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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**Washington, D.C. 20549

FORM 20-F

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended **December 31, 2005**

Commission file number:**0-29344**

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

**YUKON TERRITORY, CANADA**(Jurisdiction of incorporation or organization)

**Level 3, 40 Johnston Street, Wellington, New Zealand,
6145**(Address of principal executive offices)

**COMMON SHARES WITHOUT PAR VALUE**(Title of Class)

Securities registered or to be registered pursuant to Section
12(b) of the Act: Common Shares on American Stock Exchange, TSX
Venture Exchange, New Zealand 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: 22,666,453 common shares as of December
31, 2005

Indicate by check mark if the Registrant is a well known
seasoned issuer as defined in Rule 405 of the Securities Act. Yes [
 ] No [X]

If this report is an annual or transition report, indicate by
check mark if the Registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934Yes [  ]
No [X]

Indicate by check mark whether Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.Yes [X]  No [
 ]

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                     
 [X] Non-Accelerated Filer

Indicate by check mark which financial statement item
Registrant has elected to follow: Item 17
[X]          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
[X]

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TABLE OF CONTENTS

|         |          |                                                                                   | Page
|-------- | -------- | --------------------------------------------------------------------------------- | ----
|         |          | Glossary of Terms                                                                 | 3   
|Part I   |          |                                                                                  
|         | Item 1   | Identity of Directors, Senior Management and Advisers                             | 7   
|         | Item 2   | Offer Statistics and Expected Timetable                                           | 7   
|         | Item 3   | Key Information                                                                   | 7   
|         | Item 4   | Information on the Company                                                        | 15  
|         | Item 5   | Operating and Financial Review and Prospects                                      | 22  
|         | Item 6   | Directors, Senior Management and Employees                                        | 30  
|         | Item 7   | Major Shareholders and Related Party Transactions                                 | 38  
|         | Item 8   | Financial Information                                                             | 40  
|         | Item 9   | The Offer and Listing                                                             | 40  
|         | Item 10  | Additional Information                                                            | 41  
|         | Item 11  | Quantitative and Qualitative Disclosures About Market Risk                        | 48  
|         | Item 12  | Description of Securities other than Equity Securities                            | 49  
|Part II  |          |                                                                                  
|         | Item 13  | Defaults, Dividend Arrearages and Delinquencies                                   | 49  
|         | Item 14  | Material Modification to the Rights of Security Holders
      and Use of Proceeds | 49  
|         | Item 15  | Controls and Procedures                                                           | 49  
|         | Item 16  | Reserved                                                                          | 50  
|         | Item 16A | Audit Committee Financial Expert                                                  | 50  
|         | Item 16B | Code of Ethics                                                                    | 51  
|         | Item 16C | Principal Accountant Fees and Services                                            | 51  
|Part III |          |                                                                                  
|         | Item 17  | Financial Statements                                                              | 52  
|         | Item 18  | Financial Statements (Not Used)                                                   | 52  
|         | Item 19  | List of Exhibits                                                                  | 53  
|         |          |                                                                                   |     
|         |          | Signatures                                                                        | 53  
|         |          | Index to Exhibits                                                                 | 86  

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GLOSSARY OF TERMSThe following terms as
defined here are used throughout this filing:

Austral PacificorCompanyrefers toAustral Pacific Energy Ltd., a corporation organized and registered under
the laws of Yukon, Canada, and includes its subsidiaries.

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

AMEX refers to theAmerican Stock Exchange.

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

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

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

Depletion is the reduction in petroleum reserves due to
production.

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

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

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

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

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

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

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

GAAPrefers to generally accepted accounting principles.

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

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

Joint Ventureor JVrefers 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.

Mbbls is one thousand barrels of crude oil or other
liquid hydrocarbons.

MMcfis one million cubic feet of natural gas.

Mmscfd is one million standard cubic feet per day, a
measure of natural gas at standard pressure and temperature.

NZSXrefers to the New Zealand Stock Exchange, operated
by NZX Limited from Wellington, New Zealand.

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Participating Interest or 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.

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

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

Permit or 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, develop or produce under specific contractual or
legislative conditions.

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

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

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

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

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

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

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

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

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

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

Seismic refers 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.

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Other Expressions

Metric and Imperial Units  Conversion from metric units into imperial
equivalents is as follows:

|Metric Units             | Imperial Units          
|------------------------ | ------------------------
|                         |                         
|hectare (ha)             | 2.471 acres             
|                         |                         
|meter (m)                | 3.281 feet              
|                         |                         
|kilometer (km)           | 0.621 miles (3,281 feet)
|                         |                         
|square kilometer (sq km) | 247.106 acres           

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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.

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.

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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 information presented in the
table below for each of the years ended December 31, 2005, 2004, 2003, 2002 and
2001 is derived from the audited consolidated financial statements of Austral
Pacific. The audited financial statements of Austral Pacific for the years ended
December 31, 2005, 2004 and 2003 are included in this Filing. The selected
historical financial information for the years ended December 31, 2002 and 2001
presented in the table below is derived from audited financial statements of
Austral Pacific that are not included in this Filing. The selected financial
information presented below 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.

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 United States GAAP
(US GAAP) to the extent that amounts are 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 22 is a
reconciliation between Canadian and US GAAP.

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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 Income Statement
      Data                      
|----------------------------------------------------------
|Amounts in accordance with Canadian
      GAAP            
|                                                          
|                                                          
|                                                          
|                                                          
|                                                          
|Oil
      and gas sales                                   
|Other
      income                                        
|Gain
      on license sales                               
|Royalties                                                 
|Production costs                                          
|Interest expense                                          
|Accretion expense                                         
|General and administrative expense (1)                    
|Depletion                                                 
|Litigation costs and settlement                           
|Impairment of oil and gas properties                      
|(Loss)/income from Operations                             
|Other
      Items                                         
|(Loss)/income before income taxes                         
|Income
      taxes                                        
|(Loss)/income for the year                                
|(Loss)/income per share                                   
|Dividends declared per share                              
|(1) As restated - refer Financial Statements Note
      21
|                                                          
|Amounts in accordance with US
      GAAP                  
|                                                          
|General and administrative expense                        
|Interest expense                                          
|Beneficial conversion expense                             
|Common
      stock and warrant issuance expense           
|Compensation expense - Series A warrants                  
|NZ
      tradable warrants expense                        
|(Loss)/income from Operations                             
|(Loss)/income for the year                                
|(Loss)/income per share                                   

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|Selected Balance Sheet
      Information                  
|----------------------------------------------------------
|Amounts in accordance with Canadian
      GAAP            
|                                                          
|                                                          
|                                                          
|                                                          
|Working capital                                           
|                                                          
|Current Assets                                            
|Due from Related
      Parties                            
|Investments                                               
|Oil and gas
      properties                              
|Property &
      Equipment                                
|Deferred offering costs                                   
|Total assets                                              
|                                                          
|Current liabilities                                       
|                                                          
|Long-term liabilities                                     
|Share Capital                                             
|Contributed surplus
      (1)                             
|Accumulated deficit (1)                                   
|Shareholders' equity                                      
|(1) As restated -
      refer Financial Statements Note 21
|Amounts in accordance with US
      GAAP                  
|Current Assets                                            
|Total assets                                              
|Current liabilities                                       
|                                                          
|Long-term liabilities                                     
|                                                          
|Paid in capital                                           
|Accumulated deficit                                       
|Shareholders equity                                      

*B.*          *Capitalisation
and indebtedness*

Not applicable

*C.*          *Reasons
for the offer and use of proceeds*

Not applicable

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*D.*          *Risk
Factors*

Exploration, Development and Production Risks

An investment in the securities of the Company is speculative
due to the Companys involvement in the exploration, development and production
of oil and natural gas, and its present stage of development.

The Company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
Company plans to expand as, and when, available cash flow and meritorious
opportunities permit. Its long term goal is to maximise capital appreciation of
the Company's common shares to reflect managements perceived value of its
existing assets and potential resources not yet discovered.

Management will continue to evaluate prospects on an ongoing
basis in a manner consistent with industry standards and company strategy. The
long term commercial success of the Company depends on its ability to find,
acquire, develop and commercially produce oil and natural gas reserves. The
Company focuses its efforts mainly in the Taranaki region of New Zealand, where
sizable tracts of acreage can be accumulated, a positive history of oil
exploration success exists and, even though the acreage is relatively
under-explored, geological conditions are favorable for hydrocarbon
accumulation. The Taranaki region is where the Companys manpower, expertise and
technical resources are already principally deployed.

No assurance 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.

Operating Hazards and Environmental Liabilities

Drilling hazards or environmental damage could 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
and 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.

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 and 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. The discharge of
oil, natural gas or other pollutants into the air, soil or water may give rise
to liabilities to governments and third parties and may require the Company to
incur costs to remedy such discharge. 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.

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

Oil and Natural Gas Market

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, and the competitiveness of alternative energy sources or
product substitutes.

The availability of a ready market for oil and gas discovered
by the Company depends on numerous factors beyond its control, including the
proximity and capacity of natural gas pipelines and the effect of regional or
national regulations.

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. The Company might 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. Although the Company currently does not
do so, in order to partially hedge the effect of fluctuating oil and natural gas
prices, the Company may in the future enter into oil and/or natural gas price
swaps that fix the price that the Company will receive on a portion of its
production for a specified period of time.

Competition

The international petroleum industry is competitive in all its
phases. The Company competes with numerous other participants in the search for
oil and gas, the acquisition of oil and gas properties, the marketing of oil and
natural gas and in obtaining skilled industry personnel. The Companys
competitors include oil and gas companies which have greater financial
resources, staff and facilities than the Company.

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, discover reserves, participate in
drilling opportunities and identify and enter into commercial arrangements with
customers will be dependent upon developing and maintaining close working
relationships with future industry participants and joint venturers, and its
ability to select and evaluate suitable properties and 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. The
Company seeks to minimize 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 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. The Company seeks
to minimize these effects by focusing on the market niches of exploration and
early development stage properties where its technical competence and experience
give it a credible advantage.

If the Companys cash flow from operations is not sufficient to
satisfy its capital expenditure requirements, 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.

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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 the Company
may 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, petro-physical 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. The Company cannot guarantee that it 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 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 will be
largely dependent 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.

Risks Relating to Papua New Guinea

Some of the Companys oil and gas interests are located in
Papua New Guinea, a developing country which has historically experienced
periods of civil unrest and political and economic instability. Oil and gas
exploration and development activities in this jurisdiction may be affected in
varying degrees by political instability, government regulations relating to the
oil and gas industry and foreign investors, and the policies of other countries
in respect of Papua New Guinea. Exploration or development activities in Papua
New Guinea may require protracted negotiations with local and national
governments, companies and third parties and may be 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. There can be no

- 12 -

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assurance that future instability in Papua New Guinea will not
have a material adverse effect on the Companys financial condition or
operations.

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 does not currently hedge its exposure to currency
rate changes, although it may choose to selectively hedge exposure to foreign
currency exchange rate risk. The Company manages this risk to some degree by
shifting a portion of its excess cash from one currency to another in a timely
fashion. See also Item 5.A.3  Foreign Currency Fluctuations.

Regulatory Requirements

The current or future operations of the Company, including
development activities and commencement of production on its properties, require
permits from various foreign and local governmental authorities. Such operations
are and will be governed by laws and regulations governing 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. 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
license 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, licenses 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.

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

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

The Company has investigated the rights to explore the various
oil and gas properties it 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

- 13 -

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all work required to maintain the licence has been done.

No assurance can be given that applicable governments will not
revoke, or significantly alter the conditions of, the applicable exploration and
development authorisations and that such exploration and development
authorisations 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 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 is not a majority interest owner in most of its
properties and does not have sole control over the future course of development
in those properties. Property interests may be 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 a
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. 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 of 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 the Yukon
Territory, Canada, and all 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 effect service of process within the United
States upon the Company or upon its directors or officers, or to realize in the
United States upon judgments of United States courts predicated upon civil
liabilities under the United States Securities Exchange Act of 1934, as amended.
Furthermore, it may be difficult for investors to enforce judgments of the U.S.
courts based on civil liability provisions of the U.S. federal securities laws
in a foreign court against the Company or any of the Companys non-U.S. resident
officers or directors.

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 or liquid market for the Companys common shares will
develop. If the Company fails to remain current in its filings with the SEC,
Canadian and New Zealand regulatory authorities, the Company may lose its AMEX
listing as well as its Canadian and New Zealand listings and the Companys
shareholders may not be able to resell their shares in the public market within
the United States, as well as in the overseas markets.

Dilution, Change of Control

The Companys Articles of Continuance authorise the issuance of
an unlimited number of shares of common stock. The Companys Board of Directors
has the power to issue any further shares without stockholder approval, subject
to compliance with the policies of the TSX-V and AMEX. 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

- 14 -

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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.

Conflicts of Interest

Interests in some petroleum properties have been acquired in
conjunction with TAG Oil Ltd. with which the Company had a common director
throughout the period ending December 2005 and has certain common principal
shareholders.

The Company owns shares in Rift Oil PLC (approximately 0.5% 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 both the Companys former commercial manager as well
as the spouse of the Companys former Chief Executive Officer.

Certain of the directors of the Company are or were directors
and/or officers of these other corporations, or of other corporations engaged in
the petroleum exploration and development industry.

It is possible that conflicts of interest may arise between
their duties as director and/or officer of the related companies, and as
director or officer of the Company. The percentage participation of the Company
and any other associated 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 By-laws 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 given such approval.

Classification as a Passive Foreign Investment Company

The Company believes it 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.D - Taxation. U.S. shareholders and
prospective holders of the Companys shares are also encouraged to consult their
own tax advisers.

ITEM
4.           INFORMATION
ON THE COMPANY

*A.*          *History
and Development of the Company*

|1. | 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.                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|2. | 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.                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|3. | The Company is now domiciled in the Yukon in Canada, and
      operates as a corporation under the Business Corporations Act (Yukon).
      Subsequent to December 31, 2005, 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. That proposal
      was approved, but has not yet been implemented by the Board of Directors,
      which has the discretion to determine the timing of, or to abandon,
      implementation of this proposal.

Its registered office is care of its
Yukon attorneys:

Macdonald & Company Suite 200
Financial Plaza 204 Lambert Street Whitehorse, YT, Y1A 3T2 CANADA

Its principal business offices are
at:

Level 3, 40 Johnston Street

- 15 -

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Wellington NEW ZEALAND
Telephone Number: (644) 495 0888

4.****
Important Events

During fiscal 2005 and up to the date of this report, the
Companys business has changed by the occurrence of the following important
events:

At the Annual General Meeting of members on May 2, 2006, the
members approved a proposal to return the Companys incorporation to British
Columbia, the adoption of new Articles and the authorization of a class of
preferred shares. The Board of Directors has not yet moved to implement the
proposals and has the discretion to determine the timing of, or to abandon,
implementation of these proposals.

On October 13, 2005, the Company raised $10 million by the
issue of 4 million units in a private placement, each unit consisting of one
share and a half warrant. Two half warrants (full warrant) are exercisable for
one share, at a price of US$3.50, at any time after February 13, 2006 but on or
before October 13, 2006. The Company in its sole discretion may accelerate the
expiry date if, for any ten consecutive trading days starting four months after
the issue date (October 13, 2005), the closing price of the shares of the
Company on any stock exchange or other quotation service on which it is listed
or quoted is greater than US$4.50 during the first year following issue date. In
the event the Company exercises this discretion the expiry date will be deemed
to be amended to such date that is 30 days from the date on which the notice of
acceleration of expiry date is provided by the Company. No shares have been
issued under the warrants as at June 26, 2006.

On April 18, 2005, the Company commenced trading on the
American Stock Exchange under the symbol AEN.

Consequent upon the Companys January 2004 listings on the
TSX-V and the NZSX, and the issuance of 4 million units, consisting of one
common share and a half warrant expiring January 5, 2005, and certain other
securities expiring on the same date, the Company issued 846,408 shares in first
quarter 2005. 15,500 warrants were cancelled, unexercised.

5 & 6.   Principal Capital Expenditures &
Divestitures

During the last 3 fiscal years, the Company has made several
significant expenditures 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 and farmed-out of or farmed-in to a number of permit interests
in that time. These are detailed in Item 4.D  Property, Plants and Equipment
and in Note 20 (c) of the Companys 2005 Financial Statements (Item 17).

In addition to these expenditures and divestitures, the Company
sold its interest in New Zealand Petroleum Mining Permit 38148 (Goldie and
Ngatoro fields) in 2003, also in the normal course of operations, as disclosed
at Note 10(d) Commitments and Contingencies-Legal Settlement, of the Companys
2005 Financial Statements (Item 17).

7. ****Public
Takeovers

The Company is not aware of any takeover of its shares by third
parties, nor by the Company of any other companys shares, either planned or
having occurred in the last financial year, up to the date of this Report.

*B.*          *Business Overview*

1. ****Nature
of Operations

The Company is an oil and gas exploration and production
company incorporated in Canada, and based in Wellington, New Zealand. The
Company's focus is on the acquisition, exploration and development of properties
in the Australasian region. The Company currently holds varying net interests
equivalent to approximately 2.4 million acres of exploration permits in New
Zealand (gross 3.5 million acres) and 0.3 million acres of exploration interests
in Papua New Guinea (gross 1.0 million acres). Previously, the Company also had
interests in Australia. The Companys policy is to acquire interests, and, where
possible, to manage its risk exposure by farming-out or joint venturing property
interests to other industry participants.

- 16 -

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The Company sells oil and gas from producing or pre-producing
properties in which it holds an interest. During 2005, the Company sold all oil
from its production testing of Cheal-A3X and Cheal-A4 wells at world parity
price (less costs, fees and royalties). The Cheal joint venture has now
suspended production in order to redevelop the field and optimise field
production and oil sales strategy during the course of 2006. Gas was being
flared to atmosphere (in compliance with consent conditions) but has now been
linked to electricity generation equipment which will be used to generate
electricity on-site at Cheal. Any power surplus to site requirements will be
sold into the national electricity grid system. It is anticipated that
production from the Cheal wells will recommence in quarter 4, 2006 however this
is dependent upon, amongst other things, joint venture project approvals and
equipment availability (Refer Item 5.D).

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 price (less costs, fees and
royalties).

Five exploration wells were drilled in 2005 (including 1
sidetrack well), however only one well (Supplejack-1) is considered to have
future economic potential. This is dependent upon the drilling of further wells
in the near vicinity. The Supplejack-1 well was completed but not production
tested. The Company will re-assess the future commercial potential of this well
following the drilling of the Ratanui well (due for drilling in Q4/2006). If the
Ratanui well discovers hydrocarbons, a joint development program with
Supplejack-1 would be considered.

The Company participated (as to 35%) in one well in Papua New
Guinea known as Douglas-1. This well encountered two gas charged sands, and as
at June 27, 2006 the Company is preparing to participate in a test of the well
to ascertain if it will actually flow gas. Given the remoteness of the location
of the Douglas well, it is likely to be immediately commercial only if the gas
contains large amounts of condensates.

2.****
Principal Markets

In 2005, the Company sold virtually all (99.4%) of its oil
production to Swift Energy NZ Limited (a subsidiary of Swift Energy Ltd).
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. All gas produced was associated with
production testing and was flared to atmosphere in compliance with consent
conditions.

3.****
Seasonality of Companys business

The Companys business is not seasonal, and its revenues are
generally reliant on international oil prices and local gas prices in New
Zealand. 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). 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 does not have a reliance on raw materials, as it
operates in an extractive industry.

5. ****Marketing
channels

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

6. ****Patents
or licences, financial contracts

The Company does not have a reliance on any significant patents
or licences, apart from the use of certain software programs. The Companys
production is sold under one-off gas contracts referred to in paragraph 2 
Principal Markets above.

7. ****Companys
competitive position

The Company competes with other companies in bidding for the
acquisition of petroleum interests from

- 17 -

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various governmental authorities, and in exploring and
producing oil and gas in the Australasian region. The Company does have a
competitive position in being the holder of one of the largest acreage holdings
in onshore New Zealand and several key properties in New Zealand and Papua New
Guinea. However, the Company is subject to competitive factors as detailed in
Item 3.D  Risk Factors.

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.
The effects of those regulations are detailed in Item 3.D  Risk Factors, and in
Item 4.D  Property, Plants and Equipment.

*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 in Exhibit 8 to this Report. Substantially all of the
Company's upstream exploration and development activities are conducted jointly
with third parties under joint venture agreements.

*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 only minor office assets held for the
purpose of operating the business, and some oilfield equipment and materials.

The Company holds a number of government issued permits in the
jurisdictions of New Zealand and Papua New Guinea (and also formerly in
Australia), which authorise prospecting and exploration for hydrocarbons.For a full list of permits, refer to Note 20(c) of the Companys 2005
Financial Statements (Item 17). Since the date of those Financial Statements,
the following material changes in permit interests or assets have occurred:

- 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 is approximately $0.85 million and will be met from existing cash
resources. The agreement has not yet been settled. Following the final
settlement, the New Zealand permit interests of the Company will be as follows:

| | PMP 38153  Mining*          | 60.00%  |  |                                        
| | ---------------------------- | ------- |  | ---------------------------------------
| | PEP 38256  Exploration *    | 46.16%  |  |                                        
| | PEP 38258  Exploration *    | 75.00%  |  |                                        
| | PEP 38492  Exploration *    | 100.00% |  |                                        
| | PEP 38736  Exploration *    | 60.00%  |  |                                        
| | PEP 38738-01  Exploration   | 36.50%  |  |                                        
| | PEP 38738-02  Exploration * | 25.10%  |  |                                        
| | PEP 38741  Exploration *    | 55.00%  |  |                                        
| | PEP 38744  Exploration      | 25.00%  |  |                                        
| | PEP 38745  Exploration      | 16.66%  |  |                                        
| | PEP 38746  Exploration *    | 83.33%  |  |                                        
| | PEP 38748  Exploration *    | 66.66%  |  |                                        
| | PEP 38753  Exploration *    | 60.00%  |  |                                        
| | PEP 38765  Exploration      | 61.67%  |  | * denotes the Company as
      Operator
| | PEP 38766  Exploration      | 66.66%  |  |                                        

General

For further detail on each property and previous work done,
refer to the Companys Financial Statements (Item 17). For details on
environmental liability risks, see Item 3.D  Risk Factors. For details of work
planned to be done before December 31, 2006 on each property and estimated cost
thereof, see Item 5.B  Liquidity and Capital Resources.

- 18 -

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At June 28, 2006, 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 over Millenniums
25% interest in properties PEP38736 and PMP38153, to secure performance of the
Company under the gas prepayment agreement referred to at Note 15 of the
Companys 2005 Financial Statements (Item 17). At December 31, 2005, the
carrying value of these interests was approximately $61,000.

For definitions of technical terms used in the description of
properties, see the Glossary of Terms on page 3. The general provisions applying
to permits or licences granted by the Governments of New Zealand and Papua New
Guinea, government royalties payable, bonds payable (if any) and the rules for
renewal and default are set out in Note 4 - Property and Equipment of the
Companys 2005 Financial Statements (Item 17).

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

Reserves

Except for the Kahili (PMP38153) property in New Zealand, the
properties of the Company are Exploration Permits or Licences. An application
has been made to the New Zealand Government for a mining permit in respect to
the Cheal (PEP38738-01) and Cardiff (PEP38738-02) properties.

As at December 31, 2005, the Company had recognised proven
hydrocarbon reserves in respect of the Cheal discovery. The Cardiff discovery is
still subject to production testing and the Company has not recognised any
reserves with respect to it. The Elevala, Ketu and Stanley discoveries in PRLs
4 & 5 in Papua New Guinea are not proven, and are held in retention
licences for further appraisal.

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 de-recognised, based on an independent report by Sproule International
Limited, and remaining Proven reserves in the Kahili property were written down
to zero.

In the year ended December 31, 2005 an independent assessment
of the Cheal discovery by Sproule International Limited in April 2005 and
updated as at December 31, 2005 (Exhibit 4.4) was completed, using data obtained
from the Company and from public sources. As at April 30, 2005, Sproule assigned
0.539 million barrels (Company share) of Proven Developed and Undeveloped Oil
Reserves to the Cheal Field. These figures have now been amended in the light of
ongoing production and forecasts based on production experience and as at
December 31, 2005 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 December 31, 2005, been flow-tested from Cardiff-2A in a controlled
and sustained manner, no reserves have been assigned to Cardiff.

|                                                     |                         | Reserves, Working Interest Before
      Royalties - constant prices |                        
|---------------------------------------------------- | ----------------------- | ------------------------------------------------------------------- | -----------------------
|                                                     | As at December 31, 2005 | As at December 31, 2004                                             | As at December 31, 2003
|                                                     | Oil & Liquids           | Natural                                                             | Oil & Liquids          
|                                                     |                         | Gas                                                                 |                        
|                                                     | (MBbls)                 | (MMcf)                                                              | (MBbls)                
|Proven                                               |                         |                                                                     |                        
|New Zealand:                                         |                         |                                                                     |                        
|Cheal-undeveloped                                    | 517                     | 378                                                                 | -                      
|Kahili-undeveloped                                   | -                       | -                                                                   | -                      
|Total proven                                         | 0                       | 0                                                                   | 0                      
|                                                     |                         |                                                                     |                        
|Standardized Measure of Undiscounted Net Cash Flows: |                         |                                                                     |                        
|                                                     | US$000                 | US$000                                                             | US$000                
|New Zealand:                                         |                         |                                                                     |                        
|Revenue                                              | 30,598                  | -                                                                   | 3,700                  
|Less future
      production                         |                         |                                                                     |                        
|and development costs                                | (9,689)                 | -                                                                   | (941)                  
|Net Revenue                                          | 20,909                  | -                                                                   | 2,759                  
|Less Taxes                                           | -                       | -                                                                   | -                      
|Net income                                           | 20,909                  | -                                                                   | 2,759                  
|Discounted at 10%                                    | (6,818)                 | -                                                                   | (310)                  
|Standardized Measure                                 | 14,091                  | -                                                                   | 2,449                  

The main differences between the reported Reserves at December
31, 2005, 2004 and 2003 are that the 2003 reserves were recognised in respect to
the Kahili field but these were de-recognised in 2004 following field
performance and an independent assessment of reserves and the recognition of
reserves relating to the Cheal

- 19 -

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field in 2005.

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 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, 2005 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.

Both the December 31, 2005 and December 31, 2004 undiscounted
and discounted future net cash flows 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 EndedDecember 31, 2005
    December 31, 2004
    December 31, 2003Oil & Liquids
    Natural Gas
    Oil & Liquids
    Natural Gas
    Oil & Liquids
    Natural Gas(Bbls)
    (MMcf)
    (Bbls)
    (MMcf)
    (Bbls)
    (MMcf)Sales:New Zealand
    31,228
    -
    4,935
    0.064
    5,792
    17.1


2005 production was substantially (99.4%) from the Cheal
onshore field in New Zealand.

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. All principal
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.

New Zealand Permit PEP 38736/PMP 38153 (45%)

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. Analysis of
pressure data from flow testing carried out on the uppermost 50 feet of this
zone indicated sufficient gas-condensate reserves to justify development. Test
production sales (during 2002) of condensate (light oil) from this initial test
totalled $16,253 from approximately 613 barrels. A subsequent test in April/May
2003 recovered an additional 1236 barrels of condensate over a seven day period.
The Kahili-1A well was subsequently developed and produced briefly from August
2004 to November 2004. Underperformance of the well resulted in its being
suspended in November 2004.

Drilling of Kahili-2 is still being considered by the joint
venture participants. A seismic survey within the PEP 38736 permit area was
undertaken in May 2005 and a further seismic line was acquired in March 2006.

- 20 -

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Following processing of the data, the results will be used by
the joint venture in the development of the future work programme within the
permit.

New Zealand Permit PEP 38738 (38738-02  25.1%; 38738-01 -
36.5%)

This permit was acquired by the Company in October 2002, in
return for the grant of a 25% net profit royalty. Subsequently in September
2003, the Company purchased the 25% net profit royalty back and final
cancellation of all private interest royalties over the permit occurred in
2004.

In May 2003, the participants re-entered the Cheal-1 well,
originally drilled in 1995, which at that time had tested oil and gas from a
shallow secondary target. A test of the Urenui pay in Cheal-1 well in July 2003
flowed gas at rates up to 4.5 mmscfd in a one day test period. Further testing
was deferred until suitable production test equipment was installed. Extended
flow testing commenced in October 2004, in order to establish developable
reserves. Analysis of the test results indicates that this well was accessing
gas and oil reserves from within a few hundred metres of the wellbore and was
insufficient by itself to justify development.

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. The
field development plan is currently being considered by the joint venture
participants. An independent assessment of reserves in the Cheal field by
Sproule International Limited assigned 0.58 million barrels (Company share) of
Proven Undeveloped oil reserves to the Cheal Field, as at December 31, 2005.
Refer to Item 5.D.

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, (now represented by PEP38738-01) and of the deeper deposits,
such as the Cardiff prospect (now represented by PEP38738-02). 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
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 was not completing isolating the K1A zone and
further work was required to isolate this zone. This work has now been completed
and flow testing of the McKee zone recommenced in late May, 2006.

Papua New Guinea

Papua New Guinea Licence PPL 235 (35%); Onshore Papuan Basin

The Company was awarded this permit 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 is to drill an exploration
well within the first two years of the licence. The Douglas well was selected as
being the best prospect and as noted in Item 5.E  Off-Balance Sheet
Arrangements, 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 permit. 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 intersected two gas bearing
columns and the Joint Venture is currently considering its options.

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Papua New Guinea Licence PRL 4 (13.41%); Onshore Papuan
Basin

The PRL4 licence contains the Stanley discovery which was
drilled, completed and suspended. In March 2006, the Operator, Santos Limited,
received a Notice to Show Cause from the Papua New Guinea Minister of Petroleum
and Energy purporting that the work commitments of the PRL have not been met.
The Notice requests a written submission on the points raised. Failure to
satisfy the Minister that the work commitments have been met could result in
cancellation of the license. The Company has been advised that all requested
information has now been provided to the Minister of Petroleum and Energy and
expects that the license will be renewed in the near future.

**ITEM 5.****OPERATING AND FINANCIAL REVIEW AND PROSPECTS**

The following explanation is managements opinion of the
Companys historical financial and operating results and should be read in
conjunction with the audited consolidated financial statements of the Company
(see Item 17) for the years ended December 31, 2005, 2004 and 2003. The
financial statements have been prepared in accordance with Canadian GAAP. A
reconciliation to US GAAP is provided in Item 17. All dollar values are
expressed in U.S. dollars, unless otherwise stated. All references to daily
production are before royalty, unless stated otherwise.

*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 2005 loss of $2,408,559 (under US GAAP  loss of $2,640,585) compared
to a net loss of $5,718,533 in the December 2004 year. Net income of $47,616 was
reported in December 2003 year. Total losses incurred from incorporation to
December 31, 2005 are $19,453,553 (under US GAAP total losses of
$26,317,259).

1. Discussion of Material Changes

Production income and expenses

Gross oil revenue was $1,779,454 for the year ended December
31, 2005 compared with $67,015 for the year ended December 31, 2004. (2003:
$159,112). The increase in revenue from 2004 was attributable to higher oil
prices coupled with a 26,293 barrel increase in production. The increased
production arose from testing of two wells within the Cheal oil field.

Oil sales volume increased to 31,228 barrels compared to 4,935
barrels in 2004 (2003: 5,792 barrels). A total of 31,041 barrels (2004: 3,555
barrels) were sold from the Companys interest in the Cheal field and 187
barrels from the Companys interests in PEP 38738D and PMP38153 (2004: 1,380
barrels). The selling price increased from an average of $38.67 per barrel in
2004 to $56.98 per barrel in 2005 (2003: $28.54 per barrel).

There were no natural gas production revenues in 2005 compared
with $145,443 in 2004 (2003: $13,603). The Company has not sold any natural gas
since production ceased from the Kahili field (PMP38153) in November 2004.

Direct production costs and royalties were $923,104 versus
$82,583 in 2004 (2003: $94,675). Depletion charges of $365,241 (2004: $85,550,
2003: $25,930) were recorded in respect to the Companys New Zealand property
cost pool consistent with the full cost accounting policy.

Gross oil production revenue was $67,015 for the year ended
December, 2004 compared to $159,112 for the year ended December, 2003. This was
attributable to a decrease is sales volumes from 5,792 barrels in 2003 to 4,935
barrels in 2004 offset by an increase in selling price. Production in 2004 was
attributable to test production from the Companys interest in PEP38738 01
(3,555 barrels) and production from the Companys interest in PMP38153 (1,380
barrels). The 2004 selling price increased to $38.67 per barrel from an average
of $28.54 per barrel in 2003. Gross natural gas production revenues in 2004 were
$145,443 compared to $13,603 for 2003. The increased revenue was attributable to
gas produced from the Kahili field  PMP38153. Direct production costs and
royalties were $82,583 in 2004 versus $94,675 in 2003. Depletion of $85,550
(2003: $25,930) was recorded in regard to the Companys producing
properties.

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.

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Expenses

General and administrative expenses increased from $1,868,690
in 2004 to $3,653,539 in 2005 (2003: $1,932,718). The most significant factor
contributing to this was a foreign exchange loss of $791,234 in 2005 compared to
a foreign exchange gain of $197,858 in 2004. Increased expenses related to
personnel (including stock compensation as described below) and professional
services also contributed significantly to the increase. Cost recoveries
increased slightly to $1,093,417 compared to $930,673 in 2004 (2003: $477,439).
These recoveries are in accordance with recovery mechanisms contained within
various 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
$1,238,588 (2004: $605,069, 2003: $544,366). This included a settlement with the
former Chief Executive Officer of $429,219. Audit, legal and professional
services totaled $815,077 and listing fees and shareholder communications
expenses totaled $330,528.

Stock compensation in 2005 was $673,711 compared to a credit of
$11,450 in 2004 (2003: expense of $143,312). This was calculated using a
Black-Scholes valuation method (refer to Note 11(c) of the Companys 2005
Financial Statements) and included $548,633 relating to the calculated value of
modifications to the former Chief Executive Officers share options negotiated
as a part of a settlement agreement.

The 2005 results included a charge for Oil and Gas property
impairments of $438,263 compared to a 2004 charge of $5,287,611 (2003:
$908,433). Following the recognition of proved reserves, the Company did not
have any impairments relating to unproved properties in New Zealand as the
future estimated cash flows from the proved property reserves under the full
cost accounting ceiling test was sufficient to recover the carrying value of the
New Zealand country cost pool. The impairment charge represents write-offs in
New Zealand prior to the recognition of proved reserves (primarily in respect to
expenditure of the Kakariki-1 well) together with some minor expenditure in
Australia and Papua New Guinea.

General and administrative expenses decreased slightly from
$1,932,718 (gross) in 2003 to $1,868,690 (gross) in 2004. A foreign exchange
gain in 2004 of $197,858 was reduced from the foreign exchange gain of $673,909
in 2003. Cost recoveries increased to $930,673 in 2004 from $477,439 in 2003 in
accordance with recovery mechanisms contained within various agreements the
Company is a party to.

2004 administrative expenses included wages and benefits of
$605,069, listing fees and shareholder communications expenses of $397,902 and
miscellaneous expenditure of $325,328. Stock compensation decreased from an
expense of $143,312 in 2003 to a credit of $11,450 in 2004 which reflected a
Black-Scholes valuation using updated input assumptions (refer to Note 9c of the
Companys 2004 Financial Statements).

The 2004 results included Oil and Gas Properties write offs of
$5,287,611 compared to write-offs in 2003 of $908,433. The 2004 write off
included expenditure totaling $2,781,052 in relation to PMP 38153 (Kahili) which
was written off following an independent assessment of reserves which wrote
remaining reserves down to nil.

| | - PEP 38741 | $ 508,757 (Honeysuckle)       
| | ----------- | ------------------------------
| | - PEP 38765 | $ 305,513 (Miromiro-1)        
| | - PEP 38748 | $ 232,116 (Hihi-1, Kakariki-1)
| | - PEP 38718 | $ 210,646 (Tuihu-1A)          

In anticipation of an application being made to relinquish the
Australian permit areas the carrying value ($1,087,656) of all Australian work
programmes was written off in 2004.

Interest Income

Interest income of $460,411 (2004: $326,012; 2003; $57,624) was
earned on surplus cash balances. Interest earned has increased in line with the
increased cash balances on deposit throughout the year when compared to previous
years.

Interest Expense

The Company finances its business primarily from the issuance
of common shares, petroleum revenues, interest and cost recoveries. The Company
does not currently have any arrangements in place that incur any significant
interest expense.

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Capital Expenditure

Oil and Gas Property expenditure for the 2005 year totaled
$6,119,897 (2004: $2,395,754; 2003: $2,147,426). Major expenditures were
incurred on the following
activities: ****-  PEP
38716 ****Oru-1 exploration
well ****-  PEP
38492 ****Offshore seismic
program ****-  PEP 38738-01     Cheal field
development****
-  PEP 38738-02     Cardiff-2A exploration
well ****-  PEP
38741 ****Supplejack-1 exploration
well ****-  PEP
38746 ****Kakariki-1 exploration
well ****-  PEP
38765 ****Supplejack South-1 and 1A exploration wells Detailed 2005
expenditure may be obtained from Note 4 in the 2005 Financial Statements (Item
17).

2. Inflation

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

3. Foreign Currency Fluctuations

The Company holds cash reserves 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 2005 and up to the end of May 2006, the value of the New
Zealand currency has fluctuated against the value of the US currency. Thehighest and lowest NZ$:US$ rate throughout the period January 1, 2005 to May
31, 2006 is 0.7449 and 0.6028 respectively.The Company does not
currently hedge its exposure to currency rate changes, although it may choose to
selectively hedge exposure to foreign currency exchange rate risk. 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. The Company, however, has no
formal policy relating to the foregoing. 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, 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.

5. Other

The Companys consolidated financial statements have been
prepared in accordance with Canadian GAAP, which differs in some respects from
United States GAAP. Material differences in accounting principles are set out in
Note 22  Differences Between Canadian and United States Generally Accepted
Accounting Principles - of the Companys 2005 Financial Statements (Item 17).

6. Critical Accounting Estimates

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, these
estimates involve more judgment than others.

Oil and Gas Properties

The Company follows the full cost method of accounting for
petroleum and natural gas operations, whereby all costs related to the
acquisition, exploration and development of petroleum and natural gas interests
are accumulated within cost centres on a country-by-country basis. Such costs
include land acquisition costs, geological and geophysical expenses, carrying
charges on non-producing interests, costs of drilling both productive and
non-productive wells, major development projects and overhead charges directly
relating to acquisition, exploration and development activities.

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 center have been disposed of, unless such sale or disposition

- 24 -

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significantly alters the relationship between capitalized costs
and proved reserves of oil and gas attributable to the cost center.

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 cubic feet of natural
gas to one barrel of petroleum.

Costs of acquiring and evaluating significant unproved
petroleum and natural gas interests are excluded from costs subject to depletion
and depreciation until it is determined that proved reserves are attributable to
such interest or until impairment occurs.

The full cost method of accounting for oil and gas activities
requires a detailed impairment calculation at least annually, and when events or
circumstances indicate a potential impairment of the carrying amount of oil and
gas assets may have occurred.

An impairment loss is recognized when the carrying amount of a
cost centre is not recoverable and exceeds its fair value. The carrying amount
is assessed to be recoverable when the sum of the undiscounted cash flows
expected from proved reserves plus the cost of unproved interests, net of
impairments, exceeds the carrying amount of the cost centre. When the carrying
amount is assessed not to be recoverable, an impairment loss is recognized to
the extent that the carrying amount of the cost centre exceeds the sum of the
discounted cash flows from proved and probable reserves plus the cost of
unproved interests, net of impairments, of the cost centre. The cash flows are
estimated using expected future product prices and costs and are discounted
using a risk-free interest rate. The initial benchmark price used in the ceiling
test is based on approximately 90% of the latest selling price and then adjusted
progressively downwards. The prices used in the impairment test are as
follows:

Year 1
    Year 2
    Year 3
    Year 4
    Year 5
    ThereafterJanuary-June
    $50.00
    $45.00
    $40.00
    $35.00
    $35.00
    $35.00July-December
    $45.00
    $40.00
    $35.00
    $35.00
    $35.00
    $35.00


The Company has included the asset retirement obligations in
the capitalized cost of the full cost pool. The Company has also included in the
calculation of the full-cost ceiling test the cash outflows that are needed to
settle the unrecorded asset retirement obligations related to future costs to
develop proven reserves.

Unproved properties are assessed for impairment on an annual
basis by applying factors that rely on historical experience. In general, the
Company may transfer the costs of an unproved property to the cost pool subject
to depletion under one or more of the following conditions:

|(i)   | there are no firm plans for further work programs on the
      unproved property;                                
|----- | -----------------------------------------------------------------------------------------------------------------
|(ii)  | negative results were obtained from studies of the
      unproved property;                                      
|(iii) | negative results were obtained from studies conducted in
      the vicinity of the unproved property; or         
|(iv)  | the remaining term of the unproved property does not
      allow sufficient time for further studies or
drilling.

The Company had $365,241 (2004:$85,550, 2003:$25,930) of
depletion relating to its proven property cost pool and $438,263
(2004:$5,287,611, 2003: $908,433) of write downs in the year ended December 31,
2005.

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, 2005 was $337,075 (2004: $156,575).

Stock OptionsThe 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 $673,711 (2004: cost
recovery of $11,450, 2003: $143,312 expense

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being recorded in the financial statements for the 2005 year.
Further details are discussed in Item 5.A.1  Discussion of Material Changes 
Expenses above.

B. Liquidity and Capital Resources

1. Liquidity

The Company maintains its liquidity by raising additional
capital from outside sources, farming-out capital expenditures, or rescheduling
or deferring commitments to meet its work programmes. The Company also 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 may in the future utilize loan funding as an alternative source of
funding for development projects if it can be achieved on terms that are
beneficial to the Company.

At December 31, 2005 the Company had cash and short-term
deposits of $15,339,906 compared to $11,187,924 at December 31, 2004 (2003:
$2,234,287). Working capital as at December 31, 2005 was $14,837,152 versus
$11,832,438 for December 31, 2004 (2003: $1,923,894). The improvement in the
Companys cash and working capital position is attributable to financing
activities which included the issue of shares and associated warrants to the
public in both New Zealand and overseas. Funds were also received from the
exercise and conversion of various warrants, and options.

The Company used cash of $932,612 in operating activities
during the year ended December 31, 2005 compared to cash used in operating
activities of $65,065 in 2004: (2003; cash used of $2,646,115). A total of
$430,223 was used for purchases of property and equipment compared to $162,894
in 2004 (2003; $20,028) and $6,119,897 was expended on the Companys exploration
activities versus $2,395,754 for the year ended December 31, 2004 (2003:
$2,147,426).

No cash was provided from the sale of licences for the years
ended December 31, 2005 and 2004. In 2003 cash of $5,000,000 was provided from
the sale of PMP38148.

Financing activities raised $10,719,497 (net of costs) for the
year ended December 31, 2005 compared to $11,625,433 for 2004 and $535,442 for
2003. The funds raised were from financing activities as follows:

(a) fund raising in New Zealand and
overseas raised $10,000,000 (before costs of $448,371) through the issue of 4
million common shares; (b) the conversion of warrants (New Zealand public
float warrants, New Zealand special class warrants, Series A warrants, warrants
issued on the conversion of the convertible notes and previously issued
warrants) raised $1,127,741; and (c) the exercise of share options raised
$125,000.

Offsetting this was the value attributed to the shares acquired
in RIFT Oil Plc.

The common shares referred to in paragraph (a) above had a
one-half share warrant attached to them. As at December 31, 2005 there were
2,000,000 of these warrants outstanding (Refer to Item 4.A.4).

No amounts were due or payable to related parties at December
31, 2005 (2004: Nil; 2003: $52,065 receivable).

The net effect of the above noted transactions was an increase
of cash of $4,151,982 for the year ended December 31, 2005 compared to an
increase of $8,953,637 for the 2004 year (2003: increase of $941,460).

The Companys cash available to it decreased to $11,069,425 at
the end of May 2006. The decrease was attributable to cash used on oil and gas
property expenditure and operational costs. Only a minor amount of revenue was
received in the 5 months to May 2006, as the Cheal field was not producing over
this period (Refer Item 5.D).

2. Capital Resources

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 and 2005 as a wider
shareholder base was established, including some institutional investors. Due to
the speculative nature of the Companys business and its current limited revenue
generating assets, potential investors are generally limited to sophisticated
investors willing to accept a higher degree of risk.

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As at the date of this filing the Company has no debt.
Conventional bank financing of exploration projects is generally unavailable to
resource companies which are in the exploration stage, in the absence of
significant producing properties that can be used as collateral. The Companys
current pre-production properties are generally of too small a scale to be used
for such purpose.

Cash and cash equivalents are held primarily in US dollars. The
Company has an ongoing requirement for New Zealand dollars to meet 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 the date of this filing, the Company has no binding
agreements with management, investors, shareholders or anyone else respecting
additional financing.

3. Capital Commitments

At December 31 2005, the Company had the following material
capital commitments for the year ending December 31, 2006:

|Property | Work
      description | US$       | Source of financing
|-------- | ---------------------- | --------- | -------------------
|         |                        |           |                    
|PPL235   | Well                   | 1,400,000 | Working capital    
|PEP38258 | Seismic                | 328,484   | Working capital    
|PEP38741 | Well                   | 271,074   | Working capital    
|PEP38746 | Well                   | 536,462   | Working capital    
|PEP38765 | Well                   | 213,548   | Working capital    
|         | Drilling inventory     | 1,405,293 | Working capital    
|         |                        |           |                    

As at May 31, 2006 these commitments had changed. Major updated
commitments within the next 12 months are as follows:

|Property    | Work
      description    | US$       | Source of financing
|----------- | ------------------------- | --------- | -------------------
|            |                           |           |                    
|PEP38738-01 | Field development/seismic | 5,888,261 | Working capital    
|PPL235      | Completion/testing        | 970,000   | Working capital    
|PEP38741    | Well                      | 589,420   | Working capital    
|PEP38738-02 | Seismic/miscellaneous     | 305,504   | Working capital    
|Leases      |                           | 125,527   | Working capital    
|            |                           |           |                    

In addition to the above required work programmes, the Company
is planning to carry out (but no firm commitment exists) the following
significant projects during fiscal 2006:

Other Anticipated Work Before December 31, 2006 (as at May 31,
2006):

|Property    | Description of Work   | ($)     | Source of funds
|----------- | --------------------- | ------- | ---------------
|            |                       |         |                
|PEP38738-01 | Well workovers        | 200,000 | Working capital
|PEP38738-02 | Re-completion/testing | 400,000 | Working capital

Prior to December 31, 2006 the Company will be required to
settle its acquisition of permits (refer Item 4D) at a cost of approximately
0.85 million. Following settlement of this, commitments within one year will
increase (as a result of increased permit shares) by approximately $500,000.

In addition to the above planned significant expenditures for
the period May 31 to December 31, 2006, the Company anticipates various
expenditures on geology and geophysics desk and field studies in various permits
as work plans are further developed. Commitments beyond the 2006 fiscal year are
summarized in Item 5.F  Tabular Disclosure of Contractual Obligations, and are
subject to joint venture participants (including the 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, 2006, the Company has funded its
projects from working capital and minor 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

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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

Not applicable

D. Trend Information

In December 2005 test production from the Cheal oil field was
halted. This decision was made by the joint venture participants in order to
undertake site redevelopment and maximize value from future production. While
this situation continues the Company is not generating any revenue from oil
sales. The Cheal site development plan has been considered by the joint venture
participants and development activities commenced in June 2006. The development
plan anticipates early production estimated at 300 barrels per day (Company
share 110 barrels) from 4th quarter 2006 and then to increase to an
estimated 1000 barrels per day (Company share 365 barrels) in the first half of
2007. Within 2006 the PEP38738-02 joint venture will also be considering options
to commence commercial production from the Cardiff well. At the time of this
report production testing is ongoing and no firm development plans have been
considered by the joint venture.

Oil revenue at the time production recommences will be subject
to international prices, based in US$. Since oil sales are priced in US$ the
NZ$/US$ exchange rate fluctuations affect the Companys NZ$ cash reserves.

It is not possible to accurately forecast oil prices or what
the NZ$/US$ exchange rate will be when production re-commences.

E. Off-Balance Sheet Arrangements

The Company has off-balance sheet arrangements in the form of
farm-in or farm-out arrangements, whereby the Company or a third party will
take part share of a permit for a premium to recognize the work previously
undertaken. This is one of the options that the Company has available to meet
exploration permit commitments. See item 5.B.1.  Liquidity. 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 managing 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.

One material farm-in arrangement was entered into during the
2005 fiscal year that had a significant impact on the Company s financial
position. This was the farm-in by a British public unlisted company, Rift Oil
PLC, to PPL235 (Papua New Guinea) and its commitment to fund the first $6
million of expenditure on the Douglas-1 well. In consideration Rift Oil PLC
acquired a 65% equity interest in respect of PPL 235. This transaction was
completed in January 2005 and the well, Douglas-1, drilled in 2006.

As noted above under the introductory paragraph to Item 4.D 
Property, Plants and Equipment and below under F. Tabular Disclosure of
Contractual Obligations, the Company has finalized an agreement to acquire nine
permits in New Zealand. As well as certain cash payments and the requirement to
meet the obligations of each permit to a larger extent than previously, the deal
includes the grant of royalties to the seller, over production (if any) from
those permits. This transaction has not yet completed.

- 28 -

---

F. Tabular Disclosure of Contractual Obligations

As at December 31, 2005, the Company has the following
contractual obligations:

Contractual and Other
      Obligations
    Payments Due by Period (US$)Total
    Less than 1 year
    1-3 years
    4-5 years
    After 5 YearsOperating leases
    54,384
    35,933
    18,451
    -
    -Joint venture commitments (1)
    4,551,682
    4,551,682Other obligations (2)
    1,255,796
    
    -
    -
    1,255,796Total contractual or other
      obligations
    5,861,862
    4,587,615
    18,451
    -
    1,255,796


|(1) | The joint venture commitments are in respect of its
      current year exploration permit obligations. The Company is committed to
      its share of current year exploration permit obligations to other joint
      venture participants and has a contractual obligation to various joint
      venture participants for these current year exploration permit
      obligations.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Other Long Term Obligations classified as After 5 years
      is in respect to prepaid gas revenue. The contractual agreement underlying
      the prepaid gas revenue expires in 2013 but the obligations could arise
      earlier than this depending upon gas discoveries and commercial
      arrangements entered in respect to them.                                        

Subsequent to year end the Company entered into a lease
agreement in respect to office premises. The lease is initially for six years
with a right of renewal for a further three years. Obligations under the initial
terms and conditions total $665,388.

Effective January 1, 2006 the Company finalised an agreement to
acquire interests in nine onshore New Zealand permits and associated drilling
inventory. The Company already held an interest in seven of the permit areas.
The cash outlay is approximately $0.85 million and will be met from existing
cash resources. The agreement has not yet been settled. Taking the new equity
permit interests into account increases the joint venture commitments in the
table above by approximately $1.0 million to $5,524,720.

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, 2005 up to May 31, 2006.

- 29 -

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ITEM
6.           DIRECTORS, SENIOR
MANAGEMENT AND EMPLOYEES

*A.*         
*Directors and senior management*

The names, municipality of residence and position held of those
persons who have served the Company since January 1, 2005, as directors or
senior management of the Company are as follows:

Name
    Residence
    Date of Birth
    Positions HeldDavid Bennett
    Wellington, New Zealand
    Mar 4, 1946
    Director, Chief Executive
      Officer, President (1)Ronald Bertuzzi
    Vancouver, B.C., Canada
    Aug 7, 1937
    DirectorDouglas Ellenor
    Surrey, B.C., Canada
    Jul 9, 1943
    Director (2)Peter Hill
    London, England
    Mar 6, 1947
    Director (2)Garth Johnson
    Surrey, B.C., Canada
    Sep 12, 1972
    Director (3)David Newman
    Paraparaumu Beach, New Zealand
    Jul 23, 1943
    Chairman of the Board, interim
      CEO(1), DirectorPeter Tapper
    Auckland New Zealand
    Aug 23, 1932
    Director (5)Richard Webber
    Wellington, New Zealand
    Apr 18, 1951
    Chief Executive Officer
      (1), President (1), Director (4)Bernhard Zinkhofer
    Richmond, B.C., Canada
    May 4, 1955
    Director (6)Joseph Johnston
    Wellington, New Zealand
    Mar 4, 1960
    Petroleum Engineering Manager
      (7)Jennifer Lean
    Wellington, New Zealand
    Jan 26, 1951
    Commercial Manager (8)Bruce McGregor
    Wellington, New Zealand
    Feb 17, 1960
    Chief Financial Officer
      (9)Carey Mills
    Wellington, New Zealand
    Oct 19, 1961
    Exploration Manager
      (10)Nigel Robinson
    Wellington, New Zealand
    Aug 20, 1969
    Chief Financial Officer
      (9)Terence Russell
    Wellington, New Zealand
    Jul 15, 1948
    Exploration Manager
      (10)Jeanette Watson
    Wellington, New Zealand
    Jul 27, 1963
    Corporate Secretary


|(1)  | Dr. Bennett resigned on December 30, 2005; Mr. Newman was
      appointed as interim CEO from that date, and was replaced upon Mr.
      Webbers appointment on February 7, 2006. Dr. Bennett was not re-nominated
      as a director of the Company at the Companys Annual General Meeting and
      therefore ceased to be a director effective May 2, 2006.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2)  | Appointed with effect from January 1, 2006.                                                                                                                                                                                                                                                                                                                      
|(3)  | Resigned with effect from January 31, 2006.                                                                                                                                                                                                                                                                                                                      
|(4)  | Appointed with effect from March 2, 2006.                                                                                                                                                                                                                                                                                                                        
|(5)  | Resigned with effect from March 31, 2006.                                                                                                                                                                                                                                                                                                                        
|(6)  | Resigned with effect from July 8, 2005.                                                                                                                                                                                                                                                                                                                          
|(7)  | Appointed with effect from December 1, 2005.                                                                                                                                                                                                                                                                                                                     
|(8)  | Resigned with effect from January 29, 2005.                                                                                                                                                                                                                                                                                                                      
|(9)  | Mr. Robinson resigned and Mr. McGregor as appointed with
      effect from April 25, 2005.                                                                                                                                                                                                                                                                       
|(10) | Dr. Russell resigned and Mr. Mills was appointed with
      effect from October 4, 2005.                                                                                                                                                                                                                                                                         

- 30 -

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Dr. David Bennett

Dr. Bennett has over 35 years exploration experience, together
with various research posts. He joined the Company in 1996, subsequently
becoming Chief Executive Officer, President and a director in October 1996. He
resigned as CEO and President on December 30, 2005, but remained a director
until the AGM in May 2006, at which he did not seek re-election.

Dr. Bennett received his doctorate in Geophysics from the
Australian National University in 1973. He was employed by the Department of
Scientific and Industrial Research, Government of New Zealand, followed by 12
years in technical and management roles with New Zealand Oil and Gas Ltd.

Dr. Bennett was formerly President and a director of
Trans-Orient Petroleum Ltd. (1997-2001), a director of Durum Cons. Energy Corp.
(since re-named TAG Oil Ltd.) (1997-2001) and AMG Oil Ltd. (1998-2003)

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 35 years experience in the
exploration and production (E&P) industry, spending 25 years with the Royal
Dutch/Shell Group in Australasia, Europe and North and South America. During
that period, he held progressively more senior managerial assignments, chiefly
in Exploration, culminating in his appointment as President and CEO of the Shell
Companies of Colombia (1992-1996). He left Shell in 1996 to become CEO of the
Colombian E&P company, Hocol SA, a position he held until 1998. After a
posting as Business Development Director in London, UK, he returned home to
Canada and established an oil and gas consulting company. In this capacity, he
again served as CEO of Hocol SA (2002-2003) and later CEO of Orca Petroleum,
Inc. (2004-2006).

Dr. Ellenor was appointed to the Board of Orca Petroleum, Inc.,
Calgary (TSX-V: OPI) in 2000, and continued to serve in that capacity until
April 2006. 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 30 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. Garth Johnson

Mr. Johnson was appointed as a director of the Company in May
2003 and resigned with effect from January 31, 2006. Mr. Johnson has been
engaged in the administration of private and public businesses since 1994 with
extensive experience in finance, accounting and regulatory reporting for
international oil and gas companies. Mr. Johnson is a Certified General
Accountant.

Mr. Johnson is a Board member, CFO and Corporate Secretary of
TAG Oil Ltd., and is a former Treasurer and Corporate Secretary of Gondwana
Energy Ltd., and former CFO, director and Corporate Secretary of Trans-Orient
Petroleum Ltd. Mr. Johnson is an employee of DLJ Management Ltd. which provided
services to the Company until January 2006.

- 31 -

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

Mr. Peter Tapper

Mr. Tapper was appointed to the Board in September 2003 and
resigned as a director of the Company with effect from March 31, 2006. Mr.
Tapper has an Honours Degree in Civil Engineering from the University of
Auckland, New Zealand. Mr. Tapper has had an extensive career in the oil and gas
industry, working in technical and senior management roles for for Royal
Dutch/Shell for 34 years in Holland, Brunei, Indonesia, USA, Qatar and
Australia.

Mr. Tappers past directorships have included various Shell and
Woodside companies, Chairman of Mermaid Port and Marine Services, the Dawson
Group, and Chairman of Coplex Resources Limited. He is a Fellow of the Institute
of Engineers (Aust), a Fellow of the Energy Institute (UK), a Chartered Engineer
(UK), Member of the Institution of Civil Engineers (UK) and a Member of the
Institute of Professional Engineers of New Zealand.

Mr. Richard Webber

Mr. Webber was appointed as Chief Executive Officer and
President of the Company in February 2006 and a Director in March 2006. He holds
a B.Sc. and an M.Sc.(Hons) in physics and has thirty years of experience in the
international oil and gas industry having worked for BP, Schlumberger and
Fletcher Challenge Energy. Mr. Webber has held technical, commercial, and
executive roles in the Middle East, the Far East, the United Kingdom, Australia,
Papua New Guinea and New Zealand.

Mr. Bernhard J. Zinkhofer

Mr. Zinkhofer was appointed to the Board of Directors in March
2001 and resigned as a director of the Company with effect from July 8, 2005.
Mr. Zinkhofer has practised law as a partner at the Canadian law firm of Lang
Michener LLP in their Vancouver, British Columbia office since 1992 and provides
legal counsel to the Company in that capacity.

Mr. Zinkhofer also serves or has served as a director of
Trans-Orient Petroleum Ltd (1997-2003), TAG Oil Ltd. (1997-2003), Strategic
Technologies Inc. (1995 to present), Helijet International Corp. (1996-2004),
Foran Mining Corp. (1997-2000), Caliente Capital Corp. (1999-2003), Verida
Internet Corp. (1999-2001) and Arrabbiata Capital Corp. (2002-2004).

Mr. Joe Johnston  Petroleum Engineering Manager

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. Bruce McGregor  Chief Financial Officer

Mr. McGregor is a Chartered Accountant, a member of the
Institute of Chartered Accountants of New Zealand and a member of the Institute
of Directors in New Zealand. He joined the company as Chief Financial Officer in
April 2005 having previously worked for Methanex New Zealand, Fletcher Challenge
Energy and Royal Dutch/Shell in various accounting, finance and commercial
roles.

- 32 -

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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 Sakhalin
Island Far Eastern Russia.

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.

Ms Jenni Lean  former Commercial Manager

Ms Lean has a B.Sc. and MBA from Victoria University in
Wellington, New Zealand. She has experience as a computer programmer at the
Australian National University in Canberra, taught mathematics and science in
Wellington and has worked in the strategic planning division at New Zealands
government science research body. She has been Executive Officer for New
Zealands rural consultants body and an integral part of a forestry trading
group in New Zealand. Since 1995 she has been involved with the Company as part
of the senior management team, previously as Commercial Manager and since
January 2005 as a contractor to the Company via the company of which she is CEO,
Rift Oil PLC. Ms Leans spouse, Dr. Bennett, is the Companys former Chief
Executive Officer.

Mr. Nigel Robinson  former Chief Financial Officer

Mr. Robinson has a B.Com (Accounting) from Otago University in
Dunedin, New Zealand and is a Chartered Accountant member of the Institute of
Chartered Accountants of New Zealand. He joined the Company in September 2003
and was appointed Chief Financial Officer on December 1, 2003. He resigned from
this position effective April 25, 2005. He has experience in corporate
reporting/accounting and business processes.

Dr. Terry Russell  former Exploration Manager

Dr. Russell has a B.Sc (Hons) from Victoria University in
Wellington, New Zealand and a PhD from the University of New England, New South
Wales. He has over 25 years experience in oil and gas exploration, principally
working with junior oil explorers. Dr. Russell joined the Company as Exploration
Manager in 2002 and resigned with effect from October 2005. Prior to joining the
Company, he most recently worked for the Australian-based Bligh Oil &
Minerals NL where he was responsible for managing Bligh's operated and
non-operated permits in New Zealand and Tunisia. Dr. Russell has worked on
exploration and/or development projects in New Zealand, Australia, the United
States, Argentina and Tunisia. He has extensive experience in the development of
exploration plays and prospect generation; seismic and drilling operations; and
government liaison, project and joint venture management.

Events Subsequent to December 31, 2005

With effect from January 1, 2006, Dr. Ellenor and Dr. Hill were
appointed as directors of the Company.

Consequent upon Dr. Bennetts resignation as CEO on December
30, 2005, the Board appointed Mr. Newman as interim CEO, and then with effect
from February 7, 2006, Mr. Richard Webber was appointed as CEO. Mr. Webber was
also appointed as a director, with effect from March 2, 2006.

Mr. Johnson and Mr. Tapper resigned as directors of the Company
with effect from January 31, 2006 and March 31, 2006, respectively. Mr. Bennett
did not seek re-election as a director of the Company therefore ceased to be a
director effective May 2, 2006.

- 33 -

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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, 2005:

SUMMARY COMPENSATION TABLE

Director/Officer
      Compensation(9)
      Options granted over Securities(10)Salary
      Other
      Number
      Price
      ExpiryDavid Bennett (1)
      $738,569 (11)
      (12)
      Nil (13)
      N/a
      N/aRonald Bertuzzi
      Nil
      $83,250 (12) (14)
      Nil
      N/a
      N/aGarth Johnson
      Nil
      $18,700 (12) (14)
      Nil
      N/a
      N/aDavid Newman
      Nil
      (12)
      Nil
      N/a
      N/aPeter Tapper
      Nil
      (12)
      Nil
      N/a
      N/aBernhard Zinkhofer (2)
      Nil
      (12)
      Nil
      N/a
      N/a


Joseph Johnston (3)
    $15,613
    Nil
    100,000
    $1.90
    Dec 1, 2010Jennifer Lean (4)
    Nil (15)
    $98,107 (17)
    Nil
    N/a
    N/aCarey Mills (5)
    Nil
    $11,901 (16)
    100,000
    $1.90
    Dec 1, 2010Bruce McGregor (6)
    $78,217
    Nil
    100,000
    $2.75
    Jul 25, 2010Nigel Robinson (7)
    $32,883
    Nil
    Nil
    N/a
    N/aTerence Russell (8)
    $142,109
    Nil
    Nil
    N/a
    N/aJeanette Watson
    Nil (15)
    $91,653
    Nil
    N/a
    N/a


|(1)  | Resigned as CEO on December 30, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2)  | Resigned on July 8, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(3)  | Appointed on December 1, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(4)  | Resigned on January 29, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(5)  | Appointed with effect from October 4, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(6)  | Appointed on April 25, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(7)  | Resigned with effect from April 25, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(8)  | Resigned with effect from October 4, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(9)  | Officers 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(10) | Options granted in fiscal 2005 as compensation. See
      discussion of option terms in Item 6.E  Share Ownership.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(11) | Salary figure includes a cash termination payment of
      $429,219, in accordance with Dr. Bennetts employment agreement. See also
      disclosures at Item 7.B  Related Party Transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(12) | Directors fees are not required by the Companys home
      jurisdiction to be disclosed individually. See aggregate figure below
      under Compensation of Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(13) | 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 grant
      of 750,000 2-year options, immediately vested, exercisable at $1.20
      each.
|(14) | Aggregate value realised upon exercise of incentive stock
      options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(15) | As a contractor to the Company, no salary is
  paid.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(16) | Fees received as a contractor to the Company from Oct 4
      to Nov 28, 2005, before becoming an employee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(17) | Includes fees received as a
contractor                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

- 34 -

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Compensation of Directors

The Chairman of the Board currently receives $25,000 per year.
Other non-executive directors have in the past received $5,000 to $7,500 per
year. In fiscal 2005, the directors received a total of $57,721. Two new
directors, appointed with effect from January 1, 2006, received 60,000 options
each and no cash remuneration on appointment. See table and footnotes under Item
6.E for further details of these options, and discussion under Item 6.E for
terms of stock options. The Remuneration Committee has recently agreed that the
following remuneration will be paid in future:

|- 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)

Expenses directly attributable to services as directors are
reimbursed to the directors by the Company. No pension, retirement or similar
benefits are paid or payable.

Indemnification of Directors and Officers

The Company has taken out liability insurance to cover
Directors and Officers in the performance of their duties.

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
director of its New Zealand subsidiaries. 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 By-laws or
the provisions of the Business Corporations Act (Yukon). All officers have a
term of office lasting until their resignation or their replacement by the Board
of Directors.

As at May 31, 2006:

DIRECTORS

Name
    Period in Office
    CommitteesRonald Bertuzzi
    8 years
    AuditDouglas Ellenor
    5 months
    Audit, RemunerationPeter Hill
    5 months
    Audit, RemunerationDavid Newman
    3 years
    Audit, RemunerationRichard Webber
    3 months


OFFICERS

Name
    Period in OfficeRichard Webber, CEO
    3 monthsBruce McGregor, CFO
    1 yearJeanette Watson, Company Secretary
    6 yearsCarey Mills, Exploration Manager
    6 monthsJoseph Johnston, Petroleum Engineering
      Manager
    6 months


- 35 -

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2. Directors service contracts

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

The Company has a management agreement with a subsidiary,
Austral Pacific Energy (NZ) Limited, which company formerly had an employment
agreement with Dr. David Bennett, to manage all the Companys operations and its
affiliates, including providing to the Company the services of Dr. Bennett as
CEO and President. The severance terms of that employment agreement provided
that, upon termination without cause, he will be paid two months severance for
each year of service since October 1997 (limited to a maximum of 24 months pay)
and six months severance in lieu of equivalent notice. Upon Dr. Bennetts
resignation as CEO on December 30, 2005, he was paid $429,219 under this clause.

The severance terms of Mr. Webbers employment agreement
provided that, upon termination without cause, he will be paid a severance
payment equal to twelve months remuneration.

3. Audit and Remuneration Committees

See table in Item 6.C.1  Term of Office for Audit and
Remuneration Committee members as at May 31, 2006.

The Board adopted an Audit Committee Charter on April 24, 2004
(amended on November 8, 2004) governing the conduct of the Audit Committee, and
adopted procedures for receiving and dealing with accounting complaints on
November 8, 2004 (amended effective January 6, 2006). The Audit Committee
monitors the veracity of the financial and regulatory reports produced by the
Company, and 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 responsibilities, procedures for
communication with the auditor, and the requirements against which the
Committees performance is measured.

The Board of Directors established a Remuneration Committee in
April 2004 and established terms of reference for the remuneration committee on
June 25, 2004. Directors and officers remuneration must be considered by the
remuneration committee. The remuneration committee also approves grants of
incentive stock options to management and other service providers, under the
criteria of the 2004 Share Option Plan and the 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.

D. Employees

As of December 31, 2005, the Company employed eight people full
time in its Wellington, New Zealand office, one in New Plymouth, New Zealand and
two part-time in Port Moresby, Papua New Guinea. The persons employed in the
Wellington office are occupied with technical management and support, company
and joint venture accounting, financial reporting, and office management. In
addition, another two persons were employed in the 2005 year on a part time
basis to assist in technical and administrative support. Branch offices employ
accounting and operational supervisory staff.

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

- 36 -

---

E. Share Ownership

Director/Officer
      Beneficial Ownership(1)
      Securities
        held under Option(3)Number
      %
      Number
      Price
      ExpiryRonald Bertuzzi
      39,542
      0.17
      NilDouglas Ellenor
      Nil
      
      60,000
      (4)
      Jan 1, 2011Peter Hill
      Nil
      
      60,000
      (4)
      Jan 1, 2011David Newman
      55,000
      0.24
      25,000
      $1.25
      Oct 15, 2008Richard Webber
      Nil
      
      400,000
      (4)
      Jan 31, 2011


Joseph Johnston
      (2)
    
    100,000
    $1.90
    Dec 1, 2010Bruce McGregor
      (2)
    
    100,000
    $2.75
    Jul 25, 2010Carey Mills
      (2)
    
    100,000
    $1.90
    Dec 1, 2010Jeanette 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 at May 31, 2006. 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.
|(3) | As at May 31, 2006.                                                                                                                                                                       
|(4) | See table under section Stock Options for exercise
      price details.                                                                                                                 

Stock Options

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
filing in 2004. The Plan provides for the Board to issue non-assignable,
non-transferable options, with a term of up to 5 years, terminating within 90
days after the optionee ceases to be 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 a new share option plan, which plan
was duly approved and adopted by the shareholders (2006 Plan). The 2006 Plan
changes 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 2006 Plan are the
same as under the 2004 Plan, except that vesting may occur in 3 equal amounts
over 18 months. (see Exhibit 4.7)

Stock options granted before the 2004 Plan was put in place
were issued at exercise prices determined by the Board of Directors, with
options vesting over 18 months. These options are non-transferable,
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 2005, a total of 90,000 shares were issued to
directors and employees (60,000 of those to 2 directors) of the Company pursuant
to exercises of incentive stock options (all at an exercise price of $1.25)
..

- 37 -

---

In fiscal 2005, a total of 300,000 new incentive stock options
were granted to directors and employees (all to management  see Summary
Compensation table under Item 6.B  Compensation). After balance date, the
following options were granted to directors and management:

Name
    Number of Options Granted
    Expiry Date
    Exercise Price(s)
    Vesting DateDouglas 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, 2009Peter 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, 2009Richard 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,
      2009David 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.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------

From December 31, 2005 to May 31, 2006, 44,000 vested stock
options expired unexercised, 72,666 options lapsed unvested upon cessation of
involvement with the Company, and 78,334 shares were issued upon exercise of
options.

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, 2006):

Beneficial Owner
    Number of Shares and Rights(3)
    Percent of ClassInfratil Gas Limited Wellington, New Zealand
    3,684,691
    15.37%Mr. P Loretto (1)Vancouver, BC, Canada
    2,277,890
    9.97%Mr. A Guidi Vancouver, BC, Canada
    1,693,315
    7.44%Trans-Orient Petroleum Ltd. (2)Vancouver,
      BC, Canada
    1,634,940
    7.16%


|(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. Mr. Johnson
      (a former director of the Company) previously served as CFO, Corporate
      Secretary and a director of Trans-Orient Petroleum Ltd.                         
|(3) | As reported in public filings                                                                                                                                                                                                                                                                                

- 38 -

---

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 transfer of control of Trans-Orient Petroleum Ltd.
from Mr. Guidi to Mr. Loretto in November 2003, thereby transferring beneficial
interest in Trans-Orients holdings in the Company from Mr. Guidi to Mr.
Loretto;- 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.

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

2.      Host country shareholders

To the knowledge of the Company, as at May 31, 2006, 4,285,849
  common shares were held by 992 registered shareholders in the United States.

3.      Controlling shareholders

There are no controlling shareholders of the Company.

Mr. Peter Loretto, a resident of Canada, directly and via his
controlling position in Trans-Orient Petroleum Ltd, controls a 9.97%
shareholding in the Company.

Infratil Gas Limited acquired 2,456,461 million shares and
1,228,230 million warrants in a private placement in October 2005, thereby
acquiring approximately an 11% (15.37% diluted) 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 a change of control of the Company.

B. Related party transactions

During 2005, the Company incurred $1,287,202 (including stock
compensation) (2004: $223,373; 2003: $197,165) in remuneration to the former
President of the Company and $36,524 (2004: $37,553; 2003: $32,741) in rent to a
trust in which the President of the Company is a trustee. Also during 2005,
$98,107 (2004: $128,474; 2003: $111,634) was paid to the former President of the
Companys spouse, in her role as a consultant to the Company (2004 and 2003:
Commercial Manager).

Other directors received a total remuneration of $57,721 during
2005. (2004: $58,954; 2003:$20,986).

During 2005 the Company paid a law firm in which a former
Director is a partner, $66,470 (2004: $81,771 2003: $95,980) for legal
services.

The Company also paid a company that employed a Director,
$18,000 (2004: $18,000; 2003: $9,454) for financial services.

Interests in some petroleum properties have been acquired in
conjunction with TAG Oil Ltd. with which the Company had a common director
throughout the period ending December 2005 and has certain common principal
shareholders. Certain of the directors of the Company are or were directors
and/or officers of these other corporations, or of other corporations engaged in
the petroleum exploration and development industry.

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.

C. Interests of experts and counsel

Not applicable

- 39 -

---

ITEM
8.           FINANCIAL
INFORMATION

*A.*         
*Consolidated Statements and Other Financial Information*

Consolidated financial statements for the 12 months ended
December 31, 2005 are provided under PART III. Item 17  Financial Statements.

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 10(d) to the Companys 2005 Financial
Statements (Item 17).

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.

*B.*         
  ***S**ignificant Changes*

No significant changes material to the Companys business have
occurred since the date of the annual financial statements, except as disclosed
in Note 17  Subsequent Events of the Companys 2005 Financial Statements (Item
17) and in Items 4.A.4  Important Events and Item 4.D  Property, Plants and
Equipment.

ITEM
9.           THE OFFER AND
LISTING

*A.*         
  ***O**ffer 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, 2005:

Year
    OTCBB (1)(2)(6)
    OTCB B
    NZSX (2)(4)
    NZSX
    TSX-V (2)(5)
    TSX-V
    AMEX (2)(6)
    AMEXHigh
    Low
    High
    Low
    High
    Low
    High
    Low2001 (3)
    2.75
    0.71
    1.55
    1.55
    No trades
    No trades
    No trades
    No trades2002
    1.50
    0.63
    No trades
    No trades
    No trades
    No trades
    No trades
    No trades2003
    1.55
    0.35
    No trades
    No trades
    No trades
    No trades
    No trades
    No trades2004
    3.40
    1.30
    3.28
    1.35
    3.38
    1.32
    No trades
    No trades2005
    3.80
    2.70
    3.56
    1.84
    3.77
    1.39
    3.47
    1.63


Summary trading for the two most recently competed fiscal
periods ending December 31, 2005 and the subsequent period for full quarters:

Year/ Quarter
    OTCBB (1)(2)(6)
    OTCBB
    NZSX (2)(4)
    NZSX
    TSX-V (2)(5)
    TSX-V
    AMEX (2)(6)
    AMEXHigh
    Low
    High
    Low
    High
    Low
    High
    Low2004Quarter 1
    2.40
    1.30
    1.79
    1.34
    2.41
    1.32
    No tradesQuarter 2
    2.68
    1.75
    2.41
    1.60
    2.71
    1.72
    No tradesQuarter 3
    2.60
    1.95
    2.67
    2.05
    2.56
    1.93
    No tradesQuarter 4
    3.40
    2.68
    3.28
    2.66
    3.38
    2.81
    No trades2005Quarter 1
    3.80
    2.70
    3.56
    2.87
    3.77
    2.64
    No trades
    No tradesQuarter 2
    3.30
    2.85
    3.26
    2.72
    3.51
    2.25
    3.47
    2.30Quarter 3
    No trades
    No trades
    3.20
    2.58
    3.37
    2.36
    3.26
    2.36Quarter 4
    No trades
    No trades
    2.88
    1.84
    3.00
    1.59
    2.90
    1.632006Quarter 1
    No trades
    No trades
    2.05
    1.52
    1.97
    1.33
    1.90
    1.35


Summary trading for the six most recently completed months
ending May 31, 2006

- 40 -

---

Month
    OTCBB (1)(2)(6)
    OTCBB
    NZSX (2)(4)
    NZSX
    TSX-V (2)(5)
    TSX-V
    AMEX (2)(6)
    AMEXHigh
    Low
    High
    Low
    High
    Low
    High
    LowDec 2005
    No trades
    No trades
    2.06
    1.84
    1.85
    1.59
    1.88
    1.63Jan 2006
    No trades
    No trades
    2.05
    1.77
    1.72
    1.43
    1.75
    1.50Feb 2006
    No trades
    No trades
    1.89
    1.65
    1.49
    1.39
    1.56
    1.35Mar 2006
    No trades
    No trades
    1.83
    1.52
    1.97
    1.33
    1.90
    1.38Apr 2006
    No trades
    No trades
    2.56
    1.87
    3.02
    2.03
    3.02
    1.86May 2006
    No trades
    No trades
    2.01
    1.74
    2.05
    1.75
    2.20
    1.70


|(1) | OTCBB quotations may reflect interdealer prices, without
      retail markup, markdown or commission and may not necessarily reflect
      actual transactions.                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | OTCBB quotes are from www.amex.com. All TSX-V, AMEX and NZSX (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 implemented a 5 for 1 share consolidation,
      with effect from July 23, 2001. The market prices quoted above have been
      restated to reflect this consolidation.                                               
|(4) | 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.                                                                
|(5) | The Company listed on the TSX-V from January 2,
    2004.                                                                                                                                                                         
|(6) | 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 is listed on the TSX-V and the NZSX under the
symbol APX, and, from April 18, 2005, on the AMEX under the symbol AEN.

D., E. & F.Not applicable

ITEM
10.          ADDITIONAL
INFORMATION

A. Share Capital

Not applicable

B. Memorandum and Articles of association

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

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

In April, 2006, the Board of Directors of the Company resolved
to propose the return of the Companys incorporation to British Columbia to the
annual meeting of shareholders in May 2006. Consequent upon that decision, the
Board has proposed the adoption of new Articles and the authorization of a class
of preferred shares at the May 2006 AGM. These proposals were so confirmed by
the shareholders by special resolution at the AGM on May 2, 2006. The Board of
Directors has not yet moved to implement the proposals and has the discretion to
determine the timing of, or to abandon, implementation of these proposals.

- 41 -

---

C. Material contracts

The Company has not entered into any material contracts in the
two years prior to the date of this filing 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 those contracts disclosed in
previous filings (Forms 20-F filed for the years ended December 31, 2004 and
December 31, 2003).

D. Exchange controls

The Company is a corporation incorporated pursuant to the laws
of the Province of British Columbia, Canada, continued in the Yukon Territory of
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
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 2005 exceeds
CDN$250 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, as the rules
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.

- 42 -

---

E. Taxation

Certain Canadian Federal Income Tax Information for United
States ResidentsThe 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. No opinion or tax ruling has been sought or obtained in respect of any
assumption made in this summary.

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

Dividends

Dividends paid or deemed to be paid or credited by the Company
to a U.S. Holder are subject to Canadian withholding tax. 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 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.

- 43 -

---

U.S. Taxation EffectsThe 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 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 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

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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.

Foreign Tax Credit

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

Disposition of common shares of the Company

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

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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 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 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.

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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 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

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H. Documents on display

Certain 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, New Zealand or at the registered
office at Suite 200 Financial Plaza, 204 Lambert Street, White Horse, YT, Y1A
3T2, 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

A list of subsidiaries of the Company is identified in Note
2(b) to the Companys 2005 Financial Statements (Item 17), and in the Exhibits
as Exhibit 8. During fiscal 2005, the Companys 35%-held Rockwell Limited
changed its name to Coral Sea Drilling Limited. No changes to subsidiaries
occurred after balance date. All the subsidiaries are controlled by the Company
and there are no restrictions on the Companys ability to determine the boards
of directors of these subsidiaries.

**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 15 of the
Companys 2005 Financial Statements at Item 17, and Exhibit 4.2) . In the event
that insufficient gas is delivered by the Company to discharge the advance, and
the Company elects to refund the advance, interest will be payable for the
period on the outstanding balance at April 2, 2013, calculated at the average
New Zealand bank bill rate. The Company has several alternatives at its
discretion for repayment of the advance. The Companys current intention is to
repay the advance by physical delivery of gas in which instance interest will
not be incurred.

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

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. The Company has not
entered into any arrangement to hedge commodity price risk. As projects are
further developed the Company may choose to hedge commodity price risk,
particularly if external financing is arranged.

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.

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Derivative financial instruments:As at December 31,
2005 the Company has not entered into any derivative financial instruments to
manage any of the risks discussed above.

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.

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

None

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) a statement that the Companys independent
auditors have issued an attestation report on managements assessment of the
internal controls over financial reporting.

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, 2005, have concluded that the Companys disclosure controls and
procedures were not, based on the material weaknesses discussed below, 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.

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 General Accepted Accounting Principles 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

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subsequent event. Accordingly, the December 2005 financial
statements prepared under Canadian GAAP have been restated to account for this.

The material weaknesses referred to above did not relate to
fraud and were fully addressed prior to completion of the financial statements
presented in the US filings. The Company has moved to remediate these weaknesses
during 2006 through the following new and continued remediation actions:

- appointment of an experienced Chief Executive Officer, effective February
  2006, who has previous experience with SEC registrants;
- 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.

As the Company progresses through the internal controls
process, other conditions may be identified that 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 the Companys annual report on Form 20-F. 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, 2005.
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 2004 Material
Weaknesses

In the process of conducting our audit of the Companys 2004
fiscal year financial statements, our independent auditors notified the Company
that they had identified an error in our application of US GAAP accounting
standards. As a result, the Company recorded a post-closing adjustment to our US
GAAP reconciliation for the 31 December 2004 fiscal year, and restated the US
GAAP reconciliation for the year ended 31 December 2003. The error was due to a
material weakness related to inadequate controls over the closing processes
supporting the US GAAP financial information and the preparation and work-papers
supporting the US GAAP financial information and a lack of sufficient knowledge
and experience among internal personnel regarding the application of US GAAP and
SEC requirements. The material weakness referred to above did not relate to
fraud or require any change to the Companys Canadian GAAP accounts.

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

- the recruitment of a senior Chief Financial Officer that has previous
  experience with the application of US GAAP and SEC registrants;
- the recruitment of additional experienced professional accounting
  personnel to supplement existing staff; and,
- the development of an improved US GAAP reconciliation process and
  supporting workpapers.

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.

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The Board has determined that Mr. Newman is independent.
Although, Mr. Newman also serves as a director and Chairman of Infratil Limited,
the parent company of Infratil Gas Limited, a greater than 10% shareholder of
the Company, 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 Companys U.S. listing requirements 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 Company has made available its code of ethics on its website,
www.austral-pacific.com and has filed it on
the Canadian securities regulatory administrators website www.sedar.com.

ITEM 16C.      PRINCIPAL ACCOUNTANT
FEES AND SERVICES

Principal Accountant Service
    For the fiscal year ended
      December 31, 2005
    For the fiscal year ended
      December 31, 2004Audit Fees
    $259,972
    $70,338Audit Related Services
    $ 23,204
    $26,461


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

Audit FeesAudit 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 FeesAudit-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.

Pre-Approval Policies and ProceduresIt 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.

D.          
Exemptions From the Listing Standards for Audit Committees

None

E.          
Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Neither the Company, nor any of its affiliated purchasers,
purchased any of the Companys securities in fiscal 2005.

- 51 -

---

PART III

ITEM
17.         FINANCIAL STATEMENTS.

INDEX TO FINANCIAL STATEMENTS

PageAuditors Reports
      54Consolidated Balance Sheets
      57Consolidated Statements of Operations
        and Deficit
      58Consolidated Statements of Changes in
        Stockholders Equity
      59Consolidated Statements of Cash Flows
      60Notes to the Consolidated Financial Statements
      61


ITEM
18.         FINANCIAL STATEMENTS

Not Applicable

- 52 -

---

ITEM 19.        
EXHIBITS

List of Exhibits

Exhibit Reference
      Exhibit Description
      Reference1.1
      Articles of Continuance of
          the Company
      (1)1.2
      Certificate of Amendment of
          the Company (Dec 03)
      (2)1.3
      2005 Bylaws of the Company
          (Jun 05)
      (3)2.1
      AMEX listing agreement (Apr
          05)
      (3)4.1
      Form of Stock Option Agreement
          for all vesting options granted to named directors and officers (Oct
          02)
      (4)4.2
      Gas Pre-purchase and Option
          Agreement between the Company and NGC New Zealand Limited (Apr 03)
      (3)4.3
      2004 Share Option Plan (Jun
          04)
      (5)4.4
      Report of Reserves Form 51-101F1
          (Dec 05)
      (6)4.5
      Form
          of Unit Subscription Agreement between the Company and investors to
          the Company (Oct 05)
      Filed4.6.1
      Settlement
          Agreement between DJ Bennett and the Company (Dec 05)
      Filed (8)4.6.2
      Variation
          of Settlement Agreement between DJ Bennett and the Company (Feb 06)
      Filed (8)4.7
      10%
          Rolling Stock Option Plan adopted May 2, 2006
      Filed8
      List
          of Subsidiaries of the Company
      Filed11
      Code of Ethics
      (7)12.1
      Section
          302 Certification of CEO
      Filed12.2
      Section
          302 Certification of CFO
      Filed13.1
      Section
          906 Certification of CEO
      Filed13.2
      Section
          906 Certification of CFO
      Filed


|(1) | Incorporated by reference as previously included in Form
      10-12G filed April 8, 1998                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                          
|(2) | Incorporated by reference as previously included in a
      Form 6-K filed December 31, 2003                                                                                                                                             
|    |                                                                                                                                                                                                                                          
|(3) | Incorporated by reference as previously included in our
      Form 20-F filed for the year ended December 31, 2004                                                                                                                       
|    |                                                                                                                                                                                                                                          
|(4) | Incorporated by reference as previously included in our
      Form 20-F filed for the year ended December 31, 2002                                                                                                                       
|    |                                                                                                                                                                                                                                          
|(5) | Incorporated by reference as previously included in our
      Form 20-F filed for the year ended December 31, 2003                                                                                                                       
|    |                                                                                                                                                                                                                                          
|(6) | Incorporated by reference as previously included in a
      Form 6-K filed April 10, 2006                                                                                                                                                
|    |                                                                                                                                                                                                                                          
|(7) | Available on the Companys website at
      www.austral-pacific.com                                                                                                                                                                      
|    |                                                                                                                                                                                                                                          
|(8) | This Settlement Agreement and its Variation supersede the
      Stock Option Agreement with Dave Bennett for performance vesting options,
      as previously included in our Form 20-F filed for the year ended December
      31, 2002.

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 28, 2006 | By:                        
|                    | Name:                      
|                    |                            
|                    | Title:                     

- 53 -

---

|                
|----------------
|Auditors Report
|                

To the Shareholders ofAustral Pacific
Energy Ltd. (formerly Indo-Pacific Energy Ltd.)

We have audited the Consolidated Statements of Operations and
Deficit, Changes in Stockholders Equity and Cash Flows of Austral Pacific
Energy Ltd. (formerly Indo-Pacific Energy Ltd.) for the year ended December 31,
2003. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance with Canadian generally
accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform an audit to obtain reasonable assurance 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.

In our opinion, these consolidated financial statements present
fairly, in all material respects, the results of its operations and its cash
flows of the Company for the year ended December 31, 2003, in accordance with
Canadian generally accepted accounting principles.

/s/ BDO Dunwoody LLP

Chartered Accountants

Vancouver, Canada March 5, 2004

|                                                                  
|------------------------------------------------------------------
|Comments by the Auditors for U.S. and New
      Zealand Readers on
|Canada-U.S. and New Zealand Reporting
      Differences           
|                                                                  

The reporting standards in New Zealand and the standards of the
Public Company Accounting Oversight Board (United States) (PCAOB) for auditors
require the addition of an explanatory paragraph (following the opinion
paragraph) when the financial statements are affected by conditions and events
that cast substantial doubt on the Companys ability to continue as a going
concern, such as those described in Note 1 of the consolidated financial
statements as at December 31, 2003. The standards of PCAOB also require the
addition of an explanatory paragraph when changes in an accounting policy, such
as those involving asset retirement obligations described in Note 2 (n), have a
material effect on the consolidated financial statements. Our report to the
shareholders dated March 5, 2004, is expressed in accordance with Canadian
reporting standards, which do not permit a reference to such conditions and
events in the auditors report when these are adequately disclosed in the
financial statements.

/s/ BDO Dunwoody LLP

Chartered Accountants

Vancouver, Canada March 5, 2004

- 54 -

---

Auditors Report for the Financial Years ended 31 December,
2004 and 2005



To the Shareholders of Austral Pacific Energy Ltd.



We have audited the accompanying consolidated balance sheet of
Austral Pacific Energy Ltd. as of December 31, 2005 and 2004 and the
consolidated statements of operations and deficit, changes in stockholders
equity and cash flows for the years then ended. 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 audit.

We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform an audit to obtain reasonable assurance 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
audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Austral Pacific Energy Ltd. as of December 31, 2005 and 2004 and the results of
its operations and its cash flows for the years then ended in accordance with
Canadian generally accepted accounting principles.

As discussed in Note 21 to the consolidated financial
statements, the 2005 consolidated financial statements have been restated.

Canadian generally accepted accounting principles vary in
certain significant respects from accounting principles generally accepted in
the United States of America. Information relating to the nature and effect of
such differences is presented in note 22 to the consolidated financial
statements.

Wellington, New Zealand

March 6, 2006, except as to note 21 and 22, which are as of
June 28, 2006.

- 55 -

---





AUSTRAL PACIFIC ENERGY LTD.

CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United
States Dollars)

DECEMBER 31, 2005





- 56 -

---

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

|As at December 31                                |  | 2005           |   |  | 2004        |  
|------------------------------------------------ |  | -------------- | - |  | ----------- | -
|                                                 |  | $              |   |  | $           |  
|                                                 |  | (Restated) (1) |   |  |             |  
|                                                 |  |                |   |  |             |  
|Assets                                           |  |                |   |  |             |  
|                                                 |  |                |   |  |             |  
|Current                                          |  |                |   |  |             |  
|Cash and cash equivalents (Note 3)               |  | 15,339,906     |   |  | 11,187,924  |  
|Accounts receivable (Note 6)                     |  | 746,165        |   |  | 480,499     |  
|Inventory (Note 7)                               |  | 474,777        |   |  | 98,518      |  
|Prepaid expenses and deposits                    |  | 217,910        |   |  | 467,097     |  
|                                                 |  | 16,778,758     |   |  | 12,234,038  |  
|                                                 |  |                |   |  |             |  
|Investments (Note 8)                             |  | 83,612         |   |  | -           |  
|Property and equipment (Note 4)                  |  | 11,344,692     |   |  | 5,649,110   |  
|                                                 |  |                |   |  |             |  
|Total Assets                                     |  | 28,207,062     |   |  | 17,883,148  |  
|                                                 |  |                |   |  |             |  
|Liabilities                                      |  |                |   |  |             |  
|                                                 |  |                |   |  |             |  
|Current                                          |  |                |   |  |             |  
|Accounts payable and accrued liabilities         |  | 1,941,606      |   |  | 401,600     |  
|                                                 |  |                |   |  |             |  
|Non-current                                      |  |                |   |  |             |  
|Prepaid gas revenue (Note 15)                    |  | 1,255,796      |   |  | 1,324,785   |  
|Asset retirement
      obligations (Note 5)      |  | 337,075        |   |  | 156,575     |  
|                                                 |  |                |   |  |             |  
|Total
      Liabilities                          |  | 3,534,477      |   |  | 1,882,960   |  
|                                                 |  |                |   |  |             |  
|Stockholders Equity                             |  |                |   |  |             |  
|                                                 |  |                |   |  |             |  
|Common stock without par value (Note 11);        |  |                |   |  |             |  
|unlimited number of shares authorized;           |  |                |   |  |             |  
|Issued and outstanding 22,666,453 shares         |  | 43,499,296     |   |  | 32,683,328  |  
|Contributed surplus (Note 21)                    |  | 1,023,967      |   |  | 361,854     |  
|Accumulated
      deficit (Note 21)              |  | (19,850,678    | ) |  | (17,044,994 | )
|                                                 |  |                |   |  |             |  
|Total
      Stockholders Equity                 |  | 24,672,585     |   |  | 16,000,188  |  
|                                                 |  |                |   |  |             |  
|Total
      Liabilities and Stockholders Equity |  | 28,207,062     |   |  | 17,883,148  |  
|                                                 |  |                |   |  |             |  
|Commitments and Contingencies(Note 10)           |  |                |   |  |             |  
|Related Party Transactions(Note 9)               |  |                |   |  |             |  
|Subsequent Events(Note 17)                       |  |                |   |  |             |  
|(1) As restated refer Note 21                    |  |                |   |  |             |  

|Approved by the Directors: |  |             
|-------------------------- |  | ------------
|                           |  |             
|                           |  |             
|Director                   |  | **Director**

See accompanying notes to the consolidated financial statements

- 57 -

---

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

|For the years ended December 31                     |  | 2005           |   |  | 2004        |   |  | 2003        |  
|--------------------------------------------------- |  | -------------- | - |  | ----------- | - |  | ----------- | -
|                                                    |  | $              |   |  | $           |   |  | $           |  
|                                                    |  | (Restated) (1) |   |  |             |   |  |             |  
|                                                    |  |                |   |  |             |   |  |             |  
|Production Income:                                  |  |                |   |  |             |   |  |             |  
|Oil and gas sales                                   |  | 1,779,454      |   |  | 212,458     |   |  | 172,715     |  
|Royalties                                           |  | (74,930        | ) |  | (15,040     | ) |  | (33,543     | )
|                                                    |  |                |   |  |             |   |  |             |  
|Net revenue                                         |  | 1,704,524      |   |  | 197,418     |   |  | 139,172     |  
|                                                    |  |                |   |  |             |   |  |             |  
|Expenses                                            |  |                |   |  |             |   |  |             |  
|                                                    |  |                |   |  |             |   |  |             |  
|General and administrative
      expense (Note 21)  |  | (3,609,531     | ) |  | (1,831,137  | ) |  | (1,899,975  | )
|Litigation costs and settlement (Note 10(d))        |  | -              |   |  | -           |   |  | (2,250,463  | )
|Foreign exchange (loss)/gain                        |  | (791,234       | ) |  | 197,858     |   |  | 673,909     |  
|Production costs                                    |  | (848,174       | ) |  | (67,543     | ) |  | (61,132     | )
|Depletion (Note 4)                                  |  | (365,241       | ) |  | (85,550     | ) |  | (25,930     | )
|Operating leases/rental expense                     |  | (44,008        | ) |  | (37,553     | ) |  | (32,741     | )
|Amortization (Note 4)                               |  | (51,034        | ) |  | (32,402     | ) |  | (18,160     | )
|Interest expense                                    |  | (163           | ) |  | (28,698     | ) |  | -           |  
|Impairment of oil and gas
      properties (Note 4) |  | (438,263       | ) |  | (5,287,611  | ) |  | (908,433    | )
|Gain
      on license sales                         |  | -              |   |  | -           |   |  | 3,896,306   |  
|                                                    |  |                |   |  |             |   |  |             |  
|Total Expenses                                      |  | (6,147,648     | ) |  | (7,172,636  | ) |  | (626,619    | )
|                                                    |  |                |   |  |             |   |  |             |  
|Net loss for the year before other income           |  | (4,443,124     | ) |  | (6,975,218  | ) |  | (487,447    | )
|                                                    |  |                |   |  |             |   |  |             |  
|Other Income                                        |  |                |   |  |             |   |  |             |  
|Interest income                                     |  | 460,411        |   |  | 326,012     |   |  | 57,624      |  
|Joint venture recoveries                            |  | 1,093,417      |   |  | 930,673     |   |  | 477,439     |  
|Miscellaneous revenue (Note 8)                      |  | 83,612         |   |  | -           |   |  | -           |  
|                                                    |  |                |   |  |             |   |  |             |  
|Net (loss)/income for the
      year                |  | (2,805,684     | ) |  | (5,718,533  | ) |  | 47,616      |  
|                                                    |  |                |   |  |             |   |  |             |  
|Deficit, beginning of year                          |  | (17,044,994    | ) |  | (11,326,461 | ) |  | (11,374,077 | )
|                                                    |  |                |   |  |             |   |  |             |  
|Deficit, end of year                                |  | (19,850,678    | ) |  | (17,044,994 | ) |  | (11,326,461 | )
|                                                    |  |                |   |  |             |   |  |             |  
|Basic (loss)/earnings per share(Note 12)            |  | (0.14          | ) |  | (0.42       | ) |  | 0.01        |  
|                                                    |  |                |   |  |             |   |  |             |  
|Diluted (loss)/earnings per share(Note 12)          |  | (0.14          | ) |  | (0.42       | ) |  | 0.01        |  
|                                                    |  |                |   |  |             |   |  |             |  
|(1) As restated refer Note 21                       |  |                |   |  |             |   |  |             |  

See accompanying notes to the consolidated financial statements

- 58 -

---

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

TotalCommon Stock
    
    
    Contributed
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Amount $
    
    
    Surplus
    
    
    Deficit
    
    
    EquityBalance at January 1, 2003
    
    7,739,324
    
    
    20,478,365
    
    
    274,080
    
    
    (11,374,077
    )
    
    9,378,368Stock option compensation (Note 11(c))
    
    -
    
    
    -
    
    
    143,312
    
    
    -
    
    
    143,312Net income for the
      year
    
    -
    
    
    -
    
    
    -
    
    
    47,616
    
    
    47,616Balance at December 31, 2003
    
    7,739,324
    
    
    20,478,365
    
    
    417,392
    
    
    (11,326,461
    )
    
    9,569,296Issuance of common shares for cash (Note 11(a))
    
    4,000,000
    
    
    5,217,992
    
    
    -
    
    
    -
    
    
    5,217,992Less deferred offering costs (Note 11(a))
    
    
    
    
    (408,083
    )
    
    -
    
    
    -
    
    
    (408,083
    )Issuance of common shares in exchange for specialclass shares of subsidiary (Note 11(a))
    
    1,111,123
    
    
    943,525
    
    
    -
    
    
    -
    
    
    943,525Exercise of share purchase warrants for cash (Note11(a))
    
    4,235,052
    
    
    5,719,941
    
    
    -
    
    
    -
    
    
    5,719,941Exercise of share purchase options (Note 11(a))
    
    180,000
    
    
    231,588
    
    
    (44,088
    )
    
    -
    
    
    187,500Convertible notes converted to shares (Note
      11(a))
    
    454,546
    
    
    500,000
    
    
    -
    
    
    -
    
    
    500,000Stock option compensation (Note 11(c))
    
    -
    
    
    -
    
    
    (11,450
    )
    
    -
    
    
    (11,450
    )Net loss for the year
    
    -
    
    
    -
    
    
    -
    
    
    (5,718,533
    )
    
    (5,718,533
    )Balance at December 31, 2004
    
    17,720,045
    
    
    32,683,328
    
    
    361,854
    
    
    (17,044,994
    )
    
    16,000,188Issuance of common shares for cash (Note 11(a))
    
    4,000,000
    
    
    10,000,000
    
    
    
    
    
    
    
    
    10,000,000Less deferred offering costs (Note 11(a))
    
    
    
    
    (448,371
    )
    
    
    
    
    
    
    
    (448,371
    )Exercise of share purchase warrants for cash (Note11(a))
    
    846,408
    
    
    1,127,741
    
    
    
    
    
    
    
    
    1,127,741Exercise of share purchase options (Note 11(a))
    
    100,000
    
    
    136,598
    
    
    (11,598
    )
    
    
    
    
    125,000Stock option compensation (Note 11(c), 21)
    
    
    
    
    
    
    
    673,711
    
    
    
    
    
    673,711Net loss for the
      year (Note 21)
    
    
    
    
    
    
    
    
    
    
    (2,805,684
    )
    
    (2,805,684
    )Balance at December 31, 2005(Restated)
    
    22,666,453
    
    
    43,499,296
    
    
    1,023,967
    
    
    (19,850,678
    )
    
    24,672,585


See accompanying notes to the consolidated financial statements
- 59 -

---

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

|For the years ended December 31                        |  | 2005           |   |  | 2004       |   |  | 2003       |  
|------------------------------------------------------ |  | -------------- | - |  | ---------- | - |  | ---------- | -
|                                                       |  | $              |   |  | $          |   |  | $          |  
|                                                       |  | (Restated) (1) |   |  |            |   |  |            |  
|Operating Activities                                   |  |                |   |  |            |   |  |            |  
|Net (loss)/income for the
      year (Note 21)         |  | (2,805,684     | ) |  | (5,718,533 | ) |  | 47,616     |  
|Adjustments to reconcile net (loss)/income to          |  |                |   |  |            |   |  |            |  
|cash applied to operating
      activities:            |  |                |   |  |            |   |  |            |  
|Depletion                                              |  | 365,241        |   |  | 85,550     |   |  | 25,930     |  
|Write-off of oil and
      gas properties              |  | 438,263        |   |  | 5,287,611  |   |  | 908,433    |  
|Amortization                                           |  | 51,034         |   |  | 32,402     |   |  | 18,160     |  
|Stock option
      compensation (Note 21)              |  | 673,711        |   |  | (11,450    | ) |  | 143,312    |  
|Gain on license sales                                  |  | -              |   |  | -          |   |  | (3,896,306 | )
|Net unrealized foreign
      exchange (gain)/loss      |  | (394,563       | ) |  | 191,378    |   |  | (653,072   | )
|                                                       |  |                |   |  |            |   |  |            |  
|Change in non-cash working capital                     |  | 739,386        |   |  | 67,977     |   |  | 759,812    |  
|                                                       |  |                |   |  |            |   |  |            |  
|                                                       |  | (932,612       | ) |  | (65,065    | ) |  | (2,646,115 | )
|Financing Activities                                   |  |                |   |  |            |   |  |            |  
|Share issues                                           |  | 10,803,109     |   |  | 11,125,433 |   |  | -          |  
|Purchase of investments                                |  | (83,612        | ) |  | -          |   |  | -          |  
|Issuance of convertible notes                          |  | -              |   |  | 500,000    |   |  | -          |  
|Issuance of special class shares                       |  | -              |   |  | -          |   |  | 943,525    |  
|Deferred offering costs                                |  | -              |   |  | -          |   |  | (408,083   | )
|                                                       |  |                |   |  |            |   |  |            |  
|                                                       |  | 10,719,497     |   |  | 11,625,433 |   |  | 535,442    |  
|Investing Activities                                   |  |                |   |  |            |   |  |            |  
|Due from related parties                               |  | -              |   |  | -          |   |  | 52,065     |  
|Proceeds from sale of licenses                         |  | -              |   |  | -          |   |  | 5,000,000  |  
|Purchase of property and
      equipment               |  | (430,223       | ) |  | (162,894   | ) |  | (20,028    | )
|Oil and gas properties                                 |  | (6,119,897     | ) |  | (2,395,754 | ) |  | (2,147,426 | )
|Change in non-cash working capital                     |  | 588,383        |   |  | 90,354     |   |  | 188,361    |  
|                                                       |  | (5,961,737     | ) |  | (2,468,294 | ) |  | 3,072,972  |  
|                                                       |  |                |   |  |            |   |  |            |  
|Net increase in cash during the year                   |  | 3,825,148      |   |  | 9,092,074  |   |  | 962,299    |  
|Effect of exchange rate
      fluctuations on cash and |  |                |   |  |            |   |  |            |  
|short-term deposits                                    |  | 326,834        |   |  | (138,437   | ) |  | (20,839    | )
|Cash and cash equivalents, beginning of year           |  | 11,187,924     |   |  | 2,234,287  |   |  | 1,292,827  |  
|Cash and cash equivalents, end of year                 |  | 15,339,906     |   |  | 11,187,924 |   |  | 2,234,287  |  
|                                                       |  |                |   |  |            |   |  |            |  
|Supplemental Cash Flow Information                     |  |                |   |  |            |   |  |            |  
|Interest paid                                          |  | 163            |   |  | 28,698     |   |  | -          |  
|                                                       |  |                |   |  |            |   |  |            |  
|(1) As restated refer Note 21                          |  |                |   |  |            |   |  |            |  

See accompanying notes to the consolidated financial statements

- 60 -

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NOTE 1 - NATURE OF OPERATIONS

The Company is incorporated in the
Yukon Territory under the Business Corporations Act (Yukon). On December 31,
2003 the Company changed its name from Indo-Pacific Energy Ltd. to Austral
Pacific Energy Ltd.

The accompanying 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. The Company is primarily engaged in the acquisition,
exploration, appraisal and development of oil and gas properties in New Zealand
and Papua New Guinea. The Company has recognised proved developed and
undeveloped reserves in respect to its interest in the Cheal field (PEP38738S).
The recoverability of the amounts capitalized for oil and gas properties is
dependent upon the completion of exploration work, the discovery of oil and gas
reserves in commercial quantities and the subsequent development of such
reserves.

NOTE 2 - 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
20.

|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) Limited, 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, and Kanuka Energy Limited (registered November 25, 2004). All
      significant inter-company balances and transactions have been eliminated
      upon consolidation. All subsidiaries have the same balance date as the
      parent entity.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|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.                                                                                                                                                                                          

- 61 -

---



|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|g) | Plant and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Plant and equipment consists of furniture and office
      equipment and the Companys share of joint venture assets. The furniture
      and office equipment are recorded at cost and amortized over their
      estimated useful lives on a declining-balance basis at annual rates of 10%
      to 33 1/3%. The Companys share of the joint venture assets is recorded at
      cost and will be amortized over the assets useful production
  life.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|h) | Oil and Gas Properties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The Company follows the full cost method of accounting
      for petroleum and natural gas operations, whereby all costs related to the
      acquisition, exploration and development of petroleum and natural gas
      interests are accumulated within cost centres on a country-by-country
      basis. Such costs include land acquisition costs, geological and
      geophysical expenses, carrying charges on non-producing interests, costs
      of drilling both productive and non-productive wells, major development
      projects and overhead charges directly relating to acquisition,
      exploration and development activities.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | 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 center 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | 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 cubic feet of natural gas to one barrel of petroleum.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Costs of acquiring and evaluating significant unproved
      petroleum and natural gas interests are excluded from costs subject to
      depletion and depreciation until it is determined that proved reserves are
      attributable to such interest or until impairment occurs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The full cost method of accounting for oil and gas
      activities requires a detailed impairment calculation when events or
      circumstances indicate a potential impairment of the carrying amount of
      oil and gas assets may have occurred, but at least annually.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | An impairment loss is recognized when the carrying amount
      of a cost centre is not recoverable and exceeds its fair value. The
      carrying amount is assessed to be recoverable when the sum of the
      undiscounted cash flows expected from proved reserves plus the cost of
      unproved interests, net of impairments, exceeds the carrying amount of the
      cost centre. When the carrying amount is assessed not to be recoverable,
      an impairment loss is recognized to the extent that the carrying amount of
      the cost centre exceeds the sum of the discounted cash flows from proved
      and probable reserves plus the cost of unproved interests, net of
      impairments, of the cost centre. The cash flows are estimated using
      expected future product prices and costs and are discounted using a
      risk-free interest rate. The initial benchmark price used in the ceiling
      test is based on approximately 90% of the latest selling price and then
      adjusted progressively downwards. The prices used in the impairment test
      are as follows:

- 62 -

---

Year 1
    Year 2
    Year 3
    Year 4
    Year 5
    ThereafterJanuary-June
    $50.00
    $45.00
    $40.00
    $35.00
    $35.00
    $35.00July-December
    $45.00
    $40.00
    $35.00
    $35.00
    $35.00
    $35.00


|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 purchase
  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, if dilutive. The number of
      outstanding shares would be calculated by assuming that the outstanding
      stock options were exercised and that the proceeds from such exercises
      were used to acquire common shares at the average market price during the
      reporting period.                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|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. The obligation is increased each period, or
      accretes, due to the passage of time and is recorded in the statement of
      operations. Revisions to the estimated fair value would result in an
      adjustment to the obligation and carrying amount of the petroleum and
      natural gas properties.                                                                                                                     

- 63 -

---

|o) | Investments                                                                                                                                                              
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                          
|   | Long term investments are valued at cost. An impairment
      test is conducted on an annual basis and any impairment is recognised in
      the Statement of Operations.
|   |                                                                                                                                                                          
|p) | Comparative Figures                                                                                                                                                      
|   |                                                                                                                                                                          
|   | Certain comparative figures have been reclassified to
      conform to the current years presentation.                                                                  
|   |                                                                                                                                                                          
|q) | Changes in Accounting Policy                                                                                                                                             
|   |                                                                                                                                                                          
|   | There have been no changes in accounting policies applied
      during the year ended December 31, 2005.                                                                 

NOTE 3  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:

Cash on Deposit
    
    December 31, 2005
    
    
    December 31, 2004$
    
    
    $New Zealand Dollars
    
    490,312
    
    
    6,250,596U.S. Dollars
    
    14,815,778
    
    
    4,868,001Canada Dollars
    
    20,930
    
    
    30,202PNG Kina
    
    10,023
    
    
    37,084Australian Dollars
    
    2,863
    
    
    2,04115,339,906
    
    
    11,187,924


At balance sheet date, total cash of $438,080 (2004: $335,802)
is held by joint ventures. The Company does not maintain direct control of this
cash as it is controlled by the joint venture operators.

- 64 -

---

NOTE 4 - PROPERTY AND EQUIPMENT

|2005                                 | Net Book          |  | Additions/Transfers |  | Depreciation/ Depletion |   | Net Book          | 
|------------------------------------ | ----------------- |  | ------------------- |  | ----------------------- | - | ----------------- | 
|                                     | Value at          |  | During the Year     |  | and Write Downs         |   | Value at          | 
|                                     | December 31, 2004 |  |                     |  | During the Year         |   | 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 (1)(2)                   | -                 |  | 4,017,022           |  | (365,241                | ) | 3,651,781         | 
|Total Proved                         | -                 |  | 4,017,022           |  | (365,241                | ) | 3,651,781         | 
|Unproved:                            |                   |  |                     |  |                         |   |                   | 
|New Zealand(2)                       | 3,325,418         |  | 2,009,137           |  | (423,643                | ) | 4,910,912         | 
|Australia (3)                        | -                 |  | 12,745              |  | (12,745                 | ) | -                 | 
|Papua New Guinea (4)                 | 2,162,877         |  | 80,993              |  | (1,875                  | ) | 2,241,995         | 
|Total unproved                       | 5,488,295         |  | 2,102,875           |  | (438,263                | ) | 7,152,907         | 
|Total property and equipment         | 5,649,110         |  | 6,550,120           |  | (854,538                | ) | 11,344,692        | 

(1) The Company transferred PEP38738S to proven oil and gas
properties effective April 30, 2005 following an independent assessment of
reserves. (2) The Company participated in 4 unsuccessful exploration wells
in onshore Taranaki, New Zealand during 2005. These were Kakariki-1, Oru-1,
Supplejack South-1 and Supplejack South-1A. The expenditure relating to
Kakariki-1 has been written off as drilling occurred prior to April 30, 2005.
The expenditure relating to Oru-1, Supplejack South-1 and Supplejack South-1A
are subject to ceiling test. (3) The Company currently has no ongoing
activities within Australia. (4) All activities are considered to be in the
pre-production stage.

During the year the Company capitalized $348,691 (2004:
$190,985) of overhead charges relating directly to its exploration and
development activities. The overhead charge is exclusive of direct charges.

|2004                                 | Net Book          |  | Additions/Transfers |  | Depreciation/ Depletion |   | Net Book          | 
|------------------------------------ | ----------------- |  | ------------------- |  | ----------------------- | - | ----------------- | 
|                                     | Value at          |  | During the Year     |  | and Write Downs         |   | Value at          | 
|                                     | December 31, 2003 |  |                     |  | During the Year         |   | December 31, 2004 | 
|Furniture and office
      equipment | 30,323            |  | 62,581              |  | (32,402                 | ) | 60,502            | 
|Share of joint venture assets        | -                 |  | 100,313             |  | -                       |   | 100,313           | 
|                                     | 30,323            |  | 162,894             |  | (32,402                 | ) | 160,815           | 
|Proved:                              |                   |  |                     |  |                         |   |                   | 
|New Zealand (1)                      | 2,721,572         |  | 145,031             |  | (2,866,603              | ) | -                 | 
|Total Proved                         | 2,721,572         |  | 145,031             |  | (2,866,603              | ) | -                 | 
|Unproved:                            |                   |  |                     |  |                         |   |                   | 
|New Zealand                          | 2,478,334         |  | 2,249,328           |  | (1,402,244              | ) | 3,325,418         | 
|Australia                            | 978,013           |  | 109,642             |  | (1,087,655              | ) | -                 | 
|Papua New Guinea                     | 2,128,529         |  | 51,007              |  | (16,659                 | ) | 2,162,877         | 
|Total unproved                       | 5,584,876         |  | 2,409,977           |  | (2,506,558              | ) | 5,488,295         | 
|Total property and equipment         | 8,336,771         |  | 2,717,902           |  | (5,405,563              | ) | 5,649,110         | 

|(1) | Kahili-1A, the only producer well on the Kahili
      gas-condensate field (PMP 38153) in the onshore Taranaki basin, New
      Zealand, ceased production in November 2004. Although a pressure survey in
      March 2005 indicated some pressure recovery, it is unlikely that
      significant commercial flows will be re-established from Kahili-1A. An
      independent assessment of Kahili-1A has written the remaining reserves
      down to zero. Consequently, the capitalized expenditures associated with
      Kahili-1A were written off in 2004.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

- 65 -

---

PAPUA NEW GUINEA

Petroleum prospecting licenses 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 licenses 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 licenses under certain circumstances (by way of an Application
for Variation of the Work Program).

NOTE 5  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 $0.69
million (2004: $0.31 million) discounted using credit adjusted risk-free rates
of 8.05% - 8.85% . The costs are expected to be incurred between 2007 and 2020.
Throughout the year the Company re-estimated its obligations and increased the
present value of future liabilities by $0.106 million. The movement in the
provision is as follows:

2005
    
    
    2004$
    
    
    $Obligations at beginning of
      year
    
    156,575
    
    
    155,927Obligations incurred during the year
    
    64,559
    
    
    23,114Obligations satisfied during
      the year
    
    -
    
    
    (7,648
    )Revision in estimated obligations
    
    106,290
    
    
    (30,132
    )Accretion expense
    
    18,196
    
    
    -Foreign exchange movement
    
    (8,545
    )
    
    15,314Obligations at end of year
    
    337,075
    
    
    156,575


NOTE 6  ACCOUNTS RECEIVABLE

Total accounts receivable comprises the following categories:

2005
    
    
    2004$
    
    
    $Trade receivables
    
    608,529
    
    
    339,351Joint venture receivables
    
    137,636
    
    
    141,148746,165
    
    
    480,499


- 66 -

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NOTE 7  INVENTORY

Total inventory comprises the following categories:

2005
    
    
    2004$
    
    
    $Product inventory
    
    5,010
    
    
    -Share of joint venture inventory
    
    469,767
    
    
    98,518474,777
    
    
    98,518


NOTE 8  INVESTMENTS

Total revenue has been recognised of $83,612 for shares
received in Rift Oil Plc in return for services provided.

NOTE 9  RELATED PARTY TRANSACTIONS

TAG Oil (NZ) Limited, a subsidiary of TAG Oil Ltd, which has
directors and shareholders in common with the Company, participates in certain
oil and gas properties with the Company.

The Company farmed-out 65% of a Papua New Guinea permit,
PPL235, 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 Jan 29, 2005, followed by
her resignation as an officer of the Company effective January 29, 2005.
A subsidiary of the Company owns 180,200 shares (approximately 0.5% of issued
shares) in Rift Oil PLC. The Company incurred $5,110 (2004: Nil) in respect to
consultancy services provided by Rift.

During 2005, the Company incurred $1,287,202 (2004: $223,373;
2003: $197,165) in remuneration to the former Chief Executive Officer of the
Company and $36,524 (2004: $37,553; 2003: $32,741) in rent to a trust of which
the former Chief Executive Officer of the Company is a trustee. The former Chief
Executive Officer ceased to be an employee of the Company on 30 December, 2005
and entered into an initial three month consultancy contract. The total
remuneration to the former Chief Executive Officer includes $977,852 in
settlement of contractual obligations, including the fair value of share options
issued as a part of the settlement.

During 2005, $98,107 (2004: $128,474; 2003: $111,634) 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 and
2003: Commercial Manager).

Directors received a total remuneration of $57,721 during 2005.
(2004:$58,954; 2003:$20,986).

During 2005 the Company paid a law firm in which a former
Director is a partner, $66,470 (2004: $81,771; 2003: $95,980) for legal and
directorial services.

The Company paid a company that employs a Director, $18,000
(2004: $18,000; 2003: $9,454) for financial services.

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.

- 67 -

---

NOTE 10 - 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 2006 fiscal year are $4,587,615.

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

Contractual and
      Other Obligations
    Payments Due by Period
      (US$)Total
    Less than 1 year
    1-3 years
    4-5 years
    After 5 YearsOperating leases
    54,384
    35,933
    18,451
    -
    -Joint venture commitments (1)
    4,551,682
    4,551,682Other obligations (2)
    1,255,796
    
    -
    -
    1,255,796Total contractual or other obligations
    5,861,862
    4,587,615
    18,451
    -
    1,255,796


|(1) | The Joint venture commitments are in respect of its
      current year exploration permit obligations. TheCompany is committed to
      its share of current year exploration permit obligations to other joint
      venture participants and has a contractual obligation to various joint
      venture participants for these current year exploration permit
      obligations.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Other Long Term Obligations classified as After 5 years
      is in respect to prepaid gas revenue. The contractual agreement underlying
      the prepaid gas revenue expires in 2013 but the obligations could arise
      earlier than this depending upon gas discoveries and commercial
      arrangements entered in respect to them. (refer to Note 15)                    

The Companys share of commitments are
as recorded on various license documents, but the Company may meet these
commitments by various means which could include: farm out of major
expenditures, farm out interests in the respective license, renegotiate terms of
the license or seek further investor funds 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) | 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.                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|c) | 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.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|d) | Legal Settlement                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | On September 26, 2003 the Company sold its interest and
      entitlement to petroleum in New Zealand PMP38148 and recognised a gain on
      license sales of $3,896,306. Effective date of this sale was July 1, 2003.
      On October 3, 2003 the Company paid Greymouth Petroleum Holdings Limited
      $2 million which released both parties from any claims and liabilities
      against each other.                       

- 68 -

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NOTE 11 - COMMON STOCK

a) Authorized and Issued Share Capital

The authorized share capital of
the Company is an unlimited number of shares of common stock without par
value.

| | Issued and fully paid:       |  | Number          |  |  | Amount     | 
| | ---------------------------- |  | --------------- |  |  | ---------- | 
| |                              |  | Of
      Shares |  |  | $          | 
| | Balance at December 31, 2003 |  | 7,739,324       |  |  | 20,478,365 | 
| | Issued during 2004           |  | 9,980,721       |  |  | 12,204,963 | 
| | 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 | 

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 is exercisable to acquire one
additional common share at $3.50 until October 13, 2006. The Company has 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 is 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.

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.

- 69 -

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|b) | Incentive Stock Options                                                                                                                                                                                                            
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                    
|   | In 2004, the Company established a share option plan for
      the granting of options to employees and service providers and this plan
      was approved at the annual general meeting of the shareholders on 25 June
      2004.
|   |                                                                                                                                                                                                                                    
|   | The following stock options were outstanding at December
      31, 2005:                                                                                                                                                           

| | Number    |     | Type of Option | Date
      Fully  | Number
      Vested | Exercise  | Expiry           
| | --------- | --- | -------------- | ----------------- | ------------------- | --------- | -----------------
| | of Shares |     |                | Vested            | December 31,        | Price per | Date             
| |           |     |                |                   | 2005                | Share     |                  
| |           |     |                |                   |                     |           |                  
| | 300,000   | (1) | Performance    | -                 | -                   | $1.00     | October 15, 2007 
| | 200,000   | (1) | Non Vesting    | -                 | 200,000             | $1.10     | July 6, 2007     
| | 400,000   | (1) | Vesting        | April 15, 2004    | 400,000             | $1.10     | July 6, 2007     
| | 85,000    |     | Vesting        | April 15, 2004    | 85,000              | $1.25     | March 26, 2006   
| | 30,000    |     | Vesting        | April 15, 2004    | 30,000              | $1.25     | October 15, 2007 
| | 50,000    |     | Vesting        | April 15, 2005    | 50,000              | $1.25     | October 15, 2008 
| | 10,000    |     | Vesting        | June 25, 2007     | 3,334               | $1.25     | June 25, 2009    
| | 34,000    |     | Vesting        | February 23, 2006 | -                   | $2.75     | February 23, 2010
| | 33,000    |     | Vesting        | February 23, 2007 | -                   | $3.75     | February 23, 2010
| | 33,000    |     | Vesting        | February 23, 2008 | -                   | $4.75     | February 23, 2010
| | 33,334    |     | Vesting        | July 25, 2006     | -                   | $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  | -                   | $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 
| | 1,475,000 |     |                |                   | 768,334             |           |                  

|(1) | In February, 2006, these options were cancelled and
      replaced with a single grant of 750,000 options with an expiry date of
      February 2, 2008 and exercise price of $1.20.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The weighted average exercise price for options outstanding at
December 31, 2005 is $1.46 (December 31, 2004: $1.06) . During 2005 100,000
share options were exercised at an average exercise price of $1.25. (2004:
180,000 - average price $1.04) .

The weighted average exercise price for options fully vested at
December 31, 2005 is $1.13 (December 31, 2004: $1.07) .

- 70 -

---

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

Number
    Exercise PriceOf
      Activity
    Of
      Options
    per
      OptionOutstanding at December 31,
      2003
    1,345,000
    $1.00  $1.25Granted in 2004: vesting
    10,000
    $1.25Exercised in 2004: vesting
      (converted)
    (150,000)
    $1.00Exercised in 2004: vesting (converted)
    (30,000)
    $1.25Outstanding at December 31,
      2004
    1,175,000
    $1.00  $1.25Granted in 2005: vesting
    34,000
    $2.75Granted in 2005: vesting
    33,000
    $3.75Granted in 2005: vesting
    33,000
    $4.75Granted in 2005: vesting
    100,000
    $2.75Granted in 2005: vesting
    200,000
    $1.90Exercised in 2005: vesting (converted)
    (100,000)
    $1.25Outstanding at December 31, 2005
    1,475,000
    $1.00
      - $4.75


|c) | Stock Based Compensation                                                                                                                                                                                                                                                                                                                                                                    
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                             
|   | Stock option compensation expense of $673,711 has been
      recognized for 2005 (2004: $11,450 recovery and 2003: $143,312 expense)
      (refer Note 21). 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 weighted-average
      assumptions:

2005
    2004Expected dividend yield
    0.00%
    0.00%Expected price volatility
    30.40% - 83.80%
    35.27%Risk-free interest rate
    3.43% - 3.87%
    3.23%Expected life of option
    2 - 3 Years
    3 Years


|   | The weighted average fair value of the options granted in
      2005 was $1.32 (2004: $1.09)                       
|-- | -------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                    
|d) | Share Purchase Warrants                                                                                            
|   |                                                                                                                    
|   | The following share purchase warrants to purchase shares
      of the Company are outstanding at December 31,
2005:

Number Of
      Warrants
    Exercise Price
    Expiry Date2,000,000
    $3.50
    October 13, 2006 (1)


(1) The Company in its sole discretion may accelerate the
expiry date if, for any ten consecutive trading days starting four months after
the issue date (October 13, 2005), the closing price of the shares of the
Company on any stock exchange or other quotation service on which it is listed
or quoted is greater than US$4.50 during the first year following issue date. In
the event the Company exercises this discretion the expiry date will be deemed
to be amended to such date that is 30 days from the date on which the notice of
acceleration of expiry date is provided by the Company.

- 71 -

---

A summary of share purchase warrant activities for the years
presented is as follows:

Description
    Number
    Exercise PriceOf
      Activity
    of
      Warrants
    per
      WarrantOutstanding at December 31,
      2003
    2,086,845
    $1.15(1) 1.50
    (1)Granted in 2004
    454,546
    $1.15Granted in 2004
    2,000,000
    NZ$2.10
    (2)Granted in 2004
    555,569
    NZ$1.85
    (2)Exercised in 2004
    (836,845)
    $1.50Exercised in 2004
    (1,477,273)
    $1.15Exercised in 2004
    (290,749)
    NZ$1.85
    (2)Exercised in 2004
    (1,630,185)
    NZ$2.10
    (2)Outstanding at December 31,
      2004
    861,908
    $1.15, NZ$1.85-2.10Exercised in 2005
    (264,820)
    NZ$1.85
    (2)Exercised in 2005
    (354,315)
    NZ$2.10
    (2)Exercised in 2005
    (227,273)
    $1.15Granted in 2005
    2,000,000
    $3.50Cancelled in 2005
    (15,500)
    NZ$2.10
    (2)Outstanding at December 31, 2005
    2,000,000
    $3.50


(1) In January 2002 and then in
December 2003, the terms of the series A warrants were amended to extend the
expiry date to January 5, 2005 and to increase the exercise price per warrant to
$1.50. Also, the Series A warrant holders right to receive one Series B
warrants for each Series A warrant exercised in the event of a commercial
discovery was cancelled in December 2003.

(2) 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.

NOTE 12  EARNINGS/(LOSS) PER SHARE

The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings (loss) per share calculations for
the period ending:

|                                                  |   | For the years ended December 31 |  
|------------------------------------------------- | - | ------------------------------- | -
|                                                  |   | 2005                            |  
|                                                  |   | (Restated)                      |  
|                                                  |   |                                 |  
|Numerator, net (loss)/income
      for the year   | $ | (2,805,684                      | )
|                                                  |   |                                 |  
|Denominator:                                      |   |                                 |  
|Weighted-average number of shares  basic         |   | 19,489,336                      |  
|                                                  |   |                                 |  
|Basic (loss)/earnings per share                   | $ | (0.14                           | )
|                                                  |   |                                 |  
|Denominator:                                      |   |                                 |  
|Weighted-average number of
      shares  diluted |   | 19,489,336                      |  
|                                                  |   |                                 |  
|Diluted (loss)/earnings per
      share           | $ | (0.14                           | )

Due to net losses incurred during 2004 and 2005 and the average
stock price for 2003 being below the strike price, 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 768,334 vested options outstanding at
December 31, 2005. If exercised, these have the potential to dilute earnings of
future periods.

- 72 -

---

NOTE 13  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.

NOTE 14 - 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 37.12% (2004: 37.12%; 2003:
37.12%) and the provision for income taxes is as follows:

|For the years ended,                                   |  | 2005       |   |  | 2004       |   |  | 2003     |  
|------------------------------------------------------ |  | ---------- | - |  | ---------- | - |  | -------- | -
|                                                       |  | (Restated) |   |  |            |   |  |          |  
|                                                       |  |            |   |  |            |   |  |          |  
|Net (loss)/income for the
      year before tax        |  | (2,805,684 | ) |  | (5,718,533 | ) |  | 47,616   |  
|                                                       |  |            |   |  |            |   |  |          |  
|(Benefit of)/provision for
      tax at statutory rate |  | (1,041,470 | ) |  | (2,122,719 | ) |  | 17,675   |  
|Foreign tax rate differential                          |  | 44,160     |   |  | 198,325    |   |  | (22,955  | )
|Non-deductible stock based
      compensation          |  |            |   |  |            |   |  |          |  
|expenditure/(recovery)                                 |  | 250,655    |   |  | (4,176     | ) |  | 53,197   |  
|Non-deductible equity raising
      costs              |  | -          |   |  | -          |   |  | 72,616   |  
|Non-deductible legal settlement payment                |  | -          |   |  | -          |   |  | 742,400  |  
|Other                                                  |  | 47,592     |   |  | 5,194      |   |  | 427      |  
|Increase/(decrease) in valuation allowance             |  | 699,063    |   |  | 1,923,376  |   |  | (863,360 | )
|                                                       |  |            |   |  |            |   |  |          |  
|Income Tax Provision                                   |  | -          |   |  | -          |   |  | -        |  

- 73 -

---

In Canada the Company has net operating losses of approximately
$3.58 million available for future reduction from taxable income derived in
Canada, which expire as follows:

Net operating loss2006
    $ 113,0112007
    $ 245,8472008
    $ 332,1802009
    $ 347,8862010
    $ 605,9182011
    $ 1,001,4612012
    $ 931,469$
      3,577,772


In addition, in Canada, at December 31, 2005, 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 $15.09 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 50% continuity of shareholding from the time that the
losses and deductions are incurred until the point of offset against taxable
income.

The components of the net future income tax asset at December
31, 2005 are summarized below:

2005
    
    
    2004Future income tax assets:Net
      operating loss carryforwards
    
    6,279,599
    
    
    3,955,879Resource tax pool
    
    519,354
    
    
    459,431Share
      issuance costs
    
    224,036
    
    
    121,184Asset retirement
      obligation
    
    111,235
    
    
    58,121Total
      gross future income tax asset
    
    7,134,224
    
    
    4,594,615Less:
      Valuation allowance
    
    (4,599,660
    )
    
    (3,617,273
    )Net
      future income tax asset
    
    2,534,564
    
    
    977,342Future income tax
      liabilities:Property and equipment
    
    (2,828,270
    )
    
    (918,227
    )Foreign
      exchange
    
    293,706
    
    
    (59,115
    )Net
      future income tax liability
    
    (2,534,564
    )
    
    (977,342
    )


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.

- 74 -

---

NOTE 15  PREPAID GAS AGREEMENT

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. This property has nil carrying value as at December 31,
2005.

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. The balance outstanding is denominated in New Zealand dollars
therefore is subject to fluctuations as a consequence of changes in the US$:NZ$
exchange rate.

As at December 31, 2005, the Company had delivered gas worth
$145,443. The balance outstanding amount is classified as a non-current
liability as there is no gas currently being supplied to the issuer or a pending
gas supply agreement.

NOTE 16  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 17 - SUBSEQUENT EVENTS

| | (a) | In February 2006 the Heaphy-1 exploration well was
      plugged and abandoned. The Companys share of expenditure in respect to
      this well was approximately $0.7 million.                                                                                                                                                                                                                                                                       
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | (b) | In January 2006 the Company appointed two new Directors.
      The Company granted 60,000 stock options to each Director, vesting over 3
      years and exercisable at $1.80, $2.00 and $2.50 respectively.                                                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | (c) | In February 2006 the Company appointed a new President
      and Chief Executive Officer. As a part of the remuneration package 400,000
      stock options were granted with terms as follows:                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     | i.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | ii.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     | iii.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | (d) | In February 2006 the Company finalised an agreement to
      acquire interests in nine onshore New Zealand permits and associated
      drilling inventory. The Company already holds an interest in seven of the
      permit areas. The cash outlay is approximately $0.85 million and will be
      met from existing cash resources. The agreement is subject to regulatory
      approval with final settlement likely to be in quarter 2,
  2006.

- 75 -

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NOTE 18 - SEGMENTED INFORMATION

The Company operates in one industry: petroleum exploration and
production. It operates in several geographical regions, therefore information
on country segments is provided as follows.

2005(Restated)Canada
    
    
    New Zealand
    
    
    **Australia**
    
    
    PNG
    
    
    Total CompanyProduction Income:Revenue
    
    -
    
    
    1,779,454
    
    
    -
    
    
    -
    
    
    1,779,454Royalty expenses
    
    -
    
    
    (74,930
    )
    
    -
    
    
    -
    
    
    (74,930
    )Net revenue
    
    -
    
    
    1,704,524
    
    
    -
    
    
    -
    
    
    1,704,524Interest income
    
    6,113
    
    
    450,077
    
    
    -
    
    
    4,221
    
    
    460,411Joint venture recoveries
    
    -
    
    
    1,093,417
    
    
    -
    
    
    -
    
    
    1,093,417Miscellaneous revenue
    
    -
    
    
    83,612
    
    
    -
    
    
    -
    
    
    83,612Foreign exchange gain
    
    (10,794
    )
    
    (641,463
    )
    
    (69,527
    )
    
    (69,450
    )
    
    (791,234
    )Administrative expenses
    
    (1,716,156
    )
    
    (1,748,721
    )
    
    (12,199
    )
    
    (158,267
    )
    
    (3,634,343
    )Interest and accretion
      expense
    
    -
    
    
    (18,359
    )
    
    -
    
    
    -
    
    
    (18,359
    )Amortization expense
    
    -
    
    
    (49,056
    )
    
    -
    
    
    (1,978
    )
    
    (51,034
    )Production expenses
    
    -
    
    
    (848,174
    )
    
    -
    
    
    -
    
    
    (848,174
    )Depletion
    
    -
    
    
    (365,241
    )
    
    -
    
    
    -
    
    
    (365,241
    )Write-off of oil and gas
      properties
    
    -
    
    
    (423,643
    )
    
    (12,745
    )
    
    (1,875
    )
    
    (438,263
    )Net (loss)
    
    (1,720,837
    )
    
    (763,027
    )
    
    (94,471
    )
    
    (227,349
    )
    
    (2,805,684
    )Property and equipment
    
    -
    
    
    9,070,421
    
    
    -
    
    
    2,274,271
    
    
    11,344,692Current assets
    
    198,900
    
    
    16,606,837
    
    
    2,041
    
    
    54,592
    
    
    16,862,370Total assets
    
    198,900
    
    
    25,677,258
    
    
    2,041
    
    
    2,328,863
    
    
    28,207,062Specific Items:Purchase of property and equipment
    
    -
    
    
    397,947
    
    
    -
    
    
    32,276
    
    
    430,223


2004Canada
    
    
    New Zealand
    
    
    **Australia**
    
    
    PNG
    
    
    Total CompanyProduction Income:Revenue
    
    -
    
    
    212,458
    
    
    -
    
    
    -
    
    
    212,458Royalty expenses
    
    -
    
    
    (15,040
    )
    
    -
    
    
    -
    
    
    (15,040
    )Net revenue
    
    -
    
    
    197,418
    
    
    -
    
    
    -
    
    
    197,418Interest income
    
    18,303
    
    
    307,709
    
    
    -
    
    
    -
    
    
    326,012Joint venture recoveries
    
    -
    
    
    930,673
    
    
    -
    
    
    -
    
    
    930,673Foreign exchange gain
    
    -
    
    
    197,858
    
    
    -
    
    
    -
    
    
    197,858Administrative 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
    
    -
    
    
    (85,550
    )
    
    -
    
    
    -
    
    
    (85,550
    )Write-off of oil and gas
      properties
    
    -
    
    
    (4,183,296
    )
    
    (1,087,656
    )
    
    (16,659
    )
    
    (5,287,611
    )Net (loss)
    
    (552,767
    )
    
    (4,031,147
    )
    
    (1,102,541
    )
    
    (32,078
    )
    
    (5,718,553
    )Property and equipment
    
    -
    
    
    3,486,232
    
    
    -
    
    
    2,162,877
    
    
    5,649,110Current assets
    
    315,923
    
    
    11,837,162
    
    
    1,984
    
    
    78,969
    
    
    12,234,038Total assets
    
    315,923
    
    
    15,323,394
    
    
    1,984
    
    
    2,241,846
    
    
    17,883,148Specific Items:Purchase of property and equipment
    
    -
    
    
    162,894
    
    
    -
    
    
    -
    
    
    162,894


- 76 -

---

2003Canada
    
    
    New Zealand
    
    
    **Australia**
    
    
    PNG
    
    
    Total CompanyProduction Income:Revenue
    
    -
    
    
    172,715
    
    
    -
    
    
    -
    
    
    172,715Royalty expenses
    
    -
    
    
    (33,543
    )
    
    -
    
    
    -
    
    
    (33,543
    )Net revenue
    
    -
    
    
    139,172
    
    
    -
    
    
    -
    
    
    139,172Interest income
    
    2,188
    
    
    55,436
    
    
    -
    
    
    -
    
    
    57,624Joint venture recoveries
    
    -
    
    
    477,439
    
    
    -
    
    
    -
    
    
    477,439Gain on licence sale
    
    -
    
    
    3,896,306
    
    
    -
    
    
    -
    
    
    3,896,306Foreign exchange gain
    
    -
    
    
    673,909
    
    
    -
    
    
    -
    
    
    673,909Production expenses
    
    -
    
    
    (61,132
    )
    
    -
    
    
    -
    
    
    (61,132
    )Depletion
    
    -
    
    
    (25,930
    )
    
    -
    
    
    -
    
    
    (25,930
    )Administrative expenses
    
    (308,983
    )
    
    (1,598,359
    )
    
    (3,716
    )
    
    (21,658
    )
    
    (1,932,716
    )Litigation costs and settlement
    
    -
    
    
    (2,250,463
    )
    
    -
    
    
    -
    
    
    (2,250,463
    )Amortization expense
    
    -
    
    
    (18,160
    )
    
    -
    
    
    -
    
    
    (18,160
    )Write-off of oil and gas properties
    
    -
    
    
    (908,433
    )
    
    -
    
    
    -
    
    
    (908,433
    )Net
      income/(loss)
    
    (306,795
    )
    
    379,785
    
    
    (3,716
    )
    
    (21,658
    )
    
    47,616Plant and equipment
    
    -
    
    
    5,230,227
    
    
    978,015
    
    
    2,128,529
    
    
    8,336,771Non-current assets
    
    408,083
    
    
    -
    
    
    -
    
    
    -
    
    
    408,083Current assets
    
    234,083
    
    
    3,092,359
    
    
    9,605
    
    
    44,766
    
    
    3,380,813Total assets
    
    642,166
    
    
    8,322,586
    
    
    987,620
    
    
    2,173,295
    
    
    12,125,667Specific Items:Purchase of property and equipment
    
    -
    
    
    20,028
    
    
    -
    
    
    -
    
    
    20,028


NOTE 19  SALES TO SIGNIFICANT CUSTOMERS

The Company made oil sales of $10,033 (2004: $67,015, 2003:
$148,991) to Shell (Petroleum Mining) Company Ltd and $1,769,421 (2004:$154,906,
2003:nil) to Swift Energy (NZ) Limited during the year.

During 2005 the Company made no gas deliveries (2004: $145,443)
to NGC New Zealand Ltd under the prepaid gas agreement (refer to Note 15).

NOTE 20 - 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.

- 77 -

---

CONSOLIDATED STATEMENT OF CASH FLOWS

b) 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              |  | 2005       |   |  | 2004       |   |  | 2003       |  
| | -------------------------------------------- |  | ---------- | - |  | ---------- | - |  | ---------- | -
| | Operating Activities                         |  |            |   |  |            |   |  |            |  
| |                                              |  |            |   |  |            |   |  |            |  
| | Cash inflows                                 |  |            |   |  |            |   |  |            |  
| | Oil and gas proceeds                         |  | 1,795,714  |   |  | 279,210    |   |  | 1,430,748  |  
| | Interest received                            |  | 480,155    |   |  | 326,012    |   |  | 57,624     |  
| | Joint venture recoveries                     |  | 1,093,417  |   |  | 930,673    |   |  | 477,439    |  
| |                                              |  |            |   |  |            |   |  |            |  
| | Cash outflows                                |  |            |   |  |            |   |  |            |  
| | Payments to suppliers and
      employees    |  | (4,313,589 | ) |  | (1,626,430 | ) |  | (4,538,280 | )
| | Net GST payments                             |  | 11,691     |   |  | 25,470     |   |  | (73,646    | )
| |                                              |  |            |   |  |            |   |  |            |  
| | Net cash (outflows) for operating activities |  | (932,612   | ) |  | (65,065    | ) |  | (2,646,115 | )

- 78 -

---

c) 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, 2005 in significant
unincorporated joint ventures established to explore, develop and produce
petroleum as follows:

2005
    2004%
    %New ZealandPMP 38153
    45.00
    45.00PEP 38256  Exploration
    46.16
    46.16PEP 38258  Exploration
    75.00
    75.00PEP 38330  Exploration 1
    0.00
    44.23PEP 38480  Exploration 4
    0.00
    75.00PEP 38492  Exploration
    100.00
    100.00PEP 38716  Exploration 2
    0.00
    42.40PEP 38718  Exploration 3
    0.00
    12.50PEP 38736  Exploration
    45.00
    45.00PEP 38738  01  Exploration
    36.50
    36.50PEP 38738  02  Exploration
    25.10
    25.10PEP 38741  Exploration
    30.00
    30.00PEP 38746  Exploration 5
    66.67
    50.00PEP 38748  Exploration 5
    33.33
    25.00PEP 38753  Exploration
    60.00
    60.00PEP 38765  Exploration 6
    36.67
    27.50PEP 38766  Exploration 5
    33.33
    25.00PEP 38768  Exploration 7
    0.00
    50.00AustraliaAC/P 19 8
    0.00
    100.00Papua New GuineaPPL 228 9
    0.00
    10.00PPL 235  Exploration
    35.00
    100.00PRL 4  Retention 10
    13.41
    7.50PRL 5  Retention
    7.50
    7.50
      
      The financial statements of all joint ventures
        areun-audited.


|(1)  | Surrendered by all joint venture parties July
  2005.                                                                                                                                                                                                                                                                                        
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2)  | Permit expired at end of term January 2006.                                                                                                                                                                                                                                                                                                  
|(3)  | Withdrew from the permit effective November
  2005.                                                                                                                                                                                                                                                                                          
|(4)  | Surrendered by all joint venture parties October
    2005.                                                                                                                                                                                                                                                                                   
|(5)  | Due to withdrawals by other parties, the Company
      increased its percentage interest effective August 2005, subject to final
      governmental approvals.                                                                                                                                                                               
|(6)  | Due to withdrawals by other parties, the Company
      increased its percentage interest effective September 2005, subject to
      final governmental approvals.                                                                                                                                                                            
|(7)  | Surrendered by all joint venture parties February
      2005.                                                                                                                                                                                                                                                                                
|(8)  | Surrendered January 2005.                                                                                                                                                                                                                                                                                                                    
|(9)  | The PPL 228 joint venture did not accept the top file
      permit offered over the similar area and the joint venture has
      relinquished its interest in this permit area.                                                                                                                                                              
|(10) | Due to an assignment of interest by one party, and
      pre-emption of that offer by other joint venture parties, including the
      Company, the Companys interest in this license increased effective August
      2005. At balance date, the transfer remains subject to finalization of
      documentation and governmental approval.

The contribution made by joint ventures to the consolidated
results was to increase revenues by $1,799,454 (2004: $212,458) and expenses by
$1,288,345 (2004: $168,133). The consolidated proportion of joint venture assets
and liabilities do not represent a material portion of the companys asset and
liabilities. The total value of consolidated joint venture assets is $1,198,449
and liabilities $866,149.

- 79 -

---

d) 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:

|Parent Company Accounts - Statement of Financial
      Position |  |             |   |  |             |  
|--------------------------------------------------------------- |  | ----------- | - |  | ----------- | -
|(Expressed in
      United States Dollars)                      |  |             |   |  |             |  
|As at December 31                                               |  | 2005        |   |  | 2004        |  
|                                                                |  | $           |   |  | $           |  
|                                                                |  | Restated(1) |   |  |             |  
|                                                                |  |             |   |  |             |  
|                                                                |  |             |   |  |             |  
|Assets                                                          |  |             |   |  |             |  
|Current                                                         |  |             |   |  |             |  
|Cash and cash equivalents                                       |  | 196,316     |   |  | 308,664     |  
|Accounts receivable                                             |  | 2,584       |   |  | 705         |  
|Prepaid expenses and deposits                                   |  | -           |   |  | 6,554       |  
|                                                                |  | 198,900     |   |  | 315,923     |  
|                                                                |  |             |   |  |             |  
|Investment in/Advance to subsidiaries                           |  | 24,672,131  |   |  | 15,805,012  |  
|Total Assets                                                    |  | 24,871,031  |   |  | 16,120,935  |  
|                                                                |  |             |   |  |             |  
|Liabilities                                                     |  |             |   |  |             |  
|Accounts payable and accrued liabilities                        |  | 198,446     |   |  | 120,747     |  
|Total Liabilities                                               |  | 198,446     |   |  | 120,747     |  
|                                                                |  |             |   |  |             |  
|Stockholders Equity                                            |  |             |   |  |             |  
|Common stock without par value (Note 11);                       |  |             |   |  |             |  
|unlimited number of shares
      authorized;                    |  |             |   |  |             |  
|Issued and outstanding 22,666,453 shares                        |  | 43,499,296  |   |  | 32,683,328  |  
|Contributed surplus (Note 21)                                   |  | 1,023,967   |   |  | 361,854     |  
|Accumulated deficit (Note 21)                                   |  | (19,850,678 | ) |  | (17,044,994 | )
|Total Stockholders Equity                                      |  | 24,672,585  |   |  | 16,000,188  |  
|Total Liabilities and Stockholders Equity                      |  | 24,871,031  |   |  | 16,120,935  |  
|(1) As restated refer Note 21                                   |  |             |   |  |             |  

|Parent Company Accounts -
      Statement of Financial Performance |  |             |   | 
|------------------------------------------------------------------ |  | ----------- | - | 
|(Expressed in United States Dollars)                               |  |             |   | 
|For the years ended December 31                                    |  | 2005        |   | 
|                                                                   |  | $           |   | 
|                                                                   |  | Restated(1) |   | 
|Expenses                                                           |  |             |   | 
|General and administrative                                         |  | 1,042,445   |   | 
|Foreign exchange movement                                          |  | 274,302     |   | 
|Adjustment to investment in subsidiaries                           |  | 821,339     |   | 
|Stock option compensation                                          |  |             |   | 
|expense/(recovery) (Note 21)                                       |  | 673,711     |   | 
|Total Expenses                                                     |  | 2,811,797   |   | 
|Other Income                                                       |  |             |   | 
|Interest income                                                    |  | 6,113       |   | 
|Net loss for the year                                              |  | (2,805,684  | ) | 
|Deficit, beginning of year                                         |  | (17,044,994 | ) | 
|Deficit, end of year                                               |  | (19,850,678 | ) | 
|Basic (loss) per share                                             |  | (0.14       | ) | 
|Diluted (loss) per share                                           |  | (0.14       | ) | 
|(1) As restated refer Note 21                                      |  |             |   | 

- 80 -

---

|Parent Company Accounts - Statement of Cash Flows |  |            |   |  |            |  
|------------------------------------------------- |  | ---------- | - |  | ---------- | -
|(Expressed in
      United States Dollars)        |  |            |   |  |            |  
|For the years ended December 31                   |  | 2005       |   |  | 2004       |  
|                                                  |  | $          |   |  | $          |  
|Net Cash from/(used in) Operating                 |  |            |   |  |            |  
|Activities                                        |  |            |   |  |            |  
|Cash provided from/(used in):                     |  |            |   |  |            |  
|Interest income received                          |  | 6,113      |   |  | 18,303     |  
|Receipts from customers                           |  | -          |   |  | 8,665      |  
|                                                  |  |            |   |  |            |  
|Net Cash from/(used in) Investing                 |  |            |   |  |            |  
|Activities                                        |  |            |   |  |            |  
|Cash provided from/(used in):                     |  |            |   |  |            |  
|Payment to suppliers                              |  | (1,245,971 | ) |  | (1,749,563 | )
|Advances to subsidiaries                          |  | (9,688,458 | ) |  | (9,719,470 | )
|                                                  |  |            |   |  |            |  
|Net Cash from/(used in) Financing                 |  |            |   |  |            |  
|Activities                                        |  |            |   |  |            |  
|Proceeds from issue of shares                     |  | 10,815,968 |   |  | 11,125,433 |  
|Proceeds from
      issue of convertible notes    |  | -          |   |  | 500,000    |  
|Total movement in cash balances                   |  | (112,348   | ) |  | 183,368    |  
|Cash balances at
      beginning of year          |  | 308,664    |   |  | 125,296    |  
|Cash balances                                     |  | 196,316    |   |  | 308,664    |  

Under the New Zealand Financial Reporting Standards, the
Company is required to disclose the audit fee of $259,972 for 2005
(2004:$141,139).

NOTE 21  RESTATEMENT OF FINANCIAL STATEMENTS

In the course of preparing the Canadian to United States
General Accepted Accounting Principles reconciliation the Company became aware
that at 31 December 2005 it had not correctly accounted for the stock
compensation expense included within the Consolidated Statements of Operations
and Deficit and the Consolidated Statements of Changes in Stockholders Equity.
It has been determined that the stock options cancelled and replaced with a
single grant in February 2006, as disclosed in Note 11(b), is an adjustable
subsequent event. Accordingly, the December 2005 financial statements have been
restated to account for this. The restatement resulted in an increase in stock
compensation expense of $397,125 and increases the reported loss for the year to
$2,805,684.

- 81 -

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NOTE 22 - 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.

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

|                                                                    | Year        | Year        | Year       
|------------------------------------------------------------------- | ----------- | ----------- | -----------
|                                                                    | Ended       | Ended       | Ended      
|                                                                    | December 31 | December 31 | December 31
|                                                                    | 2005        | 2004        | 2003       
|Net (loss)/profit
      for the year under Canadian GAAP (Restated) | (2,805,684) | (5,718,533) | 47,616     
|                                                                    |             |             |            
|Add back Canadian
      GAAP compensation cost (d)                  | 673,711     | (11,450)    | 143,312    
|Stock option
      compensation cost (d)                            |             |             |            
|Employees                                                           | (3,599)     | (4,919)     | (174,316)  
|Contractors                                                         | (604,337)   | 1,141       | (21,681)   
|Common stock and
      warrant issuance expense (d)                 | -           | -           | -          
|Compensation expense
      of new Series A warrants (d)             | -           | -           | (260,303)  
|Interest expense on
      the redemption value of                   |             |             |            
|special class shares (b)                                            | -           | -           | (5,732)    
|Interest on prepaid
      gas agreement (e)                         | -           | -           | (47,291)   
|Beneficial
      conversion features (a)                            | -           | (225,503)   | -          
|NZ tradable warrants
      unrealised expense (c)                   | -           | (804,935)   | -          
|NZ tradable warrants
      realised expense (c)                     | 99,325      | (2,670,591) | -          
|Net loss for the
      year under US GAAP                           | (2,640,585) | (9,434,790) | (318,395)  
|Weighted average
      number of shares under US GAAP               |             |             |            
|Basic                                                               | 19,489,336  | 13,627,617  | 7,739,324  
|Diluted                                                             | 19,489,336  | 13,627,617  | 7,739,324  
|Loss per share under
      US GAAP                                  |             |             |            
|Basic                                                               | ($0.14)     | ($0.69)     | ($0.04)    
|Diluted                                                             | ($0.14)     | ($0.69)     | ($0.04)    

Accumulated deficit under Canadian GAAP and U.S. GAAP

|                                       | As at            |   | As at            |              | As at            |            
|-------------------------------------- | ---------------- | - | ---------------- | ------------ | ---------------- | -----------
|                                       | December 31 2005 |   | December 31 2004 |              | December 31 2003 |            
|                                       | Canadian         |   |                  | US           |                  | Canadian   
|                                       | GAAP             |   |                  | GAAP         |                  | GAAP       
|                                       | (Restated)       |   |                  |              |                  |            
|Accumulated deficit, beginning of year | (17,044,994      | ) |                  | (23,676,674) |                  | (11,326,461
|Net deficit                            | (2,805,684       | ) |                  | (2,640,585)  |                  | (5,718,533 
|                                       |                  |   |                  |              |                  |            
|Accumulated deficit, end of year       | (19,850,678      | ) |                  | (26,317,259) |                  | (17,044,994

- 82 -

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Equity reconciliation from Canadian GAAP to U.S. GAAP

|                                                       |  | As at            |  |  | As at            |  |  | As at            | 
|------------------------------------------------------ |  | ---------------- |  |  | ---------------- |  |  | ---------------- | 
|                                                       |  | December 31 2005 |  |  | December 31 2004 |  |  | December 31 2003 | 
|Total Equity
      under Canadian GAAP                 |  | 24,672,585       |  |  | 16,000,188       |  |  | 9,569,296        | 
|Fair Value of
      unsettled derivative exercised (c) |  | -                |  |  | (960,620)        |  |  | -                | 
|Imputed interest on
      Special Class Shares (b)     |  | -                |  |  | -                |  |  | (5,732)          | 
|Interest on prepaid
      gas revenue                  |  | (47,291)         |  |  | (47,291)         |  |  | (47,291)         | 
|Total Equity under US GAAP                             |  | 24,625,294       |  |  | 14,992,277       |  |  | 9,516,273        | 

Balance sheet under Canadian GAAP and U.S. GAAP

|                                            | As at            |              | As at            |              | As at           
|------------------------------------------- | ---------------- | ------------ | ---------------- | ------------ | ----------------
|                                            | December 31 2005 |              | December 31 2004 |              | December 31 2003
|                                            | Canadian         | US           |                  | Canadian     | US              
|                                            | GAAP             | GAAP         |                  | GAAP         | GAAP            
|                                            | (Restated)       |              |                  |              |                 
|Assets                                      |                  |              |                  |              |                 
|Current                                     |                  |              |                  |              |                 
|Cash and cash equivalents                   | 15,339,906       | 15,339,906   |                  | 11,187,924   | 11,187,924      
|Accounts receivable                         | 746,165          | 746,165      |                  | 480,499      | 480,499         
|Inventory                                   | 474,777          | 474,777      |                  | 98,518       | 98,518          
|Prepaid expenses and deposits               | 217,910          | 217,910      |                  | 467,097      | 467,097         
|                                            | 16,778,758       | 16,778,758   |                  | 12,234,038   | 12,234,038      
|Deferred offering costs                     | -                | -            |                  | -            | -               
|Investments                                 | 83,612           | 83,612       |                  | -            | -               
|Property and equipment                      | 11,344,692       | 11,344,692   |                  | 5,649,110    | 5,649,110       
|Total Assets                                | 28,207,062       | 28,207,062   |                  | 17,883,148   | 17,883,148      
|Liabilities                                 |                  |              |                  |              |                 
|Current                                     |                  |              |                  |              |                 
|                                            |                  |              |                  |              |                 
|Accounts payable                            | 22,992           | 22,992       |                  | 22,969       | 22,969          
|Accrued liabilities                         | 1,918,614        | 1,965,905    |                  | 378,631      | 425,922         
|Prepaid gas revenue (e)                     | -                | -            |                  | -            | -               
|                                            | 1,941,606        | 1,988,897    |                  | 401,600      | 448,891         
|Prepaid gas revenue (e)                     | 1,255,796        | 1,255,796    |                  | 1,324,785    | 1,324,785       
|Asset retirement obligations                | 337,075          | 337,075      |                  | 156,575      | 156,575         
|Special class shares of subsidiary (b)      | -                | -            |                  | -            | -               
|Warrants liability (c)                      | -                | -            |                  | -            | 960,620         
|Total Liabilities                           | 3,534,477        | 3,581,768    |                  | 1,882,960    | 2,890,871       
|Stockholders' Equity                        |                  |              |                  |              |                 
|Paid in capital (a), (c), (d), (e)          | 44,523,263       | 50,942,553   |                  | 33,045,182   | 38,668,951      
|Accumulated deficit (a), (b), (c), (d), (e) | (19,850,678)     | (26,317,259) |                  | (17,044,994) | (23,676,674)    
|Total Stockholders' Equity                  | 24,672,585       | 24,625,294   |                  | 16,000,188   | 14,992,277      
|Total Liabilities and Stockholders' Equity  | 28,207,062       | 28,207,062   |                  | 17,883,148   | 17,883,148      

|(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                                                                                                                                                                                                                                                                                                                                                                                                                                         

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|    | 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) | Special Class Shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Under US GAAP, the carrying value of Special Class shares
      should reflect the expected redemption value of the shares at the end of
      the period. Consequently, for the period ended December 31, 2003, an
      accretion expense of $5,732 was recognised to reflect an increase in the
      carrying value of the special class shares to their expected redemption
      value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | On November 12, 2003 the Special Class shareholders
      signed a conditional share exchange agreement. On January 5, 2004 the
      conditions of the exchange agreement were met, resulting in the issuance
      of one unit for every 1.35 Special Class shares. Each unit consisted of
      one common share and one half-warrant in the Company. The 555,569 warrants
      were exercisable at a price of NZ$1.85 any time before January 5, 2004.
      Upon issuance of the units by the Company the fair value of the warrants
      were classified as a liability in accordance with SFAS 133 (see note
      19(c)) with the residual of the Special Class share carrying value
      allocated to Paid in Capital.                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(c) | Derivative Contracts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | During the year ended December 31, 2004 the Company
      issued two series of share purchase warrants with exercise prices stated
      in New Zealand dollars. These warrants require physical settlement in
      common shares of the Company. The Companys functional currency is United
      States dollars. Typically, contracts indexed to a companys own stock do
      not meet the definition of a derivative. However, guidance provided by the
      Derivatives Implementation Group in Issue C8 states the difference between
      the currency of the stated exercise price and the functional currency
      gives rise to an embedded derivative. Furthermore, SFAS 133, Accounting
      for Derivative Instruments and Hedging Activity,provides that when an
      embedded derivative cannot be separated from its host contract, that
      contract must be treated as a 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 settlement 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(d) | Stock Based Compensation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | In 2002 the Company prospectively adopted CICA Handbook
      section 3870, Stock Based Compensation. This standard requires the
      Company to record a compensation expense over the vesting period of the
      options based on the fair value of the options at grant date. Upon
      exercise of the options, the value of expense previously recognised is
      reallocated from contributed surplus to share capital. Under Canadian GAAP
      a stock option compensation expense of $673,711 was recognised for the
      period ended December 31, 2005 (2004: $11,450 recovery; 2003: $143,312
      expense).                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | For US GAAP, the Company has applied Accounting
      Principles Board Opinion No. 25, Accounting for Stock Issued to
      Employees, to all stock options granted to employees. Under APB 25,
      the intrinsic value model is followed and compensation cost is recognised
      if the market price of the Companys common shares exceeds the exercise
      price on the date of the grant. During 2001 the Company re-priced all
      outstanding options. The re-priced options are accounted for under
      variable accounting and compensation cost is recognised for the difference
      between the exercise price and the market price of the common shares until
      such time as the options are exercised, expired or
  forfeited.                                                                                                                                                                                                                                                                                                                    

- 84 -

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For stock options issued to
non-employees the Company has adopted SFAS 123, Share based payments, for
US GAAP purposes. CICA section 3870 is consistent with the recommendations of
SFAS 123. The compensation expense for non-employees was calculated using the
Black-Scholes pricing model with the following ranges of assumptions:

| | Expected dividend yield   | 0.00%         
| | ------------------------- | --------------
| | Expected price volatility | 30.40  73.60%
| | Risk-free interest rate   | 3.74% - 3.75% 
| | Expected life of option   | 2 - 3 years   

In 2003 an amendment to the terms of
Series A warrants was considered a grant of new warrants under SFAS 123. (refer
to Note 9(d) of the Companys 2004 Financial Statements). Consequently,
compensation expense of $260,303 was recognised to reflect the amended terms of
the warrants. The compensation expense was calculated using the Black-Scholes
pricing model with the following assumptions:

| | Expected dividend yield   | 0.00%     
| | ------------------------- | ----------
| | Expected price volatility | 55.76%    
| | Risk-free interest rate   | 1.28%     
| | Expected life of option   | 1.04 years

- 85 -

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Index to Exhibits



Exhibit Reference
      Exhibit Description
      Reference1.1
      Articles of Continuance of
          the Company
      (1)1.2
      Certificate of Amendment of
          the Company (Dec 03)
      (2)1.3
      2005 Bylaws of the Company
          (Jun 05)
      (3)2.1
      AMEX listing agreement (Apr
          05)
      (3)4.1
      Form of Stock Option Agreement
          for all vesting options granted to named directors and officers (Oct
          02)
      (4)4.2
      Gas Pre-purchase and Option
          Agreement between the Company and NGC New Zealand Limited (Apr 03)
      (3)4.3
      2004 Share Option Plan (Jun
          04)
      (5)4.4
      Report of Reserves Form 51-101F1
          (Dec 05)
      (6)4.5
      Form
          of Unit Subscription Agreement between the Company and investors to
          the Company (Oct 05)
      Filed4.6.1
      Settlement
          Agreement between DJ Bennett and the Company (Dec 05)
      Filed (8)4.6.2
      Variation
          of Settlement Agreement between DJ Bennett and the Company (Feb 06)
      Filed (8)4.7
      10%
          Rolling Stock Option Plan adopted May 2, 2006
      Filed8
      List
          of Subsidiaries of the Company
      Filed11
      Code of Ethics
      (7)12.1
      Section
          302 Certification of CEO
      Filed12.2
      Section
          302 Certification of CFO
      Filed13.1
      Section
          906 Certification of CEO
      Filed13.2
      Section
          906 Certification of CFO
      Filed


|(1) | Incorporated by reference as previously included in Form
      10-12G filed April 8, 1998                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                          
|(2) | Incorporated by reference as previously included in a
      Form 6-K filed December 31, 2003                                                                                                                                             
|    |                                                                                                                                                                                                                                          
|(3) | Incorporated by reference as previously included in our
      Form 20-F filed for the year ended December 31, 2004                                                                                                                       
|    |                                                                                                                                                                                                                                          
|(4) | Incorporated by reference as previously included in our
      Form 20-F filed for the year ended December 31, 2002                                                                                                                       
|    |                                                                                                                                                                                                                                          
|(5) | Incorporated by reference as previously included in our
      Form 20-F filed for the year ended December 31, 2003                                                                                                                       
|    |                                                                                                                                                                                                                                          
|(6) | Incorporated by reference as previously included in a
      Form 6-K filed April 10, 2006                                                                                                                                                
|    |                                                                                                                                                                                                                                          
|(7) | Available on the Companys website at
      www.austral-pacific.com                                                                                                                                                                      
|    |                                                                                                                                                                                                                                          
|(8) | This Settlement Agreement and its Variation supersede the
      Stock Option Agreement with Dave Bennett for performance vesting options,
      as previously included in our Form 20-F filed for the year ended December
      31, 2002.

- 86 -

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