Upstream Development

The potential to transport oil to the Refinery by truck or barge could avoid the requirement to build or connect to export facilities, and significantly reduce development costs. This could increase the profitability of some fields and make marginal fields economic to develop. InterOil Group has established a position in the relevant areas (PPLs 236, 237, 238 formerly 230) in order to capture a major portion of these benefits.

The exploration risk is managed with a multiple target portfolio containing proven reserves, a spread of licences and some high potential areas. The production strategy is a sequential low risk development and acquisition action plan, the timing of which will be decided by funding priorities, available opportunities and cash flow. The priorities are as follows:

• minimise entry costs;
• ensure expenditure adds value;
• establish production cash flow to fund activities; and
• operatorship of key permits to ensure control and development.

Development Logic

InterOil believes that the cost to drill in PPLs 237 and 238 will be substantially less than in the PNG highlands and that transport by road or barge to Port Moresby is practical. The result is that smaller fields, which would not be economic in other circumstances, can be developed and could provide feed for the Refinery at a profitable level. Provided the total cost of production is less than the cost of Kutubu crude (including transport to the Refinery) each well will add to the Company's profitability. For example, it is estimated that PRL 4 and PRL 5 contains liquids, which are not currently economic to produce. The establishment of the Refinery may make it economic to produce crude and barge down the Fly River and thence to Port Moresby.

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