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TAPPING INTO THE ENERGY…
Santos is a major Australian oil and gas exploration and production company with interests
and operations in every major Australian petroleum province and in the United States,
Indonesia, Papua New Guinea and Egypt.
Santos is one of Australia's largest onshore gas producers, supplying sales gas and ethane
to all mainland Australian states and territories, and selling oil and liquids to domestic and
international customers.
In Australia, Santos has one of the largest exploration portfolios by area of any company
and has assembled an expanding, well-situated acreage position in Indonesia and the
United States. The Company is also pursuing new venture opportunities in North Africa and
the Middle East.
Santos is positioning itself to perform alongside the top quartile of the world's oil and gas
companies – rapidly expanding its exploration interests and delivering an exciting suite of
growth projects.
…TO DELIVER ON THE STRATEGY
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CORPORATE DIRECTORY
REGISTERED AND HEAD OFFICE
Ground Floor, Santos House
91 King William Street
Adelaide, South Australia 5000
GPO Box 2455
Adelaide, South Australia 5001
Telephone 08 8218 5111
Facsimile 08 8218 5274
SHARE REGISTER
Ground Floor, Santos House
91 King William Street
Adelaide, South Australia 5000
GPO Box 2455
Adelaide, South Australia 5001
Telephone 08 8218 5111
Facsimile 08 8218 5950
OFFICES
Brisbane
Level 14, Santos House
60 Edward Street
Brisbane, Queensland 4000
Telephone 07 3228 6666
Facsimile 07 3228 6920
Perth
Level 28, Forrest Centre
221 St Georges Terrace
Perth, Western Australia 6000
Telephone 08 9460 8900
Facsimile 08 9460 8971
Melbourne Project Office
Level 7, 34 Queen Street
Melbourne, Victoria 3000
Telephone: 03 8614 8500
Facsimile: 03 8614 8511
Port Bonython
PO Box 344
Whyalla, South Australia 5600
Telephone 08 8640 3100
Facsimile 08 8640 3200
United States of America
Santos USA Corp.
10111 Richmond Avenue, Suite 500
Houston, Texas 77042 USA
Telephone 1-713 986 1700
Facsimile 1-713 986 4200
Papua New Guinea
Barracuda Limited
Level 8, Pacific Place
Cnr Champion Parade
and Musgrave Street
Port Moresby, PNG
Telephone 675 321 2633
Facsimile 675 321 2847
Representative office of Santos
Asia Pacific Pty Ltd in Jakarta
Level 9, Ratu Plaza Office Tower
Jalan Jendral Sudirman Kav 9
Jakarta 10270 Indonesia
PO Box 6621, JKS GN
Jakarta 12060 Indonesia
Telephone 62-21 270 0410
Facsimile 62-21 720 4503
USEFUL E-MAIL CONTACTS
Share register enquiries:
share.register@santos.com
Investor enquiries:
investor.relations@santos.com
Employment enquiries:
recruitment@santos.com
WEBSITE
www.santos.com
TAPPING INTO THE ENERGY…
Annual Report 2004
SAN165 WWW Cover 30/3/05 12:21 PM Page 2
Santos Ltd ABN 80 007 550 923
Cover photograph:
Close-up of spinning Kelly Bushing (KB) on the drill floor of an exploration rig.
Page 1 photographs (top to bottom):
Inspection of coiled tubing drilling activities, Cooper Basin, central Australia; installation of
mid water arches, Mutineer-Exeter oil fields, Carnarvon Basin, offshore Western Australia; site
inspection and liaison with contractors, offshore Western Australia; inspection of MODEC Venture
11 Floating Production Storage and Offloading facility, Jurong Shipyard, Singapore.
INSIDE
CHAIRMAN’S REVIEW
2 Stephen Gerlach comments on Santos’
performance in 2004.
2004 ACHIEVEMENTS
2005 AND BEYOND
3 Key achievements in 2004 and three-year
performance, plus what to look for in the
near-term future.
MANAGING DIRECTOR’S
REVIEW
4 John Ellice-Flint reviews Santos’ 50th year,
where the values embodied in the great
explorers of yesteryear are shaping
Santos today.
THE WORLD OF SANTOS
8 Locations of Santos’ global exploration,
development and production activities.
ANALYSING FINANCIAL
PERFORMANCE
10 Putting the numbers in perspective and
explaining the 2004 financial results.
LEVERAGING BASE BUSINESS
12 Production results for 2004 plus a review
of activities that are creating value in
Santos’ base business.
CAPTURING AND
DELIVERING GROWTH
18 Progress on Santos’ development projects
and gas commercialisation highlights.
DIRECTORS’ STATUTORY
REPORT
47 Directors’ shareholdings, meetings,
activities and emoluments.
MANAGING OPTIONS
22 Strategic projects, portfolio management
activities and reserves movements
in 2004.
FINANCIAL REPORT
50 Statements of financial performance,
financial position and cash flows and
notes to the financial statements.
SUSTAINABILITY
26 Sustainability activities undertaken in
2004, including safety and environmental
performance, employees and communities.
CORPORATE GOVERNANCE
29 Details of the main corporate governance
practices Santos has in place.
DIRECTORS’ AND SENIOR
EXECUTIVES’ REMUNERATION
37 Remuneration details for Directors and
key executives.
BOARD OF DIRECTORS
41 Directors’ biographical details.
GROUP INTERESTS
42 Santos licence areas and percentage
interests.
STOCK EXCHANGE
AND SHAREHOLDER
INFORMATION
90 Listing of top 20 shareholders, analysis
of shares and voting rights.
INFORMATION FOR
SHAREHOLDERS
92 Annual General Meeting, final dividend,
shareholder enquiries and information
resources for shareholders.
GLOSSARY
93 Most frequently used terms explained.
BACK COVER
Corporate directory
CREATING OPPORTUNITIES
15 Exploration strategy, results and acreage
acquisitions, 2005 program and new
venture opportunities.
10 YEAR SUMMARY
44 Statistical summary of financial
performance.
GLOSSARY
barrel/bbl
The standard unit of measurement for all
production and sales. One barrel = 159 litres
or 35 imperial gallons.
bcf
Billion cubic feet, a billion defined as 109, on
average 1 bcf of sales gas = 1.055 petajoules.
boe
Barrels of oil equivalent. The factor used
by Santos to convert volumes of different
hydrocarbon production to barrels of oil
equivalent.
bopd
Barrels of oil per day.
contingent resources
Those quantities of hydrocarbons which are
estimated, on a given date, to be potentially
recoverable from known accumulations, but
which are not currently considered to be
commercially recoverable. Contingent resources
may be of a significant size, but still have
constraints to development. These constraints,
preventing the booking of reserves, may relate
to lack of gas marketing arrangements or to
technical, environmental or political barriers.
the Company or Santos
Santos Ltd and its subsidiaries.
DD&A
Depreciation, depletion and amortisation of
building, plant and equipment, exploration
and development expenditure.
delineation well
Comprises two categories: near-field
exploration wells and appraisal wells. Near-
field exploration wells are wells located near
existing fields/discoveries and have a higher
expectation of success than wildcat exploration
wells. These wells test independent structures
or traps and have a higher risk of failure than
appraisal or development wells. An appraisal
well is a well drilled for the purpose of
identifying extensions to known fields or
discoveries.
development well
Wells designed to produce hydrocarbons from
a gas or oil field within a proven productive
reservoir defined by exploration or appraisal
drilling.
EBIT
Earnings before interest and tax.
EBITDA
Earnings before interest and tax, depreciation,
depletion and amortisation of building, plant
and equipment, exploration and development
expenditure and amortisation of goodwill.
finding cost per barrel of oil equivalent
Exploration and delineation expenditure per
annum divided by reserve additions net of
acquisitions and divestments.
hydrocarbons
Solid, liquid or gas compounds of the elements
hydrogen and carbon.
LNG
Liquefied natural gas.
LPG
Liquefied petroleum gas, the name given to
propane and butane in their liquid state.
mbbls
Thousand barrels.
mean resource potential
The average of the range of recoverable
resources.
mmbbls
Million barrels.
mmboe
Million barrels of oil equivalent.
mmscf/d
Million standard cubic feet per day.
petroleum liquids
Crude oil, condensate, or its derivative
naphtha, and the liquefied petroleum gases
propane and butane.
PJ
Petajoules. Joules are the metric measurement
unit for energy. A petajoule is equal to 1 joule
x 1015. The equivalent imperial measure to
joules is British Thermal Units (BTU). One
kilojoule = 0.9478 BTU.
Proven reserves (1P)
Proven reserves (1P) are those reserves that, to
a high degree of certainty (90% confidence),
are recoverable. There is relatively little risk
associated with these reserves. Proven
developed reserves are reserves that can be
recovered from existing wells with existing
infrastructure and operating methods. Proven
undeveloped reserves require development.
Proven plus Probable reserves (2P)
Proven plus Probable reserves (2P) are those
reserves that analysis of geological and
engineering data suggests are more likely than
not to be recoverable. There is at least a 50%
probability that reserves recovered will exceed
Proven plus Probable reserves.
Proven, Probable plus Possible reserves (3P)
Proven, Probable plus Possible reserves (3P)
are those reserves that, to a low degree of
certainty (10% confidence), are recoverable.
There is relatively high risk associated with
these reserves.
PSC
Production sharing contract.
reserve replacement cost per barrel of
oil equivalent
Exploration, delineation and development
expenditure per annum divided by reserve
additions net of acquisitions and divestments.
Development includes all development and
fixed asset expenditure net of stay-in-business
and corporate capital expenditure.
reserve replacement ratio
Reserves added during the reporting period
divided by the production over the same
period, reported as a percentage.
resource potential
Resource potential refers to those quantities
of petroleum yet to be discovered. It may
refer to single opportunities or a group
of opportunities.
ROAE
Return on average equity.
ROACE
Return on average capital employed.
seismic
Data used to gain an understanding of rock
formations beneath the earth’s surface using
reflected sound waves.
tcf
Trillion cubic feet.
TJ
Terajoules. Joules are the metric measurement
unit for energy. A terajoule is equal to 1 joule
x 1012.
total recordable case frequency rate (TRCFR)
A statistical measure of safety performance.
Total recordable case frequency rate is
calculated as the total number of recordable
cases (medical treatment injuries and lost time
injuries) per million hours worked. A lost time
injury is a work-related injury or illness that
results, or would result, in a permanent
disability or time lost of one complete shift
or day or more any time after the injury or
illness. A medical treatment injury is a work-
related injury or illness, other than a lost time
injury, where the injury is serious enough to
require more than minor first aid treatment.
Santos classifies injuries that result in
modified duties as medical treatment injuries.
wildcat exploration
Exploration wells testing new play concepts or
structures distanced from current fields.
Conversion
crude oil 1 barrel = 1 boe
sales gas 1 petajoule = 171.937 boe x 103
condensate/naphtha 1 barrel = 0.935 boe
LPG 1 tonne = 8.458 boe
For a comprehensive online conversion
calculator tool, visit the Santos website,
www.santos.com.
Annual Report 2004
93
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…TO DELIVER ON THE STRATEGY
Santos continues to tap into the spirit and commitment of the
entrepreneurs and explorers who laid the Company’s foundations
as we deliver on our growth strategy.
Today, Santos is a major Australian oil and gas exploration and
production company growing a global energy business through:
LEVERAGING BASE BUSINESS
Creating value from the base business through environment,
health, safety and operational excellence, optimisation
programs and cost leadership.
CREATING OPPORTUNITIES
Maximising the value of the exploration program, building
a better and more balanced portfolio and pursuing new
opportunities.
CAPTURING AND
DELIVERING GROWTH
Commencing new production, advancing key projects,
extracting value from our infrastructure position and
seeking innovative commercial arrangements.
MANAGING OPTIONS
Delivering improved returns, strong cash flow and reserve
replacement through disciplined portfolio management,
strategic acquisitions and divestments, and making
sustainable progress.
Annual Report 2004
1
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Chairman’s Review
DELIVERING ON THE STRATEGY
Due to the long cycle times
inherent in the oil and gas
business, it had been recognised
that 2004 would be a year in
which production was marginally
below the previous year, with
subsequent increases in 2005
and beyond driven by new
development projects.
In this light, it is pleasing to
report that the Minerva gas and
Bayu-Undan liquids projects
commenced production during the
year as planned, while first oil
from Mutineer-Exeter and several
other key growth projects are
progressing to plan.
Indonesia matured into a core
area during 2004, through a
strategy of prudent acquisition,
portfolio management and
exploration. In particular, the
Jeruk discovery has the potential
to add significant value, with
further evaluation activities
underway.
Even with the large effort
expended on the Moomba
incident, Santos was able to
deliver strong results for 2004,
reflecting higher average prices
across most products.
Group sales revenue increased by
2.5% to a record $1,501 million,
earnings before interest and tax
improved by 23% to $574 million
and net profit after tax rose by
16% to $380 million.
This strong financial performance,
combined with the confidence
that Santos will continue to grow
earnings in the future, enabled
the Board to increase the final
dividend on ordinary shares by
20% from 15 cents to 18 cents
per share, fully franked. For the
full year, dividends increased
by 10% to 33 cents per share,
compared with 30 cents per share
in each of the four previous
years. On a grossed up basis, this
represents a yield of over 5%.
In response to increasing interest
and enquiry from shareholders,
the Dividend Reinvestment Plan
has been reintroduced and
applied to the final dividend
paid during March 2005.
Santos continued its proactive
approach to capital management
with the redemption and buyback
of the outstanding Preference
Shares and the issue of FUELS
(Franked Unsecured Equity Listed
Securities). This initiative was
driven by the alignment of
Australian accounting standards
with international requirements,
and closed oversubscribed, raising
$600 million in new equity.
The total shareholder return for
the year, including share price
appreciation and dividends paid,
was 28% – an excellent result.
In addition to our focus
on shareholder value, Santos
takes its corporate social
responsibilities seriously and
is committed to sustainability
as a core value in all operations.
The Company’s first Sustainability
Review was released during
the year.
Santos continues to be
recognised for the high quality
of its corporate governance,
receiving a measure of five out
of five for corporate governance
for the third successive year
in an independent report prepared
by leading accounting and
management firm, Horwath,
and the University of Newcastle.
The safety of our employees and
contractors is the highest priority
for the Board and I’m pleased
that Santos has delivered another
year of safety improvement
with an 11% reduction in the
2004 total recordable case
frequency rate.
Mr Frank Conroy retired from
the Board of Directors during
December 2004. A member of the
Board for five years, Mr Conroy
brought extensive business and
corporate experience to the
Board and I thank him for his
outstanding contribution.
In February 2005 we appointed
two new Board members, Mr
Kenneth Dean from Shell, and
Mr Christopher Recny from the
international management
consultancy firm, L.E.K. These
individuals further strengthen
the composition of the Board,
bringing strong international
oil and gas expertise and
outstanding management
experience.
Finally, I’d like to acknowledge
the extraordinary effort made by
everyone at Santos to keep the
Company moving forward during
this challenging year.
I am confident that the
significant achievements made
during 2004 provide Santos with
a solid platform from which to
achieve future growth with
increased value for our
shareholders.
Stephen Gerlach
Chairman
21 March 2005
Dear Shareholder,
I am pleased to report that
in 2004 Santos continued
to deliver on its strategy to
transform the Company into a
truly international exploration
and production business with
world-class operations.
While the year saw many
positives in terms of development
and exploration success, it did
not get off to a good start with
the incident on New Year’s Day
at the Moomba processing facility
in central Australia.
Importantly, Santos was able
to work effectively with its key
stakeholders, including customers,
joint venturers and government
departments, to minimise the
commercial impacts.
Natural gas supplies were quickly
restored, in part by recovering
processed gas from underground
storage reservoirs. Liquids
processing facilities were
progressively reinstated allowing
further increases to gas production
and sales volumes, with the
ramp-up to full liquids production
achieved by August as planned.
A large proportion of the costs
and foregone revenues associated
with the repair of the damaged
plant and the reduced oil and
gas production volumes are
being recovered under
insurance policies.
2
Annual Report 2004
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2004 HIGHLIGHTS
• Significant progress on new field developments:
> Bayu-Undan and Minerva commenced production
> John Brookes and Casino sanctioned
> Mutineer-Exeter ahead of schedule and Bayu-Undan
LNG construction on track
> Oyong and Maleo progressed to imminent sanction.
• Seven of sixteen exploration wells discovered hydrocarbons,
including Jeruk.
• Reserve replacement exceeded production for the third
successive year.
• Indonesia established as a core area.
• New country entry to Egypt.
• Improved safety performance and first Sustainability
Review released.
2005 AND BEYOND
• New production to commence:
EARNINGS AND DIVIDENDS
PER SHARE
cents
OPERATING CASH FLOW
$million
70
60
50
40
30
20
10
0
1,000
897
821
59
52
52
30
30
33
800
600
400
200
0
605
’02
’03
’04
’02
’03
’04
Earnings per share
Ordinary dividend
PRODUCTION BY PRODUCT
mmboe
SALES REVENUE
$million
1,478 1,465 1,501
57.3
54.2
47.1
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
1,600
1,400
1,200
1,000
800
600
400
200
0
’02
’03
’04
’02
’03
’04
Sales gas & ethane
Crude oil
Sales gas & ethane
Crude oil
Condensate
LPG
Condensate
LPG
> Mutineer-Exeter, John Brookes and Oyong in 2005
NET PROFIT AFTER TAX
$million
RETURN ON ORDINARY EQUITY
%
> Bayu-Undan LNG, Casino and Maleo in 2006.
• Continuing high impact exploration program.
• Follow-up on recent exploration success:
> Jeruk early production potential
> Hiu Aman, Hurricane and Martha appraisal.
• Continued commercialisation of static gas resources.
Sales ($million)
Operating profit before tax ($million)
Cash flow from operations ($million)
Earnings per share (cents)
Ordinary dividends per share (cents)
Cash flow per share (cents)
Total shareholders’ funds ($million)
Return on average ordinary equity (%)
Return on average capital employed (%)
Net debt/(net debt plus equity) (%)
Net interest cover (times)
2004
1,500.9
540.8
605.0
58.6
33
103.4
3,498.3
13.1
9.4
24.4
9.2
380
322
327
400
300
200
100
0
25
20
15
10
5
0
59
52
52
13.1% 12.3%
13.1%
70
60
50
40
30
20
10
0
e
r
a
h
s
r
e
p
s
t
n
e
c
2003
1,465.0
430.9
897.3
52.1
30
153.8
3,087.9
12.3
8.8
22.5
8.5
’02
’03
’04
’02
’03
’04
Earnings per share
Return on average ordinary shares
FINANCIAL STRENGTH
$million
SAFETY PERFORMANCE
TRCFR (per million hours worked)
1,400
1,200
1,000
800
600
400
200
0
1,163
1,131
898
28.9%
22.5%
24.4%
7.2
6.4
45%
10
9.0
40%
35%
30%
25%
20%
15%
10%
5%
0
8
6
4
2
0
’02
’03
’04
’02
’03
’04
Gearing
Net debt
Annual Report 2004
3
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Managing Director’s Review
OUR 50 YEARS OF EXPERIENCE:
AN INVESTMENT IN THE FUTURE
‘Santos has an impressive and exciting
development outlook over the next
few years.’
Fifty years ago, the founding
fathers of Santos, led by the
late John Bonython, took the
Company's first brave steps in the
search for oil and gas. It was a
risky move but, with the limited
information available, they
identified the far north-east of
South Australia as having great
potential. This judgment would
later be justified and the Cooper
Basin would become a prime
Australian source of energy for
decades to come.
With 2004 marking the
50th anniversary of Santos’
incorporation, we have been
reminded of how much the world
of commerce, technology and
regulation has changed since
those pioneering days of the
1950s and 1960s.
Complicated corporate entities
trade oil around the world
at the touch of a button. With
sophisticated seismic technology
and three-dimensional computer
images we can more clearly ‘see’
the structures that might hold the
oil and gas for which we search.
But some things never change
and it is interesting as we reach
this milestone period to reflect
on the Santos story – not in an
indulgent way as we celebrate our
progress and achievements, but
rather as a means of learning
from the past as we look forward
to the challenges ahead.
4
Annual Report 2004
RETAINING AN
ENTREPRENEURIAL SPIRIT
Santos' founders were the
entrepreneurs of their day –
among them Sir Douglas Mawson
and Reg Sprigg – people with the
drive and commitment required
to create an entirely new
industry. It was hard work in
a hostile environment but they
persevered and delivered the
discoveries that have sustained
the energy needs of Adelaide,
Sydney and beyond for the
past 35 years.
Today, we have knowledge and
technology injected into the
exploration equation that the
early prospectors could not
even dream about. But it is
vital that we retain their
entrepreneurial spirit. Our aim is
to foster a working environment
in which we encourage and
support people and build the
confidence required to make
bold but informed decisions
throughout our business.
A culture change program is
currently underway in Santos
which is all about making sure
that we work together in a way
that enhances our team spirit
and ability to be successful.
VALUES ARE IMPORTANT
There is another attribute
of our forefathers that is still very
relevant today, even though our
working environment is a vastly
different place. People matter.
Values are the essential building
blocks for any successful
company. If the basic building
blocks are not in place then
it doesn't matter whether you
have a vision for change, a
business will not go in the
direction you want without them.
In that context, the progress
we have made under the
restructuring program is most
pleasing and there is an ongoing
role for all of us to play in Santos'
continuous improvement program.
This includes striving to
operate our business in the
safest possible manner. I applaud
the great commitment and
performance of everyone who rose
to the challenges posed by the
fire at the Moomba liquids
recovery plant on New Year's Day
2004. The effort by everyone
involved to repair and return
the plant to full production was
first class and a credit to their
cooperation and professionalism.
JERUK STANDS OUT
The Jeruk oil discovery in
Indonesia, our most exciting
drilling success for many years,
is the result of deliberately
targeting this area as part of the
growth strategy put in place
in 2001.
We were in Indonesia by design,
identifying East Java as an
attractive area in which to
expand Santos' exploration effort
internationally and to establish a
new core area. We were looking
for excellent drilling targets and
found one with Jeruk.
Further, we took a strategic
approach towards gaining access
to the area, acquiring the
surrounding exploration acreage
to ensure that we manage the
evaluation of the entire play
trend, giving Santos maximum
drilling flexibility and keeping
upfront costs down.
Jeruk is a significant discovery
and has important strategic
implications for Santos. It
confirms that our exploration
strategy is delivering and has
the Company well positioned to
capture the upside value available
from this discovery.
The success of our strategy in
East Java helps us balance the
risk in our exploration program
and, with the Jeruk discovery
pointing the way to other
potential targets, we can add
some attractive lower risk
prospects to our portfolio.
Jeruk stands out from the
crowd for a number of reasons.
At 18,700 feet, it was the
deepest well (in terms of
measured depth) drilled in
Indonesia last year: a deep, high
pressure well that few companies
would have attempted. Jeruk
SAN165 WWW Text 30/3/05 12:06 PM Page 5
is also located in relatively
shallow water with infrastructure
nearby, creating options for
early production.
At Santos, we are proud that an
Australian company took on that
challenge and succeeded, and I
congratulate the exploration and
drilling teams on a great effort.
With the Jeruk discovery behind
us, Indonesia is at the forefront
of our international exploration
efforts. With eight wells planned
in the region for 2005, Santos is
currently the most active explorer
in Indonesia.
A STRONG FINANCIAL
PERFORMANCE
It was pleasing that Santos
was able to conclude 2004
on a higher note than it started.
We achieved record annual
revenue thanks to higher oil and
gas prices combined with the
return of full production at
Moomba to produce a 21.5% jump
in second half sales: the best
result for any six-month period
in Santos' history.
The average realised price for
crude oil was up nearly 19%
to A$51.83 per barrel.
These results have left Santos
well positioned to continue its
strong investment program which
saw capital expenditure peak at
$930 million in 2004.
In 2005 we expect to invest
around $850 million of new
capital in projects and our
strategy is to plan for firm
developments based on
affordability at relatively low oil
prices. If higher prices continue
and some projects mature quickly
and can be given the green light,
our overall capital expenditure
may be higher.
Production is expected to rise
in 2005 when, as usual, our
financial performance will be
subject to oil prices, exchange
rates and interest rates. These
factors have a significant effect
on our bottom line. A US$1 per
barrel change in the oil price
equates to a A$16 million change
in net profit after tax in 2005.
A one US cent movement in the
Australia–US dollar exchange rate
would produce a change in profit
after tax of A$8 million, and
a 1% change in interest rates
equates to a change in net profit
after tax of A$9 million.
2004 has also been an important
period for shareholders, with a
significant improvement in the
Santos share price combined with
an increase in the dividend.
PRODUCTION TO REBOUND
While we expected lower
production overall in 2004, our
output was obviously curtailed
further by the incident at the
Moomba plant. The good news
is that several projects emerged
from the development pipeline
during the year and made positive
contributions to our expanding
suite of oil and gas facilities.
Production is forecast to increase
by 15% in 2005, or by 4% after
excluding the effect of the
Moomba downtime, to about
54 million boe. We expect this
positive forward trend to be
followed by further production
growth of more than 10% in 2006.
The Bayu-Undan liquids project
came on line in April 2004
and, at its increased design
throughput of just over one
billion cubic feet of gas per day,
produced liquids at a rate of
100,000 barrels per day.
Bayu-Undan is currently stripping
liquids and re-injecting the gas
pending tie-in of the pipeline to
Darwin in May 2005 for future
LNG production. The onshore LNG
facilities are more than two-thirds
complete. With a gross production
of 19 million barrels, 22% above
expectations for the year, we were
pleased with the performance of
Bayu-Undan and look forward to
a full year contribution from this
exciting project in 2005.
The Minerva gas field off
Victoria's western coast started
production in December 2004
and is ramping up to full field
production of around 150 TJ
per day. Our share in this project
is 10%, and is significant because
it represents our first foray
into marketing gas directly to
customers or into the Victorian
spot market through our sales
vehicle, Santos Direct, aimed
at delivering higher prices.
RECORD EXPLORATION
EFFORT AHEAD
Exploration is a great way to
increase shareholder value so
I am pleased to be able to report
that in 2004, Santos drilled 16
wildcat wells resulting in seven
hydrocarbon discoveries.
Growing our oil and gas reserves
for future production is the goal
of our exploration efforts. On
a rolling three-year average we
have replaced the hydrocarbons
that Santos has produced at
a rate of 130% of Proven (1P)
reserves, at an average
replacement cost of around
US$7 per boe.
Santos has an exciting
exploration program for 2005: one
that I believe holds the highest
resource potential of any program
in the Company's 50-year history.
We expect to participate in
drilling a record 157 wells during
2005, of which 25 are exploration
wildcat wells. Consistent with
the growing internationalisation
of Santos, this includes eight
wells in Indonesia and six wells
in the Gulf of Suez, Egypt. This
program offers an attractive
combination of risk and reward
and is a new focus to our
overseas exploration effort.
In the US, two exploration wells
are planned, one onshore, and
one offshore in the shallow
waters of the Gulf of Mexico.
In Australia, our increasing focus
on the potential of offshore areas
will see Santos drill three wells
off Western Australia in 2005,
one off southern Australia and
two wells off northern Australia.
We will also drill two wells
onshore in Queensland and one
onshore in Victoria.
The discovery of oil and gas
at Hiu Aman in the Kutei Basin,
offshore East Kalimantan, has
provided a strong start to our
2005 exploration program and
we look forward with anticipation
to further work on that
significant find. Santos has a
50% interest in the discovery. We
believe this region of Indonesia
is very promising and Santos
expects to drill four wells in the
Kutei Basin in 2005.
BIGGEST DEVELOPMENT
YEAR YET
I am pleased also to report
that 2004 was a record year for
development with six projects
advancing through the pipeline.
The start-up of the Mutineer-
Exeter oil field is a significant
milestone in Santos' development
history. This project off the
Annual Report 2004
5
SAN165 WWW Text 30/3/05 12:06 PM Page 6
Managing Director’s Review continued
Western Australian coast, in
which Santos has a one-third
interest, is the first offshore oil
field development which we
operate and is also the first of
five more offshore production
projects due to commence over
the next 18 months, three of
which are operated by Santos.
Mutineer-Exeter appraisal
delivered a lower than expected
outcome in terms of reserves.
Conversely, at Bayu-Undan, where
the LNG project continues to
make steady progress towards
start-up in the first half of 2006,
Santos' fortunes went the other
way, as development drilling
upgraded Proven plus Probable
(2P) gas and liquids reserves
by 14 million boe.
The good news for the Mutineer-
Exeter project is that the field
has been developed under budget
and production is starting three
months ahead of schedule.
The achievements in developing
Mutineer-Exeter are world class
and provide further evidence
of the ability of Australian
companies to more than hold
their own on the global discovery
and development stage.
As projects like Minerva,
Mutineer-Exeter and Bayu-Undan
emerge from our development
pipeline, other projects enter
and continue to advance.
With contracts in place to supply
gas to customers in Western
Australia, we expect a mid-2005
start-up for the John Brookes
project in the offshore Carnarvon
Basin. Meanwhile, the Casino gas
field off the Victorian coast is
on schedule to produce first gas
in 2006, just four years after
its discovery.
6
Annual Report 2004
Several projects in Indonesia –
Maleo (gas) and Oyong (oil
and gas) – have entered the
development pipeline at a design
phase. These projects are now
joined by Jeruk which, subject
to further appraisal drilling and
commercial issues, has early
production potential.
Our Sole, Kipper and Golden
Beach gas assets in the Gippsland
Basin, where we recently
completed acquisitions to
increase our interests and become
operator of the strategic Orbost
processing plant, are also at the
early development stage.
In all, Santos has an impressive
and exciting development outlook
over the next few years.
PERFORMANCE AGAINST
TARGETS
In last year’s Annual Report,
I foreshadowed a series of
performance measures, together
with target levels for the 2004
to 2006 period. At the time, I
highlighted that it was unlikely
that all of the targets would be
achieved in any one year, and
needed to be measured over
the long run.
Our performance over 2004 is
summarised in the table below,
and while not all of the targets
were achieved, we are confident
PERFORMANCE AGAINST TARGETS
that we are on track to meet them
within the timeframe set out.
Production was down, as
expected, but was further reduced
by the effects of the Moomba
incident. However, as previously
stated, we expect this trend to
be reversed in 2005.
Reserve replacement has been
strong over the past three years,
averaging about 130%. While this
is below our long-term goal of
greater than 140%, it does not
include the recent Jeruk discovery
and is a solid result against the
industry average of less
than 100%.
Similarly, our reserve replacement
cost for 2004 is above our target
due mainly to the high level
of expenditure on major
development projects during the
year. On a three-year average
basis, which is more
representative of the nature
of the business, the result is
a reserve replacement cost of
US$7.19 – much more in line
with our target.
The netback achieved in 2004
was an improvement over 2003
and was on target due largely to
higher average product prices, but
also reflected the results of the
continuous improvement program.
All our financial measures
representing shareholder return
were favourable, being close to
targets which, given the difficult
start to the year, was an
exceptional result.
CONTINUOUS IMPROVEMENT
IMPORTANT
Our primary goal is to produce
higher returns for our shareholders
and, in our drive to do so, it is
important to identify ways in
which we might achieve more
efficient and cost-effective
outcomes.
As a result, an important initiative
has been the introduction of a
continuous improvement program.
The organisational restructure
implemented during 2004 yielded
dividends with savings recorded
in the past year of $38 million for
program outlays of $22 million.
These programs will continue to
contribute at even higher levels
going forward for even less cost.
A PART OF OUR COMMUNITY
Santos engages with many
stakeholders and we believe it
is important to have rewarding
relationships with the communities
to which we belong.
We sponsor a wide range
of educational, cultural and
community events and programs.
Long-term
target
2004
performance
Comments
Production growth
Reserve replacement ratio
6-8%
>140%
-13.1%
121%
Reserve replacement cost per boe
A$22
>10%
>10%
A$21
8.8%
9.4%
On target
Improving trend
Improving trend
SAN165 WWW Text 30/3/05 12:06 PM Page 7
These activities are designed to
acknowledge and return the
support we receive from these
communities.
It is our job to continue to
deliver on our strategy and, in
doing so, keep delivering on the
foresight of Santos' founders.
DELIVERING THE VISION
So, 50 years on, would the late
John Bonython be pleased at the
Company that Santos has become
– one of Australia's leading
energy suppliers that is an
offshore production operator,
building new businesses in places
like Indonesia, the US and Egypt,
while retaining firm roots in
Adelaide? I suspect he would.
Of course, this has to be achieved
safely and with a view to the
long term. In this regard, our
people continue to deliver: safety
performance improved again in
2004 and the publication of our
first Sustainability Review
demonstrates that we have
adopted sustainability as a
core value.
I am proud of their commitment
to Santos’ success and I thank
them for their efforts and
achievements during a year
of considerable challenges
and change.
John C Ellice-Flint
Managing Director
21 March 2005
Bayu-Undan drilling and
production platforms,
Timor Sea.
Annual Report 2004
7
SAN165 WWW Text 30/3/05 12:06 PM Page 8
THE WORLD OF SANTOS
United States
Egypt
West Natuna Basin
East Java
Deer Creek Montana
United States
South Texas, Texas/
Louisiana Gulf Coast
KEY TO MAPS
Exploration
Production
Oil field
Gas field
Oil pipeline
Gas pipeline
Houtman Basin
Duntroon Basin
Otway Basin
Sorell Basin
8
Annual Report 2004
SAN165 WWW Text 30/3/05 12:06 PM Page 9
Kutei Basin
West Papua & Papua New Guinea
Northern Australia
Carnarvon Basin
Egypt
Gulf of Suez
Joint Petroleum Development Area
Bayu-Undan, Elang-Kakatua
Kutei Basin
Timor Sea
Jabiru-Challis, Evans Shoal
West Natuna Basin
Kakap
Papua New Guinea
& West Papua
Hides, SE Gobe
East Java Basin
Maleo, Oyong, Wunut
Browse Basin
Bonaparte Basin
Petrel, Tern
Carnarvon Basin
Barrow Island, East Spar,
Legendre, Stag, Thevenard
Island, John Brookes,
Mutineer-Exeter
Amadeus Basin
Mereenie, Palm Valley, Brewer Estate
Houtman Basin
Duntroon Basin
Otway Basin
Casino, Minerva
Sorell Basin
Surat/Bowen Basins
Moonie, Roma, Scotia, Lytton
Cooper/Eromanga Basins
Ballera, Jackson, Moomba
Gippsland Basin
Patricia-Baleen, Sole, Kipper,
Golden Beach
Gippsland Basin
Surat/Bowen Basins
Cooper/Eromanga Basins
Amadeus Basin
Annual Report 2004
9
SAN165 WWW Text 30/3/05 12:06 PM Page 10
ANALYSING FINANCIAL PERFORMANCE
to effectively control its costs
in the face of significant external
pressures in the form of rising
services and materials prices.
Examining production costs in
detail reveals:
• the start-up of Bayu-Undan and
acquisitions added $16 million
to Santos’ cost base
• changes in our accounting
added a further $16 million
to Santos’ production costs
• higher insurance premiums
($8 million) and one-off stock
write-offs ($5 million) were
offset by $17 million in cost
savings largely as a result of
Santos’ continuous
improvement initiatives
• the Moomba incident resulted
in $17 million of one-off costs
in 2004.
Piecing this together, the key
themes in our financial
performance were:
• cost savings in established
production areas more than
offset increases in the price
of services and materials
• Santos’ cost base rose as
production from new
developments and acquisitions
were added to the Company’s
expanding portfolio of
producing assets.
2004 WAS A YEAR OF GOOD
OPERATING RESULTS
Overall the increase in 2004 profit
of 16% reflected a year of sound
operating performance. Sales
revenue was a record $1,501
million, up 2.5% on 2003,
reflecting higher prices across
most products and was achieved
despite lower production as a
result of the Moomba incident
and declining output from late
life fields.
Santos benefited from higher
world oil prices and realised
US$51.83 per boe in 2004, an
increase of 19% over 2003. The
benefit of higher world oil prices
substantially offset the impact
of lower production volumes.
Santos was also able to negotiate
higher domestic gas prices (up
4% on average) and deliver new
revenue streams from project
start-ups and acquisitions during
the year.
PRODUCTION HAMPERED BY
MOOMBA INCIDENT
2004 production was lower due
to the Moomba incident, which
reduced production by 4.6 million
PRODUCTION AND SALES REVENUE
boe. Field decline reduced
production by a further
5.0 million boe.
Offsetting these factors, Santos’
growth projects are starting to
come on line and have begun to
reverse the decline experienced
over the past three years. Two
projects were commissioned in
2004: the Bayu-Undan liquids
project and the Minerva gas
project. In addition, acquisitions
contributed 0.8 million boe to
production.
For 2005, production is expected
to improve by around 15%, or
4% excluding the impact of the
Moomba incident. Santos now
expects production to be around
54 million boe in 2005. This
increase is largely driven by the
commissioning of Mutineer-Exeter
in March 2005 and the John
Brookes gas field in the middle
of the year.
PRODUCTION COSTS
UNDER CONTROL
Production costs in 2004 were
$309 million, up $45 million or
17% on 2003. Analysis shows
that Santos was able to continue
2000
1500
1000
500
n
o
i
l
l
i
m
$
0
55.7
57.3
54.2
1,460
1,478
1,465
47.1
1,501
445
322
327
380
60
50
40
30
20
10
0
e
o
b
m
m
’01
’02
’03
’04
Revenue
Net profit after tax
Production
‘The sound operating results
achieved in 2004 underline
the changing face of Santos
towards a higher value, higher
margin business. We ended the
year with a strong financial
position and our financial
flexibility intact.’
PETER WASOW
Chief Financial Officer
10
Annual Report 2004
SAN165 WWW Text 30/3/05 12:06 PM Page 11
RECORD CAPITAL EXPENDITURE
Capital expenditure ended
right on target at $930 million –
a record year for Santos –
approaching a level which is
double DD&A, reflecting how
rapidly the portfolio is changing.
Santos will continue with a high
development expenditure in 2005,
but expects to spend more in line
with cash generation. Exploration
spend is estimated to be about
$150 million, while development
spend is expected to be reduced
to $530 million and delineation
to $90 million. Other capital
spending is expected to be
reduced to $80 million.
This results in a total planned
capital expenditure for 2005 of
approximately $850 million.
FINANCIAL FLEXIBILITY INTACT
Santos ended the year in a
strong financial position with its
financial flexibility intact, despite
the record development spending.
The FUELS issue was successful
and Santos’ gearing increased
only marginally, despite the large
capital program in 2004.
This is important in Santos’
business as the Company needs
to be able to fund exploration
success as it occurs, and our
development projects are
increasing in size.
OPERATING CASH FLOW AND CAPITAL EXPENDITURE
$million
897
930
821
761
717
660
750
605
1000
800
600
400
200
0
’01
’02
’03
’04
Operating cash flow
Capital expenditure
CASH FLOW LOWER
While Santos had a strong profit
year, this is not fully reflected in
cash flows.
There were large movements
in trade debtors between years,
reflecting the timing of liftings
and the payments for them.
In addition, Santos has not yet
been paid for the insurance claim
relating to the Moomba incident.
A total of $117 million was
recognised in sundry income,
which represents an estimate
of the amount receivable from
insurers for lost revenue,
additional costs and replacement
plant and equipment. At year end
the money was still owed and so
is not shown as part of operating
cash flow. The final quantification
of the claim with insurers is
progressing.
DEPRECIATION, DEPLETION AND
AMORTISATION
All things being equal, DD&A
could have been expected to
be lower this year, as Santos
produced lower volumes and had
written off the Heytesbury plant
in the onshore Otway Basin
last year.
However, two factors caused an
increase in 2004 DD&A. Firstly,
while reserve revisions were
positive overall, negative
revisions were predominantly in
producing areas which increased
depletion rates in 2004, while
positive reserve revisions were in
areas where Santos is not yet
producing or where straight line
depreciation is dominant; for
example, Casino and John
Brookes.
Secondly, on the future
development cost side, depletion
is up partly because Santos is
starting to factor in higher steel
and service company costs into
long-term economic models.
Annual Report 2004
11
SAN165 WWW Text 30/3/05 12:06 PM Page 12
Leveraging Base Business
HARNESSING VALUE FROM OPERATIONS
The Santos base business
comprises production from assets
in all of the Company's existing
producing fields.
Santos is countering decline from
mature fields with strategies such
as optimisation and trialling new
technologies to maximise output,
while running an exploration
program which aims to add new
projects and production.
At all times, ensuring the safety
of all operations and minimising
any environmental impacts
remains paramount.
2004 PRODUCTION IMPACTED
BY MOOMBA INCIDENT
Santos' total production in 2004
fell from 54.2 million boe in 2003
to 47.1 million boe, primarily due
to the effects of the 1 January
incident at Moomba that resulted
in a reduction of 4.6 million
boe, together with declining
performance from the East Spar
and Stag fields in the Carnarvon
Basin, offshore Western Australia.
Sales gas and ethane production
fell 14% during the year from
222.8 PJ to 190.5 PJ. Production
declined in the Cooper Basin and
gas production from the onshore
Otway Basin ceased with the
divestment of these interests.
However, gas production was
steady or increased in four of five
other areas of operation. This
illustrates the success of Santos'
continued efforts to diversify its
base business and to optimise
existing production.
Lower Cooper Basin gas
production was partly offset
by higher gas production from
eastern Queensland through
appraisal and development
success at Churchie, new interests
in Indonesia at Kakap and Brantas
and increased interests at
Patricia-Baleen. Amadeus Basin
gas production remained flat
as declining production was
countered by successful
development drilling during
the second half of 2004 at Palm
Valley and Mereenie.
Crude oil production was 13%
lower at 9.5 million barrels, down
from 10.9 million barrels in the
previous year as production
declined at Stag, Legendre and
Jabiru-Challis. Successful infill
drilling at Legendre and Stag
helped turn around declines for
these fields during the second
half of 2004. The program to
improve production at Stag will
continue into 2005 as simulation
studies suggest further drilling
and increased water injection
could improve future production.
Cooper Basin oil production
declined just 4% during 2004
due to successful delineation,
development and production
optimisation at several fields,
particularly Merrimelia, Derrilyn
and Mulberry. Amadeus Basin oil
production declines were made
less severe through successful
drilling at Mereenie.
Condensate production increased
by 20% from 3.1 million barrels
to 3.7 million barrels as Bayu-
Undan liquids production
commenced with better than
expected performance during
2004, offsetting the lower
condensate production from the
Cooper Basin due to the Moomba
incident and decline at East Spar
as the field approached the end
of its production life.
Condensate production from the
United States was also improved
by almost 0.1 million barrels
as successful development and
delineation wells on the deep
Frio trend contributed with
improved condensate content
during the year.
LPG production declined by
34% to 158,600 tonnes in 2004
from 240,700 tonnes in 2003,
due mainly to the effects
of the Moomba incident on the
production of liquids through the
liquids recovery plant. Production
from Bayu-Undan was able to
only partially offset this decrease.
APPLYING NEW TECHNOLOGIES
Reservoir studies have identified
that some lower permeability
reservoirs may have significant
potential to increase recoveries
through activities such as
additional infill drilling, fracture
stimulation and waterflooding.
Santos tested new technologies
in the Cooper Basin in drilling,
completions and artificial lift
optimisation during 2004 to
improve product delivery and
recovery in order to reduce
production costs per unit.
To this end, further reductions
in costs for 2005 are targeted
by increasing the focus on
fit for purpose rigs and larger
campaigns. These efforts will be
supported by a significant boost
in 3D seismic acquisition that
commenced at the end of 2003
and continues in 2005.
Coiled tubing underbalanced
drilling operations were performed
at three gas wells and one oil
well, while multiple pinpoint
fracture stimulations were
performed at five new gas wells,
with between three and six fracs
performed in each well.
These introductory programs
are providing encouraging initial
results. The underbalanced drilling
12
Annual Report 2004
program achieved better than
predicted rate improvements
for all three gas wells.
These programs will now be
extended to a variety of more
complex and possibly harsher
oil and gas wellbore/reservoir
environments during 2005.
Santos increased gas well
deliverability in the Cooper
Basin by 63 TJ per day through
numerous projects brought on
line during 2004. Some 8 PJ
of incremental gas production
resulted during 2004 from this
optimisation program. These
results were achieved at a
significantly lower cost than
conventional development drilling
and substantially exceeded
targets set at the beginning
of the year.
While the Cooper Basin
is a mature hydrocarbon area,
Santos is drilling wells which can
be commercialised quickly and
cost-effectively, delivering strong
cash flow which can be applied
to other growth opportunities.
A further focus in 2004 was
to leverage Cooper Basin
infrastructure; for example, via
gas swaps, and increase prices
under existing agreements.
An increased Gas Sales Agreement
was reached with CS Energy which
resulted in an additional seven
wells being drilled at the Scotia
coal seam methane gas field in
eastern Queensland.
SAN165 WWW Text 30/3/05 12:06 PM Page 13
‘The response of our people
to the Moomba incident and
rebuild was truly outstanding.
With this behind us, we are
now focused on continuing to
extract value from our legacy
assets while preparing to bring
our new growth projects, such
as Mutineer-Exeter, Oyong and
Casino, into production.’
JON YOUNG
Executive Vice President
Operations
Stewart Duncan, Environmental
Adviser, and Melanie Brown,
Lead Specialist Drilling
Engineer, inspecting coiled
tubing underbalanced drilling
operations, Cooper Basin,
central Australia.
Annual Report 2004
13
SAN165 WWW Text 30/3/05 12:06 PM Page 14
PRODUCTION STATISTICS
Total 2004
Total 2003
Total 2004
Total 2003
Field units
mmboe
Field units
mmboe
Field units
mmboe
Field units
mmboe
Sales gas and ethane (PJ)
Condensate (‘000 bbls)
125.9
21.6
154.0
26.5
Cooper
1,448.5
1.4
2,111.8
–
–
0.7
0.1
1.2
3.4
3.3
0.9
–
0.4
1.3
1.3
Surat/Denison
Otway
East Spar
United States
Bayu-Undan
Total production
Total sales volume
7.8
30.6
775.5
114.4
1,334.9
3,711.7
3,569.5
Total sales revenue ($million) 228.5
LPG (‘000 t)
Cooper
Surat/Denison
Bayu-Undan
Total production
Total sales volume
108.7
0.1
49.8
158.6
148.6
Total sales revenue ($million)
90.5
Total
Production (mmboe)
Sales volume (mmboe)
47.1
49.9
2.0
–
0.1
0.8
–
–
2.9
3.0
10.9
73.5
858.3
25.6
–
3,080.1
3,246.6
150.0
240.7
2.0
–
–
2.0
2.2
–
–
240.7
256.7
116.5
54.2
55.4
Sales revenue ($million)
1,500.9
1,465.0
Cooper
Surat/Denison
Amadeus
Otway
Patricia-Baleen
Carnarvon
United States
Indonesia
16.1
11.3
4.4
3.8
17.7
9.2
2.1
2.8
1.9
0.8
0.7
3.0
1.6
0.4
Total production
Total sales volume
190.5
207.1
32.8
35.6
Total sales revenue ($million) 680.1
Crude oil (‘000 bbls)
Cooper
Surat/Denison
Amadeus
Elang-Kakatua
Legendre
Thevenard
Barrow
Jabiru-Challis
Stag
SE Gobe
United States
Indonesia
Total production
Total sales volume
2,685.5
90.2
236.5
226.7
2,045.8
561.2
859.3
176.7
2,124.8
289.1
171.7
68.0
9,535.5
9,681.0
2.7
0.1
0.2
0.2
2.0
0.6
0.9
0.2
2.1
0.3
0.2
0.1
14.3
11.7
11.9
1.9
17.7
11.3
–
222.8
228.4
720.8
2,808.2
83.1
270.0
425.5
2,269.0
708.0
945.2
257.1
2,617.2
376.5
212.2
–
2.5
2.0
2.0
0.3
3.1
1.9
–
38.3
39.3
2.8
0.1
0.3
0.4
2.3
0.7
0.9
0.3
2.6
0.4
0.2
–
9.6
10,972.0
9.7
10,958.6
11.0
10.9
Total sales revenue ($million) 501.8
477.7
14
Annual Report 2004
SAN165 WWW Text 30/3/05 12:07 PM Page 15
Creating Opportunities
DELIVERING ON THE EXPLORATION STRATEGY
Exploration is a key growth driver
for Santos and success with the
drill bit is vital to adding value
for Santos shareholders. During
the past four years Santos has
been working to build exploration
opportunities by:
• acquiring new
exploration acreage
• adding material
exploration prospects
• drilling wildcat
exploration wells.
SUCCESS RATE OF 44% IN 2004
Santos’ 2004 exploration effort
produced good results, as the
Company high graded its
exploration acreage and started
drilling one of the most exciting
portfolios in the industry.
Santos discovered hydrocarbons
in seven of the sixteen wildcat
wells that were drilled, achieving
an impressive success rate
of 44%.
The program added at least
93 million boe (including the
pre-drill estimate for Jeruk) of
recoverable resources that will be
further evaluated by delineation
and, in some cases, production
history to determine 1P and 2P
reserve additions.
Importantly, these results were
achieved with financial discipline,
spending $126 million which was
substantially less than forecast.
The most significant drilling
result for the year was the Jeruk
oil discovery in the Sampang PSC
offshore East Java, Indonesia.
The Jeruk discovery is still under
evaluation but its commercial
significance appears encouraging.
Santos has confirmed an oil
column of at least 379 metres
with a likely gross recoverable
resource in excess of the pre-drill
estimate of 170 million barrels.
Santos also had further
exploration successes in the
Cooper Basin in central Australia
where four of six wildcat wells
were cased and suspended as
gas discoveries.
There was also success in the
offshore Otway Basin with the
Martha gas discovery near the
Casino field, which is currently
being evaluated to determine
its commercial significance.
Additional drilling is planned to
occur nearby in 2005 to follow
up this encouraging result.
Santos discovered gas in the
United States at the Torres 1A
onshore well, which was brought
onto production only two months
after drilling was completed.
Other wells in the offshore Otway
Basin included the deep water
Amrit 1 well, which was plugged
and abandoned after failing to
intersect economic hydrocarbons,
and Callister 1 which was also
plugged and abandoned with
gas shows.
‘2004 was a great year for our
explorers. We started drilling
one of the most exciting
portfolios in our industry and
our success to date shows that
our strategy of basin excellence
is delivering.’
JACQUES GOUADAIN
Vice President
Geoscience and New Ventures
Float-off of Jack Bates rig
prior to deep water drilling
operations, offshore Otway
Basin, Victoria.
Annual Report 2004
15
2004 EXPLORATION
EXPENDITURE BY CATEGORY
2004 EXPLORATION
EXPENDITURE BY REGION
Drilling
$63.6 million
Geoscience and other
$37.5 million
Seismic
$17.2 million
New ventures
$7.3 million
Offshore Australia
$32.6 million
Onshore Australia
$23.4 million
South East Asia
$41.4 million
United States
$28.2 million
An example of this is the strong
position Santos has created in
the Kutei Basin, with interests in
three neighbouring production
sharing contracts: Popodi,
Donggala and Papalang.
2004 also marked the year that
Santos drilled its first operated
deep water wells – a significant
achievement for a company that
had its beginnings in a desert
environment.
KUTEI BASIN
SAN165 WWW Text 30/3/05 12:07 PM Page 16
ACQUIRING NEW ACREAGE
Future exploration success depends
on quality exploration acreage.
Santos acquired five exploration
blocks in three hydrocarbon
provinces during 2004. The most
significant of these were in Egypt
and Indonesia.
Egypt and surrounding countries
are a focus area for Santos. The
Company has farmed in to three
exploration blocks in Egypt with
US petroleum group, Devon
Energy, committing approximately
$70 million to an eight-well
exploration joint venture over
the next three years in the Gulf
of Suez. This is Santos’ first move
into the North Africa–Middle East
region, which is considered the
world’s premier hydrocarbon
province.
Santos continues to seek other
exploration opportunities in this
area, concentrating on the Gulf
of Suez and the onshore Desert
Basins.
Santos has acquired six
exploration permits in Indonesia
over the past three years,
including an interest in the
Donggala PSC in the Kutei Basin
during late 2004. This block lies
between Santos’ other Kutei
acreage: the Papalang and
Popodi PSCs.
The addition of the Donggala PSC
gives Santos a particularly strong
presence in the Kutei Basin and
covers a highly prospective trend,
while adding to the Company’s
growing Indonesian operations.
Other exploration acreage
portfolio management and
activities during 2004 included:
• the award of exploration permit
T/36P in the Sorell Basin,
offshore Tasmania
16
Annual Report 2004
• the addition of three new
venture areas in the shallow
waters of the Gulf of Mexico
and onshore Montana and
Texas, which significantly
expands and diversifies the
US exploration acreage and
prospect inventory
• the farm-out of a 16.67%
interest in the WA-264-P
permit offshore Western
Australia to Beach Petroleum
• the farm-out of a 60% interest
and operatorship of the NT/P61
permit in the Bonaparte Basin,
offshore northern Australia to
ConocoPhillips
• the farm-out of a 70% interest
in the deep water exploration
block, Nth Bali 1 PSC, offshore
East Java Basin to Total
and Mitsui
• the farm-out of a 25%
interest in the VIC P/51
block containing the Callister
prospect to Mitsui & Co
subsidiary Mitwell Energy
Resources.
These farm-outs continued the
trend of risk-sharing with quality
partners.
ADDING MATERIAL PROSPECTS
Santos is now in a position that
exploration success in 2004 and
good acreage management has
created future options that will
ultimately translate into greater
value for the business in 2005
and beyond.
This has been achieved by
focusing on ‘basin excellence’.
This means becoming a technical
leader in basins, within our focus
areas, entering early where
possible to keep entry costs
down, balancing the commercial
and the technical risks and
selecting the right co-venturers.
SAN165 WWW Text 30/3/05 12:07 PM Page 17
HIGH IMPACT DRILLING
IN 2005
The 2005 exploration program
has the highest resource potential
of any program undertaken
at Santos.
Santos is planning a large, high
impact drilling campaign that is
already well underway.
Santos plans to drill 25 wells and
will invest $150 million testing
prospects within its expanding
domestic and international
exploration portfolio – up 19%
from the $126 million spent on
exploration in 2004.
Oil is the main focus of the
2005 program with most activity
in the Kutei and East Java Basins
offshore Indonesia, the Gulf of
Suez in Egypt, the Bonaparte
Basin in the Timor Sea and the
Carnarvon Basin offshore
Western Australia.
exploration portfolio. A
multi-well drilling program
will be undertaken in Santos’
Kutei Basin PSCs during 2005.
Another gas discovery has
been made at Hurricane 1 in
the Carnarvon Basin, offshore
Western Australia. While both
wells were discoveries, they
require further evaluation to
determine their commercial
significance.
The 2005 program reflects
the increasing materiality of
Santos’ exploration portfolio
and continues the emphasis on
more globally-focused exploration
as an important part of the
Company’s growth strategy.
Santos has already had drilling
success early in 2005 with the
Hiu Aman 1 well – the first to be
drilled by Santos in the Donggala
PSC. Hiu Aman 1 has indicated
the presence of a prolific
hydrocarbon system in this area.
The discovery should add other
lower risk prospects to Santos’
2005 WILDCAT EXPLORATION PROGRAM
Kutei Basin
Hiu Aman, Raksasa, Orca, Pangkal
Gulf of Mexico
Cougar, Thunder
Gulf of Suez
RAD 1, NZB A, NZB B,
NZB C,Khufu, Pawnee
East Java Basin
Agung, Herbras,
Banjar Panji
Bonaparte Basin
Caldita, Phoenix
Gas
Oil
WA Basins
Hurricane, Little Joe, Brick
Landing
Otway Basin
Pecten East, Lindsay
Denison Trough
Greenmount, Yamala
Annual Report 2004
17
SAN165 WWW Text 30/3/05 12:07 PM Page 18
Capturing and Delivering Growth
COMMISSIONING AND DELIVERING
GROWTH PROJECTS
The diversification of Santos
is evident in the creation of a
number of new higher margin
producing assets such as the
Bayu-Undan liquids project
offshore northern Australia, the
Casino gas field offshore southern
Australia, and the Mutineer-Exeter
oil and John Brookes gas fields
offshore Western Australia.
Outside Australia, Santos has also
built a core business in Indonesia
through new field developments
such as Oyong and Maleo. Santos
is further reinforcing its
capabilities to implement high
value offshore development
projects through an improved
drilling capability (including
deepwater and high pressure
reservoirs) and functional
leadership in the areas of
reservoir and production
engineering.
BAYU-UNDAN AND MINERVA
COMMISSIONED
There has been considerable
progress on all of these projects
during 2004 with two projects
being commissioned: Bayu-Undan
liquids and Minerva gas.
Bayu-Undan started liquids
production in April 2004 and
was ramped up during the year
to meet an increased design
throughput of 1.1 billion cubic
feet per day of raw gas. This
resulted in liquids production of
more than 100,000 barrels per
day. This excellent performance
generated production for the year
of 19 million barrels – 22% above
expectations.
The liquids project involves
extracting and processing wet gas
to remove condensate, propane
and butane (liquids) before re-
injecting dry gas back into the
reservoir for later use as part
of the future LNG stage of
the project.
The liquids are loaded onto a
Floating Storage and Offloading
facility. Santos has a 10.6%
interest and is the only
Australian-owned company
involved in the project, which
was recently rated as one of the
top 100 projects to change the
world by Goldman Sachs JBWere.
The other project that
commenced production during
the year was the Minerva gas
field in the Otway Basin offshore
Victoria which started up
in December.
While Santos' share of production
is only 10%, the project has
greater significance for Santos
because it has enabled the
commencement of direct-to-
customer marketing through
Santos Direct.
MUTINEER-EXETER
COMMISSIONING
Another important project for
Santos is the Mutineer-Exeter
oil fields development.
Despite disappointments
regarding the size of reserves
during development and appraisal
drilling, the construction and
connection of the fields
proceeded at a rapid pace with
the project 89% complete by
year end.
The conversion of the state-of-
the-art Floating Production
Storage and Offloading facility
was completed at the Jurong
shipyard in Singapore in
December 2004 with no lost time
safety incidents despite a massive
workforce completing over two
million work hours.
Named the MODEC Venture 11,
the vessel left Singapore in early
2005 to take up anchorage in the
Carnarvon Basin off the Western
Australian coast. First oil
production from Mutineer-Exeter
is starting about three months
ahead of schedule.
Four high-tech horizontal wells
have been drilled and completed,
which are expected to provide
initial peak plateau oil production
of 70,000 to 90,000 barrels per
day. The wells are fitted with dual
electric submersible pumps and
are supported further by seabed
flow boost pumps to maintain
high well rates throughout
field life.
Santos, with the assistance
of external experts and other
members of the joint venture,
assessed the risk of reserve
uncertainty against the
incremental value to be created
by a fast-track development and
decided to proceed with the
development, which was designed
to provide substantial flexibility
to cope with a wide range of
production rate and reserve
outcomes.
The project will come on stream
earlier than expected, delivering
strong cash flow in this high oil
price environment. Coupled with
this, the project will cost at least
10% less than budget.
CASINO AND JOHN BROOKES
SANCTIONED
While two projects came into
production, Santos added two
more to the development
conveyor with the sanctioning of
the Casino and John Brookes gas
projects during the year.
Casino was formally sanctioned
in October and was 25% complete
18
Annual Report 2004
‘2004 was the year that
we really got the conveyor
belt moving in terms of
development projects. In 2005
we’ll hand over to Operations
our first offshore operated
project, Mutineer-Exeter, ahead
of schedule and under budget,
and we’ll continue to progress
several other new offshore
developments, targeted to be
on stream during 2005-06.’
PAUL MOORE
Vice President
Development Projects
and Technical Services
by the end of the year. This
is a significant achievement
considering the field was only
discovered in late 2002.
The $200 million development
commenced following the
granting of the necessary Board
approvals as well as the
finalisation of a larger Gas Sales
Agreement with TXU. Gas
production is expected to start
in the first quarter of 2006.
All formal environmental
approvals have now been
granted for the project by the
Commonwealth Government. The
use of existing onshore facilities
and a low environmental impact
design have been integral to
SAN165 WWW Text 30/3/05 12:07 PM Page 19
allowing the development to
progress rapidly.
Another important milestone
was achieved in December with
the completion of the 'Christmas
tree' subsea wellheads which
will be installed on the Casino
development wells. These wells
are scheduled to be drilled during
the first half of 2005.
The John Brookes gas project has
also progressed rapidly since it
was sanctioned early in 2004 and
is approximately 50% complete.
This project is scheduled to come
into production in mid-2005 to
meet declining production from
East Spar and to create additional
marketing opportunities, some
of which have since been realised
(see page 20).
The platform jacket, constructed
at Batam Island in Indonesia,
is expected to be installed off
Dampier, Western Australia,
during April 2005. Development
drilling is scheduled for the
second quarter of 2005 and the
onshore gas processing plant
modifications at Varanus Island
have commenced.
PROGRESS CONTINUES
ELSEWHERE OFFSHORE
Three other projects, two outside
Australia, made significant
progress during the year.
The development plan for the
Oyong oil and gas field, offshore
East Java, Indonesia, was revised
to target early oil production.
Negotiations are proceeding to
secure a production barge for oil
production to commence during
the last quarter of 2005, ahead
of later gas production, subject
to credit security and Indonesian
Government approvals.
The Maleo gas field development,
also offshore East Java, remains
on track for a first half 2006
production start-up. The project
is on the cusp of formal sanction,
with outstanding matters being
execution of gas sales and gas
transportation agreements.
The second stage of the Bayu-
Undan project in the Timor Sea –
the US$1.5 billion LNG project –
also made good progress during
the year. The pipeline connecting
the offshore field to the LNG
plant being constructed at
DEVELOPMENT CONVEYOR at 31 December 2004
Percent complete
Bayu-Undan
Liquids 100%
100
90
80
70
60
50
40
30
20
10
0
Minerva 100%
Bayu-Undan LNG Pipeline 82%
Mutineer-Exeter 89%
Bayu-Undan LNG 67%
John Brookes 44%
Casino 25%
Oyong, Maleo, Jeruk, Sole, Kipper, Golden Beach
Project Lifecycle
Jeruk and Santos’ surrounding
interests was initiated in late
2004. In addition, a focused
multi-disciplinary team has been
assembled to assess all
development options, including
the potential for early production.
Santos' development conveyor
is functioning well, with the
number of significant projects
in the pre-development and
development stages at a
record level.
Wickham Point, Darwin, has been
laid in readiness for a planned
shutdown around May 2005 to
enable the tie-in of the offshore
facility.
Onshore progress has been steady
with the total LNG project 67%
complete at year end and on
target for first LNG production to
commence in the first half of
2006, ramping up to more than
3 million tonnes per year by 2009.
Following the discovery of oil at
Jeruk, Santos is moving rapidly to
evaluate the significance of the
field and development options. To
this end, a 3D seismic survey over
MODEC Venture II Floating
Production, Storage and Offloading
vessel, en route to Mutineer-
Exeter oil fields, Carnarvon Basin,
offshore Western Australia.
Annual Report 2004
19
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ACHIEVING INNOVATIVE COMMERCIALISATION
On top of exploration and new
ventures growth opportunities,
Santos has a large inventory of
gas fields that are yet to be
committed to gas contracts.
These fields, known as contingent
resources, represent significant
opportunities for Santos.
Each year Santos works towards
commercialising these fields by
finding new gas contracts or
extending existing contracts
so that they can be booked as
Proven (1P) or Proven plus
Probable (2P) reserves.
Santos’ contingent gas resources
are largely located offshore
southern Australia and Western
Australia, in the Bonaparte Basin
offshore northern Australia and
onshore Papua New Guinea.
Santos continued to deliver on
gas commercialisation during
2004, commercialising 27 million
boe during the year. Santos also
achieved positive contract price
reviews for gas sales that were
well above the indexed levels.
UNIQUE ENERGY HUBS DELIVER
GAS SWAPS
Some of the most important gas
commercialisation achievements
for the year were the innovative
gas swaps agreements that were
only possible because of Santos’
unique spread of assets across key
Australian gas hubs.
Santos and the other South
West Queensland Gas Producers
announced a coal seam methane
gas swap in May to allow each
party to supply the other party’s
contractual obligations in
different states via the Moomba
gas hub in central Australia. This
arrangement for 200 PJ meant
that Origin could avoid building
a pipeline and that Santos could
capture a share of the saving.
20
Annual Report 2004
Gas swapping will commence in
2005 and could continue until the
end of 2011.
A second gas swap, from eastern
Queensland to Gippsland, moved
gas through three states and five
joint ventures, expanding market
horizons for partners and
providing backup options
to customers.
EXPANDED CASINO CONTRACT
ENHANCES VALUE
The commercialisation of the
Casino gas field in the Otway
Basin, offshore southern Australia,
continued during 2004 with an
increase in the quantity of gas
being sold under the initial term
sheet signed in September 2003
with TXU for 293 PJ.
When the project was sanctioned
in October 2004, the joint venture
announced an extension to the
original Gas Sales Agreement to
supply up to 420 PJ of gas, and
possibly another 105 PJ, over 12
years for the Victorian or South
Australian markets.
The Casino contracts are unique
in that the reserves have been
contracted prior to the field being
fully appraised to confirm the
quantity of gas available. This
has allowed the joint venture
to undertake appraisal drilling
and near field exploration
programs with the knowledge
that all of the gas likely to be
discovered will be taken, thereby
significantly reducing the risk.
This shortens the time from
discovery to production and
delivers profits to Santos and
its shareholders sooner.
WA CONTRACTS FAST-TRACK
JOHN BROOKES
Santos and its co-venturer
Apache won two significant gas
contracts in Western Australia
ENERGY HUB STRATEGY
Wickham Point LNG Hub
Varanus/Barrow Island Hub
Wallumbilla/Scotia Hub
Moomba/Ballera Hub
Minerva/Casino Tiebacks
Orbost Hub
Pipeline
which resulted in the fast
tracking and sanctioning of the
John Brookes gas field in the
Carnarvon Basin.
The successful appraisal of the
field in late 2003 and early 2004
significantly increased the
available gas reserves. The
decision to bring the field into
production by mid-2005 enabled
active marketing of gas above
that already allocated to support
the declining East Spar field.
In a separate move, designed to
enhance future commercialisation
opportunities, the joint venture
equity interests in the East Spar
and the John Brookes fields were
aligned through an acquisition
program which created an
important production hub
at Varanus Island.
John Brookes has an expected
field life of more than 15 years
which could be further extended
by a development of the Reindeer
field in later years.
In the first contract, the joint
venture agreed to supply
Newcrest Mining with 120 PJ of
gas over 15 years at a maximum
rate of 25 TJ per day. Newcrest
will use the gas for power
generation at the Telfer gold
mine in the Pilbara region of
Western Australia.
The second John Brookes contract
is to supply 58 PJ of gas over 20
years to EDL to supply four gas-
fired powered stations under
construction as part of its West
Kimberly Power project in Western
Australia.
The gas will be converted to LNG
at a new facility to be built at
Karratha. The LNG will then be
transported by road tankers to
fuel the gas-fired power stations
in Broome, Derby, Fitzroy Crossing
and Halls Creek. The contract will
commence in the first half
of 2006.
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MALEO NEGOTIATIONS
ADVANCED
Outside Australia, Santos and
its co-venturers have executed
a Heads of Agreement for the
sale of the entire gas reserves
of the Maleo field offshore East
Java, Indonesia. Santos continued
negotiations with PT Perusahaan
Gas Negara, Indonesia’s state-
owned gas distributor, on behalf
of the joint venture to finalise
the Gas Sales Agreement. The
project is targeting first
production in the first half of
2006 at rates of up to 100
mmcf/d for more than five years.
FIRST RETAIL GAS SALES WITH
SANTOS DIRECT
As well as selling gas into the
wholesale gas market, Santos
secured a retail gas licence from
the Victorian Government in
2004. This allows Santos to sell
gas direct to industrial customers
and into the Victorian spot
market through a wholly-owned
subsidiary, Santos Direct Pty Ltd
(‘Santos Direct’).
Santos Direct will market Santos’
10% share of gas production from
the Minerva field – around 15
TJ/d – in the offshore Otway
Basin, which commenced
production at the end of 2004.
The move to market and sell gas
directly into the Victorian retail
market is a first for Santos and
leverages off Santos’ position as
one of Australia’s largest gas
producers, supplying wholesale
gas to major industrial customers
and specialist marketers in all
mainland Australian states and
territories.
LIQUIDS MARKETING
ALLIANCE WITH BP
Another important marketing
development during the year was
the decision to outsource the
marketing of crude oil and natural
gas liquids to BP. The new
marketing arrangements are in
response to the significantly
higher volumes of crude oil
that Santos will receive from
the Mutineer-Exeter and Oyong
projects, coming on stream
in 2005, and the increasing
globalisation of the liquids
marketplace.
The validity of this approach has
already been demonstrated by the
sale of the first Mutineer-Exeter
oil cargo at a premium to Tapis
despite a discount for the
uncertain delivery date.
Santos continues to build
an inventory of high quality
options to provide a platform
for production growth over
the coming years. Santos is
committed to a program of
diversification while capitalising
on the long-term Cooper Basin
legacy asset. Most importantly,
this involves leveraging
the strengths of the core
competencies built up over
a number of years and Santos'
well-positioned domestic
gas franchise.
‘During 2004 we brought
together everyone at Santos
responsible for commercialisation
into a single team. One of the
outcomes from this was the
introduction of gas swaps,
where we were able to move
gas between Santos assets in
different states.’
RICK WILKINSON
Vice President
Gas Marketing
and Commercialisation
The alignment of joint venture
interests in the John Brookes and
East Spar fields has created an
important production hub at
Varanus Island, Carnarvon Basin,
offshore Western Australia.
Annual Report 2004
21
SAN165 WWW Text 30/3/05 12:07 PM Page 22
Managing Options
UNLOCKING THE VALUE OF STRATEGIC ASSETS
2004 CONTINGENT RESOURCES
(TOTAL 1,443 mmboe)
Northern Australia
709 mmboe
Western Australia
71 mmboe
Central Australia
240 mmboe
Southern Australia
32 mmboe
Papua New Guinea
391 mmboe
working up a range of possible
evaluation projects to be
undertaken in 2005.
NORTHERN AUSTRALIA GAS
Santos has a significant existing
gas resource base and some
promising exploration acreage
in the waters offshore Darwin,
where it intends to drill a gas
exploration well later this year.
The Company currently operates
the Mereenie gas field in the
Amadeus Basin in central
Australia, which supplies gas to
Darwin. Santos’ first offshore gas
production in northern Australia
begins in 2006, sending Bayu-
Undan gas to Darwin for
conversion to LNG. Santos plans
to build upon its growing
position in the region to target
further development which could
ensure long-term gas supplies
for the current market, or an
expanded Northern Territory
domestic market, or for export.
PAPUA NEW GUINEA GAS
Santos is in active discussions
with the PNG Gas Project
participants to potentially
re-enter the PNG Gas Project.
Santos has a significant interest
in a large part of the liquids-rich
Hides gas field which is integral
to the development of
the Project.
Santos’ Strategic Projects team
focuses on assets that have
proven difficult to commercialise
or that need to be considered
in a regional context rather than
on an individual basis.
The other key activity for this
team has been to lead Santos’
continuous improvement focus.
UNITED STATES GAS
The US gas business was a major
focus in 2004 for a number of
reasons, not the least of which
are the higher gas prices in the
US compared with the domestic
Australian market, and the ability
to rapidly commercialise new
discoveries.
An ongoing development and
delineation program was carried
out during the year, yielding
better than planned production.
The exploration initiative also
continued to seek higher risk
but more material prospects,
aimed at enhancing the move
into the shallow water area of
the Gulf of Mexico. Exploration
results in this area during 2005
will shape Santos’ future strategy
in the US.
TIGHT GAS
Hydrocarbons contained in traps
with poor permeability are known
as ‘tight gas’. Large tight gas
resources are known to exist in
the Cooper Basin. Under current
circumstances, this gas cannot
be economically developed but,
with the combination of improved
production techniques and better
commercial terms, could prove
attractive.
Santos assessed the resources
and potential technologies that
could be applied to unlock these
resources during 2004 and is now
‘Our objective is to derive value
from undeveloped assets which
have been outside of Santos’
base business.’
BRUCE WOOD
Vice President
Strategic Projects
22
Annual Report 2004
SAN165 WWW Text 30/3/05 12:07 PM Page 23
ENHANCING THE PORTFOLIO
The acquisition of these Victorian
gas interests strengthens Santos’
domestic gas and infrastructure
strategy that was further
enhanced by the OMV purchase
announced early in 2005.
Importantly, Santos is now the
operator of the strategic Orbost
gas processing facility.
Late in the year, Santos sold its
18.02% share in the Carpentaria
Gas Pipeline between Ballera
and Mount Isa in Queensland
to Australian Pipeline Trust for
$59 million, resulting in a
$21 million after-tax profit
that was booked in the 2004
financial year.
BRANTAS PSC
In 2004, Santos continued its
normal business of actively
managing its portfolio through
the divestment of non-core assets
and the acquisition of assets that
fit well with existing Santos
assets or can add to the ability
of the Company to meet its
strategic goals.
As a result of this activity,
Santos realised an after-tax profit
of $47.4 million on oil and gas
asset sales and will continue to
high-grade its portfolio on an
ongoing basis.
Santos entered into an agreement
with PT Medco during the first
half of 2004 to acquire some of
Novus Petroleum’s Indonesian and
Cooper Basin assets conditional
on the success of PT Medco’s
takeover offer for Novus, which
was ultimately successful.
Specifically, Santos announced
in September 2004 that it had
executed formal agreements to
acquire an additional 4.75% of
the South Australian Cooper
Basin, 18% of the Brantas PSC
and 9% of the Kakap PSC from
Medco for US$110 million. On
31 December 2004, Santos paid
Medco US$98 million for the
majority of the assets, with
payment for the remaining 2.75%
of Kakap PSC expected to be
made in the first quarter of 2005.
This acquisition was an important
piece in the strategic puzzle to
tie up access to follow-up
potential from the successful
exploration at Jeruk and to
provide a production base for
the newly established Indonesian
core area.
Also during the first half of 2004,
Santos divested its remaining
18.4% shareholding in Magellan
Petroleum Australia Ltd, raising
approximately $10.6 million.
Early in the second half of 2004,
Santos concluded the sale of its
non-core onshore Otway Basin
interests to Origin Energy for
$25.75 million. This sale
resulted in an after-tax profit
of $18 million that was booked
in 2004.
In addition, an exploration
joint venture was formed with
ConocoPhillips in the NT/P61
block offshore Darwin, Northern
Territory, to drill the Caldita well
and provide Santos with access
rights to a potential expansion of
the Wickham Point LNG facility.
This deal further enhances Santos’
infrastructure strategy to leverage
its position within vital
infrastructure to improve
shareholder value while reducing
the risk profile of the wildcat
exploration program.
During the third quarter, Santos
expanded its offshore Victorian
gas interests to 50% in both the
Patricia-Baleen and the Sole gas
fields through the acquisition
from Trinity Gas Resources of an
additional 30% interest in the
Patricia-Baleen gas field and
associated processing facilities in
eastern Victoria and an additional
15% interest in the Sole gas field.
Santos earned its 30% additional
equity in the Patricia-Baleen gas
field by meeting Trinity’s
remaining share of drilling costs
on the Baleen 4 well which was
drilled successfully as a sidetrack
well of Baleen 3. Santos will earn
its 15% additional equity in the
Sole gas field by meeting certain
development costs on behalf of
Trinity, if and when the Sole joint
venture partners proceed to
develop this gas resource.
Annual Report 2004
23
SAN165 WWW Text 30/3/05 12:07 PM Page 24
REPLENISHING AND UPGRADING RESERVES
reserves and 134 million boe of
2P reserves being moved from
undeveloped to developed,
significantly increasing the value
of reserves.
• Maleo – sufficient progress
with commercialisation resulted
in the booking of 19 million
boe of 1P and 27 million boe
of 2P reserves.
The shift in Santos’ focus since
2001 is evidenced by the
reduction in onshore reserves and
the corresponding increase in
offshore reserves over time, as
shown in the charts below. This
trend can be expected to
continue as the central Australian
fields mature and new projects
move through the development
conveyor.
• Acquisitions and divestments –
a net increase in 1P reserves of
12 million boe and 2P reserves
of 22 million boe from the
acquisition of certain Novus
Petroleum assets and an
increase in Patricia-Baleen
equity, with negligible
movement due to divestments.
OFFSHORE 1P AND 2P RESERVES
mmboe - nett
ONSHORE 1P AND 2P RESERVES
mmboe - nett
600
500
400
300
200
100
0
327
303
258
222
503
474
333
316
600
500
400
300
200
100
0
’01
’02
’03
’04
’01
’02
’03
’04
Probable
Proven
Probable
Proven
Santos added 57 million boe of
Proven (1P) reserves which
represents 121% of 2004
production.
Proven reserves at the end of the
year, after 47.1 million boe of
production and after divestments,
were 348 million boe, compared
with 338 million boe at the end
of 2003.
The replacement of Proven
reserves exceeded Santos’ total
group production for the third
year in a row, with the
replacement rate for Proven
reserves averaging 130% over the
past three years: a good result
and in line with international
best practice.
Proven plus Probable (2P)
reserves increased by 54 million
boe prior to production, or by 7
million boe after production
which represents a reserves
replacement rate of 114%.
The 2004 reserves figures do not
include any potential reserve
bookings for the Jeruk oil
discovery in the Sampang PSC in
East Java or the Hiu Aman oil and
gas discovery in the Donggala PSC
in the Kutei Basin, offshore East
Kalimantan.
The average Proven reserve
replacement cost for 2004 was
US$12.37 per boe. Replacement
costs in any one year are affected
by the timing of spending and
reserve bookings, so a three-year
average is a more reliable
indicator of costs. Santos’ three-
year average replacement cost of
US$7.19 per boe is world-
competitive.
2004 was also a significant year
in terms of development, with
some 102 million boe of 1P
24
Annual Report 2004
The material movements in
reserves during the year were as
follows:
• Onshore Australia – revisions
due to positive reservoir
performance and development
results in onshore Australia
added 18.5 million boe of
1P reserves.
• Cooper Basin – poorer than
expected performance in some
tight gas fields and the
integration of results from
some previously unsuccessful
fracture stimulations resulted
in a 2P reserve reduction of 16
million boe.
• Bayu-Undan – excellent results
from development drilling
program in the Bayu-Undan
field added 7 million boe of
1P and 14 million boe of 2P
reserves.
• Mutineer-Exeter – a
disappointing appraisal and
development drilling campaign
resulted in downgrades in 1P
reserves of 10 million boe and
2P reserves of 13 million boe.
• John Brookes – integration of
the late 2003 drilling results in
the John Brookes gas field,
along with detailed reservoir
modelling, resulted in a
significant positive revision of
15 million boe of 1P and 32
million boe of 2P reserves.
• East Spar – disappointing
production performance
resulted in downgrades in 1P
reserves of 3 million boe and
2P reserves of 8 million boe.
SAN165 WWW Text 30/3/05 12:07 PM Page 25
PROVEN PLUS PROBABLE RESERVES (SANTOS SHARE) BY ACTIVITY
Reserves year end 2003
Production
Additions
Acquisitions/Divestments
Revisions
Estimated reserves year end 2004
Sales gas
(incl. ethane)
PJ
Crude oil
mmbbl
Condensate
mmbbl
2,670
-190
157
110
126
2,873
102
-10
1
2
-21
74
48
-3
0
1
3
49
PROVEN PLUS PROBABLE RESERVES (SANTOS SHARE) YEAR END 2004 BY AREA
(mmboe)
Area
Cooper Basin
Onshore Northern Territory
Offshore Northern Territory
Eastern Queensland
Southern Australia
Carnarvon Australia
PNG
Indonesia
USA
Total
RESERVES (SANTOS SHARE)
(mmboe)
Sales gas
(incl. ethane)
PJ
Crude oil
mmbbl
Condensate
mmbbl
1,051
147
310
256
271
555
0
243
40
2,873
24
1
1
0
0
43
1
4
0
74
15
1
27
0
2
3
0
0
1
49
LPG
000
tonnes
3,605
-159
24
98
-45
3,523
LPG
000
tonnes
1,842
0
1,507
22
152
0
0
0
0
3,523
Proven (1P)
Proven plus Probable (2P)
Contingent Resources (Best Estimate)
Year end
2003
338
636
1,450
Production
Revisions
Additions
Acq/Divest
-47
-47
-
26
3
-4
19
29
-13
12
22
10
Total
mmboe
636
-47
29
22
3
643
Total
mmboe
233
27
92
45
50
141
1
46
8
643
Year end
2004
348
643
1,443 *
* Contingent resources excludes any contribution from Jeruk which was still under evaluation at year end.
DEFINING RESERVES
Santos has in place an evaluation
and reporting process that is in
line with international industry
practice and is in general
conformity with reserves
definitions and resource
classification systems published by
the Society of Petroleum Engineers
(SPE), World Petroleum Congress
(WPC) and the American
Association of Petroleum
Geologists (AAPG). The definitions
used are consistent with the
requirements of the Australian
Stock Exchange Ltd (ASX).
Reserves are defined as those
quantities of petroleum which are
anticipated to be commercially
recovered from known
accumulations from a given date
forward. Santos reports reserves
net of the gas required for
processing and transportation to
the customer. Reserves reported are
based on, and accurately reflect,
information compiled by full-time
employees of the Company who
have the requisite qualifications
and experience prescribed by the
ASX Listing Rules.
EXTERNALLY REVIEWED
BOOKING PROCESS
Santos’ reserves processes and
procedures were reviewed by
independent expert, Gaffney, Cline
& Associates, and found to be
‘appropriate to providing robust
estimates of Santos’ reserve
position in accordance with
international industry practice’.
Annual Report 2004
25
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Sustainability
MANAGING FOR SUSTAINABLE GROWTH
This was a significant milestone
for Santos as it represents a
starting point for the collection
of data and the ongoing
measurement of performance
in the area of sustainability.
Communicating with stakeholders
is an important activity and the
publication of the Sustainability
Review is a further extension
of Santos’ commitment in this
regard. Santos applies considerable
resources to the communication
effort and aims to present
information in a clear and concise
manner in order to generate a
greater understanding of the
business by its stakeholders.
Santos has been recognised for
its achievements in this area.
Santos’ 2003 Annual Report
was featured as an example
of best practice reporting in
PricewaterhouseCoopers’ Trends
in Corporate Reporting 2004
publication. Reports from
companies worldwide are
considered in compiling this
publication and they must
meet specified criteria. This is
the third time a Santos annual
report has been featured. Santos
was also awarded a 2004 Silver
Award for Excellence in Annual
Reporting for the 2002 Annual
Report by the Australasian
Reporting Awards.
Receiving independent recognition
for these activities serves as
a reference point for Santos’
desire to continually improve
communication performance.
Santos has been listed as
an inaugural member of the
Australian SAM Sustainability
Index (AuSSI). The AuSSI tracks
the performance of around 70
Australian companies that lead
their industry in terms of
economic, environmental and
TOTAL RECORDABLE CASE FREQUENCY RATE
TRCFR per millions hours worked
20
15
10
5
0
’01
’02
’03
’04
Contractor
Combined
Employee
social criteria. The index is
calculated daily by Dow Jones
Indexes and published in The
Australian newspaper.
Following is an overview of
progress and achievements in the
area of sustainability for 2004.
SAFETY IMPROVING
The health and safety of employees
is of paramount concern to Santos.
Santos delivered another year of
improvement in 2004 and achieved
its lowest total recordable case
frequency rate of 6.4.
Further improvements were also
made with the implementation
of the Environment, Health and
Safety Management System
standards, with Santos operations
undergoing full assessments
against standards for the
first time.
The results demonstrated
considerable improvement
over the baseline assessments
conducted in 2003 with steady
progress in the implementation
of the procedures, processes and
tools needed to achieve the
requirements of the standards.
Process safety capability which
deals with plant and equipment
integrity assurance, design and
construction, and maintenance,
is being developed through
the formation of a new set of
standards to be incorporated
into the health and safety
management system.
The safety focus in 2005 will be
on finalising a comprehensive set
of hazard standards which outline
the required controls to ensure
that hazards encountered across
Santos’ operations and activities
are well managed.
POSITIONING THE WORKFORCE
FOR THE FUTURE
Santos commenced a major
company-wide transformational
change program in late 2003.
The program was designed to
significantly improve Santos’
performance in four areas: key
business processes, financial
performance, organisation
structure and company culture.
Reorganising and simplifying the
Company’s structure was one of
the major outcomes and in May
2004 Santos began operating
under a new functionally-based
organisation structure.
The new structure is designed
to support the exploration-
focused growth strategy.
It mirrors the ‘conveyor belt’
lifecycle of an exploration
and production company where
exploration success leads
to commercialisation and
development activity and finally
revenue-generating production.
It also follows the principle that
the majority of employees should
‘The publication of our first
Sustainability Review in 2004
was a major achievement for
Santos. The next steps are to
undertake projects to improve
our performance – not just in
Australia but worldwide – and
to accurately collect, verify and
report on a range of
sustainability data.’
MARTYN EAMES
Vice President
Corporate and People
F I R S T S T E P S
S u s t a i n a b i l i t y R e v i e w 2 0 0 4
Late in 2004 Santos published
First Steps: Sustainability Review,
the Company’s first standalone
publication on this topic.
It describes how Santos is
implementing the principles
of sustainability in the areas
of corporate governance, the
environment, social responsibility
and economic performance.
26
Annual Report 2004
SAN165 WWW Text 30/3/05 12:07 PM Page 27
across Santos operations. The
long-term environmental and
financial benefits of using this
technology are expected to be
considerable.
REDUCED OIL SPILLS
There was a substantial reduction
in the volume of hydrocarbons
released to the environment
in 2004, with uncontained
hydrocarbons spilt reducing from
1,943 cubic metres to 83 cubic
metres and Santos continues to
focus on reducing oil spills.
GREENHOUSE POLICY
Santos released its Greenhouse
Policy in 2004 to drive performance
improvements in this area through
reducing emissions and producing
oil and gas more efficiently.
Santos’ Greenhouse Policy is
being rolled out across the
organisation through cross-
functional greenhouse gas teams
that have the right skill sets and
responsibilities to progress this
initiative. These teams will
manage Greenhouse Policy and
regulation, carbon management
and trading opportunities, and
energy efficiency. A key internal
driver for emissions reduction
will be the promotion of energy
efficiency.
Santos is committed to achieving
effective emission reduction
targets, to the pursuit of energy
efficiency strategies and to the
identification and implementation
Lytton oil spill effect
Santos has a number of long-term
projects underway which will
optimise the substantial
investment the Company makes
in training people. Importantly,
these projects will deliver
programs that are targeted to
meet business and individual
needs and to support culture
change initiatives.
BANKSIA AWARDS
Santos was selected in 2004
as a finalist in the Banksia
Environmental Awards for the
work undertaken in the Company-
led initiative to protect the
world-renowned Coongie Lakes,
resulting in the area being
declared a new National Park by
the South Australian Government.
As a finalist for this award Santos
was recognised for its leadership
role in bringing together a group
of disparate parties to develop a
Memorandum of Understanding
recommending further protection
for the Coongie Lakes.
WASTE MANAGEMENT
Santos trialled innovative waste
management techniques during
2004 to reduce the volume of
hydrocarbon waste generated
from Cooper Basin operations.
Preliminary results indicate that
these waste volumes can be
reduced to 3-5% of their original
volume, which is a significant
achievement.
This technology will be
implemented where possible
OIL SPILL VOLUMES
m3
2000
1500
1000
500
0
’01
’02
’03
’04
Annual Report 2004
27
Santos is investing in the future of Australia’s petroleum industry
through the funding of the Australian School of Petroleum at the
University of Adelaide.
be working in business operations
with a lean and efficient
corporate and services group.
With the exception of a small
number of project teams, all
non-award based positions
in the Company were declared
vacant and a selection process
commenced around a set of
criteria designed to ensure that
people with the right skills and
the ability to successfully grow
Santos were appointed.
As is often the case with
transformational change
initiatives, not everyone was
re-appointed and, as a result, the
workforce was reduced by 9%.
CULTURE CHANGE
The need to develop a culture
that supports the newly designed
business processes was another
of the major outcomes of the
change program. A Santos-wide
culture change program led by
employees is currently underway.
This long-term program is
designed to ensure that the
way employees work together
enhances Santos’ ability
to be successful.
One of the first tasks undertaken
was a voluntary employee survey
to identify the gaps between the
existing culture and the desired
culture. The outcomes of the
survey will assist in the
development of programs and
activities that will better align
work practices with Santos’
strategic goals.
TRAINING AND DEVELOPING
PEOPLE
Making sure training and
development supports current
and future business requirements,
and provides opportunities for
people to develop their skills to
achieve optimum performance,
are key aspects of Santos’ human
resources strategy.
SAN165 WWW Text 30/3/05 12:07 PM Page 28
Santos employees rehabilitating a section of the River Torrens in Adelaide, as part of Santos’ three-year
commitment to the Our Patch project.
of opportunities to use fewer
greenhouse-emitting or renewable
sources of energy.
To achieve these commitments
Santos is actively pursuing an
emissions intensity reduction
target (greenhouse emissions
per unit of production) of 20%
in the period from 2002 to 2008.
SUPPORTING COMMUNITIES
Santos has relationships with a
number of communities where it
operates. Some have been long-
term and others are just beginning.
Relationships with communities
outside Australia, such as Indonesia
and the United States, are also
emerging as Santos’ business grows
in these locations.
Santos made contributions
during 2004 to a wide variety of
organisations and events through
the sponsorship program as part
of the Company’s commitment
to supporting the communities
to which it belongs.
Partnerships continued in 2004
with the Australian School of
Petroleum, the Adelaide Symphony
Orchestra, the State Opera
Company of South Australia, the
Art Gallery of South Australia and
the Lloyd McDermott Foundation.
One of the highlights of the 2004
program was the establishment
of the Santos Community Fund.
It brings together all of the
contributions Santos makes to
community-based organisations
and recognises and supports the
efforts of Santos employees who
choose to contribute their own
time and resources to improving
their communities.
The ‘Our Patch’ program was a
recipient of this fund in 2004.
This is a joint initiative of the
Patawalonga and Torrens
Catchment Management Boards
which encourages the local
community to assist with the
rehabilitation and management
of Adelaide’s water catchment.
Santos has adopted a patch of
the River Torrens and employees
are assisting with the remediation
and revegetation of this area in
a volunteering program.
CORPORATE GOVERNANCE
For the third year running, the
integrity of Santos’ corporate
governance was recognised in
2004 with the maximum five-star
rating in the Corporate
Governance Research Report
prepared by Horwath and the
University of Newcastle.
A more detailed overview of
corporate governance at Santos
follows on page 29 of this
Annual Report.
More detailed information about
sustainability at Santos is
contained in the Sustainability
Review and copies are available
from the Company and via the
Santos website www.santos.com.
28
Annual Report 2004
SAN165 WWW Text 30/3/05 12:07 PM Page 29
CORPORATE GOVERNANCE
CORPORATE GOVERNANCE
STATEMENT
The purpose of this Statement
is to provide details of the main
corporate governance practices
the Company had in place during
the past financial year.
The Board works under a set of
well-established corporate
governance policies that
reinforce the responsibilities of
all Directors in accordance with
the requirements of the
Corporations Act and the Listing
Rules of the Australian Stock
Exchange (ASX).
The Board regularly reviews and
updates its corporate governance
policies on an annual basis and
as required, to ensure that the
Company’s policies remain in
accordance with best practice.
1. COMPLIANCE WITH THE ASX
BEST PRACTICE
RECOMMENDATIONS
Following publication of the
Principles of Good Corporate
Governance and Best Practice
Recommendations of the ASX
Corporate Governance Council
(“ASX Best Practice
Recommendations”), Santos
assessed its existing corporate
governance practices for
compliance with those
Recommendations. As a result
of this assessment, which was
initially carried out in 2003, the
Board formed the view that the
Company’s existing practices
complied in substance with the
ASX Best Practice
Recommendations, except that at
that time it provided retirement
benefits to non-executive
Directors. Historically, these
benefits were provided pursuant
to agreements approved by
shareholders at the 1989 Annual
General Meeting and, as reported
in the Company’s 2003 Annual
Report, a review by the
Remuneration Committee of the
Board had determined that the
provision of those benefits
should cease on 30 June 2004
and benefits accrued to that
date should be held by the
Company and paid on retirement.
As a result of its decision to
cease the provision of retirement
benefits, the Board believes that
from 30 June 2004, the
Company’s policies and practices
comply in all substantial respects
with the ASX Best Practice
Recommendations. To assist
shareholders, the policies and
practices described in this
Corporate Governance Statement
are cross referenced to a
checklist of the ASX Best
Practice Recommendations set
out at the end of this Statement.
2. BOARD OF DIRECTORS AND
ITS COMMITTEES
Except where otherwise
indicated, references in this
Statement to the “Board
Guidelines” are to the formal
guidelines in force during the
past financial year and as at 30
March, 2005.
2.1 Board Responsibilities
The Board is responsible for the
overall corporate governance of
the Company, including its
strategic direction and financial
objectives, establishing goals for
management and monitoring the
attainment of these goals.
Specifically, as detailed in this
Statement, the Board is
responsible for:
• the provision of strategic
direction and oversight of
management;
• corporate governance;
• the selection and evaluation
of, and succession planning
for, Directors and executive
management;
• significant acquisitions and
disposals of assets;
• significant expenditure
decisions outside of the
corporate budget;
• hedging of product sales, sales
contracts and financing
arrangements;
• the remuneration of Directors
and executive management;
• the approval of, and
monitoring of financial
performance against, corporate
budgets;
• the approval of delegations of
authority to management;
• ethical standards and codes of
conduct; and
• the integrity of risk
management strategies and
controls.
The Board delegates management
of the Company’s resources to
the Company’s executive
management team, under the
leadership of the Chief Executive
Officer and Managing Director
(“CEO”), to deliver the strategic
direction and goals determined
by the Board. This Statement
details the responsibilities
delegated by the Board to
executive management for:
• implementing corporate
strategies;
‘The Company continued its
focus on stakeholder delivery
throughout 2004, enhancing its
commitment to top quartile
corporate governance.’
WESLEY GLANVILLE
Managing Counsel
and Company Secretary
• maintaining and reporting
on effective risk management
(including safety and plant
integrity); and
• operating under approved
budgets and written
delegations of authority.
2.2 Board Procedures
To assist in the effective
execution of its responsibilities,
the Board Guidelines include
procedures for providing
Directors with all relevant
information and familiarity with
the Company’s major centres of
operation. In addition, the Board
has established a number of
Board Committees including
a Nomination Committee, a
Remuneration Committee, an
Audit Committee, a Finance
Committee and an Environmental
and Safety Committee to assist
with the effective discharge of
its duties. All Committees are
chaired by, and comprised only
Annual Report 2004
29
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of, non-executive, independent
Directors, except for the
Environmental and Safety
Committee, which includes
the CEO as a member.
The Board Guidelines prescribe
that the Board is to meet at
least eight times a year,
including a strategy meeting of
two days duration. The number
of meetings of the Board and of
each of its Committees and the
names of attendees at those
meetings are set out on page 47
of this Annual Report. Board
Meetings are structured in two
separate sessions, without
management present for one of
those sessions. The agenda for
meetings is prepared by the
Company Secretary in
conjunction with the Chairman
and CEO, with periodic input
from the Board. Comprehensive
Board papers are distributed to
Directors in advance of
scheduled meetings. Board
meetings take place both at the
Company’s head office and at key
operating sites, to assist the
Board in its understanding of
operational issues.
Executive management attend
Board and Committee meetings,
at which they report to Directors
within their respective areas of
responsibility. This assists the
Board in maintaining its
understanding of the Company’s
business and assessing the
executive management team.
Where appropriate, advisors to
the Company attend meetings of
the Board and of its Committees.
2.3 Composition of the Board
The composition of the Board is
determined in accordance with
the Company’s Constitution and
the Board Guidelines which,
among other things, require that:
• the Board is to comprise
a minimum of five and a
maximum of ten Directors
(exclusive of the CEO);
• the Board should comprise a
substantial majority of
independent, non-executive
Directors;
• there should be a separation
of the roles of Chairman and
Chief Executive Officer of the
Company; and
• the Chairman of the Board
should be an independent,
non-executive Director.
Under the Company’s
Constitution approximately one-
third of Directors retire by
rotation each year and Directors
appointed during the year are
required to submit themselves
for election by shareholders at
the Company’s next Annual
General Meeting. The Board
Guidelines encourage Directors to
retire at the first Annual General
Meeting after reaching the age
of 72 years and not seek re-
appointment.
Currently, the Board comprises
eight non-executive Directors
and one executive Director. The
Board has adopted the definition
set out in the ASX Best Practice
Recommendations and as defined
in the 2002 guidelines of the
Investment and Financial
Services Association Limited and
considers all current non-
executive Directors, including the
Chairman, to be independent
directors.
Generally, the Board considers a
Director to be independent if he
or she is not a member of
management and is free of any
business or other relationship
that could materially interfere
with, or could reasonably be
perceived to materially interfere
with, the Director’s ability to
act in the best interests of the
Company. The Board will assess
the materiality of any given
relationship that may affect
independence on a case by case
basis and has adopted
materiality guidelines to assist in
that assessment. Under these
guidelines, the following
interests are regarded as material
in the absence of any mitigating
factors:
• a holding of 5% or more of
the Company’s voting shares or
a direct association with an
entity that holds more than
5% of the Company’s voting
shares;
• an affiliation with an entity
which accounts for 5% or more
or the revenue or expense of
the Company.
The Board has determined that
there should not be any arbitrary
length of tenure that should be
considered to materially interfere
with a Director’s ability to act in
the best interests of the
Company, as it believes this
assessment must be made on a
case by case basis with reference
to the length of service of all
members of the Board.
Each Director’s independence is
assessed by the Board on an
individual basis, with reference
to the above materiality
guidelines and focussing on an
assessment of each Director’s
capacity to bring independence
of judgment to Board decisions.
In this context, as mentioned
below, Directors are required to
promptly disclose their interests
in contracts and other
directorships and offices held.
The names and details of the
experience, qualifications, special
responsibilities, and term of
office of each Director of the
Company are set out on page 41
of this Annual Report. Details
of each Director’s attendance at
Board and Committee Meetings
and their shareholdings are also
set out on page 47 of this
Annual Report.
2.4 Nomination Committee
The role, responsibilities and
membership requirements of
the Nomination Committee are
documented in the Board
Guidelines and in a separate
Charter, approved by the Board.
Under the Board Guidelines,
it is the responsibility of the
Nomination Committee to devise
the criteria for, and review
membership of, and nominations
to, the Board. The primary
criteria adopted in selection of
suitable Board candidates is their
capacity to contribute to the
ongoing development of the
Company having regard to the
location and nature of the
Company’s significant business
interests and to the candidates’
age and experience by reference
to the attributes of existing
Board members.
When a Board vacancy exists or
where it is considered that the
Board would benefit from the
services of a new Director with
particular skills, the Nomination
Committee has responsibility for
proposing candidates for
consideration by the Board and,
where appropriate, engages the
services of external consultants.
Prior to appointment, each
Director is provided with a letter
of appointment which encloses a
copy of the Company’s
Constitution and of the relevant
policies. Additionally, the
expectations of the Board in
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respect to a proposed appointee
to the Board and the workings of
the Board and its Committees are
conveyed in interviews with the
Chairman and induction
procedures include access to
appropriate executives in relation
to details of the business of the
Company.
The Chairman of the Board is
the Chairman of the Nomination
Committee. The current members
of the Nomination Committee,
all of whom are independent
non-executive Directors, are
Mr S Gerlach (Chairman), Mr P C
Barnett and Mr G W McGregor.
3. REVIEW OF BOARD AND
EXECUTIVE PERFORMANCE
The Board Guidelines provide
that:
• non-executive Directors are
to be appointed on the basis
that their nomination for
re-election as a Director is
subject to review and support
by the Board;
• there should be appropriate
circumstances justifying re-
election after a specified
period of service as a Director;
and
• the contribution of the Board
and of individual Directors is
the subject of formal review
and discussion on a biennial
and annual basis, respectively.
As the biennial review of the
Board and of its Committees was
conducted by an independent
consultant in 2003, no formal
performance appraisal of the
Board was conducted in 2004.
Performance evaluation of key
executives is undertaken on a
quarterly and annual basis by
the CEO and summarised in
presentation to the
Remuneration Committee of the
Board, both specifically for
determination of remuneration
and generally in relation to
management succession planning
for review by the Board.
4. INDEMNITY, ACCESS TO
INFORMATION AND
INDEPENDENT PROFESSIONAL
ADVICE
Information in respect to
indemnity and insurance
arrangements for Directors and
senior executives appears in the
Directors’ Statutory Report on
page 49 of this Annual Report.
The Board Guidelines set out the
circumstances and procedures
pursuant to which a Director, in
furtherance of his or her duties,
may seek independent
professional advice at the
Company’s expense. Those
procedures require prior
consultation with, and approval
by, the Chairman and assurances
as to the qualifications and
reasonableness of the fees of
the relevant expert and, under
normal circumstances, the
provision of the expert’s advice
to the Board.
Pursuant to a deed executed by
the Company and each Director,
a Director also has the right to
have access to all documents
which have been presented to
meetings of the Board or to any
Committee of the Board or
otherwise made available to the
Director whilst in office. This
right continues for a term of
seven years after ceasing to be a
Director or such longer period as
is necessary to determine
relevant legal proceedings that
commenced during that term.
5. REMUNERATION
The role, responsibilities and
composition of the Remuneration
Committee and details of
the Company’s remuneration
objectives and principles, non-
executive Director remuneration
and executive remuneration are
set out on pages 37 to 40 of this
Annual Report in the Directors’
and Executives’ Remuneration
section, as well as in the
Directors’ Statutory Report
and in Notes 18 and 26 of
the Financial Statements.
Details of the nature and amount
of the remuneration of:
• the Directors; and
• the Specified Executives;
are set out on pages 37 to 40
of this Annual Report.
6. AUDIT COMMITTEE
The role of the Audit Committee
is documented in a Charter,
approved by the Board. This
Charter was revised in August
2004 in line with contemporary
best practice, and can be found
on the Company’s website.
6.1 Composition of the Audit
Committee
The Committee is required to
consist of no less than three
members and to meet at least
three times per year. All
members must be independent,
non-executive Directors and
financially literate, with at
least one member having past
employment experience in
finance and accounting, requisite
professional certification in
accounting or other comparable
experience or background.
The Chairman of the Board is
precluded from being the
Chairman of the Audit
Committee.
The current members of the
Audit Committee, all of whom
are independent non-executive
Directors, are: Mr G W McGregor
(Chairman), Professor J Sloan
and Mr R M Harding. The external
auditors, CEO, Chief Financial
Officer (“CFO”), Manager Risk and
Audit, and Manager – Financial
Planning and Analysis attend
Committee meetings by
invitation. There were 4
meetings held in 2004.
6.2 Role of the Audit
Committee
The primary objective of the
Audit Committee is to assist
the Board to fulfil its corporate
governance and oversight
responsibilities related to
financial accounting practices,
external financial reporting,
financial reporting, risk
management and internal
control, and the internal and
external audit function.
Specifically, the role of the
Audit Committee includes:
• examining the accounting
policies of the Company to
determine whether they are
appropriate and in accordance
with generally accepted
practices;
• ensuring that truth and
fairness is reflected in the
preparation and publication
of the Company’s financial
reports;
• meeting regularly with the
internal and external auditors
to reinforce their respective
independence and to
determine the appropriateness
of internal and external audit
procedures;
• reviewing the performance
of the internal and external
auditors and providing them
with confidential access to
the Board;
• receiving from the external
auditors a formal written
statement delineating all
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relationships between the
auditors and the Company and
confirming compliance with all
professional and regulatory
requirements relating to
auditor independence; and
• referring matters of concern to
the Board, as appropriate, and
considering issues which may
impact on the financial reports
of the Company.
In order to ensure that truth
and fairness is reflected in the
preparation and publication of
the Company’s financial reports,
the Audit Committee reviews the
written statement of the CEO and
CFO to the Board that the
Consolidated Financial Report
presents a true and fair view,
in all material respects, of the
financial condition and
operational results of the Santos
Group and is in accordance with
Accounting Standards. This
Statement also confirms that:
• the Consolidated Financial
Report is founded on a sound
system of risk management
and internal compliance and
control, which implements the
policies adopted by the Board;
and
• the Company’s risk
management and internal
control systems, to the extent
they relate to financial
reporting, are operating
effectively in all material
respects.
The Chairman of the Audit
Committee provides, and
addresses, a written report
together with the minutes and
recommendations of the Audit
Committee at the next Board
Meeting. Similar procedures
apply to all other Committees
of the Board.
6.3 Audit Committee Charter
and Independence of Auditors
The Board has adopted a policy
in relation to the provision of
non-audit services by the
Company’s external auditor that
is based on the principle that
work that may detract from the
external auditor’s independence
and impartiality, or be perceived
as doing so, should not be
carried out by the external
auditor. The Audit Committee
Charter clearly identifies those
services that the external auditor
may not provide, those that may
be supplied and those that
require specific approval of the
Chairman of the Audit
Committee, in consultation with
other members of the Committee.
It also provides that:
• the Board will not invite any
past or present lead audit
partner of the firm currently
engaged as the Company’s
external auditor to fill a
vacancy on the Board;
• the lead audit partner will be
the provision of non-audit
services by the external auditors
is compatible with the general
standard of independence for
auditors.
7. FINANCE COMMITTEE
The role of the Finance
Committee is documented in a
Charter, approved by the Board,
and includes responsibility for
considering and making
recommendations to the Board
on the Company’s capital
management strategy and the
Company’s funding requirements
and specific funding proposals.
The Committee also has
responsibility for formulating and
monitoring compliance with
treasury policies and practices
and the management of credit,
liquidity and commodity market
risks.
The current members of the
Finance Committee, all of whom
are independent non-executive
Directors, are: Mr S Gerlach
(Chairman), Mr P C Barnett and
Mr G W McGregor.
required to rotate off the audit
after a maximum of five years
and there will be a period of
at least three years before
that partner can again be
involved in the Company’s
audit; and
8. RISK MANAGEMENT
An Enterprise Wide Risk
Management approach forms the
cornerstone of Risk Management
activities of the Company and is
based on the relevant Australian
Standard (AS/NZS 4360 : 2004).
• internal audit function, if
outsourced, will be provided
by a firm other than the
external audit firm.
These provisions reflect the
current behaviours expected of
the world’s leading corporations
and are consistent with the
ethical values and integrity of
the Company.
The Chairman of the Audit
Committee provides the Board
with a statement clarifying that
This approach is incorporated in
the Company’s Risk Management
Policy, and aims to ensure that
major business risks facing the
Company have been consistently
identified, analysed and
evaluated, and that active
management plans and controls
are in place for the ongoing
management of these risks.
Independent validation of
controls is undertaken by
internal audit as part of its risk
based approach. The internal
audit function is independent of
the external auditor and reports
to the Audit Committee.
The CEO and CFO have stated
to the Board in writing that:
• the Consolidated Financial
Report is founded on a sound
system of risk management
and internal compliance and
control systems, which
implements the policies
adopted by the Board; and
• the Company’s risk
management and internal
control systems, to the extent
they relate to financial
reporting, are operating
efficiently and effectively in
all material respects.
The Board has in place a number
of arrangements and internal
controls intended to identify
and manage areas of significant
business risk. These include
the maintenance of:
• Board Committees;
• detailed and regular
budgetary, financial and
management reporting;
• established organisational
structures, procedures,
manuals and policies;
• audits (including internal and
external financial,
environmental and safety
audits);
• comprehensive insurance
programmes; and
• the retention of specialised
staff and external advisors.
Examples of management of
specific risks are as follows:
• MANAGEMENT OF
ENVIRONMENTAL AND SAFETY
RISK – environmental and
safety risk is managed
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through: a comprehensive
Environmental Health and
Safety Management System
based on Australian Standard
4801 and International
Standard 14001;
environmental and safety
committees at Board and
management levels; the
retention of specialist
environmental and safety staff
and advisors; regular internal
and external environmental
and safety audits; and
imposing environmental care
and safety accountability as
line management
responsibilities. The role of
the Environmental and Safety
Committee is documented in a
Charter, approved by the
Board. The current members of
the Environmental and Safety
Committee are: Mr S Gerlach
(Chairman), Mr P C Barnett, Mr
M A O’Leary and Mr J C Ellice-
Flint.
• MANAGEMENT OF
EXPLORATION RISK –
exploration risk is managed
through internal control
systems which include:
formalised risk assessment
procedures at the functional
level; corporate review in both
prospect and hindsight; Board
approval of exploration
budgets; and regular reporting
on progress to the Board.
External reviews are also
undertaken as necessary.
• INVESTMENT APPRAISAL – the
Company has clearly defined
procedures for capital
expenditure. These include:
annual budgets; detailed
appraisal and review
procedures; levels of authority;
and due diligence
requirements where assets are
being acquired.
• FINANCIAL REPORTING –
a comprehensive budgeting
system exists with an annual
budget approved by the Board.
Monthly actual results are
reported against budget and,
where applicable, revised
forecasts for the year are
prepared and reported to the
Board. Speculative
transactions are prohibited.
Further details relating to
financial instruments and
commodity price risk
management are included in
Note 32 of the Financial
Statements.
• FUNCTIONAL REPORTING –
all significant areas of
Company operations are
subject to regular reporting
to the Board. The Board
receives regular reports on
the performance of each
functional area, including:
operations; gas marketing
and commercialisation; liquids
marketing; corporate and
people; legal and secretariat;
geoscience, exploration and
new ventures; development
and technical services;
finance; safety; government;
investor relations and
environmental matters.
9. ETHICAL STANDARDS AND
CODE OF CONDUCT
To promote high standards of
corporate governance and ethical
conduct the Company has
provided its employees with a
clear set of rules, values and
guidelines to follow when
carrying out their work as a
Santos employee and
representative. In addition to the
Board Guidelines, the Company
has adopted a Code of Conduct
which prescribes that, in
addition to compliance with all
applicable legal requirements,
the Board expects all Directors,
executives and employees of the
Company to adopt appropriate
standards of professional and
business conduct in their
dealings on behalf of the
Company. In addition, the Board,
in conjunction with executive
management, has implemented
procedures designed to ensure
compliance by all employees
with those standards.
In particular, the Code of
Conduct requires that Directors
and employees:
• avoid conflicts of interest, and
ensure that all business
transactions are conducted
solely in the best interests of
the Company;
• are aware of, and comply with
laws and regulations relevant
to the Company’s operations
including environmental and
trade laws both in Australia
and abroad;
• protect any Company assets
under their control and not
use Company assets for
personal purposes, without
prior Company approval;
• do not disclose or use in any
improper manner confidential
information about the
Company, its customers or
affairs; and
• respect the privacy of others
and comply with the
Company’s Privacy Policy.
The standards of conduct
expected of Santos staff,
including those directed at the
broader stakeholder constituency
of shareholders, employees,
customers and the community,
are also recorded in separate
guidelines and policies relating
to dealing in securities (refer
to the next section), the
environment, occupational health
and safety and human resources.
Further, a Code of Conduct,
based on that developed by
the Group of 100 (an association
of senior finance executives
from Australia’s business
enterprises) applies to the
CFO and all other officers and
employees within the finance
function of the Company who
have the opportunity to
influence the integrity, direction
and operation of the Company
and its financial performance.
Where applicable, the guidelines
and policies are incorporated by
reference in individual contracts
of employment or expressly set
out in those contracts, including
provisions relating to: conflicts
of interest; confidentiality and
restrictions against use and
dissemination of information;
use of Company assets;
perquisites, tender processes,
benefits and contact with
suppliers; employment
opportunity practices; privacy;
training and further education
support; and smoking, alcohol
and drugs.
10. GUIDELINES FOR DEALING
IN SECURITIES
The Company has developed
specific written guidelines that
prohibit Directors and executives
(and their respective associates)
from acquiring, selling or
otherwise trading in the
Company’s shares if they possess
material price-sensitive
information which is not in the
public domain.
Pursuant to these guidelines,
no person may deal in securities
while they are in the possession
of price sensitive information.
In other circumstances, Directors
must inform and receive
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acknowledgment from the
Chairman or his representative
(and executives from the
Secretary or a person appointed
by the Board) of an intention
prior to any dealings in
securities either by themselves
or by their associates, and must
promptly notify details following
the dealing.
The Company’s policy is that
trading in Santos securities is
permitted, with approval as set
out above, only during the
following periods:
• the period commencing
two clear days after the
announcement of the
Company’s annual results
and ending 1 July; and
• the period commencing
two clear days after the
announcement of the
Company’s half yearly
results and ending 1 January.
Under the guidelines,
prohibitions on dealing in
securities apply not only to
the acquisition and disposal of
shares, but also to the acquiring,
taking, assigning and releasing
of options traded in the options
market. Directors and executives
may not deal in securities on
considerations of a short-term
nature.
11. CONTINUOUS DISCLOSURE
& SHAREHOLDER
COMMUNICATION
The Company is committed to
giving all shareholders timely
and equal access to information
concerning the Company.
The Company has developed
policies and procedures in
accordance with its commitment
to fulfilling its obligations to
shareholders and the broader
market for continuous disclosure.
The policies are summarised in
this Statement, which may be
accessed at the Company’s
website at www.santos.com.
The Company is currently in the
process of compiling stand-alone
summaries of relevant policies
for inclusion on the Corporate
Governance section of the
Company’s website. The policies
are regularly reviewed and
updated for changes to the law
and the Listing Rules. The
Company notes that the ASX
Best Practice Recommendations
are for full copies of certain
policies and charters to be
included on the website. The
Company has been working on
this during the year, together
with the update of the website
itself. These will shortly be
available on the Corporate
Governance section of the
website.
These policies establish
procedures to ensure that
Directors and management are
aware of and fulfil their
obligations in relation to the
timely disclosure of material
price sensitive information.
Information must not be
selectively disclosed prior to
being announced to the ASX,
NASDAQ or New Zealand
Exchange Ltd (NZX). Directors
and executive management must
notify the Company Secretary as
soon as they become aware of
information that should be
considered for release to the
market.
When the Company makes an
announcement to the market,
that announcement is released
to each exchange where its
shares are listed: ASX, NASDAQ
and NZX. The Company Secretary
is responsible for communications
with the exchanges. All material
information disclosed to the ASX
is posted on the Company’s
website at www.santos.com. This
includes ASX announcements,
annual reports (including
therefore this Corporate
Governance Statement), notices
of meeting, CEO briefings, media
releases, and materials presented
at investor, media and analyst
briefings. An email “alert”
facility is also offered to
shareholders. Web-casting of
material presentations, including
annual and half-yearly results
presentations, is provided for
the benefit of shareholders,
regardless of their location.
Additionally, the Company’s
external auditor attends annual
general meetings to be available
to answer shareholder questions
relevant to the conduct of
the audit.
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12 ASX CORPORATE GOVERNANCE COUNCIL BEST PRACTICE RECOMMENDATIONS
Principle 1:
1.1
ASX Principle
Lay solid foundations for management and oversight
Formalise and disclose the functions reserved to the Board
and those delegated to management.
Principle 2:
Structure to the board to add value
A majority of the Board should be independent Directors.
The chairperson should be an independent Director.
The roles of chairperson and chief executive officer should
not be exercised by the same individual.
2.1
2.3
2.3
2.3
The Board should establish a Nomination Committee.
2.2; 2.4
Provide the information indicated in guide to reporting on Principle 2.
2.3; 2.4; 4; 5; 7; Details of Board
Member’s Experience page 41;
Details of Directors’ Meetings,
Item 1 of the Directors’ Statutory
Report page 47.
Reference
Compliance
2.1
2.2
2.3
2.4
2.5
4.1
4.2
4.3
4.4
4.5
P
Principle 3:
Promote ethical and responsible decision-making
3.1
3.2
3.3
Establish a code of conduct to guide the Directors,
the chief executive officer (or equivalent),
the chief financial officer (or equivalent)
and any other key executives as to:
3.1.1 the practices necessary to maintain confidence
in the Company’s integrity; and
3.1.2 the responsibility and accountability of individuals
for reporting and investigating reports of unethical practices.
Disclose the policy concerning trading in Company securities
by Directors, officers and employees.
9
10
Provide the information indicated in Guide to reporting on Principle 3.
9, 10
Principle 4:
Safeguard integrity in financial reporting
Require the chief executive officer (or equivalent) and the
chief financial officer (or equivalent) to state in writing
to the Board that the Company’s financial reports present
a true and fair view, in all material respects, of the Company’s
financial condition and operational results and are in accordance
with relevant accounting standards.
The Board should establish an Audit Committee.
Structure the Audit Committee so that it consists of:
• only non-executive Directors;
• a majority of independent Directors;
• an independent chairperson, who is not chairperson
of the Board; and
• at least three members.
6.2
6
6.1
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
The Audit Committee should have a formal charter.
6.3
Comply
Provide the information indicated in Guide to reporting on Principle 4.
6.1; Annual Report pages 31 to 32
and 41; Item 1 of the Directors’ Statutory
Report page 47; Directors’ Declaration page 88.
Comply
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Principle 5:
5.1
ASX Principle
Make timely and balanced disclosure
Establish written policies and procedures designed to ensure
compliance with ASX Listing Rules disclosure requirements and to
ensure accountability at a senior management level for that compliance.
Principle 6:
Respect the rights of shareholders
6.1
6.2
Design and disclose a communications strategy to promote effective
communication with shareholders and encourage effective participation
at general meetings.
Request the external auditor to attend the annual general meeting
and be available to answer shareholder questions about the conduct
of the audit and the preparation and content of the auditor’s report.
Principle 7:
Recognise and manage risk
7.1
7.2
The Board or appropriate Board Committee should establish policies
on risk oversight and management.
The chief executive officer (or equivalent) and the chief financial officer
(or equivalent) should state to the board in writing that:
7.2.1 the statement given in accordance with best practice
recommendations 4.1 (the integrity of financial statements) is founded
on a sound system of risk management and internal compliance and
control which implements the policies adopted by the Board; and
7.2.2 the Company’s risk management and internal compliance
and control system is operating efficiently and effectively
in all material respects.
Reference
Compliance
Comply
Comply
Comply
Comply
Comply
11
11
11
8
6; 8
6; 8
7.3
Provide the information indicated in Guide to reporting on Principle 7.
8; Annual Report pages 32 and 33.
Comply
Principle 8:
Encourage enhanced performance
8.1
Disclose the process for performance evaluation of the Board,
its Committees and individual Directors, and key executives.
3; 5; Annual Report page 31.
Comply
Principle 9:
Remunerate fairly and responsibly
9.1
9.2
9.3
9.4
9.5
Provide disclosure in relation to the Company’s remuneration policies
to enable investors to understand (i) the costs and benefits of those
policies, and (ii) the link between remuneration paid to Directors
and key executives and corporate performance.
5
The Board should establish a Remuneration Committee.
2.2; 5
Clearly distinguish the structure of non-executive Directors’
remuneration from that of executives.
Ensure that payment of equity-based executive remuneration
is made in accordance with thresholds set in plans
approved by shareholders.
5
5
Comply
Comply
Comply
Comply
Provide the information indicated in Guide to reporting on Principle 9.
5; Annual Report pages 31 and 37
to 40; Directors’ Statutory Report
Items 1 and 9 on pages 47 and 49;
Notes 18 and 26 to the Financial Statements.
Comply
Principle 10:
Recognise the legitimate interests of stakeholders
10.1
Establish and disclose a code of conduct to guide compliance with
legal and other obligations.
9
Comply
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DIRECTORS’ AND SENIOR EXECUTIVES’
REMUNERATION
The Remuneration Committee is
responsible for reviewing the
remuneration policies and
practices of the Company
including: the compensation
arrangements for the Managing
Director and senior management;
the Company’s superannuation
arrangements; employee share and
option plans; executive and senior
management performance review,
succession planning, and, within
the aggregate amount approved
by shareholders, the fees for non-
executive Directors. The role of
the Remuneration Committee is
documented in a Charter,
approved by the Board, which
Charter prescribes that the
Committee must consist of at
least three non-executive
Directors. The Committee has
access to independent advice and
comparative studies on the
appropriateness of remuneration
arrangements.
The current members of the
Remuneration Committee, all of
whom are independent non-
executive Directors, are: Professor
J Sloan (Chairperson), Mr S
Gerlach and Mr P C Barnett.
NON-EXECUTIVE DIRECTORS
Within the aggregate amount
(being $1,500,000 per year)
approved by shareholders at the
Annual General Meeting of the
Company held on 7 May 2004,
the fees of the Chairman and
non-executive Directors are set
at levels which represent the
responsibilities of and the time
commitments provided by those
Directors in discharging their
duties. Regard is also had to
the level of fees payable to
non-executive Directors of
comparable companies.
As previously announced,
non-executive Directors’ fees were
increased effective 1 July 2004.
Non-executive Directors, other
than the Chairman, who are
members of Board Committees
receive additional fees. Non-
executive Directors may not
participate in any of the
Company’s bonus, share or
option plans.
The Directors determined to cease
retirement allowances to non-
executive Directors effective from
30 June 2004. Non-executive
Directors appointed before 1
January 2004 are entitled to
receive benefits accrued to that
date, payable upon ceasing to
hold office as a Director. The
retirement payment (inclusive of
superannuation guarantee charge
entitlements) is made pursuant to
an agreement entered into with
each non-executive Director on
terms approved by shareholders at
the 1989 Annual General Meeting.
These benefits have been fully
provided for by the Company.
EXECUTIVE DIRECTORS
The Managing Director, Mr J C
Ellice-Flint, is currently the only
Executive Director, he being
appointed a Director on 19
December 2000.
Mr J C Ellice-Flint has an
executive service agreement with
the Company which continues
until terminated by either party in
accordance with the agreement.
Termination arrangements relating
to the Managing Director were
agreed in advance of his
appointment, and those relating
to the equity component of his
remuneration were notified at the
time of the appointment.
His remuneration comprises a base
salary reviewed annually and an
annual bonus calculated on a
formula that includes components
to measure the growth of
profitability, exploitable reserves
and share price.
receive more; and to encourage
executives to manage from the
perspective of the shareholders by
rewarding them for aligning
Company and shareholder returns.
He also has an entitlement to
1,000,000 Restricted Shares,
details of which are described in
note 18(h) to the financial
statements and holds 3,000,000
options under the Santos
Executive Share Option Plan.
If the Company terminates Mr J C
Ellice-Flint’s appointment without
cause, the Company may at its
option, in lieu of part or all of the
notice period of 24 months, pay
to him an amount equal to a
proportion or multiple of his
annual base salary and the current
year’s potential bonus (excluding
the application of any
performance condition) at the
time at which notice is given.
SENIOR EXECUTIVES
(a) Remuneration Objectives
and Principles
The objectives of the Company’s
remuneration policy are to attract,
retain and motivate appropriately
qualified and experienced
executives capable of discharging
their respective responsibilities to
enable the Company to achieve its
business strategy.
The principles underlying the
remuneration policy are: to
realistically reflect the
responsibilities of executives and
other employees; to be industry
competitive and reasonable; that
a significant portion of
remuneration be at risk against
individual and company
performance and shareholder
wealth creation; that performance,
not failure, be rewarded so that
the Company’s best performers
(b) Remuneration Structure
The Company’s remuneration
structure for its non-award
employees is based upon Target
Total Remuneration (TTR), the
components of which comprise:
• a fixed component called Fixed
Annual Remuneration (FAR);
and
two variable components, called:
• the Short Term Incentive (STI)
and
• the Long Term Incentive (LTI).
FAR: comprises salary,
superannuation and benefits; is
quantified by reference to role and
experience; and is industry
benchmarked.
STI is represented as a percentage
of base remuneration which is “at
risk”. The STI consists of an
annual cash bonus paid to reward
performance based on a mix of
Company performance and
individual performance measured
against annual scorecards with
target and stretch performance
criteria determined in advance
each year.
LTI: in relation to executive
remuneration includes a long term
performance based component in
the form of equity participation
through the Santos Executive
Share Option Plan (SESOP) and
the Santos Employee Share
Purchase Plan (SESPP).
Participation is determined by the
Board, on recommendation of the
Remuneration Committee, and
only applies to executives who are
Annual Report 2004
37
SAN165 WWW Text 30/3/05 12:07 PM Page 38
in a position to affect shareholder
returns. It is intended that
participants will generally
comprise the senior executives
and a small number of high
potential middle managers of the
Company.
Options and rights to shares
issued under these Plans to senior
executives are linked to the longer
term performance of the Company
and are only exercisable following
the satisfaction of performance
hurdles that are designed to
maximise shareholder wealth.
The amount of the award, and
correspondingly the proportion of
remuneration at risk, varies
between executives according to
their respective levels of seniority
and responsibility.
The rules of the SESPP and SESOP
were both approved by
shareholders in 1997 and again in
2000.
Having regard to contemporary
best practice, the LTI program is
designed to drive superior
executive performance and to
reward only superior Company
performance, linked to an
appropriate performance
benchmark. The benchmark
assesses actual Company
performance in terms of long-term
comparative growth of the
Company and resulting
shareholder value.
Company performance is measured
over a three year period based on
the Company’s Total Shareholder
Return (TSR) relative to one or
more comparator groups as
determined by the Board at the
commencement of the
performance period including,
without limitation, any
combination of the ASX 100,
energy companies in ASX 100, the
ASX Energy Index and
international E&P companies. If
performance is below the 50th
percentile, no award is made. A
proportionate award is made for
performance between the 50th to
75th percentile and the maximum
award is made for performance at
or above the 75th percentile.
In relation to the current financial
year, awards may be taken only in
the form of shares pursuant to
SESPP or, at the election of an
executive, options pursuant to
SESOP, details of which are
described in Notes 18(c) and
18(d) of the financial statements.
In future periods, awards may be
taken in the form of rights over
shares pursuant to SESPP or
options granted under SESOP, at
the election of executives.
Rights to shares and options are
granted at no cost to the
executives with the number of
shares awarded being determined
by dividing the amount of the
award by the volume weighted
average price of the Company’s
shares over the five business days
up to and including the award
date. The number of options
awarded is of equivalent value
calculated by an independent
expert based on an acceptable
valuation method. The exercise
price of the options is the volume
weighted average price of the
Company’s shares over the five
business days up to and including
the award date.
The Board intends that LTI awards
be made on an annual basis using
a three year measurement period
for the applicable performance
hurdles. However, the Board
reserves the right to suspend or
modify the LTI program in light of
circumstances appropriate to the
Company from time to time.
The maximum number of shares
that may be issued under all of
the Company’s executive and
employee share and option plans
cannot exceed the limit of 5% of
38
Annual Report 2004
the issued capital, as approved by
shareholders at the 2000 AGM.
(c) Specified Executives of the
Santos Group
The following persons were the six
executives with the greatest
authority for the strategic
direction and management of the
Santos Group (“Specified
Executives”) during the financial
year receiving the highest
remuneration:
Name
Position
Gouadain, Jacques Elie
Moore, Paul Derek
Vice President Geoscience and New
Ventures
Vice President Development Project and
Technical Services
Wasow, Peter Christopher
Chief Financial Officer
Wilkinson, Richard John
Vice President Gas Marketing and
Commercialisation
Wood, Bruce James
Vice President Strategic Projects
Young, Jonathon Terence
Executive Vice President Operations
All Specified Executives are
employed by the Company.
The Specified Executives are
entitled to a termination payment
in the event of termination of
their service agreement by the
Company without cause. They are
entitled to three months’ notice,
excepting for Mr P C Wasow who is
entitled to six months’ notice, or
payment in lieu of that notice,
plus three weeks for each year of
continuous service, pro rata for
part thereof, and capped at a
maximum of sixty-five weeks of
total fixed remuneration, less
notional value of superannuation
for that period.
SAN165 WWW Text 30/3/05 12:07 PM Page 39
REMUNERATION OF DIRECTORS AND SPECIFIED EXECUTIVES 2004
REMUNERATION DETAILS OF NON-EXECUTIVE DIRECTORS
Name
Directors’
Committee
Post Employment
Non-monetary(2) Superannuation(3) Retirement(4)
$
$
$
Non-executive Directors
Barnett, Peter Charles
Conroy, Francis John (1)
Gerlach, Stephen
Harding, Richard Michael
McGregor, Graeme William
O’Leary, Michael Anthony
Sloan, Judith
fees
$
95,000
90,041
285,000
91,667
95,000
95,000
95,000
fees
$
15,500
14,689
-
-
-
31,167
1,000
20,500
9,000
19,750
-
-
-
-
Total
$
136,014
130,082
327,460
97,707
141,373
130,202
140,243
9,945
9,425
11,293
5,040
10,157
9,360
10,090
15,569
15,927
-
-
15,716
16,842
15,403
Total non-executive Directors
846,708
80,439
31,167
65,310
79,457
1,103,081
REMUNERATION DETAILS OF EXECUTIVE DIRECTOR AND SPECIFIED EXECUTIVES
Name
Fixed remuneration
Bonus
Non-monetary(2) Superannuation
Shares
Options
$
$
$
$
$
$
Total
$
Primary Benefits
Post Employment
Equity(5)
Executive Director
Ellice-Flint, John Charles
1,050,000
1,300,000
-
514,500
1,120,000 (6)
274,326
4,258,826
Specified Executives
Gouadain, Jacques Elie
Moore, Paul Derek
Wasow, Peter Christopher
Wilkinson, Richard John
Wood, Bruce James
Young, Jonathon Terence
Total Specified Executives and
Executive Director
371,327
311,734
444,389
311,875
312,596
486,306
176,600
140,600
307,200
169,800
128,200
316,500
25,513
22,000
-
-
-
-
24,292
40,606
49,361
62,583
29,594
50,263
58,939
58,819
79,052
62,341
18,900
83,443
18,731
15,674
20,000
-
40,583
30,833
675,402
589,433
900,002
606,599
529,873
967,345
3,288,227
2,538,900
47,513
771,199
1,481,494
400,147
8,527,480
(1) Upon his retirement as a Director on 14 December 2004, Mr F J Conroy became entitled to a retirement payment of $161,447 in accordance
with arrangements previously approved by shareholders. Only $15,927 of this amount has been disclosed as part of Mr Conroy’s remuneration
for the 2004 reporting period, as the balance of the payment has been provided for in previous reporting periods.
(2) Non-monetary are non base remuneration benefits including the cost to the Company of cars (including applicable FBT).
(3) Contributions for non-executive Directors are made in accordance with the Company’s Superannuation Guarantee Charge obligations.
(4) This shows provisions made in accordance with arrangements previously approved by shareholders, which amounts have been fully provided for.
(5)
(a)
Includes the notional value of shares granted by the Company during the year pursuant to the Santos Employee Share Purchase Plan,
Annual Report 2004
39
SAN165 WWW Text 30/3/05 12:07 PM Page 40
details of which are described in Note 18 to the financial statements.
Shares granted to the Specified Executives during the year are as follows, and were valued at $6.95 each, being their market value (as
defined in the Income Tax Assessment Act).
Granted to:
Shares:
Gouadain, Jacques Elie
Moore, Paul Derek
Wasow, Peter Christopher
Wilkinson, Richard John
Wood, Bruce James
Young, Jonathon Terence
6,216
5,827
7,770
5,827
5,439
8,547
(b) Includes the notional value of shares and options granted by the Company during previous financial years (and which had not vested as at
1 January 2004) which have been amortized over the relevant vesting period. All options have been valued by independent valuers using
the modified Black-Scholes or Binomial option pricing model.
(c) No options were granted by the Company during the year to the Directors or to the Specified Executives.
(d) No options or shares have been granted by the Company since the end of the financial year.
(6) This amount reflects the value during the current reporting period of the 1,000,000 Restricted Shares granted to Mr J C Ellice-Flint in 2000,
further details of which are described in note 18(h) to the financial statements.
40
Annual Report 2004
SAN165 WWW Text 30/3/05 12:07 PM Page 41
BOARD OF DIRECTORS
experience in the international
petroleum industry, having held
the position of Chief Executive
Officer, Shell Financial Services.
During his 30-year career with
Shell, held several other senior
executive positions in treasury,
audit, accounting, IT and
financial and corporate services.
Fellow of the Australian Society of
Certified Practising Accountants
and member of the Australian
Institute of Company Directors.
RICHARD MICHAEL HARDING
MSc
Age 55. Director since 1 March
2004 and member of the Audit
Committee of the Board. Former
President and General Manager
of BP Developments Australia
Limited and former Vice-Chairman
and Council member of the
Australian Petroleum Production
and Exploration Association.
Chairman of the Ministry of
Defence Command Support,
Training and Simulation Project
Governance Board and Director
of Arc Energy Ltd.
3 September 1999. Chairman of
the Audit Committee and member
of the Finance Committee and
Nomination Committee of
the Board. Director of Santos
Finance Ltd. Director of Foster’s
Group Ltd, Nufarm Ltd, WMC
Resources Ltd and Goldman Sachs
JB Were Managed Funds Limited.
Member of the Financial Reporting
Council. Former Executive Director
Finance of The Broken Hill
Proprietary Company Limited and
former Director of Community
Foundation Network Ltd.
MICHAEL ANTHONY O’LEARY
DipMinE, BSc, FAusIMM, FAIM,
FAICD
Age 69. Director since
15 October 1996 and member
of the Environmental and Safety
Committee of the Board. Director
of Newcrest Mining Ltd. Former
Chairman of Hamersley Iron,
Argyle Diamonds, Dampier Salt,
former Deputy Chairman of Bank
of Western Australia Ltd and
former Director of Rio Tinto Ltd
and Rio Tinto plc.
GRAEME WILLIAM MCGREGOR
AO, BEc, FCPA, FAIM, FAICD
Age 66. Director since
CHRISTOPHER JOHN RECNY
BSc, MSc, MBA
Age 51. Independent non-
executive Director effective
23 February 2005. Extensive
international management and
project management experience,
including as global head of
international consultancy L.E.K.’s
natural resources practice – a
company he helped establish
in the 1980s. Regional head
of Asia-Pacific for L.E.K. and
previously spent eight years with
Fluor Corporation as a project
manager on, and undertaking
feasibility studies for, major
resource developments.
PROFESSOR JUDITH SLOAN
BA (Hons), MA, MSc
Age 50. Director since
5 September 1994. Chairperson
of the Remuneration Committee
and member of the Audit
Committee of the Board.
Deputy Chair of the Australian
Broadcasting Corporation and
Part-time Commissioner of the
Productivity Commission. Former
Professor of Labour Studies at
the Flinders University of South
Australia and Director of the
National Institute of Labour
Studies. Former Chairperson of
SGIC Holdings Ltd and Director
of Mayne Group Ltd.
Santos Board of Directors during November 2004 Board meeting held at Moomba, Cooper Basin.
Left to right: Graeme McGregor, John Ellice-Flint, Peter Barnett, Stephen Gerlach, Michael Harding, Judith
Sloan, Michael O’Leary and Frank Conroy (who retired in December 2004). Kenneth Dean and Christopher
Recny subsequently joined the Board in February 2005.
STEPHEN GERLACH
LLB
Age 59. Director since 5
September 1989 and Chairman
since 4 May 2001. Chairman of
Santos Finance Ltd and of the
Environmental and Safety
Committee, Finance Committee
and Nomination Committee and
member of the Remuneration
Committee of the Board.
Chairman of Futuris Corporation
Ltd and Challenger Beston
Limited and a Director of
Southcorp Ltd. Former Managing
Partner of the Adelaide legal
firm, Finlaysons. Former Chairman
of Amdel Ltd and Equitoral
Mining Ltd.
JOHN CHARLES ELLICE-FLINT
BSc (Hons)
Age 54. Managing Director since
19 December 2000, member of
the Environmental and Safety
Committee of the Board, Director
of Santos Finance Ltd and also
Chairman of other Santos Ltd
subsidiary companies. Thirty
years’ experience in the
international oil and gas industry
including twenty six years with
Unocal, including as Senior Vice
President: Global Exploration and
Technology and Vice President:
Corporate Planning and Economics.
Member and Chair of the South
Australian Museum Board.
PETER CHARLES BARNETT
FCPA
Age 64. Director since
31 October 1995 and member
of the Environmental and Safety
Committee, Nomination
Committee, Finance Committee
and Remuneration Committee
of the Board. Director of AMCIL
Ltd and Opis Capital Ltd. Former
Managing Director and Chief
Executive Officer of Pasminco
Ltd (1988–1995) and Chief
Executive Officer of EZ Industries
Ltd. Former director of Mayne
Group Ltd.
KENNETH ALFRED DEAN
FCPA, MAICD
Age 52. Independent non-
executive Director effective 23
February 2005. Extensive financial
Annual Report 2004
41
SAN165 WWW Text 30/3/05 12:07 PM Page 42
SANTOS GROUP INTERESTS
As at 28 February 2005
Licence Area
% Interest
Licence Area
% Interest
Licence Area
% Interest
Surat Basin
PLs 30, 56 & 74
VIC/P52*
15.0
VIC/RL7 (La Bella)
ATP 336P (Roma) (PLs 3-13, 93 & PPL2)* 85.0
VIC/L22 (Minerva)
33.3
10.0
10.0
ATP 336P (Waldegrave) (PLs 10-12, 28,
69 & 89)*
ATP 470P (Redcap) (PL 71)
46.3
10.0
ATP 471P (Bainbilla) (PL 119 & PPL 58) 16.7
SOUTH AUSTRALIA
(PPL = Petroleum Production Licence;
PL = Pipeline Licence)
Cooper Basin*(I) (Fixed Factor Area)
(SA Unit PPLs 6-20, 22-25, 27-61, 63-75,
78-117, 119, 120, 124, 126-130, 132-135,
137-141, 143-146, 148-151, 153-155, 157,
159-166, 169-181, 183-186, 188-190, 192,
193, 195, 196, 198, 199 and in
Queensland PPL12)
66.6
Downstream*(I) (PL2)
66.6
Patchawarra East Joint Operating Area*
(PPLs 26, 76, 77, 118, 121-123, 125,
131, 136, 142, 147, 152, 156, 158,
167, 182, 187, 191, 194 & 197)
QUEENSLAND
(PL = Petroleum Lease; PPL = Pipeline Licence)
South-West Queensland*
ATP 259P
Naccowlah (PLs 23-26, 35, 36, 62, 76-79,
82, 87, 105, 107, 109, 133, 149, 175,
181, 182 & 189
55.5
Total 66 (PLs 34, 37, 63, 68, 75, 84, 88,
110, 129, 130, 134, 140, 142-144, 150,
168, 178, 186, 193, PPL8 & PPL14)
70.0
Wareena (PLs 113, 114, 141, 145, 148,
153, 157, 158, 187 & 188)
Innamincka (PLs 58, 80, 136, 137,
156 & 159)
Alkina
Aquitaine A (PLs 86, 131, 146,
177 & 208)
Aquitaine B (PLs 59-61, 81, 83, 85, 97,
106, 108, 111, 112, 132, 135, 139, 147,
151, 152, 155, 205 & 207)
Aquitaine C (PLs 138 & 154)
50/40/10 (PL 55)
SWQ Unit (PLs 12-13, 16-18, 31, 34,
36-40, 46-48, 62, 64-72, 78-82, 84,
86, 94-96, 98, 100, 101 & 105 and
in South Australia PLs 5, 9 & 15)
ATP 267P (Nockatunga) (PLs 33,
50 & 51)
ATP 299P (Tintaburra) (PLs 29, 38, 39,
52, 57, 95, 169 & 170)
42
Annual Report 2004
70.0
72.0
52.5
55.0
47.8
60.0
60.1
59.1
72.3
PL 2 (A & B) (Kooroon)*
ATP 471P (Myall) (PL 192)
Boxleigh*
PL 1 (Moonie)*
PL 1 (2) (Cabawin Exclusion)*
PL 1 (FO) (Cabawin Farm-out)*
PL 2 (Alton)*
PL 2C (Alton Farm-out)*
PL 5 (Drillsearch)*
PL 5 (Mascotte)*
PL 11 (Snake Creek East)*
PL 12 (Trinidad)*
PL 17 (Bennett)*
PL 17 (Bennett Exclusion)*
PL 17 (Leichardt Exclusion)*
PLs 21, 22, 27 & 64 (Balonne)
PL176
ATP 553P*
ATP 685P (Cockatoo Creek)
Facilities
Wungoona Processing Facilities*
Moonie to Brisbane Pipeline*
Jackson Moonie Pipeline (PPL 6)*
VICTORIA
Otway Basin (Onshore)
PEP 160
Otway Basin (Offshore)
VIC/P44 (Casino)*
89.0
VIC/P51*
61.2
Bowen Basin
ATP 337P* (PLs 41-45, 54, 67, 173, 183,
PPL10 & PPL11)
50.0
Gippsland Basin
VIC/RL1 (v) (Golden Beach)*(I)
100.0
VIC/RL2 (Kipper)
VIC/RL3 (Sole)(I)
VIC/L21 (Patricia-Baleen)*(I)
VIC/P55*(I)
OFFSHORE SOUTH AUSTRALIA
Duntroon Basin*
EPP 32
OFFSHORE TASMANIA
Sorell Basin*
T/32P
T/33P
T/35P
T/36P
NORTHERN TERRITORY
Amadeus Basin
OL 3 (Palm Valley)
Ls 4 and 5 (Mereenie)*
RL2 (Dingo)*
Mereenie-Brewer Estate Pipeline*
OFFSHORE NORTHERN AUSTRALIA
Carnarvon Basin
EP 61
EP 62
EP 357
L1H (Barrow Island)
L1O
L12 (Crest)
L13 (Crest)
TL/2 (Airlie)
TL/3 (Banta-Triller)
TL/7 (Thevenard)
20.0
90.0
90.0
66.7
100.0
50.0
80.0
50.0
50.0
48.0
65.0
65.7
65.0
28.6
28.6
35.7
28.6
28.6
35.7
35.7
15.0
28.6
35.7
51.0
100.0
100.0
100.0
50.0
52.5
100.0
63.5
21.3
42.5
25.0
92.5
70.0
100.0
70.0
12.5
100.0
50.0
50.0
50.0
100.0
82.8
60.0
50.0
55.0
SAN165 WWW Text 30/3/05 12:07 PM Page 43
Licence Area
% Interest
Licence Area
% Interest
Licence Area
% Interest
Timor Gap
JPDA 03-01
JPDA 03-12
Bayu-Undan Gas Field
Elang
PAPUA NEW GUINEA
PDL 1 (Hides)
PDL 3*
PL 3
PPL 190*
PPL 206
PPL 228
PRL 4*
PRL 5*
PRL 9*
SE Gobe Unit
INDONESIA
East Java Basin
Bawean
Brantas
Madura Offshore (Maleo)*
Nth Bali 1*
Sampang (Oyong)*
Kutei Basin
Donggala
Papalang
Popodi
West Natuna Basin
Kakap
West Papua Basin
Warim
TP/2
TP/7 (1-3)
TP/7 (4)
TR/4 (Australind)
WA-1-P
WA-7-L
WA-8-L (Talisman)
WA-13-L (East Spar)
WA-15-L (Stag)
WA-20-L (Legendre)
WA-26-L (Mutineer)*
WA-27-L (Exeter)*
WA-29-L (John Brookes)
WA-33-R
WA-191-P (Mutineer-Exeter)*
WA-208-P*
WA-209-P (Reindeer)
WA-214-P (John Brookes)
WA-246-P
WA-264-P*
Browse Basin*
WA-274-P
WA-281-P
WA-338-P
Bonaparte Basin*
NT/P67
NT/RL1 (Petrel)
WA-6-R (Petrel West)
WA-18-P (Tern)
WA-27-R (Tern)
Houtman Basin
WA-328-P
WA-339-P*
Timor Sea
AC/L1 (Jabiru)
AC/L2 (Challis)
AC/L3 (Cassini)
NT/P48 (Evans Shoal)
NT/P61
28.6
43.7
18.7
35.7
22.6
28.6
37.4
45.0
66.7
22.6
33.4
33.4
45.0
18.7
33.4
31.3
45.0
45.0
15.0
50.0
50.0
90.0
71.5
100.0
95.0
95.0
100.0
100.0
33.0
50.0
10.3
10.3
10.3
40.0
40.0
EGYPT
Ras Abu Darag
South East July
North Zeit Bay
50.0
20.0
50.0
UNITED STATES OF AMERICA AVG WORKING INTEREST
25.0
19.3
10.6
21.4
31.0
15.9
3.6
31.3
48.0
40.0
35.3
35.3
42.6
9.4
45.0
18.0
75.0
30.0
45.0
50.0
20.0
20.0
East Texas
Black Horse*
BP America
Jefferson Co
Knight
South Texas
Bar Harbor
BP Green*
Coquat
Cougar*
Duncan Slough*
E. Edinburgh
Elsa
Hall Ranch*
Hordes Creek
Lafite / Allen Dome*
Markham
Mikeska
Mountainside
Petru
Raymondville
Remmers*
Riverdale
Tidehaven*
6.3
Verdad
20.0
W. Mercedes
South Louisiana
Howards Creek
Montana
Deer Creek
100.0
25.0
18.8
30.0
25.0
50.0
25.0
100.0
66.2
20.8
25.0
57.5
50.3
92.1
16.0
54.5
20.8
30.9
25.3
66.3
23.1
38.9
25.0
25.0
25.0
50.0
* Santos operated.
(I) Includes interests held by Basin Oil Pty Ltd. By contract dated 17 February 2005, Santos agreed
to acquire Basin Oil Pty Ltd effective 1 January 2005. The transaction is expected to be
completed in the second quarter of 2005.
Annual Report 2004
43
SAN165 WWW Text 30/3/05 12:07 PM Page 44
10 YEAR SUMMARY 1995–2004
As at 31 December
1995
Santos average realised oil price (A$/bbl)
24.96
1996
27.43
1997
27.42
1998
20.95
1999
27.57
2000
46.54
2001
45.53
2002
44.74
2003
43.59
2004
51.83
Financial performance ($million)
Product sales revenue
Total operating revenue
671.6
740.1
729.2
804.0
778.5
769.4
944.5
1,497.1
1,459.7
1,478.4
1,465.0 1,500.9
859.5
1,000.8
995.6
1,556.2
1,561.8
1,542.3
1,619.4 1,753.2
Foreign currency gains/(losses)
(16.0)
25.0
Profit from ordinary activities before tax
241.0
Income tax relating to ordinary activities
130.4
331.9
136.0
3.6
322.3
116.1
2.0
0.3
267.3
339.6
91.0
30.5
2.7
725.9
239.1
0.2
(0.7)
(7.9)
(3.0)
627.6
181.7
493.3
171.2
430.9
103.9
540.8
160.9
Net profit after income tax attributable
to the shareholders of Santos Ltd
Financial position ($million)
110.6
195.9
206.2
176.3
309.1
486.8
445.9
322.1
327.0
379.9
Total assets
Net debt
Total equity
2,915.5
3,443.4
4,036.2
4,236.1
4,338.7
4,659.8
5,048.7
5,320.8
5,218.3 5,956.0
642.0
938.6
1,114.2
1,280.0
1,301.1
866.6
1,060.8
1,162.9
897.6 1,131.4
1,519.3
1,586.3
1,919.0
1,939.2
2,056.7
2,310.9
2,726.6
2,863.9
3,087.9 3,498.3
Reserves and production (mmboe)
Proven plus Probable reserves (2P)
Production
Exploration*
Wells drilled (number)
Expenditure ($million)
Other capital expenditure ($million)
703
36.8
860
39.2
1,009
41.1
966
45.6
941
49.2
921
56.0
724
55.7
732
57.3
636
54.2
643
47.1
66
91
112
81
34
42
26
18
19
16
87.9
121.1
190.1
180.7
78.1
100.1
93.4
133.1
136.4
125.6
Delineation and development*
53.9
105.8
179.7
158.1
116.8
187.1
308.1
Buildings, plant and equipment
* From 2001, appraisal and near-field exploration wells have been reclassified from exploration to delineation expenditure. Prior year amounts have not been restated.
150.3
205.4
165.7
153.5
102.5
40.1
258.7
308.8
319.0
519.0
672.7
94.9
131.1
44
44
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Share information
Share issues
As as 31 December
1995
1996
1997
Employee
Share Plan
1 for 8
rights issue
1998
Employee
Share Plan
1999
Employee
Share Plan/
Executive
Share Plan
2000
Employee
Share Plan/
Executive
Share Plan/
Exercise of
Options/
Restricted
Shares
2001
Employee
Share Plan/
Executive
Share Plan/
Exercise of
Options/
Share Buy
-back/
Schemes of
Arrangement
2002
Employee
Share Plan/
Executive
Share Plan/
Exercise of
Options
2003
Employee
Share Plan/
Executive
Share Plan/
Exercise of
Options
2004
Employee
Share Plan/
Executive
Share Plan/
Exercise of
Options
Preference
Share
Buy-Back
Issue of
FUELS
Convertible
Preference
Shares
Number of issued ordinary shares
at year end (million)
Weighted average number
of ordinary shares (million)
Dividends per ordinary share
- ordinary (¢)
- special (¢)
Dividends
- ordinary ($million)
- special ($million)
Number of issued preference shares
at year end (million)
Dividends per preference share ($)
- ordinary
- special
Dividends ($million)
- ordinary ($million)
- special ($million)
Earnings per share (¢)
Return on total operating revenue (%)
Return on average ordinary equity (%)
Return on average capital employed (%)
Net debt/(net debt + equity) (%)
Net interest cover (times)
General
Number of employees
(excluding contractors)
Number of shareholders
539.6
539.6
607.3
607.8
608.2
610.4
579.3
583.1
584.7
585.7
553.3
553.4
583.7
605.6
606.1
608.3
612.0
580.9
583.4
584.9
23.0
24.0
25.0
25.0
27.0
-
-
-
-
-
30.0
10.0
30.0
30.0
30.0
30.0
-
-
-
-
123.6
129.0
151.3
151.4
163.7
182.7
179.9
174.8
175.0
175.5
-
-
-
-
-
-
20.0
14.9
7.2
6.1
29.7
5.8
-
-
-
-
-
-
35.4
24.4
12.6
9.6
37.2
6.2
-
-
-
-
-
-
35.3
24.0
11.8
8.7
36.7
5.4
-
-
-
-
-
-
29.1
17.6
9.1
7.1
39.8
4.4
-
-
-
-
-
-
51.0
31.0
15.5
11.5
38.7
5.2
61.2
-
-
-
-
-
-
-
-
-
80.0
31.3
22.3
16.7
27.3
9.1
3.5
3.5
3.5
6.0
-
-
-
-
72.9
28.6
19.0
14.1
28.0
9.7
5.40
6.57
-
-
18.9
23.0
-
51.9
20.9
13.1
9.0
28.9
8.1
-
52.1
20.2
12.3
8.8
22.5
8.5
6.59
5.00
23.0
14.3
58.6
21.7
13.1
9.4
24.4
9.2
1,471
1,461
1,615
1,650
1,645
1,631
1,713
1,737
1,700
1,526
55,684
55,482
65,459
81,286
81,416
76,457
86,472
85,888
84,327
78,976
Market capitalisation ($million)
Prior year amounts have, where applicable, been adjusted to place them on a comparable basis with current year amounts.
3,826
2,741
2,111
2,654
2,516
3,670
3,589
3,509
4,017
4,965
Annual Report 2004
Annual Report 2004
45
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FINANCIAL REPORT
CONTENTS
Directors’ Statutory Report
Financial Report
Statements of Financial Performance
Statements of Financial Position
Statements of Cash Flows
Notes to the Financial Statements
1 Statement of Accounting Policies
2 Revenue from Ordinary Activities
3 Expenses from Ordinary Activities
4 Borrowing Costs
5 Profit from Ordinary Activities
6 Taxation
7 Receivables
8 Inventories
9 Other Assets
10 Exploration and Development Expenditure
11 Land and Buildings, Plant and Equipment
12 Other Financial Assets
13 Intangibles
14 Payables
15 Interest-Bearing Liabilities
16 Provisions
17 Other Liabilities
18 Contributed Equity
19 Foreign Currency Translation Reserve
20 Retained Profits
21 Earnings per Share
22 Investments in Controlled Entities
23 Interests in Joint Ventures
24 Notes to Statements of Cash Flows
25 Related Parties
26 Specified Director and Specified Executive Disclosures
27 Remuneration of Auditors
28 Segment Information
29 Commitments for Expenditure
30 Superannuation Commitments
31 Contingent Liabilities
32 Additional Financial Instruments Disclosure
33 Economic Dependency
34 Post Balance Date Events
35 Australian Equivalents to International Reporting Standards
Directors Declaration
Independent Audit Report
47
50
51
52
53
56
56
56
57
57
58
58
58
58
59
59
59
59
60
61
61
62
68
68
69
70
72
74
74
75
80
80
82
82
83
84
86
86
86
88
89
46
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DIRECTORS’ STATUTORY REPORT
The Directors present their report together with the financial report of Santos Ltd (“the Company”) and the consolidated financial report of
the consolidated entity, being the Company and its controlled entities, for the financial year ended 31 December 2004, and the auditor
report thereon. Information in this Annual Report referred to by page number in this report or contained in a Note to the financial
statements referred to in this report is to be read as part of this report.
1. Directors, Directors’ Shareholdings and Directors’ Meetings
The names of Directors of the Company in office at the date of this report and details of the relevant interest of each of those Directors in shares in
the Company at that date are as set out below:
Surname
Other Names
Shareholdings in
Santos Ltd
Surname
Other Names
Shareholdings in
Santos Ltd
Ordinary
Shares
Franked
Unsecured
Equity
Listed
Securities
Ordinary
Shares
Franked
Unsecured
Equity
Listed
Securities
Barnett
Peter Charles
12,394
Ellice-Flint
(Managing Director)
John Charles
Gerlach
(Chairman)
Stephen
1,000,000*
42,305
-
-
-
Harding
McGregor
O’Leary
Sloan
Richard Michael
-
-
Graeme William
10,000
1,200
Michael Anthony
Judith
4,725
5,000
-
195
The above named Directors held office during and since the end of the
financial year except for Mr RM Harding, who was appointed a Director
on 1 March 2004.
Except where otherwise indicated, all shareholdings are of fully paid
ordinary shares.
*These shares are Restricted Shares issued on the terms described in
Note 18 to the financial statements.
No Director holds shares in any related body corporate, other than in
trust for the Company.
At the date of this report, Mr J C Ellice-Flint holds 3,000,000 options under the Santos Executive Share Option Plan and subject to the further terms
described in Note 18 to the financial statements.
Details of the qualifications, experience and special responsibilities of each Director are set out on page 41 of this Annual Report.
Directors’ Meetings
The number of Directors’ Meetings and meetings of committees of Directors held during the financial year and the number of meetings attended by
each Director are as follows:
Surname
Other Names
Barnett
Conroy***
Ellice-Flint
Gerlach
Harding
McGregor
O’Leary
Sloan
Peter Charles
Francis John
John Charles
Stephen
Richard Michael
Graeme William
Michael Anthony
Judith
Directors’
Meetings
Audit
Committee
No. of
Mtgs
Held*
No. of
Mtgs
Attended
No. of
Mtgs
Held*
No. of
Mtgs
Attended
Environmental &
Safety Committee**
No. of
No. of
Mtgs
Mtgs
Attended
Held*
Remuneration
Committee
No. of
Mtgs
Held*
No. of
Mtgs
Attended
Finance
Committee
No. of
Mtgs
Held*
No. of
Mtgs
Attended
Nomination
Committee
No. of
Mtgs
Held*
No. of
Mtgs
Attended
12
12
12
12
11
12
12
12
12
11
12
12
11
12
12
12
-
4
-
-
1
4
-
4
-
4
-
-
1
4
-
4
4
-
4
4
-
-
4
-
4
-
4
4
-
-
4
-
6
-
-
6
-
-
-
6
5
-
-
6
-
-
-
6
-
6
-
6
-
6
-
-
-
6
-
5
-
5
-
-
1
1
-
1
-
-
-
-
1
1
-
1
-
-
-
-
*
Reflects the number of meetings held during the time the Director held office, or was a member of the Committee, during the year.
**
In addition to formal meetings, the Committee participated in a site visit to Moomba.
*** Retired as a Director of the Company on 14 December 2004.
As at the date of this report, the Company had an audit committee of the Board of Directors.
Particulars of the Company’s corporate governance practices appear on pages 29 to 40 of this Annual Report.
Annual Report 2004
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2. Principal Activities
The principal activities of the consolidated entity during the financial year were: petroleum exploration, the production, treatment and marketing of
natural gas, crude oil, condensate, naphtha and liquid petroleum gas, and the transportation by pipeline of crude oil. No significant change in the
nature of these activities has occurred during the year.
3. Review and Results of Operations
A review of the operations and of the results of those operations of the consolidated entity during the financial year are contained on pages 2 to 7,
10 to 12 and 14 to 28 of this Annual Report.
4. Dividends
On 23 February 2005, Directors declared:-
(i) that a fully franked final dividend of 18 cents per fully paid ordinary share be paid on 31 March 2005 to shareholders registered in the books of
the Company at the close of business on 4 March 2005. This final dividend amounts to approximately $105.4 million; and
(ii) that in accordance with the Terms of Issue, a fully franked dividend of $2.4497 per Franked Unsecured Equity Listed Securities be paid on 31
March 2005 to holders registered in the books of the Company at the close of business on 4 March 2005, amounting to $14.7 million.
A fully franked final dividend of $87.7 million (15 cents per share) was paid on 31 March 2004 on the 2003 results. Indication of this dividend
payment was disclosed in the 2003 Annual Report. A fully franked interim dividend of $87.8 million (15 cents per share) was paid to members on 30
September 2004.
In accordance with the Terms of Issue, fully franked dividends of $3.2940 per reset convertible preference share were paid on 31 March 2004 and 30
September 2004 respectively; each amounting to $11.5 million.
5. State of Affairs
In the opinion of the Directors, there were no significant changes in the state of affairs of the consolidated entity that occurred during the financial
year other than those referred to on pages 2 to 7, 10 to 12 and 14 to 28 of this Annual Report.
6. Environmental Regulation
The consolidated entity’s Australian operations are subject to various environmental regulations under Commonwealth, State and Territory legislation,
including under applicable petroleum legislation and in respect to its South Australian operations, licences (numbers EPA 2569, 1259, 14145, 888
and 2164) issued under the Environment Protection Act 1993, and its Queensland operations, licence no. 150029 issued under the Environmental
Protection Act 1994. Applicable legislation and requisite environmental licences are specified in the entity’s Environmental, Health and Safety
Compliance Database, which forms part of the consolidated entity’s overall Environmental Management System. Compliance performance is monitored
on a regular basis and in various forms, including environmental audits conducted by regulatory authorities and by the Company, either through
internal or external resources. During the financial year, except as mentioned below, no fines were imposed, no prosecutions were instituted and no
notice of non-compliance with the above referenced regulations was received from a regulatory body. A directive was issued by the Northern Territory
Department of Business, Industry and Resource Development in December 2004 in relation to flaring of gas at Mereenie under Clause 619 of the
Schedule of Onshore Petroleum Exploration and Production Requirements 1993 issued under the Northern Territory Petroleum Act 1984. A report was
submitted to the Department regarding this incident. A show cause notice was received from the Department of Primary Industries and Resources,
South Australia, in June 2004 in relation to the Keleary to Merrimelia oil pipeline under the South Australian Petroleum Act 2000. The pipeline has
been assessed and a management strategy has been agreed with the Department.
7. Events Subsequent to Balance Date
Except as mentioned below, in the opinion of the Directors there has not arisen in the interval between the end of the financial year and the date of
this report any matter or circumstance that has significantly affected or may significantly affect the operations of the consolidated entity, the results
of those operations, or the state of affairs of the consolidated entity in future financial years.
Dividends declared after 31 December 2004 are set out in Item 4 of this Directors’ Report and Note 20 to the financial statements.
On 17 February 2005, the Company entered into a contract to acquire Basin Oil Pty Ltd effective 1 January 2005. Basin Oil Pty Ltd has a 2.1%
interest in the South Australia Cooper Basin, a 40% interest in Patricia-Baleen and Sole and a 33.3% interest in Golden Beach and Vic/P55.
48
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8. Likely Developments
Certain likely developments in the operations of the consolidated entity and the expected results of those operations in future financial years are
referred to at pages 2 to 7, 11 to 12, 16 to 23 and 26 to 28 of this Annual Report. Further information about likely developments in the operations
of the consolidated entity and the expected results of those operations in future financial years has not been included in this report because
disclosure of the information would be likely to result in unreasonable prejudice to the consolidated entity.
9. Directors’ and Senior Executives’ Remuneration
The remuneration policies and practices of the Company, (including the compensation arrangements for executive Directors and senior management),
the Company’s superannuation arrangements, the fees for non-executive members of the Board (within the aggregate amount approved by
shareholders), the Company’s employee share and option plans and executive and senior management performance review and succession planning
are matters referred to and considered by the Remuneration Committee of the Board, which has access to independent advice and comparative
studies on the appropriateness of remuneration arrangements. Details of the Company’s remuneration policies and the nature and amount of the
remuneration of the Directors and Specified Executives are set out on pages 31 and 37 to 40 of this Annual Report and in Notes 18 and 26 to the
financial statements.
10. Indemnification
Article 177 of the Company’s Constitution provides that the Company indemnifies each person who is or who has been an “officer” (as defined in
the Corporations Act) of the Company against any liability to another person (other than the Company or a related body corporate) arising from their
position as such officer, unless the liability arises out of conduct involving a lack of good faith. The Company has insured against amounts which it
is liable to pay pursuant to Article 177 or which it otherwise agrees to pay by way of indemnity. Article 177 also provides for an indemnity in favour
of an officer or auditor (KPMG) in relation to costs incurred in defending proceedings in which judgement is given in their favour, or in which they
are acquitted or the Court grants relief.
In conformity with Article 177, the Company is party to Deeds of Indemnity in favour of each of the Directors referred to in this report who held
office during the year and certain executives of the consolidated entity, being indemnities to the full extent permitted by law. There is no monetary
limit to the extent of the indemnity under those Deeds and no liability has arisen thereunder during or since the financial year.
During the year, the Company paid premiums in respect of Directors' and Officers' Liability and Legal Expenses insurance contracts for the year ending
31 December 2004 and since the end of the year the Company has paid, or agreed to pay, premiums in respect of such contracts for the year ending
31 December 2005. The insurance contracts insure against certain liability (subject to exclusions) persons who are or have been directors or officers
of the Company and controlled entities. A condition of the contracts is that the nature of the liability indemnified and the premium payable not be
disclosed.
11. Rounding
Australian Securities and Investments Commission Class Order 98/100, dated 10 July 1998, applies to the Company and accordingly amounts have
been rounded off in accordance with that Class Order, unless otherwise indicated.
This report is made on 23 February, 2005 in accordance with a resolution of the Directors.
Director
23 February, 2005
Director
Annual Report 2004
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STATEMENTS OF FINANCIAL PERFORMANCE
for the year ended 31 December 2004
Product sales
Cost of sales
Gross profit
Other revenue
Other expenses
Borrowing costs
Profit from ordinary activities before income tax expense
Income tax expense relating to ordinary activities
Net profit after income tax attributable to the shareholders of Santos Ltd
Net exchange differences relating to self-sustaining foreign operations
Total changes in equity from non-owner related transactions attributable
to the shareholders of Santos Ltd
Earnings per share (cents)
Basic
Diluted
Consolidated
Santos Ltd
2004
$million
1,500.9
(1,049.8)
451.1
252.3
(129.0)
(33.6)
540.8
(160.9)
379.9
(0.2)
2003
$million
1,465.0
(974.4)
490.6
154.4
(179.5)
(34.6)
430.9
(103.9)
327.0
(4.7)
2004
$million
2003
$million
568.8
(414.5)
154.3
858.0
(221.0)
(91.1)
700.2
(57.1)
643.1
–
616.3
(356.6)
259.7
126.2
(108.3)
(84.0)
193.6
(10.7)
182.9
–
379.7
322.3
643.1
182.9
58.6
58.5
52.1
51.5
Note
2
3
2
3
4
6
19
21
21
The statements of financial performance are to be read in conjunction with the notes to the financial statements.
50
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STATEMENTS OF FINANCIAL POSITION
as at 31 December 2004
Current assets
Cash
Receivables
Inventories
Other
Total current assets
Non-current assets
Exploration and development expenditure
Land and buildings, plant and equipment
Other financial assets
Intangibles
Deferred tax assets
Other
Total non-current assets
Total assets
Current liabilities
Payables
Deferred income
Interest-bearing liabilities
Current tax liabilities
Provisions
Other
Total current liabilities
Non-current liabilities
Deferred income
Interest-bearing liabilities
Deferred tax liabilities
Provisions
Other
Total non-current liabilities
Total liabilities
Net assets
Equity
Contributed equity
Foreign currency translation reserve
Retained profits
Total equity
Consolidated
Santos Ltd
Note
2004
$million
2003
$million
2004
$million
2003
$million
7
8
9
10
11
12
13
9
14
15
16
17
15
16
17
18
19
20
128.0
409.1
117.3
21.5
675.9
3,210.3
2,058.7
1.2
4.0
3.0
2.9
5,280.1
5,956.0
371.6
5.8
49.9
11.2
52.8
14.7
506.0
16.3
1,209.5
560.4
131.6
33.9
1,951.7
2,457.7
3,498.3
2,139.0
(9.0)
1,368.3
3,498.3
111.1
171.7
112.4
14.3
409.5
2,945.3
1,840.8
11.7
8.5
1.4
1.1
4,808.8
5,218.3
291.3
8.9
45.4
29.3
55.3
10.6
440.8
18.8
963.3
535.8
116.0
55.7
1,689.6
2,130.4
3,087.9
1,893.1
(8.8)
1,203.6
3,087.9
39.3
1,917.7
58.8
10.0
2,025.8
905.8
665.4
2,530.7
–
2.4
–
4,104.3
6,130.1
436.3
1.5
1,686.4
9.9
48.7
–
2,182.8
–
–
462.5
46.0
–
508.5
2,691.3
3,438.8
2,139.0
–
1,299.8
3,438.8
52.9
1,410.3
53.2
7.4
1,523.8
903.6
673.1
2,295.9
–
0.8
–
3,873.4
5,397.2
655.0
2.0
1,411.7
23.5
47.5
–
2,139.7
–
–
454.2
38.3
–
492.5
2,632.2
2,765.0
1,893.1
–
871.9
2,765.0
The statements of financial position are to be read in conjunction with the notes to the financial statements.
Annual Report 2004
51
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STATEMENTS OF CASH FLOWS
for the year ended 31 December 2004
Consolidated
Santos Ltd
Note
2004
$million
2003
$million
2004
$million
2003
$million
Cash flows from operating activities
Receipts from customers
Dividends received
Interest received
Overriding royalties received
Pipeline tariffs and other receipts
Payments to suppliers and employees
Royalty, excise and PRRT payments
Borrowing costs paid
Income taxes paid
1,544.3
–
3.5
14.5
19.9
(583.6)
(169.6)
(65.2)
(158.8)
Net cash provided by operating activities
24
605.0
Cash flows from investing activities
Payments for:
Exploration
Delineation
Development
Land and buildings, plant and equipment
Acquisitions of oil and gas assets
Acquisitions of controlled entities
Share subscriptions in controlled entities
Restoration
Proceeds from disposal of non-current assets
Proceeds from disposal of controlled entities
Other investments
Net cash used in investing activities
Cash flows from financing activities
Dividends paid
Proceeds from issues of ordinary shares
Proceeds from issue of redeemable convertible preference shares
Redemption of reset convertible preference shares
Net drawdowns/(repayments) of borrowings
Net (payments to)/receipts from controlled entities
Premium paid on buy-back of reset convertible preference shares
Other
Net cash (used in)/provided by financing activities
Net increase/(decrease) in cash
Cash at the beginning of the year
Effects of exchange rate changes on the balances of cash held in foreign currencies
Cash at the end of the year
18
18
20
(126.0)
(73.7)
(256.1)
(343.1)
(14.5)
(112.3)
–
(7.3)
39.9
–
(0.5)
(893.6)
(212.8)
6.4
589.5
(350.0)
282.8
–
(2.4)
0.4
313.9
25.3
111.1
(8.4)
128.0
The statements of cash flows are to be read in conjunction with the notes of the financial statements.
1,637.3
0.4
2.5
17.0
28.2
(439.9)
(118.7)
(60.9)
(168.6)
897.3
(149.8)
(75.0)
(188.1)
(337.8)
(7.6)
(22.7)
–
(2.6)
108.0
22.6
–
(653.0)
(198.0)
8.3
–
–
(20.4)
–
–
–
(210.1)
34.2
84.8
(7.9)
111.1
644.4
251.7
45.1
19.0
18.0
(279.0)
(78.4)
(90.6)
(137.5)
392.7
(65.7)
(6.1)
(124.4)
(127.7)
–
(93.6)
(151.7)
(0.1)
430.0
–
(0.5)
(139.8)
(212.8)
6.4
589.5
(350.0)
–
(297.0)
(2.4)
–
(266.3)
(13.4)
52.9
(0.2)
39.3
683.0
0.4
36.9
22.1
1.6
(186.4)
(39.8)
(83.6)
(65.1)
369.1
(30.6)
(29.5)
(68.7)
(91.7)
(1.5)
(22.7)
(469.9)
(0.3)
62.7
3.9
–
(648.3)
(198.0)
8.3
–
–
–
494.1
–
–
304.4
25.2
26.6
1.1
52.9
52
Annual Report 2004
SAN165 WWW Fins 30/3/05 11:55 AM Page 53
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2004
1. Statement of Accounting Policies
The significant accounting policies that have
been adopted in the preparation of this
financial report are:
(a) Basis of preparation
The financial report is a general purpose
financial report prepared in accordance
with applicable Accounting Standards,
Urgent Issues Group Consensus Views,
other authoritative pronouncements of the
Australian Accounting Standards Board and
the Corporations Act 2001 collectively
referred to as Australian Generally
Accepted Accounting Principles
(“Australian GAAP”). The financial report
has been prepared on the basis of
historical costs and, except where stated,
does not take into account changing
money values or fair values of assets.
The accounting policies have been
consistently applied by each entity in the
Santos Group and are consistent with those
adopted in the previous financial year.
(b) Principles of consolidation
The consolidated financial statements
of the Santos Group include the financial
statements of the Company, Santos Ltd
being the parent entity, and its
controlled entities.
The balances and effects of all
transactions between controlled entities
are eliminated in full on consolidation.
Interests in unincorporated joint ventures
are recognised by including in the
financial statements the Santos Group’s
proportion of the joint venture costs,
assets and liabilities.
(c) Non-current assets
With the exception of exploration
expenditure carried forward pertaining to
areas of interest in the exploration stage
(refer note 1(l)), the carrying amounts of
non-current assets are reviewed to
determine whether they are in excess of
their estimated recoverable amount at
balance date. If the carrying amount of a
non-current asset exceeds the estimated
recoverable amount, the asset is written
down to the lower value. The write-down
is expensed in the reporting period in
which it occurs.
In assessing recoverable amounts, the
relevant cash flows have not been
discounted to their present value.
(d) Acquisition of assets
(f) Derivative financial instruments
All assets acquired are recorded at their cost
of acquisition, being the fair value of the
consideration provided plus incidental costs
directly attributable to the acquisition.
On acquisition of a controlled entity, the
identifiable net assets acquired are
recorded at their fair values. To the extent
that there is excess purchase consideration
representing goodwill, the goodwill is
amortised using the straight line method
over a period of 20 years. The unamortised
balance of goodwill is reviewed at each
balance date and charged against profit to
the extent that the balance exceeds the
value of expected future benefits.
Assets transferred between entities within
the Santos Group are recognised by the
acquiring entity at fair value.
(e) Foreign currency
Foreign currency transactions are
translated to Australian currency at the
rates of exchange in effect at the dates of
the transactions. Amounts receivable and
payable in foreign currencies at balance
date are translated at the rate of exchange
existing on that date. Exchange
differences relating to amounts receivable
or payable in foreign currencies are
brought to account in the statements of
financial performance in the period in
which they arise.
Monetary assets and liabilities of
integrated foreign operations are
translated at the exchange rate existing at
balance date, while non-monetary items
and revenue and expense items are
translated at exchange rates current when
the transactions occurred. Exchange
differences arising on the translation of
monetary assets and liabilities are brought
to account in the statement of financial
performance.
Assets and liabilities of self-sustaining
foreign operations are translated at the
exchange rate existing at balance date.
Equity items are translated at historical
rates. The statements of financial
performance are translated at a weighted
average rate for the year. Exchange
differences arising on translation are
taken directly to the foreign currency
translation reserve.
The Santos Group uses derivative financial
instruments to hedge its exposure to
changes in foreign exchange rates,
commodity prices and interest rates arising
in the normal course of business. The
principal derivatives used are forward
foreign exchange contracts, foreign
currency swaps, foreign currency option
contracts, interest rate swaps and options,
commodity crude oil price swap and option
contracts and natural gas swap and option
contracts. Their use is subject to a
comprehensive set of policies, procedures
and limits approved by the Board of
Directors. The Santos Group does not trade
in derivative financial instruments for
speculative purposes.
Gains and losses on derivative financial
instruments designated as hedges are
accounted for on the same basis as the
underlying exposures they are hedging.
The gains and losses on derivative
financial instruments hedging specific
purchase or sale commitments are deferred
and included in the measurement of the
purchase or sale.
Where hedge transactions are designated as
a hedge of an anticipated specific purchase
or sale, the gains or losses on the hedge
arising up to the date of the anticipated
transaction, together with any costs or
gains arising at the time of entering into
the hedge, are deferred and included in the
measurement of the anticipated transaction
when the transaction has occurred as
designated. Any gains or losses on the
hedge transaction after that date are
included in the statements of financial
performance. The net amounts receivable or
payable under forward foreign exchange
contracts and the associated deferred gains
or losses are recorded on the statements of
financial position from the inception of the
hedge transaction.
Exchange differences relating to amounts
payable in foreign currencies designated
as a hedge of a self-sustaining foreign
operation, together with any related
income tax expense/benefit, are
transferred on consolidation to the foreign
currency translation reserve.
Annual Report 2004
53
SAN165 WWW Fins 30/3/05 11:55 AM Page 54
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2004
1. Statement of Accounting Policies
(continued)
(g) Revenue
Product sales, equipment rentals and
pipeline tariffs, overriding royalties and
other income are recognised when the
goods and services are provided and the
Santos Group has a legally enforceable
entitlement to the proceeds. Interest
revenue is recognised as it accrues.
Dividend income from controlled entities
is recognised as revenue as dividends are
declared and from other parties as
dividends are received.
The gross proceeds of non-current asset
sales are included as revenue at the date
control of the asset passes to the buyer,
usually when an unconditional contract of
sale is signed. The gain or loss on disposal
is calculated as the difference between the
carrying amount of the asset at the time of
disposal and the net proceeds on disposal.
(h) Goods and services tax
Revenues, expenses and assets are
recognised net of the amount of goods
and services tax (“GST”), except where the
amount of GST incurred is not recoverable
from the Australian Tax Office (“ATO”). In
these circumstances the GST is recognised
as part of the cost of acquisition of the
asset or as part of the expense.
Receivables and payables are stated with
the amount of GST included.
The net amount of GST recoverable from,
or payable to, the ATO is included as a
current asset or liability in the statements
of financial position.
Cash flows are included in the statements
of cash flows on a gross basis. The GST
components of cash flows arising from
investing and financing activities which
are recoverable from, or payable to, the
ATO are classified as operating cash flows.
(i) Cash
For the purposes of the statements of cash
flows, cash includes cash on hand, cash at
bank and short-term deposits at call.
(j) Receivables
(m)Borrowings
Trade debtors and other receivables are
recorded at amounts due. A provision is
made for any doubtful debts based on a
review of collectability of outstanding
amounts at balance date. Bad debts are
written off in the period they are identified.
(k) Inventories
Inventories are valued at the lower of cost
and net realisable value after provision is
made for obsolescence. Cost is determined
as follows:
(i) drilling and maintenance stocks,
which include plant spares,
maintenance and drilling tools used
for ongoing operations, are valued at
average cost; and
(ii) petroleum products, which comprise
extracted crude oil, liquefied petroleum
gas, condensate and naphtha stored in
tanks and pipeline systems and
processed sales gas and ethane stored
in subsurface reservoirs, are valued
using the absorption cost method.
(l) Exploration and development
expenditure
Exploration and development expenditures
in respect of each area of interest are
accumulated and carried forward if either:
(i) such expenditure is expected to be
recouped through successful
development and commercial
exploitation of the area of interest; or
(ii) the exploration activities in the area of
interest have not yet reached a stage
which permits reasonable assessment
of the existence of economically
recoverable reserves and active and
significant operations in, or in relation
to, the area of interest are continuing.
When either an area of interest is
abandoned or the Directors consider the
expenditure to be of reduced or no further
value, accumulated exploration
expenditure is written down or off in the
period in which such a decision is made.
Borrowings are carried on the statements
of financial position at their principal
amount. Interest is accrued at the
contracted rate.
(n) Leases
Operating lease payments, where the
lessor effectively retains substantially all
the risks and benefits of ownership of the
leased items, are expensed on a straight
line basis over the term of the lease.
(o) Capitalisation of borrowing costs
Borrowing costs, including interest, finance
charges and foreign currency exchange
gains and losses relating to major plant and
equipment projects under development and
construction up to the date of
commencement of commercial operations,
are capitalised and amortised over the
expected useful lives of the facilities. Where
funds are borrowed specifically for
qualifying projects the actual borrowing
costs incurred are capitalised. Where the
projects are funded through general
borrowings the borrowing costs are
capitalised based on the weighted average
borrowing rate, which for the year ended
31 December 2004 was 5.09%
(2003: 4.91%).
Borrowing costs incurred in respect of
completed projects are expensed.
(p) Deferred income
A liability is recorded for obligations under
sales contracts to deliver natural gas in
future periods for which payment has
already been received.
(q) Depreciation and depletion
Depreciation charges are calculated to
write-off the carrying value of buildings,
plant and equipment over their estimated
useful lives to the entity. Depreciation of
onshore buildings, plant and equipment
assets is calculated using the straight line
method of depreciation. The estimated
useful lives to the entity will vary for each
asset depending on projected average rate
54
Annual Report 2004
SAN165 WWW Fins 30/3/05 11:55 AM Page 55
1. Statement of Accounting Policies
(continued)
of usage, degree of technical
obsolescence, expected commercial life
and the period of time during which the
right or entitlement to the asset exists.
The depreciation rates are reviewed and
reassessed periodically in light of technical
and economic developments.
The useful lives for each class of onshore
asset will vary depending on their
individual technical and economic
characteristics but will generally fall
within the following ranges:
•
Plant and equipment
– Computer equipment
3 – 5 years
– Motor vehicles
4 – 7 years
– Furniture and fittings 10 – 20 years
– Pipelines
10 – 30 years
– Plant and facilities
10 – 50 years
•
Buildings
20 – 50 years
Depreciation of offshore plant and
equipment is calculated using a unit of
production method which will
proportionately depreciate the assets over
the life of the Proven plus Probable (“2P”)
reserves on a field by field basis.
Depletion charges are calculated using a
unit of production method which will
amortise, over the life of the 2P reserves,
exploration and development expenditure
together with future costs necessary to
develop the reserves in the respective
areas of interest.
Depletion is not charged on costs
carried forward in respect of areas of
interest in the development stage until
production commences.
(r) Restoration
Provisions are made for environmental
restoration of areas of interest where gas
and petroleum production is undertaken.
Such provisions recognise the estimated
future restoration obligations
incrementally over the life of the reserves
on a unit of production basis. The
estimated future obligations include
removing of facilities, abandoning of wells
and restoring the affected areas. Estimates
for the future restoration obligations are
reviewed and reassessed regularly, based
on current legal requirements and
technology and are measured in current
dollars on an undiscounted basis.
Adjustments to the provisions are made
on a prospective basis.
(s) Employee benefits
The provisions for employee benefits for
wages, salaries and annual leave expected
to be settled within twelve months of the
balance date represent present obligations
resulting from employees services provided
to balance date, calculated at
undiscounted amounts based on
remuneration wage and salary rates that
the Santos Group expects to pay as at
balance date including related on-costs.
Long service leave is provided in respect
of all employees, based on the present
value of the estimated future cash outflow
to be made resulting from employees’
services up to balance date. The provision
is calculated using expected future
increases in wage and salary rates
including related on-costs and expected
settlement dates, and is discounted using
the rates attached to the Commonwealth
Government bonds at balance date which
most closely match the terms of maturity
of the related liabilities.
The Company and several controlled entities
contribute to a number of defined benefit
and cash accumulation superannuation
plans. Contributions are recognised as an
expense as they are made.
(t) Employee share ownership plans
The Company operates a number of share
ownership plans.
Shares issued under the Santos Executive
Share Plan, Santos Executive Share Option
Plan and the Santos Employee Share
Purchase Plan are recorded as contributed
equity at the fair value of the
consideration received, if any.
The value of the shares issued to eligible
employees under the Santos Employee
Share Acquisition Plan is expensed over
a three year period.
(u) Income tax
Tax effect accounting is applied whereby
the income tax charged in the statements
of financial performance is matched with
the accounting profit after allowing for
permanent differences. Income tax on
timing differences, which arise from items
being brought to account in different
periods for income tax and accounting
purposes, is carried forward in the
statements of financial position as a
deferred tax asset or deferred tax liability.
Future income tax benefits relating to
entities which incur losses are brought to
account where realisation of the benefits
is considered to be virtually certain.
Santos Ltd is the head entity in the
tax-consolidated group comprising all
the Australian resident wholly-owned
controlled entities set out in note 22.
The implementation date for the
tax-consolidated group was
1 January 2003.
The head entity recognises all of the
current and deferred tax assets and
liabilities of the tax-consolidated group.
The tax-consolidated group has entered
into a tax funding agreement that requires
wholly-owned subsidiaries to make
contributions to the head entity for tax
liabilities and deferred tax balances arising
from external transactions occurring after
implementation of tax consolidation. The
contributions are calculated as a
percentage of profit from ordinary
activities before income tax expense.
Contributions are payable following
payment of the liabilities by Santos Ltd.
The assets and liabilities arising under the
tax funding agreement are recognised as
intercompany assets and liabilities with a
consequential adjustment to income tax
expense or revenue.
The tax-consolidated group has also
entered into a tax sharing agreement
pursuant to which the wholly-owned
controlled entities may be required to
contribute to the tax liabilities of Santos
Ltd in the event of default by Santos Ltd
or upon leaving the group.
Annual Report 2004
55
SAN165 WWW Fins 30/3/05 11:55 AM Page 56
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2004
Consolidated
Santos Ltd
2004
$million
2003
$million
2004
$million
2003
$million
680.1
501.8
228.5
90.5
720.8
477.7
150.0
116.5
1,500.9
1,465.0
14.3
19.0
–
3.5
–
–
116.6
98.9
–
252.3
308.5
32.6
154.0
536.4
14.9
1,046.4
3.4
1,049.8
57.1
3.3
–
–
60.4
46.5
–
22.1
13.3
7.6
–
2.5
0.4
–
–
108.0
22.6
154.4
263.6
33.3
131.4
528.8
5.4
962.5
11.9
974.4
41.6
2.8
–
4.4
48.8
52.9
18.1
59.7
129.0
179.5
–
65.7
(32.1)
33.6
–
57.2
(22.6)
34.6
294.6
198.5
44.2
31.5
568.8
18.7
6.6
42.8
2.3
–
251.7
73.8
462.1
–
858.0
113.8
7.4
73.1
209.2
12.2
415.7
(1.2)
414.5
50.3
1.7
–
–
52.0
164.4
–
4.6
221.0
90.7
0.4
–
91.1
306.1
175.7
63.8
70.7
616.3
18.4
3.9
35.5
1.4
0.4
–
–
62.7
3.9
126.2
95.2
3.2
41.6
194.7
12.4
347.1
9.5
356.6
34.1
1.1
40.8
4.4
80.4
16.9
4.9
6.1
108.3
83.6
0.4
–
84.0
2. Revenue from Ordinary Activities
Product sales:
Gas and ethane
Crude oil
Condensate and naphtha
Liquefied petroleum gas
Other:
Overriding royalties
Equipment rentals, pipeline tariffs and other
Interest revenue:
Controlled entities
Other entities
Dividends from other entities
Dividends from controlled entities
Insurance recovery
Proceeds from sale of non-current assets
Proceeds from sale of controlled entities
3. Expenses from Ordinary Activities
Cost of sales:
Production costs
Pipeline tariffs and tolls
Royalty, excise and PRRT
Depreciation, depletion and amortisation
Third party gas purchases
Decrease/(increase) in product stock
Other:
Selling, general and administrative expenses:
Operating expenses
Depreciation and amortisation
Write-down of investment in controlled entities
Write-down of investment in listed shares
Book value of non-current assets sold
Book value of controlled entities sold
Write-down of exploration and development expenditure
4. Borrowing Costs
Interest expense:
Controlled entities
Other entities
Less interest capitalised
56
Annual Report 2004
SAN165 WWW Fins 30/3/05 11:55 AM Page 57
5. Profit from Ordinary Activities
(a) Profit from ordinary activities before tax includes the following items
Depreciation, depletion and amortisation:
Depletion of exploration and development expenditure
Depreciation of plant and equipment
Depreciation of buildings
Future restoration costs
Amortisation of goodwill
Charges to provisions:
Doubtful debts
Stock obsolescence
Employee entitlements and non-executive Directors’ retirement benefits
Operating lease rentals
Profit on disposal of non-current assets
(Profit)/loss on disposal of controlled entities
(b) Individually significant expenses/(gains) included in profit from
ordinary activities before income tax
Insurance recovery
Costs associated with Moomba liquids recovery plant fire included in cost of sales
Profit on sale of oil and gas assets
Write-down of exploration and development expenditure
Organisation restructure costs included in selling, general and administrative expenses
Accelerated depreciation – Heytesbury plant
Profit on sale of investment in listed shares
6. Taxation
Income tax attributable to profit from ordinary activities
The prima facie income tax attributable to profit from ordinary activities differs from
income tax expense and is calculated as follows:
Prima facie income tax at 30% (2003: 30%)
Tax effect of permanent and other differences which increase/(decrease) income
tax expense:
Non-deductible depletion, depreciation and amortisation
Write-down of investment in controlled entities
Other
Impact of the tax consolidation system
Income tax expense allocated to wholly-owned controlled entities under
tax funding agreement
Income tax expense relating to transactions, events and balances of
wholly-owned controlled entities in the tax-consolidated group
Transactions within the tax-consolidated group:
Dividends from controlled entities
Non-deductible interest
Profit on sale of oil and gas assets
Tax benefit arising from reduced deferred tax balances upon entering into
Australian tax consolidation regime
Income tax comprises amounts set aside to:
Provision for current income tax
Deferred tax liability
Deferred tax asset
Foreign currency translation reserve
Tax related receivable from wholly-owned controlled entities
Consolidated
Santos Ltd
2004
$million
2003
$million
2004
$million
2003
$million
344.3
169.1
2.0
19.8
4.5
539.7
(0.6)
6.4
(0.3)
42.2
(52.4)
–
(116.6)
17.5
(43.9)
22.1
21.6
–
–
333.8
168.7
3.3
16.8
9.0
531.6
0.2
1.0
6.7
45.6
(55.1)
(4.5)
–
–
–
59.7
–
20.2
(45.8)
116.5
85.8
1.0
7.6
–
210.9
(0.2)
3.1
(0.3)
21.4
(297.7)
–
(73.8)
11.9
(298.4)
4.6
21.6
–
–
119.7
69.1
1.8
5.2
–
195.8
0.1
0.2
6.2
22.5
(45.8)
1.0
–
–
–
6.1
–
–
(45.8)
162.2
129.3
210.1
58.1
17.9
–
0.8
18.9
–
10.7
2.4
–
6.2
2.5
12.2
(14.5)
–
–
–
–
–
(20.0)
160.9
143.1
24.6
(1.6)
(5.2)
–
160.9
–
–
–
–
–
(55.0)
103.9
144.7
(16.5)
12.8
(37.1)
–
103.9
(64.0)
(131.1)
60.5
138.5
(75.5)
14.2
(76.8)
(20.0)
57.1
120.9
0.2
–
–
(64.0)
57.1
–
–
–
(55.0)
10.7
126.1
15.7
–
–
(131.1)
10.7
Annual Report 2004
57
SAN165 WWW Fins 30/3/05 11:55 AM Page 58
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2004
7. Receivables
Trade debtors
Sundry debtors
Less provision for doubtful debts
Amounts owing by controlled entities:
Non-interest-bearing
Interest-bearing
Tax related balances owing by controlled entities
The interest-bearing amounts owing by controlled entities are for loans made in the
ordinary course of business on normal market terms and conditions for an indefinite period.
8.
Inventories
Petroleum products
Drilling and maintenance stocks
Less provision for obsolescence
9. Other Assets
Current
Prepayments
Deferred loss on commodity hedges
Non-current
Other
10. Exploration and Development Expenditure
At cost
Less accumulated depletion
Movements during the year
Areas in which production has commenced
Cost at the beginning of the year
Expenditure incurred during the year
Acquisitions
Disposals
Foreign currency translation
Expenditure transferred from areas in the exploration and development stage
Expenditure transferred from plant and equipment
Expenditure written off during the year
Cost at the end of the year
Less accumulated depletion
Areas in the exploration and development stage
Cost at the beginning of the year
Expenditure incurred during the year
Acquisitions
Disposals
Foreign currency translation
Expenditure transferred to areas where production has commenced
Expenditure written off during the year
Cost at the end of the year
Consolidated
Santos Ltd
2004
$million
2003
$million
2004
$million
2003
$million
181.5
228.2
(0.6)
144.3
29.1
(1.7)
–
–
–
–
–
–
72.8
131.1
(0.5)
455.2
990.0
269.1
88.1
12.6
(0.7)
359.1
636.4
314.8
409.1
171.7
1,917.7
1,410.3
82.4
44.4
(9.5)
73.7
45.9
(7.2)
117.3
112.4
18.3
3.2
21.5
2.9
14.3
–
14.3
1.1
44.8
16.1
(2.1)
58.8
7.7
2.3
10.0
–
35.9
18.9
(1.6)
53.2
7.4
–
7.4
–
6,175.3
(2,965.0)
5,613.1
(2,667.8)
1,950.7
(1,044.9)
3,210.3
2,945.3
905.8
1,859.4
(955.8)
903.6
5,190.6
399.2
146.0
(53.1)
(34.2)
107.2
60.7
(16.3)
5,108.8
277.5
19.5
(16.0)
(231.6)
36.3
–
(3.9)
1,752.4
161.7
–
(99.8)
–
38.8
17.6
–
5,800.1
(2,965.0)
5,190.6
(2,667.8)
1,870.7
(1,044.9)
2,835.1
2,522.8
825.8
422.5
66.1
–
–
(0.4)
(107.2)
(5.8)
375.2
424.2
109.6
0.4
(17.7)
(1.9)
(36.3)
(55.8)
422.5
107.0
16.4
–
–
–
(38.8)
(4.6)
80.0
905.8
1,624.3
92.6
1.6
–
–
33.9
–
–
1,752.4
(955.8)
796.6
118.0
29.0
–
–
–
(33.9)
(6.1)
107.0
903.6
Total exploration and development expenditure
3,210.3
2,945.3
58
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11. Land and Buildings, Plant and Equipment
Land and buildings
At cost
Less accumulated depreciation
Plant and equipment
At cost
Less accumulated depreciation
Total land and buildings, plant and equipment
Movements during the year
Land and buildings
Balance at the beginning of the year
Additions
Depreciation expense
Balance at the end of the year
Plant and equipment
Balance at the beginning of the year
Additions
Acquisitions
Disposals
Depreciation expense
Foreign currency translation
Expenditure transferred to exploration and development
Balance at the end of the year
12. Other Financial Assets
Investments in controlled entities
Investments in other entities:
Listed shares at cost
Listed shares at recoverable amount
Market value of investments in listed shares
13. Intangibles
Goodwill, at cost
Less accumulated amortisation
14. Payables
Trade creditors
Sundry creditors and accruals
Amounts owing to controlled entities
Consolidated
Santos Ltd
2004
$million
2003
$million
2004
$million
2003
$million
97.2
(49.7)
47.5
94.7
(47.7)
47.0
55.5
(34.0)
21.5
52.3
(33.0)
19.3
3,938.1
(1,926.9)
3,576.1
(1,782.3)
1,711.7
(1,067.8)
1,642.1
(988.3)
2,011.2
2,058.7
1,793.8
1,840.8
643.9
665.4
653.8
673.1
47.0
2.5
(2.0)
47.5
1,793.8
461.7
12.6
(26.6)
(169.1)
(0.5)
(60.7)
2,011.2
–
1.2
–
1.2
2.7
45.2
5.1
(3.3)
47.0
1,627.5
358.1
13.5
(32.2)
(168.7)
(4.4)
–
1,793.8
19.3
3.2
(1.0)
21.5
653.8
188.0
–
(94.5)
(85.8)
–
(17.6)
643.9
18.5
2.6
(1.8)
19.3
621.0
102.2
–
(0.3)
(69.1)
–
–
653.8
–
2,530.2
2,284.9
1.2
10.5
11.7
16.2
0.5
–
0.5
10.5
2,530.7
2,295.9
0.5
11.7
160.2
(156.2)
4.0
160.2
(151.7)
8.5
278.9
92.7
–
371.6
242.6
48.7
–
291.3
–
–
–
109.5
28.4
298.4
436.3
–
–
–
95.3
18.4
541.3
655.0
Annual Report 2004
59
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NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2004
15. Interest-Bearing Liabilities
Current
Amounts owing to controlled entities
Long-term notes
Bank loans
Other
The interest-bearing amounts owing to controlled entities are for loans made in the
ordinary course of business on normal market terms and conditions for an indefinite period.
Non-current
Bank loans
Commercial paper
Medium-term notes
Long-term notes
Details of major credit facilities
(a) Bank loans
The Santos Group has access to the following committed revolving facilities:
Revolving facilities at 31 December 2004
Year of maturity
Currency
2005
2006
2008
2009
Multi-currency
Multi-currency
Multi-currency
Multi-currency
Consolidated
Santos Ltd
2004
$million
2003
$million
2004
$million
2003
$million
–
45.4
–
–
45.4
–
110.0
20.0
833.3
963.3
1,685.4
–
–
1.0
1,686.4
1,411.7
–
–
–
1,411.7
–
–
–
–
–
–
–
–
–
–
–
43.7
5.2
1.0
49.9
222.7
209.0
20.0
757.8
1,209.5
Amount
A$million
75.0
125.0
300.0
200.0
700.0
Revolving bank loans bear interest at the relevant interbank reference rate plus 0.25% to 0.43%. The amount drawn at 31 December 2004
is $nil (2003: $nil).
Term facilities at 31 December 2004
Year of maturity
Currency
Amount
A$million
Amount Drawn at
31 December 2004
A$million
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
5.2
10.5
20.6
19.7
24.5
25.4
26.3
22.6
19.0
20.0
20.4
20.8
21.9
5.2
10.5
18.6
18.1
22.3
23.0
23.8
20.0
16.2
17.0
17.3
17.5
18.4
Drawdowns under the term loans are dependent upon expenditure for specific projects.
Term loans bear interest at the relevant interbank reference rate plus a margin of up to 0.75%. The amount drawn at 31 December 2004
is US$177.5 million (A$227.9 million) at a weighted average annual effective interest rate of 2.70%.
256.9
227.9
(b) Commercial paper
The Santos Group has an A$800.0 million (2003: A$800.0 million) Australian commercial paper program supported by the revolving facilities
referred to in (a) above. At 31 December 2004, A$209.0 million (2003: A$110.0 million) of commercial paper is on issue and the weighted
average annual effective interest rate is 5.61% (2003: 5.50%).
60
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15. Interest-Bearing Liabilities (continued)
(c) Medium-term notes
The Santos Group has a A$500.0 million (2003: A$500.0 million) Australian medium-term note program. At 31 December 2004, A$20.0 million
(2003: A$20.0 million) of medium-term notes have been issued at fixed rate and swapped into floating rates of interest of 6.25% (2003: 6.20%),
maturing in 2008.
(d) Long-term notes
US$170.0 million of long-term notes were issued to institutional investors in 1993 at an annual effective interest rate of 6.95% and are
repayable in five annual US dollar instalments which commenced in December 2001. As at 31 December 2004, US$34.0 million (A$43.7 million)
remains outstanding (2003: US$68.0 million equivalent to A$90.8 million). A further US$290.0 million (A$372.5 million) (2003: US$290.0 million
equivalent to A$387.3 million) of long-term notes were issued to institutional investors in 2000 at an annual effective interest rate of 8.37%
and are repayable at varying maturity dates between 2007 and 2015. In addition US$300.0 million (A$385.3 million) (2003: US$300.0 million
equivalent to A$400.6 million) of long-term notes were issued to institutional investors in 2002 at an annual effective interest rate of 6.11%
and are repayable at varying maturity dates between 2009 and 2022.
The Santos Group has entered into interest rate swap contracts to manage the exposure to interest rates. This has resulted in a weighted average
interest rate on interest-bearing liabilities of 5.50% as at 31 December 2004 (2003: 4.72%). All facilities are unsecured and arranged through a
controlled entity, Santos Finance Ltd, and are guaranteed by Santos Ltd.
16. Provisions
Current
Employee benefits
Future restoration costs
Non-executive Directors’ retirement benefits
Non-current
Future restoration costs
Non-executive Directors’ retirement benefits
Reconciliations of the carrying amount of the non-executive Directors’ retirement
benefits are set out below:
Current
Carrying amount at beginning of the year
Transfer from/(to) non-current provision
Payments made during the year
Carrying amount at end of the year
Non-current
Carrying amount at beginning of the year
Provision made during the year
Transfer from/(to) current provision
Carrying amount at end of the year
17. Other Liabilities
Current
Deferred foreign currency fluctuations on borrowings
Accrued fluctuations on foreign currency swaps
Non-current
Deferred foreign currency fluctuations on borrowings
Consolidated
Santos Ltd
2004
$million
2003
$million
2004
$million
2003
$million
48.7
3.9
0.2
52.8
129.4
2.2
131.6
–
0.2
–
0.2
2.3
0.1
(0.2)
2.2
3.5
11.2
14.7
33.9
47.7
7.6
–
55.3
113.7
2.3
116.0
0.6
(0.3)
(0.3)
–
1.7
0.3
0.3
2.3
10.6
–
10.6
55.7
47.6
0.9
0.2
48.7
43.8
2.2
46.0
–
0.2
–
0.2
2.3
0.1
(0.2)
2.2
–
–
–
–
46.3
1.2
–
47.5
36.0
2.3
38.3
0.6
(0.3)
(0.3)
–
1.7
0.3
0.3
2.3
–
–
–
–
The deferred foreign currency fluctuations on US dollar borrowings designated as hedges reflect the deferred gains arising from the movement of the
Australian dollar against the US dollar from the inception of the drawdown of the borrowings to balance date.
Annual Report 2004
61
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NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2004
18. Contributed Equity
Share capital
585,520,675 (2003: 584,475,013) ordinary shares, fully paid
181,000 (2003: 231,000) ordinary shares, paid to one cent
Nil (2003: 3,500,000) reset convertible preference shares
6,000,000 (2003: nil) redeemable convertible preference shares
Movement in fully paid ordinary shares
Balance at the beginning of the year
Santos Executive Share Plan
Santos Employee Share Acquisition Plan
Santos Employee Share Purchase Plan
Shares issued on exercise of options
Balance at the end of the year
Movement in reset convertible preference shares
Balance at the beginning of the year
Transfer to redeemable convertible preference shares
Shares redeemed
Balance at the end of the year
Movement in redeemable convertible preference shares
Balance at the beginning of the year
Shares issued
Share issue cost
Transfer from reset convertible preference shares
Balance at the end of the year
Consolidated
Santos Ltd
2004
$million
2003
$million
2004
$million
2003
$million
1,557.2
–
–
581.8
2,139.0
1,550.8
–
342.3
–
1,893.1
Note
2004
2003
Number of shares
584,475,013 582,782,293
35,750
254,106
152,864
1,250,000
50,000
157,014
123,648
715,000
(a)
(b)
(c)
(d)
585,520,675 584,475,013
3,500,000
–
(3,500,000)
3,500,000
–
–
(f)
–
3,500,000
(g)
–
6,000,000
–
–
6,000,000
–
–
–
–
–
1,557.2
–
–
581.8
2,139.0
2004
$million
1,550.8
0.1
1.3
0.9
4.1
1,557.2
342.3
7.7
(350.0)
–
–
600.0
(10.5)
(7.7)
581.8
1,550.8
–
342.3
–
1,893.1
2003
$million
1,542.5
0.1
1.5
1.0
5.7
1,550.8
342.3
–
–
342.3
–
–
–
–
–
The market price of the Company’s ordinary shares on 31 December 2004 was $8.48 (2003: $6.87).
(a) Santos Executive Share Plan
The Santos Executive Share Plan was approved by shareholders at a general meeting held on 22 December 1987.
Under the terms of the Plan, shares were initially issued as partly paid shares, paid to one cent. While partly paid, the Plan Shares are not
transferable, carry no voting right and no entitlement to dividend but are entitled to participate in any bonus or rights issue.
Shares were issued principally on: 22 December 1987; 7 February and 5 December 1989; and 24 December 1990. In 1997 the Board determined
that the Plan be discontinued and, accordingly, there has been no further issues of shares under the Plan.
At the beginning of the financial year there were 231,000 Plan Shares on issue. During the financial year 50,000 Plan Shares were fully paid and
aggregate proceeds of $138,200 received by the Company. As at 31 December 2004 there were 181,000 Plan Shares outstanding.
(b) Santos Employee Share Acquisition Plan
The Santos Employee Share Acquisition Plan was approved by shareholders at the Annual General Meeting on 15 May 1997 and its continuation,
with amendment, approved at the Annual General Meeting on 5 May 2000.
Broadly, permanent eligible employees with at least a minimum period of service determined by Directors as at the offer date (one year of completed
service for issues so far) are entitled to acquire shares under this Plan. Executives participating in the Santos Executive Share Option Plan (refer
note 18(d)) or in the Executive Long Term Incentive Plan in 2004, casual employees and Directors of the Company are excluded from participating in
this Plan. Employees are not eligible to participate under the Plan while they are resident overseas unless the Board decides otherwise.
The Plan provides for grants of fully paid ordinary shares in the capital of the Company up to a value determined by the Board which, to date,
has been $1,000 per annum per eligible employee. A trustee is funded by the Santos Group to acquire shares directly from the Company or on
market. The shares are then held by the trustee on behalf of eligible employees who have made applications under the Plan.
The employee’s ownership of shares allocated under the Plan, and his or her right to deal with them, are subject to restrictions until the earlier
of the expiration of the restriction period determined by the Board (being three years) and the time when he or she ceases to be an employee.
Participants are entitled to instruct the trustee as to the exercise of voting rights, receive dividends and participate in bonus and rights issues
during the restriction period. Shares are granted to eligible employees at no cost to the employee.
62
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18. Contributed Equity (continued)
(b) Santos Employee Share Acquisition Plan (continued)
Summary of share movements in the Plan during 2004 (and comparative 2003 information):
Grant dates
2004
24 August 2001
2 September 2002
2 September 2003
22 November 2004
2003
25 August 2000
24 August 2001
2 September 2002
2 September 2003
Opening
balance
Number
177,908
195,624
242,991
–
616,523
192,950
196,552
216,840
–
606,342
Granted during
the year
Number
of shares
Fair value
per share
$
Distributions
during the year
Number
Fair value
aggregate
$
Closing balance
Number
Fair value
aggregate
$
–
–
–
157,014
157,014
–
–
–
254,106
254,106
–
–
–
8.14
–
–
–
5.84
177,908
32,760
42,237
244
1,180,728
227,623
294,081
2,089
–
162,864
200,754
156,770
–
1,381,087
1,702,394
1,329,410
253,149
1,704,521
520,388
4,412,891
192,950
18,644
21,216
11,115
1,163,949
111,036
126,185
67,943
–
177,908
195,624
242,991
–
1,222,228
1,343,937
1,669,348
243,925
1,469,113
616,523
4,235,513
Shares are allocated at a price equal to the weighted average sale price of the Company’s ordinary shares on the Australian Stock Exchange during
the one week period up to and including the Grant Date. This is shown as fair value per share for shares granted during the year. The fair value of
shares distributed from the trust during the year and remaining in the trust at the end of the financial year is the market price of shares of the
Company on the Australian Stock Exchange as at close of trading on the respective dates.
Distributions during the year occurred at various dates throughout the year and therefore have not been separately listed.
The amounts recognised in the financial statements of the Santos Group and the Company in relation to the Santos Employee Share Acquisition
Plan during the year were:
Employee expenses
Issued ordinary share capital
Consolidated
Santos Ltd
2004
$million
2003
$million
2004
$million
2003
$million
1.2
1.3
1.4
1.5
1.2
1.3
1.4
1.5
At 31 December 2004, the total number of shares acquired under the Plan since its commencement was 1,874,287.
(c) Santos Employee Share Purchase Plan
The Santos Employee Share Purchase Plan was approved by shareholders at the Annual General Meeting on 15 May 1997 and its continuation,
with amendment, approved at the Annual General Meeting on 5 May 2000.
General Employee Participation
The Plan is open to all employees (other than a casual employee or Director of the Company) determined by the Board who are continuing
employees at the date of the offer. However, employees who are not resident in Australia at the time of an offer under the Plan and those who
have participated in the Executive Long Term Incentive Plan during the year will not be eligible to participate in that offer unless the Board
otherwise decides.
Under the Plan, eligible employees may be offered the opportunity to subscribe for or acquire fully paid ordinary shares in the capital of the
Company at a discount to market price, subject to restrictions, including on disposal, determined by the Board (which has been a period of one
year for issues so far). The subscription or acquisition price is Market Value (being the weighted average sale price of the Company’s ordinary
shares on the Australian Stock Exchange during the one week period up to and including the offer date) less any discount determined by the
Board (5% for issues so far). Under the Plan, at the discretion of the Board, financial assistance may be provided to employees to subscribe for
and acquire shares under the Plan. The 5% discount constitutes financial assistance for these purposes. Participants are entitled to vote, receive
dividends and participate in bonus and rights issues while the shares are restricted.
On 26 November 2004, the Company issued 32,400 ordinary shares to 49 eligible employees at a subscription price of $8.14 per share under
the Plan. The total market value of those shares on the issue date was $287,064 and the total amount received from employees for those shares
was $249,480.
Annual Report 2004
63
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NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2004
18. Contributed Equity (continued)
(c) Santos Employee Share Purchase Plan (continued)
Senior Executive Long Term Incentive
In addition, during the year, selected senior executives of the Company were invited to apply for shares pursuant to the terms of the Santos
Employee Share Purchase Plan as part of the Company’s long term incentive arrangements (and on different terms from the general employee
participation described above). On 27 January 2004 and 1 July 2004, 3,397 and 87,851 (2003: 129,664) shares respectively were allotted to
a trustee to hold for senior executives.
The shares allocated pursuant to the Plan were allotted to a trustee at no cost to participants, to be held on their behalf. The allocation price
is Market Value (as defined above) and the trustee was funded by the Company to subscribe for the shares.
In general the shares are restricted for a period of one year from the date of allotment. If an executive allotted such shares ceased employment
during this period, the Board in its discretion may determine that a lesser restriction on transfer and dealing applies, having regard to the
circumstances of the cessation. The shares can remain on trust for up to four years, during which time the shares are subject to forfeiture if
participants act fraudulently or dishonestly or in breach of their obligations to any Group Company. Participants are entitled to instruct the
trustee as to the exercise of voting rights, receive dividends and participate in bonus and rights issues while the shares are restricted.
The fair value of the 3,397 and 87,851 shares allotted on 27 January 2004 and 1 July 2004 respectively to a trustee to hold for senior executives
was $773,783 at the end of the financial year, being the market price of the ordinary shares of the Company on the Australian Stock Exchange as
at close of trading on that date.
Summary of share movements in the Plan:
Granted during
the year
Number
of shares
$
Fair value
per share
Restriction ceased during the year
Closing
balance
Number
Date
Number
Grant dates
2004
7 March 2003
8 September 2003
22 December 2003
27 January 2004
1 July 2004
26 November 2004
2003
7 March 2002
2 September 2002
7 March 2003
8 September 2003
22 December 2003
Opening
balance
Number
7,800
15,400
129,664
–
–
–
–
–
–
3,397
87,851
32,400
152,864
123,648
17,200
40,600
–
–
–
57,800
–
–
7,800
15,400
129,664
152,864
–
–
–
6.38
6.95
7.70
–
–
5.61
5.77
6.38
7,800
15,400
3,818
3,548
7,273
7,331
4,364
103,330
–
–
–
152,864
17,200
40,600
–
–
–
57,800
7 March 2004
8 September 2004
3 May 2004
1 June 2004
8 June 2004
2 July 2004
19 July 2004
22 December 2004
–
–
–
7 March 2003
2 September 2003
–
–
–
–
–
–
–
–
–
–
–
3,397
87,851
32,400
123,648
–
–
7,800
15,400
129,664
152,864
The fair value per share for shares granted during the year and the consideration received by the Company per share is Market Value (as defined
above) less, in the case of General Employee Participation, the discount of 5% referred to above.
The amounts recognised in the financial statements of the Santos Group and the Company in relation to the Santos Employee Share Purchase
Plan during the year were:
Issued ordinary share capital
Consolidated
Santos Ltd
2004
$million
2003
$million
2004
$million
2003
$million
0.9
1.0
0.9
1.0
At 31 December 2004, the total number of shares acquired under the Plan since its commencement was 930,112.
64
Annual Report 2004
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18. Contributed Equity (continued)
(d) Santos Executive Share Option Plan
The Santos Executive Share Option Plan was approved by shareholders at the Annual General Meeting on 15 May 1997 and its continuation, with
amendment, approved at the Annual General Meeting on 5 May 2000.
The Plan provides for the grant of options to subscribe for or purchase ordinary shares in the capital of the Company to eligible executives
selected by the Board. Participation will be limited to those executives who, in the opinion of the Board, are able to significantly influence the
generation of shareholder wealth. Directors envisage the Plan applying to up to 50 executives.
Each option is a right to acquire one share, subject to adjustment in accordance with the Rules of the Plan. The options entitle the holder to
participate in any bonus issue conducted by the Company, upon exercise of the options. The exercise price of each option will be adjusted in the
event of a rights issue.
There are no voting or dividend rights attached to the options. There are no voting rights attached to the unissued ordinary shares. Voting rights
will be attached to the unissued ordinary shares when the options have been exercised.
The exercise price of the options and other conditions, including any performance hurdles, will be determined by the Board. No consideration is
provided by Executives for the options. The Plan provides for options with a life of up to ten years.
The ability to exercise the options is generally conditional on the Company achieving a prescribed performance hurdle or exercise condition. To
reach the performance hurdle, the Company’s Total Shareholder Return (broadly, growth in share price plus dividends reinvested) (“TSR Growth”)
over a minimum three-year period must equal or exceed 10% per annum calculated on a compound basis. If Total Shareholder Return does not
reach the performance hurdle at the end of those respective periods, the options may nevertheless be exercisable if the hurdle is subsequently
reached within the remaining life of the options. In assessing the performance against the hurdle, the Board may apply on a consistent basis an
averaging method over a period of three months to allow for short-term volatility.
The fair value of shares issued as a result of exercising the options during the reporting period at their issue date is the market price of shares of
the Company on the Australian Stock Exchange as at close of trading.
During the financial year, the Company granted 330,148 options over unissued shares as set out below. The ability to exercise 200,000 of these
options is generally conditional on the Company achieving the performance hurdle described above and the balance are subject to the forfeiture
provision described in the Senior Executive Long Term Incentive section of the Santos Executive Share Purchase Plan described above.
The amounts recognised in the financial statements of the Santos Group and the Company in relation to executive share options exercised during
the financial year were:
Issued ordinary share capital
Consolidated
Santos Ltd
2004
$million
2003
$million
2004
$million
2003
$million
4.1
5.7
4.1
5.7
Annual Report 2004
65
SAN165 WWW Fins 30/3/05 11:55 AM Page 66
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2004
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66
Annual Report 2004
SAN165 WWW Fins 30/3/05 11:55 AM Page 67
18. Contributed Equity (continued)
(e) Maximum number of shares that may be acquired under share and option schemes
The aggregate number of:
(i) shares issued under and for the time being outstanding and subject to the terms of each employee share plan of the Company; and
(ii) unissued shares to which options are granted and for the time being outstanding under any employee or executive share option plan of
the Company;
cannot exceed 5% of the issued shares of all classes of the Company.
(f) Reset convertible preference shares redemption and buy-back
On 30 September 2004, through a redemption and buy-back arrangement, the Company cancelled its entire 3,500,000 reset convertible
preference shares on issue at that date. 2,865,821 shares were redeemed at face value and reinvested in redeemable convertible preference
shares, 489,774 shares were bought back for $105 each and cancelled, and 144,405 shares were redeemed at face value. This redemption and
buy-back resulted in an amount of $350,000,000 being debited against the Company’s capital account and an amount of $2,448,870 being
debited against retained profits representing the $5.00 premium paid over the issue price in the buy-back of the 489,774 reset convertible
preference shares.
(g) Redeemable convertible preference shares
On 30 September 2004, the Company issued 6,000,000 redeemable convertible preference shares at $100 each, which resulted in an amount of
$600,000,000 being credited to the Company’s capital account before deducting the costs of issue.
Under the terms of the redemption and buy-back, those shareholders whose reset convertible preference shares were redeemed at face value and
reinvested in redeemable convertible preference shares were entitled to a $5.00 per share special dividend which was paid on 7 October 2004.
Redeemable convertible preference shareholders receive a floating preferential, non-cumulative dividend which incorporates the value of franking
credits (i.e. it is on a grossed up basis), set at the Bank Bill Swap Rate for 180 day bills plus a margin. Dividends on redeemable convertible
preference shares are in priority to any dividend declared on ordinary class shares. Redeemable convertible preference shareholders are not
entitled to vote at any general meetings, except in the following circumstances:
(i) on a proposal:
(1) to reduce the share capital of the Company;
(2) that affects rights attached to the redeemable convertible preference shares;
(3) to wind up the Company; or
(4) for the disposal of the whole of the property, business and undertaking of the Company;
(ii) on a resolution to approve the terms of a buy-back agreement;
(iii) during a period in which a dividend or part of a dividend on the redeemable convertible preference shares is in arrears; or
(iv) during the winding up of the Company.
In the event of the winding up of the Company, redeemable convertible preference shares will rank for repayment of capital behind all creditors
of the Company, but ahead of the ordinary class shares.
The redeemable convertible preference shares may, at the sole discretion of the Company, be converted into ordinary class shares and/or exchanged.
(h) Restricted shares
On his appointment as Chief Executive Officer on 13 December 2000, 1,000,000 Restricted Shares were issued to Mr J C Ellice-Flint.
The Restricted Shares were issued for nil consideration and are held under a trust structure. The Restricted Shares carry rights to dividends and
bonus issues and allow Mr Ellice-Flint to instruct the trustee as to the exercise of voting rights. Legal title in the Restricted Shares will not pass
to Mr Ellice-Flint until he has completed five years continuous service with the Group or his employment is earlier terminated by the Company
(other than for cause).
Annual Report 2004
67
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NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2004
19. Foreign Currency Translation Reserve
Balance at the end of the year
Movements during the year
Balance at the beginning of the year
Exchange difference on net investment in foreign operations and related hedges:
Gross hedges
Related income tax
Overseas net assets
Net translation adjustment
Balance at the end of the year
Consolidated
Santos Ltd
2004
$million
2003
$million
2004
$million
2003
$million
(9.0)
(8.8)
(8.8)
(4.1)
17.3
(5.2)
(12.3)
(0.2)
(9.0)
123.5
(37.1)
(91.1)
(4.7)
(8.8)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
The foreign currency translation reserve records the foreign currency differences arising from the translation of self-sustaining foreign operations, the
translation of transactions that hedge the Company’s net investment in a foreign operation or the translation of foreign currency monetary items
forming part of the net investment in a self-sustaining operation.
20. Retained Profits
Balance at the end of the year
Movements during the year
Balance at the beginning of the year
Effect of initial adoption of revised AASB 1028 “Employee Benefits”
Effect of initial adoption of AASB 1044 “Provisions, Contingent Liabilities and
Contingent Assets”
Net profit after income tax attributable to the shareholders of Santos Ltd
Dividends recognised during the year
Premium paid on buy-back of reset convertible preference share
Balance at the end of the year
Dividends provided for and paid by the Company
Special dividend of $5.00 per redeemable convertible preference share paid on
7 October 2004 on 2,865,821 shares, fully franked
Preferential, non-cumulative dividend of $3.2940 per reset convertible preference
share paid on 31 March 2004, fully franked (2003: $3.2760 per share provided
and paid on 31 March 2003, fully franked)
Preferential, non-cumulative dividend of $3.2940 per reset convertible preference
share paid on 30 September 2004, fully franked (2003: $3.2940 per share paid on
30 September 2003, fully franked)
Final 2003 dividend of 15.0 cents per ordinary share paid on 31 March 2004,
fully franked (2003: 15.0 cents per share, fully franked)
Interim dividend of 15.0 cents per ordinary share paid on 30 September 2004,
fully franked (2003: 15.0 cents per share, fully franked)
Subsequent to reporting date
Since the end of the financial year, the Directors have declared the following
dividends payable on 31 March 2005:
Final 2004 dividend of 18.0 cents per ordinary share, fully franked
Preferential, non-cumulative floating rate dividend of $2.4497 per redeemable
convertible preference share, fully franked
The financial effect of these dividends has not been brought to account in the
consolidated financial statements for the year ended 31 December 2004.
Franking credits
Balance of franking account credits at 30% available for future distribution,
after adjusting for franking credits which will arise from the payment of the
current income tax provision at 31 December 2004
68
Annual Report 2004
Consolidated
Santos Ltd
2004
$million
2003
$million
2004
$million
2003
$million
1,368.3
1,203.6
1,299.8
871.9
1,203.6
–
–
379.9
(212.8)
(2.4)
983.2
(1.9)
93.3
327.0
(198.0)
–
871.9
–
–
643.1
(212.8)
(2.4)
1,368.3
1,203.6
1,299.8
795.5
(1.8)
93.3
182.9
(198.0)
–
871.9
14.3
–
14.3
–
11.5
11.5
11.5
11.5
11.5
87.4
87.6
198.0
11.5
87.7
87.8
212.8
105.4
14.7
120.1
11.5
87.4
87.6
198.0
11.5
87.7
87.8
212.8
105.4
14.7
120.1
394.7
358.3
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21. Earnings per Share
Earnings used in the calculation of basic earnings per share reconciles to
the net profit after tax in the statement of financial performance as follows:
Net profit after income tax
Less special dividend on redeemable convertible preference shares
Earnings used in the calculation of diluted earnings per share
Less dividends paid on reset convertible preference shares
Earnings used in the calculation of basic earnings per share
The weighted average number of shares used for the purposes of calculating diluted
earnings per share reconciles to the number used to calculate basic earnings per
share as follows:
Basic earnings per share
Partly paid shares
Executive share options
Reset convertible preference shares
Diluted earnings per share
Consolidated
2004
$million
2003
$million
379.9
(14.3)
365.6
(23.0)
342.6
327.0
–
327.0
(23.0)
304.0
2004
2003
Number of shares
584,924,130 583,432,623
100,722
755,897
39,367,128
112,876
164,841
50,946,143
625,147,877 634,656,483
Partly paid shares outstanding issued under the Santos Executive Share Plan; options outstanding issued under the Santos Executive Share Option
Plan; and reset convertible preference shares have been classified as potential ordinary shares and included in the calculation of diluted earnings per
share. The number of shares included in the calculation are those assumed to be issued for no consideration, being the difference between the
number that would have been issued at the exercise price and the number that would have been issued at the average market price.
During the year, 715,000 (2003: 1,250,000) options and 50,000 (2003: 35,750) partly paid shares were converted to ordinary shares.
6,000,000 redeemable convertible preference shares were not dilutive and were excluded from the calculation of diluted earnings per share.
Annual Report 2004
69
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NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2004
22. Investments in Controlled Entities
Name
Santos Ltd (Parent Entity)
Controlled entities1:
Alliance Petroleum Australia Pty Ltd
Boston L.H.F. Pty Ltd
Bridgefield Pty Ltd
Bridge Oil Developments Pty Limited
Canso Resources Pty Ltd
Coveyork Pty Ltd
Doce Pty Ltd
Farmout Drillers Pty Ltd
Kipper GS Pty Ltd
Controlled entity of Kipper GS Pty Ltd
Crusader (Victoria) Pty Ltd
Moonie Pipeline Company Pty Ltd
Novus Australia Resources NL2
Reef Oil Pty Ltd
Santos Asia Pacific Pty Ltd
Controlled entities of Santos Asia Pacific Pty Ltd
Santos (Sampang) Pty Ltd
Santos (Warim) Pty Ltd
Santos Australian Hydrocarbons Pty Ltd
Santos (BOL) Pty Ltd
Controlled entity of Santos (BOL) Pty Ltd
Bridge Oil Exploration Pty Limited
Santos Darwin LNG Pty Ltd
Santos Direct Pty Ltd3
Santos Facilities Pty Ltd
Santos Finance Ltd
Santos Globe Pty Ltd (formerly Globex Far East Pty Ltd)
Santos International Holdings Pty Ltd
Controlled entities of Santos International Holdings Pty Ltd
Barracuda Limited
Lavana Limited
Novus UK (Kakap 2) Limited2
Peko Offshore Ltd
Sanro Insurance Pte Ltd
Santos Americas and Europe Corporation
Controlled entity of Santos Americas and Europe Corporation
Santos USA Corp
Santos (Bawean) Pty Ltd
Place of
incorporation
Name
Place of
incorporation
SA
VIC
VIC
QLD
NSW
NSW
NSW
QLD
NSW
WA
VIC
QLD
VIC
NSW
QLD
SA
SA
QLD
NSW
ACT
ACT
SA
SA
NSW
WA
ACT
PNG
PNG
UK
BER
SING
USA
USA
SA
Santos Brantas Pty Ltd3
Santos (Donggala) Pty Ltd3
Santos Egypt Pty Ltd3
Santos Hides Ltd
Santos International Operations Pty Ltd
Santos (Madura Offshore) Pty Ltd
Santos Niugini Exploration Limited
Santos (Nth Bali 1) Pty Ltd
Santos (Papalang) Pty Ltd
Santos (Popodi) Pty Ltd
Santos (JPDA 91-01) Pty Ltd
Santos (JPDA 91-12) Pty Ltd
Santos (NGA) Pty Ltd
Santos (N.T.) Pty Ltd
Controlled entity of Santos (N.T.) Pty Ltd
Bonaparte Gas & Oil Pty Limited
Santos Offshore Pty Ltd
Santos Oil Exploration (Malaysia) Sdn Bhd (in liquidation)
Santos Petroleum Pty Ltd
Santos QNT Pty Ltd
Controlled entities of Santos QNT Pty Ltd
Santos QNT (No. 1) Pty Ltd
Controlled entities of Santos QNT (No. 1) Pty Ltd
Santos Petroleum Management Pty Ltd
Santos Petroleum Operations Pty Ltd
TMOC Exploration Proprietary Limited
Santos QNT (No. 2) Pty Ltd
Controlled entities of Santos QNT (No. 2) Pty Ltd
Associated Petroleum Pty Ltd
Moonie Oil Pty Ltd
Petromin Pty Ltd
Santos (299) Pty Ltd
Santos Exploration Pty Ltd
Santos Gnuco Pty Ltd
Transoil Pty Ltd
Santos Resources Pty Ltd
Santos Timor Sea Pipeline Pty Ltd
Sesap Pty Ltd2
Vamgas Pty Ltd
VIC
VIC
VIC
PNG
QLD
WA
PNG
SA
SA
SA
ACT
ACT
VIC
ACT
NSW
VIC
MAL
NSW
QLD
QLD
QLD
QLD
QLD
QLD
QLD
QLD
QLD
QLD
VIC
QLD
QLD
QLD
NSW
VIC
VIC
1 Beneficial interests in all controlled entities is 100% except for Kipper GS Pty Ltd in which two shares of the total issued capital of 9,246,353
shares are owned by a third party.
2 Company acquired during the year.
3 Company incorporated during the year.
70
Annual Report 2004
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22. Investments in Controlled Entities (continued)
Notes
(a) Place of incorporation
ACT – Australian Capital Territory
NSW – New South Wales
QLD – Queensland
SA
VIC – Victoria
WA – Western Australia
– South Australia
(b) Disposal of controlled entities
BER – Bermuda
MAL – Malaysia
PNG – Papua New Guinea
SING – Singapore
UK
USA – United States of America
– United Kingdom
During the financial year Santos Petroleum (NZ) Limited was removed from the New Zealand Companies Register.
(c) Acquisition of controlled entities
During the financial year the following controlled entities were acquired and their operating results have been included in the statement of
financial performance from the date of acquisition:
Name of entity
Date of acquisition
Sesap Pty Ltd
Novus Australia Resources NL
Novus UK (Kakap 2) Ltd
12 February 2004
1 September 2004
1 September 2004
Beneficial
interest acquired
%
Purchase
consideration
$million
Fair value of net
assets at time
of acquisition
$million
100
100
100
–
92.2
35.1
–
92.2
35.1
The financial impacts of the acquisitions on the Santos Group and the Company are summarised below:
Fair value of net assets acquired
Cash
Other
Exploration and development expenditure
Purchase consideration
Cash consideration paid
Amount payable after balance date
During the financial year the following controlled entities were registered:
Santos Direct Pty Ltd
Santos Egypt Pty Ltd
Santos Brantas Pty Ltd
Santos (Donggala) Pty Ltd
Consolidated
Santos Ltd
2004
$million
2003
$million
2004
$million
2003
$million
(1.7)
(2.4)
131.4
127.3
110.6
16.7
127.3
1.3
10.3
12.4
24.0
24.0
–
24.0
(1.4)
(2.3)
95.9
92.2
92.2
–
92.2
1.3
10.3
12.4
24.0
24.0
–
24.0
Annual Report 2004
71
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NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2004
23. Interests in Joint Ventures
(a) Santos Ltd and its controlled entities have combined interests in unincorporated joint ventures in the following major areas:
Joint venture/area
Principal activities
Average interest
%
Amadeus Basin
Mereenie
Mereenie Pipeline
Palm Valley
Browse Basin
Carnarvon Basin
Cooper Basin Downstream
Cooper Basin Unit
South Australia
Queensland
Cooper/Eromanga Basins
South Australia
Queensland, ATP 259P
Other Eromanga
Jackson Moonie Pipeline
Eastern Queensland
Bowen Basin
Surat Basin
Egypt
Gulf of Suez
Gippsland Basin
Indonesia
East Java Basin
Kutei Basin
West Natuna Basin
West Papua
Offshore Northern Australia
Bonaparte Basin
Houtman Basin
Timor Gap
Timor Sea
Otway Basin
Papua New Guinea
PDL1 (Part Hides Field)
Other interests
Sorell Basin
USA
Gulf Coast
Rocky Mountains
Oil and gas production
Oil transportation
Gas production
Oil and gas exploration
Oil and gas exploration and production
Liquid hydrocarbon transportation and processing
Oil and gas production
Oil and gas production
Oil and gas exploration and production
Oil and gas exploration and production
Oil and gas exploration and production
Oil transportation
Gas exploration and production
Oil and gas exploration and production
Oil and gas exploration
Oil and gas exploration and production
Oil and gas exploration and production
Oil and gas exploration
Oil and gas exploration and production
Oil and gas exploration
Oil and gas exploration
Oil and gas exploration
Oil and gas exploration and production
Oil and gas exploration and production
Oil and gas exploration and production
Oil and gas exploration
Oil and gas exploration and production
Oil and gas exploration
Oil and gas exploration and production
Oil and gas exploration and production
65
65
48
74
32
65
65
60
65
60
74
83
50
48
50
35
42
35
6
20
95
42
17
22
36
31
31
58
39
50
(b) The sales revenue received from the Santos Group’s share of petroleum products produced by the joint ventures is $1,493.5 million
(2003: $1,451.2 million) and the contribution of joint venture business undertakings to profit from ordinary activities before interest and tax
of the Santos Group is $581.3 million (2003: $496.7 million).
72
Annual Report 2004
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23. Interests in Joint Ventures (continued)
(c) Santos Ltd and its controlled entities’ share of assets and liabilities employed in the
joint ventures are included in the statements of financial position under the
following classifications:
Current assets
Cash
Receivables
Inventories
Total current assets
Non-current assets
Exploration and development expenditure
Land and buildings, plant and equipment
Other
Total non-current assets
Total assets
Current liabilities
Payables
Provisions
Total current liabilities
Non-current liabilities
Provisions
Total liabilities
Consolidated
Santos Ltd
2004
$million
2003
$million
2004
$million
2003
$million
89.3
63.8
20.0
173.1
2,916.9
1,971.9
1.2
4,890.0
5,063.1
237.6
3.9
241.5
129.4
370.9
72.1
26.8
27.3
126.2
2,738.9
1,684.0
1.2
4,424.1
4,550.3
190.5
7.6
198.1
113.7
311.8
32.2
29.3
13.5
75.0
858.4
645.9
–
1,504.3
1,579.3
76.0
0.9
76.9
43.8
120.7
36.3
9.1
17.8
63.2
866.6
640.9
–
1,507.5
1,570.7
60.2
1.6
61.8
36.0
97.8
Net investments in joint ventures
4,692.2
4,238.5
1,458.6
1,472.9
(d) The amount of capital expenditure commitments, minimum exploration commitments
and contingent liabilities in respect of unincorporated joint ventures are:
Capital expenditure commitments
Minimum exploration commitments
Contingent liabilities
266.9
172.5
13.4
270.9
347.3
15.1
102.1
71.5
6.1
84.5
107.4
4.8
Annual Report 2004
73
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NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2004
24. Notes to Statements of Cash Flows
Reconciliation of profit from ordinary activities after income tax to net cash
provided by operating activities
Profit from ordinary activities after income tax
Add/(deduct) non-cash items:
Depreciation, depletion and amortisation
Write-down of controlled entities
Write-down of exploration and development expenditure
Write-down of investment in listed shares
(Decrease)/increase in income taxes payable
Net increase/(decrease) in deferred tax asset and deferred tax liability
Tax benefit upon entering into Australian tax consolidation regime
Capitalised interest
Foreign currency fluctuations
Net profit on sale of non-current assets
Net (profit)/loss on sale of controlled entities
Net cash provided by operating activities before change in assets or liabilities
Add/(deduct) change in operating assets or liabilities net of acquisitions of businesses:
Decrease/(increase) in receivables
Decrease/(increase) in inventories
Decrease/(increase) in other assets
(Decrease)/increase in payables
(Decrease)/increase in provisions
Net cash provided by operating activities
25. Related Parties
Consolidated
Santos Ltd
2004
$million
2003
$million
2004
$million
2003
$million
379.9
327.0
643.1
182.9
539.7
–
22.1
–
(18.1)
23.0
(20.0)
(32.1)
(38.4)
(52.4)
–
803.7
(157.9)
(1.7)
(6.7)
(32.0)
(0.4)
605.0
531.6
–
59.7
4.4
(24.5)
14.8
(55.0)
(22.6)
13.3
(55.1)
(4.5)
789.1
100.1
11.7
2.4
(2.4)
(3.6)
897.3
210.9
–
4.6
–
12.4
5.1
(20.0)
–
(2.3)
(297.7)
–
556.1
(117.4)
(5.6)
0.7
(23.3)
(17.8)
392.7
195.8
40.8
6.1
4.4
(7.4)
(8.3)
(47.6)
–
(1.1)
(45.8)
1.0
320.8
19.6
9.0
2.3
21.0
(3.6)
369.1
Santos Ltd and its controlled entities engage in a variety of related party transactions in the ordinary course of business. These transactions are
conducted on normal terms and conditions.
Details of related party transactions and amounts are set out in:
Note 2 as to interest received from controlled entities;
Note 4 as to interest paid to controlled entities;
Note 7 as to tax related balances and other amounts owing by controlled entities;
Notes 14 and 15 as to amounts owing to controlled entities;
Note 15 as to guarantees by Santos Ltd of the financing facilities of controlled entities;
Note 16 as to non-executive Directors’ retirement benefits;
Notes 12 and 22 as to investments in controlled entities;
Note 26 as to disclosures relating to Specified Directors and Specified Executives.
In addition:
(a) The spouse of a director of a Santos Group company is an employee of a subsidiary of that company and each of those persons is also a director
of that subsidiary company.
(b) Mr J W McArdle, who retired as a Director on 14 July 2001, entered into a consultancy agreement with the Company pursuant to which he
will provide consultancy services to the Santos Group. The amount paid pursuant to this agreement during the financial year was $30,000
(2003: $70,000).
The transactions referred to in paragraphs (a) and (b) occurred on terms no more favourable than would have been adopted if dealing at arm’s
length, do not have the potential to adversely affect decisions about the allocation of scarce resources and are trivial in nature.
74
Annual Report 2004
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26. Specified Director and Specified Executive Disclosures
(a) Specified Directors
The following persons were Specified Directors of Santos Ltd during the financial year:
Barnett, Peter Charles
Conroy, Francis John
Ellice-Flint, John Charles
Gerlach, Stephen
Harding, Richard Michael
McGregor, Graeme William
O’Leary, Michael Anthony
Sloan, Judith
Non-executive Director
Non-executive Director (retired 14 December 2004)
Managing Director
Chairman and non-executive Director
Non-executive Director (appointed 1 March 2004)
Non-executive Director
Non-executive Director
Non-executive Director
(b) Specified Executives of the Santos Group
The following persons were the six executives with the greatest authority for the strategic direction and management of the Santos Group
(“Specified Executives”) during the financial year:
Name
Position
Gouadain, Jacques Elie
Moore, Paul Derek
Wasow, Peter Christopher
Wilkinson, Richard John
Wood, Bruce James
Young, Jonathon Terence
Vice President – Geoscience and New Ventures
Vice President – Development Projects and Technical Services
Chief Financial Officer
Vice President – Gas Marketing and Commercialisation
Vice President – Strategic Projects
Executive Vice President – Operations
All Specified Executives are employed by Santos Ltd.
(c) Remuneration of Specified Directors and Specified Executives
The Remuneration Committee of the Board is responsible for reviewing the remuneration policies and practices of the Company including: the
compensation arrangements for the Managing Director and senior management; the Company’s superannuation arrangements; employee share and
option plans; and the fees for non-executive Directors.
Non-executive Directors
Within the aggregate amount (being $1,500,000 per year) approved by shareholders at the Annual General Meeting of the Company held on
7 May 2004, the fees of the Chairman and non-executive Directors are set at levels which represent the responsibilities of and the time
commitments provided by those Directors in discharging their duties. Regard is also had to the level of fees payable to non-executive Directors
of comparable companies. Non-executive Directors’ fees were increased effective 1 July 2004. Non-executive Directors, other than the Chairman,
who are members of Board committees receive additional fees. Non-executive Directors may not participate in any of the Company’s bonus,
share or option plans.
The Directors determined to cease retirement allowances to non-executive Directors effective from 30 June 2004. Non-executive Directors appointed
before 1 January 2004 are entitled to receive benefits accrued to that date, payable upon ceasing to hold office as a Director. The retirement
payment (inclusive of superannuation guarantee charge entitlements) is made pursuant to an agreement entered into with each non-executive
Director on terms approved by shareholders at the 1989 Annual General Meeting. These benefits have been fully provided for by the Company.
Executive Directors
The Managing Director, Mr J C Ellice-Flint, is currently the only Executive Director.
Mr J C Ellice-Flint has an executive service agreement with the Company which continues until terminated by either party in accordance with
the agreement.
His remuneration comprises a base salary reviewed annually and an annual bonus calculated on a formula that includes components to measure
the growth of profitability, exploitable reserves and share price.
He also has an entitlement to 1,000,000 Restricted Shares, details of which are described in note 18(h) to the financial statements and holds
3,000,000 options under the Santos Executive Share Option Plan.
If the Company terminates Mr J C Ellice-Flint’s appointment without cause, the Company may at its option, in lieu of part or all of the notice
period of 24 months, pay to him an amount equal to a proportion or multiple of his annual base salary and the current year’s potential bonus
(excluding the application of any performance condition) at the time at which notice is given.
Annual Report 2004
75
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NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2004
26. Specified Director and Specified Executive Disclosures (continued)
(c) Remuneration of Specified Directors and Specified Executives (continued)
Senior Executives
Remuneration Objectives and Principles
The objectives of the Company’s remuneration policy are to attract, retain and motivate appropriately qualified and experienced executives
capable of discharging their respective responsibilities to enable the Company to achieve its business strategy.
The principles underlying the remuneration policy are: to realistically reflect the responsibilities of executives and other employees; to be
industry competitive and reasonable; that a significant portion of remuneration be at risk against individual and company performance and
shareholder wealth creation; that performance, not failure, be rewarded so that the Company’s best performers receive more; and to encourage
executives to manage from the perspective of the shareholders by rewarding them for aligning Company and shareholder returns.
Remuneration Structure
The Company’s remuneration structure for its non-award employees is based upon Target Total Remuneration (“TTR”), the components of which
comprise:
•
a fixed component called Fixed Annual Remuneration (“FAR”); and
two variable components, called:
•
•
the Short Term Incentive (“STI”) and
the Long Term Incentive (“LTI”).
FAR comprises salary, superannuation and benefits; is quantified by reference to role and experience; and is industry benchmarked.
STI is represented as a percentage of base remuneration which is “at risk”, consists of an annual cash bonus paid to reward performance based
on a mix of: Company performance and individual performance measured against annual scorecards with target and stretch performance criteria
determined in advance each year.
LTI in relation to executive remuneration includes a long-term performance based component in the form of equity participation through the
Santos Executive Share Option Plan (“SESOP”) and the Santos Employee Share Purchase Plan (“SESPP”). Participation is determined by the Board,
on recommendation of the Remuneration Committee, and only applies to executives who are in a position to affect shareholder returns.
Options and rights to shares issued under these Plans to senior executives are linked to the longer term performance of the Company and are
only exercisable following the satisfaction of performance hurdles that are designed to maximise shareholder wealth.
The amount of the award, and correspondingly the proportion of remuneration at risk, varies between executives according to their respective
levels of seniority and responsibility.
The rules of the SESPP and SESOP were both approved by shareholders in 1997 and again in 2000.
Having regard to contemporary best practice, the LTI program is designed to drive superior executive performance and to reward only superior
Company performance, linked to an appropriate performance benchmark. The benchmark assesses actual Company performance in terms of
long-term comparative growth of the Company and resulting shareholder value.
Company performance is measured over a three year period based on the Company’s Total Shareholder Return (“TSR”) relative to one or more
comparator groups as determined by the Board at the commencement of the performance period including, without limitation, any combination
of the ASX100, energy companies in ASX100, the ASX Energy Index and international exploration and production companies. If performance is
below the 50th percentile, no award is made. A proportionate award is made for performance between the 50th to 75th percentile and the
maximum award is made for performance at or above the 75th percentile.
In relation to the current financial year, awards may be taken only in the form of shares pursuant to SESPP or, at the election of an executive,
options pursuant to SESOP, details of which are described in notes 18(c) and 18(d) of the financial statements. In future periods, awards may be
taken in the form of rights over shares pursuant to SESPP or options granted under SESOP, at the election of executives.
Rights to shares and options are granted at no cost to the executives with the number of shares awarded being determined by dividing the amount
of the award by the volume weighted average price of the Company’s shares over the five business days up to and including the award date. The
number of options awarded is of equivalent value calculated by an independent expert based on an acceptable valuation method.
The exercise price of the options is the volume weighted average price of the Company’s shares over the five business days up to and including
the award date.
The Board intends that LTI awards be made on an annual basis using a three year measurement period for the applicable performance hurdles.
However, the Board reserves the right to suspend or modify the LTI program in light of circumstances appropriate to the Company from time to
time.
The maximum number of shares that may be issued under all of the Company’s executive and employee share and option plans cannot exceed the
limit of 5% of the issued capital, as approved by shareholders at the 2000 Annual General Meeting.
The Specified Executives are entitled to a termination payment in the event of termination of their service agreement by the Company without
cause. They are entitled to three months’ notice, excepting for Mr P C Wasow who is entitled to six months’ notice, or payment in lieu of that
notice, plus three weeks for each year of continuous service, pro rata for part thereof, and capped at a maximum of 65 weeks of total fixed
remuneration, less notional value of superannuation for that period.
76
Annual Report 2004
SAN165 WWW Fins 30/3/05 11:55 AM Page 77
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77
SAN165 WWW Fins 30/3/05 11:55 AM Page 78
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2004
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78
Annual Report 2004
SAN165 WWW Fins 30/3/05 11:55 AM Page 79
26. Specified Director and Specified Executive Disclosures (continued)
(d) Share Based Payment Compensation
Options Over Ordinary Shares Granted as Remuneration
During the reporting period, no options over ordinary shares were granted and vested.
Exercise of Options Granted as Remuneration
During the reporting period, no shares were issued on the exercise of options previously granted as remuneration.
(e) Equity Holdings
Options
The movement during the reporting period in the number of options of the Company held, directly, indirectly or beneficially, by each Specified
Director and Specified Executive, including their personally-related entities, is as follows:
Name
Balance at
beginning
Granted as
of the year remuneration
No.
No.
Exercised
No.
Other
changes
No.
Balance
at end of
the year
No.
Vested
at end of
the year
No.
Vested and
exercisable
No.
Vested
but not
exercisable
No.
Specified Directors
Ellice-Flint, John Charles
Specified Executives
Gouadain, Jacques Elie
Moore, Paul Derek
Wasow, Peter Christopher
Wilkinson, Richard John
Wood, Bruce James
Young, Jonathon Terence
3,000,000
200,000
125,000
150,000
–
95,085
250,000
Shares
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,000,000
2,000,000
2,000,000
200,000
125,000
150,000
–
95,085
250,000
200,000
25,000
–
–
45,085
–
200,000
25,000
–
–
45,085
–
–
–
–
–
–
–
–
The movement during the reporting period in the number of shares of the Company held, directly, indirectly or beneficially, by each Specified
Director and Specified Executive, including their personally-related entities, is as follows:
Balance at
beginning
of the year remuneration
No.
Received
Granted as on exercise
of option
No.
No.
Other
changes
No.
Balance
at end of
the year
No.
Balance
held
nominally
No.
Redeemed
No.
Name
Specified Directors
Ordinary Shares – Fully Paid
Barnett, Peter Charles
Conroy, Francis John
Ellice-Flint, John Charles
Gerlach, Stephen
Harding, Richard Michael
McGregor, Graeme William
O’Leary, Michael Anthony
Sloan, Judith
12,394
5,000
1,029,900
37,305
–
10,000
4,725
5,000
Reset Convertible Preference Shares
Conroy, Francis John
Ellice-Flint, John Charles
McGregor, Graeme William
Sloan, Judith
Redeemable Convertible Preference Shares
Conroy, Francis John
Ellice-Flint, John Charles
McGregor, Graeme William
Sloan, Judith
–
225
200
125
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(460)
(225)
(200)
(125)
–
–
–
–
–
–
7,310
5,000
–
–
–
–
460
–
–
–
460
225
1,200
195
12,394
5,000
1,037,210
42,305
–
10,000
4,725
5,000
–
–
–
–
460
225
1,200
195
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Annual Report 2004
79
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NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2004
26. Specified Director and Specified Executive Disclosures (continued)
(e) Equity Holdings (continued)
Name
Specified Executives
Ordinary Shares – Fully Paid
Gouadain, Jacques Elie
Moore, Paul Derek
Wasow, Peter Christopher
Wilkinson, Richard John
Wood, Bruce James
Young, Jonathon Terence
(f) Loans and Other Transactions
Loans
Balance at
beginning
Granted as
of the year remuneration
No.
No.
Received
on exercise
of option
No.
Redeemed
No.
Other
changes
No.
Balance
at end of
the year
No.
Balance
held
nominally
No.
6,000
6,198
8,364
6,764
1,000
8,636
6,216
5,827
7,770
5,827
5,439
8,547
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
12,216
12,025
16,134
12,591
6,439
17,183
–
–
–
–
–
–
There have been no loans outstanding at any time throughout the year with any Specified Director or Specified Executive.
Other Transactions with the Company or its Controlled Entities
Agreements exist with the non-executive Directors appointed prior to 1 January 2004 providing for the payment of a sum on retirement from
office as a Director in accordance with shareholder approval at the 1989 Annual General Meeting. From 30 June 2004 the retirement allowances
ceased to accrue.
The transactions referred to above occurred on terms no more favourable than would have been adopted if dealing at arm’s length, do not have
the potential to affect adversely decisions about the allocation of scarce resources and are trivial in nature.
27. Remuneration of Auditors
Amounts received or due and receivable by the auditors of Santos Ltd for:
External audit services
Other services:
Taxation
Due diligence
Other
The auditors ceased providing taxation services from 31 December 2004.
28. Segment Information
Consolidated
Santos Ltd
2004
$000
715
147
3
9
874
2003
$000
649
112
23
16
800
2004
$000
388
–
58
6
452
2003
$000
363
–
–
10
373
Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.
Unallocated items mainly comprise dividend revenue, interest-earning assets and revenue, interest-bearing loans, borrowings and expenses, and
corporate assets and liabilities.
Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more than one period.
Geographic segments
The Santos Group operates primarily in Australia but also has international operations in the United States, Papua New Guinea, Indonesia and Egypt.
80
Annual Report 2004
SAN165 WWW Fins 30/3/05 11:55 AM Page 81
28. Segment Information (continued)
Primary Reporting
Geographic segments
Revenue
Total segment revenue
Other unallocated revenue
Total revenue
Results
Earnings before interest, tax and significant items
Significant items:
Insurance recovery
Costs associated with Moomba liquids recovery plant fire
Profit on sale of oil and gas assets
Write-down of exploration and development expenditure
Organisation restructure costs
Accelerated depreciation – Heytesbury
Gain on sale of listed investments
Unallocated corporate expenses
Earnings before interest and tax
Unallocated borrowing costs
Profit from ordinary activities before income tax expense
Income tax expense
Net profit after income tax attributable to the
shareholders of Santos Ltd
Non-cash expenses
Depreciation, depletion and amortisation
Unallocated corporate depreciation, depletion and amortisation
Total depreciation, depletion and amortisation
Write-down of exploration and development expenditure
Unallocated corporate write-down of listed investment
Total non-cash expenses
Acquisition of non-current assets
Controlled entities
Oil and gas assets, property, plant and equipment
Unallocated corporate acquisition of oil and gas assets,
property, plant and equipment
Total acquisition of non-current assets
Assets
Segment assets
Unallocated corporate assets
Consolidated total assets
Liabilities
Segment liabilities
Unallocated corporate liabilities
Consolidated total liabilities
Secondary Reporting
Business segments
Australia
International
Consolidated
2004
$million
2003
$million
2004
$million
2003
$million
2004
$million
2003
$million
1,633.1
1,445.9
120.7
134.6
1,753.8
(0.6)
1,753.2
1,580.5
38.9
1,619.4
505.9
529.8
3.8
15.6
509.7
545.4
116.6
(17.5)
43.9
(4.7)
(21.6)
–
622.6
–
–
–
(1.3)
–
(20.2)
508.3
–
–
–
(17.4)
–
–
(13.6)
–
–
–
(58.4)
–
–
(42.8)
434.4
454.9
90.8
65.9
4.7
1.3
17.4
58.4
92.2
761.8
24.0
587.0
35.1
146.4
–
140.0
5,120.1
4,447.8
694.7
602.7
2,129.1
1,678.3
120.9
174.9
116.6
(17.5)
43.9
(22.1)
(21.6)
–
609.0
0.1
(34.7)
574.4
(33.6)
–
–
–
(59.7)
–
(20.2)
465.5
45.8
(45.8)
465.5
(34.6)
540.8
(160.9)
430.9
(103.9)
379.9
327.0
525.2
14.5
539.7
22.1
–
561.8
127.3
908.2
21.3
1,056.8
5,814.8
141.2
5,956.0
2,250.0
207.7
2,457.7
520.8
10.8
531.6
59.7
4.4
595.7
24.0
727.0
23.3
774.3
5,050.5
167.8
5,218.3
1,853.2
277.2
2,130.4
The Santos Group operates predominantly in one business, namely the exploration, development, production, transportation and marketing of
hydrocarbons. Revenue is derived from the sale of gas and liquid hydrocarbons and the transportation of crude oil.
Annual Report 2004
81
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NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2004
29. Commitments for Expenditure
The Santos Group has the following commitments for expenditure:
(a) Capital commitments
Capital expenditure contracted for at balance date for which no amounts
have been provided in the financial statements:
Due not later than one year
Due later than one year but not later than five years
Santos Ltd has guaranteed the capital commitments of certain controlled entities
(refer note 31 for further details).
(b) Minimum exploration commitments
Minimum exploration commitments for which no amounts have been provided
in the financial statement or capital commitments:
Due not later than one year
Due later than one year but not later than five years
Due later than five years
The Santos Group has certain obligations to perform minimum exploration work and expend
minimum amounts of money pursuant to the terms of the granting of petroleum
exploration permits in order to maintain rights of tenure. These commitments may be
varied as a result of renegotiations of the terms of the exploration permits, licences or
contracts or alternatively upon their relinquishment. The minimum exploration
commitments are less than the normal level of exploration expenditures expected to be
undertaken by Santos Ltd and its controlled entities.
(c) Lease commitments
Operating leases:
Due not later than one year
Due later than one year but not later than five years
Due later than five years
30. Superannuation Commitments
Consolidated
Santos Ltd
2004
$million
2003
$million
2004
$million
2003
$million
253.5
13.4
266.9
237.7
33.2
270.9
93.9
8.2
102.1
84.3
0.2
84.5
42.1
118.8
11.6
172.5
108.2
207.7
31.4
347.3
10.3
61.2
–
71.5
36.5
70.9
–
107.4
54.7
102.9
0.1
157.7
39.1
140.1
19.0
198.2
8.4
21.1
–
29.5
18.7
115.1
18.9
152.7
Santos Ltd and certain controlled entities participate in a number of superannuation funds and pension plans in Australia and the United States of
America. From 1 February 2002, three of the more significant employee benefit plans were combined into a single plan which provides benefits either
on a defined benefit or cash accumulation basis for employees or their dependants on retirement, resignation, temporary or permanent disablement
or death. The employers and employee members make contributions as specified in the rules of the plan.
In the case of the defined benefit component of the combined plan, employer contributions are based on the advice of the plan’s actuary. The most
recent actuarial assessment of the plan was undertaken as at 1 January 2004.
The following is a summary of the Santos Superannuation Plan:
Type of benefit
Basis of contributions
Defined benefits and cash accumulation
Percentage of member’s salary contributed by member and employer. The employer’s percentage
reflects the amount to provide an accumulation and the amount recommended by the actuary to
provide the defined benefit.
Last actuarial assessment:
Balance date
Date issued
Name of valuer and qualifications
1 January 2004
20 December 2004
Kathryn Daniels FIAA
82
Annual Report 2004
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30. Superannuation Commitments (continued)
The Santos Superannuation Plan has employee accrued benefits and assets as disclosed in the most recent financial report of the plan, as follows:
Net market value of assets
Less present value of employees’ accrued benefits as determined
by actuarial assessment as at 1 January 2004
Excess
As at
31 December 2003
$million
195.8
(194.8)
1.0
At 31 December 2004 the vested benefits, or the benefits payable in the event of the termination of employment of each plan member, were
$198.2 million (2003: $198.8 million) and the net market value of assets was $202.0 million (2003: $194.2 million).
31. Contingent Liabilities
Santos Ltd and its controlled entities have the following contingent liabilities
arising in respect of:
Performance guarantees
Claims and litigation
Consolidated
Santos Ltd
2004
$million
2003
$million
2004
$million
2003
$million
9.8
8.1
17.9
9.6
11.0
20.6
6.3
2.3
8.6
6.5
2.3
8.8
Legal advice in relation to the claims and litigation referred to above indicates that on the basis of available information, liability in respect of these
claims is unlikely to exceed $1.0 million on a consolidated basis.
A number of the Australian interests of the Santos Group are located within areas the subject of one or more claims or applications for native title
determination. Whatever the outcome of those claims or applications, it is not believed that they will significantly impact the Santos Group’s asset
base. The decision of the High Court of Australia in the “Wik” case has the potential to introduce delay in the grant of mineral and petroleum
tenements and consequently to impact generally the timing of exploration, development and production operations. An assessment of the impact
upon the timing of particular operations may require consideration and determination of complex legal and factual issues.
Guarantees provided by Santos Ltd for borrowings in respect of controlled entities are disclosed in note 15.
Santos Ltd has provided parent company guarantees in respect of:
(a) the funding obligations of its subsidiary companies, Santos Timor Sea Pipeline Pty Ltd and Santos Darwin LNG Pty Ltd, relating to the
construction of a pipeline from the Bayu-Undan Field to Wickham Point in Darwin and the construction of the LNG Plant in Darwin respectively,
and has provided a funding commitment letter to these subsidiary companies together with Santos (JPDA 91-12) Pty Ltd. As at 31 December
2004 the expenditure commitments of Santos Timor Sea Pipeline Pty Ltd and Santos Darwin LNG Pty Ltd for the above mentioned projects
totalled US$41.3 million (2003: US$107.6 million);
(b) payment of Santos Egypt Ltd’s financial obligations under a farmout agreement and certain concessions in the Gulf of Suez in the Arab Republic
of Egypt up to a maximum of US$46.9 million.
Annual Report 2004
83
SAN165 WWW Fins 30/3/05 11:55 AM Page 84
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2004
32. Additional Financial Instruments Disclosure
(a) Foreign exchange risk exposure
The Santos Group is exposed to foreign exchange risk principally through the sale of liquid petroleum products denominated in US dollars,
US dollar borrowings and US dollar expenditure. In order to hedge this foreign exchange risk, the Santos Group has from time to time entered
into forward foreign exchange, foreign currency swap and foreign currency option contracts.
At 31 December 2004 the Santos Group has one open forward foreign currency exchange contract which has expired in January 2005. If closed
out at balance date a loss of $0.2 million would have resulted.
US dollar denominated borrowings are either swapped into Australian dollar exposure (2004: US$321.4 million; 2003: US$115.0 million) or
designated as a hedge of US dollar denominated investments in self-sustaining overseas controlled entities (2004: US$313.0 million;
2003: US$323.6 million) or as a hedge of future US denominated sales revenues (2004: US$146.4 million; 2003: US$219.4 million). As a result,
there were no net foreign currency gains or losses arising from translation of US denominated dollar borrowings recognised in the statements
of financial performance in 2004. Accordingly, $37.4 million of unrealised foreign currency gains were deferred as at 31 December 2004
(2003: gains of $66.3 million). The ultimate foreign currency gains or losses will be included in the measurement of the specific hedged US dollar
denominated sales revenues to be realised in the years 2005 through 2006.
The Australian dollar equivalents of foreign currency monetary items included in the statements of financial position to the extent that they are
not effectively hedged are:
Current assets
Current liabilities
Non-current liabilities
– United States dollars
– United States dollars
– United States dollars
Consolidated
Santos Ltd
2004
$million
2003
$million
2004
$million
2003
$million
126.4
60.5
26.5
82.7
35.4
–
32.9
6.5
–
41.3
8.5
–
84
Annual Report 2004
SAN165 WWW Fins 30/3/05 11:55 AM Page 85
32. Additional Financial Instruments Disclosure (continued)
(b) Interest rate risk exposure
To manage interest rate risk the Santos Group has entered into interest rate swap contracts with maturities ranging from one to eighteen years.
At 31 December 2004 the Santos Group has open interest rate swap contracts which if closed out would have resulted in a gain of $44.2 million
(2003: gain of $63.3 million).
The Santos Group’s exposure to interest rate risk and the effective weighted average interest rates for classes of interest-bearing financial assets
and financial liabilities is set out below:
Weighted
average
interest
rate*
Floating
interest
rate
$million
Note
Fixed interest repriced
or maturing in
1 year
or less
$million
Over 1
to 5 years
$million
More than
5 years
$million
Non
interest-
bearing
$million
Total
$million
31 December 2004
Financial assets
Cash
Receivables
Other financial assets
Financial liabilities
Payables
Deferred income
Interest-bearing liabilities
Interest rate swaps**
31 December 2003
Financial assets
Cash
Receivables
Other financial assets
Financial liabilities
Payables
Deferred income
Interest-bearing liabilities
Interest rate swaps**
7
12
14
15
7
12
14
15
4.55%
N/A
N/A
N/A
N/A
5.50%
4.36%
N/A
N/A
N/A
N/A
4.72%
128.0
–
–
128.0
–
–
1.0
–
1.0
111.1
–
–
111.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
480.6
522.8
1,003.4
–
–
193.4
(98.3)
95.1
–
–
584.4
(424.5)
159.9
–
–
–
–
–
–
155.4
525.6
681.0
–
–
–
–
–
–
202.9
(84.2)
118.7
–
–
–
–
–
–
650.4
(441.4)
209.0
–
409.1
1.2
410.3
371.6
22.1
–
–
393.7
–
171.7
11.7
183.4
291.3
27.7
–
–
319.0
128.0
409.1
1.2
538.3
371.6
22.1
1,259.4
–
1,653.1
111.1
171.7
11.7
294.5
291.3
27.7
1,008.7
–
1,327.7
*
After incorporating the effect of interest rate swaps
** Notional principal amounts
(c) Commodity price risk exposure
The Santos Group is exposed to commodity price fluctuations through the sale of petroleum products denominated in US dollars. The Santos Group
enters into commodity crude oil price swap and option contracts and natural gas swap and option contracts to manage its commodity price risk.
At 31 December 2004 the Santos Group has open oil price swap contracts with settlement expiry dates up to nine months. If closed out at
balance date these contracts would have resulted in a loss of $11.2 million (2003: loss of $1.8 million).
(d) Credit risk exposure
Credit risk represents the potential financial loss if counterparties fail to perform as contracted.
The credit risk on financial assets, excluding investments, of the Santos Group which have been recognised on the statements of financial
position is indicated by the carrying amount.
The credit risk on off-balance sheet derivatives is the cost of replacing the contract if the counterparty were to default and is measured by their
market value at balance date. As at 31 December 2004, counterparty default of foreign currency swaps, foreign currency option contracts, oil
price swap contracts and interest rate swap contracts would result in a loss of $37.2 million (2003: loss of $61.9 million).
The Santos Group controls credit risk on derivative financial instruments by setting exposure limits related to the credit worthiness of
counterparties, all of which are selected banks or institutions with a Standard and Poor’s rating of A or better.
Annual Report 2004
85
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NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2004
32. Additional Financial Instruments Disclosure (continued)
(e) Net fair values of financial assets and liabilities
The carrying amounts of all financial assets and liabilities including hedges approximate net fair value.
At 31 December 2004 the Santos Group has open derivative financial instruments contracts relating to future operating profit which if closed out
at their market rates would have resulted in a gain of $32.8 million (2003: gain of $61.5 million).
33. Economic Dependency
There are in existence long-term contracts for the sale of gas, but otherwise the Directors believe there is no economic dependency.
34. Post Balance Date Events
The following events occurred subsequent to 31 December 2004, the financial effects of which have not been brought to account in the financial
statements for the year ended 31 December 2004:
(a) For dividends declared after 31 December 2004 refer note 20;
(b) On 17 February 2005, the Company entered into a contract to acquire Basin Oil Pty Ltd effective 1 January 2005. Basin Oil Pty Ltd has a 2.1%
interest in SA Cooper Basin, 40% interests in Patricia-Baleen and Sole, and 33.3% interests in Golden Beach and Vic/P55.
35. Australian Equivalents to International Financial Reporting Standards
Following the implementation by the Australian Accounting Standards Board (“AASB”) of the Financial Reporting Council’s policy of adopting the
accounting standards issued by the International Accounting Standards Board (“IASB”), the Santos Group must comply with the Australian
equivalents to International Financial Reporting Standards (“A-IFRS”) from 1 January 2005. Accordingly, the Santos Group will prepare a financial
report under A-IFRS for the first time for the half-year ending 30 June 2005. The prior period comparatives in that report will be based on an
opening A-IFRS statement of financial position dated 1 January 2004 except for the A-IFRS pertaining to financial instruments described below.
A project team has been in place throughout the year and is well advanced to achieve the transition from Australian GAAP to A-IFRS.
At 31 December 2004, the following activities are underway and are expected to be completed by 30 June 2005:
•
•
•
•
•
complete assessment of accounting standard AASB 6 “Exploration for and Evaluation of Mineral Resources” which was issued by the AASB in
December 2004 as an A-IFRS with an effective date of 1 January 2005;
implement changes to information systems and business processes;
conduct training programs;
engage KPMG to audit the Santos Group’s A-IFRS compliant accounting policies and submit revised accounting policies to the Board for approval;
and
restate the 2004 half-year and full year operating results and financial position from Australian GAAP to A-IFRS for comparative purposes.
Under current Australian GAAP the financial report is generally prepared on the basis of historical cost while under the IASB conceptual framework
there is an emphasis on recording assets and liabilities at their fair values. Accordingly, this will increase the volatility in reported results in future
years. The transition to A-IFRS will lead to the derecognition of some assets and the recognition of additional assets and liabilities. Additionally, the
transition will lead to increased disclosures in the notes to the financial statements.
The transition to A-IFRS at 1 January 2005 is not expected to change the Santos Group’s underlying business operations nor have any impact on
either the quantity or the value of its oil and gas reserves, its future cash flows, or its current borrowing facilities. Also, the ability of the Santos
Group to raise additional finance for normal business expansion or to pay dividends consistent with past practice is not expected to be impacted.
The differences between current Australian GAAP and A-IFRS which are more likely to have a significant effect on the Santos Group’s financial
performance and financial position are summarised below:
Financial instruments
All financial instruments including derivatives will be recognised in the statement of financial position and all
derivatives will be carried at fair value.
Changes in the fair value of certain financial instruments will be recorded in the statement of financial performance.
Where financial instruments satisfy strict hedge criteria, changes in the fair value will be recognised in equity, or
will offset the hedged exposure in the statement of financial performance.
The A-IFRS relating to financial instruments applies from 1 January 2005. Unlike the majority of other A-IFRS
standards which require retrospective application as at 1 January 2004, this accounting standard does not require
retrospective application. The effect of the first time application of this standard on the opening statement of
financial position at 1 January 2005 will be to recognise additional financial assets and liabilities.
Santos intends to continue to align its hedging transactions to underlying exposures to achieve accounting
eligibility and thereby reduce profit and loss volatility.
86
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35. Australian Equivalents to International Financial Reporting Standards (continued)
Deferred tax assets
and liabilities
Deferred tax assets and liabilities will generally be based on the differences between the accounting and tax basis
of assets and liabilities under the “balance sheet” approach which will result in the recognition of additional
deferred tax assets and liabilities.
Defined benefit
superannuation surplus
and deficits
Defined benefit superannuation plan surpluses and deficits will be recognised in the statement of financial position
and the changes in these values each period will be recognised either directly in the statement of financial
performance, progressively using a “corridor” approach or directly in retained earnings. The effective date of this
standard is 1 January 2006, however the Company is allowed to adopt earlier at 1 January 2005.
Restoration liabilities
Restoration liabilities will be discounted to present value and capitalised as a component part of capitalised
exploration and development expenditure and property, plant and equipment. The capitalised cost is to be amortised
over the life of the assets and the provision is accreted periodically to the profit and loss as the discounting of the
liability unwinds.
Functional currency
The majority of the controlled entities within the Santos Group that have petroleum operations in foreign
jurisdictions will have the US dollar as their functional currency. The first time application of A-IFRS will result in
the net assets of those foreign controlled entities to be translated from their US dollar functional currency to
Australian dollars using the spot rate at 1 January 2004. The differences arising from the initial application of this
accounting standard will be reflected in the foreign currency translation reserve at 1 January 2004.
Equity-based payments
Under A-IFRS the cost of employee remuneration provided in the form of equity-based remuneration (including
shares and options) will be measured based on the fair value of those instruments and amortised to the profit and
loss over the vesting period.
Exploration and
evaluation expenditure
Impairment
There is no International Financial Reporting Standard (“IFRS”) which comprehensively deals with the accounting
and reporting issues specific to the extractive industries. In the absence of such an industry-based IFRS, companies
operating in the extractive industries will be required to determine their own accounting policy for accounting for
exploration and evaluation expenditure which is compatible with the IFRS conceptual accounting framework
definition of assets and expenses. Generally this will require exploration and evaluation expenditures to be expensed
unless they lead to a successful discovery of economic value.
Pending the completion of a comprehensive project on accounting for extractive industries, AASB 6 “Expenditure for
and Evaluation of Mineral Resources” was issued in December 2004 to facilitate the introduction of A-IFRS in
respect of the treatment of exploration and evaluation expenditure. This standard is the Australian equivalent to
IFRS 6 issued by the IASB in December 2004, and will require exploration and evaluation expenditure incurred in
each area of interest to either be expensed as incurred or to be partially or fully capitalised and recognised as an
asset so long as the following conditions are satisfied:
(a) the rights to tenure of the area of interest are current; and
(b) at least one of the following conditions is also met:
(i) the exploration and evaluation expenditures are expected to be recouped through successful development
and exploitation of the area of interest, or alternatively, by its sale; or
(ii) exploration and evaluation activities in the area of interest have not at the reporting date reached a stage
which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves,
and active and significant operations in, or in relation to, the area of interest are continuing.
The IASB decided that the effective date of IFRS 6 to be 1 January 2006 to allow affected companies more time to
make the transition to IFRS. Despite the lateness of the issuance of the Australian equivalent accounting standard
AASB 6, Santos will be required to apply the standard from 1 January 2005.
Santos is currently evaluating this accounting standard and its accounting policy for exploration and evaluation
expenditure. At the date of this report, no decision has been made as to how the Santos Group will account for
exploration and evaluation expenditure under the IFRS conceptual framework commencing 1 January 2005.
Testing of non-current assets for impairment will be undertaken on the smallest grouping of assets generating cash
flows, called cash generating units. Where there is an indication that a cash generating unit is impaired, the
impairment is to be measured by reference to either the cash generating unit’s discounted future net cash flows, or
its estimated fair value less costs to sell. Upon initial application of this standard, such testing is likely to result in
write-downs of some non-current assets including exploration, evaluation and development expenditure to their
recoverable amount. Any initial impairment write-down may reverse in subsequent periods if there were a change in
the estimates used to determine the initial write-down. The impacts of this new requirement will, in part, depend
on the accounting policy adopted for accounting for exploration and evaluation expenditure referred to above.
The AASB and IASB have significant ongoing projects including a comprehensive “Extractive Industries” project that could affect the differences
between current Australian GAAP and A-IFRS as described above and could further impact the Santos Group’s financial reports in future years. The
future impacts of any new or amended A-IFRS will depend on the particular circumstances in those years.
Annual Report 2004
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DIRECTORS’ DECLARATION
for the year ended 31 December 2004
In the opinion of the Directors of Santos Ltd:
(a) the financial statements and notes, set out on pages 50 to 87, are in accordance with the Corporations Act 2001, including:
(i) giving a true and fair view of the financial position of the Company and consolidated entity as at 31 December 2004 and of their
performance, as represented by the results of their operations and their cash flows, for the year ended on that date; and
(ii) complying with Accounting Standards in Australia and the Corporations Regulations 2001; and
(b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.
In making this declaration, the Directors declare that declarations which satisfy the requirements of section 295A of the Corporations Act 2001
have been received from the Chief Executive Officer and Chief Financial Officer.
Dated this 23rd day of February 2005.
Signed in accordance with a resolution of the Directors:
Director
Director
88
Annual Report 2004
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INDEPENDENT AUDIT REPORT TO MEMBERS OF SANTOS LTD
Scope
The financial report and directors’ responsibility
The financial report comprises the statement of financial performance, statement of financial position, statement of cash flows, accompanying notes
to the financial statements, and the directors’ declaration for both Santos Ltd (the “Company”) and Santos Group (the “Consolidated Entity”), for the
year ended 31 December 2004. The Consolidated Entity comprises both the Company and the entities it controlled during that year.
The Directors of the Company are responsible for the preparation and true and fair presentation of the financial report in accordance with the
Corporations Act 2001. This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to
prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the financial report.
Audit approach
We conducted an independent audit in order to express an opinion to the members of the Company. Our audit was conducted in accordance with
Australian Auditing Standards in order to provide reasonable assurance as to whether the financial report is free of material misstatement. The nature
of an audit is influenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internal control, and the
availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that all material misstatements have been detected.
We performed procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001,
Australian Accounting Standards and other mandatory financial reporting requirements in Australia, a view which is consistent with our understanding
of the Company’s and the Consolidated Entity’s financial position, and of their performance as represented by the results of their operations and
cash flows.
We formed our audit opinion on the basis of these procedures, which included:
•
•
examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the financial report, and
assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of significant accounting estimates made
by the Directors.
While we considered the effectiveness of management’s internal controls over financial reporting when determining the nature and extent of our
procedures, our audit was not designed to provide assurance on internal controls.
Independence
In conducting our audit, we followed applicable independence requirements of Australian professional ethical pronouncements and the Corporations
Act 2001.
Audit opinion
In our opinion, the financial report of Santos Ltd is in accordance with:
(a) the Corporations Act 2001, including:
(i) giving a true and fair view of the Company’s and the Consolidated Entity’s financial position as at 31 December 2004 and of their
performance for the financial year ended on that date; and
(ii) complying with Accounting Standards in Australia and the Corporations Regulations 2001; and
(b) other mandatory professional reporting requirements in Australia.
KPMG
Peter A Jovic
Partner
Adelaide
23 February 2005
Annual Report 2004
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STOCK EXCHANGE AND SHAREHOLDER INFORMATION
Listed on Australian Stock Exchange at 28 February 2005 were 585,390,738 fully paid ordinary shares and 6,000,000 redeemable convertible
preference shares. Unlisted were 67,250 partly paid Plan 0 shares, 57,750 partly paid Plan 2 shares, 32,400 fully paid ordinary shares issued pursuant
to the Santos Employee Share Purchase Plan (‘SESPP’) for General Employee Participation and 178,027 fully paid ordinary shares issued pursuant to
SESPP for Senior Executive Long Term Incentive. Also unlisted were 50,000 fully paid ordinary shares issued consequent upon exercise of 50,000
options granted pursuant to the Santos Executive Share Option Plan, an application for quotation of which has been lodged with the Australian Stock
Exchange. There were: 79,423 holders of all classes of issued ordinary shares (including 9 holders of Plan 0 shares; 8 holders of Plan 2 shares; and 76
holders of SESPP shares) compared with 84,977 a year earlier; 15,479 holders of redeemable convertible preference shares; and 22 holders of the
5,438,972 options granted pursuant to the Santos Executive Share Option Plan.
The listed issued ordinary shares plus the ordinary shares issued pursuant to SESPP represent all of the voting power in Santos. The holdings of the
20 largest holders of ordinary shares represent 52.65% of the total voting power in Santos (last year 48.2%) and the holdings of the 20 largest
holders of redeemable convertible preference shares represent 43.08% of the issued redeemable convertible preference shares.
There is no current on-market buy-back.
The 20 largest shareholders of fully paid ordinary shares in Santos as shown in the Company’s Register of Members at 28 February 2005 were:
Name
Number of fully paid ordinary shares
70,657,626
62,151,354
54,655,785
40,453,440
12,939,538
11,557,825
10,659,746
7,169,037
6,981,674
4,034,278
3,712,171
3,571,716
3,280,515
3,189,289
2,721,121
2,321,134
2,311,764
2,141,738
1,956,538
1,871,246
308,337,535
% of
holders
Fully paid
ordinary
shares
(Holders)
shares
held
% of Redeemable
convertible
preference
shares
(Holders)
27,791
40,785
7,209
3,505
133
79,423
1,182
34.99
51.35
9.08
4.41
0.17
2.87
17.11
8.87
12.19
58.96
100.00
100.00
15,151
272
21
26
9
15,479
-
Westpac Custodian Nominees Limited
National Nominees Limited
J P Morgan Nominees Australia Limited
ANZ Nominees Limited
Citicorp Nominees Pty Limited
RBC Global Services Australia Nominees Pty Limited
Westpac Custodian Nominees Limited (ADR Account)
Queensland Investment Corporation
Cogent Nominees Pty Limited
AMP Life Limited
IAG Nominees Pty Limited
HSBC Custody Nominees (Australia) Limited
Citicorp Nominees Pty Limited (CFS WSLE Imputation Fnd A/c)
Australian Foundation Investment Company Limited
Government Superannuation Office (State Super Fund A/c)
Citicorp Nominees Pty Limited (CFS WSLE Aust Share Fnd A/c)
Victorian Workcover Authority
Citicorp Nominees Pty Limited (CFS Imputation Fund A/c)
Fortis Clearing Nominees P/L (Settlement A/c)
Cogent Nominees Pty Limited (SMP Accounts)
Total
Analysis of Shares - range of shares held
1-1,000
1,001-5,000
5,001-10,000
10,001-100,000
100,001 and over
Total
Less than a marketable parcel of $500
90
Annual Report 2004
%
12.07
10.62
9.34
6.91
2.21
1.97
1.82
1.22
1.19
0.69
0.63
0.61
0.56
0.54
0.46
0.40
0.39
0.37
0.33
0.32
52.65
% of
shares
held
40.09
10.00
2.70
10.53
36.68
% of
holders
97.88
1.76
0.13
0.17
0.06
100.00
100.00
SAN165 WWW Fins 30/3/05 11:55 AM Page 91
The 20 largest shareholders of redeemable convertible preference shares in Santos as shown in the Company’s Register of Members at 28 February
2005 were:
Name
Number of redeemable convertible preference shares
J P Morgan Nominees Australia Limited
Cogent Nominees Pty Limited (SMP Accounts)
National Nominees Limited
Westpac Custodian Nominees Limited
AMP Life Limited
Australian Foundation Investment Company Limited
ANZ Nominees Limited
RBC Global Services Australia Nominees Pty Limited (JBENIP A/c)
Citicorp Nominees Pty Limited
Hastings Funds Management Limited (Hastings Yield Fund A/c)
Merrill Lynch (Australia) Nominees Pty Ltd
Questor Financial Services Limited (TPS RF A/c)
Cambooya Pty Limited
ANZ Executors and Trustee Company Limited
Citicorp Nominees Pty Limited (CFSIL Cwlth Spec 5 A/c)
J B Were Capital Markets Limited
Citicorp Nominees Pty Limited (CMIL Cwlth Income Fund A/c)
Brencorp No 11 Pty Limited
Australian Executor Trustees Limited
Argo Investments Limited
Total
751,678
282,631
213,053
211,755
208,780
175,000
131,366
122,117
104,180
70,000
46,750
41,756
41,000
34,470
29,053
27,249
27,000
24,600
22,198
20,000
2,584,636
%
12.53
4.71
3.55
3.53
3.48
2.92
2.19
2.04
1.74
1.17
0.78
0.70
0.68
0.57
0.48
0.45
0.45
0.41
0.37
0.33
43.08
Substantial Shareholders, as at 28 February 2005, as disclosed by notices received by the Company:
Name
Maple-Brown Abbott Limited
No. of voting shares held
57,898,446
For Directors’ Shareholdings see Directors’ Statutory Report as set out on page 47 of this Annual Report.
Voting Rights
Every member present in person or by an attorney, a proxy or a representative shall on a show of hands, have one vote and upon a poll, one vote
for every fully paid ordinary share held. Pursuant to the Rules of the Santos Executive Share Plan, Plan 2 and Plan 0 shares do not carry any voting
rights except on a proposal to vary the rights attached to Plan shares.
Holders of redeemable convertible preference shares (“Preference Shares”) do not have voting rights at any general meeting of the Company except
in the following circumstances:
(a) on a proposal:
(1) to reduce the share capital of the Company;
(2) that affects rights attached to the Preference Shares;
(3) to wind up the Company; or
(4) for the disposal of the whole of the property, business and undertaking of the Company;
(b) on a resolution to approve the terms of a buy-back agreement;
(c) during a period in which a dividend or part of a dividend on the Preference Shares is in arrears; or
(d) during the winding up of the Company.
Annual Report 2004
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INFORMATION FOR SHAREHOLDERS
NOTICE OF MEETING
The Annual General Meeting of Santos Ltd will be held in the Auditorium
at The Adelaide Town Hall Function Centre, 128 King William Street,
Adelaide, South Australia on Friday 20 May 2005 at 10.00 am.
Other investor information available on the Santos website includes:
• open briefings with Corporate File – an ASX-endorsed online briefing
service
FINAL DIVIDEND
The 2004 final ordinary dividend will be paid on 31 March 2005 to
shareholders registered in the books of the Company at the close of
business on 4 March 2005 in respect of fully paid shares held at record
date.
STOCK EXCHANGE LISTING
Santos Ltd. Incorporated in Adelaide, South Australia, on 18 March
1954. Quoted on the official list of the Australian Stock Exchange Ltd
(ordinary shares code STO; FUELS code STOPB) and the NZX Ltd.
AMERICAN DEPOSITORY RECEIPTS
Santos American Depository Receipts issued by Morgan Guaranty in the
USA are sponsored and are quoted on the NASDAQ system in the USA
(code STOSY).
DIRECTORS
S Gerlach (Chairman), J C Ellice-Flint (Managing Director), P C Barnett,
K A Dean, R M Harding, G W McGregor, M A O’Leary, C J Recny, J Sloan.
F J Conroy (retired 14 December 2004).
SECRETARY
M G Roberts (retired 1 July 2004).
W J Glanville (appointed 23 February 2004).
Mr Glanville is responsible for corporate governance, secretariat and
legal services. Prior to his appointment, he was Manager – Legal of
Santos’ Legal Department and, prior to joining Santos, he practised law
as a Barrister and Solicitor. Mr Glanville holds a Degree of Bachelor of
Laws, a Degree of Bachelor of Arts and a Graduate Diploma in Legal
Practice.
CHANGE OF SHAREHOLDER DETAILS
Issuer Sponsored Shareholders wishing to update their details must
notify the Share Registrar in writing. The relevant shareholder forms can
be obtained from the Share Registrar or via the Investor Centre on the
Santos website, www.santos.com.
Forms are available to advise the Company of changes relating to change
of address, direct crediting of dividends, Tax File Number and Australian
Business Number, Annual Report and Sustainability Review mailing
preferences and Dividend Reinvestment Plan participation.
INVESTOR INFORMATION AND SERVICES
Santos website
A wide range of information for investors is available from Santos’
website, www.santos.com, including Annual Reports, Full Year and
Interim Reports and Presentations, Press Releases, Quarterly Activities
Reports and Weekly Drilling Summaries.
Comprehensive archives of these materials dating back to 1997 are
available on the Santos website.
• live and archived webcasts of investor briefings
• an e-mail alert facility where shareholders and other interested parties
can register to be notified, free of charge, of Santos’ Press Releases
and Weekly Drilling Summaries via e-mail.
The Santos website provides shareholder forms to help shareholders
manage their holdings, as well as a full history of Santos’ dividend
payments and equity issues. Shareholders can also check their holdings
and payment history in the secure View Shareholding section.
Santos’ website also provides an online Conversion Calculator, which
instantly computes equivalent values of the most common units of
measurement in the oil and gas industry.
Publications
The Annual Report and the Sustainability Review are the major sources
of printed information about Santos. Printed copies are available from
the Share Registrar or Investor Relations.
SHAREHOLDER ENQUIRIES
Enquiries about shareholdings should be directed to:
Share Registrar, Santos Ltd, GPO Box 2455,
Adelaide, South Australia 5001. Telephone: 08 8218 5111.
E-mail: share.register@santos.com
Investor information, other than that relating to a shareholding, can be
obtained from:
Investor Relations, Santos Ltd, GPO Box 2455,
Adelaide, South Australia 5001. Telephone: 08 8218 5111.
E-mail: investor.relations@santos.com
Electronic enquiries can also be submitted through the Contact Us
section of the Santos website, www.santos.com.
SHAREHOLDERS’ CALENDAR
2004 full year results announcement
23 February 2005
Ex-dividend date for 2004 full year dividend
28 February 2005
Record date for 2004 full year dividend
Payment date for 2004 full year dividend
Annual General Meeting
Half year end
2005 interim results announcement
Full year end
QUARTERLY REPORTING CALENDAR
2005 First Quarter Activities Report
2005 Second Quarter Activities Report
2005 Third Quarter Activities Report
2005 Fourth Quarter Activities Report
4 March 2005
31 March 2005
20 May 2005
30 June 2005
16 August 2005
31 December 2005
27 April 2005
27 July 2005
26 October 2005
25 January 2006
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Santos Ltd ABN 80 007 550 923
Cover photograph:
Close-up of spinning Kelly Bushing (KB) on the drill floor of an exploration rig.
Page 1 photographs (top to bottom):
Inspection of coiled tubing drilling activities, Cooper Basin, central Australia; installation of
mid water arches, Mutineer-Exeter oil fields, Carnarvon Basin, offshore Western Australia; site
inspection and liaison with contractors, offshore Western Australia; inspection of MODEC Venture
11 Floating Production Storage and Offloading facility, Jurong Shipyard, Singapore.
INSIDE
CHAIRMAN’S REVIEW
2 Stephen Gerlach comments on Santos’
performance in 2004.
2004 ACHIEVEMENTS
2005 AND BEYOND
3 Key achievements in 2004 and three-year
performance, plus what to look for in the
near-term future.
MANAGING DIRECTOR’S
REVIEW
4 John Ellice-Flint reviews Santos’ 50th year,
where the values embodied in the great
explorers of yesteryear are shaping
Santos today.
THE WORLD OF SANTOS
8 Locations of Santos’ global exploration,
development and production activities.
ANALYSING FINANCIAL
PERFORMANCE
10 Putting the numbers in perspective and
explaining the 2004 financial results.
LEVERAGING BASE BUSINESS
12 Production results for 2004 plus a review
of activities that are creating value in
Santos’ base business.
CAPTURING AND
DELIVERING GROWTH
18 Progress on Santos’ development projects
and gas commercialisation highlights.
DIRECTORS’ STATUTORY
REPORT
47 Directors’ shareholdings, meetings,
activities and emoluments.
MANAGING OPTIONS
22 Strategic projects, portfolio management
activities and reserves movements
in 2004.
FINANCIAL REPORT
50 Statements of financial performance,
financial position and cash flows and
notes to the financial statements.
SUSTAINABILITY
26 Sustainability activities undertaken in
2004, including safety and environmental
performance, employees and communities.
CORPORATE GOVERNANCE
29 Details of the main corporate governance
practices Santos has in place.
DIRECTORS’ AND SENIOR
EXECUTIVES’ REMUNERATION
37 Remuneration details for Directors and
key executives.
BOARD OF DIRECTORS
41 Directors’ biographical details.
GROUP INTERESTS
42 Santos licence areas and percentage
interests.
STOCK EXCHANGE
AND SHAREHOLDER
INFORMATION
90 Listing of top 20 shareholders, analysis
of shares and voting rights.
INFORMATION FOR
SHAREHOLDERS
92 Annual General Meeting, final dividend,
shareholder enquiries and information
resources for shareholders.
GLOSSARY
93 Most frequently used terms explained.
BACK COVER
Corporate directory
CREATING OPPORTUNITIES
15 Exploration strategy, results and acreage
acquisitions, 2005 program and new
venture opportunities.
10 YEAR SUMMARY
44 Statistical summary of financial
performance.
GLOSSARY
barrel/bbl
The standard unit of measurement for all
production and sales. One barrel = 159 litres
or 35 imperial gallons.
bcf
Billion cubic feet, a billion defined as 109, on
average 1 bcf of sales gas = 1.055 petajoules.
boe
Barrels of oil equivalent. The factor used
by Santos to convert volumes of different
hydrocarbon production to barrels of oil
equivalent.
bopd
Barrels of oil per day.
contingent resources
Those quantities of hydrocarbons which are
estimated, on a given date, to be potentially
recoverable from known accumulations, but
which are not currently considered to be
commercially recoverable. Contingent resources
may be of a significant size, but still have
constraints to development. These constraints,
preventing the booking of reserves, may relate
to lack of gas marketing arrangements or to
technical, environmental or political barriers.
the Company or Santos
Santos Ltd and its subsidiaries.
DD&A
Depreciation, depletion and amortisation of
building, plant and equipment, exploration
and development expenditure.
delineation well
Comprises two categories: near-field
exploration wells and appraisal wells. Near-
field exploration wells are wells located near
existing fields/discoveries and have a higher
expectation of success than wildcat exploration
wells. These wells test independent structures
or traps and have a higher risk of failure than
appraisal or development wells. An appraisal
well is a well drilled for the purpose of
identifying extensions to known fields or
discoveries.
development well
Wells designed to produce hydrocarbons from
a gas or oil field within a proven productive
reservoir defined by exploration or appraisal
drilling.
EBIT
Earnings before interest and tax.
EBITDA
Earnings before interest and tax, depreciation,
depletion and amortisation of building, plant
and equipment, exploration and development
expenditure and amortisation of goodwill.
finding cost per barrel of oil equivalent
Exploration and delineation expenditure per
annum divided by reserve additions net of
acquisitions and divestments.
hydrocarbons
Solid, liquid or gas compounds of the elements
hydrogen and carbon.
LNG
Liquefied natural gas.
LPG
Liquefied petroleum gas, the name given to
propane and butane in their liquid state.
mbbls
Thousand barrels.
mean resource potential
The average of the range of recoverable
resources.
mmbbls
Million barrels.
mmboe
Million barrels of oil equivalent.
mmscf/d
Million standard cubic feet per day.
petroleum liquids
Crude oil, condensate, or its derivative
naphtha, and the liquefied petroleum gases
propane and butane.
PJ
Petajoules. Joules are the metric measurement
unit for energy. A petajoule is equal to 1 joule
x 1015. The equivalent imperial measure to
joules is British Thermal Units (BTU). One
kilojoule = 0.9478 BTU.
Proven reserves (1P)
Proven reserves (1P) are those reserves that, to
a high degree of certainty (90% confidence),
are recoverable. There is relatively little risk
associated with these reserves. Proven
developed reserves are reserves that can be
recovered from existing wells with existing
infrastructure and operating methods. Proven
undeveloped reserves require development.
Proven plus Probable reserves (2P)
Proven plus Probable reserves (2P) are those
reserves that analysis of geological and
engineering data suggests are more likely than
not to be recoverable. There is at least a 50%
probability that reserves recovered will exceed
Proven plus Probable reserves.
Proven, Probable plus Possible reserves (3P)
Proven, Probable plus Possible reserves (3P)
are those reserves that, to a low degree of
certainty (10% confidence), are recoverable.
There is relatively high risk associated with
these reserves.
PSC
Production sharing contract.
reserve replacement cost per barrel of
oil equivalent
Exploration, delineation and development
expenditure per annum divided by reserve
additions net of acquisitions and divestments.
Development includes all development and
fixed asset expenditure net of stay-in-business
and corporate capital expenditure.
reserve replacement ratio
Reserves added during the reporting period
divided by the production over the same
period, reported as a percentage.
resource potential
Resource potential refers to those quantities
of petroleum yet to be discovered. It may
refer to single opportunities or a group
of opportunities.
ROAE
Return on average equity.
ROACE
Return on average capital employed.
seismic
Data used to gain an understanding of rock
formations beneath the earth’s surface using
reflected sound waves.
tcf
Trillion cubic feet.
TJ
Terajoules. Joules are the metric measurement
unit for energy. A terajoule is equal to 1 joule
x 1012.
total recordable case frequency rate (TRCFR)
A statistical measure of safety performance.
Total recordable case frequency rate is
calculated as the total number of recordable
cases (medical treatment injuries and lost time
injuries) per million hours worked. A lost time
injury is a work-related injury or illness that
results, or would result, in a permanent
disability or time lost of one complete shift
or day or more any time after the injury or
illness. A medical treatment injury is a work-
related injury or illness, other than a lost time
injury, where the injury is serious enough to
require more than minor first aid treatment.
Santos classifies injuries that result in
modified duties as medical treatment injuries.
wildcat exploration
Exploration wells testing new play concepts or
structures distanced from current fields.
Conversion
crude oil 1 barrel = 1 boe
sales gas 1 petajoule = 171.937 boe x 103
condensate/naphtha 1 barrel = 0.935 boe
LPG 1 tonne = 8.458 boe
For a comprehensive online conversion
calculator tool, visit the Santos website,
www.santos.com.
Annual Report 2004
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TAPPING INTO THE ENERGY…
Santos is a major Australian oil and gas exploration and production company with interests
and operations in every major Australian petroleum province and in the United States,
Indonesia, Papua New Guinea and Egypt.
Santos is one of Australia's largest onshore gas producers, supplying sales gas and ethane
to all mainland Australian states and territories, and selling oil and liquids to domestic and
international customers.
In Australia, Santos has one of the largest exploration portfolios by area of any company
and has assembled an expanding, well-situated acreage position in Indonesia and the
United States. The Company is also pursuing new venture opportunities in North Africa and
the Middle East.
Santos is positioning itself to perform alongside the top quartile of the world's oil and gas
companies – rapidly expanding its exploration interests and delivering an exciting suite of
growth projects.
…TO DELIVER ON THE STRATEGY
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CORPORATE DIRECTORY
REGISTERED AND HEAD OFFICE
Ground Floor, Santos House
91 King William Street
Adelaide, South Australia 5000
GPO Box 2455
Adelaide, South Australia 5001
Telephone 08 8218 5111
Facsimile 08 8218 5274
SHARE REGISTER
Ground Floor, Santos House
91 King William Street
Adelaide, South Australia 5000
GPO Box 2455
Adelaide, South Australia 5001
Telephone 08 8218 5111
Facsimile 08 8218 5950
OFFICES
Brisbane
Level 14, Santos House
60 Edward Street
Brisbane, Queensland 4000
Telephone 07 3228 6666
Facsimile 07 3228 6920
Perth
Level 28, Forrest Centre
221 St Georges Terrace
Perth, Western Australia 6000
Telephone 08 9460 8900
Facsimile 08 9460 8971
Melbourne Project Office
Level 7, 34 Queen Street
Melbourne, Victoria 3000
Telephone: 03 8614 8500
Facsimile: 03 8614 8511
Port Bonython
PO Box 344
Whyalla, South Australia 5600
Telephone 08 8640 3100
Facsimile 08 8640 3200
United States of America
Santos USA Corp.
10111 Richmond Avenue, Suite 500
Houston, Texas 77042 USA
Telephone 1-713 986 1700
Facsimile 1-713 986 4200
Papua New Guinea
Barracuda Limited
Level 8, Pacific Place
Cnr Champion Parade
and Musgrave Street
Port Moresby, PNG
Telephone 675 321 2633
Facsimile 675 321 2847
Representative office of Santos
Asia Pacific Pty Ltd in Jakarta
Level 9, Ratu Plaza Office Tower
Jalan Jendral Sudirman Kav 9
Jakarta 10270 Indonesia
PO Box 6621, JKS GN
Jakarta 12060 Indonesia
Telephone 62-21 270 0410
Facsimile 62-21 720 4503
USEFUL E-MAIL CONTACTS
Share register enquiries:
share.register@santos.com
Investor enquiries:
investor.relations@santos.com
Employment enquiries:
recruitment@santos.com
WEBSITE
www.santos.com
TAPPING INTO THE ENERGY…
Annual Report 2004