Annual Report C A R N A R V O N P E T R O L E U M L T D 2 0 0 5 C O R P O R A T E D I R E C T O R Y Carnarvon Petroleum Limited ABN 60 002 688 851 Directors PJ Leonhardt (Non-executive Chairman) NC Fearis (Non-executive Director) KP Judge (Non-executive Director) DJ Orth (Executive Director & COO) AG Shelton (Non-executive Director) Company Secretary RA Pullia (Chief Financial Officer) Auditors Ernst & Young Bankers Australia and New Zealand Banking Group Limited Registered Office Level 50 120 Collins Street Melbourne Victoria 3000 Australia T +61 3 9225 5400 F +61 3 9225 5050 E admin@carnarvonpetroleum.com www.carnarvonpetroleum.com Share Registry Computershare Investor Services Pty Limited Yarra Falls 452 Johnston Street Abbotsford Victoria 3067 Australia T +61 3 9415 5000 F +61 3 9473 2500 Investor Enquiries: 1300 850 505 2 0 0 5 A N N U A L R E P O R T C O N T E N T S Chairman’s Report Review and Results of Operations Directors’ Report Corporate Governance Statement Statement of Financial Performance Statement of Financial Position Statement of Cash Flows Notes to the Financial Statements Directors’ Declaration Independent Audit Report Shareholding Information Investor Information 2 3 8 12 16 17 18 19 44 45 47 49 The 2005 Annual General Meeting will be held at 11.00am on Wednesday, 30 November 2005 at The Western Australian Club, 101 St Georges Terrace, Perth, Australia. 1 C H A I R M A N ’ S R E P O R T Dear Shareholders, The 2005 financial year was challenging for Carnarvon As we now move into the next stage of Carnarvon’s Petroleum due to the actions of the Company’s joint activities, efforts are being progressed to strengthen venture partner in Thailand, Tiger Petroleum Inc (“Tiger”). Carnarvon’s industry and technical capabilities. It has also been a frustrating year because of the lack of new development activity in the SWIA concession during a period of high oil prices. Much of the year was unfortunately spent in litigation with Tiger due to its failure to abide by the provisions of the joint venture agreements and the breakdown of commercial discussions. However, normal operations, including workovers of existing wells, have continued, and cash flows from Thailand have Carnarvon’s short term objective is directed towards resolving the commercial issues surrounding the further exploration and development of the Wichian Buri field. It is also recognised that a fresh focus for Carnarvon’s activities needs to be developed to build a sustainable future and take advantage of the opportunities available in the current industry climate. improved as higher oil prices have more than offset the During the year I assumed the role of Chairman and natural production decline of the wells. Ken Judge joined the Board as a non-executive director. In late April 2005, Tiger announced that it had entered into Andrew Shelton has remained a non-executive director of an agreement with Calgary-based Pan Orient Energy Corp. the Company. On behalf of the Board, I wish to thank him (formerly Welwyn Resources Ltd) to make an offer to acquire for his contribution as Chairman during the past three years, all of the outstanding common shares of Tiger. The mailing and in particular, his commitment to the Company during of the offer and accompanying take-over bid circular to the very difficult period over the last 12 months. Tiger shareholders occurred in late August 2005 and Pan Orient and Tiger expect to complete this transaction by the end of October 2005. Pan Orient is a Canadian-based, TSX-listed energy company, with a strong, international management team and directors with extensive oil & gas industry experience. Carnarvon believes that with the impending completion of the takeover of Tiger, the outstanding matters, which are the subject of continuing litigation, may be commercially resolved with Pan Orient. This would be in the best interests of both joint venture partners as it would allow the parties to promptly move forward with further Carnarvon has commenced the new financial year in a healthy working capital position, having raised $717,000 in July 2005 from a share placement to existing and new professional investors, and our current liquidity position remains sound. On behalf of the Board I thank you for your continued support. development of the Wichian Buri oil field and environs Peter Leonhardt with a competent operator. Chairman 2 R E V I E W A N D R E S U L T S O F O P E R A T I O N S The operating results of the consolidated entity is summarised as follows: Revenue from oil and gas operations Revenue from non-operating activities Cost of sales Corporate administration costs Other expenses including carrying value of assets disposed Exploration project costs Other gains/(losses) Exploration, evaluation and development expenditure written-off Loss before income tax expense Income tax expense Loss after income tax Consolidated 2005 $ 942,840 426,136 1,368,976 (818,763) (1,139,129) (240,084) (78,681) (37,418) – (945,099) – (945,099) Consolidated 2004 $ 974,501 17,328 991,829 (984,346) (1,327,774) (66,991) (6,194) 93,591 (117,159) (1,417,044) – (1,417,044) Total revenue for the year ended 30 June 2005 was previous financial year 76,945 barrels of oil were produced $1,368,976 compared to $991,829 in the previous by the joint venture. However, the increase in world oil corresponding period, an increase of $377,147. prices resulted in the joint venture achieving higher sales The consolidated entity’s loss, after income tax, for the year prices per barrel, which helped offset the decline in barrels ended 30 June 2005 was $945,099, a 33% improvement on produced and sold in 2005. the previous corresponding period’s loss of $1,417,044. SW1A JOINT VENTURE, THAILAND Oil production continued to decline at expected rates during 2005 and additional in-fill drilling would be required to increase production. At year's end production is at (Carnarvon Petroleum Ltd 40% / Tiger Petroleum approximately 170 BOPD. Inc 60%) Carnarvon has a 40% interest in the SW1A Joint Venture which includes the Wichian Buri oilfield, Si Thep oilfield and Exploration Block license L44/43. The joint venture produced 62,184 barrels of oil during the year. The average price achieved per barrel sold over the year was US$30.87 compared to US$23.78 in 2004. Carnarvon’s share of revenue from oil and gas operations was $942,840. The decrease in revenue of $31,661 was mainly due to a During the year the operator, Pacific Tiger Energy (Thailand) Limited, a wholly owned subsidiary of Tiger Petroleum, continued with normal operations at the oilfields with Carnarvon's agreement. The operator focused on reducing overhead costs and improving gross margins resulting in an increase in Carnarvon's share of cash operating profit of the joint venture to $248,466 in the current year compared to $133,245 in 2004. reduction in the number of barrels sold during the year and No exploration or development activity was undertaken the appreciation of the A$ throughout 2005. In the during the year by the operator, as its focus was on existing 3 R E V I E W A N D R E S U L T S O F O P E R A T I O N S Northern L44/43 Leads and Prospects Wichian Buri Oilfield and Huai Phai & WB3 Prospects P90 (PROVEN) P50 (PROVEN + PROBABLE) P10 (PROVEN + PROBABLE + POSSIBLE) SW1A Concession area 11 MMBO 23 MMBO 45 MMBO operations following an internal restructure. As a result, Joint Operating Agreement (“JOA”), including an order that no Work Program & Budget for further exploration and Pacific Tiger transfer all its interests in the joint venture to development of the Wichian Buri oilfield and environs SEAL, a declaration that the joint venture properties include was put forward. During the year Carnarvon, through its subsidiary, Strategic Exploration (Asia) Limited (“SEAL”), was successful in legal proceedings against Pacific Tiger and Tiger for beaches of the joint venture agreements, including failure to pay Carnarvon its share of sales proceeds, and unauthorized use of funds. This result has clearly established under Alberta law the obligations of Pacific Tiger, as operator, to SEAL. However, Carnarvon does not believe that Pacific Tiger has fully complied with all of the directions of the court order and therefore SEAL has made further application to the Alberta court. Exploration Block L33/43, damages of US$2.2 million for negligence, breach of contract and breach of fiduciary duties, and ancillary relief. Carnarvon commenced this legal action as Pacific Tiger had been in default of the JOA for more than ninety days for underfunding its share of joint venture expenditure, and as various commercial issues remain unresolved. In April 2005 Tiger Petroleum announced that it had entered into an agreement with Calgary-based Pan Orient Energy Corp. (formerly Welwyn Resources Ltd), pursuant to which Pan Orient agreed, subject to certain conditions, to make an offer to acquire all of the outstanding common In May 2005, Carnarvon, through its subsidiary SEAL, issued shares of Tiger for consideration consisting of one common further legal proceedings in Alberta, Canada, against Pacific share of Pan Orient for each four and one quarter common Tiger and Tiger, which seeks specific performance of the shares of Tiger. 4 R E V I E W A N D R E S U L T S O F O P E R A T I O N S Location of SW1A Joint Venture The mailing of the offer and accompanying take-over The Estimated Ultimate Recovery (EUR) of oil over the life of bid circular to Tiger Petroleum shareholders occurred in the Field has a most likely or ‘P50’ value of some 23 million late August 2005 and the offer is expected to close by barrels of oil (MMBO) within the confines of PLs 1 and 2 and late October 2005. L44/43. The EUR ranges from a Proved volume of 11 Pan Orient has announced that it is preparing a new exploration and development drilling program including MMBO (P90) to a Proved plus Probable plus Possible of 45 MMBO (P10). 3D seismic for the 2005-06 financial year. Pan Orient is an To date approximately 0.8 MMBO has been produced from energy company listed on the Toronto Stock Exchange’s the Field so that the most likely remaining volume of oil that Venture Exchange, with a strong, international management can be recovered from the Field is approximately 22 MMBO. team and directors with extensive oil and gas industry These estimates compare favorably to those prepared in experience. In the prior year completion of the Phase III drilling campaign in the SW1A Concession area proved up the 2005 by Gaffney, Cline and Associates on behalf of Tiger Petroleum, given the different methodologies and purpose of the studies. existence of an extensive accumulation that allowed Engineering studies indicate that the key to successful Carnarvon to confirm earlier reserve estimates provided development of Wichian Buri is to drill wells quickly and by Helix RDS. inexpensively, on a continuous basis, so as to reduce unit 5 R E V I E W A N D R E S U L T S O F O P E R A T I O N S PRLs 4 & 5, Western Papua New Guinea cost and offset normal production decline. The actual PAPUA NEW GUINEA recovery of oil over the life of the Field will depend on a variety of factors including the scale of the development and in particular the number of wells drilled. The volume of recoverable oil can sustain a much higher level of oil production which can only be achieved by drilling many wells to build production. PRL 4 and PRL 5 including the Stanley, Elevala and Ketu discoveries (Carnarvon Petroleum Limited 15%/Santos 35%/InterOil 20%/AWE 15%/TransOrient 7.5%/Horizon 7.5%) OTHER EXPLORATION INTERESTS Petroleum Retention Licences 4 and 5, operated by Santos, are located in the foreland of the Papuan Basin adjacent to Carnarvon has been monitoring available opportunities the Irian Jayan border in western PNG. The permits contain within the region. They comprise open acreage both in Asia three gas/condensate discoveries, Elevala-1, Ketu-1 and and in Australia, fields in decline that no longer meet large Stanley-1. The joint venture is considering a condensate company hurdle rates and divestitures resulting from stripping and gas re-injection project to develop the Elevala mergers and consolidations. The corporate objective is for field. Apart from the known fields, as established by the a well balanced spread of assets in terms of the nature of gas-condensate discovery wells, there are several other large the projects, the number of countries in which they reside, targets in the areas. PRL 5 has been renewed for a further and their upside potential both for the hydrocarbon five years and renewal documents for PRL 4 have been potential and the access to additional projects. lodged with the PNG Department of Petroleum and Energy. 6 R E V I E W A N D R E S U L T S O F O P E R A T I O N S EP110 & EP424, Western Australia CARNARVON BASIN EP 110/EP 424 (Carnarvon 35%/Strike Oil 40%/Pancontinental 25%) Carnarvon has a 35% interest in the consolidated permits EP 110 and EP 424 in the Carnarvon Basin. Strike Oil is the operator of both permits and the joint venture partners have The onshore portion of the EP110 permit is adjacent to the producing Tubridgi Gas Field. Evaluations suggest that some topographic highs may overlie subsurface structuring. This concept will be further examined by making use of digital elevation modelling which, if successful, will guide future assessments of the block. approved a work program for 2005-06. A seismic program AUSAM ENERGY CORPORATION is to be undertaken within EP 424 to delineate identified Carnarvon is a shareholder in Ausam Energy Corporation, leads and prospects. It is expected a company listed on the Canadian TSX Venture Exchange. to commence in the December 2005 quarter. During the year Carnarvon realized a portion of its investment A good lead at the Birdrong Sandstone level has been mapped within EP 424 and will be delineated with the in Ausam at prices ranging from C$0.75 to C$1.50 per share, raising a total of A$396,000 net of selling costs. acquisition of some 100 km of new seismic data as part of a The market value of Carnarvon's remaining investment, larger program being conducted in the area. The timing of based on the Ausam closing price at 30 June 2005 of the survey will be dependent on other operators in the area C$0.92 per share, was approximately A$175,000. As at the with a view to saving costs on mobilization / demobilization, date of this report the value of this investment has increased but it is likely to begin during the 4th quarter of 2005. to A$200,000. 7 D I R E C T O R S ’ R E P O R T Your directors submit their report for the year ended 30 June 2005. DIRECTORS The names and details of the Company's directors in office during the financial year and until the date of this report are shown below. Directors were in office for this entire period unless otherwise stated. Peter J Leonhardt Non-Executive Chairman FCA, FAICD Age 58. Appointed director 17 March 2005 and Chairman on 1 April 2005. Mr Leonhardt is an independent company director and adviser with extensive business, financial and corporate experience. He is a Chartered Accountant, former Senior Partner with PricewaterhouseCoopers and Managing Partner of Coopers & Lybrand in Western Australia. During the past three years Mr Leonhardt has served as a director of the following listed companies: CTI Logistics Limited (from 1999); Voyager Energy Limited (from 2001 to September 2005), and Titan Resources Limited (from June 2005). He is also a director of Alliance Finance Corporation Limited, the Western Australian Institute for Medical Research and a member of the Advisory Board of the Perth International Arts Festival. Neil C Fearis Non-Executive Director LL.B(Hons), MAICD, ASIA Age 54. Appointed director 30 November 1999. Mr Fearis has 28 years’ experience as a commercial lawyer in the UK and Australia. During the past three years Mr Fearis has served as a director of the following listed companies: Kresta Holdings Limited (from 1997) and Perseus Mining Limited (from 2004). Mr Fearis is also a member of several professional bodies associated with commerce and law. Member of the Audit Committee and member of the Remuneration & Nomination Committee. Kenneth P Judge Non-Executive Director B.Com, LL.B Age 50. Appointed director 1 April 2005. Mr. Judge has extensive legal and business management experience having held a number of public company directorships and has been engaged in the establishment or corporate restructure of technology, mining and oil and gas companies in Australia, the UK, US, Brazil, Argentina, Mexico and the Philippines. 8 Mr. Judge is Chairman of Brazilian Diamonds Limited which is listed on the Toronto Stock Exchange and on the AIM market of the London Stock Exchange Plc. and is also Chairman of Hidefield Gold plc and a director of Block Shield Corporation, both of which are listed on AIM. Mr Judge is also Chairman of Alto Ventures Ltd and a director of Piper Capital Limited, Forum Developments Limited and Latin American Minerals Ltd which are listed on the TSX Venture Exchange and Chairman of Columbus Gold Corporation and Empire Mining Ltd. David J Orth Executive Director & Chief Operating Officer B.Sc; DipGeoSc Age 56. Appointed Executive Director 14 December 2000. Appointed Chief Operating Officer July 2003. A geologist with in excess of 25 years' industry experience having worked for Amoco and BHP Petroleum as well as a number of independent oil companies throughout North America, Europe, Africa, the Middle East and Australasia. Member of the Petroleum Exploration Society of Australia. Andrew G Shelton Non-Executive Director B.A., M.A(Cantab.), FAICD Age 58. Appointed director and Chairman on 1 April 2002 and was Chairman until 1 April 2005. Independent corporate finance adviser specializing in strategic and corporate finance advice, capital raisings, mergers and acquisitions, valuations and financial analysis. Principal and director of Andrew Shelton & Company Pty Ltd and Chairman of Whise Acoustics Limited. Past President & CEO of JP Morgan Canada. Chairman of the Audit Committee and Chairman of the Remuneration & Nomination Committee. COMPANY SECRETARY Mr Rick A Pullia, B.Bus CA, was appointed to the position of company secretary and Chief Financial Officer in May 2004. Mr Pullia has over 17 years finance, accounting and secretarial experience with locally-listed and overseas-based companies and has held senior management, commercial and finance roles with companies in the manufacturing and technology sectors. Mr Pullia has been a Chartered Accountant for over 14 years. D I R E C T O R S ’ R E P O R T Interests in the shares and options of the Company and related bodies corporate Relevant interest in the shares and options of the Company as at the date of this report: DIVIDENDS The directors have not recommended the payment of any dividend in respect of the financial year ending 30 June 2005. No dividends were declared or paid during the financial year. Directors Ordinary Shares PJ Leonhardt NC Fearis KP Judge DJ Orth AG Shelton 2,010,504 4,871,400 11,168,596 1,569,127 9,208,906 Options over Ordinary Shares 589,128 300,000 - 47,428 1,600,743 CORPORATE INFORMATION Corporate structure Carnarvon Petroleum Ltd is a limited liability company incorporated and domiciled in Australia. Carnarvon Petroleum Ltd has prepared a consolidated financial report incorporating the following entities: Entity Name % Ownership Carnarvon Petroleum Ltd Lassoc Pty Ltd S.R.L. Exploration Pty Ltd Strategic Exploration (Asia) Limited 100 100 100 100 Principal activities During the course of the 2005 financial year the consolidated entity’s principal activities continued to be directed towards oil and gas exploration, development and production. Employees The consolidated entity employed 2 employees as at 30 June 2005 (2004: 2 employees). EARNINGS PER SHARE Basic earnings per share Diluted earnings per share Cents (0.4) (0.4) REVIEW AND RESULTS OF OPERATIONS A review of the operations during the financial year of the consolidated entity and the results of those operations is contained in the previous section and the directors adopt and endorse that review which is to be regarded as incorporated herein. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS There were no significant changes in the state of affairs of the consolidated entity during the financial year. SIGNIFICANT EVENTS AFTER BALANCE DATE There were no significant events that occurred subsequent to year end other than as disclosed in note 26 to the financial statements. LIKELY DEVELOPMENTS The review of operations outlines likely developments in the operations of the consolidated entity. The directors are not presently in a position to predict the results of those developments. The directors are of the opinion that further information as to the likely developments in the operations of the consolidated entity would prejudice the interests of the Company and the consolidated entity and it has accordingly not been included. ENVIRONMENTAL REGULATION AND PERFORMANCE The consolidated entity’s oil and gas exploration and development activities are concentrated in Western Australia, Thailand and Papua New Guinea. Environmental obligations are regulated under both State and Federal Law in Western Australia, under the Department of Mineral Fuels regulations in Thailand, and under the Oil and Gas Act in Papua New Guinea. No significant environmental breaches have been notified by any government agency during the year ended 30 June 2005. 9 D I R E C T O R S ’ R E P O R T ENVIRONMENTAL REGULATION AND PERFORMANCE The Company has arranged Directors and Officers insurance to cover losses or liabilities incurred by a person as an officer of the Company or of a related body corporate as permitted by law. Full details of the cover and premium are not disclosed as the insurance policy prohibits the disclosure. management is in the form of cash remuneration and superannuation contributions. The Board assesses the appropriateness of the nature and amount of remuneration on an annual basis by reference to industry and market conditions, and with regard to the Company's financial and operational performance. The Company paid no bonuses during the financial year ended 30 June 2005. SHARE OPTIONS Unissued shares As at the date of this report, there were 38,492,101 options to subscribe for shares in the Company exercisable at 6 cents and expiring on 31 December 2005. Option holders are entitled to participate in any new pro- rata issue of securities of the Company only on the prior exercise of the options. Shares issued as a result of exercise of options There have been no options exercised during or since the end of the financial year. Expiry of options There have been no options that have expired during or since the end of the financial year. REMUNERATION REPORT This report outlines the remuneration arrangements in place for directors and executives of Carnarvon Petroleum Limited (the Company). The Remuneration and Nomination Committee of the Board of Directors of the Company advises the Board on remuneration policies and practices, evaluates the performance of senior management and makes recommendations to the Board on the nature and amount of remuneration of directors and senior management. The Board seeks to set aggregate remuneration at a level which provides the Company with the ability to attract and retain quality directors and senior management appropriate to the needs of the Company, whilst incurring a cost which is acceptable to shareholders. All directors and senior management have the opportunity to qualify for participation in the Carnarvon Employee Share Plan, details of which are disclosed in note 17 to the financial statements. The issue and allotment of shares under this Plan is at the discretion of the Board. No equity-based remuneration was paid to directors and 1,000,000 shares were allotted to a senior manager under the Plan during the year. The Company has an agreement with a controlled entity of DJ Orth for a term expiring on 31 October 2005. The Company has an employment agreement with RA Pullia for an unspecified term with a one month notice period and, in the event of redundancy, payment of two months’ gross salary plus two weeks’ salary for every year of service. The agreement provides for an annual salary review. There are no formal retainer agreements with non-executive directors. Details of the nature and amount of each major element of the remuneration provided to each director and executive officer of the Company during the financial year are as follows: Remuneration of directors of Carnarvon Petroleum Ltd Primary Benefits Salary & Fees $ Post Employment Superannuation $ Total $ Non-Executive Directors PJ Leonhardt (1) NC Fearis KP Judge (1) AG Shelton 11,250 27,000 7,500 42,167 - 3,000 - 4,500 11,250 30,000 7,500 46,667 Executive Directors DJ Orth (1) 95,717 25,000 120,717 (1) Paid or payable to a director related entity. Total non-executive directors’ fees are approved by shareholders and the Board is responsible for the allocation of those fees amongst the individual members of the Board. Remuneration of executive directors and senior There are no performance bonus plans offered to directors of the Company. In addition, an amount of $189,734 was paid or is payable to a director related entity, details of which are set out in note 20 to the financial statements. 10 D I R E C T O R S ’ R E P O R T Remuneration of executive officers of Carnarvon Petroleum Ltd Primary Benefits Salary & Fees $ Post Employment Superannuation $ Total $ RA Pullia 123,750 23,400 147,150 The terms ‘director’ and ‘officer’ have been treated as mutually exclusive for the purposes of this disclosure. The value of remuneration has been determined on the basis of cost to the Company and consolidated entity. Executive officers are those directly accountable and responsible for the operational management and strategic direction of the Company and the consolidated entity. DIRECTORS’ MEETINGS The number of meetings of directors (including meetings of committees of directors) held during the year and the number of meetings attended by each director were as follows: Directors Directors' Meetings Audit Committee Meetings A B PJ Leonhardt NC Fearis KP Judge DJ Orth AG Shelton 4 15 2 15 15 4 15 3 15 15 A - 2 - - 2 B - 2 - - 2 Remuneration & Nomination Committee Meetings A - 2 - - 2 B - 2 - - 2 AUDITOR INDEPENDENCE & NON-AUDIT SERVICES The directors received the following declaration from the auditor of Carnarvon Petroleum Limited. Auditor’s Independence Declaration to the Directors of Carnarvon Petroleum Limited In relation to our audit of the financial report of Carnarvon Petroleum Limited for the financial year ended 30 June 2005, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct. Ernst & Young R C Piltz Partner Melbourne 29 September 2005 Non-audit Services The following non-audit services were provided by the entity's auditor, Ernst & Young. The directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act. The nature and scope of each type of non-audit service provided means that auditor independence was not compromised. Ernst & Young received or are due to receive the following amounts for the provision of non-audit services: Taxation advice and compliance services Accounting advice $26,282 $1,000 A - Number of meetings attended. Signed in accordance with a resolution of the directors. B - Number of meetings held during the time the director held office during the year. CORPORATE GOVERNANCE In recognising the need for the highest standards of corporate behaviour and accountability, the directors of Carnarvon Petroleum Ltd support and have adhered to the principles of good corporate governance. The Company’s corporate governance statement is contained in the next section of the Annual Report. PJ Leonhardt Director Melbourne 29 September 2005 11 C O R P O R A T E G O V E R N A N C E S T A T E M E N T The Board of Directors of Carnarvon Petroleum Limited is responsible for the corporate governance of the Company. The Board guides and monitors the business and affairs of Carnarvon Petroleum Limited on behalf of the shareholders by whom they are elected and to whom they are accountable. The format of this Corporate Governance Statement is reflective of the Australian Stock Exchange Corporate Governance Council's (“the Council”) ‘Principles of Good Corporate Governance and Best Practice Recommendations’ (“the Recommendations”). In accordance with the Recommendations, this Corporate Governance Statement contains certain specific information and discloses the extent to which the Company has followed the guidelines during the period. Where a recommendation has not been followed, that fact is disclosed, together with reasons for the departure. This Statement is structured with reference to the Recommendations, which are as follows: Principle 1. Lay solid foundations for management and oversight Principle 2. Structure the board to add value Principle 3. Principle 4. Principle 5. Promote ethical and responsible decision making Safeguard integrity in financial reporting Make timely and balanced disclosure Principle 6. Respect the rights of shareholders Principle 7. Recognise and manage risk Principle 8. Encourage enhanced performance Principle 9. Remunerate fairly and responsibly Principle 10. Recognise the legitimate interests of stakeholders A description of the Company’s main corporate governance practices is set out below. These practices were in place throughout the year and have followed the Recommendations, unless otherwise stated. 12 Principle 1: Lay solid foundations for management and oversight. The Board’s primary responsibility is to oversee the Company’s business activities and management for the benefit of shareholders. The key responsibilities of the Board include: (cid:2) Developing long-term corporate objectives and strategy with management and approving plans, new investments, major capital and operating expenditures and major funding activities proposed by management (cid:2) Defining and setting performance expectations for the Company and monitoring actual performance (cid:2) Appointing and reviewing the performance of senior management (cid:2) Assuring itself that there are effective health, safety, environmental and operational procedures in place. (cid:2) Satisfying itself that there are effective reporting systems that will assure the Board that proper financial, operational, compliance, risk management and internal control processes are in place and function appropriately (cid:2) Satisfying itself that the annual financial statements of the Company fairly and accurately set out the financial position at year end, and the financial performance for the year; and (cid:2) Reporting to and advising shareholders Principle 2: Structure the board to add value Board Composition The Company presently has four non-executive directors, three of whom are considered by the Board to be independent, including the Chairman, and one executive director. The skills, experience and expertise relevant to the position of director held by each director in office at the date of this report is disclosed in the Directors’ Report. C O R P O R A T E G O V E R N A N C E S T A T E M E N T The composition of the Board, and the term in office held by each director at the date of this report, is as follows: PJ Leonhardt Chairman, Non-executive director Independent 6 months KP Judge Non-executive director Independent 6 months NC Fearis Non-executive director Independent 5 years 10 months AG Shelton Non-executive director Not Independent 3 years 6 months DJ Orth Executive director Not Independent 4 years 9 months Directors of the Company are considered to be independent when they are independent of management and free from any business or other relationship that could materially interfere with - or could reasonably be perceived to materially interfere with - the exercise of their unfettered and independent judgement. Mr AG Shelton is not considered independent as he is a principal and director of a company that provided financial consulting services to the Company during the year. Independent Professional Advice The Directors may, in carrying out their duties to the Company, seek external professional advice. They are entitled to re-imbursement of all reasonable costs where such requests for advice are approved by the Chairman. Remuneration and Nomination Committee The Remuneration and Nomination Committee advises the Board on remuneration policies and practices, evaluates the performance of senior management against pre-agreed goals, and makes recommendations to the Board on remuneration for senior managers and directors. The Committee obtains independent advice on policies and practices to attract, motivate, reward and retain strong performers. It is also the Committee's role to consider the appropriate size and composition of the Board, criteria for Board membership, candidates for Board membership, and the terms and conditions of appointment to the Board. The composition of the Board is determined in accordance with the following principles and guidelines: (cid:2) the Board should comprise a majority of non-executive directors; (cid:2) the chairman should be a non-executive director; (cid:2) the Board should comprise directors with an appropriate range of qualifications and expertise; and (cid:2) the Board should meet at least bi-annually and follow meeting guidelines set down to ensure all directors are made aware of, and have available all necessary information, to participate in an informed discussion of all agenda items. Members of the Remuneration and Nomination Committee are Mr AG Shelton (Chairman) and Mr NC Fearis. Other directors and the Company Secretary attend Committee meetings by invitation. The Remuneration Committee was established in December 2002 and its brief was expanded in August 2003 to include Board nominations. Details of these directors’ qualifications and attendance at Committee meetings are set out in the Directors’ Report. Principle 3: Promote ethical and responsible decision-making The Company recognizes the need for directors and employees to observe the highest standards of behaviour and business ethics when engaging in corporate activity. Conflict of Interest The Board has approved ‘Conflict-of-Interest Guidelines’ which apply if there is, or may be, a conflict between the personal or other interests of a Director and the business of the Company. In that event, when the matter comes before the Board for discussion, the Director withdraws from the meeting for the period the matter is considered and takes no part in the discussions or decision-making process. 13 C O R P O R A T E G O V E R N A N C E S T A T E M E N T Dealing in Company Securities The Company has a share trading policy, binding on directors and employees, designed to assist directors and employees to avoid insider trading, and provide guidelines for trading in the Company's securities. The policy stipulates that the only appropriate time for a director respects, of the Company's financial condition and operating results and are in accordance with relevant accounting standards, and that the integrity of the financial statements are founded on a sound system of risk management and internal compliance and control which, in all material respects, implements the policies adopted or employee to acquire or sell the Company's securities is by the Board. when he or she is not in possession of price-sensitive information that is not generally available to the market. Directors wishing to buy or sell the Company’s securities in accordance with the policy may only do so after first having advised the Chairman of his or her intention. In the case of employees, there is a correspondence notification requirement. Principle 4: Safeguard integrity in financial reporting Principle 5: Make timely and balanced disclosure The Company follows the disclosure requirements of the Corporations Act 2001 and the ASX Listing Rules, in particular: (cid:2) Continuous disclosure - which is its core disclosure obligation and primary method of informing the market and shareholders Audit Committee (cid:2) Periodic disclosure - in the form of full-year, half-year The Audit Committee was established in September 2002 and quarterly reporting and is the custodian of the external audit relationship and assists the Board to assure itself that there are effective accounting, auditing, internal control, business risk management, compliance and reporting systems, processes and practices in place. The Audit Committee consists of Mr AG Shelton (Chairman) and Mr NC Fearis. The external auditors, the Chief Operating Officer, the Chief Financial Officer and other non-executive directors attend Committee meetings by invitation. Details of these directors’ qualifications and attendance at Audit Committee meetings are set out in the Directors’ Report. Recommendation 4.3 requires listed entities to have an audit committee comprising of only non-executive directors, (cid:2) Specific information disclosure - as and when required, of administrative and corporate details, usually in the form of ASX releases. Directors are committed to the promotion of investor confidence by ensuring that trade in the Company’s securities takes place in an efficient, competitive and informed market. In compliance with ASX continuous disclosure requirements, the Company has procedures in place to ensure that all price sensitive information is identified, reviewed by senior management and disclosed to the ASX in a timely manner and that all information provided to the ASX is immediately available to shareholders and the market on the Company’s website. a majority of independent directors, an independent The Company shall prepare written policies and procedures chairperson, who is not chairperson of the board and at on information disclosure that will be available in a separate least three members. The Company does not currently Corporate Governance section of the Company’s website. comply with Recommendation 4.3. The Board will review the structure of the Audit Committee in the current financial year to enable full compliance with Recommendation 4.3. Principle 6: Respect the rights of shareholders The Audit Committee further requires that the Company’s Chief Executive Officer (or equivalent) and Chief Financial Officer annually certify that the Company’s financial The Board aims to ensure that shareholders are kept informed of all major developments affecting the Company. Information is communicated to shareholders through: statements present a true and fair view, in all material (cid:2) Annual and Half Yearly Reports; 14 C O R P O R A T E G O V E R N A N C E S T A T E M E N T (cid:2) The Chairman’s Address delivered at the Annual General Meeting; Principle 9: Remunerate fairly and responsibly (cid:2) Notice of all meetings of shareholders and explanatory notes of proposed resolutions; Non-executive directors are paid directors' fees out of the maximum aggregate amount approved by shareholders from time to time for the remuneration of non-executive (cid:2) Shareholder email address list allowing each ASX release directors. to be forwarded by email directly to every shareholder on the list; and A discussion of the Remuneration Committee and its role is disclosed in Principle 2. Remuneration of directors and (cid:2) Company website www.carnarvonpetroleum.com executives is disclosed in the Directors' Report. offering shareholders access to ASX releases, company media releases and other company data. Shareholders are encouraged at Annual General Meetings to ask questions of directors and senior management and also the Company’s external auditors, who are required to be in attendance. Principle 7: Recognise and manage risk Principle 10: Recognise the legitimate interests of stakeholders The Company shall develop a Code of Conduct and Business Ethics that will formally document the Company’s approach to all stakeholders. A copy of this Code will be available in a separate Corporate Governance section of the Company’s website. The Board has as one of its main objectives the oversight of the management of areas where risk to the Company is Disclosure on the Company’s website The Recommendations suggest that certain policies and perceived to be significant. Board papers and management procedures dealt with by the Recommendations should be presentations routinely address the risks associated with available on the Company's website in a section clearly proposals submitted to the Board for approval. The Board has responsibility for ensuring that there is an appropriate and effective process for the direction and control of the Company. In particular it: (cid:2) monitors the management systems and processes in place for compliance with laws and regulatory requirements, and (cid:2) monitors the management systems in place for addressing significant business risks and the framework of internal management controls. A written risk management strategy will be posted on the Company’s website when it is approved by the Board. Principle 8: Encourage enhanced performance The performance of the Board, its committees and each individual director, is to be evaluated by the Remuneration and Nomination Committee. A formal review procedure will be prepared and a performance evaluation conducted during the current reporting period. marked for corporate governance. The Company currently does not have a separate corporate governance section on its website but will introduce one in the current reporting period and will include in that section those matters recommended for inclusion by the Council. 15 S T A T E M E N T O F F I N A N C I A L P E R F O R M A N C E F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 5 REVENUE FROM ORDINARY ACTIVITIES Cost of sales General administration Directors' remuneration Salaries and employee benefits Legal and consulting fees Other expenses from ordinary activities Other gains/(losses) Exploration project costs Exploration, evaluation and development expenditure written-off LOSS FROM ORDINARY ACTIVITIES BEFORE INCOME TAX EXPENSE INCOME TAX EXPENSE RELATING TO ORDINARY ACTIVITIES LOSS FROM ORDINARY ACTIVITIES AFTER INCOME TAX EXPENSE Notes Consolidated Carnarvon Petroleum Ltd 2(a) 2(b) 2(c) 2(d) 2005 $ 2004 $ 2005 $ 2004 $ 1,368,976 991,829 405,209 17,328 (818,763) (984,346) – – (342,388) (554,865) (342,388) (554,865) (216,134) (408,146) (216,134) (408,146) (157,860) (183,934) (157,860) (183,934) (383,207) (144,736) (383,207) (144,736) (279,624) (103,084) (226,313) (103,084) (37,418) 93,591 (486,655) 95,333 (78,681) (6,194) (78,681) (6,194) 2(e) – (117,159) – – (945,099) (1,417,044) (1,486,029) (1,288,298) 3 – – – – (945,099) (1,417,044) (1,486,029) (1,288,298) NET LOSS ATTRIBUTABLE TO MEMBERS OF CARNARVON PETROLEUM LTD (945,099) (1,417,044) (1,486,029) (1,288,298) Capital raising costs TOTAL REVENUES, EXPENSES AND VALUATION ADJUSTMENTS ATTRIBUTABLE TO MEMBERS OF CARNARVON PETROLEUM LTD AND RECOGNISED DIRECTLY IN EQUITY TOTAL CHANGES IN EQUITY OTHER THAN THOSE RESULTING FROM TRANSACTIONS WITH OWNERS AS OWNERS ATTRIBUTABLE TO MEMBERS OF CARNARVON PETROLEUM LTD Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 16 – – (232,756) (232,756) – – (232,756) (232,756) (945,099) (1,649,800) (1,486,029) (1,521,054) 25 25 (0.4) (0.4) (0.6) (0.6) S T A T E M E N T O F F I N A N C I A L P O S I T I O N A S A T 3 0 J U N E 2 0 0 5 CURRENT ASSETS Cash assets Receivables Inventories Other financial assets Other TOTAL CURRENT ASSETS NON-CURRENT ASSETS Receivables Other financial assets Plant and equipment Notes Consolidated Carnarvon Petroleum Ltd 2005 $ 2004 $ 2005 $ 2004 $ 301,454 527,882 134,102 504,556 114,297 246,191 1,398 44,771 108,576 104,841 91,474 26,496 282,876 76,225 – 91,474 12,759 – 282,876 6,200 642,297 1,238,015 239,733 838,403 72,220 61,265 2,772,366 3,593,282 – – 1,482,962 1,482,962 50,692 121,294 3,532 6,089 4 5 7 6 4 7 9 Deferred exploration, evaluation and development costs 10 5,712,063 5,791,172 – – TOTAL NON-CURRENT ASSETS 5,834,975 5,973,731 4,258,860 5,082,333 TOTAL ASSETS CURRENT LIABILITIES Payables Provisions TOTAL CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Accumulated losses TOTAL EQUITY 6,477,272 7,211,746 4,498,593 5,920,736 459,237 259,322 210,056 156,880 11,590 880 11,590 880 470,827 260,202 221,646 157,760 470,827 260,202 221,646 157,760 6,006,445 6,951,544 4,276,947 5,762,976 45,318,074 45,318,074 45,318,074 45,318,074 (39,311,629) (38,366,530) (41,041,127) (39,555,098) 6,006,445 6,951,544 4,276,947 5,762,976 11 12 13 14 17 S T A T E M E N T O F C A S H F L O W S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 5 Notes Consolidated Carnarvon Petroleum Ltd 2005 $ 2004 $ 2005 $ 2004 $ CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers 932,870 994,871 – – Payments to suppliers and employees (1,569,385) (2,421,370) (1,048,117) (1,381,490) Interest received Exploration project costs NET CASH FLOWS FROM/(USED IN) OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Exploration and development expenditure Proceeds on disposal of plant & equipment Purchase of plant & equipment Proceeds from sale of equity investments Purchase of equity investments Repayment from SW1A joint venture Advances to controlled entities Repayments from controlled entities NET CASH FLOWS FROM/(USED IN) INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of shares & options Capital raising costs NET CASH FLOWS FROM/(USED IN) FINANCING ACTIVITIES 9,036 17,328 9,036 17,328 (78,681) (6,194) (78,681) (6,194) 15(a) (706,160) (1,415,365) (1,117,762) (1,370,356) (645) (1,583,967) 19,814 – (30,586) (17,312) 395,999 (2,348) 99,778 – – – – – – – – – – 395,999 (2,348) – – – (4,713) – – – (93,748) (1,635,738) 447,405 – 482,012 (1,601,279) 747,308 (1,640,451) – – – 3,426,736 (232,756) 3,193,980 – – – 3,426,736 (232,756) 3,193,980 NET INCREASE/(DECREASE) IN CASH HELD (224,148) 177,336 (370,454) 183,173 Add opening cash brought forward 527,882 357,112 504,556 321,383 Effects of foreign exchange rate changes on cash (2,280) (6,566) – – CLOSING CASH CARRIED FORWARD 15(b) 301,454 527,882 134,102 504,556 18 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of accounting The financial report is a general-purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001 including applicable Accounting Standards. Other mandatory professional reporting requirements (Urgent Issues Group Consensus Views) have also been complied with. The financial report has been prepared in accordance with the historical cost convention. Going concern The consolidated financial report has been prepared on a going concern basis, which contemplates continuity of normal business activities and realisation of assets and discharge of liabilities in the ordinary course of business. The consolidated entity has incurred an operating loss of $945,099 for the financial period ended 30 June 2005. The ability of the consolidated entity to continue as a going concern, including the ability of the consolidated entity to pay its debts as and when they fall due, is dependent upon: • • • oil sales revenue derived from the SW1A Joint Venture; generation of future profits from the SW1A Joint Venture; and injection of capital Without the generation of future profits and the injection of capital, there is significant uncertainty as to whether the consolidated entity will be able to continue as a going concern and therefore whether it will be able to realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial report. It is on the basis that the consolidated entity will generate profits in the future from oil sales derived from the SW1A Joint Venture and an injection of capital will occur to cover future exploration and development expenditure, that the directors have prepared the financial report on a going concern basis. Consequently, no adjustments have been made relating to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities that might be necessary should the consolidated entity not continue as a going concern. (b) Changes in accounting policies The accounting policies adopted are consistent with those of the previous year. (c) Cash and cash equivalents Cash on hand and in banks and short-term deposits are stated at nominal value. For the purposes of the Statement of Cash Flows, cash includes cash on hand and in banks, and money market investments at call readily convertible to cash. (d) Recoverable amount Non-current assets measured using the cost basis are not carried at an amount above their recoverable amount, and where carrying values exceed this recoverable amount, the asset is written down. In determining recoverable amount, the expected net cash flows have been discounted to their present value. (e) Investments Listed shares are classified as current investments and valued at the lower of cost and recoverable amount. Other non-current investments are carried at the lower of cost and recoverable amount. (f) Plant and equipment Cost and valuation All classes of plant and equipment are measured at cost. 19 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Depreciation Depreciation is provided on a straight-line basis on all plant and equipment. Major depreciation periods for plant and equipment are between 2 and 5 years (2004: 2 and 5 years). (g) Joint ventures Interest in the joint venture operation is recognised by including in the respective classifications, the share of individual assets employed and share of liabilities and expenses incurred. (h) Exploration, evaluation and development costs Costs carried forward Costs arising from exploration and evaluation activities are carried forward provided such costs are expected to be recouped through successful development, or by sale, or where exploration and evaluation activities have not, at reporting date, reached a stage to allow a reasonable assessment regarding the existence of economically recoverable reserves. Amortisation Costs on productive areas are amortised over the life of the area of interest to which such costs relate on the production output basis. (i) Employee benefits Provision is made for employee benefits accumulated as a result of employees rendering services up to the reporting date. These benefits include wages and salaries and annual leave. Sick leave is not accrued as it is not of a material nature and any entitlement is not vested on termination of employment. Liabilities arising in respect of wages and salaries, annual leave and any other employee entitlements expected to be settled within twelve months of the reporting date are measured at their nominal amount based on remuneration rates which are expected to be paid when the liability is settled. All other employee benefit liabilities are measured at the present value of the estimated future cash outflow to be made in respect of services provided by employees up to the reporting date. In determining the present value of future cash outflows, the market yield as at reporting date on national government bonds, which have terms to maturity approximating the terms of the related liability, are used. Employee benefit expenses and revenues arising in respect of the following categories: • • wages and salaries, non-monetary benefits, annual leave and other leave entitlements; and other types of employee benefits are recognised against profits on a net basis in their respective categories. The value of the employee share scheme described in note 17 is not being charged as an employee benefits expense. Any contributions made to superannuation plans are recognized against profits when due. (j) Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: Sale of goods Control of the goods has passed to the buyer. Interest Control of the right to receive the interest payment. (k) Comparatives Where necessary, comparatives have been reclassified and repositioned for consistency with current year disclosures. 20 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (l) Leases Leases are classified at their inception as either operating or finance leases based on the economic substance of the agreement so as to reflect the risks and benefits incidental to ownership. Operating leases The minimum lease payments of operating leases, where the lessor effectively retains substantially all of the risks and benefits of ownership of the leased item, are recognised as an expense on a straight-line basis. (m) Principles of consolidation The consolidated financial statements are those of the consolidated entity, comprising Carnarvon Petroleum Ltd (the parent company) and all entities that Carnarvon Petroleum Ltd controlled from time to time during the year and at reporting date. The financial statements of subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist. All intercompany balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full. Unrealised losses are eliminated unless costs cannot be recovered. (n) Foreign currencies Translation of foreign currency transactions Transactions in foreign currencies of entities within the consolidated entity are converted to local currency at the rate of exchange ruling at the date of the transaction. Foreign currency monetary items that are outstanding at reporting date are translated using the spot rate at the end of the financial year. All exchange differences arising from the translation of assets and liabilities are recognised as revenues and expenses for the financial year. Translation of financial reports of overseas operations Strategic Exploration (Asia) Limited (“SEAL”), a wholly owned subsidiary, is accounted for in its functional currency, being the US dollar. SEAL is an integrated operation with its financial report being translated using the temporal rate method and any exchange differences are taken directly to the Statement of Financial Performance. (o) Taxes Income taxes Tax effect accounting is applied using the liability method whereby income tax is regarded as an expense and is calculated on the accounting profit after allowing for permanent differences. To the extent timing differences occur between the time items are recognised in the financial statements and when items are taken into account in determining taxable income, the net related taxation benefit or liability, calculated at current rates, is disclosed as a future income tax benefit or a provision for deferred income tax. The net future income tax benefit relating to tax losses and timing differences is not carried forward as an asset unless the benefit is virtually certain of being recognised. Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST except: • • where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the Statement of Financial Position. 21 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Cash flows are included in the Statement of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. (p) Earnings per share Basic EPS is calculated as net profit or loss attributable to members, adjusted to exclude costs of servicing equity (other than dividends), divided by the weighted average number of ordinary shares, adjusted for any bonus element. Diluted EPS is calculated as net profit or loss attributable to members, adjusted for: • • • costs of servicing equity (other than dividends); the after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; and other non-discretionary changes in revenue or expenses during the period that would result from the dilution of potential ordinary shares divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element. (q) Contributed equity Issued and paid up capital is recognised at the fair value of the consideration received by the Company. Any transaction costs arising on the issue of ordinary shares are recognised directly in equity as a reduction of the share proceeds received. (r) Payables Liabilities for trade creditors and other amounts are carried at cost which is the fair value of the consideration to be paid in the future for goods and services received, whether or not billed to the consolidated entity. Payables to related parties are carried at the principal amount. Interest, when charged by the lender, is recognised as an expense on an accrual basis. (s) Receivables Trade receivables are recognised and carried at original invoice amount less a provision for any uncollectible debts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. Receivables from related parties are recognised and carried at the nominal amount due. Interest is taken up as income on an accrual basis. (t) Provision for rehabilitation The provision for rehabilitation is recognised when the liability arises from production. The directors believe that the rehabilitation provision is not material at this stage of production and therefore a provision for restoration has not been recorded in the financial statements. (u) Employee share loans The carrying value of advances made to eligible employees is the lower of the equivalent market value of the shares from time to time or the price of the shares at the time the shares were issued to eligible employees. (v) Inventories Inventories relate to warehouse stores and materials. These represent consumable supplies and maintenance spares expected to be used in production and are valued at the lower of cost and net realisable value. Cost comprises purchase, inspection and transportation costs. 22 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 Notes Consolidated Carnarvon Petroleum Ltd 2005 $ 2004 $ 2005 $ 2004 $ 2. PROFIT/(LOSS) FROM ORDINARY ACTIVITIES Loss from ordinary activities before income tax is arrived at after taking into account: (a) Revenue from ordinary activities Revenue from operating activities: Oil and Gas operations Oil Revenue – SW1A joint venture 942,840 974,501 Total revenue from operating activities 942,840 974,501 – – – – Revenue from non-operating activities: Interest – other persons/corporations Other income Proceeds from disposal of plant & equipment Proceeds from sale of equity investments Total revenue from non-operating activities (i) (ii) 9,036 1,287 19,814 395,999 426,136 17,328 9,036 17,328 – – – 17,328 174 – 395,999 405,209 405,209 – – – 17,328 17,328 Total revenue from ordinary activities 1,368,976 991,829 (b) Cost of sales Production Royalty and excise Transportation Depreciation of production assets Amortisation Selling, general and administration Total cost of sales (283,529) (301,907) (158,124) (162,406) (49,149) (69,429) (47,600) (49,944) (76,789) (93,146) (203,572) (307,514) (818,763) (984,346) – – – – – – – – – – – – – – 23 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 Notes Consolidated Carnarvon Petroleum Ltd 2005 $ 2004 $ 2005 $ 2004 $ 2. PROFIT/(LOSS) FROM ORDINARY ACTIVITIES (continued) (c) Other expenses from ordinary activities Depreciation - plant & equipment (2,557) (7,849) (2,557) (7,849) Rental premises - operating lease (39,540) (36,093) (39,540) (36,093) Carrying value of plant & equipment sold Carrying value of equity investments sold (i) (ii) (53,311) (10,174) – (10,174) (193,750) – (193,750) – Provision for non-recovery of employee share loans Interest expense Total other expenses from ordinary activities (i) Net gain/(loss) on disposal of plant & equipment (ii) Net gain/(loss) on disposal of equity securities (d) Other gains/(losses) 10,955 (47,820) 10,955 (47,820) (1,421) (1,148) (1,421) (1,148) (279,624) (103,084) (226,313) (103,084) (33,497) (10,174) – (10,174) 202,249 – 202,249 - Increment/(decrement) in value of investment – 70,179 Unrealised foreign exchange gain/(loss) on: Translation of integrated subsidiary (28,977) 23,412 – – 70,179 – Loan to subsidiary Other – (8,441) – – (478,214) 25,154 (8,441) – Total other gains/(losses) (37,418) 93,591 (486,655) 95,333 (e) Specific item Exploration, evaluation and development expenditure written-off (iii) – (117,159) – – (iii) During the prior financial year the directors determined that estimated ultimate recoverable (EUR) barrels of oil in the fields in which production licences had been granted was a more appropriate basis to amortise carried forward exploration, evaluation and development expenditure, compared to EUR barrels of oil in the joint venture concession area resulting in a write-off of $117,159. 24 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 Notes Consolidated Carnarvon Petroleum Ltd 2005 $ 2004 $ 2005 $ 2004 $ 3. INCOME TAX The prima facie income tax on operating loss differs from the income tax provided in the financial statements as follows: Prima facie income tax benefit on operating loss 283,530 425,113 445,809 386,489 Tax effect of permanent differences: Foreign sourced income/(loss) Foreign sourced exploration project costs Exploration, evaluation & development expenditure written-off Increment/(decrement) in value of investment Unrealised foreign exchange gains/losses Non-assessable income Non-deductible expenditure 27,508 (9,208) (2,954) (1,550) – – (9,208) (1,550) – – (11,225) 60,675 (35,148) 21,054 7,024 – – (145,996) – 60,675 – 21,054 7,546 – (82,018) (22,196) (82,018) (22,196) Current year tax benefit not brought to account (269,262) (391,343) (269,262) (391,343) Income tax benefit attributable to operating loss – – – – Income tax losses Future income tax benefit arising from tax losses not brought to account at balance date as realisation of the benefit is not regarded as virtually certain This future income tax benefit will only be obtained if: 2,067,507 1,798,245 2,238,233 1,968,971 (a) future assessable income is derived of a nature and an amount sufficient to enable the benefit to be realised; (b) the conditions for deductibility imposed by tax legislation continue to be complied with; and (c) no changes in tax legislation adversely affect the consolidated entity in realising the benefit. Tax Consolidation Effective 1 July 2003, for the purposes of income taxation, Carnarvon Petroleum Ltd (“Carnarvon”) and its 100% owned subsidiaries formed a tax consolidated group. The head entity of the tax consolidated group is Carnarvon. The impact of consolidating for tax purposes is that Carnarvon’s Australian subsidiaries will be treated as divisions of Carnarvon rather than as separate entities for tax purposes. The members of the group will enter into a tax sharing arrangement in order to allocate group tax related liabilities to contributing members on a reasonable basis. The agreement will provide for the allocation of income tax liabilities between entities should the head entity default on its tax payment obligations. At the balance date, the possibility of default is remote. Carnarvon Petroleum Ltd will formally notify the Australian Tax Office of its adoption of the tax consolidation regime when lodging its 30 June 2004 tax return. 25 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 4. RECEIVABLES CURRENT Trade debtors Other debtors Receivable from SW1A joint venture NON-CURRENT Permit security deposits Amounts receivable from controlled entities Provision for non-recovery Employee share loans Provision for non-recovery Notes Consolidated Carnarvon Petroleum Ltd 2005 $ 2004 $ 2005 $ 2004 $ 4(a) 110,307 3,990 – 96,097 50,316 99,778 – – 1,398 44,771 – – 114,297 246,191 1,398 44,771 4(a) 4(a) 17(a) 17(a) 1,490 1,490 1,490 1,490 – – – – – – 3,393,495 4,225,366 (693,349) (693,349) 2,700,146 3,532,017 211,850 478,900 211,850 478,900 (141,120) (419,125) (141,120) (419,125) 70,730 72,220 59,775 61,265 70,730 59,775 2,772,366 3,593,282 (a) Terms and Conditions Terms and conditions relating to the above financial assets: (i) Trade debtors are generally settled in the month after invoicing. (ii) Details of the terms and conditions of related party receivables are set out in note 22. 5. INVENTORIES CURRENT Production materials – at lower of cost and net realisable value 108,576 104,841 – – 6. OTHER CURRENT ASSETS Prepayments and other current assets 26,496 76,225 12,759 6,200 26 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 Notes Consolidated Carnarvon Petroleum Ltd 2005 $ 2004 $ 2005 $ 2004 $ 91,474 282,876 91,474 282,876 7. OTHER FINANCIAL ASSETS CURRENT Investments at cost: Listed shares NON-CURRENT Shares in controlled entities - at cost 24 – – 1,482,962 1,482,962 8. JOINT VENTURES The economic entity has the following interests in joint venture operations: Joint Venture Principal Activities Ownership Interest % Related Party % Thailand SW1A Concession, Exploration Block L44/43 Western Australia (Carnarvon Basin) Exploration, development, production and marketing of crude oil EPs110 & 424 Exploration for hydrocarbons 40% 35% Papua New Guinea (Papuan Basin) PRLs 4 & 5 including the Stanley, Elevala and Ketu discoveries Exploration for hydrocarbons 15% – – – 27 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 Notes Consolidated Carnarvon Petroleum Ltd 2005 $ 2004 $ 2005 $ 2004 $ 8. JOINT VENTURES (continued) Assets and liabilities relating to the joint ventures are included in the financial statements as follows: CURRENT ASSETS Cash assets Receivables Inventories Prepayments and other TOTAL CURRENT ASSETS NON-CURRENT ASSETS Plant and equipment 167,352 23,305 112,899 101,642 108,576 104,841 13,737 70,025 402,564 299,813 47,160 115,205 Exploration, evaluation and development costs 5,712,063 5,791,172 TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Payables TOTAL LIABILITIES NET ASSETS 5,759,223 5,906,377 6,161,787 6,206,190 99,862 99,862 79,952 79,952 6,061,925 6,126,238 Capital expenditure commitments and contingent liabilities in respect of the joint venture are disclosed in Notes 16 and 18 respectively. – – – – – – – – – – – – – – – – – – – – – – – – 28 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 9. PLANT AND EQUIPMENT Plant and equipment at cost Accumulated depreciation (a) Reconciliation Reconciliation of the carrying amount of plant and equipment at the beginning and end of the current financial year Plant and equipment Carrying amount at beginning Additions Disposals Depreciation expense Carrying amount at end of financial year Notes Consolidated Carnarvon Petroleum Ltd 2005 $ 2004 $ 2005 $ 2004 $ 209,353 229,798 11,316 11,316 (158,661) (108,504) 9(a) 50,692 121,294 (7,784) 3,532 (5,227) 6,089 Consolidated 2005 Consolidated 2004 121,294 32,866 (53,311) (50,157) 50,692 171,950 17,312 (10,175) (57,793) 121,294 Consolidated 2005 $ 2004 $ Carnarvon Petroleum Ltd 2005 $ 2004 $ 10. DEFERRED EXPLORATION, EVALUATION AND DEVELOPMENT EXPENDITURE Exploration, evaluation and development costs carried forward in respect of the SW1A Concession: Production phase Less: accumulated amortisation 6,039,028 6,041,348 (326,965) (250,176) 5,712,063 5,791,172 – – – The ultimate recoupment of costs carried forward is dependent on the successful development and commercial exploitation or sale of the SW1A Concession. – – – 29 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 11. PAYABLES CURRENT Trade creditors Other creditors Notes Consolidated Carnarvon Petroleum Ltd 2005 $ 2004 $ 2005 $ 2004 $ 11(a) 11(a) 54,040 59,642 – – 190,710 199,680 110,056 156,880 Owing to related parties 20, 22 214,487 – 100,000 – 459,237 259,322 210,056 156,880 (a) Terms and Conditions Terms and conditions relating to the above financial liabilities: (i) Trade and other creditors are non-interest bearing and are normally settled on 30 day terms. 12. PROVISIONS CURRENT Employee leave entitlements 17 11,590 880 11,590 880 13. CONTRIBUTED EQUITY (a) Issued and paid up capital Ordinary shares fully paid 45,318,074 45,318,074 45,318,074 45,318,074 (b) Movements in shares on issue 2005 2004 Number of Shares $ Number of Shares $ Beginning of the financial year 272,312,513 45,318,074 171,591,623 42,124,094 Issued during the year – public equity raising less transaction costs – – – – 100,720,890 3,426,736 – (232,756) End of the financial year 272,312,513 45,318,074 272,312,513 45,318,074 30 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 13. CONTRIBUTED EQUITY (continued) (c) Share options During the financial year 1,000,000 options over ordinary shares were issued. Unissued ordinary shares of the Company under option: Expiry Date Grant Date Exercise Price $ Number of Options 2004 2005 31 December 2005 22/03/2004 0.06 38,492,101 37,492,101 (d) Terms and conditions of contributed equity Ordinary Shares Ordinary shares have the right to receive dividends as declared and, in the event of a winding-up of the Company, to participate in the proceeds from the sale of all surplus assets in proportion to the number of, and amounts paid up on, shares held. Notes Consolidated Carnarvon Petroleum Ltd 2005 $ 2004 $ 2005 $ 2004 $ 14. ACCUMULATED LOSSES Balance at the beginning of the year (38,366,530) (36,949,486) (39,555,098) (38,266,800) Operating loss attributable to members of Carnarvon Petroleum Ltd (945,099) (1,417,044) (1,486,029) (1,288,298) Balance at the end of the year (39,311,629) (38,366,530) (41,041,127) (39,555,098) 31 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 Notes Consolidated Carnarvon Petroleum Ltd 2005 $ 2004 $ 2005 $ 2004 $ 15. STATEMENT OF CASH FLOWS (a) Reconciliation of the operating loss after tax to the net cash flows used in operations Loss from ordinary activities after tax (945,099) (1,417,044) (1,486,029) (1,288,298) Provision for diminution - employee share loans (10,955) 47,820 (10,955) 47,820 Amortisation and write-off of deferred exploration, evaluation and development costs Depreciation - plant & equipment Net loss on disposal of plant & equipment Unrealised foreign exchange (gain)/loss (Increment)/decrement in value of investment 79,754 50,157 33,497 37,418 – 210,305 57,793 10,174 (23,412) (70,179) – 2,557 – 486,655 – – 7,849 10,174 (25,154) (70,179) Net (gain) on disposal of equity investments (202,249) – (202,249) – Changes in assets and liabilities: (Increase)/decrease in receivables (Increase)/decrease in inventories (Increase)/decrease in other current assets 32,116 (3,735) 49,729 (56,513) (31,482) (7,419) Increase/(decrease) in payables 162,497 (110,476) Increase/(decrease) in employee entitlements 10,710 (24,932) 43,373 20,468 – (6,559) 44,735 10,710 – 800 (48,904) (24,932) Net cash flows used in operating activities (706,160) (1,415,365) (1,117,762) (1,370,356) (b) Reconciliation of cash Cash balance comprises: Cash at bank and at call Closing cash balance 301,454 301,454 527,882 527,882 134,102 134,102 504,556 504,556 32 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 Notes Consolidated Carnarvon Petroleum Ltd 2005 $ 2004 $ 2005 $ 2004 $ – – – – 16. EXPENDITURE COMMITMENTS (a) Capital expenditure commitments Estimated capital expenditure contracted for at balance date, but not provided for, payable: Not later than one year Joint venture (b) Lease expenditure commitments Operating lease (non cancellable) Not later than one year 3,150 9,450 3,150 9,450 Aggregate lease expenditure contracted for at balance date Aggregate expenditure commitments comprise: Amounts not provided for at balance date 3,150 9,450 3,150 9,450 Rental commitments 3,150 9,450 3,150 9,450 Operating lease refers to rental of office space which has a term of less than one year. Due to the nature of the consolidated entity's operations in exploring and evaluating areas of interest, it is difficult to accurately forecast the nature or amount of future expenditure, although it will be necessary to incur expenditure in order to retain the entity's present permit interests. Expenditure commitments on exploration permits can be reduced by selective relinquishment of exploration tenure, by the renegotiation of expenditure commitments, or by farming out portions of the entity's equity. The Company forecasts its expenditure for exploration commitments for the year ending 30 June 2006 to be approximately $180,000 (actual 2005: $58,214). 17. EMPLOYEE ENTITLEMENTS Aggregate employee entitlements, including on-costs The aggregate employee entitlement liability comprises: Provisions (Current) 12 11,590 880 11,590 880 33 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 17. EMPLOYEE ENTITLEMENTS (continued) (a) Employee share plan At the Annual General Meeting held on 16 October 1997 the shareholders approved the Carnarvon Employee Share Plan and a loan arrangement scheme to assist in funding the acquisition of Plan Shares. Under the terms of the Plan: (i) the Company may, in its absolute discretion, make an offer of ordinary fully paid shares in Carnarvon Petroleum Ltd to any eligible employee; (ii) an eligible employee is any person who is a director or employee of Carnarvon Petroleum Ltd or any of its subsidiaries; (iii) the issue price is determined by the directors and is not to be less than the weighted average market price of the Company's shares on the five trading days prior to the proposed date of offer; (iv) transfer of shares is limited within the first two years; (v) eligible employees receive an interest free advance to acquire the shares; (vi) the maximum liability of the advance is the market value of the shares from time to time; (vii) the carrying value of advances made to eligible employees is the lower of the equivalent market value of the shares from time to time or the price of the shares at the time the shares were issued to eligible employees; (viii) the eligible employee is the legal owner of the shares subject to the provisions of the loan agreement between the Company and the eligible employee; (ix) Australian Stock Exchange Listing Rules require the Company to obtain shareholder approval for the issue of shares to directors; and (x) the Company is empowered to sell, as agent, any shares held under the Plan by an eligible employee upon the cessation of his employment, and to apply the net sale proceeds in discharging the employee's loan from the Company. At balance date there were 3,985,000 (2004: 3,985,000) shares on issue under the Plan, with a market value of $71,730 (2004: $59,775). Of this amount, 2,200,000 (2004: 1,200,000) shares were held by 3 (2004: 2) eligible employees and 1,785,000 (2004: 2,785,000) shares, which had not been sold on the cessation of employment of 5 (2004: 8) former eligible employees in previous years, were held by the Company as agent. During the financial year the Company transferred 1,000,000 shares from its holding as agent, and allotted these shares to an eligible employee at an issue price of 1.7 cents. During the financial year, no (2004: nil) shares were issued under the Plan. During the year, a loan of $17,000 (2004: nil) was advanced and no amounts (2004: $nil) were repaid under the loan arrangement scheme. Loans with an original value of $284,050 (2004: nil) for which $269,050 (2004: nil) had been provided for, were extinguished during the financial year as a result of the transfer and allotment of the 1,000,000 shares described above. 34 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 17. EMPLOYEE ENTITLEMENTS (continued) (b) Superannuation Commitments Employees make contributions to individual superannuation plans based on various percentages of their salary and wage. The consolidated entity has a legal obligation to contribute to the plans to the extent of the superannuation guarantee legislation and the specific terms of individual employment contracts. Notes Consolidated Carnarvon Petroleum Ltd 2005 $ 2004 $ 2005 $ 2004 $ Employer contributions to the plans 55,900 46,127 55,900 46,127 18. CONTINGENT ASSETS AND CONTINGENT LIABILITIES Controlled Entities (a) In accordance with normal petroleum industry practice, the consolidated entity has entered into joint ventures and farmin agreements with other parties for the purpose of exploring and developing its petroleum permit interests. If a party to a joint venture defaults and does not contribute its share of joint venture obligations, then the other joint venturers are liable to meet those obligations. In this event, the interest in the permit held by the defaulting party may be redistributed to the remaining joint venturers. (b) Securities have been placed in favour of the Independent State of Papua New Guinea in respect of the compliance with the conditions of Petroleum Prospecting Licences (PPL's) granted to the Company and its joint venturers, totalling $1,490 (2004: $1,490). (c) If a discovery is made within an Australian exploration permit in which a Native Title claim has been made and a production licence is sought in respect of that exploration permit, the issue of the production licence may be subject to the right to negotiate procedures set out in the Native Title Act. If no agreement is reached with the claimants, the National Native Title Tribunal will conduct a hearing to determine whether the licence can be granted, and if so on what conditions. A condition of the grant may be the payment of compensation. 19. SEGMENT INFORMATION The consolidated entity operated predominantly in oil and gas exploration and development in Australia, Thailand and Papua New Guinea. Segment accounting policies Segment accounting policies are the same as the consolidated entity’s policies as described in note 1. During the financial year, there were no changes in segment accounting policies that had a material effect on the segment information. 35 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 19. SEGMENT INFORMATION (continued) Geographical Segments Australia Thailand Papua New Guinea Consolidated 2005 $ 2004 $ 2005 $ 2004 $ 2005 $ 2004 $ 2005 $ 2004 $ Revenue Sales to customers outside the consolidated entity Other revenue from outside the consolidated entity Total segment revenue Results Operating result Specific item Total segment result Assets Exploration and development costs – – 942,840 974,501 405,209 17,328 20,927 – 405,209 17,328 963,767 974,501 (1,036,792) (1,290,040) 91,693 (9,845) – – – (117,159) (1,036,792) (1,290,040) 91,693 (127,004) – – 5,712,063 5,791,172 – – – – – – – – – – – – – 942,840 974,501 426,136 17,328 1,368,976 991,829 (945,099) (1,299,885) – (117,159) (945,099) (1,417,044) – 5,712,063 5,791,172 Other 313,995 904,267 449,724 514,817 1,490 1,490 765,209 1,420,574 313,995 904,267 6,161,787 6,305,989 1,490 1,490 6,477,272 7,211,746 221,646 157,760 249,181 102,442 – 2,557 – 4,713 7,849 32,866 47,600 12,599 49,944 – 76,789 210,305 (10,955) 47,820 33,497 – – – – – – – – – – – 470,827 260,202 32,866 50,157 17,312 57,793 76,789 210,305 24,542 47,820 Total segment assets Liabilities Total segment liabilities Other segment information: Acquisition of plant and equipment Depreciation Amortisation Other non-cash expenses 36 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 20. DIRECTOR AND EXECUTIVE DISCLOSURES Specified Directors The following persons were directors of Carnarvon Petroleum Limited during the financial year: P J Leonhardt - Non-executive Chairman N C Fearis - Non-executive director K P Judge - Non-executive director D J Orth - Executive director and Chief Operating Officer A G Shelton - Non-executive director Specified Executives R A Pullia - Chief Financial Officer and Company Secretary. Remuneration of Specified Directors and Specified Executives The Remuneration and Nomination Committee advises the Board on remuneration policies and practices, evaluates the performance of senior management and makes recommendations to the Board on remuneration for senior managers. Remuneration is in the form of cash remuneration and superannuation contributions. The Board assesses the appropriateness of the nature and amount of remuneration on an annual basis by reference to industry and market conditions, and with regard to the Company's financial and operational performance. The Company paid no bonuses during the financial year ended 30 June 2005. All specified directors and specified executives have the opportunity to qualify for participation in the Carnarvon Employee Share Plan. The issue of shares under this Plan is at the discretion of the Board. No equity-based remuneration was paid to specified directors and 1,000,000 shares were allotted to a specified executive under the Plan during the year. The Company has an agreement with a controlled entity of DJ Orth for a term expiring on 31 October 2005. The Company has an employment agreement with RA Pullia for an unspecified term with a one month notice period and, in the event of redundancy, payment of two months’ gross salary plus two weeks’ salary for every year of service. The agreement provides for an annual salary review. There are no formal retainer agreements with non-executive directors. Specified Directors P J Leonhardt (Appointed 17 March 2005) N C Fearis K P Judge (Appointed 1 April 2005) D J Orth A G Shelton Total remuneration Primary Salary & Fees $ 11,250 – 27,000 27,000 7,500 – 95,717 160,096 42,167 45,200 183,634 282,950 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 *2004 Post Employment Total Superannuation $ Termination Benefits $ – – 3,000 3,000 – – 25,000 25,000 4,500 4,800 32,500 44,357 – – – – – – – – – – – 80,839 $ 11,250 – 30,000 30,000 7,500 – 120,717 185,750 46,667 50,000 216,134 408,146 37 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 20. DIRECTOR AND EXECUTIVE DISCLOSURES (continued) Specified Executives R A Pullia Total remuneration Primary Salary & Fees $ 123,750 16,450 123,750 195,409 2005 2004 2005 *2004 Post Employment Total Superannuation $ 23,400 1,481 23,400 11,126 $ 147,150 17,931 147,150 206,535 *Total in respect of the financial year ended 2004 does not equal the sum of amounts disclosed for 2004 for individuals specified in 2005, as different individuals were specified in 2004. Equity instruments disclosures relating to directors and executives The movement during the reporting period in the number of ordinary shares of, and options over ordinary shares in, Carnarvon Petroleum Limited held, directly, indirectly or beneficially, by each specified director and specified executive, including their personally-related entities, is as follows: Held at 1 July 2004 (or when appointed) Acquired/ (Sold/Cancelled, Disassociated) Employee Share Plan Held at 30 June 2005 2,010,504 3,871,400 11,168,596 1,569,127 9,208,906 – – 1,000,000 – – – – – – – – – 2,010,504 4,871,400 11,168,596 1,569,127 9,208,906 1,000,000 1,000,000 Held at 1 July 2004 (or when appointed) Acquired/ (Sold/Cancelled, Disassociated) Employee Share Plan Held at 30 June 2005 589,128 300,000 – 47,428 1,600,743 – 3,393,700 – – – – – – – – 589,128 3,693,700 – 47,428 1,600,743 Shareholdings Specified Directors P J Leonhardt N C Fearis K P Judge D J Orth A G Shelton Specified Executives R A Pullia Option holdings Specified Directors P J Leonhardt N C Fearis K P Judge D J Orth A G Shelton 38 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 20. DIRECTOR AND EXECUTIVE DISCLOSURES (continued) Specified Executives Nil All equity transactions with specified directors have been entered into under terms and conditions no more favourable than those the entity would have adopted if dealing at arm’s length. Other transactions with specified directors Mr AG Shelton is a director of Andrew Shelton & Company Pty Ltd. That company provided financial consulting services to the consolidated entity in relation to various strategic, commercial and corporate finance matters concerning the Company, the SW1A Concession in Thailand and the Company's joint venture partner, Tiger Petroleum Inc. The total value of consulting fees incurred during the year was $189,734 (2004: $117,000), of which $89,734 was paid at balance date. The outstanding balance payable is to be satisfied by an issue of 5,500,000 ordinary shares to Andrew Shelton & Company Pty Ltd, or nominee, which is subject to the approval of shareholders. The terms and conditions of the above transactions were no more favourable to the counterparties than those available, or which might reasonably be expected to be available, in respect of similar transactions entered into with non-personally related entities on an arm's length basis. 21. REMUNERATION OF AUDITORS Amounts received or due and receivable by the auditors of Carnarvon Petroleum Ltd and the consolidated entity for an audit and review of the financial report of the Company and any other entity in the consolidated entity. Other services in relation to the entity and any other entity in the consolidated entity. Consolidated Carnarvon Petroleum Ltd 2005 $ 2004 $ 2005 $ 2004 $ 69,175 66,120 69,175 66,120 27,282 39,964 27,282 39,964 Audit of overseas operations by an overseas office of the auditors of Carnarvon Petroleum Ltd. 20,875 19,694 – – 117,332 125,778 96,457 106,084 39 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 22. RELATED PARTY DISCLOSURES Ultimate parent Carnarvon Petroleum Limited is the ultimate parent company. Wholly owned group transactions During the reporting period there have been transactions between the Company and its controlled entities. The Company provided accounting and administrative services to its controlled entities for which it did not charge a management fee. The Company was repaid net $353,657 from its controlled entities during the year. In the prior financial year the Company provided interest-free funding for exploration and development expenditure to its controlled entities amounting to $1,635,738. The outstanding balance of loans made by Carnarvon Petroleum Ltd to its controlled entities at 30 June 2005 was $3,393,495 (2004: $4,225,366), of which $693,349 (2004: $693,349) has been provided for. These loans are unsecured and have no fixed terms of repayment. Other related party balances An amount of $114,487 arising on consolidation of the Company’s 40% interest in the SW1A joint venture less amounts paid to the joint venture pursuant to approved cash calls. 23. FINANCIAL INSTRUMENTS (a) Interest rate risk The consolidated entity’s exposure to interest rate risk is considered minimal and the effective interest rates of financial assets and liabilities at the reporting date are as follows: 2005 Financial assets Cash Receivables Investments - listed shares Total financial assets Financial Liabilities Trade and other creditors Total financial liabilities 2004 Financial assets Cash Receivables Investments – shares Total financial assets Financial Liabilities Trade and other creditors Cash calls payable 40 Total financial liabilities Floating interest rate $ 301,454 – – 301,454 – – Floating interest rate $ 527,822 – – 527,822 – – – Non-interest bearing $ – 186,517 91,474 277,991 459,237 459,237 Non-interest bearing $ – 307,456 282,876 590,332 259,322 60,000 259,322 Total carrying amount as per the statement of financial position $ Weighted average effective interest rate $ 2.6% 301,454 186,517 91,474 579,445 459,237 459,237 Total carrying amount as per the statement of financial position $ Weighted average effective interest rate $ 4.8% 527,822 307,456 282,876 1,118,154 259,322 60,000 259,322 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 23. FINANCIAL INSTRUMENTS (continued) (b) Net fair values All financial assets and financial liabilities have been recognised in the statement of financial position at balance date at their net fair values except for investments which are recognised at cost. The following methods and assumptions are used to determine the net fair values of financial assets and liabilities. Cash: The carrying amount approximates fair value. Receivables and trade and other creditors: The carrying amount approximates fair value. Investments: The carrying amount is at cost. Fair value is market price which at 30 June 2005 was $177,902 (2004:$282,876). (c) Credit risk exposures The consolidated entity’s maximum exposures to credit risk at reporting date in relation to each class of recognised financial assets, is the carrying amount of those assets as indicated in the statement of financial position. Concentrations of credit risk The consolidated entity considers its exposure to credit risk as minimal. Amounts receivable by the Company relate to either: (i) (ii) costs charged to related entities for which the Company awaits reimbursement; or amounts advanced to employees, which are repayable under the terms of the Carnarvon Employee Share Plan, which requires repayment on sale of the shares. 24. CONTROLLED ENTITIES AND CONTRIBUTION TO CONSOLIDATED ENTITY PROFIT/(LOSS) Name Country of Incorporation % held by parent entity Book value of shares held 2005 2004 Carnarvon Petroleum Ltd – – Controlled entities of Carnarvon Petroleum: 2005 $ – 2004 $ – Contribution to consolidated entity profit/(loss) 2005 $ 2004 $ (1,036,792) (1,290,040) Lassoc Pty Ltd Australia SLR Exploration Pty Ltd Australia 100 100 100 100 20 10 20 10 – – – – Strategic Exploration (Asia) Limited British Virgin Islands 100 100 1,482,932 1,482,932 91,693 (127,004) 1,482,962 1,482,962 (945,099) (1,417,044) 25. EARNINGS PER SHARE Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Weighted average number of ordinary shares on issue used in the calculation of earnings per share (a) (b) (c) (d) 2005 (0.4) (0.4) 2004 (0.6) (0.6) 272,312,513 215,422,141 Earnings used in calculating basic and diluted earnings per share ($945,099) ($1,417,044) All potential ordinary shares, being options to acquire ordinary shares are not considered dilutive as the exercise of the options would not decrease the basic loss per share. 41 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 5 26. SUBSEQUENT EVENTS On 22 July 2005, Carnarvon completed a share placement by issuing 39,833,333 fully paid ordinary shares at 1.8 cents per share that raised $717,000 for working capital. 27. IMPACT OF ADOPTING AASB EQUIVALENTS TO IASB STANDARDS Carnarvon Petroleum Ltd is in the process of transitioning its accounting policies and financial reporting from current Australian Accounting Standards (AGAAP) to Australian equivalents of International Financial Reporting Standards (AIFRS) which will be applicable for the financial year ended 30 June 2006. During the financial year the company allocated internal resources to conduct impact assessments to identify key areas that would be impacted by the transition to AIFRS. Priority has been given to the preparation of an opening balance sheet in accordance with AIFRS as at 1 July 2004, the Company's transition date to AIFRS. This will form the basis of accounting for AIFRS in the future, and is required when the Company prepares its first fully AIFRS compliant financial report for the year ended 30 June 2006. Set out below are the key areas where accounting policies are expected to change on adoption of AIFRS and our best estimate of the quantitative impact of the changes on total equity as at the date of transition and 30 June 2005 and on net profit for the year ended 30 June 2005. The figures disclosed are management's best estimates of the quantitative impact of the changes as at the date of preparing the 30 June 2005 financial report. The actual effects of transition to AIFRS may differ from the estimates disclosed due to (a) ongoing work being undertaken by management; (b) potential amendments to AIFRSs and Interpretations thereof being issued by the standard-setters and IFRIC; and (c) emerging accepted practice in the interpretation and application of AIFRS and UIG interpretations. (a) Financial statements of foreign operations Under current Australian GAAP, the assets and liabilities of operations that are integrated are translated using the temporal method. Monetary assets and liabilities are translated at rates of exchange at reporting date, while non-monetary items and revenue and expense items are translated at exchange rates current when the transactions occurred. Exchange differences arising on translation are brought to account in the statement of financial performance. Under AASB 121 The Effects of Changes in Foreign Exchange Rates each entity in the consolidated entity determines its functional currency, the currency of the of the economic environment in which the entity operates reflecting the underlying transactions, events and conditions that are relevant to the entity. The assets and liabilities of foreign operations are translated from the entity's functional currency to the consolidated entity's presentation currency of Australian dollars at foreign exchange rates ruling at reporting date. The revenues and expenses of foreign operations are translated to Australian dollars at the exchange rates approximating the exchange rates ruling at the date of the transactions. Foreign exchange differences arising on translation are recognised directly in a separate component of equity. All foreign operations are translated into Australian dollars using the method described above, the concepts of 'self- sustaining' and 'integrated' operations do not exist in the AIFRS framework. On disposal of a foreign operation, the amount recognized in the foreign currency translation reserve attributable to the foreign operation is included in the calculation of gain or loss on disposal and recycled through the current year income statement. The functional currency of all entities in the consolidated entity is the Australian dollar, except for Strategic Exploration (Asia) Limited, for which the US dollar is its functional currency. 42 S T A T E M E N T O F F I N A N C I A L P O S I T I O N A S A T 3 0 J U N E 2 0 0 5 27. IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO IFRS (Cont’d) Reconciliation of equity as presented under AGAAP to that under AIFRS Notes Consolidated Carnarvon Petroleum Ltd 30 June 2005 (i) $ 1 July 2004 (ii) $ 30 June 2005 (i) $ 1 July 2004 (ii) $ Total equity under AGAAP 6,006,445 6,951,544 4,276,947 5,762,976 Adjustments to retained earnings (net of tax) Derecognition of unrealised foreign exchange loss on translation of integrated subsidiary (a) 40,341 11,364 Adjustments to foreign currency translation reserve Recognition of exchange difference on translation of foreign operation (a) (1,890,975) (1,245,072) - - - - Total equity under AIFRS 4,155,811 5,717,836 4,276,947 5,762,976 (i) This column represents the cumulative adjustments as at the date of transition to AIFRS and those for the year ended 30 June 2005. (ii) This column represents the adjustments as at the date of transition to AIFRS. Reconciliation of net profit under AGAAP to that under AIFRS YEAR ENDED 30 JUNE 2005 Notes Consolidated Net loss as reported under AGAAP Derecognition of unrealised foreign exchange loss on translation of integrated subsidiary (a) 28,977 - $ (945,099) Carnarvon Petroleum Ltd $ (1,486,029) Net loss under AIFRS (916,122) (1,486,029) Restated AIFRS Statement of Cash Flows for the year ended 30 June 2005 No material impacts are expected to the cash flows presented under AGAAP on adoption of AIFRS 43 D I R E C T O R S ’ D E C L A R A T I O N DIRECTORS’ DECLARATION In accordance with a resolution of the directors of Carnarvon Petroleum Ltd, I state that: (1) In the opinion of the directors: (a) the financial statements and notes of the company and of the consolidated entity are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the company’s and consolidated entity's financial position as at 30 June 2005 and of their performance for the year ended on that date; and (ii) complying with Accounting Standards and Corporations Regulations 2001; and (b) there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. (2) This declaration has been made after receiving the declarations required to be made to the directors in accordance with section 295A of the Corporations Act 2001 for the financial period ending 30 June 2005. On behalf of the Board PJ Leonhardt Director Melbourne 29 September 2005 44 I N D E P E N D E N T A U D I T R E P O R T T O T H E M E M B E R S O F C A R N A R V O N P E T R O L E U M L I M I T E D INDEPENDENT AUDIT REPORT Scope The financial report and directors’ responsibility The financial report comprises the statement of financial position, statement of financial performance, statement of cash flows, accompanying notes to the financial statements, and the directors’ declaration for Carnarvon Petroleum Limited (the company) and the consolidated entity, for the year ended 30 June 2005. The consolidated entity comprises both the company and the entities it controlled during that year. The directors of the company are responsible for preparing a financial report that gives a true and fair view of the financial position and performance of the company and the consolidated entity, and that complies with Accounting Standards in Australia, in accordance with the Corporations Act 2001. This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the financial report. Audit approach We conducted an independent audit of the financial report in order to express an opinion on it to the members of the company. Our audit was conducted in accordance with Australian Auditing Standards, in order to provide reasonable assurance as to whether the financial report is free of material misstatement. The nature of an audit is influenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internal control, and the availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that all material misstatements have been detected. We performed procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001, including compliance with Accounting Standards in Australia, and other mandatory financial reporting requirements in Australia, a view which is consistent with our understanding of the company's and the consolidated entity's financial position, and of their performance as represented by the results of their operations and cash flows. We formed our audit opinion on the basis of these procedures, which included: • • examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the financial report, and assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of significant accounting estimates made by the directors. While we considered the effectiveness of management's internal controls over financial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls. We performed procedures to assess whether the substance of business transactions was accurately reflected in the financial report. These and our other procedures did not include consideration or judgement of the appropriateness or reasonableness of the business plans or strategies adopted by the directors and management of the company. Independence We are independent of the company, and have met the independence requirements of Australian professional ethical pronouncements and the Corporations Act 2001. We have given to the directors of the company a written Auditor’s Independence Declaration, a copy of which is included in the Directors’ Report. The Auditor’s Independence Declaration would have been expressed in the same terms if it had been given to the directors at the date this audit report was signed. In addition to our audit of the financial report, we were engaged to undertake the services disclosed in the notes to the financial statements. The provision of these services has not impaired our independence. 45 I N D E P E N D E N T A U D I T R E P O R T T O T H E M E M B E R S O F C A R N A R V O N P E T R O L E U M L I M I T E D INDEPENDENT AUDIT REPORT Audit opinion In our opinion, the financial report of Carnarvon Petroleum Limited is in accordance with: (a) the Corporations Act 2001, including: (i) giving a true and fair view of the financial position of Carnarvon Petroleum Limited and the consolidated entity at 30 June 2005 and of their performance for the year ended on that date; and (ii) complying with Accounting Standards in Australia and the Corporations Regulations 2001; and (b) other mandatory financial reporting requirements in Australia. Inherent uncertainty regarding going concern Without qualification to the opinion expressed above, attention is drawn to the following matter. As a result of the matters described in Note 1 to the financial statements relating to going concern, there is significant uncertainty whether Carnarvon Petroleum Limited and the consolidated entity will be able to continue as going concerns without the generation of future profits and obtaining further funds to continue its exploration and development activities and therefore whether they will be able to pay their debts as and when they fall due and realise their assets and extinguish their liabilities in the normal course of business at the amounts stated in the financial report. The financial report does not include any adjustments relating to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities that might be necessary should the company and consolidated entity not continue as going concerns. Ernst & Young R C Piltz Partner Melbourne 29 September 2005 46 S H A R E H O L D I N G I N F O R M A T I O N SHAREHOLDING INFORMATION Additional information required by the Australian Stock Exchange Limited and not shown elsewhere in this report is as follows. The information is current as at 15th September 2005. Distribution of equity securities Size of Holdings 1 – 1,000 1001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,000 – and over Total Number of Holders Number of Shareholders Number of Option Holders 1,817 1,250 391 859 390 4,707 326 137 69 87 56 675 The number of shareholders holding less than a marketable parcel was 3,625 Voting rights Votes of shareholders are governed by Rules 32 and 33 of the Company’s Constitution. In broad summary, but without prejudice to the provision of these rules, on a show of hands every shareholder present in person shall have one vote and upon a poll every shareholder present in person or by proxy or attorney shall have one vote for every share held. Twenty largest holders of securities Carnarvon Petroleum’s Top Twenty Shareholders Petroleum Ventures Pty Ltd Tricom Nominees Pty Ltd Hamilton Capital Partners Limited Nefco Nominees Pty Ltd Arne Investments Pty Ltd Wickham Holdings SA ANZ Nominees Limited Citicorp Nominees Pty Limited Toltec Holdings Pty Ltd Dalkeith Resources Pty Ltd Pendomer Investments Pty Ltd Westpac Custodian Nominees Pty Ltd Mr Jeffrey Frank Fradd Oasis International General Trading LLC Bayonet Investments Pty Ltd Mr Joseph Hunter Patrick Merrill Lynch (Australia) Nominees Pty Ltd Alakor Corporation Inc Mr James Daniel Cooper Blore & Mrs Marie Jean Blore Mr William Douglas Goodfellow Listed ordinary shares No. of Shares % of Shares 24,726,993 12,500,000 11,168,596 9,748,611 9,208,906 8,333,333 6,086,217 5,561,750 4,779,700 4,620,119 4,600,000 3,591,000 3,190,000 3,179,359 3,000,000 2,827,000 2,674,655 2,487,703 2,440,000 2,171,680 7.92 4.00 3.58 3.12 2.95 2.67 1.95 1.78 1.53 1.48 1.47 1.15 1.02 1.02 0.96 0.91 0.86 0.80 0.78 0.70 Total 126,895,622 40.65 47 S H A R E H O L D I N G I N F O R M A T I O N Twenty largest holders of securities (continued) Carnarvon Petroleum’s Top Twenty Option Holders Listed options expiring 31/12/05 exercisable at 6 cents No. of options % of options Petroleum Ventures Pty Ltd Dalkeith Resources Pty Ltd Beira Pty Ltd Mr Walter Alois Flaks & Mrs Brenda Joyce Flaks Hinchliffe Investments Pty Ltd Arne Investments Pty Ltd Mr Ronald James Cooper Firemat Pty Ltd Coltrange Pty Ltd 3,213,235 2,515,152 2,234,640 2,000,000 2,000,000 1,600,743 1,400,000 1,150,000 1,000,000 Mr Bryce Coleman Martin & Mrs Helen Grant McFarlane Martin 1,000,000 Mr Paul Poli & Mr Oliver Nikolovski Thorpe Road Nominees Pty Ltd Wilabenson Pty Ltd Mr Geoffrey Vernon Butcher & Mrs Wendy Anne Butcher Portfolio Investments International Pty Ltd Denecroft Pty Ltd Mr Kevin Percival Page & Mrs Mary Joan Page Mr Paul Vincent Mason & Mrs Cherie Leanne Mason Mr Jeffrey Frank Fradd Centaur Oil Services Pty Ltd 1,000,000 1,000,000 1,000,000 880,000 675,000 650,000 630,400 625,000 620,000 550,000 8.35 6.53 5.81 5.20 5.20 4.16 3.64 2.99 2.60 2.60 2.60 2.60 2.60 2.29 1.75 1.69 1.64 1.62 1.61 1.43 Total 25,744,170 66.91 Substantial shareholder The names of the substantial shareholders who have notified the Company in accordance with section 671B of the Corporations Act 2001 are: Petroleum Ventures Pty Ltd 24,496,993 ordinary shares 48 I N V E S T O R I N F O R M A T I O N Share Registry Shareholders and option holders with queries relating to their security holdings should contact the Company’s Share Registry in Melbourne: Annual General Meeting The 2005 Annual General Meeting will be held at 11.00am on Wednesday, 30 November 2005 at The Western Australian Club, 101 St Georges Terrace, Perth, Australia. by telephone 1300 850 505 or +61 3 9415 5000 by facsimile +61 3 9473 2500. Alternatively, security holders may prefer to write to: Carnarvon Petroleum Share Registry C/- Computershare Investor Services Pty Limited Yarra Falls 452 Johnston Street Abbotsford Victoria 3067 Australia Details of individual security holdings can be checked conveniently and simply by visiting our Registrar’s website at www.computershare.com/au/investors and clicking on the Investor Centre button. For security reasons, you will need to key in your Security Reference Number (SRN) or Holder Identification Number (HIN), your family name and postcode to enable access to personal information. Change of Address Issuer sponsored shareholders should notify the Share Registry immediately, in writing, signed by the shareholder/s, of any change to their registered address. For added security, shareholders should quote their previous address and HIN or SRN. CHESS uncertificated shareholders should advise their sponsoring broker or non-broker participant. Stock Exchange Listing Securities of Carnarvon Petroleum Limited are listed on the Australian Stock Exchange (ASX). ASX Codes: CVN - ordinary shares CVNO - options expiring 31/12/05 exercisable at 6 cents Publications The Company’s full year annual report is the main source of information for investors and is mailed to shareholders in October. Other sources of information are: 1. The Chairman’s address to the Annual General Meeting, which will be available on the Company’s website. 2. The half year financial report reviewing the July to December half year, which will be available on the Company’s website in March. Website Our internet website www.carnarvonpetroleum.com is an important means of keeping investors continuously informed about the Company, including announcements to the ASX. The site also offers investors copies of news releases, financial presentations, half yearly and annual reports to shareholders. Change of Name Shareholders who change their name should notify the Share Registry, in writing, and attach a certified copy of relevant marriage certificate or deed poll, and include their HIN or SRN. Removal from Mailing List Shareholders who do not wish to receive the full year annual report should advise the Share Registry, in writing, and include their HIN or SRN. Lost Holding Statements Shareholders should inform the Share Registry immediately, in writing, so that a replacement statement can be arranged. 49