for the quarter ended 31 December 2010

Dear Investor Oil & Gas Ltd, as our name A comprehensive inspection of the Due to the Pike River situation, NZOG clearly suggests, is primarily an oil and Kupe Production Station was will incur a significant accounting loss gas exploration and production successfully carried out in November. for the six months to the end of company. But in the last quarter the The Kupe gas and oil field continues to December. However, our balance sheet terrible events at the Pike River coal mine perform strongly. remains strong, we have good on the South Island’s West Coast were cashflows from Kupe and Tui, and we Like Kupe, the Tui area oil fields front of mind – for NZOG, for Pike River remain very focussed on growing our benefitted from oil prices that hit two year Coal Ltd, for the West Coast community oil and gas business and increasing highs during the quarter. Despite the and most of all, for the families of the shareholder value. three week shutdown at Kupe and a 29 men who lost their lives. shorter shutdown at Tui to undertake We all watched the events triggered by some process improvements, the two the explosion on 19th November unfold fields combined provided NZOG with with mounting concern, sadness, NZ$16.7m in revenue for the quarter. David Salisbury CEO sympathy and despair. 21 January 2010 In our exploration portfolio, NZOG has There is still a lot of uncertainty as this built a dominant position in the relatively tragedy plays out and NZOG will lightly explored northern offshore continue to have a key interest and role Taranaki Basin, with large holdings in to perform. On the back page of this three adjoining permits. In the southern report, we explain in some detail what Taranaki offshore basin, the Kaupokonui NZOG’s role has been to date, and what prospect is ‘drill-ready’ and NZOG is Key Points might lie ahead. looking at drilling options. To increase those options, we have applied for a 6 • Tragedy at Pike River We also have a responsibility to our month extension to the date for making a shareholders to get on with our core • Kupe inspection “drill or drop” decision and continue with business of oil and gas, and we’ve successfully completed our farm-out activities. been doing so throughout the last • Tui facilities upgraded three months. Production

Kupe Tui Financial update Kupe Gas and Oil Field (PML 38146) Tui Area Oil Fields (PMP 38158) NZOG’s operating revenue for the December NZOG interest 15% NZOG interest 12.5% quarter was NZ$16.7m. This was comprised A comprehensive inspection of the The Pateke well returned to production in of revenue from the sale of Tui oil (NZ$7.8m) production station, required within the first October following the successful and revenue from the sale of Kupe sales gas, 12 months of operation, was successfully completion of a workover. In November, LPG and light oil (NZ$8.9m). completed in November. Tui production was halted for a week to During the quarter NZOG advanced NZ$25m allow for maintenance and planned In the three months to the end of to Pike River Coal Ltd. This included a process modifications to be made to the payment of NZ$12m made following the December, Kupe produced 3.3 PJ of sales floating production storage and offtake explosion at the mine on 19 November. gas (NZOG’s allocation 0.56 PJ), 14,800 (FPSO) vessel, the Umuroa. This was just tonnes of LPG (NZOG’s share 2,200 $500,000 was donated to the Pike River the second shutdown required since the tonnes) and 350,000 barrels of light oil Miner’s Relief Trust Fund. Tui fields began production in July 2007. (NZOG’s share 53,000 barrels). In November, US$10m was converted to Total Tui production for the quarter was The sales gas from Kupe is sold to Genesis New Zealand dollars as part of re-balancing just over 715,000 barrels of oil, at an Energy and NZOG’s share of the LPG is NZOG’s currency holdings toward a 50/50 average rate of 7,770 barrels per day. sold to Vector subsidiary On Gas, both mix of USD and NZD holdings. NZOG’s share of the oil production was under long-term contracts. The light oil is During the quarter, 753,000 shares were almost 90,000 barrels. exported to Australian refineries through acquired and subsequently cancelled under Port Taranaki. NZOG’s revenue from Kupe NZOG’s revenue from Tui in the quarter the share buyback scheme, at a cost of in the quarter was NZ$8.9m. was NZ$7.8m. With international oil NZ$857,000. demand firming, recent shipments NZOG Production At 31 December 2010, NZOG’s cash balance have received the highest prices seen was the equivalent of NZ$111.8m. NZ$63m Product October-December 2010 for two years. There were two tanker has been drawn from a NZ$75m debt facility Kupe: shipments totalling just under 573,000 with , giving NZOG a net cash Kupe sales gas 0.56 petajoules barrels, with approximately 440,000 position of NZ$48.8m. Kupe LPG 2,200 tonnes barrels in stock (NZOG’s share 55,000 More financial information is contained in the Kupe light oil 53,000 barrels barrels) at the end of the quarter. December 2010 Quarterly Cash Flows Tui: A further shipment of 405,000 barrels Report, which has been released to the NZX Tui oil 90,000 barrels was offloaded on 5 January. and ASX. Exploration

Taranaki Basin evaluation of the undrilled oil prospects PEP 38491 (Albacore) which include Oi and Tieke North. The NZOG interest 100% PEP 51311 (Kaupokonui) results of systematic reservoir modelling NZOG will hold 100% of this second-term NZOG interest 90% during early 2011 are also expected to exploration permit following the The Kaupokonui oil prospect is ready to drill establish the scope for further development withdrawal of Westech, the previous when a suitable drilling rig on acceptable drilling within the producing Tui, Amokura operator. The prospectivity associated terms is available in New Zealand waters. and Pateke fields. with several undrilled structures is being NZOG is looking at potential options for examined in conjunction with exploration late 2011. PML 38146 (Kupe) work in the adjacent permits. Kaupokonui comprises several vertically- NZOG interest 15% PEP 51988 (Mangaa) stacked potential reservoir sands with This permit contains the producing Kupe NZOG interest 100% recoverable resources (un-risked) in excess Central Field area and also a number of NZOG was granted this block in January of 200 million barrels of oil. Several other interesting prospects and leads. The joint 2010 and is continuing to work on its prospects have been identified within venture is conducting further geological and prospectivity with the extensive existing the permit. geophysical assessments, with the possibility of drilling one or more prospects seismic data set. NZOG has entered into a farm-out agreement in conjunction with scheduled 2nd stage PEP 51321 (Kahurangi) with Peak Oil & Gas (an Australian company development drilling in 2012/13. which is in the process of merging with NZOG interest 18.9% Raisama Ltd, an ASX-listed resource PEP 51558 (Parihaka) Interpretation of the seismic data set exploration and development company) NZOG interest 20% incorporating the 200km 2D survey whereby Peak will earn a 10% interest in PEP NZOG has a 20% stake in this permit and is conducted during 2010 will be completed 51311 by contributing 20% of the cost of the in discussions to raise this level further. This by March, and a decision will be made Kaupokonui-1 well. NZOG intends to further permit is the largest of three adjacent permits whether or not relinquish the permit or farm down its exposure to the cost of drilling. through which NZOG has built a dominant proceed to drill. position in the relatively lightly explored PMP 38158 (Tui) northern offshore Taranaki Basin, to the west PEP 38483 (Bahamas) NZOG interest 12.5% and north of the Pohokura gas/condensate NZOG interest 18.9% This permit contains the producing Tui area field. A large 3D seismic survey acquired by The operator, AWE, was unable to attract oil fields and a number of prospects and a previous venture in 2007 will be a new partner to join the joint venture leads. The 3D seismic data covering most of reprocessed to improve definition of deep before drilling the high risk biogenic gas the permit area is being reprocessed targets within the Kapuni and Pakawau play. As a result, the joint venture elected including pre-stack depth migration. This is groups. Deep Kapuni group sandstones are to surrender the permit and it was handed expected to improve the resolution of the proven effective gas-condensate reservoirs back to Crown Minerals in December. reservoir interval and enable a thorough in the northern part of onshore Taranaki. Canterbury Basin PEP 38259 (Barque) Taranaki Basin PEP 51988 NZOG interest 40% (MANGAA) The large Barque gas-condensate Gas Field prospect has been mapped and continuing evaluation is focused on Oil Field PEP 38491 key technical risk factors and the (ALBACORE) Prospects and Leads determination of the optimal drilling PERMIT UNDER APPLICATION NZOG Permits location. The permit is subject to a change of conditions application to allow the joint venture sufficient time to AUCKLAND PEP 51558 (PARIHAKA) identify a suitable rig and ensure that the PEP 38259 prospect is commercially viable, given (BARQUE) Taranaki Basin

NEW PLYMOUTH the cost of drilling and developing a frontier basin prospect. PMP 38158 (TUI) NZOG CORPORATE OFFICE PEP 52717 ApplicationWELLINGTON NZOG interest 40% NZOG expects to be granted this permit Canterbury Basin adjacent to the north of the Barque permit and will be reprocessing existing seismic data in order to map out a newly-

PEP 51311 PML 38146 recognised Gas Field potential reservoir system PEP 51321 (KAUPOKONUI) (KUPE) (KAHURANGI) across Oil bothField blocks. The joint venture is the same Prospects as andthe Leads one which holds the Barque Permit permit, Under Application with NZOG as operator. NZOG Permits Pike River – an NZOG perspective

NZOG doesn’t know what caused the Before the explosion, $13m of this had Receivers are required by law to look catastrophic events at the been drawn down by PRCL to meet its primarily at how best to recover funds for on 19 November 2010. We watched, with wages bill and other ongoing costs. secured creditors, which can be by the rest of New Zealand and others around ongoing operation of the business or sale After the explosion, the NZOG Board the world, as the tragedy unfolded and it of its assets. agreed to provide PRCL with a further became clear that 29 men had lost their $12m under the working capital facility. Since their appointment on 13 December, lives. In time, the various enquiries should the receivers have had the complex task of provide some answers. Until then, At the time, everyone was still hoping that cooperating with the Police and other speculation about the cause does little but the men underground were alive and agencies, reviewing options for the mine’s add to the distress of those who have lost awaiting rescue. Without our $12m, PRCL future, determining employee and their loved ones. was broke – and facing insolvency at the contractor entitlements and preserving the very time it needed to focus on the rescue NZOG has had a long association with the remaining value of PRCL. That work is all effort. The balance remaining of this $12m Pike River mine. The mining licence was ongoing. is now funding the receiver’s ongoing work. held by an NZOG subsidiary through the NZOG is owed around $64m in loans and consent process and up until the very early The NZOG Board believed – and continues our PRCL shareholding cost $82m. It will be stages of development. Following a public to believe – that providing the $12m was some time – possibly more than a year – float in 2007, the mine had been developed the right thing to do commercially and before we know how much of that almost and operated by a separate listed company, ethically, based on the information that we $150m investment can be recovered. Pike River Coal Ltd (PRCL). NZOG retained had at the time. We have received a great a minority (ca. 30%) shareholding, and deal of shareholder correspondence on this NZOG’s share price had been declining more recently, became a lender. issue, which runs 9 to 1 in favour of throughout 2010 and a number of analyst NZOG’s actions. reports had attributed this to market As a shareholder, we are in the same concerns about the poor performance of position as the thousands of other PRCL Subsequently the situation deteriorated PRCL and the flow-on impact on NZOG. shareholders, big and small. PRCL has rapidly with further explosions, fire, loss Following the mine explosion, NZOG’s been suspended from trading and the of life and a great deal of uncertainty about share price fell another 30%. value of our shareholding is very uncertain. the mine’s future. Our shareholding may still have some value In NZOG’s view, our share price declined The Board of PRCL then came to us and (and we are working to address that), but by more than the total value of our asked that we arrange for the company to shareholders are at the end of the line investment in PRCL. On top of that, the be placed in receivership. A company when it comes to getting something back share price has not reflected the strong rise cannot put itself into receivership – this can on their investment. in international oil prices or the increase in only be arranged by a secured creditor. reserves at the Kupe field. As a debt holder, NZOG has had a more PRCL had concluded that even with the involved role. In May 2010 we advanced 19 November 2010 will be a day that will $12m provided by NZOG, it could not US$29m of first ranking secured convertible never be forgotten, but we must move on. avoid insolvency. Our Board agreed that bonds, as the mine struggled to meet its In 2011, NZOG will be doing everything it receivership was the only viable course of production and financial targets. In can to grow its oil and gas business, action and in consultation with another September 2010, with PRCL facing cash recover value from its PRCL interests and secured creditor, the BNZ, arranged for the flow difficulties, we provided a further re-build shareholder value. appointment of three Pricewaterhouse- NZ$25m short-term working capital facility. Coopers partners as receivers.

For further information please contact: For information about your share holding or to NZOG stock symbols change your address, please contact the share NZX Shares – NZO ASX Shares – NZO David Salisbury, Chief Executive Officer registrars as follows: Chris Roberts, Corporate Affairs Manager New Zealand Australia Call +64 4 495 2424 Toll free 0800 000 594 (NZ) Computershare Investor Freephone: Computershare Investor Freephone: Email [email protected] Services Limited 0800 467 335 Services Pty Limited 1 800 501 366 Visit www.nzog.com Private Bag 92119 Telephone: GPO Box 242 Telephone: Auckland +64 9 488 8777 Melbourne +61 3 9415 4083 New Zealand Victoria 3001 Australia