HYDROCARBON DYNAMICS LIMITED — Annual Report 2011

Feb 28, 2012

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PRYME ENERGY LIMITED (ABN 75 117 387 354)

AND

CONTROLLED ENTITIES DIRECTORS’ REPORT FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2011

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PRYME EnERgY LiMitEd
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directors’ Report

In accordance with a resolution of directors, the directors present their report together with the Financial Report of Pryme Energy Limited (Pryme) and its wholly owned subsidiaries (together referred to as the Consolidated Group) for the financial year ended 31 December 2011 and the Independent Audit Report thereon. In order to comply with the provisions of the Corporations Act 2001, the directors report as follows:

1. Directors

The directors of Pryme at any time during or since the end of the financial year are:

(a) George Lloyd – Chairman

Independent Non–Executive Director (Appointed 29 January 2008)

Mr Lloyd has a Bachelors degree in Engineering Science (Industrial Engineering) as well as a Masters degree in Business Administration, both from the University of New South Wales. He is a graduate of the Stanford Executive Program, Stanford University, California and is also a Fellow of the Australasian Institute of Mining and Metallurgy.

He has more than 30 years senior management experience in the resources and energy sectors, with a focus on business development, corporate strategy, mergers and acquisitions and exploration management. He is the Chairman of AWR Lloyd Limited, an Asian-based corporate finance and strategy advisor to the energy, mining and metals industries in the Asia-Pacific region.

He also holds, or has held during the past three years, directorships in the following ASX listed companies:

Cape Alumina Limited (Chairman, appointed January 2009); and

Ausenco Limited (Non-Executive Director, appointed May 2005).

(b) Justin pettett - Managing Director and Chief executive officer

Executive Director (Appointed 1 December 2005)

Mr Pettett is a co-founder of Pryme and has broad experience as a public company director with positions in senior management.

Mr Pettett has over 16 years experience at a Managing Director and CEO level of medium sized businesses, the last ten specifically in the oil and gas industry focused primarily in the United States. He has drilled over 140 wells in Louisiana and Texas, resulting in the discovery of new oil fields. He has also participated in the drilling of conventional natural gas wells in Oklahoma and has co-managed the development of a 27 well coal bed methane field.

Mr Pettett has widespread experience and knowledge from the board room through to the oil field covering many facets of the oil and gas industry.

Mr Pettett is an associate member of the American Association of Petroleum Geologists and a member of the Australian Institute of Company Directors.

With the exception of Pryme, Mr Pettett has not served as a director of any Australian listed entity in the last three years.

(c) Ryan Messer - Chief operating officer

Executive Director (Appointed 1 December 2005)

Mr Messer, a co-founder of Pryme, graduated from the University of Central Florida with a degree in Business Administration, majoring in Marketing and Finance and is a member of the Independent Petroleum Association of America.

Mr Messer has 13 years of experience in international business, five of which were in management positions in the technology sector focused on developing business within Fortune 500 accounts. During the past eight years Mr Messer has been involved in the energy sector in the areas of oil and gas project finance, asset acquisition and divestiture, asset allocation, and risk assessment. He has experience in managing field and land rig operations, developing midstream assets and assisting in the formation of technical teams, all of which were derived from the drilling of over 130 wells, and the resulting field development, spread across five basins within North America.

With the exception of Pryme, Mr Messer has not served as a director of any Australian listed entity in the last three years.

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directors’ Report

(d) Gregory Short

Independent Non – Executive Director (Appointed 21 January 2010)

Mr Short holds a Bachelor’s degree in Geology from the University of New England and is a Graduate of the Australian Institute of Company Directors.

Mr Short is a geologist with over 30 years experience in petroleum exploration, initially as a production and operations geologist then rapidly advancing to supervisory and management positions. His experience includes 15 years overseas in senior exploration management positions in the USA, Europe and Africa. In the USA he was responsible for all of Exxon’s petroleum exploration activities which included onshore and offshore Gulf Coast exploration.

Mr Short has a strong technical grounding in exploration, development and production geoscience, exploration operations, joint venture management, government relations, budgeting, contract and project management, and people management.

He also holds directorships in the following ASX listed companies:

MEO Australia Limited (Non-Executive Director, appointed July 2008); and

Po Valley Energy (Non-Executive Director, appointed July 2010).

2. Company Secretary

Swapna Keskar (MCom, LLB) is a company secretary of a number of unlisted entities and is a member of Chartered Secretaries Australia, The Institute of Company Secretaries and Administrators, UK and the Institute of Company Secretaries of India.

3. principal Activities

The principal activities of the Consolidated Group during the year under review were exploring and developing oil and gas prospects in the United States of America. There have been no changes in the nature of these activities during the year.

4. Review of operations and State of Affairs

A review of, and information about, the Consolidated Group’s operations, including the results of those operations and changes in its state of affairs during the year together with the information about the financial position of the Consolidated Group appears in the 2011 Annual Report. There are no other significant changes in the state of affairs of the Consolidated Group.

5. events Subsequent to Reporting Date

Other than the matter discussed below, in the opinion of the directors, there has not arisen in the interval between the end of the financial year and the date of the report any matter or circumstance that has significantly affected, or may significantly affect the Consolidated Group’s operations, results or the state of affairs in future financial years:

As announced to the ASX on 27 February 2012, the Company successfully negotiated the sale of its interest in the Catahoula Lake project in LaSalle, Rapides and Grant parishes, Louisiana to the Sanchez Oil and Gas Group for a total sales price of US$1.625m.

6. Likely Developments

The Consolidated Group intends to continue its principal activities of acquiring, exploring and developing oil and gas prospects in the United States of America. The strategies and objectives of the Consolidated Group are reviewed and discussed in greater detail in the 2011 Annual Report.

Certain information about the likely developments in, and expected results of, the operations of the Consolidated Group in future years, the strategies of the Consolidated Group and its prospects for future financial years has been omitted from this Directors’ Report because disclosure of the information is likely to result in unreasonable prejudice to the implementation and execution of the Consolidated Group’s business strategies.

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directors’ Report

7. environmental Regulations and performance

The Consolidated Group has various permits and licenses to operate in the United States of America. There have been no significant known breaches of the Consolidated Group’s licence or permit conditions. Furthermore, no government agency has notified the Consolidated Group of any environmental breaches during the period ended 31 December 2011.

8. Dividends

No dividend was paid, recommended for payment or declared during the year under review.

9. options and Rights

Unissued Shares Under option

At the 2010 Annual General Meeting, shareholders approved the grant of 500,000 $0.15 options over unissued ordinary shares to Mr Gregory Short as an incentive attaching to his Directorship. The options were available to be exercised after 20 January 2011 and had an expiry date of 20 January 2012. No options were exercised prior to the expiry date and accordingly at the date of this report there are no unissued shares under option.

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Held at 1 Granted exercised expired Held at Vested Vested and
January the 31 during exercisable as
2011 December the year at 31 December
2011 2011
Greg Short 2011 500,000 - - - 500,000 500,000 500,000
2010 - 500,000 - - 500,000 - -
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Unissued Shares to be Allocated upon Conversion of performance Rights/Restricted Stock Units

As at 31 December 2011, there were 2,484,429 unissued ordinary shares of Pryme that may be allocated upon conversion of Performance Rights/Restricted Stock Units. Subject to the applicable tenure conditions being satisfied, the timing for vesting of the shares is as follows:

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Vesting Date Number of Shares
2009 Long Term Incentive Plan 01 January 2012 553,427 #
2010 Long Term Incentive Plan 01 January 2012 965,501 #
2010 Long Term Incentive Plan 01 January 2013 965,501
Total 2,484,429
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As announced to the ASX on 3 January 2012, 1,518,928 Performance Rights and Restricted Stock Units shown above were due to vest on 1 January 2012. These Performance Rights and Restricted Stock Units subsequently vested and were converted to ordinary shares on 3 January 2012.

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directors’ Report

10. Directors’ Meetings

The number of meetings of the Board and of each Board Committee held during the year (while each Director was a Director or committee member) and the number of meetings attended by each director are set out below:

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Board of Directors Audit Committee (#) Remuneration & Nomination
Committee(##)
HELD ATTENDED HELD ATTENDED HELD ATTENDED
George Lloyd 14 14 3 3 1 1
Justin Pettett 14 14 3 (#) 3(#) 1(##) 1(##)
Ryan Messer 14 14 3(#) 3(#) 1(##) 1(##)
Greg Short 14 14 3 3 1 1
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Committee comprises Non-Executive Directors, although Executive Directors are invited to attend Audit Committee Meetings.

Committee comprises Non-Executive Directors, although Executive Directors were invited to attend this Remuneration & Nomination Committee Meeting.

11. Directors’ Interests

Particulars of directors’ interests in securities as at 31 December 2011 are as follows:

Director	ordinary Shares	entitlement to ordinary Shares1	options over ordinary Shares	American Depository Receipts
Justin Pettett	5,437,679	1,131,7542	-	-
Ryan Messer	3,337,759	1,131,7542	-	1,1103
George Lloyd	4,417,144	-	-	-
Greg Short	210,000	-	500,0004	-

1 Further information on securities granted to directors as part of their remuneration is set out in Note 5 of the Financial Statements.

• 2 These shares are subject to vesting requirements as set out in the Remuneration Report. 3 Equivalent to 11,100 ordinary shares.

4 These options expired on 20 January 2012.

Other than as stated above in relation to awards under the Pryme Energy Long Term Inventive Plan, there are no contracts to which a director is a party or under which a director is entitled to a benefit that confer a right for the director to call for shares in Pryme.

12. Remuneration Report

The directors of Pryme present the Remuneration Report prepared in accordance with Section 300A of the Corporations Act, Accounting Standard AASB 124 Related Party Disclosures and Principle 8 of the ASX Corporate Governance Principles and Recommendations.

The information provided in this Remuneration Report has been audited as required by section 308(3C) of the Corporations Act. This remuneration report forms part of the Directors’ Report.

Remuneration policies and practices

The Remuneration Committee and the Board regularly review the remuneration policies and practices of Pryme to ensure that it remunerates fairly and responsibly. The remuneration policy of the Board is designed to ensure that the level and composition of remuneration is competitive, reasonable and appropriate for the results delivered and to attract and maintain talented and motivated directors and employees.

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directors’ Report

Non-executive Director Remuneration

The Non-Executive Directors are remunerated as described below.

Fees

Non-executive director fees are determined within an aggregate directors’ fee pool limit, which will be periodically approved by shareholders at a general meeting. The current limit is $300,000. During the year ended 31 December 2011, $207,670 (2010: $187,143) of the fee pool was used.

Upon shareholder approval at the Annual General Meeting held on 19 April 2010, Mr Greg Short was issued 500,000 options as an incentive attaching to his Directorship. These options are exercisable at $0.15 each after 20 January 2011. No options were exercised prior to the expiry date of 20 January 2012.

Retirement Benefits

Non-executive directors do not receive retirement benefits.

Superannuation

Where applicable, Pryme pays Australian resident non-executive directors the statutory superannuation guarantee contribution.

Executive Remuneration

At Pryme, Executive Remuneration consists of:

Total Remuneration (TR) = Fixed Remuneration (FR) + Short Term Incentive (STI) + Long Term Incentive (LTI)

• TR for Executive Directors includes Directors Fees which are paid in addition to FR and, for the purposes of calculation of incentive remuneration, do not comprise part of FR.

STI and LTI are the ‘at risk’ portions of remuneration.

STI is paid in cash and reflects the achievement of a number of short term goals established on an annual basis.

• LTI is delivered in an equity award(s) which is granted upon the satisfaction of performance conditions/key performance drivers which underpin long term sustainable growth for the Company.

• The Board may also determine to pay a bonus in cash in circumstances of outstanding performance not otherwise appropriately rewarded.

• The Remuneration Committee will review the structure of at risk remuneration from time to time and report to the board. Such a review may include, but not be limited to, changing the proportion of Total Remuneration which is at risk, the payment of Short Term and Long Term Incentives and the proportion of the at risk remuneration between Short Term and Long Term Incentive.

total Reward Mix

The proportion of TR at risk is generally expressed as a proportion of FR and is related to the agreement on remuneration struck between the Company and the executive, the Company’s expectations of executive performance and the executive’s position in the Company. However, in the case of the Chief Operating Officer, the value of TR at risk is the same as the value of the Chief Executive Officer’s TR at risk irrespective of the relative levels of FR. The proportion of FR will generally not change on a year to year basis but may be reviewed and modified by the Board.

The mix of STI and LTI offered to executives will depend on their position in the Company. Generally LTI will only be available to the senior executive team; STI may be made available to employees below the senior executive team.

As a general guideline, for members of the senior executive team who receive both STI and LTI, the maximum proportion of at risk remuneration that may be payable as STI is 40%.

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directors’ Report

Fixed Remuneration

FR (including the 9% superannuation levy payable as employer contribution (where applicable)) is set with reference to market data, reflecting the scope of the role and the performance of the person in the role.

At-Risk Remuneration

Clear and focused performance targets for management are critical to the success of the Company.

StI

STI is paid in cash and reflects the achievement of a number of short term goals established on an annual basis. For the 2011 year, no STI goals were established and accordingly no STI amounts were paid.

LtI

LTI is delivered in an equity based award(s) which is granted upon the satisfaction of performance conditions/key performance drivers which underpin long term sustainable growth for the Company.

LTI is the key tool to allow the Company to attract and retain talented executives and ensure the interests of executives are aligned with those of Shareholders in creating long-term Shareholder value.

The LTI scheme for Pryme which was approved at the 2011 AGM provides for the grant of equity in the form of Performance Rights (PRs) which are subject to the achievement of a dual performance measure (for US residents Restricted Stock Units (RSUs), which have similar value characteristics). Each performance right that satisfies its vesting conditions can be converted to one ordinary share for nil consideration.

The at risk remuneration for 2011 as a percentage of FR is dependent on the achievement of specific hurdles, is as follows:

	Fixed Remuneration	At-Risk Remuneration
	FR %	Long Term Incentive % of FR
ManagingDirector & Chief Executive Offcer	67	33
Chief OperatingOffcer	58	42 (See note below this table)
Other Executives	74	26

Note:

The value of Chief Operating Officer’s TR at risk is the same as the value of the Chief Executive Officer’s TR at risk irrespective of the relative levels of FR.

The hurdles under the 2011 Incentive Plan related to relative production growth and the attainment of a total shareholder return comparable with the energy sector (Performance Conditions). The performance conditions under the FY 2011 Incentive Plan were as follows:

production target (For which the award of up to 50% of the total Available Incentive may begranted)	production target (For which the award of up to 50% of the total Available Incentive may begranted)	total Shareholder Return target (For which the award of up to 50% of the total Available Incentive may begranted)	total Shareholder Return target (For which the award of up to 50% of the total Available Incentive may begranted)
Growth in Oil and Gas Sales Per Share	Portion of Total Available Incentives to be Granted	Growth in TSR	Portion of Total Available Incentives to be Granted
<30% above previous year	Nil	<ASX 200 Energy Index growth	0
30% above previous year	20%	Equal to ASX 200 Energy Indexgrowth	25%
>30% and<50% above previous year	An additional 1% for each 1% increment	Between 1 and 1.5 times ASX 200 Energy Index growth	1% for each 0.2 times increase in ASX 200 Energy Index over 1
50% or more above previous year	50%	>1.5 times ASX 200 Energy Indexgrowth	50%

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directors’ Report

The Performance Conditions are measured in respect of the period 1 January 2011 to 31 December 2011 and are tested at 31 December 2011 (Base Date).

A second hurdle that must be met as a precondition to vesting of Incentives is continued employment with Pryme as set out below:

time	Available Incentives to Vest
Base Date + 1years(31 Dec 2012)	50%
Base Date + 2years(31 Dec 2013)	50%

In accordance with sound corporate governance principles, there will be no re-test function for any awards, instead each target has a one-off ‘cliff vesting’.

Relationship between policy and pryme’s performance

The Board believes that remuneration arrangements for employees should incorporate an “at-risk” component which is performance related and rewards employees for the achievement of goals which contribute to shareholder wealth. Such arrangements should both incentivise and reward employees for out-performance.

The Pryme Energy Long Term Incentive Plan (Plan), is designed to put a portion of executive remuneration “at-risk” and provide reasonable levels of incentives to key executives to encourage and reward performance that adds value to the Company for all Shareholders.

Specifically, the value to Shareholders will be readily measurable only if targets that align to Pyrme’s strategy are met. Under the Plan, there are two hurdles which test Pryme’s relative production growth and the attainment of a total shareholder return comparable with the energy sector (Performance Conditions). The Board considers it appropriate to have a dual test since:

• growth in production (represented by growth in annual sales per year of oil and gas) rewards achievement against Board approved targets/plan, converting opportunity into a revenue stream for the Company. The target is within management’s influence, thereby focusing executives on Pryme’s key business drivers; while

• growth in total shareholder return (TSR) component provides an additional challenging test (where reward is only delivered for strengthening Pryme’s position comparable to the S&P/ASX ASX 200 Energy Index) which has the benefit of transparency and is directly related to the return to shareholders through ownership of Pryme shares relative to the returns from the S&P/ASX ASX 200 Energy Index.

The Board believes that the dual tests, if achieved, will demonstrably aid the creation of shareholder value.

Pryme’s exploration, evaluation and development activities are expected to deliver results over an extended period of time and the Company’s remuneration policy provides for incentives related to the successful execution of these activities. As a result, the relationship between the Company’s remuneration policy and the Company’s short term performance will not be immediately apparent on a year-to-year basis. This is the case in relation to earnings as the Company does not expect to record significant profit growth until additional revenues are derived from the increased oil and gas production which is expected to result from the current development programs.

The Company’s performance during the year ended 31 December 2011 was primarily focussed on exploration and development of the Turner Bayou project. Production from the wells drilled during 2011 is expected to generate additional revenues in future periods and information obtained throughout the exploration, evaluation and drilling processes will contribute to the future development of this project.

Anti-Hedging policy

Pryme personnel are not permitted to enter into transactions with securities (or any derivative thereof) which limit the economic risk of any unvested entitlements awarded under a Pryme equity-based remuneration scheme.

As part of Pryme’s due diligence undertaken at the time of half-year and full-year results, Pryme equity plan participants are required to confirm that they have not entered into any such prohibited transactions.

Continuous Improvement

Pryme will continually review all elements of its remuneration philosophy to ensure that they are appropriate from the perspectives of governance, disclosure, reward and market conditions.

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directors’ Report

ReMUNeRAtIoN SUMMARY

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proportion of
poSt eQUItY BASeD Remuneration
SHoRt teRM totAL
eMpLoYMeNt pAYMeNtS [1] performance
Related
ReLAteD
CASH,
pARtY SUpeR-
SALARY & optIoNS RIGHtS
CoNSULtING ANNUAtIoN
FeeS
FeeS
$ $ $ $ $ $ %
NoN-eXeCUtIVe
DIReCtoRS
George Lloyd 2011 - 142,090 - - - 142,090 -
2010 - 130,000 - - - 130,000 -
Greg Short 2011 60,165 - 5,415 9,978 - 75,558 -
2010 52,425 - 4,718 3,522 - 60,665 -
eXeCUtIVeS
Justin Pettett 2011 329,808 - 15,192 - 19,802 364,802 5
2010 165,132 132,000 14,863 - 24,342 336,337 7
Ryan Messer 2011 132,080 101,742 - - 19,802 253,624 8
2010 138,300 101,442 - - 24,342 264,084 9
Sandra Gaffney 2011 151,376 - 13,624 - 3,408 168,408 2
2010 140,400 [2] - 12,636 - 4,686 157,722 3
2011 673,429 243,832 34,231 9,978 43,012 1,004,482
totAL
2010 496,257 363,442 32,217 3,522 53,370 948,808
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1 Total Directors‘ remuneration of $836,074 (2010: $791,086) includes $786,492 (2010: $738,880) which was paid in cash or cash equivalents and an amount of $39,604 (2010: $52,206) which is attributable to the expensing of rights granted pursuant to the Pryme Energy Long Term Incentive Plan in accordance with Australian Accounting Standard AASB2 – Share-based payments. AASB2 requires securities to be expensed over the performance period of the security, from the date of the grant and despite the fact that the vesting conditions related to continuity of tenure are yet to be attained.

• 2 Includes a short term incentive bonus of $nil (2010: $11,336) paid as part of compensation

optIoNS AND RIGHtS AS ReMUNeRAtIoN

During the year ended 31 December 2011, no performance rights (RSUs for US residents which have similar value characteristics) were awarded as remuneration under the Pryme Energy Long Term Incentive Plan (“LTIP”) due to the qualifying criteria not being satisfied. Details of performance rights (RSUs) provided as remuneration in the comparative prior year are as follows:

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Date of Number Rights Rights Number Vesting Fair Value Market
Grant of Rights granted vested in of Rights Date per Right Value per
held at 1 in current current held at 31 at Grant Right at
January financial financial December Date Vesting
2011 2011 year year 2011 Date
Justin pettett 31 Dec 09 257,968 - 257,968 - 1 Jan 2011 $0.059 $0.07
31 Dec 09 257,968 - - 257,968 1 Jan 2012 $0.059 n/a
31 Dec 10 436,893 - - 436,893 1 Jan 2012 $0.034 n/a
31 Dec 10 436,893 - - 436,893 1 Jan 2013 $0.034 n/a
total 1,389,722 257,968 1,131,754
Ryan Messer 31 Dec 09 257,968 - 257,968 - 1 Jan 2011 $0.059 $0.07
31 Dec 09 257,968 - - 257,968 1 Jan 2012 $0.059 n/a
31 Dec 10 436,893 - - 436,893 1 Jan 2012 $0.034 n/a
31 Dec 10 436,893 - - 436,893 1 Jan 2013 $0.034 n/a
total 1,389,722 257,968 1,131,754
Sandra Gaffney 31 Dec 09 37,492 - 37,492 - 1 Jan 2011 $0.059 $0.07
31 Dec 09 37,491 - - 37,491 1 Jan 2012 $0.059 n/a
31 Dec 10 91,715 - - 91,715 1 Jan 2012 $0.034 n/a
31 Dec 10 91,715 - - 91,715 1 Jan 2013 $0.034 n/a
total 258,413 - 37,492 220,921
Date of Number Rights Rights Number Date Rights Fair Value Market
Grant of Rights granted vested in of Rights vest per Right Value per
held at 1 in current current held at 31 at Grant Right at
January financial financial December Date Vesting
2010 2010 year year 2010 Date
Justin pettett 31 Dec 09 257,968 - - 257,968 1 Jan 2011 $0.059 n/a
31 Dec 09 257,968 - - 257,968 1 Jan 2012 $0.059 n/a
31 Dec 10 - 436,893 - 436,893 1 Jan 2012 $0.034 n/a
31 Dec 10 - 436,893 - 436,893 1 Jan 2013 $0.034 n/a
total 515,936 873,786 - 1,389,722
Ryan Messer 31 Dec 09 257,968 - - 257,968 1 Jan 2011 $0.059 n/a
31 Dec 09 257,968 - - 257,968 1 Jan 2012 $0.059 n/a
31 Dec 10 - 436,893 - 436,893 1 Jan 2012 $0.034 n/a
31 Dec 10 - 436,893 - 436,893 1 Jan 2013 $0.034 n/a
total 515,936 873,786 - 1,389,722
Sandra Gaffney 31 Dec 09 37,492 - - 37,492 1 Jan 2011 $0.059 n/a
31 Dec 09 37,491 - - 37,491 1 Jan 2012 $0.059 n/a
31 Dec 10 - 91,715 - 91,715 1 Jan 2012 $0.034 n/a
31 Dec 10 - 91,715 - 91,715 1 Jan 2013 $0.034 n/a
total 74,983 183,430 - 258,413
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estimated Value Range of Awards

The maximum possible value of awards yet to vest to be disclosed under the Australian Corporations Act 2001 is not determinable as it is dependent on, and therefore fluctuates with, the share price of Pryme Energy Limited at a date that any award is exercised. An estimate of a maximum possible value of awards can be made using the highest share price during FY2011, which was $0.27 (FY 2010: $0.20) multiplied by the number of shares awarded for the scheme.

During the reporting period 553,428 performance rights and restricted stock units shown above vested on 1 January 2011 and converted to ordinary shares on a one-for-one basis on 4 January 2011.

As announced on 3 January 2012, 1,518,928 performance rights and restricted stock units shown above vested on 1 January 2012 and converted to ordinary shares on a one-for-one basis on 3 January 2012.

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Sandra Gaffney –Chief Financial offcer	On-going	termination by pryme: • For cause - 1 month’s notice or salary in lieu (if convicted of any indictable criminal offence, termination shall be immediate, with no payment other than salary accrued up to date of termination). • For convenience - 3 months’ written notice • For redundancy – 3 months written notice + 1 months’ salary for each completed year of service. termination by the employee: • For convenience - 3 months’ written notice. • Immediately, with payment of annual and long service leave and 6 months’ salary,if Pryme commits a serious or persistent breach of the Agreement Annual Leave payment: On termination, the employee is entitled to payment in lieu of the accrued annual leave owing to her. Conditions to payments No payment is to be made where such payment is contrary to the Corporations Act 2001 or Listing Rules of the Australian Securities Exchange (as applicable).
Ryan Messer – Chief operating offcer (Coo)	On-going	termination by pryme • For cause - 1 months’ notice or salary in lieu (if convicted of any indictable criminal offence, termination shall be immediate). • For illness, injury or insanity - 9 months’ notice or salary in lieu. • For convenience - 12 months’ notice paid in lieu. • For redundancy - 12 months’ notice + 1 months’ salary for each completed year of service. termination by the Coo: • For convenience - 3 months’ written notice. • Immediately, with payment of annual and long service leave and 6 months’ salary, if Pryme commits a serious or persistent breach of the Agreement. Annual Leave payment: On termination, the COO is entitled to payment in lieu of the annual leave owing to him. Conditions to payments No payment is to be made where such payment is contrary to the Corporations Act 2001 or Listing Rules of the Australian Securities Exchange (as applicable).
Justin pettett – Chief executive offcer (Ceo) and Managing Director (MD)	On-going	termination as per Ceo Agreement: By pryme • For cause - 1 months’ notice or salary in lieu (if convicted of any indictable criminal offence, termination shall be immediate). • For illness, injury or insanity - 9 months’ notice or salary in lieu. • For convenience - 12 months’ notice paid in lieu. • For redundancy - 12 months’ notice + 1 months’ salary for each completed year of service. By the Ceo For convenience - 3 months’ written notice. Immediately, with payment of annual and long service leave and 6 months’ salary, if Pryme commits a serious or persistent breach of the Agreement. termination as per the MD Appointment Letter: • Notice for termination as Director paid in lieu of notice in proportion to notice paid under the Agreement on termination as Chief Executive Offcer. • No redundancy payment as Managing Director. Annual Leave payment: On termination, the CEO is entitled to payment in lieu of the annual leave owing to him. Conditions to payments No payment is to be made where such payment is contrary to the Corporations Act 2001 or Listing Rules of the Australian Securities Exchange (as applicable).
Contract Details	term	termination notice period and payments

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directors’ Report

13. Indemnification and Insurance of officers and Auditors

Directors, executives and the company secretaries are indemnified by Pryme against any liability incurred in their capacity as an officer of Pryme or a related body corporate to the maximum extent permitted by law. Pryme has not paid any premiums in respect of any contract insuring the directors of Pryme against a liability for legal costs.

Ryan Messer, in his capacity as an employee and director of Pryme Oil and Gas Inc, is indemnified in circumstances where he is called on to provide a personal guarantee of commitments by the Company provided that the commitment of the Company or Subsidiary was incurred with the written approval of Pryme.

Pryme has not paid any premiums in respect of any contract insuring its auditor against a liability incurred in that role as an auditor of Pryme. In respect of non-audit services, both PricewaterhouseCoopers and Moore Stephens, have the benefit of an indemnity to the extent they reasonably rely on information provided by Pryme which is false, misleading or incomplete. No amount has been paid under this indemnity during the financial year ending 31 December 2011 or to the date of this Report.

14. Non-Audit Services

Details of the amounts paid to the auditor of Pryme for audit and non-audit services provided during the year are set out in Note 6 to the financial statements. The directors are satisfied that:

• (a) the non-audit services provided during the financial year by both PricewaterhouseCoopers and Moore Stephens as the external auditor were compatible with the general standard of independence for auditors imposed by the Corporations Act; and

• (b) any non-audit services provided during the financial year by both PricewaterhouseCoopers and Moore Stephens as the external auditor did not compromise the auditor independence requirements of the Corporations Act for the following reasons:

• i. PricewaterhouseCoopers and Moore Stephens’ services have not involved partners or staff acting in a managerial or decision making capacity within Pryme or in the processing or originating of transactions; and

• ii. the nature of the services provided do not compromise the general principles relating to auditor independence in accordance with APES 110: Code of Ethics for Professional Accountants set by the Accounting Professional and Ethical Standards Board.

The auditor’s independence declaration under section 307C of the Corporations Act set out in the Annual Report forms a part of the Annual Financial Report for the year ended 31 December 2011.

15. proceedings on behalf of the Consolidated Group

During the year under review and in the interval between the end of the financial year and the date of the report, the Consolidated Group has made no application for leave under section 237 of the Corporations Act.

16. Corporate Governance

The directors aspire to maintain the highest possible standards of Corporate Governance. Pryme’s Corporate Governance Statement is contained in the Annual Report.

This report is signed in accordance with a resolution of the directors.

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Justin pettett Managing Director Brisbane, Queensland 29 February 2012

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Auditor’s independence declaration

Auditor’s Independence Declaration

As lead auditor for the audit o f Pryme Energy Limited for the year ended 31 D e cember 2011, I declare that to the best of my k nowledge and belief, there have been: a) no contraventions of the a uditor independence requirements of the Corpo r ations Act 2001 in relation to the audit; and b) no contraventions of any a pplicable code of professional conduct in relation to the audit. This declaration is in respect of Pryme Energy Limited and the entities it controlled during the period. Robert Hubbard Brisbane Partner 29 February 2012 PricewaterhouseCoopers

PricewaterhouseCoopers, ABN 52 780 433 757 Riverside Centre, 123 E agle Street, GPO BOX 150, BRISBANE QLD 4001 DX 77 Brisbane, Australia T +61 7 3257 5000, F +61 7 3257 5999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation

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Financials

CoNSoLIDAteD StAteMeNt oF CoMpReHeNSIVe INCoMe FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

Note Revenue 3 Production Costs Gross Proft Accounting and Audit Fees Depreciation and amortisation expenses and write offs 3 Directors Remuneration 5 Directors Remuneration – Share/Option Plan 5 Professional Consulting Fees 5 Employee Benefts Expense Travel and Accommodation Expenses Other expenses Gain/(Loss) on Sale of Assets Finance Expenses Share of net loss of associates Loss before income tax Income tax expense 4 Loss from continuing operations Loss for the year from discontinued operations after tax Loss for the year other Comprehensive Income Net gain/(loss) foreign currency translation reserve Income tax related to comprehensive income total Comprehensive Loss for the year (Loss) / proft attributable to members of the parent entity Total Comprehensive Loss attributable to members of the parent entity Basic earnings per share (cents per share) 7 Diluted earnings per share (cents per share) 7 From continuing operations Basic earnings per share (cents per share) 7 Diluted earnings per share (cents per share) 7 From discontinued operations Basic earnings per share (cents per share) 7 Diluted earnings per share (cents per share) 7	Consolidated Group 2011 2010 4,335,801 3,224,274 (1,080,502) (934,963)	Consolidated Group 2011 2010 4,335,801 3,224,274 (1,080,502) (934,963)
	3,255,299	2,289,311
	(148,304) (3,169,949) (542,660) (49,581) (504,661) (390,774) (258,839) (502,470) 1,301 (348,453) -	(154,113) (2,597,016) (375,438) (52,207) (580,055) (688,168) (247,198) (504,089) (291,244) - (733)
	(2,659,091) -	(3,200,950) -
	(2,659,091)	(3,200,950)
	-	36,350
	(2,659,091)	(3,164,600)
	89,247 -	(3,215,567) -
	(2,569,844)	(6,380,167)
	(2,569,844) (2,569,844) (1.1) (1.1) (1.1) (1.1) - -	(6,380,167) (6,380,167) (1.7) (1.7) (1.7) (1.7) - -

the above statement should be read in conjunction with the accompanying notes.

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Financials (cont.)

CoNSoLIDAteD StAteMeNt oF FINANCIAL poSItIoN AS At 31 DeCeMBeR 2011

	Note	Consolidated Group	Consolidated Group
		2011	2010
ASSetS
CURReNt ASSetS
Cash and cash equivalents	8	5,232,537	2,562,063
Trade and other receivables	9	612,953	617,347
Other current assets		56,968	73,578
totAL CURReNt ASSetS		5,902,458	3,252,988
NoN-CURReNt ASSetS
Investments accounted for using the equity method	10	-	5,075,331
Property, plant and equipment	13	589,932	722,330
Land		24,572	24,596
Working Interest	14	24,153,470	15,023,954
totAL NoN-CURReNt ASSetS		24,767,974	20,846,211
totAL ASSetS		30,670,432	24,099,199
CURReNt LIABILItIeS
Trade and other payables	15	1,464,075	630,318
Borrowings	16	4,345,705	-
totAL CURReNt LIABILItIeS		5,809,780	630,318
NoN-CURReNt LIABILItIeS
Provisions		137,552	94,655
totAL NoN-CURReNt LIABILItIeS		137,552	94,655
totAL LIABILItIeS		5,947,332	724,973
Net ASSetS		24,723,100	23,374,226
eQUItY
Issued capital	17	43,817,369	39,918,989
Reserves		(5,332,066)	(5,441,651)
Accumulated losses		(13,762,203)	(11,103,112)
totAL eQUItY		24,723,100	23,374,226

the above statement should be read in conjunction with the accompanying notes.

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Financials (cont.)

CoNSoLIDAteD StAteMeNt oF CHANGeS IN eQUItY FoR YeAR eNDeD 31 DeCeMBeR 2011

Note Consolidated Group Balance at 1 January 2010 total Comprehensive for the year transactions with owners in the capacity as owners: Shares issued during the year Rights issued during the year Share capital raising cost Long Term Incentive Plan rights issued during the year Options issued during the year Balance at 31 December 2010 total Comprehensive Loss for the year transactions with owners in the capacity as owners: Shares issued during the year Share capital raising cost Long Term Incentive Plan Rights issued during the year Transfer from options reserve to share capital Balance at 31 December 2011	ordinary Share Capital Accumulated Losses Foreign Currency translation Reserve options Reserve total 36,399,647 (7,938,512) (2,305,516) 22,539 26,178,158 - (3,164,600) (3,215,567) - (6,380,167) 1,700,000 - - - 1,700,000 2,000,513 - - - 2,000,513 (181,171) - - - (181,171) - - - 53,371 53,371 - - - 3,522 3,522
	39,918,989 (11,103,112) (5,521,083) 79,432 23,374,226
	- (2,659,091) 89,247 - (2,569,844) 4,028,771 - - - 4,028,771 (163,043) - - - (163,043) - - - 52,990 52,990 32,652 - - (32,652) -
	43,817,369 (13,762,203) (5,431,836) 99,770 24,723,100

the above statement should be read in conjunction with the accompanying notes.

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Financials (cont.)

CoNSoLIDAteD StAteMeNt oF CASH FLoWS FoR YeAR eNDeD 31 DeCeMBeR 2011

Note CASH FLoWS FRoM opeRAtING ACtIVItIeS Receipts from customers Interest received Payments to suppliers and employees Net cash provided by (used in) operating activities 22(a) CASH FLoWS FRoM INVeStING ACtIVItIeS Proceeds from sale of property, plant and equipment Purchase of property, plant and equipment Payment for working interest Loans repaid by other entities Net cash provided by (used in) investing activities CASH FLoWS FRoM FINANCING ACtIVItIeS Proceeds from issue of shares (net of capital raising costs) Proceeds from borrowings Net cash provided by (used in) fnancing activities Net increase (decrease) in cash held Cash at beginning of fnancial year Effect of exchange rate movement Cash at end of fnancial year 8	Consolidated Group 2011 2010 4,026,932 2,415,666 131,603 195,097 (3,115,571) (2,873,041)
	1,042,964 (262,278)
	62,905 - (36,776) (431,454) (6,263,797) (6,775,887) - 1,070,871
	(6,237,668) (6,136,470)
	3,865,728 3,519,342 4,000,000 -
	7,865,728 3,519,342
	2,671,024 (2,879,406) 2,562,063 5,454,607 (550) (13,138)
	5,232,537 2,562,063

the above statement should be read in conjunction with the accompanying notes.

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Financials (cont.)

NoteS to tHe FINANCIAL StAteMeNtS FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

Note 1 StAteMeNt oF SIGNIFICANt ACCoUNtING poLICIeS

The financial report is a general purpose financial report that has been prepared in accordance with Australian Accounting Standards, Australian Accounting Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board (“AASB”), Urgent Issues Group Interpretations and the Corporations Act 2001.

This financial report covers the consolidated financial statements and notes of Pryme Energy Limited and controlled entities (‘the Company’, ‘Consolidated Group’ or ‘Group’). Pryme Energy Limited is a listed public company, incorporated and domiciled in Australia.

Australian Accounting Standards set out accounting policies that the AASB has concluded would result in a financial report containing relevant and reliable information about transactions, events and conditions to which they apply. The financial statements and notes also comply with International Financial Reporting Standards.

Material accounting policies adopted in the preparation of this financial report are presented below. They have been consistently applied unless otherwise stated.

Consistent with other oil and gas exploration companies, Pryme raises capital to fund its exploration activities as required. Accordingly, the financial report has been prepared on a going concern basis in the belief that the Company will realise its assets and settle its liabilities in the normal course of business and for at least the amounts stated in the financial report.

The ability of the Company to continue as a going concern and meets it’s debts and commitments as they fall due is dependent upon the Company securing sufficient capital which may be in the form of (or some combination of) the following:

• Entering in to arrangements to farm out or sell existing projects/assets;

• Negotiating an extension of existing convertible note facilities;

• Establishment of new debt funding; and/or

Raising equity from new/existing shareholders

The directors believe that the Company will be successful in securing sufficient capital and, accordingly, have prepared the report on a going concern basis. At this time, the directors are of the opinion that no asset is likely to be realised for an amount less than the amount at which it is recorded in the financial report as at 31 December 2011. Accordingly, no adjustments have been made to the financial report relating to the recoverability and classification of the asset carrying amounts or the amounts and classification of liabilities that might be necessary should the Company not continue as a going concern.

Basis of preparation

The financial report has been prepared on an accruals basis and is based on historical costs, modified, where applicable, by the measurement at fair value of selected non-current assets, financial assets and financial liabilities.

Accounting policies

(a) principles of Consolidation

A controlled entity is any entity over which Pryme Energy Limited has the power to govern the financial and operating policies so as to obtain benefits from its activities. Where controlled entities have entered or left the Group during the year, the financial performance of those entities are included only for the period of the year that they were controlled. A list of controlled entities is contained in Note 11 to the financial statements.

All inter-group balances and transactions between entities in the consolidated group, including any unrealised profits or losses, have been eliminated on consolidation. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with those adopted by the parent entity.

Jointly Controlled entities

A jointly controlled entity is a corporation, partnership or other entity in which each participant holds an interest. A jointly controlled entity operates in the same way as other entities, controlling the assets of the joint venture, earning its own income and incurring its own liabilities and expenses. Interests in jointly controlled entities are accounted for using the proportional consolidation method whereby the Group’s proportionate interest in the assets, liabilities, revenues and expenses of jointly controlled entities are recognised within each applicable line item of the financial statements.

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Financials (cont.)

NoteS to tHe FINANCIAL StAteMeNtS FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

The share of jointly controlled entities’ results is recognised in the Group’s financial statements from the date that joint control commences until the date at which it ceases.

(b) Income tax

The income tax expense (revenue) for the year comprises current income tax expense (income) and deferred tax expense (income).

Current income tax expense charged to the profit or loss is the tax payable on taxable income calculated using applicable income tax rates enacted, or substantially enacted, as at reporting date. Current tax liabilities (assets) are therefore measured at the amounts expected to be paid to (recovered from) the relevant taxation authority.

Deferred income tax expense reflects movements in deferred tax asset and deferred tax liability balances during the year as well unused tax losses.

Current and deferred income tax expense (income) is charged or credited directly to equity instead of the profit or loss when the tax relates to items that are credited or charged directly to equity.

Deferred tax assets and liabilities are ascertained based on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax assets also result where amounts have been fully expensed but future tax deductions are available. No deferred income tax will be recognised from the initial recognition of an asset or liability, excluding a business combination, where there is no effect on accounting or taxable profit or loss.

Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates enacted or substantively enacted at reporting date. Their measurement also reflects the manner in which management expects to recover or settle the carrying amount of the related asset or liability.

Deferred tax assets relating to temporary differences and unused tax losses are recognised only to the extent that it is probable that future taxable profit will be available against which the benefits of the deferred tax asset can be utilised.

Current tax assets and liabilities are offset where a legally enforceable right of offset exists and it is intended net settlement or simultaneous realisation and settlement of the respective asset and liability will occur. Deferred tax assets and liabilities are offset where a legally enforceable right of setoff exists, the deferred tax assets and liabilities related to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liabilities will occur in future periods in which significant amounts of deferred tax assets or liabilities are expected to be recovered or settled.

(c) property, plant and equipment

Each class of property, plant and equipment is carried at cost as indicated less, where applicable, any accumulated depreciation and impairment losses.

plant and equipment

Plant and equipment are measured on the cost basis. The carrying amount of plant and equipment is reviewed annually by directors to ensure it is not in excess of the recoverable amount from these assets. The recoverable amount is assessed on the basis of the expected net cash flows that will be received from the asset’s employment and subsequent disposal. The expected net cash flows have been discounted to their present values in determining recoverable amounts.

Depreciation

The depreciable amount of all fixed assets including buildings and capitalised lease assets, but excluding freehold land, is depreciated on a straight-line basis over the asset’s useful life to the consolidated group commencing from the time the asset is held ready for use. Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements.

The depreciation rates used for each class of depreciable assets are:

depreciable assets are:
Class of Fixed Asset	Depreciation Rate
Offce Equipment	25%
Drilling Rig Equipment	10%
Other Drilling Equipment	20%

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Financials (cont.)

NoteS to tHe FINANCIAL StAteMeNtS FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These gains and losses are included in the income statement. When revalued assets are sold, amounts included in the revaluation reserve relating to that asset are transferred to retained earnings.

(d) exploration and Development expenditure

Exploration, evaluation and development expenditure incurred is accumulated in respect of each identifiable area of interest. These costs are only carried forward to the extent that they are expected to be recouped through the successful development of the area or where activities in the area have not yet reached a stage that permits reasonable assessment of the existence of economically recoverable reserves.

Accumulated costs in relation to an abandoned area are written off in full against profit in the year in which the decision to abandon the area is made.

Each area of interest is limited to a size related to a known or probable petroleum resource. Currently the Group operates in multiple areas of interest in the State of Louisiana and is generally defined by lease boundaries.

When production commences, the accumulated costs for the relevant area of interest are amortised over the life of the area according to the rate of depletion of the economically recoverable reserves.

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.

Costs of site restoration are provided over the life of the facility from when exploration commences and are included in the costs of that stage. Site restoration costs include the dismantling and removal of mining equipment and facilities, waste removal, and rehabilitation of the site in accordance with clauses of the petroleum permits. Such costs

have been determined using estimates of future costs, current legal requirements and technology on an undiscounted basis.

Any changes in the estimates for the costs are accounted on a prospective basis. In determining the costs of site restoration, there is uncertainty regarding the nature and extent of the restoration due to community expectations and future legislation. Accordingly the costs have been determined on the basis that the restoration will be completed within one year of abandoning the site.

(e) Leases

Leases of fixed assets where substantially all the risks and benefits incidental to the ownership of the asset, but not the legal ownership that is transferred to entities in the consolidated group, are classified as finance leases.

Finance leases are capitalised by recording an asset and a liability at the lower of the amounts equal to the fair value of the leased property or the present value of the minimum lease payments, including any guaranteed residual values. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period.

Leased assets are depreciated on a straight-line basis over the shorter of their estimated useful lives or the lease term.

Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are charged as expenses on a straight line basis over the period of the lease.

Lease incentives under operating leases are recognised as a liability and amortised on a straightline basis over the life of the lease term.

(f)

Financial Instruments

Recognition and Initial Measurement

Financial instruments, incorporating financial assets and financial liabilities, are recognised when the entity becomes a party to the contractual provisions of the instrument. Trade date accounting is adopted for financial assets that are delivered within timeframes established by marketplace convention.

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Financials (cont.)

NoteS to tHe FINANCIAL StAteMeNtS FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

Financial instruments are initially measured at fair value plus transactions costs where the instrument is not classified as at fair value through profit or loss. Transaction costs related to instruments classified as at fair value through profit or loss are expensed to profit or loss immediately. Financial instruments are classified and measured as set out below.

Derecognition

Financial assets are derecognised where the contractual rights to receipt of cash flows expires or the asset is transferred to another party whereby the entity is no longer has any significant continuing involvement in the risks and benefits associated with the asset. Financial liabilities are derecognised where the related obligations are either discharged, cancelled or expire. The difference between the carrying value of the financial liability extinguished or transferred to another party and the fair value of consideration paid, including the transfer of noncash assets or liabilities assumed, is recognised in profit or loss.

Classification and Subsequent Measurement

• i. Financial assets at fair value through profit or loss

Financial assets are classified at fair value through profit or loss when they are held for trading for the purpose of short term profit taking, where they are derivatives not held for hedging purposes, or designated as such to avoid an accounting mismatch or to enable performance evaluation where a group of financial assets is managed by key management personnel on a fair value basis in accordance with a documented risk management or investment strategy. Realised and unrealised gains and losses arising from changes in fair value are included in profit or loss in the period in which they arise.

iii. Held-to-maturity investments

Held-to-maturity investments are non-derivative financial assets that have fixed maturities and fixed or determinable payments, and it is the group’s intention to hold these investments to maturity. They are subsequently measured at amortised cost using the effective interest rate method.

• iv. Available-for-sale financial assets

Available-for-sale financial assets are nonderivative financial assets that are either designated as such or that are not classified in any of the other categories. They comprise investments in the equity of other entities where there is neither a fixed maturity nor fixed or determinable payments. Available for sale financial assets and financial assets at fair value through profit and loss are subsequently carried at fair value. Gains or losses arising from changes in the fair value of the financial assets at fair value through profit and loss category are presented in profit or loss within other income or other expenses in the period in which they arise.

v. Financial Liabilities

Non-derivative financial liabilities (excluding financial guarantees) are subsequently measured at amortised cost using the effective interest rate method.

Fair value

Fair value is determined based on current bid prices for all quoted investments. Valuation techniques are applied to determine the fair value for all unlisted securities, including recent arm’s length transactions, reference to similar instruments and option pricing models.

Impairment

ii. Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are subsequently measured at amortised cost using the effective interest rate method.

At each reporting date, the group assesses whether there is objective evidence that a financial instrument has been impaired. In the case of available-for-sale financial instruments, a prolonged decline in the value of the instrument is considered to determine whether an impairment has arisen. Impairment losses are recognised in the income statement.

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Financials (cont.)

NoteS to tHe FINANCIAL StAteMeNtS FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

(g) Impairment of Assets

At each reporting date, the group 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 income statement.

Impairment testing is performed annually for goodwill and intangible assets with indefinite lives.

Where it is not possible to estimate the recoverable amount of an individual asset, the group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

(h) Investments in Associates

Investments in associate companies are recognised in the financial statements by applying the equity method of accounting. The equity method of accounting recognised the group’s share of postacquisition reserves of its associates.

(i) Foreign Currency transactions and Balances

Functional and presentation currency

The functional currency of each of the group’s entities is measured using the currency of the primary economic environment in which that entity operates. The consolidated financial statements are presented in Australian dollars which is the parent entity’s functional and presentation currency.

Transaction and balances

Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction. Foreign currency monetary items are translated at the yearend exchange rate. Non-monetary items measured at historical cost continue to be carried at the exchange rate at the date of the transaction. Nonmonetary items measured at fair value are reported at the exchange rate at the date when fair values were determined.

Exchange differences arising on the translation of monetary items are recognised in the income statement, except where deferred in equity as a qualifying cash flow or net investment hedge.

Exchange differences arising on the translation of non-monetary items are recognised directly in equity to the extent that the gain or loss is directly recognised in equity, otherwise the exchange difference is recognised in the income statement.

Group companies

The financial results and position of foreign operations whose functional currency is different from the group’s presentation currency are translated as follows:

• assets and liabilities are translated at yearend exchange rates prevailing at that reporting date;

• income and expenses are translated at average exchange rates for the period; and

• retained earnings are translated at the exchange rates prevailing at the date of the transaction.

Exchange differences arising on translation of foreign operations are shown in the Statement of Comprehensive Income and disclosed in the group’s foreign currency translation reserve in the Statement of Financial Position.

(j) employee Benefits

Employee benefits payable later than one year have been measured at the present value of the estimated future cash outflows to be made for those benefits.

Equity-settled compensation

The group operates equity-settled share-based payment employee share and option schemes. The fair value of the equity to which employees become entitled is measured at grant date and recognised as an expense over the vesting period, with a corresponding increase to an equity account. The fair value of shares is ascertained as the market bid price. The fair value of options is ascertained using a Black–Scholes pricing model which incorporates all market vesting conditions. The number of shares and options expected to vest is reviewed and adjusted at each reporting date such that the amount recognised for services received as consideration for the equity instruments granted shall be based on the number of equity instruments that eventually vest.

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NoteS to tHe FINANCIAL StAteMeNtS FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

(k) Borrowings

Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in profit or loss over the period of the borrowings using the effective interest method.

The fair value of the liability portion of a convertible note is determined using a market interest rate for an equivalent non-convertible note. This amount is recorded as a liability on an amortised cost basis until extinguished on conversion or maturity of the notes. The remainder of the proceeds is allocated to the conversion option. This is recognised and included in shareholders’ equity, net of income tax effects.

(l)

provisions

Provisions are recognised when the group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result and that outflow can be reliably measured.

as part of the cost of acquisition of the asset or as part of an item of the expense.

Receivables and payables in the balance sheet are shown inclusive of GST.

Cash flows are presented in the cash flow statement on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows.

(p) Comparative Figures

When required by Accounting Standards, comparative figures have been adjusted to conform to changes in presentation for the current financial year.

(q) epS

i. Basic earnings per share

Basic earnings per share is determined by dividing the profit 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 year, adjusted for bonus elements in ordinary shares issued during the year.

(m) Cash and Cash equivalents

• ii. Diluted earnings per share

Cash and cash equivalents include cash on hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within short-term borrowings in current liabilities on the balance sheet.

(n) Revenue and other Income

The group uses the sales method to account for sales of crude oil and natural gas revenues. Under this method, revenues are recognised based on volumes of oil and gas sold to purchasers.

Interest revenue is recognised on a proportional basis taking into account the interest rates applicable to the financial assets.

All revenue is stated net of the amount of goods and services tax (GST).

(o) Goods and Services tax (GSt)

Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Tax Office. In these circumstances the GST is recognised

Diluted earnings per share adjusts the amounts used in determination of basic earnings per share to take in to 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.

(r) Segment Reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker who is responsible for allocating resources and assessing performance of the operating segments has been identified as the Board of Directors.

Segment revenues and expenses are those directly attributable to the segments. Segment assets include all assets used by a segment and consist principally of cash, receivables, intangibles and property, plant and equipment, net of allowances and accumulated depreciation and amortisation. While most such assets can be directly attributed to individual

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segments, the carrying amount of certain assets used jointly by two or more segments is allocated to the segments on a reasonable basis. Segment liabilities consist principally of payables, employee benefits and accrued expenses. Segment assets and liabilities do not include deferred income taxes.

(s) trade Receivables

All trade and other debtors are recognised at fair value. Collectability is reviewed on an ongoing basis. A provision for doubtful debts is made where there is objective evidence that the Company will not be able to collect all amounts due according to the original terms. The amount of the provision is the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the effective interest rate. The amount of any provision is recognised in the income statement. Trade receivables are due for settlement no more than 30-60 days from the date of recognition.

(t) trade payables

These amounts represent liabilities for goods and services provided to the entity prior to the end of the financial year and which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition.

(u) Contributed equity

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable to the issue of new shares or options for the acquisition of a business are not included in the cost of acquisition as part of the purchase consideration.

Critical Accounting estimates and Judgments

The directors evaluate estimates and judgments incorporated into the financial report based on historical knowledge and best available current information. Estimates assume a reasonable expectation of future events and are based on current trends and economic data, obtained both externally and within the group.

Impairment

The group assesses impairment at each reporting date by evaluating conditions specific to the group that may lead to impairment of assets. Where an impairment trigger exists, the recoverable amount of the asset is

determined. Value-in-use calculations performed in assessing recoverable amounts incorporate a number of key estimates.

Exploration expenditure for each area of interest is carried forward as an asset based on the provisions in AASB 6 Exploration for and Evaluation of Mineral Resources. Exploration expenditure which fails to meet at least one of the conditions outlined in AASB 6 is written off. Expenditure is not carried forward in respect of any area of interest unless the Company’s rights of tenure to that area of interest are current. The ultimate recoupment of exploration and evaluation expenditure is dependent on successful development and commercial exploitation, or alternatively, sale of the respective area.

Provision for Impairment of Receivables

During the year the provision for doubtful debts previously raised was adjusted only by an amount received from the joint venture partner that had entered bankruptcy in the United States in the prior financial year.

Restoration Obligations

The Company estimates the future removal costs of production facilities and wells at the time of installation of the assets. In most instances, restoration occurs many years in to the future. This requires assumptions regarding removal date, future environmental legislation, methodology for estimating costs and specific discount rates to determine the present value of these cash flows.

Reserves Estimates

Estimates of proven and probable oil and gas reserves require interpretation of complex and difficult geological and geophysical models in order to make an assessment of the size, shape, depth and quality of reservoirs and their anticipated recoveries. The economic, geological and technical factors used to estimate reserves may change from period to period. Changes in reserves can impact asset carrying values, provisions for restoration and the recognition of any deferred tax assets due to changes in expected future cash flows. Reserve estimates are prepared based on standard definitions set out by the Society of Petroleum Engineers, Petroleum Resources Management System, 2007 for all reserves classifications by an independent and appropriately qualified reserve engineer.

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NoteS to tHe FINANCIAL StAteMeNtS FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

Note 2 NeW ACCoUNtING StANDARDS AND INteRpRetAtIoNS

Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2011 reporting period. The Group’s assessment of the impact of these new standards and interpretations is set out below.

AASB 9 Financial Instruments, AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 and AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) (effective for annual reporting periods beginning on or after 1 January 2013]

AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities. The standard is not applicable until 1 January 2013 but is available for early adoption. When adopted, the standard will have no impact on the Group’s accounting for financial assets as Group only has debt assets.

There will be no impact on the group’s accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated as fair value through profit or loss and the group does not have any such liabilities. The derecognition rules have been transferred from AASB 139 Financial Instruments: Recognition and Measuremen and have not been changed. The group has not yet decided when to adopt AASB 9.

AASB 1053 Application of tiers of Australian Accounting Standards and AASB 2010-2 Amendments to Australian Accounting Standards arising from Reduced Disclosure Requirements (effective 1 July 2013)

On 30 June 2010 the AASB officially introduced a revised differential reporting framework in Australia. Under this framework, a two-tier differential reporting regime applies to all entities that prepare general purpose financial statements. Pryme Energy Limited is listed on the ASX and is therefore not eligible to adopt the new Australian Accounting Standards – Reduced Disclosure Requirements. As a consequence, the two standards will have no impact on the financial statements of the Group.

AASB 2010-6 Amendments to Australian Accounting Standards – Disclosures on transfers of Financial Assets (effective for annual reporting periods beginning on or after 1 July 2011)

In November 2010, the AASB made amendments to AASB 7 Financial Instruments: Disclosures which introduce additional disclosures in respect of risk exposures arising from transferred financial assets. The amendments will affect particularly entities that sell, factor, securitise, lend or otherwise transfer financial assets to other parties. They are not expected to have any significant impact on the group’s disclosures.

AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in other entities, revised AASB 127 Separate Financial Statements and AASB 128 Investments in Associates and Joint Ventures and AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards (effective 1 January 2013)

In August 2011, the AASB issued a suite of five new and amended standards which address the accounting for joint arrangements, consolidated financial statements and associated disclosures.

AASB 10 replaces all of the guidance on control and consolidation in AASB 127 Consolidated and Separate Financial Statements, and Interpretation 12 Consolidation – Special Purpose Entities. The core principle that a consolidated entity presents a parent and its subsidiaries as if they are a single economic entity remains unchanged, as do the mechanics of consolidation. However the standard introduces a single definition of control that applies to all entities. It focuses on the need to have both power and rights or exposure to variable returns before control is present. Power is the current ability to direct the activities that significantly influence returns. Returns must vary and can be positive, negative or both. There is also new guidance on participating and protective rights and on agent/principal relationships. While the group does not expect the new standard to have a significant impact on its composition, it has yet to perform a detailed analysis of the new guidance in the context of its various investees that may or may not be controlled under the new rules.

AASB 11 introduces a principles based approach to accounting for joint arrangements. The focus is no longer on the legal structure of joint arrangements, but rather on how rights and obligations are shared by the parties to the joint arrangement. Based on the assessment of rights and obligations, a joint arrangement will be classified as either a joint operation or joint venture. Joint ventures are

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accounted for using the equity method, and the choice to proportionately consolidate will no longer be permitted. Parties to a joint operation will account their share of revenues, expenses, assets and liabilities in much the same way as under the previous standard. AASB 11 also provides guidance for parties that participate in joint arrangements but do not share joint control. While the group does not expect the new standard to have any impact on its approach to accounting for joint arrangements, it has yet to perform a detailed analysis of the new standards.

AASB 12 sets out the required disclosures for entities reporting under the two new standards, AASB 10 and AASB 11, and replaces the disclosure requirements currently found in AASB 128. Application of this standard by the group will not affect any of the amounts recognised in the financial statements, but will impact the type of information disclosed in relation to the group’s investments.

AASB 127 is renamed Separate Financial Statements and is now a standard dealing solely with separate financial statements. Application of this standard by the group will not affect any of the amounts recognised in the financial statements.

Amendments to AASB 128 provide clarification that an entity continues to apply the equity method and does not remeasure its retained interest as part of ownership changes where a joint venture becomes an associate, and vice versa. The amendments also introduce a “partial disposal” concept. The group is still assessing the impact of these amendments.

The group does not expect to adopt the new standards before their operative date. They would therefore be first applied in the financial statements for the annual reporting period ending 31 December 2013.

AASB 13 Fair Value Measurement and AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13 (effective 1 January 2013)

AASB 13 was released in September 2011. It explains how to measure fair value and aims to enhance fair value disclosures. The group does not use fair value measurements extensively. It is therefore unlikely that the new rules will have a significant impact on any of the amounts recognised in the financial statements. However, application of the new standard will impact the type of information disclosed in the notes to the financial statements. The group does not intend to adopt the new standard before its operative date, which means that it would be first applied in the annual reporting period ending 31 December 2013.

AASB 2011-9 Amendments to Australian Accounting Standards – presentation of Items of other Comprehensive Income (effective 1 July 2012)

In September 2011, the AASB made an amendment to AASB 101 Presentation of Financial Statements which requires entities to separate items presented in other comprehensive income into two groups, based on whether they may be recycled to profit or loss in the future. This will not affect the measurement of any of the items recognised in the balance sheet or the profit or loss in the current period. The group intends to adopt the new standard from 1 January 2013.

AASB 2011-4 Amendments to Australian Accounting Standards to Remove Individual Key Management personnel Disclosure Requirements (effective 1 July 2013)

In July 2011 the AASB decided to remove the individual key management personnel (KMP) disclosure requirements from AASB 124 Related Party Disclosures, to achieve consistency with the international equivalent standard and remove a duplication of the requirements with the Corporations Act 2001. While this will reduce the disclosures that are currently required in the notes to the financial statements, it will not affect any of the amounts recognised in the financial statements. The amendments apply from 1 July 2013 and cannot be adopted early. The Corporations Act requirements in relation to remuneration reports will remain unchanged for now, but these requirements are currently subject to review and may also be revised in the near future.

offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32) and Disclosures-offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7) (effective 1 January 2014 and 1 January 2013 respectively)

In December 2011, the IASB made amendments to the application guidance in IAS 32 Financial Instruments: Presentation, to clarify some of the requirements for offsetting financial assets and financial liabilities in the balance sheet. These amendments are effective from 1 January 2014. They are unlikely to affect the accounting for any of the entity’s current offsetting arrangements. However, the IASB has also introduced more extensive disclosure requirements into IFRS 7 which will apply from 1 January 2013. The AASB is expected to make equivalent changes to IAS 32 and AASB 7 shortly. When they become applicable, the group will have to provide a number of additional disclosures in relation to its offsetting arrangements. The group intends to apply the new rules for the first time in the financial year commencing 1 January 2013.

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NoteS to tHe FINANCIAL StAteMeNtS FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

Note 3 ReVeNUe AND eXpeNDItURe FoR YeAR

ReVeNUe

Sales Revenue Oil and gas revenue Less: Oil and gas revenue discontinued operations Total Sales Revenue Other Revenue Operator Fees Less provision for doubtful debt Interest Total Other Revenue Total Sales Revenue and Other Revenue eXpeNDItURe Production costs – oil and gas Less: Production costs discontinued operations Depreciation and amortisation Depletion of working interest Capitalised exploration expenditure write-off Total Depreciation, amortisation and write-offs	Consolidated Group 2011 $ 2010 $ 4,068,760 2,750,268 - (46,657)
	4,068,760 2,703,611
	104,119 508,166 28,571 (189,531) 134,351 202,028
	267,041 520,663
	4,335,801 3,224,274
	Consolidated Group 2011 $ 2010 $ 1,080,502 945,269 - (10,306)
	1,080,502 934,963
	105,425 89,625 3,064,524 1,690,697 - 816,694
	3,169,949 2,597,016

Amounts disclosed as revenue and production costs from discontinued operations for 2010 relate to an assignment by the Group of a 5% working interest and its overriding royalty interests in the Raven natural gas project to Amelia Resources LLC in settlement of outstanding claims. The effective date of the assignment is 30 September 2010 after which time the Group retains a 35% working interest (26.25% Net Revenue Interest) in Raven.

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NoteS to tHe FINANCIAL StAteMeNtS FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

Note 4 INCoMe tAX eXpeNSe

a. The prima facie tax on loss before income tax is reconciled to the income tax as follows: Prima facie tax payable on loss before income tax at 30% (2010: 30%) Add: Non allowable deduction Share options expensed during the year Less: Tax deductible equity raising costs Current year tax losses not recognised Income tax expense b. Net deferred tax assets not brought to account: Unused tax losses for which no deferred tax asset has been recognised Potential tax beneft@30%	Consolidated Group 2011 2010 $ $ (797,727) (949,380) 9,475 5,599 15,897 17,068 (85,866) (163,107)	Consolidated Group 2011 2010 $ $ (797,727) (949,380) 9,475 5,599 15,897 17,068 (85,866) (163,107)
	(858,221) 858,221	(1,089,820) 1,089,820
	-	-
	10,649,385 3,194,815	7,782,722 2,334,817

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NoteS to tHe FINANCIAL StAteMeNtS FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

Note 5 KeY MANAGeMeNt peRSoNNeL CoMpeNSAtIoN

a. Names and positions held of consolidated and parent entity key management personnel in office at any time during the financial year are:

Key Management person

position

executive Directors

Justin Pettett Managing Director and Chief Executive Officer since 1 December 2005 Ryan Messer Chief Operations Officer since 1 December 2005 Non executive Directors George Lloyd Appointed Director and Chairman on 29 January 2008 Greg Short Appointed Director on 21 January 2010

Key management personnel remuneration is included in the Remuneration Report section of the Directors’ Report.

b. Related party transactions – Key Management personnel

Management consulting fees totalling $nil (2010: $132,000) were paid to an entity of which J Pettett is a beneficial shareholder and director and amounts totalling $64,886 (2010:$ 68,854) were paid to associates of Mr J Pettett for accounting and graphic design related services.

Management consulting fees totalling $101,742 (2010: $101,442) were paid to an entity of which Mr R Messer is a beneficial shareholder and director and amounts totalling $43,720 (2010: $49,525) were paid to an associate of Mr Messer for administration related services.

Directorship fees totalling $142,090 (2010: $130,000) were paid to an entity of which Mr G Lloyd is a beneficiary.

Transactions between related parties are on normal commercial terms and conditions no more favourable than those available to other parties unless otherwise stated.

c. equity Instrument Disclosures

Details of options and performance rights provided as remuneration together with qualifying and vesting terms and conditions are provided in the Remuneration Report section of the Directors’ Report.

(i) options

2011 Greg Short Total 2010 Greg Short Total	Balance 1.1.2011 500,000	Granted -	exercised -	Balance 31.12.2011 500,000	Vested during the year 500,000	Vested and exercisable 31.12.2011 500,000	total Unexercisable 31.12.2011 -
	500,000	-	-	500,000	-	500,000	-
	Balance 1.1.2010 -	Granted 500,000	exercised -	Balance 31.12.2010 500,000	Vested during the year -	Vested and exercisable 31.12.2010 -	total Unexercisable 31.12.2010 500,000
	-	500,000	-	500,000	-	-	500,000

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(ii) performance Rights/Restricted Stock Units

2011 Justin Pettett Ryan Messer Total 2010 Justin Pettett Ryan Messer Total	Balance 1.1.2011 1,389,722 1,389,722 2,779,444 Balance 1.1.2010 515,936 515,936 1,031,872	Granted as Compensation - -	Vested 257,968 257,968	Balance 31.12.2011 1,131,754 1,131,754	total Unvested 31.12.2011 1,131,754 1,131,754
		-	515,936	2,263,508	2,263,508
		Granted as Compensation 873,786 873,786	Vested - -	Balance 31.12.2010 1,389,722 1,389,722	total Unvested 31.12.2010 1,389,722 1,389,722
		1,747,572	-	2,779,444	2,779,444

d. Shareholdings

The number of shares held during the year by the Directors, including their personally related parties are as follows:

2011 Justin Pettett Ryan Messer George Lloyd Greg Short Total 2010 Justin Pettett Ryan Messer George Lloyd Greg Short Total	Balance 1.1.2011 Rights/ Restricted Stock Units Issued Net Change other Balance 31.12.2011* 4,500,000 257,968 679,711 5,437,679 2,887,791 257,968 192,000 3,337,759 3,665,000 - 752,144 4,417,144 60,000 - 150,000 210,000
	11,112,791 515,936 1,773,855 13,402,582
	Balance 1.1.2010 Rights/ Restricted Stock Units Issued Net Change other ** Balance 31.12.2010** 3,661,000 - 839,000 4,500,000 2,506,925 - 380,866 2,887,791 3,080,000 - 585,000 3,665,000 - - 60,000 60,000
	9,247,925 - 1,864,866 11,112,791

• Net Change Other in relation to the 2011 year refers to shares purchased or sold during the financial year and also includes shares acquired pursuant to the non-renounceable rights issue announced to shareholders on 15 June 2011.

** Net Change Other in relation to the 2010 year refers to shares purchased or sold during the financial year and also includes shares acquired pursuant to the non-renounceable rights issue announced to shareholders on 31 August 2010.

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NoteS to tHe FINANCIAL StAteMeNtS FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

Note 6 AUDItoRS’ ReMUNeRAtIoN

Remuneration of the auditor of the Group for: PwC — auditing or reviewing the fnancial report — taxation services Non PwC Audit Firms — auditing or reviewing the fnancial report — taxation services Note 7 eARNINGS peR SHARe	Consolidated Group 2011 $ 2010 $ 80,000 - 5,000 -	Consolidated Group 2011 $ 2010 $ 80,000 - 5,000 -
	85,000	-
	5,022 2,158	77,014 5,460
	7,180	82,474

a. Reconciliation of earnings to proft or loss Loss Earnings used to calculate basic EPS b. Weighted average number of ordinary shares outstanding during the year used in calculating basic EPS Weighted average number of options outstanding Weighted average number of rights outstanding Weighted average number of ordinary shares outstanding during the year used in calculating dilutive EPS	Consolidated Group 2011 $ 2010 $ (2,659,091) (3,164,600)	Consolidated Group 2011 $ 2010 $ (2,659,091) (3,164,600)
	(2,659,091)	(3,164,600)
	No. 238,519,032 500,000 2,484,429	No. 187,706,452 473,973 -
	241,503,461	188,180,425

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Note 8 CASH AND CASH eQUIVALeNtS

Cash at bank and in hand Short-term bank deposits The effective interest rate on short-term bank deposits was 4.25% (2010: 4.4%). Reconciliation of cash Cash at the end of the fnancial year as shown in the cash fow statement is reconciled to items in the balance sheet as follows: Cash and cash equivalents	Consolidated Group 2011 $ 2010 $ 884,620 527,114 4,347,917 2,034,949	Consolidated Group 2011 $ 2010 $ 884,620 527,114 4,347,917 2,034,949
	5,232,537	2,562,063
	5,232,537	2,562,063
	5,232,537	2,562,063

Note 9 tRADe AND otHeR ReCeIVABLeS

Note 9 tRADe AND otHeR ReCeIVABLeS
	Consolidated Group
	2011	2010
	$	$
CURRENT
– Trade receivables	587,041	602,345
– Provision for impairment of receivables	(104,937)	(134,569)
	482,104	467,776
Other receivables:
– GST receivable	7,987	26,576
– Operating bond	122,862	122,995
	612,953	617,347
A reconciliation of the movement in the provision for impairment of receivables is shown below:
	2011	2010
	$	$
Opening Balance	134,569	-
– additional provision	-	134,569
– reversal of prior year provision	(28,571)	-
– foreign currency movement	(1,061)	-
Closing Balance	104,937	134,569

Impaired assets are provided for in full. There are no other balances within trade and other receivables that contain assets that are impaired or are past due.

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NoteS to tHe FINANCIAL StAteMeNtS FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

Note 10 INVeStMeNtS ACCoUNteD FoR USING tHe eQUItY MetHoD

				Note	Consolidated Group	Consolidated Group
					2011	2010
					$	$
Associated companies				10a	-	5,075,331
Interests are held	in the following associated unincorporated		companies
Name	principal Activities	Country of	ownership	Interest	Carry amount of
		Incorporation			investment
			2011	2010	2011	2010
			%	%	$	$
Unlisted:
Turner Bayou,	Oil and Gas Exploration	United States	-	80.80	-	5,075,331
LLC*	and Drilling	of America

*The Company does not control of Turner Bayou LLC as percentage of voting power is not in proportion to ownership.

During the year, the Company withdrew as a member of Turner Bayou LLC under an agreement which assigned the seismic data previously held by Turner Bayou LLC directly to Pryme Oil and Gas LLC in proportion to the ownership interest held by the Company. Accordingly seismic data assets previously owned by virtue of membership of Turner Bayou LLC are now included in working interests (Note 14).

During the 2010 financial year, the Company withdrew as member of Avoyelles Energy LLC under an agreement which assigned the leasehold interests previously held by Avoyelles Energy LLC directly to Pryme Oil and Gas LLC in proportion to the working interest held by the Company. Accordingly the leasehold assets, previously owned by virtue of membership of Avoyelles Energy LLC, are now included in working interests (Note 14).

a. Movements During the Year in equity Accounted Investment in Associated Companies Balance at beginning of the fnancial year Add: Share of associated company’s loss after income tax Less: Transfer to working interest Adjustment for foreign currency movement Balance at end of the fnancial year b. equity accounted proft/(loss) of associates are broken down as follows: Share of associate’s loss before income tax expense Share of associate’s income tax expense Share of associate’s loss after income tax	Consolidated Group 2011 $ 2010 $ 5,075,331 8,623,033 - (733) (5,069,843) (2,501,767) (5,488) (1,045,202)	Consolidated Group 2011 $ 2010 $ 5,075,331 8,623,033 - (733) (5,069,843) (2,501,767) (5,488) (1,045,202)
	-	5,075,331
	- - -	(733) - (733)

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NoteS to tHe FINANCIAL StAteMeNtS FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

		Consolidated	Group
		2011	2010
		$	$
c.	Summarised presentation of Aggregate Assets, Liabilities and
	performance of Associates
	Current assets	-	2,232
	Non-current assets	-	5,604,358
	Total assets	-	5,606,590
	Current liabilities	-	29
	Non-current liabilities	-	-
	Total liabilities	-	29
	Net assets	-	5,606,561
	Revenues	-	-
	Loss after income tax of associates	-	701

d. the reporting date of the associated companies is 31 December.

Note 11 CoNtRoLLeD eNtItIeS

Note 11 CoNtRoLLeD eNtItIeS
	Country of	ownership	Interest (%)*
	Incorporation
		2011	2010
Subsidiaries of Pryme Energy Limited:
- Pryme Oil and Gas Inc	US	100%	100%
- Pryme Energy LLC	US	100%	100%
- Trident Minerals LLC	US	100%	100%
- Pryme Royalty Holdings LLC	US	100%	100%
- Pryme Mineral Holdings LLC	US	100%	100%
- Pryme Oil and Gas LLC	US	100%	100%

• Percentage of voting power is in proportion to ownership

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NoteS to tHe FINANCIAL StAteMeNtS FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

Note 12: INteReStS IN JoINtLY CoNtRoLLeD eNtItIeS

Entities included below are subject to joint control as a result of governing contractual arrangements.

	Country of	principal Activity	Reporting Date	ownership Interest (%)	ownership Interest (%)
	Incorporation
				2011	2010
Pryme Lake Exploration LLC	US	Oil Exploration	31 Dec	50%	50%
		In Aggregate		Group Share
		2011	2010	2011	2010
		$	$	$	$
Net Assets of Jointly Controlled	entities
Current assets		461,831	97,792	230,916	48,896
Non-current assets		3,913,443	4,453,445	1,956,722	2,226,723
Current liabilities		37,319	50,912	18,659	25,456
Non-current liabilities		58,340	-	29,170	-
Net assets		4,279,615	4,500,325	2,139,809	2,250,163
Revenues		1,229,600	801,458	614,800	400,729
Proft/(Loss) after income tax		216,503	575,094	108,251	287,547

Note 13 pRopeRtY, pLANt AND eQUIpMeNt

PLANT AND EQUIPMENT Offce Equipment: At cost Accumulated depreciation Drilling Equipment: At cost Accumulated depreciation Other Equipment: At cost Accumulated depreciation totAL At cost Accumulated depreciation	Consolidated Group 2011 $ 2010 $ 68,878 59,770 (44,872) (32,990)
	24,006 26,780
	592,450 598,729 (115,308) (59,275)
	477,142 539,454
	114,313 174,413 (25,529) (18,317)
	88,784 156,096
	775,641 832,912 (185,709) (110,582)
	589,932 722,330

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NoteS to tHe FINANCIAL StAteMeNtS FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

a. Movements in Carrying Amounts

Movement in the carrying amounts for each class of property, plant and equipment between the beginning and the end of the current financial year

Consolidated Group: Balance at 1 January 2010 Foreign currency movement Additions Disposals Depreciation expense Balance at 31 December 2010 Foreign currency movement Additions Disposals Depreciation expense Balance at 31 December 2011	offce equipment Drilling equipment other equipment total $ $ $ $ 24,466 418,435 - 442,901 376 (45,309) 112 (44,821) 13,971 225,603 174,301 413,875 - - - - (12,033) (59,275) (18,317) (89,625)
	26,780 539,454 156,096 722,330
	(143) (1,535) (663) (2,341) 10,898 - 26,131 37,029 - (225) (61,436) (61,661) (13,529) (60,552) (31,344) (105,425)
	24,006 477,142 88,784 589,932

Note 14 WoRKING INteReSt

Exploration expenditure capitalised - Exploration and evaluation phases - Less exploration costs written off Production phase Accumulated depletion Intangible exploration costs capitalised* Less intangible costs written off Total Exploration Expenditure	2011 $ 6,941,381 - 24,024,063 (6,811,974) - -	2010 $ 8,021,574 (695,512) 11,446,290 (3,748,398) 227,842 (227,842)
	24,153,470	15,023,954

*Intangible assets comprise the acquisition costs of seismic data. Recoverability of the carrying amount of these costs is dependent on either the successful exploration in the area of interest to which the seismic data relates or subsequent sale of the asset to third parties.

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NoteS to tHe FINANCIAL StAteMeNtS FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

Note 15 tRADe AND otHeR pAYABLeS

Note 15 tRADe AND otHeR pAYABLeS
Other payables and accrued expenses Note 16 BoRRoWINGS Convertible Notes	Consolidated Group 2011 $ 2010 $
	1,464,075	630,318
	4,345,705	-

As announced to the ASX on 14 March 2011 and ratified by shareholders at the Annual General Meeting on the 18th April 2011, the Company completed a funding agreement with its major shareholder, Belmont Park Investments Pty Ltd (BPI), to raise $4.0 million through an unsecured convertible note facility. The terms of the facility provide for repayment on the date falling 12 months after initial drawdown with interest payable at a rate of 9.381% per annum and a facility fee equal to 2.5% of the principal. The principal, interest and facility fee is convertible into ordinary shares of the Company at BPI’s election at any time from initial drawdown to maturity at a price of $0.30 per share in the Company (with such issue price being adjusted in the event that the Company reorganises its share capital or undertakes a rights issue).

Note 17 ISSUeD CApItAL

257,841,350 (2010: 225,057,754) fully paid ordinary shares Capital raising costs a. Ordinary shares At the beginning of reporting period Shares issued during the year - 6 September 2010 - 17 November 2010 - 6 December 2010 - 9 December 2010 - 4 January 2011 - 21 July 2011 - 14 August 2011 - 24 August 2011 At reporting date	Consolidated Group 2011 2010 $ $ 46,171,282 42,109,858 (2,353,913) (2,190,869) 43,817,369 39,918,989 No. of Shares No. of Shares 225,057,754 178,801,337 - 21,250,000 - 9,789,488 - 6,619,051 - 8,597,878 553,428 - 7,880,720 - 22,149,448 - 2,200,000 -
	257,841,350 225,057,754

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NoteS to tHe FINANCIAL StAteMeNtS FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

Ordinary shares participate in dividends and the proceeds on winding up of the parent entity in proportion to the number of shares held. At the shareholders’ meetings each ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands.

On 1 January 2011 553,428 performance rights and restricted stock units shown above vested and converted to ordinary shares on a one-for-one basis on 4 January 2011.

On 15 June 2011 the company invited its shareholders to subscribe to a non-renounceable rights issue of 32,230,168 shares at an issue price of $0.125 per share on the basis of 1 share for every 7 fully paid ordinary shares held. Shareholders subscribed for 7,880,720 shares which were allotted on 21 July 2011. The Company undertook a placement of the 24,349,448 shortfall shares and allotted 22,149,448 shares on 14 August and the 2,200,000 balance of the shortfall shares on 24 August 2011.

Capital risk management

The group’s objectives when managing capital are to safeguard their ability to continue as a going concern and to maintain an optimal capital structure to reduce the cost of capital.

Consistently with others in the industry, the group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including ‘borrowings’ and ‘trade and other payables’ as shown in the balance sheet) less cash and cash equivalents. Total capital is calculated as ‘equity’ as shown in the balance sheet (including non-controlling interests) plus net debt.

b. Options 15 cent options – At the beginning of the period – Add: 15 cent options issued – 19 April 2010 total 15 cent options	Consolidated Group Number of options 2011 Number of options 2010 500,000 - - 500,000
	500,000 500,000

Note 18 ReSeRVeS

a. Foreign Currency translation Reserve

The foreign currency translation reserve records exchange differences arising on translation of a foreign controlled subsidiary.

b. option Reserve

The option reserve records items recognised as expenses on valuation of directors share rights/options under the Pryme Long Term Incentive Plan.

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Note 19 CApItAL AND LeASING CoMMItMeNtS

a. operating Lease Commitments

Non-cancellable operating leases contracted for but not capitalised in the financial statements

Payable — minimum lease payments — not later than 12 months — between 12 months and 5 years — Greater than 5 years Capital expenditure Commitments contracted for Expenditure on working interest Payable: — not later than 12 months — between 12 months and 5 years — greater than 5 years	8,655 15,147 -	5,187 - -
	23,802	5,187
	1,218,855	364,738
	1,218,855	364,738
	1,218,855 - -	364,738 - -
	1,218,855	364,738

b. Capital expenditure Commitments contracted for

Note 20 CoNtINGeNt LIABILItIeS AND CoNtINGeNt ASSetS

There are no contingent liabilities or contingent assets as at 31 December 2011 (2010: Nil)

Note 21 SeGMeNt RepoRtING

Operating Segments — Geographical Segments

The Consolidated group comprises the following two operating segments defined geographically:

• Core operations comprising the exploration, development and production of oil and gas projects in the US; and

• Administrative operations undertaken in Australia to support the exploration, development and production of oil and gas projects in the US, which includes the recharging of such costs via management fees.

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NoteS to tHe FINANCIAL StAteMeNtS FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

2011 Income Oil and Gas Revenue Intercompany Management Fee Other Expenditure Production Expenses Depletion, depreciation and exploration expenditure written off Employee Related Expenses Intercompany Management Fee Other Segment result Assets Liabilities 2010 Income Oil and Gas Revenue Intercompany Management Fee Other Expenditure Production Expenses Depletion, depreciation and exploration expenditure written off Employee Related Expenses Intercompany Management Fee Other Segment result Assets Liabilities	Australia United States of America eliminations total $ $ $ $ - 4,068,759 - 4,068,759 1,458,547 - (1,458,547) - 134,346 132,695 - 267,041 - (1,080,502) - (1,080,502) (6,294) (3,163,655) - (3,169,949) (749,034) (233,982) - (983,016) - (1,458,547) 1,458,547 - (1,067,740) (693,684) - (1,761,424) (230,175) (2,428,916) - (2,659,091) 47,312,117 26,284,781 (42,926,466) 30,670,432 4,490,600 44,383,100 (42,926,368) 5,947,332 Australia United States of America eliminations total $ $ $ $ - 2,750,268 - 2,750,268 1,486,379 - (1,486,379) - 134,800 385,863 - 520,663 - (945,269) - (945,269) (4,685) (2,592,331) - (2,597,016) (234,992) (453,176) - (688,168) - (1,486,379) 1,486,379 - (1,084,642) (1,120,436) - (2,205,078) 296,860 (3,461,460) - (3,164,600) 39,215,527 21,911,737 (37,122,720) 24,004,544 82,553 37,670,387 (37,122,622) 630,318	Australia United States of America eliminations total $ $ $ $ - 4,068,759 - 4,068,759 1,458,547 - (1,458,547) - 134,346 132,695 - 267,041 - (1,080,502) - (1,080,502) (6,294) (3,163,655) - (3,169,949) (749,034) (233,982) - (983,016) - (1,458,547) 1,458,547 - (1,067,740) (693,684) - (1,761,424) (230,175) (2,428,916) - (2,659,091) 47,312,117 26,284,781 (42,926,466) 30,670,432 4,490,600 44,383,100 (42,926,368) 5,947,332 Australia United States of America eliminations total $ $ $ $ - 2,750,268 - 2,750,268 1,486,379 - (1,486,379) - 134,800 385,863 - 520,663 - (945,269) - (945,269) (4,685) (2,592,331) - (2,597,016) (234,992) (453,176) - (688,168) - (1,486,379) 1,486,379 - (1,084,642) (1,120,436) - (2,205,078) 296,860 (3,461,460) - (3,164,600) 39,215,527 21,911,737 (37,122,720) 24,004,544 82,553 37,670,387 (37,122,622) 630,318	Australia United States of America eliminations total $ $ $ $ - 4,068,759 - 4,068,759 1,458,547 - (1,458,547) - 134,346 132,695 - 267,041 - (1,080,502) - (1,080,502) (6,294) (3,163,655) - (3,169,949) (749,034) (233,982) - (983,016) - (1,458,547) 1,458,547 - (1,067,740) (693,684) - (1,761,424) (230,175) (2,428,916) - (2,659,091) 47,312,117 26,284,781 (42,926,466) 30,670,432 4,490,600 44,383,100 (42,926,368) 5,947,332 Australia United States of America eliminations total $ $ $ $ - 2,750,268 - 2,750,268 1,486,379 - (1,486,379) - 134,800 385,863 - 520,663 - (945,269) - (945,269) (4,685) (2,592,331) - (2,597,016) (234,992) (453,176) - (688,168) - (1,486,379) 1,486,379 - (1,084,642) (1,120,436) - (2,205,078) 296,860 (3,461,460) - (3,164,600) 39,215,527 21,911,737 (37,122,720) 24,004,544 82,553 37,670,387 (37,122,622) 630,318
	296,860	(3,461,460)	-
	39,215,527 82,553	21,911,737 37,670,387	(37,122,720) (37,122,622)

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Financials (cont.)

NoteS to tHe FINANCIAL StAteMeNtS FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

Note 22 CASH FLoW INFoRMAtIoN

a. Reconciliation of Cash Flow from operations with Loss after Income tax Loss after income tax Non-cash fows Depreciation, depletion and amortisation Share options expensed Write-off of capitalised expenditure (Gain)/Loss on sale of assets Movement in foreign currency Interest Expense accrued Share of associated companies net loss after income tax and dividends Changes in assets and liabilities (Increase)/decrease in trade and term receivables (Increase)/decrease in prepayments Increase/(decrease) in trade payables and accruals Cashfow from (used in) operations	Consolidated Group 2011 $ 2010 $ (2,659,091) (3,164,600) 3,169,949 1,780,322 52,990 56,893 - 816,694 (1,301) 291,244 42,465 11,111 345,705 - - 733 21,015 (29,507) (8,042) (24,401) 79,274 (767)	Consolidated Group 2011 $ 2010 $ (2,659,091) (3,164,600) 3,169,949 1,780,322 52,990 56,893 - 816,694 (1,301) 291,244 42,465 11,111 345,705 - - 733 21,015 (29,507) (8,042) (24,401) 79,274 (767)
	1,042,964	(262,278)

b. Credit Standby Arrangements with Banks

There are no credit or standby arrangements with financiers as at 31 December 2011 (2010: Nil)

Note 23 eVeNtS AFteR tHe BALANCe SHeet DAte

Other than the matter discussed below, in the opinion of the directors, there has not arisen in the interval between the end of the financial year and the date of the report any matter or circumstance that has significantly affected, or may significantly affect the Consolidated Group’s operations, results or the state of affairs in future financial years:

As announced to the ASX on 27 February 2012, the Company successfully negotiated the sale of its interest in the Catahoula Lake project in LaSalle, Rapides and Grant parishes, Louisiana to the Sanchez Oil and Gas Group for a total sales price of US$1.625m.

Note 24 ReLAteD pARtY tRANSACtIoNS

Note 24 ReLAteD pARtY tRANSACtIoNS
		Consolidated	Group
	Note	2011	2010
		$	$
Transactions between related parties are on normal commercial terms
and conditions no more favourable than those available to other parties
unless otherwise stated.
Transactions with related parties:
Key Management Personnel	5(b)	352,438	481,821

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NoteS to tHe FINANCIAL StAteMeNtS FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

Note 25 FINANCIAL RISK MANAGeMeNt

a. Financial Risk Management policies

The group’s financial instruments consist mainly of deposits with banks, short-term investments, accounts receivable and payable, loans to and from subsidiaries and leases.

i. treasury Risk Management

Senior executives of the group regularly analyse financial risk exposure and evaluate treasury management strategies in the context of the most recent economic conditions and forecasts.

The executive’s overall risk management strategy seeks to assist the consolidated group in meeting its financial targets, whilst minimising potential adverse effects on financial performance.

Risk management policies are approved and reviewed by the Board on a regular basis.

ii. Financial Risk exposures and Management

The main risks the group is exposed to through its financial instruments are foreign currency risk, liquidity risk, credit risk and price risk.

Interest Rate Risk

There is no exposure to interest rate risk as the interest rate on the debt owing is fixed.

Foreign Currency Risk

The group is exposed to fluctuations in foreign currencies arising from the sale and purchase of goods and services in currencies other than the group’s measurement currency. The group is also exposed to fluctuations in foreign currencies arising from the loans advanced by the Australian based parent entity to its United States based subsidiaries. Foreign currency gains/losses are recorded by the subsidiaries and eliminated on consolidation via the foreign currency translation reserve.

Liquidity Risk

The group manages liquidity risk by monitoring forecast cash flows and ensuring that adequate funds from capital raising are maintained for future expenditure on working interest.

Credit Risk

The maximum exposure to credit risk is the carrying amount of receivables, net of any provisions for impairment of those assets, as disclosed in the balance sheet and notes to the financial statements. Credit risk is managed on a group basis. It arises from exposures to customers as well as through deposits with financial institutions.

The group manages credit risk by actively assessing the rating quality and liquidity of counter parties including:

• only utilising banks and financial institutions with an ‘A’ rating;

• all potential customers are rated for credit worthiness taking into account their size, market position and financial standing; and

The consolidated group does not have any material credit risk exposure to any single receivable or group of receivables under arrangements entered into by the consolidated group.

price Risk

The group is exposed to commodity price risk for oil and gas as determined by the world market prices which fluctuate based on demand and supply. These prices are regularly monitored.

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NoteS to tHe FINANCIAL StAteMeNtS FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

b. Financial Instruments composition and maturity analysis

The tables below reflect the undiscounted contractual settlement terms for financial instruments of a fixed period and maturity, as well as management’s expectations of the settlement period for all other financial instruments. As such amounts may not reconcile to the balance sheet.

2011 CoNSoLIDAteD Financial Assets: Cash and cash equivalents Receivables Financial Liabilities: Trade and sundry payables Borrowings Total 2010 CoNSoLIDAteD Financial Assets: Cash and cash equivalents Receivables Financial Liabilities: Trade and sundry payables Total	Average Interest Rate 4.25% - - -	Variable Interest Rate $ 5,232,537 - - -	Fixed Interest Rate Less than 1 year $ 1 to 5 years $ - - - - - - (4,345,705) -	Fixed Interest Rate Less than 1 year $ 1 to 5 years $ - - - - - - (4,345,705) -	Non Interest Bearing $ - 612,953 (1,464,075) -	total $ 5,232,537 612,953 (1,464,075) (4,345,705)
		5,232,537	(4,345,705)	-	(851,122)	35,710
	Average Interest Rate 4.4% - -	Variable Interest Rate $ 2,562,063 - -	Fixed Interest Rate Less than 1 year $ 1 to 5 years $ - - - - - -		Non Interest Bearing $ - 617,347 (630,318)	total $ 2,562,063 617,347 (630,318)
		2,562,063	- -		(12,971)	2,549,092

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Financials (cont.)

NoteS to tHe FINANCIAL StAteMeNtS FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

c. Net Fair Values

The net fair values of:

• Other loans and amounts due are determined by discounting the cash flows, at market interest rates of similar borrowings, to their present value. Where the loan is repayable within one year the cashflows are undiscounted and approximate fair value.

• Other assets and other liabilities approximate their carrying value.

No financial assets and financial liabilities are readily traded on organised markets in standardised form other than listed investments, forward exchange contracts and interest rate swaps.

Financial assets where the carrying amount exceeds net fair values have not been written down as the consolidated group intends to hold these assets to maturity.

d. Sensitivity Analysis

Interest Rate Risk, Foreign Currency Risk and price Risk

The group has performed sensitivity analysis relating to its exposure to price 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.

price Risk Sensitivity Analysis

At 31 December 2011, the effect on profit and equity as a result of changes in the price risk, with all other variables remaining constant would be as follows:

		Consolidated	Group
		2011	2010
		$	$
Change in proft
—	Increase in oil/gas price by 10%	393,570	224,619
—	Decrease in oil/gas price by10%	(393,570)	(224,619)

The above price risk sensitivity analysis has been performed on the assumption that all other variables remain unchanged.

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NoteS to tHe FINANCIAL StAteMeNtS FoR tHe YeAR eNDeD 31 DeCeMBeR 2011

Note 26 pAReNt INFoRMAtIoN

The following information has been extracted from the books and records of the parent, Pryme Energy Limited, and has been prepared in accordance with Accounting Standards.

StAteMeNt oF CoMpReHeNSIVe INCoMe

Total (Loss) / Proft Total Comprehensive Income StAteMeNt oF FINANCIAL poSItIoN ASSETS Current Assets Non Current Assets TOTAL ASSETS LIABILITIES Current Liabilities TOTAL LIABILITIES EQUITY Issued capital Reserves Accumulated losses TOTAL EQUITY	parent entity 2011 $ 2010 $ (230,175) 296,860	parent entity 2011 $ 2010 $ (230,175) 296,860
	(230,175)	296,860
	2011 $ 4,374,125 42,937,992	2010 $ 2,080,613 37,134,914
	47,312,117	39,215,527
	4,490,600	82,553
	4,490,600	82,553
	43,817,369 99,769 (1,095,621)	39,918,989 79,432 (865,447)
	42,821,517	39,132,974

The net assets of the parent entity as at 31 December 2011 includes a related party loan receivable from the US subsidiary of $42,926,467. Recoverability of this account has been revieved and is supported by the Group’s estimated reserves as prepared in accordance with Note 1 of these financial statements.

Note 27 CoMpANY DetAILS

the registered office and principal place of business of the company is:

Pryme Energy Limited Level 7, 320 Adelaide Street Brisbane QLD 4000

the principal place of business of the US subsidiaries is:

Pryme Oil and Gas Inc 1001 Texas Ave, Suite 1400 Houston Texas 77002, United States of America

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directors’ declaration

1. In the opinion of the Directors of Pryme Energy Limited (Pryme):

2. (a) the Financial Statements and Notes as set out on pages 14 to 45 are in accordance with the Corporations Act 2001, including:

   • i. complying with Accounting Standards and Corporations Regulations 2001; and

   • ii. giving a true and fair view of Pryme and the consolidated entity’s financial position as at 31 December 2011 and of their performance as represented by the results of their operations and their cash flows for the year ended on that date; and

3. b) the remuneration disclosures that are included on pages 5 to 11 of the Remuneration Report in the Directors’ Report comply with Australian Accounting Standard AASB 124 Related Party Disclosures; and

4. c) there are reasonable grounds to believe that Pryme will be able to pay its debts as and when they become due and payable.

5. This declaration has been made after receiving the declarations required to be made to the directors in accordance with section 295A of the Corporations Act 2001 for the financial period ending 31 December 2011.

Signed in accordance with a Resolution of the Directors:

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Justin pettett Managing Director

Brisbane 29th February 2012

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PRYME EnERgY LiMitEd
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Auditor’s Review Report

Independent auditor’s report to the members of Pryme Energy Limited

Report on the financial report

We have audited the accompanying financial report of Pryme Energy Limited (the Company), which comprises the balance sheet as at 31 December 2011, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration for Pryme Energy Limited and Controlled entities (the consolidated entity). The consolidated entity comprises the Company and the entities it controlled at the year's end or from time to time during the financial year.

Directors’ responsibility for the financial report

The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements , that the financial statements comply with International Financial Reporting Standards.

Auditor’s 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.

Our procedures include reading the other information in the Annual Report to determine whether it contains any material inconsistencies with the financial report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.

Independence

In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001.

PricewaterhouseCoopers, ABN 52 780 433 757

Riverside Centre, 123 Eagle Street, BRISBANE QLD 4000, GPO Box 150, BRISBANE QLD 4001 T: +61 7 3257 5000, F: +61 7 3257 5999, www.pwc.com.au

Liability limited by a scheme approved under Professional Standards Legislation.

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Auditor’s Review Report

Auditor’s opinion In our opinion:

• (a) the financial report of Pryme Energy Limited is in accordance with the Corporations Act 2001 , including:

• (i) giving a true and fair view of the consolidated entity’s financial position as at 31 December 2011 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 report and notes 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 5 to 11 of the directors’ report for the year ended 31 December 2011. 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 2001 . Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards.

Auditor’s opinion

In our opinion, the remuneration report of Pryme Energy Limited for the year ended 31 December 2011 complies with section 300A of the Corporations Act 2001 .

Matters relating to the electronic presentation of the audited financial report

This auditor’s report relates to the financial report and remuneration report of Pryme Energy Limited for the year ended 31 December 2011 included on Pryme Energy Limited’s web site. The Company’s directors are responsible for the integrity of Pryme Energy Limited’s web site. We have not been engaged to report on the integrity of this web site. The auditor’s report refers only to the financial report and remuneration report named above. It does not provide an opinion on any other information which may have been hyperlinked to/from the financial report or the remuneration report. If users of this report are concerned with the inherent risks arising from electronic data communications they are advised to refer to the hard copy of the audited financial report and remuneration report to confirm the information included in the audited financial report and remuneration report presented on this web site.

PricewaterhouseCoopers

Robert Hubbard Brisbane Partner 29 February 2012

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Corporate directory

Directors

Mr George Lloyd (Chairman) Mr Justin Pettett (Managing Director) Mr Ryan Messer (Executive Director) Mr Greg Short (Non-Executive Director)

Chief Financial officer Sandra Gaffney

Company Secretary Ms Swapna Keskar

Registered and principal office

Level 7, 320 Adelaide Street BRISBANE QLD 4000 phone: +61 7 3371 1103 Fax: +61 7 3371 1105

postal Address

GPO Box 111 BRISBANE QLD 4001

USA office

1001 Texas Ave. Suite 1400 HOUSTON TX 77002 phone: +1 713 401 9806 Fax: +1 832 201 0936 email: info@prymeenergy.com Website: www.prymeenergy.com

Share Registry

Link Market Services Limited Level 15, 324 Queen Street BRISBANE QLD 4000 phone: +61 2 8280 7454 Fax: +61 2 9287 0303

Auditors

PricewaterhouseCoopers 123 Eagle Street BRISBANE Qld 4000 phone: +617 3257 5000 Fax: +617 3257 5999

Attorneys

Winstead P.C. 1100 J.P. Morgan Chase Tower 600 Travis Street HOUSTON Texas 77002 United States of America

Stock exchanges Australian Securities Exchange Limited (ASX) Code: PYM International OTCQX Code: POGLY

Australian Company Number 117 387 354

Australian Business Number 75 117 387 354

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B R I S B A N E – H O U S T O N

ABN: 75 117 387 354 Tel: +61 7 3371 1103 | Fax: +61 7 3371 1105 Level 7 320 Adelaide Street Brisbane Qld 4000 Australia | GPO Box 111 Brisbane Qld 4001 www.prymeenergy.com