ANNUAL REPORT 2013

CONTENT

CHAIRMAN’S REMARKS

Chairman’s remarks......................................................................................................... 3

In the beginning of 2013, Interoil Exploration and Production ASA was heading towards

CEO’s statement to the shareholders.............................................................................. 4

bankruptcy. The company needed to cut costs, attract new capital, increase production

Company introduction .................................................................................................... 6

and improve the cash flows. This was accomplished during the year. After several years

Norway............................................................................................................................. 7

of production decline, heavy losses and financial distress, we managed to reverse the

Peru.................................................................................................................................. 8

production trend and reported a net profit of USD 19 million for the year.

Colombia........................................................................................................................ 10 Board of Directors´ report ............................................................................................ 12 Responsibility Statement............................................................................................... 18 Board of Directors and management............................................................................ 20 Interoil Exploration and Production group consolidated financial statements............. 22 Consolidated statement of comprehensive income................................................. 23 Consolidated statement of financial position........................................................... 24 Consolidated statement of changes in equity.......................................................... 25 Consolidated cash flow statement............................................................................ 26 Notes ........................................................................................................................ 27 Interoil Exploration and Production ASA financial statements..................................... 70 Statement of comprehensive income....................................................................... 71 Statement of financial position................................................................................. 72 Statement of changes in equity................................................................................ 73 Cash flow statement.................................................................................................. 74 Notes......................................................................................................................... 75 Auditor´s report for 2013............................................................................................... 88

In March 2013, the company raised USD 35 million through a private placement and embarked on a 12-well drilling program in Colombia. The campaign resulted in a 66% increase in oil production. The cash flow generation in Colombia became sufficient to fund the operations going forward. Our new and very experienced management team in Colombia has developed a revised development plan for the fields for 2014. The estimated results are 40% production increase based on 2013 production figures, and more than 5 million barrels in gross reserves. Further increase of reserves are expected

Anne Grete Ellingsen Chairman

through the start of an enhanced oil recovery program in late 2014. The early results of the 3D seismic on LLA-47 looks very promising and the planning of the drilling program is in progress. Interoil Peru experienced a set-back in April 2014, when an ICC Arbitral Tribunal ruled that the Interoil Peru licenses would not be extended due to force majeure incidents. Despite this setback we remain committed to our operations in Peru. We were awarded a 12-month license contract and will be operating the blocks until April 2015. This will secure the cash flows to the Group.

Sustainability report 2013.............................................................................................. 90 Corporate governance................................................................................................. 106

We have therefore initiated a process to clarify the framework for the bidding process

Share information........................................................................................................ 113

to positioning Interoil Peru towards stakeholders and to gain recognition for the fact that

Contact......................................................................................................................... 115

Interoil is a competent operator capable of developing Blocks III and IV further to the benefit of Peru, our employees and the shareholders. On behalf of the Board, I want to thank our employees, who have shown dedication and great spirit through a very challenging period for the company. Interoil is today in a much better position than it was a year ago and there is a strong potential to increase the production both in Colombia and Peru going forward. Best regards

Anne Grete Ellingsen Chairman

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CEO’S STATEMENT TO THE SHAREHOLDERS

Key Figures (in million USD)

Today I am happy to report that production has stabilized, cash flows are significantly stronger, the company has no overdue debt and the company has adopted a new strategy that will further strengthen Interoil through increased production, reserves and improved corporate governance.

In Colombia, we intend to reduce the operational and financial risk by executing a revised field development plan for Puli-C. This revised field development plan has been made possible through the successful completion of the 12-well drilling program and the appointment of a new management team in Colombia. The successful execution of this strategy will significantly increase production and reserves. Further, the early results of the 3D seismic on LLA-47 have confirmed that the initial leads identified from the 2D seismic are in place. This will significantly increase our ability to farm out a portion of LLA-47 on attractive terms and represents a substantial value trigger for Interoil.

2012

4 251 5.7

4 799 5.2

Net revenues EBITDAx** EBIT Net income/(loss)

97 57 46 19

118 69 (17) (24)

Cash flow from operating activities Capex

11 18

39 11

Net interest-bearing debt***

49

64

82 245

53 285

Average production per day (boed)* Proven reserves (P2) (mmboe)

When the current management team was appointed a little over a year ago the company was on the verge of bankruptcy. Production was declining rapidly, cash flows were negative, the company had overdue debts of 17 MUSD and an unclear strategy and corporate governance policy.

Despite our achievements, Interoil needs to further reduce its operational and financial risk. Reduced financial risk and cost of capital is closely linked to the company’s operational risk.

2013

Thomas J. Fjell Chief Executive Officer

Market capitalization at year-end Number of employees at year-end *

Average daily working interest production before royalty

** EBITDA adjusted for exploration expenses *** 2012 figures exclude overdue supplier and Proseis debt and oil hedge liabilities

In Peru the surprising and disappointing loss of the arbitration case against Perupetro was a significant setback in our strategy to reduce our operational risk. The 12-month license that we were able to achieve did, however, alleviate this. To some extent, Interoil Peru is therefore in the same situation as it was last year. The option of a 10-year license extension with 50% royalty through the successful outcome of an arbitration case has been replaced by the potential for a 30-year license extension at a lower royalty rate through the successful outcome of a bidding round. We have therefore initiated a process of positioning Interoil Peru towards stakeholders in order to demonstrate and gain recognition for the fact that Interoil is the operator that can develop Blocks III and IV in an optimal way to the benefit of both Peru and Interoil. Our new corporate strategy and our approach to sustainability are interlinked. Interoil’s success in Peru and Colombia will depend on our ability to improve our HSEQ and CSR performance and these components have therefore been included as explicit strategic targets. Our sustainability reporting is therefore attached in our annual report. Best regards

Thomas J. Fjell Chief Executive Officer

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COMPANY INTRODUCTION Interoil Exploration and Production ASA is an international, independent petroleum company and is engaged in the development and operation of oil and natural gas properties. The company is an operator and license partner in exploration and production licenses in Colombia and Peru, with an average net production of 4’251 boepd in 2013. Interoil drilled 12 development wells in Colombia during the year, thereby reversing a production trend that had been negative for several years. Through operational improvements and the drilling of a few strategic wells, Interoil expects to increase production further in Colombia in 2014.

contract that expires on 5 April 2015. It is expected that a bid round for a 30 year license contract for the same blocks will be completed before the expiry of the current contract. Interoil Peru will participate in the bid round. The new operator will be selected based on proposed investment program and royalty rate. Interoil has drilled more than 150 wells since 2006, with a 95% drilling success rate and more than doubled the production since 2006.

Interoil Peru is operating Blocks III and IV through a 12 month

Interoil employs 245 professionals in Peru and Colombia. The headquarter is in Oslo, Norway. The company’s shares are registered on the Oslo Stock Exchange and are traded under the ticker-code “IOX”.

Highlights 2013 and early 2014

Key Facts as of 31.12.2013

• USD 35 million raised in new equity, bond loan maturity extended until 2016

• • • • • • •

• Overhead cost reduction program completed • 12 wells drilled in Colombia, significantly increasing production • Interoil Peru awarded 12 month license contract for blocks III and IV • New management team in Colombia

Listed on the Oslo Stock Exchange, ticker: IOX Market capitalization USD 81.9 million Total shares 251.9 million EBITDAx USD 57 million, net income USD 19 million Capital Investments USD 22 million Net debt USD 49 million 245 professionals worldwide

Number of employees: 4

CORPORATE STRUCTURE: INTEROIL EXPLORATION AND PRODUCTION ASA Norway

Interoil Exploration and Production ASA, based in Oslo, Norway, is the holding company and headquarters of the Group. The company acts as an active owner of its assets in Peru and Colombia and is heavily involved in the operations throughout the Group.

the abandonment of the African operations, through the liquidation of the Norwegian holding companies owning these assets. In addition, all related party consultancy agreements were terminated. As a consequence, annual savings of around USD 10 million has been achieved. In addition to Interoil Exploration and Production ASA, there are two limited liability Norwegian subsidiaries, UP Colombia Holding AS and Interoil Exploration and Production Latin America AS, that own Interoil Colombia Exploration and Production Inc and Interoil Peru SA, respectively. These companies hold no other assets than the shares of the operating companies in Colombia and Peru.

UP Colombia Holding AS

Interoil E&P Latin America AS Norway

Interoil Exploration and Production ASA strives to create value for its shareholders and simultaneously contribute to the future of its host countries, through successful development and production of oil and gas resources.

Interoil Colombia E&P Inc

Interoil Peru SA

During 2013, the overhead cost reduction program led to a significant downsizing of the Oslo office, the liquidation of the Zurich office, and

Interoil Colombia E&P Inc

Northoil SA

Norway

BVI

Colombia branch office

6

NORWAY

Peru

Peru

7

PERU Interoil operates Blocks III and IV in Peru under a 12 month contract that expires in April 2015. Meanwhile, we expect a bid round for a 30 year ­license contract for the same blocks will be completed. The new operator will be selected based on proposed investment program and royalty rate. Interoil Peru will participate in this bid round. Until then, full focus is on optimizing cash flows.

official name: Republica of

Peru

population: 30,1 million

(2014 est) area:

1’285’216 km2

political: Constitutional

republic capital: Lima language: Spanish (official), Quechua (official), Aymara, and a large number of minor Amazonian languages religion: Roman Catholic currency: Nuevo sol (PEN) gdp (ppp): $344 billion (2013 est.) gdp per capita: $11,100 (2013 est.) major exports: Copper, gold, zinc, crude petroleum and petroleum products, coffee, potatoes, asparagus, textiles and fishmeal oil production: 160,400 boe/day (2012 est.) oil consumption: 206,900 bbl/day (2012 est.) oil proved 579.2 million bbl reserves: (2013 est.) sources: CIA World

Factbook

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Interoil’s licenses on Blocks III and IV originally expired in March 2013. The company was awarded a court injunction to continue operating the fields until ­October 2014 and January 2016 for Blocks IV and III respectively, due to former force majeure events. During 2013, the resulting arbitration proceedings between Interoil Peru and Perupetro were completed, and in April 2014, the ICC Arbitration Tribunal ruled in favor of Perupetro. Interoil is both surprised and disappointed with this ruling as it contradicts all legal arguments in this case. Although Interoil considered this outcome to be unlikely, as a contingency, we approached Perupetro to negotiate a 12 month contract that would apply should Interoil lose the arbitration case, in order to avoid a shutdown of operations, which would have been very negative for Peru. The short term contract is positive for ­Interoil as it enables Interoil Peru to ­continue operations, allowing for strong cash flow generation until 5 April 2015. In addition, Interoil Peru will seek to win the upcoming bid round for the same blocks, thereby securing a 30 year license, potentially on improved terms

Due to the short term nature of the ­contract, Interoil Peru will continue to limit investments while focusing on maintaining production and optimizing cash flows. Interoil Peru is ISO 9001, 14001 and OHSAS 18001 recertified.

Interoil Peru’s main office is in Lima. ­Interoil is operator and holds 100% ­working interest in Block III and IV in Peru. Both licenses are located in the Talara ­Basin, north-west in Peru, where most of the Peruvian oil is produced. The ­produced oil is sold to Petroperu and transported directly by pipelines to the Talara r­efinery. The blocks carry a royalty rate of a ­ pproximately 49% and the ­corporate tax rate is 30%. As of 31 December 2012, Interoil could not book any reserves in Peru due to the license uncertainty.

Interoil in Peru number of employees:

annual production:

129

968’637 bbl

Approx. 800

2’654 bbl

160,000 acres (663 km2)

USD 1.3 million

total number of wells: area:

average daily production: capex:

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COLOMBIA In June 2013, Interoil initiated a 12-well drilling campaign on Puli C, ­resulting in a 66% increase in oil production by the end of the year. At year-end 2013, the new wells accounted for about 40% of total ­production in Colombia. For 2014, a new development program has been initiated, targeting a further 40% production increase on 2013 and more than 5 million boe in new 2P gross reserves.

official name: Republica of

Colombia

population: 45.2 mill area:

1,138,914 km2 political: Republic; executive branch dominates government structure capital: Bogotá language: Spanish religion: Roman Catholic currency: Colombian Pesos (COP) gdp (ppp): $526.5 billion (2013 est.) gdp per capita: $11,100 (2013 est.) major exports: Petroleum, coffee, coal, nickel, emeralds, apparel, bananas and cut flowers oil production: 969,100 bbl/day (2012 est.) oil consumption: 287,000 bbl/day (2011 est.) oil proved 2.2 billion bbl reserves: (2013 est.) sources: CIA World

Factbook

Since acquiring Mercantile’s Colombian assets in late 2005, Interoil Colombia has been successful in increasing production and the resource base through enhanced recovery from existing wells, successful drilling of new production wells, extension of existing fields as well as discovery of new accumulations through exploration. Interoil operates four licenses in Colombia; Puli C, COR-6, Altair and Lla-47. The blocks COR-6 and Lla-47 are in the First Phase of Exploration under ANH contracts. The Puli C is comprised of Mana, Ambrosia and Rio Opia. The 72 km2 producing block is located in the Middle Magdalena Valley Basin. Interoil holds 70% working interest and the remainder is held by Ecopetrol. The royalty rate is 8%. The Altair block is located in the Llanos Foreland Basin, and it is producing from one single well, Altair-1. Interoil also holds a 100% working interest in the LLA-47 exploration block, acquired in the 2010 ANH open round. As per the ANH commitments, Interoil has recently completed shooting and processing of 350 square kilometers of 3D seismic. Interoil is obligated to drill eight exploration wells within early 2016. Although Interoil has great belief in this block, in order to reduce the operating risk of the company, a farm down of this block is being considered. The Cor-6 block is located in the Upper ­Magdalena Valley Basin and it was acquired in the 2010 ANH open round. Interoil is in negotiations with ANH about the technical prospects of this license. Meanwhile, no

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investments will be carried out on the Cor-6 block. Significant efforts have been made relating to HSE and CSR issues during 2013 and social responsibilities are of high priority. Interoil Colombia is ISO 9001, 14001 and OHSAS 18001 recertified.

Interoil Colombia is an active operator in the Colombia upstream oil and gas ­industry with a diversified portfolio of operated production, development and ­exploration assets. The company is a limited ­liability corporation registered on the British Virgin Islands (“BVI”) operating through the ­Colombian Branch. The company is a 100% ultimately owned subsidiary of Interoil Exploration and Production ASA. Interoil Colombia has its main office in Bogotà with operations in the Middle ­Magdalena Valley, Upper Magdalena Valley and in the Llanos basins. Interoil ­Colombia is a fully integrated company and has a management, staff and technical team covering all aspects of operating oil and gas ­exploration and production. As of 31 ­December 2013, Interoil Colombia employs 112. Interoil’s reserves in Colombia have been audited and approved by Gaffney, Cline and Associates as of 31 December 2013. Interoil’s probable reserves (P2) were 3,5 million barrels of oil and 2,2 million boe. All numbers represent Interoil’s working interest after royalties.

Interoil in Colombia number of employees:

annual production:

112

583’145 (net production before royalty)

approx. 45

1’597

209’298 acres (1’189 km2)

USD 18 million

total number of wells: area:

average daily production: capex:

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BOARD OF DIRECTORS’ REPORT In 2013, Interoil Exploration and Production ASA (“Interoil”) generated an EBITDA adjusted for exploration expenses of USD 57 million and a profit before tax of USD 39 million. Although 2013 was a strong year for Interoil, the Board was s ­ urprised and disappointed with the negative ruling from the ICC Arbitral Tribunal, regarding the licenses for Interoil Peru. We clearly believe that all legal merits of this case suggested that the Arbitral Tribunal would rule in favour of Interoil and that the licenses­for Blocks III and IV should be extended due to force majeure events, with a subsequent 10 year extension for both licenses. However, despite this set-back, we are committed to our operations in Peru. The 12 month contract entered into with Perupetro positions us to participate in the coming bid round for the same blocks. We expect that the bid round for a 30 year license contract for Blocks III and IV will be completed before the expiry of the contract on 5 April 2015, and that the new operator will be selected based on proposed investment program and royalty rate. In the meantime, we expect Interoil Peru to continue to g ­ enerate strong cash flows for the Group. In Colombia, 12 wells were drilled during 2013, increasing production substantially to a level where Interoil Colombia ­generates sufficient cash flows to support the development program for 2014. We have a new, strong management team in place, and we expect to see strong growth in both production and reserves, while delineating more of our reservoir. Additionally, we have completed the acquisition of seismic on the LLA-47 exploration license and are excited about its prospects. Compared to the start of 2013, Interoil has a substantially lower cost base and a stronger balance sheet. In 2014, the Board aims to further increase the value of Interoil Colombia while positioning Interoil Peru for continued strong cash flow generation and a successful outcome in a coming bid round for its blocks.

In 2014, we expect to increase production by 40% on 2013 and increase gross reserves by more than 5 million barrels. Longer term, we expect to increase the recovery factor of the field, through a gas re-injection project, that could materially increase the reserves and hence the value of the Puli C field. On the LLA-47 exploration license, the 3D seismic has recently been processed and we are excited about its prospects. The neighboring fields are prolific and give further support for this asset. The first wells are planned drilled in early 2015. As previously stated, we will pursue a farm-down process for this asset in order to reduce the operational and financial risk of the company. Interoil Colombia divested the Altair and the Cor-6 exploration licenses in early 2013 to Trayectoria Oil & Gas. Trayectoria is in breach of its obligations under this transaction and Interoil has initiated legal action against Trayectoria. Interoil is also in close dialogue with ANH about the technical prospects of the Cor-6 license. Meanwhile, Interoil will not carry out any investments on this block. Due to Trayectoria’s breach of contract, Interoil will continue to operate from the Altair license while evaluating strategic alternatives for this asset.

KEY ACHIEVEMENTS 2013 - April 2014 PERU

COLOMBIA

Interoil Peru’s licenses on Blocks III and IV originally expired in March 2013. However, Interoil Peru has been operating the blocks under a court injunction granted in June 2012, due to force majeure events declared in 1998 and 2001. The subsequent ICC arbitration case against the Peruvian licensing agency, Perupetro, was completed in 2013 and the final ruling was communicated in April 2014. The ICC Arbitral Tribunal ruled in favor of Perupetro, and concluded that the declared force majeure events did not constitute grounds for Interoil to have its licenses extended by the same period.

After years of production decline in Colombia, both production and cash flow generation was at a level where the company was struggling to meet its operational and financial obligations. The 12-well drilling campaign was started in June and by year-end, oil production on Puli C had increased by 66%. The program, which was highly profitable, secured a sufficient cash flow level for Interoil Colombia to support the development program in 2014.

Although we are surprised and disappointed of this ruling, we are committed to our operations in Peru. Interoil Peru has been granted a 12 month contract to operate the blocks until 5 April 2015. Meanwhile, we aim to optimize cash flows while positioning the company for a successful bid round for the same blocks. Although recent press speculation in Peru suggests otherwise, the Board is of the clear opinion that Perupetro have no legal or financial grounds to seek compensation as a result of the award. Please see note 28 for further details.

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• USD 35 million raised in new equity, bond loan maturity ­extended until March 2016 • Overhead cost reduction program, targeting USD 10 million in annual savings completed • 12 wells drilled in Colombia, significantly increasing production • Interoil Peru is awarded 12 month license contract for Blocks III and IV • New management in Colombia

INTEROIL’S BUSINESS As part of our internal evaluation of the development program in 2013, it was clear that Interoil Colombia lacked the required geological and geophysical competence in its organization. To address this, Mr. Carlos Guerrero Moreno was hired as new General Manager in late 2013 and Mr. Juan Fernando Ardila was employed as new Operations Manager. The new management team, with a long experience and strong track record, devised a new development program for 2014 that will focus on operational improvements to reduce decline rates and increase the recovery factor, and the drilling of a few strategic wells to add reserves and delineate our reservoir.

Interoil is an upstream oil exploration and production company, headquartered in Oslo, with production in Latin America. The Company is an operator of 2 production licenses in Peru and 4 production and exploration licenses in Colombia. Interoil acquired the Peruvian and Colombian operating assets in 2005 from Mercantile, while the exploration licenses were awarded in the 2010 open bid round. The production licenses in Peru and Colombia have been developed significantly since the acquisition and production has doubled since 2006.

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FINANCIAL OVERVIEW (Group) Consolidated financial statements Production fell from 4’799 barrels per day in 2012 to 4’251 ­barrels pr day in 2013. With the average oil price also falling from USD 107 per barrel in 2012 to USD 103 in 2013, revenues fell from USD 118 million in 2012 to USD 97. EBITDA adjusted for exploration expenses reached USD 57 ­million in 2013 against USD 69 million in 2012. Depreciation charges reached USD 7 million in 2013, down from USD 41 million in 2012. In addition, an impairment charge of USD 45 million was recorded in 2012. The reduction in depreciation and impairment is explained by the full write down of all assets in Peru in 2012. As a result, Interoil recorded an operating profit of USD 46 million for 2013 against an operating loss of USD 17 million in 2012. Interoil recorded net financial expenses of USD 7 million, mainly caused by interest expenses of USD 10 million, offset by ­exchange rate gains. The Group reported a net profit for the year of USD 19 million, against a net loss of USD 24 million in 2012. Total assets amounted to USD 85 million, compared to USD 65 million in 2012. The increase is mainly a result of PP&E in­creasing on the back of higher capex spending, and a higher cash balance. Cash at end of the year was USD 16 million, of which USD 5 million was restricted under our loan agreements with bondholders and Colpatria Bank in Colombia. As of end of the year 2013, Interoil had interest-bearing debts of USD 65 million, of which USD 49 million is related to the NOK bond loan. USD 11 million is related to loans in Colombia while the Group has a debt of USD 6 million for the final installment on the Interoil E&P Switzerland AG acquisition, conducted in 2006. Operating cash flows for the year reached USD 11 million against USD 39 million in 2012. The reduction reflects improvements to working capital of USD 15 million and repayment of tax debt of USD 5 million. Total capex for the year was USD 18 million, against USD 11 million in 2012. Cash flows from financing activities amounted to USD 13 million. The net proceeds from the private placement of USD 33 million were offset by interest expenses of USD 10 million and debt repayments of USD 10 million. Total change in cash for the year was USD 6 million, against USD -13 million in 2012.

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Equity situation As at 31 December 2013 the Group’s book equity is USD -11 million (2012: USD -63 million). The USD 52 million improvement to the equity position reflects the proceeds from the private placement and the USD 19 million net profit for the year. Although the book equity for the Group is negative, the assets of the Group exceed the liabilities and as such, the real equity of the Group is positive. Gaffney, Cline & Associates has evaluated Interoil’s proven and probable reserves in Colombia and has calculated that the net present value of the company’s assets exceed all liabilities in the Group. In addition, Interoil Peru will continue to operate Blocks III and IV under a 12 month contract, which is expected to have a positive impact on profitability and cash flows. Interoil Peru aims to participate in the coming bid round for both blocks.

PARENT COMPANY ACCOUNTS The profit and loss account for the period for the parent company, Interoil Exploration and Production ASA, showed a net profit of USD 0,5 million compared to USD 26 million in previous year. The parent company’s equity totalled USD -10 million as of 31 December 2013. The parent company has therefore no ­distributable reserves as of year-end 2013.

FINANCIAL RISK As of 31 December 2013 the Group’s liquidity situation was ­satisfactory and total debt is significantly reduced compared to one year ago. However, the book equity is negative. Further information regarding financial risk factors is described in note 3 and 4 in the financial statement.

GOING CONCERN The financial statements in the 2013 Annual Report have been prepared under the going concern assumption in accordance with the Norwegian Accounting Act §3-3 and the Board of ­Directors hereby confirms that this assumption is valid. As at 31 December 2013, the Group’s liquidity situation is significantly improved from one year prior and the underlying cash flow generation in both Peru and Colombia is strong. Furthermore, the Group reported a net profit of USD 19 million for 2013 and the equity and working capital positions are improving. In the parent company, the cost reduction program proceeded as planned, and on the current run rate, savings of ­approximately USD 10 million in annual corporate overhead has been achieved. The Group has continued to repay interest-bearing debts during the year, to a manageable level on current cash flow generation. Interoil Peru is debt-free and generating strong cash flows, while

Interoil Colombia entered into a secured bank loan facility with Banco Colpatria for USD 15 million in April 2014. In 2014, Interoil Colombia will target operational improvements and the drilling of a few strategic wells, with the aim to substantially increase production and reserves. The program is not expected to require additional external funding. Interoil Colombia signed a binding agreement with Trayectoria Oil & Gas for the divestment of the Altair and Cor-6 exploration licenses in 2013. Trayectoria is in breach of this contract and the transaction is not completed. Until the transaction is closed, Interoil Colombia is liable towards ANH for the investment obligations on Cor-6, which amount to USD 22 million, to be executed by June 2014. Interoil Colombia will hold Trayectoria liable for any damages incurred. Interoil Colombia is also in close dialogue with ANH about the technical prospects of the Cor-6 license. Meanwhile, no investments will be carried out on the Cor-6 license. On the LLA-47 exploration license, Interoil Colombia will spend

around USD 14 million on the acquisition of seismic, as per the ANH commitments. This will be covered by internal cash flows. In addition, Interoil Colombia has an obligation to drill eight exploration wells, the first of which is expected to be drilled in early 2015. Interoil lost the arbitration case against Perupetro for Blocks III and IV in Peru. However, Interoil Peru will continue to operate the blocks until 5 April 2015, through a license contract on identical commercial terms as the original contracts. As such, Interoil Peru is expected to generate strong cash flows and profitability for 2014. In addition, Interoil Peru plans to participate in the coming bid rounds for the same blocks. The Group is thinly capitalized and access to new capital cannot be guaranteed. Consequently, Interoil is vulnerable to unforeseen negative developments. However, the Board believes that the Interoil Group has sufficient cash flow generation to meet its obligations throughout 2014 as well as the upside potential to create substantial shareholder values in the medium to long term.

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ORGANISATION Interoil has its main office in Oslo, Norway. At year-end 2013, there were a total of 245 employees (4 in Norway, 129 in Peru and 112 in Colombia) in the Group. As part of the cost reduction program, the administration in Oslo was reduced from 10 to 4 employees. Further, the technical office in Switzerland was liquidated. Considerable efforts have been made during 2013 to increase our Geological & Geophysical and management competence. Interoil now has the required expertise reflecting what an upstream oil and gas company needs in-house. This includes geology, geophysics, reservoir, production and development engineers. Since we are operators in both Peru and Colombia, we also have drilling and completion engineers, as well as field workers that maintain and service our production equipment. HSE managers are employed in Peru and Colombia. In addition, Interoil has access to third party consultants for complementary and additional services and competence.

HEALTH, SAFETY AND ENVIRONMENT Interoil is committed to excellence in operations and standards of Quality, Health, Safety and Environment (QHSE) throughout its activities. Interoil will strive towards our QHSE vision: Systematically promote work environment, zero accident and zero incident operations, promote environmental protection and reduce negative influence on local communities and optimize raw material and energy consumption to minimize waste. In 2013, Interoil unfortunately experienced an oil spill of 480 barrels at one of the fields in Colombia. The spill was the most significant oil spill in Interoil’s recent history. However, the process after the incident has been handled well. After two months, all the affected land was recovered, traces of the spill had been removed and compensation had been paid to affected land­ owners. The incident was caused by human errors and resulted in direct changes in the organisation. In 2013, HSE reviews were performed both in Peru and Colombia. The review resulted in new procedures to improve the HSE situation, including guidelines for investigations of incidents, an updated access control procedure for personnel entering into the area of operations, and a work permit procedure. Further, HSE training of workers has been intensified as of late 2013. Interoil is also in the process of implementing clear divisional and functional descriptions for employees, to ensure responsibility and capability. The Company aims to be in line with industry practices and all statutory requirements. The working environment is considered to be good, and efforts for improvements are made on an ongoing basis.

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Time lost due to employee illness or accidents was approximately 0.4 percent for the Company and 0.8 % for the Group during 2013, respectively a total of 7 days and 496 days.

The stock option program has been designed to align the ­interest of the Group Management and other key personnel with those of the company its stakeholders.

Both Interoil Colombia and Interoil Peru are ISO 9001, 14001 and OHSAS 18001 certified.

The Board of Interoil has, in accordance with the approval of the shareholders meeting held on 21 June 2013, granted a total of 15 000 000 options to management and key employees. The board issued 10 500 000 options in June and 1 500 000 options in November. The options are free of charge, based on requirements of reduced salaries. Options cannot be exercised before 30 June 2015 and not later than 30 June 2016. The options are fully vested at 30 June 2015. Exercise price is NOK 1,68 per share for all options issued in 2013.

There is a policy of equal pay for equal work. This means that men and women in equal jobs shall receive equal pay. As per today 82 % of all employees are male. The Group has recruitment and personnel policies to ensure equal opportunities and rights, and prevent discrimination based on ethnicity, national origin, ancestry, colour, language, religion or belief.

CORPORATE GOVERNANCE Further information related to Interoil`s corporate governance principles are included on page 106 in the annual report.

Pension Scheme: The Norwegian employees participate in a defined benefit plan. The pension includes retirement pension, disability pension and widows’ pension.

REMUNERATION OF SENIOR EXECUTIVES

Salary Payments after Termination of ­Employment:

The Board of Directors of Interoil Exploration and Production ASA hereby submits its statement on remunerations to management in accordance with the Public Limited Company Act §6-16 A.

Thomas J Fjell, the CEO of the Company, has a right to ­severance payment of 18 months. Erik Sandøy, CFO, and Kari Kaugerud, COAA, have 6 months severance payment.

Interoil Group management as of April 2014: Thomas Fjell, Chief Executive Officer Erik Sandøy, Chief Financial Officer Kari Kaugerud, Chief of Organisation, Audit and Accounting

Other: We are of the opinion that all terms and conditions have been negotiated on an arm’s length basis at market conditions, enabling Interoil to recruit the kind of professionals it needs to succeed with its strategy, to the benefit of its shareholders.

OUTLOOK Interoil’s main focus going forward is to increase production and reserves in Colombia through operational improvements and the drilling of a few strategic wells. Interoil has farmed out the Altair and Cor-6 exploration licenses in Colombia, but Trayectoria Oil & Gas is in breach of its obligations and Interoil has initiated legal action against Trayectoria. Conse­ quently, Altair and Cor-6 have reverted to Interoil Colombia. Interoil Colombia is also in close dialogue with ANH about the technical prospects of the Cor-6 license. Meanwhile, no investments will be made. In Peru, we will continue operating Blocks III and IV until 5 April 2015 under a new 12 month contract. During this period, we aim to optimize cash flows, while positioning Interoil Peru for a successful outcome of the coming bid round for the same blocks. This report contains forward looking statements. These statements are based upon various assumptions, many of which are based, in turn, upon further assumptions, including Interoil examination of historical operating trends. Although Interoil believes that these assumptions were reasonable when made, these assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict with certainty and are beyond our control, Interoil cannot give assurance that it will achieve or accomplish these expectations, beliefs or intentions.

General Managers of operating subsidiaries: Steve Benedetti, Peru Carlos Guerrero Moreno, Colombia Oslo, 29 April 2014

General: Our guidelines for future stipulation of management remuneration is to follow the general salary adjustments in our local ­society and, at the same time, consider the measures necessary to avoid losing our key personnel and maintain a level of ­remuneration enabling us to recruit the kind of professionals needed for us to develop the Company according to plans.

The Board of Interoil Exploration and Production ASA



Anne-Grete Ellingsen

Arturo G. Vilas



Chairman of the Board

Member of the Board

Bonus Program: Interoil has a bonus based compensation program for the management and key personnel. The program is based on individual performance targets. The compensation structure and guidelines for executive managers and key employees are subject to annual review and approval by the Board of Directors.



Peter Nicol

Thomas J. Fjell



Member of the Board

Chief Executive Officer



Option Program: The Group has introduced a share-based payment agreement for the members of the Group Management and other key employees.

17

RESPONSIBILITY STATEMENT We confirm, to the best of our knowledge, that the financial statements for the period 1 January to 31 December 2013 have been prepared in accordance with current applicable accounting standards and give a true and fair view of the assets, liabilities, financial position and profit and loss of the group taken as whole.

We also confirm that the Board of Directors’ Report includes a true and fair review of the development and performance of the business and the entity and the group, together with a description of the principal risks and uncertainties facing the entity and the group.

Oslo, 29 April 2014 The Board of Interoil Exploration and Production ASA



Anne-Grete Ellingsen

Arturo G. Vilas



Chairman of the Board

Member of the Board



Peter Nicol

Thomas J. Fjell



Member of the Board

Chief Executive Officer



18

BOARD OF DIRECTORS AND MANAGEMENT INTEROIL EXPLORATION AND PRODUCTION ASA BOARD OF DIRECTORS Anne Grete Ellingsen, Peter Nicol, Arturo G. Vilas, Håkon Sandby (deputy)

Group executive committee

Thomas J. Fjell

Erik Sandøy CFO

Carlos Guerrero

General Manager - Colombia

ANNE GRETE ELLINGSEN, CHAIRMAN OF THE BOARD Anne-Grete Ellingsen is the CEO of the Norwegian Center of expertise of drilling engineering, NCENODE. She has ­experience from executive management positions in the oil and gas both up- and downstream in Norway, UK and ­internationally in addition to the hydropower sector and offshore wind projects. She has been Secretary General of the World Petroleum Congress and deputy minister at the Norwegian Ministry of Petroleum and Energy. Ms. Ellingsen has more than 15 years of experience as a board member of privately owned and listed companies. Ms. Ellingsen holds a BSc in chemistry, a MSc. in Petroleum Technology, a BSc. in Economics and an Executive Master in Energy. PETER NICOL, DIRECTOR Peter Nicol is an energy- and financial advisor through his own firm Locin Energy, located in London. He has 35 years of corporate finance and M&A experience from the oil and gas sector. Previous experience includes positions as Global Sector Director of Oil and Gas Research for ABN Amro, Managing Director for Tristone Capital and Partner with GMP Europe

20

CEO

Anne Grete Ellingsen

Arturo G. Vilas

Peter Nicol

Håkon Sandby

Erik Sandøy

Kari Kaugerud

Steve Benedetti

Carlos Guerrero Moreno

Thomas J. Fjell

Kari Kaugerud Chief of COAA

Steven Benedetti

General Manager - Peru

ARTURO G. VILAS, DIRECTOR Arturo G. Vilas is a senior investment banker and Oil & Gas industry executive. He has over 30 years of corporate finance and M&A experience from the energy sector in Latin America. Mr Vilas is currently the Vice President for Business Development and Country Manager for Argentina Miramar Hydrdrocarbons Ltd./ Petrolera del Comahue S.A. Previous experience includes Managing Director and Head of Energy Group for J.P. Morgan Chase, Managing Director for the Latin American regional office of Scotia Waterous and Managing Director for Latin America for Tristone Capital. HÅKON SANDBY, ALTERNATE DIRECTOR Håkon Sandby is a lawyer and economist with extensive experience from the Norwegian and international oil and gas industry. He has held various positions in Esso Norway AS’s downstream business from 1983-1991 after which he joined the law firm of Arntzen Underland & Co. From 1994, he was the director of legal affairs in Total Norge AS until he joined the legal department at Total’s headquarter in France. His experience includes work with oil and energy law in the North Sea area, the former Soviet Union republics and Turkey as well as mineral law in west Africa. He has been a consultant and in private practice since 2004.

THOMAS J. FJELL, CHIEF EXECUTIVE OFFICER Thomas Fjell has a MBA in Energy from Norwegian School of Management (BI) in Oslo and Nanyang Technical University in Singapore in addition to a law degree from the ­University of Oslo. Before joining Interoil, Mr. Fjell was General ­Manager of African Offshore Services. Prior to this he worked as an a ­ ttorney for 10 years advising a variety of global and ­domestic oil and gas clients. ERIK SANDØY, CHIEF FINANCIAL OFFICER Erik Sandøy has previous experience as CFO of African O ­ ffshore Services (AOS). Prior to this he worked for ­Bridgehead Corporate Finance and Goldman Sachs International. He holds Bachelor of Commerce with a major in Finance from University of British Colombia, Vancouver, Canada and a MSc in Finance from Norwegian School of Management (BI), Norway. KARI KAUGERUD, CHIEF OF CORPORATE ORGANIZATION, AUDIT AND ACCOUNTING Kari Kaugerud has 17 years of experience from the audit sector and experience as Head of Group Accounting and Controlling both from Interoil and African Offshore Services. Ms. Kaugerud holds a Bachelor in Audit and Accounting from Oslo and Akershus University College of Applied Sciences. She has significant experience from IFRS.

CARLOS GUERRERO MORENO, GENERAL MANAGER COLOMBIA Mr. Guerrero Moreno is a Geologist and Geophysicist and holds a PhD in Geophysics from the University of Leeds and an MBA from Thunderbird School of Global Management. He has more than 20 years experience from the Latin American oil and gas industry. He has held various managerial positions with Ecopetrol and Gran Tieraa Energy Colombia prior to his current role. STEVE BENEDETTI, GENERAL MANAGER PERU Mr. Benedetti has 37 years of experience as a geologist, new ventures manager and business unit manger primarily in Latin American. He spent 24 years working with Unocal Corporation in the U.S., Europe and Latin America. He formed his consulting company, Southern Cone Energy Consultants, in 2002 and has consulted with many companies in the region. From 2004-2007 he was V.P. of Petrominerales in Colombia during its initial growth phase. From 2008-2011 he was V.P. for Petro Vista Energy Corp. in Colombia. Beginning June 2013, he has been General Manager and CEO for Interoil Peru, residing in Lima.

21

IN T E ROIL NOTES TO THE E XP LORAT CONSOLIDATED IO N AN D PRO FINANCIAL DU CTIOSTATEMENTS N G RO U P C O N S O L IDAT E D F INA NCIAL STATEM EN TS

NOTES CONSOLIDATED TO THE CONSOLIDATED STATEMENT OF FINANCIAL COMPREHENSIVE STATEMENTS INCOME Amounts in USD 1 000 unless otherwise stated

31 D E CE MBE R 2 0 1 3

For the year ended 31 December

Notes

2013

2012

Sales 6 97 375 118 266 Cost of goods sold 7 -28 388 -34 298 Depreciation 17 -6 906 -40 610 Gross profit 62 081 43 358 Exploration cost expensed 8 -3 930 -12 209 Administrative expense 9 -17 632 -13 382 Other income / (expense) 13 5 789 10 638 Impairment oil and gas assets 14 - -45 256 Result from operating activities 46 308 -16 851 Finance income 15 9 359 27 178 Finance costs 15 -16 548 -42 153 Net finance costs -7 189 - 14 975 Profit / (loss) before income tax 39 119 -31 826 Income tax expense 16 -19 999 7 869 Profit / (loss) for the year 19 120 -23 957 Other comprehensive income -116 0 Other comprehensive income for the year, net of tax -116 0 Total comprehensive income for the year, net of tax 19 004 -23 957 Attributable to: Equity holders of the parent 19 004 -23 957 19 004 -23 957 Earnings per share (expressed in USD per share) – basic 24 0.10 -0.50 – diluted 24 0.09 -0.50

22

23

NOTES TO THE CONSOLIDATED CONSOLIDATED STATEMENT OF FINANCIAL FINANCIAL STATEMENTS POSITION

NOTES TO THE CONSOLIDATED CONSOLIDATED STATEMENT OF FINANCIAL CHANGES IN STATEMENTS EQUITY

Amounts in USD 1 000

Amounts in USD 1 000

as of 31 December

Notes

2013

2012

ASSETS Non-current assets Property, plant and equipment 17 50 215 39 548 Deferred tax asset 16 2 981 2 105 Retirement benefit asset 19 0 67 Total non-current assets 53 196 41 720 Current assets Inventories 20 1 499 1 041 Trade and other receivables 18 13 873 12 489 Cash and cash equivalents, non-restricted 22 11 575 4 641 Cash and cash equivalents, restricted 22,25 4 829 5 562 Total current assets 31 776 23 733 TOTAL ASSETS 84 972 65 453

Share capital Other and share paid-in Retained Notes premium equity earnings

Balance at 31 December 2011 90 985 1 742 -132 112 Total comprehensive income of the year: Profit / (loss) for the period 0 23 957 Other comprehensive income for the period 0 0 0 Balance at 31 December 2012 90 985 1 742 -156 069 Total comprehensive income of the year: Issue of share capital, cash increase 23 34 993 0 0 Share issuance cost -2 077 0 0 Share options 11 0 450 0 Total comprehensive income for the period 0 0 19 004 Balance at 31 December 2013 123 901 2 192 -137 066

Total equity

-39 385 -23 957 0 -63 342

34 993 -2 077 450 19 004 -10 973

EQUITY Share capital and share premium 23 123 901 90 985 Other paid-in equity 2 192 1 742 Retained earnings -137 066 -156 069 Total equity -10 973 -63 342 LIABILITIES Non-current liabilities Borrowings/Non-current interest-bearing liabilities 25 54 977 16 Retirement benefit obligation 19 81 0 Provisions for other liabilities and charges 26 2 277 2 760 Total non-current liabilities 57 335 2 776 Current liabilities Borrowings/Current interest-bearing liabilities 25 10 467 74 617 Other financial liabilities 21 0 4 392 Trade and other payables 27 20 477 37 744 Income tax liabilities 16 4 284 4 059 Provisions for other liabilities and charges 26 3 382 5 207 Total current liabilities 38 610 126 019 TOTAL LIABILITIES 95 945 128 795 TOTAL EQUITY AND LIABILITIES 84 972 65 453

Oslo, 29 April 2014 The Board of Interoil Exploration and Production ASA



Anne-Grete Ellingsen

Arturo G. Vilas



Chairman of the Board

Member of the Board



Peter Nicol

Thomas J. Fjell



Member of the Board

Chief Executive Officer



24

25

NOTES TO THE CONSOLIDATED CONSOLIDATED CASH FLOW STATEMENT FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts in USD 1 000

1.

For the year ended 31 December

Notes

2013

2012

Cash generated from operations Profit/(loss) for the year 19 004 -23 957 Income tax expense 16 19 999 -7 869 Depreciation, amortization and impairment 17 7 231 91 684 Amortization of debt issuance cost 15 567 2 311 Fee regarding tax claim/bond loan 15,25 -385 -1 441 Share based payment and change in retirement benefit obligation 11,19 598 -14 Interest income 15 -15 -105 Interest expense 15 9 682 11 654 Unrealized exchange (gain) / loss from revaluation of borrowings 25 -5 472 4 378 Gain from sale of PP&E 294 0 Changes in assets & liabilities Inventories 20 -458 -508 Financial liabilities at FVtPL 21 -4 393 -21 263 Trade and other receivables 18 -1 757 4 147 Trade and other payables and provision for other liabilities 26,27 -13 303 -3 211 Taxes paid -20 650 -16 357 Net cash generated from operating activities 10 942 39 448 Cash flows from investing activities Interest received 15 15 105 Investment in exploration, production and other assets 17 -18 192 -11 256 Net cash used in investing activities -18 177 -11 151 Cash flows from financing activities Interest paid 15 -9 682 -11 689 Repayment of borrowings 25 -18 342 -50 827 Proceeds from new bank financing 25 8 545 20 720 Proceeds from issuance of ordinary shares 23 32 916 0 Net cash used in financing activities 13 437 -41 796 Net increase in cash and cash equivalents 6 201 -13 499 Cash and cash equivalents at beginning of the period 22 10 203 23 702 Cash and cash equivalents at end of the year 22 16 404 10 203 Whereof cash and cash equivalents, non-restricted 11 575 4 641 Whereof cash and cash equivalents, restricted 4 829 5 562

corporate information

Interoil Exploration and Production ASA (the “Company”) and its subsidiaries (together the “Group or Interoil”) is an upstream oil exploration and production company focused on South America. The Company is operator of several production and exploration assets in Peru and Colombia. The Company is a Norwegian public limited liability ­company incorporated and domiciled in Norway. The Company is listed on the Oslo Stock Exchange. The ­Company is registered in the Register of Business

2.

The principal activities of the Group are described in note 5. These consolidated financial statements have been ­approved for issue by the Board of Directors on 29 April 2014.

summary of significant accounting policies

The principal accounting policies applied in preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The consolidated financial statement is presented in USD and is rounded up to thousands (1 000). The consolidated financial statements have been prepared under the historical cost convention, except for financial assets and liabilities at fair value through profit or loss. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 2.20. Changes in accounting policies and disclosures The accounting policies adopted are consistent with those of the previous financial year, except for the following amendments to IFRS effective as of 1 January 2013: IAS 1 Financial statement presentation – Amendments The main change resulting from these amendments is a requirement for entities to group items presented in other comprehensive income (OCI) on the basis of whether they are potentially reclassifiable to profit or loss subsequently (reclassification adjustments). The amendments do not address which items are presented in OCI. The amendment affects presentation only and has no impact on the Group’s financial position or performance.

26

Enterprises with organization number 988 247 006. The Company’s registered office is Kronprinsensgate 17, 0251 Oslo, Norway.

IFRS 7 Financial Instruments – Disclosures (amendment) The IASB has introduced new disclosure requirements in IFRS 7. These disclosures provide users with information that is useful in (a) evaluating the effect of potential effect of netting arrangements on an entity’s financial position and (b) analysing and comparing financial statements prepared in accordance with IFRS. The amendment affects disclosure only and has no impact on the Group’s financial position or performance. IAS 19 Employee Benefits The IASB has endorsed numerous amendments in IAS 19. The amendments are both of fundamental character, such as the corridor approach no longer is accepted and that ­expected return on plan assets is amended con­ceptually, and of simpler character such as clarifications and ­rephrasing. Due to the discharge of the corridor approach the actuarial gains and losses now has to be recognised through other comprehensive income in the period in which they arise. The amendments in IAS 19 has affected the net amount of pension costs as a result of expected return on plan assets now is being calculated with the same interest as the one used in the discounting of the pension liability. IFRS 13 Fair value measurement The standard aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within ­IFRSs. IFRS 13 does not impact the fair value measurement, but has a material impact on the disclosure requirements.

27

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The standards and interpretations that are issued, but not yet effective, up to the date of the issuance of the Group’s financial statements are disclosed below. The Group intends to adopt these standards, if applicable, when they become effective.

Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

IAS 28 Investments in Associates and Joint Ventures (as revised in 2011) As a consequence of the new IFRS 11 and IFRS 12, IAS 28 has been renamed IAS 28 Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. IAS 28 as revised in 2011 becomes effective for annual periods beginning on or after 1 January 2014. IAS 32 Financial Instruments - Presentation (amendment) The amendments to IAS 32 clarify the meaning of ­“currently has a legally enforceable right to set-off” and also clarify the application of the IAS 32 offsetting criteria to settlement systems (such as central clearing house ­systems) which apply gross settlement mechanisms that are not simultaneously. These amendments are not expected to impact the Group’s financial position or performance and become effective for annual periods beginning on or after 1 January 2014. IAS 36 Impairment of assets – Amendments The amendment removes certain disclosures of the recoverable amount of CGUs which has been included in IAS 36 by the issue of IFRS 13. The amendment is not mandatory for the group until 1 January 2014. IFRS 9 Financial instruments The standard, addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in November 2009 and October 2010. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity’s business model for managing its financial ­instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for ­financial liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. The Group is yet to assess IFRS 9’s full impact. The Group will also consider the impact of the remaining phases of IFRS 9 when completed by the Board. The Group will implement the standard from 1 January 2014.

28

IFRS 10 Consolidated financial statements The standard, builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. IFRS 10 is not considered to have significant impact on the financial statements, will be effective from 1 January 2014. IFRS 11 Joint arrangements IFRS 11 focuses on the rights and obligations of the parties to the arrangement rather than its legal form. There are two types of joint arrangements: Joint operations and joint ventures. Joint operations arise where the investors have rights to the assets and obligations for the liabilities of an arrangement. A joint operator accounts for its share of the assets, liabilities, revenue and expenses. Joint ventures arise where the investors have rights to the net assets of the arrangement; Joint ventures are accounted for under the equity method. Proportional consolidation of joint arrangements is no longer permitted. IFRS 11 is not considered to have significant impact on the financial statements. Will be effective from 1 January 2014, IFRS 12 Disclosure of involvement with other entities IFRS 12 includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, structured entities and other off balance sheet vehicles. IFRS 12 is not considered to have significant impact on the Group’s financial statements. Will be effective from 1 January 2014. 2.2 Consolidation Subsidiaries Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Transaction costs other than share and debt issuance cost are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. Any excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill if applicable.

Consolidated subsidiaries Consolidated subsidiaries are specified in note 10. 2.3 Foreign currency translation (a) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in USD, which is the functional currency for the parent company and all significant ­companies in the Group. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. 2.4 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Chief ­Financial Officer and the Chief Executive Officer. They are responsible for strategic decisions and together with local ­management allocating resources and assessing performance of the operating segments. 2.5 Revenue recognition Sales revenue related to sale of oil and gas is recognised when the ownership rights are transferred to the customer at the time of delivery based on contractual terms in the sales agreements, i.e. when deliveries are made at a sales transfer point. Sales are presented net of royalty payments. Revenues connected to test production for new wells in association contract are recognised as deferred revenue until participation by the association party is determined. If the association party declares participation in accordance with the agreement, deferred revenue is transferred to the association contract account. If the association party ­declares no participation, the deferred revenue is recognised as revenue

2.6 Tax Current income tax Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, by the reporting date, in the countries where the Group operates and generates taxable income. Current income tax relating to items recognised directly in other comprehensive income or equity is recognised in other comprehensive income or equity and not in profit or loss The income tax expense consists of the tax payable and changes to deferred tax. Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the ­deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting, nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially ­enacted by the end of the reporting period and are ­expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Other tax On 29 December 2011 the Colombian Congress passed a law that imposes a 6% equity tax on Colombian operations. The tax will be paid in eight equal instalments over a four year period. The tax is payable even if the company ceases to have taxable equity in subsequent years. The equity tax does not qualify as an income tax, hence the Group has recognized the present value of the entire amount of the equity tax payable as an operating expense in 2011.

29

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2.7 Classifications Classification in the statement of financial position Interoil separately presents current and non-current assets and liabilities in its statement of financial position. Assets and liabilities are classified as current when it is expected to be realized (or is intended for sale or consumption) in the normal operating cycle, is held primarily for being traded, or is expected to be realized within twelve months after the reporting period. Also, cash or cash equivalent asset are classified as current assets, unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. A liability is classified as a current liability if it does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. Terms of a liability that can be settled with equity instruments at the option of the counterparty, do not affect its classification. Other balance sheet items are classified as non-current assets / non-current liabilities. Classification of income and expenses Operating expenses in the statement of comprehensive income are presented by function. Cost of goods sold includes lifting costs, changes in inventory and depreciation and amortization of production assets. Exploration cost expensed includes seismic acquisitions, internal cost incurred, including salaries for geographical and geophysical analysis and administration, and cost of dry wells. Administrative expenses include employee benefit expenses, general and administration expenses and depreciation and amortization of non-oil assets. Other income/ ­(expense) include refund of operating expenses based on association contracts and jointly controlled operations, gain/loss on sale of PP&E and other income and expense. Information of the nature of expenses is presented by their nature in the notes to the financial statements. 2.8 Property, plant and equipment Other property, plant and equipment are other assets not classified as either development or oil producing assets and are stated at historical cost less depreciation and impairment. Historical costs include expenditures that are directly attributable to the acquisition of the items. Depreciation is calculated using the straight-line method to allocate their cost to their values over their estimated useful lives (3 – 10 years). The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each end of the reporting period. Assets that are subject to depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an ­asset’s fair value less costs to sell and value in use.

30

2.9 Intangible assets (a) Exploration and evaluation assets Some exploration and evaluation assets are classified as intangible assets according to IFRS 6, for example license acquisition costs and capitalized exploration cost. When technical feasibility and commercial viability of the assets are demonstrable, the assets are reclassified to development assets within property plant and equipment. The exploration and evaluation assets which are ­classified as intangible are assessed for impairment before ­reclassification. (b) Other intangible assets Acquired computer software licences are capitalised on the basis of the cost incurred to acquire and bring to use the specific software. These costs are amortised over the estimated useful lives (three to five years). All intangible assets in the Group are fully amortised. Proceeds from sale of oil and gas licenses in the exploration stage are offset against the related capitalized costs of each cost centres with any excess of net proceeds over all costs capitalized included in Other income/(expense) in the statement of comprehensive income. 2.10 Oil and Gas assets Exploration and production rights assets Oil exploration expenditures are accounted for using the successful efforts method of accounting. Some exploration and evaluation assets should be classified as intangible, for example license acquisition costs and capitalized ­exploration assets. Costs are accumulated on a fieldby-field basis. Geological and geophysical costs are ­expensed as incurred, except for costs connected to areas with proven reserves which are capitalised. Costs directly associated with an exploration well are capitalised until the determination of reserves is evaluated. Each individual exploration well is considered being a cash generating unit (CGU) when considering impairment of the evaluation and exploration asset. If the commercial discovery has not been achieved, these costs are charged to expense. Once commercial reserves are found, exploration and production rights assets are tested for impairment and transferred to development assets. No depreciation and/or amortisation are charged during the exploration phase. Production rights, exploration and development assets (see below) are tested for impairment whenever facts and circumstances indicate impairment. An impairment loss is recognised for the amount by which the assets’ carrying amount exceeds their recoverable amount. The recoverable amount is the higher of the assets’ fair value less costs to sell and their value in use. For the purposes of assessing impairment, the assets subject to testing are tested for impairment on a production field (CGU) by production field basis.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Development assets Expenditure on the construction, installation or completion of infrastructure facilities such as production equipment, pipelines and the drilling of commercially proven development wells is capitalised within tangible assets. When ­development is completed on a specific field, it is transferred to production assets. No depreciation and/or amortisation are charged during the development phase. Oil production assets Oil production assets are aggregated exploration, production rights assets and development expenditures associated with the production of proved reserves. Furthermore, the oil production assets include property leasehold acquisition costs directly attributable to production assets. Oil production assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, the proved oil and gas properties subject to testing are tested for impairment on a production field (CGU) by production field basis. Depreciation and amortisation Oil and Gas assets that are purchased are depreciated and amortised using the unit-of-production method based on proved and probable reserves (P2). Exploration and development assets transferred to production assets are depreciated and amortised using the unit-of-production method based on proved developed reserves, which are oil mineral reserves estimated to be recovered from existing facilities using current operating methods. 2.11 Financial Instruments (i) Financial assets The Group initially recognizes loans and receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognized initially on the trade date, which is the date that the Group becomes a party to the contractual provisions of the instrument. The Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognized as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset

the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. The Group classifies financial assets into the following categories: financial assets at fair value through profit or loss, loans and receivables. Financial assets at fair value through profit or loss (FVtPL) A financial asset is classified at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated at fair value through profit or loss if the Group manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Group’s documented risk management or investment strategy. Attributable transaction costs are recognized in profit or loss as incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss, presented as finance income (loss). This category includes derivative financial instruments that are not designated as hedging instruments in hedge relationships. Financial instruments included in the financial assets at FVtPL category for the Group comprise commodity-based derivative contracts (oil swaps) to reduce the risks in overall earnings and cash flows. The Group holds derivative financial instruments to hedge its commodity price and interest rate risk exposures. However, these contracts are not designated in a hedge relationship that qualifies for hedge accounting. Derivatives are recognized initially at fair value; attributable transaction costs are recognized in profit or loss as incurred. ­Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are recognized immediately as financial income (cost) in profit or loss. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss. Changes in the fair value of separated embedded derivatives are recognized immediately in profit or loss. Financial assets designated at fair value through profit or loss comprise equity securities that otherwise would have been classified as available for sale. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are

31

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS measured at amortized cost using the effective ­interest method, less any impairment losses. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Loans and receivables comprise cash and cash equivalents and trade and other receivables. Cash and cash equivalents - comprise cash balances, cash in hand and call deposits with original maturities of three months or less. All cash and cash equivalents not available to the Group at the end of the reporting period is classified as restricted as specified in note 22. (ii) Financial liabilities The Group initially recognizes debt securities issued and subordinated liabilities on the date that they are originated. All other financial liabilities (including liabilities designated at fair value through profit or loss) are recognized initially on the trade date, which is the date that the Group becomes a party to the contractual provisions of the instrument. The Group derecognizes a financial liability when its contractual obligations are discharged, cancelled or expire. The Group classifies non-derivative financial liabilities into the Other financial liabilities category. Such financial liabilities are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortized cost using the effective interest method. Other financial liabilities comprise loans and borrowings, bank overdrafts, and trade and other payables. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are, if any, included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Borrowings Any difference between the proceeds (net of transaction­ costs) and the redemption value is recognized in the statement of comprehensive income over the period of the borrowings using the effective interest method. Gains and losses are recognized in the statement of comprehensive income when the liabilities are derecognized as well as through the effective interest rate method amortization process. Other financial liabilities are presented as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing costs are recognized as an expense. To the extent that Interoil Group borrows funds generally and uses them

32

for the purpose of obtaining a qualifying asset, the Group will determine the amount of borrowing costs eligible for capitalization by applying a capitalization-rate to the expenditures on that asset. The capitalization-rate shall be the weighted average of the borrowing costs applicable to the borrowings of the entity that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. (iii) Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognized as a deduction from equity, net of any tax effects. 2.12 Inventories Inventories are valued at the lower of cost and net realizable value. Cost is determined by the first-in, first-out (FIFO) method. Inventory cost includes raw material, freight, and direct production expenses together with a portion of indirect expenses. 2.13 Employee benefits Defined benefit plan: The Group operates one defined benefit plan for the employees in the holding company, Interoil Exploration and Production ASA. The scheme is funded through payments to insurance companies, determined by periodic actuarial calculations. Typically, defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The cost of providing benefits under the defined benefit plan is determined using the projected unit credit method. Re-measurements, comprising of actuarial gains and losses, the effect of the asset ceiling, excluding net interest (not applicable to the Group) and the return on plan assets (excluding net interest), are recognised immediately in the statement of financial position with a corresponding debit or credit to retained earnings through OCI in the period in which they occur. Re-measurements are not reclassified to profit or loss in subsequent periods. Past service costs are recognised in profit or loss on the earlier of: • The date of the plan amendment or curtailment, and • The  date that the Group recognises restructuring-related costs. Net interest is calculated by applying the discount rate to the net defined benefit liability or asset. The Group recognises the following changes in the net defined benefit obligation under “cost of sales”, “administration expenses” and “selling and distribution expenses” in consolidated statement of profit or loss (by function):

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS • Service  costs comprising current service costs, pastservice costs, gains and losses on curtailments and non-routine settlements • Net interest expense or income. 2.14 Share-based payment The cost of equity-settled transactions is determined by the fair value at the date when the grant is made using an ­appropriate valuation model, such as Black-Scholes model. The fair value determined at grant date is expensed on a straight-line basis over the vesting period, based on the company’s estimate of shares that will ultimately vest. The cost is recognized as employee benefit expenses included in administrative expenses, together with a corresponding increase in other capital reserves in equity. Cancellations or settlement of equity settled share-based payments are treated as an acceleration of vesting and as a result any amounts that otherwise would have been recognized for services received over the reminder of the vesting period are recognized immediately in the income statement. When options are exercised the payments from employees are recognized as an increase in the groups share capital and share premium reserve. The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share. 2.15 Provisions General: A provision is recognised in the statement of financial position when the Group has a present legal or constructive obligation as a result of past events and it is more likely than not that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense. Abandonment and decommissioning liabilities: In accordance with the terms of the license concessions for licenses where the Group has ownership interest, the local authorities may instruct the license holders to partly or completely remove the facilities at the end of production or when the concession period expires. Upon initial recognition of a liability when the Company has a constructive obligation, the Company calculates and records the net present value related to future abandonment and decom-

missioning. The same amount is capitalised as part of the cost price of the asset and depreciated using the unit of production method. The change in the time value of the liability related to the abandonment and decommissioning is charged to expense as other expenses and increases the future liability related to the abandonment and decommissioning. Any change in the estimate related to expenditures associated with abandonment and decommissioning liabilities are accounted for prospectively (remaining production) based on the unit of production method. 2.16 Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the statement of comprehensive income on a straight-line basis over the period of the lease. 2.17 Non-current assets held for sale and ­discontinued operations Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale or distribution rather than through continuing use, are classified as held for sale. Immediately before classification as held for sale, the assets, or components of a disposal group, are remeasured in accordance with the Group’s accounting policies. Thereafter generally the assets, or disposal group, are measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss on a disposal group first is allocated to goodwill, and then to remaining assets and liabilities on pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets and employee benefit assets, which continue to be measured in accordance with the Group’s accounting policies. Impairment losses on initial classification as held for sale and subsequent gains and losses on remeasurement are recognised in profit or loss. Gains are not recognised in excess of any cumulative impairment loss. The Group does not classify non-current assets (or disposal groups) that are to be abandoned as held for sale, since its carrying amount will be recovered principally through continuing use. However, if the disposal group to be abandoned represents a separate major line of business or geographical area of operations; is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or is a subsidiary acquired exclusively with a view to resale, The Group will present the results and cash flows of the disposal group as discontinued operations at the date on which it ceases to be used. Intangible assets and property, plant and equipment once classified as held for sale or discontinued operations are not amortised or depreciated.

33

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2.18 Accounting for association contract with ­Ecopetrol (Colombia) Revenues connected to test production for new wells in association contract with Ecopetrol are recognised as deferred revenue until 30% participation by Ecopetrol is determined. Deferred revenue is transferred to the association contract account when Ecopetrol declares participation in accordance with the association contract. Capital expenditures are capitalized as incurred and operating expenses connected to such test production are expensed as incurred. At the time Ecopetrol declares participation in accordance with the association contract, 30% of capital expenditures and operating expenses that will be refunded from Ecopetrol are credited to property, plant and equipment. The same share will be recorded as exploration cost. 2.19 Interest in jointly controlled operations Certain of the Group’s activities, particularly exploration and production, are conducted through unincorporated joint ventures where the ventures have a direct ownership interest in and jointly control the assets of the venture. The Group recognises, on a line by line basis, its share of the assets, liabilities and expenses of these jointly controlled operation, along with the Group’s income from the sale of its share of the output and liabilities and expenses incurred in relation to the venture. Licences are funded through cash calls from the operator to the licence partners. The net of total cash called and total payments made by the licence, the over-/under call, is recognised in the statement of financial position as other short-term receivables or other current liabilities respectively. When the Group, acting as an operator, receives reimbursement of direct costs recharged to the joint venture, such recharges represent reimbursements of costs that the operator incurred as an agent for the joint venture and therefore have no effect on profit or loss. 2.20 Critical accounting estimates and judgments The preparation of the Group’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of reported amounts of assets, liabilities, and the disclosure of contingent liabilities, at the end of the reporting period and amounts of revenues and expenses recognized during the reporting period. Estimates and judgments are continuously evaluated and are based on management’s experience, historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. However, uncertainty about these assumptions and estimates could result in outcomes that require a material

34

adjustment to the carrying amount of the asset or liability affected in future periods. (a) Impairment of exploration and other oil related assets The Group tests whether exploration assets and oil related assets have been subject to any impairment, in accordance with the accounting policy stated in note 2.10. The recoverable amounts of cash-generating units and individual assets have been determined based on value-in-use calculations as net present value (before tax). These calculations require the use of estimates and assumptions such as management evaluations in addition to discount rates, expected future cash flows and future market conditions, including production, remaining proved and probable reserves (P2), future capital expenditures, lifting cost and forward oil price. It is reasonably possible that these assumptions may change, which may then impact the estimated life of the field and may then require a material adjustment to the carrying value of exploration assets and oil related assets. The Group monitors internal and external indicators of impairment relating to its tangible and intangible assets. Current oil price does not indicate impairment of any of the oil producing assets at 31 December 2013. In 2013 no impairment charges are recognized. In 2012 the Group recognized an impairment charge of USD 45.3 million relating to the oil assets in Peru. Reserves cannot be booked for the force majeure period that was injunctioned, and Interoil Peru consequently wrote down all oil assets to zero at the end of 2012. See note 14 and 17 for further information. (b) Abandonment and decommissioning liabilities Abandonment and decommissioning costs will be incurred by the Group at the end of the operating life of some of the Group’s facilities and properties. The ultimate decommissioning costs are uncertain and cost estimates can vary in response to many factors including changes to relevant legal requirements, the emergence of new restoration techniques or experience at other production sites. The expected timing and amount of expenditure can also change, for example, in response to changes in reserves or changes in laws and regulations or their interpretation. As a result, there could be significant adjustments to the provisions established which would affect future financial results. The carrying amount of provisions for abandonment and decommissioning at 31 December 2013 is USD 1.3 million (2012: USD 1.1 million). See note 26. (c) Hydrocarbon reserves and resource estimates Oil and gas production properties are depreciated on units of production basis at a rate calculated by reference to total proved developed and un-developed reserves determined in accordance with Society of Petroleum Engineers rules and incorporating the estimated future cost of developing those reserves. The Group estimates its commercial reserves based on information compiled by appropriately qualified persons relating to the geological

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS and technical data on the size, depth, shape and grade of the hydrocarbon body and suitable production techniques and recovery rates. Commercial reserves are determined using estimates of oil in place, recovery factors and future oil prices, the latter having an impact on the total amount of recoverable reserves and the proportion of the gross reserves which are attributable to the host government under the terms of the Pro-duction-Sharing Agreements. Future development costs are estimated using assumptions as to the number of wells required to produce the com-mercial reserves, the cost of such wells and associated production facilities, and other capital costs.

• Depreciation and amortisation charges in profit or loss may change where such charges are determined using the units of production method, or where the useful life of the related assets change. • Provisions for decommissioning may change - where changes to the reserve estimates affect expectations about when such activities will occur and the associated cost of these activities. • The recognition and carrying value of deferred income tax assets may change due to changes in the judgements regarding the existence of such assets and in estimates of the likely recovery of such assets.

As the economic assumptions used may change and as additional geological information is produced during the operation of a field, estimates of recoverable reserves may change. Such changes may impact the Group’s reported financial position and results which include:

The approved reserves as of 31 December 2013 are not including the reserves corresponding to the force majeure period. Interoil Peru was awarded an injunction to ­continue operating until 2014 and 2016 for Blocks IV and III respectively. As a consequence the approved reserves for the Group were considerably reduced in 2012. See note 30. In addition the oil assets in Peru are written down to zero. See note 17.

• The carrying value of exploration and evaluation assets, oil and gas properties and property, plant and equipment may be affected due to changes in estimated future cash flows.

3.

financial risk management objectives and policies

The Group’s principal financial liabilities, other than derivatives, comprise accounts payable, bank loans and overdrafts, and debentures. The main purpose of these financial instruments is to manage short-term cash flow and raise finance for the Group’s capital expenditure program. The Group has various financial assets such as trade and other receivables and cash and short-term deposits, that arise directly from its operations. The Group manages its exposure to key financial risks in accordance with its financial risk management policy. The objective of the policy is to support the delivery of the Group’s financial targets while protecting future financial security. The main risks that could adversely affect the Group’s financial assets, liabilities or future cash flows are: market risks, comprising commodity price risk, cash flow interest rate risk and foreign currency risk; and liquidity risk and credit risk. The Group’s overall risk management plan focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. Risk management is carried out by the administration and finance department supervised by Chief Financial Officer. The Board of Directors reviews and agrees policies for managing each of these risks summarised below. The Group is continuously updating and reviewing its financial manual to ensure proper and uniform entries and reporting of all transactions, in accordance with IFRS

and group policy. The Board provides management with guidelines for overall risk management. (a) Market risk Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market prices comprise three types of risk: commodity price risk, interest rate risk and currency risk. Financial instruments affected by market risk include: loans and borrowings, deposits, trade receivables, trade payables, accrued liabilities and derivative financial instruments. Foreign exchange risk; The Group operates internationally and is, to some extent, exposed to foreign exchange risk arising from various currency exposures with respect to the following currencies; NOK, CHF, PEN and COP, in which NOK and COP are the most significant exposures. Revenues is invoiced to the customers in USD, while operating expenses are mostly denominated in USD, NOK, CHF, PEN and COP. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and the investment of excess liquidity. Currently, the Company uses no derivative financial instruments to hedge the above mentioned risk exposures. At 31 December 2013, if the USD had weakened / strengthened by 10% against NOK and COP with all other

35

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS variables held constant, post-tax profit for the year would have been respectively USD 4.7 million and 0.6 million (2012: USD 5.3 million and 0.9 million) higher / lower, mainly as a result of foreign exchange gains / losses on translation of NOK and COP denominated cash and NOK and COP denominated borrowings. The impact on the Group equity would have been the same as for the post tax profit. The impact related to PEN would be immaterial, because receivables and most cash are in USD, while suppliers are in both PEN and USD. Price risk; The Group is exposed to changes in oil prices. The results of Interoil’s operations largely depend on a number of ­factors, most significantly those that affect the price ­Interoil receive for the sold products. Specifically, such factors include the level of crude oil and some extent natural gas prices. Interoil’s results will also be affected by trends in the international oil industry, including possible actions by governments and other regulatory authorities in the jurisdictions in which we operate, or possible or continued actions by members of the Organization of Petroleum Exporting Countries (OPEC) that affect price levels and volumes; increasing cost of oilfield services, supplies and equipment; increasing competition for ­exploration opportunities and operatorship’s, and deregulation of the markets, which may cause substantial changes to the existing market structures and to the overall level and volatility of prices. If the net oil price of the oil sold had been USD 10 per barrel higher/lower than the net realized price received, the net operating income effect would be USD 8.6 million (2012: USD 10.9 million). The net income effect of an increased oil price of USD 10 per barrel would have been USD 6.3 million (2012: USD 0.9 million), as an increase in oil price would result in a financial loss of USD 2.3 million (2012: USD 10.0 million). The impact on the Group equity would have been the same as for net income. The estimated sensitivity of each of the factors on the financial results has been estimated based on the assumption that all other factors would remain unchanged. The estimated effects on the financial results would differ from those that would actually appear in the Group’s consolidated financial statements because the consolidated financial statements would also reflect the effect on depreciation, trading margins, exploration expenses, inflations and potential tax system changes. The oil-based derivative contracts entered into in 2010 – see note 21, affected the risk throughout 2012 and up until August 2013. The oil-based derivatives benchmark the oil price towards West Texas Intermediate (WTI). If the WTI had been USD 10 per barrel higher/lower than the actual price, the net effect on the realized and unrealized gain /

36

loss on the derivative financial instruments for 2012 would be USD 10,0 million. The net income effect and the equity effect for the Group would have been the same. The estimated sensitivity of each of the factors on the financial results has been estimated based on the assumption that all other factors would remain unchanged. The estimated effects on the financial results would differ from those that would actually appear in the Group’s consolidated financial statements because the consolidated financial statements would also reflect the effect on depreciation, trading margins, exploration expenses, inflation and potential tax system changes Interest rate risk; As the Group has no significant interest-bearing assets, the Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group’s interest rate risk arises from borrowings. Borrowings issued at variable rates expose the group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. During 2013 and 2012, the Group’s borrowings at variable rate were denominated in USD while the borrowings at fixed rates were denominated in NOK and COP. The Group analyses its interest rate exposure on a dynamic basis. The Group calculates the impact on profit and loss of a defined interest rate shift. The scenarios are run only for liabilities that represent the major interestbearing positions. Based on the simulations performed, the impact on posttax profit of a 1.0% shift in interest rates on borrowings issued at variable rates would be a maximum increase / decrease in interest expense of less than USD 0.1 million (2012: USD 0.3 million ) at 31 December 2013. The impact on the Group equity would have been the same as for post-tax profit. Interoil has entered into an interest rate swaps to reduce the interest rate risk on borrowings issued at variable rates in Colombia. The accounting impact is insignificant. (b) Credit risk Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions. Credit risk is, in other words, the risk that Interoil’s customers or counterparties will cause financial loss by failing to honour their obligations. In Peru the Group is selling all of its oil to the local state owned ­company PetroPeru S.A. In Colombia the oil is sold to Ecopetrol, the state owned company, to Hocol S.A, CI International Fuels Ltda and Perenco, three private

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS companies. The total revenue from PetroPeru S.A. in 2013 was USD 52 million (2012: USD 60.6 million). In ­Colombia revenue from Ecopetrol in 2013 was USD 9.5 million, revenue of USD 20.3 million (2012: USD 38.0 million) was recognised based on sale to Holcol S.A while sale to CI International Fuels Ltda amounted to USD 6.0 million in 2013 (2012: USD 10.4 million) and sale to ­Perenco amounted to 1.1 million for 2013. The credit risk is c­ onsidered to be low due to the credit worthiness of these customers. No credit limits were exceeded during the reporting period, and management does not expect any losses from non-performance by these counter­parties. Maximum exposure to credit risk at the reporting date is the carrying value of each class of financial assets disclosed in note 21. The Group has a guarantee of USD 3.0 million with an insurance company as security for payments from CI International. See note 18 for an ageing analysis of trade and other receivables and impairment of non-current receivables. A minimum of the current trade and receivables are past due. No impairment charges are made. (c) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and develop operations according to budget. Liquidity risk is the risk that the Group will not be able to meet all obligations when due. The purpose of liquidity and short term liability management is to make certain that the Group at all times has sufficient funds available to cover financial and operational obligations in addition to fund the Group’s drilling program. Funding needs arise as a result of the Group’s general business activity. Liquidity forecasts serve as tools for financial planning. New noncurrent funding will be initiated if liquidity forecasts reveal non-compliance with given limits, unless further detailed considerations indicate that the non-compliance is likely to be temporary. In this case, the situation will be further monitored. Management monitors rolling forecasts of the Group’s expected cash flow from operations. Weekly, monthly and quarterly reports are reviewed and analyzed by management and all cost categories are matched with budgets and historical figures. All important accounts are reconciled on a continuous basis. The liquidity situation of the Group is substantially improved from year-end 2012. A USD 35 million private placement was completed in March 2013 and the Bond Loan maturity was extended from March 2014 until March 2016. The working capital situation is at a normalized level. Interoil Colombia will fund its 2014 development program from internal cash and cash flows, while Interoil

Peru is generating sufficient cash flows to support its own operations and fund corporate SG&A and debt servicing. (d) Capital Management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in the short run and to provide returns for shareholders, benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital in the long run. See note 4 for additional information on going concern. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Due to tight liquidity over several years, the Group has not had the capability of declaring dividends. The Company’s cash flow from operations may not be sufficient to fund its ongoing activities and implement its business plans. From time to time the Company may enter into transactions to acquire assets or the shares of other companies. These transactions, along with the Company’s ongoing operations, may be financed partially or wholly with debt, which may increase the Company’s debt levels above industry standards. Depending on future exploration and development plans, the Company may require additional financing, which may not be available or, if available, may not be available on favourable terms. ­Failure to obtain such financing on a timely basis could cause the Company to forfeit or forego various oppor­ tunities. The Company has a significant amount of debt. A breach of the terms of the Company’s current or future financing agreements may cause the lenders to require ­repayment of the financing immediately and to enforce security granted over the Company’s assets, including its ­subsidiaries. If the Company is unable to comply with the terms of the financing agreements and accordingly is required to obtain additional amendments or waivers from its lenders relating to an existing or prospective breach of one or more covenants in its financing agreements, the ­lenders may require the Company to pay significantly higher ­interest going forward. The operations of the Company are conducted through its subsidiaries in South America and a bank ­facility is ­secured in the Colombian assets. In the event of ­insolvency, liquidation or a similar event relating to one of the Company’s subsidiaries, all creditors of such ­subsidiary would be entitled to payment in full out of the assets of such subsidiary before the Company, as a shareholder, would be entitled to any payments. ­Defaults by, or the insolvency of, certain subsidiaries of the C ­ ompany could result in the obligation of the

37

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Company to make payments under ­parent financial or performance guarantees in respect of such subsidiaries or the occurrence of cross defaults on certain borrowings of the C ­ ompany or other Group companies. Additionally, the Company or its assets may become directly subject to a bankruptcy or similar proceeding initiated against a subsidiary. There can be no assurance that the Company and its assets would be protected from any actions by the creditors of any subsidiary of the Company, whether under bankruptcy law, by contract or otherwise.

4.

The exploration and development of hydrocarbon reserves are highly capital intensive, and are associated with considerable uncertainty in terms of the relationship between budgeted costs and actual costs. The Company may therefore, from time to time, experience that the actual costs of one or more of its developments and/or under­ takings are materially higher than the projected costs. The Company will also be required to make substantial capital expenditure for the acquisition of oil and gas reserves in the future. The Company may hence require additional funding in the future to cover working capital and investment needs for future development and growth. There can be no assurance that the Company will be able to obtain necessary funding in a timely manner and on acceptable terms. Should the Company not be able, at any time, to obtain the necessary funding in a timely manner and on acceptable terms, the Company may be forced to reduce or delay capital expenditures or sell assets or businesses at unanticipated times and/or at unfavourable prices or other terms, or to seek additional equity capital (having a dilutive effect on existing shareholders) or to restructure or refinance its debt, There can be no assurance that such

38

measures would be successful or would be adequate to meet debt and other obligations as they come due, or would not result in the Company being placed in a less competitive position. The shares of Interoil E&P Latin America AS and UP Colombia Holding AS serve as collateral under the ­current Interoil Exploration ASA 10/16 15,00% C NOK 310,000,000 bond loan, and should the Company default on its obligations under this bond loan, the lenders may choose to accede their collateral in these companies. Interoil’s total assets as of 31 December 2013 amount to USD 85.0 million (2012: USD 65.5 million).Total cash and cash equivalents were USD 16.4 million (2012: USD 10.2 million), whereof USD 4.8 million restricted (2012: USD 5.6 million). As at 31 December 2013 the Group’s equity is USD -11.0 million (2012: USD -63.3 million). The current equity level is below the Group’s objectives for managing capital. The negative equity as at 31 December 2013 is highly affected by the: • unsuccessful exploration activities in Africa • realized mark-to-market losses of hedging derivatives. • decline in production due to under-investments in oil production assets. • reserves not posted based on force majeure, and all oil assets in Peru are written down. • significant refinancing expenditures The book equity improved by USD 52.3 million during 2013 on the back of the USD 35 million private placement and a net income of USD 19 million.

going concern

The financial statements in the 2013 Annual Report have been prepared under the going concern ­assumption in ­accordance with the Norwegian Accounting Act §3-3 and the Board of Directors hereby confirms that this ­assumption is valid. As at 31 December 2013 the Group’s liquidity ­situation is significantly improved from one year prior and the ­underlying cash flow generation in both Peru and ­Colombia is strong. Furthermore, the Group reported a net profit of USD 19 million for 2013 and the equity and working capital positions are improving. In the Company, the cost reduction program proceeded as planned, and on the current run rate, savings of ­approximately USD 10 million in annual corporate overhead has been achieved. The Group has continued to repay interest-bearing debts during the year, to a manageable level on current cash flow generation. Interoil Peru is debt-free and generating strong cash flows, while Interoil Colombia entered into a secured bank loan facility with Banco Colpatria for USD 15 million in March 2014. In 2014, Interoil Colombia will target operational ­improvements and the drilling of a few strategic wells, with the aim to substantially increase production and ­reserves. The program is not expected to require ­additional external funding. Interoil Colombia signed a binding agreement with Trayectoria Oil & Gas for the divestment of the Altair and Cor-6 exploration licenses in 2013. Trayectoria

is in breach of this contract and the transaction is not ­completed. Until the transaction is closed, Interoil ­Colombia is liable towards ANH for the investment obligations on Cor-6, which amount to USD 22 million, to be executed by June 2014. Interoil Colombia will hold ­Trayectoria liable for any damages incurred. Interoil Colombia is also in close dialogue with ANH about the technical ­prospects of the Cor-6 license. Meanwhile, no investments will be carried out on the Cor-6 license. On the LLA-47 exploration license, Interoil Colombia will spend around USD 14 million on the acquisition of s­ eismic, as per the ANH commitments. This will be ­covered by internal cash flows. In addition, Interoil Colombia has an obligation to drill eight exploration wells, the first of which is expected to be drilled in early 2015. Interoil lost the arbitration case against Perupetro for Blocks III and IV in Peru. However, Interoil Peru will continue to operate the blocks until 5 April 2015, through a license contract on identical commercial terms as the original contracts. As such, Interoil Peru is expected to generate strong cash flows and profitability for 2014. In addition, Interoil Peru plans to participate in the coming bid rounds for the same blocks. The Group is thinly capitalized and access to new capital cannot be guaranteed. Consequently, Interoil is vulnerable to unforeseen negative developments. However, the Board believes that the Interoil Group has sufficient cash flow generation to meet its obligations throughout 2014 as well as the upside potential to create substantial shareholder values in the medium to long term.

39

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

5.

As of 31 December 2012 Unallocated / Amounts in USD 1 000 Colombia Peru Ghana Other eliminated

segment information

The Group’s organizational structure reflects the different activities in which Interoil is engaged. Management has determined the operating segments based on reports that are reviewed and used to make strategic decisions. The Group has three reportable segments, as described below, which are the Group’s strategic business units. The business is considered both from a geographic and development phase perspective. Geographically, management considers the performance of the activities in Colombia and Peru and Corporate. For each of the strategic business units, the management and other decision makers review internal management reports on a day to day basis. The following summary describes the operations in each of the Group’s reportable segments: – Colombia, consists of upstream activities including oil and natural gas exploration, field development and production from the Group’s licenses in Colombia – Peru, consists of upstream activities including oil and natural gas exploration, field development and production from the Group’s licenses in Peru – Other businesses and Corporate consist of corporate activities world wide

No operating segments have been aggregated to form the above reportable operating segments. Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on production, operating profit or loss and is measured consistently with operating profit or loss in the consolidated financial statements. Segment revenues and segment results include transactions between business segments. These transactions and any unrealized profits and losses are eliminated. Transfer prices between operating segments are on an arm’s length basis in a manner similar to transactions with third parties. See note 3 (b) for more information regarding third-party customers.

As of 31 December 2013 Unallocated / Amounts in USD 1 000 Colombia Peru Other eliminated

Group

Total Revenue 43 643 53 355 377 0 97 375 Inter-segment sales 0 0 1 103 -1 103 0 Cost of goods sold -12 638 -15 682 -68 0 -28 388 Depreciation -4 608 -2 299 0 0 -6 907 Gross profit 26 397 35 375 1 412 -1 103 62 081 Exploration cost expensed -3 930 0 0 0 -3 930 Administrative expense -3 660 -6 168 -7 804 0 -17 632 Other income / (expenses) 4 324 -2 812 4 277 0 5 789 Inter-segment cost 0 -1 021 -82 1 103 0 Impairment oil and gas assets 0 0 0 0 0 Result from operating activities 23 131 25 374 -2 197 0 46 308 Finance income 3 993 3 081 5 750 -3 465 9 359 Finance costs -4 118 -2 227 -13 668 3 465 -16 548 Profit / (loss) before income tax 23 006 26 228 -10 115 0 39 119 Income tax expense -8 940 -11 059 0 0 -19 999 Profit / (loss) before o. income 14 066 15 169 -10 115 0 19 120 Other comprehensive income 0 0 -116 0 -116 Profit/(loss) for the period 14 066 15 169 -10 231 0 19 004

40

Group

Total Revenue 54 067 62 916 0 1 283 0 118 266 Inter-segment sales 0 0 0 10 287 -10 287 0 Cost of goods sold -15 126 -18 543 0 -629 0 -34 298 Depreciation -3 144 -37 466 0 0 0 -40 610 Gross profit 35 797 6 907 0 10 941 -10 287 43 358 Exploration cost expensed -7 219 0 -1 225 -4 065 300 -12 209 Administrative expense -1 850 -2 715 0 -8 817 0 -13 382 Other income / (expenses) 1 056 251 170 9 161 0 10 638 Inter-segment cost -4 275 -5 610 0 -102 9 987 0 Impairment oil and gas assets 0 -45 256 0 0 0 -45 256 Result from operating activities 23 509 -46 423 -1 055 7 118 0 -16 851 Finance income 14 484 13 991 24 12 691 -14 012 27 178 Finance costs -15 952 -9 691 -548 -31 754 15 792 -42 153 Profit / (loss) before income tax 22 041 -42 123 -1 579 -11 945 1 780 -31 826 Income tax expense -5 859 13 731 0 0 -3 7 869 Profit / (loss) for the period 16 182 -28 392 -1 579 -11 945 1 777 -23 957

As of 31 December 2013 Unallocated / Amounts in USD 1 000 Colombia Peru Other eliminated Group

Property, plant and equipment Other assets Total segment assets Total segment liabilities Capital expenditure

49 353 10 920 60 273 24 926 17 367

832 19 678 20 510 14 110 839

29 4 160 4 189 56 908 -14

0 0 0 0 0

50 215 34 757 84 972 95 944 18 192

Other segment information Lifting cost DD & A, cost of goods sold

12 022 4 256

15 137 2 909

0 66

0 0

27 159 7 231

As of 31 December 2012 Amounts in USD 1 000 Colombia Peru Ghana Other

Property, plant and equipment Other assets Total segment assets Total segment liabilities Capital expenditure

36 710 9 365 46 075 40 784 4 729

2 392 9 403 11 795 19 251 6 502

0 7 7 1 377 0

446 5 062 5 508 65 317 25

Unallocated / eliminated

0 0 0 0 0

Group

39 548 23 837 63 384 126 728 11 256

Other segment information Lifting cost 15 576 17 337 0 0 0 32 912 Depreciation and impairment 3 144 82 722 0 50 0 85 866

41

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

6.

8.

sales and royalty agreements

exploration cost expensed

For the year ended 31 December

For the year ended 31 December

Amounts in USD 1 000

Amounts in USD 1 000

2013

Sale of oil – before royalty 143 068 Royalty -54 219 Sale of oil – net, barrels 88 849 Sale of gas 2 848 Sale of services 5 678 Total sales 97 375 Sale in barrels – see note 30.

2012

172 875 -63 953 108 922 2 528 6 816 118 266

Royalty: The royalty payments have been deducted from total sales reported by the Group.

Value of Crude Basket Block III Oil Price 36 000 barrels pr month The main financial covenants related to the Bond Loan are as follows • Secured/Unsecured debt and leasing Peru/Colombia < USD 20 million

Interoil may redeem the Bond Loan, in whole or in part, as follows: a) from 14 September 2012 to 14 March 2015, at a price equal to 105.00 % plus accrued interest on redeemed amount; and b) from 14 March 2015 to the final maturity date at a price equal to 101.00 %, plus accrued interest on redeemed amount.

The table below sum up the maturity profile of the Group’s financial liabilities at 31 December 2013 based on contractual undiscounted payments.

The Bond Loan recognised in the statement of financial position is calculated as follows:

Borrowings including interest 18 067 7 600 60 552 86 219 Trade and other payables 20 477 0 0 20 477 Other interest bearing liabilities 0 0 0 0 Year ended 31 December 2012

Amounts in USD 1 000

Bond Loan at issue date, 14 September 2010 Borrowing costs (fees and legal expenses) Amortisation of debt issue cost Revaluation loss as at end of reporting period Balance at 31 December 2013

50 617 -4 966 3 191 50 48 892

The Group has recognized a foreign exchange gain of USD 5,5 million (2012 : loss USD 4,4 million) related to the ­revaluation of borrowings for the Bond loan and the Colpatria loan. Colpatria loan USD 13.5 million In June 2012 the Group entered into a USD 13.5 million loan agreement with Banco Colpatria Cayman Inc. The loan will mature in May 2014, and will be repaid in 8 quarterly equal instalments ending on the maturity date. The loan bears interest of LIBOR + 5 % per annum payable quarterly. The Colpatria loan recognised in the statement of financial position is calculated as follows: Amounts in USD 1 000 Face value of loan issued Repayments performed Balance at 31 December 2013

62

Leasing 15 Bank loan BCS – Interoil Colombia Branch 1 716 Bank loan Helm Bank – Interoil Colombia Branch 1 044 Banco de Occidente 4 317 Other non-current interest bearing liabilities 6 085 Total other interest bearing liabilities 31 December 2013 13 177 Other non-current interest bearing liabilities refers to the final payment related to Interoil E&P Switzerland AG acquired in 2006. For 2012 USD 5.6 million is included in other accrued expenses, see note 27.

Year ended 31 December 2013

Less than 1 year



Less than 1 year

Between 1 and 2 years

Between 1 and 2 years

Between 2 and 5 years

Total

Between 2 and 5 years

Total

Borrowings including interest* 33 747 52 625 0 86 372 Trade and other payables 37 744 0 0 37 744 Other interest bearing liabilities 0 16 0 16 * In the consolidated statement of financial position for 2012 borrowings have been classified as current due to breach of covenants. However, the loan facilities were not declared due and were in the maturity table presented based on original contractual undiscounted cash flows.

As the amounts included in the above table are the contractual undiscounted cash flows, these amounts will not ­reconcile to the amounts disclosed on the statement of financial position for borrowings which is recorded at amortised cost. The specific time buckets presented are not mandated by the standard, but are based on choice by management.

13 500 -10 125 3 375

63

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

26.

28.

provisions for other liabilities and charges

For the year ended 31 December Amounts in USD 1 000

2013

2012

Non-current: Asset retirement obligations 1 281 1 142 Other long term obligations 996 1 618 Total non-current provisions for other liabilities and charges 2 277 2 760 Current: Other provisions and charges 3 382 5 207 Total current provisions for other liabilities and charges 3 382 5 207 Total provisions for other liabilities and charges 5 659 7 967 Asset retirement obligation is a liability for plugging, abandonment and decommissioning costs that are recognized since the Group has an obligation in Colombia to dismantle and remove facilities and restore the site on which it is located. The amount recognized is the present value of the estimated future expenditure determined in accordance with local conditions and requirements. The discount rate used for 2013 was 6.6% (2012 : 5.4%). Of the provision related to Colombia USD 0.8 million (2012: 1.5 million), USD 0.2 million (2012: 0.25 million) is expected to be executed within the next five years. Interoil Peru has been informed that the Company may have an obligation for site restoration and to abandon wells. Provision recognised in 2013 of USD 0.5 million is based on correspondence with OEFA, and will be effectuated within the next five years. Other long term obligations are provision based on local statutory requirements in connection with employees in ­Colombia. Other provisions and charges are related to the accounting of the association contract as outlined in note 2.18. USD 2.9 million relating to a claim from the operator of Block 5 in Angola was also included in other provisions and charges for 2012. The amount is reversed in 2013. See note 13.

27.

trade and other payables

For the year ended 31 December Amounts in USD 1 000

Trade creditors Public duties payable Debt to employees and shareholders Other accrued expenses Total trade and other payables

2013

10 014 2 460 2 668 5 335 20 477

2012

16 892 4 389 5 244 11 219 37 744

For 2012 USD 5.6 million regarding the final payment of Interoil E&P Switzerland AG acquired in 2006 is included in o ­ ther accrued expenses. The agreement is amended and new maturity is March 2016, consequently the debt is ­transferred to other interest bearing liabilities for 2013. See note 25.

commitments and contingencies

The Group is involved in a number of legal proceedings in various forms. While acknowledging the uncertainties of litigation, the Group is of the opinion that based on the information currently available, these matters will be resolved without any material adverse effect individually or in aggregate on the Group’s financial position. No provisions have been made for the legal disputes discussed in this note. For legal disputes, in which the Group assesses to be probable (more likely than not) that an economic outflow will be required to settle the obligations, provisions have been made based on management’s best estimate. Legal proceedings- numbers in USD 1000 Force Majeure Arbitration – Perupetro Interoil Peru operated Blocks III and IV in Peru under a 20-year license contract with Perupetro, the licensing agency in Peru, which originally expired in March 2013. Both contracts contain a force majeure clause. In 1998 and 2003, force majeure was declared, due to the phenomena El Nino. The parties disagreed as to whether the duration of the force majeure events should be added to the license contracts’ term. In June 2012, Interoil Peru obtained a provisional measures order by the Talara Judge of First Instance, declaring as temporary interim relief the extension of the contracts’ term until January 2016 and October 2014, respectively. Interoil further submitted a request for arbitration before the ICC requesting extension of the contracts for the duration of the force majeure events, and, as temporary interim relief, confirmation of the order granted by the Talara Judge while the arbitration was pending. In April 2013, the ICC Arbitral Tribunal issued a decision confirming the order granted by the Talara Judge and providing that the contracts’ terms was extended until the Arbitral Tribunal rendered its final award. Interoil Peru has been operating according to this provisional measures order under identical terms as per the original license contracts. The Arbitral Tribunal expressly reserved the right to grant damages to Perupetro, should the force majeure extension ultimately be rejected. Thus, as Interoil Peru according to the injunction had legal access to operate in the Blocks for the period after March 2013 (the original expiry of the contracts) and until the arbitral award was notified to the parties, the revenues relating to sale of oil produced in the Blocks have been recognized. In April 2014, the ICC Arbitral Tribunal ruled in favour of Perupetro and from the date Perupetro was notified of the Arbitral Tribunal’s award, the provisional measures order ceased to have effect. Although the award lifted the provisional measure order, it confirmed that until the notification of the award, the contracts continued to produce effect. Immediately after such notification, Interoil Peru and Perupetro entered into a license contract whereby Interoil Peru will continue to operate Blocks III and IV for a 12-month period. Under Peruvian law, a party may be entitled to claim damages when a provisional measures order is withdrawn by an Arbitral Tribunal or ceases to have effect. Although the Arbitral Tribunal did not award damages to Perupetro, that the award stated that Interoil Peru had valid grounds to seek arbitration, and that the expenses would be shared between the parties, one cannot discard the possibility that Perupetro will seek damages as a result of Interoil Peru operating the blocks from March 2013 until the award was made in April 2014. However, Perupetro has no automatic or objective right to obtain compensation. Perupetro will first have to overcome certain procedural obstacles. There is a procedural debate under Peruvian law as to whether any claim for compensation for damages arising out of provisional measures ordered by an Arbitral Tribunal must be made before the same Arbitral Tribunal, before another Arbitral Tribunal constituted in a second arbitration, or before the Peruvian courts. Interoil’s legal advisors are of the opinion that such claim for damages must be brought before the Arbitral Tribunal as part of the ICC Arbitration. If Perupetro overcome the procedural obstacles, it will have to prove that it has suffered economic loss due to Interoil operating the Blocks in the period from March 2013 until the award was issued. The economic loss would have to be a result of Interoil Peru operating sub-optimally, i.e. another operator could have (i) produced more, thereby paying higher royalties and/or (ii) generated higher profits, thereby paying higher income taxes, or that Perupetro could have operated the blocks, thereby capturing all profits to the benefit for the state. Perupetro is not involved in any up-stream operations and does not have the personnel, competence or funding to engage in oil production. Further, Interoil is of the opinion that another operator could not have produced more or generated higher profits. Perupetro will further have to demonstrate that Interoil Peru has acted negligently or with intent to be able to claim damages. Thus, Interoil does not believe it is likely that Perupetro will be able to demonstrate economic loss, and prove that Interoil Peru has acted negligently or with intent, especially considering that the Arbitral Tribunal stated in the award that Interoil had valid reasons to initiate the arbitration and acted in good faith throughout the proceedings, and hence no provision has been made.

64

65

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

OEFA In January 2013, Interoil Peru was fined by the Environmental Assessment and Control Agency in Peru (“OEFA”) for drilling four wells in locations not authorised by OEFA. The fine amounted to USD 1,8 million. The fine was challenged by Interoil Peru In March 2014, Interoil was informed by OEFA that the USD 1,8 million fine had been reversed, as it recognized that Interoil, by moving the well locations, actually reduced the environmental impact. Interoil has drilled other wells that OEFA is reviewing. Interoil believes the successful appeal of the fine will lay precedent also for these wells.

that Norwegian courts is the correct legal venue for the dispute. The court concluded preliminarily that there is a clear presumption that the promissory note is invalid/false. The ruling has not been appealed and PetroCarbon is liable for Interoil’s legal costs. Due to procedural issues, the dispute regarding the payment claim will be filed to the conciliation board, before the case is transferred to the Oslo District Court , which will resolve finally on the existence of the payment claim.

Tax Litigation Procedures – SUNAT The Company and Interoil Switzerland have issued invoices to Interoil Peru and Interoil Colombia for technical and consulting services provided during the years 2008-2013. SUNAT, the tax agency in Peru, has performed and finished on 30 December 2013 a partial audit of the year 2008. In July 2013, SUNAT initiated a partial audit of 2009. In December, SUNAT informed Interoil Peru that it deemed the services provided in 2008 and 2009 as royalties. Consequently, these invoices would be liable to 30 % income tax. Invoices issued in 2008: Interoil Peru has appealed the claim from SUNAT of USD 750 comprising of tax and fines. The legal advisors of Interoil Peru believe Interoil has a strong case. Invoices issued in 2009: SUNAT is still auditing 2009. The contingency for this year approximately USD 1,2 million. Environmental administrative investigations The environmental authorities in Colombia, Cortolima, is currently reviewing a case against Interoil Colombia regarding alleged contamination of the Opia river due to washing a water vehicle and oil spots. The sanction may vary between verbal sanction to a USD 1,6 million fine. As Interoil Colombia does not have previous environmental sanctions record, there is low probability that there will be any material sanctions. Additionally, the oil spots are due to natural hydrocarbons swipe. Labor proceedings In Colombia, there are certain claims from third party employees regarding certain social security contributions and indemnification for disability by virtue of work accidents. As there is a lack of legal relationship between the plaintiff and the company, there is low probability for success for the plaintiff. There are also certain claims from employees against Interoil Colombia, however, the claims are of limited size. Claims from contractors In Peru, there are certain claims from contractors claiming that Interoil has a payment obligation. The claim from SERMEPET amounts to approximately USD 112,000, however, Interoil is of the opinion that the payments has been made, and the claim has been rejected. Interoil Peru has also received a claim for compensation for damages from Servicios Petroleros San Marcos SAC, and the claim amounts to approximately USD 723,000. Interoil has disputed the claim. There are also claims from other contractors, however, the claims are of limited size and Interoil considers the probability of occurrence as low.

The Colombian branch has the following contract obligations: Interoil has fulfilled all contract obligations connected to the Altair licence situated in the Llanos Basin. In the 2010 Colombian licensing round, Interoil signed two licenses with the Colombian Hydrocarbon Agency (ANH), for Cor-6 and LLA-47. Cor-6 is located in the Middle Magdalena Valley and covers an area of 447 km². The Branch is committed to acquire 150 km² of 3D seismic and to drill 2 exploration wells during the initial exploration phase of 36 months. Estimated cost is USD 10 million and USD 12 million respectively. As per contract the seismic and wells should be finalized within June 2014. However, the Company is in negotiations with ANH about the technical prospects of the block. Meanwhile, Interoil will not make any investments under the Cor-6 license . LLA-47 is located in the prolific Llanos basin and covers an area of 447 km². Interoil is committed to acquire 350 km² of 3D seismic and to drill 8 exploration wells by February 2016. Estimated cost is USD 14 million and USD 24 million respectively. In February 2013, Interoil Colombia signed an assignment agreement with Trayectoria Oil & Gas, to sell Interoil’s interest Altair and Cor-6 exploration licenses in Colombia. Trayectoria is in breach of the contract and will be liable towards any financial damages incurred by Interoil. Interoil has initiated legal action against Trayectoria for breach of its obligations under this transaction and will be held liable for any damages incurred by Interoil. Interoil is also in close dialogue with ANH about the technical prospects of the Cor-6 license. Meanwhile, no investments will be carried out on the Cor-6 license The Colombian tax authorities(Dian), has opened an audit of 2011, and are requesting further information in relation to transfer pricing. Interoil Colombia has previously chosen to settle a claim from the authorities for the years 2006-2008 in relation to transfer pricing based on advice then given by Interoil’s legal advisors. The possible taxclaim will be up to USD 1.8 million. The Group leases offices and machinery under non-cancellable operating lease agreements. The future aggregate minimum lease payments under non-cancellable operating leases are USD 0.9 million.

29.

subsequent events

1 April 2014, the Arbitral Tribunal ruled against Interoil in the case between Interoil Peru and Perupetro. Police investigation In June 2013, Interoil Peru filed a criminal charge in Peru against Jamie Mur Campoverde (the former general manager of Interoil Peru) and Jamie Mur Mendiola (the former CFO of Interoil Peru). Interoil Peru is of the opinion that the Mur Campoverde and Mur Mendiola have committed crimes and fraud against Interoil Peru, including unlawful appropriation and forgery of documents. The case is under investigation, and the Peruvian authorities will decide on whether to file a criminal complaint against Mur Campoverde and Mur Mendiola to open a criminal file against the defendants. Dispute PetroCarbon Invest SA On 11 June 2013, Interoil received a payment claim of USD 40,5 million on behalf of PetroCarbon Invest SA (“PetroCarbon”), a company owned by Jamie Mur Campoverde, the former director and acting general manager of Interoil Peru. The claim was based on the intercompany loan from Interoil Peru to Interoil Exploration and Production AS (“LATAM”). On 13 June, Interoil filed a writ to Oslo District Court disputing the claim. PetroCarbon submitted a promissory note related to the intercompany loan agreement, which allegedly transferred the loan from Interoil Peru to PetroCarbon Invest, and Interoil ASA allegedly acted as guarantor for the claim. The promissory note had the State of New York as legal venue. Interoil disputed the existence of the promissory note, and claimed that PetroCarbon is unauthorized to dispose of or recover the claim against LATAM. On 14 February 2014, the Oslo District Court concluded

66

The Company is surprised and disappointed with the arbitration ruling. The Company, and our legal advisors, are of the strong opinion that all legal merits of this case entailed that the Arbitration Tribunal would rule in favor of Interoil. 5 April 2014 Interoil Peru secured a 12 month license contract for Blocks III and IV with Perupetro. The contract’s commercial terms are identical to the original license contracts. It is expected that a bid round for a 30 year license contract for Blocks III and IV will be completed before expiry of the contract on 5 April 2015. Interoil Peru will participate in the bid round. Perupetro will select the new operator based on proposed investment program and royalty rate. 7 April 2014 Interoil Colombia Exploration & Production Inc (BVI) has entered into a secured bank loan facility with Banco Colpatia, for USD 15 million. The loan carries an interest rate of LIBOR + 4,5% with maturity in February 2016. 26 March 2014, Interoil was informed by OEFA that the USD 1,8 million fine had been reversed, as it recognized that Interoil, by moving the well locations, actually reduced the environmental impact.

67

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

30.

Aggregated equity oil and gas Reserves, Production, Developments and Adjustments

oil and gas reserves

(unaudited)

The reserves have been estimated and classified according to the “Petroleum Resources Management System”, ­developed and approved in March 2007 jointly by the Society of Petroleum Engineers, World Petroleum Council, American Society of Petroleum Geologists and Society of Petroleum Evaluations Engineers, here after referred to as the “2007 PRMS“ and have been audited by the independent petroleum engineering firm of Gaffney, Cline & Associates Inc. Oil Reserves by geographical region Developed Producing reserves as of 31 December 2013 1P

Gross



Interest

Equity

Oil Gas (mmbbl)

Colombia Peru Total

(BCF)

(mmboe)

%

(mmboe)

2P

Gross Interest

Equity

Oil Gas

(mmbbl)

(BCF)

(mmboe)

%

(mmboe)

2.8 10.1 4.7 65 % 3.1 2.9 10.2 4.8 65 % 3.1 0 0 0 0 0 0 0 0 2.8 10.1 4.7 3,1 2.9 10.2 4.8 3.1

Developed Non-Producing reserves as of 31 December 2013 1P

Gross



Interest

Equity

Oil Gas (mmbbl)

Colombia Peru Total

(BCF)

(mmboe)

%

(mmboe)

2P

Gross Interest

Equity

Oil Gas

(mmbbl)

(BCF)

(mmboe)

%

Non-Developed reserves as of 31 December 2013

Gross



Interest

Equity

Oil Gas (mmbbl)

Colombia Peru Total

(BCF)

(mmboe)

% (mmboe)

2P

Gross Interest

Equity

Oil Gas

(mmbbl)

(BCF)

(mmboe)

%

(mmboe)

0.8 1.9 1.1 64 % 0.7 2.5 6.1 3.6 64 % 2.3 0 0 0 0 0 0 0 0 0.8 1.9 1.1 0.7 2.5 6.1 3.6 2.3

Total reserves as of 31 December 2013 1P

Gross



Interest

Equity

(mmbbl)

Colombia Peru Total

(BCF)

(mmboe)

%

(mmboe)

Equity

Oil Gas

(mmbbl)

(BCF)

3,2 -0.7 0 0 0.7 0 -0.1 0 3.1

0,9 0 0 0 0

1,1 0 0 0 1.1

5,2 -0.7 0 0 1.8

-0.6 0 -0.6 0 0.1 -0 -0.6 1.2 0.5 0.3 2.3 5.7

Notes mmboe = m  illion stock tank barrels of oil equivalent Gross Reserves are Operated Reserves Equity reserves: Colombia - Net after Royalty Peru - Net before Royalty Working Interest varies per concession; reported percentages are averages Gas converted to oil equivalent based on 5300 scf equals 1 boe Numbers may not add up due to rounding

Production and sales for the period from 1 January to 31 December 2013

Colombia Peru Total

Sale of oil in barrels – net Sale of oil, barrels 372 024 489 436 861 460 Total sale in barrels – net 372 024 489 436 861 460 Sale of gas in barrels – net Sale of gas, barrels 155 816 0 155 816 Total sale in barrels – net 155 816 0 155 816 Production in barrels – net Working interest, barrels 413 775 968 637 1 382 412 Working interest, gas (boe) 169 370 0 169 370 Royalty -46 660 -479 189 -525 849 Total production in barrels – net of royalty 536 485 489 448 1 025 933 Production and sales for the period from 1 January to 31 December 2012

(mmboe)

%

(mmboe)

3.7 14.0 6.3 65 % 4.1 5.4 18.4 8.9 64 % 5.7 0 0 0 0 0 0 0 0 3.7 14.0 6.3 4.1 5.4 18.4 8.9 5.7

Notes mmboe = million stock tank barrels of oil equivalent Gross Reserves are Operated Reserves Equity Reserves: Working Interest varies per concession; reported percentages are averages Gas converted to oil equivalent based on 5.30 Mscf equals 1 boe

For a full description of the “2007 PRMS”, please refer to the Society of Petroleum Engineers website: www.spe.org

68

Reserves at 31.12.12 3,1 0,8 0,5 4,4 Production -0.7 0 0 -0.7 Aquisition / Disposals 0 0 0 0 Extensions & Discoveries 0 0 0 0 New Developments 0.7 0 0.2 0.9 Transfer to/from Contingent Resources 0 -0.5 0 -0.5 Revisions -0.1 0 0 -0.1 Total Changes 0.0 -0.5 0.2 -0.3 Reserves at 31.12.13 3,1 0.3 0.7 4.1

2P

Gross Interest

Oil Gas

1P 2P Devel- Devel- Non- Devel- Devel- Nonoped oped Non- Devel- oped oped Non- DevelProducing Producing oped Total Producing Producing oped Total

(mmboe)

0.1 2.1 0.5 65 % 0.3 0.1 2.1 0.5 65 % 0.3 0 0 0 0 0 0 0 0 0.1 2.1 0.5 0.3 0.1 2.1 0.5 0.3

1P

(mmboe)

Colombia Peru Total

Sale of oil in barrels – net Sale of oil, barrels 462 165 556 162 1 018 327 Total sale in barrels – net 462 165 556 162 1 018 327 Sale of gas in barrels – net Sale of gas, barrels 142 807 0 142 807 Total sale in barrels – net 142 807 0 142 807 Production in barrels – net Working interest, barrels 493 584 1 102 105 1 595 689 Working interest, gas (boe) 156 247 0 156 247 Royalty -56 180 -545 940 -602 120 Total production in barrels – net of royalty 593 651 556 165 1 149 816

69

IN T E ROIL E XP LORAT IO N AN D PRO DU CTIO N ASA

N OT E S TO T OF STATEMENT H E COMPREHENSIVE FI NAN CI AL S TAT E INCOME MENTS

FINA N CIAL S TAT E ME N TS Amounts in USD 1 000 unless otherwise stated

31 D E CE MBE R 2 0 1 3

For the year ended 31 December

Notes

2013

2012

Sales 4 1 019 5 415 Gross profit 1 019 5 415 Exploration cost expensed 5 -82 -862 Administrative expense 6 -6 316 -7 556 Other operating income 7 0 9 078 Result from operating activities -5 379 6 075 Finance income 8 41 567 46 315 Impairment of intercompany investments and receivables 8 -25 551 -1 972 Finance costs 8 -10 126 -24 334 Net finance income 5 890 20 009 Profit / (loss) before income tax 511 26 084 Income tax expense 9 0 0 Profit / (loss) from continuing operations 511 26 084 Other comprehensive income -116 0 Other comprehensive income for the year, net of tax -116 0 Total comprehensive income for the year, net of tax 395 26 084 Attributable to: Retained earnings 395 26 084 395 26 084

70

71

STATEMENT OF FINANCIAL POSITION

S TAT E M E N T O F CH AN G E S I N E Q U I T Y

Amounts in USD 1 000

Amounts in USD 1 000

As of 31 December

Notes

2013

2012

ASSETS Non-current assets Property, plant and equipment 10 29 66 Investments in subsidiaries 11 27 268 27 257 Retirement benefit asset 6 0 66 Intercompany receivables 13,14 15 997 1 388 Total non-current assets 43 294 28 777 Current assets Trade and other receivables 12,14 198 223 Cash and cash equivalents, restricted 14,15 2 115 2 568 Cash and cash equivalents, non-restricted 14,15 1 353 1 290 Total current assets 3 666 4 081 TOTAL ASSETS 46 960 32 858 EQUITY Share capital and share premium 16 123 901 90 985 Other paid-in equity 3 330 2 880 Retained earnings -137 078 -137 472 Total equity -9 847 -43 607 LIABILITIES Non-current liabilities Long term borrowings 14,17 54 977 0 Retirement benefit obligations 82 0 Intercompany payables 13,14 0 15 253 Total non-current liabilities 55 059 15 253 Current liabilities Trade and other payables 14,18 1 748 7 830 Borrowings/Current interest-bearing liabilities 14,17 0 53 382 Total current liabilities 1 748 61 212 TOTAL LIABILITIES 56 807 76 465 TOTAL EQUITY AND LIABILITIES 46 960 32 858

Share capital Other and share paid-in Retained Notes premium equity earnings

Total equity

Balance at 31 December 2011 90 985 2 880 -163 556 -69 691 Total comprehensive income of the year: Profit / (loss) for the period 0 0 26 084 26 084 Balance at 31 December 2012 90 985 2 880 -137 472 -43 607 Total comprehensive income of the year: Issue of share capital, cash increase 34 993 0 0 34 993 Share issuance cost -2 077 0 0 -2 077 Share options 0 450 0 450 Profit / (loss) for the period 0 0 395 395 Balance at 31 December 2013 123 901 3 330 -137 078 -9 847 Other paid-in equity – consist of subscription rights.

Oslo, 29 April 2014 The Board of Interoil Exploration and Production ASA



Anne-Grete Ellingsen

Arturo G. Vilas



Chairman of the Board

Member of the Board



Peter Nicol

Thomas J. Fjell



Member of the Board

Chief Executive Officer



72

73

C A S H F LOW S TAT E ME NT

N OT E S TO T H E FI NAN CI AL S TAT E M E N T S

Amounts in USD 1 000

1.

For the year ended 31 December

Notes

2013

2012

Cash generated from operations Profit/(loss) for the year 395 26 084 Depreciation, amortization and impairment 6 67 50 Impairment of intercompany receivables 8 0 1 972 Fee regarding taxclaim/bondloan -385 -1 441 Amortization of debt issuance cost 8, 17 566 1 754 Change in retirement benefit obligation 6 598 -14 Interest income 8 -15 -2 135 Interest expense 8 8 676 15 955 Unrealized exchange loss / (gain) from revaluation of borrowings 8, 17 -4 672 3 658 Changes in assets & liabilities Change in intercompany accounts 13 -30 377 -35 796 Trade and other receivables 12 25 -50 Trade and other payables 18 115 1 301 Net cash generated from operating activities -25 007 11 337 Cash flows from investing activities Acq. of subsidiary, net of cash acquired 11 -11 0 Interest received 8 15 105 Investment in property, plant and equipment (PPE) 10 -29 0 Net cash used in investing activities -25 105 Cash flows from financing activities Interest paid 8 -8 273 -8 156 Repayment of borrowings 17 0 - 3 400 Proceeds from issuance of ord. shares 16 32 916 0 Net cash used in financing activities 24 643 -11 556 Net increase in cash and cash equivalents -390 -113 Cash and cash equivalents at beginning of the period 15 3 858 3 971 Cash and cash equivalents at end of the year 3 468 3 858 Whereof cash and cash equivalents, non-restricted 15 1 353 2 568 Whereof cash and cash equivalents, restricted 15 2 115 1 290

summary of significant accounting policies

The financial statements for Interoil Exploration and Production ASA (the “Company”) are prepared in accordance with simplified IFRS according to the Norwegian Accounting Act § 3-9. This mainly implies that recognition and measurements in the financial statements are in accordance with IFRS, while the notes disclosures are presented in accordance with the Norwegian Accounting Act. The Company’s accounting policies are specified in Group note 2 (consolidated financial statements). These financial statements are presented in USD, which is the Company’s functional currency, and rounded up to ­thousands (1 000). Shares in subsidiaries are recorded in accordance with the cost method in the parent company accounts. The ­investments are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

2.

going concern

The financial statements have been prepared based on the going concern assumption. For further details, we refer to the Board of Director’s report and Group notes 3 and 4.

3.

financial risk management

The Company’s activities are exposed to a variety of financial risks: market risk (including currency risk, price risk and i­nterest rate risk), credit risk and liquidity risk. See Group note 3 for more information regarding Financial Risk ­Management. The table below sum up the maturity profile of the Company’s financial liabilities at 31 December 2013 based on ­contractual undiscounted payments. Year ended 31 December 2013

Borrowings including interest Trade and other payables

Less than 1 year Between 1 and 2 years

Between 2 and 5 years

Total

7 600 0

60 552 0

75 752 1 748

Less than 1 year Between 1 and 2 years

Between 2 and 5 years

Total

0 0 15 253

65 137 7 830 15 253

7 600 1 748

Year ended 31 December 2012

Borrowings including interest *) Trade and other payables Intercompany loan and payables

15 887 7 830 0

49 250 0 0

*) As the amounts included in the above table are the contractual undiscounted cash flows, these amounts will not reconcile to the amounts disclosed on the statement of financial position for borrowings which is recorded at amortised cost. The specific time buckets presented were not mandated by the standard, but are based on choice by management. See notes 13, 17 and 18 for the carrying amounts.

74

75

N OT E S TO T HE F INANCIAL STATEM EN TS 4.

N OT E S TO T H E FI NAN CI AL S TAT E M E N T S Pensions Interoil has a defined benefit plan for employees in the Company. Interoil meets the Norwegian requirements for mandatory occupational pension (Nw: obligatorisk tjenestepensjon). See Group note 19 for further information.

sales

For the year ended 31 December Amounts in USD 1 000

2013

2012

Remuneration of senior executives The Management consists of the Company’s Directors, who are the CEO, CFO and the COAA.

Sale of services Management fee Total sales

0 1 019 1 019

149 5 266 5 415

Management remuneration 2013 Amounts in USD 1 000

5.

exploration cost expensed

For the year ended 31 December Amounts in USD 1 000

Analysis and general G&G Total exploration cost expensed

6.

2013

2012

82 82

862 862

Erik Sandøy

CEO

CFO

Kari Kaugerud COAA *)

Period 01.01 – 31.12 01.01 – 31.12 01.01 – 31.12 Salary 804 427 203 Bonus related to 2013, paid 2014 143 184 103 Pension scheme 20 18 26 Expensed option cost 278 124 31 Other (company car) 47 0 0 Senior management reduced their salaries with effect from 1 October 2013. From this date, Tomas J Fjell and Erik Sandøy’s salaries are USD 572 and USD 368, respectively. Payments to Tom Wolden, the COO until December 2012, for the period from January to March 2013 is USD 238 in total. Payments to Rene Graf, the CEO until December 2012, is USD 181 for 2013.

administrative expenses

*) As from 1 September 2013 Kari Kaugerud was appointed Chief of Corporate Organisation, Audit and Accounting.

For the year ended 31 December Amounts in USD 1 000

T. Fjell

Notes

2013

2012

Employee benefit expenses *) 3 494 2 276 Depreciation 10 67 50 Professional, related parities consultancy fees 0 3 408 General administration expenses 2 755 1 822 Total administrative expenses 6 316 7 556 Employee benefit expense directly related to the operation are reclassified to exploration expenses in the statement of comprehensive income.

Management remuneration 2012

2013

COO **)

R. Graf

T. Fjell

Erik Sandøy

CEO **)

CEO **)

CFO

Period 01.01 – 31.12 01.01 – 31.12 01.01 – 31.12 01.01 – 31.12 Salary 636 555 472 378 Bonus 0 0 0 0 Pension scheme 35 42 13 20 Consultancy fee *) 0 0 296 0 Other (company car) 40 0 27 0 *)

* Employee benefit expenses, specifications:

T. Wolden

Amounts in USD 1 000

S  ee Group note 10 regarding JL Management/AOS. The compensation paid to JL Management/AOS is based on actual hours worked for Interoil in the period.

2012

**) As from 8 March 2012 Rene Graf, was appointed CEO of the Company, while Tom Wolden was appointed COO. Tom Wolden resigned from the Company in December 2012. Rene Graf resigned from the position as CEO in December 2012. Thomas J Fjell acted

Salaries and wages employees 2 418 2 373 as interim CEO until he was appointed CEO by the new board in January 2013. Salary from January to May 2012 have been charged Social expenses 489 448 as consultancy fee from JL Management/AOS Norway. As of 1 June 2012, Thomas J. Fjell was employed by the Company. Share options granted to directors and employees 450 0 Other payroll related expenses 53 101 Pension cost – defined benefit plan (Group note 19) 84 216 Interoil has an incentive scheme for the Management and key personnel. The program is based on individual Employee expenses reclassified to exploration expenses 0 -862 performance targets and key performance indicators. The collective and individual bonus schemes may in total Total employee benefit expense 3 494 2 276 constitute to around 50% of the base salary. The compensation structure and guidelines for executive Management and key employees are subject to annual review and approval by the Board of Directors. The average number of employees during the period 6.1 10.0 In previous years, a portion of employee expenses were reclassified to exploration expenses. This practice was changed in 2013 to reflect all employee expenses as administration expenses. The Company incurred significant restructuring expenses related to the overhead cost reduction program and the ­corporate restructuring. This resulted in high administration expenses in 1H 2013.



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The Group Management takes part in the general pension scheme described in the note regarding pension. According to this scheme, they are entitled to 66% of the basis for calculating entitlement to pension up to 12G from the age of 67. The scheme also consists of disability pension and dependents’ pension. The mentioned pension cost equals the gross pension cost, and it is calculated based on the principles and assumptions stated in the note regarding pension. Thomas J Fjell, the CEO of the Company, has a right to severance payment of 18 months salary. Erik Sandøy, the CFO and Kari Kaugerud, the COAA, have the right to 6 months severance payment. No members of the Board of Directors have any right to severance payment.

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N OT E S TO T HE F INANCIAL STATEM EN TS

N OT E S TO T H E FI NAN CI AL S TAT E M E N T S

No member of the Group Management has received remuneration or economic benefits from other companies in the Group, other than Board of Director fees as listed in the table in Group note 11. No additional remuneration has been given for special services outside the normal functions of a Group Director.

8.

No loans have been granted to, or guarantees granted on behalf of, any members of the Group Management, the Board or other elected corporate bodies. The Group has introduced a share-based payment agreement with the members of the Group Management or other key employees. The stock option program has been designed to align the interest of the Group Management and other key personnel with those of the Company’s stakeholders. Further, the Group Management and other key personnel is vital for the further development of the Company: The Board of Interoil has, in accordance with the approval of the shareholders meeting held on 21 June 2013, granted a total of 15 000 000 options to management and key employees. The Board issued 10 500 000 options in June and 1 500 000 options in November. The options are free of charge, based on requirements of reduced salaries. Options cannot be exercised before 30 June 2015 and not later than 30 June 2016. The options are fully vested at 30 June 2015. The exercise price is NOK 1,68 per share for all options issued in 2013. The fair value of the options granted during 2013, are determined using the Black & Scholes valuation model. TUSD 450 is expensed in 2013. The significant inputs in the model were share price at the grant date, exercise price at NOK 1,68 per share, volatility of 50%, risk-free interest rate, and expected exercise at 30 June 2016. An analysis of the volatility for shares in comparable companies is used to calculate the expected volatility in the future for the shares in Interoil. Average exercise price is 1,68 NOK per share. The weighted average fair value of options granted during the year was NOK 0,41 per share. Declaration regarding the determination of salary and other remuneration to senior employees Guidelines for 2014 The declaration applies for the coming financial year in accordance with the Norwegian Public Limited Companies Act, § 6-16 a). The content of the declaration is summarized in the Board of Directors Report – cf. the Norwegian Accounting Act, etc §7-31b (7). Remuneration of senior executives in 2013 was in accordance with the declaration submitted to the general meeting in 2013. The principles are unchanged from 2013 to 2014. The declaration for 2014 will, in accordance with the Norwegian Public Limited Companies Act, § 6-16 a), be enclosed in the notice convening the general meeting. Board of Directors Remuneration For remuneration to Board of Directors and related party disclosure, see Group note 10 and 11.

For the year ended 31 December Amounts in USD 1 000

Notes

2013

2012

Interest income 15 105 Interest income, inter-company loan 0 2 030 Exchange rate gain, unrealized items 5 001 2 769 Group contribution from subsidiary 13 36 550 41 411 Other financial income 1 0 Total financial income 41 567 46 315 Impairment of investment in subsidiaries 11 25 250 0 Impairment of intercompany receivables 13 301 1 972 Total impairment 25 551 1 972 Interest expenses 8 162 8 259 Interest expenses, inter-company loan 514 7 696 Amortisation of debt issue cost 566 1 754 Exchange rate loss, unrealized items 763 6 566 Other financial expenses 121 59 Financial expenses 10 126 24 334 Total financial expenses 35 677 26 306 Net finance income 5 890 20 009 The Group performed its annual impairment test as at 31 December 2013. The Group considers the relationship ­between its recoverable amount and its book value, among other factors, when reviewing for indicators of impairment. For 2013, impairment charges of USD 25.6 million were recognized. USD 0.3 million was related to receivables from Interoil Exploration and Production Switzerland AG, which was liquidated in 2013. USD 25.3 million was related to the investment in Interoil Exploration and Production Latin America which was impaired due to organizational changes in the Group, see note 13. In 2012, total impairment charges of USD 2.0 million were recognized in respect of the subsidiaries holding exploration licenses in Ghana and Angola and the investment in Switzerland. The impairment charge consisted of i­ntercompany receivables (Ghana and Africa) of USD 2.0 million. Interoil Exploration and Production Africa AS, which held the licenses in Angola was requested by the Angolan ­authorities to relinquish the Product Sharing Agreement (PSA). As a consequence, the company was liquidated in 2013. All the assets and intercompany receivables have been impaired in previous years. Interoil Exploration and Production Ghana AS has been liquidated in 2013. The license is relinquished and all assets and intercompany receivables have been impaired in previous years.

Auditor Remuneration Ernst & Young (EY) is the principal auditor of the Company. EY was paid USD 215 excluding VAT for audit service for the parent company in 2013 (2012: USD 298). See Group note 12 for further specifications.

7.

net finance income



other operating income/expenses

For the year ended 31 December Amounts in USD 1 000

Other operating income Other operating income/expenses

2013

2012

0 0

9 078 9 078

Other income for 2012 is related to the settlement between the Company and Eksportconsult/Force Capital Partners – see Group note 10.

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79

N OT E S TO T HE F INANCIAL STATEM EN TS

N OT E S TO T H E FI NAN CI AL S TAT E M E N T S

9.

taxes 10. property, plant and equipment For the year ended 31 December Period ended 31 December 2012 Opening net book amount 116 116 Additions 0 0 Amounts in USD 1 000 2013 2012 Disposal, net 0 0 Income statement: Depreciation charge 6 -50 -50 Current income tax charge 0 0 Closing net book amount 66 66 Deferred tax 0 0 Income tax expense reported in the income statement 0 0 Period ended 31 December 2013 Opening net book amount 66 66 Reconciliation of tax expense: Additions 29 29 Disposal, net 0 0 Amounts in USD 1 000 2013 2012 Depreciation charge 6 -67 -66 Profit / (loss) before tax 511 26 084 Closing net book amount 29 29 Expected income tax according to nominal tax rate (28%) 143 7 304 Cost 29 29 Adjustment of deferred tax assets 34 -560 Accumulated depreciation 0 0 Adjustment of deferred tax assets not recorded -1 387 -525 Net book amount 29 29 Adjustment tax effect Group contribution -3 090 -10 380 Adjustment deferred tax due to taxrate change from 28% to 27% 1 585 0 Useful life 3-5 years Expenses not deductible for tax purposes 3 173 554 Adjustment previous years 0 566 Exchange rate effect -458 3 041 Total income taxes 0 0 11. subsidiaries Effective income tax rate - % -% Period ended 31 December

Profit/ (loss) before tax Adjustment of deferred tax assets Adjustment tax effect Group contribution Expenses not deductible for tax purposes Adjustment previous years Exchange rate effect Total taxable income Tax losses Total taxable income

511

26 084

121 -11 035 11 331 0 -1 634 -706

-1 998 -37 072 1 981 2 020 10 859 1 875

-706 0

1 875 0

Deferred income tax: Temporary differences Fixed assets -45 Provisions -81 Total temporary differences -126 Tax loss Total temporary differences Deferred tax liability/asset Deferred tax included in the balance sheet Deferred tax not included in the balance sheet

-5 0 -5

158 357 -158 483 - 42 790

157 651 -157 656 -44 144

0 42 790

0 44 144

Amounts in USD 1 000 Registered Interest business and voting address rights held

Company’s share capital in 1 000

Interoil SA*) Switzerland 100% CHF 100 Interoil LatinAmerica AS**) Norway 100% NOK 100 Interoil Exploration and Production Latin America AS Norway 100% NOK 1 000 Interoil Peru Holding AS Norway 100% NOK 100 Up Colombia Holding AS Norway 100% NOK 900 Total book value

Company’s Company’s equity profit / in USD (loss) in 1 000 USD 1 000

Book value 2013

Book value 2012

150 0

-25 0

78 0

78 17

-270 13 25 371 25 264

-2 475 -5 11 344 8 840

1 912 21 25 257 27 268

27 162 0 0 27 257

All shares invested in subsidiaries with at total book value of USD 27 268 (2012: 27 257) have been pledged as security for the interest-bearing borrowings (see note 17 and Group note 10). *) Interoil SA is under liquidation. **) Interoil LatinAmerica AS was liquidated in 2013. Interoil Ghana AS and Interoil Exploration and Production Africa AS have also been liquidated in 2013.

Net deferred tax assets have not been recognized, as the recognition criteria in IAS 12 has not been met. As of 31 ­December 2013, there is not convincing evidence that sufficient taxable profit will be available which the unused tax losses could be utilized against.

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N OT E S TO T H E FI NAN CI AL S TAT E M E N T S

12.

trade and other receivables

14.

Period ended 31 December

Amounts in USD 1000 Loans and Period ended 31 Dec 2013 Notes FVtPL receivables

Amounts in USD 1 000

Notes 2013 2012 Current: Trade receivables 1 74 Prepaid expenses 133 97 Vat receivables 64 52 Total trade and other receivables 198 223

13.

intercompany Non-current intercompany receivables Period ended 31 December Amounts in USD 1 000

Notes 2013 2012 Interoil Switzerland Exploration and Production AG 0 201 Interoil Colombia Exploration and Production Inc. 707 1 186 Interoil Peru SA 336 0 Interoil Exploration and Production Africa AS 0 1 308 Interoil Exploration and Production Ghana AS 0 665 Interoil Peru Holding AS 4 0 Up Colombia Holding AS 14 950 0 Less; impairment of intercompany receivables 8 0 -1 972 Total non-current intercompany receivables 15 997 1 388

Non-current intercompany payables Period ended 31 December

Amounts in USD 1 000

2013

2012

Interoil SA Interoil LatinAmerica AS Interoil Exploration and Production Latin America AS Total non-current intercompany payables

0 0 0 0

109 18 15 126 15 253

financial instruments Other financial liabilities at amortized cost

Total carrying amount

Fair value

Non-current: Intercompany receivables 13 0 15 997 0 15 997 15 997 Current: Trade and other receivables 12 0 198 0 198 198 Cash and Cash equivalents 15 0 3 468 0 3 468 3 468 Total financial assets 0 19 663 0 19 663 19 663 Non-current: Interest bearing liabilities 0 0 6 085 6 085 6 085 Bondloan 17 0 0 48 892 48 892 52 439 Current: Trade and other payables 18 0 0 1 748 1 748 1 748 Borrowings 17 0 0 0 0 0 Total financial liabilities 0 0 56 725 56 725 60 272 Amounts in USD 1000 Loans and Period ended 31 Dec 2012 Notes FVtPL receivables

Other financial liabilities at amortized cost

Total carrying amount

Fair value

Non-current: Intercompany receivables 13 0 1 388 0 1 388 1 388 Current: Trade and other receivables 12 0 223 0 223 223 Cash and Cash equivalents 15 0 3 858 0 3 858 3 858 Total financial assets 0 5 469 0 5 469 5 469 Non-current: Intercompany payables 13 0 0 15 253 15 253 15 253 Current: Trade and other payables 18 0 0 7 830 7 830 7 830 Borrowings 17 0 0 53 382 53 382 56 085 Total financial liabilities 0 0 76 465 76 465 79 168

As of 31 December 2013, intercompany receivables of USD 16.0 million (2012: USD 3.4 million) were tested for impairment. For 2013, no impairment charges were recognized at year end. Nevertheless impairment charges related to receivables from Interoil Exploration and Production AG, which was liquidated during the year, USD 0.3 million were recognized. For 2012, the amount of provision was related to Interoil Exploration and Production Africa AS, USD 1.3 ­million and Interoil Exploration and Production Ghana AS, USD 0.7 million, in total USD 2.0 million. The Company received group contribution of USD 11.3 million from Up Colombia Holding AS and USD 25.3 million from Interoil Exploration and Production Latin America AS for 2013. Shares in Interoil Colombia BVI and debt ­amounting to net 25.3 million were transferred as contribution in kind to UP Colombia Holding AS as part of a restructuring of the Group. Thereafter the shares in UP Colombia Holding AS was transferred to the Company as a group contribution. The ­Company received group contribution of USD 91.4 million from Interoil Exploration and Production Latin America AS as of 31 December 2012. Also see Group note 10 for more information regarding transactions with related parties.

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N OT E S TO T H E FI NAN CI AL S TAT E M E N T S

Fair value hierarchy The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

15. cash and cash equivalents

Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities. Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly. Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. The carrying amount of intercompany receivables, trade and other receivables approximate their fair value. During the reporting period ending 31 December 2013, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers in and out of Level 3 fair value measurements. The carrying amount of trade and other payable is considered to approximate their fair value. The fair value of the other non-current interest bearing liabilities equals their carrying amount. The fair value of bond loans has been calculated using the prevailing interest rates. The carrying amount of the current interest bearing ­liabilities approximates the fair value. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of financial assets mentioned above and the carrying amount of investments in subsidiaries (see note 11). The Company does not hold any collateral as security.

Period ended 31 December Amounts in USD 1 000

2013

2012

Bank deposits denominated in USD 1 257 1 216 Bank deposits denominated in NOK 96 74 Bank deposits denominated in NOK, restricted 2 115 2 568 Total cash and cash equivalents 3 468 3 858 The restricted bank deposits are placed as collateral for the interest-bearing borrowings, (see note 17 and Group note 25) deposit for rent and withheld employee taxes.

16.

paid in capital Amounts in USD 1 000

Number of Shares (1 000)

Share

Share

capital

premium

Total

As at 31 December 47 765 366 Changes 2012 0 0 At 31 December 2012 47 765 366 Capital increase 09.04.2013 200 000 1 714 Capital increase 19.04.2013 4 138 36 Cost capital increase At 31 December 2013 251 903 2 116

90 619 0 90 619 32 566 677 -2 077 121 785

90 985 0 90 985 34 280 713 -2 077 123 901

The total number of authorised shares as of 31 December 2013 consists of the following: 1. 251 903 thousands issued shares mentioned above; 2. The Board of Directors have been authorised to increase the share capital by 15 million shares regarding the stock option program for management and key employees. The authorisation was given by the ordinary general meeting held on 21 June 2013 and is valid until the ordinary general meeting 2015, however no longer than 30 June 2015 Based on this, total authorised share capital as of 31 December 2013 amounts to 266 903 thousand shares (2012: 71 648 shares). For specifications of top 20 shareholders, see Group note 23. For specification of shares owned the Board and ­executive management, see Group note 10.

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N OT E S TO T H E FI NAN CI AL S TAT E M E N T S

17.

borrowings

18.

Period ended 31 December

For the year ended 31 December

trade and other payables





Amounts in USD 1 000

Amounts in USD 1 000

2013

2012

Trade creditors Public duties payable Accrued interest Other accrued expenses Total trade and other payables

403 267 0 1 078 1 748

209 452 469 6 700 7 830

2013

Current: Bond loan denominated NOK Total current interest-bearing liabilities

0 0

2012

53 382 53 382

Non-Current Other non-current interest bearing liabilities 6 085 0 Bond loan denominated NOK 48 892 0 Total non-current interest-bearing liabilities 54 977 0 Total borrowings 54 977 53 382 The maturity of the Group’s borrowings is as follows:

The final payment related to Interoil E&P Switzerland AG acquired in 2006, USD 6.1 million is transferred to borrowings, see note 17. For 2012, USD 5.5 million was included in other accrued expenses.

19.

subsequent events

Period ended 31 December Amounts in USD 1 000

2013

0-12 months Between 1 and 2 years Between 2 and 5 years Over 5 years Total borrowings

0 0 54 977 0 54 977

See Group note 29 for information regarding subsequent events.

2012

53 382 0 0 0 53 382

As per 31 December 2013 the Company is not in breach of any covenant, and thus loans are classified as short term and long term according to normal procedures. See note 2.7. As per 31 December 2012, Interoil Colombia was in breach of the current ratio covenant under the loan agreement with Colpatria Bank. In addition, Interoil Colombia had unsecured debt in Colombia of more than 5 million. However, the total unsecured debt (including leases and debt to suppliers) was below USD 20 million. As a consequence of the breaches and due to existence of cross default clauses, the NOK 310 million Bond Loan had in accordance with IFRS (IAS 1.74-75) to be classified as current as Interoil had not the unconditional right to defer its contractual settlements for 2012 for at least twelve months after the balance sheet date. Other non-current interest bearing liabilities refers to the final payment related to Interoil E&P Switzerland AG acquired in 2006. For 2012 USD 5.5 million is included in other accrued expenses, see note 18. For terms and conditions of outstanding loans per year end 2013, see Group note 25.

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87

AU D ITOR ´S RE P ORT F OR 2013

88

89

SUSTAINABILITY REPORT 2013 It is part of Interoil’s vision and strategy to grow oil and gas production primarily through development programs focused on maximizing the value of our existing asset portfolio and secondary by acquiring new assets with a sustainable risk profile. We strive to do business in a responsible way, and consider social and environmental challenges as opportunities for business development. We engage in constructive dialogue with stakeholders to ensure the continuous improvement of our operations. As an international exploration and production company, Interoil aims to conduct our business in an economically efficient, socially responsible and environmentally acceptable way. In 2013, Interoil initiated several projects related to CSR. The focus has been on transparency, and the implementation of an anti-corruption program. A CSR review of the organisation in Peru was conducted, which will lead to an updated CSR policy for the Group and to a CSR plan for both Peru and Colombia. Further, Interoil conducted an HSE review with the aim of ­improving the HSE situation in the organization. These projects will be continued in 2014.

REPORTING SCOPE This is Interoil’s first corporate sustainability report. It details our sustainability activities and performance data during calendar year 2013, unless otherwise is noted. This report is based on the reporting principles used in Global Reporting Initiative’s (GRI) 3.1 reporting standard. However, as this is Interoil’s first year of sustainability reporting, the GRI reporting standard has only been used as basis, and we do not seek approval by the GRI.

GOVERNANCE STRUCTURE AND MANAGEMENT SYSTEMS Vision and strategy Interoil’s corporate policies and procedures are designed to guide our economic, environmental and social performance towards Interoil’s vision and strategy:

– Grow oil and gas production primarily through development programs focused on maximizing the value of our asset portfolio and secondary by acquiring new assets with a balanced risk profile. – Become the employer of choice for E&P professionals in Latin America. – Systematically contribute to the development of stakeholders in areas where we operate. – Continuously focus on improving our HSE performance in line with best practices in the Latin American E&P sector.

Values Interoil’s values define behaviour that is key to achieve our corporate vision and strategy. These values – Openness, Trust, Resilience and Integrity – provide a framework of expectations for employee conduct.

Open • Proactively communicate in a clear, truthful, direct and sincere way • Work together and share experiences. Promote and value transparency • Say what you mean, and do what you say • Stand up for what you believe is just and good

Trust • Believe in your colleagues capabilities and competences • Empower yourself and your colleagues to work towards our strategic goals • Respect that the value of your contributions depend on the contributions from others • Set high standards for yourself and your colleagues

Resilient • Accept that your decisions and actions are influenced by forces outside your control • Adapt to change, learn from mistakes and seize the ­opportunity to improve • Constantly develop your expertise and capabilities • Remain dedicated, focused and self-controlled

To grow to become one of the strongest exploration and ­production companies operating in Colombia and Peru.

Integrity

– Maintain a strong balance sheet by adopting a disciplined financial philosophy that balances profitability and sustainable growth. – Allocate and deploy capital with a focus on achieving returns well in excess of Interoil’s cost of capital.

• Be ethically unyielding and honest • Accept that you are empowered and have influence over our decisions and actions • Take responsibility for your actions and deliver on promises • Act decisively and be loyal to decisions

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Code of Conduct

Economic

Interoil’s Code of Conduct outlines our commitment to high ethical standards and compliance with applicable laws wherever we operate. The Code of Conduct is built on Interoil’s values and provides guidelines regarding how our directors, officers, and employees are expected to conduct themselves.

Our operations have economic impact on the communities in which we operate. Organisation wide goals relating to this include those described in the board’s report on Corporate ­Governance, i.e. Interoil’s objective is to contribute to value creation over time, benefitting shareholders as well as other stakeholders.

Our code applies to the whole organisation and its employees, including the Chief Executive Officer, board members, consultants, and others who act on Interoil’s behalf. The Code of Conduct is available in both Spanish and English ensuring that all employees understand the content. The compliance with the Code of Conduct is the responsibility of each Interoil employee.

Socio-economic benefits are most obviously manifested through taxes and royalties to governments, and payments to local s­ uppliers and employees. Further, Interoil supports local ­communities with financial contribution. For more information on Interoil’s support to local communities, please refer to the section on Social investments.

Policies and procedures Our corporate policies and procedures address topics related to economic, environmental and social performance. In this section, we will present an overview over Interoil’s policies related to economic, environmental and social aspects.

The exploration and production industry is characterized by a high level of risk. Interoil must be able to sustain considerable fluctuations in profitability as a result of price volatility for crude oil as well as weaker results due to production related

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challenges. Further, Interoil must be able to sustain other risks related to the industry, such as security and environmental risks. Such aspects may also have an economic impact on Interoil.

and continuously improve the above. This ensures that any local negative environmental impacts are identified and managed, in a systematic way, for continuous improvement.

Environment

Both Interoil Colombia and Interoil Peru are ISO 14001 certified.

Interoil is committed to minimizing the impact our business has on the environment. Interoil will act responsibly with an ambition to reduce direct and indirect negative influences on the external environment. The individual operating companies are responsible for implementing an Environmental Management System based upon the ISO 14001 standards. The standard provides practical tools for companies and organizations looking to identify and control their environmental impact, and constantly improve their environmental performance according their business activity. In addition, the system helps organizations to minimize how their operations negatively affect the environment, comply with applicable laws, regulations and other environmentally oriented requirements,

Social aspects CSR policy Interoil’s principles and values with respect to corporate social responsibility are set out in Interoil’s CSR policy. Follow-up of actions defined in the CSR plans is done through internal monitoring processes. The CSR plan is a tool to implement our strategic goal to systematically contribute to the development of stakeholders in areas where we operate, and be recognized as a socially responsible company. For more information on Interoil’s work with CSR, please refer to the section Social investments below.

Subjects and principles for Interoil’s CSR policy

Organizational

Code of conduct

Ethical behaviour

Comunity involvement and development

Work environment

CSR HSE

Environment

Transparency Respect for stakeholders interest Respect for law Respect for human right

Human rights

Gover nance

Anti-corruption program Interoil is against all forms of corruption. In the first quarter of 2014, Interoil developed an anti-corruption program, which will be implemented throughout the Interoil Group. Workshops for all employees is part of the implementation strategy and a key success factor for the program. Whistle-blowing An important part of ensuring transparency is allowing employees and others acting on Interoil’s behalf to express concerns related to ethics and corruption. Interoil has therefore created a line of reporting, where employees can report

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breaches and concerns related to ethics and transparency to the compliance function ([email protected]). Compliance function and ethics committees Interoil’s compliance function has the overall responsibility for the preparation and updating the Code of Conduct and the AntiCorruption Program. The compliance function is comprised of the management at the corporate headquarters in Oslo. Interoil Colombia and Interoil Peru have established ethics committees, which has the local responsibility to ensure compliance with the Code of Conduct and the Anti-Corruption Program, including training of employees. The ethics committees report to the

compliance function, and local general managers are responsible for implementing any decision and/or advice given by the compliance function and ethics committee. Procurement practices All procurements are subject to Interoil’s procurement routines, which is described in Interoil’s Financial Manual. The procurement routines ensure that investments fulfil our requirements to compliance, ethical standards and other criteria. For 2014, Interoil has an ambition to develop a list of pre-qualified suppliers, ensuring that the suppliers abide to the same ethical standards and principles as Interoil. Future suppliers and sub-suppliers will also be expected to confirm their compliance to the Interoil Code of Conduct and the Anti-Corruption Program. Social investments A social investment is an economic transaction where financial funds are provided by Interoil to a third party for a defined purpose. Part of Interoil’s strategy is to systematically contribute to the development of the local communities affected by our operations. In 2013, the Peruvian consultancy company Senca, was hired to conduct a review of the local communities in the vicinity of

Interoil’s blocks in Talara, Peru. The review focused on identifying the local needs and interest of the communities. In 2014, Interoil Colombia will conduct a similar review of local communities affected by its operations. The review will be the basis for CSR plans for Peru and Colombia. Our goal is to support initiatives that help to create self-sustaining activities in the communities. Local recruitment We aim to recruit locally, offer a safe working environment to all our employees and provide attractive training opportunities that build local capacity and skills. Further, Interoil aims to purchase goods and services locally whenever viable. Hiring and buying goods and services locally is an effective way of contributing to local development. Such approach has a direct and positive impact on the local economy, creates jobs and improves local capacity and knowledge. Work environment Part of Interoil’s strategy is to become the employer of choice for exploration and production professionals in Latin America. Interoil Colombia is currently in a process of an internal reorganisation. In this relation, Interoil Colombia is defining clear divisional requirements and functional requirements for each

93

Both Interoil Colombia and Interoil Peru are OHSAS 18001 certified. In 2013, Interoil conducted an HSE review in Colombia and Peru. The review resulted in action points that will be implemented throughout 2014. Many of the associated changes will require a new way of working, and the cultural development process

Interoil expects its suppliers to have responsible standards, and we will work with our suppliers to seek improvements. In 2014, Interoil has updated its Code of Conduct and the Anti-Corruption Policy, strengthening the requirements to suppliers, and suppliers are expected to abide to the same ethical standards as Interoil.

Interoil Management System Interoil’s Management System provides the basis for managing our operations in a systematic and transparent way. Our Management System provides the principles, policies, processes and requirements that describe how work should be organized and executed in order to achieve our visions and strategic goals. Commitment to and compliance with our Management System is a requirement for all Interoil employees.

Determining materiality

The Management System consists of the following documents:

In defining material interest, Interoil identifies the aspects with highest potential impact on the sustainability of its operations

(i)

Values

Leadership

Operating model

(ii)

The Interoil Management Handbook (a) Vision and Strategy (b) Values (c) Leadership model (d) Operating model (e) Corporate governance (f) Corporate policies (1) Code of Conduct (2) Financial Manual including procurement routines (3) IR Policy (4) HR Policy (5) QHSE Policy (6) CSR Policy (7) Anti-Corruption Program Division requirements

(iii) Functional requirements

Corporate governance

Corporate policies

Division requirements

HIGH

HSE Interoil shall ensure occupational safety for its employees. We aim to have both operating companies certified according to the Health and Safety Management System OHSAS 18001 standard for occupational health and safety. OHSAS 18001 is designed to help organisations to implement processes and focus on occupational health and safety performance in addition to comply with applicable legal framework.

Human rights Interoil aims to have an inclusive working environment. Discrimination based on ethnic background, nationality, language, gender, sexual orientation or religious belief is not tolerated. The companies within the group shall promote equal opportunities and fair treatment of all employees.

Increasing influence to stakeholders

Training Employees shall receive systematic training both to educate and motivate. Interoil shall facilitate professional and personal development of each employee. In 2014, Interoil will develop individual career plans for all employees, including training plans, with personal work related goals.

requires a long-term perspective. For more information on the goals for 2014 in relation to HSE, please refer to the section on Employee conditions below.

and includes additional aspects, which are of high concern to the external stakeholders.

Organisation building/ employment

Economic performance/ govenment approval

Communities

Human rights

HSE/environment

Anti-corruption/ Code of conduct

LOW

employee to ensure clearly defined roles and responsibilities. Further, the company will implement a system of Key Performance Indicators (KPI) to measure employees’ performance. A similar process relating to structure, KPIs, roles and responsibilities will be executed in Peru in 2014.

LOW

Increasing influence on business success

HIGH

Functional requirements

94

95

Interoil hopes that this Sustainability Report may facilitate more transparent and constructive dialogues between Interoil and its stakeholders.

Risk assessment and management Interoil’s approach is based upon an assessment made by the Interoil management, where it has assessed the probability

of a risk to occur and the consequence of a potential risk (reputational and financial impact) for each material sustainability aspect. The perceived risk exposure has been categorised into critical, significant, and insignificant risk areas. The outcome is described below, with a discription of how the critical and significant risk areas are being addressed:

OUR STAKEHOLDER ENGAGEMENT We encourage to dialogue with stakeholders who are directly involved with or impacted by our industry or who constructively engage in seeking industry improvements. Both operating companies in the Interoil Group are certified according to the ISO9001 Quality Management System. The ISO9001 system helps organisations to ensure that they meet the needs of customer and other stakeholders and obtain satisfaction according to business activity.

Authorities Employees

Suppliers

Shareholdes Stakeholder engagement is carried out both at local and corporate level and our aim is to engage in constructive dialogue based on respect and transparency. Risk areas

Progress in addressing these areas

Governmental approval – critical risk for Interoil’s operations in Peru and Colombia

Interoil is reliant on government approval to conduct its operations in Peru and Colombia. This is a critical risk for Interoil’s economic performance. Interoil strives to have transparent and open communications with local governmental authorities.

People and capability – significant risk to Interoil in Peru and Colombia

Interoil Colombia is in the process of reorganisation, and aims during 2014, to implement divisional and functional requirements for each employee to ensure competence. Each employee will have their own career plan. The same process will be implemented in Peru.

Ethical misconduct and non-compliance – significant risk in Peru and Colombia

Interoil’s Code of Conduct has ethical guidelines to prevent ethical misconduct, and has provisions on consequences of infringement of the Code.

Corruption – significant risk in Colombia and Peru

Interoil has a zero-tolerance policy for corruption and has defined ethical guidelines on corruption and procedures for whistle blowing. A new anticorruption program was implemented in 2014. Anti-corruption training will be conducted throughout 2014.

Interactions with local communities – significant risk to operations in Peru and Colombia

Safety and environmental risks – significant risk for Interoil’s operations in Peru and Colombia

Security – significant risk at place of operation in Peru and Colombia

Crisis management – significant risk to operations in Peru and Colombia

Interoil is dependent on support from the local communities in the regions Interoil operates. In 2013, Interoil Peru conducted a CSR review and interactions with local communities was part of this review. This will result in a CSR plan and a communication plan. Interoil Colombia will conduct a similar review in 2014 and will also develop a CSR plan. Interoil’s operating companies are working towards according to OHSAS 18001 Occupational Health & Safety Management Standard. Further, the individual operating companies are responsible for implementing an Environmental Management System based upon the ISO 14001 standards. Both Interoil Peru and Interoil Colombia are OHSAS 18001 and ISO 14001 certified. A HSE review was conducted in 2013. This lead to implementation of new routines in Peru, including further training of workers. Interoil Colombia has also conducted further training to improve the situation. More extensive training will be conducted throughout 2014. A proper crisis management will reduce safety and environmental hazards. Crisis management training has been conducted in the operating fields both in Peru and Colombia in 2013, and further training will continue throughout 2014. The emergency preparedness plan will be reviewed and updated in 2014.

Dialogue with our employees is continuous through well-established local management structures and practices. The competence, commitment and efforts of all our employees are crucial to the success of our business. Relations with our employees are described in more detail under Employee conditions. Shareholders, analysts and providers of capital are key stakeholders, and continuous contact with them is important to ensure accurate assessment of our business. Interoil informs shareholders, analyst and investors about the company’s value creation through press releases, roadshows, one-to-one meetings, quarterly presentations and the annual report.

Interoil

Local communites

Dialogue with stakeholders, which takes place in both structured and unstructured ways, plays an important role for the materiality of our reporting. Our stakeholders include employees, shareholders, suppliers, local communities and authorities.

munity development, but also increased road traffic and changes in land use and landscapes. We have established processes and forums for interaction between the communities and Interoil. Both countries have personnel dedicated to work with the local communities. Dialogue with local communities is addressed mainly through the CSR team and in addition, third party companies are used to support the processes with communities in both Peru and Colombia. According to legal requirements in both Peru and Colombia studies have to be completed prior to starting any activity.

PERFORMANCE Suppliers are of utmost importance to Interoil. In 2014, Interoil has updated its Code of Conduct and has incorporated an AntiCorruption Policy. Both requires suppliers to abide to the same ethical principles as Interoil. Authorities and politicians are stakeholders at the local, regional and national levels and they define the framework conditions for our industry. Interoil believes that transparent dialogue is a prerequisite for reaching good and sound decisions. Local communities are important to ensure acceptance for Interoil’s local operations, support for future growth and recruitment of employees. This is important for all our activities where our presence may bring on new changes in the local area, such as jobs, capacity building for local suppliers and support for com-

Amounts in USD 1 000

Peru National Colombia National

Revenues

Investments

Purchase of goods and services

102 994*)

1 216

14 349

46 910*)

14 307**) 15 749

In the following, Interoil presents a set of indicators that we have determined as being applicable and relevant for our operations. The indicators are based on the GRI 3.1 reporting standard and the oil and gas sector-specific disclosures. However, as this is Interoil’s first year of reporting, we do not aim to fully report on the chosen indicators.

Economic performance Interoil contributes to economic development locally mainly through taxes and royalties to governments, workers we hire, services and goods we buy from local suppliers and direct social investments destined to local communities where we operate. The total of taxes and royalties paid by Interoil in 2013 was USD 81 million. Below, we present Interoil’s economic contributions for 2013.

Contractual social contriRoyalties bution

Valountary social contribution

Salaries and Number sosial of benefit employees

Income taxes paid

Indirect taxes paid

22 556

1 242

48 670

151

34

3 687

106

548

3 267

195

39

4 946

86

6 187***)

Local = operations in field *) Revenues before royalties **) Costs related to land permits, civil jobs and rig (materials and services) ***) Income taxes paid as correction for the years 2006 – 2008 amounts to USD 1,851 and is included in the amount. Indirect taxes excluding VAT Colombian numbers are working interest.

96

97

Use of suppliers

Emissions/national limits or standards Peru 2012

%

Peru 2013

30 25 20 15 10 5

National

International

Local

National

International

Local 0 Colombia SPM/PM10

Colombia 2012

Colombia 2013

2012

Peru SPM/PM10

Colombia NOx

Peru NOx

Colombia SO

Peru SO2

Colombia CO

Peru CO

2013

* SPM/PM10: In Colombia, suspended particular matter (SPM) is measured while in Peru one measure particulate matter with diameter of 10 micrometers or less (PM10). The indicator expresses the amount of particles in the air. Even though not identical, the indicators are presented together with their respective limits. NOx: Mono-nitrogen oxides which is created during combustion at high temperatures SO2 : Petroleum contains sulfur compounds and combustion generates SO2 gas CO: Carbon monoxide, which is generated during combustion processes when there is not enough oxygen to produce CO2.

National

International

Local

Use of local suppliers In Peru, Interoil primarily operates in the region of Talara. In Talara, the supplier industry to the oil production sector is well developed due to several operating companies. Interoil integrates the local communities through hiring basic services and personnel though local community companies. In Colombia, the operating blocks are widely spread throughout the country, and the Tolima region, where Interoil’s main operating block is located, has limited supplier industry. The activity in the area is not extensive enough for large suppliers to establish themselves. Thus, there is a natural limitation to local purchases. Interoil is conscious of the role the company plays in the local communities. If viable, purchases are done locally. Generic services like catering, cleaning and transport are purchased locally in both countries. In Peru, Interoil hires local community companies that offer services such as construction of flow lines and maintenance of facilities. These types of services are included in local purchases. In Colombia, these services are acquired through hiring personnel from the local communities directly, implying that they become part of Interoil payroll, and such expense is not considered as local purchase. For Colombia, the actual amount

National

International

Local

of contribution to the local communities is therefore higher than the above illustrations indicate. For more information regarding Interoil’s contribution to local communities, please refer to section Community engagement below.

Oil spills Interoil unfortunately experienced a significant oil spill in 2013, of 480 barrels at one of the fields in Colombia. The process after the incident, however, has been handled well. After two months, the affected land was recovered, traces of the spill had been removed and compensation had been paid to affected landowners. The incident occurred during the transfer of crude oil after work over operations. Two of the pipes in a flow line were not properly connected and caused the spill. The internal investigation of the incident revealed that there had been several breaches of operating procedures and human errors. This led to changes in the organization, and the annual bonus for all employees was lowered.

Environment Interoil is committed to minimizing the impact our business has on the environment. Interoil will act responsibly with an ambition to reduce direct and indirect negative influences on the external environment. Emissions The emission of gas is controlled by governmental authorities in both Peru and Colombia, through requirements regarding limits of emissions, periodic reporting, and methodology. The ­methodology is somewhat different between the two countries, but Interoil complies with the respective guidelines and is well within the legal boundaries in both countries. Emissions are reported on a regular basis. The table below provides an overview of the emissions ­compared to standards/legal limits (µg/m3). The results ­presented below are based on average values measured over time at different locations throughout the year.

As for Peru, there were no oil spills over one barrel in 2012, but two spills over one barrel in 2013. There are some ­challenges in

Peru relating to the conditions of flow lines at the facilities. The operating areas are located in a highly corrosive environment close to the sea, where facilities and equipment is constantly ­exposed to wind, sand and salt from the sea. Due to these conditions, rust is an issue and continuous maintenance is required to avoid spills. At the end of 2013, all pipelines were evaluated, and during first half of 2014, the most critical pipes (approximately 1500 pipes) will be changed as the first step of a refurbishing process. The goal for 2014 is to have no significant oil spills, neither in Peru nor in Colombia. This will be achieved through further training of employees and maintenance of facilities. There are several processes currently ongoing throughout the organization to improve routines and the HSE situation in general.

Number of barrels spilled for spills over one barrels 2,66

Peru 2013

3

Peru 2012

0

480

Colombia 2013

1,67

2,38 1 4

Colombia 2012

0

100

200

300

400

500

Number of barrels spilled

98

99

Energy consumption Interoil’s operations involves to explore and produce oil and gas. Such operations requires high amounts of energy. Energy is also required for office facilities and for transportation. To promote sustainability, Interoil strives to take advantage of the energy sources produced during production. In Colombia, approximately 90% of the pump units operate by gas that is re-directed from the wells. The intention is to maximize benefit of gas produced, and flare as little as possible. As can be seen from the table below, the amount of flared gas has gone considerably down from 2012 to 2013, implying that little energy goes to waste. The goal is to continue this trend and to either sell or use the gas produced.

Interoil Peru also aim to take advantage of as much as possible of the gas produced. As an example, gas is injected in wells that produce through gas lifts, pump units run on gas and compressors use gas. However, the blocks in which Interoil Peru operates, does not have the necessary infrastructure required to commercialize gas. As there is produced more gas than needed during operations, gas has to be flared. A possible way to reduce the amount of gas flared, is to develop the infrastructure to commercialize the gas produced, and this possibility will be further evaluated in 2014.



Total energy consumption per year



Consumption Gas flared

Colombia 2012

Colombia 2013

Peru 2012

Peru 2013

60,398 240,733

25,279 69,304

934,054 1,178,248

941,923 1,458,128

Energy consumed (measured in GJ) = primary energy acquired + primary energy produced – primary energy sold – gas flared

In Peru, Interoil use energy in production, while in Colombia, energy is only used in the operation of machines, which explains the ­difference of energy consumption between the countries.

Water consumption Even though activities performed by Interoil are similar in Peru and Colombia, the water situation differ. The operating fields in Peru are located in desert-like environment where water is scarce and therefore valuable. The local communities’ access to water for cultivation purposes is vital. Households in the nearby city of Talara may also need access to water during dry spells. All water used by Interoil Peru is purchased from third party companies and transported to required locations by tanker trucks or via pipelines. The operating fields in Colombia are located in green areas

with easy access to water both from rivers and sub-surface sources. However, there are limitations to how much water can be ­extracted from rivers. There is also costs related to extracting and transportation of water from the sources to the locations, and optimizing usage is thus important. Usage of water depends on the type of activity performed. Drilling activities requires large amounts of water, while regular operations require only a minimum amount. Interoil Colombia had high drilling activity in 2013, and thus had a significant water consumption. Interoil aims to limit the use of water as much as possible.

Water consumption (cubic meters) 25 000

Social performance Community engagement Interoil’s financial contributions to the local communities can be split into three categories: i) contributions in form of compensation for Interoil’s operations; ii) contribution by way of purchasing of services from local communities; and ii) voluntary social contributions. Payments related to compensation for operations comprise of compensation for the right to use the land, and compensation for impact on land. For more information on Interoil’s contribution by way of purchasing services from local suppliers, please refer to section Use of local suppliers under Economic performance. Interoil also contributes by voluntary social contributions to the communities. Such donations vary in size and purposes, but is of great importance as such contributions directly affect the communities. Examples of voluntary contributions made by Interoil to the communities are contributions for purposes as education, culture, recreation, health, roads and agriculture.

Contributions to local communities in Peru 2013

Contract

Valuntary

Agreements

Social contributions Colombia 2013

Interoil Peru divides contributions to the local communities in three types of contributions: donations to the communities as result of contracts related to operations, donations as result of private, voluntary agreements, and voluntary donations without any contractual arrangement. Anti-corruption training Work related anti-corruption and ethics has high priority within the organization, and several processes related to this was initiated in 2013. During 2013, an amendment to Interoil Colombia’s employee contract relating to anti-corruption was implemented, and a process regarding declaration of conflicts of interest executed. Further, the company established an ethics committee. This work will continue with full force in 2014 with training and workshops throughout the year. The same process is planned for Peru in 2014, based on the same guidelines as in Colombia. All employees located at the Bogota office in Colombia received in 2013 basic training relating to anti-corruption and conflict of interest, which implies that approximately 50% of the Colombian work force has been trained. This work will continue in 2014, both in Colombia and Peru, and the goal is that by the end of 2014, all employees shall have received anti-corruption training.

Culture, recreation and sports Investments in projects to increase income in communities Education Strengthening community organisations Training of governmental authorities Roads Other

Break-down of contributions to local communities in Peru 2013

Employee conditions Our commitment to social responsibility begins with an emphasis on a safe working environment. We also want to provide our employees with meaningful careers. We wish to have workplace diversity and a well-trained, healthy workforce. Interoil aims to become the employer of choice for exploration and production professionals in Latin America.

20 000

15 000

10 000

Local management Interoil believes that most of our work force should be local, as this provides an organisation with the best knowledge of local conditions and culture.

5 000

0 Colombia 2012

100

Peru 2013

Total

In Colombia, the entire top management is Colombian. In Peru, there is some international participation. The general manager is American and the CFO, who has worked for Interoil for several years, is Norwegian.

Agriculture

Quarry

Civil events

Education

Infrastructure

Oil spill repairs

Health & Nutrition

Work payment

101

Locals in management

Colombia 2012

Colombia 2013

Peru 2012

Peru 2013

100%

100%

100%

70%

Workforce composition Total workforce by employment type, employment contract, and region Colombia 2012 Colombia 2013

Peru 2012

Peru 2013

Employees Full-time 80 86 105 106 Part-time 0 0 0 0 Type of contract Indefinite or permanent contract 75 77 96 87 Fixed-term or temporary contract 5 9 9 19 Type of position Colombia 2012 Colombia 2013 Peru 2012 Peru 2013 Administrative Operative

37 43

38 48

55 50

50 56

Colombia 2012

Colombia 2013

Peru 2012

Peru 2013

25 44 11

30 44 12

17 49 39

17 49 40

Employee category* Category 1/2 5 5 7 Category 3/4 20 25 32 Category 5/6 51 51 66 Category 7 4 4 0

7 30 70 0

Age 50

* internal categorization of employees based on a hierarchy where level 1-2 is top management and 5/6 are operators and certain administrative ­functions.

Diversity Interoil is an equal opportunity employer where all shall have the same rights and opportunities regardless of gender, age and religious beliefs. Due to the nature of the industry and the type of work executed, there is an overweight of male employees in the organization. There have been no reported incidents of discrimination in 2012 nor in 2013.

improve the HSE situation in the organization in general, were important factors to why the reorganization was initiated. The process will continue in 2014, and the goal for 2014 is to create a stable organization in Colombia and limit turnover significantly compared to previous years. In Peru, the work force has been stable over a long period. The turnover that has taken place is natural for an organization of Interoil’s size.

Total number and rate of new employee hires and employee turnover by age, group, gender and region Age 50 Men Women

Age 50

Men Women

Distribution between men and women in Peru and Colombia

Employees hired Colombia 2012

Employees hired Colombia 2013

Employees hired Peru 2012

Employees hired Peru 2013

17 21 3

19 19 3

1 3 3

4 6 2

Employees hired in Colombia 2012 28 13

Employees hired in Colombia 2013 28 5

Employees hired in Peru 2012 5 2

Employees hired in Peru 2013 11 1

Employees leaving Colombia 2012

Employees leaving Colombia 2013

17 20 3

17 15 3

Employees leaving Colombia 2012

Employees leaving Colombia 2013

Employees leaving Employees leaving Peru 2012 Peru 2013 2 1 2

4 7 2

Employees leaving Employees leaving Peru 2012 Peru 2013

30 22 10 13

3 11 2 2

100

Incidents and absence Interoil strives to have zero lost time incidents, and has high attention on safety of personnel. Both in Colombia and Peru, the lost time injury frequency is low, and there are few incidents. However, the oil industry in general is considered risky due to dangerous operations, both during maintenance (electrical charges, confined space, working in heights) and during day-today operations.

80

60

40

20

0 2012 Men

102

Turnover Colombia has experienced high turnover the last couple of years. Such instability in the workforce is unfortunate for several reasons, including loss of valuable experience, increased resources having to be spent on personnel processes and the general sense of instability affecting the working environment. Due to this situation, a significant reorganization process was initiated in Colombia. The oil spill Interoil Colombia experienced in 2013, were human errors led to the spill, and the wish to

2013 Women

A HSE review was conducted in both Colombia and Peru in 2013. The review revealed that Interoil Colombia had most of the HSE procedures in place, but that workers lacked attention to the procedures. Further, there was also evidence of lack of qualified personnel and lack of divisional and functional descriptions providing clear responsibilities for employees and persons contracted from local communities. Based on the review, Interoil initiated more intensive training of workers in late 2013, and this work will continue in 2014. Interoil Colombia is also in the process of implementing clear divisional and functional descriptions for employees.

Lost-time injury frequency Definition: Number of accidents/total hours worked x 200,000 1,2 1,0 0,8 0,6 0,4 0,2 0,0

Colombia 2012

Colombia 2013

Peru 2012

Peru 2013

103

In Peru, the review resulted in updated procedures and processes to improve the HSE situation. These updates included guidelines for reporting and investigating incidents, update of ­access control to operating areas and the process regarding work permits and risk analysis. Further, there has been conducted extensive HSE training of workers in late 2013/early 2014. Interoil Peru has an in-house doctor in the fields of operations, and in Colombia, the employees have strong professional support through labor risk insurance. This creates a focus on prevention and limits potential health risks affecting employees. Health related campaigns are held at a regular basis in both countries, internally and in the local communities. Both countries have zero absenteeism due to professional diseases in both 2012 and 2013. Training The training conducted over the last two years has mainly been internal training and has focused on HSE. This type of training is key to ensure personnel safety and to improve day-to-day operations.

Sickness absence

Composition 2013 Board of directors Interoil Exploration and Production ASA Board of directors Interoil Colombia Board of directors Interoil Peru Group’s executive committee Management Peru Management Colombia

1,2 1,0 0,8 0,6

Remuneration Men and women employed in Interoil are paid equal for the same type of work. Capabilities and performance of the individual employee is determining for the salary set. Interoil promotes equal opportunity, and gender does not affect the salary.

0,4 0,2

Profit sharing is required by law in Peru, while in Colombia, there is no legal restrictions on how to distribute bonuses. Interoil aims

0,0

Colombia 2012

Colombia 2013

Peru 2012

Peru 2013

Definition: The total number of days absent as percentage of planned days worked.

0

1705,1 841,0

Average hours of training per employee category Category 1 / 2 0,3 17,6 Category 3 / 4 25,6 25,8 Category 5/ 6 4,2 17 Category 7 6,5 27 Average hours of training by gender Men 1,2 15,0 33,1 Women 27,4 31,7 9,2 Interoil recognises that relevant training of employees is key to minimize work related incidents, and to improve the HSE s­ ituation in general. For 2014, Interoil aims to establish ­individual training plans for all employees, both in Colombia and Peru. Further, Interoil aims to provide training to suppliers to increase the general knowledge of the organization and the quality of the work executed.

33,33% 25% 33,33% 33,33% 0% 50%

to develop a new bonus program in 2014, based on KPI’s per department and employee. In Colombia, people from the local communities are hired on short-term contracts to do maintenance and construction work in the field. These workers are not included in the statistics below, but all receive the same benefits as full-time Interoil employees.

Colombia

20

2012

Training Training Training Training Colombia 2012 Colombia 2013 Peru 2012 Peru 2013 751,8 63,83

66,67% 75% 66,67% 66,67% 100% 50%

Salary ratio women to men in Interoil (men´s salary is 100%)

Average hours of training per year per employee by gender and by employee category

Total number of hours Total number of hours internal training

Women

Peru

Interoil Peru has conducted more training than Interoil Colombia, both when it comes to internal training and external training. There have been less internal training in 2013 compared to 2012. The external training conducted has been stable due to ­investments made by the company and because training is ­offered as part of the insurance agreements Interoil have.



Men

3092,7 2167,53

1519,7 383,9

40

60

80

100

120

2013

Total remuneration over base salary (%)

Peru 2013

9,5 43,3 24,9 0

4,9 24,4 10,8 0

16,1 4,6

Governance bodies Interoil consider its strategic groups to be the board of directors, the group’s executive committee (CEO, CFO and COAA), the participants in the management meetings between the corporate headquarters and Colombia and Peru, respectively, the local management groups and the ethics committee.

Peru 2012

Colombia 2013

Colombia 2012

0

10

Women

20

30

40

50

60

Men

There is a strong female presence in these groups with both the Chairman of the Board and the Chief of Corporate Organization, Audit and Accounting being women. In addition, there are two women in the management group in Colombia. Peru, however, still lacks the participation of women.

104

105

CORPORATE GOVERNANCE Interoil`s corporate governance principles aim to contribute to value creation over time, benefitting shareholders as well as other stakeholders. As an international exploration and production company, Interoil aims to conduct our business in an economically efficient, socially responsible and environmentally acceptable way. The corporate governance principles are based on the Norwegian Code of Practice for Corporate Governance, dated October 23 2012. The recommendation from NUES can be found at: www.nues.no. The following presentation is structured after the 15 guidelines in the Code of Practice, and is also available on the company’s web pages.

1. Implementation and reporting on Corporate Governance: Interoil`s board of directors strongly believes sound principles for corporate governance are an important prerequisite for building trust between the company and its stakeholders and securing shareholder value. Owners, investors, customers, employees and other stakeholders should in the future be confident that Interoil`s business activities are characterized by reliability, control, transparency and high environmental and ethical standards. Interoil will in all material aspects follow the Norwegian Code of Practice for Corporate Governance and report the company’s Corporate Governance in the annual report. Any deviations from the Code of Practice will be explained in the report.

• Maintain a strong balance sheet by adopting a disciplined financial philosophy that balances profitability and sustainable growth. • Allocate and deploy capital with a focus on achieving returns well in excess of Interoil’s cost of capital. • Grow oil and gas production primarily through development programs focused on maximizing the value of our asset portfolio and secondary by acquiring new assets with a balanced risk profile. • Become the employer of choice for E&P professionals in Latin America. • Systematically contribute to the development of stakeholders in areas we operate. • Continuously focus on improving our HSE performance in line with best practices in the Latin American E&P sector.

3. Equity and dividends As of December 31, 2013, Interoil had 251,903,145 shares outstanding. Interoil`s book equity as of December 31, 2013, was USD -10 million. In 2013, the company completed an equity issue of USD 35 million. The funds has improved the capital structure and has been invested in production growth, and thus created value for stakeholders. Due to the equity situation and the financial result of 2013, Interoil will not pay any dividend in the near future.

Authorizations for the board of directors 2. Business Interoil’s objective, as defined in the articles of association article 3 is “activities such as exploration, development, production, purchase and sale of oil and natural gas deposits and production licenses, as well as any activities related thereto, including investments in equal and similar enterprises”. Interoil’s vision and strategy is adopted, both for Interoil as a group and for each business area, to support the company’s objective. Interoil’s vision and strategy is to become one of the strongest E&P companies operating in Colombia and Peru. Our corporate vision and strategy have the following pillars:

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The company’s annual general meeting held in June 2013 resolved to authorize the board of directors to increase the share capital by up to NOK 750,000. The mandate is valid for 24 months until June 30, 2015, not for one year as recommended by the Code. The authorization is to be used in relation to the company’s stock option scheme. A total of 15 000 000 options for executive management and key personnel was authorized in June. Effective grant date for 10 500,000 options is 21 June and 1 500 000 options 26 November. The options had a pre-established subscription price of NOK 1.68. At the end of 2013, the company has 3 000 000 remaining options for allocation by the board. For more information on the stock option scheme, please refer to annual report note 6 in the financial statement.

4. Equal treatment of shareholders and transactions with close associates Interoil has one class of shares representing one vote at the annual general meeting. The articles of association have no restriction regarding the rights to vote. Equal treatment is of high importance for the company and the board of directors must justify any waiver of these rights in capital increases. By the boards authorization to complete the equity issue of USD 35 million, the board was given the right to deviate from existing shareholders’ pre-emptive rights. This was due to the need for flexibility and the ability to rapidly carry out a share issue. However, the board was granted the right to favor existing shareholders in the allocation of shares. Material transactions between the company and shareholders, a shareholders parent company, members of the board of directors, executive personnel or close associates of any such parties, shall be evaluated by an independent third party. Any transactions with closely related parties, primary insiders or employees wishing to trade in Interoil shares must be cleared prior to the purchase of shares in the company, and are firmly regulated in Interoil’s own Directives for Insider Trading. Interoil is focusing on transparency and independent verification of any transactions with related parties. The company’s ethical guidelines, which apply to all employees, contain guidelines for handling potential conflicts of interest.

5. Freely negotiable shares Interoil’s shares are listed on the Oslo Stock Exchange and are freely transferable. There are no restrictions on trade in the company’s articles of association.

6. General Meetings Interoil encourages as many shareholders as possible to exercise their rights by participating in the annual general meeting of the company. Notices convening general meetings, including supporting documentation relating to the items on the agenda, are made available on the company’s web site no later than 21 days prior to the general meeting. The notice is also distributed as a stock exchange notification. The deadline for registering intended attendance is as close to the general meeting as possible, but no later than four days prior to the general meeting. Shareholders who are unable to attend are encouraged to vote by proxy. Information concerning both the registration procedure and the filing of proxies is included in the notice. The proxy form allows separate voting instructions to be given for each item on the agenda and for each of the candidates nominated for election. It is intended for the nomination committee, members of the board of directors and the auditor to attend the general meeting.

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The minutes from the meeting is released as a stock exchange notification (ticker: IOX) and on our website www.interoil.no.

7. Nomination Committee The articles of association stipulate that the company shall have a nomination committee, elected by the general meeting. The nomination committee shall consist of three members, who shall normally serve for a term of two years. The current members of the nomination committee are Kristen S. Jakobsen (chairman), Lindsay Trzaska and Elisa Palazzo. Kristen S. Jakobsen and Lindsay Trzaka were elected by the extraordinary general meeting on 12 April 2013, and Elisa Palazzo was elected at the annual general meeting on 21 June 2013. All members are independent both of Interoil’s executive management and the board of directors. The purpose of the committee is to recommend candidates for election to the board of directors and propose the fee payable to the board members. The committee shall emphasis that the candidates for the board have the necessary experience, competence and capacity to perform their duties in a satisfactory manner. A reasonable presentation regarding gender and background should also be emphasized. The nomination committee shall ensure that the recommendations are endorsed by the largest shareholders. The justified recommendations are available together with the notification to the general meeting, not later than 21 days prior to the general meeting.

8. Corporate assembly and the board of directors; composition and independence The company is not required to have a corporate assembly, cf. the Public Limited Liabilities Companies Act § 6-35 (1). Thus, the general meeting elects the representatives to the board of directors directly. According to the articles of association, the board of directors shall consists of one to seven members. Currently, there are three members and one alternate director. The members are elected for a term of two years and may stand for re-election. The nominations are distributed to the shareholders together with the notice of the general meeting. Up until June 2013, the board of directors consisted of Anne Grete Ellingsen, Nils Trulsvik and Thor Haugenæss, with Håkon Sandby as deputy. The board of directors currently consist of Anne Grete Ellingsen (chairperson), Peter Nicol and Arturo G. Vilas, and Håkon Sandby as deputy. All members, of which Anne Grete Ellingsen and Håkon Sandby were re-elected, were elected for a two-year term in June 2013. All board members are independent of the main shareholders of the company, and the executive personnel and important business associates of the company.

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The composition of the board of directors as a whole, represents sufficient diversity of background and expertise to help ensure that the board carries out its work in a satisfactory manner. The company’s website and annual report provides detailed information about the board members expertise and capacities. The board of directors is aware of the need for diversification of its members, in order to add value and to best serve the common interest of Interoil and its shareholders (particularly with respect to expertise, experience, social skills, and independence, flexibility and time capacity). The composition of the board of directors also fulfils the diversity of both genders. The board held 26 board meetings in 2013, which have been attended by an average of 97,4%. The former board held 15 board meetings, of which 13 was attended by all board members, and two meetings was attended by two out of three board members. The current board was elected in June 2013. The board meetings held from June 2013, has been attended by all board members. The board members are encouraged to own shares in the company.

9. The work of the board of directors The board of directors has established an annual schedule for the board meetings and an annual plan for its work. The plan covers both the control functions and the strategy focus of the company in addition to implementation of decision made by the board. The board of directors leads the company’s strategic planning, and make decisions that form the basis for the executive personnel to prepare for and implement investments and structural measures. The board is engaged in the financing of the company. The board shall ensure that the activities in Interoil are soundly organized. This includes drawing up plans and budgets for the activities of the company, keeping itself informed of the company’s financial position and ensuring that its activities, accounts and asset management are subject to adequate control. The board of directors has issued instructions for its own work as well as for the executive personnel with particular emphasis on clear internal allocation of responsibilities and duties. The chairperson of the board ensures that the board’s duties are undertaken in efficient and correct manner.

members. A separate remuneration committee is considered, but not appointed, due to the fact that all the members of the board of directors are independent form the company’s executive personnel.

10. Risk management and internal control The board of directors focuses on risk management and internal control to support the company’s corporate values, business development and the quality of the financial reporting encompassing ethical guidelines and guidelines for social responsibility. Interoil manages risk through an internal framework comprising of guidelines, procedures and tools intended to ensure safe and stable business operations and provide unified and reliable financial reporting, which is applicable for throughout the group. This enables the operating businesses to manage the day-to-day risk related to their operations. The operating companies in both Colombia and Peru are ISO-certified. Each group function in corporate have a global responsibility for following up their respective areas of specialization and frameworks associated therewith. The audit committee assists the board of directors with safeguarding the quality of the internal control and risk management, particularly in relation to financial reporting. The audit committee holds regular meetings, at least once every quarter. The board of directors provides in note 3 in the annual report the main features of the company’s internal control and risk management systems as they relate to the company’s financial reporting.

11. Remuneration of the board of directors The remuneration of the board of directors should reflect the responsibilities, the expertise and the time commitment, as well as the complexity of business. The remuneration is proposed by the nomination committee. The remuneration is not linked to the company’s performance or linked to options in Interoil. The board of directors instructions clearly states that the members should not take on specific assignments for the company in addition to their appointments as a board member. The remuneration to the board of directors for 2013 is described in note 6 in the financial statement.

12. Remuneration of the executive personnel The Chief Executive Officer is responsible for the company’s daily operations and ensures that all necessary information is presented to the board. The board of directors evaluates its performance and expertise annually. As the board consists of only three members and one deputy, all independent, the audit committee consists of the board

The board of directors of Interoil submits its statement on remunerations to management in accordance with the Public Limited Companies Act §6-16 a. Our guidelines for future stipulation of management remuneration is to follow the general salary adjustments in our local society and, at the same time, consider the measures necessary to avoid losing our key personnel and maintain a level of remuneration enabling us to recruit the kind of professionals needed for us to develop the company according to plans.

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The compensation structure and guidelines for executive personnel and key employees are subject to annual review and approval by the board of directors. In 2013, Interoil introduced an option program for executive personnel. More information is included in the financial statement note 6.The compensation structure and guidelines for executive personnel and key employees are described in “Remuneration of Senior Executives” in the Board of Directors report. Interoil negotiates all terms and conditions on an arm’s length basis at market terms, enabling Interoil to recruit the professionals the company seeks. The remuneration to the executive management is described in note 6 in the consolidated financial statements.

• Interoil publishes an annual financial calendar which can be consulted on the Oslo Stock Exchange website, through news agencies and on the company’s website.

14. Takeovers The board of directors has established guideline principles for how it will act in the event of a take-over bid: • In a bid situation, the company’s board of directors and management has an independent responsibility to ensure that shareholders are treated equally, and that the company’s business activities are not disrupted unnecessarily. • The board has a particular responsibility to ensure that shareholders are given sufficient information and time to form a view of the offer.

13. Information and communications Interoil’s information policy is based on transparency and on providing the shareholders, investors and financial market with correct and timely information, in a way that safeguards the principle of equal treatment of all shareholders, and satisfies the regulations and practice applicable to listed companies. Interoil’s key communication objectives are visibility, transparency and openness, and the company will achieve these objectives through precise, relevant, timely and consistent information. Interoil co-ordinates its external and internal communication activities to ensure that the company is presented in a clear and consistent manner, and that the company’s brand and reputation is managed properly. All sensitive information will be controlled and disclosed in compliance with statutory laws and the relevant stock exchange rules and regulations. The board of directors has approved a designated IR (Investor Relations) policy which covers guidelines for the company’s contact with shareholders other than through general meetings Interoil reports the financial result each quarter, in addition to presentations at conferences in Norway and abroad. Our quarterly reports and investor presentations are made available on Interoil’s web site, www.interoil.no. The company also reports its monthly average production the first trading day at Oslo Børs after the 10th of each month.

• The board of directors should not hinder or obstruct take-over bids for the company’s activities or shares. • In the event of a take-over bid for the company’s shares, the company’s board of directors should not exercise mandates or pass any resolutions with the intention of obstructing the take-over bid unless this is approved by the general meeting following announcement of the bid. • If an offer is made for the company’s shares, the company’s board of directors should issue a statement making a recommendation as to whether shareholders should or should not accept the offer. The board’s statement on the offer should make it clear whether the views expressed are unanimous, and if this is not the case it should explain the basis on which specific members of the board have excluded themselves from the board’s statement. • The board should arrange a valuation from an independent expert. The valuation should include an explanation, and should be made public no later than at the time of the public disclosure of the board’s statement. Any transaction that is in effect a disposal of the company’s activities should be decided by the general meeting.

15. Auditor • Interoil’s website, www.interoil.no contains comprehensive information regarding the company, its activity and contact information, and is updated on a regular basis. In addition, all presentation materials and financial reports are available on the website.

The auditor shall be independent of the company. The remuneration for auditors is presented in note 6 in the financial statement.

• Interoil distributes all sensitive press releases as well as all reports through Hugin and Oslo Stock Exchange (www.newsweb.no).

Interoil has established an audit committee, which will meet with the auditor regularly. The objective of the committee is to focus on internal control, independence of the auditor, risk management

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Ernst & Young was appointed as auditor on the general meeting 27 May 2009.

and the company’s financial standing, including the quarterly and annual financial statements.

directors also meets with the auditor at least once a year without presence of the executive management

The auditor will send a complete Management Letter/Report to the Board – which is a summary report with comments from the auditors including suggestions of any improvements if needed. This is an important tool for the board in order to get a better overview and fulfil the control duties. The auditor is also present in at least one board meeting each year.

The auditors presents once a year to the audit committee a review of the company’s internal control procedures, identifying weaknesses and proposals for improvement.

The auditor annually submits the audit plan for the audit committee. The auditor participates in meetings of the board of directors that deal with the annual accounts. In this meeting, the auditor reviews any material changes in accounting principles, comments on estimated figures and report material matters regarding disagreement with the executive management. The board of

The board of directors reports the remuneration paid to the auditor at the ordinary general meeting. The fee is detailed in fee paid for audit and fee paid for other specific assignments. The board of directors of the company has not established guidelines for the executive management’s use of the auditors for services other than the audit, contrary to what is recommended by the Code of Practice. .

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

THE FINANCIAL CALENDAR FOR INTEROIL EXPLORATION AND PRODUCTION ASA IN 2014 IS AS FOLLOW: Interim Reports

Date

4th Quarter Report Annual Report 1st Quarter Report Annual General Meeting 2nd Quarter Report 3rd Quarter Report

26.02.14 30.04.14 27.05.14 23.06.14 22.08.14 26.11.14

ANALYST COVERAGE Company Analyst Pareto Thomas Aarrestad Platou Alex Gheorghe Swedbank First Securities Teodor Sveen Nilsen Sparebanken 1 Markets Kristoffer Dahlberg

20 LARGEST SHAREHOLDERS AS OF PER 1 APRIL 2014 Shares held 30 904 178 19 912 003 13 907 441 8 223 422 5 953 841 5 550 000 5 100 000 3 284 973 3 075 000 2 963 189 2 567 416 2 367 000 1 924 808 1 900 000 1 800 000 1 541 056 1 500 000 1 436 640 1 419 881 1 418 000 116 748 848 251 903 145

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% of total shares

Name

12,27 DEUTSCHE BANK AG PRIME BROKERAGE FULL 7,90 The Bank of New York BNYM SA/NV - BNY GCM 5,52 DELPHI NORGE JPMORGAN EUROPE LTD, 3,26 STOREBRAND VEKST JPMORGAN EUROPE LTD, 2,36 VERDIPAPIRFONDET DNB 2,20 MP PENSJON PK 2,02 SOCIETE GENERALE SS S/A SG/SGBT LUX/CLTS 1,30 Merrill Lynch Prof. MLPRO SEG FOR EXCLSV 1,22 CITIBANK, N.A. S/A BARCLAYS BANK ( 1,18 NORDNET BANK AB 1,02 NORDNET PENSJONSFORS 0,94 SANDQUIST PATRICIA RODRIGUES D 0,76 SÆTER HAAKON MORTEN 0,75 ALDEN AS 0,71 HAUGNÆSS THOR KRISTIAN 0,61 NETFONDS LIV ASBJØRN 0,60 OLAV OLSEN HOLDING A 0,57 DANSKE BANK A/S 3887 OPERATIONS SEC. 0,56 SIX SIS AG 25PCT ACCOUNT 0,56 HELLESTØ ARNE FREDRIK 46,3 % 100 %

Acc.type NOM NOM

NOM NOM NOM NOM

NOM NOM

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Contact Main Office Interoil Exploration and Production ASA Kronprinsensgate 17, 0251 Oslo +47 67 51 86 50 www.Interoil.no

Peru Office Interoil Perú SA Av. República de Panamá 3531 Torre A Office 403 San Isidro, Lima, Perú +51 1 422 8591

Colombia Office Interoil E&P Colombia Carrera 7 No. 113-43 oficina 1202, Edificio Torres Samsung Bogotá, Colombia +57 16205450

www.Interoil.no

www.mariannegrafiskdesign.no

Interoil Exploration and Production ASA Kronprinsensgate 17, NO-0251 Oslo, Norway