SAN171 WWW Cover 28/3/06 2:14 PM Page 1
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 6777
Perth
Level 28, Forrest Centre
221 St Georges Terrace
Perth, Western Australia 6000
Telephone 08 9460 8900
Facsimile 08 9460 8971
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 6221, JKS GN
Jakarta 12060 Indonesia
Telephone 62-21 270 0410
Facsimile 62-21 720 4503
USEFUL EMAIL CONTACTS
Share register enquiries:
share.register@santos.com
Investor enquiries:
investor.relations@santos.com
Employment enquiries:
recruitment@santos.com
WEBSITE
www.santos.com
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NAVIGATING
SUCCESSAnnual Report 2005
Santos Ltd ABN 80 007 550 923
COVER PHOTOGRAPH:
Roger Lewis (right), Mutineer-Exeter Project Close Out Manager,
inspecting the MODEC Venture 11 Floating Production Storage
and Offtake vessel with a Quality Assurance Engineer.
INSIDE
INTRODUCING SANTOS
Company profile and history, and an overview
of Santos’ vision, strategy and values.
2005 OPERATING AND
FINANCIAL HIGHLIGHTS
2
Key results for 2005 and three-year
performance.
PROGRESS ON THE GROWTH
STRATEGY IN 2005
3
Milestones that delivered on the growth
strategy during 2005 and activities
planned for 2006.
CHAIRMAN’S REVIEW
4
Stephen Gerlach comments on Santos’
performance in 2005.
MANAGING DIRECTOR’S REVIEW
John Ellice-Flint reviews a year of record
5
financial, safety and environmental
performance, successful exploration,
outstanding reserve replacement and fast-
tracked developments.
MEETING STRATEGIC TARGETS
9
Explanation of Santos’ good performance
against its long-term targets.
THE WORLD OF SANTOS
10
Locations of Santos’ global exploration,
development and production activities.
DELIVERING RECORD
FINANCIAL PERFORMANCE
12
Putting the numbers in perspective and
explaining the 2005 financial results.
ACHIEVING OPERATIONAL
EXCELLENCE
14
Production and sales analysis plus activities
that are creating value from Santos’
changing production profile.
PRODUCTION STATISTICS
16
Summary of production results for 2005.
BOARD OF DIRECTORS
55
Directors’ biographical details.
CAPTURING NEW RESOURCES
17
Exploration results, acreage additions and
new ventures in 2005, together with the
program for 2006.
LEADERSHIP TEAM
56 Management structure and senior
executives’ responsibilities and
biographical details.
EXPANDING GLOBALLY THROUGH
GROWTH PROJECTS
20
Development projects that commenced
production or were further progressed.
BROADENING
COMMERCIALISATION HORIZONS
22 Market context, new gas contracts and
innovative use of infrastructure hubs.
REALISING VALUE AND BALANCING
THE PORTFOLIO
24
Strategic projects and portfolio
management activities.
GROWING THE SIZE AND
VALUE OF RESERVES
26
Analysis of reserves movements in 2005.
MANAGING FOR LONG-TERM
SUSTAINABILITY
28
Sustainability framework, polices, systems
and activities, including safety and
environmental performance, employees
and communities.
CORPORATE GOVERNANCE
34
Details of the main corporate governance
practices Santos has in place.
REMUNERATION REPORT
40
Remuneration details for Directors and
key executives.
MAJOR ANNOUNCEMENTS MADE
BY SANTOS DURING 2005
54 Major releases to the market as part of
continuous disclosure.
GROUP INTERESTS
58
Santos licence areas and percentage
interests.
10 YEAR SUMMARY
60
Statistical summary of financial
performance.
FINANCIAL REPORT
62
Income statements, balance sheets,
cash flow statements, statements of
recognised income and expense, and notes
to the consolidated financial statements.
DIRECTORS’ STATUTORY REPORT
Directors’ shareholdings, meetings,
63
activities and emoluments.
STOCK EXCHANGE AND
SHAREHOLDER INFORMATION
137 Listing of top 20 shareholders, analysis
of shares and voting rights.
INFORMATION FOR
SHAREHOLDERS
139 Annual General Meeting, final dividend,
shareholder enquiries and information
resources for shareholders.
GLOSSARY
140 Most frequently used terms explained.
BACK COVER
Corporate directory
SAN171 WWW Cover 28/3/06 2:14 PM Page 2
SANTOS IS A MAJOR AUSTRALIAN-BASED OIL AND GAS
EXPLORATION AND PRODUCTION COMPANY
GROWING A GLOBAL ENERGY BUSINESS.
COMPANY PROFILE
HISTORY
VISION
VALUES
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, Kyrgyzstan and Egypt.
Santos is one of Australia’s largest gas producers, supplying sales gas
to all mainland Australian states and territories, ethane to Sydney,
and oil and liquids to domestic and international customers.
The Cooper Basin, which Santos and its joint venture partners have
developed in central Australia, is Australia’s largest onshore resource
project.
In Australia, Santos has one of the largest exploration portfolios by
area of any company and has assembled a large, well-situated acreage
position in Indonesia and the United States. The Company is also
pursuing new venture opportunities in North Africa, the Middle East,
and Central and South East Asia.
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 production growth through an exciting suite of
growth projects.
Santos Ltd is listed on Australian Stock Exchange – ordinary shares
code STO; preference shares (FUELS) code STOPB.
At year end 2005, Santos had a total market capitalisation of
approximately $7.9 billion, making it one of Australia’s Top 40
companies.
Santos American Depository Receipts are issued by Citibank, N.A.
and listed on the NASDAQ (code STOSY).
Founded in 1954, Santos has been active in the energy business for
more than 50 years. Its name was an acronym for South Australia
Northern Territory Oil Search.
Santos has a vision that by the end of the decade it will become
the leading energy company in South East Asia with a share price that
continues to grow and a reputation for sustainability in its operations.
Santos aspires to a set of values which are the guiding principles
that define how it conducts its business and what it stands for as
a company. This means working as a team that:
Santos made its first significant discovery of natural gas in the Cooper
Basin with the Gidgealpa 2 well in 1963. The Moomba 1 discovery in
1966 confirmed this region as a major petroleum province.
As a result of these discoveries, Santos had a commercially viable
quantity of gas and entered into Gas Sales Agreements with the South
Australian Gas Company, the Electricity Trust of South Australia and
the Australian Gas Light Company. Gas supplies commenced in 1969.
The 1980s saw Santos develop a major liquids business following the
discovery of oil at Tirrawarra in the early 1970s. A liquids recovery
plant was built at Moomba, along with a fractionation and loadout
facility at Port Bonython.
By the 1990s Santos had become a major Australian operating
enterprise with interests in United States and United Kingdom
petroleum provinces and in emerging areas such as the Timor Sea
and Carnarvon Basin in Western Australia.
A number of acquisitions in the 1990s provided Santos with additional
opportunities onshore and offshore Australia, Indonesia and Papua
New Guinea.
Since 2000 Santos has continued to build its business in South East
Asia, the United States and southern Australia, while undertaking
a high impact exploration program and developing new projects to
drive production and earnings growth.
Santos’ vision of future success is to be a safe, low cost, fast-moving
explorer and producer and an agile niche player with a well developed
ability to manage relationships with employees, partners and other
stakeholders.
As the Company grows, it will provide a working environment that
encourages innovation across the business and where employees
are engaged in something which is tangibly more than just a job.
STRATEGY
Santos has in place a robust growth strategy to achieve this
vision. It has three main components, which are illustrated on
the opposite page:
• Enhance existing core areas in eastern and Western Australia.
• Mature emerging core areas in Indonesia, the Timor
Sea/Bonaparte Basin area and Papua New Guinea.
• Identify new core areas in North Africa, Central and South East
Asia and the United States.
• Discovers – through being creative, making courageous decisions,
learning from successes and failures to continually improve
everything we do.
• Delivers – through being accountable for actions and decisions,
creating the right alignment with partners, striving for excellence
and effective results.
• Collaborates – through building trusting relationships based on
mutual respect, sharing what we know for the benefit of others
and demonstrating leadership.
• Cares – by doing the right thing and assuring our future.
These values are the basis of Santos’ commitment to operating with a
view to its long-term sustainability as an energy company.
Main photograph:
Paul Nardone, Completions Supervisor.
Small photographs (left to right):
MODEC Venture 11 Floating Production Storage and Offtake vessel;
close-up of drill sections; ENSCO 56 jack-up rig conducting development
drilling over John Brookes wellhead offshore Western Australia;
Emma Wild, Staff Development & Economics Engineer.
PLEASE RECYCLE THIS REPORT
This Annual Report is printed in Australia on
recyclable paper from sustainable plantation
forests. The manufacture of this paper is
externally certified to the ISO 14001
Environmental Management System,
complying with International Standards.
The printing process uses digital printing
plates, which eliminate film and its
associated chemicals. The vegetable-based
inks used in the printing process use linseed
oil, which is made from renewable sources
such as flax, rather than the traditional
higher greenhouse gas emitting mineral oils.
HELP SAVE PAPER BY DOWNLOADING AN
ELECTRONIC VERSION
An electronic version of this Annual Report
is available on Santos’ website
www.santos.com.
Shareholders who do not require a printed
Annual Report, or who receive more than
one copy due to multiple shareholdings,
can help reduce the number of copies
printed by advising the Share Register in
writing of changes to their Annual Report
mailing preferences.
Shareholders who choose not to receive a
printed Annual Report will continue to receive
all other shareholder information, including
notices of shareholders’ meetings.
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SAN171 WWW Cover 28/3/06 2:14 PM Page 2
SANTOS IS A MAJOR AUSTRALIAN-BASED OIL AND GAS
EXPLORATION AND PRODUCTION COMPANY
GROWING A GLOBAL ENERGY BUSINESS.
COMPANY PROFILE
HISTORY
VISION
VALUES
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, Kyrgyzstan and Egypt.
Santos is one of Australia’s largest gas producers, supplying sales gas
to all mainland Australian states and territories, ethane to Sydney,
and oil and liquids to domestic and international customers.
The Cooper Basin, which Santos and its joint venture partners have
developed in central Australia, is Australia’s largest onshore resource
project.
In Australia, Santos has one of the largest exploration portfolios by
area of any company and has assembled a large, well-situated acreage
position in Indonesia and the United States. The Company is also
pursuing new venture opportunities in North Africa, the Middle East,
and Central and South East Asia.
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 production growth through an exciting suite of
growth projects.
Santos Ltd is listed on Australian Stock Exchange – ordinary shares
code STO; preference shares (FUELS) code STOPB.
At year end 2005, Santos had a total market capitalisation of
approximately $7.9 billion, making it one of Australia’s Top 40
companies.
Santos American Depository Receipts are issued by Citibank, N.A.
and listed on the NASDAQ (code STOSY).
Founded in 1954, Santos has been active in the energy business for
more than 50 years. Its name was an acronym for South Australia
Northern Territory Oil Search.
Santos has a vision that by the end of the decade it will become
the leading energy company in South East Asia with a share price that
continues to grow and a reputation for sustainability in its operations.
Santos aspires to a set of values which are the guiding principles
that define how it conducts its business and what it stands for as
a company. This means working as a team that:
Santos made its first significant discovery of natural gas in the Cooper
Basin with the Gidgealpa 2 well in 1963. The Moomba 1 discovery in
1966 confirmed this region as a major petroleum province.
As a result of these discoveries, Santos had a commercially viable
quantity of gas and entered into Gas Sales Agreements with the South
Australian Gas Company, the Electricity Trust of South Australia and
the Australian Gas Light Company. Gas supplies commenced in 1969.
The 1980s saw Santos develop a major liquids business following the
discovery of oil at Tirrawarra in the early 1970s. A liquids recovery
plant was built at Moomba, along with a fractionation and loadout
facility at Port Bonython.
By the 1990s Santos had become a major Australian operating
enterprise with interests in United States and United Kingdom
petroleum provinces and in emerging areas such as the Timor Sea
and Carnarvon Basin in Western Australia.
A number of acquisitions in the 1990s provided Santos with additional
opportunities onshore and offshore Australia, Indonesia and Papua
New Guinea.
Since 2000 Santos has continued to build its business in South East
Asia, the United States and southern Australia, while undertaking
a high impact exploration program and developing new projects to
drive production and earnings growth.
Santos’ vision of future success is to be a safe, low cost, fast-moving
explorer and producer and an agile niche player with a well developed
ability to manage relationships with employees, partners and other
stakeholders.
As the Company grows, it will provide a working environment that
encourages innovation across the business and where employees
are engaged in something which is tangibly more than just a job.
STRATEGY
Santos has in place a robust growth strategy to achieve this
vision. It has three main components, which are illustrated on
the opposite page:
• Enhance existing core areas in eastern and Western Australia.
• Mature emerging core areas in Indonesia, the Timor
Sea/Bonaparte Basin area and Papua New Guinea.
• Identify new core areas in North Africa, Central and South East
Asia and the United States.
• Discovers – through being creative, making courageous decisions,
learning from successes and failures to continually improve
everything we do.
• Delivers – through being accountable for actions and decisions,
creating the right alignment with partners, striving for excellence
and effective results.
• Collaborates – through building trusting relationships based on
mutual respect, sharing what we know for the benefit of others
and demonstrating leadership.
• Cares – by doing the right thing and assuring our future.
These values are the basis of Santos’ commitment to operating with a
view to its long-term sustainability as an energy company.
Main photograph:
Paul Nardone, Completions Supervisor.
Small photographs (left to right):
MODEC Venture 11 Floating Production Storage and Offtake vessel;
close-up of drill sections; ENSCO 56 jack-up rig conducting development
drilling over John Brookes wellhead offshore Western Australia;
Emma Wild, Staff Development & Economics Engineer.
PLEASE RECYCLE THIS REPORT
This Annual Report is printed in Australia on
recyclable paper from sustainable plantation
forests. The manufacture of this paper is
externally certified to the ISO 14001
Environmental Management System,
complying with International Standards.
The printing process uses digital printing
plates, which eliminate film and its
associated chemicals. The vegetable-based
inks used in the printing process use linseed
oil, which is made from renewable sources
such as flax, rather than the traditional
higher greenhouse gas emitting mineral oils.
HELP SAVE PAPER BY DOWNLOADING AN
ELECTRONIC VERSION
An electronic version of this Annual Report
is available on Santos’ website
www.santos.com.
Shareholders who do not require a printed
Annual Report, or who receive more than
one copy due to multiple shareholdings,
can help reduce the number of copies
printed by advising the Share Register in
writing of changes to their Annual Report
mailing preferences.
Shareholders who choose not to receive a
printed Annual Report will continue to receive
all other shareholder information, including
notices of shareholders’ meetings.
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SAN171 WWW Cover 28/3/06 2:14 PM Page 1
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 6777
Perth
Level 28, Forrest Centre
221 St Georges Terrace
Perth, Western Australia 6000
Telephone 08 9460 8900
Facsimile 08 9460 8971
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 6221, JKS GN
Jakarta 12060 Indonesia
Telephone 62-21 270 0410
Facsimile 62-21 720 4503
USEFUL EMAIL CONTACTS
Share register enquiries:
share.register@santos.com
Investor enquiries:
investor.relations@santos.com
Employment enquiries:
recruitment@santos.com
WEBSITE
www.santos.com
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NAVIGATING
SUCCESSAnnual Report 2005
Santos Ltd ABN 80 007 550 923
COVER PHOTOGRAPH:
Roger Lewis (right), Mutineer-Exeter Project Close Out Manager,
inspecting the MODEC Venture 11 Floating Production Storage
and Offtake vessel with a Quality Assurance Engineer.
INSIDE
INTRODUCING SANTOS
Company profile and history, and an overview
of Santos’ vision, strategy and values.
2005 OPERATING AND
FINANCIAL HIGHLIGHTS
2
Key results for 2005 and three-year
performance.
PROGRESS ON THE GROWTH
STRATEGY IN 2005
3
Milestones that delivered on the growth
strategy during 2005 and activities
planned for 2006.
CHAIRMAN’S REVIEW
4
Stephen Gerlach comments on Santos’
performance in 2005.
MANAGING DIRECTOR’S REVIEW
John Ellice-Flint reviews a year of record
5
financial, safety and environmental
performance, successful exploration,
outstanding reserve replacement and fast-
tracked developments.
MEETING STRATEGIC TARGETS
9
Explanation of Santos’ good performance
against its long-term targets.
THE WORLD OF SANTOS
10
Locations of Santos’ global exploration,
development and production activities.
DELIVERING RECORD
FINANCIAL PERFORMANCE
12
Putting the numbers in perspective and
explaining the 2005 financial results.
ACHIEVING OPERATIONAL
EXCELLENCE
14
Production and sales analysis plus activities
that are creating value from Santos’
changing production profile.
PRODUCTION STATISTICS
16
Summary of production results for 2005.
BOARD OF DIRECTORS
55
Directors’ biographical details.
CAPTURING NEW RESOURCES
17
Exploration results, acreage additions and
new ventures in 2005, together with the
program for 2006.
LEADERSHIP TEAM
56 Management structure and senior
executives’ responsibilities and
biographical details.
EXPANDING GLOBALLY THROUGH
GROWTH PROJECTS
20
Development projects that commenced
production or were further progressed.
BROADENING
COMMERCIALISATION HORIZONS
22 Market context, new gas contracts and
innovative use of infrastructure hubs.
REALISING VALUE AND BALANCING
THE PORTFOLIO
24
Strategic projects and portfolio
management activities.
GROWING THE SIZE AND
VALUE OF RESERVES
26
Analysis of reserves movements in 2005.
MANAGING FOR LONG-TERM
SUSTAINABILITY
28
Sustainability framework, polices, systems
and activities, including safety and
environmental performance, employees
and communities.
CORPORATE GOVERNANCE
34
Details of the main corporate governance
practices Santos has in place.
REMUNERATION REPORT
40
Remuneration details for Directors and
key executives.
MAJOR ANNOUNCEMENTS MADE
BY SANTOS DURING 2005
54 Major releases to the market as part of
continuous disclosure.
GROUP INTERESTS
58
Santos licence areas and percentage
interests.
10 YEAR SUMMARY
60
Statistical summary of financial
performance.
FINANCIAL REPORT
62
Income statements, balance sheets,
cash flow statements, statements of
recognised income and expense, and notes
to the consolidated financial statements.
DIRECTORS’ STATUTORY REPORT
Directors’ shareholdings, meetings,
63
activities and emoluments.
STOCK EXCHANGE AND
SHAREHOLDER INFORMATION
137 Listing of top 20 shareholders, analysis
of shares and voting rights.
INFORMATION FOR
SHAREHOLDERS
139 Annual General Meeting, final dividend,
shareholder enquiries and information
resources for shareholders.
GLOSSARY
140 Most frequently used terms explained.
BACK COVER
Corporate directory
SAN171 WWW Colour 28/3/06 2:59 PM Page 1
2005, BY ANY MEASURE,WAS
A GOOD YEAR FOR SANTOS.
IT WAS THE YEAR THAT WE MADE SIGNIFICANT AND
LASTING INROADS TOWARDS OUR STRATEGIC VISION.
WITH THIS SUCCESS COMES THE OPPORTUNITY TO
NAVIGATE THE PATH TO FURTHER GROWTH AND
PROSPERITY AND CONSOLIDATE OUR POSITION AS
ONE OF SOUTH EAST ASIA’S LEADING UPSTREAM OIL
AND GAS COMPANIES.
SANTOS GROWTH STRATEGY
MATURE EMERGING CORE AREAS
Indonesia, Timor/Bonaparte,
Papua New Guinea.
ENHANCE EXISTING CORE AREAS
Eastern and Western Australia.
ENHANCE
IDENTIFY NEW CORE AREAS
North Africa, Central and
South East Asia, United States.
IDENTIFY
MATURE
2001
2003
2005
2007
2009
2011
2013
SAN171 WWW Colour 28/3/06 2:59 PM Page 2
2005 OPERATING AND FINANCIAL HIGHLIGHTS
• Production up 19% to 56.0 mmboe.
Sales ($million)
• Revenue up 64% to $2.5 billion.
Operating profit before tax ($million)
• Net profit up 115% to $762 million.
Cash flow from operations ($million)
• Dividend up 15% to 38 cents per share.
Earnings per share (cents)
• Proven plus Probable (2P) reserves
up 20% to 774 mmboe.
Ordinary dividends per share (cents)
Cash flow per share (cents)
2005
2,462.8
1,133.5
1,457.9
124.4
38
248.0
Total shareholders' funds ($million)
2,964.0
Return on average ordinary equity (%)
Return on average capital employed (%)
Net debt/(net debt plus equity) (%)
Net interest cover (times)
35.1
19.8
35.0
14.9
2004
1,500.9
518.8
605.0
54.2
33
103.4
2,357.8
19.9
11.7
32.5
9.1
PRODUCTION BY PRODUCT
mmboe
SALES REVENUE
$million
OPERATING CASH FLOW
$million
NET PROFIT AFTER TAX*
$million
54.2
56.0
47.1
60
50
40
30
20
10
0
2,463
1,465
1,501
2,500
2,000
1,500
1,000
500
0
1,458
1,458
897
605
1,500
1,200
900
600
300
0
762
355
327
800
640
480
320
160
0
’03
’04
’05
Sales gas & ethane
Crude oil
Condensate
LPG
’03
’04
’05
Sales gas & ethane
Crude oil
Condensate
LPG
’03
’04
’05
’03
’04
’05
EARNINGS & DIVIDENDS PER SHARE*
cents
RETURN ON ORDINARY EQUITY*
%
GEARING*
$million
SAFETY PERFORMANCE
Total recordable case frequency rate
(per million hours worked)
150
125
100
75
50
25
0
124
52
54
30
33
38
’03
’04
’05
Earnings per share
Ordinary dividend per share
35.1%
19.9%
12.3%
40
30
20
10
0
1,600
1,280
960
640
320
0
1,599
100
10
1,133
32.5%
35.0%
898
22.5%
80
60
40
20
0
8
6
4
2
0
7.2
6.4
4.9
’03
’04
’05
’03
’03
’04
’04
’05
’05
’03
’04
’05
Gearing
Net debt
* From 2004, amounts reflect Australian equivalents to International Financial Reporting Standards (AIFRS).
2003 comparatives reflect previous Australian Generally Accepted Accounting Principles and have not been restated.
2
Annual Report 2005
SAN171 WWW Colour 28/3/06 2:59 PM Page 3
PROGRESS ON THE GROWTH STRATEGY IN 2005
ENHANCE EXISTING
CORE AREAS
MATURE EMERGING
CORE AREAS
IDENTIFY NEW
CORE AREAS
• Production commenced from
Mutineer-Exeter oil and John
Brookes gas projects in
Western Australia.
• Leading coal seam gas
position established in
eastern Queensland.
• Exploitation of Cooper Basin
oil resources with 80%
success rate from 29 wells
drilled; significant activity
planned for 2006.
• Gas production from Casino
project offshore Victoria
achieved in February 2006
plus reserves addition from
nearby Henry gas discovery.
• First cargoes from the
• New country entry in
Kyrgyzstan.
• Regional studies in South
East Asia, with a further
new country entry likely
during 2006.
Bayu-Undan Darwin LNG
facility in February 2006.
• Significant gas discovery
at Caldita in the Timor/
Bonaparte region; extensive
seismic and drilling program
planned for 2006.
• Appraisal of the Jeruk oil
discovery and development
of the Oyong and Maleo
fields in East Java, Indonesia.
• Discovery of gas and
condensate at Hiu
Aman in the Kutei Basin,
Indonesia.
SANTOS VS ASX ALL ORDINARIES INDEX THREE-YEAR RELATIVE PERFORMANCE
$
14
12
10
8
6
4
AFETY PERFORMANCE
tal recordable case frequency rate
er million hours worked)
0
8
6
4
2
0
7.2
6.4
4.9
’03
’04
’05
John Brookes
sanction
Jeruk 2
flows oil
Oyong & Maleo
sanction
John Brookes
start-up
Mutineer-Exeter
sanction
Novus asset
acquisition
Minerva
start-up
SANTOS (STO)
ASX ALL
ORDINARIES
January 2003
January 2004
Moomba
incident
January 2005
December 2005
Casino
sanction
Tipperary
acquisition
Bayu-Undan
LNG sanction
Bayu-Undan
liquids start-up
Mutineer-Exeter
start-up
Caldita
discovery
Annual Report 2005
3
SAN171 WWW Colour 28/3/06 2:59 PM Page 4
CHAIRMAN’S REVIEW
STRATEGY ON TRACK
six years on the Santos Board, and Mr Peter
Barnett, who retired in February 2006 after
10 years on the Santos Board. Graeme’s and
Peter’s dedication and contributions to the
workings of the Board have been much
appreciated during a period of significant
change for Santos.
Ongoing renewal of the Board is a vital
part of the governance process, especially
considering the industry in which Santos
operates and the expanding nature and
reach of the Company’s operations.
The Board was pleased to welcome
Mr Ken Dean formerly from Shell and
Mr Chris Recny from the international
management consultancy firm, L.E.K., as new
Non-Executive Directors in February 2005.
They are two high calibre individuals with
strong international oil and gas expertise
and outstanding management experience.
The Board renewal process will continue
and further appointments can be anticipated
during the coming year.
On behalf of the Directors, I thank everyone
at Santos for their dedicated efforts and
loyal contributions towards our outstanding
2005 results.
The Board and the entire Santos team
remain committed to building value for our
shareholders. The performance of the past
year has us well placed to deliver in 2006
and beyond.
Stephen Gerlach
Chairman
15 March 2006
Santos delivered a very strong financial
performance in 2005, building on its strategy
and achievements of recent years and
positioning the Company for further growth.
change within Santos, notably our
broadening production base and
the successful commissioning of new
areas of operation.
It is pleasing to report that the successful
implementation of our growth strategy
enabled Santos to take advantage of buoyant
oil prices, which resulted in earnings per
share growth in 2005 of 130%.
That change will accelerate as Santos’
business continues to develop and it has
been pleasing to see the production growth
and very positive reserve replacement
achieved during 2005.
Net operating profit increased by 115%
to a record $762 million in the year ended
31 December 2005. The record profit was up
from $355 million in 2004 and easily eclipsed
Santos’ previous highest annual profit of
$487 million in 2000.
Santos’ strong 2005 earnings performance
was driven by a 64% increase in total annual
sales revenue to $2.5 billion. This in turn
reflected a 19% improvement in Santos’
annual production to 56 million barrels
of oil equivalent (mmboe), together with
continuing high prices for most products.
Operating cash flow at $1,458 million was
also substantially higher compared with
$605 million in the previous year. Gearing
increased by only 3% to 35% despite a
period of heavy capital expenditure and
the acquisition of Tipperary Corporation
for more than $600 million.
The return on capital employed grew to 20%,
well above our annual target of 10% and a
most pleasing improvement in this important
indicator of financial efficiency.
Santos’ strong 2005 performance and positive
outlook have enabled Directors to increase
the annual dividend for the second successive
year. A fully franked final dividend of 20 cents
per share has been declared, taking the total
annual dividend 15% higher to a fully franked
38 cents per share, compared with 33 cents
in 2004 and 30 cents per share in 2003.
The total shareholder return for the year,
including share price appreciation and
dividends paid, was a most pleasing 50%.
As you will see in the Managing Director’s
review, the record-breaking 2005 earnings
and revenue performance has been achieved
during a period of further considerable
The Board places the highest priority on
safety and environmental management
and we congratulate our employees and
contractors on achieving improvements
in these areas during 2005.
Our focus on high quality corporate
governance has again been recognised by
the independent report prepared by leading
accounting and management firm, Horwath,
and the University of Newcastle. For the
fourth successive year, this highly respected
report has awarded Santos a measure of five
out of five for its corporate governance.
Santos invited tenders for our audit work
during 2005 and recently completed a
rigorous selection process. The Board will
recommend to shareholders at the Annual
General Meeting that Ernst & Young be
appointed to replace KPMG as statutory
auditors. We formally recognise Santos’
long audit relationship with KPMG and
its antecedent firms.
Santos adopted the Australian equivalent
of the International Financial Reporting
Standards (AIFRS) from 1 January 2005,
as required by all Australian companies.
This is a major step towards standardising
accounting practices around the world,
which will provide greater transparency and
increased comparability between companies.
While the required changes to accounting
policies will affect the way our financial
accounts are presented, they will not impact
in any way on Santos’ business strategy,
operations, cash flow, credit ratings or
capacity to pay fully franked dividends.
On behalf of the Board, I pay tribute to the
contribution of Mr Graeme McGregor who
retired as a Director in September 2005 after
4
Annual Report 2005
SAN171 WWW Colour 28/3/06 2:59 PM Page 5
MANAGING DIRECTOR’S REVIEW
RECORD YEAR CEMENTS PLATFORM
FOR FUTURE GROWTH
‘SANTOS’ TRANSFORMATION HAS BEEN ACHIEVED
BY LIFTING OUR SIGHTS, GRASPING OPPORTUNITIES
AND APPLYING THE SKILLS AND EXPERIENCE REQUIRED
TO DELIVER SUSTAINABLE DEVELOPMENT PROJECTS.’
Santos’ success in 2005 reflected the
implementation of our growth strategies,
coupled with three key factors: people,
product and prices.
Each contributed to the most successful
year in Santos’ history, with record sales
and profits, higher returns to shareholders,
and excellent exploration and development
results.
I put people at the top of the list quite
deliberately. Without the energy, imagination
and commitment of a highly skilled and
experienced team, the other factors could
not have contributed to the maximum
extent possible.
Over the past year we have continued to
realise more of the goals laid down five
years ago in our renewal plan. Our pursuit
of a balanced portfolio of assets and activities
has achieved positive results both here and
abroad.
A highlight of the year was the start-up,
ahead of schedule and under budget, of the
Mutineer-Exeter oil project off the Western
Australian coast, which was Santos’ first
major operated offshore oil project.
We have entered 2006 with a major step
into the international energy marketplace
by dispatching the first cargo of liquefied
natural gas (LNG) from the Bayu-Undan
processing facility in Darwin.
In 2005, we complemented Santos’
traditional gas production business by
adding the Fairview coal seam gas reserves
in Queensland to our eastern Australian
gas business. We also completed a major
upgrading of the process control systems at
our Moomba gas production hub in a project
which presented complex engineering
and logistical challenges.
Taken together with new gas production
from the John Brookes and Minerva fields –
off the Western Australian and Victorian
coasts respectively – Santos is well placed
to be a major long-term supplier to customers
hungry for energy with lower greenhouse gas
emissions than competing fuels.
Our confidence in Santos becoming a
significant LNG exporter is underpinned
by growing demand in major markets in
South East Asia and the United States.
Buyers are also keen to ensure their energy
supplies by diversifying sources, at a time
when some traditional sellers like Indonesia
are consuming more of their own production
domestically.
In a world where political and security
uncertainty prevails, Australia is
well regarded as a reliable trading partner.
Santos is positioning itself to play a growing
role as a significant supplier to international
energy markets.
A defining feature of the year under review
was historically high prices for crude oil.
There are a number of market indicators that
suggest oil prices could remain robust into
the medium term.
Supply from some traditional sources in the
Middle East is slowing through dwindling
reserves or production interruptions in Iraq
and a number of other traditional suppliers.
While the supply side is constrained, growth
in demand for crude oil continues unabated
with China among the major drivers of
increased petroleum consumption.
Such a market outlook for natural gas and
crude oil augurs well for Santos. We face
the future with enthusiasm, confident
in the knowledge that our exploration
and development strategies are delivering
sustainable growth for the Company, its
shareholders and employees.
A RECORD FINANCIAL PERFORMANCE
Higher oil and gas prices, coupled with
increased hydrocarbon production from
existing and new developments and a strong
operating performance, delivered record
financial results in 2005.
Santos achieved:
• sales revenue of $2.5 billion (up 64%
over 2004)
• net profit of $762 million (up 115%)
• annual dividend of 38 cents per share
(up 15%)
• netback, or margin, of $32 per barrel
(up 50%)
• average crude oil price of $73.83 a barrel
(up 42%)
• average natural gas price of $3.62
a gigajoule (up 10%).
These impressive results confirm that Santos’
strategy of growing our core businesses,
coupled with the pursuit of new oil and gas
opportunities in Australia and overseas, is
achieving its goal.
The maturing of Santos into a geographically
diverse energy group is also shown by the
changing composition of our revenue and
production results. A decade ago, our
traditional Cooper Basin assets generated
three-quarters of Santos’ annual production
and total sales revenue. In the past year,
these assets produced 40% and 51% of
revenue and production respectively.
Annual Report 2005
5
SAN171 WWW Colour 28/3/06 2:59 PM Page 6
Below left: LNG tanker docked at the Bayu-Undan LNG
processing and load-out facility, Wickham Point, Darwin.
Below right: Ian Marks (right), and a Stolt pipelay
operator, inspecting operations aboard the Seaway Falcon
vessel, Casino project, offshore Victoria.
This transformation is proof of the merits
of the course on which we are now travelling.
It has been achieved by lifting our sights,
grasping opportunities and applying the
skills and experience required to deliver
sustainable development projects.
To that end, identifying good exploration
targets remains crucial to future success.
EXPLORATION EFFORT INTENSIFIES
Our 2005 exploration effort delivered
significant results. In 2006, we are
aiming even higher with one of the most
aggressive programs in Santos’ history.
In the past year we drilled 22 wildcat
exploration wells and recorded seven
discoveries. With a conversion rate of 32%,
this result is well ahead of the oil and gas
sector’s average.
Successful drilling in Australia included
gas discoveries with the Hurricane (offshore
Western Australia), Henry (offshore Victoria),
6
Annual Report 2005
and Yamala and Greenmount (eastern
Queensland) wells.
The Otway Basin off the Victorian coast has
been a source of much success for Santos
with the Henry discovery continuing a 100%
success rate in three successive wells in the
area. Gas from the Henry field will be
commercialised by linking it to the nearby
Casino gas facility which came online early
in 2006.
In a similar vein, the 2005 Caldita gas
discovery in the Timor/Bonaparte region,
offshore Northern Territory, is located about
200 kilometres from the existing Bayu-Undan
infrastructure. It could potentially feed a
second processing train at the LNG plant
in Darwin, depending on further appraisal.
In Indonesia, the gas and condensate
discovery at Hiu Aman in the Kutei Basin was
our first success from an attractive portfolio
of exploration acreage that is well positioned
for future production. The massive
Bontang LNG plant, in an adjoining province,
is reported to be unable to meet contract
commitments because of shortages of
gas supply.
In keeping with our practice of exploring
frontier areas with potential, Santos took
its first steps towards a drilling program
in Kyrgyzstan in 2005. We signed a joint
venture agreement to earn an 80% share in
10 exploration licences in the prospective
Fergana Basin in the west of the Central Asian
country, formerly part of the Soviet Union.
A four-week field trip to Kyrgyzstan in 2005
was an opportunity for a Santos team to
better understand the local terrain, access
available seismic data and review the region’s
geology. After some reprocessing of existing
data we will conduct a seismic program in
2006 to identify prospective oil targets, and
expect to drill our first well in that country
in 2008.
SAN171 WWW Colour 28/3/06 2:59 PM Page 7
Santos’ 2006 program will see us drill a
total of 310 wells – almost six wells a week –
of which 25 will be wildcat exploration
wells focusing on the Cooper Basin,
Timor/Bonaparte region, Indonesia,
Egypt and the United States.
The overall goal for our exploration program
is to continue to produce the successes that
have generated strong petroleum reserve
replacement ratios and underpinned our
new development activities.
OUTSTANDING RESERVE REPLACEMENT
Another highlight in 2005 was Santos’
excellent reserve replacement ratio of 218%,
extending our three-year rolling average
replacement ratio from all sources to 165%.
This reserves replacement performance
positions Santos with the world’s best
exploration and production companies.
In the most recent reporting season in the
United States, many of the major integrated
and independent oil and gas companies failed
to replace their production for the year; that
is to say, their replacement ratios were less
than 100%.
For Santos, this is evidence that our growth
strategies are working. We have chosen
prospective geological basins, worked hard
to fully understand the regional geology
and then secured large acreage positions
to maximise drilling potential and returns.
FAST-TRACKING DEVELOPMENTS
The achievements of our development
programs, technical and marketing teams
have successfully progressed a number of
projects during the year.
Offshore Western Australia, the Mutineer-
Exeter oil project was brought on stream
three months ahead of schedule, 10% under
budget and with an excellent safety record.
And the John Brookes gas and liquids
project was fast-tracked with first production
occurring just 18 months after the project
was sanctioned.
MODEC Venture 11 Floating
Production Storage and Offtake
vessel, Mutineer-Exeter oil fields.
The year also saw construction of the Casino
gas project, offshore Victoria, with first
production, again ahead of schedule,
occurring in January 2006. Completion
of the Casino facility will enable rapid
commercialisation of the nearby Henry
gas field discovered in 2005.
In Indonesia, Santos is aiming for early
development of the Jeruk oil discovery. After
further seismic and appraisal drilling in 2005
increased our understanding of the geology,
we plan to undertake additional appraisal
drilling in 2006 to gain a more complete
picture of the resource. Development studies
for Jeruk will be carried out in parallel with
drilling activity in the current year.
Our cash flow from international activities
will be bolstered in 2006 with the start-up
of production from the Santos-operated
Oyong oil and gas and Maleo gas fields in
East Java, Indonesia.
RECORD PRODUCTION IN SIGHT
During 2006, Santos expects to eclipse its
previous highest annual production of 57.3
mmboe. We came close to that peak in the
past year as new developments boosted
production to 56.0 mmboe. Mutineer-Exeter
(6.5 mmboe), John Brookes (1.1 mmboe)
and Minerva (0.7 mmboe) made maiden
contributions while Santos’ share of Bayu-
Undan output lifted from 1.7 to 2.8 mmboe.
We expect total annual production of oil
and gas in 2006 to top 60 mmboe. With
further developments pending both here
and overseas, I am confident we will go on
to set further records.
COOPER BASIN CONTINUES TO PERFORM
Strong oil prices were also a factor in the
design of the Cooper Oil Exploitation Program
that has been targeting undeveloped
resources in this mature basin.
The latest 3D seismic technologies and
interpretation techniques have given
us greater insights into the location and
development potential of these relatively
small but viable pools of crude oil.
In 2005, we had an 80% success rate from
29 wells drilled. In the current year, we
will ramp up activity with three automated
truck-mounted drilling rigs which have been
imported by Santos.
In an industry known for its innovation,
the new rigs are self-levelling, thereby
requiring less site works and leaving a smaller
environmental footprint to be rehabilitated.
The rigs have operational safety advantages
and run at a lower unit cost than
conventional units.
With potential gross capital expenditure
of up to $1.3 billion, the Cooper Oil
Exploitation Program could see 1,000 wells,
targeting 75 million barrels of oil, drilled
over the next five years. Santos’ share of the
program cost would be approximately $900
million with the potential to add 50 million
barrels to our reserves.
IMPROVED SAFETY PERFORMANCE
Throughout Santos, we continue to drive
a culture of awareness and responsibility
of health, safety and the environment in
all of our activities.
I am pleased to report further progress
on this front. Santos’ safety record is much
improved with our total recordable case
frequency rate – a measure of incidents
– being reduced by around 50% in the past
three years.
As an organisation, we believe that superior
safety performance is primarily about
protecting the welfare of our employees.
But it also translates directly into improved
business performance.
These improved statistics represent the
journey that we are undertaking to ensure
that Santos has the necessary systems in
place to strive for, and achieve, continuous
improvement in everything that we do.
SUSTAINABILITY DELIVERS VALUE
At Santos, sustainability is becoming embedded
in the organisation and has a practical
business edge.
Annual Report 2005
7
SAN171 WWW Colour 28/3/06 2:59 PM Page 8
Jim Forsyth and Steve Stehr, Mutineer-Exeter oil
fields development.
South Australia for the comprehensive
audit process which forms part of Santos’
Environment, Health and Safety Management
System.
our scarce resources. Education and
technology developments should prevail
because our long-term solution will require
technological breakthroughs.
An effective response to climate change
requires leadership by business and
government. Industry leaders need to
contribute to conservation education
and behavioural change in the workplace,
community and at home. We must continue
as innovators in technology and improve
the efficiency of energy sources.
Governments, at both Federal and State
levels, must also show leadership. Australia
needs a clearly articulated energy plan for
the future whereby all sources are regulated
equally. We cannot have a situation where
some energy sources are subsidised while
others are heavily taxed, as is currently
the case.
Climate change is an issue affecting all
of us. We must take action. There is no
time to waste.
APPLAUDING OUR EMPLOYEES
As I indicated at the start of this review,
Santos has a first-class workforce with the
skills, drive and determination to take the
Company’s strategies and turn them into
tangible successes.
I would like to record my appreciation for the
excellent outcomes achieved by our people in
2005, and I look forward to being part of the
Santos team that enthusiastically tackles the
challenges ahead.
John C Ellice-Flint
Managing Director
15 March 2006
LEADERSHIP REQUIRED ON
CLIMATE CHANGE
The biggest issue on the sustainability
agenda is, of course, climate change.
The weight of scientific evidence now
clearly indicates that carbon dioxide
concentrations in the atmosphere are
increasing. Further, the rate of change
of temperature that is likely to result from
this increase in carbon dioxide is critical
to the survival of the world as we know it.
The petroleum industry worldwide was
shocked at the destruction wreaked by
Hurricane Katrina in the Gulf of Mexico last
year. Production platforms designed to
withstand a one-in-five-hundred-year weather
event were severely damaged, some beyond
repair.
Such catastrophic weather events are thought
to be due to an increased rate of global
warming and there are severe business and
social consequences that flow from these
climatic events.
Natural gas is the lowest greenhouse
gas emitting fossil fuel and I see it as the
transition fuel to future cleaner energy
sources. Gas gives us the time to make
technological advances in efficiency and
lower emissions in other energy sources.
I am a firm believer that there is not one
quick fix; rather, we need to develop a
portfolio approach to improve global energy
efficiency and reduce greenhouse gas
emissions.
In the short term we need to focus on
conservation education, using techniques
that are already in existence and, in parallel,
invest research dollars wisely in clean energy
and energy-efficient techniques.
We have to stop the current scattergun
approach to conservation and emission
research and, in the medium term, pool
With changed operating, energy and
materials management systems within
Santos, we have saved:
• 1.7 million gigajoules of energy through
efficiency measures, enough to supply
natural gas to about 70,000 households
annually
• 151,000 litres of water per urinal per
year with the introduction of waterless
facilities
• 2,000 kilowatt hours per month of
electricity during a four-month ‘lights
off’ trial on one floor alone of our
Adelaide office
• $23 million through a strategic sourcing
process targeting key procurement
arrangements that reduce the total
cost of ownership to Santos and are
sustainable over the long term.
I quote these simple examples to show that
‘people power’ can make a substantial and
enduring difference. This is behavioural
change at its best.
Another achievement in 2005 was formal
recognition by the Self Insurers Group in
8
Annual Report 2005
SAN171 WWW Colour 28/3/06 2:59 PM Page 9
MEETING STRATEGIC TARGETS
Santos achieved strong results when
measured against a series of targets
established two years ago to measure
performance.
A 59% growth in earnings before interest,
tax, depreciation, amortisation and
exploration (EBITDAX) per share was achieved
in 2005, well exceeding the target of greater
than 10%. Similarly, Santos’ return on capital
of 20% outstripped the 10%+ target.
On the production front, output grew by 19%
in 2005, or 8% when adjusted for the effect
of the Moomba incident in 2004, against
a target of 6–8% growth.
Higher oil prices and improved operating
efficiencies produced a netback, or margin
per barrel, of $32, well over the $22 a
barrel target.
Santos’ three-year rolling average reserve
replacement ratio of 165% topped the target
of 140%. Although the three-year average
cost of replacing those reserves at US$8.71
a barrel was above the target cost of US$5.50
a barrel, Santos’ performance compared
favourably with industry averages.
The buoyant industry conditions which are
resulting in an increased netback are also
increasing reserves replacement costs due
to the competition for acreage, resources
and equipment.
2005 PERFORMANCE AGAINST TARGETS
RESERVE REPLACEMENT RATIO***
140%
Target
165%
Actual
PRODUCTION GROWTH
6-8%
Target
19%*
Actual
EBITDAX GROWTH PER SHARE
>10%
Target
59%
Actual
RETURN ON CAPITAL EMPLOYED
>10%
Target
20%
Actual
RESERVE REPLACEMENT COST PER BOE***
US$5.50
Target
US$8.71
Actual
NETBACK
$22
Target
$32**
Actual
If adjusted for the impact of the 2004 Moomba incident, growth would have been 8%.
*
** If normalised for the A$45 oil price implicit in target, netback would have been approximately $22.
*** Three-year rolling average.
Annual Report 2005
9
SAN171 WWW Colour 29/3/06 3:20 PM Page 10
THE WORLD OF SANTOS
Egypt
North Qarun
Cairo
Suez
Ras Abu Darag
Egypt
Sinai Peninsula
Kyrgyzstan
0
100
kilometres
Kazakhstan
Bishkek
North Mailisu
Ashvaz
West Mailisu
Kyrgyzstan
East Mailisu
Charvak
Naryn
Gulf
of Suez
Uzbekistan
Egypt
Ras Abu
Rudeis
0
50
kilometres
South East July
North Zeit Bay
Sulukta
Katran
Batken
Tajikistan
Naryn
Djalal-Abad
Aksai
Akbura
China
Kashi
United States
West Natuna Basin
East Java Basin
Paka
Kerteh
Kuantan
(cid:26)(cid:10)(cid:11)(cid:10) (cid:8)(cid:12)(cid:10)
Singapore
(cid:16)(cid:14)(cid:17)(cid:3)(cid:14)(cid:25)(cid:8)(cid:12)(cid:10)
Kakap PSC
(cid:28)(cid:10)(cid:5)(cid:4)(cid:14)(cid:10)
(cid:24)(cid:25)(cid:8)(cid:10)(cid:9)
N a t u n a S e a
0
100
kilometres
J a v a S e a
0
50
kilometres
Sampang PSC
Madura
Offshore PSC
&(cid:25)(cid:9)(cid:4)’
$ (cid:3)(cid:14)(cid:15)
(cid:26)(cid:10)(cid:11)(cid:25)(cid:3)
Surabaya
(cid:18)(cid:10)(cid:14)(cid:15)(cid:15)(cid:4)(cid:11)(cid:10)(cid:14)(cid:15)(cid:12)(cid:14)
I
Brantas PSC
II
III
Grati
IV
V
Besuki
%(cid:10)(cid:8)(cid:5)(cid:23)&(cid:10)(cid:27)(cid:10)
Nth
Bali 1
PSC
(cid:24)(cid:10)(cid:11)(cid:12)
(cid:18)(cid:25).(cid:10)(cid:8)
(cid:18)(cid:6)(cid:4)(cid:14)(cid:17)(cid:25)(cid:9)
(cid:24)(cid:11)(cid:10)(cid:21)’(cid:23)!(cid:3)(cid:9)(cid:8)(cid:25)
(cid:13)(cid:14)(cid:12)(cid:15)(cid:6)(cid:5)
!(cid:3)0(cid:10)(cid:9)(cid:17)1(cid:8)(cid:23)#(cid:9)(cid:25)(cid:25)’
(cid:24)(cid:3)"(cid:21)(cid:10)(cid:5)
#(cid:3)(cid:4)(cid:15)(cid:10)(cid:9)
(cid:22)(cid:10)+(cid:12)(cid:5)(cid:25),(cid:7)(cid:11)(cid:11)(cid:25)(cid:14)(cid:23)-(cid:3)(cid:19)(cid:25)
&(cid:10)(cid:15)(cid:4)(cid:10)(cid:9)
!(cid:3)(cid:9)(cid:17)(cid:25)(cid:8)(cid:23)#(cid:9)(cid:25)(cid:25)’
((cid:4)(cid:14)(cid:14)(cid:25)(cid:11)(cid:11)(cid:8),(cid:18)(cid:12)(cid:17)(cid:25)(cid:6)(cid:10)(cid:27)(cid:25)(cid:14)
((cid:25)(cid:19)(cid:19)(cid:25)(cid:9)(cid:8)
!(cid:10)(cid:11)(cid:11)(cid:23)((cid:10)(cid:14)(cid:21)(cid:6)
#(cid:3)*(cid:4)(cid:10)(cid:5)
%/(cid:23)%(cid:17)(cid:12)(cid:14)"(cid:4)(cid:9)(cid:15)
(cid:13)(cid:25)(cid:14)(cid:25)(cid:17)
((cid:10) (cid:19)(cid:3)(cid:14)(cid:17)(cid:27)(cid:12)(cid:11)(cid:11)(cid:25)
(cid:26)(cid:3)(cid:4)(cid:14)(cid:5)(cid:10)(cid:12)(cid:14)(cid:8)(cid:12)(cid:17)(cid:25)
(cid:29)(cid:25)(cid:17)(cid:9)(cid:10))(cid:10)
Mexico
Gulf of Mexico
Colorado/Nebraska
United States
Gulf of Mexico
KEY TO MAPS
Exploration
Production
Processing and
load-out facility
Oil field
Gas field
Oil pipeline
Gas pipeline
Houtman Basin
Carnarvon
Duntroon Basin
Otway Basin
Streaky Bay
Port Bonython
Whyalla
(cid:2)(cid:3)(cid:4)(cid:5)(cid:6)
(cid:7)(cid:4)(cid:8)(cid:5)(cid:9)(cid:10)(cid:11)(cid:12)(cid:10)
Port Pirie
PEP 160
(cid:20)(cid:12)(cid:21)(cid:5)(cid:3)(cid:9)(cid:12)(cid:10)
Hamilton
(cid:28)(cid:3)(cid:9)(cid:5)(cid:6)(cid:23)(cid:29)(cid:10)(cid:10)(cid:9)(cid:10)(cid:5)(cid:5)(cid:25)
(cid:30)(cid:10)(cid:8)(cid:23)(cid:31)(cid:10)(cid:21)(cid:12)(cid:11)(cid:12)(cid:5)
Geelong
Cobden
Portland
!(cid:25) (cid:5)(cid:25)(cid:8)"(cid:4)(cid:9) (cid:23)(cid:30)(cid:10)(cid:8)(cid:23)(cid:31)(cid:10)(cid:21)(cid:12)(cid:11)(cid:12)(cid:5)
VIC/
P51
VIC/P44
(cid:26)(cid:12)(cid:14)(cid:25)(cid:9)(cid:27)(cid:10)
(cid:16)(cid:3)(cid:14)(cid:10)(cid:23)(cid:30)(cid:10)(cid:8)(cid:23)(cid:31)(cid:10)(cid:21)(cid:12)(cid:11)(cid:12)(cid:5)
Port Campbell
VIC/P52
0
50
kilometres
VIC/L22
#(cid:10)(cid:8)(cid:12)(cid:14)(cid:3)
(cid:22)(cid:10)(cid:23)(cid:24)(cid:25)(cid:11)(cid:11)(cid:10)
VIC/RL7
(cid:18)(cid:10)(cid:8)(cid:19)(cid:10)(cid:14)(cid:12)(cid:10)
(cid:13)(cid:12)(cid:14)(cid:15)(cid:23)(cid:16)(cid:8)(cid:11)(cid:10)(cid:14)(cid:17)
Sorell Basin
(cid:20)(cid:12)(cid:21)(cid:5)(cid:3)(cid:9)(cid:12)(cid:10)
T/40P
(cid:13)(cid:12)(cid:14)(cid:15)
(cid:16)(cid:8)(cid:11)(cid:10)(cid:14)(cid:17)
T/35P
Bass Strait
T/32P
Port Latta
T/33P
Devonport
(cid:31)(cid:11)(cid:12)(cid:14)(cid:17)(cid:25)(cid:9)(cid:8)
(cid:16)(cid:8)(cid:11)(cid:10)(cid:14)(cid:17)
Launceston
T/36P
(cid:18)(cid:10)(cid:8)(cid:19)(cid:10)(cid:14)(cid:12)(cid:10)
0
100
kilometres
Hobart
WA-339-P
WA-328-P
Geraldton
Indian Ocean
Windimurra
Western
Australia
Port Lincoln
EPP 32
0
200
kilometres
Perth
0
100
kilometres
Adelaide
Murray Bridge
Investigator Strait
Kingscote
(cid:13)(cid:10)(cid:14)(cid:15)(cid:10)(cid:9)(cid:3)(cid:3)
(cid:16)(cid:8)(cid:11)(cid:10)(cid:14)(cid:17)
Southern Ocean
10
Annual Report 2005
SAN171 WWW Colour 29/3/06 3:20 PM Page 11
Kutei Basin
(cid:13)(cid:10)(cid:11)(cid:12)(cid:19)(cid:10)(cid:14)(cid:5)(cid:10)(cid:14)
Bontang
Santan
Samarinda
Senipah
Balikpapan
!(cid:12)(cid:4)
(cid:7)(cid:19)(cid:10)(cid:14)
Popodi
PSC
Donggala
PSC
Papalang
PSC
Palu
Apar
Bay
Makassar Strait
(cid:2)(cid:4)(cid:11)(cid:10)0(cid:25)(cid:8)(cid:12)
0
50
kilometres
West Papua & Papua New Guinea
Northern Australia
Carnarvon Basin
Indian Ocean
WA-208-P
WA-1-P(3)
WA-246-P
#(cid:3)(cid:9)(cid:27)(cid:4)(cid:8)
WA-29-L
(cid:26)(cid:10)(cid:12)(cid:5)(cid:11)(cid:10)(cid:14)(cid:17)
WA-33-R
WA-7-L
TL/3
(cid:24)(cid:10)(cid:9)(cid:9)(cid:3)0(cid:23)(cid:16)(cid:8)(cid:11)(cid:10)(cid:14)(cid:17)
L 1H
L 10
TP/7(1)
TL/2
TP/7(2)
(cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:23)#(cid:6)(cid:25)(cid:9)(cid:27)(cid:12)(cid:11)(cid:23)%.(cid:21)(cid:11)
TP/7 (3)
WA-214-P(1)
&(cid:3)(cid:6)(cid:14)(cid:23)(cid:24)(cid:9)(cid:3)(cid:3)’(cid:25)(cid:8)
WA-214-P(2)
WA-13-L
WA-214-P(3)
%(cid:10)(cid:8)(cid:5)(cid:23)(cid:2)2(cid:10)(cid:9)
(cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:23)(cid:29)(cid:25)22(cid:25)(cid:9)
TP/2
(cid:28)(cid:3)(cid:9)(cid:5)(cid:6)(cid:23)!(cid:25)(cid:9)(cid:10)(cid:11)(cid:17)
#(cid:3)(cid:9)(cid:3)0(cid:10)
TP/7(4)
#(cid:6)(cid:25)(cid:9)(cid:27)(cid:12)(cid:11)
TR/4
L13
WA-264-P
TL/4
TL/7
(cid:18)(cid:6)(cid:25)(cid:27)(cid:25)(cid:14)(cid:10)(cid:9)(cid:17)(cid:23)(cid:16)(cid:8)(cid:11)(cid:10)(cid:14)(cid:17)
WA-26-L
WA-27-L
%.(cid:25)(cid:5)(cid:25)(cid:9)
WA-1-P(1)
(cid:26)(cid:4)(cid:5)(cid:12)(cid:14)(cid:25)(cid:25)(cid:9),(cid:28)(cid:3)(cid:9)+(cid:3)(cid:11)’
WA-191-P(1)
WA-8-L
WA-191-P(2)
(cid:22)(cid:25)(cid:15)(cid:25)(cid:14)(cid:17)(cid:9)(cid:25)
WA-20-L
WA-1-P(1)
WA-1-P(2)
((cid:25)(cid:12)(cid:14)(cid:17)(cid:25)(cid:25)(cid:9)
WA-209-P
(cid:2)(cid:5)(cid:10)(cid:15)
WA-15-L
Dampier
4(cid:25)(cid:8)(cid:5)(cid:25)(cid:9)(cid:14)
(cid:7)(cid:4)(cid:8)(cid:5)(cid:9)(cid:10)(cid:11)(cid:12)(cid:10)
0
50
kilometres
(cid:16)(cid:14)(cid:17)(cid:3)(cid:14)(cid:25)(cid:8)(cid:12)(cid:10)
NT/P48
%(cid:27)(cid:10)(cid:14)(cid:8)
(cid:2)(cid:6)(cid:3)(cid:10)(cid:11)
(cid:13)(cid:10)’(cid:10)(cid:5)(cid:4)(cid:10)
%(cid:11)(cid:10)(cid:14)(cid:15)
(cid:24)(cid:10) (cid:4)36(cid:14)(cid:17)(cid:10)(cid:14)
(cid:18)(cid:12)(cid:19)(cid:3)(cid:9)
&(cid:3)(cid:12)(cid:14)(cid:5)(cid:23)(cid:29)(cid:25)(cid:5)(cid:9)(cid:3)(cid:11)(cid:25)(cid:4)(cid:19)
-(cid:25)(cid:27)(cid:25)(cid:11)(cid:3)2(cid:19)(cid:25)(cid:14)(cid:5)(cid:23)(cid:7)(cid:9)(cid:25)(cid:10)
JPDA 03-12
&(cid:10)"(cid:12)(cid:9)(cid:4)
#(cid:10)(cid:8)(cid:8)(cid:12)(cid:14)(cid:12)
#(cid:6)(cid:10)(cid:11)(cid:11)(cid:12)(cid:8)
(cid:18)(cid:25)(cid:9)(cid:9)(cid:12)(cid:5)(cid:3)(cid:9)
(cid:3)+(cid:23)(cid:7)(cid:8)(cid:6)(cid:19)(cid:3)(cid:9)(cid:25)(cid:23)5
#(cid:10)(cid:9)(cid:5)(cid:12)(cid:25)(cid:9)(cid:23)(cid:16)(cid:8)(cid:11)(cid:10)(cid:14)(cid:17)(cid:8)
AC/L1
AC/L2
AC/L3
WA-274-P
WA-281-P
(cid:7)(cid:4)(cid:8)(cid:5)(cid:9)(cid:10)(cid:11)(cid:12)(cid:10)
WA-6-R
WA-18-P
WA-27-R
(cid:18)(cid:25)(cid:9)(cid:14)
NT/RL1
(cid:29)(cid:25)(cid:5)(cid:9)(cid:25)(cid:11)
NT/P67
NT/P69
(cid:24)(cid:10)(cid:9)(cid:3)(cid:8)(cid:8)(cid:10)
#(cid:10)(cid:11)(cid:17)(cid:12)(cid:5)(cid:10)
NT/P61
Darwin
Wickham
Point
0
200
kilometres
4(cid:25)(cid:8)(cid:5)(cid:25)(cid:9)(cid:14)
(cid:7)(cid:4)(cid:8)(cid:5)(cid:9)(cid:10)(cid:11)(cid:12)(cid:10)
(cid:28)(cid:3)(cid:9)(cid:5)(cid:6)(cid:25)(cid:9)(cid:14)
(cid:18)(cid:25)(cid:9)(cid:9)(cid:12)(cid:5)(cid:3)(cid:9)
Papua
New Guinea
PDL 1
!(cid:12)(cid:17)(cid:25)(cid:8)
(cid:13)(cid:25)(cid:5)(cid:4)
%(cid:11)(cid:25)(cid:27)(cid:10)(cid:11)(cid:10)
PRL 5
PDL 3
(cid:2)%(cid:23)(cid:30)(cid:3)"(cid:25)
(cid:24)(cid:10)(cid:9)(cid:12)’(cid:25)0(cid:10)
PRL 9
Kumul
Offshore
Facility
#(cid:9)(cid:3)(cid:8)(cid:8)3#(cid:10)(cid:5)(cid:10)(cid:11)(cid:12)(cid:14)(cid:10)
Warim PSC
(cid:13)(cid:10)(cid:4)
West
Papua
0
100
kilometres
Kyrgyzstan
Fergana Basin
Egypt
Gindi Basin,
Gulf of Suez
Kutei Basin
Hiu Aman
Joint Petroleum Development Area
Bayu-Undan, Elang-Kakatua
Timor Sea
Caldita, Jabiru-Challis, Evans Shoal
West Natuna
Basin
West Papua & Papua New Guinea
Hides, SE Gobe
East Java Basin
Jeruk, Maleo, Oyong,
Tanggulangin, Wunut
Browse Basin
Wickham Point
Carnarvon Basin
Mutineer-Exeter,
John Brookes, Barrow,
Hurricane, Legendre,
Stag, Thevenard
Amadeus Basin
Mereenie, Palm Valley, Brewer Estate
Houtman Basin
Port Bonython
Duntroon Basin
Otway Basin
Casino, Henry, Minerva
Sorell Basin
Bonaparte Basin
Petrel, Tern
Surat/Bowen Basins
Fairview, Scotia, Moonie, Roma, Lytton
Cooper/Eromanga Basins
Moomba, Ballera, Jackson
Gippsland Basin
Patricia-Baleen, Sole, Kipper
Gippsland Basin
Surat/Bowen Basins
Cooper/Eromanga Basins
Amadeus Basin
(cid:20)(cid:12)(cid:21)(cid:5)(cid:3)(cid:9)(cid:12)(cid:10)
Orbost
(cid:29)(cid:10)(cid:5)(cid:9)(cid:12)(cid:21)(cid:12)(cid:10)3(cid:24)(cid:10)(cid:11)(cid:25)(cid:25)(cid:14)
(cid:29)(cid:10)(cid:5)(cid:9)(cid:12)(cid:21)(cid:12)(cid:10)3(cid:24)(cid:10)(cid:11)(cid:25)(cid:25)(cid:14)
(cid:30)(cid:10)(cid:8)(cid:23)(cid:31)(cid:10)(cid:21)(cid:12)(cid:11)(cid:12)(cid:5)
VIC/P39 (V)
Longford
VIC/L21
VIC/P55
VIC/
RL3
(cid:2)(cid:3)(cid:11)(cid:25)
(cid:13)(cid:12)22(cid:25)(cid:9)
VIC/RL2
Bass Strait
0
50
kilometres
7(cid:4)(cid:25)(cid:25)(cid:14)(cid:8)(cid:11)(cid:10)(cid:14)(cid:17)
Rockhampton
Gladstone
ATP 553P
ATP 337P
ATP 337P
ATP 337P
ATP 655P
ATP 336P
Waldegrave
ATP 470P RD
ATP 471P B
ATP 470P RD
ATP 745P
ATP 526P
ATP 653P
(cid:31)(cid:10)(cid:12)(cid:9)(cid:27)(cid:12)(cid:25)0
ATP 685P
(cid:2)(cid:21)(cid:3)(cid:5)(cid:12)(cid:10)
ATP 336P Roma
Roma
ATP 471P M
Moonie
P a c i f i c O c e a n
Bundaberg
Maryborough
Ipswich
Brisbane
0
100
kilometres
Aquitaine ‘C’
Aquitaine ‘B’
(cid:2)(cid:3)(cid:4)(cid:5)(cid:6)
(cid:7)(cid:4)(cid:8)(cid:5)(cid:9)(cid:10)(cid:11)(cid:12)(cid:10)
Innamincka
Aquitaine ‘A’
Ballera
7(cid:4)(cid:25)(cid:25)(cid:14)(cid:8)(cid:11)(cid:10)(cid:14)(cid:17)
Alkina
ATP 299P
ATP 267P
Jackson
ATP 267P
Moomba
PEL 114
Total 66
0
50
kilometres
(cid:28)(cid:3)(cid:9)(cid:5)(cid:6)(cid:25)(cid:9)(cid:14)(cid:23)(cid:18)(cid:25)(cid:9)(cid:9)(cid:12)(cid:5)(cid:3)(cid:9)
L4
(cid:26)(cid:25)(cid:9)(cid:25)(cid:25)(cid:14)(cid:12)(cid:25)
L5
OL3
(cid:29)(cid:10)(cid:11)(cid:19)
(cid:20)(cid:10)(cid:11)(cid:11)(cid:25)
Alice Springs
Brewer Estate
RL2
-(cid:12)(cid:14)(cid:15)(cid:3)
0
100
kilometres
Annual Report 2005
11
SAN171 WWW Colour 28/3/06 2:59 PM Page 12
DELIVERING RECORD FINANCIAL
PERFORMANCE
‘SANTOS DELIVERED ON ITS STRATEGIC OBJECTIVES IN 2005, GROWING
PRODUCTION AND MARGIN WHILE CONTROLLING THE COST OF
REPLACEMENT AND USING THIS POSITIVE BALANCE TO GOOD EFFECT
IN PROGRESSING NEW DEVELOPMENTS AND INCREASING RESERVES.’
PETER WASOW CHIEF FINANCIAL OFFICER
Santos had a good year in 2005 from many
perspectives and this is particularly evident
in the Company’s financial performance.
The clearest indicator is that profits have
more than doubled in the past year driven
by a 19% increase in production in a strong
oil price environment.
RECORD PROFIT – UP 115%
The headline net profit after tax of $762
million increased 115% from $355 million
in the previous year.
After removing the impact of significant
items, Santos’ underlying (normalised)
profits increased by 107% to $639 million
in 2005 from $309 million in 2004,
underscoring the strength of the Company’s
operating performance in 2005.
Significant items in 2005 added $123 million
to net profit after tax and included gains on
reversal of prior period impairment losses,
asset sales and additional insurance
recoveries, partly offset by accelerated
depreciation on East Spar and restructuring
costs.
In 2004, significant items added $46 million
to net profit after tax comprising mainly
gains on asset sales partly offset by
restructuring costs.
OPERATING PERFORMANCE STRONG
The underlying profit result reflects not
only the benefits of higher oil prices but also
increased production volumes and improved
operating performance.
1,000
750
500
Earnings before interest, tax, depreciation,
exploration and impairment (EBITDAX), a
measure of operating performance, increased
by 60%, about half of which was generated
12
Annual Report 2005
PROFIT DOUBLES 2004–2005
$million
417
(87)
123
762
639
s
m
e
t
i
t
n
a
c
i
f
i
n
g
i
S
e
c
e
n
c
a
n
m
a
m
r
o
r
f
o
r
e
f
r
P
e
g
p
n
g
i
n
t
a
i
t
r
a
e
r
p
e
O
p
O
d
e
s
n
e
p
x
e
n
o
i
t
a
r
o
l
p
x
E
s
m
e
t
i
t
n
a
c
i
f
i
n
g
i
S
355
(46)
309
800
725
650
575
500
425
350
275
200
2004 NPAT
reported
2004
normalised
2005
normalised
2005 NPAT
reported
EBITDAX UP 60%
$million
2,000
1,750
1,500
1,250
1,151
16
1,167
t
n
e
d
i
c
n
i
a
b
m
o
o
M
343
(39)
(28)
1,805
34
1,839
r
e
h
t
O
s
t
s
o
C
t
n
e
d
i
c
n
i
a
b
m
o
o
M
95
s
e
c
i
r
p
s
a
G
s
e
c
i
r
p
s
d
i
u
q
i
L
267
e
m
u
l
o
V
2004
EBITDAX
2004
normalised
2005
normalised
2005
EBITDAX
SAN171 WWW Colour 28/3/06 2:59 PM Page 13
from increased volumes and improved
operating performance, and half from higher
oil prices.
Production of 56 mmboe exceeded initial
expectations and was 19% higher than the
previous year, reflecting the contribution
from new projects which added 9.4 mmboe,
or about 17% of the year’s production.
Of this, the Mutineer-Exeter development
contributed approximately 6.5 million barrels
to oil production.
Another feature of the year was acquisition
activity which, net of divestments,
contributed 2.3 mmboe of production.
Average gas prices continue to rise both
in Australia and overseas contributing an
additional $95 million to EBITDAX.
Production cost increases not directly
attributable to volume increases totalled
$28 million, with $17 million the result of a
changing production mix. The remaining $11
million reflects underlying cost increases and
represents about 3% of production costs.
Being able to constrain production cost
increases to only 3% in the current
environment was a good outcome. This
is a direct result of the successful Santos
Continuous Improvement Program which,
after running for two years, was formally
concluded at the end of 2005. Going forward,
Santos expects ongoing benefits from
embedding a continuous improvement
culture in all of its operations.
Taken together, increased production and
higher gas prices combined with good cost
discipline added $334 million to EBITDAX,
which is 49% of the overall increase. These
factors, together with higher oil prices
OPERATING CASH FLOW GROWTH
$million
1,600
1,400
1,200
1,000
800
600
400
200
Tax change
12% compound
annual growth
‘94
‘95
‘96
‘97
‘98
‘99
‘00
‘01
‘02
‘03
‘04
‘05
Moomba incident
resulted in Santos’ netback, or cash margin,
increasing approximately 50% to $32 per boe.
Higher production volumes also drove
depletion and depreciation expense $86
million higher although on a unit basis,
depletion and depreciation were slightly
lower at $10.02 per boe.
Exploration and evaluation expensed
increased to $204 million in 2005, driven
mainly by the larger exploration program
and notwithstanding the continued positive
exploration success rate, as discussed on
page 17.
STRONG LONG-TERM CASH FLOW
Santos continues to generate strong
operating cash flows and the improved 2005
performance exceeded its decade-long record
of 12% compound annual growth in this
important measure.
But operating cash flow growth is only half
of the picture, as it remains for Santos to
continue to invest well. And on this score,
the Company can report positive results too.
Proven reserve replacement which averaged
165% of production has comfortably
exceeded Santos’ strategic target.
Average reserve replacement costs of
US$8.71/boe, although higher than the
target the Company set for itself, also
represents a very good result in the
current competitive environment.
Santos continues to build for the future.
In 2005, the record operating cash flow of
$1,458 million more than funded the
Company’s $959 million capital expenditure
program. Gearing increased slightly to 35%
as a result the $612 million acquisition of
Tipperary Corporation but remains within
Company targets.
The capital investment program for 2006
is again set to increase to approximately
$1,087 million.
Annual Report 2005
13
SAN171 WWW Colour 28/3/06 2:59 PM Page 14
ACHIEVING OPERATIONAL
EXCELLENCE
‘THE PRODUCTION GROWTH AND CHANGING PROFILE
DURING 2005 WAS THE RESULT OF SEVERAL OFFSHORE
DEVELOPMENTS COMING ON STREAM,THE INTEGRATION
OF ACQUIRED ASSETS, AND OUR CONTINUING EFFORTS
TO INTRODUCE NEW TECHNOLOGY TO CREATE VALUE
AND REDUCE COSTS.’
JON YOUNG EXECUTIVE VICE PRESIDENT OPERATIONS
Santos continued its drive to deliver
maximum value from its producing oil and
gas assets during 2005 through a strategy
of operational excellence.
development and production optimisation
at several fields, particularly Merrimelia,
Derrilyn, Carmina, Stimpee, Mulberry and
Fly Lake.
This involves improving environment,
health and safety performance; applying
new technologies to reduce development
costs; achieving production and capital
cost efficiencies; creating value from
infrastructure hubs and delivering
production.
Streaming new offshore and onshore
projects and integrating acquisitions into
the portfolio enabled Santos to boost
production while improving its safety and
environmental performance.
With about half its production now sourced
from outside the legacy Cooper Basin assets,
Santos has continued with strategies such as
production optimisation and trialling new
technologies to maximise output from mature
fields, while extending these concepts into
new areas of operation.
2005 PRODUCTION UP 19%
Santos' total production in 2005 increased
to 56.0 mmboe from 47.1 mmboe in 2004,
primarily due to the start-up of a number
of new growth projects and ongoing
contribution from the Cooper Basin.
Crude oil production was 60% higher at
15.3 million barrels, up from 9.5 million
barrels in the previous year. This was largely
due to the successful early commissioning of
the Mutineer-Exeter project, which contributed
6.5 million barrels during the year.
Cooper Basin oil production increased by 19%
during 2005 due to successful delineation,
Optimisation of production operations and
an increased focus on water injection at Stag,
offshore Carnarvon Basin, also increased
production from that field.
After three years of planning and
implementation, the Asset Control
Enhancement project at Moomba was
completed during 2005. This state-of-the-art
facility upgrade provides a safer, more
reliable and cost-effective process control
system, which will allow the Moomba plant
to be better optimised to meet changing
field and market requirements for the rest
of its working life.
Gas production was steady or increased in five
areas of operation, and overall sales gas and
ethane production increased by 4% during
the year to 197.3 PJ from 190.5 PJ. This
illustrates the success of Santos' continued
efforts to diversify its base business and to
optimise existing production.
There was a slight decline in gas production
from the Cooper Basin, while gas production
from the Carnarvon Basin decreased due to
the watering out of the East Spar field.
Higher production was achieved from eastern
Queensland through the development of the
Churchie field and the addition of Fairview
to the portfolio following the acquisition of
Tipperary Corporation.
Santos also achieved higher gas production
in Indonesia due to increased equity and in
the United States because of production
optimisation of the onshore Frio formation
through fracture stimulation and well
recompletions.
Gippsland Basin production increased as
a result of Santos’ acquisition of further
interests at Patricia-Baleen.
Condensate production increased by 21%
to 4.5 mmbbl from 3.7 mmbbl, reflecting
a full year of production and a continuing
good performance from the Bayu-Undan
gas recycle project in the Timor Sea and the
return of full liquids recovery at Moomba.
This was offset by production decline at East
Spar and the subsequent shut-in as the field
reached the end of its production life.
LPG production almost doubled in 2005 to
307,200 tonnes from 158,600 tonnes in 2004
due to better performance from the Cooper
Basin and Bayu-Undan gas recycle project in
the Timor Sea.
STREAMING NEW PRODUCTION
The Mutineer-Exeter oil field was brought
online in March 2005. With facility uptime
of 98% since start-up, the production
performance in 2005 was ahead of
expectations. Gross oil production rates
during 2005 averaged approximately
70,000 barrels per day.
Santos formed a coal seam gas asset team
in 2005 to manage the acquisition and
subsequent merger of Tipperary Corporation’s
Australian assets into Santos’ gas portfolio.
The world-class Fairview coal seam gas field
was integrated into Santos’ operations during
the fourth quarter and production capacity
has increased by approximately 15% since
this time. Additional development and
14
Annual Report 2005
SAN171 WWW Colour 28/3/06 2:59 PM Page 15
Grant Kinman inspecting Compressor
Site #2, Fairview coal seam gas
field, Queensland.
optimisation is planned during 2006 to
further enhance Santos’ eastern Australian
gas market position.
Gas production from the Varanus Island hub,
offshore Western Australia, increased during
the year with the streaming of gas from the
John Brookes field in September. This new
facility has a gross capacity of 240 TJ per day
and by year end was meeting all of Santos’
existing gas contracts in Western Australia.
The offshore Bayu-Undan gas recycle project
has continued to perform well since coming
on stream in 2004. A planned shutdown early
in 2005 provided an opportunity to carry out
further process optimisation in addition to
routine maintenance and vessel statutory
inspections.
Gross liquid production improved to more
than 100,000 barrels per day. Uptime on the
plant has been above expectations, leading
to increased production performance
throughout the year.
APPLYING NEW TECHNOLOGIES
Santos further tested new technologies in
the Cooper Basin in drilling, completions
and artificial lift optimisation during 2005
to improve product delivery and recovery,
thereby reducing unit production costs.
Pinpoint fracture stimulation technology,
introduced late in 2004, has now been used
at 19 wells in the Cooper Basin with
production improvements of more than
30% when compared to offset conventional
stimulated wells. Cycle time and cost
improvements have also been achieved.
The Cooper Basin successfully saw the
deepest and highest temperature use of this
technology in the world. The application of
pinpoint fracture stimulation is now part of
Santos’ base business in the Cooper Basin,
and its potential use in other Santos areas
of operation is being progressed.
COOPER OIL EXPLOITATION
Reservoir studies have identified that some
lower permeability oil reservoirs may have
significant potential to increase recoveries
through activities such as additional infill
drilling, fracture stimulation and
waterflooding.
Due to this fit-for-purpose design, the rigs
are more mobile and can reduce the drilling
cycle time, in turn delivering a step change
reduction in drilling costs.
While the Cooper Basin is a mature
hydrocarbon province, Santos is drilling
wells which can be commercialised quickly
and cost-effectively, delivering strong
cash flow which can be applied to other
growth opportunities in this high oil
price environment.
Santos successfully trialled a new program
in the Cooper Basin during 2005 to increase
the oil recovery rate from known resources.
The key is applying technologies such as 3D
seismic to better target the shallow oil
reservoirs and automated drilling rigs to
produce the oil at a low unit cost.
Santos drilled 29 oil wells in the Cooper
Basin during 2005 with an 80% success rate.
This program, which is centred on low cost
appraisal and development campaigns, will
be significantly increased in 2006 with the
drilling of up to 170 wells.
A state-of-the-art drilling rig was imported
in 2005, with a further two to follow early
in 2006.
These rigs are better for the environment as
they are self-levelling, dramatically reducing
their footprint. They also operate more safely
and at a lower cost as they are automated,
requiring less manual handling, with much
of the work undertaken by smaller crews
operating in air conditioned cabins.
Annual Report 2005
15
SAN171 WWW Colour 28/3/06 2:59 PM Page 16
PRODUCTION STATISTICS
Total 2005
Total 2004
Total 2005
Total 2004
Field units
mmboe
Field units
mmboe
Field units
mmboe
Field units
mmboe
Sales gas and ethane (PJ)
Condensate (‘000 bbls)
124.7
21.5
125.9
21.6
Cooper
1,922.6
1.8
1,448.5
Cooper
Surat/Denison
Amadeus
Otway/Gippsland
Carnarvon
Indonesia
United States
Total production
Total sales volume
Total sales revenue ($million)
22.9
12.7
14.1
7.7
4.6
10.6
197.3
228.2
3.9
2.2
2.4
1.3
0.8
1.8
33.9
39.3
825.7
16.1
11.3
8.2
17.7
2.1
9.2
190.5
207.1
2.8
1.9
1.5
3.0
0.4
1.6
32.8
35.6
Surat/Denison
Amadeus
Otway
Carnarvon
Bonaparte
United States
Total production
Total sales volume
30.8
43.7
12.8
101.5
0.0
0.1
0.0
0.1
7.8
0.0
30.6
775.5
2,139.9
2.0
1,334.9
236.1
4,487.4
4,602.7
0.2
4.2
114.4
3,711.7
4.3
3,569.5
680.1
Total sales revenue ($million)
345.9
228.5
Crude oil (‘000 bbls)
Cooper
Surat/Denison
Amadeus
Legendre
Thevenard
Barrow
Stag
Mutineer-Exeter
Elang-Kakatua
Jabiru-Challis
Indonesia
SE Gobe
United States
3,205.9
3.2
2,685.5
74.5
196.4
882.8
473.7
760.1
2,363.9
6,492.0
184.1
164.4
138.3
269.8
58.0
0.1
90.2
0.2
0.9
0.5
236.5
2,045.8
561.2
0.7
859.3
2.4
2,124.8
6.5
0.2
0.1
0.1
0.3
0.1
226.7
176.7
68.0
289.1
171.7
LPG (‘000 t)
Cooper
Surat/Denison
Bonaparte
Total production
Total sales volume
213.6
0.0
93.6
307.2
302.2
1.8
0.0
0.8
2.6
2.5
108.7
0.1
49.8
158.6
148.6
Total sales revenue ($million)
184.4
2.7
0.1
0.2
2.0
0.6
0.9
2.1
–
–
Total
Production (mmboe)
Sales volume (mmboe)
56.0
61.1
Sales revenue ($million)
2,462.8
1,500.9
0.2
0.2
0.1
0.3
0.2
9.5
9.7
1.4
0.0
0.0
0.0
0.7
1.2
0.1
3.5
3.3
0.9
0.0
0.4
1.3
1.3
90.5
47.1
49.9
Total production
15,263.9
15.3
9,535.5
Total sales volume
14,990.2
15.0
9,681.0
Total sales revenue ($million)
1,106.8
501.8
16
Annual Report 2005
SAN171 WWW Colour 28/3/06 2:59 PM Page 17
CAPTURING NEW RESOURCES
‘OUR EXPLORERS HAD FURTHER SUCCESS IN 2005, RECORDING
SEVEN DISCOVERIES.THE CALDITA DISCOVERY STRENGTHENED
SANTOS’ POSITION IN THE TIMOR/BONAPARTE AND OUR
ENTRY INTO KYRGYZSTAN PROVIDES ANOTHER OPPORTUNITY
FOR INTERNATIONAL GROWTH THROUGH EXPLORATION.’
TREVOR BROWN VICE PRESIDENT GEOSCIENCE AND NEW VENTURES
A focused and material international
exploration program is a crucial
component of Santos’ growth strategy.
Santos’ 2005 exploration program yielded
further success in Australia and overseas,
building on value generated in recent years
and broadening the scope for the Company’s
expanding production profile.
Santos drilled 22 wildcat exploration wells
and recorded seven discoveries: a conversion
rate of 32% which is ahead of the industry
average, and follows Santos’ excellent 2004
result of 44%.
A feature of the past year’s exploration
program was the increasing proportion
of targeted exploration areas outside of
the traditional Cooper Basin acreage,
including the Carnarvon Basin offshore
Western Australia, the Gippsland and Otway
Basins offshore Victoria, the Bonaparte Basin
in the Timor Sea, the Kutei and East Java
Basins offshore Indonesia and the Gulf of
Suez in Egypt.
AUSTRALIAN EXPLORATION SUCCESS
Santos had wildcat exploration success
offshore Australia with discoveries at Henry,
offshore Victoria, and Hurricane, offshore
Western Australia.
The Henry 1 well, drilled in the Otway Basin
by Santos as operator for the VIC/P44 joint
venture, was a commercial gas discovery. The
Henry discovery made it a three-out-of-three
success rate for exploration wells drilled in
this block by the joint venture since Santos
acquired a 50% interest and operatorship.
The commercialisation prospects for the
Henry discovery are promising due to the
good quality of the gas and its proximity
to the Casino gas field, which was brought
into production early in 2006.
Santos added to its position in the Sorell
Basin, offshore Tasmania, during 2005 with
the award of permit T/40P. This block is in
approximately 200 metres of water and along
the same trend as Santos’ other blocks in the
Otway and Sorell Basins.
Monique Warrington, Selina Donnelly and
Jan Rindschwenter, interpreting seismic data.
Further drilling is planned during 2006 at
the Hurricane gas discovery in the Carnarvon
Basin, with the potential to discover an
oil leg.
The Yamala and Greenmount wildcat gas
discoveries in eastern Queensland also added
to Santos’ portfolio of onshore development
opportunities.
Another eight wildcat exploration wells are
planned in Santos’ existing core areas of
eastern and Western Australia during 2006,
including four onshore, two in the Carnarvon
Basin and two in the Otway Basin.
CALDITA DISCOVERY BOOSTS BONAPARTE
POTENTIAL
Together with Indonesia, the Timor
Sea/Bonaparte Basin region is a priority
on Santos’ list of emerging core areas. As
production has commenced at the Darwin
LNG plant, the goal for exploration in this
region is to prove sufficient additional
reserves to progress a potential brownfield
expansion of these production facilities.
This program received a substantial boost
in September 2005 when Santos and its
co-venturer ConocoPhillips discovered a
significant new offshore gas field with
drilling of the Caldita 1 wildcat well about
200 kilometres from the Bayu-Undan
pipeline.
A further gas discovery was recorded at
Firebird, which was drilled only nine
kilometres from the Bayu-Undan field,
although testing did not result in commercial
hydrocarbon flow rates.
Late in 2005, Santos and ConocoPhillips were
awarded permit NT/P69 which is adjacent to
the Caldita discovery and contains the
Annual Report 2005
17
SAN171 WWW Colour 28/3/06 2:59 PM Page 18
2005 EXPLORATION EXPENDITURE BY CATEGORY
$million
previously discovered Lynedoch gas resource
which has since been renamed Barossa.
Proposed new activities planned for this
region during 2006 include a large 3D
seismic survey covering up to 8,000 square
kilometres, designed to cover the Caldita,
Barossa and Evans Shoal fields.
Santos also plans to drill an appraisal well
in the Caldita field, a commitment well in
the Barossa prospect and an exploration
well in the Evans Shoal block.
INDONESIA YIELDS FURTHER SUCCESS
Santos is the most active petroleum
exploration company in Indonesia with large
acreage positions in the East Java and Kutei
Basins.
Santos followed up the 2004 Jeruk oil
discovery in East Java with exploration
success in 2005 at the Hiu Aman 1 well drilled
in the deep water Donggala PSC in the Kutei
Basin, adjacent to the Bontang LNG plant.
This significant discovery was the highlight
of six wildcat exploration wells drilled in
Indonesia during the year. A further
exploration well to test a separate
accumulation at Hiu Aman Selatan
is planned in 2006.
In addition, Santos completed a 1,560
square kilometre 3D seismic survey in East
Java during 2005, which included the Jeruk
discovery and a number of other leads and
prospects, several of which are now being
matured for drilling during 2006 and beyond.
Kutei Basin
3 wildcat wells in 2005
Hiu Aman gas/condensate
discovery
3 wells planned in 2006
West Papua
0
500
kilom et re s
Drilling $114.5 million
Geoscience and other $38.4 million
Seismic $21.8 million
New ventures $12.3 million
2005 EXPLORATION EXPENDITURE BY REGION
$million
Offshore Australia $29.4 million
Onshore Australia $21.3 million
South East Asia $40.0 million
Middle East/North Africa $45.5 million
United States $50.8 million
INDONESIAN EXPLORATION
West Natuna Basin
East Java Basin
3 wildcat wells in 2005
1,560 sq km 3D seismic survey
5 wells planned in 2006
18
Annual Report 2005
Santos’ expanding presence as a leader in the
search for new Indonesian oil and gas fields
will include the drilling of up to five wildcat
wells in East Java during 2006 and up to
three wells in the Kutei Basin.
STRONG, WIDENING ACREAGE POSITION
Santos made a new country entry in
Kyrgyzstan during 2005 with a large acreage
position and a staged work program focused
on the under-explored but highly prospective
Fergana Basin.
This represents Santos’ first exploration
venture in Central Asia and the Company
will work with co-venturer Caspian Oil & Gas
towards earning an 80% operated working
interest in 10 exploration licences in the
Kyrgyz Republic.
This initiative is in line with Santos’ strategy
of making a measured entry into areas which
the Company believes are highly prospective
for oil and gas and which provide the
opportunity to deliver additional value to
shareholders.
Santos will continue to review the regional
geology and acquire seismic data during
2006. The first well is scheduled for 2008.
Santos’ initial 2004 entry into the Middle
East, based on a three-year program with
Devon Energy in Egypt, is now more than
halfway through the planned eight-well
program. Results to date have been
disappointing.
In the United States, Santos’ new venture
exploration plays are concentrated along the
Texas Gulf Coast, targeting deep reservoir
sand plays. A further four wildcat exploration
wells are planned in this area during 2006.
The acquisition of Tipperary Corporation also
added an active coal seam gas pilot project in
the Lay Creek area of western Colorado,
together with an active shallow gas play and
early production in eastern Colorado.
EXPANDED 2006 EXPLORATION EFFORT
Santos’ exploration program will be further
expanded in 2006 with 25 wildcat exploration
wells planned with a record exploration
budget of $225 million.
Santos will also progress appraisal
opportunities such as the Jeruk oil field
and the Caldita gas discovery.
SAN171 WWW Colour 29/3/06 4:32 PM Page 19
Exploration drilling, offshore Otway Basin.
2006 WILDCAT EXPLORATION PROGRAM
Kutei Basin
Kutei (A & B), Hiu Aman Selatan
Gulf of Mexico
Thunder 2, Kenedy Deep,
Cougar L, Jaguar A
Gulf of Suez
Chinook, Simbel,
Pawnee
East Java Basin
Banjar Panji, East Java
(B, C & D), Merpati
Bonaparte Basin
Evans Shoal South,
Barossa (Lynedoch)
Gas
Oil
WA Basins
Bricklanding, Fletcher
Otway Basin
Glenaire, Netherby 1
Bowen Basin
Mosaic 1
Cooper/Eromanga Basins
Lepard, Python, Montegue
Annual Report 2005
19
SAN171 WWW Colour 28/3/06 2:59 PM Page 20
EXPANDING GLOBALLY THROUGH
GROWTH PROJECTS
‘TWO MAJOR GROWTH PROJECTS, MUTINEER-EXETER AND
JOHN BROOKES, STARTED PRODUCTION IN 2005 WHILE FOUR
OTHER OFFSHORE DEVELOPMENT PROJECTS WERE PROGRESSED,
WITH TWO NOW ON STREAM AND A FURTHER TWO TO START UP
IN THE NEXT 12 MONTHS.’
WILF LAMMERINK ACTING VICE PRESIDENT DEVELOPMENT PROJECTS AND TECHNICAL SERVICES
Development activities during 2005 provided
further confirmation of Santos’ transition
from its traditional Australian base into an
international upstream energy company.
The Mutineer-Exeter development, which
is Santos’ first operated offshore oil project,
achieved payback of the project capital
expenditure within four months of start-up.
In the most active year in the Company’s
history, development projects came on stream
in Western Australian and Victorian waters,
LNG export facilities were completed, and
two projects in Indonesia were approved
for development.
MUTINEER-EXETER A HIGHLIGHT
The Mutineer-Exeter oil field in the Carnarvon
Basin came into production three months
ahead of schedule, 10% under budget and
with an excellent safety record.
The accelerated start-up of Mutineer-Exeter
was possible because of the excellent
development schedule achieved by Santos
for the delivery of the Floating Production
Storage and Offtake vessel and subsea
system.
A further three development wells are planned
to be drilled on the Mutineer-Exeter fields in
2006. Two appraisal wells are also planned
during the next two years, with actual timing
dependent on rig availability.
Mutineer-Exeter’s production history, and
the results from previous appraisal and
development drilling, led to an increase in
the gross ultimate recovery expected from
the field on a Proven plus Probable (2P) basis
by 13.1 mmbbls to approximately 74 mmbbls.
BAYU-UNDAN TAKES SANTOS
TO GLOBAL MARKETS
The first shipment of LNG from the
Bayu-Undan processing plant in Darwin
during February 2006 was a major milestone
for Santos. It represented a significant
step into the LNG business which is set
Seaway Falcon pipelay vessel off the coast of Port Campbell during development of the Casino gas project.
20
Annual Report 2005
to play an increasing role in international
energy markets.
The LNG phase of the project currently
consists of a single processing train with
a design capacity of 3.5 million tonnes per
annum. With the infrastructure now in place,
and with environmental approval for up to
10 million tonnes per annum of processing
capacity at the Wickham Point facility, the
focus is on proving up the reserves base
to progress a second train expansion.
Bayu-Undan’s offshore platform was
commissioned two years ago as a gas
recycling project and continues to produce
over 100,000 barrels of condensate and
LPG per day.
JOHN BROOKES DELIVERS
The John Brookes gas project also exceeded
expectations. Development and appraisal
drilling in 2005 resulted in Proven (1P)
reserves upgrades of 44%. The liquids content
of the gas is around 11 barrels per million
cubic feet, which is double the estimate on
which the project was sanctioned.
The project consists of three production wells
producing to an unmanned wellhead platform,
with raw gas sent via a 55-kilometre pipeline
to the Varanus Island processing facility.
After processing, sales gas is sent to mainland
Western Australia via two 100-kilometre
pipelines which connect into the
Dampier–Bunbury and Goldfields Gas
Transmission trunklines.
With gross 2P reserves of 1.3 trillion cubic
feet, John Brookes is a significant asset for
Santos and presents further gas marketing
and commercialisation opportunities.
SAN171 WWW Colour 28/3/06 2:59 PM Page 21
The John Brookes joint venture has already
signed contracts with three participants in
Western Australia’s electricity and mining
sectors to supply a total of 407 PJ
of gas over the next 20 years.
CASINO FAST-TRACKED TO PRODUCTION
The Casino gas project in the Otway Basin,
offshore Victoria, came on stream in early
2006. It was another demonstration of
Santos’ ability to fast-track developments
with first gas production achieved in record
time of just over three years from discovery
and 17 months after sanction: the fastest
offshore gas development in Australian
history.
As Santos’ first operated offshore gas
development, the Casino project comprises
two subsea production wells connected via
a 46-kilometre pipeline to the TRUenergy-
owned Iona onshore gas processing plant.
Commissioned ahead of schedule and within
10% of its original budget, the Casino project
– in which Santos has a 50% stake – opens
up other development options in the area.
The Henry gas field, discovered in 2005,
will be commercialised with a tie-back to
the adjacent Casino facility.
The entire gas reserves from the Casino field
have been sold under contract to energy
retailer TRUenergy which will process the
gas at its onshore Iona plant.
MINERVA GAS GOES DIRECTLY TO MARKET
First production from the Minerva gas field,
operated by BHP Billiton in Victoria’s Otway
Basin, took Santos into new territory as a
retail marketer of gas.
During the year Minerva averaged gross
production of about 120 TJ of gas per day and
about 350 barrels of condensate a day from
two subsea wells. The gas is piped to an
onshore gas processing facility 10 kilometres
away near Port Campbell.
Mike Andronov, Staff Completion Engineer.
JERUK APPRAISAL CONTINUES
The Jeruk oil discovery off the coast of
East Java was made in 2004. The field was
appraised with a flow test early in 2005 and
Santos moved quickly to acquire and interpret
3D seismic and conduct further appraisal
drilling.
Santos will drill several more appraisal wells
during 2006 while carrying out development
studies that are targeting early production.
As the field is located close to the coast of
Java in shallow water, in a region enjoying
benign weather conditions, there are a range
of possibilities for early production schemes.
OYONG UNDERWAY
The Oyong oil and gas project in East Java
is being developed in two stages.
The phase 1 oil development comprises a
simple wellhead structure with oil and gas
processed on a nearby moored barge and
the oil exported by tanker.
Solution gas associated with the early oil
production will be reinjected until gas
production begins.
The phase 2 gas development will involve
construction of a 60-kilometre gas pipeline
to PT Indonesia Power’s electricity generating
plant at Grati, East Java.
At the end of 2005, the oil phase was
approximately 90% complete with initial
production expected in mid 2006 and gas
production expected to follow in 2007.
Santos, with a 40.5% share, operates the
Oyong field which was discovered in 2001.
On a 2P basis, the field is estimated to contain
5 million barrels of oil and 86 billion cubic
feet of gas.
MALEO ON THE MOVE
A gas sales agreement for the entire
production of the Maleo gas field, over
an 8–12 year field life, has underpinned
development of this East Java project. Santos
has a 67.5% share of the project which will
supply up to 110 million cubic feet of gas per
day to Indonesian electricity generators.
The Maleo project was approximately 40%
complete at year end and is expected to
come on stream in the second half of 2006.
The project involves the conversion of a
jack-up rig into a Mobile Offshore Production
Unit together with construction of a short
pipeline to connect to existing production
infrastructure in the area.
The Maleo field has gross 2P reserves of 240
billion cubic feet of gas.
Annual Report 2005
21
SAN171 WWW Colour 28/3/06 2:59 PM Page 22
BROADENING COMMERCIALISATION
HORIZONS
‘SANTOS HAS CAPITALISED ON THE OPPORTUNITIES PROVIDED
BY SIX STRATEGICALLY-PLACED INFRASTRUCTURE HUBS
AROUND AUSTRALIA, DELIVERING INNOVATIVE CONTRACTS
TO MEET THE ENERGY NEEDS OF OUR CUSTOMERS.’
RICK WILKINSON VICE PRESIDENT GAS MARKETING AND COMMERCIALISATION
A strengthening political commitment to gas
as a fuel for electricity generation produced
several significant long-term sales contracts
in 2005.
with the latest contract, will be supplying
three of the state’s largest gas-fired power
stations: Braemar and Swanbank E near
Ipswich and Mica Creek at Mount Isa.
Santos’ commercialisation activities also
broadened into new areas as an increasingly
sophisticated marketplace offered innovative
processing and marketing opportunities.
SANTOS GAS FOR POWER GENERATION
Santos secured its third, and largest, sales
contract for John Brookes gas in 2005 with
an agreement to supply a 320 megawatt
power station to be built at Kwinana in
Western Australia.
Announcing the contract, the Western
Australian Government clearly signalled that
it expects gas to play an increasing role in
meeting the state’s power needs. It stated
that natural gas is now regarded as a cheaper,
cleaner fuel with significant climate change
advantages, producing 50% fewer greenhouse
gas emissions.
The Kwinana contract is for 229 PJ
of gas from John Brookes, a joint venture
with Apache, over 15 years. It builds on earlier
agreements to supply 58 PJ over 20 years and
120 PJ over 15 years to the West Kimberley
power project and Telfer gold mine
respectively.
Across the continent, Santos also secured a
10-year contract to supply 45 PJ of gas to the
450 megawatt power station being built at
Braemar in south-east Queensland. First gas
deliveries from Santos’ eastern Queensland
fields are expected in 2006.
Santos is strengthening its position among
Queensland’s electricity generators and,
BENEFITS FLOW FROM NEW
INFRASTRUCTURE POSITIONS
Santos entered a number of arrangements
in 2005 that aim to match hydrocarbon
reserves with the most efficient use of
processing infrastructure.
So-called toll processing – under which the
processor is paid a fee, or toll, for handling
another company’s oil or gas – has the
potential to add greater flexibility and speed
in bringing product to market. Toll processing
also adds value to Santos’ production
activities by increasing the use of
infrastructure and, potentially, lengthening
the productive life of those assets.
Following the full acquisition in 2005 of the
Patricia-Baleen production infrastructure
in the Gippsland Basin, Santos negotiated
a contract to process up to 350 PJ of gas over
10 years from Nexus Energy’s nearby Longtom
field. The contract is conditional
on sufficient gas being found at Longtom
with an appraisal well planned for mid 2006.
Santos negotiated an agreement for the
processing of gas and liquids from its
interest in the Kipper project through Esso
and BHP Billiton’s onshore facilities in the
Gippsland area.
The Kipper field, which is estimated to
contain 2P reserves of 620 billion cubic feet
of recoverable gas and 30 million barrels of
condensate and LPG, is expected to come on
stream in 2009.
In the Cooper Basin, Santos negotiated to buy
gas from Great Artesian Oil and Gas’ Smegsy
discovery. While a relatively small contract,
Santos’ first purchase of raw gas from a third
party adds another marketing and revenue
dimension to the Moomba gas hub.
Santos also signed a number of liquids
processing agreements with oil producers
in the Cooper Basin, taking third party oil
volume handled by the Company to around
6,000 barrels a day in 2005. The transport,
processing and marketing of third party oil
adds value to and greater use of the Moomba
facilities.
NEW STEP INTO DIRECT SALES
Santos added a new element to its gas
activities with the first retail sales of gas
by Santos Direct, which was awarded a retail
gas licence in 2005. Santos Direct is selling
the Company’s 10% share of output from the
Minerva gas field to industrial customers
and the spot market in Victoria.
The new marketing arm made a successful
debut in a competitive marketplace, selling
an average of 13 TJ a day. Santos Direct is
now well positioned to expand its gas sales
as other supply options become available.
MALEO SELLS LIFE-TIME PRODUCTION
International commercialisation activities
took a significant step forward with the
signing of a long-term contract for the
sale of the entire production of the 67.5%
Santos-owned Maleo gas field in East Java.
The Maleo contract, to supply Indonesia’s
leading natural gas utility, PT Perusahaan
Gas Negara, will generate more than $700
million over the 8–12 year life of the project.
22
Annual Report 2005
SAN171 WWW Colour 28/3/06 2:59 PM Page 23
N
First production from Maleo, which is
estimated to contain gross 2P reserves
of about 240 billion cubic feet of gas,
is expected in the second half of 2006.
MARKETING ALLIANCE BENEFICIAL
Santos’ oil trading arrangement with
BP Singapore, under which BP markets
all of Santos’ oil output, produced excellent
results with above average prices realised
in a surging international market.
Established in 2004, the alliance with BP
ensured that maiden oil production from
the Mutineer-Exeter field, which came
on-stream as one of the development
highlights of 2005, was efficiently
and expeditiously taken to market.
BP was also responsible for the marketing
of liquids from the Cooper Basin and
the Legendre crude oil field in the
Carnarvon Basin.
BP has added value to Santos’ marketing
efforts through its global network of trading
houses, providing access to worldwide
marketing information and internal refinery
capacity, and an entrée to niche marketing
opportunities.
Above: John Brookes gas development.
Below: Belinda Wells and Barry Edwards
inspecting the Scotia coal seam gas
facility, Queensland.
Annual Report 2005
23
SAN171 WWW Colour 28/3/06 2:59 PM Page 24
REALISING VALUE AND BALANCING
THE PORTFOLIO
the 2004 sale of the Company’s interest in
the Carpentaria Gas Pipeline.
APPLYING TECHNOLOGY TO TIGHT GAS
Santos has identified several new
technologies which have the potential to
commercialise significant quantities of the
large tight gas resource, which are
hydrocarbons contained in traps with poor
permeability, identified in the Cooper Basin.
Six projects to test these technologies are
in the process of development and
implementation during 2006 and 2007.
UNLOCKING VALUE FROM CONTINGENT
RESOURCES
Liberating value from Santos’ contingent
resources continues to be a priority.
In the Timor/Bonaparte region, Santos
and its co-venturers are focused on proving
sufficient additional resources to allow the
construction of a second LNG train at the
Darwin plant.
In Papua New Guinea, Santos has a 25%
interest in the Hides gas and condensate field
which underpins the gas volumes required for
the proposed PNG gas project.
Santos is continuing to undertake due
diligence on the PNG gas project and is
engaged in discussions and negotiations with
the project operator and other stakeholders.
The Strategic Projects team focuses on
deriving value from Santos’ undeveloped
contingent resources and balancing the
portfolio of assets.
Santos made several strategic acquisitions
in 2005 that improved its position as one
of the largest suppliers of gas to eastern
Australian markets.
STRATEGIC ACQUISITIONS
The largest acquisition of gas assets was
the US$466 million (A$612 million) purchase
of US-based Tipperary Corporation which
included a 75% working interest in the
Fairview coal seam gas field, located near
Roma in Queensland’s Bowen Basin.
The Fairview field is a world-class quality
coal seam gas resource which is well located
in relation to infrastructure and the eastern
Australian gas markets.
Net 2P reserves of 830 PJ (143 mmboe)
were booked at the end of 2005. Additional
potential exists in the large pool of contingent
resources and by virtue of more than 4,000
square kilometres of exploration acreage.
Together with Santos’ existing coal seam gas
field at Scotia, in Queensland’s Surat Basin,
and conventional gas interests in the Cooper,
Surat, Otway and Gippsland Basins and in
Papua New Guinea, the Company is well
positioned in all the current and potential
gas supply regions to the eastern seaboard.
BENEFITS ACHIEVED FROM FULL
OWNERSHIP
Santos also consolidated its position in the
emerging gas supply hub of the Gippsland
Basin, offshore Victoria, with the acquisition
of the remaining 50% interests in the
Patricia-Baleen and Sole gas fields
respectively.
The purchases, giving Santos 100% of
the two fields, occurred in two stages with
acquisitions from Basin Oil, which held OMV
Petroleum’s Gippsland Basin assets (40% of
each field), and Trinity Gas Resources (10%).
After acquiring full ownership of the
Patricia-Baleen production infrastructure,
Santos negotiated a conditional contract
to process gas from Nexus Energy’s nearby
Longtom gas field.
24
Annual Report 2005
The agreement, conditional on sufficient
reserves being proved at the Longtom field
with additional drilling, would add value to
the Patricia-Baleen development through the
processing fee paid by Nexus, the utilisation
of excess capacity, and a possible extension
of the productive life of the facility.
ADDING VALUE THROUGH DIVESTMENTS
Maintaining a balanced portfolio of
exploration and development assets also
requires regular reviews of non-performing
assets or interests that no longer fit well
with Santos’ core activities.
During 2005, Santos sold its 25% interest in
the Timor Sea exploration permit JPDA 03-01
in the Joint Petroleum Development Area
between Australia and Timor Leste, which
contains the undeveloped Jahal and Kuda
Tasi oil fields.
The sale of the Timor Sea assets to British oil
and gas group Paladin Resources generated a
net gain of $16.3 million. Santos will, under
certain circumstances, also receive up to
US$3 million should an oil field be developed
in the permit area in the future.
Santos also sold its 100% interest in the
undeveloped Golden Beach gas field in the
offshore Gippsland Basin to Cape Energy
Group in 2005.
The flexibility to divest this non-core asset
came from Santos’ acquisition of the
remaining 33% interest in Golden Beach
through the purchase of OMV’s Gippsland
Basin assets earlier in the year.
However, again with a view to adding value
to core activities, the sale agreement
included a provision that Santos is able to
purchase up to 44 PJ of gas when the Golden
Beach field is developed.
The Golden Beach agreement will add another
supply option to Santos’ gas marketing arm,
Santos Direct.
The ongoing rationalisation of non-core
assets generated cash flow of $109.7 million
in 2005 (2004: $39.9 million), principally
comprising the sale of Santos’ interests in
the Jahal and Kuda Tasi oil fields in the
Timor Sea and receipt of the proceeds from
SAN171 WWW Colour 28/3/06 2:59 PM Page 25
Darwin LNG processing and load-out facility.
2005 CONTINGENT RESOURCES
mmboe
Northern Australia 816 mmboe
Western Australia 72 mmboe
Central Australia 586 mmboe
Southern Australia 43 mmboe
Papua New Guinea 391 mmboe
Indonesia 63 mmboe
Annual Report 2005
25
SAN171 WWW Colour 28/3/06 2:59 PM Page 26
GROWING THE SIZE AND VALUE OF RESERVES
Santos added 122 mmboe of Proven (1P)
reserves in the year to 31 December 2005.
1P reserves at the end of the year,
after production of 56 mmboe and after
divestments, were 414 mmboe, up from
348 mmboe at the end of 2004.
For the fourth consecutive year, the
replacement of 1P reserves exceeded Santos’
total production. The replacement rate for
1P reserves was 218% in 2005 and averaged
165% over the past three years, which
compares very favourably with other
successful companies on a global basis.
After backing out the impact of acquisitions
and divestments, Santos’ 2005 1P organic
reserve replacement ratio was 123%, and
the three-year average was 121%.
Proven plus Probable (2P) reserves also rose
sharply, with the addition of 187 mmboe prior
to production. After allowing for production,
2P reserves rose by 131 mmboe to 774
mmboe, up from 643 mmboe a year earlier,
which represents a reserves replacement
rate of 334%.
The 2005 reserves figures do not include any
potential reserve bookings for the Jeruk oil
discovery in the Sampang PSC in East Java,
the Hiu Aman oil and gas discovery in the
Donggala PSC in the Kutei Basin, offshore
East Kalimantan or the Caldita gas discovery
in the Bonaparte Basin, offshore Northern
Territory. These discoveries are currently
carried as contingent resources.
The average 1P reserve replacement cost
for 2005 was US$9.04 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’ average
replacement cost of US$8.71 per boe
continues to be world competitive.
As a result of Santos’ major development
focus over several years, the proportion of
developed reserves has steadily increased,
with 77% of 1P reserves and 62% of 2P
reserves now in the developed category,
as shown in the graph below.
RESERVE MOVEMENTS
The material movements in reserves during
the year were as follows:
• Cooper Basin – revisions to both oil and
gas reserves in existing Cooper Basin
fields added 16.8 mmboe of 1P reserves.
In the 2P category, negative revisions in
gas reserves of 4.6 mmboe were offset by
increases in oil reserves of 4.9 mmboe.
The acquisition of Basin Oil from OMV
Petroleum resulted in an increase of
2.1 mmboe of 1P and 4.9 mmboe of
2P reserves in the South Australian
Cooper Basin.
• Eastern Queensland – reserves were
booked at the Fairview coal seam gas
field following the acquisition of
Tipperary Corporation in October 2005.
Year end bookings of 49.6 mmboe of
1P and 142.6 mmboe of 2P reserves
were recorded based on an independent
estimate undertaken by Netherland
Sewell and Associates.
Also in eastern Queensland, revisions
to existing fields added some 4.1 mmboe
of 1P and 4.4 mmboe of 2P reserves.
PERCENTAGE OF 1P AND 2P RESERVES DEVELOPED
%
100
80
60
40
20
0
2002
2003
2004
2005
1P Reserves
2P Reserves
26
Annual Report 2005
• Southern Australia – successful appraisal
of the Casino field in the Otway Basin
resulted in the addition of 6.0 mmboe
of 1P reserves and 2.0 mmboe of 2P
reserves. The discovery of the nearby
Henry field added 5.4 mmboe of 1P and
11.1 mmboe of 2P reserves.
In the Gippsland Basin, the acquisition
of the OMV Petroleum and Trinity Gas
Resources interests in the Patricia-Baleen
field added 2.6 mmboe of 1P and 4.3
mmboe of 2P reserves.
• Carnarvon Basin – successful
development and appraisal activity at
the John Brookes field resulted in an
increase of 25.5 mmboe of 1P and 10.4
mmboe of 2P reserves.
At Mutineer-Exeter, positive reservoir
performance and appraisal increased 1P
reserves by 7.1 mmboe and 2P reserves
by 4.3 mmboe, excluding the impact of
2005 production.
A positive revision was recorded at
Legendre-Thevenard of 1.8 mmboe of 1P
and 1.5 mmboe of 2P reserves. At East
Spar, the remaining reserves of 1.1
mmboe of 1P and 3.6 mmboe of 2P
reserves were written-off following the
watering out of the field.
• Indonesia – minor adds to the Maleo and
Kakap fields of 1.0 mmboe of 1P and 1.2
mmboe of 2P in aggregate were offset by
reduced reserves at Oyong of 2.6 mmboe
of 1P and 3.5 mmboe of 2P following
development drilling.
The 10% government back-in to the
Maleo field resulted in the divestment
of 1.0 mmboe of 1P and 3.0 mmboe
of 2P reserves.
Contingent Resources (best estimate) were
1,971 mmboe at the end of 2005, an increase
of 528 mmboe (37%) relative to the
previous year.
This significant increase is largely due to the
booking of additional coal seam gas resources
at Fairview and in the Roma area, together
with exploration success at Caldita in the
Timor/Bonaparte area and Hiu Aman
offshore Indonesia.
SAN171 WWW Colour 28/3/06 2:59 PM Page 27
PROVEN PLUS PROBABLE RESERVES (SANTOS SHARE) BY ACTIVITY
Reserves year end 2004
Production
Additions
Acquisitions/Divestments
Revisions
Estimated reserves year end 2005
Sales gas
(incl. ethane)
PJ
Crude oil
mmbbl
Condensate
mmbbl
2,873
-197
68
863
60
3,667
74
-15
0
0
17
76
49
-4
0
0
-2
43
PROVEN PLUS PROBABLE RESERVES (SANTOS SHARE) YEAR END 2005 BY AREA
(mmboe)
Area
Cooper Basin
Onshore Northern Territory
Offshore Northern Territory
Eastern Queensland
Southern Australia
Carnarvon Australia
Papua New Guinea
Indonesia
United States
Total
Sales gas
(incl. ethane)
PJ
Crude oil
mmbbl
Condensate
mmbbl
933
135
322
1,089
359
589
0
210
30
3,667
25
2
1
0
0
44
1
3
0
76
12
1
24
0
2
3
0
0
1
43
LPG
'000
tonnes
3,523
-307
0
40
-61
3,195
LPG
'000
tonnes
1,560
0
1,439
20
176
0
0
0
0
3,195
RESERVES SUMMARY (SANTOS SHARE)
(mmboe)
Proven (1P)
Proven plus Probable (2P)
Contingent Resources (Best Estimate)
Year End
2004
348
643
1,443
Production
Revisions
Additions
Acq/Divest
-56
-56
0
63
26
44
6
12
401
53
149
83
Total
mmboe
643
-56
12
149
26
774
Total
mmboe
210
26
91
188
65
148
1
39
6
774
Year End
2005
414
774
1,971
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 2005
27
SAN171 WWW Colour 28/3/06 2:59 PM Page 28
MANAGING FOR LONG-TERM
SUSTAINABILITY
‘SANTOS MADE GOOD PROGRESS DURING 2005 EMBEDDING THE
PRINCIPLES AND PRACTICES OF SUSTAINABILITY INTO THE MANY
ASPECTS OF OUR BUSINESS THROUGH A STRUCTURED PROCESS
OF IMPROVEMENT, MEASUREMENT AND REPORTING.’
MARTYN EAMES VICE PRESIDENT CORPORATE AND PEOPLE
As a successful energy company, Santos must
be able to uphold its reputation as a trusted
and competent explorer and operator,
continuing to make economic progress while
operating in an environmentally responsible
manner and fulfilling its social obligations.
Over the past year, significant efforts have
been made to continue the process of
integrating the principles of sustainability
into Santos’ decision-making and operational
practices. As a result, Santos has recorded
some of its best results for many of its
sustainability indicators, including
environment, health, safety and greenhouse.
FRAMEWORK FOR SUSTAINABILITY
MANAGEMENT
Santos’ commitment to sustainability is
managed through the functionally-based
organisation structure which reflects the
various activities that occur throughout
the business cycle of the Company.
Santos’ ‘conveyor belt’ model from
exploration to commercialisation,
development and operations is supported
by efficient support services that ensure
operationally-focused areas are geared
to achieve performance across the following
four sustainability domains:
• Environmental management – the
efficiency and effectiveness of how
Santos uses natural resources.
• Santos’ people – the wellbeing, skills
and capabilities of employees.
• Community development – Santos’
contribution to developing and sustaining
the communities it is part of.
• Economy prosperity – Santos’ economic
contribution to the communities it is
part of.
Santos is taking a long-term view of the
sustainability of its business activities and
assesses and measures sustainability
performance for each functional area.
Santos applies a systematic approach to
managing its operations. Aspirations and
commitments are communicated through
policies and management systems to ensure
the appropriate results are achieved.
Measurement and reporting performance
form the start of the continuous improvement
loop. Details on performance against targets,
commitments and aspirations will be included
in detail in the sustainability report which will
be issued later in the year.
REVIEWING SYSTEMS AND POLICIES
Santos has in place a number of policies and
procedures that set out the responsibilities
and systems to guide the actions of the
Company and employees in all the areas of
the business.
During the year a number of policies were
reviewed and updated to reflect best practice
EXAMPLES OF SANTOS SYSTEMS AND POLICIES
Sustainability
Environment
Safety
Health and wellbeing
Training and development
Human rights
Community
Greenhouse
In place/
In development
Business
Conduct
In place/
In development
Workplace
and Employment
In place/
In development
✔
✔
✔
✔
▲
▲
✔
Conflict of interest
Receiving gifts
Bribery and corruption
Financial management and accounting
Risk management
Securities dealing
Shareholder communication
and market disclosure
Political affiliation
Reporting misconduct
✔
✔
✔
✔
✔
✔
✔
✔
✔
Recruitment
Issue resolution
Employee benefits
Performance management
Leave
Equal opportunity
Use of company resources
Confidentiality
Privacy
Internet and electronic communication
Conditions of employment
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
In place: ✔ Formal integrated policy in development: ▲
28
Annual Report 2005
SAN171 WWW Colour 28/3/06 2:59 PM Page 29
among industry leaders and other formal
integrated policies are in the process of being
finalised. The table on page 28 summarises
the areas covered by these policies and
current status.
One of Santos’ systems is a comprehensive
Environment, Health and Safety Management
System used to define performance
expectations and accountabilities, and to
monitor and continually improve
performance.
The Self Insurers Group in South Australia
formally recognised Santos during 2005 for
its establishment of the audit process which
forms part of this system. Santos developed
this process and it is in part based on industry
best practice models.
More detail about this and the other systems
Santos has in place can be found in the
Corporate Governance section which begins
on page 34.
2005 PERFORMANCE AND STATISTICS
Health and safety improves
Santos’ safety vision is that ‘we all go home
from work without injury and illness’ and the
Company remains committed to continually
improving its safety performance.
The 2005 result is the best Santos has ever
achieved, with a total recordable case
frequency rate of 4.9. This means that there
were 4.9 lost time plus medical treatment
injuries for every million hours worked and
represents a 50% reduction over the past
three years.
requiring medical intervention. Many Santos
employees work in the harsh arid environment
of the Cooper Basin where temperatures
regularly reach over 40°C in the summer
months and the potential for heat stress is
great. Santos has made a significant effort in
educating employees about how to avoid heat
stress and equipping them to do this.
Santos was acknowledged for its improvement
in safety performance by the Australian
Petroleum Production and Exploration
Association, which nominated Santos as
a finalist for its industry-wide awards.
Santos’ own internal award system, the
Directors’ Environment, Health and Safety
Awards, was conducted for the second time in
2005. Entries were received from 29 teams for
consideration in six categories: Best Overall
Environment Performance, Best Overall Health
and Safety Performance, Best Overall Health
and Safety Performance by Santos Contractor,
Best Environmental Project or Innovation and
Best Health and Safety Project or Innovation.
Oil spills decrease
Santos’ oil spill prevention strategy continued
to be a major focus in 2005 and for the second
year in a row the Company reduced the volume
of spills during the year.
In 2006, Santos will also focus on reducing
the number of oil spills as well as volume.
A continual reduction in the number of oil
spills will reduce the chance of significant
spill volumes over time.
Coongie Lakes National Park declared
One of the most pleasing safety outcomes for
2005 is that there were no cases of heat stress
A proud moment for Santos in June 2005 was
the declaration of the Coongie Lakes area as a
National Park by the South Australian
Government at a special ceremony held on
the banks of the Coongie Lakes at dawn.
The Coongie Lakes wetland system, located
within the central Australia oil and gas fields
operated by Santos, is home to an abundance
of wildlife, fish, turtles, frogs and other
mammals and importantly provides a refuge
during drought.
Santos played a key role in securing the
future of this important environmental icon
by brokering a Memorandum of Understanding
with South Australian conservation groups
which recommended permanent protection
for the Coongie Lakes area by excluding new
petroleum activity from the area.
The Coongie Lakes National Park is testament
to Santos’ commitment to responsible
environmental management. The leadership
position taken by the Company was
instrumental in securing the long-term
protection of this vital arid wetland.
Developing and rewarding people
The investment Santos makes in its people is
focused on ensuring the best available talent
is identified and developed to support a
rapidly-growing, high-performing business.
The strategy is supported by competitive
remuneration and rewards that recognise and
differentiate performance and is underpinned
by a working environment that supports
Santos’ values and the wellbeing of all staff.
Santos has two Enterprise Agreements
operating within Australia which provide a
framework for the parties to develop and
implement improvements in work practices,
TOTAL RECORDABLE CASE FREQUENCY RATE
TRCFR per million hours worked
OIL SPILL VOLUMES
m3
15
12
9
6
3
0
1950
1560
1170
780
390
0
Lytton oil spill effect
2002
2003
2004
2005
2002
2003
2004
2005
Contractor
Combined
Santos employee
Annual Report 2005
29
SAN171 WWW Colour 28/3/06 2:59 PM Page 30
Safety exercise simulating an offshore rig evacuation.
EMPLOYEE GENDER BY FUNCTION
Geoscience and New Ventures
Gas Marketing and Commercialisation
24%
32%
76%
68%
Strategic Projects
8%
92%
22%
9%
33%
48%
30%
46%
20%
78%
91%
67%
70%
52%
54%
80%
Development Projects and Technical Services
Operations
Finance
Corporate
Indonesia Business
United States Business
Total
Female
Male
30
Annual Report 2005
SAN171 WWW Colour 28/3/06 2:59 PM Page 31
skills and technology, while increasing job
satisfaction in an increasingly challenging
environment.
This framework provided a basis for achieving
a program of voluntary redundancies in the
field, identified as part of the Santos
Continuous Improvement Program in 2004.
No time was lost at Santos during 2005 due
to industrial stoppage.
Santos invested approximately $3,000
per person during 2005 on training and
development designed to develop technical
and business capability. This training included
a focus on field appraisal and development,
integrated basin analysis, deep water
sedimentation, safety and frontline leadership.
A further $2.8 million was invested to take
Santos’ Competency Based Training model to
the next stage at Australian field locations.
This training is linked to the National
Competency Framework and collaborative
efforts involving field employees have
significantly improved Santos’ development
of on-the-job skills.
Santos’ gender profile reflects the
predominantly male workforce in trades,
engineering and science. The Company is
involved in programs to improve gender
balance; for example, the Premier of South
Australia’s Industry Awards for Teachers of
Science & Mathematics, and the Geoscience
Pathways project, which help secondary
students better understand the applications
of science and mathematics in business,
thereby encouraging careers in these
disciplines.
Voluntary employee turnover is relatively
stable, especially considering the competitive
nature of the oil and gas industry and the
worldwide demand for skilled resources.
The majority of Santos’ employees are located
in South Australia due to the significant
Cooper Basin operations and the Adelaide-
based corporate and business services that
support Santos’ assets in Australia and
overseas.
VOLUNTARY EMPLOYEE TURNOVER
%
10
8
6
4
2
0
2002
2003
2004
2005
BUILDING THE RIGHT CULTURE
In 2005 Santos continued a program of
activities to ensure that the way employees
and business partners work together
enhances Santos’ ability to be successful.
(see inside front cover flap) in a comprehensive
manner. The purpose of this was to broaden
employees’ knowledge of the business and
the part they have to play in getting the
right results.
More than 1,200 employees participated in a
series of one-day forums during the year that
examined the data that were gathered from a
survey of employees about cultural issues
which was conducted in late 2004. Employees
were encouraged to contribute ideas for
improvement, and action has now been taken
on a number of fronts.
These forums also provided an opportunity to
discuss Santos’ vision, strategy and values
LOCATION OF EMPLOYEES
%
South Australia 71%
Queensland 14%
Western Australia 2%
Northern Territory 2%
Victoria 1%
United States 3%
Indonesia 7%
Three culture project teams covering Vision,
Values, Strategy and Communication;
Leadership and Change; and Personal
Development and Training were established
and presented recommendations which will
now form the basis for planning and
establishing Santos’ approach to culture
development in the future.
INVESTING IN COMMUNITIES
Santos has formed relationships with the
many communities in which it has operations
and recognises that it has a responsibility to
contribute to the health and wellbeing of
those communities.
This is achieved in part through a well
established sponsorship and donations
program and in 2005 Santos contributed
over $3 million to more than 120 events and
organisations in South Australia, the Northern
Territory, Queensland, Victoria, Indonesia and
the United States.
In 2005 Santos also continued its support
of the Adelaide Symphony Orchestra, the
Australian School of Petroleum at the
University of Adelaide and the South
Australian Museum.
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A treasure from the Santos-sponsored Crescent Moon Islamic art exhibition: an 18th century gold crown from Java
(Banten, Java, Indonesia, Crown, 18th century, gold, precious stones, enamel, metal, 17.0 x 11.5 cm [outer crown]
National Museum of Indonesia, Jakarta).
Asian tsunami
The devastation caused by the Asian Tsunami
which struck on Boxing Day 2004 was a
tragedy of incomprehensible magnitude.
Santos and its employees together responded
to the aid effort and the Company matched
dollar for dollar the employee contributions.
Almost $200,000 was contributed to nine
different aid agencies in this manner. In
addition, Santos has pledged $250,000
to a redevelopment project in Indonesia and
is working with Red Cross Australia to identify
a suitable project.
Santos Community Fund
The Santos Community Fund makes
contributions to a wide range of community
organisations that are in turn supported by
the efforts of Santos employees who choose
to contribute their own time and resources
to improving their community.
Among the recipients in 2005 was the Royal
Flying Doctor Service, which Santos has
supported for more than 20 years; Camp
Quality; the Juvenile Diabetes Research
Foundation; and Oxfam.
Santos also contributed to the Our Patch
project in Adelaide for the second year. This
is a joint initiative of the Patawalonga and
Torrens Catchment Management Boards and
the Adelaide City Council in which Santos
employees volunteer in a program to
rehabilitate a section of the River Torrens.
Crescent Moon
Santos has been a long-time supporter
of the arts as a way of bringing new ideas,
perspectives and cultures to the wider
Australian community.
In 2005 the Company was the major sponsor
of Crescent Moon: Islamic Art and Civilisation
in Southeast Asia, an exhibition of art and
artefacts from the region.
This exhibition, a joint initiative of the Art
Gallery of South Australia and the National
Gallery of Australia, contains almost 200
treasures from six countries, some of which
had never left their country of origin before.
Sponsoring the exhibition gave Santos the
opportunity to demonstrate its commitment
to fostering greater cultural understanding
between South East Asia and Australia as well
as informing the wider community about
Santos’ activities in the region.
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Annual Report 2005
Cultural heritage
Santos seeks to work cooperatively with
the various Indigenous communities in
the Northern Territory, Queensland, South
Australia and Victoria with whom the Company
shares responsibility for protecting areas
of cultural significance.
In 2005 agreements were in place with the
Kullilli, Boonthmurra, Wangkumarra and the
Yandruwandha-Yawarraawarrka communities
that provide benefits in areas such as
education, community development and
employment.
Processes for identifying and protecting
cultural heritage are included in the
Environment, Health and Safety Management
System and there are cultural heritage
management plans in place in the relevant
operating areas.
Undurana Camel Farm
Santos has made a significant contribution
to the establishment of a camel farm at
Undurana, about 400 kilometres west of
Alice Springs.
This enterprise was established in partnership
with the people from a local outstation who
saw an opportunity to farm feral camels in the
region and sell them to buyers in Alice Springs
and interstate. These camels are the
descendants of camels that were introduced
to Australia in the 1840s and now there are
estimated to be 750,000 of them roaming
the bush.
The Undurana Camel Farm is located near
Santos’ operations at Mereenie and the
Company provided significant assistance to
the project both financially and through the
services of its employees who helped set up
the farm.
Work undertaken included the construction
of a paddock fence some 75 kilometres long,
which took two years to complete.
The project will benefit a group of Traditional
Owners through employment, income and
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Anslem Impu at the Undurana Camel Farm mustering yards, Northern Territory
(photograph courtesy of The Australian newspaper, photograph by Shannon Morris).
independence as well as removing feral
camels that damage the environment. Santos
believes that this is an exemplary model of
corporate–community partnership.
PROVIDING SUSTAINABLE PROSPERITY
Carbon business plan
Santos recognises the issues relating to a
carbon-constrained future and has developed
a carbon business plan to identify and manage
the associated risks and opportunities,
as well as identify and develop areas of
competitive advantage.
Santos’ vision is to generate value from
its carbon assets and aims to manage the
commercial risk of greenhouse emissions.
The plan includes promoting lower carbon
fuels, particularly natural gas, and supporting
research and innovation into future energy
sources and practices.
Inclusion in indices
Santos has been listed on the Australian
SAM Sustainability Index (AusSSI) since
the index was established in February 2005.
It tracks the performance of around
70 Australian companies considered to be
leaders in their sector. Companies are subject
to a rigorous assessment process where
economic, environmental and social criteria
are considered.
The Company is also listed on the Reputex
Social Responsibility Index which comprises
those companies from the ASX 300 Index
that have achieved a Reputex corporate
social responsibility rating of ‘A’ (satisfactory)
or higher.
2006 SUSTAINABILITY REPORT
Santos released its first Sustainability Review
in 2004, making public its commitment to
operating with a view to its long-term
sustainability as an energy company. At that
time Santos adopted sustainability as a core
value and committed to continually improving
its performance in this area.
Since then Santos has made considerable
progress across a number of areas and plans
to release a 2006 Sustainability Report during
the third quarter. This document will report
progress against targets and provide further
detail on policy, procedures and performance
across the four domains of sustainability in
each of Santos’ functional areas.
Annual Report 2005
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CORPORATE GOVERNANCE
‘UNDERPINNING SANTOS’ CURRENT PERFORMANCE AND
POSITIVE OUTLOOK IS STRONG CORPORATE MANAGEMENT
AND GOVERNANCE.’
WESLEY GLANVILLE MANAGING COUNSEL AND COMPANY SECRETARY
1. SANTOS’ APPROACH TO CORPORATE
GOVERNANCE
The Board and Management of Santos believe
that, for the Company to achieve and maintain
its objective of being within the top quartile
of exploration and production companies
globally, it is necessary for the Company to
meet the highest standards of personnel
safety and environmental performance,
governance and business conduct across its
operations in Australia and internationally.
Fundamental to this is the Board’s
commitment to continually enhance
the Company’s culture, vision and values,
so as to ensure Santos continues to meet
its strategic objectives whilst maintaining
the highest standards. With this focus, the
Board and Management similarly recognise
the Company’s responsibilities to its
customers, employees and suppliers, as
well as to the welfare of the communities
in which it operates.
To achieve this, the Board works under a
set of well-established corporate governance
policies that reinforce the responsibilities
of all Directors and in addition meet the
requirements of the Corporations Act 2001
and the Listing Rules of the Australian Stock
Exchange (ASX).
The Board regularly reviews and updates
Santos’ corporate governance policies and
relevant practices and procedures for changes
to the law, the Listing Rules and corporate
practice on an annual basis and as required.
Such reviews occurred during 2005 and the
Company’s policies continue to be updated as
a result to ensure that they remain compliant
with the relevant legislation and in
accordance with best practice.
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Annual Report 2005
The corporate governance section of the
Company’s website, www.santos.com,
contains information relating to the
Company’s corporate governance policies
and procedures.
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,
2006.
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 55 of this Annual Report.
Ten Board meetings are generally scheduled
per year, two more than required under the
Board guidelines. In 2005, a total of fourteen
meetings were held. Board members are
expected to attend any additional meetings as
required. Each Director ensures they are able
to devote sufficient time to discharge their
duties and to prepare for Board and
Committee meetings and associated activities.
Details of each Director’s attendance at Board
and Committee Meetings and their
shareholdings are also set out on page 63 of
this Annual Report.
2.1 BOARD RESPONSIBILITIES
The Board is responsible for the overall
corporate governance of the Company,
including its strategic direction and financial
objectives, oversight of the Company and its
management, establishing goals for
Management and monitoring the attainment
of these goals.
Specifically, the Board is responsible for:
• the provision of strategic direction and
oversight of 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 approval of, and monitoring of
financial performance against strategic
plans and corporate budgets;
• the approval of delegations of authority
to Management;
• corporate governance generally;
• ethical standards and codes of conduct;
• the selection and evaluation of, and
succession planning for, Directors and
executive management;
• the remuneration of Directors and
executive management; and
• the integrity of and oversight
of operational and financial risk
management.
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 approved
by the Board. This Statement details the
responsibilities delegated by the Board
to executive management for:
• implementing corporate strategies;
• maintaining and reporting on effective
risk management (including safety and
plant integrity); and
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• operating under approved budgets and
written delegations of authority.
2.2 BOARD PROCEDURES
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 63 of this Annual Report. Board
Meetings are structured in two separate
sessions, without Management present for
one of those sessions, unless specifically
invited to address a particular issue. The
agenda for meetings is prepared by the
Company Secretary in conjunction with the
Chairman and CEO, with periodic input from
the Board. Board papers are distributed to
Directors in advance of scheduled meetings.
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.
Further, Board meetings take place both at
the Company’s head office and from time to
time at key operating sites, to assist the Board
in its understanding of operational issues and
the Company has implemented an ongoing
regular education program in relation to the
Company’s business, opportunities and risks.
These arrangements ensure each Director is
able to inform and familiarise themselves with
the Company’s operations and does not rely
exclusively on information provided to them
by Management.
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.
Currently, the Board comprises six
non-executive Directors, all of whom are
deemed independent under the principles
set out below, and one executive Director.
The Board has adopted the definition of
independence set out in the ASX Best Practice
Recommendations and as defined in the 2002
guidelines of the Investment and Financial
Services Association Limited.
Having regard to this definition, the
Board generally considers a Director to be
independent if he or she is not a member of
Management and is free of any interest and
any business or other relationship which
could, 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 of 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,
Directors are required to promptly disclose
their interests in contracts and other
directorships and offices held.
2.4 APPOINTMENT OF NEW DIRECTORS,
TERM OF OFFICE AND RE-ELECTION
The Board Guidelines include the following
principles:
• 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.
Prospective candidates for the Board are
reviewed by the Nomination Committee and
appropriate regard is had to the business
experience, skills-sets and expertise of the
candidates and that required by the Board
to ensure its overall composition enables
the Board to meet its responsibilities. The
Nomination Committee makes appropriate
recommendations regarding possible
appointments of directors to the Board.
Prior to appointment, each Director is
provided with a letter of appointment
which encloses a copy of the Company’s
Constitution, Board Guidelines, Committee
Charters, relevant policies and functional
overviews of the Company’s strategic
objectives and operations. Additionally,
the expectations of the Board in respect
to a proposed appointee to the Board and
the workings of the Board and its Committees
are conveyed in interviews with the Chairman.
Induction procedures include access to
appropriate executives in relation to details
of the business of the Company.
Under the Company’s Constitution
approximately one third of Directors retire
by rotation each year. Directors appointed
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during the year are also required to submit
themselves for election by shareholders at
the Company’s next Annual General Meeting.
2.5 REVIEW OF BOARD AND
EXECUTIVE PERFORMANCE
As noted above, a Board review is conducted
on a biennial basis and individual Director
reviews occur annually. The biennial review
of the Board and of its Committees was
conducted by an independent consultant
in 2005.
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 for review
by the Board in relation to Management
succession planning.
2.6 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 pages 65 and 66 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.
2.7 COMPANY SECRETARY
The Company Secretary reports directly
to the Board and is responsible for the
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Annual Report 2005
administration of the business and
responsibilities of the Board and its various
Committees (excluding the Audit Committee
which is the responsibility of the Manager
Risk and Audit, who reports to the Chairman
of the Audit Committee).
The Company Secretary acts as the Secretary
to each of the Finance Committee, Nomination
Committee, Remuneration Committee and
Safety, Health and Environment Committee
and is responsible to those Committees and
the Board for ensuring compliance with their
respective charters and guidelines.
The Company Secretary advises the Board and
its Committees on governance matters and
liaises with Management to ensure the
resolutions of the Board and its Committees
are discharged. The independent Directors
of the Board also have individual access to
the Company Secretary, who is empowered to
engage the services of independent advisors
at the request of the Board, a Committee or
independent Director.
The Company Secretary can only be appointed
and removed by the Board, ensuring that the
requirements of the Board and its Committees
are met independently of Management.
The Company’s Managing Counsel, Wesley
Glanville (BA, LLB, GDLP, MAICD), aged 44
years, was appointed as a joint Company
Secretary on 23 February 2004 and, following
the retirement of the then Group General
Counsel and Company Secretary, has been the
sole Company Secretary since 1 July 2004.
3 COMMITTEES OF THE BOARD
The Board has established a number of
Board Committees to assist with the effective
discharge of its duties. All Committees
are chaired by, and comprised only of, non-
executive, independent Directors, except the
Safety, Health and Environment Committee,
which includes the CEO as a member.
The Chairman of each Committee provides,
and addresses, a written report together with
the minutes and recommendations of the
Committee at the next Board Meeting. The
Chairman of each Committee also, on an
annual basis, presents an overview report
to the Board of the Committee’s activities
for the preceding 12-month period.
3.1 AUDIT COMMITTEE
The role of the Audit Committee is
documented in a Charter, approved by the
Board. This Charter was revised in December
2005 in line with contemporary best practice.
(a) Composition of the Audit Committee
The Committee is required to consist of no less
than three members and to meet at least four
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.
At least one member must have an
understanding of the Exploration and
Production industry. 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 K.A. Dean (Chairman –
appointed effective 30 September 2005),
Professor J Sloan and Mr R M Harding. The
external auditors, CEO, Chief Financial Officer
(CFO), Manager Risk and Audit, Managing
Counsel and Company Secretary, and Group
Controller attend Committee meetings by
invitation.
There were 5 meetings held in 2005.
(b) 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, the internal and external audit
function, and compliance with laws and
regulations relating to these areas of
responsibility.
Specifically, the role of the Audit Committee
includes:
• reviewing the effectiveness of the
Company’s risk management and internal
compliance and control systems relating
to financial reporting;
• evaluating the truth and fairness
of Company financial reports and
recommending acceptance to the Board;
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• reviewing the process adopted by the CEO
• the Board will not invite any past or
and CFO when certifying to the Board as
to the truth and fairness of the Company’s
financial reports and that the financial
reports are based on a sound system of
risk management and internal compliance
and control;
• examining the accounting policies of the
Company to determine whether they are
appropriate and in accordance with
generally accepted practices;
• 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
relationships between the auditors and
the Company and confirming compliance
with all professional and regulatory
requirements relating to auditor
independence;
• referring matters of concern to the Board,
as appropriate, and considering
issues which may impact on the financial
reports of the Company; and
• recommending proposed dividends to the
Board for final adoption.
(c) Independence of auditors and
non-audit services
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:
present lead audit partner of the firm
currently engaged as the Company’s
external auditor to fill a vacancy
on the Board;
• audit partners who have had significant
roles in the statutory audit will be
required to rotate off the audit after
a maximum of five years and there will
be a period of at least two successive
years before that partner can again be
involved in the Company’s audit; and
• the internal audit function, if outsourced,
will be provided by a firm other than the
external audit firm.
The Audit Committee provides the Board
with a statement clarifying that the provision
of non-audit services by the external auditors
is compatible with the general standard
of independence for auditors.
The nature and amount of non-audit services
provide by the external auditors and are
detailed on page 66 of the Directors’
Statutory Report, together with the Directors’
reasons for being satisfied that the provision
of those services did not compromise the
auditor independence requirements of the
Corporations Act. A copy of the auditor’s
independence declaration as required under
section 307C of the Corporations Act is set out
on page 135 of this Annual Report.
3.2 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’ qualifications
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.
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 M A O’Leary and Professor J Sloan.
3.3 REMUNERATION COMMITTEE
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 Remuneration Committee is responsible
for reviewing the remuneration policies and
practices of the Company including: the
compensation arrangements for the CEO
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 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 R M Harding.
3.4 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.
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The current members of the Finance
Committee, all of whom are independent
non-executive Directors, are: Mr S Gerlach
(Chairman), Mr K A Dean and Mr M A O‘Leary.
3.5 SAFETY, HEALTH AND
ENVIRONMENT COMMITTEE
The role of the Safety, Health and
Environment Committee is documented
in a Charter, approved by the Board, and
includes oversight of the Environment,
Health and Safety Management System and
review of the regular internal and external
environmental and safety audits.
The current members of the Safety, Health
and Environment Committee are: Mr S Gerlach
(Chairman), Mr M A O’Leary, Mr R M Harding
and Mr J C Ellice-Flint.
4 DIRECTOR FEES AND
EXECUTIVE REMUNERATION
Remuneration levels are competitively set to
attract and retain appropriately qualified and
experienced personnel. Performance, duties
and responsibilities, market comparison and
independent advice are all considered as part
of the remuneration process.
The structure and details of the remuneration
paid to directors, the CEO and other senior
executives during the period are set out in
the Remuneration Report commencing on page
40 of this report and note 28 to the financial
statements on page 112 of this report.
5 RISK MANAGEMENT
The Board is responsible for overseeing
the implementation of, and ensuring
there are adequate policies in relation
to, the Company’s risk management and
internal compliance and control systems.
These systems require Management to be
responsible for identifying and managing
risks to the Company’s businesses.
An Enterprise Wide Risk Management
approach forms the cornerstone of Risk
Management activities of Santos and is based
on the relevant Australian Standard (AS/NZS
4360 : 2004). 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 are required to advise
the Board annually in writing whether:
• 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 through: a comprehensive
Environmental Health and Safety
Management System based on Australian
Standard 4801 and International
Standard 14001; safety, health and
environment committees at Board and
Management levels; the retention of
specialist environmental, health and
safety staff and advisors; regular internal
and external environmental, health
and safety audits; and imposing
environmental care and health and
safety accountability as line
management responsibilities.
• 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 and treasury –
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 34 to 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.
6 ETHICAL STANDARDS AND CODE
OF CONDUCT
To promote high standards of corporate
governance and business conduct the
Company has provided its employees with
a clear set of rules, values and guidelines
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to follow when carrying out their work as
a Santos employee and representative.
In addition to the Board Guidelines, the
Company has in place an integrated 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. The Board, in
conjunction with executive management,
is responsible for ensuring compliance
by all employees with those standards.
In particular, the integrated 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;
• respect the privacy of others and comply
with the Company’s Privacy Policy; and
• report misconduct through prescribed
reporting channels, including as a last
resort, the independent Company
‘hotline’.
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.
7 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 acknowledgment from
the Chairman or his representative (and
executives from the Company 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.
8 CONTINUOUS DISCLOSURE AND
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. 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 or NASDAQ. 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 and NASDAQ. 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.
The Board is aware of its obligations and will
seek shareholder approval as required by the
Company’s constitution, the Corporations
Act and the ASX Listing Rules.
Additionally, the Company’s external auditor
attends annual general meetings to be
available to answer shareholder questions
relevant to the conduct of the audit.
Annual Report 2005
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REMUNERATION REPORT
The Directors of the Company present the
Remuneration Report prepared in accordance
with section 300A of the Corporations Act for
the Company and the consolidated entity for
the year ended 31 December 2005. This
Remuneration Report forms part of the
Directors’ Report.
The Company’s overall objective is to deliver
top quartile strategic operating and
shareholder value performance in the short
and longer terms when compared with its
peers in the international petroleum
exploration and production industry. In order
to achieve these objectives the Company
needs to have the best, brightest and most
experienced people available to it. Delivery of
the Company’s remuneration strategy is a key
objective in delivering that performance.
The Company’s remuneration strategy is
therefore designed to attract, retain and
motivate appropriately qualified and
experienced directors, executives and staff
capable of discharging their respective
responsibilities to enable the Company to
achieve its business strategy.
NON-EXECUTIVE DIRECTORS
The fees paid to non-executive Directors are
set at a level which:
• is consistent with prevailing market
conditions;
• ensures the Company is able to attract
and retain Directors of the required
qualifications, background and
experience needed to ensure an effective
and value adding Board; and
• reflects the responsibilities of, and the
time commitment required from, each
non-executive Director to discharge his or
her duties.
CEO AND SENIOR EXECUTIVES
Executive remuneration comprises both a
fixed component and an at-risk component
and is intended to remunerate executives for
increasing shareholder value, for achieving
financial targets and business strategies and
to align their remuneration with the financial
interests of shareholders. The Company’s
executive remuneration strategy is designed
to attract and retain high calibre executives.
Details of the Company’s remuneration
strategy are set out in this Report as follows:
TABLE 1: OVERVIEW OF ELEMENTS OF REMUNERATION
Fixed remuneration
Elements of
remuneration
Fees
Salary
Superannuation
Expense allowance
Other benefits
At-risk remuneration
Short term incentive
Post-employment
Long term incentive
Notice periods &
termination payments
Directors
Non-executive
Executive
Specified
executives
Discussion in
Remuneration
Report
✔
✘
✔1
✘
✘
✘
✘
✘
✘
✔
✔
✘
✔
✔
✔
✔
✘
✔
✔
✘
✔
✔
✔
✔
Sections 1A, 1B
Sections
2A, 2C, 2D, 2F
Sections
1A, 2C, 2D, 2F
–
Sections
1B, 2D, 2F
Sections
2A, 2B, 2C, 2D, 2F
Sections
2A, 2B, 2C, 2D, 2F
Section 2E
1 Superannuation contributions are made on behalf of non-executive Directors to satisfy obligations under the Superannuation Guarantee Charge legislation.
This Remuneration Report has been adopted in accordance with a resolution of the Directors of Santos Limited.
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1 NON-EXECUTIVE DIRECTORS’ FEES
A. Board Policy on fees
Shareholder approved aggregate
Non-executive Directors’ fees, including
committee fees, are set by the Board
within the maximum aggregate amount
of $1,500,000 per annum approved by
shareholders at the Annual General Meeting
held on 7 May 2004.
TABLE 2: DIRECTORS’ FEES
Fee
The fees paid to non-executive Directors
within this aggregate amount are set at
levels which reflect both the responsibilities
of, and the time commitments required from,
each director to discharge their duties. Non-
executive Directors remuneration is not linked
to the performance of the Company in
order to maintain their independence and
impartiality. The fees paid to non-executive
Directors in 2005 are set out below.
Board
Board Committee
Chairman
330,0001
Member
110,000
Chairman
Member
9,000-18,0002
6,000-12,0003
1 The Chairman did not receive any additional fees for serving on Board Committees.
2 Finance Committee ($9,000); Remuneration Committee ($12,000); Safety, Health and Environment Committee ($15,000); Audit Committee ($18,000).
3 Finance Committee ($6,000); Remuneration Committee ($8,000); Safety, Health and Environment Committee ($10,000); Audit Committee ($12,000).
Superannuation and fees for special
services
Superannuation contributions are made on
behalf of the non-executive Directors in
accordance with the Company’s statutory
superannuation obligations.
In accordance with the constitution, non-
executive Directors are also permitted to be
paid additional fees for special duties or
exertions. Such fees may or may not be
included in the aggregate remuneration cap
approved by shareholders, as determined by
the Directors. No such fees were paid during
the year.
Directors are also entitled to be reimbursed
for all business related expenses, including
travel on company business, as may be
incurred in the discharge of their duties.
Retirement benefits
Directors appointed after 1 January 2004 are
not entitled to receive a benefit on retirement
(other than statutory entitlements).
Non-executive Directors appointed prior to
1 January 2004 are contractually entitled to
receive a retirement benefit but the amount
of the benefit was “frozen” as at 30 June
2004. The benefit is 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.
Remuneration Committee considerations
In setting fee levels, the Remuneration
Committee, which makes recommendations
to the Board, takes into account:
• independent professional advice;
• fees paid to non-executive Directors
by comparable companies;
• the general time commitment required
from non-executive Directors and the
risks associated with discharging the
duties attaching to the role of director;
• the level of personal responsibility
undertaken by a Director; and
• the general commercial expertise,
experiences and qualifications of the
Directors.
The Remuneration Committee and the Board
will continue to review the approach to non-
executive Director fees to ensure it remains
competitive and in line with general industry
practice and best practice principles of
corporate governance.
Details of the membership of the Remuneration
Committee and its responsibilities are set out
in the Corporate Governance Statement on
page 37 of the Annual Report.
Annual Report 2005
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B. Remuneration
Details of non-executive Directors’ remuneration for the years ended 31 December 2005 and 31 December 2004 are set out in the following tables.
All values are in A$ unless otherwise stated.
TABLE 3(a): DETAILS OF NON-EXECUTIVE FEES AND ENTITLEMENTS FOR 2005
Directors’
fees
Committee Superannuation
contributions1
fees
Other
S Gerlach (Chairman)
P C Barnett
K A Dean2
R M Harding
G W McGregor3
M A O’Leary
C J Recny2
J Sloan
Total
330,000
110,000
93,650
110,000
82,500
110,000
93,650
110,000
1,039,800
-
24,000
8,153
12,000
18,000
10,000
-
24,000
96,153
11,862
11,862
10,166
10,980
8,807
10,800
8,428
11,822
84,727
TABLE 3(b): DETAILS OF NON-EXECUTIVE FEES AND ENTITLEMENTS FOR 2004
S Gerlach (Chairman)
P C Barnett
F J Conroy5
R M Harding
G W McGregor
M A O’Leary
J Sloan
Total
Directors’
fees
285,000
95,000
90,041
91,667
95,000
95,000
95,000
Post-employment
Committee Superannuation
contribution1
fees
Retirement4
-
11,293
15,500
14,689
1,000
20,500
9,000
19,750
9,945
9,425
5,040
10,157
9,360
10,090
-
15,569
15,927
-
15,716
16,842
15,403
Total
341,862
145,862
111,969
132,980
109,307
130,800
102,078
145,822
1,220,680
Total
327,460
136,014
130,082
97,707
141,373
130,202
140,243
-
-
-
-
-
-
-
-
-
Other6
31,167
-
-
-
-
-
-
846,708
80,439
65,310
79,457
31,167
1,103,081
1 Superannuation contributions made on behalf of non-executive Directors to satisfy the Company’s obligations under applicable Superannuation Guarantee Charge legislation.
2 Mr K A Dean and Mr C J Recny joined the Board on 23 February 2005.
3 Mr G W McGregor retired from the Board on 30 September 2005.
4 These amounts represent the balance of the provision for retirement benefits that were “frozen” as at 30 June 2004 for non-executive Directors appointed prior to 1 January 2004. The retirement
benefits for all such Directors were fully provided for at the end of the period.
5 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 had been provided for in previous reporting periods.
6 Payment related to a leasing arrangement for a motor vehicle, which arrangement was terminated on 30 June 2004.
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2 CEO AND SENIOR EXECUTIVE
REMUNERATION
A. Board policy on remuneration
The Remuneration Committee of the Board
has recommended, and the Board has
adopted, a policy that remuneration will:
(a) reflect the responsibilities of executives
and other employees;
(b) be reasonable and competitive in the
resources and energy industry within
which the Company operates in order to
attract, motivate and retain high
performing employees;
(c) ensure a significant portion of
remuneration is at risk against individual
and company performance and
shareholder value creation;
(d) ensure that superior performance is
rewarded, thereby reinforcing the short,
medium and long term objectives of the
Company as set out in the strategic
business plans endorsed by the Board;
and
(e) encourage executives to manage from
the perspective of shareholders.
TABLE 4: OVERVIEW OF REMUNERATION PACKAGE
% of total remuneration (annualised)
CEO1
Executive VP Operations
Chief Financial Officer
Other specified executives
Other senior executives
In order to link a substantial proportion
of the Chief Executive Officer and Managing
Director (CEO) (Mr John Ellice-Flint) and
senior executive remuneration to Company
performance, the remuneration packages
include a fixed component and both short
term and long term incentive components.
Accordingly, the Board aims to achieve a
balance between fixed and at-risk or
performance related components of
remuneration at each job and seniority level.
The relative proportion of the CEO’s and
senior executive’s total remuneration
packages that is performance-based is set
out in the table below:
Fixed
remuneration
Performance-based
remuneration
TFR
44%
52%
52%
57%
66%
STI
56%
27%
27%
20%
14%
LTI
0%2
21%
21%
23%
20%
1
On appointment the CEO was granted 1,000,000 Restricted Shares subject to completion of a service condition.
2 The CEO’s total remuneration package for 2005 also incorporated a long term incentive element in the form of 1,000,000 options. This was the third tranche of a grant of options made at the time
of his appointment in December 2000. These options were subject to a TSR performance hurdle and had an exercise price of $5.83. The options vested during the year and were exercised in
September 2005. In accordance with the AIFRS Accounting Standards, as these options were granted prior to 7 November 2002, no accounting value has been attributed to these options in the
financial statements or for the purposes of remuneration disclosure in 2005.
Annual Report 2005
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B. Company performance and
Remuneration
Pay and performance relationship
Santos’ executive remuneration is directly
linked to the performance of the company
across a range of measures including the
creation of shareholder wealth. Santos’
executive remuneration policy emphasises
pay for performance, with a remuneration
mix that is on average more performance
leveraged than many competitors. That is,
a higher proportion of Santos’ executive pay
is at risk when compared to that of executives
in many competitor companies.
The at-risk element of pay is comprised of
two components.
• Short term incentives provide for a bonus
payment if performance based on a mix
of company and individual criteria meet
or exceed targets set at the beginning
of each financial year. Company
performance influences 70% of specified
executives’ short term incentives, and
individual performance influences the
remaining 30%.
• Long term incentives provide for
• Australian Worldwide Exploration Limited
the vesting of equity based rewards if
performance over a three-year period
delivers above average shareholder
returns relative to other companies. Long
term performance is assessed using
relative Total Shareholder Return (TSR).
TSR incorporates share price growth,
dividends and other capital adjustments
and is widely considered as one of the
best indicators of shareholder wealth.
Vesting of 50% of the 2005 LTI award is
based on relative TSR against ASX 100
companies, and vesting of the other 50%
is based on relative TSR against a group
of Australian exploration and production
companies in the ASX Energy Index with a
market capitalisation above $400 million and
international exploration and production
companies, which for 2005 comprised:
• Anadarko Petroleum Corporation
• Apache Corporation
• BG Group PLC
• Burlington Resources Inc
• Canadian Natural Resources Limited
• Chesapeake Energy Corporation
• Devon Energy Corporation
• EOG Resources Inc
• Hardman Resources Limited
• Murphy Oil Corporation
• Newfield Exploration Co
• Nexan Inc
• Noble Energy Inc
• Oil Search Limited
• Talisman Energy Inc
• Unocal Corporation
• Woodside Petroleum Limited
• XTO Energy Inc.
Annual company performance
The table below shows results against various measures of company performance from 2001 to 2005. These measures are examples of measures
used to determine the overall level of bonuses paid.
TABLE 5: COMPANY PERFORMANCE MEASURES 2001–2005
Year
2001
2002
Safety (total recordable case frequency rate)
Environment (cubic metres of uncontained spills)
Production (mmboe)
Netback (A$/boe)
Reserve replacement cost – 1P (A$/boe)
Reserve replacement rate – 1P (%)
ROACE (%)
EBITDAX (A$/share)
8.8
399
55.7
19.30
Not measured
Not measured
13.9
1.81
9.0
393
57.3
18.74
8.73
119
8.9
1.86
2003
7.2
1,943
54.2
19.03
8.57
148
8.8
1.81
2004
2005
6.4
83
47.1
21.27
16.79
121
11.7
1.97
4.9
18.5
56.0
31.99
12.91
218
19.8
3.13
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Long Term Company Performance
As an indication of the Company’s long
term performance, the graph to the right
illustrates the Company’s TSR from 2001 to
2005, together with the average TSR of the
ASX 100 and average TSR of the group of
Australian and international companies listed
on page 44.
The second graph shows the Company’s share
price between January 2001 and December
2005.
Dividends paid by the Company from 2001 to
2005 are as follows:
(Dividends per ordinary share)
2001
2002
2003
2004
2005
$0.30
$0.30
$0.30
$0.30
$0.36
Capital Management
As part of the Company’s ongoing capital
management strategy, $250 million of
ordinary shares were bought back on
4 December 2001. This buy-back was
funded through a $350 million offer
of Reset Convertible Preference Shares,
which provided a more flexible and
efficient form of funding.
The Company bought back 40,518,558 fully
paid ordinary shares, representing 6.54%
of fully paid ordinary shares on issue at that
date, at a price of $6.17 per share comprising
an amount of $106,563,807 debited against
the Company’s capital account and an amount
of $143,435,695 debited against the
retained earnings account.
As a further capital management initiative,
the Company decided to replace the Reset
Convertible Preference Shares with an
alternative form of capital. The Company
undertook a $600 million offering of
Redeemable Convertible Preference Shares (or
FUELS) and, out of the proceeds, on 30
September 2004 redeemed and bought back
the entire 3,500,000 Reset Convertible
TSR OF SANTOS, ASX 100 AND AUSTRALIAN AND INTERNATIONAL COMPANIES FROM 2001 TO 2005
%
200
150
100
50
0
-50
January 2001
December 2005
Santos Limited
E&P Comparator Group
ASX 100
SANTOS SHARE PRICE 2001–2005
$
15
10
5
0
January 2001
December 2005
Preference Shares on issue at that date.
2,865,821 were redeemed at face value and
reinvested in FUELS, 489,774 shares were
bought back for $105 each and cancelled, and
144,405 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.
C. ELEMENTS OF REMUNERATION – CEO
2005
The structure of the CEO’s 2005 remuneration
package was agreed at the time of entering
into his executive Service Agreement in
December 2000 in order to recruit him and to,
in part, compensate him for some of the
benefits he gave up in leaving his previous
employment. His remuneration during 2005
comprised the following components:
1. Fixed remuneration (subject to review);
2. At-risk remuneration, comprising:
• an annual bonus (as determined
by the Board);
• an entitlement to 1,000,000 five-year
Restricted Shares which vested on
12 December 2005; and
• 1,000,000 options which achieved
the required performance hurdles
and vested during the year.
Mr Ellice-Flint’s fixed remuneration for
the year ended 31 December 2005 was
$1,300,000. In accordance with the terms
of this Service Agreement Mr Ellice-Flint
was able to take this “base salary package”
in a combination of salary and benefits
agreed with the Chairman.
Annual Report 2005
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Mr Ellice-Flint’s annual bonus ranges
from 0% to a potential 150% of his fixed
remuneration, depending upon performance
measured in terms of growth of profitability,
exploitable reserves, share price increase
and other objectives set by the Board. His
performance against these targets was
determined subsequent to the balance date.
The value of the cash bonus granted to Mr
Ellice-Flint during 2005 was $1,657,500 or
85% of his maximum potential annual bonus.
The remainder of Mr Ellice-Flint’s maximum
potential annual bonus did not vest.
On 13 December 2000, Mr Ellice-Flint was
granted 1,000,000 Restricted Shares. These
shares were granted to him at no cost at the
time of his appointment as CEO as part of the
total package required to attract Mr Ellice-
Flint from the senior position he had held
previously. No performance conditions were
attached to the shares and legal title passed
to Mr Ellice-Flint upon his completion of five
years service with Santos on 12 December
2005.
In addition, the Company has been
contributing an actuarially determined
amount into the Company’s superannuation
fund to provide for Mr Ellice-Flint’s
superannuation benefits.
Mr Ellice-Flint was also granted options, each
to acquire a fully paid ordinary share in the
Company. The exercise price of the options
was set at the time of his appointment in
2000 at $5.83, and vesting of the third and
final tranche of 1,000,000 options was
effected upon the satisfaction of performance
conditions, which were tested during 2005.
These options were provided essentially on
the same terms as those issued to other
senior executives under the Santos Executive
Share Option Plan at the time of grant. The
value of these options, together with the
terms on which they were granted, are
outlined further below.
46
Annual Report 2005
2006
The structure of Mr Ellice-Flint’s remuneration
arrangements has been reviewed following
the completion of his first five years in office.
The revised arrangements are intended to
cover the period from January 2006 until at
least August 2009. Details of the proposed
arrangements were previously disclosed to
the ASX.
Mr Ellice-Flint’s fixed annual remuneration
will increase to $1,500,000 to be reviewed
annually thereafter. Mr Ellice-Flint’s short
term incentive enables a maximum of 150%
of fixed annual remuneration to be earned
for exceeding quantitative and qualitative
targets. In addition, 50% of the actual annual
bonus awarded in each year is required to be
invested in shares in the Company, which are
to be held, in general, for a further period
of two years. Subject to receiving shareholder
approval at the 2006 AGM, Mr Ellice-Flint will
be granted 2,500,000 options under the Santos
Executive Share Option Plan. The options will
be subject to the following performance
testing dates and vesting periods:
• 500,000 options which will vest no earlier
than 26 August 2007 (noting these
options were intended to be approved at
the 2005 AGM but were held over as a
result of the overall remuneration review
undertaken by the Board);
• 1,000,000 options which will vest no
earlier than 26 August 2008; and
• 1,000,000 options which will vest no
earlier than 26 August 2009.
The exercise price of the options is $11.36,
which is the weighted average of the share
price over the 10-day period up to and
including 9 March 2006.
The performance conditions may be retested
during the 12-month period commencing on
the earliest testing date for a tranche, as set
out above. If the performance conditions
are not satisfied at the end of that 12-month
retesting period, the options in that tranche
will lapse.
The superannuation arrangements put into
place when Mr Ellice-Flint was appointed
have been varied. Those arrangements are
expensive and tax inefficient for both the
Company and Mr Ellice-Flint and will be
increasingly so over time. The Company
required superannuation contribution in 2005
was $637,000 and that cost will escalate since
Mr Ellice-Flint has attained the age of 55
years. Mr Ellice-Flint’s current entitlement to
a benefit equal to 2.76 times his base salary
on retirement will be frozen. In place of the
future benefits he will forego, the Company
will seek shareholder approval to provide Mr
Ellice-Flint with an annual loan of $500,000
to acquire Santos shares in each of 2006,
2007 and 2008 which are to be held during
the course of his continued employment or
such other period as the Board determines.
Each loan of $500,000 is to be interest free
and forgiven after three years or such other
period as the Directors determine and is
to be conditional upon Mr Ellice-Flint’s
continued service and the discharge of his
responsibilities as required under his Service
Agreement, entered into with the Company
on 13 December 2000.
Fringe benefits tax will not be payable on the
interest free loan, but will be payable at the
time of its forgiveness. The total cost to the
Company for each loan will be approximately
$1 million.
D. ELEMENTS OF REMUNERATION –
OTHER SPECIFIED EXECUTIVES
As indicated in Section 2B, remuneration
for the Company’s other senior executives
is made up of the following components:
1. Total Fixed Remuneration (comprising
salary, superannuation and benefits);
and
2. At-risk remuneration, comprising:
• Short Term Incentives (STI) – based
on annual individual and Company
performance; and
SAN171 WWW Colour 28/3/06 2:59 PM Page 47
• Long Term Incentives (LTI) – based
on the Company’s performance relative
to other companies over a three-year
period.
Total Fixed Remuneration (TFR)
The terms of employment for all executive
management contain a fixed remuneration
component. The TFR component is expressed
as a dollar amount that the executive may
take in a form agreed with the Company. This
amount of remuneration is not dependent
upon performance, but is quantified by
reference to the median remuneration paid
to executives in comparable roles in the
Australian market, as well as the individual’s
qualifications and experience.
Short Term Incentive (STI)
The STI program links specific performance
targets with the opportunity for eligible
executives to earn cash incentives based on
a percentage of fixed remuneration.
Summary of the STI
What is the STI?
The STI is an annual cash bonus paid to reward performance based on a mix of both Company
and individual performance targets.
Who participates in the STI?
The CEO, senior executives and all non-award employees.
Why does the Board consider the STI an
appropriate incentive?
The STI is designed to put a proportion of each executive’s annual remuneration at risk against
meeting targets linked to the Company’s annual business objectives, thereby driving both
individual and Company performance.
What are the maximum amounts that can
be earned as a STI?
The maximum amounts that can be earned as a STI are 150% of fixed remuneration for the
CEO, and 50% or 75% of TFR for specified executives.
What proportions of an executive’s STI
is based on Company performance and
individual performance?
What are the performance conditions?
Who assesses performance?
How is Company performance assessed?
For the specified executives, 70% of the STI is based on Company performance, and the
remaining 30% is based on individual performance. For other executives, 50% of the STI is
based on Company performance, and the other 50% is based on individual performance.
Company performance is assessed on a range of metrics covering reserves growth, reserve
replacement cost, production, margin, new growth options, shareholder value creation, people,
environment, health, safety and continuous improvement. Individual performance is assessed
against targets set within each executive’s area of responsibility.
The Remuneration Committee assesses performance against the conditions in respect of the
CEO and makes a recommendation to the Board. The CEO assesses performance against the
conditions in respect of senior executives following the close of the financial year and having
regard to the relevant financial year’s results and makes a recommendation to the Remuneration
Committee, which approves the award of short term incentives to the senior executives.
Each metric is assessed against target and assigned a score on a 5 point scale. The average of
the scores of each metric is used to quantify a bonus pool expressed as a percentage of the sum
of maximum bonuses of all eligible employees. The bonus pool may be adjusted after taking into
consideration other factors not reflected in the metrics but deemed relevant to Company
performance.
Were the performance conditions met
during 2005?
The metrics indicated the Company had outperformed against target, resulting in a bonus pool
equivalent to 85% of the sum of maximum bonuses of eligible employees.
What percentage of maximum STI was paid
during the year for the specified executives
of the Company and the Group?
In respect of each of the specified executives (other than Mr Moore who had no entitlement
upon ceasing employment), the STI performance conditions were satisfied to 75-100% of the
maximum potential annual bonus. The actual amounts paid to those executives are set out in
Table 10. The remainder of the maximum potential annual bonus did not vest.
Annual Report 2005
47
SAN171 WWW Colour 28/3/06 2:59 PM Page 48
Long Term Incentive (LTI)
The Company’s LTI arrangements are designed to link executive reward with the key performance drivers which underpin sustainable growth in
shareholder value – which comprises both share price and returns to shareholders.
Summary of the LTI
Who is entitled to participate?
What form does the LTI take?
What is a SAR?
What is an option?
How is the amount of the grant determined?
Senior executives who are able to influence the generation of shareholder wealth and thus have
a direct impact on the Company’s performance against the relevant performance hurdles.
Share Acquisition Rights (SARs) or options, at the executive’s election, pursuant to the Santos
Employee Share Purchase Plan (SESPP) and the Santos Executive Share Option Plan (SESOP)
respectively.
A conditional entitlement to a fully paid ordinary share, subject to the satisfaction of
performance conditions, on terms and conditions determined by the Board.
An entitlement to acquire a fully paid ordinary share in the company at a predetermined price,
subject to the satisfaction of performance conditions, on terms and conditions determined by
the Board.
The amount of the grant is quantified by reference to the median size of grant given to
executives in comparable roles in the Australian market. Each of the three grants made in
2005 were 40% of TFR for specified executives, and 20% to 30% of TFR for other executives
(three separate grants were made at the same time in 2005, two of which represented grants
that would ordinarily have taken place in 2003 and 2004). These make-up grants were made
following the review of the senior management long term incentive program. This is consistent
with the Board’s intention that LTI awards should be made in general on an annual basis and be
judged against a three-year performance measurement period. The relative proportions of LTI
as a part of Total Remuneration are given in Table 4 on page 43 for each level of executive.
What is the performance condition?
Relative TSR, which incorporates share price growth, dividends and other capital adjustments.
What is the performance period?
A rolling period of 3 financial years.
How is TSR tested?
At the end of the performance period, over the performance period, against two
comparator groups.
What are the comparator groups for the
performance condition?
50% of each grant - the ASX 100 at the beginning of the relevant performance period.
50% of each grant - all Exploration and Production companies in the ASX Energy Index with
market capitalisation above $400 million, plus international Exploration and Production
companies.
What is the vesting schedule?
Refer to Table 7 on page 49.
Why is TSR appropriate?
The Board believes this is a fair measure of returns to shareholders, such that a proportion of
each executive’s remuneration is linked to growth in shareholder value and therefore executives
receive a benefit where there is a corresponding direct benefit to shareholders.
Why does the Board think that the vesting
schedule is appropriate?
The Board believes that for the LTI to deliver a reward to executives, the Company’s TSR must be
better than that of at least half the companies in one or both comparator groups.
48
Annual Report 2005
SAN171 WWW Colour 28/3/06 2:59 PM Page 49
What does an executive pay on grant and
exercise of the SARs or options?
What happens on cessation of employment?
Can the SARs or options be forfeited?
What happens in the event of a capital
reconstruction or bonus issue etc?
No amount is payable on grant or vesting of the SARs.
Options are granted at no cost to the executive, however, an exercise price is payable
on exercise of the options. The exercise price is the volume weighted average price of the
Company’s shares over the five business days up to and including the award date. This
difference is reflected in the different numbers of SARs and options granted.
SARs which have not already vested and options which are not exercisable will, in general,
lapse and be forfeited. If cessation is due to death, redundancy or where the Board otherwise
approves, a proportionate number of SARs may vest or options may be exercised, at the Board’s
discretion, or otherwise based on pro rata performance.
Yes. If the performance conditions are not satisfied unvested SARs or options will lapse. If an
executive acts fraudulently, dishonestly or is, in the Board’s opinion, in breach of his or her
obligations to the Company, unvested SARs or options will lapse.
The rules of the SESPP and SESOP provide for the adjustment of the number of shares to which
the SARs or options relate to take account of capital reconstructions and bonus issues. In the
event of a change in control, the Board may determine whether, and the extent to which, SARs
and options may vest.
Are there trading restrictions on the
underlying shares?
Shares allocated on vesting of a SAR are subject to a restriction on dealing for up to a maximum
of 10 years after the original date of grant.
TABLE 7: VESTING SCHEDULE FOR SARS AND OPTIONS
Performance – Santos TSR ranking against TSR ranking
of each company in the comparator group
TSR < 50th percentile of comparator group
TSR = 50th percentile of comparator group
TSR between 51st & 74th percentile of comparator group
TSR ≥ 75th percentile of comparator group
% of SARs that vest or options
which become exercisable
0%
50%
Progressive vesting from
52% to 98% pro-rata vesting
(2% increase for each percentile improvement)
100%
Annual Report 2005
49
SAN171 WWW Colour 28/3/06 2:59 PM Page 50
SARs or options granted as remuneration
The following table sets out details of the movement in SARs and options held by the CEO and specified executives during the reporting period.
TABLE 8: MOVEMENT IN SARS AND OPTIONS HELD BY EXECUTIVES
CEO and Specified Executives
J C Ellice-Flint,
CEO1
J E Gouadain,
Vice President Geoscience and New Ventures
P C Wasow,
Chief Financial Officer
Balance at
1 January 2005
Granted2
Exercised
3, 4, 5, 6
3,000,000
-
(3,000,000)
200,000
60,000
-
150,000
70,800
(150,000)
R J Wilkinson,
Vice President Gas Marketing and Commercialisation
-
53,100
-
B J Wood,
Vice President Strategic Projects
J T Young,
Executive Vice President Operations
M E J Eames,
Vice President Corporate and People
Former executives
95,085
165,900
(50,000)
250,000
78,000
(250,000)
-
69,600
-
Vested and
Balance at exercisable at
Lapsed/
Forfeited 31 December 31 December
2005
2005
7
-
-
-
-
-
-
-
-
-
260,000
220,000
70,800
23,600
53,100
17,700
210,985
45,085
78,000
26,000
69,600
-
-
P D Moore,
Vice President Development Projects and Technical Services 125,000
53,100
(125,000)
(53,100)
-
Total
3,820,085
550,500 (3,575,000)
(53,100)
742,485
332,385
1 3,000,000 options were granted to John Ellice-Flint on his appointment.
The performance conditions applicable to the options were based on achieving a 10% TSR growth over the performance period applicable to each tranche of options. Tranches 1 and 2 of the options
satisfied the performance conditions in previous financial years and were exercised on 2 March 2005. During the current reporting period, the performance condition applying to Tranche 3 was
satisfied and the options were exercised on 2 September 2005. The exercise price paid by the CEO to the Company was $5.83 for each option exercised.
2 The aggregate value of SARs and options granted during the year (as at the date of their grant) is $1,595,190.
3 The value of an option on the date of exercise is the market price of a share in the Company on that date. Accordingly, the aggregate value of options exercised during the financial year was
$35,306,000.
50
Annual Report 2005
SAN171 WWW Colour 28/3/06 2:59 PM Page 51
4
TABLE 9: OPTIONS EXERCISED DURING 2005
CEO & Specified Executives
J C Ellice-Flint, CEO
Date Exercised
Exercised
2 March 2005
2 September 2005
2,000,000
1,000,000
J E Gouadain, Vice President Geoscience and New Ventures
-
-
P C Wasow, Chief Financial Officer
30 August 2005
150,000
R J Wilkinson, Vice President Gas Marketing and Commercialisation
-
-
B J Wood, Vice President Strategic Projects
J T Young, Executive Vice President Operations
M E J Eames, Vice President Corporate and People
Former executive
P D Moore, Vice President Development Projects and Technical Services
5 No SARs were exercised during 2005.
6 No SARs or options were exercised or forfeited during 2004.
1 September 2005
50,000
5 September 2005
250,000
-
-
19 August 2005
19 August 2005
25,000
100,000
Market Price
at date
of exercise
Exercise
Price $
5.83
5.83
-
6.20
-
6.69
6.69
-
6.52
6.20
8.66
11.52
-
11.52
-
11.51
11.15
-
11.00
11.00
7 During the year, the right to 53,100 SARs held by Mr P D Moore were forfeited on his resignation 21 November 2005. No options were forfeited during the reporting period. The value of a SAR or
option on the day it lapses or is forfeited is nil.
E. SERVICE AGREEMENTS
The remuneration and other terms of employment for the CEO and the specified senior executives are formalised in Service Agreements.
Under the terms of the Service Agreements, the CEO and other members of the senior executive team continue to be employed until their
employment is terminated.
Notice periods and payments on termination
The Service Agreements provide for termination payments to be made in certain circumstances.
In particular, the CEO’s contract (entered into in 2000) provided that the Company may terminate his employment on giving 24 months’ notice,
and that the CEO must give the Company three months notice of his intention to resign.
In lieu of part or all of this notice period, the Company may pay the CEO an amount equal to a proportion or multiple of his annual base salary and
the current year’s potential bonus at the time at which notice is given.
Pursuant to the terms of the new contract entered into with the CEO, the Company’s notice period is amended so that, as from 1 January 2008,
it is reduced to 12 months.
The Company may terminate the employment of other executives on giving three months notice, except with respect to Mr P C Wasow who
is entitled to six months notice. The Company may make a payment in lieu of notice. In general, the CEO and other senior executives must
give the Company at least three months notice of resignation. In certain circumstances, such as a substantial diminution of responsibility,
the Company may be deemed to have terminated the employment of the CEO and the specified senior executives and will be liable to make
compensation payments.
The potential liability of the Company in relation to the termination of employment of other Group executives is dependent upon the circumstances
of the termination, together with the Company’s policies and arrangements. As the potential for liability is dependent upon the circumstances in
which an executive ceases employment, it is not possible to quantify the potential future impact of these agreements on the Company’s financial
position. However, the Company’s policy in relation to these potential obligations is to make provision on an annual basis when a present
obligation arises.
In addition, under his Service Agreement, the CEO is entitled to the accelerated payment of certain short term and long term incentives on the
occurrence of certain specified events, including a change of control.
Annual Report 2005
51
SAN171 WWW Colour 28/3/06 2:59 PM Page 52
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Annual Report 2005
53
SAN171 WWW Colour 28/3/06 2:59 PM Page 54
MAJOR ANNOUNCEMENTS
MADE BY SANTOS DURING 2005
7 Jan
Recommencement of Dividend Reinvestment Plan
15 Sep
First production from John Brookes gas development
19 Jan
Santos goes direct with its own marketing of Minerva gas
21 Sep
Interest in Timor Sea exploration permit divested
20 Jan
Jeruk 2/ST3 well results
26 Sep
Investor update: UK/US investor presentation
24 Jan
2004 Fourth Quarter Activities Report: record $1.5 billion
revenue
24 Jan
Open briefing with Corporate File on Jeruk oil discovery
29 Sep
Caldita gas field discovered offshore Northern Territory
26 Oct
2005 Third Quarter Activities Report: record quarterly
revenue
27 Jan
2005 exploration program announced
28 Oct
Acquisition of Tipperary Corporation approved
3 Feb
Hiu Aman discovery in Indonesia’s Kutei Basin
2 Nov
Acreage awarded adjoining Caldita gas discovery
15 Feb
Santos reserves replacement at 121% in 2004
17 Feb
Santos acquires OMV’s Gippsland and Cooper Basin assets
23 Feb
Two new Directors appointed to Santos Board
23 Feb
2004 Full Year Results: 16% profit improvement
30 Mar
First production from Mutineer-Exeter oil development
8 Apr
Casino gas project awarded a production licence
14 Apr
Go-ahead for Santos’ first Indonesian development
28 Nov
Santos and Indigenous community join forces to open
Undurana Camel Farm
30 Nov
Santos Investor Seminar presentations and audio
12 Dec
Open briefing with Corporate File on Cooper oil program
and Fairview
19 Dec
Drilling report for Firebird 1
22 Dec
Santos in new tolling and purchase contract for Nexus’
Longtom gas field
25 Apr
Gas contract awarded for new Qld Braemar power station
22 Dec Moomba insurance claim settled
27 Apr
2005 First Quarter Activities Report: strong opening quarter
for Santos
20 May
2005 Annual General Meeting: Santos growth outlook
stronger than ever
31 May
Indonesian gas sales agreement signed for Maleo
7 Jun
Adoption of Australian equivalents to International Financial
Reporting Standards
15 Jun
Kipper partners apply for a production licence
27 Jun
Additional Egyptian acreage awarded
1 Jul
Announcement of acquisition of Tipperary Corporation
6 Jul
Sorell Basin exploration position strengthened
19 Jul
Golden Beach interest divested
27 Jul
2005 Second Quarter Activities Report: record $1.02 billion
first half revenue
2 Aug
Henry 1, new gas discovery offshore Victoria
5 Aug
New exploration position in Kyrgyzstan, central Asia
9 Aug
Bayu-Undan LNG sales contract executed
17 Aug
Santos to supply gas to WA Kwinana power station
18 Aug Additional Gippsland Basin interests acquired
25 Aug
2005 Interim Results: first half profit of $290 million
Dates shown are when announcements were made to the exchanges where Santos’ shares are listed: the Australian Stock Exchange (ASX) and
NASDAQ. As part of Santos’ continuous disclosure, the Company informs the market of information that may affect the Company’s share price.
All material announcements disclosed to the ASX are published on Santos’ website, www.santos.com.
54
Annual Report 2005
SAN171 WWW Colour 29/3/06 3:21 PM Page 55
BOARD OF DIRECTORS
STEPHEN GERLACH
LLB
KENNETH ALFRED DEAN
BCom (Hons), FCPA, MAICD
Age 60. Director since 5 September 1989
and Chairman since 4 May 2001. Chairman
of Santos Finance Ltd and of the Safety,
Health and Environment Committee, Finance
Committee and Nomination Committee and
member of the Remuneration Committee of
the Board. Chairman of Futuris Corporation
Ltd and Challenger Listed Investments Ltd.
Director of Elders Rural Bank. Former
Managing Partner of the Adelaide legal firm,
Finlaysons. Former Chairman of Amdel Ltd
and Equitorial Mining Ltd. A Trustee of the
Australian Cancer Research Foundation,
Chairman of Foodbank SA and a Director
of Foodbank Australia.
Age 53. Independent non-executive Director
effective 23 February 2005. Director of Santos
Finance Ltd (appointed 30 September 2005),
Chairman of the Audit Committee
(appointment effective 30 September 2005)
and member of the Finance Committee
(appointed 30 September 2005). Chief
Financial Officer of Alumina Ltd, non-
executive Director of Alcoa of Australia Ltd,
Alcoa World Alumina and related companies.
Fellow of the Australian Society of Certified
Practising Accountants and member of the
Australian Institute of Company Directors.
Former Chief Executive Officer of Shell
Financial Services, former non-executive
Director of Woodside Petroleum Ltd and
member of the La Trobe University Council.
JOHN CHARLES ELLICE-FLINT
BSc (Hons)
Age 55. Managing Director since
19 December 2000, member of the Safety,
Health and Environment Committee of the
Board, Director of Santos Finance Ltd and
also Chairman of other Santos Ltd subsidiary
companies. Thirty-four years’ experience in
the international oil and gas industry
including twenty-eight 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. Member of APPEA
Council and Member of the Energy Governors
of the World Economic Forum.
RICHARD MICHAEL HARDING
MSc
Age 56. Director since 1 March 2004 and
member of the Audit Committee, Safety,
Health and Environment Committee and
Remuneration 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 Project Governance Board
– Land Systems Division (Army) and Director
of Arc Energy Ltd.
MICHAEL ANTHONY O’LEARY
DipMinE, BSc, FAusIMM, FAIM, FAICD
Age 70. Director since 15 October 1996
and member of the Safety, Health and
Environment Committee, Nomination
Committee and Finance 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.
CHRISTOPHER JOHN RECNY
BSc, MSc, MBA
Age 52. 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.
PROF. JUDITH SLOAN
BA (Hons), MA, MSc
Age 51. Director since 5 September 1994.
Chairperson of the Remuneration Committee
and member of the Audit Committee and
Nomination Committee of the Board.
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.
Annual Report 2005
55
SAN171 WWW Colour 29/3/06 3:21 PM Page 56
LEADERSHIP TEAM
TREVOR BROWN
Vice President Geoscience and New Ventures
BSc (Hons)
Trevor Brown leads a team of highly qualified
geoscientists to implement a challenging
exploration strategy, with responsibility for
all exploration, appraisal and new venture
activities in the Company. Trevor was most
recently Santos’ Manager Growth Projects,
having joined the Company in 2001 from US
independent oil company Unocal where he
was part of an active exploration group.
He has over 20 years of experience in the
oil and gas industry, including 11 years in
Indonesia managing onshore and offshore
exploration programs.
WILF LAMMERINK
Acting Vice President Development Projects
and Technical Services
BSc (Hons)
Wilf Lammerink is currently responsible for
the development portfolio of the Company,
including operated and non-operated
projects, subsurface engineering, drilling and
technical services. Wilf has been engaged in
the international oil and gas industry for
more than 25 years, initially as a petroleum
engineer with Shell International, then in a
variety of petroleum engineering, technical
management and business development roles
with Fletcher Challenge Energy in New
Zealand, Canada and Brunei. Wilf also has the
role of Manager Development Portfolio,
having joined Santos in 2001.
RICK WILKINSON
Vice President Gas Marketing and
Commercialisation
BSc (Hons), Adv Industrial Marketing,
Postgrad Pet Eng and Geology
Rick Wilkinson is responsible for gas
and liquids marketing, commercialising
discovered resources and developing new gas
business. Rick was formerly General Manager
Southern Australia. Before joining Santos in
1997, he was Group Manager Energy Retail for
the Victorian Gas and Fuel Corporation,
responsible for energy trading, customer
relations, marketing and sales. He has also
held various engineering, strategy and
management positions with Schlumberger,
McKinsey & Co and Pilkington Glass.
MARTYN EAMES
Vice President Corporate and People
BSc (Hons)
Martyn Eames is responsible for the leadership
of the corporate groups including shared
business services, human resources, corporate
affairs, environment, health, safety and
sustainability, government and Indigenous
affairs and media relations. Martyn joined
Santos in December 2004 and was formerly Vice
President Strategy and Business Planning with
BP Angola. His career spans more than 25 years
with BP, working various upstream roles in
Angola, Canada, Australia, Papua New Guinea,
Norway, the UK and the United States.
GARY CHRISTENSON
President Indonesia
BA Geology; post graduate studies geology;
S.E.P.
Gary Christenson is responsible for maturing
Santos’ emerging core area in Indonesia.
Gary joined Santos in March 2005 after
spending seven years with Unocal where
he was most recently General Manager for
Unocal Makassar Ltd and Senior Vice
President Deepwater Exploration and
Production in Jakarta, Indonesia. Gary has
more than 23 years of industry experience
including 15 years of international oil and
gas management experience in Asia and
Africa, and has also worked for Keltex
Energy, British Gas, and Tenneco Oil.
KATHY HOGENSON
President USA
BS Chem Eng
Kathy Hogenson joined Santos as president
of Santos USA Corp in May 2001 and is
responsible for all of the Company’s activities
in the United States. Before joining Santos,
Kathy worked for Unocal Corporation as vice
president of Exploration and Production
Technology and was responsible for global
technology, technical excellence practices,
quality assurance and global procurement.
She has held leadership positions with US and
foreign majors and independent operators,
including six years of assignments in South
East Asia and South America.
56
Annual Report 2005
SAN171 WWW Colour 29/3/06 3:21 PM Page 57
JON YOUNG
Executive Vice President Operations
BSc, BEng Chemical
PETER WASOW
Chief Financial Officer
BCom, GradDipMgmt, FCPA
Jon Young is responsible for all of Santos’
production operations, including delineation
and development of onshore Australian
operations, facilities engineering,
maintenance and environment, health and
safety. Jon joined Santos in February 2000 as
General Manager of the former South Australia
Business Unit, then from February 2002 was
General Manager of the Central Australia
Business Unit. Prior to joining Santos, Jon
had a varied and international 17-year career
with Mobil Corporation. His most recent role
with Mobil was Chief Executive Officer, Indo
Mobil Ltd, based in New Delhi, India.
Peter Wasow is responsible for corporate
development, corporate strategy and
planning, investor relations, accounting,
corporate finance, taxation and audit. Peter
joined Santos in May 2002 following a varied
and international 23-year career with BHP
Billiton. His roles included Vice President
Finance and Administration for BHP
Petroleum in Houston, Texas. His most recent
role was Vice President Finance, in the BHP
corporate office, Melbourne.
WESLEY GLANVILLE
Managing Counsel and Company Secretary
LLB, BA, GDLP, MAICD
Wesley Glanville is responsible for the Office
of General Counsel, comprising the Company’s
operational and corporate legal function,
Secretariat and Share Registry. Wesley joined
Santos from private practice in January 1997
and has previously been responsible for
managing the legal requirements of Santos’
offshore exploration, development and
production operations. Wesley is admitted to
practice in the Supreme Court of South Australia
and the High Court of Australia and has over
15 years’ experience advising Australian
resources companies as in-house counsel and
as an external advisor.
SANTOS CORPORATE STRUCTURE
VICE PRESIDENT
VICE PRESIDENT
VICE PRESIDENT
GEOSCIENCE
AND
NEW VENTURES
GAS MARKETING
AND
COMMERCIALISATION
DEVELOPMENT
PROJECTS AND
TECHNICAL
SERVICES
EXECUTIVE
VICE PRESIDENT
OPERATIONS
VICE PRESIDENT
STRATEGIC
PROJECTS*
CHIEF
FINANCIAL
OFFICER
MANAGING
COUNSEL
AND COMPANY
SECRETARY
VICE PRESIDENT
CORPORATE
AND PEOPLE
PRESIDENT
INDONESIA
PRESIDENT
USA
*Bruce Wood held this position during 2005 prior to his resignation in March 2006. A replacement has not yet been appointed.
Annual Report 2005
57
SAN171 WWW Colour 28/3/06 2:59 PM Page 58
SANTOS GROUP INTERESTS
As at 28 February 2006
Licence Area
% Interest
Licence Area
% Interest
Licence Area
% Interest
SOUTH AUSTRALIA
Surat Basin
Facilities
(PPL = Petroleum Production Licence;
PL = Pipeline Licence)
Cooper Basin* (Fixed Factor Area)
(PPLs 6-20, 21-61, 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 and 199)
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 & 197)
72.3
Derrilyn Unit* (PPL 206/208)
65.0
Reg Sprigg West 1 Unit*(PPL 194/211) 52.0
Downstream*(PL2)
66.6
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)
ATP 212P (Major) (PLs 30, 56 & 74)
15.0
Wungoona Processing Facilities*
ATP 336P (Roma) (PLs 3-13, 93
& PPL2)*
ATP 336P (Waldegrave) (PLs 10-12,
28, 69 & 89)*
ATP 470P (Redcap) (PL 71)
85.0
46.3
10.0
Moonie to Brisbane Pipeline*
Jackson Moonie Pipeline (PPL 6)*
Comet Ridge to Wallumbilla Pipeline
(PPL 118)*
ATP 471P (Bainbilla) (PL 119 & PPL 58) 16.7
VICTORIA
ATP 471P (Myall) (PL 192 & PPL 87)
51.0
Otway Basin (Onshore)
Boxleigh*
PL 1 (Moonie)*
PL 1 (2) (Cabawin Exclusion)*
PL 1 (2) (Cabawin Farm-out)*
PL 2 (A & B) (Kooroon)*
100.0
100.0
100.0
50.0
52.5
PEP 160
Otway Basin (Offshore)
VIC/P44 (Casino)*
VIC/P51*
VIC/P52*
PL 2 (Alton)*
100.0
VIC/RL7 (La Bella)
PL 2C (Alton Farm-out)*
PL 5 (Drillsearch)*
PL 5 (Mascotte)*
PL 11 (Snake Creek East)*
PL 12 (Trinidad)*
PL 17 (Bennett)*
55.5
63.5
21.3
42.5
25.0
92.5
VIC/L22 (Minerva)
Gippsland Basin
VIC/RL2 (Kipper)
VIC/RL3 (Sole)*
VIC/L21 (Patricia-Baleen)*
70.0
VIC/L24
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)
61.2
Innamincka (PLs 58, 80, 136, 137,
156 & 159)
Alkina
Aquitaine A (PLs 86, 131, 146,
177 & 208)
70.0
72.0
52.5
Aquitaine B (PLs 59-61, 81, 83, 85, 97,
106, 108, 111, 112, 132, 135, 139, 147,
151, 152, 155, 205 & 207)
55.0
Aquitaine C (PLs 138 & 154)
50/40/10 (PL 55)
47.8
60.0
SWQ Unit (PPLs 13, 16-18, 31, 34, 35,
36-40, 46-48, 62, 64-72, 78-82, 84, 86,
94-96, 98, 100, 101 & 105, 113 and in
South Australia PLs 5 & 9)
60.1
ATP 267P (Nockatunga)(PLs 33, 50 & 51) 59.1
ATP 299P (Tintaburra)(PLs 29, 38, 39, 52,
57, 95,169 & 170, PPLs 109, 110 & 112) 89.0
58
Annual Report 2005
PL 17 (Bennett Exclusion)*
100.0
VIC/P55*
PPL 119 (Downlands East Exclusion)
28.8
ATP 470P (Formosa Downs)
5.5
OFFSHORE SOUTH AUSTRALIA
ATP 526 (PLs 90-92, 99-100 & 232-236, PPLs
71.7
76 & 92) Fairview*
Duntroon Basin*
EPP 32
ATP 653P (Fairview)*
ATP 655P (Fairview)*
ATP 745P (Fairview)*
PL 17 (Leichardt Exclusion)*
PLs 21, 22, 27 & 64 (Balonne)
Bowen Basin
ATP 337P (Denison)* (PLs 41-45, 54,
67, 173, 183, 218, PPL10 & PPL11)
ATP 337P (Mahalo)*
PL176 (Scotia)*
ATP 553P (Denison)*
ATP 685P (Cockatoo Creek)
71.7
100.0
71.7
70.0
12.5
50.0
40.0
100.0
50.0
50.0
OFFSHORE TASMANIA
Sorell Basin*
T/32P
T/33P
T/35P
T/36P
T/40P
NORTHERN TERRITORY
Amadeus Basin
OL 3 (Palm Valley)
Ls 4 and 5 (Mereenie)*
RL2 (Dingo)*
Mereenie-Brewer Estate Pipeline*
50.0
100.0
82.8
100.0
30.0
50.0
55.0
33.3
10.0
10.0
7.1
100.0
100.0
50.0
100.0
100.0
50.0
80.0
50.0
50.0
100.0
48.0
65.0
65.7
65.0
SAN171 WWW Colour 28/3/06 2:59 PM Page 59
Licence Area
% Interest
Licence Area
% Interest
Licence Area
% Interest
OFFSHORE NORTHERN AUSTRALIA
Carnarvon Basin
EP 61
EP 62
EP 357
L1H (Barrow Island)
L10
L12 (Crest)
L13 (Crest)
TL/2 (Airlie)
TL/3 (Banta-Triller)
TL/7 (Thevenard)
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 (Maitland)
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
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
NT/P69
Timor Gap
JPDA 03-12
Bayu-Undan Gas Field
Elang
PAPUA NEW GUINEA
PDL 1 (Hides)
PDL 3*
PL 3
PPL 206*
PPL 228
PRL 4*
PRL 5*
PRL 9*
SE Gobe Unit
INDONESIA
East Java Basin
Brantas
Madura Offshore (Maleo)*
Nth Bali I*
Sampang (Oyong)*
Kutei Basin
Donggala*
Papalang
Popodi
28.6
28.6
35.7
28.6
28.6
35.7
35.7
15.0
28.6
35.7
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
100.0
West Natuna Basin
95.0
95.0
Kakap
West Papua Basin
100.0
Warim
100.0
EGYPT
Ras Abu Darag
33.0
South East July
100.0
North Zeit Bay
North Qarun
50.0
20.0
50.0
25.0
10.3
10.3
10.3
40.0
40.0
40.0
19.3
10.6
21.4
31.0
15.9
3.6
48.0
40.0
35.3
35.3
42.6
9.4
18.0
67.5
30.0
40.5
50.0
20.0
20.0
9.0
20.0
UNITED STATES OF AMERICA AVG WORKING INTEREST
East Texas
Black Horse*
Jefferson Co
Knight
South Texas
Bar Harbor
BP Green*
Coquat
Cougar*
Duncan Slough*
E. Edinburgh
Elsa
Hall Ranch*
Hordes Creek
Jaguar*
Kenedy Deep
Lafite/Allen Dome*
Markham
Mountainside
Port Acres, W
Nordheim SW
Raymondville
Tidehaven*
Thunder
South Louisiana
Howards Creek
Colorado/Nebraska
Frenchman
Lay Creek
Republican
Sand Hill*
State Line
* Santos operated.
100.0
18.8
30.0
25.0
50.0
25.0
100.0
66.2
20.8
20.8
58.3
46.7
100.0
55.0
83.9
16.0
27.5
25.0
66.0
16.9
37.5
60.0
25.0
26.7
50.0
20.0
100.0
25.0
Annual Report 2005
59
SAN171 WWW Colour 28/3/06 2:59 PM Page 60
10 YEAR SUMMARY 1996–2005
As at 31 December
1996
Santos average realised oil price (A$/bbl)
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
2005
73.83
Financial performance ($million)
Product sales revenue
Total revenue1
Foreign currency gains/(losses)3
729.2
773.7
25.0
Profit from ordinary activities before tax3
331.9
Income tax relating to ordinary activities3 136.0
778.5
817.4
3.6
322.3
116.1
769.4
806.9
2.0
944.5
1,497.1
1,459.7
1,478.4
1,465.0
1,500.9 2,462.8
958.5
1,515.0
1,480.8
1,498.0
1,478.7
1,515.2 2,475.9
0.3
267.3
339.6
91.0
30.5
2.7
725.9
239.1
0.2
(0.7)
(7.9)
2.6
(3.8)
627.6
181.7
493.3
171.2
430.9
103.9
518.8 1,133.5
164.1
371.4
Net profit after income tax attributable
to the shareholders of Santos Ltd3
Financial position ($million)
195.9
206.2
176.3
309.1
486.8
445.9
322.1
327.0
354.7
762.1
Total assets3
Net debt3
Total equity3
3,443.4
4,036.2
4,236.1
4,338.7
4,659.8
5,048.7
5,320.8
5,218.3
4,836.6 6,191.3
938.6
1,114.2
1,280.0
1,301.1
866.6
1,060.8
1,162.9
897.6
1,133.3 1,598.9
1,586.3
1,919.0
1,939.2
2,056.7
2,310.9
2,726.6
2,863.9
3,087.9
2,357.8 2,964.0
Reserves and production (mmboe)
Proven plus Probable reserves (2P)
Production
Exploration2
Wells drilled (number)
Expenditure ($million)
Other capital expenditure ($million)
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
774
56.0
91
112
81
34
42
26
18
19
16
22
121.1
190.1
180.7
78.1
100.1
93.4
133.1
136.4
125.6
187.0
Delineation and development2
Buildings, plant and equipment
105.8
150.3
179.7
205.4
158.1
165.7
116.8
102.5
187.1
153.5
308.1
258.7
308.8
319.0
519.0
94.9
672.7
131.1
666.1
106.0
6060
Annual Report 2005
SAN171 WWW Colour 28/3/06 2:59 PM Page 61
Share information
Share issues
As as 31 December
1996
1997
1998
Employee
Share Plan
1 for 8
rights issue
1999
Employee
Share Plan
2000
Employee
Share Plan/
Executive
Share Plan
2001
Employee
Share Plan/
Executive
Share Plan/
Exercise of
Options/
Restricted
Shares
2002
Employee
Share Plan/
Executive
Share Plan/
Exercise of
Options/
Share Buy
-back/
Schemes of
Arrangement
2003
Employee
Share Plan/
Executive
Share Plan/
Exercise of
Options
2005
Employee
Share Plan/
Executive
Share Plan/
Exercise of
Options/
Dividend
Reinvestment
Plan
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 paid per ordinary share (¢)
- ordinary
- special
Dividends ($million)
- ordinary
- special
Number of issued preference shares
at year end (million)
Dividends paid per preference share ($)
- ordinary
- special
Dividends ($million)
- ordinary
- special
Earnings per share (¢)3
Return on total revenue (%)1, 3
Return on average ordinary equity (%)3
Return on average capital employed (%)3
Net debt/(net debt + equity) (%)3
Net interest cover (times)3
General
Number of employees
(excluding contractors)
Number of shareholders
539.6
607.3
607.8
608.2
610.4
579.3
583.1
584.7
585.7
594.4
553.4
583.7
605.6
606.1
608.3
612.0
580.9
583.4
584.9
587.9
23.0
25.0
25.0
25.0
30.0
-
-
-
-
-
30.0
10.0
30.0
30.0
30.0
36.0
-
-
-
-
123.6
142.5
151.4
151.5
182.0
184.8
174.2
175.0
175.5
212.4
-
-
-
-
-
-
35.4
25.3
12.6
9.4
37.2
6.2
-
-
-
-
-
-
35.3
25.2
11.8
8.5
36.7
5.4
-
-
-
-
-
-
29.1
21.8
9.1
7.0
39.8
4.4
-
-
-
-
-
-
51.0
32.2
15.5
11.4
38.7
5.2
-
-
-
-
-
-
80.0
32.1
22.3
16.5
27.3
9.1
61.2
-
-
-
-
3.5
3.5
3.5
6.0
6.0
-
-
-
-
72.9
30.1
19.0
13.9
28.0
9.7
5.40
6.57
-
-
18.9
23.0
-
51.9
21.5
13.1
8.9
28.9
8.1
-
52.1
22.1
12.3
8.8
22.5
8.5
6.59
5.00
23.0
14.3
54.2
23.4
19.9
11.7
32.5
9.1
5.10
-
30.6
-
124.4
30.8
35.1
19.8
35.0
14.9
1,461
1,615
1,650
1,645
1,631
1,713
1,737
1,700
1,526
1,521
55,482
65,459
81,286
81,416
76,457
86,472
85,888
84,327
78,976
78,157
Market capitalisation ($million)
2,741
3,826
2,654
2,516
3,670
3,589
3,509
4,017
4,965
7,280
1 From 2005, ‘Total operating revenue’ has been reclassified to ‘Total revenue’ and prior year amounts have been restated.
2 From 2001, appraisal and near-field exploration wells have been reclassified from exploration to delineation expenditure. Prior year amounts have not been restated.
3 From 2004, amounts reflect AIFRS. Prior year amounts reflect previous Australian Generally Accepted Accounting Principles and have not been restated.
Annual Report 2005
Annual Report 2005
61
61
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FINANCIAL REPORT
CONTENTS
Directors’ Statutory Report
Financial Report
Income Statements
Balance Sheets
Cash Flow Statements
Statements of Recognised Income and Expense
Notes to the Consolidated Financial Statements
1 Significant Accounting Policies
2 Revenue and Other Income
3 Expenses
4 Earnings
5 Net Financing Costs
6 Income Tax Expense
7 Cash and Cash Equivalents
8 Trade and Other Receivables
9 Inventories
10 Other Assets
11 Exploration and Evaluation Assets
12 Oil and Gas Assets
13 Other Land, Buildings, Plant and Equipment
14 Impairment of Cash Generating Units
15 Other Investments
16 Deferred Tax Assets and Liabilities
17 Trade and Other Payables
18 Interest-Bearing Loans and Borrowings
19 Employee Benefits
20 Provisions
21 Other Liabilities
22 Capital and Reserves
23 Earnings per Share
24 Consolidated Entities
25 Acquisitions of Subsidiaries
26 Interests in Joint Ventures
27 Reconciliation of Cash Flows from Operating Activities
28 Key Management Personnel Disclosures
29 Related Parties
30 Remuneration of Auditors
31 Segment Information
32 Commitments for Expenditure
33 Contingent Liabilities
34 Financial Instruments
35 Economic Dependency
36 Explanation of Transition to AIFRSs
37 Changes in Accounting Policy
Directors’ Declaration
Lead Auditor’s Independence Declaration
Independent Audit Report
62
Annual Report 2005
63
68
69
70
71
72
79
79
80
81
81
82
82
82
82
83
84
86
87
88
88
89
90
92
101
102
102
106
107
108
110
111
112
121
121
122
124
125
126
128
128
133
134
135
136
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DIRECTORS’ STATUTORY REPORT
The Directors present their report together with the financial report of Santos Ltd (Santos or Company) and the consolidated financial
report of the consolidated entity, being the Company and its controlled entities, for the financial year ended 31 December 2005, and the
auditor’s report thereon. Information in this Annual Report referred to by page number in this report, including the Remuneration
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
Barnett
Dean
Peter Charles
Kenneth Alfred
Ellice-Flint
(Managing Director)
John Charles
12,394
3,000
4,000,000*
Gerlach
(Chairman)
Stephen
43,856
Franked
Unsecured
Equity
Listed
Securities
Nil
Nil
Nil
Nil
Ordinary
Shares
Harding
O’Leary
Recny
Sloan
Richard Michael
Michael Anthony
Christopher John
Judith
Nil
4,898
Nil
5,000
Franked
Unsecured
Equity
Listed
Securities
Nil
Nil
Nil
195
The above named Directors held office during and since the end of the
financial year, except for Messrs KA Dean and CJ Recny, who were
appointed Directors on 23 February 2005. Mr GW McGregor held office
as a Director of the Company until his retirement on 30 September 2005.
Except where otherwise indicated, all shareholdings are of fully paid
ordinary shares.
*1,000,000 shares were issued on the terms described in Note 19 to
the financial statements and ceased to be restricted on 12 December
2005.
No Director holds shares in any related body corporate, other than in
trust for the Company.
Details of the qualifications, experience and special responsibilities of each Director and the Company Secretary are set out on pages 36, 55
and 57 respectively 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
Dean
Ellice-Flint
Gerlach
Harding
McGregor
O’Leary
Recny
Sloan
Peter Charles
Kenneth Alfred
John Charles
Stephen
Richard Michael
Graeme William ***
Michael Anthony
Christopher John
Judith
Directors’
Meetings
No. of
Mtgs
Held*
No. of
Mtgs
Attended
Audit
Committee
No. of
Mtgs
Attended
No. of
Mtgs
Held*
Safety, Health
& Environment
Committee**
No. of
No. of
Mtgs
Mtgs
Attended
Held*
Remuneration
Committee
No. of
Mtgs
Attended
No. of
Mtgs
Held*
Finance
Committee
No. of
Mtgs
Attended
No. of
Mtgs
Held*
Nomination
Committee
No. of
Mtgs
Attended
No. of
Mtgs
Held*
14
13
14
14
14
10
14
13
14
12
12
13
14
12
8
14
10
12
-
1
-
-
5
4
-
-
5
-
1
-
-
4
4
-
-
5
4
-
4
4
-
-
4
-
-
3
-
4
4
-
-
4
-
-
5
-
-
5
-
-
-
-
5
4
-
-
5
-
-
-
-
5
3
1
-
3
-
3
-
-
-
1
1
-
3
-
3
-
-
-
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 30 September 2005.
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 34 to 39 of this Annual Report.
Annual Report 2005
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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 detailed review of the operations and of the results of those operations of the consolidated entity during the financial year is contained on pages
2 to 9 of this Annual Report. Further details regarding the results and operations appear in the individual reports at pages 12 to 33 inclusive.
In summary, the consolidated net profit after income tax attributable to the shareholders was $762.1 million, a 115% increase from the previous
period comparative result of $354.7 million. Sales revenue was a record $2,463 million, up 64% from 2004.
In particular, revenues for the Australian segment was $2,303.5 million, a 64.5% increase from the 2004 result of $1,400.5 million. International
operations recorded revenue growth of 50.2% from 2004 to $172.3 million in 2005.
Total production was up by 19% to 56.0 million barrels of oil equivalent (mmboe), reflecting the start-up of several new projects as detailed in
Section 4 below.
4. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS
The Directors consider that matters or circumstances that have significantly affected, or may significantly affect, the operations, results of
operations or the state of affairs of the Company in subsequent financial years are:
•
•
•
•
•
•
•
•
•
The acquisition of Tipperary Corporation for a total consideration of approximately US$466 million (A$612 million), which delivers an
approximate 72% net revenue interest in the Fairview coal seam gas field located north of Roma in Queensland together with over 4,000
square kilometres of exploration acreage in the Bowen Basin;
The acquisition of Basin Oil Pty Ltd for $89.6 million, which holds all of OMV Petroleum Pty Ltd’s Gippsland Basin and Cooper Basin assets;
The commencement of oil production from the Mutineer-Exeter fields in the Carnarvon Basin offshore Western Australia during March 2005;
The commencement of gas production from the John Brookes field in the Carnarvon Basin offshore Western Australia during September 2005;
The award of a production licence by the Victorian Government for the Casino development in the Otway Basin offshore Victoria;
The development approval for the Oyong oil and gas field in Offshore East Java, Indonesia, which is Santos’ first operated oil and gas
development in Indonesia;
The signing of an agreement for the long term sale of gas from the Maleo field in East Java, Indonesia;
The discovery of a major new gas field offshore Northern Territory with the Caldita 1 exploration well, and subsequent award of an adjoining
permit which contains the previously discovered Lynedoch gas resource;
The adoption of the Australian equivalents of International Financial Reporting Standards (AIFRS) and the “Successful Efforts” methodology
for accounting for exploration and evaluation expenditure during the 2005 financial year, which will impact on the accounting for impairment
of assets, taxation, restoration and exploration and evaluation expenditure and accounting and disclosure of financial instruments. These
accounting policy changes will not impact in any way on Santos’ business strategy, operations, cash flow, credit ratings or capacity to pay
fully franked dividends.
5. DIVIDENDS
On 23 February 2006, Directors declared:
(i) that a fully franked final dividend of $0.20 per fully paid ordinary share be paid on 31 March 2006 to shareholders registered in the books of
the Company at the close of business on 6 March 2006. This final dividend amounts to approximately $118.9 million; and
(ii) that in accordance with the Terms of Issue, a fully franked dividend of $2.5300 per Franked Unsecured Equity Listed Securities be paid on 31
March 2006 to holders registered in the books of the Company at the close of business on 6 March 2006, amounting to $15.2 million.
A fully franked final dividend of $105.8 million (18 cents per share) was paid on 31 March 2005 on the 2004 results. Indication of this dividend
payment was disclosed in the 2004 Annual Report. In addition, a fully franked interim dividend of $106.6 million (18 cents per fully paid
ordinary share) was paid to members on 30 September 2005.
In accordance with the Terms of Issue, a fully franked final dividend of $2.4497 per Franked Unsecured Equity Listed Securities (amounting to
$14.7 million) was paid on 31 March 2005 and a fully franked interim dividend of $2.6538 per Franked Unsecured Equity Listed Securities
(amounting to $15.9 million) was paid on 30 September 2005.
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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 888, 1259,
2164, 2569, 14145 and 14427) issued under the Environment Protection Act 1993, its Queensland operations, licences (numbers 150029,
150351,150276, 150286, 150287, 150288, 150329, 150330, 150331, 150332, 150333, 150334, 150347, 170543 and 170544) issued under the
Environmental Protection Act 1994, and its Victorian operations, licence (54626) issued under the Environment Protection Act 1970. Applicable
legislation and requisite environmental licences are specified in the entity’s EHS 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.
Since the end of the financial year, the Company has received a formal warning from the Queensland Department of Natural Resources and Mines
in relation to a delay by the Company in reporting as required under the Aboriginal Cultural Heritage Act 2003 (Qld) the existence and location
of a culturally significant Aboriginal burial site at Okotoko Waterhole in the Cooper Creek Basin in South West Queensland. The Department has
confirmed that it has decided not to prosecute the Company in this instance.
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 2005 are set out in Item 5 of this Directors’ Report and Note 22 to the financial statements.
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 3 to 9 of this Annual Report. Further details regarding likely developments appear in the individual reports at pages 14
to 27 inclusive.
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 in the Remuneration Report commencing on page 40 of
this Annual Report. The Company claims the relief afforded to it under Australian Securities and Investment Commission Class Order 06/105 and
reports that differences between values attributed to measurement under AASB 124 in the tables contained in note 28 and under section 6 of
AASB 1046 are that: (i) options issued prior to, or on, 7 November 2002 have not been valued; (ii) for defined benefit superannuation the
benefit is measured as current service cost under AASB 124 compared to contribution amounts under AASB 1046; and (iii) the value of forfeited
shares and options is credited against remuneration expenses under AASB 124.
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 2001 (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.
Annual Report 2005
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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 2005 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 2006. 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. OTHER SERVICES PROVIDED BY THE AUDITOR
During the year the Company’s auditor, KPMG, was paid the following amounts in relation to non-audit services provided by KPMG:
Other Assurance services:
$12,000
The Directors are satisfied, based on the advice of the audit committee, that the provision of the non-audit services detailed above by KPMG is
compatible with the general standard of independence for auditors imposed by the Corporations Act.
The reasons for forming this opinion are:
• all non-audit services have been reviewed by the audit committee to ensure they do not impact the impartiality and objectivity of the
auditor; and
• the non-audit services provided do not undermine the general principle relating to auditor independence as set out in Professional Statement
F1 Professional Independence.
A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 135 of this
Annual Report.
12. SHARES UNDER OPTION
Unissued ordinary shares of Santos Ltd under option at the date of this report are as follows:
Date options granted
19 October 2001
18 June 2002
12 December 2003
12 December 2003
15 June 2004
15 June 2004
22 May 2005
Expiry date
18 October 2006
17 June 2007
22 December 2007
22 December 2008
14 June 2009
1 July 2008
22 May 2015
Issue price of shares
Number under option
$6.52
$6.20
$6.38
$6.38
$6.95
$6.95
$8.46
500,000
250,000
72,180
100,000
200,000
130,148
1,166,000
2,418,328
Options do not confer an entitlement to participate in a bonus or rights issue, prior to the exercise of the option.
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13. SHARES ISSUED ON THE EXERCISE OF OPTIONS
The following ordinary shares of Santos Ltd were issued during the year ended 31 December 2005 on the exercise of options granted under the
Santos Executive Share Option Plan. No further shares have been issued since that date on the exercise of options granted under the Santos
Executive Share Option Plan. No amounts are unpaid on any of the shares.
Date options granted
Issue price of shares
Number of shares issued
18 April 2000
26 August 2000
6 June 2001
19 October 2001
18 June 2002
12 December 2003
$3.92
$5.83
$6.69
$6.52
$6.20
$6.38
50,000
3,000,000
550,000
225,000
300,000
136,134
4,261,134
14. ROUNDING
Australian Securities and Investments Commission Class Order 98/100 (as in force on 30 June 2005), applies to the Company and accordingly
amounts have been rounded off in accordance with that Class Order, unless otherwise indicated.
This report is made on 23 February 2006 in accordance with a resolution of the Directors.
Director
23 February 2006
Director
Annual Report 2005
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INCOME STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
Product sales
Cost of sales
Gross profit
Other revenue
Other income
Other expenses
Operating profit before net financing costs
Financial income
Financial expenses
Net financing costs
Profit before tax
Income tax expense
Net profit after income tax attributable to equity holders of Santos Ltd
Earnings per share (¢)
Basic
Diluted
Dividends per share ($)
Ordinary shares
Redeemable preference shares
Reset preference shares
Consolidated
Santos Ltd
2005
$million
2,462.8
(1,220.2)
1,242.6
13.1
104.7
(155.6)
1,204.8
8.6
(79.9)
(71.3)
1,133.5
(371.4)
762.1
124.4
117.7
0.36
5.1035
2004
$million
1,500.9
(974.2)
2005
$million
721.2
(412.8)
2004
$million
568.8
(405.2)
308.4
19.9
42.7
306.7
677.7
52.1
(108.9)
(56.8)
620.9
(102.2)
518.7
163.6
270.4
416.0
(67.7)
782.3
45.1
(97.8)
(52.7)
729.6
(74.2)
655.4
526.7
14.3
189.0
(163.6)
566.4
3.5
(51.1)
(47.6)
518.8
(164.1)
354.7
54.2
54.2
0.30
5.00
–
6.5880
Note
2
3
2
2
3
5
5
6
23
23
22
22
22
The income statements are to be read in conjunction with the notes to the consolidated financial statements.
68
Annual Report 2005
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BALANCE SHEETS
AS AT 31 DECEMBER 2005
Current assets
Cash and cash equivalents
Trade and other receivables
Inventories
Other
Total current assets
Non-current assets
Exploration and evaluation assets
Oil and gas assets
Other land, buildings, plant and equipment
Other investments
Deferred tax assets
Other
Total non-current assets
Total assets
Current liabilities
Trade and other payables
Deferred income
Interest-bearing loans and borrowings
Current tax liabilities
Employee benefits
Provisions
Other
Total current liabilities
Non-current liabilities
Deferred income
Interest-bearing loans and borrowings
Deferred tax liabilities
Employee benefits
Provisions
Other
Total non-current liabilities
Total liabilities
Net assets
Equity
Issued capital
Reserves
Retained profits
Consolidated
Santos Ltd
Note
2005
$million
2004
$million
2005
$million
2004
$million
7
8
9
10
11
12
13
15
16
10
17
18
19
20
21
18
16
19
20
21
22
22
22
229.2
511.7
144.0
27.2
912.1
339.1
4,792.5
73.5
14.8
57.4
1.9
5,279.2
126.1
420.8
117.5
3.2
667.6
272.0
3,736.4
66.9
1.2
89.6
2.9
65.5
1,376.2
67.3
–
1,509.0
17.7
1,727.4
52.4
2,995.3
–
–
4,169.0
4,792.8
6,191.3
4,836.6
6,301.8
392.2
4.9
11.1
184.7
49.7
22.7
1.8
667.1
13.8
1,817.0
512.9
11.3
198.9
6.3
2,560.2
3,227.3
2,964.0
372.9
5.8
49.9
11.7
45.3
16.2
14.6
516.4
16.3
1,209.5
521.8
12.5
168.5
33.8
1,962.4
2,478.8
2,357.8
2,212.1
(178.3)
930.2
2,141.7
(195.3)
411.4
379.6
1.1
2,450.9
176.6
48.2
6.6
1.3
3,064.3
–
–
165.6
11.3
59.7
–
236.6
3,300.9
3,000.9
2,212.1
4.4
784.4
39.3
1,656.3
58.8
2.3
1,756.7
15.0
1,138.2
42.0
2,071.6
–
–
3,266.8
5,023.5
451.9
1.5
1,686.2
9.9
44.4
1.1
–
2,195.0
–
–
133.3
12.5
34.4
–
180.2
2,375.2
2,648.3
2,141.7
–
506.6
Total equity attributable to equity holders of Santos Ltd
2,964.0
2,357.8
3,000.9
2,648.3
The balance sheets are to be read in conjunction with the notes to the consolidated financial statements.
Annual Report 2005
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CASH FLOW STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
Consolidated
Santos Ltd
Note
2005
$million
2004
$million
2005
$million
2004
$million
Cash flows from operating activities
Receipts from customers
Dividends received
Interest received
Overriding royalties received
Insurance proceeds received
Pipeline tariffs and other receipts
Payments to suppliers and employees
Royalty, excise and PRRT payments
Borrowing costs paid
Income taxes paid
2,474.7
0.1
8.6
12.8
55.9
53.8
(696.3)
(209.3)
(86.3)
(156.1)
1,544.3
–
3.5
14.5
–
19.9
(583.6)
(169.6)
(65.2)
(158.8)
729.9
0.1
52.1
19.7
35.8
16.8
(259.5)
(110.8)
(99.9)
(113.8)
Net cash provided by operating activities
27
1,457.9
605.0
270.4
644.4
251.7
45.1
19.0
–
18.0
(279.0)
(78.4)
(90.6)
(137.5)
392.7
(65.7)
(249.7)
(8.5)
–
(93.6)
–
(0.1)
(151.7)
(0.5)
430.0
–
(187.3)
(843.8)
(23.2)
(9.3)
(556.1)
(5.0)
(9.7)
–
3.1
80.7
29.0
(126.0)
(664.4)
(8.5)
(14.5)
(112.3)
–
(7.3)
–
(0.5)
39.9
–
(91.3)
(228.1)
(24.6)
(451.9)
(108.1)
(5.0)
(0.3)
(426.5)
0.7
32.3
29.0
(1,521.6)
(893.6)
(1,273.8)
(139.8)
(200.2)
27.6
–
–
343.3
–
–
0.5
171.2
107.5
126.1
(4.4)
(212.8)
6.4
589.5
(350.0)
282.8
–
(2.4)
0.4
313.9
25.3
111.1
(10.3)
126.1
(200.2)
27.6
–
–
(1.0)
1,204.7
–
–
1,031.1
27.7
39.3
(1.5)
65.5
(212.8)
6.4
589.5
(350.0)
–
(297.0)
(2.4)
–
(266.3)
(13.4)
52.9
(0.2)
39.3
Cash flows from investing activities
Payments for:
Exploration and evaluation expenditure
Oil and gas assets expenditure
Other land, buildings, plant and equipment
Acquisitions of oil and gas assets
Acquisitions of controlled entities
Acquisitions of other investments
Restoration expenditure
Share subscriptions in controlled entities
Other investing activities
Proceeds from disposal of non-current assets
Proceeds from disposal of 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 receipts from/(payments to) controlled entities
Premium paid on buy-back of reset convertible preference shares
Other financing activities
Net cash provided by/(used in) financing activities
Net increase/(decrease) in cash
Cash and cash equivalents at the beginning of the year
Effects of exchange rate changes on the balances of cash held in
foreign currencies
Cash and cash equivalents at the end of the year
7
229.2
The cash flow statements are to be read in conjunction with the notes to the consolidated financial statements.
70
Annual Report 2005
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STATEMENTS OF RECOGNISED INCOME AND EXPENSE
FOR THE YEAR ENDED 31 DECEMBER 2005
Adjustment on initial adoption of AASB 132 “Financial Instruments:
Disclosure and Presentation” and AASB 139 “Financial Instruments:
Recognition and Measurement”, net of tax, to:
Retained profits
Reserves
Change in fair value of equity securities available-for-sale, net of tax
Foreign exchange translation differences
Net gain/(loss) on hedge of net investment in foreign subsidiaries
Cash flow hedges:
Gains taken to equity
Share-based payment transactions
Actuarial (loss)/gain on defined benefit plan, net of tax
Net income/(expense) recognised directly in equity
Profit for the period
Total recognised income and expense for the period attributable to
Consolidated
Santos Ltd
Note
2005
$million
2004
$million
2005
$million
2004
$million
37
37
19
(2.4)
(6.7)
4.9
57.1
(46.1)
7.8
2.4
(0.3)
16.7
762.1
–
–
–
(52.7)
12.1
–
0.1
3.3
(37.2)
354.7
–
(7.9)
4.5
–
–
7.8
2.4
(0.3)
6.5
518.7
–
–
–
–
–
–
0.1
3.3
3.4
655.4
equity holders of Santos Ltd
22
778.8
317.5
525.2
658.8
Other movements in equity arising from transactions with owners as owners are set out in note 22.
The statements of recognised income and expense are to be read in conjunction with the notes to the consolidated financial statements.
Annual Report 2005
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
1. Significant Accounting Policies
Santos Ltd (“the Company”) is a company
domiciled in Australia. The consolidated
financial report of the Company for the year
ended 31 December 2005 comprises the
Company and its controlled entities (“the
consolidated entity”).
The financial report was authorised for issue
by the Directors on 23 February 2006.
(a) Statement of compliance
The financial report is a general purpose
financial report which has been prepared
in accordance with Australian Accounting
Standards, Urgent Issues Group
Interpretations adopted by the Australian
Accounting Standards Board (“AASB”)
and the Corporations Act 2001.
International Financial Reporting
Standards (“IFRSs”) form the basis of
Australian Accounting Standards adopted
by the AASB, being Australian
equivalents to IFRSs (“AIFRSs”).
This is the consolidated entity’s first
financial report prepared in accordance
with AIFRS and AASB 1 “First-time
Adoption of Australian Equivalents to
International Financial Reporting
Standards” has been applied. An
explanation of how the transition to
AIFRS has affected the reported financial
position, financial performance and cash
flows of the consolidated entity and the
Company is provided in note 36.
(b) Basis of preparation
The financial report is presented in
Australian dollars.
The financial report is prepared on the
historical cost basis except that
derivative financial instruments and
financial instruments classified as
available-for-sale are stated at their
fair value.
The Company is of a kind referred to in
ASIC Class Order 98/100 dated 10 July
1998 (updated by Class Order 05/641
effective 28 July 2005) and in accordance
with that Class Order, amounts in the
financial report and Directors’ Report
have been rounded off to the nearest
hundred thousand dollars, unless
otherwise stated.
The preparation of a financial report in
conformity with Australian Accounting
Standards requires management to make
judgements, estimates and assumptions
72
Annual Report 2005
that affect the application of policies
and reported amounts of assets and
liabilities, income and expenses. The
estimates and associated assumptions
are based on historical experience and
various other factors that are believed to
be reasonable under the circumstances,
the results of which form the basis of
making the judgements about carrying
values of assets and liabilities that are
not readily apparent from other sources.
Actual results may differ from these
estimates. These accounting policies have
been consistently applied by each entity
in the consolidated entity.
The estimated quantities of proven and
probable hydrocarbon reserves reported
by the Company are integral to the
calculation of depletion and depreciation
expense and to assessments of possible
impairment of assets. Estimated reserve
quantities are based upon interpretations
of geological and geophysical models and
assessments of the technical feasibility
and commercial viability of producing the
reserves. These assessments require
assumptions to be made regarding future
development and production costs,
commodity prices, exchange rates and
fiscal regimes. Reserves estimates are
prepared in accordance with the
Company’s policies and procedures for
reserves estimation which conform to
guidelines prepared by the Society of
Petroleum Engineers.
The estimates and underlying
assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates
are recognised in the period in which the
estimate is revised if the revision affects
only that period or in the period of the
revision and future periods if the revision
affects both current and future periods.
The consolidated entity has elected to
early adopt revised accounting standard
AASB 119 “Employee Benefits” and
AASB 2004-3 “Amendments to Australian
Accounting Standards” in these financial
statements. All other recently issued
or amended Australian Accounting
Standards which are not yet effective
have not been early adopted for the year
ended 31 December 2005, and they are
not expected to result in significant
accounting policy or disclosure changes.
Except for the change in accounting
policy relating to classification and
measurement of financial instruments
(refer note 37), the accounting policies
set out below have been applied
consistently to all periods presented in
the consolidated financial report, and in
preparing an opening AIFRS balance
sheet at 1 January 2004 for the purpose
of transition to Australian Accounting
Standards – AIFRS. The policies applied to
financial instruments for 2004 and 2005
are disclosed in notes 1(e), 1(k) and 1(r).
The accounting policies have been
consistently applied by the consolidated
entity.
(c) Basis of consolidation
Subsidiaries
Subsidiaries are entities controlled by
the Company. Control exists when the
Company has the power, directly or
indirectly, to govern the financial and
operating policies of an entity so as to
obtain benefits from its activities. In
assessing control, potential voting
rights that presently are exercisable or
convertible are taken into account. The
financial statements of subsidiaries are
included in the consolidated financial
statements from the date that control
commences until the date that control
ceases. On acquisition, the assets,
liabilities and contingent liabilities of
a subsidiary are measured at their fair
value at the date of acquisition.
Investments in subsidiaries are carried at
their cost of acquisition in the Company’s
financial statements.
Intragroup balances and any unrealised
gains and losses or income and expenses
arising from intragroup transactions are
eliminated in preparing the consolidated
financial statements.
Jointly controlled operations
The interests of the Company and of the
consolidated entity in unincorporated
joint ventures are brought to account by
recognising in its financial statements
the assets it controls, the expenses and
liabilities it incurs, and the income from
the sale or use of its share of the
production of the joint venture.
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1. Significant Accounting Policies
(continued)
(d) Foreign currency
(e) Derivative financial instruments
Foreign currency transactions
Transactions in foreign currencies are
translated at the foreign exchange rate
ruling at the date of the transaction.
Monetary assets and liabilities
denominated in foreign currencies at the
balance sheet date are translated to the
functional currency at the foreign
exchange rate ruling at that date.
Foreign exchange differences arising on
translation are recognised in the income
statement.
Foreign exchange differences that arise
on the translation of monetary items that
form part of the net investment in a
foreign operation are recognised in
equity in the consolidated financial
statements.
Non-monetary assets and liabilities that
are measured in terms of historical cost
in a foreign currency are translated using
the exchange rate at the date of the
transaction. Non-monetary assets and
liabilities denominated in foreign
currencies that are stated at fair value are
translated to the functional currency at
foreign exchange rates ruling at the dates
the fair value was determined.
Financial statements of foreign
operations
The assets and liabilities of foreign
operations, including fair value
adjustments arising on consolidation, are
translated to Australian dollars at foreign
exchange rates ruling at the balance
sheet date. The revenues and expenses of
foreign operations are translated to
Australian dollars at rates approximating
the foreign exchange rates ruling at
the dates of the transactions. Foreign
exchange differences arising on
retranslation are recognised directly in
the foreign currency translation reserve.
Net investment in foreign operations
Exchange differences arising from the
translation of the net investment in
foreign operations and of related hedges
are taken to the foreign currency
translation reserve. They are released
into the income statement upon disposal
of the foreign operation.
Current accounting policy
The consolidated entity 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, interest rate
swaps, commodity crude oil price swap
and option contracts, and natural gas
price swap and option contracts. Their
use is subject to a comprehensive set of
policies, procedures and limits approved
by the Board of Directors. The
consolidated entity does not trade in
derivative financial instruments for
speculative purposes.
Derivative financial instruments are
recognised initially at cost. Subsequent
to initial recognition, derivative financial
instruments are stated at fair value.
Where derivatives qualify for hedge
accounting, recognition of any resultant
gain or loss depends on the nature of the
item being hedged, otherwise the gain or
loss on re-measurement to fair value is
recognised immediately in profit or loss.
The fair value of interest rate swaps is the
estimated amount that the consolidated
entity would receive or pay to terminate
the swap at the balance sheet date,
taking into account current interest rates
and the current creditworthiness of the
swap counterparties. The fair value of
forward exchange contracts is their
quoted market price at the balance sheet
date, being the present value of the
quoted forward price. The fair value of
commodity swap and option contracts is
their quoted market price at the balance
sheet date.
Comparative accounting policy
The consolidated entity 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
consolidated entity does not trade in
derivative financial instruments for
speculative purposes.
The quantitative effect of the change in
accounting policy is set out in note 37.
(f) Hedging
Current accounting policy
Fair value hedge
Where a derivative financial instrument
hedges the changes in fair value of a
recognised asset or liability or an
unrecognised firm commitment (or an
identified portion of such asset, liability
or firm commitment), any gain or loss on
the hedging instrument is recognised in
the income statement. The hedged item is
stated at fair value in respect of the risk
being hedged, with any gain or loss being
recognised in the income statement.
Cash flow hedge
Where a derivative financial instrument is
designated as a hedge of the variability
in cash flows of a recognised asset or
liability, or a highly probable forecast
transaction, the effective part of any
gain or loss on the derivative financial
instrument is recognised directly in
equity. When the forecast transaction
subsequently results in the recognition of
a non-financial asset or non-financial
liability, or the forecast transaction for a
non-financial asset or non-financial
liability becomes a firm commitment for
which fair value hedging is applied, the
associated cumulative gain or loss is
removed from equity and included in the
initial cost or other carrying amount of
the non-financial asset or liability. If a
hedge of a forecast transaction
subsequently results in the recognition of
a financial asset or a financial liability,
the associated gains and losses that were
recognised directly in equity are
reclassified into profit or loss in the same
period or periods during which the asset
acquired or liability assumed affects
profit or loss (i.e. when interest income
or expense is recognised).
Annual Report 2005
73
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
1. Significant Accounting Policies
(continued)
For cash flow hedges, other than those
covered by the preceding two policy
statements, the associated cumulative
gain or loss is removed from equity and
recognised in the income statement in
the same period or periods during which
the hedged forecast transaction affects
profit or loss. The ineffective part of any
gain or loss is recognised immediately in
the income statement.
When a hedging instrument expires or
is sold, terminated or exercised, or the
entity revokes designation of the hedge
relationship, but the hedged forecast
transaction is still expected to occur, the
cumulative gain or loss at that point
remains in equity and is recognised in
accordance with the above policy when
the transaction occurs. If the hedged
transaction is no longer expected to take
place, the cumulative unrealised gain or
loss recognised in equity is recognised
immediately in the income statement.
Hedge of monetary assets and liabilities
When a derivative financial instrument is
used to hedge economically the foreign
exchange exposure of a recognised
monetary asset or liability, hedge
accounting is not applied and any gain
or loss on the hedging instrument is
recognised in the income statement.
Hedge of net investment in a foreign
operation
The portion of the gain or loss on an
instrument used to hedge a net
investment in a foreign operation that
is determined to be an effective hedge
is recognised directly in equity. Any
ineffective portion is recognised
immediately in the income statement.
Comparative accounting policy
Cash flow hedge
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
74
Annual Report 2005
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 income statements. The net
amounts receivable or payable under
forward foreign exchange contracts and
the associated deferred gains or losses
are recorded on the balance sheets from
the inception of the hedge transaction.
Hedge of net investment in a foreign
operation
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.
(g) Acquisition of assets
All assets acquired are recorded at their
cost of acquisition, being the amount of
cash or cash equivalents paid and the fair
value of any other consideration given.
The cost of an asset comprises the
purchase price including any incidental
costs directly attributable to the
acquisition; any costs directly
attributable to bringing the asset to the
location and condition necessary for it to
be capable of operating; and the estimate
of the costs of dismantling and removing
the asset and restoring the site on which
it is located determined in accordance
with note 1(p).
Business combinations
All business combinations are accounted
for by applying the purchase method.
The classification and accounting
treatment of business combinations that
occurred prior to 1 January 2004 have
not been reconsidered in preparing the
consolidated entity’s opening AIFRS
balance sheet at 1 January 2004.
(h) Exploration and evaluation expenditure
Exploration and evaluation expenditure
in respect of each area of interest is
accounted for using the successful efforts
method of accounting. The successful
efforts method requires all exploration
and evaluation expenditure to be
expensed in the period it is incurred,
except the costs of successful wells and
the costs of acquiring interests in new
exploration assets, which are capitalised
as intangible exploration and evaluation.
The costs of wells are initially capitalised
pending the results of the well.
An area of interest refers to an individual
geological area where the presence of oil
or a natural gas field is considered
favourable or has been proved to exist,
and in most cases will comprise an
individual oil or gas field.
Exploration and evaluation expenditure
is recognised in relation to an area of
interest when the rights to tenure of the
area of interest are current and either:
(i) such expenditure is expected to be
recovered 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 an oil or gas field enters the
development phase the accumulated
exploration and evaluation expenditure is
transferred to oil and gas assets – assets
in development.
(i) Oil and gas assets
Assets in development
When the technical and commercial
feasibility of an undeveloped oil or gas
field has been demonstrated the field
enters its development phase. The costs
of oil and gas assets in the development
phase are separately accounted for as
tangible assets and include past
exploration and evaluation costs,
development drilling and other
subsurface expenditure, surface plant
and equipment and any associated land
and buildings.
When commercial operation commences
the accumulated costs are transferred to
oil and gas assets – producing assets.
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1. Significant Accounting Policies
(continued)
Producing assets
The costs of oil and gas assets in
production are separately accounted
for as tangible assets and include past
exploration and evaluation costs,
pre-production development costs and
the ongoing costs of continuing to
develop reserves for production and to
expand or replace plant and equipment
and any associated land and buildings.
These costs are subject to depreciation
and depletion in accordance with the
following policy.
Probable (“2P”) reserves in a cash
generating unit, together with future
subsurface costs necessary to develop the
hydrocarbon reserves in the respective
cash generating units.
The heating value measurement used for
the conversion of volumes of different
hydrocarbon products is barrels of oil
equivalent.
Depletion is not charged on costs
carried forward in respect of assets
in the development stage until
production commences.
(j) Depreciation and depletion
(k) Investments
Depreciation charges are calculated to
write-off the depreciable value of
buildings, plant and equipment over their
estimated economic useful lives to the
entity. Each component of an item of
buildings, plant and equipment with a
cost that is significant in relation to the
total cost of the asset is depreciated
separately. The residual value, useful life
and depreciation method applied to an
asset is reviewed at the end of each
annual reporting period.
Depreciation of onshore buildings, plant
and equipment and corporate assets is
calculated using the straight line method
of depreciation on an individual asset
basis from the date the asset is available
for use.
The estimated useful lives for each class
of onshore assets for the current and
comparative periods are as follows:
• Plant and equipment
3 – 5 years
– Computer equipment
– Motor vehicles
4 – 7 years
– Furniture and fittings 10 – 20 years
10 – 30 years
– Pipelines
10 – 50 years
– Plant and facilities
20 – 50 years
• Buildings
Depreciation of offshore plant and
equipment is calculated using the unit of
production method on a cash generating
unit basis (refer note 1(o)) from the date
of commencement of production.
Depletion charges are calculated using
a unit of production method based on
heating value which will amortise the
cost of carried forward exploration,
evaluation and subsurface development
expenditure (“Sub-surface assets”) over
the life of the estimated Proven plus
Current accounting policy
Financial instruments held by the
consolidated entity which are classified
as being available-for-sale are stated at
fair value, with any resultant gain or loss
being recognised directly in equity.
The fair value of financial instruments
classified as available-for-sale is their
quoted bid price on the balance sheet date.
Financial instruments classified
as available-for-sale are
recognised/derecognised by the
consolidated entity on the date it
commits to purchase/sell the
investments. When these investments
are derecognised, the cumulative gain or
loss previously recognised directly in
equity is recognised in profit or loss.
Comparative accounting policy
Investments in other listed entities are
measured at the lower of cost and
recoverable amount. The quantitative
effect of the change in accounting policy
is set out in note 37.
(l) Inventories
Inventories are stated at the lower of cost
and net realisable value. Net realisable
value is the estimated selling price in the
ordinary course of business, less the
estimated costs of completion and selling
expenses. Cost is determined as follows:
(i) drilling and maintenance stocks,
which include plant spares,
consumables and maintenance and
drilling tools used for ongoing
operations, are valued at weighted
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
sub-surface reservoirs, are valued using
the absorption cost method in a manner
which approximates specific
identification.
(m)Trade and other receivables
Trade and other receivables are stated at
their cost less impairment losses.
(n) Cash and cash equivalents
Cash and cash equivalents comprises cash
balances and call deposits.
Bank overdrafts that are repayable on
demand and form an integral part of the
consolidated entity’s cash management
are included as a component of cash and
cash equivalents for the purpose of the
cash flows statement.
(o) Impairment
The carrying amounts of the consolidated
entity’s assets, other than inventories
and deferred tax assets, are reviewed at
each balance sheet date to determine
whether there is any indication of
impairment. Where an indicator of
impairment exists a formal estimate
of the recoverable amount is made.
Oil and gas assets, land, buildings,
plant and equipment are assessed for
impairment on a cash generating unit
(“CGU”) basis. A cash generating unit is
the smallest grouping of assets that
generates independent cash flows, and
generally represents an individual oil or
gas field. Impairment losses recognised in
respect of cash generating units are
allocated to reduce the carrying amount of
the assets in the unit on a pro-rata basis.
An impairment loss is recognised in the
income statement whenever the carrying
amount of an asset or its cash generating
unit exceeds its recoverable amount.
Where a decline in the fair value of an
available-for-sale financial asset has
been recognised directly in equity and
there is objective evidence that the asset
is impaired, the cumulative loss that had
been recognised directly in equity is
recognised in profit or loss even though
the financial asset has not been
derecognised. The amount of the
cumulative loss that is recognised in
profit or loss is the difference between
Annual Report 2005
75
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
1. Significant Accounting Policies
(continued)
the acquisition cost and current fair
value, less any impairment loss on that
financial asset previously recognised in
profit or loss.
Calculation of recoverable amount
The recoverable amount of an asset is the
greater of its fair value less costs to sell
and its value in use. In assessing value in
use, the estimated future cash flows are
discounted to their present value using a
pre-tax discount rate that reflects current
market assessments of the time value of
money and the risks specific to the asset.
Where an asset does not generate cash
flows that are largely independent from
other assets or groups of assets, the
recoverable amount is determined for
the cash generating unit to which the
asset belongs.
For oil and gas properties the estimated
future cash flows are based on estimates
of hydrocarbon reserves, future
production profiles, commodity prices,
operating cost and any future
development costs necessary to produce
the reserves. Estimates of future
commodity prices are based on contracted
prices where applicable or based on
forward market prices where available.
Reversals of impairment
An impairment loss is reversed if there
has been an increase in the estimated
recoverable amount of a previously
impaired asset. An impairment loss is
reversed only to the extent that the
asset’s carrying amount does not exceed
the carrying amount that would have
been determined, net of depreciation
or depletion, if no impairment loss had
been recognised.
(p) Provisions
A provision is recognised in the balance
sheet when the consolidated entity has a
present legal or constructive obligation
as a result of a past event, and it is
probable that an outflow of economic
benefits will be required to settle the
obligation. Provisions are determined by
discounting the expected future cash
flows at a pre-tax rate that reflects
current market assessments of the true
value of money and, where appropriate,
the risks specific to the liability.
76
Annual Report 2005
Restoration
Provisions for future environmental
restoration are recognised where there
is a present obligation as a result of
exploration, development, production,
transportation or storage activities
having been undertaken, and it is
probable that an outflow of economic
benefits will be required to settle the
obligation. The estimated future
obligations include the costs of removing
facilities, abandoning wells and restoring
the affected areas.
The provision for future restoration costs
is the best estimate of the present value
of the expenditure required to settle the
restoration obligation at the reporting
date, based on current legal requirements
and technology. Future restoration costs
are reviewed annually and any changes in
the estimate are reflected in the present
value of the restoration provision at the
end of the balance sheet date, with a
corresponding change in the cost of the
associated asset.
The amount of the provision for future
restoration costs relating to exploration,
development and production facilities is
capitalised and depleted as a component
of the cost of those activities.
The unwinding of the effect of
discounting on the provision is
recognised as a finance cost.
(q) Employee benefits
Wages, salaries and annual leave
Liabilities for employee benefits for
wages, salaries and annual leave
represent present obligations resulting
from employees’ services provided to
reporting date, are calculated at
undiscounted amounts based on
remuneration wage and salary rates
that the consolidated entity expects to
pay as at reporting date including
related on-costs.
Long-term service benefits
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 obligation 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 the
balance sheet date which have maturity dates
approximating the terms of the consolidated
entity’s obligations.
Defined contribution plans
The Company and several controlled entities
contribute to a number of defined
contribution superannuation plans.
Obligations for contributions are recognised
as an expense in the income statement as
incurred.
Defined benefit plan
The consolidated entity has early adopted the
revised AASB 119 “Employee Benefits”.
The consolidated entity’s net obligation in
respect of the defined benefit
superannuation plan is calculated by
estimating the amount of future benefit that
employees have earned in return for their
service in the current and prior periods; that
benefit is discounted to determine its present
value, and the fair value of any plan assets is
deducted.
The discount rate is the yield at the balance
sheet date on government bonds that have
maturity dates approximating the terms of
the consolidated entity’s obligations. The
calculation is performed by a qualified
actuary using the projected unit credit
method.
When the benefits of the plan are improved,
the portion of the increased benefit relating
to past service by employees is recognised as
an expense in the income statement on a
straight line basis over the average period
until the benefits become vested. To the
extent that the benefits vest immediately, the
expense is recognised immediately in the
income statement.
All actuarial gains and losses as at 1 January
2004, the date of transition to AIFRS, were
recognised in retained earnings. Actuarial
gains or losses that arise subsequent to 1
January 2004 in calculating the consolidated
entity’s obligation in respect of the plan are
recognised directly in retained earnings.
When the calculation results in plan assets
exceeding liabilities to the consolidated
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1. Significant Accounting Policies
(continued)
entity, the recognised asset is limited to
the net total of any unrecognised
actuarial losses and past service costs
and the present value of any future
refunds from the plan or reductions in
future contributions to the plan.
Past service cost is the increase in the
present value of the defined benefit
obligation for employee services in prior
periods, resulting in the current period
from the introduction of, or changes to,
post-employment benefits or other
long-term employee benefits. Past
service costs may either be positive
(where benefits are introduced or
improved) or negative (where existing
benefits are reduced).
Share-based payment transactions
The Santos Executive Share Option Plan
allows eligible executives to acquire
shares in the capital of the Company.
The fair value of options granted is
recognised as an employee expense with
a corresponding increase in equity. The
fair value is measured at grant date and
recognised over the period during which
the executive becomes unconditionally
entitled to the options. The fair value
of the options granted during 2005 is
measured using the Monte Carlo
Simulation Method, which takes into
account the performance hurdles that
form part of the vesting conditions. The
fair value of the options granted during
2004 is measured using a Black-Scholes
option pricing model, taking into account
the terms and conditions upon which the
options were granted. The amount
recognised as an expense is only adjusted
when the options do not vest due to
non-market related conditions.
The fair value of Share Acquisition Rights
(“SARs”) issued to eligible executives
under the Executive Long-term Incentive
Program is recognised as an employee
expense with a corresponding increase in
equity. The fair value is measured at grant
date and recognised over the period
during which the executive becomes
unconditionally entitled to the SARs.
The fair value of the SARs granted is
measured using the Monte Carlo
Simulation Method, which takes into
account the performance hurdles that
form part of the vesting conditions. The
amount recognised as an expense is only
adjusted when the SARs do not vest due
to non-market related conditions.
The fair value of shares issued to eligible
employees under the Santos Employee
Share Acquisition Plan, and to eligible
executives and employees under the
Santos Employee Share Purchase Plan,
is recognised as an increase in issued
capital on grant date.
(r) Interest-bearing borrowings
Current accounting policy
Interest-bearing borrowings are
recognised initially at fair value, net of
transaction costs incurred. Subsequent
to initial recognition, interest-bearing
borrowings are stated at amortised cost
with any difference between cost and
redemption value being recognised in the
income statement over the period of the
borrowings on an effective interest basis.
Fixed rate notes that are hedged by an
interest rate swap are recognised at fair
value (refer note 1(f)).
Comparative accounting policy
Borrowings are carried on the balance
sheets at their principal amount. Interest
is accrued at the contracted rate.
(s) Capitalisation of borrowing costs
Borrowing costs, including preproduction
interest, finance charges and foreign
currency gains and losses on the interest
costs of foreign currency borrowings,
relating to major oil and gas assets
under development up to the date of
commencement of commercial
operations, are capitalised as a
component of the cost of development.
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.
Borrowing costs incurred after
commencement of commercial operations
are expensed.
(t) 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.
(u) Share capital
Preference share capital
Preference share capital is classified as
equity if it is non-redeemable and any
dividends are discretionary, or it is
redeemable only at the Company’s
option. Dividends on preference share
capital classified as equity are recognised
as distributions within equity.
Dividends
Dividends are recognised as a liability in
the period in which they are declared.
Transaction costs
Transaction costs of an equity transaction
are accounted for as a deduction from
equity, net of any related income
tax benefit.
(v) Revenue
Product sales and overriding royalties are
recognised in the income statement when
the significant risks and rewards of
ownership have been transferred to the
buyer. Dividend revenue from controlled
entities is recognised as the dividends are
declared and from other parties as the
dividends are received.
(w) Other income
Equipment rentals, pipeline tariffs and
other income are recognised in the
income statement when the significant
risks and rewards of ownership have been
transferred to the buyer or when the
service has been performed.
The gain or loss arising on disposal of
a non-current asset is included as other
income at the date control of the asset
passes to the buyer. 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.
(x) Expenses
Government royalties and petroleum
resource rent tax
Government royalties and petroleum
resource rent tax (“PRRT”) are recognised
as an operating expense on an accruals
basis when the related sales are
recognised or related production takes
place. The amount is recognised in
Annual Report 2005
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
1. Significant Accounting Policies
(continued)
accordance with government legislative
requirements.
Some oil and gas industry participants
are of the view that PRRT is more
appropriately accounted for as an income
tax by applying AASB 112 “Income Taxes”.
The Company is of the view that there has
been no definitive guidance from any of
the relevant accounting standards setting
bodies and that there remains uncertainty
as to what constitutes an income tax.
Accordingly, the Company will continue to
account for PRRT under the accruals basis
described above until such time as this
uncertainty is resolved or a clear industry
practice develops.
Had PRRT been accounted for as an
income tax, a deferred tax asset of
$95.3 million would be recognised on
transition to AIFRS at 1 January 2004
with a corresponding increase in retained
earnings. At 31 December 2005 the
balance of the deferred tax asset would
have been $108.9 million (2004:
$33.1 million). Profit before tax would
have increased by $52.5 million (2004:
$34.6 million), the PRRT income tax
benefit in 2005 would have been
$39.0 million (2004: $86.5 million
expense), and profit after tax would
have increased by $75.8 million (2004:
$62.3 million decrease).
Operating lease payments
Operating lease payments, where the
lessor effectively retains substantially
all the risks and rewards incidental to
ownership of the leased items, are
recognised in the income statement on
a straight line basis over the term of
the lease.
Net financing costs
Net financing costs comprise interest
payable on borrowings calculated using
the effective interest rate method, the
unwinding of the effect of discounting on
provisions, and interest receivable on
funds invested.
Interest income is recognised in the
income statement as it accrues, using the
effective interest method.
78
Annual Report 2005
(y) 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 balance sheet.
Cash flows are included in the cash flow
statement 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.
(z) Income tax
Income tax on the profit or loss for the
year comprises current and deferred tax.
Income tax is recognised in the income
statement except to the extent that it
relates to items recognised directly in
equity, in which case it is recognised
in equity.
Current tax is the amount of income tax
payable on the taxable profit or loss for
the year, using tax rates enacted or
substantially enacted at the balance
sheet date, and any adjustment to tax
payable in respect of previous years.
Deferred tax is determined using the
balance sheet approach, providing for
temporary differences between the
carrying amounts of assets and liabilities
for financial reporting purposes and the
appropriate tax bases. The following
temporary differences are not provided
for: the initial recognition of assets or
liabilities that affect neither accounting
nor taxable profit, and differences
relating to investments in subsidiaries to
the extent it is probable that they will not
reverse in the foreseeable future. The
amount of deferred tax provided is based
on the expected manner of realisation or
settlement of the carrying amount of
assets and liabilities, using tax rates
enacted or substantially enacted at the
balance sheet date.
A deferred tax asset is recognised only
to the extent that it is probable that
future taxable profits will be available
against which the asset can be utilised.
Deferred tax assets are reduced to the
extent that it is no longer probable that
the related tax benefit will be realised.
The Company and all its wholly-owned
Australian resident entities are part of a
tax-consolidated group under Australian
taxation law. Santos Ltd is the head
entity in the tax-consolidated group.
Current tax expense/income, deferred tax
liabilities and deferred tax assets arising
from temporary differences of the
members of the tax-consolidated group
are allocated among the members of the
tax-consolidated group using a
“stand-alone taxpayer” approach in
accordance with UIG 1052 “Tax
Consolidation Accounting” and are
recognised in the separate financial
statements of each entity. Current tax
liabilities and assets and deferred tax
assets arising from unused tax losses
and tax credits of the members of the
tax-consolidated group are recognised
by the Company (as head entity in the
tax-consolidated group).
The Company and the other entities in
the tax-consolidated group have entered
into a tax funding agreement. Tax
contribution amounts payable under the
tax funding agreement are recognised as
payable to or receivable by the Company
and each other member of the group.
Where the tax contribution amount
recognised by each member of the
tax-consolidated group for a particular
period under the tax funding agreement is
different to the aggregate of the current
tax liability or asset and any deferred tax
asset arising from unused tax losses and
tax credits in respect of that period
assumed by the Company, the difference
is recognised as a contribution from
(or distribution to) equity participants.
The Company and the other entities in the
tax-consolidated group have also entered
into a tax sharing agreement pursuant to
which the other entities may be required
to contribute to the tax liabilities of the
Company in the event of default by the
Company or upon leaving the group.
SAN171 WWW Financials 28/3/06 3:02 PM Page 79
2. Revenue and Other Income
Product sales:
Gas and ethane
Crude oil
Condensate and naphtha
Liquefied petroleum gas
Other revenue:
Overriding royalties
Dividends from other entities
Dividends from controlled entities
Total revenue
Other income:
Insurance recovery
Equipment rentals, pipeline tariffs and other
Sole-risk buy-back premium
Net gain on sale of non-current assets
Net gain on sale of controlled entities
3. Expenses
Cost of sales:
Cash cost of production:
Production costs:
Production expenses
Production facilities operating leases
Other operating costs:
Pipeline tariffs and tolls
Royalty and excise
PRRT
Total cash cost of production
Depreciation and depletion
Third party gas purchases
(Increase)/decrease in product stock
Total cost of sales
Consolidated
Santos Ltd
2005
$million
2004
$million
2005
$million
2004
$million
825.7
1,106.8
345.9
184.4
680.1
501.8
228.5
90.5
2,462.8
1,500.9
13.0
0.1
–
13.1
14.3
–
–
14.3
333.4
237.4
84.8
65.6
721.2
19.8
0.1
–
19.9
2,475.9
1,515.2
741.1
33.9
15.6
15.8
23.1
16.3
104.7
330.1
38.7
368.8
33.7
115.2
52.5
201.4
570.2
559.0
100.9
(9.9)
1,220.2
116.6
11.2
–
61.2
–
189.0
270.1
27.6
297.7
32.6
119.4
34.6
186.6
484.3
471.6
14.9
3.4
974.2
23.7
(1.2)
–
5.1
15.1
42.7
95.0
15.0
110.0
9.2
49.1
–
58.3
168.3
187.8
66.9
(10.2)
412.8
294.6
198.5
44.2
31.5
568.8
18.7
–
251.7
270.4
839.2
73.8
5.4
–
336.8
–
416.0
99.8
12.9
112.7
7.4
73.1
–
80.5
193.2
201.0
12.2
(1.2)
405.2
Annual Report 2005
79
SAN171 WWW Financials 28/3/06 3:02 PM Page 80
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
3. Expenses (continued)
Other expenses:
Selling, general and administrative expenses:
Operating expenses
Depreciation
Foreign exchange losses/(gains)
Hedge ineffectiveness (gains)/losses
Exploration and evaluation expensed
Net impairment reversal of oil and gas assets (refer note 14)
Net impairment (reversal)/loss of investment in controlled entities
Profit before tax includes the following items:
Depreciation and depletion:
Depletion of exploration and development expenditure
Depreciation of plant and equipment
Depreciation of buildings
Employee benefits expense
Share-based payments expense
Write-down of inventories
Operating lease rentals
Included in expenses are the following items:
Accelerated depreciation due to East Spar shut-in included in depreciation
and depletion
Costs associated with Moomba liquids recovery plant fire included in
production expenses
Organisation restructure costs included in selling, general and
administrative expenses
4. Earnings
Earnings before interest, tax, depreciation, depletion, exploration and impairment
(“EBITDAX”) is calculated as follows:
Profit before tax
Add back:
Net financing costs
Earnings before interest and tax (“EBIT”)
Add back:
Depreciation and depletion
Exploration and evaluation expensed
Net impairment reversal of oil and gas assets
Net impairment (reversal)/loss of investment in controlled entities
Consolidated
Santos Ltd
2005
$million
2004
$million
2005
$million
2004
$million
78.1
2.0
80.1
3.8
(1.2)
204.2
(131.3)
–
155.6
330.4
228.1
2.5
561.0
126.5
2.4
4.0
53.2
18.5
–
5.2
23.7
53.1
3.3
56.4
(2.6)
–
117.4
(7.6)
–
163.6
308.5
164.4
2.0
474.9
130.9
0.1
5.0
38.9
–
17.5
21.6
39.1
48.6
0.2
48.8
–
1.9
31.5
(50.5)
(338.4)
(306.7)
104.6
82.1
1.3
188.0
105.2
2.4
2.4
21.0
–
–
5.2
5.2
46.2
0.3
46.5
0.1
–
46.0
(34.4)
9.5
67.7
114.7
85.6
1.0
201.3
116.8
0.1
3.1
19.1
–
11.9
21.6
33.5
1,133.5
518.8
620.9
729.6
71.3
1,204.8
561.0
204.2
(131.3)
–
47.6
566.4
474.9
117.4
(7.6)
–
56.8
677.7
188.0
31.5
(50.5)
(338.4)
52.7
782.3
201.3
46.0
(34.4)
9.5
EBITDAX
1,838.7
1,151.1
508.3
1,004.7
80
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 81
5. Net Financing Costs
Interest income:
Controlled entities
Other entities
Financial income
Interest expense:
Controlled entities
Other entities
Less borrowing costs capitalised
Unwind of the effect of discounting on provisions (refer note 1(p))
Interest expense on defined benefit obligation
Financial expenses
Net financing costs
6. Income Tax Expense
Recognised in the income statement
Current tax expense
Current year
Adjustments for prior years
Deferred tax expense
Origination and reversal of temporary differences
Benefit of tax losses recognised
Total income tax expense
Numerical reconciliation between tax expense and pre-tax net profit
Profit before tax
Prima facie income tax at 30% (2004: 30%)
Increase/(decrease) in income tax expense due to:
Non-deductible depletion and depreciation
Abandonment of exploration
Net impairment (reversal)/loss of investments in controlled entities
Foreign losses not recognised
Gain on sale of oil and gas assets
Tax benefit arising from deferred tax balances upon entering into tax
consolidation regime
Dividends from controlled entities
Non-deductible interest
Gain on sale of oil and gas assets
Under/(over) provided in prior years
Other
Income tax expense on pre-tax net profit
Consolidated
Santos Ltd
2005
$million
2004
$million
2005
$million
2004
$million
–
8.6
8.6
–
89.7
(28.0)
61.7
14.5
3.7
79.9
71.3
320.7
5.5
326.2
36.6
8.6
45.2
371.4
1,133.5
340.1
3.4
1.2
–
18.9
(7.1)
–
–
–
–
5.5
9.4
371.4
–
3.5
3.5
–
65.7
(32.1)
33.6
14.0
3.5
51.1
47.6
157.2
(10.0)
147.2
9.3
7.6
16.9
164.1
518.8
155.6
16.6
1.1
–
–
–
(20.0)
–
–
–
(10.0)
20.8
164.1
48.9
3.2
52.1
99.5
0.5
–
100.0
5.2
3.7
108.9
56.8
58.4
14.2
72.6
29.6
–
29.6
102.2
620.9
186.2
6.6
(0.6)
(101.5)
–
–
–
–
–
–
14.2
(2.7)
102.2
42.8
2.3
45.1
90.7
0.4
–
91.1
3.2
3.5
97.8
52.7
53.4
19.6
73.0
1.2
–
1.2
74.2
729.6
218.9
0.6
(0.6)
2.9
–
–
(20.0)
(75.5)
14.2
(76.8)
19.6
(9.1)
74.2
Annual Report 2005
81
SAN171 WWW Financials 28/3/06 3:02 PM Page 82
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
6. Income Tax Expense (continued)
Deferred tax recognised directly in equity
Hedges of investments in foreign operations
Change in available-for-sale financial assets
Foreign exchange translation differences
Equity raising costs
Actuarial (loss)/gain on defined benefit plan
7. Cash and Cash Equivalents
Bank balances
Call deposits
8. Trade and Other Receivables
Trade receivables
Receivables due from controlled entities:
Non-interest-bearing
Interest-bearing
Tax related balances owing by controlled entities
Prepayments
Insurance proceeds receivable
Other
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.
9. Inventories
Petroleum products
Drilling and maintenance stocks
Inventories stated at fair value less costs to sell
10. Other Assets
Current
Interest rate swap contracts
Deferred loss on commodity hedges
Non-current
Other
Consolidated
Santos Ltd
2005
$million
2004
$million
2005
$million
2004
$million
(15.7)
2.6
7.1
–
(0.2)
(6.2)
229.2
–
229.2
5.2
–
(2.2)
(3.3)
1.4
1.1
126.0
0.1
126.1
–
1.9
–
–
(0.2)
1.7
65.5
–
65.5
–
–
–
(3.3)
1.4
(1.9)
39.3
–
39.3
294.9
179.3
134.8
72.3
–
–
–
2.8
95.4
118.6
511.7
99.1
44.9
144.0
21.0
27.2
–
27.2
1.9
–
–
–
18.5
116.6
106.4
420.8
82.4
35.1
117.5
21.4
–
3.2
3.2
2.9
402.1
549.8
138.9
2.5
36.0
112.1
393.0
990.0
62.3
7.6
73.8
57.3
1,376.2
1,656.3
55.7
11.6
67.3
11.6
–
–
–
–
44.8
14.0
58.8
14.0
–
2.3
2.3
–
82
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 83
11. Exploration and Evaluation Assets
Balance at 31 December 2004
Balance at 31 December 2005
Reconciliation of movements
Balance at 1 January 2004
Acquisitions
Additions
Exploration expensed
Net impairment (losses)/reversals
Transfer to oil and gas assets
Foreign currency translation
Balance at 31 December 2004
Balance at 1 January 2005
Acquisitions
Additions
Exploration expensed
Net impairment (losses)/reversals
Transfer to oil and gas assets
Foreign currency translation
Balance at 31 December 2005
Sub-surface
assets
$million
Consolidated
Plant and
equipment
$million
271.8
333.4
277.5
0.7
216.5
(117.4)
–
(102.7)
(2.8)
271.8
271.8
24.9
168.2
(153.5)
6.3
–
15.7
333.4
0.2
5.7
0.2
–
–
–
–
–
–
0.2
0.2
4.7
0.6
–
–
–
0.2
5.7
Sub-surface
assets
$million
Santos Ltd
Plant and
equipment
$million
14.6
17.1
13.5
–
47.6
(46.0)
(0.5)
–
–
14.6
14.6
1.2
19.2
(19.1)
1.2
–
–
17.1
0.4
0.6
0.4
–
–
–
–
–
–
0.4
0.4
–
–
–
0.2
–
–
0.6
Total
$million
272.0
339.1
277.7
0.7
216.5
(117.4)
–
(102.7)
(2.8)
272.0
272.0
29.6
168.8
(153.5)
6.3
–
15.9
339.1
Total
$million
15.0
17.7
13.9
–
47.6
(46.0)
(0.5)
–
–
15.0
15.0
1.2
19.2
(19.1)
1.4
–
–
17.7
Annual Report 2005
83
SAN171 WWW Financials 28/3/06 3:02 PM Page 84
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
12. Oil and Gas Assets
2005
Cost at 31 December 2005
Less accumulated depreciation, depletion and
Sub-surface
assets
$million
Consolidated
Plant and
equipment
$million
Total
$million
Sub-surface
assets
$million
Santos Ltd
Plant and
equipment
$million
Total
$million
6,040.7
4,397.1
10,437.8
2,093.4
1,924.7
4,018.1
impairment
(3,451.9)
(2,193.4)
(5,645.3)
(1,163.0)
(1,127.7)
(2,290.7)
Balance at 31 December 2005
2,588.8
2,203.7
4,792.5
930.4
797.0
1,727.4
Reconciliation of movements
Assets in development
Balance at 1 January 2005
Additions
Transfer from exploration and evaluation assets
Transfer to producing assets
Exploration expensed
Foreign currency translation
208.7
70.0
–
(152.3)
(2.5)
2.6
341.3
134.6
–
(142.0)
–
12.7
550.0
204.6
–
(294.3)
(2.5)
15.3
Balance at 31 December 2005
126.5
346.6
473.1
Producing assets
Balance at 1 January 2005
Acquisitions
Additions
Transfer from assets in development
Disposals
Depreciation and depletion expense
Exploration expensed
Net impairment reversals/(losses)
Foreign currency translation
1,670.7
597.4
336.3
152.3
–
(330.4)
(48.2)
62.4
21.8
1,515.7
95.1
242.0
142.0
(0.4)
(213.2)
–
62.6
13.3
3,186.4
692.5
578.3
294.3
(0.4)
(543.6)
(48.2)
125.0
35.1
Balance at 31 December 2005
2,462.3
1,857.1
4,319.4
Total oil and gas assets
2,588.8
2,203.7
4,792.5
25.8
5.0
–
–
(2.5)
–
28.3
489.8
360.2
115.7
–
–
(104.6)
(9.9)
50.9
–
902.1
930.4
17.5
78.3
–
–
–
–
95.8
605.1
101.4
64.7
–
–
(68.2)
–
(1.8)
–
701.2
797.0
43.3
83.3
–
–
(2.5)
–
124.1
1,094.9
461.6
180.4
–
–
(172.8)
(9.9)
49.1
–
1,603.3
1,727.4
84
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 85
12. Oil and Gas Assets (continued)
2004
Cost at 31 December 2004
Less accumulated depreciation, depletion and
Sub-surface
assets
$million
Consolidated
Plant and
equipment
$million
Total
$million
Sub-surface
assets
$million
Santos Ltd
Plant and
equipment
$million
Total
$million
4,976.0
3,875.2
8,851.2
1,562.1
1,682.9
3,245.0
impairment
(3,096.6)
(2,018.2)
(5,114.8)
(1,046.5)
(1,060.3)
(2,106.8)
Balance at 31 December 2004
1,879.4
1,857.0
3,736.4
515.6
622.6
1,138.2
Reconciliation of movements
Assets in development
Balance at 1 January 2004
Additions
Transfer from exploration and evaluation assets
Transfer to producing assets
Foreign currency translation
Balance at 31 December 2004
Producing assets
Balance at 1 January 2004
Acquisitions
Additions
Transfer from assets in development
Disposals
Depreciation and depletion expense
Net impairment reversals
Foreign currency translation
Balance at 31 December 2004
Total oil and gas assets
151.7
115.8
102.7
(159.1)
(2.4)
208.7
1,488.3
173.5
185.0
159.1
(21.5)
(308.5)
4.8
(10.0)
1,670.7
1,879.4
343.4
246.6
–
(236.8)
(11.9)
341.3
1,274.4
8.3
155.7
236.8
(13.5)
(146.5)
2.5
(2.0)
1,515.7
1,857.0
495.1
362.4
102.7
(395.9)
(14.3)
550.0
2,762.7
181.8
340.7
395.9
(35.0)
(455.0)
7.3
(12.0)
3,186.4
3,736.4
22.4
3.4
–
–
–
25.8
471.7
–
131.1
–
(27.1)
(114.7)
28.8
–
489.8
515.6
2.6
14.9
–
–
–
17.5
616.0
–
141.5
–
(88.3)
(70.0)
5.9
–
605.1
622.6
25.0
18.3
–
–
–
43.3
1,087.7
–
272.6
–
(115.4)
(184.7)
34.7
–
1,094.9
1,138.2
Annual Report 2005
85
SAN171 WWW Financials 28/3/06 3:02 PM Page 86
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
13. Other Land, Buildings, Plant and Equipment
Cost at 31 December 2004
Less accumulated depreciation, depletion and
impairment
Balance at 31 December 2004
Cost at 31 December 2005
Less accumulated depreciation, depletion and
impairment
Balance at 31 December 2005
Reconciliation of movements
Balance at 1 January 2004
Additions
Disposals
Depreciation
Net impairment reversals
Balance at 31 December 2004
Balance at 1 January 2005
Additions
Depreciation
Foreign currency translation
Balance at 31 December 2005
Land and
buildings
$million
Consolidated
Plant and
equipment
$million
Land and
buildings
$million
Santos Ltd
Plant and
equipment
$million
Total
$million
Total
$million
97.2
54.9
152.1
55.5
60.4
115.9
(49.7)
(35.5)
(85.2)
(34.0)
(39.9)
(73.9)
47.5
100.2
19.4
78.6
66.9
178.8
21.5
57.1
20.5
85.3
42.0
142.4
(52.2)
(53.1)
(105.3)
(36.2)
(53.8)
(90.0)
48.0
25.5
73.5
20.9
31.5
52.4
47.0
2.5
–
(2.0)
–
47.5
47.5
3.0
(2.5)
–
48.0
29.1
7.9
–
(17.9)
0.3
19.4
19.4
20.6
(14.9)
0.4
25.5
76.1
10.4
–
(19.9)
0.3
66.9
66.9
23.6
(17.4)
0.4
73.5
19.3
3.2
–
(1.0)
–
21.5
21.5
0.7
(1.3)
–
20.9
29.1
6.9
(0.1)
(15.6)
0.2
20.5
20.5
24.9
(13.9)
–
31.5
48.4
10.1
(0.1)
(16.6)
0.2
42.0
42.0
25.6
(15.2)
–
52.4
86
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 87
14. Impairment of Cash Generating Units
During the year ended 31 December 2005, the consolidated entity reassessed the recoverable amount of its oil and gas assets in light of increased
oil prices and $144.6 million (31 December 2004: $74.4 million) of previously recognised impairment losses were reversed. The estimates of
recoverable amounts were based on the assets value in use, determined using a discount rate of 8.7% (2004: 8.8%).
Sub-surface
assets
$million
2005
Plant and
equipment
$million
Total
$million
Sub-surface
assets
$million
2004
Plant and
equipment
$million
Total
$million
CGU
Consolidated
SWQ Oil
Mereenie
Moonie
Elang-Kakatua
Barrow
East Spar/John Brookes
Thevenard
Other – impairment losses
Other – impairment reversals
Australia
USA Gulf Coast
Other
International
Impairment losses
Impairment reversals
Net impairment reversal
Santos Ltd
SWQ Oil
Other – impairment losses
Other – impairment reversals
Impairment losses
Impairment reversals
Net impairment reversal
Description
Oil field and pipelines
Oil and gas field
Oil field
Oil field
Oil field
Gas field and
production facility
Oil field
Gas field
–
(9.6)
(5.3)
(11.1)
(14.1)
–
(12.5)
2.2
(17.6)
(68.0)
(0.7)
–
(0.7)
–
(8.4)
(5.3)
(0.7)
(16.8)
–
(42.3)
11.1
(0.2)
(62.6)
–
–
–
–
(18.0)
(10.6)
(11.8)
(30.9)
–
(54.8)
13.3
(17.8)
(130.6)
(0.7)
–
(0.7)
(68.7)
(62.6)
(131.3)
Oil field and pipelines
(51.1)
2.6
(3.6)
(52.1)
–
2.1
(0.5)
1.6
13.3
(144.6)
(131.3)
(51.1)
4.7
(4.1)
(50.5)
4.7
(55.2)
(50.5)
(27.8)
9.6
–
(1.6)
9.5
(5.3)
1.0
0.5
(11.9)
(26.0)
21.4
(0.2)
21.2
(4.8)
(27.8)
1.8
(2.3)
(28.3)
(20.2)
8.4
0.8
(0.1)
12.2
(4.0)
3.4
–
(3.3)
(2.8)
–
–
–
(2.8)
(3.7)
–
(2.4)
(6.1)
(48.0)
18.0
0.8
(1.7)
21.7
(9.3)
4.4
0.5
(15.2)
(28.8)
21.4
(0.2)
21.2
(7.6)
66.8
(74.4)
(7.6)
(31.5)
1.8
(4.7)
(34.4)
1.8
(36.2)
(34.4)
Annual Report 2005
87
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
15. Other Investments
Equity securities available for sale
Investments in other entities at cost
Investments in controlled entities – at cost
16. Deferred Tax Assets and Liabilities
Recognised deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
Consolidated
Santos Ltd
2005
$million
2004
$million
14.8
–
–
14.8
–
1.2
–
1.2
2005
$million
11.8
–
2,983.5
2,995.3
2004
$million
–
0.5
2,071.1
2,071.6
Consolidated
Exploration, evaluation, oil and gas assets, other land,
buildings, plant and equipment
Other investments
Trade debtors
Sundry debtors
Inventories
Doubtful debts
Prepayments
Other assets
Equity-raising costs
Trade creditors
Non-trade payables and accrued expenses
Interest-bearing loans and borrowings
Employee benefits
Defined benefit obligations
Provisions
Other liabilities
Other items
Tax value of loss carry-forwards recognised
Tax (assets)/liabilities
Set-off of tax
Net tax (assets)/liabilities
Assets
Liabilities
Net
2005
$million
2004
$million
2005
$million
2004
$million
2005
$million
2004
$million
–
(2.6)
–
–
–
–
–
–
(2.0)
(5.2)
–
–
(16.3)
(3.4)
(1.5)
–
–
(30.4)
(61.4)
4.0
(57.4)
–
–
–
–
–
(0.2)
–
–
–
(1.7)
(1.4)
–
(15.1)
(3.7)
(0.8)
(11.2)
–
(7.8)
(41.9)
(47.7)
(89.6)
398.0
–
3.3
19.1
17.2
–
1.8
8.1
–
–
–
68.3
–
–
–
–
1.1
–
516.9
(4.0)
512.9
362.4
–
0.8
2.6
11.7
–
1.9
–
–
–
–
94.7
–
–
–
–
–
–
474.1
47.7
521.8
398.0
(2.6)
3.3
19.1
17.2
–
1.8
8.1
(2.0)
(5.2)
–
68.3
(16.3)
(3.4)
(1.5)
–
1.1
(30.4)
455.5
–
455.5
362.4
–
0.8
2.6
11.7
(0.2)
1.9
–
–
(1.7)
(1.4)
94.7
(15.1)
(3.7)
(0.8)
(11.2)
–
(7.8)
432.2
–
432.2
88
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 89
16. Deferred Tax Assets and Liabilities (continued)
Santos Ltd
Exploration, evaluation, oil and gas assets, other land,
buildings, plant and equipment
Other investments
Trade debtors
Sundry debtors
Inventories
Doubtful debts
Prepayments
Equity-raising costs
Non-trade payables and accrued expenses
Employee benefits
Defined benefit obligations
Provisions
Other items
Tax (assets)/liabilities
Set-off of tax
Net tax (assets)/liabilities
Assets
Liabilities
Net
2005
$million
2004
$million
2005
$million
2004
$million
2005
$million
2004
$million
–
–
–
–
–
–
–
(2.0)
(2.7)
(15.6)
(3.4)
–
–
(23.7)
23.7
–
–
–
–
–
–
(0.2)
–
–
(1.5)
(14.6)
(3.7)
(0.8)
(0.3)
(21.1)
21.1
–
155.6
1.9
2.4
18.3
10.8
–
0.3
–
–
–
–
–
–
189.3
(23.7)
165.6
145.0
–
–
–
8.5
–
0.9
–
–
–
–
–
–
154.4
(21.1)
133.3
155.6
1.9
2.4
18.3
10.8
–
0.3
(2.0)
(2.7)
(15.6)
(3.4)
–
–
165.6
–
165.6
145.0
–
–
–
8.5
(0.2)
0.9
–
(1.5)
(14.6)
(3.7)
(0.8)
(0.3)
133.3
–
133.3
At 31 December 2005, a deferred tax liability of $465.0 million (2004: deferred tax asset of $231.1 million) relating to investments in subsidiaries
has not been recognised because the Company controls whether the liability will be incurred and it is satisfied that it will not be incurred in the
foreseeable future.
Unrecognised deferred tax assets
Deferred tax assets have not been recognised in respect of the following items:
Deductible temporary differences
Tax losses
Deferred tax assets have not been recognised in respect of these items because it is not
probable that future taxable profits will be available against which the consolidated
entity can utilise the benefits therefrom. Unrecognised deductible temporary differences
and tax losses of $45.7 million (2004: $49.4 million) will expire between 2006 and 2025.
The remaining deductible temporary differences and tax losses do not expire under
current tax legislation.
17. Trade and Other Payables
Trade payables
Non-trade payables and accrued expenses
Amounts owing to controlled entities
Consolidated
Santos Ltd
2005
$million
2004
$million
2005
$million
2004
$million
30.4
86.3
116.7
26.7
97.2
123.9
–
39.1
39.1
–
46.7
46.7
260.2
132.0
–
392.2
286.2
86.7
–
372.9
89.6
54.9
235.1
379.6
109.5
29.1
313.3
451.9
Annual Report 2005
89
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
18. Interest-Bearing Loans and Borrowings*
This note provides information about the contractual terms of the consolidated entity’s
interest-bearing loans and borrowings. For more information about the consolidated
entity’s exposure to interest rate and foreign currency risk, see note 34.
Current liabilities
Amounts owing to controlled entities
Bank loans
Long-term notes
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 liabilities
Bank loans
Commercial paper
Medium-term notes
Long-term notes
Consolidated
Santos Ltd
2005
$million
2004
$million
2005
$million
2004
$million
–
11.1
–
–
11.1
250.4
265.5
468.5
832.6
–
5.2
43.7
1.0
49.9
222.7
209.0
20.0
757.8
1,817.0
1,209.5
2,450.9
–
–
–
2,450.9
1,685.2
–
–
1.0
1,686.2
–
–
–
–
–
–
–
–
–
–
* Comparative information has been prepared under previous GAAP in accordance with the transition rules in AASB 1 “First-time Adoption of Australian Equivalents
to International Financial Reporting Standards”.
The consolidated entity has entered into interest rate swap contracts to manage the exposure to interest rates. This has resulted in a weighted
average interest rate on interest-bearing liabilities of 5.89% as at 31 December 2005 (2004: 5.09%). All facilities are unsecured and arranged
through a controlled entity, Santos Finance Ltd, and are guaranteed by Santos Ltd.
Details of major credit facilities
(a) Bank loans
The consolidated entity has access to the following committed revolving bank facilities:
Revolving facilities at 31 December 2005
Year of maturity
2006
2007
2008
2009
Currency
Multi-currency
Multi-currency
Multi-currency
Multi-currency
Amount
A$million
200.0
–
300.0
200.0
700.0
Revolving bank facilities bear interest at the relevant interbank reference rate plus 0.25% to 0.43%. The amount drawn at 31 December
2005 is $nil (2004: $nil).
90
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 91
18. Interest-Bearing Loans and Borrowings (continued)
(a) Bank loans (continued)
Term bank loans at 31 December 2005
Year of maturity
Currency
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
Amount
A$million
11.1
21.4
20.6
25.6
26.5
27.4
23.5
19.7
20.7
21.1
21.5
22.4
261.5
Term bank loans bear interest at the relevant interbank reference rate plus a margin of up to 0.75%. The amount outstanding at
31 December 2005 is US$191.5 million (A$261.5 million) at a weighted average annual effective interest rate of 5.02% (2004: 2.70%).
(b) Commercial paper
The consolidated entity has an $800.0 million (2004: $800.0 million) Australian commercial paper program supported by the revolving bank
facilities referred to in (a) above. At 31 December 2005, $265.5 million (2004: $209.0 million) of commercial paper is on issue and the
weighted average annual effective interest rate is 5.83% (2004: 5.61%).
(c) Medium-term notes
The consolidated entity has a $1,000.0 million (2004: $500.0 million) Australian medium-term note program.
Medium-term notes on issue at 31 December 2005
Year of issue
Year of maturity
Effective interest rate
1998
2005
2005
2008
2011
2015
* Floating rate of interest.
(d) Long-term notes
6.61%
6.18% *
6.35%
2005
$million
2004
$million
20.0
349.1
99.4
468.5
20.0
–
–
20.0
Long-term notes on issue at 31 December 2005
Year of issue
Year of maturity
Effective interest rate
2005
US$million
2004
US$million
2005
A$million
2004
A$million
1993
2000
2002
2005
2007 - 2015
2009 - 2022
6.95%
8.37%
6.11%
–
308.4
301.5
609.9
34.0
290.0
300.0
624.0
–
421.0
411.6
832.6
43.7
372.5
385.3
801.5
Annual Report 2005
91
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
19. Employee Benefits
Current
Liability for annual leave
Liability for long service leave
Non-current
Liability for defined benefit obligations
(a) Liability for defined benefit obligations
Consolidated
Santos Ltd
2005
$million
2004
$million
2005
$million
2004
$million
18.6
31.1
49.7
11.3
16.0
29.3
45.3
12.5
17.9
30.3
48.2
11.3
15.5
28.9
44.4
12.5
Defined benefit members of the Santos Superannuation Plan receive a lump sum
benefit on retirement, death, disablement and withdrawal. The defined benefit
section of the Plan is closed to new members. All new members receive accumulation-
only benefits.
Movements in the net liability for defined benefit obligations recognised in the
balance sheet
Net liability at start of year
Expense recognised in income statement
Amount recognised in retained earnings
Employer contributions
Net liability at end of year
Defined benefit plan
Amount recognised in the balance sheet:
Liabilities
The consolidated entity has recognised a liability in the balance sheet in respect
of its defined benefit superannuation arrangements. However, the Santos
Superannuation Plan does not impose a legal liability on any of its employer
sponsors to cover any deficit that exists in the Plan.
Historical information for the current and previous period*
Present value of defined benefit obligations
Fair value of Plan assets
Deficit in Plan
Experience adjustments on Plan assets
Experience adjustments on Plan liabilities
* Comparative information has been provided for only one year in accordance with the
transition rules in AASB 1 “First-time Adoption of Australian Equivalents to
International Financial Reporting Standards”.
Reconciliation of the present value of the defined benefit obligations
Opening defined benefit obligations
Service cost
Interest cost
Contributions by Plan participants
Actuarial losses/(gains)
Benefits paid
Transfers (out)/in
Closing defined benefit obligations
12.5
2.9
0.5
(4.6)
11.3
19.1
4.3
(6.0)
(4.9)
12.5
12.5
2.9
0.5
(4.6)
11.3
19.1
4.3
(6.0)
(4.9)
12.5
11.3
12.5
11.3
12.5
90.7
(79.4)
11.3
(5.6)
(0.1)
88.6
4.1
3.7
4.1
6.1
(10.5)
(5.4)
90.7
88.6
(76.1)
12.5
(3.9)
(3.2)
99.3
5.0
4.5
4.3
(2.1)
(23.2)
0.8
88.6
90.7
(79.4)
11.3
(5.6)
(0.1)
88.6
4.1
3.7
4.1
6.1
(10.5)
(5.4)
90.7
88.6
(76.1)
12.5
(3.9)
(3.2)
99.3
5.0
4.5
4.3
(2.1)
(23.2)
0.8
88.6
92
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 93
19. Employee Benefits (continued)
(a) Liability for defined benefit obligations (continued)
Reconciliation of the fair value of Plan assets
Opening fair value of Plan assets
Expected return on Plan assets
Actuarial gains
Employer contributions
Contributions by Plan participants
Benefits paid
Transfers (out)/in
Closing fair value of Plan assets
Plan assets
The percentage invested in each class of Plan assets at the balance sheet date
are as follows:
Australian equity
International equity
Fixed income
Property
Cash
Consolidated
Santos Ltd
2005
$million
2004
$million
2005
$million
2004
$million
76.1
4.9
5.6
4.6
4.1
(10.5)
(5.4)
79.4
80.2
5.1
3.9
5.0
4.3
(23.2)
0.8
76.1
76.1
4.9
5.6
4.6
4.1
(10.5)
(5.4)
79.4
80.2
5.1
3.9
5.0
4.3
(23.2)
0.8
76.1
Consolidated
Santos Ltd
2005
%
35
29
15
7
14
2004
%
38
25
17
7
13
2005
%
35
29
15
7
14
2004
%
38
25
17
7
13
Fair value of Plan assets
The fair value of Plan assets does not include any amounts relating to any of Santos’ own financial instruments, property, or any other assets
owned or used by the consolidated entity.
Expected rate of return on Plan assets
The expected return on assets assumption is determined by weighting the expected long-term return for each asset class by the target
allocation of assets to each class. The returns used for each class are net of investment tax, investment fees and asset-based administration
fees.
Principal actuarial assumptions at the balance sheet date
(expressed as weighted average)
Discount rate
Expected rate of return on Plan assets
Expected salary increase rate:
2004
2005
2006
2007
Later than 2007
Consolidated
Santos Ltd
2005
%
2004
%
2005
%
2004
%
4.5
6.9
N/A
9.0
7.0
7.0
5.0
4.4
6.4
4.5
4.5
4.5
4.5
4.5
4.5
6.9
N/A
9.0
7.0
7.0
5.0
4.4
6.4
4.5
4.5
4.5
4.5
4.5
The expected rate of return on Plan assets includes a reduction to allow for asset-based administrative expenses of the Plan.
Annual Report 2005
93
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
19. Employee Benefits (continued)
(a) Liability for defined benefit obligations (continued)
Expense recognised in the income statement
Service cost
Interest cost
Expected return on Plan assets
The expense is recognised in the following line items in the income statement:
Other expenses
Financial expenses
Amount recognised in the statement of recognised income and expense
Actuarial (losses)/gains
Tax effect
Actuarial (losses)/gains
Summary of the most recent financial position of the Plan
Net market value of Plan assets
Accrued benefits
Net (deficit)/surplus
Consolidated
Santos Ltd
2005
$million
2004
$million
2005
$million
2004
$million
4.1
3.7
(4.9)
2.9
(0.8)
3.7
2.9
(0.5)
0.2
(0.3)
5.0
4.5
(5.1)
4.4
(0.1)
4.5
4.4
4.8
(1.5)
3.3
4.1
3.7
(4.9)
2.9
(0.8)
3.7
2.9
(0.5)
0.2
(0.3)
5.0
4.5
(5.1)
4.4
(0.1)
4.5
4.4
4.8
(1.5)
3.3
31 Dec 04
$million
1 Jan 04
$million
31 Dec 04
$million
1 Jan 04
$million
98.6
98.9
(0.3)
114.5
113.5
1.0
98.6
98.9
(0.3)
114.5
113.5
1.0
Expected contributions
The consolidated entity expects to contribute $5.5 million to the defined benefit superannuation plan in 2006.
Contribution recommendation
The current contribution recommendations as set out in the most recent actuarial valuation of the Plan as at 31 December 2004, are 15.0% of
salaries of defined benefit members and 9.0% of salaries of defined contribution members. The consolidated entity is currently contributing
at these rates.
Funding method
The method used to determine the employer contribution recommendations at the last actuarial review was the Attained Age Normal method.
The method adopted affects the timing of the cost to the consolidated entity.
Under the Attained Age Normal method, a “normal” cost is calculated which is the estimated employer contribution rate required to provide
benefits in respect of future service after the review date. The “normal” cost is then adjusted to take into account any surplus (or deficiency)
of assets over the value of liabilities in respect of service prior to the review date. Any surplus or deficiency can be used to reduce or increase
the “normal” employer contribution rate over a suitable period of time.
Economic assumptions
The economic assumptions adopted for the last actuarial review as at 31 December 2004 of the Plan were:
Expected rate of return on plan assets
Future annual salary increases
7.9% in year 1; 7.0% thereafter
9.0%; 7.0%; 7.0%; 5.0% thereafter
(b) Defined contribution plans
The consolidated entity makes contributions to several defined contribution plans. The amount recognised as an expense for the year was
$7.2 million (2004: $6.9 million).
94
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 95
19. Employee Benefits (continued)
(c) Share-based payments
(i) Current General Employee Share Plans
The Company currently operates two general employee share plans:
• the Santos Employee Share Acquisition Plan (“SESAP”); and
• the Santos Employee Share Purchase Plan (“SESPP”).
Both of these plans have operated since 1997.
SESAP
Broadly, SESAP provides for 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) to be entitled to acquire shares under this Plan. Executives participating in the
Executive Long-term Incentive Program in 2005, 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 consolidated entity 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.
Summary of share movements in the SESAP during 2005 (and comparative 2004 information):
Opening
balance
Granted during
the year
Distributions
during the year
Grant dates
Number
Number
Fair value
per share
$
Number
Fair value
aggregate
$
Closing balance
Number
Fair value
aggregate
$
2005
2 September 2002
2 September 2003
22 November 2004
18 November 2005
2004
24 August 2001
2 September 2002
2 September 2003
22 November 2004
162,864
200,754
156,770
–
–
–
–
106,744
–
–
–
11.24
162,864
27,531
19,764
2,288
1,854,533
287,283
208,725
26,921
–
173,223
137,006
104,456
–
2,121,982
1,678,323
1,279,586
520,388
106,744
212,447
2,377,462
414,685
5,079,891
177,908
195,624
242,991
–
616,523
–
–
–
157,014
157,014
–
–
–
8.14
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
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.
Annual Report 2005
95
SAN171 WWW Financials 28/3/06 3:02 PM Page 96
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
19. Employee Benefits (continued)
(c) Share-based payments (continued)
(i) Current General Employee Share Plans (continued)
The amounts recognised in the financial statements of the consolidated entity and the Company in relation to SESAP during the year were:
Employee expenses
Issued ordinary share capital
Consolidated
Santos Ltd
2005
$million
2004
$million
2005
$million
2004
$million
1.2
1.2
1.2
1.3
1.2
1.2
1.2
1.3
At 31 December 2005, the total number of shares acquired under the Plan since its commencement was 1,981,031.
SESPP
The general employee offer under SESPP 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 Program 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 18 November 2005, the Company issued 49,800 ordinary shares to 84 eligible employees at a subscription price of $10.67 per share
under the Plan. The total market value of those shares on the issue date was $559,254, being the market price at the close of trade on the
date of issue and the total amount received from employees for those shares was $531,366.
A summary of share movements in the SESPP are set out below:
Opening
balance
Granted during
the year
Restriction ceased
during the year
Closing
balance
Grant dates
Number
Number
2005
26 November 2004
18 November 2005
2004
7 March 2003
8 September 2003
26 November 2004
32,400
–
32,400
7,800
15,400
–
23,200
–
49,800
49,800
–
–
32,400
32,400
Fair value
per share
$
–
11.24
–
–
8.14
Number
Date
Number
32,400
–
32,400
7,800
15,400
–
23,200
26 November 2005
–
7 March 2004
8 September 2004
–
–
49,800
49,800
–
–
32,400
32,400
The fair value per share for shares granted during the year is Market Value (as defined above). The consideration received by the
Company per share is Market Value less the discount of 5% referred to above.
The amounts recognised in the financial statements of the consolidated entity and the Company in relation to the general employee offer
under the SESPP during the year were:
Issued ordinary share capital
Consolidated
Santos Ltd
2005
$million
2004
$million
2005
$million
2004
$million
0.5
0.3
0.5
0.3
At 31 December 2005, the total number of shares acquired under the general employee offer of the Plan since its commencement
was 759,000.
96
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 97
19. Employee Benefits (continued)
(c) Share-based payments (continued)
(ii) Executive Long-term Incentive Program
The Company’s Executive Long-term Incentive Program provides for invitations to be extended 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 Program applying to up to 50 executives.
The Program currently consists of an offer of securities under:
• the Santos Employee Share Purchase Plan (“SESPP”); and
• the Santos Executive Share Option Plan (“SESOP”).
SESOP has operated since 1997, the SESPP has been used as a component of executive compensation since 2003.
SESPP
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 below) and the trustee was funded by the Company to subscribe for the shares.
In general the shares were restricted for a period of one year from the date of allotment. If a participating executive ceased employment
during this period, the Board in its discretion could determine that a lesser restriction on transfer and dealing applied, having regard to
the circumstances of the cessation. The shares can remain on trust for up to four years from the date of allotment, 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 held on trust.
No shares were issued under the executive long-term incentive component of the Plan during 2005 (2004: 91,248).
A summary of share movements in the executive long term incentive component of the SESPP are set out below:
Opening
balance
Granted during
the year
Restriction ceased
during the year
Closing
balance
Grant dates
Number
Number
2005
27 January 2004
1 July 2004
2004
22 December 2003
3,397
87,851
91,248
129,664
–
–
–
–
Fair value
per share
$
–
–
–
27 January 2004
1 July 2004
–
–
129,664
3,397
87,851
91,248
6.38
6.95
Number
Date
Number
3,397
3,496
5,026
3,847
75,482
91,248
3,818
3,548
7,273
7,331
4,364
103,330
–
–
129,664
27 January 2005
1 February 2005
16 March 2005
4 April 2005
1 July 2005
3 May 2004
1 June 2004
8 June 2004
2 July 2004
19 July 2004
22 December 2004
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,397
87,851
91,248
The fair value per share for shares granted during the year and the consideration received by the Company per share 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).
Annual Report 2005
97
SAN171 WWW Financials 28/3/06 3:02 PM Page 98
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
19. Employee Benefits (continued)
(c) Share-based payments (continued)
(ii) Executive Long-term Incentive Program (continued)
The amounts recognised in the financial statements of the consolidated entity and the Company in relation to the executive long-term
incentive component of the SESPP during the year were:
Employee expenses
Issued ordinary share capital
Consolidated
Santos Ltd
2005
$million
2004
$million
2005
$million
2004
$million
–
–
0.6
0.6
–
–
0.6
0.6
At 31 December 2005, the total number of shares acquired under the executive long-term incentive component of the Plan since its
commencement was 220,912.
SARs and options
During the year eligible senior executives are invited to acquire SARs or options, at the executive’s election. Each SAR and option is a
conditional entitlement to a fully paid ordinary share, subject to the satisfaction of performance conditions, on terms and conditions
determined by the Board.
SARs and options carry no voting or dividend rights until the performance conditions are satisfied and, in the case of options, when the
options are exercised or, in the case of SARs, when the SARs vest.
SARs 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. Options have a life of up to 10 years.
The Board intends that long-term incentive (“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.
SARs and options vest where the Company achieves 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
three-year performance period is compared to the following comparator groups:
• as to 50% of each grant – the ASX 100 at the beginning of the relevant performance period; and
• as to the other 50% of each grant – the energy and petroleum companies in the ASX Energy Index with market capitalisation above
$400 million, plus international energy and petroleum companies.
The following table sets out the vesting schedule for the SARs and options:
Performance – Santos TSR ranking against TSR ranking of
each company in the comparator group
TSR < 50th percentile of comparator group
TSR = 50th percentile of comparator group
TSR between 51st and 74th percentile of comparator group
TSR ≥ 75th percentile of comparator group
% of SARs that vest or options which become exercisable
0%
50%
Progressive vesting from 52% to 98% pro-rata vesting
(2% increase for each percentile improvement)
100%
SARs which have not vested and options which are not exercisable at the time of an executive ceasing employment will, in general, lapse
and be forfeited. If cessation is due to death, redundancy or where the Board consents, a proportionate number of SARs may vest or
options may be exercised, at the Board’s discretion, or otherwise based on pro-rata performance.
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.
The amounts recognised in the financial statements of the consolidated entity and the Company in relation to executive share options
exercised during the financial year were:
Issued ordinary share capital
98
Annual Report 2005
Consolidated
Santos Ltd
2005
$million
25.6
2004
$million
2005
$million
2004
$million
4.1
25.6
4.1
SAN171 WWW Financials 28/3/06 3:02 PM Page 99
19. Employee Benefits (continued)
(c) Share-based payments (continued)
(ii) Executive Long-term Incentive Program (continued)
During the financial year, the Company granted 1,166,000 options over unissued shares as set out below.
2005
Number of options
Type 1
C
Type 2
Total
2004
Weighted
average
exercise
price
Number of
options
Weighted
average
exercise
price
A
–
B
–
$6.12
–
338,462
5,175,000 5,513,462
$6.04
5,998,314
$8.46
139,800
342,900
683,300
–
$6.00
–
–
–
–
–
–
–
–
–
–
1,166,000
$6.95
330,148
–
$6.45
(100,000)
(136,134) (4,125,000) (4,261,134)
$5.71
(715,000)
$7.47
139,800
342,900
683,300
202,328 1,050,000 2,418,328
$6.12
5,513,462
Outstanding at
the beginning of
the period
Granted during
the period
Forfeited during
the period
Exercised during
the period
Outstanding at
the end of the
period
Exercisable at the
end of the period $6.48
–
–
–
202,328
750,000
952,328
$6.00
2,983,314
The options outstanding at 31 December 2005 have an exercise price in the range of $6.20 to $8.46, and a weighted average contractual
life of seven years.
During the year 4,261,134 options were exercised (2004: 715,000). The weighted average share price at the dates of exercise was $9.91
(2004: $7.03).
The fair value of services received in return for share options granted are measured by reference to the fair value of share options granted.
The estimate of the fair value of the services received is measured based on the Monte Carlo Simulation Method (2004: Black-Scholes model).
The contractual life of the option is used as an input into this model. Expectations of early exercise are incorporated into the models.
Option grant
Fair value at measurement date
Share price
Exercise price
Expected volatility (weighted average)
Option life (weighted average)
Expected dividends
Risk free interest rate (based on national government bonds)
A
$0.59
$8.48
$8.461
21%
1 year
3.5%
5.33%
2005
B
$0.90
$8.48
$8.461
21%
2 years
3.5%
5.06%
2004
C
Type 1*
Type 2*
$1.15
$8.48
$8.461
21%
3 years
3.5%
5.11%
$0.67
$6.95
$6.95
16.13%
Medium
5.22%
5.99%
$0.73
$6.95
$6.95
16.13%
3–5 years
5.22%
5.99%
* Type 1 options have a one year vesting period with no performance hurdle.
Type 2 options have a performance hurdle which requires the TSR growth of the Company during the time period of measurement to have at least
equalled 10% per annum calculated on a compound basis for that period. The time period of measurement commences three years from the grant date
of the options and ceases 59 months and one day from the grant date of the options.
The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share options),
adjusted for any expected changes to future volatility due to publicly available information.
Annual Report 2005
99
SAN171 WWW Financials 28/3/06 3:02 PM Page 100
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
19. Employee Benefits (continued)
(c) Share-based payments (continued)
(ii) Executive Long-term Incentive Program (continued)
The amounts recognised in the income statements of the consolidated entity and the Company during the financial year in relation to
executive share options granted were:
Employee expenses
Consolidated
Santos Ltd
2005
$million
2004
$million
2005
$million
2004
$million
0.5
0.1
0.5
0.1
During the financial year, the Company granted 862,600 SARs as set out below. Shares allocated on vesting of SARs will be subject to
further restrictions on dealing for a maximum of ten years after the original grant date. No amount is payable on grant or vesting of
the SARs.
Outstanding at the beginning of the period
Granted during the period
Forfeited during the period
Number of SARs
2005
B
C
Total
–
270,100
(17,700)
–
306,000
(17,700)
–
862,600
(53,100)
A
–
286,500
(17,700)
Outstanding at the end of the period
268,800
252,400
288,300
809,500
Exercisable at the end of the period
268,800
–
–
268,800
2004
–
–
–
–
–
The fair value of services received in return for SARs granted are measured by reference to the fair value of SARs granted. The estimate of
the fair value of the services received is measured based on the Monte Carlo Simulation Method. The contractual life of the SARs is used as
an input into this model. Expectations of early exercise are incorporated into the Monte Carlo Simulation Method.
SARs grant
Fair value at measurement date
Share price
Exercise price
Expected volatility (weighted average)
Right life (weighted average)
Expected dividends
Risk free interest rate (based on national government bonds)
A
$3.59
$8.48
–
21%
1 year
3.5%
5.33%
2005
B
$4.17
$8.48
–
21%
2 years
3.5%
5.06%
C
$4.63
$8.48
–
21%
3 years
3.5%
5.11%
2004
–
–
–
–
–
–
–
The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share rights),
adjusted for any expected changes to future volatility due to publicly available information.
The amounts recognised in the income statements of the consolidated entity and the Company in relation to SARs granted during the
financial year were:
Employee expenses
Consolidated
Santos Ltd
2005
$million
1.9
2004
$million
2005
$million
2004
$million
–
1.9
–
(iii) Legacy Plan – Santos Executive Share Plan
The Santos Executive Share Plan operated between 1987 and 1997, when it was discontinued.
Under the terms of the Plan, shares were issued as partly 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. After a “vesting” period, calls
could be made for the balance of the issue price of the shares, which varied between $2.00 and the market price of the shares on the date
of the call being made.
Shares were issued principally on: 22 December 1987; 7 February and 5 December 1989; and 24 December 1990.
At the beginning of the financial year there were 181,000 Plan shares on issue. During the financial year 93,000 Plan shares were fully
paid and aggregate proceeds of $295,985 received by the Company. As at 31 December 2005 there were 88,000 Plan Shares outstanding.
100
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 101
19. Employee Benefits (continued)
(c) Share-based payments (continued)
(iv) 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 held by a trustee subject to Mr Ellice-Flint completing five years’ service with the
Company. As Mr Ellice-Flint satisfied the condition on 12 December 2005, legal title of the shares passed unrestricted to him on that date.
20. Provisions
Current
Restoration
Non-executive Directors’ retirement benefits
Non-current
Restoration
Non-executive Directors’ retirement benefits
Consolidated
Balance at 1 January 2005
Provisions made during the year
Provisions used during the year
Unwind of discount
Balance at 31 December 2005
Santos Ltd
Balance at 1 January 2005
Provisions made during the year
Provisions used during the year
Unwind of discount
Balance at 31 December 2005
Consolidated
Santos Ltd
2005
$million
2004
$million
2005
$million
2004
$million
20.5
2.2
22.7
198.9
–
198.9
16.0
0.2
16.2
166.3
2.2
168.5
4.4
2.2
6.6
59.7
–
59.7
0.9
0.2
1.1
32.2
2.2
34.4
Total
Non-executive
Directors’
retirement
benefits
$million
Total
restoration
$million
182.3
32.3
(9.7)
14.5
219.4
33.1
26.1
(0.3)
5.2
64.1
2.4
–
(0.2)
–
2.2
2.4
–
(0.2)
–
2.2
Total
$million
184.7
32.3
(9.9)
14.5
221.6
35.5
26.1
(0.5)
5.2
66.3
Restoration
Provisions for future environmental restoration are recognised where there is a present obligation as a result of exploration, development,
production, transportation or storage activities having been undertaken, and it is probable that an outflow of economic benefits will be required to
settle the obligation. The estimated future obligations include the costs of removing facilities, abandoning wells and restoring the affected areas.
Non-executive Directors’ retirement benefits
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. Such benefits ceased to accrue with effect from
30 June 2004. These benefits have been fully provided for by the Company.
During the year, a retirement payment was made to Mr F Conroy who retired as a Director in December 2004. A retirement payment will be made
in 2006 to Mr G McGregor who retired in September 2005.
Annual Report 2005
101
SAN171 WWW Financials 28/3/06 3:02 PM Page 102
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
21. Other Liabilities
Current
Deferred foreign currency fluctuations on borrowings
Accrued fluctuations on foreign currency swaps
Other
Non-current
Deferred foreign currency fluctuations on borrowings
Other
Consolidated
Santos Ltd
2005
$million
2004
$million
2005
$million
2004
$million
–
–
1.8
1.8
–
6.3
6.3
3.4
11.2
–
14.6
33.8
–
33.8
–
–
1.3
1.3
–
–
–
–
–
–
–
–
–
–
22. Capital and Reserves
Reconciliation of movement in capital and reserves attributable to equity holders of Santos Ltd
Share
capital
$million
Translation
reserve
$million
Hedging
reserve
$million
Fair value
reserve
$million
Retained
earnings
$million
Total
equity
$million
Consolidated
Balance at 1 January 2004
Movement per recognised income and expense statement
Share options exercised by employees
Shares issued
Share buy-back
Dividends to shareholders
Balance at 31 December 2004
Balance at 1 January 2005
Movement per recognised income and expense statement
Share options exercised by employees
Shares issued
Dividends to shareholders
Balance at 31 December 2005
Santos Ltd
Balance at 1 January 2004
Movement per recognised income and expense statement
Share options exercised by employees
Shares issued
Share buy-back
Dividends to shareholders
Balance at 31 December 2004
Balance at 1 January 2005
Movement per recognised income and expense statement
Share options exercised by employees
Shares issued
Dividends to shareholders
Balance at 31 December 2005
1,893.1
–
4.1
594.5
(350.0)
–
2,141.7
2,141.7
–
25.6
44.8
–
2,212.1
1,893.1
–
4.1
594.5
(350.0)
–
2,141.7
2,141.7
–
25.6
44.8
–
2,212.1
(154.7)
(40.6)
–
–
–
–
(195.3)
(195.3)
11.0
–
–
–
(184.3)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
6.0
–
–
–
6.0
–
–
–
–
–
–
–
–
4.4
–
–
–
4.4
268.5
358.1
–
–
(2.4)
(212.8)
2,006.9
317.5
4.1
594.5
(352.4)
(212.8)
411.4
2,357.8
411.4
761.8
–
–
(243.0)
2,357.8
778.8
25.6
44.8
(243.0)
930.2
2,964.0
63.0
658.8
–
–
(2.4)
(212.8)
1,956.1
658.8
4.1
594.5
(352.4)
(212.8)
506.6
2,648.3
506.6
520.8
–
–
(243.0)
2,648.3
525.2
25.6
44.8
(243.0)
784.4
3,000.9
102
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 103
22. Capital and Reserves (continued)
Share capital
594,301,771 (2004: 585,520,675) ordinary shares, fully paid
88,000 (2004: 181,000) ordinary shares, paid to one cent
6,000,000 (2004: 6,000,000) 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
Shares issued on exercise of options
Dividend Reinvestment Plan
Santos Employee Share Purchase Plan
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
2005
$million
2004
$million
2005
$million
2004
$million
1,627.6
–
584.5
2,212.1
1,557.2
–
584.5
2,141.7
1,627.6
–
584.5
2,212.1
1,557.2
–
584.5
2,141.7
Note
2005
2004
Number of shares
2005
$million
2004
$million
585,520,675 584,475,013
50,000
157,014
715,000
–
123,648
93,000
106,744
4,261,134
4,270,418
49,800
19
19
19
a
19
594,301,771 585,520,675
b
c
–
–
–
–
3,500,000
–
(3,500,000)
–
6,000,000
–
–
–
–
6,000,000
–
–
6,000,000
6,000,000
1,557.2
0.3
1.2
25.6
42.8
0.5
1,627.6
–
–
–
–
584.5
–
–
–
584.5
1,550.8
0.1
1.3
4.1
–
0.9
1,557.2
342.3
7.7
(350.0)
–
–
600.0
(7.8)
(7.7)
584.5
The market price of the Company’s ordinary shares on 31 December 2005 was $12.25 (2004: $8.48). Ordinary shares entitle the holder to
participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held.
This is subject to the prior entitlements of the reset convertible preference shares.
(a) Dividend Reinvestment Plan
The Santos Dividend Reinvestment Plan is in operation. Shares are allocated at the daily weighted average market price of the Company’s
shares on the ASX over a period of seven business days commencing on the business day after the Dividend Record Date. At this time, the
Board has determined that no discount will apply.
(b) 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.
(c) 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.
Annual Report 2005
103
SAN171 WWW Financials 28/3/06 3:02 PM Page 104
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
22. Capital and Reserves (continued)
Share capital (continued)
(c) Redeemable convertible preference shares (continued)
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.
Translation reserve
The foreign currency translation reserve comprises all foreign exchange differences arising from the translation of the financial statements
of foreign operations where their functional currency is different to the presentation currency of the reporting entity, as well as from the
translation of liabilities that hedge the Company’s net investment in a foreign subsidiary and exchange differences that arise on the translation of
monetary items that form part of the net investment in a foreign operation.
Hedging reserve
The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related
to hedged transactions that have not yet occurred.
Fair value reserve
The fair value reserve includes the cumulative net change in the fair value of available-for-sale investments until the investment is derecognised.
104
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 105
22. Capital and Reserves (continued)
Dividends
Dividends recognised during the year by the Company are:
Dollars
per share
Total
$million
Franked/
unfranked
2005
Interim 2005 redeemable preference
Final 2004 redeemable preference
Interim 2005 ordinary
Final 2004 ordinary
2004
Special 2004 redeemable preference
Interim 2004 reset preference
Final 2003 reset preference
Interim 2004 ordinary
Final 2003 ordinary
Franked dividends paid during the year were franked at the tax
rate of 30%.
After the balance sheet date the following dividends were
proposed by the Directors. The dividends have not been provided
for and there are no income tax consequences.
Final 2005 preference
Final 2005 ordinary
$2.6538
$2.4497
$0.18
$0.18
$5.00
$3.2940
$3.2940
$0.15
$0.15
$2.5300
$0.20
15.9
14.7
106.6
105.8
243.0
14.3
11.5
11.5
87.8
87.7
212.8
15.2
118.9
134.1
Payment date
30 Sep 2005
31 Mar 2005
30 Sep 2005
31 Mar 2005
7 Oct 2004
30 Sep 2004
31 Mar 2004
30 Sep 2004
31 Mar 2004
Franked
Franked
Franked
Franked
Franked
Franked
Franked
Franked
Franked
Franked
Franked
31 Mar 2006
31 Mar 2006
The financial effect of these dividends have not been brought to account in the financial statements for the year ended 31 December 2005
and will be recognised in subsequent financial reports.
Dividend franking account
30% franking credits available to shareholders of Santos Ltd for future distribution, after adjusting for
franking credits which will arise from the payment of the current tax liability at 31 December 2005
Santos Ltd
2005
$million
2004
$million
570.8
394.7
The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends.
The impact on the dividend franking account of dividends proposed after the balance sheet date but not recognised as a liability is to reduce
it by $57.5 million (2004: $51.6 million).
Annual Report 2005
105
SAN171 WWW Financials 28/3/06 3:02 PM Page 106
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
23. Earnings per Share
Earnings used in the calculation of basic earnings per share reconciles to the
net profit after tax in the income statement as follows:
Net profit after income tax
Less:
Special dividend on redeemable convertible preference shares
Dividends paid on reset convertible preference shares
Earnings used in the calculation of diluted earnings per share
Less:
Dividends paid on redeemable 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
Share acquisition rights
Redeemable convertible preference shares
Diluted earnings per share
Consolidated
2005
$million
2004
$million
762.1
354.7
–
–
762.1
(30.6)
731.5
(14.3)
(23.0)
317.4
–
317.4
2005
2004
Number of shares
587,935,245 584,924,130
79,299
1,337,318
524,650
57,450,099
109,843
779,536
–
–
647,326,611 585,813,509
Partly paid shares outstanding issued under the Santos Executive Share Plan; options outstanding issued under the Santos Executive Share Option
Plan; share acquisition rights issued to eligible executives, and redeemable 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, 4,261,134 (2004: 715,000) options and 93,000 (2004: 50,000) partly paid shares were converted to ordinary shares. The diluted
earnings per share calculation includes that portion of these options and partly paid shares assumed to be issued for nil consideration, weighted
with reference to the date of conversion. The weighted average number included is 707,164 (2004: 20,101).
No options lapsed during the year (2004: 100,000). The diluted earning per share calculation includes that portion of these options assumed to be
issued for nil consideration, weighted with reference to the date the options lapsed. The weighted average number included is nil (2004: 7,405).
The redeemable convertible preference shares and reset convertible preference shares on issue in 2004 were not included in the calculation of
diluted earnings per share in 2004 as they were antidilutive for that period.
106
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 107
24. Consolidated Entities
Name
Santos Ltd (Parent Entity)
Controlled entities1:
Alliance Petroleum Australia Pty Ltd
Basin Oil Pty Ltd2
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
Country of
incorporation
Name
Country of
incorporation
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
PNG
PNG
AUST
UK
BER
SING
USA
Santos (Bawean) Pty Ltd
Santos (BBF) Pty Ltd3
Santos Brantas Pty Ltd
Santos (Donggala) Pty Ltd
Santos Egypt Pty Ltd
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 (SPV) Pty Ltd3
Santos (JPDA 91-12) Pty Ltd
Santos (NGA) Pty Ltd
Santos (NARNL Cooper) Pty Ltd (formerly Novus Australia
Resources NL)
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 (TGR) Pty Ltd (formerly Trinity Gas Resources Pty Ltd)2
Santos Timor Sea Pipeline Pty Ltd
Sesap Pty Ltd
Vamgas Pty Ltd
AUST
AUST
AUST
AUST
AUST
PNG
AUST
AUST
PNG
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
MAL
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
AUST
1. Beneficial interests in all controlled entities are 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. Refer note 25.
3. Company incorporated during the year.
4. Company acquired as part of Novus UK (Kakap 2) Limited acquisition in
2004.
Annual Report 2005
107
Crusader (Victoria) Pty Ltd
Moonie Pipeline Company Pty Ltd
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 Ltd
Santos Facilities Pty Ltd
Santos Finance Ltd
Santos Globe Pty Ltd
Santos International Holdings Pty Ltd
Controlled entities of Santos International Holdings Pty Ltd
Barracuda Limited
Lavana Limited
Novus Nominees Pty Ltd4
Santos UK (Kakap 2) Limited (formerly Novus UK
(Kakap 2) Limited)
Peko Offshore Ltd (in liquidation)
Sanro Insurance Pte Ltd
Santos Americas and Europe Corporation
Controlled entities of Santos Americas and Europe Corporation
Santos USA Corp
Tipperary Corporation2
Controlled entities of Tipperary Corporation
Burro Pipeline Inc2
Tipperary Qld Inc2
Tipperary Oil & Gas Corporation2
Controlled entities of Tipperary Oil & Gas Corporation
Tipperary CSG Inc2
Tipperary Oil & Gas (Australia) Pty Ltd2
Controlled entity of Tipperary Oil & Gas
(Australia) Pty Ltd
Tipperary Pastoral Company Pty Ltd2
USA
USA
USA
USA
USA
USA
AUST
AUST
SAN171 WWW Financials 28/3/06 3:02 PM Page 108
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
24. Consolidated Entities (continued)
Notes
Country of incorporation
AUST –
Australia
BER
MAL
PNG
SING
–
Bermuda
– Malaysia
–
–
Papua New Guinea
Singapore
UK
– United Kingdom
USA
– United States of America
In the financial statements of the Company, investments in controlled entities are measured at cost.
25. Acquisitions of Subsidiaries
During the financial year the following controlled entities were acquired and their operating results have been included in the income statement
from the date of acquisition:
Name of entity
Date of acquisition
Basin Oil Pty Ltd
Santos (TGR) Pty Ltd
Tipperary Corporation
17 February 2005
31 August 2005
1 July 2005
Beneficial
interest acquired
%
Purchase
consideration
$million
Contribution to
consolidated profit
since acquisition
$million
100
100
100
89.6
18.5
450.9
8.5
3.6
(7.0)
Basin Oil Pty Ltd holds interests in the Patricia Baleen gas field and associated processing facilities (40%); Sole gas field (40%); Golden Beach gas
field (33%), VIC/P55 exploration block (55%); and the South Australian Cooper Basin (2.1%). This acquisition resulted in Santos holding a 100%
interest in the Golden Beach gas field and, as part of its strategy to sell non-core assets, in July 2005 Santos entered into an agreement with Cape
Energy Group to sell its 100% working interest in permit VIC/RL1 which contained the Golden Beach gas field.
Santos (TGR) Pty Ltd (formerly Trinity Gas Resources Pty Ltd) holds a 10% interest in the Patricia Baleen gas field and production facilities and the
Sole gas field.
The acquisition of Tipperary Corporation provided Santos with an approximately 72% revenue interest in the producing Fairview coal seam
methane field, and approximately 4,000 km2 of additional exploration acreage in the Bowen Basin. This acquisition has been provisionally
accounted because at balance date the fair value of the net assets acquired has not been finally determined. The amount of deferred tax liabilities
to be recognised requires each of the assets and liabilities acquired to have their relevant tax base for income tax purposes assigned. This is
subject to a valuation process, which at balance date is incomplete.
If the acquisitions had occurred on 1 January 2005, consolidated entity revenue would have been approximately $2,535.7 million and net profit
would have decreased to $757.8 million.
108
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 109
25. Acquisitions of Subsidiaries (continued)
The acquisitions had the following effect on the consolidated entity’s assets and liabilities:
Cash and cash equivalents
Trade and other receivables
Inventories
Exploration and evaluation assets
Oil and gas assets
Deferred tax assets
Trade and other payables
Interest-bearing loans and borrowings
Provisions
Net identifiable assets and liabilities
Cash paid
Acquisition costs
Total consideration
Cash acquired
Payment made relating to 2004 acquisition
Net cash outflow
Carrying
Fair value
amounts adjustments
$million
$million
Recognised
values
$million
19.6
7.8
2.2
29.6
706.7
28.6
(41.8)
(154.7)
(26.9)
571.1
–
–
1.9
–
(14.2)
0.2
–
–
–
(12.1)
19.6
7.8
4.1
29.6
692.5
28.8
(41.8)
(154.7)
(26.9)
559.0
552.5
6.5
559.0
(19.6)
16.7
556.1
Annual Report 2005
109
SAN171 WWW Financials 28/3/06 3:02 PM Page 110
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
26. Interests in Joint Ventures
(a) Santos Ltd and its controlled entities have combined interests in unincorporated joint ventures in the following major areas:
Principal activities
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
Average interest
%
65
65
48
70
34
65
65
60
67
60
74
83
58
50
50
35
42
35
9
20
95
33
17
25
36
31
34
58
31
32
Joint venture/area
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
110
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 111
26. Interests in Joint Ventures (continued)
(b) The consolidated entity’s interest in assets employed in unincorporated joint
ventures are included in the balance sheet under the following asset categories:
Current assets
Cash and cash equivalents
Trade and other receivables
Inventories
Total current assets
Non-current assets
Exploration and evaluation assets
Oil and gas assets
Other
Total non-current assets
Total assets
(c) 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
27. Reconciliation of Cash Flows from Operating Activities
Profit after income tax
Add/(deduct) non-cash items:
Depreciation and depletion
Net impairment (reversal)/loss of investment in controlled entities
Exploration and evaluation expensed
Net impairment reversal of oil and gas assets
Foreign exchange debt hedging gains/(losses)
Share-based payments expense
Increase/(decrease) in income taxes payable
Net increase in deferred tax asset and deferred tax liability
Tax benefit upon entering into Australian tax consolidation regime
Borrowing costs capitalised
Unwind of the effect of discounting on provisions
Foreign currency fluctuations
Net gain on sale of non-current assets
Net gain on sale of controlled entities
Consolidated
Santos Ltd
2005
$million
2004
$million
2005
$million
2004
$million
113.2
34.9
22.2
170.3
130.9
4,105.1
1.5
4,237.5
4,407.8
87.2
32.1
18.6
137.9
78.6
3,423.6
1.2
3,503.4
3,641.3
33.0
12.0
11.8
56.8
7.2
1,727.4
–
1,734.6
1,791.4
32.2
8.5
13.5
54.2
6.3
1,138.2
–
1,144.5
1,198.7
214.3
169.5
15.2
266.9
172.5
13.4
90.8
48.8
4.0
102.1
71.5
6.1
762.1
354.7
518.7
655.4
561.0
–
204.2
(131.3)
(1.8)
2.4
173.5
41.5
–
(28.0)
14.5
(81.9)
(23.1)
(16.3)
474.9
–
117.4
(7.6)
–
0.1
(18.1)
26.2
(20.0)
(32.1)
14.0
(38.4)
(61.2)
–
188.0
(338.4)
31.5
(50.5)
0.5
2.4
(42.1)
30.7
–
–
5.2
5.1
(5.1)
(15.1)
201.3
9.5
46.0
(34.4)
–
0.1
12.4
29.6
(20.0)
–
3.2
(2.3)
(336.8)
–
564.0
(117.4)
(5.6)
0.7
(23.3)
(25.7)
392.7
Annual Report 2005
111
Net cash provided by operating activities before changes in assets or liabilities
Add/(deduct) change in operating assets or liabilities net of acquisitions of businesses:
1,476.8
809.9
330.9
Increase in receivables
Increase in inventories
Decrease/(increase) in other assets
Increase/(decrease) in payables
Increase/(decrease) in provisions
Net cash provided by operating activities
(151.2)
(17.6)
10.5
135.1
4.3
1,457.9
(157.9)
(1.7)
(6.7)
(27.5)
(11.1)
605.0
(107.7)
(8.5)
5.2
51.2
(0.7)
270.4
SAN171 WWW Financials 28/3/06 3:02 PM Page 112
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
28. Key Management Personnel Disclosures
(a) Key management personnel
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the
consolidated entity and the Company, directly or indirectly, including the Directors of the Company.
The following were key management personnel of the consolidated entity and the Company at any time during the reporting period and unless
otherwise indicated were key management personnel for the entire period.
Directors
Name
Barnett, Peter Charles
Dean, Kenneth Alfred
Ellice-Flint, John Charles
Gerlach, Stephen
Harding, Richard Michael
McGregor, Graeme William
O’Leary, Michael Anthony
Recny, Christopher John
Sloan, Judith
Executives
Name
Eames, Martyn Edward James
Gouadain, Jacques Elie
Moore, Paul Derek
Wasow, Peter Christopher
Wilkinson, Richard John
Wood, Bruce James
Young, Jonathon Terence
Position
Non-executive Director
Non-executive Director (appointed 23 February 2005)
Managing Director
Chairman and Non-executive Director
Non-executive Director
Non-executive Director (resigned 30 September 2005)
Non-executive Director
Non-executive Director (appointed 23 February 2005)
Non-executive Director
Position
Vice President – Corporate and People
Vice President – Geoscience and New Ventures
Vice President – Development Projects and Technical Services (resigned 21 November 2005)
Chief Financial Officer
Vice President – Gas Marketing and Commercialisation
Vice President – Strategic Projects
Executive Vice President – Operations
All Executives are employed by Santos Ltd.
(b) Key management personnel compensation
The Remuneration Committee of the Board is responsible for reviewing the compensation 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
In setting fee levels, the Remuneration Committee, which makes recommendations to the Board, takes into account:
• independent professional advice;
• fees paid to Non-executive Directors by comparable companies;
• the general time commitment required from Non-executive Directors and the risks associated with discharging the duties attaching to the
role of director;
• the level of personal responsibility undertaken by a Director; and
• the general commercial expertise, experiences and qualifications of the Directors.
Fee levels are set 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. 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.
Directors appointed after 1 January 2004 are not entitled to receive a benefit on retirement (other than statutory entitlements) as the
Company has ceased this practice.
Non-executive Directors appointed prior to 1 January 2004 are contractually entitled to receive a retirement benefit but the amount of the
benefit was “frozen” as at 30 June 2004. The benefit is 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. The Board has
determined that these Non-executive Directors may take all or part of their fixed entitlement in the form of a Company contribution into their
own nominated superannuation funds.
112
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 113
28. Key Management Personnel Disclosures (continued)
(b) Key management personnel compensation (continued)
Executive Director
The Managing Director, Mr J C Ellice-Flint, is currently the only Executive Director.
The structure of the current year’s remuneration package for the Managing Director, Mr J C Ellice-Flint, was agreed at the time of entering into
his executive service agreement in December 2000 in order to recruit him and to, in part, compensate him for some of the benefits he gave up
in leaving his previous employment.
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 compensation comprises a base salary reviewed annually and an annual bonus potential of between 0% and 150% of his fixed
remuneration calculated on a formula that includes components to measure the growth of profitability, exploitable reserves and share price.
On 13 December 2000, Mr J C Ellice-Flint was granted 1,000,000 Restricted Shares. These shares were granted to him at no cost at the time of
his appointment as Chief Executive Officer as part of the total package required to attract Mr J C Ellice-Flint from the senior position he had
held previously. No performance conditions were attached to the shares and legal title in them passed to Mr J C Ellice-Flint upon his
completion of five years of service with Santos on 12 December 2005. Further details regarding the Restricted Shares are set out in note 19 to
the financial statements.
In addition, as Mr J C Ellice-Flint gave up his right to a sizeable potential US pension entitlement to join the Company, the Company has been
contributing an actuarially determined amount into the Company’s superannuation fund to provide for Mr J C Ellice-Flint’s superannuation
benefits. While he was entitled to a much lower accrued benefit until 7 February 2006 (his 55th birthday), under the arrangement his benefit
was to change to a defined multiple of fixed remuneration after that date to recognise his five years service and to provide a “make up”
superannuation benefit. This arrangement however is currently being reviewed in conjunction with a review of his total remunerative
arrangements.
Mr J C Ellice-Flint was also granted options, each to acquire a fully paid ordinary share in the Company. The exercise price of the options was
set at the time of his appointment in 2000 at $5.83, and vesting of the third and final tranche of 1,000,000 options was subject to the
satisfaction of performance conditions, which were tested during 2005. These options were provided essentially on the same terms as those
issued to other senior executives 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
Remuneration objectives and principles
The objectives of the Company’s compensation 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 compensation policy are: to realistically reflect the responsibilities of executives and other employees; to be
industry competitive and reasonable; that a significant portion of compensation 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.
Compensation structure
The Company’s compensation structure for its non-award employees is based upon Target Total Remuneration (“TTR”), the components of
which comprise:
•
a fixed component called Total Fixed Remuneration (“TFR”); and
two variable components, called:
•
•
the Short-term Incentive (“STI”) and
the Long-term Incentive (“LTI”).
TFR 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.
The STI is designed to put a proportion of each executive’s annual remuneration at risk against meeting targets linked to the Company’s
annual business objectives, thereby driving both individual and Company performance.
For the specified executives, 70% of the STI is based on Company performance, and the remaining 30% is based on individual performance.
For other executives, 50% of the STI is based on Company performance, and the other 50% is based on individual performance.
Annual Report 2005
113
SAN171 WWW Financials 28/3/06 3:02 PM Page 114
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
28. Key Management Personnel Disclosures (continued)
(b) Key management personnel compensation (continued)
Company performance is assessed on a range of metrics covering reserves growth, reserve replacement cost, production, margin, new growth
options, shareholder value creation, people, environment, health, safety and continuous improvement. Individual performance is assessed
against targets set within each executive’s area of responsibility.
Each metric is assessed against target and assigned a score on a five-point scale. The average of the scores of each metric is used to quantify a
bonus pool expressed as a percentage of the sum of maximum bonuses of all eligible employees. The bonus pool may be adjusted after taking
into consideration other factors not reflected in the metrics but deemed relative to Company performance.
LTI in relation to executive compensation 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. For
2005, these were:
• BG Group PLC
• Burlington Resources Inc
• Devon Energy Corporation
• Canadian Natural Resources Limited
• Anadarko Petroleum Corporation
• Apache Corporation
• Unocal Corporation
• Woodside Petroleum Limited
• EOG Resources Inc
• Talisman Energy Inc
• XTO Energy Inc
• Nexan Inc
• Chesapeake Energy Corporation
• Murphy Oil Corporation
• Noble Energy Inc
• Newfield Exploration Co
• Oil Search Limited
• Hardman Resources Limited
• Australian Worldwide Exploration Limited
114
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 115
28. Key Management Personnel Disclosures (continued)
(b) Key management personnel compensation (continued)
If performance is below the 50th percentile, no award is made. A proportionate award is made for performance between the 50th and 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 in the form of rights over shares pursuant to SESPP or, at the election of an
executive, options pursuant to SESOP, details of which are described in note 19(c)(ii) to the financial statements. In the previous period,
awards could only be taken in the form of 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 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.
Annual Report 2005
115
SAN171 WWW Financials 28/3/06 3:02 PM Page 116
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
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SAN171 WWW Financials 28/3/06 3:02 PM Page 118
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
28. Key Management Personnel Disclosures (continued)
(b) Key management personnel compensation (continued)
The relative proportion of the Managing Director’s and senior executives’ total remuneration packages that is performance-based is set out in
the table below:
% of total remuneration (annualised)
Fixed
remuneration
TFR
Performance-based
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LTI
Managing Director1
0%2
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Executive VP Operations
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Other specified Executives
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Other senior Executives
1 On appointment the Managing Director was granted 1,000,000 Restricted Shares subject to completion of a service condition. The Managing Director is
44%
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66%
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27%
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20%
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also entitled to an annual bonus depending upon performance measured in terms of growth of profitability, exploitable reserves and share price.
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exercise price of $5.83 per option. As the grant date preceded 7 November 2002 no value is attributed to them for 2005 in accordance with AASB 1
“First-time Adoption of Australian Equivalents to International Financial Reporting Standards”.
118
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 119
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Annual Report 2005
119
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(
SAN171 WWW Financials 28/3/06 3:02 PM Page 120
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
28. Key Management Personnel Disclosures (continued)
(c) Equity instruments (continued)
Share holdings
The movement during the reporting period in the number of shares of the Company held directly, indirectly or beneficially, by each key
management person, including their related parties, is as follows:
Balance at
beginning
Granted as
of the year compensation
Received on
exercise
of options
Redeemed
Other
changes
Balance
at end
of the year
Balance held
nominally
at end
of the year
Name
Directors
Ordinary shares – fully paid
Barnett, Peter Charles
Dean, Kenneth Alfred
Ellice-Flint, John Charles
Gerlach, Stephen
Harding, Richard Michael
McGregor, Graeme William*
O’Leary, Michael Anthony
Recny, Christopher John
Sloan, Judith
Redeemable convertible preference
shares
Ellice-Flint, John Charles
McGregor, Graeme William*
Sloan, Judith
Mr G McGregor resigned as Director
on 30 September 2005.
*
Executives
Ordinary shares – fully paid
12,394
–
1,037,210
42,305
–
10,000
4,725
–
5,000
225
1,200
195
Eames, Martyn Edward James
Gouadain, Jacques Elie
Moore, Paul Derek*
Wasow, Peter Christopher
Wilkinson, Richard John
Wood, Bruce James
Young, Jonathon Terence
Mr P Moore resigned on 21 November 2005.
–
12,216
12,025
16,134
12,591
6,439
17,183
*
(d) Loans
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,000,000
–
–
–
–
–
–
–
–
–
–
–
125,000
150,000
–
50,000
250,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,000
5,033
1,551
–
–
173
–
–
12,394
3,000
4,042,243
43,856
–
10,000
4,898
–
5,000
–
–
–
225
1,200
195
–
–
(137,025)
(150,000)
–
851
–
–
12,216
–
16,134
12,591
57,290
267,183
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
There have been no loans made, guaranteed or secured, directly or indirectly, by the consolidated entity or any of its subsidiaries at any time
throughout the year with any key management person, including their related parties.
120
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 121
29. Related Parties
Identity of related parties
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 5 as to interest received from/paid to controlled entities;
Note 8 as to tax related balances and other amounts owing by controlled entities;
Notes 17 and 18 as to amounts owing to controlled entities;
Note 18 as to guarantees by Santos Ltd of the financing facilities of controlled entities;
Note 20 as to Non-executive Directors’ retirement benefits;
Notes 15 and 24 as to investments in controlled entities;
Note 26 as to interests in joint ventures; and
Note 28 as to disclosures relating to key management personnel.
Other related party transactions
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 consolidated entity. The amount paid pursuant to this agreement during the financial year was $85,000
(2004: $55,000). This transaction occurred on terms no more favourable than would have been adopted if dealing at arm’s length, does not have
the potential to adversely affect decisions about the allocation of scarce resources and is trivial in nature.
30. 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
Amounts received or due and receivable by other auditors:
External audit services
The auditors ceased providing taxation services from 31 December 2004.
Consolidated
Santos Ltd
2005
$000
1,091
–
–
12
1,103
77
2004
$000
2005
$000
2004
$000
715
147
3
9
874
–
360
443
–
–
6
366
–
–
3
6
452
–
Annual Report 2005
121
SAN171 WWW Financials 28/3/06 3:02 PM Page 122
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
31. Segment Information
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 consolidated entity operates primarily in Australia but also has international operations in the United States, Papua New Guinea, Indonesia
and Egypt.
Australia
International
Consolidated
2005
$million
2004
$million
2005
$million
2004
$million
2005
$million
2004
$million
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
Exploration and evaluation expensed
Net impairment reversal/(loss) of oil and gas assets
Organisation restructure costs
Accelerated depreciation due to East Spar shut-in
Unallocated corporate expenses
Earnings before interest and tax
Unallocated net financing costs
Profit before income tax expense
Income tax expense
Net profit after income tax attributable to the
shareholders of Santos Ltd
Non-cash expenses
Depreciation and depletion
Unallocated corporate depreciation and depletion
Total depreciation and depletion
2,303.5
1,400.5
172.3
114.7
2,475.8
0.1
2,475.9
1,515.2
–
1,515.2
1,184.5
526.4
83.7
14.8
1,268.2
541.2
33.9
116.6
–
–
33.9
116.6
–
34.5
(66.7)
130.6
(5.2)
(18.5)
(17.5)
54.3
(61.2)
28.8
(21.6)
–
1,293.1
625.8
–
0.2
(137.5)
0.7
–
–
(52.9)
–
6.8
(56.2)
(21.2)
–
–
(55.8)
493.2
388.1
51.9
72.4
–
34.7
(204.2)
131.3
(5.2)
(18.5)
1,240.2
(35.4)
1,204.8
(71.3)
1,133.5
(371.4)
(17.5)
61.1
(117.4)
7.6
(21.6)
–
570.0
(3.6)
566.4
(47.6)
518.8
(164.1)
762.1
354.7
545.1
15.9
561.0
204.2
(131.3)
633.9
460.5
14.4
474.9
117.4
(7.6)
584.7
Exploration and evaluation expensed
Net impairment (reversal)/loss of oil and gas assets
66.7
(130.6)
61.2
(28.8)
137.5
(0.7)
56.2
21.2
Total non-cash expenses
122
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 123
31. Segment Information (continued)
Primary reporting (continued)
Geographic segments (continued)
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
Australia
International
Consolidated
2005
$million
2004
$million
2005
$million
2004
$million
2005
$million
2004
$million
519.4
701.1
92.2
773.2
20.0
250.6
35.1
146.4
539.4
951.7
127.3
919.6
5,243.3
4,193.1
521.0
454.0
924.7
952.4
143.1
158.9
23.6
10.4
1,514.7
1,057.3
5,764.3
427.0
6,191.3
1,067.8
2,159.5
3,227.3
4,647.1
189.5
4,836.6
1,111.3
1,367.5
2,478.8
Secondary reporting
Business segments
The consolidated entity 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 2005
123
SAN171 WWW Financials 28/3/06 3:02 PM Page 124
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
32. Commitments for Expenditure
The consolidated entity 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:
Not later than one year
Later than one year but not later than five years
Later than five years
Santos Ltd has guaranteed the capital commitments of certain controlled entities
(refer note 33 for further details).
(b) Minimum exploration commitments
Minimum exploration commitments for which no amounts have been provided in the
financial statement or capital commitments:
Not later than one year
Later than one year but not later than five years
Later than five years
The consolidated entity 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
Non-cancellable operating lease rentals are payable as follows:
Not later than one year
Later than one year but not later than five years
Later than five years
Consolidated
Santos Ltd
2005
$million
2004
$million
2005
$million
2004
$million
78.8
135.5
–
214.3
63.8
105.2
0.5
169.5
253.5
13.4
–
266.9
42.1
118.8
11.6
172.5
37.6
53.2
–
90.8
6.8
42.0
–
48.8
93.9
8.2
–
102.1
10.3
61.2
–
71.5
38.9
105.9
42.0
186.8
54.7
102.9
0.1
157.7
32.9
103.7
41.8
178.4
8.4
21.1
–
29.5
The consolidated entity leases floating production, storage and offtake (“FPSO”) facilities at four of its producing fields and leases building
office space under operating leases. The FPSO leases typically run for a period of five to seven years. Building office space leases are for ten
years. Both have an option to renew the lease after that date. Lease payments generally increase every year based on various indices and
factors. None of the leases include contingent rentals.
During the year ended 31 December 2005 $53.2 million (2004: $38.9 million) was recognised as an expense in the income statement in
respect of operating leases.
124
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 125
33. Contingent Liabilities
The Directors are of the opinion that provisions are not required in respect of these
matters, as it is not probable that a future sacrifice of economic benefits will be
required or the amount is not capable of reliable measurement.
Santos Ltd and its controlled entities have the following contingent liabilities arising
in respect of:
Performance guarantees
Litigation and proceedings
Consolidated
Santos Ltd
2005
$million
2004
$million
2005
$million
2004
$million
22.5
8.2
30.7
9.8
8.1
17.9
12.4
3.5
15.9
6.3
2.3
8.6
Legal advice in relation to the litigation and proceedings referred to above indicates that on the basis of available information, any liability in
respect of these claims is unlikely to exceed $2.8 million on a consolidated basis.
A number of the Australian interests of the consolidated entity 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 consolidated
entity’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 18.
Santos Ltd has provided parent company guarantees in respect of:
(a) the funding and performance obligations of a number of subsidiary companies, relating to:
• the supply, operation and maintenance of the Mutineer-Exeter floating production storage and offloading facility;
• a Patricia Baleen equipment master rental agreement;
(b) the payment of certain financial obligations of certain subsidiary companies in relation to farmout agreements and exploration concessions;
and
(c) a subsidiary company’s obligations to meet distribution charges for gas retail customers.
The total expenditure commitment under these transactions and which are the subject of a parent company guarantee is $256.2 million.
Annual Report 2005
125
SAN171 WWW Financials 28/3/06 3:02 PM Page 126
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
34. Financial Instruments
Comparative information has been prepared under previous GAAP in accordance with the transition rules in AASB 1 “First-time Adoption of Australian
Equivalents to International Financial Reporting Standards”.
Exposure to foreign currency, interest rate, credit, and commodity price risks arises in the normal course of the consolidated entity’s business.
Derivative financial instruments are used to hedge exposure to fluctuations in foreign exchange rates, interest rates, and commodity prices.
(a) Foreign currency risk
The consolidated entity is exposed to foreign currency 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 currency risk, the consolidated entity has from time
to time entered into forward foreign exchange, foreign currency swap and foreign currency option contracts.
US dollar denominated borrowings are either swapped into Australian dollar exposure (2005: $nil; 2004: US$321.4 million) or designated as
a hedge of US dollar denominated investment in foreign operations (2005: US$782.6 million; 2004: US$313.0 million) or as a hedge of future
US denominated sales revenues (2005: $nil; 2004: US$146.4 million). As a result, there were no net foreign currency gains or losses arising
from translation of US denominated dollar borrowings recognised in the income statements in 2005. Accordingly, $nil unrealised foreign
currency gains were deferred as at 31 December 2005 (2004: gains of $37.4 million).
Recognised assets and liabilities
Changes in the fair value of forward exchange contracts that economically hedge monetary assets and liabilities in foreign currencies and for
which no hedge accounting is applied are recognised in the income statement. Both the changes in fair value of the forward contracts and the
foreign exchange gains and losses relating to the monetary items are recognised as an expense. The fair value of forward exchange contracts
used as economic hedges of monetary assets and liabilities in foreign currencies and recognised in fair value derivatives at 31 December 2005
was $nil (2004: $11.2 million).
(b) Interest rate risk
Hedging
The consolidated entity adopts a policy of ensuring that the majority of its exposure to changes in interest rates on borrowings is on a floating
rate basis. Interest rate swaps, denominated in Australian dollars and US dollars, have been entered into as fair value hedges of medium-term
notes and long-term notes respectively. The swaps have maturities ranging from one to 18 years, following the maturity of the related notes
(see the following table) and have fixed swap rates ranging from 5.85% to 8.44%. At 31 December 2005, the consolidated entity had interest
rate swaps with a notional contract amount of $654.5 million (2004: $522.8 million).
The consolidated entity classifies interest rate swaps as fair value hedges and states them at fair value. The fair value of swaps at 1 January
2005 was adjusted against the opening balance of retained earnings at that date.
The net fair value of swaps at 31 December 2005 was $27.1 million, comprising assets of $27.2 million and liabilities of $0.1 million. These
amounts were recognised as fair value derivatives.
126
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 127
34. Financial Instruments (continued)
(b) Interest rate risk (continued)
Effective interest rates and repricing analysis
In respect of income-earning financial assets and interest-bearing financial liabilities, the following table indicates their effective interest
rates at the balance sheet date and the periods in which they reprice.
Consolidated
2005
Cash and cash equivalents
Bank loans
Commercial paper
Medium-term notes
Long-term notes
Interest rate swaps**
2004
Cash and cash equivalents
Bank loans
Commercial paper
Medium-term notes
Long-term notes
Interest rate swaps**
Effective
Note interest rate
Total
$million
6 months
or less
$million
6–12
months
$million
1–2 years
$million
2–5 years
$million
More than
5 years
$million
7
18
18
18
18
7
18
18
18
18
5.02%
5.02%
5.83%
6.22%*
6.00%*
4.55%
2.70%
5.61%
6.25%*
5.61%*
229.2
(261.5)
(265.5)
(468.5)
(832.6)
27.1
229.2
(261.5)
(265.5)
–
–
(627.4)
(1,571.8)
(925.2)
126.1
(227.9)
(209.0)
(20.0)
(801.5)
–
(1,132.3)
126.1
(227.9)
(209.0)
–
–
(522.8)
(833.6)
–
–
–
–
–
–
–
–
–
–
–
(43.7)
–
(43.7)
–
–
–
–
(152.1)
83.3
–
–
–
(20.0)
(200.5)
104.0
–
–
–
(448.5)
(480.0)
467.2
(68.8)
(116.5)
(461.3)
–
–
–
–
–
–
–
–
–
–
(20.0)
(173.4)
98.3
(95.1)
–
–
–
–
(584.4)
424.5
(159.9)
After incorporating the effect of interest rate swaps.
*
** Notional principal amounts.
(c) Commodity price risk exposure
The consolidated entity is exposed to commodity price fluctuations through the sale of petroleum products denominated in US dollars. The
consolidated entity 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 2005 the consolidated entity has no open oil price swap contracts. At 31 December 2004 the consolidated entity had open oil
price swap contracts with settlement expiry dates up to nine months. If closed out at that date these contracts would have resulted in a loss of
$11.2 million.
(d) Credit risk
Credit risk represents the potential financial loss if counterparties fail to perform as contracted. Management has a credit policy in place and
the exposure to credit risk is monitored on an ongoing basis.
The consolidated entity controls credit risk on derivative financial instruments by setting exposure limits related to the creditworthiness of
counterparties, all of which are selected banks or institutions with a Standard & Poor’s rating of A or better.
The maximum exposure to credit risk is represented by the carrying amount of financial assets of the consolidated entity, excluding investments,
which have been recognised on the balance sheet. At the balance sheet date there were no significant concentrations of credit risk.
(e) Fair values
The financial assets and liabilities of the consolidated entity and the Company are recognised on the balance sheets at their fair value in
accordance with the accounting policies in note 1, except for long-term notes that do not form part of an interest rate swap, and bank
borrowings, which are recognised at face value.
The carrying value of the long-term notes is US$198.5 million and their fair value is estimated at US$203.3 million based on discounting the
future cash flows excluding the credit spread at the time of issue. The discount rate used is the interest rate swap rate for the remaining term
to maturity of the note as at 31 December 2005.
The carrying value of the bank borrowings approximates fair value as it is a floating rate instrument.
Annual Report 2005
127
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
35. Economic Dependency
There are in existence long-term contracts for the sale of gas, but otherwise the Directors believe there is no economic dependency.
36. Explanation of Transition to AIFRSs
As stated in note 1, these are the consolidated entity’s first consolidated financial statements prepared in accordance with AIFRSs.
The accounting policies in note 1 have been applied in preparing the financial statements for the year ended 31 December 2005, the comparatives
information presented in these financial statements for the year ended 31 December 2004, and in the preparation of an opening AIFRS balance
sheet at 1 January 2004 (the consolidated entity’s date of transition).
In preparing its opening AIFRS balance sheet, the consolidated entity has adjusted amounts reported previously in financial statements prepared
in accordance with its old basis of accounting (previous GAAP). An explanation of how the transition from previous GAAP to AIFRSs has affected
the consolidated entity’s financial position and financial performance is set out in the following tables and the notes that accompany the tables.
There are no material differences between the cash flow statement presented under AIFRSs and the cash flow statement presented under
previous GAAP.
128
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 129
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Annual Report 2005
129
SAN171 WWW Financials 28/3/06 3:02 PM Page 130
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
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SAN171 WWW Financials 28/3/06 3:02 PM Page 131
36. Explanation of Transition to AIFRSs (continued)
Reconciliation of profit for 2004
Consolidated
Effect of
transition
to AIFRSs
$million
–
64.5
64.5
–
9.0
(78.0)
(4.5)
–
(17.5)
(17.5)
(22.0)
(3.2)
Previous
GAAP
$million
1,500.9
(1,038.7)
462.2
14.3
180.0
(85.6)
570.9
3.5
(33.6)
(30.1)
540.8
(160.9)
AIFRSs
$million
1,500.9
(974.2)
526.7
14.3
189.0
(163.6)
566.4
3.5
(51.1)
(47.6)
518.8
(164.1)
Santos Ltd
Effect of
transition
to AIFRSs
$million
Previous
GAAP
$million
568.8
(414.5)
154.3
270.4
378.1
(56.6)
746.2
45.1
(91.1)
(46.0)
700.2
(57.1)
–
9.3
9.3
–
37.9
(11.1)
36.1
–
(6.7)
(6.7)
29.4
(17.1)
AIFRSs
$million
568.8
(405.2)
163.6
270.4
416.0
(67.7)
782.3
45.1
(97.8)
(52.7)
729.6
(74.2)
Note
b,c,d
b
a,b,c
d,e
f
Product sales
Cost of sales
Gross profit
Other revenue
Other income
Other expenses
Operating profit before net financing costs
Interest income
Finance costs
Net financing costs
Profit before tax
Income tax expense
Net profit after income tax attributable to
the shareholders of Santos Ltd
379.9
(25.2)
354.7
643.1
12.3
655.4
Earnings per share (¢)
Basic
Diluted
Notes to the reconciliations of equity and profit
(a) Functional currency
58.6
58.5
(4.4)
(4.3)
54.2
54.2
The functional currency adjustments reflect the adoption of the US dollar as the functional currency for the Timor Gap, Indonesian and Papua
New Guinean operations. The asset carrying values are adjusted using the Australian dollar to United States dollar exchange rate at each
balance date with differences due to exchange rate movements reflected in the foreign currency translation reserve.
The effect in the consolidated entity is to decrease net assets by $152.3 million at 1 January 2004 and decrease net assets by $31.8 million at
31 December 2004. This resulted in a $5.7 million decrease in profit for the consolidated entity in 2004.
There is no adjustment in the Company on transition to AIFRS or during 2004.
(b) Successful efforts
The adoption of the successful efforts method of accounting for exploration and evaluation expenditure has resulted in the expensing of
unsuccessful exploration costs.
The effect in the consolidated entity is to decrease exploration and evaluation assets by $712.8 million at 1 January 2004. In 2004, the
consolidated entity expensed exploration and evaluation expenditure of $117.4 million.
The effect in the Company is to decrease exploration and evaluation assets by $257.6 million at 1 January 2004. In 2004, the Company
expensed exploration and evaluation expenditure of $46.0 million.
(c) Impairment
Impairment is assessed at an asset level, or where an asset does not generate separately identifiable cash flows impairment is assessed on
a cash generating unit basis, being the smallest grouping of assets that generates independent cash flows. Impairment is measured using
discounted cash flows. Under previous GAAP, future cash flows were not discounted and assets were grouped together under a broader area
of interest concept which included all of the producing assets within a geological basin.
The effect in the consolidated entity is to decrease exploration and development by $248.8 million at 1 January 2004 and $73.2 million at
31 December 2004; decrease land and buildings, plant and equipment by $102.1 million at 1 January 2004 and $14.6 million at 31 December
2004. A net impairment reversal of $7.6 million is recognised in the income statement of the consolidated entity in 2004.
Annual Report 2005
131
SAN171 WWW Financials 28/3/06 3:02 PM Page 132
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
36. Explanation of Transition to AIFRSs (continued)
(c) Impairment (continued)
The effect in the Company at 1 January 2004 is to decrease exploration and development by $105.6 million, decrease land and buildings, plant
and equipment by $13.5 million and decrease investments in controlled entities by $449.6 million. At 31 December 2004 exploration and
development increased by $28.3 million, land and buildings, plant and equipment increased by $6.1 million and investments in controlled
entities decreased by $9.5 million. A net impairment reversal of oil and gas assets of $34.4 million and a net impairment loss of investment in
controlled entities of $9.5 million is recognised in the income statement of the Company in 2004.
(d) Restoration
Under AIFRS the liability for future restoration reflects the present value of the total expected restoration costs, and is capitalised as a
component of oil and gas assets. Under previous GAAP, the cost of restoration was provided for over the life of the reserves.
The effect in the consolidated entity at 1 January 2004 is to increase exploration and development by $43.2 million, land and buildings, plant
and equipment by $61.8 million, provisions by $39.6 million and retained earnings by $45.0 million.
The effect in the Company at 1 January 2004 is to increase exploration and development by $15.5 million, land and buildings, plant and
equipment by $8.7 million, decrease provisions by $1.4 million and increase retained earnings by $17.9 million.
In 2004 the consolidated entity recognised $14.0 million interest expense from the unwind of the effect of discounting on the provision, and
the Company recognised $3.2 million.
(e) Employee benefits
Santos Ltd is the sponsor of a defined benefit superannuation plan. Under previous GAAP cumulative actuarial gains and losses on the defined
benefit plan were not recognised on the balance sheet. At the date of transition a liability has been recognised in the provision for employee
benefits. The liability is measured as the difference between the present value of the employees’ accrued benefits at that date and the net
market value of the superannuation fund’s assets at that date.
The effect in the consolidated entity and the Company is to increase liabilities for employee benefits by $17.8 million at 1 January 2004 and
decrease it by $5.3 million at 31 December 2004.
In 2004 the consolidated entity and the Company recognised a net $0.5 million increase to profit resulting from a credit to defined benefits
expense of $4.0 million, and interest expense of $3.5 million.
(f) Income tax
Under previous GAAP income tax expense was calculated by reference to the accounting profit after allowing for permanent differences. The
tax-effect of timing differences, which occur when items where included or allowed for income tax purposes in a period different to that for
accounting were recognised at current taxation rates as deferred tax assets and deferred tax liabilities, as applicable.
Under AIFRS, deferred tax is determined using the balance sheet liability method in respect of temporary differences arising from differences
between the carrying amount of assets and liabilities in the financial statements and their corresponding tax bases.
(g) Retained earnings
The effect of the above adjustments on retained earnings is as follows:
Consolidated
Santos Ltd
1 Jan 2004 31 Dec 2004
$million
$million
1 Jan 2004 31 Dec 2004
$million
$million
Note
a
b
c
d
e
f
18.3
(542.1)
(283.9)
45.0
(12.5)
(159.9)
(935.1)
5.7
(117.4)
7.6
(11.9)
5.3
90.6
(20.1)
–
(180.3)
(533.5)
17.9
(12.4)
(67.4)
(775.7)
–
(46.0)
24.9
(3.2)
5.3
35.1
16.1
Functional currency
Successful efforts
Impairment
Restoration
Employee benefits
Deferred tax
132
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 133
37. Changes in Accounting Policy
In the current financial year the consolidated entity adopted AASB 132 “Financial Instruments: Disclosure and Presentation” and AASB 139
“Financial Instruments: Recognition and Measurement”. This change in accounting policy has been adopted in accordance with the transition rules
in AASB 1 “First-time Adoption of Australian Equivalents to International Financial Reporting Standards”, which does not require the restatement
of comparative information for financial instruments within the scope of AASB 132 and AASB 139.
The adoption of AASB 139 has resulted in the consolidated entity recognising available-for-sale investments and all derivative financial
instruments as assets or liabilities at fair value. This change has been accounted for by adjusting the opening balance of retained earnings,
hedging reserve and fair value reserve at 1 January 2005.
The effect of changes in the accounting policies for financial instruments on the balance sheet as at 1 January 2005 is shown below:
Consolidated
Impact of
change in
accounting
policy
$million
Restated
1 January
2005
$million
AIFRSs
31 December
2004
$million
1.6
(11.1)
40.4
(43.8)
3.8
(1.1)
7.8
2.4
2.8
(11.1)
40.4
(1,303.2)
(518.0)
(1.1)
7.8
(409.0)
0.5
–
–
(1,686.2)
(133.3)
–
–
(506.6)
Santos Ltd
Impact of
change in
accounting
policy
$million
(0.2)
(11.1)
–
–
3.4
0.1
7.8
–
Restated
1 January
2005
$million
0.3
(11.1)
–
(1,686.2)
(129.9)
0.1
7.8
(506.6)
AIFRSs
31 December
2004
$million
Note
a
b
c
c
a
b
c
1.2
–
–
(1,259.4)
(521.8)
–
–
(411.4)
Equity securities available-for-sale
Commodity hedges
Interest rate swaps
Interest-bearing liabilities
Deferred tax liabilities
Fair value reserve
Hedging reserve
Retained earnings
The transitional provisions will not have any effect in future reporting periods.
Notes to the reconciliation of financial instruments:
(a) Under previous GAAP, the consolidated entity recorded available-for-sale equity securities at cost. In accordance with AIFRSs, they are now
recognised at fair value.
The effect in the consolidated entity is to increase “Investments in other entities at cost” and “Fair value reserve” by $1.6 million and
$1.1 million respectively ($1.6 million less related deferred tax of $0.5 million) at 1 January 2005. The effect in the Company is to decrease
“Investments in other entities at cost” by $0.2 million and “Fair value reserve” by $0.1 million ($0.2 million less deferred tax of $0.1 million).
(b) Under previous GAAP, the consolidated entity did not recognise derivatives at fair value on the balance sheet. In accordance with AIFRSs
derivatives are now recognised at fair value.
The effect in the consolidated entity and the Company at 1 January 2005 is to recognise a liability for commodity hedges of $11.1 million and
a charge to “Hedging reserve” of $7.8 million ($11.1 million less related deferred tax of $3.3 million).
(c) The net ineffectiveness of interest rate swap hedges in the consolidated entity of $2.4 million ($3.4 million less related deferred tax of
$1.0 million) has been charged to retained earnings. No adjustment has arisen for the Company.
Annual Report 2005
133
SAN171 WWW Financials 28/3/06 3:02 PM Page 134
DIRECTORS’ DECLARATION
FOR THE YEAR ENDED 31 DECEMBER 2005
In the opinion of the Directors of Santos Ltd (“the Company”):
(a) the financial statements and notes, set out on pages 68 to 133, 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 2005 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 Australian Accounting Standards 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 2006.
Signed in accordance with a resolution of the Directors:
Director
Director
134
Annual Report 2005
SAN171 WWW Financials 28/3/06 3:02 PM Page 135
LEAD AUDITOR’S INDEPENDENCE DECLARATION UNDER
SECTION 307C OF THE CORPORATIONS ACT 2001
To the directors of Santos Ltd
I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 31 December 2005 there have been:
• No contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and
• No contraventions of any applicable code of professional conduct in relation to the audit.
KPMG
Peter A Jovic
Partner
Adelaide
23 February 2006
Annual Report 2005
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INDEPENDENT AUDIT REPORT TO MEMBERS OF
SANTOS LTD
Scope
The financial report and Directors’ responsibility
The financial report comprises the income statements, balance sheets, statements of recognised income and expense, cash flow statements,
accompanying notes 1 to 37 to the financial statements, and the Directors’ declaration for both Santos Ltd (the “Company”) and Santos Ltd and its
Controlled Entities (the “Consolidated Entity”), for the year ended 31 December 2005. 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. The Directors are
also responsible for preparing the relevant reconciling information regarding the adjustments required under the Australian Accounting Standard
AASB 1 “First-time Adoption of Australian Equivalents to International Financial Reporting Standards”.
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.
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 Consolidated Entity’s financial position as at 31 December 2005 and of their performance
for the financial year ended on that date; and
(ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and
(b) other mandatory financial reporting requirements in Australia.
KPMG
Peter A Jovic
Partner
Adelaide
23 February 2006
136
Annual Report 2005
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STOCK EXCHANGE AND SHAREHOLDER INFORMATION
Listed on Australian Stock Exchange at 28 February 2006 were 594,137,602 fully paid ordinary shares and 6,000,000 redeemable convertible
preference shares. Unlisted were 46,500 partly paid Plan 0 shares, 41,500 partly paid Plan 2 shares, 49,800 fully paid ordinary shares issued
pursuant to the Santos Employee Share Purchase Plan (‘SESPP’) for General Employee Participation and 114,369 fully paid ordinary shares issued
pursuant to SESPP for Senior Executive Long Term Incentive. There were: 79,237 holders of all classes of issued ordinary shares (including 6
holders of Plan 0 shares; 5 holders of Plan 2 shares; and 84 holders of SESPP shares) compared with 79,423 a year earlier; 15,609 holders of
redeemable convertible preference shares; and 34 holders of the 2,318,328 options granted pursuant to the Santos Executive Share Option Plan
and 36 holders of 770,200 Share Acquisition Rights.
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 55.73% of the total voting power in Santos (last year 52.65%) and the holdings of the 20
largest holders of redeemable convertible preference shares represent 37.85% of the issued redeemable convertible preference shares.
The 20 largest shareholders of fully paid ordinary shares in Santos as shown in the Company’s Register of Members at 28 February 2006 were:
Name
Number of fully paid ordinary shares
Westpac Custodian Nominees Limited
National Nominees Limited
J P Morgan Nominees Australia Limited
ANZ Nominees Limited (Cash Income A/c)
Citicorp Nominees Pty Limited
ANZ Nominees Limited (Income Reinvest Plan A/c)
Cogent Nominees Pty Limited
RBC Dexia Investor Services Australia Nominees Pty Limited
AMP Life Limited
Queensland Investment Corporation
Australian Foundation Investment Company Limited
Mr John Charles Ellice-Flint
Victorian Workcover Authority
UBS Nominees Pty Ltd (Prime Broking A/c)
Argo Investments Limited
HSBC Custody Nominees (Australia) Limited
Merrill Lynch (Australia) Nominees Pty Ltd
Transport Accident Commission
Neweconomy Com Au Nominees Pty Limited (Scrip Lending Coll Mgt A/c)
Citicorp Nominees Pty Limited (CFSIL Cwlth Aust Shs 1 A/c)
Total
Analysis of Shares - range of shares held
87,998,001
67,728,794
61,800,933
40,464,542
18,214,901
15,389,372
6,265,865
5,862,633
3,839,880
3,414,779
3,189,289
3,000,000
2,837,623
2,821,350
1,536,230
1,518,435
1,436,720
1,415,779
1,200,000
1,180,000
331,115,126
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
% of
holders
Fully paid
ordinary
shares
(Holders)
shares
held
% of Redeemable
convertible
preference
shares
(Holders)
27,406
41,261
7,037
3,413
120
79,237
1,171
34.59
52.07
8.88
4.31
0.15
2.61
16.47
8.44
11.68
60.80
100.00
100.00
15,237
316
24
27
5
15,609
2
%
14.81
11.40
10.40
6.81
3.07
2.59
1.05
0.99
0.65
0.57
0.54
0.50
0.48
0.47
0.26
0.26
0.24
0.24
0.20
0.20
55.73
% of
shares
held
44.60
11.48
2.88
13.34
27.70
% of
holders
97.62
2.03
0.15
0.17
0.03
100.00
100.00
Annual Report 2005
137
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The 20 largest shareholders of redeemable convertible preference shares in Santos as shown in the Company’s Register of Members at 28 February
2006 were:
Name
Number of redeemable convertible preference shares
J P Morgan Nominees Australia Limited
Westpac Custodian Nominees Limited
Australian Foundation Investment Company Limited
ANZ Nominees Limited (Cash Income A/c)
RBC Dexia Investor Services Australia Nominees Pty Limited (JBENIP A/c)
Cogent Nominees Pty Limited (SMP Accounts)
Hastings Funds Management Limited (Hastings Yield Fund A/c)
UBS Wealth Management Australia Nominees Pty Ltd
Citicorp Nominees Pty Limited (CFSIL Cwlth Spec 5 A/c)
Pan Australian Nominees Pty Limited
Cambooya Pty Limited
Questor Financial Services Limited (TPS RF A/c)
RBC Dexia Investor Services Australia Nominees Pty Limited (MLCI A/c)
AMP Life Limited
Cogent Nominees Pty Limited
Brencorp No 11 Pty Limited
Australian Executor Trustees Limited
Goldman Sachs JBWere Capital Markets Limited (Hybrid Portfolio A/c)
Argo Investments Limited
Hastings Fund Management Limited (Hit A/c)
Total
1,052,985
200,598
175,000
120,858
112,492
84,789
70,000
60,210
56,848
55,947
41,000
40,060
39,699
28,005
25,344
24,600
23,552
20,141
20,000
20,000
2,272,128
%
17.55
3.34
2.92
2.01
1.87
1.41
1.17
1.00
0.95
0.93
0.68
0.67
0.66
0.47
0.42
0.41
0.39
0.34
0.33
0.33
37.85
Substantial Shareholders, as at 28 February 2006, as disclosed by notices received by the Company:
Name
Barclays Global Investors Australia Limited
Wellington Management Company, LLP
No. of voting shares held
35,665,305
42,458,713
For Directors’ Shareholdings see Directors’ Statutory Report as set out on page 63 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.
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Annual Report 2005
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INFORMATION FOR SHAREHOLDERS
NOTICE OF MEETING
The Annual General Meeting of Santos Ltd will be held in the Festival
Theatre at Adelaide Festival Centre, King William Road, Adelaide, South
Australia on Thursday 4 May 2006 at 10.00 am.
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.
FINAL DIVIDEND
The 2005 final ordinary dividend will be paid on 31 March 2006 to
shareholders registered in the books of the Company at the close of
business on 6 March 2006 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).
AMERICAN DEPOSITORY RECEIPTS
Santos American Depository Receipts are issued by Citibank, N.A. and
are listed on NASDAQ (code STOSY).
DIRECTORS
S Gerlach (Chairman), J C Ellice-Flint (Managing Director), P C Barnett
(retired 28 February 2006), K A Dean, R M Harding, G W McGregor
(retired 30 September 2005), M A O’Leary, C J Recny, J Sloan.
SECRETARY
W J Glanville
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 Current Well Information.
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, First-Half 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.
Email: 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.
Email: investor.relations@santos.com
Electronic enquiries can also be submitted through the Contact Us
section of the Santos website, www.santos.com.
SHAREHOLDERS’ CALENDAR
2005 full year results announcement
23 February 2006
Ex-dividend date for 2005 full year dividend
28 February 2006
Record date for 2005 full year dividend
6 March 2006
Payment date for 2005 full year dividend
31 March 2006
Annual General Meeting
Half year end
4 May 2006
30 June 2006
2006 interim results announcement
24 August 2006
Full year end
31 December 2006
Comprehensive archives of these materials dating back to 1997 are
available on the Santos website.
QUARTERLY REPORTING CALENDAR
2006 First Quarter Activities Report
27 April 2006
Other investor information available on the Santos website includes:
2006 Second Quarter Activities Report
27 July 2006
• open briefings with Corporate File – an ASX-endorsed online
2006 Third Quarter Activities Report
24 October 2006
briefing service
• live and archived webcasts of investor briefings
• an email alert facility where shareholders and other interested
parties can register to be notified, free of charge, of Santos’
Press Releases via email.
2006 Fourth Quarter Activities Report
24 January 2007
Annual Report 2005
139
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GLOSSARY
AIFRS
Australian equivalents to International Financial
Reporting Standards.
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 PJ.
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.
EBITDAX
Earnings before interest, tax, depreciation,
exploration and impairment.
140
Annual Report 2005
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.
IFRS
International Financial Reporting Standards.
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 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 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.
SAN171 WWW Cover 28/3/06 2:14 PM Page 2
SANTOS IS A MAJOR AUSTRALIAN-BASED OIL AND GAS
EXPLORATION AND PRODUCTION COMPANY
GROWING A GLOBAL ENERGY BUSINESS.
COMPANY PROFILE
HISTORY
VISION
VALUES
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, Kyrgyzstan and Egypt.
Santos is one of Australia’s largest gas producers, supplying sales gas
to all mainland Australian states and territories, ethane to Sydney,
and oil and liquids to domestic and international customers.
The Cooper Basin, which Santos and its joint venture partners have
developed in central Australia, is Australia’s largest onshore resource
project.
In Australia, Santos has one of the largest exploration portfolios by
area of any company and has assembled a large, well-situated acreage
position in Indonesia and the United States. The Company is also
pursuing new venture opportunities in North Africa, the Middle East,
and Central and South East Asia.
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 production growth through an exciting suite of
growth projects.
Santos Ltd is listed on Australian Stock Exchange – ordinary shares
code STO; preference shares (FUELS) code STOPB.
At year end 2005, Santos had a total market capitalisation of
approximately $7.9 billion, making it one of Australia’s Top 40
companies.
Santos American Depository Receipts are issued by Citibank, N.A.
and listed on the NASDAQ (code STOSY).
Founded in 1954, Santos has been active in the energy business for
more than 50 years. Its name was an acronym for South Australia
Northern Territory Oil Search.
Santos has a vision that by the end of the decade it will become
the leading energy company in South East Asia with a share price that
continues to grow and a reputation for sustainability in its operations.
Santos aspires to a set of values which are the guiding principles
that define how it conducts its business and what it stands for as
a company. This means working as a team that:
Santos made its first significant discovery of natural gas in the Cooper
Basin with the Gidgealpa 2 well in 1963. The Moomba 1 discovery in
1966 confirmed this region as a major petroleum province.
As a result of these discoveries, Santos had a commercially viable
quantity of gas and entered into Gas Sales Agreements with the South
Australian Gas Company, the Electricity Trust of South Australia and
the Australian Gas Light Company. Gas supplies commenced in 1969.
The 1980s saw Santos develop a major liquids business following the
discovery of oil at Tirrawarra in the early 1970s. A liquids recovery
plant was built at Moomba, along with a fractionation and loadout
facility at Port Bonython.
By the 1990s Santos had become a major Australian operating
enterprise with interests in United States and United Kingdom
petroleum provinces and in emerging areas such as the Timor Sea
and Carnarvon Basin in Western Australia.
A number of acquisitions in the 1990s provided Santos with additional
opportunities onshore and offshore Australia, Indonesia and Papua
New Guinea.
Since 2000 Santos has continued to build its business in South East
Asia, the United States and southern Australia, while undertaking
a high impact exploration program and developing new projects to
drive production and earnings growth.
Santos’ vision of future success is to be a safe, low cost, fast-moving
explorer and producer and an agile niche player with a well developed
ability to manage relationships with employees, partners and other
stakeholders.
As the Company grows, it will provide a working environment that
encourages innovation across the business and where employees
are engaged in something which is tangibly more than just a job.
STRATEGY
Santos has in place a robust growth strategy to achieve this
vision. It has three main components, which are illustrated on
the opposite page:
• Enhance existing core areas in eastern and Western Australia.
• Mature emerging core areas in Indonesia, the Timor
Sea/Bonaparte Basin area and Papua New Guinea.
• Identify new core areas in North Africa, Central and South East
Asia and the United States.
• Discovers – through being creative, making courageous decisions,
learning from successes and failures to continually improve
everything we do.
• Delivers – through being accountable for actions and decisions,
creating the right alignment with partners, striving for excellence
and effective results.
• Collaborates – through building trusting relationships based on
mutual respect, sharing what we know for the benefit of others
and demonstrating leadership.
• Cares – by doing the right thing and assuring our future.
These values are the basis of Santos’ commitment to operating with a
view to its long-term sustainability as an energy company.
Main photograph:
Paul Nardone, Completions Supervisor.
Small photographs (left to right):
MODEC Venture 11 Floating Production Storage and Offtake vessel;
close-up of drill sections; ENSCO 56 jack-up rig conducting development
drilling over John Brookes wellhead offshore Western Australia;
Emma Wild, Staff Development & Economics Engineer.
PLEASE RECYCLE THIS REPORT
This Annual Report is printed in Australia on
recyclable paper from sustainable plantation
forests. The manufacture of this paper is
externally certified to the ISO 14001
Environmental Management System,
complying with International Standards.
The printing process uses digital printing
plates, which eliminate film and its
associated chemicals. The vegetable-based
inks used in the printing process use linseed
oil, which is made from renewable sources
such as flax, rather than the traditional
higher greenhouse gas emitting mineral oils.
HELP SAVE PAPER BY DOWNLOADING AN
ELECTRONIC VERSION
An electronic version of this Annual Report
is available on Santos’ website
www.santos.com.
Shareholders who do not require a printed
Annual Report, or who receive more than
one copy due to multiple shareholdings,
can help reduce the number of copies
printed by advising the Share Register in
writing of changes to their Annual Report
mailing preferences.
Shareholders who choose not to receive a
printed Annual Report will continue to receive
all other shareholder information, including
notices of shareholders’ meetings.
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SAN171 WWW Cover 28/3/06 2:14 PM Page 1
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 6777
Perth
Level 28, Forrest Centre
221 St Georges Terrace
Perth, Western Australia 6000
Telephone 08 9460 8900
Facsimile 08 9460 8971
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 6221, JKS GN
Jakarta 12060 Indonesia
Telephone 62-21 270 0410
Facsimile 62-21 720 4503
USEFUL EMAIL CONTACTS
Share register enquiries:
share.register@santos.com
Investor enquiries:
investor.relations@santos.com
Employment enquiries:
recruitment@santos.com
WEBSITE
www.santos.com
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NAVIGATING
SUCCESSAnnual Report 2005
Santos Ltd ABN 80 007 550 923
COVER PHOTOGRAPH:
Roger Lewis (right), Mutineer-Exeter Project Close Out Manager,
inspecting the MODEC Venture 11 Floating Production Storage
and Offtake vessel with a Quality Assurance Engineer.
INSIDE
INTRODUCING SANTOS
Company profile and history, and an overview
of Santos’ vision, strategy and values.
2005 OPERATING AND
FINANCIAL HIGHLIGHTS
2
Key results for 2005 and three-year
performance.
PROGRESS ON THE GROWTH
STRATEGY IN 2005
3
Milestones that delivered on the growth
strategy during 2005 and activities
planned for 2006.
CHAIRMAN’S REVIEW
4
Stephen Gerlach comments on Santos’
performance in 2005.
MANAGING DIRECTOR’S REVIEW
John Ellice-Flint reviews a year of record
5
financial, safety and environmental
performance, successful exploration,
outstanding reserve replacement and fast-
tracked developments.
MEETING STRATEGIC TARGETS
9
Explanation of Santos’ good performance
against its long-term targets.
THE WORLD OF SANTOS
10
Locations of Santos’ global exploration,
development and production activities.
DELIVERING RECORD
FINANCIAL PERFORMANCE
12
Putting the numbers in perspective and
explaining the 2005 financial results.
ACHIEVING OPERATIONAL
EXCELLENCE
14
Production and sales analysis plus activities
that are creating value from Santos’
changing production profile.
PRODUCTION STATISTICS
16
Summary of production results for 2005.
BOARD OF DIRECTORS
55
Directors’ biographical details.
CAPTURING NEW RESOURCES
17
Exploration results, acreage additions and
new ventures in 2005, together with the
program for 2006.
LEADERSHIP TEAM
56 Management structure and senior
executives’ responsibilities and
biographical details.
EXPANDING GLOBALLY THROUGH
GROWTH PROJECTS
20
Development projects that commenced
production or were further progressed.
BROADENING
COMMERCIALISATION HORIZONS
22 Market context, new gas contracts and
innovative use of infrastructure hubs.
REALISING VALUE AND BALANCING
THE PORTFOLIO
24
Strategic projects and portfolio
management activities.
GROWING THE SIZE AND
VALUE OF RESERVES
26
Analysis of reserves movements in 2005.
MANAGING FOR LONG-TERM
SUSTAINABILITY
28
Sustainability framework, polices, systems
and activities, including safety and
environmental performance, employees
and communities.
CORPORATE GOVERNANCE
34
Details of the main corporate governance
practices Santos has in place.
REMUNERATION REPORT
40
Remuneration details for Directors and
key executives.
MAJOR ANNOUNCEMENTS MADE
BY SANTOS DURING 2005
54 Major releases to the market as part of
continuous disclosure.
GROUP INTERESTS
58
Santos licence areas and percentage
interests.
10 YEAR SUMMARY
60
Statistical summary of financial
performance.
FINANCIAL REPORT
62
Income statements, balance sheets,
cash flow statements, statements of
recognised income and expense, and notes
to the consolidated financial statements.
DIRECTORS’ STATUTORY REPORT
Directors’ shareholdings, meetings,
63
activities and emoluments.
STOCK EXCHANGE AND
SHAREHOLDER INFORMATION
137 Listing of top 20 shareholders, analysis
of shares and voting rights.
INFORMATION FOR
SHAREHOLDERS
139 Annual General Meeting, final dividend,
shareholder enquiries and information
resources for shareholders.
GLOSSARY
140 Most frequently used terms explained.
BACK COVER
Corporate directory