Australian Oil Company - +61 2 8231 7000

AUSTRALIAN OIL COMPANY LIMITED

Corporate Governance Policy Statement

The Board recognises that the implementation of a sound corporate governance system promotes superior corporate performance and as a consequence, the Board has adopted a comprehensive corporate governance framework to assist with the direction and management of the Company.

The Board supports and, where appropriate and practical, seeks to implement the ASX Corporate Governance Council’s “Corporate Governance Principles and Recommendations – 2nd Edition” (ASX Recommendations). The Council accepts that there is no single model of good corporate governance and that each company must develop its own policies to meet the relevant circumstances of each company. Where a company considers that a recommendation of the Council is inappropriate, a company may decide not to adopt a particular recommendation but in doing so, its reasons should be explained and disclosed to Shareholders.

Generally, the Company's corporate governance framework satisfies the 8 core principles identified by the Council as those principles which underlie good corporate governance. Where the Company's corporate framework does not adopt a recommendation of the Council, it is disclosed and explained in this section.

The Board will review, at regular intervals, the Company's corporate governance framework in light of the Council's recommendations, having regard to the Company's size, development and operations.

The details of the Company’s current and developing corporate governance practices as they relate to the eight key principles of the ASX Recommendations are explained below and set out in details on the Company’s website at www.australianoilcompany.com.

Principle 1: Lay solid foundations for management and oversight

The Company has adopted this recommendation and formalised the functions reserved to the Board and those delegated to management. The Company has a small board, comprising four Directors, three of whom are non-executive (including the Chairman).

The Board is the governing body of the Company and its powers are set out in the Company’s Constitution. The Board has overall responsibility for directing the business of the Company towards increasing Shareholder wealth and promoting the interests of the Company’s other stakeholders such as its employees.

The Board is responsible for:

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

approving the strategic direction and financial objectives of the Company;

monitoring management’s performance and progress against these objectives;

ensuring compliance with legal requirements and standards of performance;

implementing procedures and principles which ensure that the business is conducted ethically and with openness, honesty and integrity;

ensuring that the interests of all Shareholders are represented;

approving and monitoring the progress of major capital expenditure and acquisitions and divestitures;

appointing and reviewing the performance of the Managing Director/Chief Executive Officer and implementing appropriate succession planning for the Board and management;

ensuring that activities to improve performance are developed and undertaken in accordance with the essential principles of corporate governance and risk management; and

nominating new board members, reviewing remuneration policies and procedures and establishing remuneration levels for the Managing director/Chief Executive Officer and directors.

The Board has adopted a corporate governance framework which seeks to achieve these objectives. Responsibility for managing the business on a day-to-day basis has been delegated to the Managing Director and the Company Secretary. The Managing Director in consultation with the rest of the Board develops the business strategy and implements the strategy once approved by the Board. He is also responsible for the overall financial and operational management and control. The Managing Director’s focus is on the management of exploration programmes, technical reporting and any future joint ventures or other commercial opportunities.

The Board as a whole acts as the remuneration committee which from time to time, as required, carries out informal performance evaluations. In view of its size and the resources available to the Company, the Board considers that there are no significant benefits to be gained at present through the implementation of a formal review process.

There are no senior executives other than the Directors of the Company and therefore there is no evaluation of senior executives as such, outside the evaluation of the Directors themselves.

Although, not required to hold shares in the Company, the Board believes the alignment of the interests of Directors with those of Shareholders as being the most efficient way to ensure Shareholders’ interests are protected.

Principle 2 – Structure the Board to add value

The procedures for election and retirement of the Directors are governed by the Company's Constitution, the Corporations Act and the Listing Rules.

The number of Directors must not be less than 3 nor more than such numbers as the Directors determine. There is no requirement for any shareholding qualification. A minimum of half of the number of Directors should be independent non-executive directors.

Currently, there is a majority of independent non-executive directors.Given the Company’s background, the nature and size of its business and the current stage of its development, the Board believes a board of this size is both appropriate and acceptable. It is considered that the Directors possess a broad range of skills, qualifications and industry experience encompassing the current and proposed activities of the Company. The details of the Directors, their experience, qualifications and term of office are set out in the Directors’ Report.

If the Group’s activities increase in size, nature and scope, the size of the Board will be reviewed periodically and the optimum number of Directors required to supervise adequately the Company’s affairs determined within the limitations imposed by the Company’s constitution and as circumstances demand. The membership of the Board, its activities and composition is subject to periodic review. The criteria for determining the identification and appointment of a suitable candidate for the Board shall include quality of the individual, background of experience and achievement, compatibility with other Board members, credibility within the Group’s scope of activities, intellectual ability to contribute to Board duties and physical ability to undertake Board duties and responsibilities.

Under the Company’s constitution the tenure of Directors (other than the managing director) is subject to reappointment by Shareholders not later than the 3rd anniversary following his or her last appointment. A managing director may be appointed for any period and on any terms the Board thinks fit and, subject to the terms of any agreement entered into, the Board may revoke any such appointment.

The Board considers that the Company is not currently of a size, nor are its affairs of such complexity, to justify the formation of separate or special committees at this time. The Board as a whole is able to address the governance aspects of the full scope of the Company’s activities and to ensure that it adheres to appropriate ethical standards. As the Group’s activities develop in size, nature and scope, the implementation of a formal corporate governance committee will be given further consideration.

Directors are required to take into consideration any conflicts when accepting appointment to other boards.

Independence of Directors

The Board will review annually whether or not each director is independent. It believes that the best interests of the company, when it is of significant size and complexity, will be served by a majority of the directors being independent. This is in accordance with the terms of ASX Corporate Governance Guideline 2.1.

The Chairman is an independent director. The roles of the Chairman and the Chief Executive Officer are not exercised by the same individual.

This structure is considered appropriate by the Board having regard to what is most appropriate and cost-effective, the shareholding structure, the early stage of development of the company and the skills and experience of the incumbent.

The status of each director is as follows:

Ian Ferrier - Chairman
Grant Jagelman - Managing Director
John Blumer – Non-Executive Director
Peter Cockcroft – Non-Executive Director

Independent
Non-Independent
Independent
Independent

(appointed May 2005)
(appointed May 2005)
(appointed May 2005)
(appointed May 2005)

The Directors have been re-elected at Annual General Meetings as required by the Company’s Constitution. The definition of director independence used by the company is as set out in the ASX Corporate Governance Guideline 2.1. Materiality levels used by the company for the purposes of this definition are as follows:

Professional advisers – Material if either:

(a)

(b)

Fees received by the adviser from the Company exceed 10% of the total fees received by the adviser/company in the last 12 months; or

Fees paid to the adviser exceed 10% of the total fees paid to all professional advisers by the Company in the last 12 months.

Suppliers/Customers – Material if either:

(a)

(b)

Purchases from the Company or sales to the Company exceed 10% of the Company’s total revenue or total purchases (respectively) in the last 12 months; or

Purchases from the Company or sales to the Company exceed 10% of the customer’s total purchases or supplier’s total sales for the last 12 months.

Nomination Committee

The Board does not have a Nomination Committee. The Board considers that the Company is not currently of a size, nor are its affairs of such complexity, to justify the formation of separate or special committees at this time. The Board as a whole is able to address the governance aspects of the full scope of the Company’s activities and to ensure that it adheres to appropriate ethical standards. As the Group’s activities develop in size, nature and scope, the implementation of formal committees will be given further consideration.

Board Performance

The Board as a whole acts as the remuneration committee which from time to time, as required, carries out informal performance evaluations. In view of its size and the resources available to the Company, the Board considers that there are no significant benefits to be gained at present through the implementation of a formal review process.

The performance evaluation compares the performance of the Board, any committees, individual Directors and key executives within the requirements of this framework. It also sets the goals and objectives of the Board for the upcoming year; and considers developments in best practice corporate governance and any improvements to the Company’s governance practices considered necessary or desirable.

A review of the remuneration of the Chief Executive Officer took place in June 2008 and will be carried out annually thereafter.

Independent professional advice

The Board has determined that individual Directors have the right, in connection with their duties and responsibilities as Directors, to seek independent professional advice at the Company’s expense. With the exception of expenses for legal advice in relation to Director’s rights and duties, the engagement of an outside adviser is subject to prior approval of the chair of the Board and this will not be withheld unreasonably.

Principle 3 – Promote ethical and responsible decision making

In performing their responsibilities, members of the Board must act at all times in a manner designed to create, and continue to build, sustainable value for Shareholders and in accordance with the duties and obligations imposed upon them by the Constitution, by law and the Listing Rules and by any codes of conduct adopted by the Board from time to time.

Non-executive Directors who sit on other Boards must ensure that they can dedicate a sufficient amount of time to effectively carry out their duties and responsibilities as Directors.

The Board will meet on a regular basis to consider the business of the Company. Directors who have a material personal interest in a matter being considered at a directors’ meeting must not be present at that meeting or vote on the matter unless permitted by the Corporations Act.

All Directors are free to attend meetings of any Committee if they do not have an actual or perceived conflict of interest. Board Committees may only make recommendations to the Board and do not have any executive power to commit the Board to the implementation of their recommendations.

The Board has resolved to adopt a policy binding on all Directors from time to time, and their associates as defined in the Corporations Act 2001, relating to trading in the securities issued by the Company. This will enhance market confidence in the management of the Company and ensure the Directors and officers do not breach insider trading provisions of the Corporations Act.

That Policy prohibits Directors and their associates from trading in the securities issued by the Company as follows:-

-
-
-

during a period where the Company or its joint venture parties are drilling.
a period of 14 days before the publication of the annual accounts of the Company; and
a period of 14 days before announcements made to ASX in accordance with the continuous disclosure obligations of the Company.

The policy further obliges each Director to discuss with the Chairman (or in the case of the Chairman himself), with a non-executive director of the Company, any trade in the securities of the Company contemplated by that Director or the Chairman.The policy also provides that no Director may trade in the securities issued by the Company if he or she is in possession of information that may have a material impact on the price of the securities issued by the Company if it were publicly known.All share trades must be advised to the Company Secretary when they occur so that the ASX can be advised in accordance with the Listing Rules.The policy adopted by the Board, as described above, requires each Director to declare any conflict or potential conflict of interest in relation to any matter the subject of deliberation by the Board. A register of conflict declarations is to be maintained by the Secretary of the Company. In Board discussions concerning any item in which a Director has or may have a conflict, that Director may not participate in the discussion or resolution regarding that item.

The Board continues to review existing procedures over time to ensure adequate processes are in place. All Directors, employees and contractors are expected to act with the utmost integrity and objectivity in their dealings with other parties, striving at all times to enhance the reputation and performance of the Company.

Principle 4 – Safeguard integrity in financial reporting

The Board considers that the Company is not currently of a size, nor are its affairs of such complexity, to justify the formation of a separate audit committee at this time. The Board as a whole is able to address the governance aspects of the full scope of the Company’s activities and to ensure that it adheres to appropriate ethical standards. All other matters which might properly be dealt with by special committees are subject to regular scrutiny at full Board meetings. As the Group’s activities develop in size, nature and scope, the implementation of a formal audit committee will be given further consideration.

The Board comprises members with sufficient industry expertise to ensure the establishment of and adherence with proper internal controls of the Company’s accounting systems and financial reporting processes.

The Managing Director and the Company Secretary (in his capacity as Chief Financial Officer) each declare in writing to the Board that the Company’s financial reports present a true and fair view, in all material respects, of the Company’s financial condition and operational results, and have been prepared in accordance with the Corporations Act 2001 and the relevant Australian Accounting Standards.

Principle 5 – Make timely and balanced disclosures

The Company is aware of the legal and other responsibilities arising under the Corporations Act 2001 and the ASX Listing Rules to keep the market fully informed on a continuing basis. These rules mean that the Company is required to disclose to ASX any information concerning the Company which is not generally available and which a reasonable person would expect to have a material effect on the price or value of the securities of the Company unless certain exemptions from the obligation to disclose apply. To enable it to meet its obligations, the Company has adopted a continuous disclosure protocol.

The Board has adopted a policy which establishes procedures to ensure that each Director is aware of and fulfils his or her obligations in relation to the timely disclosure of price sensitive information.

All relevant information provided to the ASX will, apart from being published by the ASX, be posted promptly on to the website of the Company (www.australianoilcompany.com) in compliance with the continuous disclosure requirements. Other relevant information, such as Company presentations, radio and video broadcasts are also disclosed to shareholders via the Company’s website and where relevant, to the ASX.

The Company has also instigated internal procedures designed to provide reasonable assurance as to the effectiveness and efficiency of operations, the reliability of financial reporting and compliance with relevant laws and regulations. The Board is acutely aware of the continuous disclosure regime and there are strong informal systems in place to ensure compliance, underpinned by experience.

The Company’s continuous disclosure policy is designed to ensure that the Company complies with its legal obligations under the Corporations Act and the Listing Rules and to produce a high level of transparency in respect to the Company’s operations. It is designed to ensure there are procedures in place so that share markets in which the company’s shares are traded are properly informed of matters which may have a material impact on the price at which the shares are traded and toensure compliance with the ASX listing rules and specifically Rule 3.1, 3.1A and 3.1B.

At a procedural level the Managing Director in consultation with the Company Secretary will decide whether a matter would have a material effect on the price the Company’s shares and, therefore, should be disclosed. In the case of a matter being assessed as likely to have a material effect whether the matter qualified for exemption from disclosure by addressing whether the information falls within a category listed in Listing Rule 3.1A.3; whether the information is confidential (and ASX has not formed an alternative view), and then whether a reasonable person would not expect it to be disclosed.

If the matter does not qualify for an exemption the Chief Executive Office/Company Secretary will advise all directors and then make the disclosure to ASX, as appropriate.

If the matter is not likely to have a material effect on the price of the Company’s, the Chief Executive Officer will assess whether a disclosure will, in any case, be made to keep the share market further informed.

Principle 6 – Respect the rights of shareholders

In line with adherence to continuous disclosure requirements of ASX all shareholders are kept informed of major developments affecting the Company. The disclosure is through the Company’s continuous and periodic reporting obligations (annual, half yearly, quarterly announcements) as well as the Company’s website and the distribution of specific releases covering major transactions or events.

Adherence to the Code of Conduct and the Company’s desire to keep both shareholders and the wider investment community informed, ensure that shareholders and potential investors are provided with up-to-date information regarding the Company and its operations.

Shareholders are encouraged to attend and be heard at the Company’s annual general meeting. Shareholders are also encouraged to exercise their right to vote, either by attending meetings, or by lodging a proxy. The external auditors are required to attend all Shareholders’ meetings and are available to respond to specific questions from shareholders.

Principle 7 – Recognise and manage risk

The Board considers that proper risk and compliance management is a basic requirement for the success of the Company’s operations and the Board takes seriously its obligations in this regard. The Company does not have a fomalised policy on risk management. However the Board recognises its responsibility for identifying areas of significant business risk and for ensuring that consideration is given for adequately managing these risks. Risk matters are regularly reviewed at Board meetings.

Determined areas of risk that are regularly considered include the performance and funding of exploration activities, status of mineral exploration licences, compliance with government laws and regulations of other regulatory bodies, continuous disclosure obligations, exchange rate fluctuations and budget control and asset protection.

Financial and legal risks are managed by the Managing Director and Company Secretary as part of the day-to-day management of the Company’s affairs. These risks are managed with the support of relevant professional advisors. The Managing Director and Company Secretary have reported to the Board in relation to the management of these risks.

The Board has received assurance from the Managing Director and the Company Secretary that the declaration provided in accordance with section 259A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks.

In light of the current activities and size of then Company, it is not presently considered necessary for a separate Committee of Board Members to be formed, but this situation will be kept under constant review by the Board. If it is considered that the functioning of the Board will be assisted by the appointment of a Risk Committee, such a committee will then be established.

Principle 8 – Remunerate Fairly and Responsibly

The Company has not established a formal remuneration committee as such. The Board as a whole acts as the remuneration committee which from time to time, as required, carries out informal performance evaluations. In view of its size and the resources available to the Company, the Board considers that there are no significant benefits to be gained at present through the implementation of a formal review process.

Matters of remuneration of the Board and Managing Director considered by the Board and in the case of non-executive Directors, remuneration does not exceed the limit set by shareholders at annual general meeting. Remuneration levels of the Board and Managing Director are approved by the Board. In doing so, the Board seeks to retain the professional services of Directors as it requires, at reasonable market rates, and seeks external advice and market comparisons where necessary.

The remuneration policy of the Company has been designed to align director and executive objectives with shareholder and business objectives. The Board believes the remuneration policy to be appropriate and effective in its ability to attract and retain the best executives and directors to run and manage the consolidated entity. The Board reviews executive packages annually by reference to the economic entity’s performance, executive performance and comparable information from industry sectors. All remuneration paid to directors and executives is valued at the cost to the company and expensed.

The Company discloses remuneration-related information in the Directors’ Report section of the Annual Report to Shareholders in accordance with the Corporations Act 2001. Non-executive Directors are each paid $30,000 per annum and the non-executive Chairman receives $50,000 per annum. The non-executive directors are not entitled to any retirement benefit.