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From Deep Within the Png Highlands…

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From Deep Within the Png Highlands… FROM DEEP WITHIN THE PNG HIGHLANDS… OIL SEARCH LIMITED ANNUAL REPORT 2009 CONTENTS 2009 Highlights 8 Report From the Chairman 10 Report From the Managing Director 12 Financial Performance 18 PNG LNG Project 20 Gas Expansion 25 Operations 28 – Production – Exploration – Safety – Licence Interests 2009 Reserves and Resources 36 Our People 38 Sustainability 40 Corporate Governance 45 Directors’ Report 53 Financial Statements 76 Shareholder Information 115 … ENERGY WILL COME TO POWER THE MODERN WORLD… LIQUEFIED NATURAL GAS (LNG). In December 2009, the PNG LNG Project participants decided to proceed with the development of a world scale LNG project with gas sourced from the Highlands of PNG. When LNG sales commence in 2014, PNG will join an exclusive global energy club, becoming one of just 19 countries in the world with LNG production and export capability. Demand for LNG from the Asia Pacifi c region has grown on average by 5% per annum over the last decade. It is a clean and safe fuel used in industry, for electricity generation and in homes for heating and cooking. With carbon emissions from gas powered power generation approximately 45% lower than coal, LNG is expected to play an important and increasing role in satisfying global energy demands as countries seek to improve their carbon footprint. … THE MOST SIGNIFICANT DEVELOPMENT IN OUR 80 YEAR HISTORY… PERSEVERENCE. Gas was fi rst discovered in PNG in the 1960s when modern exploration drilling commenced. Recognising that there was signifi cant potential value in developing these vast gas reserves, in 1995 Oil Search and its partners commenced work on a proposal to pipe gas from the PNG Highlands to Australia. Over the next decade, world gas prices and the demand for LNG in the Asia Pacifi c region increased sharply. It became clear that an LNG development would capture signifi cant additional value and was by far the best way to commercialise PNG’s gas resources. Work commenced on the PNG LNG Project in early 2008. Milestones, including front end engineering design work, securing LNG markets and project fi nancing, have been progressively achieved. In less than two years, the Project has been sanctioned and construction has commenced. Oil Search’s patience and perseverance have fi nally paid off. … PNG LNG WILL BRING SUSTAINABLE BENEFITS… TRANSFORMATION. The PNG LNG Project will transform both Oil Search and PNG. Following the sanction decision, Oil Search has booked proven and probable reserves of 505 million barrels of oil equivalent (mmboe), increasing its reserves position seven-fold. When LNG sales reach plateau, approximately 18 mmboe will be added annually to the Company’s production, providing a large, steady cash fl ow stream for the next 30 years. The economic impact of the PNG LNG Project in PNG will be substantial, with the country’s Gross Domestic Product forecast to double and tax revenue expected to total over US$25 billion. The benefi ts will reach well beyond the direct investment in the country and the tax and equity returns to the PNG Government, as PNG will also gain from new labour and business development opportunities. With the impacts already starting to be felt, the PNG LNG Project will be a major contributor to the PNG economy for many years to come. … LNG IS THE FUTURE FOR OIL SEARCH AND THE PEOPLE OF PNG… LOOKING FORWARD. The construction of the PNG LNG Project infrastructure will establish an excellent platform for further LNG growth. Existing discovered gas resources in PNG, excluding those dedicated to PNG LNG, are estimated at 9.5 trillion cubic feet (tcf). Oil Search has interests in 4.6 tcf of these resources, 1.6 tcf on a net basis. Given the existing resources and PNG’s prospectivity for further gas discoveries, Oil Search believes it is highly likely that suffi cient gas will be available to support additional LNG trains in the coming years and that the Company is well positioned to participate in this expansion. The economic advantages of brownfi eld LNG extensions over new LNG projects are signifi cant and the robust returns available make more LNG trains in PNG compelling. Oil Search plans to undertake an extensive programme of gas exploration and appraisal activities over the next few years, aimed at establishing suffi cient certifi ed gas reserves to underwrite at least one more LNG train. 2009 HIGHLIGHTS 8 | 2009 Oil Search ANNUAL REPORT SUCCESS IN SLOWING PRODUCTION DECLINE RATES Production (mmboe) Production in 2009 was 8.1 million barrels 12 of oil equivalent (mmboe), 5% lower than in 10 8 2008. Oil Search was successful in mitigating 6 the natural decline from the PNG oil fi elds 4 through focused well management and 2 0 drilling new development wells. 2005 2006 2007 2008 2009 2009 HIGHLIGHTS Year REALISED OIL PRICES SHARPLY WEAKER Realised Oil Price (US$/bbl) The average oil price realised in 2009 was 100 US$65.40 per barrel, 35% lower than in 80 2008. This refl ected weaker global demand 60 for oil as a result of the global fi nancial crisis. 40 20 0 2005 2006 2007 2008 2009 Year PROFIT IMPACTED BY OIL PRICES, PRODUCTION Net Profit After Tax (US$ million) 2009 reported net profi t after tax was 450 US$133.7 million while net profi t excluding 375 300 signifi cant items was US$99.6 million. 225 This was below 2008’s record levels, 150 primarily due to lower realised oil prices 75 0 and lower production. 2005 2006 2007 2008 2009 NPAT excluding significant items Reported NPAT SEVEN FOLD INCREASE IN RESERVES Following the sanction of the PNG LNG Proven and probable reserves (mmboe) Project, Oil Search booked 505 mmboe of 600 500 proven and probable reserves. This increased 400 total reserves from 67 mmboe at the end of 300 2008 to 567 mmboe at the end of 2009. 200 100 0 2005 2006 2007 2008 2009 Year DIVIDEND DECLARED ALIGNED WITH PROFITS Dividends per share (US cents) In light of the reduced profi ts and higher 8 capital requirements of the PNG LNG Project, 6 Oil Search declared dividends totalling four 4 US cents per share in respect of the 2009 2 fi nancial year. Dividend payments during the 0 period were funded by a fully underwritten 2005 2006 2007 2008 2009 Dividend Reinvestment Plan. Year WORLD CLASS SAFETY PERFORMANCE Oil Search’s safety performance improved Total Recordable Incidents per million hours worked for the fi fth consecutive year to an all time 2.5 2.0 low of 1.16 total recordable incidents per 1.5 million hours worked during 2009. This 1.0 compares very favourably to the Company’s 0.5 peers, both in Australia and globally. 0.0 2005 2006 2007 2008 2009 Year 2009 Oil Search ANNUAL REPORT | 9 REPORT FROM THE CHAIRMAN BRIAN HORWOOD Brian was appointed Chairman of Oil Search in 2004. Prior to joining Oil Search, Brian worked for 35 years with the Rio Tinto Group, holding executive positions in Australia, the UK and PNG. 10 | 2009 Oil Search ANNUAL REPORT 2009 was one of the most DIVIDEND PAYMENTS was to determine the best means of further important years in Oil Search’s In response to the lower level of profi tability growing the Company, both before earnings and in light of the large capital requirements start to fl ow from LNG and after. A number 80 year corporate life. of the PNG LNG Project, the Board of growth options have been identifi ed and The decision to develop the approved the payment of a 2009 fi nal plans are now being developed to pursue PNG LNG Project sets the dividend of two US cents per share, taking these opportunities. total dividends for the year to four US cents STAFF, MANAGEMENT AND BOARD Company on a new course, per share, funded by a fully underwritten I would like to acknowledge the enormous Dividend Reinvestment Plan. The Board with the PNG LNG Project effort put in by staff, management and my intends to continue to align future dividend representing by far the largest fellow Board members during 2009. levels with half and full year earnings. investment Oil Search has ever To reach a sanction decision on the world PNG LNG PROJECT scale PNG LNG Project in less than two REPORT FROM THE CHAIRMAN made. Despite the challenges The decision to proceed with the PNG LNG years, and during the global fi nancial crisis, of 2009, the Company has Project in December 2009 was an historic was an outstanding outcome. On behalf of emerged from the global occasion for Oil Search. Completing all key the directors, I would like to thank everyone milestones on schedule was a major for their efforts. fi nancial crisis in a strong achievement, while securing US$14 billion position and is very well of debt funding, the world’s largest ever placed for the major project fi nancing, in today’s fi nancial markets was particularly pleasing and a testament to expansion to come. the strength of the Project. Project sanction RESULTS FOR 2009 was a result of much hard work from the Net profi t after tax in 2009 was Operator, ExxonMobil, and the Project US$133.7 million, 57% lower than the 2008 participants as well as a range of other record profi t due to lower oil prices and stakeholders. The PNG Government made reduced oil sales. Net profi t after tax before a major contribution to the Project’s signifi cant items, which primarily comprised progress during 2009 and we would like Insait long 80 pela Krismas adjustments relating to the PNG to acknowledge its efforts.
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