Transform
Build
Grow
Annual
Report
2016
Santos Limited ABN 80 007 550 923
This 2016 Annual Report is a summary of Santos’ operations,
activities and financial position as at 31 December 2016.
All references to dollars, cents or $ in this document are
to US currency, unless otherwise stated.
An electronic version of this report is available on Santos’ website,
www.santos.com
Santos’ Corporate Governance Statement can be viewed at:
www.santos.com/who-we-are/corporate-governance
CONTENTS
1 About Santos
2 Corporate Directory
4
Message from the Chairman and from the
Managing Director and Chief Executive Officer
6 Board of Directors
8 Santos Executive Committee
10 Reserves statement
16 Directors’ Report
29 Remuneration in brief
31 Remuneration Report
51 Financial Report
115 Directors’ Declaration
116
Independent Auditor’s Report
121 Auditor’s Independence Declaration
122 Securities Exchange and shareholder information
124 Glossary
An Australian
energy pioneer
Santos is an Australian natural gas company.
Established in 1954, the company is proud to
deliver the economic and environmental benefits
of natural gas to homes and businesses
throughout Australia and Asia.
Five core long-life natural gas assets sit at the heart of a disciplined, focused strategy
to drive sustainable shareholder value: the Cooper Basin, GLNG, Papua New Guinea,
Northern Australia and Western Australia Gas. Each of these core assets provide stable
production, long-term revenue streams and significant upside opportunities.
With one of the largest exploration and production acreages in Australia, a significant
and growing footprint in Papua New Guinea and a strategic infrastructure position,
Santos is well positioned to benefit from the growing global demand for energy.
The Santos turnaround is now well underway. A three phase strategy to Transform,
Build and Grow the business will drive returns as we continue to focus on the exploration,
development, production and sale of natural gas.
Santos is focused on driving sustainable shareholder value by becoming a low-cost,
reliable and high performance business with the financial flexibility to build and grow
the business through the oil price cycle.
Santos Annual Report 2016 / 1
Corporate Directory
Santos Limited ABN 80 007 550 923
SECURITIES EXCHANGE LISTING
Santos Limited. Incorporated in Adelaide, South Australia, on
18 March 1954.
Quoted on the official list of the Australian Securities Exchange
(ordinary shares code STO).
COMPANY SECRETARY
David Lim joined Santos in 2007 and was appointed to the role of
Company Secretary in 2010. He has over 20 years of experience
in commercial and corporate legal practice. He is an accredited
Chartered Secretary, and holds a Bachelor of Economics and a
Bachelor of Laws from the University of Adelaide.
REGISTERED AND HEAD OFFICE
Ground Floor Santos Centre
60 Flinders Street
Adelaide SA 5000
Australia
GPO Box 2455
Adelaide SA 5001
Australia
Telephone: +61 8 8116 5000
Facsimile: +61 8 8116 5050
Website: www.santos.com
SHARE REGISTER
Computershare Investor Services Pty Ltd
Yarra Falls, 452 Johnston Street
Abbotsford VIC 3067
Australia
GPO Box 2975
Melbourne VIC 3001
Australia
Online enquiries: www.investorcentre.com/contact
Website:
www.investorcentre.com/sto
Telephone: 1300 017 716 (within Australia)
+61 3 9938 4343 (international)
2 / Santos Annual Report 2016
Moomba plant, Cooper Basin.
Santos Annual Report 2016 / 3
Message from the Chairman and from the
Managing Director and Chief Executive Officer
Peter Coates and Kevin Gallagher
Dear Shareholder,
OPERATIONAL PERFORMANCE
2016 was a year of transformational
change for Santos. With the oil price
trading at less than US$30 per barrel
at the start of the year, decisive action
was taken to stabilise the business and
increase operating cash flow. The aim
was to be free cash flow breakeven at
US$35-40 per barrel on a portfolio basis.
The key strategic imperative was to create
shareholder value by becoming a low-cost,
reliable, high performance business and
position Santos to deliver positive cash
returns through the cycle.
A new leadership team with strong
technical expertise was established.
Stronger levels of governance and central
controls were also implemented around key
decision making and planning processes.
A new operating model was embraced
to focus on our primary business of
exploration, development, production and
sales of natural gas both onshore and
offshore.
As a result of the changes implemented
by the Board and management, Santos
is beginning to turnaround. The free cash
flow breakeven oil price was reduced from
US$47 per barrel at the start of the year to
US$36.50 per barrel by year-end. Santos
generated $370 million positive free cash
flow over the last eight months of 2016
resulting in a net $206 million of free cash
flow for the full-year, before asset sales.
Whilst these results are pleasing and faster
than anticipated, we recognise that there
is still more to do and we will continue to
focus on sustainably driving costs out of
the business in the coming year.
Operations continued to perform well,
with annual sales volumes up 31% to a
record 84.1 million barrels of oil equivalent
(mmboe) reflecting a ramp up in LNG from
GLNG train 1 and first LNG from train 2
in May 2016. Record annual production of
61.6 mmboe was also reported, up 7% on
2015.
A statutory net loss after tax, of $1,047
million was recorded which included after
tax impairments of $1,050 million on
GLNG, announced earlier in the year. The
impairment was due to the scaling back
of activity in the field in response to lower
oil prices, which impacted the ramp-up of
production. Combined with an increase in
the price of third party gas, this resulted
in the need to update long-term operating
assumptions for the asset.
Excluding impairments and other
significant items, underlying net profit
after tax was $63 million, 29% higher
than the prior year.
Excellent progress has been made over
the past twelve months in sustainably
taking costs out of the business and has
contributed to a 51% reduction in capital
expenditure to $625 million and an 18%
reduction in upstream unit production
costs to $8.45 per barrel of oil equivalent.
In 2015 the Board announced a new
dividend framework to reflect Santos’
exposure to oil-linked LNG pricing and
the cyclical characteristics of global oil
markets. This framework states that
dividends are expected to be a minimum of
40 percent of underlying net profit, subject
to business conditions.
Consistent with the company’s immediate
focus to strengthen the balance sheet
and reduce net debt, the Board resolved
not to pay a final dividend. Whilst we
understand that some shareholders will
be disappointed, it is our firm view that
a disciplined focus on debt reduction is
the most responsible course of action
in the circumstances. With the strong
progress being made in reducing costs
and improving free cash flow, the Board is
confident in the company’s ability to return
to paying dividends and will next review
this position at the 2017 half-year results.
SAFETY
The company recorded its lowest
three-year rolling average lost time injury
frequency rate on record. It is a credit to
all Santos employees that they have stayed
focused during the restructuring of the
organisation and indeed have embraced
a low-cost, high performance mindset
to re-establish Santos as a strong and
sustainable business with a proud history.
STRONGER BALANCE SHEET
Strengthening the balance sheet was
a significant focus for the organisation
in 2016. Net debt was reduced by $1.3
billion to $3.5 billion via a combination
of assets sales, free cash flow and the
successful completion of the A$1,040
million institutional placement in December.
The decision to raise capital was not taken
lightly. It was deemed necessary to enable
the company to operate in a lower oil price
environment and to provide the financial
flexibility to build and grow the business in
2017 and beyond.
4 / Santos Annual Report 2016
We will continue to adopt a disciplined
approach to capital management and will
target a further $1.5 billion reduction in
net debt by the end of 2019 through free
cash flow, asset sales and monetisation of
infrastructure assets.
This focus is not only driving improved
performance and further productivity gains
but also providing a clear line-of-sight to
higher-margin growth opportunities and
the delivery of Australia’s lowest-cost
onshore operations.
$447 million in proceeds from asset sales
were received in 2016, including the sale
of the Kipper asset offshore Victoria, Stag
asset offshore Western Australia and
pastoral holdings in the Cooper Basin.
The sale of the company’s Gippsland and
Otway Basin assets offshore Victoria were
announced in October and completed
in early January 2017, with proceeds of
A$61 million received. A A$118 million
abandonment liability was removed from
the balance sheet upon completion.
In December 2016, we also entered into
an agreement to sell our remaining 50%
interest in the Mereenie oil and gas asset
in the Northern Territory for A$52 million.
Completion is expected in the first quarter
of 2017.
NEW GROWTH STRATEGY
In December 2016 Santos announced a
new three phase growth strategy to drive
shareholder value – Transform, Build,
Grow.
Under the Transform phase we have
simplified the business to focus on five
core long-life natural gas assets:
• Cooper Basin,
• GLNG,
•
Papua New Guinea,
• Northern Australia, and
• Western Australia Gas.
Our remaining assets are being run
separately as a stand-alone business.
Bruce Clement, ex-CEO of AWE, has been
appointed Vice President Asia, NSW and
WA Oil Assets to manage these assets
with a mid-tier oil and gas company
mindset to maximise value.
Under the Build phase we are building the
portfolio of development and exploration
opportunities across the five core long-life
natural gas assets to maximise production,
drive down costs and increase gas supply.
Future Growth will come from focussing
on opportunities to increase production
from our core assets and an exploration
strategy to identify new high-value gas
targets.
In 2017 we will continue to refine our
operating model and look to further
improve the asset mix and value drivers
as well as build our capabilities and focus
on a disciplined cost structure to drive
more value out of our assets.
BOARD RENEWAL
In the first-half of the year we continued
the process of Board renewal by
acknowledging the services of Ken Dean
and Jane Hemstritch who both retired
from the Board and welcomed Peter
Hearl and Guy Cowan as Directors. Peter
has over 30 years’ international business
experience, including 18 years in the oil
and gas industry with Exxon Mobil. He
is a director of Telstra Corporation and
Treasury Wine Estates. Guy also has over
30 years’ experience, including 25 years in
the oil and gas industry with Shell and is
Chairman of Queensland Sugar Limited.
These new appointments underscore
the Board renewal process with more than
half the Directors appointed within the last
3 years.
Thank you for your continued support
for Santos. We enter 2017 with a clear
strategy, a new leadership team and a
solid platform off which we can build and
grow. We are confident that we have
the strategy, assets, people and growth
options to drive future success and deliver
shareholder value.
Sincerely,
Peter Coates AO
Chairman
Kevin Gallagher
Managing Director and CEO
Santos Annual Report 2016 / 5
Board of Directors
COMMITTEES OF THE
BOARD
Audit and Risk
Committee
Mr G Cowan (Chair)
MR H Goh
Mr P Hearl
Mr G Martin
Nomination Committee
Mr P Coates (Chair)
Mr R Franklin
Mr G Martin
People and
Remuneration
Committee
Mr G Martin (Chair)
Ms Y Allen
Mr R Franklin
Environment, Health,
Safety
and Sustainability
Committee
Mr R Franklin (Chair)
Ms Y Allen
Mr K Gallagher
Mr H Goh
PETER COATES AO
KEVIN GALLAGHER
YASMIN ALLEN
GUY COWAN
BSc (Hons) Engineering
Independent non-executive
Director since 10 May 2016.
Chair of the Audit and Risk
Committee and a Director
of Santos Finance Limited.
Currently Chairman of
Queensland Sugar Limited.
Formerly a Director of UGL
Limited, where he chaired the
Health and Safety Committee,
and Coffey International and
Ludowici Limited, where he
chaired the Audit and Risk
Committees for both
companies. Shell appointed
alternative director of Woodside
between 1992 and 1995.
Mr Cowan had a 23-year
career with Shell International
in various senior commercial
and financial roles. His last
two roles were as CFO and
Director of Shell Oil US and
CFO of Shell Nigeria. He was
CFO of Fonterra Co-operative
Ltd between 2005 and 2009.
BComm, FAICD
Independent non-executive
Director since 22 October 2014.
A member of the People and
Remuneration Committee and
Environment, Health, Safety
and Sustainability Committee.
Ms Allen has more than 20
years' experience in finance and
investment banking, including
senior roles at Deutsche Bank
AG, ANZ and HSBC Group Plc,
former chairman of Macquarie
Global Infrastructure Funds,
former Director of EFIC
(Export, Finance and Insurance
Corporation). She is a Director
of Cochlear Limited, chairs its
Audit Committee and is a
member of the Nomination
and Remuneration Committee.
She is a member of the
George Institute for Global
Health Board and a Director
of the National Portrait Gallery.
Ms Allen is a non-executive
Director of ASX Limited, a
Director of the ASX Clearing
and Settlement boards and
a member of its Audit
Committee.
Ms Allen was a former
non-executive Director of
Insurance Australia Group
Limited and a former national
Director and acting Chair of the
Australian Institute of Company
Directors.
CHAIRMAN
BSc (Mining Engineering),
FAICD, FAusIMM
Independent non-executive
Director. Member of the Board
since March 2008, Chairman
from December 2009 to May
2013, reappointed Chairman
April 2015 and appointed
Executive Chairman from
August 2015 to January 2016.
Chairman of Santos Finance
Ltd and Chair of the
Nomination Committee.
Non-executive Director of
Glencore plc since its float
in April 2011 until its merger
with Xstrata plc in May 2013.
Joined the Board of the merged
company in June 2013 and
worked as an Executive
Director assisting with the
integration of Glencore and
Xstrata before resuming the
position as a non-executive
Director from 1 January 2014.
Non-executive Director of Event
Hospitality & Entertainment
Limited (formerly Amalgamated
Holdings Limited) since July
2009.
Former non-executive
Chairman of Xstrata Australia
Pty Limited from January
2008 to August 2009, former
Chairman and non-executive
Director of Minara Resources
Limited from May 2008 to April
2011, and former Chairman of
Sphere Minerals from May 2013
to June 2016. Previously Chief
Executive of Xstrata Coal,
Xstrata plc’s global coal
business. Past Chairman of the
Minerals Council of Australia,
the NSW Minerals Council and
the Australian Coal Association.
Made an Officer of the Order
of Australia in June 2009 and
was awarded the 2010
Australasian Institute of Mining
and Metallurgy Medal.
MANAGING DIRECTOR
& CHIEF EXECUTIVE
OFFICER
BEng (Mechanical) Hons,
FIEAust
Kevin joined Santos as
Managing Director and Chief
Executive Officer on 1 February
2016, bringing more than 25
years’ experience in managing
oil and gas operations in
Australia, the USA and north
and west Africa.
A turnaround specialist with
a track record in transforming
underperforming operations,
Kevin commenced his career
as a drilling engineer with Mobil
North Sea, before joining
Woodside in 1998. During his
13 year tenure with Woodside,
Kevin led the drilling
organisation through rapid
growth, delivering several
Australian and international
development projects and
exploration campaigns. He
also led the Australian Oil
Business Unit consisting of
five floating production and
storage offloading (FPSO)
operations and east-coast
domestic gas plants. As CEO
of the North West Shelf
Venture at Woodside, Kevin
was responsible for production
on Australia’s largest resource
project.
Kevin joined Clough Limited
as CEO and Managing Director
in 2011, and during his four-year
tenure he implemented
strategies that transformed
the business. He established
a strong leadership team,
improved cost and operational
performance and delivered
record financial results. He
oversaw the development of
innovative programs to improve
safety and drive productivity
and executed an M&A and
international expansion strategy
which saw Clough enter five
new regions including the US,
UK, Canada, Africa and Asia.
Since joining Santos, Kevin
has restructured the business,
removed substantial costs
and significantly improved
production and financial
performance. He has
implemented a growth strategy
to focus the business on five
core long-life gas assets and
has strengthened the balance
sheet to provide a sustainable
business in a low oil price
environment.
6 / Santos Annual Report 2016
ROY FRANKLIN OBE
HOCK GOH
PETER HEARL
GREGORY MARTIN
SCOTT SHEFFIELD
BSc (Hons)
BEng (Hons) Mech Eng
BComm (With Merit), FAICD
BEc, LLB, FAIM, MAICD
BS Petroleum Engineering
Independent non-executive
Director since 28 September
2006. Chair of the
Environment, Health, Safety
and Sustainability Committee,
member of the People and
Remuneration Committee and
Nomination Committee.
Chairman of Cuadrilla
Resources Holdings Limited
since April 2015. Appointed
deputy Chairman of Statoil with
effect from 1 July 2015, and as
a Director of Amec Foster
Wheeler plc with effect from
1 January 2016.
Non-executive Director of
Keller Group plc from 2007
to 2016 and Chairman from
2009 to 2016. Chief Executive
Officer of Paladin Resources
plc from 1997 to 2005 and
former Group Managing
Director of Clyde Petroleum plc.
Chairman of BRINDEX, the
trade association for UK
independent oil and gas
companies, from 2002 to
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 from 2002 to 2005.
In 2004, awarded the OBE
for services to the UK oil and
gas industry.
Independent non-executive
Director since 22 October 2012.
Member of the Environment,
Health, Safety and Sustainability
Committee and the Audit and
Risk Committee.
More than 30 years’ experience
in the global oil and gas
industry, having spent 25 years
with Schlumberger Limited,
including as President of
Network and Infrastructure
Solutions division in London,
President of Asia, and Vice
President and General Manager
of China. Previously held
managerial and staff positions
in Asia, the Middle East and
Europe.
Chairman of MEC Resources
Ltd since October 2006.
Appointed as non-executive
Director of Stora Enso Oyj
(Finland) in April 2012. Also a
non-executive Director of AB
SKF (Sweden) since March
2014 and Vesuvius PLC (UK)
since April 2015.
Previously a non-executive
Director of BPH Energy Ltd
from 2007 to March 2015, an
Operating Partner of Baird
Capital Partners Asia, based in
China, from 2007 to June 2012,
and non-executive Director of
Xaloy Holding Inc in the US
from 2006 to 2008.
Independent non-executive
Director since 10 May 2016.
Member of the Audit and
Risk Committee.
During an 18-year career in the
oil industry with Esso Australia
Ltd and Exxon USA, subsidiaries
of oil giant Exxon, he held a
variety of senior marketing,
operations, logistics and
strategic planning positions.
Mr Hearl joined PepsiCo as
KFC Australia’s Director of
Operations in 1991 and
subsequently held several
Regional Vice President
(Managing Director) roles
before assuming the role of
YUM Brands’ global Chief
Operating & Development
Officer in 2006, based in Dallas,
Texas and Louisville, Kentucky.
Non-executive Director of
Australia’s largest
telecommunications company,
Telstra Ltd since August 2014,
and chairs that company’s
Remuneration Committee.
Also a non-executive Director
of the Australian listed, global
wine company, Treasury Wine
Estates since 2012, where he
serves on the Audit and Risk
Committee.
Former non-executive Director
on the board of Goodman
Fielder Ltd from 2010 until that
company was sold to overseas
interests in 2015.
Independent non-executive
Director since 24 February
2014. Executive Chairman of
Pioneer Natural Resources
Company, which is listed on
the New York Stock Exchange
and included in the S&P 500
Index, since 1999.
Serves on various industry
and education-related boards,
including the National Petroleum
Council and the Maguire
Energy Institute of the SMU
Cox School of Business.
Recipient of the Permian Basin
Association’s Top Hand award,
which recognises individuals
who have demonstrated
exceptional leadership within
the oil and gas industry and the
Permian Basin community. He
is also a 2013 inductee into the
Permian Basin Petroleum
Museum Hall of Fame.
Independent non-executive
Director since 29 October
2009. Chair of the People
and Remuneration Committee,
member of the Audit and Risk
and Committee and member
of the Nomination Committee.
Director of Spark Infrastructure
from 1 January 2017. Appointed
Deputy Chairman of the
Board of Electricity Networks
Corporation, trading as Western
Power in 2015. Mr Martin was
also appointed to the COAG
Energy Council Energy
Appointments Selection Panel
in 2015. The role of the Panel
is to provide recommendations
to COAG's Energy Council on
appointments to the Australian
Energy Market Operator,
Australian Energy Market
Commission, Australian
Energy Regulator and Energy
Consumers Australia.
Chairman of Iluka Resources
Limited from 2013. Chairman
and Joint Managing Partner of
Prostar Capital from July 2012
and independent non-executive
Chairman of Sydney Desalination
Plant Pty Ltd from December
2012.
Formerly non-executive
Director of Australian Energy
Market Operator Limited (July
2008 to November 2014) and
Energy Developments Limited
(May 2006 to October 2015),
Deputy Chairman of the
Australian Gas Association and
inaugural Chairman of the
Energy Supply Association of
Australia. Past member of the
Business Council of Australia,
Committee for the Economic
Development of Australia, and
the Council on Australia Latin
America Relations. Formerly
Managing Director and Chief
Executive Officer of AGL, Chief
Executive, Infrastructure at
Challenger Financial Services
Group and Managing Director
of Murchison Metals Limited.
Santos Annual Report 2016 / 7
Santos Executive Committee
KEVIN GALLAGHER
ANTHONY NEILSON
JOHN ANDERSON
VINCE SANTOSTEFANO
CHIEF FINANCIAL
OFFICER
BComm; MBA; FFin; ACA
Anthony Neilson joined Santos
as Chief Financial Officer in
2016, and is responsible for
the finance, tax, treasury and
investor relations functions. He
brings over 20 years’ experience
in chartered accounting,
banking and corporate financial
roles including 15 years’
experience in the upstream
and downstream oil and gas
industry.
Prior to joining Santos, Anthony
was CEO of Roc Oil Company
Ltd (ROC), which was acquired
in 2014 by Hong Kong-listed
investor Fosun International
Limited. Previously, Anthony
was Chief Financial Officer
of ROC (ASX listed) and has
held commercial, finance and
business services roles at Caltex
Australia, Credit Suisse First
Boston (London) and Arthur
Andersen (Sydney).
Anthony holds a Master of
Business Administration from
AGSM and is a Fellow of the
Financial Services Institute
of Australasia and a Member
of Chartered Accountants
Australia and New Zealand.
EXECUTIVE VICE
PRESIDENT COMMERCIAL
& BUSINESS
DEVELOPMENT
CHIEF OPERATIONS
OFFICER
BEng (Civil), SPE
Vince joined Santos in March
of 2016 as COO, accountable
for the profit and loss of all
our operated producing assets.
Vince retired from Woodside
Energy in November 2013
as Chief Operating Officer.
As COO he was responsible
for Woodside’s producing
business units; the production
function including six LNG
trains with associated offshore
infrastructure, four FPSOs;
the Marine Division and the
Brownfields Projects Group.
During 2014 and 2015, Vince
was engaged in Board work as
a non-executive Director and
various management-consulting
assignments. Vince has a deep
and respected knowledge of
the industry, with significant
experience in onshore and
offshore operations and
asset management. He has a
proven capability to manage
a demanding workload and to
drive cultural change.
LLB, BEc, GDCL
John Anderson is accountable
for commercial and business
development.
John joined Santos in 1996 as a
Corporate Counsel in Brisbane
having previously worked for 10
years as a solicitor with a large
corporate law firm in Brisbane,
and Melbourne.
John has held a number of
senior roles in Santos including
Vice President Commercial,
Vice President Strategic
Projects and Group Executive
Business Development, and
was responsible for taking
Santos, interests in the Hides
gas field to FEED in the PNG
LNG Project. In 2009, John
relocated to Perth to run
Santos’ WA & NT operations
including domestic gas and oil
production in the Carnarvon
Basin, exploration activity in the
Browse and Bonaparte basins
and the company’s first LNG
project, Darwin LNG.
In 2014, John moved
to Singapore after his
responsibilities were extended
to include Santos’ Asian
activities including the
company’s second LNG project,
PNG LNG, as well as oil and gas
production assets in Indonesia
and Vietnam. John returned
to Australia in the second half
of 2016 to his current position
of Executive Vice President,
Commercial and Business
Development.
MANAGING DIRECTOR
& CHIEF EXECUTIVE
OFFICER
Mr Gallagher’s biography can
be read on page 6.
8 / Santos Annual Report 2016
BRETT WOODS
ANGUS JAFFRAY
NAOMI JAMES
BILL OVENDEN
VICE PRESIDENT
DEVELOPMENT
BSc (Hons) Geology and
Geophysics
EXECUTIVE VICE
PRESIDENT STRATEGY &
CORPORATE SERVICES
EXECUTIVE VICE
PRESIDENT EHS &
GOVERNANCE
BA (Hons) Geography, MBA
LLB (Hons), MLM
VICE PRESIDENT
EXPLORATION
BSc (Hons) Geology and
Geophysics
Bill Ovenden is accountable
for developing and executing
a targeted exploration strategy.
Bill is a geologist with over
30 years of experience in the
oil and gas industry. He has
worked on exploration projects
in Australia, Central and South-
East Asia, North Africa, the
Middle East and South America,
with companies including Sun
Oil, Kufpec, ExxonMobil and
Ampolex. He joined Santos
in 2002 after working for
ExxonMobil in Indonesia.
Naomi joined Santos in 2016
and is responsible for Santos’
legal, risk and audit, company
secretary, environment and
safety functions.
Prior to joining Santos, Naomi
held a range of functional and
line leadership roles with Arrium
including as Chief Executive
of the Group’s non-integrated
steel businesses, Chief Legal
Officer and Chief Executive,
Strategy. Naomi’s roles with
Arrium included leading major
acquisitions and divestments,
business restructuring and
turnaround and the legal,
company secretary, government
affairs and strategy functions.
Naomi has previously worked in
private practice at law firms in
Australia and the UK.
Brett is responsible for
delivering projects, sustaining
capital work programs across
the Cooper Basin, Narrabri and
Queensland CSG, Drilling and
Completions and non-operated
assets including Darwin LNG,
PNG LNG, Asia and Western
Australia Domestic Gas.
Angus has over 20 years of
leadership and consulting
experience. Prior to joining
Santos he was a Director of
Azure Consulting, a Partner at
The Boston Consulting Group
and a Supply Chain Manager
with the global packaging group
Crown Cork and Seal.
Brett previously held the
role as Vice President,
Eastern Australia from
August 2015 which included
production, development
and commercialisation of the
company's oil and gas resources
in Central Australia.
Brett joined Santos in
February 2013 as the
Manager Exploration for the
company's Perth-based WA
and NT business unit. Brett is a
geologist and geophysicist, and
has over 20 years of oil and gas
industry experience including
executive management,
technical and business
development roles. He is a
member of the APPEA Board.
At Azure Consulting Angus
supported companies in
developing strategy and driving
organisational change, mainly
in Western Australia. At BCG
Angus set up the Perth office,
led the Australian Operations
practice and was a core
member of both the Mining &
Metals practice and the Energy
Practice. He served clients in
Australia, New Zealand, Asia,
Europe and North America,
building strong capabilities in
strategy, operational efficiency
and running transformation
programs. As a Supply
Chain Manager Angus was
accountable for procurement,
planning, logistics and product
delivery.
Santos Annual Report 2016 / 9
Reserves statement
for the year ended 31 December 2016
Santos proved (1P) petroleum reserves were 485 million barrels of oil equivalent (mmboe) at the end of 2016. 1P reserves increased by
61 mmboe before production and the organic 1P reserves replacement ratio was 106%.
Proved plus probable (2P) petroleum reserves were 889 mmboe. 2P reserves increased by 6 mmboe before production and the organic
2P reserves replacement ratio was 19%.
The key movements in 2P reserves before production in 2016 were:
•
•
•
•
15 mmboe increase due to a reserves upgrade at Reindeer (WA Gas).
14 mmboe increase due to positive field performance at PNG LNG.
18 mmboe reduction at GLNG primarily due to revisions in field development plans.
5 mmboe net reduction in other assets.
After deducting 2016 production of 62 mmboe, 1P reserves were in line with the prior year and 2P reserves reduced by 6%.
RESERVES (SANTOS SHARE)
Santos share
Proved reserves
Proved plus probable reserves
COOPER BASIN
Unit
mmboe
mmboe
2016
485
889
2015
%change
485
945
(0)
(6)
The Cooper Basin produces natural gas, gas liquids and crude oil. Gas is sold primarily for the production of liquefied natural gas, and to
industry and domestic retailers, while gas liquids and crude oil are sold in the domestic and export markets.
Cooper Basin proved plus probable reserves by product (Santos share)
Santos share
Sales gas
Crude oil
Condensate
LPG
Total
Unit
PJ
mmbbl
mmbbl
000 tonnes
mmboe
2016
672
18
10
1,288
154
2015
726
20
11
1,457
168
%change
(7)
(11)
(14)
(12)
(9)
Sales gas proved plus probable reserves were maintained before 2016 production.
Work continues to mature the Permian Source Rock (Deep Coal) play to assess the potential for the recovery of incremental volumes of
gas, while exploration and development of shale and tight gas within the Nappamerri Trough has been suspended.
10 / Santos Annual Report 2016
GLNG
The GLNG Joint Venture (JV) produces liquefied natural gas (LNG) for export to global markets from the LNG plant at Gladstone.
Gas is also sold into domestic markets. Santos has a 30% interest in GLNG JV.
GLNG JV reserves (GLNG 100% share)
GLNG 100% share
Proved reserves
Proved plus probable reserves
Unit
PJ
PJ
2016
2,486
5,256
2015
2,540
5,546
%change
(2)
(5)
GLNG JV share proved plus probable reserves decreased by 3% before 2016 production, primarily due to revisions to field development
plans and some reclassification in deeper low permeability coals. There was no change to reserves in the Raslie area of the Roma field,
where remediation plans are progressing. In addition to the reserves in the table above, GLNG JV has Santos portfolio and third party
gas supply agreements for an aggregate of between approximately 2,100 PJ and 2,800 PJ over periods of up to 20 years.
GLNG JV share contingent resources increased in 2016. Santos is committed to ongoing appraisal and operational efficiencies to
potentially mature resources to reserves and develop for additional gas supply to the project.
GLNG proved plus probable reserves by product (Santos share)
Santos share
Sales gas
Unit
mmboe
2016
341
2015
367
%change
(7)
Santos share GLNG asset proved plus probable reserves decreased by 5% before 2016 production. Santos share GLNG asset reserves
in the table above include Santos’ share of the Combabula, Ramyard, Spring Gully and Denison fields.
PAPUA NEW GUINEA
Santos’ business in Papua New Guinea (PNG) is centred on the PNG LNG Project. Completed in 2014, PNG LNG produces LNG for
export to global markets, as well as gas and gas liquids. Santos has a 13.5% interest in PNG LNG.
PNG proved plus probable reserves by product (Santos share)
Santos share
Sales gas
Condensate
Total
Unit
PJ
mmbbl
mmboe
2016
1,215
14
222
2015
1,173
20
220
%change
4
(29)
1
Sales gas proved plus probable reserves increased by 9% before 2016 production. Positive Hides field performance and revised fuel,
flare and vent assumptions led to the increase. Condensate reserves were lower due to revisions to the forecast condensate to gas ratio
in the Hides field.
PNG LNG underpins the majority of Santos’ reserves and resources in PNG. As a foundation partner of the PNG LNG project, Santos’
equity provides a strong position off which to leverage growth opportunities, including LNG backfill and expansion. The project has
recently undergone an independent contingent resource recertification which resulted in an increase in 1C project resources, supporting
extended production at current plateau rates.
Santos holds an extensive exploration and production position throughout PNG and is a foundation partner in the nationally significant
PNG LNG project. Santos has interests in several large scale discoveries across the PNG Fold Belt, Gulf of Papua, and PNG Forelands,
which could provide future backfill, expansion or standalone development opportunities.
• PPL-402 (Santos 20%, subject to future government back-in) contains the recently drilled and potentially multi-tcf Muruk discovery.
Following the discovery at the Muruk-1 exploration well in December 2016, sidetrack drilling has commenced to further appraise the
size and quality of the Muruk discovery. The Muruk gas field is located within close proximity to the Hides gas field and PNG LNG
network infrastructure, potentially providing a simplified development pathway and access to export LNG markets via backfill or
expansion of the PNG LNG project.
• PRL-38 (Santos 10%, subject to future government back-in) is located offshore in the Gulf of Papua and contains the Pandora A
and B gas fields. The Joint Venture intends to drill a well in PRL-38 in 2018/19 to test near-field exploration opportunities or appraise
discovered resources. The Joint Venture is continuing to assess the technical and commercial viability of various potential
development options.
Santos Annual Report 2016 / 11
Reserves statement
continued
• PRL-9 (Santos 40%, subject to future government back-in) contains the Barikewa gas discovery. The Joint Venture intends to drill
an appraisal well prior to permit expiry in 2020 to appraise the discovered resources. The Barikewa gas field is located within close
proximity to the PNG LNG network infrastructure and the Joint Venture is continuing to assess the technical and commercial viability
of various development options.
NORTHERN AUSTRALIA
In Northern Australia, Santos has an 11.5% interest in the Bayu-Undan/Darwin LNG Project (DLNG), which produces LNG and gas
liquids for export to global markets.
Northern Australia proved plus probable reserves by product (Santos share)
Santos share
Sales gas
Condensate
LPG
Total
Unit
PJ
mmbbl
000 tonnes
mmboe
2016
2015
%change
72
2
141
15
93
3
178
20
(23)
(22)
(21)
(23)
Sales gas proved plus probable reserves were maintained before 2016 production.
Santos has a strong infrastructure and discovered resource position across Northern Australia, with multi-PJ scale discoveries across
the Browse and Bonaparte Basins, in close proximity to DLNG and other LNG projects under construction in the region.
• Bayu Undan (Santos 11.5%) is the current gas supply source to DLNG. Reserves and field are expected to be extended through the
drilling of infill wells, with first gas targeted for late 2018.
• Barossa Caldita (Santos 25%) is a multi-tcf discovery being positioned to backfill DLNG. Appraisal drilling commenced in early 2017
and pre-FEED activities and regulatory approvals are being progressed.
• Petrel-Tern and Frigate (Santos 35% and 40% respectively) are well appraised assets located approximately 300 kilometres from
Darwin. Potential commercialisation options are being evaluated with opportunity to target LNG, NT domestic and east coast
markets.
• Crown and Lasseter (Santos 30%) have material resources with further prospectivity and are located near large LNG projects
under construction. Concept evaluation to support standalone and joint development options are being considered.
WA GAS
Santos is one of the largest producers of domestic natural gas in Western Australia and is also a significant producer of gas liquids.
WA Gas proved plus probable reserves by product (Santos share)
Santos share
Sales gas
Condensate
Total
Unit
PJ
mmbbl
mmboe
2016
641
7
117
2015
606
7
111
%change
6
(3)
5
Sales gas proved plus probable reserves increased by 14% before 2016 production, primarily due to a reserves upgrade at the Reindeer
asset.
Santos has an established position in the Carnarvon Basin which underpins the WA domestic gas business. The Varanus Island and
Devil Creek domestic gas infrastructure is supplied by John Brookes, Spar, Halyard and Reindeer, and a discovered resource base that
may support backfill of these facilities in the longer term.
•
•
John Brookes, Spar, Halyard and Reindeer (Santos 45%). Reserves growth from the producing fields has extended production
plateau and new projects such as Spar-2 tieback and Varanus Island Inlet Compression will unlock undeveloped reserves. Modern
seismic datasets in the vicinity of existing infrastructure are being analysed to deliver low cost supply tiebacks into existing
infrastructure.
Zola-Bianchi (Santos 25%). Seismic acquisition is planned for 2017, targeting new prospects to build volume in the vicinity of the
discovered resource base.
• Maitland-Davis (Santos 45%). Resources increased in 2016 with successful well Davis-1, with further work being done to refine the
appraisal and development plan.
• Spartan (Santos 45%). Discovered in 2016, development planning is underway with seismic acquisition planned for 2017 targeting
similar near-field opportunities to aggregate volume.
12 / Santos Annual Report 2016
PROVED RESERVES
Year-end 2016 (Santos share)
Asset
Cooper Basin
GLNG1
PNG
Northern Australia
WA Gas
Other Assets2
Total 1P
Sales gas
PJ
Crude oil
mmbbl
Condensate
mmbbl
LPG
000 tonnes
Developed Undeveloped
Total
All products
mmboe
309
888
855
51
399
88
2,590
10
-
0
-
-
7
17
4
-
10
1
4
0
19
579
-
-
59
-
-
638
48
72
107
10
54
16
307
23
81
49
-
18
7
179
71
153
156
10
73
22
485
32%
Proportion of total proved reserves that are unconventional
1 GLNG Asset proved sales gas reserves include 746 PJ Santos share GLNG Joint Venture and 142 PJ other Santos Queensland assets.
2 Other Assets include Indonesia, Vietnam, Western Australia oil, Victoria and onshore Northern Territory.
Proved reserves reconciliation
Product
Sales gas
Crude oil
Condensate
LPG
Total 1P
Unit
PJ
mmbbl
mmbbl
000 tonnes
mmboe
Reserves
Year-end
2015 Production
Revisions and
extensions
Discoveries
Net
acquisitions
and
divestments
2,534
21
23
873
485
(286)
(8)
(4)
(147)
(62)
366
4
(1)
(87)
65
-
-
-
-
-
(23)
-
(0)
-
(4)
Reserves
Year-end
2016
2,590
17
19
638
485
Santos Annual Report 2016 / 13
Reserves statement
continued
PROVED PLUS PROBABLE RESERVES
Year-end 2016 (Santos share)
Asset
Cooper Basin
GLNG1
PNG
Northern Australia
WA Gas
Other Assets2
Total 2P
Sales gas PJ
Crude oil
mmbbl
Condensate
mmbbl
672
1,980
1,215
72
641
150
4,730
18
-
0
-
-
15
33
10
-
14
2
7
0
33
LPG 000
tonnes
1,288
-
-
141
-
-
1,429
Proportion of total proved plus probable reserves that are unconventional
All products
mmboe
Developed Undeveloped
Total
101
82
147
15
76
32
453
53
259
75
-
41
9
436
154
341
222
15
117
41
889
38%
1 GLNG Asset proved plus probable sales gas reserves include 1,577 PJ Santos share GLNG Joint Venture and 403 PJ other Santos Queensland assets.
2 Other Assets include Indonesia, Vietnam, Western Australia oil, Victoria and onshore Northern Territory.
Proved plus probable reserves reconciliation
Product
Sales gas
Crude oil
Condensate
LPG
Total 2P
Unit
PJ
mmbbl
mmbbl
000 tonnes
mmboe
Reserves
Year-end
2015 Production
Revisions
and
extensions
Discoveries
Net
acquisitions
and
divestments
4,931
42
42
1,933
945
(286)
(8)
(4)
(147)
(62)
120
(1)
(5)
(357)
12
-
-
-
-
-
(34)
-
(0)
-
(6)
Reserves
Year-end
2016
4,730
33
33
1,429
889
14 / Santos Annual Report 2016
Notes
1. This reserves statement:
a.
b.
c.
is based on, and fairly represents, information and
supporting documentation prepared by, or under the
supervision of, the qualified petroleum reserves and
resources evaluators listed in note 14 of this reserves
statement. Details of each qualified petroleum
reserves and resources evaluator’s employment and
professional organisation membership are set out in
note 14 of this reserves statement; and
as a whole has been approved by Barbara Pribyl,
who is a qualified petroleum reserves and resources
evaluator and whose employment and professional
organisation membership details are set out in note
14 of this reserves statement; and
is issued with the prior written consent of Barbara
Pribyl as to the form and context in which the
estimated petroleum reserves and contingent
resources and the supporting information are
presented.
2. The estimates of petroleum reserves and contingent
resources contained in this reserves statement are as at
31 December 2016.
3. Santos prepares its petroleum reserves and contingent
resources estimates in accordance with the Petroleum
Resources Management System (PRMS) sponsored by
the Society of Petroleum Engineers (SPE).
4. This reserves statement is subject to risk factors
associated with the oil and gas industry. It is believed that
the expectations of petroleum reserves and contingent
resources reflected in this statement are reasonable,
but they may be affected by a range of variables which
could cause actual results or trends to differ materially,
including but not limited to: price fluctuations, actual
demand, currency fluctuations, geotechnical factors,
drilling and production results, gas commercialisation,
development progress, operating results, engineering
estimates, loss of market, industry competition,
environmental risks, physical risks, legislative, fiscal and
regulatory developments, economic and financial markets
conditions in various countries, approvals and cost
estimates.
5. All estimates of petroleum reserves and contingent
resources reported by Santos are prepared by, or under
the supervision of, a qualified petroleum reserves
and resources evaluator or evaluators. Processes are
documented in the Santos Reserves Guidelines which are
overseen by a Reserves Committee. The frequency of
reviews is dependent on the magnitude of the petroleum
reserves and contingent resources and changes indicated
by new data. If the changes are material, they are
reviewed by the Santos internal technical leaders, prior
to overall approval by management and the Reserves
Committee.
6. Santos engages independent experts Gaffney, Cline
& Associates, Netherland, Sewell & Associates, Inc.
and DeGolyer and MacNaughton to audit and/or
evaluate reserves and contingent resources. Each
auditor found, based on the outcomes of its respective
audit and evaluation, and its understanding of the
estimation processes employed by Santos, that Santos’
31 December 2016 petroleum reserves and contingent
resources quantities in aggregate compare reasonably
to those estimates prepared by each auditor. Thus, in
the aggregate, the total volumes summarised in the
tables included in this reserves statement represent a
reasonable estimate of Santos’ petroleum reserves and
contingent resources position as at 31 December 2016.
7. Unless otherwise stated, all references to petroleum
reserves and contingent resources quantities in this
reserves statement are Santos’ net share.
8. Reference points for Santos’ petroleum reserves and
contingent resources and production are defined points
within Santos’ operations where normal exploration and
production business ceases, and quantities of produced
product are measured under defined conditions prior to
custody transfer. Fuel, flare and vent consumed to the
reference points are excluded.
9. Petroleum reserves and contingent resources are
aggregated by arithmetic summation by category and
as a result, proved reserves may be a very conservative
estimate due to the portfolio effects of arithmetic
summation.
10. Petroleum reserves and contingent resources are
typically prepared by deterministic methods with support
from probabilistic methods.
11. Any material concentrations of undeveloped petroleum
reserves that have remained undeveloped for more than
5 years: (a) are intended to be developed when required
to meet contractual obligations; and (b) have not been
developed to date because they have not yet been
required to meet contractual obligations.
12. Petroleum reserves replacement ratio is the ratio of the
change in petroleum reserves (excluding production)
divided by production. Organic reserves replacement
ratio excludes net acquisitions and divestments.
13.
Information on petroleum reserves and contingent
resources quoted in this reserves statement is rounded
to the nearest whole number. Some totals in the tables
may not add due to rounding. Items that round to zero
are represented by the number 0, while items that are
actually zero are represented with a dash “-“.
14. Qualified Petroleum Reserves and Resources Evaluators
Name
B Pribyl
Employer
Santos Ltd
S Chipperfield
Santos Ltd
Professional
Organisation
SPE
SPE
Santos Ltd
SPE, PESA
Santos Ltd
SPE, APEGA
B Camac
E Klettke
N Pink
Santos Ltd
S Lawton
Santos Ltd
J Telford
Santos Ltd
A Wisnugroho
Santos Ltd
C Harwood
Santos Ltd
D Smith
NSAI
SPE
SPE
SPE
SPE
PESA
SPE
SPE: Society of Petroleum Engineers
APEGA: The Association of Professional Engineers and
Geoscientists of Alberta
PESA: Petroleum Exploration Society of Australia
Abbreviations and conversion factors
Abbreviations
1P
2P
GJ
LNG
LPG
mmbbl
mmboe
NGLs
PJ
tcf
TJ
proved reserves
proved plus probable reserves
gigajoules
liquefied natural gas
liquefied petroleum gas
million barrels
million barrels of oil equivalent
natural gas liquids
petajoules
trillion cubic feet
terajoules
Conversion factors
Sales gas and ethane, 1 PJ
171,937 boe
Crude oil, 1 barrel
Condensate, 1 barrel
LPG, 1 tonne
1 boe
0.935 boe
8.458 boe
Santos Annual Report 2016 / 15
Directors’ Report
DIRECTORS’ REPORT
The Directors present their report together with the consolidated financial report of the consolidated entity, being Santos Limited
(“Santos” or “the Company”) and its controlled entities, for the financial year ended 31 December 2016, and the Auditor’s Report
thereon. Information in the Annual Report referred to in this report, including the Remuneration Report, or contained in a note to the
financial statements referred to in this report forms part of, and is to be read as part of, this report.
DIRECTORS, DIRECTORS’ SHAREHOLDINGS AND DIRECTORS’ MEETINGS
Directors and Directors’ Shareholdings
The names of Directors of the Company in office at the date of this report and details of the relevant interest of each of those Directors
in shares in the Company at that date are as set out below:
Surname
Other Names
Shareholdings in Santos Limited
Allen
Coates
Cowan
Franklin
Gallagher
Goh
Hearl
Martin
Sheffield
Yasmin Anita
Peter Roland (Chairman)
Guy Michael
Roy Alexander
Kevin Thomas
Hock
Peter Roland
Gregory John Walton
Scott Douglas
15,883
131,870
15,000
28,996
103,808
37,215
48,808
42,720
63,529
The above named Directors held office during and since the end of the financial year. Mr Kenneth Dean and Ms Jane Hemstritch were
Directors until their retirement at the Annual General Meeting on 4 May 2016. Mr Kevin Gallagher was appointed Managing Director
effective 16 February 2016. Mr Guy Cowan and Mr Peter Hearl were appointed Directors on 10 May 2016. There were no other persons
who acted as Directors at any time during the financial year and up to the date of this report. All shareholdings are of fully paid ordinary
shares. No Director holds a relevant interest in a related body corporate of Santos Limited.
At the date of this report, Mr Gallagher holds 1,235,142 share acquisition rights (SARs). No other Director holds options or SARs.
Details of the qualifications, experience and special responsibilities of each Director are set out on the Directors’ biography pages of this
Annual Report. This information includes details of other listed company directorships held during the last three years.
16 / Santos Annual Report 2016
Directors’ Report Directors’ Meetings
The number of Directors’ meetings and meetings of committees of Directors held during the financial year and the number of meetings
attended by each Director are set out below:
Table of Directors’ Meetings
Director
Allen2
Coates3
Cowan4
Dean5
Franklin
Gallagher6
Goh
Hearl7
Hemstritch8
Martin9
Sheffield
Yasmin A.
Peter R.
Guy M.
Kenneth A.
Roy A.
Kevin T.
Hock
Peter R.
Jane S.
Gregory J. W.
Scott D.
Directors’
Meeting
Audit & Risk
Committee
Environment,
Health, Safety
& Sustainability
Committee
People &
Remuneration
Committee
Nomination
Committee
Attended/Held1
Attended/Held1
Attended/Held1
Attended/Held1
Attended/Held1
11 of 13
13 of 13
7 of 7
6 of 6
12 of 13
11 of 11
13 of 13
7 of 7
5 of 6
13 of 13
11 of 13
1 of 2
n/a
3 of 3
1 of 1
n/a
n/a
4 of 4
2 of 3
1 of 1
4 of 4
n/a
4 of 4
2 of 2
n/a
n/a
n/a
4 of 4
4 of 4
4 of 4
n/a
n/a
n/a
n/a
n/a
n/a
n/a
3 of 5
n/a
n/a
n/a
1 of 2
5 of 5
n/a
n/a
4 of 4
n/a
2 of 2
4 of 4
n/a
n/a
n/a
n/a
2 of 2
n/a
1 Reflects the number of meetings held during the time the Director held office, or was a member of the Committee, during the year
2 Ms YA Allen retired as a member of the Audit & Risk Committee and became a member of the People & Remuneration Committee on 24 June 2016
3 Mr PR Coates retired as a member of the Environment Health, Safety & Sustainability Committee on 16 February 2016
4 Mr GM Cowan was appointed as a Director and became Chair of the Audit & Risk Committee on 10 May 2016
5 Mr KA Dean retired as a Director on 4 May 2016
6 Mr KT Gallagher was appointed Managing Director and became a member of the Environment, Health, Safety & Sustainability Committee on 16 February 2016
7 Mr PR Hearl was appointed as a Director and member of the Audit & Risk Committee on 10 May 2016
8 Ms JS Hemstritch retired as a Director on 4 May 2016
9 Mr GJW Martin became a member of the Nomination Committee on 3 May 2016
Santos Annual Report 2016 / 17
OPERATING AND FINANCIAL REVIEW
Santos’ principal activities during 2016 were the exploration for, and development, production, transportation and marketing of,
hydrocarbons. There were no significant changes in the nature of these activities during the year. Revenue is derived primarily from the
sale of gas and liquid hydrocarbons.
The consolidated entity has changed its reporting currency from Australian dollars to United States (US) dollars, effective 1 January
2016. Consequently, unless otherwise stated, all references to dollars are to US dollars.
A review of the operations and of the results of those operations of the consolidated entity during the year is as follows:
Summary of results table
Production volume
Sales volume
Product sales
EBITDAX1
Exploration and evaluation expensed
Depreciation and depletion
Net impairment loss
Change in future restoration assumptions
EBIT1
Net finance costs
Taxation benefit
2016
mmboe
61.6
84.1
2015
mmboe
57.7
64.3
US$million
US$million
2,594
1,199
(138)
(741)
2,442
1,454
(188)
(793)
(1,561)
(2,854)
37
-
(1,204)
(2,381)
(281)
438
(217)
645
Net loss for the period and attributable to equity holders of Santos
(1,047)
(1,953)
Underlying profit for the period1
Underlying earnings per share (cents)
63
3.5
49
4.3
Variance
%
7
31
6
(18)
27
7
45
-
49
(29)
(32)
46
29
(18.6)
1
EBITDAX (earnings before interest, tax, depreciation, depletion, amortisation, exploration and evaluation and impairment), EBIT (earnings before interest and tax) and underlying profit
are non-IFRS measures that are presented to provide an understanding of the underlying performance of Santos’ operations. Underlying profit excludes the impacts of asset acquisitions,
disposals and impairments, as well as items that are subject to significant variability from one period to the next, including the effects of fair value adjustments and fluctuations in exchange
rates. Please refer to page 21 for the reconciliation of net loss to underlying profit for the period. Underlying earnings per share represents underlying profit for the period divided by the
weighted average number of shares on issue during the period. The non-IFRS financial information is unaudited however the numbers have been extracted from the audited financial
statements.
Production and sales
Santos achieved record production and sales volumes in 2016. Higher volumes were driven by the ramp-up of production at GLNG,
record production from PNG LNG and strong performance from Darwin LNG, the Cooper Basin and WA Gas.
Production of 61.6 million barrels of oil equivalent (mmboe) was the Company’s highest annual production and a 7% increase on the
prior year, primarily due to a full year of production from GLNG Train 1 and the start-up of Train 2, and record production from PNG LNG.
Sales volumes were up 31% to a record 84.1 mmboe. LNG sales volumes were up 89% to 2.8 million tonnes, due to the ramp-up at
GLNG and strong performance from PNG LNG and Darwin LNG. Sales of third party volumes increased to 20.1 mmboe due to higher
domestic gas and LNG volumes, partially offset by lower crude oil volumes.
Sales revenue of $2.6 billion was 6% higher than 2015, reflecting the growth in sales volumes but offset by lower realised oil and LNG
prices. The average realised crude oil price for the year was $46.43 per barrel, 14% lower than 2015, while the average realised LNG
price was down 33% to $6.03 per mmbtu.
18 / Santos Annual Report 2016
Directors’ ReportDirectors’ Reportcontinued Review of operations
In 2016, Santos undertook swift and decisive action to stabilise the business, reduce costs and increase operating cash flow. These
measures delivered tangible results, with the business achieving record production and sales volumes, unit production costs of $8.45/
boe were down 18% compared to last year, capital expenditure (excluding capitalised interest) of $625 million was down 51% and the
Company generated $206 million in free cash flow before asset acquisitions and divestments in 2016.
Santos also restructured its business to focus on five core, long-life natural gas assets: Cooper Basin, GLNG, PNG, Northern Australia
and WA Gas. Other assets are run separately for value as a standalone business.
Cooper Basin
The Cooper Basin produces natural gas, gas liquids and crude oil. Gas is sold primarily to domestic retailers, industry and for the
production of liquefied natural gas, while gas liquids and crude oil are sold in the domestic and export markets.
Santos’ share of Cooper Basin gas production of 61.2 petajoules (PJ) was slightly lower than 2015, reflecting lower raw gas capacity
due to natural field decline, offset by higher uptime and production optimisation activities. Santos’ share of Cooper Basin condensate
production was in line with the prior year at 938,500 barrels.
Santos’ share of Cooper Basin oil production of 2.7 million barrels (mmbbl) was 5% lower than 2015 due to reduced development
activity and natural field decline. Volumes of third party crude oil processed at Moomba decreased as activity in the Basin was curtailed
in response to lower oil prices.
Cooper Basin EBITDAX was $265 million, 10% lower than 2015 primarily due to lower commodity prices.
Significant reductions were achieved in operating and development costs in 2016. Unit production costs were down 15% to $10.71/
boe and average gas well costs were down 12% to $4.2 million per well. As operator, Santos aims to continue to reduce costs and drive
efficiencies to deliver a low-cost, cash flow positive business in the Cooper Basin.
GLNG
GLNG produces liquefied natural gas (LNG) for export to global markets from the LNG plant at Gladstone. Gas is also sold into domestic
markets. Santos has a 30% interest in GLNG.
The LNG plant has two LNG trains with a combined nameplate capacity of 7.8 mtpa. Production from Train 1 commenced in September
2015 and Train 2 in May 2016. The plant produced 4.6 million tonnes of LNG in 2016 and shipped 75 cargoes.
Santos’ share of sales gas to the LNG plant increased to 30.2 PJ in 2016, reflecting the ramp-up of Train 1 and start-up of Train 2 during
the year. In addition, Santos’ share of domestic gas production was 5 PJ.
GLNG EBITDAX was $183 million, 490% higher than 2015 primarily due to the ramp-up of GLNG operations with first cargo in October
2015.
Santos’ strategy is to transform GLNG to deliver steady-state operations and a cash flow positive business. GLNG LNG sales are
expected to ramp-up from 2016 levels to approximately six million tonnes per annum over the next three years.
PNG
Santos’ business in PNG is centred on the PNG LNG Project. Completed in 2014, PNG LNG produces LNG for export to global markets,
as well as gas and gas liquids. Santos has a 13.5% interest in PNG LNG.
The LNG plant near Port Moresby has two LNG trains with a combined nameplate capacity of 6.9 mtpa. Production from both trains
commenced in 2014 and they operated at record rates in 2016, producing over 7.9 million tonnes of LNG and shipping 106 cargoes.
Santos’ share of sales gas to the LNG plant increased to 62.5 PJ in 2016, reflecting the strong operating performance. Santos’ share of
condensate production was 1.5 mmbbl. Unit upstream production costs were down 17% to $4.59/boe.
PNG LNG EBITDAX was $350 million, 21% lower than 2015 primarily due to lower commodity prices.
Santos’ strategy in PNG is to work with its partners to align interests to support LNG expansion opportunities. In December 2016,
Santos and its partners announced a gas discovery with the Muruk-1 exploration well, which is located near to existing PNG LNG
production facilities.
Santos Annual Report 2016 / 19
Northern Australia
In Northern Australia, Santos has an 11.5% interest in the Bayu-Undan/Darwin LNG Project, which produces LNG and gas liquids for
export to global markets.
In operation since 2006, Darwin LNG continued to perform strongly in 2016, producing 3.6 million tonnes of LNG and shipping 57
cargoes. Santos’ net entitlement to gas production of 19.3 PJ was in line with the prior year. Santos’ net entitlement to condensate from
Bayu-Undan was 0.59 mmbbl. Unit upstream production costs were reduced by 7% to $17.57/boe.
Northern Australia EBITDAX was $86 million, 40% lower than 2015 primarily due to lower commodity prices.
Santos has extensive discovered resources across Northern Australia which are well positioned to backfill and expand existing LNG
infrastructure. These resource opportunities include the Barossa-Caldita (Santos 25%), Petrel-Tern (Santos 35-40%) and Crown-
Lasseter (Santos 30%) fields. Engineering studies are underway to assess Barossa-Caldita as a candidate for Darwin LNG backfill. Two
Barossa appraisal wells are planned to be drilled in 2017.
WA Gas
Santos is one of the largest producers of domestic natural gas in Western Australia and is also a significant producer of gas liquids.
Santos’ Western Australia gas and condensate production of 49.3 PJ and 478,100 barrels respectively, were both slightly lower than 2015
primarily due to lower customer nominations.
WA Gas EBITDAX was $210 million, 30% higher than 2015.
Santos’ position in two WA domestic gas hubs (Varanus Island and Devil Creek) provides opportunities to meet short and long-term
domestic gas demand in the state.
Other assets
Santos’ other assets have been packaged and run separately for value as a standalone business. These assets include Santos interests
in Indonesia, Vietnam, East Coast Australia Gas and WA Oil. The portfolio will be continually optimised to drive efficiency and shareholder
value.
Santos’ share of gas production from the Otway Basin offshore Victoria was 10.4 PJ, 20% lower than 2015 due to natural field decline.
Santos announced the sale of its Victorian assets in October 2016 for up to A$82 million, and the sale (excluding Minerva) was
completed in early January 2017. Completion of the sale of Minerva is expected in the first quarter of 2017.
In December 2016, Santos entered an agreement to sell its remaining 50% interest in the Mereenie oil and gas assets in the Northern
Territory to a subsidiary of Macquarie Group Limited for A$52 million. Completion is expected in the first quarter of 2017.
Santos’ share of Western Australia oil production of 2.3 mmbbl was in line with 2015, as higher production from Mutineer-Exeter/
Fletcher Finucane was offset by the sale of the Company’s interest in the Stag asset, which was completed in November 2016.
Santos’ net entitlement to oil production in Vietnam of 2.6 mmbbl was in line with 2015.
Santos’ net entitlement to gas production in Indonesia of 22.3 PJ was 6% lower than 2015, primarily due to natural field decline and
lower net contractor entitlement.
20 / Santos Annual Report 2016
Directors’ ReportDirectors’ Reportcontinued Net loss
The 2016 net loss attributable to equity holders of Santos Limited of $1,047 million is $906 million lower than the net loss
of $1,953 million in 2015. This decrease is primarily due to lower impairment losses of $1,101 million after tax ($2,014 million
in 2015), higher sales revenue and higher cost of sales as a result of the ramp-up of the GLNG project following first cargo on
16 October 2015.
Net loss includes items before tax of $1,572 million ($1,110 million after tax), as referred to in the reconciliation of net loss to underlying
profit below. Underlying profit was $63 million, $14 million higher than 2015.
Reconciliation of net loss to underlying profit1
Net loss after tax attributable to equity holders
of Santos Limited
Add/(deduct) the following:
Net gains on sales of non-current assets
Impairment losses
Change in future restoration assumptions
Foreign exchange (gains)/ losses
Fair value adjustments on embedded derivatives
and hedges
Remediation (income)/costs for incidents net
of related insurance recoveries
Other expense items2
Other tax adjustments
Underlying profit1
2016
US$million
2015
US$million
Gross
Tax
Net
Gross
Tax
Net
(1,047)
(1,953)
8
(460)
10
21
(16)
(17)
1,101
(27)
(13)
38
–
(10)
(25)
1,561
(37)
(34)
54
(10)
63
–
(18)
(7)
1,572
(462)
45
(7)
1,110
63
(1)
–
(1)
2,854
(840)
2,014
(196)
(9)
–
50
–
173
3
–
(15)
(17)
(23)
(6)
–
35
(17)
2,698
(696)
2,002
49
1 Underlying profit is a non-IFRS measure that is presented to provide an understanding of the underlying performance of Santos’ operations. The measure excludes the impacts of asset
acquisitions, disposals and impairments, as well as items that are subject to significant variability from one period to the next, including the effects of fair value adjustments and fluctuations
in exchange rates. The non-IFRS financial information is unaudited, however the numbers have been extracted from the financial statements which have been subject to audit by the
Company’s auditor.
2 Other expense items in 2016 relate to restructure costs including redundancy payments and an onerous contract provision for unutilised transport capacity.
Financial position
Summary of financial position
Exploration and evaluation assets
Oil and gas assets and other land, buildings, plant and equipment
Restoration provision
Other net assets/(liabilities)1
Total funds employed
Net debt2
Net tax assets/(liabilities)3
Net assets/equity
2016
2015
Variance
US$million
US$million
US$million
495
10,533
(1,468)
167
9,727
(3,492)
845
7,080
520
12,585
(1,778)
453
11,780
(4,749)
390
7,421
(25)
(2,052)
310
(286)
(2,053)
1,257
455
(341)
1 Other net assets/(liabilities) comprises trade and other receivables, prepayments, inventories, other financial assets, share of investments in joint ventures, offset by trade and other
payables, deferred income, provisions and other financial liabilities.
2 Net debt reflects the net borrowings position and includes interest-bearing loans, net of cash and interest rate and cross-currency swap contracts and commodity derivatives.
3 Net tax assets/(liabilities) comprises deferred tax assets and tax receivable, offset by deferred tax liabilities and current tax payable.
Santos Annual Report 2016 / 21
Impairment of assets
During the Company’s regular review of asset carrying values, Santos undertook an impairment review as part of the preparation of its
2016 full-year accounts.
Some assets were assessed to be impaired and non-cash after-tax impairment losses of $1,101 million have been recognised in the 2016
accounts.
The impairment losses primarily relate to the 30 June 2016 impairment of GLNG.
Exploration and evaluation assets
Exploration and evaluation assets were $495 million compared to $520 million at the end of 2015, a decrease of $25 million, mainly
due to impairment losses before tax of $59 million, exploration and evaluation expensed of $71 million and the Sole project in Victoria
classified as held for sale, offset by 2016 capital expenditure, including drilling in Papua New Guinea, two near-field exploration wells in
Indonesia along with evaluation studies, in addition to acquisition costs comprising interests in PPLs 402, 261 and 287 in Papua New
Guinea.
Oil and gas assets and other land, buildings, plant and equipment
Oil and gas assets and other land and buildings, plant and equipment of $10,533 million were $2,052 million lower than in 2015 mainly
due to impairment losses before tax of $1,502 million and depreciation and depletion charges, offset by 2016 capital expenditure,
including GLNG, PNG LNG and the Cooper Basin. Assets classified as held for sale in 2016 include Mereenie, Casino/Henry, Patricia
Baleen and Vic/P44.
Restoration provision
Restoration provision balances have decreased by $310 million to $1,468 million mainly due to revised restoration cost estimates,
provisions sold as part of asset sales or classified as held for sale and favourable changes in discount rates.
Net debt
Net debt of $3,492 million was $1,257 million lower than at the end of 2015 primarily as a result of free cash flow before asset
acquisitions and divestments of $206 million, an institutional share placement of $751 million and proceeds from asset sales of
$447 million, offset by acquisitions and unfavourable fair value movements in other financial assets and liabilities.
Net tax assets/(liabilities)
Net tax assets of $845 million have increased by $455 million primarily as a result of higher carry-forward tax losses recognised
by the group and impairments of non-current assets.
Net assets/equity
Total equity decreased by $341 million to $7,080 million at year end. The decrease primarily reflects the net loss after tax attributable to
owners of Santos of $1,047 million, partially offset by the increase in issued capital of $764 million, primarily as a result of the institutional
share placement in December 2016.
Future commitments
Due to the nature of Santos’ operations, the Company has future obligations for capital expenditure, for which no amounts have been
provided in the financial statements. Santos also has certain requirements to perform minimum exploration work and spend minimum
amounts of money pursuant to the terms of the granting of petroleum exploration permits in order to maintain rights of tenure. The
minimum exploration commitments are less than the normal level of exploration expenditures expected to be undertaken by the
Company.
Santos leases LNG carriers and tug facilities under finance leases. The leases have terms of between 10 and 20 years with varying
renewal options. At the reporting date, finance lease liabilities for a purpose-built LNG carrier and tug boats were recorded on the
balance sheet. Santos also leases floating production, storage and offtake facilities, floating storage offloading facilities, LNG carriers
and mobile offshore production units under operating leases. These 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 office space and a warehouse under operating leases. These leases are
generally for a period of 10 years, with an option to renew the lease after that date.
22 / Santos Annual Report 2016
Directors’ ReportDirectors’ Reportcontinued Oil price hedging
During 2016, the Company implemented an Oil Price Hedging Policy. The objectives of the policy are to reduce the effect of commodity
price volatility and support annual capital expenditure plans. The Company will continue to monitor commodity market conditions and
will enter hedging transactions as appropriate.
As at 31 December 2016, the Company had hedged 11 million barrels of oil in 2017 using zero-cost three-way collars. Under the collars,
where the Brent oil price is above $62.85, Santos receives $62.85. Where the Brent oil price is between $50 and $62.85, Santos
receives the actual Brent price. Where the Brent oil price is between $40 and $50, Santos receives $50, and where the Brent oil price
is below $40, Santos receives the actual Brent price plus $10.
Business strategy and prospects for future financial years
Business strategy
In December 2016, the Company announced a new strategy to transform Santos into a low-cost, reliable and high performance
business. It is a disciplined, focused strategy to drive shareholder value which sees five core, long-life natural gas assets at the heart
of the Company’s operations, each with significant upside potential. The remaining non-core assets have been packaged and run
separately to maximise value. This will ensure a simplified, focused organisation.
The Company’s new strategy has three phases:
Transform
• New leadership team and simplified operating model to deliver a low-cost, reliable and high performance business.
•
Focus on five core, long-life natural gas assets: Cooper Basin, GLNG, PNG, Northern Australia and WA Gas.
Build
•
Identify and develop growth opportunities, including exploration, across the five core long-life natural gas assets.
• Maximise production, drive down costs and increase gas supply.
Grow
•
•
•
Execute and bring on-line growth opportunities across the core portfolio.
Focused exploration strategy to identify new high-value gas targets.
Find and unlock sixth core long-life natural gas asset.
Significant progress in the Transform phase of the strategy was made in 2016, including:
•
Appointment of new Chief Executive Officer and Executive Committee (Excom).
• Restructured the business and new operating model established.
• Removed substantial costs: unit production costs cut by 18%, capital expenditure by 51% and employee headcount by 20%.
•
•
•
•
Free cash flow breakeven point reduced to $36.50 per barrel. The Company generated $206 million in free cash flow before
asset sales in 2016.
Sold non-core assets.
Implemented oil price hedging strategy.
Strengthened the balance sheet via an institutional placement which raised $751 million.
• Reduced net debt by $1.3 billion.
Importantly, during a period of significant organisational change, Santos continued to maintain record safety performance.
Santos Annual Report 2016 / 23
Prospects for future financial years
Santos enters 2017 with a clear strategy and a solid platform for growth. The business turnaround will continue as the Company
focuses the organisation to support the five core assets. This singular focus will enable Santos to become a leaner, lower cost and
higher performing business with significant upside opportunities across the portfolio. The Company will also begin to increase focus
on the Build and Grow phases of its new strategy.
The Company is well placed to withstand an extended period of low oil prices, with more than $2 billion in cash as at 31 December 2016
and no material debt maturities until 2019. Santos will continue to focus on reducing costs and building on the significant improvements
made in 2016 to operating efficiency.
Santos expects 2017 sales volumes to be in the range of 73-80 mmboe and production to be in the range of 55-60 mmboe. Capital
expenditure is expected to be in the range of $700-750 million.
Santos remains confident in the long-term underlying demand for energy on the back of Asian economic growth, the rising global
population and rapid urbanisation in developing economies. Large cuts in capital expenditure by oil and gas companies are expected
to lead to falling production and a recalibration of oil prices to higher levels. However, the Company will continue to focus on resetting
the cost base in order to operate profitably and sustainably in periods of prolonged weakness in the oil price, and is confident that the
measures taken will drive better returns for shareholders.
Material business risks
The achievement of the business strategy, production growth outlook and future financial performance is subject to various risks
including the material business risks summarised below. Santos undertakes steps to identify, assess and manage these risks and
operates under a Board-approved Enterprise-wide Risk Management Policy. This summary refers to significant risks identified at
a whole of entity level relevant to Santos. It is not an exhaustive list of all risks that may affect the Company nor have they been
listed in any particular order of importance.
Volatility in oil and gas prices
•
Santos’ business relies primarily on the production and sale of oil and gas products to a variety of buyers under a range of short-term
and long-term contracts. A significant part of Santos’ business consists of the production and sale of LNG through its holdings in
PNG LNG, GLNG and Darwin LNG. The majority of LNG produced or to be produced from these projects has been sold under
long-term LNG sales contracts where the LNG sale price is linked to the global price of oil. Lower global oil prices will therefore
reduce Santos’ revenues and the profitability of its operations.
• Global oil prices are affected by numerous factors beyond the Company’s control and have fluctuated widely historically. Oil
prices in 2016 saw Santos continue to manage risks associated with a lower oil price operating environment. In conjunction with
the implementation of a new three-tiered strategy and aligned operating model, further action was taken to progress operational
efficiencies, reduce capital expenditure and strengthen the Company’s balance sheet. Additionally, in 2016 the Board implemented
a dividend framework that reflects Santos’ exposure to oil-linked LNG pricing and the cyclical characteristics of global oil markets.
Project development risks
•
Santos undertakes investment in a variety of oil and gas projects to extract, process and supply oil and gas to a variety of customers,
including long-term high-volume contracts to supply feedstock gas to the GLNG project. Such projects may be delayed or be
unsuccessful for many reasons, including unanticipated economic, financial, operational, engineering, technical, environmental,
contractual, regulatory, community or political events. Delays, changes in scope, cost increases or poor performance outcomes pose
risks that may impact the Company’s financial performance.
•
Santos has comprehensive project and risk management and reporting systems in place and the progress and performance of
material projects is regularly reviewed by senior management and the Board.
Oil and gas reserves
•
•
Estimations of recoverable oil and gas reserves and resources contain significant uncertainties, which are inherent in the reservoir
geology, seismic and well data available and other factors such as project development and operating costs, together with
commodity prices.
Santos has adopted a reserves management system that is consistent with the Society of Petroleum Engineers’ Petroleum Resource
Management System. The Company’s reserves and resources estimations are subject to annual independent audits and evaluations.
24 / Santos Annual Report 2016
Directors’ ReportDirectors’ Reportcontinued Exploration risks
•
•
Santos’ future long-term prospects are also directly related to the success of efforts to replace existing oil and gas reserves as they
are depleted through production. Exploration is a high-risk endeavour subject to geological and technological uncertainties and the
failure to replace utilised reserves with additional proved reserves is a risk inherent in the oil and gas exploration and production
industry.
Santos employs a well-established exploration prospect evaluation methodology and risking process to manage the risks associated
with exploration.
Regulatory and licence to operate risks
•
•
•
•
•
•
Santos’ business is subject to various laws and regulations, in each of the countries in which it operates, relating to the development,
production, marketing, pricing, transportation and storage of its products. A change in the laws which apply to the Company’s
business or the way in which it is regulated could have a material adverse effect on its business, results of operations and financial
condition. For example, a change in taxation laws, environmental laws, land access laws or the application of existing laws could also
have a material effect on Santos.
A range of health, safety and environmental risks exists with oil and gas exploration and production activities. Accidents,
environmental incidents and real or perceived threats to the environment or the amenity of local communities could result in a loss of
the Company’s licence to operate and access to land, leading to delays, disruption or the shut-down of exploration and production
activities.
Santos has interests in areas which may be subject to claims by landowners, who may have concerns over the distribution of oil and
gas royalties and access to mining and petroleum-related benefits. This has the potential to result in community unrest and activism
targeted towards project infrastructure.
A number of Santos’ interests are also located within areas which are the subject of one or more claims or applications for native title
determination. In Australia, compliance with the requirements 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.
Santos continually monitors legislative and regulatory developments and engages appropriately with legislative and regulatory bodies
to manage regulatory risks. Santos and its operating joint venture partners work closely with relevant governments and landowners
to ensure all concerns are fairly addressed and managed, and Santos’ operations benefit from the support of governments and
landowners. Santos and its operating joint venture partners also have comprehensive security and risk management plans in place,
and are committed to conducting operations in a way that protects the security of its personnel, facilities and operations.
Santos has a long history of safe and sustainable operations undertaken working with communities and landholders across the
country. The Company has hundreds of land access agreements in place and a team of experienced community and land access
representatives who work with Aboriginal stakeholders, landholders and communities to ensure that issues are understood and
addressed appropriately.
Contract and counterparty risks
•
•
As part of its ongoing commercial activities, Santos is party to a number of material contracts including finance agreements,
infrastructure access agreements, agreements for the sale and purchase of hydrocarbon, transportation agreements, joint venture
agreements, and engineering, procurement and construction (EPC) contracts. Santos also enters into sale and purchase contracts
with various third parties for the sale and purchase of natural gas, LNG and other products.
The economic effects of these contracts over their term may be impacted by fluctuations in commodity prices, operational
performance and other market conditions. Any failure to perform any of the obligations under these contracts by Santos and/or the
applicable counterparties, or to secure any extensions or amendments to these contracts may result in a material impact on Santos’
operations and financial results.
•
Santos tracks key contractual obligations and monitors performance across its material contracts.
Litigation risks
•
The nature of Santos’ business means that it is likely to be involved in litigation or regulatory actions arising from a wide range of
matters. Santos may also be involved in investigations, inquiries or disputes, debt recoveries, commercial and contractual disputes,
native title claims, land tenure and access disputes, environmental claims or occupational health and safety claims. Any of these
claims or actions could result in delays, increase costs or otherwise adversely impact Santos’ assets and operations, and adversely
impact Santos’ financial performance and future financial prospects.
•
Santos’ legal team actively monitors and manages potential and actual claims, actions and disputes.
Santos Annual Report 2016 / 25
Operational, environmental and safety risks
•
•
Santos is exposed to risks in relation to its ongoing oil and gas exploration and production activities, such as failure of drilling and
completions equipment, pipeline and facilities integrity failures, major processing or transportation incidents, release of hydrocarbons
or other substances, security incidents and other well control and process safety risks, which may have an adverse effect on Santos’
profitability and results of operations.
Santos has a comprehensive approach to management of environmental, health and safety risks, which includes technical,
operational and asset reliability and integrity standards and competency requirements designed to ensure it meets regulatory
requirements and industry standards.
Joint venture arrangements
•
Santos’ business is carried out through joint ventures. The use of joint ventures is common in the exploration and production industry
and serves to mitigate the risk and associated cost of exploration, production and operational failure. However, failure of agreement
or alignment with joint venture partners or the failure of third-party joint venture operators could have a material effect on Santos’
business. The failure of joint venture partners to meet their commitments and share costs and liabilities can result in increased costs
to Santos.
•
Santos works closely with its joint venture partners in order to reduce the risk of misalignment in joint venture activities.
Financial risks
•
Foreign currency risk
Santos is exposed to foreign currency risk principally through the sale of products denominated in US dollars, borrowings
denominated in US dollars and Euros and foreign currency capital and operating expenditure.
• Credit risk
Credit risk for Santos represents a potential financial loss if counterparties fail to perform as contracted, and arises from
investments in cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well
as credit exposures to customers including outstanding receivables and committed transactions.
•
Access to capital and liquidity
Santos’ business and, in particular, the development of large-scale projects, relies on access to debt and equity financing. The ability
to secure financing, or financing on acceptable terms, may be adversely affected by volatility in the financial markets, globally or
affecting a particular geographic region, industry or economic sector, or by a downgrade in its credit rating.
Santos’ overall financial risk management strategy is to seek to ensure that Santos is able to fund its corporate objectives and meet
its obligations to stakeholders. Financial risk management is carried out by a central treasury department which operates under
a Board-approved framework and policies. The framework and principles for overall financial risk management address specific
financial risks, such as foreign exchange risk, interest rate risk and credit risk, approved derivative and non-derivative financial
instruments, and liquidity management.
Consistent with the Company’s focus on maximising operating cash flow and mitigating risk in volatile oil markets, in 2016 Santos
established a specific Oil Price Hedging Policy. The objectives of the policy are to reduce the effect of commodity price volatility
and support annual capital expenditure plans. Santos continues to monitor commodity market conditions and will enter hedging
transactions as appropriate.
Material prejudice
As permitted by sections 299(3) and 299A(3) of the Corporations Act 2001 (Cth), Santos has omitted some information from the above
Operating and Financial Review in relation to the Company’s business strategy, future prospects and likely developments in operations
and the expected results of those operations in future financial years on the basis that such information, if disclosed, would be likely to
result in unreasonable prejudice (for example, because the information is premature, commercially sensitive, confidential or could give a
third party a commercial advantage). The omitted information typically relates to internal budgets, forecasts and estimates, details of the
business strategy, and contractual pricing.
Forward looking statements
This report contains forward-looking statements, including statements of current intention, opinion and predictions regarding the
Company’s present and future operations, possible future events and future financial prospects. While these statements reflect
expectations at the date of this report, they are, by their nature, not certain and are susceptible to change. Santos makes no
representation, assurance or guarantee as to the accuracy or likelihood of fulfilling of any such forward-looking statements (whether
express or implied), and except as required by applicable law or the ASX Listing Rules, disclaims any obligation or undertaking to publicly
update such forward-looking statements.
26 / Santos Annual Report 2016
Directors’ ReportDirectors’ Reportcontinued
SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS
The Operating and Financial Review on (pages 18 to 26) outlines a number of significant changes in the state of affairs of the Company
during the year and the Material business risks section (pages 24 to 26) outlines various risks, which if materialised, may have a
significant effect on the state of affairs of the Company in subsequent financial years.
DIVIDENDS
On 16 February 2017, the Directors resolved not to pay a final dividend.
A fully franked final dividend of US$66 million (A$0.05 cents per fully paid ordinary share) was paid on 30 March 2016 in respect of the
year ended 31 December 2015, as disclosed in the 2015 Annual Report. The Dividend Reinvestment Plan (DRP) was in operation and
shares were allocated based on the DRP issue price that was advised to the market.
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 specified in the consolidated 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.
On 25 February 2016, Santos received a penalty infringement notice and $8,835 fine from the Department of Environment and Heritage
Protection (DEHP) for causing environmental nuisance due to black smoke releases from the GLNG facility on Curtis Island in November
2015. The consolidated entity undertook corrective measures in respect of the infringements to prevent re-occurrences.
This was the only penalty Infringement Notice and fine the consolidated entity received.
POST BALANCE DATE EVENTS
Except as mentioned below or elsewhere in this report, in the opinion of the Directors there has not arisen, in the interval between
the end of the financial year and the date of this report, any matter or circumstance that has significantly affected or may significantly
affect the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in future
financial years.
On 6 February 2017 Santos completed the Share Purchase Plan, as announced during December 2016, with total proceeds of
approximately A$201 million received.
On 16 February 2017, the Directors of Santos Limited resolved not to pay a final dividend in respect of the 2016 financial year.
SHARES UNDER OPTION AND UNVESTED SHARE ACQUISITION RIGHTS
Options
Unissued ordinary shares of Santos Limited under option at the date of this report are as follows:
Date options granted
Expiry date
Issue price of shares1
Number of options
1 July 2007
1 July 2007
30 June 2017
30 June 2017
3 September 2007
2 September 2017
3 May 2008
3 May 2008
28 July 2008
02 March 2009
2 May 2018
2 May 2018
27 July 2018
2 March 2019
$14.14
$14.14
$12.81
$15.39
$15.39
$17.36
$14.81
203,900
47,400
100,000
447,540
227,951
81,948
50,549
1,159,288
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.
Santos Annual Report 2016 / 27
Unvested SARs
Unissued ordinary shares of Santos Limited under unvested SARs at the date of this report are as follows:
Date SARs granted
7 March 2014
1 July 2014
6 March 2015
28 July 2015
10 February 2016
1 May 2016
14 June 2016
31 August 2016
1 December 2016
Number of shares under
unvested SARs
1,253,618
304,787
2,072,453
658,853
333,822
42,585
4,556,550
690,195
23,777
9,936,640
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 31 of this report and in note 7.2 to the financial statements.
SHARES ISSUED ON THE EXERCISE OF OPTIONS AND ON THE VESTING OF SARS
Options
No options were exercised during the year ended 31 December 2016 or up to the date of this report.
Vested SARs
The following ordinary shares of Santos Limited were issued during the year ended 31 December 2016 on the vesting of SARs granted
under the Santos Employee Equity Incentive Plan (SEEIP) (formerly known as the Santos Employee Share Purchase Plan (SESAP)) and
ShareMatch Plan (ShareMatch). No amount is payable on the vesting of SARs and accordingly no amounts are unpaid on any of the
shares.
Date SARs granted
21 June 2012
15 April 2013
1 July 2013
21 January 2014
1 July 2014
28 July 2015
31 August 2016
Number of shares issued
88,706
18,121
322,671
26,787
69,991
125,552
33,817
685,645
Since 31 December 2016, the following ordinary shares of Santos Limited have been issued on the vesting of SARs granted under the
SEEIP and ShareMatch.
Date SARs granted
1 July 2014
28 July 2015
31 August 2016
Number of shares issued
1,412
2,100
977
4,489
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 financial year) are set out in the Remuneration Report commencing on page 31
of this report and in notes 7.2 and 7.3 to the financial statements.
28 / Santos Annual Report 2016
Directors’ ReportDirectors’ Reportcontinued
Remuneration in brief
This section is in addition to the Remuneration Report on pages 31 to 49. This section therefore does not form part of the audited
Remuneration Report. It provides additional information in relation to the amount of remuneration paid to the Company’s Managing
Director and Chief Executive Officer (CEO), Kevin Gallagher, and Senior Executives during 2016. The Company has chosen to do this so
that investors have the benefit of this information in addition to the Remuneration Report on pages 31 to 49, which has been prepared in
accordance with statutory requirements and accounting standards.
2016 – THE START OF THE COMPANY’S TURNAROUND
Santos’ performance in 2016 points to the Company’s turnaround having begun. Under the leadership of the new CEO, Kevin Gallagher,
and the newly formed Executive team, Santos achieved record production of 61.6 mmboe, record sales of 84.1 mmboe, generated free
cash flow of US$206 million (before asset sales) and implemented sustainable cost out and productivity measures that will drive further
value from the existing asset base and position the Company to deliver its strategy over the next few years. By year end 2016, the
Company had reached a free cash flow breakeven oil price of US$36.50 per barrel. Santos is also proud to have continued its strong
safety record and achieved its lowest three-year rolling average lost time injury frequency rate in five years.
The actions of the CEO and the Executive team have set a strong foundation for delivering value to shareholders over the coming years.
In recognition that the CEO and many of the Executive joined Santos in 2016, and are responsible for the swift and decisive actions to
stabilise the business, reduce costs, increase operating cash flow and reduce debt, the Board has determined that the 2016 Short-Term
Incentive (STI) award will be based on the Company’s Scorecard performance score of 86.5% (see page 33 for explanation of the
score). The Board determined that awarding the 2016 STI in accordance with the Scorecard recognises and rewards the achievement
of the targets specifically set at the beginning of the year in order to drive the Company’s turnaround and incentivises management to
maintain the progress and momentum of that turnaround into 2017 and beyond. However, having regard to the year of continued volatile
oil prices and modest returns for shareholders, and the Company’s focus on maximising free cash flow, the Board and management have
agreed that in addition to the 30% of any STI award that is deferred into equity for two years, a further 20% of the 2016 STI award to
the CEO and Senior Executives will be awarded in ordinary shares, rather than in cash.
ALIGNING REMUNERATION AND COMPANY PERFORMANCE
Despite the strong operational performance during 2016, no Long-Term Incentive (LTI) vested because the Company did not achieve its
relative Total Shareholder Return (TSR) targets. This is the sixth year in a row that relative TSR-tested LTI awards have lapsed, reflecting
the clear link between shareholder returns and Senior Executive remuneration.
Santos continued to manage its Executive remuneration conservatively in response to market conditions by:
•
•
•
•
•
setting the CEO’s total remuneration package with a greater proportion “at risk” based on performance linked incentives;
driving sustainable free cash flow generation and effective capital deployment through two additional new measures in the LTI plan,
Free Cash Flow Breakeven Point (FCFBP) and Return on Average Capital Employed (ROACE), given success in these areas should
lead to long-term shareholder value;
allocating Share Acquisition Rights (SARs) on a face value, rather than fair value basis, for the Company’s 2016 LTI Plan;
focussing on financial performance in the Company Scorecard, taking it from the previous year’s 45% to a 60% weighting of overall
performance, and setting more challenging performance levels across the Scorecard;
ensuring that any STI cash payments could be fully funded by free cash flow (FCF), such that if Santos did not reach its FCF
gateway of achieving positive FCF in excess of the total net Santos STI cash cost, the CEO and Senior Executives’ STI would be
awarded as two-year deferred equity and not cash; and
• maintaining the same fees for non-Executive Directors (NED) that have been fixed since October 2013.
REPORTING CURRENCY
As announced to the market on 19 July 2016, Santos changed its reporting currency from A$ to US$ for the 2016 performance year.
In line with Santos’ US$ reporting currency the majority of the Remuneration Report is now disclosed in US$ (unless otherwise
indicated) with all remuneration components having been converted from A$ to US$ using an average rate of $0.7451 for 2016 and
$0.7523 for 2015.
The Actually realised remuneration table in this section will continue to be disclosed in A$. Given the CEO and Senior Executives are
contracted and paid in A$ and are predominantly based in the Australian Head Office located in South Australia, the Actually realised
remuneration table will continue to clearly provide the remuneration “actually realised” by the CEO and Senior Executives without
US$ exchange rate fluctuations.
Santos Annual Report 2016 / 29
Remuneration in brief
continued
ACTUALLY REALISED REMUNERATION
The Table below shows remuneration “actually realised” by the CEO and Senior Executives in relation to 2016, namely:
•
•
•
•
cash payments on account of Total Fixed Remuneration (TFR);
STI awarded in cash and ordinary shares in respect of 2016 performance;
deferred STI awards in respect of prior performance years which vested in 2016; and
SARs granted as part of the LTI program, only if they vest, valued on the basis of their closing price on the date of vesting.
These amounts differ from the amounts reported in the Remuneration Report which are prepared in accordance with the Corporations
Act 2001 (Cth) and Accounting Standards. This is because the Accounting Standards require a value to be placed on “share based
payments” at the time of grant, and for that “accounting value” to be reported as remuneration, even though the CEO and Senior
Executives may ultimately NOT realise any actual value from the “share based payments” (e.g. because the performance conditions
are not satisfied, as was the case for the 2014 three-year LTI award tested at the end of 2016).
Termination payments, leave entitlements and cashing out of leave entitlements, where allowable under legislation, are not included in
the table below. The total remuneration amounts determined in accordance with the requirements of the Corporations Act 2001 (Cth)
and Accounting Standards are set out in Table 5: 2015 and 2016 Senior Executive remuneration details (see page 40).
Actually realised remuneration (unaudited and non-IFRS)
Year
TFR1 Cash STI2
A$
A$
2016
1,650,000
712,600
2014 deferred
STI that vested
in 20163
Ordinary
shares4
A$
–
A$
285,000
740,504
275,700
54,817
110,300
712,016
–
–
–
–
–
–
63,608
–
–
97,200
–
–
81,000
–
–
–
566,70011
58,310
770,752
770,752
–
660,000
202,600
561,167
–
365,429
126,90015
724,914
–
2016
2015
2016
2015
2016
2015
2016
2015
2016
662,195
243,100
LTI5
A$
Other6
A$
Total
A$
–
–
–
–
–
–
–
–
–
–
9,8048 2,657,404
15,000
1,196,321
45,000
757,016
9,804
1,012,299
–
–
1,395,762
770,752
3,24813
946,848
9,804
570,971
–
555,937
1,477
726,391
K Gallagher7
Chief Executive Officer
J Anderson9
Executive Vice President
Commercial and Business
Development
V Santostefano10
Chief Operations Officer
A Seaton
Chief Financial Officer
B Woods12
Vice President Development
T Brown14
Vice President Queensland
TFR comprises base salary and superannuation. The amount shown here is the actually received TFR, i.e. are pro-rated amounts for those Executives who commenced during the year.
1
2 50% of the STI award for 2016 performance for continuing Executives will be paid in cash and this is the amount reported in the “Cash STI” column above. The remaining 50% will be
awarded as equity with 20% delivered as ordinary shares and the remaining 30% delivered as deferred shares or SARs (subject to a two-year service-based period). The 2016 Company
Scorecard outcome is presented at Table 1: 2016 STI scorecard performance on page 33. 2015 and 2016 Senior Executive remuneration details including deferred STI accounting valuations,
can be found on page 40.
3 This relates to deferred restricted shares from the 2014 STI award that vested on 31 December 2016. The amount reflected is based on the closing share price of A$4.02 on the vesting date.
4 This relates to the ordinary shares the CEO and Senior Executives will receive as part of the 2016 STI award. The amount reflected is based on the closing share price of A$4.02 on
31 December 2016.
5 No LTI vested in 2016. For the value of share-based payments calculated in accordance with the Accounting Standards, see Table 5: 2015 and 2016 Senior Executive remuneration details on
page 40.
“Other” comprises ad hoc payments treated as remuneration, such as assignment and mobilisation allowances.
6
7 Mr Gallagher became a key management personnel (KMP) on 1 February 2016 when he commenced as the CEO.
8 Mr Gallagher received a relocation allowance in February 2016.
9 Mr Anderson remained a KMP for the whole of 2016, initially as Vice President (VP) Asia, WA and NT and then in the role of Executive Vice President (EVP) Commercial and Business
Development from 1 July 2016.
10 Mr Santostefano became a KMP on 21 March 2016 when he commenced as Chief Operations Officer.
11 At the time of paying Mr Seaton’s 2016 STI in April 2017, he will no longer be employed by the Company. His 2016 STI will be delivered wholly in cash. These figures for Mr Seaton do not
include any termination payments, details of which are set out in Table 5: 2015 and 2016 Senior Executive remuneration details.
12 For comparison purposes when Mr Woods’ was promoted to VP Eastern Australian Business Unit his TFR on an annual basis was A$630,000. His 2016 TFR of A$670,000 represents a 6.3%
increase, in line with his increased responsibilities as VP Development.
13 This amount represents Mr Woods’ previous participation in the Company’s employee share plan prior to becoming a KMP in August 2015 and 808 of these shares vested in 2016. The
amount reflected is based on the closing share price of A$4.02 on 31 December 2016. This value may not reflect the actual benefit received.
14 Mr Brown was a KMP from 1 January 2016 to 20 March 2016 while in the role of VP Queensland. He ceased to be a KMP on 21 March 2016. Mr Brown continued to provide transitionary
support for three months after ceasing to be a KMP and his total remuneration earned for 2016 has been provided for comparison purposes. The figures for Mr Brown do not include his
termination payments, details of which are set out in Table 5: 2015 and 2016 Senior Executive remuneration details.
15 Given Mr Brown is no longer employed by the Company, his pro-rated 2016 STI will be delivered wholly in cash.
30 / Santos Annual Report 2016
Directors’ Report
Remuneration Report
The Directors of Santos Limited (referred to as “the Company” or “Santos”) present this Remuneration Report for the consolidated
entity for the year ended 31 December 2016. The information provided in this Report has been audited as required by section 308(3C) of
the Corporations Act 2001 (Cth) (Corporations Act) and forms part of the Directors’ Report.
The Remuneration Report outlines the Company’s key remuneration activities in 2016 and remuneration information pertaining to the
Company’s Directors, Managing Director and Chief Executive Officer (CEO) Kevin Gallagher and Senior Executives who are the key
management personnel (KMP) of the consolidated entity for the purposes of the Corporations Act and Accounting Standards. These
are the Executives who have authority and responsibility for planning, directing and controlling the activities of the Company’s major
financial, commercial and operating divisions.
REMUNERATION APPROACH
Remuneration policy objective
Attracting and retaining talented and
qualified executives
Focusing executives to strive for
superior performance
Aligning executive and shareholder
interests
Implemented through the company’s remuneration framework
Remuneration levels are market-
aligned against similar roles in
comparable companies.
The Company compares
remuneration levels for similar
roles in a benchmarking group.
This group comprises peer companies
across broader-based industries of the
ASX100 and also the oil and gas sector
(and related resources sectors).
A significant component of
remuneration is “at risk” under
Short-Term and Long-Term Incentive
plans. The value to the executive is
dependent on meeting challenging
targets.
Short-Term Incentive outcomes are
based on performance measures
that include safety, environment,
production, cash flow, capital
expenditure, costs, reserves
development and leadership measures.
Long-Term Incentive and deferred
Short-Term Incentives are delivered
through equity instruments linked
to Santos ordinary shares or Share
Acquisition Rights (SARs).
Vesting of performance-based Long-
Term Incentives is contingent on
achieving performance hurdles.
Long-Term Incentive and deferred
Short-Term Incentives are “at risk”
and executives cannot hedge equity
instruments that are unvested
or subject to restrictions. These
incentives are also subject to
“clawback”.
REMUNERATION GOVERNANCE
People and Remuneration Committee
The People and Remuneration Committee (Committee) oversees and formulates recommendations to the Board on the remuneration
policies and practices of the Company generally, including the remuneration of non-executive Directors, the CEO and Senior Executives.
External advisors and remuneration advice
The Board has adopted a protocol for engaging and seeking advice from remuneration consultants. In 2016, no remuneration
recommendations were provided by remuneration consultants.
Santos Annual Report 2016 / 31
REMUNERATION FRAMEWORK
Remuneration benchmarking
Total Fixed Remuneration (TFR), Short-Term Incentive (STI) and Long-Term Incentive (LTI) levels are set by reference to market data
and performance in order to ensure that the Company is competitive and able to attract and retain the skills it needs to deliver the
Company’s short-term and long-term objectives.
TFR
TFR comprises base pay and superannuation and is reviewed annually and formally benchmarked against comparable peer companies.
It is set by reference to an individual’s role and responsibilities and also reflects an individual’s experience and competencies.
STI
The Company sets a range of short-term operational and financial targets to be achieved annually. These are chosen to drive outcomes
and behaviours that support the safe operation and delivery of the business and lead to long-term growth in shareholder value. These
are reviewed annually by the Board. Table 1 on page 33 outlines the short-term objectives used in 2016 to measure performance for STI
purposes and the reasons why these objectives were chosen.
To drive a focus on productivity and cash flow in a low oil price environment significant changes were made to the 2016 Company
Scorecard and remuneration framework including increasing the financial based metrics to 60% weighting and introducing a Free Cash
Flow (FCF) gateway for any cash STI award.
If the FCF gateway is met, the Company’s policy is to deliver 30% of any STI award for the CEO and Senior Executives into deferred
shares or SARs. If the gateway is not met, 100% of any STI award will be delivered as shares or SARs that vest at the end of a two-year
deferral period. If a Senior Executive resigns during the period, they will ordinarily forfeit their deferred shares or SARs.
Further details are provided in relation to the STI program on page 47.
LTI
In order to align the interests of executives with the creation of long-term shareholder value, the Company awards its LTI grants as
SARs. The SARs are granted at no cost and only vest if the Company meets a number of performance hurdles. In 2016 the Company
introduced two new performance conditions into the LTI program: Free Cash Flow Breakeven Point (FCFBP) and Return on Average
Capital Employed (ROACE), in addition to the two relative Total Shareholder Return (TSR) measures. Both FCFBP and ROACE align
with the Company’s focus on cash flow generation, debt reduction and effective use of capital to grow shareholder value.
Vesting of the 2016 LTI grants is based on the following performance targets:
•
•
•
•
25% relative TSR measured against companies in the ASX100;
25% relative TSR measured against companies in the S&P Global 1200 Energy Index (GEI);
25% Free Cash Flow Breakeven Point; and
25% Return on Average Capital Employed.
Further details are provided in relation to the LTI program on page 48.
Clawback
The share plan rules give the Company the discretion to lapse or forfeit unvested deferred shares or SARs awarded under the STI or LTI
programs as well as claw back any vested shares or cash paid in certain circumstances. These include dishonest or fraudulent conduct,
breach of material obligations, miscalculation or error, a material misstatement or omission in the accounts of a group company or events
which require re-statement of the Group’s financial accounts in circumstances where an LTI or deferred STI award would not otherwise
have been granted or would not have vested. This is in addition to any rights the Company has under the plan rules and general legal
principles to seek to recover payments made in error.
32 / Santos Annual Report 2016
Directors’ ReportRemuneration Report continued Link between performance and remuneration
2016 STI scorecard performance
The Company’s performance against the 2016 STI scorecard as assessed by the Board resulted in a score of 86.5%. The table below
summarises the short-term objectives in the scorecard, their rationale and the Company’s performance against them.
Table 1: 2016 STI scorecard performance
STI Measure
Personnel safety
Measured by the rolling average
number of lost time injuries per
million hours worked over a
three-year period (2014 to 2016).
Process safety
Measured by the number of
Tier 1 loss of containment of
hydrocarbon incidents, and
the level of Safety Critical
Compliance performed on plant
and equipment in enclosed and
open areas.
Environmental incidents
Measured by the number
of environmental incidents
of moderate or greater
consequence.
Enterprise risk reviews
Measured by the number of
reviews conducted by the
Executive Committee of the
Company’s Risk Management
Framework.
)
%
0
2
(
y
t
i
r
g
e
t
n
I
l
a
n
o
i
t
a
r
e
p
O
d
n
a
k
s
i
R
Rationale
Performance
The Company is committed to providing
a workplace without injury or illness and
managing the impact of our operations on
the environment.
The Company achieved a three-year
rolling lost time injury frequency
rate of 0.40, exceeding the
Company target.
Score
17.3%
Safety Critical Maintenance was
slightly below target and Tier 1 loss
of containment of hydrocarbon
incidents achieved better than target.
The integrated targets for personnel
safety, process safety, and the
environment represent the Company’s
holistic approach to safety management.
This is aimed at: reducing the number of
injuries to employees and contractors;
the likelihood of low frequency but
high impact incidents such as fires
and explosions; and the incidence of
significant environmental incidents.
There were no environmental
incidents of moderate or greater
consequence.
The continued focus on the Company’s
Risk Management Framework represented
a commitment by the Santos Executive
Committee for risk to be a regular part of
the conversation.
Enterprise risk reviews were
conducted by the Executive
Committee at the target level.
Santos Annual Report 2016 / 33
Rationale
Performance
Score
55.0%
STI Measure
Production
Operating cash flow
Operating cash flow measures
the net cash flow from
operating activities as reported
in the Company’s Consolidated
Statement of Cash Flows.
Capital expenditure
)
%
0
6
(
l
a
n
o
i
t
a
r
e
p
O
&
l
i
a
c
n
a
n
F
i
Production is critical to the Company’s
profitability and overall performance, and
underpins annual earnings and cash flow.
Maximising cash from operating activities
is essential to drive returns and support
reinvestment for future growth.
Capital expenditure was introduced as a
measure to reflect the focus on preserving
capital in a low oil price environment.
Total cash operating costs
and selling, general and
administration costs
Total Cash Operating Costs and Selling,
General and Administration costs were
introduced to reflect the focus on
reducing costs and lifting efficiency
across the entire Company.
Production of 61.6 mmboe, the
highest annual production ever, was
at the upper end of the guidance
range.
Strong operating cash flow of
US$857 million exceeded target due
to a focus on maximising production,
cost reductions and operational
efficiencies. This improved the Free
Cash Flow Breakeven Point to
US $36.50 per barrel.
Capital expenditure was significantly
reduced for a result of US$625
million which was better than target
(including the average Cooper Basin
gas well costs down 12% to US$4.2
million per well).
Total Cash Operating Costs and
Selling, General and Administration
costs of US$924 million met target.
Efficiencies delivered through
restructuring incurred a one-off
cost of US$40 million.
Reserves replacement
The volume of proven and
probable (2P) reserves added
by the Company organically
compared to the volume of
reserves used in the current
year’s production.
2P undeveloped to developed
reserves conversion cost
($/boe)
The cost of developing existing
2P reserves into developed
reserves ready for production.
Net debt
)
%
0
1
(
n
o
i
t
a
e
r
C
e
u
l
a
V
Reserves replacement reflects the
Company’s ability to replace the reserves
it uses in the current year’s production to
ensure the longer-term sustainability of
the Company.
The 2P reserves replacement growth
target was not achieved as our
focus in 2016 was conversion of
undeveloped reserves and resources
to developed.
5.6%
This conversion cost metric assesses
how efficiently capital is being deployed
to develop booked 2P reserves for
production.
The Undeveloped to Developed
Reserves conversion cost ($/boe)
was slightly below target.
Net debt was introduced to reflect
the focus on reducing Company debt,
following start-up of major projects and
resultant high gearing level, and against a
backdrop of a low oil price environment.
Net debt was substantially reduced
to US$4.23 billion which met the
target (excluding the proceeds of the
Institutional Placement at the end of
2016).
)
i
%
0
1
(
p
h
s
r
e
d
a
e
L
Leadership
To drive leadership behaviours
and a “one team” culture.
The new Excom must have a results focus
to drive Santos’ transformation, generate
stronger returns and ensure the long-term
sustainability of the Company.
8.6%
The Excom delivered strong
leadership performance in 2016. The
organisation restructured and a new
operating model was established.
A low cost high performing culture
was driven through the business as
demonstrated through the significant
improvements in Free Cash Flow and
Net Debt reduction.
Total
86.5%
34 / Santos Annual Report 2016
Directors’ ReportRemuneration Report continued
LTI PERFORMANCE
The Company’s TSR for the period 1 January 2014 to 31 December 2016 ranked below the 51st percentile in the comparator groups
comprising the companies in the ASX 100 and S&P GEI. As a result, none of the SARs granted to the Executives in 2014 as part of the
three-year transitionary grant vested. This reflects the alignment of the Company’s LTI program with the interests and long-term returns
of shareholders.
Details about how performance targets are set and tested for the purposes of STI and LTI awards are set out on pages 47 and 48.
FINANCIAL PERFORMANCE
Table 2 sets out the Company’s performance over the past five years in respect of several key financial and non-financial indicators and
the STI and LTI awards during this period.
Table 2: Key metrics of company performance 2012 – 2016
2012
2013
2014
2015
2016
Injury frequency
total recordable case frequency rate
lost time injury frequency rate (three-year rolling average)
Production (mmboe)
Reserve replacement rate – 2P organic (%)
5.0
0.9
52.1
136
3.8
0.8
51.0
3
3.5
0.7
54.1
0
2.8
0.5
57.7
0
2.2
0.4
61.6
19
Net profit/(loss) after tax1 ($m)
US$537
US$499
US$(630)
US$(1,953)
US$(1,047)
Dividends per ordinary share (cents) A$
30
30
35
20
0
Share price – closing price on first trading day of year
A$12.34
A$11.11
A$14.63
A$8.25
A$3.682
LTI performance (% vesting) – shown against final year
of performance period
STI score (% of maximum)
0%
68%
0%
60%
0%
58%3
0%
67%
0%
86.5%
1
2012–2015 Net profit/(loss) after tax figures have been translated from A$ to US$ at an applicable exchange rate for the year for comparison purposes.
2 Closing share price at 31 December 2016 was A$4.02.
3 Whilst the 2014 company performance result was 78%, the actual STI payout was reduced by the Board to 58%.
Santos Annual Report 2016 / 35
CEO REMUNERATION
What is the CEO’s TFR?
US$1,341,180 per annum.
What notice periods are
applicable for termination?
The CEO’s contract has no fixed term and may be terminated with 12 months’ notice by either party.
Employment may be ended immediately in certain circumstances including misconduct, incapacity,
and mutual agreement or in the event of a fundamental change in the CEO’s role or responsibility.
What termination
benefits apply?
The Company may elect to pay the CEO in lieu of any unserved notice period. If termination is by mutual
agreement, the CEO will receive a payment of US$1,117,650.
In the case of death, incapacity or fundamental change, the CEO is entitled to a payment equivalent to
12 months’ base salary.
What sign-on grants
were received?
In recognition of previous incentives foregone from his previous employer, the CEO received SARs
with a face value of US$745,100 equal to a total of 333,822 SARs. The conditions of the grant were
as follows:
•
•
50% (166,911 SARs) that vested on 31 January 2017; and
50% (166,911 SARs) will vest on 31 January 2018.
The unvested rights will vest in line with the above provided the CEO has not resigned or been
terminated by the Company for cause or terminated his employment by mutual agreement with the
Company.
Any unvested rights will vest immediately (or at his election stay on foot and vest at the end of the
two-year period) if the Company terminates his employment without cause or if the CEO terminates his
employment due to a fundamental change in his role or his employment is terminated due to death or
incapacity.
Following vesting, the CEO will have five years to convert the rights into Santos shares. The CEO does
not need to pay any amount on conversion of the rights.
The CEO has a maximum STI opportunity of 100% of his TFR.
The CEO’s performance was assessed using the Company Scorecard. The overall result was 86.5%
of maximum. Given the CEO’s commencement date of 1 February 2016, his STI was pro-rated for
the period from his commencement date to 31 December 2016. This has a total value equivalent to
US$1,061,842: 50% will be paid in cash, 20% delivered as ordinary shares and 30% delivered as
deferred equity.
The CEO has a maximum LTI opportunity of 150% of TFR allocated on a face value basis. In accordance,
with the approval of shareholders at the May 2016 Annual General Meeting (AGM), the CEO was
granted 901,320 SARs as his 2016 LTI.
The performance conditions of the CEO’s grant are the same as the Senior Executives’ grant as
outlined on page 48.
STI
What is the maximum STI the
CEO could receive?
How much STI did the CEO
receive in respect of 2016
performance?
LTI
What is the amount of LTI
the CEO can receive?
What are the performance
conditions of the 2016 LTI
grant for the CEO?
36 / Santos Annual Report 2016
Directors’ ReportRemuneration Report continued SENIOR EXECUTIVE REMUNERATION
Fixed remuneration
Was there an increase in
Senior Executives’ TFR?
STI
What was the maximum
STI Senior Executives could
receive?
How were STI payments
calculated?
Mr Anderson and Mr Woods’ received TFR increases of between 5.3% and 6.3% as a result of market
benchmarking of their roles. Market appropriate remuneration levels for new KMP were set at the
commencement of their employment in 2016.
The Senior Executives have a maximum STI opportunity of between 70% and 85% of their TFR.
To promote alignment and focus of the new Excom on the organisation’s turnaround, in 2016, all Senior
Executives shared the Corporate Scorecard as the basis for 90% of their performance outcome.
The other 10% of the performance outcome was based on the individual Executive’s leadership and
contribution to the delivery of the Company’s results.
How was performance
assessed for STI purposes?
Company performance against the overall Corporate scorecard was assessed by the Committee and
the Board.
Senior Executives’ performance against the individual Leadership component was assessed by the CEO,
and reviewed and endorsed by the Committee.
The Company’s performance against the 2016 STI Scorecard as assessed by the Board resulted
in a score of 86.5%. 50% of the STI award will be paid in cash and the remaining 50% will be awarded
as equity with 20% delivered as ordinary shares and the remaining 30% delivered as deferred shares or
SARs (subject to a two-year service-based period). Further details for each individual Senior Executive’s
remuneration are provided in Table 5: 2015 and 2016 Senior Executive remuneration details on page 40.
How much STI will Senior
Executives receive in respect
of 2016 performance?
LTI
How much LTI was granted
to Senior Executives in 2016?
In 2016, all Senior Executives received an LTI award equivalent to 80% of TFR which was allocated on
a face value basis. This is different to the 2015 grant size in which Senior Executives received an LTI
award of between 50% and 60% of TFR and SARs were allocated on a fair value basis.
What are the performance
conditions?
The grant has a four-year performance period from 1 January 2016 to 31 December 2019. Vesting is
based on the four equally weighted performance targets as indicated on page 48. The vesting schedule
can be also be found on page 49.
What proportion of prior year
LTI grants vested in 2016?
Nil.
The testing of the three-year 2014 LTI grant with a performance period 1 January 2014 to 31 December
2016 occurred in early 2017. As the performance hurdle was not achieved, there was no vesting of the
grant and this was forfeited.
Service agreements and termination entitlements
The Company has entered into service agreements with the Senior Executives. For all existing Senior Executives, the service
agreements are ongoing until termination by the Company upon giving between 6 and 12 months’ notice, or by the Senior Executive
giving between 6 and 12 months’ notice. In a Company-initiated termination, the Company may make a payment in lieu of notice
equivalent to the TFR that the Senior 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 are payable under
the agreement.
Santos Annual Report 2016 / 37
AT RISK REMUNERATION SUMMARY
At risk remuneration
A higher proportion of the CEO’s total remuneration package is “at risk” relative to that of the Senior Executives because the CEO has
the greatest scope to personally influence the Company’s performance.
For Senior Executives, the slight increase in proportion of “at risk” remuneration reflects the change in LTI allocation methodology, given
an increase in LTI as a percentage of TFR occurred to partially offset the move from fair to face value basis for allocating SARs.
Table 3: Relative weightings of remuneration components for CEO and Senior Executives1
CEO3 (Kevin Gallagher)
Former CEO (David Knox)
Senior
Executives
2016
20154
2016
2015
At risk remuneration
Fixed
remuneration
28.6%
33.3%
38.2%
40.8%
STI2
28.6%
33.3%
31.2%
34.7%
LTI
42.8%
33.3%
30.6%
24.5%
Total
“at risk”
71.4%
66.6%
61.8%5
59.2%
Total
100%
100%
100%
100%
1
These figures represent maximum potential of each component. They do not reflect the actual relative value derived by the Executive from each of the components, which is dependent on
actual performance against targets for the “at risk” components.
2 Also includes deferred STI component.
3 The figures here do not include the CEO’s sign-on grant.
4
2015 relates to the former CEO.
5 As noted on page 37 the increase in LTI as a percentage of TFR was made with the change from fair to face value allocation basis and is reflected in the proportion of Senior Executive
remuneration being “at risk”.
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:
•
•
time commitment and workload;
the risk and responsibility attached
to the role;
•
experience and expertise; and
• market benchmarking.
•
•
Fee levels do not vary according
to the performance of the
Company or individual Director
performance from year to year.
Independent Directors
performance is assessed at the
time of re-election.
•
Santos encourages its non-
executive Directors to build a
long-term stake in the Company
and established a minimum
shareholding requirement of
15,000 shares for all non-
executive Directors within three
years.
• Non-executive Directors can
acquire shares through acquisition
on market during trading windows
and/or through the Non-executive
Director share plan.
38 / Santos Annual Report 2016
Directors’ ReportRemuneration Report continued Maximum aggregate amount
Total fees paid to all non-executive Directors in a year, including Board Committee fees, must not exceed US$1,937,260, being the
amount approved by shareholders at the 2013 AGM.
Directors may also be paid additional fees for special duties or exertions, and are entitled to be reimbursed for all business-related
expenses.
Remuneration
There have been no increases in non-executive Director fees since October 2013.
Remuneration details for the non-executive Directors are provided in Table 10: 2015 and 2016 Non-executive Director remuneration
details on page 43.
Fee structure
Table 4: Non-executive Directors’ fees per annum1
Board
Audit and Risk Committee
Environment, Health, Safety and Sustainability Committee
Nomination Committee3
People and Remuneration Committee
1
Fees are shown exclusive of superannuation.
2 The Chair of the Board does not receive any additional fees for serving on or chairing any Board committee.
3 The Chair of the Board is the Chair of the Nomination Committee, in accordance with its Charter.
Superannuation and retirement benefits
Chair2
US$
Member
US$
$375,195
$124,842
$31,294
$16,392
N/A
$22,353
$15,647
$11,177
$7,451
$11,922
Superannuation contributions are made on behalf of non-executive Directors in accordance with the requirements of the Company’s
statutory superannuation obligations. Non-executive Directors are not entitled to retirement benefits (other than mandatory statutory
entitlements).
Santos Annual Report 2016 / 39
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Directors’ ReportRemuneration Report continued
Table 6 contains details of the number and value of SARs that were granted, vested and lapsed for the CEO in 2016. The CEO did not
have any options granted, vesting or lapsing in 2016. The CEO has no options to exercise.
Table 6: 2016 SARs outcomes for CEO
Granted
Vested
Lapsed
Number
Maximum
value1
US$
Number
Value
Number
SARs
1,235,1422
3,211,862
_
_
_
1 Maximum value represents the fair value of LTI grants received in 2016 determined in accordance with AASB 2 Share-based Payment. The fair values represent multiple grants in 2016
weighted at a fair value of A$3.49. Details of the assumptions underlying the valuations are set out in note 7.2 to the financial statements. The minimum total value of the grant to the CEO,
if the applicable vesting conditions are not met, is nil in all cases. All values have been converted to US$.
2 The number of SARs granted to the CEO relate to his 2016 sign-on grant of 333,822 and the 2016 LTI performance grant of 901,320.
Tables 7 and 8 contains details of the number and value of shares and SARs granted, vested and lapsed for Senior Executives in 2016.
No Senior Executive had any options granted, vesting or lapsing in 2016. No options were exercised in 2016.
Table 7: 2016 SARs outcomes for Senior Executives
JH Anderson
V Santostefano
AJ Seaton
BK Woods
TJ Brown
Total
Granted
Vested
Lapsed
Number1
Maximum
value2
Number
Value
Number3
155,844
176,620
160,156
139,220
_
US$
429,642
486,918
441,529
383,811
_
631,840
1,741,900
_
_
_
_
_
_
_
_
_
_
_
_
(48,980)
_
(53,020)
(20,545)
(125,693)4
(248,238)
1
The grant relates to the Senior Executives’ full LTI awards for the four-year performance period ending on 31 December 2019.
2 Maximum value represents the fair value of LTI grants received in 2016 determined in accordance with AASB 2 Share-based Payment. The fair values of the grant as at the grant date
of 29 June 2016 is weighted at a fair value of A$3.70. Details of the assumptions underlying the valuations are set out in note 7.2 to the financial statements. The minimum total value of
the grant to the Senior Executives, if the applicable vesting conditions are not met, is nil in all cases. All values have been converted to US$.
3
Lapsed SARs relate to the 2014 LTI grant.
4 The total for Mr Brown includes SARs related to previous LTI grants which lapsed after he ceased to be a KMP on 21 March 2016 (84,152 lapsed SARs) in addition to the lapsed SARs
related to the 2014 LTI grant (41,541 lapsed SARs).
Santos Annual Report 2016 / 41
Table 8: 2016 share outcomes for Senior Executives
JH Anderson
V Santostefano5
AJ Seaton6
BK Woods7
TJ Brown
Total
Granted
Vested
Number1
74,881
_
_
54,556
76,242
205,679
Maximum
Value2
US$
217,038
_
_
158,127
220,983
596,148
Number3
13,636
_
14,505
8088
15,823
44,772
Value4
US$
40,844
_
43,447
2,420
47,395
134,106
Lapsed
Number
_
_
_
_
_
_
1
This relates to the 2015 STI award. The entire award was deferred into shares for two-years that were granted on 11 May 2016.
2 Maximum value represents the fair value of 2015 STI shares received in 2016 determined in accordance with AASB 2 Share-based Payment. The fair value of the grant as at the grant date
of 11 May 2016 is weighted at a fair value of A$3.89. The minimum total value of the grant, if the applicable vesting conditions are not met, is nil. All values have been converted to US$.
3 This relates to the 2014 STI grant that was deferred for two-years from 1 January 2015 to 31 December 2016 which vested in full on 31 December 2016.
4 These figures show the value of the 2014 deferred STI grant, using the share price of A$4.02 on 31 December 2016 converted to US$.
5 Mr Santostefano only commenced in 2016 and did not participate in the 2015 STI Plan.
6 Mr Seaton forfeited his 2015 STI award.
7 Mr Woods did not participate in the 2014 deferred STI grant as he was not a Senior Executive at that time.
8 Mr Woods previously participated in the Company’s general employee share plan prior to becoming a KMP in August 2015. In 2016 a total of 808 shares vested. The value reflected is based
on the closing share price of A$4.02 on 31 December 2016 converted to US$.
Table 9 outlines the LTI grants that were tested or still in progress in 2016.
Table 9: LTI grants
Grant year
Grant type
Vesting condition(s)
2014
Three-year transitionary
Performance Award
Four-year Performance Award
2015
Four-year Performance Award
2016
Four-year Performance Award
CEO sign-on grant
Relative TSR performance
against ASX 100 companies
(75%) and S&P GEI (25%)
Relative TSR performance
against ASX 100 companies
(75%) and S&P GEI (25%)
Relative TSR performance
against ASX 100 companies
(75%) and S&P GEI (25%)
Relative TSR performance
against ASX 100 companies
(25%) and S&P GEI (25%)
FCFBP (25%)
ROACE (25%)
Service Based
Performance/
vesting period
1 January 2014 to
31 December 2016
1 January 2014 to
31 December 2017
1 January 2015 to
31 December 2018
1 January 2016 to
31 December 2019
Status
Testing completed.
Resulted in 0% of the
grant vesting.
In progress.
In progress.
In progress.
50% vesting (12 months)
– 1 February 2016
to 31 January 2017
50% vesting (24 months)
– 1 February 2016
to 31 January 2018
Vested.
In progress.
Full details of all grants made prior to 2016 can be found in note 7.2 to the financial statements and in prior Remuneration Reports.
42 / Santos Annual Report 2016
Directors’ ReportRemuneration Report continued
Details of the fees and other benefits paid to non-executive Directors in 2016 are set out in Table 10. No fee increases were received
in 2016. Differences in fees received between 2015 and 2016 reflect changes in roles and responsibilities (i.e. Chair or Committee
appointments) and superannuation payments. No share-based payments were made to any non-executive Directors.
Table 10: 2015 and 2016 Non-executive Director remuneration details
Director
Short-term benefits
Director
Year
Directors’ fees
(incl. committee
fees)
Fees for
special duties
or exertions
Retirement
benefits
Other Superannuation9
YA Allen1
PR Coates2
GM Cowan3
KA Dean4
RA Franklin5
H Goh
PR Hearl6
JS Hemstritch7
GJW Martin8
SD Sheffield
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
US$
148,463
146,916
373,938
299,885
99,463
–
50,374
154,056
173,173
170,598
164,353
165,896
89,411
–
57,277
168,726
166,514
168,958
137,799
142,729
US$
US$
–
–
30,621
131,797
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
US$
14,104
13,957
17,410
26,738
9,405
–
4,786
14,106
677
1,295
557
607
8,494
–
5,073
14,328
14,501
14,328
287
440
Share-based
payments
US$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
US$
162,567
160,873
421,969
458,420
108,868
–
55,160
168,162
173,850
171,893
164,910
166,503
97,905
–
62,351
183,054
181,015
183,286
138,086
143,169
1 Ms Allen retired from the Audit and Risk Committee on 24 June 2016 and was appointed to the People and Remuneration Committee on 24 June 2016.
2 Mr Coates was appointed as the Chair of the Board on 1 May 2015. In addition to his role as Chair of the Board, Mr Coates acted in the role of Executive Chairman from 24 August 2015
until 31 January 2016. His remuneration in Table 10 shows his fees as both the Chair of the Board and the Executive Chairman.
3 Mr Cowan was appointed to the Board on 10 May 2016 and is the current Chair of the Audit and Risk Committee.
4 Mr Dean retired as a non-executive Director on 4 May 2016.
5 Mr Franklin is the current Chair of the Environment, Health, Safety and Sustainability Committee.
6 Mr Hearl was appointed to the Board on 10 May 2016 and is a member of the Audit and Risk Committee.
7 Ms Hemstritch retired as a non-executive Director on 4 May 2016.
8 Mr Martin is the current Chair of the People and Remuneration Committee, and was appointed to the Nomination Committee on 3 May 2016.
9
Includes superannuation guarantee payments. Superannuation guarantee payments are made to Mr Franklin, Mr Goh and Mr Sheffield only in relation to days worked in Australia.
Santos Annual Report 2016 / 43
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Directors’ ReportRemuneration Report continued
DETAILED INFORMATION ABOUT LINKING COMPANY PERFORMANCE TO AT RISK REMUNERATION
STI questions and answers
How are the Company’s
short-term performance
targets determined?
What is measured in
the Company’s annual
performance scorecard?
The Company’s short-term performance targets comprise a combination of financial and
operational targets, all of which are agreed with the Board and directly related to stabilising of
the base business and improving financial performance. These are captured in the Company’s
annual performance scorecard.
The Company scorecard includes a range of Company performance measures used 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 – see Table 1: 2016 STI scorecard performance on page 33.
The Board believes that this scorecard is balanced and focuses the CEO and Senior Executives'
attention on achieving the key conditions and milestones necessary to deliver stronger returns
to shareholders.
How is Company
performance assessed?
Company performance is formally assessed by the Committee against the overall Company scorecard
at the end of each financial year, and this forms the basis of a recommendation to the Board.
Each metric is assessed against an agreed target and assigned a percentage weighting of the total
scorecard. The actual versus the target performance of each metric is assigned a score between 0%
and 100%. The weightings are then applied to these scores to derive a rating for that metric. The sum
of each metric’s rating is used to determine the Company’s overall performance score.
The Board believes the above method of assessment is rigorous and provides a balanced assessment
of the Company’s performance.
How does Company
performance impact
the STI program?
First, the Company’s overall performance score sets the budget available for STI allocations across
the organisation in respect of that performance year. This is calculated by applying the percentage
performance score to the maximum potential STI values of all eligible employees.
Secondly, the Company’s overall performance score contributes to the actual STI payment made to
individuals in a given year. For the CEO, the Company performance outcome determines 100% of his
2016 STI payment. For Senior Executives, the Company performance outcome determines 90% of their
STI payment. The other 10% is based on their individual performance assessment.
Santos Annual Report 2016 / 47
LTI questions and answers
How are LTIs linked to
Company performance?
How is LTI awarded?
LTI aligns the rewards received by the CEO and Senior Executives with the longer-term performance
of Santos. The 2016 performance measures ensures Santos is able to measure its performance relative
to other ASX 100 companies and international energy sector peers in addition to stabilising the business
through strong cash flows and shareholder returns.
All 2016 LTI grants were solely performance-based, ensuring further alignment with shareholder interests.
All LTI grants are delivered in the form of SARs, i.e. a conditional entitlement to a fully paid ordinary share
at zero price, subject to satisfaction of the performance condition. Nothing is payable by the CEO and
Senior Executives if and when SARs vest. The Board has discretion to settle the SARs in cash if they vest.
What is the performance
period?
SARs issued under the annual LTI program after 2014 have a four-year performance period. This period
represents an appropriate balance between providing a genuine and foreseeable incentive to Senior
Executives and fostering a long-term view of shareholder interests.
What performance hurdles
are applied to the LTI?
Vesting of the 2016 LTI grants is based on the following performance measures:
Weighting
Performance measures
25%
25%
25%
25%
relative TSR measured against companies of the ASX100
relative TSR measured against companies of the S&P GEI
Free Cash Flow Breakeven Point (FCFBP)
Return on Average Capital Employed (ROACE)
The Board has discretion to adjust the TSR comparator groups; for example, to take account of
takeovers, mergers and demergers that occur during the performance period. Relative TSR performance,
being a market-based measure, is tested by an independent third party and reviewed by the Board prior
to vesting. FCFBP and ROACE, being non-market based measures, will be tested and audited internally
with all results externally audited as part of the Annual Report release.
In line with the Company’s focus on cash flow generation, debt reduction and effective use of capital
these additional performance hurdles will align the CEO and Senior Executives to deliver long-term
shareholder value. Demonstrating improvements in cash flow and capital efficiency will be critical
indicators of the successful delivery of the Company’s new strategy. These performance hurdles aim
to drive the underlying business to become an operationally efficient low-cost producer focused on
delivering shareholder value throughout the oil price cycle.
FCFBP is the US$ oil price at which cash flows from operating activities equal cash flows from investing
activities, as published in the Company’s financial statements. As the aim of the performance hurdle is to
measure the performance of the underlying business, the Board will have discretion to adjust the FCFBP
for individually material items including asset acquisitions and disposals that may otherwise distort the
measurement.
ROACE is measured as the underlying earnings before interest and tax (EBIT) divided by the average
capital employed, being shareholders’ equity plus net debt, as published in the Company’s financial
statements. As the aim of the condition is to measure the performance of the underlying business, the
Board will have discretion to adjust the ROACE for individually material items that may otherwise distort
the measurement.
For 2016, these performance hurdles will be measured at the end of the four-year performance period.
The Board believes that relative TSR continues to effectively align the interests of individual Senior
Executives with that of the Company’s shareholders, by motivating Senior Executives to achieve
superior shareholder outcomes relative to Santos’ competitors for investor capital and its energy sector
peers. TSR takes into account share price and dividend yield and is therefore a robust and objective
measure of shareholder returns.
Why have additional
performance hurdles
been introduced into
the LTI in 2016?
Why is Relative TSR also
used as a performance target
in the LTI?
48 / Santos Annual Report 2016
Directors’ ReportRemuneration Report continued LTI questions and answers
Why have the ASX 100
and S&P Global Energy
Index been chosen as the
comparator groups for
Relative TSR?
The ASX 100 represents the companies in which most of the Company’s shareholders would invest
as an alternative to Santos. If Santos performs well relative to these companies, it means that Santos
shareholders’ investments have performed well relative to alternative investments.
The S&P GEI was chosen as a second comparator group because the global energy market is
of increasing relevance to Santos. Many of the companies that comprise the S&P GEI have oil
and gas operations and are likely to be affected by similar global cyclical issues as Santos. Santos’
major competitors are included in the Index, along with other leading industry players based in
various countries.
How is vesting determined?
The vesting scales below apply to both the CEO and Senior Executives’ 2016 LTI performance grants.
There is no re-testing of the performance conditions. SARs that do not vest upon testing of the
performance conditions will lapse.
Relative TSR against the ASX100 and S&P GEI
TSR percentile ranking
Below 51st percentile
51st percentile
% of grant vesting
0%
50%
straight line pro-rata vesting in between
76th percentile and above
100%
Free cash flow breakeven point (FCFBP)
FCFBP
Above US$40/bbl
Equal to US$40/bbl
% of grant vesting
0%
50%
straight line pro-rata vesting in between
Equal to or below US$35/bbl
100%
Return on average capital employed (ROACE)
ROACE
% of grant vesting
Below 75% of the weighted average cost
of capital (WACC)
Equal to 75% of WACC
0%
50%
Equal to or above WACC
100%
straight line pro-rata vesting in between
When can vested SARs
be traded?
Upon vesting of SARs, shares will automatically be allocated to the CEO and Senior Executives.
Trading in these shares is subject to compliance with the Company’s Securities Trading Policy.
Santos Annual Report 2016 / 49
Directors’ Report
continued
INDEMNIFICATION
Rule 61 of the Company’s Constitution provides that the Company indemnifies, on a full indemnity basis and to the full extent permitted
by law, officers of the Company for all losses or liabilities incurred by the person as an officer of the Company, a related body corporate
or trustee of a company-sponsored superannuation fund. Rule 61 does not permit the Company to indemnify an officer for any liability
involving a lack of good faith.
Rule 61 also permits the Company to purchase and maintain a Directors’ and Officers’ insurance policy.
In conformity with Rule 61, the Company is party to Deeds of Indemnity in favour of each of the Directors referred to in this report who
held office during the year and certain 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 financial year ending 31 December 2016 under the Deeds of Indemnity.
During the year, the Company paid premiums in respect of Directors' and Officers' Liability and Legal Expenses insurance contracts for
the year ended 31 December 2016 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 2017. The insurance contracts insure against certain liability (subject to exclusions) persons
who are or have been directors or officers of the Company and its controlled entities. A condition of the contracts is that the nature of
the liability indemnified and the premium payable not be disclosed.
NON-AUDIT SERVICES
Amounts paid or payable to the Company’s auditor, Ernst & Young, for non-audit services provided during the year were:
Taxation and other services $16,000
Assurance services
$360,000
The Directors are satisfied, based on the advice of the Audit & Risk 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 & Risk 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 121.
ROUNDING
Australian Securities and Investments Commission Corporations (Rounding in Financial/Directors’ Report) Instrument 2016/191, applies
to the Company. Accordingly, amounts have been rounded off in accordance with that Instrument, unless otherwise indicated.
This report is made out on 16 February 2017 in accordance with a resolution of the Directors.
Director
50 / Santos Annual Report 2016
Directors’ Report Financial Report
Consolidated Income Statement
Consolidated Statement of Comprehensive Income
Consolidated Statement of Financial Position
Consolidated Statement of Cash Flows
Consolidated Statement of Changes in Equity
Notes to the Consolidated Financial Statements
52
53
54
55
56
57
SECTION 1
BASIS OF PREPARATION
PAGE
SECTION 5
FUNDING AND RISK MANAGEMENT
1.1 Statement of compliance
1.2 Key events in the current period
1.3
Significant accounting judgements,
estimates and assumptions
1.4 Foreign currency
58
58
58
59
Interest-bearing loans and borrowings
5.1
5.2 Net finance costs
5.3 Issued capital
5.4 Reserves and retained earnings
5.5 Financial risk management
SECTION 2
FINANCIAL PERFORMANCE
PAGE
SECTION 6
GROUP STRUCTURE
2.1 Segment information
2.2 Revenue
2.3 Expenses
2.4 Taxation
2.5 Earnings per share
2.6 Dividends
2.7 Other income
SECTION 3
CAPITAL EXPENDITURE, OPERATING ASSETS
AND RESTORATION OBLIGATIONS
60
63
64
65
69
70
71
6.1 Consolidated entities
6.2 Acquisitions and disposals of subsidiaries
6.3 Joint arrangements
6.4 Parent entity disclosures
6.5 Deed of Cross Guarantee
SECTION 7
PEOPLE
PAGE
7.1 Employee benefits
7.2 Share-based payment plans
7.3 Key management personnel disclosures
3.1 Exploration and evaluation assets
3.2 Oil and gas assets
3.3 Impairment of non-current assets
3.4 Restoration obligations
3.5 Commitments for expenditure
3.6 Assets held for sale
72
73
76
80
81
82
SECTION 4
WORKING CAPITAL MANAGEMENT
PAGE
SECTION 8
OTHER
8.1 Contingent liabilities
8.2 Events after the end of the reporting period
8.3 Commitment on removal of shareholder cap
8.4 Remuneration of auditors
8.5 Accounting policies
PAGE
85
88
89
89
90
PAGE
95
97
98
101
102
PAGE
104
105
110
PAGE
111
111
111
112
112
4.1 Cash and cash equivalents
4.2 Trade and other receivables
4.3 Inventories
4.4 Trade and other payables
Directors’ Declaration
Independent Auditor’s Report
Auditor’s Independence Declaration
83
84
84
84
115
116
121
Santos Annual Report 2016 / 51
Consolidated Income Statement
for the year ended 31 December 2016
Product sales
Cost of sales
Gross profit
Other revenue
Other income
Impairment of non-current assets
Other expenses
Finance income
Finance costs
Share of net profit of joint ventures
Loss before tax
Income tax benefit
Royalty-related tax (expense)/benefit
Total tax benefit
Note
2.2
2.3
2.7
3.3
2.3
5.2
5.2
6.3(c)
2.4(a)
2.4(b)
2016
US$million
(Restated)
2015
US$million
2,594
(2,153)
441
33
157
(1,561)
(284)
15
(296)
10
(1,485)
445
(7)
438
2,442
(1,883)
559
36
9
(2,854)
(141)
6
(223)
10
(2,598)
621
24
645
Net loss for the period attributable to owners of Santos Limited
(1,047)
(1,953)
Earnings per share attributable to the equity holders of Santos Limited (¢)
Basic loss per share
Diluted loss per share
Dividends per share (¢)
Paid during the period
Declared in respect of the period
2.5
2.5
2.6
2.6
(58.2)
(58.2)
4
–
(169.5)
(169.5)
22
15
The consolidated income statement is to be read in conjunction with the notes to the consolidated financial statements.
52 / Santos Annual Report 2016
Financial Report
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2016
Net loss for the period
Other comprehensive income, net of tax:
Other comprehensive income to be reclassified to profit or loss in
subsequent periods:
Exchange loss on translation of foreign operations
Tax effect
Gain/(loss) on foreign currency loans designated as hedges of
net investments in foreign operations
Tax effect
Gain on derivatives designated as cash flow hedges
Tax effect
Net other comprehensive loss to be reclassified to profit or loss in
subsequent periods
Items not to be reclassified to profit or loss in subsequent periods:
Remeasurement of defined benefit obligation
Tax effect
Net other comprehensive income not being reclassified to profit
or loss in subsequent periods
Other comprehensive loss, net of tax
Total comprehensive loss attributable to owners of Santos Limited
2016
US$million
(Restated)
2015
US$million
(1,047)
(1,953)
(36)
–
(36)
20
(6)
14
27
(8)
19
(3)
2
(1)
1
1
(128)
–
(128)
(518)
158
(360)
4
(1)
3
(485)
4
(1)
3
3
(2)
(1,049)
(482)
(2,435)
The consolidated statement of comprehensive income is to be read in conjunction with the notes to the consolidated financial
statements.
Santos Annual Report 2016 / 53
Consolidated Statement of Financial Position
as at 31 December 2016
Current assets
Cash and cash equivalents
Trade and other receivables
Prepayments
Inventories
Other financial assets
Tax receivable
Assets held for sale
Total current assets
Non-current assets
Receivables
Prepayments
Investments in joint ventures
Other financial assets
Exploration and evaluation assets
Oil and gas assets
Other land, buildings, plant and equipment
Deferred tax assets
Total non-current assets
Total assets
Current liabilities
Trade and other payables
Deferred income
Interest-bearing loans and borrowings
Current tax liabilities
Provisions
Other financial liabilities
Liabilities directly associated with assets held for sale
Total current liabilities
Non-current liabilities
Deferred income
Interest-bearing loans and borrowings
Deferred tax liabilities
Provisions
Other financial liabilities
Total non-current liabilities
Total liabilities
Net assets
Equity
Issued capital
Reserves
Accumulated (losses)/retained earnings
Equity attributable to owners of Santos Limited
Non-controlling interests
Total equity
Note
4.1
4.2
4.3
5.5(f)
3.6
4.2
6.3(b)
5.5(f)
3.1
3.2
2.4(d)
4.4
5.1
3.4, 7.1
5.5(f)
3.6
5.1
2.4(d)
3.4, 7.1
5.5(f)
5.3
5.4
5.4
2016
US$million
(Restated)
2015
US$million
(Restated)
2014
US$million
2,026
367
34
321
7
15
180
2,950
5
17
56
152
495
10,398
135
1,054
12,312
15,262
520
23
420
3
121
366
103
1,556
99
4,819
221
1,464
23
6,626
8,182
7,080
8,883
(510)
(1,293)
7,080
–
7,080
839
392
47
360
1
85
401
2,125
4
20
71
158
520
12,404
181
466
13,824
15,949
618
7
152
8
125
2
14
926
158
5,246
153
1,736
309
7,602
8,528
7,421
8,119
(699)
1
7,421
–
7,421
634
518
75
362
54
47
–
1,690
8
154
79
136
905
15,071
219
19
16,591
18,281
1,131
41
267
12
138
3
–
1,592
123
6,483
486
1,747
149
8,988
10,580
7,701
5,762
(335)
2,278
7,705
(4)
7,701
The consolidated statement of financial position is to be read in conjunction with the notes to the consolidated financial statements.
54 / Santos Annual Report 2016
Financial Report
Consolidated Statement of Cash Flows
for the year ended 31 December 2016
Note
2016
US$million
(Restated)
2015
US$million
Cash flows from operating activities
Receipts from customers
Dividends received
Pipeline tariffs and other receipts
Payments to suppliers and employees
Exploration and evaluation seismic and studies
Royalty and excise paid
Borrowing costs paid
Carbon costs paid
Income taxes paid
Royalty-related taxation paid
Other operating activities
Net cash provided by operating activities
4.1(b)
Cash flows from investing activities
Payments for:
Exploration and evaluation assets
Oil and gas assets
Other land, buildings, plant and equipment
Acquisitions of oil and gas assets
Proceeds from disposal of non-current assets
Borrowing costs paid
Other investing activities
Net cash used in investing activities
Cash flows from financing activities
Dividends paid
Drawdown of borrowings
Repayment of borrowings
Proceeds from issues of ordinary shares
Net cash provided by financing activities
2.7
Net increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Effects of exchange rate changes on the balances of cash held in foreign currencies
Cash and cash equivalents at the end of the period
4.1
2,708
12
60
(1,600)
(68)
(34)
(226)
–
(17)
(4)
26
857
(128)
(517)
(4)
(18)
447
(20)
18
(222)
(43)
–
(147)
733
543
1,178
839
9
2,026
2,711
13
25
(1,520)
(111)
(43)
(164)
(16)
(50)
(43)
9
811
(279)
(1,125)
(17)
(102)
60
(109)
(20)
(1,592)
(161)
636
(1,770)
2,300
1,005
224
634
(19)
839
The consolidated statement of cash flows is to be read in conjunction with the notes to the consolidated financial statements.
Santos Annual Report 2016 / 55
Consolidated Statement of Changes in Equity
for the year ended 31 December 2016
Equity attributable to owners of Santos Limited
Total
equity
Note US$million US$million US$million US$million US$million US$million US$million US$million
Issued Translation
reserve
capital
Hedging
reserve
equity
Non-
Total controlling
interests
Accum-
ulated
Accum-
ulated
losses/
profits Retained
earnings
reserve
5,762
(320)
(15)
–
2,278
7,705
(4)
7,701
(Restated)
Balance at 1 January 2015
Transfer retained profits to
accumulated profits reserve 5.4
Items of comprehensive income:
Loss for the period
Other comprehensive
(loss)/income for the period
Total comprehensive
(loss)/income for the period
Transactions with owners in their
capacity as owners:
Shares issued
Dividends to shareholders
Share-based payment
transactions
5.3
2.6
7.2
Non-controlling interest exit
from foreign operations
2,357
–
–
–
Balance at 31 December 2015
Balance at 1 January 2016
Transfer retained profits to
accumulated profits reserve 5.4
Items of comprehensive income:
Loss for the period
Other comprehensive (loss)/income
for the period
Total comprehensive
(loss)/income for the period
Transactions with owners in their
capacity as owners:
–
–
–
–
–
–
–
–
8,119
8,119
(808)
(808)
(12)
(12)
121
121
–
–
(488)
(488)
–
–
–
–
–
–
3
3
–
–
–
–
121
(121)
–
–
–
–
–
–
–
–
(1,953)
(1,953)
3
(482)
(1,950)
(2,435)
–
(219)
2,357
(219)
17
(4)
1
1
17
(4)
7,421
7,421
–
–
(22)
(22)
–
–
–
–
–
19
19
–
–
–
7
258
(258)
–
–
–
–
–
(66)
–
(1,047)
(1,047)
1
(2)
(1,046)
(1,049)
–
–
10
764
(66)
10
313
(1,293)
7,080
–
–
–
–
–
–
–
4
–
–
–
–
–
–
–
–
–
–
–
(1,953)
(482)
(2,435)
2,357
(219)
17
–
7,421
7,421
–
(1,047)
(2)
(1,049)
764
(66)
10
7,080
Shares issued
Dividends to shareholders
Share-based payment
transactions
5.3
2.6
7.2
764
–
–
Balance at 31 December 2016
8,883
(830)
The consolidated statement of changes in equity is to be read in conjunction with the notes to the consolidated financial statements.
56 / Santos Annual Report 2016
Financial Report
Notes to the Consolidated Financial Statements
for the year ended 31 December 2016
STRUCTURE OF THE FINANCIAL REPORT
The notes are organised into key sections to provide an enhanced understanding of the Group’s performance that is aligned with
management’s view of the business, as shown below.
Significant and other accounting policies that summarise the measurement bases and that are relevant to an understanding of the
financial statements are provided throughout the notes to the financial statements.
SECTION 1
BASIS OF PREPARATION
PAGE
SECTION 5
FUNDING AND RISK MANAGEMENT
1.1 Statement of compliance
1.2 Key events in the current period
1.3
Significant accounting judgements,
estimates and assumptions
1.4 Foreign currency
58
58
58
59
Interest-bearing loans and borrowings
5.1
5.2 Net finance costs
5.3 Issued capital
5.4 Reserves and retained earnings
5.5 Financial risk management
SECTION 2
FINANCIAL PERFORMANCE
PAGE
SECTION 6
GROUP STRUCTURE
2.1 Segment information
2.2 Revenue
2.3 Expenses
2.4 Taxation
2.5 Earnings per share
2.6 Dividends
2.7 Other income
SECTION 3
CAPITAL EXPENDITURE, OPERATING ASSETS
AND RESTORATION OBLIGATIONS
60
63
64
65
69
70
71
6.1 Consolidated entities
6.2 Acquisitions and disposals of subsidiaries
6.3 Joint arrangements
6.4 Parent entity disclosures
6.5 Deed of Cross Guarantee
SECTION 7
PEOPLE
PAGE
7.1 Employee benefits
7.2 Share-based payment plans
7.3 Key management personnel disclosures
3.1 Exploration and evaluation assets
3.2 Oil and gas assets
3.3 Impairment of non-current assets
3.4 Restoration obligations
3.5 Commitments for expenditure
3.6 Assets held for sale
SECTION 4
WORKING CAPITAL MANAGEMENT
4.1 Cash and cash equivalents
4.2 Trade and other receivables
4.3 Inventories
4.4 Trade and other payables
72
73
76
80
81
82
PAGE
83
84
84
84
SECTION 8
OTHER
8.1 Contingent liabilities
8.2 Events after the end of the reporting period
8.3 Commitment on removal of shareholder cap
8.4 Remuneration of auditors
8.5 Accounting policies
PAGE
85
88
89
89
90
PAGE
95
97
98
101
102
PAGE
104
105
110
PAGE
111
111
111
112
112
Santos Annual Report 2016 / 57
Notes to the Consolidated Financial Statements
Section 1: Basis of Preparation
This section provides information about the basis of preparation of the financial report, and certain accounting policies that are
not disclosed elsewhere in the financial report. Accounting policies specific to individual elements of the financial statements
are located within the relevant section of the report.
1.1 STATEMENT OF COMPLIANCE
The consolidated financial report of Santos Limited (“the Company”) for the year ended 31 December 2016 was authorised for issue in
accordance with a resolution of the Directors on 16 February 2017.
The consolidated financial report of the Company for the year ended 31 December 2016 comprises the Company and its controlled
entities (“the Group”). Santos Limited (“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 Group is a for-profit entity
for the purpose of preparing the financial report. The nature of the operations and principal activities of the Group are described in the
Directors’ Report.
This consolidated financial report is:
•
•
•
•
a general purpose financial 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
(“AASB”);
compliant with Australian Accounting Standards as issued by the AASB and International Financial Reporting Standards (“IFRS”)
as issued by the International Accounting Standards Board, including new and amended accounting standards issued and
effective for reporting periods beginning on or after 1 January 2016;
presented in United States dollars (“US$”);
prepared on the historical cost basis except for derivative financial instruments, fixed rate notes that are hedged by an interest
rate swap or a cross-currency swap, and available-for-sale financial assets, which are measured at fair value; and
•
rounded to the nearest million dollars, unless otherwise stated, in accordance with ASIC Instrument 2016/191.
1.2 KEY EVENTS IN THE CURRENT PERIOD
The financial position and performance of the Group was particularly impacted by the following events and transactions during the year:
•
•
•
•
•
restructure of the business completed with new operating model established, including new Executive Committee team
(“Excom”);
both record production of 61.6 mmboe (2015: 57.7 mmboe), and sales of 84.1 mmboe (2015: 64.3 mmboe) in 2016;
in May 2016 GLNG Train 2 commenced production;
sale of non-core assets resulting in $447 million in proceeds with a gain on disposal of $25 million; and
completion of an institutional placement in December 2016 which raised $751 million (A$1,040 million).
1.3 SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
The carrying amounts of certain assets and liabilities are often determined based on management’s judgement regarding estimates and
assumptions of future events. The key judgements, estimates and assumptions that have a significant risk of causing a material adjustment
to the carrying amount of certain assets and liabilities within the next annual reporting period are disclosed in the following notes:
• Note 2.4 Taxation
• Note 3.1 Exploration and evaluation assets
• Note 3.2 Oil and gas assets – Estimates of reserve quantities
• Note 3.3 Impairment of non-current assets
• Note 3.4 Restoration obligations
In addition to the significant judgements referenced above, other areas of estimation and judgement are highlighted throughout the
financial report.
58 / Santos Annual Report 2016
Financial Report
1.4 FOREIGN CURRENCY
Functional and presentation currency
The Directors have elected to change the Group’s presentation currency from Australian dollars (“A$”) to United States (US) dollars
effective from 1 January 2016. The change in presentation currency is a voluntary change which is accounted for retrospectively. All
other accounting policies are consistent with those adopted in the annual financial report for the year ended 31 December 2015. The
financial report has been restated to US dollars using the procedures outlined below:
1.
2.
3.
4.
Income Statement and Statement of Cash Flows have been translated into US dollars using average foreign currency rates
prevailing for the relevant period.
Assets and liabilities in the Statement of Financial Position have been translated into US dollars at the closing foreign currency
rates on the relevant balance sheet dates.
The equity section of the Statement of Financial Position, including foreign currency translation reserve, retained earnings,
share capital and the other reserves, have been translated into US dollars using historical rates.
Earnings per share and dividend disclosures have also been restated to US dollars to reflect the change in presentation
currency.
The functional currency of the Parent is Australian dollars, whilst the presentation currency of the Group is now in United States dollars.
Some subsidiaries have a functional currency other than Australian dollars which is translated to the presentation currency.
Transactions and balances
Transactions in currencies other than an entity’s functional currency 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 currencies other than an entity’s
functional currency 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 a foreign operation
are recognised in the translation reserve in the consolidated financial statements.
Non-monetary assets and liabilities that are measured in terms of historical cost in currencies other than an entity’s functional currency
are translated using the exchange rate at the date of the initial transaction. Non-monetary assets and liabilities denominated in
currencies other than an entity’s functional currency 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.
The year-end exchange rate used was A$/US$ 1:0.7221 (2015: 1:0.7274, 2014: 1:0.8181).
Group companies
The results of subsidiaries with a functional currency other than Australian dollars (the functional currency of the Parent) 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 translation reserve.
The Group’s consolidated Australian dollar financial statements are then translated to United States dollars (presentation currency) in
line with the procedures outlined above.
Exchange differences arising from the translation of the net investment in foreign operations and of related hedges are recognised in the
translation reserve. They are released into the income statement upon disposal of the foreign operation.
Also refer to note 5.5(b) Foreign currency risk for further details on the net investment hedge in place.
Santos Annual Report 2016 / 59
Notes to the Consolidated Financial Statements
Section 2: Financial Performance
This section focuses on the operating results and financial performance of the Group. It includes disclosures of segmental
financial information, taxes, dividends and earnings per share, including the relevant accounting policies adopted in each area.
2.1 SEGMENT INFORMATION
Commencing in the second half of 2016, the Group identified its operating segments to be the five key assets/operating areas of:
Cooper Basin; Gladstone LNG (“GLNG”); Papua New Guinea (“PNG”); Northern Australia; and Western Australia (“WA”) gas; based on
the nature and geographical location of the assets, plus “Other” non-core assets. This is the basis on which internal reports are provided
to the Chief Executive Officer for assessing performance and determining the allocation of resources within the Group. Comparative
disclosures have been restated to a consistent basis.
Segment performance is measured based on earnings before interest, tax, impairment, exploration and evaluation, depletion,
depreciation and amortisation (“EBITDAX”). Corporate and exploration expenditure and inter-segment eliminations are included in the
segment disclosure for reconciliation purposes.
60 / Santos Annual Report 2016
Financial Report
2.1 SEGMENT INFORMATION (CONTINUED)
US$million
Revenue
Sales to external customers
Inter-segment sales1
Other revenue from external customers
Total segment revenue
Costs
Production costs
Other operating costs
Third-party product purchases
Inter-segment purchases1
Results
EBITDAX
Depreciation and depletion
Exploration and evaluation expensed
Net impairment (loss)/reversal
Change in future restoration
assumptions
EBIT
Net finance costs
Loss before tax
Income tax benefit
Royalty-related tax benefit/(expense)
Net loss
Asset additions and acquisitions:
Exploration and evaluation assets
Oil and gas assets
Cooper
Basin
2016
GLNG
2016
Northern
Australia
2016
PNG
2016
WA
Gas
2016
Corporate,
exploration,
Other eliminations
2016
2016
Total
2016
716
33
19
768
(162)
(77)
(201)
(18)
265
(179)
–
(49)
–
37
521
13
6
540
(61)
(74)
(142)
(75)
183
(192)
–
(1,500)
439
–
5
444
(56)
(38)
(2)
–
350
(105)
–
–
–
–
(1,509)
245
145
–
–
145
(73)
–
–
–
86
(46)
–
–
–
40
184
–
–
184
(45)
(5)
–
–
210
(72)
–
–
–
138
405
4
2
411
(164)
(16)
(3)
–
217
(115)
–
47
37
186
2
(3)
–
(4)
(19)
(7)
9
37
46
1
238
239
–
14
14
2
36
38
–
75
75
47
(30)2
17
184
(50)
1
2,594
–
33
135
2,627
41
(116)
(196)
93
(112)
(32)
(138)
(59)
(520)
(326)
(544)
–
1,199
(741)
(138)
(1,561)
–
37
(341)
(281)
(1,204)
(281)
(1,485)
445
(7)
(1,047)
153
370
523
445
24
94
–
94
1.
2.
Inter-segment pricing is determined on an arm's length basis. Inter-segment sales and purchases are eliminated on consolidation.
Includes impact on restoration assets following changes in future restoration provision assumptions (refer note 3.4).
2016 Revenue from external customers
by geographical location
US$million
2016 Non-current assets by geographical location
(excluding financial and deferred tax assets)
US$million
Australia
Papua New Guinea
Indonesia
Vietnam
Total
1,922
444
138
123
2,627
Australia
7,622
Papua New Guinea
2,840
Other countries
Total
622
11,084
Santos Annual Report 2016 / 61
Notes to the Consolidated Financial Statements
Section 2: Financial Performance
2.1 SEGMENT INFORMATION (CONTINUED)
Cooper
Basin
2015
GLNG
2015
Northern
Australia
2015
PNG
2015
WA
Gas
2015
Corporate,
exploration,
Other eliminations
2015
2015
US$million (Restated)
Revenue
Sales to external customers
Inter-segment sales1
Other revenue from external customers
Total segment revenue
Costs
Production costs
Other operating costs
Third-party product purchases
Inter-segment purchases1
Results
EBITDAX
Depreciation and depletion
Exploration and evaluation expensed
Net impairment loss
EBIT
Net finance costs
Loss before tax
Income tax benefit
Royalty-related tax benefit
Net loss
Asset additions and acquisitions:
Exploration and evaluation assets
Oil and gas assets
829
9
13
851
(197)
(83)
(230)
(26)
293
(269)
–
(1,541)
97
22
4
123
(36)
(25)
(46)
(13)
31
(82)
–
(454)
(1,517)
(505)
559
–
7
566
(61)
(47)
(2)
–
443
(103)
–
–
340
215
–
–
215
(81)
(1)
–
–
143
(47)
–
–
96
227
–
–
227
(47)
(4)
–
–
162
(74)
–
–
88
452
14
7
473
(215)
(19)
(13)
–
217
(185)
–
(373)
(341)
20
7
–
(14)
(26)
14
21
503
524
11
441
452
24
96
120
6
22
28
1
38
39
43
121
164
Total
2015
2,442
–
36
2,478
(597)
(200)
(358)
–
63
(45)
5
23
40
(21)
(67)
39
165
(33)
(188)
(486)
1,454
(793)
(188)
(2,854)
(542)
(2,381)
(217)
(217)
621
23
200
–
200
(2,598)
621
24
(1,953)
306
1,221
1,527
1.
Inter-segment pricing is determined on an arm's length basis. Inter-segment sales and purchases are eliminated on consolidation.
2015 Revenue from external customers
by geographical location
US$million
2015 Non-current assets by geographical location
(excluding financial and deferred tax assets)
US$million
Australia
1,623
Papua New Guinea
566
Vietnam
Indonesia
Other countries
Total
147
139
3
2,478
Australia
9,604
Papua New Guinea
2,961
Other countries
Total
611
13,176
62 / Santos Annual Report 2016
Financial Report
2.2 REVENUE
Revenue is recognised in the income statement when the significant risks and rewards of ownership have been transferred to the buyer.
Revenue is recognised and measured at the fair value of the consideration or contributions received, net of goods and services tax or
similar taxes, to the extent it is probable that the economic benefits will flow 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 field (“entitlements” method), when the physical product
and associated risks and rewards of ownership pass to the purchaser, which is generally at the time of ship or truck loading, or on the
product entering the pipeline.
Revenue earned under a production sharing contract (“PSC”) is recognised on a net entitlements basis according to the terms of
the PSC. Generally, under these terms the local government retains title to the resources, and is therefore entitled to its share of the
production and revenue, after allowing for the joint venture partners to extract and sell their share of hydrocarbons to recover specified
costs and a profit margin.
During the year, revenue from one customer amounted to $324 million (2015: $464 million from one customer), arising from sales from
two segments of the Group.
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.
Sales revenue
Product sales:
Gas, ethane and liquefied natural gas
Crude oil
Condensate and naphtha
Liquefied petroleum gas
Total product sales1
1. Total product sales include third-party product sales of $643 million (2015: $440 million).
2016
US$million
(Restated)
2015
US$million
1,784
575
183
52
2,594
1,442
740
183
77
2,442
Santos Annual Report 2016 / 63
Notes to the Consolidated Financial Statements
Section 2: Financial Performance
2.3 EXPENSES
Cost of sales :
Production costs:
Production expenses
Production facilities operating leases
Total production costs
Other operating costs:
LNG plant costs
Pipeline tariffs, processing tolls and other
Onerous pipeline contract
Royalty and excise
Shipping costs
Total other operating costs
Total cash cost of production
Depreciation of plant, equipment and buildings
Depletion of subsurface assets
Total depreciation and depletion
Third-party product purchases
Decrease/(increase) in product stock
Total cost of sales
Other expenses:
Selling
Corporate
Depreciation
Foreign exchange gains
Losses from change in fair value of derivative financial instruments designated
as fair value through profit or loss
Fair value hedges, (gains)/losses:
On the hedging instrument
On the hedged item attributable to the hedged risk
Exploration and evaluation expensed
Other
Total other expenses
2016
US$million
(Restated)
2015
US$million
469
51
520
58
174
29
43
22
326
846
463
273
736
544
27
2,153
19
88
5
(34)
14
59
(19)
138
14
284
524
73
597
29
106
–
42
23
200
797
470
321
791
358
(63)
1,883
20
128
2
(196)
5
49
(63)
188
8
141
64 / Santos Annual Report 2016
Financial Report
2.4 TAXATION
Income tax
Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement
except in relation to items recognised directly in equity.
Current tax is the amount of income tax payable on the taxable profit or loss for the year, using tax rates enacted or substantively
enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from
or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively
enacted at the reporting date in the countries where the Group operates and generates taxable income.
The Company and all of its wholly-owned Australian resident entities are part of a tax-consolidated group under Australian taxation law.
Santos Limited is the head entity in the tax-consolidated group. The head entity and the controlled entities in the tax-consolidated group
continue to account for their own current and deferred tax amounts. 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 and a tax sharing
agreement.
Santos Annual Report 2016 / 65
Notes to the Consolidated Financial Statements
Section 2: Financial Performance
2.4 TAXATION (CONTINUED)
Royalty-related tax
Petroleum Resource Rent Tax (“PRRT”), Resource Rent Royalty and Timor-Leste’s Additional Profits Tax are accounted for as income
tax.
Current income tax and royalty-related tax recognised in the income statement for the group is as follows:
2016
US$million
(Restated)
2015
US$million
(a) Income tax expense/(benefit)
Current tax expense/(benefit)
Current year
Adjustments for prior years
Deferred tax benefit
Origination and reversal of temporary differences
Adjustments for prior years
Total income tax benefit
(b) Royalty-related tax expense
Current tax expense
Current year
Deferred tax benefit
Origination and reversal of temporary differences
Total royalty-related tax expense/(benefit)
(c) Numerical reconciliation between pre-tax net loss and tax benefit
Loss before tax
Prima facie income tax benefit at 30% (2015: 30%)
(Decrease)/increase in income tax (benefit)/expense due to:
Foreign losses not recognised
Non-deductible expenses
Exchange and other translation variations
Tax adjustments relating to prior years
Other
Income tax benefit
Royalty-related tax expense/(benefit)
Total tax benefit
66 / Santos Annual Report 2016
86
(12)
74
(510)
(9)
(519)
(445)
14
14
(7)
(7)
7
(1,485)
(446)
(2)
3
14
(2)
(12)
(445)
7
(438)
11
24
35
(589)
(67)
(656)
(621)
25
25
(49)
(49)
(24)
(2,598)
(779)
29
9
111
5
4
(621)
(24)
(645)
Financial Report
2.4 TAXATION (CONTINUED)
(d) Deferred tax assets and liabilities
Deferred tax is determined using the statement of financial position approach, providing for temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the appropriate tax bases.
The following temporary differences are not provided for:
•
•
the initial recognition of assets or liabilities that affect neither accounting or taxable profit; nor
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.
Significant judgement – Deferred taxes recognised
The calculation of the Group’s tax charge involves a degree of estimation and judgement in respect of certain items
for which the ultimate tax determination is uncertain.
The Group recognises deferred tax assets only to the extent that it is probable that future taxable profits will be
available against which the asset can be utilised. Future taxable profits are estimated by internal budgets and
forecasts. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit
will be realised.
Assets
Liabilities
Net
Recognised deferred tax assets
and liabilities
2016
US$million
(Restated)
2015
2016
US$million US$million
(Restated)
2015
2016
US$million US$million
(Restated)
2015
US$million
Exploration and evaluation assets
Oil and gas assets
Available-for-sale financial assets
Other assets
Derivative financial instruments
Interest-bearing loans and borrowings
Provisions
Royalty-related tax
Other items
Tax value of carry-forward
losses recognised
Tax assets/(liabilities)
Set-off of tax
Net tax assets/(liabilities)
28
15
–
10
85
162
82
–
–
660
1,042
12
1,054
–
–
–
–
58
174
44
–
14
452
742
(276)
466
(66)
–
–
(46)
–
–
–
(60)
(37)
–
(209)
(12)
(221)
(55)
(246)
(20)
(42)
–
–
–
(54)
(12)
–
(429)
276
(153)
(38)
15
–
(36)
85
162
82
(60)
(37)
660
833
–
833
(55)
(246)
(20)
(42)
58
174
44
(54)
2
452
313
–
313
Santos Annual Report 2016 / 67
Notes to the Consolidated Financial Statements
Section 2: Financial Performance
2.4 TAXATION (CONTINUED)
Accounting judgement and estimate – Deferred taxes unrecognised
Deferred tax assets have not been recognised in respect of the following items set out below, because it is not
probable that the temporary differences will reverse in the future and that there will be sufficient future taxable
profits against which the benefits can be utilised. Tax losses of $64 million (2015: $65 million) will expire between
2021 and 2028. The remaining deductible temporary differences and tax losses do not expire under current tax
legislation.
Unrecognised deferred tax assets
Deferred tax assets have not been recognised in respect of the following items:
Temporary differences in relation to investments in subsidiaries
Deductible temporary differences relating to royalty-related tax
(net of income tax)
Other deductible temporary differences
Tax losses
2016
US$million
(Restated)
2015
US$million
5,705
5,284
128
373
11,490
5,527
4,430
220
366
10,543
68 / Santos Annual Report 2016
Financial Report
2.5 EARNINGS PER SHARE
Basic earnings per share amounts are calculated by dividing net profit or loss for the year attributable to ordinary equity holders of
Santos Limited by the weighted average number of ordinary shares outstanding during the year.
Diluted earnings per share amounts are calculated by adjusting basic earnings per share by the weighted average number of ordinary
shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.
Earnings used in the calculation of basic and diluted earnings per share reconciles to the net profit or loss after tax in the income
statement as follows:
2016
US$million
(Restated)
2015
US$million
Earnings used in the calculation of basic and diluted earnings per share
(1,047)
(1,953)
The weighted average number of shares used for the purpose of calculating diluted earnings per share reconciles to the number used to
calculate basic earnings per share as follows:
Basic earnings per share
Dilutive potential ordinary shares1
Diluted earnings per share
Earnings per share attributable to the equity holders of Santos Limited
Basic earnings per share
Diluted earnings per share
2016
Number of shares
2015
Number of shares
1,797,896,876
–
1,151,977,771
–
1,797,896,876
1,151,977,771
2016
¢
(58.2)
(58.2)
2015
¢
(169.5)
(169.5)
1. Due to a net loss after tax in 2016 and 2015, potential ordinary shares are anti-dilutive and therefore excluded from the calculation of diluted earnings per share.
Santos Annual Report 2016 / 69
Notes to the Consolidated Financial Statements
Section 2: Financial Performance
2.6 DIVIDENDS
Dividends are recognised as a liability at the time the Directors resolve to pay or declare the dividend.
Dividends recognised during the year
2016
Final 2015 ordinary – paid 30 Mar 2016 (A$0.05)
2015 (Restated)
Interim 2015 ordinary – paid 30 Sep 2015 (A$0.15)
Final 2014 ordinary – paid 25 Mar 2015 (A$0.15)
Dividends declared in respect of the year
2016
No dividends were declared in respect of 2016.
2015 (Restated)
Final 2015 ordinary – paid 30 Mar 2016 (A$0.05)
Interim 2015 ordinary – paid 30 Sep 2015 (A$0.15)
All dividends declared were franked dividends and were franked at the tax rate of 30%.
Dividend franking account
30% franking credits available to the shareholders of Santos Limited
for future distribution, after adjusting for franking credits which will
arise from the refund of the current tax receivable at 31 December
Dividend
per share
US¢
Total
US$million
4
4
11
11
22
66
66
109
110
219
Dividend
per share
US¢
Total
US$million
4
11
15
66
109
175
2016
US$million
(Restated)
2015
US$million
363
429
70 / Santos Annual Report 2016
Financial Report
2.7 OTHER INCOME
Other income is recognised at the fair value of the consideration received or receivable, when significant risks and rewards have been
transferred to the buyer or when the service has been performed.
Gain or loss arising on disposal of a non-current asset is included as other income at the date control of the asset passes to the buyer.
Note
3.4
Other income
Liquidated damages of gas sales agreement
Change in future restoration assumptions
Gain on sale of non-current assets
Insurance proceeds
Other
Total other income
Net gain on sale of non-current assets:
Proceeds on disposals
Book value of oil and gas assets disposed
Book value of other land, buildings, plant and equipment disposed
Book value of exploration and evaluation assets disposed
Recoupment of current year exploration and evaluation expenditure
Book value of working capital disposed
Total net gain on sale of non-current assets
Comprising:
Net (loss)/gain on sale of exploration and evaluation assets
Net gain/(loss) on sale of oil and gas assets
Net gain on sale of other land, buildings, plant and equipment
Net gain on liquidation of controlled entities
Reconciliation to cash inflows from proceeds on disposal of non-current assets
Proceeds after recoupment of current year exploration and evaluation expenditure
Amounts receivable
Amounts received from disposals
Total proceeds on disposal of non-current assets
Comprising:
Proceeds from disposal of oil and gas assets
Proceeds from disposal of exploration and evaluation assets
Proceeds from disposal of other land, buildings, plant and equipment
2016
US$million
(Restated)
2015
US$million
69
37
25
10
16
157
447
(162)
(5)
–
–
(255)
25
(2)
13
8
6
25
447
–
447
447
432
–
15
447
–
–
1
–
8
9
93
(54)
(2)
(28)
(9)
1
1
3
(3)
1
–
1
84
(24)
60
60
32
28
–
60
Santos Annual Report 2016 / 71
Notes to the Consolidated Financial Statements
Section 3: Capital Expenditure, Operating Assets
and Restoration Obligations
This section includes information about the assets used by the Group to generate profits and revenue, specifically information
relating to exploration and evaluation assets, oil and gas assets, associated restoration obligations, and commitments for capital
expenditure not yet recognised as a liability.
The life cycle of the Group's assets is summarised as follows:
Exploration
and evaluation
Appraisal drilling
Development
Production
Decomissioning
Abandonment
and restoration
Key information to note in this section includes:
•
•
the carrying values of various assets were written down at 31 December 2016; as a result a pre-tax impairment charge of $1,561
million was recognised in impairment expenses; and
significant movements in oil and gas assets resulted from the continued construction of the GLNG project, with the completion
of various aspects of the project seeing the assets transition from assets in development to producing assets.
3.1 EXPLORATION AND EVALUATION ASSETS
Exploration and evaluation expenditure
Exploration and evaluation activity involves the search for hydrocarbon resources, the determination of technical feasibility and the
assessment of commercial viability of an identified resource. 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 acquiring interests in new exploration and evaluation assets, the cost of successful wells and appraisal costs relating to
determining development feasibility, which are capitalised as intangible exploration and evaluation assets.
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:
•
•
such expenditure is expected to be recovered through successful development and commercial exploitation of the area of
interest or, alternatively, by its sale; or
the exploration activities in the area of interest have not yet reached a stage that permits reasonable assessment of the
existence of economically recoverable reserves and active and significant operations in, or in relation to, the area of interest are
continuing.
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.
No amortisation is charged during the exploration and evaluation phase.
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.
Exploration licence and leasehold property acquisition costs are capitalised as intangible assets. Licence costs paid in connection with a
right to explore in an existing exploration area are capitalised and amortised over the term of the permit.
72 / Santos Annual Report 2016
Financial Report 3.1 EXPLORATION AND EVALUATION ASSETS (CONTINUED)
Significant judgement - Exploration and evaluation
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 resources 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 through the
income statement.
Cost
Less impairment
Balance at 31 December
Reconciliation of movements
Balance at 1 January
Acquisitions
Additions
Transfer to assets held for sale
Expensed
Impairment losses
Transfer to oil and gas assets in development
Transfer to oil and gas assets in production
Exchange differences
Balance at 31 December
Comprising:
Acquisition costs
Successful exploration wells
Pending determination of success
3.2 OIL AND GAS ASSETS
2016
US$million
1,805
(1,310)
495
520
37
116
(28)
(71)
(59)
(1)
(15)
(4)
495
150
249
96
495
(Restated)
2015
US$million
1,834
(1,314)
520
905
95
211
(27)
(88)
(498)
–
(1)
(77)
520
207
233
80
520
Oil and gas assets are usually single oil or gas fields being developed for future production or that are in the production phase. Where
several individual oil or gas fields are to be produced through common facilities, the individual oil or gas field and the associated
production facilities are managed and reported as a single oil and gas asset.
Assets in development
When the technical and commercial feasibility of an undeveloped oil or gas field has been demonstrated and approval of commercial
development occurs, the field enters its development phase from the exploration and evaluation phase. Expenditure on the construction,
installation or completion of infrastructure facilities such as platforms, pipelines, and the drilling of development wells, as well as
exploration and evaluation costs, are capitalised as tangible assets within oil and gas assets. Other subsurface expenditures include the
costs of de-watering coal seam gas fields to provide access to coal seams to enable production from coal seam gas reserves. De-
watering costs include the costs of extracting, transporting, treating and disposing of water during the development phase of the coal
seam gas fields.
When commercial operation commences the accumulated costs are transferred to oil and gas producing assets.
Santos Annual Report 2016 / 73
Notes to the Consolidated Financial Statements
Section 3: Capital Expenditure, Operating Assets
and Restoration Obligations
3.2 OIL AND GAS ASSETS (CONTINUED)
Producing assets
The costs of oil and gas assets in production are separately accounted for as tangible assets and include past exploration and evaluation
costs, pre-production development costs and the ongoing costs of continuing to develop reserves for production and to expand or
replace plant and equipment and any associated land and buildings.
Ongoing exploration and evaluation activities
Often the initial discovery and development of an oil or gas asset will lead to ongoing exploration for, and evaluation of, potential new oil
or gas fields in the vicinity with the intention of producing any near-field discoveries using the infrastructure in place.
Exploration and evaluation expenditure associated with oil and gas assets is accounted for in accordance with the policy note in 3.1.
Exploration and evaluation amounts capitalised in respect of oil and gas assets are separately disclosed in the table below.
Depreciation and depletion
Depreciation charges are calculated to write off the 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 significant in relation to the total cost of the
asset is depreciated separately.
Depreciation of onshore buildings, plant and equipment and corporate assets is calculated using the straight-line method of depreciation
from the date the asset is available for use, unless a units of production method represents a more reasonable allocation of the asset’s
depreciable value over its economic useful life.
The estimated useful lives for each class of onshore assets for the current and comparative periods are generally as follows:
•
•
•
Buildings
Pipelines
20 – 50 years
10 – 30 years
Plant and facilities 10 – 50 years
Depreciation of offshore plant and equipment is calculated using the units of production method from the date of commencement of
production.
Significant judgement – Estimates of reserve quantities
The estimated quantities of Proven plus Probable (“2P”) 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
fiscal regimes. The estimates of reserves may change from period to period as the economic assumptions used to
estimate the reserves can change from period to period, and as additional geological data is generated during the
course of operations. Reserves estimates are prepared in accordance with the Group’s policies and procedures for
reserves estimation which conform to guidelines prepared by the Society of Petroleum Engineers.
Accounting judgement and estimate – Depletion charges
Depletion and certain depreciation charges are calculated using the units of production method. This is based on
barrels of oil equivalent which will amortise the cost of carried forward exploration, evaluation and subsurface
development expenditure (“subsurface assets”) over the life of the estimated 2P hydrocarbon reserves for an asset
or group of assets, together with future subsurface costs necessary to develop the hydrocarbon reserves in the
respective asset or group of assets.
74 / Santos Annual Report 2016
Financial Report
3.2 OIL AND GAS ASSETS (CONTINUED)
2016
2015 (Restated)
Subsurface
assets
$million
Plant and
equipment
$million
Total
$million
Subsurface
assets
$million
Plant and
equipment
$million
Total
$million
9,244
15,652
24,896
9,659
15,565
25,224
(7,467)
(7,031)
(14,498)
(7,049)
(5,771)
(12,820)
Cost
Less accumulated depreciation,
depletion and impairment
Balance at 31 December
1,777
8,621
10,398
2,610
9,794
12,404
Reconciliation of movements
Assets in development
Balance at 1 January
Additions1
Capitalised depreciation
Transfer from exploration and
evaluation assets
Disposals
Transfer to oil and gas assets
in production
Transfer to oil and gas assets held for
sale net of impairment
Net impairment losses on assets transferred
to held for sale
Exchange differences
Balance at 31 December
Producing assets
Balance at 1 January
Acquisitions of oil and gas assets
Additions1
Transfer from exploration and
evaluation assets
Transfer from oil and gas assets
in development
Disposals
Depreciation and depletion
Net impairment losses
Transfer of assets held for sale
Net impairment losses on assets transferred
to held for sale
Exchange differences
Balance at 31 December
Total oil and gas assets
Comprising:
Exploration and evaluation expenditure
pending commercialisation
Other capitalised expenditure
96
11
–
1
(2)
941
50
–
–
–
1,037
61
–
1
(2)
346
18
–
–
–
4,555
276
24
–
–
4,901
294
24
–
–
(35)
(972)
(1,007)
(179)
(3,785)
(3,964)
–
–
–
71
2,514
–
(14)
15
35
(10)
(272)
(521)
(29)
–
(12)
1,706
1,777
202
1,575
1,777
–
–
–
19
–
–
–
90
8,853
–
323
11,367
–
309
–
15
972
(38)
(435)
(968)
(97)
(4)
(4)
8,602
8,621
21
8,600
8,621
1,007
(48)
(707)
(1,489)
(126)
(4)
(16)
10,308
10,398
223
10,175
10,398
(69)
(100)
(9)
(11)
96
3,446
1
387
1
179
(51)
(321)
(926)
–
–
(202)
2,514
2,610
206
2,404
2,610
(14)
(15)
941
6,724
–
539
–
3,785
(23)
(458)
(1,403)
–
–
(311)
8,853
9,794
–
9,794
9,794
(169)
(23)
(26)
1,037
10,170
1
926
1
3,964
(74)
(779)
(2,329)
–
–
(513)
11,367
12,404
206
12,198
12,404
Santos Annual Report 2016 / 75
1.
Includes impact on restoration assets following changes in future restoration provision assumptions (refer note 3.4).
Notes to the Consolidated Financial Statements
Section 3: Capital Expenditure, Operating Assets
and Restoration Obligations
3.3 IMPAIRMENT OF NON-CURRENT ASSETS
The carrying amounts of the Group’s oil and gas 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.
Indicators of impairment – Exploration and evaluation assets
The carrying amounts of the Group’s exploration and evaluation assets are reviewed at each reporting date, to determine whether any
of the following indicators of impairment exists:
•
•
•
•
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
substantive expenditure on further exploration for, and evaluation of, mineral resources in the specific area is not budgeted or
planned; or
exploration for, and evaluation of, resources in the specific area have not led to the discovery of commercially viable quantities of
resources, and the Group has decided to discontinue activities in the specific area; or
sufficient data exists to indicate that although a development is likely to proceed, the carrying amount of the exploration and
evaluation asset is unlikely to be recovered in full from successful development or from sale.
Cash-generating units – Oil and gas assets
Oil and gas assets, land, buildings, plant and equipment are assessed for impairment on a cash-generating unit (“CGU”) basis. A CGU is
the smallest grouping of assets that generates independent cash inflows, and generally represents an individual oil or gas field or oil and
gas fields that are being produced through a common facility. Impairment losses recognised in respect of CGUs are allocated to reduce
the carrying amount of the assets in the unit on a pro-rata basis.
Individual assets within a CGU may become impaired if their ongoing use changes, or that the benefits to be obtained from ongoing use
are likely to be less than the carrying value of the individual asset. 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.
76 / Santos Annual Report 2016
Financial Report 3.3 IMPAIRMENT OF NON-CURRENT ASSETS (CONTINUED)
Recoverable amount
The recoverable amount of an asset is the greater of its fair value less costs of disposal (“FVLCD”) (based on level 3 fair value hierarchy)
and its value-in-use (“VIU”), using an asset's estimated future cash flows (as described below) discounted to their present value using a
pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
Significant judgement - Impairment of oil and gas assets
For oil and gas assets, the expected future cash flow estimation is based on a number of factors, variables and
assumptions, the most important of which are estimates of reserves, future production profiles, commodity prices,
costs and foreign exchange rates. In most cases, the present value of future cash flows is most sensitive to
estimates of future oil price and discount rates.
The estimated future cash flows for the VIU calculation are based on estimates, the most significant of which are
2P hydrocarbon reserves, future production profiles, commodity prices, operating costs including third-party gas
purchases and any future development costs necessary to produce the reserves. Under a FVLCD calculation, future
cash flows are based on estimates of 2P hydrocarbon reserves in addition to other relevant factors such as value
attributable to additional resource and exploration opportunities beyond 2P reserves based on production plans.
Estimates of future commodity prices are based on the Group’s best estimate of future market prices with reference
to external market analysts’ forecasts, current spot prices and forward curves. Future commodity prices are reviewed
at least annually. Where volumes are contracted, future prices are based on the contracted price. Future prices
(US$/bbl) used were:
2017
60.00
2018
70.00
20191
80.77
20201
82.79
20211
84.86
20221
86.98
1. Based on US$75/bbl (2016 real) from 2019 escalated at 2.5% p.a., consistent with June 2016 assumptions.
Forecasts of the foreign exchange rate for foreign currencies, where relevant, are estimated with reference to
observable external market data and forward values, including analysis of broker and consensus estimates. The
future estimated rate applied is A$/US$ of 0.70 in 2017, and A$/US$ of 0.75 in all subsequent years.
The discount rates applied to the future forecast cash flows are based on the weighted average cost of capital,
adjusted for risks where appropriate, including functional currency of the asset, and risk profile of the countries
in which the asset operates. The range of pre-tax discount rates that have been applied to non-current assets is
between 9.7% and 18.9%.
In the event that future circumstances vary from these assumptions, the recoverable amount of the Group’s oil and
gas assets could change materially and result in impairment losses or the reversal of previous impairment losses.
Due to the interrelated nature of the assumptions, movements in any one variable can have an indirect impact on
others and individual variables rarely change in isolation. Additionally, management can be expected to respond to
some movements, to mitigate downsides and take advantage of upsides, as circumstances allow. Consequently, it
is impracticable to estimate the indirect impact that a change in one assumption has on other variables and hence,
on the likelihood, or extent, of impairments or reversals of impairments under different sets of assumptions in
subsequent reporting periods.
Santos Annual Report 2016 / 77
Notes to the Consolidated Financial Statements
Section 3: Capital Expenditure, Operating Assets
and Restoration Obligations
3.3 IMPAIRMENT OF NON-CURRENT ASSETS (CONTINUED)
Impairment expense
Current assets
Assets held for sale
Other assets
Total impairment of current assets
Non-current assets
Exploration and evaluation assets
Oil and gas assets
Land and buildings
Total impairment of non-current assets
Total impairment
Note
3.6
2016
US$million
(Restated)
2015
US$million
4
–
4
59
1,489
9
1,557
1,561
23
4
27
498
2,329
–
2,827
2,854
Recoverable amounts and resulting impairment write-downs/(reversals) recognised in the year ended 31 December 2016 are:
2016
Exploration and evaluation assets:
Papua New Guinea
Vietnam
Gunnedah Basin
Segment
Exploration
Exploration
Exploration
Total impairment of exploration and evaluation assets
Oil and gas assets – producing:
Vietnam (Chim Sáo/Dua)
Sampang
Cooper – unconventional resources3
GLNG
Total impairment of oil and gas assets
Total impairment of exploration
and evaluation and oil and gas assets
Other
Other
Cooper Basin
GLNG
Subsurface
assets
Recoverable
amount1
US$million US$million US$million US$million
Plant and
equipment
Total
56
–
–
56
(47)
–
49
519
521
–
2
1
3
(8)
(5)
–
981
968
56
2
1
59
(55)
(5)
49
1,500
1,489
nil2
nil2
nil2
135
22
nil2
5,487
577
971
1,548
1. Recoverable amounts represent the carrying values of assets before deducting the carrying value of restoration liabilities. All producing oil and gas asset amounts are calculated using the
VIU method, whilst all exploration and evaluation asset amounts use the FVLCD method.
2.
Impairment of exploration and evaluation assets relates to certain individual licences/areas of interest that have been impaired to nil.
3. Cooper – unconventional resources comprises exploration and evaluation expenditure pending commercialisation within oil and gas assets, producing assets.
The impairment charges noted above for exploration and evaluation assets, primarily result from the lower oil price environment and, in
some cases, a consequential reduction or delay in future capital expenditure that diminishes or removes the path to commercialisation.
The impairment reversal for Vietnam arose due to a reduction in future operating costs.
GLNG
Sustained low oil prices continue to constrain capital expenditure and impact GLNG. During 2016 there has been a slower ramp-up of
GLNG equity gas production and an increase in the price of third-party gas and this has led to a change in upstream gas supply and
third-party gas pricing assumptions. As a consequence, the GLNG asset carrying value has been written down and an impairment
charge of $1,500 million before tax ($1,050 million after tax) has been recognised.
78 / Santos Annual Report 2016
Financial Report
3.3 IMPAIRMENT OF NON-CURRENT ASSETS (CONTINUED)
To the extent the CGUs have been written down to their respective recoverable amounts in the current and prior years, any change
in key assumptions on which the valuations are based would further impact asset carrying values. When modelled in isolation, it is
estimated that changes in the key assumptions would result in the following additional impairment in 2016 for the GLNG CGU:
Sensitivity
GLNG
Discount rate
increase 0.50%
US$million
Oil price
decrease
US$5/bbl
all years
US$million
189
439
As identified above, the impact of changes in key assumptions such as 2P reserves, production levels, commodity prices and discount
rates are significant on the determination of recoverable amount. Due to the number of factors that could impact any of these
assumptions, as well as any actions taken to respond to adverse changes, actual future determinations of recoverable amount may
vary from those stated above.
Recoverable amounts and resulting impairment write-downs recognised in the year ended 31 December 2015 were:
2015 (Restated)
Segment
Exploration and evaluation assets:
Gunnedah Basin
Cooper – unconventional resources
Papua New Guinea
Malaysia
Exploration
Cooper Basin
Exploration
Exploration
Total impairment of exploration and evaluation assets
Oil and gas assets – producing:
Cooper Basin
Mereenie
Patricia Baleen
Barrow
WA&NT oil assets
Vietnam (Chim Sáo/Dua)
SE Gobe
GLNG
Denison
Cooper Basin
Other
Other
Other
Other
Other
Corporate
GLNG
GLNG
Total impairment of oil and gas assets
Total impairment of exploration
and evaluation and oil and gas assets
Subsurface
assets
Recoverable
amount1
US$million US$million US$million US$million
Plant and
equipment
Total
409
17
38
16
480
570
–
7
70
55
46
1
163
14
926
18
–
–
–
18
954
9
5
111
12
31
4
248
29
427
17
38
16
498
1,524
9
12
181
67
77
5
411
43
nil2
nil2
nil2
nil2
982
45
19
47
18
118
nil
6,847
nil
1,403
2,329
1,406
1,421
2,827
1. Recoverable amounts represent the carrying values of assets before deducting the carrying value of restoration liabilities.
2.
Impairment of exploration and evaluation assets relates to certain individual licences/areas of interest that have been impaired to nil.
Santos Annual Report 2016 / 79
Notes to the Consolidated Financial Statements
Section 3: Capital Expenditure, Operating Assets
and Restoration Obligations
3.4 RESTORATION OBLIGATIONS
Provisions for future removal and environmental 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 future outflow
of economic benefits will be required to settle the obligation. The estimated future obligations include the costs of removing facilities,
abandoning wells and restoring the affected areas and 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. Any changes in the estimate are reflected
in the present value of the restoration provision at the reporting date, with a corresponding change in the cost of the associated asset.
In the event the restoration provision is reduced, the cost of the related oil and gas asset is reduced by an amount not exceeding its
carrying value. If the decrease in restoration provision exceeds the carrying amount of the asset, the excess is recognised immediately
in the income statement as other income.
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.
Significant judgement - 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 and the
extent of restoration activities required.
The Group has recorded provisions for restoration obligations as follows:
Current provision
Non-current provision
Movements in the provision during the financial year are set out below:
Balance at 1 January 2016
Impact of changes in future restoration assumptions – restoration asset
Impact of changes in future restoration assumptions – other income
Provisions used during the year
Unwind of discount
Disposal of provision
Change in discount rate
Transferred to liabilities held for sale
Exchange differences
Balance at 31 December 2016
2016
US$million
69
1,399
1,468
(Restated)
2015
US$million
52
1,726
1,778
Total restoration
US$million
1,778
(18)
(37)
(25)
41
(56)
(111)
(99)
(5)
1,468
Payments made into escrow accounts relating to future restoration obligations included in the table above of $62 million (2015: $52
million) are included within other non-current financial assets (note 5.5(f)).
Other provisions
In addition to the provision for restoration shown above and employee provisions in note 7.1, other items for which a provision has been
recorded are other current provisions $7 million (2015: $13 million), and other non-current provisions $52 million (2015: nil).
80 / Santos Annual Report 2016
Financial Report
3.5 COMMITMENTS FOR EXPENDITURE
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 the Group.
The Group leases floating production, storage and offtake facilities, floating storage offloading facilities, LNG carriers 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 buildings including office space and a warehouse under operating leases. The leases are generally for a period of
10 years, with an option to renew the lease after that date. The lease payments typically increase annually by the Consumer Price Index.
During the year ended 31 December 2016, the Group recognised $51 million (2015: $73 million) as an expense in the income statement in
respect of operating leases.
The Group has the following commitments for expenditure for which no liabilities have been recorded in the financial statements as the
goods or services have not been received, including non-cancellable operating lease rentals:
Commitments
Not later than one year
Later than one year but not later
than five years
Later than five years
Capital
Minimum exploration
Operating lease
2016
US$million
(Restated)
2015
2016
US$million US$million
(Restated)
2015
2016
US$million US$million
(Restated)
2015
US$million
161
14
–
175
277
36
–
313
80
292
–
372
170
340
1
511
83
129
93
305
112
216
147
475
Santos Annual Report 2016 / 81
Notes to the Consolidated Financial Statements
Section 3: Capital Expenditure, Operating Assets
and Restoration Obligations
3.6 ASSETS HELD FOR SALE
Non-current assets are classified as held for sale and measured at the lower of their carrying amount or fair value less costs of disposal
if their carrying amount will be recovered principally through a sale transaction. Assets are not depreciated or amortised. For an asset to
be classified as held for sale, it must be available for immediate sale in its present condition and its sale must be highly probable.
An impairment loss is recognised for any initial or subsequent write-down of the asset (or disposal group) to fair value less cost of
disposal. A gain is recognised for any subsequent increases in fair value less cost of disposal of an asset (or disposal group) but not in
excess of any cumulative impairment loss previously recognised. A gain or loss not previously recognised by the date of the sale of the
non-current asset (or disposal group) is recognised at the date of derecognition.
Following agreement to sell the Group’s interests in its offshore Victoria assets, and interest in Mereenie, the associated assets and
liabilities have been classified as held for sale at 31 December 2016. The sale agreements remained subject to outstanding conditions at
31 December 2016 and will be accounted for upon completion or waiver of each significant condition.
The following amounts are included within the financial statements in relation to assets classified as held for sale:
Assets and liabilities classified as held for sale
Trade and other receivables
Inventories
Exploration and evaluation assets
Oil and gas assets
Assets classified as held for sale
Trade and other payables
Other liabilities and deferred income
Restoration provisions
Liabilities classified as held for sale
Net assets
2016
US$million
24
2
28
126
180
1
3
99
103
77
A net impairment loss of $4 million attributed to the write-down of assets to fair value, in the Other segment, has been recorded.
82 / Santos Annual Report 2016
Financial Report
Notes to the Consolidated Financial Statements
Section 4: Working Capital Management
This section provides information about the Group’s working capital balances and management, including cash flow
information. Cash flow management is a significant consideration in running our business in an efficient and resourceful
manner. We also consider inventories which contribute to the business platform for generating profits and revenues.
4.1 CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise cash balances and short-term deposits that are readily convertible to cash, are subject to an
insignificant risk of changes in value, and generally have an original maturity of three months or less.
The carrying amounts of cash and cash equivalents represent fair value. Bank balances and short-term deposits earn interest at floating
rates based upon market rates.
Cash at bank and in hand
Short-term deposits
(a) Restricted cash balances
2016
US$million
392
1,634
2,026
(Restated)
2015
US$million
366
473
839
In accordance with the terms of the PNG LNG project financing, cash relating to the Group’s interest in undistributed cash flows
from the PNG LNG project is required to be held in secured bank accounts. As at 31 December 2016, $122 million (2015: $24 million)
was held in these accounts.
(b) Reconciliation of cash flows from operating activities
Loss after income tax
Add/(deduct) non-cash items:
Depreciation and depletion
Exploration and evaluation expensed
Net impairment loss
Net loss/(gains) on fair value hedges
Share-based payment expense
Unwind of the effect of discounting on provisions
Foreign exchange gains
Other
Net cash provided by operating activities before changes in assets or liabilities
Add/(deduct) change in operating assets or liabilities, net of acquisitions
or disposals of businesses:
Decrease in trade and other receivables
Decrease/(increase) in inventories
Decrease/(increase) in other assets
Decrease in net deferred tax liabilities
Increase/(decrease) in current tax liabilities
Decrease in trade and other payables
Decrease in provisions
Net cash provided by operating activities
(c) Non-cash financing and investing activities
2016
US$million
(Restated)
2015
US$million
(1,047)
(1,953)
741
71
1,561
54
11
41
(34)
(94)
1,304
25
15
35
(500)
75
(82)
(15)
857
793
88
2,854
(14)
17
47
(41)
16
1,807
60
(63)
(20)
(642)
(39)
(261)
(31)
811
Santos Dividend Reinvestment Plan
23
61
Santos Annual Report 2016 / 83
Notes to the Consolidated Financial Statements
Section 4: Working Capital Management
4.2 TRADE AND OTHER RECEIVABLES
Trade and other receivables are initially recognised at fair value, which in practice is the equivalent of cost, less any impairment losses.
Long-term receivables are discounted and are stated at amortised cost, less any impairment losses.
Trade receivables are non-interest-bearing and settlement terms are generally within 30 days. Trade receivables that are neither past
due nor impaired relate to a number of independent customers for whom there is no recent history of default.
Current
Trade receivables
Other receivables
Non-current
Other receivables
2016
US$million
(Restated)
2015
US$million
269
98
367
5
248
144
392
4
Of the Group’s $372 million total receivables (2015: $396 million), $363 million (2015: $385 million) is not yet due and $2 million
(2015: $1 million) is past due by over 12 months but not impaired. No amounts are considered impaired at 31 December 2016 (2015: nil).
4.3 INVENTORIES
Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary
course of business, less the estimated costs of completion and selling expenses. Cost is determined as follows:
•
•
drilling and maintenance stocks, which include plant spares, consumables and maintenance and drilling tools used for ongoing
operations, are valued at weighted average cost; and
petroleum products, which comprise extracted crude oil, liquefied petroleum gas, condensate and naphtha stored in tanks and
pipeline systems and processed sales gas and ethane stored in subsurface reservoirs, are valued using the absorption cost
method.
Petroleum products
Drilling and maintenance stocks
Total inventories at lower of cost and net realisable value
Inventories included above that are stated at net realisable value
4.4 TRADE AND OTHER PAYABLES
2016
US$million
(Restated)
2015
US$million
219
102
321
47
263
97
360
62
Trade and other payables are recognised when the related goods or services are received, at the amount of cash or cash equivalents
that will be required to discharge the obligation, gross of any settlement discount offered. Trade payables are non-interest-bearing and
are settled on normal terms and conditions.
Trade payables
Non-trade payables
84 / Santos Annual Report 2016
2016
US$million
417
103
520
(Restated)
2015
US$million
537
81
618
Financial Report
Notes to the Consolidated Financial Statements
Section 5: Funding and Risk Management
Our business has exposure to capital, credit, liquidity and market risks. This section provides information relating to our
management of, as well as, our policies for measuring and managing these risks.
Capital risk management objectives
The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, allowing returns to
shareholders and benefits for other stakeholders to be maintained, and to retain an efficient capital structure. In order to optimise the
capital structure, the Group may adjust its dividend distribution policy, return capital to shareholders, issue new shares, draw or repay
debt or undertake other corporate initiatives consistent with its strategic objectives.
In applying these objectives, the Group aims to:
• minimise the weighted average cost of capital whilst retaining appropriate financial flexibility;
•
ensure ongoing access to a range of debt and equity markets; and
• maintain an investment-grade credit rating.
A range of financial metrics are used to monitor the capital structure including ratios measuring gearing, funds from operations to debt
(“FFO-to-Debt”) and debt to earnings before interest, tax, depreciation and amortisation (“Debt-to-EBITDA”). The Group monitors
these capital structure metrics on both an actual and forecast basis.
On 15 December 2016 Santos Limited’s BBB– corporate credit rating was affirmed by Standard & Poor’s and the outlook revised from
‘negative’ to ‘stable’.
5.1 INTEREST-BEARING LOANS AND BORROWINGS
Interest-bearing loans and borrowings are recognised initially at fair value, net of transaction costs incurred. Subsequent to initial
recognition, interest-bearing loans and borrowings are stated at amortised cost with any difference between cost and redemption value
being recognised in the income statement over the period of the borrowings on an effective interest basis.
Fixed-rate notes that are hedged by an interest rate swap are recognised at fair value.
All borrowings are unsecured, with the exception of the secured bank loans and finance leases.
All interest-bearing loans and borrowings, with the exception of secured bank loans and finance leases, are borrowed through Santos
Finance Ltd, which is a wholly-owned subsidiary of Santos Limited. All interest-bearing loans and borrowings by Santos Finance Ltd are
guaranteed by Santos Limited.
Current
Bank loans – secured
Bank loans – unsecured
Long-term notes
Finance leases
Non-current
Bank loans – secured
Bank loans – unsecured
Long-term notes
Subordinated notes
Finance leases
Ref
(a)
(b)
(c)
(e)
(a)
(b)
(c)
(d)
(e)
2016
US$million
(Restated)
2015
US$million
132
82
205
1
420
1,617
1,653
413
1,072
64
4,819
119
32
–
1
152
1,750
1,712
603
1,146
35
5,246
Santos Annual Report 2016 / 85
Notes to the Consolidated Financial Statements
Section 5: Funding and Risk Management
5.1 INTEREST-BEARING LOANS AND BORROWINGS (CONTINUED)
The Group’s weighted average interest rate on interest-bearing liabilities is 4.79% as at 31 December 2016 (2015: 4.07%).
(a) Bank loans – secured
Facility
Currency
Limit
Drawn principal
Accounting balance
Effective interest rate
Maturity
Other
PNG LNG
US dollars
$1,838 million (2015: $1,973 million)
$1,838 million (2015: $1,973 million)
$1,749 million (2015: $1,869 million) including prepaid amounts
4.97% (2015: 4.57%)
2024–2026
Loan facilities for the PNG LNG project, in which Santos entities hold an equity interest of
13.5%, were entered into by the joint venture participants on 15 December 2009 and are
provided by commercial banks and export credit agencies, bear fixed and floating rates of
interest and have final maturity dates of June 2024 and June 2026 respectively.
Assets pledged as security and restricted cash
The PNG LNG facilities include security over assets and entitlements of the participants in
respect of the project. The total carrying value of the Group’s assets pledged as security
is $2,959 million at 31 December 2016 (2015: $2,910 million).
As referred to in note 4.1, under the terms of the project financing, cash relating to the
Group’s interest in undistributed project cash flows is required to be held in secured bank
accounts. Funds held in these accounts attributable to the Group may be withdrawn on
the provision of acceptable credit support to the lenders. As at 31 December 2016, no
letters of credit (2015: $100 million) had been provided.
(b) Bank loans – unsecured
Facility
Currency
Limit
Drawn principal
Accounting balance
Effective interest rate
Maturity
Facility
Currency
Limit
Drawn principal
Accounting balance
Effective interest rate
Maturity
Other
Term bank loans
US dollars
$17 million (2015: $32 million)
$17 million (2015: $32 million)
$17 million (2015: $32 million)
0.87% (2015: 0.41%)
2017
Export credit agency supported loan facilities
US dollars
$1,730 million (2015: $1,730 million)
$1,730 million (2015: $1,730 million)
$1,718 million (2015: $1,712 million) including prepaid amounts
2.64% (2015: 2.40%)
2017–2024
Loan facilities are supported by various export credit agencies.
86 / Santos Annual Report 2016
Financial Report
5.1 INTEREST-BEARING LOANS AND BORROWINGS (CONTINUED)
(c) Long-term notes
Facility
Currency
Limit
Drawn principal
Accounting balance
Effective interest rate
Maturity
Other
(d) Subordinated notes
Facility
Currency
Limit
Drawn principal
Accounting balance
Effective interest rate
Maturity
Other
Long-term notes
US dollars
$577 million (2015: $577 million)
$577 million (2015: $577 million)
$618 million (2015: $603 million) including fair value accounting measurement
and prepaid amounts
1.41%
2017–2027
Long-term notes bear a fixed interest rate of 6.05% to 6.81% (2015: 6.05% to 6.81%),
which have been swapped to floating rate commitments.
Subordinated notes
Euro
€1,000 million (2015: €1,000 million)
€1,000 million (2015: €1,000 million)
$1,072 million (2015: $1,146 million) including fair value accounting measurement and
prepaid amounts
6.60% (2015: 6.12%)
2070
The notes mature in 2070 and can be redeemed at the Group’s option on or after
22 September 2017.
(e) Finance leases
Finance lease commitments are payable as follows:
Not later than one year
Later than one year but not later than five years
Later than five years
Minimum lease payments
Future finance charges
Leases not commenced at reporting date
Total lease liabilities
2016
US$million
(Restated)
2015
US$million
10
37
124
171
(106)
–
65
8
37
131
176
(55)
(85)
36
The Group participates in leases of LNG carriers and tug facilities under finance leases. The leases have terms of between
10 and 20 years with varying renewal options. Title does not pass to the Group on expiration of the relevant lease period.
Santos Annual Report 2016 / 87
Notes to the Consolidated Financial Statements
Section 5: Funding and Risk Management
5.2 NET FINANCE COSTS
Borrowing costs
Borrowing costs relating to major oil and gas assets under development are capitalised as a component of the cost of development.
Where funds are borrowed specifically for qualifying projects the actual borrowing costs incurred are capitalised. Where the projects are
funded through general borrowings, the borrowing costs are capitalised based on the weighted average cost of borrowing. Borrowing
costs incurred after commencement of commercial operations are expensed to the income statement.
All other borrowing costs are recognised in the income statement in the period in which they are incurred.
Interest income
Interest income is recognised in the income statement as it accrues using the effective interest method.
Finance income:
Interest income
Total finance income
Finance costs:
Interest paid to third parties
Deduct borrowing costs capitalised
Unwind of the effect of discounting on provisions
Total finance costs
Net finance costs
2016
US$million
(Restated)
2015
US$million
15
15
275
(20)
255
41
296
281
6
6
294
(118)
176
47
223
217
88 / Santos Annual Report 2016
Financial Report
5.3 ISSUED CAPITAL
Ordinary share capital
Ordinary share capital is classified as equity. The issued shares do not have a par value and there is no limit on the authorised share
capital of the Company.
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 2016 was A$4.02 (2015: A$3.68).
Transaction costs
Transaction costs of an equity transaction are accounted for as a deduction from equity, net of any related income tax benefit. During
2016 transaction costs of $13 million have been deducted from equity.
Movement in ordinary shares
2016
Number
of shares
2015
2016
Number
of shares US$million
(Restated)
2015
US$million
Note
Balance at 1 January
Institutional placement, net of costs
Rights issue, net of costs
Santos Dividend Reinvestment Plan (“DRP”)
DRP underwriting
Santos Employee Share1000 Plan
Santos Employee ShareMatch Plan
Shares issued on vesting of Share Acquisition Rights (“SARs”)
Shares issued on vesting of Executive Deferred Short-
term incentive (“STI”)
Shares issued on vesting of Executive Strategy Grant
Santos Executive Share Plan
Non-executive Director Share Plan
1,766,210,639
256,000,000
–
8,205,002
–
297,036
719,764
578,818
7.2
7.2
7.2
253,747
106,827
–
17,842
983,750,151
73,529,412
654,198,741
15,052,884
37,960,195
180,040
890,889
611,618
–
–
18,000
18,709
8,119
738
–
23
–
1
2
–
–
–
–
–
5,762
352
1,781
61
158
1
4
–
–
–
–
–
Balance at 31 December
2,032,389,675
1,766,210,639
8,883
8,119
Included within the Group’s ordinary shares at 31 December 2016 are 25,000 (2015: 25,000) ordinary shares paid to one cent with a
value of nil (2015: nil).
5.4 RESERVES AND RETAINED EARNINGS
The Group’s reserves and retained earnings balances, and movements during the period, are disclosed in the statement of changes in
equity.
Translation reserve
The translation reserve comprises all foreign exchange differences arising from the following:
•
•
•
the translation of the financial statements of foreign operations where their functional currency is different from the functional
currency of the Parent entity;
the translation of liabilities that hedge the Company’s net investment in a foreign subsidiary; and
exchange differences that arise on the translation of the monetary items that form part of the net investment in a foreign
operation.
Hedging reserve
The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments
related to hedged transactions that have not yet occurred.
Accumulated profits reserve
The accumulated profits reserve acts to quarantine profits generated in prior periods. The reserve was established during 2015.
Santos Annual Report 2016 / 89
Notes to the Consolidated Financial Statements
Section 5: Funding and Risk Management
5.5 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 financial risk management strategy is to seek to ensure that the Group is able to fund its corporate
objectives and meet its obligations to stakeholders. Derivative financial instruments may be used to hedge exposure to fluctuations in
foreign exchange rates, interest rates and commodity prices.
The Group uses various methods to measure the types of financial 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 specific financial risks, such as foreign
exchange risk, interest rate risk and credit risk, approved derivative and non-derivative financial instruments, and liquidity management.
(a) Liquidity
The Group adopts a prudent liquidity risk management strategy and seeks to maintain sufficient liquid assets and available
committed credit facilities to meet short-term to medium-term liquidity requirements. The Group’s objective is to maintain flexibility
in funding to meet ongoing operational requirements, exploration and development expenditure, and other corporate initiatives.
The following tables analyse the contractual maturities of the Group’s financial assets and liabilities held to manage liquidity risk. The
relevant maturity groupings are based on the remaining period to the contractual maturity date, as at 31 December. The amounts
disclosed in the table are the contractual undiscounted cash flows comprising principal and interest repayments. Estimated variable
interest expense is based upon appropriate yield curves as at 31 December.
Financial assets held to manage liquidity risk
2016
Cash and cash equivalents
Derivative financial assets
Interest rate swap contracts
Derivative financial liabilities
Cross-currency swap contracts
Non-derivative financial liabilities
Trade and other payables
Obligations under finance leases
Bank loans
Long-term notes
Subordinated debt1
Less than
1 year
2 to 5 More than
5 years
years
US$million US$million US$million US$million
1 to 2
years
2,026
31
(368)
(520)
(9)
(355)
(237)
(1,136)
(568)
–
25
–
–
(9)
(323)
(24)
–
–
36
–
–
(28)
(2,124)
(204)
–
–
11
–
–
(125)
(1,420)
(247)
–
(331)
(2,320)
(1,781)
1. Subordinated debt matures in 2070, however it can be redeemed at the Group’s option on or after September 2017.
Financial assets held to manage liquidity risk
2015 (Restated)
Cash and cash equivalents
Derivative financial assets
Interest rate swap contracts
Derivative financial liabilities
Cross-currency swap contracts
Non-derivative financial liabilities
Trade and other payables
Obligations under finance leases
Bank loans
Long-term notes
Subordinated debt
90 / Santos Annual Report 2016
Less than
1 year
2 to 5 More than
5 years
years
US$million US$million US$million US$million
1 to 2
years
839
30
3
(618)
(5)
(288)
(37)
(90)
(166)
–
26
(323)
–
(5)
(330)
(237)
(1,183)
–
37
–
–
(15)
(2,157)
(214)
–
–
17
–
–
(66)
(1,709)
(262)
–
(2,052)
(2,349)
(2,020)
Financial Report
5.5 FINANCIAL RISK MANAGEMENT (CONTINUED)
(b) Foreign currency risk
Foreign exchange risk arises from commercial transactions and valuations of assets and liabilities that are denominated in a
currency that is not the entity’s functional currency.
The Group is exposed to foreign currency risk principally through the sale of products denominated in currencies other than the
functional currency, borrowings denominated in Euros and capital and operating expenditure incurred in currencies other than US
dollars, principally Australian dollars. In order to economically hedge foreign currency risk, the Group from time to time enters into
forward foreign exchange, foreign currency swap and foreign currency option contracts.
The Group has certain investments in domestic and foreign operations whose net assets are exposed to foreign currency
translation risk.
All foreign currency denominated borrowings of Australian dollar functional currency companies are either designated as a hedge of
US dollar denominated investments in foreign operations (2016: $824 million; 2015: $2,340 million), swapped using cross-currency
swaps to US dollars and designated as a hedge of US dollar denominated investments in foreign operations (2016: $1,410 million;
2015: $1,410 million), or offset by US dollar denominated cash balances (2016: $1,500 million; 2015: nil). As a result, there were
no net foreign currency gains or losses arising from translation of US dollar-denominated borrowings recognised in the income
statement in 2016.
Monetary items, including financial assets and liabilities, denominated in currencies other than the functional currency of an
operation are periodically restated to US dollar equivalents, and the associated gain or loss is taken to the income statement. The
exception is foreign exchange gains or losses on foreign currency provisions for restoration at operating sites that are capitalised in
oil and gas assets.
Sensitivity to foreign currency movement
Based on the Group’s net financial assets and liabilities at 31 December 2016, the estimated impact of a ±15 cent movement in the
Australian dollar exchange rate (2015: ±15 cent) combined with a ±10 cent movement in the Euro exchange rate (2015: ±10 cent),
each against the US dollar, with all other variables held constant is $5 million (2015: $26 million) on post-tax profit and $980 million
(2015: $1,020 million) on equity.
(c) Market risk
Cash flow 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 flow interest
rate risk. Borrowings issued at fixed 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 floating
rate basis. Interest rate swaps have been entered into as fair value hedges of long-term notes and subordinated debt. When
transacted, these swaps had maturities ranging from 1 to 20 years, aligned with the maturity of the related notes.
The Group’s interest rate swaps had a notional contract amount of $1,777 million (2015: $1,824 million) and a net fair value of $83
million (2015: $91 million). The net fair value amounts were recognised as fair value derivatives.
Sensitivity to interest rate movement
Based on the net debt position as at 31 December 2016, taking into account interest rate swaps, it is estimated that if the US
dollar London Interbank Offered Rate (“LIBOR”) interest rates changed by ±0.50% (2015: ±0.50%), Euro Interbank Offered Rate
(“EURIBOR”) changed by ±0.50% (2015: ±0.50%) and Australian Bank Bill Swap reference rate (“BBSW”) changed by ±0.50%
(2015: ±0.50%), with all other variables held constant, the impact on post-tax profit is $6 million (2015: $10 million).
This assumes that the change in interest rates is effective from the beginning of the financial year and the net debt position
and fixed/floating mix is constant over the year. However, interest rates and the debt profile of the Group are unlikely to remain
constant and therefore the above sensitivity analysis will be subject to change.
Commodity price risk exposure
The Group is exposed to commodity price fluctuations through the sale of petroleum products and other oil price linked contracts.
The Group may enter into crude oil price swap and option contracts to manage its commodity price risk. At 31 December 2016,
the Group has 10.95 million barrels of open oil price option contracts (2015: nil), covering 2017 exposures. The 3-way collar option
structure does not qualify for hedge accounting, with the movement in fair value recorded in the income statement. The Group
continues to monitor oil price volatility and to assess whether further commodity price hedging is appropriate.
Santos Annual Report 2016 / 91
Notes to the Consolidated Financial Statements
Section 5: Funding and Risk Management
5.5 FINANCIAL RISK MANAGEMENT (CONTINUED)
(d) Credit risk
Credit risk represents the potential financial loss if counterparties fail to complete their obligations under financial instrument or
customer contracts. Santos employs credit policies which include monitoring exposure to credit risk 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 15% of sales revenue.
At 31 December 2016 there were no significant concentrations of credit risk within the Group and financial instruments are spread
amongst a number of financial institutions to minimise the risk of counterparty default.
The maximum exposure to financial institution credit risk is represented by the sum of all cash deposits plus accrued interest, bank
account balances and fair value of derivative assets.
(e) Fair values
The financial assets and liabilities of the Group are all initially recognised in the statement of financial position at their fair values.
Receivables, payables, interest-bearing liabilities and other financial assets and liabilities, which are not subsequently measured at
fair value, are carried at amortised cost. The following summarises the significant methods and assumptions used in estimating the
fair values of financial instruments:
Derivatives
The fair value of interest rate swaps is calculated by discounting estimated future cash flows based on the terms of maturity
of each contract, using market interest rates for a similar instrument at the reporting date. Where these cash flows are in a
foreign currency, the present value is converted to US 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 flows, discounted at the market rate of
interest at the reporting date. Where these cash flows are in a foreign currency, the present value is converted to US 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 flows, where applicable, are based on the market yield curve and
credit spreads at the reporting date.
The interest rates including credit spreads used to determine fair value were as follows:
Derivatives
Loans and borrowings
2016
%
(0.3) – 3.9
(0.3) – 3.9
2015
%
(0.1) – 4.1
(0.1) – 4.1
The Group uses the following hierarchy for determining and disclosing the fair value of financial 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 a significant effect on the recorded fair value are
observable, either directly or indirectly;
Level 3:
techniques which use inputs which have a significant effect on the recorded fair value that are not based
on observable market data.
All of the Group’s financial instruments were valued using the Level 2 valuation technique.
92 / Santos Annual Report 2016
Financial Report
5.5 FINANCIAL RISK MANAGEMENT (CONTINUED)
(f) Hedging
The Group uses derivative financial instruments to hedge its exposures to changes in foreign exchange rates, interest rates and
commodity markets arising in the normal course of business. The principal derivatives that may be used are forward foreign
exchange contracts, cross-currency interest rate swaps, interest rate swaps and oil price options. Their use is subject to a set of
policies, procedures and limits approved by the Board of Directors. The Group does not trade in derivative financial instruments for
speculative purposes. The Group’s accounting policy for fair value and cash flow hedges are as follows:
Types of hedges
Fair value hedges
Cash flow hedges
What is it?
A derivative or financial instrument designated
as hedging the change in fair value of a
recognised asset or liability.
A derivative or financial instrument to hedge the
exposure to variability in cash flows attributable
to a particular risk associated with an asset,
liability or forecast transaction.
Recognition date
At the date the instrument is entered into.
At the date the instrument is entered into.
Measurement
Measured at fair value, being the estimated
amount that the Group would receive or pay to
terminate the contracts at the reporting date.
Measured at fair value, being the estimated
amount that the Group would receive or pay to
terminate the contracts at the reporting date.
Changes in fair value
The gains or losses on both the derivative or
financial instrument and hedged asset or liability
attributable to the hedged risk are recognised in
the income statement immediately.
The gain or loss relating to the effective
portion of interest rate swaps hedging fixed
rate borrowings is recognised in the income
statement within finance costs, together with
loss or gain in the fair value of the hedged fixed
rate borrowings attributable to interest rate risk.
The gain or loss relating to the ineffective
portion is recognised in the income statement
within other income or other expenses.
If the hedge no longer meets the criteria for
hedge accounting, the adjustment to the
carrying amount of a hedged item for which the
effective interest method is used is amortised
to the income statement over the period to
maturity using a recalculated effective interest
rate.
Changes in the fair value of derivatives
designated as cash flow hedges are recognised
directly in other comprehensive income and
accumulated in equity in the hedging reserve to
the extent that the hedge is highly effective. To
the extent that the hedge is ineffective, changes
in fair value are recognised immediately in the
income statement within other income or other
expenses.
Amounts accumulated in equity are transferred
to the income statement or the balance sheet,
for a non-financial asset, at the same time as the
hedged item is recognised.
When a hedging instrument expires or is sold,
terminated or exercised, or when a hedge no
longer meets the criteria for hedge accounting,
any cumulative gain or loss existing in equity at
that time remains in equity and is recognised
when the underlying forecast transaction
occurs.
When a forecast transaction is no longer
expected to occur, the cumulative gain or loss
that was reported in equity is immediately
transferred to the income statement.
Hedge of monetary assets and liabilities
When a derivative financial instrument is used to hedge economically the foreign exchange exposure of a recognised monetary
asset or liability, hedge accounting is not applied and any gain or loss on the hedging instrument is recognised in the income
statement.
Santos Annual Report 2016 / 93
Notes to the Consolidated Financial Statements
Section 5: Funding and Risk Management
5.5 FINANCIAL RISK MANAGEMENT (CONTINUED)
(f) Hedging (continued)
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 the income
statement.
Hedges in place
The Group has issued €1,000 million subordinated notes with a fixed interest rate of 8.25%.
In order to reduce the variability of the cash flows arising from the Euro principal and interest payments to September 2017, the
Group entered into cross-currency interest rate swap contracts in March 2011, under which it has a right to receive interest at fixed
Euro rates and pay interest at floating US dollar interest rates. These contracts are in place to cover principal and interest payments
on €950 million of the subordinated notes through to the call date in 2017.
Subordinated notes totalling €50 million have been swapped to a fixed US dollar interest rate of 8.48% through to the call date in
2017.
The cross-currency and interest rate swap contracts are recognised at fair value and all gains and losses attributable to the hedged
risks are recognised in the hedge reserve and reclassified into the income statement when the interest expense is recognised.
The table below contains all “other financial assets and liabilities” as shown on the balance sheet, including derivative financial
instruments used for hedging:
2016
US$million
(Restated)
2015
US$million
Current assets
Interest rate swap contracts
Other
Non-current assets
Interest rate swap contracts
Available-for-sale financial assets
Amounts held in escrow1
Defined benefit surplus
Current liabilities
Cross-currency swap contracts
Commodity derivatives
Other
Non-current liabilities
Cross-currency swap contracts
Embedded derivatives
Other
1. Amounts represent cash held in escrow for future restoration obligations relating to certain assets.
94 / Santos Annual Report 2016
7
–
7
77
8
62
5
152
349
14
3
366
–
3
20
23
–
1
1
91
7
52
8
158
–
–
2
2
282
4
23
309
Financial Report
Notes to the Consolidated Financial Statements
Section 6: Group Structure
This section provides information which will help users understand how the Group structure affects the financial position
and performance of the Group as a whole. Specifically, it contains information about consolidated entities, acquisitions and
disposals of subsidiaries, joint arrangements as well as parties to the Deed of Cross Guarantee under which each company
guarantees the debts of others.
6.1 CONSOLIDATED ENTITIES
Subsidiaries are entities controlled by the Company. Control exists when the Company is exposed to, or has the rights to, variable
returns from its involvement with an entity and has the ability to affect those returns through its power over the entity. The financial
statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date
that control ceases.
Acquisitions of subsidiaries are accounted for using the acquisition method of accounting, and are initially recorded in the parent entity’s
financial statements at the cost of acquisition less any impairment charges.
A change in ownership interest of a subsidiary that does not result in the loss of control is accounted for as an equity transaction.
Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-group transactions are eliminated in
preparing the consolidated financial statements.
Non-controlling interests
Non-controlling interests in the net assets of consolidated entities are allocated their share of net profit after tax in the income
statement, and are identified separately from the Group’s equity in those entities. Losses are attributed to the non-controlling interests
even if that results in a deficit balance.
Santos Annual Report 2016 / 95
Notes to the Consolidated Financial Statements
Section 6: Group Structure
6.1 CONSOLIDATED ENTITIES (CONTINUED)
Name
Country of incorporation
Name
Country of incorporation
Santos Limited1 (Parent Company)
Controlled entities:
Alliance Petroleum Australia Pty Ltd1
Basin Oil Pty Ltd1
Bridgefield Pty Ltd
Bridge Oil Developments Pty Ltd1
Bronco Energy Pty Ltd
Canso Resources Pty Ltd5
Doce Pty Ltd
Fairview Pipeline Pty Ltd1,2
Farmout Drillers Pty Ltd5
Gidgealpa Oil Pty Ltd
Kipper GS Pty Ltd5
Controlled entities of Kipper GS Pty Ltd
Santos Carbon Pty Ltd5
Controlled entity of Santos Carbon Pty Ltd
SB Jethro Pty Ltd5
Moonie Pipeline Company Pty Ltd
Reef Oil Pty Ltd1
Santos Asia Pacific Pty Ltd
Controlled entities of Santos Asia Pacific Pty Ltd
Santos (Sampang) Pty Ltd
Santos (Warim) Pty Ltd
Santos Australian Hydrocarbons Pty Ltd
Santos (BOL) Pty Ltd1
Controlled entity of Santos (BOL) Pty Ltd
Bridge Oil Exploration Pty Ltd
Santos Browse Pty Ltd
Santos CSG Pty Ltd
Santos Darwin LNG Pty Ltd1,3
Santos Direct Pty Ltd
Santos Facilities Pty Ltd5
Santos Finance Ltd
Santos GLNG Pty Ltd
Controlled entity of Santos GLNG Pty Ltd
Santos GLNG Corp
Santos (Globe) Pty Ltd
Santos International Holdings Pty Ltd
Controlled entities of Santos International
Holdings Pty Ltd
Barracuda Ltd
Lavana Ltd
Sanro Insurance Pte Ltd
Santos Americas and Europe Corporation
Controlled entities of Santos Americas
and Europe Corp
Santos TPY Corp
Controlled entities of Santos TPY Corp
Santos Queensland Corp
Santos TOG Corp
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
USA
AUS
AUS
PNG
PNG
SGP
USA
USA
USA
USA
Controlled entities of Santos TOG Corp
Santos TOGA Pty Ltd
Santos TPY CSG Corp
Santos Bangladesh Ltd
Santos Baturaja Pty Ltd
96 / Santos Annual Report 2016
Controlled entities of Santos International
Holdings Pty Ltd (cont)
Santos (BBF) Pty Ltd
Controlled entities of Santos (BBF) Pty Ltd
Santos (SPV) Pty Ltd
Controlled entity of Santos (SPV) Pty Ltd
Santos (Madura Offshore) Pty Ltd
Santos Belida Pty Ltd
Santos (Donggala) Pty Ltd5
Santos Egypt Pty Ltd4
Santos EOM Pty Ltd
Santos Hides Ltd
Santos International Pte Ltd
Santos International Operations Pty Ltd
Santos OIG Pty Ltd
Santos P’nyang Ltd
Santos (Papalang) Pty Ltd5
Santos (Popodi) Pty Ltd5
Santos Sabah Block R Limited
Santos Sangu Field Ltd
Santos (UK) Limited
Controlled entities of Santos (UK) Limited
Santos Northwest Natuna B.V.
Santos Petroleum Ventures B.V.
Santos Sabah Block S Limited
Santos Vietnam Pty Ltd
Santos (JBJ1) Pty Ltd5
Controlled entities of Santos (JBJ1) Pty Ltd
Santos (JBJ2) Pty Ltd5
Santos (JPDA 06–104) Pty Ltd5
Santos (JPDA 91–12) Pty Ltd
Santos (NARNL Cooper) Pty Ltd1
Santos NSW Pty Ltd
Controlled entities of Santos NSW Pty Ltd
Santos NSW (Betel) Pty Ltd
Santos NSW (Hillgrove) Pty Ltd
Santos NSW (Holdings) Pty Ltd
AUS
AUS
AUS
AUS
AUS
AUS
AUS
PNG
SGP
AUS
AUS
PNG
AUS
AUS
GBR
GBR
GBR
NLD
NLD
GBR
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
Controlled entities of Santos NSW (Holdings) Pty Ltd
Santos NSW (LNGN) Pty Ltd
Santos NSW (Pipeline) Pty Ltd
Santos NSW (Sales) Pty Ltd5
Santos NSW (Narrabri Energy) Pty Ltd
Controlled entities of Santos NSW
(Narrabri Energy) Pty Ltd
Santos NSW (Eastern) Pty Ltd
Santos NSW (Sulu) Pty Ltd5
Santos NSW (Tooncomet) Pty Ltd5
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
Santos NSW (Narrabri Power) Pty Ltd
Santos NSW (Operations) Pty Ltd
Santos (N.T.) Pty Ltd
Controlled entity of Santos (N.T.) Pty Ltd
Bonaparte Gas & Oil Pty Ltd
Santos Offshore Pty Ltd1
Santos Petroleum Pty Ltd1
Santos QLD Upstream Developments Pty Ltd
AUS
USA
GBR
AUS
Financial Report
Name
Country of incorporation
Name
Country of incorporation
Santos QNT Pty Ltd1
Controlled entities of Santos QNT Pty Ltd
Outback Energy Hunter Pty Ltd
Santos QNT (No. 1) Pty Ltd1
Controlled entities of Santos QNT (No. 1) Pty Ltd
Santos Petroleum Management Pty Ltd
Santos Petroleum Operations Pty Ltd6
TMOC Exploration Proprietary Limited
Santos QNT (No. 2) Pty Ltd1,3
Controlled entities of Santos QNT (No. 2) Pty Ltd
Moonie Oil Pty Ltd
Petromin Pty Ltd
Santos (299) Pty Ltd6
Santos Exploration Pty Ltd5
Santos Gnuco Pty Ltd5
Santos Upstream Pty Ltd5
Santos TPC Pty Ltd
Santos Wilga Park Pty Ltd
Santos Resources Pty Ltd
Santos (TGR) Pty Ltd
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
AUS
6.2 ACQUISITIONS AND DISPOSALS OF SUBSIDIARIES
There were no acquisitions or disposals of subsidiaries during 2016.
Santos Timor Sea Pipeline Pty Ltd
Santos Ventures Pty Ltd
SESAP Pty Ltd
Shaw River Power Station Pty Ltd
Vamgas Pty Ltd1
AUS
AUS
AUS
AUS
AUS
Notes
1. Company is party to a Deed of Cross Guarantee. Refer note 6.5.
2. Company joined the Deed of Cross Guarantee during 2016.
3. Company has entered into a Revocation Deed to be released from the Deed of Cross
Guarantee.
4. Company was deregistered on 28 January 2016.
5. Company placed in liquidation during 2016 and deregistered on 19 December 2016.
6.
In liquidation.
Country of incorporation
AUS
GBR
NLD
PNG
SGP
USA
–
Australia
– United Kingdom
– Netherlands
–
–
Papua New Guinea
Singapore
– United States of America
Santos Annual Report 2016 / 97
Notes to the Consolidated Financial Statements
Section 6: Group Structure
6.3 JOINT ARRANGEMENTS
The Group’s investments in joint arrangements are classified as either joint operations or joint ventures, depending on the contractual
rights and obligations each investor has, rather than the legal structure of the joint arrangement. Santos’ exploration and production
activities are often conducted through joint arrangements governed by joint operating agreements, production sharing contracts or
similar contractual relationships.
The differences between joint operations and joint ventures are as follows:
Types of
arrangement
Characteristics
Rights and obligations
Accounting method
Joint operation
Joint venture
A joint operation involves the joint control, and
often the joint ownership, of assets contributed
to, or acquired for the purpose of, the joint
operation. The assets are used to obtain benefits
for the parties to the joint operation and are
dedicated to that purpose.
Each party has control over its share of future
economic benefits through its share of the
joint operation, and has rights to the assets,
and obligations for the liabilities, relating to the
arrangement.
The interests of the Group in joint operations are
brought to account by recognising the Group’s
share of jointly controlled assets, share of
expenses and liabilities incurred, and the income
from its share of the production of the joint
operation.
The Group has interests in joint ventures, whereby
the venturers have contractual arrangements that
establish joint control over the economic activities
of the entities.
Parties that have joint control of the arrangement
have rights to the net assets of the arrangement.
The Group recognises its interest in joint ventures
using the equity method of accounting.
Under the equity method, the investment
in a joint venture is initially recognised in the
consolidated statement of financial position at
cost and adjusted thereafter to recognise the
post-acquisition changes to the Group’s share of
net assets of the joint venture. 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 joint venture.
The Group’s share of the joint venture’s post-
acquisition profits 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. Dividends receivable from the joint
venture reduce the carrying amount of the
investment in the consolidated financial
statements of the Group.
98 / Santos Annual Report 2016
Financial Report
6.3 JOINT ARRANGEMENTS (CONTINUED)
(a) Joint operations
The following are the material joint operations in which the Group has an interest:
Joint operation
Area of cash-generating unit/
area of interest
Principal activities
2016
% Interest
2015
% Interest
Oil and gas assets – Producing assets
Barrow Island
Bayu-Undan
Casino1
Chim Sáo
Fairview
GLNG Downstream
Halyard/Spar
John Brookes
Madura Offshore PSC (Maleo)
Mutineer-Exeter/
Barrow
Bayu-Undan
Victoria
Vietnam (Block 12W)
GLNG
GLNG
Varanus Island
Varanus Island
Madura PSC
Mutineer-Exeter/
Fletcher Finucane
Fletcher Finucane
PNG LNG
Reindeer
GLNG
Cooper Basin
Sampang PSC
Stag
Cooper Basin
PNG LNG
Reindeer
Roma
SA Fixed Factor Area
Sampang PSC (Oyong, Wortel)
Stag
SWQ Unit
Oil and gas assets – Assets in development
Kipper
Exploration and evaluation assets
EPP43
EP161, 162 and 189
Block R
Caldita/Barossa
Northwest Natuna
PEL1 and 12
PEL238 and PAL2
PPL269
PPL4022
Kipper
Ceduna Basin
McArthur Basin
–
Bonaparte Basin
–
–
Gunnedah Basin
–
–
Bonaparte Basin
Bonaparte Basin
Carnarvon Basin
WA-58-R (WA-274-P)
WA-323-P
WA-49-R3
1. Asset classified as held for sale.
Oil production
Gas and liquids production
Gas production
Oil and gas production
Gas production
LNG facilities
Gas production
Gas production
Gas production
Oil production
Gas and liquids production
Gas production
Gas production
Oil and gas production
Oil and gas production
Oil production
Gas production
Gas development
Contingent oil or gas resource
Contingent gas resource
Oil and gas exploration
Contingent gas resource
Oil resource
Contingent gas resource
Contingent gas resource
Oil and gas exploration
Gas discovery
Gas development
Contingent gas resource
Contingent gas resource
28.6
11.5
50.0
31.9
22.8
30.0
45.0
45.0
67.5
37.5
13.5
45.0
30.0
66.6
45.0
–
60.1
–
50.0
50.0
20.0
25.0
50.0
65.0
80.0
30.0
–
30.0
75.0
24.8
28.6
11.5
50.0
31.9
22.8
30.0
45.0
45.0
67.5
37.5
13.5
45.0
30.0
66.6
45.0
66.7
60.1
35.0
50.0
50.0
20.0
25.0
50.0
65.0
80.0
30.0
–
30.0
75.0
24.8
2. During 2016 the Group acquired a 20% interest in PPL402, which is subject to customary regulatory approvals.
3. During 2016 the Group acquired an additional 6.7% interest in WA-49-R, which is subject to customary regulatory approvals.
Santos Annual Report 2016 / 99
Notes to the Consolidated Financial Statements
Section 6: Group Structure
6.3 JOINT ARRANGEMENTS (CONTINUED)
(b) Share of investments in joint ventures
The Group’s only material joint venture is Darwin LNG Pty Ltd, which operates the Darwin LNG liquefaction facility that currently
processes gas from the Bayu-Undan gas fields.
Summarised financial information of the joint venture, based on the amounts presented in its financial statements, and a
reconciliation to the carrying amount of the investment in the consolidated financial statements, are set out below:
Share of investments in Darwin LNG Pty Ltd
Reconciliation to carrying amount:
Opening net assets 1 January
Profit for the period
Reduction in capital
Dividends paid
Closing net assets 31 December
Group’s share (%)
Group’s share of closing net assets ($million)
Carrying amount of investments in joint ventures ($million)
Summarised statement of comprehensive income:
Profit for the period
Other comprehensive income
Total comprehensive income
Group’s share of profit
Dividends received from joint venture
2016
US$million
(Restated)
2015
US$million
620
88
(130)
(88)
490
11.5%
56
56
88
–
88
10
10
693
91
(70)
(94)
620
11.5%
71
71
91
–
91
10
10
The following are the joint ventures in which the Group has an interest, including those which are immaterial:
Joint venture
Darwin LNG Pty Ltd
Easternwell Drilling Services Holdings Pty Ltd
GLNG Operations Pty Ltd
GLNG Property Pty Ltd
Lohengrin Pty Ltd
(c) Income from all joint ventures
A reconciliation of the Group’s total income from all joint ventures:
Share of Darwin LNG Pty Ltd net profits
Total share of net profits
2016
% interest
2015
% interest
11.5
–
30.0
30.0
50.0
11.5
50.0
30.0
30.0
50.0
2016
US$million
10
10
(Restated)
2015
US$million
10
10
At 31 December 2016 the Group reassessed the carrying amount of its investments in joint ventures for indicators of
impairment. As a result, no impairment was recorded (2015: nil).
100 / Santos Annual Report 2016
Financial Report
6.4 PARENT ENTITY DISCLOSURES
Selected financial information of the ultimate parent entity in the Group, Santos Limited, is as follows:
Net profit/(loss) for the period
Total comprehensive income/(loss)
Current assets
Total assets
Current liabilities
Total liabilities
Issued capital
Reserves
Accumulated losses
Total equity
2016
US$million
(Restated)
2015
US$million
42
43
414
9,757
529
3,389
8,883
(766)
(1,750)
6,367
(2,519)
(2,514)
963
9,290
1,351
3,619
8,119
(899)
(1,549)
5,671
Commitments of the parent entity
The parent entity’s capital expenditure commitments and minimum exploration
commitments are:
Capital expenditure commitments
Minimum exploration commitments
42
27
75
18
Guarantees entered into by the parent entity in relation to the debts of its subsidiaries
All interest-bearing loans and borrowings, as disclosed in note 5.1, with the exception of the finance leases and secured bank loans, are
arranged through Santos Finance Ltd, which is a wholly-owned subsidiary of Santos Limited. All interest-bearing loans and borrowings of
Santos Finance Ltd are guaranteed by Santos Limited.
Contingent liabilities of the parent entity
Contingent liabilities arise in the ordinary course of business through claims against Santos Limited, including contractual, third-party and
contractor claims. In most instances it is not possible to reasonably predict the outcome of these claims, and as at reporting date Santos
Limited believes that the aggregate of such claims will not materially impact the Company’s financial report.
Santos Annual Report 2016 / 101
Notes to the Consolidated Financial Statements
Section 6: Group Structure
6.5 DEED OF CROSS GUARANTEE
As a condition of the Instrument, the Company and each of the wholly-owned subsidiaries identified in note 6.1 (refer footnote 1)
(collectively, “the Closed Group”) have entered into a Deed of Cross Guarantee (“the Deed”). The effect of the Deed is that the
Company has guaranteed to pay any deficiency in the event of winding up of any of the subsidiaries under certain provisions of the
Corporations Act 2001. The subsidiaries have also given a similar guarantee in the event that the Company is wound up.
Pursuant to ASIC Corporations (wholly-owned companies) Instrument 2016/785, the wholly-owned subsidiaries within the Closed
Group are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of their financial reports.
Set out below is a consolidated income statement, consolidated statement of comprehensive income and summary of movements in
consolidated retained earnings for the year ended 31 December 2016 of the Closed Group.
2016
US$million
(Restated)
2015
US$million
Consolidated income statement
Product sales
Cost of sales
Gross profit
Other revenue
Other income
Other expenses
Impairment of non-current assets
Interest income
Finance costs
Profit/(loss) before tax
Income tax (expense)/benefit
Royalty-related tax (expense)/benefit
Total tax (expense)/benefit
Net profit/(loss) for the period
Consolidated statement of comprehensive income
Net profit/(loss) for the period
Other comprehensive income, net of tax:
Net actuarial gain on defined benefit plan
Total comprehensive profit/(loss)
Summary of movements in the Closed Group’s retained earnings:
Retained earnings at 1 January
Add opening retained earnings of companies added during the period
Transfer to accumulated profits reserve
Net profit/(loss) for the period
Net actuarial gain on defined benefit plan
Dividends to shareholders
Share-based payment transactions
Accumulated losses at 31 December
102 / Santos Annual Report 2016
1,147
(1,008)
139
369
98
(126)
(306)
9
(5)
178
(45)
(15)
(60)
118
118
1
119
(2,133)
6
(258)
118
1
–
10
(2,256)
1,193
(1,103)
90
311
11
(231)
(3,791)
4
(41)
(3,647)
638
18
656
(2,991)
(2,991)
3
(2,988)
1,178
–
(121)
(2,991)
3
(219)
17
(2,133)
Financial Report
6.5 DEED OF CROSS GUARANTEE (CONTINUED)
Set out below is a consolidated statement of financial position as at 31 December 2016 of the Closed Group:
2016
US$million
(Restated)
2015
US$million
Current assets
Cash and cash equivalents
Trade and other receivables
Other current assets
Total current assets
Non-current assets
Other financial assets
Exploration and evaluation assets
Oil and gas assets
Other non-current assets
Total non-current assets
Total assets
Current liabilities
Trade and other payables
Other current liabilities
Total current liabilities
Non-current liabilities
Interest-bearing loans and borrowings
Provisions
Other non-current liabilities
Total non-current liabilities
Total liabilities
Net assets
Equity
Issued capital
Reserves
Accumulated losses
Total equity
130
1,665
268
2,063
7,316
143
1,891
1,064
10,414
12,477
1,339
154
1,493
4,053
1,041
86
5,180
6,673
5,804
8,883
(823)
(2,256)
5,804
683
1,398
134
2,215
6,093
125
2,160
1,432
9,810
12,025
1,286
749
2,035
3,593
1,293
134
5,020
7,055
4,970
8,119
(1,016)
(2,133)
4,970
Santos Annual Report 2016 / 103
Notes to the Consolidated Financial Statements
Section 7: People
This section includes information relating to the various programs the Group uses to reward and recognise employees and key
management personnel. It includes details of our employee benefits and share-based payment schemes.
7.1 EMPLOYEE BENEFITS
Wages, salaries and sick leave
Liabilities for wages and salaries, including non-monetary benefits that are expected to be settled within 12 months of the reporting
date, are recognised in respect of employee service 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.
Long-term service benefits
Liabilities for long service leave and annual leave that is not expected to be taken within 12 months of the respective service being
provided, are recognised and measured at the present value of the estimated future cash outflows to be made in respect of employee
service up to the reporting date.
Defined benefit plan
The Group’s net obligation in respect of the defined benefit superannuation plan is calculated by estimating the discounted amount of
future benefit that employees have earned in relation to their service in the current and prior periods and deducting the fair value of any
plan assets.
Actuarial gains or losses that arise in calculating the Group’s obligation in respect of the plan are recognised directly in retained earnings.
Defined benefit members of the Santos Superannuation Plan receive a lump sum benefit on retirement, death, disablement and
withdrawal. The defined benefit section of the plan is closed to new employees. All new employees receive accumulation-only benefits.
During the period, an expense of $2 million (2015: $1 million) was recorded in relation to the defined benefit plan.
The Group expects to contribute $2 million to the defined benefit superannuation plan in 2017 (2016: $1 million).
Defined contribution plans
The Group makes contributions to several defined contribution superannuation plans. Obligations for contributions are recognised as an
expense in the income statement as incurred. The amount incurred during the year was $12 million (2015: $11 million).
The following amounts are recognised on the Group’s balance sheet in relation to employee benefits:
2016
US$million
(Restated)
2015
US$million
5
45
10
3
13
58
8
60
10
–
10
70
Non-current assets
Defined benefit surplus
Current provisions
Employee benefits
Non-current provisions
Employee benefits
Defined benefit obligations
Total non-current provisions
Total employee benefits provisions
104 / Santos Annual Report 2016
Financial Report
7.2 SHARE-BASED PAYMENT PLANS
The Group provides benefits to employees of the Group through share-based incentives. Employees are paid for their services or
incentivised for their performance in part through shares or rights over shares.
There are two main share-based payment plans: equity-settled share-based payment plans and cash-settled share-based payment
plans. The equity-settled plans consist of the general employee share-based payment plans and Executive Long-Term Incentive share-
based payment plans.
The amounts recognised in the financial statements of the Group during the financial year in relation to shares issued under the share
plans are summarised as follows:
Statement of financial position:
General employee share plans – ShareMatch Plan
Issued capital:
General employee share plans:
Share1000 Plan
ShareMatch Plan (matched Share Acquisition Rights (“SARs”))
Retained earnings:
General employee share plans – matched SARs
Executive Long-Term Incentive share-based payment plans – equity-settled
2012–2015 Four-year CEO Strategy Grant
2013–2015 Three-year Executive Strategy Grant
Employee expenses:
General employee share plans:
Share1000 Plan
ShareMatch Plan (matched SARs)
Executive Long-Term Incentive share-based payment plans – equity-settled
2012–2015 Four-year CEO Strategy Grant
2013–2015 Three-year Executive Strategy Grant
Total equity
2016
US$000
(Restated)
2015
US$000
2,622
2,622
1,007
2,622
3,629
3,604
6,392
–
–
9,996
(1,007)
(3,604)
(6,392)
–
–
(11,003)
2,622
4,583
4,583
917
4,583
5,500
4,337
11,797
(134)
73
16,073
(917)
(4,337)
(11,797)
134
(73)
(16,990)
4,583
Santos Annual Report 2016 / 105
Notes to the Consolidated Financial Statements
Section 7: People
7.2 SHARE-BASED PAYMENT PLANS (CONTINUED)
(a) Equity-settled share-based payment plans
The cost of equity-settled transactions is determined by the fair value at the grant date using an appropriate valuation model.
The cost is recognised, together with a corresponding increase in other capital reserves in equity, over the period in which the
performance and/or service conditions are met. Currently, the Company has four equity-settled share-based payment plans in
operation, the details of which are as follows:
i. General employee share plans
Santos operates two general employee share plans, the Share1000 Plan and the ShareMatch Plan. Eligible employees
have the option to participate in either the Share1000 Plan or the ShareMatch Plan. Members of the ExCom, Directors
of the Company, casual employees, employees on fixed-term contracts and employees on international assignment are
excluded from participating in the Share1000 Plan and the ShareMatch Plan.
Share1000
ShareMatch
What is it?
The Share1000 Plan provides for grants
of fully paid ordinary shares up to a value
determined by the Board, which in 2016 was
A$1,000 per employee (2015: A$1,000).
The employee’s
ownership and right
to deal with them
Subject to restrictions until the earlier of the
expiration of the three-year restriction period
and the time when the employee ceases to be
in employment.
How is the fair value
recognised?
The fair value of these shares is recognised
as an employee expense with a corresponding
increase in issued capital, and the fair value
per share is determined by the Volume
Weighted Average Price (“VWAP”) of ordinary
Santos shares on the ASX during the week
up to and including the date of issue of the
shares.
The ShareMatch Plan allows for the purchase
of shares through salary sacrificing up to
A$5,000 over a maximum 12-month period,
and to receive matched SARs at a 1:1 ratio or
as otherwise set by the Board.
Upon vesting, subject to restrictions until
the earlier of the expiration of the restriction
period (which will be three, five or seven years
from the date of the offer, depending on any
election made by the employee) and the time
when he or she ceases to be an employee.
The fair value of the shares is recognised
as an increase in issued capital and a
corresponding increase in loans receivable.
The fair value per share is determined by the
VWAP of ordinary Santos shares on the ASX
during the week up to and including the date
of issue of the shares.
The fair value of services required in return
for matched SARs granted is measured by
reference to the fair value of matched SARs
granted. The estimate of the fair value of the
services received is measured by discounting
the share price on the grant date using the
assumed dividend yield and recognised as
an employee expense for the term of the
matched SARs.
The following shares were issued pursuant to the employee share plans during the period:
Share1000 Plan
ShareMatch Plan
Issued
shares
No.
Fair value
per share
A$
297,036
180,040
4.44
7.14
Issued
shares
No.
719,764
890,889
Fair value
per share
A$
4.44
7.14
Year
Issue date
2016 1 Sep 2016
2015 28 Jul 2015
106 / Santos Annual Report 2016
Financial Report
7.2 SHARE-BASED PAYMENT PLANS (CONTINUED)
i. General employee share plans (continued)
The number of SARs outstanding, and movements throughout the financial year are:
Year
2016 Total
2015 Total
Beginning of
the year
No.
Granted
No.
Lapsed
No.
Vested
No.
End of
the year
No.
1,600,103
719,764
(75,118)
(578,818)
1,665,931
1,361,730
890,889
(56,025)
(596,491)
1,600,103
The inputs used in the valuation of the SARs are as follows:
Matched SARs grant
Share price on grant date (A$)
Exercise price (A$)
Right life (weighted average, years)
Expected dividends (% p.a.)
Fair value at grant date (A$)
2016
4.44
Nil
3
2.25
4.15
The loan arrangements relating to the ShareMatch Plan are as follows:
During the year the Company issued $3 million (2015: $5 million) of share capital under the ShareMatch Plan, with
$4 million (2015: $5 million) received from employees under loan arrangements. The movements in loans receivable
from employees are:
Employee loans at 1 January
Ordinary share capital issued during the year
Cash received during the year
Foreign exchange movement
Employee loans at 31 December
2016
US$000
2,695
2,622
(3,942)
(25)
1,350
(Restated)
2015
US$000
2,954
4,583
(4,759)
(83)
2,695
ii. Executive Long-Term Incentive share-based payment plans
The Company’s Executive Long-term Incentive program (“LTI Program”) provides for eligible executives selected by
the Board to receive SARs upon the satisfaction of set market and non-market performance conditions. Each SAR is a
conditional entitlement to a fully paid ordinary share, subject to the satisfaction of performance or service conditions,
on terms and conditions determined by the Board. The Board has the discretion to cash-settle SARs granted under the
amended Santos Employee Equity Incentive Plan.
The fair value of SARs 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 performance-based SARs granted is measured using a Monte Carlo simulation method,
taking into account the terms and market conditions upon which the SARs were granted. The fair value of the deferred
based SARs granted is measured by discounting the share price on the grant date using the assumed dividend yield for
the term of the SAR. The amount recognised as an expense is only adjusted when SARs do not vest due to non-market-
related conditions.
The 2016 LTI Program offers consisted only of SARs. Performance Awards were granted to eligible executives in 2016
who were granted one four-year grant (1 January 2016 – 31 December 2019).
In each of the grants 25% of the SARs are subject to Santos’ Total Shareholder Return (“TSR”) relative to the
performance of the ASX 100 companies (“ASX 100 comparator group”), 25% are subject to Santos’ TSR relative to the
performance of the Standard & Poor’s Global 1200 Energy Index companies (“S&P GEI comparator group”), 25% are
subject to Santos’ Free Cash Flow Breakeven Point (“FCFBP”) relative to internal targets, and 25% are subject to Santos’
Return on Average Capital Employed (“ROACE”) relative to internal targets, measured at the end of the performance
period.
Santos Annual Report 2016 / 107
Notes to the Consolidated Financial Statements
Section 7: People
7.2 SHARE-BASED PAYMENT PLANS (CONTINUED)
ii. Executive Long-Term Incentive share-based payment plans (continued)
The numbers of SARs outstanding at the end of, and movements throughout, the financial year are:
Year
2016 total
2015 total
Beginning of
the year
No.
Granted
No.
Lapsed
No.
Vested
No.
End of
the year
No.
7,650,098
4,799,922
(3,047,376)
–
9,402,644
6,631,253
3,158,016
(2,124,044)
(15,127)
7,650,098
The SARs granted during 2016 totalling 4,799,922 were issued across the following four tranches, each with varying
valuations:
2016
Performance awards
N1
N2
N3
N4
Performance index
Fair value at grant date (A$)
Share price on grant date (A$)
Exercise price (A$)
Expected volatility (weighted average, % p.a.)
Right life (weighted average, years)
Expected dividends (% p.a.)
Risk-free interest rate (% p.a.)
Total granted (No.)
ASX 100
3.18
4.54
nil
42
4
2.2
1.6
1,199,981
S&P GEI
3.20
4.54
nil
42
4
2.2
1.6
1,199,981
FCFBP
4.21
4.54
nil
42
4
2.2
1.6
1,199,980
ROACE
4.21
4.54
nil
42
4
2.2
1.6
1,199,980
The above table includes the valuation assumptions used for Performance Awards SARs granted during the current year.
The expected vesting period of the SARs is based on historical data and current expectations and is not necessarily
indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility
over a period similar to the life of the SARs is indicative of future trends, which may not necessarily be the actual
outcome.
Vesting of Performance Awards
All Performance Awards are subject to hurdles based on the Company’s TSR relative to both the ASX 100 and S&P GEI
comparator group over the performance period, as well as the Company’s FCFBP and ROACE at the end of the vesting
period. There is no re-testing of performance conditions. Each tranche of the Performance Awards granted during 2016
vests in accordance with the following vesting schedule, relative to the TSR conditions:
TSR percentile ranking
% of grant vesting
< 51st percentile
= 51st percentile
0%
50%
52nd to 75th percentile
Further 2.0% for each percentile over 51st
≥ 76th percentile
100%
Restriction period
Shares allocated on vesting of SARs granted in 2011 and 2012 may be subject to additional restrictions on dealing for
five or seven years after the original grant date, depending on whether the executive elected to extend the trading
restrictions period beyond the vesting date. Shares allocated on the vesting of SARs that were granted prior to 2012
will be subject to further restrictions on dealing for a maximum of 10 years after the original grant date. No amount is
payable on grant or vesting of the SARs.
108 / Santos Annual Report 2016
Financial Report
7.2 SHARE-BASED PAYMENT PLANS (CONTINUED)
iii. Executive sign-on grants
a. On 11 February 2016 the Company issued 333,822 SARs split across two tranches, as follows:
•
•
50% (166,911) are subject to a 12-month continuous service condition starting on 1 February 2016 and ending
on 31 January 2017. If this service condition is satisfied, the SARs will vest on 1 February 2017; and
50% (166,911) are subject to a 24-month continuous service condition starting on 1 February 2016 and ending
on 31 January 2018. If this service condition is satisfied, the SARs will vest on 1 February 2018.
The share price on the grant date was A$3.05 and the fair values were A$2.95 (12-month term) and A$2.86
(24-month term) after applying a 3.3% dividend yield assumption to the valuation.
b.
On 11 July 2016 the Company issued 42,585 SARs subject to a 24-month continuous service condition starting on 1
May 2016 and ending on 30 April 2018. If this service condition is satisfied, the SARs will vest on 1 February 2018.
The share price on the grant date was A$4.80 and the fair value was A$4.61 after applying a 2.2% dividend yield
assumption to the valuation.
c.
On 1 December 2016 the Company issued 23,777 SARs subject to a 12-month continuous service condition starting
on 1 December 2016 and ending on 30 November 2017. If this service condition is satisfied, the SARs will vest on 1
December 2017.
The share price on grant date was A$4.39 and the fair value was A$4.29 after applying a 2.2% dividend yield
assumption to the valuation.
iv. Executive Deferred Short-Term Incentives (“STIs”)
Deferred STIs represent a proportion of the total executive STI of the applicable year that has been deferred in to shares.
The deferred shares are subject to a 24-month continuous service period following the year to which the STI related. The
number of Deferred STIs outstanding at the end of, and movements throughout, the financial year are:
Beginning of
the year
No.
Granted
No.
Lapsed
No.
Vested
No.
End of
the year
No.
2016 Total
2015 Total
154,409
308,163
–
154,409
–
–
154,409
308,163
–
154,409
On 11 May 2016 the Company issued 308,163 deferred shares to eligible executives. The share price on the grant date was
A$4.06 and the fair value was A$3.89 after applying a 2.2% dividend yield assumption to the valuation.
(b) Options
The Company has not granted options over unissued shares under the Executive Long-Term Incentive share-based payment plans
since 2009. The information as set out below relates to options issued under the Executive Long-Term Incentive share-based
payment plans in 2009 and earlier that have vested in prior years:
Beginning of
the year
No.
Lapsed
No.
Exercised
No.
End of
the year
No.
Exercisable
at end of
the year
No.
2016
Vested in prior years
3,922,588
(2,763,300)
Weighted average exercise price (A$)
12.38
11.28
2015
Vested in prior years
3,992,038
(69,450)
Weighted average exercise price (A$)
12.31
8.46
–
–
–
–
1,159,288
1,159,288
15.01
15.01
3,922,588
3,922,588
12.38
12.38
Santos Annual Report 2016 / 109
Notes to the Consolidated Financial Statements
Section 7: People
7.2 SHARE-BASED PAYMENT PLANS (CONTINUED)
(c) Cash-settled share-based payment plans
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 benefits. 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 a Monte Carlo
simulation method.
7.3 KEY MANAGEMENT PERSONNEL DISCLOSURES
(a) Key management personnel compensation
Short-term employee benefits
Post-employment benefits
Other long-term benefits
Termination benefits
Share-based payments
2016
US$000
6,444
194
29
836
2,631
10,134
(Restated)
2015
US$000
5,415
181
47
1,754
3,324
10,721
(b) Loans to key management personnel
There have been no loans made, guaranteed or secured, directly or indirectly, by the Group or any of its subsidiaries at any time
throughout the year to any key management person, including their related parties.
110 / Santos Annual Report 2016
Financial Report
Notes to the Consolidated Financial Statements
Section 8: Other
This section provides information that is not directly related to the specific line items in the financial statements, including
information about contingent liabilities, events after the end of the reporting period, the Group’s commitment to the removal
of the shareholder cap, remuneration of auditors and changes to accounting policies and disclosures.
8.1 CONTINGENT LIABILITIES
Contingent liabilities arise in the ordinary course of business through claims against the Group, including contractual, third-party and
contractor claims. In most instances it is not possible to reasonably predict the outcome of these claims, and as at reporting date the
Group believes that the aggregate of such claims will not materially impact the Group's financial report.
8.2 EVENTS AFTER THE END OF THE REPORTING PERIOD
On 6 February 2017 Santos completed the Share Purchase Plan, as announced during December 2016, with total proceeds of
approximately A$201 million received.
On 16 February 2017, the Directors of Santos Limited resolved not to pay a final dividend in respect of the 2016 financial year.
8.3 COMMITMENT ON REMOVAL OF SHAREHOLDER CAP
Pursuant to a Deed of Undertaking to the Premier of South Australia dated 16 October 2007 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 Benefits Program specified in the Deed
totalling A$60 million over a 10-year period from the date the legislation was enacted. As at 31 December 2016, approximately
A$3.5 million (2015: A$6 million) remains to be paid over the remainder of the 10-year period through to 29 November 2017; and
continue to maintain the South Australian Cooper Basin asset’s Head Office and Operational Headquarters together with other
roles in South Australia for 10 years subsequent to the date the legislation was enacted. At 31 December 2016, if this condition
had not been met, the Company would have been liable to pay a maximum of A$50 million (2015: A$50 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 has an
adverse discriminatory effect in their application to the Company relative to other companies domiciled in South Australia.
Santos Annual Report 2016 / 111
Notes to the Consolidated Financial Statements
Section 8: Other
8.4 REMUNERATION OF AUDITORS
The auditor of Santos Limited is Ernst & Young.
(a) Audit and review services
Amounts received or due and receivable for an audit or review of the financial report of the entity and any other entity in the
Group by:
Ernst & Young (Australia)
Overseas network firms of Ernst & Young (Australia)
2016
US$000
1,070
150
1,220
(b) Other services
Amounts received or due and receivable for other services in relation to the entity and any other entity in the Group by:
Ernst & Young (Australia) for other assurance services
Ernst & Young (Australia) for taxation and other services
Overseas network firms of Ernst & Young (Australia) for taxation services
2016
US$000
360
2
14
376
(Restated)
2015
US$000
1,102
168
1,270
(Restated)
2015
US$000
381
48
15
444
8.5 ACCOUNTING POLICIES
Changes in accounting policies and disclosures
The Group applied a number of amendments to accounting standards applicable for the first time for the financial year beginning
1 January 2016.
The amendments below did not impact the consolidated financial statements and disclosures of the Group:
•
AASB 2014-3 Amendments to Australian Accounting Standards – Accounting for acquisitions of Interests in Joint Operations
(AASB 1 & AASB 11); and
•
AASB 2015-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 101.
In addition, several other standard amendments and interpretations were applicable for the first time in 2016, but were not relevant
to the Company and do not impact the Group’s annual consolidated financial statements or half-year condensed financial statements.
New standards and interpretations not yet adopted
The Group has not elected to apply any pronouncements before their effective date for the annual reporting period ended
31 December 2016.
112 / Santos Annual Report 2016
Financial Report
8.5 ACCOUNTING POLICIES (CONTINUED)
New standards and interpretations not yet adopted (continued)
A number of new standards, amendments to standards and interpretations are effective for annual periods beginning on or after
1 January 2017, and have not been applied in preparing these consolidated financial statements. The Group’s assessment of the
impact of these new standards, amendments to standards and interpretations are set out below:
Reference
Description
AASB 9 Financial
Instruments
AASB 9 as issued replaces AASB 139 and includes a logical model
for classification, measurement and derecognition of financial
assets, a single, forward-looking “expected loss” impairment model
and a substantially reformed approach to hedge accounting. The
main changes to the classification and measurement of financial
assets and liabilities are:
•
•
•
Financial assets that are debt instruments will be
classified based on: (1) the objective of the entity's
business model for managing the financial assets;
and (2) the characteristics of the contractual cash flows.
Irrevocable election are allowed on initial recognition to
present gains and losses on investments in equity
instruments that are not held-for-trading in other
comprehensive income. Dividends in respect of these
investments that are a return on investment can be
recognised in profit or loss and there is no impairment
or recycling on disposal of the instrument.
Financial assets can be designated and measured at fair
value through profit or loss at initial recognition if doing
so eliminates or significantly reduces a measurement or
recognition inconsistency that would arise from
measuring assets or liabilities, or recognising the gains
and losses on them, on different bases.
• Where the fair value option is used for financial liabilities,
the change attributable to changes in credit risk is
presented in other comprehensive income, and the
remaining change is presented in profit or loss.
AASB 15 as issued replaces AASB 111, AASB 118 and related IFRIC
Interpretations. The core principle of AASB 15 is that an entity
recognises revenue in accordance with the transfer of promised
goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled
in exchange for those goods or services. An entity recognises
revenue in accordance with that core principle by applying the
following steps:
Step 1: Identify the contract(s) with a customer
Step 2: Identify the performance obligations in
the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance
obligations in the contract
Step 5: Recognise revenue when (or as) the entity
satisfies a performance obligation.
AASB 15 Revenue
from Contracts
with Customers
Application of
standard
Impact on Group
financial report
Effective
1 January 2018,
however the
Group intends
adopting from
1 January 2017
(retrospective
application).
1 January 2018
The impact of
adoption is not
expected to be
material. The
most significant
change will be the
classification of
fair value gains/
losses on financial
instruments
resulting from
changes in
Santos’ credit
risk being
recorded in other
comprehensive
income (rather
than the income
statement), which
in 2016 totalled
$39 million (2015:
$14 million).
Impact is currently
being assessed.
It is expected
the key impacts
will relate to:
accounting
for production
imbalances and
consideration of
the entitlements
method versus
sales method;
take-or-pay
contracts;
gas balance
arrangements;
and provisional
pricing.
Santos Annual Report 2016 / 113
Notes to the Consolidated Financial Statements
Section 8: Other
8.5 ACCOUNTING POLICIES (CONTINUED)
Reference
Description
Application of
standard
Impact on Group
financial report
Impact yet to
be assessed.
AASB 16 Leases
The key features of AASB 16 are as follows:
1 January 2019
Lessee accounting
•
•
•
Lessees are required to recognise assets and liabilities
for all leases with a term of more than 12 months,
unless the underlying asset is of low value.
A lessee measures right-of-use assets similarly to
other non-financial assets and lease liabilities similarly
to other financial liabilities.
Assets and liabilities arising from a lease are initially
measured on a present value basis. The measurement
includes non-cancellable lease payments (including
inflation-linked payments), and also includes
payments to be made in optional periods if the lessee
is reasonably certain to exercise an option to extend
the lease, or not to exercise an option to terminate
the lease.
•
AASB 16 contains disclosure requirements for lessees.
Lessor accounting
•
•
AASB 16 substantially carries forward the lessor
accounting requirements in AASB 117. Accordingly, a
lessor continues to classify its leases as operating
leases or finance leases, and to account for those
two types of leases differently.
AASB 16 also requires enhanced disclosures to be
provided by lessors that will improve information
disclosed about a lessor’s risk exposure, particularly
to residual value risk.
Several other amendments to standards and interpretations will apply on or after 1 January 2017, and have not yet been applied,
however they are not expected to impact the Group’s annual consolidated financial statements or half-year condensed consolidated
financial statements.
114 / Santos Annual Report 2016
Financial Report
Directors’ Declaration
for the year ended 31 December 2016
In accordance with a resolution of the Directors of Santos Limited (“the Company”), we state that:
1.
In the opinion of the Directors:
(a)
the financial statements and notes of the consolidated entity are in accordance with the Corporations Act 2001 (Cth),
including:
(i)
giving a true and fair view of the consolidated entity’s financial position as at 31 December 2016 and of its performance
for the year ended on that date; and
(ii) complying with Accounting Standards and the Corporations Regulations 2001 (Cth); and
(b) the financial statements and notes comply with International Financial Reporting Standards as disclosed in note 1.1; and
(c)
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.
3.
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 (Cth) for the financial year ended 31 December 2016.
As at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identified in
note 6.5 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 ASIC Corporations (Wholly owned
Companies) Instrument 2016/785.
Dated this 16th day of February 2017
On behalf of the Board:
Director
Santos Annual Report 2016 / 115
Independent Auditor’s Report
to the members of Santos Limited
To the Shareholders of Santos Limited
Report on the Audit of the Financial Report
Opinion
We have audited the financial report of Santos Limited (the Company), including its subsidiaries (the Group), which comprises the
consolidated statement of financial position as at 31 December 2016, the consolidated income statement, the consolidated statement of
comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then
ended, notes comprising a summary of significant accounting policies and other explanatory information and the Directors’ Declaration.
In our opinion:
the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including:
(i)
giving a true and fair view of the Group’s consolidated financial position as at 31 December 2016 and of its consolidated financial
performance for the year ended on that date; and
(ii)
complying with Australian Accounting Standards and the Corporations Regulations 2001.
Basis for Opinion
We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further
described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group
in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards
Board’s APES110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in
Australia; and we have fulfilled our other ethical responsibilities in accordance with the Code.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of
the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion
thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed
the matter is provided in that context.
We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our
report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to
our assessment of the risks of material misstatement of the financial statements. The results of our audit procedures, including the
procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report.
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
116 / Santos Annual Report 2016
Financial Report 1. Recovery of carrying value of oil and gas assets
Why significant
How our audit addressed the key audit matter
Under Australian Accounting Standards, an
entity shall assess throughout the reporting
period whether there is any indication that
an asset may be impaired, or that reversal
of a previously recognised impairment may
be required. If any such indication exists,
an entity shall estimate the recoverable
amount of the asset. Impairment indicators
were present at 31 December 2016 and
impairment testing was undertaken. The
principal indicators of impairment were the
ongoing low oil price and deficit between the
net assets and market capitalisation of the
Company.
The impairment testing process is complex
and highly judgemental and is based on
assumptions and estimates that are affected
by expected future performance and market
conditions. Key assumptions, judgements
and estimates used in the formulation of
the consolidated entity’s impairment of
exploration and evaluation assets and oil and
gas assets are set out in the financial report
in note 3.3.
At 31 December 2016, the consolidated
entity has recognised a net impairment
expense totalling US$1.6 billion pertaining to
exploration and evaluation assets and oil and
gas assets. Refer to note 3.3 in the financial
report.
2. Funding and liquidity
In obtaining sufficient audit evidence we evaluated the assumptions and
methodologies used by the consolidated entity and the estimates made. In particular
we considered those estimates and judgements relating to the determination of cash
generating units (CGU’s), the forecast cash flows and the inputs used to formulate
those cash flows, such as discount rates, reserves and resources, inflation rates,
operating costs, foreign exchange rates and commodity prices.
We involved our business modelling and valuation specialists to assist in the
impairment assessment for the audit. Our audit procedures were undertaken across
all material CGUs.
Specifically, we evaluated the discounted cash flow models and other data supporting
the consolidated entity’s assessment. In doing so, we:
•
•
•
•
understood future production profiles compared to reserves and resources, as
outlined in key audit matter 4, current sanctioned budgets and historical
operations;
evaluated commodity prices with reference to contractual arrangements, market
prices (where available), broker consensus, analyst views and historical
performance;
evaluated discount rates and foreign exchange rates with reference to market
prices (where available), market research, market practice, market indices, broker
consensus and historical performance;
compared future operating and development expenditure to current sanctioned
budgets, historical expenditure and ensured variations were in accordance with
our expectations based upon other information obtained throughout the audit;
and
•
tested the mathematical accuracy of the discounted cash flow models.
We also considered the adequacy of the financial report disclosures regarding
impairment and the recoverable amount of the consolidated entity’s assets.
Why significant
How our audit addressed the key audit matter
While the consolidated entity had cash at
bank at 31 December 2016 of US$2.0 billion,
the consolidated entity’s interest-bearing
loans and borrowings at 31 December 2016
were US$5.3 billion. The consolidated entity
has debt repayments due in the next 2 years,
as outlined in note 5.5 of the financial report.
We evaluated the consolidated entity’s funding and liquidity position at 31 December
2016 and the ability of the consolidated entity to repay its debts as and when they
fall due for a minimum of 12 months from the date of signing the financial report. We
took specific note of the equity raise completed on 15 December 2016 raising A$1
billion.
In order to assess the funding and liquidity position, we:
•
•
•
•
understood the process undertaken to determine the appropriateness of the use
of the going concern basis;
understood the funding plan for the consolidated entity;
obtained external confirmation of the consolidated entity’s cash, short-term
deposits and debt;
assessed the debt covenant compliance calculations performed by the
consolidated entity; and
•
assessed the classification and disclosure of debt.
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
Santos Annual Report 2016 / 117
Independent Auditor’s Report
to the members of Santos Limited (continued)
3. Accounting for deferred tax and uncertain tax positions
Why significant
How our audit addressed the key audit matter
The financial report of the consolidated entity
includes deferred tax assets arising from
Petroleum Resources Rent Tax (PRRT), as
well as Income Taxes. The determination of
the quantum, likelihood and timing of the
realisation of deferred tax assets arising
from PRRT and Income Taxes is highly
judgemental, due to the interpretation of
PRRT and income tax legislation, as well
as the estimation of future taxable profits.
The consolidated entity recognised a net
deferred tax asset of US$0.8 billion at
31 December 2016 in respect of corporate
income tax, which is disclosed in note 2.4
of the financial report.
We assessed the consolidated entity’s determination of tax payable now and in
the future. We involved our taxation specialists to assist in this assessment of the
determination of the tax bases.
We considered the consolidated entity’s methodologies, assumptions and estimates
in relation to the calculation of current taxes and the likelihood of generating
future taxable profits to support the recognition of deferred tax assets. We made
reference to forecasts of taxable profits and consistency of these forecasts with the
consolidated entity’s budgets approved by the Board and those used in impairment
modelling.
We evaluated the assessment of uncertain tax positions through enquiries with
the consolidated entity’s taxation department, reviewed correspondence with local
tax authorities and involved our tax specialists, where appropriate, to assess the
associated provisions and disclosures.
We assessed the consolidated entity’s disclosures about PRRT and Income Taxes
which are included in the summary of significant accounting policies in note 2.4.
4. Estimation of oil and gas reserves and resources
Why significant
How our audit addressed the key audit matter
Estimation of oil and gas reserves and
resources is conducted by specialist
engineers, requiring significant judgement
and the use of a number of assumptions,
particularly those disclosed in note 3.2, by
the consolidated entity. These estimates can
have a material impact on the financial report,
primarily in the following areas:
•
•
•
•
capitalisation and classification of
expenditure as exploration and
evaluation (E&E) assets (refer note 3.1),
or oil and gas (O&G) assets (note 3.2);
valuation of assets and impairment
testing (note 3.3);
calculation of depreciation, depletion and
amortisation (DD&A) of assets (note
3.2); and
the calculation of decommissioning and
restoration provisions (note 3.4).
Our audit procedures focused on the work of the consolidated entity’s experts,
in accordance with ASA 620 Using the Work of an Auditor’s Expert (ASA 620).
In obtaining sufficient audit evidence, we:
•
•
•
•
•
assessed the competence and objectivity of both the consolidated entity’s
internal and external experts involved in the estimation process;
evaluated the adequacy of the expert’s work;
understood the consolidated entity’s reserves estimation process and controls;
assessed the design and operating effectiveness of key controls over the
reserves review process;
understood the reasons for reserve revisions or the absence of reserves revisions
where expected, and assessed changes in reserves or lack of changes in
reserves with other information that we obtained throughout the audit; and
•
reconciled to the applicable financial information.
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
118 / Santos Annual Report 2016
Financial Report 5. Decommissioning and restoration provisions
Why significant
How our audit addressed the key audit matter
The calculation of decommissioning and
restoration provisions is conducted by
specialist engineers and requires significant
judgement in respect of asset lives, timing
of restoration work being undertaken,
environmental legislative requirements, the
extent of restoration activities required and
estimation of future costs.
The judgements and estimation can have
a material impact on the financial report.
The consolidated entity has recognised
decommissioning and restoration provisions
of US$1.5 billion at 31 December 2016 which
are disclosed in note 3.4.
Our audit procedures focused on the work of the consolidated entity’s experts,
in accordance with ASA 620.
In obtaining sufficient audit evidence, we:
•
•
•
•
•
assessed the competence and objectivity of both the consolidated entity’s
internal and external experts involved in the estimation process;
evaluated the adequacy of the expert’s work;
understood the consolidated entity’s decommissioning and restoration estimation
processes;
tested the consistency in the application of principles and assumptions to other
areas of the audit such as reserves estimation and impairment testing;
tested the mathematical accuracy of the net present value calculations
and discount rate applied; and
•
reconciled the calculations to the financial report.
Information Other than the Financial Statements and Auditor’s Report
The Directors are responsible for the other information. The other information comprises the information in the Group’s Annual Report
for the year ended 31 December 2016, but does not include the financial report and the auditor’s report thereon.
Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion
thereon.
In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether
the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to
be materially misstated. If, based upon the work we have performed, we conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing to report in this regard.
Directors’ Responsibilities for the Financial Report
The Directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance
with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the Directors determine is
necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement,
whether due to fraud or error.
In preparing the financial report, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing,
as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to
liquidate the Group or cease operations, or have no realistic alternative but to do so.
Auditor’s Responsibilities for the Audit of the Financial Report
Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of
assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report.
As part of an audit in accordance with Australian Auditing Standards, we exercise professional judgement and maintain professional
scepticism throughout the audit. We also:
•
Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit
procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may
involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit 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 control.
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
Santos Annual Report 2016 / 119
Independent Auditor’s Report
to the members of Santos Limited (continued)
•
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures
made by the Directors.
• Conclude on the appropriateness of the Directors’ use of the going concern basis of accounting in the preparation of the financial
report. We also conclude, based on the audit evidence obtained, whether a material uncertainty exists related to events and
conditions that may cast significant doubt on the entity’s ability to continue as a going concern. If we conclude that a material
uncertainty exists, we are required to draw attention in the auditor’s report to the disclosures in the financial report about the
material uncertainty or, if such disclosures are inadequate, to modify the opinion on the financial report. However, future events
or conditions may cause an entity to cease to continue as a going concern.
•
Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the
consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group
to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit.
We remain solely responsible for our audit opinion.
We communicate with the Directors regarding, among other matters, the planned scope and timing of the audit and significant audit
findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide the Directors with a statement that we have complied with relevant ethical requirements regarding independence, and
to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where
applicable, related safeguards.
From the matters communicated to the Directors, we determine those matters that were of most significance in the audit of the
financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law
or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should
not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the
public interest benefits of such communication.
Report on the Remuneration Report
Opinion on the Remuneration Report
We have audited the Remuneration Report included in pages 31 to 49 of the Directors' Report for the year ended 31 December 2016.
In our opinion, the Remuneration Report of Santos Limited for the year ended 31 December 2016 complies with section 300A of the
Corporations Act 2001.
Responsibilities
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.
Ernst & Young
R J Curtin
Engagement Partner
Adelaide
16 February 2017
L A Carr
Engagement Partner
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
120 / Santos Annual Report 2016
Financial Report
Auditor’s Independence Declaration
to the Directors of Santos Limited
As lead auditor for the audit of Santos Limited for the financial year ended 31 December 2016, I declare to the best of my knowledge and
belief, there have been:
a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and
b) no contraventions of any applicable code of professional conduct in relation to the audit.
This declaration is in respect of Santos Limited and the entities it controlled during the financial year.
Ernst & Young
R J Curtin
Partner
Adelaide
16 February 2017
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
Santos Annual Report 2016 / 121
Securities Exchange
and Shareholder Information
Listed on the Australian Securities Exchange at 31 January 2017 were 2,032,086,651 fully paid ordinary shares. Unlisted were
12,500 partly paid Plan 0 shares, 12,500 partly paid Plan 2 shares, 228,039 restricted fully paid ordinary shares issued to eligible Senior
Executives pursuant to the Santos Employee Share Purchase Plan (SESPP), 10,979 fully paid ordinary shares issued pursuant to the
Non-executive Director Share Plan (NED Share Plan), 87,140 fully paid ordinary shares issued with further restrictions pursuant to the
ShareMatch Plan and 5,378 fully paid ordinary shares issued with further restrictions pursuant to the SESPP.
There were 148,853 holders of all classes of issued ordinary shares, including: 2 holders of Plan 0 shares: 2 holders of Plan 2 shares:
24 holders of restricted shares pursuant to the SESPP; 1 holder of NED Share Plan shares: 36 holders of ShareMatch shares with
further restrictions and 1 holder of SESPP shares with further restrictions. This compared with 162,013 holders of all classes of issued
ordinary shares a year earlier.
On 31 January 2017 there were also: 35 holders of 1,159,288 Options granted pursuant to the Santos Executive Share Option Plan:
80 holders of 9,802,828 Share Acquisition Rights pursuant to the SESPP and 1,242 holders of 1,657,620 Share Acquisition Rights
pursuant to the ShareMatch Plan.
The listed issued ordinary shares plus the ordinary shares issued pursuant to the SESPP, and the restricted shares issued pursuant to
the SESPP, ShareMatch Plan and NED Share Plan represent all of the voting power in Santos. The holdings of the 20 largest holders of
ordinary shares represent 64.43% of the total voting power in Santos (56.94% on 29 February 2016). The largest shareholders of fully
paid ordinary shares in Santos as shown in the Company’s Register of Members at 31 January 2017 were:
Name
HSBC Custody Nominees (Australia) Limited
Citicorp Nominees Pty Limited
JP Morgan Nominees Australia Limited
United Faith Ventures Limited
National Nominees Limited
BNP Paribas Nominees Pty Ltd
BNP Paribas Nominees Pty Ltd
BNP Paribas Noms Pty Ltd
AMP Life Limited
Argo Investments Limited
HSBC Custody Nominees (Australia) Limited
Citicorp Nominees Pty Limited
HSBC Custody Nominees (Australia) Limited – A/c 2
UBS Nominees Pty Ltd
RBC Investor Services Australia Nominees Pty Limited
Merrill Lynch (Australia) Nominees Pty Limited
HSBC Custody Nominees (Australia) Limited-GSCO ECA
Dynamic Supplies Investments Pty Ltd
RBC Investor Services Australia Nominees Pty Ltd
Bainpro Nominees Pty Limited
Total:
No. of Shares
412,120,228
260,795,613
223,729,440
140,189,820
118,915,116
44,675,737
19,257,000
14,356,090
11,427,593
11,326,884
11,066,981
7,179,188
6,939,796
5,439,059
5,312,953
3,943,881
3,583,702
3,091,868
2,990,901
2,988,680
1,309,330,530
%
20.28
12.83
11.01
6.90
5.85
2.20
0.95
0.71
0.56
0.56
0.54
0.35
0.34
0.27
0.26
0.19
0.18
0.15
0.15
0.15
64.4
122 / Santos Annual Report 2016
ANALYSIS OF SHARES – RANGE OF SHARES HELD
1–1,000
1,001–5,000
5,001–10,000
10,001–100,000
100,001 and over
Total
Less than a marketable parcel of $500
Fully paid
ordinary
shares
(holders) % of holders
% of shares
held
51,209
66,954
17,270
13,022
398
148,853
7,959
34.40
44.98
11.60
8.75
0.27
1.21
8.28
6.15
14.03
70.33
100.00
100.00
Substantial Shareholders as disclosed by notices received by the Company as at 16 February 2017:
Name
ENN Ecological Holdings Co Ltd
For Directors’ shareholdings see the Directors’ Report as set out on page 16 of this Annual Report.
VOTING RIGHTS
Number of voting
shares held
209,734,518
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.
Santos Annual Report 2016 / 123
Glossary
Aboriginal
Refers to both Aboriginal and Torres Strait
Islander people.
joules
Joules are the metric measurement unit for
energy.
oil
A mixture of liquid hydrocarbons of
different molecular weights.
barrel/bbl
The standard unit of measurement for all
oil and condensate production. One barrel =
159 litres or 35 imperial gallons.
A gigajoule (GJ) is equal to 1 joule × 109
A terajoule (TJ) is equal to 1 joule × 1012
A petajoule (PJ) is equal to 1 joule × 1015
boe
Barrels of oil equivalent.
the company
Santos Ltd and its subsidiaries.
condensate
A natural gas liquid that occurs in
association with natural gas and is mainly
composed of pentane and heavier
hydrocarbon fractions.
proven, probable plus possible reserves
contingent resources (2C)
Those quantities of hydrocarbons which are
estimated, on a given date, to be potentially
recoverable from known accumulations,
but which are not currently considered to
be commercially recoverable. Contingent
resources may be of a significant size, but
still have constraints to development.
These constraints, preventing the booking
of reserves, may relate to lack of gas
marketing arrangements or to technical,
environmental or political barriers.
crude oil
A general term for unrefined liquid
petroleum or hydrocarbons.
CSG
Coal seam gas. Predominantly methane
gas stored within coal deposits or seams.
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.
hydrocarbon
Compounds containing only the elements
hydrogen and carbon, which may exist as
solids, liquids or gases.
liquid hydrocarbons (liquids)
A sales product in liquid form; for example,
condensate and LPG.
LNG
Liquefied natural gas. Natural gas that has
been liquefied 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, calculated by the number
of hours worked. A lost-time injury is a
work-related injury or illness that results
in a persons disability, or time lost from
work of one day shift or more.
LPG
Liquefied petroleum gas. A mixture of
light hydrocarbons derived from oil-
bearing strata which is gaseous at normal
temperatures but which has been liquefied
by refrigeration or pressure to store or
transport it. Generally, LPG comprises
mainly propane and butane.
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
A work-related injury or illness, other than
a lost-time injury, that is serious enough to
require more than minor first aid treatment.
Santos classifies injuries that result in
modified duties as medical treatment
injuries.
mmbbl
million barrels
mmboe
million barrels of oil equivalent.
mtpa
million tonnes per annum
proven reserves (1P)
Reserves that, to a high degree of certainty
(90% confidence), are recoverable. There
is relatively little risk associated with these
reserves. Proven developed reserves
are reserves that can be recovered from
existing wells with existing infrastructure
and operating methods. Proven
undeveloped reserves require development.
proven plus probable reserves (2P)
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.
sales gas
Natural gas that has been processed by
gas plant facilities and meets the required
specifications under gas sales agreements.
Santos
Santos Limited and its subsidiaries.
seismic survey
Data used to gain an understanding
of rock formations beneath the earth’s
surface using reflected sound waves.
t
tonnes
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
1 barrel = 1 boe
Sales gas
1 petajoule = 171,937 boe
Condensate/
naphtha
1 barrel = 0.935 boe
LPG
1 tonne = 8.458 boe
For a comprehensive online conversion
calculator tool, visit the Santos website
at www.santos.com
124 / Santos Annual Report 2016
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