Santos Ltd Annual Report 2006

Plain-text annual report

SAN175 AW3 Cover 21/3/07 11:56 AM Page 1 A N N U A L R E P O R T 2 0 0 6 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 PORT MORESBY Barracuda Limited Level 8, Pacific Place Cnr Champion Parade and Musgrave Street Port Moresby, Papau New Guinea Telephone 675 321 2633 Facsimile 675 321 2847 HOUSTON Santos USA Corp. 10111 Richmond Avenue, Suite 500 Houston, Texas 77042, USA Telephone 1 713 986 1700 Facsimile 1 713 986 4200 Corporate directory REGISTERED AND HEAD OFFICE Ground Floor, 60 Flinders Street Adelaide, South Australia 5000 GPO Box 2455 Adelaide, South Australia 5001 Telephone 61 8 8116 5000 Facsimile 61 8 8116 5050 SHARE REGISTER Ground Floor, 60 Flinders Street Adelaide, South Australia 5000 GPO Box 2455 Adelaide, South Australia 5001 Telephone 61 8 8218 5111 Facsimile 61 8 8218 5950 OFFICES BRISBANE Level 14, Santos House 60 Edward Street Brisbane, Queensland 4000 Telephone 61 7 3228 6666 Facsimile 61 7 3228 6700 PERTH Level 28, Forrest Centre 221 St Georges Terrace Perth, Western Australia 6000 Telephone 61 8 9460 8900 Facsimile 61 8 9460 8971 PORT BONYTHON PO Box 344 Whyalla, South Australia 5600 Telephone 61 8 8640 3100 Facsimile 61 8 8640 3200 JAKARTA Santos Asia Pacific Pty Ltd Level 4, 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 Inside INTRODUCING SANTOS PRODUCTION STATISTICS CORPORATE GOVERNANCE Company profile and history, and an overview of Santos’ vision, strategy and values. 2006 OPERATING AND FINANCIAL HIGHLIGHTS 2 Key results for 2006 and three-year performance. PROGRESS MADE ON THE GROWTH STRATEGY IN 2006 3 Milestones that delivered on the growth strategy during 2006 and share price performance. 14 Summary of production results for 2006. RESERVES STATISTICS 15 Summary of reserves movements in 2006. STRONG DRILLING RESULTS AND EXPANSION INTO ASIA 16 Exploration results, acreage additions and new ventures activities in 2006, together with the program for 2007. THREE NEW DEVELOPMENTS RECORD RESULTS AS TARGETS MET STARTED PRODUCTION 4 Chairman Stephen Gerlach comments on Santos’ performance in 2006. 18 Development projects that commenced production or were further progressed. 36 Details of the main corporate governance practices Santos has in place. MAJOR ANNOUNCEMENTS MADE BY SANTOS DURING 2006 43 Major releases to the market as part of continuous disclosure. SANTOS GROUP INTERESTS 44 Santos’ licence areas and percentage interests. 10-YEAR SUMMARY 46 Statistical summary of financial performance. DIRECTORS’ STATUTORY REPORT 49 Directors’ shareholdings, meetings, activities and emoluments. REMUNERATION REPORT 54 Remuneration details for Directors and key executives. FINANCIAL REPORT 70 Income statements, balance sheets, cash flow statements, statements of recognised income and expense, and notes to the consolidated financial statements. A clear view… ANNUAL REPORT 2006 GROWTH CONTINUED AS PRODUCTION AND REVENUE ROSE 5 Managing Director John Ellice-Flint reviews a year where production and revenue hit record levels as new projects started up. OPERATING PERFORMANCE REMAINED STRONG 8 Putting the numbers in perspective and explaining the 2006 financial results. PERFORMANCE AGAINST STRATEGIC TARGETS IN 2006 9 Explanation of Santos’ performance against its long-term targets. THE WORLD OF SANTOS 10 Locations of Santos’ global exploration, development and production activities. RECORD PRODUCTION AND SALES WERE ACHIEVED 12 Production and sales analysis plus activities that are creating value from Santos’ changing production profile. GAS SUPPLY HUBS UNDERPINNED INNOVATIVE CONTRACTS 20 Innovative use of infrastructure hubs which delivered new gas contracts and opportunities. LNG AND CARBON OPPORTUNITIES A PRIORITY 22 LNG and carbon strategies together with acquisitions and divestments in 2006. GOOD PROGRESS WAS MADE IN SECURITIES EXCHANGE AND MANAGING SUSTAINABILITY SHAREHOLDER INFORMATION 24 Sustainability framework, policies, systems and activities, including safety and environmental performance, employees and communities. BOARD OF DIRECTORS 32 Directors’ biographical details. SANTOS LEADERSHIP TEAM 34 Senior executives’ responsibilities and biographical details. 139 Listing of top 20 shareholders, analysis of shares and voting rights. INFORMATION FOR SHAREHOLDERS 141 Annual General Meeting, final dividend, shareholder enquiries and information resources for shareholders. 142 GLOSSARY 144 INDEX CORPORATE DIRECTORY Santos Ltd ABN 80 007 550 923 Cover photograph: Sedco 601 rig which drilled the Wortel-1 gas discovery offshore East Java. SAN175 AW3 Cover 21/3/07 11:24 AM Page 1 A N N U A L R E P O R T 2 0 0 6 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 PORT MORESBY Barracuda Limited Level 8, Pacific Place Cnr Champion Parade and Musgrave Street Port Moresby, Papau New Guinea Telephone 675 321 2633 Facsimile 675 321 2847 HOUSTON Santos USA Corp. 10111 Richmond Avenue, Suite 500 Houston, Texas 77042, USA Telephone 1 713 986 1700 Facsimile 1 713 986 4200 Corporate directory REGISTERED AND HEAD OFFICE Ground Floor, 60 Flinders Street Adelaide, South Australia 5000 GPO Box 2455 Adelaide, South Australia 5001 Telephone 61 8 8116 5000 Facsimile 61 8 8116 5050 SHARE REGISTER Ground Floor, 60 Flinders Street Adelaide, South Australia 5000 GPO Box 2455 Adelaide, South Australia 5001 Telephone 61 8 8218 5111 Facsimile 61 8 8218 5950 OFFICES BRISBANE Level 14, Santos House 60 Edward Street Brisbane, Queensland 4000 Telephone 61 7 3228 6666 Facsimile 61 7 3228 6700 PERTH Level 28, Forrest Centre 221 St Georges Terrace Perth, Western Australia 6000 Telephone 61 8 9460 8900 Facsimile 61 8 9460 8971 PORT BONYTHON PO Box 344 Whyalla, South Australia 5600 Telephone 61 8 8640 3100 Facsimile 61 8 8640 3200 JAKARTA Santos Asia Pacific Pty Ltd Level 4, 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 Inside INTRODUCING SANTOS PRODUCTION STATISTICS CORPORATE GOVERNANCE Company profile and history, and an overview of Santos’ vision, strategy and values. 2006 OPERATING AND FINANCIAL HIGHLIGHTS 2 Key results for 2006 and three-year performance. PROGRESS MADE ON THE GROWTH STRATEGY IN 2006 3 Milestones that delivered on the growth strategy during 2006 and share price performance. 14 Summary of production results for 2006. RESERVES STATISTICS 15 Summary of reserves movements in 2006. STRONG DRILLING RESULTS AND EXPANSION INTO ASIA 16 Exploration results, acreage additions and new ventures activities in 2006, together with the program for 2007. THREE NEW DEVELOPMENTS RECORD RESULTS AS TARGETS MET STARTED PRODUCTION 4 Chairman Stephen Gerlach comments on Santos’ performance in 2006. 18 Development projects that commenced production or were further progressed. 36 Details of the main corporate governance practices Santos has in place. MAJOR ANNOUNCEMENTS MADE BY SANTOS DURING 2006 43 Major releases to the market as part of continuous disclosure. SANTOS GROUP INTERESTS 44 Santos’ licence areas and percentage interests. 10-YEAR SUMMARY 46 Statistical summary of financial performance. DIRECTORS’ STATUTORY REPORT 49 Directors’ shareholdings, meetings, activities and emoluments. REMUNERATION REPORT 54 Remuneration details for Directors and key executives. FINANCIAL REPORT 70 Income statements, balance sheets, cash flow statements, statements of recognised income and expense, and notes to the consolidated financial statements. A clear view… ANNUAL REPORT 2006 GROWTH CONTINUED AS PRODUCTION AND REVENUE ROSE 5 Managing Director John Ellice-Flint reviews a year where production and revenue hit record levels as new projects started up. OPERATING PERFORMANCE REMAINED STRONG 8 Putting the numbers in perspective and explaining the 2006 financial results. PERFORMANCE AGAINST STRATEGIC TARGETS IN 2006 9 Explanation of Santos’ performance against its long-term targets. THE WORLD OF SANTOS 10 Locations of Santos’ global exploration, development and production activities. RECORD PRODUCTION AND SALES WERE ACHIEVED 12 Production and sales analysis plus activities that are creating value from Santos’ changing production profile. GAS SUPPLY HUBS UNDERPINNED INNOVATIVE CONTRACTS 20 Innovative use of infrastructure hubs which delivered new gas contracts and opportunities. LNG AND CARBON OPPORTUNITIES A PRIORITY 22 LNG and carbon strategies together with acquisitions and divestments in 2006. GOOD PROGRESS WAS MADE IN SECURITIES EXCHANGE AND MANAGING SUSTAINABILITY SHAREHOLDER INFORMATION 24 Sustainability framework, policies, systems and activities, including safety and environmental performance, employees and communities. BOARD OF DIRECTORS 32 Directors’ biographical details. SANTOS LEADERSHIP TEAM 34 Senior executives’ responsibilities and biographical details. 139 Listing of top 20 shareholders, analysis of shares and voting rights. INFORMATION FOR SHAREHOLDERS 141 Annual General Meeting, final dividend, shareholder enquiries and information resources for shareholders. 142 GLOSSARY 144 INDEX CORPORATE DIRECTORY Santos Ltd ABN 80 007 550 923 Cover photograph: Sedco 601 rig which drilled the Wortel-1 gas discovery offshore East Java. SAN175 AW3 Text 21/3/07 9:48 AM Page 1 …with a portfolio for growth. We achieved record production and positive financial results in 2006, while fine-tuning our strategy around our portfolio of five growth businesses. A PORTFOLIO OF GROWTH BUSINESSES COOPER BASIN OIL EASTERN AUSTRALIAN GAS WESTERN AUSTRALIAN OIL AND GAS LNG PROJECTS ASIAN GROWTH Unique infrastructure and know-how Versatility through supply hubs Growth at higher prices Large contingent resources Growing international proﬁle Santos Annual Report 2006 1 SAN175 AW3 Cover 21/3/07 11:24 AM Page 2 Santos is a major Australian-based oil and gas exploration and production company operating internationally. COMPANY PROFILE HISTORY Santos has exploration interests and production operations in every major Australian petroleum province and in Indonesia, Papua New Guinea, Vietnam, India, Kyrgyzstan, Egypt and the United States. We are Australia's largest domestic gas producer, supplying sales gas to all mainland Australian states and territories, ethane to Sydney, and oil and liquids to domestic and international customers. Through our interest in the Darwin LNG project, we are a producer of liquefied natural gas (LNG) which is exported to customers in Japan. Santos has the largest Australian exploration portfolio by area of any company and is pursuing new venture opportunities with a focus on Asia. Founded in 1954, our name was an acronym for South Australia Northern Territory Oil Search. Santos made its first significant discovery of natural gas in the Cooper Basin in 1963. The Moomba discovery in 1966 confirmed this region as a major petroleum province and gas supplies to Adelaide commenced in 1969. The 1980s saw Santos develop a major liquids business with the construction of a liquids recovery plant at Moomba and a fractionation and load-out facility at Port Bonython. During the 1990s Santos further expanded its interests in Australia and overseas. Since 2000 the Company has continued to build its business in South East Asia while undertaking high-impact exploration and developing new projects to drive production and earnings growth. In 2006, a significant milestone was reached with the first export of LNG from the Darwin LNG project. Development drilling on the John Brookes gas field, Carnarvon Basin, offshore Western Australia. VISION STRATEGY Santos has in place a robust growth strategy to achieve its vision through a portfolio of growth businesses: • Cooper Basin oil; • Eastern Australian gas; • Western Australian oil and gas; • LNG projects; and • Asian growth. Santos’ vision is to become a leading energy company in South East Asia with a share price that continues to grow and a reputation for sustainability in its operations. Our 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. VALUES We are a team that: • discovers – by opening our minds to new possibilities, thinking creatively and having the courage to learn from successes and failures, to take on new challenges, to capture opportunities and to resolve problems; • delivers – by taking personal responsibility and pride in our work to deliver timely, quality results that benefit Santos and help achieve our vision and strategy; • collaborates – by recognising the value and power in diversity of thought and communicating openly to understand the perspectives of others; demonstrating leadership by sharing what we know and respectfully challenging each other to achieve the best results for all; and • cares – by taking the long- term view to build a sustainable future for our Company, our people and the environments and communities in which we operate. PAPER AND PRINTING OF THE ANNUAL REPORT This report is printed on Monza Recycled and Ozone Offset paper, which contains elemental- chlorine-free (ECF) recycled fibre and fibre from sustainable plantation forests. The paper is certified by the Forest Stewardship Council (FSC), which promotes environmentally appropriate, socially beneficial, and economically viable management of the world’s forests. The report was printed by Southern Colour, one of a small number of printers in Australia accredited by the FSC to continue the chain of custody when printing on FSC-certified paper. Southern Colour is a partner with the Australian Government’s Greenhouse Challenge and is accredited with ISO 14001 (Environmental Management Systems), AS/NZS 4801 (Occupational Health and Safety) and ISO 9001 (Quality) International Standards. The printing process uses digital printing plates which eliminate film and associated chemicals. The vegetable-based inks use linseed oil, which is made from renewable sources such as flax, rather than the traditional mineral oils which emit higher volumes of greenhouse gases. HELP SAVE PAPER BY DOWNLOADING AN ELECTRONIC VERSION An electronic version of this report is available on Santos’ website www.santos.com. Shareholders who do not require a printed Annual Report or Sustainability 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 report mailing preferences. Shareholders who choose not to receive printed reports will continue to receive all other shareholder information, including notices of shareholders’ meetings. Photography: cover and page 19 by Melbourne the Photographer; inside cover and pages 1, 2, 13, 19, 21 and 23 by Robert Garvey; pages 1, 4, 5, 17, 32 and 34 by Milton Wordley; page 25 by Campbell Brodie courtesy of The Advertiser newspaper. Designed and produced by Perspexa.com SAN175 AW3 Cover 21/3/07 11:24 AM Page 2 Santos is a major Australian-based oil and gas exploration and production company operating internationally. COMPANY PROFILE HISTORY Santos has exploration interests and production operations in every major Australian petroleum province and in Indonesia, Papua New Guinea, Vietnam, India, Kyrgyzstan, Egypt and the United States. We are Australia's largest domestic gas producer, supplying sales gas to all mainland Australian states and territories, ethane to Sydney, and oil and liquids to domestic and international customers. Through our interest in the Darwin LNG project, we are a producer of liquefied natural gas (LNG) which is exported to customers in Japan. Santos has the largest Australian exploration portfolio by area of any company and is pursuing new venture opportunities with a focus on Asia. Founded in 1954, our name was an acronym for South Australia Northern Territory Oil Search. Santos made its first significant discovery of natural gas in the Cooper Basin in 1963. The Moomba discovery in 1966 confirmed this region as a major petroleum province and gas supplies to Adelaide commenced in 1969. The 1980s saw Santos develop a major liquids business with the construction of a liquids recovery plant at Moomba and a fractionation and load-out facility at Port Bonython. During the 1990s Santos further expanded its interests in Australia and overseas. Since 2000 the Company has continued to build its business in South East Asia while undertaking high-impact exploration and developing new projects to drive production and earnings growth. In 2006, a significant milestone was reached with the first export of LNG from the Darwin LNG project. Development drilling on the John Brookes gas field, Carnarvon Basin, offshore Western Australia. VISION STRATEGY Santos has in place a robust growth strategy to achieve its vision through a portfolio of growth businesses: • Cooper Basin oil; • Eastern Australian gas; • Western Australian oil and gas; • LNG projects; and • Asian growth. Santos’ vision is to become a leading energy company in South East Asia with a share price that continues to grow and a reputation for sustainability in its operations. Our 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. VALUES We are a team that: • discovers – by opening our minds to new possibilities, thinking creatively and having the courage to learn from successes and failures, to take on new challenges, to capture opportunities and to resolve problems; • delivers – by taking personal responsibility and pride in our work to deliver timely, quality results that benefit Santos and help achieve our vision and strategy; • collaborates – by recognising the value and power in diversity of thought and communicating openly to understand the perspectives of others; demonstrating leadership by sharing what we know and respectfully challenging each other to achieve the best results for all; and • cares – by taking the long- term view to build a sustainable future for our Company, our people and the environments and communities in which we operate. PAPER AND PRINTING OF THE ANNUAL REPORT This report is printed on Monza Recycled and Ozone Offset paper, which contains elemental- chlorine-free (ECF) recycled fibre and fibre from sustainable plantation forests. The paper is certified by the Forest Stewardship Council (FSC), which promotes environmentally appropriate, socially beneficial, and economically viable management of the world’s forests. The report was printed by Southern Colour, one of a small number of printers in Australia accredited by the FSC to continue the chain of custody when printing on FSC-certified paper. Southern Colour is a partner with the Australian Government’s Greenhouse Challenge and is accredited with ISO 14001 (Environmental Management Systems), AS/NZS 4801 (Occupational Health and Safety) and ISO 9001 (Quality) International Standards. The printing process uses digital printing plates which eliminate film and associated chemicals. The vegetable-based inks use linseed oil, which is made from renewable sources such as flax, rather than the traditional mineral oils which emit higher volumes of greenhouse gases. HELP SAVE PAPER BY DOWNLOADING AN ELECTRONIC VERSION An electronic version of this report is available on Santos’ website www.santos.com. Shareholders who do not require a printed Annual Report or Sustainability 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 report mailing preferences. Shareholders who choose not to receive printed reports will continue to receive all other shareholder information, including notices of shareholders’ meetings. Photography: cover and page 19 by Melbourne the Photographer; inside cover and pages 1, 2, 13, 19, 21 and 23 by Robert Garvey; pages 1, 4, 5, 17, 32 and 34 by Milton Wordley; page 25 by Campbell Brodie courtesy of The Advertiser newspaper. Designed and produced by Perspexa.com SAN175 AW3 Text 21/3/07 9:48 AM Page 2 2006 operating and financial highlights Installation of subsea wellheads for the Casino gas ﬁeld, Otway Basin, offshore Victoria. • Production up 9% to record 61.0 mmboe. Sales ($million) • Revenue up 12% to record $2.8 billion. • Reported net proﬁt after tax down 16% to $643 million impacted by impairment adjustments and one-off expenses. Operating proﬁt before tax ($million) Cash ﬂow from operations ($million) Earnings per share (cents) Ordinary dividends per share (cents) Operating cash ﬂow per share (cents) 2006 2,769.1 964.7 1,550.3 102.8 40 260.0 2005 % change 2,462.8 1,133.5 1,457.9 124.4 38 248.0 12 (15) 6 (17) 5 5 13 (32) (24) (14) (32) • Underlying net proﬁt after tax up 7% Total shareholders’ funds ($million) 3,355.5 2,963.9 to record $683 million. • Dividend up 5% to 40 cents per share. • Proven plus Probable (2P) reserves up 6% to 819 mmboe. Return on average ordinary equity (%) Return on average capital employed (%) Net debt/(net debt plus equity) (%) Net interest cover (times) 23.8 15.1 30.2 10.1 35.1 19.8 35.0 14.9 PRODUCTION BY PRODUCT 61.0 mmboe SALES REVENUE $2,769m OPERATING CASH FLOW $1,550m NET PROFIT AFTER TAX $643m 61.0 56.0 47.1 70 60 50 40 30 20 10 0 2,769 2,463 1,501 3000 2500 2000 1500 1000 500 0 ‘04 ‘05 ‘06 ‘04 ‘05 ‘06 Sales gas & ethane Condensate Sales gas & ethane Condensate Crude oil LPG Crude oil LPG 1600 1200 800 400 0 1,550 1,458 605 ‘04 ‘05 ‘06 800 600 400 200 0 762 643 355 ‘04 ‘05 ‘06 DIVIDENDS PER SHARE 40 cents RETURN ON EQUITY 23.8% GEARING 30.2% SAFETY PERFORMANCE 6.4 Total recordable case frequency rate (per million hours worked) 150 125 100 75 50 25 0 124 103 54 33 38 40 ‘04 ‘05 ‘06 Earnings per share Ordinary dividend per share 2 Santos Annual Report 2006 40 35 30 25 20 15 10 5 0 35.1 19.9 23.8 ‘04 ‘05 ‘06 1800 1500 1200 900 600 300 0 1,599 1,450 1,133 % 5 . 2 3 % 0 . 5 3 % 2 . 0 3 ‘04 ‘05 ‘06 Gearing Net debt 10 8 6 4 2 0 6.4 6.4 4.9 ‘04 ‘05 ‘06 SAN175 AW3 Text 21/3/07 9:48 AM Page 3 Progress made on the growth strategy in 2006 COOPER BASIN OIL WESTERN AUSTRALIAN OIL AND GAS • Project commenced with three latest-generation drilling rigs mobilised and a signiﬁcant amount of infrastructure installed (page 18). • Gnu gas and Amulet oil discoveries in the Carnarvon Basin (page 16). • Two new John Brookes gas sales contracts to supply • 108 wells drilled with 79% success rate, above 16 PJ to Newmont and 37 PJ to Wesfarmers (page 20). expectations (page 18). • Two new Mutineer-Exeter oil wells brought online, • 15 mmbbl of 2P reserves added (page 12). lifting gross production to over 50,000 bopd (page 18). EASTERN AUSTRALIAN GAS LNG PROJECTS • Gas production started from the Casino gas ﬁeld, • LNG exports started from the Bayu-Undan Darwin offshore Victoria (page 18). LNG facility (page 18). • Fairview production increased by 67% since acquisition in late 2005 (page 12). • Exploration/appraisal on the Barossa, Caldita and Evans Shoal South discoveries in Timor/Bonaparte (page 16). • Gas swap with Origin Energy expanded to 40 PJ per annum to mid 2012 (page 20). • New gas sales contract to supply 34 PJ over nine years to Zinifex’s Century zinc mine (page 20). ASIAN GROWTH • Wortel gas discovery, offshore East Java (page 16). • New country entry in Vietnam followed by oil discoveries at Dua and Blackbird (page 16). • Gas production started from the Maleo ﬁeld, offshore East Java (page 18). • New country entry in India in February 2007 (page 16). SANTOS VS ASX ALL ORDINARIES INDEX THREE-YEAR RELATIVE PERFORMANCE $ 14 12 10 8 6 4 John Brookes sanction Jeruk 2 flows oil Oyong & Maleo sanction John Brookes start-up Casino start-up Jeruk downgrade Novus asset acquisition Minerva start-up ASX ALL ORDINARIES SANTOS (STO) January 2004 January 2005 January 2006 December 2006 Casino sanction Tipperary acquisition Bayu-Undan LNG start-up Maleo start-up Bayu-Undan liquids start-up Mutineer-Exeter start-up Caldita discovery Banjar Panji incident Santos Annual Report 2006 3 SAN175 AW3 Text 21/3/07 9:49 AM Page 4 Record results as targets met REVIEW BY STEPHEN GERLACH, CHAIRMAN Santos achieved its operational targets in 2006 to deliver a record production performance and robust ﬁnancial results. increase in the interim payment, shareholders will receive a full year dividend of 40 cents per share, up 5% on the total distribution for 2005. ACROSS THE BOARD TABLE There were a number of changes to the composition of Santos’ Board in 2006. Sustained high product prices combined with lower production costs to generate a 7% increase in underlying net proﬁt after tax of $683 million – the best result in the Company’s history. However, this gain was offset by one-off signiﬁcant items, including costs associated with the Banjar Panji mudﬂow incident in Indonesia, with reported net proﬁt after tax 16% lower at $643 million. Operating cash ﬂow of $1,550 million was a record for the Company and enabled a reduction of gearing at year end to 30.2%. SHARE PRICE PERFORMANCE Notwithstanding this excellent operational result, Santos’ share price declined during the year with a total shareholder return of negative 17%. While the lower global oil price resulted in negative sentiment towards companies operating in the upstream oil and gas sector, Santos was further impacted by uncertainty surrounding our ultimate exposure to the Banjar Panji mudﬂow incident, and disappointing appraisal drilling results at the Jeruk oil discovery. This underperformance is of great concern to the Board and management, and we are committed to driving future increases in shareholder value. FULL YEAR DIVIDEND INCREASED The Board of Directors declared an unchanged ﬁnal dividend of 20 cents per share. With the earlier Santos’ strong production and ﬁnancial performance reﬂects the growth strategies which are creating a balanced production portfolio across onshore and offshore locations in Australia and overseas. SHIFT IN EXPLORATION FOCUS The oil and gas sector remains inherently a ‘high-risk, high-reward’ business and companies like Santos must be pragmatic and adaptable as they pursue continued growth. With the costs of drilling rigs and other services at historically high rates, Santos will spend less on exploration in 2007 as the Company increases its focus on near-ﬁeld targets of the type being pursued in the Cooper Basin Oil Project and coal seam gas activities in Queensland. That said, Santos is also looking forward to further exploration in the exciting offshore acreage the Company has acquired in India and Vietnam where positive results have already been achieved. Santos’ contingent resources now comprise more than 2.2 billion barrels of oil equivalent in projects offshore and onshore Australia, Papua New Guinea and Asia. This provides a solid foundation for Santos’ future development and the opportunity to create further shareholder value. QUALITY GOVERNANCE RECOGNISED Our focus on high quality corporate governance continues to be recognised by the independent report prepared by leading accounting and management ﬁrm, Horwath, and the University of Newcastle. For the ﬁfth successive year, this highly regarded report has awarded Santos a measure of ﬁve out of ﬁve for its corporate governance. We were saddened by the sudden death of Mr Chris Recny in June 2006 following a short illness. Chris was a very able and constructive Director and his contribution to the work of the Board will be missed. Mr Michael O’Leary resigned from the Board in December 2006 following 10 years of service. Mr Roy Franklin was appointed to the Board in September 2006, bringing extensive international petroleum experience from his recent roles as CEO of Paladin Resources plc and Clyde Petroleum plc and from previous senior positions with BP plc. Mr Kenneth Borda was appointed to the Board in February 2007 bringing to the Board his extensive international banking experience drawing on his most recent position as CEO – Middle East and North Africa of Deutsche Bank. On behalf of the Board, I would like to record my appreciation for the signiﬁcant contribution made by both Mr Recny and Mr O’Leary and to formally welcome Mr Franklin and Mr Borda to the Company. On behalf of the Directors, I thank everyone at Santos for their continuing commitment and performance during 2006 to building value for shareholders. STEPHEN GERLACH CHAIRMAN 15 MARCH 2007 4 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:49 AM Page 5 Growth continued as production and revenue rose REVIEW BY JOHN ELLICE-FLINT, MANAGING DIRECTOR Santos achieved excellent operational results in 2006 with record production during a period of sustained high oil prices and encouraging signs of strengthening gas prices. We also made a successful new country entry, in Vietnam, where we have three potential development projects which will be the subject of further appraisal and studies in 2007. Tempering these positive features of 2006 were the Banjar Panji mudﬂow incident in Indonesia, an event of signiﬁcant concern to the Company at all levels, and the disappointing appraisal of the Jeruk oil discovery. Looking ahead, Santos’ Cooper Basin Oil Project and the eastern Australian coal seam gas initiatives are reinvigorating one legacy asset and establishing another. These opportunities represent two of the Company’s most important growth engines. The emergence of a robust political and public debate over climate change in Australia also has profound implications for future energy use and Santos’ role as a signiﬁcant gas supplier to domestic and international markets. Throughout a dynamic period of change, one constant is the energy and commitment of Santos’ employees. The Company’s values and goals are being widely embraced by employees and, with a move to a new corporate headquarters in early 2007, Santos is entering an exciting phase as an emerging international oil and gas producer. I would like to record my appreciation for the positive contribution made by the Santos team to the Company’s success in 2006. SAFETY A PRIORITY In 2006, our employee injury frequency rate continued to fall for the ﬁfth successive year but the contractor injury frequency rate increased, resulting in the total recordable case frequency rate increasing from 4.9 to 6.4 recordable injuries per million hours worked. We have put systems, processes and training in place to improve our future safety performance. STRONG OPERATIONAL RESULTS Santos achieved its highest ever production in 2006 of 61 mmboe, up 9% on the previous year. With higher prices lifting sales revenue 12% to $2.8 billion and unit production costs down 3% to $6.41 per barrel, Santos’ earnings before interest, tax, depreciation and amortisation increased by 17% to $2.14 billion. For the third year in a row, we increased our 2P reserves base, with year-end reserves of 819 mmboe, an increase of 6%, even after production of 61 mmboe. Contingent resources also rose by 14% and now stand at 2,248 mmboe. Commercialising these reserves is an important focus across the Company. BANJAR PANJI INCIDENT In May 2006 an incident occurred at the Banjar Panji-1 exploration well located near Surabaya, in East Java, in which Santos holds an 18% non-operated interest. Hot, non-toxic mud started ﬂowing to the surface through vents near the drillhole and continues unabated. By early 2007, the mud had covered an area in excess of 450 hectares and, in doing so, has had a signiﬁcant impact on the local community, environment and economy. A large number of people have been displaced and the process of relocating the affected communities is ongoing. Santos is very concerned about the impact of this incident and has made a signiﬁcant contribution toward the response efforts led by the Indonesian Government-appointed National Team. Uncertainty surrounding the liability and insurance aspects of this incident has clearly had a signiﬁcant impact on share market sentiment towards Santos in the latter part of 2006 and into 2007. Santos has provisioned $89 million as at 31 December 2006 in relation to the Banjar Panji incident which reﬂects the current best estimate of drilling, mud management and other costs. Offsetting this, the Company has recognised an amount of $22 million as insurance proceeds, leading to a net expense of $67 million. GROWTH ON FIVE FRONTS Cooper Basin Oil Project – Santos is one year into a ﬁve-year, 1000-well project which is expected to increase Cooper Basin oil production from 10,000 barrels to 30,000 barrels a day of oil by the end of the decade. Initial results exceeded expectations in 2006 with 108 wells drilled, adding 15 million barrels of Proven plus Probable (2P) reserves: double the extra reserves anticipated. Santos Annual Report 2006 5 SAN175 AW3 Text 21/3/07 9:49 AM Page 6 One of the most rewarding elements of the project is that the exploration, appraisal and extraction of oil is being achieved with leading edge technology that leaves only a light environmental footprint to be rehabilitated. Eastern Australian gas – Santos is still the largest producer of natural gas in eastern Australia and is well positioned to meet the growing gas demand in this region. The Fairview coal seam gas (CSG) project was fully integrated into Santos’ operations during 2006 and has recorded a 67% increase in production since acquisition. With existing production from the Scotia and Fairview ﬁelds, plus signiﬁcant additional upside demonstrated by successful pilot drilling at Roma, CSG has been built into a new legacy asset for Santos. Total CSG reserves in southern Queensland now outweigh the gas reserves in the Cooper Basin. Western Australian oil and gas – Reﬂecting robust demand for energy, gas contract prices in Western Australia have recently moved to more than $5/GJ – sharply higher pricing that will support further gas developments. With uncontracted 2P reserves of 200 PJ of gas at John Brookes and a 45% interest in the 300–500 PJ resource at Reindeer (from which the joint venture is targeting ﬁrst production in 2010), Santos is set to make a signiﬁcant contribution towards meeting Western Australia’s domestic demand for gas. LNG projects – Santos became a LNG producer for the ﬁrst time in 2006 with the initial cargoes from the Darwin LNG plant shipped to customers in Japan. The potential to convert the large contingent gas reserves in Papua New Guinea into producing assets has been boosted by renewed consideration of a LNG development in the country. Santos is aligned with the operator ExxonMobil in the evaluation of a 5–6.5 million tonnes per annum LNG plant, with a target start-up date of 2012–2013. In the waters off the Northern Territory, appraisal work continues targeting a second train of 3.5–6 million tonnes per annum at the Darwin LNG project. Santos has a 40% interest in each of the Barossa, Caldita and Evans Shoal gas ﬁelds. A large 3D seismic survey is currently underway following the drilling of three wells on these structures in the past 12 months. Asian growth – Santos refocused its international strategy in 2006 with a greater emphasis on Asia and a decision to divest the Company’s United States holdings. We made a new country entry into Vietnam which yielded almost immediate success with the Blackbird and Dua oil discoveries. These ﬁelds, in addition to the existing Swan gas ﬁeld discovery in southern Vietnamese waters, are being considered for development. In Indonesia, the Maleo gas project came on-stream in 2006 and the Oyong project is scheduled to begin producing oil in mid 2007, with the gas component of this project to follow in 2008. We added India to our Asian portfolio in early 2007 when, against strong international competition, we secured two blocks of attractive frontier exploration acreage in the offshore Bengal Basin. The Company has committed to an eight-year $90 million work program which includes 2D and 3D seismic data acquisition and one exploration well. ADVANCING SUSTAINABILITY Santos took signiﬁcant steps in 2006 towards achieving the important goal of having a fully-integrated approach to managing our business for long- term sustainability. This Company-wide program demands continuous improvement in our approach to exploration, development and production, and other key indicators of sustainability such as environment, health and safety, ethics and conduct, our people and community relations. One area in which we will redouble our efforts in 2007 is occupational health and safety. As well as producing positive outcomes for all stakeholders, sustainability improves Santos’ efﬁciency and proﬁtability as it strives for a leadership position in the international energy marketplace. 6 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:49 AM Page 7 Our 2006 Sustainability Report provides more information about Santos’ sustainability performance and initiatives. A copy can be obtained by contacting the Company’s Share Register or visiting our website at www.santos.com/sustainability. CLIMATE CHANGE VISION REQUIRED Sustainability is at the heart of the debate over Australia’s national response to global warming and climate change. As an energy provider with large reserves of natural gas, the least carbon-intensive of fossil fuels, the political and policy parameters ﬂowing from this discussion have positive implications for Santos. However, we believe that the current situation represents a more fundamental opportunity to shape the future and the lifestyle that we can all lead. There are no ‘silver bullets’ to address climate change but there are a number of initiatives that we should embrace, including: • changing behaviours through education to conserve energy; • using cleaner fuels including Santos is contributing to the technology responses to climate change by participating in a major carbon capture and geosequestration trial project. The Company is evaluating the construction of a 100 megawatt power station, fuelled by coal seam gas at Fairview in Queensland, that would capture and store exhaust emissions in one of the largest carbon dioxide (CO2) geosequestration projects in the world. We are also examining the potential to inject CO2 into depleted reservoirs deep underground in the Cooper Basin. However, on a broader scale, we need a vision that will see Australians respond to the challenge of climate change and, in doing so, gain a comparative advantage in technology and lifestyle. When we build a clean, green nation we will attract the people, the skills and the investment that are vital to the prosperity of generations to come. We will also retain our ‘best and brightest’ because the opportunities in Australia will be second to none. natural gas for power generation and industrial use; Australia can lead the world. We simply need the will and drive to do so. • introducing a national emissions trading scheme to send a carbon pricing signal to the market; and • accelerating the research and investment required to develop new, clean energy technologies in Australia. JOHN C ELLICE-FLINT MANAGING DIRECTOR 15 MARCH 2007 Santos Annual Report 2006 7 SAN175 AW3 Text 21/3/07 9:49 AM Page 8 Operating performance remained strong Sales revenue in 2006 was a record $2,769 million, an increase of 12% on the previous record achieved in 2005. OPERATING CASH FLOW $ million 1600 1200 Tax change 800 13% compound annual growth rate 400 0 Moomba incident ‘94 ‘97 ‘00 ‘03 ‘06 Over the past 13 years, Santos has achieved an average compound annual growth rate for operating cash ﬂow of 13%.This cash has been reinvested to build a business that continues to deliver on its strategic targets. Santos’ record revenue reﬂected higher production from new projects commissioned during the year, including the Casino gas project, the Darwin LNG project and the Maleo gas project, together with a full year of production from the John Brookes gas project which was brought online in the latter part of 2005. HIGHER PRODUCT PRICES Favourable movements in commodity prices also contributed to the increased revenue, with a 21% increase in oil price of A$89.35 compared with A$73.83 in 2005, and a 4% increase in gas price to $3.78 per GJ from $3.62 previously. LOW UNIT COSTS OF PRODUCTION Unit production costs of $6.41 per boe were 3% lower than 2005, reﬂecting increased production from ﬁelds with low operating cost, notably the John Brookes ﬁeld in Western Australia. OPERATING PROFIT HIGHER As a result of higher prices and lower costs, the netback or cash margin sold increased by 12% to $33.10 per boe. Earnings before interest, tax, depreciation, amortisation (EBITDA) increased by 17% to a record $2.14 billion. UNDERLYING NET PROFIT HIGHER One-off charges in 2006 reduced the reported net proﬁt by $40 million, compared with an uplift of $123 million in 2005. Combined with higher depletion, depreciation and amortisation expense, reﬂecting an increase in future development and restoration costs, reported net proﬁt after tax (NPAT) of $643 million was 16% lower than 2005. After adjusting for signiﬁcant items, underlying NPAT was $683 million, 7% higher than 2005. CASH FLOW AND BALANCE SHEET ROBUST Operating cash ﬂow increased by 6% to $1,550 million, a record for the Company. Net debt of $1,450 million at year end was $149 million lower than 2005, as sufﬁcient operating cash ﬂow was generated after funding exploration, development, net acquisitions and dividends. Net assets increased by $392 million to $3,356 million, resulting in gearing (net debt to net debt plus equity) of 30.2%, which is lower than the Company’s preferred maximum of around 40%. 8 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:49 AM Page 9 Performance against strategic targets in 2006 2006 PERFORMANCE AGAINST TARGETS Reserve Replacement Ratio** 140% Target 162% Actual Production Growth 6-8% Target 9% Actual EBITDAX Growth Per Share >10% Target 15% Actual Return on Capital Employed >10% Target 15% Actual Reserve Replacement Cost Per boe** US$5.50 Target US$10.74 Actual Netback $22 Target $33* Actual * Normalised for the A$45 oil price implicit in the target, netback would have been approximately $20. ** Three-year rolling average. Santos achieved strong results in 2006 against a series of targets established three years ago to measure performance. Production growth for the year was above target at 9% as the impact of new projects more than offset the natural decline of existing ﬁelds. Santos’ netback target was set at a A$45 oil price. Given the oil price experienced during the year, the Company was able to exceed this target. Together with the higher level of production, this has resulted in more cash being available to build reserves. The same cycle that is driving netback higher is also driving replacement cost higher. Three-year average reserve replacement cost of US$10.74 per boe was above target, reﬂecting cost inﬂation seen across the industry. Taking netback and reserve replacement cost together shows that Santos’ ability to replace reserves from the cash generated by production remains strong. Over the past three years, Santos has replaced 162% of production on a Proven (1P) basis which exceeds the Company’s target reserve replacement rate and therefore extends reserve life. This is a strong performance when the industry generally is struggling to replace reserves. Success on these metrics in conjunction with higher prices means Santos is increasing its cash generation and operating income per share at well above target rates. Return on capital is also well in excess of target. Santos Annual Report 2006 9 SAN175 AW3 Text 21/3/07 9:49 AM Page 10 The world of Santos EGYPT KYRGYZSTAN INDIA UNITED STATES Kyrgyzstan Fergana Basin Colorado/Nebraska Gulf of Mexico BROWSE,TIMOR AND BONAPARTE CARNARVON BASIN OTWAY BASIN 10 Santos Annual Report 2006 India Bengal Basin Song Hong Basin Nam Con Son Basin Dua, Blackbird, Swan West Natuna Basin SORELL BASIN T/35P T/32P T/33P Victoria T/40P King Island Bass Strait T/36P Tasmania 0 100 kilometres SAN175 AW3 Text 21/3/07 9:49 AM Page 11 KEY TO MAPS Exploration Production Processing and load-out facility Oil ﬁeld Gas ﬁeld Oil pipeline Gas pipeline INDONESIA AND VIETNAM EAST JAVA BASIN KUTEI BASIN Kutei Basin Hiu Aman East Java Basin Jeruk, Maleo, Oyong, Tanggulangin, Wortel, Wunut Joint Petroleum Development Area Bayu-Undan, Elang-Kakatua Timor Sea Barossa, Caldita, Jabiru-Challis, Evans Shoal West Papua and Papua New Guinea Hides, SE Gobe, Barikewa WEST PAPUA AND PAPUA NEW GUINEA Browse Basin Wickham Point Bonaparte Basin Petrel, Tern Carnarvon Basin Barrow, Hurricane, John Brookes, Legendre, Mutineer-Exeter, Stag, Thevenard Amadeus Basin Mereenie, Palm Valley, Brewer Estate Houtman Basin Cooper/Eromanga Basins Moomba, Ballera, Jackson Port Bonython Duntroon Basin AMADEUS BASIN Surat/Bowen Basins Fairview, Scotia, Moonie, Roma, Lytton, Wallumbilla Otway Basin Casino, Henry, Minerva Sorell Basin Gippsland Basin Patricia-Baleen, Sole, Kipper GIPPSLAND BASIN SURAT/BOWEN BASINS COOPER/EROMANGA BASINS Santos Annual Report 2006 11 SAN175 AW3 Text 21/3/07 9:49 AM Page 12 Record production and sales were achieved Santos achieved its highest ever oil and gas output of 61 mmboe in 2006 as production from new developments came on-stream. For the ﬁrst time in the Company’s history, areas outside the Cooper Basin contributed more than 50% of total hydrocarbons produced. Nevertheless, production from the Cooper Basin Oil Project more than offset the natural decline in the basin’s existing oil ﬁelds. The success of this venture to date bodes well as drilling and development activity accelerates in 2007. COOPER OIL SUCCESS The initial results from the Cooper Basin Oil Project exceeded expectations in 2006. This is a high-value, scaleable opportunity that is unique to Santos. Activities relating to the project added 2P reserves of 15 mmbbl to Santos’ portfolio in 2006. The potential of the Cooper Basin Oil Project was further expanded during 2006 and early 2007 with a number of farm-ins by Santos securing additional exploration acreage. Santos’ net acreage has increased by more than 33% in the past four years to more than 30,000 square kilometres. FAIRVIEW DELIVERS REDOUBLING SAFETY EFFORT Santos’ coal seam gas (CSG) production from the Fairview ﬁeld in southern Queensland was another operations highlight in 2006. Santos recorded a disappointing increase in contractor personal safety incidents in 2006, many of which were hand and ﬁnger injuries. As the Company expands its operations, a large increase in workforce numbers, including contractors, presents challenges in educating new staff and instilling Santos’ strong commitment to employee health and safety. Santos’ goal in 2007 will be to return to the continuous improvement that had been achieved in the previous three years which produced a 50% reduction in the Company’s total recordable case frequency rate – a statistical measure of safety performance. Further discussion of Santos’ safety performance appears on page 26. Fairview has been fully integrated into Santos’ CSG operations and now forms an important element of the Wallumbilla gas hub, near Roma. Since its acquisition in late 2005, production at Fairview has increased by 67%, with the extra output readily ﬁnding a market through Santos’ extensive sales portfolio. Importantly, production efﬁciency has been enhanced with a decrease in water production. In an Australian ﬁrst in 2006, Santos successfully trialed the underground injection of salty water produced with the CSG at Fairview. This sustainable solution for the disposal of produced water will, at current injection rates, prevent the equivalent of ﬁve tonnes of salt from entering the Dawson River system each day. Santos plans to expand its CSG exploration program in the Roma area in 2007. 12 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:49 AM Page 13 Initial results from the Cooper Basin Oil Project exceeded expectations: 108 wells were drilled with a 79% success rate. Santos Annual Report 2006 13 SAN175 AW3 Text 21/3/07 9:49 AM Page 14 Production statistics Total 2006 Total 2005 Total 2006 Total 2005 Field units mmboe Field units mmboe Field units mmboe Field units mmboe Sales gas, ethane and LNG (PJ) Cooper 109.2 18.8 124.7 21.5 Surat/Bowen/Denison Amadeus Otway/Gippsland Carnarvon Bonaparte Indonesia United States Total production Total sales volume Total sales revenue ($million) 29.4 12.7 26.3 31.7 13.1 6.8 6.1 235.3 254.8 5.1 2.2 4.5 5.4 2.2 1.2 1.0 40.4 43.8 963.0 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 Crude oil (’000 bbls) Cooper Surat/Denison Amadeus Legendre Thevenard Barrow Stag Mutineer-Exeter Elang-Kakatua Jabiru-Challis Indonesia SE Gobe United States Total production Total sales volume 3,455.1 66.8 139.3 462.0 390.4 687.5 2,768.9 4,865.1 160.8 157.1 111.6 267.5 38.6 3.5 0.1 0.1 0.5 0.4 0.6 2.8 4.9 0.2 0.1 0.1 0.3 0.0 3,205.9 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 13,570.7 13,452.2 13.6 13.5 15,263.9 14,990.2 Total sales revenue ($million) 1,202.0 3.2 0.1 0.2 0.9 0.5 0.7 2.4 6.5 0.2 0.1 0.1 0.3 0.1 15.3 15.0 1,106.8 Condensate (’000 bbls) Cooper Surat/Denison Amadeus Otway Carnarvon Bonaparte United States Total production Total sales volume 1,618.9 24.0 58.0 23.2 424.6 2,384.4 124.2 4,657.3 4,623.9 1.5 0.0 0.1 0.0 0.4 2.3 0.1 4.4 4.3 1,922.6 30.8 43.7 12.8 101.5 2,139.9 236.1 4,487.4 4,602.7 1.8 0.0 0.1 0.0 0.1 2.0 0.2 4.2 4.3 Total sales revenue ($million) 397.3 345.9 LPG (’000 t) Cooper Bonaparte Total production Total sales volume 200.6 106.3 306.9 294.0 1.7 0.9 2.6 2.5 213.6 93.6 307.2 302.2 1.8 0.8 2.6 2.5 Total sales revenue ($million) 206.8 184.4 Total Production (mmboe) Sales volume (mmboe) Sales revenue* ($million) 61.0 64.1 2,769.1 56.0 61.1 2,462.8 * Full year 2006 revenue includes an $18.8 million year-end revaluation of embedded derivatives in sales contracts. 14 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:49 AM Page 15 Reserves statistics PROVEN PLUS PROBABLE RESERVES (SANTOS SHARE) BY ACTIVITY Reserves year end 2005 Production Additions Acquisitions/divestments Estimated reserves year end 2006 Sales gas (incl. ethane & LNG) PJ 3,667 -235 328 189 3,949 Crude oil mmbbl Condensate mmbbl LPG ’000 tonnes Total mmboe 76 -14 13 0 75 43 -5 2 3 43 3,195 -307 -257 264 2,895 774 -61 69 37 819 PROVEN PLUS PROBABLE RESERVES (SANTOS SHARE) YEAR END 2006 BY AREA Area Cooper Basin Onshore Northern Territory Offshore Northern Territory Eastern Queensland Southern Australia Carnarvon Basin Papua New Guinea Indonesia United States Total RESERVES SUMMARY (SANTOS SHARE) (mmboe) Proven (1P) reserves Proven plus Probable (2P) reserves Contingent resources (best estimate) 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), the World Petroleum Congress (WPC) and the American Association of Petroleum Geologists (AAPG). The deﬁnitions used are consistent with the requirements of the Australian Securities Exchange (ASX). Sales gas (incl. ethane & LNG) PJ Crude oil mmbbl Condensate mmbbl LPG ’000 tonnes Total mmboe 811 118 328 1,451 437 586 0 192 26 3,949 39 2 0 0 0 30 1 3 0 75 11 0 21 0 5 5 0 0 1 1,448 0 1,041 16 390 0 0 0 0 43 2,895 200 22 85 251 83 136 1 36 5 819 Year end 2005 414 774 1,971 Production Additions Acquisitions/ divestments -61 -61 0 62 69 177 26 37 100 Year end 2006 441 819 2,248 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’. Santos Annual Report 2006 15 SAN175 AW3 Text 21/3/07 9:49 AM Page 16 Strong drilling results and expansion into Asia Positive perceptions of Santos as a maturing oil and gas company in Asia contributed to a successful new country entry in Vietnam, adding another dimension to the Company’s international profile in 2006. In a year in which Santos recorded strong drilling results in its traditional search areas, both onshore and offshore Australia, the success of the Company’s ‘growth through exploration’ strategy was underscored by its experience in Vietnam. Santos continues to consider other opportunities in Asia and was granted acreage in the Bengal Basin, in the northern Bay of Bengal offshore India, in early 2007. The Amulet-1 discovery, also in the Carnarvon Basin, yielded a 28-metre oil column with a subsequent sidetrack and appraisal well helping to deﬁne a signiﬁcant oil accumulation. Further appraisal drilling in 2007 will establish the number of oil accumulations present at the Amulet ﬁeld. In Indonesia, the Wortel-1 exploration well discovered gas and ﬂowed at 18.5 mmscf/d. Further appraisal drilling of the Wortel structure is planned in 2007. SIGNIFICANT DISCOVERIES Santos drilled 25 exploration wells in 2006, with discoveries in the Timor/Bonaparte region, Carnarvon Basin, Cooper Basin, Vietnam and Indonesia. The Barossa-1 well in the Timor/ Bonaparte region offshore Northern Territory ﬂowed gas at a rate of 30 mmscf/d and provided valuable reservoir data. An ongoing exploration and appraisal effort, also incorporating the nearby Caldita ﬁeld, will aim to convert the area’s gas into feedstock for a second train at the Wickham Point LNG plant, near Darwin. In the Carnarvon Basin, the Gnu-1 well ﬂowed gas at 26 mmscf/d and considerably enhanced Santos’ Western Australian gas portfolio. Gnu has added to the reserves of the adjacent Reindeer ﬁeld for which commercialisation options are being considered by the project operator, Apache. SUCCESSFUL ENTRY TO VIETNAM Santos recorded strong oil and gas ﬂows from the Blackbird and Dua discovery wells after farming into the Nam Con Son Basin off Vietnam’s southern coast in 2006. Blackbird yielded oil from four zones and ﬂowed at rates of more than 3,700 bopd and 2.5 mmscf/d, while Dua ﬂowed at 5,500 bopd and 6.76 mmscf/d. Two appraisal wells provided information on the Dua reservoirs and studies in 2007 will consider the type and scale of potential development options. Santos is acquiring 3D seismic data to delineate the Blackbird structure and, with the two discoveries in close proximity, consideration will be given to joint development of Dua and Blackbird. Santos’ standing as a professional and skilled explorer saw the Company become operator of a joint venture in the Song Hong Basin, offshore northern Vietnam. Santos funded the acquisition and interpretation of 2D seismic data in this prospective area and has committed to shooting a 3D seismic program and drilling an exploration well within three years. The strong long-term political, education and trade ties that exist between Australia and Vietnam are now delivering in a commercial sense, and Santos is the most active Australian exploration company operating in the country. PROGRESS IN KYRGYZSTAN AND EGYPT Santos established a sound platform for exploring the prospective Fergana Basin in western Kyrgyzstan with the completion of a reinterpretation of Soviet-era seismic data. Santos will undertake a 2D seismic program in early 2007 and apply technology and techniques not previously employed in the region to plan a drilling program. In Egypt, Santos drilled two unsuccessful wells in 2006; however, seismic data previously acquired is being reprocessed to allow improved imaging. 2007 FOCUS ON NEAR-FIELD EXPLORATION With drilling rig and service costs to remain high in the current competitive market, Santos will sharpen its focus on near-ﬁeld exploration and appraisal of recent successes in the year ahead. The Company’s exploration budget reﬂects this prudent stance and has a greater emphasis on seismic acquisition and less on drilling. Twelve exploration wells with a budget of $173 million are planned for 2007, with oil as the principal target. 16 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:49 AM Page 17 2007 WILDCAT EXPLORATION PROGRAM Nam Con Son Basin Falcon East Java Basin EJ-1 Carnarvon Basin Hurricane-2, Totem-1, Fletcher-1, Charm-1 Cooper/Eromanga Basin Montegue Houtman Basin Charon Surat/Bowen Basin Mahogany, Stitch Gulf of Suez RAD-2X, SEJ-1 Gas Oil Martin Novak, Senior Staff Geophysicist, and Aaron Cummings, Geologist, in the Offshore Southern and Western Australia Exploration team. 2006 EXPLORATION EXPENDITURE BY CATEGORY $million Drilling 188.8 Geoscience and other 47.3 Seismic 12.1 New ventures 10.3 2006 EXPLORATION EXPENDITURE BY AREA $million Offshore Australia 73.4 Onshore Australia 17.3 South East Asia 88.5 United States 56.1 North Africa 17.3 Central Asia 5.9 Santos Annual Report 2006 17 SAN175 AW3 Text 21/3/07 9:49 AM Page 18 Three new developments started production Robust analysis coupled with advanced technology and development techniques delivered strong results across Santos’ portfolio of oil and gas projects in 2006. The Cooper Basin Oil and Mutineer- Exeter projects are two examples of Santos breaking new ground in drilling and development activity. The skills and knowledge gained on such projects can be leveraged across all of the Company’s activities. Underpinning the Company’s approach to the planning, implementation and construction of new oil and gas facilities is the Santos Quality Asset Development (SQAD) process. This is a structured framework in which the Company appraises projects, assesses risks and rewards, undertakes investment decisions, initiates Front End Engineering and Design (FEED) and ultimately brings a project to production. A WINNER IN CASINO SQAD played an important role in the Casino gas ﬁeld development which was brought into production in record time and ahead of budget early in 2006. Located 30 kilometres off Victoria’s south-west coast, Casino performed well in its ﬁrst year, producing an average of 100 mmscf/d of gas with limited downtime. Casino is the centrepiece of an emerging gas hub in the Otway Basin where the Henry gas ﬁeld, located 8.5 kilometres north-west of Casino, has advanced in Santos’ development pipeline. The Company approved the commencement of FEED for Henry in late 2006, with a ﬁnal investment decision on the project to be made in the second half of 2007. Santos has a number of attractive exploration prospects in tenement VIC/P44, which hosts Casino and Henry, to be drilled in late 2007 and 2008. If successful, these prospects would add to the resources which could be developed in conjunction with the Henry gas ﬁeld. MALEO INTO PRODUCTION Santos’ ﬁrst offshore operated gas ﬁeld outside Australia, the Maleo gas project located off the East Java coast in Indonesia, came on-stream in September 2006 and soon achieved its contracted production level of approximately 80 TJ/day. The Maleo ﬁeld, containing gross 2P reserves of 240 billion cubic feet of gas, was developed using a jack-up rig converted into a Mobile Offshore Production Unit connected to a short pipeline to existing production infrastructure in the area. BAYU-UNDAN LNG STARTS EXPORTS The ﬁrst shipment of LNG from the Bayu-Undan processing plant in Darwin during February 2006 was a major milestone for Santos. With a 10.64% interest, Santos is the only Australian company involved in this project which is operated by ConocoPhillips. The LNG phase of the project involves the transportation of lean gas from the Bayu-Undan ﬁelds in the Timor Sea via a 500-kilometre subsea pipeline for processing at a single train LNG plant at Wickham Point, Darwin. MUTINEER-EXETER DEVELOPMENT CONTINUES In 2006 Santos achieved several milestones in the ongoing development of the Mutineer-Exeter oil ﬁelds. The phase three drilling program was successfully completed with two new development wells brought online increasing production rates from 35,000 bopd to over 50,000 bopd. The program successfully executed the longest offshore directional well drilled by Santos at a total measured depth of 4,822 metres. An extensive high-deﬁnition 3D seismic survey over the Mutineer- Exeter ﬁelds was acquired and processed during 2006 and is now being used to optimise the 2007 appraisal and development program. SMALL RIGS, BIG RESULTS Santos’ innovative approach to oil ﬁeld development can also be seen in the Cooper Basin Oil Project in 2006, with three state-of-the-art truck-mounted rigs delivering a 20% improvement in drilling performance together with more sustainable drilling operations. With the introduction of these new rigs, Santos has implemented a number of improvements to the traditional lease size, layout and construction methodology that minimises the environmental footprint. Santos is the only company in Australia with the acreage, infrastructure, equipment and know-how to be able to undertake this ambitious 1,000-well program over ﬁve years. 18 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:50 AM Page 19 The Maleo gas project offshore East Java – Santos’ ﬁrst offshore operated gas ﬁeld outside Australia – started production in September 2006. During 2006, Santos drilled 108 wells under the Cooper Basin Oil Project. A 79% success rate saw 47 wells brought on-stream with an average duration from discovery to production of about 60 days. JERUK DISAPPOINTS Extensive reservoir analysis of the Jeruk oil discovery, offshore East Java, established that the upside recoverable oil resource for the ﬁeld was most likely to be less than 50 mmbbl. Opportunities to commercialise Jeruk are being examined in discussions with the Indonesian Government. However, plans for additional appraisal drilling were placed on hold in 2006 pending the review of development scenarios and the resolution of commercial and technical issues which may potentially impact the viability of any development. The second phase of the Oyong project, which will supply gas to electricity generators in East Java via a new pipeline, is expected to come on-stream in late 2008. OYONG BACK ON TRACK The Oyong oil and gas project, also offshore East Java, is expected to achieve ﬁrst oil production by mid- 2007. The start-up date was delayed due to the need to re-tender the contract for the production barge. With an 80% Indonesian content in the Floating Storage and Offtake vessel contract, the Oyong project is a good example of Santos’ sustainability policy and commitment to local communities. Santos Annual Report 2006 19 SAN175 AW3 Text 21/3/07 9:50 AM Page 20 Gas supply hubs underpinned innovative contracts In 2006, Santos participated in several innovative commercialisation activities which leveraged the Company’s network of gas supply hubs in eastern Australia. The interaction between the Wallumbilla and the Cooper Basin hubs, in south-east Queensland and South Australia respectively, is now delivering the greater production versatility and the optimisation of costs that were the objectives of Santos’ hub strategy. This strategy is delivering a number of commercial beneﬁts including: • the sale of coal seam gas (CSG) under Cooper Basin contracts which has underwritten further development of Fairview reserves by bringing forward the production of gas for which markets were not immediately available in south-east Queensland; • meeting Cooper Basin sales commitments with CSG, which contains no ethane, facilitates the separate sale of higher-value Cooper Basin ethane; • the expansion of an existing gas swap agreement between Santos and Origin Energy from 18 PJ to 40 PJ per annum, and extension of the agreement by six months until mid 2012; • the sale of 34 PJ of gas over nine years to Zinifex for power generation at the Century zinc mine; and • the potential to further extend Santos’ gas supplies to South Australia and New South Wales. GROWING ROLE FOR CSG CSG is playing an increasing role in Australia’s energy supply mix and now represents 25% of the 2P gas reserves in eastern Australia. With low barriers to entry and established transmission infrastructure in the region, the CSG market is highly competitive with many new and emerging participants. Given its low-cost, high-productivity production facilities at Fairview and Scotia, Santos is well positioned to supply CSG to this burgeoning market. GAS PRICE TRENDS UP IN WA In Western Australia, Santos signed several new gas contracts in 2006 as prices moved sharply higher, reﬂecting robust and increasing demand for gas. Santos contracted with Newmont Australia for the supply of 16 PJ of gas over three years from the John Brookes ﬁeld. The contract, which will supply gas to Newmont’s Jundee gold mine and Parkeston power station, is expected to generate more than $90 million in revenue during its term. The John Brookes ﬁeld will also supply up to 37 PJ of gas over 10 years to Wesfarmers’ new LNG plant at Kwinana, south of Perth, which is scheduled to come online in early 2008. The favourable demand and gas price trends in Western Australia provide an attractive opportunity to commercialise an additional 300–500 PJ of gas resource from the Reindeer gas ﬁeld, located north-east of John Brookes, in which Santos has a 45% interest. CLIMATE CHANGE INFLUENCES Political and market responses to climate change created commercial opportunities for Santos in 2006. Santos sold Gas Electricity Certiﬁcates (credits earned by the Company’s Ballera power plant) to Energex to enable the power retailer to meet its obligations to the Queensland Government to source 13% of its electricity from gas-ﬁred generation or purchase Gas Electricity Certiﬁcates in lieu of ﬁnancial penalties. The pursuit of lower-carbon-intensity fuel has enhanced the competitiveness of natural gas over coal, and is expected to stimulate more gas-ﬁred power generation in eastern Australia with a resulting positive impact on gas prices. In 2006, the New South Wales Greenhouse Abatement Certiﬁcate Scheme, under which electricity retailers are required to meet mandatory targets for reducing or offsetting greenhouse gas emissions, was extended until at least 2021. This scheme increases the competitiveness of gas-ﬁred electricity generation and improves the outlook for gas in one of Santos’ core markets. SANTOS DIRECT SALES TOP $30 MILLION Sales by Santos’ retail gas marketing arm, Santos Direct, passed $30 million for the ﬁrst time with sales on the Victorian spot market and to large industrial users. In 2006, Santos acquired a gas retail licence in South Australia and applied for a licence in New South Wales. 20 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:50 AM Page 21 Two new gas sales contracts were completed in 2006 to supply gas from the John Brookes ﬁeld to Newmont and Wesfarmers. Santos Annual Report 2006 21 SAN175 AW3 Text 21/3/07 9:50 AM Page 22 LNG and carbon opportunities a priority LNG commercialisation opportunities will be an important focus for Santos in 2007 as the Company seeks to convert contingent gas resources into new developments. The Hides gas ﬁeld in Papua New Guinea’s Southern Highlands, in which Santos has a 25% interest, is the largest known gas resource in the region and would be expected to be the cornerstone of any LNG project. Initial studies indicate there are potential sites for a LNG development on PNG’s southern coast and that sufﬁcient reserves exist to support a single LNG train. Santos is very supportive of the efforts by the operator of the Hides ﬁeld, ExxonMobil, to commercialise these gas reserves, targeting production in 2012–2013. In Australian waters, Santos continued exploration and appraisal work on the Evans Shoal South, Caldita and Barossa gas ﬁelds in the Timor/Bonaparte region to prove up the resource required to support a second LNG train at the Wickham Point plant in Darwin. PURSUING CARBON CAPTURE TECHNOLOGIES Santos is playing a leading role in the pursuit of the lower carbon emission energy technologies demanded by climate change. In 2007, Santos expects to complete its evaluation of a proposed CO2 capture and storage project based on the Company’s Fairview CSG operations in southern Queensland. The proposed $435 million Fairview Power Project, which would be funded in part by a $75 million grant from the Australian Government’s Low Emissions Technology Demonstration Fund, would be one of the largest CO2 geosequestration projects in the world. The project would involve construction of a 100 megawatt power station fuelled by Fairview’s CSG. Exhaust gases containing CO2 would be captured, compressed and transported by pipeline to be injected deep underground into the Fairview coal seams. In a move that enhances the sustainability beneﬁts of the project, water produced with the coal seam gas would be used in the power station. The electricity generated would be sold into the national grid via a new 100- kilometre transmission line to Roma. A ﬁnal investment decision on the Fairview Power Project, which is a joint venture with General Electric Energy, is expected by the end of 2007. EMISSIONS TRADING Santos recognises that a well- designed emissions trading scheme will be a key component of a portfolio of initiatives to reduce Australia’s greenhouse gas emissions. Emissions trading provides a mechanism by which the market determines the least cost means of emissions abatement, and the Company supports the earliest possible introduction of such a scheme on a national basis. Natural gas is a transition fuel between coal-ﬁred electricity and a clean-fuel future. If Australia is to achieve emissions abatement over the long term, natural gas must play a much greater role in electricity generation. INCREASED STAKE IN KIPPER Santos acquired Woodside Petroleum’s 21% stake in the Kipper gas ﬁeld, located off the Gippsland coast in Victoria, to take its interest to 35%. A production licence for the ﬁeld, which is estimated to contain 620 billion cubic feet of recoverable gas and 30 million barrels of condensate and LPG, was approved by the Victorian Government. Kipper gas and liquids will be processed at the nearby Longford facility with production expected to commence in 2010. MINORITIES ACQUIRED Santos acquired the outstanding minority interests, other than Origin Energy, in the Fairview ﬁeld in 2006. The three minority interests represented, in aggregate, 5% of Fairview, and the acquisition takes Santos’ working interest to 79.5%. In addition, Santos acquired a small interest in the adjacent Origin Energy operated Spring Gully CSG ﬁeld, as well as the remaining 15% minority interests in the Roma gas ﬁelds, taking Santos’ ownership to 100%. US HOLDINGS TO BE DIVESTED Following a strategic review in 2006, Santos announced its intention to sell all of its United States holdings. While Santos has a long history of involvement in the US upstream oil and gas sector, the Company believes that it will be better placed to meet its strategic objectives by redeploying capital into its other business activities in Australia, Asia and the Middle East. 22 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:50 AM Page 23 Santos became a LNG producer for the ﬁrst time in 2006 with initial cargoes from the Darwin LNG plant shipped to customers in Japan. Santos Annual Report 2006 23 SAN175 AW3 Text 21/3/07 9:50 AM Page 24 Good progress was made in managing sustainability As a successful energy company, Santos must be able to uphold its reputation as a trusted and competent explorer, developer and operator, continuing to make economic progress while operating in an environmentally responsible manner and fulfilling its social obligations. Over the past year, signiﬁcant progress has been made towards the important goal of having a fully- integrated approach to managing the Company for long-term sustainability. As a result, Santos recorded improved performance for many of its sustainability indicators, including environment, greenhouse and employee commitment. FRAMEWORK FOR CONTINUOUS IMPROVEMENT IN SUSTAINABILITY Santos’ commitment to sustainability is managed through the functionally- based organisational structure (see page 31) which reﬂects the various activities that occur throughout the business cycle of the Company. There are eight functional areas, with three focusing on the oil and gas ‘conveyor belt’ of exploration, development and operations, and ﬁve – strategic projects, gas marketing and commercialisation, ﬁnance, legal, and corporate and people – helping to drive this conveyor belt. These functions provide the structure, company policies and technical systems to ensure the Company achieves a high performance across the four sustainability domains: • environment – the natural resources in the areas where Santos operates and how efﬁciently they are used; • community – Santos’ relationship with and contribution to the communities it is associated with and the strength of those communities; • our people – the skills, capabilities and effectiveness of the people in Santos’ workforce; and • economy – the economic impacts of Santos’ activities. Santos’ sustainability framework is driven by a traditional improvement cycle of assessment, gap analysis, action planning, measurement and reporting. This provides a consistent approach to the consideration of the principles of sustainability in decision-making and operational practices. The sustainability framework has been developed in parallel with a continuous improvement framework and during 2007 Santos will progressively align them further. The continuous improvement framework was piloted with the Operations and Shared Business Services teams during 2006 and will be rolled out throughout Santos in 2007. EXAMPLES OF SANTOS SYSTEMS AND POLICIES BUSINESS CONDUCT Bribery and corruption Conﬂict of interest Financial management and accounting Political afﬁliation Receiving gifts Reporting misconduct Risk management Securities dealing Shareholder communication and market disclosure ENVIRONMENT AND SOCIAL Community Environment Greenhouse Health and wellbeing Human rights* Safety Training and development WORKPLACE AND EMPLOYMENT Conditions of employment Conﬁdentiality Employee beneﬁts Equal opportunity Internet and electronic communication Issue resolution Leave Performance management Privacy Recruitment Use of company resources * Draft policy under review. 24 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:50 AM Page 25 Annamarie van Riet, Corporate Affairs Ofﬁcer, is one of Santos’ employees volunteering to restore a section of Adelaide’s Torrens Riverbank. Santos Annual Report 2006 25 SAN175 AW3 Text 21/3/07 9:50 AM Page 26 TOTAL RECORDABLE CASE FREQUENCY RATE recordable injuries per million hours worked 15 12 9 6 3 0 ‘02 ‘03 ‘04 ‘05 ‘06 Contractor Combined Santos employee Santos’ employee injury frequency rate continued to fall for the ﬁfth successive year but the contractor injury frequency rate increased, resulting in the total recordable case frequency rate increasing to 6.4 in 2006. Annual audits of EHSMS implementation show a number of Santos sites have reached or are approaching the continuous improvement zone, reﬂecting a fully functioning and improving system in place. EHSMS MANAGEMENT STANDARD ASSESSMENTS % implementation 100 80 60 40 20 0 SYSTEMS AND POLICIES GUIDE CONDUCT To promote high standards of corporate governance and ethical business conduct, Santos has a clear set of values, policies and procedures to guide the actions of the Company and employees in all the areas of the business. This includes an integrated code of conduct which prescribes that, in addition to compliance with all applicable legal requirements, all employees are expected to adopt appropriate standards of professional and business conduct in their dealings on behalf of Santos. The table on page 24 summarises the areas covered by these systems and policies. One of Santos’ systems is a comprehensive Environment, Health and Safety Management System (EHSMS) used to deﬁne performance expectations and accountabilities, and to monitor and continually improve performance. The EHSMS is a dynamic system which is continually being improved to ensure it is current and aligned with the changing nature of Santos’ business. More detail about this and the other systems Santos has in place can be found in the Corporate Governance section which begins on page 36. In 2006, Santos launched a Reporting Misconduct program where employees can conﬁdentially report non-compliance with laws and regulations and Company policy and procedures without fear of reprisal or discrimination. The Reporting Misconduct program reﬂects corporate best practice and is an additional last resort mechanism to report non-compliance. SAFETY FOCUS CONTINUES Santos’ safety vision is that ‘we all go home from work without injury or illness’. After achieving its best ever safety performance in 2005, with a total recordable case frequency rate of 4.9, Santos had a mixed performance in 2006. The employee injury frequency rate continued to fall for the ﬁfth successive year but the contractor injury frequency rate increased, resulting in the total recordable case frequency rate increasing to 6.4 in 2006. Continuous Improvement Zone Baseline in 2006 Port Bonython 2003 Ballera Plant 2004 Moomba Plant Eastern Queesland Mereenie Production Central 2005 2006 Drilling & Petroleum Engineering Common Processes Mutineer - Exeter Fairview Indonesia United States EHS & Operations Support Patricia -Baleen 26 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:50 AM Page 27 This result is related to a signiﬁcant increase in the number of new ﬁeld- based contractors. Santos is taking action to address this speciﬁc issue. Notwithstanding this, an encouraging trend has been the reduction of the severity of injuries to employees and contractors. Santos achieved a 15% reduction in injury severity in 2006 which contributed to a total reduction of 60% since 2004. Areas of particular focus during 2006 were keeping hands safe (a signiﬁcant challenge in a manual labour environment), driving and working in hot climates. Santos has developed new health and safety lead indicators which will help ﬁne-tune programs to drive further improvement in health and safety performance. An example is proactive reporting ratios which encourage the reporting and management of hazards and extraction of lessons learnt from near misses. BUILDING AN ACHIEVEMENT- ORIENTATED CULTURE Santos has continued to implement the strategy developed in 2004 to create an organisational culture deﬁned by shared goals, values and principles founded on people systems, leadership and behaviour. Employee survey results in 2006 conﬁrmed that the practice of leaders directly discussing Company vision, strategy and values has been instrumental in improving employee understanding of and alignment with Company direction. Signiﬁcant foundation work has been undertaken over the past three years to develop people systems that are progressive and support business direction. Central to this has been the development of performance management and remuneration systems. The Company’s performance management system has been revised to clarify individuals’ performance objectives and now provides a clear line of sight with Santos’ strategic objectives. The link between performance and rewards has also been strengthened through changes to the short-term incentive program. DEVELOPING CAPABILITY TO ENSURE SUCCESS At Santos, capabilities are deﬁned as the set of organisational behaviours that are required for success at work. The Santos Capability Framework has been developed based on extensive independent global research on leadership development and success, employee potential, and oil and gas industry experience. Implementation of the framework will commence during 2007 through leadership assessments, tailored development for individuals and teams, and the embedding of the framework in all recruitment, selection and employee development activities. Another way Santos invests in the future capability of the Company is through its Graduate Program. This is a structured three-year program that provides graduate employees with exposure to a range of work assignments on a rotational basis. In 2006, 55 geoscience and engineering graduates participated in this program which provides LOCATION OF EMPLOYEES 2006 % South Australia 71.8% Queensland 15.4% Northern Territory 2.0% Western Australia 0.8% Victoria 0.1% Indonesia 7.4% United States 2.4% Papua New Guinea 0.1% 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. At 31 December 2006, Santos had 1,679 employees, a 10% increase on the previous year due to the ramp-up of the Cooper Basin Oil Project and Fairview operations. Some 387 people are employed under award-based agreements and in 2006 there was no time lost due to industrial stoppage. EMPLOYEE GENDER BY FUNCTION 2006 % Geoscience and New Ventures 76 24 Gas Marketing and Commercialisation 68 32 Development Projects and Technical Services 78 22 Operations Strategic Projects Finance 93 7 76 24 68 32 Office of General Counsel 38 62 Corporate and People Office of Managing Director Indonesia Business 57 43 56 44 58 42 United States Business 61 39 Total Male Female 80 20 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 Geoscience Pathways project which encourages school students to consider careers in this discipline. Santos Annual Report 2006 27 SAN175 AW3 Text 21/3/07 9:50 AM Page 28 EMPLOYEE COMMITMENT % favourable 100 80 60 40 20 0 Best employer zone* Indifferent zone* ‘02 ‘06 *Adapted from the Hewitt Best Employer study. Employee commitment has increased signiﬁcantly over four years, as measured by employee surveys. VOLUNTARY EMPLOYEE TURNOVER % 10 8 6 4 2 0 ‘02 ‘03 ‘04 ‘05 ‘06 Voluntary employee turnover is relatively stable in a climate where worldwide demand for skilled resources is rapidly increasing. 28 Santos Annual Report 2006 accelerated career development. The program incorporates on-the- job technical training and specialist development activities. A further 28 penultimate-year students participated in Santos’ 12-week Vacation Employment Program which helps the Company assess students for possible graduate positions in the following year. Santos has had this program in place for 17 years. In 2006, Santos spent $3.8 million (an average of $2,300 per person) on training and development programs. The apprenticeship program was reinvigorated in 2005 and in 2006 had eight participants. EMPLOYEE COMMITMENT GROWS Employee commitment is characterised by what employees say about the Company, their intention to stay with Santos and their preparedness to give discretionary effort. In other words, how people feel, think and act. Over the past four years Santos has tracked employee commitment. The results from an employee survey in 2006, in which 74.5% of all employees participated, showed that: • overall employee commitment has increased by over 50% compared to the 2002 survey; • every survey item has shown improvement from 2004 to 2006; and • signiﬁcant improvement is evident in the areas that Santos has focused on since the last survey in 2004; namely, communicating vision and strategy, employee involvement, values and openness to change. HEALTHY WORK-LIFE BALANCE In 2006, Santos introduced a number of measures to improve employees’ ability to manage a healthy balance between their personal lives and their work. The Parental Leave Policy was updated to provide 12 weeks of paid maternity leave to employees with a newborn or adopted child. The Company also revised its Employee Assistance Plan which provides employees with free conﬁdential professional counselling about personal or work problems. Santos offers a range of employee beneﬁts in addition to performance rewards such as ﬂexible super- annuation arrangements, salary sacriﬁcing, bank discounts, discounted medical fund membership, professional memberships, study assistance, ﬁtness club facilities or memberships and social clubs. STRONG PARTICIPATION IN HEALTH PROGRAMS Santos conducted a major employee health campaign in 2006 to launch its new Health and Wellbeing Standard. The standard is part of Santos’ EHSMS and is designed to create an environment which encourages employees and contractors to maintain a healthy lifestyle and manage the risk associated with those people who are not ﬁt for work. More than 1,300 employees attended one of the 21 health and wellbeing SAN175 AW3 Text 21/3/07 9:50 AM Page 29 expos held across Santos’ sites and ofﬁces and there has been a noticeable increase in gym memberships provided by Santos. There was strong participation by Santos employees in other initiatives including conﬁdential health checks, education programs on men’s and women’s health (470 participants), sleep (440 participants) and healthy eating (450 participants), and physical ﬁtness programs, including providing gyms and ﬁtness programs such as ‘Walk the Moomba pipeline’ (400 participants) and ‘Biggest Loser’ (150 participants). OIL SPILLS DECREASE Santos’ oil spill prevention strategy continued to be a major focus in 2006 and for the third year in a row the Company reduced the volume of spills during the year. Santos is focused on reducing the number of oil spills as well as the total volume of oil released. EXPANDING RESPONSE TO CLIMATE CHANGE Since the publication of its Greenhouse Policy in 2004, Santos’ scope of activities to manage greenhouse emissions has expanded from compliance reporting and energy efﬁciency to broader concepts of research and development, target setting, emissions forecasting and identifying lower greenhouse- emitting energy sources. To steward various aspects of the Greenhouse Policy, Santos has established a framework for greenhouse management and created three cross-functional teams with different functional leads: • governance, policy and reporting – aiming to position Santos as an energy industry leader in the effective response to climate change; • energy efﬁciency – targeting a reduction in energy use per unit of product produced; and • carbon business – focusing on generating value from Santos’ carbon assets and building competencies in carbon services where there is competitive advantage, so offsetting the commercial risk of greenhouse emissions. Natural gas is the lowest greenhouse gas-emitting fossil fuel, providing a transition fuel to future cleaner energy sources. Santos is also pursuing greenhouse gas abatement projects such as energy efﬁciency and carbon capture and storage. Santos participates in a number of voluntary greenhouse reporting programs including disclosure of emissions to the Australian Greenhouse Ofﬁce Challenge Plus program, Carbon Disclosure Project and Dow Jones Sustainability Index. OFFSHORE BIODIVERSITY RESEARCH PARTNERSHIPS Santos has worked closely with regulatory authorities and Deakin University researchers since 2002 to better understand the distribution and behaviour of the whales during seismic surveys off south-eastern Australia. In 2006, the Company also contributed signiﬁcant funds towards the purchase by Deakin University of a specialist vessel to observe whale behaviour. OIL SPILL VOLUMES m3 Lytton oil spill effect 2000 1500 1000 500 0 ‘02 ‘03 ‘04 ‘05 ‘06 Santos reduced the volume of oil spills for the third consecutive year. GREENHOUSE GAS EMISSIONS million tonnes CO2 equivalent (net Santos production) 4.2 4.1 4.0 3.9 3.8 3.7 3.6 ‘02 ‘03 Australia Papua New Guinea ‘04 United States ‘05 Indonesia Santos reports its total greenhouse emissions and emissions intensity mid-year as a ratio of greenhouse emissions per unit of production, and is on track to meet its target of 20% intensity reduction in the period 2002–08. Santos Annual Report 2006 29 SAN175 AW3 Text 21/3/07 9:50 AM Page 30 SPONSORSHIP BY AREA 2006 % Corporate* 73.9% South Australia 10.5% Indonesia 6.6% Victoria 5.2% Queensland 2.3% Northern Territory 1.4% United States 0.1% * Sponsorships that are not geographically focused. Santos’ sponsorship program is geographically distributed in a manner consistent with the spread of the Company’s operations in each area. SPONSORSHIP BY ACTIVITY 2006 % Education 68.4% General community 16.4% Arts and culture 7.5% Environment 3.2% Conferences/industry/ government 2.6% Santos Community Fund 0.9% Indigenous 0.9% Youth 0.1% Santos’ sponsorship program provides support to education (e.g., Australian School of Petroleum at the University of Adelaide), environment (e.g., Our Patch program, Snowy River Walking Trail), art and culture (e.g., Adelaide Symphony Orchestra, Darwin Festival) and a range of youth development activities (e.g., Science Week at the South Australian Museum). 30 Santos Annual Report 2006 Santos is also partnering with the University of Sydney to better understand the effects of drilling on deep-sea biodiversity, undertake experiments to study the physiological impacts on marine fauna and determine whether subsea production structures can create reefs. WIDESPREAD COMMUNITY PROGRAMS Santos has formed relationships with the many communities in which it has operations and recognises that it has a responsibility to contribute to the social fabric of those communities. This is achieved in part through a well-established sponsorship and donations program and in 2006 Santos contributed over $3.8 million to more than 160 events and organisations in South Australia, the Northern Territory, Queensland, Victoria, Indonesia and the United States and some examples follow. In 2006, Santos teamed up with Adelaide organisation ITShare to recycle and redistribute more than 500 laptop computers that were no longer required by the Company. ITShare is a not-for-proﬁt organisation that helps socially disadvantaged people to enjoy the beneﬁts of computer technology. An important part of Santos’ sponsorship program is the Santos Community Fund, which provides ﬁnancial and in-kind support to organisations that beneﬁt the community in the areas of health, the environment and building social capacity. The fund brings together all the contributions Santos makes to community-based organisations and also provides additional support to Santos employees who contribute their own time and resources to improve the community. Effective consultation and engagement with local people has been the centrepiece of Santos’ community development programs in Indonesia, which aim to assist those communities improve their quality of life through initiatives that boost health, education and incomes. Santos’ programs are based on high quality research – including baseline studies, social mapping and needs assessment – community and government consultation, and third-party partnerships. In 2006, Santos supported education scholarships; agricultural, vocational and teacher training; maternal child health; home industries; ﬁshing ﬂeets; water and sanitation; health centres, and cultural events in 36 villages – up from four in 2002. INDIGENOUS RELATIONS Santos seeks to work cooperatively with Indigenous communities in the geographic areas the Company operates in and shares responsibility for managing and protecting areas of cultural signiﬁcance to Indigenous people. Santos works with regulatory agencies and local Indigenous communities to develop appropriate compensation and cultural heritage plans in the areas in which we operate. At present, Santos has agreements in place with nine Indigenous groups. Elements of these agreements include provision for the employment of nominated members of the SAN175 AW3 Text 21/3/07 9:50 AM Page 31 Indigenous communities as cultural heritage ofﬁcers on Santos’ exploration and development projects. These individuals receive training in Santos’ environment, health and safety policies and procedures as well as four-wheel-drive, remote area GPS navigation and computer skills. 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 about 70 Australian companies considered to be leaders in their sector. 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. SANTOS CORPORATE STRUCTURE 2006 SUSTAINABILITY REPORT More information about Santos’ progress against sustainability targets is available in the 2006 Sustainability Report. The report can be downloaded from the Santos website at www.santos.com/sustainability or a printed copy can be ordered from Santos’ Share Register by telephoning 08 8218 5111. Shareholders can also elect to receive future Sustainability Reports by contacting the Share Register. SUMMARY OF SOCIOECONOMIC CONTRIBUTION Number of employees Number of shareholders Wages and salaries ($million) Materials, goods and services ($million) Royalties and taxes ($million) Sponsorship ($million) 2006 2005 2004 2003 1,679 1,521 1,526 1,700 83,566 78,157 78,976 84,327 230.7 216.6 214.0 191.8 754.2 544.7 433.8 305.6 427.5 209.3 169.6 118.7 3.8 3.5 4.0 3.2 Santos continued to provide a signiﬁcant socioeconomic contribution to the communities in which it operates through suppliers and contracts, employee salaries and community sponsorship activities. 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 GENERAL COUNSEL AND COMPANY SECRETARY VICE PRESIDENT CORPORATE AND PEOPLE Santos is structured on a functional basis which is aligned with its growth strategy and reﬂects the asset life cycle of an exploration and production company. Santos Annual Report 2006 31 SAN175 AW3 Text 21/3/07 9:51 AM Page 32 Board of Directors KENNETH ALFRED DEAN JOHN CHARLES ELLICE-FLINT STEPHEN GERLACH BCom (Hons), FCPA, MAICD BSc (Hons) LLB Age 54. Independent non-executive Director since 23 February 2005. Director of Santos Finance Ltd, Chairman of the Audit Committee and member of the Finance Committee. Chief Financial Ofﬁcer of Alumina Ltd, non-executive Director of Alcoa of Australia Ltd, Alcoa World Alumina LLC and related companies. Fellow of the Australian Society of Certiﬁed Practising Accountants and member of the Australian Institute of Company Directors. During the last three years, Mr Dean served as a Director of Woodside Petroleum Ltd. Former Chief Executive Ofﬁcer of Shell Financial Services and member of the La Trobe University Council. Age 56. 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-ﬁve 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. Age 61. Independent non-executive Director since 5 September 1989 and Chairman since 4 May 2001. Chairman of Santos Finance Ltd and of the Finance Committee and Nomination Committee and member of the Safety, Health and Environment Committee and Remuneration Committee of the Board. Chairman of Futuris Corporation Ltd and Challenger Listed Investments Ltd. Former Managing Partner of the Adelaide legal ﬁrm, Finlaysons. A Trustee of the Australian Cancer Research Foundation, Chairman of Foodbank SA and a Director of Foodbank Australia. During the last three years, Mr Gerlach served as a Director of Southcorp Ltd, Boston Paciﬁc Vineyard Management Ltd and Elders Australia Ltd. 32 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:51 AM Page 33 KENNETH CHARLES BORDA (Not pictured) LLB, BA Age 54. Independent non-executive Director since 14 February 2007 and member of the Audit Committee and Finance Committee of the Board. Most recent position CEO – Middle East and North Africa of Deutsche Bank. Formerly Regional CEO Asia Paciﬁc and CEO Australia and New Zealand, Deutsche Bank. Board member of Fullerton Funds Management, the asset management arm of Temasek, Singapore. Previously a Board member of SFE Corporation for over ﬁve years until its acquisition by the Australian Stock Exchange Limited in July 2006. PROF. JUDITH SLOAN RICHARD MICHAEL HARDING ROY ALEXANDER FRANKLIN OBE BA (Hons), MA, MSc MSc BSc Age 52. Independent non-executive Director since 5 September 1994. Chairperson of the Remuneration Committee and member of the Audit Committee and Nomination Committee of the Board. Chairman of Primelife Corporation Limited. Commissioner of the Australian Fair Pay Commission and part-time Commissioner of the Productivity Commission. Former Professor of Labour Studies at the Flinders University of South Australia and Director of the National Institute of Labour Studies. During the last three years, Professor Sloan served as Chairperson of SGIC Holdings Ltd, as Deputy Chair of the Australian Broadcasting Corporation and as a Director of Mayne Group Ltd. Age 57. Independent non-executive Director since 1 March 2004. Chairman of the Safety, Health and Environment Committee and member of the Audit Committee, Nomination Committee and Remuneration Committee of the Board. Deputy Chairman of Arc Energy Ltd and Director of Clough Limited. 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). Age 53. Independent non-executive Director since 28 September 2006 and member of the Safety, Health and Environment Committee of the Board. Non-executive Chairman of Batemen Litwin NV and Director of Novera Energy Limited. Former Chief Executive Ofﬁcer of Paladin Resources plc and former Group Managing Director of Clyde Petroleum plc. Former Chairman of BRINDEX (the trade association for UK independent oil and gas companies) and a former member of PILOT (the joint industry/government task force set up to maximise hydrocarbon recovery from the UK North Sea). Santos Annual Report 2006 33 SAN175 AW3 Text 21/3/07 9:51 AM Page 34 Santos Leadership Team TREVOR BROWN JON YOUNG JOHN ANDERSON RICK WILKINSON PETER WASOW Vice President Geoscience and New Ventures BSc (Hons) Executive Vice President Operations Vice President Strategic Projects BSc, BEng Chemical LLB, BEc, GDCL Vice President Gas Marketing and Commercialisation BSc (Hons) Chief Financial Ofﬁcer BCom, GradDipMgmt, FCPA Rick Wilkinson is responsible for gas and liquids marketing, commercialising discovered resources and developing new gas business. Rick was formerly General Manager Southern Australia Business Unit. 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. 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 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. 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 a very 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. 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. John Anderson is responsible for the emerging core areas of Timor/Bonaparte and Papua New Guinea, business development and identiﬁed projects of speciﬁc importance such as carbon business, tight gas and price review. John joined Santos in 1996 as Corporate Counsel for the former Queensland Northern Territory Business Unit after 10 years as a solicitor with Freehills. He has held a range of roles at Santos including Manager Legal and Business Services, Manager Commercial for the former Central Business Unit and most recently Group Executive Business Development. John was appointed Vice President in April 2006. 34 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:51 AM Page 35 MARK MACFARLANE MARTYN EAMES JOHN ELLICE-FLINT JAMES BAULDERSTONE Vice President Development Projects and Technical Services BEng (Hons) Mechanical Vice President Corporate and People BSc (Hons) Mark Macfarlane is responsible for the development portfolio of the Company, including operated and non-operated projects, subsurface engineering, drilling and technical services. Mark joined Santos in 1997 after a nine-year career with Esso in Australia and Malaysia. He has worked in a variety of leadership roles at Santos, including reservoir management, production and corporate planning, gas and oil exploitation and optimisation and was most recently Manager Production. Mark was appointed Vice President in April 2006. 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. Managing Director and Chief Executive Ofﬁcer General Counsel and Company Secretary BSc (Hons) LLB (Hons), BSc (Hons) John Ellice-Flint is responsible for the overall performance and strategic direction of the Company. John leads major strategic initiatives, develops top level external relationships, leads and manages the Santos Leadership Team and takes responsibility for the management succession process. John joined Santos as Managing Director in December 2000. He has 35 years’ experience in the international oil and gas industry including 28 years with Unocal, including as Senior Vice President: Global Exploration and Technology and Vice President: Corporate Planning and Economics. James Baulderstone is responsible for the Ofﬁce of General Counsel, comprising the Company’s operational and corporate legal function, Secretariat and Share Registry. James joined Santos in January 2007 and was previously Corporate Counsel at Bluescope Steel and Chief Legal Ofﬁcer at Mayne Group Limited. James has extensive legal and commercial experience in leading teams negotiating complex corporate transactions across many diverse jurisdictions including the US, Germany, UK, Malaysia, China and India. Santos Annual Report 2006 35 SAN175 AW3 Text 21/3/07 9:51 AM Page 36 Corporate governance SANTOS’ APPROACH TO CORPORATE GOVERNANCE PART 1: COMPOSITION OF THE BOARD 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, to ensure Santos continues to meet its strategic objectives whilst maintaining the highest standards. To achieve this, the Board works under a set of well-established corporate governance policies and charters 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 Securities Exchange (ASX). These policies are publicly available on the Company’s website, www.santos.com. The Board is aware of, and has regard to, developments in Australia and overseas in relation to corporate governance ‘best practice’. The Board regularly reviews and updates Santos’ corporate governance policies and charters to ensure that they remain in accordance with best practice. The Board believes that the Company’s policies and practices have complied in all substantial respects with corporate governance best practice in Australia, including the ASX Corporate Governance Council Principles of Good Corporate Governance introduced in March 2003. This Statement is divided into four sections: • Composition of the Board; • Board responsibilities; • Governance policies applicable to the Board; and • Governance policies of general application throughout Santos. RELEVANT POLICIES AND CHARTERS See www.santos.com • Board Guidelines • Company’s Constitution The composition of the Board is determined in accordance with the Company’s Constitution and the Board Guidelines1 which, among other things, require that: • the Board is comprised of a minimum of ﬁve, and a maximum of ten Directors (exclusive of the CEO); • the Board should be comprised of 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. The Board has adopted the deﬁnition of independence set out in the ASX Principles of Good Corporate Governance and 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; or • 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 judgement to Board decisions. In this context, Directors are required to promptly disclose their interests in contracts and other directorships and ofﬁces held. Currently, the Board comprises six non- executive Directors, all of whom are deemed independent under the principles set out above, and one executive Director. The names and details of the experience, qualiﬁcations, special responsibilities, and term of ofﬁce of each Director of the Company are set out on pages 32 to 33 of this Annual Report. 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. Appropriate regard is had to the business experience, skills 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 to the Board regarding possible appointments of new Directors. 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 36 Santos Annual Report 2006 1 Except where otherwise indicated, references to the “Board Guidelines” are to the formal guidelines in force during the past ﬁnancial year and as at 15 March 2007. SAN175 AW3 Text 21/3/07 9:51 AM Page 37 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 during the year are also required to submit themselves for election by shareholders at the Company’s next Annual General Meeting. REVIEW OF BOARD AND EXECUTIVE PERFORMANCE 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 and the next review is scheduled for 2007. During 2006, individual Director reviews were held. This process was facilitated by the Chairman and involved individual meetings with each Director. Performance evaluation of key executives is also undertaken on a quarterly and annual basis by the CEO, the results of which are used by the Remuneration Committee of the Board in determining future remuneration and generally for review by the Board in relation to management succession planning. PART 2: BOARD RESPONSIBILITIES RELEVANT POLICIES AND CHARTERS See www.santos.com • Board Guidelines • Audit Committee Charter • Nomination Committee Charter • Remuneration Committee Charter • Finance Committee Charter • Safety, Health and Environment Committee Charter 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. 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. The Board has also established a number of Board committees to assist with the effective discharge of its duties. 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 50 of this Annual Report. 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 is formally documented in the Company’s Delegation of Authority which details the responsibilities delegated by the Board to executive Management for: • implementing corporate strategies; • maintaining and reporting on effective risk management; and • operating under approved budgets and written delegations of authority. 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. Ten Board meetings are generally scheduled per year, two more than required under the Board Guidelines. In 2006, a total of 14 meetings were held. Board members are expected to attend any additional meetings as required. 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; 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. BOARD COMMITTEES The Board has established the following committees to assist with the effective discharge of its duties: • Audit Committee; • Safety, Health and Environment Committee; • Finance Committee; • Nomination Committee; and • Remuneration Committee. Santos Annual Report 2006 37 SAN175 AW3 Text 21/3/07 9:51 AM Page 38 All committees are chaired by, and composed only of, non-executive, independent Directors, except the Safety, Health and Environment Committee, which includes the CEO as a member. Each committee operates under a speciﬁc charter, which is reviewed periodically by the Board and is available from the Corporate Governance section on the Company’s website. 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. AUDIT COMMITTEE Members Mr K A Dean (Chairman) Professor J Sloan Mr R M Harding Mr K C Borda The external auditors, CEO, Chief Financial Ofﬁcer (CFO), Manager Risk and Audit, General Counsel and Company Secretary, and Group Controller attend committee meetings by invitation. Composition The Committee is required to consist of: • no less than three members; • only independent, non-executive Directors who are ﬁnancially literate; • at least one member must have past employment experience in ﬁnance and accounting, requisite professional certiﬁcation in accounting or other comparable experience or background; and • 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. Role 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. The primary objective of the Audit Committee is to assist the Board to fulﬁl its corporate governance and oversight responsibilities 38 Santos Annual Report 2006 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; • reviewing the process adopted by the CEO 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. 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: • the Board will not invite any past or present lead audit partner of the ﬁrm currently engaged as the Company’s external auditor to ﬁll a vacancy on the Board; • 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 provided by the external auditors are detailed on page 52 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 137 of this Annual Report. SAFETY, HEALTH AND ENVIRONMENT COMMITTEE Members Mr R M Harding (Chairman) Mr R A Franklin Mr S Gerlach Mr J C Ellice-Flint Mr M A O’Leary retired as a member on 15 December 2006. SAN175 AW3 Text 21/3/07 9:51 AM Page 39 Composition REMUNERATION COMMITTEE The role of the Finance Committee includes: The Committee consists of at least three non- executive Directors and the Managing Director. Role The role of the Safety, Health and Environment Committee is documented in a charter, approved by the Board. The role of the Safety, Health and Environment Committee includes: • oversight of the Environment, Health and Safety Management System, including greenhouse gas, sustainability and cultural heritage matters; and • review of the regular internal and external environmental and safety audits. NOMINATION COMMITTEE Members Mr S Gerlach (Chairman) Professor J Sloan Mr R M Harding Members Professor J Sloan (Chairperson) Mr S Gerlach Mr R M Harding Mr P C Barnett retired as a member on 28 February 2006. Composition The Committee is required to consist of no less than three non-executive Directors, including the Chairman of the Board. Role The role of the Remuneration Committee is documented in a charter, approved by the Board. The Remuneration Committee is responsible for reviewing the remuneration policies and practices of the Company including: • 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; • formulating and monitoring compliance with treasury policies and practices; and • the management of credit, liquidity and commodity market risks. PART 3: GOVERNANCE POLICIES APPLICABLE TO THE BOARD RELEVANT POLICIES AND CHARTERS See www.santos.com • Board Guidelines • Risk Management Policy • the compensation arrangements for the COMPANY SECRETARY CEO and senior management; Mr M A O’Leary retired as a member on 15 December 2006. • the Company’s superannuation arrangements; Composition The Committee consists of at least three independent, non-executive Directors. Role 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. • 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. FINANCE COMMITTEE Members Mr S Gerlach (Chairman) Mr K A Dean Mr K C Borda Mr P C Barnett retired as a member on 28 February 2006. Mr M A O’Leary retired as a member on 15 December 2006. Composition The Committee consists of only independent, non-executive Directors. Role The role of the Finance Committee is documented in a charter, approved by the Board. The Company Secretary reports directly to the Board and is responsible for the 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 General Counsel, James Leslie Baulderstone (BSc (Hons), LLB (Hons)), aged 40 years, was appointed as the Company Secretary on 14 February 2007. Mr Wesley Glanville (BA, LLB, GDLP, MAICD), aged 44, Santos Annual Report 2006 39 SAN175 AW3 Text 21/3/07 9:51 AM Page 40 fulﬁlled the role of Company Secretary during the 2006 reporting period. Mr Glanville ceased acting as Company Secretary on 19 February 2007. INDEMNITY, ACCESS TO INFORMATION AND INDEPENDENT PROFESSIONAL ADVICE Information in respect to indemnity and insurance arrangements for Directors and senior executives appears in the Directors’ Statutory Report on page 52 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. 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. A description of the Company’s risk management system is available from the corporate governance section of the Company’s website. An Enterprise-Wide Risk Management approach forms the cornerstone of Risk Management activities of the Company and is based on the relevant Australian Standard (AS/NZS 4360 : 2004). 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. As part of the risk management system, 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 that 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 and Board reporting – all signiﬁcant areas of Company operations are subject to regular reporting to the Board and Board committees. Regular reports on the performance of each functional area are prepared, 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; • 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 programs; and • the retention of specialised staff and external advisors. Examples of management of speciﬁc risks are as follows: Type of Risk Method of management 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. 40 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:51 AM Page 41 Type of Risk Exploration risk Method of management 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 risk The Company has clearly deﬁned procedures for capital allocation and expenditure. These include: • a portfolio management system; • annual budgets; • detailed appraisal and review procedures; • project management processes; • levels of authority; and Financial reporting and treasury • A comprehensive budgeting system exists with an annual budget approved by the Board. • due diligence requirements where assets are being acquired. • Monthly actual results are reported against budget and quarterly forecasts for the year are prepared and reported to the Board. • Treasury operations are subject to a comprehensive system of internal control, and speculative transactions are prohibited. • Further details relating to ﬁnancial instruments and commodity price risk management are included in Note 37 to the ﬁnancial statements. Operational risk 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 projects and technical services; ﬁnance; safety; government; investor relations; and greenhouse gas, sustainability, cultural heritage and environmental matters. 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 54 of this report and note 30 to the ﬁnancial statements on page 117 of this report. PART 4: GOVERNANCE POLICIES OF GENERAL APPLICATION THROUGHOUT SANTOS RELEVANT POLICIES AND CHARTERS See www.santos.com • Code of Conduct • Guidelines for Dealing in Securities • Continuous Disclosure Policy 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 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 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; Santos Annual Report 2006 41 SAN175 AW3 Text 21/3/07 9:51 AM Page 42 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 meetings, 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. • 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 (discussed below), 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. 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. 42 Santos Annual Report 2006 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. 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 and NASDAQ. Directors and management must notify a designated Disclosure Ofﬁcer, being the CEO, CFO, Vice President Corporate and People, Company Secretary or Group Executive Investor Relations, 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 both exchanges where its shares are listed: ASX and NASDAQ. The Company Secretary is SAN175 AW3 Text 21/3/07 9:51 AM Page 43 Major announcements made by Santos during 2006 20 Jan Drilling report on Nyari-1 exploration well 22 Aug Drilling report on Galloway-1 exploration well 25 Jan LNG and oil focus in $225 million exploration program 24 Aug 2006 Interim Results: record Santos ﬁrst half result 25 Jan 2005 Fourth Quarter Activities Report: 2005 revenue up 64% to record $2.46 billion 1 Feb 3 Feb First production from Casino gas ﬁeld Update on PNG Gas Project 5 Sep Drilling report on Wortel-1 exploration well, Sampang PSC 21 Sep Further oil and gas discovered on Dua structure 22 Sep Gulf of Mexico exploration venture with KNOC and Samsung 10 Feb New drilling rig being assembled at Toowoomba 26 Sep Santos to supply Wesfarmers domestic LNG plant 23 Feb 2005 Full Year Results: Santos' 2005 proﬁt doubles 28 Sep Roy Franklin appointed to Santos Board 23 Feb Santos increases reserves 23 Feb Capital expenditure outlook 17 Mar Extension of CEO contract 26 Apr 27 Apr 4 May Santos continues building its position in South East Asia with Vietnam farm-in 2006 First Quarter Activities Report: Santos increases ﬁrst quarter production and revenue 2006 Annual General Meeting: Board remains conﬁdent in Santos’ future success 3 Oct 5 Oct 9 Oct First production from Maleo gas ﬁeld Santos announces $606 million cash offer for QGC Drilling report on Wortel-2 exploration well 11 Oct Santos challenges QGC to provide valuation 11 Oct Santos CSG bidders statement 12 Oct Progress report on Dua-5X appraisal well 19 Oct Banjar Panji announcement from Lapindo Brantas 24 Oct Santos CSG bidders statement 9 May Santos acquires additional interest in Gippsland gas ﬁeld 26 Oct 2006 Third Quarter Activities Report: record quarterly production for Santos 18 May Progress report on Jeruk-3 appraisal well 9 Jun Progress report on Jeruk-3 appraisal well 27 Jun Banjar Panji-1 well incident 30 Jun Clariﬁcation about Banjar Panji-1 well incident 30 Jun Drilling report on Dua-4X exploration well 12 Jul Santos in discussions about possible Delhi acquisition 14 Jul Progress report on Jeruk-3 appraisal well and resource downgrade 17 Jul Santos announces $474 million Delhi acquisition bid 21 Jul Banjar Panji announcement from Lapindo Brantas 24 Jul Gas encountered at Evans Shoal South 30 Oct Santos continues to build its position in Vietnam 6 Nov 9 Nov Update on Santos offer for QGC Statement on QGC reserves announcement 12 Nov ‘QGC shareholders in the dark’: Santos Chairman 14 Nov Queensland Gas ‘major back-ﬂip’ on independent expert position 17 Nov Blackbird oil discovery 20 Nov Santos update on QGC offer 23 Nov East Java gas pipeline incident 24 Nov Jeruk reserves update 27 Jul 2006 Second Quarter Activities Report: record ﬁrst half for Santos 29 Nov Drilling report on Barossa-1 exploration well 8 Dec Banjar Panji-1 incident brieﬁng document 28 Jul Update on Delhi transaction 11 Dec Santos CSG supplementary bidder's statement 2 Aug Progress report on Jeruk-3 appraisal well 11 Dec United States interests to be divested 16 Aug Successful gas delineation well at Gnu-1 15 Dec Retirement of Director, Michael O’Leary 17 Aug Drilling report on Dua-4X appraisal well 15 Dec Successful testing of the Blackbird oil discovery Dates shown are when announcements were made to the exchanges where Santos’ shares are listed: the Australian Securities 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. The Santos website provides an email alert facility where people can register to be notiﬁed, free of charge, of Santos’ News Announcements via email, as well as an RSS feed which allows people to view these announcements using RSS reader software. Santos Annual Report 2006 43 SAN175 AW3 Text 21/3/07 9:51 AM Page 44 Santos Group interests As at 28 February 2007 Licence Area % Interest Licence Area % Interest Licence Area % Interest SOUTH AUSTRALIA ATP 543 N 100.0 Moonie to Brisbane Pipeline* 100.0 ATP 765 Farmin (Under Appln) ATP 766 Farmin (Under Appln) 63.0 63.0 Jackson to Moonie Pipeline (PPL 6)* 82.8 Comet Ridge to Wallumbilla Pipeline (PL = Petroleum Lease; PPL = Pipeline Licence) PL 2 (Alton)* (PPL = Petroleum Production Licence; PL = Pipeline Licence; PEL = Petroleum Exploration 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 & 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, 194, 197, 200 & 201) Derrilyn Unit* (PPL 206 & 208) PEL 114* PL2* QUEENSLAND South-West Queensland* ATP 259P Naccowlah (PLs 23-26, 35, 36, 62, 76-79, 82, 87, 105, 107, 109, 133, 149, 175, 181, 182 & 189) 55.5 Total 66 (PLs 34, 37, 63, 68, 75, 84, 88, 110, 129, 130, 134, 140, 142-144, 150, 168, 178, 186, 193, 241, PPL8 & PPL14) 70.0 Wareena (PLs 113, 114, 141, 145, 148, 153, 157, 158, 187 & 188) Innamincka (PLs 58, 80, 136, 137, 156 & 159) Alkina Aquitaine A (PLs 86, 131, 146, 177 & 208) Aquitaine B (PLs 59-61, 81, 83, 85, 97, 106, 108, 111, 112, 132, 135, 139, 147, 151, 152, 155, 205 & 207) Aquitaine C (PLs 138 & 154) 50/40/10 (PL 55) 61.2 70.0 72.0 52.5 55.0 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) ATP 299P (Tintaburra) (PLs 29, 38, 39, 52, 57, 95, 169 & 170, PPLs 109, 110, 111 & 112) ATP 543 S 59.1 89.0 50.0 44 Santos Annual Report 2006 Surat Basin ATP 212P (Major) (PLs 30, 56 & 74) 15.0 ATP 336P (Roma) (PLs 3-13, 93 & PPL2)* ATP 336P (Waldegrave) (PLs 10-12, 28, 69 & 89)* ATP 470P (Redcap) (PL 71) ATP 470P (Formosa Downs) 100.0 53.8 10.0 5.5 ATP 471P (Bainbilla) (PL 119 & PPL 58) 16.7 72.3 65.0 100.0 66.6 ATP 471P (Myall) (PL 192 & PPL 87) Boxleigh (PL15 Sublease)* PL 1 (Moonie)* PL 1 (2) (Cabawin Exclusion)* PL 1 (FO) (Cabawin Farm-out)* PL 2 (A & B) (Kooroon)* 51.0 100.0 100.0 100.0 50.0 52.5 100.0 63.5 25.0 59.0 75.0 100.0 100.0 28.8 5.5 PL 2C (Alton Farm-out)* PL 5 (Drillsearch)* PL 5 (Mascotte)* PL 11 (Snake Creek East)* PL 12 (Trinidad)* PL 17 Upper Stratum Farmin* PPL 119 (Downlands East Exclusion) ATP 470P (Formosa Downs) ATP 526 (PLs 90-92, 99-100 & 232-236, PPLs 76 & 92) (Fairview)* 71.7 ATP 653P (Fairview)* ATP 655P (Fairview)* ATP 745P (Fairview)* PLs 21, 22, 27 & 64 (Balonne) PL 213 (Churchie West) ATP 842 (under application) ATP 592P, (PLs 195, 203) ATP 804P 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) ATP 850 (under application) Facilities 71.7 100.0 71.7 12.5 16.7 100.0 2.0 50.0 30.0 100.0 50.0 50.0 100.0 Wungoona Processing Facilities* 50.0 (PPL 118)* VICTORIA Otway Basin (Onshore) PEP 160 Otway Basin (Offshore) VIC/P44 (Casino)* VIC/P51* VIC/RL7 (La Bella) VIC/L22 (Minerva) Gippsland Basin (Onshore) VIC/P39 (V)* Gippsland Basin (Offshore) VIC/RL3 (Sole)* VIC/L21 (Patricia-Baleen)* VIC/L24 VIC/L25 (Kipper) VIC/P55* OFFSHORE SOUTH AUSTRALIA Duntroon Basin* EPP 32 OFFSHORE TASMANIA Sorell Basin* T/32P T/33P T/35P T/36P T/40P NORTHERN TERRITORY Amadeus Basin OL 3 (Palm Valley) OLs 4 and 5 (Mereenie)* RL2 (Dingo)* PL2 Mereenie Pipeline* 100.0 30.0 50.0 55.0 10.0 30.0 37.5 100.0 100.0 50.0 50.0 100.0 100.0 37.5 55.0 37.5 50.0 100.0 48.0 65.0 65.7 65.0 OFFSHORE NORTHERN AUSTRALIA Carnarvon Basin EP 61 EP 62 * Santos-operated. 28.6 28.6 SAN175 AW3 Text 21/3/07 9:51 AM Page 45 Licence Area % Interest Licence Area % Interest Licence Area % Interest 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) 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 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 47.9 100.0 95.0 95.0 100.0 33.0 100.0 10.3 10.3 10.3 40.0 40.0 71.6 20.8 20.8 58.3 46.7 45.0 55.0 90.2 38.9 27.5 66.0 37.5 60.0 25.0 25.0 NT/P69 Timor Gap JPDA 03-12 Bayu-Undan Gas Field Elang PAPUA NEW GUINEA PDL 1 (Hides) PDL 3* PRL 5* PRL 9* 40.0 Duncan Slough* E. Edinburgh Elsa Hall Ranch* Hordes Creek Jaguar* Kenedy Deep Laﬁte/Allen Dome* Markham Mountainside Nordheim SW 19.3 10.6 21.4 31.0 15.9 50.3 42.6 SE Gobe Unit (Unitisation of PDLs 3 & 4) 9.4 Tidehaven* INDONESIA East Java Basin Brantas Madura Offshore (Maleo)* Nth Bali I* Sampang (Oyong)* Kutei Basin Donggala* Papalang Popodi West Natuna Basin Kakap West Papua Basin Warim EGYPT Ras Abu Darag South East July* North Zeit Bay North Qarun Thunder* South Louisiana Howards Creek Colorado Lay Creek KYRGYZSTAN 18.0 67.5 30.0 40.5 50.0 20.0 20.0 9.0 50.0 100.0 50.0 25.0 20.0 Joint Stock Company Textonic (Textonic) Closed Joint Stock Company South Petroleum Company (SPC) The Santos Group holds a legal and beneﬁcial interest in 70% of the entire issued capital of SPC which is the legal and beneﬁcial holder of the following prospecting licences: Tuzluk, Soh, West Soh, Nuashkent, Nanai and Arkit. The Santos Group is beneﬁcially entitled to 33% of the entire issued share capital of Textonic which is the legal and beneﬁcial owner of the following prospecting licences: Sulukta, Batken, Katran, Akbura, Charvak, East Mailisu, Ashvaz, Aksai, North Mailisu, West Mailisu and other licences: 256 (Dudumel Area); 257 (Djany-Talap Area); 258 (Uchken Area); 259 (Alabuga Area); 260 (Ozgorush Area); 261 (Maistan Area); 262 (Baibichetau Area); 263 (Chunkur Area). UNITED STATES OF AMERICA % average working interest East Texas Black Horse* Jefferson Co Knight South Texas Bar Harbor BP Green* Coquat Cougar* 100.0 18.8 30.0 25.0 50.0 25.0 50.0 VIETNAM 12E 12W 101-100/04 INDIA NEC-DWN-2004/1* NEC-DWN-2004/2* * Santos-operated. 37.5 37.5 55.0 100.0 100.0 Santos Annual Report 2006 45 SAN175 AW3 Text 21/3/07 9:51 AM Page 46 10-year summary 1997–2006 As at 31 December 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Santos average realised oil price (A$/bbl) Financial performance ($million) 27.42 20.95 27.57 46.54 45.53 44.74 43.59 51.83 73.83 89.35 Product sales revenue 778.5 769.4 944.5 1,497.1 1,459.7 1,478.4 1,465.0 1,500.9 2,462.8 Total revenue1 817.4 806.9 958.5 1,515.0 1,480.8 1,498.0 1,478.7 1,515.2 2,475.9 Foreign currency gains/(losses)2 3.6 2.0 0.3 2.7 0.2 (0.7) (7.9) 2.6 (3.8) 2,769.1 2,784.6 0.8 Proﬁt from ordinary activities before tax2 Income tax relating to ordinary activities2 Net proﬁt after income tax attributable to the shareholders of Santos Ltd2 Financial position ($million) 322.3 267.3 339.6 725.9 627.6 493.3 430.9 518.8 1,133.5 964.7 116.1 91.0 30.5 239.1 181.7 171.2 103.9 164.1 371.4 321.3 206.2 176.3 309.1 486.8 445.9 322.1 327.0 354.7 762.1 643.4 Total assets2 Net debt2 Total equity2 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 6,902.9 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 1,449.7 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 3,355.5 Reserves and production (mmboe) Proven plus Probable reserves (2P) 1,009 Production Exploration3 41.1 966 45.6 941 49.2 921 56.0 724 55.7 732 57.3 636 54.2 643 47.1 774 56.0 819 61.0 Wells drilled (number) 112 81 34 42 26 18 19 16 22 Expenditure ($million) 190.1 180.7 78.1 100.1 93.4 133.1 136.4 125.6 187.0 25 258.5 Other capital expenditure ($million) Delineation and development3 Buildings, plant and equipment 179.7 205.4 158.1 165.7 116.8 187.1 308.1 308.8 519.0 102.5 153.5 258.7 319.0 94.9 672.7 131.1 666.1 106.0 865.5 182.1 46 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:51 AM Page 47 Share information Share issues As as 31 December 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 ($million) - ordinary - special Earnings per share (¢)2 Return on total revenue (%)1, 2 35.3 25.2 Return on average ordinary equity (%)2 11.8 Return on average capital employed (%)2 8.5 Net debt/(net debt + equity) (%)2 Net interest cover (times)2 General Number of employees (excluding contractors) 36.7 5.4 1997 1998 1999 2000 2001 2002 2003 2004 2005 Employee Share Plan 1 for 8 rights issue Employee Share Plan Employee Share Plan/ Executive Share Plan Employee Share Plan/ Executive Share Plan/ Exercise of Options/ Restricted Shares Employee Share Plan/ Executive Share Plan/ Exercise of Options/ Share Buy-back/ Schemes of Arrangement Employee Share Plan/ Executive Share Plan/ Exercise of Options Employee Share Plan/ Executive Share Plan/ Exercise of Options/ Dividend Reinvestment Plan Employee Share Plan/ Executive Share Plan/ Exercise of Options/ Preference Share Buy-back/ Issue of FUELS/ Convertible Preference Shares 2006 Employee Share Plan/ Executive Share Plan/ Exercise of Options/ Dividend Reinvestment Plan 607.3 607.8 608.2 610.4 579.3 583.1 584.7 585.7 594.4 598.5 583.7 605.6 606.1 608.3 612.0 580.9 583.4 584.9 587.9 596.2 25.0 25.0 25.0 30.0 - - - - 30.0 10.0 30.0 30.0 30.0 36.0 - - - - 40.0 - 142.5 151.4 151.5 182.0 184.8 174.2 175.0 175.5 212.4 238.1 - - - - - - 29.1 21.8 9.1 7.0 39.8 4.4 - - - - - - 51.0 32.2 15.5 11.4 38.7 5.2 - - - - - - 80.0 32.1 22.3 16.5 27.3 9.1 61.2 - - - - 3.5 3.5 3.5 6.0 6.0 - 6.0 - - - - 72.9 30.1 19.0 13.9 28.0 9.7 5.40 6.57 - - 18.9 23.0 - 51.9 21.5 13.1 8.9 28.9 8.1 - 52.1 22.1 12.3 8.8 22.5 8.5 6.59 5.00 23.0 14.3 54.2 23.4 19.9 11.7 32.5 9.1 5.10 5.06 - - 30.6 30.4 - - 124.4 102.8 30.8 35.1 19.8 35.0 14.9 23.1 23.8 15.1 30.2 10.1 1,615 1,650 1,645 1,631 1,713 1,737 1,700 1,526 1,521 Number of shareholders 65,459 81,286 81,416 76,457 86,472 85,888 84,327 78,976 78,157 Market capitalisation ($million) 3,826 2,654 2,516 3,670 3,589 3,509 4,017 4,965 7,280 Netback - - - - - 18.9 18.4 19.8 29.5 1,679 83,566 5,907 33.1 1 From 2005, ‘Total operating revenue’ has been reclassiﬁed to ‘Total revenue’ and prior year amounts have been restated. 2 From 2004, amounts reﬂect AIFRS. Prior year amounts reﬂect previous Australian Generally Accepted Accounting Principles and have not been restated. 3 From 2001, appraisal and near-ﬁeld exploration wells have been reclassiﬁed from exploration to delineation expenditure. Prior year amounts have not been restated. Santos Annual Report 2006 47 SAN175 AW3 Text 21/3/07 9:51 AM Page 48 Financial Report CONTENTS Directors’ Statutory Report Remuneration Report FINANCIAL REPORT Income Statements Balance Sheets Cash Flow Statements Statements of Recognised Income and Expense Notes to the Consolidated Financial Statements Expenses Earnings Signiﬁcant Accounting Policies Exploration and Evaluation Assets 1 2 Revenue and Other Income 3 4 5 Net Financing Costs 6 Income Tax Expense 7 Discontinued Operations Cash and Cash Equivalents 8 Trade and Other Receivables 9 10 Inventories 11 Other Assets 12 13 Oil and Gas Assets 14 Other Land, Buildings, Plant and Equipment 15 Impairment of Cash Generating Units 16 Other Investments 17 Deferred Tax Assets and Liabilities Trade and Other Payables 18 Interest-Bearing Loans and Borrowings 19 20 Provisions 21 Other Liabilities 22 Capital and Reserves 23 Earnings per Share Consolidated Entities 24 25 Acquisitions of Subsidiaries 26 Interests in Joint Ventures 27 Reconciliation of Cash Flows from Operating Activities 28 29 30 Key Management Personnel Disclosures 31 Related Parties 32 Remuneration of Auditors Segment Information 33 34 Commitments for Expenditure 35 Contingent Liabilities 36 Deed of Cross Guarantee 37 38 Employee Beneﬁts Share-Based Payment Plans Financial Instruments Economic Dependency Directors’ Declaration Auditor’s Independence Declaration Independent Audit Report 48 Santos Annual Report 2006 49 54 70 71 72 73 74 84 84 86 86 87 88 89 89 89 89 90 91 93 94 95 95 96 97 99 100 100 102 104 105 105 106 107 110 117 127 127 128 130 131 132 134 135 136 137 138 SAN175 AW3 Text 21/3/07 9:51 AM Page 49 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 2006, and the audit report thereon. Information in the 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 Borda Dean Ellice-Flint (Managing Director) Franklin Gerlach (Chairman) Harding Sloan Kenneth Charles Kenneth Alfred John Charles Roy Alexander Stephen Richard Michael Judith Ordinary Shares Nil 3,000 4,000,000 Nil 44,880 Nil 5,000 Franked Unsecured Equity Listed Securities Nil Nil Nil Nil Nil Nil 195 The above named Directors held ofﬁce during and since the end of the ﬁnancial year, except for Mr R A Franklin, who was appointed a Director on 28 September 2006. Mr P C Barnett held ofﬁce as a Director of the Company until his retirement on 28 February 2006. Mr C J Recny held ofﬁce as a Director of the Company until his death on 4 June 2006. Mr M A O’Leary held ofﬁce as a Director of the Company until his retirement on 15 December 2006. Mr K C Borda was appointed as a Director on 14 February 2007. All shareholdings are of fully paid ordinary shares. No Director holds shares in any related body corporate, other than in trust for the Company. At the date of this report, Mr J C Ellice-Flint holds 2,500,000 options under the Santos Executive Share Option Plan and subject to the further terms described in Note 29 to the ﬁnancial statements. Details of the qualiﬁcations, experience and special responsibilities of each Director and the Company Secretary are set out on pages 32 to 33 and 35 of the Annual Report. Santos Annual Report 2006 49 SAN175 AW3 Text 21/3/07 9:51 AM Page 50 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 Directors’ Meetings No. of No. of Mtgs Mtgs Held* Attended Audit Committee No. of No. of Mtgs Mtgs Held* Attended Safety, Health & Environment Remuneration Committee** No. of No. of Mtgs Mtgs Held* Attended Committee No. of No. of Mtgs Mtgs Held* Attended Finance Committee No. of No. of Mtgs Mtgs Held* Attended Nomination Committee No. of No. of Mtgs Mtgs Held* Attended Barnett Dean Ellice-Flint Franklin Gerlach Harding O’Leary Recny Sloan Peter Charles *** Kenneth Alfred John Charles Roy Alexander Stephen Richard Michael Michael Anthony**** Christopher John***** Judith 1 14 14 4 14 14 14 5 14 1 14 14 2 14 14 14 3 14 - 5 - - - 5 - - 5 - 5 - - - 5 - - 5 - - 4 - 4 4 4 - - - - 4 - 4 3 4 - - 1 - - - 4 3 - - 4 1 - - - 4 2 - - 4 1 4 - - 4 - 3 - - 1 4 - - 4 - 1 - - - - - - 2 2 2 - 2 - - - - 2 2 2 - 2 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 Tarbat. ** *** Retired as a Director of the Company on 28 February 2006. **** Retired as a Director of the Company on 15 December 2006. ***** Died on 4 June 2006. 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 36 to 42 of the Annual Report. 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 are contained on pages 2 to 7 of the Annual Report. Further details regarding the results and operations appear in the individual reports at pages 8 to 9, 12, 13 to 20, 22, 24, 26 to 31 of the Annual Report. In summary, the consolidated net proﬁt after income tax attributable to the shareholders was $643.4 million, a 15.6% decrease from the previous period comparative result of $762.1 million. Sales revenue was a record $2,769.1 million, up 12.4% from 2005. In particular, revenues for the Australian segment was $2,675.5 million, a 15.3% increase from the 2005 result of $2,319.9 million. International operations recorded revenue decline of 28.6% from 2005 to $122.6 million in 2006. Total production was up by 8.9% to 61.0 million barrels of oil equivalent (mmboe), reﬂecting a full year of production from 2005 acquisitions and John Brookes and commencement of production from Casino and Bayu Undan LNG. 50 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:51 AM Page 51 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 commencement of gas production from the Casino ﬁeld, offshore Victoria in February 2006 and from the Maleo ﬁeld, offshore East Java, Indonesia during September 2006. • The despatch of the ﬁrst LNG cargoes from the Darwin LNG plant during February 2006. • An incident at the onshore Banjar Panji-1 well, near Surabaya in Indonesia. • Appraisal drilling at the Jeruk oil discovery in Indonesia which reduced the most likely contingent resource for the Jeruk ﬁeld to less than 50 million barrels of oil. • A new country entry into Vietnam, and subsequent exploration and appraisal success at the Blackbird and Dua oil ﬁelds. • The proposed sale of Santos’ United States assets. • A gas discovery at the Evans Shoal South exploration well, offshore Northern Australia. • Commencement of the Cooper Basin Oil Project, a 1,000 well oil exploitation program in the Cooper Basin. 5. DIVIDENDS On 22 February 2007, the Directors: (i) (ii) resolved to pay a fully franked ﬁnal dividend of $0.20 per fully paid ordinary share on 2 April 2007 to shareholders registered in the books of the Company at the close of business on 5 March 2007. This ﬁnal dividend amounts to approximately $119.7 million; and declared that in accordance with the Terms of Issue, a fully franked dividend of $2.7272 per Franked Unsecured Equity Listed Securities be paid on 2 April 2007 to holders registered in the books of the Company at the close of business on 5 March 2007, amounting to $16.4 million. A fully franked ﬁnal dividend of $118.9 million (20 cents per share) was paid on 31 March 2006 on the 2005 results. Indication of this dividend payment was disclosed in the 2005 Annual Report. In addition, a fully franked interim dividend of $119.2 million (20 cents per fully paid ordinary share) was paid to members on 2 October 2006. In accordance with the Terms of Issue, a fully franked ﬁnal dividend of $2.5300 per Franked Unsecured Equity Listed Securities ($15.2 million) was paid on 31 March 2006. Indication of this dividend payment was disclosed in the 2005 Annual Report. A fully franked interim dividend of $2.5275 per Franked Unsecured Equity Listed Securities ($15.2 million) was paid on 2 October 2006. 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, authorisations (numbers EPA 888, 1259, 2164, 2569, 14145, 14427 and 45060001) issued under the Environment Protection Act 1993, its Queensland operations, authorisations (numbers 150029, 150286, 150287, 150351, 150359, 150238, 150276, 150288, 150330, 150331, 150332, 150333, 150334, 150368, 150381, 170543 and 170544) issued under the Environmental Protection Act 1994 and its Victorian operations, licence (number 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, 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. Santos Annual Report 2006 51 SAN175 AW3 Text 21/3/07 9:51 AM Page 52 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 2006 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 7 of the Annual Report. Further information about likely developments in the operations of the consolidated entity and the expected results of those operations in future ﬁnancial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the consolidated entity. Further details regarding likely developments appear in the individual reports at pages 8 to 9, 12, 13 to 20, 22, 24, 26 to 31 of the Annual Report. 9. DIRECTORS’ AND RELEVANT GROUP 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 Relevant Group Executives are set out in the Remuneration Report commencing on page 54 of the Annual Report. 10. INDEMNIFICATION Rule 61 of the Company’s Constitution provides that the Company indemniﬁes, on a full indemnity basis and to the full extent permitted by law, ofﬁcers of the Company for all losses or liabilities incurred by the person as an ofﬁcer of the Company, a related body corporate or trustee of a company-sponsored superannuation fund. Rule 61 does not indemnify an ofﬁcer for any liability involving a lack of good faith. Rule 61 also permits the Company to purchase and maintain a Directors’ and Ofﬁcers’ insurance policy. No indemnity has been granted to an auditor of the Company in their capacity as auditor of the Company. In conformity with Rule 61, 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. Since the date of the previous report to the Directors Mr R A Franklin, upon his appointment to the Board on 28 September 2006, entered into a Deed of Indemnity on the same terms as those entered into by other Directors. 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 2006 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 2007. 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. NON-AUDIT SERVICES During the year the Company’s auditor, Ernst & Young, was paid the following amounts in relation to non-audit services provided by Ernst & Young: Other assurance services $67,000 The Directors are satisﬁed, based on the advice of the Audit Committee, that the provision of the non-audit services detailed above by Ernst & Young is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The reasons for forming this opinion are that all non-audit services have been reviewed by the Audit Committee to ensure they do not impact on the impartiality and objectivity of the auditor. A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 137 of the Annual Report. 52 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:51 AM Page 53 12. SHARES UNDER OPTION Unissued ordinary shares of Santos under option at the date of this report are as follows: Date options granted 18 June 2002 12 December 2003 12 December 2003 15 June 2004 15 June 2004 22 May 2005 22 October 2006 4 May 2006 4 May 2006 4 May 2006 Expiry date 17 June 2007 22 December 2007 22 December 2008 14 June 2008 1 July 2009 22 May 2015 24 October 2016 3 May 2016 3 May 2016 3 May 2016 Issue price of shares Number under option $6.20 $6.38 $6.38 $6.95 $6.95 $8.46 $10.48 $11.36 $11.36 $11.36 150,000 27,095 100,000 116,181 200,000 957,850 897,700 500,000 1,000,000 1,000,000 4,948,826 Options do not confer an entitlement to participate in a bonus or rights issue, prior to the exercise of the option. 13. SHARES ISSUED ON THE EXERCISE OF OPTIONS The following ordinary shares of Santos were issued during the year ended 31 December 2006 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 19 October 2001 12 December 2003 15 June 2004 22 May 2005 14. ROUNDING $6.52 $6.38 $6.95 $8.46 500,000 45,085 13,967 27,650 586,702 Australian Securities and Investments Commission Class Order 98/100 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 22 February 2007 in accordance with a resolution of the Directors. DIRECTOR 22 FEBRUARY 2007 DIRECTOR Santos Annual Report 2006 53 SAN175 AW3 Text 21/3/07 9:51 AM Page 54 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 2006. 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 CEO AND SENIOR EXECUTIVES 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. Executive remuneration comprises both a ﬁxed component and an at-risk component. The at-risk component 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 for 2006 are set out in this Report as follows: TABLE 1: OVERVIEW OF ELEMENTS OF REMUNERATION Fixed remuneration At-risk remuneration Post-employment Elements of remuneration Fees Salary Superannuation Expense allowance Other beneﬁts Short-term incentive Long-term incentive Notice periods and termination payments Directors Non-Executive ✓ Executive ✗ ✗ ✓ ✗ ✗ ✗ ✗ ✗ ✓ ✓ ✗ ✓ ✓ ✓ ✓ Relevant Group Executives Discussion in Remuneration Report ✗ ✓ ✓ ✗ ✓ ✓ ✓ ✓ Sections 1A, 1B Sections 2A, 2C, 2E Sections 1A, 1B, 2C, 2D, 2E - Section 2E Sections 2A, 2B, 2C, 2E Sections 2A, 2B, 2C, 2E Section 2E This Remuneration Report has been adopted in accordance with a resolution of the Directors of Santos Ltd. 54 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:51 AM Page 55 1 NON-EXECUTIVE DIRECTORS’ FEES 1a. 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. This amount was approved at the Annual General Meeting held on 7 May 2004. 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 his or her duties. Non-executive Directors’ remuneration is not linked to the performance of the Company in order to maintain their independence and impartiality. The annual Directors’ fees set by the Board as payable to Directors during the 2006 year were revised with effect from 1 July 2006. Those fees are now set at the following levels: TABLE 2: DIRECTORS’ FEES Fees Board Committee Chair1 $390,000 Member Chair2 Member $130,000 $10,000–$28,000 $4,000-$14,000 1 The Chairman of the Board does not receive any additional fees for serving on any Board committee. 2 The Chairman of the Board chairs the Nomination Committee. 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 39 of the Annual Report. 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 are not included in the aggregate remuneration cap approved by shareholders. 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 is made pursuant to an agreement entered into with each non-executive Director on terms approved by shareholders at the 1989 Annual General Meeting. Accrued retirement beneﬁts are set out in Table 3 below. These beneﬁts have been fully provided for by the Company. Santos Annual Report 2006 55 SAN175 AW3 Text 21/3/07 9:51 AM Page 56 1b. REMUNERATION Details of non-executive Directors’ remuneration for the year ended 31 December 2006 are set out in the following table. All values are in A$. TABLE 3: DETAILS OF NON-EXECUTIVE FEES AND ENTITLEMENTS FOR 2006 S Gerlach4 (Chairman) P C Barnett2 K A Dean R A Franklin R M Harding M A O’Leary3 C J Recny5 J Sloan4 Directors’ fees 360,000 17,781 120,000 33,568 120,000 114,568 27,500 120,000 Committee Superannuation contributions1 fees Other - 3,879 29,750 - 35,000 20,768 - 31,500 12,412 1,949 12,372 - 12,122 - 2,475 12,372 - - - - - - - - Total 372,412 23,609 162,122 33,568 167,122 135,336 29,975 163,872 879,849 Total 1 Superannuation contributions made on behalf of non-executive Directors, with the exception of Mr R A Franklin and Mr M A O’Leary, to satisfy the Company’s obligations under applicable Superannuation Guarantee legislation. Under Superannuation Guarantee legislation, superannuation contributions are not required to be made on behalf of Mr R A Franklin as he is not a resident of Australia, and superannuation contributions are not required to be made on behalf of Mr M A O’Leary as he has passed the age of 70. 120,897 53,702 - 1,054,448 2 Mr P C Barnett ceased as a Director on 28 February 2006. Upon ceasing to hold ofﬁce, Mr Barnett was paid a retirement beneﬁt of $303,853 pursuant to the agreement entered into with the Company prior to 1 January 2004. No part of this amount has been included in Mr Barnett’s remuneration for the year, as the beneﬁt had been fully provided for in previous reporting periods. 3 Mr M A O’Leary ceased as a Director on 15 December 2006. Upon ceasing to hold ofﬁce, Mr O’Leary was paid a retirement beneﬁt of $268,420 pursuant to the agreement entered into with the Company prior to 1 January 2004. No part of this amount has been included in Mr O’Leary’s remuneration for the year, as the beneﬁt had been fully provided for in previous reporting periods. 4 Mr S Gerlach and Professor J Sloan are, when they cease to hold ofﬁce as Directors, entitled to receive a retirement beneﬁt pursuant to agreements entered into with the Company prior to 1 January 2004. These beneﬁts are calculated with reference to completed years of service as at 30 June 2004. Mr Gerlach had completed 10 years of service (and more than three as Chairman) and Professor Sloan had completed nine years of service at that time. Their respective accrued beneﬁts are $1,130,725 and $346,752. No part of these amounts have been included in Mr Gerlach or Professor Sloan’s remuneration for the year, as these beneﬁts had been fully provided for in previous reporting periods. 5 Mr C J Recny held ofﬁce as a Director until his death on 4 June 2006. 56 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:51 AM Page 57 2 CEO AND SENIOR EXECUTIVE REMUNERATION 2a. BOARD POLICY ON REMUNERATION The Remuneration Committee of the Board has recommended, and the Board has adopted, a policy that remuneration of the CEO, Company Secretary and other senior executives will: (c) ensure a signiﬁcant portion of senior executive remuneration is at risk against individual and company performance and shareholder value creation; (a) (b) reﬂect the responsibilities of senior executives and other employees; (d) 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; 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 senior executives to manage from the perspective of shareholders. TABLE 4: OVERVIEW OF REMUNERATION PACKAGE CEO Executive Vice President Operations Chief Financial Ofﬁcer Other Relevant Group Executives Other 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 both ﬁxed and at-risk components. The Board views the at-risk component as an essential driver of the Company’s high performance culture. Table 4 below sets out the relative proportions of the CEO’s and senior executives’ total remuneration packages that are performance- based. At each job and seniority level, the Board aims to achieve a balance between ﬁxed and at-risk or performance-related components of remuneration. % of total remuneration (annualised) Performance-based remuneration Fixed remuneration TFR 46% 52% 52% 57% 66% STI1 27% 27% 27% 20% 14% LTI2 27% 21% 21% 23% 20% 1 The percentages in the table indicate STI paid for target performance. 2 The percentages in the table represent the relative size of the initial LTI grant which is dependent on each executive’s seniority. Once granted, vesting of Share Acquisition Rights or options made under the Company’s LTI program is dependent on Company performance and may range from 0% to 100% (as explained in Section 2C). 2b. COMPANY PERFORMANCE AND REMUNERATION Pay and performance relationship Santos’ senior executive remuneration strategy 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. The at-risk element of pay is comprised of two components: delivers above-average shareholder returns relative to other companies. • 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. • Long-term incentives provide for the vesting of equity-based rewards if performance over a three-year period 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 one of the best indicators of shareholder wealth. Santos Annual Report 2006 57 SAN175 AW3 Text 21/3/07 9:51 AM Page 58 Vesting of 50% of the 2006 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 large Australian and international exploration and production companies, which for 2006 comprised: • Anadarko Petroleum Ltd • Apache Corp • Chesapeake Energy Corp • Oil Search Ltd • EOG Resources Inc • Forest Oil Corp • Pioneer Natural Resources Co • Pogo Producing Co • Hardman Resources Ltd • Premier Oil PLC • Kerr McGee Corp • Murphy Oil Corp • Talisman Energy Inc • Woodside Petroleum Ltd • Newﬁeld Exploration Co • XTO Energy Inc. • Australian Worldwide Exploration Ltd • Nexen Inc • Cairn Energy PLC • Noble Energy Inc Indicators of Company performance The table below shows results against various measures of company performance in the ﬁve year period from 2002 to 2006. These measures are examples of measures used to determine the overall level of bonuses paid. TABLE 5: COMPANY PERFORMANCE MEASURES 2002–2006 Year 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) 2002 9.0 393 57.3 18.9 8.7 119 8.9 1.9 2003 7.2 1,943 54.2 18.4 8.6 148 8.8 1.8 2004 2005 2006 6.4 84 47.1 19.8 16.8 121 11.7 2.0 4.9 23.1 56.0 29.5 12.9 218 19.8 3.1 6.4 21.6 61.0 33.1 14.5 143 15.1 3.6 Further discussion of the Company’s overall performance is contained on pages 8 to 31. Long-term Company performance As an indication of the Company’s long-term performance, the graph below illustrates the Company’s TSR in the ﬁve year period from 2002 to 2006, together with the average TSRs of the two comparator groups used in the Company’s long-term incentive program, as described above. TSR OF SANTOS, ASX100 AND AUSTRALIAN AND INTERNATIONAL COMPANIES 2002–2006 % 250 200 150 100 50 0 -50 January 2002 December 2006 Santos ASX 100 E&P comparator group 58 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:51 AM Page 59 The second graph shows the Company’s share price between January 2002 and December 2006. SANTOS SHARE PRICE 2002–2006 $ 14 12 10 8 6 4 2 0 January 2002 December 2006 During the 2002 to 2006 period, the Company’s share price grew strongly. The Company’s TSR outperformed the average TSR of the ASX 100 for the period, but lagged behind the average TSR of the Australian and international companies used as one of the comparator groups in the Company’s long-term incentive program. During this period, vesting of the grants made to executives under the Company’s long-term incentive program, which forms part of at-risk remuneration, has been commensurate with the Company’s long- term performance relative to comparator companies. Fifty per cent of the grant based on the Company’s relative TSR for the 2003 to 2005 period vested, and the remaining 50% lapsed. No portion of the grant based on the Company’s relative TSR for the 2004 to 2006 period vested. Dividends paid by the Company from 2002 to 2006, showing a consistently strong level of return to shareholders, are as follows: (Dividends per ordinary share) 2002 2003 2004 2005 2006 $0.30 $0.30 $0.30 $0.36 $0.40 Capital management In conjunction with its $600 million offering of Redeemable Convertible Preference Shares (or FUELS), on 30 September 2004 the Company redeemed and bought back the entire 3,500,000 Reset Convertible 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. Santos Annual Report 2006 59 SAN175 AW3 Text 21/3/07 9:51 AM Page 60 2c. ELEMENTS OF REMUNERATION This section deals with the elements of remuneration for the CEO and the “Relevant Group Executives” listed below. The Relevant Group Executives include the ﬁve highest remunerated executives of the Company and the Group as well as other Key Management Personnel. TABLE 6: CEO AND RELEVANT GROUP EXECUTIVES CEO / Senior executives Current executives J C Ellice-Flint J H Anderson T J Brown M E Eames M S Macfarlane P C Wasow R J Wilkinson J T Young Former executives J E Gouadain1 B J Wood2 Position CEO Vice President Strategic Projects (commenced on 3 April 2006) Vice President Geoscience and New Ventures (commenced 4 February 2006) Vice President Corporate and People Vice President Development Projects and Technical Services (commenced 18 April 2006) Chief Financial Ofﬁcer Vice President Gas Marketing and Commercialisation Executive Vice President Operations Vice President Geoscience and New Ventures Vice President Strategic Projects 1 Mr J E Gouadain ceased employment with the Company on 30 March 2006. 2 Mr B J Wood ceased employment with the Company on 15 June 2006. As indicated in Section 2B, remuneration for the CEO and Relevant Group 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 • Long-Term Incentives (LTI) – based on the Company’s performance relative to other companies over a three-year period. SUMMARY OF THE STI What is the STI? Total Fixed Remuneration (TFR) 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. The terms of employment for the CEO and Relevant Group Executives 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. The STI is an annual bonus paid to reward performance based on a mix of both Company and individual performance targets. Who participates in the STI? The CEO, Relevant Group Executives, other executives and all non-award employees. Why does the Board consider the STI an appropriate incentive? What are the maximum amounts that can be earned as a STI? 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. The maximum amounts that can be earned as a STI are 150% of base salary for the CEO, and 50% or 75% of TFR for Relevant Group Executives. Such amounts are only payable for exceptional performance. 60 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:51 AM Page 61 How is the STI paid? What proportions of an executive’s STI are based on Company performance and individual performance respectively? The CEO must take 50% of any STI awarded to him in the form of shares in the Company. These shares are, in general, subject to restrictions on sale, transfer and hedging for a period of two years from the date of their acquisition. The remaining 50% of any STI awarded is paid to the CEO in cash. All other participants receive their STI in cash. For the CEO, 100% of the STI is based upon a number of agreed objectives which include Company performance as well as strategic growth initiatives which form part of the Company’s strategic plan. For Relevant Group 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. The Board believes that linking part of the Company’s executives’ STI to achievement of the Company’s objectives for the performance period is important to the promotion of collaborative behaviour and actions directed towards the overall beneﬁt of the Company. What are the performance conditions? The CEO’s STI is based on growth of proﬁtability, exploitable reserves and share price increase and other objectives set by the Board. Who assesses performance? How is Company performance assessed? For other participants, 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 Board believes it is important to assess the Company’s performance against a broad range of metrics in order to avoid over-emphasising certain areas to the detriment of others. Further, the Board believes these metrics should include lagging indicators to assess the Company’s past performance as well as forward-looking indicators to ensure the Company is positioning itself well for the future. 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 Relevant Group Executives following the close of the ﬁnancial year and having regard to the relevant ﬁnancial year’s results, makes a recommendation to the Remuneration Committee, which approves the award of short-term incentives to the Relevant Group Executives. 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 relevant to Company performance. The Board believes that this method of assessing performance is rigorous and transparent and results in a balanced assessment of the Company’s performance. Were the performance conditions met during the year? The metrics indicated that the Company had met and exceeded targets to a level commensurate with a bonus pool equivalent to 70% of the sum of maximum bonuses of eligible employees. What percentage of maximum STI was paid during the year for the Relevant Group Executives of the Company and the Group? In respect of the CEO and each of the Relevant Group Executives (other than Mr Gouadain and Mr Wood, who had no entitlement upon ceasing employment), the STI performance conditions, which included individual as well as Company performance, were satisﬁed to 60% to 82% 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 was forfeited. Santos Annual Report 2006 61 SAN175 AW3 Text 21/3/07 9:51 AM Page 62 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? What is the performance condition? 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. The relative proportions of LTI as a part of total remuneration are given in Table 4 on page 57 for each level of executive. Relative TSR, which incorporates share price growth, dividends and other capital adjustments, measures the total return to shareholders relative to companies in the chosen comparator groups. What is the performance period? In accordance with the terms approved by shareholders at the 2006 AGM, the 2,500,000 options granted to the CEO with effect from 4 May 2006 vest as follows: - 500,000 options vest no earlier than 26 August 2007; - 1,000,000 options vest no earlier than 26 August 2008; - 1,000,000 options vest no earlier than 26 August 2009. As set out in the Notice of the 2006 AGM, 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 in late 2005. For all other participants, rolling grants are made with a performance period of three ﬁnancial years. The 2006 grant’s performance period is from 1 January 2006 to 31 December 2008 and vests no earlier than 1 January 2009. At the end of the performance period, over the performance period, against two comparator groups. 50% of each grant – the ASX 100 at the beginning of the relevant performance period. 50% of each grant – Australian and international exploration and production companies with market capitalisation of at least 15% of Santos market capitalisation, and no more than ﬁve times Santos’ market capitalisation. The comparator group for the 2006 LTI grants is set out in section 2B above. These are seen as reasonable comparators of Santos’ performance against the market generally (ASX 100) and its peers (E&P companies) and TSR is considered an appropriate measure of shareholder value. How is TSR tested? What are the comparator groups for the performance condition? What is the vesting schedule? Refer to Table 7 on page 63. 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 the growth in shareholder value and therefore executives receive a beneﬁt where there is a corresponding direct beneﬁt to shareholders. 62 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:51 AM Page 63 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. Is retesting of performance conditions permitted? 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? In relation to the CEO’s options, the performance conditions may be retested quarterly during the 12-month period commencing on the earliest exercise 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. In relation to other executives, there is no retesting of the performance conditions relating to the executive’s options or SARs. 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 (or 10 days in the case of the CEO) 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 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. Consistent with the CEO’s arrangements in 2000, the Board has exercised its discretion to determine that all options held by the CEO will vest and become exercisable where the Company terminates the employment of the CEO (other than for cause) in accordance with his Service Agreement. 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% Santos Annual Report 2006 63 SAN175 AW3 Text 21/3/07 9:51 AM Page 64 t e y t o n t u b d e t s e V d n a d e t s e V 6 0 0 2 6 0 0 2 6 0 0 2 ) 3 ( d e t i e f r o F ) 2 ( d e s i c r e x E ) b ( ) 1 ( t n a r g ) a ( ) 1 ( d e t n a r G 6 0 0 2 t a e l b a s i c r e x e t a e l b a s i c r e x e t a e c n a l a B r e b m e c e D 1 3 r e b m e c e D 1 3 r e b m e c e D 1 3 / d e s p a L f o e u l a v m u m i x a M t a e c n a l a B y r a u n a J 1 s e v i t u c e x E p u o r G t n a v e l e R d n a O E C . d o i r e p g n i t r o p e r e h t g n i r u d s e v i t u c e x E p u o r G t n a v e l e R d n a O E C e h t y b d l e h s n o i t p o d n a s R A S n i t n e m e v o m e h t f o s l i a t e d t u o t e s i s e l b a t g n w o l l o f e h T n o i t a r e n u m e r s a d e t n a r g s n o i t p o r o s R A S I S E V T U C E X E Y B D L E H S N O T P O D N A S R A S N I I I T N E M E V O M D N A R A E Y E H T G N R U D D E T N A R G S N O T P O D N A S R A S I : 8 E L B A T 64 Santos Annual Report 2006 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 4 4 7 , 2 1 4 4 0 , 4 3 1 - - - - - ) 0 0 3 , 4 ( ) 0 0 3 , 4 ( - - - - 7 3 1 , 6 1 - 0 0 7 , 3 6 0 0 6 , 8 4 4 3 , 0 7 0 0 0 , 0 6 9 6 7 , 4 8 1 ) 0 0 5 , 4 1 ( ) 0 0 0 , 0 0 2 ( 5 9 6 , 6 1 0 0 9 , 5 6 9 6 3 , 3 3 3 - 0 0 0 , 0 0 5 , 2 - - - - - - 5 0 2 , 6 0 4 , 1 0 0 0 , 0 0 5 , 2 - - - - - 0 0 5 , 9 3 0 0 0 , 0 5 0 0 2 , 9 1 0 0 7 , 3 6 - - - - ) 0 0 8 , 4 ( ) 0 0 8 , 4 ( - - - - 1 7 9 , 8 1 0 0 9 , 9 1 0 0 6 , 9 1 0 0 0 , 0 5 0 0 8 , 8 2 - - 7 3 1 , 6 1 0 0 7 , 3 6 - - - - - - - 0 0 2 , 0 7 ) 0 0 8 , 1 1 ( ) 0 0 8 , 1 1 ( 7 2 9 , 1 2 0 0 0 , 3 2 0 0 8 , 0 7 0 0 6 , 1 5 ) 0 5 8 , 8 ( ) 0 5 8 , 8 ( 4 4 4 , 5 1 0 0 2 , 6 1 0 0 1 , 3 5 - - - - - 0 0 0 , 8 7 0 0 0 , 2 5 0 0 2 , 3 9 ) 0 0 0 , 3 1 ( ) 0 0 0 , 3 1 ( - - 1 1 6 , 3 2 0 0 2 , 3 9 - t n i l F - e c i l l E C J s n o i t p O s R A S n o s r e d n A H J s n o i t p O s R A S s n o i t p O s R A S s e m a E E M n w o r B J T s n o i t p O s R A S e n a l r a f c a M S M s n o i t p O s R A S s n o i t p O s R A S w o s a W C P n o s n i k l i W J R s n o i t p O s R A S s n o i t p O s R A S g n u o Y T J SAN175 AW3 Text 21/3/07 9:51 AM Page 65 t e y t o n t u b d e t s e V d n a d e t s e V 6 0 0 2 6 0 0 2 6 0 0 2 ) 3 ( d e t i e f r o F ) 2 ( d e s i c r e x E ) b ( ) 1 ( t n a r g ) a ( ) 1 ( d e t n a r G 6 0 0 2 t a e l b a s i c r e x e t a e l b a s i c r e x e t a e c n a l a B r e b m e c e D 1 3 r e b m e c e D 1 3 r e b m e c e D 1 3 / d e s p a L f o e u l a v m u m i x a M t a e c n a l a B y r a u n a J 1 - - - - - - - - - - - - - - - - - ) 0 0 0 , 0 5 ( - ) 0 0 0 , 0 1 ( ) 0 0 0 , 0 0 2 ( ) 0 5 2 , 8 3 1 ( ) 5 3 7 , 2 7 ( - - - - - - - - 0 0 5 , 2 3 2 ) 0 5 7 , 2 9 ( ) 0 5 7 , 2 5 ( 2 4 3 , 6 5 0 0 1 , 9 5 4 4 7 , 2 7 3 1 7 , 5 2 0 , 3 ) 0 5 7 , 2 5 1 ( ) 5 3 7 , 2 7 4 ( 5 8 7 , 8 7 4 , 1 0 0 5 , 6 8 7 , 2 0 0 0 , 0 6 0 0 0 , 0 0 2 - 5 8 9 , 0 1 2 0 0 9 , 8 1 3 8 9 6 , 4 6 8 s e v i t u c e x E p u o r G t n a v e l e R d n a O E C s e v i t u c e x E r e m r o F n i a d a u o G E J s n o i t p O s R A S s n o i t p O s R A S d o o W J B s n o i t p O l a t o T S R A S e h t h t i w e c n a d r o c c a n i t s e v l l i w s I T L s ’ O E C e h T . e v o b a d e s s u c s i d e r a s I T L e h t f o s m r e t e h T . r a e y e h t g n i r u d d e t i e f r o f e r e w r o d e t s e v 6 0 0 2 n i d e t n a r g s I T L e h t f o e n o n , s d o i r e p l a i c n a n ﬁ e r u t u f n i d e t s e t e b o t e r a h c i h w s n o i t i d n o c e c n a m r o f r e p f o n o i t c a f s i t a s n o y l n o t s e v s I T L e h t s A . r a e y e h t g n i r u d m e h t o t e d a m s t n a r g e h t f o % 0 0 1 d e t u t i t s n o c s e v i t u c e x E p u o r G t n a v e l e R d n a O E C e h t o t e d a m s t n a r g e h T ) a ( . s t n e m e t a t s l a i c n a n ﬁ e h t o t 9 2 e t o N n i t u o t e s e r a n o i t a u l a v e h t g n i y l r e d n u s n o i t p m u s s a e h t f o s l i a t e D . d o h t e m n o i t a u l a v e h t t a s a d e n i m r e t e d s i d o i r e p g n i t r o p e r e h t g n i r u d t s e v t o n o d h c i h w s t n e m u r t s n i y t i u q e f o e u l a v l a n o i t o n e h T . r a e y e h t g n i r u d g n i d n a t s t u o r o d e t n a r g n o i t a s n e p m o c y t i u q e f o e u l a v l a n o i t o n e h t f o n o i t r o p o r p e s i l a e r y l e t a m i t l u y a m s e v i t u c e x e l a u d i v i d n i t a h t ) y n a f i ( t ﬁ e n e b e h t f o e v i t a c i d n i r o o t d e t a l e r t o n s i n o i t a r e n u m e r s a d e d u l c n i t n u o m a e h T . d o i r e p g n i t s e v e h t r e v o d e t a c o l l a y l e v i s s e r g o r p s i d n a e t a d t n a r g o l r a C e t n o M e h t g n i y l p p a ” s e r u s o l c s i D y t r a P d e t a l e R “ 2 B S A A h t i w e c n a d r o c c a n i d e n i m r e t e d n e e b s a h t n a r g r i e h t f o e t a d e h t t a s a s n o i t p o d n a s R A S f o e u l a v l a n o i t o n e h T . t s e v s t n e m u r t s n i y t i u q e e h t d l u o h s a s e d u l c n i n o i t a r e n u m e r , s d r a d n a t S g n i t n u o c c A e h t f o s t n e m e r i u q e r e h t h t i w e c n a d r o c c a n I . 7 2 1 , 5 3 5 , 1 $ s i ) t n a r g r i e h t f o e t a d e h t t a ( r a e y e h t g n i r u d d e t n a r g s n o i t p o d n a s R A S f o e u l a v e t a g e r g g a e h T 1 6 7 . 0 $ d n a R A S r e p 6 8 . 2 $ t a d e t a l u c l a c e r e w s e v i t u c e x E p u o r G t n a v e l e R e h t o t d e t n a r g I T L r e p s e u l a v e h T . n o i t p o r e p 5 0 . 2 $ f o e u l a v a g n i v a h s a d e t a l u c l a c e r e w s n o i t p o e h t f o 0 0 0 , 0 0 0 , 1 d n a , n o i t p o e l b a c i l p p a e h t f i , t n a r g e h t f o e u l a v l a t o t m u m i n i m e h T . s t n e m e t a t s l a i c n a n ﬁ e h t o t 9 2 e t o N n i t u o t e s s i s e u l a v e s e h t e t a l u c l a c o t d e s u l e d o m g n i c i r p e h t g n i d r a g e r n o i t a m r o f n I . n o i t p o r e p r e p 4 9 . 1 $ f o e u l a v a g n i v a h s a d e t a l u c l a c e r e w s n o i t p o e h t f o 0 0 0 , 0 0 0 , 1 , n o i t p o r e p 7 7 . 1 $ f o e u l a v a g n i v a h s a d e t a l u c l a c e r e w s n o i t p o e h t f o 0 0 0 , 0 0 5 , O E C e h t o t d e t n a r g s n o i t p o 0 0 0 , 0 0 5 , 2 e h t f O ) b ( . 9 0 0 2 y r a u n a J 1 n a h t r e i l r a e o n t s e v l l i w I T L s ’ e v i t u c e x E p u o r G t n a v e l e R e h t d n a , 2 6 e g a p n o t u o t e s y r a m m u s n i t u o t e s e r a r a e y e h t g n i r u d d e s i c r e x e s R A S d n a s n o i t p o g n i d r a g e r s l i a t e d r e h t r u F . 5 0 3 , 1 8 5 $ s a w r a e y l a i c n a n ﬁ e h t g n i r u d d e t s e v s R A S f o e u l a v e t a g e r g g a e h t d n a 3 2 7 , 5 9 2 , 5 $ s a w r a e y l a i c n a n ﬁ e h t g n i r u d d e s i c r e x e s n o i t p o f o e u l a v e t a g e r g g a e h t , y l g n i d r o c c A . e t a d t a h t n o y n a p m o C e h t n i e r a h s a f o e c i r p t e k r a m e h t s i g n i t s e v f o e t a d e h t n o R A S a f o e u l a v e h t d n a e s i c r e x e f o e t a d e h t n o n o i t p o n a f o e u l a v e h T 2 . l i n s i , t e m t o n e r a s n o i t i d n o c e c n a m r o f r e p 0 0 0 , 0 4 o t t h g i r e h T . g n i s p a l f l a h r e h t o e h t d n a g n i t s e v t n a r g e h t f l a h n i g n i t l u s e r , s n o i t i d n o c e c n a m r o f r e p e l b a c i l p p a t e m y l l a i t r a p h c i h w t n a r g I T L n a o t d e t a l e r e r e w h c i h w d e s p a l s R A S 0 5 2 , 7 6 , r a e y e h t g n i r u D 3 r o R A S a f o e u l a v e h T . 6 0 0 2 e n u J 5 1 n o n o i t a n g i s e r s i h n o d e t i e f r o f e r e w d o o W J B y b d l e h s n o i t p o 0 0 6 , 0 1 1 o t t h g i r e h t d n a 6 0 0 2 h c r a M 0 3 n o n o i t a n g i s e r s i h n o d e t i e f r o f e r e w n i a d a u o G E J y b d l e h s R A S . l i n s i d e t i e f r o f s i r o s e s p a l t i y a d e h t n o n o i t p o . 9 e l b a T Santos Annual Report 2006 65 SAN175 AW3 Text 21/3/07 9:51 AM Page 66 TABLE 9: OPTIONS EXERCISED AND SARS VESTED AND LAPSED DURING 2006 Options SARs2 Date exercised or lapsed Exercised or lapsed Exercise Price $ Market price at date of exercise $ Vested Lapsed - - - - 16 October 2006 7 March 2006 200,000 14,500 - - - - - - - - - - 15 June 2006 15 June 2006 12 April 20061 45,085 27,650 200,000 - - 6.52 - - - - - - 6.38 8.46 6.52 - - 10.47 - - - - - - 11.16 11.16 11.95 - 4,300 - - - 4,800 11,800 8,850 13,000 - - - 4,300 - - - 4,800 11,800 8,850 13,000 - - 10,000 10,000 CEO & Relevant Group Executives J C Ellice-Flint J H Anderson T J Brown Exercised Lapsed M E Eames M S Macfarlane P C Wasow R J Wilkinson J T Young Former executives B J Wood J E Gouadain 1 By consent of the Board in accordance with the rules of the Company’s share option plan, options were exercised by J E Gouadain after he ceased employment with the Company on 30 March 2006. 2 All SARs vested on 7 March 2006 and the market value at that date was $11.02. 2d. SERVICE AGREEMENTS The remuneration and other terms of employment for the CEO and the Relevant Group Executives are formalised in Service Agreements. Under the terms of the Service Agreements, the CEO and Relevant Group Executives 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. CEO In particular, the CEO’s contract provides that the Company may terminate his employment on giving 24 months’ notice. The contract was varied with effect from 1 January 2006 so that this notice period is reduced to 12 months from 1 January 2008. The Company may require the CEO to continue to work for up to three months of the notice period. The Company must make a payment to the CEO equivalent to his base salary for the full notice period. In general, any unvested options granted to the CEO under the SESOP will vest and become exercisable where the Company terminates the CEO’s 66 Santos Annual Report 2006 employment, and any restrictions on shares acquired using the CEO’s STI award will be lifted. The Company may terminate the CEO’s employment at any time for cause, and no payment in lieu of notice or early vesting of incentive awards will be made in these circumstances. The CEO must give the Company three months’ notice of his intention to resign. Relevant Group Executives The Company may terminate the employment of Relevant Group Executives on giving 12 months’ notice, except with respect to Mr J T Young, who is entitled to three months’ notice. The Company may make a payment in lieu of notice. Relevant Group Executives must give the Company at least six months’ notice of resignation, with the exception of Mr J T Young, who 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 Relevant Group Executives and will be liable to make compensation payments. 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. Other executives 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. Accordingly, 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. Superannuation arrangements for CEO The CEO’s Service Agreement provides for the Company to contribute an actuarially determined amount into the Company’s superannuation fund to provide for Mr Ellice-Flint’s superannuation beneﬁts. These arrangements were agreed at the time the CEO originally joined the Company in 2000 to replace the pension SAN175 AW3 Text 21/3/07 9:51 AM Page 67 e h t o t s n a o l e e r f t s e r e t n i e k a m o t M G A 6 0 0 2 e h t t a l a v o r p p a r e d l o h e r a h s d e n i a t b o y n a p m o C e h t e l i h W . r e y o l p m e s u o i v e r p s i h h t i w d e l t i t n e e m o c e b e v a h d l u o w e h h c i h w o t s t n e m e l t i t n e g n i t s i x e e h t e g n a h c o t d e e n y n a d e v o m e r e v a h t e g d u b l a r e d e F y a M e h t n i d e c n u o n n a n o i t a u n n a r e p u s f o n o i t a x a t e h t o t s e g n a h c , s n o i t u b i r t n o c n o i t a u n n a r e p u s e s e h t f o u e i l n i O E C . y r a l a s l a n ﬁ s i h f o e l p i t l u m a s a d e t a l u c l a c , y n a p m o C e h t m o r f t n e m e r i t e r s i h n o p u t ﬁ e n e b d e n ﬁ e d a d i a p e b o t t n i l F - e c i l l E r M r o f e d i v o r p t n e m e e r g A e c i v r e S e h t r e d n u s t n e m e g n a r r a e h T . s t n e m e g n a r r a n o i t a u n n a r e p u s 2 2 . 3 o t s e s a e r c n i s i h t 7 0 0 2 y r a u r b e F n I . t n e m e r i t e r s i h n o p u y r a l a s l a n ﬁ s i h s e m i t 6 7 . 2 o t t n e l a v i u q e t n e m y a p n o i t a u n n a r e p u s a o t d e l t i t n e s a w t n i l F - e c i l l E r M , 6 0 0 2 r e b m e c e D 1 3 t a s A y l l a i r a u t c a e k a m o t e u n i t n o c l l i w y n a p m o C e h T . y r a s r e v i n n a t n e u q e s b u s h c a e n o y r a l a s l a n ﬁ s e m i t 5 . 0 y l e t a m i x o r p p a f o e t a r a t a s e s a e r c n i t ﬁ e n e b d e n ﬁ e d s i h t d n a y r a l a s l a n ﬁ s e m i t . t n e m e e r g A e c i v r e S s i h r e d n u r o f d e d i v o r p s a t n i l F - e c i l l E r M f o f l a h e b n o s n o i t u b i r t n o c n o i t a u n n a r e p u s d e n m r e t e d i f o f o l a t o T k s i r - t a f o l a t o T d e x ﬁ f o s t n e n o p m o c s t n e n o p m o c $ $ $ $ s n o i t p O $ s R A S n o i t a r e n u m e r n o i t a r e n u m e r l a t o T 2 s t n e m y a p d e s a b - e r a h S . $ A n i e r a s e u l a v l l i A . e l b a t g n w o l l o f e h t n i - - 5 0 2 , 2 3 1 1 5 1 , 6 0 2 5 0 2 , 2 3 1 1 5 1 , 6 0 2 - - 5 0 2 , 6 8 7 , 2 9 3 3 , 3 9 3 , 2 6 4 4 5 , 9 7 1 , 5 5 0 2 , 6 0 4 , 1 7 3 9 , 9 5 1 5 9 5 , 2 5 1 1 7 2 , 0 1 2 7 3 9 , 9 5 1 7 2 4 , 3 5 3 4 4 4 , 0 8 1 1 1 0 , 5 1 4 7 6 4 , 5 0 4 5 7 6 , 2 4 4 6 0 9 , 1 0 5 5 5 2 , 2 1 4 9 5 0 , 7 9 5 8 6 6 , 2 2 5 7 4 4 , 5 2 6 8 5 4 , 0 4 0 , 1 1 1 6 , 3 2 4 0 4 , 5 6 5 0 7 2 , 5 9 5 7 7 1 , 2 1 7 2 9 1 , 2 7 5 6 8 4 , 0 5 9 2 1 1 , 3 0 7 - 7 3 1 , 6 1 5 9 6 , 6 1 - - - 1 7 9 , 8 1 7 3 1 , 6 1 - - - 7 2 9 , 1 2 4 4 4 , 5 1 - - - r e h t O s t ﬁ e n e b m r e t - g n o l t s o P n o i t a n i m r e T t n e m y o l p m e s t ﬁ e n e b e e y o l p m e m r e t - t r o h S t u o t e s e r a 6 0 0 2 g n i r u d s e v i t u c e x E p u o r G t n a v e l e R e h t f o h c a e d n a O E C e h t o t d i a p n o i t a r e n u m e r e h t f o s l i a t e D S E R U S O L C S I D C I F I C E P S R E H T O D N A D A P N O T A R E N U M E R I I . e 2 R A E Y L A C N A N I F I 6 0 0 2 R O F I S E R U S O L C S I D N O T A R E N U M E R E V T U C E X E I : 0 1 E L B A T $ $ n o i t a u n n a r e p u S 1 r e h t O $ I T S $ y r a l a S p u o r G e h t d n a y n a p m o C e h t f o s e v i t u c e x E p u o r G t n a v e l e R d n a O E C 0 0 0 , 0 8 3 , 1 0 0 0 , 0 0 5 , 1 t n i l F - e c i l l E C J $ - - - - - - - - - - - $ - - - - - - - - 9 6 4 , 4 1 9 8 6 , 2 2 8 5 1 , 7 3 3 3 8 6 , 6 8 8 6 9 8 , 7 3 4 7 6 0 , 8 1 5 8 3 , 2 4 0 5 7 , 8 2 0 4 2 , 9 3 6 3 , 4 7 2 1 4 , 2 1 1 1 3 , 3 5 6 1 4 , 0 1 6 5 6 , 6 6 5 6 , 6 6 5 6 , 6 6 5 6 , 6 6 5 6 , 6 6 5 6 , 6 6 5 6 , 6 6 5 6 , 6 4 6 6 , 1 1 5 0 , 3 0 0 8 , 3 4 1 0 0 9 , 5 3 1 0 0 3 , 1 9 1 0 0 8 , 3 4 1 0 0 5 , 1 3 3 0 0 0 , 5 6 1 0 0 4 , 1 9 3 - - 5 1 9 , 0 6 3 2 5 9 , 7 1 4 5 6 8 , 2 5 4 9 4 8 , 6 7 3 3 6 1 , 1 8 5 9 4 6 , 1 4 4 9 7 3 , 6 0 6 1 6 7 , 2 1 1 5 9 9 , 9 6 1 n o s r e d n A H J n w o r B J T s e m a E E M e n a l r a f c a M S M n o s n i k l i W J R w o s a W C P g n u o Y T J s e v i t u c e x e r e m r o F n i a d a u o G E J d o o W J B l a t o T 7 2 8 , 7 1 4 , 4 2 7 1 , 9 3 2 , 6 9 9 9 , 6 5 6 , 0 1 5 8 7 , 8 7 4 , 1 2 4 3 , 6 5 3 2 5 , 3 2 1 , 1 3 6 9 , 7 5 0 0 7 , 2 8 8 , 2 8 2 5 , 0 2 0 , 5 r o o t d e t a l e r t o n s i n o i t a r e n u m e r s a d e d u l c n i t n u o m a e h T . d o i r e p g n i t s e v e h t r e v o d e t a c o l l a y l e v i s s e r g o r p s i d n a e t a d t n a r g e h t t a s a d e n i m r e t e d s i d o i r e p g n i t r o p e r e h t g n i r u d t s e v t o n o d h c i h w s t n e m u r t s n i y t i u q e f o e u l a v l a n o i t o n e h T . r a e y e h t g n i r u d g n i d n a t s t u o r o d e t n a r g n o i t a s n e p m o c y t i u q e f o e u l a v l a n o i t o n e h t f o n o i t r o p o r p a s e d u l c n i n o i t a r e n u m e r , s d r a d n a t S g n i t n u o c c A e h t f o s t n e m e r i u q e r e h t h t i w e c n a d r o c c a n I n i d e n i m r e t e d n e e b s a h t n a r g r i e h t f o e t a d e h t t a s a s n o i t p o d n a s R A S f o e u l a v l a n o i t o n e h T . t s e v s t n e m u r t s n i y t i u q e e h t d l u o h s e s i l a e r y l e t a m i t l u y a m s e v i t u c e x e l a u d i v i d n i t a h t ) y n a f i ( t ﬁ e n e b e h t f o e v i t a c i d n i . s e v i t u c e x E p u o r G t n a v e l e R d n a O E C e h t r o f e d i a l e d A n i e c ﬁ f o d a e h s ’ y n a p m o C e h t n i d e d i v o r p g n i k r a p r a c f o t s o c e h t s e d u l c n I 1 2 . s t n e m e t a t s l a i c n a n ﬁ e h t o t 9 2 e t o N n i t u o t e s e r a n o i t a u l a v e h t g n i y l r e d n u s n o i t p m u s s a e h t f o s l i a t e D . d o h t e m n o i t a u l a v o l r a C e t n o M e h t g n i y l p p a ” s e r u s o l c s i D y t r a P d e t a l e R “ 4 2 1 B S A A h t i w e c n a d r o c c a t c e p s e r n i y n a p m o C e h t y b 6 0 0 2 g n i r u d e d a m n o i t u b i r t n o c l a u t c a e h T . d o i r e p e h t g n i r u d d e d i v o r p s e c i v r e s e h t g n i t c e ﬂ e r t ﬁ e n e b n o i t a u n n a r e p u s e h t o t d e b i r c s a e u l a v g n i t n u o c c a e h t s t c e ﬂ e r t n u o m a s i h T 3 t c e p s e r n i y n a p m o C e h t y b 6 0 0 2 g n i r u d e d a m n o i t u b i r t n o c l a u t c a e h T . d o i r e p e h t g n i r u d d e d i v o r p s e c i v r e s e h t g n i t c e ﬂ e r t ﬁ e n e b n o i t a u n n a r e p u s e h t o t d e b i r c s a e u l a v g n i t n u o c c a e h t s t c e ﬂ e r t n u o m a s i h T 4 . 2 1 4 , 2 1 $ s a w n w o r B J T r M f o s t n e m e l t i t n e e r u t u f d n a t n e r r u c e h t f o t c e p s e r n i y n a p m o C e h t y b 6 0 0 2 g n i r u d e d a m n o i t u b i r t n o c l a u t c a e h T . d o i r e p e h t g n i r u d d e d i v o r p s e c i v r e s e h t g n i t c e ﬂ e r t ﬁ e n e b n o i t a u n n a r e p u s e h t o t d e b i r c s a e u l a v g n i t n u o c c a e h t s t c e ﬂ e r t n u o m a s i h T 5 . e u l a v l i n a s a h , t e m t o n e r a s n o i t i d n o c e c n a m r o f r e p e l b a c i l p p a f i , h c i h w , r a e y e h t g n i r u d d e t n a r g n o i t a s n e p m o c y t i u q e s ’ O E C e h t f o e u l a v l a n o i t o n e h t f o n o i t r o p o r p e h t s e d u l c n i t n u o m a s i h T 6 . 8 3 2 , 4 1 $ s a w d o o W J B r M f o s t n e m e l t i t n e e r u t u f d n a t n e r r u c e h t f o . 0 0 0 , 5 3 7 $ s a w O E C e h t f o s t n e m e l t i t n e e r u t u f d n a t n e r r u c e h t f o Santos Annual Report 2006 67 SAN175 AW3 Text 21/3/07 9:51 AM Page 68 d e t s e V r e b m u N s t h g i R s n o i t p O e t a d e s i c r e x e e t a d e s i c r e x e e t a d y r i p x e t s a l s n o i t p O t s r ﬁ s n o i t p O s n o i t p O e s i c r e x E r e p e c i r p $ n o i t p o $ e t a d e u l a v r i a F t h g i r r e p t n a r g t a $ e t a d t n a r g t a e u l a v r i a F n o i t p o r e p e t a d t n a r G s t h g i R s n o i t p O r e b m u N t n a r g h c a e r o f s n o i t i d n o c d n a s m r e T d e t n a r G ) D E T A D I L O S N O C I ( R A E Y E H T G N R U D D E T S E V D N A D E T N A R G S T H G R D N A S N O T P O N O T A S N E P M O C I I I 0 5 7 , 2 5 0 0 5 , 4 1 - - - - - 0 0 3 , 4 0 0 0 , 0 1 0 0 8 , 4 0 0 8 , 1 1 0 5 8 , 8 - 0 0 0 , 3 1 - - - - 7 0 0 2 6 1 0 2 y a M 3 t s u g u A 6 2 6 1 0 2 y a M 3 6 3 . 1 1 9 0 0 2 8 0 0 2 6 1 0 2 y a M 3 t s u g u A 6 2 6 1 0 2 y a M 3 6 3 . 1 1 6 1 0 2 y a M 3 t s u g u A 6 2 6 1 0 2 y a M 3 6 3 . 1 1 6 1 0 2 9 0 0 2 6 1 0 2 r e b o t c O 4 2 y r a u n a J 1 r e b o t c O 4 2 8 4 . 0 1 0 0 5 , 4 1 r e b o t c O 4 2 y r a u n a J 1 r e b o t c O 4 2 8 4 . 0 1 6 1 0 2 9 0 0 2 6 1 0 2 - - - - - - - - - - - - - - - 6 1 0 2 9 0 0 2 6 1 0 2 r e b o t c O 4 2 y r a u n a J 1 r e b o t c O 4 2 8 4 . 0 1 - - - - - - - - - - - - 6 1 0 2 9 0 0 2 6 1 0 2 r e b o t c O 4 2 y r a u n a J 1 r e b o t c O 4 2 8 4 . 0 1 - - - - - - - 6 8 . 2 6 8 . 2 6 8 . 2 - - 7 7 . 1 4 9 . 1 5 0 . 2 6 7 . 0 6 7 . 0 - - 6 7 . 0 - - - 6 7 . 0 6 0 0 2 y a M 4 6 0 0 2 y a M 4 6 0 0 2 y a M 4 6 0 0 2 r e b o t c O 4 2 6 0 0 2 r e b o t c O 4 2 - - - - - - 6 0 0 2 6 0 0 2 r e b o t c O 4 2 - - r e b o t c O 4 2 0 0 9 , 9 1 6 0 0 2 r e b o t c O 4 2 0 0 0 , 3 2 r e b o t c O 4 2 0 0 2 , 6 1 - 6 0 0 2 6 0 0 2 r e b o t c O 4 2 - - 0 0 0 , 0 0 5 t n i l F - e c i l l E C J 0 0 0 , 0 0 0 , 1 0 0 0 , 0 0 0 , 1 - - 0 0 7 , 3 6 0 0 9 , 5 6 n o s r e d n A H J s e v i t u c e x E n w o r B J T s e m a E E M 1 n i a d a u o G E J 0 0 7 , 3 6 e n a l r a f c a M S M - - - 0 0 2 , 3 9 n o s n i k l i W J R w o s a W C P 2 d o o W J B g n u o Y T J 0 0 1 , 9 5 0 0 5 , 6 8 7 , 2 l a t o T . 6 0 0 2 h c r a M 0 3 n o d e n g i s e r n i a d a u o G E J r M . 6 0 0 2 e n u J 5 1 n o d e n g i s e r d o o W J B r M 1 2 : 1 1 E L B A T s r o t c e r i D e m a N 6 0 0 2 68 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:51 AM Page 69 TABLE 12: SHARES ISSUED ON EXERCISE OF COMPENSATION OPTIONS AND VESTING OF SARS (CONSOLIDATED) Exercise of compensation options Shares issued Number Paid per share $ Unpaid per share $ Vesting of SARs Shares issued Number Paid per share $ Unpaid per share $ Name 2006 Directors J C Ellice-Flint Executives J H Anderson T J Brown M E Eames J E Gouadain1 M S Macfarlane P C Wasow R J Wilkinson B J Wood2 J T Young - - 200,000 - 200,000 - - - 45,085 27,650 - - - 6.52 - 6.52 - - - 6.38 8.46 - - - - - - - - - - - - Total 1 Mr J E Gouadain resigned on 30 March 2006. 2 Mr B J Wood resigned on 15 June 2006. 472,735 - 4,300 - - 10,000 4,800 11,800 8,850 - - 13,000 52,750 - - - - - - - - - - - - - - - - - - - - - - Santos Annual Report 2006 69 SAN175 AW2 Fins 21/3/07 10:36 AM Page 70 Income Statements For the year ended 31 December 2006 Consolidated Santos Ltd 2006 $million 1,188.4 – 2005 $million 721.2 – 1,188.4 (703.3) 485.1 31.3 6.1 (402.7) 119.8 36.9 (169.6) (132.7) (12.9) (97.6) (110.5) – (110.5) – (110.5) (110.5) 721.2 (413.5) 307.7 19.4 43.9 306.7 677.7 52.1 (108.9) (56.8) 620.9 (102.2) 518.7 – 518.7 – 518.7 518.7 Total product sales Less sales from discontinued operations Continuing operations Product sales Cost of sales Gross profit Other revenue Other income Other expenses Operating profit before net financing costs Financial income Financial expenses Net financing costs Profit/(loss) before tax Income tax expense Profit/(loss) after tax from continuing operations Discontinued operations Loss after tax from discontinued operations Net profit/(loss) for the period Attributable to: Minority interest Equity holders of Santos Ltd Earnings per share for profit from continuing operations attributable to the ordinary equity holders of Santos Ltd (¢) Basic earnings per share Diluted earnings per share Earnings per share for profit attributable to the ordinary equity holders of Santos Ltd (¢) Basic earnings per share Diluted earnings per share Dividends per share ($) Ordinary shares Redeemable preference shares Note 2 3 2 2 3 5 5 6 7 23 23 23 23 22 22 2006 $million 2,769.1 (61.2) 2,707.9 (1,302.2) 1,405.7 29.0 25.0 (344.2) 1,115.5 12.0 (135.5) (123.5) 992.0 (321.1) 670.9 (27.5) 643.4 – 643.4 643.4 107.4 103.1 102.8 98.9 0.40 5.0575 2005 $million 2,462.8 (119.9) 2,342.9 (1,169.5) 1,173.4 29.0 89.4 (86.0) 1,205.8 8.3 (79.1) (70.8) 1,135.0 (371.4) 763.6 (1.5) 762.1 – 762.1 762.1 124.7 117.9 124.4 117.7 0.36 5.1035 The income statements are to be read in conjunction with the notes to the consolidated financial statements. 70 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 71 Balance Sheets As at 31 December 2006 Current assets Cash and cash equivalents Trade and other receivables Inventories Other current assets Assets classified as held for sale 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 non-current assets Total non-current assets Total assets Current liabilities Trade and other payables Deferred income Interest-bearing loans and borrowings Current tax liabilities Provisions Other current liabilities Liabilities directly associated with assets classified as held for sale 7 Total current liabilities Non-current liabilities Deferred income Interest-bearing loans and borrowings Deferred tax liabilities Provisions Other non-current liabilities Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Equity attributable to equity holders of Santos Ltd Equity attributable to minority interest Total equity 19 17 20 21 22 22 22 22 Consolidated Santos Ltd 2006 $million 2005 $million 2006 $million 2005 $million Note 8 9 10 11 7 12 13 14 16 17 11 18 19 20 21 158.7 487.5 167.4 36.1 849.7 210.8 1,060.5 360.3 5,232.7 117.2 45.2 75.1 11.9 5,842.4 6,902.9 441.8 6.4 159.7 213.5 134.8 8.9 965.1 16.8 981.9 11.3 1,490.0 517.5 539.1 7.6 2,565.5 3,547.4 3,355.5 2,254.4 (198.9) 1,300.0 3,355.5 – 3,355.5 229.2 511.8 144.0 27.2 912.2 – 912.2 339.1 4,792.5 73.5 14.8 57.4 6.6 5,283.9 6,196.1 392.2 4.9 11.1 184.7 72.4 1.9 667.2 – 667.2 13.8 1,817.0 512.9 215.0 6.3 2,565.0 3,232.2 2,963.9 2,212.0 (178.3) 930.2 2,963.9 – 2,963.9 52.8 1,499.5 75.0 1.3 1,628.6 – 1,628.6 20.7 1,718.9 94.8 2,854.1 – 7.9 4,696.4 6,325.0 562.9 1.7 2,583.6 207.8 62.9 – 3,418.9 – 3,418.9 – – 65.3 182.3 – 247.6 3,666.5 2,658.5 2,254.4 3.8 400.3 2,658.5 – 2,658.5 65.5 1,376.2 67.3 – 1,509.0 – 1,509.0 17.7 1,727.4 52.4 2,995.3 – 4.8 4,797.6 6,306.6 379.7 1.1 2,450.9 176.6 54.8 1.3 3,064.4 – 3,064.4 – – 165.6 75.8 – 241.4 3,305.8 3,000.8 2,212.0 4.4 784.4 3,000.8 – 3,000.8 The balance sheets are to be read in conjunction with the notes to the consolidated financial statements. Santos Annual Report 2006 71 SAN175 AW2 Fins 21/3/07 10:36 AM Page 72 Cash Flow Statements For the year ended 31 December 2006 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)/refunds Borrowing costs paid Income taxes paid Consolidated Santos Ltd 2006 $million 2005 $million 2006 $million 2005 $million Note 2,860.6 – 12.6 14.7 95.4 29.2 (915.7) (94.2) (119.0) (333.3) 1,550.3 (377.0) (721.2) (54.9) (113.6) (5.2) – (35.0) – (20.5) 66.3 – 2,474.7 0.1 8.6 12.8 55.9 53.8 (696.3) (209.3) (86.3) (156.1) 1,457.9 (243.7) (787.4) (23.2) (9.3) (556.1) (5.0) (9.7) – 3.1 80.7 29.0 1,267.4 – 36.9 23.3 36.0 49.4 (393.6) 21.0 (156.6) (282.9) 600.9 (47.9) (267.9) (49.5) (14.8) – – (4.2) (176.0) (5.1) 16.1 – 729.9 0.1 52.1 19.7 35.8 16.8 (259.5) (110.8) (99.9) (113.8) 270.4 (106.8) (212.6) (24.6) (451.9) (108.1) (5.0) (0.3) (426.5) 0.7 32.3 29.0 (1,261.1) (1,521.6) (549.3) (1,273.8) (231.7) 5.7 (139.8) 53.8 – – – (312.0) (22.8) 229.2 (6.4) 200.0 (200.2) 27.6 (249.6) 592.9 – – 0.5 171.2 107.5 126.1 (4.4) 229.2 (231.7) 5.7 – – 215.1 (52.9) – (63.8) (12.2) 65.5 (0.5) 52.8 (200.2) 27.6 (1.0) – 1,393.5 (188.8) – 1,031.1 27.7 39.3 (1.5) 65.5 Net cash provided by operating activities 27 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 Repayments of borrowings Drawdown of borrowings Net receipts from controlled entities Net payments to controlled entities Other financing activities Net cash (used in)/provided by financing activities Net (decrease)/increase in cash and cash equivalents 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 8 The cash flow statements are to be read in conjunction with the notes to the consolidated financial statements. 72 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 73 Statements of Recognised Income and Expense For the year ended 31 December 2006 Consolidated Santos Ltd 2006 $million 2005 $million 2006 $million 2005 $million Note 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 Hedging reserve Fair value reserve Foreign exchange translation differences Net (loss)/gain on hedge of net investment in foreign subsidiaries Cash flow hedges: Gains taken to equity Change in fair value of equity securities available for sale, net of tax Share-based payment transactions Actuarial loss on defined benefit plan, net of tax 29 28 Net (expense)/income recognised directly in equity Profit/(loss) for the period Total recognised income and expense for the period Attributable to: Equity holders of Santos Ltd Minority interest 22 – – – (81.6) 52.0 – 7.6 2.6 (6.3) (25.7) 643.4 617.7 617.7 – 617.7 (2.4) (7.8) 1.1 57.1 (46.1) 7.8 4.9 2.4 (0.3) 16.7 762.1 778.8 778.8 – 778.8 – – – – – – (2.0) 2.6 (6.3) (5.7) (110.5) (116.2) (116.2) – (116.2) – (7.8) (0.1) – – 7.8 4.5 2.4 (0.3) 6.5 518.7 525.2 525.2 – 525.2 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. Santos Annual Report 2006 73 SAN175 AW2 Fins 21/3/07 10:36 AM Page 74 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 1. SIGNIFICANT ACCOUNTING POLICIES Santos Ltd (“the Company”) is a company limited by shares incorporated in Australia whose shares are publicly traded on the Australian Securities Exchange (“ASX”). The consolidated financial report of the Company for the year ended 31 December 2006 comprises the Company and its controlled entities (“the consolidated entity”). The financial report was authorised for issue in accordance with a resolution of the Directors on 22 February 2007. (A) STATEMENT OF COMPLIANCE The financial report is a general purpose financial report which has been prepared in accordance with the requirements of the Corporations Act 2001 and Australian Accounting Standards. Compliance with Australian Accounting Standards ensures that the financial statements and notes of the consolidated entity comply with International Financial Reporting Standards (“IFRSs”). The Company’s financial statements and notes also comply with IFRS except for the disclosure requirements in IAS 32 Financial Instruments: Disclosure and Presentation as the Australian equivalent Accounting Standard, AASB 132 Financial Instruments: Disclosure and Presentation does not require such disclosures to be presented by the Company where its separate financial statements are presented together with the consolidated financial statements. (B) BASIS OF PREPARATION The financial report is presented in Australian dollars. The financial report is prepared on the historical cost basis, except for derivative financial instruments and available-for-sale investments, which are measured at 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 74 Santos Annual Report 2006 Directors’ Report have been rounded to the nearest hundred thousand dollars, unless otherwise stated. The following standards and amendments were available for early adoption but have not been applied by the consolidated entity in these financial statements: • AASB 7 Financial Instruments: Disclosure replaces the presentation requirements of financial instruments in AASB 132 Financial Instruments: Disclosure and Presentation, and is applicable for annual reporting periods beginning on or after 1 January 2007. • AASB 2005-10 Amendments to Australian Accounting Standards makes consequential amendments to a number of accounting standards following the release of AASB 7, and is applicable for annual reporting periods beginning on or after 1 January 2007. • AASB 101 Presentation of Financial Statements has been revised to align more closely with the International Accounting Standard IAS 1 Presentation of Financial Statements, and is applicable for annual reporting periods beginning on or after 1 January 2007. The consolidated entity plans to adopt the above standards from 1 January 2007. The initial application of the standards is not expected to have an impact on the financial results of the Company and the consolidated entity as the standards and the amendment are concerned only with disclosures. The accounting policies set out below have been applied consistently to all periods presented in the consolidated financial report. 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. Minority interests Minority interests in the net assets of consolidated entities are allocated their share of net profit after tax in the income statement, and are identified separately from the consolidated entity’s equity in those entities. Minority interests consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since the date of the combination. Jointly controlled assets Santos’ exploration and production activities are often conducted through joint venture arrangements governed by joint operating agreements, production sharing contracts or similar contractual relationships. A summary of the consolidated entity’s interests in its significant joint ventures is included in note 26. SAN175 AW2 Fins 21/3/07 10:36 AM Page 75 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A joint venture characterised as a jointly controlled asset involves the joint control, and often the joint ownership, by the venturers of one or more assets contributed to, or acquired for the purpose of, the joint venture and dedicated to the purposes of the joint venture. The assets are used to obtain benefits for the venturers. Each venturer may take a share of the output from the assets and each bears an agreed share of expenses incurred. Each venturer has control over its share of future economic benefits through its share of jointly controlled assets. The interests of the Company and of the consolidated entity in unincorporated joint ventures are brought to account by recognising in the financial statements the consolidated entity’s share of jointly controlled assets, share of expenses and liabilities incurred, and the income from the sale or use of its share of the production of the joint venture in accordance with the revenue policy in note 1(X). (D) FOREIGN CURRENCY 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. (E) DERIVATIVE FINANCIAL INSTRUMENTS 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 that may be used are forward foreign exchange contracts, foreign currency swaps, interest rate swaps and commodity crude oil 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 fair value. 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 remeasurement 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. (F) HEDGING 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 Santos Annual Report 2006 75 SAN175 AW2 Fins 21/3/07 10:36 AM Page 76 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 non-financial 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). 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. 76 Santos Annual Report 2006 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. (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(Q). Business combinations All business combinations are accounted for by applying the purchase method. The purchase method of accounting involves allocating the cost of the business combination to the fair value of the assets acquired and the liabilities and contingent liabilities assumed at the date of acquisition. (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 prospective 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, alternatively, by its sale; 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. The carrying amounts of the consolidated entity’s exploration and evaluation assets are reviewed at each balance sheet date, in conjunction with the impairment review process referred to in note 1(P), to determine whether any of the following indicators of impairment exists: (i) tenure over the licence area has expired during the period or will expire in the near future, and is not expected to be renewed; (ii) substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is not budgeted or planned; (iii) exploration for and evaluation of resources in the specific area has not led to the discovery of commercially viable quantities of resources, and the consolidated entity has decided to discontinue activities in the specific area; or SAN175 AW2 Fins 21/3/07 10:36 AM Page 77 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (iv) sufficient data exists to indicate that although a development is likely to proceed the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or from sale. Where an indicator of impairment exists a formal estimate of the recoverable amount is made, and any resultant impairment loss is recognised in the income statement. When a discovered 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 Oil and gas assets are usually single oil or gas fields being developed for future production or which are in the production phase. Where several individual oil or gas fields are to be produced through common facilities the individual oil or gas fields and the associated production facilities are managed and reported as a single oil and gas asset. 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 sub-surface 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. 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 note 1(K). Ongoing exploration and evaluation activities Often the initial discovery and development of an oil or gas asset will lead to ongoing exploration for, and evaluation of, potential new oil or gas fields in the vicinity with the intention of producing any near field discoveries using the infrastructure in place. Exploration and evaluation expenditure associated with oil and gas assets is accounted for in accordance with the policy in note 1(H). Exploration and evaluation expenditure amounts capitalised in respect of oil and gas assets are separately disclosed in note 13. (J) LAND, BUILDINGS, PLANT AND EQUIPMENT Land and buildings are measured at cost less accumulated depreciation on buildings, less any impairment losses recognised. Plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses. Such cost includes the cost of rotable spares and insurance spares that are purchased for back up or rotation with specific plant and equipment items. Similarly, the cost of major cyclical maintenance is recognised in the carrying amount of the related plant and equipment as a replacement only if it is eligible for capitalisation. Any remaining carrying amount from the cost of the previous major cyclical maintenance is derecognised. All other repairs and maintenance are recognised in profit or loss as incurred. Depreciation on buildings, plant and equipment is calculated in accordance with note 1(K). (K) DEPRECIATION AND DEPLETION Depreciation charges are calculated to write-off the depreciable value of buildings, plant and equipment over their estimated economic useful lives to the consolidated 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: • Buildings • Plant and equipment 20 – 50 years – Computer equipment 3 – 5 years – Motor vehicles 4 – 7 years – Furniture and 10 – 20 years fittings – Pipelines 10 – 30 years – Plant and facilities 10 – 50 years Depreciation of offshore plant and equipment is calculated using the units of production method on a cash generating unit basis (refer note 1(P)) 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 sub-surface development expenditure (“Sub-surface assets”) over the life of the estimated Proven plus Probable (“2P”) reserves in a cash generating unit, together with future sub-surface costs necessary to develop the hydrocarbon reserves in the respective cash generating units. The heating value measurement used for the conversion of volumes of Santos Annual Report 2006 77 SAN175 AW2 Fins 21/3/07 10:36 AM Page 78 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. (L) INVESTMENTS Financial instruments held by the consolidated entity and the Company 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 and the Company 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. (M) 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. 78 Santos Annual Report 2006 (N) TRADE AND OTHER RECEIVABLES Trade and other receivables are initially recognised at fair value, which in practice is the equivalent of cost, less any impairment losses. Trade receivables are non-interest bearing and settlement terms are generally within 30 days. Long-term receivables are discounted and are stated at amortised cost, less impairment losses. Trade and other receivables are assessed for indicators of impairment at each balance sheet date. Where a receivable is impaired the amount of the impairment is the difference between the asset’s carrying value and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the receivable is reduced through the use of an allowance account. Changes in the allowance account are recognised in profit or loss. (O) CASH AND CASH EQUIVALENTS Cash and cash equivalents comprise cash balances and short-term deposits that are readily convertible to known amounts of cash, are subject to an insignificant risk of changes in value, and have an original maturity of three months or less. (P) 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. Exploration and evaluation assets are assessed for impairment in accordance with note 1(H). 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 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, an asset’s 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 assets the estimated future cash flows are based on estimates of hydrocarbon reserves, future production profiles, commodity prices, operating costs 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. SAN175 AW2 Fins 21/3/07 10:36 AM Page 79 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. Impairment losses recognised on equity instruments classified as available-for-sale financial assets are not reversed. in the estimate are reflected in the present value of the restoration provision at 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. (R) EMPLOYEE BENEFITS (Q) 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, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. 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 future expenditure required to settle the restoration obligation at the reporting date, based on current legal requirements. Future restoration costs are reviewed annually and any changes Wages, salaries and annual leave Liabilities for employee benefits for wages, salaries and annual leave that are expected to be settled within twelve months of the reporting date 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’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. Actuarial gains or losses that arise 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 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). Santos Annual Report 2006 79 SAN175 AW2 Fins 21/3/07 10:36 AM Page 80 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 is measured using the Monte Carlo Simulation Method, taking into account the terms and market 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, taking into account the terms and market conditions upon which the SARs were granted. 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. (S) INTEREST-BEARING BORROWINGS 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 80 Santos Annual Report 2006 recognised in the income statement over the period of the borrowings on an effective interest basis. capital classified as equity are recognised as distributions within equity. Fixed rate notes that are hedged by an interest rate swap are recognised at fair value (refer note 1(F)). (T) CAPITALISATION OF BORROWING COSTS Borrowing costs, including interest and finance charges 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. (U) 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. (V) TRADE AND OTHER PAYABLES Trade and other payables are recognised when the related goods or services are received, at the amount of cash or cash equivalent that will be required to discharge the obligation, gross of any settlement discount offered. Trade payables are non-interest-bearing and are settled on normal terms and conditions. (W) SHARE CAPITAL Ordinary share capital Ordinary share capital is classified as equity. Dividends Dividends are recognised as a liability at the time the Directors resolve to pay or declare the dividend. Transaction costs Transaction costs of an equity transaction are accounted for as a deduction from equity, net of any related income tax benefit. (X) REVENUE Revenue is recognised in the income statement when the significant risks and rewards of ownership have been transferred to the buyer. Revenue is recognised and measured at the fair value of the consideration or contributions received, net of goods and services tax (“GST”), to the extent it is probable that the economic benefits will flow to the consolidated entity and the revenue can be reliably measured. Sales revenue Sales revenue is recognised on the basis of the consolidated entity’s interest in a producing field (“entitlements” method), when the physical product and associated risks and rewards of ownership pass to the purchaser, which is generally at the time of ship or truck loading, or on the product entering the pipeline. Revenue earned under a production sharing contract (“PSC”) is recognised on a net entitlements basis according to the terms of the PSC. Dividends Dividend revenue from controlled entities is recognised as the dividends are declared, and from other parties as the dividends are received. Preference share capital Overriding royalties 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 Royalties recognised on farmed-out operating lease rights are recognised as revenue as they accrue in accordance with the terms of the overriding royalty agreements. SAN175 AW2 Fins 21/3/07 10:36 AM Page 81 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Pipeline tariffs and processing tolls Tariffs and tolls charged to other entities for use of pipelines and facilities owned by the consolidated entity are recognised as revenue as they accrue in accordance with the terms of the tariff and tolling agreements. Trading revenue Trading revenue represents the net revenue derived from the purchase and subsequent sale of hydrocarbon products from third parties where the risks and benefits of ownership of the product do not pass to the consolidated entity, or where the consolidated entity acts as an agent or broker with compensation on a commission or fee basis. (Y) OTHER INCOME Other income is recognised in the income statement at the fair value of the consideration received or receivable, net of GST, 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. (Z) EXPENSES Government royalties, petroleum resource rent tax and similar taxes Government royalties, petroleum resource rent tax (“PRRT”) and similar taxes 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 accordance with government legislative requirements. Some oil and gas industry participants are of the view that PRRT and similar taxes are more appropriately accounted for as an income tax by applying AASB 112 Income Taxes. The Company notes that there has been no definitive guidance from any of the relevant accounting standards setting bodies and that there remains divergent practices resulting in 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. Had PRRT and similar taxes been accounted for as an income tax under AASB 112, a deferred tax liability would have been recognised for $108.9 million (2005: deferred tax asset $44.9 million). Profit before tax would have increased by $30.0 million (2005: $52.5 million), the income tax expense attributed to these taxes would have been $173.5 million (2005: $86.2 million expense), and profit after tax would have decreased by $143.5 million (2005: $85.4 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. (AA) 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. (AB) 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. Santos Annual Report 2006 81 SAN175 AW2 Fins 21/3/07 10:36 AM Page 82 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 tax-consolidated 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 tax-consolidated group. 82 Santos Annual Report 2006 (AC) DISCONTINUED OPERATIONS AND NON-CURRENT ASSETS HELD FOR SALE A discontinued operation is a component of the consolidated entity that has been disposed of, or is classified as held for sale, and that represents a major line of business or geographical area of operations, is part of a single coordinated plan to dispose of such a line of business or area of operations. The results of discontinued operations are presented separately on the face of the income statement. Non-current assets and disposal groups are classified as held for sale and measured at the lower of their carrying amount and fair value less costs to sell if their carrying amount will be recovered principally through a sale transaction. They are not depreciated or amortised. For an asset or disposal group to be classified as available for sale, it must be available for immediate sale in its present condition and its sale must be highly probable. An impairment loss is recognised for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell. A gain is recognised for any subsequent increases in fair value less costs to sell of an asset (or disposal group) but not in excess of any cumulative impairment loss previously recognised. A gain or loss not previously recognised by the date of the sale of the non-current asset (or disposal group) is recognised at the date of derecognition. (AD) SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS The carrying amounts of certain assets and liabilities are often determined based on management’s judgement regarding estimates and assumptions of future events. The reasonableness of 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 key judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amount of certain assets and liabilities within the next annual reporting period are: Estimates of reserve quantities 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. The estimates of reserves may change from period to period as the economic assumptions used to estimate the reserves can change from period to period, and as additional geological data is generated during the course of operations. 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. Exploration and evaluation The consolidated entity’s policy for exploration and evaluation expenditure is discussed in note 1(H). The application of this policy requires management to make certain estimates and assumptions as to future events and circumstances, particularly in relation to the assessment of whether economic quantities of reserves have been found. Any such estimates and assumptions may change as new information becomes available. If, after having capitalised exploration and evaluation expenditure, management concludes SAN175 AW2 Fins 21/3/07 10:36 AM Page 83 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) that the capitalised expenditure is unlikely to be recovered by future exploitation or sale, then the relevant capitalised amount will be written off to the income statement. The carrying amount of exploration and evaluation assets is disclosed in note 12. Provision for restoration The consolidated entity estimates the future removal and restoration costs of oil and gas production facilities, wells, pipelines and related assets at the time of installation of the assets. In most instances the removal of these assets will occur many years in the future. The estimate of future removal costs therefore requires management to make judgements regarding the removal date, future environmental legislation, the extent of restoration activities required and future removal technologies. The carrying amount of the provision for restoration is disclosed in note 20. Impairment of oil and gas assets The consolidated entity assesses whether oil and gas assets are impaired on a semi-annual basis. This requires an estimation of the recoverable amount of the cash generating unit to which the assets belong. The assumptions used in the estimation of recoverable amount and the carrying amount of oil and gas assets are discussed in notes 13 and 15. Petroleum resource rent tax The consolidated entity’s accounting policy for petroleum resource rent tax (“PRRT”) is discussed in note 1(Z). Whether or not PRRT is an income tax within the scope of AASB 112 Income Taxes is a matter of judgement concerning the nature of PRRT and whether the PRRT taxable amount is sufficiently related to profit in the usual sense. This issue is discussed further in note 1(Z). Banjar Panji-1 incident The consolidated entity has raised a provision for potential remediation and related costs that may arise from the Banjar Panji-1 incident. The amounts recognised and the basis of the estimate are discussed in note 3. Santos Annual Report 2006 83 SAN175 AW2 Fins 21/3/07 10:36 AM Page 84 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 Consolidated 2006 $million 915.9 1,196.9 388.3 206.8 2,707.9 – 15.5 3.2 5.6 4.7 29.0 2005 $million 727.3 1,100.3 330.9 184.4 2,342.9 0.1 13.0 5.0 5.3 5.6 29.0 Santos Ltd 2006 $million 2005 $million 381.6 650.1 81.8 74.9 1,188.4 – 24.2 (0.3) 4.9 2.5 31.3 333.4 237.4 84.8 65.6 721.2 0.1 19.8 (4.6) 2.6 1.5 19.4 2,736.9 2,371.9 1,219.7 740.6 21.8 – 3.2 – 25.0 329.9 53.0 382.9 50.8 109.0 30.0 189.8 572.7 666.9 69.1 (6.5) 34.4 15.8 22.9 16.3 89.4 313.8 45.9 359.7 35.0 106.8 52.5 194.3 554.0 524.5 100.9 (9.9) 1,302.2 1,169.5 64.0 1.2 65.2 (0.8) (0.2) 268.8 11.2 – – 344.2 72.2 1.0 73.2 3.8 (1.3) 142.1 (131.8) – – 86.0 – – 6.1 – 6.1 112.4 35.3 147.7 24.4 40.8 – 65.2 212.9 418.1 67.0 5.3 703.3 47.1 0.3 47.4 0.5 – 19.9 2.9 6.3 325.7 402.7 23.7 – 5.1 15.1 43.9 95.0 15.0 110.0 9.9 49.1 – 59.0 169.0 187.8 66.9 (10.2) 413.5 48.6 0.2 48.8 – 1.9 31.5 (50.5) – (338.4) (306.7) 2. REVENUE AND OTHER INCOME Product sales: Gas, ethane and liquefied gas Crude oil Condensate and naphtha Liquefied petroleum gas Other revenue: Dividends from other entities Overriding royalties Pipeline tariffs and tolls Trading revenue Other Total revenue Other income: Insurance recovery 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 Depreciation and depletion Third party gas purchases (Increase)/decrease in product stock Total cost of sales Other expenses: Selling, general and administrative expenses: Operating expenses Depreciation Foreign exchange (gains)/losses Hedge ineffectiveness (gains)/losses Exploration and evaluation expensed Net impairment loss/(reversal) of oil and gas assets (refer note 15) Impairment loss on receivables due from controlled entities Net impairment loss/(reversal) of investment in controlled entities 84 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 85 3. EXPENSES (CONTINUED) Profit before tax from continuing operations includes the following items: Depreciation and depletion: Depletion of exploration and development expenditure Depreciation of plant and equipment Depreciation of buildings Employee benefits expense (includes share-based payments expense) Write-down of inventories Operating lease rentals: Minimum lease payments Contingent rentals Amounts that are unusual because of their nature, size, or incidence: Included in exploration and evaluation expensed is the following amount related to the Banjar Panji-1 well incident: Consolidated Santos Ltd 2006 $million 2005 $million 2006 $million 2005 $million 400.3 265.1 2.7 668.1 174.7 0.4 73.2 0.6 296.8 226.2 2.5 525.5 143.5 4.0 55.0 0.6 296.7 120.4 1.3 418.4 171.6 0.2 48.5 0.2 104.6 82.1 1.3 188.0 139.3 2.4 24.2 0.2 Amount provided for potential remediation and related costs 88.5 – – – Banjar Panji-1 well incident The Banjar Panji-1 onshore exploration well is located near Surabaya, East Java, within the area of the Brantas Production Sharing Contract (“PSC”). In late May 2006 non-toxic mud started flowing to the surface through vents about 200 metres from the drill hole. The cause of the incident is yet to be determined and is the subject of an Indonesian police investigation. Mud and water however continue to flow from the vents, affecting the site of the drilling operations as well as approximately 450 hectares of land and a number of villages in the area. The Company, through its subsidiary Santos Brantas Pty Ltd (“STOB”), has a non-operated 18% interest in the Brantas PSC, which is operated by 50% participant Lapindo Brantas Inc (“Lapindo”). The other party to the PSC is an Indonesian company, PT Medco E & P Brantas (“Medco”). The flow of mud and water has resulted in significant property damage, the interruption of local infrastructure and the need to relocate a significant number of local villagers. On 8 September 2006, the President of Indonesia appointed a national taskforce (“National Mitigation Team”) to take integrated operational measures to mitigate the mudflow. This includes efforts to stop the mudflow and address social, regional and environmental issues including the relocation of families within and around the affected area, the drilling of relief wells to attempt to stem the mudflow, the disposal of the mud and the relocation of infrastructure. According to Lapindo, efforts to contain and manage the mudflow are continuing and the development of plans for the establishment of long-term environmentally sustainable solutions concerning mud disposal and rehabilitation of the affected areas are currently underway. STOB remains committed to supporting Lapindo and the National Mitigation Team in their efforts to manage the incident and assist the community. STOB has not admitted any liability in relation to the incident under the PSC or the Operating Agreement or at all. On 18 October 2006, Lapindo announced to the Jakarta Stock Exchange that its estimate of the costs for drilling relief wells and short-term mud management in relation to the incident to be US$180 million. In those circumstances the Company announced to the market on 19 October 2006 that it considered that this provision would need to be revised to approximately $43.7 million on the basis of the information provided by the Operator. The Company has considered the adequacy of the 19 October 2006 estimate and, while not accepting any liability in relation to the incident or its ongoing management or any remediation of the area, believes it further prudent to revise its provision to $88.5 million, which incorporates mud management and other costs (including general costs associated with managing the incident as well as relief operations). This provision, which is the Board’s prudent estimate of the costs that may arise relating to the incident, reflects an assumption (based upon an assessment of information currently available) that a resolution will ultimately be agreed between the Government, Lapindo Brantas Inc, the non-operating PSC parties (Santos Brantas Pty Ltd and PT Medco E & P Brantas) and all other relevant parties as to the costs related to long-term mud management options, proposed costs of infrastructure relocation and any third party claims. With the mudflow continuing, the complexity of the incident and the dynamic nature of the ongoing work, there is significant uncertainty surrounding these issues. The resolution of these uncertainties may ultimately be on a different basis than presently assumed which could result in the costs borne by STOB being significantly different than the current estimate. Santos Annual Report 2006 85 SAN175 AW2 Fins 21/3/07 10:36 AM Page 86 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 3. EXPENSES (CONTINUED) STOB has continued, subject to a full reservation of its legal rights, to pay cash calls by Lapindo in relation to Brantas PSC operations, in the amount of US$16.3 million since the date of the incident to 31 December 2006. Medco has alleged that Lapindo acted negligently in relation to the operation of the Banjar Panji-1 well. STOB is aware that Medco has commenced and is proceeding with arbitration under the Operating Agreement, which is being defended by Lapindo. STOB is not a party to the arbitration and has reserved all rights in relation to the incident and its management. The Company’s accounting policy in respect of insurance claims is to recognise insurance proceeds only when the insurers have granted indemnity or there is a high probability that indemnity will be granted. In accordance with this policy, the Company has recognised an amount of A$21.8 million as insurance proceeds, leading to net costs of A$66.7 million (after-tax A$66.7 million). The insurance proceeds include STOB’s share of the US$25.0 million well control insurance held by the Joint Venture, of which a small initial amount has already been received (by the Joint Venture). The balance relates to the Company’s own well control insurance. The Company has therefore recognised an amount that reflects a progress claim under the Company’s own policy, while it continues to work towards a resolution with its insurers. Given the uncertainties relating to the incident and its resolution, the Company will continue to review the adequacy of its provision as further information comes to light. 4. EARNINGS Earnings before interest, tax, depreciation, depletion, exploration and impairment (“EBITDAX”) is calculated as follows: Continuing operations: Profit/(loss) before tax Add back: Net financing costs Earnings before interest and tax (“EBIT”) Add back: Depreciation and depletion Exploration and evaluation expensed Net impairment loss/(reversal) of oil and gas assets Impairment loss on receivables due from controlled entities Net impairment loss/(reversal) of investment in controlled entities Discontinued operations EBITDAX 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(Q)) Interest expense on defined benefit obligation Financial expenses Net financing costs Consolidated Santos Ltd 2006 $million 2005 $million 2006 $million 2005 $million 992.0 1,135.0 (12.9) 123.5 1,115.5 668.1 268.8 11.2 – – 2,063.6 80.4 2,144.0 – 12.0 12.0 – 120.3 (14.5) 105.8 25.4 4.3 135.5 123.5 70.8 1,205.8 525.5 142.1 (131.8) – – 1,741.6 97.1 1,838.7 – 8.3 8.3 – 89.1 (28.0) 61.1 14.3 3.7 79.1 70.8 132.7 119.8 418.4 19.9 2.9 6.3 325.7 893.0 – 893.0 34.2 2.7 36.9 156.1 0.9 – 157.0 8.3 4.3 169.6 132.7 620.9 56.8 677.7 188.0 31.5 (50.5) – (338.4) 508.3 – 508.3 48.9 3.2 52.1 99.5 0.5 – 100.0 5.2 3.7 108.9 56.8 86 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 87 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/(loss) Profit/(loss) before tax from continuing operations Loss before tax from discontinuing operations Profit/(loss) before tax Prima facie income tax at 30% (2005: 30%) Increase/(decrease) in income tax expense due to: Non-deductible depletion and depreciation Abandonment of exploration Net impairment loss/(reversal) of investments in controlled entities Foreign losses not recognised Gain on sale of oil and gas assets Tax losses recognised Under/(over) provided in prior years Other Income tax expense on pre-tax net profit/(loss) Aggregate income tax expense is attributable to: Continuing operations Discontinued operations Deferred tax recognised directly in equity Hedges of investments in foreign operations Change in available-for-sale financial assets Foreign exchange translation differences Actuarial loss on defined benefit plan Consolidated Santos Ltd 2006 $million 2005 $million 2006 $million 2005 $million 372.1 5.1 377.2 (40.6) (15.3) (55.9) 321.3 992.0 (27.3) 964.7 289.4 6.1 – – 41.3 – (15.3) 5.1 (5.3) 321.3 321.1 0.2 321.3 25.4 3.8 (2.4) (2.7) 24.1 320.7 5.5 326.2 36.6 8.6 45.2 371.4 1,135.0 (1.5) 1,133.5 340.1 3.4 1.2 – 18.9 (7.1) – 5.5 9.4 371.4 371.4 – 371.4 (15.7) 2.6 7.1 (0.2) (6.2) 179.5 (0.4) 179.1 (81.5) – (81.5) 97.6 (12.9) – (12.9) (3.9) 2.2 1.9 97.6 – – – (0.4) 0.2 97.6 97.6 – 97.6 – (0.3) – (2.7) (3.0) 58.4 14.2 72.6 29.6 – 29.6 102.2 620.9 – 620.9 186.2 6.6 (0.6) (101.5) – – – 14.2 (2.7) 102.2 102.2 – 102.2 – 1.9 – (0.2) 1.7 Santos Annual Report 2006 87 SAN175 AW2 Fins 21/3/07 10:36 AM Page 88 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 7. DISCONTINUED OPERATIONS On 5 December 2006, the Company announced that a decision had been made to sell all of its exploration and production activities in the United States, part of the international reporting segment (refer note 33). This decision was made as part of a broader strategy of increasing the Company’s investment in South East Asia in order to identify new core areas for exploration where there is a clear strategic or technical advantage and an ability to build material acreage position. It is anticipated that a sale agreement will be in place by March 2007. The results of the discontinued operation for the year are presented below: 2006 $million 2005 $million 119.9 0.2 0.5 120.6 (17.5) (34.5) (52.0) (62.1) (0.5) (6.0) (1.0) (0.5) (122.1) (1.5) – (1.5) – – (1.5) Sales revenue Net gain on sale of non-current assets Other income Revenue and other income Cash cost of sales Depreciation and depletion Cost of sales Exploration expensed Net impairment loss Selling and administration costs Selling and administration depreciation Net financing costs Expenses Gross loss Loss recognised on remeasurement to fair value Loss before tax from discontinued operations Tax expense: Related to pre-tax loss Related to measurement to fair value Loss for the year from discontinued operations The major classes of assets and liabilities are as follows: Assets Cash and cash equivalents Trade and other receivables Inventories Exploration and evaluation assets Oil and gas assets Assets classified as held for sale Liabilities Trade and other payables Provisions Liabilities directly associated with assets classified as held for sale Net assets attributable to discontinued operations The net cash flows are as follows: Operating activities Investing activities: Payments for oil and gas activities Proceeds from sale of assets Financing activities Net cash inflow 61.2 31.1 7.8 100.1 (12.2) (23.0) (35.2) (79.0) (5.1) (7.5) (1.1) 0.5 (127.4) (27.3) – (27.3) (0.2) – (27.5) 41.3 9.1 17.6 21.1 121.7 210.8 (14.8) (2.0) (16.8) 194.0 49.9 (63.6) 56.6 – 42.9 88 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 89 8. CASH AND CASH EQUIVALENTS Cash at bank and in hand Call deposits Cash at bank and in hand attributable to discontinued operations (refer note 7) Cash and cash equivalents in the cash flow statements Bank balances and call deposits earn interest at floating rates based upon market rates. The carrying amounts of cash and cash equivalents represent fair value. Restricted cash balances Barracuda Ltd, a wholly-owned subsidiary incorporated in Papua New Guinea, has cash and cash equivalents at 31 December 2006 of US$4.9 million (2005: US$21.8 million) which can only be repatriated to Australia with the permission of the Internal Revenue Commission of Papua New Guinea in accordance with the financing plan submitted in respect of PDL 3. 9.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 Receivables due from controlled entities are shown net of impairment losses of $6.3 million (2005: $nil). Receivables due from controlled entities are for loans made in the ordinary course of business for an indefinite period. Interest-bearing amounts owing by controlled entities are at normal market terms and conditions. 10. INVENTORIES Petroleum products Drilling and maintenance stocks Total inventories at the lower of cost and net realisable value Drilling and maintenance stocks included above that are stated at net realisable value 11. OTHER ASSETS Current Interest rate swap contracts Fair value of embedded derivatives Non-current Other Consolidated Santos Ltd 2006 $million 2005 $million 2006 $million 2005 $million 136.6 22.1 158.7 41.3 200.0 229.2 – 229.2 – 229.2 49.5 3.3 52.8 – 52.8 65.5 – 65.5 – 65.5 370.2 – – – 2.1 20.6 94.6 487.5 113.5 53.9 167.4 34.1 17.3 18.8 36.1 11.9 294.9 – – – 2.8 95.4 118.7 511.8 99.1 44.9 144.0 21.0 27.2 – 27.2 6.6 172.1 601.7 662.1 46.6 – – 17.0 134.8 402.1 549.8 138.9 2.5 36.0 112.1 1,499.5 1,376.2 55.4 19.6 75.0 18.3 – 1.3 1.3 7.9 55.7 11.6 67.3 11.6 – – – 4.8 Santos Annual Report 2006 89 SAN175 AW2 Fins 21/3/07 10:36 AM Page 90 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 12. EXPLORATION AND EVALUATION ASSETS Balance at 31 December 2005 Balance at 31 December 2006 Reconciliation of movements Balance at 1 January 2005 Acquisitions Additions Exploration and evaluation expensed Net impairment reversals Foreign currency translation Balance at 31 December 2005 Balance at 1 January 2006 Acquisition of controlled entities Acquisition of exploration and evaluation assets Additions Exploration and evaluation expensed Disposals Transfer to oil and gas assets Assets included in discontinued operations (refer note 7) Foreign currency translation Balance at 31 December 2006 Sub-surface assets $million Consolidated Plant and equipment $million 333.4 359.7 271.8 24.9 168.2 (153.5) 6.3 15.7 333.4 333.4 10.3 46.2 230.4 (97.2) (8.7) (114.9) (21.1) (18.7) 359.7 5.7 0.6 0.2 4.7 0.6 – – 0.2 5.7 5.7 – – – – (5.1) – – – 0.6 Sub-surface assets $million Santos Ltd Plant and equipment $million 17.1 20.6 14.6 1.2 19.2 (19.1) 1.2 – 17.1 17.1 – – 17.8 (14.3) – – – – 20.6 0.6 0.1 0.4 – – – 0.2 – 0.6 0.6 – – – – (0.5) – – – 0.1 Total $million 339.1 360.3 272.0 29.6 168.8 (153.5) 6.3 15.9 339.1 339.1 10.3 46.2 230.4 (97.2) (13.8) (114.9) (21.1) (18.7) 360.3 Total $million 17.7 20.7 15.0 1.2 19.2 (19.1) 1.4 – 17.7 17.7 – – 17.8 (14.3) (0.5) – – – 20.7 90 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 91 13. OIL AND GAS ASSETS 2006 Cost at 31 December 2006 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 6,430.9 4,863.6 11,294.5 2,337.1 2,103.5 4,440.6 impairment (3,574.4) (2,487.4) (6,061.8) (1,481.4) (1,240.3) (2,721.7) Balance at 31 December 2006 2,856.5 2,376.2 5,232.7 855.7 863.2 1,718.9 Reconciliation of movements Assets in development Balance at 1 January 2006 Additions Transfer from exploration and evaluation assets Transfer to producing assets Exploration and evaluation expensed Foreign currency translation Balance at 31 December 2006 Producing assets Balance at 1 January 2006 Acquisition of oil and gas assets Additions Transfer from assets in development Transfer from exploration and evaluation Disposals Depreciation and depletion expense Exploration and evaluation expensed Net impairment (losses)/reversals Assets included in discontinued operations (refer note 7) Foreign currency translation Balance at 31 December 2006 Total oil and gas assets Comprising: 126.5 50.8 109.4 (67.0) (9.7) (5.4) 204.6 2,462.3 84.5 876.2 67.0 5.5 (18.4) (423.3) (240.5) (18.2) (116.0) (27.2) 2,651.9 2,856.5 346.6 10.1 – (353.8) – – 2.9 1,857.1 – 450.3 353.8 – – (253.5) – 1.9 (5.7) (30.6) 2,373.3 2,376.2 473.1 60.9 109.4 (420.8) (9.7) (5.4) 207.5 4,319.4 84.5 1,326.5 420.8 5.5 (18.4) (676.8) (240.5) (16.3) (121.7) (57.8) 5,025.2 5,232.7 Exploration and evaluation expenditure pending commercialisation Other capitalised expenditure 57.9 2,798.6 2,856.5 – 2,376.2 2,376.2 57.9 5,174.8 5,232.7 28.3 – – (28.3) – – – 902.1 11.4 218.7 28.3 – (0.4) (296.6) (5.6) (2.2) – – 855.7 855.7 – 855.7 855.7 95.8 – – (95.8) – – – 701.2 3.6 184.4 95.8 – (13.6) (107.5) – (0.7) – – 863.2 863.2 – 863.2 863.2 124.1 – – (124.1) – – – 1,603.3 15.0 403.1 124.1 – (14.0) (404.1) (5.6) (2.9) – – 1,718.9 1,718.9 – 1,718.9 1,718.9 Santos Annual Report 2006 91 SAN175 AW2 Fins 21/3/07 10:36 AM Page 92 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 13. OIL AND GAS ASSETS (CONTINUED) 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 6,104.6 4,467.3 10,571.9 2,113.1 1,938.8 4,051.9 impairment (3,515.8) (2,263.6) (5,779.4) (1,182.7) (1,141.8) (2,324.5) 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 to producing assets Exploration expensed Foreign currency translation Balance at 31 December 2005 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 Balance at 31 December 2005 Total oil and gas assets Comprising: Exploration and evaluation expenditure pending commercialisation Other capitalised expenditure 208.7 70.0 (152.3) (2.5) 2.6 126.5 1,670.7 597.4 336.3 152.3 – (330.4) (48.2) 62.4 21.8 2,462.3 2,588.8 341.3 134.6 (142.0) – 12.7 346.6 1,515.7 95.1 242.0 142.0 (0.4) (213.2) – 62.6 13.3 1,857.1 2,203.7 550.0 204.6 (294.3) (2.5) 15.3 473.1 3,186.4 692.5 578.3 294.3 (0.4) (543.6) (48.2) 125.0 35.1 4,319.4 4,792.5 30.1 2,558.7 2,588.8 – 2,203.7 2,203.7 30.1 4,762.4 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 – 930.4 930.4 17.5 78.3 – – – 95.8 605.1 101.4 64.7 – – (68.2) – (1.8) – 701.2 797.0 – 797.0 797.0 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 – 1,727.4 1,727.4 92 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 93 14. OTHER LAND, BUILDINGS, PLANT AND EQUIPMENT Cost at 31 December 2005 Less accumulated depreciation Balance at 31 December 2005 Cost at 31 December 2006 Less accumulated depreciation Balance at 31 December 2006 Reconciliation of movements Balance at 1 January 2005 Additions Depreciation Foreign currency translation Balance at 31 December 2005 Balance at 1 January 2006 Acquisition of controlled entities Additions Disposals Depreciation Balance at 31 December 2006 Land and buildings $million Consolidated Plant and equipment $million 104.4 (56.4) 48.0 122.1 (60.5) 61.6 47.5 3.0 (2.5) – 48.0 48.0 – 17.7 – (4.1) 61.6 57.2 (31.7) 25.5 98.7 (43.1) 55.6 19.4 20.6 (14.9) 0.4 25.5 25.5 0.1 41.4 (0.1) (11.3) 55.6 Land and buildings $million Santos Ltd Plant and equipment $million Total $million 57.5 (36.6) 20.9 58.6 (38.9) 19.7 21.5 0.7 (1.3) – 20.9 20.9 – 1.1 – (2.3) 19.7 79.6 (48.1) 31.5 135.0 (59.9) 75.1 20.5 24.9 (13.9) – 31.5 31.5 – 55.7 (0.1) (12.0) 75.1 137.1 (84.7) 52.4 193.6 (98.8) 94.8 42.0 25.6 (15.2) – 52.4 52.4 – 56.8 (0.1) (14.3) 94.8 Total $million 161.6 (88.1) 73.5 220.8 (103.6) 117.2 66.9 23.6 (17.4) 0.4 73.5 73.5 0.1 59.1 (0.1) (15.4) 117.2 Santos Annual Report 2006 93 SAN175 AW2 Fins 21/3/07 10:36 AM Page 94 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 15. IMPAIRMENT OF CASH GENERATING UNITS At 31 December 2006 the consolidated entity reassessed the carrying amount of its oil and gas assets for indicators of impairment such as changes in future prices, future costs and reserves. As a result, the recoverable amount of some cash generating units were formally reassessed resulting in an impairment loss of $16.3 million (includes $5.1 million in discontinued operations). Estimates of recoverable amounts are based on the assets value in use, determined by discounting each asset’s estimated future cash flows at asset specific discount rates. The pre-tax discount rates applied were equivalent to post-tax discount rates between 6.3% and 9.1% (2005: 8.7% and 15.0%) depending on the nature of the risks specific to each 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. CGU Consolidated Continuing Operations Barrow Elang Kakatua Mereenie Moonie Patricia Baleen Thevenard Other – impairment losses Other – impairment reversals Australia International – other Impairment losses Impairment reversals Net impairment loss/(reversal) Santos Ltd Patricia Baleen SWQ Oil Other – impairment losses Other – impairment reversals Impairment losses Impairment reversals Net impairment loss/(reversal) Description Sub-surface assets $million 2006 Plant and equipment $million Total $million Sub-surface assets $million 2005 Plant and equipment $million Total $million Oil field Oil field Oil and gas field Oil field Gas field and production facility Oil field Gas field and production facility Oil field and pipelines – 6.2 – – 4.4 – 2.2 (3.3) 9.5 3.4 12.9 2.2 – – – 2.2 – 0.3 – – – – 0.8 (2.8) (1.7) – (1.7) – – 0.7 – 0.7 – 6.5 – – 4.4 – 3.0 (6.1) 7.8 3.4 11.2 17.3 (6.1) 11.2 2.2 – 0.7 – 2.9 2.9 – 2.9 (14.1) (11.1) (9.6) (5.3) – (12.5) 2.2 (17.6) (68.0) (1.2) (69.2) – (51.1) 2.6 (3.6) (52.1) (16.8) (0.7) (8.4) (5.3) – (42.3) 11.1 (0.2) (62.6) – (62.6) – – 2.1 (0.5) 1.6 (30.9) (11.8) (18.0) (10.6) – (54.8) 13.3 (17.8) (130.6) (1.2) (131.8) 13.3 (145.1) (131.8) – (51.1) 4.7 (4.1) (50.5) 4.7 (55.2) (50.5) The consolidated entity has continued to carry forward capitalised exploration and evaluation expenditure of $55.0 million in respect of the Jeruk oil discovery in the Sampang PSC in East Java, Indonesia, and has recognised an associated receivable of $6.0 million from the Indonesian partner for their share of past costs due to the consolidated entity. Opportunities to commercialise Jeruk continue to be pursued; however, plans for additional appraisal drilling have been placed on hold pending the review of development scenarios and the resolution of commercial and technical issues that may impact the viability of any development. At 31 December 2006 the recoverable amount of Jeruk was formally estimated by applying probabilistic assessments to potential future cash flows. This analysis indicated that the recoverable amount of Jeruk supports the carrying amount at 31 December 2006. 94 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 95 Consolidated Santos Ltd 2006 $million 45.2 – 45.2 2005 $million 14.8 – 14.8 2006 $million 20.3 2,833.8 2,854.1 2005 $million 11.8 2,983.5 2,995.3 16. OTHER INVESTMENTS Equity securities available for sale Investments in controlled entities Investments in equity securities available for sale consist of investments in listed ordinary shares, and therefore have no fixed maturity date or coupon rate. 17. DEFERRED TAX ASSETS AND LIABILITIES Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Assets Liabilities Net 2006 $million 2005 $million 2006 $million 2005 $million 2006 $million 2005 $million Consolidated Exploration, evaluation, oil and gas assets, other land, buildings, plant and equipment Other investments Trade debtors Sundry debtors Inventories Prepayments Other assets Equity-raising costs Trade creditors Interest-bearing loans and borrowings Employee benefits Defined benefit obligation Provisions Other items Tax value of carry-forward losses recognised Tax (assets)/liabilities Set-off of tax Net tax (assets)/liabilities – – (7.9) – – – – (1.3) (7.8) – (18.3) (5.5) (9.1) – (20.2) (70.1) (5.0) (75.1) – (2.6) – – – – – (2.0) (5.2) – (16.3) (3.4) (1.5) – (30.4) (61.4) 4.0 (57.4) 358.8 1.6 – – 15.0 2.0 9.7 – – 91.1 – – – 34.3 – 512.5 5.0 517.5 398.0 – 3.3 19.1 17.2 1.8 8.1 – – 68.3 – – – 1.1 – 516.9 (4.0) 512.9 358.8 1.6 (7.9) – 15.0 2.0 9.7 (1.3) (7.8) 91.1 (18.3) (5.5) (9.1) 34.3 (20.2) 442.4 – 442.4 398.0 (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 Santos Annual Report 2006 95 SAN175 AW2 Fins 21/3/07 10:36 AM Page 96 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 17. DEFERRED TAX ASSETS AND LIABILITIES (CONTINUED) Santos Ltd Exploration, evaluation, oil and gas assets, other Assets Liabilities Net 2006 $million 2005 $million 2006 $million 2005 $million 2006 $million 2005 $million land, buildings, plant and equipment Other investments Trade debtors Sundry debtors Inventories Prepayments Other assets Equity-raising costs Non-trade payables and accrued expenses Employee benefits Defined benefit obligation Provisions Other liabilities Other items Tax value of carry-forward losses Tax (assets)/liabilities Set-off of tax Net tax liabilities – – (8.5) – – – – (1.3) – (17.5) (5.5) (6.2) (2.8) – (17.0) (58.8) 58.8 – – – – – – – – (2.0) (2.7) (15.6) (3.4) – – – – (23.7) 23.7 – 111.7 1.6 – – 9.7 – 0.9 – – – – – – 0.2 – 124.1 (58.8) 65.3 155.6 1.9 2.4 18.3 10.8 0.3 – – – – – – – – – 189.3 (23.7) 165.6 111.7 1.6 (8.5) – 9.7 – 0.9 (1.3) – (17.5) (5.5) (6.2) (2.8) 0.2 (17.0) 65.3 – 65.3 155.6 1.9 2.4 18.3 10.8 0.3 – (2.0) (2.7) (15.6) (3.4) – – – – 165.6 – 165.6 At 31 December 2006, a deferred tax liability of $1,000.2 million (2005: $465.0 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 Consolidated Santos Ltd 2006 $million 40.3 124.5 164.8 2005 $million 30.4 86.3 116.7 2006 $million – 38.8 38.8 2005 $million – 39.1 39.1 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 from. Unrecognised deductible temporary differences and tax losses of $83.9 million (2005: $45.7 million) will expire between 2007 and 2025. The remaining deductible temporary differences and tax losses do not expire under current tax legislation. 18.TRADE AND OTHER PAYABLES Trade payables Non-trade payables and accrued expenses Amounts owing to controlled entities 341.4 100.4 – 441.8 260.2 132.0 – 392.2 136.2 55.0 371.7 562.9 89.7 54.9 235.1 379.7 96 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 97 19. 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 37. Current liabilities Amounts owing to controlled entities Bank loans – secured Bank loans – unsecured Long-term notes 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 – secured Bank loans – unsecured Commercial paper Medium-term notes Long-term notes Consolidated Santos Ltd 2006 $million 2005 $million 2006 $million 2005 $million – 9.0 20.3 130.4 159.7 52.5 212.4 129.6 463.7 631.8 – – 11.1 – 11.1 – 250.4 265.5 468.5 832.6 1,490.0 1,817.0 2,583.6 – – – 2,583.6 2,450.9 – – – 2,450.9 – – – – – – – – – – – – 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 6.86% as at 31 December 2006 (2005: 5.89%). 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 – SECURED A reserve-based lending facility for US$65.0 million (A$82.2 million) (2005: $nil) was entered into in the 2006 reporting period which bears a floating rate of interest. The facility is secured by a first charge over the consolidated entity’s interests in the Maleo and Kakap assets in Indonesia with a carrying amount at 31 December 2006 of A$142.5 million. The average rate for the year was 9.37%, and A$61.5 million was outstanding at the balance sheet date. The facility is available until 2012, and the current amount drawn down is expected to be fully repaid by 2010. (B) BANK LOANS – UNSECURED The consolidated entity has access to the following committed revolving bank facilities: Revolving facilities Year of maturity 2006 2007 2008 2009 Currency Multi-currency Multi-currency Multi-currency Multi-currency 2006 A$million 2005 A$million – 200.0 300.0 200.0 700.0 200.0 – 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 2006 is $nil (2005: $nil). Santos Annual Report 2006 97 SAN175 AW2 Fins 21/3/07 10:36 AM Page 98 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 19. INTEREST-BEARING LOANS AND BORROWINGS (CONTINUED) (B) BANK LOANS – UNSECURED (CONTINUED) Term bank loans Year of maturity Currency 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 USD USD USD USD USD USD USD USD USD USD USD USD 2006 A$million 2005 A$million – 20.3 19.1 23.7 24.4 25.3 21.9 18.2 19.2 19.6 20.0 21.0 11.1 21.4 20.6 25.6 26.5 27.4 23.5 19.7 20.7 21.1 21.5 22.4 232.7 261.5 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 2006 is US$183.9 million (A$232.7 million) (2005: US$191.5 million (A$261.5 million)) at a weighted average annual effective interest rate of 6.22% (2005: 5.02%). (C) COMMERCIAL PAPER The consolidated entity has an $800.0 million (2005: $800.0 million) Australian commercial paper program supported by the revolving bank facilities referred to in (B) above. At 31 December 2006, $129.6 million (2005: $265.5 million) of commercial paper is on issue and the weighted average annual effective interest rate is 6.61% (2005: 5.83%). (D) MEDIUM-TERM NOTES The consolidated entity has a $1,000.0 million (2005: $1,000.0 million) Australian medium-term note program. Medium-term notes on issue Year of issue Year of maturity 1998 2005 2005 2008 2011 2015 Effective interest rate 6.61% 7.00%* 6.35% * Floating rate of interest. (E) LONG-TERM NOTES Long-term notes on issue 2006 A$million 2005 A$million 19.7 349.2 94.8 463.7 20.0 349.1 99.4 468.5 Year of issue Year of maturity 2000 2002 2007 – 2015 2009 – 2022 Effective interest rate 8.37% 6.11% 2006 US$million 2005 US$million 2006 A$million 2005 A$million 303.4 298.9 602.3 308.4 301.5 609.9 384.0 378.2 762.2 421.0 411.6 832.6 98 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 99 20. PROVISIONS Current Liability for annual leave Liability for long service leave Restoration Non-executive Directors’ retirement benefits Non-current Liability for defined benefit obligations (refer note 28) Restoration Consolidated Santos Ltd 2006 $million 2005 $million 2006 $million 2005 $million 21.6 34.5 77.0 1.7 134.8 26.3 512.8 539.1 18.6 31.1 20.5 2.2 72.4 16.1 198.9 215.0 20.8 33.8 6.6 1.7 62.9 26.3 156.0 182.3 17.9 30.3 4.4 2.2 54.8 16.1 59.7 75.8 Movements in each class of provision during the financial year, other than provisions relating to employee benefits are set out below: Consolidated Balance at 1 January 2006 Provisions made during the year Provisions used during the year Unwind of discount Change in discount rate Provisions included in discontinued operations (refer note 7) Balance at 31 December 2006 Santos Ltd Balance at 1 January 2006 Provisions made during the year Provisions used during the year Unwind of discount Change in discount rate Balance at 31 December 2006 Total Non-executive Directors’ retirement benefits $million Total restoration $million 219.4 231.3 (35.0) 25.4 150.7 (2.0) 589.8 64.1 56.8 (4.2) 8.3 37.6 162.6 2.2 – (0.5) – – – 1.7 2.2 – (0.5) – – 1.7 Total $million 221.6 231.3 (35.5) 25.4 150.7 (2.0) 591.5 66.3 56.8 (4.7) 8.3 37.6 164.3 Restoration Provisions for future removal and restoration costs 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 G McGregor who retired as a Director in September 2005 and to Mr P Barnett who retired in February 2006. Santos Annual Report 2006 99 SAN175 AW2 Fins 21/3/07 10:36 AM Page 100 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 21. OTHER LIABILITIES Current Interest rate swap contracts Other Non-current Other 22. CAPITAL AND RESERVES Consolidated Santos Ltd 2006 $million 2005 $million 2006 $million 2005 $million 6.7 2.2 8.9 7.6 0.1 1.8 1.9 6.3 – – – – – 1.3 1.3 – Reconciliation of movement in capital and reserves attributable to equity holders of Santos Ltd Share capital $million Translation reserve $million Fair value reserve $million Retained earnings $million Total equity $million Consolidated 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 Balance at 1 January 2006 Movement per recognised income and expense statement Share options exercised by employees Shares issued Dividends to shareholders Balance at 31 December 2006 Add: Minority interest Total equity 2,141.6 – 25.6 44.8 – 2,212.0 2,212.0 – 3.9 38.5 – 2,254.4 – (195.3) 11.0 – – – (184.3) (184.3) (29.6) – – – (213.9) – 2,254.4 (213.9) Santos Ltd 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 Balance at 1 January 2006 Movement per recognised income and expense statement Share options exercised by employees Shares issued Dividends to shareholders Balance at 31 December 2006 2,141.6 – 25.6 44.8 – 2,212.0 2,212.0 – 3.9 38.5 – 2,254.4 – – – – – – – – – – – – – 6.0 – – – 6.0 6.0 7.6 – – – 13.6 – 13.6 – 4.4 – – – 4.4 4.4 (2.0) – – – 2.4 411.4 761.8 – – (243.0) 930.2 930.2 639.7 – – (268.5) 1,301.4 – 2,357.7 778.8 25.6 44.8 (243.0) 2,963.9 2,963.9 617.7 3.9 38.5 (268.5) 3,355.5 – 1,301.4 3,355.5 506.6 520.8 – – (243.0) 784.4 784.4 (114.2) – – (268.5) 401.7 2,648.2 525.2 25.6 44.8 (243.0) 3,000.8 3,000.8 (116.2) 3.9 38.5 (268.5) 2,658.5 Share capital 598,524,106 (2005: 594,301,771) ordinary shares, fully paid 88,000 (2005: 88,000) ordinary shares, paid to one cent 6,000,000 (2005: 6,000,000) redeemable convertible preference shares Consolidated Santos Ltd 2006 $million 2005 $million 2006 $million 2005 $million 1,670.0 – 584.4 2,254.4 1,627.6 – 584.4 2,212.0 1,670.0 – 584.4 2,254.4 1,627.6 – 584.4 2,212.0 100 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 101 22. CAPITAL AND RESERVES (CONTINUED) Note Movement in fully paid ordinary shares Balance at the beginning of the year Santos Employee Share Acquisition Plan Santos Employee Share Purchase Plan Shares issued on exercise of options Shares issued on vesting of Share Acquisition Rights Santos Executive Share Plan Dividend Reinvestment Plan Balance at the end of the year Movement in redeemable convertible preference shares 29(A) 29(A) 29(B) 29(B) 29(C) A Balance at the beginning of the year Shares issued Share issue cost Balance at the end of the year 2006 Number of shares 2005 2006 $million 2005 $million 594,301,771 114,356 62,900 586,702 127,850 – 3,330,527 585,520,675 106,744 49,800 4,261,134 – 93,000 4,270,418 598,524,106 594,301,771 6,000,000 – – 6,000,000 6,000,000 – – 6,000,000 1,627.6 1.2 0.6 3.9 – – 36.7 1,670.0 584.4 – – 584.4 1,557.2 1.2 0.5 25.6 – 0.3 42.8 1,627.6 584.4 – – 584.4 The market price of the Company’s ordinary shares on 31 December 2006 was $9.87 (2005: $12.25). 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) 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. 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. Santos Annual Report 2006 101 SAN175 AW2 Fins 21/3/07 10:36 AM Page 102 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 22. CAPITAL AND RESERVES (CONTINUED) 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. 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. Dividends Dividends recognised during the year by the Company are: Dollars per share Total $million Franked/ unfranked Payment date 2006 Interim 2006 redeemable preference Final 2005 redeemable preference Interim 2006 ordinary Final 2005 ordinary 2005 Interim 2005 redeemable preference Final 2004 redeemable preference Interim 2005 ordinary Final 2004 ordinary $2.5275 $2.5300 $0.20 $0.20 $2.6538 $2.4497 $0.18 $0.18 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 2006 redeemable preference Final 2006 ordinary $2.7272 $0.20 15.2 15.2 119.2 118.9 268.5 15.9 14.7 106.6 105.8 243.0 16.4 119.7 136.1 Franked Franked Franked Franked 2 Oct 2006 31 Mar 2006 2 Oct 2006 31 Mar 2006 Franked Franked Franked Franked 30 Sep 2005 31 Mar 2005 30 Sep 2005 31 Mar 2005 Franked Franked 2 Apr 2007 2 Apr 2007 The financial effect of these dividends have not been brought to account in the financial statements for the year ended 31 December 2006 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 2006 Santos Ltd 2006 $million 2005 $million 738.3 570.8 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 $58.3 million (2005: $57.5 million). 23. EARNINGS PER SHARE Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of Santos Ltd (after deducting dividends paid on redeemable convertible preference shares) by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders of Santos Ltd (after adding back the dividends paid on redeemable convertible preference shares) by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares. 102 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 103 23. EARNINGS PER SHARE (CONTINUED) Earnings used in the calculation of basic and diluted earnings per share reconciles to the net profit after tax in the income statement as follows: Net profit attributable to ordinary equity holders of Santos Ltd from continuing operations Net loss attributable to ordinary equity holders of Santos Ltd from discontinued operations Net profit attributable to ordinary equity holders of Santos Ltd Dividends paid on redeemable convertible preference shares Earnings used in the calculation of basic earnings per share Dividends paid on redeemable convertible preference shares Earnings used in the calculation of diluted earnings per share Consolidated 2006 $million 2005 $million 670.9 (27.5) 643.4 (30.4) 613.0 30.4 643.4 2006 763.6 (1.5) 762.1 (30.6) 731.5 30.6 762.1 2005 Number of shares 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 596,176,555 587,935,245 63,763 654,780 675,123 52,942,374 79,299 1,337,318 524,650 57,450,099 650,512,595 647,326,611 Partly paid shares outstanding issued under the Santos Executive Share Plan; options outstanding issued under the Santos Executive Share Option Plan; Share Acquisition Rights (“SARs”) 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, 586,702 (2005: 4,261,134) options, 127,850 (2005: nil) SARs and nil (2005: 93,000) partly paid shares were converted to ordinary shares. The diluted earnings per share calculation includes that portion of these options, SARs 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 391,882 (2005: 707,164). 280,500 (2005: nil) options and 212,350 (2005: 53,100) SARs lapsed during the year. The diluted earnings per share calculation includes that portion of these options and SARs assumed to be issued for nil consideration, weighted with reference to the date the options or SARs lapsed. The weighted average number included is 139,619 (2005: 47,135). To calculate earnings per share amounts for the discontinued operation, the loss figure used in the numerator, and the weighted average number of ordinary shares for both basic and diluted amounts are per the above tables. Earnings per share for continuing and discontinued operations Basic earnings per share: From continuing operations From discontinued operations Diluted earnings per share: From continuing operations From discontinued operations Consolidated 2006 cents 107.4 (4.6) 102.8 103.1 (4.2) 98.9 2005 cents 124.7 (0.3) 124.4 117.9 (0.2) 117.7 Santos Annual Report 2006 103 SAN175 AW2 Fins 21/3/07 10:36 AM Page 104 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 24. CONSOLIDATED ENTITIES Name Santos Ltd (Parent Entity) Controlled entities1: Alliance Petroleum Australia Pty Ltd2 Basin Oil Pty Ltd Boston L.H.F. Pty Ltd Bridgefield Pty Ltd Bridge Oil Developments Pty Limited2 Canso Resources Pty Ltd Coveyork Pty Ltd Doce Pty Ltd Fairview Pipeline Pty Ltd3 Fairview Power Pty Ltd3 Farmout Drillers Pty Ltd Kipper GS Pty Ltd Controlled entity of Kipper GS Pty Ltd Crusader (Victoria) Pty Ltd Moonie Pipeline Company Pty Ltd Reef Oil Pty Ltd2 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 Ltd2 Controlled entity of Santos (BOL) Pty Ltd Bridge Oil Exploration Pty Limited Santos CSG Pty Ltd (previously Sundog Investments Pty Ltd3) Santos Darwin LNG Pty Ltd2 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 CJSC South Petroleum Company4 Lavana Limited Sanro Insurance Pte Ltd Santos Americas and Europe Corporation Controlled entities of Santos Americas and Europe Corporation PNG KYR PNG SING USA Santos USA Corp Santos TPY Corp (previously Tipperary Corporation) Controlled entities of Santos TPY Corp Burro Pipeline Inc Santos Queensland Corp (previously Tipperary Qld Inc) Santos TOG Corp (previously Tipperary Oil & Gas Corporation) Controlled entities of Santos TOG Corp Santos TPY CSG Corp (previously Tipperary CSG Inc) Santos TOGA Pty Ltd (previously Tipperary Oil & Gas (Australia) Pty Ltd) Controlled entity of Santos TOGA Pty Ltd Santos TPC Pty Ltd (previously USA USA USA USA USA USA AUST Santos (Bawean) Pty Ltd Santos (BBF) Pty Ltd Controlled entities of Santos (BBF) Pty Ltd Tipperary Pastoral Company Pty Ltd) AUST AUST AUST Santos (SPV) Pty Ltd Controlled entities of Santos (SPV) Pty Ltd Novus Nominees Pty Ltd Santos Brantas Pty Ltd AUST AUST AUST 104 Santos Annual Report 2006 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 AUST AUST AUST Santos (Madura Offshore) Pty Ltd Santos UK (Kakap 2) Limited Santos (Donggala) Pty Ltd Santos Egypt Pty Ltd Santos Hides Ltd Santos International Operations Pty Ltd Santos Niugini Exploration Limited Santos (Nth Bali 1) Pty Ltd Santos (Papalang) Pty Ltd Santos (Popodi) Pty Ltd Santos Vietnam Pty Ltd3 Santos (JPDA 06-104) Pty Ltd3 Santos (JPDA 91-12) Pty Ltd Santos (NGA) Pty Ltd5 Santos (NARNL Cooper) Pty Ltd Santos (N.T.) Pty Ltd Controlled entity of Santos (N.T.) Pty Ltd Bonaparte Gas & Oil Pty Limited Santos Offshore Pty Ltd2 Santos Oil Exploration (Malaysia) Sdn Bhd (in liquidation) Santos Petroleum Pty Ltd2 Santos QNT Pty Ltd2 Controlled entities of Santos QNT Pty Ltd Santos QNT (No. 1) Pty Ltd2 Controlled entities of Santos QNT (No. 1) Pty Ltd Santos Petroleum Management Pty Ltd2 Santos Petroleum Operations Pty Ltd TMOC Exploration Proprietary Limited Santos QNT (No. 2) Pty Ltd2 Controlled entities of Santos QNT (No. 2) Pty Ltd Associated Petroleum Pty Ltd5 Moonie Oil Pty Ltd Petromin Pty Ltd Santos (299) Pty Ltd5 Santos Exploration Pty Ltd Santos Gnuco Pty Ltd5 Transoil Pty Ltd Santos Resources Pty Ltd Santos (TGR) Pty Ltd Santos Timor Sea Pipeline Pty Ltd Sesap Pty Ltd Vamgas Pty Ltd2 AUST UK AUST AUST PNG AUST PNG AUST 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 CJSC South Petroleum Company which is 70%. Company is party to a Deed of Cross Guarantee. Refer note 36. Company incorporated during the year. Company acquired during the year. Refer note 25. Company approved for liquidation. 2. 3. 4. 5. 6. Peko Offshore Pty Ltd was liquidated during the year. Country of incorporation AUST – Australia KYR MAL PNG SING – Singapore UK – United Kingdom USA – United States of America In the financial statements of the Company, investments in controlled entities are recognised at cost, less any impairment losses. – Kyrgyz Republic – Malaysia – Papua New Guinea SAN175 AW2 Fins 21/3/07 10:36 AM Page 105 25.ACQUISITIONS OF SUBSIDIARIES During the financial year the following controlled entity was acquired and its operating results have been included in the income statement from the date of acquisition: Name of entity Date of acquisition Beneficial interest acquired % CJSC South Petroleum Company 13 November 2006 70 Purchase consideration $million 10.5 Contribution to consolidated profit since acquisition $million (0.2) CJSC South Petroleum Company is engaged in exploration for oil in the Kyrgyz Republic and has no operating revenues. If the acquisition had occurred on 1 January 2006, there would have been no impact on consolidated entity revenue and net profit would have decreased to $642.7 million. The acquisition had the following effect on the consolidated entity’s assets and liabilities: Trade and other receivables Exploration and evaluation assets Other land, buildings, plant and equipment Net identifiable assets and liabilities Total consideration Deferred consideration Net cash outflow Carrying amounts $million Fair value adjustments $million Recognised values $million 0.1 – 0.1 0.2 – 10.3 – 10.3 0.1 10.3 0.1 10.5 10.5 (5.3) 5.2 The consideration for the acquisition comprises an initial payment of US$4.0 million (A$5.2 million), and deferred consideration of US$4.1 million (A$5.3 million), being the net present value of the commitment to fund the minority interest’s share of phase 1 of the exploration program over three years. The consolidated entity has the right to withdraw from the exploration program either within 60 days of completion of phase 1, or within 60 days after the completion of the drilling of the second exploration well in the phase 2 exploration program. If the consolidated entity commits to fund the minority interest’s share of phase 2 of the exploration program (US$13.8 million), shares in Santos Ltd with a market value of US$1,000,000 will be issued to DWM Petroleum AG, the original owner of CJSC South Petroleum Company. 26. INTERESTS IN JOINT VENTURES (A) The following are the significant joint ventures in which the consolidated entity is a joint venturer: Joint venture Cash generating unit Principal activities % Interest Oil and gas assets – Producing assets Bayu Undan Liquids Bayu Undan LNG Casino Fairview Madura PSC Mereenie John Brookes Mutineer-Exeter Stag SA Fixed Factor Area SWQ Unit Oil and gas assets – Assets in development Jeruk Kipper Oyong Exploration and evaluation assets Evans Shoal Hides Reindeer Bayu Undan Bayu Undan Casino Fairview Madura PSC Mereenie John Brookes/East Spar Mutineer-Exeter Stag Cooper Basin Cooper Basin Sampang PSC Kipper Sampang PSC – – – Gas production Gas production Gas production Gas production Gas production Oil and gas production Gas production Oil production Oil and gas production Oil and gas production Gas production Oil development Contingent gas resource Oil and gas development Contingent gas resource Contingent gas resource Contingent gas resource 10.6 10.6 50.0 76.1 67.5 65.0 45.0 33.4 66.7 66.6 60.1 40.5 50.0 40.5 40.0 31.0 45.0 Santos Annual Report 2006 105 SAN175 AW2 Fins 21/3/07 10:36 AM Page 106 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 26. INTERESTS IN JOINT VENTURES (CONTINUED) (B) The consolidated entity’s interest in assets employed in joint ventures are included in the balance sheets under the following asset categories: Current assets Cash and cash equivalents Trade and other receivables Inventories Assets classified as held for sale Total current assets Non-current assets Exploration and evaluation assets Oil and gas assets Other Total non-current assets Total assets Consolidated Santos Ltd 2006 $million 2005 $million 2006 $million 2005 $million 56.7 67.2 19.0 210.8 353.7 329.0 3,705.7 3.8 4,038.5 4,392.2 113.2 34.9 22.2 – 170.3 130.9 4,105.1 1.5 4,237.5 4,407.8 40.6 6.3 16.2 – 63.1 5.3 1,603.8 – 1,609.1 1,672.2 33.0 12.0 11.8 – 56.8 7.2 1,727.4 – 1,734.6 1,791.4 (C) The consolidated entity’s share of capital expenditure commitments and minimum exploration commitments in respect of joint ventures are: Capital expenditure commitments Minimum exploration commitments 264.0 149.2 214.3 169.5 101.5 18.5 90.8 48.8 27. RECONCILIATION OF CASH FLOWS FROM OPERATING ACTIVITIES Profit/(loss) after income tax Add/(deduct) non-cash items: Depreciation and depletion Net impairment loss/(reversal) of investment in controlled entities Impairment loss on receivables due from controlled entities Exploration and evaluation expensed Net impairment loss/(reversal) of oil and gas assets Foreign exchange debt hedging (losses)/gains Share-based payments expense Borrowing costs capitalised Unwind of the effect of discounting on provisions Fair value of embedded derivatives Defined benefit plan expense Foreign currency fluctuations Net gain on sale of non-current assets Net gain on sale of controlled entities 643.4 692.2 – – 347.8 16.3 (0.3) 1.2 (14.5) 25.4 (18.8) 4.3 (18.6) (41.1) – Net cash provided by operating activities before changes in assets or liabilities 1,637.3 Add/(deduct) change in operating assets or liabilities net of acquisitions of businesses: Decrease/(increase) in trade and other receivables Increase in inventories (Increase)/decrease in other assets Net (increase)/decrease in deferred tax assets and deferred tax liabilities Increase/(decrease) in current tax liabilities (Decrease)/increase in trade and other payables Increase/(decrease) in provisions 23.2 (40.4) (12.9) (42.5) 30.2 (78.7) 34.1 762.1 (110.5) 518.7 561.0 – – 204.2 (131.3) (1.8) 2.4 (28.0) 14.3 – 2.9 (81.9) (23.1) (16.3) 1,264.5 (151.2) (17.6) 10.5 41.5 173.5 137.9 (1.2) 418.4 325.7 6.3 19.9 2.9 – 1.2 – 8.3 (1.3) 4.3 0.5 (6.1) – 669.6 75.0 (7.7) 15.4 (97.7) (87.6) 13.2 20.7 600.9 188.0 (338.4) – 31.5 (50.5) 0.5 2.4 – 5.2 – 2.9 5.1 (5.1) (15.1) 345.2 (107.7) (8.5) 5.2 30.7 (42.1) 54.0 (6.4) 270.4 Net cash provided by operating activities 1,550.3 1,457.9 106 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 107 28. EMPLOYEE BENEFITS (A) LIABILITY FOR DEFINED BENEFIT OBLIGATIONS 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. Defined benefit plan Amount recognised in the balance sheet: Deficit in plan recognised in non-current provisions (refer note 20) Other non-current assets (refer note 11) Movements in the liability for net defined benefit obligations recognised in the balance sheet Liability at start of year Expense recognised in the income statement Amount recognised in retained earnings Employer contributions Liability at end of year Consolidated Santos Ltd 2006 $million 2005 $million 2006 $million 2005 $million 26.3 (7.9) 18.4 11.3 4.3 9.0 (6.2) 18.4 16.1 (4.8) 11.3 12.5 2.9 0.5 (4.6) 11.3 26.3 (7.9) 18.4 11.3 4.3 9.0 (6.2) 18.4 16.1 (4.8) 11.3 12.5 2.9 0.5 (4.6) 11.3 Nature of liability 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 the Company or the consolidated entity to cover any deficit that exists in the Plan. If the Plan were wound up there would be no legal obligation on the Company or the consolidated entity to make good any shortfall. The Trust Deed of the Plan states that if the Plan winds up, the remaining assets are to be distributed by the Trustee of the Plan in an equitable manner as it sees fit. The Company may at any time by notice to the Trustee terminate its contributions. The Company has a liability to pay the contributions due prior to the effective date of the notice, but there is no requirement for the Company to pay any further contributions, irrespective of the financial condition of the Plan. Historical information for the current and previous periods* Present value of defined benefit obligations Fair value of Plan assets Deficit in Plan Experience adjustments on Plan assets Experience adjustments on Plan liabilities 2006 $million 158.2 (131.9) 26.3 (6.3) 17.5 Consolidated 2005 $million 2004 $million 2006 $million Santos Ltd 2005 $million 129.5 (113.4) 16.1 (8.0) (0.1) 126.5 (108.7) 17.8 (5.5) (4.5) 158.2 (131.9) 26.3 (6.3) 17.5 129.5 (113.4) 16.1 (8.0) (0.1) 2004 $million 126.5 (108.7) 17.8 (5.5) (4.5) * Comparative information has been provided for only two of the previous four periods in accordance with the transition rules in AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards. Santos Annual Report 2006 107 SAN175 AW2 Fins 21/3/07 10:36 AM Page 108 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 Consolidated Santos Ltd 2006 $million 2005 $million 2006 $million 2005 $million 90.7 5.4 4.3 4.9 13.4 (6.2) (2.2) 0.5 110.8 79.4 5.5 4.4 6.1 4.9 (6.2) (2.2) 0.5 92.4 88.6 4.1 3.7 4.1 6.1 (8.1) (2.4) (5.4) 90.7 76.1 4.9 5.6 4.6 4.1 (8.1) (2.4) (5.4) 79.4 90.7 5.4 4.3 4.9 13.4 (6.2) (2.2) 0.5 110.8 79.4 5.5 4.4 6.1 4.9 (6.2) (2.2) 0.5 92.4 Consolidated Santos Ltd 2006 % 36 28 15 8 13 2005 % 35 29 15 7 14 2006 % 36 28 15 8 13 88.6 4.1 3.7 4.1 6.1 (8.1) (2.4) (5.4) 90.7 76.1 4.9 5.6 4.6 4.1 (8.1) (2.4) (5.4) 79.4 2005 % 35 29 15 7 14 28. EMPLOYEE BENEFITS (CONTINUED) (A) LIABILITY FOR DEFINED BENEFIT OBLIGATIONS (CONTINUED) Reconciliation of the present value of the net defined benefit obligations Opening net defined benefit obligations Service cost Interest cost Contributions by Plan participants Actuarial losses Benefits paid Taxes and premiums paid Transfers in/(out) Closing net defined benefit obligations Reconciliation of the fair value of net Plan assets Opening fair value of net Plan assets Expected return on Plan assets Actuarial gains Employer contributions Contributions by Plan participants Benefits paid Taxes and premiums paid Transfers in/(out) Closing fair value of net Plan assets Plan assets The percentage invested in each asset class at the balance sheet date: Australian equity International equity Fixed income Property Cash Fair value of Plan assets The fair value of Plan assets includes no amounts relating to: • any of the consolidated entity’s own financial instruments; • any property occupied by, or other assets used by, the consolidated entity. Actual return on Plan assets Actual return on Plan assets Consolidated Santos Ltd 2006 $million 2005 $million 2006 $million 2005 $million 9.9 10.5 9.9 10.5 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 asset class and allowing for the correlations of the investment returns between asset classes. The returns used for each asset class are net of investment tax and investment fees. An allowance for asset-based administration expenses has also been deducted from the expected return. 108 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 109 28. EMPLOYEE BENEFITS (CONTINUED) (A) LIABILITY FOR DEFINED BENEFIT OBLIGATIONS (CONTINUED) Principal actuarial assumptions at the balance sheet date (expressed as weighted average) Discount rate Expected rate of return on Plan assets Expected average salary increase rate over the life of the Plan 2006 % pa 4.9 6.9 6.9 2005 % pa 4.5 6.9 5.8 The expected rate of return on Plan assets includes a reduction to allow for the asset-based administrative expenses of the Plan. Expense recognised in the income statements Service cost Interest cost Expected return on Plan assets The expense is recognised in the following line items in the income statements: Other expenses Financial expenses Amount recognised in the statements of recognised income and expense Actuarial losses Tax effect Actuarial losses Summary of the most recent financial position of the Plan Net market value of Plan assets Accrued benefits Net (deficit)/surplus Consolidated Santos Ltd 2006 $million 2005 $million 2006 $million 2005 $million 5.4 4.3 (5.4) 4.3 – 4.3 4.3 (9.0) 2.7 (6.3) 4.1 3.7 (4.9) 2.9 (0.8) 3.7 2.9 (0.5) 0.2 (0.3) 5.4 4.3 (5.4) 4.3 – 4.3 4.3 (9.0) 2.7 (6.3) 4.1 3.7 (4.9) 2.9 (0.8) 3.7 2.9 (0.5) 0.2 (0.3) 31 Dec 2004 $million 98.6 98.9 (0.3) 31 Dec 2004 $million 98.6 98.9 (0.3) Expected contributions The consolidated entity expects to contribute $6.4 million to the defined benefit superannuation plan in 2007. Contribution recommendation The current contribution recommendations as set out in the report of 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 long-term economic assumptions adopted for the last actuarial review of the Plan as at 31 December 2004 were: Expected rate of return on assets (discount rate) 7.9% in year 1; 7.0% pa thereafter Expected salary increase rate 9.0%; 7.0%; 7.0%; 5.0% pa thereafter Santos Annual Report 2006 109 SAN175 AW2 Fins 21/3/07 10:36 AM Page 110 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 28. EMPLOYEE BENEFITS (CONTINUED) (B) DEFINED CONTRIBUTION PLANS The consolidated entity makes contributions to several defined contribution plans. The amount recognised as an expense for the year was $5.7 million (2005: $5.9 million). 29. SHARE-BASED PAYMENT PLANS (A) 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 2006, 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 participate in 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 2006 (and comparative 2005 information): Opening balance Granted during the year Distributions during the year Closing balance Grant dates Number Number Fair value per share $ Number Fair value aggregate $ 2006 2 September 2003 22 November 2004 18 November 2005 17 November 2006 2005 2 September 2002 2 September 2003 22 November 2004 18 November 2005 173,223 137,006 104,456 – 414,685 162,864 200,754 156,770 – 520,388 – – – 114,356 114,356 – – – 106,744 106,744 – – – 10.88 – – – 11.24 Number – 127,002 96,272 113,620 Fair value aggregate $ – 1,253,510 950,205 1,121,429 173,223 10,004 8,184 736 1,933,837 116,798 95,025 7,481 192,147 2,153,141 336,894 3,325,144 162,864 27,531 19,764 2,288 212,447 1,854,533 287,283 208,725 26,921 2,377,462 – 173,223 137,006 104,456 – 2,121,982 1,678,323 1,279,586 414,685 5,079,891 Shares are allocated at a price equal to the weighted average sale price of the Company’s ordinary shares on the ASX 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 ASX 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. 110 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 111 29. SHARE-BASED PAYMENT PLANS (CONTINUED) (A) 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 2006 $million 1.2 1.2 2005 $million 1.2 1.2 2006 $million 1.2 1.2 2005 $million 1.2 1.2 At 31 December 2006, the total number of shares acquired under the Plan since its commencement was 2,095,387. 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 ASX 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 17 November 2006, the Company issued 62,900 ordinary shares to 101 eligible employees at a subscription price of $9.96 per share under the Plan, being the 5% discount on the Market Value of $10.48. The total market price of those shares on the issue date was $684,352, being the market price at the close of trade on the date of issue ($10.88). The total amount received from employees for those shares was $626,484. A summary of share movements in the SESPP are set out below: Grant dates 2006 18 November 2005 17 November 2006 2005 26 November 2004 18 November 2005 Opening balance Number 49,800 – 49,800 32,400 – 32,400 Granted during the year Fair value per share $ Number Restrictions ceased during the year Closing balance Number Date Number – 62,900 62,900 – 49,800 49,800 – 10.48 – 11.24 49,800 – 49,800 32,400 – 32,400 18 November 2006 – 26 November 2005 – – 62,900 62,900 – 49,800 49,800 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 2006 $million 0.6 2005 $million 0.5 2006 $million 0.6 2005 $million 0.5 At 31 December 2006, the total number of shares acquired under the general employee offer of the Plan since its commencement was 821,900. Santos Annual Report 2006 111 SAN175 AW2 Fins 21/3/07 10:36 AM Page 112 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 29. SHARE-BASED PAYMENT PLANS (CONTINUED) (B) 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 80 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 2006 (2005: nil). At 31 December 2006, 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 CEO options As approved at the Annual General Meeting held on 4 May 2006, 2,500,000 options were granted to Mr J C Ellice-Flint pursuant to the Santos Executive Share Option Plan as part of his long-term incentive arrangements on the terms set out in the notice of the meeting. There were no options outstanding for Mr Ellice-Flint at the beginning of the period and no options were forfeited or exercised. At the end of the period, Mr Ellice-Flint held 2,500,000 options which were not exercisable. The options were granted at no cost to Mr Ellice-Flint, but will, if capable of being exercised, require the payment of the exercise price set out below. The options carry no voting or dividend rights until the performance conditions are satisfied and the options are exercised. Mr Ellice-Flint is the only Director who is entitled to participate in the Plan. Each option is a conditional entitlement which entitles Mr Ellice-Flint to acquire a fully paid ordinary share in the capital of the Company upon paying the exercise price, subject to the satisfaction of performance conditions. The grant to Mr Ellice-Flint has been made in three tranches as follows: Tranche 1 2 3 Number of options Earliest exercise date 500,000 1,000,000 1,000,000 26 August 2007 26 August 2008 26 August 2009 The exercise price of the options is $11.36 which is the weighted average of the share price over the ten-day period up to and including 9 March 2006. The performance conditions applying to the options compare the Total Shareholder Return (“TSR”) performance of the Company with the TSR performance of two comparator groups. Broadly, TSR is the growth in share price, plus dividends reinvested. The TSR is measured over a performance period which begins 27 August 2005 and ends: • in relation to Tranche 1 – on 26 August 2007; • in relation to Tranche 2 – on 26 August 2008; and • in relation to Tranche 3 – on 26 August 2009. 112 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 113 29. SHARE-BASED PAYMENT PLANS (CONTINUED) (B) EXECUTIVE LONG-TERM INCENTIVE PROGRAM (CONTINUED) The performance conditions may be retested quarterly during the twelve-month period commencing on the earliest exercise date for a tranche, as set out above. If the performance conditions are not satisfied at the end of that twelve-month retesting period, the options in that tranche will lapse. Upon satisfaction of the performance hurdle (up to the expiration of the retesting period), options become exercisable. The exercise period for each tranche of options ends on the tenth anniversary of the grant date. Any options that have not been exercised by this date will lapse. Shares allocated on the exercise of options will not be subject to any restrictions on dealing. If Mr Ellice-Flint ceases to be a Santos group employee before the options become exercisable by reason of death, disability, bona fide redundancy or other reason with the approval of the Board, the Board has determined that the options become exercisable. If Mr Ellice-Flint ceases employment for any other reason, all unvested options will lapse. 50% of the options in each tranche (i.e. 250,000 options in tranche 1 and 500,000 options in each of tranches 2 and 3) will be tested against a comparator group of the companies comprising the ASX 100 at the beginning of the performance period previously referred to. The other 50% of the options in each tranche (i.e. 250,000 options in tranche 1 and 500,000 options in each of tranches 2 and 3) vest based on a different test which relates the Company’s TSR performance against a comparator group comprising all exploration and production companies in the ASX Energy Index with market capitalisation above $400 million, plus international exploration and production companies. The threshold performance ranking of each tranche of options in respect of a performance period will be the 50th percentile of each of the two comparator groups. Options in a tranche will in respect of a performance period vest as shown below: Company performance % of options which become exercisable (each to apply to 50% of a tranche) TSR < 50th percentile of comparator group TSR = 50th percentile of comparator group TSR between 51st and 74th percentile of comparator group 0% 50% 52% to 98% pro-rata vesting TSR ≥ 75th percentile of comparator group 100% (for each percentile improvement, an additional 2% vest) 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. 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 grant date Share price Exercise price Expected volatility (weighted average) Option life (weighted average) Expected dividends Risk free interest rate (based on Australian national government bonds) Tranche 1 2006 CEO options Tranche 2 Tranche 3 $1.77 $11.48 $11.36 23% 10 years 3.3% 5.4% $1.94 $11.48 $11.36 23% 10 years 3.3% 5.4% $2.05 $11.48 $11.36 23% 10 years 3.3% 5.4% 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. The amounts recognised in the income statements of the consolidated entity and the Company during the financial year in relation to the CEO share options granted were: Employee expenses Consolidated Santos Ltd 2006 $million 1.4 2005 $million – 2006 $million 1.4 2005 $million – Santos Annual Report 2006 113 SAN175 AW2 Fins 21/3/07 10:36 AM Page 114 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 29. SHARE-BASED PAYMENT PLANS (CONTINUED) (B) EXECUTIVE LONG-TERM INCENTIVE PROGRAM (CONTINUED) Eligible senior executives 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 ten years. The Board intends that long-term incentive (“LTI”) awards be made to eligible senior executives 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 % 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) TSR ≥ 75th percentile of comparator group 100% SARs which have not vested and options which are not exercisable at the time of an eligible senior 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 or vesting of SARs during the reporting period at their issue date is the market price of shares of the Company on the ASX 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 Consolidated Santos Ltd 2006 $million 3.9 2005 $million 25.6 2006 $million 3.9 2005 $million 25.6 114 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 115 5 0 0 2 r e b m u N s n o i t p o f o e c i r p e g a r e v a e s i c r e x e d e t h g i e W – 2 6 4 , 3 1 5 , 5 0 0 0 , 6 6 1 , 1 ) 4 3 1 , 1 6 2 , 4 ( 8 2 3 , 2 5 9 8 2 3 , 8 1 4 , 2 – 2 1 . 6 $ 6 4 . 8 $ 0 0 . 6 $ 7 4 . 7 $ 8 4 . 6 $ 0 0 7 , 7 9 8 ) 0 0 5 , 0 8 2 ( ) 2 0 7 , 6 8 5 ( – ) 0 0 0 , 0 0 1 ( ) 0 0 0 , 0 0 5 ( 6 2 8 , 8 4 4 , 2 0 0 0 , 0 5 4 6 2 5 , 5 3 4 0 0 0 , 0 5 2 – – ) 2 5 0 , 9 5 ( 6 7 2 , 3 4 1 6 7 2 , 3 4 1 8 2 3 , 8 1 4 , 2 0 0 0 , 0 5 0 , 1 8 2 3 , 2 0 2 l a t o T 2 e p y T 1 e p y T D – s n o i t p o f o r e b m u N C B A 0 0 3 , 3 8 6 0 0 9 , 2 4 3 0 0 8 , 9 3 1 – – – 0 0 7 , 7 9 8 – – – – – – ) 0 0 3 , 5 5 ( ) 0 0 3 , 5 5 ( 0 0 7 , 7 9 8 0 0 0 , 8 2 6 0 0 6 , 7 8 2 – ) 0 0 9 , 9 6 ( ) 0 5 6 , 7 2 ( 0 5 2 , 2 4 0 5 2 , 2 4 e c i r p e g a r e v a e s i c r e x e d e t h g i e W 7 4 . 7 $ 8 4 . 0 1 $ – 1 8 . 9 $ 6 7 . 8 $ 7 6 . 6 $ i f o g n n n i g e b e h t t a g n i d n a t s t u O d o i r e p e h t g n i r u d d e t i e f r o F d o i r e p e h t g n i r u d d e s i c r e x E d o i r e p e h t g n i r u d d e t n a r G d o i r e p e h t d o i r e p e h t f o d n e e h t t a g n i d n a t s t u O d o i r e p e h t f o d n e e h t t a e l b a s i c r e x E 6 0 0 2 . w o l e b t u o t e s s a s e r a h s d e u s s i n u r e v o s n o i t p o 0 0 7 , 7 9 8 d e t n a r g y n a p m o C e h t , r a e y l a i c n a n i f e h t g n i r u D ) I D E U N T N O C ( M A R G O R P I E V T N E C N I M R E T - G N O L I E V T U C E X E ) B ( ) I D E U N T N O C ( S N A L P T N E M Y A P D E S A B - E R A H S . 9 2 e r a e s i c r e x e y l r a e f o s n o i t a t c e p x E . l e d o m s i h t o t n i t u p n i n a s a d e s u s i n o i t p o e h t f o e f i l l a u t c a r t n o c e h T . d o h t e M n o i t a l u m i S o l r a C e t n o M e h t n o d e s a b d e r u s a e m s i d e v i e c e r s e c i v r e s e h t f o e u l a v r i a f e h t f o e t a m i t s e e h T . d e t n a r g s n o i t p o e r a h s f o e u l a v r i a f e h t o t e c n e r e f e r y b d e r u s a e m e r a d e t n a r g s n o i t p o e r a h s r o f n r u t e r n i d e v i e c e r s e c i v r e s f o e u l a v r i a f e h T . s l e d o m e h t o t n i d e t a r o p r o c n i . s r a e y e n n f o e f i l i l a u t c a r t n o c e g a r e v a d e t h g i e w a d n a , 8 4 . 0 1 $ o t 0 2 . 6 $ f o e g n a r e h t n i e c i r p e s i c r e x e n a e v a h 6 0 0 2 r e b m e c e D 1 3 t a g n i d n a t s t u o s n o i t p o e h T . ) 1 9 . 9 $ : 5 0 0 2 ( 1 8 . 9 $ s a w e s i c r e x e f o s e t a d e h t t a e c i r p e r a h s e g a r e v a d e t h g i e w e h T . ) 4 3 1 , 1 6 2 , 4 : 5 0 0 2 ( d e s i c r e x e e r e w s n o i t p o 2 0 7 , 6 8 5 r a e y e h t g n i r u D Santos Annual Report 2006 115 SAN175 AW2 Fins 21/3/07 10:36 AM Page 116 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 29. SHARE-BASED PAYMENT PLANS (CONTINUED) (B) EXECUTIVE LONG-TERM INCENTIVE PROGRAM (CONTINUED) Option grant Fair value at grant date Share price Exercise price Expected volatility (weighted average) Option life (weighted average) Expected dividends Risk free interest rate (based on Australian government bonds) 2006 D $0.76 $10.27 $10.48 22.0% 10 years 3.9% 6.0% A $0.59 $8.48 $8.461 21.0% 1 year 3.5% 5.33% 2005 B $0.90 $8.48 $8.461 21.0% 2 years 3.5% 5.06% C $1.15 $8.48 $8.461 21.0% 3 years 3.5% 5.11% 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. 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 2006 $million 0.5 2005 $million 0.5 2006 $million 0.5 2005 $million 0.5 During the financial year, the Company granted 289,600 SARs as set out below. Shares allocated on vesting of SARs will be subject to further restrictions on dealing for a maximum of 10 years after the original grant date. No amount is payable on grant or vesting of the SARs. A B Outstanding at the beginning of the period Granted during the period Forfeited during the period Vested during the period Outstanding at the end of the period Exercisable at the end of the period 268,800 – (140,950) (127,850) – – 252,400 – (33,100) – 219,300 219,300 Number of SARs 2006 C 288,300 – (38,300) – 250,000 – D Total – 289,600 – – 289,600 – 809,500 289,600 (212,350) (127,850) 758,900 219,300 2005 – 862,600 (53,100) – 809,500 268,800 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 grant date Share price Exercise price Expected volatility (weighted average) Right life (weighted average) Expected dividends Risk free interest rate (based on national government bonds) 2006 D $2.86 $10.27 – 22.0% 10 years 3.9% 6.0% A $3.59 $8.48 – 21.0% 1 year 3.5% 5.33% 2005 B $4.17 $8.48 – 21.0% 2 years 3.5% 5.06% C $4.63 $8.48 – 21.0% 3 years 3.5% 5.11% 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 116 Santos Annual Report 2006 Consolidated Santos Ltd 2006 $million 0.7 2005 $million 1.9 2006 $million 0.7 2005 $million 1.9 SAN175 AW2 Fins 21/3/07 10:36 AM Page 117 29. SHARE-BASED PAYMENT PLANS (CONTINUED) (C) 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 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 88,000 Plan shares on issue. During the financial year no Plan shares were fully paid and no aggregate proceeds were received by the Company. As at 31 December 2006 there were 88,000 Plan shares outstanding. (D) 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 J C Ellice-Flint completing five years service with the Company. As Mr J C Ellice-Flint satisfied the condition on 12 December 2005, legal title of the shares passed unrestricted to him on that date. 30. 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. Name Directors Barnett, Peter Charles Dean, Kenneth Alfred Ellice-Flint, John Charles Franklin, Roy Alexander Gerlach, Stephen Harding, Richard Michael O’Leary, Michael Anthony Recny, Christopher John Sloan, Judith Executives Anderson, John Hugh Brown, Trevor John Eames, Martyn Edward James Gouadain, Jacques Elie Macfarlane, Mark Stuart Wasow, Peter Christopher Wilkinson, Richard John Wood, Bruce James Young, Jonathon Terence All Executives are employed by Santos Ltd. Position Non-executive Director (retired 28 February 2006) Non-executive Director Managing Director Non-executive Director (appointed 28 September 2006) Chairman and Non-executive Director Non-executive Director Non-executive Director (retired 15 December 2006) Non-executive Director (deceased 4 June 2006) Non-executive Director Vice President – Strategic Projects (appointed 3 April 2006) Vice President – Geoscience and New Ventures (appointed 4 February 2006) Vice President – Corporate and People Vice President – Geoscience and New Ventures(resigned 30 March 2006) Vice President – Development Projects and Technical Services (appointed 18 April 2006) Chief Financial Officer Vice President – Gas Marketing and Commercialisation Vice President – Strategic Projects (resigned 15 June 2006) Executive Vice President – Operations Santos Annual Report 2006 117 SAN175 AW2 Fins 21/3/07 10:36 AM Page 118 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 30. KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) (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 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. This amount was approved at the Annual General Meeting held on 7 May 2004. 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. 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. 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 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. Managing Director and Senior Executives Remuneration objectives and principles The Company has adopted a policy that the remuneration of the Managing Director and senior executives will: (a) appropriately reflect their responsibilities; (b) be reasonable and competitive in the resources and energy industry within which the Company operates; (c) ensure a significant portion of their 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 them to manage from the perspective of shareholders. Elements of remuneration Remuneration for the Managing Director and 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 • 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 the Managing Director and senior executives 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. 118 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 119 30. KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) (B) KEY MANAGEMENT PERSONNEL COMPENSATION (CONTINUED) Short-term Incentive (“STI”) The STI program links specific performance targets with the opportunity for eligible executives to earn incentives based on a percentage of fixed remuneration. The maximum amounts that can be earned as STI are 150% of base salary for the Managing Director, and 50% or 75% of TFR for senior executives. For the Managing Director, 100% of the STI is based upon a number of agreed objectives which include Company performance and other factors which relate to the performance by the Company during the year of strategic growth initiatives which form part of the Company’s strategic plan. For senior 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. 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 relevant to Company performance. The Managing Director must take 50% of any STI awarded to him in the form of shares in the Company. These shares are, in general, subject to restrictions on sale, transfer and hedging for a period of two years from the date of their acquisition. The remaining 50% of any STI awarded is paid to the Managing Director in cash. Other participants receive 100% of their STI in cash. 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. LTI is delivered 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 only vest or become 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 two comparator groups, one of which applies to 50% of an LTI grant, while the other group applies to the other 50%. One of the two groups comprises the ASX 100 at the beginning of the relevant performance period, while the other comprises Australian and international exploration and production companies, which for 2006 were: • Anadarko Petroleum Ltd • Apache Corp • Australian Worldwide Exploration Ltd • Cairn Energy PLC • Chesapeake Energy Corp • EOG Resources Inc • Forest Oil Corp • Hardman Resources Ltd • Kerr McGee Corp • Murphy Oil Corp • Newfield Exploration Co • Nexen Inc • Noble Energy Inc • Oil Search Ltd • Pioneer Natural Resources Co • Pogo Producing Co • Premier Oil PLC • Talisman Energy Inc • Woodside Petroleum Ltd • XTO Energy Inc If performance is below the 50th percentile, no award is made. A proportionate award is made for performance between the 50th to 75th percentile and the maximum award is made for performance at or above the 75th percentile. In relation to the current financial year, awards may be taken 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 29(B). Santos Annual Report 2006 119 SAN175 AW2 Fins 21/3/07 10:36 AM Page 120 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 30. KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) (B) KEY MANAGEMENT PERSONNEL COMPENSATION (CONTINUED) 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 Managing Director was granted 2,500,000 options with effect from 4 May 2006, which vest as follows: • 500,000 options no earlier than 26 August 2007; • 1,000,000 options no earlier than 26 August 2008; • 1,000,000 options no earlier than 26 August 2009. Superannuation arrangements of the Managing Director The arrangements under his Service Agreement provide for Mr J C Ellice-Flint to be paid a defined benefit upon his retirement from the Company, calculated as a multiple of his final salary. As at 31 December 2006, Mr J C Ellice-Flint was entitled to a superannuation payment equivalent to 2.76 times his final salary upon his retirement. In February 2007 this increases to 3.22 times final salary and this defined benefit increases at a rate of approximately 0.5 times final salary on each subsequent anniversary. The Company will continue to make actuarially determined superannuation contributions on behalf of Mr J C Ellice-Flint as provided for under his Service Agreement. Termination The Company may terminate the employment of senior executives on giving twelve months notice, except with respect to Mr J T Young who is entitled to three months notice. The Company may make a payment in lieu of notice. Senior executives must give the Company at least six months notice of resignation, with the exception of Mr J T Young who must give the Company at least three months notice of resignation. The Managing Director’s contract provides that the Company may terminate his employment on giving 24 months notice. This notice period is reduced to twelve months from 1 January 2008. The Company may require the Managing Director to continue to work for up to three months of the notice period. The Company must make a payment to the Managing Director equivalent to his Base Salary for the full notice period. In general, any unvested options granted to the Managing Director under the SESOP will vest and become exercisable where the Company terminates the Managing Director’s employment, and any restrictions on shares acquired using the Managing Director’s STI award will be lifted. The Company may terminate the Managing Director’s or senior executives’ employment at any time for cause, and no payment in lieu of notice or early vesting of incentive awards will be made in these circumstances. The Managing Director must give the Company three months notice of intention to resign. In certain circumstances, such as a substantial diminution of responsibility, the Company may be deemed to have terminated the employment of the Managing Director or senior executives and will be liable to make compensation payments. 120 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 121 e c n a d e t a l e r - m r o f r e P l a t o T n o i t a - n i m r e T r e h t O - g n o l m r e t s t i f e n e b 4 s t n e m y a p d e s a b - e r a h S t s o P t n e m - r e p u S - y o l p m e s t i f e n e b e e y o l p m e m r e t - t r o h S % – – 4 5 – – – – – – 8 2 6 2 0 3 – 8 2 7 3 6 2 – 0 4 $ 9 0 6 , 3 2 2 2 1 , 2 6 1 4 4 5 , 9 7 1 , 5 8 6 5 , 3 3 2 1 4 , 2 7 3 2 2 1 , 7 6 1 6 3 3 , 5 3 1 5 7 9 , 9 2 2 7 8 , 3 6 1 4 0 4 , 5 6 5 0 7 2 , 5 9 5 7 7 1 , 2 1 7 5 0 2 , 2 3 1 2 9 1 , 2 7 5 6 8 4 , 0 5 9 2 1 1 , 3 0 7 1 5 1 , 6 0 2 $ – – – – – – – – – – – – – – – 9 6 4 , 4 1 9 8 6 , 2 2 8 5 4 , 0 4 0 , 1 – 5 1 0 , 5 4 7 , 1 1 8 5 1 , 7 3 $ – – – – – – – – – – – – – – – – – – – l a t o T s n o i t p O s R A S 3 n o i t a u n n a l a t o T 2 r e h t O $ – – $ – – 5 0 2 , 6 0 4 , 1 5 0 2 , 6 0 4 , 1 – – – – – – – – – – – – – 7 3 1 , 6 1 5 9 6 , 6 1 1 7 9 , 8 1 7 3 1 , 6 1 7 2 9 , 1 2 4 4 4 , 5 1 – – – – 7 3 1 , 6 1 5 9 6 , 6 1 – – 7 3 1 , 6 1 1 1 6 , 3 2 1 1 6 , 3 2 $ – – – – – – – – – – – – – – – 1 7 9 , 8 1 7 2 9 , 1 2 4 4 4 , 5 1 $ $ 9 4 9 , 1 2 7 3 , 2 1 0 6 6 , 1 2 0 5 7 , 9 4 1 $ – – – 2 1 4 , 2 1 2 2 1 , 2 1 – 5 7 4 , 2 2 7 3 , 2 1 6 9 8 , 7 3 7 6 0 , 8 1 5 8 3 , 2 4 1 1 3 , 3 0 5 7 , 8 2 0 4 2 , 9 3 6 3 , 4 7 6 1 4 , 0 1 2 1 4 , 2 1 8 6 5 , 3 3 0 0 0 , 0 6 3 0 0 0 , 5 5 1 6 3 3 , 5 3 1 0 0 5 , 7 2 0 0 5 , 1 5 1 1 7 3 , 1 1 5 8 0 5 , 0 6 5 1 2 8 , 0 5 6 5 2 4 , 4 1 1 5 0 3 , 7 2 5 9 1 3 , 9 1 9 5 0 3 , 3 1 6 6 4 0 , 3 7 1 5 3 4 , 4 0 0 , 1 – – – – – – 6 5 6 , 6 6 5 6 , 6 6 5 6 , 6 4 6 6 , 1 6 5 6 , 6 6 5 6 , 6 6 5 6 , 6 1 5 0 , 3 6 5 6 , 6 $ I T S – – – – – – – – $ s e e f - m o C e e t t i m $ / s e e F 1 y r a l a S – – – – 0 0 0 , 5 3 8 6 7 , 0 2 8 6 5 , 3 3 0 0 0 , 0 6 3 0 0 0 , 0 2 1 8 6 5 , 4 1 1 0 0 5 , 7 2 0 0 5 , 1 3 0 0 0 , 0 2 1 0 0 8 , 3 4 1 0 0 9 , 5 3 1 0 0 3 , 1 9 1 – 0 0 8 , 3 4 1 0 0 5 , 1 3 3 0 0 0 , 5 6 1 – 0 0 4 , 1 9 3 – – – – – – – – – 5 1 9 , 0 6 3 2 5 9 , 7 1 4 5 6 8 , 2 5 4 1 6 7 , 2 1 1 9 4 8 , 6 7 3 3 6 1 , 1 8 5 9 4 6 , 1 4 4 5 9 9 , 9 6 1 9 7 3 , 6 0 6 l e a h c i M d r a h c i R , g n i d r a H 5 y n o h t n A l e a h c i M , y r a e L ’ O 5 n h o J r e h p o t s i r h C , y n c e R r e d n a x e l A y o R , n i l k n a r F n e h p e t S , h c a l r e G h g u H n h o J , n o s r e d n A n h o J r o v e r T , n w o r B h t i d u J , n a o l S s e v i t u c e x E s e m a J d r a w d E n y t r a M , s e m a E 6 e i l E s e u q c a J , n i a d a u o G t r a u t S k r a M , e n a l r a f c a M r e h p o t s i r h C r e t e P , w o s a W n h o J d r a h c i R , n o s n i k l i W e c n e r e T n o h t a n o J , g n u o Y 7 s e m a J e c u r B , d o o W 6 0 0 2 s r o t c e r i D e m a N 3 8 6 , 6 8 8 6 5 6 , 6 8 8 , 2 6 5 6 , 6 0 0 0 , 0 8 3 , 1 0 0 0 , 0 0 5 , 1 s e l r a h C n h o J , t n i l F - e c i l l E 9 7 8 , 3 0 5 7 , 9 2 1 8 7 , 7 1 0 0 0 , 0 2 1 5 s e l r a h C r e t e P , t t e n r a B d e r f l A h t e n n e K , n a e D ) I D E U N T N O C ( S E R U S O L C S I D L E N N O S R E P T N E M E G A N A M Y E K . 0 3 ) I D E U N T N O C ( I N O T A S N E P M O C L E N N O S R E P T N E M E G A N A M Y E K ) B ( n o i t a u n n a r e p u S r e d n U . n o i t a l s i g e l e e t n a r a u G n o i t a u n n a r e p u S e l b a c i l p p a r e d n u s n o i t a g i l b o s ’ y n a p m o C e h t y f s i t a s o t , n i l k n a r F A R r M f o n o i t p e c x e e h t h t i w , s r o t c e r i D e v i t u c e x e - n o N f o f l a h e b n o e d a m s n o i t u b i r t n o c n o i t a u n n a r e p u S t i f e n e b e h t f o t n e m s s e s s a l a i r a u t c a r o s n o i t u b i r t n o c h s a c r e h t i e t n e s e r p e r s t n u o m A . a i l a r t s u A f o t n e d i s e r a t o n s i e h s a n i l k n a r F A R r M f o f l a h e b n o e d a m e b o t d e r i u q e r t o n e r a s n o i t u b i r t n o c n o i t a u n n a r e p u s , n o i t a l s i g e l e e t n a r a u G . t n a v e l e r e r e h w d e d i v o r p . s e v i t u c e x e d n a O E C e h t r o f e d i a l e d A n i e c i f f o d a e h s ’ y n a p m o C e h t n i d e d i v o r p g n i k r a p r a c f o t s o c e h t s e d u l c n I . y r a l a s o n d n a s e e f s e v i e c e r s r o t c e r i D e v i t u c e x e - n o N e h t f o h c a E 1 2 3 e h t g n i y l p p a s t n e m y a P d e s a b - e r a h S 2 B S A A h t i w e c n a d r o c c a n i d e n i m r e t e d n e e b s a h t n a r g r i e h t f o e t a d e h t t a s a s n o i t p o d n a s R A S f o e u l a v l a n o i t o n e h T . t s e v s t n e m u r t s n i y t i u q e e h t d l u o h s e s i l a e r y l e t a m i t l u y a m s e v i t u c e x e l a u d i v i d n i t a h t ) y n a f i ( t i f e n e b e h t f o e v i t a c i d n i r o o t d e t a l e r t o n s i n o i t a r e n u m e r s a d e d u l c n i t n u o m a e h T . d o i r e p g n i t s e v e h t r e v o d e t a c o l l a y l e v i s s e r g o r p s i d n a e t a d t n a r g e h t t a s a d e n i m r e t e d s i d o i r e p g n i t r o p e r e h t g n i r u d t s e v t o n o d h c i h w s t n e m u r t s n i y t i u q e f o e u l a v l a n o i t o n e h T . r a e y e h t g n i r u d g n i d n a t s t u o r o d e t n a r g n o i t a s n e p m o c y t i u q e f o e u l a v l a n o i t o n e h t f o n o i t r o p o r p a s e d u l c n i n o i t a r e n u m e r , s d r a d n a t S g n i t n u o c c A e h t f o s t n e m e r i u q e r e h t h t i w e c n a d r o c c a n I 4 . 6 0 0 2 e n u J 4 n o h t a e d s i h l i t n u r o t c e r i D a s a e c i f f o d l e h y n c e R J C r M . 6 0 0 2 r e b m e c e D 5 1 n o r o t c e r i D a s a d e s a e c y r a e L ’ O A M r M d n a 6 0 0 2 y r a u r b e F 8 2 n o r o t c e r i D a s a d e s a e c t t e n r a B C P r M . s t n e m e t a t s l a i c n a n i f e h t o t ) B ( 9 2 e t o n n i t u o t e s e r a n o i t a u l a v e h t g n i y l r e d n u s n o i t p m u s s a e h t f o s l i a t e D . d o h t e M n o i t a l u m i S o l r a C e t n o M . d e s p a l 0 0 0 , 6 7 1 $ f o e u l a v e h t t a , s R A S 0 0 0 , 0 4 s i h o t t h g i r e h t d n a 6 0 0 2 h c r a M 0 3 n o y n a p m o C e h t h t i w t n e m y o l p m e d e s a e c n i a d a u o G E J r M . d e t i e f r o f 5 6 3 , 3 1 1 $ f o e u l a v e h t t a , s n o i t p o 0 0 6 , 0 1 1 s i h o t t h g i r e h t d n a 6 0 0 2 e n u J 5 1 n o y n a p m o C e h t h t i w t n e m y o l p m e d e s a e c d o o W J B r M 5 6 7 Santos Annual Report 2006 121 7 2 1 , 5 3 5 , 1 5 8 7 , 8 7 4 , 1 2 4 3 , 6 5 5 2 2 , 7 7 1 , 1 5 0 5 , 5 9 9 , 8 3 6 9 , 7 5 0 0 7 , 2 8 8 , 2 7 9 8 , 0 2 1 5 4 9 , 3 3 9 , 5 l a t o T SAN175 AW2 Fins 21/3/07 10:36 AM Page 122 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 e c n a d e t a l e r - m r o f r e P l a t o T n o i t a - n i m r e T r e h t O - g n o l m r e t s t i f e n e b 4 s t n e m y a p d e s a b - e r a h S t s o P t n e m - r e p u S - y o l p m e s n o i t p O s R A S 3 n o i t a u n n a l a t o T $ $ $ $ 2 r e h t O s t i f e n e b e e y o l p m e m r e t - t r o h S $ s e e f - m o C e e t t i m $ / s e e F 1 y r a l a S % – – 1 5 – – – – – – 4 4 8 4 5 3 4 5 1 5 4 4 7 5 $ $ $ 2 6 8 , 5 4 1 9 6 9 , 1 1 1 3 9 2 , 4 3 2 , 3 2 6 8 , 1 4 3 0 8 9 , 2 3 1 7 0 3 , 9 0 1 0 0 8 , 0 3 1 8 7 0 , 2 0 1 2 2 8 , 5 4 1 2 6 5 , 5 4 7 7 8 6 , 3 1 9 0 9 8 , 8 1 6 – – – – – – – – – – – 7 4 5 , 1 4 0 9 6 , 3 4 1 , 1 2 4 6 , 7 3 7 5 4 1 , 1 5 6 3 5 1 , 4 1 3 , 1 – – – – 2 4 7 , 9 7 5 , 0 1 7 4 5 , 1 4 – – – – – – – – – – – – – – – – – $ l a t o T – – – – – – – – – $ – – – – – – – – – – – – – – – – – – 8 4 2 , 8 4 1 0 0 8 , 7 4 2 3 0 3 , 9 1 2 4 0 4 , 2 9 2 3 0 3 , 9 1 2 2 9 9 , 5 4 1 0 4 1 , 2 2 3 – – – – 0 0 5 , 7 5 8 4 7 , 0 9 0 0 8 , 7 4 2 3 0 3 , 9 1 2 4 0 4 , 2 9 2 3 0 3 , 9 1 2 2 9 9 , 5 4 1 – – 0 4 1 , 2 2 3 $ I T S – – – – – – – – 8 7 8 , 0 7 2 5 1 4 , 3 6 9 , 2 5 1 9 , 5 0 0 5 , 7 5 6 , 1 2 6 8 , 1 1 6 6 1 , 0 1 0 0 0 , 4 3 1 3 0 8 , 1 0 1 – – 3 5 1 , 8 0 0 0 , 4 2 0 5 6 , 3 9 0 0 0 , 0 1 1 s e l r a h C r e t e P , t t e n r a B 7 d e r f l A h t e n n e K , n a e D 2 6 8 , 1 1 0 8 9 , 0 1 7 0 8 , 8 0 0 8 , 0 1 8 2 4 , 8 2 2 8 , 1 1 4 3 4 , 9 3 5 8 5 , 4 3 8 4 7 , 6 3 9 5 9 , 4 1 8 1 0 , 7 2 8 6 8 , 5 2 5 8 5 , 1 1 0 0 0 , 0 3 3 0 0 0 , 2 2 1 0 0 5 , 0 0 1 0 0 0 , 0 2 1 0 5 6 , 3 9 0 0 0 , 4 3 1 0 8 8 , 7 5 5 2 0 3 , 1 3 6 2 9 2 , 1 2 3 7 2 3 , 6 3 8 1 2 3 , 1 9 4 5 8 2 , 9 7 4 8 2 4 , 0 8 9 – – – – – – 5 1 9 , 5 5 1 9 , 5 3 8 2 , 5 5 1 9 , 5 5 1 9 , 5 5 1 9 , 5 5 1 9 , 5 – 0 0 4 , 6 7 1 0 0 0 , 0 9 1 0 0 1 , 0 3 3 0 0 5 , 6 5 1 0 0 0 , 8 3 1 0 0 9 , 4 2 4 – – – – – – – – – 0 0 0 , 2 1 0 0 0 , 8 1 0 0 0 , 0 1 – 0 0 0 , 4 2 0 0 0 , 0 0 3 , 1 s e l r a h C n h o J , t n i l F - e c i l l E 0 0 0 , 0 3 3 0 0 0 , 0 1 1 0 0 5 , 2 8 0 0 0 , 0 1 1 0 5 6 , 3 9 0 0 0 , 0 1 1 5 6 5 , 5 7 3 7 8 3 , 5 3 4 9 0 0 , 6 1 3 2 1 3 , 0 0 5 6 0 9 , 8 2 3 0 7 3 , 5 3 3 3 1 6 , 9 4 5 8 m a i l l i W e m e a r G , r o g e r G c M l e a h c i M d r a h c i R , g n i d r a H y n o h t n A l e a h c i M , y r a e L ’ O 7 n h o J r e h p o t s i r h C , y n c e R n e h p e t S , h c a l r e G h t i d u J , n a o l S s e v i t u c e x E s e m a J d r a w d E n y t r a M , s e m a E r e h p o t s i r h C r e t e P , w o s a W n h o J d r a h c i R , n o s n i k l i W e i l E s e u q c a J , n i a d a u o G 9 k e r e D l u a P , e r o o M e c n e r e T n o h t a n o J , g n u o Y s e m a J e c u r B , d o o W s t n e m u r t s n i y t i u q e f o e u l a v l a n o i t o n e h T . r a e y e h t g n i r u d g n i d n a t s t u o r o d e t n a r g n o i t a s n e p m o c y t i u q e f o e u l a v l a n o i t o n e h t f o n o i t r o p o r p a s e d u l c n i n o i t a r e n u m e r , s d r a d n a t S g n i t n u o c c A e h t f o s t n e m e r i u q e r e h t h t i w e c n a d r o c c a n I t a h t ) y n a f i ( t i f e n e b e h t f o e v i t a c i d n i r o o t d e t a l e r t o n s i n o i t a r e n u m e r s a d e d u l c n i t n u o m a e h T . d o i r e p g n i t s e v e h t r e v o d e t a c o l l a y l e v i s s e r g o r p s i d n a e t a d t n a r g e h t t a s a d e n i m r e t e d s i d o i r e p g n i t r o p e r e h t g n i r u d t s e v t o n o d h c i h w g n i y l p p a s t n e m y a P d e s a b - e r a h S 2 B S A A h t i w e c n a d r o c c a n i d e n i m r e t e d n e e b s a h t n a r g r i e h t f o e t a d e h t t a s a s n o i t p o d n a s R A S f o e u l a v l a n o i t o n e h T . t s e v s t n e m u r t s n i y t i u q e e h t d l u o h s e s i l a e r y l e t a m i t l u y a m s e v i t u c e x e l a u d i v i d n i . n o i t a l s i g e l e e t n a r a u G n o i t a u n n a r e p u S e l b a c i l p p a r e d n u s n o i t a g i l b o s ’ y n a p m o C e h t y f s i t a s o t s r o t c e r i D e v i t u c e x e - n o N f o f l a h e b n o e d a m s n o i t u b i r t n o c n o i t a u n n a r e p u S . s t n e m e t a t s l a i c n a n i f e h t o t ) B ( 9 2 e t o n n i t u o t e s e r a n o i t a u l a v e h t g n i y l r e d n u s n o i t p m u s s a e h t f o s l i a t e D . d o h t e M n o i t a l u m i S o l r a C e t n o M e h t . e d i a l e d A n i e c i f f o d a e h s ’ y n a p m o C e h t n i d e d i v o r p g n i k r a p r a c f o t s o c e h t s e d u l c n I . y r a l a s o n d n a s e e f s e v i e c e r s r o t c e r i D e v i t u c e x e - n o N e h t f o h c a E 1 2 3 4 s t n a r g f o s t s i s n o c r a e y l a i c n a n i f e h t r o f n o i t a r e n u m e r s ’ e v i t u c e x e h c a e f o % 3 2 o t % 0 2 f o e g n a r a , s e v i t u c e x e r o i n e s f o t c e p s e r n I . d e c n e m m o c y n a p m o C e h t h t i w t n e m y o l p m e s i h e m i t e h t t a s n o i t p o d e t n a r g s a w r o t c e r i D g n i g a n a M e h T 5 d l u o w t a h t s t n a r g e h t r o f s p u - h c t a c s a y r a s s e c e n e r e w o w t r e h t o e h t , 5 0 0 2 r o f t n a r g l a m r o n e h t s a w e e r h t e h t f o e n o e l i h W . e m i t e m a s e h t t a s t n a r g e t a r a p e s e e r h t t n e s e r p e r 5 0 0 2 n i d e t n a r g s n o i t p o d n a s R A S f o r e b m u n l a t o t e h T 6 d e t e l p m o c s a w h c i h w , n g i s e d s t i f o w e i v e r h g u o r o h t a e l b a n e o t m a r g o r p I T L e h t f o n o i s n e p s u s e h t o t e u d s a w e m i t e t a i r p o r p p a e h t t a e c a l p e k a t t o n d i d s t n a r g e s e h t n o s a e r e h T . 4 0 0 2 d n a 3 0 0 2 n i e c a l p n e k a t e v a h y l i r a n i d r o . s n o i t p o r o s R A S f o . 4 0 0 2 e t a l n i . d e s p a l , 3 0 3 , 9 1 2 $ f o e u l a v e h t t a , s R A S 0 0 1 , 3 5 s i h d n a 5 0 0 2 r e b m e v o N 1 2 n o y n a p m o C e h t h t i w t n e m y o l p m e d e s a e c e r o o M D P r M . 5 0 0 2 r e b m e t p e S 0 3 n o d r a o B e h t m o r f d e r i t e r r o g e r G c M W G r M . 5 0 0 2 y r a u r b e F 3 2 n o d r a o B e h t d e n i o j y n c e R J C r M d n a n a e D A K r M 7 8 9 0 9 1 , 5 9 5 , 1 2 9 4 , 3 0 2 8 9 6 , 1 9 3 , 1 2 0 8 , 5 4 5 3 0 2 , 7 9 3 , 8 8 8 6 , 6 4 0 0 4 , 3 7 0 , 3 3 5 1 , 6 9 2 6 9 , 0 8 1 , 5 l a t o T ) I D E U N T N O C ( S E R U S O L C S I D L E N N O S R E P T N E M E G A N A M Y E K . 0 3 ) I D E U N T N O C ( I N O T A S N E P M O C L E N N O S R E P T N E M E G A N A M Y E K ) B ( 5 0 0 2 s r o t c e r i D e m a N 122 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 123 y e k h c a e y b , y l l a i c i f e n e b r o y l t c e r i d n i , y l t c e r i d d l e h y n a p m o C e h t f o s e r a h s y r a n i d r o r e v o s n o i t p o d n a s t h g i r f o r e b m u n e h t n i d o i r e p g n i t r o p e r e h t g n i r u d t n e m e v o m e h T d e t s e V t o n t u b d n a d e t s e V e l b a s i c r e x e e l b a s i c r e x e d e t s e V f o d n e t a r a e y e h t f o d n e t a r a e y e h t f o d n e t a r a e y e h t d e t s e V g n i r u d r a e y e h t e c n a l a B f o d n e t a r a e y e h t 5 s e g n a h C d e t s e v t h g i r 4 d e t s e v 3 , 2 , 1 d e t n a r G r a e y e h t r e h t O d i a p t n u o m A n o i t p o r e p / d e s i c r e x e s t h g i r s n o i t p O / d e s i c r e x e t a e c n a l a B f o g n i n n i g e b 6 0 0 2 s n o i t p O s r o t c e r i D e m a N – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 4 4 7 , 2 1 9 6 8 , 0 6 4 4 7 , 2 1 9 6 8 , 0 6 – – 0 0 5 , 4 1 – – – – – 0 0 1 , 1 1 – – – 4 4 0 , 4 3 1 9 6 7 , 4 8 1 0 0 0 , 0 5 – 0 0 7 , 3 6 0 0 0 , 0 0 5 , 2 – – – – – – – ) 0 0 5 , 4 1 ( ) 0 5 2 , 8 3 1 ( – 0 0 2 , 3 9 – 3 1 6 , 3 7 3 1 6 , 3 7 0 0 6 , 5 2 3 1 7 , 5 2 0 , 3 ) 0 5 7 , 2 5 1 ( – – – – – – – – – – – – – – – – – – – – – – 0 0 3 , 4 – 0 0 0 , 0 1 0 0 8 , 4 0 5 8 , 8 0 0 8 , 1 1 0 0 0 , 3 1 0 5 7 , 2 5 – – – 0 0 5 , 9 3 – 0 0 2 , 9 1 0 0 2 , 0 7 0 0 6 , 1 5 0 0 0 , 2 5 0 0 5 , 2 3 2 – – ) 0 0 3 , 4 ( ) 0 0 0 , 0 5 ( ) 0 0 8 , 4 ( ) 0 5 8 , 8 ( ) 0 0 8 , 1 1 ( – ) 0 0 0 , 3 1 ( ) 0 5 7 , 2 9 ( – – 2 5 . 6 $ – 2 5 . 6 $ – – – 8 3 . 6 $ 6 4 . 8 $ – – – – – – – – – – – – – ) 0 0 0 , 0 0 2 ( ) 0 0 0 , 0 0 2 ( – – – – ) 5 8 0 , 5 4 ( ) 0 5 6 , 7 2 ( 0 0 0 , 0 0 5 , 2 – – – – 0 0 7 , 3 6 0 0 9 , 5 6 – – 0 0 7 , 3 6 4 4 3 , 0 7 0 0 0 , 0 5 9 6 3 , 3 3 3 0 0 0 , 0 0 2 – – – 5 8 9 , 0 1 2 s e m a J d r a w d E n y t r a M n h o J r o v e r T , n w o r B , s e m a E h g u H n h o J , n o s r e d n A s e l r a h C n h o J , t n i l F - e c i l l E s e v i t u c e x E t r a u t S k r a M , e n a l r a f c a M e i l E s e u q c a J , n i a d a u o G r e h p o t s i r h C r e t e P , w o s a W n h o J d r a h c i R , n o s n i k l i W 6 s e m a J e c u r B , d o o W 0 0 2 , 3 9 – e c n e r e T n o h t a n o J , g n u o Y ) 5 3 7 , 2 7 4 ( 0 0 5 , 6 8 7 , 2 8 9 6 , 4 6 8 – – ) 0 0 3 , 4 ( – ) 0 0 0 , 0 1 ( ) 0 0 8 , 4 ( ) 0 5 8 , 8 ( ) 0 0 8 , 1 1 ( ) 0 0 0 , 3 1 ( ) 0 5 7 , 2 5 ( – – – – – – 0 0 9 , 9 1 0 0 0 , 3 2 0 0 2 , 6 1 0 0 1 , 9 5 – – 0 0 6 , 8 0 0 6 , 9 1 0 0 0 , 0 6 0 0 8 , 8 2 0 0 8 , 0 7 0 0 1 , 3 5 0 0 0 , 8 7 0 0 9 , 8 1 3 s e m a J d r a w d E n y t r a M n h o J r o v e r T , n w o r B , s e m a E h g u H n h o J , n o s r e d n A 7 e i l E s e u q c a J , n i a d a u o G t r a u t S k r a M , e n a l r a f c a M r e h p o t s i r h C r e t e P , w o s a W n h o J d r a h c i R , n o s n i k l i W e c n e r e T n o h t a n o J , g n u o Y s e m a J e c u r B , d o o W l a t o T s e v i t u c e x E s t h g i R l a t o T r e p 7 7 . 1 $ f o e u l a v r i a f a e v a h d e t n a r g s n o i t p o e h t f o 0 0 0 , 0 0 5 , t n a r g f o e t a d e h t t A . 6 3 . 1 1 $ f o e c i r p e s i c r e x e n a , d n a 6 1 0 2 y a M 3 f o e t a d n o i t a r i p x e n a e v a h h c i h w , 6 0 0 2 y a M 4 n o t n i l F - e c i l l E C J r M o t d e t n a r g e r e w s n o i t p o 0 0 0 , 0 0 5 , 2 1 , t e m e r a s n o i t i d n o c e c n a m r o f r e p g n i d i v o r P . t n i l F - e c i l l E C J r M o t t s o c o n t a d e t n a r g e r e w s n o i t p o e h T . n o i t p o r e p 5 0 . 2 $ f o e u l a v r i a f a e v a h s n o i t p o 0 0 0 , 0 0 0 , 1 d n a , n o i t p o r e p 4 9 . 1 $ f o e u l a v r i a f a e v a h s n o i t p o 0 0 0 , 0 0 0 , 1 , n o i t p o . 9 0 0 2 t s u g u A 6 2 n a h t r e i l r a e o n e l b a s i c r e x e e r a s n o i t p o e h t f o 0 0 0 , 0 0 0 , 1 d n a , 8 0 0 2 t s u g u A 6 2 n a h t r e i l r a e o n e l b a s i c r e x e e r a s n o i t p o e h t f o 0 0 0 , 0 0 0 , 1 , 7 0 0 2 t s u g u A 6 2 n a h t r e i l r a e o n e l b a s i c r e x e e r a s n o i t p o e h t f o 0 0 0 , 0 0 5 t s o c o n t a d e d i v o r p e r e w s n o i t p o e h T . e t a d t n a r g t a 6 7 . 0 $ f o e u l a v r i a f a d n a , 8 4 . 0 1 $ f o e c i r p e s i c r e x e n a , 6 1 0 2 r e b o t c O 4 2 f o e t a d n o i t a r i p x e n a e v a h , 6 0 0 2 r e b o t c O 4 2 n o d e t n a r g e r e w r a e y t n e r r u c e h t n i s e v i t u c e x e o t d e t n a r g s n o i t p O 2 e r e w s R A S e h T . e t a d t n a r g t a 6 8 . 2 $ f o e u l a v r i a f a e v a h d n a , n o i t a r e d i s n o c o n r o f t n e i p i c e r e h t h t i w t s e v , 6 1 0 2 r e b o t c O 4 2 f o e t a d n o i t a r i p x e n a e v a h , 6 0 0 2 r e b o t c O 4 2 n o d e t n a r g e r e w r a e y t n e r r u c e h t n i s e v i t u c e x e o t d e t n a r g s R A S 3 . 9 0 0 2 y r a u n a J 1 n a h t r e i l r a e o n e l b a s i c r e x e e r a s n o i t p o e h t , t e m e r a s n o i t i d n o c e c n a m r o f r e p g n i d i v o r P . s t n e i p i c e r e h t o t e h t r o , t e m t o n e r a s n o i t i d n o c e c i v r e s n e h w s R A S f o e r u t i e f r o f , t e m g n i e b t o n s n o i t i d n o c e c n a m r o f r e p o t e u d s t n e m e l t i t n e s R A S n i s n o i t c u d e r , d o i r e p e s i c r e x e e h t f o y r i p x e e h t n o s n o i t p o f o e s p a l e h t e d u l c n i y a m s e g n a h c r e h t O . s R A S f o g n i t s e v d n a s n o i t p o f o e s i c r e x e e h t f o t l u s e r a s a d e u s s i s e r a h s e h t n o d i a p n u s t n u o m a o n e r a e r e h T . t n e i p i c e r e h t o t y n a p m o C e h t f o e r a h s y r a n i d r o e n o f o e u s s i e h t n i s t l u s e r d e t s e v R A S r o d e s i c r e x e n o i t p o h c a E . 9 0 0 2 y r a u n a J 1 n a h t r e i l r a e o n t s e v s R A S e h t , t e m e r a s n o i t i d n o c e c n a m r o f r e p g n i d i v o r P . s t n e i p i c e r e h t o t t s o c o n t a d e d i v o r p . y n a p m o C e h t h t i w t n e m y o l p m e e t a n i m r e t y e h t n e h w e r u s o l c s i d l e n n o s r e p t n e m e g a n a m y e k e h t m o r f g n i d l o h y t i u q e s ’ e e y o l p m e n a f o l a v o m e r . d e t i e f r o f 5 6 3 , 3 1 1 $ f o e u l a v e h t t a s n o i t p o 0 0 6 , 0 1 1 s i h o t t h g i r e h t d n a 6 0 0 2 e n u J 5 1 n o y n a p m o C e h t h t i w t n e m y o l p m e d e s a e c d o o W J B r M . d e s p a l 0 0 0 , 6 7 1 $ f o e u l a v e h t t a s R A S 0 0 0 , 0 4 s i h o t t h g i r e h t d n a 6 0 0 2 h c r a M 0 3 n o y n a p m o C e h t h t i w t n e m y o l p m e d e s a e c n i a d a u o G E J r M 4 5 6 7 . ) B ( 9 2 e t o n n i d e d u l c n i e r a t n e i p i c e r e h t h t i w t s e v s R A S r o s n o i t p o e h t e r o f e b t e m e b t s u m t a h t s n o i t i d n o c e c n a m r o f r e p d n a e c i v r e s e h t g n i d r a g e r s l i a t e D Santos Annual Report 2006 123 : s w o l l o f s a s i , s e i t r a p d e t a l e r r i e h t g n i d u l c n i , n o s r e p t n e m e g a n a m ) I D E U N T N O C ( S E R U S O L C S I D L E N N O S R E P T N E M E G A N A M Y E K . 0 3 L E N N O S R E P T N E M E G A N A M Y E K F O S G N D L O H Y T U Q E I I i s g n d o h l s t h g i r d n a s n o i t p O ) C ( SAN175 AW2 Fins 21/3/07 10:36 AM Page 124 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 5 8 0 , 5 4 5 8 0 , 5 4 0 0 0 , 0 0 2 0 0 0 , 0 0 2 0 0 0 , 0 0 0 , 1 – – – – – 0 0 0 , 0 5 1 0 0 0 , 0 5 0 0 0 , 0 5 2 0 0 0 , 0 5 0 0 0 , 0 0 2 – – – – 5 8 9 , 0 1 2 5 8 0 , 5 4 2 5 8 0 , 5 4 2 0 0 0 , 0 5 4 , 1 5 8 9 , 0 6 4 – – – – – – – – – – – – – – – – – – – – – – – – 0 0 6 , 9 1 0 0 0 , 0 6 – 0 0 8 , 0 7 0 0 1 , 3 5 – 0 0 0 , 8 7 0 0 5 , 1 8 2 ) 0 0 1 , 3 5 ( – – – – – – – – – – – – – – – ) 0 0 1 , 3 5 ( 3 8 . 5 $ 3 8 . 5 $ – – – 0 2 . 6 $ 2 5 . 6 $ 0 2 . 6 $ 9 6 . 6 $ 9 6 . 6 $ – – – – – – – ) 0 0 0 , 0 0 0 , 2 ( ) 0 0 0 , 0 0 0 , 1 ( – 0 0 0 , 0 0 0 , 3 s e l r a h C n h o J , t n i l F - e c i l l E – – – ) 0 0 0 , 5 2 ( ) 0 0 0 , 0 0 1 ( ) 0 0 0 , 0 5 1 ( ) 0 0 0 , 0 5 ( ) 0 0 0 , 0 5 2 ( 0 0 0 , 0 5 – – – – – – 0 0 9 , 5 6 1 0 0 0 , 0 0 2 0 0 0 , 5 2 1 – 0 0 0 , 0 5 1 5 8 0 , 5 9 0 0 0 , 0 5 2 ) 0 0 0 , 5 7 5 , 3 ( 0 0 9 , 5 1 2 5 8 0 , 0 2 8 , 3 – – – – – – – – – 0 0 6 , 9 1 0 0 0 , 0 6 0 0 1 , 3 5 0 0 8 , 0 7 0 0 1 , 3 5 0 0 0 , 8 7 0 0 6 , 4 3 3 – – – – – – – – s e m a J d r a w d E n y t r a M , s e m a E e i l E s e u q c a J , n i a d a u o G k e r e D l u a P , e r o o M s e v i t u c e x E r e h p o t s i r h C r e t e P , w o s a W n h o J d r a h c i R , n o s n i k l i W e c n e r e T n o h t a n o J , g n u o Y s e m a J e c u r B , d o o W s e m a J d r a w d E n y t r a M , s e m a E r e h p o t s i r h C r e t e P , w o s a W n h o J d r a h c i R , n o s n i k l i W e i l E s e u q c a J , n i a d a u o G 5 k e r e D l u a P , e r o o M e c n e r e T n o h t a n o J , g n u o Y s e m a J e c u r B , d o o W l a t o T s e v i t u c e x E s t h g i R l a t o T 0 0 3 , 5 5 , t e m e r a s n o i t i d n o c e c n a m r o f r e p g n i d i v o r P . s t n e i p i c e r e h t o t t s o c o n t a d e d i v o r p e r e w s n o i t p o e h T . n o i t p o r e p 5 1 . 1 $ f o e u l a v r i a f a e v a h s n o i t p o 0 0 3 , 5 0 1 d n a , n o i t p o r e p 0 9 . 0 $ f o e u l a v r i a f a e v a h s n o i t p o 0 0 3 , 5 5 , n o i t p o r e p 9 5 . 0 $ f o e u l a v r i a f a e v a h d e t n a r g s n o i t p o e h t f o 0 0 3 , 5 5 , t n a r g f o e t a d e h t t A . 6 4 . 8 $ f o e c i r p e s i c r e x e n a d n a 5 1 0 2 y a M 2 2 f o e t a d n o i t a r i p x e n a e v a h , 5 0 0 2 y a M 3 2 n o d e t n a r g e r e w r a e y t n e r r u c e h t n i s e v i t u c e x e o t d e t n a r g s n o i t p O 1 0 0 0 , 5 0 1 , t e m e r a s n o i t i d n o c e c n a m r o f r e p g n i d i v o r P . s t n e i p i c e r e h t o t t s o c o n t a d e t n a r g e r e w s R A S e h T . R A S r e p 3 6 . 4 $ f o e u l a v r i a f a e v a h s R A S 0 0 6 , 4 2 1 d n a , R A S r e p 7 1 . 4 $ f o e u l a v r i a f a e v a h s R A S 0 0 0 , 5 0 1 , R A S r e p 9 5 . 3 $ f o e u l a v r i a f a e v a h d e t n a r g s R A S e h t f o 0 0 0 , 5 0 1 , t n a r g f o e t a d e h t t A . n o i t a r e d i s n o c o n r o f t n e i p i c e r e h t h t i w t s e v d n a , 5 1 0 2 y a M 2 2 f o e t a d n o i t a r i p x e n a e v a h , 5 0 0 2 y a M 3 2 n o d e t n a r g e r e w r a e y t n e r r u c e h t n i s e v i t u c e x e o t d e t n a r g s R A S 2 . 8 0 0 2 y r a u n a J 1 n a h t r e i l r a e o n e l b a s i c r e x e e r a s n o i t p o 0 0 3 , 5 0 1 d n a , 7 0 0 2 y r a u n a J 1 n a h t r e i l r a e o n e l b a s i c r e x e e r a s n o i t p o 0 0 3 , 5 5 , 6 0 0 2 y r a u n a J 1 n a h t r e i l r a e o n e l b a s i c r e x e e r a s n o i t p o e h t r o , t e m t o n e r a s n o i t i d n o c e c i v r e s n e h w s R A S f o e r u t i e f r o f , t e m g n i e b t o n s n o i t i d n o c e c n a m r o f r e p o t e u d s t n e m e l t i t n e s R A S n i s n o i t c u d e r , d o i r e p e s i c r e x e e h t f o y r i p x e e h t n o s n o i t p o f o e s p a l e h t e d u l c n i y a m s e g n a h c r e h t O . s R A S f o g n i t s e v d n a s n o i t p o f o e s i c r e x e e h t f o t l u s e r a s a d e u s s i s e r a h s e h t n o d i a p n u s t n u o m a o n e r a e r e h T . t n e i p i c e r e h t o t y n a p m o C e h t f o e r a h s y r a n i d r o e n o f o e u s s i e h t n i s t l u s e r d e t s e v R A S r o d e s i c r e x e n o i t p o h c a E . 8 0 0 2 y r a u n a J 1 n a h t r e i l r a e o n t s e v s R A S 0 0 6 , 4 2 1 d n a , 7 0 0 2 y r a u n a J 1 n a h t r e i l r a e o n t s e v s R A S 0 0 0 , 5 0 1 , 6 0 0 2 y r a u n a J 1 n a h t r e i l r a e o n t s e v s R A S . y n a p m o C e h t h t i w t n e m y o l p m e e t a n i m r e t y e h t n e h w e r u s o l c s i d l e n n o s r e p t n e m e g a n a m y e k e h t m o r f g n i d l o h y t i u q e s ’ e e y o l p m e n a f o l a v o m e r . d e s p a l s R A S 0 0 1 , 3 5 s i h d n a 5 0 0 2 r e b m e v o N 1 2 n o y n a p m o C e h t h t i w t n e m y o l p m e d e s a e c e r o o M D P r M 3 4 5 . ) B ( 9 2 e t o n n i d e d u l c n i e r a t n e i p i c e r e h t h t i w t s e v s R A S d n a s n o i t p o e h t e r o f e b t e m e b t s u m t a h t s n o i t i d n o c e c n a m r o f r e p d n a e c i v r e s e h t g n i d r a g e r s l i a t e D d e t s e V t o n t u b d n a d e t s e V e l b a s i c r e x e e l b a s i c r e x e d e t s e V f o d n e t a r a e y e h t f o d n e t a r a e y e h t f o d n e t a r a e y e h t d e t s e V g n i r u d r a e y e h t e c n a l a B f o d n e t a r a e y e h t 4 s e g n a h C d e t s e v t h g i r 3 d e t s e v 2 , 1 d e t n a r G r a e y e h t r e h t O d i a p t n u o m A n o i t p o r e p / d e s i c r e x e s t h g i r s n o i t p O / d e s i c r e x e t a e c n a l a B f o g n i n n i g e b 5 0 0 2 s n o i t p O s r o t c e r i D e m a N ) I D E U N T N O C ( L E N N O S R E P T N E M E G A N A M Y E K F O S G N D L O H Y T U Q E I I ) C ( ) I D E U N T N O C ( S E R U S O L C S I D L E N N O S R E P T N E M E G A N A M Y E K . 0 3 124 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 125 d e t a l e r r i e h t g n i d u l c n i , n o s r e p t n e m e g a n a m y e k h c a e y b , y l l a i c i f e n e b r o y l t c e r i d n i , y l t c e r i d d l e h y n a p m o C e h t f o s e r a h s f o r e b m u n e h t n i d o i r e p g n i t r o p e r e h t g n i r u d t n e m e v o m e h T f o d n e t a r a e y e h t y l l a n i m o n d l e h e c n a l a B e c n a l a B f o d n e t a r a e y e h t r e h t O 1 s e g n a h c d e m e e d e R g n i t s e v s t h g i r f o e s i c r e x e s n o i t p o f o n o d e v i e c e R n o d e v i e c e R s a d e t n a r G t a e c n a l a B g n i n n i g e b n o i t a s n e p m o c r a e y e h t f o – – – – – – – – – – – – – – – – – – – – – – – 0 0 0 , 3 – ) 4 9 3 , 2 1 ( 0 4 9 , 7 3 0 , 4 ) 3 0 3 , 4 ( – – – – 0 8 8 , 4 4 0 0 0 , 5 5 7 1 , 6 0 0 0 , 0 0 2 – – – 4 0 2 , 3 4 3 9 , 7 2 1 4 4 , 1 2 – – 4 2 0 , 1 ) 8 9 8 , 4 ( – – – – 3 6 – – ) 0 0 8 , 4 ( ) 6 1 2 , 2 2 2 ( ) 5 2 0 , 0 3 1 ( 5 2 2 5 9 1 0 2 4 – – – 3 8 1 , 0 8 2 – 7 5 7 , 9 2 6 , 4 ) 9 4 5 , 7 7 3 ( – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 0 0 3 , 4 – 0 0 0 , 0 1 0 0 8 , 4 0 0 8 , 1 1 0 5 8 , 8 0 0 0 , 3 1 0 5 7 , 2 5 – – – – – – – – – – – – – 0 0 0 , 0 0 2 – 0 0 0 , 0 0 2 – – – – 5 3 7 , 2 7 5 3 7 , 2 7 4 – – – – – – – – – – – – – – – – – – – – – – – – – 0 0 0 , 3 4 9 3 , 2 1 3 4 2 , 2 4 0 , 4 – – 8 9 8 , 4 6 5 8 , 3 4 – 0 0 0 , 5 – – 2 1 8 , 1 6 1 2 , 2 1 4 0 2 , 3 4 3 1 , 6 1 1 9 5 , 2 1 0 9 2 , 7 5 3 8 1 , 7 6 2 5 2 2 5 9 1 0 2 4 1 2 8 , 1 8 4 , 4 d i a p y l l u f – s e r a h s y r a n i d r O s e l r a h C n h o J , t n i l F - 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e c i l l E s e l r a h C r e t e P , t t e n r a B d e r f l A h t e n n e K , n a e D n e h p e t S , h c a l r e G l e a h c i M d r a h c i R , g n i d r a H y n o h t n A l e a h c i M , y r a e L ’ O n h o J r e h p o t s i r h C , y n c e R s r o t c e r i D h t i d u J , n a o l S s e v i t u c e x E s e m a J d r a w d E n y t r a M , s e m a E r e h p o t s i r h C r e t e P , w o s a W n h o J d r a h c i R , n o s n i k l i W e i l E s e u q c a J , n i a d a u o G 1 k e r e D l u a P , e r o o M e c n e r e T n o h t a n o J , g n u o Y s e m a J e c u r B , d o o W l a t o T 5 0 0 2 e m a N s e r a h s e c n e r e f e r p e l b i t r e v n o c e l b a m e e d e R s e l r a h C n h o J , t n i l F - e c i l l E s r o t c e r i D h t i d u J , n a o l S l a t o T y e k y n a h t i w r a e y e h t t u o h g u o r h t e m i t y n a t a s e i r a i d i s b u s s t i f o y n a r o y t i t n e d e t a d i l o s n o c e h t y b , y l t c e r i d n i r o y l t c e r i d , d e r u c e s r o d e e t n a r a u g , e d a m s n a o l o n n e e b e v a h e r e h T . s e i t r a p d e t a l e r r i e h t g n i d u l c n i , n o s r e p t n e m e g a n a m . 5 0 0 2 r e b m e v o N 1 2 n o y n a p m o C e h t h t i w t n e m y o l p m e d e s a e c e r o o M D P r M 1 L E N N O S R E P T N E M E G A N A M Y E K O T S N A O L ) I D E U N T N O C ( L E N N O S R E P T N E M E G A N A M Y E K F O S G N D L O H Y T U Q E I I ) C ( ) D ( ) I D E U N T N O C ( S E R U S O L C S I D L E N N O S R E P T N E M E G A N A M Y E K . 0 3 126 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 127 31. 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 9 as to tax related balances and other amounts owing by controlled entities; notes 18 and 19 as to amounts owing to controlled entities; note 19 as to guarantees by Santos Ltd of the financing facilities of controlled entities; note 20 as to Non-executive Directors’ retirement benefits; notes 16 and 24 as to investments in controlled entities; note 26 as to interests in joint ventures; and note 30 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 $105,325 (2005: $85,000). 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. 32. REMUNERATION OF AUDITORS The auditor of Santos Ltd is Ernst & Young. Amounts received or due and receivable by Ernst & Young (Australia): An audit or review of the financial report of the entity and any other entity in the consolidated group Other services: Assurance Taxation Other Amounts received or due and receivable by overseas related practices of Ernst & Young (Australia) for: Taxation Other services Amounts received or due and receivable by non-Ernst & Young firms for: External audit services Other services KPMG were the auditors of Santos Ltd in 2005. Consolidated Santos Ltd 2006 $000 2005 $000 2006 $000 2005 $000 816 10 3 4 833 12 38 50 73 – 73 – – – – – – – – 1,168 12 1,180 545 10 3 4 562 – – – 49 – 49 – – – – – – – – 360 6 366 Santos Annual Report 2006 127 SAN175 AW2 Fins 21/3/07 10:36 AM Page 128 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 e s i r p m o c y l n i a m s m e t i d e t a c o l l a n U . s i s a b e l b a n o s a e r a n o d e t a c o l l a e b n a c t a h t e s o h t s a l l e w s a t n e m g e s a o t e l b a t u b i r t t a y l t c e r i d s m e t i e d u l c n i s e i t i l i b a i l d n a s t e s s a , s t l u s e r t n e m g e S I N O T A M R O F N I T N E M G E S . 3 3 . s e i t i l i b a i l d n a s t e s s a e t a r o p r o c d n a , s e s n e p x e d n a s g n w o r r o b , s n a o l g n i i r a e b - t s e r e t n i , e u n e v e r d n a s t e s s a g n n r a e - t s e r e t n i i , e u n e v e r d n e d i v i d s n o i t a r e p o l a t o T s n o i t a r e p o d e u n i t n o c s i D l a t o T s n o i t a r e p o g n i u n i t n o C l a n o i t a n r e t n I a i l a r t s u A 5 0 0 2 n o i l l i m $ 6 0 0 2 n o i l l i m $ 5 0 0 2 n o i l l i m $ 6 0 0 2 n o i l l i m $ 5 0 0 2 n o i l l i m $ 6 0 0 2 n o i l l i m $ 5 0 0 2 n o i l l i m $ 6 0 0 2 n o i l l i m $ 5 0 0 2 n o i l l i m $ 6 0 0 2 n o i l l i m $ , m a n t e i V , a e n i u G w e N a u p a P , a i s e n o d n I , ) n o i t a r e p o d e u n i t n o c s i d ( s e t a t S d e t i n U e h t n i s n o i t a r e p o l a n o i t a n r e t n i s a h o s l a t u b a i l a r t s u A n i y l i r a m i r p s e t a r e p o y t i t n e d e t a d i l o s n o c e h T . t p y g E d n a c i l b u p e R z y g r y K 1 . 0 6 . 6 1 8 1 . 5 7 6 , 1 7 . 1 9 4 , 2 8 . 1 9 4 , 2 – 6 . 5 2 9 5 . 2 7 8 , 1 1 . 8 9 7 , 2 1 . 8 9 7 , 2 – – 9 . 9 1 1 9 . 9 1 1 9 . 9 1 1 ) 2 . 7 2 ( 0 . 2 3 2 , 1 ) 2 . 7 5 ( 9 . 4 4 1 , 1 ) 3 . 1 7 ( 8 . 4 0 2 , 1 ) 4 . 1 7 3 ( 5 . 3 3 1 , 1 1 . 2 6 7 2 . 5 4 5 8 . 5 1 0 . 1 6 5 2 . 4 0 2 ) 0 . 3 2 1 ( 7 . 7 8 0 , 1 7 . 4 6 9 ) 3 . 1 2 3 ( 4 . 3 4 6 5 . 6 7 6 7 . 5 1 2 . 2 9 6 8 . 7 4 3 ) 3 . 1 3 1 ( 9 . 3 3 6 3 . 6 1 3 . 6 5 0 , 1 – ) 0 . 1 ( ) 0 . 1 ( ) 5 . 0 ( ) 5 . 1 ( – ) 5 . 1 ( 5 . 5 3 – 5 . 5 3 1 . 2 6 5 . 0 1 . 8 9 – – 2 . 1 6 2 . 1 6 2 . 1 6 – ) 8 . 7 2 ( 5 . 0 ) 8 . 7 2 ( ) 2 . 0 ( ) 3 . 7 2 ( ) 5 . 7 2 ( 1 . 4 2 – 1 . 4 2 0 . 9 7 1 . 5 2 . 8 0 1 1 . 0 6 . 6 1 8 2 . 5 5 5 , 1 8 . 1 7 3 , 2 9 . 1 7 3 , 2 – 6 . 5 2 9 3 . 1 1 8 , 1 9 . 6 3 7 , 2 9 . 6 3 7 , 2 ) 2 . 7 2 ( 0 . 3 3 2 , 1 ) 2 . 7 5 ( 7 . 2 7 1 , 1 ) 8 . 0 7 ( 8 . 5 0 2 , 1 ) 4 . 1 7 3 ( 0 . 5 3 1 , 1 6 . 3 6 7 7 . 9 0 5 8 . 5 1 5 . 5 2 5 1 . 2 4 1 ) 8 . 1 3 1 ( 8 . 5 3 5 ) 5 . 3 2 1 ( 5 . 5 1 1 , 1 0 . 2 9 9 ) 1 . 1 2 3 ( 9 . 0 7 6 4 . 2 5 6 7 . 5 1 1 . 8 6 6 8 . 8 6 2 2 . 1 1 1 . 8 4 9 – 9 . 1 5 9 . 1 5 – 4 . 1 6 4 . 1 6 6 . 6 1 8 3 . 3 0 5 , 1 9 . 9 1 3 , 2 6 . 5 2 9 9 . 9 4 7 , 1 5 . 5 7 6 , 2 s r e m o t s u c l a n o i t a n r e t n i m o r f e u n e v e R s r e m o t s u c n a i l a r t s u A m o r f e u n e v e R s t n e m g e s c i h p a r g o e G g n i t r o p e r y r a m i r P e u n e v e R e u n e v e r d e t a c o l l a n u r e h t O e u n e v e r t n e m g e s l a t o T e u n e v e r l a t o T s t l u s e R ) 3 . 3 5 ( ) 8 . 2 3 1 ( 3 . 6 8 2 , 1 5 . 5 0 3 , 1 ) ” T I B E “ ( x a t d n a t s e r e t n i e r o f e b s g n i n r a E 4 . 6 1 6 . 6 2 3 . 3 9 4 8 . 5 2 6 4 . 5 7 ) 2 . 1 ( 8 . 7 7 1 7 . 6 6 4 . 3 ) 6 . 0 3 1 ( 0 . 1 9 8 . 7 g n i c n a n i f t e n d n a x a t e r o f e b ) s s o l ( / t i f o r P s t s o c g n i c n a n i f t e n d e t a c o l l a n U s t s o c e s n e p x e x a t e m o c n i e r o f e b ) s s o l ( / t i f o r P e s n e p x e x a t e m o c n I x a t e m o c n i r e t f a ) s s o l ( / t i f o r p t e N s e s n e p x e e t a r o p r o c d e t a c o l l a n U n o i t a i c e r p e d e t a r o p r o c d e t a c o l l a n U n o i t e l p e d d n a n o i t a i c e r p e D n o i t e l p e d d n a s e s n e p x e h s a c - n o N d n a l i o f o ) l a s r e v e r ( / s s o l t n e m r i a p m i t e N d e s n e p x e n o i t a u l a v e d n a n o i t a r o l p x E n o i t e l p e d d n a n o i t a i c e r p e d l a t o T s e s n e p x e h s a c - n o n l a t o T s t e s s a s a g . d o i r e p e n o n a h t e r o m r o f d e s u e b o t d e t c e p x e e r a t a h t s t e s s a t n e m g e s e r i u q c a o t d o i r e p e h t g n i r u d d e r r u c n i t s o c l a t o t e h t s i e r u t i d n e p x e l a t i p a c t n e m g e S S T N E M G E S C H P A R G O E G I 128 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 129 s n o i t a r e p o l a t o T s n o i t a r e p o d e u n i t n o c s i D l a t o T s n o i t a r e p o g n i u n i t n o C l a n o i t a n r e t n I a i l a r t s u A 5 0 0 2 n o i l l i m $ 6 0 0 2 n o i l l i m $ 5 0 0 2 n o i l l i m $ 6 0 0 2 n o i l l i m $ 5 0 0 2 n o i l l i m $ 6 0 0 2 n o i l l i m $ 5 0 0 2 n o i l l i m $ 6 0 0 2 n o i l l i m $ 5 0 0 2 n o i l l i m $ 6 0 0 2 n o i l l i m $ 4 . 9 3 5 7 . 1 5 9 6 . 3 2 7 . 4 1 5 , 1 8 . 1 3 4 3 . 4 6 7 , 5 1 . 6 9 1 , 6 8 . 7 6 0 , 1 4 . 4 6 1 , 2 2 . 2 3 2 , 3 2 . 5 6 . 3 5 5 , 1 1 . 9 5 9 . 7 1 6 , 1 4 . 9 2 4 5 . 3 7 4 , 6 9 . 2 0 9 , 6 7 . 3 8 6 , 1 7 . 3 6 8 , 1 4 . 7 4 5 , 3 – – – – – – – – – – – 2 . 1 1 1 – 2 . 1 1 1 – 8 . 0 1 2 8 . 0 1 2 – 8 . 6 1 8 . 6 1 4 . 9 3 5 7 . 1 5 9 6 . 3 2 7 . 4 1 5 , 1 8 . 1 3 4 3 . 4 6 7 , 5 1 . 6 9 1 , 6 8 . 7 6 0 , 1 4 . 4 6 1 , 2 2 . 2 3 2 , 3 2 . 5 0 . 0 2 2 . 5 4 . 2 4 4 , 1 6 . 0 5 2 9 . 4 7 2 4 . 9 1 5 1 . 1 0 7 – 5 . 7 6 1 , 1 1 . 9 5 7 . 6 0 5 , 1 4 . 9 2 4 7 . 2 6 2 , 6 1 . 2 9 6 , 6 9 . 6 6 6 , 1 7 . 3 6 8 , 1 6 . 0 3 5 , 3 0 . 1 2 5 7 . 0 4 5 3 . 3 4 2 , 5 0 . 2 2 7 , 5 1 . 3 4 1 0 . 1 4 2 7 . 4 2 9 9 . 5 2 4 , 1 t n e m p i u q e d n a t n a l p , y t r e p o r p , s t e s s a s a g d n a l i o f o n o i t i s i u q c a e t a r o p r o c d e t a c o l l a n U s t e s s a t n e r r u c - n o n f o n o i t i s i u q c a l a t o T ) d e u n i t n o c ( s t n e m g e s c i h p a r g o e G s t e s s a t n e r r u c - n o n f o n o i t i s i u q c A s e i t i t n e d e l l o r t n o C d n a t n a l p , y t r e p o r p , s t e s s a s a g d n a l i O ) d e u n i t n o c ( g n i t r o p e r y r a m i r P t n e m p i u q e s t e s s a e t a r o p r o c d e t a c o l l a n U s t e s s a l a t o t d e t a d i l o s n o C s t e s s a t n e m g e S s t e s s A s e i t i l i b a i l e t a r o p r o c d e t a c o l l a n U s e i t i l i b a i l l a t o t d e t a d i l o s n o C s e i t i l i b a i l t n e m g e S s e i t i l i b a i L g n i t r o p e r y r a d n o c e S s t n e m g e s s s e n i s u B d e v i r e d s i e u n e v e R . s n o b r a c o r d y h f o g n i t e k r a m d n a n o i t a t r o p s n a r t , n o i t c u d o r p , t n e m p o l e v e d , n o i t a r o l p x e e h t y l e m a n , s s e n i s u b e n o n i i y l t n a n m o d e r p s e t a r e p o y t i t n e d e t a d i l o s n o c e h T . l i o e d u r c f o n o i t a t r o p s n a r t e h t d n a s n o b r a c o r d y h d i u q i l d n a s a g f o e l a s e h t m o r f Santos Annual Report 2006 129 ) I D E U N T N O C ( I N O T A M R O F N I T N E M G E S . 3 3 SAN175 AW2 Fins 21/3/07 10:36 AM Page 130 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 34. 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, payable: 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 35 for further details). (B) MINIMUM EXPLORATION COMMITMENTS Minimum exploration commitments for which no amounts have been provided in the financial statements or capital commitments, payable: 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 2006 $million 2005 $million 2006 $million 2005 $million 211.4 116.8 3.9 332.1 133.0 74.1 – 207.1 78.8 135.5 – 214.3 63.8 105.2 0.5 169.5 107.4 54.4 1.9 163.7 21.9 14.1 – 36.0 37.6 53.2 – 90.8 6.8 42.0 – 48.8 99.8 266.0 75.0 440.8 38.9 105.9 42.0 186.8 45.8 112.1 39.7 197.6 32.9 103.7 41.8 178.4 The consolidated entity leases floating production, storage and offtake facilities, floating storage offloading facilities and mobile offshore production units under operating leases. The leases typically run for a period of four to six years, and may have an option to renew after that date. The consolidated entity also leases building office space and a warehouse under operating leases. The leases are generally for a period of ten years, with an option to renew the lease after that date. The lease payments typically increase by 5.0% per annum. The consolidated entity has subleased its surplus office space. The lease and subleases on these properties expire on or before 31 January 2008. Sublease payments of $2.0 million are expected to be received prior to that date. During the year ended 31 December 2006 the consolidated entity recognised $73.8 million (2005: $55.6 million) as an expense in the income statement in respect of operating leases. 130 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 131 34. COMMITMENTS FOR EXPENDITURE (CONTINUED) (D) REMUNERATION COMMITMENTS Commitments for the payment of salaries and other remuneration under the long-term employment contracts in existence at the reporting date but not recognised in liabilities, payable: Consolidated Santos Ltd 2006 $million 2005 $million 2006 $million 2005 $million Not later than one year 3.3 1.7 3.3 1.7 Amounts included as remuneration commitments include commitments arising from the service contracts of Directors and executives referred to in the Remuneration Report of the Directors’ Report that are not recognised as liabilities and are not included in the compensation of key management personnel. 35. 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: The consolidated entity: – Performance guarantees – Litigation and proceedings The consolidated entity’s share of contingent liabilities of joint venture operations: – Performance guarantees – Litigation and proceedings 15.9 3.0 5.6 8.0 32.5 18.1 2.4 4.4 5.8 30.7 10.1 2.4 2.8 1.1 16.4 9.5 2.4 2.9 1.1 15.9 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 $2.9 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 19. Santos Ltd has provided parent company guarantees in respect of: (a) the funding and performance obligations of a number of subsidiary companies, relating to: • a Patricia Baleen equipment master rental agreement; • a floating storage and offloading facilities agreement for the Sampang PSC; • a mobile offshore production unit agreement for the Madura PSC; and (b) a subsidiary company’s obligations to meet distribution charges for gas retail customers. A subsidiary company has provided a letter of performance guarantee in respect of the performance obligations of its subsidiary company relating to a production sharing contract. The total expenditure commitment under these transactions and which are the subject of a parent company guarantee is $217.6 million. Santos Annual Report 2006 131 SAN175 AW2 Fins 21/3/07 10:36 AM Page 132 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 35. CONTINGENT LIABILITIES (CONTINUED) Banjar Panji-1 well incident While the Board has made provision in relation to this incident, the provision reflects an assumption (based upon an assessment of information currently available) that a resolution will ultimately be agreed between the Government, Lapindo Brantas Inc, the non-operating PSC parties (Santos Brantas Pty Ltd (“STOB”) and PT Medco E&P Brantas) and all other relevant parties as to the costs related to long-term mud management options, proposed costs of infrastructure relocation and any third party claims. With the mudflow continuing, the complexity of the incident and the dynamic nature of the ongoing work, there is significant uncertainty surrounding these issues. Should the resolution of the uncertainties be on a different basis than presently assumed, the ultimate costs to be borne by STOB may be significantly different than the current estimate. Details of the Banjar Panji-1 well incident are further disclosed in note 3. 36. DEED OF CROSS GUARANTEE Pursuant to Class Order 98/1418, the wholly-owned subsidiaries listed below are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of their financial reports. As a condition of the Class Order the Company and each of the listed subsidiaries (the “Closed Group”) entered into a Deed of Cross Guarantee on 8 December 2006. The effect of the Deed is that the Company has guaranteed to pay any deficiency in the event of winding up of any of the subsidiaries under certain provisions of the Corporations Act 2001. The subsidiaries have also given a similar guarantee in the event that the Company is wound up. The subsidiaries subject to the Deed are: Alliance Petroleum Australia Pty Ltd Bridge Oil Developments Pty Limited Reef Oil Pty Ltd Santos (BOL) Pty Ltd Santos Darwin LNG Pty Ltd Santos Offshore Pty Ltd Santos Petroleum Management Pty Ltd Santos Petroleum Pty Ltd Santos QNT Pty Ltd Santos QNT (No. 1) Pty Ltd Santos QNT (No. 2) Pty Ltd Vamgas Pty Ltd The consolidated income statement and balance sheet of the entities that are members of the Closed Group are as follows: Closed Group 2006 $million 271.8 (213.6) 58.2 1,377.3 (268.5) 1.2 (6.3) 1,161.9 Consolidated income statement Profit before tax Income tax expense Profit after tax Retained earnings at the beginning of the period Dividends provided for or paid Share-based payment transactions Actuarial loss on defined benefit plan, net of tax Retained earnings at the end of the period 132 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 133 36. DEED OF CROSS GUARANTEE (CONTINUED) Consolidated balance sheet 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 Current tax liabilities Employee benefits Other provisions Total current liabilities Non-current liabilities Deferred income Deferred tax liabilities Employee benefits Other provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity Closed Group 2006 $million 85.7 726.5 134.7 17.8 964.7 28.4 3,825.1 117.2 2,038.2 16.2 9.0 6,034.1 6,998.8 2,631.1 6.3 208.1 58.1 8.8 2,912.4 11.3 186.1 26.3 438.5 662.2 3,574.6 3,424.2 2,254.4 7.9 1,161.9 3,424.2 Santos Annual Report 2006 133 SAN175 AW2 Fins 21/3/07 10:36 AM Page 134 Notes to the Consolidated Financial Statements For the year ended 31 December 2006 37. FINANCIAL INSTRUMENTS 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. All US dollar denominated borrowings are designated as a hedge of US dollar denominated investment in foreign operations (2006: US$825.6 million; 2005: US$782.6 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 2006. (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 16 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 2006, the consolidated entity had interest rate swaps with a notional contract amount of $615.4 million (2005: $654.5 million). The consolidated entity classifies interest rate swaps as fair value hedges and states them at fair value. The net fair value of swaps at 31 December 2006 was $10.6 million (2005: $27.1 million), comprising assets of $17.3 million and liabilities of $6.7 million. These amounts were recognised as fair value derivatives. 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 2006 Cash and cash equivalents Bank loans Commercial paper Medium-term notes Long-term notes Interest rate swaps** 2005 Cash and cash equivalents Bank loans Commercial paper Medium-term notes Long-term notes Interest rate swaps** Note 8 19 19 19 19 11, 21 8 19 19 19 19 11, 21 Effective interest rate Total $million 6 months or less $million 6 to 12 months $million 1 to 2 years $million 2 to 5 More than 5 years years $million $million 5.96% 6.90% 6.61% 6.99%* 6.80%* 5.02% 5.02% 5.83% 6.22%* 6.00%* 158.7 (294.2) (129.6) (463.7) (762.2) 10.6 158.7 (294.2) (129.6) – – (604.8) – – – – (130.4) 77.2 (1,480.4) (869.9) (53.2) 229.2 (261.5) (265.5) (468.5) (832.6) 27.1 (1,571.8) 229.2 (261.5) (265.5) – – (627.4) (925.2) – – – – – – – – – – (19.7) – 20.0 0.3 – – – – (152.1) 83.3 (68.8) – – – (349.2) (192.6) 77.8 (464.0) – – – (20.0) (200.5) 104.0 (116.5) – – – (94.8) (439.2) 440.4 (93.6) – – – (448.5) (480.0) 467.2 (461.3) * After incorporating the effect of interest rate swaps. ** Notional principal amounts. 134 Santos Annual Report 2006 SAN175 AW2 Fins 21/3/07 10:36 AM Page 135 37. FINANCIAL INSTRUMENTS (CONTINUED) (B) INTEREST RATE RISK (CONTINUED) Sensitivity analysis At 31 December 2006, it is estimated that a general increase of one percentage point in interest rates would decrease the consolidated entity’s profit before tax by approximately $11.9 million (2005: $13.0 million). Interest rate swaps have been included in this calculation. (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 2006 the consolidated entity has no open oil price swap contracts. (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 these long-term notes is US$198.5 million and their fair value is estimated at US$200.6 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 2006. The carrying value of the bank borrowings approximates fair value as it is a floating rate instrument. 38. ECONOMIC DEPENDENCY There are in existence long-term contracts for the sale of gas, but otherwise the Directors believe there is no economic dependency. Santos Annual Report 2006 135 SAN175 AW3 Text 21/3/07 9:51 AM Page 136 Directors’ Declaration For the year ended 31 December 2006 In accordance with a resolution of the Directors of Santos Ltd (“the Company”), we state that: 1. In the opinion of the Directors: (a) the ﬁnancial statements and notes of the Company and of the consolidated entity are in accordance with 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 2006 and of their performance for the year ended on that date; and (ii) complying with 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. 2. This declaration has been made after receiving the declarations required to be made to the Directors in accordance with section 295A of the Corporations Act 2001 for the ﬁnancial year ending 31 December 2006. 3. As at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identiﬁed in note 36 will be able to meet any obligations or liabilities to which they are or may become subject, by virtue of the Deed of Cross Guarantee between the Company and those members of the Closed Group pursuant to Class Order 98/1418. Dated this 22 day of February 2007. On behalf of the Board: DIRECTOR ADELAIDE DIRECTOR 136 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:51 AM Page 137 Auditor’s Independence Declaration to the Directors of Santos Ltd In relation to our audit of the ﬁnancial report of Santos Ltd for the ﬁnancial year ended 31 December 2006, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct. ERNST & YOUNG RJ CURTIN PARTNER ADELAIDE, SOUTH AUSTRALIA 22 FEBRUARY 2007 Santos Annual Report 2006 137 SAN175 AW3 Text 21/3/07 9:51 AM Page 138 Independent Audit Report to the members of Santos Ltd SCOPE THE FINANCIAL REPORT AND DIRECTORS’ RESPONSIBILITY The ﬁnancial report comprises the income statements, balance sheets, cash ﬂow statements and statements of recognised income and expenses, accompanying notes to the ﬁnancial statements, and the directors’ declaration for Santos Ltd (“the Company”) and the consolidated entity, for the year ended 31 December 2006. The consolidated entity comprises both the Company and the entities it controlled during the year. The Directors of the Company are responsible for preparing a ﬁnancial report that gives a true and fair view of the ﬁnancial position and performance of the Company and the consolidated entity, and that complies with Accounting Standards in Australia, in accordance with the Corporations Act 2001. This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the ﬁnancial report. AUDIT APPROACH We conducted an independent audit of the ﬁnancial report 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, including compliance with Accounting Standards in Australia, 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 and whether the remuneration disclosures comply with Accounting Standard AASB 124 Related Party Disclosures. 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. We performed procedures to assess whether the substance of business transactions was accurately reﬂected in the ﬁnancial report. These and our other procedures did not include consideration or judgement of the appropriateness or reasonableness of the business plans or strategies adopted by the Directors and management of the Company. INDEPENDENCE We are independent of the Company and the consolidated entity and have met the independence requirements of Australian professional ethical pronouncements and the Corporations Act 2001. We have given to the Directors of the Company a written Auditor’s Independence Declaration, signed on 22 February 2007. In addition to our audit of the ﬁnancial report, we were engaged to undertake the services disclosed in the notes to the ﬁnancial statements. The provision of these services has not impaired our independence. 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 ﬁnancial position of Santos Ltd and the consolidated entity at 31 December 2006 and of their performance for the year ended on that date; and ii. complying with Accounting Standards in Australia and the Corporations Regulations 2001; and b) other mandatory ﬁnancial reporting requirements in Australia. We formed our audit opinion on the basis of these procedures, which included: ERNST & YOUNG • 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. R J CURTIN PARTNER ADELAIDE, SOUTH AUSTRALIA 22 FEBRUARY 2007 138 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:52 AM Page 139 Securities exchange and shareholder information Listed on Australian Securities Exchange at 28 February 2007 were 598,275,554 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, 62,900 fully paid ordinary shares issued pursuant to the Santos Employee Share Purchase Plan (‘SESPP’) for General Employee Participation, 93,702 fully paid ordinary shares issued pursuant to SESPP for Senior Executive Long Term Incentive (‘LTI’) and 91,950 restricted fully paid ordinary shares issued pursuant to the vesting of LTI Share Acquisition Rights. There were: 82,862 holders of all classes of issued ordinary shares (including 6 holders of Plan 0 shares; 5 holders of Plan 2 shares; 117 holders of SESPP shares; and 21 holders of restricted shares) compared with 79,237 a year earlier; 14,970 holders of redeemable convertible preference shares; and 49 holders of the 4,661,226 options granted pursuant to the Santos Executive Share Option Plan and 47 holders of 539,600 Share Acquisition Rights. The listed issued ordinary shares plus the ordinary shares issued pursuant to SESPP and the restricted ordinary shares issued pursuant to the vesting of LTI Share Acquisition Rights represent all of the voting power in Santos. The holdings of the 20 largest holders of ordinary shares represent 53.30% of the total voting power in Santos (last year 55.73%) and the holdings of the 20 largest holders of redeemable convertible preference shares represent 38.39% 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 2007 were: Name Number of fully paid ordinary shares National Nominees Limited ANZ Nominees Limited (Cash Income A/c) Westpac Custodian Nominees Limited J P Morgan Nominees Australia Limited Citicorp Nominees Pty Limited HSBC Custody Nominees (Australia) Limited – A/c 2 Cogent Nominees Pty Limited HSBC Custody Nominees (Australia) Limited UBS Nominees Pty Ltd (116C A/c) RBC Dexia Investor Services Australia Nominees Pty Limited Australian Foundation Investment Company Limited HSBC Custody Nominees (Australia) Limited – GSI ECSA Argo Investments Limited Feta Nominees Pty Limited Queensland Investment Corporation Mr John Charles Ellice-Flint Citicorp Nominees Pty Limited (CFSIL Cwlth Aust Shs 1 A/c) Australian Reward Investment Alliance AMP Life Limited Woodross Nominees Pty Ltd Total ANALYSIS OF SHARES – RANGE OF SHARES HELD 1 – 1000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Less than a marketable parcel of $500 Fully paid ordinary shares (holders) 30,241 41,784 7,163 3,539 135 82,862 1,507 % of holders 36.50 50.43 8.64 4.27 0.16 100.0 % of shares held 2.88 16.67 8.62 12.23 59.60 100.0 64,978,233 60,095,054 58,807,101 54,881,116 20,783,168 8,988,283 8,533,879 8,476,617 6,100,000 5,328,134 3,189,289 2,811,252 2,630,000 2,614,825 2,026,650 2,000,000 1,900,000 1,895,764 1,680,510 1,202,959 318,922,834 Redeemable convertible preference shares (holders) 14,560 356 24 24 6 14,970 1 % of holders 97.26 2.38 0.16 0.16 0.04 100.0 % 10.86 10.04 9.83 9.17 3.47 1.50 1.43 1.42 1.02 0.89 0.53 0.47 0.44 0.44 0.34 0.33 0.32 0.32 0.28 0.20 53.30 % of shares held 44.54 11.97 2.90 10.61 29.98 100.0 Santos Annual Report 2006 139 SAN175 AW3 Text 21/3/07 9:52 AM Page 140 The 20 largest shareholders of redeemable convertible preference shares in Santos as shown in the Company’s Register of Members at 28 February 2007 were: Name J P Morgan Nominees Australia Limited Westpac Custodian Nominees Limited ANZ Nominees Limited (Cash Income A/c) Australian Foundation Investment Company Limited Cogent Nominees Pty Limited (SMP Accounts) RBC Dexia Investor Services Australia Nominees Pty Limited (GSENIP A/c) Hastings Funds Management Limited (Hastings Yield Fund A/c) UBS Wealth Management Australia Nominees Pty Ltd M F Custodians Ltd Citicorp Nominees Pty Limited (CFSIL Cwlth Spec 5 A/c) Cambooya Pty Limited RBC Dexia Investor Services Australia Nominees Pty Limited (MLCI A/c) Questor Financial Services Limited (TPS RF A/c) Cogent Nominees Pty Limited Brencorp No 11 Pty Limited Citicorp Nominees Pty Limited Australian Executor Trustees Limited (No 1 Account) Goldman Sachs JBWere Capital Markets Ltd (Hybrid Portfolio A/c) Argo Investments Limited Hastings Fund Management Limited (Hit A/c) Total Number of redeemable convertible preference shares 959,142 200,618 192,654 175,000 171,691 100,492 70,000 66,649 48,692 44,898 40,800 38,661 36,811 27,557 24,600 22,611 22,076 21,241 20,000 20,000 2,304,193 % 15.99 3.34 3.21 2.92 2.86 1.67 1.17 1.11 0.81 0.75 0.68 0.64 0.61 0.46 0.41 0.38 0.37 0.35 0.33 0.33 38.39 Substantial Shareholders, as at 28 February 2007, as disclosed by notices received by the Company: Name Barclays Global Investors Australia Limited Maple-Brown Abbott Ltd No. of voting shares held 49,543,607 30,165,594 For Directors’ Shareholdings see Directors’ Statutory Report as set out on page 49 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. 140 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:52 AM Page 141 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 Tuesday 1 May 2007 at 10.00 am. FINAL DIVIDEND The 2006 ﬁnal ordinary dividend will be paid on 2 April 2007 to shareholders registered in the books of the Company at the close of business on 5 March 2007 in respect of fully paid shares held at record date. SECURITIES EXCHANGE LISTING Santos Ltd. Incorporated in Adelaide, South Australia, on 18 March 1954. Quoted on the ofﬁcial list of the Australian Securities Exchange (ordinary shares code STO; FUELS code STOPB). AMERICAN DEPOSITORY RECEIPTS • an RSS feed of Santos’ News Announcements, which allows people to view these announcements using RSS reader software. The Santos website provides shareholder forms to help shareholders manage their holdings, as well as a full history of Santos’ dividend payments and equity issues. Shareholders can also check their holdings and payment history in the secure View Shareholding section. Santos’ website also provides an online Conversion Calculator, which instantly computes equivalent values of the most common units of measurement in the oil and gas industry. PUBLICATIONS The Annual Report, First-Half Report and the Sustainability Report are the major sources of printed information about Santos. Printed copies are available from the Share Registrar or Investor Relations. Santos American Depository Receipts are issued by Citibank, N.A. and are listed on NASDAQ (code STOSY). SHAREHOLDER ENQUIRIES Enquiries about shareholdings should be directed to: DIRECTORS S Gerlach (Chairman), J C Ellice-Flint (Managing Director), K C Borda, K A Dean, R A Franklin, R M Harding, J Sloan. Share Registrar, Santos Ltd, GPO Box 2455, Adelaide, South Australia 5001. Telephone: 08 8218 5111. Email: share.register@santos.com SECRETARY J L Baulderstone 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 Report 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, News Announcements, Quarterly Activities Reports and Current Well Information. Comprehensive archives of these materials dating back to 1997 are available on the Santos website. Other investor information available on the Santos website includes: 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 8116 5000. 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 2006 Full Year Results announcement 22 February 2007 Ex-dividend date for 2006 full year dividend 27 February 2007 Record date for 2006 full year dividend 5 March 2007 Payment date for 2006 full year dividend Annual General Meeting Half year end 2 April 2007 1 May 2007 30 June 2007 2007 Interim Results announcement 23 August 2007 Full year end 31 December 2007 QUARTERLY REPORTING CALENDAR 2007 First Quarter Activities Report 24 April 2007 26 July 2007 • open brieﬁngs with Corporate File – an ASX-endorsed online 2007 Second Quarter Activities Report brieﬁng service; • webcasts of investor brieﬁngs; • an email alert facility where people can register to be notiﬁed, free of charge, of Santos’ News Announcements via email; and 2007 Third Quarter Activities Report 25 October 2007 2007 Fourth Quarter Activities Report 24 January 2008 Santos Annual Report 2006 141 SAN175 AW3 Text 21/3/07 9:52 AM Page 142 Glossary AIFRS DD&A GREENHOUSE EFFECT 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. THE COMPANY OR SANTOS 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. The trapping of heat by certain gases in the earth’s atmosphere in the same way that the glass in a greenhouse prevents heat from escaping and warms its internal environment. GREENHOUSE GAS A gas that contributes to the greenhouse effect by absorbing infrared radiation. HYDROCARBONS Solid, liquid or gas compounds of the elements hydrogen and carbon. IFRS International Financial Reporting Standards. LIQUIDS A sales product in liquid form produced as a result of further processing by the onshore plant; for example, condensate and LPG. Santos Ltd and its subsidiaries. EBIT CONDENSATE 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. EXPLORATION Drilling, seismic or technical studies undertaken to identify and evaluate regions or prospects with the potential to contain hydrocarbons. FINDING COST PER BARREL OF OIL EQUIVALENT Exploration and delineation expenditure per annum divided by reserve additions net of acquisitions and divestments. LNG Liqueﬁed natural gas. LPG Liqueﬁed petroleum gas, the name given to propane and butane in their liquid state. MARKET CAPITALISATION A measurement of a company’s stock market value at a given date. Market capitalisation is calculated as the number of shares on issue multiplied by the closing share price on that given date. mbbl Thousand barrels. MEAN RESOURCE POTENTIAL The average of the range of recoverable resources. mmbbl Million barrels. mmboe GEOSCIENCE Million barrels of oil equivalent. Scientiﬁc disciplines related to the study of the earth. mmscf/d Million standard cubic feet per day. A natural gas liquid that occurs in association with natural gas and is mainly composed of propane, butane, pentane and heavier hydrocarbon fractions. 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. CRUDE OIL A general term for unreﬁned liquid petroleum or hydrocarbons. CULTURAL HERITAGE Deﬁnitions of cultural heritage are highly varied. Cultural heritage can be considered to include property ('things' such as landscapes, places, structures, artefacts and archives) or a social, intellectual or spiritual inheritance. 142 Santos Annual Report 2006 SAN175 AW3 Text 21/3/07 9:52 AM Page 143 NETBACK Total product sales revenue less operating costs (namely production costs, tariffs/tolls, royalties, PRRT and gas purchases and movement in stock). Netback per boe is netback divided by total sales volumes. OIL A mixture of liquid hydrocarbons of different molecular weights. 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. 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. 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 condensate/naphtha 1 barrel = 0.935 boe RESOURCE POTENTIAL LPG 1 tonne = 8.458 boe Resource potential refers to those quantities of petroleum yet to be discovered. It may refer to single opportunities or a group of opportunities. For a comprehensive online conversion calculator tool, visit the Santos website, www.santos.com. ROAE Return on average equity. PROVEN RESERVES (1P) ROACE 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. 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 Santos Annual Report 2006 143 SAN175 AW3 Text 21/3/07 9:52 AM Page 144 Index A Announcements: 2006 Annual General Meeting Audit Committee Audit Report B Banjar Panji Basins Bayu-Undan Board of Directors Balance Sheets C Carbon trading Cash Flow Statements Casino Chairman’s review Chief Executive Ofﬁcer’s review Climate change Committees Company proﬁle Continuous disclosure Cooper Basin Cooper Basin Oil Project Corporate directory Corporate governance statement Corporate structure 7, 22, 29 72 8, 11, 18 4 5–7 5, 7, 20, 22, 29 37–39 Inside cover 42–43 7, 11, 12, 16, 20 5, 12, 18–19 Back cover 36–42 31 D Darwin LNG Development projects Directors’ fees Directors’ proﬁles Directors’ remuneration Directors’ shareholdings Discoveries: 2006 Dividends Drilling results E 6, 8, 18, 22 5, 6, 10–11, 12, 16, 18–19, 22 55 32–33 54–56 49 3, 6, 16 2, 4, 47, 51, 59 16, 18–19 2, 5, 8 Earnings 2, 102–103 Earnings per share 10, 16 Egypt 27–29 Employee programs and statistics 5, 6, 18, 24, 29–30 Environment Executive management team 32–33 Exploration 4–6, 10–11, 12, 16–17, 18, 22 F Fairview Finance Committee Financial summary Financial statements 6–7, 11, 12, 20, 22 39 2 48, 70–135 144 Santos Annual Report 2006 43 141 3 138 G Gas contracts Gas ﬁelds Glossary Greenhouse Group interests Growth progress 5, 85 10–11 11, 18 32–33 71 H History I 6, 20 10–11 142–143 20, 22, 24, 29 44–45 3, 5–6 Inside cover Income Statements Indigenous relations Indonesia 70 30–31 5, 6, 11, 16, 18, 19, 30 S 38–39 2, 5, 6, 12, 26–27, 58 34–35 3, 47, 58–59, 139–140 3, 59 139–140 Safety, Health and Environment Committee Safety performance Senior executives Share information Share price Shareholders: top 20 Statements of Recognised Income and Expense Strategy Strategic targets Sustainability Sponsorship 73 Inside cover, 1, 3, 5–6, 16, 20 4, 9 6, 19, 22, 24–31 30 T 5, 11, 19 6, 8, 11, 20 10-year Summary Total recordable case frequency rate 46–47 12, 26, 58 U United States 6, 10, 22 V Values Vietnam Vision Inside cover, 5, 26, 27, 28, 36, 41 4, 5–6, 11, 16–17 Inside cover W Wildcat exploration program: 2007 17 J Jeruk John Brookes K Key performance indicators Kyrgyzstan 9, 58–59 10, 11, 16, L Licence areas and percentage interests LNG M Maleo Management structure Maps Mutineer-Exeter N 44–45 3, 6, 16, 18, 22 6, 8, 11, 18 31 10–11, 17 11, 18 New ventures Nomination Committee 6, 16 39 O Occupational health and safety Oil ﬁelds Oil spill performance Operating highlights Oyong P 2, 5, 6, 12, 26–27, 58 10–11 29 2–3 6, 11, 19 Papua New Guinea Performance (10-year summary) Performance (three-year summary) Production statistics 6, 11, 22 46–47 2–3 14 R Remuneration Remuneration Committee Reserve statistics Risk management 54–69 39 2, 15 39, 40–41 SAN175 AW3 Cover 21/3/07 11:24 AM Page 2 Santos is a major Australian-based oil and gas exploration and production company operating internationally. COMPANY PROFILE HISTORY Santos has exploration interests and production operations in every major Australian petroleum province and in Indonesia, Papua New Guinea, Vietnam, India, Kyrgyzstan, Egypt and the United States. We are Australia's largest domestic gas producer, supplying sales gas to all mainland Australian states and territories, ethane to Sydney, and oil and liquids to domestic and international customers. Through our interest in the Darwin LNG project, we are a producer of liquefied natural gas (LNG) which is exported to customers in Japan. Santos has the largest Australian exploration portfolio by area of any company and is pursuing new venture opportunities with a focus on Asia. Founded in 1954, our name was an acronym for South Australia Northern Territory Oil Search. Santos made its first significant discovery of natural gas in the Cooper Basin in 1963. The Moomba discovery in 1966 confirmed this region as a major petroleum province and gas supplies to Adelaide commenced in 1969. The 1980s saw Santos develop a major liquids business with the construction of a liquids recovery plant at Moomba and a fractionation and load-out facility at Port Bonython. During the 1990s Santos further expanded its interests in Australia and overseas. Since 2000 the Company has continued to build its business in South East Asia while undertaking high-impact exploration and developing new projects to drive production and earnings growth. In 2006, a significant milestone was reached with the first export of LNG from the Darwin LNG project. Development drilling on the John Brookes gas field, Carnarvon Basin, offshore Western Australia. VISION STRATEGY Santos has in place a robust growth strategy to achieve its vision through a portfolio of growth businesses: • Cooper Basin oil; • Eastern Australian gas; • Western Australian oil and gas; • LNG projects; and • Asian growth. Santos’ vision is to become a leading energy company in South East Asia with a share price that continues to grow and a reputation for sustainability in its operations. Our 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. VALUES We are a team that: • discovers – by opening our minds to new possibilities, thinking creatively and having the courage to learn from successes and failures, to take on new challenges, to capture opportunities and to resolve problems; • delivers – by taking personal responsibility and pride in our work to deliver timely, quality results that benefit Santos and help achieve our vision and strategy; • collaborates – by recognising the value and power in diversity of thought and communicating openly to understand the perspectives of others; demonstrating leadership by sharing what we know and respectfully challenging each other to achieve the best results for all; and • cares – by taking the long- term view to build a sustainable future for our Company, our people and the environments and communities in which we operate. PAPER AND PRINTING OF THE ANNUAL REPORT This report is printed on Monza Recycled and Ozone Offset paper, which contains elemental- chlorine-free (ECF) recycled fibre and fibre from sustainable plantation forests. The paper is certified by the Forest Stewardship Council (FSC), which promotes environmentally appropriate, socially beneficial, and economically viable management of the world’s forests. The report was printed by Southern Colour, one of a small number of printers in Australia accredited by the FSC to continue the chain of custody when printing on FSC-certified paper. Southern Colour is a partner with the Australian Government’s Greenhouse Challenge and is accredited with ISO 14001 (Environmental Management Systems), AS/NZS 4801 (Occupational Health and Safety) and ISO 9001 (Quality) International Standards. The printing process uses digital printing plates which eliminate film and associated chemicals. The vegetable-based inks use linseed oil, which is made from renewable sources such as flax, rather than the traditional mineral oils which emit higher volumes of greenhouse gases. HELP SAVE PAPER BY DOWNLOADING AN ELECTRONIC VERSION An electronic version of this report is available on Santos’ website www.santos.com. Shareholders who do not require a printed Annual Report or Sustainability 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 report mailing preferences. Shareholders who choose not to receive printed reports will continue to receive all other shareholder information, including notices of shareholders’ meetings. Photography: cover and page 19 by Melbourne the Photographer; inside cover and pages 1, 2, 13, 19, 21 and 23 by Robert Garvey; pages 1, 4, 5, 17, 32 and 34 by Milton Wordley; page 25 by Campbell Brodie courtesy of The Advertiser newspaper. Designed and produced by Perspexa.com SAN175 AW3 Cover 21/3/07 11:24 AM Page 1 A N N U A L R E P O R T 2 0 0 6 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 PORT MORESBY Barracuda Limited Level 8, Pacific Place Cnr Champion Parade and Musgrave Street Port Moresby, Papau New Guinea Telephone 675 321 2633 Facsimile 675 321 2847 HOUSTON Santos USA Corp. 10111 Richmond Avenue, Suite 500 Houston, Texas 77042, USA Telephone 1 713 986 1700 Facsimile 1 713 986 4200 Corporate directory REGISTERED AND HEAD OFFICE Ground Floor, 60 Flinders Street Adelaide, South Australia 5000 GPO Box 2455 Adelaide, South Australia 5001 Telephone 61 8 8116 5000 Facsimile 61 8 8116 5050 SHARE REGISTER Ground Floor, 60 Flinders Street Adelaide, South Australia 5000 GPO Box 2455 Adelaide, South Australia 5001 Telephone 61 8 8218 5111 Facsimile 61 8 8218 5950 OFFICES BRISBANE Level 14, Santos House 60 Edward Street Brisbane, Queensland 4000 Telephone 61 7 3228 6666 Facsimile 61 7 3228 6700 PERTH Level 28, Forrest Centre 221 St Georges Terrace Perth, Western Australia 6000 Telephone 61 8 9460 8900 Facsimile 61 8 9460 8971 PORT BONYTHON PO Box 344 Whyalla, South Australia 5600 Telephone 61 8 8640 3100 Facsimile 61 8 8640 3200 JAKARTA Santos Asia Pacific Pty Ltd Level 4, 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 Inside INTRODUCING SANTOS PRODUCTION STATISTICS CORPORATE GOVERNANCE Company profile and history, and an overview of Santos’ vision, strategy and values. 2006 OPERATING AND FINANCIAL HIGHLIGHTS 2 Key results for 2006 and three-year performance. PROGRESS MADE ON THE GROWTH STRATEGY IN 2006 3 Milestones that delivered on the growth strategy during 2006 and share price performance. 14 Summary of production results for 2006. RESERVES STATISTICS 15 Summary of reserves movements in 2006. STRONG DRILLING RESULTS AND EXPANSION INTO ASIA 16 Exploration results, acreage additions and new ventures activities in 2006, together with the program for 2007. THREE NEW DEVELOPMENTS RECORD RESULTS AS TARGETS MET STARTED PRODUCTION 4 Chairman Stephen Gerlach comments on Santos’ performance in 2006. 18 Development projects that commenced production or were further progressed. 36 Details of the main corporate governance practices Santos has in place. MAJOR ANNOUNCEMENTS MADE BY SANTOS DURING 2006 43 Major releases to the market as part of continuous disclosure. SANTOS GROUP INTERESTS 44 Santos’ licence areas and percentage interests. 10-YEAR SUMMARY 46 Statistical summary of financial performance. DIRECTORS’ STATUTORY REPORT 49 Directors’ shareholdings, meetings, activities and emoluments. REMUNERATION REPORT 54 Remuneration details for Directors and key executives. FINANCIAL REPORT 70 Income statements, balance sheets, cash flow statements, statements of recognised income and expense, and notes to the consolidated financial statements. A clear view… ANNUAL REPORT 2006 GROWTH CONTINUED AS PRODUCTION AND REVENUE ROSE 5 Managing Director John Ellice-Flint reviews a year where production and revenue hit record levels as new projects started up. OPERATING PERFORMANCE REMAINED STRONG 8 Putting the numbers in perspective and explaining the 2006 financial results. PERFORMANCE AGAINST STRATEGIC TARGETS IN 2006 9 Explanation of Santos’ performance against its long-term targets. THE WORLD OF SANTOS 10 Locations of Santos’ global exploration, development and production activities. RECORD PRODUCTION AND SALES WERE ACHIEVED 12 Production and sales analysis plus activities that are creating value from Santos’ changing production profile. GAS SUPPLY HUBS UNDERPINNED INNOVATIVE CONTRACTS 20 Innovative use of infrastructure hubs which delivered new gas contracts and opportunities. LNG AND CARBON OPPORTUNITIES A PRIORITY 22 LNG and carbon strategies together with acquisitions and divestments in 2006. GOOD PROGRESS WAS MADE IN SECURITIES EXCHANGE AND MANAGING SUSTAINABILITY SHAREHOLDER INFORMATION 24 Sustainability framework, policies, systems and activities, including safety and environmental performance, employees and communities. BOARD OF DIRECTORS 32 Directors’ biographical details. SANTOS LEADERSHIP TEAM 34 Senior executives’ responsibilities and biographical details. 139 Listing of top 20 shareholders, analysis of shares and voting rights. INFORMATION FOR SHAREHOLDERS 141 Annual General Meeting, final dividend, shareholder enquiries and information resources for shareholders. 142 GLOSSARY 144 INDEX CORPORATE DIRECTORY Santos Ltd ABN 80 007 550 923 Cover photograph: Sedco 601 rig which drilled the Wortel-1 gas discovery offshore East Java.

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