 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, 2006. 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.

As further described in Note 4 to the consolidated financial
statements, the Company changed its method of accounting for oil and gas
properties in 2006. The consolidated financial statements for 2005 and 2004
have been restated for the retrospective application of this change in
accounting method.

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, 2006 and 2005, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 2006, in conformity with generally accepted accounting
principles in Canada.

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 27 to the consolidated financial statements.

-s- KPMG

Wellington, New Zealand

March 16, 2007, except as to note 2, which is
as of June 13, 2007.

- 72 -

---



AUSTRAL PACIFIC ENERGY LTD.

CONSOLIDATED
FINANCIAL STATEMENTS 
(Expressed in United States Dollars)

DECEMBER 31, 2006

- 73 -

---



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

|                                                     |  |          |             |                        |  |             |  
|---------------------------------------------------- |  | -------- | ----------- | ---------------------- |  | ----------- | -
|As at
  December 31                                  |  | 2006
  $ |             | 2005
  $(restated) (1) | 
|                                                     |  |          |             |                        | 
|Assets                                               |  |          |             |                        |  |             |  
|                                                    
|Current                                              |  |          |             |                        |  |             |  
|Cash and cash equivalents
  (Note 6)                 |  |          | 7,144,943   |                        |  | 15,339,906  |  
|Accounts receivable (Note
  10)                      |  |          | 1,418,071   |                        |  | 746,165     |  
|Financial Instruments
  (Note 21)                    |  |          | 210,416     |                        |  |            |  
|Inventory (Note 11)                                  |  |          | 475,280     |                        |  | 474,777     |  
|Prepaid expenses and
  deposits                      |  |          | 500,572     |                        |  | 217,910     |  
|                                                     |  |          |             |                        |  |             |  
|                                                     |  |          | 9,749,282   |                        |  | 16,778,758  |  
|                                                     |  |          |             |                        |  |             |  
|Non-current                                          |  |          |             |                        |  |             |  
|Restricted cash (Note 6
  and 20)                    |  |          | 3,000,000   |                        |  |            |  
|Investments (Note 12)                                |  |          | 136,528     |                        |  | 83,612      |  
|Held for sale asset (Note
  7)                       |  |          | 235,353     |                        |  |            |  
|Property and equipment
  (Note 7)                    |  |          | 20,853,539  |                        |  | 3,513,535   |  
|Goodwill (Note 5 and Note
  8)                       |  |          | 2,018,969   |                        |  |            |  
|                                                     |  |          |             |                        |  |             |  
|Total
  Assets                                       |  |          | 35,993,671  |                        |  | 20,375,905  |  
|                                                     |  |          |             |                        |  |             |  
|Liabilities                                          |  |          |             |                        |  |             |  
|                                                    
|Current                                              |  |          |             |                        |  |             |  
|Accounts payable and
  accrued liabilities (Note 10) |  |          | 3,839,736   |                        |  | 1,941,606   |  
|Financial instruments
  (Note 21)                    |  |          | 75,781      |                        |  |            |  
|Current portion of Long
  Term Debt (Note 20)        |  |          | 6,266,944   |                        |  |            |  
|Prepaid gas revenue (Note
  19)                      |  |          | 1,047,108   |                        |  |            |  
|                                                     |  |          |             |                        |  |             |  
|                                                     |  |          | 11,229,569  |                        |  | 1,941,606   |  
|                                                     |  |          |             |                        |  |             |  
|Non-current                                          |  |          |             |                        |  |             |  
|Financial instruments
  (Note 21)                    |  |          | 590,320     |                        |  |            |  
|Deferred taxation
  provision (Note 5)               |  |          | 2,018,969   |                        |  |            |  
|Prepaid gas revenue (Note
  19)                      |  |          | 2,330,660   |                        |  | 1,255,796   |  
|Asset retirement
  obligations (Note 9)              |  |          | 1,065,559   |                        |  | 337,075     |  
|Long Term Debt (Note 20)                             |  |          | 6,662,834   |                        |  |            |  
|                                                     |  |          |             |                        |  |             |  
|Total
  Liabilities                                  |  |          | 23,897,911  |                        |  | 3,534,477   |  
|                                                     |  |          |             |                        |  |             |  
|Stockholders
  Equity                               |  |          |             |                        |  |             |  
|Common stock without par
  value (Note 15);          |  |          |             |                        |  |             |  
|unlimited number of shares
  authorized;             |  |          |             |                        |  |             |  
|Issued and outstanding
  27,764,287 shares           |  |          | 50,045,527  |                        |  | 43,499,296  |  
|Contributed surplus                                  |  |          | 1,545,218   |                        |  | 1,023,967   |  
|Share purchase warrants
  reserve (Note 15)          |  |          | 1,540,762   |                        |  |            |  
|Accumulated other
  comprehensive income (Note 12)   |  |          | 52,916      |                        |  |            |  
|Accumulated deficit                                  |  |          | (41,088,663 | )                      |  | (27,681,835 | )
|                                                     |  |          |             |                        |  |             |  
|Total
  Stockholders Equity                         |  |          | 12,095,760  |                        |  | 16,841,428  |  
|                                                     |  |          |             |                        |  |             |  
|Total
  Liabilities and Stockholders Equity         |  |          | 35,993,671  |                        |  | 20,375,905  |  
|                                                     |  |          |             |                        |  |             |  

|                                            |  |                                                  
|------------------------------------------- |  | -------------------------------------------------
|Commitments
  and Contingencies
  (Note 14) |  | Related
  Party Transactions
  (Note 13)         
|Subsequent
  Events (Note 25)               |  | Ability to
  Continue As A Going Concern (Note 2)
|(1) As restated (Note 4)                    |  |                                                  
|Approved by the Directors:                  |  |                                                  

|         |  |          |  | 
|-------- |  | -------- |  | 
|         |  |          |  | 
|Director |  | Director

See accompanying notes to the consolidated financial statements

- 74 -

---



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

|                                                |  |          |             |                        |  |                        |   |  |             |  
|----------------------------------------------- |  | -------- | ----------- | ---------------------- |  | ---------------------- | - |  | ----------- | -
|For the
  years ended December 31               |  | 2006
  $ |             | 2005
  $(restated) (1) |  | 2004
  $(restated) (1) |  
|                                                |  |          |             |                        |  |                        |  
|Production Income:                              |  |          |             |                        |  |                        |   |  |             |  
|Oil and gas sales                               |  |          | 911,931     |                        |  | 1,779,454              |   |  | 212,458     |  
|Royalties                                       |  |          | (40,899     | )                      |  | (74,930                | ) |  | (15,040     | )
|                                                |  |          |             |                        |  |                        |   |  |             |  
|                                                |  |          |             |                        |  |                        |   |  |             |  
|Net revenue                                     |  |          | 871,032     |                        |  | 1,704,524              |   |  | 197,418     |  
|                                                |  |          |             |                        |  |                        |   |  |             |  
|                                                |  |          |             |                        |  |                        |   |  |             |  
|Expenses                                        |  |          |             |                        |  |                        |   |  |             |  
|General and administrative
  expense            |  |          | (4,072,555  | )                      |  | (3,609,531             | ) |  | (1,831,137  | )
|Debt financing expenses                         |  |          | (12,271     | )                      |  |                       |   |  |            |  
|Foreign exchange
  (loss)/gain                  |  |          | (1,973,650  | )                      |  | (791,234               | ) |  | 197,858     |  
|Derivative loss (Note 21)                       |  |          | (455,685    | )                      |  |                       |   |  |            |  
|Production costs                                |  |          | (485,447    | )                      |  | (848,174               | ) |  | (67,543     | )
|Depletion (Note 7)                              |  |          | (347,206    | )                      |  | (61,979                | ) |  | (84,864     | )
|Operating leases/rental
  expense               |  |          | (103,526    | )                      |  | (44,008                | ) |  | (37,553     | )
|Amortization (Note 7)                           |  |          | (106,551    | )                      |  | (51,034                | ) |  | (32,402     | )
|Interest expense                                |  |          | (29,933     | )                      |  | (163                   | ) |  | (28,698     | )
|Impairment of oil and gas
  properties (Note 7) |  |          | (8,171,981  | )                      |  | (3,703,774             | ) |  | (4,197,820  | )
|                                                |  |          |             |                        |  |                        |   |  |             |  
|                                                |  |          |             |                        |  |                        |   |  |             |  
|Total Expenses                                  |  |          | (15,758,805 | )                      |  | (9,109,897             | ) |  | (6,082,159  | )
|                                                |  |          |             |                        |  |                        |   |  |             |  
|                                                |  |          |             |                        |  |                        |   |  |             |  
|Net loss for the year
  before other income     |  |          | (14,887,773 | )                      |  | (7,405,373             | ) |  | (5,884,741  | )
|                                                |  |          |             |                        |  |                        |   |  |             |  
|Other Income                                    |  |          |             |                        |  |                        |   |  |             |  
|Interest income                                 |  |          | 437,279     |                        |  | 460,411                |   |  | 326,012     |  
|Joint venture recoveries                        |  |          | 1,043,666   |                        |  | 1,093,417              |   |  | 930,673     |  
|Miscellaneous revenue                           |  |          |            |                        |  | 83,612                 |   |  |            |  
|                                                |  |          |             |                        |  |                        |   |  |             |  
|                                                |  |          |             |                        |  |                        |   |  |             |  
|Net loss for the year                           |  |          | (13,406,828 | )                      |  | (5,767,933             | ) |  | (4,628,056  | )
|                                                |  |          |             |                        |  |                        |   |  |             |  
|Deficit, beginning of year                      |  |          | (27,681,835 | )                      |  | (21,913,902            | ) |  | (17,285,846 | )
|                                                |  |          |             |                        |  |                        |   |  |             |  
|                                                |  |          |             |                        |  |                        |   |  |             |  
|Deficit, end of year                            |  |          | (41,088,663 | )                      |  | (27,681,835            | ) |  | (21,913,902 | )
|                                                |  |          |             |                        |  |                        |   |  |             |  
|                                                |  |          |             |                        |  |                        |   |  |             |  
|Basic loss per share(Note 16)                   |  |          | (0.57       | )                      |  | (0.30                  | ) |  | (0.34       | )
|                                                |  |          |             |                        |  |                        |   |  |             |  
|                                               
|Diluted loss per share(Note 16)                 |  |          | (0.57       | )                      |  | (0.30                  | ) |  | (0.34       | )
|                                                |  |          |             |                        |  |                        |   |  |             |  

(1)
As restated (Note
4)

See accompanying notes to the consolidated
financial statements

- 75 -

---



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

|                                                                                            |  |              |            |                       |  |                                       |   |                                              |           |                       |  |                            |  |  |   |  |  |             |   |  |            |  
|------------------------------------------------------------------------------------------- |  | ------------ | ---------- | --------------------- |  | ------------------------------------- | - | -------------------------------------------- | --------- | --------------------- |  | -------------------------- |  |  | - |  |  | ----------- | - |  | ---------- | -
|                                                                                            |  |              |            | Contributed
  Surplus |  | Share
  Purchase
  Warrants
  Reserve |   | Accumulated
  Other
  Comprehensive
  Income |           | Accumulated
  Deficit |  | Total
  StockholdersEquity | 
|                                                                                            |  | Common Stock |            |                       |  |                                       |   |                                             
|                                                                                            |  |              |            |                       |  |                                       |   |                                             
|                                                                                            |  | Shares       |            | Amount $              |  |                                       |   |                                              |           |                      
|                                                                                            |  |              |            |                       |  |                                       |   |                                              |           |                       |  |                            |  |  |  
|Balance at
  January 1, 2004 (Restated(1))                                                  |  |              | 7,739,324  |                       |  | 20,478,365                            |   |                                              | 417,392   |                       |  |                           |  |  |  |  |  | (17,285,846 | ) |  | 3,609,911  |  
|                                                                                            |  |              |            |                       |  |                                       |   |                                              |           |                       |  |                            |  |  |   |  |  |             |   |  |            |  
|                                                                                            |  |              |            |                       |  |                                       |   |                                              |           |                       |  |                            |  |  |   |  |  |             |   |  |            |  
|Issuance of
  common shares for cash (Note 15(a))                                           |  |              | 4,000,000  |                       |  | 5,217,992                             |   |                                              |          |                       |  |                           |  |  |  |  |  |            |   |  | 5,217,992  |  
|                                                                                            |  |              |            |                       |  |                                       |   |                                              |           |                       |  |                            |  |  |   |  |  |             |   |  |            |  
|Less
  deferred offering costs(Note 15(a)                                                   |  |              |           |                       |  | (408,083                              | ) |                                              |          |                       |  |                           |  |  |  |  |  |            |   |  | (408,083   | )
|                                                                                            |  |              |            |                       |  |                                       |   |                                              |           |                       |  |                            |  |  |   |  |  |             |   |  |            |  
|Issuance of
  common shares in exchange for special class shares of subsidiary (Note 15(a)) |  |              | 1,111,123  |                       |  | 943,525                               |   |                                              |          |                       |  |                           |  |  |  |  |  |            |   |  | 943,525    |  
|                                                                                            |  |              |            |                       |  |                                       |   |                                              |           |                       |  |                            |  |  |   |  |  |             |   |  |            |  
|Exercise of
  share purchase warrants for cash (Note 15(a))                                 |  |              | 4,235,052  |                       |  | 5,719,941                             |   |                                              |          |                       |  |                           |  |  |  |  |  |            |   |  | 5,719,941  |  
|                                                                                            |  |              |            |                       |  |                                       |   |                                              |           |                       |  |                            |  |  |   |  |  |             |   |  |            |  
|Exercise of
  share purchase options (Note 15(a))                                           |  |              | 180,000    |                       |  | 231,588                               |   |                                              | (44,088   | )                     |  |                           |  |  |  |  |  |            |   |  | 187,500    |  
|                                                                                            |  |              |            |                       |  |                                       |   |                                              |           |                       |  |                            |  |  |   |  |  |             |   |  |            |  
|Convertible notes converted to shares (Note 15(a))                                          |  |              | 454,546    |                       |  | 500,000                               |   |                                              |          |                       |  |                           |  |  |  |  |  |            |   |  | 500,000    |  
|                                                                                            |  |              |            |                       |  |                                       |   |                                              |           |                       |  |                            |  |  |   |  |  |             |   |  |            |  
|Stock option compensation                                                                   |  |              |           |                       |  |                                      |   |                                              | (11,450   | )                     |  |                           |  |  |  |  |  |            |   |  | (11,450    | )
|                                                                                            |  |              |            |                       |  |                                       |   |                                              |           |                       |  |                            |  |  |   |  |  |             |   |  |            |  
|Net loss for the year                                                                       |  |              |           |                       |  |                                      |   |                                              |          |                       |  |                           |  |  |  |  |  | (4,628,056  | ) |  | (4,628,056 | )
|                                                                                            |  |              |            |                       |  |                                       |   |                                              |           |                       |  |                            |  |  |   |  |  |             |   |  |            |  
|                                                                                            |  |              |            |                       |  |                                       |   |                                              |           |                       |  |                            |  |  |   |  |  |             |   |  |            |  
|Balance at December 31, 2004 (Restated(1))                                                  |  |              | 17,720,045 |                       |  | 32,683,328                            |   |                                              | 361,854   |                       |  |                           |  |  |  |  |  | (21,913,902 | ) |  | 11,131,280 |  
|                                                                                            |  |              |            |                       |  |                                       |   |                                              |           |                       |  |                            |  |  |   |  |  |             |   |  |            |  
|                                                                                            |  |              |            |                       |  |                                       |   |                                              |           |                       |  |                            |  |  |   |  |  |             |   |  |            |  
|Issuance of
  common shares for cash (Note 15(a))                                           |  |              | 4,000,000  |                       |  | 10,000,000                            |   |                                              |          |                       |  |                           |  |  |  |  |  |            |   |  | 10,000,000 |  
|                                                                                            |  |              |            |                       |  |                                       |   |                                              |           |                       |  |                            |  |  |   |  |  |             |   |  |            |  
|Less
  deferred offering costs (Note 15(a))                                                 |  |              |           |                       |  | (448,371                              | ) |                                              |          |                       |  |                           |  |  |  |  |  |            |   |  | (448,371   | )
|                                                                                            |  |              |            |                       |  |                                       |   |                                              |           |                       |  |                            |  |  |   |  |  |             |   |  |            |  
|Exercise of
  share purchase warrants for cash (Note 15(a))                                 |  |              | 846,408    |                       |  | 1,127,741                             |   |                                              |          |                       |  |                           |  |  |  |  |  |            |   |  | 1,127,741  |  
|                                                                                            |  |              |            |                       |  |                                       |   |                                              |           |                       |  |                            |  |  |   |  |  |             |   |  |            |  
|Exercise of
  share purchase options (Note 15(a))                                           |  |              | 100,000    |                       |  | 136,598                               |   |                                              | (11,598   | )                     |  |                           |  |  |  |  |  |            |   |  | 125,000    |  
|                                                                                            |  |              |            |                       |  |                                       |   |                                              |           |                       |  |                            |  |  |   |  |  |             |   |  |            |  
|Stock option compensation (Note 15(c), 27)                                                  |  |              |           |                       |  |                                      |   |                                              | 673,711   |                       |  |                           |  |  |  |  |  |            |   |  | 673,711    |  
|                                                                                            |  |              |            |                       |  |                                       |   |                                              |           |                       |  |                            |  |  |   |  |  |             |   |  |            |  
|Net loss for the year (Note 27)                                                             |  |              |           |                       |  |                                      |   |                                              |          |                       |  |                           |  |  |  |  |  | (5,767,933  | ) |  | (5,767,933 | )
|                                                                                            |  |              |            |                       |  |                                       |   |                                              |           |                       |  |                            |  |  |   |  |  |             |   |  |            |  
|                                                                                            |  |              |            |                       |  |                                       |   |                                              |           |                       |  |                            |  |  |   |  |  |             |   |  |            |  
|Balance at December 31, 2005(Restated(1))                                                   |  |              | 22,666,453 |                       |  | 43,499,296                            |   |                                              | 1,023,967 |                       |  |                           |  |  |  |  |  | (27,681,835 | ) |  | 16,841,428 |  
|                                                                                            |  |              |            |                       |  |                                       |   |                                              |           |                       |  |                            |  |  |   |  |  |             |   |  |            |  

- 76 -

---



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

|                                                   |  |              |            |                       |  |                                       |                       |                                              |                               |   |  |           |  |  |        |  |  |             |   |  |             |  
|-------------------------------------------------- |  | ------------ | ---------- | --------------------- |  | ------------------------------------- | --------------------- | -------------------------------------------- | ----------------------------- | - |  | --------- |  |  | ------ |  |  | ----------- | - |  | ----------- | -
|                                                   |  |              |            | Contributed
  Surplus |  | Share
  Purchase
  Warrants
  Reserve |                       | Accumulated
  Other
  Comprehensive
  Income |                               |   |  |           | 
|                                                   |  | Common Stock |            |                       |  |                                       |                       |                                              | Total
  Stockholders
  Equity |  
|                                                   |  |              |            |                       |  |                                       | Accumulated
  Deficit |                                              |                              
|                                                   |  | Shares       |            | Amount $              |  |                                       |                       |                                              |                               |  
|                                                   |  |              |            |                       |  |                                       |                       |                                              |                               |   |  |           |  |  |       
|                                                   |  |              |            |                       |  |                                       |                       |                                              |                               |   |  |           |  |  |       
|                                                   |  |              |            |                       |  |                                       |                       |                                              |                               |   |  |           |  |  |       
|Issuance of
  common shares for cash (Note 15 (a)) |  |              | 5,007,000  |                       |  | 6,509,100                             |                       |                                              |                              |   |  |          |  |  |       |  |  |            |   |  | 6,509,100   |  
|                                                   |  |              |            |                       |  |                                       |                       |                                              |                               |   |  |           |  |  |        |  |  |             |   |  |             |  
|                                                   |  |              |            |                       |  |                                       |                       |                                              |                               |   |  |           |  |  |        |  |  |             |   |  |             |  
|Less
  deferred offering costs (Note 15(a))        |  |              |           |                       |  | (89,096                               | )                     |                                              |                              |   |  |          |  |  |       |  |  |            |   |  | (89,096     | )
|                                                   |  |              |            |                       |  |                                       |                       |                                              |                               |   |  |           |  |  |        |  |  |             |   |  |             |  
|                                                   |  |              |            |                       |  |                                       |                       |                                              |                               |   |  |           |  |  |        |  |  |             |   |  |             |  
|Exercise of
  share purchase options (Note 15(a))  |  |              | 90,834     |                       |  | 126,227                               |                       |                                              | (12,684                       | ) |  |          |  |  |       |  |  |            |   |  | 113,543     |  
|                                                   |  |              |            |                       |  |                                       |                       |                                              |                               |   |  |           |  |  |        |  |  |             |   |  |             |  
|                                                   |  |              |            |                       |  |                                       |                       |                                              |                               |   |  |           |  |  |        |  |  |             |   |  |             |  
|Stock option
  compensation(Note 15 (c))           |  |              |           |                       |  |                                      |                       |                                              | 533,935                       |   |  |          |  |  |       |  |  |            |   |  | 533,935     |  
|                                                   |  |              |            |                       |  |                                       |                       |                                              |                               |   |  |           |  |  |        |  |  |             |   |  |             |  
|                                                   |  |              |            |                       |  |                                       |                       |                                              |                               |   |  |           |  |  |        |  |  |             |   |  |             |  
|Share
  purchase warrants reserve (Note 15 (d))    |  |              |           |                       |  |                                      |                       |                                              |                              |   |  | 1,540,762 |  |  |       |  |  |            |   |  | 1,540,762   |  
|                                                   |  |              |            |                       |  |                                       |                       |                                              |                               |   |  |           |  |  |        |  |  |             |   |  |             |  
|                                                   |  |              |            |                       |  |                                       |                       |                                              |                               |   |  |           |  |  |        |  |  |             |   |  |             |  
|Accumulated
  other comprehensive income (Note 12) |  |              |           |                       |  |                                      |                       |                                              |                              |   |  |          |  |  | 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  |  
|                                                  
|                                                   |  |              |            |                       |  |                                       |                       |                                              |                               |   |  |           |  |  |        |  |  |             |   |  |             |  

(1)
As restated (Note 4)


See accompanying notes to the consolidated
financial statements

- 77 -

---



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

|                                                                              |  |          |             |                           |  |                           |   |  |            |  
|----------------------------------------------------------------------------- |  | -------- | ----------- | ------------------------- |  | ------------------------- | - |  | ---------- | -
|For the years ended December 31                                               |  | 2006
  $ |             | 2005
  $
  (restated) (1) |  | 2004
  $
  (restated) (1) |  
|                                                                              |  |          |             |                           |  |                           |  
|Operating Activities                                                          |  |          |             |                           |  |                           |   |  |            |  
|                                                                              |  |          |             |                           |  |                           |   |  |            |  
|Net loss for the year                                                         |  |          | (13,406,828 | )                         |  | (5,767,933                | ) |  | (4,628,056 | )
|Adjustments to reconcile net loss to cash
  provided by operating activities: |  |          |             |                           |  |                           |   |  |            |  
|Depletion                                                                     |  |          | 347,206     |                           |  | 61,979                    |   |  | 84,864     |  
|Write-off of oil and gas properties                                           |  |          | 8,171,981   |                           |  | 3,703,774                 |   |  | 4,197,820  |  
|Amortization                                                                  |  |          | 98,187      |                           |  | 51,034                    |   |  | 32,402     |  
|Net derivative loss                                                           |  |          | 455,685     |                           |  |                          |   |  |           |  
|Stock option compensation (Note 27)                                           |  |          | 533,935     |                           |  | 673,711                   |   |  | (11,450    | )
|Net unrealized foreign exchange
(gain)/loss                                   |  |          | 1,973,650   |                           |  | (394,563                  | ) |  | 191,378    |  
|Change in non-cash working capital                                            |  |          | 396,806     |                           |  | 739,386                   |   |  | 67,977     |  
|                                                                              |  |          |             |                           |  |                           |   |  |            |  
|                                                                              |  |          |             |                           |  |                           |   |  |            |  
|                                                                              |  |          | (1,429,378  | )                         |  | (932,612                  | ) |  | (65,065    | )
|                                                                              |  |          |             |                           |  |                           |   |  |            |  
|Financing Activities                                                          |  |          |             |                           |  |                           |   |  |            |  
|Share issues                                                                  |  |          | 6,533,547   |                           |  | 10,803,109                |   |  | 11,125,433 |  
|Proceeds from debt                                                            |  |          | 14,470,540  |                           |  |                          |   |  |           |  
|Issuance of convertible notes                                                 |  |          |            |                           |  |                          |   |  | 500,000    |  
|                                                                              |  |          |             |                           |  |                           |   |  |            |  
|                                                                              |  |          |             |                           |  |                           |   |  |            |  
|                                                                              |  |          | 21,004,087  |                           |  | 10,803,109                |   |  | 11,625,433 |  
|                                                                              |  |          |             |                           |  |                           |   |  |            |  
|Investing Activities                                                          |  |          |             |                           |  |                           |   |  |            |  
|Purchase of property and equipment                                            |  |          | (486,890    | )                         |  | (430,223                  | ) |  | (162,894   | )
|Purchase of investments                                                       |  |          |            |                           |  | (83,612                   | ) |  |           |  
|Oil and gas properties                                                        |  |          | (13,624,178 | )                         |  | (6,119,897                | ) |  | (2,395,754 | )
|Acquisition of subsidiary (Note 5)                                            |  |          | (12,081,662 | )                         |  |                          |   |  |           |  
|Change in non-cash working capital                                            |  |          | 1,444,212   |                           |  | 588,383                   |   |  | 90,354     |  
|Restricted cash (Note 6)                                                      |  |          | (3,000,000  | )                         |  |                          |   |  |           |  
|                                                                              |  |          |             |                           |  |                           |   |  |            |  
|                                                                              |  |          |             |                           |  |                           |   |  |            |  
|                                                                              |  |          | (27,748,518 | )                         |  | (6,045,349                | ) |  | (2,468,294 | )
|                                                                              |  |          |             |                           |  |                           |   |  |            |  
|Net (decrease)/increase in cash and cash
  equivalents during the year        |  |          | (8,173,809  | )                         |  | 3,825,148                 |   |  | 9,092,074  |  
|Effect of exchange rate fluctuations on
  cash and short-term deposits        |  |          | (21,154     | )                         |  | 326,834                   |   |  | (138,437   | )
|                                                                              |  |          |             |                           |  |                           |   |  |            |  
|Cash and cash equivalents, beginning of
  year                                |  |          | 15,339,906  |                           |  | 11,187,924                |   |  | 2,234,287  |  
|                                                                              |  |          |             |                           |  |                           |   |  |            |  
|Cash and cash equivalents, end of year                                        |  |          | 7,144,943   |                           |  | 15,339,906                |   |  | 11,187,924 |  
|                                                                              |  |          |             |                           |  |                           |   |  |            |  
|                                                                              |  |          |             |                           |  |                           |   |  |            |  
|Supplemental Cash Flow Information                                            |  |          |             |                           |  |                           |   |  |            |  
|                                                                              |  |          |             |                           |  |                           |   |  |            |  
|Interest paid                                                                 |  |          | 29,933      |                           |  | 163                       |   |  | 28,698     |  

(1) As restated (Note 4)

See accompanying notes to the consolidated
financial statements

- 78 -

---



NOTE 1 - NATURE OF OPERATIONS

On October 16th,
2006 the Company completed its migration of place of incorporation to British
Columbia under the Business Corporations Act (British Columbia). Previously the
Company was incorporated in the Yukon Territory under the Business Corporations
Act (Yukon).

The
accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the satisfaction
of liabilities and commitments in the normal course of business (Refer Note 2).
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  LIQUIDITY AND BASIS OF PRESENTATION

As at December
31, 2006, the Company had a working capital deficit of $ 1,480,287, an
accumulated deficit of $41,088,663, has continued to incur net losses and has
been unable to generate positive net cash flows from operations. These
conditions and factors raise significant doubt about the Companys ability to
continue as a going concern for a reasonable period of time. The Companys
ability to meet its obligations and continue as a going concern is dependent
upon its ability to obtain additional sources of liquidity, the discovery,
development or sale of oil and gas reserves and achievement of profitable
operations. Managements plans to meet its anticipated working capital and
capital expenditure needs and its current obligations are to raise funds
through additional equity or debt private placements, farm-outs of mineral
properties and through the development of proven reserves. As of March 31,
2007, the Company continued to have a working capital deficit and incur net
losses. However, the Company was able to generate positive net cash flows from
operations of $3,619,979 (unaudited). Also, on May 16, 2007, the Company raised
approximately $3.2 million through the private placement of 2.5 million
additional common shares. Further, management expects that the Cheal field will
go into full production in the third quarter of 2007 and that the cash flows
generated from this will be used to further meet the Companys current
obligations and anticipated working capital and capital expenditure
requirements. Therefore, management believes that the Company will be able to
continue as a going concern for a reasonable period time.

These
consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles on the basis that the Company
will be able to continue as a going concern 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 the balance sheet classifications used that would be
necessary if the Company were unable to continue as 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 and New Zealand 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: Indo-Pacific Energy Australia
  Pty Limited, Odyssey International Pty Limited, Trans-Orient Petroleum (Aust)
  Pty Limited, ZOCA 96-16 Pty Limited, Indo-Pacific Energy (PNG) Limited
  (amalgamated with Trans-Orient Petroleum (PNG) Limited during 2004),
  Trans-Orient Petroleum (PNG)                                                                                                                                                                                                                                                                                           

- 79 -

---



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | Limited
  (subsequently renamed to Austral Pacific Energy (PNG) Ltd), Source Rock
  Holdings Limited, Austral Pacific Energy (NZ) Limited, Rata Energy Limited,
  Millennium Oil & Gas Limited, Ngatoro Energy Limited (liquidated October
  2004), Totara Energy Limited, Kanuka Energy Limited (registered November 25,
  2004) and Arrowhead Energy Ltd from the date of acquisition (December 22,
  2006). 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 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 average
  exchange rate for revenue and expenses, except depletion and amortization,
  which are translated at the rate of exchange applicable to the related
  assets. 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | 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 the Company
  is not exposed to significant interest, currency or credit risks arising from
  these financial instruments. The fair value of long tem debt is calculated
  based on the present value of future principal and interest cash flows,
  discounted at the market rate of interest at 31 December 2006.                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | 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.                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|f) | Cash and Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Cash and
  cash equivalents include government treasury bills and bankers acceptances
  with original maturities of three months or less, together with accrued
  interest. Restricted cash is excluded from cash and cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|g) | Plant and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Plant and
  equipment consists of furniture and office equipment and the Companys share
  of joint venture plant and equipment. The furniture and office equipment are
  recorded at cost and amortized over their estimated useful lives on a
  straight-line basis at annual rates of 5% to 33 1/3%. The Companys share of                                                                                                                                                                                                                                                                                                                                                                      

- 80 -

---



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | the joint
  venture assets is recorded at cost and are amortized over the assets useful
  production life.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|h) | Oil and Gas Properties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The Company
  uses the successful efforts method of accounting for oil and gas producing
  activities. Costs to acquire mineral interests in oil and gas properties, to
  drill and equip exploratory wells that find proved reserves, to drill and
  equip development wells and related asset retirement costs are capitalized.
  Costs to drill exploratory wells that do not find proved reserves, geological
  and geophysical costs, and costs of carrying and retaining unproved
  properties are expensed.                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Unproved oil
  and gas properties that are individually significant are periodically
  assessed for impairment of value, and a loss is recognized at the time of
  impairment by providing an impairment allowance. Other unproved properties
  are amortized based on the Companys experience of successful drilling and
  average holding period. Capitalized costs of producing oil and gas
  properties, after considering estimated residual salvage values, are
  depreciated and depleted by the unit-of-production method. Support equipment
  and other property and equipment are depreciated over their estimated useful
  lives.                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | On the sale
  or retirement of a complete unit of a proved 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 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|i) | 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.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|j) | Inventory                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Inventories
  of crude oil and the Companys share of joint venture inventory are valued at
  the lower of cost and net realizable value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|k) | Oil and Gas Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Sales of oil
  and gas are recognized in the period in which the product is delivered 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|l) | 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 stock options and share
  purchase warrants,                                                                                                                                                                                                                                                                                                                                                                                                                                                         

- 81 -

---



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                          
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------
|   | if dilutive.
  The number of outstanding shares would be calculated by assuming that the outstanding
  stock options and share purchase warrants were exercised and that the
  proceeds from such exercises were used to acquire common shares at the
  average market price during the reporting period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                          
|m) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                          
|n) | Asset Retirement Obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                          
|   | The Company
  recognizes the estimated fair value of legal obligations associated with the
  retirement of petroleum and natural gas properties in the period in which
  they are incurred. The obligation is recorded as a liability with a
  corresponding increase in the carrying amount of the petroleum and natural
  gas properties. The incremental capitalized amount will be depleted on a
  unit-of-production basis over the life of the proved reserves of each
  property. The obligation is increased each period, or accretes, due to the
  passage of time and is recorded in the Statement of Operations and Deficit.
  Revisions to the estimated fair value would result in an adjustment to the
  obligation and carrying amount of the oil and gas properties.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                          
|o) | Investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                          
|   | Long term
  investments are valued at fair value. An impairment test is conducted on an
  annual basis and any impairment is recognised in the Statement of Operations
  and Deficit. Any increase in value is recorded as Other comprehensive
  income within Stockholders Equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                          
|p) | Comparative Figures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                          
|   | Certain
  comparative figures have been reclassified to conform to the current years
  presentation. (Refer Note 3 q) and Note 4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                          
|q) | Changes in Accounting Policy                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                          
|   | The Company
  has retroactively changed its method of accounting for oil and gas properties
  from the full cost method to the successful efforts method. (Refer Note
  3(h) and 4). In applying this change the Company has applied:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                          
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | CICA HB
  section 1506  Accounting changes                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                          
|   | The Company
  has prospectively adopted, effective January 1, 2006, the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                          
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 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                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                          
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | CICA HB
  section 3865 Hedges                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                          
|   | There have
  been no other changes in accounting policies applied during the year ended
  December 31, 2006, 2005 and 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                          
|r) | Acquisitions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                          
|   | Acquisitions
  are accounted for using the purchase method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

- 82 -

---



|   |                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | 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 liabilities are recognized at their fair value at acquisition
  date. The fair value does not take into consideration any future intentions
  by the Company.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                            
|s) | Goodwill                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | All business
  combinations are accounted for using the purchase method. Goodwill is recognized
  on acquisitions of subsidiaries or purchase of business assets and represents
  the excess of the acquisition cost over the fair value of the acquired net
  assets. It is stated at cost less accumulated impairment losses and tested
  annually for impairment.                                                       

NOTE 4  CHANGE IN
ACCOUNTING POLICY

The Company
voluntarily changed its method of accounting for oil and gas properties from
the full cost method to the successful efforts method. The change in
accounting policy has been applied retroactively and prior years figures have
been restated. The effect of this change on previous financial statements is as
follows:

|                                                                     |  |                       |            |                    |  |                       |  |          |            |  |  |            | 
|-------------------------------------------------------------------- |  | --------------------- | ---------- | ------------------ |  | --------------------- |  | -------- | ---------- |  |  | ---------- | 
|                                                                     |  | December
  31, 2005   |            | December
  31 2004 | 
|                                                                     |  | Previously
  Reported |            | Restated           |  | Previously
  Reported |  | Restated |           
|                                                                     |  |                       |            |                    |  |                       |  |          |           
|                                                                    
|Statement of Operations                                              |  |                       |            |                    |  |                       |  |          |            |  |  |            | 
|Net loss
  before depletion and impairment of oil and gas properties |  |                       | 2,002,180  |                    |  | 2,002,180             |  |          | 345,372    |  |  | 345,372    | 
|Depletion                                                            |  |                       | 365,241    |                    |  | 61,979                |  |          | 85,550     |  |  | 84,864     | 
|Impairment
  of oil and gas properties                               |  |                       | 438,263    |                    |  | 3,703,774             |  |          | 5,287,611  |  |  | 4,197,820  | 
|Net Loss                                                             |  |                       | 2,805,684  |                    |  | 5,767,933             |  |          | 5,718,533  |  |  | 4,628,056  | 
|                                                                     |  |                       |            |                    |  |                       |  |          |            |  |  |            | 
|                                                                     |  |                       |            |                    |  |                       |  |          |            |  |  |            | 
|Consolidated Balance Sheets                                          |  |                       |            |                    |  |                       |  |          |            |  |  |            | 
|Capitalized
  oil and gas properties                                 |  |                       | 10,804,688 |                    |  | 2,973,531             |  |          | 5,488,295  |  |  | 619,387    | 
|                                                                     |  |                       |            |                    |  |                       |  |          |            |  |  |            | 
|                                                                     |  |                       |            |                    |  |                       |  |          |            |  |  |            | 
|                                                                     |  |                       |            |                    |  |                       |  |          |            |  |  |            | 
|Statement of Deficit                                                 |  |                       |            |                    |  |                       |  |          |            |  |  |            | 
|                                                                     |  |                       |            |                    |  |                       |  |          |            |  |  |            | 
|Opening
  accumulated deficit                                        |  |                       | 17,044,994 |                    |  | 21,913,902            |  |          | 11,326,461 |  |  | 17,285,846 | 
|                                                                     |  |                       |            |                    |  |                       |  |          |            |  |  |            | 
|Depletion                                                            |  |                       | 365,241    |                    |  | 61,979                |  |          | 85,550     |  |  | 84,864     | 
|                                                                     |  |                       |            |                    |  |                       |  |          |            |  |  |            | 
|Impairment
  of oil and gas properties                               |  |                       | 438,263    |                    |  | 3,703,774             |  |          | 5,287,611  |  |  | 4,197,820  | 
|                                                                     |  |                       |            |                    |  |                       |  |          |            |  |  |            | 
|Closing
  accumulated deficit                                        |  |                       | 19,850,678 |                    |  | 27,681,835            |  |          | 17,044,994 |  |  | 21,913,902 | 
|                                                                     |  |                       |            |                    |  |                       |  |          |            |  |  |            | 

NOTE 5  ACQUISITION
OF ARROWHEAD ENERGY LTD

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:

| |                                                    |  |  |            |  
| | -------------------------------------------------- |  |  | ---------- | -
| | Total
  purchase price including acquisition costs |  |  | 12,081,662 |  
| |                                                    |  |  |            |  
| | Oil and gas
  properties                           |  |  | 14,337,756 |  
| | Prepaid gas
  agreement (Refer Note 19)            |  |  | (2,078,901 | )
| | Asset
  retirement obligations                     |  |  | (184,977   | )
| | Working
  capital                                  |  |  | 7,784      |  
| |                                                    |  |  |            |  
| |                                                    |  |  | 12,081,662 |  
| | Deferred
  taxation liabilities                    |  |  | (2,018,969 | )
| |                                                    |  |  |            |  
| |                                                    |  |  | 10,062,693 |  
| | Goodwill                                           |  |  | 2,018,969  |  
| |                                                    |  |  |            |  
| |                                                    |  |  | 12,081,662 |  
| |                                                    |  |  |            |  

- 83 -

---



The Company
received the benefit of Arrowhead Energy Ltds share of Cheal revenue, and was
responsible for Arrowhead Energy Ltds share of costs, from the date of
acquisition. These revenues and expenses were not significant for the year ended
31 December 2006. Fair value of the oil and gas properties has been determined
by assessing the expected future cash flows of this asset. The fair value of
the other assets and liabilities has been accepted as their carrying value at
the date of the acquisition.

NOTE 6  CASH AND
CASH EQUIVALENTS

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

|                      |  |                   |           |                   |  |            | 
|--------------------- |  | ----------------- | --------- | ----------------- |  | ---------- | 
|                      |  | December 31, 2006 |           | December 31, 2005 | 
|Cash on
  Deposit     |  |                   | $         |                   |  | $          | 
|                      |  |                   |           |                   |  |            | 
|New
  Zealand Dollars |  |                   | 3,251,980 |                   |  | 490,312    | 
|U.S.
  Dollars        |  |                   | 3,878,508 |                   |  | 14,815,778 | 
|Canadian
  Dollars    |  |                   |          |                   |  | 20,930     | 
|PNG Kina              |  |                   | 14,455    |                   |  | 10,023     | 
|Australian
  Dollars  |  |                   |          |                   |  | 2,863      | 
|                      |  |                   |           |                   |  |            | 
|                      |  |                   | 7,144,943 |                   |  | 15,339,906 | 
|                      |  |                   |           |                   |  |            | 

At balance
sheet date, total cash of $3,027,532 (2005: $438,080) is held by joint
ventures. The Company does not maintain direct control of this cash as it is
controlled by the joint venture operators.

The U.S.
dollar balance excludes $3,000,000 (2005: nil) cash that has restricted access
under the terms of the Project Loan facility (refer Note 20).

NOTE 7 - PROPERTY AND
EQUIPMENT

|                                 |  |                                         |           |                                       |  |                                                             |  |                                         |            |   |  |            | 
|-------------------------------- |  | --------------------------------------- | --------- | ------------------------------------- |  | ----------------------------------------------------------- |  | --------------------------------------- | ---------- | - |  | ---------- | 
|2006                             |  | Net Book
  Value at
  December 31, 2005 |           | Additions/Transfers
  During the Year |  | Amortization/ Depletion
  and Write Downs
  During the Year |  | Net Book
  Value at
  December 31, 2006 |           
|                                 |  |                                         |           |                                       |  |                                                             |  |                                         |           
|Furniture
  and office equipment |  |                                         | 139,234   |                                       |  | 226,419                                                     |  |                                         | (91,729    | ) |  | 273,924    | 
|Share of joint
  venture assets  |  |                                         | 400,770   |                                       |  | 33,483                                                      |  |                                         | (14,822    | ) |  | 419,431    | 
|                                 |  |                                         |           |                                       |  |                                                             |  |                                         |            |   |  |            | 
|                                 |  |                                         | 540,004   |                                       |  | 259,902                                                     |  |                                         | (106,551   | ) |  | 693,355    | 
|                                 |  |                                         |           |                                       |  |                                                             |  |                                         |            |   |  |            | 
|Proved:                          |  |                                         |           |                                       |  |                                                             |  |                                         |            |   |  |            | 
|New Zealand                      |  |                                         | 1,038,198 |                                       |  | 19,565,262                                                  |  |                                         | (443,276   | ) |  | 20,160,184 | 
|                                 |  |                                         |           |                                       |  |                                                             |  |                                         |            |   |  |            | 
|Total Proved                     |  |                                         | 1,038,198 |                                       |  | 19,565,262                                                  |  |                                         | (443,276   | ) |  | 20,160,184 | 
|                                 |  |                                         |           |                                       |  |                                                             |  |                                         |            |   |  |            | 
|Unproved:                        |  |                                         |           |                                       |  |                                                             |  |                                         |            |   |  |            | 
|New Zealand                      |  |                                         | 1,935,333 |                                       |  | 3,201,482                                                   |  |                                         | (5,136,815 | ) |  |           | 
|Papua New
  Guinea               |  |                                         |          |                                       |  | 2,939,096                                                   |  |                                         | (2,939,096 | ) |  |           | 
|                                 |  |                                         |           |                                       |  |                                                             |  |                                         |            |   |  |            | 
|Total
  unproved                 |  |                                         | 1,935,333 |                                       |  | 6,140,578                                                   |  |                                         | (8,075,911 | ) |  |           | 
|                                 |  |                                         |           |                                       |  |                                                             |  |                                         |            |   |  |            | 
|Total
  property and equipment   |  |                                         | 3,513,535 |                                       |  | 25,965,742                                                  |  |                                         | (8,625,738 | ) |  | 20,853,539 | 
|                                 |  |                                         |           |                                       |  |                                                             |  |                                         |            |   |  |            | 

During the
year the Company capitalized $234,416 (2005: $348,691) of overhead charges
relating directly to its exploration and development activities.

Included in
amortization/depletion and write downs for furniture and office equipment is a
loss on sale of fixed assets of $8,357 (2005: nil).

- 84 -

---



|                                 |  |                                      |         |                                       |  |                                                               |  |                                           |            |   |  |           | 
|-------------------------------- |  | ------------------------------------ | ------- | ------------------------------------- |  | ------------------------------------------------------------- |  | ----------------------------------------- | ---------- | - |  | --------- | 
|2005(Restated(1))                |  | Net
  Book
  Value at
  December 31, |         | Additions/Transfers
  During the Year |  | Amortization/
  Depletion
  and Write Downs
  During the Year |  | Net
  Book
  Value at
  December 31, 2005 |           
|                                 |  |                                      |         |                                       |  |                                                               |  |                                           |           
|Furniture and office
  equipment |  |                                      | 60,502  |                                       |  | 129,766                                                       |  |                                           | (51,034    | ) |  | 139,234   | 
|Share of joint venture
  assets  |  |                                      | 100,313 |                                       |  | 300,457                                                       |  |                                           |           |   |  | 400,770   | 
|                                 |  |                                      |         |                                       |  |                                                               |  |                                           |            |   |  |           | 
|                                 |  |                                      | 160,815 |                                       |  | 430,223                                                       |  |                                           | (51,034    | ) |  | 540,004   | 
|                                 |  |                                      |         |                                       |  |                                                               |  |                                           |            |   |  |           | 
|Proved:                          |  |                                      |         |                                       |  |                                                               |  |                                           |            |   |  |           | 
|New Zealand (2)                  |  |                                      |        |                                       |  | 1,100,177                                                     |  |                                           | (61,979    | ) |  | 1,038,198 | 
|                                 |  |                                      |         |                                       |  |                                                               |  |                                           |            |   |  |           | 
|Total Proved                     |  |                                      |        |                                       |  | 1,100,177                                                     |  |                                           | (61,979    | ) |  | 1,038,198 | 
|                                 |  |                                      |         |                                       |  |                                                               |  |                                           |            |   |  |           | 
|Unproved:                        |  |                                      |         |                                       |  |                                                               |  |                                           |            |   |  |           | 
|New Zealand                      |  |                                      | 619,387 |                                       |  | 4,925,982                                                     |  |                                           | (3,610,036 | ) |  | 1,935,333 | 
|Australia (3)                    |  |                                      |        |                                       |  | 12,745                                                        |  |                                           | (12,745    | ) |  |          | 
|Papua New Guinea                 |  |                                      |        |                                       |  | 80,993                                                        |  |                                           | (80,993    | ) |  |          | 
|                                 |  |                                      |         |                                       |  |                                                               |  |                                           |            |   |  |           | 
|Total unproved                   |  |                                      | 619,387 |                                       |  | 5,019,720                                                     |  |                                           | (3,703,774 | ) |  | 1,935,333 | 
|                                 |  |                                      |         |                                       |  |                                                               |  |                                           |            |   |  |           | 
|Total property and
  equipment   |  |                                      | 780,202 |                                       |  | 6,550,120                                                     |  |                                           | (3,816,787 | ) |  | 3,513,535 | 
|                                 |  |                                      |         |                                       |  |                                                               |  |                                           |            |   |  |           | 

(1) As restated (refer Note
4).

(2) The Company transferred
PEP 38738-01 to proven oil and gas properties effective April 30, 2005
following an independent assessment of reserves.

(3) The Company currently has
no ongoing activities within Australia.

Held for sale asset

The Company is intending to
sell its 35% share of its drilling rig and has therefore categorized the
carrying cost as a non-current asset held for sale.

NEW ZEALAND

Unless otherwise indicated,
petroleum exploration permits granted in New Zealand provide for the 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. Permit holders can
apply for extensions or reductions of the committed work programs for the
permits under certain circumstances. Any production permits granted will be for
a term of up to 40 years from the date of issue. The New Zealand government has
reserved a royalty of the greater of 5% of net sales revenue or 20% of
accounting profits from the sale of petroleum products, except for any
discovery made between June 30, 2004 and December 31, 2009, for which the
royalty will be the greater of 1% of the net sales revenue from any natural gas
and 5% of the net sales revenues from any oil or 20% of accounting profits from
the sale of petroleum products.

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 Agreement 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 Agreement 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 which includes a 2% participating interest that can be acquired by
project landowners and affected local level government. 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).

- 85 -

---



NOTE 8  GOODWILL

2006
  $

2005
  $Opening net book value





Additions (Refer Note 5)


2,018,969


Closing net book value


2,018,969





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 $2.28 million (2005: $0.69 million) discounted
using credit adjusted risk-free rates of 8.05% - 9.02%. The costs are expected
to be incurred between 2008 and 2020. Throughout the year the Company
re-estimated its obligations and decreased the present value of future
liabilities by $0.01 million (2005: increase $0.11million). The movement in the
provision is as follows:

2006
  $

2005
  $Obligations at beginning
  of year


337,075


156,575Obligations incurred
  during the year


496,234


64,559Obligations through
  acquisition (Refer Note 5)


184,977


Revision in estimated
  obligations


(10,405
)

106,290Accretion expense


46,118


18,196Foreign exchange movement


11,560


(8,545
)Obligations at end of year


1,065,559


337,075


NOTE 10  ACCOUNTS
RECEIVABLE/PAYABLE

Total accounts receivable
comprises the following categories:

2006
  $

2005
  $Trade receivables


755,909


608,529Joint venture receivables


662,162


137,6361,418,071


746,165


Total accounts payable
comprises the following categories:

2006
  $

2005
  $Trade payables


841,394


574,107Joint venture payables


2,998,342


1,367,4993,839,736


1,941,606


NOTE 11  INVENTORY

Total inventory comprises
the following categories:

2006
  $

2005
  $Product inventory





5,010Share of joint venture
  inventory


475,280


469,767475,280


474,777


- 86 -

---



During the
year the Company has written off $100,000 (2005: nil) to recognize inventory at
its net realizable value.

NOTE 12  INVESTMENTS

The Company
owns 1,495,660 shares (2005: 180,200) (approximately 0.4% of issued shares) in
Rift Oil PLC, a company listed on the AIM stock exchange. As at December 31,
2006 and in accordance with CICA 3855, the shares are recorded at the market
value of $136,528  an increase of $52,916 since December 31, 2005.

NOTE 13  RELATED PARTY TRANSACTIONS

Directors
received a total remuneration of $124,000 during 2006 (2005: $57,721;
2004:$58,954).

The Company
paid a company that employs a Director, $1,500 during 2006 (2005:$18,000; 2004:
$18,000) for financial services provided during the period prior to the
resignation of the Director.

During 2006
the Company paid a law firm in which a former Director is a Partner, $42,538
(2005: $66,470; 2004: $81,771) for legal services (2005 and 2004: legal and
directorial services).

During 2006,
the Company also paid a Director $54,923 for consultancy services.

During 2005,
the Company incurred $890,077 (2004: $223,373) in remuneration to the former
Chief Executive Officer of the Company which included $580,727 in settlement of
contractual obligations, including the fair value of share options agreement
modifications approved as a part of the settlement. 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. The Company paid
the former Chief Executive Officer and Director $95,695 for consultancy
services provided during the period subsequent to the CEOs resignation on 30
December 2005.

During 2005,
$98,107 (2004: $128,474) was paid to a trust of which the former Chief
Executive Officer of the Company is a trustee for services provided by the
spouse of the former Chief Executive Officer of the Company in her role as a
consultant to the Company (2004: Commercial Manager).

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.

The Company
farmed-out 65% of a Papua New Guinea permit, PPL 235, to Rift Oil PLC (Rift)
which was negotiated while Rift was at arms-length to Austral. Australs former
Commercial Manager and spouse of its former Chief Executive Officer, accepted
employment as Chief Executive Officer of Rift and equity participation in Rift,
effective January 29, 2005, followed by her resignation as an officer of the
Company effective 31 January, 2005. A subsidiary of the Company owns 1,495,660
shares, approximately 0.4% of issued shares (2005: 180,200 shares,
approximately 0.5% of issued shares) in Rift Oil PLC. The Company incurred
$87,189 (2005: $5,110; 2004: Nil)
in respect to consultancy services provided by Rift.

The
above-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.

NOTE 14 - COMMITMENTS AND CONTINGENCIES

|   |                                                                                                                                                                                                                                                                                                                                                          
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|a) | Work 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 for the 2007
  fiscal year are $28,074,460.

- 87 -

---



The Companys
commitments under licence obligations and other agreements are summarized as follows:

|                                        |  |                              |            |                    |  |            |  |           |            |                 |  |         |  |  |         | 
|--------------------------------------- |  | ---------------------------- | ---------- | ------------------ |  | ---------- |  | --------- | ---------- | --------------- |  | ------- |  |  | ------- | 
|                                        |  | Payments Due by Period (US$) |           
|                                        |  |                             
|Contractual and
  Other Obligations     |  | Total                        |            | Less than 1
  year |  | 1-3 years  |  | 4-5 years |            | After 5
  Years | 
|                                        |  |                              |            |                    |  |            |  |           |            |                 | 
|Operating
  leases                      |  |                              | 637,054    |                    |  | 132,118    |  |           | 248,961    |                 |  | 236,849 |  |  | 19,126  | 
|Loan
  facility (1) (4)                 |  |                              | 17,636,449 |                    |  | 7,526,084  |  |           | 10,110,365 |                 |  |        |  |  |        | 
|Joint
  venture                         |  |                              |            |                    |  |            |  |           |            |                 |  |         |  |  |         | 
|commitments (2)                         |  |                              | 19,369,150 |                    |  | 19,369,150 |  |           |           |                 |  |        |  |  |        | 
|Other
  obligations (3)                 |  |                              | 3,377,768  |                    |  | 1,047,108  |  |           | 1,629,940  |                 |  | 598,434 |  |  | 102,286 | 
|                                        |  |                              |            |                    |  |            |  |           |            |                 |  |         |  |  |         | 
|Total contractual
  orOther obligations |  |                              | 41,020,421 |                    |  | 28,074,460 |  |           | 11,989,266 |                 |  | 835,283 |  |  | 121,412 | 



|                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|----------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)                           | Refer Note 20                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(2)                           | 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.                                                                                                                                             
|                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(3)                           | Other Obligations is in
  respect to prepaid gas revenue.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(4)                           | Balance consists of loan
  principal and interest                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                              | The
  Companys share of commitments are as recorded on various licence 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
  licence, renegotiate terms of the licence or seek further investor funds 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.
|                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|b)                            | Potential Legal Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                              | A third
  party has claimed entitlement to purchase part of certain Company properties.
  The Company considers the claim to be without merit. No proceedings have been
  issued, and any proceedings would be vigorously defended. Accordingly the
  Company has made no provision for this claim at 31 December 2006.                                                                                                                                                                                       
|                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|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.                                                                                                                                                                                                                                                            
|                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|d)                            | Environmental Laws and Regulations                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                              | The Company
  is not aware of any events of noncompliance 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.                                                                                           
|                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|e)                            | Foreign Exchange and Interest Rate Risks                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                              | The Company
  does not currently hedge its exposure to currency or interest rate changes
  which may have an adverse impact on the operations of the Company.                                                                                                                                                                                                                                                                                                                                                 
|                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|NOTE 15  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                                                                                                                                                                                                                                                                                                                                                                                                      

- 88 -

---



|                               |  |                    |            |            |  |            | 
|------------------------------ |  | ------------------ | ---------- | ---------- |  | ---------- | 
|par value.                     |  |                    |            |            |  |            | 
|                               |  |                    |            |            |  |            | 
|Issued and
  fully paid:       |  | Number
  Of Shares |            | Amount
  $ | 
|                               |  |                    |            |            |  |            | 
|                               |  |                    |            |            |  |            | 
|                               |  |                    |            |            | 
|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 | 
|                               |  |                    |            |            |  |            | 

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | On January
  5, 2004, 4,000,000 units at NZ$2.00 were issued by the Company for total
  proceeds of $5,217,992 under a public fund raising on the New Zealand Stock
  Exchange. Each unit entitled the holder to a common share and half share
  purchase warrant exercisable at NZ$2.10 on or before January 5, 2005. The New
  Zealand public fund raising had associated costs of $408,083. During 2005 a
  total of 354,315 warrants were exercised and the remaining 15,500 expired
  unexercised.                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | During 2004
  the special class shareholders in one of the Companys New Zealand
  subsidiaries also converted their special class shares into 1,111,123 units
  in the Company.Each unit was
  comprised of a common share and a one-year half share purchase warrant
  exercisable at NZ$1.85 on or before January 5, 2005. Each warrant entitles
  the holder to purchase one common share of the Company. During 2005 the final
  264,820 warrants were exercised.                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | During 2004
  two $250,000 convertible notes that the Company had issued on January 5, 2004
  were converted into 227,273 units per Convertible Note. Each unit comprised
  one common share and one share purchase warrant permitting the holder to
  purchase an additional common share at a price of $1.15 per share, for a 12
  month period from issuance date of the Note (expiry 5 January 2005). During
  2005 the final 227,273 warrants were exercised.                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | 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 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|b) | Incentive Stock Options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | The Company
  has established a stock option plan for the granting of options to employees
  and service providers.
Under the stock option plan the number of shares reserved for issuance as share
incentive                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

- 89 -

---



options will be equal to 10% of the Companys issued and outstanding
shares at any time. The plan was approved by shareholders on May 2, 2006 at the
annual general meeting of the shareholders, and accepted by the TSX-V. As at 31
December 2006, no options have been issued under the new stock option plan.

The following
stock options were outstanding at December 31, 2006:

|                   |  |                |         |                     |  |                               |  |                                  |         |                |   |      |  |  |                  | 
|------------------ |  | -------------- | ------- | ------------------- |  | ----------------------------- |  | -------------------------------- | ------- | -------------- | - | ---- |  |  | ---------------- | 
|                   |  |                |         |                     |  |                               |  |                                  |         |                |   |      |  |  |                  | 
|Number
  of Shares |  | Type of Option |         | Date Fully
  Vested |  | Number 
  December 31,
  2006 |  | Exercise Price Price per
  Share |         | Expiry 
  Date |  
|                   |  |                |         |                     |  |                               |  |                                  |         |                |   |      |  |  |                  | 
|                  
|750,000            |  |                | Vesting |                     |  | February 2, 2006              |  |                                  | 750,000 |                | $ | 1.20 |  |  | February 2, 2008 | 
|30,000             |  |                | Vesting |                     |  | April 15, 2004                |  |                                  | 30,000  |                | $ | 1.25 |  |  | October 15, 2007 | 
|12,500             |  |                | Vesting |                     |  | April 15, 2005                |  |                                  | 12,500  |                | $ | 1.25 |  |  | October 15, 2008 | 
|33,334             |  |                | Vesting |                     |  | July 25, 2006                 |  |                                  | 33,334  |                | $ | 2.75 |  |  | July 25, 2010    | 
|33,333             |  |                | Vesting |                     |  | July 25, 2007                 |  |                                  |        |                | $ | 2.75 |  |  | July 25, 2010    | 
|33,333             |  |                | Vesting |                     |  | July 25, 2008                 |  |                                  |        |                | $ | 2.75 |  |  | July 25, 2010    | 
|68,000             |  |                | Vesting |                     |  | December 1, 2006              |  |                                  | 68,000  |                | $ | 1.90 |  |  | December 1, 2010 | 
|66,000             |  |                | Vesting |                     |  | December 1, 2007              |  |                                  |        |                | $ | 1.90 |  |  | December 1, 2010 | 
|66,000             |  |                | Vesting |                     |  | December 1, 2008              |  |                                  |        |                | $ | 1.90 |  |  | December 1, 2010 | 
|40,000             |  |                | Vesting |                     |  | January 1, 2007               |  |                                  |        |                | $ | 1.80 |  |  | January 1, 2011  | 
|40,000             |  |                | Vesting |                     |  | January 1, 2008               |  |                                  |        |                | $ | 2.00 |  |  | January 1, 2011  | 
|40,000             |  |                | Vesting |                     |  | January 1, 2009               |  |                                  |        |                | $ | 2.50 |  |  | January 1, 2011  | 
|200,000            |  |                | Vesting |                     |  | January 31, 2007              |  |                                  |        |                | $ | 1.50 |  |  | January 31, 2011 | 
|100,000            |  |                | Vesting |                     |  | January 31, 2008              |  |                                  |        |                | $ | 2.00 |  |  | January 31, 2011 | 
|100,000            |  |                | Vesting |                     |  | January 31, 2009              |  |                                  |        |                | $ | 2.50 |  |  | January 31, 2011 | 
|3,334              |  |                | Vesting |                     |  | February 2, 2007              |  |                                  |        |                | $ | 1.90 |  |  | February 2, 2011 | 
|3,333              |  |                | Vesting |                     |  | February 2, 2008              |  |                                  |        |                | $ | 1.90 |  |  | February 2, 2011 | 
|3,333              |  |                | Vesting |                     |  | February 2, 2009              |  |                                  |        |                | $ | 1.90 |  |  | February 2, 2011 | 
|                  
|                   |  |                |         |                     |  |                               |  |                                  |         |                |   |      |  |  |                  | 
|1,622,500          |  |                |         |                     |  |                               |  |                                  | 893,834 |                |   |      |  |  |                  | 
|                   |  |                |         |                     |  |                               |  |                                  |         |                |   |      |  |  |                  | 

The weighted average
exercise price for options outstanding at December 31, 2006 is $1.62 (December
31, 2005: $1.46). During 2006, 90,834 options were exercised at an average
exercise price of $1.25. (2005: 100,000 - average price $1.25).

The weighted
average exercise price for options fully vested at December 31, 2006 is $1.31
(December 31, 2005: $1.13).

A summary of
stock option activities for the years presented is as follows:

|                                         |  |                     |           |                             |   |              | 
|---------------------------------------- |  | ------------------- | --------- | --------------------------- | - | ------------ | 
|Description
  Of Activity                |  | Number
  Of Options |           | Exercise Price
  per Option |  
|                                         |  |                     |           |                             |   |              | 
|Outstanding
  at December 31, 2004       |  |                     | 1,175,000 |                             | $ | 1.00 - $1.25 | 
|Granted in
  2005: vesting               |  |                     | 34,000    |                             |   | $2.75        | 
|Granted in
  2005: vesting               |  |                     | 33,000    |                             |   | $3.75        | 
|Granted in
  2005: vesting               |  |                     | 33,000    |                             |   | $4.75        | 
|Granted in
  2005: vesting               |  |                     | 100,000   |                             |   | $2.75        | 
|Granted in
  2005: vesting               |  |                     | 200,000   |                             |   | $1.90        | 
|Exercised in
  2005: vesting (converted) |  |                     | (100,000  | )                           |   | $1.25        | 
|                                         |  |                     |           |                             |   |              | 
|                                         |  |                     |           |                             |   |              | 
|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 and
  forfeited in 2006: vesting |  |                     | (141,666  | )                           | $ | 1.25 - $4.75 | 
|                                         |  |                     |           |                             |   |              | 
|                                         |  |                     |           |                             |   |              | 
|Outstanding at December 31, 2006         |  |                     | 1,622,500 |                             | $ | 1.20 - $2.75 | 
|                                         |  |                     |           |                             |   |              | 

- 90 -

---



|   |                                                                                                                                                                                                                                                                                                                                      
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|c) | Stock Based Compensation                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                      
|   | Stock option compensation expense of $533,935 has
  been recognized for 2006 (2005: $673,711 expense and 2004: $11,450 recovery).
  The fair value of each stock option grant on the date of grant was estimated
  using the Black-Scholes option-pricing model, amortized over the vesting
  period using the following assumptions:

| |                           |  |      |                    |      |  |                |  
| | ------------------------- |  | ---- | ------------------ | ---- |  | -------------- | -
| |                           |  | 2006 |                    | 2005 | 
| | Expected dividend yield   |  |      | 0.00               | %    |  | 0.00           | %
| | Expected price volatility |  |      | 73.60% - 76.40     | %    |  | 30.40% - 83.80 | %
| | Risk-free interest rate   |  |      | 3.86               | %    |  | 3.43% - 3.87   | %
| | Expected life of option   |  |      | 2 years to 5 years |      |  | 3 Years        |  

The
weighted average fair value of the options granted in 2006 was $0.92 (2005:
$1.32)

|   |                                                                                                                
|-- | ---------------------------------------------------------------------------------------------------------------
|d) | Share Purchase Warrants                                                                                        
|   |                                                                                                                
|   | The following share purchase warrants to purchase
  shares of the Company are outstanding at December 31, 2006:

| |                    |  |                  |       |               |  |                   | 
| | ------------------ |  | ---------------- | ----- | ------------- |  | ----------------- | 
| | 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                      |  | Number        |            | Exercise
  Price |   |                    
| | Of
  Activity                    |  | of
  Warrants |            | per
  Warrant    |   |                    
| |                                  |  |               |            |                  |   |                    
| | Outstanding at December 31, 2004 |  |               | 861,908    |                  | $ | 1.15, NZ$1.85- 2.10 |  |    
| | Exercised in 2005                |  |               | (264,820   | )                |   | NZ$1.85             |  | (1)
| | Exercised in 2005                |  |               | (354,315   | )                |   | NZ$2.10             |  | (1)
| | Exercised in 2005                |  |               | (227,273   | )                | $ | 1.15                |  |    
| | Granted in 2005                  |  |               | 2,000,000  |                  | $ | 3.50                |  |    
| | Cancelled in 2005                |  |               | (15,500    | )                |   | NZ$2.10             |  | (1)
| |                                  |  |               |            |                  |   |                     |  |    
| |                                  |  |               |            |                  |   |                     |  |    
| | 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                |  | (2)
| |                                  |  |               |            |                  |   |                     |  |    
| |                                  |  |               |            |                  |   |                     |  |    
| | Outstanding at December 31, 2006 |  |               | 2,500,000  |                  | $ | 2.11                |  |    
| |                                  |  |               |            |                  |   |                     |  |    

| |     |                                                                                                                                                                                                                                   
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Based on the foreign exchange rate at balance date
  warrants granted at NZ$2.10 equates to US$1.50 and warrants granted for
  NZ$1.85 equates to US$1.32.                                                                        
| |     |                                                                                                                                                                                                                                   
| | (2) | Under the terms of the 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 20).

As part of the term facility (Refer note 20) 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 over the vesting
period.

NOTE 16
LOSS PER SHARE

The following is a reconciliation of the numerators
and denominators of the basic and diluted loss per share

- 91 -

---



calculations for the period ending:

|                                            |  |                                 |             |                    |   |                    |   |   |            |  
|------------------------------------------- |  | ------------------------------- | ----------- | ------------------ | - | ------------------ | - | - | ---------- | -
|                                            |  | For the years ended December 31 |            
|                                            |  | 2006                            |             | 2005(restated) (1) |   | 2004(restated) (1) |  
|                                            |  |                                 |             |                    |   |                    |  
|                                            |  |                                 |             |                    |   |                    |   |   |            |  
|Numerator, net loss for the year            |  | $                               | (13,406,828 | )                  | $ | (5,767,933         | ) | $ | (4,628,056 | )
|                                            |  |                                 |             |                    |   |                    |   |   |            |  
|                                            |  |                                 |             |                    |   |                    |   |   |            |  
|Denominator:                                |  |                                 |             |                    |   |                    |   |   |            |  
|Weighted-average number of shares  basic   |  |                                 | 23,327,042  |                    |   | 19,489,336         |   |   | 13,627,617 |  
|                                            |  |                                 |             |                    |   |                    |   |   |            |  
|                                            |  |                                 |             |                    |   |                    |   |   |            |  
|Basic loss per share                        |  | $                               | (0.57       | )                  | $ | (0.30              | ) | $ | (0.34      | )
|                                            |  |                                 |             |                    |   |                    |   |   |            |  
|                                            |  |                                 |             |                    |   |                    |   |   |            |  
|Denominator:                                |  |                                 |             |                    |   |                    |   |   |            |  
|Weighted-average number of shares  diluted |  |                                 | 23,327,042  |                    |   | 19,489,336         |   |   | 13,627,617 |  
|                                            |  |                                 |             |                    |   |                    |   |   |            |  
|                                            |  |                                 |             |                    |   |                    |   |   |            |  
|Diluted loss per share                      |  | $                               | (0.57       | )                  | $ | (0.30              | ) | $ | (0.34      | )
|                                            |  |                                 |             |                    |   |                    |   |   |            |  

|    |                           
|--- | --------------------------
|(1) | As restated (refer Note 4)

Due to net losses incurred during 2006, 2005 and 2004
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 893,834 vested options outstanding at December
31, 2006. If exercised, these have the potential to dilute earnings of future
periods.

NOTE 17
 ISSUE OF SPECIAL CLASS SHARES OF SUBSIDIARY

On June 18, 2003, a private placement in one of the
Companys New Zealand subsidiaries, Austral Pacific Energy (NZ) Limited
(APENZ), was made to certain private investors for the issue of 1,500,000
Special Class shares in that company, for a total of NZ$1,500,000 (approx.
$943,525). Such shares conferred no voting rights, but did confer the right to
convert such shares to common shares units of APENZ in the event of a listing
of and issue of other common shares in APENZ on the New Zealand Stock Exchange.
Each unit consisted of one common share and one half warrant with the same
terms as the warrants included in the public offering.  Subsequently, the company decided not to
proceed with the listing of APENZ. In the event that the listing did not
proceed, the subscription agreement required the Company to offer to exchange such
Special Class shares for common shares in the Company at the higher of 80% of
prevailing market and $0.75 per common share of the Company. If the Special
Class shareholders rejected the Companys share exchange offer, they were
entitled to receive redemption dividends calculated based on and paid out of
20% of APENZs production income.

On November 12, 2003, each Special Class shareholder
signed a conditional share exchange agreement which agreed to transfer to the
Company all of the Special Class shares in exchange for the issuance of common
shares by the Company.  These Special
Class shares where exchanged for common shares on January 5, 2004, upon the
listing of the Company on the TSX Venture Exchange and the New Zealand Stock
Exchange (NZX), at one common share for every 1.35 Special Class share
resulting in the issuing of 1,111,123 common shares.  In addition, 555,569 warrants were attached to these shares
exercisable at a price of NZ$1.85 any time before January 5, 2005. As at
December 31, 2005, all warrants had been exercised.

- 92 -

---



NOTE 18
- 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% (2005: 37.12%; 2004: 37.12%) and the
provision for income taxes is as follows:

|                                                                 |  |      |             |                    |  |                    |   |  |            |  
|---------------------------------------------------------------- |  | ---- | ----------- | ------------------ |  | ------------------ | - |  | ---------- | -
|For the
  years ended,                                           |  | 2006 |             | 2005(restated) (1) |  | 2004(restated) (1) |  
|                                                                 |  |      |             |                    |  |                    |  
|                                                                 |  |      |             |                    |  |                    |   |  |            |  
|Net loss for the
  year before tax                               |  |      | (13,406,828 | )                  |  | (5,767,933         | ) |  | (4,628,056 | )
|                                                                 |  |      |             |                    |  |                    |   |  |            |  
|                                                                 |  |      |             |                    |  |                    |   |  |            |  
|Benefit of tax
  at statutory rate                               |  |      | (4,574,410  | )                  |  | (2,141,057         | ) |  | (1,717,934 | )
|Foreign tax rate
  differential                                  |  |      | 132,705     |                    |  | 166,205            |   |  | 90,692     |  
|Non-deductible
  stock based compensation expenditure/(recovery) |  |      | 185,643     |                    |  | 250,655            |   |  | (4,176     | )
|Other                                                            |  |      | 771,337     |                    |  | 47,592             |   |  | 5,194      |  
|Increase in
  valuation allowance                                |  |      | 3,484,725   |                    |  | 1,676,605          |   |  | 1,626,224  |  
|                                                                 |  |      |             |                    |  |                    |   |  |            |  
|                                                                 |  |      |             |                    |  |                    |   |  |            |  
|Income Tax
  Provision                                           |  |      |            |                    |  |                   |   |  |           |  
|                                                                 |  |      |             |                    |  |                    |   |  |            |  

|    |                     
|--- | --------------------
|(1) | As restated (Note 4)

In Canada the Company has net operating losses of
approximately $5.26 million available for future reduction from taxable income
derived in Canada, which expire as follows:

|     |  |                      |           | 
|---- |  | -------------------- | --------- | 
|     |  | Net
  operating loss |          
|2007 |  | $                    | 245,658   | 
|2008 |  | $                    | 331,924   | 
|2009 |  | $                    | 347,617   | 
|2010 |  | $                    | 605,451   | 
|2014 |  | $                    | 951,770   | 
|2015 |  | $                    | 1,196,579 | 
|2016 |  | $                    | 1,577,464 | 
|     |  |                      |           | 
|     |  | $                    | 5,256,463 | 
|     |  |                      |           | 

In addition, in Canada, at December 31, 2006, the
Company has approximately $1.23 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
$13.23 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
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.

- 93 -

---



The components of the net future income tax asset at
December 31, 2006 are summarized below:

|                                    |  |      |            |                    |   |            |  
|----------------------------------- |  | ---- | ---------- | ------------------ | - | ---------- | -
|                                    |  | 2006 |            | 2005(restated) (1) |  
|                                    |  |      |            |                    |  
|Future income tax assets:           |  |      |            |                    |   |            |  
|Net operating loss carryforwards    |  | $    | 5,919,309  |                    | $ | 6,279,599  |  
|Property and equipment              |  | $    | 1,896,532  |                    | $ | (65,786    | )
|Resource tax pool                   |  | $    | 503,038    |                    | $ | 519,353    |  
|Share issuance costs                |  | $    | 171,805    |                    | $ | 224,036    |  
|Asset retirement obligation         |  | $    | 351,634    |                    | $ | 111,235    |  
|                                    |  |      |            |                    |   |            |  
|Total gross future income tax asset |  | $    | 8,842,318  |                    | $ | 7,068,437  |  
|                                    |  |      |            |                    |   |            |  
|Less: Valuation allowance           |  | $    | (8,842,318 | )                  | $ | (7,068,437 | )
|                                    |  |      |            |                    |   |            |  
|                                    |  |      |            |                    |   |            |  
|Net future income tax asset         |  | $    | 0          |                    | $ | 0          |  
|                                    |  |      |            |                    |   |            |  
|                                    |  |      |            |                    |   |            |  
|Future income tax liabilities:      |  |      |            |                    |   |            |  
|Arrowhead acquisition (Note 5)      |  | $    | 2,018,969  |                    | $ | 0          |  
|                                    |  |      |            |                    |   |            |  
|Net future income tax liability     |  | $    | 2,018,969  |                    | $ | 0          |  
|                                    |  |      |            |                    |   |            |  

|    |                     
|--- | --------------------
|(1) | As restated (Note 4)

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 19
 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 $1,438,000) to fund the Companys ongoing
exploration programs. This money was advanced on April 3, 2003, with the
Company to deliver NZ$2,000,000 (approximately $1,438,000) 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 venture PEP 38736
(now PMP 38153). This property has nil carrying value as at December 31, 2006.

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, 2006, the Company had delivered gas
worth NZ$157,565.

(b) On February 4, 2004, Arrowhead Energy Ltd, a company acquired on
December 22, 2006,  entered into a gas
prepayment agreement with a New Zealand company, whereby the issuer provided
NZ$2,500,000 (approximately $1,700,000) to fund Arrowheads development
programs. Arrowhead is obliged to deliver NZ$2,500,000 (approximately
$1,700,000) of gas to the issuer, under the Kahili Gas Sales Agreement and,
when negotiated, the Cheal Gas Sales Agreement. 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. An amount of $324,300 has
been

- 94 -

---



included within the balance outstanding representing
the amount by which the pricing formula under the prepaid gas agreement for
Cheal gas is below that which would be expected to be achieved from an open
market price.

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 venture PMP 38156 and
its 25% interest in the Kahili joint venture PMP 38153 and supported by a
guarantee of NZ$2,500,000 provided by Investec Bank (Australia) Ltd. As at
December 31, 2006, Arrowhead Energy Ltd had delivered gas worth NZ$11,204.

The balances outstanding in respect to the prepaid gas agreements are
denominated in New Zealand dollars 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 20  LONG TERM DEBT

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 and the first drawdown of $15,738,000 was
made on December 22, 2006. 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%).
  At December 31, 2006 a total drawdown of $10,738,000 had been made from the
  Senior tranche. Total drawdowns under the Senior tranche are restricted to
  $13,000,000 until the finalisation of certain project contracts.
| |       |                                                                                                                                                                                                                                                                                                                                                                   
| | (ii)  | $5,000,000 Junior tranche. The interest rate prior
  to project completion is LIBOR plus 4.00% (post completion LIBOR plus 3.5%).                                                                                                                                                                                                                                
| |       |                                                                                                                                                                                                                                                                                                                                                                   
| | (iii) | NZ$2,500,000 Guarantee tranche. The interest rate
  prior to project completion is 2.00% (post completion 1.75%)                                                                                                                                                                                                                                                

The term of the facility is 4 years with principal
repayments anticipated as follows:

|     |  |                  |            |                  |   |           | 
|---- |  | ---------------- | ---------- | ---------------- | - | --------- | 
|     |  | Senior
  Tranche |            | Junior
  Tranche |  
|     |  |                  |            |                  |  
|     |  |                  |            |                  |   |           | 
|2007 |  | $                | 6,550,000  |                  |   |          | 
|2008 |  | $                | 7,400,000  |                  |   |          | 
|2009 |  | $                | 4,050,000  |                  | $ | 1,000,000 | 
|2010 |  |                  |           |                  | $ | 4,000,000 | 
|     |  |                  |            |                  |   |           | 
|     |  | $                | 18,000,000 |                  | $ | 5,000,000 | 

The Company has established a Debt Service Reserve
Account which has been funded with $3,000,000. Upon the Senior Tranche
maturity date the balance in the account can be reduced to $1,500,000 with the
$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 Note19(b)) reduces to nil or the day on which the project loan facility
is repaid.

As part of the term facility, 2,500,000 share purchase
warrants were issued to the lender. The warrants have a life of 2 years from
December 21, 2006 and an exercise price of $2.11. The fair value of the
warrants was estimated at $1,676,000 and this is excluded from the non-current
term liability balance in the Consolidated Balance Sheets.

- 95 -

---



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 the current year, and the
remainder of $1,132,222 included within the current and non-current term
liability balance in the Consolidated Balance Sheets.

A summary of the accounting treatment of the debt
raising is as follows:

|                       |  |         |           |             |   |            |   |   |            |  
|---------------------- |  | ------- | --------- | ----------- | - | ---------- | - | - | ---------- | -
|                       |  | Current |           | Non-current |   | Total      |  
|                       |  |         |           |             |   |            |  
|Balance outstanding    |  | $       | 6,550,000 |             | $ | 9,188,000  |   | $ | 15,738,000 |  
|                      
|Fair value of warrants |  |         |          |             | $ | (1,676,000 | ) | $ | (1,676,000 | )
|Prepaid expenses       |  | $       | (283,056  | )           | $ | (849,166   | ) | $ | (1,132,222 | )
|Reported
  balance     |  | $       | 6,266,944 |             | $ | 6,662,834  |   | $ | 12,929,778 |  

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 21.

As at December 31, 2006 security for the facility has
been given over all present and after-acquired property of the Group. 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.

Throughout the term of the project loan facility the
Company must continue to meet certain covenants. As at December 31, 2006 the
Company was in compliance with all covenants.

NOTE 21  FINANCIAL INSTRUMENTS AND DERIVATIVES

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. The contracts were entered into in connection with the raising of
long term debt (refer Note 20). As the put options and forward sales contracts
hedge commodity price against the Brent 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 $455,685 net reduction in the fair value of the derivative
instruments has been recognised in the Statements of Operations and Deficit in
the current period. The current portion of the change in fair value has been
included within Accounts Receivable/Payable (refer Note 10).

The Companys outstanding contracts for derivative
instruments, and the related fair values at December 31st, 2006 were
as follows:

|                        |  |                   |  |                 |                             |                              |       |                                        |          |   |  |  | 
|----------------------- |  | ----------------- |  | --------------- | --------------------------- | ---------------------------- | ----- | -------------------------------------- | -------- | - |  |  | 
|                        |  | Quantity(barrels) |  | Maturity
  date |                             | Average
  priceUS$ 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 | )

The loss is categorized by current $75,781 and
non-current $590,320.

NOTE 22  CONVERTIBLE NOTES

On January 5, 2004, the Company issued two Convertible
Notes for $250,000 each. On September 29, 2004 the two Convertible Notes were
converted, at the option of the holder, into 227,273 Units per Convertible Note
at the conversion rate of $1.10 per Unit. Each Unit comprised one common share
and one share purchase warrant permitting the holder to purchase an additional
common share at a price of $1.15 per share, for a 12 month period from issuance
date of the Note (expiry 5 January 2005). As at December 31, 2005 all warrants
issued on conversion of the convertible notes had been exercised. Interest of
$26,833 was paid on conversion.

NOTE 23 - SEGMENT INFORMATION

- 96 -

---



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.

2006

|                                    |  |        |            |               |  |            |   |     |          |                 |  |            |   |  |             |  
|----------------------------------- |  | ------ | ---------- | ------------- |  | ---------- | - | --- | -------- | --------------- |  | ---------- | - |  | ----------- | -
|                                    |  | Canada |            | New
  Zealand |  | Australia  |   | PNG |          | Total
  Company | 
|                                    |  |        |            |               |  |            |   |     |          |                 | 
|Production
  Income:                |  |        |            |               |  |            |   |     |          |                 |  |            |   |  |             |  
|Revenue                             |  |        |           |               |  | 911,931    |   |     |         |                 |  |           |   |  | 911,931     |  
|Royalty expenses                    |  |        |           |               |  | (40,899    | ) |     |         |                 |  |           |   |  | (40,899     | )
|                                    |  |        |            |               |  |            |   |     |          |                 |  |            |   |  |             |  
|Net revenue                         |  |        |           |               |  | 871,032    |   |     |         |                 |  |           |   |  | 871,032     |  
|                                    |  |        |            |               |  |            |   |     |          |                 |  |            |   |  |             |  
|Interest income                     |  |        | 980        |               |  | 436,299    |   |     |         |                 |  |           |   |  | 437,279     |  
|Joint venture recoveries            |  |        |           |               |  | 1,043,666  |   |     |         |                 |  |           |   |  | 1,043,666   |  
|Foreign exchange gain/(loss)        |  |        | (2,071     | )             |  | (1,822,823 | ) |     | (81,321  | )               |  | (67,436    | ) |  | (1,973,650  | )
|Unrealised gain on derivatives      |  |        |           |               |  | (455,685   | ) |     |         |                 |  |           |   |  | (455,685    | )
|Administrative expenses             |  |        | (1,376,233 | )             |  | (1,871,392 | ) |     | (59,000  | )               |  | (839,242   | ) |  | (4,145,868  | )
|Interest and accretion expense      |  |        |           |               |  | (72,229    | ) |     |         |                 |  | (188       | ) |  | (72,417     | )
|Amortization expense                |  |        |           |               |  | (92,874    | ) |     |         |                 |  | (13,677    | ) |  | (106,551    | )
|Production expenses                 |  |        |           |               |  | (485,447   | ) |     |         |                 |  |           |   |  | (485,447    | )
|Depletion                           |  |        |           |               |  | (347,206   | ) |     |         |                 |  |           |   |  | (347,206    | )
|Write-off of oil and gas properties |  |        |           |               |  | (5,232,887 | ) |     |         |                 |  | (2,939,094 | ) |  | (8,171,981  | )
|                                    |  |        |            |               |  |            |   |     |          |                 |  |            |   |  |             |  
|                                    |  |        |            |               |  |            |   |     |          |                 |  |            |   |  |             |  
|Net loss                            |  |        | (1,377,324 | )             |  | (8,029,546 | ) |     | (140,321 | )               |  | (3,859,637 | ) |  | (13,406,828 | )
|                                    |  |        |            |               |  |            |   |     |          |                 |  |            |   |  |             |  
|Property and equipment              |  |        |           |               |  | 20,853,539 |   |     |         |                 |  |           |   |  | 20,853,539  |  
|Current assets                      |  |        | 1,602      |               |  | 12,552,132 |   |     |         |                 |  | 195,548    |   |  | 12,749,282  |  
|Non-current assets                  |  |        |           |               |  | 2,155,497  |   |     |         |                 |  | 235,353    |   |  | 2,390,850   |  
|                                    |  |        |            |               |  |            |   |     |          |                 |  |            |   |  |             |  
|Total assets                        |  |        | 1,602      |               |  | 35,561,168 |   |     |         |                 |  | 430,901    |   |  | 35,993,671  |  
|                                    |  |        |            |               |  |            |   |     |          |                 |  |            |   |  |             |  
|Specific
  Items:                   |  |        |            |               |  |            |   |     |          |                 |  |            |   |  |             |  
|Purchase of property and equipment  |  |        |           |               |  | 259,902    |   |     |         |                 |  |           |   |  | 259,202     |  
|                                    |  |        |            |               |  |            |   |     |          |                 |  |            |   |  |             |  

|                                    |  |        |            |               |  |            |   |     |         |                 |  |          |   |  |            |  
|----------------------------------- |  | ------ | ---------- | ------------- |  | ---------- | - | --- | ------- | --------------- |  | -------- | - |  | ---------- | -
|2005(Restated  refer Note 4)       |  |        |            |               |  |            |   |     |         |                 |  |          |   |  |            |  
|                                    |  | Canada |            | New
  Zealand |  | Australia  |   | PNG |         | Total
  Company | 
|                                    |  |        |            |               |  |            |   |     |         |                 | 
|Production
  Income:                |  |        |            |               |  |            |   |     |         |                 |  |          |   |  |            |  
|Revenue                             |  |        |           |               |  | 1,779,454  |   |     |        |                 |  |         |   |  | 1,779,454  |  
|Royalty expenses                    |  |        |           |               |  | (74,930    | ) |     |        |                 |  |         |   |  | (74,930    | )
|                                    |  |        |            |               |  |            |   |     |         |                 |  |          |   |  |            |  
|Net revenue                         |  |        |           |               |  | 1,704,524  |   |     |        |                 |  |         |   |  | 1,704,524  |  
|                                    |  |        |            |               |  |            |   |     |         |                 |  |          |   |  |            |  
|Interest income                     |  |        | 6,113      |               |  | 450,077    |   |     |        |                 |  | 4,221    |   |  | 460,411    |  
|Joint venture recoveries            |  |        |           |               |  | 1,093,417  |   |     |        |                 |  |         |   |  | 1,093,417  |  
|Miscellaneous revenue               |  |        |           |               |  | 83,612     |   |     |        |                 |  |         |   |  | 83,612     |  
|Foreign exchange gain               |  |        | (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 expense                |  |        |           |               |  | (49,056    | ) |     |        |                 |  | (1,978   | ) |  | (51,034    | )
|Production expenses                 |  |        |           |               |  | (848,174   | ) |     |        |                 |  |         |   |  | (848,174   | )
|Depletion                           |  |        |           |               |  | (61,979    | ) |     |        |                 |  |         |   |  | (61,979    | )
|Write-off of oil and gas properties |  |        |           |               |  | (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 |  
|                                    |  |        |            |               |  |            |   |     |         |                 |  |          |   |  |            |  
|Specific
  Items:                   |  |        |            |               |  |            |   |     |         |                 |  |          |   |  |            |  
|Purchase of property and equipment  |  |        |           |               |  | 397,947    |   |     |        |                 |  | 32,276   |   |  | 430,223    |  
|                                    |  |        |            |               |  |            |   |     |         |                 |  |          |   |  |            |  

- 97 -

---



|                                    |  |        |          |               |  |            |   |     |          |                 |  |         |   |  |            |  
|----------------------------------- |  | ------ | -------- | ------------- |  | ---------- | - | --- | -------- | --------------- |  | ------- | - |  | ---------- | -
|2004(Restated  refer Note 4)       |  |        |          |               |  |            |   |     |          |                 |  |         |   |  |            |  
|                                    |  |        |          |               |  |            |   |     |          |                 |  |         |   |  |            |  
|                                    |  | Canada |          | New
  Zealand |  | Australia  |   | PNG |          | Total
  Company | 
|                                    |  |        |          |               |  |            |   |     |          |                 | 
|Production
  Income:                |  |        |          |               |  |            |   |     |          |                 |  |         |   |  |            |  
|Revenue                             |  |        |         |               |  | 212,458    |   |     |         |                 |  |        |   |  | 212,458    |  
|Royalty expenses                    |  |        |         |               |  | (15,040    | ) |     |         |                 |  |        |   |  | (15,040    | )
|                                    |  |        |          |               |  |            |   |     |          |                 |  |         |   |  |            |  
|Net revenue                         |  |        |         |               |  | 197,418    |   |     |         |                 |  |        |   |  | 197,418    |  
|                                    |  |        |          |               |  |            |   |     |          |                 |  |         |   |  |            |  
|Interest income                     |  |        | 18,303   |               |  | 307,709    |   |     |         |                 |  |        |   |  | 326,012    |  
|Joint venture recoveries            |  |        |         |               |  | 930,673    |   |     |         |                 |  |        |   |  | 930,673    |  
|Foreign exchange gain               |  |        |         |               |  | 197,858    |   |     |         |                 |  |        |   |  | 197,858    |  
|Administrative expenses             |  |        | (542,372 | )             |  | (1,296,014 | ) |     | (14,885  | )               |  | (15,419 | ) |  | (1,868,690 | )
|Interest expense                    |  |        | (28,698  | )             |  |           |   |     |         |                 |  |        |   |  | (28,698    | )
|Amortization expense                |  |        |         |               |  | (32,402    | ) |     |         |                 |  |        |   |  | (32,402    | )
|Production expenses                 |  |        |         |               |  | (67,543    | ) |     |         |                 |  |        |   |  | (67,543    | )
|Depletion                           |  |        |         |               |  | (84,864    | ) |     |         |                 |  |        |   |  | (84,864    | )
|Write-off of oil and gas properties |  |        |         |               |  | (4,037,171 | ) |     | (109,642 | )               |  | (51,007 | ) |  | (4,197,820 | )
|                                    |  |        |          |               |  |            |   |     |          |                 |  |         |   |  |            |  
|                                    |  |        |          |               |  |            |   |     |          |                 |  |         |   |  |            |  
|Net loss                            |  |        | (552,767 | )             |  | (3,884,336 | ) |     | (124,527 | )               |  | (66,426 | ) |  | (4,628,056 | )
|                                    |  |        |          |               |  |            |   |     |          |                 |  |         |   |  |            |  
|                                    |  |        |          |               |  |            |   |     |          |                 |  |         |   |  |            |  
|Property and equipment              |  |        |         |               |  | 780,202    |   |     |         |                 |  |        |   |  | 780,202    |  
|Current assets                      |  |        | 315,923  |               |  | 11,837,162 |   |     | 1,984    |                 |  | 78,969  |   |  | 12,234,038 |  
|                                    |  |        |          |               |  |            |   |     |          |                 |  |         |   |  |            |  
|Total assets                        |  |        | 315,923  |               |  | 12,617,364 |   |     | 1,984    |                 |  | 78,969  |   |  | 13,014,240 |  
|                                    |  |        |          |               |  |            |   |     |          |                 |  |         |   |  |            |  
|                                    |  |        |          |               |  |            |   |     |          |                 |  |         |   |  |            |  
|Specific
  Items:                   |  |        |          |               |  |            |   |     |          |                 |  |         |   |  |            |  
|Purchase of property and equipment  |  |        |         |               |  | 162,894    |   |     |         |                 |  |        |   |  | 162,894    |  
|                                    |  |        |          |               |  |            |   |     |          |                 |  |         |   |  |            |  

NOTE 24  SALES TO SIGNIFICANT CUSTOMERS

The Company made oil sales of $875,247 (2005:
$1,769,421, 2004: $154,906) to Swift Energy (NZ) Limited during the year.

During 2006 the Company made no gas deliveries (2005:
Nil) to Vector Gas Ltd under the prepaid gas agreements (refer to Note 19).

NOTE 25 - SUBSEQUENT EVENTS

The following events have occurred since 31 December
2006:

| |     |                                                                                                                                                   
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | In February 2007 the Ratanui exploration well was
  plugged and abandoned.                                                                        
| |     |                                                                                                                                                   
| | (b) | On 1 March 2007 the former Chief Executive Officer
  of the Company David Bennett exercised 200,000 stock options at an exercise
  price of $1.20.

NOTE 26 - DIFFERENCES BETWEEN NEW ZEALAND AND CANADIAN
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

These financial statements have been prepared in accordance
with Canadian generally accepted accounting principles (Canadian GAAP) which
conform in all material respects with New Zealand generally accepted accounting
principles (NZ GAAP) except for the following differences:

|   |                       
|-- | ----------------------
|a) | Stockholders
  Equity

A
previous reconciling difference, as reported in 2003, existed between NZ and
Canadian GAAP relating to the recognition of stock based compensation
expenditure. Canadian GAAP requires all stock options to be recognized using a
fair value based approach. For the purposes of NZ GAAP, there was no previous
requirement to record the fair value of stock options granted.

For
the year ended 31 December 2004, the company elected to early adopt NZIFRS 2Share Based Payments. NZIFRS 2 requires
stock options issued to be measured and recognized in the financial statements
using a fair value based approach. NZIFRS 1 First
time adoption encourages, a first time adopter to apply NZIFRS 2 to
equity instruments that were granted on or before 7 November 2002. As a result
the company has retrospectively applied NZIFRS 2 from 1 January 2002,
consistent with the adoption of the fair value method under Canadian GAAP.

- 98 -

---



b)
Financial Instruments

The
Company has adopted CICA 3855 Financial Instruments- Recognition and Measurement
effective 1 January 2006. CICA 3855 requires all financial instruments,
including derivatives, to be included on the companys balance sheet and
measured either at fair value or, in limited circumstances when the fair value
may not be considered most relevant, at cost or amortised cost.

For
the purposes of NZ GAAP, there is no requirement to record the fair value of
financial instruments. The company has elected to adopt NZ IAS 39 Financial
instruments: Recognition and Measurement from 1 January 2006 consistent
with the adoption of the fair value method under Canadian GAAP. The adoption of
NZ IAS 39 eliminates a reconciling difference between NZ and Canadian GAAP
relating to the recognition and measurement of financial instruments.

c) Cash
Flows from operating activities.

The Statement of Cash Flows is presented in Canadian
GAAP using the indirect method. The Statement of Cash Flows under NZ GAAP
requires the direct method to be used. Cash Flows for operating activities
under the direct method are as follows:

|                                           |  |      |            |      |  |            |   |  |            |  
|------------------------------------------ |  | ---- | ---------- | ---- |  | ---------- | - |  | ---------- | -
|For the years ended December 31            |  | 2006 |            | 2005 |  | 2004       |  
|Operating
  Activities                     |  |      |            |      |  |            |   |  |            |  
|                                           |  |      |            |      |  |            |   |  |            |  
|Cash inflows                               |  |      |            |      |  |            |   |  |            |  
|Oil and gas
  proceeds                     |  |      | 441,369    |      |  | 1,795,714  |   |  | 279,210    |  
|Interest
  received                        |  |      | 437,279    |      |  | 480,155    |   |  | 326,012    |  
|Joint venture
  recoveries                 |  |      | 1,043,666  |      |  | 1,093,417  |   |  | 930,673    |  
|                                           |  |      |            |      |  |            |   |  |            |  
|Cash outflows                              |  |      |            |      |  |            |   |  |            |  
|Payments to
  suppliers and employees      |  |      | (3,299,879 | )    |  | (4,313,589 | ) |  | (1,626,430 | )
|Net GST payments                           |  |      | (51,813    | )    |  | 11,691     |   |  | 25,470     |  
|                                           |  |      |            |      |  |            |   |  |            |  
|                                           |  |      |            |      |  |            |   |  |            |  
|Net cash outflows for operating activities |  |      | (1,429,378 | )    |  | (932,612   | ) |  | (65,065    | )
|                                           |  |      |            |      |  |            |   |  |            |  

|   |                                         
|-- | ----------------------------------------
|d) | Disclosure
  of Joint Venture Interests.

In accordance with SSAP 25 Accounting for Interests in
Joint Ventures and Partnerships, which deals with the accounting and disclosure
requirements of participants for interests in joint ventures, the company is
required to disclose significant joint venture information for New Zealand
reporting purposes.

The company held interests at December 31, 2006 in
significant unincorporated joint ventures established to explore, develop and
produce petroleum as follows:

- 99 -

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|                             |  |          |        |          |  |        | 
|---------------------------- |  | -------- | ------ | -------- |  | ------ | 
|                             |  | 2006
  % |        | 2005
  % | 
|New
  Zealand                |  |          |        |          |  |        | 
|PMP 38153 1,3                |  |          | 85.00  |          |  | 45.00  | 
|PMP 38156
  Shallow 2,3      |  |          | 69.50  |          |  | 0.00   | 
|PMP 38156
  Deep 2,          |  |          | 25.10  |          |  | 0.00   | 
|PEP 38256 
  Exploration 4  |  |          | 0.00   |          |  | 46.16  | 
|PEP 38258 
  Exploration 10 |  |          | 75.00  |          |  | 75.00  | 
|PEP 38492  Exploration 5    |  |          | 0.00   |          |  | 100.00 | 
|PEP 38736  Exploration 6    |  |          | 0.00   |          |  | 45.00  | 
|PEP 38738 01  Exploration 3 |  |          | 69.50  |          |  | 36.50  | 
|PEP 38738 02  Exploration   |  |          | 25.10  |          |  | 25.10  | 
|PEP 38741  Exploration1     |  |          | 55.00  |          |  | 30.00  | 
|PEP 38744  Exploration1,8   |  |          | 0.00   |          |  | 0.00   | 
|PEP 38745  Exploration1     |  |          | 16.67  |          |  | 0.00   | 
|PEP 38746  Exploration 1    |  |          | 83.33  |          |  | 66.67  | 
|PEP 38748  Exploration 1    |  |          | 66.66  |          |  | 33.33  | 
|PEP 38753  Exploration 5    |  |          | 0.00   |          |  | 60.00  | 
|PEP 38765  Exploration 1    |  |          | 61.67  |          |  | 36.67  | 
|PEP 38766  Exploration 1,10 |  |          | 66.66  |          |  | 33.33  | 
|                             |  |          |        |          |  |        | 
|Papua
  New Guinea           |  |          |        |          |  |        | 
|PPL 235  Exploration        |  |          | 35.00  |          |  | 35.00  | 
|PPL 261  Exploration 7      |  |          | 50.00  |          |  | 0.00   | 
|PRL 4  Retention 9          |  |          | 28.92  |          |  | 13.41  | 
|PRL 5  Retention 9          |  |          | 10.712 |          |  | 7.50   | 

The financial statements of
all joint ventures are un-audited.

|     |                                                                                                                                                   
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------
|(1)  | Due to an assignment of
  interest by one party, the Company increased/obtained its percentage
  interest, effective March 2006.                  
|     |                                                                                                                                                   
|(2)  | A new permit was granted to
  the Company, effective July 2006.                                                                                   
|     |                                                                                                                                                   
|(3)  | Due to the acquisition of
  Arrowhead Energy Ltd in December 2006, the Company increased its percentage
  interest effective from October 2006.   
|     |                                                                                                                                                   
|(4)  | The Company withdrew its
  interest in the permit, effective August 2006.                                                                         
|     |                                                                                                                                                   
|(5)  | The Company surrendered its
  interest, effective August 2006.                                                                                    
|     |                                                                                                                                                   
|(6)  | The Company surrendered its
  interest, effective September 2006.                                                                                 
|     |                                                                                                                                                   
|(7)  | A new permit was granted to
  the Company, effective November 2006.                                                                               
|     |                                                                                                                                                   
|(8)  | The Company withdrew from
  the permit, effective August 2006. At balance date, the withdrawal remains
  subject to finalization of documentation.
|     |                                                                                                                                                   
|(9)  | Numerous small events led
  to an overall increase in the Companys percentage interest during 2006.                                              
|     |                                                                                                                                                   
|(10) | The Company surrendered its
  interest, effective February 2007                                                                                   

The contribution made by joint ventures to the
consolidated results was to increase revenues by $911,831 (2005: $1,779,454);
and expenses by $8,308,849 (2005: $1,288,345). The total value of consolidated
joint venture assets is $4,568,104 and liabilities $2,998,342.

|   |                                         
|-- | ----------------------------------------
|e) | Disclosure
  of Parent Company Accounts.

In accordance with the New Zealand Financial Reporting
Act 1993, the company is required to disclose separately a Statement of Financial
Position, Statement of Financial Performance and Statement of Cash Flows, for
the parent entity: Austral Pacific Energy Ltd. These are as follows:

- 100 -

---



Parent
Company Accounts - Statement of Financial Position
(Expressed in United States Dollars)


|                                                                                  |  |          |             |                        |  |             |  
|--------------------------------------------------------------------------------- |  | -------- | ----------- | ---------------------- |  | ----------- | -
|                                                                                 
|                                                                                 
|As at December 31                                                                 |  | 2006
  $ |             | 2005
  $(restated) (1) | 
|                                                                                  |  |          |             |                        | 
|                                                                                  |  |          |             |                        |  |             |  
|Assets                                                                            |  |          |             |                        |  |             |  
|Current                                                                           |  |          |             |                        |  |             |  
|Cash and cash equivalents                                                         |  |          |            |                        |  | 196,316     |  
|Accounts receivable                                                               |  |          | 1,602       |                        |  | 2,584       |  
|Prepaid expenses and deposits                                                     |  |          |            |                        |  |            |  
|                                                                                  |  |          |             |                        |  |             |  
|                                                                                  |  |          | 1,602       |                        |  | 198,900     |  
|                                                                                  |  |          |             |                        |  |             |  
|Investment in/Advance to subsidiaries                                             |  |          | 12,311,428  |                        |  | 16,840,974  |  
|                                                                                  |  |          |             |                        |  |             |  
|Total Assets                                                                      |  |          | 12,313,030  |                        |  | 17,039,874  |  
|                                                                                  |  |          |             |                        |  |             |  
|                                                                                  |  |          |             |                        |  |             |  
|Liabilities                                                                       |  |          |             |                        |  |             |  
|Accounts payable and accrued liabilities                                          |  |          | 270,186     |                        |  | 198,446     |  
|                                                                                  |  |          |             |                        |  |             |  
|Total Liabilities                                                                 |  |          | 270,186     |                        |  | 198,446     |  
|                                                                                  |  |          |             |                        |  |             |  
|Stockholders Equity                                                              |  |          |             |                        |  |             |  
|Common stock without par value (Note 15);unlimited number of shares
  authorized; |  |          |             |                        |  |             |  
|Issued and outstanding 27,764,287 shares                                          |  |          | 50,045,527  |                        |  | 43,499,296  |  
|Contributed surplus                                                               |  |          | 1,545,218   |                        |  | 1,023,967   |  
|Share purchase warrants reserve                                                   |  |          | 1,540,762   |                        |  |            |  
|Accumulated deficit                                                               |  |          | (41,088,663 | )                      |  | (27,681,835 | )
|                                                                                  |  |          |             |                        |  |             |  
|Total Stockholders Equity                                                        |  |          | 12,042,844  |                        |  | 16,841,428  |  
|                                                                                  |  |          |             |                        |  |             |  
|Total Liabilities and Stockholders Equity                                        |  |          | 12,313,030  |                        |  | 17,039,874  |  
|                                                                                  |  |          |             |                        |  |             |  

(1) refer Note 4

|                                                               |  |          |             |                        |  |             |  
|-------------------------------------------------------------- |  | -------- | ----------- | ---------------------- |  | ----------- | -
|Parent
  Company Accounts - Statement of Financial Performance |  |          |             |                        |  |             |  
|(Expressed
  in United States Dollars)                         |  |          |             |                        |  |             |  
|                                                              
|                                                              
|For the years ended December 31                                |  | 2006
  $ |             | 2005
  $(restated) (1) | 
|                                                              
|Expenses                                                       |  |          |             |                        |  |             |  
|General and administrative                                     |  |          | 834,217     |                        |  | 1,042,445   |  
|Foreign exchange movement                                      |  |          | 29,495      |                        |  | 274,302     |  
|Adjustment to investment in subsidiaries                       |  |          | 12,010,161  |                        |  | 3,783,588   |  
|Stock option compensation expense                              |  |          | 533,935     |                        |  | 673,711     |  
|                                                               |  |          |             |                        |  |             |  
|Total Expenses                                                 |  |          | 13,407,808  |                        |  | 5,774,046   |  
|                                                               |  |          |             |                        |  |             |  
|Other Income                                                   |  |          |             |                        |  |             |  
|Interest income                                                |  |          | 980         |                        |  | 6,113       |  
|                                                               |  |          |             |                        |  |             |  
|Net loss for the year                                          |  |          | (13,406,828 | )                      |  | (5,767,933  | )
|                                                               |  |          |             |                        |  |             |  
|Deficit, beginning of year                                     |  |          | (27,681,835 | )                      |  | (21,913,902 | )
|                                                               |  |          |             |                        |  |             |  
|Deficit, end of year                                           |  |          | (41,088,663 | )                      |  | (27,681,835 | )
|                                                               |  |          |             |                        |  |             |  
|Basic loss per share                                           |  |          | (0.57       | )                      |  | (0.30       | )
|                                                               |  |          |             |                        |  |             |  
|Diluted loss per share                                         |  |          | (0.57       | )                      |  | (0.30       | )
|                                                               |  |          |             |                        |  |             |  

(1) refer Note 4

- 101 -

---



|                                                  |  |          |            |          |  |            |  
|------------------------------------------------- |  | -------- | ---------- | -------- |  | ---------- | -
|                                                  |  |          |            |          |  |            |  
|Parent Company Accounts - Statement of Cash Flows |  |          |            |          |  |            |  
|(Expressed in United States Dollars)              |  |          |            |          |  |            |  
|                                                  |  |          |            |          | 
|                                                 
|For the years ended December 31                   |  | 2006
  $ |            | 2005
  $ | 
|                                                  |  |          |            |          |  |            |  
|Net Cash from/(used in) Operating Activities      |  |          |            |          |  |            |  
|Cash provided from/(used in):                     |  |          |            |          |  |            |  
|Interest income received                          |  |          | 980        |          |  | 6,113      |  
|                                                  |  |          |            |          |  |            |  
|Net Cash from/(used in) Investing Activities      |  |          |            |          |  |            |  
|Cash provided from/(used in):                     |  |          |            |          |  |            |  
|Payment to suppliers                              |  |          | (790,990   | )        |  | (1,245,971 | )
|Advances to subsidiaries                          |  |          | (5,952,537 | )        |  | (9,688,458 | )
|                                                  |  |          |            |          |  |            |  
|Net Cash from/(used in) Financing Activities      |  |          |            |          |  |            |  
|Proceeds from issue of shares                     |  |          | 6,546,231  |          |  | 10,815,968 |  
|                                                  |  |          |            |          |  |            |  
|Total movement in cash balances                   |  |          | (196,316   | )        |  | (112,348   | )
|                                                  |  |          |            |          |  |            |  
|Cash balances at beginning of year                |  |          | 196,316    |          |  | 308,664    |  
|                                                  |  |          |            |          |  |            |  
|Cash balances                                     |  |          |           |          |  | 196,316    |  
|                                                  |  |          |            |          |  |            |  

Under New Zealand Financial Reporting Standards, the
Company is required to disclose audit fees of $261,797 for 2006 (2005:
$259,972).

|   |                                                          
|-- | ---------------------------------------------------------
|f) | Adoption
  of International Financial Reporting Standards

The Financial
Statements are prepared in accordance with Canadian GAAP with a reconciliation
of differences to NZ GAAP provided in Note 26.

In December 2002
the New Zealand Accounting Standards Review Board announced that New Zealand
International Financial Reporting Standards (NZ IFRS) will apply to all New
Zealand reporting entities for the periods commencing on or after 1 January
2007.

The Canadian
Institute of Chartered Accountants has announced that it will be adopting the
equivalent to IFRS, which is expected to occur in 2011. The Canadian Accounting
Standards Board (AcSB) intends to announce the exact changeover date by 31
March 2008. As these financial statements are prepared in accordance with
Canadian GAAP, the Company has not yet commenced a project to assess the key
differences in accounting policies between Canadian IFRS, existing NZ GAAP and
NZ IFRS. As the Company has not yet completed an analysis of the differences
between existing NZ GAAP and NZ IFRS, it is unable to reliably estimate the key
differences in accounting policies or quantify the impacts to the financial
statements that are expected to arise on transition to NZ IFRS, in respect to
the Canadian GAAP to NZ GAAP reconciliation.

NOTE 27 - 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.

- 102 -

---



Reconciliation of Net Loss and Loss per share under
Canadian GAAP to U.S. GAAP

|                                                                |  |                                   |             |                                   |    |                                   |   |    |            |  
|--------------------------------------------------------------- |  | --------------------------------- | ----------- | --------------------------------- | -- | --------------------------------- | - | -- | ---------- | -
|                                                                |  | Year
  Ended
  December 31
  2006 |             | Year
  Ended
  December 31
  2005 |    | Year
  Ended
  December 31
  2004 |  
|                                                                |  |                                   |             |                                   |    |                                   |  
|Net
  (loss)/profit for the year under Canadian GAAP (Restated) |  |                                   | (13,406,828 | )                                 |    | (5,767,933                        | ) |    | (4,628,056 | )
|                                                                |  |                                   |             |                                   |    |                                   |   |    |            |  
|Add back
  Canadian GAAP compensation cost (c)                  |  |                                   | 533,935     |                                   |    | 673,711                           |   |    | (11,450    | )
|Stock option
  compensation cost (c)                            |  |                                   |             |                                   |    |                                   |   |    |            |  
|Employees                                                       |  |                                   | (348,559    | )                                 |    | (3,599                            | ) |    | (4,919     | )
|Contractors                                                     |  |                                   | 0           |                                   |    | (604,338                          | ) |    | 1,141      |  
|Common stock and
  warrant issuance expense (c)                 |  |                                   |            |                                   |    |                                  |   |    |           |  
|Compensation
  expense of new Series A warrants (c)             |  |                                   |            |                                   |    |                                  |   |    |           |  
|Interest on
  prepaid gas agreement (d)                         |  |                                   | 47,291      |                                   |    |                                  |   |    |           |  
|Beneficial
  conversion features (a)                            |  |                                   |            |                                   |    |                                  |   |    | (225,503   | )
|NZ tradable
  warrants unrealised expense (b)                   |  |                                   |            |                                   |    |                                  |   |    | (804,935   | )
|NZ tradable
  warrants realised expense (b)                     |  |                                   | 0           |                                   |    | 99,325                            |   |    | (2,670,591 | )
|                                                                |  |                                   |             |                                   |    |                                   |   |    |            |  
|Net
  loss for the year under US GAAP                           |  |                                   | (13,174,161 | )                                 |    | (5,602,834                        | ) |    | (8,344,313 | )
|                                                                |  |                                   |             |                                   |    |                                   |   |    |            |  
|Weighted average
  number of shares under US GAAP               |  |                                   |             |                                   |    |                                   |   |    |            |  
|Basic                                                           |  |                                   | 23,327,042  |                                   |    | 19,489,336                        |   |    | 13,627,617 |  
|Diluted                                                         |  |                                   | 23,327,042  |                                   |    | 19,489,336                        |   |    | 13,627,617 |  
|                                                                |  |                                   |             |                                   |    |                                   |   |    |            |  
|Loss per share
  under US GAAP                                  |  |                                   |             |                                   |    |                                   |   |    |            |  
|Basic                                                           |  | ($                                | 0.56        | )                                 | ($ | 0.29                              | ) | ($ | 0.61       | )
|Diluted                                                         |  | ($                                | 0.56        | )                                 | ($ | 0.29                              | ) | ($ | 0.61       | )

Accumulated deficit under Canadian GAAP and U.S. GAAP

|                                         |  |                          |             |                          |  |                          |   |            |             |                 |  |             |   |  |             |   |  |             |  
|---------------------------------------- |  | ------------------------ | ----------- | ------------------------ |  | ------------------------ | - | ---------- | ----------- | --------------- |  | ----------- | - |  | ----------- | - |  | ----------- | -
|                                         |  | As at
  December 31 2006 |             | As at
  December 31 2005 |  | As at
  December 31 2004 |  
|                                         |  |                          |             |                          |  |                          |  
|                                         |  | Canadian
  GAAP          |             | US
  GAAP                |  | Canadian
  GAAP          |   | US
  GAAP  |             | Canadian
  GAAP |  | US
  GAAP   |  
|                                         |  |                          |             |                          |  | (Restated)               |   | (Restated) |             | (Restated)      |  | (Restated)  |  
|                                         |  |                          |             |                          |  |                          |   |            |             |                 |  |             |   |  |             |   |  |             |  
|Accumulated deficit, beginning of
  year |  |                          | (27,681,835 | )                        |  | (34,148,416              | ) |            | (21,913,902 | )               |  | (28,545,582 | ) |  | (17,285,846 | ) |  | (20,201,269 | )
|                                        
|Net loss                                 |  |                          | (13,406,828 | )                        |  | (13,174,161              | ) |            | (5,767,933  | )               |  | (5,602,834  | ) |  | (4,628,056  | ) |  | (8,344,313  | )
|                                         |  |                          |             |                          |  |                          |   |            |             |                 |  |             |   |  |             |   |  |             |  
|                                         |  |                          |             |                          |  |                          |   |            |             |                 |  |             |   |  |             |   |  |             |  
|Accumulated deficit, end of year         |  |                          | (41,088,663 | )                        |  | (47,322,577              | ) |            | (27,681,835 | )               |  | (34,148,416 | ) |  | (21,913,902 | ) |  | (28,545,582 | )

Equity reconciliation from Canadian GAAP to U.S. GAAP

|                                                 |  |                          |            |                          |  |                          |   |  |            |  
|------------------------------------------------ |  | ------------------------ | ---------- | ------------------------ |  | ------------------------ | - |  | ---------- | -
|                                                 |  | As at
  December 31 2006 |            | As at
  December 31 2005 |  | As at
  December 31 2004 |  
|                                                 |  |                          |            |                          |  |                          |   |  |            |  
|Total Equity under Canadian GAAP                 |  |                          | 12,095,760 |                          |  | 16,841,428               |   |  | 11,131,280 |  
|                                                
|Fair Value of unsettled derivative exercised (c) |  |                          |           |                          |  |                         |   |  | (960,620   | )
|                                                
|Interest on prepaid gas revenue                  |  |                          |           |                          |  | (47,291                  | ) |  | (47,291    | )
|                                                
|                                                 |  |                          |            |                          |  |                          |   |  |            |  
|Total Equity under US GAAP                       |  |                          | 12,095,760 |                          |  | 16,794,137               |   |  | 10,123,369 |  

- 103 -

---



Balance sheet under Canadian GAAP and U.S. GAAP

|                                             |                                          |  |                          |             |                          |            |                 |            |            |             |   |            |             |  
|-------------------------------------------- | ---------------------------------------- |  | ------------------------ | ----------- | ------------------------ | ---------- | --------------- | ---------- | ---------- | ----------- | - | ---------- | ----------- | -
|                                             |                                          |  | As at
  December 31 2006 |             | As at
  December 31 2005 |           
|                                             |                                          |  |                          |             |                          |           
|                                             |                                          |  | Canadian
  GAAP          |             | US
  GAAP                |            | Canadian
  GAAP |            | US
  GAAP  |            
|                                             |                                          |  |                          |             |                          | (Restated) |                 | (Restated) |           
|                                             |                                          |  |                          |             |                          |            |                 |            |            |             |   |            |            
|Assets                                       |                                          |  |                          |             |                          |            |                 |            |            |             |   |            |            
|Current                                      |                                          |  |                          |             |                          |            |                 |            |            |             |   |            |            
|                                             | Cash and cash equivalents                |  |                          | 7,144,943   |                          |            | 7,144,943       |            |            | 15,339,906  |   |            | 15,339,906  |  
|                                             | Accounts receivable                      |  |                          | 1,418,071   |                          |            | 1,418,071       |            |            | 746,165     |   |            | 746,165     |  
|                                             | Financial Instruments                    |  |                          | 210,416     |                          |            | 210,416         |            |            |            |   |            |            |  
|                                             | Inventory                                |  |                          | 475,280     |                          |            | 475,280         |            |            | 474,777     |   |            | 474,777     |  
|                                             | Prepaid expenses and deposits            |  |                          | 500,572     |                          |            | 500,572         |            |            | 217,910     |   |            | 217,910     |  
|                                             |                                          |  |                          |             |                          |            |                 |            |            |             |   |            |             |  
|                                             |                                          |  |                          | 9,749,282   |                          |            | 9,749,282       |            |            | 16,778,758  |   |            | 16,778,758  |  
|                                             |                                          |  |                          |             |                          |            |                 |            |            |             |   |            |             |  
|                                             | Deferred offering costs                  |  |                          |            |                          |            |                |            |            |            |   |            |            |  
|                                             | Restricted cash                          |  |                          | 3,000,000   |                          |            | 3,000,000       |            |            |             |   |            |             |  
|                                             | Investments                              |  |                          | 136,528     |                          |            | 136,528         |            |            | 83,612      |   |            | 83,612      |  
|                                             | Held for sale asset                      |  |                          | 235,353     |                          |            | 235,353         |            |            |             |   |            |             |  
|                                             | Property and equipment                   |  |                          | 20,853,539  |                          |            | 20,853,539      |            |            | 3,513,535   |   |            | 3,513,535   |  
|                                             | Goodwill                                 |  |                          | 2,018,969   |                          |            | 2,018,969       |            |            |             |   |            |             |  
|                                             |                                          |  |                          |             |                          |            |                 |            |            |             |   |            |             |  
|Total Assets                                 |                                          |  | 35,993,671               |             |                          | 35,993,671 |                 |            | 20,375,905 |             |   | 20,375,905 |            
|                                             |                                          |  |                          |             |                          |            |                 |            |            |             |   |            |            
|Liabilities                                  |                                          |  |                          |             |                          |            |                 |            |            |             |   |            |            
|Current                                      |                                          |  |                          |             |                          |            |                 |            |            |             |   |            |            
|                                             | Accounts payable and accrued liabilities |  |                          | 3,839,736   |                          |            | 3,839,736       |            |            |            |   |            |            |  
|                                             | Financial Instruments                    |  |                          | 75,781      |                          |            | 75,781          |            |            | 1,941,606   |   |            | 1,988,897   |  
|                                             | Prepaid gas revenue                      |  |                          | 1,047,108   |                          |            | 1,047,108       |            |            |            |   |            |            |  
|                                             | Current portion of long-term debt        |  |                          | 6,266,944   |                          |            | 6,266,944       |            |            |            |   |            |            |  
|                                             |                                          |  |                          |             |                          |            |                 |            |            |             |   |            |             |  
|                                             |                                          |  |                          | 11,229,569  |                          |            | 11,229,569      |            |            | 1,941,606   |   |            | 1,988,897   |  
|                                             |                                          |  |                          |             |                          |            |                 |            |            |             |   |            |             |  
|                                             | Financial Instruments                    |  |                          | 590,320     |                          |            | 590,320         |            |            |            |   |            |            |  
|                                             | Deferred taxation provision              |  |                          | 2,018,969   |                          |            | 2,018,969       |            |            |            |   |            |            |  
|                                             | Prepaid gas revenue                      |  |                          | 2,330,660   |                          |            | 2,330,660       |            |            | 1,255,796   |   |            | 1,255,796   |  
|                                             | Asset retirement obligations             |  |                          | 1,065,559   |                          |            | 1,065,559       |            |            | 337,075     |   |            | 337,075     |  
|                                             | Long Term Debt                           |  |                          | 6,662,834   |                          |            | 6,662,834       |            |            |            |   |            |            |  
|                                             | Warrants liability (b)                   |  |                          |            |                          |            |                |            |            |            |   |            |            |  
|                                             |                                          |  |                          |             |                          |            |                 |            |            |             |   |            |             |  
|Total Liabilities                            |                                          |  | 23,897,911               |             |                          | 23,897,911 |                 |            | 3,534,477  |             |   | 3,581,768  |            
|                                             |                                          |  |                          |             |                          |            |                 |            |            |             |   |            |             |  
|Stockholders Equity                         |                                          |  |                          |             |                          |            |                 |            |            |             |   |            |            
|                                             | Paid in capital (a), (b), (c)            |  |                          | 53,184,423  |                          |            | 59,418,337      |            |            | 44,523,263  |   |            | 50,942,553  |  
|                                             | Accumulated deficit (a), (b), (c)        |  |                          | (41,088,663 | )                        |            | (47,322,577     | )          |            | (27,681,835 | ) |            | (34,148,416 | )
|                                             |                                          |  |                          |             |                          |            |                 |            |            |             |   |            |             |  
|Total Stockholders Equity                   |                                          |  | 12,095,760               |             |                          | 12,095,760 |                 |            | 16,841,428 |             |   | 16,794,137 |            
|                                             |                                          |  |                          |             |                          |            |                 |            |            |             |   |            |             |  
|                                            
|                                             |                                          |  |                          |             |                          |            |                 |            |            |             |   |            |             |  
|Total Liabilities and Stockholders
  Equity |                                          |  | 35,993,671               |             |                          | 35,993,671 |                 |            | 20,375,905 |             |   | 20,375,905 |            
|                                             |                                          |  |                          |             |                          |            |                 |            |            |             |   |            |             |  

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Convertible Instrument with Beneficial
  Conversion Feature                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | Emerging Issues Task Force (EITF) issue No. 00-27
  requires an imputed interest expense be recognised for convertible
  instruments with beneficial conversion features. The expense is calculated as
  the excess of (1) the fair value of the common shares issuable upon
  conversion over (2) the proportionate share of the carrying value of the
  convertible instrument allocated to those common shares based on their
  relative fair value compared to all instruments to be issued upon
  conversion.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | On January 5, 2004, the Company issued convertible
  notes with a face value of $500,000. The notes were convertible into one unit
  at $1.15. Each unit consists of one common share and one warrant. At
  issuance, the fair value of the units exceeded the carrying value of the
  convertible notes. In the year ended December 31, 2004 for US GAAP, the
  Company recognised $225,503 of imputed beneficial conversion interests
  costs.                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(b) | 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                                                                                                                                                                                                                                                                                                              

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | 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 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 recognised 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(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. Under this method,
  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.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | Share-based
  compensation cost that has been included in income from continuing operations
  amounted to $348,559 for the year ended December 31, 2006. No income tax
  benefit has been recognized in the income statement for share-based
  compensation arrangements for the year ended December 31, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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|                                                             |  |                     |           | 
|------------------------------------------------------------ |  | ------------------- | --------- | 
|                                                             |  | 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 | 
|                                                             |  |                     |           | 

Cash Flow Statement under Canadian GAAP and
U.S. GAAP

There is no difference
in the cash flow statement under Canadian GAAP and U.S. GAAP

- 106 -

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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)      
|                    |  |                                             |  |              |  |                                                                            |  |          
|2.1.1               |  | US$ Cash
  Advance Agreement                |  | Dec 21, 2006 |  | Investec
  Bank (Australia) Ltd; various Austral companies                 |  | (7)      
|                    |  |                                             |  |              |  |                                                                            |  |          
|2.1.2               |  | Warrant Agreement                           |  | Dec 21, 2006 |  | Investec
  Bank (Australia) Ltd; Austral                                   |  | (7)      
|                    |  |                                             |  |              |  |                                                                            |  |          
|4.1                 |  | Form of
  Stock Option Agreement            |  | Oct 15, 2002 |  | various
  employees, directors, and consultants; Austral                   |  | (2)      
|                    |  |                                             |  |              |  |                                                                            |  |          
|4.2.1               |  | Gas
  Pre-payment and Option Agreement      |  | Apr 2, 2003  |  | NGC Energy;
  Austral                                                      |  | (1)      
|                    |  |                                             |  |              |  |                                                                            |  |          
|4.2.2               |  | Gas
  Pre-Payment and Sale Agreement        |  | Feb 4, 2004  |  | NGC Energy
  International Resource Management Corporation (IRM)           |  | (7)      
|                    |  |                                             |  |              |  |                                                                            |  |          
|4.2.3               |  | Asset Sale
  Agreement                      |  | Oct 23, 2005 |  | International
  Resource Management Corporation (IRM) Arrowhead Energy Ltd |  | (7)      
|                    |  |                                             |  |              |  |                                                                            |  |          
|4.3                 |  | Stock Option
  Plan                         |  | Mar 3, 2006  |  |                                                                            |  | (4)      
|                    |  |                                             |  |              |  |                                                                            |  |          
|4.4.1               |  | Form of Unit
  Subscription Agreement       |  | Oct 18, 2006 |  | Austral and various purchasers of the Units                                |  | (7)      
|                    |  |                                             |  |              |  |                                                                            |  |          
|4.4.2               |  | Form of Unit
  Subscription Agreement       |  | Mar 30, 2007 |  | Austral and
  various purchasers of the Units                              |  | (7)      
|                    |  |                                             |  |              |  |                                                                            |  |          
|4.5.1               |  | Settlement
  Agreement                      |  | Dec 30, 2005 |  | DJ Bennett;
  Austral                                                      |  | (3)      
|                    |  |                                             |  |              |  |                                                                            |  |          
|4.5.2               |  | Variation of
  Settlement Agreement         |  | Feb 2, 2006  |  | DJ Bennett;
  Austral                                                      |  | (3)      

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|                    |  |                                                                                                                                                                                                |  |              |  |                                                                         |  |          
|------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | ----------------------------------------------------------------------- |  | ---------
|Exhibit
  Reference |  | Document                                                                                                                                                                                       |  | Date         |  | Parties                                                                 |  | Reference
|                    |  |                                                                                                                                                                                                |  |              |  |                                                                         |  |          
|4.6                 |  | Share Sale
  Agreement                                                                                                                                                                         |  | Oct 18, 2006 |  | Shareholders
  of Arrowhead Energy Ltd; Austral Pacific Energy (NZ) Ltd |  | (7)      
|                    |  |                                                                                                                                                                                                |  |              |  |                                                                         |  |          
|4.7.1               |  | Offer of
  Employment                                                                                                                                                                          |  | Apr 23, 2007 |  | Austral; T B
  Jewell                                                   |  | (7)      
|                    |  |                                                                                                                                                                                                |  |              |  |                                                                         |  |          
|4.7.2               |  | Variation to
  offer of employment                                                                                                                                                             |  | May 24, 2007 |  | Austral; T B
  Jewell                                                   |  | (7)      
|                    |  |                                                                                                                                                                                                |  |              |  |                                                                         |  |          
|8                   |  | List of
  Subsidiaries of the Company                                                                                                                                                          |  | May 31, 2007 |  |                                                                         |  | (7)      
|                    |  |                                                                                                                                                                                                |  |              |  |                                                                         |  |          
|11                  |  | Code of
  Ethics                                                                                                                                                                               |  | Dec 19, 2006 |  |                                                                         |  | (7)      
|                    |  |                                                                                                                                                                                                |  |             
|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)         
|                    |  |                                                                                                                                                                                                |  |              |  |                                                                         |  |          
|15.1                |  | Evaluation
  of the Petroleum & Natural Gas Reserves of Austral Pacific Energy Ltd                                                                                                             |  | Dec 31, 2006 |  | Sproule
  International Limited                                         |  | (6)      

|    |                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------
|(1) | Incorporated
  by reference as previously included in our Form 20-F filed for the year ended
  December 31, 2004.
|    |                                                                                                                  
|(2) | Incorporated
  by reference as previously included in our Form 20-F filed for the year ended
  December 31, 2002.
|    |                                                                                                                  
|(3) | Incorporated
  by reference as previously included in our Form 20-F filed for the year ended
  December 31, 2005.
|    |                                                                                                                  
|(4) | Incorporated
  by reference as previously included in our Form 20-F filed for the year ended
  December 31, 2003.
|    |                                                                                                                  
|(5) | Incorporated
  by reference as previously included in a Form 6-K filed October 26, 2006.                         
|    |                                                                                                                  
|(6) | Incorporated
  by reference as previously included in a Form 6-K filed April 3, 2007.                            
|    |                                                                                                                  
|(7) | Filed as an
  exhibit to this Annual Report on Form 20-F.                                                        

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