SAN175 AW3 Cover 21/3/07 11:56 AM Page 1
A
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U
A
L
R
E
P
O
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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;
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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
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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
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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
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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
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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
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Remuneration Report
The Directors of the Company present
the Remuneration Report prepared in
accordance with section 300A of the
Corporations Act for the Company and
the consolidated entity for the year ended
31 December 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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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SAN175 AW2 Fins 21/3/07 10:36 AM Page 126
Notes to the Consolidated Financial Statements
For the year ended 31 December 2006
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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
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3
4
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12
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4
562
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49
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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
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SAN175 AW2 Fins 21/3/07 10:36 AM Page 129
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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
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214.3
63.8
105.2
0.5
169.5
107.4
54.4
1.9
163.7
21.9
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37.6
53.2
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6.8
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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
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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
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P
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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.