Exploration and Production

InterOil has four exploration licenses or Petroleum Prospecting Licenses (PPL) in Papua New Guinea which cover a total area of approximately 4 million acres operated and 4.6 million total. The Oil and Gas Legislation in Papua New Guinea permits a licensee (InterOil) to apply for a second exploration term covering a five year period, but is required to relinquish 50% of the acreage granted under the primary term. Subsequent to year end, on March 5, 2009, all three licenses have been re-issued for a second five year term covering the most prospective 50% of the licenses, as per our application. With the Elk/Antelope discoveries lying primarily on PPL 238, our expenditures on that license have exceeded the license commitment under the primary term by 9 fold. However, on each of the other two licenses, PPL 236 and 237, we were granted a deferral of the commitment well into the second term. As a result of the relinquishments the reduced Operated Exploration Licenses covers 4,015,817 acres, including the 105,445 acres in the Elk/Antelope Petroleum Development License.
 
The three onshore PPL's (PPL 236, 237 and 238) lie adjacent to the coast in the Eastern Papuan Basin northwest of Port Moresby. InterOil operates and has a 100% working interest in these three licenses which represent our core exploration focus.
 

Petroleum License Details
Net Working Interests on PPL236, PPL237 & PPL238
(the Operated Exploration Licenses)

The operated exploration licenses are located onshore in the eastern Papuan Basin, northwest of Port Moresby and are 100% owned by InterOil, subject to investor elections to earn a working interest in any discoveries under our various indirect participation interest agreements. The State also has the right to acquire a 22.5% interest in any PDL, by contributing its share of exploration and development costs. The table below sets forth the potential dilution of existing working interests in a discovery in the event that the State exercises its right to acquire its allocated interest in a discovery

Our current exploration efforts are focused on the Operated Exploration Licenses, with the vast majority of our exploration expenditure relating to PPLs 238 and 237, where the Elk/Antelope field is located.

On October 30, 2008, Petromin, a government entity mandated to invest in resource projects on behalf of the State, entered into an agreement to take a 20.5% direct interest in the Elk/Antelope field. If certain conditions in the agreement are met, Petromin has agreed to fund 20.5% of the costs of developing the Elk/Antelope field. The State.s right to invest arises upon issuance of the PDL, which has not yet occurred. The agreement contains certain provisions applicable in the event that the PDL is not issued within a certain timeframe, or if the State does not designate Petromin to hold its interest at that time. In the event the PDL is not granted for the Elk/Antelope field, Petromin will be issued InterOil common shares. We expect the PDL to be granted in due course and that no shares will be issued to Petromin.

Petroleum Prospecting License 236 (Onshore)

We have a 100% working interest in PPL 236, subject to elections made by holders of indirect participation interests described below. We are the operator of the license. During 2006, we conducted an extensive review of available data in this license in preparation for submission of a work program to further our exploration of the license in 2007. This license covers an area that includes our refinery and it has limited road access. We believe that the proximity of this license area to Port Moresby would reduce the costs of developing any future oil or gas discoveries. We conducted a ground geological survey over this license area in the fourth quarter of 2008.

Petroleum Prospecting License 237 (Onshore)

We have a 100% working interest in PPL 237, subject to elections made by holders of indirect participation interests described below. We are the operator of the license. In 2006, we carried out an airborne gravity/magnetic survey consisting of 2,471 miles over the western and southern parts of this license. In 2007, 28 miles (44 kilometres) of the 144 mile (230 kilometres) Elk appraisal 2D seismic program were acquired over PPL 237. Our current geological interpretation indicates that a portion of the Elk/Antelope field lies on PPL 237, and the Antelope-2 well location, currently under construction is located in this license area. This well would satisfy our obligation to drill a well on PPL 237 in the first year of the second term of the PPL 237 license.

Petroleum Prospecting License 238 (Onshore)

We have a 100% working interest in PPL 238, subject to elections made by holders of indirect participation interests described below. We are the operator of the license. We have drilled a total of seven wells on this license of which Elk 1, Elk 4A and Antelope-1 have been gas/condensate discovery wells. On March 2, 2009 a short term surface flow test of Antelope-1 was conducted resulting in an estimated 382 mmscfpd of gas and associated condensate of approximately 5,000 bblpd. This well encountered a dolomitized reef and penetrated approximately 2,000 feet of reservoir with matrix porosity averaging around 8%. On November 28, 2008, we applied for a Declaration of Location over our discovery block and an additional 8 blocks in the license that comprised the Elk/Antelope field and a development corridor. The declaration of location is a necessary precondition to the application for a PRL or a PDL and was granted in March 2009.

Petroleum Prospecting License 244 (Offshore)

We have a 15% working interest in PPL 244. Talisman Oil Limited is the operator of this license. This license was granted on February 25, 2005 for a six year term ending February 25, 2011. This license is located offshore in the Gulf of Papua and the operator is applying for State approval for a deferral of the 2009 well commitment.