VOLTAIC STRATEGIC RESOURCES LTD - Annual Report 2011

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annual report ‘11

Annual Report for the year ended 31 December 2011

Page 1. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

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Corporate Information 3 Chairman’s Letter 4 Operational Review 5 Directors’ Report 11 Consolidated Statement of Financial Position 20 Consolidated Statement of Comprehensive Income 21 Consolidated Statement of Changes in Equity 22 Consolidated Statement of Cash Flows 23 Notes to the Financial Statements 24 Directors’ Declaration 44 Independent Audit Report to the members of Incremental Oil and Gas Ltd 45 Auditor’s Independence Declaration 47 Corporate Governance Statement 49 Additional ASX Information 56

Corporate Information Incremental Oil And Gas Ltd ABN: 66 138 145 114

This annual report is of the group comprising Incremental Oil and Gas Ltd (“the Company”) and its subsidiaries (collectively “the Group”). The Company’s functional and presentation currency is USD ($). At 1 January 2011 the Company adopted the US Dollar as the functional and presentation currency. Unless otherwise stated, all amounts in the Annual Report are in US Dollars

A description of the Group’s operations and of its principal activities is included in the review of operations and activities in the Directors’ Report on pages 12 to 18. The Directors’ Report is not part of the financial report.

DIRECTORS

Chris Cronin (Chairman) Gerry McGann (Managing Director) Mark Stowell Hon JAL (Sandy) Macdonald

SHARE REgISTRY

Security Transfer Registrars Pty Ltd PO Box 535 Applecross WA 6953 770 Canning Highway Applecross WA 6153

CHIEF FINANCIAL OFFICER

Jonathan Asquith

Tel: (08) 9315 2333 Fax: (08) 9315 2233 Web: www.securitytransfer.com.au

COMPANY SECRETARY

Susan Hunter

REgISTERED OFFICE

Unit 2, 16 Phillimore Street Fremantle, WA 6160

AuDITOR

Stantons International Level 2, 1 Walker Avenue West Perth WA 6005 Australia

Telephone: (08) 9431 7306 Facsimile: (08) 9430 4883 Web: www.incrementaloilandgas.com

SOLICITORS

Johnson Winter & Slattery Level 4 167 St Georges Terrace Perth WA 6000

Page 3. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

Chairman’s Letter

Dear Shareholder,

Incremental Oil and Gas Ltd (“Incremental”) is a producing oil and gas company with a primary focus on production and cash flow rather than high risk exploration. Incremental has been profitable in each of its first two years of operations. In 2011 operating and capital expenditure was largely funded from internally generated cashflow.

The current Incremental projects are in California as shown in Figure 1.

The Sheep Springs Oilfield has performed well over the year, with an average production of 132 boepd and revenues exceeding US$ 5.3 million. The field has entered a period of natural production decline due to gradually depleting reservoir pressures. Incremental will undertake a number of field development activities in 2012 to arrest that decline. Significant shallow heavy oil reserves on the lease add long term value to the project.

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Most importantly, the Round Mountain Project has become Incremental’s second producing oilfield with new production significantly exceeding the decline at Sheep Springs. All six wells drilled at Round Mountain in 2012 have been successful and this project will continue to be a major focus in 2012 with the aim of further increasing production.

The Company has also significantly upgraded the portfolio through a series of acquisitions and divestments. The Ventura Basin Project and the McDonald Anticline Project will both be drilled during 2012 and the acquisition of new exploration acreage on the eastern side of the San Joaquin Basin adds exploration upside and excitement to the portfolio. Substantial technical analysis has positioned the company to reduce its exposure to the Guijarral Hills Project and the Raven Pass Exploration Project in order to achieve a balanced portfolio.

On behalf of the Board I express our gratitude to the management, staff and contractors and consultants who, together, have worked hard to achieve this excellent outcome

Your Board plans to continue to diligently develop these projects in order to significantly enhance production and cash flow over the coming year.

In addition to ensuring a strong focus on developing our existing projects, the Board will continue to identify and evaluate for possible acquisition, additional projects which provide a strategic fit with our existing portfolio and meet the Company’s financial criteria.

I would like to thank shareholders for their support over the year. The Board and management look forward to delivering substantial increase in shareholder value in 2012

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Yours sincerely

Chris Cronin Chairman 16 April 2012

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Page 4. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

Operational Review

Incremental has six projects, all in California:

Round Mountain Producing Oilfield
Sheep Springs Producing Oilfield
McDonald Anticline Development Project
Ventura Development Project
Raven Pass Exploration Project
East Joaquin Exploration

These projects provide a balanced portfolio with positive cash flow, low risk development with near term production expansion and exploration upside. The location of the projects is shown in Figure 1.

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Figure 1 Locations, IOG projects in California

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Page 5. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

OPERATIONAL REvIEw

1.1 Round Mountain developMent pRoject (100% woRking inteRest)

The Round Mountain project has progressed from the exploration phase into a profitable producing oilfield throughout the year. The first Incremental well was drilled in February 2011 and, with five follow-up wells now drilled, the total production for 2011 was 24,413 barrels of oil

The greater Round Mountain field has historically produced more than 100 million barrels of oil. The Incremental leases are shown in yellow in Figure 2. All of the 2011 wells have been drilled in the eastern lease.

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Figure 2
Round Mountain project area and top
Vedder depth structure map
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Six wells have been drilled by Incremental in 2011 in Round Mountain.

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wELL SPUD DATE TOTAL DRILL DEPTH INITIAL OIL PRODUCTION REMARKS
(ft) (bopd)
Smoot 1 15 February 1875 100
Smoot 2 5 June 1700 28
Smoot 3 8 June 2610 24 Horizontal well
Smoot 4 30 June 2700 25 Inclined well
Smoot 5 19 November 2300 Will now be converted to
water disposal
Smoot 6 27 November 2000 Awaiting fracture
stimulation
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Page 6. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

OPERATIONAL REvIEw

The stratigraphy of the Round Mountain oilfield is shown in Figure 3.

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Figure 3 Round Mountain stratigraphic section

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Page 7. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

OPERATIONAL REvIEw

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Figure 4. Location map of Incremental’s Round Mountain wells

SMOOT 1 was drilled to acquire modern reservoir data in the Round Mountain lease. It was drilled to a total depth of 1875’, with four cores being cut with 100% recovery. Good shows were encountered with 120’ of oil pay between 1115’ and 1528’ The main pay is in the Walker Formation and it is the first Walker discovery in the San Joaquin Basin. The average production over the year was 65 bopd of 20° API oil.

SMOOT 2 was an offset to evaluate the Smoot 1 Walker discovery. It reached a total depth of 1700’ and intersected 57’ of net oil pay in the Walker target The well provided valuable information on oil/water contact, reservoir distribution and Smoot #1 reservoir drainage area. A 24’ interval was perforated and the well has produced at an average of 20 bopd with 110 bwpd. Initial internally calculated proven reserves for the Walker Formation accumulation in the Incremental acreage are 330,000 barrels of oil

SMOOT 3 was the first horizontal well drilled by Incremental. It was drilled to 1514’ where the drill string became stuck. Nine days were spent retrieving the fish. After 7 5/8” casing was set at 1800’, a 810’ horizontal hole was drilled

to a total depth of 2610’. Excellent shows were seen throughout the Pyramid Hill reservoir, with oil over the shakers. A 4 ½” slotted liner was run to 2610’. The well remains an enigma as the excellent shows and log character have not been converted into high flow rates with the well averaging 20 bopd (with virtually no water) since it was brought onto production in June 2011. Attempts to increase the productivity are continuing. The knowledge gained from this horizontal well accelerated the learning curve in developing the Round Mountain lease and have prompted Incremental to focus on drilling vertical wells that can then be fracture stimulated rather than additional horizontal wells.

SMOOT 4 was drilled as an inclined well to better site the surface location. It was drilled without incident to a total depth of 2700’ with shows down to 2185’ The drill string became stuck at 1900’ whilst pulling out of the hole to log. The fish was successfully recovered after 4 days. The well intersected a substantial oil column of 159’ of net oil pay. The well was initially completed in the Pyramid Hill Formation and was fracture stimulated between 1616’ and 1642’. Production has averaged 15 bopd and 166 bwpd, suggesting that a natural

fracture is carrying underlying water to the open perforations. At the end of the reporting period, plans are in place to perforate and fracture stimulate the shallower Jewett reservoir to increase the production from this well.

SMOOT 5 was an aggressive vertical stepout to determine the lateral extent of the productive oil zones in Round Mountain. It was drilled to the planned total depth of 2300’ Good to excellent mudlog shows were observed between 1360’ and 1545’ The net oil pay in the well was calculated as 103’. 7” casing was run to 1810’ and a slotted 5 ½” liner from 1810’ to total depth At the end of the report period, plans were well advanced to complete the well as a water disposal well.

Produced water from Incremental’s Round Mountain wells has to date been disposed of with a third party. Incremental has now gained approval to dispose of produced water into the water-bearing Walker interval in Smoot 5. This immediately saves Incremental as much as $50,000 per month. A replacement production well at the Smoot 5 location will be drilled in the coming months

Page 8. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

OPERATIONAL REvIEw

SMOOT 6 was a vertical well from the same surface location as the horizontal well Smoot 3. It was drilled to 2000’. Good to excellent mudlog shows with elevated gas readings were encountered in the objective Jewett and Pyramid Hill reservoir sections. The interval 1498’ to 1642’ was perforated and this interval has been fracture stimulated in two stages. At the end of the reporting period, the well is being brought onto production.

Wireline log responses of Smoot 5 and 6 are virtually identical, with substantial pay intervals in the Jewett and Pyramid Hill Formations in each well with an average porosity of 36%. As both Smoot 5 and 6 appear similar and as Smoot 5 was more beneficial as a water disposal well, it was decided to stimulate only Smoot 6.

Smoot 5 and 6 added significant productive area and reserves in the Jewett and Pyramid Hill intervals in the field. Reserve estimates will be calculated once sustained and stable production is observed from Smoot 6.

1.2 SHEEP SPRINgS PRODuCINg

oilfield (100% woRking inteRest)

The Sheep Springs oilfield was bought by Incremental in January 2010 Since that time, the field has produced over 50,000 barrels of oil and generated revenues in excess of US$11 million, significantly more than the purchase price of the field. Average production since acquisition has been 182 boepd. The field is now on decline (Figure 5), mainly due to the gradual depletion of reservoir pressure in the field. A number of workovers are currently being planned in Sheep Springs in an attempt to slow or even reverse this field decline. Studies are underway to evaluate the most appropriate method of developing the substantial heavier oil reserves in this lease at shallow depths.

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Figure 5. Monthly production graph of Sheep Springs, in Barrels per day

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1.3 McDONALD ANTICLINE developMent pRoject (100% woRking inteRest) Incremental continues to acquire significant mineral leases in the McDonald Anticline Field on the western margin of the San Joaquin Basin (Figure 1). This field has historically produced more than 22 million barrels of light oil from shallow, stacked sandstone reservoirs. A number of potential targets have already been identified for drilling in 2012 Figure 6 illustrates the type of play that Incremental is pursuing in the McDonald Anticline.

Figure 6. A typical cross section on Incremental’s Lease, showing probable unproduced oil below a shallow, early well.

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Page 9. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

OPERATIONAL REvIEw

1.4 ventuRa Basin pRoject (75% woRking inteRest)

In November 2011, Incremental signed an agreement to acquire a 75% working interest in 300 acres within the prolific Oak Ridge Anticline, a large regional anticlinal structure near the city of Ventura on the California coast (Figure 1) The lease is adjacent to the South Mountain field which has historically produced over 158 million barrels of oil. Peak oil production from the Incremental lease was about 1000 bopd in 1948 with a cumulative production of about 4 million barrels There has been no drilling in Incremental’s acreage since 1948

There are multiple stacked reservoirs between about 3200’ to below 8000’ within the area and oil production is typically accompanied by minimal water. Oil is light to moderate gravity. Incremental believes that the field was inadequately drained by the early operators and that there is substantial scope to drill infill wells. The first well is planned for mid-year when the drier conditions make access to the hilly drilling locations easier. Incremental will pay 100% of the cost of the first well to earn a 75% working interest in the lease.

1.5 RAvEN PASS ExPLORATION

pRospect (100% woRking inteRest)

The Raven Pass prospect is a large surface anticline with a strike length of over 10 kilometres. It is well defined by surface mapping, with 1500’ of structural relief and is located in the west of San Joaquin Basin (Figure 1), neighbouring giant oilfields such as Belridge. A shallow well drilled in anticline flowed 52º API gravity oil in 1942, but the deeper reservoir section has not been tested although it is productive in some nearby oilfields. Incremental has undertaken considerable field mapping, seismic purchase and subsurface studies over the reporting period. As an exploration well on this prospect carries risk along with potentially substantial reward, Incremental plans to farm out the drilling of at least one well in 2012, whilst maintaining significant equity in the project

1.6 EAST JOAquIN ExPLORATION

pRojects (100% woRking inteRest)

Over 450 acres of mineral leases have been acquired on the eastern side of the San Joaquin Basin (Figure 1) These leases are within or adjoin substantial shallow producing oilfields. These leases are viewed by Incremental to be highly prospective. Available seismic has been acquired and is being interpreted, along with offset well and production data. It is anticipated that at least one of these prospects will be drilled in 2012.

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Figure 7: Ventura Project, showing Incremental’s lease area

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Figure 8: North-south cross section, Ventura project

fractured oil shales mostly in the San Joaquin Basin Incremental’s prefers to focus on conventional resources, however, and is in an advanced stage of divesting of this asset.

1.7 guIJARRAL HILLS DEvELOPMENT pRoject (80-100% woRking inteRest)

The Guijarral Hills project is situated approximately 90 km north of the Sheep Springs oilfield. Incremental’s leases are located within a prolific oilfield that has historically produced over 50 million barrels of light oil, mainly in the 1950’s

1.8 INCREMENTAL’S DEvELOPMENT STRATEgY

Incremental’s development strategy for 2012 focuses on four projects:

Incremental acquired a substantial leasehold position within the Guijarral Field in 2011 to pursue unswept light oil in conventional sandstone reservoirs between 8300’ and 10300’. Detailed examination of all well records revealed that the main potential of the lease area lies in the unconventional fractured oil shales which are productive in adjacent fields. These siliceous, brittle shales are a major attraction for companies such as Occidental and Chevron, with Oxy currently producing 45,000 bopd from

Ongoing development of the Round Mountain oilfield. Up to five wells are planned in 2012
Drilling of the Ventura project.
Drilling of a number of wells in the McDonald Anticline project.
Drilling of the East San Joaquin exploration projects.

Concurrent with the development of these projects, Incremental will continue to evaluate new projects for acquisition.

page 10. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

Header

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Directors’ Report

Page 11. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

Directors’ Report

DIRECTORS

Mr CHRIS CRONIN B Bus (Acc ) FAIM (Non-executive Chairman)

Chris has 34 years’ experience in executive positions with some of the largest international companies in the oil and gas industry

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He retired from the position of Director, Corporate Strategy and Planning, Woodside Petroleum Ltd in October 2003 after 23 years of service. Key responsibilities during four years in this job included mergers and acquisitions, strategy and business planning, portfolio management (economics), and external affairs.

Other roles at Woodside included Director, Northern Australian Gas Projects and prior to that General Manager, Human Resources, IT and Corporate Affairs.

Prior to joining Woodside in 1980, Chris spent 9 years with BP Australia Ltd in marketing and personnel/industrial relations roles in both Victoria and Western Australia Chris is a founding investor in Incremental.

Current appointments in addition to Incremental are:

Chairman of the David Wirrpanda Foundation, a not-for-profit trust which provides assistance for the development of indigenous youth.

Additional non executive appointments in the last 5 years include:

Deputy Chairman, Indian Pacific Ltd, owner and operator of the West Coast Eagles Football Club (July 2002 – October 2011)
Chairman Incremental Petroleum Ltd (July 2005-June 2009)
Chairman Alinta Network Holdings Pty Ltd (July 2003-Feb 2007)
Non Executive Director, Geodynamics Ltd (October 2003-Feb. 2007)
President, Australian Institute of Management (WA) (May 2004-May 2006)
Appointed to Chair the Inquiry into the failure by Western Power, to supply electricity to Western Australia during the period 16-18 February 2004.

Qualifications:

Bachelor Business (Accounting), Curtin University, W.A., 1977
Stanford Senior Executive Program, Stanford University, USA, 1993
Fellow of the Australian Institute of Management

Mr gERRY MCgANN B Sc (Hons) (Managing Director)

Gerry has over 40 years experience in the upstream oil and gas industry in a career that has spanned all five continents. As a petroleum geologist, he has

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been instrumental in the discovery of oilfields totalling more than 200 million barrels of oil in Australia, Middle East and the North Sea. In his position as Exploration Manager for Occidental Petroleum, Gerry was responsible in increasing production from 32,000 bopd to 52,000 bopd in 3 years in Oman

Gerry was a founding shareholder and Managing Director of Incremental Petroleum. He identified the Selmo Oilfield in Turkey in 2005 and increased the production from a declining 1500 bopd to 2000 bopd before the company was taken over in March 2009. Additional appointments in the last 5 years include a non-executive director of Target Energy in 2009

Gerry has taught Petroleum Geology at degree and post-degree level at Curtin University for seven years. He was the president of three chapters of the Society of Petrophysicists and Well Log Analysts (SPWLA) and has been an invited speaker to SPWLA and the Society of Exploration Geophysicists annual conventions. He has published 14 technical papers and is a certified petroleum geologist. He is a founding investor in Incremental.

Hon jal (sandY) Macdonald LLB (Non-Executive Director)

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Sandy holds a Bachelor of Law from the University of Sydney and was admitted to the Roll of Solicitors in 1977 Sandy was elected to the Australian Senate

in 1993 During his parliamentary career of 15 years he was Deputy Leader of the National Party in the Senate and served in the Howard Ministry as Parliamentary Secretary for Trade and Parliamentary Secretary for Defence He also chaired the Senate Foreign Affairs, Defence and Trade Committee for eight years. Sandy had political responsibility for Austrade and has represented Australia at a high level. He has led delegations of both business and parliamentarians on behalf of Government to Turkey, the Middle East, Asia and the Pacific Rim.

On retiring from politics in 2008 Sandy was appointed a non-executive director of Defence Housing Australia (DHA) and serves on the DHA board audit committee. In 2011 he was appointed to the Anzac Centenary Advisory Board. He was a director of Incremental Petroleum Ltd from 2008 until its takeover in March 2009. He was a founding investor in Incremental.

MR MaRk stowell Bus CA

(Non-executive Director)

Mark has over 20 years of corporate finance and business management experience in a large variety of roles. Mark’s initial senior role was

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Manager of Corporate Finance at Arthur Andersen, involved in significant IPO and merger activity in the resource and energy sectors

Mark was a founder and board member for seven years of Anvil Mining, a significant African based copper mining company, listed on the ASX and subsequently TSX.

In 2004 he was a joint founder and Director of Incremental Petroleum Ltd

Mark was a joint founder and now Chairman of Mawson West Ltd, a TSX listed copper and silver producer in Africa. Mark is a founding investor in Incremental.

Page 12. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

DIRECTORS REPORT

MANAgEMENT

Incremental has an experienced and committed management team in place:

Mr JONATHAN ASquITH (Hons) CA MBA (CHIEF FINANCIAL OFFICER)

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Jonathan is a Chartered Accountant with over 25 years corporate experience with major international accounting firms and commercial

enterprises and has held senior executive positions with a number of public and listed Australian companies Jonathan holds a Masters of Business Administration from the University of Western Australia and brings to the company considerable experience in financial control and management and strategic planning for developing businesses. Jonathan is also a nonexecutive director of Mawson West Ltd. Jonathan is a founding investor in Incremental

Mr JIM HuSSEY M Pet Eng. University of Southern California (vICE PRESIDENT, uSA)

Jim first worked for Arco for seven years, where he contributed to an increase in production of 2,000 bopd over the projected field decline

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As Engineering Manager for Ferguson and Bosworth for 14 years, he was responsible for the company’s producing and exploration operations. Jim was then appointed President of Bosworth Oil Company, a significant independent, for three years. He was responsible for all day to day activities associated with the company.

Jim served for eight years as a consulting Petroleum Engineer for Laymac Corporation, where he was responsible for the McDonald Anticline Field and the French Camp Gas Field He then joined Occidental Petroleum Corporation for eight years until 2008, at the giant Elk Hills where he was responsible for reservoir engineering on the South East Nose and W31S project areas Concurrently, he worked for Laurus Capital Management where he analyzed and recommended oil and gas investment opportunities presented to the Fund.

Ms SuSAN HuNTER BCom, ACA, F Fin (GDipAFin (SecInst)), MAICD (Dip), ACIS (Dip) (COMPANY SECRETARY)

Susan has over 18 years experience in the corporate finance industry and has significant experience acting as Company Secretary of companies

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listed on the ASX. She has held senior management positions in Ernst & Young, PricewaterhouseCoopers, Bankwest and boutique advisory firm Norvest. Ms Hunter is founder and Managing Director of consulting firm Hunter Corporate which provides corporate governance advice and company secretarial services to ASX listed companies.

Susan holds a Bachelor of Commerce degree from the University of Western Australia majoring in accounting and finance, is a Member of the Australian Institute of Chartered Accountants, a Fellow of the Financial Services Institute of Australasia and a Member of the Australian Institute of Company Directors She is also a Member of the Institute of Chartered Secretaries and Administrators and Chartered Secretaries Australia and she is currently Company Secretary for five ASX listed companies.

Page 13. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

DIRECTORS REPORT

directors’ interests in the shares and options of the company

As at the date of this report, the interests of the Directors in the shares and options of Incremental Oil and Gas Ltd were:

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Ordinary Shares Unlisted Options $0.20 exercise price
Director
C Cronin 7,500,002 6,000,000
G McGann 24,340,004 20,500,000
J Macdonald 5,778,001 4,250,000
M Stowell 13,500,002 10,200,000
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principal activities

The principal activities during the year of entities within the Group are oil and gas exploration and production in North America. There has been no significant change in the nature of these activities during the year.

Review of operations

The Sheep Springs oilfield operated profitably during the year. The group acquired further interests in prospective oil producing areas in California at Round Mountain, the McDonald Anticline and the Ventura Basin and an exploration prospect at Raven’s Pass.

The current year had a full year of production in California USA from the Sheep Springs oilfield and the production from the Round Mountain oilfield which commenced in March 2011.

Profit before interest expense, tax, amortisation, depreciation and foreign exchange differences for the year was $2,981,917 (2010:$2,497,768)

Holders of convertible notes to the value of $A5,000,000 all converted their notes to shares on 2 July 2011.

Development and production at the Sheep Springs and Round Mountain oilfields continues. The company anticipates drilling further wells at these and other projects during 2012 and increasing production.

operating results for the year

The Group’s operating profit after income tax for the year was $814,672 (2010: $628,016). The Group’s basic earnings per share for the year was 0.66 cents (2010: 0.96 cents)

financial condition

Following the successful Initial Public Offer in the previous period, the Group has sufficient funds to implement its expansion strategies and repay debts as and when they fall due.

liquidity and capital resources

The consolidated cash flow statement illustrates that there was a decrease in cash and cash equivalents in the year of $3,657,641 (Period ended 31 December 2010, increase of $5,114,421). Analyses of the components of the increase are detailed in the consolidated statement of cash flows.

share issues during the year and to the date of this report

The number of shares on issue at 31 December 2011 was 135,643,680. Details of the issues of shares are set out in Note19 to the accounts

share options

At the date of this report, the unissued ordinary shares of the Company under option are as follows:

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Date of Expiry Exercise Price (AUD) Number under option
1 November 2014 20 cents 92,600,000
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dividends

The directors do not recommend that a dividend be paid. No dividends have been paid by the Company since incorporation.

Risk management

An Audit and Risk Committee has been established with a purpose to review and monitor the financial affairs of the Company. At the discretion of the committee, the external auditor and other members of the Board and management will be invited to Audit and Risk Committee meetings. The Audit and Risk Committee will consider any matters relating to the financial affairs of the Company and any other matter referred to it by the Board. The members of the Audit and Risk Committee are Mark Stowell (Chair) and Chris Cronin

Page 14. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

DIRECTORS REPORT

significant changes in the state of affairs

There were no significant changes in the state of affairs of the Group during the year other than as disclosed elsewhere in this report

environmental Regulation and performance

The Group’s activities are subject to environmental regulations under either Federal or State legislation. However, the Board believes that the Group has adequate systems in place for the management of its environmental requirements and is not aware of any breach of those environmental requirements as they apply to the Group

significant events after the balance date

Except for the foregoing, there were no significant events after the balance date

likely developments and expected results

The Group will continue to focus on oil and gas production and exploration opportunities.

indemnification and insurance of directors and officer

The Company has entered into Director and Officer Protection Deeds (“Deed”) with each Director and the Company Secretary (collectively “Officers”). Under the Deed, the Company indemnifies the Officers to the maximum extent permitted by law and the Constitution against legal proceedings, damage, loss, liability, cost, charge, expense, outgoing or payment (including legal expenses on a solicitor/client basis) suffered, paid or incurred by the officers in connection with the Officers being an officer of the Company, the employment of the officer with the Company or a breach by the Company of its obligations under the Deed The total amount of insurance premiums paid was $16,876.

The Company has not provided any insurance or indemnification for the Auditor of the Company.

Remuneration Report (audited)

The remuneration report outlines the Director remuneration and executive remuneration arrangements of the Company and the Group in accordance with the requirements of the Corporations Act 2001 and its Regulations. For the purposes of this report, key management personnel (KMP) of the group are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Company and the Group, directly or indirectly, including any Director (whether executive or otherwise) of the parent company, Incremental Oil and Gas Ltd (“the Parent”)

For the purposes of this report, the term ‘executive’ encompasses the chief executive, senior executives, general managers and secretaries of the Parent and the Group

details of key directors and management personnel

The Directors of Incremental Oil and Gas Ltd during the year were:

Chris Cronin (Chairman)

Remuneration policy

The performance of the Group depends on the quality of its key management and personnel. To prosper the Group must attract, motivate and retain highly skilled directors and executives.

To this end the Group embodies the following principles in its remuneration policy:

Provide competitive rewards to attract high calibre executives;
Link executive rewards to share holder value;
Significant proportion of executive compensation ‘at risk’, dependent upon meeting pre-determined targets; and
Establishing demanding, appropriate performance hurdles in relation to variable executive compensation.
The members of the Company’s remuneration committee are Chris Cronin (Chair) and Sandy Macdonald

non executive director Remuneration

Non Executive Directors’ fees are determined within an aggregate fee pool limit, which is periodically recommended for approval by shareholders. This amount is separate from any specific tasks that the Directors may take on for the Company. The current aggregate fee pool limit approved by shareholders is $350,000.

senior executive Remuneration policy

The Company is committed to remunerating its senior executives in a manner that is market-competitive and consistent with best practice as well as supporting the interests of shareholders. Consequently, under the senior executive remuneration policy the remuneration of senior executives may be comprised of the following:

fixed salary that is determined from a review of the market and reflects core performance requirements and expectations;
a performance bonus designed to reward actual achievement by the individual of performance objectives and for materially improved Company performance;
participation in any share/option scheme with thresholds approved by shareholders; and
statutory superannuation.

There are no fixed terms of employment in the senior executive employment agreements

By remunerating senior executives through performance and long-term incentive plans in addition to their fixed remuneration the Company aims to align the interests of senior executives with those of shareholders and increase Company performance

The objective behind using this remuneration structure is to drive improved Company performance and thereby increase shareholder value as well as aligning the interests of executives and shareholders

The Board may use its discretion with respect to the payment of bonuses, stock options, share purchase plans and other incentives.

Gerry McGann (Managing Director)
Hon JAL (Sandy) Macdonald
Mark Stowell

The key management personnel (other than the directors) during the year were:

Jim Hussey (Vice President)

Page 15. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

DIRECTORS REPORT

Remuneration of each company director and key management personnel

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Year ended 31 Post
December 2011 Short Term Employment Equity
Salary & Non Other Superannuation Equity Total Value of
Fees (i) Monetary Benefits based Equity based
Benefits (iii) payments payments % of
(ii) Remuneration
(iv)
Directors $ $ $ $ $ $ %
C Cronin 77,498 4,219 - 6,975 - 88,692 -
G McGann 236,799 4,219 - 44,776 - 285,794 -
J Macdonald 51,665 4,219 - 4,650 - 60,534 -
M Stowell 51,665 4,219 - 4,650 - 60,534 -
executives
J Hussey 215,264 - 5,309 - - 220,573 -
Total 632,891 16,876 5,309 61,051 - 716,127 -
Period ended 31 Post
December 2010 Short Term Employment Equity
Salary & Non Other Superannuation Equity Total Value of
Fees (i) Monetary Benefits based Equity based
Benefits (iii) payments payments % of
(ii) Remuneration
(iv)
Directors $ $ $ $ $ $ %
C Cronin 76,380 4,146 - 6,874 - 87,400 -
G McGann 254,600 4,146 - 22,914 - 281,660 -
J Macdonald 50,920 4,146 - 4,583 - 59,649 -
M Stowell 50,920 4,146 - 4,583 - 59,649 -
executives
J Hussey 220,516 - 15,484 - 147,997 383,997 38 5%
J Asquith 24,442 - - - - 24, 442 -
Total 677,778 16,584 15,484 38,954 147,997 896,797 -
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i Included in Salary and Fees are amounts made available to related parties of directors. The amounts shown above in relation to directors include the provision of their services relating to other geologists and geological services and corporate services and administration.

ii The cost of D&O insurance is split between the Directors and is shown under Non Monetary Benefits

iii Other monetary benefits comprise health insurance and employment related benefits.

iv. Employee options were issued in 2010 as part of the remuneration philosophy of the company. The value of the options has been calculated using the Black-Scholes model. Bonuses have also been issued in the form of shares to certain employees.

Page 16. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

DIRECTORS REPORT

Mr McGann has an employment contract with the Company dated 14 February 2010 which commenced on 1 January 2010. The per annum gross salary under the contract is:

$250,000; increasing to $300,000 subject to the Company achieving average daily gross production of 400 boepd over a continuous 3 month period; and further increasing to $375,000, subject to the Company achieving average daily gross production of 700 boepd over a continuous 3 month period.

In addition to the salary, one-off cash bonuses are applicable as follows:

$50,000 on achieving average daily gross production of 300 boepd over a continuous period of 3 months.
$60,000 on achieving average daily gross production of 400 boepd over a continuous period of 3 months.
$60,000 on achieving average daily gross production of 600 boepd over a continuous period of 3 months.

The contract is to be re-negotiated subject to average production of the Company exceeding 1000 boe per day. The contract may be terminated by either the Company or Mr McGann by providing three months notice in writing, with Mr McGann being entitled to the salary up to and including the date of termination.

Mr Hussey, Vice President USA of the Company, has an employment contract with the Company dated 5 January 2010, as amended on 7 August 2010. The salary under the contract (as amended) is related to the gross annual average oil production as follows:

< 200 bopd US$160,000

From Board approval of two new significant projects (Round Mountain and Guijarral)

200 bopd US$200,000 > 400 bopd US$250,000 > 1000 bopd US$300,000

The contract was modified on 7 August 2010 such that the base salary was increased to US$200,000, with other aspects remaining the same

Cash bonuses are payable, related to half yearly average oil production, as a percentage of the gross salary as follows:

Half yearly production average > 500 bopd 20% of gross salary Half yearly production average > 700 bopd 20% of gross salary Half yearly production average > 1000 bopd 20% of gross salary

analysis of movements in options issued as remuneration

There was no movement during the reporting year of options issued as remuneration for Company directors and the key management personnel of the Group (other than the directors). No remuneration options were exercised or lapsed during the year.

The movement during the prior reporting period of options issued as remuneration for Company Director and key management personnel of the Group (other than the Directors) is shown below. These are presented in AUD.

For the period from incorporation to 31 December 2010

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Terms and Conditions for each Grant Vested
Granted Grant Date Fair Value Per Exercise Expiry Date First Last No %
No Option at Grant Price Per Exercise Exercise
Date Option Date Date
(A$) (A$)
J Hussey 1,000,000 1/12/2009 0 035123 0 20 1/11/2014 1/6/2010 1/11/2014 1,000,000 100
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Summary options issued as remuneration for each Company Director and the 2 most highly remunerated ofcers of the Group (other than the Directors) by value for the period ended 31 December 2010

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Granted in period Value of Options exercised in period Lapsed in Period
A$ $ $
J Hussey 35,123 - -
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Page 17. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

DIRECTORS REPORT

committee Memberships

Memberships of Board committees by independent Board members are as follows:

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----- Start of picture text -----

Director Audit and Risk committee Remuneration and nomination
committee
C Cronin X X
JAL Macdonald X
M Stowell X
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corporate governance

In recognising the need for high standards of corporate behaviour and accountability, the Directors’ support and have, where currently considered appropriate given the size and nature of the Company, adhered to the best practice recommendations set by the ASX Corporate Governance Council.

directors’ Meetings

The number of meetings of Directors held during the year and the numbers of meetings attended by each Director were as follows:

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DIRECTORS MEETINGS
DIRECTORS HELD ATTENDED
Mr C Cronin 8 8
Mr G McGann 8 8
Mr J Macdonald 8 7
Mr M Stowell 8 8
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directors’ benefits

No Director of the Company has received or become entitled to receive a benefit because a contract that the Director or a firm of which the Director is a member or an entity in which the Director has a substantial financial interest made with the company or an entity that the company controlled, or a body corporate that was related to the company, when the contract was made or when the Director received, or became entitled to receive the benefit, other than a benefit included in the aggregate amount of emoluments received or due and receivable by the Directors shown in Note 6 to the Financial Statements.

number of employees

The number of employees at 31 December 2011 is 2

proceedings on behalf of the company

No person has applied for leave of court to bring proceedings on behalf of the Company or intervene in any proceedings to which the Group is a party for the purpose of taking responsibility on behalf of the Company for all or any part of those proceedings The Company was not a party to any such proceedings during the year.

auditor independence declaration to the directors of incremental oil and gas ltd

The auditor’s independence declaration for the year ended 31 December 2011 has been received and is to be found on page 47.

non-audit services

During the year no amount was paid to Stantons International or a related entity of Stantons International for the provision of nonaudit services.

This report is signed in accordance with a resolution of the Directors, made pursuant to Section 298(2) of the Corporations Act 2001

On behalf of the Directors

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Gerry McGann Managing Director 30 March 2012

Page 18. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

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Financial Report

Page 19. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

Consolidated Statement of Financial Position

AS AT 31 DECEMBER 2011

Notes current assets Cash and cash equivalents 9 Trade and other receivables 10 Inventories 11 total current assets non-current assets Other fnancial assets 12 Oil propertes 13 Exploraton assets 14 Plant and equipment 15 total non-current assets Total assets current liabilites Trade and other payables 16 Convertble notes 17 Provisions 18 total current liabilites non current liabilites Convertble notes 17 Deferred taxaton 5 total non-current liabilites total liabilites Net assets Equity atributable to equity holders of the parent Issued capital 19 Reserves 20 Accumulated Losses total equity	31 december 2011 $ 1,456,780 704,372 91,046 2,252,198 100,000 15,747,741 739,700 472,588 17,060,029 19,312,227 516,805 - 30,769 547,574 - 1,139,658 1,139,658 1,687,232 17,624,995 17,905,010 35,769 (315,784) 17,624,995	31 december 2010 $ 5,114,421 538,780 44,521
		5,697,722
		100,000 11,120,893 388,797 510,149
		12,119,839
		17,817,561
		688,826 2,800,600 25,460
		3,514,886
		2,291,400 501,130
		2,792,530
		6,307,416
		11,510,145
		12,604,832 35,769 (1,130,456)
		11,510,145

The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes.

page 20. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

Consolidated Statement of Comprehensive Income

FOR THE YEAR ENDED 31 DECEMBER 2011

Notes Oil and Gas Revenue 4 Other Revenue 4 Royaltes paid Depreciaton Amortsaton Exploraton Lease operatng expenses Other costs Wages and salaries Share based payments Foreign exchange losses (diferences) Interest proft/(loss) before income tax Income tax expense 5 proft/(loss) afer tax other comprehensive income/(loss) for the period Foreign currency translaton diferences total comprehensive income/(loss) proft for the year/period atributable to members of the entty total comprehensive income/ (loss) for the year/period atributable to members of the entty Basic Earnings Per Share (cents) 21 diluted earnings per share (cents) 21	Year ended 31 december 2011 $ 7,704,018 46,476 (1,157,910) (68,402) (993,442) (64,081) (1,472,946) (1,343,095) (730,545) - (142,074) (324,799) 1,453,200 (638,528) 814,672 - 814,672 814,672 814,672 0 66 0 54	period from incorporaton to 31 december 2010 $ 6,169,254 31,848 (956,929) (67,807) (705,842) (107,496) (799,217) (958,504) (722,191) (158,996) (102,852) (492,122)
		1,129,146 (501,130)
		628,016
		(1,758,472)
		(1,130,456)
		628,016
		(1,130,456)
		0 96 0 96

The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes

Page 21. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

Consolidated Statement of Changes in Equity

FOR THE YEAR ENDED 31 DECEMBER 2011

	issued capital	accumulated losses	other reserves	total equity
	$	$	$	$
at 31 december 2010 Proft atributable to members	12,604,832 -	(1,130,456) 814,672	35,769 -	11,510,145 814,672
of the Group
Other comprehensive income	-	-	-	-
Total comprehensive income for the year	-	814,672	-	814,672
Exercise of Optons	32,927	-	-	32,927
Capital raising costs Conversion of Convertble notes	(31,373) 5,298,624	- -	- -	(31,373) 5,298,624
at 31 december 2011	17,905,010	(315,784)	35,769	17,624,995
for the period from	issued capital	accumulated losses	other reserves	total equity
incorporaton to
31 december 2010
Proft atributable to	$	$	$	$
members of the Group	-	628,016	-	628,016
Other comprehensive income	-	-	(1,758,472)	(1,758,472)
Total comprehensive income
for the period	-	628,016	(1,758,472)	(1,130,456)
Share opton reserve	-	-	35,769	35,769
Issue of share capital	13,019,598	-	-	13,019,598
Capital raising costs Efect of change of functonal currency	(414,766) -	- (1,758,472)	- 1,758,472	(414,766) -
at 31 december 2010	12,604,832	(1,130,456)	35,769	11,510,145

The above Consolidated Statement of Changes in Equity is to be read in conjunction with the accompanying notes.

Page 22. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

Consolidated Statement of Cash Flows

FOR THE YEAR ENDED 31 DECEMBER 2011

Notes cash fows from operatng actvites Receipts from customers Payments to suppliers and employees Interest received Interest paid net cash provided by operatng actvites 22 cash fows from investng actvites Payments for oil propertes Payments for purchases of property plant and equipment 15 Payments for exploraton 14 net cash used in investng actvites cash fows from fnancing actvites proceeds from issue of shares Capital raising costs proceeds of borrowings Repayment of borrowings net cash provided by fnancing actvites net decrease in cash and cash equivalents exchange diferences on cash balances held cash and cash equivalents at beginning of the year cash and cash equivalents at end of period/year 9	2011 $ 7,540,508 (4,725,584) 44,394 (646,693) 2,212,625 (5,499,243) (30,841) (406,286) (5,936,370) 32,927 (31,373) - - 1,554 (3,722,191) 64,550 5,114,421 1,456,780	2010 $ 5,630,475 (3,675,203) 31,848 (171,225)
		1,815,895
		(13,185,447) (645,714) (430,475)
		(14,261,636)
		12,882,928 (414,766) 5,438,256 (346,256)
		17,560,162
		5,114,421 - -
		5,114,421

The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes

Page 23. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

Notes to the Financial Statements

1. CORPORATE INFORMATION

The financial report of Incremental Oil and Gas Ltd (the Company) for the financial year ended 31 December 2011 was authorised for issue in accordance with a resolution of the Directors on 30 March 2011. The consolidated financial statements of the company as at and for the year ended 31 December 2011 comprises the Company and its subsidiaries (“Group”)

Separate financial statements for Incremental Oil and Gas Ltd as an individual entity are no longer presented as the consequence of a change in the Corporations Act 2001, however required financial information for Incremental Oil and Gas Ltd as an individual entity is included in Note 29.

2. SuMMARY OF SIgNIFICANT ACCOuNTINg POLICIES

The significant policies that have been adopted in the preparation of this financial report are:

(a) Basis of preparation

The financial report is a general purpose financial report which has been prepared in accordance with the requirements of the Corporations Act 2001 and Australian Accounting Standards including Australian Accounting Interpretations. The financial report has also been prepared on a historical cost basis and accrual accounting, modified where applicable by the measurement of selected financial assets and financial liabilities at fair value. The financial report is presented in United States dollars

(b) statement of compliance

The financial report complies with Australian Accounting Standards, which include Australian equivalents to International Financial Reporting Standards (AIFRS). Compliance with AIFRS ensures that the financial report, comprising the financial statements and notes thereto, complies with International Financial Reporting Standards (IFRS).

The Company has adopted all new and revised Australian Accounting Standards issued by the AASB which are mandatory to apply to the current period. The new Standards and amendments which are mandatory are as follows:

AASB 124 Related Party Transactions (Amendment). The AASB issued an amendment to AASB 124 that clarifies the definitions of a related party. The new definitions emphasise a symmetrical view of related party relationships and clarifies the circumstances in which persons and key management personnel affect related party relationships of an entity. In addition, the amendment introduces an exemption from the general related party disclosure requirements for transactions with government and entities that are controlled, jointly controlled or significantly influenced by the same government as the reporting entity. The adoption of the amendment did not have any impact on the financial position or performance of the Group

effect on the financial position or performance of the Group because the Group does not have these type of instruments

AASB Int 14 Prepayments of a Minimum Funding Requirement (Amendment). The amendment removes an unintended consequence when an entity is subject to minimum funding requirements and makes an early payment of contributions to cover such requirements. The amendment permits a prepayment of future service cost by the entity to be recognised as a pension asset The Group is not subject to minimum funding requirements, therefore the amendment of the interpretation has no effect on the financial position nor performance of the Group
In May 2010, the AASB issued its third omnibus of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard. The adoption of the following amendments resulted in changes to accounting policies, but no impact on the financial position or performance of the Group
AASB 7 Financial instruments – Disclosures: The amendment was intended to simplify the disclosures provided by reducing the volume of disclosures around collateral held and improving disclosures by requiring qualitative information to put the quantitative information in context.
AASB 101 Presentation of Financial Statements: The amendment clarifies that an entity may present an analysis of each component of other comprehensive income maybe either in the statement of changes in equity or in the notes to the financial statements.

Other amendments resulting from Improvements to AASBs to the following standards did not have any impact on the accounting policies, financial position or performance of the Group:

AASB 3 Business Combinations (Contingent consideration arising from business combination prior to adoption of AASB 3 (as revised in 2008))
AASB 3 Business Combinations (Un-replaced and voluntarily replaced share-based payment awards)
AASB 127 Consolidated and Separate Financial Statements
AASB 134 Interim Financial Statements

The following interpretations and amendments to

interpretations did not have any impact on the accounting policies, financial position or performance of the Group:

AASB Int 13 Customer Loyalty Programmes (determining the fair value of award credits)
AASB Int 19 Extinguishing Financial Liabilities with Equity instruments
AASB 132 Financial instruments: Presentation (Amendment). The AASB issued an amendment that alters the definition of a financial liability in AASB 132 to enable entities to classify rights issues and certain options or warrants as equity instruments The amendment is applicable if the rights are given pro rata to all of the existing owners of the same class of an entity’s non-derivative equity instruments, to acquire a fixed number of the entity’s own equity instruments for a fixed amount in any currency. The amendment has had no

Page 24. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

NOTES TO THE FINANCIAL STATEMENTS

new accounting standards for application in future periods The AASB has issued a number of new and amended Accounting Standards and Interpretations that have mandatory application dates for future reporting periods, some of which are relevant to the Group. The Group has decided not to early adopt any of the new and amended pronouncements. The Group’s assessment of the new and amended pronouncements that are relevant to the Group but applicable in future reporting periods is set out below:

AASB 9: Financial Instruments (December 2010) and AASB 2010-7: Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) [AASB 1, 3, 4, 5, 7, 101, 102, 108, 112, 118, 120, 121, 127, 128, 131, 132, 136, 137, 139, 1023 & 1038 and Interpretations 2, 5, 10, 12, 19 & 127] (applicable for annual reporting periods commencing on or after 1 January 2013).

These Standards are applicable retrospectively and include revised requirements for the classification and measurement of financial instruments, as well as recognition and derecognition requirements for financial instruments.

The key changes made to accounting requirements include:

simplifying the classifications of financial assets into those carried at amortised cost and those carried at fair value;
simplifying the requirements for embedded derivatives;
removing the tainting rules associated with held-tomaturity assets;
removing the requirements to separate and fair value embedded derivatives for financial assets carried at amortised cost;
allowing an irrevocable election on initial recognition to present gains and losses on investments in equity instruments that are not held for trading in other comprehensive income. Dividends in respect of these investments that are a return on investment can be recognised in profit or loss and there is no impairment or recycling on disposal of the instrument
requiring financial assets to be reclassified where there is a change in an entity’s business model as they are initially classified based on: (a) the objective of the entity’s business model for managing the financial assets; and (b) the characteristics of the contractual cash flows; and
requiring an entity that chooses to measure a financial liability at fair value to present the portion of the change in its fair value due to changes in the entity’s own credit risk in other comprehensive income, except when that would create an accounting mismatch. If such a mismatch would be created or enlarged, the entity is required to present all changes in fair value (including the effects of changes in the credit risk of the liability) in profit or loss.

The Group has not yet been able to reasonably estimate the impact of these pronouncements on its financial statements.

AASB 2010-6: Amendments to Australian Accounting Standards – Disclosures on Transfers of Financial Assets [AASB 1 & AASB 71 (applicable for annual reporting periods beginning on or after 1 July 2011).
This Standard adds and amends disclosure requirements about transfers of financial assets, especially those in respect of the nature of the financial assets involved and the risks associated with them. Accordingly, this Standard makes amendments to AASB 1: First-time Adoption of Australian Accounting Standards, and AASB 7: Financial Instruments: Disclosures, establishing additional disclosure requirements in relation to transfers of financial assets.

This Standard will only affect certain disclosures relating to financial instruments and is not expected to significantly impact the Group

AASB 2010-8: Amendments to Australian Accounting Standards - Deferred Tax: Recovery of Underlying Assets [AASB 112] (applies to periods beginning on or after 1 January 2012)
This Standard makes amendments to AASB 112: income Taxes and incorporates Interpretation 121 into AASB 112.
Under the current AASB 112, the measurement of deferred tax liabilities and deferred tax assets depends on whether an entity expects to recover an asset by using it or by selling it. The amendments introduce a presumption that an investment property is recovered entirely through sale. This presumption is rebutted if the investment property is held within a business model whose objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale.
The amendments are not expected to significantly impact the Group
AASB 1054: Australian Additional Disclosures and AASB 20111: Amendments to Australian Accounting Standards arising from the Trans-Tasman Convergence Project [AASB 1, AASB 5, AASB 101, AASB 107, AASB 108, AASB 121, AASB 128, AASB 132 & AASB 134 and Interpretations 2, 112 & 113] (applicable for annual reporting periods commencing on or after 1 July 2011)
AASB 1054 sets out the Australian-specific disclosures that are additional to IFRS disclosure requirements.

The disclosure requirements in AASB 1054 were previously located in other Australian Accounting Standards.

These Standards are not expected to significantly impact the Group
AASB 10: Consolidated Financial Statements, AASB 11: Joint Arrangements, AASB 12: Disclosure of Interests in Other Entities, AASB 127: Separate Financial Statements (August 2011), AASB 128: Investments in Associates and Joint Ventures (August 2011) and AASB 2011-7: Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards [AASB 1, 2, 3, 5, 7, 9, 2009-11, 101, 107, 112, 118, 121, 124 132, 133, 136, 138: 139, 1023 & 1038 and Interpretations 5, 9, 16 & 17] (applicable for annual reporting periods commencing on or after 1 January 2013).
AASB 10 replaces parts of AASB 127: Consolidated and Separate Financial Statements (March 2008, as amended) and Interpretation 112: Consolidation - Special Purpose Entities. AASB 10 provides a revised definition of control and additional application guidance so that a single control model will apply to all investees.
The Group has not yet been able to reasonably estimate the impact of this Standard on its financial statements.
AASB 11 replaces AASB 131: Interests in Joint Ventures (July 2004, as amended) AASB 11 requires joint arrangements to be classified as either “joint operations” (whereby the parties that have joint control of the arrangement have rights to the assets and obligations for the liabilities) or ‘joint ventures” (where the parties that have joint control of the arrangement have rights to the net assets of the arrangement). Joint ventures are required to adopt the equity method of accounting (proportionate consolidation is no longer allowed).

AASB 12 contains the disclosure requirements applicable to entities that hold an interest in a subsidiary, joint venture, joint operation or associate. AASB 12 also introduces the concept of a “structured entity”, replacing the ‘special

Page 25. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

notes to the financial statements

purpose entity” concept currently used in Interpretation 112, and requires specific disclosures in respect of any investments in unconsolidated structured entities. This Standard will only affect disclosures and is not expected to significantly impact the Group

To facilitate the application of AASBs 10, 11 and 12, revised versions of AASB 127 and AASB 128 have also been issued. These Standards are not expected to significantly impact the Group
AASB 13: Fair Value Measurement and AASB 2011-8: Amendments to Australian Accounting Standards arising from AASB 13 [AASB 1, 2, 3, 4, 5, 7, 9, 2009-11, 2010-7, 101, 102, 108, 110, 116, 117, 118, 119, 120, 121, 128, 131, 132, 133, 134, 136, 138, 139, 140, 141, 1004, 1023 & 1038 and Interpretations 2, 4, 12, 13, 14, 17, 19, 131 & 132] (applicable for annual reporting periods commencing on or after 1 January 2013)

AASB 13 defines fair value, sets out in a single Standard a framework for measuring fair value, and requires disclosures about fair value measurements.

AASB 13 requires:

inputs to all fair value measurements to be categorised in accordance with a fair value hierarchy; and
enhanced disclosures regarding all assets and liabilities (including, but not limited to, financial assets and financial liabilities) measured at fair value.
These Standards are not expected to significantly impact the Group
AASB 2011-9: Amendments to Australian Accounting Standards – Presentation of Items of Other Comprehensive Income [AASB 1, 5, 7, 101, 112, 120, 121, 132, 133, 134, 1039 & 1049] (applicable for annual reporting periods commencing on or after 1 July 2012).
The main change arising from this Standard is the requirement for entities to group items presented in other comprehensive income (OCI) on the basis of whether they are potentially reclassifiable to profit or loss subsequently.
• This Standard affects presentation only and is not expected to significantly impact the Group.
AASB 119: Employee Benefits (September 2011) and AASB 2011-10: Amendments to Australian Accounting Standards arising from AASB 119 [AASB 1, AASB 8, AASB 101, AASB 124, AASB 134, AASB 1045 & AASB 2011-8 and Interpretation 14] (applicable for annual reporting periods commencing on or after 1 January 2013).

These Standards introduce a number of changes to the presentation and disclosure of defined benefit plans. The Group does not have any defined benefit plans.

AASB 119 (September 2011) also includes changes to the accounting for termination benefits that require an entity to recognise an obligation for such benefits at the earlier of:

(i) for an offer that may be withdrawn – when the employee accepts;
(ii) for an offer that cannot be withdrawn – when the offer is communicated to affected employees; and
(iii) where the termination is associated with a restructuring of activities under AASB 137: Provisions, Contingent Liabilities and Contingent Assets, and if earlier than the first two conditions – when the related restructuring costs are recognised

The Group has not yet been able to reasonably estimate the impact of these changes on its financial statements.

(c) Basis of consolidation

The consolidated financial statements comprise the financial statements of Incremental Oil and Gas Ltd (“Incremental Oil and Gas”) and its subsidiaries (as outlined in note 24) as at and for the period ended 31 December Interests in associates are equity accounted and are not part of the Group

Subsidiaries are all those entities over which Incremental Oil and Gas has the power to govern the financial and operating policies so as to obtain benefits from their activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether Incremental Oil and Gas controls another entity.

The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. In preparing the consolidated financial statements, all intercompany balances and transactions, income and expenses and profits and losses resulting from infra-group transactions have been eliminated in full.

Subsidiaries are fully consolidated from the date on which Incremental Oil and Gas obtains control until such time as Incremental Oil and Gas ceases to control such entities.

The acquisition of subsidiaries is accounted for using the acquisition method of accounting. The acquisition method of accounting involves recognising at acquisition, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non controlling interest in the acquiree The identifiable assets acquired and liabilities assumed are measured at their fair values at the date of acquisition. Any difference between the fair value of the consideration and the fair values of the identifiable net assets acquired is recognised as goodwill or a discount on acquisition.

A change in the ownership interest of a subsidiary that does not result in a loss of control is accounted for as an equity transaction.

Non-controlling interests are allocated their share of net profit after tax in the statement of comprehensive income and are presented with equity in the consolidated statement of financial position, separately from the equity of the owners of the parent

Losses are attributed to the non-controlling interest even if that results in a deficit balance.

If Incremental Oil and Gas loses control over a subsidiary, it:

Derecognises the assets (including goodwill) and liabilities of the subsidiary;
Derecognises the carrying value of any non-controlling interest;
Derecognises the cumulative translation differences recorded in equity;
Recognises the fair value of the consideration received;
Recognises the fair value of any investment retained;
Recognises and surplus or deficit in the statement of comprehensive income;
Reclassifies the parent’s share of components previously recognised in other comprehensive income to profit or loss.

(d) Business combinations

Business combinations occur where an acquirer obtains control over one or more businesses and results in the consolidation of its assets and liabilities.

A business combination is accounted for by applying the acquisition method, unless it is a combination involving

Page 26. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

NOTES TO THE FINANCIAL STATEMENTS

entities or businesses under common control. The acquisition method requires that for each business combination one of the combining entities must be identified as the acquirer fie parent entity). The business combination will be accounted for as at the acquisition date, which is the date that control over the acquiree is obtained by the parent entity. At this date, the parent shall recognise, in the consolidated accounts, and subject to certain limited exceptions, the fair value of the identifiable assets acquired and liabilities assumed, in addition, contingent liabilities of the acquiree will be recognised where a present obligation has been incurred and its fair value can be reliably measured

The acquisition may result in the recognition of goodwill (refer to Note 2 (k)) or a gain from a bargain purchase The method adopted for the measurement of goodwill will impact on the measurement of any non-controlling interest to be recognised in the acquiree where less than 100% ownership interest is held in the acquires

The acquisition date fair value of the consideration transferred for a business combination plus the acquisition date fair value of any previously held equity interest shall form the cost of the investment in the separate financial statements, Consideration may comprise the sum of the assets transferred by the acquirer Liabilities incurred by the acquirer to the former owners of the acquiree and the equity interests issued by the acquirer

Fair value uplifts in the value of pre-existing equity holdings are taken to the statement of comprehensive income. Where changes in the value of such equity holdings had previously been recognised in other comprehensive income, such amounts are recycled to profit or loss.

Included in the measurement of consideration transferred is any asset or liability resulting from a contingent consideration arrangement. Any obligation incurred relating to contingent consideration is classified as either a financial liability off equity instrument, depending upon the nature of the arrangement Rights to refunds of consideration previously paid are recognised as a receivable. Subsequent to initial recognition, contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. Contingent consideration classified as an asset or a liability is remeasured each reporting period to fair value through the statement of comprehensive income unless the change in value can be identified as existing at acquisition date.

All transaction costs incurred in relation to the business combination are expensed to the statement comprehensive income

(e) taxation

Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes

Deferred income tax liabilities are recognised for all taxable temporary differences:

except where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable

that the temporary differences will not reverse in the foreseeable future

Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised:

except where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised.

Deferred income tax assets and liabilities are measured 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 (and tax laws) that have been enacted or substantively enacted at the balance sheet date

Income taxes relating to items recognised directly in equity are recognised in equity and not in the income statement

(f) investments and other financial assets

Financial assets in the scope of AASB 139 Financial Instruments: Recognition and Measurement are classified as either financial assets at fair value through profit or loss, loans and receivables, held to maturity investments, or available-for-sale assets. When financial assets are recognised initially, they are measured at fair value, plus in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The Group determines the classification of its financial assets after initial recognition and when allowed and appropriate reevaluates this designation at each financial period-end.

All regular way purchases and sales of financial assets are recognised on the trade date i e the date that the Group commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets under contracts that require delivery of the assets within the period established generally by regulation or convention in the Market place.

(i) Financial assets at fair value through profit or loss

Financial assets classified as held for trading are included in the category ‘financial assets at fair value through profit or loss’. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term with the intention of making a profit. Derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on investments held for trading are recognised in profit or loss.

(ii) Held- to- maturity investments

Non derivative financial assets with fixed or determinable

Page 27. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

notes to the financial statements

payments and fixed maturity are classified as held-to maturity when the Group has the positive intention and ability to hold to maturity. Investments intended to be held for an undefined period are included in this classification. Investments that are intended to be held-to-maturity, such as bonds, are subsequently measured at amortised cost. This cost is computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initially recognised amount and the maturity amount. This calculation includes all fees and points paid or received between parties to the contract that are integral part of the effective interest rate, transaction costs and all other premiums and discounts. For investments carried at amortised cost, gains and losses are recognised in profit or loss when the investments are derecognised or impaired, as well as through amortisation process

(iii) Loans and receivables

Loans and receivables including loan notes and loans to key management personnel are non-derivative financial assets with fixed determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains or losses are recognised in profit or loss when the loans and receivables are derecognised or impaired, as well as through the amortisation process.

(iv) Available-for-sale investments

Available-for-sale investments are those non-derivative financial assets that are designated as available-for-sale or are not classified as any of the three preceding categories. After initial recognition available-for-sale investments are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is recognised in profit or loss.

The fair values of the investments that are actively traded in the organised financial markets are determined by reference to quoted market bid prices at the close of business on the balance sheet date. For investments with no active market fair values are determined using valuation techniques.

Such techniques include: using recent arm’s length market transactions; reference to the current market value of another instrument that is substantially the same discounted cash flow analysis and option pricing models making as much use of available and supportable market data as possible and keeping judgemental inputs to a minimum

(g) interest in a jointly controlled operation

A joint venture is a contractual agreement whereby two or more parties undertake an economic activity that is subject to joint control. A jointly controlled operation involves use of assets and other resources of the venturers rather than the establishment of a separate entity. The Group recognises its interest in the jointly controlled operation by recognising the assets that it controls and the liabilities that it incurs. The Group also recognises the expenses that it incurs and its share of the income that it earns from the sale of goods or services by the jointly controlled operation.

(h) plant and equipment

Plant and equipment is stated at cost less accumulated depreciation and any impairment in value. Land and buildings are measured at fair value less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows:

Plant and equipment over 5 to 10 years.

Impairment

The carrying values of plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cashgenerating units are written down to their recoverable amount. The recoverable amount of plant and equipment is the greater of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current Market assessments of the time value of money and the risks specific to the asset.

(i) exploration and evaluation expenditure

Expenditure incurred during exploration and the early stages of evaluation of new areas of interest is written off as incurred.

Costs of acquisition of exploration areas of interest are

carried forward where right of tenure of the area of interest is current and they are expected to be recouped through sale or successful development and exploitation of the area of interest or, where exploration and evaluation activities in the area of interest have not yet reached a stage that permits reasonable assessment of the existence of economically recoverable reserves.

When an area of interest is abandoned or the Directors decide that it is not commercial, any accumulated costs in respect of that area are written off in the financial period the decision is made. Each area of interest is also reviewed at the end of each accounting period and accumulated costs written off to the extent that they will not be recoverable in the future.

(j) Oil and gas Assets

assets in development

The costs of oil and gas assets in development are separately accounted for and include past exploration and evaluation costs, development drilling and other subsurface expenditure, surface plant and equipment and any associated land and buildings. When the committed development expenditure programs are completed and production commences, these costs are subject to amortisation. Once the required statutory documentation for a production licence is lodged the accumulated costs are transferred to oil and gas assets – producing assets

producing assets

The costs of oil and gas assets in production are separately accounted for and include past exploration and evaluation costs, past development costs and ongoing costs of continuing to develop reserves for production and to expand or replace plant and equipment and any associated land and buildings These costs are subject to amortisation. Where asset costs incurred in relation to a producing field are under evaluation and appraisal, those costs will be continually reviewed for recoupment of those costs by future exploration. When a determination has been made that those expenditures will not be recouped and/or further appraisal will be undertaken, they will be written off.

Page 28. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

NOTES TO THE FINANCIAL STATEMENTS

amortisation of oil and gas assets

Costs in relation to producing assets are amortised on a production output basis. Producing assets under evaluation and appraisal are not subject to amortisation until such time as the evaluation and appraisal stage is complete.

Restoration costs

Site restoration costs are capitalised within costs of the associated assets and the provision is included in the statement of financial position at total estimated present value. These costs are estimated and based on judgements and assumptions regarding removal dates, environmental legislation and technologies. Over time, the liability is increased for the change in the present value based on a risk adjusted pre-tax discount rate appropriate to the risks inherent in the liability The costs of restoration are brought to account in the profit and loss through depreciation of the associated assets over the economic life of the projects with which these costs are associated. The unwinding of the discount is recorded as an accretion charge within finance costs.

(k) goodwill

Goodwill on acquisition is initially measured at cost being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities.

Following initial recognition, goodwill is measured at cost less any accumulated impairment losses

Goodwill is not amortised.

Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

As at the acquisition date, any goodwill acquired is allocated to each of the cash-generating units expected to benefit from the combination’s synergies.

Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill relates.

Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised

Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation.

Goodwill disposed of in this circumstance is measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained.

(l) cash and cash equivalents

Cash and short-term deposits in the statement of financial position comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. For the purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.

(m) share-based payment transactions

The Group provides benefits to employees (including Directors) of the Group in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares (‘equity-settled transactions’).

In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of Incremental Oil and Gas Ltd (`market conditions’).

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (`vesting date’).

The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects

i the extent to which the vesting period has expired and
ii the number of awards that, in the opinion of the Directors of the Group, will ultimately vest. This opinion is formed based on the best available information at balance date. No adjustment is made for the likelihood of Market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition.

Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any increase in the value of the transaction as a result of the modification, as measured at the date of modification.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph.

The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of earnings per share

(n) Recoverable amount of assets

At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes a formal estimate of recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount. Recoverable amount is the greater of fair value less costs to sell and value in use. It is determined for an individual asset, unless the asset’s value in use cannot be estimated to be close to its fair value less costs to sell and it does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

(o) foreign currency translation

(i) Functional and presentation currency

Until 31 December 2010, both functional and presentation

Page 29. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

notes to the financial statements

currency of Incremental Oil and Gas Ltd was Australian dollars. Each entity in the Group determined its own functional currency and items included in the financial statements of each entity are measured using that functional currency. The functional currency for the US subsidiary was United States ($). At 1 January 2011 all companies in the group adopted US dollar functional and presentational currency. All amounts included in the financial statements are in US dollars unless otherwise indicated.

An entity’s functional currency is the currency of the primary economic environment in which the entity operates. The economic entity now has a significant US dollar revenue stream and most of its costs are paid in US dollars Consequently the directors determined that the functional currency of the Company and all its subsidiaries is US dollars The change in functional currency was applied with effect from 1 January 2011 in accordance with the requirements of accounting standards.

Following the change in functional currency, Incremental Oil and Gas Ltd has elected to change its presentation currency from Australian dollars to US dollars. The directors believe that changing the presentation currency to US dollars will enhance comparability with its industry peer group, a majority which report in US dollars

The functional and presentation currency of Incremental Oil and Gas Ltd changed during the year to United States dollars ($). Incremental Oil and Gas Ltd changed its functional and presentation currency.

To give effect to the change in functional currency and presentation currency all balances of entities with an Australian dollar functional currency at 31 December 2010 were converted to US dollars at a fixed exchange rate on 1 January 2011 of A$1.00:US$1.0184, and comparative financial information has been translated at this rate

(ii) Transactions & balances

Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date

All exchange differences in the consolidated financial report are taken to profit or loss with the exception of differences on foreign currency borrowings that provide a hedge against a net investment in a foreign operation. These are taken directly to equity until the disposal of the net investment, at which time they are recognised in profit or loss. On disposal of a foreign operation, the cumulative amount recognised in equity relating to that particular foreign operation is recognised in profit or loss. Tax charges and credits attributable to exchange differences on those borrowings are also recognised in equity.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined

(iii) Foreign operations

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to US dollars at exchange rates at the reporting date. The income and expenses of Australian operations are translated to US dollars at exchange rates at the dates of the transactions.

Foreign currency differences are recognized directly in equity. Such differences are recognised in the foreign currency translation reserve (FCTR). When the foreign operation is disposed of, in part or in full, the relevant amount in the FCTR is transferred to profit and loss.

(p) impairment of assets

The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of its fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets and the assets value in use cannot be estimated to be close to its fair value. In such cases the asset is tested for impairment as part of the cashgenerating unit to which it belongs. When the carrying amount of an asset or cash-generating unit exceeds its recoverable amount, the asset or cash-generating unit is considered impaired and is written down to its recoverable amount.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses relating to continuing operations are recognised in those expense categories consistent with the function of the impaired asset unless the asset is carried at revalued amount (in which case the impairment loss is carried as a revaluation decrease).

(q) trade and other payables

Trade payables and other payables are carried at amortised costs and represent liabilities for goods and services provided to the Group prior to the end of the financial period that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of those goods and services.

(r) Share capital

Ordinary share capital is recognised at the fair value of the consideration received by the company. Any transaction costs arising on the issue of ordinary shares are recognised directly in equity as a reduction of the share proceeds received.

(s) trade and other receivables

Debtors are carried at amounts due. The recoverability of debts is assessed at balance date and specific provision is made for any doubtful accounts.

(t) employee leave benefits

Wages, salaries, annual leave and sick leave liabilities for wages and salaries, including non-monetary benefits and annual leave and accumulating sick leave expected to be settled within 12 months of the reporting date are recognised in other payables in respect of employee’s services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for non-accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable

(u) goods and services tax

Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the Australian Tax Office (ATO). In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expenses

page 30. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

NOTES TO THE FINANCIAL STATEMENTS

Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the balance sheet. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows.

(v) inventories

Oil and gas amounts are physically measured or estimated and valued at the lower of cost or net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and costs of selling final product.

(w) Revenue recognition

Revenue is recognised to the extent it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, and sales taxes or duty. The Group assesses its revenue arrangements against specific criteria in order to determine if it is acting as principal or agent. The Group has concluded that it is acting as a principal in all of its revenue arrangements.

Revenue from the sale of goods is recognised when the significant risks and rewards of ownership have been transferred, which is considered to occur when title passes to the customer. This generally occurs when product is physically transferred onto a vessel, train, conveyor or other delivery mechanisms. Revenue is measured at the fair value of the consideration received or receivable.

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised:

Interest

Revenue is recognised as the interest accrues (using the effective interest method, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument) to the net carrying amount of the financial asset.

Dividends

Revenue is recognised when the shareholders’ right to receive the payment is established

(x) earnings per share

Basic earnings per share is calculated as net profit attributable to members of the parent, adjusted to include any costs of servicing equity (other than dividends) and preference share dividends divided by the average weighted number of ordinary shares adjusted for any bonus element

Diluted earnings per share is calculated as net profit attributable to members of the parent adjusted for:

Costs of servicing equity (other than dividends) and preference share dividends;
The after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses;
Other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential ordinary shares divided by the weighted average number of ordinary shares; and
Dilutive potential ordinary shares, adjusted for any bonus element

(y) comparatives

Where necessary, comparatives have been reclassified and repositioned for consistency with the current year disclosures. The comparatives have also been translated to the current functional and presentation currency, which is in United States dollars

3. SIgNIFICANT ACCOuNTINg JuDgEMENTS, ESTIMATES AND ASSuMPTIONS

In applying the Group’s accounting policies management continually evaluates judgements, estimates and assumptions based on experience and other factors, including expectations of future events that may have an impact on the Group. All judgements, estimates and assumptions made are believed to be reasonable based on the most current set of circumstances available to management. Actual results may differ from the judgements, estimates and assumptions. Significant judgements, estimates and assumptions made by management in the preparation of these financial statements are outlined below:

(i) significant accounting judgements

classification of valuation of investments

The Group has decided to classify investments in listed and unlisted securities as ‘available-for-sale’ investments and movements in fair value are recognised directly in equity. The fair value of listed shares has been determined by reference to published price quotations in an active market. The fair values of unlisted securities not traded in an active Market are determined by an appropriately qualified independent valuer by projecting future cash flows from expected future dividends and subsequent disposal of the securities.

impairment of non-financial assets other than goodwill

The Group assesses impairment of all assets at each reporting date by evaluating conditions specific to the Group and to the particular asset that may lead to impairment, including economic and political environments. If an impairment trigger exists the recoverable amount of the asset is determined. This involves value in use calculations, which incorporate a number of key estimates and assumptions.

share based payment transactions

The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The accounting estimates and assumptions relating to equitysettled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact expenses and equity.

The Group measures the cost of cash-settled share-based payments at fair value at the grant date using the Black-Scholes formula taking into account the terms and conditions upon which the instruments were granted.

allowance for impairment loss on trade receivables

Where receivables are outstanding beyond the normal trading terms, the likelihood of the recovery of these receivables is assessed by management

capitalised exploration and evaluation expenditure

The future recoverability of capitalised exploration and evaluation expenditure is dependent on a number of factors, including whether the Group decides to exploit the related lease itself or, if not, whether it successfully recovers the related exploration and evaluation asset through sale. Factors

Page 31. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

notes to the financial statements

that could impact future recoverability include the level of reserves and resources, future technological changes, which could impact the cost of mining, future legal changes and changes to commodity prices To the extent that capitalised exploration and evaluation expenditure is determined not to be recoverable, profits and net assets will be reduced in the period in which determination is made.

estimation of useful lives of assets

The estimation of useful lives of assets has been based on historical experience as well as manufacturers’ warranties (for plant and equipment), lease terms (for leased equipment) and turnover policies (for motor vehicles). In addition, the condition of the assets is assessed at least once per year and considered against the remaining useful life Adjustments to useful life are made when considered necessary. Depreciation charges are included in note 15

contingencies

By their nature, contingencies will only be resolved when one or more uncertain future events occur or fail to occur. The assessment of contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events.

units-of-production amortisation

Estimated recoverable reserves are used in determining the amortisation of oilfield assets. This results in an amortisation charge proportional to the depletion of the anticipated remaining life of field production. Each item’s life, which is assessed annually, has regard to both its physical life limitations and to present assessments of economically recoverable reserves of the property at which the asset is located. These calculations require the use of estimates and assumptions, including the amount of recoverable reserves and estimates of future capital expenditure. Numerous units-of-production (UOP) depreciation methodologies are available to choose from. Changes are accounted for prospectively.

Recovery of deferred tax assets

Judgment is required in determining whether deferred tax assets are recognised on the statement of financial position, Deferred tax assets, including those arising from un-utilised tax losses, require management to assess the likelihood that the Group will generate taxable earnings in future periods, in order to utilise recognised deferred tax assets. Estimates of future taxable income are based on forecast cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Group to realise the net deferred tax assets recorded at the reporting date could be impacted.

Additionally, future changes in tax laws in the jurisdictions in which the Group operates could limit the ability of the Group to obtain tax deductions in future periods.

oil and gas reserve and resource estimates

Oil and Gas reserves are estimates of the amount of Oil and Gas that can be economically and legally extracted from the Group’s mining properties. The Group estimates its Oil and Gas reserves based on information compiled by appropriately qualified persons relating to the geological data on the size, depth and shape of the reserve, and requires complex geological judgments to interpret the data. The estimation of recoverable reserves is based upon factors such as estimates of foreign exchange rates, commodity prices, future capital requirements, and production costs along with geological assumptions and judgments made in estimating the size and grade of the ore body. Changes in the reserve or resource estimates may impact upon the carrying value of exploration and evaluation assets, mine properties, property, plant and equipment, goodwill, provision for rehabilitation, recognition of deferred tax assets, and depreciation and amortisation charges.

Page 32. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

NOTES TO THE FINANCIAL STATEMENTS

2011 $ 4. Revenues and expenses Revenue and expenses from contnuing operatons Proft from ordinary actvites before income tax includes the following items of revenue and expense. (a) Revenue Oil and gas sales 7,704,018 Interest income 46,476 7,750,494 (b) Expenses Depreciaton of property, plant and equipment (68,402) Amortsaton of producing oilfeld (993,442) Foreign exchange losses (142,074) Exploraton expenditure expensed (64,081) 5. income tax (a) numerical reconciliaton of income tax expense to prima facie tax payable Proft from ordinary actvites before income tax 1,453,200 Prima facie tax payable on proft from ordinary actvites at 30% 435,960 Efect of diferent taxaton rates of other countries 63,853 Movement in unrecognised temporary diferences (169,409) Tax efect of amounts which are not deductble in calculatng taxable income 536 Tax efect of current period tax losses for which no deferred tax asset has been recognised 307,588 Income tax expense 638,528 (b) unrecognised deferred tax assets (at 30%) Carry forward revenue tax losses 44,994 Other tming diferences 99,466 144,460 The deferred tax assets have not been brought to account as it is not probable they will crystallise unless the Company generates sufcient revenue to utlise them. (c) deferred tax assets Provision for expenses 265,469 Carry forward foreign tax losses 1,387,401 1,652,870 (d) deferred tax liabilites Oilfeld acquisiton and enhancements 2,504,031 Other 288,497 2,792,528 Net deferred tax liability 1,139,658	2010 $ 6,169,254 31,848
	6,201,102
	(67,807) (705,842) (102,852) (107,496) 1,129,146
	338,744 58,956 - 1,360 102,070
	501,130
	54,331 47,739
	102,070
	124,925 330,583
	455,508
	956,638 -
	956,638
	501,130

No income tax is payable by the Group. The Group has $149,981 in Australian income tax losses and $4,080,591 in foreign losses.

6. directors’ and key management personnel compensation The aggregate compensation of the Company’s Directors and key management personnel is set out below.

compensaton by category-key Management personnel Short-Term Post-Employment Other long term Terminaton Benefts Equity-Based Payments	2011 $ 655,076 61,051 - - - 716,127	2010 $ 709,846 38,954 - - 147,997
		896,797

Page 33. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

notes to the financial statements

Related party transactions

Specific transactions with Directors and Director-related entities:

There are no outstanding balances or commitments at 31 December 2011 and no valuation adjustments for doubtful or bad debts were made during the year.

Directors also applied for and received shares, options, and convertible notes and converted the convertible notes in the Company as disclosed in this note

Movement of shareholdings of each company director and the key management personnel during the year ended 31 december 2011

==> picture [483 x 205] intentionally omitted <==

----- Start of picture text -----

Balance at 1 Conversion of Convertible Net Change Other Balance at 31
January 2011 notes December 2011
number number number number
Directors
C Cronin 6,000,002 1,500,000 - 7,500,002
G McGann 20,500,004 3,750,000 90,000 24,340,004
J Macdonald 4,250,001 1,500,000 28,000 5,778,001
M Stowell 9,900,002 3,500,000 100,000 13,500,002
executives
- -
J Hussey 1,034,000 1,034,000
J Asquith (i) 5,000,003 - (5,000,003) -
Total 46,684,012 10,250,000 (4,782,003) 52,152,009
----- End of picture text -----

(i) No longer key management personnel

Movement of shareholdings of each company director and the key management personnel during the period ended 31 december 2010

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----- Start of picture text -----

Issued for cash during Granted as Balance at
the period remuneration 31 December 2010
number number number
Directors
C Cronin 6,000,002 - 6,000,002
G McGann 20,500,004 - 20,500,004
J Macdonald 4,250,001 - 4,250,001
M Stowell 9,900,002 - 9,900,002
executives
-
J Hussey 1,034,000 1,034,000
-
J Asquith 5,000,003 5,000,003
Total 45,650,012 1,034,000 46,684,012
----- End of picture text -----

Page 34. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

NOTES TO THE FINANCIAL STATEMENTS

Movement on option holdings of each company director and the key management personnel during the year ended 31 december 2011

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----- Start of picture text -----

Balance at 1 Changed Granted as Balance at Vested at 31 December 2011
during the 31 December
January 2011 year Remuner ation 2011
Total Exercisable Not Exercisable
number number number number number number number
Directors
C Cronin 6,000,000 - - 6,000,000 6,000,000 6,000,000 -
G McGann 20,500,000 - - 20,500,000 20,500,000 20,500,000 -
J Macdonald 4,250,000 - - 4,250,000 4,250,000 4,250,000 -
M Stowell 10,200,000 - - 10,200,000 10,200,000 10,200,000 -
executives
- - -
J Hussey 1,000,000 1,000,000 1,000,000 1,000,000
- - - - -
J Asquith (i) 5,000,000 (5,000,000)
Total 46,950,000 (5,000,000) - 41,950,000 41,950,000 41,950,000
----- End of picture text -----

(i) No longer key management personnel

Movement on option holdings of each company director and the key management personnel during the period ended 31 december 2010

==> picture [483 x 234] intentionally omitted <==

----- Start of picture text -----

Balance at
Issued during Granted as Vested at 31 December 2010
31 December
the period Remuneration 2010
Total Exercisable Not Exercisable
number number number number number number
Directors
C Cronin 6,000,000 - 6,000,000 6,000,000 6,000,000 -
G McGann 20,500,000 - 20,500,000 20,500,000 20,500,000 -
J Macdonald 4,250,000 - 4,250,000 4,250,000 4,250,000 -
M Stowell 10,200,000 - 10,200,000 10,200,000 10,200,000 -
executives
- -
J Hussey 1,000,000 1,000,000 1,000,000 1,000,000
- -
J Asquith 5,000,000 5,000,000 5,000,000 5,000,000
Total 45,950,000 1,000,000 46,950,000 46,950,000 46,950,000
----- End of picture text -----

Page 35. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

notes to the financial statements

7. equity-based payments to directors employees and consultants

During the current year ended 31 December 2011, the Company granted no shares and options to Directors, key management personnel, consultants and staff.

	2011	2010
8. auditors remuneraton The auditor of Incremental Oil and Gas Ltd is Stantons Internatonal Amounts received or due and receivable by Stantons Internatonal for Incremental Oil and Gas in relaton to audit services Amounts received or due and receivable by Stantons Internatonal for Incremental Oil and Gas in relaton to non-audit services	$ 53,925 -	$ 20,367 32,589
	53,925	52,956
9. cash and cash equivalents For the purposes of the statements of cash fows, cash and cash equivalents
comprise the following at 31 December
Cash at bank and on hand	1,456,780	5,114,421
10. trade and other receivables
Oil and gas sales debtors	704,372	538,780
i Trade and other receivables are non interest bearing and generally 30 - 90 day terms.
An allowance for doubtul debts is made where there is objectve evidence that a trade	receivable is impaired.
ii Trade and other receivables do not contain impaired assets and are not past due.
11. inventories
Oil on hand, at cost	91,046	44,521
12. other fnancial assets
Non current
Bonds	100,000	100,000
13. oil propertes
At cost Accumulated Amortsaton	17,378,686 (1,630,945)	11,758,396 (637,503)
	15,747,741	11,120,893
Opening balance Additons Amortsaton Foreign exchange diferences	11,120,893 5,620,290 (993,442) -	11,851,262 1,234,186 (705,842) (1,258,713)
Closing balance	15,747,741	11,120,893
14. exploraton and evaluaton assets Exploraton and evaluaton assets at cost Exchange rate diference	739,700 -	430,475 (41,678)
	739,700	388,797
Opening balance Additons	388,797 406,286	- 430,475
Amounts expensed Foreign exchange diferences	(55,383) -	- (41,678)
Closing balance	739,700	388,797

The ultimate recoupment of acquisition costs carried forward is dependent on the successful development commercial exploitation or sale of the respective lease-holdings.

Page 36. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

NOTES TO THE FINANCIAL STATEMENTS

15. plant and equipment Opening balance: net of accumulated depreciaton and impairment Additons Depreciaton charge Foreign exchange diferences Closing balance: net of accumulated depreciaton and impairment Balance at beginning of year Cost Accumulated depreciaton and impairment Net carrying amount Balance at end of year Cost Accumulated depreciaton and impairment Net carrying amount 16. trade and other payables Trade payables and accruals Trade payables are non interest bearing payables and are normally setled on 17. interest Bearing liabilites Current Convertble Notes - current porton Non-Current Convertble Notes - non-current porton The Convertble Notes had a maturity date of 2 July 2011 and a conversion price of AUD $0.20 per share. Convertble Notes converted at maturity date amounted to 24,900,000 at a price of AUD $0.20 per share. Holders of convertble notes to the value of $A5,000,000 all converted their notes to shares on 2 July 2011, which amounted to 24,900,000 shares The convertble notes were secured by way of a fxed and foatng charge against all the property of the company 18. provisions Employee enttlements – annual leave	2011 $ 510,149 30,841 (68,402) - 472,588 571,868 (61,719) 510,149 602,709 (130,121) 472,588 516,805 30 day terms. - - 30,769	2010 $ - 645,714 (67,807) (67,758)
		510,149
		- -
		-
		571,868 (61,719)
		510,149
		688,826
		2,800,600
		2,291,400
		25,460

Page 37. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

notes to the financial statements

19. contributed equity 2011 $ 135,643,680 Fully paid ordinary shares (2010: 110,447,010) 17,905,010 Year ended 31 december 2011 Movement in ordinary shares on issue $ No. Equity at the start of the year 12,604,832 110,477,010 On incorporaton - - Issued for cash Jul-Oct 2009 - - Issued as remuneraton to employee - - Issued for cash Oct 2009 to February 2010 - - Exercise of Optons February 2011 32,927 166,670 Conversion of convertble notes April 2010 - - Conversion of convertble notes June 2011 21,318 100,000 Conversion of convertble notes July 2011 5,277,306 24,900,000 Issued to consultant in lieu of payment - - Issued pursuant to Inital Public Ofer for cash - - Issued to consultants and employees in lieu of payment - - Capital raising costs (31,373) - At 31 December 17,905,010 135,643,680 2011 $ 20. Reserves Share opton reserve 35,769 Movement in share opton reserve Optons issued to employee - share optons At 31 December 2011 there were the following unlisted optons over unissued fully paid ordinary shares on issue: 92,600,000 unlisted optons exercisable at AUD 20 cents per opton before 1 November 2014. foreign currency translaton reserve Translaton diferences - Less:Adjusted due to change in functonal and reportng currency - -	2010 $ 12,604,832 period from incorporaton to 31 december 2010 $ No. - - - 1 203,680 20,000,000 101,840 1,000,000 5,616,476 55,150,011 - - 1,692,242 16,616,670 - - - - 3,055 30,000 5,366,253 17,564,328 36,052 116,000 (414,766) -
	12,604,832 110,477,010
	2010 $ 35,769 35,769
	(1,758,472) 1,758,472
	-

Page 38. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

NOTES TO THE FINANCIAL STATEMENTS

21. Earnings per share 2011 Basic earnings per share amounts are calculated by dividing net proft for the year/period atributable to equity holders of the parent by the weighted average number of ordinary shares outstanding during the year/period. The following refects the income and share data used in the basic earnings per share computatons: $ Net proft atributable to equity holders of the parent 814,672 2011 Cents per share Basic earnings per share 0 66 No. The weighted average number of ordinary shares on issue during the fnancial year used in the calculaton of basic earnings per share 122,417,139 Cents per share Diluted earnings per share 0 54 No. The weighted average number of ordinary shares on issue during the fnancial year used in the calculaton of diluted earnings per share 151,168,863 2011 $ 22. Reconciliaton of net proft afer tax to net cash fows from operatons Net Proft 814,672 Adjustments for: Tax expense 638,528 Leave provision 5,309 Amortsaton 993,442 Depreciaton 68,402 Consultancy fees (non cash) - Share based payments - Current receivables (165,592) Inventories (46,525) Current payables (237,685) Foreign exchange diferences 142,074 Cash provided by operatng actvites 2,212,625	2010 $ 628,016
	2010 Cents per share 0 96
	No. 64,968,407
	Cents per share 0 96
	No. 64,968,407
	2010 $ 628,016 501,130 - 705,842 67,807 13,442 158,996 (538,780) (44,521) 714,287 (390,324)
	1,815,895

non cash financing and investment activities:

During the year A$5,000,000 of convertible notes were converted into shares.

23. commitments and contingencies

The Company has entered into a lease agreement for office and parking facilities in Australia. The amount of the commitment is $11,304 per annum. The lease was renewed for one year on 4 March 2012. The Company has entered into a lease agreement for the office facilities in the United States. The amount of the commitment is $23,748 per annum. The lease was renewed for one year on 1 March 2012

Except for the foregoing, the Group has no commitments or contingencies.

24. controlled entities

24. controlled enttes
name of entty parent entty	country of incorporaton	ownership Interest
Incremental Oil and Gas Ltd	Australia
controlled entty
Incremental Oil and Gas USA Holdings Inc	United States	100%
Incremental Oil and Gas LLC	United States	100%
Incremental Oil and Gas (Round Mountain) LLC	United States	100%
Incremental Oil and Gas (Guijarral) LLC	United States	100%

25. segment Reporting

The Group has adopted AASB 8 Operating Statements with effect from 1 July 2009. AASB 8 requires operating segments to be

Page 39. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

notes to the financial statements

identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance

The Group has identified its operating segments based on the internal reports that are reviewed and used by the executive management team in assessing performance and in determining the allocation of resources.

The group operates in one operating segment, being oil and gas production and two geographical segments being Australia and the USA and this is the basis on which internal reports are provided to the Directors for assessing performance and determining the allocation of resources in the Group.

geographical segments

The Group’s geographical segments are determined based on location of the Group’s assets.

Year ended 31 december 2011 Revenue Income Total segment revenue Segment Proft/(Loss) Income tax expense Segment loss afer income tax expense Assets Segment assets liabilites Segment liabilites Other Depreciaton and amortsaton of segment assets period from incorporaton to 31 december 2010 Revenue Income Total segment revenue Segment Proft/(Loss) Income tax expense Segment loss afer income tax expense Assets Segment assets liabilites Segment liabilites Other Depreciaton and amortsaton of segment assets	australia $ 1,626,744 1,626,744 (143,120) - (143,120) 1,288,801 91,742 5,856 australia $ 1,263,219 1,263,219 (1,844,239) - (1,844,239) 4,711,839 5,507,998 4,930	united States $ 7,700,209 7,700,209 1,596,320 (638,528) 957,792 18,023,426 1,595,490 1,055,988 united States $ 6,169,255 6,169,255 1,473,912 (501,130) 972,782 13,105,722 799,420 768,719	consolidaton adjustments $ (1,576,459) (1,576,459) - - - - - consolidaton adjustments $ (1,231,372) (1,231,372) 1,499,473 - 1,499,473 - - -	Consolidated $ 7,750,494
				7,750,494
				1,453,200 (638,528)
				814,672
				19,312,227 1,687,232 1,061,844 Consolidated $ 6,201,102
				6,201,102
				1,129,146 (501,130)
				628,016
				17,817,561 6,307,418 773,649

26. Related party disclosures

The wholly-owned group includes the ultimate parent entity in the group and the controlled entities. The ultimate parent entity in the wholly owned group is Incremental Oil and Gas Ltd. During the year the company advanced loans of $3,163,840 (2010:$11,592,521) and charged management fees and interest of $1,576,459 (2010:$1,201,895) by way of loan account transactions. The loans have no fixed terms of repayment.

27. events after the balance sheet date

Subsequent to the year end the company has continued production of oil from its properties in the USA.

28. financial Risk Management

The Group’s activities expose it to a variety of financial risks: Market risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group.

The Group takes a proactive approach to risk management. The Board is responsible for ensuring that risks, and also opportunities are identified on a timely basis and that the Group’s objectives and activities are aligned with the risks and opportunities identified by the Board. The Board provides policies for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk and investment of excess liquidity.

page 40. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

NOTES TO THE FINANCIAL STATEMENTS

approval.

(a) Market Risk

(i) foreign exchange Risk

The Group operates internationally and are exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the Australian dollar.

Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in a currency that is not the entity’s functional currency and net investments in foreign operations.

The material foreign exchange exposure on the net monetary position of key group entities against its respective functional currency, expressed in the group’s presentation currency is an amount of cash of $477,240 held in $A by the parent entity and creditors totalling $91,742 at 31 December 2011 . A 10% movement exchange rates would have a profit and loss effect of $38,550 before taxation. As the Company is in a tax loss position the effect on equity would be $38,550

(ii) Interest Rate Risk

The Group is exposed to interest rate risk as it invests funds at floating interest rates.

Sensitivity analysis has not been performed against movement in interest rates as the exposure is not considered material

(c) fair values

The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes

The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and availablefor-sale securities) is based on quoted market prices at the reporting date. The quoted market price used for financial assets held by the Group is the current bid price

The fair value of financial instruments that are not traded in an active market (for example investments in unlisted subsidiaries) is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance date. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments.

The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values due to their short-term nature. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments

(iii) community price risk

The Group is exposed to commodity price risk as its income is determined by reference to international prices of oil and gas. A 10% change in the oil and gas prices during the period would have had a profit and loss effect of $770,401 before taxation.

(b) credit Risk

There are no significant concentrations of credit risk within the Group

Credit risk is managed on a group basis Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposure relating to outstanding receivables and committed transactions. For banks and financial institutions, only independently rated parties with a minimum rating of ‘A’ are accepted. The Group has a credit risk in relation to its receivables. All sales are normally settled within 30 days of the issue of the invoice.

The Group does not have any exposure to any derivative financial instruments.

Credit risk further arises in relation to financial guarantees given to certain parties. Such guarantees are only provided in exceptional circumstances and are subject to specific board

Page 41. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

notes to the financial statements

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----- Start of picture text -----

fixed fixed
average Interest Interest
Interest variable Rate Rate
Rate Interest Maturity Less Maturity Non Interest
% Rate than 1 Year 1-5 Years Bearing Total
$ $ $ $ $
2011
Financial Assets
Cash and cash equivalents 1 64% 1,456,780 - - - 1,456,780
Trade and other receivables 0 00% - - - 704,372 704,372
Other financial assets 0 00% - - - 100,000 100,000
1,456,780 - - 804,372 2,261,152
Financial Liabilites
Trade and other payables 0 00% - - - 516,805 516,805
- - - 516,805 516,805
Net financial assets/(liabilities) 1,456,780 - - 287,657 1,744,347
----- End of picture text -----

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----- Start of picture text -----

fixed fixed
average Interest Interest
Interest variable Rate Rate
Rate Interest Maturity Less Maturity Non Interest
% Rate than 1 Year 1-5 Years Bearing Total
2010
Financial Assets
Cash and cash equivalents 0 25% 5,114,421 - - - 5,114,421
Trade and other receivables 0 00% - - - 538,780 538,780
Other financial assets 0 00% - - - 100,000 100,000
5,114,421 - - 638,780 5,753,201
Financial Liabilities
Trade and other payables 0 00% - - - 688,826 688,826
Convertible notes 10 0% - 5,092,000 - 5,092,000
5,092,000 - 688,826 5,780,826
net financial assets/(liabilities) 5,114,421 (5,092,000) - (50,046) (27,625)
----- End of picture text -----

Page 42. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

NOTES TO THE FINANCIAL STATEMENTS

(d) Reconciliation of net financial assets to net assets

Net fnancial liabilites as above: Non-fnancial assets & liabilites Inventories Oil propertes Exploraton assets Plant and equipment Provision Deferred taxaton Net Assets per Statement of Financial Positon 29. parent entty disclosures Assets Current assets Non-current assets Total assets liabilites Current liabilites Non-current liabilites Total Liabilites Net Assets equity Issued Capital Accumulated losses Reserves Total Equity financial performance Loss for the period	2011 $ 1,744,347 91,046 15,747,741 739,700 472,588 (30,769) (1,139,658) 17,624,995 company 2011 $ 1,286,508 14,758,654 16,045,162 91,742 - 91,742 15,953,420 17,905,010 (1,987,359) 35,769 15,953,420 Year ended 31 december 2011 $ 143,120	2010 $ (27,625) 44,521 11,120,893 388,797 510,149 (25,460) (501,130)
		11,510,145
		company 2010 $ 4,703,692 11,600,668
		16,304,360
		3,216,598 2,291,400
		5,507,998

		10,796,362
		12,604,832 (1,844,239) 35,769
		10,796,362
		period from incorporaton to december 2010 $ 1,844,239

The Company has not guaranteed the debts of any of its subsidiaries The Company has no contingent liabilities.

The Company has no commitments for the acquisition of property, plant and equipment.

Page 43. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

Directors’ Declaration

In accordance with a resolution of the Directors of Incremental Oil and Gas Ltd I state that:

1 In the opinion of the Directors
(a) The financial statements, and the additional disclosures included in the Directors’ report designated as audited and notes of the Economic entity as set out on pages 13 to 44 are in accordance with the Corporations Act 2001, including;
- (i) giving a true and fair view of Group’s financial position as at 31 December 2011 and of its performance for the year ended on that date, and
- (ii) complying with Accounting Standards and Corporations Regulations 2001; and
- (iii) The financial report also complies with International Financial Reporting Standards as disclosed in note 2(b).
(b) There are grounds to believe that the company will be able to pay its debts as and when they become due and payable.
This declaration has been made after receiving the declarations required to be made to the Directors in accordance with sections 295A of the Corporations Act 2001 for the financial year ended 31 December 2011.

On behalf of the Board

==> picture [149 x 69] intentionally omitted <==

Gerry McGann Managing Director Perth 30 March 2012

Page 44. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

Independent Audit Report to the members of Incremental Oil and Gas Ltd

Stantons International Audit and Consulting Pty Ltd trading as

==> picture [146 x 19] intentionally omitted <==

Chartered Accountants and Consultants

PO Box 1908 West Perth WA 6872 Australia

Level 2, 1 Walker Avenue West Perth WA 6005

Australia Tel: +61 8 9481 3188 Fax: +61 8 9321 1204 ABN: 84 144 581 519 www.stantons.com.au

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF INCREMENTAL OIL AND GAS LIMITED

Report on the Financial Report

We have audited the accompanying financial report of Incremental Oil and Gas Limited, which comprises the consolidated statement of financial position as at 31 December 2011, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information and the directors’ declaration of the consolidated entity comprising 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 and fair presentation 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 2(b), the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the financial report, comprising the financial statements and notes, complies 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.

Liability limited by a scheme approved under Professional Standards Legislation

Page 45. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

INDEPENDENT AuDIT REPORT TO THE MEMBERS OF INCREMENTAL OIL AND gAS LTD

==> picture [95 x 13] intentionally omitted <==

Our audit did not involve an analysis of the prudence of business decisions made by directors or management.

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

Independence

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

Auditor’s opinion

In our opinion:

(a) the financial report of Incremental Oil and Gas 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 and the Corporations Regulations 2001.
(b) the consolidated financial report also complies with International Financial Reporting Standards as disclosed in note 2(b).

Report on the Remuneration Report

We have audited the remuneration report included in pages 7 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 Incremental Oil and Gas Limited for the year ended 31 December 2011 complies with section 300A of the Corporations Act 2001.

STANTONS INTERNATIONAL AUDIT AND CONSULTING PTY LTD

(Trading as Stantons International) (An Authorised Audit Company)

==> picture [228 x 50] intentionally omitted <==

J P Van Dieren

Director

West Perth, Western Australia 30 March 2012

Page 46. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

Auditor’s Independence Declaration

Stantons International Audit and Consulting Pty Ltd trading as Chartered Accountants and Consultants

PO Box 1908 West Perth WA 6872 Australia Level 2, 1 Walker Avenue West Perth WA 6005 Australia Tel: +61 8 9481 3188 Fax: +61 8 9321 1204 ABN: 84 144 581 519 www.stantons.com.au

30 March 2012

Board of Directors Incremental Oil and Gas limited Unit 2, 16 Phillimore Street Fremantle WA 6160

Dear Directors

RE: INCREMENTAL OIL AND GAS LIMITED

In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Incremental Oil and Gas Limited.

As Audit Director for the audit of the financial statements of Incremental Oil and Gas Limited for the year ended 31 December 2011, I declare that to the best of my knowledge and belief, there have been no contraventions of:

(i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and
(ii) any applicable code of professional conduct in relation to the audit.

Yours sincerely

STANTONS INTERNATIONAL AUDIT AND CONSULTING PTY LIMITED (Authorised Audit Company)

==> picture [112 x 28] intentionally omitted <==

JP Van Dieren Director

Liability limited by a scheme approved under Professional Standards Legislation

Page 47. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

Page 48. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

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Corporate Governance Statement

Page 49. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

Corporate Governance Statement

corporate governance statement

Incremental Oil and Gas Ltd (“the Company”) and its subsidiaries (collectively “the Group”) are committed to implementing a high standard of corporate governance. The Board of Directors of the Company is responsible for its corporate governance and the Board has adopted a manual of corporate governance policies and procedures based on control systems and accountability The Board of the Company adopted the Corporate Governance Manual which is available in the corporate governance information section of the Company’s website at www.incrementaloilandgas.com. A summary of the Group’s corporate governance policies and procedures is included in this Statement

The Group’s corporate governance policies and procedures are in line with the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (“the Principles & Recommendations”). The Group has followed the Principles & Recommendations where the Board has considered the recommendation to be an appropriate benchmark for its corporate governance practices. Where, after due consideration by the Board, the Company’s corporate governance practices depart from the Principles & Recommendations, the Board has fully disclosed the departure and the reason for the adoption of its own practice, in compliance with the “if not, why not” exception reporting regime.

Board of directors - Role of the Board and Management

The Board’s role is to govern the Company rather than to manage it. In governing the Company, the Directors must act in the best interests of the Company as a whole. It is the role of senior management to manage the Company in accordance with the direction and delegations of the Board and the responsibility of the Board to oversee the activities of management in carrying out these delegated duties.

In carrying out its governance role, the main task of the Board is to drive the performance of the Company. The Board must also ensure that the Company complies with all of its contractual, statutory and any other legal obligations, including the requirements of any regulatory body. The Board has the final responsibility for the successful operations of the Company.

To assist the Board carry out its functions, it has developed a Code of Conduct to guide the Directors, the Chief Financial Officer and other key executives in the performance of their roles.

In general, the Board is responsible for, and has the authority to determine, all matters relating to the policies, practices, management and operations of the Company. It is required to do all things that may be necessary to be done in order to carry out the objectives of the Company.

Without intending to limit this general role of the Board, the principal functions and responsibilities of the Board include the following.

Leadership of the Organisation: overseeing the Company and establishing codes that reflect the values of the Company and guide the conduct of the Board
Strategy Formulation: to set and review the overall strategy and goals for the Company and ensuring that there are policies in place to govern the operation of the Company.
Overseeing Planning Activities: the development of the Company’s strategic plan
Shareholder Liaison: ensuring effective communications

with shareholders through an appropriate communications policy and promoting participation at general meetings of the Company

Monitoring, Compliance and Risk Management: the development of the Company’s risk management, compliance, control and accountability systems and monitoring and directing the financial and operational performance of the Company
Company Finances: approving expenses and approving and monitoring acquisitions, divestitures and financial and other reporting.
Human Resources: appointing, and, where appropriate, removing the Chief Executive Officer or Managing Director (CEO / MD), and key executives as well as reviewing their performance in the implementation of the Company’s strategy
Ensuring the health, safety and well-being of employees: in conjunction with the senior management team, developing, overseeing and reviewing the effectiveness of the Company’s occupational health and safety systems to ensure the wellbeing of all employees
Delegation of Authority: delegating appropriate powers to the CEO / MD to ensure the effective day-to-day management of the Company and establishing and determining the powers and functions of the Committees of the Board.

The Board’s role and the Company’s corporate governance practices are periodically reviewed and improved as required.

The Company will undertake periodic performance reviews of senior executives, committees of the Board and the Board. The Board evaluates the performance of individual directors and of committees. The Company has not adopted formal processes for evaluating the performance of the Board, its committees and individual directors on the basis that such formal processes are not appropriate at this stage of the Company’s development.

The Board under the Remuneration and Nominations Committee Charter will oversee the performance evaluation of the senior executive team. This evaluation will be based on specific criteria, including the performance of the Company, whether strategic objectives are being achieved and the development of management and personnel. At this stage of the development of the Company, Incremental has only informal procedures in place for performance evaluation of the senior executives but will consider formal processes in future.

The Board Charter including matters reserved for the Board and senior management and the performance evaluation policies are available on the Company’s website at www. incrementaloilandgas com

composition of the Board

To add value to the Company, the Board has been formed so that it has effective composition, size and commitment to adequately discharge its responsibilities and duties given its current size and scale of operations. Directors are appointed based on the specific skills required by the Company and on their decision-making and judgment skills.

The Company has adopted a policy on assessing the independence of Directors which is consistent with the guidelines detailed in the ASX Principles & Recommendations and detailed in the Board Charter The materiality thresholds

page 50. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

CORPORATE gOvERNANCE STATEMENT

in this policy are assessed on a case-by-case basis, taking into account the relevant Director’s specific circumstances, rather than referring to a general materiality threshold

The Company recognises the importance of Non-Executive Directors and the external perspective and advice that NonExecutive Directors can offer. The current Board includes a non-executive Chairman, Mr. Cronin, two non-executive Directors, Mr. Stowell and Mr. Macdonald and Managing Director, Mr McGann The role of the Chairman, Mr Cronin, and Managing Director, Mr McGann, are exercised by different people. Mr. Cronin (Chairman and Non-Executive Director), Mr. Stowell (Non Executive Director) and Mr. McGann (Managing Director) do not meet the Company’s criteria for Independence. However, their experience and knowledge of the Company makes their contribution to the Board such that it is appropriate for them to remain on the Board

A minimum of three (3) Directors and a maximum of nine (9) Directors is stipulated under the Company’s Constitution. Any changes to the composition of the Board will be determined by the Board, subject to any applicable laws and the resolutions of Shareholders. The Board will seek to nominate persons for appointment to the Board with the appropriate mix of skills and experience to ensure an effective decisionmaking body and to ensure that the Board is comprised of Directors who contribute to the successful management of the Company and discharge their duties having regard to the law and the highest standards of corporate governance. The Board should comprise Directors with a mix of qualifications, experience and expertise which will assist the Board in fulfilling its responsibilities, as well as assisting the Company in achieving growth and delivering value to shareholders. The Company aims at all times to have at least two Directors with experience appropriate to the Company’s target market

Pursuant to the Constitution of the Company, at every Annual General Meeting of Shareholders, one-third of the Directors, or, if their number is not a multiple of 3, then the whole number nearest one-third, shall retire from office. Prior to the Board proposing re-election of non-executive Directors, their performance will be evaluated to ensure that they continue to contribute effectively to the Board.

The Company’s policy for re-election of Directors and selection and appointment of new Directors is available in the Board Charter and Remuneration and Nominations Committee Charter in the Corporate Governance Manual on the Company’s website at www.incrementaloilandgas.com.

It is the policy of the Company that any new director will undergo an induction process in which they are given a briefing on the Company. Where possible this includes meetings with key executives, tours of the premises, the Company’s projects and exploration sites, an induction package and presentations. Information conveyed to new directors includes:

details of the roles and responsibilities of a director;
formal policies on director appointment as well as conduct and contribution expectations;
a synopsis of the current strategic direction of the Company; and

• a copy of the Constitution of the Company. In order to achieve continuing improvement in Board performance, all directors are encouraged to undergo continual professional development.

A profile of each Director containing their skills, experience and expertise is set out in the Directors’ Report.

statement concerning availability of independent professional advice

The Board collectively and each Director has the right to seek independent professional advice at the Company’s expense, subject to the prior written approval of the Chairman and up to specified limits, to assist them to carry out their responsibilities.

Remuneration and nominations committee

The role of the Remuneration and Nominations Committee is to assist the Board in respect of establishing appropriate remuneration levels and incentive policies for employees. The purpose of the Remuneration and Nominations Committee is to ensure that the Company attracts and retains appropriate people by offering competitive remuneration packages and to review Board composition and performance.

The members of the Remuneration and Nomination Committee are Mr Cronin (Chairman) and Mr Macdonald

The Remuneration and Nominations Committee monitors and reviews:

the remuneration arrangements for the Managing Director and other senior executives;
the remuneration policies, personnel practices and strategies of the Company generally;
any employee incentive scheme;
the remuneration arrangements for non-executive members of the Board;
the size and composition of the Board, and criteria for Board membership; and
the membership of the Board and propose candidates for consideration by the Board.

The Remuneration and Nominations Committee Charter is available on the Company’s website www.incrementaloilandgas. com in the Corporate Governance Manual.

Remuneration of Directors and senior management is

determined with regard to the performance of the Company, the performance and skills and experience of the particular person and prevailing remuneration expectations in the market. Details of remuneration of Directors and Key Management Personnel are disclosed in the Remuneration Report.

There are no termination or retirement benefits for nonexecutive Directors (other than for superannuation).

Executives are prohibited from entering into transactions or arrangements which limit the economic risk of participating in unvested entitlements.

guidelines on how the Board processes function;
details of past, recent and likely future developments relating to the Board;
background information on and contact information for key people in the organisation;
an analysis of the Company;

Page 51. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

Corporate GovernanCe Statement

code of conduct

The Company has adopted a Code of Conduct that outlines how the Company expects its Directors and employees of the Group to behave and conduct business in the workplace on a range of issues. The Company is committed to the highest level of integrity and ethical standards in all business practices.

The purpose of the Code of Conduct is to provide a framework for decisions and actions in relation to ethical conduct in employment It underpins the Company’s commitment to integrity and fair dealing in its business affairs and to a duty of care to all employees, clients and stakeholders

It sets out the Company’s expectations of its Directors and employees with respect to a range of issues including conflicts of interests, receipt of gifts, company property, computer, telephone and internet use, confidentiality, business ethics, equal opportunity, harassment and discrimination, health and safety, the environment and travel expenses.

A breach of the Code is subject to disciplinary action which may include punishment under legislation and/or termination of employment

The Code of Conduct is available on the Company’s website at www.incrementaloilandgas.com.

Ethical Standards

The Board considers that the success of the Company will be enhanced by a strong ethical culture within the Company. Accordingly, the Board is committed to the highest level of integrity and ethical standards in all business practices. The Company expects its Directors, employees and consultants to deal in good faith, with integrity and with the highest standards of business ethics and morals in their negotiations and commercial dealings with third parties.

conflicts of interest

In accordance with the Corporations Act, Directors must keep the Board advised, on an ongoing basis, of any interest that could potentially conflict with those of the Company. Where the Board believes that a significant conflict exists, the Director concerned does not receive the relevant Board papers and is not present at the meeting whilst the item is considered.

securities trading policy

The Securities Trading Policy adopted by the Board prohibits trading in shares by a Director, officer or employee during certain blackout periods (in particular, prior to release of quarterly, half yearly or annual results) except in exceptional circumstances and subject to procedures set out in the Policy

Outside of these blackout periods, a Director, officer or employee must first obtain clearance in accordance with the Policy before trading in shares For example:

A Director must receive clearance from the Chairman, or in his absence the Managing Director, before he may buy or sell shares
• If the Chairman wishes to buy or sell shares he must first obtain clearance from the Audit and Risk Committee.
Other officers and employees must receive clearance from the Chairman, or in his absence the Managing Director, before they may buy or sell shares

Directors, officers and employees must observe their obligations under the Corporations Act not to buy or sell shares if in possession of price sensitive non-public information and that they do not communicate price sensitive non-public information to any person who is likely to buy or sell shares or communicate such information to another party.

The Securities Trading Policy is available on the Company’s website at www.incrementaloilandgas.com.

continuous disclosure

The Company’s Board Charter includes a section on Continuous Disclosure The Board has designated the Company Secretary as the person responsible for overseeing and coordinating disclosure of information to the ASX as well as communicating with the ASX.

In accordance with the ASX Listing Rules the Company immediately notifies the ASX of information:

concerning the Company that a reasonable person would expect to have a material effect on the price or value of the Company’s securities; and
that would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the Company’s securities.

All relevant information provided to ASX in compliance with the continuous disclosure requirements and legislation and the Listing Rules is promptly posted on the Company’s website www.incrementaloilandgas.com.

audit and Risk committee

The members of the Audit and Risk Committee are Mr. Stowell (Chairman) and Mr Cronin The Board has adopted an Audit and Risk Committee Charter which is available on the Company’s website www.incrementaloilandgas.com in the Corporate Governance Manual.

The Audit and Risk Committee is responsible for reviewing the integrity of the Company’s financial reporting and overseeing the independence of the external auditors. The Committee will set aside sufficient time to discharge its functions to ensure the integrity of the financial statements of the Company and the independence of the external auditor

The Audit and Risk Committee will review the audited annual and half-yearly financial statements and any reports which accompany published financial statements and recommend their approval or otherwise to the full Board.

The Audit and Risk Committee will each year review the appointment of the external auditor, their independence, the audit fee, and any questions of resignation or dismissal.

communication to shareholders

The Company’s Board Charter includes a section on Shareholder Communication.

The Company respects the rights of its shareholders and to facilitate the effective exercise of those rights the Company is committed to:

communicating effectively with shareholders through releases to the market via ASX, information mailed to shareholders and the general meetings of the Company;
giving shareholders ready access to balanced and understandable information about the Company and corporate proposals;
making it easy for shareholders to participate in general meetings of the Company; and
requesting the external auditor to attend the annual general meeting and be available to answer shareholder questions about the conduct of the audit and the preparation and content of the auditor’s report

The Company also makes available a telephone number and email address for shareholders to make enquiries of the Company

Page 52. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

CORPORATE gOvERNANCE STATEMENT

confidentiality

In accordance with legal requirements and agreed ethical standards, Directors and key executives of the Company have agreed to keep confidential, information received in the course of the exercise of their duties and will not disclose non-public information except where disclosure is authorised or legally mandated

Risk Management

As noted in the Audit and Risk Committee Charter, the Board is responsible for ensuring there is a sound system for overseeing and managing risk. Due to the size and scale of operations of the Company, risk management issues are considered by the Board as a whole.

The Board has delegated to the Managing Director responsibility for implementing the risk management system. The Managing Director submits particular matters to the Board for its approval or review. The Managing Director is required to report on management of the Company’s material risks as a standing agenda item at each Board meeting. This involves the tabling of a risk register which is monitored and updated by management periodically

integrity of financial Reporting

Mr McGann, Managing Director, and Mr Asquith, Chief Financial Officer, have provided a declaration in accordance with section 295A of the Corporations Act in writing to the Board that:

the consolidated financial statements of the Company and its controlled entities for the period ended 31 December 2011 present a true and fair view, in all material aspects, of the Company’s financial condition and operational results and are in accordance with accounting standards;
the above statement is founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the Board; and
the Company’s risk management and internal compliance and control framework is operating efficiently and effectively in all material respects

The Board also requires Mr McGann, in the capacity as Managing Director of the Company, to confirm that a risk management and internal control system to manage the Company’s material business risks has been designed and implemented This confirmation has been received by Mr. McGann prior to finalisation of the 31 December 2011 Financial Report.

environmental, Heath and safety policy

The Company has an Environmental, Health and Safety Policy. The purpose of this Environmental, Health and Safety Policy is to provide guidelines for Directors, officers, employees and contractors of the Company to conduct their business activities and work practices in relation to the Company in a safe and environmentally sensitive and sustainable manner. The policy also seeks to encourage Directors, officers, employees and contractors to conduct their business activities and work practices in a manner that promotes general health and well-being, as well as a suitable work-life balance.

The Environmental, Health and Safety Policy is available on the Company’s website at www.incrementaloilandgas.com.

diversity policy

The Company has not adopted a formal Diversity Policy. The Board will re-consider establishing a formal Diversity Policy as the Company’s workforce and operations grow.

The Company has two employees who are men, no women in senior executive positions and no women on the Board. The Company’s Company Secretary, Ms Susan Hunter, is female and is employed on a contract basis

Page 53. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

Corporate GovernanCe Statement

ASx LISTINg RuLE DISCLOSuRE – ExCEPTION REPORTINg

As required by ASX Listing Rules, the following table discloses the extent to which the Company has not followed the best practice recommendations set by the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations.

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Principle Best practice compliance Reasons for non-compliance
No Recommendation
1.2 Disclose the process the company has in place at this stage of the development, the
for evaluation of senior informal procedures for company has only informal procedures in
executives. evaluating the performance of place for performance evaluation of the
senior executives. senior executives but will consider the
implementation of formal processes when
required as the company’s operations evolve.
2.1 a majority of the Board the Board is not currently made the Board considers that in the current phase
should be independent up of a majority of independent of the company’s growth, the company’s
Directors. directors as the directors are shareholders are better served by directors
also substantial shareholders of who have a vested interest in the company.
the company. the Board has been structured based on the
need to effectively discharge its responsibilities
and duties, given the current scale of the
company’s operations. each director has the
relevant experience and specific expertise
relevant to the company’s business and level
of operations. the company considers that
the non-independent directors possess the
skills and experience suitable for building
the company. the Board will monitor its
composition as the company’s operations
evolve, and may appoint independent directors
as it deems appropriate.
2.2 the chair should be an currently the company has a The Board considers that the non-independent
independent Director non-independent Chair. chair possesses skills and experience suitable
for leading the Board and considers a non-
independent chair to be appropriate in the
context of the stage of development of the
company and the scope and scale of the
company’s operations. the Board will consider
the appointment of an independent director
as the chair if deemed appropriate depending
on the scope and scale of the company’s
operations.
2.5 companies should disclose the company has not adopted the company has not adopted formal
the process for evaluating formal processes for evaluating processes for evaluating the performance
the performance of the the performance of the Board, of the Board, its committees and individual
Board, its committees and its committees and individual directors on the basis that such formal
individual directors. directors. processes are not appropriate at this stage of
the company’s development. the company
will consider the implementation of formal
processes in future particularly as the size of
the company, Board and the level of activity of
the company increase.
3.2 the company should the company does not currently given the current size and stage of the
establish a diversity policy. have a diversity policy in place. company’s operations it is yet to establish and
implement a diversity policy. the Board will
review the need for a diversity policy as the
company develops.
3.3 companies should disclose the company does not currently given the current size and stage of the
in each annual report the have a diversity policy in place company’s operations it is yet to implement a
measurable objectives and has not disclosed the diversity policy. the Board will review the need
for achieving gender information required in the 31 for a diversity policy as the company develops.
diversity set by the board december 2011 financial report.
in accordance with the
diversity policy and progress
towards achieving them.
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Page 54. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

CORPORATE gOvERNANCE STATEMENT

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Principle Best practice compliance Reasons for non-compliance
No Recommendation
4.2 the audit committee should the members of the audit and the Board believes that given the company’s
be structured so that it is Risk committee are Mr. stowell size and stage of development and the size of
chaired by an independent (chairman) and Mr. cronin, both the Board the composition of the audit and
chairperson, consists of a non-executive directors of the Risk committee is appropriate and adequate.
majority of independent company. Both the chairman Mr. stowell, the chairman of the committee,
directors and have at least of the committee, Mr. stowell, is a chartered accountant and has over 20
three members. and Mr. cronin do not meet the years of corporate finance and business
independence criteria. There management experience in a large variety of
are currently only two members roles and is an appropriate chairman for the
of the audit committee. committee. as the size and composition of the
full Board evolves and the company develops,
the company will consider the appropriateness
of the composition of the audit and Risk
committee.
8.2 the remuneration the members of the the Board believes that given the company’s
committee should be Remuneration and nomination size and stage of development and the
structured so that it is committee are Mr. cronin size of the Board the composition of the
chaired by an independent (chairman) and Mr. Macdonald, Remuneration and nomination committee
chairperson, consists of a both non-executive directors of is appropriate and adequate. as the size and
majority of independent the company. the chairman of composition of the full Board evolves and the
directors and have at least the committee, Mr. cronin, does company develops, the company will consider
three members. not meet the independence the appropriateness of the composition of the
criteria. there are currently Remuneration and nomination committee.
only two members of the
Remuneration and nomination
committee.
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Page 55. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

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Additional ASX Information

Page 56. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

ADDITIONAL ASx INFORMATION

Additional ASX Information The following additional information is required by the Australian Securities Exchange. The information is current as at 19 March 2012

(a) distribution schedule and number of holders of equity securities of incremental oil and gas limited as at 19 March 2012 is shown below:

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1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,001 – and Total
100,000 over
Fully Paid Ordinary
12 45 80 200 110 447
Shares (IOG)
Unquoted Options –
exercise price 20c, - - - 1 61 62
expiring 1/11/14
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The number of holders holding less than a marketable parcel of fully paid ordinary shares (ASX code: IOG) as at 19 March 2012 is 21.

(b) 20 largest holders of quoted equity securities as at 19 March 2012

The names of the twenty largest holders of fully paid ordinary shares (ASX code: IOG) as at 19 March 2012 are:

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Rank Name Units % of Units
1 R McGann 9,128,530 6 73%
2 McGann Consulting Pty Ltd < McGann S/F Portfolio A/C> 8,516,671 6 28%
3 Ascot Park Enterprises Pty Ltd 7,400,000 5 46%
4 Upora Pty Ltd 6,500,000 4 79%
5 Linear A Pty Ltd 6,000,003 4 42%
6 Merchant Holdings Pty Ltd 5,800,002 4 28%
7 Bryan Welch Pty Ltd < Bryan Welch S/F A/> 4,983,700 3 67%
8 Plan B Trustees LTD 4,900,002 3 61%
9 J A L Macdonald 3,775,001 2 78%
10 McGann Consulting Pty Ltd < McGann S/F Portfolio A/C> 3,750,000 2 76%
11 JP Morgan Nominees Australia Ltd 2,769,999 2 04%
12 UBS Wealth Management Australia Nominees Pty Ltd 2,500,000 1 84%
13 RMB Resources Ltd 2,415,000 1 78%
14 C. Lubich 2,000,000 1 47%
15 J & O Fitzgerald 2,000,000 1 47%
16 Riverglen Nominees Pty Ltd 2,000,000 1 47%
17 McGann Consulting Pty Ltd < McGann S/F Portfolio A/C> 1,783,333 1 31%
18 A & P Carboni 1,543,333 1 14%
19 Fopar Nominees Pty Ltd 1,500,000 1 11%
20 L F Cronin 1,500,000 1 11%
TOTAL 80,765,574 59.52%
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Stock Exchange Listing – Listing has been granted for all ordinary fully paid shares of the Company on issue on the Australian Securities Exchange other than the restricted ordinary fully paid shares noted in section (f) below.

Page 57. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

AdditionAl ASX informAtion

(c) substantial shareholders

Substantial shareholders in Incremental Oil and Gas Limited and the number of equity securities over which the substantial shareholder has a relevant interest as disclosed in substantial holding notices given to the Company are listed below:

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No Shares Held % of Issued Capital
G. McGann & Related Entities 24,340,004 17 9%
M. Stowell & Related Entities 13,500,002 9 95%
C. Cronin & Related Entities 7,500,002 5 5%
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(d) Unquoted Securities

The number of unquoted securities on issue as at 19 March 2012:

	Number on issue
Unquoted Optons – exercise price 20c, expiring 1/11/14	92,600,000
(e) there are no holders holding more than 20% of a given class of unquoted securites (other than employee optons) as at 19 March 2012. (f) Restricted securites as at 19 March 2012 Included below is a listng of restricted securites on issue as at 19 March 2012: Fully paid ordinary shares, 24 months from date of quotaton 40,356,681 Unlisted optons, 24 months from date of quotaton 47,150,000

Number on issue

Unquoted Optons –
exercise price 20c, expiring 1/11/14

92,600,000

(e) there are no holders holding more than 20% of a given class of unquoted securites (other than employee optons) as at
19 March 2012.
(f) Restricted securites as at 19 March 2012
Included below is a listng of restricted securites on issue as at 19 March 2012:
Fully paid ordinary shares, 24 months from date of quotaton
40,356,681
Unlisted optons, 24 months from date of quotaton
47,150,000

There are no other restricted securities on issue as at 19 March 2012.

g) voting Rights

All fully paid ordinary shares carry one vote per ordinary share without restriction.

Unquoted options have no voting rights.

(h) company secretary

The Company Secretary is Ms Susan Hunter

(i) Registered office

The Company’s Registered Office is Unit 2, 16 Phillimore Street, Fremantle, WA 6160. Telephone: (08) 9431 7306.

(j) share Registry

The Company’s Share Registry is Security Transfer Registrars Pty Ltd, 770 Canning Highway, Applecross WA 6153. Telephone: (08) 9315 2333. Fax: (08) 9315 2233. Website: www.securitytransfer.com.au

(k) on-Market Buy-back

The Company is not currently performing an on-market buy-back.

(l) application of funds

During the financial year, the Company has used its cash and assets (in a form readily convertible to cash) in a manner which is consistent with its business objectives.

Page 58. Incremental Oil And Gas Ltd Annual Report | 31 December 2011

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NOTES TO THE FINANCIAL STATEMENTS
Page 59. Incremental Oil And Gas Ltd Annual Report | 31 December 2011
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AI assistant

VOLTAIC STRATEGIC RESOURCES LTD — Annual Report 2011

66024_rns_2012-04-15_908428bc-0a87-459c-91c0-50a020a905bd.pdf

annual report ‘11

Contents

Corporate Information Incremental Oil And Gas Ltd ABN: 66 138 145 114

DIRECTORS

SHARE REgISTRY

CHIEF FINANCIAL OFFICER

COMPANY SECRETARY

REgISTERED OFFICE

AuDITOR

SOLICITORS

Chairman’s Letter

Dear Shareholder,

Operational Review

1.1 Round Mountain developMent pRoject (100% woRking inteRest)

1.2 SHEEP SPRINgS PRODuCINg

oilfield (100% woRking inteRest)

1.4 ventuRa Basin pRoject (75% woRking inteRest)

1.5 RAvEN PASS ExPLORATION

pRospect (100% woRking inteRest)

1.6 EAST JOAquIN ExPLORATION

pRojects (100% woRking inteRest)

1.7 guIJARRAL HILLS DEvELOPMENT pRoject (80-100% woRking inteRest)

1.8 INCREMENTAL’S DEvELOPMENT STRATEgY

Directors’ Report

DIRECTORS

MR MaRk stowell Bus CA

MANAgEMENT

Mr JONATHAN ASquITH (Hons) CA MBA (CHIEF FINANCIAL OFFICER)

Mr JIM HuSSEY M Pet Eng. University of Southern California (vICE PRESIDENT, uSA)

directors’ interests in the shares and options of the company

principal activities

Review of operations

operating results for the year

financial condition

liquidity and capital resources

share issues during the year and to the date of this report

share options

dividends

Risk management

significant changes in the state of affairs

environmental Regulation and performance

significant events after the balance date

likely developments and expected results

indemnification and insurance of directors and officer

Remuneration Report (audited)

details of key directors and management personnel

Remuneration policy

non executive director Remuneration

senior executive Remuneration policy

Remuneration of each company director and key management personnel

analysis of movements in options issued as remuneration

committee Memberships

corporate governance

directors’ Meetings

directors’ benefits

number of employees

proceedings on behalf of the company

auditor independence declaration to the directors of incremental oil and gas ltd

non-audit services

Consolidated Statement of Financial Position

Consolidated Statement of Comprehensive Income

Consolidated Statement of Changes in Equity

Consolidated Statement of Cash Flows

Notes to the Financial Statements

1. CORPORATE INFORMATION

2. SuMMARY OF SIgNIFICANT ACCOuNTINg POLICIES

(a) Basis of preparation

(b) statement of compliance

AASB 13 requires:

(c) Basis of consolidation

(d) Business combinations

(e) taxation

(f) investments and other financial assets

(i) Financial assets at fair value through profit or loss

(ii) Held- to- maturity investments

(iii) Loans and receivables

(iv) Available-for-sale investments

VOLTAIC STRATEGIC RESOURCES LTD Annual Report 2011