Corporate Directory. Directors. Robert M Willcocks Non-executive Chairman. Russell D Langusch Managing Director. Dennis Morton Non-executive

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1 A N N U A L R E P O R T 2010 O r i o n P e t r o l e u m L i m i t e d

2 Orion Petroleum Limited ACN Corporate Directory Directors Robert M Willcocks Non-executive Chairman Russell D Langusch Managing Director Dennis Morton Non-executive Ashley Edgar Non-executive David Casey Alternative Director to Ashley Edgar Company Secretary Allan Freeman Registered Office Level 3, 10 Bridge Street Sydney NSW 2000 P: F: E: office@orionpetroleum.com.au Website Share Registry Registries Limited Level 7, 207 Kent Street Sydney NSW 2000 GPO Box 3993, Sydney NSW 2001 P: F: CONTENT Page Corporate Directory IFC Chairman s Letter 1 Managing Director s Exploration Review 2 The Board 12 Licence Schedule 14 Corporate Governance Statement 15 Directors Report 19 Auditors Independence Declaration 25 Statement of Comprehensive Income 26 Statement of Financial Position 27 Statement of Changes in Equity 28 Statement of Cash Flows 29 Notes to the Financial Statements 30 Directors Declaration 43 Auditors Report to the Members 44 Additional Shareholder Information 46 Auditors PKF Level 10, 1 Margaret Street Sydney NSW 2000 Home Stock Exchange ASX Limited 20 Bridge Street Sydney NSW 200 ASX Code: 0IP

3 CHAIRMAN S LETTER Dear Orion Shareholder, The year has proved a challenging one for your Company s Board and Management. Our strategy remains to grow the Company into a self-funding petroleum producer through a combination of hopefully exploration success and well-researched acquisitions. During the past year the Company embarked on a potential merger which ultimately was abandoned for technical reasons. The merger would have provided Orion with critical portfolio diversification and lower risk balance. Immediately following this we then successfully defended a hostile takeover. Both of these activities proved a costly distraction of management time. Nonetheless we remain undeterred and committed to seek out appropriate acquisition growth targets either as individual projects or corporate mergers. It is vitally important that junior explorers manage their risk profile, central to which is asset diversification. Our exploration program through has included the drilling of one conventional well and three coal seam gas coreholes operated by our farmee partner, Eastern Star Gas. Eastern Star has now fulfilled its farm-in obligations in relation to the CSG rights in PELs 6, 427 and 428. The Toenda-1/ST1 conventional well was drilled in PEL 6 in the second quarter of Unfortunately the well failed to intersect hydrocarbons, although the recovery of flammable bitumen once again proved a working hydrocarbon system in the north-east of PEL 6. Our follow up work in this prospective area will be aimed at finding oil in better reservoir sands. Looking forward to the coming year, we are planning exploration activities in our NSW licences in parallel with ongoing CSG exploration conducted by Eastern Star Gas in the Surat-Bowen licences. In addition we shall continue our clear new venture expansion strategy. Both producing or near-producing assets and low risk exploration plays are being targeted. I wish to take this opportunity to thank Orion s Managing Director and our loyal shareholders for their support over the past twelve months which have tested us all. Yours truly, Robert Willcocks Chairman 23 September 2010 Orion Petroleum Limited Annual Report

4 Managing Director s Exploration Review Overview Orion Petroleum Limited is an oil and gas exploration company with ambitions to become a material petroleum producer. The Company seeks to increase the size and value of its asset base through a combination of successful exploration and new venture activities. Orion operates seven conventional petroleum exploration licences in the Surat-Bowen and Darling Basins of northern NSW and is exploring the coal seam gas (CSG) potential of its four licences in the Surat-Bowen Basin (Figure 1). In the Surat and Bowen Basins the Company has interests in PELs 6, 427, 428 and 455 and in the Darling Basin holds a 100% interest in PELs 422, 424 and 471. QUEENSLAND 29 00' NEW SOUTH WALES PEL 427 Kurrabooma-1 Whalan Creek PEL 455 Moree-4 Willaroo 1 Toenda-1 PEL 6 Milguy-1 Moree Camurra-2 Gwydir-1 Ballera Jackson Cunnamulla QUEENSLAND Waggamba Gasfield Brisbane Moonie Fairymount Alton Moonie Oilfield Oilfield Oilfield Warwick PEL 455 Goondiwindi Moonie Pipeline 30 00' PEL 471 Moomba - Sydney PEL 424 PEL 422 Cobar PEL 427 PEL 6 Narrabri PEL 428 Coonarah Gasfield Gunnedah Tamworth Coonabarabran 30 00' PEL 428 Maules Creek SW-1 Maules Creek SW-2 Edgeroi-2 Broken Hill Dubbo 35 00' VICTORIA Horsham Mildura Bendigo Echuca Ararat Hamilton Ballarat Melbourne Warnambool Portland NEW SOUTH WALES Griffith Koonoomoo Shepparton Wagga Wagga Sale Longford Tumut Albury Wodonga Orange Bathurst Lithgow Oberon Sydney Newcastle Oil & gas licences Gas pipelines Oil pipelines Proposed gas pipeline km ' Conventional Oil Prospects Leads CSG Prospects Bungil-Coreena Moolayember Maules Creek Figure 2: Surat-Bowen Basin Licences Oil & gas licences Proposed Well Dry Well Oil Show Gas Well Gas Show 0 30 km ' ' Figure 1: Location of Orion Licences Since listing on the Australian Securities Exchange (ASX) in December 2007, Orion has drilled three conventional exploration wells, acquired two seismic surveys and participated in the drilling of five CSG coreholes. The two exploration wells drilled in the north-east corner of PEL 6 have upgraded the prospectivity of an area where little previous activity had occurred. The 2008 Willaroo-1 well recovered a small amount of oil on test being the first of its kind in NSW. The Toenda-1/ST1 well drilled during 2010 also provided proof of a working hydrocarbon system in the area. Orion s exploration licences are located reasonably close to pipeline and transport infrastructure which will assist in field development in the event of a commercial discovery in any of the Company s licences. The under-utilised Moomba-Sydney gas pipeline transects the Company s Darling Basin licences and proximity to infrastructure in the Surat-Bowen area will further improve if the proposed Hunter-Wallumbilla pipeline project goes ahead (Figure 4). Although Orion s primary focus has been and remains on conventional oil and gas exploration, the potential for CSG prospectivity in its Surat-Bowen Basin licences has also been recognised within coals ranging in age from Permian to Cretaceous. In order to effectively explore the potential of this resource, a farm-in agreement was negotiated with Eastern Star Gas (ESG), one of the leading CSG operators in NSW ' Orion has been free-carried through a CSG work program conducted by ESG in three of the Company s licences during the 2009 and 2010 years. Orion has retained residual interests of 20-25% in the CSG rights of PELs 6, 427 and 428. ESG has now earned its CSG interests and will operate an ongoing CSG exploration program in coming years. The farm-out agreement necessitated the separation of PELs 6, 427 and 428 into separate CSG and conventional petroleum joint ventures. Orion remains as operator of the conventional petroleum joint ventures. The conventional oil and gas resource potential of Orion s licences is significant. The Company has identified a number of Bowen Basin prospects in PELs 6, 427 and 455. The recovery of oil in Willaroo-1 and bitumen observed in Toenda-1/ST1 proved the existence of an active petroleum system in this region and consequently the geological risk of resident prospects has been substantially reduced. Over the next year Orion will continue to pursue its conventional exploration program while in parallel ESG operates a CSG program. The Darling Basin represents a frontier exploration region with little drilling to date. Orion s three licences in the basin host prospective in-place gas resources estimated at approximately 5 trillion cubic feet (TCF) in the most-likely case. Orion s estimate has been based on recent, good quality seismic data where there is a high degree of certainty with regard to structural configuration and size. Sparse drilling density and limited deep well penetrations in the Darling Basin have inhibited the determination of source rock potential in the area. Lack of evidence that source rocks are present in the various 2 Orion Petroleum Limited Annual Report 2010

5 Managing Director s Exploration Review continued sub-basins in the region has led to a perception that geological risk is high, which in turn has impeded exploration activity in the past. However, there exist many global analogs of prolific hydrocarbon production in Devonian-aged basins. It has been reported that 8% of petroleum reserves world-wide comes from Devonian sediments (AAPG Bulletin Volume 73, 1989). It is therefore not unrealistic to expect that mature source rocks could also occur in the Darling Basin. In the year Orion will continue to advance its exploration activities across its various licences. Where deemed appropriate farm-in partners will be sought as a prudent risk mitigation strategy. Corporate Strategy Since its December 2007 IPO, Orion has pursued a four-component exploration strategy consisting of: Conventional oil and gas exploration in its Surat-Bowen Basin licences with particular emphasis on the oil prospectivity of PEL 6 following the 2008 oil discovery in the Company s Willaroo-1 well; Conventional exploration in four frontier Darling Basin permits; Exploration of the CSG potential of PELs 6, 427 and 428 following a farm-in by Eastern Star Gas, an well-established and successful CSG operator and a substantial shareholder of Orion, and; Active pursuit of new ventures both domestic and international in order to diversify its exploration risk profile, add appraisal opportunities plus development and/or production projects. Whilst the adverse impacts of the global financial crisis resulted in a more cautious approach and focus on capital preservation during , a more expansive new ventures strategy has been adopted over the past year. Not only is company growth possible as a result of successful exploration but also project and even corporate acquisitions need full consideration. Because the bid conditions were not satisfied, the accepting shares were returned to their holders. The Orion Directors very much appreciate the support shown by shareholders during the failed takeover period. Not only did the exercise incur substantial costs for the Company to defend, it also acted as a huge distraction of management time away from the Company s core business of oil and gas exploration. Following this series of corporate events, the Company remains determined to expand its asset base. Portfolio diversification and appropriate risk management strategies are cornerstones of all successful exploration companies. Hence new opportunities to expand and grow are continually being identified and assessed. Management is hopeful that at least one of the initiatives will bear fruit in the coming year. Surat-Bowen Basin Licences Conventional Exploration PEL 6 (95%-97.5% conventional interest) PEL 6 is arguably Orion s most prospective licence. In short it offers conventional oil and gas prospectivity in the northern part of the permit combined with CSG potential in the southern portion of the block. It occupies an area of approximately 5,160 km 2 and is located in the southern extension of the Bowen and overlying Surat Basins of northern NSW (Figures 2 and 3). The licence term was renewed by Industry & Investment NSW (I&I NSW) for a further two years from December In return for a waiver of a 25% acreage relinquishment requirement, the licence and interest holders agreed to a combined conventional and CSG work program over the two year renewal period. Bowen Basin To this end a proposed merger with a fellow junior listed oil explorer, Gas2Grid Limited, by way of a scheme of arrangement was announced in October Gas2Grid offered portfolio diversification to Orion particularly into a lower risk appraisal project in the Philippines. During the lengthy scheme process a small group of Orion shareholders conducted a concerted campaign opposing the merger proposal. The exposure to uncapped legal expenses and issues with the independent expert s assessment of the merger terms resulted in the merger being abandoned in March Prior to this abandonment, on 18 February 2010 Octanex NL (ASX: OXX) announced its intention to make a highly conditional scrip takeover bid for Orion. Octanex is a substantial Orion shareholder. Subsequently Octanex dispatched its mandatory Bidder s Statement to Orion shareholders on 23 April In response, Orion published its Target s Statement to shareholders rejecting the Octanex bid for a number of reasons and recommending that Orion shareholders take no action. The key reasons for the Orion Directors recommendation were that the Octanex scrip offer undervalued Orion s shares and was conditional on many factors, some of which were impossible to satisfy. QLD NSW Surat Basin 30 00' Oil & gas licences Surat Basin Bowen Basin Gunnedah Basin 0 50 km The Octanex offer remained open for acceptances until 1 June 2010 at which time the offer lapsed. From the only public disclosure made by Octanex approximately one week before the offer closed, acceptances represented less than 1% of Orion s issued capital. Figure 3: Infrastructure Map Gunnedah Basin ' Orion Petroleum Limited Annual Report

6 Managing Director s Exploration Review continued Alton Oilfield Waggamba Gasfield Proposed Hunter-Wallumbilla Pipeline Jackson-Moonie Moonie Moonie Oilfield Oil Pipeline 28 00' Fairymount Oilfield Goondiwindi 29 00' PEL 427 PEL 455 Moree PEL 6 Oil & gas licences Roads Gas pipelines Oil pipelines Gasfields Oilfields Prospects Leads PEL km ' Figure 4: Surat-Bowen Basin Licences ' The Surat and Bowen Basins have been the subject of extensive hydrocarbon exploration in Queensland where numerous oil and gas discoveries have been made since the early 1960s. However, prior to Orion undertaking its exploration programs, relatively little conventional petroleum exploration work had occurred on the NSW side of the border and no CSG drilling had occurred in the area. Since listing, Orion has drilled the Willaroo-1 and Toenda-1/ST1 exploration wells and participated in the acquisition of the 106 line km 2D Moree North seismic survey. Willaroo-1 drilled in May 2008 was the Company s first drilling activity since listing and recorded a sub-commercial oil discovery. It recovered 2-4 barrels of high grade, light crude oil (41.6 o API gravity), emulsion and mud with elevated gas readings. The Willaroo discovery is significant because the well proved the existence of an active petroleum system within Permian sediments in the southern region of the Bowen Basin. The Willaroo accumulation is presently sub-commercial due to the low permeability, thin oil-bearing reservoir sands. However, post-drilling technical analyses indicate that better developed reservoir sands may exist in some of the other prosects mapped in the licence. In an effort to locate oil hosted in better reservoir sands, the Toenda prospect was drilled using Lucas Drilling Rig DRS-026 during the second quarter of calendar The prospect was located on the hanging wall of the major Moonie-Goondiwindi Fault (Figure 5) and targeted the same Permian-age Back Creek sands that were oil-bearing in Willaroo-1. Figure 5: PEL 6 Permian Depth Structure Map (c.i. 20 m) The Toenda-1 vertical well was spudded on 11 April 2010 and drilled to a measured depth of 1,571m. At this depth the primary objective had not been intersected and it was interpreted that the wellpath had crossed to the upthrown side of the fault. A decision was made to plug back the well to about 500m and then sidetrack to a bottomhole location about 250m north-west. The sidetrack well, designated Toenda-ST1, was drilled to a total measured depth of 1,924m after successfully fishing for a twisted-off bottom hole drilling assembly. No significant hydrocarbons were observed in either of the two main objectives. However fragments of flammable bitumen were described in cuttings samples retrieved from the Back Creek formation. The bitumen was collected from various sandstone intervals. Its significance with regard to future exploration prospectivity in the northern part of PEL 6 is being assessed. Clearly the establishment of a working hydrocarbon system in the area is positive. The challenge now is to locate prospects with better reservoir characteristics. Several satellite structures located nearby to Willaroo and Toenda provide follow-up drilling opportunities. All of these prospects possess multiple reservoir objectives that individually offer significant hydrocarbon resource potential. 4 Orion Petroleum Limited Annual Report 2010

7 Managing Director s Exploration Review continued The unrisked, midcase resource potential of the primary reservoir objectives for the three undrilled prospects in northern PEL 6 is summarised in Table 1 below. Name of Prospect Depth (m) UPPER BACK CREEK (Permian) Area (km²) Oil In-place (MMBO) Willaroo-2 1, Coolibah 2, Myall Plain 1, Total 29.7 Table 1: Unrisked Prospective Resources - Permian Sands *Prospective resource potential (midcase hydrocarbons in-place) A total of 26 wells have been drilled and nearly 3,500 line km of seismic acquired in the Surat-Bowen Basin of northern NSW. Most of this seismic was recorded during the first phase of exploration in the area soon after the discovery of the Moonie field in 1961 located to the north of PEL 6 in Queensland. Early data quality is quite poor and this contributed to unfavourable positioning of previous well locations and invalid testing of structural closures. A number of previous exploration wells are mapped as being sited outside of structural closure or on late-formed structures that were not created early enough to receive hydrocarbon charge. As a result, these wells did not test the full petroleum potential of the area, which accounts for the Company s belief that a substantial amount of petroleum resides in the licence area. Recent exploration endeavours have focused on reducing the pre-drill risk of prospects in Orion s NSW licences. Seismic attribute studies including spectral attenuation have been carried out in PEL 6. This technology has successfully identified hydrocarbons in the Queensland sector of the Surat-Bowen Basin for other explorers. The Company considers its use in NSW to be equally effective as the same sequence of sediments occur on both sides of the state border. Orion has also acquired Passive-Transient Electromagnetic data (P-TEM) over northern PEL 6. Spectral attenuation and P-TEM anomalies have been identified in the vicinity of the Toenda and Willaroo structures, which could correspond to direct detection of hydrocarbons. PEL 427 (75% conventional interest) & PEL 428 (60% conventional interest) PELs 427 and 428 lie to the west of PEL 6 and occupy areas of 7,010 km 2 and 6,021 km 2 respectively. The current licence term for PEL 427 is due to end in May 2011 whereas the term of PEL 428 ended in mid September 2010 with the licence in good standing. Prior to expiry a renewal application for the latter licence has been submitted to I&I NSW. PEL 427 is largely located in the Surat-Bowen Basin with a small area in the southeast extending into the Gunnedah Basin. PEL 428 in its entirety appears to be underlain by Surat Basin sediments. High exinite and total organic carbon content of the upper part of Permian aged Gunnedah-Bowen Basin sediments are considered good quality source rock for conventional petroleum prospects vintage seismic data recorded in PEL 427 and PEL 428 has been processed and interpreted to advance assessment of the conventional petroleum and CSG resource potential in both the Surat-Bowen and Gunnedah Basins. This new data has been used to define the structural closure of various leads and assess the prospectivity of the area for conventional petroleum and CSG. Several different conventional play types have been identified based on limited exploration data in the northern portion of PEL 427. Additional seismic and well control is required to enable better estimation of the conventional petroleum potential in both PEL 427 and PEL 428. Sparse well control has hampered the Company s understanding of the various reservoirs units in the area. However there is sufficient information available, including Willaroo-1 data, to confirm that the main Surat-Bowen Basin reservoir targets that occur in the area are primarily late Permian Upper Back Creek formation and Middle Triassic Showgrounds sandstone. The principal outstanding work commitments in PEL 427 cover acquisition of a minimum of 75 line km of new 2D seismic data plus drilling one exploration well. This commitment will be met by the approved CSG work program scheduled to commence in early The pending renewal application for PEL 428 included acquisition of a regional seismic line to provide some preliminary assessment of conventional and CSG prospectivity in a licence with very limited seismic data available. PEL 455 (100% conventional interest) PEL 455 covering some 1,733 km 2 was issued for a four year term ending in July, It is located in the southern region of the Bowen Basin, immediately west of PEL 6 in northern NSW (Figure 2). Based on the recovery of oil from Willaroo-1, there is now a proven petroleum system associated with the Bowen Basin in northern NSW and the area covered by this licence has good petroleum prospectivity. A Passive Transient Electromagnetic (P-TEM) survey acquired in April 2008 following a proof of concept survey over oil fields in southeastern Queensland concluded that the technique has the capability to reveal hydrocarbon accumulations in Surat-Bowen sediments. This airborne geophysical technique is based on the detection of alternation zones above hydrocarbon accumulations. Importantly P-TEM anomalies have been recorded in PEL 455 coincident with subsurface structural closures mapped on seismic data. These petroleum leads were investigated by the acquisition of 95 line km of 2D seismic data in February Orion has processed and interpreted the 1990 seismic dataset, confirming the existence of a significant petroleum prospect on the western flank of the Bowen Basin named the Whalan Creek prospect (Figures 6 and 7). The midcase prospective resource estimate of this ready-to-drill prospect is approximately 20 MMBO. Orion is seeking farm-in participation to drill Whalan Creek as part of its risk mitigation strategy. Orion Petroleum Limited Annual Report

8 Managing Director s Exploration Review continued SP SSW 1200 PROPOSED WHALAN CK NNE WALLOON CM HUTTON SST 28 44' Proposed Whalan Creek TWT (sec) UPPER BACK CK MAULES CK 28 46' S ' 0 1 km ' Figure 6: PEL 455 Whalan Creek Permian Time Structure Map (c.i. 10 msec) CSG Exploration Orion was listed in late 2007 with an exploration portfolio comprising the conventional oil and gas interests of its largest shareholder, Eastern Star Gas (ASX: ESG). At that time ESG s primary focus was in and around its Narrabri CSG project located in PEL 238 to the south of Orion s licences where the Permian coals of the Gunnedah Basin are the primary CSG objective. However a subsequent study of Orion s permit areas (PELs 6, 427, 428 and 455) indicated that they too offered good CSG prospectivity. Three main prospective coal sequences were identified (Figure 8) - the early Cretaceous Bungil-Coreena member; the mid Triassic Moolayember formation and the early Permian Maules Creek formation. All potential CSG targets require exploration to determine the potential lateral extent of the coals, coal thickness, gas content, gas composition and permeability. Neither of the first two target formations has been successfully exploited for CSG to date whether in NSW or southern Queensland. Moreover it was also believed that while the Permian Gunnedah Basin coals presented a valid CSG objective in the southern portion of Orion s licences, elsewhere these coals (or their equivalent in the Bowen Basin) were likely to be too deep for commercial CSG production Surat Basin Bowen Basin BASEMENT Figure 7: Whalan Creek Seismic Line S In order to accelerate exploration of the CSG potential of the southern Surat-Bowen Basins within the Company s licences, Orion signed a two stage farm-out agreement in October 2008 with ESG whereby ESG would earn an interest in the CSG rights of three Orion licences in return for carrying Orion through an agreed work program. In total this program comprised of acquiring the 100 line km Moree North seismic survey in PEL 6, drilling two CSG coreholes in the same permit and a single corehole in each of PEL 427 and PEL 428. CRETACEOUS JURASSIC TRIASSIC PERMIAN CARBON- IFEROUS E M L EARLY MIDDLE LATE EARLY MIDDLE LATE EARLY MIDDLE LATE EARLY GRIMAN CK FM WALLUMBILLA FM BUNGIL FM MOOGA SST ORALLO FM PILLIGA SST WALLOON COAL MEASURES HUTTON SST EVERGREEN FM PRECIPICE SST MOOLAYEMBER FM SNAKE CK MEMBER SHOWGROUNDS SST REWAN FM KIANGA FM UPPER BACK CK GP LOWER BACK CK GP MAULES CK FM KUTTUNG/BOGGABRI VOLCANICS Coal Seams Bungil & Coreena Walloon Moolayember Black Jack Maules Ck Figure 8: Major Coals in Surat-Bowen Stratigraphic Column 6 Orion Petroleum Limited Annual Report 2010

9 Managing Director s Exploration Review continued All of these commitments have been satisfied during the year such that ESG has now earned a 50% interest in the CSG resources of PELs 6 and 427 and 40% in PEL 428 (see Table 2). Edendale Area PEL 6 PEL 427 PEL 428 Remainder Conventional JV Orion (95%) Orion (97.5%) Orion (75%) Orion (60%) Coal Seam Gas JV Orion (20%) Orion (22.5%) Orion (25%) Orion (20%) Table 2: Company interests Post ESG CSG Farm-in This program not only satisfied the minimum joint venture work commitments in each of these licences but also underwrote an increase in Orion s conventional rights in PELs 427 and 428 under a long-standing farm-in agreement with Comet Ridge. Although CSG presents a secondary exploration focus for the Company, its primary objective remains exploration for conventional oil and gas. Orion will benefit from any future successes in the ESG-operated CSG exploration activities but its main interests lie in conventional exploration. PEL 6 (20%-22.5% CSG interest) Following the acquisition of the high resolution Moree North seismic survey in February 2009, three CSG coreholes were drilled in the central portion of the PEL 6 licence during the year targeting Triassic Moolayember and Permian Maules Creek coals. Gwydir-1 was spudded in mid November 2009 with dual objectives, coals within the Moolayember and Maules Creek formations. By year-end 2009 the well reached a total depth of 814m in basement after intersecting approximately 4m of coal within the Triassic. The Maules Creek formation was absent at this location. In the first quarter of calendar 2010, the Milguy-1 corehole was drilled chasing similar dual objectives. The well encountered about 6m of gassy coals in the Moolayember formation. However due to severe hole problems the Maules Creek was not reached. In the second quarter of 2010, a third corehole, Camurra-2, was drilled as twin to a conventional petroleum well from the 1980s which intersected around 9m of Moolayember coal. However the main upper coal appears to be faulted out at the Camurra-2 location and the well encountered around 6.8m of coal before reaching its total depth of 1,090m. While the relatively limited coal seen in these three coreholes is disappointing, nonetheless the presence of coal in the Triassic has been established across PEL 6. Future CSG exploration will be directed towards areas where thicker Moolayemeber coal development is interpreted as well as chasing Permian coals in the southern part of the licence area. PEL 427 (25% CSG interest) & PEL 428 (20% CSG interest) The Moree-4 and Kurrabooma-1 coreholes were drilled by ESG during the year to fulfil its obligations under the CSG farm-in agreement. Both holes targeted younger Cretaceous coals within the Bungil-Coreena formation. Each well intersected around 5m of low permeability coal. Gas contents were relatively low however little carbon dioxide was present in the gas sampled. The recognition of the Bungil coals has largely gone unnoticed due to the lack of detailed wellsite geological description of cuttings and the absence of formation density log coverage of the shallow section. However, their presence has been established in several conventional wells drilled in the area and hence they remain of interest for CSG exploration. In the coming year attention will switch to the Permian coal known to exist in the southern part of PEL 427, primarily in an area known as the Bellata Trough. The Edgeroi-1 and Edgeroi-2 coreholes drilled by ESG in PEL 238 just across the southern permit boundary from PEL 427 each intersected over 20m of gassy coal in the Black Jack and underlying Maules Creek formations. Such positive results have significantly upgraded the prospectivity of PEL 427 in particular. The joint venture s forward work program in PEL 427 consists of reprocessing about 120km of vintage seismic data, acquisition of 75km of new seismic and drilling one corehole before the licence expiry due in May The corehole will target the Hoskissons seam within the Black Jack formation. To the west of PEL 427, the prospectivity of PEL 428 for both conventional petroleum and CSG is difficult to assess given the sparse seismic coverage. Licence PEL 428 is in good standing having met all work commitments including drilling and teating the Kurrabooma-1 CSG corehole. The current licence term expired in September 2010, but prior to this date a renewal application was submitted to I&I NSW proposing a two year renewal with seismic acquisition and a CSG corehole planned in the permit. Darling Basin PELs 422, 424 and 471 (100% interest) PELs 422, 424 and 471 are 100% held by Orion. These large licences occupy an area of almost 19,000 km 2 or around 20% of the total Darling Basin which is located approximately 700 km west-northwest of Sydney (Figure 9). Following the drilling of Nyngynderry-1 exploration well in September 2008, Orion surrendered PEL 8 after the well failed to encounter hydrocarbons. In May 2009 I&I NSW granted PEL 471 in the Bancannia Trough to Orion for a four year term with a first two year commitment that includes a 55 line km 2D seismic survey and geotechnical studies. In January 2010 PELs 422 and 424 reached the end of their initial licence term which included reprocessing 75 line km of vintage 2D seismic data. Both licences were subsequently extended for a further two year term with work commitments which include acquiring 50 line km of seismic and drilling one exploration well in each licence. Each of Orion s Darling Basin licences covers a sub-basin with its own prospectivity and hydrocarbon characteristics. The Nelyambo (PEL 422), Pondie Range (PEL 424) and Bancannia (PEL 471) sub-basins contain a thick sections of marine and non-marine sediments ranging in age from Cambrian to Permian (Figure 10). Orion Petroleum Limited Annual Report

10 Managing Director s Exploration Review continued The basin is one of the largest onshore sedimentary basins in Australia, covering an area in excess of 100,000 km². It hosts up to 12km of Devonian-Silurian sediments that were deposited in a wide range of environments from alluvial fan to shallow marine. Exploration of Devonian basins in Australia has been disappointing to date despite the analgous western Canada Sedimentary Basin representing one of Canada s most prolific oil and gas provinces. However the Darling Basin remains relatively under-explored with the entire basin tested by only 19 wells and less than 3,000 line km of multi-fold reflection seismic data. Only six wells have been drilled in Orion s licence areas and none of these wells was drilled within structural closure. The Nyngynderry-1 was drilled on structure but the well failed to test a valid trap because no sealing units were encountered. Orion s licences lie in an ideal location for exploitation of any commercial gas discoveries. The Moomba-Sydney gas pipeline transects the Darling Basin (Figure 10) currently has about 50% spare capacity and is expected to be increasingly underutilised as the main Cooper Basin fields deplete. Hence a gas discovery in the basin could be rapidly developed with access through this pipeline network to supply the burgeoning energy demand on the eastern seaboard AGE EARLY PERMIAN CARBON- IFEROUS DEVONIAN SILURIAN FORMATION CAPE JERVIS BEDS RAVENDALE INTERVAL SNAKE CAVE INTERVAL SNAKE CAVE SANDSTONE COCO RANGE SANDSTONE WINDUCK INTERVAL AMPHITHEATRE GROUP DEPOSITIONAL ENVIRONMENTAL SHALLOW MARINE AND GLACIAL FLUVIAL FLUVIAL DELTAIC TO MARINE SOURCE RESER- VOIR SHOW Seismic acquired in 2004 together with purchased reprocessed seismic data has allowed the delineation of a number of very large structural closures in PEL 422, PEL 424 and PEL 471. Gas anomalies detected during a soil gas survey (Figure 11) are coincident with the Netallie prospect in PEL 424 and several of the petroleum leads in PEL 471, including Rigel located updip of gas shows in Jupiter-1. Such gas anomalies could signify that petroleum has been generated in the respective sub-basins. No soil gas samples were available from PEL 422. The Company is seeking farm-in partners to fulfil its drilling commitments in its Darling Basin licences as part of a prudent risk management strategy. Whilst the prospects are large, they remain relatively high risk in essentially a frontier exploration area. To date no CSG potential has been indentified in Orion s Darling Basin licences ' PEL 471 West Flank Play Bancannia West Oil & gas licences Gas pipelines Prospects Leads 0 50 km Rigel East Flank Play Moomba-Sydney Gas Pipeline Polpah Coona Coona The Avenue PEL 424 Netallie Wilcannia ' Figure 9: Darling Basin Licence Location Map Darling Basin PEL 422 Kinindee Creek Burnamwood ORDOVICIAN CAMBRIAN??? FIRST DISCOVERY LIMESTONE MARINE FUNERAL CREEK LIMESTONE??? MT. WRIGHT VOLCANICS Figure 10: Darling Basin Stratigraphic Column PEL 471 Figure 11: Darling Basin Soil Gas Anomalies Oil & gas licences Prospects Leads Abandoned Well PEL 424 Methane ppm km 8 Orion Petroleum Limited Annual Report 2010

11 Managing Director s Exploration Review continued Conventional Petroleum Program PEL 422 covers an area of 4,338 km 2 and occupies a majority of the Nelyambo sub-basin. PEL 424 (6,019 km 2 ) is located in the Pondie Range sub-basin and PEL 471 (8,386 km 2 ) covers the Bancannia Trough of the western Darling Basin. All three sub-basins are interpreted to contain thick sequences of Middle to Early Devonian clastic sediments and each is expected to have its own prospectivity and hydrocarbon characteristics. All prospects and leads in the Darling Basin licences are well located to receive migrating hydrocarbons out of the axes and margins of the sub-basins. Existing seismic coverage is limited and additional seismic will hopefully identify additional hydrocarbon plays, thus adding to the already significant petroleum potential of the area. The resource potential of the principal prospects in the Darling Basin is summarised in Table 3, on page 10 of this Exploration Review. At the present time, there is uncertainty as to the likelihood of oil versus gas within the primary Snake Cave reservoir sand units, hence both oil and gas estimates are included here. On balance Orion believes that gas is more likely to have been generated and accumulated in the basin. SP TWT (sec) SW 200 SNAKE CAVE FM PROPOSED BURNAMWOOD Figure 13: Burnamwood Seismic Line E04DB NE The Burnamwood prospect in PEL 422 is a roughly circular closure on the high side of a south-west dipping high angle reverse fault (Figure 12). The prospect has up to 200m of fault-independent closure extending over a 100 km² area. Closure exists from the base of Tertiary to basement. Because there is no previous drilling in the licence, it is not possible to determine the depths where either the petroleum reservoir targets or basement are expected. Seismic line E04DB-05 represents a cross-sectional image of the structure (Figure 13). The Netallie Prospect in PEL 424 is a large anticline (144 km²) with over 500m of fault-independent closure (Figure 14). The crest of the structure is approximately 2.2km northeast of the Pondie Range-1 well (Figure 15). This well was drilled off structure and did not penetrate most of the prospective Lower Devonian sedimentary section ' DMR ' ' Proposed Netallie km ' Figure 14: PEL 424 Netallie Snake Cave Time Structure Map (c.i. 100msec) 31 05' W SP PONDIE RANGE PROPOSED NETALLIE E E04DB Proposed Burnamwood TWT (sec) m SNAKE CAVE FM 31 15' km Figure 15: Netallie Seismic Line DMR ' Figure 12: PEL 422 Burnamwood Prospect - Snake Cave Time Structure Map (c.i. 20 msec) Orion Petroleum Limited Annual Report

12 Managing Director s Exploration Review continued It is not possible to accurately quantify the hydrocarbon potential of the entire area of PEL 471 at this stage, but reprocessed seismic data purchased by Orion has substantially improved sub-surface imaging and understanding of the area around the Jupiter-1 well. The Company has identified a number of structural and stratigraphic plays. One of the most attractive leads is Rigel, a structural closure that is updip of gas shows in the Jupiter-1 well (Figure 16). Seismic line NU68-26 (Figure 17) shows the Rigel structure as a roll-over into a major thrust fault with fault-independent closure. The seismic reprocessing results confirm that the structural crest of Rigel is significantly updip of Jupiter-1 and that the latter well did not penetrate the major unconformity marked as the yellow horizon with sediments below this unconformity interpreted as hydrocarbon prospective. The Rigel structure could potentially be very large occupying an area of up to 76km 2 in the fault-dependent case SP W 115 PROPOSED RIGEL JUPITER-1 E NU ' Proposed Rigel TWT (sec) Jupiter-1 MID DEVONIAN U/C Figure 17: Rigel Seismic Line NU68-26 Other leads have been identified in the northern half of PEL 471 where traces of bitumen were recorded in the Bancannia South-1 well. The bitumen correlates to an interval in Jupiter-1 that contained minor marine shales and thin marginal marine evaporitic limestone. It is possible that this interval represents a source for hydrocarbons. Solution gas was also encountered throughout the shallower Middle Devonian in Bancannia North km ' ' Figure 16: PEL 471 Rigel Early Devonian Time Structure Map (c.i. 20msec) Name of Prospect Depth (m) SNAKE CAVE - WINDUCK (Mid Devonian) Area (km 2 ) Oil* (MMBO) PEL Burnamwood 2, or 700 PEL Netallie 3, or 2,000 PEL Rigel 2, ,600 or 2,300 Totals 2,450 or 5,000 Table 3: Unrisked Prospective Resources - Devonian Sands * Prospective resource potential (midcase hydrocarbons in-place) Gas* (BCF) 10 Orion Petroleum Limited Annual Report 2010

13 Managing Director s Exploration Review continued Early Devonian age marine sediments may be the source of the traces of bitumen that were recorded over the interval 1,840-1,987m in the 1968 Bancannia South-1 well. Solution gas was also recorded throughout the shallower middle Devonian-Carboniferous section in this well. Such evidence of an active petroleum system in the Bancannia Trough is very encouraging for future exploration across PEL 471. Hydrocarbon Shows Hydrocarbon shows recorded to date in the Darling Basin occurred in the following wells that are regarded as possible valid structural tests: North Bancannia-1 (PEL 471): Anomalous gas detector readings recorded and gassy water recovered during drill stem testing. South Bancannia-1 (PEL 471): Drilled on a fault-dependent structure and reported anomalous gas detector readings and recovered formation waters with a relatively high concentration of methane. Pondie Range-1 (PEL 424): Drilled without any shows. While apparently within closure at the deeper levels, its location is well down-dip of the structural crest, leaving significant attic potential. A large part of the Middle Devonian section, currently considered the most prospective, was not penetrated by this well. Conclusion Orion s NSW exploration assets provide shareholders with exposure to large upside in the event of a conventional petroleum discovery in either the Surat-Bowen or Darling Basins as well as CSG potential principally in PELs 6 and 427. Over the next year the Company s efforts in conventional exploration will be directed towards assessing the oil potential around the Willaroo-1 and Toenda-1 wells in PEL 6 plus pursuing farm-outs of the exploration well commitments in PEL 455 and the Darling Basin permits. Ongoing assessment of the CSG potential of its easternmost Surat-Bowen licences will continue operated by its farminee partner, Eastern Star Gas. Concurrent with these activities the Company will be actively seeking new opportunities both domestically and internationally in order to diversify its asset base and risk profile. Management is excited by the Company s prospects and the next 12 months should provide its shareholders with important activity and hopefully a successful result. The past 12 months have proved a challenging period for the Company s management and shareholders. We look forward to more productive results in the coming year. I personally wish to thank Orion s staff, advisers and consultants for their support, dedication and patience. Technical data, including oil and gas shows and bitumen staining in Devonian rocks in exploration wells, confirm the presence of a source rock potential. Gas cut water has also been recovered from several drill stem tests and water bores. This gas has been assessed to be thermogenic in origin and together with soil geochemical anomalies and government gas studies, there is strong evidence that gas generation is continuing to the present. To date the argillaceous sequences penetrated in the wells have proved to be either lean in organic matter and/or their thermal maturity seems relatively high where measured. The fluid inclusion studies that have been carried out indicate that the generation and migration of gas and condensate may have occurred but the results are inconclusive. However, none of the wells drilled in the basin intersected the potential source units of the early Devonian within a basinal setting where a thick sequence of Devonian sediments is observed on seismic data to exist. Orion Petroleum Limited Annual Report

14 THE BOARD Robert M Willcocks Chairman Non-Executive Russell D Langusch Managing Director Dennis J Morton Non-Executive Director Robert M Willcocks Robert Willcocks has Bachelor of Arts and Bachelor of Laws degrees from the Australian National University and a Master of Laws degree from the University of Sydney. He joined the law firm Stephen Jaques & Stephen (now Mallesons Stephen Jaques) in 1974 and was a partner in that firm from 1980 until There he was a member of the Corporate Advisory Group with an emphasis on the mining and oil and gas sectors representing international clients. In 1994 he left Mallesons Stephen Jaques to become a corporate adviser and public company Director. During the early and mid-1990s he was a member of the Australia-Vietnam Business Council and was appointed by the Australian Government to the Australian International Legal Advisory Committee. He has been a member of the Council of Bond University and a Director and Chairman of a number of Australian Stock Exchange (ASX) listed public companies. In addition to Orion Petroleum Ltd, he is currently a director of ASX listed CBH Resources Ltd, Arc Exploration Limited, Mt Gibson Iron Ltd (Alternate Director) and Hong Kong Stock Exchange listed APAC Resources Ltd. He is also Chairman and Director of Trilogy Funds Management Ltd, a Responsible Entity under Australian law. As a corporate advisor he has undertaken assignments in a range of industry sectors beyond resources to private equity and business process outsourcing. This has included facilitating transactions as well as representing the interests of clients from the Asian region as advisor and director. He is a member of the Audit and Risk Management Committee and Chairman of the Remuneration Committee. Russell D Langusch Russell Langusch holds the degrees of Bachelor of Engineering (Electrical First Class Honours) and Master of Engineering Science from the University of Queensland, Brisbane. He is an independent energy consultant with over 35 years combined experience in the upstream oil & gas and finance industries. He commenced his career with Schlumberger working in many international locations in a multitude of roles including petroleum engineering, petrophysics, sales-marketing and management. He was then employed by Esso Australia as a senior reservoir engineer before joining the finance sector in Here he worked for a number of international investment banks undertaking company research and corporate advisory activities. He established his own successful consultancy business in 2001 providing independent research reports, project assessments, financial modelling, corporate advisory services and expert valuations for many domestic and international clients. During the period 2004 to early 2008 he was the founding Managing Director of Elixir Petroleum, a dual ASX and AIM-listed E&P company based in London with assets in the UK North Sea, Gulf of Mexico and West Africa. He is a member of the Society of Petroleum Engineers and the Australasian Institute of Mining & Metallurgy. Dennis J Morton Dennis Morton graduated in 1975 with First Class Honours in Geology from Macquarie University, Sydney and in the same year commenced work with Esso Australia Limited. Whilst employed by Esso, Dennis worked both in Australia and internationally. Following Esso he worked for 10 years with Hartogen Energy Limited and became Exploration Manager Hartogen Group. He subsequently spent 3 years as resident Australian manager for Canadian listed Bow Valley Resources Inc., immediately prior to the parent being taken over. After a period as an Executive Director of Capital Energy NL and Stirling Resources NL, Dennis worked as a consultant and established the petroleum assets which formed the basis of Eastern Star Gas Limited s business when he listed Eastern Star Gas Limited on the ASX in Dennis was employed as Managing Director of Eastern Star Gas Limited from its formation until he retired in October In April 2008 Dennis was appointed MD of ASX listed oil and gas explorer Gas2Grid Limited. He is a member of the Audit and Risk Management Committee and the Remuneration Committee. 12 Orion Petroleum Limited Annual Report 2010

15 THE BOARD continued Ashley V Edgar Non-Executive Director David A Casey Alternate Director to A V Edgar Allan B Freeman Company Secretary Ashley V Edgar Ashley Edgar is a geologist with 25 years experience in petroleum exploration and development. From 1985 to 1994 he held various geological positions with Santos Limited, involved in conventional oil and gas exploration and development primarily in central and eastern Australia and offshore in the Northwest Shelf. Ashley spent the following 13 years with the Origin Energy Group occupying several key positions, including Exploration Manager, Coal Seam Gas Manager, International Opportunities and New Ventures and Manager of Exploration and Production Geoscience for the company s conventional onshore and Coal Seam Gas areas. In August 2007 he was appointed General Manager of Exploration and New Ventures for Eastern Star Gas Limited. Ashley has a Bachelor of Applied Science in Applied Geology from the Queensland University of Technology and a Graduate Diploma of Environmental Studies from the University of Adelaide. Ashley was appointed a Non-executive Director of Orion on incorporation in 2007 and is Chairman of the Audit and Risk Management Committee of Orion. COMPANY SECRETARY Allan B Freeman Allan Freeman holds a Bachelor of Commerce Degree in Accounting from the University of New South Wales and is a fellow of the Australian Certified Practicing Accountants (FCPA). Allan commenced his career as a commercial cadet with BHP and spanning a period of some 45 years has held Senior Financial Executive and/or company secretarial roles with Boral, Hanimex Corporation, Nationwide Food Service/Spotless Group, Laporte Group Australia and finally with Australian Defence Industries, leading up to its privatisation. Since 2004 he has consulted to a number of small and medium sized Australian businesses covering a broad range of financial issues. David A Casey David Casey graduated with Honours in Geology from the University of Sydney in 1991 and in the same year joined specialist coal seam gas company In Situ (Australia) Pty Ltd. In 1996, he formed his own coal seam gas consultancy business, and subsequently was a founder of Multiphase Technologies Pty Ltd, a provider of coal seam testing services. David has over 15 years experience in the management and evaluation of all aspects of coal seam gas exploration and appraisal, from initial reservoir characterisation and fairway identification through to drilling, testing and production operations. Between April 2001 and October 2005 he was a director of Molopo Australia Limited. He was previously Executive Director - Operations and is presently the Managing Director of Eastern Star Gas Limited. Orion Petroleum Limited Annual Report

16 Licence Schedule as at 23 September 2010 Basin/State Licence Interest Subject to Royalty Interest* Surat/Bowen Basin PEL 6 Conventional Petroleum JV New South Wales 97.5% - Remainder 3.5% 95% - Edendale Block 1.75% Coal Seam Gas JV 22.5% - Remainder 3.5% 20% - Edendale Block 1.75% PEL 427 Conventional Petroleum JV 75% Coal Seam Gas JV 25% PEL 428 Conventional Petroleum JV 60% Coal Seam Gas JV 20% PEL % Darling Basin PEL % 8% New South Wales PEL % 8% PEL % *These royalties are in addition to the standard 10% well head royalty payable to the NSW state government upon achieving production, subject to a royalty holiday in the first five years of production. 14 Orion Petroleum Limited Annual Report 2010

17 CORPORATE GOVERNANCE The Board of directors monitors the business and affairs of the Company on behalf of the shareholders by whom they are elected and to whom they are accountable. Board Charter The Board is responsible for: i. developing, approving and monitoring implementation of corporate policy, strategy and performance objectives; ii. developing and monitoring adoption of the most appropriate principles of corporate governance; iii. reviewing and ratifying systems of risk management and internal control, codes of conduct and legal compliance; iv. approving and monitoring the progress of major capital expenditure projects, funding programmes, acquisitions and divestments; v. reviewing and approving annual business plans, operating and capital budgets; vi. reviewing and ratifying systems for health, safety, environment management and controls; vii. appointing and evaluating the performance of senior executives; and viii. selecting and appointing new directors to the board, and evaluating the performance of all members of the board. Corporate Governance Statement Orion Petroleum Limited and the Board of Directors of the Company are committed to following good corporate governance practices and procedures. The information provided below sets out how the Company is implementing the various Principles of Good Corporate Governance and Best Practice Recommendations established by the ASX Corporate Governance Council (ASX listing rule ). Principle 1: Lay solid foundations for management and oversight On 29 October 2007, the Board adopted a Corporate Governance Policy. The detailed policy is available for viewing on the Company s website. The Corporate Governance Policy lists the essential obligations of the Board in relation to corporate governance. These obligations include, inter alia, identifying and managing risks; developing strategic direction and identifying business opportunities; monitoring and ensuring compliance with laws and ethical practice; and monitoring systems established to ensure prompt and appropriate responses to shareholder complaints and enquiries. The Managing Director of the Company, Mr Russell Langusch, has entered into an employment agreement with the Company dated 2 October This employment agreement formalises the responsibilities of Mr. Langusch as the Managing Director of the Company. The Managing Director is accountable to and must report to the Board. The employment agreement contains provisions relating to Mr Langusch s remuneration, confidentiality obligations owed to the Company and the terms of his appointment, as well as various other matters. Given the current size of the Board and the Company, the Board has not adopted a formal charter of performance evaluation of the Board, individual directors and key executives. However each of the committees established by the Company periodically reviews their respective functions, roles, responsibilities and work to assess whether they are operating effectively by reference to their charter and prevailing market practices. Each Director has the right to seek independent professional advice at the Company s expense. However prior approval from the Chairman is required, which cannot be unreasonably withheld. As detailed in the Directors Report, the remuneration structure for executives, including executive directors, is based on a number of factors, including qualifications, particular experience and general past performance of the individual concerned, overall performance of the Company and general human resources market pricing. There is no predetermined equity compensation element within the remuneration structure nor predetermined performance condition to be satisfied. The contracts for service between the Company and the executives are on a continuing basis. Upon retirement executive directors and executives are paid employee benefit entitlements accrued, in accordance with applicable legislation, to the date of retirement. Executives are able to participate in the Orion Petroleum Employee Incentive Plan at the invitation of the Board where securities offered under the plan may be subject to predetermined performance conditions. Directors may participate in the Orion Petroleum Employee Incentive Plan subject to approval of shareholders. Performance evaluations take place in July the last one occurred in July This was completed in accordance with the process disclosed. Principle 2: Structure of the board to add value The Board of the Company consists of four directors. Of these two are independent (Messrs Willcocks, and Morton), Ashley Edgar is independent however he is also an executive of Eastern Star Gas Ltd, which is a substantial shareholder of Orion Petroleum Limited (22.34%). The fourth Director is the Managing Director. The roles of Chair and Chief Executive are exercised by separate individuals and the Chair is an independent director. Given the present size of the Company the existing Board handles selection and appointment practices without the formal establishment of a nomination committee. However, the directors are committed to ensuring the Board is made up of experienced and qualified individuals. The performance of the Board of directors is reviewed annually by the Board under a peer review procedure. Any unsatisfactory performance is addressed with the individual director concerned. Orion Petroleum Limited Annual Report

18 CORPORATE GOVERNANCE continued The composition of the Board is determined in accordance with the following principles and guidelines: i. the Board shall comprise at least three directors, increasing where additional expertise is considered desirable in certain areas to a maximum of nine directors; ii. at each annual general meeting a director (except for the Managing Director) appointed since the last annual general meeting, one third of the other directors, and any director for whom that annual general meeting would be his or her third annual general meeting or who has been in office for three years since his or her last appointment, shall automatically retire and be eligible for re-election; iii. the Board shall have a balance of non-executive and independent directors; and iv. Directors should bring characteristics that allow a mix of qualifications, skills, expertise and experience. The Board reviews its composition on an annual basis to ensure that it has the appropriate mix of expertise and experience. Where a vacancy exists, for whatever reason, or where it is considered that the Board would benefit from the services of a new director with particular skills and expertise, the Board selects that new director from appropriate candidates with relevant qualifications, skills, expertise and experience. The directors believe the size of the Board is appropriate for the current size of the Company. Principle 3: Promote ethical and responsible decision making The company has established a code of conduct which is published on the Orion Petroleum website in the Corporate Governance section. This covers ethical standards, environment health and safety management and the securities trading policy. Under the Code of Ethics, all directors, the Company Secretary, executives, employees and consultants of the Company are required to act with integrity and objectivity and maintain appropriate ethical standards. Specifically, and among other matters, they have a duty to act honestly, fairly and without prejudice in all commercial dealings and to conduct business with professional courtesy and integrity. The Company is committed to protecting the legitimate interests of stakeholders. The Corporate Governance Policy, Code of Ethics and Charters adopted by the Board will help to ensure that the Company acts, to the greatest extent practicable at any point in time, in accordance with ASX Governance Principles. On 22 May 2008, the Board adopted a revised Securities Trading Policy. Directors and employees, and their family members and close associates may not buy, sell or subscribe for any securities of the Company, whether on their own account or on behalf of another person while in possession of price sensitive information which is not generally available to the public. In particular, they may only deal in securities of the Company during a trading window being the period of ten (10) business days (in NSW) after the release to the ASX of :- Quarterly activity reports The half year financial reports The annual report of the Company The date of the Company s annual general meeting Any other information which is clearly price sensitive information Principle 4: Safeguard integrity in financial reporting The Board has established an Audit & Risk Management Committee and has adopted an Audit & Risk Management Committee Charter to safeguard the integrity of the financial reporting of the Company and to ensure significant risks are identified and mitigated appropriately. The Charter mandates that the Audit & Risk Management Committee must be composed of at least three persons, a majority of whom must be both independent and non-executive directors. At present, the members of the Audit & Risk Management Committee are Mr Robert M Willcocks, Mr Dennis J Morton and Mr Ashley V Edgar. All three are independent, however Mr Edgar is an executive of Eastern Star Gas Ltd, which is a major shareholder of Orion Petroleum Limited. Chair of the Audit & Risk Management Committee is Mr Edgar who is independent and not Chair of the Board. The Committee meets four times a year. Additional meetings are held if there is a need. The Audit & Risk Management Committee Charter was formalised by the Board on 24 January The charter is detailed on the Company s website under corporate governance. The Audit & Risk Management Committee is responsible for: i. reviewing the quality and integrity of the Company s financial reporting to shareholders, ASX and the Australian Securities and Investments Commission; ii. reviewing the accounting policies, internal controls, practices and disclosures to assist the Board in making informed decisions, with direct access to management; iii. reviewing the scope and outcome of external audits, with direct access to external auditors; iv. nominating external auditors and reviewing the adequacy of existing external audit arrangements; v. ensuring the independence of external auditors and reviewing any other services provided by them; vi. reviewing the Company s risk management systems; and environment management and controls; reporting to the board on its meetings and the results of any assessments and reviews; vii. reporting to the Board on its meetings and the results of any assessments and reviews. 16 Orion Petroleum Limited Annual Report 2010

19 CORPORATE GOVERNANCE continued Principle 5: Make timely and balanced disclosure Whilst the Board has not adopted a formal charter regarding compliance with the disclosure requirements under the ASX Listing Rules, the Board and the Company Secretary possess knowledge and experience in complying with those disclosure requirements. The Audit & Risk Management Committee Charter also provides that the Audit & Risk Management Committee is required to provide advice and assistance to the Board in order to allow the Board to fulfil its reporting obligations. The Company endeavours to report to the ASX and the market at large any matter or event of material significance to the market value of the Company in accordance with its continuous disclosure requirements under ASX listing rule 3.1. The importance of continuous disclosure is well understood by the Board and senior executives of the Company and continuous disclosure has been maintained throughout the financial period. This is carefully monitored by the Managing Director and Company Secretary. Principle 6: Respect the rights of shareholders The Company makes use of its website to complement any official release to ASX of material information to the market. Under the Corporate Governance Policy, the Board is responsible for monitoring systems established to ensure prompt and appropriate response to shareholder complaints and enquiries. In accordance with the Corporations Act 2001, the Company will give notice of general meetings and related communications to its auditor. The Company website contains full text of notices of meeting, past ASX announcements, annual reports/interim reports including quarterly reports. Principle 7: Recognise and manage risk The identification and effective management of risk, including calculated risk-taking is viewed as an essential part of the company s approach to creating long-term shareholder value. The Board is responsible for satisfying itself annually, or more frequently as required, that management has developed and implemented a sound system of risk management and internal control. Detailed work on this task is delegated to the Board s Audit & Risk Management Committee and reviewed by the full Board. The Audit Committee also oversees the adequacy and comprehensiveness of risk reporting from management. The Company carries out risk specific management activities in four core areas; strategic risk, operational risk, reporting risk and compliance risk. Strategic and operational risks are reviewed at least annually as part of the annual strategic planning, business planning, forecasting and budgeting process. The Company has developed a series of operational risks which the company believes to be inherent in the industry in which it operates. These relate to: exploration drilling; geophysical surveys; and field visits. and include: technical or drilling specific risks; cultural/heritage risks; and environment/landholder risks. Through the Company Secretary s office, a detailed compliance programme operates to ensure the Company meets its regulatory obligations. An executive management committee also meets regularly to deal with specific areas of risk such as OH&S and environmental risk. The Board also receives a written assurance from the Managing Director (MD) and Chief Financial Officer (CFO) that to the best of their knowledge and belief, the declaration provided by them in accordance with section 295A of the Corporations Act is founded on a system of risk management and internal control and that the system is operating effectively in relation to financial reporting risks. The Board notes that due to its nature, internal control assurance from the MD and CFO can only be reasonable rather than absolute. The company will provide updates on any changes in its circumstances in press releases on the investor relations section of the Company s website. Principle 8: Remunerate fairly and responsibly The Board has established a Remuneration Committee and has adopted a Remuneration Committee Charter. The Remuneration Committee is comprised of Mr Robert M Willcocks (Chairman), and Mr Dennis J Morton. The role of the Remuneration Committee is to review and make recommendations to the Board on remuneration packages and policies related to the non-executive directors, Managing Director and senior executives of the Company and to ensure the remuneration policies and practices are consistent with the Company s strategic goals and human resources objectives. The current remuneration of Mr. Langusch is $321,101 per annum excluding employer superannuation contributions. No director s fees have been paid or are being paid to Mr. Langusch in addition to his above mentioned remuneration. In March 2010 Mr Langusch was issued with 5,000,000 incentive shares in the Company as detailed in the Remuneration Report. Orion Petroleum Limited Annual Report

20 Financial Report 18 DIRECTORS REPORT 19 AUDITORS INDEPENDENCE DECLARATION 24 STATEMENT OF COMPREHENSIVE INCOME 26 STATEMENT OF FINANCIAL POSITION 27 STATEMENT OF CHANGES IN EQUITY 28 STATEMENT OF CASH FLOWS 29 NOTES TO THE FINANCIAL STATEMENTS 30 DIRECTORS DECLARATION 43 AUDITORS REPORT 44 Orion Petroleum Limited Annual Report 2010

21 DIRECTORS REPORT The Directors present their report on Orion Petroleum Limited ( the Company ) for the financial year ended 30 June DIRECTORS The Directors in office at any time during the financial year and up to the date of this report are: Director Role Robert Willcocks Chairman Non-executive (appointed 16 April 2010) Russell Langusch Managing Director (appointed 2 October 2009) Dennis J Morton Non-executive Director (appointed 9 July 2007) Ashley V Edgar Non-executive Director (appointed 24 October 2007) David A Casey Alternate Director to A V Edgar (appointed 23 October 2008) Bun C Hung Chairman Non-executive (appointed 9 July ceased 2 October 2009) Barry L Smith Managing Director (appointed 9 July 2007 ceased 2 October 2009) W Guy Allinson Non-executive Director (appointed 9 July 2007 ceased 2 October 2009) COMPANY SECRETARY Allan B Freeman PRINCIPAL ACTIVITY The principal activity of the Company during the year was the exploration for oil and gas resources. There have been no significant changes in the affairs of the Company during the year. OPERATING RESULTS The net loss of the Company for the year was $4,632,000 (2009: $4,731,000). The result was arrived at after writing off deferred exploration expenditure of $3,101,000 (2009: $4,386,000). FINANCIAL POSITION The total assets decreased by $2,797,000 and total liabilities increased by $1,794,000 resulting in the decrease of net assets to $4,591,000 at 30 June The decrease in net assets arose predominately from payments for, and trade and other payables associated with, exploration and evaluation expenditure incurred during the year. DIVIDENDS No dividends have been paid or declared during the financial year. STATE OF AFFAIRS The state of affairs of the Company was not affected by any significant changes during the financial year other than the following: (a) During the year the Company drilled the Toenda-1/ST1 exploration well in PEL 6, in northern NSW. The well, drilled to a total depth of 1,924m measured depth, was plugged and abandoned on 16 May 2010 after failing to return significant hydrocarbon shows. MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL PERIOD There has not arisen in the interval since 30 June 2010 and up to the date of this report, any matter that in the opinion of the Directors has significantly affected or may significantly affect the operations of the Company, the results of those operations or the state of affairs of the Company in future financial periods. ENVIRONMENTAL REGULATIONS The Company s operations are subject to significant environmental and other regulations. The Company has a policy of engaging appropriately experienced contractors and consultants to advise on and ensure compliance with environmental regulations in respect of its exploration activities. There have been no reports of breaches of environmental regulations in the financial period and at the date of this report. INDEMNIFICATION OF OFFICERS AND AUDITORS The Company has entered into a Deed of Access, Indemnity and Insurance with each of the Directors of the Company. Subject to the Corporations Act 2001, the Deed provides an indemnity in respect of liability that each of the Directors may incur in relation to the conduct of the business or affairs of the Company, acts or omission of the Directors in relation to the business or affairs of the Company or the performance, manner of performance or failure to perform the Directors responsibilities in relation to the business or affairs of the Company, in each case in the period during which each Director (respectively) holds office. The Company has not otherwise, during or since the end of the financial period, indemnified or agreed to indemnify an auditor of the Company against a liability incurred by such an auditor. (b) Also during the year Eastern Star Gas Limited completed its obligations in relation to its farm-in to coal seam gas rights in three of Orion s northern NSW licenses in the Surat-Bowen and Gunnedah Basins. The Managing Director s Exploration Review in the Annual Report contains further details of business strategies and prospects for future financial years. Orion Petroleum Limited Annual Report

22 DIRECTORS REPORT continued MEETINGS OF DIRECTORS The following table sets out the number of meetings held by the Directors of the Company during the financial year ended 30 June 2010 and the number of meetings attended by each Director: no. of meetings attended no. of meetings held while in office Robert M Willcocks 2 2 Russell D Langusch 7 7 Bun C Hung 3 3 Barry L Smith 3 3 Dennis J Morton W Guy Allinson 3 3 Ashley V Edgar 9 10 David A Casey (Alternate) 0 10 The Audit & Risk Management Committee met four times during the financial year ended 30 June No. of meetings attended no. of meetings held while in office Robert M Willcocks 1 1 Dennis J Morton 4 4 W Guy Allinson 1 1 Ashley V Edgar 4 4 REMUNERATION REPORT The remuneration report is set out under the following headings: a) Directors and Executives b) Remuneration Policy and Practices c) Details of Remuneration (a) Directors and Executives The names and positions held of the Company Directors and Executives in office during the financial year ended 30 June 2010 are: Directors Mr Robert M Willcocks (Chairman Non-executive from 16 April 2010), Mr Bun C Hung (Chairman Non-executive to 2 October 2009), Mr R D Langusch (Managing Director executive from 2 October 2010), Mr B L Smith (Managing Director executive to 2 October 2010), Mr W G Allinson (Non-executive to 2 October 2010), Mr D J Morton (Non-executive), Mr A V Edgar (Non-executive) and Mr D A Casey (Alternate to A V Edgar, Non-executive) Executive Mr A B Freeman (Company Secretary and Chief Financial Officer) (b) Remuneration Policy and Practices The Company s policy for determining the nature and amount of emoluments of Board members and Executives is as follows: Non-executive Directors The Board s policy is to remunerate Non-executive Directors at market rates for comparable companies for time, commitment and responsibilities. The Board determines payments to the Non-executive Directors and reviews their remuneration annually, based on market practices. The base fee (inclusive of the 9% Superannuation Guarantee contributions) of each Non-executive Director for all Board activities was at the rate of $35,000 per annum and the fee for the Chairman was at the rate of $52,500 per annum. The Superannuation Guarantee contributions where applicable are paid to each Non-executive Director s personal retirement plan. An annual retainer fee of $25,000 commencing from 12 December 2008 was payable to Mr W. G Allinson for 20 days of consultancy services and any additional days were payable at the rate of $1,250 per 8 hour day. This agreement was terminated on 2 October Consultancy fees are payable to Mr D.J. Morton at the rate of $1,250 per 8 hour day in the event that he provides services to the Company in addition to the normal duties of a non-executive Director. Consultancy fees of $300 per hour are payable to the non-executive Chairman in the event that he provides services to the Company other than the normal duties of a non-executive Chairman. Executives The remuneration structure for Executives, including Executive Directors, is based on a number of factors, including qualifications, particular experience and general past performance of the individual concerned, general human resources market pricing and is linked to the overall performance of the Company. There is no predetermined equity compensation element within the remuneration structure nor predetermined performance condition to be satisfied. The contracts for service between the Company and the Executives are on a continuing basis. Upon retirement Executive Directors and Executives are paid employee benefit entitlements accrued, in accordance with applicable legislation, to the date of retirement. Executives are able to participate in the Orion Petroleum Employee Incentive Plan at the invitation of the Board where securities offered under the plan may be subject to predetermined performance conditions. Directors may participate in the Orion Petroleum Employee Incentive Plan subject to approval of shareholders. 20 Orion Petroleum Limited Annual Report 2010

23 DIRECTORS REPORT continued (c) Details of remuneration 1 July 2009 to 30 June 2010 Non-executive Directors Short term salary & fees Non-cash benefits Post employment retirement benefits Share based payments Super - annuation R.M. Willcocks 10, ,938 B.C. Hung 12, ,084 13,125 D.J. Morton 32, ,890 35,000 W.G. Allinson 8, ,750 A.V. Edgar 32, ,890 35,000 D.A. Casey (alternate) Total 95, , ,813 Total Executive Directors R.D Langusch 239, ,493 21, ,052 B.L. Smith 63, ,816-5, , , ,816 30,493 27, ,618 Key Management A.B. Freeman 115, , ,304 Total 514, ,816 35,804 34, ,735 1 July 2008 to 30 June 2009 Non-executive Directors Short term salary & fees Non-cash benefits Post employment retirement benefits Share based payments Super - annuation B.C. Hung 48, ,335 52,500 D.J. Morton 32, ,890 35,000 W.G. Allinson 32, ,890 35,000 A.V. Edgar 32, ,890 35,000 D.A. Casey (alternate) Total 144, , ,500 Total Executive Directors B.L. Smith 252, , ,997 Key Management A.B. Freeman 144, , ,380 Total 541, ,858 35, ,877 The only portion of the above remuneration which is performance based is the share based benefit applicable to Mr R D Langusch in This is a non recourse loan expense. Orion Petroleum Limited Annual Report

24 DIRECTORS REPORT continued Details of the Managing Director s service contract are contained in the section Corporate Governance which appears in the Annual Report. On 26 February 2010 shareholders approved the issue of 5,000,000 Orion shares as Incentive Shares to the Managing Director, Mr Russell D. Langusch, at 13 cents each. The terms on which the Incentive Shares were to be issued to Mr Langusch are summarised as follows:- The Company will make an interest free loan to Mr Russell Langusch for a term of five years for the sum of $650,000 to enable him to acquire the Incentive Shares. The Company will hold a lien over the Incentive Shares to secure repayment of the Loan and until the Loan is repaid, the Incentive Shares will be subject to a trading lock. The Loan will become immediately due if Mr Russell Langusch ceases to be an employee, officer or consultant of Orion. The Incentive Shares will be sold under the lien if the Loan is not repaid when due or if the following conditions are not satisfied within 18 months of the date of issue of the Incentive Shares: - Any of the Company s current exploration licences or those acquired over the next 18 months cease to be in good standing with the relevant granting authorities. In this context, good standing is defined as involuntary forfeiture of any licence during this period; - Orion ceases to have sufficient available funding to meet all planned exploration activity in the Company s licensed areas. Planned activity means the current-planned exploration program which may be subject to amendment from time to time due to operational, technical and other factors; If the Incentive Shares are sold by the Company pursuant to the lien, any surplus on sale will be retained by the Company and any shortfall on sale will be borne by the Company. In the event of a shortfall on sale, the Company will have no recourse for the balance to Mr Russell Langusch. The terms of the issue of the Incentive Shares will otherwise be the same as under the Company s Employee Incentive Plan, which was approved by the Company in General Meeting on 23 July The Incentive Shares were formally issued to Mr Russell Langusch on 24 March The assessed value of these shares has been allocated equally over the time period from issue date to vesting date and the amount is included in the remuneration tables above. Fair value at issue date is independently determined using a Black-Scholes pricing model that takes into account the issue price, the vesting term, the impact of dilution, the share price at date of issue and expected price volatility of the underlining share, the expected dividend yield and the risk free interest rate for the term. The model inputs for these shares granted during the year ended 30 June 2010 included: a) shares issued vest over a 18 month period b) issue price: 13 cents c) issue date: 26 February 2010 (shareholder approval) d) share price at grant date: 7 cents e) expected volatility: 116% f ) expected dividend yield: 0% g) risk free interest rate: 5% The following options were granted over unissued shares during the financial year by the Company to employees and eligible persons as part of their remuneration. Granted as compensation Date granted Exercisable on or before Exercisable amount per share Vested & exercisable Unvested A.B. Freeman 50,000 23/07/09 23/07/12 $ ,000 S. Keenan 40,000 23/07/09 23/07/12 $ ,000 S. Gray 10,000 23/07/09 23/07/12 $ ,000 Since the end of the financial year no further options have been granted to employees and eligible persons as part of their remuneration. The assessed value at grant date of the options granted to the individuals is allocated equally over the time period from grant date to vesting date and the amount is included in the remuneration tables above. Fair values at grant date are independently determined using a Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlining share, the expected dividend yield and the risk free interest rate for the term of the option. The model inputs for options granted during the year ended 30 June 2010 included: a) options are granted for no consideration and vest over a 12 month period b) exercise price:15c c) grant date: 23 July 2010 d) expiry date: 3 years after grant date e) share price at grant date: 15c f ) expected volatility: 116% g) expected dividend yield: 0% h) risk free interest rate: 5% 22 Orion Petroleum Limited Annual Report 2010

25 DIRECTORS REPORT continued SECURITIES HOLDINGS As at the date of this report, the relevant interests of the Company Directors in the securities of the Company were as follows: Number of securities Directors Ordinary shares Options (listed) Options ( unlisted) R. M. Willcocks D.J. Morton 1,500,000 1,000, ,000 R.D.Langusch 5,000, A.V. Edgar 550, ,000 D.A. Casey (alternate) TOTAL 7,050,000 1,000,000 1,000,000 The Unlisted Options are each exercisable at $0.30 per share on or before 30 September The Listed Options are each exercisable at $0.30 per share on or before 30 September AUDITORS PKF was appointed by the Directors in accordance with the requirements of the Corporations Act 2001 on incorporation of the Company in July NON AUDIT SERVICES The Company may decide to employ the auditors on assignments additional to their statutory audit duties where the auditors expertise and experience with the Company are important. Details of amounts paid or payable to the auditors, PKF, for the audit and non-audit services provided during the year are set out below. The Board of Directors has considered the position and is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act The Directors are satisfied that the provision of non-audit services by the auditors, set out below, did not compromise the auditors independence requirements of the Corporations Act 2001 for the following reasons: All non-audit services have been reviewed by the audit and risk committee to ensure they do not impact the impartiality and objectivity of the auditors None of the services undermine the general principles relating to auditors independence as set out in APES 110 Code of Ethics for Professional Accountants. During the year the following fees were paid or payable for services provided by the auditors: Audit services PKF Audit and review of financial reports 43,000 41,000 Non-audit services PKF General matters 3,000 7,000 Total 46,000 48, $ 2009 $ Orion Petroleum Limited Annual Report

26 AUDITORS INDEPENDENCE DECLARATION The Auditors Independence Declaration required under section 307C of the Corporations Act 2001 is set out on page 14 and forms part of the Directors Report for the financial period ended 30 June ROUNDING OF AMOUNTS Amounts in the financial report and Directors report have been rounded to the nearest thousand dollars in accordance with Australian Securities and Investments Commission Class Order 98/100. This report is made in accordance with a resolution of the Directors. Russell D Langusch Managing Director 23 September Orion Petroleum Limited Annual Report 2010

27 AUDITORS INDEPENDENCE DECLARATION continued Auditors Independence Declaration - ANNUAL FINANCIAL STATEMENTS Auditors Independence Declaration As lead engagement partner for the audit of Orion Petroleum Limited for the year ended 30 June 2010, I declare that, to the best of my knowledge and belief, there have been: (a) (b) no contraventions of the auditor independence requirements of the Corporations Act in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. PKF Bruce Gordon Partner 23 September 2010 Tel: Fax: PKF ABN Level 10, 1 Margaret Street Sydney New South Wales 2000 Australia DX Sydney Stock Exchange New South Wales The PKF East Coast Practice is a member of the PKF International Limited network of legally independent member firms. The PKF East Coast Practice is also a member of the PKF Australia Limited national network of legally independent firms each trading as PKF. PKF East Coast Practice has offices in NSW, Victoria and Brisbane. PKF East Coast Practice does not accept responsibility or liability for the actions or inactions on the part of any other individual member firm or firms. Liability limited by a scheme approved under Professional Standards Legislation. Orion Petroleum Limited Annual Report

28 Statement of comprehensive income Note 30 June June 2009 Interest income Exploration and evaluation expenditure written off (3,101) (4,386) Directors fees (92) (158) Employee benefit expenses (860) (571) Professional and consulting fees (147) (173) Auditors remuneration (46) (48) Depreciation and amortisation (57) (58) Proposed Gas2Grid merger (terminated) (320) - Octanex takeover defence (lapsed) (230) - Other operating expenses (312) (228) Loss before income tax (4,632) (4,731) Income tax expense Loss attributable to members of ORION PETROLEUM LIMITED (4,632) (4,731) Other comprehensive income - - Total comprehensive loss for the year (4,632) (4,731) Loss per share from continuing operations attributable to the ordinary Cents Cents equity holders of the Company: Basic loss per share 21 (2.99) (3.05) Diluted loss per share 21 (2.99) (3.05) The above statement of comprehensive income should be read in conjunction with the accompanying notes. 26 Orion Petroleum Limited Annual Report 2010

29 Statement of financial position as at 30 June 2010 Note Assets Current assets Cash and cash equivalents 6 9,851 12,770 Inventories Other current assets Total current assets 10,448 13,092 Non-current assets Exploration and evaluation expenditure 9 1,578 1,676 Property, plant and equipment Total non-current assets 1,704 1,857 Total assets 12,152 14,949 LIABILITIES Current liabilities Trade and other payables 11 1, Provisions Total current liabilities 1, Non-current liabilities - - Total liabilities 1, Net assets 10,155 14,746 EQUITY Contributed equity 13 21,282 21,282 Options reserve Accumulated losses 15 (11,237) (6,605) Total equity 10,155 14,746 The above statement of financial position should be read in conjunction with the accompanying notes. Orion Petroleum Limited Annual Report

30 Statement of changes in equity Issued Capital Options Reserve Accumulated Losses Balance at 1 July ,282 - (1,874) 19,408 Total comprehensive loss for the year - - (4,731) (4,731) Other comprehensive income - - Total comprehensive loss for the year - - (4,731) (4,731) Total Transactions with owners in their capacity as owners Share based payments Balance at 30 June , (6,605) 69 Total comprehensive loss for the year - - (4,632) (4,632) Other comprehensive income - - Total comprehensive loss for the year - - (4,632) (4,632) Transactions with owners in their capacity as owners Share based payments Balance at 30 June , (11,237) 10,155 The above statement of changes in equity should be read in conjunction with the accompanying notes. 28 Orion Petroleum Limited Annual Report 2010

31 Statement of cash flows Note 2010 Cash flows from operating activities Payments for exploration and evaluation (1,577) (6,468) Payments to suppliers and employees (inclusive of goods and services tax) (1,878) (1,065) Interest received 539 1,198 Net cash outflow from operating activities 20 (2,916) (6,335) Cash flows from investing activities Payments for property, plant and equipment (4) (5) Proceeds on disposal of property, plant and equipment 1 - Net cash outflow from investing activities (3) (5) Net (decrease) increase in cash and cash equivalents (2,919) (6,340) Cash and cash equivalents at beginning of the year 12,770 19,110 Cash and cash equivalents at end of year 6 9,851 12,770 The above statement of cash flows should be read in conjunction with the accompanying notes Orion Petroleum Limited Annual Report

32 Notes to the financial statements 1. Summary of significant accounting policies The financial report covers Orion Petroleum Limited, a public listed company, incorporated and domiciled in Australia, for the year ended 30 June The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all years presented, unless otherwise stated. (a) Basis of preparation This general purpose financial report has been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Company Interpretations and the Corporations Act 2001.These financial statements comply in material respects with International Financial Reporting Standards (IFRS). The financial statements are presented in Australian Dollars. Historical cost convention These financial statements have been prepared under the historical cost convention. Rounding of amounts The Company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that class order all financial information in the financial report has been rounded to the nearest one thousand dollars unless otherwise stated. Financial statement presentation The Company has applied the revised AASB101 Presentation of Financial Statements which became effective on 1 January The revised standard requires the separate presentation of a statement of comprehensive income and a statement of changes in equity. All non owner changes in equity must now be presented in the statement of comprehensive income. As a consequence, the Company has had to change the presentation of its financial statements. Comparative information has been re-presented so that it is also in conformity with the revised standard where applicable. Operating segments The Company has applied the revised AASB 8 Operating Segments on its effective date. The Operating segments determined in accordance with AASB 8 disclosures are shown in note 4. Critical accounting estimates The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company s accounting policies. The areas involving a high degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 3. (b) Income tax The income tax expense or revenue for the period is the tax payable on the current period s taxable income based on the national income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted for each jurisdiction. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability. An exception is made for certain temporary differences arising from the initial recognition of an asset or a liability. No deferred tax asset or liability is recognised in relation to these temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the Company has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. (c) Cash and cash equivalents For cash flow statement presentation purposes, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value and bank overdrafts. (d) Property, plant and equipment Property, plant and equipment is carried at cost less accumulated depreciation and impairment losses. Depreciation is calculated on a straight line basis to write off the net cost of each item of property, plant and equipment (excluding land) over its expected useful life to the Company. Estimates of remaining useful lives are made on a regular basis for all assets, with annual reassessments for major items. The depreciation rates used for each class of depreciable assets are: Class of Fixed Assets Depreciation Rate IT and office equipment 33.30% Office furniture and fittings 20.00% Leasehold improvements 20.00% (e) Inventory Inventories comprise consumables used in drilling of wells and are stated at the lower of cost and net realisable value. Net realisable value is determined with reference to the replacement cost of the inventory. 30 Orion Petroleum Limited Annual Report 2010

33 Notes to the financial statements continued (f) Trade and other payables These amounts represent liabilities for goods and services provided to the Company prior to the end of the financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. (g) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of the new shares or options are shown in equity as a deduction, net of tax, from the proceeds. (h) Earnings per share (i) Basic earnings per share Basic earnings per share is calculated by dividing the loss attributable to equity holders of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year. (ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. (i) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flow. (j) Share based payments When goods or services received are acquired in a share-based payment transaction, they are recognised as expenses or assets, as determined by the nature of the goods or services received, over the vesting period attached to the equity instrument acquired in the transaction. A corresponding increase is recognised in equity. The goods or services are measured by reference to the fair value of goods or services received, or where this is not possible, indirectly, by reference to the equity instrument acquired. The fair value of the equity instrument is measured at grant date. The Company offers interest free loans to employees and eligible persons (including Directors) for terms of up to five years under the Employee Incentive Plan for subscription of shares, and under such loans, the Company holds a lien over the issued shares. The issue of shares using the proceeds of any loan under the Employee Incentive Plan to employees and eligible parties (including Directors) has been treated as an option grant. (k) Exploration and evaluation expenditure Exploration and evaluation expenditures incurred are accumulated in respect of each identifiable area of interest and are carried forward in the statement of financial position where: (i) rights to tenure of the area and participating interest are current; and (ii) one of the following conditions is met: such costs are expected to be recouped through successful development and exploitation of the area of interest or alternatively, by its sale; or exploration and/or evaluation activities in the area of interest have not, at balance sheet date, yet reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves and active and significant operations in, or relation to, the areas are continuing. A regular review is undertaken of each area of interest to determine the appropriateness of continuing to carry forward costs in relation to that area of interest. Accumulated expenditure on areas that have been abandoned, or are considered to be of no value is written off in the year in which such a decision is made. Expenditure relating to pre-exploration activities (such as for new venture work) is written off to the statement of comprehensive income during the period in which the expenditure is incurred. When production commences, the accumulated costs for the relevant area of interest will be amortised over the life of the area according to the rate of depletion of the economically recoverable reserves. (l) Rehabilitation obligations Where applicable, a provision for material rehabilitation obligations is recognised on a gradual basis over the life of the exploration licenses. The amount recognised includes costs of reclamation and site rehabilitation after taking into account restoration works that are carried out during exploration. Costs are determined from estimates of future costs on an undiscounted basis. (m) Impairment At each reporting date, the Company reviews the carrying values of its tangible and intangible assets to determine whether there is any indication that those assets have been impaired. If such an indication exists, the recoverable amount of the asset, being the higher of the asset s fair value less costs to sell and value in use, is compared to the asset s carrying value. Any excess of the asset s carrying value over its recoverable amount is expensed to the statement of comprehensive income. Orion Petroleum Limited Annual Report

34 Notes to the financial statements continued (n) Revenue recognition Interest income Revenue is recognised as interest accrued using the effective interest method. (o) New accounting standards and interpretations The following Australian Accounting Standards have been issued or amended and are applicable to the Company but are not yet effective. They have not been adopted in preparation of the financial statements at reporting date. AASB No. Title Issue Date Operative Date (Annual reporting periods beginning on or after) 9 Financial Instruments Dec Jan Further Amendments to Australian Accounting Standards arising from the May Jan 2010 Annual Improvements Project [AASB 5, 8, 101, 107, 117, 118, 136 & 139] Amendments to Australian Accounting Strandards Group Cash-settled Jul Jan 2010 Share-based Payment Transactions Amendments to Australian Accounting Standards Classification of Rights Oct Feb 2010 Issue [AASB 132] Amendments to Australian Accounting Standards [AASBs 5, 8, 108, 110, 112, 119, 133, 137, 139, 1023 & 1031 and Interpretations 2, 4, 6, 1039 & 1052] Dec Jan 2011 Australian Interpretations Int No. Title Issue Date Operative Date (Annual reporting periods beginning on or after) 9 Extinguishing Financial Liabilities with Equity Instruments Dec July 2010 Main Features of newly issued or amended Australian Accounting Standards AASB 9 Financial Instruments AASB 9 includes requirements for the classification and measurement of financial assets resulting from the first part of Phase 1 of the IASB s project to replace IAS 39 Financial Instruments: Recognition and Measurement (AASB 139 Financial Instruments: Recognition and Measurement). These requirements improve and simplify the approach for classification and measurement of financial assets compared with the requirements of AASB 139. The IASB plans to complete its work on financial liabilities during 2010 and will issue requirements for financial liabilities that will be included in AASB 9 in due course. The main changes from AASB 139 are described below: (a) Financial assets are classified based on (a) the objective of the entity s business model for managing the financial assets; and (b) the characteristics of the contractual cash flows. This replaces the numerous categories of financial assets in AASB 139, each of which had its own classification criteria. Application guidance has been included in AASB 9 on how to apply the conditions necessary for amortised cost measurement. (b) AASB 9 allows an irrevocable election on initial recognition to present gains and losses on investments in equity instruments that are not held for trading in other comprehensive income. Dividends in respect of these investments that are a return on investment can be recognised in profit or loss and there is no impairment or recycling on disposal of the instrument. (c) Financial assets can be designated and measured at fair value through profit or loss at initial recognition if doing so eliminates or significantly reduces a measurement or recognition inconsistency that would arise from measuring assets or liabilities, or recognising the gains and losses on them, on different bases. (d) Hybrid contracts with financial asset hosts are classified and measured in their entirety in accordance with the classification criteria. Embedded derivative assets that are separated from financial liability or non-financial hosts in accordance with AASB 139 are to be accounted for in accordance with AASB 9. (e) Investments in unquoted equity instruments (and contracts on those investments that must be settled by delivery of the unquoted equity instrument) must be measured at fair value. However, in limited circumstances, cost may be an appropriate estimate of fair value. (f ) Investments in contractually linked instruments that create concentrations of credit risk (tranches) are classified and measured using a look through approach. Such an approach looks to the underlying assets generating cash flows and assesses the cash flows against the classification criteria (discussed in (a) above) to determine whether the investment is measured at fair value or amortised cost. (g) Financial assets are reclassified when there is a relevant change in the entity s business model changes. 32 Orion Petroleum Limited Annual Report 2010

35 Notes to the financial statements continued AASB Amendments Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project [AASB 5, 8, 101, 107, 117, 118, 136 & 139] AASB results from the International Accounting Standards Board s annual improvements project. The annual improvements project provides a vehicle for making non-urgent but necessary amendments to accounting standards. The amendments to some Standards result in accounting changes for presentation, recognition or measurement purposes, while some amendments that relate to terminology and editorial changes are expected to have no or minimal effect on accounting. The subjects of the principal amendments to the Standards are set out in the preface to the standard. AASB Amendments to Australian Accounting Standards Group Cash-settled Share-based Payment Transactions [AASB 2] AASB clarifies the scope of AASB 2 by requiring an entity that receives goods or services in a share-based payment arrangement to account for those goods or services no matter which entity in the group settles the transaction, and no matter whether the transaction is settled in shares or cash. The amendments incorporate the requirements previously included in Interpretation 8 and Interpretation 11 and as a consequence these two Interpretations are superseded by the amendments. AASB Amendments to Australian Accounting Standards Classification of Rights Issue [AASB 132] The amendments clarify that rights, options or warrants to acquire a fixed number of an entity s own equity instruments for a fixed amount in any currency are equity instruments if the entity offers the rights, options or warrants pro rata to all existing owners of the same class of its own non-derivative equity instruments. AASB Amendments to Australian Accounting Standards [AASBs 5, 8, 108, 110, 112, 119, 133, 137, 139, 1023 & 1031 and Interpretations 2, 4, 6, 1039 & 1052] The amendment to AASB 8 requires an entity to exercise judgement in assessing whether a government and entities known to be under the control of that government are considered a single customer for the purposes of certain operating segment disclosures. The Standard also makes numerous editorial amendments to a range of Australian Accounting Standards and Interpretations, including amendments to reflect changes made to the text of IFRSs by the IASB. These amendments have no major impact on the requirements of the amended pronouncements. Main features of newly issued or amended Australian Interpretations Interpretation 19 Extinguishing Financial Liabilities with Equity Instruments This Interpretation addresses the following issues: The issue of an entity s equity instruments to a creditor to extinguish all or part of a financial liability is consideration paid in accordance with paragraph 41 of AASB 139. An entity shall remove a financial liability (or part of a financial liability) from its statement of financial position when, and only when, it is extinguished in accordance with paragraph 39 of AASB 139. When equity instruments issued to a creditor to extinguish all or part of a financial liability are recognised initially, an entity shall measure them at the fair value of the equity instruments issued, unless that fair value cannot be reliably measured. If the fair value of the equity instruments issued cannot be reliably measured then the equity instruments shall be measured to reflect the fair value of the financial liability extinguished. In measuring the fair value of a financial liability extinguished that includes a demand feature (e.g. a demand deposit), paragraph 49 of AASB 139 is not applied. If only part of the financial liability is extinguished, the entity shall assess whether some of the consideration paid relates to a modification of the terms of the liability that remains outstanding. If part of the consideration paid does relate to modification of the terms of the remaining part of the liability, the entity shall allocate the consideration paid between the part of the liability extinguished and the part of the liability that remains outstanding. The entity shall consider all relevant facts and circumstances relating to the transaction in making this allocation. The difference between the carrying amount of the financial liability (or part of a financial liability) extinguished, and the consideration paid, shall be recognised in profit or loss, in accordance with paragraph 41 of AASB 139. The equity instruments issued shall be recognised initially and measured at the date the financial liability (or part of that liability) is extinguished. When only part of the financial liability is extinguished, consideration shall be allocated in accordance with above. The consideration allocated to the remaining liability shall form part of the assessment of whether the terms of that remaining liability have been substantially modified. If the remaining liability has been substantially modified, the entity shall account for the modification as the extinguishment of the original liability and the recognition of a new liability as required by paragraph 40 of AASB 139. An entity shall disclose a gain or loss recognised as a separate line item in profit or loss or in the notes. 2. Financial risk management The Company s only financial instruments consist of deposits with banks and accounts payable. The Company does not presently have any bills, leases, preference shares, trade receivables, loans payable or receivable, or derivatives. Orion Petroleum Limited Annual Report

36 Notes to the financial statements continued Market risk The Company has no material exposure to foreign exchange risk. Credit risk The Company has no significant concentrations of credit risk. Liquidity risk Prudent liquidity risk management ensures the Company maintains sufficient cash flows to meet its requirements. Liquidity risk table Noninterest bearing 1 Year or less Over 1 to 5 years More than 5 years Floating interest rate Total Weighted average interest rate s s s s s s 2010 Financial liabilities Payables 1,918 1, ,918 - Borrowings ,918 1, , Financial liabilities Payables Borrowings Cash flow and fair value interest rate risk The Company s operations are currently exposed to interest rate risk. This risk is managed by the use of fixed term deposits over periods ranging from 30 to 180 days. Interest rate risk The Company s exposure to interest rate risk, which is the risk that a financial instrument s value will fluctuate as a result of changes in the market interest rates and the effective weighted average interest rates on those financial assets, is as follows: 2010 Average interest rate Fixed interest rate maturity less than 1 year Non-interest bearing % Financial assets Cash and cash equivalent ,851-9,851 Other Total financial assets 9, ,214 Total Financial liabilities Trade and other payables - 1,918 1,918 Total financial liabilities - 1,918 1, Orion Petroleum Limited Annual Report 2010

37 Notes to the financial statements continued Financial instruments (i) Derivative financial instruments As at the date of this report, the Company does not have any derivative financial instruments. (ii) Trade payables Trade and sundry payables are expected to be paid as follows: Less than 6 months 1, (iii) Net fair values The net fair values of all assets and liabilities approximate their carrying value. No financial assets and financial liabilities are readily traded on organised markets in standardised form. Financial assets where the carrying amount exceeds net fair values have not been written down as the Company intends to hold these assets to maturity. Aggregate net fair values and carrying amounts of financial assets and financial liabilities at balance date. Fair values are materially in line with carrying values. (iv) Sensitivity analysis Interest rate risk and foreign currency risk The Company has performed sensitivity analysis relating to its exposure to interest rate risk at balance date. This sensitivity analysis demonstrates the effect on the current year results and equity which could result from a change in these risks. Interest rate sensitivity analysis At 30 June 2010, the only item affected by a change in interest rate would be the cash on deposit. Interest rate risk sensitivity analysis change in profit before tax Increase in interest rates by 1% Decrease in interest rates by 1% (97) (128) Apart from a change to profit, a change in interest rates will have no impact on equity of the Company. The above interest rate sensitivity analysis has been performed on the assumption that all other variables remain unchanged. Capital management Management controls the capital of the Company in order to provide the shareholders with adequate returns and ensure that the Company can fund its operations and continue as a going concern. Due to the early stage nature of the Company s business, the Company s capital is limited to ordinary share capital. There are no externally imposed capital requirements. Management effectively manages the Company s capital by assessing the Company s financial risks and adjusting its capital structure in response to changes in these risks and in the market. These responses include the distributions to shareholders and share issues. There have been no changes in the strategy adopted by management to control the capital of the Company since commencement of operations. The Company does not presently have any borrowings. 3. Critical accounting estimates and judgments Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of the future events that may have a financial impact on the Company and that are believed to be reasonable under the circumstances. Critical accounting estimates and assumptions The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. There are no current estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Estimated impairment of intangible assets The Company tests annually whether intangible assets have suffered any impairment in accordance with the accounting policy stated in note Segment information Orion Petroleum Limited operates in one geographical area, Australia, within one business segment, exploration for oil and gas resources Income tax (a) Numerical reconciliation of income tax expense to prima facie tax payable Loss from continuing operations before income tax expense 4,632 4,731 Tax at the Australian tax rate of 30% 1,390 1,419 Tax effect of non-temporary differences (7) (22) Tax effect of equity raising costs debited to equity Tax losses and timing differences not bought to account (1,486) (1,500) Income tax expense - - (b) Tax losses Unused tax losses for which no deferred 13,437 9,000 tax asset has been recognised Potential tax 30% 4,031 2,700 No amounts have been recognised for deferred tax on income losses as it is not yet probable that future taxable amounts will be available against which to utilise losses. Orion Petroleum Limited Annual Report

38 Notes to the financial statements continued Deposits at call 9,726 12,700 Total cash balances per statement of cash flows 9,851 12, Cash and cash equivalents Cash at bank and in hand Deposits at call The deposits are bearing floating interest rates ranging from 4.45% to 5.85% per annum. (These deposits have an average maturity of 90 days). 7. Inventories Consumables The inventory consists of production casing (2,550 meters), a refurbished wellhead and a drilling bit 8½ GF30 ODPS. 8. Other current assets 5 - Prepayments Interest receivable Sundry debtors Deposits GST receivable Fuel tax rebate receivable Exploration and evaluation expenditure Exploration and evaluation expenditure Opening balance 1 July 1, Additions during the year at cost 3,003 5,240 (3,101) (4,386) 1,578 1,676 Amounts written off during the year Closing balance 30 June Recoverability of the carrying amount of the exploration and evaluation expenditure is dependent on successful development and commercial exploitation, or alternatively, sale of the respective areas of interest. Management has considered whether indicators of impairment exist in relation to exploration and evaluation expenditure with reference to AASB 6 Exploration for and Evaluation of Mineral Resources. Where no indicators of impairment are identified no impairment testing is performed. Where an indicator of impairment is identified, management policy is to impair the asset until such time as there is an indicator of reversal of impairment. 36 Orion Petroleum Limited Annual Report 2010

39 Notes to the financial statements continued 10. Property, plant and equipment IT and office equipment Furniture and fixtures Leasehold improvements As at 30 June 2010 Cost or fair value Accumulated depreciation and amortisation (38) (40) (52) (130) Net book amount Total Year ended 30 June 2010 Reconciliation of movement in property, plant and equipment Opening net book amount Additions Disposals (2) - - (2) Depreciation and amortisation charge (17) (18) (22) (57) Closing net book amount As at 30 June 2009 Cost or fair value Accumulated depreciation and amortisation (23) (22) (30) (75) Net book amount Year ended 30 June 2009 Reconciliation of movement in property, plant and equipment Opening net book amount Additions Depreciation and amortisation charge (18) (17) (23) (58) Closing net book amount Trade and other payables Trade payables 1, Office fit-out incentive Other payables , All current liabilities are unsecured. 12. Provisions Provision for employee entitlements opening balance 15 2 Charge to the statement of comprehensive income for the year Benefits paid out (8) This provision relates solely to employee annual leave entitlements. Orion Petroleum Limited Annual Report

40 Notes to the financial statements continued 13. Contributed equity (a) Share capital 2010 Shares 2009 Shares Ordinary shares 160,000, ,000,000 21,282 21,282 (b) Movements in equity Date Details Number of Shares 1 July 2009 Opening balance 155,000,000 21, March 2010 Issue ordinary shares under employee incentive plan 5,000, cents Issue Price 2009 Treasury shares held under Employee Incentive Plan (650) 30 June 2010 Closing balances 160,000,000 21,282 Treasury shares are shares held in Orion Petroleum Limited under the Employee Loan Plan. Refer to Section (c) of the Remuneration Report on page 21 for details of the loan plan. (c) Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. The fully paid ordinary shares have no par value. (d) Treasury Shares Treasury shares are shares held in Orion Petroleum Limited that are held in escrow under the Orion Petroleum Employee Incentive Plan. (e) Options Date Details Number of Options Exercise Date Exercise ($) 1 July 2009 Opening balance 119,950, July 2009 Issue of options under employee incentive plan 100,000 23/07/12 $ June 2010 Closing balances 120,050, Options reserve The options reserve comprises the fair value of incentive shares and options issued over ordinary shares of the Company and increased during the year as follows; The Company has recognised an expense of $10,622 for employee services received during the year arising from the issue of 100,000 employee options as detailed in the Remuneration Report (2009: $69,240). The Company has also recognised an expense of $30,493 for employee services received during the year arising from the issue of 5,000,000 incentive shares to the Managing Director as detailed in the Remuneration Report (2009: nil). 15. Accumulated losses Opening balance 1 July 6,605 1,874 Net loss for the year 4,632 4,731 Closing balance 30 June 11,237 6, Orion Petroleum Limited Annual Report 2010

41 Notes to the financial statements continued 16. Key management personnel disclosures (a) Directors The following persons were Directors of Orion Petroleum Limited during the financial period: Robert Willcocks Chairman Non-executive (appointed 16 April 2010) Russell Langusch Managing Director (appointed 2 October 2009) Dennis J Morton Non-executive Director (appointed 9 July 2007) Ashley V Edgar Non-executive Director (appointed 24 October 2007) David A Casey Alternate Director to A V Edgar (appointed 23 October 2008) Bun C Hung Chairman Non-executive (appointed 9 July ceased 2 October 2009) Barry L Smith Managing Director (appointed 9 July 2007 ceased 2 October 2009) W Guy Allinson Non-executive Director (appointed 9 July 2007 ceased 2 October 2009) (b) Other key management personnel compensation The following persons also had authority and responsibility for planning, directing and controlling the activities of the Company, directly or indirectly, during the financial year: Allan B Freeman (c) Company Secretary and Chief Financial Officer Key management personnel compensation Detailed remuneration disclosures can be found in sections (a) to (c) of the remuneration report which forms part of the Directors Report. (d) Equity instrument disclosures relating to key management personnel Options provided as remuneration and shares issued on exercise of such options Details of options provided as remuneration and shares issued on the exercise of such options, together with terms & conditions of the options, can be found in section (c) of the remuneration report on pages 20 to 23. Option holdings The number of unlisted options over ordinary shares in the Company held during the financial year by each Director of Orion Petroleum Limited are set out below. These options were released from escrow effective 12 December Name Balance at start of the year/or on appointment Exercised Issued Balance at end of the year/or on vacating office * Vested and exercisable Unvested R M Willcocks R D Langusch B C Hung 1,250, ,250,000* 1,250,000 - B L Smith 1,500, ,500,000* 1,500,000 - W G Allinson 500, ,000* 500,000 - A V Edgar 500, , ,000 - DJ Morton 500, , ,000 - D A Casey (Alt) ,250, ,250,000 4,250,000 - *balance on date ceased to be a Director, 2 October In addition to the above Mr D J Morton, through Budisde Pty Ltd <Employees Super Fund> also holds 1,000,000 listed options, as detailed in the Remuneration Report on page 23. Share holdings The number of shares in the Company held during the financial year by each Director of Orion Petroleum Limited, including their personally related parties, are set out below. There were 5,000,000 shares issued to the Managing Director under the Employee Incentive Plan during the reporting period. Orion Petroleum Limited Annual Report

42 Notes to the financial statements continued Name Balance at start of the year/or on appointment Purchased during the year Sold during the period Balance at the end of the year/or on vacating office* R M Willcocks R D Langusch - 5,000,000-5,000,000 B C Hung* 1,550, ,550,000 Barry L Smith* 1,570, ,570,000 W Guy Allinson* 500, ,000 Ashley V Edgar 550, ,000 Dennis J Morton 1,500, ,500,000 David A Casey (Alt) * ceased to be a director on 2 October 2009 (e) Loans to key management personnel 5,670,000 5,000,000-10,670,000 The only loan made to key management personnel by the Company during the year was a loan of $650,000 made to the Managing Director, Mr R D Langusch in March 2010 to enable him to take up 5,000,000 incentive shares in the Company, under the Employees Incentive Plan. Refer to Section (c) of the Remuneration Report on page 21 for details of the loan plan. (f) Loans from key management personnel There were no loans made by key management personnel to the Company during the year. (g) (i) Other transactions with key management personnel Dunraven Holdings Pty Ltd Mr Robert M Willcocks, a director, is also a director of Dunraven Holdings Pty Ltd. Orion Petroleum Limited has engaged Dunraven Holdings Pty Ltd to provide corporate advisory consulting services from time to time, which include his normal duties of a non-executive Chairman. The contract is based on normal commercial terms Amounts recognised as an expense or directly in equity Corporate advisory and associated services 11 - (ii) Petrolex Pty Ltd Bun C Hung, a director until 2 October 2009, is also a director of Petrolex Pty Ltd. Orion Petroleum Limited had engaged Petrolex Pty Ltd to provide consulting services from time to time, which were in addition to his normal duties of a non-executive Chairman. The contract was based on normal commercial terms and has now been terminated Amounts recognised as an expense or directly in equity Corporate advisory and associated services 6 12 (iii) Petroleum Economics Pty Ltd Guy Allinson, a Director until 2 October 2009, is also a Director of Petroleum Economics Pty Ltd. Orion Petroleum Limited had engaged Petroleum Economics Pty Ltd to provide consulting services from time to time which were in addition to his normal duties of a non-executive director. The contract was based on normal commercial terms and has now been terminated. Amounts recognised as an expense or directly in equity Corporate advisory and associated services (iv) Allan Freeman Consulting Allan Freeman, a senior executive, is also the Principal of Allan Freeman Consulting. Orion Petroleum Limited has engaged Allan Freeman Consulting to provide Company secretarial and accounting services on a part-time basis. The contract is based on normal commercial terms. Amounts recognised as an expense Accounting and secretarial services Orion Petroleum Limited Annual Report 2010

43 Notes to the financial statements continued 17. Contingencies (a) Contingent liabilities Bankers guarantees issued for the fulfilment of obligations under exploration licences Obligations under a bank corporate credit card facility with the Commonwealth Bank of Australia Bankers guarantee issued as security for the performance by the Company of its obligations under a lease of office premises at Suite 303, 10 Bridge Street, Sydney Total (b) Contingent assets The Company has no contingent assets to report as at 30 June 2010 (2009: nil). 18. Commitments Exploration expenditure commitments Orion Petroleum Limited is required to meet minimum committed expenditure requirements to maintain current rights of tenure to petroleum and mining licences. These obligations may be subject to renegotiation, may be farmed out or may be relinquished and have not been provided for in the statement of financial position. In addition, the Company has obligations in regard to Native Title. A summary of aggregate commitments is as follows: Within 1 year 1, year or longer, but not longer than 5 years 1, Longer than 5 years - - Total 2,876 1, Auditor s remuneration During the year the following fees were paid or payable for services provided by the auditor: Audit services PKF Audit and review of financial reports 43,000 41,000 Non-audit services PKF General matters 3,000 7,000 Total 46,000 48, Reconciliation of loss after income tax to net cash inflow from operating activities Loss for the year (4,632) (4,731) Depreciation (Increase) Decrease in other exploration and evaluation expenditure capitalised 98 (854) (Increase) Decrease in inventory (2) (198) (Increase) in other assets (5) (11) (Increase) Decrease in other debtors (268) 1,014 (Decrease) Increase in creditors and accruals 1,836 (1,613) Net cash outflow from operating activities (2,916) (6,335) Orion Petroleum Limited Annual Report

44 Notes to the financial statements continued 21. Earnings per share (a) Basic loss per share Loss from continuing operations attributable to the ordinary equity holders of the Company 4,632 4,731 Loss attributable to ordinary equity holders of the Company 4,632 4, (b) Diluted loss per share Options issued to shareholders and related parties are considered to be potential ordinary shares and have been considered in the determination of diluted earnings per share. There are no options in the money and as such they do not have a material dilutive effect on earnings per share. The diluted earnings per share are not different from basic earnings per share. Details relating to the options are set out in the Director s Report on page 19 to 25. (c) Reconciliation of earnings used in calculating earnings per share Basic earnings per share Loss from continuing operations attributable to the ordinary equity holders of the Company 4,632 4,731 Loss attributable to ordinary equity holders of the Company 4,632 4, Number 2009 Number (d) Weighted average number of shares used as the denominator Weighted average number of shares used as denominator in calculating: Basic earnings per share 155,000, ,000,000 Diluted earnings per share 155,000, ,000, Subsequent events There has not arisen in the interval since 30 June 2010 any matter that has significantly affected or may significantly affect the operations of the Company, the results of those operations or the state of affairs of the Company in future financial periods. 23. Corporate information The financial report of Orion Petroleum Limited for the period ended 30 June 2010 was authorised for issue in accordance with a resolution of the Directors on 23 September Orion Petroleum Limited is a Company limited by shares, incorporated in Australia, whose shares are publicly traded of the Australian Securities Exchange. The Directors have the power to amend and re-issue the financial report. 42 Orion Petroleum Limited Annual Report 2010

45 Directors Declaration The Directors of Orion Petroleum Limited declare that: (a) In the Directors opinion the financial statements and notes and the Remuneration report in the Directors Report set out on pages 30 to 42, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the company s financial position as at 30 June 2010 and of its performance, for the financial year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and Corporations Regulations (b) the financial report also complies with International Financial Reporting Standards issued by the International Accounting Standards Board ( IASB) as disclosed in note 1; and (c) there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 by the Managing Director and Chief Financial Officer for the financial year ended 30 June Signed in accordance with a resolution of the directors. Russell D Langusch Managing Director Dated: 23rd September 2010 Orion Petroleum Limited Annual Report

46 AUDITORS REPORT To the members of Orion Petroleum Limited Report on the Financial Report We have audited the accompanying financial report of Orion Petroleum Limited, which comprises the statement of financial position as at 30 June 2010, and the statement of comprehensive income, statement of changes in equity and statement of cash flow for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors declaration. Directors Responsibility for the Financial Report The directors of the company are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act This responsibility includes establishing and maintaining internal controls relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors Responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act Tel: Fax: PKF ABN Level 10, 1 Margaret Street Sydney New South Wales 2000 Australia DX Sydney Stock Exchange New South Wales The PKF East Coast Practice is a member of the PKF International Limited network of legally independent member firms. The PKF East Coast Practice is also a member of the PKF Australia Limited national network of legally independent firms each trading as PKF. PKF East Coast Practice has offices in NSW, Victoria and Brisbane. PKF East Coast Practice does not accept responsibility or liability for the actions or inactions on the part of any other individual member firm or firms. Liability limited by a scheme approved under Professional Standards Legislation. 44 Orion Petroleum Limited Annual Report 2010

47 AUDITORS REPORT continued Auditors Opinion In our opinion: (a) the financial report of Orion Petroleum Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the company s financial position as at 30 June 2010 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and (b) the financial statements also comply with International Financial Reporting Standards as disclosed in Note 1. Report on the Remuneration Report We have audited the Remuneration Report included in pages 7 to 12 of the directors report for the year ended 30 June The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Auditors Opinion In our opinion the Remuneration Report of Orion Petroleum Limited for the year ended 30 June 2010, complies with section 300A of the Corporations Acts PKF Bruce Gordon Partner 23 September 2010 Orion Petroleum Limited Annual Report