Santos Ltd Annual Report 2009

Plain-text annual report

ANNUAL REPORT 2009 We’re not just an energy company. We’re a company with energy. ABOUT SANTOS An Australian energy pioneer since 1954, Santos is one of the country’s leading gas producers, supplying Australian and Asian customers. Santos has been providing Australia with natural gas from the remote outback for more than 40 years. The company today is the largest producer of natural gas to the Australian domestic market, supplying 18% of the nation’s gas needs. Santos has also developed major oil and liquids businesses in Australia and operates in all mainland Australian states and the Northern Territory. From this base, Santos is pursuing a transformational liqueﬁ ed natural gas (LNG) strategy with interests in four exciting LNG projects. This strategy is led by the cornerstone GLNG® project in Queensland – a leading project in converting coal seam gas into LNG. Also in Santos’ LNG portfolio are the PNG LNG project, which was formally approved in December 2009, Bonaparte LNG, a proposed ﬂ oating LNG project in the Timor Sea, and Darwin LNG, Santos’ ﬁ rst LNG venture, which began production in 2006. Santos has built a strong and reliable production business in Indonesia and is further developing its Asian business through development projects and exploration investment. In 2009, Santos’ total production was 54.4 million barrels of oil equivalent. We have the largest Australian exploration portfolio by area of any company – 133,800 square kilometres. Santos has about 2,200 employees working across its operations in Australia and Asia. VISION AND STRATEGY Santos’ vision is to be a leading energy company for Australia and Asia by delivering the base business, tapping our resource riches, being a great place to work and doing it safely and sustainably to deliver a superior shareholder return. Santos has a robust strategy to achieve this through: Reliable base business: • Eastern Australia: margin growth and resource conversion • Indonesia: established business with incremental growth • Western Australia: growing a material domestic gas business 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 beneﬁ t 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. • 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. Transformational LNG: • GLNG: a leading CSG-to-LNG project underpinned by quality reserves • PNG LNG: approved in 2009 with ﬁ rst production in 2014 • Darwin LNG: LNG production since 2006, mature brownﬁ eld growth • Bonaparte LNG: innovative proposed ﬂ oating LNG project Focused growth in Asia: • Vietnam: develop Chim Sáo and exploration-led growth • India/Bangladesh: Bay of Bengal exploration-led growth • Kyrgyz Republic: exploration prospects in proven oil and gas provinces 12 PRODUCTION STATISTICS 2009 22 BOARD OF DIRECTORS 2 2009 OPERATING AND FINANCIAL HIGHLIGHTS Key results for 2009 and ﬁ ve-year performance. 3 CONTINUING TO PROGRESS OUR GROWTH STRATEGY IN 2009 Summary of production results for 2009. 13 RESERVES STATISTICS 2009 Summary of reserves movements in 2009. 14 LNG PROJECTS THE ENERGY TO TRANSFORM Chairman Peter Coates comments on Santos’ performance in 2009. Santos’ transformational GLNG project, progress on PNG LNG, Bonaparte LNG and Darwin LNG. 24 SANTOS LEADERSHIP TEAM 26 CORPORATE GOVERNANCE 38 SANTOS GROUP INTERESTS 40 10-YEAR SUMMARY 43 DIRECTORS’ STATUTORY REPORT 52 REMUNERATION REPORT 70 FINANCIAL REPORT 151 SECURITIES EXCHANGE AND SHAREHOLDER INFORMATION 16 AUSTRALIA Growth in the Cooper Basin, New South Wales coal seam gas exploration and Reindeer gas project go-ahead. 153 GLOSSARY 154 INDEX 155 INFORMATION FOR SHAREHOLDERS 156 MAJOR ANNOUNCEMENTS MADE BY SANTOS DURING 2009 18 ASIA Solid progress in Indonesia, Vietnam drilling success and seismic surveys offshore India. 20 SUSTAINABILITY Sustainability policies, systems and activities, including safety and environmental performance, employees and communities. 4 6 8 THE ENERGY TO DELIVER Chief Executive Ofﬁ cer David Knox reviews a year which marked a signiﬁ cant chapter in the ongoing transformation of Santos. STRONG BALANCE SHEET TO FUND GROWTH Chief Financial Ofﬁ cer Peter Wasow puts the numbers in perspective and explains the 2009 ﬁ nancial results. 10 THE WORLD OF SANTOS Locations of Santos’ exploration, development and production activities. Cover: Operator maintainer Bill Loof at Fairview in Santos’ eastern Queensland ﬁ elds. This page: Drilling and completions rig, Arcadia Valley coal seam gas ﬁ elds, eastern Queensland. We’re a company with energy The energy to explore the remotest and harshest terrain … The energy to unlock vast resources in places where many said nothing would be found … The energy to spearhead innovations like CSG to LNG conversion … The clean energy to fuel homes and industry throughout Australia and Asia as well as power nations now and into the future … The energy to take bold initiatives to grow our own business. In short, we have the energy to make things happen. 2009 operating and ﬁ nancial highlights (cid:129) SALES REVENUE $2,181 MILLION, DOWN 21%; PRODUCTION 54.4 MMBOE, WITHIN GUIDANCE. Sales ($million) 2009 2008 2,181.0 2,762.0 (cid:129) NET PROFIT AFTER TAX $434 MILLION. (cid:129) UNDERLYING NET PROFIT AFTER TAX $257 MILLION, COMPARED TO $548 MILLION IN 2008. (cid:129) 2009 FULL YEAR DIVIDEND OF 42 CENTS PER SHARE, UNCHANGED FROM 2008. (cid:129) PROVEN AND PROBABLE (2P) RESERVES INCREASED 42% TO 1.44 BILLION BARRELS. (cid:129) STRONG BALANCE SHEET: $2.2 BILLION OF CASH. % change (21) (72) (17) (79) 0 Operating proﬁ t before tax ($million) 717.0 2,533.0 Cash ﬂ ow from operations ($million) 1,155.0 1,385.0 Earnings per share (cents) 52.1 251.9 Ordinary dividends per share (cents) 42.0 42.0 Cash ﬂ ow per share (cents) 148.2 216.5 (32) Total shareholders’ funds ($million) 6,967.0 4,478.0 Return on average ordinary equity (%) Return on average capital employed (%) 7.5 7.3 50.6 34.1 56 (85) (79) Net debt/(net debt plus equity) (%) (9.5) 10.2 (193) Net interest cover (times) (45.4) 38.5 (218) PRODUCTION BY PRODUCT 54.4 mmboe SALES REVENUE $2,181 million OPERATING CASH FLOW $1,155 million 60 56.0 61.0 59.1 54.4 54.4 40 20 0 3,000 2,500 2,000 1,500 1,000 500 0 2,750 2,762 2,463 2,489 1,500 1,458 1,550 2,181 1,200 1,385 1,214 1,155 900 600 300 0 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 Sales gas & ethane Condensate Crude oil LPG LNG Sales gas & ethane Condensate Crude oil LPG LNG NET PROFIT AFTER TAX $434 million 1,650 EARNINGS & DIVIDENDS PER SHARE 42 cents SAFETY PERFORMANCE 3.6 Total recordable case frequency rate (per millions hours worked) 1,500 1,200 900 600 300 0 762 643 359 434 252 115 95 36 40 51 40 42 52 42 250 200 150 100 50 0 8 6 4 2 0 6.4 5.8 5.3 4.9 3.6 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 Earnings per share Dividends per share 2 Santos Annual Report 2009 Continuing to progress our growth strategy in 2009 LNG projects Page 15 • GLNG signs gas sales agreement with project partner PETRONAS for up to three million tonnes per annum of LNG; submits Environmental Impact Statement to Queensland Government. • PNG LNG project formally approved. • Bonaparte LNG: proposed ﬂ oating LNG processing facility in the Timor Sea. Australia Page 17 • Santos celebrates 40 years of natural gas delivery from Moomba processing plant in the Cooper Basin. The basin retains signiﬁ cant development potential. • Newly sanctioned projects offshore Victoria; Reindeer project offshore Western Australia well underway. • Acquisition of signiﬁ cant new acreage in Gunnedah Basin, NSW. Asia Page 19 • Indonesia ﬁ rmly established in Santos’ base business. Continues incremental growth in producing assets. • Oyong Phase-2 project in Indonesia online. Delivered safely and ramped up to production within 20 days. • Chim Sáo, Santos’ ﬁ rst oil project in Vietnam, formally approved. Operator maintainer Mark Bunker and operations superintendent Belinda Wells near Scotia in Santos’ eastern Queensland coal seam gas ﬁ elds. The energy to transform Review by Peter Coates, Chairman 4 Santos Annual Report 2009 Santos made great progress in delivering its growth strategy in 2009 and is well equipped to meet the signiﬁ cant challenges ahead. It has a clear set of strategic priorities, an exciting pipeline of growth projects, a sound balance sheet, high quality partners and a talented executive team led by its Chief Executive Ofﬁ cer, David Knox who, since becoming CEO in 2008, has led a transformation of the company’s perception by the investment market and its shareholders. While our underlying ﬁ nancial performance was down on 2008 due to lower oil prices, our base business performed well with consistent production, an improved cost performance and excellent project delivery. STRATEGIC PROGRESS IN 2009 Our strategy is underpinned by the twin pillars of growing demand for primary energy in Australia and Asia, and the role that natural gas can play as a cleaner fuel in meeting that demand. Some of the signiﬁ cant strategic milestones achieved during 2009 were: • In December, we sanctioned the Papua New Guinea LNG project. PNG LNG will provide Santos with long-term production and cash ﬂ ow when it comes online in 2014 and create a legacy asset for decades to come. • Our Gladstone Liquiﬁ ed Natural Gas (GLNG) project took major steps forward as it moves towards a ﬁ nal investment decision. In June, GLNG signed a binding offtake agreement to sell two million tonnes per annum of LNG to project partner PETRONAS, with an option for a further one million tonnes per annum at GLNG’s sole option. This agreement underpins the ﬁ rst LNG train, or processing unit, of two planned for the initial phase of the project. • We focused the business, selling a number of non-core assets and growing our strategic position in the Gunnedah Basin, Australia’s next major coal seam gas (CSG) province. SOLID FINANCIAL PERFORMANCE BOARD RENEWAL Santos recorded a net proﬁ t of $434 million in 2009. This compares with the $1.7 billion result reported for 2008 which was boosted by a $1.2 billion proﬁ t from the sale of a 40% interest in the GLNG project to PETRONAS. Underlying net proﬁ t in 2009 of $257 million compares with $548 million in the prior year. Lower product prices reduced sales revenue by nearly $600 million compared with 2008. Production from the base business of 54.4 million barrels of oil equivalent was the same as the previous year and within the company’s guidance range. Importantly, cost reduction initiatives in the base business delivered early beneﬁ ts. In November, Santos celebrated the 40th anniversary of the ﬁ rst delivery of natural gas from the Moomba processing plant in the Cooper Basin. The Cooper Basin has underpinned the growth of Santos for four decades and will continue to play a very important role in providing primary energy for eastern Australia. SUCCESSFUL EQUITY RAISING Santos issued new equity in 2009 to raise approximately $3 billion to fund PNG LNG, future growth and redeem the FUELS hybrid security. The equity raising was very successful with strong support from institutional and retail shareholders. On behalf of the Board, I would like to thank shareholders for their support. DIVIDEND MAINTAINED At a time when many companies were cutting or eliminating their dividends, the Board maintained the Santos dividend at 42 cents per share fully franked, the same as the previous year. This dividend was paid on the expanded capital base following the equity raising. The ongoing process of Board renewal has continued, with the retirement of two longstanding directors and two new appointments. Jane Hemstritch and Greg Martin have joined the Board and are already making signiﬁ cant contributions. Judith Sloan retired from the Board following the Annual General Meeting in May after serving shareholders and the company with distinction over her 14 years as a director. Stephen Gerlach retired from the Board in December after 20 years of service as a Director and the last eight years as Chairman. Stephen oversaw the transformation of Santos from a Cooper Basin focused domestic business to one with a clear vision of becoming a major energy supplier to Australia and Asia. On behalf of the Board and all shareholders, I thank Stephen for his 20 years of service to the company. I am delighted to assume the Chairmanship at this critical point in the company’s history, when it is on the cusp of major transformation from a domestic focused natural gas producer into a leading energy company for Australia and Asia. On behalf of the Directors, I would like to thank David and the team at Santos for their hard work and dedication to delivering value for shareholders. Peter Coates AO Chairman Santos Annual Report 2009 5 The energy to deliver Review by David Knox, Chief Executive Ofﬁ cer and Managing Director Santos’ vision is to be a leading energy company in Australia and Asia. We have a simple and robust strategy to achieve this: we will drive performance in our base business, deliver a suite of LNG projects and pursue focused opportunities in Asia. In 2009, we demonstrated our determination to deliver the vision, making signiﬁ cant progress on all our strategic fronts. MEETING AN ENERGY CHALLENGE Australasia faces the challenge of achieving energy security for its growing economies in a carbon-constrained world. Natural gas as a fuel for electricity generation has the potential to underwrite signiﬁ cant cuts in greenhouse gas emissions while meeting energy needs. Importantly, natural gas is abundant, affordable and available now. We are Australia’s largest producer of gas for domestic consumption, and 95% of our proved and probable reserves are gas or associated gas liquids. There is sufﬁ cient natural gas in eastern Australia to meet domestic needs and, at the same time, build a new LNG export industry on the east coast. Australia – and Santos in particular – is poised to capture a signiﬁ cant market opportunity in LNG, demand for which is expected to double in Asia in the next 15 years. LNG GROWTH STRATEGY Santos’ LNG growth portfolio is unique for a company of our size. We have made substantial progress on our ﬂ agship GLNG project and we are moving towards a ﬁ nal investment decision in the middle of 2010. GLNG has all the ingredients for success: an ideal site, high quality reserves, a binding sales contract and the experience and expertise of our partner PETRONAS, the largest LNG supplier in Asia. Elsewhere, the PNG LNG project was approved for development at the end of 2009. The project has signed binding long-term LNG sales agreements with four Asian buyers and ﬁ rst sales are expected in 2014. The existing Darwin LNG project – our ﬁ rst LNG investment – delivered another excellent year of production. Finally, in 2009 we added our fourth LNG project, Bonaparte LNG, in partnership with GDF SUEZ. This project exposes Santos to ﬂ oating LNG technology and GDF SUEZ is targeting 2013 for the ﬁ nal investment decision. BASE BUSINESS PROGRESS Our growth strategy is not all about LNG. We have a pipeline of base business projects that will grow production in the near term before our LNG ventures deliver a step change in production and earnings from 2014. In 2009, progress on the base projects was excellent, with two reaching initial production, three progressing to schedule and the approval of a sixth, the Chim Sáo oil project in Vietnam. Our Oyong gas project in Indonesia delivered ﬁ rst gas in October 2009 on schedule, on budget and with an excellent safety record. In Vietnam, the Chim Sáo oil project was approved – our ﬁ rst in that country. In Australia, we completed the upgrade of the Patricia-Baleen plant in Victoria to process gas from the offshore Longtom ﬁ eld. The Kipper and Henry gas projects in Victoria and the Reindeer project in Western Australia progressed well, with ﬁ rst gas from Henry achieved on schedule in early 2010. SAFETY PERFORMANCE Tragically, in August, a contractor was killed during a drilling rig move in our eastern Queensland ﬁ elds. It was a sobering reminder of the need to always be conscious of risks in everything we do. Overall in 2009, we achieved the lowest injury rate in the company’s history, which is pleasing. This result was built on strong safety systems and a series of initiatives that were implemented to improve our focus on safety. SUSTAINABILITY Santos has reduced its carbon footprint by 1.5 million tonnes of carbon dioxide equivalent over the past ﬁ ve years. I encourage you to read our Sustainability Report 2009 and ﬁ nd out more about what sustainability means to Santos and what we are doing to achieve it. It is important that we make meaningful contributions to the communities in which we operate. In 2009, we continued to support many community, education, arts, environment and indigenous organisations and initiatives throughout Australia, plus community programs in Indonesia and Vietnam. Our partnership with the Santos Tour Down Under was the headline act of our community sponsorship program. The event attracted worldwide attention and was watched by 750,000 spectators over its six days. LOOKING TO THE FUTURE Looking forward, our excellent portfolio of current and future projects positions us well to achieve our growth strategies. Our focus remains on executing our transformational LNG growth projects and delivering production from our base businesses in Australia and Asia. We are committed to doing all that safely and sustainably to deliver maximum value for our shareholders. David Knox Chief Executive Ofﬁ cer and Managing Director Santos Annual Report 2009 7 Strong balance sheet to fund growth Review by Peter Wasow, Chief Financial Ofﬁ cer and Executive Vice President In 2009, the company continued to deliver on its strategy: improving performance from the base business; commercialising contingent resources and growing reserves; and building a strong ﬁ nancial position to fund its future growth. Much of this growth will result from realising our LNG ambitions, progress against which was detailed in the CEO’s Review. BUILDING A BETTER BASE BUSINESS Despite our efforts, we were not immune from the effects of the economic downturn which resulted in lower selling prices across our portfolio and reduced proﬁ ts compared to last year. Santos achieved a net proﬁ t of $434 million after tax in 2009. This compares to the $1.7 billion result reported for 2008, which was boosted by a $1.2 billion proﬁ t from the sale of a 40% interest in the GLNG project to PETRONAS. Underlying net proﬁ t in 2009 of $257 million compares to $548 million in the prior year. Lower oil and gas prices signiﬁ cantly impacted the 2009 result, reducing sales revenue by almost $600 million compared to the previous year. Production of 54.4 million barrels of oil equivalent (mmboe) was the same as the previous year and in the middle of the company’s guidance range. Sales volumes were up by 8% to 60.1 mmboe. Strong gas production in Western Australia and Indonesia, combined with new production from Oyong Phase-2 in Indonesia, offset natural ﬁ eld decline in mature assets. The company undertook a major cost reduction program at the start of the year and achieved improved performance in both cost of sales and cost of production. Pleasingly, we had a very good result on our major expense item, depreciation and depletion, where costs reduced by almost $50 million compared to last year. Operating cash ﬂ ow of $1,155 million was 17% lower, primarily due to product prices, but was offset by lower cash costs and income taxes paid. We expect 2010 production to be between 51 and 54 mmboe. Production growth will resume in 2011 as the company’s pipeline of new projects, including Reindeer, Kipper and Chim Sáo, come on stream. RESERVES GROWTH AND RESOURCE CONVERSION Reserves growth and resource conversion have been key features of our strategy. Our track record of commercialising contingent resources was again a feature in 2009. In total we commercialised more than 750 mmboe by either converting these resources to reserves or divesting them for cash. Santos increased its proved and probable (2P) reserves by 427 mmboe, taking the company’s total 2P reserves to a record 1,440 mmboe. 2P reserve life, on 2009 production rates, has increased to over 26 years: around twice the reserve life of ﬁ ve years ago. 2P RESERVES mmboe 1,440 774 819 1,013 879 1,500 1,200 900 600 300 0 2005 2006 2007 2008 2009 Five-year compound growth rate = 18% 8 Santos Annual Report 2009 The quality of the reserve base is also improving. We now have almost half of our reserves targeted at the higher margin LNG business, and about a third of those are conventional reserves at PNG LNG and Darwin LNG. STRONG BALANCE SHEET Despite the uncertainty in ﬁ nancial markets which marked most of 2009, we were able to successfully raise more than $5 billion in new capital. This has put us in a very strong position to continue to advance our strategy. Santos successfully issued new equity in 2009 to raise approximately $3 billion to fund PNG LNG, future growth and redeem the FUELS hybrid security. Cash and term deposits at the end of the year totalled more than $2.2 billion. Santos has committed but undrawn corporate debt facilities of $700 million. In addition, the company has committed debt facilities of $2.1 billion to fund the PNG LNG project. Total funding capacity therefore stood at $5 billion at year end. As part of actively managing our portfolio of assets, Santos generated over $300 million in proceeds from asset sales during 2009. A total of US$200 million was realised through the sale of 60% of the Petrel, Tern and Frigate ﬁ elds to GDF SUEZ as part of the Bonaparte LNG transaction. Santos also sold its interests in Petroleum Retention Licence 5 in Papua New Guinea, the Kakap Joint Venture in Indonesia, oil and gas assets in Egypt and the Churchie oil and gas assets in Queensland. Santos also announced the acquisition of signiﬁ cant additional CSG acreage in the Gunnedah Basin in northern New South Wales and investment in leading local CSG company Eastern Star Gas Limited for $476 million. The acquisition combines the proven CSG experience of Santos and Eastern Star with the ability of Santos to deliver major projects and develop various channels to market. Santos maintained its fully franked dividend at 42 cents per share in 2009. SANTOS VS ASX 200 INDEX FIVE-YEAR RELATIVE PERFORMANCE $ 25 20 15 10 5 0 John Brookes gas start-up GLNG announced PETRONAS appointed GLNG partner GDF SUEZ strategic partnership announced Mutineer-Exeter oil start-up Casino gas start-up Parliamentary approval to remove 15% share cap Equity raising announced Darwin LNG start-up Oyong oil start-up GLNG FEED contractor appointed PNG LNG sanctioned Tipperary acquisition Maleo gas start-up PNG LNG gas agreement and FEED entry GLNG signs binding Heads of Agreement for sale of 2 mtpa of LNG 2005 2006 2007 2008 2009 Santos (STO) ASX 200 Santos Annual Report 2009 9 The world of Santos Bishkek 1 Fergana Basin New Delhi Dhaka North East Coast Basin 2 3 Bengal Basin Hanoi 4 Beibuan Trough 5 Phu Khanh Basin 6 Nam Con Son Basin Kutei Basin 7 Jakarta 8 East Java Basin Timor 10 11 Browse Basin 13 Papua New Guinea 9 12 Darwin Port Moresby Carnarvon Basin 14 Bonaparte Basin Amadeus Basin 15 Gladstone Roma 18 Brisbane Cooper/Eromanga Basins 16 Surat/Bowen Basins Perth Port Bonython 17 Gunnedah 19 Gunnedah Basin Adelaide Otway Basin 21 20 Gippsland Basin OPERATED NON-OPERATED Exploration Development Operations/Production Santos ofﬁ ces 10 10 Santos Annual Report 2009 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 REF LOCATION SITE/ASSET ACTIVITY DESCRIPTION Fergana Basin, Kyrgyz Republic North East Coast Basin, offshore India Bengal Basin, offshore Bangladesh Beibuan Trough, offshore Vietnam Phu Khanh Basin, offshore Vietnam Nam Con Son Basin, offshore Vietnam Kutei Basin, offshore Indonesia East Java Basin, offshore Indonesia Papua New Guinea Timor Sea and Timor Gap Bonaparte Basin, offshore northern Australia Darwin, Northern Territory Non-operated exploration in six prospecting licences. Operated interests in two exploration permits. Sangu Non-operated interests in one exploration permit and gas and condensate production from Sangu development area. Chim Sáo, Dua Maleo, Oyong, Wortel PNG LNG, Hides, Barikewa, SE Gobe Bayu-Undan, Darwin LNG, Jabiru-Challis Barossa, Caldita, Evans Shoal, Petrel-Tern-Frigate Operated interest in one exploration permit. Operated interest in one exploration permit. Non-operated interest in one exploration permit, which contains Chim Sáo oil (in development) and Dua oil and gas discoveries. Non-operated interest in Popodi and Papalang PSCs. Operated interest in Sampang PSC, which contains Oyong oil and gas production, and the Wortel gas discovery (for which development planning is currently in progress). Operated interest in Madura Offshore PSC, which contains Maleo gas production. Non-operated interests in the PNG LNG project and the Hides ﬁ eld and oil production from SE Gobe. Operated interests in the undeveloped Barikewa gas resources. Non-operated interests in four production licences, which contain gas, condensate and LPG production from Bayu-Undan, LNG production from Darwin LNG, and oil production from Jabiru-Challis. Operated interest in three retention licences and one exploration permit in the southern Bonaparte, which contains the Petrel-Tern-Frigate gas ﬁ elds under development in a joint venture with GDF SUEZ (Bonaparte LNG). Operated interest in one exploration permit in the northern Bonaparte, which contains the undeveloped Evans Shoal gas resource, and non-operated interests in two exploration permits containing the undeveloped Barossa and Caldita gas resources. Wickham Point Non-operated Darwin LNG facility. Browse Basin, offshore Western Australia Burnside Carnarvon Basin, offshore Western Australia Mutineer-Exeter, John Brookes, Barrow Island, Legendre, Reindeer, Stag, Thevenard Amadeus Basin, Northern Territory Mereenie, Palm Valley, Dingo Brewer Estate Cooper/Eromanga Basins, South Australia and Queensland Moomba, Ballera, Jackson Operated interests in four exploration permits, including the Burnside discovery. Operated interests in three production licences which include oil production from Mutineer-Exeter, ten exploration permits and one retention licence. Non-operated interests in numerous exploration permits and production licences, which contain oil production from Barrow Island, Legendre, Stag and Thevenard, and gas and condensate production from John Brookes, and the Reindeer gas development. Operated interests in two production licences, which contain oil, gas and condensate production from Mereenie. Non-operated interest in one production licence, which contains gas production from Palm Valley. Operated interest in one retention licence containing the Dingo ﬁ eld, also contains Brewer Estate liquids facility. Operated and non-operated interests in numerous exploration and production permits across South Australia and Queensland, which contain oil, gas, condensate and LPG. Main production centres are located at Moomba, Ballera and Jackson, plus satellite facilities and associated infrastructure. Port Bonython Operated processing and load-out facility. Spencer Gulf, South Australia Surat/Bowen Basins, Queensland Gunnedah Basin, New South Wales Denison, Fairview, Spring Gully, Scotia, Roma, Moonie, Wallumbilla Gippsland Basin, offshore Victoria Patricia-Baleen, Kipper, Sole 21 Otway Basin, offshore Victoria Casino, Henry, Minerva Operated and non-operated interests in numerous exploration and production permits, which contain coal seam gas production from Fairview, Scotia, Spring Gully and Roma, conventional gas production from Denison and Roma and oil production from Moonie. Wallumbilla contains an LPG extraction plant and export compression facilities. Drilling of coal seam gas ﬁ elds underway for GLNG. Operated interests in six exploration permits. Non-operated interests in three exploration permits, one assessment lease which is to appraise coal seam gas and one production permit which contains conventional gas production. Operated interests in three permits, which contain Patricia-Baleen gas ﬁ eld and processing plant and the Sole gas resource. Non-operated interest in one permit, which contains the Kipper gas development project. Operated interests in three permits, which contain gas and condensate production from Casino and Henry/Netherby developments. Operated exploration interests in one permit. Non-operated interest in one permit which contains gas and condensate production from Minerva. Detailed exploration maps are available on the Santos website www.santos.com. Percentage interests are provided in the Santos Group interests section of Santos’ Annual Report 2009. Santos Annual Report 2009 11 11 Production statistics 2009 Total 2009 Total 2008 Total 2009 Total 2008 Field Units mmboe Field Units mmboe Field Units mmboe Field Units mmboe Sales gas, ethane and LNG (PJ) Condensate (‘000 bbls) 15.5 Cooper 1,095.2 5.6 Surat/Denison Cooper Surat/Bowen/ Denison Amadeus Otway/Gippsland Carnarvon Bonaparte Indonesia Bangladesh Total production Total sales volume Total sales revenue ($million) Crude oil (‘000 bbls) Cooper Surat/Denison Amadeus Legendre Thevenard Barrow Stag Mutineer-Exeter Jabiru-Challis Indonesia SE Gobe Total production Total sales volume Total sales revenue ($million) 79.9 31.9 10.6 20.5 43.5 16.3 30.2 5.7 13.7 5.5 1.8 3.5 7.5 2.8 5.2 1.0 90.2 32.8 12.2 21.0 27.3 16.3 24.2 6.3 2.1 3.6 4.7 2.8 4.2 1.1 238.6 268.2 41.0 46.1 1,098.2 230.3 237.9 39.6 40.9 1,051.6 3,598.4 62.5 106.3 288.7 305.7 573.5 1,643.9 995.0 105.9 560.3 148.1 8,388.3 8,604.5 3.6 0.1 0.1 0.3 0.3 0.6 1.6 1.0 0.1 0.6 0.1 8.4 8.6 3,945.7 71.1 127.9 299.6 339.8 617 1,627.9 1,254.6 142.0 983.4 188.2 9,597.2 9,796.8 4.0 0.1 0.1 0.3 0.3 0.6 1.6 1.3 0.1 1.0 0.2 9.6 9.8 678.3 1,150.6 7.6 46.6 23.4 435.5 1,552.6 0.9 3,161.8 3,505.8 1.0 0.0 0.1 0.0 0.4 1.5 0.0 3.0 3.3 1,295.1 17.4 67.4 22.1 291.4 1,594.7 1.2 3,289.3 3,173.9 1.2 0.0 0.1 0.0 0.3 1.5 0.0 3.1 3.0 233.2 321.2 151.2 0.3 88.6 240.1 252.6 1.3 0.0 0.7 2.0 2.1 162.0 1.3 88.1 251.4 250.5 1.4 0.0 0.7 2.1 2.1 170.8 238.4 54.4 60.1 54.4 55.8 2,180.5 2,761.8 Amadeus Otway Carnarvon Bonaparte Bangladesh Total production Total sales volume Total sales revenue ($million) LPG (‘000 t) Cooper Surat/Denison Bonaparte Total production Total sales volume Total sales revenue ($million) Total Production (mmboe) Sales volume (mmboe) Sales revenue ($million) 12 Santos Annual Report 2009 Reserves statistics 2009 Proven plus probable reserves (Santos share) by activity Sales gas (incl. ethane & LNG) PJ Crude oil mmbbl Condensate mmbbl LPG ‘000 tonnes Reserves year end 2008 Production Additions Acquisitions/divestments Estimated reserves year end 2009 5,039 (239) 2,857 (197) 7,460 83 (8) 2 (3) 74 42 (3) 32 (7) 64 2,989 (240) 109 (10) 2,848 Total mmboe 1,013 (54) 525 (44) 1,440 Proven plus probable reserves (Santos share) year end 2009 by area Sales gas (incl. ethane & LNG) PJ Crude oil mmbbl Condensate mmbbl LPG ‘000 tonnes Total mmboe Area Eastern Australia Cooper Basin Southern Australia Qld CSG Qld conventional NSW CSG Total EA Western Australia and Northern Territory Carnarvon Bonaparte Amadeus Total WA and NT Asia Paciﬁ c PNG Indonesia Vietnam Bangladesh Total AP Total Beneﬁ cial interests* Grand total 762 465 3,024 56 532 4,839 742 278 95 1,115 1,130 168 9 7 1,314 7,268 192 7,460 31 0 0 0 0 31 24 0 5 29 1 1 12 0 14 74 0 74 11 5 0 0 0 16 5 17 1 23 25 0 0 0 25 64 0 64 1,607 398 0 0 0 2,005 0 843 0 843 0 0 0 0 0 2,848 0 2,848 186 88 520 10 91 895 155 71 23 249 218 30 14 1 263 1,407 33 1,440 *STO owns 19.42% of Eastern Star Gas, which has a 65% interest of PPL3, PAL2, PEL238, PEL433 and PEL434 Reserves (Santos share) (mmboe) 1P reserves 2P reserves 2C contingent resources The information in this reserves statement has been compiled by Greg Horton, a full-time employee of the company. Greg Horton is qualiﬁ ed in accordance with ASX Listing Rule 5.11 and has consented to the form and context in which this statement appears. Year end 2008 Production Additions Acq/Div Year end 2009 518 1,013 2,849 54 54 0 230 525 (260) (46) (44) (92) 647 1,440 2,497 Approximately 70% of Santos’ year-end 2009 2P Reserves and 37% of 2C contingent resources (including 100% of CSG 2P Reserves and 99% of CSG 2C contingent resources), were audited by independent experts Gaffney, Cline & Associates (conventional assets) and Netherland, Sewell & Associates, Inc. (CSG assets). Additionally, over the last two years, GCA, NSAI and DeGolyer and MacNaughton have audited approximately 94% of Santos’ combined total year-end 2009 2P plus 2C estimates. The auditors found that based on the outcomes of each of the respective audits and their understanding of the estimation processes employed by Santos, that Santos’ December 31, 2009 Reserves and Contingent Resources quantities in aggregate compare reasonably to those estimates prepared by the auditors. Gaffney, Cline & Associates found that, in the aggregate, the total volumes summarised in the Santos summary table represents a reasonable estimate of Santos’ December 31, 2009 Reserves and Contingent Resources position. Santos Annual Report 2009 13 Senior completions engineer Gabriel Amorer in Santos’ coal seam gas ﬁ elds in the Arcadia Valley, eastern Queensland. LNG projects Unprecedented economic growth in Asia is increasing demand in the region for LNG – demand that Santos’ transformational LNG strategy is poised to support. of the project. After a period of public review, a supplementary EIS was submitted to the Queensland Government in November 2009. LNG demand in the Asia-Paciﬁ c is expected to double in the next 15 years. This forecast increase substantially outstrips contracted supplies. Santos has abundant resources in close proximity to these markets and a track record of reliable delivery. Santos has an LNG portfolio unique for a company of its size: its cornerstone GLNG project, the recently approved PNG LNG project, the existing Darwin LNG project, and the proposed Bonaparte LNG project. GLNG: SIGNIFICANT ACHIEVEMENTS The GLNG project will involve piping CSG from Santos’ eastern Queensland ﬁ elds to a plant at Gladstone, where the gas will be liqueﬁ ed and loaded to ships for sale to world markets. GLNG reached an important milestone in June 2009 when it announced a binding heads of agreement to sell two million tonnes per annum (mtpa) of LNG to Santos’ GLNG project partner PETRONAS over 20 years, starting in 2014. As part of the deal, PETRONAS has also undertaken to buy an additional one mtpa of LNG should GLNG elect to supply. The commercial terms and price of the agreement are in line with industry practice for long-term contracts. The gas will be used in the Malaysian domestic market. PETRONAS, the world’s third-largest LNG producer and the largest LNG producer in Asia, bought a 40% stake in GLNG in 2008. Proven and probable CSG reserves have grown three-fold since 2007, and Santos now has more than enough gas to underpin the ﬁ rst GLNG train. Front-end engineering and design studies are nearing completion. The GLNG Environmental Impact Statement (EIS) was submitted to the Queensland Government in March 2009. The EIS examined the potential environmental, social and economic impacts GLNG’s cultural heritage management plans are well advanced, with ﬁ ve of seven Indigenous Land Use Agreements already established. These agreements provide beneﬁ ts to Aboriginal groups in the form of compensation, and employment and training initiatives. A ﬁ nal investment decision is expected around the middle of this year and ﬁ rst LNG shipments are scheduled for 2014. PNG LNG PROJECT APPROVED Co-venturers in the PNG LNG project gathered in Port Moresby in December 2009 to formally give the go-ahead for the project. PNG LNG will involve piping gas from the Hides gas ﬁ eld in the PNG highlands to a proposed 6.6 mtpa LNG plant near Port Moresby. It is the largest ever investment in PNG and is expected to double the country’s gross domestic product. Santos has a 13.5% stake in the ExxonMobil-led project and a US$2 billion share of the estimated capital cost. First gas sales are targeted for 2014. Offtake agreements have been signed for all expected production, and will supply to Sinopec, TEPCO, Osaka Gas and CPC Taiwan. GLNG operations adviser Glen Anyon at Santos’ Chinchilla white gum plantation near Fairview, eastern Queensland. BENEFICIAL USE OF CSG WATER Santos has developed an innovative solution to a challenge faced by the global CSG industry – effectively using water produced during CSG extraction. The water will be used to nurture a plantation of two million native Chinchilla white gum trees near Fairview in eastern Queensland. Almost one million trees have been planted, and plans are being discussed to extend the plantation to six million trees. Santos will also use the water to irrigate feedstock for cattle, boosting beef production in the area. PROPOSED FLOATING LNG Santos has partnered with France’s GDF SUEZ, one of the world’s leading LNG companies, to develop the Bonaparte LNG project in the Timor Sea. Bonaparte LNG proposes to use cutting-edge technology to develop a ﬂ oating LNG processing plant. As part of the partnership, GDF SUEZ has bought 60% of the Petrel, Tern and Frigate gas ﬁ elds from Santos for up to US$370 million, and will carry all Santos’ share of the costs until a ﬁ nal investment decision, expected in 2013. DARWIN LNG CONTINUES SOLID PRODUCTION The Darwin LNG project, Santos’ ﬁ rst producing LNG asset, continued to produce well in 2009. Santos has an 11.4% stake in Darwin LNG, which commenced production in 2006. The successful project takes gas from the offshore Bayu-Undan ﬁ elds 500 kilometres north-west of Darwin in the Timor Gap. Darwin LNG capacity will be increased during statutory shutdown work planned for the ﬁ rst half of 2010. Santos Annual Report 2009 15 Steel pipeline being spooled onto pipelay vessel at Crib Point on Victoria’s Mornington Peninsula. The pipe was welded together on land and spooled onto the vessel, before being unreeled offshore to connect the Netherby and Henry wells to existing Casino infrastructure. Australia Santos is Australia’s largest domestic gas producer. The company’s Australian base business comprises gas and oil production assets in all mainland states and the Northern Territory. Continued solid production combined with sanctioned projects and the potential of untapped reserves ﬁ rmly places Santos in a position to serve the growing demand for natural gas and help Australia move towards a cleaner energy future. NATURAL GAS: THE KEY TO A CLEANER ENERGY PORTFOLIO As Australia’s largest domestic gas producer, Santos is in a unique position to help Australia and the Asia-Paciﬁ c signiﬁ cantly cut greenhouse gas emissions through natural gas. By increasing the use of natural gas as a source of electricity generation, Australia can immediately and signiﬁ cantly reduce its carbon footprint, while supporting the development of intermittent renewable power technology. By progressively replacing coal-ﬁ red power generation, natural gas can underwrite a 20% reduction in carbon emissions from electricity generation while still doubling the level of power available to Australian industry and homes. Australia has a natural gas resource base equivalent to hundreds of years of current use. Natural gas is also affordable; prices in eastern Australia are among the cheapest in the OECD. A BRIGHT FUTURE FOR THE COOPER The Cooper Basin has been the heartland of Santos for more than four decades and still retains signiﬁ cant development potential. Santos is working to unlock its signiﬁ cant gas resources through inﬁ ll drilling and by tapping unconventional reservoirs. Inﬁ ll drilling involves drilling multiple wells across areas where previously only one would be drilled – a method that will produce previously uncommercial gas from within existing ﬁ elds. Longer term, Santos is building its ability to produce from unconventional resources. An audit of the Cooper Basin has shown vast amounts of unconventional shale gas and tight gas resources. Already, the company is producing shale gas from one of its wells. Santos believes gas demand in Australia’s eastern states will grow signiﬁ cantly as the region seeks cleaner energy through gas-ﬁ red power plants. Established infrastructure and access to extensive pipeline networks positions the Cooper Basin to play a large role in meeting that demand. NEW EASTERN AUSTRALIA PROJECTS In the Otway Basin offshore Victoria, pipelay work to join the new Netherby and Henry gas ﬁ elds to the existing Casino production system began near the end of 2009. First gas was achieved in February 2010. Santos holds a 50% interest in this project. In the nearby Gippsland Basin, also offshore Victoria, work on the Kipper project is progressing well. Drilling is scheduled to commence in the ﬁ rst half of 2010, with ﬁ rst gas scheduled for production in the ﬁ rst half of 2011. Santos has a 35% interest in Kipper. The Shaw River Power Station project near Orford in western Victoria illustrates Santos’ recognition of the potential for natural gas to help Australia achieve cleaner electricity generation. The proposed 500MW base load power station would be supplied with natural gas from Santos’ own gas portfolio. Feasibility work on the project is continuing. SIGNIFICANT WA BUSINESS Santos is a leading gas supplier in Western Australia and maintains a portfolio of quality growth opportunities. Development of the Reindeer project offshore Western Australia is well underway, with ﬁ rst gas scheduled for the fourth quarter of 2011. Santos has a 45% interest in Reindeer, and has signed an agreement to supply CITIC Paciﬁ c’s Sino Iron project. Other contracts are expected to follow. Production in Santos’ other Western Australian assets, such as John Brookes, remained strong in 2009. The ﬁ rst major discovery of natural gas in the Cooper Basin occurred at the Gidgealpa-2 well on New Year’s Eve, 1963. 40 YEARS OF NATURAL GAS On 10 November 2009, Santos commemorated the 40th anniversary of natural gas delivery from its Moomba processing plant in the Cooper Basin. The company held a series of events in Adelaide and throughout the Cooper Basin to celebrate the event. The ﬁ rst molecules of natural gas arrived in Adelaide via the 755-kilometre pipeline from Moomba. Santos and its joint venture partners have since delivered 5.8 trillion cubic feet of gas to customers throughout the eastern Australian states and territories. South Australia uses this abundant and local natural gas supply for a high proportion of its electricity generation (56%), and subsequently has the cleanest power supply of all Australian mainland states. GUNNEDAH EXPLORATION Santos took the next major step in its strategic CSG strategy when it acquired signiﬁ cant additional acreage in the Gunnedah Basin of New South Wales and invested in leading local CSG Company Eastern Star Gas. Santos and Eastern Star’s total combined area of petroleum permits in the Gunnedah Basin is about 45,000 square kilometres. Since acquiring 35% interest in ESG operated acreage on 2 July 2009, 2P reserves have increased by 1,184 PJ to 1,520 PJ gross. Santos Annual Report 2009 17 Wida Yarifa, an electrical and instrument engineer with Santos contractor GPS. On an offshore gas rig in the Maleo ﬁ eld, Indonesia. Asia The company’s focused Asia strategy continues to progress, with producing assets delivering strong performance in 2009 and multiple options for growth. Also in Vietnam, 2D seismic surveys are complete in offshore Block 123 in the Phu Khanh Basin, north of Chim Sáo and Dua. Drilling is planned there for 2011. The developing Wortel and Peluang prospects add to the producing Maleo and Oyong assets in Indonesia, the Chim Sáo oil project in Vietnam has been formally approved, and exploration in the Bay of Bengal and the Kyrgyz Republic is progressing. INDONESIA: NEW PROJECT AND FURTHER GROWTH Santos’ Indonesian assets are now ﬁ rmly established as part of the company’s base business portfolio. The business has continued to display incremental growth in producing assets, and in 2009 brought the new Oyong Phase-2 gas project online. The Phase-2 project included modiﬁ cations to the existing offshore Oyong facilities and construction of a 60-kilometre pipeline to a new onshore gas processing facility. The project in East Java started production on schedule in the third quarter of 2009. The project was delivered safely, and was ramped up to production capacity within 20 days. Oil production from Oyong began in September 2007, and to date has produced more than four million barrels. The nearby Wortel development is proposed to be tied back to Oyong. A ﬁ nal investment decision for Wortel is targeted for mid-2010, with ﬁ rst gas forecast for the second half of 2011. Also in East Java, the Maleo gas ﬁ eld continued to produce strongly. The nearby Peluang-1 well was drilled in the ﬁ rst quarter of 2009, and has the potential to tie back to Maleo to maintain plateau production levels. FIRST OIL PROJECT IN VIETNAM Santos’ ﬁ rst oil project in Vietnam, Chim Sáo, has been formally approved. Work on the wellhead platform is well underway and ﬁ rst oil is expected in the second half of 2011. Santos has a 31.875% non-operating interest in the Chim Sáo ﬁ eld, which is located offshore southern Vietnam in the Nam Con Son Basin. BAY OF BENGAL AND BANGLADESH In Santos’ offshore acreage in the Bay of Bengal, an extensive 3D seismic program began in 2009 and is largely complete. Santos is targeting natural gas, which could be sold to the domestic Indian market. Interpretation of seismic results is ongoing. Santos has two deep water exploration licences that cover about 16,500 square kilometres in the north of the Bay. They were awarded by the Indian Government in 2007 under the competitive New Exploration Licensing Policy. Santos has shot over 300 kilometres of 3D seismic which is being evaluated with a view to drilling in 2011-12. In Bangladesh, a well optimisation program is extending the life of the offshore Sangu ﬁ eld. The Sangu ﬁ eld has associated onshore gas processing facilities, positioning Santos to feed the nearby Chittagong gas market. A 3D seismic program for the Magnama and South Sangu ﬁ elds is planned for early 2010. KYRGYZ REPUBLIC: LEADING ACREAGE POSITION Santos has established a leading acreage position in the Fergana Basin in the south of the Kyrgyz Republic. Santos holds interests in six prospecting licences covering approximately 2,700 square kilometres in the proven oil and gas province. 2D seismic work has been completed and shallow drilling occurred in 2009. Deeper drilling is planned for 2010 and 2011 to further evaluate the potential of these assets. If successful, existing pipelines and reﬁ neries will enable production to be brought on quickly and will provide multiple export options. Santos has secured an option for further acreage in the Fergana Basin, adding to production potential. Students on the EcoBoat learn to balance environmental protection with economic development. ON BOARD THE ECOBOAT Santos has partnered with Fauna & Flora International in the EcoBoat – an interactive ‘ﬂ oating classroom’ in Vietnam’s picturesque Ha Long Bay. The EcoBoat initiative gives local and international students hands-on experience in balancing environmental conservation with economic development. While staying on board the EcoBoat, students explore caves, talk to local communities and businesses, learn marine safety, navigation, and scientiﬁ c measurement of the natural environment. They use this experience to create their own sustainable vision for Ha Long Bay – a World Heritage Site and national treasure. In Indonesia, Santos continued its commitment to working with local communities, helping local ﬁ shermen and food business owners to improve their operations and create avenues to broader markets. Santos also installed 1.2 kilometres of pipeline to deliver clean water to village homes, and supported road development and coastal lighting. Santos Annual Report 2009 19 Landholder adviser David Lobb with a native Queensland bottle tree, in the Coxon Creek area of Santos’ eastern Queensland coal seam gas ﬁ elds. Sustainability Applying the principles of sustainability makes good business sense Santos recognises that an integrated sustainability framework delivers value beyond traditional economic measures. To achieve this Santos has established targets across 24 sustainability indicators, six for each of four categories: environment, community, our people, and economic. Target scores were achieved for 75% of these indicators, with the rest on track for achievement in 2010. Key indicator improvements achieved in 2009 include: • climate change management • safety TRCFR • incidents and spills • waste management. The efﬁ ciency and effectiveness with which Santos manages environmental resources is the pathway to keeping the company’s licence to operate in communities and with government regulators. Reducing greenhouse gas emissions, the use of clean water, land disturbance and waste to landﬁ ll contributes to the key concept of ‘doing more with less’ and has a positive effect on operating and regulatory costs – ultimately beneﬁ ting both Santos and the environment. GREENHOUSE GAS EMISSIONS FROM OPERATED ASSETS Million tonnes CO2-e (Scope 1) 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 OIL SPILL VOLUMES m3 550 500 450 400 350 300 250 200 150 100 50 0 Moonie East/Algester spills Carindale spill 2004 2005 2006 2007 2008 FY08-09 2005 2006 2007 2008 2009 Australia Indonesia United States Santos’ greenhouse gas emissions proﬁ le has reduced from over ﬁ ve million tonnes in 2005 to less than 3.5 million tonnes. Energy efﬁ ciency projects implemented in 2009 will save approximately 1,095 TJ of gas per year. Santos’ integrity management program and training programs helped deliver signiﬁ cant reductions of oil spill volumes in 2009. TOTAL RECORDABLE CASE FREQUENCY RATE Recordable injuries per million hours worked 10 8 6 4 2 0 EMPLOYEE TURNOVER % 8 6 4 2 0 2006 2007 2008 2009 2006 2007 2008 2009 Employees Contractors Combined A sustained focus on safety contributed to the lowest injury rate level in Santos’ history, this result was built on strong safety systems and a series of initiatives that were implemented to improve Santos’ focus on safety. Low employee turnover is an indication of a committed, engaged and proactive workforce. During this period employee turnover reduced to just 3.5%. SPONSORSHIP BY AREA 2009 % funding SPONSORSHIP BY ACTIVITY 2009 % funding SUSTAINABILITY REPORT 2009 Santos’ Sustainability Report 2009 provides a detailed annual review of its sustainability scorecard performance (www.santos.com/sustainability2009). South Australia 36.1% Australian School of Petroleum Royal Institution of Australia Queensland Victoria Indonesia Vietnam 21.0% 15.0% 8.9% 8.8% 6.6% 1.7% Education 40% General community 30% Arts and culture Environment Indigenous Conference/ industry/govt Youth 13% 10% 3% 2% 2% Northern Territory 0.8% Papua New Guinea 0.1% Western Australia 0.5% New South Wales 0.1% Santos’ sponsorship program is geographically distributed in a manner consistent with the spread of the company’s operations in each area. Santos’ community support program provides assistance to education, environment, art and culture and a range of youth and indigenous initiatives. Santos Annual Report 2009 21 Board of Directors ROY ALEXANDER FRANKLIN OBE BSc (Hons) Age 56. Independent non-executive Director since 28 September 2006 and member of the Environment, Health, Safety and Sustainability Committee of the Board. Non-executive director of Keller Group Plc since July 2007 and Chairman since August 2009. Non-executive director of StatoilHydro ASA since October 2007. Former non-executive Chairman of Bateman Litwin NV and Novera Energy Plc. Former Chief Executive Ofﬁ cer of Paladin Resources Plc 1997-2005 and former Group Managing Director of Clyde Petroleum Plc. Former Chairman of BRINDEX, the trade association for UK independent oil and gas companies 2002-2005 and a former member of PILOT, the joint industry/UK Government task force set up to maximise hydrocarbon recovery from the UK North Sea 2002-2005. In 2004 awarded the OBE for services to the UK oil and gas industry. KENNETH ALFRED DEAN DAVID JOHN WISSLER KNOX PETER ROLAND COATES AO BCom (Hons), FCPA, MAICD Age 57. Independent non- executive Director since 23 February 2005. Chairman of the Audit Committee and member of the Finance Committee of the Board. Director of Santos Finance Ltd since 30 September 2005. Non-executive Director of Bluescope Steel and Chair of Bluescope’s Audit & Risk Committee. Chief Financial Ofﬁ cer of Alumina Ltd October 2005-February 2009, alternate director of Alumina Ltd October 2005-February 2009 and non-executive director of Alcoa of Australia Ltd, Alcoa World Alumina LLC and related companies October 2005-February 2009. Director of Shell Australia Ltd from 1997 to 2001 and Woodside Petroleum Ltd from 1998 to 2004. Over 35 years’ experience in the oil and gas industry. Fellow of the Australian Society of Certiﬁ ed Practising Accountants and member of the Australian Institute of Company Directors. Former Chief Executive Ofﬁ cer of Shell Financial Services and member of the La Trobe University Council. Chief Executive Ofﬁ cer and Managing Director BSc (Hons) Mech Eng, MBA Age 52. Joined Santos in September 2007 as Executive Vice President Growth Businesses. Appointed Acting Chief Executive Ofﬁ cer in March 2008 and Chief Executive Ofﬁ cer and Managing Director in July 2008. Member of the Environment, Health, Safety and Sustainability Committee of the Board. Director of Santos Finance Limited. Previously Managing Director of BP Exploration & Production in Australasia and an Executive Member of APPEA. David has a wealth of upstream oil and gas experience, having held management and engineering roles at BP, ARCO and Shell across Australia, United Kingdom, Pakistan, United States, Netherlands and Norway. Also a director on the Board of the Botanic Gardens and State Herbarium, South Australia and a Fellow of the Australian Institute of Mechanical Engineering. Chairman BSc (Mining Engineering) Age 64. Appointed Santos Chairman on 9 December 2009. Previously an independent non-executive Director since 18 March 2008. Chairman of the Remuneration Committee of the Board, the Nomination Committee of the Board and the Santos Finance Limited Board. Member of the Finance Committee of the Board. Former non-executive Chairman of Xstrata Australia. Previously Chief Executive of Xstrata Coal, Xstrata Plc’s global coal business. Appointed non-executive director of Minara Resources Limited in April 2008 and appointed Chairman in May 2008. Non- executive director of Amalgamated Holdings Limited since July 2009. Past Chairman of the Minerals Council of Australia, the NSW Minerals Council and the Australian Coal Association. Member of the APEC 2007 Business Consultative Group and the Emissions Trading Task Group. Current member of the NSW Minerals Ministerial Advisory Council and the Business Council of Australia. RICHARD MICHAEL HARDING KENNETH CHARLES BORDA JANE SHARMAN HEMSTRITCH MSc LLB, BA BSc, FCA Age 60. Independent non-executive Director since 1 March 2004. Chairman of the Environment, Health, Safety and Sustainability Committee of the Board. Member of the Audit, Nomination and Remuneration Committees of the Board. Independent non-executive Chairman of Clough Ltd, having been appointed as director in May 2006. Non-executive director of Downer EDI Limited since July 2008. Non-executive Deputy Chairman of Arc Energy Ltd until May 2007 (appointed as non-executive director in August 2003). Chairman of the Ministry of Defence Project Governance Board – Land Systems Division (Army) 2003–February 2009. Former President and General Manager of BP Developments Australia Ltd with over 25 years of extensive international experience with BP. Former Vice-Chairman and Council member of the Australian Petroleum Production and Exploration Association (APPEA). Age 57. Independent non- executive Director since 14 February 2007. Chairman of the Finance Committee of the Board and member of the Nomination Committee of the Board. Board member of Fullerton Funds Management, owned by Temasek, Singapore, since February 2007. Non-executive director of Ithmaar Bank (Bahrain) since February 2007 and Leighton Contractors Pty Ltd since July 2007. Appointed a director of Talent2 International Ltd in August 2008 and the Asian Advisory Board of Aviva Pte Ltd in Singapore in February 2009. Previously a Board member of SFE Corporation for over ﬁ ve years until its acquisition by the Australian Stock Exchange Ltd in July 2006. CEO of Middle East and North Africa, Deutsche Bank before retirement in May 2007. Formerly Regional CEO Asia Paciﬁ c and CEO Australia and New Zealand, Deutsche Bank. Director of Deutsche Bank Malaysia from 2002 until retirement in May 2007. Age 56. Independent non-executive director since 16 February 2010. Member of the Remuneration Committee of the Board and the Audit Committee of the Board. Non-executive director of the Commonwealth Bank of Australia since October 2006, The Global Foundation since November 2006 and Tabcorp Holdings Ltd since November 2008. Member of the Research and Policy Council and Advisory Committee of the Committee for Economic Development of Australia. 25 years’ experience with Accenture and Andersen Consulting. Previously Asia Paciﬁ c Managing Director, Country Managing Director for Australia and member of Accenture’s Executive Leadership Team 2004-2007. Past roles also include Managing Partner of Accenture’s Communications and HighTech Operating Unit for Asia Paciﬁ c and of Accenture’s Communications and HighTech Practice for Australia and New Zealand GREGORY JOHN WALTON MARTIN BEc, LLB, FAIM, MAICD Age 50. Independent non-executive Director since 29 October 2009. Member of the Remuneration Committee of the Board and the Environment, Health, Safety and Sustainability Committee of the Board. Non-executive director of Energy Developments Limited and the Australian Energy Market Operator Limited. Chairman of Everest Financial Group, Gas Valpo S.A. (Chile) and the Royal Botanic Gardens & Domain Trust of New South Wales. Previous Deputy Chairman of the Australian Gas Association and inaugural Chairman of the Energy Supply Association of Australia between 2004 and 2006. Former Chairman of Jackgreen Limited. Past member of the Business Council of Australia and Committee for the Economic Development of Australia. Formerly Managing Director and Chief Executive Ofﬁ cer of AGL, and Chief Executive Infrastructure at Challenger Financial Services Group. Santos Leadership Team JOHN ANDERSON Vice President Western Australia and Northern Territory LLB, BEc, GDCL John Anderson is responsible for Santos’ activities in Western Australia and Northern Territory, including commercial and ﬁ nance, business development, exploration, development and operated assets. 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, Group Executive Business Development, Vice President Strategic Projects and most recently Vice President Commercial. MARTYN EAMES Vice President Asia Paciﬁ c BSc (Hons) Martyn Eames is responsible for Santos’ activities in the Asia Paciﬁ c region. These comprise Santos’ business interests in Indonesia, Papua New Guinea, India, Bangladesh, Kyrgyz Republic and Vietnam. Martyn joined Santos in December 2004 as Vice President Corporate and People. Before then, he spent more than 25 years with BP, working various upstream roles in Angola, Canada, Australia, Papua New Guinea, Norway, United Kingdom and United States. PETRINA COVENTRY Chief Human Resources Ofﬁ cer BEd, PostDipHR, Master Business Ethics Petrina Coventry is responsible for human resources strategy and activities throughout Santos, including remuneration and beneﬁ ts, organisational effectiveness, talent management, learning and development, recruitment and payroll. Petrina has spent many years working in the US, Asia and Europe in global human resource management roles for The General Electric Company and The Coca Cola Company. Her most recent role was Chief Human Resource Ofﬁ cer for a private equity consortium in Singapore. She has deep industry knowledge across many industrial sectors including renewable energy, oil and gas services, real estate and ﬁ nancial services. DAVID KNOX ROGER KENNETT Vice President GLNG Operations BSc Chemical Technology Roger Kennett is responsible for the project management, engineering, construction and operation of the coal seam gas ﬁ eld development in eastern Queensland, the 435- kilometre pipeline from Fairview to Gladstone, and the GLNG plant and facilities on Curtis Island. Roger joined Santos in 1984, and has held a range of operations and technical leadership roles during his 25 year career with Santos. His most recent role was Vice President Operations. Before joining Santos, Roger worked for 13 years in chemical and fertiliser industries. Chief Executive Ofﬁ cer and Managing Director BSc (Hons) Mech Eng, MBA David Knox was appointed Chief Executive Ofﬁ cer of Santos in July 2008. He has 25 years of experience in the global oil and gas industry, including as Managing Director for BP Developments in Australasia from 2003 to 2007. David Knox joined Santos in September 2007 as Executive Vice President, Growth Businesses, responsible for growth in Santos’ emerging new businesses including LNG, Geoscience and New Ventures, Indonesia and other strategic projects. Originally from Edinburgh, Scotland, David holds a ﬁ rst class honours degree in Mechanical Engineering from Edinburgh University and a Masters of Business Administration from the University of Strathclyde. David Knox has previously held senior positions with BP in Australia, the United Kingdom and Pakistan. He has worked for ARCO and Shell in the United States, Netherlands, the United Kingdom and Norway. PETER WASOW Chief Financial Ofﬁ cer and Executive Vice President BCom, GradDipMgmt, FCPA Peter Wasow is responsible for strategy and planning, corporate ﬁ nance, accounting, taxation, treasury, investor relations, risk and audit, and public affairs. 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 ofﬁ ce. RAY BETROS Vice President Technical BEng Chemical, GradDip Process Plant Engineering Ray Betros is responsible for driving overall performance; enhancing Santos’ technical excellence across subsurface and surface engineering disciplines; leading environment, health and safety and clean energy strategies; and overseeing delivery of key technical services (drilling, IT, and procurement and logistics). Ray joined Santos in January 2009 from BG Group where he was the Technical Director and Chief Operating Ofﬁ cer for the Asian, Middle Eastern and African regions. During his more than 30-year career, he has also held senior positions with BHP Billiton and Hoechst. TREVOR BROWN Vice President Exploration BSc (Hons) Trevor Brown is responsible for implementing Santos’ exploration and new ventures strategy and for building a material portfolio of growth opportunities. Trevor also leads a team of highly qualiﬁ ed geoscientists and subsurface engineers ensuring the application of subsurface excellence across all Santos’ conventional and unconventional exploration, appraisal and development activities. Trevor joined Santos in 2001 from the US independent oil company Unocal where he was part of a very active exploration team gaining experience across SE Asia, the United States and South America. His previous roles at Santos include Manager New Ventures, Manager Growth Projects and Vice President Geoscience and New Ventures. Trevor has over 24 years’ experience in the oil and gas industry including 11 years in Indonesia managing onshore and offshore exploration programs. JAMES BAULDERSTONE Vice President Corporate Development and Legal LLB (Hons), BSc (Hons) James Baulderstone is responsible for the M&A team and has functional responsibility for Commercial and Marketing Excellence, Legal and Secretariat. James is also General Counsel and Company Secretary of the Santos Group. James joined Santos in January 2007 after holding similar roles at Mayne Group and BlueScope Steel. James has extensive legal, commercial and business development experience across many countries including the United States, Germany, United Kingdom, Malaysia, China and India. RICK WILKINSON President GLNG and Queensland BSc (Hons) Rick Wilkinson is responsible for Santos’ Queensland assets, including the GLNG business and LNG marketing. Rick was formerly Vice President Commercial. 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. MARK MACFARLANE Vice President Eastern Australia BEng (Hons) Mechanical Mark Macfarlane is responsible for Santos’ eastern Australia activities, including commercial and ﬁ nance, business development, exploration and development, production operations, plant operations and reliability, and human resources. 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, corporate planning, gas and oil exploitation and optimisation, and operations. Mark’s most recent role was Vice President Development. Corporate governance INTRODUCTION The Board and management of Santos believe that, for the Company to achieve its vision of becoming a leading energy company for Australia and Asia, 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. To achieve the highest standards of corporate governance, the Board has established corporate governance policies and charters (Policies). The Policies, or a summary of the Policies, are publicly available on the Company’s website, www.santos.com. The Company’s Policies meet the requirements of both the Corporations Act 2001 (Cth) (the Act) and the Listing Rules of the Australian Securities Exchange (ASX), and, in the opinion of the Board, comply with best practice, including the ASX Principles of Good Corporate Governance and Good Practice Recommendations (ASX Principles). The table on page 27 indicates where speciﬁ c ASX Principles are dealt with in this Statement. PART 1: COMPOSITION OF THE BOARD Relevant policies and charters See www.santos.com • Board Guidelines • Company Constitution 1.1 Composition The composition of the Board is determined in accordance with the Company’s Constitution and the Board Guidelines which, among other things, require that: • the Board comprises a minimum of ﬁ ve directors (exclusive of the Chief Executive Ofﬁ cer/Managing Director (CEO)), and a maximum of ten directors; • the Board should comprise a substantial majority of independent, non-executive Directors; Under these guidelines, the following interests are regarded as material in the absence of any mitigating factors: • there should be a separation of the roles of Chairman and CEO of the Company; • the Chairman of the Board should be an independent, non-executive Director; and • performance of the Board and its members should be reviewed regularly and objectively. The names and details of the experience, qualiﬁ cations, special responsibilities, and term of ofﬁ ce of each Director of the Company and the Company Secretary are set out on pages 22 to 25 of this Annual Report. In 2009: • Chairman Mr Stephen Gerlach retired from the Company’s Board. Mr Peter Coates assumed the role of Chairman, having been appointed Deputy Chairman in 2008 as part of the Board’s succession planning process. • As part of the Company’s Board renewal process, Professor Judith Sloan retired from the Board on 6 May 2009 and, in October 2009, Mr Gregory Martin was appointed a Director and, in February 2010 Ms Jane Hemstritch was also appointed a Director. 1.2 Director independence The Board has adopted the deﬁ nition of independence set out in the ASX Principles. Having regard to this deﬁ nition, 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. • 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 afﬁ liation with an entity which accounts for 5% or more of the revenue or expense of the Company. Each Director’s independence is assessed by the Board on an individual basis, with reference to the above materiality guidelines and focusing 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 to the Board their interests in contracts, family ties and cross-directorships which may be relevant in considering their independence. Currently, the Board comprises seven non-executive Directors, all of whom are considered independent under the principles set out above, and one executive Director (the Managing Director/CEO). 1.3 Conflicts of interest The Board has an obligation to ensure that Directors avoid conﬂ icts between their duty to the Company and their own personal interests. Directors are required to declare actual or potential conﬂ icts of interest both on their appointment to the Board and on an ongoing basis. For example, Directors must declare any conﬂ ict of interest that they may have at the start of all Board meetings. Where a material personal interest arises with respect to a matter that is to be considered by the Board, the Director is required to declare that interest and must not take part in any Board discussion or vote in relation to that matter, unless permitted in accordance with the Act. 26 Santos Annual Report 2009 Principles and Recommendations Principle 1 – Lay solid foundations for management and oversight 1.1 Establish and disclose the functions reserved to the Board and those delegated to management. 1.2 Disclose the process for evaluating the performance of senior executives. 1.3 Provide the information indicated in the guide to reporting on Principle 1. Principle 2 – Structure the Board to add value 2.1 A majority of the Board should be independent Directors. 2.2 The chairperson should be an independent Director. 2.3 The roles of chairperson and chief executive ofﬁ cer should not be exercised by the same individual. 2.4 The Board should establish a Nomination Committee consisting of a minimum of 3 members, the majority being independent Directors. 2.5 Disclose the process for evaluating the performance of the Board, its committees and individual directors. 2.6 Provide the information indicated in the guide to reporting on Principle 2. Section 2.1 1.6 1.6, 2 1.2 1.1 1.1 3.1, 3.2, 3.3 1.6 1.1, 1.2, 1.4, 1.6, 2.2, 3.1, 3.2, 3.3 Principle 3 – Promote ethical and responsible decision-making 3.1 Establish a code of conduct to guide the Directors, the chief executive ofﬁ cer (or equivalent), the chief ﬁ nancial 5.1, 5.2 ofﬁ cer (or equivalent) and any other key executives as to: 3.1.1 the practices necessary to maintain conﬁ dence in the Company’s integrity; 3.1.2 the practices necessary to take into account their legal obligations and the reasonable expectations of stakeholders. 3.1.3 the responsibility and accountability of individuals for reporting and investigating reports of unethical practices. 3.2 Disclose the policy concerning trading in Company securities by Directors, senior executives and employees. 3.3 Provide the information indicated in the guide to reporting on Principle 3. Principle 4 – Safeguard integrity in ﬁ nancial reporting 4.1 The Board should establish an Audit Committee. 4.2 Structure the Audit Committee so that it : • consists only of non-executive Directors; • consists of a majority of independent Directors; • is chaired by an independent chair, who is not a chair of the Board; and • has at least three members. 4.3 The Audit Committee should have a formal charter. 4.4 Provide the information indicated in the guide to reporting on Principle 4. Principle 5 – Make timely and balanced disclosure 5.1 Establish and disclose written policies and procedures designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior management level for that compliance. 5.2 Provide the information indicated in the guide to reporting on Principle 5. Principle 6 – Respect the rights of shareholders 6.1 Design and disclose a communications strategy to promote effective communication with shareholders and encourage effective participation at general meetings. 6.2 Provide the information indicated in the guide to reporting on Principle 6. Principle 7 – Recognise and manage risk 7.1 Establish policies for the oversight and management of material business risks and disclose a summary of those policies. 7.2 Require management to design and implement the risk management and internal control system to manage the company’s material business risks and report to the Board on whether those risks are being managed effectively. 7.3 Disclose whether the Board has received assurance from the chief executive ofﬁ cer and the chief ﬁ nancial ofﬁ cer that the declaration provided under s295A of the Act is founded on a sound system of risk management and internal control that is operating effectively in all material respects in relation to ﬁ nancial reporting risks. 7.4 Provide the information indicated in the guide to reporting on Principle 7. Principle 8 – Remunerate fairly and responsibly 8.1 The Board should establish a remuneration committee. 8.2 Distinguish the structure of non-executive Directors’ remuneration from that of executive Directors and senior executives. 8.3 Provide the information indicated in the guide to reporting on Principle 8. 5.3 5.1, 5.2, 5.3 3.2, 3.3 3.1, 3.2, 3.3 3 3.2 5 5 5.4 5.4 4.1 4.1, 4.2 4.2 4.1, 4.2 3.2, 3.3 3.3 3.2, 3.3 Santos Annual Report 2009 27 Corporate governance (continued) 1.4 Appointment of new Directors, term of office and re-election The Board Guidelines include the following principles: • non-executive Directors are to be appointed on the basis that their nomination for re-election as a Director is subject to review and support by the Board; • there should be appropriate circumstances justifying re-election after a speciﬁ ed period of service as a Director; and • the contribution of the Board, Board Committees, and of individual Directors is the subject of formal review and discussion in accordance with the process set out below. Prospective candidates for election and re-election to the Board are reviewed by the Nomination Committee. The Committee considers the business experience, skills and expertise of the candidates and the requirements of the Board, to ensure that the Board’s overall composition enables it to meet its responsibilities. The Nomination Committee makes appropriate recommendations to the Board regarding possible appointments of Directors. 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. The Nomination Committee considers candidates for re-election and makes recommendations to the Board, taking into account performance, internal and external Board and Director review results and the requirements of the Board. 28 Santos Annual Report 2009 In 2009, the following changes in the directorship of the Company took place as part of the Board renewal process: • Mr Stephen Gerlach retired as Chairman of the Company on 9 December 2009 and as a Director on 31 December 2009; • Mr Peter Coates assumed the role of Chairman on 9 December 2009; • Professor Judith Sloan retired from the Board on 6 May 2009; and • Mr Gregory Martin was appointed a Director on 29 October 2009. The Board renewal process is overseen by the Nomination Committee and involves regularly reviewing the composition of the Board to ensure that the Directors have the necessary experience, skills and expertise to manage a leading energy company. Throughout 2009, the Nomination Committee had been actively seeking appropriate candidates for appointment to the Board to replace Mr Gerlach. In February 2010, the Board appointed Ms Hemstritch as a Director. The details of Ms Hemstritch’s experience and qualiﬁ cations are set out on page 23 of the Annual Report. 1.5 Director induction and continuing education Prior to appointment, each Director is provided with a letter of appointment which includes copies of the Company’s Constitution, Board Guidelines, Committee Charters, relevant policies and functional overviews of the Company’s strategic objectives and operations. Additionally, the expectations of the Board in respect to a proposed appointee to the Board and the workings of the Board and its Committees are conveyed in interviews with the Chairman. Induction procedures include access to appropriate executives in relation to details of the business of the Company. Directors are encouraged by the Board to continue their education by attending both internal and external training and education relevant to their role. 1.6 Review of Board, Director and executive performance Ordinarily, an external review of the Board and individual Directors is carried out on a biennial basis and internal reviews of individual Directors are conducted annually. The external reviews are carried out by an independent consultant, based on a scope agreed in advance with the Board. Internal reviews are facilitated by the Chairman, in consultation with the Nomination Committee, and involve formal interviews with each Director culminating in a written report prepared by the Chairman. With the change of Chairman and other Board renewal changes taking place in 2009, the Board review in 2009 was via an internal review conducted by the incoming Chairman. In 2010, it is expected that an external review will be undertaken of the Board as a whole, together with peer review of all individual Directors. Board Committees conduct their own internal review of their performance, structure, objectives and purpose from time to time. Performance evaluation of senior executives is undertaken twice a year by the CEO, the results of which are used by him in association with the Remuneration Committee in determining future remuneration and generally for review by the Board in relation to management succession planning. Performance reviews were conducted for each of the senior executives, including the CEO, during the year. These reviews were carried out in accordance with the process set out above against the following criteria: • analysing performance against agreed measures; • examining the effectiveness and quality of the individual in their given role; • assessing key contributions; • identifying areas of potential improvement; and • assessing whether various expectations of shareholders have been met. As a result of recommendations arising from the internal Board review, a number of initiatives have been introduced to ensure the continued effectiveness of the Board’s performance and enable its sustained focus on key issues for the Company. The performance evaluations of senior executives that were conducted in accordance with the above procedures directly impacted their short term incentives. Details of the remuneration received by Directors and senior executives are set out in the Remuneration Report commencing on page 52 of the Annual Report. PART 2: BOARD RESPONSIBILITIES Relevant policies and charters See www.santos.com • Board Guidelines In addition to the Board Guidelines, the Board has adopted a formal document outlining the Role of the Board. The overriding objective is to increase shareholder value to top quartile performance. The Board endeavours to do this by use of a management framework which protects the rights and interests of shareholders and ensures the Company is properly managed through the implementation of sound strategies and action plans and the development of an integrated framework of risk management and control over the Company’s economic resources. 2.1 Responsibilities The Board is responsible for the overall corporate governance of the Company, including approving the strategic direction and ﬁ nancial objectives, oversight of the Company and its management, establishing goals for management and monitoring the attainment of these goals. Speciﬁ cally, the Board is responsible for: • the oversight of the Company’s strategic direction management of the Company; • the approval of delegations of authority to management; • signiﬁ cant acquisitions and disposals of assets; • signiﬁ cant expenditure decisions outside of the Board-approved corporate budget including hedging of product sales, sales contracts and ﬁ nancing arrangements; • the approval of, and monitoring of, ﬁ nancial performance against strategic plans and corporate budgets; • approving ethical standards and codes of conduct; • the selection and evaluation of, and succession planning for, Directors, CEO, CFO and Company Secretary and general endorsement of the same for other executives reporting to the CEO; • the remuneration of Directors and the CEO and general endorsement of the same for other executives reporting to the CEO; • oversight of the integrity of material business risk management including ﬁ nancial and non-ﬁ nancial risks. The Board has also established a number of Board Committees to assist with the effective discharge of its duties. Each Director is required to ensure that they are able to devote sufﬁ cient time to discharge their duties and to prepare for Board and Committee meetings and associated activities. The Board delegates management of the Company’s resources to the Company’s executive management team, under the leadership of the 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 Management for: • implementing corporate strategies; and • operating under approved budgets and written delegations of authority. 2.2 Indemnity, access to information and independent professional advice 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 qualiﬁ cations 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 access 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 ofﬁ ce. 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. Information in respect of indemnity and insurance arrangements for Directors and certain senior executives appears in the Directors’ Statutory Report on page 47 of this Annual Report. Santos Annual Report 2009 29 Corporate governance (continued) PART 3: BOARD COMMITTEES Relevant policies and charters See www.santos.com • Audit Committee Charter • Environment, Health, Safety & Sustainability Committee Charter • Finance Committee Charter • Nomination Committee Charter • Remuneration Committee Charter Board Committees KC Borda1 PR Coates2 Non-executive Director Non-executive Director (Deputy Chairman/ Chairman) 3.1 Role and membership The Board has established a number of Committees to assist with the effective discharge of its duties. The membership and role of each Committee is set out in section 3.3. All Committees are chaired by and comprise only non-executive, independent Directors, except the Environment, Health, Safety and Sustainability Committee, which includes the CEO as a member. Other composition requirements speciﬁ c to the individual Committee are set out in section 3.3. Non-Committee members may attend Committee meetings by invitation. Each Committee operates under a speciﬁ c charter approved by the Board. The Board Committee Charters have been reviewed in accordance with the revised ASX Principles. Board Committees have access to internal and external resources, including access to advice from external consultants or specialists without management present. The Chairman of each Committee provides an oral, and, where practicable, a written report together with the minutes and recommendations of the Committee at the next Board meeting. As a result of changes in directorship of the Company (as outlined in section 1.4), the Board reviewed the Board Committee memberships to ensure that the members of each Committee have the requisite expertise and skill. As a result of this review, the following changes to Committee membership occurred in February 2010: • Mr Gregory Martin was appointed to the Remuneration Committee with effect from 1 February 2010 and the Environment, Health, Safety and Sustainability Committee with effect from 17 February 2010; Environment, Health, Safety & Sustainability Committee Audit Committee Member Member Finance Committee Nomination Committee Remuneration Committee Chairman Member Member Chairman Chairman KA Dean Non-executive Director Chairman Member RA Franklin Non-executive Director S Gerlach3 Non-executive Director (Chairman) RM Harding Non-executive Director Member DJW Knox Executive Director (Managing Director/CEO) J Sloan4 Non-executive Director GJW Martin5 Member Member Chairman Member Non-executive Director Member JS Hemstritch6 Non-executive Director Member Member Chairman Member Member Member Member Member Member 1 Mr Kenneth Borda was appointed to the Nomination Committee with effect from 17 February 2010. 2 Mr Peter Coates assumed the role of Chairman on 9 December 2009 and increased his Board Committee responsibilities by becoming Chairman of the Nomination Committee and a member of the Environment, Health, Safety and Sustainability Committee and the Finance Committee on 31 December 2009. Mr Coates ceased to be a member of the Audit Committee on 31 December 2009 and the Environment, Health, Safety and Sustainability Committee on 17 February 2010. 3 Mr Stephen Gerlach retired from the Board on 31 December and at that time ceased to be a member of any Board Committee. 4 Professor Judith Sloan retired from the Board on 6 May 2009 and at that time ceased to be a member of the Nomination Committee. 5 Mr Gregory Martin was appointed a Director on 29 October 2009, and a member of the Remuneration Committee with effect from 1 February 2010, and the Environment, Health, Safety and Sustainability Committee with effect from 17 February 2010. 6 Ms Jane Hemstritch was appointed a Director on 16 February 2010, and a member of the Remuneration Committee and Audit Committee with effect from 17 February 2010. 30 Santos Annual Report 2009 • Mr Peter Coates ceased to be a member of the Environment, Health, Safety and Sustainability Committee on 17 February 2010; • Ms Jane Hemstritch was appointed to the Remuneration Committee and the Audit Committee with effect from 17 February 2010; and • Mr Kenneth Borda was appointed to the Nomination Committee with effect from 17 February 2010. Following is a summary of the membership of the Board Committees. Details of the qualiﬁ cations and experience of each Director is set out in pages 22 to 23. 3.2 Board and Committee meetings The Board Guidelines prescribe that the Board is to meet at least eight times a year, including a strategy meeting. Board members are expected to attend any additional meetings as required. In 2009, a total of 12 meetings were held. Details of the Board and Committee meetings held and attendances at those meetings appear in the Directors’ Statutory Report on page 44 of this Annual Report. In addition to the Board meetings, several meetings of the non-executive Directors are scheduled to take place each year. The Managing Director/CEO (as an executive Director) and members of management do not attend these meetings. Two meetings of the non-executive Directors were held in 2009. Also, in accordance with the Board Guidelines, at least four Board dinners are held each year, of which at least one is attended exclusively by non-executive Directors. Members of management attend Board and Committee meetings, at which they report to Directors within their respective areas of responsibility. Where appropriate, advisors to the Company attend meetings of the Board and of its Committees. 3.3 Role and Membership of Committees Committee Members and Composition Role Audit Mr KA Dean (Chairman) Mr RM Harding Ms JS Hemstritch The Committee is required to consist of: • members who are ﬁ nancially literate; • at least one member with past employment experience in ﬁ nance and accounting, requisite professional certiﬁ cation in accounting or other comparable experience or background; and • at least one member with an understanding of the exploration and production industry. The Chairman of the Board is precluded from being the Chairman of the Audit Committee. The primary objective of the Audit Committee is to assist the Board to fulﬁ l its corporate governance and oversight responsibilities related to ﬁ nancial accounting practices, external ﬁ nancial reporting, ﬁ nancial risk management and internal control, the internal and external audit function, and compliance with laws and regulations relating to these areas of responsibility. Speciﬁ cally, the role of the Audit Committee includes: • reviewing the effectiveness of the Company’s risk management and internal compliance and control systems relating to ﬁ nancial reporting; • evaluating the truth and fairness of Company ﬁ nancial reports and recommending acceptance to the Board; • reviewing the process adopted by the CEO and Chief Financial Ofﬁ cer (CFO) when certifying to the Board that the Company’s ﬁ nancial reports are true and fair and that they are based on a sound system of risk management and internal compliance and control that is operating effectively in all material respects; • 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; • where the external auditor provides non-audit services, reporting to the Board as to whether the Committee is satisﬁ ed that the provision of those services has not compromised the auditor’s independence; • reviewing the performance of the internal and external auditors and providing them with conﬁ dential access to the Board; • receiving from the external auditors a formal written statement delineating all relationships between the auditors and the Company and conﬁ rming 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 ﬁ nancial reports of the Company; • recommending proposed dividends to the Board for ﬁ nal adoption; and • recommending to the Board the appointment and dismissal of the head of internal audit. Santos Annual Report 2009 31 Corporate governance (continued) Committee Members and Composition Role Environment, Health, Safety and Sustainability Mr RM Harding (Chairman) The role of the Environment, Health, Safety and Sustainability Committee includes: Mr RA Franklin Mr GJW Martin Mr DJW Knox During 2009, Mr Coates replaced Mr Gerlach as a member of the Environment, Health, Safety and Sustainability Committee on 31 December 2009. Mr Martin replaced Mr Coates as a member of the Environment, Health, Safety and Sustainability Committee on 17 February 2010. • monitoring and review of the Environment, Health and Safety and Greenhouse Policies and related systems; • monitoring and review of the development of the Company’s Sustainability Management Framework and the performance of sustainability aspects of this framework under the categories of Environment, Community and Our People (excluding sustainability aspects under the category of Economy); and • review of the regular internal and external environmental, health and safety audits. Nomination Mr PR Coates (Chairman) Mr KC Borda Mr RM Harding During 2009, Mr Coates was appointed to the Nomination Committee on 31 March 2009. Professor Sloan ceased to be a member of the Nomination Committee upon retiring from the Board on 6 May 2009 and Mr Gerlach upon his retirement on 31 December 2009. Mr Borda was appointed a member of the Nomination Committee with effect from 17 February 2010. Remuneration Mr PR Coates (Chairman) Mr RM Harding Ms JS Hemstritch Mr GJW Martin During 2009, Mr Gerlach ceased to be a member of the Remuneration Committee on 31 December 2009. Mr Martin and Ms Hemstritch were appointed members of the Remuneration Committee with effect from 1 February and 17 February 2010, respectively. It is the responsibility of the Nomination Committee to devise the criteria for, and review membership of, and nominations to, the Board (including the re-election of incumbent Directors). The primary criteria adopted in selection of suitable Board candidates, and the assessment of incumbent directors seeking re-election is their capacity to contribute to the ongoing development of the Company, having regard to the location and nature of the Company’s signiﬁ cant business interests and to the candidates’ qualiﬁ cations 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 beneﬁ t from the services of a new Director with particular skills, the Nomination Committee has responsibility for proposing candidates for consideration by the Board and, where appropriate, engages the services of external consultants. The Remuneration Committee is responsible for reviewing the remuneration policies and practices of the Company including: • the compensation arrangements for the non-executive and executive Directors (including the CEO), and senior executives; • the Company’s superannuation arrangements; and • employee share and option plans. The Committee has access to independent advice and comparative studies on the appropriateness of remuneration arrangements. 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 52 of this Annual Report and note 32 to the ﬁ nancial statements commencing on page 70 of this Annual Report. Finance Mr KC Borda (Chairman) The role of the Finance Committee includes: Mr PR Coates Mr KA Dean During 2009, Mr Gerlach ceased to be a member of the Finance Committee on 31 December 2009 and Mr Coates was appointed a member of the Finance Committee with effect from 31 December 2009. • responsibility for considering and making recommendations to the Board on the Company’s capital management strategy and the Company’s funding requirements and speciﬁ c funding proposals; • formulating and monitoring compliance with treasury policies and practices; and • the management of credit, liquidity and commodity market risks. 32 Santos Annual Report 2009 PART 4: RISK MANAGEMENT Relevant policies and charters See www.santos.com • Board Guidelines • Risk Management Policy 4.1 Risk management systems 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 the Company’s material business risks, which include ﬁ nancial and non-ﬁ nancial risks, such as environmental, exploration and investment risks. An Enterprise-Wide Risk Management approach forms the cornerstone of Risk Management activities of the Company, which has been 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 material business risks (both ﬁ nancial and non-ﬁ nancial) facing the Company are consistently identiﬁ ed, 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. 4.2 Management reporting on risk Management reporting on risk operates on a number of levels. All reports to the Board on strategic and operational issues incorporate an assessment by Management of the associated risks, which ensures that the Board is in a position to make fully-informed business judgements on these issues. In addition, the Board receives dedicated risk management updates from management, which address the material business risks facing the Company and the systems and policies in place to manage those risks. In addition to these periodic updates, the Board and Management give consideration to effectiveness of the Company’s risk management and internal compliance and control systems, and whether there is scope for further improvement of these systems. The Board conﬁ rms that it has received a report from management as to the effectiveness of the Company’s management of its material business risks for the 2009 Financial Year. The Board also receives written certiﬁ cations from the CEO and the CFO in relation to the Company’s ﬁ nancial reporting processes. For the 2009 ﬁ nancial year, the CEO and CFO certiﬁ ed that: “The declaration provided in accordance with section 295A of the Corporations Act in respect of the Consolidated Financial Report for the year ended 31 December 2009 is founded on a sound system of risk management and internal control, and the system is operating effectively in all material respects in relation to ﬁ nancial reporting risks.” Santos Annual Report 2009 33 Corporate governance (continued) 4.3 Examples of business risks Examples of management of speciﬁ c business risks, and the systems Santos has in place to manage these risks, include the following: 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; • environment, health, safety and sustainability 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 reviews, including process safety reviews; • regular training of employees with respect to environment, health and safety; and • imposing environmental care and health and safety accountability as line management responsibilities. Exploration and reserves risk Exploration risk and uncertainty is managed through: • the implementation of risk management processes, including reporting mechanisms in respect of each exploration project; • internal control systems which include resource assessment of exploration prospects, resource development plans and project assurance processes; • corporate review in both prospect and hindsight; and • Board approval of exploration budgets. The Company has a Reserves Management System that is consistent with the Society of Petroleum Engineers Petroleum Resources Management System. External reserves reviews and audits are also undertaken as necessary. Investment risk The Company has clearly deﬁ ned procedures for capital allocation and expenditure. These include: • a portfolio management system; • annual budgets approved by the Board; • short and long term funding strategies in respect of each exploration project which are approved by the Finance Committee; • detailed appraisal and review procedures, including the appointment of independent advisers; • project management processes, including cost reporting, project forecasts and monitoring of impacts on projects; • levels of authority; and • due diligence requirements where assets are being acquired. Financial reporting and treasury • A comprehensive budgeting system exists with an annual budget approved by the Board. • Monthly actual results are reported against budget and 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 ﬁ nancial instruments and commodity price risk management are included in Note 38 to the Consolidated Financial Statements. • Regular treasury and market risk reports are made to the Finance Committee of the Board. Operational risk • All signiﬁ cant areas of Company operations are subject to regular reporting to the Board. • The Board receives regular reports on the performance of each business unit, functional area and major project, including: Eastern Australia, Western Australia and the Northern Territory; Asia Paciﬁ c; GLNG and Queensland; PNG LNG; Corporate Development; Finance and Investor Relations; Human Resources; Government and Media; Environment, Health, Safety and Sustainability. Organisation capability risk In order to manage organisation capability risk, the Company: • conducts regular reviews of the organisational capacity; • has developed a workforce plan and succession plans in respect of key roles within the Company; • has developed and implemented speciﬁ c training programs; and • conducts regular reviews of its Human Resources policy, framework and development programs. 34 Santos Annual Report 2009 PART 5: ETHICS AND CONDUCT Relevant policies and charters See www.santos.com • Code of Conduct • Reporting Misconduct Policy • Guidelines for Dealing in Securities • Continuous Disclosure Policy • Shareholder Communications • Market Disclosure Policy 5.1 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. These rules, values and guidelines set out what is expected of Directors, employees, contractors and agents of Santos. In particular, the Company has in place an integrated Code of Conduct which: • sets out the Company’s key rules, values and guidelines with respect to workplace and environment, business conduct and sustainability; and • outlines the processes for reporting and investigating suspected breaches, and the penalties that may be imposed where a breach is found to have occurred. Key issues addressed by the Code of Conduct include: • achieving compliance with all applicable laws of the countries in which Santos operates; • avoiding conﬂ icts, by prioritising the interests of the Company and its stakeholders over personal interests; • prohibiting inappropriate gifts, hospitalities, bribes, commissions and inducements; • communicating regularly, accurately and effectively with investors, other stakeholders, the media and the market generally; • treating employees and prospective employees fairly and equitably in all matters; • protecting rights of privacy and conﬁ dentiality, both at an individual and Company level; • ensuring Company assets are used solely to promote the interests of the Company and its stakeholders; • operating with a view to long-term sustainability, through a focus on health, safety and the environment; and • acting as a responsible corporate citizen in all communities of which the Company is part, and actively contributing to the needs of the communities. 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 Finance Code of Conduct, based on that developed by the Group of 100 (an association of senior ﬁ nance executives from Australia’s business enterprises) applies to the CFO and all other ofﬁ cers and employees within the ﬁ nance function of the Company who have the opportunity to inﬂ uence the integrity, direction and operation of the Company and its ﬁ nancial performance. Santos treats actual or suspected breaches of its guidelines and policies seriously, and has adopted an Issue Resolution Policy and a Reporting Misconduct Policy to ensure that suspected breaches are reported and acted upon fairly and effectively. Where a serious breach is found to have occurred, penalties may be imposed ranging from counselling to dismissal. 5.2 Reporting Misconduct Santos is committed to practising high standards of business conduct and corporate governance and complying with legal requirements wherever the Company operates. See also discussion on the Code of Conduct above. A Reporting Misconduct Programme is in place at Santos, to enable employees to conﬁ dentially report misconduct without fear of reprisal or discrimination. Misconduct is deﬁ ned as non-compliance with laws and regulations and company policy and procedures. The Reporting Misconduct Policy is an additional mechanism, over and above existing reporting and support avenues. It is expected that, in most circumstances, the normal channels are used to report misconduct in the ﬁ rst instance. An independent hotline is available for reporting. Matters are investigated without bias and anyone using the hotline in good faith will be protected from reprisals and discrimination and their identity will be protected (if desired by them or otherwise required by law). Santos Annual Report 2009 35 Corporate governance (continued) 5.3 Guidelines for dealing in securities The Company has developed speciﬁ c written guidelines that prohibit Directors and executives (and their respective associates) from acquiring, selling or otherwise trading in the Company’s shares or another company’s shares, if they possess material price-sensitive information which is not in the public domain. Pursuant to these guidelines, no person may deal in securities while they are in the possession of price-sensitive information. In other circumstances, Directors must provide notice of their intention and receive acknowledgement from the Chairman or his representative (and for executives, from the Company Secretary or a person appointed by the Board) 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. Directors and executives may not deal in securities on considerations of a short term nature. Directors and senior executives are not permitted to hedge their shareholdings or long term incentives unless those securities have fully vested and are no longer subject to restrictions. Breaches of this policy will be subject to appropriate sanctions, which could include disciplinary action or termination of employment. 5.4 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 fulﬁ lling 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 fulﬁ l 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. Employees must notify their departmental manager or a designated Disclosure Ofﬁ cer as soon as they become aware of information that should be considered for release to the market. As part of the Company’s continuing education program and to ensure that all Directors and employees are aware of their obligations in relation to continuous disclosure, in 2009, the Company engaged an external consultant to conduct a training session with senior executives of the Company with respect to their continuous disclosure obligations. This training has subsequently been rolled out across various business units of the Company. When the Company makes an announcement to the market, that announcement is released to the ASX. The Company Secretary and Group Executive Investor Relations are 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, notices of meetings, CEO brieﬁ ngs, media releases, and materials presented at investor, media and analyst brieﬁ ngs. An email alert facility is also offered to shareholders. Webcasting of material presentations, including annual and half-yearly results presentations, is provided for the beneﬁ t of shareholders, regardless of their location. The Board is conscious of its obligations to shareholders and will seek their approval as required by the Company’s Constitution, the Act and the ASX Listing Rules, or where otherwise considered appropriate by the Directors. Additionally, the Company’s external auditor attends Annual General Meetings to be available to answer shareholder questions relevant to the conduct of the audit. 5.5 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. The policy ensures the external auditor’s independence and impartiality by prescribing that: • the Board will not invite any past or present lead audit partner of the ﬁ rm currently engaged as the Company’s external auditor to ﬁ ll a vacancy on the Board; • audit partners who have had signiﬁ cant roles in the statutory audit will be required to rotate off the audit after a maximum of ﬁ ve 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 ﬁ rm other than the external audit ﬁ rm. The nature and amount of non-audit services provided by the external auditors is detailed on page 47 of the Directors’ Statutory Report, together with the Directors’ reasons for being satisﬁ ed that the provision of those services did not compromise the auditor independence requirements of the Act. The policy requires that services which are considered to be in conﬂ ict with the role of statutory auditor are not performed by the Company’s external auditor and prescribes the approval process for all non-audit services where the Company’s external auditor is used. The Audit Committee Chairman is responsible for the ﬁ nal approval of these services. Non-assurance service work in 2009 represented 4% of the fees paid to the Company’s external auditor or associates. A copy of the auditor’s independence declaration as required under section 307C of the Act is set out on page 149 of the Annual Report. 36 Santos Annual Report 2009 Organisational chart BOARD COMMITTEES BOARD OF DIRECTORS AUDIT ENVIRONMENT, HEALTH, SAFETY AND SUSTAINABILITY FINANCE NOMINATION REMUNERATION CHIEF EXECUTIVE OFFICER SANTOS LEADERSHIP TEAM The SLT comprises the CEO and his direct reports and drives business strategy and operations CORPORATE CENTRE DISCIPLINES BUSINESS UNITS Allocate capital and provide governance and policy HUMAN RESOURCES LEGAL, CORPORATE DEVELOPMENT AND COMMERCIAL STRATEGY, FINANCE, PUBLIC AFFAIRS AND COMMUNICATIONS Provide excellence, service and assurance Business execution and delivery EXPLORATION ASIA TECHNICAL (climate change and sustainability, information technology, logistics and procurement, drilling, environment, health and safety) EASTERN AUSTRALIA GLNG AND QUEENSLAND WESTERN AUSTRALIA AND NORTHERN TERRITORY Santos Annual Report 2009 37 Santos Group interests as at 28 February 2010 Licence area % interest Licence area % interest Licence area % interest Note: In South Australia PPL = Petroleum Production Licence and PL = Pipeline Licence. In Queensland PPL = Pipeline Licence and PL = Petroleum Lease. South Australia Cooper Basin (Fixed Factor Area)1 (PPLs 6-20, 22-25, 27, 29-33, 35-48, 51-61, 63-70, 72-75, 78-81, 83-84, 86-92, 94-95, 98-111, 113-117, 119, 120, 124, 126-130, 132-135, 137-140, 144-146, 148-151, 153-155, 159-166, 169, 171, 174-181, 184-186, 190, 192, 193, 195, 196, 199, 228 & 230-238) Cooper Basin (Patchawarra East Block)1 (PPLs 26, 76, 77, 118, 121-123, 125, 131, 136, 142, 147, 152, 156, 158, 167, 182, 187, 191, 197, 201 & 229) Reg Sprigg West (PPL 194)1 Derrilyn Unit (PPL 206)1 PEL 1141 PL21 PL171 Queensland South-West Queensland1 ATP 259P Naccowlah (PLs 23-26, 35, 36, 62, 76-79, 82, 87, 107, 109, 133, 149, 175, 181, 182 & 189, 287) Total 66 (PLs 34, 37, 63, 68, 75, 84, 88, 110, 129, 130, 134, 140, 142-144, 150, 168, 178, 186, 193, 241, PPL 8 & 14) 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, 108, 111, 112, 132, 135, 139, 147, 151, 152, 155, 205, 207, 288) Aquitaine C (PLs 138 & 154) 50/40/10 (PL 55) SWQ Unit (PPLs 13, 16-18, 31, 34-40, 46 48, 62, 64-72, 78-82, 84, 86, 94-96, 98, 100, 101, 105 & 113 and in South Australia PLs 5 & 9) ATP 267P (Nockatunga) (PLs 33, 50,51, 244 & 245) 66.6 72.3 54.2 65.0 100.0 66.6 100.0 55.5 70.0 61.2 70.0 72.0 52.5 55.0 47.8 60.0 60.0 100.0 ATP 299P(Tintaburra)(PLs 29, 38, 39, 52, 57, 95, 169 & 170, PPLs 109, 110, 111 & 112) PPL 127 (Tickalara to SA Border) PPL 128 (Jackson to Tickalara) ATP 543P (PL117) ATP 543P S ATP 636P (Under Application) ATP 661P (Under Application) ATP 752P B (Barta)1,2 ATP 752P W (Wompi)1,2 ATP 820P (Under Application) ATP 765 Farmin (Under Appln) ATP 766 Farmin (Under Appln) ATP 820P (Under Application) Surat Basin ATP 212P (Major) (PL 56) ATP 336P (R) – Petronas (PLs 3-9, 13, 93,309)1 ATP 336P (Roma) (PLs 10, 11 & 12)1 ATP 336P (Waldegrave) (PLs 10W-12W, 28, 69 & 89)1 ATP 470P (Redcap) ATP 470P (Formosa Downs) Boxleigh (PL15 Sublease)1 PL 1 (Moonie)1 PL 1 (2) (Cabawin Exclusion)1 PL 1 (FO) (Cabawin Farm-out)1 PL 2 (A & B) (Kooroon)1 PL 2 (Alton)1 PL 2C (Alton Farm-out)1 PL 5K (Drillsearch)1 PL 5M (Mascotte)1 PL 11 (Snake Creek East)1 PL 12 (Trinidad)1 PL 12 (Oberina)1 PL 21, 22, 27, 64 (Balonne) PL 17 Upper Stratum Farmin1 PL 30 PL 64 (Cogoon River) PL 74 PL 71 (Parknook) PL 195 PL 200 (Spring Gully) PL 203 PL 204 (Spring Gully) PL 213 (Churchie West) ATP 526P (PLs 90,91, 92, 99, 100, 232, 233, 234, 235, 236, PPLs 76 & 92)1 ATP 606P ATP 631P1 ATP 653P (Arcadia)1 89.0 100.0 100.0 100.0 50.0 100.0 100.0 45.0 25.0 100.0 100.0 100.0 100.0 15.0 60.0 100.0 53.8 10.0 5.5 100.0 100.0 100.0 50.0 52.5 100.0 63.5 25.0 50.0 100.0 100.0 100.0 12.5 100.0 15.0 12.5 15.0 8.0 4.0 2.7 4.0 0.2 16.7 45.6 2.6 81.9 45.6 Bowen Basin ATP 665P1 ATP 708P (Fairview)1 ATP 745P (Fairview)1 ATP 803P1 ATP 804P1 ATP 868P1 ATP 972P EPC 9371 ATP 592P ATP 337P (Mahalo)1 ATP 337P (Denison Trough) (PLs 41-45, 54, 67, 173, 183, 218, PPL10 & PL11) PL 176 (Scotia)1 ATP 553P (Denison)1 ATP 655P (Taringa)1 ATP 685P (Cockatoo Creek) Facilities1 Wungoona Processing Facilities (PPL 4) Moonie to Brisbane Pipeline Comet Ridge to Wallumbilla Pipeline (PPL 118) New South Wales Gunnedah Basin1,2 PEL 1 PEL 12 PEL 238 PEL 433 PEL 434 PEL 450 PEL 452 PEL 456 PEL 462 Facilities Wilga Park Power Station Victoria Otway Basin VIC/P441 VIC/RL7 (La Bella) VIC/L22 (Minerva) VIC/L24 (Casino) VIC/L30 (Henry) Gippsland Basin VIC/RL3 (Sole)1 VIC/L21 (Patricia-Baleen)1 VICL/25 (Kipper) VIC/L25 (Kipper Unit) 100.0 100.0 76.2 100.0 70.7 100.0 2.6 100.0 4.0 30.0 50.0 100.0 50.0 100.0 50.0 25.0 100.0 100.0 25.0 25.0 35.0 35.0 35.0 100.0 100.0 25.0 100.0 35.0 50.0 10.0 10.0 50.0 50.0 100.0 100.0 50.0 35.0 38 Santos Annual Report 2009 Licence area % interest Licence area % interest Licence area % interest Offshore Tasmania Sorell Basin1 T/35P T/36P3 T/48P Northern Territory Amadeus Basin OL 3 (Palm Valley) OLs 4 and 5 (Mereenie)1 RL2 (Dingo)1 PL 2 Mereenie Pipeline1 Offshore Northern Australia Carnarvon Basin EP 61 EP 62 EP 357 L1H (Barrow Island) L10 L12 (Crest) L13 (Crest) TL/2 (Airlie) TL/3 (Banta-Triller) TL/4 TL/7 (Thevenard) TP/7 (1-2) TP/7 (3) TP/7 (4) TR/4 (Australind) WA-1-P WA-4-R (Spar) WA-8-L (Talisman) WA-13-L (East Spar) WA-15-L (Stag) WA-20-L (Legendre) WA-26-L (Mutineer)1 WA-27-L (Exeter)1 WA-29-L (John Brookes) WA-33-R (Maitland) WA-41-L (Reindeer) WA-191-P (Mutineer-Exeter)1 WA-208-P1 WA-209-P WA-214-P (John Brookes) WA-246-P WA-358-P WA-264-P1 WA-290-P Browse Basin1 WA-274-P WA-281-P WA-410-P WA-411-P 37.5 50.0 100.0 Bonaparte Basin1 NT/RL1 (Petrel) WA-6-R (Petrel West) WA-18-P (Tern) WA-27-R (Tern) Timor Sea AC/L1 (Jabiru) AC/L2 (Challis) AC/L3 (Cassini) NT/P48 (Evans Shoal) NT/P61 NT/P69 Timor Gap JPDA 03-12 Bayu-Undan Gas Field Bangladesh Block 16 Sangu Development Area Egypt1,3 South East July India1 NEC-DWN-2004/1 NEC-DWN-2004/2 Indonesia East Java Basin1 Madura Offshore (Maleo) Sampang (Oyong) Kutei Basin Donggala1,3 Papalang Popodi West Papua Basin Warim 48.0 65.0 65.7 65.0 28.6 28.6 35.7 28.6 28.6 35.7 35.7 15.0 28.6 35.7 35.7 43.7 63.4 18.7 35.7 22.6 100.0 37.4 45.0 66.7 22.6 33.4 33.4 45.0 18.7 45.0 33.4 31.3 45.0 45.0 15.0 60.0 50.0 15.0 30.0 47.8 30.0 63.6 95.0 95.0 100.0 100.0 10.3 10.3 10.3 40.0 40.0 40.0 19.4 11.4 50.0 37.5 40.03 Kyrgyzstan4 Closed Joint Stock Company South Petroleum Company (SPC) The Santos Group holds a 70% equity interest in SPC which is the legal and beneﬁ cial holder of the following exploration licences: Tuzluk, Soh, West Soh, Nuashkent, Nanai. Closed Joint Stock Company KNG Hydrocarbons (KNG HC) The Santos Group holds a 75% equity interest in Zhibek Resources Limited (English company) which in turn owns 72% of KNG HC (Kyrgyz company), which is the legal and beneﬁ cial holder of the Tashkumyr and Pishkoran exploration licences. Papua New Guinea PDL 1 (Hides) PDL 31 PRL 51,3 PRL 91 SE Gobe Unit (Unitisation of PDLs 3 & 4) Vietnam Block 101-100/041,5 12W Block 1231 1 Santos operated. 24.0 15.9 50.3 42.6 9.4 55.0 31.9 50.0 2 Subject to Farmin commitments. 100.0 100.0 3 Disposal of entire interest is near completion and is only subject to ﬁ nal Governmental approval, which is expected shortly. 4 Some of the Kyrgyzstan licenses are in the process of being renewed or extended and are awaiting Government approval. 5 Santos has executed a conditional farmout agreement which provides for a reduction in Santos’ % interest to 27.5 and a transfer of operatorship. 67.5 45.0 00.0 20.0 20.0 20.0 Santos Annual Report 2009 39 10-year summary As at 31 December 2009 2000 2001 2002 2003 2004 2005 2006 2007 2008 Santos average realised oil price (A$/bbl) 46.54 45.53 44.74 43.59 51.83 73.83 89.35 92.00 117.45 2009 78.83 Financial performance ($million) Product sales revenue Total revenue* 1,497.1 1,459.7 1,478.4 1,465.0 1,500.9 2,462.8 2,750.3 2,488.5 2,761.8 2,180.5 1,537.1 1,501.9 1,518.5 1,486.3 1,526.4 2,491.8 2,779.3 2,518.0 2,805.0 2,250.5 Foreign currency gains/(losses)*** 2.7 0.2 (0.7) (7.9) 2.6 (3.8) 0.8 0.4 24.4 (28.3) Proﬁ t from ordinary activities before tax*** 725.9 627.6 493.3 430.9 518.8 1,133.5 964.7 718.6 2,533.2 Income tax relating to ordinary activities*** 239.1 181.7 171.2 103.9 164.1 371.4 321.3 195.7 768.4 486.8 445.9 322.1 327.0 354.7 762.1 643.4 359.3 1,650.1 163.6 114.7 716.5 204.6 78.4 433.5 Royalty related taxes** Net proﬁ t after income tax attributable to the shareholders of Santos Ltd*** Financial position ($million) Total assets*** Net debt (cash)*** Total equity*** Reserves and production (mmboe) Proven plus Probable reserves (2P) Production Exploration**** Wells drilled (number) Expenditure ($million) Other capital expenditure ($million) 4,659.8 5,048.7 5,320.8 5,218.3 4,836.6 6,191.3 6,902.9 7,320.2 9,801.9 11,361.0 866.6 1,060.8 1,162.9 897.6 1,133.3 1,598.9 1,449.7 1,838.7 506.0 (605.4) 2,310.9 2,726.6 2,863.9 3,087.9 2,357.8 2,964.0 3,355.5 3,093.1 4,478.3 6,967.1 921 56.0 724 55.7 732 57.3 636 54.2 643 47.1 774 56.0 819 61.0 879 1,013 1,440 59.1 54.4 54.4 42 26 18 19 16 22 25 10 13 6 100.1 93.4 133.1 136.4 125.6 187.0 258.5 149.8 233.1 181.0 Delineation and development**** 187.1 308.1 308.8 519.0 672.7 666.1 865.5 954.6 1,290.3 1,203.8 Buildings, plant and equipment 153.5 258.7 319.0 94.9 131.1 106.0 182.1 202.2 105.1 172.2 40 Santos Annual Report 2009 As at 31 December Share information Share issues Number of issued ordinary shares at year end (million) Weighted average number of ordinary shares (million) Dividends per ordinary share - ordinary (¢) - special (¢) Dividends - ordinary ($million) - special ($million) Number of issued preference shares at year end (million) Dividends per preference share - ordinary ($) - special ($) Dividends - ordinary ($million) - special ($million) Earnings per share (¢)*** Return on total revenue (%)* Return on average ordinary equity (%)*** Return on average capital employed (%)*** Net debt/(net debt + equity) (%)*** 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Employee Share Plan/ Executive Share Plan/ Exercise of Options Employee Share Plan/ Executive Share Plan/ Exercise of Options 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/ Dividend Reinvestment Plan 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 Employee Share Plan/ Executive Share Plan/ Non-executive Director Share Plan/ Exercise of Options/ Dividend Reinvestment Plan/ Buy Back Employee Share Plan/ Executive Share Plan/ Non-executive Director Share Plan/ Exercise of Options/ Dividend Reinvestment Plan/ Buy Back Employee Share Plan/ Executive Share Plan/ Exercise of Options/ Dividend Reinvestment Plan/2 for 5 Rights Issue/ Redemption of FUELS/ Convertible Preference Shares 610.4 579.3 583.1 584.7 585.7 594.4 598.5 586.1 584.9 831.9 658.9 662.9 629.2 631.9 633.5 636.8 645.8 639.6 639.8 779.2 30.0 - 182.0 - - - - - - 73.9 31.7 22.3 30.0 10 184.2 61.2 3.5 - - - - 67.3 29.7 19.0 30.0 - 30.0 - 30.0 - 36.0 - 40.0 - 40.0 - 42.0 - 42.0 - 174.2 - 3.5 175.0 - 3.5 175.5 - 6.0 5.4 - 18.9 - 48.2 21.2 12.4 6.6 - 23.0 - 48.1 22.0 11.6 6.6 5.0 23.0 14.3 50.1 23.2 18.6 212.4 - 6.0 5.1 - 30.6 - 114.9 30.6 35.5 238.1 - 235.1 - 248.3 6.0 6.0 6.0 299.4 - - 5.1 - 30.4 - 94.9 23.1 23.9 5.6 - 33.5 - 50.9 14.3 12.4 6.3 - 38.0 251.9 58.8 50.6 4.6 - 27.7 - 52.1 19.3 7.5 16.5 13.9 8.9 8.8 11.7 19.8 15.1 9.0 34.1 7.3 27.3 28.0 28.9 22.5 32.5 35.0 30.2 37.3 10.2 (9.5) Net interest cover (times)*** 9.1 9.7 8.1 8.5 9.1 14.9 10.1 7.4 38.5 (45.4) General Number of employees (excluding contractors) 1,631 1,713 1,737 1,700 1,526 1,521 1,679 1,786 1,940 2,096 Number of shareholders 76,457 86,472 85,888 84,327 78,976 78,157 83,566 77,498 78,933 107,138 Market capitalisation ($million) 3,670 3,589 3,509 4,017 4,965 7,280 5,907 8,274 8,696 11,721 Netback - - 18.9 18.4 19.8 29.5 32.9 32.9 35.9 22.9 *From 2005, ‘Total operating revenue’ has been reclassiﬁ ed to ‘Total revenue’ and prior year amounts have been restated. **From 2007, ‘Royalty related taxes’ have been accounted for as a tax. ***From 2004 amounts reﬂ ect IFRS. Prior year amounts reﬂ ect AAGAP and have not been restated. ****From 2001, appraisal, near ﬁ eld exploration wells and CSG expenditure have been reclassiﬁ ed from exploration to delineation expenditure. Prior year amounts have not been restated. Santos Annual Report 2009 41 Financial Report DIRECTORS’ STATUTORY REPORT REMUNERATION IN BRIEF REMUNERATION REPORT FINANCIAL REPORT INCOME STATEMENTS STATEMENTS OF COMPREHENSIVE INCOME STATEMENTS OF FINANCIAL POSITION STATEMENTS OF CASH FLOWS STATEMENTS OF CHANGES IN EQUITY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 Signiﬁ cant Accounting Policies 2 Segment Information 3 Revenue and Other Income 4 Expenses 5 Earnings 6 Net Financing Costs 7 Taxation Expense 8 Cash and Cash Equivalents 9 Trade and Other Receivables 10 Inventories 11 Other Financial Assets 12 Available-For-Sale Financial Assets 13 Exploration and Evaluation Assets 14 Oil and Gas Assets 15 Other Land, Buildings, Plant and Equipment 16 Impairment of Cash-Generating Units 17 Deferred Tax Assets and Liabilities 18 Trade and Other Payables 19 Interest-Bearing Loans and Borrowings 20 Provisions 21 Other Liabilities 22 Capital and Reserves 23 Earnings per Share 24 Consolidated Entities 25 Acquisitions of Subsidiaries 26 Disposal of Subsidiaries 27 Investment in an Associate 28 Interests in Joint Ventures 29 Notes to the Statements of Cash Flows 30 Employee Beneﬁ ts 31 Share-Based Payment Plans 32 Key Management Personnel Disclosures 33 Related Parties 34 Remuneration of Auditors 35 Commitments for Expenditure 36 Contingent Liabilities 37 Deed of Cross Guarantee 38 Financial Risk Management 39 Events After the End of the Reporting Period DIRECTORS’ DECLARATION AUDITOR’S INDEPENDENCE DECLARATION INDEPENDENT AUDIT REPORT 42 50 52 70 71 72 73 74 75 89 91 92 93 93 94 95 95 96 96 96 97 98 100 101 102 103 103 106 107 107 110 111 112 113 113 114 115 116 119 129 134 134 135 137 138 142 147 148 149 150 42 Santos Annual Report 2009 Directors’ Statutory Report The Directors present their report together with the ﬁ nancial report of Santos Limited (Santos or the Company) and the consolidated ﬁ nancial report of the consolidated entity, being the Company and its controlled entities, for the ﬁ nancial year ended 31 December 2009, and the auditor’s 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 ﬁ nancial statements referred to in this report is to be read as part of this report. DIRECTORS, DIRECTORS’ SHAREHOLDINGS AND DIRECTORS’ MEETINGS Directors’ Shareholdings The names of Directors of the Company in ofﬁ ce 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 Borda Coates Dean Franklin Harding Hemstritch Knox Martin Other Names Kenneth Charles Peter Roland Kenneth Alfred Roy Alexander Richard Michael Jane Sharman David John Wissler Gregory John Walton Shareholdings in Santos Ltd Ordinary Shares 67,308 19,714 11,638 – 2,441 14,000 3,550 3,250 The above named Directors held ofﬁ ce during and since the end of the ﬁ nancial year, except for Mr GJW Martin, who was appointed a Director of the Company on 29 October 2009, and Ms JS Hemstritch, who was appointed on 16 February 2010. Professor J Sloan held ofﬁ ce as a Director of the Company until her retirement on 6 May 2009. Mr S Gerlach held ofﬁ ce as Chairman of the Board until 9 December 2009 and as a Director of the Company until his retirement on 31 December 2009. All shareholdings are of fully paid ordinary shares. At the date of this report, Mr DJW Knox holds 544,974 options and 186,779 share acquisition rights (SARs) under the Santos Executive Share Option Plan and Santos Employee Share Purchase Plan, respectively, and subject to the further terms described in Note 31 to the ﬁ nancial statements. Details of the options and SARs granted to Mr Knox during the year are set out in the Remuneration Report on page 52. Details of the qualiﬁ cations, experience and special responsibilities of each Director and the Company Secretary are set out on the Directors’ and Executives’ biography pages of the Annual Report. This information includes details of other directorships held during the last three years. Santos Annual Report 2009 43 Directors’ Statutory Report (continued) Directors’ Meetings The number of Directors’ Meetings and meetings of committees of Directors held during the ﬁ nancial year and the number of meetings attended by each Director are as follows: Surname Other Names Directors’ Meetings2 Audit Committee Environment, Health, Safety and Sustainability Committee Remuneration Committee Finance Committee Nomination Committee No. of Mtgs Held1 No. of Mtgs Attended No. of Mtgs Held1 No. of Mtgs Attended No. of Mtgs Held1 No. of Mtgs Attended No. of Mtgs Held1 No. of Mtgs Attended No. of Mtgs Held1 No. of Mtgs Attended No. of Mtgs Held1 No. of Mtgs Attended Borda Coates Dean Kenneth Charles Peter Roland Kenneth Alfred Franklin Roy Alexander Gerlach Stephen Harding Richard Michael Knox Martin Sloan David John Wissler Gregory John Walton Judith 12 12 12 12 12 12 12 2 3 12 12 12 12 12 10 12 2 3 - 4 4 - - 4 - - - - 4 4 - - 4 - - - - - - 4 4 4 4 - - - - - 4 4 4 4 - - - 4 - - 4 4 - - - - 4 - - 4 4 - - - 5 - 5 - 5 - - - - 5 - 5 - 5 - - - - - 2 - - 3 3 - - 1 - 2 - - 3 3 - - 1 1 Reﬂ ects the number of meetings held during the time the Director held ofﬁ ce, or was a member of the Committee, during the year. 2 In addition to formal meetings, the Board participated in a site visit to Jakarta and the Oyong ﬁ eld in Indonesia. 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 in the Corporate Governance Statement in the Annual Report. PRINCIPAL ACTIVITIES The principal activities of the consolidated entity during the ﬁ nancial year were: petroleum exploration, the production, treatment and marketing of natural gas, crude oil, condensate, naphtha, liquid petroleum gas, and the transportation by pipeline of crude oil. No signiﬁ cant change in the nature of these activities has occurred during the year. REVIEW AND RESULTS OF OPERATIONS A detailed review of the operations of the consolidated entity during the ﬁ nancial year, the results of those operations and the ﬁ nancial position of the consolidated entity as at the end of the ﬁ nancial year is contained in the reports by the Chairman, Chief Executive Ofﬁ cer and Chief Financial Ofﬁ cer in the Annual Report. Further details regarding the operations, results and business strategies of the consolidated entity appear in the Annual Report. In summary, the consolidated net proﬁ t of $434 million after tax for the year ended 31 December 2009 is $1.2 billion or 74% lower than the net proﬁ t for 2008, which included a $1.2 billion proﬁ t from the sale of a 40% interest in the GLNG project to PETRONAS. The 2009 result includes proﬁ ts of $180 million after tax from asset sales. The sale of 60% of the Petrel, Tern and Frigate ﬁ elds to GDF SUEZ announced in August 2009 contributed $139 million of this amount. Underlying net proﬁ t after tax in 2009 of $257 million was 53% lower than the prior year. Sales revenue of $2,181 million was down $581 million or 21% from 2008, mainly due to lower international crude oil, condensate and LPG prices, which had a signiﬁ cant impact on the underlying 2009 result. 44 Santos Annual Report 2009 Total revenue for the Eastern Australia segment was $1,082 million, an 18% decrease from the 2008 result of $1,319 million. The Western Australia and Northern Territory segment recorded a total revenue decline of 23% from 2008 to $864 million. The Asia-Paciﬁ c segment recorded a total revenue decline of 31% from 2008 to $167 million and the Gladstone LNG segment recorded a 25% growth in total revenue to $141 million from 2008. Total production of 54.4 million barrels of oil equivalent (mmboe) remained the same as 2008 production. Natural ﬁ eld decline, asset sales and unscheduled downtime were offset by increased production contributions from the John Brookes, Maleo, Sampang and Fairview ﬁ elds. NET PROFIT The 2009 net proﬁ t of $434 million is $1,216 million lower than in 2008 and includes the net proﬁ t/(loss) items before tax of $197 million (after tax $177 million), referred to below. Underlying Profit Table1 The following amounts are included in the calculation of underlying proﬁ t for the year ending 31 December: Underlying profit Net gains/(losses) on sales and impairment losses Foreign currency gains/(losses) Fair value adjustments on embedded derivatives and hedges Remediation costs and contract losses, net of related insurance recoveries Investment allowances, capital losses and other tax adjustments Net profit after tax (NPAT) 2009 $million 2008 $million Gross Tax effect 211 (28) 10 4 - (48) 7 (4) (2) 27 197 (20) Net 257 163 (21) 6 2 27 177 434 Gross Tax effect Net 548 1,481 (433) 1,048 24 (5) 4 - (6) 2 7 28 1,504 (402) 182 (3)2 11 28 1,102 1,650 1 This table has been prepared in accordance with the AICD/Finsia principles for reporting underlying proﬁ t. 2 Adjustment to prior year to ensure comparability with current year. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS The Directors consider that matters or circumstances that have signiﬁ cantly affected, or may signiﬁ cantly affect, the operations, results of operations or the state of affairs of the Company in subsequent ﬁ nancial years are: • the approval of the Papua New Guinea liqueﬁ ed natural gas (PNG LNG) project in December 2009, marking the next step in the delivery of Santos’ transformational LNG growth strategy. Santos has a 13.5% interest in the 6.6 million tonne per annum (mtpa) PNG LNG project. First LNG is expected in 2014; • the Gladstone LNG (GLNG®) project signed a binding Heads of Agreement in July 2009 to sell 2 mtpa of LNG to PETRONAS with an option for an additional 1 mtpa; • the acquisition in July 2009 of signiﬁ cant additional acreage in the Gunnedah Basin in northern New South Wales and an investment in leading local coal seam gas company Eastern Star Gas Limited; and • Santos announced a strategic partnership with GDF SUEZ, one of the world’s leading LNG companies, to develop a ﬂ oating LNG project in the Bonaparte Basin offshore northern Australia. Santos sold a 60% interest in the Petrel, Tern and Frigate gas ﬁ elds to GDF SUEZ for US$200 million. GDF SUEZ will lead the development of a 2 mtpa ﬂ oating LNG project. GDF SUEZ will carry Santos’ share of pre-front end engineering design (FEED) and FEED costs and make an additional payment of US$170 million upon a ﬁ nal investment decision of the project. Santos Annual Report 2009 45 Directors’ Statutory Report (continued) DIVIDENDS On 18 February 2010, the Directors resolved to pay a fully franked ﬁ nal dividend of 20 cents per fully paid ordinary share on 31 March 2010 to shareholders registered in the books of the Company at the close of business on 2 March 2010. This ﬁ nal dividend amounts to approximately $166 million. A fully franked ﬁ nal dividend of $117 million (20 cents per fully paid ordinary share) was paid on 31 March 2009 on the 2008 results. Indication of this dividend payment was disclosed in the 2008 Annual Report. In addition, a fully franked interim dividend of $182 million (22 cents per fully paid ordinary share) was paid to members on 30 September 2009. In accordance with the Terms of Issue, a fully franked ﬁ nal dividend of $2.9989 per Franked Unsecured Equity Listed Security amounting to approximately $18 million was paid on 31 March 2009. Indication of this dividend payment was disclosed in the 2008 Annual Report. A fully franked interim dividend of $1.6191 per Franked Unsecured Equity Listed Securities amounting to approximately $10 million was paid on 30 September 2009. ENVIRONMENTAL REGULATION The consolidated entity’s Australian operations are subject to various environmental regulations under Commonwealth, State and Territory legislation. Applicable legislation and requisite environmental licences are speciﬁ ed 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 ﬁ nancial year, the consolidated entity did not receive any ﬁ nes and was not subject to prosecution or other enforcement action in respect of applicable environmental regulations or environmental protection legislation, except as set out below: • on 15 January 2009, the Queensland Environmental Protection Agency issued an Infringement Notice under the Environmental Protection Act 1994 (Qld) and imposed a $2,000 penalty for unauthorised vegetation clearance on the proposed GLNG plant site on Curtis Island. The Company had earlier reported the vegetation clearance (which was carried out by its geotechnical contractors) to the Agency as a potential non-compliance matter. No criminal conviction was recorded against the Company and appropriate corrective measures have been taken to preclude a re-occurrence; and • hydrocarbons were identiﬁ ed in the groundwater at Port Bonython during routine quality testing undertaken in April 2009. An extensive and thorough source identiﬁ cation program has been undertaken, and recovery and remediation plans have been ﬁ nalised following endorsement by an independent third party auditor. Communications with the regulator, the South Australian Environment Protection Authority, have been ongoing and actions have been incorporated into site environmental licence conditions. In September 2009, the Authority notiﬁ ed the Company of its intention to conduct a formal investigation to determine what, if any, breaches of the Environment Protection Act 1993 (SA) may have occurred and what enforcement action should be taken if a breach is determined. 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 ﬁ nancial year and the date of this report any matter or circumstance that has signiﬁ cantly affected or may signiﬁ cantly affect the operations of the consolidated entity, the results of those operations or the state of affairs of the consolidated entity in future ﬁ nancial years. Dividends declared after 31 December 2009 are set out above and in Note 22 to the ﬁ nancial statements. LIKELY DEVELOPMENTS Certain likely developments in the operations of the consolidated entity and the expected results of those operations in future ﬁ nancial years are referred to in the reports in the Annual Report by the Chairman, Chief Executive Ofﬁ cer and Chief Financial Ofﬁ cer. Further information about likely developments in the operations of the consolidated entity and the expected results of those operations in future ﬁ nancial 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 providing more detailed discussion of business activities and outlook in the Annual Report. 46 Santos Annual Report 2009 DIRECTORS’ AND SENIOR EXECUTIVES’ REMUNERATION Details of the Company’s remuneration policies and the nature and amount of the remuneration of the Directors and senior management (including shares, options and SARs granted during the ﬁ nancial year) are set out in the Remuneration Report commencing on page 52 of this report. INDEMNIFICATION Rule 61 of the Company’s Constitution provides that the Company indemniﬁ es, on a full indemnity basis and to the full extent permitted by law, ofﬁ cers of the Company for all losses or liabilities incurred by the person as an ofﬁ cer of the Company, a related body corporate or trustee of a company-sponsored superannuation fund. Rule 61 does not indemnify an ofﬁ cer for any liability involving a lack of good faith. Rule 61 also permits the Company to purchase and maintain a Directors’ and Ofﬁ cers’ 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 ofﬁ ce during the year and certain senior executives of the consolidated entity. The indemnities operate to the full extent permitted by law and are not subject to a monetary limit. Santos is not aware of any liability having arisen, and no claims have been made, during or since the ﬁ nancial year under the Deeds of Indemnity. During the year, the Company paid premiums in respect of Directors’ and Ofﬁ cers’ Liability and Legal Expenses insurance contracts for the year ending 31 December 2009 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 2010. The insurance contracts insure against certain liability (subject to exclusions) persons who are or have been directors or ofﬁ cers of the Company and its controlled entities. A condition of the contracts is that the nature of the liability indemniﬁ ed and the premium payable not be disclosed. NON-AUDIT SERVICES During the year the Company’s auditor, Ernst & Young, was paid the following amounts in relation to non-audit services it provided: Taxation services Assurance services Other services $73,000 $533,000 $4,000 The Directors are satisﬁ ed, 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 (Cth). The reason for forming this opinion is that all non-audit services have been reviewed by the audit committee to ensure they do not impact 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 (Cth) is set out on page 149 of the Annual Report. Santos Annual Report 2009 47 Directors’ Statutory Report (continued) SHARES UNDER OPTION AND UNVESTED SARS Options Unissued ordinary shares of Santos Limited under option at the date of this report are as follows: Date options granted 23 May 2005 23 May 2005 24 October 2006 4 May 2006 1 July 2007 1 July 2007 3 September 2007 3 May 2008 3 May 2008 28 July 2008 28 July 2008 28 July 2008 2 March 2009 2 March 2009 Expiry date 22 May 2015 22 May 2015 24 October 2016 3 May 2016 30 June 2017 30 June 2017 2 September 2017 2 May 2018 2 May 2018 27 July 2018 27 July 2018 27 July 2018 2 March 2019 2 March 2019 Issue price of shares1 Number under option $8.46 $8.46 $10.48 $11.36 $14.14 $14.14 $12.81 $15.39 $15.39 $17.36 $17.36 $17.36 $14.81 $14.81 8,350 77,100 435,800 2,500,000 225,968 59,800 100,000 641,791 281,573 94,193 131,976 131,976 207,988 67,896 4,964,411 1 This is the exercise price payable by the option holder. Options do not confer an entitlement to participate in a bonus or rights issue, prior to the exercise of the option. SARs Unissued ordinary shares of Santos Limited under unvested SARs at the date of this report are as follows: Date SARs granted 6 August 2007 18 December 2007 6 August 2007 23 June 2008 4 August 2008 4 August 2008 4 August 2008 23 June 2008 2 March 2009 2 March 2009 2 March 2009 48 Santos Annual Report 2009 Number of shares under unvested SARs 331,500 50,000 319,700 131,119 35,973 50,403 50,403 71,625 399,516 170,621 114,377 1,725,237 No amount is payable on the vesting of SARs. SARs do not confer an entitlement to participate in a bonus or rights issue, prior to the vesting of the SAR. Further details regarding the SARs (including when they will lapse) are contained in the Remuneration Report commencing on page 52 of this report. SHARES ISSUED ON THE EXERCISE OF OPTIONS AND ON THE VESTING OF SARS Options The following ordinary shares of Santos Limited were issued during the year ended 31 December 2009 on the exercise of options granted under the Santos Executive Share Option Plan. No further shares have been issued since then 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 15 June 2004 23 May 2005 23 May 2005 24 October 2006 SARS $6.95 $8.46 $8.46 $10.48 50,000 14,500 82,350 280,200 427,050 The following ordinary shares of Santos Limited were issued during the year ended 31 December 2009 on the vesting of SARs granted under the Santos Employee Share Purchase Plan. No further shares have been issued since then on the vesting of SARs granted under the Santos Employee Share Purchase Plan. No amount is payable on the vesting of SARs and accordingly no amounts are unpaid on any of the shares. Date SARs granted 8 December 2006 6 August 2007 6 August 2007 23 June 2008 23 June 2008 2 March 2009 2 March 2009 ROUNDING Number of shares issued 249,000 20,414 17,787 9,917 4,178 579 1,210 303,085 Australian Securities and Investments Commission Class Order 98/100, dated 10 July 1998, applies to the Company and, accordingly, amounts have been rounded off in accordance with that Class Order, unless otherwise indicated. This report is made on 18 February 2010 in accordance with a resolution of the Directors. Director 2010 Director 2010 Santos Annual Report 2009 49 Remuneration in Brief This Remuneration in Brief is an addition to Santos Limited’s (Santos or the Company) reporting framework, which describes Santos’ remuneration in a clear and transparent manner. The Remuneration in Brief outlines the key remuneration decisions made by the Company in 2009, and discloses the actual amount of remuneration paid to the Company’s senior executives. It should be read in conjunction with the Remuneration Report on pages 52 to 69, which provides disclosure of the remuneration framework of the Company in accordance with statutory obligations and accounting standards. KEY REMUNERATION DRIVERS AND ACTIONS IN 2009 Exercising restraint The Company’s remuneration practices in 2009 were commensurate with the business conditions resulting from the economic downturn. Accordingly: • there was no increase to the Managing Director and Chief Executive Ofﬁ cer’s (CEO) remuneration, which was set on 28 July 2008; • except for adjustments due to changes in roles and responsibilities and other exceptional reasons, pay was frozen in 2009 at April 2008 levels for Senior Executives and Australian non-award employees; • there was no increase to non-executive Directors’ fees, which were last adjusted on 1 July 2008; • allowances paid to ﬁ eld-based employees, normally adjusted annually by the inﬂ ation rate, were frozen. These measures resulted in cash savings in excess of $10 million, and were among the most decisive among employers in the Australian exploration and production industry. Rewarding strong performance While exercising restraint in respect of pay increases, the Board upheld the principle of rewarding performance and the delivery of shareholder value. First, strong achievement against short-term objectives set for the Company in 2009 was recognised through the payment of a short-term incentive at 80% of maximum. Determination of the payout percentage was based on a focused set of performance measures and delivery of strategic milestones, including the Company’s proﬁ tability in 2009. Secondly, there was full vesting of the long-term incentive grant covering the 2007–2009 period, during which Santos’ Total Shareholder Return of 69.6%, or 19.3% per annum compound, was in the top 12% of the comparator group of Australian and international exploration and production companies. The external environment In setting and reviewing its remuneration arrangements, Santos has regard to the external environment, including market practice and prevailing regulatory and governance standards. During 2009, Santos participated in various general and industry-speciﬁ c remuneration surveys, as well as a review of the performance of its outsourced superannuation arrangements. In addition, the Company actively monitored the tax, regulatory and governance activities which impacted remuneration in 2009, in particular the Productivity Commission’s inquiry into Executive Remuneration. In reviewing its approach to remuneration, Santos’ aim was to maintain a responsible and measured approach to remuneration, while ensuring that the Company continued to be able to secure the skills it needs for project delivery in an exploration and production labour market that, after a brief hiatus in 2009, has rebounded to pre-downturn buoyancy. 50 Santos Annual Report 2009 Remuneration outcomes for the CEO and Senior Executives The remuneration values for the CEO and Senior Executives, contained on pages 57 and 63 of the Remuneration Report, are calculated in accordance with statutory obligations and accounting standards, and are theoretical. To make the information more meaningful to shareholders, the following table discloses the actual “dollar value” of remuneration received by the Company’s CEO and Senior Executives during 2009 in a clear and concise way (including prior year awards where the executive “realised” value from these awards in 2009). DJW Knox Managing Director and Chief Executive Ofﬁ cer JH Anderson Vice President Western Australia and Northern Territory JL Baulderstone Vice President Corporate Development and Legal, Company Secretary and General Counsel MEJ Eames Vice President Asia Paciﬁ c MS Macfarlane Vice President Eastern Australia PC Wasow Chief Financial Ofﬁ cer and Executive Vice President RJ Wilkinson President GLNG and Queensland Fixed remuneration1 STI2 $1,750,000 $1,400,000 $540,000 $223,800 $546,063 $254,000 LTI3 $0 $0 $0 $621,860 $258,000 $266,660 $532,460 $199,600 $0 $1,000,000 $562,300 $308,200 Other4 Total $500,0005 $3,650,000 $22,435 $786,235 - - - - $800,063 $1,146,520 $732,060 $1,870,500 $559,801 $232,000 $217,080 $16,800 $1,025,681 1 2 3 Comprising base salary and superannuation. This ﬁ gure represents the amount of the short-term incentive or bonus paid to the executive for 2009 performance. For further details of the Company’s short-term incentive program, please see pages 55 and 59 of the Remuneration Report. This ﬁ gure represents the value of vested Share Acquisition Rights (SARs), which vested in 2009 based on the closing share price of $13.40 on the date of vesting (23 January 2009) and options that were exercised (if any) in 2009 based on the difference between the exercise price and the closing share price on the date of exercise. No options were exercised by the Senior Executives in 2009. Although shares allocated under Share Acquisition Rights are subject to a further restriction on dealing of up to 10 years after the grant date and can be forfeited for misconduct, their full value is included here. For further details of the Company’s LTI program, please see pages 56 to 57 and 59 to 62 of the Remuneration Report. 4 Comprised of ad hoc payments treated as remuneration such as relocation allowance. 5 Mr Knox received a once-only retention bonus for continued employment between 25 March 2008, the date of his appointment as Acting Chief Executive Ofﬁ cer, and 25 March 2009. Santos Annual Report 2009 51 Remuneration Report The Directors of Santos Limited (Santos or the Company) present this Remuneration Report for the Company and its controlled entities for the year ended 31 December 2009. The information provided in the Remuneration Report has been audited as required by section 308(3C) of the Corporations Act 2001 (Cth). The Remuneration Report forms part of the Directors’ Statutory Report. The Remuneration Report sets out remuneration information pertaining to the Company’s Directors and Senior Executives, who are the key management personnel of the consolidated entity for the purposes of the Corporations Act and the Accounting Standards. They include the ﬁ ve highest remunerated executives of the Company and Group for the 2009 ﬁ nancial year, and are listed in Table 1 below. Table 1: Directors and Senior Executives Executive Name DJW Knox Position Non-Executive Name Position Managing Director and Chief Executive Ofﬁ cer PR Coates Deputy Chairman (Chairman from 9 December 2009) JH Anderson Vice President Western Australia and Northern Territory KC Borda Director JL Baulderstone Vice President Corporate Development and Legal, Company Secretary and General Counsel KA Dean Director MEJ Eames Vice President Asia-Paciﬁ c MS Macfarlane Vice President Eastern Australia PC Wasow Chief Financial Ofﬁ cer and Executive Vice President RJ Wilkinson President GLNG and Queensland 1 Appointed 29 October 2009. 2 Retired 31 December 2009. 3 Retired 6 May 2009. RA Franklin RM Harding GJW Martin Former S Gerlach J Sloan Director Director Director1 Chairman (until 8 December 2009)2 Director3 52 Santos Annual Report 2009 Senior Executive Remuneration REMUNERATION POLICY The diagram below shows the key objectives of Santos’ remuneration policy for Senior Executives and how these are implemented through the Company’s remuneration framework. ATTRACTING AND RETAINING TALENTED, QUALIFIED EXECUTIVES ENCOURAGING EXECUTIVES TO STRIVE FOR SUPERIOR PERFORMANCE ALIGNING EXECUTIVE AND SHAREHOLDER INTERESTS • Remuneration levels are market- aligned against similar roles in comparable companies. • Individual performance targets determine 30% of the short-term incentive award for Senior Executives. • The deferred component of the long-term incentive plan promotes retention and rewards loyalty. • A signiﬁ cant component of • The long-term incentive remuneration is “at risk” under short-term and long-term incentive plans. Value to the executive is dependent on meeting challenging targets. • Consistently high-performing executives are also rewarded through higher base remuneration. component of remuneration is delivered through equity instruments linked to Santos ordinary shares. • Vesting of performance-based long-term incentive awards is contingent on delivery of superior shareholder returns. • Executives cannot hedge equity instruments that are unvested or subject to restrictions. Santos Annual Report 2009 53 Remuneration Report (continued) LINKING REMUNERATION STRUCTURES TO CORPORATE OBJECTIVES Santos’ executive remuneration structures support the Company’s vision to be a leading energy company for Australia and Asia. The diagram below highlights the links between the Company’s remuneration systems and its corporate objectives. Santos Corporate objective Link to remuneration structures Examples of measures used to reinforce link DELIVERING THE BASE BUSINESS TAPPING OUR RESOURCE RICHES BEING A GREAT, SAFE PLACE TO WORK Senior Executives with oversight of the existing base businesses are rewarded for delivering sustained performance and growth in core operations. • Individual performance measures for relevant executives are linked to delivery of strategic milestones and performance targets. • Financial key performance indicators for Senior Executives under the short-term incentive plan include safety and environmental performance production, proﬁ t, cash ﬂ ow, capital invested, reserve growth and reserve replacement cost. Performance measures for Senior Executives in strategic roles and growth businesses are linked to delivery of growth targets. Remuneration frameworks reward collaboration and reinforce safety as a priority for employees at all levels. • Short-term incentive measures for Senior Executives are weighted towards overall company performance to encourage collaboration. • Safety and environmental performance is a key performance indicator that impacts on the short-term incentive award for the CEO and Senior Executives. • Key Performance Indicators for the CEO’s 2009 short- term incentive included: – Santos’ strategic positioning in Australia and Asia; and – furtherance of Santos’ LNG projects. • Senior Executives with responsibility for the growth LNG businesses (PNG LNG and GLNG) have strategic performance targets linked to delivery of key project milestones. DELIVERING SUPERIOR RETURNS TO SHAREHOLDERS A signiﬁ cant proportion of remuneration for the CEO and Senior Executives is “at risk” based on delivery of superior shareholder returns. • The long-term incentive plan links a signiﬁ cant component of pay for the CEO and other Senior Executives to delivery of superior returns. • Long-term incentive grants lapse (and participants receive no value) if Santos’ total shareholder return does not meet at least the median for ASX 100 companies. • Remuneration • Full vesting of targets are fair, challenging, clearly understood and within the control of employees. performance awards under the long- term incentive plan only occurs where Santos outperforms all other ASX 100 companies in its total shareholder return performance. 54 Santos Annual Report 2009 CEO REMUNERATION ARRANGEMENTS Remuneration components and their relative weightings Total remuneration for the Managing Director and Chief Executive Ofﬁ cer (CEO), Mr DJW Knox, is made up of the following components: • Base remuneration – comprising salary and superannuation; • Short-term Incentive (STI) – an annual bonus linked to Company performance and achievement of strategic objectives; and • Long-term Incentive (LTI) – equity grants tied to vesting conditions dependent on Santos’ achievement of superior performance relative to the ASX 100. The Board received external advice on Mr Knox’s remuneration package, which is benchmarked against the remuneration paid to CEOs of comparable companies in the industry. In line with the Company’s general pay freeze, Mr Knox’s remuneration did not change in 2009 and, in fact, has not changed since his appointment in 2008. The relative weightings of the three components comprising the CEO’s total remuneration are set out in Table 2 below. Table 2: Relative weightings of remuneration components1 CEO % of total remuneration (annualised) Fixed remuneration Performance-based remuneration 37% STI 26% LTI 37% 1 These ﬁ gures do not reﬂ ect the relative value derived by the CEO from each of the components, which is dependent on actual performance against targets for the “at risk” components. This is discussed in the STI and LTI sections below. Base remuneration Mr Knox is paid Total Fixed Remuneration (TFR), which includes the Company’s contributions into his accumulation superannuation fund of at least the minimum statutory amount. He may, if he wishes, salary sacriﬁ ce part of his TFR for additional superannuation contributions. Mr Knox’s TFR for 2009 (as set out in Table 4 below) was $1,750,000. Short-term Incentive Mr Knox has a maximum annual STI opportunity of 100% of TFR, subject to delivery of strategic milestones and performance targets set by the Board. Mr Knox’s performance measures comprise a combination of strategic, ﬁ nancial and operational targets, all of which are directly related to strategic objectives agreed with the Board. The Board believes that this method of setting performance targets focuses the CEO’s attention on achieving the key conditions and milestones necessary to deliver Santos’ strategic plan. At the end of each ﬁ nancial year, the Remuneration Committee assesses performance against the objectives set by the Board, and makes recommendations to the Board regarding Mr Knox’s performance and the appropriate level of STI award. The Board believes this method of assessment provides a balanced assessment of the CEO’s overall performance. As outlined above, for the 2009 performance period, Mr Knox’s STI targets were based on agreed objectives linked to Company performance targets and delivery of its strategic growth initiatives. Consistent with his role as CEO, these performance measures for 2009 included the Company’s strategic positioning in Australia and Asia, delivery of ﬁ nancial and operational performance targets, in particular, from the base business, achievement of speciﬁ c milestones in the GLNG and PNG LNG projects in furtherance of the Company’s vision to achieve transformational growth through its LNG portfolio and achievement of safety and environmental performance milestones. Based on performance against these targets during the year, Mr Knox was awarded an STI payment of $1,400,000 or 80% of the maximum STI payable. The difference between actual STI paid and maximum STI will not be carried forward. Santos Annual Report 2009 55 Remuneration Report (continued) Long-term Incentive No new LTI grant was made to the CEO in 2009 as the grants made to Mr Knox in 2008 constitute his LTI entitlement for the 2008, 2009 and 2010 years. The 2008 grants comprised: • a performance-based equity award made to Mr Knox in his capacity as Executive Vice President, Growth Projects (Performance Award); • a service-based equity award made to Mr Knox in his capacity as Executive Vice President, Growth Projects (Deferred Award); and • a further performance-based equity award made to Mr Knox upon his appointment as CEO to supplement the grants already made to him in his Senior Executive capacity (CEO Performance Award). Mr Knox elected to receive his equity awards as a combination of options and share acquisition rights (SARs). The key terms of Mr Knox’s awards are as follows: • The LTI grants made in 2008 were structured to provide Mr Knox with an annual LTI opportunity of 100% of TFR (based on the 2008 level of $1.75 million) for each of the 2008, 2009 and 2010 years, subject to achieving applicable vesting conditions. • Mr Knox was able to elect to receive his LTI grant as either SARs, market value options or a combination of the two. He chose to take a combination of the two. • All of the performance-based LTIs are subject to hurdles based on the Company’s Total Shareholder Return (TSR) relative to the ASX 100 over a three-year performance period. There is no retesting of performance conditions. • The CEO Performance Award is divided into three tranches: – Tranche 1 Tested over the period from 1 January 2008 to 31 December 2010; – Tranche 2 Tested over the period from 1 January 2009 to 31 December 2011; and – Tranche 3 Tested over the period from 1 January 2010 to 31 December 2012. • Each tranche of the CEO Performance Award vests in accordance with the following vesting schedule: TSR percentile ranking % of grant vesting < 50th percentile = 50th percentile 51st to 75th percentile 76th to 100th percentile 0% 37.5% 39%-75% 76%-100% • None of the grants have vested as none of their performance periods have been completed. • Upon vesting of SARs, ordinary shares in Santos will automatically be allocated to Mr Knox. These shares will be subject to restrictions until the earlier of ten years from the grant date, cessation of employment, or if the Board approves, at Mr Knox’s request, the removal of the restrictions. • Options may be exercised at any time between the vesting date and the expiry date (27 July 2018), subject to payment of the exercise price of $17.36 per option (being the volume weighted average price in the week up to and including the grant date). • Full details of the equity grants made to Mr Knox in 2008 are contained in the 2008 Remuneration Report. 56 Santos Annual Report 2009 Table 3 contains details of the number and value of SARs and options granted to Mr Knox in 2008. Table 3: SARs and options granted to Mr Knox in 20081 Grant name CEO Performance Award 2008 Awards prior to CEO Appointment Performance Award Deferred Award Number of SARs granted Number of options granted Maximum value of grant2 Tranche 1 Tranche 2 Tranche 3 35,973 50,403 50,403 Tranche 1 Tranche 2 Tranche 3 94,193 Tranche 1 $1,040,640 131,976 131,976 Tranche 2 Tranche 3 $990,405 $990,066 - - 64,992 21,837 $341,208 $159,410 1 2 These grants constitute Mr Knox’s full LTI awards for the 2008, 2009 and 2010 ﬁ nancial years. As the SARs and options only vest on satisfaction of service and/or performance conditions to be tested in future ﬁ nancial years, none of the SARs or options detailed above were forfeited during the year. Maximum value represents the fair value of the LTI awards as at their grant date (being 3 May 2008 for the Performance Award and Deferred Award and 28 July 2008 for the CEO Performance Award). The fair value per instrument at the grant date was: CEO Performance Award Tranche 1: SARs – $13.82 Options – $5.77 Options – $4.22 Options – $4.29 Tranche 2: SARs – $8.60 Tranche 3: SARs – $8.41 Performance Award Options – $5.25 Deferred Award Options – $7.30 Monte Carlo simulation was used to determine the value of the SARs and options granted. Details of the assumptions underlying the valuation are set out in Note 31 to the ﬁ nancial statements. The minimum total value of the grant, if the applicable vesting conditions are not met, is nil in all cases. 2009 Remuneration details for Mr DJW Knox Table 4: 2008 and 2009 remuneration details for Mr DJW Knox Year Short-term employee benefits Post- employment Share-based payments1,2 Termination Other long-term benefits3 Total % at risk Base salary $ STI $ Other $ Super- annuation $ $ 2009 2008 1,735,897 1,400,0004 500,0005 14,103 1,486,8736 1,200,115 1,100,000 - 54,745 800,206 $ - - $ $ 29,891 5,166,7647 19,826 3,174,892 56% 60% 1 In accordance with the requirements of the Accounting Standards, remuneration includes a proportion of the theoretical value of equity linked compensation determined as at the grant date and progressively expensed over the vesting period. The amount allocated as remuneration is not related to or indicative of the actual beneﬁ t (if any) that Mr Knox may ultimately realise should the equity instruments vest. The theoretical value of equity linked compensation was determined in accordance with AASB 2 Share-based payment applying the Monte Carlo simulation method. Details of the assumptions underlying the valuation are set out in Note 31 to the ﬁ nancial statements. 2 Of the total remuneration for Mr Knox for the year, 23% consisted of SARs and options. 3 “Other long-term beneﬁ ts” represent the movement in the CEO’s long service leave entitlements measured as the present value of the estimated future cash outﬂ ows to be made in respect of the CEO’s service between the respective reporting dates. 4 This amount represents the STI award made for the 2009 year, which will be paid in March 2010. 5 Mr Knox received a once-only retention bonus for continued employment between 25 March 2008, the date of his appointment as Acting Chief Executive Ofﬁ cer, to 25 March 2009. 6 “Share-based payments” in 2009 consists of the following equity linked theoretical compensation and, as a consequence of the rights issue in May 2009, now includes a cash-settled component. This matter is discussed further on page 61. SARs $553,452 Options $634,898 Cash-settled $298,523 7 The difference between Mr Knox’s total remuneration for 2009 and 2008 is principally a consequence of his appointment as CEO in July 2008, which resulted in (1) an increase in his base salary since that time and (2) the granting of additional SARs and options as part of his CEO remuneration package. Santos Annual Report 2009 57 Remuneration Report (continued) Service Agreement The Company entered into a service agreement with the CEO on 28 July 2008, which is ongoing until termination by the CEO or the Company. The service agreement provides that the Company may terminate the CEO’s employment on giving 12 months notice. Where the Company exercises this general right to terminate, it must make a payment to the CEO equivalent to his TFR for the full notice period. Pro-rata STI entitlements, subject to performance, will apply to the date of termination and the Board retains discretion to vest any outstanding LTI, having regard to performance and reasons for termination. The Company may terminate the CEO’s employment at any time for cause. No payment in lieu of notice, nor any payment in respect of STI or LTI will be made in this circumstance. Mr Knox may initiate termination of his service agreement by giving the Company six months’ notice, in which case he will be entitled to payment of TFR in respect of the notice period and pro-rata STI to the date of termination, subject to performance. The Board retains discretion to vest any outstanding LTI, having regard to performance and reasons for termination. Mr Knox may also initiate termination of his service agreement immediately if there is a fundamental change in his role or responsibilities without his consent. In this circumstance the service agreement provides for payment of 12 months’ TFR, full STI for the year in which employment is terminated and a pro rata portion of the following year’s STI, subject to current year performance. Pro-rata vesting of outstanding LTI will apply, based on the expired portion of the performance period and performance achieved to the termination date. SENIOR EXECUTIVE REMUNERATION ARRANGEMENTS Remuneration components and their relative weightings Total remuneration for Senior Executives is made up of the following components: • Base remuneration – comprising salary and superannuation; • Short-term incentives (STI) – annual bonuses tied to individual and Company performance; and • Long-term incentives (LTI) – equity grants tied to vesting conditions tested over a three-year period. Santos’ executive remuneration structure is consistent with the Company’s “reward performance” policy. The relative weightings of the three components comprising the Senior Executives’ total remuneration are provided in Table 5 below. Table 5: Relative weightings of remuneration components1 Chief Financial Ofﬁ cer and Executive Vice President Other Senior Executives % of total remuneration (annualised) Fixed remuneration Performance-based remuneration TFR 52% 57% STI 27% 20% LTI 21% 23% 1 These ﬁ gures do not reﬂ ect the actual value derived by Senior Executives from each of the components, which is dependent on actual performance against targets for the “at risk” components. This is discussed in the STI and LTI sections below. 58 Santos Annual Report 2009 Base remuneration Salary and superannuation Senior Executives are paid TFR, out of which the Company makes contributions into their superannuation funds of at least the minimum statutory amount. They may, if they wish, salary sacriﬁ ce part of their TFR for additional superannuation contributions or other beneﬁ ts such as novated car leases. Beneﬁ ts Senior Executives do not receive any beneﬁ ts in addition to TFR. Market alignment Executive remuneration levels are market-aligned by comparison to similar roles in ASX 100 energy, materials and utilities companies, excluding BHP Billiton and Rio Tinto due to their disproportionately larger size and market capitalisation. This broad industry group is used, as there are too few Australian exploration and production companies of similar size to Santos for benchmarking purposes. Short-term Incentive Frequency Maximum STI Performance measures STI is assessed and paid annually. 75% of TFR for Chief Financial Ofﬁ cer and Executive Vice President. 50% of TFR for other Senior Executives. To promote collaboration among Senior Executives and to focus their efforts towards the overall beneﬁ t of the Company, 70% of their STI is based on Company performance. The remaining 30% is based on the executive’s individual performance. A range of Company performance measures is used in order to drive balanced business performance. These measures include lagging indicators to assess the Company’s past performance, as well as forward-looking indicators to ensure the Company is positioning itself effectively for future growth. The areas covered by the measures include reserve growth, reserve replacement cost, production, margin, new growth options, shareholder value creation, people, environment, health and safety, and continuous improvement. Individual performance is assessed against targets set within each executive’s own area of responsibility. Assessment of performance Individual performance is assessed by the CEO. Company performance is assessed by the Remuneration Committee. Each metric is assessed against target and assigned a score on a ﬁ ve-point scale. The average of these scores forms the basis of the overall Company performance score. The Board believes the above methods of assessment are rigorous and transparent, and provide a balanced assessment of the executive’s performance. Payment method Cash. STI awarded in 2009 Company performance against the measures in 2009 resulted in an average STI of 80% of maximum payable to all eligible employees. 2009 STI awards made to individual Senior Executives ranged from 75% to 92% of maximum. The difference between actual STI paid and maximum STI will not be carried forward. Long-term Incentives During the year, the Company made equity grants to its Senior Executives as the LTI component of their remuneration for 2009. The grants comprised: • a performance-based component, equal to 75% of the total grant value (Performance Award); and • a service-based component, equal to 25% of the total grant value (Deferred Award). All LTI grants were delivered, at the executive’s election, in the form of either: • SARs – a conditional entitlement to a fully paid ordinary share at zero price, subject to satisfaction of vesting conditions; or • Options – an entitlement to acquire a fully paid ordinary share at a predetermined price, subject to satisfaction of vesting conditions. Grant sizes were market-aligned. Santos Annual Report 2009 59 Remuneration Report (continued) Vesting details of the Performance and the Deferred Awards are summarised in Table 6 below. In addition, Table 6 contains details of the number and value of SARs and options granted to Senior Executives in 2009 under the Performance and the Deferred Awards. Table 6: Performance Award and Deferred Award vesting details Performance Award Vesting period 1 January 2009 to 31 December 2011. Vesting condition Vesting of this grant is based on relative TSR against ASX 100 companies as at 1 January 2009. Vesting schedule The Board believes the chosen performance hurdle effectively aligns the interests of the individual executives with that of the Company’s shareholders, as TSR is a fair measure of shareholder returns and the ASX 100 represents the companies in which most of the Company’s shareholders could invest as an alternative to Santos. Vesting commences when Santos’ TSR performance equals the median for ASX 100 companies, with one-third of the total grant vesting at this level of performance. A further 1.33% of the grant vests for each percentile improvement in Santos’ TSR ranking, with full vesting only occurring if Santos is the top-performing ASX 100 company based on its TSR growth over the vesting period. There is no re-testing of the performance condition if it is not satisﬁ ed. Santos TSR percentile ranking % of grant vesting < 50th percentile = 50th percentile 51st to 99th percentile 100th percentile 0% 33.33% Further 1.33% for each percentile improvement 100% Deferred Award 2 March 2009 to 1 March 2012. Vesting of the Deferred Award is based on continuous service to 1 March 2012, or three years from the grant date. 0% if the continuous service condition is not met. 100% if the continuous service condition is met. Exercise price $14.81 for options, being the volume weighted average price in the week up to and including the grant date of 2 March 2009. As for Performance Award. SARs have no exercise price. Exercise period Options may be exercised at any time between the vesting date and the expiry date. As for Performance Award. Upon vesting of SARs, shares will automatically be allocated to the executive. These shares will be subject to restrictions until the earlier of ten years from the grant date, cessation of employment or the date at which the Board approves the removal of the restrictions. Expiry/lapse SARs and options that do not vest upon testing of the performance condition will lapse. Vested options will expire if not exercised before 2 March 2019. Cessation/change of control Upon cessation of employment, SARs which have not already vested and options which are not exercisable will, in general, lapse and be forfeited. SARs and options will lapse if the service condition is not satisﬁ ed. Vested options will expire if not exercised before 2 March 2019. As for Performance Award. Hedging Policy However, if cessation occurs due to death, disability or redundancy, or in special circumstances approved by the Board, then a proportion of the SARs and options may vest and become exercisable. Where there is a change in control, the Board may determine whether, and the extent to which, SARs and options may vest. Consistent with the objective of creating a meaningful alignment of interests, Directors and Senior Executives are not permitted to hedge their shareholdings or LTIs unless those securities have fully vested and are no longer subject to restrictions. Breaches of this policy will be subject to appropriate sanctions, which could include disciplinary action or termination of employment. As for Performance Award. 60 Santos Annual Report 2009 Table 7: SARs and Options granted to Senior Executives in 20091 Executive Grant name Number of SARs granted Number of options granted Maximum value of grant2 JH Anderson Performance Award Deferred Award JL Baulderstone Performance Award Deferred Award MEJ Eames Performance Award Deferred Award MS Macfarlane Performance Award Deferred Award PC Wasow Performance Award Deferred Award RJ Wilkinson Performance Award Deferred Award 13,359 4,168 13,450 5,057 15,744 4,471 13,481 4,152 25,320 8,305 14,175 5,160 - - - - - - - - - - - - 115,823 60,228 116,612 73,074 136,500 64,606 116,880 59,996 219,524 120,007 122,897 74,562 1 The grants made to the Senior Executives during the year constitute their full LTI awards for the 2009 ﬁ nancial year. As the SARs and options only vest on satisfaction of service and/or performance conditions to be tested in future ﬁ nancial years, none of the SARs or options detailed above were forfeited during the year. 2 Maximum value represents the fair value of the Performance Award and Deferred Award as at their grant date (being 2 March 2009). The fair value per instrument at the grant date was: Performance Award SARs – $8.67, Options – $4.54 Deferred Award SARs – $14.45, Options – $6.75 Monte Carlo simulation was used to determine the value of the SARs and options granted. Details of the assumptions underlying the valuation are set out in Note 31 to the ﬁ nancial statements. The minimum total value of the grant, if the applicable vesting conditions are not met, is nil in all cases. Preserving alignment under the LTI Plan in response to equity issue During the year the Company raised $2.914 billion through a two-for-ﬁ ve rights issue. Each new share was issued at a price of $12.50, representing a 26.9% discount to the closing price of the shares before the announcement of the rights issue. Employees who held unvested SARs and options were unable to participate in the rights issue and there was no adjustment to the applicable exercise price or the number of underlying shares to which each SAR or option was entitled. The ASX Listing Rules do allow an adjustment to the exercise price of options to reﬂ ect the impact of discounted rights issues but the terms of the grant need to expressly refer to the formula in ASX Listing Rule 6.22.2 and the Listing Rules do not contemplate (nor provide a mechanism for adjusting) SARs. Accordingly, in order to ensure the rights issue would neither unfairly disadvantage or advantage executives and so as to avoid a misalignment between the incentives of management (through the LTI component of their remuneration) and a capital raising which was considered by the Board to be in the best interests of the Company and shareholders, the Board determined, in respect of existing LTI grants: • to use TSR data which takes into account the impact of rights issues and other capital management activities on both Santos and comparator group companies when testing the satisfaction of TSR performance hurdles that apply to Santos LTI awards; and • subject to the SARs and options vesting following satisfaction of applicable hurdles (and, in the case of options, being exercised), to make a future cash remuneration payment to executives equal to the value of the right to participate in the rights issue (calculated at $1.31 for each underlying share in accordance with the formula in ASX Listing Rule 6.22.2). The intention is to “keep whole” the executives in respect of SARs and options that actually vest in due course. No cash payment will be made in respect of SARs that do not vest or options that do not vest or are not exercised. These future cash remuneration payments apply to LTI participants with grants that were yet to vest at the time of the rights issue, including the CEO and Senior Executives. No changes have been made to the performance hurdles or testing dates. Despite the intention to “keep whole” the LTI participants, the future cash remuneration payments did not fully compensate for the loss in the value of the unvested SARs and options. The overall value of the future cash remuneration payments for the CEO and Senior Executives is $89,556 less than the loss in value of the SARs and options, both determined in accordance with AASB 2 Share-based payments. The value of these future cash remuneration payments has been expensed in accordance with AASB 2, over the period from 8 May 2009 (the last trading day prior to the announcement of the rights issue; closing price of $17.09) to the end of their performance or vesting periods. Santos Annual Report 2009 61 Remuneration Report (continued) LTI grants to Senior Executives The following LTI grants were still in progress or were tested during 2009. Table 8: LTI grants to Senior Executives Grant year Grant type Vesting condition(s) Performance/vesting period Status 2007 Performance Award • Relative TSR performance against Australian and international E&P companies (50% of grant) • Absolute TSR target of 11% per annum compound (50% of grant) Deferred Award Continuous service 1 January 2007 to 31 December 2009 Grant tested after the end of the ﬁ nancial year resulting in full vesting of the grant. In progress. DJW Knox1: 3 September 2007 to 2 September 2010 Senior Executives: 1 July 2007 to 30 June 2010 2008 2009 Performance Award Relative TSR performance against ASX 100 companies 1 January 2008 to 31 December 2010 In progress. Deferred Award Continuous service 3 May 2008 to 2 May 2011 In progress. Performance Award Relative TSR performance against ASX 100 companies 1 January 2009 to 31 December 2011 Deferred Award Continuous service 2 March 2009 to 1 March 2012 In progress. In progress. 1 Options and SARs granted to Mr Knox in his capacity as a Senior Executive prior to his appointment as CEO. Service Agreements – Senior Executives The Company has entered into service agreements with the Senior Executives. The service agreements are ongoing until termination by the Company upon giving 12 months’ notice or the Senior Executive upon giving six months’ notice. In a Company-initiated termination, the Company may make a payment in lieu of notice equivalent to the TFR the executive would have received over the notice period. All Senior Executives’ service agreements may be terminated immediately for cause, whereupon no payments in lieu of notice or other termination payments apply. 62 Santos Annual Report 2009 2009 Senior Executive Remuneration Details Table 9: 2009 Senior Executive remuneration details Executive Short-term employee benefits Base salary3 $ STI5 $ Other $ JH Anderson 489,116 223,800 22,4356 JL Baulderstone7 512,621 254,000 MEJ Eames 585,296 268,000 MS Macfarlane 500,145 199,600 PC Wasow8 RJ Wilkinson 985,897 562,300 488,533 232,000 16,8009 Post- employment Share-based payments1,2 (LTI) Termination Other long-term benefits4 Total % at risk Super- annuation $ 50,884 33,441 36,564 32,314 14,103 71,267 $ 262,336 365,017 308,127 261,079 358,269 257,492 $ - - - - - - $ $ 10,111 1,058,682 9,597 1,174,676 12,577 1,210,564 6,698 999,836 37,801 1,958,370 6,488 1,072,580 46% 53% 48% 46% 47% 46% - - - - 1 The percentage of each Senior Executive’s total remuneration for the year that consisted of SARs and options is as follows: JH Anderson JL Baulderstone MEJ Eames 20% 21% 20% MS Macfarlane PC Wasow RJ Wilkinson 21% 15% 20% 2 “Share-based payments” consist of the following equity linked theoretical compensation and, as a consequence of the rights issue in May 2009, now includes a cash-settled component. Executive JH Anderson JL Baulderstone MEJ Eames MS Macfarlane PC Wasow RJ Wilkinson SARs $126,470 $122,994 $147,935 $126,705 $296,065 $210,646 Options Cash-settled $55,626 $80,240 $115,255 $126,768 $65,626 $94,566 $55,325 $79,049 $62,204 - $46,846 - 3 4 5 6 7 8 The base salaries for Mr JH Anderson, Mr MS Macfarlane, Mr MEJ Eames and Mr RJ Wilkinson were frozen in 2009 at April 2008 levels. They are higher than the base salary ﬁ gures in Table 10 “2008 Senior Executive remuneration details” because the base salary ﬁ gures in the 2008 table include the lower pre-April 2008 amounts. “Other long-term beneﬁ ts” represent the movement in the Senior Executive’s long service leave entitlements measured as the present value of the estimated future cash outﬂ ows to be made in respect of the Senior Executive’s service between the respective reporting dates. This amount represents the STI award made for the 2009 year, which will be paid in March 2010. Mr Anderson received an allowance of $22,435 for relocating from Adelaide to Perth to head up the Western Australian Business Unit subsequent to commencing the role of Vice President Western Australia and Northern Territory. Effective 5 January 2009, Mr Baulderstone’s role was expanded to include responsibility for the Corporate Development and Commercial Excellence functions. Mr Baulderstone’s remuneration increased in 2009 commensurate with the increased responsibilities of his new role. In recognition of his seniority and strategic leadership, Mr Wasow was promoted to the position of Executive Vice President (in addition to his role as Chief Financial Ofﬁ cer) effective 1 July 2008. Mr Wasow’s remuneration increased in 2009 commensurate with the increased responsibilities of his new role. 9 Mr Wilkinson received an Incidentals Allowance of $16,800 for commuting between Adelaide and Brisbane in relation to the GLNG project. Santos Annual Report 2009 63 Remuneration Report (continued) 2008 Senior Executive remuneration details Table 10: 2008 Senior Executive remuneration details Executive Short-term employee benefits Base salary $ STI4 $ Other $ JH Anderson 468,021 205,000 JL Baulderstone 465,734 250,000 MEJ Eames 551,505 220,000 MS Macfarlane 471,282 205,000 PC Wasow 830,548 585,000 - - - - - RJ Wilkinson 485,676 255,000 5,2825 Post- employment Super- annuation $ 48,689 46,326 57,455 49,029 13,289 90,260 Share-based payments1,2 (LTI) Termination Other long-term benefits3 Total % at risk $ 203,594 231,473 241,862 202,553 265,239 201,462 $ - - - - - - $ 16,351 5,963 $ 941,655 999,496 20,213 1,091,035 17,536 945,400 68,629 1,762,705 18,192 1,055,872 43% 48% 42% 43% 48% 43% 1 The percentage of total remuneration for the year that consisted of SARs and options is as follows: DJW Knox JH Anderson JL Baulderstone 25% 22% 23% MEJ Eames MS Macfarlane 22% 21% PC Wasow RJ Wilkinson 15% 19% 2 “Share-based payments” consisted of the following equity linked theoretical compensation: Executive JH Anderson JL Baulderstone MEJ Eames SARs $122,742 $111,832 $173,306 Options $80,852 $119,641 $68,556 Executive MS Macfarlane PC Wasow RJ Wilkinson SARs $122,742 $265,239 $201,462 Options $79,811 - - 3 4 5 “Other long-term beneﬁ ts” represent the movement in the Senior Executive’s long service leave entitlements measured as the present value of the estimated future cash outﬂ ows to be made in respect of the Senior Executive’s service between the respective reporting dates. This amount represents the STI award made for the 2008 ﬁ nancial year, paid in March 2009. This amount represents an Incidentals Allowance for Mr Wilkinson for commuting between Adelaide and Brisbane in relation to the GLNG project. LINK BETWEEN COMPANY PERFORMANCE AND SENIOR EXECUTIVE REMUNERATION OUTCOMES Table 11 sets out the Group’s performance over the past ﬁ ve years in respect of the key ﬁ nancial and non-ﬁ nancial indicators used to measure year-on-year performance. Table 11 also shows how the size of the STI pool available to Senior Executives has varied over this period based on the level of performance achieved each year across these key indicators. Table 11: Key indicators of Company performance 2005–2009 Key Indicator Safety (total recordable case frequency rate) Production (mmboe) Reserve replacement cost – 1P (A$/boe) Reserve replacement rate – 1P (%) Proven plus probable reserves – 2P Netback (A$/boe) Net proﬁ t after tax $m Earnings per share (cents) Dividends per ordinary share (cents) Size of STI pool (% of maximum) 64 Santos Annual Report 2009 2005 4.9 56.0 13 218 774 30 762 124 36 85 2006 6.4 61.0 15 143 819 33 643 103 40 70 2007 5.3 59.1 13 175 879 33 359 55 40 80 2008 5.8 54.4 13 160 1,013 36 1,650 273 42 80 2009 3.6 54.4 9 336 1,441 23 434 52 42 80 As set out earlier, Company performance in 2009 against the STI measures (detailed on page 59) resulted in an average STI award of 80% of the maximum payable to all eligible employees. Performance against key metrics was on target in 2009, including the achievement of key strategic milestones such as: • sanction of PNG LNG on schedule in December 2009 in furtherance of the Company’s vision to achieve transformational growth through an LNG portfolio; • the GDF Suez–Bonaparte LNG partnership, resulting in the commercialisation of substantial contingent resources in the Petrel, Tern and Frigate ﬁ elds; • the signing of the binding LNG offtake Heads of Agreement with PETRONAS for 2 mtpa plus a further 1 mtpa at GLNG’s option, underpinning the development of the ﬁ rst GLNG train; • the successful $3 billion capital raising in May 2009. The graphs below show the relationship over the past ﬁ ve years between the Company’s TSR and share price growth, being two key indicators of long-term Company performance, and the percentage of LTI grants to Senior Executives that vested. The graphs demonstrate how the level of Senior Executive reward derived from their LTI grants is dependent upon the delivery of sustained above-average returns to shareholders. TSR OF SANTOS, ASX100 AND AUSTRALIAN AND INTERNATIONAL EXPLORATION AND PRODUCTION COMPANIES 2005-2009 % 140 120 100 80 60 40 20 0 -20 -40 2005 2006 2007 2006 2007 2008 2007 2008 2009 Santos ASX 100 E&P Santos ASX 100 E&P Santos ASX 100 E&P LTI vesting for 2005-2007 performance period = 50% LTI vesting for 2006-2008 performance period = 100% LTI vesting for 2007-2009 performance period = 100% SANTOS SHARE PRICE 2005-2009 $ 20 16 12 8 4 0 2005 2006 2007 2008 2009 The TSR growth shown above incorporates dividends and capital returns the Company made to shareholders during the past ﬁ ve years. Dividends paid by the Company in the past ﬁ ve years are as follows: (Dividends per ordinary share) 2005 $0.36 2006 $0.40 2007 $0.40 2008 $0.42 2009 $0.42 Santos Annual Report 2009 65 Remuneration Report (continued) The following capital returns were made in the 2005–2009 period: • On 30 June 2007, the Company bought back 24,671,275 fully paid ordinary shares, representing 4.10% of fully paid ordinary shares on issue at that date, at a price of $12.16 per share. • On 6 October 2008, the Company bought back 18,487,305 fully paid ordinary shares, representing 3.07% of fully paid shares on issue at that date, at a price of $16.23 per share. • On 30 September 2009, the Company redeemed the 6,000,000 Franked Unsecured Equity Listed Securities (FUELS) on issue at the price of $100 each. As noted above, Santos’ superior TSR performance compared to the Australian and international exploration and production companies over the period from 1 January 2007 to 31 December 2009 resulted in full vesting of the 2007 Performance Award. The value derived by Senior Executives during 2009 in respect of LTIs granted in previous ﬁ nancial years (i.e. prior year awards which vested and/or were exercised during 2009) is set out in Table 12 below. Table 12 also contains details of prior year LTIs that lapsed or were forfeited during 2009. Table 12: Senior Executives’ LTI remuneration outcomes in 2009 Vested Exercised Forfeited/Lapsed Number Value1 Number Value2 Number Value DJW Knox SARs Options JH Anderson SARs Options JL Baulderstone SARs Options MEJ Eames SARs Options MS Macfarlane SARs Options PC Wasow SARs Options RJ Wilkinson SARs Options Total SARs Total Options - - - 63,700 - - 19,900 - - 63,700 23,000 - 16,200 - 59,100 127,400 - - - 224,224 - - 288,351 - - 224,224 333,270 - 234,738 - 856,359 448,448 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1 2 The value of each SAR on the date of vesting is based on the closing market price of Santos Limited shares on the ASX on the preceding trading day. The value of each option on the date of vesting is based on the difference between the closing market price of Santos Limited shares on the ASX on the preceding trading day and the relevant exercise price. The value of each option exercised during the year is based on the difference between the closing market price of Santos Limited shares on the ASX on the preceding trading day and the relevant exercise price. 66 Santos Annual Report 2009 Non-executive Director Remuneration REMUNERATION POLICY The diagram below shows the key objectives of Santos’ non-executive Director remuneration policy and how these are implemented through the Company’s remuneration framework. SECURING AND RETAINING TALENTED, QUALIFIED DIRECTORS PROMOTING INDEPENDENCE AND IMPARTIALITY ALIGNING DIRECTOR AND SHAREHOLDER INTERESTS Fee levels are set with regard to: • Fee levels do not vary according • Santos encourages its non- • time commitment and workload; • the risk and responsibility attached to the role; • experience and expertise; and • market benchmarking. to the performance of the Company or individual Director performance from year to year. • Santos’ market capitalisation is considered in setting the aggregate fee pool and in benchmarking of Board and committee fees. executive Directors to build a long-term stake in the Company. • Traditionally, this has been facilitated through the non- executive Director share plan. REMUNERATION ARRANGEMENTS Maximum aggregate amount Total non-executive Directors’ fees paid in a year, including Board committee fees, cannot exceed $2,100,000. This amount was approved by shareholders at the Annual General Meeting held on 2 May 2008. Directors may also be paid additional fees for special duties or exertions, and are entitled to be reimbursed for all business-related expenses. These payments are not included in the maximum aggregate amount approved by shareholders. No additional fees were paid during the year. 2009 Non-executive Directors’ fees In line with the Company’s general pay freeze, there was no increase to non-executive Directors’ fees, which were last adjusted on 1 July 2008. Directors’ fee rates are provided in Table 13 below. Table 13: Non-executive Directors’ fees per annum Annual Fees Chair1 $435,000 Deputy Chair1 Member Chair Member $217,500 $145,000 $12,000-$30,000 $5,000-$15,000 Board Committees 1 The Chairman and Deputy Chairman of the Board do not receive any additional fees for serving on or chairing any Board committee. Superannuation Superannuation contributions are made on behalf of non-executive Directors in accordance with the requirements of the Company’s statutory superannuation obligations. Santos Annual Report 2009 67 Remuneration Report (continued) Retirement benefits Professor J Sloan and Mr S Gerlach, who were appointed prior to 1 January 2004, were contractually entitled to receive beneﬁ ts upon their retirement under the agreements entered into at their appointment, the terms of which were approved by shareholders at the 1989 Annual General Meeting. These retirement beneﬁ ts were frozen with effect from 30 June 2004, at which time their entitlements ceased to accrue. However, to prevent erosion in the real value of the frozen beneﬁ ts, the Board determined that from 1 July 2007 the beneﬁ ts would be indexed annually against the ﬁ ve-year Australian Government Bond Rate. Non-executive Directors appointed after 1 January 2004 are not entitled to receive a beneﬁ t upon retirement (other than statutory entitlements). Both Professor Sloan and Mr Gerlach retired during 2009. Table 14 below shows the increase in Professor Sloan’s and Mr Gerlach’s frozen beneﬁ ts as a result of indexation in 2009 and the ﬁ nal retirement beneﬁ ts paid to them upon retirement. Table 14: Non-executive Director retirement beneﬁ ts Director S Gerlach J Sloan Benefit as at 1 January 2009 Increase as a result of indexation Final benefit as at retirement $1,208,547 $370,617 $62,421 $5,469 $1,270,9681 $376,0862 1 Mr Gerlach retired on 31 December 2009. 2 Professor Sloan retired on 6 May 2009. Non-executive Director Share Plan The Non-executive Director Share Plan (NED Share Plan) was introduced in July 2007, following shareholder approval at the 2007 Annual General Meeting. Participation in the NED Share Plan is voluntary and all present and future non-executive Directors are eligible to participate. Under the NED Share Plan, Directors elect to sacriﬁ ce all or part of their pre-tax fees in return for an allocation of shares of equivalent value. The NED Share Plan, therefore, does not involve any additional remuneration for participating Directors. Shares are allocated quarterly and are either issued as new shares or purchased on the ASX at the prevailing market price. The shares are registered in the name of the participating Director, but are subject to a restriction on dealing. In the absence of exceptional circumstances, the restriction will apply until the Director ceases to hold ofﬁ ce or until ten years have elapsed since the allocation of the shares, whichever is earlier. Following the changes to employee share schemes introduced by the Government in 2009, the Directors were able to elect to withdraw from the NED Share Plan in the second half of 2009. Details of the shares allocated to Directors under the NED Share Plan during the year are set out in Table 15 below. Table 15: 2009 NED Share Plan allocations Director KC Borda PR Coates KA Dean S Gerlach RM Harding J Sloan5 Q1 2009 allocation1 Q2 2009 allocation2 Q3 2009 allocation3 Q4 2009 allocation4 2,284 1,655 665 949 284 2,182 2,753 1,907 802 1,144 343 - 2,598 2,824 - - - - - - - - - - Total 10,459 3,562 1,467 2,093 627 2,182 1 2 3 4 Shares were allocated to the participating Directors on 7 April 2009 at $17.1811 per share. Shares were allocated to the participating Directors on 29 June 2009 at $14.2552 per share. Shares were allocated to the participating Directors on 7 October 2009 at $15.1076 per share. Shares were allocated to the participating Directors on 23 December 2009 at $13.8947 per share. 5 Retired 6 May 2009. 68 Santos Annual Report 2009 Details of remuneration paid to non-executive Directors Details of the fees and other beneﬁ ts paid to Directors during 2009 are set out in Table 16 below. Table 16: 2009 Non-executive Director remuneration details Short-term benefits Retirement benefits Share-based payments Total Directors’ fees (incl. committee fees)1 $ Fees for special duties or exertions $ S Gerlach5 KC Borda PR Coates KA Dean RA Franklin RM Harding GJW Martin J Sloan6 402,375 0 178,528 160,125 158,500 185,963 25,425 14,301 - - - - - - - - Super- annuation contributions3 $ 14,103 13,937 14,103 14,103 898 14,103 2,288 4,662 Other2 $ 4,629 - - - - - - - Increase to retirement benefit4 $ 62,421 - - - - - - NED Share Plan $ 32,625 157,000 55,626 22,875 - 9,788 - 5,469 37,500 $ 516,153 170,937 248,257 197,103 159,398 209,854 27,713 61,932 1 Refer to Table 13 above for details of annual Directors’ fees and Committee fees. Figure shown is after fee sacriﬁ ce to NED Share Plan. 2 3 4 This ﬁ gure represents the value of car parking provided to the Chairman in the Company’s head ofﬁ ce in Adelaide. Includes superannuation guarantee payments. Superannuation guarantee payments are made to Mr Franklin only in relation to days worked in Australia. This shows the increase to retirement beneﬁ ts during the year. See Table 14 for details of retirement beneﬁ ts paid out. 5 Retired 31 December 2009. 6 Retired 6 May 2009. Details of the fees and other beneﬁ ts paid to Directors during 2008 are set out in Table 17 below. Table 17: 2008 Non-executive Director remuneration details Short-term benefits Retirement benefits Share-based payments Total Directors’ fees (incl. committee fees)1 $ Fees for special duties or exertions $ S Gerlach KC Borda PR Coates KA Dean RA Franklin RM Harding J Sloan 350,625 0 0 130,687 150,250 167,287 0 - - - - - - - Super- annuation contributions3 $ 13,437 13,060 10,246 13,437 813 6,872 13,376 Other2 $ 4,796 - - - - - - Increase to retirement benefit $ 39,897 - - - - - 12,235 NED Share Plan $ 61,875 147,141 124,644 43,563 - 18,588 157,342 $ 470,630 160,201 134,890 187,687 151,063 192,747 182,953 1 Refer to Table 13 above for details of annual Directors’ fees and committee fees. Figure shown is after fee sacriﬁ ce to NED Share Plan. 2 3 This ﬁ gure represents the value of car parking provided to the Chairman in the Company’s head ofﬁ ce in Adelaide. Includes superannuation guarantee payments. Superannuation guarantee payments are made to Mr Franklin only in relation to days worked in Australia. Santos Annual Report 2009 69 Income Statements for the year ended 31 December 2009 Product sales Cost of sales Gross proﬁ t Other revenue Other income Other expenses Interest income Finance expenses Share of net losses of an associate Proﬁ t before tax Income tax expense Royalty-related taxation (expense)/beneﬁ t Total taxation expense Net proﬁ t for the period Net proﬁ t attributable to: Owners of Santos Ltd Minority interests Earnings per share 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 Consolidated Santos Ltd Note 2009 $million 2008 $million 2009 $million 2008 $million 681 (463) 218 34 49 (164) 197 (133) – 201 (62) 3 (59) 142 142 – 142 873 (521) 352 64 1 (211) 183 (286) – 103 (51) (32) (83) 20 20 – 20 3 4 3 3 4 6 6 27 7 7 23 23 22 22 2,181 (1,423) 2,762 (1,423) 758 70 254 (351) 85 (98) (1) 717 (205) (78) (283) 434 434 – 434 52.1 51.9 1,339 43 1,735 (493) 63 (154) – 2,533 (768) (115) (883) 1,650 1,650 – 1,650 251.9 242.8 0.42 0.42 4.6180 6.3348 The income statements are to be read in conjunction with the notes to the consolidated ﬁ nancial statements. 70 Santos Annual Report 2009 Statements of Comprehensive Income for the year ended 31 December 2009 Net proﬁ t for the period 434 1,650 142 20 Consolidated Santos Ltd Note 2009 $million 2008 $million 2009 $million 2008 $million Other comprehensive income: Net exchange (loss)/gain on translation of foreign operations Tax effect Net gain/(loss) on foreign currency loans designated as hedges of net investments in foreign operations Tax effect Net change in fair value of available-for-sale ﬁ nancial assets Tax effect Net actuarial gain/(loss) on the deﬁ ned beneﬁ t plan Tax effect Other comprehensive (losses)/income, net of tax Total comprehensive income Total comprehensive income attributable to: Owners of Santos Ltd Minority interests 7 7 7 7 30 (294) – (294) 286 (86) 200 – – – 16 (5) 11 (83) 351 351 – 351 271 – 271 (259) 82 (177) (13) 4 (9) (37) 11 (26) 59 – – – – – – – – – 16 (5) 11 11 1,709 153 1,709 – 1,709 153 – 153 – – – – – – (13) 4 (9) (37) 11 (26) (35) (15) (15) – (15) The statements of comprehensive income are to be read in conjunction with the notes to the consolidated ﬁ nancial statements. Santos Annual Report 2009 71 Statements of Financial Position as at 31 December 2009 Current assets Cash and cash equivalents Trade and other receivables Inventories Other ﬁ nancial assets Tax receivable Total current assets Non-current assets Receivables Available-for-sale ﬁ nancial assets Investment in an associate Other ﬁ nancial assets Exploration and evaluation assets Oil and gas assets Other land, buildings, plant and equipment Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Deferred income Interest-bearing loans and borrowings Tax liabilities Provisions Other liabilities Total current liabilities Non-current liabilities Deferred income Interest-bearing loans and borrowings Deferred tax liabilities Provisions Other liabilities Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Equity attributable to equity holders of Santos Ltd Minority interests Total equity Consolidated Santos Ltd Note 2009 $million 2008 $million 2009 $million 2008 $million 8 9 10 11 9 12 27 11 13 14 15 17 18 19 20 21 19 17 20 21 22 2,240 917 273 65 24 3,519 10 2 177 134 923 6,317 200 79 7,842 11,361 709 83 164 20 94 10 1,553 581 290 59 – 2,483 18 2 – 345 493 6,190 160 111 7,319 9,802 605 55 99 469 117 8 1,080 1,353 17 1,649 871 768 9 3,314 4,394 6,967 4,987 (283) 2,263 6,967 – 6,967 54 2,356 744 808 9 3,971 5,324 4,478 2,531 (189) 2,136 4,478 – 4,478 2,031 357 139 60 7 2,594 9 2 – 5,748 30 1,722 134 – 7,645 10,239 778 7 1 – 70 – 856 – 3,600 103 258 – 3,961 4,817 5,422 4,987 (2) 437 5,422 – 5,422 1,403 694 136 – – 2,233 17 2 – 4,724 43 1,778 110 – 6,674 8,907 723 2 1 454 66 – 1,246 – 4,085 134 311 – 4,530 5,776 3,131 2,531 (2) 602 3,131 – 3,131 The statements of ﬁ nancial position are to be read in conjunction with the notes to the consolidated ﬁ nancial statements. 72 Santos Annual Report 2009 Statements of Cash Flows for the year ended 31 December 2009 Consolidated Santos Ltd Note 2009 $million 2008 $million 2009 $million 2008 $million Cash ﬂ ows from operating activities Receipts from customers Interest received Overriding royalties received Insurance proceeds received Pipeline tariffs and other receipts Payments to suppliers and employees Exploration and evaluation expenditure – seismic and studies Royalties and excise paid Borrowing costs paid Income taxes paid Royalty-related taxes paid Net cash provided by operating activities 29 Cash ﬂ ows 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 Restoration expenditure Acquisition of investment in an associate Advances to related entities Proceeds from disposal of non-current assets Proceeds from disposal of controlled entities Proceeds from disposal of other investments Income taxes paid on disposal of non-current assets Other investing activities Net cash (used in)/provided by investing activities Cash ﬂ ows from ﬁ nancing activities Dividends paid Proceeds from issues of ordinary shares Proceeds from share issues placed on term deposits Proceeds from maturity of term deposits Redeemable cumulative preference shares redeemed Off-market buy-back of ordinary shares Repayments of borrowings Drawdown of borrowings Receipts from controlled entities Payments to controlled entities Net cash provided by/(used in) ﬁ nancing activities Net 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 2,308 85 8 30 93 (899) (199) (65) (80) (55) (71) 1,155 (98) (1,182) (74) (363) (17) (29) (178) (6) 12 24 – (497) (3) (2,411) (297) 3,003 (1,176) 1,116 (600) – (92) – – – 1,954 698 1,553 (11) Cash and cash equivalents at the end of the year 8 2,240 3,101 49 15 13 64 (1,089) (88) (102) (134) (292) (152) 1,385 (266) (1,179) (40) – (7) (55) – (6) 2,080 – 1 – 4 710 81 12 – 12 (286) (19) (26) (2) (24) (25) 433 (27) (355) (49) – – – (178) – – – – (497) (4) 532 (1,110) (251) 220 – – – (302) (751) 500 – – (584) 1,333 200 20 1,553 (297) 3,003 (1,176) 1,116 (600) – (1) – 759 (1,492) 1,312 635 1,403 (7) 2,031 985 39 24 – 41 (402) (11) (47) – (229) (35) 365 (73) (359) (14) (1) (6) (3) – – 1 – 1 – 3 (451) (251) 220 – – – (302) (1) – 2,817 (1,052) 1,431 1,345 57 1 1,403 The statements of cash ﬂ ows are to be read in conjunction with the notes to the consolidated ﬁ nancial statements. Santos Annual Report 2009 73 Statements of Changes in Equity for the year ended 31 December 2009 Issued capital $million Translation reserve $million Fair value reserve $million Retained earnings $million Total equity $million Note Consolidated Balance at 1 January 2009 Total comprehensive income for the period Transactions with owners in their capacity as owners: Share options exercised by employees Entitlement offer exercised Shares issued Redeemable cumulative preference shares redeemed Dividends to shareholders Share-based payment transactions Equity attributable to equity holders of Santos Ltd Equity attributable to minority interests Balance at 31 December 2009 Balance at 1 January 2008 Total comprehensive income for the period Transactions with owners in their capacity as owners: Share options exercised by employees Shares issued Off-market buy-back Dividends to shareholders Share-based payment transactions Equity attributable to equity holders of Santos Ltd Equity attributable to minority interests Balance at 31 December 2008 Santos Ltd Balance at 1 January 2009 Total comprehensive income for the period Transactions with owners in their capacity as owners: Share options exercised by employees Entitlement offer exercised Shares issued Redeemable cumulative preference shares redeemed Dividends to shareholders Share-based payment transactions Balance at 31 December 2009 Balance at 1 January 2008 Total comprehensive income for the period Transactions with owners in their capacity as owners: Share options exercised by employees Shares issued Off-market buy-back Dividends to shareholders Share-based payment transactions Balance at 31 December 2008 22 22 22 22 22 31 22 22 22 22 31 22 22 22 22 22 31 22 22 22 22 31 2,531 – 4 2,914 138 (600) – – 4,987 – 4,987 2,331 – 3 253 (56) – – 2,531 – 2,531 2,531 – 4 2,914 138 (600) – – 4,987 2,331 – 3 253 (56) – – 2,531 (187) (94) (2) – 2,136 445 – – – – – – (281) – (281) (281) 94 – – – – – (187) – (187) – – – – – – – – – – – – – – – – – – – – – – – (2) – (2) 7 (9) – – – – – (2) – (2) (2) – – – – – – – (2) 7 (9) – – – – – (2) – – – – (327) 9 2,263 – 2,263 1,035 1,624 – – (245) (286) 8 2,136 – 2,136 602 153 – – – – (327) 9 437 1,131 (6) – – (245) (286) 8 602 4,478 351 4 2,914 138 (600) (327) 9 6,967 – 6,967 3,092 1,709 3 253 (301) (286) 8 4,478 – 4,478 3,131 153 4 2,914 138 (600) (327) 9 5,422 3,469 (15) 3 253 (301) (286) 8 3,131 The statements of changes in equity are to be read in conjunction with the notes to the consolidated ﬁ nancial statements. 74 Santos Annual Report 2009 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 1. SIGNIFICANT ACCOUNTING POLICIES The ﬁ nancial report of Santos Ltd (“the Company”) for the year ended 31 December 2009 was authorised for issue in accordance with a resolution of the Directors on 18 February 2010. Santos Ltd (the parent) is a company limited by shares incorporated in Australia whose shares are publicly traded on the Australian Securities Exchange (“ASX”) and is the ultimate parent entity in the Group. The consolidated ﬁ nancial report of the Company for the year ended 31 December 2009 comprises the Company and its controlled entities (“the Group”). The nature of the operations and principal activities of the Group are described in the Directors’ Statutory Report. (A) STATEMENT OF COMPLIANCE The ﬁ nancial report is a general purpose ﬁ nancial report which has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. The ﬁ nancial report complies with Australian Accounting Standards as issued by the Australian Accounting Standards Board and International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. (B) BASIS OF PREPARATION The ﬁ nancial report is presented in Australian dollars. The ﬁ nancial report is prepared on the historical cost basis, except for derivative ﬁ nancial instruments, ﬁ xed rate notes that are hedged by an interest rate swap and available-for-sale ﬁ nancial assets, 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 ﬁ nancial report and Directors’ Statutory Report have been rounded to the nearest million dollars, unless otherwise stated. Adoption of new accounting standards and interpretations From 1 January 2009, the Company has adopted the following standards and interpretations, and all consequential amendments, which became applicable on 1 January 2009. Adoption of these standards and interpretations has only affected the presentation and disclosure in these ﬁ nancial statements. There has been no impact on the ﬁ nancial position or performance of the Company. • AASB 8 Operating Segments • AASB 101 Presentation of Financial Statements • AASB 2008-1 Amendments to Australian Accounting Standard – Share-based Payments: Vesting Conditions and Cancellations • AASB 2008-5 Amendments to Australian Accounting Standards arising from the Annual Improvements Project • AASB 2008-7 Amendments to Australian Accounting Standards – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate • AASB 2009-2 Amendments to Australian Accounting Standards – Improving Disclosures about Financial Instruments • AASB 2009-6 Amendments to Australian Accounting Standards Santos Annual Report 2009 75 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective have not been adopted by the Group for the annual reporting period ended 31 December 2009. These are outlined in the following table: Reference Title Summary Effective for annual reporting periods beginning on or after AASB 3 Business Combinations Adopts the acquisition method to account for 1 July 2009 Impact on Group ﬁ nancial report Will impact recognition of future acquisitions Unlikely to have material impact Application date for Group 1 January 2010 1 January 2013 1 January 2013 1 July 2009 Unlikely to have impact 1 January 2010 1 July 2009 No impact 1 January 2010 1 July 2009 No impact 1 January 2010 AASB 9 Financial Instruments AASB 127 Consolidated and Separate Financial Statements AASB 2008-3 AASB 2008-6 Amendments to Australian Accounting Standards arising from AASB 3 and AASB 127 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project business combinations; acquisition costs expensed; contingent consideration recognised at fair value on acquisition date. AASB 9 includes requirements for the classiﬁ cation and measurement of ﬁ nancial assets resulting from the ﬁ rst part of phase 1 of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement (AASB 139 Financial Instruments: Recognition and Measurement). These requirements improve and simplify the approach for classiﬁ cation and measurement of ﬁ nancial assets compared with the requirements of AASB 139. Changes in a parent’s ownership in a subsidiary that result in a loss of control requires reserves to be recycled and remaining ownership interest to be measured at fair value; changes that do not result in a loss of control are accounted for as equity transactions. Consequential amendments to a number of standards following the issue of the revised AASB 3 Business Combinations and AASB 127 Consolidated and Separate Financial Statements. Extends scope of AASB 5 Non-current Assets Held for Sale and Discontinued Operations to require where entity is committed to sale plan involving loss of control of a subsidiary but retains a partial investment in the disposed subsidiary, in which case all of the subsidiary’s assets and liabilities are classiﬁ ed as held for sale; also includes minor terminology or editorial amendments to other standards. AASB 2008-8 Amendments to Australian Accounting Standards – Eligible Hedged Items Clariﬁ es the hedge accounting provisions of AASB 139 Financial Instruments: Recognition and Measurement to address inﬂ ation in a ﬁ nancial hedged item, and one-sided risk in a hedged item. 1 July 2009 No impact 1 January 2010 76 Santos Annual Report 2009 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Reference Title Summary AASB 2008-13 AASB 2009-4 AASB 2009-5 AASB 2009-7 AASB 2009-8 AASB 2009-9 Amendments to Australian Accounting Standards arising from AASB Interpretation 17 – Distributions of Non-cash Assets to Owners Amends AASB 5 Non-current Assets Held for Sale and Discontinued Operations in respect of the classiﬁ cation, presentation and measurement of non-current assets held for distribution to owners in their capacity as owners and AASB 110 Events after the Reporting Period for the disclosure requirements for dividends that are declared after the reporting period but before the ﬁ nancial statements are authorised for issue. Amendments to Australian Accounting Standards arising from the Annual Improvements Project Amends scope of AASB 2 Share-based Payment to exclude business combinations from scope; there are additional consequential amendments to AASB 138 Intangible Assets arising from revised AASB 3 Business Combinations. Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project Amendments to Australian Accounting Standards Amendments to Australian Accounting Standards – Group Cash-settled Share-based Payment Transactions Includes a number of other amendments to existing standards which are not expected to have a material impact. Will amend classiﬁ cation of exploration expenditure in statement of cash ﬂ ows. Various minor editorial amendments to a number of standards and an interpretation to correct errors that occurred in AASB 2008-12, AASB 2008-13 and AASB Interpretation 17 Distributions of Non-cash Assets to Owners and other amendments reﬂ ect changes made by the IASB to its pronouncements. The amendments clarify the scope of AASB 2 Share-based Payment by requiring an entity that receives goods or services in a share-based payment arrangement to account for those goods or services no matter which entity in the group settles the transaction, and no matter whether the transaction is settled in shares or cash. Amendments to Australian Accounting Standards – Additional Exemptions for First-time Adopters Provides additional exemptions and modiﬁ cations on transition to Australian Accounting Standards in relation to certain oil and gas and lease assessments under Interpretation 4 Determining whether an Arrangement contains a Lease. Effective for annual reporting periods beginning on or after Impact on Group ﬁ nancial report Application date for Group 1 July 2009 No impact 1 January 2010 1 July 2009 No impact 1 January 2010 1 July 2009 No impact 1 January 2010 1 July 2009 No impact 1 January 2010 1 January 2010 No impact 1 January 2010 1 January 2010 No impact 1 January 2010 Santos Annual Report 2009 77 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 Effective for annual reporting periods beginning on or after Impact on Group ﬁ nancial report Application date for Group 1 February 2010 No impact 1 January 2011 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Reference Title Summary AASB 2009-10 Amendments to Australian Accounting Standards – Classiﬁ cation of Rights Issues Amends AASB 132 Financial Instruments: Presentation to require a ﬁ nancial instrument that gives the holder the right to acquire a ﬁ xed number of the entity’s own equity instruments for a ﬁ xed amount of any currency to be classiﬁ ed as an equity instrument if, and only if, the entity offers the ﬁ nancial instrument pro-rata to all of its existing owners of the same class of its own non-derivative equity instruments. Before this amendment, rights issues (rights, options, or warrants), denominated in a currency other than the functional currency of the issuer, were accounted for as derivative instruments. AASB 2009-11 AASB 2009-12 Amendments to Australian Accounting Standards arising from AASB 9 Amendments to Australian Accounting Standards AASB 2009-13 Amendments to Australian Accounting Standards arising from Interpretation 19 Interpretation 17 Distributions of Non-cash Assets to Owners Interpretation 18 Transfers of Assets from Customers Interpretation 19 Extinguishing Financial Liabilities with Equity Instruments This standard gives effect to consequential changes arising from the issuance of AASB 9. 1 January 2013 1 January 2013 Unlikely to have material impact The amendment to AASB 8 requires an entity to exercise judgement in assessing whether a government and entities known to be under the control of that government are considered a single customer for the purposes of certain operating segment disclosures. The objective of this Standard is to make amendments to AASB 1 First-time Adoption of Australian Accounting Standards as a consequence of the issuance of Interpretation 19 Extinguishing Financial Liabilities with Equity Instruments. Provides guidance on when and how a liability for certain distributions of non-cash assets is recognised and measured, and how to account for that liability. Does not apply to common control transactions. Provides guidance on transfers of property, plant and equipment for entities that receive such contributions from their customers. This interpretation addresses the accounting by an entity when the terms of a ﬁ nancial liability are renegotiated and result in the entity issuing equity instruments to a creditor of the entity to extinguish all or part of the ﬁ nancial liability. 1 January 2011 No impact 1 January 2011 1 July 2010 No impact 1 January 2011 1 July 2009 No impact 1 January 2010 1 July 2009 No impact 1 January 2010 1 July 2010 No impact 1 January 2011 78 Santos Annual Report 2009 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Group has changed the classiﬁ cation of exploration and evaluation expenditure in the statement of cash ﬂ ows such that only exploration and evaluation expenditure that results in the initial recognition of an exploration and evaluation asset is included in investing activities. Exploration and evaluation expenditure that is expensed as incurred (generally seismic and study activities) is classiﬁ ed in operating activities. As a result, $88 million of exploration and evaluation expenditure was transferred from cash ﬂ ows from investing activities to cash ﬂ ows from operating activities for the Group and $11 million for Santos Ltd in the prior year ended 31 December 2008. The accounting policies set out below have been applied consistently to all periods presented in the consolidated ﬁ nancial report. The accounting policies have been consistently applied by the Group. (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 ﬁ nancial and operating policies of an entity so as to obtain beneﬁ ts from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The ﬁ nancial statements of subsidiaries are included in the consolidated ﬁ nancial statements from the date that control commences until the date that control ceases. The acquisition of subsidiaries is accounted for using the purchase method of accounting, which 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 (refer note 1(G)). Investments in subsidiaries are carried at their cost of acquisition, less any impairment charges, in the Company’s ﬁ nancial statements. beneﬁ ts through its share of jointly controlled assets. Intragroup balances and any unrealised gains and losses or income and expenses arising from intragroup transactions are eliminated in preparing the consolidated ﬁ nancial statements. Minority interests Minority interests in the net assets of consolidated entities are allocated their share of net proﬁ t after tax in the income statement, and are identiﬁ ed separately from the Group’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. Where the minority interest has losses greater than its equity interest in the consolidated subsidiary, the excess and any further losses applicable to the minority interest are allocated against the Group’s interest. If the minority interest subsequently reports proﬁ ts, the proﬁ ts are allocated to the Group until the minority’s share of losses previously absorbed by the Group have been fully recovered. 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 Group’s interests in its signiﬁ cant joint ventures is included in note 28. 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 beneﬁ ts 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 The interests of the Company and of the Group in unincorporated joint ventures are brought to account by recognising in the ﬁ nancial statements the Group’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). Jointly controlled entities The Group has interests in joint ventures which are jointly controlled entities, whereby the venturers have contractual arrangements that establish joint control over the economic activities of the entities. The Group recognises its interest in jointly controlled entities using proportionate consolidation, by combining its share of the assets, liabilities, income and expenses of the joint venture with similar line items in the consolidated ﬁ nancial statements. Investment in an associate The Group’s investment in an associate is accounted for using the equity method of accounting in the consolidated ﬁ nancial statements and at cost in the parent. An associate is an entity over which the Group has signiﬁ cant inﬂ uence and that is neither a subsidiary nor a joint venture. The Group generally has signiﬁ cant inﬂ uence if it has between 20% and 50% of the voting rights of an entity. Under the equity method, the investment in an associate is carried in the consolidated statement of ﬁ nancial position at cost plus post-acquisition changes to the Group’s share of net assets of the associate. Goodwill relating to the associate is included in the carrying amount of the investment and is not amortised. After application of the equity method, the Group determines whether it is necessary to recognise any impairment loss with respect to the Group’s net investment in the associate. Santos Annual Report 2009 79 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Group’s share of the associate’s post-acquisition proﬁ ts or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in the statement of changes in equity and, when applicable, in the statement of comprehensive income. The cumulative post-acquisition movements are recorded against the carrying amount of the investment. Dividends receivable from the associate are recognised in the parent entity’s income statement, while in the consolidated ﬁ nancial statements the Group reduces the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any unsecured long-term receivables and loans, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. The reporting dates of the associate and the Group are identical and the associate’s accounting policies conform to those used by the Group for like transactions and events in similar circumstances. (D) FOREIGN CURRENCY Functional and presentation currency Both the functional and presentation currency of Santos Ltd is Australian dollars. Some subsidiaries have a functional currency of United States dollars which is translated to the presentation currency (see below). Transactions and balances Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the foreign exchange rate ruling at the reporting 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 80 Santos Annual Report 2009 a foreign operation are recognised in equity in the consolidated ﬁ nancial 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 initial 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. Group companies The results of subsidiaries with a functional currency of United States dollars are translated to Australian dollars as at the date of each transaction. The assets and liabilities are translated to Australian dollars at foreign exchange rates ruling at the reporting date. Foreign exchange differences arising on retranslation are recognised directly in the foreign currency translation reserve. 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 Group frequently uses derivative ﬁ nancial instruments to hedge its exposures 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 and options, 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 Group does not trade in derivative ﬁ nancial instruments for speculative purposes. Derivative ﬁ nancial instruments are recognised initially at fair value. Subsequent to initial recognition, derivative ﬁ nancial 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 proﬁ t or loss. The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the reporting 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 reporting 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 reporting date. Embedded derivatives Derivatives embedded in other ﬁ nancial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contract and the host contracts are not measured at fair value with changes in fair value recognised in proﬁ t or loss. (F) HEDGING Hedge effectiveness Hedge accounting (see below) is only applied where the derivative ﬁ nancial instrument provides an effective hedge of the hedged item. Where a derivative ﬁ nancial instrument provides a partially effective hedge, any gain or loss on the ineffective part is recognised immediately in the income statement. Fair value hedge Where a derivative ﬁ nancial instrument hedges the changes in fair value of a recognised asset or liability or an unrecognised ﬁ rm commitment (or an identiﬁ ed portion of such asset, liability or ﬁ rm 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. 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cash ﬂ ow hedge Where a derivative ﬁ nancial instrument is designated as a hedge of the variability in cash ﬂ ows of a recognised asset or liability, or a highly probable forecast transaction, any gain or loss on the derivative ﬁ nancial instrument is recognised directly in equity. When the forecast transaction subsequently results in the recognition of a non-ﬁ nancial asset or non-ﬁ nancial liability, or the forecast transaction for a non-ﬁ nancial asset or non-ﬁ nancial liability becomes a ﬁ rm commitment for which fair value hedging is applied, the associated cumulative gain or loss is removed from equity and included in the initial cost or other carrying amount of the non-ﬁ nancial asset or non-ﬁ nancial liability. If a hedge of a forecast transaction subsequently results in the recognition of a ﬁ nancial asset or a ﬁ nancial liability, the associated gains and losses that were recognised directly in equity are reclassiﬁ ed into proﬁ t or loss in the same period or periods during which the asset acquired or liability assumed affects proﬁ t or loss. For cash ﬂ ow hedges, other than those covered by the preceding paragraph, 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 proﬁ t or loss. 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 ﬁ nancial instrument is used to hedge economically the foreign exchange exposure of a recognised monetary asset or liability, hedge accounting is not applied and any gain or loss on the hedging instrument is recognised in the income statement. Hedge of net investment in a foreign operation The gain or loss on an instrument used to hedge a net investment in a foreign operation is recognised directly in equity. On disposal of the foreign operation, the cumulative value of any such gains or losses recognised directly in equity is transferred to proﬁ t or loss. (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 assets given, shares issued or liabilities incurred. 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 The purchase method of accounting is used to account for all business combinations regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, shares issued or liabilities incurred or assumed at the date of exchange plus costs directly attributable to the combination. Where equity instruments are issued in a business combination, the fair value of the instruments is their published market price as at the date of exchange. Transaction costs arising on the issue of equity instruments are recognised directly in equity. Except for non-current assets or disposal groups classiﬁ ed as held for sale (which are measured at fair value less costs to sell), all identiﬁ able assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the costs of the business combination over the net fair value of the identiﬁ able net assets of the Group’s share of the identiﬁ able net assets acquired is recognised as goodwill. If the cost of acquisition is less than the Group’s share of the net fair value of the identiﬁ able net assets of the subsidiary, the difference is recognised as a gain in the income statement, but only after a reassessment of the identiﬁ cation and measurement of the net assets acquired. Where settlement of any part of the consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent ﬁ nancier under comparable terms and conditions. (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 ﬁ eld is considered favourable or has been proved to exist, and in most cases will comprise an individual prospective oil or gas ﬁ eld. Santos Annual Report 2009 81 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 signiﬁ cant operations in, or in relation to, the area of interest are continuing. (iv) sufﬁ cient 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 ﬁ eld enters the development phase the accumulated exploration and evaluation expenditure is transferred to oil and gas assets – assets in development. Where an ownership interest in an exploration and evaluation asset is exchanged for another, the transaction is recognised by reference to the carrying value of the original interest. Any cash consideration paid, including transaction costs, is accounted for as an acquisition of exploration and evaluation assets. Any cash consideration received, net of transaction costs, is treated as a recoupment of costs previously capitalised with any excess accounted for as a gain on disposal of non-current assets. The carrying amounts of the Group’s exploration and evaluation assets are reviewed at each reporting 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; or (ii) substantive expenditure on further exploration for and evaluation of mineral resources in the speciﬁ c area is not budgeted or planned; or (iii) exploration for and evaluation of resources in the speciﬁ c area has not led to the discovery of commercially viable quantities of resources, and the Group has decided to discontinue activities in the speciﬁ c area; or (I) OIL AND GAS ASSETS Oil and gas assets are usually single oil or gas ﬁ elds being developed for future production or which are in the production phase. Where several individual oil or gas ﬁ elds are to be produced through common facilities, the individual oil or gas ﬁ elds 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 ﬁ eld has been demonstrated, the ﬁ eld enters its development phase. The costs of oil and gas assets in the development phase are separately accounted for as tangible assets and include past exploration and evaluation costs, development drilling and other subsurface expenditure, surface plant and equipment and any associated land and buildings. When commercial operation commences the accumulated costs are transferred to oil and gas assets – producing assets. 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 ﬁ elds in the vicinity with the intention of producing any near ﬁ eld 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 14. (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 speciﬁ c 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 proﬁ t or loss as incurred. Depreciation on buildings, plant and equipment is calculated in accordance with note 1(K). 82 Santos Annual Report 2009 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (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 Group. Each component of an item of buildings, plant and equipment with a cost that is signiﬁ cant 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 generally as follows: • Buildings • Plant and equipment 20 – 50 years – Computer equipment 3 – 5 years 4 – 7 years – Motor vehicles – Furniture and ﬁ ttings 10 – 20 years 10 – 30 years – Pipelines 10 – 50 years – Plant and facilities 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 subsurface development expenditure (“subsurface assets”) over the life of the estimated Proven plus Probable (“2P”) reserves in a cash-generating unit, together with future subsurface costs necessary to develop the hydrocarbon reserves in the respective cash-generating units. The heating value measurement used for the conversion of volumes of different hydrocarbon products is barrels of oil equivalent. Depletion is not charged on costs carried forward in respect of assets in the development stage until production commences. (L) AVAILABLE-FOR-SALE FINANCIAL ASSETS Financial instruments held by the Group and the Company which are classiﬁ ed 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 ﬁ nancial instruments classiﬁ ed as available for sale is their quoted bid price at the close of business on the reporting date. Financial instruments classiﬁ ed as available for sale are recognised or derecognised by the Group and the Company on the date it commits to purchase or sell the investments. When these investments are derecognised, the cumulative gain or loss previously recognised directly in equity is recognised in proﬁ t 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, liqueﬁ ed petroleum gas, condensate and naphtha stored in tanks and pipeline systems and processed sales gas and ethane stored in subsurface reservoirs, are valued using the absorption cost method in a manner which approximates speciﬁ c identiﬁ cation. (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. 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 reporting 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 ﬂ ows, 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 proﬁ t 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 insigniﬁ cant risk of changes in value, and generally have an original maturity of three months or less. (P) IMPAIRMENT The carrying amounts of the Group’s assets, other than inventories and deferred tax assets, are reviewed at each reporting 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 inﬂ ows, and generally represents an individual oil or gas ﬁ eld. 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). Santos Annual Report 2009 83 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 ﬁ nancial 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 proﬁ t or loss even though the ﬁ nancial asset has not been derecognised. The amount of the cumulative loss that is recognised in proﬁ t or loss is the difference between the acquisition cost and current fair value, less any impairment loss on that ﬁ nancial asset previously recognised in proﬁ t 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 ﬂ ows are discounted to their present value using a pre-tax discount rate that reﬂ ects current market assessments of the time value of money and the risks speciﬁ c to the asset. Where an asset does not generate cash ﬂ ows 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 ﬂ ows are based on estimates of hydrocarbon reserves, future production proﬁ les, 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. 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 in proﬁ t or loss on equity instruments classiﬁ ed as available-for-sale ﬁ nancial assets are not reversed through proﬁ t or loss. (Q) PROVISIONS A provision is recognised in the statement of ﬁ nancial position when the Group has a present legal or constructive obligation as a result of a past event and it is probable that an outﬂ ow of resources embodying economic beneﬁ ts will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation using a discounted cash ﬂ ow methodology. If the effect of the time value of money is material, the provision is discounted using a current pre-tax rate that reﬂ ects current market assessments of the time value of money and, where appropriate, the risks speciﬁ c to the liability. The increase in the provision resulting from the passage of time is recognised in ﬁ nance costs. 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 outﬂ ow of economic beneﬁ ts 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 in the estimate are reﬂ ected in the present value of the restoration provision at the reporting 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. Remediation Provisions for remediation costs are recognised where there is a present obligation as a result of an unexpected event that occurs outside of the planned operations of an asset. The provision for future remediation costs is the best estimate of the present value of the future expenditure required to settle the remediation obligation at the reporting date, based on current legal requirements. Future remediation costs are reviewed annually and any changes in the estimate are reﬂ ected in the present value of the remediation provision at the reporting date, with a corresponding charge to the income statement. (R) EMPLOYEE BENEFITS Wages, salaries, annual leave and sick leave Liabilities for wages and salaries, including non-monetary beneﬁ ts, and annual leave that are expected to be settled within twelve months of the reporting date are recognised in respect of employees’ services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Expenses for non-vesting sick leave are recognised when the leave is taken and are measured at the rates paid or payable. 84 Santos Annual Report 2009 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Long-term service beneﬁ ts A liability for long service leave is recognised and measured as the present value of the estimated future cash outﬂ ows to be made in respect of employees’ services up to the reporting date. The obligation is calculated using expected future increases in wage and salary rates, experience of employee departures and periods of service. Expected future payments are discounted using the rates attached to the Commonwealth Government bonds at the reporting date which have maturity dates approximating the terms of the Group’s obligations. Deﬁ ned contribution plans The Company and its controlled entities contribute to several deﬁ ned contribution superannuation plans. Obligations for contributions are recognised as an expense in the income statement as incurred. Deﬁ ned beneﬁ t plan The Group’s net obligation in respect of the deﬁ ned beneﬁ t superannuation plan is calculated by estimating the amount of future beneﬁ t that employees have earned in return for their service in the current and prior periods; that beneﬁ t 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 reporting date on Government bonds that have maturity dates approximating the terms of the Group’s obligations. The calculation is performed by a qualiﬁ ed actuary using the projected unit credit method. When the beneﬁ ts of the plan are improved, the portion of the increased beneﬁ t 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 beneﬁ ts become vested. To the extent that the beneﬁ ts vest immediately, the expense is recognised immediately in the income statement. Actuarial gains or losses that arise in calculating the Group’s obligation in respect of the plan are recognised directly in retained earnings. When the calculation results in plan assets exceeding liabilities to the Group, 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 deﬁ ned beneﬁ t obligation for employee services in prior periods, resulting in the current period from the introduction of, or changes to, post-employment beneﬁ ts or other long-term employee beneﬁ ts. Past service costs may either be positive (where beneﬁ ts are introduced or improved) or negative (where existing beneﬁ ts are reduced). Share-based payment transactions The Santos Executive Share Option Plan allows eligible executives to acquire shares in the capital of the Company. The fair value of options granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and recognised over the period during which the executive becomes unconditionally entitled to the options. The fair value of the options granted 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 Programme 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 Group recognises the fair value of cash-settled share-based payment transactions as an employee expense with a corresponding increase in the liability for employee beneﬁ ts. The fair value of the liability is measured initially, and at the end of each reporting period until settled, at the fair value of the cash-settled share-based payment transaction, by using the Monte Carlo simulation method, taking into account the terms and conditions on which the cash-settled share-based payment transactions were granted, and the extent to which the employees have rendered service to date. The fair value of shares issued to eligible employees under the Santos Employee Share Acquisition Plan, to eligible executives and employees under the Santos Employee Share Purchase Plan, and new shares issued to Non-executive Directors under the Non-executive Director Share Plan, is recognised as an increase in issued capital on grant date. Shares issued under the Santos Employee Share Acquisition Plan to employees of subsidiaries are recognised in the Company’s separate ﬁ nancial statements as an additional investment in the subsidiary with a corresponding credit to equity. As a result, the expense recognised by the Company in relation to equity-settled awards only represents the expense associated with grants to employees of the Company. The expense recognised by the Group is the total expense. (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 recognised in the income statement over the period of the borrowings on an effective interest basis. Santos Annual Report 2009 85 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Fixed rate notes that are hedged by an interest rate swap are recognised at fair value (refer note 1(F)). (T) BORROWING COSTS Borrowing costs, including interest and ﬁ nance 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 speciﬁ cally 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 (refer note 19). Borrowing costs incurred after commencement of commercial operations are expensed. All other borrowing costs are recognised in the proﬁ t or loss in the period in which they are incurred. (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. Deferred income is also recognised on asset sale agreements where consideration is received prior to all conditions precedent being fulﬁ lled. (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 classiﬁ ed as equity. Preference share capital Preference share capital is classiﬁ ed as equity if it is non-redeemable and any 86 Santos Annual Report 2009 dividends are discretionary, or it is redeemable only at the Company’s option. Dividends on preference share capital classiﬁ ed as equity are recognised as distributions within equity. Dividends Dividends are recognised as a liability at the time the Directors resolve to pay or declare the dividend. with the terms of the overriding royalty agreements. Pipeline tariffs and processing tolls Tariffs and tolls charged to other entities for use of pipelines and facilities owned by the Group are recognised as revenue as they accrue in accordance with the terms of the tariff and tolling agreements. Transaction costs Trading revenue Transaction costs of an equity transaction are accounted for as a deduction from equity, net of any related income tax beneﬁ t. (X) REVENUE Revenue is recognised in the income statement when the signiﬁ cant 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 or similar taxes, to the extent it is probable that the economic beneﬁ ts will ﬂ ow to the Group and the revenue can be reliably measured. Sales revenue Sales revenue is recognised on the basis of the Group’s interest in a producing ﬁ eld (“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. Overriding royalties Royalties recognised on farmed-out operating lease rights are recognised as revenue as they accrue in accordance Trading revenue represents the net revenue derived from the purchase and subsequent sale of hydrocarbon products from third parties where the risks and beneﬁ ts of ownership of the product do not pass to the Group, or where the Group acts as an agent or broker with compensation on a commission or fee basis. (Y) INTEREST INCOME Interest income is recognised in the income statement as it accrues, using the effective interest method. This is a method of calculating the amortised cost of a ﬁ nancial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the ﬁ nancial asset to the net carrying amount of the ﬁ nancial asset. (Z) OTHER INCOME Other income is recognised in the income statement at the fair value of the consideration received or receivable, net of goods and services tax, when the signiﬁ cant 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. 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (AA) LEASES The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulﬁ lment of the arrangement is dependent on the use of a speciﬁ c asset or assets and the arrangement conveys a right to use the asset. Leases are classiﬁ ed as ﬁ nance leases when the terms of the lease transfer substantially all the risks and rewards incidental to ownership of the leased asset to the lessee. All other leases are classiﬁ ed as operating leases. Finance leases are capitalised at the lease’s inception at the fair value of the leased property or, if lower, the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of ﬁ nancial position as a ﬁ nance lease obligation. Lease payments are apportioned between ﬁ nance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Assets under ﬁ nance lease are depreciated over the shorter of the estimated useful life of the asset and the lease term if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term. Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic beneﬁ ts from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred. (AB) 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 Taxation Ofﬁ ce (“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 statement of ﬁ nancial position. Cash ﬂ ows are included in the statement of cash ﬂ ows on a gross basis. The GST components of cash ﬂ ows arising from investing and ﬁ nancing activities which are recoverable from, or payable to, the ATO are classiﬁ ed as operating cash ﬂ ows. Similar taxes in other tax jurisdictions are accounted for in a like manner. (AC) TAXATION Royalty-related taxation Petroleum resource rent tax, resource rent royalty and additional proﬁ ts tax are recognised as an income tax under AASB 112 Income Taxes. Income tax Income tax on the proﬁ t 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 proﬁ t or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is determined using the statement of ﬁ nancial position approach, providing for temporary differences between the carrying amounts of assets and liabilities for ﬁ nancial 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 proﬁ t; 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 substantively enacted at the reporting date. A deferred tax asset is recognised only to the extent that it is probable that future taxable proﬁ ts 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 beneﬁ t will be realised. The Company and all its wholly-owned Australian resident entities are part of a tax-consolidated group under Australian taxation law. Santos Ltd is the head entity in the tax-consolidated group. Current tax expense/beneﬁ t, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax-consolidated group are allocated amongst the members of the tax-consolidated group using a “stand-alone taxpayer” approach in accordance with Interpretation 1052 Tax Consolidation Accounting and are recognised in the separate ﬁ nancial 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 from 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. Santos Annual Report 2009 87 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. (AD) DISCONTINUED OPERATIONS AND NON-CURRENT ASSETS HELD FOR SALE A discontinued operation is a component of the Group that has been disposed of, or is classiﬁ ed as held for sale, and that represents a separate major line of business or geographical area of operations, and 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 and the assets and liabilities are presented separately on the statement of ﬁ nancial position. Non-current assets and disposal groups are classiﬁ ed 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 classiﬁ ed as held 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. (AE) 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 signiﬁ cant 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 plus Probable hydrocarbon reserves reported by the Group 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 ﬁ scal 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 Group’s policies and procedures for reserves estimation which conform to guidelines prepared by the Society of Petroleum Engineers. 88 Santos Annual Report 2009 Exploration and evaluation The Group’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 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 13. Provision for restoration The Group 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 and reviews these assessments periodically. 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 Group 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 carrying amount of oil and gas assets and the assumptions used in the estimation of recoverable amount are discussed in notes 14 and 16 respectively. l a t o T d n a r e h t O d e t a c o l l a n u G N L G c ﬁ i c a P a i s A T N & A W n r e t s a E a i l a r t s u A 8 0 0 2 9 0 0 2 8 0 0 2 9 0 0 2 8 0 0 2 9 0 0 2 8 0 0 2 9 0 0 2 8 0 0 2 9 0 0 2 8 0 0 2 9 0 0 2 n o i l l i m $ n o i l l i m $ n o i l l i m $ n o i l l i m $ n o i l l i m $ n o i l l i m $ n o i l l i m $ n o i l l i m $ n o i l l i m $ n o i l l i m $ n o i l l i m $ n o i l l i m $ e t o N G N L e n o t s d a l G d n a , c ﬁ i c a P a i s A , ) ” T N & A W “ ( y r o t i r r e T n r e h t r o N d n a a i l a r t s u A n r e t s e W , a i l a r t s u A n r e t s a E f o s t i n u s s e n i s u b r u o f e h t e b o t s t n e m g e s g n i t a r e p o s t i d e ﬁ i t n e d i s a h p u o r G e h T e h t y b n e k a t r e d n u s e i t i v i t c a e h t s e s i r p m o c t n e m g e s d e t a c o l l a n u d n a r e h t o e h T . s n o i g e r e s o h t n i h t i w s t e s s a f o y t i r a l i m i s e h t d n a s n o i g e r l a c i h p a r g o e g t n e r e f f i d e h t n o d e s a b , ) ” ® G N L G “ ( d n a e c n a m r o f r e p g n i s s e s s a r o f r e c ﬁ f O e v i t u c e x E f e i h C e h t o t d e d i v o r p e r a s t r o p e r l a n r e t n i h c i h w n o s i s a b e h t s i s i h T . s p u o r g l a n o i t c n u f e t a r o p r o c d n a n o i t a r o l p x e , l a c i n h c e t ’ s p u o r G . p u o r G e h t n i h t i w s e c r u o s e r f o n o i t a c o l l a e h t g n i n i m r e t e d t u o b a s t r o p e r l a n r e t n i f o s i s a b e h t n o d e ﬁ i t n e d i e b o t s t n e m g e s g n i t a r e p o s e r i u q e r 8 B S A A . 9 0 0 2 y r a u n a J 1 m o r f t c e f f e h t i w s t n e m g e S g n i t a r e p O 8 B S A A d e t p o d a s a h p u o r G e h T . e c n a m r o f r e p s t i s s e s s a o t d n a t n e m g e s e h t o t s e c r u o s e r e t a c o l l a o t r e d r o n i r e k a m n o i s i c e d g n i t a r e p o f e i h c e h t y b d e w e i v e r y l r a l u g e r e r a t a h t p u o r G e h t f o s t n e n o p m o c s a g f o e l a s e h t m o r f d e v i r e d s i e u n e v e R . s n o b r a c o r d y h f o g n i t e k r a m d n a n o i t a t r o p s n a r t , n o i t c u d o r p , t n e m p o l e v e d , n o i t a r o l p x e e h t y l e m a n , s s e n i s u b e n o n i y l i r a m i r p s e t a r e p o p u o r G e h T . l i o e d u r c f o n o i t a t r o p s n a r t e h t d n a s n o b r a c o r d y h d i u q i l d n a . t p y g E d n a c i l b u p e R z y g r y K , h s e d a l g n a B , a i d n I , m a n t e i V , a e n i u G w e N a u p a P , a i s e n o d n I n i s n o i t a r e p o s e d u l c n i t n e m g e s g n i t a r e p o c ﬁ i c a P a i s A e h T – 3 4 – 0 7 2 6 7 , 2 1 8 1 , 2 5 0 8 , 2 1 5 2 , 2 1 3 ) 2 3 ( 7 6 6 2 ) 3 4 ( 4 1 ) 3 ( 7 1 5 0 1 3 1 1 8 2 0 0 1 3 1 1 4 1 – – – 1 2 4 2 6 6 1 1 5 2 9 9 0 , 1 5 1 5 4 8 4 – 4 3 – 8 3 5 8 2 , 1 4 4 0 , 1 s r e m o t s u c l a n r e t x e o t s e l a S s e l a s t n e m g e s - r e t n I l a n r e t x e m o r f e u n e v e r r e h t O s r e m o t s u c e u n e v e R 2 4 2 7 6 1 5 2 1 , 1 4 6 8 9 1 3 , 1 2 8 0 , 1 3 e u n e v e r t n e m g e s l a t o T I N O T A M R O F N I T N E M G E S . 2 ) 4 6 6 ( ) 9 7 1 ( 3 8 6 , 3 ) 9 1 6 ( ) 2 0 2 ( 8 8 5 , 1 ) 2 4 ( ) 3 1 ( ) 9 7 1 ( ) 1 5 ( ) 8 1 ( ) 2 0 2 ( ) 6 1 2 ( ) 7 3 ( ) 1 ( – 3 6 ) 4 5 1 ( 4 2 6 , 2 3 3 5 , 2 ) 8 6 7 ( ) 5 1 1 ( ) 3 8 8 ( 5 8 0 3 7 ) 8 9 ( 7 1 7 ) 8 7 ( ) 5 0 2 ( ) 3 8 2 ( 0 5 6 , 1 4 3 4 3 6 ) 5 3 2 ( ) 4 5 1 ( – ) 8 6 7 ( 5 8 ) 8 9 ( ) 1 7 2 ( – ) 5 0 2 ( ) 2 2 ( 5 5 7 , 1 8 3 ) 0 3 ( – – 3 3 7 , 1 – – – 8 – ) 1 5 ( 8 0 2 – ) 9 2 ( 9 1 1 – ) 8 4 1 ( 5 1 – – 2 6 8 ) 8 6 1 ( – 7 5 8 ) 3 8 1 ( – 0 0 9 ) 0 1 4 ( – 5 2 6 ) 9 5 3 ( ) 3 4 ( ) 7 6 ( ) 9 ( 9 – 5 0 1 4 9 6 1 3 6 3 2 4 7 5 2 – ) 1 1 1 ( ) 1 7 ( ) 4 ( ) 7 ( 5 7 d e s n e p x e n o i t a u l a v e d n a n o i t a r o l p x E l a s r e v e r / ) s s o l ( t n e m r i a p m i t e N n o i t e l p e d d n a n o i t a i c e r p e D s t e s s a s a g d n a l i o f o d n a t s e r e t n i e r o f e b s g n i n r a E t n e m r i a p m i d n a n o i t a r o l p x e , n o i t e l p e d , n o i t a i c e r p e d , x a t , t s e r e t n i e r o f e b s g n i n r a E ) ” X A D T I B E “ ( s t l u s e R e s n e p x e n o i t a x a t d e t a l e r - y t l a y o R d o i r e p e h t r o f t ﬁ o r p t e N e s n e p x e n o i t a x a t l a t o T ) ” T I B E “ ( x a t s e s n e p x e e c n a n i F e m o c n i t s e r e t n I e s n e p x e x a t e m o c n I x a t e r o f e b t ﬁ o r P Santos Annual Report 2009 89 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 l a t o T d n a r e h t O d e t a c o l l a n u G N L G c ﬁ i c a P a i s A T N & A W n r e t s a E a i l a r t s u A n o i l l i m $ n o i l l i m $ n o i l l i m $ n o i l l i m $ n o i l l i m $ n o i l l i m $ n o i l l i m $ n o i l l i m $ n o i l l i m $ n o i l l i m $ n o i l l i m $ n o i l l i m $ e t o N ) I D E U N T N O C ( 8 0 0 2 9 0 0 2 8 0 0 2 9 0 0 2 8 0 0 2 9 0 0 2 8 0 0 2 9 0 0 2 8 0 0 2 9 0 0 2 8 0 0 2 9 0 0 2 I N O T A M R O F N I T N E M G E S . 2 – 6 3 7 9 6 , 1 – ) 2 3 ( ) 4 1 ( 2 6 2 8 3 1 ) 8 1 ( – – – – – – – – – – 2 0 8 , 9 1 6 3 , 1 1 0 9 8 , 2 9 6 8 , 3 4 2 3 , 5 4 9 3 , 4 3 9 7 , 3 7 8 8 , 2 – – – – 5 9 9 3 4 1 7 9 6 , 1 1 – – – ) 2 ( – – 7 2 – – 8 3 2 , 1 0 6 6 3 2 1 4 9 4 3 ) 4 1 ( – 9 ) 6 1 ( 7 0 8 9 4 1 – – – – – – – – – 7 2 2 – – 9 – ) 2 3 ( – – 8 4 – e r o f e b t ﬁ o r p n i d e d u l c n i s t n u o m A f o e s u a c e b l a u s u n u e r a t a h t x a t : e c n e d i c n i r o e z i s , e r u t a n r i e h t s t e s s a s a g d n a l i o f o e l a s n o n i a G y t i t n e d e l l o r t n o c f o e l a s n o s s o L m o r f s e i r e v o c e r e c n a r u s n I n o i t a i d e m e r f o s n o i s i v o r p n i e g n a h C s e s s o l g n i t c a r t n o c r o f n o i s i v o r P s t n e d i c n i d e t a l e r d n a s t n e d i c n i 8 2 9 , 1 5 0 0 , 2 9 2 3 , 3 2 4 4 , 3 * s t e s s a t n e m g e s l a t o T 1 1 7 7 4 7 3 8 5 8 8 4 s e i t i l i b a i l t n e m g e s l a t o T 90 Santos Annual Report 2009 – 7 7 1 – 7 7 1 – – – – – – – – 5 4 3 9 0 4 , 1 9 8 5 6 0 1 , 1 – 8 4 9 6 8 7 1 1 1 3 0 3 – 4 4 6 0 0 5 9 3 8 7 1 2 4 7 7 2 – – 2 0 8 , 1 2 4 9 , 1 8 5 3 3 2 7 9 1 3 9 8 6 9 1 – 6 2 1 1 3 – 1 4 1 4 – – 8 6 2 2 – – 4 1 3 – – – 9 2 2 2 – – 6 6 6 – – – 7 0 4 – – 5 4 1 0 7 2 4 1 3 1 3 2 6 6 6 7 0 4 7 2 3 1 4 1 5 1 7 2 g n i s u r o f d e t n u o c c a s t n e m t s e v n I d o h t e m y t i u q e e h t s t e s s a n o i t a u l a v e d n a n o i t a r o l p x E f o s n o i t i s i u q c a d n a s n o i t i d d A s t e s s a t n e r r u c - n o n d n a t n a l p , s g n i d l i u b , d n a l r e h t O s t e s s a s a g d n a l i O e t a i c o s s a n a n i t n e m t s e v n I t n e m p i u q e d n a ; 8 0 0 2 n i s t e s s a t n e r r u c - n o n f o l a s o p s i d m o r f s d e e c o r p e h t d n a r e f f o t n e m e l t i t n E 9 0 0 2 e h t m o r f d e v i e c e r h s a c f o t l u s e r a s a s t i s o p e d m r e t d n a s t n e l a v i u q e h s a c d n a h s a c f o ) n o i l l i m 3 5 5 , 1 $ : 8 0 0 2 ( n o i l l i m 0 0 3 , 2 $ . s t e s s a n o i t a u l a v e d n a n o i t a r o l p x e f o ) n o i l l i m 8 2 4 $ : 8 0 0 2 ( n o i l l i m 2 9 7 $ • • : e d u l c n i s t e s s a t n e m g e s d e t a c o l l a n u d n a r e h t o l a t o T * 2. SEGMENT INFORMATION (CONTINUED) Note Consolidated Santos Ltd 2009 $million 2008 $million 2009 $million 2008 $million Revenue from external customers by geographical location of production Australia Other countries Total revenue 2,084 167 2,251 3 During the year revenue from two separate customers amounted to $512 million (2008: $770 million) and $253 million (2008: $539 million) respectively, arising from sales from all segments of the Group. Non-current assets by geographical location Australia Other countries Non-current assets by geographical location comprises: Exploration and evaluation assets Oil and gas assets Other land, buildings, plant and equipment Investment in an associate 13 14 15 27 3. REVENUE AND OTHER INCOME Product sales: Gas, ethane and liqueﬁ ed gas Crude oil Condensate and naphtha Liqueﬁ ed petroleum gas Other revenue: Overriding royalties Pipeline tariffs and tolls Trading revenue Dividends from controlled entities Other 6,620 997 7,617 923 6,317 200 177 7,617 1,098 679 233 171 2,181 8 30 18 – 14 70 2,563 242 2,805 5,738 1,105 6,843 493 6,190 160 – 6,843 1,052 1,151 321 238 2,762 16 9 13 – 5 43 310 250 58 63 681 12 2 19 – 1 34 301 407 81 84 873 24 4 8 27 1 64 Total revenue 2,251 2,805 715 937 Other income: Insurance recoveries Net gain on sale of non-current assets Net loss on sale of controlled entities 8 260 (14) 254 36 1,699 – 1,735 – 49 – 49 – 1 – 1 Santos Annual Report 2009 91 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 4. EXPENSES Cost of sales: Cash cost of production Production costs: Production expenses Production facilities operating leases Other operating costs: Pipeline tariffs, tolls and other Royalties and excise Total cash cost of production Depreciation and depletion Third party gas purchases Decrease/(increase) in product stock Total cost of sales Other expenses: Selling Corporate Depreciation Foreign exchange losses/(gains) Change in fair value of ﬁ nancial assets designated as at fair value through proﬁ t or loss Fair value hedges, losses/(gains): On the hedging instrument On the hedged item attributable to the hedged risk Exploration and evaluation expensed Net impairment loss of oil and gas assets Impairment reversal of receivables due from controlled entities Net impairment loss of investments in controlled entities Proﬁ t before tax includes the following: Depreciation and depletion: Depletion of subsurface assets Depreciation of plant and equipment Depreciation of buildings Total depreciation and depletion Employee beneﬁ ts expense Net write-down of inventories Operating lease rentals: Minimum lease payments Consolidated Santos Ltd 2009 $million 2008 $million 2009 $million 2008 $million 460 72 532 91 61 152 684 612 117 10 465 78 543 84 101 185 728 662 62 (29) 1,423 1,423 10 77 7 94 28 (6) 134 (138) 202 37 – – 351 348 268 3 619 243 – 85 18 97 2 117 (24) 12 (236) 229 179 216 – – 493 402 257 5 664 217 1 88 95 29 124 29 25 54 178 250 35 – 463 4 86 3 93 7 – – – 32 35 (8) 5 164 147 105 1 253 223 – 41 155 30 185 21 43 64 249 273 7 (8) 521 11 87 – 98 (6) – – – 22 71 (24) 50 211 181 90 2 273 210 – 39 92 Santos Annual Report 2009 5. EARNINGS EBITDAX is calculated as follows: Proﬁ t before tax Add back: Net ﬁ nancing costs/(income) EBIT Add back: Depreciation and depletion Exploration and evaluation expensed Net impairment loss on oil and gas assets Impairment reversal on receivables due from controlled entities Net impairment loss on investments in controlled entities EBITDAX 6. NET FINANCING COSTS Interest income: Controlled entities Other entities Interest income Interest expense: Controlled entities Other entities Less borrowing costs capitalised Unwind of the effect of discounting on provisions Finance expenses Net ﬁ nancing costs/(income) Consolidated Santos Ltd 2009 $million 2008 $million 2009 $million 2008 $million 717 13 730 619 202 37 – – 2,533 91 2,624 664 179 216 – – 1,588 3,683 – (85) (85) – 69 (9) 60 38 98 13 – (63) (63) – 132 (10) 122 32 154 91 201 (64) 137 253 32 35 (8) 5 454 (117) (80) (197) 121 1 – 122 11 133 (64) 103 103 206 273 22 71 (24) 50 598 (129) (54) (183) 276 1 – 277 9 286 103 Santos Annual Report 2009 93 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 7. TAXATION EXPENSE Recognised in the income statement: Income tax expense Current tax expense Current year Adjustments for prior years Deferred tax expense Origination and reversal of temporary differences Beneﬁ t of tax losses recognised Adjustments for prior years Total income tax expense Royalty-related taxation expense Current tax expense Current year Adjustments for prior years Deferred tax expense Origination and reversal of temporary differences Adjustments for prior years Total royalty-related taxation expense Numerical reconciliation between tax expense and pre-tax net proﬁ t: Proﬁ t before tax Prima facie income tax at 30% (2008: 30%) Increase in income tax expense due to: Investment allowance Net impairment loss of investments in controlled entities Net impairment reversal of receivables from controlled entities Beneﬁ t arising from previously unrecognised tax losses or temporary differences that are used to reduce current tax expense Foreign losses not recognised Dividends from controlled entities Tax losses recognised/(derecognised) Beneﬁ ts arising from previously unrecognised tax bases in assets upon change in use Under-provided in prior years Other Income tax expense Royalty-related taxation expense Total taxation expense Deferred tax charged/(credited) directly to equity: Gain/(loss) on foreign currency loans designated as hedges of net investments in foreign operations Change in fair value of available-for-sale ﬁ nancial assets Off-market buy-back transaction costs Entitlement offer transaction costs Actuarial gain/(loss) on deﬁ ned beneﬁ t plan 94 Santos Annual Report 2009 Consolidated Santos Ltd 2009 $million 2008 $million 2009 $million 2008 $million 79 (15) 64 116 – 25 141 205 72 (1) 71 6 1 7 78 717 215 (21) – – (7) 25 – 15 (32) 10 – 205 78 283 86 – – (23) 5 68 727 (9) 718 90 (28) (12) 50 768 79 7 86 29 – 29 115 2,533 760 – – – (2) 26 – (28) – 19 (7) 768 115 883 (82) (4) (1) – (11) (98) 74 9 83 (21) – – (21) 62 4 – 4 (7) – (7) (3) 201 60 (10) 2 – – – – – – 9 1 62 (3) 59 – – – (23) 5 (18) (8) 14 6 42 (28) 31 45 51 28 2 30 2 – 2 32 103 31 – 15 (7) – – (10) (28) – 45 5 51 32 83 – (4) (1) – (11) (16) 8. CASH AND CASH EQUIVALENTS Cash at bank and in hand Short-term deposits Cash and cash equivalents in the statements of cash ﬂ ows Consolidated Santos Ltd 2009 $million 2008 $million 2009 $million 2008 $million 234 2,006 2,240 273 1,280 1,553 58 1,973 2,031 155 1,248 1,403 The carrying amounts of cash and cash equivalents represent fair value. Bank balances and short-term deposits earn interest at ﬂ oating rates based upon market rates. The Group’s usual cash management process includes investing cash in short-term deposits with an original maturity of three months or less. However, much of the proceeds from the 2009 Entitlement offer have been invested in short-term deposits with longer maturities to take advantage of higher available yields. As at 31 December 2009, $1,583 million was placed in term deposits with original maturities of 4 to 18 months. All deposits are held with a range of high creditworthy ﬁ nancial institutions and are readily convertible to cash with commensurate interest adjustments if required. Restricted cash balances Barracuda Limited, a wholly-owned subsidiary incorporated in Papua New Guinea, has cash and cash equivalents at 31 December 2009 of US$16 million (2008: US$10 million) which can only be repatriated to Australia with the permission of the Internal Revenue Commission of Papua New Guinea in accordance with the ﬁ nancing plan submitted in respect of PDL 3. Wholly-owned Australian subsidiaries, Santos (BBF) Pty Ltd and Santos (SPV) Pty Ltd, have total cash and cash equivalents at 31 December 2009 of US$18 million (2008: US$20 million) that are held to cover obligations under a reserve-based facility. 9. TRADE AND OTHER RECEIVABLES Current receivables Trade receivables Allowance for impairment loss Tax-related balances owing by controlled entities Other receivables and prepayments Non-current receivables Other receivables The ageing of trade receivables at the reporting date is as follows: Trade receivables not yet due Past due not impaired: Less than one month One to three months Three to six months Six to twelve months Greater than twelve months Considered impaired: Greater than twelve months Consolidated Santos Ltd 2009 $million 2008 $million 2009 $million 2008 $million 324 – 324 – 593 917 10 327 – 327 – 254 581 18 119 – 119 – 238 357 9 286 307 113 11 17 3 4 3 – 3 11 2 3 1 – 1 2 – 3 – – 121 – 121 533 40 694 17 121 – – – – – – Trade receivables are non-interest-bearing and settlement terms are generally within 30 days. Trade receivables that are neither past due nor impaired relate to a number of independent customers for whom there is no recent history of default. Impaired receivables An allowance for impairment loss is recognised when there is objective evidence that an individual trade receivable is impaired. No impairment loss was recognised by the Group or the Company during the year. 324 327 119 121 Santos Annual Report 2009 95 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 Consolidated Santos Ltd 2009 $million 2008 $million 2009 $million 2008 $million 147 126 273 39 60 3 – 2 65 123 – – – 10 – – 1 164 126 290 29 – – 59 – 59 304 33 – – 6 – – 2 134 345 85 54 139 24 60 – – – 60 – – 147 1,848 – 3,575 178 – 5,748 82 54 136 18 – – – – – – – 108 1,193 – 3,422 – 1 4,724 10. INVENTORIES Petroleum products Drilling and maintenance stocks Total inventories at lower of cost and net realisable value Inventories included above that are stated at net realisable value 11. OTHER FINANCIAL ASSETS Current other ﬁ nancial assets Term deposits Interest rate swap contracts Cross-currency swap contracts Other Non-current other ﬁ nancial assets Interest rate swap contracts Cross-currency swap contracts Receivables due from controlled entities: Non-interest-bearing Interest-bearing Receivables due from other related entities Investments in controlled entities Investment in an associated entity Other Receivables due from controlled entities are shown net of impairment losses of nil (2008: $8 million). Receivables due from controlled entities are for loans made in the ordinary course of business for an indeﬁ nite period. Interest-bearing amounts owing by controlled entities are at normal market terms and conditions. Receivables due from other related entities are for loans made in the ordinary course of business for a term of ﬁ ve years, and interest is calculated on normal market terms and conditions. 12. AVAILABLE-FOR-SALE FINANCIAL ASSETS Equity securities available for sale 2 2 2 2 Investments in equity securities available for sale consist of investments in ordinary shares listed on the Australian Securities Exchange, and have no ﬁ xed maturity date or coupon rate. 96 Santos Annual Report 2009 13. EXPLORATION AND EVALUATION ASSETS 2009 Balance at 31 December 2009 Reconciliation of movements Balance at 1 January 2009 Acquisition of controlled entities Acquisition of exploration and evaluation assets Additions Exploration and evaluation expensed Disposals and recoupment of exploration and evaluation expenditure Transfer to oil and gas assets Exchange differences Balance at 31 December 2009 Comprising: Acquisition-related costs Successful exploration wells Exploration and evaluation assets pending determination of success* 2008 Balance at 31 December 2008 Reconciliation of movements Balance at 1 January 2008 Acquisition of controlled entities Acquisition of exploration and evaluation assets Additions Exploration and evaluation expensed Net impairment losses Transfer to oil and gas assets Exchange differences Balance at 31 December 2008 Comprising: Acquisition-related costs Successful exploration wells Exploration and evaluation assets pending determination of success* Consolidated Santos Ltd Subsurface assets $million Plant and equipment $million Total $million Subsurface assets $million Plant and equipment $million Total $million 783 140 923 451 – 351 140 (63) (24) (38) (34) 783 527 199 57 783 451 332 15 28 260 (82) (1) (160) 59 451 218 106 127 451 42 8 – 90 – – – – 140 8 – 132 140 42 – – – 42 – – – – 42 – – 42 42 493 8 351 230 (63) (24) (38) (34) 923 535 199 189 923 493 332 15 28 302 (82) (1) (160) 59 493 218 106 169 493 30 43 – – 16 (13) (23) 7 – 30 7 23 – 30 43 16 – – 81 (22) – (32) – 43 12 23 8 43 – – – – – – – – – – – – – – – – – – – – – – – – – – – – 30 43 – – 16 (13) (23) 7 – 30 7 23 – 30 43 16 – – 81 (22) – (32) – 43 12 23 8 43 * Amounts related to plant and equipment includes costs capitalised for the evaluation of the GLNG facilities. Santos Annual Report 2009 97 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 14. OIL AND GAS ASSETS 2009 Cost at 31 December 2009 Less accumulated depreciation, depletion and impairment Consolidated Subsurface assets $million Plant and equipment $million Total $million Subsurface assets $million Santos Ltd Plant and equipment $million Total $million 8,090 6,423 14,513 3,007 2,474 5,481 (4,886) (3,310) (8,196) (2,199) (1,560) (3,759) Balance at 31 December 2009 3,204 3,113 6,317 808 914 1,722 Reconciliation of movements Assets in development Balance at 1 January 2009 Additions Recoupment of exploration and evaluation expenditure Transfer from exploration and evaluation assets Exchange differences Balance at 31 December 2009 Producing assets Balance at 1 January 2009 Acquisition of oil and gas assets Additions Transfer from exploration and evaluation assets Disposals Depreciation and depletion expense Net impairment losses Exchange differences Balance at 31 December 2009 Total oil and gas assets Comprising: Exploration and evaluation expenditure pending commercialisation Other capitalised expenditure 464 217 (48) 1 (96) 538 2,727 7 360 37 (43) (348) (24) (50) 2,666 3,204 123 118 – – (11) 230 2,876 2 402 – (5) (242) (13) (137) 2,883 3,113 587 335 (48) 1 (107) 768 5,603 9 762 37 (48) (590) (37) (187) 5,549 6,317 31 3,173 3,204 – 3,113 3,113 31 6,286 6,317 – – – – – – 862 – 130 (7) – (147) (30) – 808 808 – 808 808 – – – – – – 916 – 86 – (2) (81) (5) – 914 914 – 914 914 – – – – – – 1,778 – 216 (7) (2) (228) (35) – 1,722 1,722 – 1,722 1,722 98 Santos Annual Report 2009 14. OIL AND GAS ASSETS (CONTINUED) Consolidated Subsurface assets $million Plant and equipment $million Total $million Subsurface assets $million Santos Ltd Plant and equipment $million Total $million 2008 Cost at 31 December 2008 Less accumulated depreciation, depletion and impairment Balance at 31 December 2008 Reconciliation of movements Assets in development Balance at 1 January 2008 Additions Transfer from exploration and evaluation assets Exchange differences Balance at 31 December 2008 Producing assets Balance at 1 January 2008 Acquisition of oil and gas assets Additions Transfer from exploration and evaluation assets Disposals Depreciation and depletion expense Net impairment losses Exchange differences Balance at 31 December 2008 Total oil and gas assets Comprising: Exploration and evaluation expenditure pending commercialisation Other capitalised expenditure 7,838 6,121 13,959 2,885 2,392 5,277 (4,647) (3,122) (7,769) (2,023) (1,476) (3,499) 3,191 2,999 6,190 862 916 1,778 220 93 113 38 464 2,907 – 593 47 (351) (402) (138) 71 2,727 3,191 223 2,968 3,191 1 122 – – 123 2,457 – 601 – (1) (239) (77) 135 2,876 2,999 1 2,998 2,999 221 215 113 38 587 5,364 – 1,194 47 (352) (641) (215) 206 5,603 6,190 224 5,966 6,190 – – – – – 750 1 301 32 – (181) (41) – 862 862 – 862 862 – – – – – 900 – 117 – – (71) (30) – 916 916 – 916 916 – – – – – 1,650 1 418 32 – (252) (71) – 1,778 1,778 – 1,778 1,778 Santos Annual Report 2009 99 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 15. OTHER LAND, BUILDINGS, PLANT AND EQUIPMENT Land and buildings $million Plant and equipment $million Total $million Land and buildings $million Consolidated Santos Ltd Plant and equipment $million Total $million 2009 Cost at 31 December 2009 Less accumulated depreciation Balance at 31 December 2009 Reconciliation of movements Balance at 1 January 2009 Additions Depreciation Balance at 31 December 2009 2008 Cost at 31 December 2008 Less accumulated depreciation Balance at 31 December 2008 Reconciliation of movements Balance at 1 January 2008 Additions Depreciation Balance at 31 December 2008 37 (4) 33 32 2 (1) 33 35 (3) 32 25 8 (1) 32 344 (177) 167 128 67 (28) 167 276 (148) 128 110 40 (22) 128 381 (181) 200 160 69 (29) 200 311 (151) 160 135 48 (23) 160 7 (1) 6 5 1 – 6 5 – 5 5 – – 5 296 (168) 128 105 48 (25) 128 248 (143) 105 103 23 (21) 105 303 (169) 134 110 49 (25) 134 253 (143) 110 108 23 (21) 110 100 Santos Annual Report 2009 16. IMPAIRMENT OF CASH-GENERATING UNITS At 31 December 2009 the Group 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 amounts of some cash-generating units were formally reassessed, resulting in an impairment loss of $37 million (2008: $216 million). Estimates of recoverable amounts are based on the asset’s value in use, determined by discounting each asset’s estimated future cash ﬂ ows at asset-speciﬁ c discount rates. The pre-tax discount rates applied were equivalent to post-tax discount rates between 9.1% and 15.8% (2008: 8.8% and 15.8%), depending on the nature of the risks speciﬁ c to each asset. Where an asset does not generate cash ﬂ ows that are largely independent of other assets or groups of assets, the recoverable amount is determined for the cash-generating unit (“CGU”) to which the asset belongs. Consolidated Santos Ltd CGU Segment Description Subsurface Plant and assets equipment $million $million Subsurface Plant and assets equipment $million $million Total $million Consolidated 2009 Mutineer-Exeter Thevenard Palm Valley Moonie to Brisbane pipeline Sampang Sangu Total impairment loss 2008 Sampang Sangu Other Cooper Basin Patricia Baleen Mutineer-Exeter Total impairment loss WA & NT WA & NT WA & NT Eastern Australia Asia Paciﬁ c Asia Paciﬁ c Oil ﬁ eld Oil ﬁ eld Gas ﬁ eld Pipeline Oil and gas ﬁ eld Gas ﬁ eld Asia Paciﬁ c Asia Paciﬁ c Asia Paciﬁ c Eastern Australia Eastern Australia WA & NT Oil and gas ﬁ eld Gas ﬁ eld Gas ﬁ eld Oil and gas ﬁ eld Gas ﬁ eld Oil ﬁ eld 27 2 4 – (6) (3) 24 97 20 1 – 21 – 139 4 6 – 9 (6) – 13 31 – – 45 1 – 77 31 8 4 9 (12) (3) 37 128 20 1 45 22 – 216 31 – (1) – – – 30 – – – – 10 31 41 5 – – – – – 5 – – – 24 1 5 30 Total $million 36 – (1) – – – 35 – – – 24 11 36 71 Santos Annual Report 2009 101 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 17. DEFERRED TAX ASSETS AND LIABILITIES 2009 $million 2008 $million 2009 $million 2008 $million 2009 $million 2008 $million Assets Liabilities Net Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Consolidated Exploration and evaluation assets Oil and gas assets Other land, buildings, plant and equipment Available-for-sale ﬁ nancial assets Trade receivables Other receivables Inventories Prepayments Derivative ﬁ nancial instruments Other assets Equity-raising costs Interest-bearing loans and borrowings Other liabilities Provisions Royalty-related taxes Other items Tax value of carry-forward losses recognised Tax assets/(liabilities) Set-off of tax Net tax assets/(liabilities) Santos Ltd Exploration and evaluation assets Oil and gas assets Other land, buildings, plant and equipment Available-for-sale ﬁ nancial assets Trade receivables Other receivables Inventories Other assets Equity-raising costs Provisions Royalty-related taxes Other items Tax assets/(liabilities) Set-off of tax Net tax liabilities Unrecognised deferred tax assets – – 36 1 – – – – – – 19 – – 57 – – 9 122 (43) 79 – – – 1 – – – 1 19 41 – – 62 (62) – – – 46 1 – – – – – – 1 86 – 66 – – 6 206 (95) 111 – – – 1 – – – 1 1 46 – – 49 (49) – (192) (241) – – (6) (4) (30) – (35) (16) – (71) (1) – (269) (49) – (914) 43 (871) (2) (48) (21) – (6) (4) (17) – – – (61) (6) (165) 62 (103) (73) (289) – – (4) (4) (27) (2) (117) (10) – – (3) – (258) (52) – (839) 95 (744) (10) (77) (9) – (3) (5) (15) – – – (61) (3) (183) 49 (134) (192) (241) 36 1 (6) (4) (30) – (35) (16) 19 (71) (1) 57 (269) (49) 9 (792) – (792) (2) (48) (21) 1 (6) (4) (17) 1 19 41 (61) (6) (103) – (103) (73) (289) 46 1 (4) (4) (27) (2) (117) (10) 1 86 (3) 66 (258) (52) 6 (633) – (633) (10) (77) (9) 1 (3) (5) (15) 1 1 46 (61) (3) (134) – (134) Consolidated Santos Ltd 2009 $million 2008 $million 2009 $million 2008 $million 578 110 35 723 915 74 46 1,035 – – – – – – – – Deferred tax assets have not been recognised in respect of the following items: Temporary differences in relation to investments in subsidiaries Deductible temporary differences Tax losses Deferred tax assets have not been recognised in respect of these items because it is not probable that the temporary differences will reverse in the future and that there will be sufﬁ cient future taxable proﬁ ts against which the beneﬁ ts can be utilised. Unrecognised deductible temporary differences and tax losses of $35 million (2008: $46 million) will expire between 2021 and 2028. The remaining deductible temporary differences and tax losses do not expire under current tax legislation. 102 Santos Annual Report 2009 18. TRADE AND OTHER PAYABLES Trade payables Non-trade payables and accrued expenses Tax-related balances owing to controlled entities Amounts owing to controlled entities 19. INTEREST-BEARING LOANS AND BORROWINGS This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings. For more information about the Group’s exposure to interest rate and foreign currency risk, see note 38. Current liabilities Obligations under ﬁ nance leases Bank loans – secured Bank loans – unsecured Long-term notes Non-current liabilities Amounts owing to controlled entities Obligations under ﬁ nance leases Bank loans – secured Bank loans – unsecured Medium-term notes Long-term notes Consolidated Santos Ltd 2009 $million 2008 $million 2009 $million 2008 $million 430 279 – – 709 1 11 22 130 164 – 2 8 128 448 1,063 1,649 391 214 – – 605 1 24 28 46 99 – 3 20 194 457 1,682 2,356 129 70 62 517 778 1 – – – 1 3,598 2 – – – – 3,600 132 65 – 526 723 1 – – – 1 4,082 3 – – – – 4,085 The amounts owing to controlled entities are for loans made in the ordinary course of business on normal market terms and conditions and are not repayable for a minimum of nine years. The Group has entered into interest rate swap contracts to manage the exposure to interest rates. This has resulted in a weighted average interest rate on interest-bearing liabilities of 3.58% as at 31 December 2009 (2008: 5.74%). All borrowings are unsecured, with the exception of the secured bank loan, and arranged through a controlled entity, Santos Finance Ltd, and guaranteed by Santos Ltd. Santos Annual Report 2009 103 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 19. INTEREST-BEARING LOANS AND BORROWINGS (CONTINUED) Details of major credit facilities (A) BANK LOANS – SECURED A reserve-based lending facility for US$65 million was entered into in the 2006 reporting period which bears a ﬂ oating rate of interest. The facility is secured by a ﬁ rst charge over the Group’s interests in the Maleo assets in Indonesia with a carrying amount at 31 December 2009 of A$86 million. The average rate for the year was 6.33%, and A$19 million was outstanding at the reporting date (2008: A$44 million). The facility is available until 2012, and the current amount drawn down is expected to be fully repaid by 2011. Committed loan facilities for the PNG LNG project were entered into by the joint venture participants on 15 December 2009 and are currently subject to the satisfaction of conditions precedent scheduled for the ﬁ rst quarter of 2010. The facilities include security over shares in Santos’ project participants and the assets and entitlements of those participants in the project including their shares in the jointly owned borrowing entity Papua New Guinea Liqueﬁ ed Natural Gas Global Company LDC. Under the ﬁ nancing arrangements, Santos’ entities are entitled to on-loans from the jointly-owned borrowing entity to fund 70% of project costs representing up to 13.5% of the total loan commitments of US$14 billion which equates to A$2.1 billion. The facilities were provided by 17 commercial banks and six export credit agencies, bear ﬁ xed and ﬂ oating rates of interest and have estimated ﬁ nal maturity dates (subject to the date of completion of the project) of December 2024 and December 2026 respectively. (B) BANK LOANS – UNSECURED The Group has access to the following committed revolving credit bank facilities with a number of ﬁ nancial institutions: Year of maturity Currency 2011 2012 2013 Multi-currency Multi-currency Multi-currency 2009 A$million 2008 A$million 225 375 100 700 225 375 100 700 Revolving credit facilities bear interest at the relevant interbank reference rate plus a margin. The amount drawn at 31 December 2009 is nil (2008: nil). Term bank loans Year of maturity Currency 2009 2010 2011 2012 2013 2014 2015 2016 2017 USD USD USD USD USD USD USD USD USD 2009 A$million 2008 A$million – 22 22 19 16 17 17 18 19 28 28 29 25 21 22 22 23 24 150 222 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 2009 is US$134 million (A$150 million) (2008: US$153 million (A$222 million)) at a weighted average annual effective interest rate of 2.30% (2008: 5.03%). 104 Santos Annual Report 2009 19. INTEREST-BEARING LOANS AND BORROWINGS (CONTINUED) Details of major credit facilities (continued) (C) COMMERCIAL PAPER The Group has an $800 million (2008: $800 million) Australian commercial paper programme supported by the revolving credit facilities referred to in (B) above. At 31 December 2009, no commercial paper is on issue (2008: nil). (D) MEDIUM-TERM NOTES The Group has a $1,000 million (2008: $1,000 million) Australian medium-term note programme under which the following were issued in 2005: Year of issue Year of maturity 2005 2005 2011 2015 * Floating rate of interest. (E) LONG-TERM NOTES Effective interest rate % 4.65* 4.21 2009 $million 2008 $million 349 99 448 349 108 457 The Group has issued long-term notes in the US Private Placement market with varying maturities. The Group has the following long-term notes on issue: Year of issue Year of maturity 2000 2002 2007 2010 to 2015 2010 to 2022 2017 to 2027 Effective interest rate % 2009 US$million 2008 US$million 2009 A$million 2008 A$million 3.75 2.83 0.85 203 286 578 211 337 646 227 320 646 306 487 935 1,067 1,194 1,193 1,728 Santos Annual Report 2009 105 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 20. PROVISIONS Current Liability for employee beneﬁ ts Restoration Remediation Non-executive Directors’ retirement beneﬁ ts Other Non-current Liability for employee beneﬁ ts Liability for deﬁ ned beneﬁ t obligations (refer note 30) Restoration Remediation Consolidated Santos Ltd 2009 $million 2008 $million 2009 $million 2008 $million 72 12 7 1 2 94 5 34 728 1 768 62 32 21 2 – 117 4 62 742 – 808 66 1 – 1 2 70 5 34 218 1 258 61 3 – 2 – 66 4 62 245 – 311 Movements in each class of provision during the ﬁ nancial year, other than provisions relating to employee beneﬁ ts, are set out below: Consolidated Balance at 1 January 2009 Provisions made during the year Provisions used during the year Unwind of discount Change in discount rate Exchange differences Balance at 31 December 2009 Santos Ltd Balance at 1 January 2009 Provisions made during the year Provisions used during the year Unwind of discount Change in discount rate Exchange differences Balance at 31 December 2009 Total Non-executive Directors’ retirement beneﬁ ts $million Total remediation $million Total restoration $million Other $million Total $million 774 22 (15) 38 (53) (26) 740 248 (12) (2) 11 (23) (3) 219 21 (5) (8) – – – 8 – 1 – – – – 1 2 – (1) – – – 1 2 – (1) – – – 1 – 2 – – – – 2 – 2 – – – – 2 797 19 (24) 38 (53) (26) 751 250 (9) (3) 11 (23) (3) 223 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 outﬂ ow of economic beneﬁ ts will be required to settle the obligation. The estimated future obligations include the costs of removing facilities, abandoning wells and restoring the affected areas. Remediation Provisions for remediation costs are recognised where there is a present obligation as a result of an unexpected event that occurs outside of the planned operations of an asset. Non-executive Directors’ retirement beneﬁ ts Agreements exist with Non-executive Directors appointed prior to 1 January 2004 providing for the payment of a sum on retirement from ofﬁ ce as a Director in accordance with shareholder approval at the 1989 Annual General Meeting. Such beneﬁ ts ceased to accrue with effect from 30 June 2004. These beneﬁ ts have been fully provided for by the Company. In June 2007, the Board resolved to adopt a policy of indexation of these frozen beneﬁ ts to prevent further erosion of the real value. The entitlements are annually indexed to the ﬁ ve-year Government bond rate. 106 Santos Annual Report 2009 21. OTHER LIABILITIES Current Interest rate swap contracts Cross-currency swap contracts Embedded derivatives Other Non-current Other 22. CAPITAL AND RESERVES Issued capital 831,834,626 (2008: 584,812,875) ordinary shares, fully paid 88,000 (2008: 88,000) ordinary shares, paid to one cent Nil (2008: 6,000,000) redeemable convertible preference shares Consolidated Santos Ltd 2009 $million 2008 $million 2009 $million 2008 $million 1 7 – 2 10 9 – – 6 2 8 9 – – – – – – – – – – – – 4,987 – – 4,987 1,947 – 584 2,531 4,987 – – 4,987 1,947 – 584 2,531 In accordance with changes to the Corporations Law effective 1 July 1998, the shares issued do not have a par value and there is no limit on the authorised share capital of the Company. Movement in fully paid ordinary shares Note Number of shares 2009 2008 2009 $million 2008 $million 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 Non-executive Director Share Plan Entitlement offer Dividend Reinvestment Plan (“DRP”) DRP underwriting agreement Off-market buy-back Transfer from redeemable convertible preference shares Balance at the end of the year Redeemable convertible preference shares Balance at the beginning of the year Redeemable convertible preference shares bought back at face value and cancelled Transfer to fully paid ordinary shares Balance at the end of the year 31(a) 31(a) 31(b) 31(b) 31(c) 31(d) 22(a) 22(b) 22(b) 22(c) 22(d) 22(d) 22(d) 22(d) 584,812,875 101,376 18,400 427,050 303,085 – 20,390 237,287,762 2,005,880 6,857,808 – – 585,964,352 111,153 300,100 303,583 141,330 – 33,356 – 2,323,249 14,123,057 (18,487,305) – 831,834,626 584,812,875 1,947 2 – 4 – – – 2,914 30 106 – (16) 4,987 6,000,000 6,000,000 584 (6,000,000) – – – – 6,000,000 (600) 16 – 1,747 1 3 3 – – 1 – 35 213 (56) – 1,947 584 – – 584 Fully paid ordinary shares carry one vote per share, which entitles 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. The market price of the Company’s ordinary shares on 31 December 2009 was $14.09 (2008: $14.87). Santos Annual Report 2009 107 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 22. CAPITAL AND RESERVES (CONTINUED) (A) ENTITLEMENT OFFER On 11 May 2009 the Company launched a two for ﬁ ve accelerated pro-rata non-renounceable entitlement offer (“Entitlement offer”) at an offer price of $12.50 per share. As a result, 140,040,844 ordinary shares (fully paid) were allotted to institutional investors of the Company on 22 May 2009 and 97,246,918 ordinary shares (fully paid) were allotted to retail investors of the Company on 16 June 2009. The entitlement offer to the retail investors was fully underwritten. $2,966 million was credited and transaction costs, net of tax of $52 million was debited to the Company’s capital account. (B) 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. The Dividend Reinvestment Plan is currently not underwritten. (C) OFF-MARKET BUY-BACK On 6 October 2008, the Company bought back 18,487,305 fully paid ordinary shares, representing 3.07% of fully paid ordinary shares on issue at that date, at a price of $16.23 per share. $56 million was debited against the Company’s capital account (including $1 million transaction costs, net of tax) and $245 million was debited against retained earnings. (D) REDEEMABLE CONVERTIBLE PREFERENCE SHARES On 30 September 2009, the Company redeemed 6,000,000 redeemable convertible preference shares at their face value of $100, which resulted in an amount of $600 million being debited to the Company’s capital account. The accumulated transaction costs, net of tax, of $16 million were transferred to ordinary share capital. Nature and purpose of reserves Translation reserve The foreign currency translation reserve comprises all foreign exchange differences arising from the translation of the ﬁ nancial 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. Fair value reserve The fair value reserve includes the cumulative net change in the fair value of available-for-sale ﬁ nancial assets until the ﬁ nancial asset is derecognised. Capital risk management The Group’s objective when managing capital is to safeguard its ability to continue as a going concern in order to meet its objectives with various stakeholders, and to maintain an efﬁ cient capital structure. In order to maintain a prudent long-term capital structure the Group may adjust its distribution policy, return capital to shareholders, issue new shares or undertake corporate initiatives. The Group manages its capital with a primary objective to maintain investment grade credit rating. One of the measures which is used to monitor capital is the gearing ratio. The Group undertakes this on a forecast and actual results basis. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total interest-bearing loans and borrowings less cash and cash equivalents and value of ﬁ nancial derivatives used to hedge net debt. Total capital is calculated as total equity as shown in the statement of ﬁ nancial position plus net debt. Equity in 2008 included redeemable convertible preference shares which were redeemed in September 2009 (refer note 22(D) above). During 2009 the Group’s target was to maintain a gearing ratio below 45% and a BBB+ Standard & Poor’s credit rating. The gearing ratios at 31 December 2009 and 31 December 2008 were as follows: 108 Santos Annual Report 2009 22. CAPITAL AND RESERVES (CONTINUED) Total interest-bearing loans and borrowings (note 19) Less: Cash and cash equivalents (note 8) Term deposits (note 11) Net fair value of ﬁ nancial derivatives used to hedge debt (notes 11 and 21): Cross-currency swap contracts Interest rate swap contracts Net (assets)/debt Total equity Total capital Gearing ratio Consolidated 2009 $million 2008 $million 1,813 2,455 (2,240) (60) 7 (125) (605) 6,967 6,362 (1,553) – (92) (304) 506 4,478 4,984 (9.5%) 10.2% The decrease in the Group gearing ratio resulted primarily from the proceeds received from the Entitlement offer issued during the year. Dividends Dividends recognised during the year by the Company are: Dividend per share $ Total $million Franked/ unfranked Payment date 2009 Interim 2009 redeemable preference Final 2008 redeemable preference Interim 2009 ordinary Final 2008 ordinary 2008 Interim 2008 redeemable preference Final 2007 redeemable preference Interim 2008 ordinary Final 2007 ordinary 1.6191 2.9989 0.22 0.20 3.3365 2.9983 0.22 0.20 Franked dividends paid during the year were franked at the tax rate of 30%. After the reporting date the following dividends were proposed by the Directors. The dividends have not been provided for and there are no income tax consequences. Final 2009 ordinary 0.20 Franked 30 Sep 2009 Franked 31 Mar 2009 Franked 30 Sep 2009 Franked 31 Mar 2009 Franked Franked Franked Franked 30 Sep 2008 31 Mar 2008 30 Sep 2008 31 Mar 2008 Franked 31 Mar 2010 10 18 182 117 327 20 18 131 117 286 166 166 The ﬁ nancial effect of these dividends has not been brought to account in the ﬁ nancial statements for the year ended 31 December 2009 and will be recognised in subsequent ﬁ nancial 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 2009 Santos Ltd 2009 $million 2008 $million 965 1,062 The ability to utilise the franking credits is dependent upon there being sufﬁ cient available proﬁ ts to declare dividends. The impact on the dividend franking account of dividends proposed after the reporting date but not recognised as a liability is to reduce it by $71 million (2008: $58 million). Santos Annual Report 2009 109 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 23. EARNINGS PER SHARE Basic earnings per share amounts are calculated by dividing net proﬁ t 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 proﬁ t 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. Earnings used in the calculation of basic and diluted earnings per share reconciles to the net proﬁ t after tax in the income statement as follows: Net proﬁ t 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 2009 $million 2008 $million 434 (28) 406 – 406 1,650 (38) 1,612 38 1,650 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: 2009 Number of shares 2008 Basic earnings per share 779,217,946 639,831,571 Partly paid shares Executive share options Share acquisition rights Redeemable convertible preference shares 69,842 890,143 2,445,269 – 71,222 1,446,209 1,694,044 36,650,691 Diluted earnings per share 782,623,200 679,693,737 Partly paid shares outstanding issued under the Santos Executive Share Plan, options outstanding issued under the Santos Executive Share Option Plan and Share Acquisition Rights (“SARs”) issued to eligible executives and redeemable convertible preference shares have been classiﬁ ed as potential ordinary shares and included in the calculation of diluted earnings per share in 2009. 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. The weighted average number of shares used for the purposes of calculating diluted earnings per share in 2008 was retrospectively adjusted for the effect of the Entitlement offer (refer note 22(A)). During the year, 427,050 (2008: 303,583) options and 303,085 (2008: 141,330) SARs 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 197,097 (2008: 181,447). 24,690 (2008: 460,385) options and 61,961 (2008: 236,426) 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 45,570 (2008: 177,527). The redeemable convertible preference shares on issue during 2009 were not included in the 2009 diluted earnings per share calculation as they were anti-dilutive for that period. 110 Santos Annual Report 2009 24. CONSOLIDATED ENTITIES Name Country of incorporation Name Country of incorporation Santos Ltd (Parent Entity) Controlled entities1: Alliance Petroleum Australia Pty Ltd2 Basin Oil Pty Ltd Boston L.H.F. Pty Ltd Bridgeﬁ eld Pty Ltd Bridge Oil Developments Pty Limited2 Bronco Energy Pty Limited Canso Resources Pty Ltd Coveyork Pty Ltd Doce Pty Ltd Fairview Pipeline Pty Ltd Farmout Drillers Pty Ltd Gidgealpa Oil Pty Ltd Kipper GS Pty Ltd Controlled entity of Kipper GS Pty Ltd Santos Carbon Pty Ltd Moonie Pipeline Company Pty Ltd Reef Oil Pty Ltd2 Santos Asia Paciﬁ c Pty Ltd Controlled entities of Santos Asia Paciﬁ c 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 Santos Darwin LNG Pty Ltd2 Santos Direct Pty Ltd Santos Facilities Pty Ltd Santos Finance Ltd Santos GLNG Pty Ltd Santos (Globe) Pty Ltd Santos International Holdings Pty Ltd Controlled entities of Santos International Holdings Pty Ltd Barracuda Limited CJSC South Petroleum Company1 Lavana Limited Santos Petroleum Ventures B.V. Sanro Insurance Pte Ltd Santos Americas and Europe Corporation Controlled entities of Santos Americas and Europe Corporation Santos TPY Corp Controlled entities of Santos TPY Corp Santos Queensland Corp Santos TOG Corp Controlled entities of Santos TOG Corp Santos TOGA Pty Ltd Controlled entity of Santos TOGA Pty Ltd 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 AUST AUST PNG KGZ PNG NL SG USA USA USA USA AUST AUST USA UK AUST AUST Santos TPC Pty Ltd Santos TPY CSG Corp Santos Bangladesh Limited Santos (Bawean) Pty Ltd Santos (BBF) Pty Ltd Controlled entities of Santos (BBF) Pty Ltd Santos (SPV) Pty Ltd Controlled entities of Santos (SPV) Pty Ltd AUST Santos (Madura Offshore) Pty Ltd SB Jethro Pty Ltd (previously Santos Brantas Pty Ltd) AUST AUST AUST PNG AUST Santos (Donggala) Pty Ltd Santos Egypt Pty Ltd Santos Hides Ltd Santos International Operations Pty Ltd AUST AUST PNG AUST AUST AUST AUST UK KGZ AUST AUST AUST AUST AUST AUST AUST AUST AUST MY AUST AUST AUST AUST AUST AUST AUST AUST AUST AUST AUST AUST AUST AUST AUST AUST AUST AUST AUST Santos International Ventures Pty Ltd Santos Niugini Exploration Limited Santos (Nth Bali 1) Pty Ltd Santos (Papalang) Pty Ltd Santos (Popodi) Pty Ltd Santos Vietnam Pty Ltd Zhibek Resources Limited1 Controlled entity of Zhibek Resources Limited CJSC KNG Hydrocarbons1 Santos (JBJ1) Pty Ltd Controlled entities of Santos (JBJ1) Pty Ltd Santos (JBJ2) Pty Ltd Controlled entity of Santos (JBJ2) Pty Ltd Shaw River Power Station Pty Ltd Santos (JPDA 06-104) Pty Ltd Santos (JPDA 91-12) Pty Ltd Santos (NARNL Cooper) Pty Ltd2 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 Gastar Power Pty Ltd3 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 Moonie Oil Pty Ltd Petromin Pty Ltd Santos (299) Pty Ltd (in liquidation) Santos Exploration Pty Ltd Santos Gnuco Pty Ltd Transoil Pty Ltd Santos Resources Pty Ltd Santos (TGR) Pty Ltd Santos Timor Sea Pipeline Pty Ltd Sesap Pty Ltd Vamgas Pty Ltd2 Notes 1 Beneﬁ cial interests in all controlled entities are 100%, except: • CJSC South Petroleum Company (70%); • CJSC KNG Hydrocarbons (54%); and, • Zhibek Resources Limited (75%). 2 Company is party to a Deed of Cross Guarantee. Refer note 37. 3 Company acquired during the year. Refer note 25. Country of incorporation AUST – Australia KGZ MY NL PNG SG UK USA – Kyrgyz Republic – Malaysia – Netherlands – Papua New Guinea – Singapore – United Kingdom – United States of America In the ﬁ nancial statements of the Company, investments in controlled entities are recognised at cost, less any impairment losses. Santos Annual Report 2009 111 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 25. ACQUISITIONS OF SUBSIDIARIES During the ﬁ nancial year the following controlled entities were acquired and their operating results have been included in the income statement from the date of acquisition: Name of entity Date of acquisition Beneﬁ cial interest acquired % Purchase consideration $million Contribution to consolidated proﬁ t since acquisition $million Gastar Power Pty Ltd 2 July 2009 100 8 – Gastar Power Pty Ltd owns a 35% share of the Wilga Park Power Station. The operator and owner of the remaining 65% is Narrabri Power Pty Ltd, which is a wholly-owned subsidiary of Eastern Star Gas Limited. If the acquisition had occurred on 1 January 2009, revenue and net proﬁ t would not have been affected. The acquisitions had the following effect on the Group’s assets and liabilities: Plant and equipment Net identiﬁ able assets and liabilities The cash outﬂ ow on acquisition of controlled entities is as follows: Cash paid Net cash acquired with subsidiaries Total cash paid for current year acquisition Deferred consideration paid* Net consolidated cash outﬂ ow * Deferred consideration paid in 2009 comprises: Carrying amounts $million Fair value adjustments $million Recognised values $million 7 7 1 1 8 8 8 – 8 9 17 • $8 million to fund phase 2 of the exploration programme relating to the 2006 acquisition of CJSC South Petroleum Company; and • $1 million to fund phase 1 of the exploration programme relating to the 2008 acquisition of Zhibek Resources Limited. In 2008, the Group acquired beneﬁ cial interest in the following controlled entities: Name of entity Date of acquisition Beneﬁ cial interest Purchase acquired consideration $million % Zhibek Resources Limited CJSC KNG Hydrocarbons 17 November 2008 17 November 2008 75 54 – – 112 Santos Annual Report 2009 26. DISPOSAL OF SUBSIDIARIES On 10 May 2009, the Group disposed of the wholly-owned subsidiaries Santos UK (Kakap) Limited and Novus Nominees Pty Ltd for US$18 million (A$24 million), resulting in a loss on sale of $14 million. The amount of foreign currency translation reserve recycled into proﬁ t and loss is nil. The major classes of assets and liabilities of Santos UK (Kakap) Limited and Novus Nominees Pty Ltd at the date of disposal were as follows: Trade and other receivables Inventories Exploration and evaluation assets Interest-bearing loan receivable Trade and other payables Tax liabilities Provisions Deferred tax liabilities Net assets attributable to the disposed entities The cash inﬂ ow on disposal of controlled entities is as follows: Cash received Net cash and cash equivalents disposed with subsidiaries Net consolidated cash inﬂ ow 27. INVESTMENT IN AN ASSOCIATE Company Country Principal activity 10 May 2009 $million 2 1 38 14 (3) (2) (1) (11) 38 24 – 24 Ownership interest 2009 2008 % % Consolidated 2009 $million 2008 $million Eastern Star Gas Limited Australia Oil and gas 19.42 – 177 Movement in the carrying amount of the Group’s investment in an associate Balance at beginning of the year Purchase of investment in associate Share of losses, after tax Balance at end of the year Fair value of the Group’s investment in listed associate Market value of the Group’s investment in Eastern Star Gas Limited based on the closing share price on 31 December 2009 The Company believes that the Group’s investment in Eastern Star Gas Limited will be recovered through ongoing exploration and evaluation of the associated company’s underlying assets in which the Group also holds a direct interest. Summarised ﬁ nancial information* The following table illustrates the summarised ﬁ nancial information relating to the Group’s associate: The Group’s share of the associate’s statement of ﬁ nancial position Total assets Total liabilities Net assets The Group’s share of the associate’s income statement Revenue Net loss after tax – 178 (1) 177 145 181 (4) 177 – (1) – – – – – – – – – – – * The Group’s share of the associate’s summarised ﬁ nancial information is estimated based on the Eastern Star Gas Limited’s 30 June 2009 annual ﬁ nancial report and the latest ASX releases. Santos Annual Report 2009 113 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 28. INTERESTS IN JOINT VENTURES (A) The following are the signiﬁ cant joint ventures in which the Group 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 (Maleo) Mereenie John Brookes Mutineer-Exeter Sampang PSC (Oyong, Wortel) Sangu Stag SA Fixed Factor Area SWQ Unit Bayu-Undan Bayu-Undan Casino Fairview Madura PSC Mereenie John Brookes Mutineer-Exeter Sampang PSC Sangu PSC Stag Cooper Basin Cooper Basin Oil and gas assets – Assets in development PNG LNG Kipper Reindeer Chim Sao PNG LNG Kipper Reindeer Vietnam (Block 12) Exploration and evaluation assets Evans Shoal Gunnedah PEL1 and 12 – – – Gas production Gas production Gas production Gas (CSG) production Gas production Oil and gas production Gas production Oil production Oil and gas production Gas production Oil and gas production Oil and gas production Gas production Gas development Gas development Gas development Gas development Contingent gas resource Contingent gas (CSG) resource Contingent gas (CSG) resource 11.4 11.4 50.0 45.7 67.5 65.0 45.0 33.4 45.0 37.5 66.7 66.6 60.1 13.5 35.0 45.0 31.9 40.0 35.0 25.0 (B) The Group recognises its interests in the following jointly controlled entities using the proportionate consolidation method of accounting: Joint venture entity Darwin LNG Pty Ltd Papua New Guinea Liqueﬁ ed Natural Gas Global Company LDC Easternwell Drilling Services Holdings Pty Ltd GLNG Operations Pty Ltd % interest 11.4 13.5 50.0 60.0 The Group’s share of the assets, liabilities, income and expenses of the jointly controlled entities, which are included in the consolidated ﬁ nancial statements using the proportionate consolidation method of accounting, are as follows: Current assets Non-current assets Current liabilities Non-current liabilities Net assets Revenue Expenses Proﬁ t before income tax 114 Santos Annual Report 2009 Consolidated Santos Ltd 2009 $million 2008 $million 2009 $million 2008 $million 64 164 228 (21) (24) 183 216 (189) 27 50 194 244 (98) (15) 131 238 (214) 24 – – – – – – – – – – – – – – – – – – 28. INTERESTS IN JOINT VENTURES (CONTINUED) (C) The Group’s share of capital expenditure commitments and minimum exploration commitments in respect of joint ventures are: Capital expenditure commitments Minimum exploration commitments 29. NOTES TO THE STATEMENTS OF CASH FLOWS (A) RECONCILIATION OF CASH FLOWS FROM OPERATING ACTIVITIES Proﬁ t after income tax Add/(deduct) non-cash items: Depreciation and depletion Net impairment loss on investment in controlled entities Net impairment reversal on receivables due from controlled entities Dividends distributed by controlled entities Net borrowing costs charged by controlled entities Exploration and evaluation expensed Net impairment loss on oil and gas assets Net gains on fair value hedges Share-based payments expense Borrowing costs capitalised Unwind of the effect of discounting on provisions Change in fair value of ﬁ nancial assets designated as at fair value through proﬁ t or loss Deﬁ ned beneﬁ t plan expense Foreign exchange losses/(gains) Net gain on sale of non-current assets Share of net loss in an associate Net loss on sale of controlled entities Consolidated Santos Ltd 2009 $million 2008 $million 2009 $million 2008 $million 2,113 157 366 187 104 9 93 7 434 619 – – – – 64 37 (5) 11 (9) 38 (5) 3 28 (260) 1 14 1,650 664 – – – – 83 216 (7) 8 (10) 32 12 3 (24) (1,699) – – 142 253 5 (8) – 4 13 35 – 11 – 11 – 2 7 (49) – – 20 273 50 (24) (27) 147 12 71 – 8 – 9 – 2 (6) (1) – – Net cash provided by operating activities before changes in assets or liabilities 970 928 426 534 Add/(deduct) change in operating assets or liabilities net of acquisitions or disposals of businesses: Decrease/(increase) in trade and other receivables Decrease/(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 Increase/(decrease) in trade and other payables (Decrease)/increase in provisions 17 17 (8) 63 95 14 (13) 11 (58) (1) 74 398 (18) 51 Net cash provided by operating activities 1,155 1,385 (B) NON-CASH FINANCING AND INVESTING ACTIVITIES Dividend Reinvestment Plan Dividends distributed by controlled entities Share subscriptions in controlled entities Income tax transferred from controlled entities Net borrowing costs charged by controlled entities (C) TOTAL TAXATION PAID Income tax paid Cash outﬂ ow from operating activities Cash outﬂ ow from investing activities Royalty-related tax paid Cash outﬂ ow from operating activities 31 – – – – (55) (497) (71) (623) 35 – – – – (292) – (152) (444) (16) (1) 1 (34) 28 26 3 433 31 – (158) 40 (4) (24) (497) (25) (546) 49 (20) (7) 40 (174) (63) 6 365 35 27 (14) 613 (147) (229) – (35) (264) Santos Annual Report 2009 115 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 30. EMPLOYEE BENEFITS (A) DEFINED BENEFIT PLAN Deﬁ ned beneﬁ t members of the Santos Superannuation Plan receive a lump sum beneﬁ t on retirement, death, disablement and withdrawal. The deﬁ ned beneﬁ t section of the plan is closed to new members. All new members receive accumulation only beneﬁ ts. Amount recognised in the statements of ﬁ nancial position: Deﬁ cit in plan recognised in non-current provisions (refer note 20) Non-current receivables (refer note 9) Movements in the liability for net deﬁ ned beneﬁ t obligations recognised in the statements of ﬁ nancial position Liability at the beginning of the year Expense recognised in income statement Amount capitalised in oil and gas assets Amount recognised in retained earnings Deﬁ ned beneﬁ t receivable from controlled entities Employer contributions Liability at the end of the year 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: Cost of sales Other expenses Amounts recognised in the statements of comprehensive income Actuarial gain/(loss) in the year Tax effect Net actuarial gain/(loss) in the year Consolidated Santos Ltd 2009 $million 2008 $million 2009 $million 2008 $million 34 (9) 25 45 3 1 (16) – (8) 25 4 3 (4) 3 3 – 3 16 (5) 11 62 (17) 45 11 3 2 37 – (8) 45 3 4 (4) 3 – 3 3 (37) 11 (26) 34 (9) 25 45 2 1 (16) 1 (8) 25 2 2 (2) 2 2 – 2 16 (5) 11 62 (17) 45 11 2 1 37 2 (8) 45 2 2 (2) 2 – 2 2 (37) 11 (26) (23) Cumulative actuarial gain/(loss) recognised in the statements of comprehensive income, net of tax 8 (23) 8 116 Santos Annual Report 2009 30. EMPLOYEE BENEFITS (CONTINUED) (A) DEFINED BENEFIT PLAN (CONTINUED) Historical information for the current and previous periods Consolidated Present value of deﬁ ned beneﬁ t obligations Fair value of plan assets Deﬁ cit in plan Experience adjustments (gain)/loss on plan assets Experience adjustments (gain)/loss on plan liabilities Santos Ltd Present value of deﬁ ned beneﬁ t obligations Fair value of plan assets Deﬁ cit in plan Experience adjustments (gain)/loss on plan assets Experience adjustments (gain)/loss on plan liabilities 2009 $million 2008 $million 2007 $million 2006 $million 2005 $million 170 (136) 34 (9) (7) 170 (136) 34 (9) (7) 175 (113) 62 43 (14) 175 (113) 62 43 (14) 162 (146) 16 (4) (1) 162 (146) 16 (4) (1) 158 (132) 26 (6) 18 158 (132) 26 (6) 18 129 (113) 16 (8) – 129 (113) 16 8 – Consolidated Santos Ltd 2009 $million 2008 $million 2009 $million 2008 $million Reconciliation of the present value of the deﬁ ned beneﬁ t obligations Opening deﬁ ned beneﬁ t obligations Service cost Interest cost Contributions by plan participants Actuarial (gains)/losses Beneﬁ ts paid Taxes and premiums paid Curtailments Settlements Closing deﬁ ned beneﬁ t obligations Reconciliation of the fair value of plan assets Opening fair value of plan assets Expected return on plan assets Actuarial gains/(losses) Employer contributions Contributions by plan participants Beneﬁ ts paid Taxes and premiums paid Settlements Closing fair value of plan assets 175 8 7 8 (14) (3) (3) (1) (7) 170 113 8 9 11 8 (3) (3) (7) 136 162 8 9 8 7 (16) (3) – – 175 145 10 (43) 12 8 (16) (3) – 113 175 8 7 8 (14) (3) (3) (1) (7) 170 113 8 9 11 8 (3) (3) (7) 136 162 8 9 8 7 (16) (3) – – 175 145 10 (43) 12 8 (16) (3) – 113 Santos Annual Report 2009 117 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 30. EMPLOYEE BENEFITS (CONTINUED) (A) DEFINED BENEFIT PLAN (CONTINUED) Plan assets The percentage invested in each asset class at the reporting date: Australian equity International equity Fixed income Property Other Cash Fair value of plan assets The fair value of plan assets includes no amounts relating to: • any of the Group’s own ﬁ nancial instruments; or • any property occupied by, or other assets used by, the Group. Consolidated Santos Ltd 2009 % 2008 % 2009 % 2008 % 32 29 10 9 7 13 28 27 10 13 10 12 32 29 10 9 7 13 28 27 10 13 10 12 Actual return on plan assets Consolidated Santos Ltd 2009 $million 2008 $million 2009 $million 2008 $million Actual return on plan assets – gain/(loss) 12 (24) 12 (24) 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 been deducted from the expected return. Principal actuarial assumptions at the reporting 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 2009 % p.a. 4.8 7.0 6.0 2008 % p.a. 4.0 7.0 6.0 The expected rate of return on Plan assets includes a reduction to allow for the administrative expenses of the plan. Expected contributions The Group expects to contribute $8 million to the deﬁ ned beneﬁ t superannuation plan in 2010. (B) DEFINED CONTRIBUTION PLANS The Group makes contributions to several deﬁ ned contribution plans. The amount recognised as an expense for the year was $8 million (2008: $6 million). 118 Santos Annual Report 2009 31. 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) to be entitled to acquire shares under this Plan. Executives participating in the Executive Long-term Incentive Programme in 2009, 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 being $1,000 per annum per eligible employee. A trustee is funded by the Group to acquire shares directly from the Company or on market. The shares are then held by the trustee on behalf of eligible employees who 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. At the end of the reporting period shares are granted to eligible employees at no cost to the employee. Summary of share movements in the SESAP during 2009 (and comparative 2008 information): Grant date 2009 17 November 2006 20 November 2007 21 November 2008 20 November 2009 2008 18 November 2005 17 November 2006 20 November 2007 21 November 2008 Opening balance Granted during the year Distributions during the year Closing balance Number Number Fair value per share $ Fair value aggregate $ Number Fair value aggregate $ Number 97,980 92,625 110,679 – – – – 101,376 – – – 15.11 97,980 1,495,791 95,780 111,436 8,602 6,150 7,189 594 – – 86,475 1,218,433 103,490 1,458,174 100,782 1,420,018 301,284 101,376 111,913 1,711,609 290,747 4,096,625 89,848 105,156 99,825 – – – – 111,153 – – – 12.62 89,848 7,176 7,200 474 1,164,977 117,648 119,379 6,621 – 97,980 92,625 110,679 – 1,456,963 1,377,334 1,656,797 294,829 111,153 104,698 1,408,625 301,284 4,491,094 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 ﬁ nancial 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. Santos Annual Report 2009 119 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 31. SHARE-BASED PAYMENT PLANS (CONTINUED) (A) CURRENT GENERAL EMPLOYEE SHARE PLANS (CONTINUED) The amounts recognised in the ﬁ nancial statements of the Group and the Company in relation to SESAP during the year were: Employee expenses Issued ordinary share capital Consolidated Santos Ltd 2009 $000 1,532 1,532 2008 $000 1,403 1,403 2009 $000 1,532 1,532 2008 $000 1,403 1,403 At 31 December 2009, the total number of shares acquired under the Plan since its commencement was 2,408,566. 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 Programme 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, for a period determined by the Board (one year). 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%). Under the Plan, at the discretion of the Board, ﬁ nancial assistance may be provided to employees to subscribe for and acquire shares under the Plan. The 5% discount constitutes ﬁ nancial assistance for these purposes. Participants are entitled to vote, receive dividends and participate in bonus and rights issues during the restriction period. On 20 November 2009, the Company issued 18,400 ordinary shares to 36 eligible employees at a subscription price of $14.86 per share under the Plan, being a 5% discount on the Market Value of $15.641 (calculated by reference to the weighted average sales price of those shares listed on the ASX during the one-week period up to and including the offer date, 23 October 2009). The total market price of those shares on the issue date was $276,368, based on the market price of $15.02 at the close of trade on the date of issue. The total amount received from employees for those shares was $273,424. A summary of share movements in the SESPP are set out below: Grant date 2009 21 November 2008 20 November 2009 2008 20 November 2007 21 November 2008 Opening balance Granted during the year Distributions during the year Closing balance Number Number Fair value per share $ Number Date Number 300,100 – – 18,400 – 15.64 300,100 18,400 300,100 – 300,100 20 November 2009 – 400 – 400 – 300,100 300,100 – 11.48 400 – 400 20 November 2008 – – 18,400 18,400 – 300,100 300,100 The fair value per share for shares granted during the year is Market Value (as deﬁ ned above). The consideration received by the Company per share is Market Value less the discount of 5% referred to above. 120 Santos Annual Report 2009 31. SHARE-BASED PAYMENT PLANS (CONTINUED) (A) CURRENT GENERAL EMPLOYEE SHARE PLANS (CONTINUED) The amounts recognised in the ﬁ nancial statements of the Group and the Company in relation to the general employee offer under the SESPP during the year were: Issued ordinary share capital Consolidated Santos Ltd 2009 $000 273 2008 $000 3,274 2009 $000 273 2008 $000 3,274 At 31 December 2009, the total number of shares acquired under the general employee offer of the Plan since its commencement was 1,140,800. (B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME The Company’s Executive Long-term Incentive (“LTI”) Programme provides for invitations to be extended to eligible executives selected by the Board. The Programme 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 and the SESPP has been used as a component of executive compensation since 2003. Share Acquisition Rights and options Each Share Acquisition Right (“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 satisﬁ ed and, in the case of options, when the options are exercised or, in the case of SARs, when the SARs vest. Chief Executive Ofﬁ cer and Managing Director No new LTI grant was made to the Chief Executive Ofﬁ cer (“CEO”) in 2009 as the grants made to Mr D J W Knox in 2008 constitute his LTI entitlement for the 2008, 2009 and 2010 years. The 2008 grants comprised: • a performance-based equity award made to Mr Knox in his capacity as Executive Vice President, Growth Projects (“Performance Award”); • a service-based equity award made to Mr Knox in his capacity as Executive Vice President, Growth Projects (“Deferred Award”); and • a further performance-based equity award made to Mr Knox upon his appointment as CEO to supplement the grants already made to him in his Senior Executive capacity (“CEO Performance Award”). Mr Knox elected to receive his equity awards as a combination of options and share acquisition rights (SARs). The key terms of Mr Knox’s awards are as follows: • The LTI grants made in 2008 were structured to provide Mr Knox with an annual LTI opportunity of 100% of Total Fixed Remuneration (“TFR”) (based on the 2008 level of $1.75 million) for each of the 2008, 2009 and 2010 years, subject to achieving applicable vesting conditions. • Mr Knox was able to elect to receive his LTI grant as either SARs, market value options or a combination of the two. He chose to take a combination of the two. • All of the performance-based LTIs are subject to hurdles based on the Company’s Total Shareholder Return (“TSR”) relative to the ASX 100 over a three-year performance period. There is no retesting of performance conditions. Santos Annual Report 2009 121 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 31. SHARE-BASED PAYMENT PLANS (CONTINUED) (B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME (CONTINUED) • The CEO Performance Award is divided into three tranches: Tranche 1: Tested over the period from 1 January 2008 to 31 December 2010; Tranche 2: Tested over the period from 1 January 2009 to 31 December 2011; and Tranche 3: Tested over the period from 1 January 2010 to 31 December 2012. • Each tranche of the CEO Performance Award vests in accordance with the following vesting schedule: TSR percentile ranking % of grant vesting < 50th percentile = 50th percentile 51st to 75th percentile 76th to 100th percentile 0% 37.5% 39% to 75% 76% to 100% • None of the grants has vested as the period over which the performance hurdles are tested has not expired. • Upon vesting of SARs, ordinary shares in Santos will automatically be allocated to Mr Knox. These shares will be subject to restrictions until the earlier of 10 years from the grant date, cessation of employment, or the date at which the Board approves, at Mr Knox’s request, the removal of the restrictions. • Options may be exercised at any time between the vesting date and the expiry date (27 July 2018), subject to payment of the exercise price of $17.36 per option (being the volume weighted average price in the week up to and including the grant date). • Full details of the equity grants made to Mr Knox in 2008 are contained in the 2008 Remuneration Report. During the ﬁ nancial year, the Company granted nil (2008: 444,974) options over unissued shares to the CEO as set out below: Outstanding at the beginning of the year Granted during the year Outstanding at the end of the year Exercisable at the end of the year 2009 2008 Weighted average exercise price $ 16.98 – 16.98 – Weighted average exercise price $ – 16.98 16.98 – Number 444,974 – 444,974 – Number – 444,974 444,974 – The options outstanding at 31 December 2009 have an exercise price in the range of $15.39 to $17.36, and a weighted average contractual life of 8.55 years. During the year no options were exercised (2008: nil). The fair value of shares issued as a result of exercising the options or vesting of SARs during the reporting period at their issue date is the market price of shares of the Company on the ASX as at close of trading. The fair value of services received in return for share options granted is measured by reference to the fair value of share options granted. The estimate of the fair value of the services received is measured based on the Monte Carlo simulation method. The contractual life of the option is used as an input into this model. Expectations of early exercise are incorporated into the models. 122 Santos Annual Report 2009 31. SHARE-BASED PAYMENT PLANS (CONTINUED) (B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME (CONTINUED) 2008 Performance Award Deferred Award CEO Performance Awards Option grant F1 F2 F3 F4 F5 Fair value at grant date ($) Share price on grant date ($) Exercise price ($) Expected volatility (weighted average, %p.a.) Option life (weighted average) Expected dividends (%p.a.) Risk-free interest rate (based on Australian Government 5.25 17.71 15.39 30.7 10 years 2.3 7.30 17.71 15.39 30.7 10 years 2.3 5.77 17.40 17.36 30.9 10 years 2.3 4.22 17.40 17.36 30.9 10 years 2.3 4.29 17.40 17.36 30.9 10 years 2.3 bond yields, %p.a.) 6.29 6.29 6.05 6.05 6.05 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. During the ﬁ nancial year, the Company granted nil (2008: 136,779) SARs to the CEO as set out below. Shares allocated on vesting of SARs will be subject to further restrictions on dealing for a maximum of ten years after the original grant date. No amount is payable on grant or vesting of the SARs. Outstanding at the beginning of the year Granted during the year Outstanding at the end of the year Exercisable at the end of the year Number of SARs 2009 2008 136,779 – 136,779 – 136,779 136,779 – – The fair value of services received in return for SARs granted is 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. 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. SARs grant Fair value at grant date ($) Share price on grant date ($) Exercise price ($) Expected volatility (weighted average, %p.a.) Right life (weighted average) Expected dividends (%p.a.) Risk-free interest rate (based on Australian Government bond yields, %p.a.) 2008 CEO Performance Award F3 F4 F5 13.82 17.40 – 30.9 10 years 2.3 6.05 8.60 17.40 – 30.9 10 years 2.3 6.05 8.41 17.40 – 30.9 10 years 2.3 6.05 Santos Annual Report 2009 123 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 31. SHARE-BASED PAYMENT PLANS (CONTINUED) (B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME (CONTINUED) Former CEO Mr J C Ellice-Flint retired on 25 March 2008. Consistent with the terms of his service agreement, 2,312,500 of Mr Ellice-Flint’s options, which had not previously vested, were vested and became exercisable upon cessation of his employment. Each option entitles Mr Ellice-Flint to acquire one fully paid ordinary share in the Company at a predetermined price, subject to satisfaction of vesting conditions. The grant size is determined by reference to the median grant size given to executives in similar roles in comparable companies. No options have been granted to Mr Ellice-Flint since 2006. At 31 December 2009, the 2,500,000 options are on issue, and are exercisable. The exercise price for the options granted is $11.36, being the volume weighted average price in the ten days up to and including 9 March 2006 as approved by shareholders on 4 May 2006. The options have a contractual life of ten years. Eligible senior executives – SARs and options During 2009, the Company made equity grants to its Senior Executives as the LTI component of their remuneration for 2009. The grants comprised: • a performance-based component, equal to 75% of the total grant value (“Performance Award”); and • a service-based component, equal to 25% of the total grant value (“Deferred Award”). Both the Performance Award and the Deferred Award were delivered, at the executive’s election, in the form of either SARs (under the SESPP) or options (under the SESOP). SARs and options were granted at no cost to the executives with the number of SARs awarded being determined by dividing the amount of the award by the volume weighted average price of the Company’s shares over the week 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. Vesting details of the Performance Award and the Deferred Award are summarised below: Performance Award Vesting period Vesting condition Vesting schedule Exercise price Expiry/lapse 1 January 2009 to 31 December 2011. Vesting of the Performance Award is based on relative TSR against ASX 100 companies as at 1 January 2009. Relative TSR condition Santos TSR percentile ranking < 50th percentile = 50th percentile 51st to 99th percentile 100th percentile % of grant vesting 0% 33.33% Further 1.33% for each percentile 100% $14.81 for options, being the volume weighted average price in the week up to and including the grant date of 2 March 2009. SARs have no exercise price. Upon cessation of employment, SARs which have not already vested and options which are not exercisable will, in general, lapse and be forfeited. There is no retesting of the performance conditions if they are not satisﬁ ed. 124 Santos Annual Report 2009 31. SHARE-BASED PAYMENT PLANS (CONTINUED) (B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME (CONTINUED) Deferred Award Vesting period Vesting condition Vesting schedule Exercise price Expiry/lapse 2 March 2009 to 1 March 2012. Vesting of the Deferred Award is based on continuous service to 1 March 2012, or three years from the grant date. 0% if the continuous service condition is not met. 100% if the continuous service condition is met. As for Performance Award. As for Performance Award. Upon cessation of employment, SARs which have not already vested and options which are not exercisable will, in general, lapse and be forfeited. However, if cessation occurs due to death, disability or redundancy, or in special circumstances approved by the Board, then a proportion of the SARs and options may vest and become exercisable. Where there is a change in control, the Board may determine whether, and the extent to which, SARs and options may vest. During the ﬁ nancial year, the Company granted 275,884 (2008: 880,533) options over unissued shares as set out below: Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Outstanding at the end of the year 2009 2008 Weighted average exercise price $ 12.70 14.81 11.34 9.61 Number 2,195,293 275,884 (24,690) (427,050) 13.65 2,019,437 Weighted average exercise price $ 10.27 15.39 9.71 8.41 12.70 Number 2,078,728 880,533 (460,385) (303,583) 2,195,293 Exercisable at the end of the year 10.15 521,250 8.14 232,300 The options outstanding at 31 December 2009 have an exercise price in the range of $8.46 to $15.39, and a weighted average remaining contractual life of 7.9 years. During the year 427,050 (2008: 303,583) options were exercised. The weighted average share price at the dates of exercise was $14.40 (2008: $17.81). 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 ﬁ nancial statements of the Group and the Company in relation to executive share options exercised during the ﬁ nancial year were: Consolidated Santos Ltd Issued ordinary share capital 4,103 2,553 4,103 2009 $000 2008 $000 2009 $000 2008 $000 2,553 Santos Annual Report 2009 125 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 31. SHARE-BASED PAYMENT PLANS (CONTINUED) (B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME (CONTINUED) The fair value of services received in return for share options granted is measured by reference to the fair value of share options granted. The estimate of the fair value of the services received is measured based on the Monte Carlo simulation method. The contractual life of the option is used as an input into this model. Expectations of early exercise are incorporated into the models. Option grant Fair value at grant date ($) Share price on grant date ($) Exercise price ($) Expected volatility (weighted average, %p.a.) Option life (weighted average) Expected dividends (%p.a.) Risk-free interest rate (based on Australian Government bond yields, %p.a.) 2009 2008 Performance Award G1 Deferred Award G2 Performance Award F1 4.54 15.00 14.81 46.5 10 years 2.6 6.75 15.00 14.81 46.5 10 years 2.6 5.25 17.71 15.39 30.7 10 years 2.3 Deferred Award F2 7.30 17.71 15.39 30.7 10 years 2.3 2.94 2.94 6.29 6.29 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. During the ﬁ nancial year, the Company granted 723,792 (2008: 241,668) SARs to eligible senior executives as set out below. Shares allocated on vesting of SARs will be subject to further restrictions on dealing for a maximum of ten years after the original grant date. No amount is payable on grant or vesting of the SARs. Outstanding at the beginning of the year Granted during the year Forfeited during the year Vested during the year Outstanding at the end of the year Exercisable at the end of the year Number of SARs 2009 2008 1,229,712 723,792 (61,961) (303,085) 1,365,800 241,668 (236,426) (141,330) 1,588,458 1,229,712 – – The fair value of services received in return for SARs granted is 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. 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. SARs grant Fair value at grant date ($) Share price on grant date ($) Exercise price ($) Expected volatility (weighted average, %p.a.) Right life (weighted average) Expected dividends (%p.a.) Risk-free interest rate (based on Australia Government 2009 2008 Performance Award G1 Deferred Award G2 G3 Performance Award F1 8.67 15.00 – 46.5 10 years 2.6 14.45 15.00 – 46.5 10 years 2.6 14.45 15.00 – 46.5 10 years 2.6 11.23 17.71 – 30.7 10 years 2.3 Deferred Award F2 16.73 17.71 – 30.7 10 years 2.3 bond yields, %p.a.) 2.94 2.94 2.94 6.29 6.29 126 Santos Annual Report 2009 31. SHARE-BASED PAYMENT PLANS (CONTINUED) (B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME (CONTINUED) Cash-settled share-based payments During the year the Company raised $2,914 million through a two for ﬁ ve rights issue (refer note 22(A)). Each new share was issued at a price of $12.50 representing a 26.9% discount to the closing price of the shares before the announcement of the rights issue. Executives, being the CEO and eligible senior executives, who held unvested SARs and options, were unable to participate in the rights issue and there was no adjustment to the applicable exercise price or the number of underlying shares to which each SAR or option was entitled. The ASX Listing Rules do allow an adjustment to the exercise price of options to reﬂ ect the impact of discounted rights issues but the terms of the grant need to expressly refer to the formula in ASX Listing Rule 6.22.2 and the Listing Rules do not contemplate (nor provide a mechanism for adjusting) SARs. Accordingly, in order to ensure the rights issue would neither unfairly disadvantage or advantage executives and so as to avoid a misalignment between the incentives of management (through the LTI component of their remuneration) and a capital raising which was considered by the Board to be in the best interests of the Company and shareholders, the Board determined, in respect of existing LTI grants: • to use TSR data which takes into account the impact of rights issues and other capital management activities on both Santos and comparator group companies when testing the satisfaction of TSR performance hurdles that apply to Santos LTI awards; and • subject to the SARs and options vesting following satisfaction of applicable hurdles (and, in the case of options, being exercised), to make a future cash remuneration payment to executives equal to the value of the right to participate in the rights issue (calculated at $1.31 for each underlying share in accordance with the formula in ASX Listing Rule 6.22.2). The intention is to “keep whole” the executives in respect of SARs and options that actually vest in due course. No cash payment will be made in respect of SARs that do not vest or options that do not vest or are not exercised. These future cash remuneration payments apply to LTI participants with grants that were yet to vest at the time of the rights issue, including the CEO. No changes have been made to the performance hurdles or testing dates. Despite the intention to “keep whole” the executives, the future cash remuneration payments did not fully compensate for the loss in the value of the unvested SARs and options. The overall value of the future cash remuneration payments is $166,523 less than the loss in value of the SARs and options, both determined in accordance with AASB 2 Share-based Payment. The value of these future cash remuneration payments has been expensed in accordance with AASB 2, over the period from 8 May 2009 (the last trading day prior to the announcement of the rights issue; closing price of $17.09) to the end of their performance or vesting periods. Financial statement impact of Executive Long-term Incentive Programme The amounts recognised in the ﬁ nancial statements of the Group and the Company, during the ﬁ nancial year in relation to equity grants issued under the Executive Long-term Incentive Programme were: Employee expenses: CEO and Managing Director options CEO and Managing Director SARs Former CEO options Eligible senior executive options Eligible senior executive SARs Cash-settled share-based payments Retained earnings Liability for employee beneﬁ ts Consolidated Santos Ltd 2009 $000 635 553 – 2,260 5,099 2,084 10,631 8,547 2,084 10,631 2008 $000 418 382 1,667 1,723 4,125 – 8,315 8,315 – 8,315 2009 $000 635 553 – 2,260 5,099 2,084 10,631 8,547 2,084 10,631 2008 $000 418 382 1,667 1,723 4,125 – 8,315 8,315 – 8,315 Santos Annual Report 2009 127 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 31. SHARE-BASED PAYMENT PLANS (CONTINUED) (B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME (CONTINUED) Eligible senior executives – Shares No shares have been issued under the executive long-term incentive component of the SESPP since 2004. At 31 December 2009, the total number of shares acquired under the executive long-term incentive component of the Plan since its commencement was 220,912. The shares allocated pursuant to the SESPP were allotted to a trustee at no cost to participants, to be held on their behalf. The allocation price is Market Value (as deﬁ ned above) 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 ten 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. (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 $2.00 and the market price of the shares on the date of the call being made. Shares were issued principally on: 22 December 1987; 7 February and 5 December 1989; and 24 December 1990. At the beginning of the ﬁ nancial year there were 88,000 Plan shares on issue. During the ﬁ nancial year no Plan shares were fully paid and no aggregate proceeds were received by the Company. As at 31 December 2009 there were 88,000 Plan shares outstanding. (D) NON-EXECUTIVE DIRECTOR SHARE PLAN In accordance with shareholder approval given at the 2007 Annual General Meeting, the Non-executive Director (“NED”) Share Plan was introduced in July 2007. Participation in the NED Share Plan is voluntary and all present and future Non-executive Directors are eligible to participate. Under the NED Share Plan, Directors elect to sacriﬁ ce all or part of their fees in return for an allocation of fully paid ordinary shares of equivalent value. The NED Share Plan therefore does not involve any additional remuneration for participating Directors. Shares are allocated quarterly and are either issued as new shares or purchased on the ASX at the prevailing market price. The shares are registered in the name of the participating Director, but are subject to a restriction on dealing. In the absence of exceptional circumstances, the restriction will apply until the Director ceases to hold ofﬁ ce or until ten years have elapsed since the allocation of the shares, whichever is earlier. 128 Santos Annual Report 2009 31. SHARE-BASED PAYMENT PLANS (CONTINUED) (D) NON-EXECUTIVE DIRECTOR SHARE PLAN (CONTINUED) In 2009, 20,390 (2008: 33,356) shares were allocated to participating Directors as follows: Date 7 April 2009 29 June 2009 7 October 2009 23 December 2009 Shares issued Number Price per share $ 8,019 6,949 2,598 2,824 17.1811 14.2552 15.1076 13.8947 The amounts recognised in the ﬁ nancial statements of the Group and the Company in relation to the NED Share Plan during the year were: Employee expenses Issued ordinary share capital 32. KEY MANAGEMENT PERSONNEL DISCLOSURES (A) KEY MANAGEMENT PERSONNEL COMPENSATION Short-term employee beneﬁ ts Post-employment beneﬁ ts Other long-term beneﬁ ts Termination beneﬁ ts Share-based payments Consolidated Santos Ltd 2009 $000 315 315 10,106 399 113 – 3,615 14,233 2008 $000 553 553 10,442 1,739 259 2,705 4,619 19,764 2009 $000 315 315 10,106 399 113 – 3,615 14,233 2008 $000 553 553 10,442 1,739 259 2,705 4,619 19,764 Santos Annual Report 2009 129 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 t o n t u b d e t s e V t a e l b a s i c r e x e r a e y e h t f o d n e d n a d e t s e V t a e l b a s i c r e x e r a e y e h t f o d n e d e t s e V f o d n e t a r a e y e h t e c n a l a B f o d n e t a r a e y e h t r e h t O 3 s e g n a h c s n o i t p O s t h g i r / d e s i c r e x e 2 d e t s e v 1 d e t n a r G t a e c n a l a B g n i n n i g e b r a e y e h t f o s r o t c e r i D s n o i t p O 9 0 0 2 e m a N – – – – – – – – – – – – – – – – – – – – – – 0 0 1 , 8 7 0 0 1 , 8 7 – – – – 0 0 0 , 5 2 – 0 0 7 , 3 6 – – – – 0 0 0 , 5 2 – 0 0 7 , 3 6 4 7 9 , 4 4 5 – 8 7 6 , 1 9 7 3 6 , 3 2 1 – 7 6 6 , 8 7 2 8 6 , 8 0 1 – – – – – – – – – – ) 7 1 9 , 7 3 1 ( 0 0 8 , 6 6 1 0 0 8 , 6 6 1 8 3 6 , 7 4 9 ) 7 1 9 , 7 3 1 ( – – – – – – – – – – – – – – – – – – – – 9 7 7 , 6 8 1 – 7 2 5 , 4 4 7 0 1 , 3 4 – 5 1 2 , 2 5 3 3 6 , 4 4 5 4 8 , 3 9 0 5 6 , 5 6 – – – – – – ) 0 0 2 , 7 2 ( – ) 8 6 6 , 6 4 ( 6 5 7 , 0 3 5 ) 8 6 8 , 3 7 ( – – – – – – – – – – – – – – ) 0 0 9 , 9 1 ( – – ) 0 0 0 , 3 2 ( ) 0 0 2 , 6 1 ( ) 0 0 1 , 9 5 ( – – – – – – – – – – – – 7 2 5 , 7 1 7 0 5 , 8 1 – 5 1 2 , 0 2 3 3 6 , 7 1 5 2 6 , 3 3 5 3 3 , 9 1 4 7 9 , 4 4 5 r e l s s i W n h o J d i v a D , x o n K – – – 8 7 6 , 1 9 7 3 6 , 3 2 1 7 1 9 , 7 3 1 7 6 6 , 8 7 2 8 6 , 8 0 1 5 5 5 , 5 8 0 , 1 e i l s e L s e m a J , e n o t s r e d l u a B h g u H n h o J , n o s r e d n A n h o J r o v e r T , n w o r B s e m a J d r a w d E n y t r a M , s e m a E l l e w x a M r e g o R , t t e n n e K t r a u t S k r a M , e n a l r a f c a M r e h p o t s i r h C r e t e P , w o s a W n h o J d r a h c i R , n o s n i k l i W s e v i t u c e x E s r o t c e r i D s t h g i R l a t o T 9 7 7 , 6 8 1 r e l s s i W n h o J d i v a D , x o n K 0 0 0 , 7 2 0 0 6 , 4 2 0 0 2 , 7 2 0 0 9 , 1 5 8 6 6 , 6 4 0 0 0 , 7 2 0 2 2 , 3 8 5 1 5 , 2 6 e i l s e L s e m a J , e n o t s r e d l u a B h g u H n h o J , n o s r e d n A n h o J r o v e r T , n w o r B s e m a J d r a w d E n y t r a M , s e m a E l l e w x a M r e g o R , t t e n n e K t r a u t S k r a M , e n a l r a f c a M r e h p o t s i r h C r e t e P , w o s a W n h o J d r a h c i R , n o s n i k l i W s e v i t u c e x E 2 4 8 , 6 2 1 2 8 8 , 6 3 5 l a t o T e v a h d e t n a r g s R A S e h t f o 9 2 5 , 5 9 , t n a r g f o e t a d e h t t A . n o i t a r e d i s n o c o n r o f t n e i p i c e r e h t h t i w t s e v d n a , 9 1 0 2 h c r a M 2 f o e t a d n o i t a r i p x e n a e v a h , 9 0 0 2 h c r a M 2 n o d e t n a r g e r e w r a e y t n e r r u c e h t n i s e v i t u c e x e o t d e t n a r g s R A S . s R A S f o g n i t s e v d n a s n o i t p o f o e s i c r e x e e h t f o t l u s e r a s a d e u s s i s e r a h s e h t n o d i a p n u s t n u o m a o n e r a e r e h T . t n e i p i c e r e h t o t y n a p m o C e h t f o e r a h s y r a n i d r o e n o f o e u s s i e h t n i s t l u s e r d e t s e v R A S r o d e s i c r e x e n o i t p o h c a E . 9 0 0 2 n i l e n n o s r e p t n e m e g a n a m y e k e b o t d e s a e c t t e n n e K M R r M d n a n w o r B J T r M , e r u t c u r t s e r y n a p m o c a o t e u D . R A S r e p 5 4 . 4 1 $ f o e u l a v r i a f a e v a h d e t n a r g s R A S e h t f o 3 1 3 , 1 3 d n a , R A S r e p 7 6 . 8 $ f o e u l a v r i a f a 1 2 3 . ) B ( 1 3 e t o n n i d e d u l c n i e r a t n e i p i c e r e h t h t i w t s e v s R A S d n a s n o i t p o e h t e r o f e b t e m e b t s u m t a h t s n o i t i d n o c e c n a m r o f r e p d n a e c i v r e s e h t g n i d r a g e r s l i a t e D t n e m e g a n a m y e k h c a e y b , y l l a i c ﬁ e n e b r o y l t c e r i d n i , y l t c e r i d d l e h y n a p m o C e h t f o s e r a h s y r a n i d r o r e v o s n o i t p o d n a s t h g i r f o r e b m u n e h t n i d o i r e p g n i t r o p e r e h t g n i r u d t n e m e v o m e h T : s w o l l o f s a s i , s e i t r a p d e t a l e r r i e h t g n i d u l c n i , n o s r e p s g n i d l o h s t h g i r d n a s n o i t p O ) I D E U N T N O C ( S E R U S O L C S I D L E N N O S R E P T N E M E G A N A M Y E K . 2 3 L E N N O S R E P T N E M E G A N A M Y E K F O S G N D L O H Y T U Q E I I ) B ( 130 Santos Annual Report 2009 – – – – – – – – – – – – – – – – – – – – – t o n t u b d e t s e V t a e l b a s i c r e x e r a e y e h t f o d n e d n a d e t s e V t a e l b a s i c r e x e r a e y e h t f o d n e d e t s e V f o d n e t a r a e y e h t – – – – 0 0 4 , 4 1 – 0 0 0 , 9 2 0 0 0 , 5 2 – – – – 0 0 4 , 4 1 – 0 0 0 , 9 2 0 0 0 , 5 2 – 0 0 0 , 0 0 5 , 2 – 0 0 0 , 0 0 5 , 2 e c n a l a B f o d n e t a r a e y e h t – 4 7 9 , 4 4 5 7 3 6 , 3 2 1 8 7 6 , 1 9 7 6 6 , 8 7 7 1 9 , 7 3 1 – 2 8 6 , 8 0 1 – – r e h t O 6 s e g n a h c s n o i t p O s t h g i r / d e s i c r e x e 5 d e t s e v 4 , 3 , 2 , 1 d e t n a r G t a e c n a l a B g n i n n i g e b r a e y e h t f o s r o t c e r i D s n o i t p O 8 0 0 2 e m a N – ) 0 0 0 , 0 0 5 , 2 ( – – – – – – ) 0 0 4 , 4 1 ( – ) 0 0 5 , 4 1 ( ) 0 0 0 , 5 2 ( – – – – – – – ) 4 4 7 , 2 1 ( – 4 7 9 , 4 4 4 – – 7 3 5 , 5 4 8 7 6 , 1 4 7 1 0 , 3 4 7 6 6 , 3 5 – 2 8 9 , 4 4 0 0 0 , 0 0 1 0 0 0 , 0 0 5 , 2 s e l r a h C n h o J , t n i l F - e c i l l E r e l s s i W n h o J d i v a D , x o n K – – 4 4 2 , 5 0 1 0 0 0 , 0 5 0 0 0 , 0 5 0 0 4 , 9 0 1 – 0 0 7 , 3 6 s e m a J d r a w d E n y t r a M n h o J r o v e r T , n w o r B , s e m a E e i l s e L s e m a J , e n o t s r e d l u a B h g u H n h o J , n o s r e d n A l l e w x a M r e g o R , t t e n n e K t r a u t S k r a M , e n a l r a f c a M r e h p o t s i r h C r e t e P , w o s a W n h o J d r a h c i R , n o s n i k l i W s e v i t u c e x E ) I D E U N T N O C ( S E R U S O L C S I D L E N N O S R E P T N E M E G A N A M Y E K . 2 3 ) I D E U N T N O C ( L E N N O S R E P T N E M E G A N A M Y E K F O S G N D L O H Y T U Q E I I ) B ( 0 0 4 , 8 6 5 , 2 0 0 4 , 8 6 5 , 2 5 5 5 , 5 8 0 , 1 ) 0 0 9 , 3 5 5 , 2 ( ) 4 4 7 , 2 1 ( 5 5 8 , 3 7 6 4 4 3 , 8 7 9 , 2 s r o t c e r i D s t h g i R l a t o T – – – – – – – – – – – – – – – – – – – – 9 7 7 , 6 8 1 0 0 0 , 7 2 0 0 6 , 4 2 0 0 2 , 7 2 0 0 9 , 1 5 8 6 6 , 6 4 0 0 0 , 7 2 0 2 2 , 3 8 5 1 5 , 2 6 2 8 8 , 6 3 5 – – – – ) 0 0 8 , 9 ( ) 0 0 5 , 4 ( ) 0 0 8 , 4 ( ) 0 5 8 , 8 ( ) 0 0 8 , 1 1 ( ) 0 5 7 , 9 3 ( – – – – ) 0 0 8 , 9 ( ) 0 0 5 , 4 ( ) 0 0 8 , 4 ( ) 0 5 8 , 8 ( ) 0 0 8 , 1 1 ( ) 0 5 7 , 9 3 ( 9 7 7 , 6 3 1 – – – – – 8 6 6 , 7 1 0 2 2 , 3 2 5 1 1 , 8 1 2 8 7 , 5 9 1 0 0 0 , 0 5 0 0 0 , 7 2 0 0 6 , 4 2 0 0 2 , 7 2 0 0 5 , 1 7 0 0 0 , 8 3 0 0 6 , 6 3 0 0 6 , 3 8 0 0 1 , 2 6 0 0 6 , 0 2 4 s e m a J d r a w d E n y t r a M n h o J r o v e r T , n w o r B , s e m a E e i l s e L s e m a J , e n o t s r e d l u a B h g u H n h o J , n o s r e d n A r e l s s i W n h o J d i v a D , x o n K s e v i t u c e x E l l e w x a M r e g o R , t t e n n e K t r a u t S k r a M , e n a l r a f c a M r e h p o t s i r h C r e t e P , w o s a W n h o J d r a h c i R , n o s n i k l i W l a t o T s n o i t p o e h t , t n a r g f o e t a d e h t t A . 9 3 . 5 1 $ f o e c i r p e s i c r e x e n a d n a 8 1 0 2 y a M 2 f o e t a d n o i t a r i p x e n a e v a h 8 0 0 2 y a M 3 n o d e t n a r g e r e w r a e y t n e r r u c e h t n i s e v i t u c e x e o t d e t n a r g s n o i t p o , x o n K W J D r M f o n o i t p e c x e e h t h t i W 1 e r a s n o i t p o e h t , t e m e r a s n o i t i d n o c g n i t s e v g n i d i v o r P . s t n e i p i c e r e h t o t t s o c o n t a d e d i v o r p e r e w s n o i t p o e h T . ) s n o i t p o 8 6 2 , 4 5 ( n o i t p o r e p 0 3 . 7 $ d n a ) s n o i t p o 3 1 6 , 4 7 1 ( n o i t p o r e p 5 2 . 5 $ f o e u l a v r i a f a e v a h d e t n a r g : s w o l l o f s a d e t n a r g e r e w r a e y t n e r r u c e h t n i x o n K W J D r M o t d e t n a r g s n o i t p O 2 . 1 1 0 2 y r a u n a J 1 n a h t r e i l r a e o n e l b a s i c r e x e s n o i t p o e h t f o l l a , t e m e r a s n o i t i d n o c g n i t s e v g n i d i v o r P . ) s n o i t p o 6 7 9 , 1 3 1 ( n o i t p o r e p 5 2 . 4 $ f o t n a r g f o e t a d e h t n o e u l a v r i a f , 6 3 . 7 1 $ f o e c i r p e s i c r e x e , 8 1 0 2 y l u J 7 2 e t a d n o i t a r i p x e : 2 e h c n a r t , 8 0 0 2 y l u J 8 2 n o t n a r g O E C ) i i i ( g n i t s e v g n i d i v o r P . ) s n o i t p o 7 3 8 , 1 2 r o f ( 0 3 . 7 $ d n a ) s n o i t p o 2 9 9 , 4 6 r o f ( 5 2 . 5 $ f o t n a r g f o e t a d e h t n o n o i t p o r e p e u l a v r i a f , 9 3 . 5 1 $ f o e c i r p e s i c r e x e , 8 1 0 2 y a M 2 f o e t a d n o i t a r i p x e : 8 0 0 2 y a M 3 n o t n a r g e v i t u c e x E ) i ( e h t f o l l a , t e m e r a s n o i t i d n o c g n i t s e v g n i d i v o r P . ) s n o i t p o 3 9 1 , 4 9 ( n o i t p o r e p 3 8 . 5 $ f o t n a r g f o e t a d e h t n o e u l a v r i a f , 6 3 . 7 1 $ f o e c i r p e s i c r e x e , 8 1 0 2 y l u J 7 2 e t a d n o i t a r i p x e : 1 e h c n a r t , 8 0 0 2 y l u J 8 2 n o t n a r g O E C ) i i ( . 1 1 0 2 y r a u n a J 1 n a h t r e i l r a e o n e l b a s i c r e x e e r a s n o i t p o e h t f o l l a , t e m e r a s n o i t i d n o c . 1 1 0 2 y r a u n a J 1 n a h t r e i l r a e o n e l b a s i c r e x e e r a s n o i t p o s n o i t p o e h t f o l l a , t e m e r a s n o i t i d n o c g n i t s e v g n i d i v o r P . ) s n o i t p o 6 7 9 , 1 3 1 ( n o i t p o r e p 2 3 . 4 $ f o t n a r g f o e t a d e h t n o e u l a v r i a f , 6 3 . 7 1 $ f o e c i r p e s i c r e x e , 8 1 0 2 y l u J 7 2 e t a d n o i t a r i p x e : 3 e h c n a r t , 8 0 0 2 y l u J 8 2 n o t n a r g O E C ) v i ( . 2 1 0 2 y r a u n a J 1 n a h t r e i l r a e o n e l b a s i c r e x e e r a , t n a r g f o e t a d e h t t A . n o i t a r e d i s n o c o n r o f t n e i p i c e r e h t h t i w t s e v d n a , 8 1 0 2 y a M 2 f o e t a d n o i t a r i p x e n a e v a h , 8 0 0 2 y a M 3 n o d e t n a r g . R A S r e p 3 7 . 6 1 $ f o e u l a v r i a f a e v a h d e t n a r g e r e w s R A S r a e y t n e r r u c e h t n i s e v i t u c e x e o t d e t n a r g s R A S , x o n K W J D r M f o n o i t p e c x e e h t h t i W e h t f o 3 7 5 , 4 1 d n a , R A S r e p 3 2 . 1 1 $ f o e u l a v r i a f a e v a h d e t n a r g s R A S e h t f o 0 3 4 , 4 4 . 3 1 0 2 y r a u n a J 1 n a h t r e i l r a e o n e l b a s i c r e x e e r a . x o n K W J D r M o t t s o c o n t a d e d i v o r p e r e w s n o i t p o e h T r i a f a e v a h d e t n a r g s R A S e h t , t n a r g f o e t a d e h t t A . n o i t a r e d i s n o c o n r o f x o n K W J D r M h t i w t s e v d n a , 8 1 0 2 y l u J 7 2 f o e t a d n o i t a r i p x e n a e v a h , 8 0 0 2 y l u J 8 2 n o d e t n a r g e r e w r a e y t n e r r u c e h t n i x o n K W J D r M o t d e t n a r g s R A S e h t r o , t e m t o n e r a s n o i t i d n o c e c i v r e s n e h w s R A S . s R A S f o g n i t s e v d n a s n o i t p o f o e s i c r e x e e h t f o f o t l u s e r a s a d e u s s i s e r a h s e h t n o d i a p n u s t n u o m a o n e r a e r e h T . t n e i p i c e r e h t o t y n a p m o C e h t f o e r a h s y r a n i d r o e n o f o e u s s i e h t n i s t l u s e r d e t s e v R A S r o d e s i c r e x e n o i t p o h c a E e r u t i e f r o f , t e m g n i e b t o n s n o i t i d n o c e c n a m r o f r e p o t e u d s t n e m e l t i t n e s R A S n i s n o i t c u d e r , d o i r e p e s i c r e x e e h t f o y r i p x e e h t n o s n o i t p o f o e s p a l e h t e d u l c n i y a m s e g n a h c r e h t O . y n a p m o C e h t h t i w t n e m y o l p m e e t a n i m r e t y e h t n e h w e r u s o l c s i d l e n n o s r e p t n e m e g a n a m y e k e h t m o r f g n i d l o h y t i u q e s ’ e e y o l p m e n a f o l a v o m e r . ) s R A S 3 0 4 , 0 5 ( 4 4 . 8 $ d n a ) s R A S 3 0 4 , 0 5 ( 5 6 . 8 $ , ) s R A S 3 7 9 , 5 3 ( R A S r e p 7 0 . 4 1 $ f o e u l a v 3 4 5 6 . ) B ( 1 3 e t o n n i d e d u l c n i e r a t n e i p i c e r e h t h t i w t s e v s R A S d n a s n o i t p o e h t e r o f e b t e m e b t s u m t a h t s n o i t i d n o c e c n a m r o f r e p d n a e c i v r e s e h t g n i d r a g e r s l i a t e D Santos Annual Report 2009 131 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 d l e h e c n a l a B t a y l l a n i m o n e c n a l a B f o d n e t a r a e y e h t f o d n e r a e y e h t r e h t O ¹ s e g n a h c r e f f o t n e m e l t i t n E d e m e e d e R n o t e k r a m g n i t s e v s t h g i r f o e s i c r e x e s n o i t p o f o d e s a h c r u P n o d e v i e c e R n o d e v i e c e R s a d e t n a r G t a e c n a l a B g n i n n i g e b n o i t a s n e p m o c r a e y e h t f o – – – – – – – – – – – – – – – – – – – – 8 0 3 , 7 6 4 1 7 , 9 1 8 3 6 , 1 1 – 0 5 8 , 1 7 – 1 4 4 , 2 0 5 5 , 3 0 5 2 , 3 6 2 6 , 6 2 – – – 0 8 7 , 9 2 7 0 2 , 1 1 8 2 8 , 7 6 8 8 0 , 5 6 0 7 8 , 3 1 2 7 , 1 9 1 9 , 1 1 – 4 8 6 3 1 8 , 3 – 0 5 ) 5 3 1 , 0 2 ( – – – ) 9 6 3 , 6 4 2 ( – – – – – 8 2 0 , 5 9 4 0 , 3 7 1 2 , 9 1 3 7 6 , 3 1 – – 8 0 6 , 7 – – – – – – – – – – – ) 0 0 0 , 9 ( 0 8 8 , 1 1 ) 0 0 8 , 1 1 ( ) 5 9 2 , 4 6 ( – – – – 3 0 2 , 3 4 9 0 , 5 2 7 9 5 , 8 1 – – – ) 0 0 0 , 0 2 ( – – – – – – 0 0 5 , 3 0 5 2 , 3 – – – – – – – – – 0 8 2 , 0 8 3 ) 2 4 7 , 8 0 3 ( 9 4 3 , 7 0 1 ) 0 0 8 , 0 4 ( 0 5 7 , 6 – – – – – – – – – ) 5 9 1 ( ) 5 6 1 ( ) 0 6 3 ( – – – – – – – – – – – – – – – – – 0 0 9 , 9 1 0 0 0 , 3 2 0 0 2 , 6 1 0 0 1 , 9 5 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 2 7 1 , 5 4 6 1 8 , 0 1 8 6 8 , 6 – 7 5 7 , 1 4 6 3 , 4 5 – – 5 3 1 , 0 2 – 8 1 0 , 9 1 9 6 3 , 6 4 2 0 0 8 , 9 4 0 0 , 8 5 9 2 , 4 6 4 3 7 , 9 3 1 9 2 , 0 3 3 2 6 , 6 5 5 5 9 1 5 6 1 0 6 3 d i a p y l l u f – s e r a h s y r a n i d r O s e l r a h C h t e n n e K , a d r o B d n a l o R r e t e P , s e t a o C d e r f l A h t e n n e K , n a e D r e d n a x e l A y o R , n i l k n a r F n e h p e t S , h c a l r e G s r o t c e r i D n o t l a W n h o J y r o g e r G , n i t r a M l e a h c i M d r a h c i R , g n i d r a H r e l s s i W n h o J d i v a D , x o n K h t i d u J , n a o l S s e v i t u c e x E e i l s e L s e m a J , e n o t s r e d l u a B h g u H n h o J , n o s r e d n A n h o J r o v e r T , n w o r B s e m a J d r a w d E n y t r a M , s e m a E l l e w x a M r e g o R , t t e n n e K t r a u t S k r a M , e n a l r a f c a M r e h p o t s i r h C r e t e P , w o s a W n h o J d r a h c i R , n o s n i k l i W l a t o T e l b i t r e v n o c e l b a m e e d e R s e r a h s e c n e r e f e r p l l e w x a M r e g o R , t t e n n e K l a t o T : e d u l c n i s e g n a h c r e h t O 1 h t i d u J , n a o l S s e v i t u c e x E s r o t c e r i D e m a N 9 0 0 2 . 9 0 0 2 y a M 6 n o y n a p m o C e h t f o r o t c e r i D a e b o t g n i s a e c r e h f o t l u s e r a s a e r u s o l c s i d l e n n o s r e p t n e m e g a n a m y e k e h t m o r f g n i d l o h y t i u q e s ’ n a o l S J r o s s e f o r P f o l a v o m e R . e r u t c u r t s e r y n a p m o c a o t e u d 9 0 0 2 n i l e n n o s r e p t n e m e g a n a m y e k e b o t g n i s a e c t t e n n e K M R r M d n a n w o r B J T r M , s e v i t u c e x e f o t c e p s e r n I . s n o i t a c o l l a e r a h s n a l P t n e m t s e v n i e R d n e d i v i D d n a n a l P e r a h S D E N ) i ( ) i i ( ) i i i ( d e t a l e r r i e h t g n i d u l c n i , n o s r e p t n e m e g a n a m y e k h c a e y b , y l l a i c ﬁ e n e b r o y l t c e r i d n i , y l t c e r i d d l e h y n a p m o C e h t f o s e r a h s f o r e b m u n e h t n i d o i r e p g n i t r o p e r e h t g n i r u d t n e m e v o m e h T : s w o l l o f s a s i , s e i t r a p s g n i d l o h e r a h S ) I D E U N T N O C ( S E R U S O L C S I D L E N N O S R E P T N E M E G A N A M Y E K . 2 3 ) I D E U N T N O C ( L E N N O S R E P T N E M E G A N A M Y E K F O S G N D L O H Y T U Q E I I ) B ( 132 Santos Annual Report 2009 d l e h e c n a l a B t a y l l a n i m o n r a e y e h t f o d n e e c n a l a B f o d n e t a r a e y e h t r e h t O ¹ s e g n a h c n o t e k r a m d e s a h c r u P g n i t s e v s t h g i r f o n o d e v i e c e R e s i c r e x e s n o i t p o f o n o d e v i e c e R s a d e t n a r G n o i t a s n e p m o c t a e c n a l a B g n i n n i g e b r a e y e h t f o e m a N 8 0 0 2 – – – – – – – – – – – – – – – – – – – – – – 2 7 1 , 5 4 6 1 8 , 0 1 8 6 8 , 6 – – – 7 5 7 , 1 4 6 3 , 4 5 5 3 1 , 0 2 – 8 1 0 , 9 1 9 6 3 , 6 4 2 0 0 8 , 9 4 0 0 , 8 5 9 2 , 4 6 4 3 7 , 9 3 1 9 2 , 0 3 3 2 6 , 6 5 5 – 5 9 1 5 6 1 0 6 3 – 4 5 1 , 5 9 4 1 , 1 – 6 9 4 , 9 – – – – – – – 1 3 5 6 9 , 9 0 4 4 , 7 3 2 7 , 2 ) 4 4 3 , 3 1 1 , 4 ( – – – – – – – – – – – – – – – – 6 7 3 , 3 ) 6 8 3 , 7 7 0 , 4 ( 6 7 3 , 3 – – ) 5 2 2 ( ) 5 2 2 ( – – – – – – – – – – – – – – – – 0 0 8 , 9 0 0 5 , 4 0 0 8 , 4 0 5 8 , 8 0 0 8 , 1 1 0 5 7 , 9 3 – – – – – – – – – – – – – – – – – – – – 4 4 7 , 2 1 4 4 7 , 2 1 – – – – – – – – – – – – – – – – – – – – – – – – – – – 5 4 1 , 4 7 0 2 , 5 3 d i a p y l l u f – s e r a h s y r a n i d r O s e l r a h C h t e n n e K , a d r o B d n a l o R r e t e P , s e t a o C d e r f l A h t e n n e K , n a e D s r o t c e r i D 4 4 3 , 3 1 1 , 4 s e l r a h C n h o J , t n i l F - e c i l l E – 0 1 2 , 9 4 – 8 0 6 9 3 6 , 0 1 – 3 4 2 , 6 9 6 3 , 6 4 2 – 4 0 2 , 3 5 9 7 , 9 5 4 3 9 , 7 2 1 4 4 , 1 2 r e d n a x e l A y o R , n i l k n a r F n e h p e t S , h c a l r e G l e a h c i M d r a h c i R , g n i d r a H r e l s s i W n h o J d i v a D , x o n K h t i d u J , n a o l S s e v i t u c e x E e i l s e L s e m a J , e n o t s r e d l u a B h g u H n h o J , n o s r e d n A n h o J r o v e r T , n w o r B s e m a J d r a w d E n y t r a M , s e m a E l l e w x a M r e g o R , t t e n n e K t r a u t S k r a M , e n a l r a f c a M r e h p o t s i r h C r e t e P , w o s a W n h o J d r a h c i R , n o s n i k l i W 9 3 1 , 8 7 5 , 4 l a t o T 5 2 2 5 9 1 5 6 1 5 8 5 e l b i t r e v n o c e l b a m e e d e R s e r a h s e c n e r e f e r p s e l r a h C n h o J , t n i l F - e c i l l E s r o t c e r i D l l e w x a M r e g o R , t t e n n e K h t i d u J , n a o l S s e v i t u c e x E l a t o T : e d u l c n i s e g n a h c r e h t O 1 , n o s r e p t n e m e g a n a m y e k y n a h t i w r a e y e h t t u o h g u o r h t e m i t y n a t a s e i r a i d i s b u s s t i f o y n a r o p u o r G e h t y b , y l t c e r i d n i r o y l t c e r i d , d e r u c e s r o d e e t n a r a u g , e d a m s n a o l o n n e e b e v a h e r e h T . s e i t r a p d e t a l e r r i e h t g n i d u l c n i L E N N O S R E P T N E M E G A N A M Y E K O T S N A O L ) C ( . 8 0 0 2 h c r a M 5 2 n o y n a p m o C e h t f o r o t c e r i D a e b o t g n i s a e c s i h f o t l u s e r a s a e r u s o l c s i d l e n n o s r e p t n e m e g a n a m y e k e h t m o r f g n i d l o h y t i u q e s ’ t n i l F - e c i l l E C J r M f o l a v o m e R . s n o i t a c o l l a e r a h s n a l P t n e m t s e v n i e R d n e d i v i D d n a n a l P e r a h S D E N ) i ( ) i i ( Santos Annual Report 2009 133 ) I D E U N T N O C ( S E R U S O L C S I D L E N N O S R E P T N E M E G A N A M Y E K . 2 3 ) I D E U N T N O C ( L E N N O S R E P T N E M E G A N A M Y E K F O S G N D L O H Y T U Q E I I ) B ( Notes to the Consolidated Financial Statements for the year ended 31 December 2009 33. 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 6 as to interest charged to/by controlled entities; • note 11 as to amounts owing by controlled entities and other related entities; • notes 18 and 19 as to amounts owing to controlled entities; • notes 19 and 36 as to Santos Ltd’s parent company guarantees (including ﬁ nancing facilities) provided for its controlled entities; • note 20 as to Non-executive Directors’ retirement beneﬁ ts; • notes 11 and 24 as to investments in controlled entities; • note 28 as to interests in joint ventures; and • note 32 as to disclosures relating to key management personnel. 34. REMUNERATION OF AUDITORS The auditor of Santos Ltd is Ernst & Young. Amounts received or due and receivable by Ernst & Young (Australia) for: An audit or review of the ﬁ nancial report of the entity and any other entity in the consolidated group Other assurance services Other services: Taxation Other Amounts received or due and receivable by overseas related practices of Ernst & Young (Australia) for: External audit Assurance Taxation Other services Amounts received or due and receivable by overseas non-Ernst & Young audit ﬁ rms for: Audit of ﬁ nancial reports for subsidiaries incorporated in Papua New Guinea 40 62 Amounts received or due and receivable by related Australian practices of non-Ernst & Young audit ﬁ rms for: Assurance Taxation Other services 195 657 35 887 60 297 190 547 134 Santos Annual Report 2009 Consolidated Santos Ltd 2009 $000 2008 $000 2009 $000 2008 $000 1,035 513 – – 1,061 368 5 38 725 433 – – 813 292 4 38 1,548 1,472 1,158 1,147 143 20 73 4 240 122 20 33 4 179 – – – – – – 137 151 25 313 – – – – – – 42 69 133 244 35. COMMITMENTS FOR EXPENDITURE The Group has the following commitments for expenditure: (A) CAPITAL COMMITMENTS Capital expenditure contracted for at balance date for which no amounts have been provided in the ﬁ nancial statements, payable: Not later than one year Later than one year but not later than ﬁ ve years Later than ﬁ ve years Santos Ltd has guaranteed the capital commitments of certain controlled entities (refer note 37 for further details). (B) MINIMUM EXPLORATION COMMITMENTS Minimum exploration commitments for which no amounts have been provided in the ﬁ nancial statements or capital commitments, payable: Not later than one year Later than one year but not later than ﬁ ve years Later than ﬁ ve years The Group has certain obligations to perform minimum exploration work and expend minimum amounts of money pursuant to the terms of the granting of petroleum exploration permits in order to maintain rights of tenure. These commitments may be varied as a result of renegotiations of the terms of the exploration permits, licences or contracts or alternatively upon their relinquishment. The minimum exploration commitments are less than the normal level of exploration expenditures expected to be undertaken by Santos Ltd and its controlled entities. (C) OPERATING LEASE COMMITMENTS Non-cancellable operating lease rentals are payable as follows: Not later than one year Later than one year but not later than ﬁ ve years Later than ﬁ ve years Consolidated Santos Ltd 2009 $million 2008 $million 2009 $million 2008 $million 935 1,285 10 2,230 76 270 8 354 330 150 4 484 270 162 – 432 124 – – 124 6 6 8 20 82 245 130 457 94 167 49 310 37 70 36 143 109 23 – 132 4 9 – 13 38 68 46 152 The Group leases ﬂ oating production, storage and offtake facilities, ﬂ oating storage ofﬂ oading 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 time. The Group also leases building ofﬁ ce 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 annually by CPI. During the year ended 31 December 2009 the Group recognised $85 million (2008: $88 million) as an expense in the income statement in respect of operating leases. Santos Annual Report 2009 135 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 35. COMMITMENTS FOR EXPENDITURE (CONTINUED) Consolidated Santos Ltd 2009 $million 2008 $million 2009 $million 2008 $million (D) FINANCE LEASE COMMITMENTS Finance lease commitments are payable as follows: Not later than one year Later than one year but not later than ﬁ ve years Later than ﬁ ve years Total minimum lease payments Less amounts representing ﬁ nance charges Present value of minimum lease payments 1 2 1 4 (1) 3 1 1 1 3 (1) 2 1 2 1 4 (1) 3 1 1 1 3 (1) 2 The Group has ﬁ nance leases for various items of plant and equipment with a carrying amount of $3 million (2008: $3 million) for both the Group and the Company. The leases generally have terms of between three to twelve years with no escalation clauses and no option to renew. Title to the assets passes to the Group at the expiration of the relevant lease periods. (E) COMMITMENT ON REMOVAL OF SHAREHOLDER CAP Pursuant to a Deed of Undertaking to the Premier of South Australia dated 16 October 2006 and as a consequence of the enactment of the Santos Limited (Deed of Undertaking) Act 2007 on 29 November 2007, Santos has agreed to: • Continue to make payments under its existing Social Responsibility and Community Beneﬁ ts Programme speciﬁ ed in the Deed totalling $60 million over a ten-year period from the date the legislation was enacted. As at 31 December 2009, approximately $48 million remains to be paid over the next eight years. • Continue to maintain the South Australian Cooper Basin asset’s Head Ofﬁ ce and Operational Headquarters together with other roles in South Australia for ten years subsequent to the date the legislation was enacted. At 31 December 2009, if this condition had not been met, the Company would have been liable to pay approximately $90 million to the State Government of South Australia. Santos is required to make these payments only if the State Government of South Australia does not reintroduce a shareholder cap on the Company’s shares or introduce any other restriction on or in respect of the Company’s Board or senior management which have an adverse discriminatory effect in their application to the Company relative to other companies domiciled in South Australia. (F) 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: Not later than one year Consolidated Santos Ltd 2009 $million 2008 $million 2009 $million 2008 $million 6 7 6 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’ Statutory Report that are not recognised as liabilities and are not included in the compensation of key management personnel. 136 Santos Annual Report 2009 36. 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 sacriﬁ ce of economic beneﬁ ts 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 Group: Performance guarantees* Actual and possible legal claims and proceedings The Group’s share of contingent liabilities of joint venture operations: Performance guarantees Litigation and proceedings Consolidated Santos Ltd 2009 $million 2008 $million 2009 $million 2008 $million 18 30 21 2 71 29 17 13 5 64 8 15 6 – 29 10 3 3 2 18 * Performance guarantees in the nature of bank guarantees provided to secure statutory and contractual commitments such as leases or work commitments in respect of exploration permits and pipelines. Legal advice in relation to the actual and possible legal claims and proceedings referred to above indicates that, on the basis of available information, any liability in respect of these claims is unlikely to exceed $7 million on a consolidated basis. A number of the Australian interests of the Group are located within areas the subject of one or more claims or applications for native title determination. Whatever the outcome of those claims or applications, it is not believed that they will signiﬁ cantly impact the Group’s asset base. Compliance with the “future act” provisions of the Native Title Act 1993 (Cth) can delay the grant of mineral and petroleum tenements and consequently 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 of controlled entities are disclosed in note 19. Santos Ltd has provided parent company guarantees in respect of obligations estimated at $2,379 million which include: (a) the funding and performance obligations of a number of subsidiary companies relating to: • a ﬂ oating storage and ofﬂ oading facilities agreement for the Sampang Production Sharing Contract; • a mobile offshore production unit agreement for the Madura Production Sharing Agreement; • the development of a jetty, marine ofﬂ oading facilities and in relation to the acquisition of land development and LNG facilities for the GLNG project; and • performance obligations under Production Sharing Contracts in India; (b) a subsidiary company’s obligations to meet distribution charges for gas retail customers; (c) the ﬁ nancial obligations of subsidiary companies relating to: • ﬂ oating production storage and ofﬂ oading vessel charter agreement for the Chim Sao development in Block 12 W, offshore Vietnam; and • subsidiary companies’ share (13.5%) of the US$14 billion ﬁ nancing for the PNG LNG Project. Subsidiary companies have provided parent or related company guarantees in respect of obligations estimated at $225 million which include: (a) the performance obligations of their subsidiary or related companies in relation to: • the sale of certain interest in the Bonaparte Basin; • the sale of certain interests in the KAKAP PSC; and • the acquisition of interest from Gastar Exploration USA Inc. and Gastar Exploration New South Wales, Inc.; and (b) the payment obligations of a controlled entity in respect of mudlogging services in the Kyrgyz Republic. Santos Annual Report 2009 137 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 37. 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 ﬁ nancial reports. As a condition of the Class Order the Company and each of the listed subsidiaries (“the Closed Group”) have entered into a Deed of Cross Guarantee. The effect of the Deed is that the Company has guaranteed to pay any deﬁ ciency 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 (NARNL Cooper) Pty Ltd (became a party to the Deed on 28 November 2008); • 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; and • Vamgas Pty Ltd. 138 Santos Annual Report 2009 37. DEED OF CROSS GUARANTEE (CONTINUED) The consolidated income statement, statement of comprehensive income, statement of ﬁ nancial position and statement of changes in equity of the entities that are members of the Closed Group are as follows: Consolidated income statement Product sales Cost of sales Gross proﬁ t Other revenue Other income Other expenses Interest income Finance expenses Share of net proﬁ ts of an associate Proﬁ t before tax Income tax expense Royalty-related taxation expense Total taxation expense Net proﬁ t for the period Consolidated statement of comprehensive income Net proﬁ t for the period Other comprehensive income: Exchange losses on translation of foreign operations, net of tax Change in fair value of available-for-sale ﬁ nancial assets, net of tax Actuarial gain/(loss) on deﬁ ned beneﬁ t plan, net of tax Total comprehensive income Closed Group 2009 $million 2008 $million 1,865 (1,411) 2,233 (1,412) 454 53 132 (178) 82 (127) – 416 (89) (39) (128) 288 288 (22) – 11 277 821 106 (6) (414) 56 (221) – 342 (154) (48) (202) 140 140 26 (9) (26) 131 Santos Annual Report 2009 139 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 37. DEED OF CROSS GUARANTEE (CONTINUED) Closed Group 2009 $million 2008 $million Consolidated statement of ﬁ nancial position Current assets Cash and cash equivalents Trade and other receivables Inventories Other ﬁ nancial assets Tax receivable Total current assets Non-current assets Receivables Available-for-sale ﬁ nancial assets Other ﬁ nancial assets Exploration and evaluation assets Oil and gas assets Other land, buildings, plant and equipment Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Deferred income Interest-bearing loans and borrowings Tax liabilities Provisions Total current liabilities Non-current liabilities Deferred income Interest-bearing loans and borrowings Deffered tax liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity 140 Santos Annual Report 2009 2,048 938 254 63 9 3,312 9 2 2,471 601 4,410 134 6 7,633 10,945 471 31 1 9 94 606 4 3,125 452 618 4,199 4,805 6,140 4,987 – 1,153 6,140 1,342 1,046 256 – – 2,644 17 2 2,124 209 4,439 110 9 6,910 9,554 769 50 1 444 38 1,302 6 3,434 380 707 4,527 5,829 3,725 2,531 22 1,172 3,725 Closed Group Issued capital $million Translation reserve $million Fair value reserve $million Retained earnings $million Total equity $million 24 (22) (2) – 1,172 299 37. DEED OF CROSS GUARANTEE (CONTINUED) Consolidated statement of changes in equity Balance at 1 January 2009 Total comprehensive income for the period Transactions with owners in their capacity as owners: Share options exercised by employees Entitlement offer exercised Shares issued Redeemable cumulative preference shares redeemed Dividends to shareholders Share-based payment transactions Balance at 31 December 2009 Balance at 1 January 2008 Total comprehensive income for the period Adjustment to retained earnings for company added to Deed during the year Transactions with owners in their capacity as owners: Share options exercised by employees Shares issued Transaction costs, net of tax Dividends to shareholders Share-based payment transactions Balance at 31 December 2008 2,531 – 4 2,914 138 (600) – – 4,987 2,331 – – 3 253 (56) – – 2,531 – – – – – – 2 (2) 26 – – – – – – 24 – – – – – – (2) 7 (9) – – – – – – – – – – (327) 9 1,153 1,205 114 131 – – – (286) 8 3,725 277 4 2,914 138 (600) (327) 9 6,140 3,541 131 131 3 253 (56) (286) 8 (2) 1,172 3,725 Santos Annual Report 2009 141 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 38. FINANCIAL RISK MANAGEMENT Exposure to foreign currency risk, interest rate risk, commodity price risk, credit risk, and liquidity risk arises in the normal course of the Group’s business. The Group’s overall ﬁ nancial risk management strategy is to seek to ensure that the Group is able to fund its business plans. Derivative ﬁ nancial instruments may be used to hedge exposure to ﬂ uctuations in foreign exchange rates, interest rates and commodity prices. The Group uses various methods to measure the types of ﬁ nancial risk to which it is exposed. These methods include Cash Flow at Risk analysis in the case of interest rate, foreign exchange and commodity price risk, and ageing analysis for credit risk. Financial risk management is carried out by a central treasury department (“Treasury”) which operates under Board-approved policies. The policies govern the framework and principles for overall risk management and covers speciﬁ c ﬁ nancial risks, such as foreign exchange risk, interest rate risk and credit risk, approved derivative and non-derivative ﬁ nancial instruments, and liquidity management. (A) FOREIGN CURRENCY RISK Foreign exchange risk arises from commercial transactions and valuations in assets and liabilities that are denominated in a currency that is not the entity’s functional currency. The risk is measured using cash ﬂ ow forecasting and Cash Flow at Risk analysis. The Group is exposed to foreign currency risk principally through the sale of products denominated in US dollars, foreign currency borrowings and expenditure. In order to economically hedge foreign currency risk, the Group has from time to time entered into forward foreign exchange, foreign currency swap and foreign currency option contracts. All US dollar (“USD”) denominated borrowings of Australian dollar (“AUD”) functional currency companies (2009: US$1,090 million; 2008: US$1,141 million) are either designated as a hedge of US dollar denominated investments in foreign operations, or swapped using cross-currency swaps to Australian dollars in order to achieve an economic hedge. As a result, there were no net foreign currency gains or losses arising from translation of US dollar denominated borrowings recognised in the income statements in 2009. The Group’s risk management policy is to hedge between 0% and 50% of forecasted cash ﬂ ows in US dollars for the current ﬁ nancial year. Based on the Group’s net ﬁ nancial assets and liabilities at 31 December 2009, the following table demonstrates the estimated sensitivity to a +/–13 cent movement in the US dollar exchange rate (2008: +/–10 cents) with all other variables held constant, on post-tax proﬁ t and equity: Impact on post-tax proﬁ t: AUD/USD +13 cents (2008: +10 cents) AUD/USD –13 cents (2008: -10 cents) Impact on equity: AUD/USD +13 cents (2008: +10 cents) AUD/USD –13 cents (2008: -10 cents) Consolidated Santos Ltd 2009 $million 2008 $million 2009 $million 2008 $million – – – – (1) 1 (1) 1 – – – – – – – – The above sensitivity will vary depending on the Group’s ﬁ nancial asset and liability proﬁ le over time. The +/–13 cent sensitivity is the Group’s estimate of reasonably possible changes in the US dollar exchange rate over the following ﬁ nancial year, based on recent volatility experienced in the market. 142 Santos Annual Report 2009 38. FINANCIAL RISK MANAGEMENT (CONTINUED) (B) MARKET RISK Cash ﬂ ow and fair value interest rate risk The Group’s interest rate risk arises from its borrowings. Borrowings issued at variable rates expose the Group to cash ﬂ ow interest rate risk. Borrowings issued at ﬁ xed rates expose the Group to fair value interest rate risk. The Group adopts a policy of ensuring that the majority of its exposure to changes in interest rates on borrowings is on a ﬂ oating 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. When transacted, these swaps have maturities ranging from 1 to 20 years, and align with the maturity of the related notes. At 31 December 2009, the Group had interest rate swaps with a notional contract amount of $1,028 million (2008: $1,302 million). The net fair value of swaps at 31 December 2009 was $125 million (2008: $304 million), comprising assets of $126 million and liabilities of $1 million. These amounts were recognised as fair value derivatives. Based on the net debt position as at 31 December 2009, taking into account interest rate swaps, it is estimated that if interest rates changed by US London Inter-Bank Offer Rate (“LIBOR”) +0.13%/–0.13% and Australian Bank Bill Swap reference rate (“BBSW”) +1.14%/–1.14% (2008: +0.25%/–2.0%), with all other variables held constant, the estimated impact on post-tax proﬁ t and equity would have been: Impact on post-tax proﬁ t: Interest rates +US 0.13%/+AU 1.14% (2008: +0.25%) Interest rates –US 0.13%/–AU 1.14% (2008: –2.0%) Impact on equity: Interest rates +US 0.13%/+AU 1.14% (2008: +0.25%) Interest rates –US 0.13%/–AU 1.14% (2008: –2.0%) Consolidated Santos Ltd 2009 $million 2008 $million 2009 $million 2008 $million 14 (14) 14 (14) (1) 4 (1) 4 – – – – – – – – This assumes that the change in interest rates is effective from the beginning of the ﬁ nancial year and the net debt position and ﬁ xed/ﬂ oating mix is constant over the year. However, interest rates and the debt proﬁ le of the Group are unlikely to remain constant and therefore the above sensitivity analysis will be subject to change. The sensitivity analysis is based on the Group’s reasonable estimate of changes in interest rates over the following ﬁ nancial year and reﬂ ects annual interest rate volatility. Changes in interest rates over the following year may be greater or less than the US LIBOR +0.13%/–0.13% and the Australian BBSW +1.14%/–1.14% sensitivity employed in the estimates above. Commodity price risk exposure The Group is exposed to commodity price ﬂ uctuations through the sale of petroleum products and other oil-price-linked contracts. The Group may enter into commodity crude oil price swap and option contracts to manage its commodity price risk. At 31 December 2009 the Group has no open oil price swap contracts (2008: nil), and therefore is not exposed to movements in commodity prices on ﬁ nancial instruments. The Group continues to monitor oil price volatility and to assess the need for commodity price hedging. Santos Annual Report 2009 143 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 38. FINANCIAL RISK MANAGEMENT (CONTINUED) (C) CREDIT RISK Credit risk arises from investments in cash and cash equivalents, derivative ﬁ nancial instruments and deposits with banks and ﬁ nancial institutions, as well as credit exposures to customers including outstanding receivables and committed transactions, and represents the potential ﬁ nancial loss if counterparties fail to perform as contracted. Management has Board-approved credit policies and the exposure to credit risk is monitored on an ongoing basis. The majority of Santos’ gas contracts are spread across major Australian energy retailers and industrial users. Contracts exist in every mainland state whilst the largest customer accounts for less than 20% of contracted gas. The Group controls credit risk by setting minimum creditworthiness requirements of counterparties, which for banks and ﬁ nancial institutions is a Standard & Poor’s rating of A or better. Rating AA, AA– A+ Approved counterparties Total credit limit $million Total exposure* $million 6 7 3,400 1,300 2,356 203 Exposure range $million 0 – 653 0 – 152 * Cash deposits plus accrued interest, bank account balances and the mark-to-market gain and percentage of notional value weighted by term on derivatives. If customers are independently rated these ratings are used, otherwise the credit quality of the customer is assessed by taking into account its ﬁ nancial position, past experience and other factors including credit support from a third party. Individual risk limits for banks and ﬁ nancial institutions are set based on external ratings in accordance with limits set by the Board. Limits for customers are determined within contract terms. The daily nomination of gas demand by customers and the utilisation of credit limits by customers is monitored by line management. In addition, receivables balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not signiﬁ cant. The Group does not hold collateral, nor does it securitise its trade and other receivables. At the reporting date there were no signiﬁ cant concentrations of credit risk within the Group and ﬁ nancial instruments are spread amongst a number of ﬁ nancial institutions to minimise the risk of default by counterparties. The maximum exposure to credit risk is represented by the carrying amount of ﬁ nancial assets of the Group, excluding investments, which have been recognised on the statement of ﬁ nancial position. 144 Santos Annual Report 2009 38. FINANCIAL RISK MANAGEMENT (CONTINUED) (D) LIQUIDITY RISK The Group adopts a prudent liquidity risk management strategy and seeks to maintain sufﬁ cient liquid assets and available committed credit facilities to meet short-term to medium-term liquidity requirements. The Group’s objective is to maintain ﬂ exibility in funding to meet ongoing operational requirements, exploration and development expenditure, and other corporate initiatives. The following table analyses the contractual maturities of the Group’s ﬁ nancial liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash ﬂ ows comprising principal and interest repayments, except for interest rate swaps. Estimated variable interest expense is based upon appropriate yield curves existing as at 31 December 2009. Less than 1 year $million 1 to 2 years $million 2 to 5 years $million More than 5 years $million Consolidated 2009 Non-derivative ﬁ nancial liabilities Trade and other payables Obligations under ﬁ nance leases Bank loans Medium-term notes Long-term notes Derivative ﬁ nancial liabilities/(assets) Cross-currency swap contracts Interest rate swap contracts 2008 Non-derivative ﬁ nancial liabilities Trade and other payables Obligations under ﬁ nance leases Bank loans Medium-term notes Long-term notes Derivative ﬁ nancial assets Cross-currency swap contracts Interest rate swap contracts Santos Ltd 2009 Trade and other payables Obligations under ﬁ nance leases Amounts owing to controlled entities 2008 Trade and other payables Obligations under ﬁ nance leases Amounts owing to controlled entities 709 1 32 24 199 5 (50) 920 605 1 54 18 141 (56) (42) 721 778 1 – 779 723 1 – 724 – 1 38 372 59 – (34) 436 – 1 34 17 260 (31) (58) 223 – 1 – 1 – 1 – 1 – 1 54 13 278 – (32) 314 – 1 82 376 375 – (74) 760 – 1 – 1 – 1 – 1 – 1 51 113 1,056 – (35) 1,186 – 1 119 119 1,432 – (184) 1,487 – 1 3,598 3,599 – 1 4,082 4,083 Amounts owing to controlled entities are shown at their carrying value as any interest charged on the loans is added to the loan balance. The loans are made in the ordinary course of business on normal market terms and conditions and are not repayable for a minimum of nine years. Santos Annual Report 2009 145 Notes to the Consolidated Financial Statements for the year ended 31 December 2009 38. FINANCIAL RISK MANAGEMENT (CONTINUED) (E) FAIR VALUES The ﬁ nancial assets and liabilities of the Group and the Company are recognised in the statement of ﬁ nancial position at their fair value in accordance with the accounting policies in note 1, except for long-term notes that are not swapped to a variable interest rate, and bank borrowings, which are recognised at face value. The carrying value of these long-term notes is US$125 million and their fair value is estimated at US$131 million based on discounting the future cash ﬂ ows 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 2009. The carrying value of the bank borrowings approximates fair value as it is a ﬂ oating rate instrument. Basis for determining fair values The following summarises the signiﬁ cant methods and assumptions used in estimating the fair values of ﬁ nancial instruments: Trade and other receivables The carrying value less impairment provision of trade receivables is a reasonable approximation of their fair values due to the short-term nature of trade receivables. Available-for-sale ﬁ nancial assets The fair value of available-for-sale ﬁ nancial assets is determined by reference to their quoted bid price at the reporting date. Derivatives The fair value of interest rate swaps is calculated by discounting estimated future cash ﬂ ows based on the terms of maturity of each contract and using market interest rates for a similar instrument at the reporting date. Where these cash ﬂ ows are in a foreign currency the present value is converted to Australian dollars at the foreign exchange spot rate prevailing at reporting date. Financial liabilities Fair value is calculated based on the present value of future principal and interest cash ﬂ ows, discounted at the market rate of interest at the reporting date. Where these cash ﬂ ows are in a foreign currency the present value is converted to Australian dollars at the foreign exchange spot rate prevailing at reporting date. Interest rates used for determining fair value The interest rates used to discount estimated future cash ﬂ ows, where applicable, are based on the market yield curve at the reporting date. The dealt credit spread is assumed to be the same as the market rate for the credit as at reporting date as allowed under AASB 139 Financial Instruments: Recognition and Measurement. The interest rates including credit spreads used to determine fair value were as follows: Derivatives Loans and borrowings 2009 2008 0.4% – 6.3% 0.4% – 6.9% 1.3% – 4.3% 1.7% – 4.9% 146 Santos Annual Report 2009 38. FINANCIAL RISK MANAGEMENT (CONTINUED) (E) FAIR VALUES (CONTINUED) Fair value hierarchy As at 31 December 2009, the Group held the following ﬁ nancial instruments measured at fair value. The Group uses the following hierarchy for determining and disclosing the fair value of ﬁ nancial instruments by valuation technique: Level 1: quoted (unadjusted) prices in active markets for identical assets and liabilities. Level 2: other techniques for which all inputs which have signiﬁ cant effect on the recorded fair value are observable, either directly or indirectly. Level 3: techniques which use inputs which have a signiﬁ cant effect on the recorded fair value that are not based on observable market data. Assets measured at fair value Financial assets at fair value through proﬁ t and loss: Interest rate swap contracts Available-for-sale ﬁ nancial assets: Equity shares Liabilities measured at fair value Financial liabilities at fair value through proﬁ t and loss: Long-term notes Medium-term notes Cross-currency swap contracts Interest rate swap contracts Total $million Level 1 $million Level 2 $million Level 3 $million 126 2 (1,193) (99) (7) (1) – 2 – – – – 126 – (1,193) (99) (7) (1) – – – – – – During the reporting period ended 31 December 2009, there were no transfers between level 1 and level 2 fair value measurements, and no transfers into or out of level 3 fair value measurements. 39. EVENTS AFTER THE END OF THE REPORTING PERIOD On 18 February 2010, the Directors of Santos Ltd declared a ﬁ nal dividend on ordinary shares in respect of the 2009 ﬁ nancial year. Refer to note 22 for dividends declared after 31 December 2009. Santos Annual Report 2009 147 Directors’ Declaration For the year ended 31 December 2009 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 ﬁ nancial 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 ﬁ nancial position as at 31 December 2009 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 ﬁ nancial year ended 31 December 2009. 3. As at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identiﬁ ed in note 37 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 18th day of February 2010 On behalf of the Board: Director Adelaide Director 148 Santos Annual Report 2009 Auditor’s Independence Declaration to the Directors of Santos Ltd In relation to our audit of the ﬁ nancial report of Santos Ltd and the entities it controlled for the year ended 31 December 2009, 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 R J Curtin Partner Adelaide Ernst & Young 18 February 2010 Liability limited by a scheme approved under Professional Standards Legislation Santos Annual Report 2009 149 Independent Audit Report to the members of Santos Ltd Report on the Financial Report Independence We have audited the accompanying ﬁ nancial report of Santos Ltd, which comprises the statement of ﬁ nancial position as at 31 December 2009, and the income statement, statement of comprehensive income, statement of cash ﬂ ows and statement of changes in equity for the year ended on that date, a summary of signiﬁ cant accounting policies, other explanatory notes and the directors’ declaration of the consolidated entity comprising the Company and the entities it controlled at the year’s end or from time to time during the ﬁ nancial year. In conducting our audit we have met the independence requirements of the Corporations Act 2001. We have given to the Directors of the Company a written Auditor’s Independence Declaration, a copy of which is included on page 149 of the Annual Report and is referred to in the directors’ statutory report. In addition to our audit of the ﬁ nancial report, we were engaged to undertake the services disclosed in the notes to the ﬁ nancial statements. The provision of these services has not impaired our independence. Directors’ responsibility for the financial report The Directors of the Company are responsible for the preparation and fair presentation of the ﬁ nancial report in accordance with the Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal controls relevant to the preparation and fair presentation of the ﬁ nancial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. In note 1(A), the Directors also state that the ﬁ nancial report, comprising the ﬁ nancial statements and notes, complies with International Financial Reporting Standards as issued by the International Accounting Standards Board. Auditor’s responsibility Our responsibility is to express an opinion on the ﬁ nancial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the ﬁ nancial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the ﬁ nancial report. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the ﬁ nancial report, whether due to fraud or error. In making those risk assessments, we consider internal controls relevant to the entity’s preparation and fair presentation of the ﬁ nancial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Directors, as well as evaluating the overall presentation of the ﬁ nancial report. We believe that the audit evidence we have obtained is sufﬁ cient and appropriate to provide a basis for our audit opinion. Auditor’s opinion In our opinion: 1. the ﬁ nancial report of Santos Ltd is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the ﬁ nancial position of Santos Ltd and the consolidated entity at 31 December 2009 and of their performance for the year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001. 2. the ﬁ nancial report also complies with International Financial Reporting Standards as issued by the International Accounting Standards Board. Report on the Remuneration Report We have audited the remuneration report included in pages 52 to 69, within the directors’ statutory report for the year ended 31 December 2009. The Directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. Auditor’s opinion In our opinion the remuneration report of Santos Ltd for the year ended 31 December 2009, complies with section 300A of the Corporations Act 2001. Ernst & Young RJ Curtin Partner Adelaide 18 February 2010 Liability limited by a scheme approved under Professional Standards Legislation 150 Santos Annual Report 2009 Securities exchange and shareholder information Listed on Australian Securities Exchange at 26 February 2010 were 831,413,347 fully paid ordinary shares. Unlisted were 46,500 partly paid Plan 0 shares, 41,500 partly paid Plan 2 shares, 18,400 fully paid ordinary shares issued pursuant to the Santos Employee Share Purchase Plan (SESPP) for General Employee Participation, 57,512 fully paid ordinary shares issued pursuant to SESPP for Senior Executive Long Term Incentive (LTI), 693,800 restricted fully paid ordinary shares issued pursuant to the vesting of LTI Share Acquisition Rights and 42,735 fully paid ordinary shares issued pursuant to the Non-executive Director Share Plan. There were: 111,111 holders of all classes of issued ordinary shares (including 6 holders of Plan 0 shares; 5 holders of Plan 2 shares; 36 holders of SESPP shares; and 56 holders of restricted shares) compared with 73,746 a year earlier; and 52 holders of the 4,954,743 options granted pursuant to the Santos Executive Share Option Plan and 87 holders of 1,343,737 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 57.38% of the total voting power in Santos (last year 57.80%). The 20 largest shareholders of fully paid ordinary shares in Santos as shown in the Company’s Register of Members at 26 February 2010 were: Name HSBC Custody Nominees (Australia) Limited National Nominees Limited JP Morgan Nominees Australia Limited Citicorp Nominees Pty Limited ANZ Nominees Limited (Cash Income A/c) Cogent Nominees Pty Limited Queensland Investment Corporation Australian Foundation Investment Company Limited AMP Life Limited Citicorp Nominees Pty Limited (CFS WSLE Geared Shr Fnd A/c) Argo Investments Limited Citicorp Nominees Pty Limited (BHP Billiton ADR Holders A/c) UBS Wealth Management Australia Nominees Pty Ltd RTS Nominees Pty Limited Cogent Nominees Pty Limited (SMP Accounts) Mr John Charles Ellice-Flint UBS Nominees Pty Ltd Neweconomy Com Au Nominees Pty Limited (SBL Account) HSBC Custody Nominees (Australia) Limited – A/c 3 Merrill Lynch (Australia) Nominees Pty Limited Total Number of fully paid ordinary shares 161,469,916 108,651,936 97,485,218 29,004,735 19,026,225 11,874,389 6,842,105 6,611,628 5,765,314 4,343,686 3,350,000 3,247,356 3,161,739 3,118,324 2,820,736 2,578,746 2,389,746 1,898,596 1,736,299 1,712,523 % 19.42 13.07 11.73 3.49 2.29 1.43 0.82 0.80 0.69 0.52 0.40 0.39 0.38 0.38 0.34 0.31 0.29 0.23 0.21 0.21 477,089,217 57.38 Santos Annual Report 2009 151 Securities exchange and shareholder information (continued) Analysis of Shares – Range of Shares Held 1-1,000 1,001-5,0000 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) % of holders % of shares held 45,821 51,628 8,859 4,632 171 111,111 1,866 41.24 46.47 7.97 4.17 0.15 2.86 14.54 7.50 11.41 63.69 100.00 100.00 Substantial Shareholders, as at 26 February 2010, as disclosed by notices received by the Company: Name No. of voting shares held Blackrock Investment Management (Australia) Limited 42,060,067 For Directors’ Shareholdings see the Directors’ Statutory Report as set out on page 43 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. 152 Santos Annual Report 2009 Glossary barrel/bbl The standard unit of measurement for all production and sales. One barrel = 159 litres or 35 imperial gallons. boe Barrels of oil equivalent. The factor used by Santos to convert volumes of different hydrocarbon production to barrels of oil equivalent. the company or Santos Santos Ltd and its subsidiaries. condensate 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 signiﬁ cant 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 unreﬁ ned liquid petroleum or hydrocarbons. EBITDAX Earnings before interest, tax, depreciation, depletion, 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. geoscience Scientiﬁ c disciplines related to the study of the earth. hazard A source of potential harm. hydrocarbons Solid, liquid or gas compounds of the elements hydrogen and carbon. liquids A sales product in liquid form; for example, condensate and LPG. LNG Liqueﬁ ed natural gas. Natural gas that has been liqueﬁ ed by refrigeration to store or transport it. Generally, LNG comprises mainly methane. lost time injury frequency rate (LTIFR) A statistical measure of health and safety performance. A lost time injury is a work-related injury or illness that results in a permanent disability or time lost of one complete shift or day or more any time after the injury or illness. LTIFR is calculated as the number of lost time injuries per million hours worked. LPG Liqueﬁ ed 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. medical treatment injury frequency rate (MTIFR) A statistical measure of health and safety performance. A medical treatment injury is a work-related injury or illness, other than a lost time injury, where the injury is serious enough to require more than minor ﬁ rst aid treatment. Santos classiﬁ es injuries that result in modiﬁ ed duties as medical treatment injuries. mmbbl Million barrels. mmboe Million barrels of oil equivalent. mtpa Million tonnes per annum. 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. OECD Organisation for Economic Cooperation and Development oil A mixture of liquid hydrocarbons of different molecular weights. PJ Petajoules. Joules are the metric measurement unit for energy. A petajoule is equal to 1 joule x 1015. proven plus probable reserves (2P) 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) Reserves that, to a low degree of certainty (10% conﬁ dence), are recoverable. There is relatively high risk associated with these reserves. proven reserves (1P) Reserves that, to a high degree of certainty (90% conﬁ dence), 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. sales gas Natural gas that has been processed by gas plant facilities and meets the required speciﬁ cations under gas sales agreements. seismic survey Data used to gain an understanding of rock formations beneath the earth’s surface using reﬂ ected 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 health and 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. Conversion Crude oil Sales gas Condensate/ naphtha 1 barrel = 1 boe 1 petajoule = 171,937 boe 1 barrel = 0.935 LPG 1 tonne = 8.458 For a comprehensive online conversion calculator tool, visit the Santos website, www.santos.com Santos Annual Report 2009 153 Index A Audit Committee Auditor’s Independence Declaration to Directors Auditors’ independence Announcements Annual General Meeting 30, 31 149 36 156 155 B Balance sheet Bangladesh Basins Bay of Bengal Board of Directors Bonaparte LNG project Browse Basin 9 19 10-11 19 22-3, 26–31 15 11 C Chairman’s review Chief Executive Ofﬁ cer’s review Chief Financial Ofﬁ cer’s review Chim Sáo Committees Company proﬁ le Continuous disclosure Corporate governance 5 7 8-9 19 30-2 inside front cover 36 26-6 D Directors Directors’ remuneration Directors’ Statutory Report Dividends 26, 28-9, 52 47 43-9 46 E Earnings Earnings per share Environment, Health, Safety and Sustainability Committee Exploration and evaluation assets 93 110 30, 31 97 F Finance Committee Financial Report Financial summary G GDF SUEZ GLNG Glossary Greenhouse gas emissions I Income statement Indonesian projects Information for shareholders J John Brookes K Kyrgyz Republic L LNG projects M Maleo Mutineer-Exeter P Papua New Guinea Performance awards PETRONAS PNG LNG Production statistics R Reindeer Remuneration Committee Remuneration in Brief Remuneration Report Reserve statistics Risk management S Safety Performance Senior executives Share price Sponsorships Statements of Comprehensive Income Statements of Financial Position Statements of Cash Flows Statements of Changes in Equity Sustainability 30, 31 42-74 40-1 8, 15 8, 15 153 21 70 19 155 8 19 15 T 10-year summary Total recordable case frequency rate Total shareholder return (TSR) 8, 19 8 11 60 8, 15 8, 15 12 17 30, 31 50 52-69 13 33–4 21, 7 52 65 21 71 72 73 74 21 40-1 95 65 N Nomination Committee Notes to the Consolidated Financial Statements 30, 31 75-147 V Values Vietnam Vision and strategy inside front cover 19 inside front cover O Operating and ﬁ nancial highlights Organisational chart Oyong 2 37 8, 19 154 Santos Annual Report 2009 Information for shareholders NOTICE OF MEETING INVESTOR INFORMATION AND SERVICES The Annual General Meeting of Santos Ltd will be held in the Festival Theatre at Adelaide Festival Centre, King William Road, Adelaide, South Australia on Thursday 6 May 2010 at 10:00 am. FINAL DIVIDEND The 2009 ﬁ nal ordinary dividend will be paid on 31 March 2010 to shareholders registered in the books of the Company at the close of business on 2 March 2010 in respect of fully paid shares held at record date. Santos website A wide range of information for investors is available from Santos’ website, www.santos.com, including Annual Reports, Sustainability 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: SECURITIES EXCHANGE LISTING • webcasts of investor brieﬁ ngs; Santos Ltd. Incorporated in Adelaide, South Australia, on 18 March 1954. Quoted on the ofﬁ cial list of the Australian Securities Exchange (ordinary shares code STO). • an email alert facility where people can register to be notiﬁ ed, free of charge, of Santos’ News Announcements via email; and • an RSS feed of Santos’ News Announcements, 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 2009 Full Year Results announcement 18 Feb 2010 Ex-dividend date for 2009 full year dividend 24 Feb 2010 Record date for 2009 full year dividend 02 Mar 2010 DIRECTORS P R Coates (Chairman), D J W Knox (Managing Director), K C Borda, K A Dean, R A Franklin, R M Harding, G J W Martin, J Hemstritch. SECRETARY J L Baulderstone CHANGE OF SHAREHOLDER DETAILS Shareholders can access their current shareholding details and change many of these details online via Santos Ltd website www.santos.com. The website requires you to quote your Shareholder Reference Number (SRN) or Holder Identiﬁ cation Number (HIN) in order to access this information. Forms are also 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 by contacting Computershare Investor Services Pty Limited. which allows people to view these announcements using RSS reader software. Payment date for 2009 full year dividend 31 Mar 2010 The Santos website provides 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 of the reports are available from the Share Register or Investor Relations. SHAREHOLDER ENQUIRIES Enquiries about shareholdings should be directed to: Computershare Investor Services Pty Limited GPO Box 2975 Melbourne, Victoria 3001 Phone: 1300 017 716 (within Australia) or +61 3 9938 4343 (outside Australia) Email: web.queries@computershare.com Annual General Meeting 06 May 2010 2010 Interim Results announcement 26 Aug 2010 Ex-dividend date for 2010 interim dividend TBA Record date for 2010 interim dividend TBA Payment date for 2010 interim dividend TBA QUARTERLY REPORTING CALENDAR 2010 First Quarter Activities Report 22 Apr 2010 2010 Second Quarter Activities Report 22 Jul 2010 2010 Third Quarter Activities Report 21 Oct 2010 2010 Fourth Quarter Activities Report 20 Jan 2011 Dates are subject to change and are published on the Santos website, www.santos.com. Santos Annual Report 2009 155 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 notiﬁ ed, free of charge, of Santos’ news announcements via email. It also provides an RSS feed which allows people to view these announcements using RSS reader software. Santos 2009 Major Announcements 07 Jan 2009 Santos signs US$585 million Sino Iron gas supply contract 23 Jan 2009 2008 Fourth Quarter Activities Report 28 Jan 2009 Santos 2008 Reserves Report 19 Feb 2009 Underlying proﬁ t up 42% to $572 million for 2008 05 Mar 2009 Reindeer Project Update 31 Mar 2009 Retirement of Chairman, Stephen Gerlach: Appointment of Peter Coates 31 Mar 2009 GLNG Completes Environmental Milestone 23 Apr 2009 First Quarter Activities Report 06 May 2009 2009 AGM address 11 May 2009 Santos Announces Equity Raising 13 May 2009 Successful Completion of Institutional Component of Equity Raising 15 May 2009 Ground-breaking solution to CSG water management 28 May 2009 Santos announces $6 million community beneﬁ ts package for SA 03 Jun 2009 Sale of interest in PRL 5 in Papua New Guinea 16 Jun 2009 Successful Completion of Retail Component of Equity Raising 18 Jun 2009 GLNG signs binding Heads of Agreement for sale of 2 mtpa of LNG 20 Jun 2009 GLNG Environmental Impact Statement to be released for public comment 22 Jun 2009 PNG LNG reaches signiﬁ cant marketing milestone 30 Jun 2009 Santos to delist its ADRs from NASDAQ 02 Jul 2009 Santos increases strategic coal seam gas position in Gunnedah Basin 23 Jul 2009 Second Quarter Activities Report 27 Jul 2009 Santos secures $100 million Newmont gas supply extension in Western Australia 13 Aug 2009 Santos discovers gas in Browse Basin offshore Western Australia 18 Aug 2009 Santos and GDF SUEZ announce strategic partnership 20 Aug 2009 Santos reports $102 million net proﬁ t for the ﬁ rst half of 2009 27 Aug 2009 Redemption of FUELS 27 Aug 2009 Santos Tour Down Under sponsorship 25 Sep 2009 Natural gas key to driving lower carbon emissions from power generation 02 Oct 2009 First gas from Oyong Phase-2 in Indonesia 19 Oct 2009 PNG LNG Update 22 Oct 2009 Third Quarter Activities Report 29 Oct 2009 Santos appoints Greg Martin to Board 04 Nov 2009 PNG LNG signs Heads of Agreement with Sinopec 10 Nov 2009 Santos marks 40 years of natural gas delivery 04 Dec 2009 PNG LNG Project signs LNG Sale and Purchase Agreement with Sinopec 07 Dec 2009 PNG LNG Project signs LNG Sale and Purchase Agreement with TEPCO 08 Dec 2009 PNG LNG Project approved by Co-Venturers 22 Dec 2009 PNG LNG Project signs LNG Sale and Purchase Agreement with Osaka Gas 156 Santos Annual Report 2009 Port Bonython PO Box 344 Whyalla South Australia 5600 Telephone: 61 8 8649 0100 Facsimile: 61 8 8649 0200 Jakarta Santos Asia Paciﬁ c Pty Ltd Level 4 Ratu Plaza Ofﬁ ce Tower Jalan Jendral Sudirman Kav 9 Jakarta 10270 Indonesia PO Box 6221 JKS GN Jakarta 12060 Indonesia Telephone: 62 21 2750 2750 Facsimile: 62 21 720 4503 Port Moresby Barracuda Ltd Level 8 Paciﬁ c Place Cnr Musgrave Street and Champion Parade Port Moresby Papua New Guinea Telephone: 675 321 2633 Facsimile: 675 321 2847 Hanoi Santos Vietnam Pty Ltd Suite 701 Level 7 39 A Ngo Quyen Hanoi Vietnam Telephone: 84 4 2220 6000 Facsimile: 84 4 2220 6002 New Delhi Santos International Operations Pty Ltd 1401 & 1402 Level 14 Narain Manzil 23 Barakhamba Road Connaught Place New Delhi 110 001 India Telephone: 91 11 4351 2000 Facsimile: 91 11 4351 2070 Bishkek CJSC South Petroleum Company 5th Floor 93/2, Shopokov str., Bishkek Kyrgyz Republic Telephone: 996 312 90 1004 Facsimile: 996 312 90 1005 Santos Ltd ABN 80 007 550 923 REGISTERED AND HEAD OFFICE Ground Floor Santos Centre 60 Flinders Street Adelaide South Australia 5000 GPO Box 2455 Adelaide South Australia 5001 SHARE REGISTER Computer Share Yarra Falls 452 Johnston Street Abbotsford Victoria 3067 GPO Box 2975 Melbourne Victoria 3001 Telephone:- Within Australia: 1300 017 716 From overseas: 61 3 9938 4343 Facsimile: 61 3 9473 2500 Email: web.queries@computershare.com.au OFFICES Brisbane Level 22 Santos Place 32 Turbot Street Brisbane Queensland 4000 GPO Box 1010 Telephone: 61 7 3838 3000 Facsimile: 61 7 3838 3350 Perth Level 1, 40 The Esplanade Perth Western Australia 6000 Telephone: 61 8 9333 9500 Facsimile: 61 9333 9571 Gladstone 114 Goondoon Street Gladstone Queensland 4680 Telephone: 61 7 4970 8419 Facsimile: 61 7 4970 8444 Roma 39 Currey Street Roma Queensland 4455 Telephone: 61 7 4622 2400 Facsimile: 61 7 4622 3476 Gunnedah 88 Marquis Street Gunnedah New South Wales 2380 Telephone: 61 2 6741 5100 Facsimile: 61 2 6741 5101 PAPER AND PRINTING OF THE ANNUAL REPORT This report is printed on 9Lives 80 paper and ecoStar paper, which contains chlorine-free recycled ﬁ bre and ﬁ bre from responsibly managed plantation forests. The paper is certiﬁ ed by the Forest Stewardship Council (FSC), which promotes environmentally appropriate, socially beneﬁ cial, and economically viable management of the world’s forests. The report was printed by Southern Colour, certiﬁ ed by the FSC chain of custody and certiﬁ ed for ISO 14001: 2004 (Environmental Management Systems). The printing process uses digital printing plates which eliminate ﬁ lm and associated chemicals. The vegetable based inks use renewable sources such as ﬂ ax, rather than traditional mineral oils which emit higher volumes of greenhouse gases. All paper waste during the printing process is recycled. HELP SAVE PAPER BY READING THIS REPORT ONLINE An electronic version of this report is available on Santos’ website www.santos.com. 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