PWC (2015) - 48 - State-Owned Enterprises - Catalysts For Public Value Creation (PEs SOEs)

Annual Report 2006
Another Korean Wave

Contents
Profile 02
Financial Highlights 03
Message from the CEO 04
Executive Committee 06
6 Noteworthy Achievements in 2006 08
2006 at a Glance 08
Insightful Progression 10
Powerful Realm 16
Respectful Management 30
Financial Statements 37
Organization Chart 78
History of KNOC 79
Our Global Network 80
KNOC will continue to provide leadership as Korea
continues its drive towards energy self-sufficiency by positioning itself as a
global-wide, state-owned oil company.
PROFILE
Driving Korea’s Energy Future

The Korea National Oil Corporation (KNOC), founded by the Korean government in 1979, is tasked with the exploration and storage of the
nation’s petroleum resources and the improvement of its petroleum distribution infrastructure. Because Korea relies heavily on imports for most of
its petroleum needs, the company’s primary mission is to contribute to the nation’s economic development by stabilizing petroleum supply and
demand.
KNOC took a major step towards turning Korea into an independent oil producer through the development of the Donghae-1 gas field, located on
the nation’s continental shelf. Today, the company has adopted the motto “Challenge 20-50” to underline its newest strategic objective--that of
growing into a global-wide, state-owned oil company with operating income of USD 2.0 billion, reserves of 2.0 billion barrels and sales of USD 5.0
billion by the year 2015.
KNOC is committed to ensuring customer satisfaction by heightening its global competitiveness, securing stable energy supplies and providing
leadership to Korea’s petroleum industry. In terms of petroleum development, its primary goals are to alleviate the country’s dependence on
Middle Eastern supplies and to increase its volume of supply. These ends will be achieved primarily by centering on six core areas. In the area of
petroleum stockpiles--a key means of support for the Korean economy--the company will stabilize petroleum supplies and take steps to meet the
nation’s future energy needs. It will also operate its petroleum stockpiling assets in an efficient and effective manner by increasing its
competitiveness through a series of integrated stockpiling strategies.
In the future, KNOC will continue to provide leadership as Korea continues its drive towards energy self-sufficiency by positioning itself as a global-
wide, state-owned oil company.
02 Korea National Oil Corporation

FINANCIAL HIGHLIGHTS
Summary of Balance Sheets

(In billions of KRW)
8,428.8
7,572.1 2006 2005 2004
7,133.5 Total assets 8,428.8 7,572.1 7,133.5
Total liabilities 3,539.6 3,307.4 3,349.6
04 05 06 Total shareholder’s equity 4,889.2 4,264.7 3,783.9
Total Assets
(In Billions of KRW)
956.8
918.1
Summary of Income Statements
796.8 (In billions of KRW)
2006 2005 2004

04 05 06 Sales 918.1 956.8 796.8
Sales Gross profit 374.6 452.8 268.8
(In Billions of KRW) Operating income 326.0 406.0 234.1
Net income 185.2 279.5 271.7
406.0
325.9
234.1
04 05 06 Summary of Cash Flows Statements

Operating Income
(In Billions of KRW) 2006 2005 2004
Cash Flows from operating activities 29.5 217.9 177.0
279.5 Cash Flows from investing activities -834.5 -315.9 -434.2
271.7 Cash Flows from financing activities 690.0 218.7 247.6
185.2 Net increase (decrease) in cash and cash equivalents -115.0 120.7 -96
Cash and cash equivalents at beginning of year 366.4 245.7 255.2
Cash and cash equivalents at end of year 251.4 366.4 245.7
04 05 06
Net Income
(In Billions of KRW)
2006 Annual Report 03

MESSAGE FROM THE CEO
President & CEO

Hwang Doo-Yul
The Korea National Oil Corporation (KNOC) has made singular contributions production--by relying entirely on Korean technology and capital. This block is
towards stabilizing Korea’s petroleum supply and demand. Since its expected to generate net earnings of more than 0.5 billion US dollars over the
establishment in 1979, it has carried out an impressive number of exploration next 23 years. We experienced similar successes in exploration projects in other
and production (E&P) and stockpiling projects, both at home and abroad. With areas, including Kazakhstan Block ADA--the first success story among all the
oil prices reaching ever-higher levels, the political and economic importance of Korean companies operating there. In addition, we secured strongholds for
petroleum has grown exponentially. In such a climate, the various roles played growth in such areas of great potential as Canada, Nigeria, West Kamchatka,
by a state-owned oil company--including taking the lead in overseas resources and Yemen, demonstrating yet again our “gold-standard”E&P capabilities.
exploration and securing energy resources in an extremely competitive
marketplace--take on an added significance. In the field of petroleum stockpiling, we increased our gross storage capacity to
121.0 million barrels by completing the Geoje Stockpile Base III. And we have
Last year, we faced high entry barriers to promising new areas for exploration 76 million barrels of stockpile of crude oil and petroleum products at our nine
and development due to increasing nationalist tendencies among many oil- storage sites.
producing nations and heightened competition for energy among the BRICs
nations (especially China and India). Despite this, we achieved noteworthy This has allowed us to build a foundation on which to carry forward full-scale
results in our two core businesses (E&P and stockpiling) by cultivating an petroleum logistics operations in northeastern Asia and to cope with possible
entrepreneurial spirit and a sense of camaraderie throughout the company. As a future energy crises.
consequence, we recorded KRW 918.1 billion in sales and KRW 325.9 billion in
operating income in 2006. Despite these impressive accomplishments, Koreans still worry about petroleum
supply and demand whenever the international energy environment becomes
In 2006, we realized sales of KRW 167.8 billion from our continental shelf uncertain and problematic. Given this reality, we must redouble our efforts.
exploitation projects as the result of stable production of natural gas and Since we are a state-owned company, we also need the government’s support
condensate and optimal operations at the Donghae-1 gas field. In February of in furthering our operational competencies to assure the nation of a secure and
the year, we discovered a 10 billion cubic feet natural gas reservoir in the stable supply of petroleum. Unfortunately, Korea suffers from a weak supply
Gorae-14 structure, further accentuating the value of the nation’s continental system--despite the fact that it is the world’s fifth-largest petroleum importer
floor. Thanks to these accomplishments, a foreign major oil company has signed and seventh-largest consumer. To deal with this problem, the government has
a contract with us for joint continental shelf exploration projects--15 years after formulated a plan for overseas resources exploitation, the overall objective of
major oil companies had completely withdrawn from all such ventures. which is to realize a self-efficiency ratio of 18% by 2013.
In overseas E&P, we enjoyed remarkable results from our investments and In response to this, KNOC developed its own operational strategy: “Challenge
advanced into promising new areas. For example, our Vietnam Block 11-2 20-50”, its aim is to realize 2 billion US dollars in operating income, 5 billion US
began producing natural gas in December 2006. We carried out all operations dollars in total sales, and 2 billion barrels of reserves by 2015. If we succeed,
relating to this venture--from the acquisition of initial exploration rights to the company will become a world-class, state-owned oil company leading the

“As Korea’s leading energy company, we took another impressive
step towards realizing our goal of becoming a world-class publicly-
owned organization in 2006.”
nation’s quest for energy self-sufficiency. To move towards this end, our goal for Our strengths in R&D--spurred on as always by our specialists in the Petroleum
2007 is to maximize earnings at each of our divisions. Technology Institute--will be used to heighten the value of our enterprise and
enhance the technological capabilities of the Korean petroleum industry as a
With regard to domestic continental shelf exploitation projects, we will continue whole.
exploring the deep areas of the East Sea and our western and southern
territorial waters to secure new reserves while operating the Donghae-1 gas In the areas of management and administration, we will continue to pursue
field as efficiently and effectively as possible. change and innovation as the surest means of approaching--and exceeding--
global standards. We will overhaul less productive operational sectors by
In the fields of overseas E&P, we will strive to increase supply volume, with a continuing to develop high-quality management infrastructures, such as the
special focus on reducing our dependence on the Middle East and increasing the Enterprise Resource Planning (ERP) system. In addition, we will maximize our
nation’s self-efficiency ratio. To this end, we will carry out petroleum exploration earnings by creating performance- and responsibility-based management
projects in large oil fields where we have secured operational rights--including systems and securing differentiated technologies. Our end goal is to create a
those in Nigeria, Yemen and Russia. In addition, we will continue to develop our globally-oriented organizational culture that gives priority to initiative and
portfolio of overseas petroleum development projects. Finally, we will creativity.
strengthen our business structure by further diversification, by purchasing
development and production assets and by expanding the number of our Last--but certainly not least--we will fulfill our responsibilities as a publicly-
operational rights-secured projects. owned company by making sure that our motto, “Management of Sharing”,
includes social and charitable activities based on the voluntary participation of
We will also bolster the efficiency of our petroleum stockpiling operations. In all our employees. In addition, we are committed to being a transparent and
concrete terms, we will enhance our capacity to deal with oil crises through the trustworthy public organization. One of our primary concerns will be
optimal operation of our nine storage bases and increase the efficient use of environmental management. This will be realized through the operation of safe
stored assets, primarily by participating in international joint stockpiling projects and clean stockpiling facilities and the acquisition of an ISO 14001 certification.
and petroleum trading. We plan to have the facilities of 146 million barrels of
petroleum by 2009. KNOC is primed to become a “gold-standard” energy company that thrives on
challenge and utilizes creative thinking to provide solid support for the Korean
We also intend to augment our position as a comprehensive global information economy. Our primary goals are to assume a leadership role in Korea’s quest for
service provider. To this end, we will amplify our information utilization ratio by energy self-sufficiency and to earn the trust and respect of our customers. All of
constructing a field-oriented information collection system and strengthen our our staff members are committed to meeting the twin objectives of “Challenge
research and analysis operations to provide faster and more efficient customer- 20-50”, our long-term growth strategy: to strengthen the nation’s energy
centered information services. In addition, we will improve the quality of that security and position KNOC as a world-class oil company. Thank you.
information by networking with other organizations with similar operational
interests. May 2007

EXECUTIVE COMMITTEE

3 6 9
1. President 2. Auditor
Doo Yul, Hwang Soo Man, Lee
8 7 3. Senior Executive Vice President 4. Executive Vice President for Administration
Moon Kyu, Suh Sung Ki, Hwang
4 1 2 5 5. Executive Vice President for Development & Production

Bum Suk, Poo
6. Executive Vice President for Petroleum Stockpile
Kwan Seop, Kim
7. Executive Vice President for Engineering & Construction 8. Executive Vice President for New Ventures & Exploration
Yong Ho, Cho Seong Hoon, Kim
9. Director General for Petroleum Technology Institute
Jong Hwa, Lee

[ Indomitable Challenger is Who we are!
]
February 20 March 3
Discovered an additional 10.0 billion cubic Inaugurated the “KNOC Volunteers”
feet of natural gas at Block 6-1 in the East
2006 Sea
February 22
Launched the Korea Overseas Energy
March 9
Signed a Production Sharing Contract
(PSC) with Nigeria on OPL321 and 323
At a Glance Development Promotion Society March 12

Concluded an Strategic Alliance
Agreement (SAA) with Algeria regarding
the expansion of International Joint
Stockpile volume

6 Noteworthy
Achievements In 2006
Our spirit of innovation is driving

Korea’s energy future
01
Triumph in Southeast Asia
Vietnam 11-2
KNOC celebrated the completion of the Rong Doi gas field in Block 11-2 in Vietnam on
November 17, 2006. The first-ever success story in the independent development of gas
fields by a Korean company, Rong Doi began production on December 25, following the
construction of such production facilities as platforms, pipelines and a floating storage and
offloading (FSO) vessel--all in less than two years. In addition to being Korea’s first
overseas gas field development project, each step of the entire process, from the initial
acquisition of exploration rights to final production, was accomplished solely by Korean
technologies and capital. The Vietnam 11-2 block is estimated to have an annual capacity
of 47.5 billion cubic feet of natural gas and 1.53 million barrels of condensate, which will
generate net earnings of approximately USD 0.5 billion over the next 23 years.
Triumph in the Americas
Canada Blackgold Oilsands

On July 24, 2006, KNOC purchased a 100% stake in the Blackgold oil sands in Alberta,
Canada, with an estimated capacity of 216 million barrels. This acquisition aptly illustrates
KNOC’s commitment to diversification, since it was Korea’s first entry into non-
conventional petroleum operations. Acquiring this stake means that KNOC has secured
both its largest-ever reserves (216 million barrels) and the right to exploit them
independently. KNOC plans to start the full-scale construction of production facilities in
2008, producing up to 35,000 barrels of oil per day by 2010 while generating estimated
annual revenues of USD 0.5 billion.
02
03
Triumph in the Caspian Sea
Kazakhstan ADA
KNOC discovered a new oil field in the Bashenkol structure inside the ADA Block in
Actobe, Kazakhstan. Although it is estimated to hold about 20 million barrels of oil by
itself, estimated reserves in three other promising structures put the total volume of the
block at about 0.17 billion barrels. The company plans to begin production in 2007. This
accomplishment was particularly meaningful for two reasons: first, it was finalized in a
mere five months; secondly, it is the first success story among all the Korean companies
which have interests in Kazakhstan.
Triumph in West Africa
Nigeria OPL 321 and OPL 323

KNOC inked a Production Sharing Agreement on Oil Prospecting Licenses 321 and 323 in
Nigeria, in a joint signing ceremony attended by the presidents of both countries being held on
March 9, 2006. KNOC succeeded in securing the rights to these two deep-water oil fields
following extremely intense international bidding. A number of major oil companies
participated in this exercise, since the area is estimated to hold 2.0 billion barrels of crude oil.
This success confirmed the company’s exploration technologies, following as it did upon similar
successes in Vietnam 15-1 and 11-2. The project will act as a bridgehead for further
participation by Korean energy companies in West Africa.
04
05
Triumph in the Middle East
Joint Stockpiling with Kuwait

KNOC signed an agreement with the Kuwait Petroleum Corporation (KPC) for the
International Joint Stockpile of two million barrels of crude oil at its facilities in South
Korea October 31, 2006. Korea has generated earnings from leasing the facilities and has
obtained preferential right to purchase the crude in the event of emergency. This illustrates
the benefits of KNOC's policy of cooperating with both OPEC countries (such as Kuwait
and Algeria) and non-OPEC ones (such as Norway). As a consequence, Korea's
International Joint Stockpile volume grew by 7.1 million barrels to 27 million barrels as of
the end of 2006. This compares favorably with 19.9 million barrels in 2005 and resulted
primarily from agreements involving Kuwait and Algeria. Earnings from International Joint
Stockpile have been also dramatically increased from KRW 13.8 billion in 2005 to KRW
26.4 billion in 2006.
Triumph in Northeast Asia
West Kamchatka
KNOC performed 2-D seismic exploration and technical research work in the West
Kamchatka Block in the Sea of Okhotsk, Russia in 2006. Initially, the area was estimated
to hold 3.7 billion barrels of crude oil reserves, but results indicate that volume is expected
to increase in the wake of further explorations.
The company will conduct more such operations in 2007, and plans to begin full-scale
exploratory drilling by 2008.
06
Our spirit of innovation is driving Korea’s energy future
[ 6 Noteworthy Achievements in 2006
]
May 13 July 24 November 17 December 8
Signed a Memorandum Of Acquired the Blackgold oil sands field Completed gas production facilities at Signed a formal contract for a
Understanding (MOU) for an in Canada Vietnam Block 11-2 petroleum exploration project at an
international joint stockpile project onshore oil field in West Kamchatka
with the United Arab Emirates August 30 November 28
Concluded an agreement for the Aral Concluded an agreement for exploration
June 29 Sea gas field PSC with Uzbekistan rights at the South Karpovsky oil field in
Completed the Geoje petroleum Kazakhstan
stockpile base (capacity 48.0 million October 31
barrels) Signed an agreement with the Kuwait November 29
Petroleum Corporation (KPC) for the Introduced Oil Field Development Fund I
July 6 International Joint Stockpile
Discovered a new oil field at the ADA
Block in Kazakhstan

Insightful
Progression
Moving steadily forward, exploring the potential of tomorrow
rather than resting on the laurels of today
Vision & Strategy

R&D
INSIGHTFUL PROGRESSION
VISION &
STRATEGIES
Reserve
2.0 billion barrels
Sales Operating Income

USD 5.0 billion USD 2.0 billion
Challenge
20-50
Production Saving
400 thousand barrels / day 141 million barrels
Developed ”Challenge 20-50”, KNOC’s strategic

goal of realizing operating income of USD 2.0
billion, reserves of 2.0 billion barrels and sales of
USD 5.0 billion by 2015 as a means of
developing into a global-wide, state-owned oil
company

Planning for the nation’s energy future
We are harnessing our creativity and our spirit of innovation to plan for Korea’s
future energy needs today.
KNOC developed “Challenge 20-50” its strategic objective of becoming a world-class, state-owned oil company leading the nation’s quest for
energy self-sufficiency, by consulting with all its workers and heeding their ideas and suggestions. This motto encapsulates our goal of realizing an
annual operating income of USD 2.0 billion, reserves of 2.0 billion barrels and sales of USD 5.0 billion by 2015.
To bring these goals to fruition, we will concentrate on developing oil fields in core strategic areas through mergers with and acquisitions of
promising oil companies and/or by purchasing their assets. At the same time, we will expand our R&D investments to enhance the company’s
petroleum development technologies. In addition, we will maximize earnings from our domestic continental shelf operations by the optimal
operation of our Donghae-1 gas field, by expanding our exploration activities and by exploring promising deep-sea areas.
In terms of our petroleum stockpile, we will meet the government’s stockpile goals through the safe and efficient operation of our facilities. We will
also strive to become the primary hub for petroleum logistics in northeastern Asia by laying the foundations for an advanced petroleum stockpiling
system.
The future of KNOC is the future of Korean energy. With this in mind, we remain committed to becoming a “gold-standard” energy company
meeting global criteria in the areas of petroleum development, stockpiling and information services.

INSIGHTFUL PROGRESSION
RESEARCH &
DEVELOPMENT
Capitalizing on state-of-the-art R&D

to become a world-class energy company
KNOC is enhancing Korea’s competitiveness in the energy sector by developing
next-generation growth sources.

The company has established mid- and long-term research and development (R&D) plans to address
any and all challenges in the global petroleum development environment. These include the re-
emergence of nationalist tendencies in many countries, intense international competition to secure
and develop petroleum resources and the expansion of exploration activities into the deep oceans and
polar regions. In addition, the company has tasked its R&D specialists with the challenge of increasing
its technological competitiveness and identifying future growth technologies. Major R&D activities to
increase our success in the areas of exploration and productivity include research into deep-sea
exploration and development technologies, oil shale and gas hydrates, non-conventional petroleum
(including gas-to-liquid manufacturing technologies), 4-D seismic surveys and Enhanced Oil Recovery
(EOR) technologies.
To execute these tasks efficiently, cultivate the abilities of our petroleum E&P technologists and pursue
the development of our core technologies, the company established the Petroleum Technology
Institute in January 2006. This allowed us to lay the foundations for specialized R&D capabilities and
enhance our goal of developing into a world-class state oil company by separating technological
support matters from our R&D functions. We also increased our 2006 R&D investments by 46% year-
on-year to facilitate the development of future growth technologies and expanded our research
infrastructure by introducing advanced computerization equipment, including KOTIS.
KNOC operates its own educational program, the “Oil Academy”, to foster the abilities of its
technologists through its experience in petroleum development projects over the past 25 years. We
also contribute to domestic technological developments by partnering in joint research projects,
academic seminars and international technological collaborations with colleges and professional
research organizations, both from Korea and abroad. In a similar vein, we provide technical feasibility
services for private companies that are exploring the potential of new operations. Finally, we are
involved in a variety of technological support activities in relation to petroleum development, including
opening the “Oil Academy” to other Korean petroleum companies.
Building upon its expertise as a pioneer in the nation’s petroleum development industry, KNOC will
continue with its goal of contributing to Korea’s energy competitiveness by developing next-
generation sources of growth through continuous R&D activities.

Powerful Realm
Harnessing challenge and innovation in the search for a better future
Continental Shelf Exploration
Overseas Exploration & Production
Offshore Rig Operations

Petroleum Information Services
Petroleum Stockpile
Construction of Stockpile Facilities

POWERFUL REALM
OVERSEAS EXPLORATION &

PRODUCTION
Ceaseless work, endless challenges
KNOC relies on creativity and welcomes all challenges in

its quest to become a world-class energy company.
As the only Korean company that specializes in the development of petroleum resources, KNOC participates in diverse overseas oilfield development
projects with the goal of increasing the nation’s ratio of oil self-sufficiency to 18% by 2013. We are committed to becoming a world-class company that will
be producing 0.4 million barrels of oil a day by 2015. This goal will be accomplished by increasing our exploration and production (E&P) activities and by
diversifying into such related fields as oil sands, gas-to-liquid (GTL) and gas hydrates.
KNOC is currently participating in 28 E&P projects in fifteen different countries, of which seven are for production, three for development, and 18 for
exploration. Meanwhile, seven production fields are producing approximately 45,000 barrels of oil equivalent per day. Through strategic operations and
investments in promising oil fields, we secured reserves totaling 549 million barrels of oil equivalent by 2006--a leap of about 74% from the 315 million
barrels we accumulated in 2005.
In order to grow into a world-class petroleum developer, we are establishing a global management system that focuses on six core regions: Northeast Asia
(including China, Kamchatka and Sahkalin), Southeast Asia (including Indonesia and Vietnam), the Middle East (including the Emirates and Yemen), West
Africa (including Nigeria), the Caspian Sea (including Kazakhstan) and the Americas (including Canada and the USA). We will also concentrate on the
optimal operation of our existing production fields, on seeking out new reserves and on diversifying our operations by partnering with strategic nations and
major international petroleum companies.
2006 MILESTONES
The Rong Doi gas field of Block 11-2 in Vietnam, which KNOC developed, began production activities on December KNOC also purchased a 100% stake in the Blackgold
25, 2006. In addition to being Korea’s first overseas gas field development project, each step of the entire oil sands fields in Alberta, Canada on July 24, 2006.
operation, from the initial acquisition of exploration rights to final production, was accomplished solely with Korean With an estimated capacity of 216 million barrels of oil,
technologies and capital. The block is forecast to produce annually up to 47.5 billion cubic feet of natural gas and this was the first advance into non-conventional
1.53 million barrels of condensate, generating net earnings of more than USD 0.5 billion, over the next 23 years. petroleum projects by a Korean company. It also
marked the company’s first success in a heavy oil sands
field since it first became involved in such activities in
1988.

8
2004 7 7
2005 6
2006 55 5
4 4
3 33
The number of E&P 2 2 2
activities by area 1 1
0
Northeast Southeast Middle West the Caspian the Americas
Asia Asia East Africa Sea
KNOC secured additional reserves of about 20 million barrels of oil by succeeding in its exploratory drilling in the
Bashenkol structure of Kazakhstan’s ADA Block on July 6, 2006. When estimated reserves at three other promising
structures in this block are factored in, total reserves are estimated to be about 170 million barrels of oil. This
accomplishment is of special significance both because of the sheer size of the oil field and because it marks the
first success story among Korean companies operating in Kazakhstan.

POWERFUL REALM
CONTINENTAL SHELF
EXPLORATION
Domestic continental shelf development has made

Korea an oil-producing country
The Donghae-1 gas field resulted from the application of our efforts and our technological
expertise over many years.
KNOC has taken the lead in Korea’s continental shelf exploration since the mid-1980s. In 1997, we confirmed the existence of three large-scale basins (at
Seohae, Jeju, and Ulleung) where natural petroleum resources were likely to exist by means of the comprehensive evaluation of exploration data. In June of
the following year, we discovered the Donghae-1 gas field at Block 6-1. Production began in July, 2004, making Korea the world’s ninety-fifth oil-producing
country.
The Donghae-1 gas field has already produced 46.0 billion cubic feet of natural gas and 1.0 million barrels of crude oil. Daily average production capacity is
50 million cubic feet of natural gas and 1,000 barrels of crude oil, which has been delivered to homes and power stations in Ulsan and Gyeongnam. Total
proven reserves amount to 265.0 billion cubic feet, meaning that its LNG import substitute value is in excess of USD 2.65 billion (based on 2006 prices).
KNOC will continue to pursue exploration activities in those areas of Block 6-1 where the existence of oil and gas reserves has been confirmed. We also
plan to resume joint exploration activities in the deep waters of the East Sea by partnering with a major foreign-based oil company. In addition, we are
scheduled to begin operating in new prospects in the southwestern sea, basing our projections on exploration data we obtained in 2006. We have also
completed the second year of our first-stage investigation project(2005-2007) on gas hydrates, which are widely considered to be the ultimate “next-
generation” energy source. These projects will be carried out in stages, with commercial production scheduled for 2015.
KNOC has conducted seismic surveys on a total of 277,357L-km since the beginning of its domestic continental shelf exploration. In the future, we will drill
2-3 wells annually, representing an investment of approximately KRW 60.0 billion. We estimate that these activities will secure additional reserves of 600.0
billion cubic feet of natural gas and 0.1 billion barrels of oil from 2007 until 2016.
2006 MILESTONES
KNOC struck a deal with a major foreign-based oil company, Woodside Energy of Australia, to jointly explore off the
East sea deep water starting in February 2007. This will generate positive synergies by sharing both risks and
expenses between both partners. If these operations succeed, they are forecast to generate about USD 7.0 billion
worth of import substitute effects.

167.8
Goal
Performance
129.6
87.4
82.4 80.4
The performance in the
Donghae-1 gas field 47.2
(in billions of KRW)
the sales cost of profit of
sales sales
KNOC generated sales of KRW 167.8 billion from its KNOC discovered an additional 10.0 billion cubic feet
gas fields in 2006, exceeding its original target of KRW of natural gas in the Donghae Gorae 14 Structure in
129.6 billion by 29%. The company was able to February 2006. This is worth about USD 0.1 billion in
operate for a total of 336 days, which compares terms of import substitute effects, contributing
favorably with its original goal of 321. dramatically to the development of stable production
bases and the further stabilization of domestic supply
and demand.

POWERFUL REALM
OFFSHORE RIG
OPERATIONS
The result of safe operational culture and

efficient management
KNOC’s offshore rig operations have grown into a profitable business at a time of high oil
prices, thanks to cutting-edge equipment and outstanding technologies.
Korea's only semi-submersible drilling unit, the “Doo Sung” was built in 1984. It has been successful at 91 wells, both in Korea and in Alaska, China,
Vietnam, Malaysia, and Indonesia. In order to meet increasingly stringent safety regulations and requirements, KNOC acquired an International Safety
Management (ISM) Code, an ISO 9001 Certification and an International Ship and Port Facility Security (ISPS) Code.
The ship has an exceptional safety record as the result of the company’s preemptive HSEQ (Health, Safety, Environment & Quality) activities. It has been
hailed throughout the world petroleum drilling market for its efficiency and its safety--including receiving a certificate for nine consecutive accident-free
years of operation from the International Association of Drilling Contractors in June 2005.
The company’s drilling ship operations has emerged as a major source of revenue due to sharp upturns in charterage fees. This, in turn, has resulted from
the scarcity such ships as countries worldwide expand their oil exploration activities.
2006 MILESTONES
In 2006, the Doo Sung operated for 297 days, exceeding both management’s goal of 280 days and the world
average of 291. Its utilization ratio stood at 81.4%--1.7% higher than the world average and 13.1% higher than
the southeastern Asia market average. When considering the time required for regular inspections and repair work
(68 days), it actually recorded a 100% operations ratio.

81.4
79.7
68.3
Comparison of drilling
ship’s utilization ratio(%)
Doo Sung World Southeastern
Average Asia Average
KNOC recorded sales of KRW 22.9 billion and KNOC sharpened the performance, power generation
operating income of KRW 5.2 billion from its offshore efficiency and safety facilities of the Doo Sung at a cost
rig operations. This represents gains of 35% and of KRW 8,135 million. These improvements have
139%, respectively, from the previous year. enhanced both the ship’s competitiveness and the
length of time during which it can actually operate.

POWERFUL REALM
PETROLEUM
STOCKPILE
A cornerstone of the nation’s

economy and energy security
Petroleum stockpiling increases the nation’s energy security by supplying it with petroleum
in a stable manner and enabling it to cope proactively with the threat of energy crises.
The petroleum stockpile is an essential investment, both for the stability of the nation’s economy and energy security. KNOC contributes to the stabilization
of the nation’s petroleum supply and demand by releasing stored oil in a timely and efficient manner whenever market disruptions occur.
The company operates underground caverns and aboveground tank facilities with a total capacity of 121 million barrels of oil in nine locations. These
include bases at Ulsan, Geoje, Yeosu, and Seosan, where 101 million barrels of crude oil, petroleum products, and LPG were in storage as of the end of
March 2007. In addition, the company is carrying forward the government’s third petroleum storage plan, which calls for secure storage facilities for 146
million barrels by 2009 and 141 million barrels of crude by 2010.
In order to increase our stockpile levels more economically, we have moved to “dynamic”stockpile (which considers both security and economy) from
“static” storage (which concentrates only on security). This has heightened the competitiveness of our stockpiling operations.
In addition, KNOC has been encouraging the “New-START”, a voluntary innovation movement, at all stockpile bases.
Meanwhile, our primary external strategies are to maximize our profitability through joint stockpiling projects and stored oil trading and to strengthen our
relationships with China, Japan and Russia as part of our goal of making Korea a hub for petroleum logistics in northeastern Asia.
2006 MILESTONES
KNOC completed the Geoje Petroleum Stockpile Base with a capacity of 7.5 million barrels, in June 2006. The
company is now able to store 47.5 million barrels of crude oil at the Geoje base alone--the equivalent of 23 days of
Korean petroleum consumption. Our underground and aboveground reserve facilities now have a capacity of 121
million barrels of oil at nine bases across the country.

Supply capability
(million barrels)
27.0
Earnings
(in billions of KRW) 19.9
11.3 26.4
13.8
Performance of
8.5
petroleum stockpile
2004 2005 2006
KNOC bolstered its supply capability by increasing its joint stockpile volume to 27,000 thousand barrels (compared In October, KNOC launched its first international joint
to 19,900 thousand barrels in 2005). This allowed us to reduce our joint stockpile volume goal by two years and stockpiling project with a Middle Eastern oil-producing
resulted in the company’s largest-ever earnings: KRW 26.4 billion. This compares extremely favorably with KRW 8.5 country by signing an agreement with the Kuwait
billion in 2004 and KRW 13.8 billion in 2005. Petroleum Corporation for the joint storage of 2 million
barrels of crude oil. This shows the benefit of KNOC’s
policy of cooperating with both OPEC countries (such
as Kuwait and Algeria) and non-OPEC ones (such as
Norway).

POWERFUL REALM
CONSTRUCTION OF
STOCKPILE FACILITIES
Building environmentally-friendly stockpile facilities that

let people, nature and our operations exist in harmony
KNOC is a leader in the construction of environmentally-friendly stockpile bases,
placing a high priority on both environment and human beings.
KNOC has been building safe and environmentally-friendly stockpile facilities for more than twenty-five years. At every stage, from the establishment of
blueprints, surveys, planning and construction up to trial runs, we are committed to ensuring exhaustive quality and safety management.
Our expertise in this area is such that we have earned an ISO 9001 certification for quality standards and an ISO 14001 for environmental management. We
are also dedicated to building our bases economically, minimizing costs by applying state-of-the art engineering and construction technologies.
Because we have been building underground storage facilities for more than twenty-five years, KNOC boasts a high degree of expertise and an advanced
knowledge of construction techniques.
Based on this expertise and know-how, we are actively participating in construction projects of oil storage facilities in countries such as China, India and
Vietnam, where petroleum demand is rapidly increasing in the wake of strong economic growth.
These activities allow us to demonstrate our technological prowess to the world, contribute to the nation’s economic development, and promote overseas
expansion by private Korean companies.
2006 MILESTONES
KNOC completed construction at all its stockpile bases KNOC completed expansion of Geoje base with a
on schedule with strict construction management capacity of 7.5 million barrels (2.5 million aboveground
processes. and 5.0 million barrels underground). This gives the
company a total storage capacity of 121 million
barrels.

100.0
2005
2006 92.2
88.7 91.7
78.3
73.1 55.6
Construction 34.9
processes of each bases(%) 9.7 14.4
Geoje base Yeosu base Seosan base Ulsan base Pyeongtaek base
KNOC enjoyed an accident-free construction period while drilling 15.1 km of underground caverns for a second KNOC is creating new and innovative earnings base by
Yeosu base through its utilization of advanced technological verification and safety countermeasures. We also plan exporting its technological knowhow (covering such
to complete a loading and offloading pier and an access facility for 0.3 million DWT ships in Seosan, utilizing CTM operations as facilities planning and design,
engineering methods. construction, management, operations, etc.) and its
vast experience in the field to newly-emerging nations
such as China and India.

POWERFUL REALM
PETROLEUM
INFORMATION SRVICES
A cutting-edge tool making

Korea an energy power
KNOC supports the nation’s energy policies and other companies’ energy-related decision-
making by providing them with high-quality petroleum information services.
The international situation surrounding the petroleum industry has been marked by a series of unpredictable events, including the first and second oil crises
in the 1970s, the Gulf War in the 1990s and the war in Iraq. As the world’s fifth-largest petroleum importer and seventh-largest petroleum consumer,
Korea depends on foreign imports for a large portion of its energy needs. This makes speedy and accurate information on petroleum matters essential.
To accommodate this need, KNOC gathers, analyzes and evaluates petroleum information both from home and abroad and makes it available to
governmental organizations, petroleum industry stakeholders, academic circles and the general public. By doing so, we help the government determine its
energy policies, contribute to academic research and facilitate private sector decision-making.
KNOC is continually seeking out methods of providing customer-friendly and timely petroleum information while researching and analyzing key issues to
cope with market changes in a proactive manner. We produce and offer tailored information for internal and external customer assistance and are exploring
more efficient and effective ways to provide information by reinforcing our online and offline information delivery systems. The company is committed to
bolstering its customer-centered petroleum information services, meeting the needs of its customers by presenting them with high-quality data.
2006 MILESTONES
KNOC has changed its petroleum information-gathering survey methodologies by establishing a series of joint KNOC has developed a new strategic model for
information networks with professional organizations. It also conducts due-diligence examinations and indirect advancing into overseas energy and energy-related
data dissemination through books, publications and Web sites. It is focusing its petroleum information survey-and- industries by taking the initiative in launching the
analysis activities on key strategic areas to help the government achieve its energy self-sufficiency ratio of 18% by Korea Overseas Energy Development Promotion
2015. Society, which was established in February 2006.

KNOC’s Early Warning System (EWS) is the world’s only KNOC creates an optimal environment for the provision
crisis-warning system in the petroleum sector and has of petroleum information by continuously supplementing
been applauded for its excellence by the IEA. The and bettering “Petronet,” its petroleum information
company is strengthening the reliability of the EWS by network. The number of users now exceeds 100,000
making continuous improvements to it, further as of January 2006.
ensuring the accuracy and timeliness of its government
reports and press releases.

Respectful
Management
Exercising equitable and transparent management in the service of customer satisfaction
Human Resources Ethical Management

Social Contributions
Environmental Management
RESPECTFUL MANAGEMENT
Human Resources
Nurturing the talents and

potential of our employees
In the belief that a qualified workforce is the key to a
respected and successful company, we foster the abilities of
our workers to ensure a better future for everyone.
KNOC believes that employees are the greatest assets of a corporation. Because of this, we seek out
talented professionals with creative minds, progressive spirits and the will to deal with change and
challenge to ensure that we will grow into a world-class, state-owned petroleum company. To this
end, we have formulated a series of plans and policies (including a mid- and long term strategic
management plan and an annual human resource development plan) to enhance the abilities of our
staff.
We have strengthened our competency in human resource sector to aid in the cultivation of specialists
and other professionals and have accordingly increased our training courses by 88.1% compared to
the previous year. We are also endeavoring to nurture expertise in our core business sectors and have
expanded our “Oil Academy” program to accommodate 426 students in thirty sessions on topics from
geology through drilling, reservoir engineering, production operations, economics and management.
At the same time, our OJT courses have been augmented to accommodate 110 students taking eight
courses. These trainees can deepen their expertise and knowledge at our domestic and international
petroleum development sites as well as those of our overseas partner companies. In addition, we have
just introduced an E&P mentoring program to promote the competency at work through on-site
training.
Meanwhile, our Petroleum Technology Institute has been designated a “Military Service Alternative
Enterprise”. We plan to select people holding Master’s or PhD degrees in geology, geophysics or
petroleum engineering fields to serve there.
Other efforts to increase the capabilities of our human resources include an increase in our petroleum
E&P scholarships, the enhancement of the E&P internship program, support for the Academy for
Mineral & Energy Resources Development and participation in BK21 joint projects. Besides this, we
are establishing a competition system for our employees by implementing an innovative and efficient
human resource management system that will be based solely on their capabilities and performance.
We are introducing a similar system among our business divisions to heighten their productivity.

Ethical Management
Earning trust and confidence by

practicing transparent management
KNOC is committed to earning the trust and confidence of
the people it serves.
KNOC believes that corporate ethics should not be limited to “one-off” campaigns and institutional
slogans. Ethical management is a core factor in managing for sustainability and is a prerequisite for
any company that wants to grow.
At KNOC, we ensure that we are always engaged in ethical management--it’s part of our mission of
becoming a world-class petroleum company.
Because of this, we have implemented a master plan for ethical management that calls for the
development of company-wide strategies and action plans, and have worked out concrete and
definite ethical management policies that will operate in conjunction with them. In addition, all our
employees participate in “ethical diagnoses” through the company’s Intranet site. We encourage and
support ethical management by monitoring and evaluating our workers and giving them feedback.
As a public enterprise that is committed to corporate transparency, we actively utilize our homepage
to provide disclosures and other forms of information and provide the media with data that are of
interest to our stakeholders.
We will continue to honor our goal of serving the people by sharing any and all information with
them.

RESPECTFUL MANAGEMENT
Environmental Management
Preserving the environment and respecting

people for healthier tomorrow
KNOC promises to provide clean and abundant energy
throughout the year and to protect the environment.
A company must be committed to environmental preservation and prepare plans to guarantee that it
will be carried out. In order to guarantee clean and safe petroleum stockpile bases, KNOC manages
for pollutants that could damage the air or the soil during planning for storage and while the product
is actually in stockpile.
We also take steps to guard against marine pollution while offloading oil for storage. In addition, we
carry out environmental impact assessments on our stockpile bases both when they are under
construction and when they are in operation.
We also established system that has enabled us to monitor the environment at each of our sites. We
operate state-of-the-art environment pollution prevention facilities that complement both of our
petroleum storage methods--punderground caverns and aboveground tanks.
We insist on having stern in-house standards that can prevent environmental pollution and our water
quality regulations are four times more rigorous than the statutory limit.
We also apply the internationally-recognized ISO quality and environmental standards to our major
projects including E&P. In 2006, we enjoyed accident-and disaster-free records at all our work sites. In
our offshore rig operations, we observe the International Management Code for the Safe Operation of
Ships and Pollution Prevention. Finally, our domestic and overseas E&P drilling work has been carried
out according to the health, safety and environment standards of the international petroleum industry
for more than 20 years.
As a further commitment to environmentally-friendly management, we signed the Voluntary

Agreement For Soil Pollution Prevention & Cleanup agreement with the Ministry of Environment in
December 2006-the first public-sector company that has participated in the government’s soil
preservation activities. This agreement has allowed us to consolidate our pollution prevention
activities in places where pollution is most apt to occur such as our petroleum stockpile bases and our
gas field production facilities.
We are committed to doing our utmost to satisfy the requirements of all laws and statutes relating to
safety and the environment. As part of this pledge, we will strive to minimize safety and environment
risks by taking the needs of our customers and stakeholders into consideration both during
development and storage and while constructing future stockpile bases.

Social Contributions
Sharing our wealth and fulfilling

our social responsibilities
We translate ”sharing” into ”action” by helping our
neighbors in need and the communities we serve.
KNOC engages in a variety of social contribution activities to fulfill its responsibilities as a corporate
citizen and help its neighbors in need. This “management of sharing” is mainly practiced through
petroleum E&P scholarships, participation in blood donor campaigns, assistance to the underprivileged
and support for social service organizations and juvenile heads of families.
We inaugurated the “KNOC Volunteers” in order to carry out these activities in a more systematic
manner.
Relying on the voluntary participation of about 470 members, this group participates in a broad array
of public service activities in communities throughout the nation. In addition, we operate a “Matching
Grant” program to help raise funds for these projects. We have entered into “one-company/one-
village” partnerships with Yongsomak village in Wonju and Jongdong village in Ulsan, enabling their
residents to take part in urban cultural exchanges and giving a helping hand to hard-pressed farmers.
These endeavors are not limited to Korea. We helped in the construction of an elementary school in
Vietnam where we are carrying out large-scale E&P projects. In Kazakhstan, we donated wheelchairs
for the differently-challenged when we opened our branch office there.
We will continue to fulfill our corporate responsibilities through these and other forms of social
contributions.

We will continue making our all
efforts to realize our goal.

December 31, 2006 and 2005
Financial Statements
Financial Statements 37
Organization Chart 78
History of KNOC 79
Domesitc & Overseas Offices 80

Management Discussion and Analysis
Overview
KNOC intends to grow into a world-class state-owned petroleum company, leading Korea’s quest for energy self-sufficiency. As part of that goal, it has
concentrated on stable production at the Donghae-1 gas field (which it discovered in 1998) and the expansion of its continental shelf exploration projects.
It has also striven to discover and develop new fields and other sources of crude oil to increase the nation’s petroleum self-sufficiency ratio.
In addition, it is working to maximize the utilization of its stockpile assets, to establish the foundations for making Korea a petroleum logistics center in
northeastern Asia, and to generate synergies through other supporting projects. The company recorded sales of KRW 918.1 billion and operating income of
KRW 326.0 billion in 2006.
Results By Business
2006 2005 YoY % Change

Sales 918.1 956.8 ¡ 38.7
Petroleum development 674.5 503.8 170.7
Petroleum stockpile 73.1 329.8 ¡ 256.7
Financing 139.7 101.9 37.8
Other 30.8 21.3 9.5
Sales Costs 543.5 504.0 39.5
Petroleum stockpile 109.6 235.4 ¡ 125.8
Financing 130.4 90.9 39.5
Other 18.9 16.7 2.2
Gross Profits 374.6 452.8 ¡ 78.2
(Gross Margin) (41%) (47%)
Petroleum stockpile ¡ 36.5 94.4 ¡ 130.9
Financing 9.3 11.0 ¡ 1.7
Other 11.9 2.2 9.7
Sales and administrative expenses 48.6 46.8 1.8
Operating income 326.0 406.0 80.0
(Operating margin) (35%) (42%)
Analysis of Financial Results For 2006
Petroleum Development Business
KNOC produced 16.0 million barrels of crude oil and natural gas at the Donghae-1 gas field and its overseas production fields (including Vietnam Block 15-
1, Peru Block 8, Libya Elephant, UK Captain, Indonesia SES and Venezuela Onado) while generating gross profits of KRW 389.9 billion.
The Donghae-1 gas field, which began production in 2004, enabled Korea to join the ranks of the world’s oil-producing nations. Located 58 kilometers
offshore, its proven reserves amount to 250.0 billion cubic feet. This will be supplied to the Ulsan and Gyeongnam areas over the next fifteen years or so to
be used for urban gas and power generation. With the development of this field, Korea realized an import substitute effect of more than USD 1.5 billion
and gained valuable technological expertise in a full range of “upstream” activities, from exploration to development and production. As a consequence,
the company obtained inhouse technological knowhow essential to the efficient development of E&P projects both at home and overseas.

The company completed the installation of production platforms at its Vietnam Block 11-2 in June 2006, and pumping began in December.
KNOC owns the operational rights to this field, which is expected to produce more than 6,000 barrels of natural gas and condensate a day.
We operated seven new fields in 2006; they included the Blackgold oil sand field in Canada, OPL 321 and OPL 323 in Nigeria, the Gulf of Mexico in the
USA, the Uzbekistan Aral Sea, the North Sea 113/22d, South Karpovski and Egizkara in Kazakhstan. We expect to secure approximately 1.0 billion barrels
of product from these operations.
Sales by Field
(In billions of KRW and tens of thousands of barrels)
Name of field 2006 2005

Volume Amount Volume Amount
Vietnam 15-1 260 159.5 353 190.2
Peru 8 119 67.3 126 65.2
Yemen Mariv - - 21 11.3
Libya NC174 153 99.0 83 46.4
Venezuela Onado 9 2.4 16 8.2
Donghae-1 gas field 343 167.8 379 182.5
UK Captain 233 130.3 - -
Indonesia SES 100 48.2 - -
Total 1,217 674.5 978 503.8
Petroleum Stockpile Business

The petroleum stockpile allows the Korean government to stabilize domestic energy supply and demand and prices at times of market disruption.
Accordingly, KNOC’s primary aim is to serve the public interest rather than generate profits. We ensure that the government’s stockpile policies and goals
are observed while utilizing our stored assets and efficiently managing our stockpile facilities, provided that this does not interfere with our overall storage
volume. The company recorded a gross profit of KRW 44.0 billion in 2006 from its stockpiling operations.
Financing Business
KNOC borrows from the government to partly fund its energy-related projects; it allocates these funds to end users in the form of loans. This is done to
stabilize energy supply and demand and prices and execute various energy and resources projects. In 2006, we supplied KRW 239.5 billion for various
projects, including petroleum development, urban gas piping and the construction of access roads to oil pipelines. We realized a gross profit of KRW 9.3
billion from these operations.
Loans by year Balance at 2006-end

2004 2005 2006
Loans for general oil businesses 70.0 23.0 21.0 1,645.7
Loans for oil development projects 207.8 187.1 218.5 537.1
Total 277.8 210.1 239.5 2,182.8
Other Businesses
The Doo Sung offshore drilling rig generated a gross profit of KRW 5.2 billion from 297 days of operations in 2006. In addition, KNOC helped to publicize
the nation’s oil policies and supported related industries through its petroleum information services and special energy accounting management services.

Management Discussion and Analysis
Financial Summary
2006 2005 YoY % Change

Assets Current Assets 2,933.7 2,752.3 6%
Quick Assets 991.3 1,069.2 ¡ 7%
Inventory 1,942.4 1,683.1 15%
Fixed Assets 5,495.1 4,819.8 14%
Investment Assets 2,042.8 2,420.1 ¡ 15%
Tangible Assets 1,836.2 1,725.4 6%
Intangible Assets 1,616.1 674.3 139%
Total Assets 8,428.8 7,572.1 11%
Liabilities Current Liabilities 552.0 447.9 23%
Fixed Liabilities 2,987.6 2,859.5 4%
Total Liabilities 3,539.6 3,307.4 7%
Capital Capital Stock 3,964.5 3,488.5 14%
Capital Surplus 25.0 25.0 0%
Retained Earnings 909.4 745.1 22%
Capital Adjustments ¡ 9.7 6.1 ¡ 259%
Total Shareholders’ Equity 4,889.2 4,264.7 15%
Assets
Total assets amounted to KRW 8.4 trillion at the end of 2006, up KRW 856.7 billion from the previous year. Current assets increased by KRW 181.4 billion,
and it was led by a decline in quick assets and a rise in inventory. Quick assets contracted by KRW 77.9 billion, due mainly to a decline in deposits
following a rise in investments in oil field development. Inventory values increased by KRW 259.3 billion, due primarily to purchases of stored oil.
Fixed assets grew by KRW 675.3 billion. This was caused in part by a downturn of KRW 377.3 billion in investment assets resulting from the company’s
decision to have mines owned by its subsidiaries classified as intangible assets. Other factors included an increase in tangible assets by KRW 110.8 billion
due to the construction of more petroleum stockpile bases and a rise of KRW 941.8 billion in intangible assets as the result of mine exploration,
development and production.
Liabilities
Total liabilities increased by KRW 232.2 billion to KRW 3.5 trillion. Our debt-to-equity ratio fell by 5.21% points to 72.34% from 77.55% the previous
year, leading to an improved financial structure. Current liabilities increased by KRW 104.1 billion, led by a rise in long-term current liabilities due to the
repayment of long-term borrowings. Fixed liabilities grew by KRW 128.1 billion, resulting mainly from a rise in liabilities related to our Vietnam Block 15-1
oil field development fund.
Capital
Total shareholders’ equity increased by KRW 624.5 billion to reach KRW 4.9 trillion at the end of 2006. Capital stock, which is wholly owned by the Korean
government, expanded by KRW 475.9 billion as the result of additional investments in the petroleum stockpile and other E&P projects.
Retained earnings were up by KRW 164.3 billion, reflecting the payment of KRW 20.9 billion in dividends for fiscal year 2005 and an increase in net
income of KRW 185.2 billion. Capital adjustments contracted by KRW 15.8 billion, caused by changes in foreign exchange rates for overseas oil field
development-related SPC investment equities.
Investments by year Balance at 2006-end

2004 2005 2006
Investments in petroleum stockpile projects 170.2 149.3 311.4 3,589.6
Investments in oilfield development projects 47.7 73.1 164.5 374.9
Total 217.9 222.4 475.9 3,964.5

Independent Auditors’ Report
Based on a report originally issued in Korean
The Board of Directors and Stockholder

Korea National Oil Corporation:
We have audited the accompanying balance sheets of Korea National Oil Corporation (the “Company”) as of December 31, 2006, and 2005, and
the related statements of income, appropriation of retained earnings and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Korea National Oil
Corporation as of December 31, 2006 and 2005, and the results of its operations, the appropriation of its retained earnings, and its cash flows for
the years then ended in conformity with accounting principles generally accepted in the Republic of Korea and, where applicable, Accounting
Rules, Accounting Standards and Financial Statement Preparation Guidelines for Government-invested Institutions, as established by the Ministry
of Finance and Economy of the Republic of Korea.
The accompanying financial statements as of and for the years ended December 31, 2006 and 2005 have been translated into United States
dollars solely for the convenience of the reader. We have audited the translation and, in our opinion, the financial statements expressed in Korean
Won have been translated into dollars on the basis set forth in note 1(c) to the financial statements.
KPMG Samjong Accounting Corp.

Seoul, Korea
February 2, 2007
This report is effective as of February 2, 2007, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date
and the time of reading this report, could have a material impact on the accompanying financial statements and notes thereto. Accordingly, the readers of the
audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or
circumstances, if any.

Balance Sheets
(In thousands of Korean won, In U.S. dollars)
2006 2005 2006 2005

Assets
Current assets:
Cash and cash equivalents (notes 2 and 10) £ 251,393,361 366,390,163 $ 270,431,756 394,137,438
Short-term financial instruments 243,780,000 290,729,000 262,241,824 312,746,343
Accounts receivable - trade (note 10) 71,877,397 73,701,936 77,320,781 79,283,495
Short-term loans (note 10) 236,542,778 207,160,812 254,456,517 222,849,411
Accounts receivable - other 51,445,376 65,798,703 55,341,412 70,781,737
Inventories (note 3) 1,942,419,186 1,683,076,716 2,089,521,499 1,810,538,636
Commodity swap 3,719,330 - 4,001,000 -
Deferred tax assets (note 21) - 602,154 - 647,756
Other current assets (note 4) 132,529,220 64,812,930 142,565,857 69,721,310
Total current assets 2,933,706,648 2,752,272,414 3,155,880,646 2,960,706,126
Investments:
Available-for-sale securities (note 5) 27,060,225 14,837,052 29,109,537 15,960,684
Equity method investments (note 5) 1,419,628 169,806,689 1,527,138 182,666,404
Long-term local currency loans receivable,
less allowance for doubtful accounts
of £ 4,914,537 thousand in 2006
and £ 5,159,901 thousand in 2005 (note 12) 1,436,126,117 1,587,074,641 1,544,886,098 1,707,266,180
Long-term foreign currency loans receivable,
less allowance for doubtful accounts and present
value discount of £ 2,321,547 thousand in 2006
and £ 3,496,001thousand in 2005 (notes 10 and 12) 503,014,916 486,128,997 541,108,989 522,944,274
Long-term accounts receivable - trade,
less allowance for doubtful accounts
of £ 9,428,088 thousand in 2006
and £ 8,749,593 thousand in 2005 (note 12) 52,922,548 59,184,560 56,930,451 63,666,696
Long-term advances for guaranteed
payment, less allowance for doubtful accounts of
£ 0 thousand in 2006 and W16,486 thousand
in 2005 (notes 10 and 22) - 3,280,743 - 3,529,199
Deferred tax assets (note 21) 7,242,434 - 7,790,915 -
Property, plant and equipment, at cost (note 7) 2,388,609,920 2,191,223,247 2,569,502,926 2,357,167,864
Less accumulated depreciation and government grants (555,392,173) (465,777,853) (594,225,659) (501,051,908)
Net property, plant and equipment 1,836,217,747 1,725,445,394 1,975,277,267 1,856,115,956
Intangible assets:
Oil interest - exploration (note 8) 397,982,322 172,528,627 428,122,119 185,594,479
Oil interest - development (note 8) 291,063,388 82,862,466 313,106,055 89,137,765
Oil interest - production (note 8) 920,711,573 413,581,383 990,438,439 444,902,521
Other assets (note 9) 21,357,845 105,127,797 22,975,306 113,089,280

Total assets £ 8,428,825,391 7,572,130,763 $ 9,067,152,960 8,145,579,564
See accompanying notes to the financial statements.

2006 2005 2006 2005

Liabilities and Shareholder’s Equity
Current liabilities:
Accounts payable - trade (note 10) £ 24,132,467 3,921,595 $ 25,960,055 4,218,583
Accounts payable - other (note 10) 88,457,627 112,369,316 95,156,656 120,879,213
Short-term debt (note 10) - 3,298,328 - 3,548,115
Withholdings 4,320,394 3,315,224 4,647,584 3,566,291
Income taxes payable 5,273,338 40,158,440 5,672,696 43,199,699
Current portion of long-term debt (notes 10, 13 and 14) 353,408,567 243,805,373 380,172,726 262,269,119
Other current liabilities (note 11) 76,434,350 41,020,317 82,222,838 44,126,847
Total current liabilities 552,026,743 447,888,593 593,832,555 481,807,867
Long-term local currency debt (note 13) 1,441,040,654 1,592,234,542 1,550,172,821 1,712,816,848
Long-term foreign currency debt, net of present value
discount (notes 10, 12 and 13) 1,144,722,482 1,124,126,984 1,231,414,030 1,209,258,804
Long-term accounts payable - trade, net
of present value discount (note 12) 47,686,373 53,825,882 51,297,733 57,902,196
Retirement and severance benefits (note 15) 13,417,440 11,188,416 14,433,563 12,035,732
Provision for decommissioning costs 183,749,885 75,775,004 197,665,539 81,513,558
Deferred tax liabilities (note 21) - 691,696 - 744,079
Asset-backed securitization liabilities (note 14) 131,969,594 - 141,963,849 -
Other long-term liabilities 25,050,970 1,700,223 26,948,118 1,828,983
Total liabilities 3,539,664,141 3,307,431,340 3,807,728,208 3,557,908,067
Shareholder’s equity:
Capital stock (note 16) 3,964,541,780 3,488,552,780 4,264,782,465 3,752,746,106
Capital surplus 24,954,221 24,954,221 26,844,042 26,844,042
Retained earnings (note 17) 909,382,517 745,105,207 978,251,417 801,533,140
Capital adjustments (note 18) (9,717,268) 6,087,215 (10,453,172) 6,548,209
Total shareholder’s equity 4,889,161,250 4,264,699,423 5,259,424,752 4,587,671,497
Commitments and contingencies (note 22)

Total liabilities and stockholder’s equity £ 8,428,825,391 7,572,130,763 $ 9,067,152,960 8,145,579,564

Statements of Income
Years ended December 31, 2006 and 2005

2006 2005 2006 2005

Sales (note 28) £ 918,133,143 956,790,686 $ 987,664,741 1,029,249,877
Cost of sales (notes 7, 24 and 25) 543,575,287 503,954,826 584,741,058 542,120,079
Gross profit 374,557,856 452,835,860 402,923,683 487,129,798
Selling and administrative expenses (notes 20, 25 and 26) 48,621,173 46,816,356 52,303,327 50,361,828
Operating income 325,936,683 406,019,504 350,620,356 436,767,970
Other income (expense):

Interest income 29,839,304 19,364,617 32,099,079 20,831,128
Interest expense (note 7) (15,567,421) (15,054,957) (16,746,365) (16,195,091)
Loss on sale of available-for-sale securities, net - (75,958) - (81,710)
Equity in income of affiliates, net (note 5) 205,009 42,393,914 220,535 45,604,468
Loss on impairment of available-for-sale securities (4,371,153) (396,147) (4,702,186) (426,148)
Foreign currency translation gain, net 23,098,235 6,802,529 24,847,499 7,317,694
Foreign currency transaction loss, net (11,819,570) (1,026,856) (12,714,684) (1,104,622)
Dividend income 10,000 9,759 10,757 10,499
Gain on sale of property, plant and equipment, net 6,949,593 4,871,199 7,475,896 5,240,103
Gain on exemption of debts (note 12) 2,980,040 1,800,763 3,205,723 1,937,138
Bad debt expenses - other (note 12) (3,658,549) (2,335,551) (3,935,617) (2,512,425)
Donations (note 26) (13,460,823) (16,466,740) (14,480,232) (17,713,791)
Refund of income taxes 1,132,846 1,785,112 1,218,639 1,920,301
Additional payment of income taxes (592) (9,439,849) (636) (10,154,743)
Loss on impairment of oil interest (44,444,263) (5,295,606) (47,810,093) (5,696,651)
Gain (loss) on derivative contract transactions, net (note 23) 1,289,903 (16,752,002) 1,387,589 (18,020,656)
Gain (loss) on valuation of oil swap, net (note 23) 1,098,787 (3,986,155) 1,182,000 (4,288,032)
Gain on differences in customs duties 1,661,319 1,746,825 1,787,133 1,879,115
Gain on loan-out of oil - 4,885,218 - 5,255,183
Loss on overseas mining area – other, net (12,864,735) - (13,839,001) -
Gain on valuation of fixed contract, net 2,402,851 - 2,584,823 -
Other, net (13,606,184) (3,430,047) (14,636,602) (3,689,812)
Income before income taxes 276,811,280 415,419,572 297,774,613 446,879,918
Income tax expense (note 21) 91,602,653 135,939,766 98,539,859 146,234,688

Net income £ 185,208,627 279,479,806 $ 199,234,754 300,645,230

Statements of Appropriation of Retained Earnings
Date of Appropriation for 2006: February 22, 2007

Date of Appropriation for 2005: February 23, 2006
2006 2005 2006 2005

Unappropriated retained earnings:
Balance at beginning of year £ - - $ - -
Net income 185,208,627 279,479,806 199,234,754 300,645,230
Balance at end of year before appropriation 185,208,627 279,479,806 199,234,754 300,645,230
Appropriations of retained earnings:

Legal reserve 83,287,640 129,274,245 89,595,138 139,064,377
Reserve for expansion 83,287,640 129,274,245 89,595,138 139,064,377
Dividends (note 19) 18,633,347 20,931,316 20,044,478 22,516,476
185,208,627 279,479,806 199,234,754 300,645,230
Unappropriated retained earnings

to be carried over to subsequent year £ - - $ - -

Statements of Cash Flows
2006 2005 2006 2005

Cash flows from operating activities:
Net income £ 185,208,627 279,479,806 $ 199,234,754 300,645,230
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 90,355,291 74,569,639 97,198,032 80,216,910
Amortization 86,087,439 34,524,128 92,606,970 37,138,692
Provision for retirement and severance benefits 7,096,434 7,844,884 7,633,858 8,438,989
Loss on sale of available-for-sale securities, net - 75,958 - 81,710
Gain on sale of property, plant and equipment, net (6,949,593) (4,871,200) (7,475,896) (5,240,103)
Foreign currency translation gain, net (23,459,888) (10,899,086) (25,236,541) (11,724,491)
Equity in income of affiliates, net (205,009) (42,393,914) (220,535) (45,604,468)
Gain on exemption of debts (2,980,040) (1,800,763) (3,205,723) (1,937,138)
Loss on impairment of available-for-sale securities 4,371,153 396,147 4,702,186 426,148
Reversal of allowance for doubtful accounts - trade (1,059,504) (222,769) (1,139,742) (239,639)
Bad debt expenses - other 3,658,549 2,335,551 3,935,617 2,512,425
Interest income, net (20,667,251) (16,108,694) (22,232,412) (17,328,629)
Interest expense, net 19,654,220 14,884,184 21,142,664 16,011,385
Loss on impairment of oil interests 44,444,263 5,295,607 47,810,093 5,696,651
Loss on valuation of oil swap 2,620,542 3,986,155 2,819,000 4,288,032
Provision for decommissioning costs 3,401,931 3,079,538 3,659,565 3,312,756
Loss from inventory shrinkage 36,899 9,326 39,693 10,032
Gain on valuation of oil swap (3,719,329) - (4,001,000) -
Miscellaneous gain, net (501,822) (124,696) (539,825) (134,139)
Changes in assets and liabilities:
Accounts receivable - trade 24,747,757 (30,639,524) 26,621,942 (32,959,901)
Accounts receivable - other 14,353,327 (14,283,191) 15,440,326 (15,364,878)
Short-term loans 171,402,901 (43,396,501) 184,383,499 (46,682,983)
Inventories (225,359,435) (11,083,808) (242,426,243) (11,923,202)
Long-term local currency loans (17,891,350) 90,968,830 (19,246,289) 97,858,035
Long-term foreign currency loans (87,232,164) (45,964,477) (93,838,386) (49,445,436)
Deferred tax assets (26,884,690) 5,853,651 (28,920,707) 6,296,957
Other current assets (114,524,596) (13,403,908) (123,197,716) (14,419,007)
Accounts payable - trade (902,125) (94,246,863) (970,444) (101,384,319)
Accounts payable - other (23,923,002) 47,505,241 (25,734,727) 51,102,885
Withholdings 1,005,170 (25,203,420) 1,081,293 (27,112,113)
Income taxes payable (34,885,102) 13,284,522 (37,527,003) 14,290,579

2006 2005 2006 2005

Cash flows from operating activities, continued:
Current portion of long-term debt £ (171,402,901) 43,396,501 $ (184,383,499) 46,682,983
Long-term local currency debt 17,891,350 (90,968,830) 19,246,289 (97,858,035)
Long-term foreign currency debt 87,232,164 45,964,477 93,838,386 49,445,436
Deposit for severance benefit insurance (389,542) (4,427,333) (419,043) (4,762,622)
Other current liabilities 29,934,639 (4,804,076) 32,201,634 (5,167,895)
Payments of retirement and
severance benefits (1,070,855) (714,615) (1,151,952) (768,734)
Net cash provided by operating activities 29,494,458 217,896,477 31,728,118 234,398,103
Cash flows from investing activities:

Proceeds from sale of available-for-sale securities - 268,576 - 288,915
Proceeds from sale of property, plant and equipment 9,714,220 6,716,695 10,449,892 7,225,361
Proceeds from sale of short-term financial instruments 821,281,685 1,354,966,266 883,478,577 1,457,579,890
Additions to property, plant and equipment (204,192,620) (178,128,210) (219,656,433) (191,618,127)
Acquisition of short-term financial instruments (773,841,194) (1,290,325,012) (832,445,346) (1,388,043,257)
Decrease in advances for guaranteed payments - 12,455,460 - 13,398,731
Decrease in long-term advance guarantee deposits 3,297,229 - 3,546,933 -
Decrease in leasehold guarantee deposits - (520,856) - (560,301)
Purchases of available-for-sale securities - (1,397,657) - (1,503,503)
Decrease (increase) in other assets 456,599 (24,497,958) 491,178 (26,353,225)
Increase in development costs (1,780,402) (2,683,089) (1,915,235) (2,886,284)
Increase in oil interests - exploration (229,179,476) (78,513,964) (246,535,581) (84,459,944)
Increase in oil interests - development and production (459,000,649) (113,532,528) (493,761,455) (122,130,516)
Increase in other intangible assets (1,267,626) (735,941) (1,363,625) (791,675)
Net cash used in investing activities (834,512,234) (315,928,218) (897,711,095) (339,853,935)
Cash flows from financing activities:

Proceeds from long-term debt - 109,266,968 - 117,541,919
Repayments of long-term debt,
including current portion (92,580,460) (96,635,615) (99,591,716) (103,953,975)
Proceeds from issuance of capital stock 475,989,000 222,461,000 512,036,360 239,308,305
Dividends paid (20,931,317) (16,330,459) (22,516,477) (17,567,189)
Proceeds from current portion of liabilities 192,936,800 - 207,548,193 -
Proceeds from other current liabilities 23,350,748 - 25,119,133 -
Increase of long-term foreign currency debt 114,554,531 - 123,229,917 -
Repayments of short-term debt (3,298,328) - (3,548,115) -
Increase in other long-term liabilities - (24,777) - (26,654)
Net cash provided by financing activities 690,020,974 218,737,117 742,277,295 235,302,406
Net increase (decrease) in cash and cash equivalents (114,996,802) 120,705,376 (123,705,682) 129,846,574
Cash and cash equivalents at beginning of year 366,390,163 245,684,787 394,137,438 264,290,864
Cash and cash equivalents at end of year £ 251,393,361 366,390,163 $ 270,431,756 394,137,438

Notes to Financial Statements
(1) Summary of Significant Accounting Policies and Basis of Presenting Financial Statements
(a) Organization and Description of Business

Korea National Oil Corp. (the “Company”) was established on March 3, 1979 to develop oil fields, maintain reserve stock of petroleum and improve the
distribution structure of petroleum under the Korean National Oil Corporation Act.
The Company’s headquarters is located in Anyang. The Company also has 9 petroleum stockpile offices, 4 construction offices, 2 overseas branches and 11
other overseas offices and 1 domestic office.
As of December 31, 2006, the Company is wholly owned by the Korean Government.
(b) Basis of Presenting Financial Statements

The Company maintains its accounting records in Korean Won and prepares statutory financial statements in the Korean language in conformity with accounting
principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Company that conform with financial accounting standards
and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these financial
statements are intended solely for use by only those who are informed about Korean accounting principles and practices. The accompanying financial statements
have been condensed, restructured and translated into English (with certain expanded descriptions) from the Korean language financial statements.
Certain information attached to the Korean language financial statements, but not required for a fair presentation of the Company's financial position,
results of operations or cash flows, is not presented in the accompanying financial statements.
Effective January 1, 2006, the Company adopted Statements of Korea Accounting Standards (“SKAS”) No. 18 (Interest in Joint Ventures), No. 19 (Lease)
and No. 20 (Related Party Disclosures). The adoption of these standards had no significant impact on accompanying financial statements. As allowed by
these standards, prior year balances were not reclassified to conform to the current year presentation.
(c) Basis of Translating Financial Statements

The financial statements are expressed in Korean Won and, solely for the convenience of the reader, have been translated into U.S. dollars at the rate of
£ 929.60 to US$1, the basic exchange rate on December 31, 2006, solely for the convenience of the reader. These translations should not be construed as
a representation that any or all of the amounts shown could be converted into U.S. dollars at this or any other rate.
(d) Cash Equivalents

The Company considers short-term financial instruments with maturities of three months or less at the acquisition date to be cash equivalents.
(e) Financial Instruments

Short-term financial instruments are instruments handled by financial institutions which are held for short-term cash management purposes, maturing
within one year. Such investments may include time deposits, installment savings deposits and restricted bank deposits.
(f) Allowance for Doubtful Accounts

Allowance for doubtful accounts is estimated based on an analysis of individual accounts and past experience of collection.
(g) Inventories
The cost of inventories is determined on the moving-average method. Oil in reserve stock is recorded at acquisition cost regardless of whether acquisition
cost is lower than net realizable value in accordance with the Special Accounting Provisions of the Ministry of Finance and Economy.
(h) Investments in Securities

Upon acquisition, the Company classifies certain debt and equity securities into one of the three categories: held-to-maturity, available-for-sale, or trading
securities and such determination is reassessed at each balance sheet date. Investments in debt securities that the Company has the positive intent and
ability to hold to maturity are classified as held-to-maturity. Securities that are bought and held principally for the purpose of selling them in the near term
(thus held for only a short period of time) are classified as trading securities. Trading generally reflects active and frequent buying and selling, and trading
securities are generally used to generate profit on short-term differences in price. Investments not classified as either held-to-maturity or trading securities
are classified as available-for-sale securities.

Trading securities are carried at fair value, with unrealized holding gains and losses included in current income. Available-for-sale securities are carried at
fair value, with unrealized holding gains and losses reported as a capital adjustment, net of tax. Investments in equity securities that do not have readily
determinable fair values are stated at cost. Investments in debt securities that are classified into held-to-maturity are reported at amortized cost at the
balance sheet date and such amortization is included in interest income.
The fair value of marketable securities is stated at quoted market prices as of the period end. Non-marketable debt securities are recorded at the fair values
derived from the discounted cash flows by using an interest rate deemed to approximate the market interest rate. The market interest rate is determined by
the issuers’ credit rate announced by the accredited credit rating agencies in Korea. Money market funds are recorded at the fair value determined by the
investment management companies.
Trading securities are classified as current assets, whereas available-for-sale securities and held-to-maturity securities are classified as long-term
investments. However, available-for-sale securities whose maturity dates are due within one year from the balance sheet date or whose likelihood of being
disposed of within one year from the balance sheet date is probable are classified as current assets. Likewise, held-to-maturity securities whose maturity
dates are due within one year from the balance sheet date are classified as current assets.
A decline in market value of any available-for-sale or held-to-maturity securities below cost that is deemed to be other-than-temporary results in a
reduction in carrying amount to fair value and the impairment loss is charged to current results of operations.
(i) Investment Securities under the Equity Method of Accounting

Investments in affiliated companies of which the Company owns 20% or more of the voting stock or over which the Company has significant management
control are stated at an amount as determined using the equity method. Under the equity method of accounting, the Company’s initial investment is
recognized at cost and is subsequently increased or decreased to reflect the changes in Company’s share of the net assets of investee. The Company’s
share of the profit or loss of the investee is recognized in the Company’s profit or loss and other changes in the investee's equity are recognized directly in
the corresponding equity account of the Company. If the Company holds other investments such as preferred stock or loans issued by the investee, the
Company’s share of loss of the investee continues to be recorded until such other investments are reduced to zero.
Any excess in the Company’s acquisition cost over the Company’s share of the net fair value of the investee's identifiable net assets is considered as
goodwill and amortized by the straight-line method over the estimated useful life. The amortization of such goodwill is recorded against the equity in
income (losses) of affiliates. When events or circumstances indicate that carrying amount may not be recoverable, the Company reviews goodwill for any
impairment.
Assets and liabilities of foreign-based companies accounted for using the equity method are translated at current rate of exchange at the balance sheet
date while profit and loss items in the statement of income are translated at average rate and capital account at historical rate. The translation gains and
losses arising from collective translation of the foreign currency financial statements of foreign-based companies are offset and the balance is accumulated
as capital adjustment.
Under the equity method of accounting, unrealized gains and losses on transactions with an investee are eliminated to the extent of the company's interest
in the investee. However, unrelaized gains and losses from a down-stream transaction with a subsidiary are eliminated entirely.
Investments in affiliated companies are reduced when dividends are declared by shareholders’ meeting of the respective affiliated companies.
(j) Property, Plant and Equipment

Property, plant and equipment are stated at cost. Significant additions or improvements extending useful lives of assets are capitalized. However, normal
maintenance and repairs are charged to expense as incurred.

Depreciation is computed by the declining-balance method, except for buildings and structures for which the straight-line method is used, in accordance
with Accounting Rules, Accounting Standards and Financial Statement Preparation Guidelines for Government-invested Institutions, as established by the
Ministry of Finance and Economy (Article 63 “Application of Corporate Income Tax Law”). Estimated useful lives of the respective assets are as follows:
Useful lives(years)
Buildings 40
Structures 40
Machinery and equipment 5
Vehicles 5
Furniture and fixtures 5
Oil prospecting vessel 12
The Company capitalizes interest costs on all borrowings incurred prior to completion of the acquisitions until the related assets and placed for its intended
use, as part of the cost of qualifying assets.
In accordance with SKAS No.17, Provision, Contingent Liabilities and Contingent Assets, the Company included in 2004 in the cost of the assets the
present value of initial estimate of the costs in the amount of £ 70,718 million for dismantling and removing the assets and restoring the site on which
they were located and the same amount was recognized as provision. The Company subsequently depreciates the asset retirement costs using the straight-
line method over the useful life of the related assets.
The Company reviews the impairment of property, plant and equipment, whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. An impairment loss would be recognized when the expected estimated undiscounted future net cash flows from the use
of the asset and its eventual disposal are less than its carrying amount.
(k) Intangible Assets

Intangible assets are stated at cost less accumulated amortization, as described below.
(i) Research and Development Costs

Expenditure on research activities undertaken with the prospects of gaining new scientific or technical knowledge and understanding is recognized in the
statement of income as an expense as incurred.
Expenditure on development incurred in conjunction with new products or technologies in which the elements of costs can be identified and future
economic benefits are clearly expected is capitalized and amortized on a straight-line basis over the expected periods to be benefited, generally 5 years.
The expenditure capitalized includes the cost of materials, direct labor and an appropriate proportion of overheads.
(ii) Oil Interests

The Company has participated in the development of overseas natural resources either by entering into contracts for sharing the extracted products or by
acquiring equity interests in the related projects. The acquisition cost of the oil field is included in oil interest- production or oil interest-development or oil
interest-exploration in the financial statements.

(ii) Oil Interests, Continued

Oil interests are depreciated on the unit-of-production basis based upon the proved reserves of the pool in accordance with Accounting Rules, Accounting
Standards and Financial Statement Preparation Guidelines for Government-invested Institutions, as established by the Ministry of Finance and Economy
(Article 63 “Application of Corporate Income Tax Law”). The proved reserves of oil interest - productions at acquisition are as follows:
(Unit: barrel)
Field Production Reserve

Peru 8 1,247,388 15,836,880
Vietnam 15-1 2,852,700 55,717,500
Onado 38,197 6,455,935
Libyan NC174 3,769,420 40,817,000
Donghae-1 Gas 3,434,685 31,122,159
England Captain 15,895,244 137,041,773
Indonesia SES 2,000,903 2,746,804
Vietnam 11-2 46,152 82,939,329
For the projects proven to be unsuccessful upon evaluation, the principal amount invested in those projects is immediately recognized as loss on
termination of exploration and the Company’s obligations to repay the borrowings related to such unsuccessful projects are exempted in accordance with
the Special Accounts for Energy and Resources (“SAER”).
The financing charges, including interest expense incurred on borrowings for the development of overseas exploration, constitute part of the acquisition cost.
The Company recognizes provision for costs of decommissioning oil-producing facilities, including marine oil platforms and underwater pipes, etc. to the
extent of the estimated cost of restoring the gas fields to their original condition.
When the recoverable amount of the oil interests are substantially below the carrying amount of the assets due to obsolescence or a decline in their market
value and others, the Company reduces the carrying amount to the recoverable amount and the amount impaired is recognized as impairment loss. The
Company recognized an impairment loss of oil interests in the amount of £ 44,444 million for the year ended December 31, 2006 and £ 5,296 million for
the year ended December 31, 2005.
(iii) Other Intangible Assets

Other intangible assets, which are acquired by the Company, are stated at cost less accumulated amortization and impairment losses. Such intangible
assets are amortized using the straight-line method over a reasonable period, generally 5 or 20 years, based on the nature of the asset.
(l) Government Grants

Government grants that are used for the acquisition of certain assets are deducted from the acquisition cost of the acquired assets. Such grants or
donations offset the depreciation charge on the acquired assets during the useful lives of the assets. When selling the assets, the undepreciated balance of
the asset is added to or deducted from the disposal gain or loss, if any. The Company recognizes such grants as part of sales (service revenues) when the
Company receives government grants to perform certain projects on behalf of the Korean government or to meet certain special regulations, or to be
compensated for the price difference under the Korean government’s control of contract prices.
(m) Valuation of Receivables and Payables at Present Value

Receivables and payables arising from long-term cash loans/borrowings and other similar transactions are stated at present value. The difference between
the nominal value and present value of related receivables or payables is amortized using the effective interest method. The amount amortized is included
in interest expense or interest income.
(n) Retirement and Severance Benefits

The Company introduced a new pension plan, effective 2006. Under the Retirement Benefits Regulation, consideration of service requirements under the
new plan begins from the date the new plan is effective; the period of service prior to the effective date of the new plan will continue to be covered by the
existing retirement benefits plan.

The Company introduced a defined benefit pension plan, under which each eligible employee receives a fixed amount of pension after retirement. The
Company accrued, as the liability for retirement and severance benefits, lump-sum payments payable to employees who are currently in service, assuming
that they left the Company as of the balance sheet date. All employees with a minimum of one year of service are eligible to participate and must elect to
participate in the plan. Participants accrue estimated benefits based on actuarial assumptions measured on the balance sheet date at the discounted
present value. Employees become vested in their benefits after completing five years of vesting service or reaching age 65, if earlier. In addition, the
Company requires employees to purchase lump-sum pension product when they have selected to benefit from the pension under the policy of a defined
benefit pension plan; as a consequence, the Company does not bear pension payment liability after retirement. Operational assets in the pension plan are
reflected in the accompanying balance sheets as a deduction of the liability for retirement and severance benefits.
(o) Foreign Currency Translation

Monetary assets and liabilities denominated in foreign currencies are translated into Korean Won at the balance sheet date, with the resulting gains and
losses recognized in current results of operations. Monetary assets and liabilities denominated in foreign currencies are translated into Korean Won at
£ 929.6 to US$1, the rate of exchange on December 31, 2006 that is permitted by the Financial Accounting Standards. Non-monetary assets and
liabilities denominated in foreign currencies, which are stated at historical cost, are translated into Korean Won at the foreign exchange rate on the date of
the transaction.
However, starting with 1995, monetary liabilities denominated in foreign currencies incurred in connection with the Company’s loans for developing oil
fields, whose repayment obligation is contingent upon the success of the project, are not translated into Korean Won until such time when the
development turns out to be a success in accordance with the Special Accounting Provisions of the Ministry of Finance and Economy.
In case of translation of foreign currency for overseas branches, monetary assets and liabilities are translated by the current exchange rate and non-
monetary assets and liabilities are translated by the historical exchange rate.
(p) Derivatives
Derivative instruments are recorded either as an asset or a liability measured principally at the fair value of rights or obligations associated with the
derivative contracts. The unrealized gain or loss from derivative transactions is recognized in current operations. However, for derivative instruments with
the purpose of hedging the exposure to the variability of cash flows of a forecasted transaction, the hedge-effective portion of the derivative’s gain or loss
is deferred as a capital adjustment, a component of stockholders’ equity. The deferred gain or loss will be adjusted to the related asset or liability resulted
from the forecasted transaction, or adjusted to income when the forecasted transaction affects the income statement. The ineffective portion of the gain or
loss is recognized in current operations.
(q) Provisions, Contingent Assets and Contingent Liabilities

Provisions are recognized when all of the following are met: (1) an entity has a present obligation as a result of a past event, (2) it is probable that an
outflow of resources embodying economic benefits will be required to settle the obligation, and (3) a reliable estimate can be made of the amount of the
obligation. Where the effect of the time value of money is material, a provision is recorded at the present value of the expenditures expected to be required
to settle the obligation.
Where the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement is recognized as a separate asset
when, and only when, it is virtually certain that reimbursement will be received if the Company settles the obligation. The expense relating to a provision is
presented net of the amount recognized for a reimbursement.
(r) Revenue Recognition

The Company recognizes revenue from the sale of oil when the oil is delivered. Revenue from other than the sale of oil is recognized when the Company’s
revenue-earning activities have been substantially completed, the amount of revenue can be measured reliably, and it is probable that the economic
benefits associated with the transaction will flow to the Company.
(s) Income Taxes

Deferred tax is provided using the asset and liability method, providing for temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for tax purposes. The amount of deferred tax provided is based on the expected manner of realization
or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date.
A deferred tax asset is recognized only to the extent that it is probable that future taxable income will be available against which the unused tax losses and

credits can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
Deferred tax assets and liabilities are classified as current or non-current based on the classification of the related asset or liability for financial reporting or
the expected reversal date of the temporary difference for those with no related asset or liability such as loss carryforwards and tax credit carryforwards.
The deferred tax amounts are presented as a net current asset or liability and a net non-current asset or liability.
Deferred taxes are recognized on the temporary differences related to unrealized gains and losses on investment securities that are reported as a separate
component of capital adjustments.
(t) Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the Republic of Korea requires management to
make estimates and assumptions that affect the amounts reported in the financial statements and related notes to financial statements. Actual results
could differ from those estimates.
(2) Cash and Cash Equivalents
Cash and cash equivalents as of December 31, 2006 and 2005 are summarized as follows:
2006 2005 2006 2005

Passbook accounts £ 9,518,939 7,414,414 $ 10,239,822 7,975,919
Checking accounts 28,930 460 31,121 495
Securities sold under repurchase agreements 96,990,000 57,633,000 104,335,198 61,997,633
Certificates of deposit 45,118,000 51,068,000 48,534,854 54,935,456
Money market deposit accounts 33,968,379 39,348,224 36,540,855 42,328,124
Cover bill 10,821,000 3,720,000 11,640,491 4,001,721
Time deposits 54,948,113 207,206,065 59,109,415 222,898,090
£ 251,393,361 366,390,163 $ 270,431,756 394,137,438
(3) Inventories
Inventories as of December 31, 2006 and 2005 are summarized as follows:

2006 2005 2006 2005

Merchandise £ 74,499,315 - $ 80,141,259 -
Finished goods 911,485 4,084,314 980,513 4,393,626
Raw materials 4,768,239 7,877,800 5,129,345 8,474,398
Oil in reserve stock 1,854,287,848 1,662,974,576 1,994,715,844 1,788,914,130
General stock 4,446,694 4,129,897 4,783,448 4,442,660
Stock for drilling 3,505,605 4,010,129 3,771,090 4,313,822
£ 1,942,419,186 1,683,076,716 $ 2,089,521,499 1,810,538,636

(4) Other Current Assets
Other current assets as of December 31, 2006 and 2005 are summarized as follows:
2006 2005 2006 2005

Accrued income (note 10) £ 2,334,563 3,253,406 $ 2,511,363 3,499,791
Advance payments (note 10) 82,283,211 33,143,072 88,514,642 35,653,046
Prepaid expenses 3,329,665 2,404,889 3,581,825 2,587,015
Other 44,581,781 26,011,563 47,958,027 27,981,458
£ 132,529,220 64,812,930 $ 142,565,857 69,721,310
(5) Investment Securities
(a) Investments other than those accounted for using the equity method as of December 31, 2006 and 2005 are summarized as follows:
(In thousands of Korean won)
2006 2005
Acquisition cost Book value Book value
Available-for-sale securities:
Non-marketable securities:
Daehan Oil Pipeline Corporation £ 8,298,000 8,298,000 8,298,000
Micronic Korea Co. Ltd. 775,000 378,853 378,853
Mobens Co., Ltd. 1,270,000 - -
KSLOC.(*) - - 6,160,199
PetroOnado S.A. 22,754,525 18,383,372 -
£ 33,097,525 27,060,225 14,837,052
(*) Ningxia KNOC Samsung Lantian Oil Development Co., Ltd.
(In U.S. dollars)
2006 2005
Acquisition cost Book value Book value
Available-for-sale securities:
Non-marketable securities:
Daehan Oil Pipeline Corporation $ 8,926,420 8,926,420 8,926,420
Micronic Korea Co., Ltd. 833,692 407,544 407,544
Mobens Co., Ltd 1,366,179 - -
KSLOC(*) - - 6,626,720
PetroOnado S.A. 24,477,759 19,775,573 -
$ 35,604,050 29,109,537 15,960,684
(*) Ningxia KNOC Samsung Lantian Oil Development Co., Ltd.
The shares of Daehan Oil Pipeline Corporation in the amount of £ 8,298 million are non-marketable and their fair value is not estimable reliably, so that
the securities are recorded at acquisition cost.

The amounts assumed collectible from securities of Micronic Korea Co., Ltd. and Mobens Co., Ltd. are estimated to be less than their acquisition cost;
therefore, a loss on valuation of available-for-sale securities has been recognized in relation to those securities. Loss on valuation of available-for-sale
securities in relation to shares in PetroOnado S.A. in the amount of £ 4,371 million has been recognized for the year ended December 31, 2006.
Under SKAS No. 18, Interest in Joint Ventures, KSLOC securities have been reclassified as Oil interest-exploration as of December 31, 2006.
Among the above non-marketable securities, PetroOnado S.A was classified as an oil interest until the prior period. However, on April, 2006, government
of Venezuela required every operating contract to be transferred to a joint venture, Empresa Mixta and Mixed Co., so that non-marketable securties held by
of the Company (5.64%) were classified as an available-for-sale securities because of uncertain prospects of settlement of shareholders’ rights and
obligations. In addition, the fair value of these non-marketable securities held by the Company is estimated at present value of discounted future cash
flows until 2026.
(b) Investment in affiliated company
(i) Investment in affiliated company accounted for using the equity method as of December 31, 2006 is as follows:
Percentage
Affiliate Acquisition cost Net asset value Book value
of ownership
KOL(*1) 30.00% £ 1,100,000 1,419,628 1,419,628
(In U.S. dollars)
Percentage
Affiliate Acquisition cost Net asset value Book value
of ownership
KOL(*1) 30.00% $ 1,183,305 1,527,138 1,527,138
(*1) Korea Offshore Logistics Co., Ltd.
In addition, beginning from the current period, the Company applied the same method used for direct invested oil interest to investments in overseas
subsidiaries that were accounted for using the equity method until the prior period.
(ii) Changes in the balances of investment in affiliated company accounted for using the equity method for the year ended December 31, 2006 are as follows:
Adjustment to
Balance at Net income Capital Other increase Balance at
Affiliate
Jan.1, 2006 (loss) adjustment (decrease) Dec.31, 2006
KOL(*1) £ 1,314,519 205,009 - (99,900) 1,419,628
(In U.S. dollars)
Adjustment to
Affiliate
KOL(*1) $ 1,414,069 220,535 - (107,466) 1,527,138
(*1) The Company used unaudited financial statements of KOL when applying the equity method of accounting. Provisional settlements accounts in the above financial statements were subjected to a
process verifying their reliability. Other decrease represents dividends received.

Changes in the balances of investments in affiliated companies accounted for using the equity method for the year ended December 31, 2005 are as follows:
Adjustment to
Affiliate
KCCL(*1) £ 114,811,706 36,471,664 (4,410,685) - 146,872,685
KSL(*2) 94 - (12) (82) -
KNOCSL 13,935,619 8,328,655 (644,789) - 21,619,485
KOL(*1) 1,162,554 178,605 - (26,640) 1,314,519
KNOC NEM ONE Ltd.(*3) 104 (985,562) 27,638 957,820 -
KNOC NEM TWO Ltd.(*3) 104 (528,823) 14,828 513,891 -
KNOC Benin Energy, Sarl(*3) 2,170 (1,070,625) 29,401 1,039,054 -
£ 129,912,351 42,393,914 (4,983,619) 2,484,043 169,806,689
(In U.S. dollars)
Adjustment to
Affiliate
KCCL(*1) $123,506,570 36,233,717 (4,744,713) - 157,995,574
KSL(*2) 101 - (13) (88) -
KNOCSL 14,990,984 8,959,396 (693,619) - 23,256,761
KOL(*1) 1,250,596 192,131 - (28,658) 1,414,069
KNOC NEM ONE Ltd.(*3) 112 (1,060,200) 29,731 1,030,357 -
KNOC NEM TWO Ltd.(*3) 112 (568,872) 15,951 552,809 -
KNOC Benin Energy, Sarl(*3)) 2,334 (1,151,704) 31,627 1,117,743 -
$139,750,809 45,604,468 (5,361,036) 2,672,163 182,666,404
(*1) The Company used unaudited financial statements of KCCL and KOL when applying the equity method of accounting.
(*2) The Company discontinued use of the equity method due to the liquidation of KSL.
(*3) In accordance with SKAS No. 15, Investment in Associates, the Company recorded its share of loss of the investee in the allowance for doubtful accounts of loans to related parties although such
losses make the Company’s investment in such entity less than zero.
(iii) Summarized financial information of an affiliated company accounted for using the equity method as of December 31, 2006 is as follows:
Affiliate Total assets Total liabilities Sales Net income(loss)

KOL )
£ 11,471,031 6,737,969 4,733,062 683,364
Affiliate Total assets Total liabilities Sales Net income(loss)

KOL )
$ 12,339,749 7,248,245 5,091,504 735,116

(6) Transactions and Balances with Related Companies
(a) No profit and loss transactions occurred with related companies for the years ended December 31, 2006 and 2005.
(b) Account balances which occurred in the normal course of business with related companies as of December 31, 2006 and 2005
are summarized as follows:
Related company Account 2006 2005 2006 2005

KNOCSL Loans to related parties £ - 35,284,849 $ - 37,957,024
KSL Loans to related parties - 13,126,844 - 14,120,959
KNOC NEM ONE Ltd. Loans to related parties - 9,387,685 - 10,098,629
KNOC NEM TWO Ltd. Loans to related parties - 4,359,996 - 4,690,185
KNOC Benin Energy, Sarl Loans to related parties - 22,711,315 - 24,431,277
KSLOC Loans to related parties - 3,090,558 - 3,324,611
Employees Loans to employees 9,985,593 8,853,109 10,741,817 9,523,568
(c) The guarantees that the Company has provided for related companies as of December 31, 2006 and 2005 are as follows:
(In U.S. dollars)
Related company Type of guaranty 2006 2005

KCCL Payment guaranty USD - USD 62,720,677
CLJOC(*) Payment guaranty 10,840,000 16,260,000
(*) CLJOC : Cuu Long Joint Operating Co.
(7) Property, Plant and Equipment
(a) Changes in property, plant and equipment for the year ended December 31, 2006 are as follows:
2006
Book value Book value as
Acquisition
as of January Disposals Depreciation Others of December
cost
1, 2006 31, 2006
Land £ 195,966,483 101 (1,947,009) - 795,234 194,814,809
Buildings 76,022,378 3,214,897 (761,713) (2,267,536) 1,823,675 78,031,701
Structures 939,219,907 466,853 (79,818) (46,329,171) 110,176,417 1,003,454,188
Machinery and equipment 107,084,152 2,678,082 (1,423) (35,076,454) 23,323,588 98,007,945
Vehicles 537,405 417,853 (2,697) (330,838) - 621,723
Furniture and fixtures 6,370,609 2,932,112 (97,328) (3,182,438) 39,141 6,062,096
Oil prospecting vessels 4,960,939 8,115,907 - (3,168,854) 1,261,859 11,169,851
Construction-in-progress 395,283,521 186,366,815 - - (137,594,902) 444,055,434
£ 1,725,445,394 204,192,620 (2,889,988) (90,355,291) (174,988) 1,836,217,747

(In U.S. dollars)
2006
Acquisition
cost
1, 2006 31, 2006
Land $210,807,318 108 (2,094,458) - 855,458 209,568,426
Buildings 81,779,667 3,458,366 (819,399) (2,439,260) 1,961,785 83,941,159
Structures 1,010,348,436 502,209 (85,863) (49,837,748) 118,520,242 1,079,447,276
Machinery and equipment 115,193,796 2,880,898 (1,532) (37,732,846) 25,089,919 105,430,235
Vehicles 578,104 449,498 (2,901) (355,893) - 668,808
Oil prospecting vessels 5,336,638 8,730,536 - (3,408,836) 1,357,421 12,015,759
$1,856,115,956 219,656,433 (3,108,851) (97,198,032) (188,239) 1,975,277,267
(b) Changes in property, plant and equipment for the year ended December 31, 2005 are as follows:
2005
Acquisition
cost
1, 2005 31, 2005
Land £ 169,276,730 1,560,836 (380,081) - 25,508,998 195,966,483
Buildings 60,940,748 9,455,273 (1,190,123) (2,046,261) 8,862,741 76,022,378
Structures 786,724,592 564,783 (25,791) (44,658,833) 196,615,156 939,219,907
Machinery and equipment 78,548,057 3,836,678 (2) (23,612,010) 48,311,429 107,084,152
Vehicles 430,039 435,631 (9) (328,256) - 537,405
Oil prospecting vessels 6,125,511 2,973 - (1,407,404) 239,858 4,960,939
Others 239,859 - - - (239,859) -
£ 1,623,458,941 178,128,210 (1,845,496) (74,569,639) 273,378 1,725,445,394
(In U.S. dollars)
2005
Acquisition
cost
1, 2005 31, 2005
Land $ 182,096,311 1,679,040 (408,865) - 27,440,832 210,807,318
Buildings 65,555,882 10,171,336 (1,280,253) (2,201,228) 9,533,930 81,779,667
Structures 846,304,424 607,555 (27,745) (48,040,914) 211,505,116 1,010,348,436
Machinery and equipment 84,496,619 4,127,236 (2) (25,400,183) 51,970,126 115,193,796
Vehicles 462,607 468,622 (10) (353,115) - 578,104
Oil prospecting vessels 6,589,405 3,199 - (1,513,989) 258,023 5,336,638
Others 258,024 - - - (258,024) -
$1,746,405,918 191,618,127 (1,985,258) (80,216,910) 294,079 1,856,115,956

(c) Officially Declared Value of Land
The officially declared value of land at December 31, 2006, as announced by the Minister of Construction and Transportation, is as follows:
Book value Declared value Book value Declared value

Anyang (Head office) £ 22,017,479 35,553,600 $ 23,684,895 38,246,127
Ulsan Gas Production Terminal 6,024,294 9,631,856 6,480,523 10,361,291
Ulsan office(*) 13,292,739 101,552,979 14,299,418 109,243,738
Geoje office(*) 12,779,653 21,827,071 13,747,476 23,480,068
Yeosu office(*) 54,297,907 24,161,656 58,409,969 25,991,455
Seosan office(*) 25,650,240 27,522,193 27,592,771 29,606,489
Pyeongtaek office 11,190,581 83,877,186 12,038,060 90,229,331
Yong-in office 20,499,353 22,468,947 22,051,800 24,170,554
Gokseong office 18,615,540 10,231,512 20,025,322 11,006,360
Donghae office 10,447,023 5,286,015 11,238,192 5,686,333
£ 194,814,809 342,113,015 $ 209,568,426 368,021,746
The officially declared value, which is used for government purposes, is not intended to represent fair value.
(*) Land categories are classified as roads, rivers, etc., of which the government does not officially declare values. Undeclared value for certain offices (Ulsan office- £ 247,852 thousand, Geoje office-
£ 29,577 thousand, Yeosu office- £ 17,090,031 thousand, Yong-in office- £ 2,675 thousand) is not included in the declared value.
(d) Insurance
As of December 31, 2006, inventories, buildings, structures, vehicles and so on were insured against fire damage and other casualty losses up to
£ 7,515,784 million.
(e) Capitalization of Interest costs

The Company did not capitalize interest costs during the year ended December 31, 2006. As of December 31, 2005, interest costs of £ 14,355,059
thousand, which were incurred for the oil interest-development and construction, were capitalized as part of the cost of the related assets. If the Company
had expensed the interest costs, the balances of the relevant accounts would have been as follows:
2006 2005
Capitalized Expensed Capitalized Expensed
Property, plant and equipment, net £ 1,046,304,058 1,043,374,304 $ 1,125,542,232 1,122,390,602
Oil interest 413,581,383 381,669,151 444,902,521 410,573,528
Cost of sales 308,418,112 305,265,801 331,775,077 328,384,037
Interest costs 15,054,957 29,410,016 16,195,091 31,637,280
Net income 279,479,806 271,357,814 300,645,230 291,908,147

(8) Intangible Assets-Oil Interests
Changes in oil interests for the years ended December 31, 2006 and 2005 are as follows:
2006 2005
Oil interest- Oil interest- Oil interest- Oil interest- Oil interest- Oil interest-
exploration development production exploration development production
Beginning balance £ 172,528,627 82,862,466 413,581,383 106,672,072 32,647,125 379,746,797
Increases 202,750,796 446,767,759 99,603,908 78,513,964 58,881,182 54,651,346
Amortization - - 80,559,312 - - (33,211,689)
Loss on reduction 44,444,263 - - - - -
Other changes 67,147,162 (238,566,837) 496,620,240 (7,657,409) (8,665,841) 12,394,929
Net balance at
£ 397,982,322 291,063,388 920,711,573 172,528,627 82,862,466 413,581,383
end of year
(In U.S. dollars)
2006 2005
Oil interest- Oil interest- Oil interest- Oil interest- Oil interest- Oil interest-
exploration development production exploration development production
Beginning balance $ 185,594,479 89,137,765 444,902,521 109,371,850 35,119,541 408,505,591
Increases 218,105,418 480,602,150 107,147,061 84,459,944 63,340,342 58,790,175
Amortization - - 86,660,189 - - 35,726,860
Loss on reduction 47,810,093 - - - - -
Other changes 72,232,315 (256,633,860) 534,230,034 (8,237,315) (9,322,118) 13,333,615
Net balance at
$ 428,122,119 313,106,055 990,438,439 185,594,479 89,137,765 444,902,521
end of year
(9) Other Assets
Other assets as of December 31, 2006 and 2005 are summarized as follows:
2006 2005 2006 2005

Guarantee deposits £ 2,578,696 3,335,049 $ 2,773,985 3,587,617
Loans to related parties (note 6) - 85,450,483 - 91,921,776
Loans to employees (note 6) 9,939,115 8,705,158 10,691,820 9,364,412
Other investments 2,491,522 2,298,195 2,680,208 2,472,239
Industrial property rights 5,569 9,030 5,990 9,714
Development costs 3,866,944 3,054,550 4,159,793 3,285,876
Less government grants - (5,433) - (5,844)
Other intangible assets 2,476,104 2,283,793 2,663,623 2,456,748
Less government grants (105) (3,028) (113) (3,258)
£ 21,357,845 105,127,797 $ 22,975,306 113,089,280

(10) Assets and Liabilities Denominated in Foreign Currency
Assets and liabilities denominated in foreign currencies as of December 31, 2006 and 2005 are summarized as follows:
2006 2005
Won equivalent Won equivalent
Foreign currency (thousands) Foreign currency (thousands)
Assets:
Cash and cash equivalents USD 65,414,099.97 £ 60,808,947.00 USD 211,866,115.45 £ 196,950,741.00
CAD 291,046.36 270,557.00 - -
Accounts Receivable - trade USD 18,200,032.91 16,918,751.00 39,000,369.97 36,254,744.00
Short-term and long-term loans USD 577,815,797.44 537,137,565.00 598,412,126.00 556,283,912.00
Advance payments USD 70,346,259.88 65,393,883.00 USD 28,246,234.16 26,257,699.00
AUD 950,309.77 883,408.00 AUD 5,385,860.62 5,006,696.00
Long-term advances for guaranteed payment - - 3,254,915.42 3,025,769.00
USD731,776,190.20
CAD 291,046.36 USD 880,779,761.00
AUD 950,309.77 £ 681,413,111.00 AUD 5,385,860.62 £ 823,779,561.00
Liabilities:
Accounts payable - trade USD - £ - USD 836,016.25 £ 777,161.00
Accounts payable - other USD 2,003,066.25 1,862,050.00 - -
Current portion of long-term debt USD 94,391,319.36 87,746,170.00 68,351,452.11 63,539,510.00
Short-term foreign currency borrowings - - 3,256,000.00 3,026,778.00
Long-term foreign currency borrowings USD 816,399,598.88 758,925,067.00 1,084,231,184.49 1,007,901,309.00
USD 912,793,984.49 £ 848,533,287.00 USD 1,156,674,652.85 £ 1,075,244,758.00
(11) Other Current Liabilities
Other current liabilities as of December 31, 2006 and 2005 are as follows:
2006 2005 2006 2005

Accrued expenses £ 721,809 1,345,990 $ 776,473 1,447,924
Unearned income - 86,240 - 92,771
Oil swap (note 23) 2,620,542 3,986,155 2,819,000 4,288,032
Deferred Income Tax Credits (note 21) 4,107,583 - 4,418,656 -
Other payables 68,984,416 35,601,932 74,208,709 38,298,120
£ 76,434,350 41,020,317 $ 82,222,838 44,126,847

(12) Valuation of Receivables and Payables at Prevent Value
Present value discounts on short-term and long-term receivables and payables as of December 31, 2006 are as follows:
Nominal Present Present value

Interest rate Maturity
value value discount
Short-term and long-term
5% - 7% 2006 - 2012 4,684,506 3,954,378 730,128
foreign currency loans receivable
4% - 6% 2006 - 2012 4,684,506 3,864,982 819,524
foreign currency borrowings
Rate varies on a
Long-term trade receivables 2007 - 2010 62,350,636 53,797,449 8,553,187
quarterly basis
Rate varies on a
Long-term trade payables 2007 - 2010 55,242,550 48,424,774 6,817,776
quarterly basis
Rate varies on a
Monetary account receivable 2006 22,893,914 22,019,012 874,901
quarterly basis
Rate varies on a
Monetary account payable 2006 21,112,998 20,374,596 738,401
quarterly basis
(In U.S. dollars)
Nominal Present Present value

Interest rate Maturity
value value discount
5% - 7% 2006 - 2012 5,039,271 4,253,849 785,422
foreign currency loans receivable
4% - 6% 2006 - 2012 5,039,271 4,157,683 881,587
foreign currency borrowings
Rate varies on a
Long-term trade receivables 2007 - 2010 67,072,543 57,871,610 9,200,932
quarterly basis
Rate varies on a
Long-term trade payables 2007 - 2010 59,426,152 52,092,055 7,334,096
quarterly basis
Rate varies on a
Monetary account receivable 2006 24,627,704 23,686,545 941,159
quarterly basis
Rate varies on a
Monetary account payable 2006 22,711,917 21,917,595 794,322
quarterly basis
The collection schedule for the loans receivable from Inchon Oil Refinery Co., Ltd. (“IORC”), which the Company borrowed from SAER under the policy of
the Ministry of Commerce, Industry and Energy, was readjusted from 2001 ~ 2005 to 2005 ~ 2012 according to the decision of court receiver on March
25, 2003. Meanwhile, the repayment schedule for the Company’s borrowings from the SAER was changed accordingly.
When Daehan Oil Pipeline Co., Ltd. (“DOPCO”), previously a government-funded organization, was privatized, the Company made a loan to DOPCO with
the borrowings made from the SAER under the policy of the Ministry of Commerce, Industry and Energy. The original collection schedule of 2002, 2003,
2004 and 2005 for the loans receivables from DOPCO was extended to 2007, 2008, 2009 and 2010 respectively, and the interest rate was also
readjusted. Meanwhile, the collection schedule for the Company’s borrowings from the SAER was changed accordingly. As a result, the Company recorded
other bad debt expense and gain on exemption of debt of £ 3,658,549 thousand and £ 2,980,040 thousand, respectively, for the year ended December
31, 2006.

(13) Long-term Borrowings
(a) Long-term borrowings as of December 31, 2006 and 2005 are summarized as follows:
i) Long-term borrowings denominated in Korean Won

Lender Annual interest rate 2006 2005

SAER 3.5 – 4.75% £ 1,645,735,852 1,766,799,894
Less: current portion (204,695,198) (174,565,352)
£ 1,441,040,654 1,592,234,542
ii) Long-term borrowings denominated in foreign currencies

Lender Annual interest rate 2006 2005

SAER for loan to 3rd party:
Successful loan(**) 3% £ 399,155,016 336,672,915
General loan(*) 2 - 5% 137,925,890 185,337,848
Less: current portion 2 - 5% (31,801,102) (32,447,508)
505,279,804 489,563,255
SAER for KNOC:
Successful loan 3% 386,616,931 326,640,609
General loan(*) 3% 272,904,597 322,660,996
Less: current portion 3% (55,945,061) (24,636,513)
603,576,467 624,665,092
BNP PARIBAS Bank:
General loan(*) 6M Libor + 0.35% 10,225,600 23,299,000
Less: current portion 3M Libor + 0.3% - (12,156,000)
10,225,600 11,143,000
BNP PARIBAS Bank:
General loan(*) Libor + 0.17% 26,460,135 -
Less: current portion Libor +0.17% - -
26,460,135 -
1,145,542,006 1,125,371,347
Less: present value discount (819,524) (1,244,363)
£ 1,144,722,482 1,124,126,984

i) Long-term borrowings denominated in Korean Won

(In U.S. dollars)
2006 2005
SAER 3.5 – 4.75% $ 1,770,369,892 1,900,602,296
Less: current portion (220,197,071) (187,785,448)
$ 1,550,172,821 1,712,816,848
ii) Long-term borrowings denominated in foreign currencies

(In U.S. dollars)
2006 2005
SAER for loan to 3rd party
Successful loan (**) 3% $ 429,383,623 362,169,659
General loan (*) 2 - 5% 148,371,224 199,373,762
Less: current portion 2 - 5% (34,209,447) (34,904,807)
543,545,400 526,638,614
SAER for KNOC
Successful loan (**) 3% 415,896,010 351,377,591
General loan (*) 3% 293,572,071 347,096,596
Less: current portion 3% (60,181,864) (26,502,273)
649,286,217 671,971,914
BNP PARIBAS Bank
General loan (*) 6M Libor + 0.35% 11,000,000 25,063,468
Less: current portion 3M Libor + 0.3% - (13,076,592)
11,000,000 11,986,876
BNP PARIBAS Bank:
General loan (*) Libor + 0.17% 28,464,000 -
Less: current portion Libor +0.17% - -
28,464,000 -
1,232,295,617 1,210,597,404
Less: present value discount (881,587) (1,338,600)
$ 1,231,414,030 1,209,258,804
(*) The Company’s general long-term borrowings denominated in foreign currencies are to be repaid in installments.
(**) The principal amount of these borrowings is to be repaid on an installment basis subject to the successful start-up of commercial oil production. The Company’s obligation to repay the principal
amount will be waived when the exploration is proven to be not successful and withdrawn without any commercial production in accordance with the Ministry of Commerce, Industry and Energy’s
applicable standards (No. 2001-27) on loans.
(b) Aggregate maturities of the Company’s long-term borrowings as of December 31, 2006 are as follows:
Local Foreign
December 31 Total
currency loan currency loan
2007 204,695,198 87,746,163 292,441,361
2008 221,070,038 107,470,036 328,540,074
2009 228,551,921 81,699,560 310,251,481
2010 227,149,985 77,425,943 304,575,928
Thereafter 764,268,710 93,174,520 857,443,230
£ 1,645,735,852 447,516,222 2,093,252,074

(In U.S. dollars)
Local Foreign
December 31 Total
currency loan currency loan
2007 220,197,072 94,391,311 314,588,383
2008 237,812,003 115,608,903 353,420,906
2009 245,860,500 87,886,790 333,747,290
2010 244,352,394 83,289,525 327,641,919
Thereafter 822,147,924 100,230,766 922,378,690
$ 1,770,369,893 481,407,295 2,251,777,188
The principal amount of these borrowings is to be repaid on an installment basis subject to the successful start-up of commercial oil production; therefore,
these borrowings are not included in the annual repayment plan of long-term borrowings.
(14) Asset-backed Securitization Liabilities
The Company, during the current period, entered into a contract for transferring future trade receivables from Vietnam 15-1 oil interest generated during
the next five years to an overseas resources investment company under the Overseas Resources Development Business Act. The Company records the
asset-backed securitization liabilities for each settlement period.
Description 2006 2005

Vietnam 15-1 Asset backed securitization liabilities £ 192,936,800 -
Less: Current portion (60,967,206) -
£ 131,969,594 -
(In U.S. dollars)
Description 2006 2005

Vietnam 15-1 Asset backed securitization liabilities $ 207,548,193 -
Less: Current portion (65,584,344) -
$ 141,963,849 -
(15) Retirement and Severance Benefits
Changes in retirement and severance benefits for the years ended December 31, 2006 and 2005 are summarized as follows:
2006 2005 2006 2005

Estimated severance accrual at beginning of year £ 27,760,831 20,630,562 $ 29,863,201 22,192,946
Provision 7,096,434 7,844,884 7,633,858 8,438,989
Payments (1,070,855) (714,615) (1,151,952) (768,734)
Estimated severance accrual at end of year 33,786,410 27,760,831 36,345,107 29,863,201
Assets for pension (19,923,862) - (21,432,727) -
Deposit for severance benefit trust (445,108) (16,572,415) (478,817) (17,827,469)
Net balance at end of year £ 13,417,440 11,188,416 $ 14,433,563 12,035,732

The Company maintains employees’ severance benefit trust arrangements with the Samsung Life Insurance Co. and others, where the employees have a
vested interest in the deposits with the insurance companies in trust. The deposits for employees’ severance benefits held in trust are, therefore, reflected in
the balance sheets as a deduction from the liability for retirement and severance benefits.
Details of retirement and severance benefits for the years ended December 31, 2006 and 2005 are summarized below. The Company has entered into a
pension plan contract on December 29, 2006, so that operational pension fund is credited as a withholding of Asset Management Company for Pensions.
2006 2005 2006 2005

Cash and Cash equivalents £ 19,923,863 - $ 21,432,727 -
The Company maintains an employees’ severance benefit insurance arrangement with Kumho Life Insurance Co. in the amount of £ 445 million in relation
to the Company’s previous retirement and severance benefits as of December 31, 2006. This deposit is to be used to make the required payments to the
retirees and accounted for as a reduction of the reserve balance.
(16) Capital Stock
Transactions in capital stock for the year ended December 31, 2006 are summarized as follows:
Capital stock Capital stock

Balance at December 31, 2005 £ 3,488,552,780 $ 3,752,746,106
March 7 (Increase for stockpiling petroleum) 21,263,000 22,873,279
March 13 (Increase for stockpiling petroleum) 41,053,000 44,162,005
April 7 (Increase for stockpiling petroleum) 14,191,000 15,265,706
June 23 (Increase for stockpiling petroleum) 28,383,000 30,532,485
June 29 (Increase for stockpiling petroleum) 66,429,000 71,459,768
July 11 (Increase for stockpiling petroleum) 12,445,000 13,387,478
August 10 (Increase for exploring and developing oil field) 60,000,000 64,543,890
August 31 (Increase for exploring and developing oil field) 60,000,000 64,543,890
September 28 (Increase for stockpiling petroleum) 24,500,000 26,355,422
October 18 (Increase for stockpiling petroleum) 47,116,000 50,684,165
November 20 (Increase for stockpiling petroleum) 40,504,000 43,571,429
December 19 (Increase for exploring and developing oil field) 15,605,000 16,786,790
December 19 (Increase for stockpiling petroleum) 44,500,000 47,870,052
Balance at December 31, 2006 £ 3,964,541,780 $ 4,264,782,465
(17) Retained Earnings
Retained earnings as of December 31, 2006 and 2005 are summarized as follows:
2006 2005 2006 2005

Legal reserve £ 362,808,756 233,534,511 $ 390,284,806 251,220,430
Reserve for expansion 361,365,134 232,090,890 388,731,857 249,667,480
Unappropriated retained earnings 185,208,627 279,479,806 199,234,754 300,645,230
£ 909,382,517 745,105,207 $ 978,251,417 801,533,140

(a) Legal reserve

The Korean Oil Corporation Act requires the Company to appropriate as legal reserve an amount equal to at least 20% of net income for each accounting
period until the reserve equals 50% of stated capital after having offset operating deficit with net income for the current year. The legal reserve may be
transferred to stated capital.
(b) Reserve for expansion

The Korean Oil Corporation Act requires the Company to appropriate from retained earnings an amount equal to at least 20% of net income for each
accounting period as reserve for expansion until the reserve equals stated capital having appropriated for legal reserve. The reserve for expansion may be
used to reduce an operating deficit.
(18) Capital Adjustments
Details of capital adjustments as of December 31, 2006 and 2005 are as follows:
2006 2005 2006 2005

Gain on valuation of investments
£ (9,717,268) 6,087,215 $ (10,453,172) 6,548,209
in affiliates using equity method, net
Overseas Business Translation Debit was credited in the negative amount of KRW 9,717 million which has resulted from a conversion of the financial
statements of the England Captain oil interest and SES oil interest as of December 31, 2006.
(19) Dividends
Details of dividends for the years ended December 31, 2006 and 2005 are summarized as follows:
2006 2005 2006 2005

Cash dividends £ 18,633,347 20,931,316 $ 20,044,478 22,516,476
Net income 185,208,627 279,479,806 199,234,754 300,645,230
Dividends as a percentage of net income 10.06% 7.49% 10.06% 7.49%

(20) Selling and Administrative Expenses
Details of selling and administrative expenses for the years ended December 31, 2006 and 2005 are as follows:
2006 2005 2006 2005

Salaries £ 23,746,378 23,654,701 $ 25,544,727 25,446,107
Provision for retirement and severance benefits 4,019,875 3,626,113 4,324,306 3,900,724
Other employee benefits 1,786,741 1,529,249 1,922,054 1,645,061
Travel 921,048 915,404 990,801 984,729
Books and other prints 218,724 280,220 235,288 301,441
Clothing 91,714 93,678 98,660 100,772
Entertainment 108,669 208,040 116,898 223,795
Advertising 934,007 493,285 1,004,741 530,642
Supplies 305,925 160,985 329,093 173,177
Communications 283,592 261,515 305,069 281,320
Utilities 344,148 250,419 370,210 269,384
Maintenance 838,577 645,874 902,084 694,787
Commissions and fees 3,281,822 2,555,977 3,530,359 2,749,545
Insurance 34,769 21,075 37,403 22,671
Depreciation 2,165,967 1,782,129 2,329,999 1,917,092
Amortization 1,701,845 908,307 1,830,728 977,094
Taxes and public dues 2,038,794 2,007,604 2,193,195 2,159,643
Vehicle maintenance 614,610 809,211 661,156 870,494
Training 1,358,052 1,135,366 1,460,899 1,221,349
Rewards 113,164 109,497 121,734 117,789
Registry and legal fees 103,849 168,834 111,714 181,620
Association 80,761 61,874 86,877 66,560
Rent 163,713 178,298 176,111 191,801
Research 5,355 5,280 5,761 5,680
Bad debts 174,235 69,188 187,430 74,428
Development expense 2,567,605 4,438,044 2,762,054 4,774,144
Miscellaneous 617,234 446,189 663,976 479,979
£ 48,621,173 46,816,356 $ 52,303,327 50,361,828
(21) Income Taxes
(a) The Company is subject to a number of income taxes based on taxable income at the following normal tax rates:
Taxable income Normal tax rate

Up to £ 100 million 14.3%
Over £ 100 million 27.5%

The components of income tax expense for the years ended December 31, 2006 and 2005 are summarized as follows:
2006 2005 2006 2005

Current £ 94,827,045 127,350,481 $ 102,008,440 136,994,924
Deferred (3,224,392) 8,589,285 (3,468,581) 9,239,764
£ 91,602,653 135,939,766 $ 98,539,859 146,234,688
(b) The provision for income taxes calculated using the normal tax rates differs from the actual provision for the years ended
December 31, 2006 and 2005 for the following reasons:
2006
Provision for income taxes at normal tax rates £ 76,109,902 $ 81,873,819
Tax effects of permanent differences, primarily entertainment expenses in excess of tax limit 1,526,177 1,641,756
Tax credits (39,901,656) (42,923,469)
Foreign taxes 62,344,700 67,066,158
Effect of change in recognition of deferred tax
(8,476,470) (9,118,405)
Assets (liabilities) and change in prior year’s tax reconciliation
Actual provision for income taxes £ 91,602,653 $ 98,539,859
(In thousands of Korean won and U.S. dollars)
2005
Provision for income taxes at normal tax rates £ 114,227,182 $ 122,877,778
Tax effects of permanent differences, primarily entertainment expenses in excess of tax limit 1,503,950 1,617,846
Tax credits (49,616,751) (53,374,302)
Special tax 359,504 386,730
Foreign taxes 76,988,249 82,818,684
Effect of change in recognition of deferred tax
(7,522,368) (8,092,048)
Assets (liabilities) and change in prior year’s tax reconciliation
Actual provision for income taxes £ 135,939,766 $ 146,234,688
(c) The effective tax rates, after adjustments for certain differences between amounts reported for financial accounting and income
tax purposes, were approximately 33.09% and 32.7% in 2006 and 2005, respectively.

(d) The tax effects of temporary differences that result in significant portions of the deferred income tax assets and liabilities at
December 31, 2006 and 2005 are presented below:
2006
Deferred tax assets:
Land £ 223,877 $ 240,832
Retirement and severance benefits 5,574,758 5,996,943
Impairment losses on available-for-sale securities 1,660,257 1,785,991
Depreciation 2,471,683 2,658,867
Amortization 1,804,109 1,940,737
Foreign currency translation loss 6,734 7,244
Capitalized interest 2,816,599 3,029,904
Loss on prior period adjustments 565,712 608,555
Provision for rehabilitation 45,715,521 49,177,626
Interest 1,880,468 2,022,878
Guaranteed payment 1,719,014 1,849,197
Loss on impairment of oil interests 10,704,375 11,515,034
Rehabilitation expense-Peru 494,773 532,242
Total deferred tax assets £ 75,637,880 $ 81,366,050
Deferred tax liabilities:

Property, Plant and Equipment 39,142 42,106
Profit from overseas oil interests 20,285,372 21,821,614
Depreciation (building) 6,152 6,618
Accrued income 781,450 840,630
Deposit for severance benefit trust 5,574,758 5,996,943
Equity in income of affiliates 85,147 91,595
Foreign currency translation gain 1 1
Foreign currency translation - credit 25,154 27,059
Present value discount 2,303,318 2,477,752
Oil interests - production 38,387,715 41,294,874
Loss on swap transactions 1,022,815 1,100,274
Depreciation-Peru 3,992,005 4,294,325
Total deferred tax liabilities 72,503,029 77,993,791
Net deferred tax assets £ 3,134,851 $ 3,372,259

2005
Deferred tax assets:
Land £ 223,877 $ 240,831
Retirement and severance benefits 4,580,537 4,927,428
Impairment losses on available-for-sale securities 458,190 492,889
Depreciation 2,497,216 2,686,334
Amortization 1,919,186 2,064,529
Foreign currency translation loss 12,682 13,642
Foreign currency translation - debit 167,548 180,237
Capitalized interest 2,816,901 3,030,230
Loss on prior period adjustments 565,712 608,555
Provision for rehabilitation 20,838,126 22,416,228
Losses on valuation of oil swap 1,096,193 1,179,209
Interest 1,362,031 1,465,180
Guaranteed payment 967,080 1,040,318
Loss on impairment of oil interests 1,456,292 1,566,579
Rehabilitation expense-Peru 498,252 535,986
Total deferred tax assets £ 39,459,823 $ 42,448,175
Deferred tax liabilities:

Depreciation (building) 6,152 6,618
Accrued income 494,039 531,453
Deposit for severance benefit trust 4,557,414 4,902,554
Equity in income of affiliates 8,458,574 9,099,154
Foreign currency translation gain 1 1
Foreign currency translation - credit 110,940 119,342
Present value discount 2,276,911 2,449,345
Oil interests - production 16,698,306 17,962,894
Loss on swap transactions 3,105,225 3,340,389
Depreciation-Peru 3,841,803 4,132,748
Total deferred tax liabilities 39,549,365 42,544,498
Net deferred tax liabilities £ (89,542) $ (96,323)
(e) Deferred tax assets have been recognized because it is probable that future profit will be available against which the Company
can utilize the related benefit.
(f) Deductible temporary differences and the carryforward of unused tax credits, of which its deferred tax assets have not been
recognized as of December 31, 2006, amount to £ 22,972 million.
(g) The Company did not recognize a deferred tax liability in the amount of £ 9,717 million arising from the taxable temporary
differences associated with investments in affiliates as of December 31, 2006, since it is able to control the timing of the reversal
of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

(h) Under SKAS No. 16, the deferred tax amounts should be presented as a net current asset or liability and a net non-current asset
or liability. In addition, the Company is required to disclose aggregate deferred tax assets (liabilities). As of December 31, 2006,
details of aggregate deferred tax assets (liabilities) are as follows:
Deferred tax assets (liabilities)

Temporary
differences at Current Non-current
December 31, 2006
Assets:
Land £ 814,099 - 223,877
Retirement and severance benefits 20,271,846 - 5,574,758
Impairment losses on available-for-sale securities 6,037,299 - 1,660,257
Depreciation 8,987,938 - 2,471,683
Amortization 6,560,397 - 1,804,109
Foreign currency translation loss 24,488 - 6,734
Capitalized interest 10,242,177 - 2,816,599
Loss on prior period adjustments 2,057,136 - 565,712
Provision for rehabilitation 166,238,258 - 45,715,521
Losses on valuation of oil swap - - -
Interest 6,838,064 - 1,880,468
Guaranteed payment 6,250,959 - 1,719,014
Loss on impairment of oil interests 38,925,001 - 10,704,375
Rehabilitation expense-Peru 1,649,243 - 494,773
274,896,905 - 75,637,880
Liabilities:
Property, Plant and Equipment 142,334 - 39,142
Profit from overseas oil interest 73,764,989 - 20,285,372
Capital adjustment of overseas oil interest 5,482,512 - -
Depreciation-building 22,371 - 6,152
Accrued income 2,841,636 781,450 -
Deposit for severance benefit trust 20,271,846 - 5,574,758
Equity in income of affiliates 309,628 - 85,147
Foreign currency translation gain 2 - 1
Foreign currency translation - credit 91,468 - 25,154
Present value discount 8,375,701 2,303,318 -
Oil interest - production 139,591,692 - 38,387,715
Loss on swap transactions 3,719,329 1,022,815 -
Depreciation-Peru 13,306,684 - 3,992,005
267,920,192 4,107,583 68,395,446
£ 6,976,713 (4,107,583) 7,242,434

(In U.S. dollars)
Deferred tax assets (liabilities)

Temporary
differences at Current Non-current
December 31, 2006
Assets:
Land $ 875,752 - 240,832
Retirement and severance benefits 21,807,063 - 5,996,943
Impairment losses on available-for-sale securities 6,494,513 - 1,785,991
Depreciation 9,668,608 - 2,658,867
Amortization 7,057,226 - 1,940,737
Foreign currency translation loss 26,343 - 7,244
Capitalized interest 11,017,832 - 3,029,904
Loss on prior period adjustments 2,212,926 - 608,555
Provision for rehabilitation 178,827,730 - 49,177,626
Losses on valuation of oil swap - - -
Interest 7,355,921 - 2,022,877
Guaranteed payment 6,724,354 - 1,849,197
Loss on impairment of oil interests 41,872,849 - 11,515,034
Rehabilitation expense-Peru 1,774,142 - 532,243
295,715,259 - 81,366,050
Liabilities:
Property, Plant and Equipment 153,113 - 42,106
Profit from overseas oil interest 79,351,322 - 21,821,613
Capital adjustment of overseas oil interest 5,897,712 - -
Depreciation - building 24,065 - 6,618
Accrued income 3,056,837 840,630 -
Deposit for severance benefit trust 21,807,063 - 5,996,943
Equity in income of affiliates 333,076 - 91,596
Foreign currency translation gain 2 - 1
Foreign currency translation - credit 98,395 - 27,059
Present value discount 9,010,006 2,477,752 -
Oil interests - production 150,163,180 - 41,294,874
Loss on swap transactions 4,001,000 1,100,274 -
Depreciation-Peru 14,314,419 - 4,294,325
288,210,190 4,418,656 73,575,135
$ 7,505,069 (4,418,656) 7,790,915

(22) Commitments and Contingencies
(a) As of December 31, 2006, the Company is involved in various lawsuits as a defendant, including those claiming £ 58,267
million for alleged fraudulent practice against Woori Bank, co-creditor for KODECO, and £ 25 million related to an additional
charge for delinquency in payment of taxes with Korea NamBang Investment Co., Ltd. Also, the Company brought a legal action
against former persons related to the incident for reimbursement of claims paid for previous lawsuits in the amount of £ 554
million. These lawsuits arose in the ordinary course of business and management believes that they will not have a material
adverse effect on the Company’s financial position, operating results or cash flow.
In addition, the Company is also involved in some lawsuits as a defendant including those claiming £ 209 million for damages
related to the exploration work of East Sea-1 Gas and those claiming £ 110 million for damages related to the decrease of a
catch of fish due to the production facilities of East Sea-1 Gas.
In the claim against Woori Bank regarding alleged fraudulent practice with KODECO, the Company has won the lawsuit on
December 8, 2006 and Woori Bank appealed against the decision. Additionally, for the claim against former employees for
reimbursement of claims previously paid for previous lawsuits, the Company lost the case, but appealed against the decision.
Currently, both appeals are pending in court.
(b) The Company accounts estimated amounts of rehabilitation expenses relating to oil fields, structures, and machinery and
equipment as a provision for rehabilitation. As of December 31, 2006, the Company’s provision for rehabilitation for Peru8 and
Donghae-1 is £ 2,788 million and £ 76,240 million, respectively. In addition, for Vietnam 15-1, Vietnam 11-2 and England
Captain, the Company’s provision for rehabilitation is £ 4,734 million, £ 82,476 million and £ 17,512 million, respectively.
(c) The Company was provided with guarantees by BNP PARIBAS Bank, Korea Development Bank, and Standard Chartered Bank
aggregating to USD 506,178,180 for the purpose of purchasing oil interest and others as of December 31, 2006. In addition, the
purposes of guarantees comprise oil carriage, performance of a drilling operation, exploration of OPL 321/323 and bonus
discount of OPL 321/323.
(23) Derivatives
(a) Gains and losses on derivative contract transactions as of December 31, 2006 and 2005 are summarized as follows:
2006 2005 2006 2005

Gain on oil option transactions £ - 938,430 $ - 1,009,499
Loss on oil option transactions (959,347) - (1,032,000) -
Gain on oil swap transactions 14,424,303 3,364,320 15,516,677 3,619,104
Loss on oil swap transactions (17,080,273) (25,166,618) (18,373,788) (27,072,523)
Gain on hybrid option transactions - 4,111,866 - 4,423,264
Gain on valuation of swap transactions 3,719,329 - 4,001,000 -
Loss on valuation of swap transactions (2,620,542) - (2,819,000) -
Gain on forwarding trading 5,461,120 - 5,874,699 -
Loss on forwarding trading (555,900) - (597,999) -
Gain on valuation of fixed contracts 4,286,850 - 4,611,500 -
Loss on valuation of fixed contracts (1,883,999) - (2,026,677) -
£ 4,791,541 (16,752,002) $ 5,154,412 (18,020,656)

(b) The Company has entered into oil swap contracts to pay at floating price and to receive at fixed price involving forecasted sales
transaction for 1.5 million barrels of the Dubai crude oil. However, expected sales were delayed to FY2006 to derive its revenue
using contango market conditions and the Company entered into new oil swap contracts to carry forward previous oil swap
contracts. As a result, hedge accounting was not applied inevitably due to uncertainty of expected transactions against hedge
objects. The Company recorded a gain and loss on oil swap contract transactions of £ 12,540 million and £ 15,413 million,
respectively, for the year ended December 31, 2006. In addition, sales will increase as much as the amounts of profit and loss on
oil swap transactions, which were recognized during the current period, because hedge accounting was not applied.
Oil swap contracts as of December 31, 2006 are as follows:
Oil Swap
Contractor Fixed price Floating price Quantity Termination Date
J Aron USD65.03 The average quotation for the 0.3 million Dec 31,
Per barrel Dubai crude oil during Dec 2007 Barrels 2007
Vitol Asia Pte Ltd. USD64.70 The average quotation for the 0.4 million Dec 31,
Per barrel Dubai crude oil during Dec 2007 Barrels 2007
Vitol Asia Pte Ltd. USD59.72 The average quotation for the 0.4 million Jan 31,
per barrel Dubai crude oil during Jan 2007 barrels 2007
Morgan Stanley Capital USD59.90 The average quotation for the 0.4 million Jan 31,
Group Inc. per barrel Dubai crude oil during Jan 2007 barrels 2007
Morgan Stanley Capital USD64.46 The average quotation for the 0.3 million Dec 31,
Group Inc. per barrel Dubai crude oil during Dec 2007 barrels 2007
The Company, at the time of delay, purchased a call option in the amount of USD 68.00 per barrel, the exercise price, for 300 thousand barrels to hedge
against the raising of crude oil price; however, at the exercisable point in time, the market price did not reach the exercise price so that call option was not
exercised. Hedge accounting was not applied to the same call option contract for the same reason as above and a loss on contractual transactions of
£ 959 million was recorded.
(f) The Company has entered into oil swap contracts to pay at floating price and to receive at fixed price involving sales transaction
for 0.1 million barrels of the 0.25 million barrels reserve from GS-Caltex Oil Co., Ltd on February 2006. The Company recorded a
gain on oil swap contract transactions of £ 1,008 million and loss on valuation of fixed contracts of £ 1,008 million for the year
ended December 31, 2006.
In addition, the Company also has entered into oil swap contracts to pay at floating price and to receive at fixed price involving
sales transaction for 2 million barrels and 1 million barrels of reserve during the current period. The Company recorded a gain on
oil swap contracts of £ 876 million, loss on valuation of fixed contracts of £ 876 million, loss on oil swap contracts of £ 1,666
million, and gain on valuation of fixed contracts of £ 1,666 million.

(g) The Company has entered into forward currency trading contracts in the amount of CAD 224 million, 80% of the contract
amount, to hedge against foreign currency risk from a large scale of foreign currency transactions related to purchase of oil
interest in Canada. This transaction has been cleared off on August, 2006. The Company recorded a gain on forwarding trading
of £ 5,461 million, loss on foreign currency transactions of £ 5,217 million in the related transactions. In addition, in the
forwarding trading to hedge against change of foreign currency price for purchasing of reserve, the Company recorded a loss on
forwarding trading of £ 556 million and gain on foreign currency transactions of £ 556 million.
(h) The Company has entered into oil swap contracts to pay at floating price and to receive at fixed price involving sales transaction
for 1.3 million barrels of the Ural crude oil. As a result, the Company recorded a gain on valuation of fixed contract of £ 2,621
million.
(24) Accounting Changes
In regard to the method of recognizing the financial statements of overseas oil interest investment companies, the Company adopted the same accounting
treatment as is given to directly invested oil interests, dropping the prior method applicable to equity method investment securities, in accordance with the
‘An Agenda - #00044’ of the Korean Financial Supervisory Service. Operating income for the current period has increased by £ 57,205 million under this
treatment. However, income before income taxes after the change is the same as that before the change.
In accordance with the government guideline for account settlement, the accompanying financial statements do not reflect the effect of this change in
accounting method. However, if this accounting change took effect retroactive to fiscal year 2004, some of the more important accounts would be as
follows:
FY 2006 FY 2005 FY 2004

Accounts Before After Before After Before After
Sales £ 956,790,687 1,123,743,570 796,811,726 975,621,767 334,863,664 464,831,887
Cost of goods sold 503,954,826 626,881,536 528,018,628 659,994,688 258,486,100 375,291,302
Selling expenses 46,816,356 46,816,356 34,701,111 34,701,111 28,682,226 28,682,226
Non-operating income 125,923,995 89,081,910 172,064,587 142,251,118 215,850,857 208,072,896
Non-operating expenses 116,523,928 123,708,016 79,426,534 96,447,046 137,967,029 143,352,089
Income before income taxes 415,419,572 415,419,572 326,730,040 326,730,040 125,579,166 125,579,166
(In U.S. dollars)
FY 2006 FY 2005 FY 2004

Accounts Before After Before After Before After
Sales $1,029,249,877 1,208,846,351 857,155,471 1,049,507,064 360,223,390 500,034,303
Cost of goods sold 542,120,080 674,356,213 568,006,270 709,977,074 278,061,639 403,712,675
Selling expenses 50,361,828 50,361,828 37,329,078 37,329,078 30,854,374 30,854,374
Non-operating income 135,460,408 95,828,217 185,095,296 153,024,009 232,197,566 223,830,568
Non-operating expenses 125,348,459 133,076,609 85,441,624 103,751,126 148,415,479 154,208,358
Income before income taxes 446,879,918 446,879,918 351,473,795 351,473,795 135,089,464 135,089,464

(25) Added Value
The components of cost of sales and selling and administrative expenses which are necessary in calculating added value at December 31, 2006 and 2005
are as follows:
2006 2005 2006 2005

Salaries £ 55,321,744 54,105,740 $ 59,511,343 58,203,249
Retirement allowance 6,642,365 6,972,494 7,145,401 7,500,531
Other employee benefits 4,254,619 3,682,475 4,576,828 3,961,355
Rent 1,267,967 1,554,015 1,363,992 1,671,703
Depreciation 90,204,441 74,446,882 97,035,758 80,084,856
Amortization 94,014,806 34,524,128 101,134,689 37,138,692
Taxes and dues 9,561,892 7,995,687 10,286,028 8,601,212
(26) Employee Welfare and Contributions to Society

For employee welfare, the Company maintains a refectory, an infirmary, athletic facilities, a scholarship fund, workmen’s accident compensation insurance,
medical insurance, and so forth. The amounts of welfare spending for the years ended December 31, 2006 and 2005 were estimated at £ 4,669 million
and £ 4,045 million, respectively.
The Company donated £ 13,461 million and £ 16,467 million to the internal labor welfare fund and others for the years ended December 31, 2006 and
2005, respectively.
The Company expended a total of £ 1,705 million and £ 1,865 million for the years ended December 31, 2006 and 2005, respectively, for the human
resource development in a variety of functional areas.
(27) The Company’s Environmental Standards and Policies

The Company has established environmental objectives from mid-term to long-term and detailed strategies to meet the objectives. This is due to the
potential safety problems and the Company’s inherent business risks, including contamination or pollution of water, soil and sea that may occur during
construction of stockpiling facilities, development of petroleum resources or preservation of oil in reserve stock.
To ensure both systematic implementation of environmental policies and efficiency of allocation and investment of resources, the Company adopted ISO
14000 in 1998 and has been operating under the system.
(28) Segment Information

The Company is organized into the following major operating divisions and sales by segment for the years ended December 31, 2006 and 2005 are as follows:
2006 2005 2006 2005

Oil resource development £ 680,475,004 506,143,890 $ 732,008,395 544,474,925
Stockpiling of oil 73,102,183 329,753,652 78,638,321 354,726,390
Financing 139,730,051 101,901,299 150,312,017 109,618,437
Other 24,825,905 18,991,845 26,706,009 20,430,127
£ 918,133,143 956,790,686 $ 987,664,742 1,029,249,879
(29) Date of Finalizing Financial Statement
The Company’s FY2006 financial statements are expected to be finalized at the board of directors’ meeting scheduled for February 23, 2006.

ORGANIZATION CHART
Secretariat
President & Chairman of
Board of Directors
Public Relations Team
Legal Affairs Team

Senior Executive
Vice President
Planning & Coordination Dept.
General Affairs Dept.
Management Innovation Dept.
Administration Finance Management Dept. Ulsan Gas Production Terminal

Vietnam Office
System Management Dept. Indonesia Office
Peru Office
Emergency Planning Dept. United Kingdom Office
Russia Office
Kazakhstan Office
Yemen Office
E&P Planning & Coordination Dept.
Nigeria Office
Development & Production Production Operations Dept. Canada Office
Uzbekistan Office
Development Management Dept. Offshore Rig Area Office
Houston Office
Offshore Rig Operations Dept.
New Ventures Dept.
New Ventures & Exploration Global Exploration Dept. Ulsan Office

Geoje Office
Drilling & Subsea Dept. Yeosu Office
Seosan Office
Pyeongtaek Office
Guri Office
Petroleum Stockpile Petroleum Stockpile Dept. Yongin Office
Gokseong Office
Petroleum Marketing Dept. Donghae Office
Beijing Office
Yeosu Construction Office

Seosan Construction Office
Ulsan Construction Office
Engineering & Construction Construction Dept. Pyeongtaek Construction Office
Engineering Dept.
Technical Support & Evaluation Dept.

Petroleum Technology Institute
Research & Development Dept.
Oil Research & Information Center
Auditor Auditing Dept.

HISTORY OF KNOC
2000~ 1990~
Nov 2006 Held the ceremony for the completion of gas production May 1999 Opened Gokseong Office
facilities at Vietnam Block 11-2
Jan 1999 Company name changed to Korea National Oil Corporation
Introduced Oil Field Development Fund I (KNOC) from PEDCO
Feb 2006 Established Petroleum Technology Institute and Offshore Sep 1998 Opened Yeosu Office
Rig Operations Dept. Jul 1998 Discovered Donghae-1 gas field
Oct 2005 Completed first phase of ERP project May 1998 Opened Yongin Office
Obtained “A” and “A3” credit ratings

Oct 1997 Established Indonesian subsidiary, KNOC-Sambidoyong Ltd.
(Standard and Poor’s, Moody’s)
(KSL)
Opened Kazakhstani Office
Jan 1997 Opened Peruvian Office
Aug 2005 Completed aboveground tanks for Seosan Stockpile Base
Feb 1996 Established UK subsidiary, Korea Captain Company Ltd.
Nov 2004 Held completion ceremony for Donghae-1 gas field (KCCL)
Jul 2004 Began gas production at Donghae-1 gas field Jul 1995 Completed Korean Oil Development Center
Dec 2003 Opened Beijing Office Dec 1994 Sold stake in Korean Oil Pipeline Company and invested in
Daehan Oil Pipeline Corporation
Nov 2003 Began crude oil production at Block 15-1, off Vietnam
Oct 1992 Opened Vietnamese Office
Mar 2002 Held groundbreaking ceremony for Donghae-1 gas
production facility
Aug 2001 Announced development of Vietnam Block 15-1

1970~1980
Jul 1981 Opened Guri and Ulsan offices
Held ceremony marking successful Korean-Vietnamese
petroleum development projects Aug 1981 Opened Houston Representative Office
Sep 2000 Discovered large-scale petroleum in Block 15-1, off Jan 1985 Opened Geoje Office
Vietnam
Jun 1985 Opened Indonesian Office
Jul 2000 Opened Donghae Office
Aug 1986 Established Korean Pipeline Corp. (KDC)
Dec 1987 Discovered gas on Korea’s continental shelf
Jul 1989 Opened Pyeongtaek Office
Mar 1979 Established Korea Petroleum Development Corp.(PEDCO)

OUR GLOBAL NETWORK
OVERSEAS OFFICES
Russia Office
Embassy of the Republic of Korea Beijing Office
56 Plyushchikha st, Moscow Room 1612, Beijing Silver Tower, 2 North Dong San
U.K Office Tel. (7-495)783-2791 Kazakhstan Office Huan Rd. Chaoyang Dist. 100027, Beijing, China
Suite 1/53, 5th Floor, Tolworth Tower, Ewell Fax. (7-495)783-2777 Office 4, 3th fl., “Nurly Tau” 1A 5, Tel. (86-10)6410-6871
Road, Tolworth Surrey KT6 7EL United Kingdom Al-Farabi avenue 050059, Fax. (86-10)6410-6873
Tel. (44-208)399-0830 Almaty Republic of Kazakhstan
Fax. (44-208)399-9929 Tel. (7-3272)447-030
Fax. (7-3272)447-031
Offshore Rig Area Office

#201, 2nd floor, Shwe Hin Thar Tower, No 51, Corner of
Pyay Road & Shwe Hin Thar Road, Yangon, Myanmar
Tel. (95-1)507-100
Fax. (95-1)539-300
Dubai Office
Office 5A 201, Dubai Airport Freezone Authority, Vietnam Office
Dubai, UAE, P.O. Box 120669 10th Floor, Diamond Plaza, 34 Le Duan St., Dist. 1,
Tel. (971-4)2045-648 Ho Chi Minh Socialist Rep. of Vietnam
Fax. (971-4)2045-651 Tel. (84-8)825-7808
Nigeria Office Fax. (84-8)825-7806
Plot 934, Idejo Street, Victoria Island,
Lagos, Nigeria Yemen Office
Tel. (234-1)271-5892 58 Street, House No. 15, Haddah Area, PO Box 16955,
Fax. (234-1)271-5890 Haddah, Sanaa, Republic of Yemen Indonesia Office
Tel. (967-1)413-046 Gedung BRI II 17th Floor,Jl.Jend. Sudirman
Fax. (967-1)413-163 No.44-46 Jakarta 10210, Indonesia
Tel. (62-21)5793-2517
Fax. (62-21)5793-2519
DOMESTIC
ULSAN OFFICE GEOJE OFFICE
300, Hagnam-ri, Onsan-eup, Ulju-gun, Ulsan-si, Korea 8-7, Jisepo-ri, Irun-myeon, Geoje-si, Gyeongsangnam-do, Korea
Tel. (82-52)238-3235 Tel. (82-55)681-0075
PYEONGTAEK OFFICE GURI OFFICE
79, Wonjeong-ri, Poseung-myeon, Pyeongtaek-si, Gyeonggi-do, Korea 297, Achun-dong, Guri-si, Gyeonggi-do, Korea
Tel. (82-31)680-1414 Tel. (82-2)452-9995
DONGHAE OFFICE YEOSU CONSTRUCTION OFFICE
226, Guho-dong, Donghae-si, Gangwon-do, Korea 1157, Nakpo-dong, Yeosu-si, Jeollanam-do, Korea
Tel. (82-33)522-3225 Tel. (82-61)685-0121
PYEONGTAEK CONSTRUCTION OFFICE ULSAN GAS PRODUCTION TERMINAL
79, Wonjeong-ri, Poseung-myeon, Pyeongtaek-si, Gyeonggi-do, Korea 400, Hagnam-ri, Onsan-eub, Ulju-gun, Ulsan-si, Korea
Tel. (82-31)680-6713 Tel. (82-52)240-4700

Canada Office
Suite 2010, 520-5th Avenue SW, Calgary, Alberta T2P 3R7, Canada
Tel. (1-403)718-7084
Fax. (1-403)269-8081
Houston Office
11767 Katy Freeway, Suite 800, Houston, TX 77079 U.S.A.
Tel. (1-281)493-1798
Fax. (1-281)493-1774
Peru Office
Av. Republica de Panama 3531, Oficina
1401, Torre A, San Isidro, Lima Peru
Tel. (51-1)222-4772
Fax. (51-1)222-5947
YEOSU OFFICE SEOSAN OFFICE

1157, Nakpo-dong, Yeosu-si, Jeollanam-do, Korea San 58-1, Daejook-ri, Daesan-eup, Seosan-si, Choongcheongnam-do, Korea
Tel. (82-61)688-8700 Tel. (82-41)660-4114
YONGIN OFFICE GOKSEONG OFFICE
517-2, Ho-dong, Yongin-si, Gyeonggi-do, Korea 612, Gyoejeong-ri, Gyeom-myeon, Gokseong-gun, Jeollanam-do, Korea
Tel. (82-31)329-4900 Tel. (82-61)360-2114
SEOSAN CONSTRUCTION OFFICE ULSAN CONSTRUCTION OFFICE
667, Daejoog-ri, Daesan-eub, Seosan-si, Choongchungnam-do, Korea 300, Hagnam-ri, Onsan-eup, Ulju-gun, Ulsan-si, Korea
Tel. (82-41)662-0166 Tel. (82-52)237-3386

www.knoc.co.kr

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Annual Report 2006

Another Korean Wave

Driving Korea’s Energy Future

02 Korea National Oil Corporation

Summary of Balance Sheets

2006 2005 2004

04 05 06 Summary of Cash Flows Statements

2006 Annual Report 03

President & CEO

04 Korea National Oil Corporation

2006 Annual Report 05

06 Korea National Oil Corporation

4 1 2 5 5. Executive Vice President for Development & Production

2006 Annual Report 07

At a Glance Development Promotion Society March 12

08 Korea National Oil Corporation

Our spirit of innovation is driving

Canada Blackgold Oilsands

Nigeria OPL 321 and OPL 323

Joint Stockpiling with Kuwait

2006 Annual Report 09

Vision & Strategy

Sales Operating Income

Developed ”Challenge 20-50”, KNOC’s strategic

12 Korea National Oil Corporation

2006 Annual Report 13

Capitalizing on state-of-the-art R&D

14 Korea National Oil Corporation

2006 Annual Report 15

Continental Shelf Exploration

Overseas Exploration & Production

Offshore Rig Operations

Construction of Stockpile Facilities

OVERSEAS EXPLORATION &

Ceaseless work, endless challenges

KNOC relies on creativity and welcomes all challenges in

18 Korea National Oil Corporation

2006 Annual Report 19

Domestic continental shelf development has made

20 Korea National Oil Corporation

2006 Annual Report 21

The result of safe operational culture and

22 Korea National Oil Corporation

2006 Annual Report 23

A cornerstone of the nation’s

24 Korea National Oil Corporation

2004 2005 2006

2006 Annual Report 25

Building environmentally-friendly stockpile facilities that

26 Korea National Oil Corporation

2006 Annual Report 27

A cutting-edge tool making

28 Korea National Oil Corporation

2006 Annual Report 29

Human Resources Ethical Management

Nurturing the talents and

32 Korea National Oil Corporation

Earning trust and confidence by

2006 Annual Report 33

Preserving the environment and respecting

As a further commitment to environmentally-friendly management, we signed the Voluntary

34 Korea National Oil Corporation

Sharing our wealth and fulfilling