Santos Finance Limited

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PROSPECTUS DATED 21 SEPTEMBER 2010

SANTOS FINANCE LIMITED (incorporated with limited liability in Australia, ACN 002 799 537) €650,000,000 Fixed to Floating Rate Subordinated Notes due 2070 (with an option for the issue of a further €65,000,000 in aggregate principal amount of Notes)

unconditionally and irrevocably guaranteed by SANTOS LIMITED (incorporated with limited liability in Australia, ACN 007 550 923) Issue price: 100 per cent. The €650,000,000 Fixed to Floating Rate Subordinated Notes due 2070 (the Notes) are issued by Santos Finance Limited (the Issuer) and unconditionally and irrevocably guaranteed by Santos Limited (the Guarantor, which term shall unless the context requires otherwise, include the Optional Notes (as defined below). The Notes will bear interest, payable semi-annually in arrear on 22 March and 22 September in each year, from and including 22 September 2010 (the Issue Date) to but excluding 22 September 2017 (the Optional Redemption Date) at the rate of 8.25 per cent. per annum. From and including the Optional Redemption Date, the Notes will bear interest at a rate of 6.851 per cent. per annum above three-month EURIBOR, payable quarterly in arrear on the Floating Interest Payment Dates. Interest payments must be deferred in certain circumstances in the case of a Trigger Event. See Condition 4 of “Terms and Conditions of the Notes“ for details as to how and when Deferred Interest Payments may be made. The Notes mature in 2070, subject as described in “Terms and Conditions of the Notes”. However, the Issuer may redeem the Notes on the Optional Redemption Date or on any Floating Interest Payment Date thereafter at their Principal Amount (plus any accrued interest and any outstanding Deferred Interest Payments, including any amount of interest accrued thereon). If a Gross-Up Event or a Change of Control Event occurs, the Issuer may redeem the Notes prior to (but excluding) the Optional Redemption Date (in the case of a Gross-Up Event) or at any time (in the case of a Change of Control Event) at their Principal Amount (plus any accrued interest and any outstanding Deferred Interest Payments, including any amount of interest accrued thereon). The Issuer may also redeem the Notes prior to (but excluding) the Optional Redemption Date at the Early Redemption Amount on the occurrence of a Tax Event, a Capital Event or an Accounting Event. In addition, the Issuer may elect to redeem the Notes at any time prior to the Optional Redemption Date at their Early Redemption Amount, or on, or on any Floating Interest Payment Date after, the Optional Redemption Date at their Principal Amount (plus any accrued interest and any outstanding Deferred Interest Payments, including any amount of interest accrued thereon), if the outstanding aggregate principal amount of the Notes falls to or below 20 per cent. of the aggregate principal amount of the Notes originally issued. See Condition 5.6 of “Terms and Conditions of the Notes” for further detail. If the Issuer does not choose to redeem the Notes upon the occurrence of a Change of Control Event, and a Rating Downgrade has also occurred, Noteholders will have the right to require the Issuer to redeem or (at the Issuer’s option) purchase that Noteholder’s Notes in the circumstances described in Condition 5.7 of “Terms and Conditions of the Notes”. Application has been made to the Financial Services Authority in its capacity as competent authority under the Financial Services and Markets Act 2000 (the UK Listing Authority) for up to €715,000,000 in principal amount of Notes to be admitted to the Official List of the UK Listing Authority and to the London Stock Exchange plc (the London Stock Exchange) for the Notes to be admitted to trading on the London Stock Exchange’s regulated market. The London Stock Exchange’s regulated market is a regulated market for the purposes of Directive 2004/39/EC (the Markets in Financial Instruments Directive). The Notes will be rated BB by Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies Inc. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. Pursuant to the Subscription Agreement (as defined in “Subscription and Sale”) the Managers have agreed jointly and severally, subject as provided herein, to subscribe or procure subscriptions for €650,000,000 in principal amount of the Notes. In addition, the Issuer has granted to the Managers in the Subscription Agreement an option (the Option) exercisable on a date on or before 23 September 2010 to subscribe or procure subscribers for up to an additional €65,000,000 in principal amount of the Notes (the Optional Notes). The Notes will initially be represented by a temporary global note (the Temporary Global Note), without interest coupons, which will be deposited on or about 22 September 2010 (the Closing Date) with a common depositary for Euroclear Bank SA/NV (Euroclear) and Clearstream Banking, société anonyme (Clearstream, Luxembourg). Interests in the Temporary Global Note will be exchangeable for interests in a permanent global note (the Permanent Global Note and, together with the Temporary Global Note, the Global Notes), without interest coupons, on or after 2 November 2010 (the Exchange Date), upon certification as to non- U.S. beneficial ownership. Interests in the Permanent Global Note will be exchangeable for definitive Notes only in certain limited circumstances – see “Summary of Provisions relating to the Notes while represented by the Global Notes”. Word and expressions defined in “Terms and Conditions of the Notes” and not otherwise defined in this Prospectus shall have the same meanings when used in the remainder of this Prospectus. An investment in Notes involves certain risks. Prospective investors should have regard to the factors described under the heading “Risk Factors” on page 11. Joint Lead Managers UBS Investment Bank Deutsche Bank (Structuring Adviser) Level: 3 – From: 3 – Monday, September 20, 2010 – 17:15 – eprint3 – 4262 Intro

This Prospectus comprises a prospectus for the purposes of Article 5.4 of Directive 2003/71/EC (the Prospectus Directive) and for the purpose of giving information with regard to the Issuer, the Guarantor and its subsidiaries and affiliates taken as a whole (the Group), the Guarantor and the Notes which according to the particular nature of the Issuer, the Guarantor and the Notes, is necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profit and losses and prospects of the Issuer and the Guarantor.

The Issuer and the Guarantor accept responsibility for the information contained in this Prospectus. To the best of the knowledge and belief of each of the Issuer and the Guarantor (each having taken all reasonable care to ensure that such is the case) the information contained in this Prospectus is in accordance with the facts and does not omit anything likely to affect the import of such information.

Neither the Managers (as described under “Subscription and Sale”, below) nor the Trustee have independently verified the information contained herein. Accordingly, no representation, warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by the Managers or the Trustee as to the accuracy or completeness of the information contained or incorporated in this Prospectus or any other information provided by the Issuer or the Guarantor in connection with the offering of the Notes. Neither the Managers nor the Trustee accepts any liability in relation to the information contained in this Prospectus or any other information provided by the Issuer or the Guarantor in connection with the offering of the Notes or their distribution. Advisors named in this Prospectus have not caused the issue of, and take no responsibility for, this Prospectus, have acted pursuant to the terms of their respective engagements and do not make, and should not be taken to have verified, any statement or information in this Prospectus unless expressly stated otherwise.

No person is or has been authorised by the Issuer, the Guarantor or the Trustee to give any information or to make any representation not contained in or not consistent with this Prospectus and, if given or made, such information or representation must not be relied upon as having been authorised by or on behalf of the Issuer, the Guarantor, any of the Managers or the Trustee.

Neither this Prospectus nor any other information supplied in connection with the offering of the Notes (a) is intended to provide the basis of any credit or other evaluation or (b) should be considered as a recommendation by the Issuer, the Guarantor, any of the Managers or the Trustee that any recipient of this Prospectus or any other information supplied in connection with the offering of the Notes should purchase any Notes. This Prospectus does not take into account the objectives, financial situation or needs of any potential investor. Each investor contemplating purchasing any Notes should make its own independent investigation of the financial condition and affairs, and its own appraisal of the creditworthiness, of the Issuer and/or the Guarantor. Neither this Prospectus nor any other information supplied in connection with the offering of the Notes constitutes an offer or invitation by or on behalf of the Issuer, the Guarantor, any of the Managers or the Trustee to any person to subscribe for or to purchase any Notes.

Neither the delivery of this Prospectus nor the offering, sale or delivery of the Notes shall in any circumstances imply that there has been no change in the affairs of the Issuer or the Guarantor since the date hereof or the date upon which this Prospectus has been most recently amended or supplemented or that there has been no adverse change in the financial position of the Issuer or the Guarantor since the date hereof or the date upon which this Prospectus has been most recently amended or supplemented or that the information contained herein or any other information supplied in connection with the Notes is correct at any time subsequent to the date on which it is supplied or, if different, the date indicated in the document containing the same. The Managers and the Trustee expressly do not undertake to review the financial condition or affairs of the Issuer or the Guarantor during the life of the Notes or to advise any investor in the Notes of any information coming to their attention. The Notes and the Guarantee have not been and will not be registered under the United States Securities Act of 1933, as amended (the Securities Act) and are subject to U.S. tax law requirements. Subject to certain exceptions, the Notes and the Guarantee may not be offered, sold or delivered within the United States or to U.S. persons. For a further description of certain restrictions on the offering and sale of the Notes and on distribution of this document, see “Subscription and Sale” below.

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This Prospectus does not constitute an offer to sell or the solicitation of an offer to buy any of the Notes in any jurisdiction to any person to whom it is unlawful to make the offer or solicitation in such jurisdiction. The distribution of this Prospectus and the offer or sale of Notes may be restricted by law in certain jurisdictions. None of the Issuer, the Guarantor, the Managers or the Trustee represents that this Prospectus may be lawfully distributed, or that the Notes may be lawfully offered, in compliance with any applicable registration or other requirements in any such jurisdiction, or pursuant to an exemption available thereunder, or assumes any responsibility for facilitating any such distribution or offering. In particular, no action has been taken by the Issuer, the Guarantor, the Managers or the Trustee which is intended to permit a public offering of the Notes or the distribution of this Prospectus in any jurisdiction where action for that purpose is required. Accordingly, no Notes may be offered or sold, directly or indirectly, and neither this Prospectus nor any advertisement or other offering material may be distributed or published in any jurisdiction, except under circumstances that will result in compliance with any applicable laws and regulations. Persons into whose possession this Prospectus or any Notes may come must inform themselves about, and observe, any such restrictions on the distribution of this Prospectus and the offering and sale of Notes. For a description of further restrictions on the distribution of this Prospectus and the offer or sale of Notes in the United States, the European Economic Area (including the United Kingdom) and Australia, see “Subscription and Sale”.

This Prospectus has not been, and will not be, lodged with the Australian Securities and Investments Commission and is not, and does not purport to be, a document containing disclosure to investors for the purposes of Part 6D.2 or Part 7.9 of the Corporations Act 2001 of the Commonwealth of Australia (the Corporations Act). It is not intended to be used in connection with any offer for which such disclosure is required and does not contain all the information that would be required by those provisions if they applied. It is not to be provided to any ‘retail client’ as defined in section 761G of the Corporations Act. The Issuer and the Guarantor are not licensed to provide financial product advice in respect of the Notes or the Guarantee. Cooling off rights do not apply to the acquisition of the Notes.

This Prospectus does not constitute an offer to sell or the solicitation of an offer to buy any of the Notes in any jurisdiction to any person who is an associate of the Issuer within the meaning of subsection 128F(9) of the Income Tax Assessment Act 1936 of the Commonwealth of Australia and is: (a) a resident of Australia that would acquire the Note through a permanent establishment outside Australia, or a non- resident that would not acquire the Note through a permanent establishment in Australia; and (b) is not acting in the capacity of a dealer, manager or underwriter in relation to the placement of the relevant Notes, or a clearing house, custodian, funds manager or responsible entity of a registered managed investment scheme for the purposes of the Corporations Act.

The Managers, the Trustee and the Principal Paying Agent have received, or will receive, fees from the Issuer in connection with their participation in the offer and may hold interests in the Notes for their own account. In addition, certain of the Managers, the Trustee and the Principal Paying Agent and their affiliates have engaged, and may in the future engage, in investment banking and/or commercial banking transactions with, or may provide services to, the Issuer and/or the Guarantor.

IN CONNECTION WITH THE ISSUE OF THE NOTES, UBS LIMITED AS STABILISING MANAGER (THE STABILISING MANAGER) (OR PERSONS ACTING ON BEHALF OF THE STABILISING MANAGER) MAY OVER ALLOT NOTES OR EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE NOTES AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS NO ASSURANCE THAT THE STABILISING MANAGER (OR PERSONS ACTING ON BEHALF OF THE STABILISING MANAGER) WILL UNDERTAKE STABILISATION ACTION. ANY STABILISATION ACTION MAY BEGIN ON OR AFTER THE DATE ON WHICH ADEQUATE PUBLIC DISCLOSURE OF THE TERMS OF THE OFFER OF THE NOTES IS MADE AND, IF BEGUN, MAY BE ENDED AT ANY TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF 30 DAYS AFTER THE ISSUE DATE OF THE NOTES AND 60 DAYS AFTER THE DATE OF THE ALLOTMENT OF THE NOTES. ANY STABILISATION ACTION OR OVER-ALLOTMENT MUST BE CONDUCTED BY THE STABILISING MANAGER (OR PERSONS ACTING ON BEHALF OF ANY STABILISING MANAGER) IN ACCORDANCE WITH ALL APPLICABLE LAWS AND RULES.

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All references in this document to AUD and A$ refer to the currency of the Commonwealth of Australia and to euro and € refer to the currency introduced at the start of the third stage of European economic and monetary union pursuant to the Treaty establishing the European Community, as amended.

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CONTENTS

Page

Overview...... 6

Risk Factors ...... 11

Conditions of the Notes ...... 21

Summary of provisions relating to the Notes while represented by the Global Notes...... 41

Use of Proceeds ...... 44

Description of the Issuer ...... 45

Description of the Guarantor ...... 46

Taxation ...... 57

Subscription and Sale ...... 62

Australian Accounting Standards and Financial Statements ...... 64

General Information ...... 65

Glossary ...... 67

Financial Information ...... 69

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OVERVIEW

This overview must be read as an introduction to this Prospectus and any decision to invest in the Notes should be based on a consideration of this Prospectus as a whole.

Words and expressions defined in “Conditions of the Notes” shall have the same meanings in this section.

Issuer: Santos Finance Limited

Guarantor: Santos Limited

Description of Notes: €650,000,000 Fixed to Floating Rate Subordinated Notes due 2070 (the Notes), to be issued by the Issuer on 22 September 2010 (the Issue Date). Pursuant to the Subscription Agreement the Managers have agreed jointly and severally, subject as provided herein, to subscribe or procure subscriptions for €650,000,000 in principal amount of the Notes. In addition, the Issuer has granted to the Managers in the Subscription Agreement an option (the Option) exercisable on a date on or before 23 September 2010 to subscribe or procure subscribers for the Optional Notes, being up to an additional €65,000,000 in principal amount of the Notes. The date of issue (the Second Closing Date) of any Optional Notes may not be later than the tenth London business day after the date of exercise of the Option.

Trustee: BNY Corporate Trustee Services Limited

Structuring Adviser: UBS Limited

Managers: Deutsche Bank AG, London Branch

UBS Limited

Maturity Date: The Floating Interest Payment Date falling in September 2070.

The Notes will be redeemed on the Maturity Date, unless redeemed by the Issuer beforehand, at their Principal Amount plus any interest accrued up to (but excluding) the Maturity Date and any outstanding Deferred Interest Payments (including any amount of interest accrued thereon in accordance with Condition 4.3).

Guarantee: Payments of the principal and interest in respect of the Notes and all other moneys payable by the Issuer under or pursuant to the Trust Deed will be unconditionally and irrevocably guaranteed by the Guarantor. The obligations of the Guarantor under its guarantee will be direct, unconditional, subordinated and unsecured obligations of the Guarantor. The rights and claims of the Noteholders and Couponholders in respect of the Guarantee will rank as set out in Condition 3.2 of “Terms and Conditions of the Notes”.

Status of the Notes: The Notes and the Coupons will constitute direct, unconditional, subordinated and unsecured obligations of the Issuer and will rank pari passu, without any preference among themselves. The rights and claims of the Noteholders and the Couponholders will rank as set out in Condition 2.2 of “Terms and Conditions of the Notes”.

Subordination: Payments in respect of the Notes and the Guarantee will be subordinated as described in Conditions 2.2, 2.3 and 3.2 of “Terms and Conditions of the Notes”.

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OVERVIEW

Interest: Subject to the limitations as described in Condition 4 of “Terms and Conditions of the Notes”, the Notes bear interest at:

(a) from (and including) the Issue Date to (but excluding) the Optional Redemption Date, a fixed rate of 8.25 per cent. per annum; and

(b) thereafter at a rate per annum reset quarterly of 6.851 per cent. Per annum above three-month EURIBOR.

Interest Payment Dates: Interest payments in respect of the Notes will be payable:

(a) from (and including) 22 September 2010 to (and including) the Optional Redemption Date semi-annually in arrear in equal instalments on 22 September and 22 March in each year, commencing on 22 March 2011; and

(b) thereafter, subject to adjustment for non-business days, on 22 March, 22 June, 22 September and 22 December in each year, commencing on 22 December 2017.

Mandatory Deferral of If, on any day which is 8 Business Days prior to any Interest Payment Interest Payments: Date, a Trigger Event exists and the Issuer fulfils the S&P Rating Criteria, the Interest Amount falling due on such Interest Payment Date will not be due and payable or be paid until the relevant Payment Reference Date and will constitute a Deferred Interest Payment. A Trigger Event exists if the corporate credit rating assigned by Standard & Poor’s to the Guarantor (and the Issuer, if it has been assigned such a credit rating) as published by Standard & Poor’s is BB+ or lower. The Issuer fulfils the S&P Rating Criteria if the Issuer or the Guarantor is rated by Standard & Poor’s and the Notes are eligible for the same or higher category of equity credit as was attributed to the Notes at the Issue Date (as notified from time to time to the Issuer by Standard & Poor’s).

The Holders will have no entitlement or claim in respect of any Interest Payment so deferred, other than in accordance with the provisions below relating to the payment of Deferred Interest Payments.

All Deferred Interest Payments (including interest thereon which accrues as provided in “Terms and Conditions of the Notes”) must be paid in full on the Payment Reference Date, being the earliest of:

(i) the Business Day falling 5 Business Days after the date on which the Trigger Event is no longer subsisting;

(ii) the date which is the fifth anniversary of the date on which any of the then outstanding Deferred Interest Payments was initially deferred;

(iii) the Maturity Date;

(iv) the date on which the Notes are otherwise redeemed; and

(v) the date on which the Trustee takes any action in respect of an Event of Default which results from an order being made for the winding-up of the Issuer or the Guarantor.

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OVERVIEW

Early Redemption: The Notes will mature on the Maturity Date unless redeemed earlier.

Prior to the Maturity Date, the Issuer may redeem the Notes (in whole but not in part) on the Optional Redemption Date or on any subsequent Floating Interest Payment Date at their Principal Amount (plus any accrued interest up to (but excluding) the Early Redemption Date and any outstanding Deferred Interest Payments, including any amount of interest accrued thereon in accordance with Condition 4.3).

Following a Gross-up Event or a Change of Control Event, all of the Notes may at the option of the Issuer be redeemed (in the case of a Gross-up Event, prior to (but excluding) the Optional Redemption Date and, in the case of a Change of Control Event, at any time) at their Principal Amount (plus any accrued interest up to (but excluding) the Early Redemption Date and any outstanding Deferred Interest Payments, including any amount of interest accrued thereon in accordance with Condition 4.3).

Following a Tax Event, a Capital Event or an Accounting Event, all of the Notes may at the option of the Issuer be redeemed at any time prior to (but excluding) the Optional Redemption Date at their Early Redemption Amount.

For further details, see Condition 5 of “Terms and Conditions of the Notes”.

Put Option on a Change If both a Change of Control Event and a Rating Downgrade occurs of Control: and are subsisting following the end of the Change of Control Period, and the Issuer chooses not to exercise its right to redeem the Notes, Noteholders will have the option to require the Issuer to redeem or, at the Issuer’s option, purchase (or procure the purchase of), the Notes of that Noteholder at their Principal Amount plus any interest accrued up to (but excluding) the Put Date and any outstanding Deferred Interest Payments (including any amount of interest accrued thereon in accordance with Condition 4.3).

For further details, see Condition 5.7 of “Terms and Conditions of the Notes”.

Purchases: The Issuer, the Guarantor or any of its Wholly Owned Subsidiaries may, in compliance with applicable laws, at any time following 31 December 2015, purchase Notes in any manner and at any price. Such acquired Notes may be surrendered for cancellation or held or resold. In the event that the Issuer, the Guarantor and/or any Wholly Owned Subsidiary has, individually or in aggregate, purchased (and not resold) or redeemed Notes equal to or in excess of 80 per cent. of the aggregate Principal Amount of the Notes issued on the Issue Date, the Issuer may redeem the remaining Notes (in whole but not in part): (i) at any time prior to the Optional Redemption Date, at the Early Redemption Amount; and (ii) on or on any Floating Interest Payment Date after the Optional Redemption Date, at their Principal Amount (plus any accrued and outstanding interest and any Deferred Interest Payments).

Replacement capital covenant: The Issuer and the Guarantor intend to enter into a replacement capital covenant for the benefit of one or more designated series of the Issuer’s debt securities. It is anticipated that the terms of such

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OVERVIEW

replacement capital covenant will provide that neither the Issuer nor the Guarantor, during the period from the Issue Date until the termination of the replacement capital covenant (and subject to certain circumstances in which it will cease to apply), will redeem or purchase any Notes, and the Guarantor will not permit any Subsidiary to purchase any Notes, unless and to the extent that the aggregate redemption or purchase price is equal to or less than the net proceeds received by the Issuer, the Guarantor or its Subsidiaries during the 12 months prior to such redemption or purchase date, from new issuances of qualifying securities (subject to certain exemptions).

Withholding Tax and The Issuer will pay such Additional Amounts as may be necessary in Additional Amounts: order that the net payment received by each Noteholder in respect of the Notes, after withholding for any taxes imposed by tax authorities in the Relevant Jurisdiction upon payments made by or on behalf of the Issuer in respect of the Notes, will equal the amount which would have been received in the absence of any such withholding taxes, subject to customary exceptions, as described in Condition 7 of the Conditions of the Notes.

Meetings of Noteholders: The Conditions of the Notes and the Trust Deed contain provisions for calling meetings of Noteholders to consider matters affecting their interests generally. These provisions permit defined majorities to bind all Noteholders including Noteholders who did not attend and vote at the relevant meeting and Noteholders who voted in a manner contrary to the majority.

Modification, Waiver and The Trustee may, without the consent of Noteholders, agree to (i) any Substitution: modification of, or to the waiver or authorisation of any breach or proposed breach of, any of the provisions of Notes or (ii) the substitution of the Guarantor or a subsidiary of the Guarantor as principal debtor under any Notes in place of the Issuer, in each case, in the circumstances and subject to the conditions described in Conditions 14 and 15 of “Terms and Conditions of the Notes”.

Listing and admission to trading: Application has been made to the UK Listing Authority for €715,000,000 in principal amount of Notes to be admitted to the Official List and to the London Stock Exchange for the Notes to be admitted to trading on the London Stock Exchange’s regulated market.

Governing Law: The Notes will be governed by, and construed in accordance with, English law, with the exception that the subordination provisions will be construed in accordance with the laws of Australia.

Form: The Notes will be issued in bearer form in denominations of €50,000 and integral multiples of €1,000 in excess thereof.

Credit Rating: The Notes are expected to be assigned on issue a rating of BB by Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies Inc. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to suspension, reduction or withdrawal at any time by the assigning rating agency.

Selling Restrictions: The Notes and the Guarantee have not been and will not be registered under the Securities Act and, subject to certain exceptions, may not be offered or sold within the United States. The Notes may be sold in

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OVERVIEW

other jurisdictions (including Australia) only in compliance with applicable laws and regulations. See “Subscription and Sale” below.

Use of Proceeds: The proceeds of the issue of the Notes will be applied by the Issuer for its general corporate purposes and (in whole or in part) to fund its growth strategy.

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RISK FACTORS

Each of the Issuer and the Guarantor believes that the following factors may affect its ability to fulfil its obligations under the Notes. All of these factors are contingencies which may or may not occur and neither the Issuer nor the Guarantor is in a position to express a view on the likelihood of any such contingency occurring.

In addition, factors that are material for the purpose of assessing the market risks associated with the Notes are described below.

Each of the Issuer and the Guarantor believes that the factors described below represent the principal risks inherent in investing in the Notes, but the inability of the Issuer or the Guarantor to pay interest, principal or other amounts on or in connection with the Notes may occur for other reasons which may not be considered significant risks by the Issuer and the Guarantor based on information currently available to them or which they may not currently be able to anticipate. Prospective investors should also read the detailed information set out elsewhere in this Prospectus and reach their own views prior to making any investment decision.

Please refer to “Description of the Guarantor” and “Glossary” for definitions of terms used but not otherwise defined in this section.

Factors that may affect the Issuer’s ability to fulfil its obligations under the Notes and the Guarantor’s ability to fulfil its obligations under the Guarantee The risk factors described below apply in the context of the Guarantor and the Group and are also applicable to the Issuer.

Finance vehicle

The Issuer is a finance vehicle and acts as the principal finance company for the Group. The Issuer’s sole business is raising debt to be on-lent to companies within the Group and to fund their investment programmes and to manage cash generated from Group operations. Accordingly, substantially all the assets of the Issuer are loans and advances made to other members of the Group. The ability of the Issuer to satisfy its obligations in respect of the Notes will depend upon payments made to it by other members of the Group in respect of loans and advances made by it.

Volatility in oil and gas prices

The Guarantor’s business relies primarily on the production and sale of oil and gas products (including LNG) to a variety of buyers under a range of short-term and long-term contracts. International oil and gas prices have fluctuated widely in recent years and may continue to fluctuate significantly in the future. The Guarantor cannot predict future oil and gas prices.

Demand for, and pricing of, LNG remains sensitive to external economic and political factors, including crude oil prices and buyer preferences as between LNG and oil. Crude oil prices are affected by numerous factors beyond the Guarantor’s control, including worldwide oil supply and demand, the level of economic activity in the markets that the Guarantor serves, regional political developments and military conflicts in oil producing countries and regions (in particular, the Middle East), the weather, the ability of the Organization of the Petroleum Exporting Countries (OPEC) and other producing nations to influence global production levels and prices, the price and availability of new technology and the availability and cost of alternative sources of energy. The international price for crude oil has historically been volatile. Accordingly, it is impossible to predict future crude oil price movements with certainty.

Fluctuations in the global oil and global and domestic gas market, in particular, any extended or substantial decline in oil and gas prices or demand for oil and gas, may materially affect the Guarantor’s financial condition and results of operations. Increases and decreases in oil and gas prices affect the amount of cash flow available for capital expenditure and the Guarantor’s ability to borrow money or raise additional

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RISK FACTORS capital. Lower oil and gas prices may also reduce the amount of oil and natural gas that the Guarantor can produce economically.

LNG supply contracts

The Guarantor’s market share of LNG supply contracts and, therefore, its profits may be adversely affected by the introduction of new LNG facilities and the expansion, by the Guarantor’s competitors, of their existing LNG facilities in the global LNG market. Such new facilities or expansion of existing facilities could increase the global supply of LNG, thereby potentially lowering the price of LNG.

Replacement of existing reserves

The Guarantor’s future long-term results are directly related to the success of efforts to replace existing oil and gas reserves as they are utilised, either through exploration or acquisition. In general, the volume of production from oil and gas properties declines as reserves are depleted, although the rate of decline depends on the characteristics of a particular reserve. The Guarantor’s reserves will decline as they are utilised unless the Guarantor acquires properties with proved reserves or conducts successful exploration and development activities. The Guarantor’s aim is to continue to replace its utilised reserves but given that exploration is a high risk endeavour subject to geological, technological and environmental hazards and that there is no certainty that acquisitions will continue to be made, no assurance can be given that the Guarantor will be able to continue to replace its utilised reserves with additional proved reserves.

Acquisition and divestment activities

The Guarantor from time to time evaluates acquisition and divestment opportunities across its range of assets and businesses. Any acquisitions or disposals would lead to a change in the sources of the Guarantor’s earnings and result in variability of earnings over time. Any acquisitions or disposals could also lead to changes in future capital and operating expenditure obligations which may impact the Guarantor’s funding requirements. They may also give rise to liabilities. Integration of new businesses into the Santos group may be costly and may occupy a large amount of management’s time. There is no certainty that the Guarantor will complete any acquisition or divestment that it has entered into, including the sale of its Evans Shoal interests to Magellan announced on 26 March 2010. On 9 September 2010, the Guarantor announced the sale of a 15 per cent. interest in the GLNG Project to Total E&P Australia which is subject to certain customary conditions including the approval of the Australian Foreign Investment Review Board. While it is expected that these conditions will be satisfied to allow completion to occur, there is no certainty that such approvals will be forthcoming and a failure to complete this sale would have an adverse impact on the Guarantor’s future funding requirements. The Guarantor has also announced the possibility of a further sell down of an interest in the GLNG Project, but there is no certainty that it will be successful in doing so.

Projects risks

The Guarantor is investing a significant amount of capital in the PNG LNG and GLNG Projects. These and other projects may be delayed or be unsuccessful for many reasons, including unanticipated financial, operational or political events, the failure to receive state and federal government environmental and other approvals, whether a final investment decision is reached, cost overruns, decline in LNG prices or demand, equipment and labour shortages, technical concerns including possible reserves and deliverability difficulties, environmental and water disposal impacts, increases in operating cost structures, contractual issues associated with GLNG upstream joint venture alignment or with major engineering procurement and construction contracts, community or industrial actions or other circumstances which may result in the delay, suspension or termination of the projects, the total or partial loss of the investment and a material adverse effect on the Guarantor’s business, results of operations, financial condition and credit rating.

In addition, sales contracts with various counterparties are expected to be entered into in relation to the PNG LNG and GLNG projects. The ability of the counterparties to meet their commitments under such an arrangement may impact on the Guarantor’s investment in these projects.

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RISK FACTORS

Project developments in which the Guarantor is, or may become, involved are subject to risks, including technical risk. Changes in reserves, liquids and gas prices, exchange rates, construction costs, design requirements and delays in construction may adversely affect the commerciality and economics of project development.

Operational risk

Industrial disputes, work stoppages and accidents, natural disasters, drilling and production results, reserve estimates, environmental impacts and other factors all contribute towards operational risk which may have an adverse effect on the Guarantor’s profitability and results of operations. Appropriate insurance can only provide protection for some, but not all, of the costs that may arise from unforeseen events.

Counterparty risk

As part of its ongoing commercial activities, the Guarantor enters into sales contracts with various third parties for the sale of natural gas, LNG and other products. If any counterparty were unable to meet its commitments to the Guarantor under such contracts, in whole or in part, and if there is no form of security in place, there is a risk that future anticipated revenues would reduce unless and until the Guarantor was able to secure an alternative customer. Therefore, such failure of a counterparty to a sales contract could materially and adversely affect the Guarantor’s financial condition and credit rating. Counterparty risk also arises when the Guarantor enters into contracts for committed lines of credit and derivatives with financial institutions. The Guarantor’s risk to counterparty credit risk is reduced by the implementation of credit policies that apply to sales contracts, banking arrangements and derivative contracts.

Currency risk

The functional and presentational currency of the Guarantor is the Australian dollar. Some subsidiaries have a functional currency of U.S. dollars and the results of their operations are translated into Australian dollars. The Guarantor may incur expenditure in the local currencies of the countries in which it operates or in other currencies for supplies of materials and services. The Guarantor is exposed to foreign exchange rate fluctuations in the Australian dollar value of foreign currency-denominated revenues, expenses, assets and liabilities. Accordingly, a change in the value of the Australian dollar relative to the relevant local currency and/or U.S. dollar may have an effect on the net asset value and profit and loss of the Guarantor in Australian dollars.

Market risk

The Guarantor borrows money domestically and internationally on interest rates that are either fixed or floating. A rise in interest rates, either domestically or internationally, would affect the Guarantor’s cost of borrowing and would adversely affect its business and financial condition.

The Guarantor, from time to time, hedges some of its commodity price, exchange rate and interest rate risks. While such hedging activities may provide downside risk protection for the Guarantor, it is also possible such activities may limit its upside benefit potential or give rise to additional losses. The management of interest rate risk, foreign exchange risk and commodity risks are governed by treasury policies which are approved by the Board of the Guarantor.

Access to capital

The Guarantor’s business and, in particular, development of large scale projects, relies on access to debt and equity financing. The Guarantor’s ability to secure financing, or financing on acceptable terms may be materially 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 (the Guarantor is currently rated BBB+ by S&P). For these or other reasons, financing may be unavailable or the cost of financing may be significantly increased. Such inability to obtain, or increase to the costs of obtaining, financing could materially and adversely affect the Guarantor’s business, results of operations and financial condition.

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RISK FACTORS

Mineral Resources Rent Tax and other Australian taxes

In addition to the standard level of income tax imposed on all industries, companies in the petroleum and gas industries are required to pay government royalties, direct and indirect taxes and other imposts in the jurisdictions in which they operate. The profitability of companies in these industries can be affected by changes in government taxation and royalty policies or in the interpretation or application of such policies. On 2 July 2010, the Australian Labor government announced that it intends to introduce a Minerals Resource Rent Tax (MRRT) and an expanded Petroleum Resource Rent Tax (PRRT) from 1 July 2012. The existing PRRT regime applies to offshore oil and gas projects. The MRRT was stated to be intended to apply to iron ore and coal in Australia, with all other minerals excluded, whilst the expanded PRRT was stated to be intended to apply to onshore and offshore oil, gas and coal seam methane projects. The recent Australian federal election on 21 August 2010 initially produced an inconclusive result as neither major party was able to secure the requisite number of seats in the House of Representatives to form a government in its own right. On 7 September 2010, the Australian Labor Party secured the support of a further two independent members of Parliament such that it had the requisite backing to form a minority government. Accordingly, it is unclear whether and to what extent the MRRT and expanded PRRT will be implemented. Further, assuming implementation, exact details concerning the proposed changes to the tax regime remain uncertain and the extent to which they may impact on the Guarantor and/or its operations is yet to be determined. The possible introduction of the expanded PRRT has the potential to increase the Guarantor’s effective tax rate, which could adversely affect the Guarantor’s financial performance, financial position, cash flows and share price.

Environmental risk

Oil and gas exploration and production is an environmentally hazardous activity which may give rise to substantial costs for environmental rehabilitation, damage control and losses.

With increasingly heightened government and public sensitivity to environmental sustainability, environmental regulation is becoming more stringent. The Guarantor could be subject to increasing environmental responsibility and liability, including laws and regulations dealing with air quality, water and noise pollution and other discharges of materials into the environment, plant and wildlife protection, the reclamation and restoration of certain of its properties, greenhouse gas emissions, the storage, treatment and disposal of wastes and the effects of its business on the water table and groundwater quality.

Sanctions for non-compliance with these laws and regulations may include administrative, civil and criminal penalties, revocation of permits, reputational issues, increased licence conditions and corrective action orders. These laws sometimes apply retroactively. In addition, a party can be liable for environmental damage without regard to that party’s negligence or fault.

Increased costs associated with regulatory compliance and/or with litigation could have a material and adverse effect on the Guarantor’s earnings and cash flows.

Carbon emissions

There is growing recognition that greenhouse gas emissions potentially contribute to global warming, greenhouse effects and climate change. A number of governments or governmental bodies, including those in Australia, have introduced, or are contemplating, regulatory change in response to the potential impacts of climate change and greenhouse gas emissions.

The Australian Labor government, under former Prime Minister Kevin Rudd, proposed a national emissions trading scheme (the Carbon Pollution Reduction Scheme (CPRS)). The proposed CPRS would require certain carbon emitters to purchase permits which reflect their emissions volume, subject to price caps. If the CPRS is introduced in the form previously proposed (which is not certain), the Guarantor may be exposed to additional operating costs which will have an adverse impact on its financial performance. The CPRS legislation was not passed by the Australian parliament. On 27 April 2010, the Australian Labor government announced the delay of the implementation of the CPRS until after the end of the current commitment period of the Kyoto Protocol, at the end of 2012, or until the domestic and international

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RISK FACTORS political circumstances improve. In the lead up to the recent federal election, the Australian Labor Party maintained its commitment to a CPRS following that delay, but also proposed further public consultation measures. The Coalition (comprised of a coalition of the centre-right Liberal Party of Australia and the centre-right National Party of Australia) has proposed an alternative ‘direct action’ approach. The Australian Greens support stronger responses. A carbon tax is a further alternative, including as an interim measure before an emissions trading scheme operates. Likely global action is also uncertain. The recently formed minority Labor government has released an agreement that was signed with the regional Independents Rob Oakeshott MP and Tony Windsor MP. Amongst the issues canvassed in the agreement is detail regarding the formation of a Climate Change Committee, which will encompass experts and parliamentary representatives. The Climate Change Committee will review carbon pricing and conduct public forums to discuss social and economic impacts of climate change and climate change mitigation policies. Although the precise terms of any potential legislation are unclear, from a medium and long-term perspective, the regulation of greenhouse gas emissions is likely to become more stringent and there are likely to be changes in the returns on the Guarantor’s greenhouse gas-intensive assets and energy-intensive assets as a result of regulatory impacts on the industry in which the Guarantor operates. It will depend on, among other things, the final form of greenhouse gas emissions regulation, commercial arrangements, energy efficiency, the development of low emissions technology and the carbon price. Until the final form of greenhouse gas emissions regulation is known, the impact on the Guarantor’s business, results of operations and financial condition is uncertain.

Government actions and regulatory risk The Guarantor’s business is subject to various national and local 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 Guarantor’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. Other changes in the regulatory environment (including applicable accounting standards) may have a material adverse effect on the carrying value of material assets or otherwise have a material adverse effect on the Guarantor’s business, results of operations and financial condition. The Guarantor’s operations could also be affected by government actions in Australia and other countries or jurisdictions in which it has interests. These actions include government legislation, government approvals, guidelines and regulations in relation to the environment, the petroleum and gas industries, competition policy, native title and cultural heritage. Such actions could impact on land access, the granting of licences and other petroleum and gas interests, the approval of developments and freedom to conduct operations. The possible extent of introduction of additional legislation, regulations, guidelines or amendments to existing legislation that might affect the Guarantor’s business is difficult to predict. Any such government action may require increased capital or operating expenditures and could prevent or delay certain operations by the Guarantor, which could have a material adverse effect on the Guarantor’s business and financial condition.

Political risk The Guarantor is subject to a risk that it may not be able to carry out its operations as it intends to or enter into new operations, nor ensure the security of its assets. In addition, it is subject to risks of, among other things, loss of revenue, property and equipment as a result of hazards such as expropriation, border and territorial disputes, war, insurrection and acts of terrorism and other political risks and increases in taxes and government royalties. The Guarantor has operations outside Australia in Indonesia, Kyrgyz Republic, India, Bangladesh, Vietnam, Papua New Guinea and Timor-Leste.

The Guarantor’s interests are subject to political, economic, social and other uncertainties, including the risk of civil rebellion, expropriation, nationalisation, land ownership disputes, renegotiation or termination of

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RISK FACTORS existing contracts, licences and permits or other agreements, changes in laws or taxation policies, currency exchange restrictions and changing political conditions. The effects of these factors are difficult to predict and any combination of one or other of the above may have a material adverse effect on the operation or development of the Guarantor’s business and even render it uneconomic.

Joint venture risk

The Guarantor’s business is carried out through joint ventures. Some of these joint venture assets are managed and operated by the Guarantor or its subsidiaries, and some are “non-operated” (that is, managed and operated by other international and domestic exploration and production companies). 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 the Guarantor’s business. The failure of joint venture partners to meet their commitments and share of costs and liabilities can result in increased costs to the Guarantor.

Land resource and tenure

The Guarantor has investments and operations in several countries where title to land and access and other rights with respect to land and resources (including indigenous title) may be complex and unclear. From time to time, these complexities and uncertainties can result in disputes with local groups and/or parties representing local interests. The outcome of these disputes may have an adverse impact on the Guarantor’s assets (including its ability to develop these assets) in the relevant jurisdictions. A number of the Guarantor’s Australian interests are located within areas which are the subject of one or more claims or applications for native title determinations. The Guarantor does not believe that the outcome of those claims or applications will significantly impact on its asset base, however, native title decisions have the potential to introduce royalty payments and delay in the grant of mineral and petroleum tenements and other licences and consequently may impact generally on the timing of exploration, development and productions operations.

Banjar Panji-1 Well Incident

In May 2006, a non-toxic mudflow incident occurred at the Banjar Panji-1 Well near Surabaya, East Java. The incident resulted in significant property damage, the interruption of local infrastructure and the need to relocate a significant number of local villages. In December 2008, the Guarantor’s subsidiary (Santos Brantas) transferred its 18 per cent. non-operating interest in the project to Minarak Labuan Co (L) Ltd (Minarak), with approval from the relevant Indonesian regulator. The transaction also included a release from the remaining joint venturers in the project from all liability (if any) to them in relation to the project and the mudflow incident. However, the transaction did not release Santos Brantas from liability to third parties. There are currently no third party claims pending and no matters have come to the Guarantor’s attention to indicate that a third party has or is likely to claim against Santos Brantas in respect of the incident. Consistent with the Guarantor’s view that the chance of a third party claim being made is unlikely and, if such a claim were made, it would be able to successfully defend those claims, no provision for any future costs in relation to the incident and no contingent liability disclosures were made in the Guarantor’s 30 June 2010 financial statements.

Key Personnel

The Guarantor’s future success depends on the expertise and continued service of certain key executives and technical personnel. Although the Guarantor enters into employment and incentive arrangements with such personnel to secure their services, the Guarantor cannot guarantee the retention of their services. Should key personnel leave, the Guarantor’s business, its results of operations and financial condition may be adversely affected.

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RISK FACTORS

Estimates of oil and gas resources are uncertain

Calculations of recoverable oil and gas resources contain significant uncertainties, which are inherent in the reservoir geology, the seismic and well data available and other factors such as project development and operating costs, together with commodity prices. This uncertainty is often expressed as a range of resource levels with associated probabilities. During the course of appraisal, development and continuing operations, the increased quantity and variety of data will generally improve the accuracy of the resource estimate and narrow the range of uncertainty. However, in some cases the stated reserves may move significantly away from the previous estimates, either upwards or downwards.

Exploration and production licences may be withdrawn

The Guarantor’s exploration and prospective production are dependent upon the granting and maintenance of appropriate licences, permits and regulatory consents (authorisations) which may not be granted or may be withdrawn or made subject to limitations at the discretion of, inter alia, government or regulatory authorities. Although the authorisations may be renewed following expiry or granted (as the case may be), there can be no assurance that such authorisations will be continued, renewed or granted or as to the terms of such renewals or grants. Moreover, if the Guarantor does not meet its work and/or expenditure obligations under permits and licences, this may lead to dilution of its interest in, or the loss of, such permits and licences.

Factors which are material for the purpose of assessing the market risks associated with the Notes The Notes may not be a suitable investment for all investors

Each potential investor in the Notes must determine the suitability of that investment in light of its own circumstances. In particular, each potential investor should:

(i) have sufficient knowledge and experience to make a meaningful evaluation of the Notes, the merits and risks of investing in the Notes and the information contained in this Prospectus or any applicable supplement;

(ii) have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the Notes and the impact the Notes will have on its overall investment portfolio;

(iii) have sufficient financial resources and liquidity to bear all of the risks of an investment in the Notes, including where the currency for principal or interest payments is different from the potential investor’s currency;

(iv) understand thoroughly the terms of the Notes and be familiar with the behaviour of any relevant financial markets; and

(v) be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks.

The Notes are complex investment securities. Sophisticated institutional investors generally do not purchase complex investment securities as stand-alone investments. They purchase complex investment securities as a way to reduce risk or enhance yield with an understood, measured, appropriate addition of risk to their overall portfolios. A potential investor should not invest in the Notes unless it has the expertise (either alone or with a financial adviser) to evaluate how the Notes will perform under changing conditions, the resulting effects on the value of the Notes and the impact this investment will have on the potential investor’s overall investment portfolio.

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RISK FACTORS

The Notes are subordinated obligations

The Notes will be subordinated obligations of the Issuer and the Notes will rank pari passu with each other in a winding-up of the Issuer. Upon the occurrence of any winding-up proceedings of the Issuer, payments on the Notes will be subordinated in right of payment to the prior payment in full of all other liabilities of the Issuer, except for obligations which rank equally with the Notes.

Similarly, the Guarantor’s obligations under the Guarantee are subordinated obligations of the Guarantor. Upon the occurrence of any winding-up proceedings of the Guarantor, the Guarantor’s obligations under the Guarantee will be subordinated in right of payment to the prior payment in full of all other liabilities of the Issuer, except for obligations which rank equally with the Guarantee.

Holders of the Notes are advised that unsubordinated liabilities of the Issuer or the Guarantor may also arise out of events that are not reflected on the balance sheet of the Issuer or the Guarantor (as the case may be), including, without limitation, the issuance of guarantees on an unsubordinated basis. Claims made under such guarantees will become unsubordinated liabilities of the Issuer or the Guarantor (as the case may be) that in a winding-up of the Issuer or the Guarantor (as the case may be) will need to be paid in full before the obligations under the Notes or the Guarantee (as the case may be) may be satisfied.

Under certain conditions, interest payments under the Notes must be deferred

If there is a Trigger Event and the S&P Rating Criteria is satisfied, the Issuer will be obliged to defer interest payments whilst that Trigger Event is continuing (as defined and further described in Condition 4.3 of “Terms and Conditions of the Notes“). Deferred Interest Payments will only be satisfied in certain circumstances (as set out in Condition 4.4 of “Terms and Conditions of the Notes”). While the deferral of interest payments continues, the Issuer may make payments on any instrument ranking senior, pari passu or subordinated to the Notes.

Any deferral of interest payments will likely have an adverse effect on the market price of the Notes. In addition, as a result of the interest deferral provision of the Notes, the market price of the Notes may be more volatile than the market prices of other debt securities on which interest accrues that are not subject to such deferrals and may be more sensitive generally to adverse changes in the Issuer’s financial condition.

The Notes are long-dated securities

The Notes will mature on the Floating Interest Payment Date falling in September 2070 and, although the Issuer may redeem the Notes in certain circumstances prior to such date, the Issuer is under no obligation to do so. Further, the Issuer and the Guarantor have entered into a replacement capital covenant (as described in “General Information“) which may limit the circumstances in which the Issuer may choose to redeem the Notes. The Holders have no right to call for the redemption of Notes except in the limited circumstances following a Change of Control Event (as set out in Condition 5.7 of “Terms and Conditions of the Notes”). Holders can only declare the Notes due and payable in certain circumstances relating to payment default and insolvent winding-up of the Issuer or the Guarantor (see Condition 10 of “Terms and Conditions of the Notes“). Therefore, Holders should be aware that they may be required to bear the financial risks associated with an investment in long-term securities.

The Issuer may redeem the Notes under certain circumstances

Holders should be aware that the Notes may be redeemed at the option of the Issuer (in whole but not in part) at their Principal Amount (plus any accrued and outstanding interest and any outstanding Deferred Interest Amounts) on 22 September 2017 or on any Floating Interest Payment Date thereafter. The Notes are also subject to redemption (in whole but not in part) at the Issuer’s option upon the occurrence of a Gross-Up Event, Change of Control Event, Tax Event, Capital Event or Accounting Event (each as defined in Condition 5 of “Terms and Conditions of the Notes”) or if the outstanding Principal Amount of the Notes falls below 20 per cent. of the original outstanding Principal Amount. The relevant redemption amount may be less than the then current market value of the Notes.

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RISK FACTORS

No limitation on issuing senior or pari passu securities

There is no restriction on the amount of securities or other liabilities which the Issuer or the Guarantor may issue or incur and which rank senior to, or pari passu with, the Notes or the Guarantee (as the case may be). The issue of any such securities or the incurrence of any such other liabilities may reduce the amount (if any) recoverable by Holders on a winding-up of the Issuer or the Guarantor (as the case may be) and/or may increase the likelihood of a deferral of Interest Payments under the Notes.

Fixed rate securities have a market risk

The Notes will bear interest at a fixed rate until 22 September 2017. A holder of a security with a fixed interest rate is exposed to the risk that the price of such security falls as a result of changes in the current interest rate on the capital market (the Market Interest Rate). While the nominal interest rate of a security with a fixed interest rate is fixed during the life of such security or during a certain period of time, the Market Interest Rate typically changes on a daily basis. A change of the Market Interest Rate causes the price of such security to change. If the Market Interest Rate increases, the price of such security typically falls. If the Market Interest Rate falls, the price of a security with a fixed interest rate typically increases. Investors should be aware that movements of the Market Interest Rate can adversely affect the price of the Notes and can lead to losses for the Holders if they sell the Notes.

Floating rate securities may suffer a decline in interest rate

If not previously redeemed, from 22 September 2017 until their redemption the Notes will bear interest at a floating rate. A holder of a security with a floating interest rate is exposed to the risk of fluctuating interest rate levels and uncertain interest income. Fluctuating interest rate levels make it impossible to determine the yield of such securities in advance.

Risks related to the Notes generally Set out below is a brief description of certain risks relating to the Notes generally:

Modification, waivers and substitution

The conditions of the Notes and the Trust Deed contain provisions for calling meetings of Noteholders to consider matters affecting their interests generally. These provisions permit defined majorities to bind all Noteholders including Noteholders who did not attend and vote at the relevant meeting and Noteholders who voted in a manner contrary to the majority.

The conditions of the Notes also provide that the Trustee may, without the consent of Noteholders, agree to (i) any modification of, or to the waiver or authorisation of any breach or proposed breach of, any of the provisions of Notes or (ii) determine without the consent of the Noteholders that any Event of Default or Potential Event of Default shall not be treated as such or (iii) the substitution of the Guarantor or a subsidiary of the Guarantor as principal debtor under any Notes in place of the Issuer, in the circumstances described in Conditions 14 and 15 of “Terms and Conditions of the Notes“.

Change of law

The conditions of the Notes are based on laws in effect as at the date of this Prospectus. No assurance can be given as to the impact of any possible judicial decision or change to relevant law or administrative practice after the date of this Prospectus.

Denominations involve integral multiples: definitive Notes

The Notes have denominations consisting of a minimum of €50,000 plus one or more higher integral multiples of €1,000. It is possible that the Notes may be traded in amounts that are not integral multiples of €50,000. In such a case a holder who, as a result of trading such amounts, holds an amount which is less than €50,000 in his account with the relevant clearing system at the relevant time may not receive a

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RISK FACTORS definitive Note in respect of such holding (should definitive Notes be printed) and would need to purchase a principal amount of Notes such that its holding amounts to €50,000.

If definitive Notes are issued, holders should be aware that definitive Notes which have a denomination that is not an integral multiple of €50,000 may be illiquid and difficult to trade.

Risks related to the market generally Set out below is a brief description of the principal market risks, including liquidity risk, exchange rate risk and credit risk:

The secondary market generally

The Notes may have no established trading market when issued, and one may never develop. If a market does develop, it may not be very liquid. Illiquidity may have a severely adverse effect on the market value of the Notes. Investors may not be able to sell their Notes easily or at prices that will provide them with a yield comparable to similar investments that have a developed secondary market.

Exchange rate risks and exchange controls

The Issuer will pay principal and interest on the Notes, and the Guarantor will make any payments under the Guarantee, in euro. This presents certain risks relating to currency conversions if an investor’s financial activities are denominated principally in a currency or currency unit (the Investor’s Currency) other than euro. These include the risk that exchange rates may significantly change (including changes due to devaluation of the euro or revaluation of the Investor’s Currency) and the risk that authorities with jurisdiction over the Investor’s Currency may impose or modify exchange controls. An appreciation in the value of the Investor’s Currency relative to euros would decrease (1) the Investor’s Currency-equivalent yield on the Notes, (2) the Investor’s Currency equivalent value of the principal payable on the Notes and (3) the Investor’s Currency equivalent market value of the Notes.

Government and monetary authorities may impose (as some have done in the past) exchange controls that could adversely affect an applicable exchange rate. As a result, investors may receive less interest or principal than expected, or no interest or principal.

Credit ratings may not reflect all risks

S&P have assigned a credit rating to the Notes. The rating may not reflect the potential impact of all risks related to structure, market, additional factors discussed above, and other factors that may affect the value of the Notes. A credit rating is not a recommendation to buy, sell or hold securities and may be revised or withdrawn by the rating agency at any time.

Legal investment considerations may restrict certain investments

The investment activities of certain investors are subject to investment laws and regulations, or review or regulation by certain authorities. Each potential investor should consult its legal advisers to determine whether and to what extent (1) the Notes are legal investments for it, (2) the Notes can be used as collateral for various types of borrowing and (3) other restrictions apply to its purchase or pledge of the Notes. Financial institutions should consult their legal advisers or the appropriate regulators to determine the appropriate treatment of the Notes under any applicable risk-based capital or similar rules.

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CONDITIONS OF THE NOTES

The following, subject to alteration, are the terms and conditions of the Notes which will be endorsed on each Note in definitive form (if issued).

The issue of the €650,000,000* Fixed to Floating Rate Subordinated Notes due 2070 (the Notes, which expression, unless the context otherwise requires, includes any further notes issued pursuant to Condition 9 and forming a single series with the Notes) of Santos Finance Limited (the Issuer) are constituted by a Trust Deed dated 22 September 2010 (the Trust Deed) made between the Issuer, Santos Limited (the Guarantor) as guarantor and BNY Corporate Trustee Services Limited (the Trustee, which expression includes its successor(s)) as trustee for the holders of the Notes (the Noteholders) and the holders of the interest coupons appertaining to the Notes (the Couponholders and the Coupons respectively, which expression, unless the context otherwise requires, includes the talons for further interest coupons (the Talons) and the holders of the Talons).

The statements in these Conditions include summaries of, and are subject to, the detailed provisions of the Trust Deed. Copies of the Trust Deed and the agency agreement dated 22 September 2010 (the Agency Agreement) made between the Issuer, the Guarantor, The Bank of New York Mellon, London branch as initial principal paying agent (in such capacity, the Principal Paying Agent, which expression includes any successor thereto) and initial interest calculation agent (in such capacity, the Interest Calculation Agent, which expression includes any successor thereto) and the Trustee. Copies of the Trust Deed, the Agency Agreement and the Calculation Agency Agreement (if any) are available for inspection during normal business hours by the Noteholders and the Couponholders at the specified office of the Trustee, the Principal Paying Agent and of each of the other paying agents appointed under the Agency Agreement (together with the Principal Paying Agent, the Paying Agents). The Noteholders and Couponholders are entitled to the benefit of, are bound by, and are deemed to have notice of all the provisions of the Trust Deed and are deemed to have notice of all of the provisions of the Agency Agreement and the Calculation Agency Agreement (if any) applicable to them.

1. FORM, DENOMINATION AND TITLE

1.1 Form and denomination

The Notes are in bearer form, serially numbered, in the denominations of €50,000 and integral multiples of €1,000 in excess thereof (the Principal Amount) with Coupons and one Talon attached on issue.

1.2 Title

Title to the Notes and the Coupons will pass by delivery.

1.3 Noteholder absolute owner

The Issuer, the Guarantor, any Paying Agent and the Trustee may (to the fullest extent permitted by applicable laws) deem and treat the bearer of any Note or Coupon as the absolute owner for all purposes (whether or not the Note or Coupon is overdue and notwithstanding any notice of ownership or writing on the Note or Coupon or any notice of previous loss or theft of the Note or Coupon or of any trust or interest therein) and will not be required to obtain any proof thereof or as to the identity of such bearer.

2. STATUS AND SUBORDINATION

2.1 Status

The Notes and the Coupons constitute direct, unconditional, unsecured and subordinated obligations of the Issuer and will at all times rank pari passu without any preference among themselves. The rights and claims of the Noteholders and the Couponholders are subordinated as described in Condition 2.2.

* If the Option is exercised this may increase to €715,000,000.

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CONDITIONS OF THE NOTES

2.2 Subordination

The Noteholder Claims, including any claim in respect of Deferred Interest Payments, will, in the event that an order is made, an effective resolution is passed or other action is taken for the Winding-Up of the Issuer (subject to and to the extent permitted by applicable law), rank in such Winding-Up:

(a) junior to the rights and claims of all Senior Creditors of the Issuer;

(b) pari passu with each other and with the rights and claims of any Parity Creditors or holders of Parity Shares of the Issuer; and

(c) senior to the rights and claims of holders of the Issuer’s shares other than Parity Shares, and, for the purposes of giving effect to the foregoing, in any Winding-Up of the Issuer the Noteholder Claims:

(i) are subordinated and postponed and subject in right of payment to payment in full of the rights and claims of Senior Creditors of the Issuer, and may only be proved (to the extent otherwise provable) as a debt which is subject to and contingent upon prior payment in full of the rights and claims of Senior Creditors of the Issuer; and

(ii) are further limited as to the amount provable (to the extent otherwise provable) in any winding-up of the Issuer to the extent necessary to ensure that, after the satisfaction of the Noteholder Claims (as so limited), the distribution payable in respect of the rights and claims of any holder of Parity Shares in the Issuer is equal to the amount that would be payable in respect of such rights and claims if the Maximum Amount in respect of such shares was a debt provable in the winding-up of the Issuer with which the Noteholder Claims ranked equally under Condition 2.2(b).

In these conditions, references to the Maximum Amount in respect of a share is a reference to the maximum amount the holder of such a share would be entitled to receive (whether by way of return of capital, participation in any profits or surplus, payment of any debt due to the holder in its capacity as a member or otherwise) in respect of such share assuming the Issuer or Guarantor (as the case may be) had sufficient assets to satisfy that entitlement after satisfaction of all claims ranking in priority to it.

In these Conditions, Winding-Up includes receivership or other appointment of a controller, deregistration, compromise, deed of arrangement, amalgamation, administration, reconstruction, winding up, dissolution, assignment for the benefit of creditors, arrangement or compromise with creditors or bankruptcy.

2.3 No set-off

To the extent and in the manner permitted by applicable law, no Noteholder or Couponholder may exercise, claim or plead any right of set-off, counterclaim, compensation or retention in respect of any amount owed to it by the Issuer in respect of, or arising from, the Notes and each Noteholder and Couponholder will, by virtue of his holding of any Note, be deemed to have waived all such rights of set-off, counterclaim, compensation or retention.

3. GUARANTEE

3.1 Guarantee

The payment of the principal and interest in respect of the Notes and all other moneys payable by the Issuer under or pursuant to the Trust Deed has been unconditionally and irrevocably guaranteed by the Guarantor (the Guarantee) in the Trust Deed.

3.2 Status of the Guarantee

The obligations of the Guarantor under the Guarantee constitute direct, unconditional, unsecured and subordinated obligations of the Guarantor. The Noteholder Claims, including any claim under the Guarantee in respect of Deferred Interest Payments, will, in the event that an order is made or an effective

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CONDITIONS OF THE NOTES resolution is passed or other action is taken for the Winding-Up of the Guarantor (subject to and to the extent permitted by applicable law), rank in such Winding-Up:

(a) junior to the rights and claims of all Senior Creditors of the Guarantor;

(b) pari passu with the rights and claims of any Parity Creditors or holders of Parity Shares of the Guarantor; and

(c) senior to the rights and claims of the holders of the Guarantor’s shares other than Parity Shares, and, for the purposes of giving effect to the foregoing, in any Winding-Up of the Guarantor the Noteholder Claims:

(i) are subordinated and postponed and subject in right of payment to payment in full of the rights and claims of Senior Creditors of the Guarantor, and may only be proved (to the extent otherwise provable) as a debt which is subject to and contingent upon prior payment in full of the rights and claims of Senior Creditors of the Guarantor; and

(ii) are further limited as to the amount provable (to the extent otherwise provable) in any winding-up of the Guarantor to the extent necessary to ensure that, after the satisfaction of the Noteholder Claims (as so limited), the distribution payable in respect of the rights and claims of any holder of Parity Shares in the Guarantor is equal to the amount that would be payable in respect of such rights and claims if the Maximum Amount in respect of such shares was a debt provable in the winding-up of the Guarantor with which the Noteholder Claims ranked equally under Condition 3.2(b).

3.3 No set-off

To the extent and in the manner permitted by applicable law, no Noteholder nor Couponholder may exercise, claim or plead any right of set-off, counterclaim, compensation or retention in respect of any amount owed to it by the Guarantor in respect of, or arising from, the Notes and each Noteholder and Couponholder will, by virtue of his holding of any Note, be deemed to have waived all such rights of set- off, counterclaim, compensation or retention.

4. INTEREST

4.1 Fixed Interest Periods

Unless previously redeemed in accordance with these Conditions and subject to the further provisions of this Condition 4, interest on the Notes from and including the Issue Date to but excluding the Optional Redemption Date will be paid as follows:

(a) The Notes bear interest at the Fixed Rate of Interest on their Principal Amount. Such interest will be payable semi-annually in arrear on 22 March and 22 September of each year commencing on 22 March 2011 (each a Fixed Interest Payment Date). The amount of interest payable on each Fixed Interest Payment Date is €2062.50 per €50,000 in principal amount of the Notes.

(b) When interest is required to be calculated in respect of a period of less than a full half-year, it shall be calculated on the basis of (a) the actual number of days in the period from and including the date from which interest begins to accrue (the Accrual Date) to but excluding the date on which it falls due divided by (b) the actual number of days from and including the Accrual Date to but excluding the next following Interest Payment Date multiplied by two.

4.2 Floating Interest Periods

Unless previously redeemed in accordance with these Conditions and subject to the further provisions of this Condition 4, interest on the Notes will be paid from and including the Optional Redemption Date to, but excluding, the calendar day of redemption of the Notes as follows:

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(a) The Notes will bear interest at a rate determined by the Interest Calculation Agent pursuant to Condition 4.2(d) below, payable quarterly in arrear on each Floating Interest Payment Date.

(b) If any Floating Interest Payment Date would otherwise fall on a calendar day which is not a Business Day, the Floating Interest Payment Date will be postponed to the next calendar day which is a Business Day unless it would thereby fall into the next calendar month, in which case the relevant Floating Interest Payment Date will be the immediately preceding Business Day.

(c) The rate of interest for each Floating Interest Period (the Floating Rate of Interest) will, except as provided below, be the offered quotation (expressed as a percentage rate per annum) for three-month deposits in euro for that Floating Interest Period which appears on the Screen Page as of 11.00 a.m. (Central European Time) on the Interest Determination Date, plus the Floating Margin, all as determined by the Interest Calculation Agent.

If the Screen Page is not available or if no such quotation is available, the Interest Calculation Agent will request each of the Reference Banks selected by the Issuer to provide the Interest Calculation Agent with its offered quotation (expressed as a percentage rate per annum) for the relevant Floating Interest Period in an amount that is representative for a single transaction in the relevant market at the relevant time to leading banks in the interbank market of the participating Member States in the third stage of the Economic and Monetary Union, as contemplated by the Treaty on the Functioning of the European Union, for three-month deposits in euro. The offered quotations will be those offered at approximately 11.00 a.m. (Central European Time) on the relevant Interest Determination Date. As long as two or more of the selected Reference Banks provide the Interest Calculation Agent with such offered quotations, the relevant Floating Rate of Interest for such Floating Interest Period will be the arithmetic mean of such offered quotations (rounded if necessary to the nearest one thousandth of a percentage point, with 0.0005 being rounded upwards), plus the Floating Margin, all as determined by the Interest Calculation Agent.

If the Floating Rate of Interest cannot be determined in accordance with the foregoing provisions, the Floating Rate of Interest will be the offered quotation on the Screen Page, as described above, on the last calendar day preceding the Interest Determination Date on which such quotation was displayed, plus the Floating Margin, all as determined by the Interest Calculation Agent.

Floating Margin means 6.851 per cent. per annum.

Screen Page means Reuters Page EURIBOR01 (or such other screen page of Reuters or such other information service which is the successor to Reuters Page EURIBOR01 for the purpose of displaying such rates).

(d) The Interest Calculation Agent will, on or as soon as practicable after each Interest Determination Date, determine the Floating Rate of Interest for each Note and calculate the amount of interest payable per Note for the relevant Floating Interest Period (the Floating Interest Amount). Each Floating Interest Amount will be calculated by multiplying the Floating Rate of Interest by the Day Count Fraction and the Principal Amount per Note and rounding the resulting figure to the nearest cent (with 0.5 or more of a cent being rounded upwards).

Day Count Fraction means, in respect of the calculation of the Floating Interest Amount for any Floating Interest Period, or part thereof, the actual number of calendar days in that period divided by 360.

(e) The Interest Calculation Agent will cause the Floating Rate of Interest, the Floating Interest Amount for each €1,000 in principal amount of Notes for each Floating Interest Period, the relevant Floating Interest Payment Date, and each Floating Interest Period (as the case may be), to be notified to the Issuer, the Guarantor and the Trustee promptly and, if required by the rules of any stock exchange on which the Notes are listed from time to time, to be notified to such stock exchange and to the Noteholders in accordance with Condition 13 without undue delay, but, in any case, not later than on the fourth Business Day after their determination.

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(f) All notifications, opinions, determinations, certificates, calculations, quotations and decisions given, expressed, made or obtained for the purposes of the provisions of these Conditions, whether by the Reference Banks (or any of them) or the Interest Calculation Agent will (in the absence of negligence, default or bad faith) be binding upon the Issuer, the Guarantor, the Trustee, the Interest Calculation Agent, the Paying Agents and all Noteholders and Couponholders and (in the absence of negligence, default or bad faith) no liability to the Issuer, the Guarantor or the Noteholders or the Couponholders will attach to the Reference Banks (or any of them) or the Interest Calculation Agent in connection with the exercise or non-exercise by any of them of their powers, duties and discretions pursuant to such provisions.

4.3 Mandatory Deferral of Interest Payments

(a) If, on any day which is 8 Business Days prior to any Interest Payment Date, a Trigger Event exists and the Issuer fulfils the S&P Rating Criteria, the Interest Amount falling due on such Interest Payment Date will not be due and payable or be paid until the relevant Payment Reference Date and will constitute a Deferred Interest Payment. Interest will accrue on each Deferred Interest Payment for so long as such Deferred Interest Payment remains outstanding at the same rate of interest as the Principal Amount of the Notes bears at such time and will be added to such Deferred Interest Payment (and thereafter bear interest accordingly) on each Interest Payment Date. Each Deferred Interest Payment and interest thereon will be payable in accordance with Condition 4.4.

(b) The Issuer will notify the Noteholders (in accordance with Condition 13.1), the Trustee and the Principal Paying Agent of the existence of the Trigger Event not less than 5 Business Days prior to the relevant Interest Payment Date. Deferral of interest pursuant to this Condition 4.3 will not constitute an Event of Default or a default of the Issuer or the Guarantor or any other breach of their respective obligations under the Notes or the Trust Deed or for any other purpose.

(c) A Trigger Event will exist if the corporate credit rating assigned by Standard & Poor’s to the Guarantor (and the Issuer, if it has been assigned such a credit rating), as published by Standard & Poor’s, is BB+ or lower.

(d) The Issuer fulfils the S&P Rating Criteria if:

(i) the Issuer or the Guarantor is rated by Standard & Poor’s; and

(ii) the Notes are eligible for the same or higher category of equity credit as was attributed to the Notes at the Issue Date, as notified from time to time to the Issuer by Standard & Poor’s.

4.4 Payment of Deferred Interest Payments

(a) A Deferred Interest Payment will become due and payable, and the Issuer must pay such Deferred Interest Payment (including any amount of interest accrued thereon in accordance with Condition 4.3), on the relevant Payment Reference Date (in accordance with Condition 6), on the giving of at least one Business Day’s prior notice to the Noteholders (in accordance with Condition 13), the Trustee and the Principal Paying Agent.

(b) Payment Reference Date means the date which is the earliest of:

(i) the Business Day falling 5 Business Days after the date on which the Trigger Event is no longer subsisting;

(ii) the date which is the fifth anniversary of the date on which any of the then outstanding Deferred Interest Payments was initially deferred;

(iii) the Maturity Date;

(iv) the date on which the Notes are otherwise redeemed; and

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(v) the date on which the Trustee takes any action in respect of an Event of Default which results from an order being made for the winding-up of the Issuer or the Guarantor as described in Condition 10(b).

4.5 Accrual of interest

The Notes will cease to bear interest from the beginning of the calendar day on which they are due for redemption. If the Issuer fails to redeem the Notes upon due presentation and surrender thereof when due, interest will continue to accrue as provided in the Trust Deed.

5. REDEMPTION AND PURCHASE

5.1 Maturity

Unless redeemed earlier in accordance with these Conditions, the Notes will be redeemed on the Floating Interest Payment Date falling in September 2070 (the Maturity Date) at their Principal Amount plus any interest accrued up to (but excluding) the Maturity Date and any outstanding Deferred Interest Payments (including any amount of interest accrued thereon in accordance with Condition 4.3).

5.2 Early Redemption at the option of the Issuer

The Issuer may redeem the Notes (in whole but not in part) on 22 September 2017 (the Optional Redemption Date) or on any subsequent Floating Interest Payment Date at their Principal Amount, plus any interest accrued up to (but excluding) the relevant Early Redemption Date and any outstanding Deferred Interest Payments (including any amount of interest accrued thereon in accordance with Condition 4.3), on the giving of not less than 30 and not more than 60 calendar days’ irrevocable notice of redemption to the Noteholders in accordance with Condition 13.1.

5.3 Early Redemption due to a Gross-up Event or Change of Control Event

(a) If a Gross-up Event or a Change of Control Event occurs, the Issuer may redeem the Notes (in whole but not in part) (in the case of a Gross-up Event, prior to (but excluding) the Optional Redemption Date and, in the case of a Change of Control Event, at any time), at their Principal Amount, plus any interest accrued up to (but excluding) the relevant Early Redemption Date and any outstanding Deferred Interest Payments (including any amount of interest accrued thereon in accordance with Condition 4.3), on the giving of not less than 30 and not more than 60 calendar days’ irrevocable notice of redemption to the Noteholders in accordance with Condition 13.

(b) In the case of a Gross-up Event:

(i) no such notice of redemption may be given earlier than 45 calendar days prior to the earliest calendar day on which the Issuer or, as the case may be, the Guarantor would be for the first time obliged to pay the Additional Amounts in question on payments due in respect of the Notes; and

(ii) prior to the giving of any such notice of redemption, the Issuer will deliver or procure that there is delivered to the Trustee:

(A) a certificate signed by any one duly Authorised Signatory of the Issuer stating that the Issuer is entitled to effect such redemption and setting out a statement of facts showing that the conditions to the exercise of the right of the Issuer to redeem have been satisfied and that the obligation to pay Additional Amounts cannot be avoided by the Issuer or, as the case may be, the Guarantor taking reasonable measures available to it; and

(B) an opinion of an independent legal or tax adviser of recognised standing to the effect that the Issuer or, as the case may be, the Guarantor has or will become obliged to pay the Additional Amounts in question as a result of a Gross-up Event,

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and the Trustee shall be entitled to accept the above certificate and opinion as sufficient evidence of the satisfaction of the conditions precedent set out above, in which event it shall be conclusive and binding on the Noteholders and the Couponholders.

(c) In the case of a Change of Control Event, such notice of redemption may only be given simultaneously with or after a notification by the Issuer in accordance with Condition 13.1 that a Change of Control Event has occurred.

(d) Gross-up Event means that as a result of any change in, or amendment to, the laws (or any rules or regulations thereunder) of the Relevant Jurisdiction, or any change in or amendment to any official interpretation or application of those laws or rules or regulations, which change or amendment becomes effective on or after the Issue Date (i) the Issuer has or will become obliged to pay Additional Amounts; or (ii) the Guarantor has or will become obliged to pay Additional Amounts provided that (in either case) the payment obligation cannot be avoided by the Issuer or, as the case may be, the Guarantor taking reasonable measures available to it.

A Change of Control Event will occur if:

(i) the Issuer ceases to be a Wholly Owned Subsidiary of the Guarantor; or

(ii) the Guarantor becomes a Subsidiary of another person (Relevant Person),

provided that a Change of Control Event will not have occurred if: (A) the shareholders of the Relevant Person holding, directly or indirectly, more than 50 per cent. of the issued voting share capital of the Relevant Person are also, or immediately prior to the event which would otherwise constitute a Change of Control Event were, shareholders of the Guarantor who held, directly or indirectly, more than 50 per cent. of the issued voting share capital of the Guarantor; or (B) the event which would otherwise constitute a Change of Control Event occurs as part of a Solvent Reorganisation of the Issuer or the Guarantor.

5.4 Early Redemption due to a Tax Event, Capital Event or Accounting Event

(a) If a Tax Event, a Capital Event or an Accounting Event occurs, the Issuer may redeem the Notes (in whole but not in part) at any time prior to but excluding the Optional Redemption Date at their Early Redemption Amount, on the giving of not less than 30 and not more than 60 calendar days’ irrevocable notice of redemption to the Noteholders in accordance with Condition 13.1.

(b) Such notice of redemption may only be given simultaneously with or after a notification by the Issuer in accordance with Condition 13 that a Tax Event, a Capital Event or an Accounting Event (as the case may be) has occurred.

(i) in the opinion of a recognised independent tax adviser (such opinion to have been obtained by the Guarantor and delivered to the Trustee), on or after the Issue Date, as a result of:

(A) any amendment to, or change in, the laws (or any rules or regulations thereunder) of the Commonwealth of Australia or any political subdivision or any taxing authority thereof or therein which is enacted, promulgated, issued or becomes effective otherwise on or after the Issue Date; or

(B) any amendment to, or change in, an official and binding interpretation of any such laws, rules or regulations by any legislative body, court, governmental agency or regulatory authority (including the enactment of any legislation and the publication of any judicial decision or regulatory determination) which is enacted, promulgated, issued or becomes effective otherwise on or after the Issue Date; or

(C) any generally applicable official interpretation or pronouncement that provides for a position with respect to such laws or regulations that differs from the previous generally accepted position which is issued or announced on or after the Issue Date,

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payments by the Issuer on the Notes and by the Guarantor pursuant to the Guarantee would no longer, or within 90 calendar days of the date of that opinion will no longer, be fully deductible (or the entitlement to make such deduction shall be materially reduced) by the Issuer or (as applicable) the Guarantor for Australian corporate income tax purposes; and

(ii) such risk cannot be avoided by the Issuer or, as the case may be, the Guarantor taking reasonable measures available to it (as certified to the Trustee by any one duly Authorised Signatory of the Issuer).

The Trustee shall be entitled to accept such opinion and certification as sufficient evidence of the satisfaction of the conditions precedent set out above, in which event it shall be conclusive and binding on the Noteholders and the Couponholders.

A Capital Event will occur if the Issuer or the Guarantor has been notified by Standard & Poor’s, or has become aware following a publication by Standard & Poor’s, that the Notes will no longer be eligible for the same or higher category of equity credit as was attributed to the Notes at the Issue Date.

An Accounting Event will occur if the obligations of the Issuer under the Notes or of the Guarantor under the Trust Deed may no longer be recorded as a “financial liability” in the audited consolidated financial statements of the Issuer or the Guarantor prepared in accordance with Australian International Financial Reporting Standards or other recognised accounting standards that the Issuer or (as the case may be) the Guarantor may adopt from time to time for the preparation of its audited consolidated financial statements.

5.5 Early Redemption Amount

The Early Redemption Amount will be calculated by the Calculation Agent on the Redemption Calculation Date as the greater of the Principal Amount of the Notes and the Make-Whole Amount of the Notes, in each case plus interest accrued thereon until (but excluding) the relevant Early Redemption Date and any outstanding Deferred Interest Payments (including any amount of interest accrued thereon in accordance with Condition 4.3), where:

The Adjusted Comparable Yield will be equal to the yield at the Redemption Calculation Date on the euro- denominated benchmark security selected by the Calculation Agent, after consultation with the Issuer, as having a maturity comparable to the remaining term of the Notes to the Optional Redemption Date that would be utilised, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the Optional Redemption Date.

The Make-Whole Amount will be calculated by the Calculation Agent, and will be equal to the sum of the Present Values on the relevant Early Redemption Date of: (i) the Principal Amount of the Notes; and (ii) the remaining scheduled interest payments on the Notes up to and including the Optional Redemption Date (not including any Deferred Interest Payments or any interest amount accrued thereon or the portion of any scheduled interest payment in respect of which interest has already accrued prior to the relevant Early Redemption Date). In performing such calculation, it will be assumed that the Principal Amount of the Notes is due and payable on the Optional Redemption Date and that all interest payments that have not been paid prior to the relevant Early Redemption Date are due and payable in full.

The Present Values will be calculated by the Calculation Agent by discounting the Principal Amount of the Notes and the remaining scheduled interest payments to and including the Optional Redemption Date using the Adjusted Comparable Yield plus 1.75 per cent. per annum. If interest is to be calculated for a period of less than one year, it will be calculated on the basis of the actual number of calendar days in the relevant period divided by the actual number of days in the relevant year (365 or 366).

Redemption Calculation Date means the fourth Business Day prior to the relevant Early Redemption Date.

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5.6 Purchase of Notes

The Issuer, the Guarantor or any Wholly Owned Subsidiary of the Guarantor may, in compliance with applicable laws, at any time following 31 December 2015 purchase Notes (provided that all unmatured Coupons and unexchanged Talons appertaining to the Notes are purchased with the Notes) in any manner and at any price. Such acquired Notes may be surrendered for cancellation or held or resold.

In the event that the Issuer, the Guarantor and/or any Wholly Owned Subsidiary of the Guarantor has, individually or in aggregate, purchased (and not resold) or redeemed Notes equal to or in excess of 80 per cent. of the aggregate Principal Amount of the Notes issued on the Issue Date, the Issuer may redeem the remaining Notes (in whole but not in part):

(a) at any time prior to the Optional Redemption Date, at the Early Redemption Amount; or

(b) on, or on any Floating Interest Payment Date after, the Optional Redemption Date, at their Principal Amount plus any interest accrued and outstanding up to (but excluding) the Early Redemption Date and any Deferred Interest Payments (including any amount of interest accrued thereon in accordance with Condition 4.3), on the giving of not less than 30 and not more than 60 calendar days’ irrevocable notice of redemption to the Noteholders in accordance with Condition 13.1.

5.7 Optional Noteholder redemption upon a Change of Control Event

(a) If both a Rating Downgrade and a Change of Control Event have occurred and are subsisting, the Issuer shall within 14 days after the end of the Change of Control Period relating to that Change of Control give notice thereof to the Noteholders in accordance with Condition 13 (a Change of Control Notice). Such notice shall contain a statement confirming whether or not the Issuer intends to exercise its right to redeem the Notes pursuant to Condition 5.3 and, if the Issuer does not intend to exercise its right to redeem the Notes pursuant to Condition 5.3, of the Noteholders’ entitlement to exercise their rights pursuant to Condition 5.7(b) below. The Change of Control Notice will also specify, if relevant: (i) the material facts comprising the Change of Control Event; (ii) the Put Date; (iii) the names and specified offices of all Paying Agents; and (iv) that a Put Notice, once validly given, may not be withdrawn.

(b) If the Change of Control Notice specifies that the Issuer does not intend to exercise its right to redeem the Notes pursuant to Condition 5.3, a Noteholder may require the Issuer to redeem or, at the Issuer’s option, purchase (or procure the purchase of), the entire aggregate principal amount of the Notes held by such Noteholder on the Put Date at their Principal Amount plus any interest accrued up to (but excluding) the Put Date and any outstanding Deferred Interest Payments (including any amount of interest accrued thereon in accordance with Condition 4.3), on the giving of not less than 30 and not more than 60 calendar days’ notice (which shall be irrevocable) after the delivery of a Change of Control Notice to the Issuer in accordance with Condition 13.2 and this Condition 5.7 (a Put Notice).

(i) the name and address of the Noteholder;

(ii) the aggregate principal amount of the Notes held by such Noteholder;

(iii) the details of the euro cash account to which payments can be made; and

(iv) confirmation that such Noteholder authorises the production of such Put Notice in any applicable administrative proceedings.

(d) If, subsequent to a Noteholder exercising its rights under Condition 5.7(b), the Issuer chooses to exercise its right to redeem the Notes pursuant to Condition 5.2, 5.3, 5.4 or 5.6, all Notes will be redeemed in accordance with Condition 5.2, 5.3, 5.4 or 5.6 (as relevant) and not in accordance with Condition 5.7(b). In such circumstances, all Put Notices will be disregarded.

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(e) Change of Control Period means the period:

(i) commencing on the date that is the earlier of: (A) the date of the relevant Change of Control Event; and (B) the date of the earliest Relevant Potential Change of Control Announcement (if any); and

(ii) ending 90 days after the Date of Announcement.

Date of Announcement means the date of the public announcement by the Issuer or the Guarantor that a Change of Control Event has occurred.

Put Date means the Business Day which is, or immediately follows, the two month anniversary of the last day of the Change of Control Period.

Rating Downgrade means, within the Change of Control Period:

(i) any rating (other than an unsolicited rating) assigned to the Notes by any rating agency is withdrawn;

(ii) the Guarantor (and the Issuer, if it has been assigned a credit rating) ceases to hold a credit rating from any rating agency (other than a rating agency that has provided an unsolicited rating); or

(iii) any credit rating assigned to the Guarantor (and the Issuer, if it has been assigned a credit rating) is lowered by at least one full rating notch by any rating agency (other than a rating agency that has provided an unsolicited rating) and the lowered credit rating is lower than ‘BBB+’ (or equivalent thereof) in the case of Standard & Poor’s or the nearest equivalent in the case of any other rating agency,

provided that no Rating Downgrade will occur by virtue of a particular withdrawal of, or reduction in, rating within the Change of Control Period unless the rating agency withdrawing or making the reduction in the rating announces or confirms that the withdrawal or reduction was the result, in whole or in part, of the relevant Change of Control Event and does not reinstate the rating that applied prior to the withdrawal or reduction prior to the end of the Change of Control Period.

Relevant Potential Change of Control Announcement means any formal public announcement or statement by or on behalf of the Issuer or Guarantor, or any actual or potential bidder or any advisor thereto relating to any potential Change of Control Event where, within 90 days of the date of such announcement or statement, a Change of Control Event occurs.

5.8 Cancellations

All Notes which are (a) redeemed or (b) purchased by or on behalf of the Issuer, the Guarantor or any of the Guarantor’s Subsidiaries and which the Issuer elects to cancel will forthwith be cancelled, together with all relevant unmatured Coupons and unexchanged Talons attached to the Notes or surrendered with the Notes, and accordingly may not be held, reissued or resold.

6. PAYMENTS AND EXCHANGE OF TALONS

6.1 Payments in respect of Notes

Payment of principal and interest in respect of each Note will be made against presentation and surrender (or, in the case of part payment only, endorsement) of the Note, except that payments of interest due on an Interest Payment Date will be made against presentation and surrender (or in the case of part payment only, endorsement) of the relevant Coupon, in each case at the specified office outside the United States of any of the Paying Agents.

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6.2 Method of payment

Payments will be made by credit or transfer to a euro account (or any other account to which euro may be credited or transferred) specified by the payee or, at the option of the payee, by euro cheque.

6.3 Missing Unmatured Coupons

Each Note should be presented for payment together with all relative unmatured Coupons (which expression will, for the avoidance of doubt, include Coupons falling to be issued on exchange of matured Talons). Upon the date on which any Note becomes due and repayable, all unmatured Coupons appertaining to the Note (whether or not attached) will become void and no payment will be made in respect of such Coupons.

6.4 Payments subject to applicable laws

Payments in respect of principal and interest on the Notes are subject in all cases to any fiscal or other laws and regulations applicable in the place of payment, but without prejudice to the provisions of Condition 7.

6.5 Payment only on a Presentation Date

A holder will be entitled to present a Note or Coupon for payment only on a Presentation Date and will not, except as provided in Condition 4.3, be entitled to any further interest or other payment if a Presentation Date is after the due date.

Presentation Date means a day which (subject to Condition 8):

(a) is or falls after the relevant due date;

(b) is a Payment Business Day in the place of the specified office of the Paying Agent at which the Note or Coupon is presented for payment; and

In this Condition, Payment Business Day means, in relation to any place, a day on which commercial banks and foreign exchange markets settle payments and are open for general business (including dealing in foreign exchange and foreign currency deposits) in that place.

6.6 Exchange of Talons

On and after the Interest Payment Date on which the final Coupon comprised in any Coupon sheet matures, the Talon comprised in the Coupon sheet may be surrendered at the specified office of any Paying Agent in exchange for a further Coupon sheet (including any appropriate further Talon), subject to the provisions of Condition 8. Each Talon will, for the purposes of these Conditions, be deemed to mature on the Interest Payment Date on which the final Coupon comprised in the relative Coupon sheet matures.

6.7 Initial Paying Agents

The name of the initial Principal Paying Agent and its specified office is set out below. In accordance with the Agency Agreement, the Issuer reserves the right, subject to the prior written approval of the Trustee, at any time to vary or terminate the appointment of, and to appoint additional or other, Paying Agents, provided that:

(a) there will at all times be a Principal Paying Agent;

(b) there will at all times be at least one Paying Agent (which may be the Principal Paying Agent) having its specified office in a European city which so long as the Notes are admitted to official listing on the London Stock Exchange shall be London or such other place as the UK Listing Authority may approve;

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(d) the Issuer undertakes that it will ensure that it maintains a Paying Agent in a Member State of the European Union that is not obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/EC or any law implementing or complying with, or introduced in order to conform to, such Directive.

Notice of any termination or appointment and of any change in specified office will be given to the Noteholders promptly by the Issuer in accordance with Condition 13.

7. TAXATION AND GROSS-UP

7.1 Payment without withholding

All payments in respect of the Notes by or on behalf of the Issuer or the Guarantor will be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature (Taxes) imposed or levied by or on behalf of the Relevant Jurisdiction, unless the withholding or deduction of the Taxes is required by law. In that event, the Issuer or, as the case may be, the Guarantor, will pay such additional amounts (Additional Amounts) as may be necessary in order that the net amounts received by the Noteholders and Couponholders after the withholding or deduction will equal the respective amounts which would otherwise have been receivable in respect of the Notes or, as the case may be, the Coupons in the absence of the withholding or deduction; except that no additional amounts will be payable in relation to any payment in respect of any Note or Coupon:

(a) presented for payment by or on behalf of a Noteholder who is liable to the Taxes in respect of such Note or Coupon by reason of their having some connection with the Commonwealth of Australia other than the mere holding of the Note or Coupon;

(b) presented for payment by, or by a third party on behalf of, a Noteholder or Couponholder who is liable to Taxes in respect of the Note or Coupon by reason of that person being an associate of the Issuer for the purposes of Section 128F of the Tax Act;

(c) where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC or any law implementing or complying with, or introduced in order to conform to, such Directive;

(d) presented for payment by or on behalf of a Noteholder or a Couponholder who would have been able to avoid such withholding or deduction by presenting the relevant Note or Coupon to another Paying Agent in a Member State of the European Union;

(e) presented for payment more than 30 days after the Relevant Date (as defined below) except to the extent that a holder of such Note or Coupon would have been entitled to such Additional Amounts on presenting the same for payment on the last day of the period of 30 days assuming, whether or not such is in fact the case, that day to have been a Presentation Date (as defined in Condition 6);

(f) to, or to a third party on behalf of, a holder who could lawfully avoid (but has not so avoided) such deduction or withholding by complying or procuring that any third party complies with any statutory requirements or by making or procuring that any third party makes a declaration of non-residence or other similar claim for exemption to any tax authority in the place where the relevant Note or Coupon is presented for payment;

(g) in respect of any tax, duty, assessment, withholding or other governmental charge that is imposed, deducted or withheld by reason of a failure of a holder or beneficial owner of a Note or Coupon (i) to provide certification, information, or documentation concerning the nationality, residence, identity or connection with the Commonwealth of Australia of the holder or beneficial owner (including, without limitation, the supplying of an Australian Business Number (if relevant), any appropriate tax file number or other appropriate exemption details), if and to the extent that furnishing such information would have reduced or eliminated any taxes, duties, assessments, withholdings or other

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governmental charges as to which additional amounts would have otherwise been payable to such holder or beneficial owner, or (ii) to make any certification, declaration or other similar claim or satisfy any information, documentation, statement or reporting requirement, which, in the case of (i) or (ii), is required or imposed by a statute, treaty, rule, regulation or administrative practice of the Commonwealth of Australia (or any territories or political subdivisions or any taxing authority thereof or therein) as a condition or precondition to relief or exemption from all or part of such tax, duty, assessment, withholding or other governmental charge; or

(h) presented for payment in the Commonwealth of Australia.

7.2 Interpretation

In these Conditions:

(a) The Relevant Date means the date on which the payment first becomes due but, if the full amount of the money payable has not been received by the Principal Paying Agent or the Trustee on or before the due date, it means the date on which, the full amount of the money having been so received, notice to that effect has been duly given to the Noteholders by the Issuer in accordance with Condition 13.

(b) The Relevant Jurisdiction means the Commonwealth of Australia or any political subdivision or any authority thereof or therein having power to tax or, in the event of any substitution, Solvent Reorganisation or other corporate action resulting in either the Issuer or the Guarantor (as the case may be) being incorporated in any other jurisdiction, that other jurisdiction or any political subdivision or any authority thereof or therein having power to tax.

7.3 Additional Amounts, principal and interest

Any reference in these Conditions to any amounts in respect of the Notes will be deemed also to refer to any Additional Amounts which may be payable under this Condition 7 or under any undertakings given in addition to, or in substitution for, this Condition pursuant to the Trust Deed. Unless the context otherwise requires, any reference in these Conditions to “principal” includes any instalment amount or redemption amount and any other amounts in the nature of principal payable pursuant to these Conditions and “interest” includes all amounts payable pursuant to Condition 4 and any other amounts in the nature of interest payable pursuant to these Conditions.

8. PRESCRIPTION

Notes and Coupons (which for this purpose does not include the Talons) will become void unless presented for payment within periods of 10 years (in the case of principal) and five years (in the case of interest) from the Relevant Date in respect of the Notes or, as the case may be, the Coupons, subject to the provisions of Condition 6. There may not be included in any Coupon sheet issued upon exchange of a Talon any Coupon which would be void upon issue under this Condition 8 or Condition 6.

9. FURTHER ISSUES

The Issuer is at liberty from time to time without the consent of the Noteholders or Couponholders to create and issue further notes or bonds either (a) ranking pari passu in all respects (or in all respects save for the first payment of interest thereon) and so that the same will be consolidated and form a single series with the Notes or (b) upon such terms as to ranking, interest, conversion, redemption and otherwise as the Issuer may determine at the time of the issue. Any further notes which are to form a single series with the Notes will be constituted by a deed supplemental to the Trust Deed. Any further notes or bonds not forming a single series with the Notes will not be constituted by the Trust Deed.

10. EVENTS OF DEFAULT

If any of the following events occurs (each an Event of Default) then the Trustee may, and shall if so directed by an Extraordinary Resolution of the Noteholders or so requested in writing by the holders of at least one-

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CONDITIONS OF THE NOTES quarter in principal amount of the Notes then outstanding (subject in each case to being indemnified and/or secured and/or prefunded to its satisfaction): (i) serve notice on the Issuer and the Guarantor that they are (and they shall upon the service of such notice be) in default under the Trust Deed, the Notes and the Coupons and the Trustee, (ii) notwithstanding Condition 11, institute proceedings for the winding-up of the Issuer and/or the Guarantor and/or prove in the winding-up of the Issuer and/or the Guarantor and/or (iii) claim in the liquidation of the Issuer and/or the Guarantor for the payment referred to in paragraph (a) below and/or give notice to the Issuer and the Guarantor that the Notes are, and they shall immediately become, due and payable at their Principal Amount together with any accrued and unpaid interest to such date and any outstanding Deferred Interest Payments (including any amount of interest accrued thereon in accordance with Condition 4.3), as provided in the Trust Deed:

(a) neither the Issuer nor the Guarantor pays any principal or interest or other amount due and payable in respect of the Notes or any of them in full within 30 days of its due date; or

(b) an order is made (other than an order successfully appealed or permanently stayed within 30 days) by a State or Federal Court in the Commonwealth of Australia or a resolution is passed by the shareholders of the Issuer or the Guarantor, as the case may be, for the winding up of the Issuer or the Guarantor (other than for the purposes of Solvent Reorganisation of the Issuer or the Guarantor).

11. ENFORCEMENT

11.1 Enforcement by the Trustee

Without prejudice to Condition 10, the Trustee may at any time, at its discretion (subject to the next following sentence) and without further notice institute such proceedings against the Issuer and/or the Guarantor as it may think fit to enforce any term or condition binding on the Issuer or the Guarantor under the Trust Deed, the Notes or the Coupons (other than any payment obligation of the Issuer or the Guarantor under or arising from the Trust Deed, the Notes or the Coupons, including, without limitation, payment of any principal or interest in respect of the Notes or the Coupons and including damages awarded for the breach of any obligations) but in no event shall the Issuer or the Guarantor, by virtue of the institution of any such proceedings, be obliged to pay any sum or sums in cash or otherwise, sooner than the same would otherwise have been payable by it. The Trustee will not be bound to take any such proceedings or any other action in relation to the Trust Deed, the Notes or the Coupons unless (a) it has been so directed by an Extraordinary Resolution of the Noteholders or so requested in writing by the holders of at least one- quarter in principal amount of the Notes then outstanding and (b) it has been indemnified and/or secured and/or prefunded to its satisfaction.

11.2 Enforcement by the Noteholders

No Noteholder or Couponholder will be entitled to proceed directly against the Issuer or the Guarantor unless the Trustee, having become bound so to proceed, fails so to do within a reasonable period and the failure is continuing.

12. REPLACEMENT OF NOTES AND COUPONS

Should any Note or Coupon be lost, stolen, mutilated, defaced or destroyed it may be replaced at the specified office of the Principal Paying Agent upon payment by the claimant of the expenses incurred in connection with the replacement and on such terms as to evidence and indemnity as the Issuer may reasonably require. Mutilated or defaced Notes or Coupons must be surrendered before replacements will be issued.

13. NOTICES

13.1 Notification in newspapers

All notices to the Noteholders will be valid if published in a leading English language daily newspaper published in London (expected to be the Financial Times) or such other English language daily newspaper

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CONDITIONS OF THE NOTES with general circulation in Europe as the Trustee may approve. The Issuer will also ensure that notices are duly published in a manner which complies with the rules and regulations of any stock exchange or the relevant authority on which the Notes are for the time being listed. Any such notice will be deemed to have been given on the date of the first publication or, where required to be published in more than one newspaper, on the date of the first publication in all required newspapers. If publication as provided above is not practicable, notice will be given in such other manner, and will be deemed to have been given on such date, as the Trustee may approve. Couponholders will be deemed for all purposes to have notice of the contents of any notice given to the Noteholders in accordance with this paragraph.

13.2 Notices from the Noteholders

Notices to be given by any Noteholder must be in writing and given by lodging the same, together with the relative Note or Notes, with the Principal Paying Agent or, if the Notes are held in a clearing system, may be given through the clearing system in accordance with its standard rules and procedures.

14. SUBSTITUTION

The Trustee may, without the consent of the Noteholders or Couponholders, agree with the Issuer and the Guarantor to the substitution in place of the Issuer (or of any previous substitute under this Condition) as the principal debtor under the Notes, the Coupons and the Trust Deed of the Guarantor or any of its other Subsidiaries, subject to:

(a) except in the case of the substitution of the Guarantor, the Notes being unconditionally and irrevocably guaranteed by the Guarantor;

(b) the Trustee being satisfied that the interests of the Noteholders will not be materially prejudiced by the substitution; and

15. MEETINGS OF NOTEHOLDERS, MODIFICATION, WAIVER, AUTHORISATION AND DETERMINATION

15.1 Meetings of Noteholders

The Trust Deed contains provisions for convening meetings of the Noteholders to consider any matter affecting their interests, including the modification or abrogation by Extraordinary Resolution of any of these Conditions or any of the provisions of the Trust Deed. The quorum at any meeting for passing an Extraordinary Resolution will be one or more persons present holding or representing more than 50 per cent. in principal amount of the Notes for the time being outstanding, or at any adjourned such meeting one or more persons present whatever the principal amount of the Notes held or represented by him or them, except that, at any meeting the business of which includes the modification or abrogation of certain of the provisions of these Conditions and certain of the provisions of the Trust Deed, the necessary quorum for passing an Extraordinary Resolution will be one or more persons present holding or representing not less than two-thirds, or at any adjourned such meeting not less than one-third, of the principal amount of the Notes for the time being outstanding. An Extraordinary Resolution passed at any meeting of the Noteholders will be binding on all Noteholders, whether or not they are present at the meeting, and on all Couponholders.

15.2 Modification, Waiver, Authorisation and Determination

The Trustee may agree, without the consent of the Noteholders or Couponholders, to any modification of, or to the waiver or authorisation of any breach or proposed breach of, any of these Conditions or any of the provisions of the Trust Deed, or determine, without any such consent as aforesaid, that any Event of Default or Potential Event of Default (as defined in the Trust Deed) will not be treated as such (provided that, in any such case, it is not, in the opinion of the Trustee, materially prejudicial to the interests of the Noteholders) or may agree, without any such consent as aforesaid, to any modification which, in its opinion, is of a formal, minor or technical nature or to correct a manifest or proven error.

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15.3 Trustee to have Regard to Interests of Noteholders as a Class

In connection with the exercise by it of any of its trusts, powers, authorities and discretions (including, without limitation, any modification, waiver, authorisation, determination or substitution), the Trustee must have regard to the general interests of the Noteholders as a class but must not have regard to any interests arising from circumstances particular to individual Noteholders or Couponholders (whatever their number) and, in particular but without limitation, must not have regard to the consequences of any such exercise for individual Noteholders or Couponholders (whatever their number) resulting from their being for any purpose domiciled or resident in, or otherwise connected with, or subject to the jurisdiction of, any particular territory or any political sub-division thereof and the Trustee will not be entitled to require, nor will any Noteholder or Couponholder be entitled to claim, from the Issuer, the Guarantor, the Trustee or any other person any indemnification or payment in respect of any tax consequence of any such exercise upon individual Noteholders or Couponholders except to the extent already provided for in Condition 7 and/or any undertaking given in addition to, or in substitution for, Condition 7 pursuant to the Trust Deed.

15.4 Notification to the Noteholders

Any modification, waiver, authorisation, determination or substitution agreed to by the Trustee will be binding on the Noteholders and the Couponholders and, unless the Trustee agrees otherwise, any modification or substitution will be notified by the Issuer to the Noteholders as soon as practicable thereafter in accordance with Condition 13.

16. INDEMNIFICATION OF THE TRUSTEE AND ITS CONTRACTING WITH THE ISSUER AND THE GUARANTOR

16.1 Indemnification of the Trustee

The Trust Deed contains provisions for the indemnification of the Trustee and for its relief from responsibility, including provisions relieving it from taking action unless indemnified to its satisfaction.

16.2 Trustee Contracting with the Issuer and the Guarantor

The Trust Deed also contains provisions pursuant to which the Trustee is entitled, inter alia, (a) to enter into business transactions with the Issuer and/or the Guarantor and/or any of the Guarantor’s Subsidiaries and to act as trustee for the holders of any other securities issued or guaranteed by, or relating to, the Issuer and/or the Guarantor and/or any of the Guarantor’s Subsidiaries, (b) to exercise and enforce its rights, comply with its obligations and perform its duties under or in relation to any such transactions or, as the case may be, any such trusteeship without regard to the interests of, or consequences for, the Noteholders or Couponholders, and (c) to retain and not be liable to account for any profit made or any other amount or benefit received thereby or in connection therewith.

17. GOVERNING LAW AND SUBMISSION TO JURISDICTION

17.1 Governing law

The Trust Deed, the Notes and the Coupons, and any non-contractual obligations arising out or in connection with the Trust Deed, the Notes or the Coupons, are governed by and must be construed in accordance with, English law, with the exception that Conditions 2.2 and 3.2 must be construed in accordance with the laws of Australia.

17.2 Jurisdiction of English courts

(a) Each of the Issuer and the Guarantor has, in the Trust Deed, irrevocably agreed for the benefit of the Trustee, the Noteholders and the Couponholders that the courts of England are to have non-exclusive jurisdiction to settle any disputes which may arise out of or in connection with the Trust Deed, the Notes or the Coupons (including any dispute relating to any non-contractual obligations arising out

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of or in connection with the Trust Deed, the Notes or the Coupons) and has accordingly submitted to the non-exclusive jurisdiction of the English courts.

(b) Each of the Issuer and the Guarantor has, in the Trust Deed, waived any objection to the courts of England on the grounds that they are an inconvenient or inappropriate forum. The Trustee, the Noteholders and the Couponholders may take any suit, action or proceeding arising out of, or in connection with the Trust Deed, the Notes or the Coupons respectively (including any suit, action or proceeding relating to any non-contractual obligations arising out of or in connection with the Trust Deed, the Notes or the Coupons respectively) (referred to as Proceedings) against the Issuer or the Guarantor in any other court of competent jurisdiction and concurrent Proceedings in any number of jurisdictions.

17.3 Appointment of process agent

Each of the Issuer and the Guarantor has, in the Trust Deed, irrevocably and unconditionally appointed Law Debenture Corporate Services Limited at the latter’s registered office for the time being as its agent for service of process in England in respect of any Proceedings and has undertaken that in the event of such agent ceasing so to act it will appoint such other person as the Trustee may approve as its agent for that purpose.

18. RIGHTS OF THIRD PARTIES

No rights are conferred on any person under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Note, but this does not affect any right or remedy of any person which exists or is available apart from that Act.

19. DEFINITIONS

Unless the context otherwise requires, the following terms will have the following meanings in these Conditions:

Accounting Event has the meaning specified in Condition 5.4(c).

Additional Amounts has the meaning specified in Condition 7.1.

Adjusted Comparable Yield has the meaning specified in Condition 5.5.

Agency Agreement has the meaning specified in the preamble to these Conditions.

Authorised Signatory has the meaning given to it in the Trust Deed.

Business Day means a day on which the Trans-European Automated Real-Time Gross Settlement Express Transfer (TARGET2) System is open.

Calculation Agency Agreement means any agreement entered into by the Issuer, the Guarantor and the Calculation Agent in respect of the appointment of the Calculation Agent to perform the functions expressed to be performed by the Calculation Agent under these Conditions.

Calculation Agent means the independent investment bank or financial institution, appointed on the terms of a Calculation Agency Agreement selected by the Issuer for the purposes of performing the functions expressed to be performed by it under these Conditions.

Capital Event has the meaning specified in Condition 5.4(c).

Change of Control Event has the meaning specified in Condition 5.3(d).

Change of Control Notice has the meaning specified in Condition 5.7(a).

Change of Control Period has the meaning specified in Condition 5.7(e).

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CONDITIONS OF THE NOTES

Conditions means these terms and conditions of the Notes.

Corporations Act means the Corporations Act 2001 (Cth).

Couponholders has the meaning specified in the preamble to these Conditions.

Date of Announcement has the meaning specified in Condition 5.7(e).

Day Count Fraction has the meaning specified in Condition 4.2(d).

Deferred Interest Payment has the meaning specified in Condition 4.3(a).

Early Redemption Amount has the meaning specified in Condition 5.5.

The Early Redemption Date is the date on which the Notes are to be redeemed as specified in any notice of redemption given to Noteholders pursuant to Condition 5.

Fixed Interest Amount means the amount due on each Note on a Fixed Interest Payment Date.

Fixed Interest Payment Date has the meaning specified in Condition 4.1(a).

Fixed Rate of Interest means 8.25 per cent. per annum.

Floating Interest Amount has the meaning specified in Condition 4.2(d).

Floating Interest Payment Date means, subject to Condition 4.2(b), 22 March, 22 June, 22 September and 22 December in each year, commencing on the first such date following the Optional Redemption Date.

Floating Interest Period means each period from and including the Optional Redemption Date to but excluding the first Floating Interest Payment Date and, thereafter, from and including each Floating Interest Payment Date to but excluding the immediately following Floating Interest Payment Date.

Floating Margin has the meaning specified in Condition 4.2(c).

Floating Rate of Interest has the meaning specified in Condition 4.2(c).

Gross-up Event has the meaning specified in Condition 5.3(d) .

Guarantee has the meaning specified in Condition 3.1.

Guarantor means Santos Limited.

Interest Amount means the Fixed Interest Amount and the Floating Interest Amount, as the case may be, and will include any interest accrued on such Interest Amount pursuant to Condition 4.3(a) and Condition 4.3(b).

Interest Calculation Agent has the meaning specified in the preamble to these Conditions.

Interest Determination Date means the second Business Day prior to the commencement of the relevant Floating Interest Period.

Interest Payment Date means any Fixed Interest Payment Date and any Floating Interest Payment Date, as the case may be.

Issue Date means 22 September 2010.

Issuer means Santos Finance Limited.

Make-Whole Amount has the meaning specified in Condition 5.5.

Maturity Date has the meaning specified in Condition 5.1.

Noteholder Claims means:

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(a) when used in Condition 2.2, the rights and claims of the Trustee (in respect of the principal of and interest on the Notes) and of the Noteholders and the Couponholders in respect of the Notes and the Coupons; and

(b) when used in Condition 3.2, the rights and claims of the Trustee (in respect of the principal of and interest on the Notes) and of the Noteholders and Couponholders in respect of the Guarantee.

Noteholders has the meaning specified in the preamble to these Conditions.

Notes has the meaning specified in the preamble to these Conditions.

Optional Redemption Date has the meaning specified in Condition 5.2.

Parity Creditor means, with respect to the Issuer or the Guarantor, any creditor of the Issuer or the Guarantor, as the case may be, whose claim is expressed to rank pari passu with the Issuer’s obligations under the Notes or, as the case may be, the Guarantor’s obligations under the Guarantee.

Parity Shares means preference shares in the capital of the Issuer or the Guarantor (as the case may be) that are expressed to rank equally with the Notes or the Guarantee (as the case may be) for return of capital.

Paying Agent has the meaning specified in the preamble to these Conditions.

Payment Business Day has the meaning specified in Condition 6.5.

Payment Reference Date has the meaning specified in Condition 4.4(b).

Present Values has the meaning specified in Condition 5.5.

Principal Amount has the meaning specified in Condition 1.1.

Principal Paying Agent has the meaning specified in the preamble to these Conditions.

Proceedings has the meaning specified in Condition 17.2(b).

Put Date has the meaning specified in Condition 5.7(e).

Put Notice has the meaning specified in Condition 5.7(b).

Rating Downgrade has the meaning specified in Condition 5.7(e).

Redemption Calculation Date has the meaning specified in Condition 5.5.

Redemption Date means the day on which the Notes become due for redemption in accordance with these Conditions.

Reference Banks means four major banks in the euro-zone inter-bank market.

Relevant Date has the meaning specified in Condition 7.2.

Relevant Jurisdiction has the meaning specified in Condition 7.2.

Relevant Person has the meaning specified in Condition 5.3(d).

Relevant Potential Change of Control Announcement has the meaning specified in Condition 5.7(e).

S&P Rating Criteria has the meaning specified in Condition 4.3(d).

Screen Page has the meaning specified in Condition 4.2(c).

Senior Creditors means, with respect to the Issuer or the Guarantor, all creditors (including subordinated creditors) of the Issuer or the Guarantor (as the case may be) other than the Trustee (in respect of the principal of and interest on the Notes), the Noteholders and the Couponholders, any Parity Creditors of the Issuer or the Guarantor (as the case may be) and the holders of the Issuer’s or the Guarantor’s (as the case may be) shares.

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Solvent Reorganisation means, with respect to the Issuer or the Guarantor (as the case may be), solvent winding-up, deregistration, dissolution, scheme of arrangement or other reorganisation of the Issuer or the Guarantor (as the case may be) solely for the purposes of a consolidation, amalgamation, merger or reconstruction, the terms of which have been approved by the shareholders of the Issuer or the Guarantor (as the case may be) or by a court of competent jurisdiction under which the continuing or resulting corporation effectively assumes the obligations of the Issuer under the Notes and the Trust Deed or of the Guarantor under the Guarantee and the Trust Deed (as the case may be).

Standard & Poor’s means Standard & Poor’s Ratings Services, a Division of The McGraw-Hill Companies Inc. or any successor in business thereto from time to time.

Subsidiary has the meaning given in the Corporations Act.

Talon has the meaning specified in the preamble to these Conditions.

Tax Act means the Income Tax Assessment Act 1936 of Australia.

Tax Event has the meaning specified in Condition 5.4.

Trigger Event has the meaning specified in Condition 4.3(c).

Trust Deed has the meaning specified in the preamble to these Conditions.

Trustee has the meaning specified in the preamble to these Conditions.

Wholly Owned Subsidiary has the meaning given in the Corporations Act.

Winding-Up has the meaning specified in Condition 2.2.

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SUMMARY OF PROVISIONS RELATING TO THE NOTES WHILE REPRESENTED BY THE GLOBAL NOTES

The following is a summary of the provisions to be contained in the Trust Deed to constitute the Notes and in the Global Notes which will apply to, and in some cases modify, the Conditions of the Notes while the Notes are represented by the Global Notes.

1. Exchange

The Notes will be represented initially by a Temporary Global Note in bearer form without Coupons or Talons which will be deposited outside the United States for a common depositary for Euroclear and Clearstream, Luxembourg on or about the Issue Date. Any Optional Notes will also be represented initially by a Temporary Global Note, if the Second Closing Date occurs after the Issue Date. Such Temporary Global Note will also be deposited with the same common depositary on the Second Closing Date. Each Temporary Global Note will be exchangeable in whole or in part (free of charge to the holder) for interests in a Permanent Global Note in bearer form without Coupons or Talons on or after a date which is 40 days after the later of the Issue Date and the Second Closing Date, upon certification as to non-U.S. beneficial ownership as required by U.S. Treasury regulations and as described in each Temporary Global Note.

The Permanent Global Note will be exchangeable in whole but not in part (free of charge to the holder) for definitive Notes only:

(a) upon the happening of any of the events defined in the Trust Deed as “Events of Default”;

(b) if the Issuer has been notified that both Euroclear and Clearstream, Luxembourg have been closed for business for a continuous period of 14 days (other than by reason of holiday, statutory or otherwise) or have announced an intention permanently to cease business or have in fact done so and no successor clearing system satisfactory to the Trustee is available; or

(c) if the Issuer has or will become subject to adverse tax consequences which would not be suffered were the Notes represented by the Permanent Global Note in definitive form and a certificate to such effect signed by one Authorised Signatory of the Issuer is given to the Trustee.

Thereupon (in the case of (a) and (b) above) the holder of the Permanent Global Note (acting on the instructions of one or more of the Accountholders (as defined below)) or the Trustee may give notice to the Issuer and (in the case of (c) above) the Issuer may give notice to the Trustee and the Noteholders, of its intention to exchange the Permanent Global Note for definitive Notes on or after the Exchange Date (as defined below).

On or after the Exchange Date the holder of the Permanent Global Note may or, in the case of (c) above, shall surrender the Permanent Global Note to or to the order of the Principal Paying Agent. In exchange for the Permanent Global Note the Issuer will deliver, or procure the delivery of, an equal aggregate principal amount of definitive Notes (having attached to them all Coupons in respect of interest which has not already been paid on the Permanent Global Note), security printed in accordance with any applicable legal and stock exchange requirements and in or substantially in the form set out in the Trust Deed. On exchange of the Permanent Global Note, the Issuer will procure that it is cancelled and, if the holder so requests, returned to the holder together with any relevant definitive Notes.

For these purposes, Exchange Date means a day specified in the notice requiring exchange falling not less than 60 days after that on which such notice is given and being a day on which banks are open for general business in the place in which the specified office of the Principal Paying Agent is located and, except in the case of exchange pursuant to (b) above, in the place in which the relevant clearing system is located.

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SUMMARY OF PROVISIONS RELATING TO THE NOTES WHILE REPRESENTED BY THE GLOBAL NOTES

2. Payments

On and after 2 November 2010 or if later 40 days after the Second Closing Date, no payment will be made on a Temporary Global Note unless exchange for an interest in the Permanent Global Note is improperly withheld or refused. Payments of principal and interest in respect of Notes represented by a Global Note will, subject as set out below, be made to the bearer against presentation of such Global Note and, if no further payment falls to be made in respect of the Notes, against surrender of such Global Note to the order of the Principal Paying Agent or such other Paying Agent as shall have been notified to the Noteholders for such purposes. A record of each payment made will be endorsed on the appropriate part of the schedule to the relevant Global Note by or on behalf of the Principal Paying Agent, which endorsement shall be prima facie evidence that such payment has been made in respect of the Notes. Payments of interest on a Temporary Global Note (if permitted by the first sentence of this paragraph) will be made only upon certification as to non-U.S. beneficial ownership unless such certification has already been made.

3. Notices

For so long as all of the Notes are represented by a Global Note and such Global Note is held on behalf of Euroclear and/or Clearstream, Luxembourg, notices to Noteholders may be given by delivery of the relevant notice to Euroclear and/or Clearstream, Luxembourg (as the case may be) for communication to the relative Accountholders rather than by publication as required by Condition 13. Any such notice shall be deemed to have been given to the Noteholders on the second day after the day on which such notice is delivered to Euroclear and/or Clearstream, Luxembourg (as the case may be) as aforesaid.

Whilst any of the Notes held by a Noteholder are represented by a Global Note, notices to be given by such Noteholder may be given by such Noteholder (where applicable) through Euroclear and/or Clearstream, Luxembourg and otherwise in such manner as the Principal Paying Agent and Euroclear and Clearstream, Luxembourg may approve for this purpose.

4. Accountholders

For so long as all of the Notes are represented by a Global Note and such Global Note is held on behalf of Euroclear and/or Clearstream, Luxembourg, each person (other than Euroclear or Clearstream, Luxembourg) who is for the time being shown in the records of Euroclear or Clearstream, Luxembourg as the holder of a particular principal amount of such Notes (each an Accountholder) (in which regard any certificate or other document issued by Euroclear or Clearstream, Luxembourg as to the principal amount of such Notes standing to the account of any person shall, in the absence of manifest error, be conclusive and binding for all purposes) shall be treated as the holder of such principal amount of such Notes for all purposes (including but not limited to, for the purposes of any quorum requirements of, or the right to demand a poll at, meetings of the Noteholders and giving notice to the Issuer pursuant to Condition 10 and Condition 5.7) other than with respect to the payment of principal and interest on such principal amount of such Notes, the right to which shall be vested, as against the Issuer and the Trustee, solely in the bearer of the relevant Global Note in accordance with and subject to its terms and the terms of the Trust Deed. Each Accountholder must look solely to Euroclear or Clearstream, Luxembourg, as the case may be, for its share of each payment made to the bearer of the relevant Global Note.

5. Prescription

Claims against the Issuer and the Guarantor in respect of principal and interest on the Notes represented by a Global Note will be prescribed after 10 years (in the case of principal) and five years (in the case of interest) from the Relevant Date (as defined in Condition 7).

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6. Cancellation

Cancellation of any Note represented by a Global Note and required by the Conditions of the Notes to be cancelled following its redemption or purchase will be effected by endorsement by or on behalf of the Principal Paying Agent of the reduction in the principal amount of the relevant Global Note on the relevant part of the schedule thereto.

7. Put Option

For so long as all of the Notes are represented by one or both of the Global Notes and such Global Note(s) is/are held on behalf of Euroclear and/or Clearstream, Luxembourg, the option of the Noteholders provided for in Condition 5.7 may be exercised by an Accountholder giving notice to the Principal Paying Agent in accordance with the standard procedures of Euroclear and Clearstream, Luxembourg (which may include notice being given on his instructions by Euroclear or Clearstream, Luxembourg or any common depositary for them to the Principal Paying Agent by electronic means) of the principal amount of the Notes in respect of which such option is exercised and at the same time presenting or procuring the presentation of the relevant Global Note to the Principal Paying Agent for notation accordingly within the time limits set forth in that Condition.

8. Euroclear and Clearstream, Luxembourg

References in the Global Notes and this summary to Euroclear and/or Clearstream, Luxembourg shall be deemed to include references to any other clearing system approved by the Trustee.

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USE OF PROCEEDS

The proceeds of the issue of the Notes will be applied by the Issuer for its general corporate purposes and (in whole or in part) to fund its growth strategy.

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DESCRIPTION OF THE ISSUER

Introduction

Santos Finance Ltd (ACN 002 799 537) (the Issuer) was incorporated with limited liability in Sydney, New South Wales on 6 July 1984 and is registered under the Corporations Act 2001 of Australia. Its principal and registered office is located at Ground Floor, Santos Centre, 60 Flinders Street, Adelaide, South Australia 5000, Australia. The telephone number of its registered office is +61 8 8116 5000.

The issued share capital of the Issuer is AUD234,470,555 which is fully paid up and divided into 234,470,555 ordinary shares which are fully held by the Guarantor.

Business

The Issuer is a wholly owned subsidiary of the Guarantor and acts as the principal finance company for the Group. Its sole business is raising debt to be on-lent to companies within the Group to fund their investment programmes and to manage cash generated from Group operations. The Issuer has issued bonds and notes previously and has had no other industrial or commercial activities.

Board of Directors of the Issuer

Board of Directors Other Directorships and principal activities outside the Group –––––––––––––––– ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Peter Coates Minara Resources Limited (Chairman) Amalgamated Holdings Limited Member of the NSW Minerals Ministerial Advisory Council Member of the Business Council of Australia

Kenneth Dean BlueScope Steel Limited Fellow of the Australian Society of Certified Practising Accountants Member of the LaTrobe University Council

David Knox Botanic Gardens and State Herbarium, South Australia Fellow of the Australian Institute of Mechanical Engineering

There are no potential conflicts of interest between the duties to the Issuer of the persons listed above and their private interests or other duties.

The business address of each of the Directors is Ground Floor, Santos Centre, 60 Flinders Street, Adelaide, South Australia 5000, Australia.

Major Shareholder

The sole shareholder of the Issuer is the Guarantor.

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Please refer to “Glossary” for definitions of technical terms used but not otherwise defined in this section.

Introduction

Santos Ltd (ACN 007 550 923) (the Guarantor or Santos) was incorporated with limited liability in Adelaide, South Australia on 18 March 1954 and is registered under the Corporations Act 2001 of Australia. Its principal and registered office is located at Ground Floor, Santos Centre, 60 Flinders Street, Adelaide, South Australia 5000, Australia. The telephone number of its registered office is +61 8 8116 5000.

Santos has its ordinary shares listed on the Australian Securities Exchange (ASX). As at 8 September 2010, Santos had a market capitalisation of A$11.5 billion, making it one of Australia’s 30 largest listed companies by market capitalisation.

History and Development

Founded in 1954, Santos was originally South Australia Northern Territory Oil Search and has been active in the energy business for more than 50 years. Santos acquired exploration leases covering over 325,000 square kilometres in South Australia and South West Queensland in 1954.

Santos made its first significant discovery of natural gas in the Cooper Basin with the Gidgealpa 2 well in 1963. The Moomba 1 discovery in 1966 confirmed this region as a major petroleum province. As a result of these discoveries, Santos had a commercially viable quantity of gas and entered into Gas Sales Agreements with the South Australian Gas Company, the Electricity Trust of South Australia and the Australian Gas Light Company. Gas supplies commenced in 1969.

The 1980s saw Santos develop a major liquids business following the discovery of oil at Tirrawarra in the early 1970s. A liquids recovery plant was built at Moomba, along with a fractionation and load-out facility at Port Bonython.

By the 1990s Santos had become a major Australian operating enterprise with interests beyond the Cooper Basin in emerging areas such as the Timor Sea and Carnarvon Basin in Western Australia. A number of acquisitions in the 1990s provided Santos with additional opportunities onshore and offshore Australia, Indonesia and Papua New Guinea.

Since 2000, Santos has continued to build its business in South East Asia and Australia, while undertaking exploration activities and developing new projects to drive production and earnings growth.

More recently, Santos has focussed on expanding its LNG portfolio. The first of the LNG projects, the ConocoPhillips operated Darwin LNG project commenced first export of LNG in 2006. In 2009, the ExxonMobil operated PNG LNG project was formally approved for development. The project has signed binding long-term LNG sales agreements with four Asian buyers and first sales are expected in 2014. A final investment decision is expected in late 2010 for the Gladstone Liquefied Natural Gas (GLNG) project. A fourth proposed LNG project, the Bonaparte floating LNG project, was announced in partnership with GDF SUEZ in 2009. An investment decision in respect of this project is expected in 2014.

Santos’ strategy is further outlined below under “Business Operations and Strategy“.

Business Overview

Santos’ business involves oil and gas exploration and production with interests in every major Australian petroleum province, and in Indonesia, Papua New Guinea (PNG), Vietnam, India, Bangladesh and Kyrgyz Republic.

Santos is the largest producer of gas sold in Australia, supplying 17 per cent. of the Australian domestic gas market in 2010. Santos supplies sales gas to all mainland Australian states and territories and ethane to

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Sydney. It sells oil and gas liquids to a number of domestic and international customers. As at 31 December 2009, Santos’ assets totalled A$11,361 million. Santos produced approximately 54.4 mmboe during 2009 and, as at 31 December 2009 had a substantial reserve base of approximately 1,440 mmboe on a 2P basis. Current production is approximately 600 mmscf/d of gas and approximately 40 kbbls/d of liquids.

As at 31 December 2009, Santos had 2,096 employees excluding contractors working across its operations and offices in Adelaide, Brisbane, Perth, Gladstone, Roma, Gunnedah and country offices in Jakarta, Port Moresby, Hanoi, New Delhi, Bishkek and Dhaka.

Figure 1 below shows the location of Santos’ main operations and assets referred to in this document.

Figure 1: Guarantor’s main operations and assets referred to in this document

Business Operations and Strategy

Santos’ vision is to be a leading energy company in Australia and Asia. Santos’ strategy is to drive performance from its existing base business, deliver a suite of LNG projects and pursue focussed opportunities in Asia.

Australian Oil & Gas Operations.

Santos’ Australian base business comprises gas and oil production assets in all mainland states and the Northern Territory. Solid production combined with sanctioned projects and the potential of untapped reserves firmly places Santos in a position to serve the growing demand for natural gas and help Australia move towards a cleaner energy future.

Eastern Australian Gas

Santos’ business in Eastern Australia includes interests and joint ventures in the Cooper/Eromanga Basins in central Australia, Surat/Bowen CSG Basins in south-eastern Queensland and Otway/Gippsland Basins in offshore southern Australia. These basins are the primary source of gas supply into Victoria, NSW, ACT, South Australia and Queensland.

The Cooper Basin has been the heartland of Santos for more than four decades and still retains significant development potential. Santos believes gas demand in Australia’s eastern states will grow significantly as

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DESCRIPTION OF THE GUARANTOR the region seeks cleaner energy through gas-fired power plants and a gas export channel is created through projects like Santos’ GLNG project. Established infrastructure and access to extensive pipeline networks positions the Cooper Basin to play a large role in meeting that demand. Santos is working to unlock its significant gas resources through enhanced recovery and infill drilling and by exploiting unconventional reservoirs.

Development work is also progressing on the ExxonMobil operated Kipper project in Victoria with first production expected in second half of 2011.

Santos took the next major step in its CSG strategy when it acquired significant additional acreage in the Gunnedah Basin of New South Wales and invested in leading local CSG Company Eastern Star Gas. Santos and Eastern Star’s total combined area of petroleum permits in the Gunnedah Basin in about 45,000 square kilometres.

Western Australian Oil and Gas

Santos is a leading gas supplier in Western Australia, having supplied gas there for over 20 years through interests in the Carnarvon Basin, offshore Western Australia, together with several small producing oil fields in the Timor Sea and Timor Gap. John Brookes is Santos’ major producing gas asset in the Carnarvon Basin and has been producing since 2005.

In addition to the producing assets, Santos has a portfolio of quality growth opportunities. Development of the Reindeer project offshore Western Australia was approved in 2008, with first gas scheduled for the fourth quarter of 2011. On 30 August 2010, Santos announced the development of the Halyard field, the latest Western Australian domestic gas project with production targeted to start in mid 2011.

LNG Projects:

Strong economic growth and primary energy demand in Asia alongside the desire for security of supply, a scarcity of hydrocarbon reserves in importing nations and the need for clean burning fuels has resulted in growing demand in the region for LNG. Santos has a strategic portfolio of four LNG projects in Asia at various stages of appraisal, development and operation to service this demand.

The Asia Pacific LNG market is characterised by binding offtake contracts between buyers and producers with a duration typically between 15 to 25 years and with pricing formulae agreed prior to production.

Darwin LNG – In operation since 2006

The Darwin LNG Project, operated by ConocoPhillips, is Santos’ first producing LNG asset. The project involves the export of gas from the Bayu-Undan fields, situated in 80 metres of water approximately 500 kilometres north-west of Darwin to a 3.6 mtpa LNG plant in Darwin. LNG production commenced in February 2006 with a contract to supply leading Asian utilities. Santos holds an 11.5 per cent. stake in the project. The Bayu-Undan fields in the Timor Gap produce approximately 1,100 MMscf/d of raw gas (gross) and approximately 103,000 bbl/d of liquids (gross).

PNG LNG – Approved in 2009

The PNG LNG Project, operated by ExxonMobil, was formally approved by Santos and project partners in December 2009 with financial close being achieved in March 2010. The PNG LNG project will develop the gas and condensate resources in the Hides, Angore and Juhu fields and the associated gas resources in the currently operating oil fields of Kutubu, Agogo, Gobe and Moran in the Southern Highlands and Western Provinces of Papua New Guinea. The gas will be transported by pipeline to a two train LNG facility with an initial capacity of 6.6 mtpa located northwest of Port Moresby on the coast of the Gulf of Papua. PNG LNG is the largest ever investment in PNG and is expected to double the country’s gross domestic product.

Santos has a 13.5 per cent. stake in the PNG LNG Project and a U.S.$2 billion share of the estimated total project capital cost which is funded as to approximately 70 per cent. by a completed project financing debt facility. The first LNG cargo is expected to be shipped in 2014 with plateau production of approximately

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9 mmboe per annum net to Santos. Offtake agreements have been signed for all expected production, and will supply Sinopec, TEPCO, Osaka Gas and CPC Taiwan. Early works construction commenced prior to sanction and continues at the upstream and LNG plant locations and for supporting infrastructure. Further growth could arise from debottlenecking or from additional resources giving rise to a potential third LNG train.

GLNG – Expected approval in 2010

Santos’ proposed GLNG Project involves the production of LNG using CSG sourced from the GLNG gas fields in the Bowen and Surat Basins in Queensland. The Fairview Field in the Bowen Basin has been producing gas since 1995.

GLNG is making significant progress towards a final investment decision in 2010 with first LNG deliveries scheduled to begin in 2014. There is no certainty that a final investment decision will be reached for GLNG. The design contemplates a two-train development with a capacity of 7.2 mtpa of LNG.

In May 2010, GLNG became Australia’s first major CSG to LNG project to receive environmental approval from the Queensland Government. The environmental approval process is continuing with Federal Government consideration of the project. Engineering design works for the project are nearing completion.

In September 2010, Santos announced that it had entered into an agreement to sell 15 per cent. equity in GLNG to Total E&P Australia. Additionally, Santos announced the sale of 1 mtpa of LNG from Train 1 and 0.5 mtpa of LNG from Train 2 to Total E&P Australia and the further sale of LNG to PETRONAS along with a re-configuration of the LNG volumes previously sold to PETRONAS such that PETRONAS’ offtake from GLNG would be 2.33 mtpa from Train 1 and 1.17 mtpa from Train 2. In parallel, PETRONAS also entered into an agreement to sell a 5% interest in GLNG to Total E&P Australia.

Upon completion of the Santos and PETRONAS sale transactions, the ownership structure of GLNG will be: Santos 45 per cent.; PETRONAS 35 per cent.; and Total E&P Australia 20 per cent.

Santos and GLNG remain in detailed ongoing discussions with a number of Asian parties in relation to further potential LNG sales and equity in the project. These parties include KOGAS, the world’s largest LNG buyer.

Bonaparte LNG – Expected approval in 2014

Santos has partnered with France’s GDF SUEZ, to develop Bonaparte LNG, a proposed 2 mtpa floating LNG project, located in the Timor Sea off the northern coast of Australia.

As part of the partnership, GDF SUEZ has bought 60 per cent. of the Petrel, Tern and Frigate gas fields from Santos for up to U.S.$370 million, and will carry all of Santos’ share of the costs until a final investment decision, expected in 2014. The resource is approximately 2.1 trillion cubic feet (TCF) gross.

Asia

Santos has built a strong and reliable production business in Indonesia and is further developing its Asian business through development projects and exploration investment in Indonesia, Vietnam, India, Bangladesh and Kyrgyz Republic.

PNG

In addition to its interest in the PNG LNG development, Santos has interests in PNG that produced 0.1 mmboe net to Santos in 2009.

Indonesia

Santos first acquired interests in Indonesia in 1993. Santos holds a 67.5 per cent. operating interest in the Madura Offshore Production Sharing Contract (PSC), located in offshore east Java which contains the

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Maleo field. Production commenced from the Maleo gas project in September 2006, which now has gross gas production of approximately 110 mmscf/d.

Santos also holds a 45 per cent. operating interest in the Sampang PSC, also located in offshore East Java. The Oyong field was discovered in 2001 and oil production commenced in 2007. The existing offshore facilities have been modified with the construction of a 60 kilometre pipeline to a new onshore gas processing facility and first gas production commenced in October 2009.

Santos is expected to approve the Wortel Project in 2010, which is a tie back to Oyong, with first gas forecasted in second half of 2011.

Vietnam

In 2006, Santos entered Vietnam via a farm-in to the Nam Con Son and Hong Song Basins. The Chim Sao field in the Nam Con Son basin was discovered in the same year and approved for development in 2009. The development of this field is proceeding on track with first oil expected in the second half of 2011 with a net plateau production of approximately 8,000 bbl/d.

India and Bangladesh

During May 2007, Santos was awarded a 100 per cent. working interest and operatorship of blocks covering approximately 16,500 square kilometres in the Bengal Basin, in the northern Bay of Bengal, offshore India. An extensive 3D seismic program began in 2008 and is largely complete. Santos’ ability to conduct operations (including the completion of the 3D seismic program) in certain areas within the blocks has, however, been directly affected by circumstances arising in connection with the maritime boundary dispute between India and Bangladesh. Bangladesh commenced arbitration proceedings (under the United Nations Convention on the Law of the Sea) against India with respect to its maritime boundary claims in October 2009. The award of the tribunal will be binding on each of the States and the arbitration proceedings are expected to take approximately 3 to 5 years to finish. This timing is not certain, however, and it is also possible that negotiations between India and Bangladesh may result in a binding settlement being reached with respect to the dispute prior to the conclusion of the arbitration proceedings.

Santos acquired assets in Bangladesh in October 2007 from Cairn Energy PLC (Cairn). Santos acquired a 37.5 per cent. non-operating interest in the producing Sangu Development Area and a 37.5 per cent. Non operating interest in the Block 16 exploration acreage.

Kyrgyz Republic

Santos has established a substantial acreage position in the Fergana Basin in the south of the Kyrgyz Republic. Santos holds interests in six prospecting licences covering approximately 2,700 square kilometres in the proven oil and gas province. 2D seismic work has been completed and shallow drilling occurred in 2009. Deeper drilling is planned for 2011 to further evaluate the potential of these assets.

The Fergana Basin covers an area of 63,000 square kilometres and has been producing hydrocarbons since the early 1900s.

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Production Statistics

Details of Santos’ production statistics for 2009 are set out in Table 1 below:

Table 1: Production statistics – 2009 Total 2009 Total 2008 –––––––––––––––––––– –––––––––––––––––––– Field Units mmboe Field Units mmboe ––––––––– ––––––––– ––––––––– ––––––––– Sales gas, ethane and LNG (PJ) Cooper ...... 79.9 13.7 90.2 15.5 Surat/Bowen/Denison ...... 31.9 5.5 32.8 5.6 Amadeus...... 10.6 1.8 12.2 2.1 Otway/Gippsland ...... 20.5 3.5 21.0 3.6 Carnarvon ...... 43.5 7.5 27.3 4.7 Bonaparte ...... 16.3 2.8 16.3 2.8 Indonesia ...... 30.2 5.2 24.2 4.2 Bangladesh ...... 5.7 1.0 6.3 1.1 ––––––––– ––––––––– ––––––––– ––––––––– Total production...... 238.6 41.0 230.3 39.6 ––––––––– ––––––––– ––––––––– ––––––––– Total sales volume ...... 268.2 46.1 237.9 40.9 ––––––––– ––––––––– ––––––––– ––––––––– Total sales revenue (A$ million) ...... 1,098.2 1,051.6 ––––––––– ––––––––– Crude oil (‘000 bbls) Cooper ...... 3,598.4 3.6 3,945.7 4.0 Surat/Denison ...... 62.5 0.1 71.1 0.1 Amadeus...... 106.3 0.1 127.9 0.1 Legendre...... 288.7 0.3 299.6 0.3 Thevenard...... 305.7 0.3 339.8 0.3 Barrow ...... 573.5 0.6 617 0.6 Stag...... 1,643.9 1.6 1,627.9 1.6 Mutineer-Exeter ...... 995.0 1.0 1,254.6 1.3 Jabiru-Challis ...... 105.9 0.1 142.0 0.1 Indonesia ...... 560.3 0.6 983.4 1.0 SE Gobe ...... 148.1 0.1 188.2 0.2 ––––––––– ––––––––– ––––––––– ––––––––– Total production...... 8,388.3 8.4 9,597.2 9.6 ––––––––– ––––––––– ––––––––– ––––––––– Total sales volume ...... 8,604.5 8.6 9,796.8 9.8 ––––––––– ––––––––– ––––––––– ––––––––– Total sales revenue (A$ million) ...... 678.3 1,150.6 ––––––––– ––––––––– Condensate (‘000 bbls) Cooper ...... 1,095.2 1.0 1,295.1 1.2 Surat/Denison ...... 7.6 0.0 17.4 0.0 Amadeus...... 46.6 0.1 67.4 0.1 Otway...... 23.4 0.0 22.1 0.0 Carnarvon ...... 435.5 0.4 291.4 0.3 Bonaparte ...... 1,552.6 1.5 1,594.7 1.5 Bangladesh ...... 0.9 0.0 1.2 0.0 ––––––––– ––––––––– ––––––––– ––––––––– Total production...... 3,161.8 3.0 3,289.3 3.1 ––––––––– ––––––––– ––––––––– ––––––––– Total sales volume ...... 3,505.8 3.3 3,173.9 3.0 ––––––––– ––––––––– ––––––––– ––––––––– Total sales revenue (A$ million) ...... 233.2 321.2 ––––––––– –––––––––

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Total 2009 Total 2008 –––––––––––––––––––– –––––––––––––––––––– Field Units mmboe Field Units mmboe ––––––––– ––––––––– ––––––––– ––––––––– LPG (‘000 t) Cooper ...... 151.2 1.3 162.0 1.4 Surat/Denison ...... 0.3 0.0 1.3 0.0 Bonaparte ...... 88.6 0.7 88.1 0.7 ––––––––– ––––––––– ––––––––– ––––––––– Total production...... 240.1 2.0 251.4 2.1 ––––––––– ––––––––– ––––––––– ––––––––– Total sales volume ...... 252.6 2.1 250.5 2.1 ––––––––– ––––––––– ––––––––– ––––––––– Total sales revenue (A$ million) ...... 170.8 238.4 ––––––––– ––––––––– Total Production (mmboe) ...... 54.4 54.4 Sales volume (mmboe) ...... 60.1 55.8 Sales revenue (A$ million) ...... 2,180.5 2,761.8 Reserves and Resources

Santos has in place an evaluation and reporting process that is in line with international industry practice and is in general conformity with reserves definitions and resource classification systems published by the Society of Petroleum Engineers, World Petroleum Congress and the American Association of Petroleum Geologists.

Santos has the largest Australian exploration portfolio by area (133,800 square kilometres) and a substantial Asian asset base. At the end of 2009, Santos had 2P reserves of 1,440 mmboe. Over the past five years Santos has more than doubled 2P reserves despite producing almost 300 million barrels of oil equivalent in this period. At the current rate of production, Santos has an average reserve life of approximately 26 years based upon 2P reserves. Santos has added reserves and resources at a compound annual growth rate of 14% from 2004 to 2009.

Santos now has almost half of its reserves targeted at the higher margin LNG business, and about a third of those are conventional reserves at PNG LNG and Darwin LNG.

Details of Santos’ 2009 Reserves statistics are set out in Table 2 below.

Table 2: Reserves statistics – 2009

Proven plus probable reserves (Santos share) by activity

Sales gas (incl. ethane Crude Oil Condensate LPG ‘000 Total & LNG) PJ mmbbl mmbbl tonnes mmboe –––––––––––– –––––––––––– –––––––––––– –––––––––––– –––––––––––– Reserves year end 2008...... 5,039 83 42 2,989 1,013 Production ...... (239) (8) (3) (240) (54) Additions ...... 2,857 2 32 109 525 Acquisitions/divestments ...... (197) (3) (7) (10) (44) Estimated reserves year end 2009 ...... 7,460 74 64 2,848 1,440

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Proven plus probable reserves (Santos share) year end 2009 by area

Sales gas (incl. ethane Crude Oil Condensate LPG ‘000 Total & LNG) PJ mmbbl mmbbl tonnes mmboe –––––––––––– –––––––––––– –––––––––––– –––––––––––– –––––––––––– Area Eastern Australia Cooper Basin...... 762 31 11 1,607 186 Southern Australia ...... 465 0 5 398 88 Qld CSG ...... 3,024000520 Qld conventional...... 5600010 NSW CSG...... 53200091 –––––––––––– –––––––––––– –––––––––––– –––––––––––– –––––––––––– Total EA ...... 4,839 31 16 2,005 895 –––––––––––– –––––––––––– –––––––––––– –––––––––––– –––––––––––– Western Australia and Northern Territory Carnarvon...... 742 24 5 0 155 Bonaparte ...... 278 0 17 843 71 Amadeus ...... 9551023 –––––––––––– –––––––––––– –––––––––––– –––––––––––– –––––––––––– Total WA and NT...... 1,115 29 23 843 249 –––––––––––– –––––––––––– –––––––––––– –––––––––––– –––––––––––– Asia Pacific PNG ...... 1,130 1 25 0 218 Indonesia...... 16810030 Vietnam...... 9 12 0 0 14 Bangladesh ...... 70001 –––––––––––– –––––––––––– –––––––––––– –––––––––––– –––––––––––– Total AP ...... 1,314 14 25 0 263 –––––––––––– –––––––––––– –––––––––––– –––––––––––– –––––––––––– Total ...... 7,268 74 64 2,848 1,407 –––––––––––– –––––––––––– –––––––––––– –––––––––––– –––––––––––– Beneficial interests(*) ...... 19200033 –––––––––––– –––––––––––– –––––––––––– –––––––––––– –––––––––––– Grand total ...... 7,460 74 64 2,848 1,440 –––––––––––– –––––––––––– –––––––––––– –––––––––––– –––––––––––– Reserves (Santos share)

Year end Year end 2008 Production Additions Acq/Div 2009 –––––––––––– –––––––––––– –––––––––––– –––––––––––– –––––––––––– (mmboe) 1P reserves ...... 518 54 230 (46) 647 2P reserves ...... 1,013 54 525 (44) 1,440 2C contingent resources ...... 2,849 0 (260) (92) 2,497

Group Structure

As at 30 June 2010, the Guarantor was the parent of 85 wholly-owned subsidiaries, and eight partly-owned subsidiaries: CJSC South Petroleum Company (70%); CJSC KNG Hydrocarbons (54%); Zhibek Resources limited (75%); Easternwell Drilling Services Holdings Pty Ltd and its subsidiaries (50%); Lohengrin Pty Ltd (50%) and GLNG Operations Pty Ltd (60%); Darwin LNG Pty Ltd (11.5%); and Papua New Guinea Liquefied Natural Gas Global Company LDC (13.5%).

The Group structure comprises four asset-based business units: • Eastern Australia; • Western Australia and Northern Territory; • Asia; and • GLNG.

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These business units are backed by a corporate centre comprising: Strategy and Corporate Development; Finance; Legal; and Human Resources. In addition, Santos has two specialist disciplines: Technical; and Exploration.

Applicable Regulatory Issues

Australia

Taxation

Excise and royalty on the production of hydrocarbons is levied via a regime of excise, royalties and petroleum resource rent tax.

Onshore, federal excise is levied on the net volume of oil and condensate removed (after removal of water and gas) from a producing field in excess of the first 30 mmbbL of production, which is excise free. Thereafter, excise is charged on an annual sliding scale of marginal rates for oil ranging from nil (up to 3.15 mmbbL) to 30 per cent. (above 5.03 mmbbL). Lesser rates of excise apply to condensate. State royalty is payable as a percentage of the wellhead value of all production (gross value of petroleum less approved post wellhead costs). The royalty rate currently payable by the Issuer in South Australia, Queensland and the Northern Territory is 10 per cent.

In relation to its offshore operations, excise and royalty of 10 per cent. apply to production licences on Thevenard Island. Barrow Island is covered by the Resource Rent Royalty (RRR) tax regime which is unique to the island and replaced the well-head royalty and excise regime described above. RRR is charged at a rate of 40 per cent. of the net cashflow from annual production (the accumulated value of sales less eligible deductions).

In addition, the Petroleum Resource Rent Tax (PRRT) applies in all Commonwealth waters, other than the North West Shelf permits. PRRT is charged at a rate of 40 per cent. of the taxable profit of a project. For further details, see “Risk Factors - Mineral Resources Rent Tax and other Australian taxes”.

Exploration and Production Licences

Petroleum resources within Australia are the property of the Crown and rights to explore and produce are conferred by statutory titles granted by legislation of the relevant State or Territory, the most significant of which are exploration and production leases or licences.

The ownership and operation of gas transportation pipelines is regulated by State, Territory and Commonwealth legislation. Petroleum operations in Australian territorial waters are subject to the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (OPGGSA) in respect of operations in Commonwealth waters and the various State and Territory Acts in respect of operations in areas adjacent to the respective State or Territory. These legislations regulate exploration and development operations including the grant of key titles, such as Exploration Permits, Retention Leases, Production Licenses and Pipeline Licences.

Exploration licences are usually subject to the condition that a prescribed minimum work programme be carried out, and to progressive acreage relinquishment after the elapse of prescribed periods. Production licences generally enure for the full productive life of all fields, including those developed after the production licence is granted.

Joint Petroleum Development Area

The Joint Petroleum Development Area (formerly known as the Timor Gap Zone of Co-operation) is subject to an international agreement between Australia and the Timor-Leste.

Under the Bayu-Undan PSCs, Santos and its contractors are entitled to a share of first tranche petroleum, which is a 10 per cent. portion of gross revenue “distributed” prior to cost recovery, equal to 60 per cent. of revenue from LPG and gas and 50 per cent. of revenue from condensate, an investment credit equal to

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DESCRIPTION OF THE GUARANTOR

127 per cent. of eligible exploration and capital costs, recovery of costs (operating costs, intangibles expensed and depreciation of tangibles at 20 per cent. straight line) and a share of remaining “profit oil or gas”. Profit oil is split on a sliding scale from 50 per cent. of the first 50,000 barrels per day to 30 per cent. over 150,000 barrels per day, contractors’ share. Profit gas and LPG is 60 per cent. and profit condensate is 50 per cent. contractors’ share. In addition, income tax and additional profits tax is applicable in Timor Leste on 90 per cent. of income and income tax is applicable in Australia on 10 per cent. of income.

Indonesia

The development of Indonesia’s natural resources is based on the philosophy enshrined in Article 33 of the Constitution that all natural resources fall under the jurisdiction of the State. Upon being granted a PSC, the contractor is committed to a minimum level of exploration activity. If commercial hydrocarbons are found, the contractor must apply for commerciality of the block to the government and will be required to submit a plan of development.

Post tax profit share for oil is typically 85:15 in favour of the State, and for gas 70:30 or 65:35 in favour of the State. At tax rates of 44 per cent. to 48 per cent., these splits generate a pre tax profit share to the contractor of between 26.8 per cent. and 28.8 per cent. for oil and between 53.6 per cent. and 62.5 per cent. for gas.

All PSCs in Indonesia are subject to a domestic market obligation (DMO) for oil. This obligation occurs five years after first oil production for new fields and the contractor is required to supply a percentage of oil to the domestic market at a reduced price. No DMO is applicable on gas production. The price at which the domestic crude is sold depends on the date of signing the PSC and is typically between 10 per cent. and 25 per cent. of the export price.

Vietnam

Santos is a party to a number of PSCs entered into with Vietnam Oil and Gas Corporation (PetroVietnam), the State owned national oil company with authority under Article 14 of the Petroleum Law (1993) to enter into PSCs.

Contractors are subject to income tax of 32 per cent. and export duty of 4 per cent. on oil exports. The contractors are also required to make bonus payments to PetroVietnam upon commercial discovery and on reaching various production rates.

The Board and Management of the Guarantor

The directors of the Guarantor, and a brief description of their activities outside the group, as at the date of this Prospectus, are as follows:

Other Directorships and principal activities outside the Group Peter Coates (Chairman) Minara Resources Limited (Chairman) Amalgamated Holdings Limited Member of the NSW Minerals Ministerial Advisory Council Member of the Business Council of Australia David Knox (Chief Executive Botanic Gardens and State Herbarium, South Australia Officer and Managing Director) Fellow of the Australian Institute of Mechanical Engineering Peter Wasow (Chief Financial APPEA Limited Officer)* Fellow of the Australian Society of Certified Practising Accountants Kenneth Borda Fullerton Funds Management Ithmaar Bank (Bahrain) Leighton Contactors Plc Ltd Talent2 International Ltd Asian Advisory Board of Aviva Pte Ltd (Singapore)

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DESCRIPTION OF THE GUARANTOR

Kenneth Dean BlueScope Steel Limited Fellow of the Australian Society of Certified Practising Accountants Member of the LaTrobe University Council Roy Franklin Keller Group plc (Chairman) StatoilHydro ASA Richard Harding Clough Ltd Downer EDI Limited Gregory Martin Energy Developments Limited Australian Energy Market Operator Limited Everest Financial Group Gas Valpo S.A. (Chile) Chairman of The Royal Botanic Gardens & Domain Trust of New South Wales Jane Hemstritch Commonwealth Bank of Australia The Global Foundation Tabcorp Holdings Ltd Member of the Research and Policy Council and Advisory Committee for Economic Development of Australia Fellow of the Institutes of Chartered Accountants in Australia and in England and Wales David Lim (Company Secretary) Member of Chartered Secretaries Australia Member of Australian Corporate Lawyers Association

*Mr Wasow will retire from the Guarantor on 31 December 2010.

There are no potential conflicts of interest between the duties to the Guarantor of the persons listed above and their private interests or other duties.

The business address of each of the Directors is Ground Floor, Santos Centre, 60 Flinders Street, Adelaide, South Australia 5000, Australia.

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TAXATION

Australian Taxation

The following is a general summary of the taxation treatment under the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 (together, the “Tax Act”) and any relevant regulations, rulings or judicial or administrative pronouncements, at the date of this Prospectus, of payments of interest and certain other amounts on the Notes and certain other matters.

Tax considerations which may arise for investors who are in the business of trading or dealing in securities, or otherwise hold Notes on revenue account have not been considered in this tax summary.

This summary is not exhaustive and is not intended to be, nor should it be construed as, legal or tax advice to any particular investor. Prospective Noteholders should consult their professional advisers on the tax implications of an investment in the Notes in their particular circumstances.

1. Interest withholding tax

Absent the exemptions discussed below, payments of interest on the Notes would be within the scope of Australia’s rules on interest withholding tax. Division 11A of Part III of the Tax Act provides that a payment of interest by an Australian resident, not acting through a permanent establishment outside Australia, to a non-resident, not acting through a permanent establishment in Australia; or to an Australian resident acting through a permanent establishment outside Australia, is ordinarily subject to withholding tax at the rate of 10%.

For the purposes of Division 11A, subsection 128(1AB) provides that interest includes amounts in the nature of interest. A premium on redemption of a security would generally be treated as an amount in the nature of interest. A payment by the Guarantor to a Noteholder in respect of accrued interest on a Note may also be interest, or in the nature of interest, for these purposes.

A payment in consideration of the transfer of certain securities can be deemed to be interest: • under section 128AA where the transfer price of a ‘qualifying security’ exceeds the issue price; or • where the security is disposed of to an Australian resident prior to the payment of interest with the sole or dominant purpose of avoiding withholding tax on that interest (a ‘washing arrangement’).

Section 128F exemption

Under section 128F of the Tax Act, an exemption from Australian interest withholding tax applies provided all prescribed conditions are met. The exemption under section 128F extends to interest under subsection 128(1AB) paid by an issuer and, where applicable, deemed interest on transfer of a qualifying security under section 128AA.

The relevant conditions to be satisfied in respect of the Notes are: • the Issuer is a resident of Australia when it issues the Notes and when interest is paid in respect of the Notes; • interest is not paid to an associate of the Issuer of the kind described below; • the Notes are debentures; and • the Notes are offered for issue in a manner which satisfies the public offer test. In broad terms, an issue of the Notes will satisfy the public offer test where there are: • offers to 10 or more unrelated financiers or securities dealers;

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• offers to 100 or more persons that are reasonable to regard as having acquired similar instruments in the past, or as being likely to be interested in acquired the Notes; • offers of Notes as a result of them having been accepted for listing on a stock exchange; • offers via publicly available information sources; or • offers to a dealer, manager or underwriter who offers to sell those Notes within 30 days by one of the preceding methods.

The public offer test will not be satisfied if, at the time of issue, the Issuer knew or had reasonable grounds to suspect that the Notes were being or would later be acquired directly or indirectly by an associate of the Issuer (within the meaning of subsection 128F(9)) that is: • a resident of Australia that would acquire the Note through a permanent establishment outside Australia, or a non-resident that would not acquire the Note through a permanent establishment in Australia; and • is not acting in the capacity of a dealer, manager or underwriter in relation to the placement of the relevant Notes, or a clearing house, custodian, funds manager or responsible entity of a registered managed investment scheme.

Even if the public offer is satisfied, a payment of interest will not be exempt from withholding tax if it is in fact paid to an associate of the Issuer within the meaning of subsection 128F(9) that is: • a resident of Australia that would acquire the Note through a permanent establishment outside Australia, or a non-resident that would not acquire the Note through a permanent establishment in Australia; and • is not acting in the capacity of a clearing house, paying agent, custodian, funds manager or responsible entity of a registered managed investment scheme.

The Commissioner of Taxation accepts that where payments by a guarantor would be interest for withholding tax purposes, the exemption in section 128F will be available in respect of such payments (provided the requirements of section 128F are satisfied).

Although the section 128F interest withholding tax exemption does not apply to deemed interest under a ‘washing arrangement’ where interest in respect of the Notes is otherwise exempt from interest withholding tax, a Noteholder could not be taken to have a purpose of avoiding withholding tax by transfer of the Notes and so these provisions should not apply.

The taxation of financial arrangements (TOFA) provisions in Division 230 of the Tax Act do not affect the availability of the section 128F interest withholding tax exemption.

Compliance with the section 128F exemption

The Issuer intends to issue the Notes in a manner that will satisfy the conditions for the application of the interest withholding tax exemption in section 128F. In particular, and pursuant to an agreement between the Issuer and the Managers, it is expected that Notes will not be issued or sold to an associate of the Issuer in a manner that would cause the failure of the public offer test in the section 128F exemption.

Where section 128F applies, payments of interest (and principal) on the Notes will not be subject to Australian interest withholding tax, where the Noteholder is a non-resident and does not hold the Notes in the course of carrying on a business through a permanent establishment in Australia.

Other exemptions

In the event that the section 128F exemption did not apply to a payment of interest in respect of the Notes, a payment to a person outside Australia may nonetheless be exempt from interest withholding tax if:

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• the Noteholder is a pension or superannuation fund for non-residents that is exempt from income tax in its country of residence; • the Noteholder is entitled to the benefit of the sovereign immunity doctrine; or • the Noteholder is a resident of a country with which Australian has concluded a double tax treaty and is entitled to the benefits of an exemption under that treaty.

Payment of additional amounts

As set out in more detail in the Terms and Conditions, if the Issuer or the Guarantor is at any time required by law to deduct or withhold an amount in respect of any withholding taxes imposed or levied by the Commonwealth of Australia in respect of the Notes, the Issuer or Guarantor must, subject to certain exceptions, pay such additional amounts as may be necessary in order to ensure that the net amounts received by the holders of those Notes after such deduction or withholding are equal to the respective amounts which would have been received had no such deduction or withholding been required.

A payment of an additional amount in these circumstances is not itself interest, or in the nature of interest, and so should not be subject to additional withholding tax.

If the Issuer or Guarantor is compelled by law in relation to any Notes to deduct or withhold an amount in respect of any withholding taxes, the Issuer will have the option to redeem those Notes in accordance with the Terms and Conditions.

2. Income Tax

Non-residents

Where a Noteholder is a non-resident, and the Noteholder does not hold the Notes through a permanent establishment in Australia, interest paid in respect of the Notes should not be included in the assessable income of the Noteholder.

A gain arising to a non-resident Noteholder from disposal of Notes should only be subject to Australian tax, and a loss should only be deductible, if: • the non-resident Noteholder is resident of a country with which Australia has concluded a comprehensive double tax treaty and the Notes are held through a permanent establishment through which the Noteholder is doing business in Australia; or • the non-resident Noteholder is not resident of a country with which Australia has concluded a comprehensive double tax treaty and the gain has an Australian source. Where a non-resident Noteholder makes a gain from a disposal of a Note to another non-resident, and the relevant negotiations are undertaken and the transaction is documented outside of Australia, the gain would not ordinarily an have an Australian source.

Australian residents

Interest derived by an Australian resident Noteholder in respect of the Notes, and any gains upon disposal or redemption, should be included in their assessable income, subject to any specific exemption applicable to that Noteholder.

The manner and timing of inclusion of such amounts in assessable income will depend upon the specific tax rules applying to the Noteholder, including whether and how the TOFA rules in Division 230 of the Tax Act apply to the Noteholder. Where the TOFA rules do not apply, a Noteholder will need to consider the application of the rules dealing with ‘traditional securities’ and the foreign exchange tax rules in Division 775 and Subdivision 960-C of the Tax Act.

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3. Other Australian tax matters

Debt interests

The Notes should be ‘debt interests’, rather than ‘equity interests’, for the purposes of Australian debt/equity tax rules. Accordingly, interest paid on the Notes should not be treated as dividends for the purposes of Australia’s dividend imputation (franking) system and dividend withholding tax rules.

Stamp duty

Subject to the Notes being ‘debt interests’ as described above, no ad valorem stamp, issue, registration or similar taxes are payable in Australia on the issue or transfer of any Notes.

Goods and services tax (GST)

Neither the issue of the Notes, the payment of interest in respect of the Notes, nor the redemption of the Notes will give rise to a liability for GST in Australia. Dealings in respect of the Notes will comprise either an input taxed financial supply or (in the case of an offshore Noteholder) a GST-free supply.

Bearer debentures withholding tax

Where a company pays interest on a bearer debenture to an Australian resident, or to a non-resident holder that holds the bearer debenture through a permanent establishment in Australia, and the issuing company does not give the Commissioner of Taxation the name and address of the holder, then the issuing company is liable to pay tax on that interest at the rate of 45%, pursuant to section 126 of the Tax Act to non- residents. No such tax is payable where the section 128F exemption applies to payments of interest. If section 126 applies to a Note, the Issuer is authorized by subsection 126(2) of the Tax Act to deduct the amount of this tax from the interest otherwise payable to the Noteholder.

For these purposes, the Issuer intends to treat the operator of a clearing system that holds the physical Notes as being the holder of the Notes for these purposes.

TFN Withholding tax

A Noteholder that does not provide their tax file number, Australian Business Number or exemption category may have an amount of tax deducted from any interest in respect of the Notes equal to the top marginal tax rate for individuals plus the Medicare levy (currently 46.5%). A Noteholder that is a non- resident and does not hold the Notes through a permanent establishment in Australia is exempt from quoting a tax file number.

Supply withholding tax

Payments in respect of the Notes can be made free and clear of the “supply withholding tax” imposed under section 12-190 of Schedule 1 to the Taxation Administration Act 1953 of Australia (Taxation Administration Act).

Additional withholdings from certain payments to non-residents

Section 12-315 of Schedule 1 to the Taxation Administration Act gives the Governor-General power to make regulations requiring withholding from certain payments to non-residents of Australia. However, section 12 315 expressly provides that the regulations will not apply to interest and other payments which are already subject to Division 11A of Part III of the Tax Act or specifically exempt from those rules. Further, regulations may only be made if the responsible Minister is satisfied the specified payments are of a kind that could be reasonably related to the assessable income of foreign residents. The existing regulations made pursuant to section 12-315 are not relevant to any payments in respect of the Notes and it is not anticipated that any future regulations would apply in respect of such payments.

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TAXATION

Garnishee notices

The Commissioner of Taxation may issue a notice requiring any person who owes, or who may later owe, money to a taxpayer who has a tax-related liability, to pay to him the money owed to the taxpayer. If the Issuer or the Guarantor is served with such a notice in respect of a Noteholder, then the Issuer or the Guarantor (as the case may be) will comply with that notice.

Death duties

No Notes will be subject to death, estate or succession duties imposed by Australia, or by any political subdivision or authority therein having power to tax, if held at the time of death.

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SUBSCRIPTION AND SALE

UBS Limited and Deutsche Bank AG, London Branch (the Managers) have, pursuant to a Subscription Agreement (the Subscription Agreement) dated 21 September 2010, jointly and severally agreed to subscribe or procure subscribers for the Notes at the issue price of 100 per cent. of the principal amount of the Notes, less a combined selling, management and underwriting commission. In addition, the Issuer has granted to the Managers in the Subscription Agreement an option (the Option) exercisable on a date on or before 23 September 2010 to subscribe or procure subscribers for the Optional Notes, being up to an additional €65,000,000 in principal amount of the Notes also at 100 per cent. of their principal amount, less a combined selling, management and underwriting commission. The Issuer will also reimburse the Managers in respect of certain of their expenses, and has agreed to indemnify the Managers against certain liabilities, incurred in connection with the issue of the Notes. The Subscription Agreement may be terminated in certain circumstances prior to payment of the Issuer.

United States

The Notes and the Guarantee have not been and will not be registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in certain transactions exempt from the registration requirements of the Securities Act.

The Notes are subject to U.S. tax law requirements and may not be offered, sold or delivered within the United States or its possessions or to a United States person, except in certain transactions permitted by U.S. tax regulations. Terms used in this paragraph have the meanings given to them by the U.S. Internal Revenue Code of 1986 and regulations thereunder.

Each Manager has agreed that, except as permitted by the Subscription Agreement, it will not offer, sell or deliver the Notes and the Guarantee (a) as part of their distribution at any time or (b) otherwise until 40 days after (i) the later of the commencement of the offering and (ii) the later of the Closing Date and any Second Closing Date within the United States or to, or for the account or benefit of, U.S. persons and that it will have sent to each dealer to which it sells any Notes and the Guarantee during the distribution compliance period a confirmation or other notice setting forth the restrictions on offers and sales of the Notes and the Guarantee within the United States or to, or for the account or benefit of, U.S. persons. Terms used in this paragraph have the meanings given to them by Regulation S under the Securities Act.

In addition, until 40 days after the commencement of the offering, an offer or sale of Notes or the Guarantee within the United States by any dealer that is not participating in the offering may violate the registration requirements of the Securities Act.

United Kingdom

Each Manager has represented and agreed that:

(a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of any Notes in circumstances in which Section 21(1) of the FSMA does not apply to the Issuer or the Guarantor; and

(b) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to any Notes in, from or otherwise involving the United Kingdom.

Commonwealth of Australia

No prospectus or other disclosure document (as defined in the Corporations Act of Australia 2001 (Corporations Act)) in relation to the Notes has been or will be lodged with the Australian Securities & Investments Commission (ASIC). Each Manager has represented and agreed that it:

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SUBSCRIPTION AND SALE

(a) has not (directly or indirectly) offered, and will not offer for issue or sale and has not invited, and will not invite, applications for issue, or offers to purchase, the Notes (including interests or rights in Notes held in Euroclear or Clearstream, Luxembourg or any other clearing system) in, to or from Australia (including an offer or invitation which is received by a person in Australia); and

(b) has not distributed or published, and will not distribute or publish, any information memorandum, advertisement or other offering material relating to the Notes in Australia, unless (i) the aggregate consideration payable by each offeree or invitee is at least A$500,000 (or its equivalent in any other currency, but disregarding moneys lent by the offeror or its associates) or the offer or invitation otherwise does not require disclosure to investors in accordance with Part 6D.2 or 7.9 of the Corporations Act or Australia, (ii) such action complies with all applicable laws, regulations and directives (including without limitation the licensing requirements set out in Chapter 7 of the Corporations Act), (iii) such action does not require any document to be lodged with ASIC and (iv) the offer or invitation is not made to a person who is a “retail client” within the meaning of section 761G of the Corporations Act.

General

No action has been taken by the Issuer, the Guarantor or any of the Managers that would, or is intended to, permit a public offer of the Notes in any country or jurisdiction where any such action for that purpose is required. Accordingly, each Manager has undertaken that it will not, directly or indirectly, offer or sell any Notes or have in its possession, distribute or publish any offering circular, prospectus, form of application, advertisement or other document or information in any country or jurisdiction except under circumstances that will, to the best of its knowledge and belief, result in compliance with any applicable laws and regulations and all offers and sales of Notes by it will be made on the same terms.

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AUSTRALIAN ACCOUNTING STANDARDS AND FINANCIAL STATEMENTS

The Guarantor and the Issuer prepare financial statements in accordance with Australian Accounting Standards which are compliant with International Financial Reporting Standards as issued by the International Accounting Standards Board, with the exception of certain disclosure exemptions applicable to the Issuer which are detailed in Note 1(a) of the financial statements of the Issuer included in the Prospectus on pages F-247 and F-276. Under Australian law, the Issuer has been classified as a “non- reporting entity” which must prepare its financial statements in accordance with Australian Accounting Standards, and therefore IFRS standards generally, but is exempted from making all of the detailed disclosures required by Australian Accounting Standards and IFRS in the notes to its financial statements. There are no differences between the Issuer’s reported results, financial position or cash flows prepared under Australian Accounting Standards and the results, financial position or cash flows the Issuer would have reported under IFRS because the measurement and recognition criteria of IFRS and Australian Accounting Standards are consistent. When the Notes are issued, the Issuer will no longer be considered a “non-reporting entity” and will be required to prepare general purpose financial statements incorporating all of the presently exempted financial statement note disclosure requirements.

The Guarantor and the Issuer prepare annual financial statements as at 31 December each year which are subject to audit by the Group’s auditors. The Guarantor also prepares six-month consolidated financial statements as at 30 June each year which are subject to review by the Group’s auditors.

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GENERAL INFORMATION

Authorisation

1. The issue of the Notes was duly authorised by a resolution of the Board of Directors of the Issuer dated 14 September 2010 and the giving of the Guarantee was duly authorised by a resolution of the Board of Directors of the Guarantor dated 14 September 2010.

Listing

2. It is expected that official listing will be granted on or about 23 September 2010 in respect of €650,000,000 in aggregate principal value of the Notes, subject only to the issue of a Temporary Global Note. It is expected that listing will be granted on or about the date of issue of any Optional Notes, again subject to the issue of a Temporary Global Note in respect of such Notes. Application has been made to the UK Listing Authority for the Notes to be admitted to the Official List and to the London Stock Exchange for such Notes to be admitted to trading on the London Stock Exchange’s regulated market. The total expenses related to the admission to trading are estimated to be £4,200.

Clearing Systems

3. The Notes have been accepted for clearance through Euroclear and Clearstream, Luxembourg. The ISIN for this issue is XS0543710395 and the Common Code is 054371039.

The address of Euroclear is Euroclear Bank SA/NV, 1 Boulevard du Roi Albert II, B-1210 Brusssels and the address of Clearstream, Luxembourg is Clearstream Banking, 42 Avenue JF Kennedy, L 1855 Luxembourg.

No significant change

4. Save as disclosed under the heading “Acquisition and divestment activities” on page 12 and under the heading “GLNG – Expected approval in 2010” on page 49 of this Prospectus, there has been no significant change in the financial or trading position of the Issuer since 31 December 2009 or of the Group since 30 June 2010 and there has been no material adverse change in the prospects of either the Issuer or the Group since 31 December 2009.

Litigation

5. Neither the Issuer nor the Guarantor nor any other member of the Group is or has been involved in any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Issuer or the Guarantor are aware) in the 12 months preceding the date of this document which may have or have in such period had a significant effect on the financial position or profitability of the Issuer, the Guarantor or the Group.

Auditors

6. The auditors of the Issuer and the Guarantor are Ernst & Young, whose audit partners are members of the Institute of Chartered Accountants in Australia, who have audited the financial statements of both the Issuer and the Guarantor, without qualification, in accordance with Australian Auditing Standards for each of the two financial years ended on 31 December 2009 and 31 December 2008. The auditors of the Issuer and the Guarantor have no material interest in the Issuer or the Guarantor. Australian auditing requirements have no significant departures from International Standards on Auditing.

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GENERAL INFORMATION

U.S. tax

7. The Notes and Coupons will contain the following legend: “Any United States person who holds this obligation will be subject to limitations under the United States income tax laws, including the limitations provided in Sections 165(j) and 1287(a) of the Internal Revenue Code.”

Documents Available

8. For the period of 12 months following the date of this Prospectus, copies of the following documents will be available for inspection from the registered office of the Issuer and from the specified office of the Paying Agent for the time being in London:

(a) the constitution of the Issuer and the constitution of the Guarantor;

(b) the audited financial statements of the Issuer and the Guarantor in respect of the years ended 31 December 2008 and 31 December 2009 and the consolidated financial statements of the Guarantor in respect of the financial years ended 31 December 2008 and 31 December 2009 and the consolidated financial statements of the Guarantor for the half-year end 30 June 2010 (unaudited);

(c) the most recently published audited annual financial statements of the Issuer and the Guarantor and the most recently published unaudited interim financial statements (if any) of the Guarantor, together with any audit or review reports prepared in connection therewith. The Issuer currently prepares audited financial statements on an annual basis and the Guarantor currently prepares audited consolidated and non consolidated accounts on an annual basis and unaudited financial statements for each half-year;

(d) the Trust Deed and the Agency Agreement; and

(e) this Prospectus.

Managers transacting with the Issuer and the Guarantor

9. Certain of the Managers and their affiliates have engaged, and may in the future engage, in investment banking and/or commercial banking transactions with, and may perform services to the Issuer, the Guarantor and/or their affiliates in the ordinary course of business.

Replacement Capital Covenant

10. The Issuer and the Guarantor intend to enter into a deed poll to be dated the Issue Date containing a replacement capital covenant for the benefit of one or more designated series of the Guarantor’s debt securities. It is anticipated that the terms of such replacement capital covenant will provide that neither the Issuer nor the Guarantor, during the period from the Issue Date until the termination of the replacement capital covenant (and subject to certain circumstances in which it shall cease to apply), will redeem or purchase any Notes, and the Guarantor will not permit any Subsidiary to purchase any Notes, unless and to the extent that the aggregate redemption or purchase price is no greater than the net proceeds received by the Issuer, the Guarantor or any Subsidiary during the twelve months prior to such redemption or purchase date, from new issuances of certain qualifying securities described in the replacement capital covenant and that the covenant will terminate on the redemption of the Notes if not terminated earlier in accordance with its terms. The replacement capital covenant will continue to be effective following any substitution or variation of the Notes in accordance with their terms.

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GLOSSARY barrel/bbl The standard unit of measurement for all production and sales. One barrel = 159 litres or 35 imperial gallons. boe Barrels of oil equivalent. The factor used by Santos to convert volumes of different hydrocarbon production to barrels of oil equivalent. condensate A natural gas liquid that occurs in association with natural gas and is mainly composed of propane, butane, pentane and heavier hydrocarbon fractions. contingent resources Those quantities of hydrocarbons which are estimated, on a given date, to be potentially recoverable from known accumulations, but which are not currently considered to be commercially recoverable. Contingent resources may be of a 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. exploration Drilling, seismic or technical studies undertaken to identify and evaluate regions or prospects with the potential to contain hydrocarbons. hydrocarbons Solid, liquid or gas compounds of the elements hydrogen and carbon. liquids A sales product in liquid form; for example, condensate and LPG.

LNG Liquefied natural gas. Natural gas that has been liquefied by refrigeration to store or transport it. Generally, LNG comprises mainly methane.

LPG Liquefied petroleum gas, the name given to propane and butane in their liquid state. market capitalisation A measurement of a company’s stock market value at a given date. Market capitalisation is calculated as the number of shares on issue multiplied by the closing share price on that given date. mmbbl Million barrels. mmboe Million barrels of oil equivalent. mtpa Million tonnes per annum. oil A mixture of liquid hydrocarbons of different molecular weights.

PJ Petajoules. Joules are the metric measurement unit for energy. A petajoule is equal to 1 joule x 1015. proven plus probable reserves (2P) Reserves that analysis of geological and engineering data suggests are more likely than not to be recoverable. There is at least a 50% probability that reserves recovered will exceed Proven plus Probable reserves.

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GLOSSARY 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. sales gas Natural gas that has been processed by gas plant facilities and meets the required specifications under gas sales agreements. tcf Trillion cubic feet.

Conversion Crude oil 1 barrel = 1 boe

Sales gas 1 petajoule = 171,937 boe

Condensate/naphtha 1 barrel = 0.935

LPG 1 tonne = 8.458

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FINANCIAL INFORMATION

Consolidated Financial Statements, Directors’ Report and Auditor's Report for the Guarantor for the Year Ended 31 December 2008 ...... F-1

Consolidated Financial Statements, Directors’ Report and Auditor's Report for the Guarantor for the Year Ended 31 December 2009 ...... F-102

Consolidated Financial Statements, Directors’ Report and Auditor's Report (Review Opinion) for the Guarantor for the Six Months Ended 30 June 2010 ...... F-212

Financial Statements, Directors’ Report and Auditor's Report for the Issuer for the Year Ended 31 December 2008...... F-241

Financial Statements, Directors’ Report and Auditor's Report for the Issuer for the Year Ended 31 December 2009...... F-269

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CONSOLIDATED FINANCIAL STATEMENTS, DIRECTORS’ REPORT AND AUDITO’S REPORT FOR THE GUARANTOR FOR THE YEAR ENDED 31 DECEMBER 2008

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Financial Report

Contents

DIRECTORS’ STATUTORY REPORT 45 REMUNERATION REPORT 50 FINANCIAL REPORT INCOME STATEMENTS 68 BALANCE SHEETS 69 CASH FLOW STATEMENTS 70 STATEMENTS OF RECOGNISED INCOME AND EXPENSE 71 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 Significant Accounting Policies 72 2 Segment Information 85 3 Revenue and Other Income 87 4 Expenses 87 5 Earnings 89 6 Net Financing Costs 89 7 Taxation Expense 90 8 Discontinued Operations 91 9 Cash and Cash Equivalents 91 10 Trade and Other Receivables 91 11 Inventories 92 12 Derivative Financial Instruments 92 13 Exploration and Evaluation Assets 93 14 Oil and Gas Assets 94 15 Other Land, Buildings, Plant and Equipment 96 16 Impairment of Cash-Generating Units 97 17 Available-For-Sale Financial Assets 97 18 Other Financial Assets 97 19 Deferred Tax Assets and Liabilities 98 20 Trade and Other Payables 99 21 Interest-Bearing Loans and Borrowings 99 22 Provisions 102 23 Other Liabilities 103 24 Capital and Reserves 103 25 Earnings per Share 107 26 Consolidated Entities 109 27 Acquisitions of Subsidiaries 110 28 Interests in Joint Ventures 111 29 Notes to the Cash Flow Statements 112 30 Employee Benefits 113 31 Share-Based Payment Plans 116 32 Key Management Personnel Disclosures 125 33 Related Parties 130 34 Remuneration of Auditors 130 35 Commitments for Expenditure 131 36 Contingent Liabilities 133 37 Deed of Cross Guarantee 134 38 Financial Risk Management 136

DIRECTORS’ DECLARATION 141 AUDITOR’S INDEPENDENCE DECLARATION 142 INDEPENDENT AUDIT REPORT 143

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Directors’ Statutory Report

The Directors present their report together with the financial report of Santos Limited (Santos or Company) and the consolidated financial report of the consolidated entity, being the Company and its controlled entities, for the financial year ended 31 December 2008, and the auditor’s report thereon. Information in the Annual Report referred to by page number in this report, including the Remuneration Report, or contained in a Note to the financial statements referred to in this report is to be read as part of this report.

1. DIRECTORS, DIRECTORS’ SHAREHOLDINGS AND DIRECTORS’ MEETINGS

The names of Directors of the Company in office at the date of this report and details of the relevant interest of each of those Directors in shares in the Company at that date are as set out below:

Surname Other Names Shareholdings in Santos Ltd Ordinary Franked Unsecured Shares Equity Listed Securities Borda Kenneth Charles 45,172 - Coates Peter Roland 7,440 - Dean Kenneth Alfred 6,868 - Franklin Roy Alexander - - Gerlach (Chairman) Stephen 54,364 - Harding Richard Michael 1,757 - Knox David John Wissler - - Sloan Judith 20,135 195

The above named Directors held office during and since the end of the financial year, except for Mr P R Coates, who was appointed a Director of the Company on 18 March 2008 and Mr D J W Knox, who was appointed Managing Director of the Company on 6 August 2008.

Mr J C Ellice-Flint held office as Managing Director of the Company until his retirement on 25 March 2008.

Except where otherwise indicated, all shareholdings are of fully paid ordinary shares.

At the date of this report, Mr D J W Knox holds 544,974 options under the Santos Executive Share Option Plan and subject to the further terms described in Note 31 to the financial statements. Details of the options granted to Mr Knox during the year are set out in the Remuneration Report on page 56.

Details of the qualifications, experience and special responsibilities of each Director and the Company Secretary are set out on the Directors’ and Executives’ biography pages of the Annual Report on pages 26 to 29. This information includes details of other directorships held during the last three years.

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Directors’ Statutory Report CONTINUED

Directors’ Meetings The number of Directors’ Meetings and meetings of committees of Directors held during the financial year and the number of meetings attended by each Director are as follows:

Surname Other Names Environment, Health, Safety and Directors’ Audit Sustainability Remuneration Finance Nomination Meetings** Committee Committee Committee Committee Committee

No. of No. of No. of No. of No. of No. of No. of No. of No. of No. of No. of No. of Mtgs Mtgs Mtgs Mtgs Mtgs Mtgs Mtgs Mtgs Mtgs Mtgs Mtgs Mtgs Held* Attended Held* Attended Held* Attended Held* Attended Held* Attended Held* Attended Borda Kenneth Charles 12 12------44-- Coates Peter Roland 10822 - -11 - - - - Dean Kenneth Alfred 12 12 5 5----44-- Ellice-Flint John Charles 2 2 - - 1 1------Franklin Roy Alexander 12 12 - - 4 4------Gerlach Stephen 12 12 - -44554411 Harding Richard Michael 12 10544455 - -11 Knox David John Wissler 5 5 - - 3 3------Sloan Judith 121133 - -44 - -1 1

* Reﬂects the number of meetings held during the time the Director held ofﬁce, or was a member of the Committee, during the year. ** In addition to formal meetings, the Board participated in a site visit to the PETRONAS operations in Malaysia. (PETRONAS is the joint venture partner for GLNG.)

As at the date of this report, the Company had an Audit Committee of the Board of Directors.

Particulars of the Company’s corporate governance practices appear in the Corporate Governance Statement commencing on page 30 of the Annual Report.

2. PRINCIPAL ACTIVITIES

The principal activities of the consolidated entity during the financial year were: petroleum exploration, the production, treatment and marketing of natural gas, crude oil, condensate, naphtha, liquid petroleum gas, and the transportation by pipeline of crude oil. No significant change in the nature of these activities has occurred during the year.

3. REVIEW AND RESULTS OF OPERATIONS

A detailed review of the operations of the consolidated entity during the financial year, the results of those operations and the financial position of the consolidated entity as at the end of the financial year is contained in the reports by the Chairman, Chief Executive Officer and Chief Financial Officer in the Annual Report. Further details regarding the operations, results and business strategies of the consolidated entity appear in the individual reports providing more detailed discussion of business activities and outlook in the Annual Report.

In summary, the consolidated net profit after income tax attributable to the shareholders was $1,650.1 million, a 359.3% increase from the previous period comparative result of $359.3 million. Sales revenue was a record $2,761.8 million, up 11.0% from 2007.

In particular, total revenue for the Australian segment was $2,563.4 million, an 8.8% increase from the 2007 result of $2,356.4 million. International operations recorded revenue growth of 49.5% from 2007 to $241.6 million in 2008.

Total production was down by 8.0% to 54.4 million barrels of oil equivalent (mmboe), reflecting natural field decline, Mutineer Exeter FPSO down time, the Varanus Island plant incident and the Stag shut-in, partially offset by commencement of production from the Sampang field, increased production contributions from Maleo, the acquisition of the Sangu field and increased contributions from Cooper Oil.

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4. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS

The Directors consider that matters or circumstances that have significantly affected, or may significantly affect, the operations, results of operations or the state of affairs of the Company in subsequent financial years are:

ÝÛ ÛK`]Ûk]d][lagfÛg^ÛPETRONAS, one of the world’s largest LNG producers, to be the Company’s 40% partner in the development, operation and marketing of the Company’s proposed GLNG project; ÝÛ ÛK`]ÛljYfk^]jÛg^Ûl`]Û:gehYfq¿kÛafl]j]klÛafÛl`]Û9jYflYkÛGjg\m[lagfÛJ`Yjaf_Û:gfljY[lÛ¨GJ:©ÛafÛ@f\gf]kaYÛaf[dm\af_Ûl`]Û9YfbYjÛGYfba¤~Ûo]ddÛ to a company associated with the operator of the PSC; ÝÛ ÛK`]Ûka_faf_Ûg^ÛYÛ>YkÛ8_j]]e]flÛZ]lo]]fÛl`]Û>gn]jfe]flÛg^ÛGYhmYÛE]oÛ>maf]YÛ¨GE>©ÛYf\Ûl`]ÛGE>ÛCE>ÛbgaflÛn]flmj]ÛYf\Ûl`]Ûhjgb][lÛ formally entering into Front End Engineering Design (FEED); and ÝÛ Û>gn]jfe]flÛg^ÛJgml`Û8mkljYdaYÛd]_akdYlagfÛhj]n]flaf_ÛYfqÛgf]Ûk`Yj]`gd\]jÛ`Ynaf_ÛYfÛ]flald]e]flÛlgÛegj]Ûl`YfÛ~ÉÛg^Ûl`]Û:gehYfq¿kÛ shares was repealed effective 29 November 2008.

5. DIVIDENDS

On 19 February 2009, the Directors:

(i) resolved to pay a fully franked final dividend of $0.20 per fully paid ordinary share on 31 March 2009 to shareholders registered in the books of the Company at the close of business on 3 March 2009. This final dividend amounts to approximately $117.0 million; and

(ii) declared that in accordance with the Terms of Issue, a fully franked dividend of $2.9989 per Franked Unsecured Equity Listed Security be paid on 31 March 2009 to holders registered in the books of the Company at the close of business on 3 March 2009, amounting to $18.0 million.

A fully franked final dividend of $117.2 million (20 cents per share) was paid on 31 March 2008 on the 2007 results. Indication of this dividend payment was disclosed in the 2007 Annual Report. In addition, a fully franked interim dividend of $131.1 million (22 cents per fully paid ordinary share) was paid to members on 30 September 2008.

In accordance with the Terms of Issue, a fully franked final dividend of $2.9983 per Franked Unsecured Equity Listed Security ($18.0 million) was paid on 31 March 2008. Indication of this dividend payment was disclosed in the 2007 Annual Report. A fully franked interim dividend of $3.3365 per Franked Unsecured Equity Listed Securities ($20.0 million) was paid on 30 September 2008.

6. ENVIRONMENTAL REGULATION

The consolidated entity’s Australian operations are subject to various environmental regulations under Commonwealth, State and Territory legislation, including under applicable petroleum legislation, under authorisations in respect of its South Australian operations (numbers EPA 888, 1259, 2164, 2569, 14145, 14427, 45080036, 45080037, 45080038 and 45080092 issued under the Environment Protection Act 1993), its Queensland operations (numbers EA 150029, 150101, 150125, 150224, 150225, 150238, 150245, 150271, 150275, 150288, 150313, 150347, 150351, 150343, 150355, 150359, 150368, 150381, 150382, 150274, 150166, 150390, 170526, 170533, 170562, and numbers EA PEN 2000018207, 2000054807, 2000054007, 200054107, 200214208, 200196508, 10021028, 100188208, 200039307, 200196208, 200196308, 200196408, 100030807, 200194208, 200196608, 200012400, 200214308, 2100214408 and 100090007 issued under the Environmental Protection Act 1994) and its Victorian operations (number LA 54626 issued under the Environment Protection Act 1970). Applicable legislation and requisite environmental licences are specified in the entity’s EHS Compliance Database, which forms part of the consolidated entity’s overall Environmental Management System. Compliance performance is monitored on a regular basis and in various forms, including environmental audits conducted by regulatory authorities and by the Company, either through internal or external resources.

During the financial year, no fines were imposed and no prosecutions were instituted in respect of the above-referenced environmental regulations. Since the end of the financial year, Santos has received a minor infringement notice for a breach of the Environmental Protection Act 1994 (Qld). Apart from this, Santos has not been the subject of any enforcement action under the environmental protection legislation to which its operations are subject. Appropriate corrective measures have been taken to preclude a recurrence of the circumstances which led to the issuing of this notice. In February 2008, Santos received a notice of non-compliance from the Department of Primary Industries and Resources South Australia in relation to the disturbance of cultural heritage sites during clear and grade activities on the Jackson to Moomba Pipeline right of way. This incident was formally investigated by Santos and appropriate corrective measures have been taken to preclude a recurrence.

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Directors’ Statutory Report CONTINUED

7. EVENTS SUBSEQUENT TO BALANCE DATE

Except as mentioned below, in the opinion of the Directors there has not arisen in the interval between the end of the financial year and the date of this report any matter or circumstance that has significantly affected or may significantly affect the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in future financial years.

Dividends declared after 31 December 2008 are set out in Item 5 of this Directors’ Report and Note 24 to the financial statements.

8. LIKELY DEVELOPMENTS

Certain likely developments in the operations of the consolidated entity and the expected results of those operations in future financial years are referred to in the reports in the Annual Report by the Chairman, Chief Executive Officer and Chief Financial Officer on pages 4 to 9.

Further information about likely developments in the operations of the consolidated entity and the expected results of those operations in future financial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the consolidated entity. Further details regarding likely developments appear in the individual reports providing more detailed discussion of business activities and outlook in the Annual Report.

9. 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 and options granted during the financial year) are set out in the Remuneration Report commencing on page 50 of this report.

10. INDEMNIFICATION

Rule 61 of the Company’s Constitution provides that the Company indemnifies, on a full indemnity basis and to the full extent permitted by law, officers of the Company for all losses or liabilities incurred by the person as an officer of the Company, a related body corporate or trustee of a company-sponsored superannuation fund. Rule 61 does not indemnify an officer for any liability involving a lack of good faith. Rule 61 also permits the Company to purchase and maintain a Directors’ and Officers’ insurance policy. No indemnity has been granted to an auditor of the Company in their capacity as auditor of the Company.

In conformity with Rule 61, the Company is party to Deeds of Indemnity in favour of each of the Directors referred to in this report who held office during the year and certain 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 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 ending 31 December 2008 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 2009. 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.

11. NON-AUDIT SERVICES

During the year the Company’s auditor, Ernst & Young, was paid the following amounts in relation to non-audit services it provided:

Taxation services $38,000 Assurance services $388,000 Other services $42,000

The Directors are satisfied, based on the advice of the Audit Committee, that the provision of the non-audit services detailed above by Ernst & Young is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001.

The reason for forming this opinion is that all non-audit services have been reviewed by the Audit Committee to ensure they do not impact the impartiality and objectivity of the auditor.

A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 142 of the financial statements.

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12. SHARES UNDER OPTION

Unissued ordinary shares of Santos Ltd under option at the date of this report are as follows:

Date options granted Expiry date Issue price of shares* Number under option 15 June 2004 14 June 2009 $6.95 50,000 23 May 2005 22 May 2015 $8.46 22,850 23 May 2005 22 May 2015 $8.46 159,450 24 October 2006 24 October 2016 $10.48 736,000 4 May 2006 3 May 2016 $11.36 2,500,000 1 July 2007 30 June 2017 $14.14 227,500 1 July 2007 30 June 2017 $14.14 59,800 3 September 2007 2 September 2017 $12.81 100,000 3 May 2008 2 May 2018 $15.39 644,949 3 May 2008 2 May 2018 $15.39 281,573 28 July 2008 27 July 2018 $17.36 94,193 28 July 2008 27 July 2018 $17.36 131,976 28 July 2008 27 July 2018 $17.36 131,976 5,140,267

* 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.

13. SHARES ISSUED ON THE EXERCISE OF OPTIONS

The following ordinary shares of Santos Ltd were issued during the year ended 31 December 2008 on the exercise of options granted under the Santos Executive Share Option Plan. No further shares have been issued since then on the exercise of options granted under the Santos Executive Share Option Plan. No amounts are unpaid on any of the shares.

Date options granted Issue price of shares Number of shares issued 15 June 2004 $6.95 50,000 15 June 2004 $6.95 46,178 23 May 2005 $8.46 11,100 23 May 2005 $8.46 132,100 24 October 2006 $10.48 64,205 303,583

14. ROUNDING

Australian Securities and Investments Commission Class Order 98/100, dated 10 July 1998, applies to the Company and accordingly amounts have been rounded off in accordance with that Class Order, unless otherwise indicated.

This report is made on 19 February 2009 in accordance with a resolution of the Directors.

Director Director

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Remuneration Report

The Directors of Santos Limited present the Remuneration Report for the Company and its controlled entities for the year ended 31 December 2008. The information provided in this Remuneration Report has been audited as required by section 308(3C) of the Corporations Act. This Remuneration Report forms part of the Directors’ Report.

In order to achieve its objective of delivering top quartile strategic operating and shareholder value performance compared to its peers in the Australian and international exploration and production industry, the Company needs to have highly capable staff. Consistent with this objective, the Company’s remuneration strategy is designed to attract and retain appropriately qualified and experienced directors, executives and staff with the necessary skills and attributes to lead and manage the Company. The Company’s remuneration strategy is therefore critical to the delivery of the Company’s overall strategic objectives.

In addition to attracting and retaining talent, Santos’ remuneration strategy also aims to encourage its employees to strive for superior performance by rewarding the achievement of targets that are fair, challenging, clearly understood and within the control of employees to achieve through their own actions. For the Company’s most senior staff, performance targets are primarily aligned with long-term shareholder value creation.

The Remuneration Report sets out remuneration information for the Company’s non-executive Directors, Managing Director and Senior Executives who are the key management personnel accountable for planning, directing and controlling the affairs of the consolidated entity. They include the five highest remunerated executives of the Company and Group for the 2008 financial year, and are listed in Table 1 below.

TABLE 1: NON-EXECUTIVE DIRECTORS, MANAGING DIRECTOR AND SENIOR EXECUTIVES

Executive Non-Executive Name Position Name Position D J W Knox Managing Director S Gerlach Chairman 1 and Chief Executive Officer K C Borda Director J H Anderson Vice President Commercial2 P R Coates Deputy Chairman6 J L Baulderstone General Counsel and Company Secretary K A Dean Director T J Brown Vice President Geoscience and New Ventures R A Franklin Director M E J Eames Vice President Corporate and People R M Harding Director R M Kennett Vice President Operations3 J Sloan Director M S Macfarlane Vice President Development P C Wasow Chief Financial Officer R J Wilkinson Vice President GLNG4 Former J C Ellice-Flint Managing Director and Chief Executive Officer5

1 Appointed on 28 July 2008, formerly Acting Chief Executive Ofﬁcer (from 25 March 2008 to 27 July 2008) and Executive Vice President Growth Businesses (until 24 March 2008). 2 Appointed on 1 September 2008, formerly Vice President Strategic Projects. 3 Seconded to GLNG Operations Pty Ltd on 24 July 2008. 4 Appointed on 1 September 2008, formerly Vice President Commercial. 5 Departed 25 March 2008. 6 Appointed Director on 18 March 2008. Appointed Deputy Chairman on 10 December 2008.

DELIVERING ON PERFORMANCE CRITERIA

2008 was an important year in Santos’ history, during which the achievement of key milestones shaped the Company’s future. The Company’s ambition to be a significant supplier of energy to Asia took a major step forward through two significant achievements. First, the sale of a 40% interest in the Company’s GLNG project, and the resultant joint venture with PETRONAS, the leading LNG player in the region. Second, the entry into FEED in the PNG LNG project. These achievements, together with the Company meeting its production guidance, placed Santos as one of the premium growth stocks on the ASX as well as in the broader energy sector. Santos was one of only eight ASX 100 companies whose share price grew during the severe stock market downturn in 2008 and was also one of the top performing exploration and production companies internationally. The achievement of these significant milestones was an important aspect in the Company’s 2008 remuneration deliberations.

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David Knox assumed the position of Acting Chief Executive Officer upon the retirement of John Ellice-Flint on 25 March 2008, and was subsequently appointed Managing Director and Chief Executive Officer (CEO) on 28 July 2008, following an international search by the Company. The terms of Mr Knox’s appointment were outlined in an ASX release dated 29 July 2008, and are summarised on pages 54 to 57. Details of Mr Ellice-Flint’s retirement package were communicated to the market on 14 May 2008 and are summarised on page 65.

REMUNERATION POLICY

The Company’s remuneration policy as set by the Board is summarised below.

Policy objective Implementation approach Non-executive Directors To enable the Company to prudently secure and Directors’ fees are set taking into account, among retain the services of suitable individuals to serve other things, fees paid for similar roles in comparable as Directors. companies, the commitment, risk and responsibility accepted by non-executive Directors, and recognition of their commercial expertise and experience. To promote independence and impartiality. Non-executive Director remuneration does not vary according to the performance of the Company. To align non-executive Director and shareholder Purchase of the Company’s shares by Directors is interests by encouraging the creation of long-term facilitated via the Non-executive Director Share Plan. shareholder value. Managing Director and Senior To enable the Company to prudently secure and Executive remuneration levels are market-aligned by Executives retain the services of suitable individuals able to comparison against similar roles in comparable contribute towards meeting its strategic objectives. companies. To encourage executives to strive for superior A significant component of executive remuneration is performance by rewarding achievement driven by Company and individual performance of targets that are fair, challenging, clearly through the Company’s short-term and long-term understood and within the control of employees incentive programs. These components of to achieve through their own actions. remuneration are “at risk”, so executives only derive value from participating in these programs where they satisfy challenging performance hurdles. Individual performance also affects base remuneration. The Board intends the base remuneration of consistently high-performing executives to be higher, in market terms, than that of others. To align executive and shareholder Part of executive remuneration is delivered interests by encouraging the creation in share-based payments, in order to align executive of long-term shareholder value. and shareholder interests. Consistent with the objective of creating a meaningful alignment of interests, Directors and Senior Executives are not permitted to hedge their shareholdings or Long-term Incentives (LTIs) unless those securities have fully vested and are no longer subject to restrictions. Breaches of this policy will be subject to appropriate sanctions, which could include disciplinary action or termination of employment.

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Remuneration Report CONTINUED

DETAILS OF REMUNERATION POLICY IMPLEMENTATION IN 2008

Non-executive Director remuneration

Maximum aggregate amount

Total non-executive Directors’ fees paid in a year, including Board committee fees, cannot exceed $2,100,000. This amount was approved by shareholders at the Annual General Meeting held on 2 May 2008. Directors may also be paid additional fees for special duties or exertions, and are entitled to be reimbursed for all business-related expenses. These payments are not included in the maximum aggregate amount approved by shareholders. No additional fees were paid during the year.

2008 non-executive Directors’ fees

Within the maximum aggregate amount approved by shareholders, fees are set for Board and Committee responsibilities. An external review of Directors’ fees was undertaken by Egan Associates in December 2007, which included benchmarking comparisons of non-executive Directors’ fees for similar companies and consideration of the responsibilities and time commitments required from each Director to discharge their duties. Recommendations arising from this review resulted in approval by the Board of a revised scale of payment, effective from 1 July 2008. An extension of this review, conducted in January 2009 by Egan Associates, also provided benchmark data for remuneration for the new Deputy Chairman’s role. The Board adopted the recommended fees with effect from the date of appointment of the Deputy Chairman on 10 December 2008. Directors’ fee rates are provided in Table 2 below.

TABLE 2: NON-EXECUTIVE DIRECTORS’ FEES PER ANNUM

Board Committees Chair1 Deputy Chair1 Member Chair Member Annual fees $435,000 $217,500 $145,000 $12,000-$30,000 $5,000-$15,000

1 The Chairman and Deputy Chairman of the Board do not receive any additional fees for serving on or chairing any Board committee.

Superannuation and retirement benefits

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 appointed prior to 1 January 2004 (Participating Directors) are contractually entitled to receive benefits upon their retirement pursuant to agreements entered into upon their appointment, the terms of which were approved by shareholders at the 1989 AGM. Non-executive Directors appointed after 1 January 2004 are not entitled to receive a benefit upon retirement other than statutory entitlements.

The retirement benefits of Participating Directors were frozen with effect from 30 June 2004, at which time their entitlements ceased to accrue. However, to prevent erosion in the real value of the frozen benefits, the Board determined that from 1 July 2007 the benefits would be indexed annually against the five-year Australian Government Bond Rate.

Table 3 below shows the increase in Participating Directors’ frozen benefits as a result of indexation in 2008. Full provision has been made for these retirement benefits.

TABLE 3: NON-EXECUTIVE DIRECTOR RETIREMENT BENEFITS

Director Benefit as at Increase as a result Benefit as at 1 January 2008 of indexation 31 December 2008 S Gerlach $1,168,650 $39,897 $1,208,547 J Sloan $358,382 $12,235 $370,617

Non-executive Director Share Plan

The Non-executive Director Share Plan (NED Share Plan) was introduced in July 2007 following shareholder approval at the 2007 Annual General Meeting. Participation in the NED Share Plan is voluntary and all present and future non-executive Directors are eligible to participate. Under the NED Share Plan, Directors elect to sacrifice all or part of their pre-tax fees in return for an allocation of shares of equivalent value. The NED Share Plan therefore does not involve any additional remuneration for participating Directors.

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Shares are allocated quarterly and are either issued as new shares or purchased on the ASX at the prevailing market price. The shares are registered in the name of the participating Director, but are subject to a restriction on dealing. In the absence of exceptional circumstances, the restriction will apply until the Director ceases to hold office or until ten years have elapsed since the allocation of the shares, whichever is earlier.

Details of the shares allocated to Directors under the NED Share Plan during the year are set out in Table 4 below.

TABLE 4: 2008 NED SHARE PLAN ALLOCATIONS

Director Q1 2008 allocation1 Q2 2008 allocation2 Q3 2008 allocation3 Q4 2008 allocation4 Total K C Borda 2,316 1,654 2,188 2,770 8,928 P R Coates 336 1,564 2,412 3,105 7,417 K A Dean 697 497 639 807 2,640 S Gerlach 985 703 911 1,151 3,750 R M Harding 296 211 273 345 1,125 J Sloan 2,746 1,961 2,143 2,646 9,496

1 Shares were allocated to the participating Directors on 4 April 2008 at $14.8381 per share. 2 Shares were allocated to the participating Directors on 3 July 2008 at $20.7745 per share. 3 Shares were allocated to the participating Directors on 7 October 2008 at $17.8867 per share. 4 Shares were allocated to the participating Directors on 30 December 2008 at $14.1676 per share.

Details of remuneration paid to non-executive Directors

Details of the fees and other benefits paid to Directors during 2008 are set out in Table 5 below.

TABLE 5: 2008 NON-EXECUTIVE DIRECTOR REMUNERATION DETAILS

Share-based Short-term benefits Retirement benefits payments Directors’ fees Fees for special Increase to NED (incl. Committee duties or Superannuation retirement Share fees)1 exertions Other2 contributions3 benefit Plan Total S Gerlach $350,625 - $4,796 $13,437 $39,897 $61,875 $470,630 K C Borda $0 - - $13,060 - $147,141 $160,201 P R Coates $0 - - $10,246 - $124,644 $134,890 K A Dean $130,687 - - $13,437 - $43,563 $187,687 R A Franklin $150,250 - - $813 - - $151,063 R M Harding $167,287 - - $6,872 - $18,588 $192,747 J Sloan $0 - - $13,376 $12,235 $157,342 $182,953

1 Refer Table 2 above for details of annual Directors’ fees and Committee fees. Figure shown is after fee sacrifice to NED Share Plan. 2 This figure represents the value of car parking provided to the Chairman in the Company’s head office in Adelaide. 3 Includes superannuation guarantee payments. Superannuation guarantee payments are made to Mr Franklin only in relation to days worked in Australia.

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Remuneration Report CONTINUED

TABLE 6: 2007 NON-EXECUTIVE DIRECTOR REMUNERATION DETAILS

Share-based Short-term benefits Retirement benefits payments Directors’ fees Fees for special Increase to NED (incl. Committee duties or Superannuation retirement Share fees)1 exertions Other2 contributions3 benefit Plan Total S Gerlach $252,229 - $4,788 $111,678 $37,925 $39,000 $445,620 K C Borda $51,704 - - $10,672 - $68,750 $131,126 K A Dean $107,575 - - $54,282 - $16,550 $178,407 R A Franklin $140,512 - - $3,195 - - $143,707 R M Harding $39,600 - - $136,440 - $8,800 $184,840 C J Recny4 $19,589 - - $1,763 - - $21,352 J Sloan $0 - - $94,407 $11,630 $81,500 $187,537

1 Figure shown is after fee sacrifice to superannuation and/or NED Share Plan. 2 This figure represents the value of car parking provided to the Chairman in the Company’s head office in Adelaide. 3 Includes superannuation guarantee payments and any voluntary fee sacrifice to superannuation. 4 Payment to deceased estate.

Managing Director and CEO remuneration

Remuneration components and their relative weightings

Total remuneration for the Managing Director and CEO, Mr D J W Knox, is made up of the following components:

ÝÛ 9Yk]Ûj]emf]jYlagfÛ¦Û[gehjakaf_ÛkYdYjqÛYf\Ûkmh]jYffmYlagf ÝÛ J`gjl¤l]jeÛ@f[]flan]Û¨JK@©Û¦ÛYfÛYffmYdÛZgfmkÛdafc]\ÛlgÛ:gehYfqÛh]j^gjeYf[]ÛYf\ÛY[`a]n]e]flÛg^ÛkljYl]_a[ÛgZb][lan]kÛYf\ ÝÛ ÛCgf_¤l]jeÛ@f[]flan]Û¨CK@©Û¦Û]imalqÛ_jYflkÛla]\ÛlgÛn]klaf_Û[gf\alagfkÛ\]h]f\]flÛgfÛJYflgk¿ÛY[`a]n]e]flÛg^Ûkmh]jagjÛh]j^gjeYf[]Ûj]dYlan]Û to the ASX 100.

The Board received external advice on Mr Knox’s remuneration package, which is benchmarked against the remuneration paid to Managing Directors/CEOs of comparable companies in the industry.

The relative weightings of the three components comprising the Managing Director and CEO’s total remuneration are provided below.

TABLE 7: RELATIVE WEIGHTINGS OF REMUNERATION COMPONENTS1

% of total remuneration (annualised) Fixed remuneration Performance-based remuneration STI LTI Managing Director 37% 26% 37%

1 These figures reflect the annualised weightings of the Managing Director and CEO’s remuneration components (based on target performance for the “at risk” components). The figures do not reflect the relative weightings of the remuneration components paid to Mr Knox in 2008, as Mr Knox did not serve as Managing Director for the full period. These figures do not reflect the relative value derived by Mr Knox from each of the components, which is dependent on actual performance against targets for the “at risk” components. This is discussed in the STI and LTI sections below.

Base remuneration

Mr Knox is paid Total Fixed Remuneration (TFR), out of which the Company makes contributions into his accumulation superannuation fund of at least the minimum statutory amount. He may, if he wishes, salary sacrifice part of his TFR for additional superannuation contributions or other benefits such as a novated car lease. Under his service agreement, TFR for the Managing Director and CEO is set at $1.75 million per annum, subject to annual review. Mr Knox’s TFR for the 2008 financial year (as set out in Table 9 below) was pro-rated according to the various roles he held during the period.

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Short-term Incentive (STI)

The Managing Director and CEO has a maximum annual STI opportunity of 100% of TFR, subject to achievement of applicable performance targets set by the Board. For the 2008 financial year, Mr Knox’s maximum STI was pro-rated for the various roles he held during the period (that is, his maximum STI amount of $1,358,167 reflects a pro-rated portion of the maximum amount he could have earned from the roles held during the year).

Consistent with his role as Managing Director and CEO, Mr Knox’s performance measures comprise a combination of financial and operational targets, all of which are directly related to strategic objectives set by the Board. The Board believes that this method of setting performance targets focuses the Managing Director and CEO’s attention on achieving the key conditions and milestones necessary to achieve the Board’s strategic plan for the Company.

At the end of each financial year, the Remuneration Committee assesses performance against the objectives set by the Board, and makes recommendations to the Board regarding Mr Knox’s performance and the appropriate level of STI award. The Board believes this method of assessment provides a balanced assessment of the Managing Director and CEO’s overall performance.

For the 2008 performance period, as outlined above, Mr Knox’s STI targets were based on agreed objectives linked to Company performance targets and delivery of its strategic growth initiatives. Consistent with his role as Managing Director and CEO, these performance measures for 2008 included the Company’s strategic positioning in Australia and Asia, furtherance of its LNG projects (including formation of a strategic joint venture for its GLNG project) and achievement of financial, operational and safety performance milestones.

Based on performance against these targets during the year, Mr Knox was awarded an STI payment of $1,100,000 or 81% of the maximum STI payable. The difference between actual STI paid and maximum STI was forfeited.

Long-term Incentive (LTI)

Overview of grants made to Mr Knox in 2008

On 3 May 2008, the Company made equity grants to its Senior Executives for the Long-term Incentive (LTI) component of their remuneration for 2008. Mr Knox participated in these grants in his capacity as Acting Chief Executive Officer. The grants comprised:

ÝÛ YÛh]j^gjeYf[]¤ZYk]\Û[gehgf]flÛ]imYdÛlgÛ~ÉÛg^Ûl`]ÛlglYdÛ_jYflÛnYdm]Û¨G]j^gjeYf[]Û8oYj\©ÛYf\ ÝÛ YÛk]jna[]¤ZYk]\Û[gehgf]flÛ]imYdÛlgÛÉÛg^Ûl`]ÛlglYdÛ_jYflÛnYdm]Û¨;]^]jj]\Û8oYj\©Û

The key terms of the Performance Award and Deferred Award are set out on pages 59 to 60.

Upon his formal appointment as CEO, Mr Knox received a further grant of equity awards (CEO Performance Award) to supplement the grants already made to him in his Senior Executive capacity.

The grants made to Mr Knox in 2008 constitute his full LTI entitlement for the 2008, 2009 and 2010 financial years.

All LTI grants were delivered in the form of:

ÝÛ ÛJ`Yj]Û8[imakalagfÛIa_`lkÛ¨J8Ik©Û¦ÛYÛ[gf\alagfYdÛ]flald]e]flÛlgÛYÛ^mddqÛhYa\Ûgj\afYjqÛk`Yj]ÛYlÛr]jgÛhja[]ÛkmZb][lÛlgÛkYlak^Y[lagfÛg^Ûn]klaf_Û conditions; or ÝÛ FhlagfkÛ¦ÛYfÛ]flald]e]flÛlgÛY[imaj]ÛYÛ^mddqÛhYa\Ûgj\afYjqÛk`Yj]ÛYlÛYÛhj]\]l]jeaf]\Ûhja[]ÛkmZb][lÛlgÛkYlak^Y[lagfÛg^Ûn]klaf_Û[gf\alagfk

Table 8 below contains details of the number and value of SARs and options granted to Mr Knox in 2008.

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TABLE 8: SARS AND OPTIONS GRANTED TO MR KNOX IN 20081

Grant name Number of SARs granted Number of Options granted Maximum value of grant2 CEO Performance Award Tranche 1 35,973 Tranche 1 94,193 Tranche 1 $1,040,640 Tranche 2 50,403 Tranche 2 131,976 Tranche 2 $990,405 Tranche 3 50,403 Tranche 3 131,976 Tranche 3 $990,066 2008 Awards prior to CEO Appointment Performance Award - 64,992 $341,208 Deferred Award - 21,837 $159,410

1 The grants made to Mr Knox during the year constitute his full LTI awards for the 2008, 2009 and 2010 ﬁnancial years. As the SARs and options only vest on satisfaction of service and/or performance conditions to be tested in future ﬁnancial years, none of the SARs or options detailed above were forfeited during the year. 2 Maximum value represents the fair value of the LTI Awards as at their grant date (being 3 May 2008 for the Performance Award and Deferred Award and 28 July 2008 for the CEO Performance Award). The fair value per instrument at the grant date was: Û :

Summary of CEO Performance Award

The CEO Performance Award operates on the same terms as the performance-based LTI granted to other Senior Executives described on pages 56 to 60 below, that is, it is subject to performance hurdles based on the Company’s TSR relative to the ASX 100 over a three-year performance period. The Board believes the chosen performance hurdles effectively align the CEO’s interests with that of the Company’s shareholders, as TSR is a fair measure of shareholder returns and the ASX 100 represents the companies in which most of the Company’s shareholders could invest as an alternative to Santos.

As the CEO Performance Award forms part of the Managing Director and CEO’s remuneration for each of the 2008, 2009 and 2010 financial years, it is divided into 3 tranches as follows:

Tranche 1: Tested over the period from 1 January 2008 to 31 December 2010

Tranche 2: Tested over the period from 1 January 2009 to 31 December 2011

Tranche 3: Tested over the period from 1 January 2010 to 31 December 2012.

Depending on Santos’ relative TSR over the applicable performance period, each tranche of the CEO Performance Award will vest in accordance with the following schedule:

TSR percentile ranking % of grant vesting < 50th percentile 0% = 50th percentile 37.5% 51st to 75th percentile 39% to 75% 76th to 100th percentile 76% to 100%

Full vesting of the CEO Performance Award will only occur where Santos’ TSR growth over the performance period exceeds that of all other companies in the comparator group, and therefore requires exceptional performance.

There is no re-testing of the performance conditions. SARs or options which remain unvested following testing of the performance condition will lapse.

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Upon vesting of SARs, ordinary shares in Santos will automatically be allocated to Mr Knox. These shares will be subject to restrictions until the earlier of ten years from the grant date, cessation of employment, or the date at which the Board approves, at Mr Knox’s request, the removal of the restrictions. Options may be exercised at any time between the vesting date and the expiry date (27 July 2018), subject to payment of the exercise price of $17.36 per option (being the volume weighted average price in the week up to and including the grant date).

2008 Remuneration details for Mr DJW Knox

TABLE 9: 2008 REMUNERATION DETAILS FOR MR DJW KNOX1

Other Post- long-term % Short-term employee benefits employment Share-based payments2 Termination benefits3 Total at risk Base Super- salary STI4 Other annuation SARs Options $1,200,115 $1,100,000 - $54,745 $381,824 $418,382 - $39,593 $3,194,659 59%

1 Remuneration paid to Mr Knox in 2008 varied according to each of the three positions he held during the year. 2 In accordance with the requirements of the Accounting Standards, remuneration includes a proportion of the notional value of equity compensation granted or outstanding during the year. The notional value of equity instruments which do not vest during the reporting period is determined as at the grant date and is progressively allocated over the vesting period. The amount included as remuneration is not related to or indicative of the benefit (if any) that Mr Knox may ultimately realise should the equity instruments vest. The notional value of SARs and options as at their date of grant was determined in accordance with AASB 2 “Share Based Payment” applying the Monte Carlo simulation method. Details of the assumptions underlying the valuation are set out in Note 31 to the financial statements. Of the total remuneration for Mr Knox for the year, 25% consisted of SARs and options. 3 This amount represents the value of long service leave accrued in 2008. 4 This amount represents the STI award made for the 2008 financial year, which will be paid in March 2009.

Service agreement

The Company entered into a service agreement with the Managing Director and CEO on 28 July 2008, which is ongoing until termination by the Managing Director and CEO, or the Company.

The service agreement provides that the Company may terminate the Managing Director and CEO’s employment on giving 12 months’ notice. Where the Company exercises this general right to terminate, it must make a payment to the Managing Director and CEO equivalent to his TFR for the full notice period. Pro-rata STI entitlements, subject to performance, will apply to the date of termination and the Board retains discretion to vest any outstanding LTI, having regard to performance and reasons for termination.

The Company may terminate the Managing Director and CEO’s employment at any time for cause. No payment in lieu of notice, nor any payment in respect of STI or LTI will be made in this circumstance.

Mr Knox may initiate termination of his service agreement by giving the Company six months’ notice, in which case he will be entitled to payment of TFR in respect of the notice period and pro-rata STI to the date of termination, subject to performance. The Board retains discretion to vest any outstanding LTI, having regard to performance and reasons for termination. Mr Knox may also initiate termination of his service agreement immediately if there is a fundamental change in his role or responsibilities without his consent. In this circumstance the service agreement provides for payment of 12 months’ TFR, full STI for the year in which employment is terminated and a pro rata portion of the following year’s STI, subject to current year performance. Pro-rata vesting of outstanding LTI will apply, based on the expired portion of the performance period and performance achieved to the termination date.

Senior Executive remuneration

Remuneration components and their relative weightings

Total remuneration for Senior Executives is made up of the following components:

ÝÛ 9Yk]Ûj]emf]jYlagfÛ¦Û[gehjakaf_ÛkYdYjqÛYf\Ûkmh]jYffmYlagf ÝÛ J`gjl¤l]jeÛaf[]flan]kÛ¨JK@©Û¦ÛYffmYdÛZgfmk]kÛla]\ÛlgÛaf\ana\mYdÛYf\Û:gehYfqÛh]j^gjeYf[]ÛYf\ ÝÛ Cgf_¤l]jeÛaf[]flan]kÛ¨CK@©Û¦Û]imalqÛ_jYflkÛla]\ÛlgÛn]klaf_Û[gf\alagfkÛl]kl]\Ûgn]jÛYÛl`j]]¤q]YjÛh]jag\Û

Santos’ executive remuneration structure is consistent with the Company’s “pay for performance” policy.

The relative weightings of the three components comprising the Senior Executives’ total remuneration are provided in Table 10 below.

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TABLE 10: RELATIVE WEIGHTINGS OF REMUNERATION COMPONENTS1

% of total remuneration (annualised) Fixed remuneration Performance-based remuneration TFR STI LTI Executive Vice Presidents 52% 27% 21% and Chief Financial Officer Other Senior Executives 57% 20% 23%

1 These figures reflect the relative weightings used by the Company to determine the size of STI and LTI allocations to Senior Executives. The figures do not reflect the relative value derived by Senior Executives from each of the components, which is dependent on actual performance against targets for the “at risk” components.

Base remuneration

Salary and superannuation Senior Executives are paid Total Fixed Remuneration (TFR), out of which the Company makes contributions into their superannuation funds of at least the minimum statutory amount. They may, if they wish, salary sacrifice part of their TFR for additional superannuation contributions or other benefits such as novated car leases. Benefits Senior Executives do not receive any benefits in addition to TFR. Market alignment Executive remuneration levels are market-aligned by comparison to similar roles in ASX 100 energy, materials and utilities companies, excluding BHP Billiton and Rio Tinto due to their disproportionately larger size and market capitalisation. This broad industry group is used as there are too few Australian exploration and production companies of similar size to Santos for benchmarking purposes.

Short-term Incentive

Frequency STI is assessed and paid annually. Maximum STI 75% of TFR for Executive Vice Presidents. 50% of TFR for other Senior Executives. Performance measures To promote collaboration among Senior Executives and to focus their efforts towards the overall benefit of the Company, 70% of their STI is based on Company performance. The remaining 30% is based on the executive’s individual performance. A range of Company performance metrics is used in order to drive balanced business performance. These metrics include lagging indicators to assess the Company’s past performance, as well as forward-looking indicators to ensure the Company is positioning itself effectively for future growth. The metrics include reserve growth, reserve replacement cost, production, margin, new growth options, shareholder value creation, people, environment, health and safety and continuous improvement. Individual performance is assessed against targets set within each executive’s area of responsibility. Assessment of performance Individual performance is assessed by the Managing Director and CEO. Company performance is assessed by the Remuneration Committee. Each metric is assessed against target and assigned a score on a five-point scale. The average of these scores forms the overall Company performance score. The Board believes the above methods of assessment are rigorous and transparent and provide a balanced assessment of the executive’s performance. Payment method Cash. STI awarded in 2008 Company performance against the metrics in 2008 resulted in an average STI of 80% of maximum payable to all eligible employees. 2008 STI awards made to individual Senior Executives ranged from 56% to 94% of maximum. The difference between actual STI paid and maximum STI was forfeited.

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Long-term Incentives

During the year, the Company made equity grants to its Senior Executives as the Long-term Incentive (LTI) component of their remuneration for 2008. The grants comprised:

All LTI grants were delivered, at the executive’s election, in the form of either:

Grant sizes were market-aligned.

For the Performance Award, an additional 50% of the award was added to the standard grant for Relative TSR performance above the 75th percentile, up to the 100th percentile of the comparator group. Consistent with its remuneration philosophy, the Board believes it is appropriate to provide executives with an additional incentive to strive for exceptional performance, recognising that executives will only benefit from the additional 50% where Santos achieves a ranking in the top quartile of its comparator group. Executives will only receive the full benefit of this additional component where Santos outperforms all other companies in the comparator group in delivering superior returns to shareholders.

Vesting details of the Performance Award and the Deferred Award are summarised in Table 11 below. In addition, Table 12 contains details of the number and value of SARs and options granted to Senior Executives in 2008 under the Performance Award and the Deferred Award.

TABLE 11: PERFORMANCE AWARD AND DEFERRED AWARD VESTING DETAILS

Performance Award Deferred Award Vesting period 1 January 2008 to 31 December 2010. 3 May 2008 to 2 May 2011. Vesting condition Vesting of this grant is based on relative TSR Vesting of the Deferred Award is based on continuous against ASX 100 companies as at 1 January 2008. service to 2 May 2011, or three years from the grant date. Vesting schedule Santos TSR % of standard 0% if the continuous service condition is not met. percentile ranking grant vesting 100% if the continuous service condition is met. < 50th percentile 0%

= 50th percentile 50%

51st to 75th percentile 52% to 100%

76th to 100th percentile 102% to 150% Exercise price $15.39 for options, being the volume weighted As for Performance Award. average price in the week up to and including the grant date of 3 May 2008.

SARs have no exercise price. Exercise period Options may be exercised at any time between As for Performance Award. the vesting date and the expiry date.

Upon vesting of SARs, shares will automatically be allocated to the executive.

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Performance Award Deferred Award Expiry/lapse SARs and options that do not vest upon testing SARs and options will lapse where the service of the performance condition will lapse. There is condition is not satisfied. no re-testing of the performance condition if it is not satisfied. Vested options will expire if not exercised before 3 May 2018. Vested options will expire if not exercised before 3 May 2018. Cessation/change of control Upon cessation of employment, SARs which have As for Performance Award. not already vested and options which are not exercisable will, in general, lapse and be forfeited.

However, if cessation occurs due to death, disability or redundancy, or in special circumstances approved by the Board, then a proportion of the SARs and options may vest and become exercisable.

Where there is a change in control, the Board may determine whether, and the extent to which, SARs and options may vest.

TABLE 12: SARS AND OPTIONS GRANTED TO SENIOR EXECUTIVES IN 20081

Number of Number of Maximum value Executive Grant name SARs granted Options granted of grant2 J H Anderson Performance Award - 34,290 180,023 Deferred Award - 11,247 82,103 J L Baulderstone Performance Award - 31,384 164,766 Deferred Award - 10,294 75,146 T J Brown Performance Award - 33,925 178,106 Deferred Award - 9,092 66,372 M E J Eames Performance Award - 40,412 212,163 Deferred Award - 13,255 96,762 R M Kennett Performance Award 13,304 - 149,404 Deferred Award 4,364 - 73,010 M S Macfarlane Performance Award - 34,602 181,661 Deferred Award - 10,380 75,774 P C Wasow Performance Award 17,485 - 196,357 Deferred Award 5,735 - 95,947 R J Wilkinson Performance Award 13,641 - 153,188 Deferred Award 4,474 - 74,850

1 The grants made to the Senior Executives during the year constitute their full LTI awards for the 2008 financial year. As the SARs and options only vest on satisfaction of service and/or performance conditions to be tested in future financial years, none of the SARs or options detailed above were forfeited during the year. 2 Maximum value represents the fair value of the Performance Award and Deferred Award as at their grant date (being 3 May 2008). The fair value per instrument at the grant date was: Performance AwardÛ J8IkÛ¦Û~~ÛFhlagfkÛ¦Û Deferred AwardÛ J8IkÛ¦Û~ÛFhlagfkÛ¦Û Monte Carlo simulation was used to determine the value of the SARs and options granted. Details of the assumptions underlying the valuation are set out in Note 31 to the financial statements. The minimum total value of the grant, if the applicable vesting conditions are not met, is nil in all cases.

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Prior year LTI grants to Senior Executives

The following LTI grants were still in progress or were tested during 2008:

Grant year Grant type Vesting condition(s) Performance/vesting period Status 2005 Performance Award ÝÛÛI]dYlan]ÛKJIÛh]j^gjeYf[]Û 1 January 2005 to Grant tested during the year, against ASX 100 companies 31 December 2007 resulting in: (50% of grant) ÝÛÛ=mddÛn]klaf_Ûg^ÛÉÛg^Ûl`]Û_jYflÛ ÝÛÛI]dYlan]ÛKJIÛh]j^gjeYf[]Û as the Company’s TSR ranked against Australian and at the 75th percentile of the international E&P companies ASX 100 comparator group; and (50% of grant) ÝÛÛEgÛn]klaf_Ûg^ÛÉÛg^Ûl`]Û_jYflÛ as the Company ranked below the 50th percentile of the E&P comparator group. 2006 Performance Award ÝÛÛI]dYlan]ÛKJIÛh]j^gjeYf[]Û 1 January 2006 to Grant tested after the end of against ASX 100 companies 31 December 2008 financial year resulting in full (50% of grant) vesting of the grant as the Company’s TSR ranked above ÝÛÛI]dYlan]ÛKJIÛh]j^gjeYf[]Û the 75th percentile of both the against Australian and ASX 100 comparator group and international E&P companies the E&P comparator group. (50% of grant) 2007 Performance Award ÝÛÛI]dYlan]ÛKJIÛh]j^gjeYf[]Û 1 January 2007 to Still in progress. against Australian and 31 December 2009 international E&P companies (50% of grant)

ÝÛÛ8Zkgdml]ÛKJIÛlYj_]lÛg^Û~~ÉÛh]jÛ annum compound (50% of grant) Deferred Award Continuous service 1 July 2007 to 30 June 2010 Still in progress. 2008 Performance Award Relative TSR performance 1 January 2008 to Still in progress. against ASX 100 companies 31 December 2010 Deferred Award Continuous service 3 May 2008 to 2 May 2011 Still in progress.

The value derived by Senior Executives during 2008 in respect of LTIs granted in previous financial years is set out in Table 13 below. Table 13 also contains details of prior year LTIs that lapsed or were forfeited during 2008.

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TABLE 13: SENIOR EXECUTIVES’ LTI REMUNERATION OUTCOMES IN 2008

Vested Exercised1 Forfeited/Lapsed Number Value2 Number Value3 Number Value4 J H Anderson SARs ------Options 14,400 74,592 12,744 188,611 14,400 16,560 J L Baulderstone SARs ------Options ------T J Brown SARs ------Options 14,400 74,592 - - 14,400 16,560 M E J Eames SARs 9,800 133,672 - - 9,800 45,374 Options - - - - 25,000 28,750 R M Kennett SARs 4,500 61,380 - - 4,500 20,835 Options ------M S Macfarlane SARs 4,800 65,472 - - 4,800 22,224 Options ------P C Wasow SARs 11,800 160,952 - - 11,800 54,634 Options ------R J Wilkinson SARs 8,850 120,714 - - 8,850 40,976 Options ------Total SARs 39,750 542,190 - 188,611 39,750 184,043 Total options 28,800 149,184 12,744 - 53,800 61,870

1 For each option exercised during the year, the relevant executive received one fully paid ordinary share in the Company. Options were exercised on 20 June 2008, at an exercise price of $6.95 per option. 2 The value of each SAR on the date of vesting is based on the closing market price of Santos Limited shares on ASX on the preceding trading day. The value of each option on the date of vesting is based on the difference between the closing market price of Santos Limited shares on ASX on the preceding trading day and the relevant exercise price. 3 The value of each option exercised during the year is based on the difference between the closing market price of Santos Limited shares on ASX on the preceding trading day and the relevant exercise price. 4 The value of a SAR or option on the day it lapsed represents the beneﬁt foregone as determined by the Monte Carlo valuation method at the date the SAR or option was granted.

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2008 Senior Executive Remuneration Details

TABLE 14: 2008 SENIOR EXECUTIVE REMUNERATION DETAILS

Other Post- Share-based payments2 Termin- long-term % Short-term employee benefits employment (LTI) ation benefits3 Total at risk Base Super- salary STI4 Other annuation SARs Options J H Anderson $468,021 $205,000 - $48,689 $122,742 $80,852 - $12,228 $937,532 44% J L Baulderstone $465,734 $250,000 - $46,326 $111,832 $119,641 - $12,030 $1,005,563 48% T J Brown $500,023 $145,000 - $18,5231 $123,651 $77,719 - $11,803 $876,720 40% M E J Eames $551,505 $220,000 - $57,455 $173,306 $68,556 - $14,078 $1,084,901 43% R M Kennett5 $484,297 $235,000 $22,4306 $64,3151 $147,201 - - $12,983 $966,226 40% M S Macfarlane $471,282 $205,000 - $49,029 $122,742 $79,811 - $12,056 $939,919 43% P C Wasow $830,548 $585,000 - $13,289 $265,239 - - $22,639 $1,716,716 50% R J Wilkinson $485,676 $255,000 $5,2826 $90,260 $201,462 - - $11,681 $1,049,361 43%

1 This amount reflects the accounting value ascribed to the superannuation benefit reflecting the services provided during the period. The actual contribution made during 2008 by the Company in respect of the current and future entitlements of T J Brown and R M Kennett was $13,289 and $57,526 respectively. 2 In accordance with the requirements of the Accounting Standards, remuneration includes a proportion of the notional value of equity compensation granted or outstanding during the year. The notional value of equity instruments which do not vest during the reporting period is determined as at the grant date and is progressively allocated over the vesting period. The amount included as remuneration is not related to or indicative of the benefit (if any) that individual executives may ultimately realise should the equity instruments vest. The notional value of SARs and options as at their date of grant was determined in accordance with AASB 2 “Share Based Payment” applying the Monte Carlo valuation method. Details of the assumptions underlying the valuation are set out in Note 31 to the financial statements. The amounts set out above include a proportion of the value of SARs and Options granted during 2008 under the Performance Award and Deferred Award as well as a proportion of the value of SARs and options granted in previous financial years that had not vested as at 1 January 2008. The percentage of each Senior Executive’s total remuneration for the year that consisted of SARs and options is as follows: J H Anderson 22% R M Kennett 15% J L Baulderstone 23% M S Macfarlane 22% T J Brown 23% P C Wasow 15% M E J Eames 22% R J Wilkinson 19% 3 These amounts represent Senior Executives’ long service leave accruals in 2008. 4 This amount represents the STI award made for the 2008 financial year, which will be paid in March 2009. 5 R M Kennett was seconded to GLNG Operations Pty Ltd on 24 July 2008. Figures in this table represent his remuneration for the full 2008 year. 6 This amount represents allowances paid to R M Kennett for relocation to Brisbane and for incidental expenses for R J Wilkinson relating to commuting between Adelaide and Brisbane.

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2007 Senior Executive Remuneration Details

TABLE 15: 2007 SENIOR EXECUTIVE REMUNERATION DETAILS

Other % Post- Share-based payments3 Termin- long-term at Short-term employee benefits employment (LTI) ation benefits4 Total risk Base Super- salary STI Other1 annuation SARs Options J H Anderson $426,902 $199,500 $1,944 $44,542 $61,371 $35,458 - $10,961 $780,678 38% J L Baulderstone $379,833 $167,000 $1,463 $38,340 $55,916 $33,200 - - $675,751 38% T J Brown $465,358 $163,700 $1,944 $17,6272 $61,826 $36,330 - $11,031 $757,816 35% M E J Eames $505,228 $235,100 $1,944 $52,766 $135,576 $22,181 - $ 12,916 $965,711 41% R M Kennett $391,597 $187,500 $1,976 $66,0822 $72,549 - - $10,304 $730,008 36% D J W Knox5 $230,403 $143,300 - $21,792 $65,429 $28,143 - - $489,067 48% M S Macfarlane $426,902 $180,700 $1,944 $44,542 $78,517 $22,682 - $10,961 $766,248 37% P C Wasow $631,261 $406,900 $1,944 $12,686 $158,421 - - $14,904 $1,226,117 46% R J Wilkinson $411,455 $207,800 $1,944 $81,752 $118,370 - - $10,524 $831,846 39%

1 These amounts represent the cost of car parking provided partly in the Company’s old head office premises in Adelaide and partly in its current premises, up to 30 April 2007. On 1 May 2007, the cost of parking in the Company’s current head office was added to TFR, and from then on executives were required to obtain parking via salary sacrifice. 2 This amount reflects the accounting value ascribed to the superannuation benefit reflecting the services provided during the period. The actual contributions made during 2007 by the Company in respect of the current and future entitlements of TJ Brown and RM Kennett were $12,686 and $51,180 respectively. 3 In accordance with the requirements of the Accounting Standards, remuneration includes a proportion of the notional value of equity compensation granted or outstanding during the year. The notional value of equity instruments which do not vest during the reporting period is determined as at the grant date and is progressively allocated over the vesting period. The amount included as remuneration is not related to or indicative of the benefit (if any) that individual executives may ultimately realise should the equity instruments vest. The notional value of SARs and options as at their date of grant was determined in accordance with AASB 2 “Share Based Payment” applying the Monte Carlo valuation method. Details of the assumptions underlying the valuation are set out in Note 31 to the financial statements. The amounts set out above include a proportion of the value of SARs and Options granted during 2007 under the Performance Grant and Growth Awards as well as a proportion of the value of SARs and options granted in previous financial years that had not vested as at 1 January 2007. The percentages of each Senior Executive’s total remuneration for the year that consisted of SARs and options are as follows: J H Anderson 11% R M Kennett 19% J L Baulderstone 13% D J W Knox 12% T J Brown 12% P C Wasow 12% M E J Eames 16% R J Wilkinson 13% M S Macfarlane 8% 4 These amounts represent Senior Executives’ long service leave accruals in 2007. 5 Mr D J W Knox was appointed on 3 September 2007.

Service Agreements – Senior Executives

The Company has entered into service agreements with the Senior Executives. The service agreements are ongoing until termination by the Company upon giving 12 months’ notice or the Senior Executive upon giving six months’ notice. In a Company-initiated termination, the Company may make a payment in lieu of notice equivalent to the TFR the executive would have received over the notice period. All Senior Executives’ service agreements may be terminated immediately for cause, whereupon no payments in lieu of notice or other termination payments apply.

64 Santos Annual Report 2008

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Former Managing Director and CEO

Mr J C Ellice-Flint retired as Managing Director and CEO on 25 March 2008.

Consistent with the terms of his service agreement, Mr Ellice-Flint received the following benefits upon cessation of his employment:

ÝÛ YÛhYqe]flÛg^Û~ ÛeaddagfÛ]imanYd]flÛlgÛ~Ûegfl`k¿ÛZYk]ÛkYdYjq ÝÛ YÛhYqe]flÛg^Û ÛafÛj]kh][lÛg^ÛYffmYdÛYf\Ûdgf_Ûk]jna[]Ûd]Yn]ÛY[[jm]\ÛYlÛl`]Û\Yl]ÛàkÛ]ehdgqe]flÛ[]Yk]\Û ÝÛ Û~ÛghlagfkÛoà[`Û`Y\ÛfglÛhj]nagmkdqÛn]kl]\Ûo]j]Ûn]kl]\ÛYf\ÛZ][Ye]Û]p]j[akYZd]Û@fÛY[[gj\Yf[]Ûoal`Ûl`]Ûgja_afYdÛl]jekÛg^Ûakkm]Û approved by shareholders, these options are exercisable, at an exercise price of $11.36 per option, until 3 May 2016; and ÝÛ YÛhjg¤jYl]\ÛYegmflÛg^ÛàkÛk`gjl¤l]jeÛaf[]flan]Ûhgl]flaYdÛ^gjÛl`]Ûh]jag\Û^jgeÛ~ÛAYfmYjqÛlgÛ~ÛDYj[`Û Û¨~©Û

Whilst Mr Ellice-Flint officially stepped down as CEO on 25 March 2008, he continued to provide services to the Company until 30 June 2008 in a consultancy capacity, for which he was paid $492,337.

Details of Mr Ellice-Flint’s remuneration are shown in Table 16 below.

TABLE 16: DETAILS OF 2007 AND 2008 REMUNERATION FOR MR J C ELLICE-FLINT

Share-based Post- payments Short-term employee benefits employment (LTI) Options2 Other Super- long-term % Base salary STI Other annuation1 Termination benefits4 Total at risk 2008 $433,135 $520,312 - $1,172,553 $1,570,522 $2,705,262 - $6,401,784 33% 2007 $1,702,694 $1,950,000 $1,9443 $987,357 $1,898,273 - $42,601 $6,582,869 58%

1 This amount reflects the accounting value ascribed to the superannuation benefit reflecting the services provided during the period. The actual contribution made by the Company in respect of Mr Ellice-Flint’s entitlements was $1,094,334 in 2007 and $208,250 in 2008. 2 In accordance with the requirements of the Accounting Standards, remuneration includes a proportion of the notional value of equity compensation granted or outstanding during the year. The notional value of equity instruments which do not vest during the reporting period is determined as at the grant date and is progressively allocated over the vesting period. The notional value of SARs and options as at their date of grant was determined in accordance with AASB 2 “Share Based Payment” applying the Monte Carlo valuation method. Details of the assumptions underlying the valuation are set out in Note 31 to the financial statements. The amounts set out above include a proportion of the value of options granted to Mr Ellice-Flint in 2006 that had not vested as at 1 January 2007 and 1 January 2008. Of Mr Ellice-Flint’s total remuneration for the year, 29% consisted of options in 2007 and 25% consisted of options in 2008. Û ÛKàkÛYegmflÛj]hj]k]flkÛl`]Û[gklÛg^Û[YjÛhYjcaf_Ûhjgna\]\ÛafÛl`]Ûh]jag\Û~ÛAYfmYjqÛ¦Û8hjadÛÛ=jgeÛ~ÛDYqÛÛl`]Û[gklÛg^ÛhYjcaf_ÛafÛl`]Û:gehYfq¿kÛf]oÛ head office was paid by the Managing Director. 4 This amount represents long service leave accrued in 2007.

Santos Annual Report 2008 65

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Remuneration Report CONTINUED

LINK BETWEEN COMPANY PERFORMANCE, SHAREHOLDER WEALTH AND REMUNERATION 2004–2008 Table 17 sets out the Group’s performance over the past five years in respect of the key financial and non-financial indicators used to measure year-on-year performance. Table 17 also shows how the size of the STI pool available to Senior Executives has varied over this period based on the level of performance achieved each year across these key indicators. TABLE 17: KEY INDICATORS OF SHORT-TERM COMPANY PERFORMANCE 2004–2008 2004 2005 2006 2007 2008 Safety (total recordable case frequency rate) 6.4 4.9 6.4 5.3 5.8 Production (mmboe) 47.1 56.0 61.0 59.1 54.4 I]k]jn]Ûj]hdY[]e]flÛ[gklÛ¦Û~GÛ¨8£Zg]© 17 13 15 13 13 I]k]jn]Ûj]hdY[]e]flÛjYl]Û¦Û~GÛ¨É© 121 218 143 175 160 Gjgn]fÛhdmkÛhjgZYZd]Ûj]k]jn]kÛ¦ÛGÛ¨eeZg]© 643 774 819 879 1,013 Netback (A$/boe) 20 30 33 33 36 Net profit after tax ($m) 355 762 643 359 1,650 Earnings per share (cents) 54 124 103 55 273 Dividends per ordinary share (cents) 30 36 40 40 42 Size of STI pool (% of maximum) 80.0 85.0 70.0 80.0 80.0

The graphs below show the relationship over the past five years between the Company’s TSR and share price growth, being two key indicators of long-term Company performance, and the percentage of LTI grants to Senior Executives that vested. The graphs demonstrate how the level of Senior Executive reward derived from their LTI grants is dependent upon the delivery of sustained above-average returns to shareholders.

TSR OF SANTOS, ASX100 AND AUSTRALIAN AND INTERNATIONAL EXPLORATION AND PRODUCTION COMPANIES 2004–2008 % 160 140 120 100 80 60 40 20 0 -20

2004 2005 2006 2005 2006 2007 2006 2007 2008 Santos ASX100 E&P Santos ASX100 E&P Santos ASX100 E&P

LTI vesting for 2004–2006 LTI vesting for 2005–2007 LTI vesting for 2006–2008 performance period = 0% performance period = 50% performance period = 100%

SANTOS SHARE PRICE 2004–2008 $

2004 2005 2006 2007 2008

66 Santos Annual Report 2008

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The TSR growth shown above incorporates dividends and capital returns the Company made to shareholders during the past five years. Dividends paid by the Company in the past five years are as follows:

(Dividends per ordinary share)

2004 $0.30 2005 $0.36 2006 $0.40 2007 $0.40 2008 $0.42

K`]Û^gddgoaf_Û[YhalYdÛj]lmjfkÛo]j]ÛeY\]ÛafÛl`]Û¦ Ûh]jag\

ÝÛ Û@fÛ[gfbmf[lagfÛoal`ÛalkÛÛeaddagfÛg^^]jaf_Ûg^ÛI]\]]eYZd]Û:gfn]jlaZd]ÛGj]^]j]f[]ÛJ`Yj]kÛ¨gjÛ=L

Santos Annual Report 2008 67

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Income Statements FORTHEYEARENDED$ECEMBER

Consolidated Consolidated Santos Ltd 2008 2007 2008 2007 Continuing Discontinued Total Continuing Discontinued Total Note $million $million $million $million $million $million $million $million Product sales 3 2,761.8 – 2,761.8 2,458.4 30.1 2,488.5 872.5 974.3 Cost of sales 4 (1,422.6) – (1,422.6) (1,329.1) (5.8) (1,334.9) (520.7) (603.1) Gross profit 1,339.2 – 1,339.2 1,129.3 24.3 1,153.6 351.8 371.2 Other revenue 3 43.2 – 43.2 29.5 – 29.5 64.3 901.3 Other income 3 1,734.6 – 1,734.6 81.7 (69.6) 12.1 1.1 15.6 Other expenses 4 (493.4) – (493.4) (317.8) (20.5) (338.3) (210.6) 169.7 Operating profit/(loss) before net financing costs 2,623.6 – 2,623.6 922.7 (65.8) 856.9 206.6 1,457.8 Financial income 6 63.3 – 63.3 13.6 0.8 14.4 183.0 188.8 Financial expenses 6 (153.7) – (153.7) (152.7) – (152.7) (286.4) (294.4) Net financing (costs)/income (90.4) – (90.4) (139.1) 0.8 (138.3) (103.4) (105.6) Profit/(loss) before tax 2,533.2 – 2,533.2 783.6 (65.0) 718.6 103.2 1,352.2 Income tax expense 7 (768.4) – (768.4) (195.1) (0.6) (195.7) (51.4) (50.1) Royalty related taxation expense 7 (114.7) – (114.7) (163.6) – (163.6) (31.7) (31.9) Total taxation expense (883.1) – (883.1) (358.7) (0.6) (359.3) (83.1) (82.0) Net profit/(loss) for the period attributable to equity holders of Santos Ltd 1,650.1 – 1,650.1 424.9 (65.6) 359.3 20.1 1,270.2

Earnings per share attributable to the ordinary equity holders of Santos Ltd (¢) Basic earnings per share 25 272.9 272.9 66.3 55.2 Diluted earnings per share 25 261.7 261.7 66.0 54.9

Dividends per share ($) Ordinary shares 24 0.42 0.40 Redeemable preference shares 24 6.3348 5.5864

The income statements are to be read in conjunction with the notes to the consolidated financial statements.

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Balance Sheets ASAT$ECEMBER

Consolidated Santos Ltd 2008 2007 2008 2007 Note $million $million $million $million Current assets Cash and cash equivalents 9 1,552.9 200.5 1,402.9 56.8 Trade and other receivables 10 581.6 607.4 693.9 208.5 Inventories 11 289.7 241.5 136.0 115.9 Derivative financial instruments 12 59.2 6.9 – – Total current assets 2,483.4 1,056.3 2,232.8 381.2 Non-current assets Receivables 10 6.0 – 1,300.9 1,304.8 Derivative financial instruments 12 336.3 77.2 – – Exploration and evaluation assets 13 427.5 332.4 42.7 15.5 Oil and gas assets 14 6,254.8 5,584.4 1,777.7 1,650.1 Other land, buildings, plant and equipment 15 159.9 134.8 109.7 107.4 Available-for-sale financial assets 17 2.1 15.6 2.1 15.6 Other financial assets 18 20.9 32.7 3,440.8 3,488.6 Deferred tax assets 19 111.0 86.8 – – Total non-current assets 7,318.5 6,263.9 6,673.9 6,582.0 Total assets 9,801.9 7,320.2 8,906.7 6,963.2 Current liabilities Trade and other payables 20 604.8 609.7 723.0 625.1 Deferred income 55.2 12.0 1.8 1.7 Interest-bearing loans and borrowings 21 98.6 103.1 0.6 – Current tax liabilities 469.2 71.7 454.2 46.5 Provisions 22 116.7 112.4 65.8 65.1 Other current liabilities 23 8.1 15.4 – – Total current liabilities 1,352.6 924.3 1,245.4 738.4 Non-current liabilities Deferred income 54.1 8.8 – – Interest-bearing loans and borrowings 21 2,355.8 1,992.9 4,085.4 2,478.2 Deferred tax liabilities 19 744.1 743.0 134.0 109.2 Provisions 22 808.0 543.6 310.9 167.8 Other non-current liabilities 23 9.0 14.5 – – Total non-current liabilities 3,971.0 3,302.8 4,530.3 2,755.2 Total liabilities 5,323.6 4,227.1 5,775.7 3,493.6 Net assets 4,478.3 3,093.1 3,131.0 3,469.6

Equity Issued capital 24 2,530.8 2,331.6 2,530.8 2,331.6 Reserves 24 (188.8) (272.9) (2.0) 7.4 Retained earnings 24 2,136.0 1,034.4 602.2 1,130.6 Equity attributable to equity holders of Santos Ltd 4,478.0 3,093.1 3,131.0 3,469.6 Equity attributable to minority interests 24 0.3 – – – Total equity 4,478.3 3,093.1 3,131.0 3,469.6

The balance sheets are to be read in conjunction with the notes to the consolidated financial statements.

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Cash Flow Statements FORTHEYEARENDED$ECEMBER

Consolidated Santos Ltd 2008 2007 2008 2007 Note $million $million $million $million Cash flows from operating activities Receipts from customers 3,100.9 2,555.1 985.3 1,036.6 Dividends received – – – 874.0 Interest received 48.8 14.2 39.4 188.7 Overriding royalties received 14.8 14.7 24.2 22.0 Insurance proceeds received 12.5 18.3 – – Pipeline tariffs and other receipts 64.3 83.0 41.4 2.0 Payments to suppliers and employees (1,089.0) (808.4) (401.7) (313.4) Royalty and excise paid (102.2) (76.3) (47.5) (33.9) Borrowing costs paid (133.5) (128.4) (0.3) (280.6) Income taxes paid (291.8) (384.6) (229.0) (231.1) Royalty related taxes paid (151.6) (73.7) (35.4) (22.4) Net cash provided by operating activities 29 1,473.2 1,213.9 376.4 1,241.9 Cash flows from investing activities Payments for: Exploration and evaluation expenditure (353.5) (279.8) (84.7) (80.5) Oil and gas assets expenditure (1,178.5) (919.4) (358.9) (324.3) Other land, buildings, plant and equipment (39.6) (58.5) (13.8) (47.7) Acquisitions of oil and gas assets – (33.5) (0.7) – Acquisitions of controlled entities (7.5) (75.7) (6.2) (4.5) Restoration expenditure (54.9) (34.4) (2.6) (2.7) Share subscriptions in controlled entities – – – (245.2) Advances to related entities (6.0) – – – Other investing activities 3.9 3.5 3.2 (1.8) Proceeds from disposal of non-current assets 2,080.0 0.6 1.2 – Proceeds from disposal of discontinued operations: Non-current assets – 6.1 – – Controlled entities – 73.4 – – Proceeds from disposal of other investments 0.4 52.2 0.4 23.8 Net cash provided by/(used in) investing activities 444.3 (1,265.5) (462.1) (682.9) Cash flows from financing activities Dividends paid (251.2) (217.0) (251.2) (217.0) Proceeds from issues of ordinary shares 220.5 93.8 220.5 93.8 Off-market buy-back of ordinary shares (301.9) (302.0) (301.9) (302.0) Repayments of borrowings (752.2) (1,703.1) (0.7) – Drawdown of borrowings 500.0 2,182.6 – – Receipts from controlled entities – – 2,816.7 166.8 Payments to controlled entities – – (1,052.6) (296.4) Net cash (used in)/provided by financing activities (584.8) 54.3 1,430.8 (554.8) Net increase in cash 1,332.7 2.7 1,345.1 4.2 Cash and cash equivalents at the beginning of the year 200.5 200.0 56.8 52.8 Effects of exchange rate changes on the balances of cash held in foreign currencies 19.7 (2.2) 1.0 (0.2) Cash and cash equivalents at the end of the year 9 1,552.9 200.5 1,402.9 56.8

The cash flow statements are to be read in conjunction with the notes to the consolidated financial statements.

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Statements of Recognised Income and Expense FORTHEYEARENDED$ECEMBER

Consolidated Santos Ltd 2008 2007 2008 2007 Note $million $million $million $million Adjustment to retained earnings on initial adoption of Interpretation 1003 Australian Petroleum Resource Rent Tax – (136.1) – (51.3) Adjustment to retained earnings on initial adoption of Interpretation 11 AASB 2 Group and Treasury Share Transactions – – – 0.2 Exchange differences on translation of foreign operations 269.0 (101.8) – – (Loss)/gain on foreign currency loans designated as hedges of net investments in foreign operations (177.0) 62.6 – – Change in fair value of available-for-sale financial assets, net of tax (9.3) 17.4 (9.3) 14.7 Share-based payment transactions 31 8.3 5.2 8.3 5.2 Actuarial (loss)/gain on defined benefit plan, net of tax 30 (25.5) 4.4 (25.5) 4.4 Net income/(expense) recognised directly in equity 65.5 (148.3) (26.5) (26.8) Transfers (net of any related tax): Transfer to profit on sale of available-for-sale financial assets (0.1) (23.6) (0.1) (9.7) Transfer to profit on disposal of foreign operation 1.5 (27.2) – – Profit for the period 1,650.1 359.3 20.1 1,270.2 Total recognised income and expense for the period attributable to equity holders of Santos Ltd 1,717.0 160.2 (6.5) 1,233.7

Other movements in equity arising from transactions with owners as owners are set out in note 24.

The statements of recognised income and expense are to be read in conjunction with the notes to the consolidated financial statements.

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

1. SIGNIFICANT ACCOUNTING POLICIES

The financial report of Santos Ltd (“the The financial report complies with Change in accounting policy Company”) for the year ended 31 December Australian Accounting Standards as issued From 1 January 2008 the Group has adopted 2008 was authorised for issue in accordance by the Australian Accounting Standards Interpretation 1003 Australian Petroleum with a resolution of the Directors on Board and International Financial Reporting Resource Rent Tax, which is applicable for 19 February 2009. Standards (“IFRS”) as issued by the annual reporting periods ending on or after International Accounting Standards Board. 30 June 2008. Santos Ltd (the parent) is a company limited by shares incorporated in Australia whose shares (B) BASIS OF PREPARATION The adoption of Interpretation 1003 has are publicly traded on the Australian Securities resulted in the Group recognising some Exchange (“ASX”) and is the ultimate parent The financial report is presented in royalty-based taxes, including petroleum entity in the Group. The consolidated financial Australian dollars. resource rent tax, resource rent royalty and report of the Company for the year ended additional profits tax as an income tax 31 December 2008 comprises the Company The financial report is prepared on the under AASB 112 Income Taxes. This change and its controlled entities (“the Group”). historical cost basis, except for derivative financial instruments, fixed rate notes that has been accounted for by adjusting the opening balance of current and deferred The nature of the operations and principal are hedged by an interest rate swap and tax liabilities and retained earnings at activities of the Group are described in the available-for-sale financial assets, which 1 January 2007. Directors’ Report. are measured at fair value. The effect of the change in the accounting (A) STATEMENT OF COMPLIANCE The Company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 policy for these royalty-based taxes from The financial report is a general purpose (updated by Class Order 05/641 effective 1 January 2007 is shown below: financial report which has been prepared 28 July 2005), and in accordance with that in accordance with the requirements of Class Order amounts in the financial report the Corporations Act 2001, Australian and Directors’ Report have been rounded to Accounting Standards and other the nearest hundred thousand dollars, authoritative pronouncements of the unless otherwise stated. Australian Accounting Standards Board.

Consolidated Santos Ltd Impact of Impact of change in change in accounting Restated accounting Restated policy amount policy amount $million $million $million $million $million $million 31 December 2007 Cost of sales 1,452.5 (117.6) 1,334.9 643.3 (40.2) 603.1 Profit before tax 601.0 117.6 718.6 1,312.0 40.2 1,352.2 Income tax expense 160.4 35.3 195.7 38.0 12.1 50.1 Royalty related taxation expense – 163.6 163.6 – 31.9 31.9 Profit after tax 440.6 (81.3) 359.3 1,274.0 (3.8) 1,270.2 Basic earnings per share (¢) 68.9 (13.7) 55.2 – – – Diluted earnings per share (¢) 68.7 (13.8) 54.9 – – – Trade and other payables 650.9 (41.2) 609.7 642.9 (17.8) 625.1 Current tax liabilities 30.5 41.2 71.7 28.7 17.8 46.5 Deferred tax liabilities 525.6 217.4 743.0 54.1 55.1 109.2 Retained earnings 1,251.8 (217.4) 1,034.4 1,185.7 (55.1) 1,130.6

1 January 2007 Trade and other payables 441.8 (12.5) 429.3 562.9 – 562.9 Current tax liabilities 213.5 12.5 226.0 207.8 – 207.8 Deferred tax liabilities 517.5 136.1 653.6 65.3 51.3 116.6 Retained earnings 1,301.4 (136.1) 1,165.3 401.7 (51.3) 350.4

72 Santos Annual Report 2008

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1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Adoption of new accounting standards and interpretations The Group has also adopted the following standards and interpretations, which became applicable on 1 January 2008. Adoption of these standards and interpretations has only affected the disclosure in these financial statements. There has not been any impact on the financial position or performance of the Group.

Û ÝÛ 88J9Û¤~Û Amendments to Australian Accounting Standards arising from AASB Interpretation 11 Û ÝÛ 88J9Û¤Û Amendments to Australian Accounting Standards Û ÝÛ 88J9Û ¤Û Amendments to Australian Accounting Standard – Key Management Personnel Disclosures by Disclosing Entities Û ÝÛ 88J9Û ¤~Û Amendments to Australian Accounting Standards – Reclassification of Financial Assets Û ÝÛ 88J9Û ¤~Û Amendments to Australian Accounting Standards – Reclassification of Financial Assets – Effective Date and Transition Û ÝÛ @fl]jhj]lYlagfÛ~~Û AASB 2 Group and Treasury Share Transactions Û ÝÛ @fl]jhj]lYlagfÛ~Û AASB 119 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction.

The adoption of Interpretation 11 had a minor impact on the 2007 opening retained earnings of the Company ($0.2 million) for shares issued to employees of subsidiaries (refer note 1(R)).

Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective have not been adopted by the Group for the annual reporting period ending 31 December 2008. These are outlined in the following table:

Effective for annual reporting periods Impact on beginning on Group financial Application Reference Title Summary or after report date for Group AASB 3 Business Combinations Adopts the acquisition method to account for 1 July 2009 Recognition 1 January 2010 business combinations; acquisition costs expensed; of future contingent consideration recognised at fair value acquisitions. on acquisition date. AASB 8 Operating Segments Segment disclosure based on components of an 1 January 2009 Minor 1 January 2009 entity that management monitors in making disclosure decisions about allocating resources to segments impact. and in assessing their performance. AASB 101 Presentation of Financial Changes the titles of financial statements; requires 1 January 2009 Minor impact. 1 January 2009 Statements (issued in all non-owner changes in equity be presented in Presentation of September 2007) statement of comprehensive income; additional financial statement of financial position at beginning of statements will earliest comparative period required for changes in change from accounting policy or reclassifications; income tax 2009 onwards. relating to each component of comprehensive income to be disclosed. AASB 123 Borrowing Costs Removes option to expense borrowing costs related 1 January 2009 No impact. 1 January 2009 to qualifying assets. AASB 127 Consolidated and Changes in a parent’s ownership in a subsidiary that 1 July 2009 Unlikely to 1 January 2010 Separate Financial result in a loss of control requires reserves to be have impact. Statements recycled and remaining ownership interest to be measured at fair value; changes that do not result in a loss of control are accounted for as equity transactions. AASB 2007-3 Amendments to Consequential amendments to a number of 1 January 2009 No impact. 1 January 2009 Australian Accounting standards following release of AASB 8 Operating Standards arising from Segments. AASB 8 Santos Annual Report 2008 73

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Effective for annual reporting periods Impact on beginning on Group financial Application Reference Title Summary or after report date for Group AASB 2007-6 Amendments to Consequential amendments to a number of 1 January 2009 No impact. 1 January 2009 Australian Accounting standards following release of AASB 123 Borrowing Standards arising from Costs. AASB 123 AASB 2007-8 Amendments to Consequential amendments to a number 1 January 2009 No impact. 1 January 2009 Australian Accounting of standards following issue of a revised AASB 101 Standards arising from Presentation of Financial Statements in September AASB 101 2007. AASB 2007-10 Further Amendments to Changes terminology in Australian Accounting 1 January 2009 No impact. 1 January 2009 Australian Accounting Standards to align with IFRS. Standards arising from AASB 101 AASB 2008-1 Amendments to Clarifies the definition of vesting conditions; 1 January 2009 No impact. 1 January 2009 Australian Accounting introduces concept of non-vesting conditions; Standard – Share-based requires non-vesting conditions to be reflected in Payments: Vesting grant date fair value; provides the accounting Conditions and treatment for non-vesting conditions and Cancellations cancellations. AASB 2008-2 Amendments to Introduces exception to the definition of financial 1 January 2009 No impact. 1 January 2009 Australian Accounting liability to classify certain puttable financial Standards – Puttable instruments as equity instruments. Financial Instruments and Obligations arising on Liquidation AASB 2008-3 Amendments to Consequential amendments to a number of 1 July 2009 No impact. 1 January 2010 Australian Accounting standards following the issue of the revised AASB 3 Standards arising from Business Combinations and AASB 127 Consolidated AASB 3 and AASB 127 and Separate Financial Statements. AASB 2008-5 Amendments to Amends 15 standards, including where entity 1 January 2009 Unlikely to 1 January 2009 Australian Accounting committed to sale plan involving loss of control of have material Standards arising from subsidiary then all of subsidiary’s assets and impact. the Annual liabilities are classified as held for sale (AASB 5 Improvements Project Non-current Assets Held for Sale and Discontinued Operations); additional disclosures where recoverable amount is based on fair value less costs to sell (AASB 136 Impairment of Assets). AASB 2008-6 Further Amendments to Terminology or editorial amendments to eight 1 July 2009 No impact. 1 January 2010 Australian Accounting standards that are expected to have no or minimal Standards arising effects on accounting practices. from the Annual Improvements Project

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1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Effective for annual reporting periods Impact on beginning on Group financial Application Reference Title Summary or after report date for Group AASB 2008-7 Amendments to Removes the definition of the cost method in 1 January 2009 No Group 1 January 2009 Australian Accounting AASB 127 Consolidated and Separate Financial impact. Standards – Cost of Statements; requires all dividends from subsidiaries, Potential an Investment in a jointly controlled entities or associates to be impairment Subsidiary, Jointly recognised as income; receipt of dividend may be impact on Controlled Entity or indicator of impairment if certain criteria met; investments Associate specified accounting for certain transactions where held by the newly formed entity becomes parent of another Company if entity in a group. intercompany dividends are received. AASB 2008-8 Amendments to Clarifies the hedge accounting provisions of 1 July 2009 No impact. 1 January 2010 Australian Accounting AASB 139 Financial Instruments: Recognition and Standards – Eligible Measurement to address inflation in a financial Hedged Items hedged item, and one-sided risk in a hedged item. AASB 2008-13 Amendments to Consequential amendments to existing standards 1 July 2009 No impact. 1 January 2010 Australian Accounting following the issue of Interpretation 17 Standards arising from Distributions of Non-Cash Assets to Owners. AASB Interpretation 17 Distributions of Non-Cash Assets to Owners Interpretation 16 Hedges of net Provides guidance on net investment hedging. 1 October 2008 No impact. 1 January 2009 investments in foreign operations Interpretation 17 Distributions of Non-Cash Provides guidance on when and how a liability for 1 July 2009 No impact. 1 January 2010 Assets to Owners certain distributions of non-cash assets is recognised and measured, and how to account for that liability. Does not apply to common control transactions.

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The accounting policies set out below have excess and any further losses applicable to (D) FOREIGN CURRENCY been applied consistently to all periods the minority interest are allocated against presented in the consolidated financial the Group’s interest. If the minority interest Functional and presentation currency report. subsequently reports profits, the profits are Both the functional and presentation allocated to the Group until the minority’s currency of Santos Ltd is Australian dollars. The accounting policies have been share of losses previously absorbed by the Some subsidiaries have a functional consistently applied by the Group. Group have been fully recovered. currency of United States dollars which is translated to presentation currency (C) BASIS OF CONSOLIDATION Jointly controlled assets (see below). Subsidiaries Santos’ exploration and production activities are often conducted through Transactions and balances Subsidiaries are entities controlled by the joint venture arrangements governed by Transactions in foreign currencies are Company. Control exists when the Company joint operating agreements, production initially recorded in the functional currency has the power, directly or indirectly, to sharing contracts or similar contractual by applying the exchange rate ruling at the govern the financial and operating policies relationships. A summary of the Group’s date of the transaction. Monetary assets of an entity so as to obtain benefits from interests in its significant joint ventures is and liabilities denominated in foreign its activities. In assessing control, potential included in note 28. currencies are retranslated at the foreign voting rights that presently are exercisable exchange rate ruling at the balance sheet or convertible are taken into account. A joint venture characterised as a jointly date. Foreign exchange differences arising The financial statements of subsidiaries controlled asset involves the joint control, on translation are recognised in the income are included in the consolidated financial and often the joint ownership, by the statement. statements from the date that control venturers of one or more assets contributed commences until the date that control to, or acquired for the purpose of, the joint Foreign exchange differences that arise on ceases. venture and dedicated to the purposes of the translation of monetary items that form the joint venture. The assets are used to part of the net investment in a foreign The acquisition of subsidiaries is obtain benefits for the venturers. Each operation are recognised in equity in the accounted for using the purchase method venturer may take a share of the output consolidated financial statements. of accounting, which involves allocating from the assets and each bears an agreed the cost of the business combination to the share of expenses incurred. Each venturer Non-monetary assets and liabilities that are fair value of the assets acquired and the has control over its share of future economic measured in terms of historical cost in a liabilities and contingent liabilities assumed benefits through its share of jointly foreign currency are translated using the at the date of acquisition (refer note 1(G)). controlled assets. exchange rate at the date of the initial transaction. Non-monetary assets and Investments in subsidiaries are carried The interests of the Company and of the liabilities denominated in foreign currencies at their cost of acquisition, less any Group in unincorporated joint ventures are that are stated at fair value are translated impairment charges, in the Company’s brought to account by recognising in the to the functional currency at foreign financial statements. financial statements the Group’s share of exchange rates ruling at the dates the jointly controlled assets, share of expenses Intragroup balances and any unrealised fair value was determined. and liabilities incurred, and the income from gains and losses or income and expenses the sale or use of its share of the production arising from intragroup transactions are Group companies of the joint venture in accordance with the eliminated in preparing the consolidated The results of subsidiaries with a functional revenue policy in note 1(X). financial statements. currency of United States dollars are translated to Australian dollars as at the Jointly controlled entities Minority interests date of each transaction. The assets and The Group has interests in joint ventures Minority interests in the net assets liabilities are translated to Australian which are jointly controlled entities, of consolidated entities are allocated their dollars at foreign exchange rates ruling at whereby the venturers have contractual share of net profit after tax in the income the balance sheet date. Foreign exchange arrangements that establish joint control statement, and are identified separately differences arising on retranslation over the economic activities of the entities. from the Group’s equity in those entities. are recognised directly in the foreign The Group recognises its interest in jointly Minority interests consist of the amount of currency translation reserve. controlled entities using proportionate those interests at the date of the original consolidation, by combining its share of the Exchange differences arising from the business combination and the minority’s assets, liabilities, income and expenses of translation of the net investment in foreign share of changes in equity since the date the joint venture with similar line items in operations and of related hedges are taken of the combination. Where the minority the consolidated financial statements. to the foreign currency translation reserve. interest has losses greater than its equity They are released into the income statement interest in the consolidated subsidiary, the upon disposal of the foreign operation.

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1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(E) DERIVATIVE FINANCIAL INSTRUMENTS (F) HEDGING When a hedging instrument expires or is sold, terminated or exercised, or the The Group uses derivative financial Fair value hedge entity revokes designation of the hedge instruments to hedge its exposure to Where a derivative financial instrument relationship, but the hedged forecast changes in foreign exchange rates, hedges the changes in fair value of transaction is still expected to occur, commodity prices and interest rates arising a recognised asset or liability or an the cumulative gain or loss at that point in the normal course of business. The unrecognised firm commitment (or an remains in equity and is recognised in principal derivatives that may be used are identified portion of such asset, liability or accordance with the above policy when forward foreign exchange contracts, foreign firm commitment), any gain or loss on the the transaction occurs. If the hedged currency swaps and options, interest rate hedging instrument is recognised in the transaction is no longer expected to take swaps and commodity crude oil price swap income statement. The hedged item is place, the cumulative unrealised gain or and option contracts. Their use is subject stated at fair value in respect of the risk loss recognised in equity is recognised to a comprehensive set of policies, being hedged, with any gain or loss being immediately in the income statement. procedures and limits approved by the recognised in the income statement. Board of Directors. The Group does not Hedge of monetary assets and liabilities trade in derivative financial instruments Cash flow hedge When a derivative financial instrument is for speculative purposes. Where a derivative financial instrument is used to hedge economically the foreign exchange exposure of a recognised Derivative financial instruments are designated as a hedge of the variability in monetary asset or liability, hedge recognised initially at fair value. Subsequent cash flows of a recognised asset or liability, accounting is not applied and any gain to initial recognition, derivative financial or a highly probable forecast transaction, or loss on the hedging instrument is instruments are stated at fair value. Where the effective part of any gain or loss on recognised in the income statement. derivatives qualify for hedge accounting, the derivative financial instrument is recognition of any resultant gain or loss recognised directly in equity. When the Hedge of net investment in a depends on the nature of the item being forecast transaction subsequently results foreign operation hedged; otherwise the gain or loss in the recognition of a non-financial asset on re-measurement to fair value is or non-financial liability, or the forecast The portion of the gain or loss on recognised immediately in profit or loss. transaction for a non-financial asset or an instrument used to hedge a net non-financial liability becomes a firm investment in a foreign operation that The fair value of interest rate swaps is the commitment for which fair value hedging is is determined to be an effective hedge estimated amount that the Group would applied, the associated cumulative gain or is recognised directly in equity. Any receive or pay to terminate the swap at the loss is removed from equity and included in ineffective portion is recognised balance sheet date, taking into account the initial cost or other carrying amount of immediately in the income statement. current interest rates and the current the non-financial asset or non-financial On disposal of the foreign operation, the creditworthiness of the swap counterparties. liability. If a hedge of a forecast transaction cumulative value of any such gains or losses The fair value of forward exchange contracts subsequently results in the recognition of recognised directly in equity is transferred is their quoted market price at the balance a financial asset or a financial liability, to profit or loss. sheet date, being the present value of the the associated gains and losses that were quoted forward price. The fair value of recognised directly in equity are reclassified (G) ACQUISITION OF ASSETS commodity swap and option contracts is into profit or loss in the same period or their quoted market price at the balance periods during which the asset acquired All assets acquired are recorded at their cost sheet date. or liability assumed affects profit or loss of acquisition, being the amount of cash or (that is, when interest income or expense cash equivalents paid, and the fair value Embedded derivatives is recognised). of assets given, shares issued or liabilities incurred. The cost of an asset comprises the Derivatives embedded in other financial For cash flow hedges, other than those purchase price including any incidental costs instruments or other host contracts are covered by the preceding paragraph, directly attributable to the acquisition; treated as separate derivatives when their the associated cumulative gain or loss any costs directly attributable to bringing risks and characteristics are not closely is removed from equity and recognised in the asset to the location and condition related to those of the host contract and the income statement in the same period necessary for it to be capable of operating; the host contracts are not measured at fair or periods during which the hedged and the estimate of the costs of dismantling value with changes in fair value recognised forecast transaction affects profit or loss. and removing the asset and restoring the in profit or loss. The ineffective part of any gain or loss site on which it is located determined in is recognised immediately in the accordance with note 1(Q). income statement.

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Business combinations (H) EXPLORATION AND EVALUATION (ii) substantive expenditure on further EXPENDITURE exploration for and evaluation of The purchase method of accounting is used mineral resources in the specific area to account for all business combinations Exploration and evaluation expenditure in is not budgeted or planned; regardless of whether equity instruments or respect of each area of interest is accounted other assets are acquired. Cost is measured for using the successful efforts method of (iii) exploration for and evaluation of as the fair value of the assets given, shares accounting. The successful efforts method resources in the specific area has not issued or liabilities incurred or assumed at requires all exploration and evaluation led to the discovery of commercially the date of exchange plus costs directly expenditure to be expensed in the period it viable quantities of resources, and the attributable to the combination. is incurred, except the costs of successful Group has decided to discontinue Where equity instruments are issued in a wells and the costs of acquiring interests activities in the specific area; or business combination, the fair value of the in new exploration assets, which are instruments is their published market price capitalised as intangible exploration (iv) sufficient data exists to indicate that as at the date of exchange. Transaction and evaluation. The costs of wells are although a development is likely to costs arising on the issue of equity initially capitalised pending the results proceed the carrying amount of the instruments are recognised directly of the well. exploration and evaluation asset is in equity. unlikely to be recovered in full from An area of interest refers to an individual successful development or from sale. Except for non-current assets or disposal geological area where the presence of oil or groups classified as held for sale (which are a natural gas field is considered favourable Where an indicator of impairment exists a measured at fair value less costs to sell), all or has been proved to exist, and in most formal estimate of the recoverable amount identifiable assets acquired and liabilities cases will comprise an individual prospective is made, and any resultant impairment loss and contingent liabilities assumed in a oil or gas field. is recognised in the income statement. business combination are measured initially at their fair values at the acquisition date. Exploration and evaluation expenditure is When a discovered oil or gas field enters The excess of the costs of the business recognised in relation to an area of interest the development phase the accumulated combination over the net fair value of the when the rights to tenure of the area of exploration and evaluation expenditure is identifiable net assets of the Group’s share interest are current and either: transferred to oil and gas assets – assets in of the identifiable net assets acquired is development. recognised as goodwill. If the cost of (i) such expenditure is expected to acquisition is less than the Group’s share be recovered through successful (I) OIL AND GAS ASSETS of the net fair value of the identifiable net development and commercial assets of the subsidiary, the difference exploitation of the area of interest, Oil and gas assets are usually single oil or is recognised as a gain in the income or alternatively, by its sale; or gas fields being developed for future statement, but only after a reassessment of production or which are in the production the identification and measurement of the (ii) the exploration activities in the area of phase. Where several individual oil or gas net assets acquired. interest have not yet reached a stage fields are to be produced through common which permits reasonable assessment facilities, the individual oil or gas fields Where settlement of any part of the of the existence of economically and the associated production facilities are consideration is deferred, the amounts recoverable reserves and active and managed and reported as a single oil and payable in the future are discounted to their significant operations in, or in relation gas asset. present value as at the date of exchange. to, the area of interest are continuing. The discount rate used is the entity’s Assets in development incremental borrowing rate, being the The carrying amounts of the Group’s When the technical and commercial rate at which a similar borrowing could be exploration and evaluation assets are feasibility of an undeveloped oil or gas field obtained from an independent financier reviewed at each balance sheet date, in has been demonstrated, the field enters under comparable terms and conditions. conjunction with the impairment review its development phase. The costs of oil and process referred to in note 1(P), to gas assets in the development phase are determine whether any of the following separately accounted for as tangible assets indicators of impairment exist: and include past exploration and evaluation costs, development drilling and other (i) tenure over the licence area has expired subsurface expenditure, surface plant during the period or will expire in and equipment and any associated land the near future, and is not expected and buildings. to be renewed;

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1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

When commercial operation commences the maintenance are recognised in profit or The heating value measurement used for accumulated costs are transferred to oil and loss as incurred. the conversion of volumes of different gas assets – producing assets. hydrocarbon products is barrels of oil Depreciation on buildings, plant and equivalent. Producing assets equipment is calculated in accordance with note 1(K). Depletion is not charged on costs carried The costs of oil and gas assets in production forward in respect of assets in the are separately accounted for as tangible (K) DEPRECIATION AND DEPLETION development stage until production assets and include past exploration commences. and evaluation costs, pre-production Depreciation charges are calculated to development costs and the ongoing write off the depreciable value of buildings, (L) AVAILABLE-FOR-SALE FINANCIAL costs of continuing to develop reserves for plant and equipment over their estimated ASSETS production and to expand or replace plant economic useful lives to the Group. and equipment and any associated land Each component of an item of buildings, Financial instruments held by the Group and and buildings. plant and equipment with a cost that is the Company which are classified as being significant in relation to the total cost of available for sale are stated at fair value, These costs are subject to depreciation and the asset is depreciated separately. The with any resultant gain or loss being depletion in accordance with note 1(K). residual value, useful life and depreciation recognised directly in equity. method applied to an asset is reviewed at Ongoing exploration and the end of each annual reporting period. The fair value of financial instruments evaluation activities classified as available for sale is their Often the initial discovery and development Depreciation of onshore buildings, plant quoted bid price at the close of business of an oil or gas asset will lead to ongoing and equipment and corporate assets on the balance sheet date. exploration for, and evaluation of potential is calculated using the straight-line method new oil or gas fields in the vicinity with of depreciation on an individual asset basis Financial instruments classified as available the intention of producing any near field from the date the asset is available for use. for sale are recognised/derecognised by the discoveries using the infrastructure in place. Group and the Company on the date it The estimated useful lives for each class of commits to purchase/sell the investments. Exploration and evaluation expenditure onshore assets for the current and When these investments are derecognised, associated with oil and gas assets is comparative periods are as follows: the cumulative gain or loss previously accounted for in accordance with the policy recognised directly in equity is recognised in note 1(H). Exploration and evaluation Û ÝÛ 9mad\af_kÛ Û¦ÛÛq]Yjk in profit or loss. expenditure amounts capitalised in respect Û ÝÛ GdYflÛYf\Û]imahe]fl of oil and gas assets are separately disclosed – Computer equipment 3 – 5 years (M) INVENTORIES in note 14. – Motor vehicles 4 – 7 years – Furniture and Inventories are stated at the lower of cost (J) LAND, BUILDINGS, PLANT AND fittings 10 – 20 years and net realisable value. Net realisable EQUIPMENT – Pipelines 10 – 30 years value is the estimated selling price in the – Plant and facilities 10 – 50 years ordinary course of business, less the Land and buildings are measured at cost less estimated costs of completion and selling accumulated depreciation on buildings, less Depreciation of offshore plant and expenses. Cost is determined as follows: any impairment losses recognised. equipment is calculated using the units of production method on a cash-generating (i) drilling and maintenance stocks, which Plant and equipment is stated at cost unit basis (refer note 1(P)) from the date of include plant spares, consumables and less accumulated depreciation and any commencement of production. maintenance and drilling tools used accumulated impairment losses. Such cost for ongoing operations, are valued at includes the cost of rotable spares and Depletion charges are calculated using weighted average cost; and insurance spares that are purchased for a unit of production method based on back up or rotation with specific plant and heating value which will amortise the cost (ii) petroleum products, which comprise equipment items. Similarly, the cost of of carried forward exploration, evaluation extracted crude oil, liquefied petroleum major cyclical maintenance is recognised in and subsurface development expenditure gas, condensate and naphtha stored the carrying amount of the related plant (“subsurface assets”) over the life of the in tanks and pipeline systems and and equipment as a replacement only if it is estimated Proven plus Probable (“2P”) processed sales gas and ethane stored eligible for capitalisation. Any remaining reserves in a cash-generating unit, together in subsurface reservoirs, are valued carrying amount from the cost of the with future subsurface costs necessary to using the absorption cost method in a previous major cyclical maintenance is develop the hydrocarbon reserves in the manner which approximates specific derecognised. All other repairs and respective cash-generating units. identification.

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(N) TRADE AND OTHER RECEIVABLES An impairment loss is recognised in the Impairment losses recognised on equity income statement whenever the carrying instruments classified as available-for-sale Trade and other receivables are initially amount of an asset or its cash-generating financial assets are not reversed. recognised at fair value, which in practice is unit exceeds its recoverable amount. the equivalent of cost, less any impairment (Q) PROVISIONS losses. Where a decline in the fair value of an available-for-sale financial asset has been A provision is recognised in the balance Long-term receivables are discounted and recognised directly in equity and there sheet when the Group has a present legal or are stated at amortised cost, less is objective evidence that the asset is constructive obligation as a result of a past impairment losses. impaired, the cumulative loss that had been event and it is probable that an outflow of recognised directly in equity is recognised resources embodying economic benefits will Trade and other receivables are assessed for in profit or loss even though the financial be required to settle the obligation and a indicators of impairment at each balance asset has not been derecognised. The reliable estimate can be made of the amount sheet date. Where a receivable is impaired amount of the cumulative loss that is of the obligation. the amount of the impairment is the recognised in profit or loss is the difference difference between the asset’s carrying between the acquisition cost and current Provisions are measured at the present value and the present value of estimated fair value, less any impairment loss on that value of management’s best estimate of the future cash flows, discounted at the original financial asset previously recognised in expenditure required to settle the present effective interest rate. The carrying amount profit or loss. obligation using a discounted cash flow of the receivable is reduced through the use methodology. If the effect of the time value of an allowance account. Changes in the Calculation of recoverable amount of money is material, the provision is allowance account are recognised in profit discounted using a current pre-tax rate or loss. The recoverable amount of an asset is the that reflects current market assessments greater of its fair value less costs to sell and of the time value of money and, where (O) CASH AND CASH EQUIVALENTS its value in use. In assessing value in use, appropriate, the risks specific to the an asset’s estimated future cash flows are liability. The increase in the provision Cash and cash equivalents comprise cash discounted to their present value using a resulting from the passage of time is balances and short-term deposits that are pre-tax discount rate that reflects current recognised in finance costs. readily convertible to known amounts of market assessments of the time value of cash, are subject to an insignificant risk money and the risks specific to the asset. Restoration of changes in value, and generally have an Where an asset does not generate cash Provisions for future environmental original maturity of three months or less. flows that are largely independent from other assets or groups of assets, the restoration are recognised where there is a (P) IMPAIRMENT recoverable amount is determined for present obligation as a result of exploration, the cash-generating unit to which the development, production, transportation or The carrying amounts of the Group’s assets, asset belongs. storage activities having been undertaken, other than inventories and deferred tax and it is probable that an outflow of assets, are reviewed at each balance sheet For oil and gas assets the estimated future economic benefits will be required to date to determine whether there is any cash flows are based on estimates of settle the obligation. The estimated future indication of impairment. Where an hydrocarbon reserves, future production obligations include the costs of removing indicator of impairment exists a formal profiles, commodity prices, operating costs facilities, abandoning wells and restoring estimate of the recoverable amount is made. and any future development costs necessary the affected areas. to produce the reserves. Estimates of future Oil and gas assets, land, buildings, commodity prices are based on contracted The provision for future restoration costs is plant and equipment are assessed for prices where applicable or based on forward the best estimate of the present value of the impairment on a cash-generating unit market prices where available. future expenditure required to settle the (“CGU”) basis. A cash-generating unit is the restoration obligation at the reporting date, smallest grouping of assets that generates Reversals of impairment based on current legal requirements. Future independent cash inflows, and generally restoration costs are reviewed annually and An impairment loss is reversed if there represents an individual oil or gas field. any changes in the estimate are reflected has been an increase in the estimated Impairment losses recognised in respect in the present value of the restoration recoverable amount of a previously impaired of cash-generating units are allocated to provision at the balance sheet date, with asset. An impairment loss is reversed only to reduce the carrying amount of the assets in a corresponding change in the cost of the the extent that the asset’s carrying amount the unit on a pro-rata basis. associated asset. does not exceed the carrying amount that Exploration and evaluation assets are would have been determined, net of assessed for impairment in accordance with depreciation or depletion, if no impairment note 1(H). loss had been recognised.

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1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The amount of the provision for future The discount rate is the yield at the balance recognised as an expense is only adjusted restoration costs relating to exploration, sheet date on government bonds that have when the options do not vest due to development and production facilities is maturity dates approximating the terms of non-market related conditions. capitalised and depleted as a component the Group’s obligations. The calculation is of the cost of those activities. performed by a qualified actuary using the The fair value of Share Acquisition Rights projected unit credit method. (“SARs”) issued to eligible executives under (R) EMPLOYEE BENEFITS the Executive Long-term Incentive When the benefits of the plan are improved, Programme is recognised as an employee Wages, salaries, annual leave and the portion of the increased benefit relating expense with a corresponding increase in sick leave to past service by employees is recognised equity. The fair value is measured at grant Liabilities for wages and salaries, including as an expense in the income statement on a date and recognised over the period during non-monetary benefits, and annual leave straight-line basis over the average period which the executive becomes that are expected to be settled within until the benefits become vested. To the unconditionally entitled to the SARs. The twelve months of the reporting date are extent that the benefits vest immediately, fair value of the SARs granted is measured recognised in respect of employees’ services the expense is recognised immediately in using the Monte Carlo simulation method, up to the reporting date. They are measured the income statement. taking into account the terms and market at the amounts expected to be paid when conditions upon which the SARs were Actuarial gains or losses that arise in the liabilities are settled. Expenses for granted. The amount recognised as an calculating the Group’s obligation in respect non-vesting sick leave are recognised when expense is only adjusted when the SARs of the plan are recognised directly in the leave is taken and are measured at the do not vest due to non-market-related retained earnings. rates paid or payable. conditions. When the calculation results in plan assets Long-term service benefits The fair value of shares issued to eligible exceeding liabilities to the Group, the employees under the Santos Employee Share A liability for long service leave is recognised asset is limited to the net total Acquisition Plan, to eligible executives and recognised and measured as the present of any unrecognised actuarial losses and employees under the Santos Employee value of the estimated future cash outflows past service costs and the present value Share Purchase Plan, and new shares to be made in respect of employees’ services of any future refunds from the plan or issued to Non-executive Directors under up to the balance sheet date. The obligation reductions in future contributions to the Non-executive Director Share Plan, is is calculated using expected future increases the plan. recognised as an increase in issued capital in wage and salary rates, experience of on grant date. employee departures and periods of service. Past service cost is the increase in the Expected future payments are discounted present value of the defined benefit Shares issued under the Santos Employee using the rates attached to the obligation for employee services in prior Share Acquisition Plan to employees Commonwealth Government bonds at the periods, resulting in the current period of subsidiaries are recognised in the balance sheet date which have maturity from the introduction of, or changes to, Company’s separate financial statements as dates approximating the terms of the post-employment benefits or other an additional investment in the subsidiary Group’s obligations. long-term employee benefits. Past service with a corresponding credit to equity. costs may either be positive (where benefits As a result, the expense recognised by Defined contribution plans are introduced or improved) or negative the Company in relation to equity-settled The Company and its controlled entities (where existing benefits are reduced). awards only represents the expense contribute to several defined contribution associated with grants to employees of the superannuation plans. Obligations for Share-based payment transactions Company. The expense recognised by the contributions are recognised as an expense The Santos Executive Share Option Plan Group is the total expense. in the income statement as incurred. allows eligible executives to acquire shares in the capital of the Company. The fair (S) INTEREST-BEARING BORROWINGS Defined benefit plan value of options granted is recognised as Interest-bearing borrowings are recognised an employee expense with a corresponding The Group’s net obligation in respect of the initially at fair value, net of transaction increase in equity. The fair value is defined benefit superannuation plan is costs incurred. Subsequent to initial measured at grant date and recognised calculated by estimating the amount of recognition, interest-bearing borrowings over the period during which the executive future benefit that employees have earned are stated at amortised cost with any becomes unconditionally entitled to the in return for their service in the current and difference between cost and redemption options. The fair value of the options prior periods; that benefit is discounted to value being recognised in the income granted is measured using the Monte Carlo determine its present value, and the fair statement over the period of the borrowings simulation method, taking into account the value of any plan assets is deducted. on an effective interest basis. terms and market conditions upon which the options were granted. The amount

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Fixed rate notes that are hedged by an Preference share capital Overriding royalties interest rate swap are recognised at fair Preference share capital is classified as Royalties recognised on farmed-out value (refer note 1(F)). equity if it is non-redeemable and any operating lease rights are recognised as dividends are discretionary, or it is revenue as they accrue in accordance with (T) BORROWING COSTS redeemable only at the Company’s option. the terms of the overriding royalty Borrowing costs, including interest and Dividends on preference share capital agreements. finance charges relating to major oil and classified as equity are recognised as gas assets under development up to the distributions within equity. Pipeline tariffs and processing tolls date of commencement of commercial Tariffs and tolls charged to other entities for operations, are capitalised as a component Dividends use of pipelines and facilities owned by the of the cost of development. Where funds are Dividends are recognised as a liability at the Group are recognised as revenue as they borrowed specifically for qualifying projects time the Directors resolve to pay or declare accrue in accordance with the terms of the the actual borrowing costs incurred are the dividend. tariff and tolling agreements. capitalised. Where the projects are funded through general borrowings the borrowing Transaction costs Trading revenue costs are capitalised based on the weighted Transaction costs of an equity transaction Trading revenue represents the net revenue average borrowing rate (refer note 21). are accounted for as a deduction from derived from the purchase and subsequent Borrowing costs incurred after equity, net of any related income tax sale of hydrocarbon products from third commencement of commercial operations benefit. parties where the risks and benefits of are expensed. ownership of the product do not pass to the (X) REVENUE Group, or where the Group acts as an agent All other borrowing costs are recognised in or broker with compensation on a the profit or loss in the period in which they Revenue is recognised in the income commission or fee basis. are incurred. statement when the significant risks and rewards of ownership have been (Y) OTHER INCOME (U) DEFERRED INCOME transferred to the buyer. Revenue is recognised and measured at the fair value of Other income is recognised in the income A liability is recorded for obligations under the consideration or contributions received, statement at the fair value of the sales contracts to deliver natural gas in net of goods and services tax, to the extent consideration received or receivable, net of future periods for which payment has it is probable that the economic benefits goods and services tax, when the significant already been received. will flow to the Group and the revenue can risks and rewards of ownership have been Deferred income is also recognised on asset be reliably measured. transferred to the buyer or when the service sale agreements where consideration is has been performed. Sales revenue received prior to all conditions precedent The gain or loss arising on disposal of a being fulfilled. Sales revenue is recognised on the basis of non-current asset is included as other the Group’s interest in a producing field income at the date control of the asset (V) TRADE AND OTHER PAYABLES (“entitlements” method), when the physical passes to the buyer. The gain or loss on product and associated risks and rewards disposal is calculated as the difference Trade and other payables are recognised of ownership pass to the purchaser, which between the carrying amount of the asset when the related goods or services are is generally at the time of ship or truck at the time of disposal and the net proceeds received, at the amount of cash or cash loading, or on the product entering the on disposal. equivalent that will be required to discharge pipeline. the obligation, gross of any settlement Interest income is recognised in the income discount offered. Trade payables are Revenue earned under a production sharing statement as it accrues, using the effective non-interest-bearing and are settled on contract (“PSC”) is recognised on a net interest method. This is a method of normal terms and conditions. entitlements basis according to the terms calculating the amortised cost of a financial of the PSC. (W) SHARE CAPITAL asset and allocating the interest income Dividends over the relevant period using the effective Ordinary share capital interest rate, which is the rate that exactly Dividend revenue from controlled entities discounts estimated future cash receipts Ordinary share capital is classified as equity. is recognised as the dividends are declared, through the expected life of the financial and from other parties as the dividends asset to the net carrying amount of the are received. financial asset.

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1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(Z) LEASES Receivables and payables are stated with A deferred tax asset is recognised only to the amount of GST included. The net amount the extent that it is probable that future The determination of whether an of GST recoverable from, or payable to, the taxable profits will be available against arrangement is or contains a lease is based ATO is included as a current asset or liability which the asset can be utilised. Deferred tax on the substance of the arrangement and in the balance sheet. assets are reduced to the extent that it is no requires an assessment of whether the longer probable that the related tax benefit fulfilment of the arrangement is dependent Cash flows are included in the cash flow will be realised. on the use of a specific asset or assets and statement on a gross basis. The GST the arrangement conveys a right to use components of cash flows arising from The Company and all its wholly-owned the asset. investing and financing activities which are Australian resident entities are part of a recoverable from, or payable to, the ATO are tax-consolidated group under Australian Leases are classified as finance leases when classified as operating cash flows. taxation law. Santos Ltd is the head entity the terms of the lease transfer substantially in the tax-consolidated group. Current tax all the risks and rewards incidental to (AB) TAXATION expense/income, deferred tax liabilities and ownership of the leased asset to the deferred tax assets arising from temporary lessee. All other leases are classified as Royalty related taxation differences of the members of the operating leases. Petroleum resource rent tax, resource rent tax-consolidated group are allocated among royalty and additional profits tax are the members of the tax-consolidated group Finance leases are capitalised at the lease’s recognised as an income tax under using a “stand-alone taxpayer” approach inception at the fair value of the leased AASB 112 Income Taxes. in accordance with Interpretation 1052 property or, if lower, the present value Tax Consolidation Accounting and are of the minimum lease payments. The Income tax recognised in the separate financial corresponding liability to the lessor is statements of each entity. Current tax included in the balance sheet as a finance Income tax on the profit or loss for the year comprises current and deferred tax. Income liabilities and assets and deferred tax lease obligation. Lease payments are assets arising from unused tax losses apportioned between finance charges and tax is recognised in the income statement except to the extent that it relates to items and tax credits of the members of the reduction of the lease obligation so as to tax-consolidated group are recognised achieve a constant rate of interest on the recognised directly in equity, in which case it is recognised in equity. by the Company (as head entity in the remaining balance of the liability. Assets tax-consolidated group). under finance lease are depreciated over Current tax is the amount of income tax the shorter of the estimated useful life of payable on the taxable profit or loss for The Company and the other entities in the the asset and the lease term if there is no the year, using tax rates enacted or tax-consolidated group have entered into reasonable certainty that the Group will substantively enacted at the balance sheet a tax funding agreement. Tax contribution obtain ownership by the end of the date, and any adjustment to tax payable in amounts payable under the tax funding lease term. respect of previous years. agreement are recognised as payable to or receivable by the Company and each other Operating lease payments are recognised as Deferred tax is determined using the member of the tax-consolidated group. an expense on a straight-line basis over the balance sheet approach, providing for Where the tax contribution amount lease term, except where another systematic temporary differences between the carrying recognised by each member of the basis is more representative of the time amounts of assets and liabilities for tax-consolidated group for a particular pattern in which economic benefits from financial reporting purposes and the period under the tax funding agreement is the leased asset are consumed. Contingent appropriate tax bases. The following different from the aggregate of the current rentals arising under operating leases are temporary differences are not provided tax liability or asset and any deferred tax recognised as an expense in the period in for: the initial recognition of assets or asset arising from unused tax losses and tax which they are incurred. liabilities that affect neither accounting nor credits in respect of that period assumed by the Company, the difference is recognised (AA) GOODS AND SERVICES TAX taxable profit; and differences relating to investments in subsidiaries to the extent it as a contribution from (or distribution to) Revenues, expenses and assets are is probable that they will not reverse in the equity participants. recognised net of the amount of goods foreseeable future. The amount of deferred The Company and the other entities in the and services tax (“GST”), except where the tax provided is based on the expected tax-consolidated group have also entered amount of GST incurred is not recoverable manner of realisation or settlement of the into a tax sharing agreement pursuant to from the Australian Taxation Office (“ATO”). carrying amount of assets and liabilities, which the other entities may be required In these circumstances the GST is recognised using tax rates enacted or substantively to contribute to the tax liabilities of the as part of the cost of acquisition of the asset enacted at the balance sheet date. Company in the event of default by the or as part of the expense. Company or upon leaving the tax-consolidated group.

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(AC) DISCONTINUED OPERATIONS (AD) SIGNIFICANT ACCOUNTING Exploration and evaluation AND NON-CURRENT ASSETS HELD JUDGEMENTS, ESTIMATES AND The Group’s policy for exploration and FOR SALE ASSUMPTIONS evaluation expenditure is discussed in A discontinued operation is a component The carrying amounts of certain assets and note 1(H). The application of this policy of the Group that has been disposed of, liabilities are often determined based requires management to make certain or is classified as held for sale, and that on management’s judgement regarding estimates and assumptions as to future represents a separate major line of business estimates and assumptions of future events. events and circumstances, particularly in or geographical area of operations, and The reasonableness of estimates and relation to the assessment of whether is part of a single coordinated plan to underlying assumptions are reviewed on economic quantities of reserves have been dispose of such a line of business or area an ongoing basis. Revisions to accounting found. Any such estimates and assumptions of operations. The results of discontinued estimates are recognised in the period in may change as new information becomes operations are presented separately on the which the estimate is revised if the revision available. If, after having capitalised face of the income statement and the assets affects only that period or in the period of exploration and evaluation expenditure, and liabilities are presented separately on the revision and future periods if the management concludes that the capitalised the balance sheet. revision affects both current and future expenditure is unlikely to be recovered periods. The key judgements, estimates and by future exploitation or sale, then the Non-current assets and disposal groups are assumptions that have a significant risk relevant capitalised amount will be written classified as held for sale and measured of causing a material adjustment to the off to the income statement. at the lower of their carrying amount and carrying amount of certain assets and The carrying amount of exploration and fair value less costs to sell if their carrying liabilities within the next annual reporting evaluation assets is disclosed in note 13. amount will be recovered principally period are: through a sale transaction. They are not Provision for restoration depreciated or amortised. For an asset or Estimates of reserve quantities disposal group to be classified as held for The Group estimates the future removal and The estimated quantities of Proven plus sale, it must be available for immediate sale restoration costs of oil and gas production Probable hydrocarbon reserves reported by in its present condition and its sale must be facilities, wells, pipelines and related assets the Company are integral to the calculation highly probable. at the time of installation of the assets. of depletion and depreciation expense and In most instances the removal of these to assessments of possible impairment of An impairment loss is recognised for any assets will occur many years in the future. assets. Estimated reserve quantities are initial or subsequent write-down of the The estimate of future removal costs based upon interpretations of geological asset (or disposal group) to fair value less therefore requires management to make and geophysical models and assessments costs to sell. A gain is recognised for any judgements regarding the removal date, of the technical feasibility and commercial subsequent increases in fair value less costs future environmental legislation, the extent viability of producing the reserves. These to sell of an asset (or disposal group) but of restoration activities required and future assessments require assumptions to be not in excess of any cumulative impairment removal technologies. made regarding future development and loss previously recognised. A gain or loss production costs, commodity prices, not previously recognised by the date of the The carrying amount of the provision for exchange rates and fiscal regimes. sale of the non-current asset (or disposal restoration is disclosed in note 22. The estimates of reserves may change group) is recognised at the date of from period to period as the economic derecognition. Impairment of oil and gas assets assumptions used to estimate the reserves The Group assesses whether oil and gas can change from period to period, and as assets are impaired on a semi-annual additional geological data is generated basis. This requires an estimation of the during the course of operations. Reserves recoverable amount of the cash-generating estimates are prepared in accordance with unit to which the assets belong. The the Company’s policies and procedures for carrying amount of oil and gas assets and reserves estimation which conform to the assumptions used in the estimation of guidelines prepared by the Society of recoverable amount are discussed in notes Petroleum Engineers. 14 and 16 respectively.

84 Santos Annual Report 2008

F-42 Level: 0 – From: 0 – Friday, September 17, 2010 – 22:54 – eprint3 – 4262 Section 06a (359.3) (195.7) (163.6) (138.3) (59.5) 359.3 718.6 856.9 2,518.0 916.4 895.5 1,622.5 $million 2007 2007 operations 2008 947.8 (90.4) (114.7) (104.1) (768.4) (883.1) 1,857.2 2,727.7 1,650.1 2,533.2 2,623.6 2,805.0 $million (0.6) (65.6) (0.6) – (65.0) (65.8) – (65.8) 0.8 30.1 30.1 – 30.1 $million 2007 2007 – – – – – – – – – – – – operations 2008 $million (163.6) (163.6) (358.7) (195.1) (195.1) (139.1) (139.1) (59.5) 424.9 424.9 783.6 783.6 982.2 922.7 1,592.4 1,592.4 2,487.9 895.5 $million 2007 2007 2008 947.8 (90.4) (114.7) (104.1) (768.4) (883.1) 1,857.2 2,727.7 1,650.1 2,533.2 2,623.6 2,805.0 $million (45.3) 131.5 131.5 131.5 – $million 2007 2007 – 2008 241.6 241.6 (58.0) $million Continuing operations Discontinued Total

1,027.5 1,027.5 2,356.4 1,460.9 1,460.9 895.5 $million 2007 2007 Australia International Australia Total 2008 947.8 1,615.6 2,785.7 2,563.4 $million

Net profit/(loss) for the period the for Net profit/(loss) Royalty related taxation expense taxation Total expense Income tax expense Unallocated net financingUnallocated (costs)/income tax before Profit/(loss) Results Segment results corporateUnallocated expenses and tax (“EBIT”) interest Earnings before from international Revenue customers revenue Total Primary reporting segments Geographic Revenue from Australian Revenue customers

2. SEGMENT INFORMATION 2. The Group operates predominantly in one business, namely the exploration, development, production, transportation is derived of hydrocarbons. Revenue and marketing from the sale of gas and liquid hydrocarbons the transportation of crude oil. Segment results, assets and liabilities include items directly attributable to a segment as well those items mainly that on a reasonable basis. Unallocated can be allocated comprise dividend revenue, interest-earning assets and revenue, interest-bearing loans, borrowings and expenses, and corporateassets and liabilities. Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected for more thanperiod. to one be used GEOGRAPHIC SEGMENTS The Group operates primarily in Australia but also has international operations and Egypt. in Indonesia, Papua Republic New Guinea, Vietnam, India, Bangladesh, Kyrgyz

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER 6,671.2 42.4 1,420.8 1,289.0 234.8 – 2,141.0 4,227.1 89.4 734.2 25.1 759.3 – 994.1 $million 649.0 2,086.1 2007 2007 7,320.2 0.4 47.9 13.6 22.8 2008 641.1 216.2 179.0 663.9 1,897.4 2,547.8 7,408.0 2,775.8 1,835.9 9,801.9 1,059.5 5,323.6 2,393.9 $million 2007 2007 – – – – – 8.7 – – – – $million – – – 8.7 – – – – – – – – – – – – – – – – – – – – operations operations Discontinued Total 2008 $million 1,420.8 1,420.8 6,671.2 42.4 1,289.0 1,289.0 2,141.0 2,141.0 734.2 734.2 226.1 – – 4,227.1 4,227.1 89.4 2007 2007 $million 25.1 759.3 985.4 649.0 7,320.2 2,086.1 0.4 47.9 13.6 22.8 2008 641.1 216.2 179.0 663.9 1,897.4 2,547.8 7,408.0 2,775.8 1,835.9 9,801.9 1,059.5 5,323.6 2,393.9 $million

634.5 634.5 193.6 193.6 – 27.0 27.0 94.4 – 77.0 77.0 2007 2007 $million 149.8 149.8 – International Total 48.1 13.6 64.6 2008 149.5 126.0 802.2 406.7 $million Continuing operations

6,036.7 1,095.4 1,095.4 – –

707.2 707.2 131.7

12.4 12.4 2007 2007 $million 1,936.3 – Australia 0.4 66.7 2008 114.4 593.0 2,421.8 1,429.2 6,605.8 $million

SEGMENT INFORMATION SEGMENT INFORMATION (CONTINUED) Total acquisitions and additions of acquisitions and additions of Total non-current assets Assets Segment assets Unallocated corporate Unallocated and oil of acquisition gas assets, property, plant and equipment Oil and gas assets, property, plant and equipment Net impairment loss on oil and gas assets Net impairment loss on receivables Unallocated corporate liabilities corporate Unallocated liabilities total Consolidated Secondary reporting Business segments As described the to above, there Group operatesbe made. one business. Accordingly are no additional business segment disclosures predominantly in Total depreciation and depletion and Primary reporting (continued) segments (continued) Geographic depreciation Non-cash expenses Depreciation and depletion corporate Unallocated depreciation and depletion Total Exploration and evaluation expensed non-cash expenses Total Consolidated total assets total Consolidated Acquisitions and additions of non-current assets Controlled entities 2. corporateUnallocated assets Liabilities Segment liabilities

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Consolidated Consolidated Santos Ltd 2008 2007 2008 2007 Continuing Discontinued Total Continuing Discontinued Total 3. REVENUE AND OTHER INCOME $million $million $million $million $million $million $million $million Product sales: Gas, ethane and liquefied gas 1,051.6 – 1,051.6 920.8 23.3 944.1 301.3 311.6 Crude oil 1,150.6 – 1,150.6 1,034.4 2.4 1,036.8 407.2 497.2 Condensate and naphtha 321.2 – 321.2 325.7 4.4 330.1 80.5 94.1 Liquefied petroleum gas 238.4 – 238.4 177.5 – 177.5 83.5 71.4 2,761.8 – 2,761.8 2,458.4 30.1 2,488.5 872.5 974.3 Other revenue: Overriding royalties 16.1 – 16.1 13.3 – 13.3 23.9 20.2 Pipeline tariffs and tolls 9.3 – 9.3 4.4 – 4.4 3.5 – Trading revenue 12.5 – 12.5 6.6 – 6.6 8.4 6.1 Dividends from controlled entities – – – – – – 27.0 874.0 Other 5.3 – 5.3 5.2 – 5.2 1.5 1.0 43.2 – 43.2 29.5 – 29.5 64.3 901.3 Total revenue 2,805.0 – 2,805.0 2,487.9 30.1 2,518.0 936.8 1,875.6

Other income: Insurance recoveries 35.8 – 35.8 2.4 – 2.4 – – Net gain on redetermination of unitised field – – – 46.8 – 46.8 – – Net gain on sale of available-for-sale financial assets 0.3 – 0.3 33.4 – 33.4 0.3 13.9 Net loss on sale of discontinued operations* – – – – (67.7) (67.7) – – Net gain on sale of non-current assets 1,698.5 – 1,698.5 (0.9) (1.9) (2.8) 0.8 1.7 1,734.6 – 1,734.6 81.7 (69.6) 12.1 1.1 15.6

* Includes impairment loss on measurement to fair value less costs to sell of $97.6 million, net of $27.2 million gain recycled into proﬁt and loss on the reversal of associated amounts previously deferred in the foreign currency translation reserve.

4. EXPENSES Cost of sales: Cash cost of production Production costs: Production expenses 464.8 – 464.8 377.9 3.0 380.9 155.3 115.3 Production facilities operating leases 78.6 – 78.6 67.9 – 67.9 29.4 27.7 543.4 – 543.4 445.8 3.0 448.8 184.7 143.0 Other operating costs: Pipeline tariffs, tolls and other 84.1 – 84.1 68.9 – 68.9 20.8 23.1 Royalty and excise 100.5 – 100.5 71.3 2.8 74.1 43.4 30.8 184.6 – 184.6 140.2 2.8 143.0 64.2 53.9 Total cash cost of production 728.0 – 728.0 586.0 5.8 591.8 248.9 196.9 Depreciation and depletion 661.5 – 661.5 756.8 – 756.8 272.9 418.2 Third party gas purchases 62.0 – 62.0 20.1 – 20.1 7.4 3.7 Increase in product stock (28.9) – (28.9) (33.8) – (33.8) (8.5) (15.7) Total cost of sales 1,422.6 – 1,422.6 1,329.1 5.8 1,334.9 520.7 603.1

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

Consolidated Consolidated Santos Ltd 2008 2007 2008 2007 Continuing Discontinued Total Continuing Discontinued Total 4. EXPENSES (CONTINUED) $million $million $million $million $million $million $million $million Other expenses: Selling 17.6 – 17.6 12.5 – 12.5 10.5 7.5 Corporate 97.0 – 97.0 62.8 11.8 74.6 87.3 64.3 Depreciation 2.4 – 2.4 2.5 – 2.5 0.4 1.1 117.0 – 117.0 77.8 11.8 89.6 98.2 72.9 Foreign exchange (gains)/losses (24.4) – (24.4) (0.4) – (0.4) (7.1) 0.7 Change in fair value of financial assets designated as at fair value through profit or loss 12.5 – 12.5 11.9 – 11.9 – 1.3 Fair value hedges, (gains)/losses: On the hedging instrument (236.2) – (236.2) (56.7) – (56.7) – – On the hedged item attributable to the hedged risk 228.9 – 228.9 59.1 – 59.1 – – Exploration and evaluation expensed 179.0 – 179.0 226.1 8.7 234.8 22.2 54.2 Net impairment loss on oil and gas assets 216.2 – 216.2 – – – 71.2 56.6 Net impairment loss on receivables 0.4 – 0.4 – – – 0.3 – Impairment (reversal)/loss on receivables due from controlled entities – – – – – – (23.8) 25.3 Net impairment loss/(reversal) on investments in controlled entities – – – – – – 49.6 (380.7) 493.4 – 493.4 317.8 20.5 338.3 210.6 (169.7)

Profit before tax includes the following: Depreciation and depletion: Depletion of subsurface assets 401.7 – 401.7 431.3 – 431.3 181.2 265.7 Depreciation of plant and equipment 256.6 – 256.6 323.6 – 323.6 89.7 151.3 Depreciation of buildings 5.6 – 5.6 4.4 – 4.4 2.4 2.3 Total depreciation and depletion 663.9 – 663.9 759.3 – 759.3 273.3 419.3 Employee benefits expense 216.7 – 216.7 173.8 6.5 180.3 210.4 176.8 Net write-down of inventories 0.6 – 0.6 0.2 – 0.2 0.2 0.3 Operating lease rentals: Minimum lease payments 88.4 – 88.4 59.1 0.2 59.3 39.0 41.1 Contingent rentals 0.4 – 0.4 0.5 – 0.5 0.2 0.1

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Consolidated Consolidated Santos Ltd 2008 2007 2008 2007 Continuing Discontinued Total Continuing Discontinued Total 5. EARNINGS $million $million $million $million $million $million $million $million Earnings before interest, tax, depreciation, depletion, exploration and impairment (“EBITDAX”) is calculated as follows: Profit/(loss) before tax 2,533.2 – 2,533.2 783.6 (65.0) 718.6 103.2 1,352.2 Add back: Net financing costs/(income) 90.4 – 90.4 139.1 (0.8) 138.3 103.4 105.6 Earnings before interest and tax (“EBIT”) 2,623.6 – 2,623.6 922.7 (65.8) 856.9 206.6 1,457.8 Add back: Depreciation and depletion 663.9 – 663.9 759.3 – 759.3 273.3 419.3 Exploration and evaluation expensed 179.0 – 179.0 226.1 8.7 234.8 22.2 54.2 Net impairment loss on oil and gas assets 216.2 – 216.2 – – – 71.2 56.6 Net impairment loss on receivables 0.4 – 0.4 – – – 0.3 – Impairment (reversal)/loss on receivables due from entities – – – – – – (23.8) 25.3 Net impairment loss/(reversal) on investments in controlled entities – – – – – – 49.6 (380.7) EBITDAX 3,683.1 – 3,683.1 1,908.1 (57.1) 1,851.0 599.4 1,632.5

Amounts that are unusual because of their nature, size, or incidence: Net gain on sale of non-current assets includes the gain on sale of 40% interest in Fairview and Roma assets to PETRONAS 1,697.4 – 1,697.4 – – – – – Remediation and related costs of the Moonie to Brisbane pipeline incidents (31.5) – (31.5) (38.0) – (38.0) – –

6. NET FINANCING COSTS Interest income: Controlled entities – – – – – – (129.2) (186.2) Other entities (63.3) – (63.3) (13.6) (0.8) (14.4) (53.8) (2.6) Financial income (63.3) – (63.3) (13.6) (0.8) (14.4) (183.0) (188.8) Interest expense: Controlled entities – – – – – – 276.1 279.7 Other entities 131.5 – 131.5 129.5 – 129.5 1.2 0.6 Less borrowing costs capitalised (9.5) – (9.5) (6.3) – (6.3) – – 122.0 – 122.0 123.2 – 123.2 277.3 280.3 Unwind of the effect of discounting on provisions 31.3 – 31.3 23.9 – 23.9 8.7 8.5 Interest component of finance leases 0.4 – 0.4 – – – 0.4 – Other – – – 5.6 – 5.6 – 5.6 Financial expenses 153.7 – 153.7 152.7 – 152.7 286.4 294.4 Net financing costs/(income) 90.4 – 90.4 139.1 (0.8) 138.3 103.4 105.6

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

Consolidated Santos Ltd 2008 2007 2008 2007 7. TAXATION EXPENSE $million $million $million $million Recognised in the income statement: Income tax expense Current tax expense Current year 726.7 236.2 (8.0) 48.5 Adjustments for prior years (8.5) (23.2) 13.6 10.7 718.2 213.0 5.6 59.2 Deferred tax expense Origination and reversal of temporary differences 89.6 12.1 42.4 1.5 Benefit of tax losses recognised (27.9) (19.2) (27.9) – Adjustments for prior years (11.5) (10.2) 31.3 (10.6) 50.2 (17.3) 45.8 (9.1) Total income tax expense 768.4 195.7 51.4 50.1

Royalty related taxation expense Current tax expense Current year 79.3 94.8 27.8 28.1 Adjustments for prior years 6.7 (12.5) 2.0 – 86.0 82.3 29.8 28.1 Deferred tax expense Origination and reversal of temporary differences 28.7 81.3 1.9 3.8 Total royalty related taxation expense 114.7 163.6 31.7 31.9

Numerical reconciliation between tax expense and pre-tax net profit: Profit before tax 2,533.2 718.6 103.2 1,352.2 Prima facie income tax at 30% (2007: 30%) 760.0 215.6 31.0 405.7 Increase in income tax expense due to: Non-deductible depreciation and depletion 2.9 3.5 1.7 25.5 Net impairment loss/(reversal) of investments in controlled entities – – 14.8 (114.2) Net impairment loss/(reversal) of receivables from controlled entities – – (7.1) 7.6 Benefit arising from previously unrecognised tax losses or temporary differences that is used to reduce current tax expense (2.1) (10.1) – (6.6) Foreign losses not recognised 26.4 38.5 – – Dividends from controlled entities – – (10.2) (262.2) Tax losses recognised (27.9) (19.2) (27.9) – Under/(over) provided in prior years 19.1 (33.4) 44.9 0.1 Other (10.0) 0.8 4.2 (5.8) Income tax expense 768.4 195.7 51.4 50.1 Royalty related taxation expense 114.7 163.6 31.7 31.9 Total taxation expense 883.1 359.3 83.1 82.0 Total taxation expense is attributable to: Continuing operations 883.1 358.7 83.1 82.0 Discontinued operations – 0.6 – – 883.1 359.3 83.1 82.0

Deferred tax (credited)/charged directly to equity: (Loss)/gain on foreign currency loans designated as hedges of net investments in foreign operations (82.0) 26.8 – – Change in fair value of available-for-sale financial assets (4.0) (3.3) (4.0) 1.5 Off-market share buy-back transaction costs (0.6) (0.6) (0.6) (0.6) Actuarial (loss)/gain on defined benefit plan (11.0) 1.9 (11.0) 1.9 (97.6) 24.8 (15.6) 2.8

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8. DISCONTINUED OPERATIONS During 2007, the Group disposed of its exploration and production activities in the United States for US$70.0 million (A$85.6 million). The results of the discontinued operations for 2007 are disclosed in the income statement, with further details provided in notes 3, 4 and 6.

Consolidated Santos Ltd 2008 2007 2008 2007 9. CASH AND CASH EQUIVALENTS $million $million $million $million Cash at bank and in hand 273.2 128.6 154.5 49.3 Short-term deposits 1,279.7 71.9 1,248.4 7.5 Cash and cash equivalents in the cash flow statements 1,552.9 200.5 1,402.9 56.8

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.

Short-term deposits generally have an original maturity of three months or less. The Group currently has a significant amount of funds invested in numerous short-term deposits that are held with a range of different counterparties, and that have varying maturity dates of between three to six months based on when the cash is likely to be required and to take advantage of a range of investment yields. These funds are managed as part of the Group’s total cash management procedures and are readily convertible to cash if required.

Restricted cash balances Barracuda Ltd, a wholly-owned subsidiary incorporated in Papua New Guinea, has cash and cash equivalents at 31 December 2008 of US$10.2 million (2007: US$14.5 million) which can only be repatriated to Australia with the permission of the Internal Revenue Commission of Papua New Guinea in accordance with the financing plan submitted in respect of PDL 3.

Santos (BBF) Pty Ltd, a wholly-owned Australian subsidiary, has cash and cash equivalents at 31 December 2008 of US$20.4 million (2007: US$23.7 million) that are held to cover obligations under a reserve-based facility.

Consolidated Santos Ltd 2008 2007 2008 2007 10. TRADE AND OTHER RECEIVABLES $million $million $million $million Current receivables Trade receivables 327.6 429.0 121.3 145.2 Allowance for impairment loss (0.4) – (0.3) – 327.2 429.0 121.0 145.2 Tax related balances owing by controlled entities – – 532.8 20.0 Non-trade receivables and prepayments 254.4 178.4 40.1 43.3 581.6 607.4 693.9 208.5

The ageing of trade receivables at the reporting date is as follows: Past due not impaired: Less than one month 310.0 394.0 121.0 143.7 One to three months 11.2 20.1 – 0.7 Three to six months 2.4 13.3 – – Six to twelve months 2.9 – – 0.1 Greater than twelve months 0.7 1.6 – 0.7 Considered impaired: Greater than twelve months 0.4 – 0.3 – 327.6 429.0 121.3 145.2

Trade receivables are non-interest-bearing and settlement terms are generally within 30 days.

Trade receivables that are neither past due nor impaired relate to a number of independent customers for whom there is no recent history of default.

Impaired receivables An allowance for impairment loss is recognised when there is objective evidence that an individual trade receivable is impaired. An impairment loss of $0.4 million was recognised by the Group during the year ($0.3 million by the Company), in relation to a disputed invoice ($0.3 million) and balances owed from companies that have gone into receivership ($0.1 million).

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

Consolidated Santos Ltd 2008 2007 2008 2007 10. TRADE AND OTHER RECEIVABLES (CONTINUED) $million $million $million $million Non-current receivables Receivables due from controlled entities: Non-interest-bearing – – 108.0 29.1 Interest-bearing – – 1,192.9 1,275.7 Receivables due from other related entities 6.0 – – – 6.0 – 1,300.9 1,304.8

Receivables due from controlled entities are shown net of impairment losses of $7.8 million (2007: $31.6 million).

Receivables due from controlled entities are for loans made in the ordinary course of business for an indefinite period. Interest-bearing amounts owing by controlled entities are at normal market terms and conditions.

Receivables due from other related entities are for loans made in the ordinary course of business for a term of five years, and interest is calculated on normal market terms and conditions.

11. INVENTORIES Petroleum products 163.4 165.4 82.0 86.7 Drilling and maintenance stocks 126.3 76.1 54.0 29.2 Total inventories at the lower of cost and net realisable value 289.7 241.5 136.0 115.9

Drilling and maintenance stocks included above that are stated at net realisable value 106.2 59.7 53.3 28.6

12. DERIVATIVE FINANCIAL INSTRUMENTS Current derivative financial instruments Cross-currency swap contracts 59.2 – – – Fair value of embedded derivatives – 6.9 – – 59.2 6.9 – –

Non-current derivative financial instruments Cross-currency swap contracts 32.8 – – – Interest rate swap contracts 303.5 77.2 – – 336.3 77.2 – –

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Consolidated Santos Ltd Subsurface Plant and Subsurface Plant and 13. EXPLORATION AND assets equipment Total assets equipment Total EVALUATION ASSETS $million $million $million $million $million $million Balance at 31 December 2008 427.4 0.1 427.5 42.6 0.1 42.7

Balance at 31 December 2007 332.3 0.1 332.4 15.4 0.1 15.5

Reconciliation of movements Balance at 1 January 2008 332.3 0.1 332.4 15.4 0.1 15.5 Acquisition of controlled entities 15.0 – 15.0 – – – Acquisition of exploration and evaluation assets 27.8 – 27.8 – – – Additions 357.1 – 357.1 81.4 – 81.4 Exploration and evaluation expensed (179.0) – (179.0) (22.2) – (22.2) Disposals (0.1) – (0.1) – – – Net impairment losses (1.1) – (1.1) – – – Transfer to oil and gas assets (182.9) – (182.9) (32.0) – (32.0) Exchange differences 58.3 – 58.3 – – – Balance at 31 December 2008 427.4 0.1 427.5 42.6 0.1 42.7

Balance at 1 January 2007 359.7 0.6 360.3 20.6 0.1 20.7 Acquisition of controlled entities 56.3 – 56.3 – – – Acquisition of exploration and evaluation assets 11.5 – 11.5 – – – Additions 311.9 – 311.9 95.2 – 95.2 Exploration and evaluation expensed (226.1) – (226.1) (54.2) – (54.2) Disposals (1.0) (0.5) (1.5) – – – Transfer to oil and gas assets (163.3) – (163.3) (46.2) – (46.2) Exchange differences (16.7) – (16.7) – – – Balance at 31 December 2007 332.3 0.1 332.4 15.4 0.1 15.5

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

Consolidated Santos Ltd Subsurface Plant and Subsurface Plant and assets equipment Total assets equipment Total 14. OIL AND GAS ASSETS $million $million $million $million $million $million 2008 Cost at 31 December 2008 7,811.1 6,070.8 13,881.9 2,809.0 2,377.4 5,186.4 Less accumulated depreciation, depletion and impairment (4,555.8) (3,071.3) (7,627.1) (1,947.7) (1,461.0) (3,408.7) Balance at 31 December 2008 3,255.3 2,999.5 6,254.8 861.3 916.4 1,777.7

Reconciliation of movements Assets in development Balance at 1 January 2008 220.4 0.4 220.8 – – – Additions 133.8 123.5 257.3 – – – Transfer from exploration and evaluation assets 135.8 – 135.8 – – – Exchange differences 38.5 (0.8) 37.7 – – – Balance at 31 December 2008 528.5 123.1 651.6 – – – Producing assets Balance at 1 January 2008 2,906.6 2,457.0 5,363.6 749.8 900.3 1,650.1 Acquisition of oil and gas assets – – – 0.7 – 0.7 Additions 593.2 600.5 1,193.7 301.1 117.3 418.4 Transfer from exploration and evaluation assets 47.1 – 47.1 32.0 – 32.0 Disposals (350.7) (0.7) (351.4) – 0.4 0.4 Depreciation and depletion expense (401.6) (239.5) (641.1) (181.2) (71.5) (252.7) Net impairment losses (138.0) (77.1) (215.1) (41.1) (30.1) (71.2) Exchange differences 70.2 136.2 206.4 – – – Balance at 31 December 2008 2,726.8 2,876.4 5,603.2 861.3 916.4 1,777.7 Total oil and gas assets 3,255.3 2,999.5 6,254.8 861.3 916.4 1,777.7

Comprising: Exploration and evaluation expenditure pending commercialisation 222.9 0.7 223.6 – – – Other capitalised expenditure 3,032.4 2,998.8 6,031.2 861.3 916.4 1,777.7 3,255.3 2,999.5 6,254.8 861.3 916.4 1,777.7

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Consolidated Santos Ltd Subsurface Plant and Subsurface Plant and assets equipment Total assets equipment Total 14. OIL AND GAS ASSETS (CONTINUED) $million $million $million $million $million $million 2007 Cost at 31 December 2007 7,143.2 5,212.1 12,355.3 2,475.2 2,259.7 4,734.9 Less accumulated depreciation, depletion and impairment (4,016.2) (2,754.7) (6,770.9) (1,725.4) (1,359.4) (3,084.8) Balance at 31 December 2007 3,127.0 2,457.4 5,584.4 749.8 900.3 1,650.1

Reconciliation of movements Assets in development Balance at 1 January 2007 204.6 2.9 207.5 – – – Additions 52.1 14.6 66.7 – – – Transfer from exploration and evaluation assets 109.6 – 109.6 – – – Transfer to producing assets (133.0) (14.1) (147.1) – – – Exchange differences (12.9) (3.0) (15.9) – – – Balance at 31 December 2007 220.4 0.4 220.8 – – – Producing assets Balance at 1 January 2007 2,651.9 2,373.3 5,025.2 856.3 863.2 1,719.5 Acquisition of controlled entities 50.5 – 50.5 – – – Acquisition of oil and gas assets 20.9 – 20.9 – – – Additions 447.8 413.2 861.0 160.4 176.4 336.8 Transfer from assets in development 133.0 14.1 147.1 – – – Transfer from exploration and evaluation assets 53.7 – 53.7 46.2 – 46.2 Depreciation and depletion expense (431.3) (303.2) (734.5) (265.7) (130.1) (395.8) Net impairment losses – – – (47.4) (9.2) (56.6) Exchange differences (19.9) (40.4) (60.3) – – – Balance at 31 December 2007 2,906.6 2,457.0 5,363.6 749.8 900.3 1,650.1 Total oil and gas assets 3,127.0 2,457.4 5,584.4 749.8 900.3 1,650.1

Comprising: Exploration and evaluation expenditure pending commercialisation 197.3 0.4 197.7 – – – Other capitalised expenditure 2,929.7 2,457.0 5,386.7 749.8 900.3 1,650.1 3,127.0 2,457.4 5,584.4 749.8 900.3 1,650.1

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

Consolidated Santos Ltd Land and Plant and Land and Plant and 15. OTHER LAND, BUILDINGS, buildings equipment Total buildings equipment Total PLANT AND EQUIPMENT $million $million $million $million $million $million Cost at 31 December 2008 35.6 275.5 311.1 5.1 247.6 252.7 Less accumulated depreciation (3.2) (148.0) (151.2) (0.6) (142.4) (143.0) Balance at 31 December 2008 32.4 127.5 159.9 4.5 105.2 109.7

Cost at 31 December 2007 27.1 236.1 263.2 4.8 224.9 229.7 Less accumulated depreciation (2.5) (125.9) (128.4) (0.6) (121.7) (122.3) Balance at 31 December 2007 24.6 110.2 134.8 4.2 103.2 107.4

Reconciliation of movements Balance at 1 January 2008 24.6 110.2 134.8 4.2 103.2 107.4 Additions 8.5 39.4 47.9 0.3 22.6 22.9 Depreciation (0.7) (22.1) (22.8) – (20.6) (20.6) Balance at 31 December 2008 32.4 127.5 159.9 4.5 105.2 109.7

Balance at 1 January 2007 20.0 97.2 117.2 4.3 89.9 94.2 Additions 5.1 37.3 42.4 – 36.7 36.7 Depreciation (0.5) (24.3) (24.8) (0.1) (23.4) (23.5) Balance at 31 December 2007 24.6 110.2 134.8 4.2 103.2 107.4

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16. IMPAIRMENT OF CASH-GENERATING UNITS At 31 December 2008 the Group reassessed the carrying amount of its oil and gas assets for indicators of impairment such as changes in future prices, future costs and reserves. As a result of the significant decrease in the oil price, decreases in reserves and increases in the discount rates applied, the recoverable amounts of some cash-generating units were formally reassessed resulting in an impairment loss of $216.2 million.

Estimates of recoverable amounts are based on the asset’s value in use, determined by discounting each asset’s estimated future cash flows at asset specific discount rates. The pre-tax discount rates applied were equivalent to post-tax discount rates between 8.8% and 15.8% (2007: 8.0% and 10.6%) depending on the nature of the risks specific to each asset. Where an asset does not generate cash flows that are largely independent of other assets or groups of assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

Consolidated Santos Ltd Subsurface Plant and Subsurface Plant and assets equipment Total assets equipment Total CGU Description $million $million $million $million $million $million 2008 Sampang Oil field 97.5 30.9 128.4 – – – Sangu Gas field 20.0 – 20.0 – – – Other – impairment losses 1.1 – 1.1 – – – International 118.6 30.9 149.5 – – – Cooper Basin Oil and gas field – 44.6 44.6 – 24.4 24.4 Patricia Baleen Gas field 20.5 1.6 22.1 9.7 0.7 10.4 Mutineer-Exeter Oil field – – – 31.4 5.0 36.4 Australia 20.5 46.2 66.7 41.1 30.1 71.2 Total impairment loss 139.1 77.1 216.2 41.1 30.1 71.2

2007 Mutineer-Exeter Oil field – – – 39.3 8.6 47.9 Other – impairment losses – – – 8.1 0.6 8.7 Australia – – – 47.4 9.2 56.6 Total impairment loss – – – 47.4 9.2 56.6

Consolidated Santos Ltd 2008 2007 2008 2007 17. AVAILABLE-FOR-SALE FINANCIAL ASSETS $million $million $million $million Equity securities available for sale 2.1 15.6 2.1 15.6

Investments in equity securities available for sale consist of investments in ordinary shares listed on the Australian Securities Exchange, and have no fixed maturity date or coupon rate.

18. OTHER FINANCIAL ASSETS Investments in controlled entities – – 3,421.9 3,472.5 Other 20.9 32.7 18.9 16.1 20.9 32.7 3,440.8 3,488.6

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

Assets Liabilities Net 19. DEFERRED TAX ASSETS 2008 2007 2008 2007 2008 2007 AND LIABILITIES $million $million $million $million $million $million Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following:

Consolidated Exploration and evaluation assets – – (73.5) (18.5) (73.5) (18.5) Oil and gas assets – – (289.2) (351.5) (289.2) (351.5) Other land, buildings, plant and equipment 46.4 63.5 – – 46.4 63.5 Other investments 0.8 – – (3.3) 0.8 (3.3) Trade receivables – – (3.6) (5.7) (3.6) (5.7) Other receivables – – (4.4) (0.1) (4.4) (0.1) Inventories – – (26.7) (20.1) (26.7) (20.1) Prepayments – – (1.9) (2.2) (1.9) (2.2) Derivative financial instruments – – (117.0) (19.1) (117.0) (19.1) Other assets – – (9.6) – (9.6) – Equity-raising costs 0.8 0.6 – – 0.8 0.6 Trade payables – 6.5 – – – 6.5 Interest-bearing loans and borrowings 85.8 – – (87.1) 85.8 (87.1) Employee benefits 21.3 19.3 – – 21.3 19.3 Defined benefit obligation 13.3 3.4 – – 13.3 3.4 Other liabilities – – (3.4) – (3.4) – Provisions 31.9 11.1 – – 31.9 11.1 Royalty related taxes – – (257.7) (217.4) (257.7) (217.4) Other items – – (52.1) (54.1) (52.1) (54.1) Tax value of carry-forward losses recognised 5.7 18.5 – – 5.7 18.5 Tax assets/(liabilities) 206.0 122.9 (839.1) (779.1) (633.1) (656.2) Set-off of tax (95.0) (36.1) 95.0 36.1 – – Net tax assets/(liabilities) 111.0 86.8 (744.1) (743.0) (633.1) (656.2)

Santos Ltd Exploration and evaluation assets – – (10.2) (4.5) (10.2) (4.5) Oil and gas assets – – (77.2) (71.7) (77.2) (71.7) Other land, buildings, plant and equipment – – (9.0) (7.7) (9.0) (7.7) Other investments 0.8 – – (3.3) 0.8 (3.3) Trade receivables – – (3.0) (5.0) (3.0) (5.0) Other receivables – – (4.4) – (4.4) – Inventories – – (15.3) (12.5) (15.3) (12.5) Other assets 1.2 2.7 – – 1.2 2.7 Equity-raising costs 0.8 0.6 – – 0.8 0.6 Employee benefits 20.3 18.3 – – 20.3 18.3 Defined benefit obligation 13.3 3.4 – – 13.3 3.4 Provisions 12.2 8.2 – – 12.2 8.2 Other liabilities – – (0.2) – (0.2) – Royalty related taxes – – (60.8) (55.1) (60.8) (55.1) Other items – 8.4 (2.5) – (2.5) 8.4 Tax value of carry-forward losses recognised – 9.0 – – – 9.0 Tax assets/(liabilities) 48.6 50.6 (182.6) (159.8) (134.0) (109.2) Set-off of tax (48.6) (50.6) 48.6 50.6 – – Net tax liabilities – – (134.0) (109.2) (134.0) (109.2)

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Consolidated Santos Ltd 19. DEFERRED TAX ASSETS 2008 2007 2008 2007 AND LIABILITIES (CONTINUED) $million $million $million $million 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 1,017.1 834.4 – – Deductible temporary differences 73.7 75.8 – – Tax losses 45.9 72.8 – 27.8 1,136.7 983.0 – 27.8

Deferred tax assets have not been recognised in respect of these items because it is not probable that the temporary differences will reverse in the future and that there will be sufficient future taxable profits against which the benefits can be utilised. Unrecognised deductible temporary differences and tax losses of $45.8 million (2007: $44.9 million) will expire between 2009 and 2028. The remaining deductible temporary differences and tax losses do not expire under current tax legislation.

20. TRADE AND OTHER PAYABLES Trade payables 391.3 432.4 132.0 180.6 Non-trade payables and accrued expenses 213.5 177.3 64.8 55.3 Amounts owing to controlled entities – – 526.2 389.2 604.8 609.7 723.0 625.1

21. INTEREST-BEARING LOANS AND BORROWINGS This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings. For more information about the Group’s exposure to interest rate and foreign currency risk, see note 38.

Current liabilities Obligations under finance leases 0.6 – 0.6 – Bank loans – secured 24.1 1.4 – – Bank loans – unsecured 27.6 17.3 – – Commercial paper – 64.6 – – Medium-term notes – 19.8 – – Long-term notes 46.3 – – – 98.6 103.1 0.6 –

Non-current liabilities Amounts owing to controlled entities – – 4,082.8 2,478.2 Obligations under finance leases 2.6 – 2.6 – Bank loans – secured 19.7 46.4 – – Bank loans – unsecured 194.0 304.5 – – Medium-term notes 457.2 438.8 – – Long-term notes 1,682.3 1,203.2 – – 2,355.8 1,992.9 4,085.4 2,478.2

The amounts owing to controlled entities are for loans made in the ordinary course of business on normal market terms and conditions and are not repayable for a minimum of nine years.

The Group has entered into interest rate swap contracts to manage the exposure to interest rates. This has resulted in a weighted average interest rate on interest-bearing liabilities of 5.74% as at 31 December 2008 (2007: 6.62%). All borrowings are unsecured, with the exception of the secured bank loan, and arranged through a controlled entity, Santos Finance Ltd, and guaranteed by Santos Ltd.

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

21. INTEREST-BEARING LOANS AND BORROWINGS (CONTINUED) Details of major credit facilities (A) BANK LOANS – SECURED

A reserve-based lending facility for US$65.0 million was entered into in the 2006 reporting period which bears a floating rate of interest. The facility is secured by a first charge over the Group’s interests in the Maleo and Kakap assets in Indonesia with a carrying amount at 31 December 2008 of A$122.3 million. The average rate for the year was 7.04%, and A$43.8 million was outstanding at the balance sheet date (2007: A$47.8 million). The facility is available until 2012, and the current amount drawn down is expected to be fully repaid by 2011.

(B) BANK LOANS – UNSECURED

The Group has access to the following committed revolving bank facilities:

2008 2007 Year of maturity Currency A$million A$million 2011 Multi-currency 225.0 225.0 2012 Multi-currency 375.0 375.0 2013 Multi-currency 100.0 100.0 700.0 700.0

Revolving bank facilities bear interest at the relevant interbank reference rate plus 0.15% to 0.20%. The amount drawn at 31 December 2008 is $nil (2007: $130.0 million).

Term bank loans 2008 2007 Year of maturity Currency A$million A$million 2008 USD – 17.3 2009 USD 27.6 21.4 2010 USD 28.1 22.2 2011 USD 29.1 22.9 2012 USD 25.0 19.7 2013 USD 20.9 16.4 2014 USD 22.0 17.3 2015 USD 22.4 17.7 2016 USD 22.8 18.0 2017 USD 23.7 18.9 221.6 191.8

Term bank loans bear interest at the relevant interbank reference rate plus a margin of up to 0.75%. The amount outstanding at 31 December 2008 is US$153.1 million (A$221.6 million) (2007: US$168.1 million (A$191.8 million)) at a weighted average annual effective interest rate of 5.03% (2007: 5.99%).

The Group has an $800.0 million (2007: $800.0 million) Australian commercial paper programme supported by the revolving bank facilities referred to in (B) above. At 31 December 2008, no commercial paper is on issue (2007: $64.6 million) and the weighted average annual effective interest rate is nil (2007: 7.59%).

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21. INTEREST-BEARING LOANS AND BORROWINGS (CONTINUED) Details of major credit facilities (continued) (D) MEDIUM-TERM NOTES

The Group has a $1,000.0 million (2007: $1,000.0 million) Australian medium-term note programme.

Medium-term notes on issue Effective 2008 2007 Year of issue Year of maturity interest rate $million $million 1998 2008 – – 19.8 2005 2011 4.63% * 349.4 349.0 2005 2015 8.10% 107.8 89.8 457.2 458.6 * Floating rate of interest.

(E) LONG-TERM NOTES

Long-term notes on issue Effective 2008 2007 2008 2007 Year of issue Year of maturity interest rate US$million US$million A$million A$million 2000 2007 to 2015 5.72% 211.5 203.1 306.1 231.8 2002 2009 to 2022 5.39% 336.6 307.3 487.1 350.7 2007 2017 to 2027 3.81% 646.3 544.0 935.4 620.7 1,194.4 1,054.4 1,728.6 1,203.2

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

Consolidated Santos Ltd 2008 2007 2008 2007 22. PROVISIONS $million $million $million $million Current Liability for annual leave 23.5 23.7 22.7 22.9 Liability for long service leave 39.0 35.7 38.3 35.2 Restoration 52.6 51.5 3.2 5.5 Non-executive Directors’ retirement benefits 1.6 1.5 1.6 1.5 116.7 112.4 65.8 65.1 Non-current Liability for long service leave 4.2 3.5 4.1 3.2 Liability for defined benefit obligations (refer note 30) 61.5 16.3 61.5 16.3 Restoration 742.3 523.8 245.3 148.3 808.0 543.6 310.9 167.8

Movements in each class of provision during the financial year, other than provisions relating to employee benefits, are set out below:

Total Non-executive Directors’ Total retirement restoration benefits Total $million $million $million Consolidated Balance at 1 January 2008 575.3 1.5 576.8 Provisions made during the year 148.8 0.1 148.9 Provisions used during the year (73.4) – (73.4) Unwind of discount 31.3 – 31.3 Change in discount rate 100.9 – 100.9 Exchange differences 12.0 – 12.0 Balance at 31 December 2008 794.9 1.6 796.5

Santos Ltd Balance at 1 January 2008 153.8 1.5 155.3 Provisions made during the year 55.5 0.1 55.6 Provisions used during the year (2.6) – (2.6) Unwind of discount 8.7 – 8.7 Change in discount rate 33.1 – 33.1 Balance at 31 December 2008 248.5 1.6 250.1

Non-executive Directors’ retirement benefits Agreements exist with the Non-executive Directors appointed prior to 1 January 2004 providing for the payment of a sum on retirement from office as a Director in accordance with shareholder approval at the 1989 Annual General Meeting. Such benefits ceased to accrue with effect from 30 June 2004. These benefits have been fully provided for by the Company.

In June 2007, the Board resolved to adopt a policy of indexation of these frozen benefits to prevent further erosion of the real value. The entitlements are annually indexed to the five-year government bond rate.

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Consolidated Santos Ltd 2008 2007 2008 2007 23. OTHER LIABILITIES $million $million $million $million Current Cross-currency swap contracts – 3.4 – – Interest rate swap contracts – 9.9 – – Fair value of embedded derivatives 5.6 – – – Other 2.5 2.1 – – 8.1 15.4 – –

Non-current Cross-currency swap contracts – 7.1 – – Other 9.0 7.4 – – 9.0 14.5 – –

24. CAPITAL AND RESERVES Reconciliation of movement in capital and reserves attributable to equity holders of Santos Ltd

Share Translation Fair value Retained Total capital reserve reserve earnings equity $million $million $million $million $million Consolidated Balance at 1 January 2008 2,331.6 (280.3) 7.4 1,034.4 3,093.1 Movement per recognised income and expense statement – 93.5 (9.4) 1,632.9 1,717.0 Share options exercised by employees 2.5 – – – 2.5 Shares issued 253.1 – – – 253.1 Share buy-back (56.4) – – (245.0) (301.4) Dividends to shareholders – – – (286.3) (286.3) Equity attributable to equity holders of Santos Ltd 2,530.8 (186.8) (2.0) 2,136.0 4,478.0 Equity attributable to minority interests 0.5 – – (0.2) 0.3 Balance at 31 December 2008 2,531.3 (186.8) (2.0) 2,135.8 4,478.3

Balance at 1 January 2007 2,254.4 (213.9) 13.6 1,301.4 3,355.5 Movement per recognised income and expense statement – (66.4) (6.2) 232.8 160.2 Share options exercised by employees 3.0 – – – 3.0 Shares issued 144.4 – – – 144.4 Share buy-back (70.2) – – (231.2) (301.4) Dividends to shareholders – – – (268.6) (268.6) Balance at 31 December 2007 2,331.6 (280.3) 7.4 1,034.4 3,093.1

Santos Ltd Balance at 1 January 2008 2,331.6 – 7.4 1,130.6 3,469.6 Movement per recognised income and expense statement – – (9.4) 2.9 (6.5) Share options exercised by employees 2.5 – – – 2.5 Shares issued 253.1 – – – 253.1 Share buy-back (56.4) – – (245.0) (301.4) Dividends to shareholders – – – (286.3) (286.3) Balance at 31 December 2008 2,530.8 – (2.0) 602.2 3,131.0

Balance at 1 January 2007 2,254.4 – 2.4 401.7 2,658.5 Movement per recognised income and expense statement – – 5.0 1,228.7 1,233.7 Share options exercised by employees 3.0 – – – 3.0 Shares issued 144.4 – – – 144.4 Share buy-back (70.2) – – (231.2) (301.4) Dividends to shareholders – – – (268.6) (268.6) Balance at 31 December 2007 2,331.6 – 7.4 1,130.6 3,469.6

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

24. CAPITAL AND RESERVES (CONTINUED) Translation reserve The foreign currency translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations where their functional currency is different to the presentation currency of the reporting entity, as well as from the translation of liabilities that hedge the Company’s net investment in a foreign subsidiary and exchange differences that arise on the translation of monetary items that form part of the net investment in a foreign operation.

Fair value reserve The fair value reserve includes the cumulative net change in the fair value of available-for-sale investments until the investment is derecognised.

Consolidated Santos Ltd 2008 2007 2008 2007 $million $million $million $million Share capital 584,812,875 (2007: 585,964,352) ordinary shares, fully paid 1,946.4 1,747.2 1,946.4 1,747.2 88,000 (2007: 88,000) ordinary shares, paid to one cent – – – – 6,000,000 (2007: 6,000,000) redeemable convertible preference shares 584.4 584.4 584.4 584.4 2,530.8 2,331.6 2,530.8 2,331.6

In accordance with changes to the Corporations Law effective 1 July 1998, the shares issued do not have a par value and there is no limit on the authorised share capital of the Company.

2008 2007 2008 2007 Note Number of shares $million $million Movement in fully paid ordinary shares Balance at the beginning of the year 585,964,352 598,524,106 1,747.2 1,670.0 Santos Employee Share Acquisition Plan 31(A) 111,153 100,650 1.4 1.3 Santos Employee Share Purchase Plan 31(A) 300,100 400 3.3 – Shares issued on exercise of options 31(B) 303,583 455,398 2.5 3.0 Shares issued on vesting of Share Acquisition Rights 31(B) 141,330 – – – Santos Executive Share Plan 31(C) – – – – Non-executive Director Share Plan 31(D) 33,356 14,847 0.5 0.2 Dividend Reinvestment Plan (“DRP”) 24(A) 2,323,249 4,695,296 35.1 51.6 DRP underwriting agreement 24(A) 14,123,057 6,844,930 212.8 91.3 Off-market buy-back 24(B) (18,487,305) (24,671,275) (56.4) (70.2) Balance at the end of the year 584,812,875 585,964,352 1,946.4 1,747.2

Redeemable convertible preference shares Balance at the beginning and end of the year 24(C) 6,000,000 6,000,000 584.4 584.4

Fully paid ordinary shares carry one vote per share, entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. This is subject to the prior entitlements of the redeemable convertible preference shares. The market price of the Company’s ordinary shares on 31 December 2008 was $14.87 (2007: $14.12).

(A) DIVIDEND REINVESTMENT PLAN

The Santos Dividend Reinvestment Plan is in operation. Shares are allocated at the daily weighted average market price of the Company’s shares on the ASX over a period of seven business days commencing on the business day after the Dividend Record Date. At this time, the Board has determined that no discount will apply. The Dividend Reinvestment Plan has been fully underwritten since payment of the 2007 interim dividend.

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24. CAPITAL AND RESERVES (CONTINUED) (B) OFF-MARKET BUY-BACK

On 6 October 2008, the Company bought back 18,487,305 fully paid ordinary shares, representing 3.07% of fully paid ordinary shares on issue at that date, at a price of $16.23 per share. $56.4 million was debited against the Company’s capital account (including $1.3 million transaction costs, net of tax) and $245.0 million was debited against retained earnings.

On 30 June 2007, the Company bought back 24,671,275 fully paid ordinary shares, representing 4.10% of fully paid ordinary shares on issue at that date, at a price of $12.16 per share. $70.2 million was debited against the Company’s capital account (including $1.4 million transaction costs, net of tax) and $231.2 million was debited against retained earnings.

On 30 September 2004, the Company issued 6,000,000 redeemable convertible preference shares at $100 each, which resulted in an amount of $600,000,000 being credited to the Company’s capital account before deducting the costs of issue.

Redeemable convertible preference shareholders receive a floating preferential, non-cumulative dividend which incorporates the value of franking credits (i.e. it is on a grossed-up basis), set at the Bank Bill Swap Rate for 180-day bills plus a margin. Dividends on redeemable convertible preference shares are in priority to any dividend declared on ordinary class shares. Redeemable convertible preference shareholders are not entitled to vote at any general meetings, except in the following circumstances:

(i) on a proposal:

(1) to reduce the share capital of the Company;

(2) that affects rights attached to the redeemable convertible preference shares;

(3) to wind up the Company; or

(4) for the disposal of the whole of the property, business and undertaking of the Company;

(ii) on a resolution to approve the terms of a buy-back agreement;

(iii) during a period in which a dividend or part of a dividend on the redeemable convertible preference shares is in arrears; or

(iv) during the winding up of the Company.

In the event of the winding up of the Company, redeemable convertible preference shares will rank for repayment of capital behind all creditors of the Company, but ahead of the ordinary class shares.

The redeemable convertible preference shares may, at the sole discretion of the Company, be converted into ordinary class shares and/or exchanged.

Capital risk management The Group’s objective when managing capital is to safeguard the ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders, and to maintain an efficient capital structure.

In order to maintain or adjust the capital structure the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

Consistently with others in the industry, the Group monitors capital on the basis of the gearing ratio. The Group undertakes this on a forecast and actual results basis. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total interest-bearing loans and borrowings less cash and cash equivalents and value of financial derivatives used to hedge net debt. Total capital is calculated as total equity as shown in the balance sheet plus net debt. Equity includes redeemable convertible preference shares.

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

Consolidated Santos Ltd 2008 2007 2008 2007 24. CAPITAL AND RESERVES (CONTINUED) $million $million $million $million During 2008 the Group’s target was to maintain a gearing ratio below 45% and a BBB+ Standard & Poor’s credit rating. The gearing ratios at 31 December 2008 and 31 December 2007 were as follows:

Total interest-bearing loans and borrowings (note 21) 2,454.4 2,096.0 4,086.0 2,478.2 Less: Cash and cash equivalents (note 9) (1,552.9) (200.5) (1,402.9) (56.8) Net fair value of financial derivatives used to hedge debt (notes 12 and 23): Cross-currency swap contracts (92.0) 10.5 – – Interest rate swap contracts (303.5) (67.3) – – Net debt 506.0 1,838.7 2,683.1 2,421.4 Total equity 4,478.3 3,093.1 3,131.0 3,469.6 Total capital 4,984.3 4,931.8 5,814.1 5,891.0

Gearing ratio 10.2% 37.3% 46.1% 41.1%

The decrease in the Group gearing ratio resulted primarily from the receipt of proceeds from the sell-down of the Gladstone LNG project during the year.

Dividends Dividends recognised during the year by the Company are:

Dollars Total Franked/ Payment per share $million unfranked date 2008 Interim 2008 redeemable preference $3.3365 20.0 Franked 30 Sep 2008 Final 2007 redeemable preference $2.9983 18.0 Franked 31 Mar 2008 Interim 2008 ordinary $0.22 131.1 Franked 30 Sep 2008 Final 2007 ordinary $0.20 117.2 Franked 31 Mar 2008 286.3 2007 Interim 2007 redeemable preference $2.8592 17.1 Franked 2 Oct 2007 Final 2006 redeemable preference $2.7272 16.4 Franked 2 Apr 2007 Interim 2007 ordinary $0.20 115.4 Franked 2 Oct 2007 Final 2006 ordinary $0.20 119.7 Franked 2 Apr 2007 268.6 Franked dividends paid during the year were franked at the tax rate of 30%.

After the balance sheet date the following dividends were proposed by the Directors. The dividends have not been provided for and there are no income tax consequences.

Final 2008 redeemable preference $2.9989 18.0 Franked 31 Mar 2009 Final 2008 ordinary $0.20 117.0 Franked 31 Mar 2009 135.0

The financial effect of these dividends has not been brought to account in the financial statements for the year ended 31 December 2008 and will be recognised in subsequent financial reports.

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Santos Ltd 2008 2007 24. CAPITAL AND RESERVES (CONTINUED) $million $million Dividend franking account 30% franking credits available to shareholders of Santos Ltd for future distribution, after adjusting for franking credits which will arise from the payment of the current tax liability at 31 December 2008 1,061.6 661.6

The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends.

The impact on the dividend franking account of dividends proposed after the balance sheet date but not recognised as a liability is to reduce it by $57.9 million (2007: $57.9 million).

25. EARNINGS PER SHARE Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of Santos Ltd (after deducting dividends paid on redeemable convertible preference shares) by the weighted average number of ordinary shares outstanding during the year.

Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders of Santos Ltd (after adding back the dividends paid on redeemable convertible preference shares) by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.

Consolidated 2008 2007 $million $million Earnings used in the calculation of basic and diluted earnings per share reconciles to the net profit after tax in the income statement as follows: Net profit attributable to ordinary equity holders of Santos Ltd from continuing operations 1,650.1 424.9 Net loss attributable to ordinary equity holders of Santos Ltd from discontinued operations – (65.6) Net profit attributable to ordinary equity holders of Santos Ltd 1,650.1 359.3 Dividends paid on redeemable convertible preference shares (38.0) (33.5) Earnings used in the calculation of basic earnings per share 1,612.1 325.8 Dividends paid on redeemable convertible preference shares 38.0 33.5 Earnings used in the calculation of diluted earnings per share 1,650.1 359.3

2008 2007 Number of shares The weighted average number of shares used for the purposes of calculating diluted earnings per share reconciles to the number used to calculate basic earnings per share as follows: Basic earnings per share 590,706,516 590,505,305 Partly paid shares 71,222 65,864 Executive share options 1,446,209 818,109 Share acquisition rights 1,694,044 1,846,671 Redeemable convertible preference shares 36,650,691 – Diluted earnings per share 630,568,682 593,235,949

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

25. EARNINGS PER SHARE (CONTINUED) Partly paid shares outstanding issued under the Santos Executive Share Plan, options outstanding issued under the Santos Executive Share Option Plan, Share Acquisition Rights (“SARs”) issued to eligible executives and redeemable convertible preference shares have been classified as potential ordinary shares and included in the calculation of diluted earnings per share in 2008. The number of shares included in the calculation are those assumed to be issued for no consideration, being the difference between the number that would have been issued at the exercise price and the number that would have been issued at the average market price.

Redeemable convertible preference shares have not been included in the calculation of diluted earnings per share for 2007 as their impact was not dilutive.

During the year, 303,583 options (2007: 455,398) and 141,330 SARs (2007: nil) were converted to ordinary shares. The diluted earnings per share calculation includes that portion of these options, SARs and partly paid shares assumed to be issued for nil consideration, weighted with reference to the date of conversion. The weighted average number included is 181,447 (2007: 321,982).

460,385 options (2007: 335,900) and 236,426 SARs (2007: 273,100) lapsed during the year. The diluted earning per share calculation includes that portion of these options and SARs assumed to be issued for nil consideration, weighted with reference to the date the options or SARs lapsed. The weighted average number included is 177,527 (2007: 104,179).

To calculate earnings per share amounts for the discontinued operations, the loss figure used in the numerator and the weighted average number of ordinary shares for both basic and diluted amounts are per the above tables.

Consolidated 2008 2007 cents cents Earnings per share for continuing and discontinued operations Basic earnings per share: From continuing operations 272.9 66.3 From discontinued operations – (11.1) 272.9 55.2 Diluted earnings per share: From continuing operations 261.7 66.0 From discontinued operations – (11.1) 261.7 54.9

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26. CONSOLIDATED ENTITIES Country of Country of Name incorporation Name incorporation Santos Ltd (Parent Entity) AUST Santos International Ventures Pty Ltd AUST Controlled entities1: Santos Niugini Exploration Limited PNG Alliance Petroleum Australia Pty Ltd2 AUST Santos (Nth Bali 1) Pty Ltd AUST Basin Oil Pty Ltd AUST Santos (Papalang) Pty Ltd AUST Boston L.H.F. Pty Ltd AUST Santos (Popodi) Pty Ltd AUST Bridgefield Pty Ltd AUST Santos Vietnam Pty Ltd AUST Bridge Oil Developments Pty Limited2 AUST Zhibek Resources Limited1, 4 UK Bronco Energy Pty Limited AUST Controlled entity of Zhibek Resources Limited Canso Resources Pty Ltd AUST CJSC KNG Hydrocarbons1, 4 KGZ Coveyork Pty Ltd AUST Santos (JBJ1) Pty Ltd AUST Doce Pty Ltd AUST Controlled entities of Santos (JBJ1) Pty Ltd Fairview Pipeline Pty Ltd AUST Santos (JBJ2) Pty Ltd AUST Farmout Drillers Pty Ltd AUST Controlled entity of Santos (JBJ2) Pty Ltd Gidgealpa Oil Pty Ltd AUST Shaw River Power Station Pty Ltd (previously Kipper GS Pty Ltd AUST Santos (JBJ3) Pty Ltd) AUST Controlled entity of Kipper GS Pty Ltd Santos (JPDA 06-104) Pty Ltd AUST Santos Carbon Pty Ltd AUST Santos (JPDA 91-12) Pty Ltd AUST Moonie Pipeline Company Pty Ltd AUST Santos (NARNL Cooper) Pty Ltd2 AUST Reef Oil Pty Ltd2 AUST Santos (N.T.) Pty Ltd AUST Santos Asia Pacific Pty Ltd AUST Controlled entity of Santos (N.T.) Pty Ltd Controlled entities of Santos Asia Pacific Pty Ltd Bonaparte Gas & Oil Pty Limited AUST Santos (Sampang) Pty Ltd AUST Santos Offshore Pty Ltd2 AUST Santos (Warim) Pty Ltd AUST Santos Oil Exploration (Malaysia) Sdn Bhd (in liquidation) MY Santos Australian Hydrocarbons Pty Ltd AUST Santos Petroleum Pty Ltd2 AUST Santos (BOL) Pty Ltd2 AUST Santos QNT Pty Ltd2 AUST Controlled entity of Santos (BOL) Pty Ltd Controlled entities of Santos QNT Pty Ltd Bridge Oil Exploration Pty Limited AUST Santos QNT (No. 1) Pty Ltd2 AUST Santos CSG Pty Ltd AUST Controlled entities of Santos QNT (No. 1) Pty Ltd Santos Darwin LNG Pty Ltd2 AUST Santos Petroleum Management Pty Ltd2 AUST Santos Direct Pty Ltd AUST Santos Petroleum Operations Pty Ltd AUST Santos Facilities Pty Ltd AUST TMOC Exploration Proprietary Limited AUST Santos Finance Ltd AUST Santos QNT (No. 2) Pty Ltd2 AUST Santos GLNG Pty Ltd3 AUST Controlled entities of Santos QNT (No. 2) Pty Ltd Controlled entity of Santos GLNG Pty Ltd Moonie Oil Pty Ltd AUST GLNG Operations Pty Ltd1, 3 AUST Petromin Pty Ltd AUST Santos (Globe) Pty Ltd AUST Santos (299) Pty Ltd (in liquidation)5 AUST Santos International Holdings Pty Ltd AUST Santos Exploration Pty Ltd AUST Controlled entities of Santos International Holdings Pty Ltd Santos Gnuco Pty Ltd AUST Barracuda Limited PNG Transoil Pty Ltd AUST CJSC South Petroleum Company1 KGZ Santos Resources Pty Ltd AUST Lavana Limited PNG Santos (TGR) Pty Ltd AUST Santos Petroleum Ventures B.V. Santos Timor Sea Pipeline Pty Ltd AUST (previously Petroleum Ventures B.V.) NL Sesap Pty Ltd AUST Sanro Insurance Pte Ltd SG Vamgas Pty Ltd2 AUST Santos Americas and Europe Corporation USA Controlled entities of Santos Americas and Europe Corporation Notes Santos TPY Corp USA 1 Beneﬁcial interests in all controlled entities are 100%, except: Controlled entities of Santos TPY Corp Û ÝÛ :AJ:ÛJgml`ÛG]ljgd]meÛ:gehYfqÛ¨É© Santos Queensland Corp USA Û ÝÛ :AJ:ÛBE>Û?q\jg[YjZgfkÛ¨É©Û Santos TOG Corp USA Û ÝÛ Q`aZ]cÛI]kgmj[]kÛCaeal]\Û¨É©ÛYf\ Controlled entities of Santos TOG Corp Û ÝÛ >CE>ÛFh]jYlagfkÛGlqÛCl\ÛI]^]jÛfgl]Û ¨9© Santos TOGA Pty Ltd AUST 2 Company is party to a Deed of Cross Guarantee. Refer note 37. Controlled entity of Santos TOGA Pty Ltd 3 Company incorporated during the year. Santos TPC Pty Ltd AUST Û :gehYfqÛY[imaj]\Û\mjaf_Ûl`]Ûq]YjÛI]^]jÛfgl]Û Santos TPY CSG Corp USA Û :gehYfqÛhdY[]\ÛaflgÛngdmflYjqÛdaima\YlagfÛ\mjaf_Ûl`]Ûq]Yj Santos Bangladesh Limited (previously Cairn Energy 6 Associated Petroleum Pty Ltd and Santos (NGA) Pty Ltd were liquidated on Bangladesh Limited) UK 12 December 2008. Santos (Bawean) Pty Ltd AUST Country of incorporation Santos (BBF) Pty Ltd AUST AUST – Australia Controlled entities of Santos (BBF) Pty Ltd KGZ – Kyrgyz Republic Santos (SPV) Pty Ltd AUST Controlled entities of Santos (SPV) Pty Ltd MY – Malaysia Novus Nominees Pty Ltd AUST NL – Netherlands Santos Brantas Pty Ltd AUST PNG – Papua New Guinea Santos (Madura Offshore) Pty Ltd AUST SG – Singapore Santos UK (Kakap 2) Limited UK Santos (Donggala) Pty Ltd AUST UK – United Kingdom Santos Egypt Pty Ltd AUST USA – United States of America Santos Hides Ltd PNG In the financial statements of the Company, investments in controlled Santos International Operations Pty Ltd AUST entities are recognised at cost, less any impairment losses.

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

27. ACQUISITIONS OF SUBSIDIARIES During the financial year the following controlled entities were acquired and their operating results have been included in the income statement from the date of acquisition: Contribution to Beneficial Purchase consolidated profit interest acquired consideration since acquisition Name of entity Date of acquisition % $million $million Zhibek Resources Limited 17 November 2008 75 0.1 – CJSC KNG Hydrocarbons 17 November 2008 54 – (0.7)

CJSC KNG Hydrocarbons is a subsidiary of Zhibek Resources Limited and is engaged in exploration for oil in the Kyrgyz Republic, both have no operating revenues. If the acquisition had occurred on 1 January 2008, there would be no impact on Group revenue and net profit.

The consideration for the acquisition comprises an initial payment of £31,200 (A$73,265), and deferred consideration of US$1.3 million (A$2.0 million), being the commitment to fund the minority interest’s share of phase 1 of the exploration programme over 2009.

The Group has the right to withdraw from the exploration programme either within 60 days of completion of the seismic programme and subject to paying US$3.0 million to Xtract International Ltd, the original owner of Zhibek Resources Limited, or within 60 days after completion of phase 2, or within 60 days after the drilling and completion of the first qualifying well or if the Tashkumyr licence is not renewed or extended.

During the year, the Group committed to fund the minority interest’s share of phase 2 of the exploration programme associated with the 2006 acquisition of CJSC South Petroleum Company. Accordingly an increase in the exploration and evaluation assets acquired and deferred consideration payable of $11.6 million has been recognised during the current year.

The acquisitions had the following effect on the Group’s assets and liabilities: Carrying Fair value Recognised amounts adjustments values $million $million $million Cash and cash equivalents 0.1 – 0.1 Trade and other receivables 1.1 – 1.1 Exploration and evaluation assets 0.5 14.5 15.0 Trade and other payables (1.0) – (1.0) Deferred tax liabilities – (1.6) (1.6) Net identifiable assets and liabilities 0.7 12.9 13.6

The cost of the acquisitions is as follows: Cash paid 0.1 Deferred consideration 13.5 Total cost of the acquisitions 13.6

The cash outflow on acquisition of controlled entities is as follows: Cash paid (0.1) Net cash acquired with subsidiaries 0.1 Deferred consideration paid* (7.5) Net consolidated cash outflow (7.5)

* Deferred consideration paid in 2008 comprises: Û ÝÛ ÛÛeaddagfÛhYa\ÛafÛ]YjdqÛk]lld]e]flÛg^Ûl`]Ûh]j^gjeYf[]ÛhYqe]flkÛYkkg[aYl]\Ûoal`Ûl`]ÛÛ9jgf[gÛ

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27. ACQUISITIONS OF SUBSIDIARIES (CONTINUED) In 2007, the Group acquired 100% beneficial interest in the following controlled entities:

Purchase consideration Name of entity Date of acquisition $million Petroleum Ventures B.V. 22 January 2007 14.1 Gidgealpa Oil Pty Ltd 7 June 2007 1.7 Bronco Energy Pty Limited 25 June 2007 10.7 Cairn Energy Bangladesh Limited 25 October 2007 62.9

28. INTERESTS IN JOINT VENTURES (A) The following are the significant joint ventures in which the Group is a joint venturer:

Joint venture Cash-generating unit Principal activities % interest Oil and gas assets – Producing assets Bayu-Undan Liquids Bayu-Undan Gas production 11.4 Bayu-Undan LNG Bayu-Undan Gas production 11.4 Casino Casino Gas production 50.0 Fairview Fairview Gas production 45.7* Madura PSC (Maleo) Madura PSC Gas production 67.5 Mereenie Mereenie Oil and gas production 65.0 John Brookes John Brookes Gas production 45.0 Mutineer-Exeter Mutineer-Exeter Oil production 33.4 Sampang PSC (Oyong, Wortel, Jeruk) Sampang PSC Oil and gas production 45.0 Sangu Sangu PSC Gas production 37.5 Stag Stag Oil and gas production 66.7 SA Fixed Factor Area Cooper Basin Oil and gas production 66.6 SWQ Unit Cooper Basin Gas production 60.1

Oil and gas assets – Assets in development Hides Hides Gas development 31.0 Kipper Kipper Gas development 50.0 Reindeer Reindeer Gas development 45.0

Exploration and evaluation assets Evans Shoal – Contingent gas resource 40.0 * K`]Û>jgmh¿kÛafl]j]klÛafÛ=Yajna]oÛ\][j]Yk]\Û^jgeÛ~ÉÛlgÛÉÛYkÛYÛj]kmdlÛg^Ûl`]ÛkYd]Ûg^ÛÉÛafl]j]klÛlgÛG

(B) The Group recognises its interests in the following jointly controlled entities using the proportionate consolidation method of accounting:

Joint venture entity % interest Darwin LNG Pty Ltd 11.4 Easternwell Drilling Services Holdings Pty Ltd 50.0 Fairview Power Pty Ltd (in liquidation) 50.0 GLNG Operations Pty Ltd 60.0

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

Consolidated Santos Ltd 2008 2007 2008 2007 28. INTERESTS IN JOINT VENTURES (CONTINUED) $million $million $million $million The Group’s share of the assets, liabilities, income and expenses of the jointly controlled entities, which are included in the consolidated financial statements using the proportionate consolidation method of accounting, are as follows: Current assets 49.8 46.1 – – Non-current assets 194.7 148.8 – – 244.5 194.9 – – Current liabilities (98.0) (63.1) – – Non-current liabilities (15.3) (4.3) – – Net assets 131.2 127.5 – –

Revenue 237.5 120.0 – – Expenses (213.7) (96.0) – – Profit before income tax 23.8 24.0 – –

(C) The Group’s share of capital expenditure commitments and minimum exploration commitments in respect of joint ventures are: Capital expenditure commitments 366.3 287.4 93.0 154.4 Minimum exploration commitments 186.5 336.0 7.2 35.0

29. NOTES TO THE CASH FLOW STATEMENTS (A) RECONCILIATION OF CASH FLOWS FROM OPERATING ACTIVITIES

Profit after income tax 1,650.1 359.3 20.1 1,270.2 Add/(deduct) non-cash items: Depreciation and depletion 663.9 759.3 273.3 419.3 Net impairment loss/(reversal) on investment in controlled entities – – 49.6 (380.7) Net impairment (reversal)/loss on receivables due from controlled entities – – (23.8) 25.3 Net impairment loss on receivables 0.4 – 0.3 – Dividends distributed by controlled entities – – (27.0) – Net borrowing costs charged by controlled entities – – 146.9 – Exploration and evaluation expensed 179.0 234.8 22.2 54.2 Net impairment loss on oil and gas assets 216.2 – 71.2 56.6 Net (gains)/losses on fair value hedges (7.3) 2.4 – – Share-based payments expense 8.3 5.2 8.3 5.2 Borrowing costs capitalised (9.5) (6.3) – – Unwind of the effect of discounting on provisions 31.3 23.9 8.7 8.5 Change in fair value of financial assets designated as at fair value through profit or loss 12.5 11.9 – 1.3 Defined benefit plan expense 3.0 5.6 1.8 5.6 Foreign exchange (gains)/losses (24.4) (0.4) (7.1) 0.7 Net (gain)/loss on sale of non-current assets (1,698.5) 2.8 (0.8) (1.7) Net gain on sale of available-for-sale financial assets (0.3) (33.4) (0.3) (13.9) Net loss on sale of discontinued operations – 67.7 – – Net cash provided by operating activities before changes in assets or liabilities 1,024.7 1,432.8 543.4 1,450.6 Add/(deduct) change in operating assets or liabilities net of acquisitions or disposals of businesses: Decrease/(increase) in trade and other receivables 10.5 (90.2) 49.4 (0.9) Increase in inventories (58.4) (49.8) (20.1) (38.8) (Increase)/decrease in other assets (0.5) 2.1 (7.0) (1.9) Net increase/(decrease) in deferred tax assets and deferred tax liabilities 73.5 34.5 39.9 (10.7) Increase/(decrease) in current tax liabilities 398.0 (181.2) (174.4) (178.5) (Decrease)/increase in trade and other payables (25.5) 59.6 (60.8) 19.4 Increase in provisions 50.9 6.1 6.0 2.7 Net cash provided by operating activities 1,473.2 1,213.9 376.4 1,241.9

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Consolidated Santos Ltd 2008 2007 2008 2007 29. NOTES TO THE CASH FLOW STATEMENTS (CONTINUED) $million $million $million $million (B) NON-CASH FINANCING AND INVESTING ACTIVITIES

Dividend Reinvestment Plan 35.1 51.6 35.1 51.6 Dividends distributed by controlled entities – – 33.9 – Share subscriptions in controlled entities – – (13.6) – Income tax transferred from controlled entities – – 612.9 – Net borrowing costs charged by controlled entities – – (146.9) –

30. EMPLOYEE BENEFITS

(A) LIABILITY FOR DEFINED BENEFIT OBLIGATIONS

Defined benefit members of the Santos Superannuation Plan receive a lump sum benefit on retirement, death, disablement and withdrawal. The defined benefit section of the Plan is closed to new members. All new members receive accumulation only benefits.

Defined benefit plan Amount recognised in the balance sheet: Deficit in plan recognised in non-current provisions (refer note 22) 61.5 16.3 61.5 16.3 Other financial assets (refer note 18) (17.1) (4.9) (17.1) (4.9) 44.4 11.4 44.4 11.4

Movements in the liability for net defined benefit obligations recognised in the balance sheet Liability at the beginning of the year 11.4 18.4 11.4 18.4 Expense recognised in income statement 3.0 5.6 1.8 5.6 Amount capitalised in oil and gas assets 2.3 – 1.2 – Amount recognised in retained earnings 36.5 (6.3) 36.5 (6.3) Defined benefit receivable from controlled entities – – 2.3 – Employer contributions (8.8) (6.3) (8.8) (6.3) Liability at the end of the year 44.4 11.4 44.4 11.4

Expense recognised in the income statements Service cost 3.5 6.4 2.1 6.4 Interest cost 3.6 5.6 2.2 5.6 Expected return on Plan assets (4.1) (6.4) (2.5) (6.4) 3.0 5.6 1.8 5.6

The expense is recognised in the following line items in the income statements: Other expenses 3.0 – 1.8 – Financial expenses – 5.6 – 5.6 3.0 5.6 1.8 5.6

Amounts recognised in statements of recognised income and expense Actuarial (loss)/gain in the year (36.5) 6.3 (36.5) 6.3 Tax effect 11.0 (1.9) 11.0 (1.9) Net actuarial (loss)/gain in the year (25.5) 4.4 (25.5) 4.4

Cumulative actuarial (loss)/gain recognised in the statement of recognised income and expense, net of tax (23.4) 2.1 (23.4) 2.1

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

30. EMPLOYEE BENEFITS (CONTINUED) (A) LIABILITY FOR DEFINED BENEFIT OBLIGATIONS (CONTINUED)

Historical information for the current and previous periods 2008 2007 2006 2005 2004 $million $million $million $million $million Consolidated Present value of defined benefit obligations 174.8 161.8 158.2 129.5 126.5 Fair value of Plan assets (113.3) (145.5) (131.9) (113.4) (108.7) Deficit in Plan 61.5 16.3 26.3 16.1 17.8

Experience adjustments loss/(gain) on Plan assets 43.2 (4.0) (6.3) (8.0) (5.5) Experience adjustments (gain)/loss on Plan liabilities (13.7) (1.2) 17.5 (0.1) (4.5)

Santos Ltd Present value of defined benefit obligations 174.8 161.8 158.2 129.5 126.5 Fair value of Plan assets (113.3) (145.5) (131.9) (113.4) (108.7) Deficit in Plan 61.5 16.3 26.3 16.1 17.8

Experience adjustments loss/(gain) on Plan assets 43.2 (4.0) (6.3) (8.0) (5.5) Experience adjustments (gain)/loss on Plan liabilities (13.7) (1.2) 17.5 (0.1) (4.5)

Consolidated Santos Ltd 2008 2007 2008 2007 $million $million $million $million Reconciliation of the present value of the defined benefit obligations Opening defined benefit obligations 161.8 158.2 161.8 158.2 Service cost 8.4 9.1 8.4 9.1 Interest cost 8.7 8.0 8.7 8.0 Contributions by Plan participants 7.9 9.1 7.9 9.1 Actuarial losses/(gains) 6.8 (5.0) 6.8 (5.0) Benefits paid (16.2) (15.7) (16.2) (15.7) Taxes and premiums paid (2.7) (2.2) (2.7) (2.2) Transfers in 0.1 0.3 0.1 0.3 Closing defined benefit obligations 174.8 161.8 174.8 161.8

Reconciliation of the fair value of Plan assets Opening fair value of Plan assets 145.5 131.9 145.5 131.9 Expected return on Plan assets 10.0 9.1 10.0 9.1 Actuarial (losses)/gains (43.2) 4.0 (43.2) 4.0 Employer contributions 11.9 9.0 11.9 9.0 Contributions by Plan participants 7.9 9.1 7.9 9.1 Benefits paid (16.2) (15.7) (16.2) (15.7) Taxes and premiums paid (2.7) (2.2) (2.7) (2.2) Transfers in 0.1 0.3 0.1 0.3 Closing fair value of Plan assets 113.3 145.5 113.3 145.5

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Consolidated Santos Ltd 2008 2007 2008 2007 30. EMPLOYEE BENEFITS (CONTINUED) % % % % (A) LIABILITY FOR DEFINED BENEFIT OBLIGATIONS (CONTINUED)

Plan assets The percentage invested in each asset class at the balance sheet date: Australian equity 28 33 28 33 International equity 27 28 27 28 Fixed income 10 13 10 13 Property 13 9 13 9 Other 10 – 10 – Cash 12 17 12 17

Fair value of Plan assets The fair value of Plan assets includes no amounts relating to:

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Consolidated Santos Ltd 2008 2007 2008 2007 Actual return on Plan assets $million $million $million $million Actual return on Plan assets (24.2) 9.2 (24.2) 9.2

Expected rate of return on Plan assets The expected return on assets assumption is determined by weighting the expected long-term return for each asset class by the target allocation of assets to each asset class and allowing for the correlations of the investment returns between asset classes. The returns used for each asset class are net of investment tax and investment fees. An allowance for asset-based administration expenses has been deducted from the expected return.

Principal actuarial assumptions at the balance sheet date (expressed as weighted average) 2008 2007 % pa % pa Discount rate 4.0 5.3 Expected rate of return on Plan assets 7.0 6.9 Expected average salary increase rate over the life of the Plan 6.0 6.0

The expected rate of return on Plan assets includes a reduction to allow for the administrative expenses of the Plan.

Expected contributions The Group expects to contribute $8.3 million to the defined benefit superannuation plan in 2009.

(B) DEFINED CONTRIBUTION PLANS

The Group makes contributions to several defined contribution plans. The amount recognised as an expense for the year was $8.4 million (2007: $8.5 million).

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

31. SHARE-BASED PAYMENT PLANS (A) CURRENT GENERAL EMPLOYEE SHARE PLANS

The Company currently operates two general employee share plans:

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Both of these plans have operated since 1997.

SESAP Broadly, SESAP provides for permanent eligible employees with at least a minimum period of service determined by Directors as at the offer date (one year of completed service for issues so far) to be entitled to acquire shares under this Plan. Executives participating in the Executive Long-term Incentive Programme in 2008, and casual employees and Directors of the Company are excluded from participating in this Plan. Employees are not eligible to participate under the Plan while they are resident overseas unless the Board decides otherwise.

The Plan provides for grants of fully paid ordinary shares in the capital of the Company up to a value determined by the Board which, to date, has been $1,000 per annum per eligible employee. A trustee is funded by the Group to acquire shares directly from the Company or on market. The shares are then held by the trustee on behalf of eligible employees who participate in the Plan.

The employee’s ownership of shares allocated under the Plan, and his or her right to deal with them, are subject to restrictions until the earlier of the expiration of the restriction period determined by the Board (being three years) and the time when he or she ceases to be an employee. Participants are entitled to instruct the trustee as to the exercise of voting rights, receive dividends and participate in bonus and rights issues during the restriction period. Shares are granted to eligible employees at no cost to the employee.

Summary of share movements in the SESAP during 2008 (and comparative 2007 information):

Opening Granted Distributions Closing balance during the year during the year balance Fair value Fair value Fair value Grant date per share aggregate aggregate Number Number $ Number $ Number $ 2008 18 November 2005 89,848 – – 89,848 1,164,977 – – 17 November 2006 105,156 – – 7,176 117,648 97,980 1,456,963 20 November 2007 99,825 – – 7,200 119,379 92,625 1,377,334 21 November 2008 – 111,153 12.62 474 6,621 110,679 1,656,797 294,829 111,153 104,698 1,408,625 301,284 4,491,094

2007 22 November 2004 127,002 – – 127,002 1,679,902 – – 18 November 2005 96,272 – – 6,424 81,065 89,848 1,268,654 17 November 2006 113,620 – – 8,464 107,105 105,156 1,484,803 20 November 2007 – 100,650 13.33 825 11,471 99,825 1,409,529 336,894 100,650 142,715 1,879,543 294,829 4,162,986

Shares are allocated at a price equal to the weighted average sale price of the Company’s ordinary shares on the ASX during the one-week period up to and including the Grant Date. This is shown as fair value per share for shares granted during the year. The fair value of shares distributed from the trust during the year and remaining in the trust at the end of the financial year is the market price of shares of the Company on the ASX as at close of trading on the respective dates.

Distributions during the year occurred at various dates throughout the year and therefore have not been separately listed.

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31. SHARE-BASED PAYMENT PLANS (CONTINUED) (A) CURRENT GENERAL EMPLOYEE SHARE PLANS (CONTINUED)

The amounts recognised in the financial statements of the Group and the Company in relation to SESAP during the year were:

Consolidated Santos Ltd 2008 2007 2008 2007 $million $million $million $million Employee expenses 1.4 1.3 1.4 1.3 Issued ordinary share capital 1.4 1.3 1.4 1.3

At 31 December 2008, the total number of shares acquired under the Plan since its commencement was 2,307,190.

SESPP The general employee offer under SESPP is open to all employees (other than a casual employee or Director of the Company) determined by the Board who are continuing employees at the date of the offer. However, employees who are not resident in Australia at the time of an offer under the Plan and those who have participated in the Executive Long-term Incentive Programme during the year will not be eligible to participate in that offer unless the Board otherwise decides.

Under the Plan, eligible employees may be offered the opportunity to subscribe for or acquire fully paid ordinary shares in the capital of the Company at a discount to market price, subject to restrictions, including on disposal, determined by the Board (which has been a period of one year for issues so far). The subscription or acquisition price is Market Value (being the weighted average sale price of the Company’s ordinary shares on the ASX during the one-week period up to and including the offer date) less any discount determined by the Board (5% for issues so far). Under the Plan, at the discretion of the Board, financial assistance may be provided to employees to subscribe for and acquire shares under the Plan. The 5% discount constitutes financial assistance for these purposes. Participants are entitled to vote, receive dividends and participate in bonus and rights issues while the shares are restricted.

On 21 November 2008, the Company issued 300,100 ordinary shares to 397 eligible employees at a subscription price of $10.91 per share under the Plan, being a 5% discount on the Market Value of $11.48. The total market price of those shares on the issue date was $3,766,255, based on the market price at the close of trade on the date of issue $12.55. The total amount received from employees for those shares was $3,274,091.

A summary of share movements in the SESPP are set out below:

Opening Granted Restriction ceased Closing balance during the year during the year balance Fair value Grant date per share Number Number $ Number Date Number 2008 20 November 2007 400 – – 400 20 November 2008 – 21 November 2008 – 300,100 11.48 – – 300,100 400 300,100 400 300,100

2007 17 November 2006 62,900 – – 62,900 17 November 2007 – 20 November 2007 – 400 15.72 – – 400 62,900 400 62,900 400

The fair value per share for shares granted during the year is Market Value (as defined above). The consideration received by the Company per share is Market Value less the discount of 5% referred to above.

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

31. SHARE-BASED PAYMENT PLANS (CONTINUED) (A) CURRENT GENERAL EMPLOYEE SHARE PLANS (CONTINUED)

The amounts recognised in the financial statements of the Group and the Company in relation to the general employee offer under the SESPP during the year were:

Consolidated Santos Ltd 2008 2007 2008 2007 $million $million $million $million Issued ordinary share capital 3.3 – 3.3 –

At 31 December 2008, the total number of shares acquired under the general employee offer of the Plan since its commencement was 1,122,400.

(B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME

The Company’s Executive Long-term Incentive Programme provides for invitations to be extended to eligible executives selected by the Board.

The Programme currently consists of an offer of securities under:

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SESOP has operated since 1997 and the SESPP has been used as a component of executive compensation since 2003.

SARs and options Each SAR and option is a conditional entitlement to a fully paid ordinary share, subject to the satisfaction of performance conditions, on terms and conditions determined by the Board.

SARs and options carry no voting or dividend rights until the performance conditions are satisfied and, in the case of options, when the options are exercised or, in the case of SARs, when the SARs vest.

Chief Executive Officer (“CEO”) and Managing Director Mr D J W Knox was appointed as CEO and Managing Director on 28 July 2008.

On 3 May 2008, the Company made equity grants to its Senior Executives for the long-term incentive (“LTI”) component of their remuneration for 2008. Mr Knox participated in these grants in his capacity as Acting Chief Executive Officer. The grants comprised:

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The key terms of the Performance Award and Deferred Award are set out in the Eligible Senior Executives section below.

Upon his formal appointment as CEO, Mr Knox received a further grant of equity awards (“CEO Performance Award”) to supplement the grants already made to him in his Senior Executive capacity.

The grants made to Mr Knox in 2008 constitute his full LTI entitlement for the 2008, 2009 and 2010 financial years.

All LTI awards were granted, at Mr Knox’s election, as either Share Acquisition Rights (“SARs”) (under SESPP) or options (under SESOP).

SARs and options were granted at no cost to the CEO, with the number of SARs awarded being determined by dividing the amount of the award by the volume weighted average price of the Company’s shares over the week up to and including the award date. The number of options awarded is of equivalent value calculated by an independent expert based on an acceptable valuation method.

The CEO Performance Award operates on the same terms as the performance-based LTI granted to other Senior Executives described below, that is, it is subject to performance hurdles based on the Company’s Total Shareholder Return (“TSR”) relative to the ASX 100 over a three-year performance period. The Board believes the chosen performance hurdles effectively align the CEO’s interests with that of the Company’s shareholders, as TSR is a fair measure of shareholder returns and the ASX 100 represents the companies in which most of the Company’s shareholders could invest as an alternative to Santos.

118 Santos Annual Report 2008

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31. SHARE-BASED PAYMENT PLANS (CONTINUED) (B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME (CONTINUED)

As the CEO Performance Award forms part of the CEO’s remuneration for each of the 2008, 2009 and 2010 financial years, it is divided into three tranches as follows:

Tranche 1: Tested over the period from 1 January 2008 to 31 December 2010; Tranche 2: Tested over the period from 1 January 2009 to 31 December 2011; Tranche 3: Tested over the period from 1 January 2010 to 31 December 2012.

The following numbers of SARs and options were granted to the CEO in 2008:

SARs Options Performance Award (F1) – 64,992 Deferred Award (F2) – 21,837 CEO Performance Award: Tranche 1 (F3) 35,973 94,193 Tranche 2 (F4) 50,403 131,976 Tranche 3 (F5) 50,403 131,976 Total 136,779 444,974

Depending on Santos’ relative TSR over the applicable performance period, each tranche of the CEO Performance Award will vest in accordance with the following schedule:

TSR percentile ranking % of grant vesting < 50th percentile 0% = 50th percentile 37.5% 51st to 75th percentile 39% to 75% 76th to 100th percentile 76% to 100%

There is no re-testing of the performance conditions. SARs or options which remain unvested following testing of the performance condition will lapse.

Upon vesting of SARs, ordinary shares in Santos will automatically be allocated to Mr Knox. These shares will be subject to restrictions until the earlier of 10 years from the grant date, cessation of employment, or the date at which the Board approves, at Mr Knox’s request, the removal of the restrictions. Options may be exercised at any time between the vesting date and the expiry date (27 July 2018), subject to payment of the exercise price of $17.36 per option (being the volume weighted average price in the week up to and including the grant date).

During the financial year, the Company granted 444,974 options over unissued shares to the CEO as set out below:

2008 2007 Weighted Weighted average average exercise exercise price price $ Number $ Number Outstanding at the beginning of the year – – – – Granted during the year 16.98 444,974 – – Outstanding at the end of the year 16.98 444,974 – –

Exercisable at the end of the year – – – –

The options outstanding at 31 December 2008 have an exercise price in the range of $15.39 to $17.36, and a weighted average contractual life of ten years.

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

31. SHARE-BASED PAYMENT PLANS (CONTINUED) (B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME (CONTINUED)

During the year no options were exercised (2007: nil).

The fair value of shares issued as a result of exercising the options or vesting of SARs during the reporting period at their issue date is the market price of shares of the Company on the ASX as at close of trading.

The fair value of services received in return for share options granted is measured by reference to the fair value of share options granted. The estimate of the fair value of the services received is measured based on the Monte Carlo simulation method. The contractual life of the option is used as an input into this model. Expectations of early exercise are incorporated into the models.

2008 2007 Performance Deferred Award Award CEO Performance Awards Option grant F1 F2 F3 F4 F5 Fair value at grant date ($) 5.25 7.30 5.77 4.22 4.29 – Share price on grant date ($) 17.71 17.71 17.40 17.40 17.40 – Exercise price ($) 15.39 15.39 17.36 17.36 17.36 – Expected volatility (weighted average, % pa) 30.7 30.7 30.9 30.9 30.9 – Option life (weighted average) 10 years 10 years 10 years 10 years 10 years – Expected dividends (% pa) 2.3 2.3 2.3 2.3 2.3 – Risk-free interest rate (based on Australian government bond yields) (% pa) 6.29 6.29 6.05 6.05 6.05 –

During the financial year, the Company granted 136,779 SARs to the CEO as set out below. Shares allocated on vesting of SARs will be subject to further restrictions on dealing for a maximum of ten years after the original grant date. No amount is payable on grant or vesting of the SARs.

Number of SARs 2008 2007 Outstanding at the beginning of the year – – Granted during the year 136,779 – Outstanding at the end of the year 136,779 –

Exercisable at the end of the year – –

The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share rights), adjusted for any expected changes to future volatility due to publicly available information.

2008 2007 CEO Performance Award SARs grant F3 F4 F5 Fair value at grant date ($) 13.82 8.60 8.41 – Share price on grant date ($) 17.40 17.40 17.40 – Exercise price ($) – – – – Expected volatility (weighted average, % pa) 30.9 30.9 30.9 – Right life (weighted average) 10 years 10 years 10 years – Expected dividends (% pa) 2.3 2.3 2.3 – Risk-free interest rate (based on Australian government bond yields) (% pa) 6.05 6.05 6.05 –

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31. SHARE-BASED PAYMENT PLANS (CONTINUED) (B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME (CONTINUED)

Former CEO Mr J C Ellice-Flint retired on 25 March 2008. Consistent with the terms of his service agreement, 2,312,500 of Mr Ellice-Flint’s options which had not previously vested, were vested and became exercisable upon cessation of his employment.

Each option entitles Mr Ellice-Flint to acquire one fully paid ordinary share in the Company at a predetermined price, subject to satisfaction of vesting conditions. The grant size is determined by reference to the median grant size given to executives in similar roles in comparable companies.

No options have been granted to Mr Ellice-Flint since 2006.

At the 2006 AGM, shareholder approval was given for the grant of three tranches of options to Mr Ellice-Flint as follows:

Tranche Number of options Performance period 1 500,000 4 May 2006 – 26 August 2007 2 1,000,000 4 May 2006 – 26 August 2008 3 1,000,000 4 May 2006 – 26 August 2009

At 31 December 2008, the 2,500,000 options are on issue, and are exercisable. The exercise price for the options granted is $11.36, being the volume weighted average price in the ten days up to and including 9 March 2006 as approved by shareholders on 4 May 2006. The options have a contractual life of ten years.

Eligible senior executives – SARs and options During 2008, the Company made equity grants to its Senior Executives as the LTI component of their remuneration for 2008. The grants comprised:

For the Performance Award, an additional 50% of the award was added to the standard grant for Relative TSR performance above the 75th percentile, up to the 100th percentile of the comparator group. Consistent with its remuneration philosophy, the Board believes it is appropriate to provide executives with an additional incentive to strive for exceptional performance, recognising that executives will only benefit from the additional 50% where Santos achieves a ranking in the top quartile of its comparator group. Executives will only receive the full benefit of this additional component where Santos outperforms every other company in the comparator group in delivering superior returns to shareholders.

Both the Performance Award and the Deferred Award were delivered, at the executive’s election, in the form of either SARs (under the SESPP) or options (under the SESOP).

SARs and options were granted at no cost to the executives with the number of SARs awarded being determined by dividing the amount of the award by the volume weighted average price of the Company’s shares over the week up to and including the award date. The number of options awarded is of equivalent value calculated by an independent expert based on an acceptable valuation method.

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

31. SHARE-BASED PAYMENT PLANS (CONTINUED) (B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME (CONTINUED)

Vesting details of the Performance Award and the Deferred Award are summarised below:

Performance Award Vesting period 1 January 2008 to 31 December 2010. Vesting condition Vesting of the Performance Award is based on relative TSR against ASX 100 companies as at 1 January 2008. Vesting schedule Relative TSR condition Santos TSR percentile ranking % of grant vesting < 50th percentile 0% = 50th percentile 50% 51st to 75th percentile 52% to 100% 76th to 100th percentile 102% to 150% Exercise price $15.39 for options, being the volume weighted average price in the week up to and including the grant date of 3 May 2008. SARs have no exercise price. Expiry/lapse Upon cessation of employment, SARs which have not already vested and options which are not exercisable will, in general, lapse and be forfeited. There is no re-testing of the performance conditions if they are not satisfied.

Deferred Award Vesting period 3 May 2008 to 2 May 2011. Vesting condition Vesting of the Deferred Award is based on continuous service to 2 May 2011, or three years from the grant date. Vesting schedule 0% if the continuous service condition is not met. 100% if the continuous service condition is met. Exercise price As for Performance Award. Expiry/lapse As for Performance Award.

Upon cessation of employment, SARs which have not already vested and options which are not exercisable will, in general, lapse and be forfeited. However, if cessation occurs due to death, disability or redundancy, or in special circumstances approved by the Board, then a proportion of the SARs and options may vest and become exercisable.

Where there is a change in control, the Board may determine whether, and the extent to which, SARs and options may vest.

During the financial year, the Company granted 880,533 options over unissued shares as set out below:

2008 2007 Weighted Weighted average average exercise exercise price price $ Number $ Number Outstanding at the beginning of the year 10.27 2,078,728 8.76 2,448,826 Granted during the year 15.39 880,533 13.82 421,200 Forfeited during the year 9.71 (460,385) 8.75 (335,900) Exercised during the year 8.41 (303,583) 6.57 (455,398) Outstanding at the end of the year 12.70 2,195,293 10.27 2,078,728

Exercisable at the end of the year 8.14 232,300 7.23 180,128

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31. SHARE-BASED PAYMENT PLANS (CONTINUED) (B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME (CONTINUED)

The options outstanding at 31 December 2008 have an exercise price in the range of $6.95 to $15.39, and a weighted average contractual life of 9.88 years.

During the year 303,583 options were exercised (2007: 455,398). The weighted average share price at the dates of exercise was $17.81 (2007: $13.96).

The amounts recognised in the financial statements of the Group and the Company in relation to executive share options exercised during the financial year were:

Consolidated Santos Ltd 2008 2007 2008 2007 $million $million $million $million Issued ordinary share capital 2.5 3.0 2.5 3.0

2008 2007 Performance Deferred Performance Award Award Award Growth Award Option grant F1 F2 E1 GA1 GA2 Fair value at grant date ($) 5.25 7.30 3.32 3.87 1.97 Share price on grant date ($) 17.71 17.71 13.94 13.94 13.25 Exercise price ($) 15.39 15.39 14.14 14.14 12.81 Expected volatility (weighted average, % pa) 30.7 30.7 24.2 24.2 23.9 Option life (weighted average) 10 years 10 years 10 years 10 years 10 years Expected dividends (% pa) 2.3 2.3 3.5 3.5 3.5 Risk-free interest rate (based on government bond yields): Australia (% pa) 6.29 6.29 6.26 6.26 6.26 United States (% pa) n/a n/a 5.00 n/a n/a United Kingdom (% pa) n/a n/a 5.36 n/a n/a

During the financial year, the Company granted 241,668 SARs to eligible senior executives as set out below. Shares allocated on vesting of SARs will be subject to further restrictions on dealing for a maximum of ten years after the original grant date. No amount is payable on grant or vesting of the SARs.

Number of SARs 2008 2007 Outstanding at the beginning of the year 1,365,800 758,900 Granted during the year 241,668 880,000 Forfeited during the year (236,426) (273,100) Vested during the year (141,330) – Outstanding at the end of the year 1,229,712 1,365,800

Exercisable at the end of the year – –

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

31. SHARE-BASED PAYMENT PLANS (CONTINUED) (B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME (CONTINUED)

2008 2007 Performance Deferred Growth Award Award Performance Award Award SARs grant F1 F2 E1 E2 GA1 Fair value at grant date ($) 11.23 16.73 9.95 9.16 12.78 Share price on grant date ($) 17.71 17.71 13.94 13.25 13.94 Exercise price ($) – – – – – Expected volatility (weighted average, % pa) 30.7 30.7 24.2 23.9 24.2 Right life (weighted average) 10 years 10 years 10 years 10 years 10 years Expected dividends (% pa) 2.3 2.3 3.5 3.5 3.5 Risk-free interest rate (based on government bond yields): Australia (% pa) 6.29 6.29 6.26 6.26 6.26 United States (% pa) n/a n/a 5.00 4.55 n/a United Kingdom (% pa) n/a n/a 5.36 5.75 n/a

The amounts recognised in the income statements of the Group and the Company during the financial year in relation to equity grants issued under the Executive Long-term Incentive Programme were:

Consolidated Santos Ltd 2008 2007 2008 2007 $million $million $million $million Employee expenses: CEO share options 0.3 – 0.3 – CEO SARs 0.3 – 0.3 – Former CEO share options 1.7 1.9 1.7 1.9 Executive share options 1.7 0.7 1.7 0.7 Executive SARs 4.3 2.6 4.3 2.6 8.3 5.2 8.3 5.2

Eligible senior executives – Shares No shares have been issued under the executive long-term incentive component of the SESPP since 2004. At 31 December 2008, the total number of shares acquired under the executive long-term incentive component of the Plan since its commencement was 220,912.

The shares allocated pursuant to the SESPP were allotted to a trustee at no cost to participants, to be held on their behalf. The allocation price is Market Value (as defined below) and the trustee was funded by the Company to subscribe for the shares.

In general the shares were restricted for a period of one year from the date of allotment. If a participating executive ceased employment during this period, the Board in its discretion could determine that a lesser restriction on transfer and dealing applied, having regard to the circumstances of the cessation. The shares can remain on trust for up to ten years from the date of allotment, during which time the shares are subject to forfeiture if participants act fraudulently or dishonestly or in breach of their obligations to any Group company. Participants are entitled to instruct the trustee as to the exercise of voting rights, receive dividends and participate in bonus and rights issues while the shares are held on trust.

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31. SHARE-BASED PAYMENT PLANS (CONTINUED) (C) LEGACY PLAN – SANTOS EXECUTIVE SHARE PLAN

The Santos Executive Share Plan operated between 1987 and 1997, when it was discontinued. Under the terms of the Plan, shares were issued as partly paid to one cent. While partly paid, the Plan shares are not transferable, carry no voting right and no entitlement to dividend but are entitled to participate in any bonus or rights issue. After a “vesting” period, calls could be made for the balance of the issue price of the shares, which varied between $2.00 and the market price of the shares on the date of the call being made. Shares were issued principally on: 22 December 1987; 7 February and 5 December 1989; and 24 December 1990.

At the beginning of the financial year there were 88,000 Plan shares on issue. During the financial year no Plan shares were fully paid and no aggregate proceeds were received by the Company. As at 31 December 2008 there were 88,000 Plan shares outstanding.

(D) NON-EXECUTIVE DIRECTOR (“NED”) SHARE PLAN

In accordance with shareholder approval given at the 2007 Annual General Meeting, the Non-executive Director (“NED”) Share Plan was introduced in July 2007. Participation in the NED Share Plan is voluntary and all present and future Non-executive Directors are eligible to participate. Under the NED Share Plan, Directors elect to sacrifice all or part of their pre-tax fees in return for an allocation of fully paid ordinary shares of equivalent value. The NED Share Plan therefore does not involve any additional remuneration for participating Directors.

In 2008, 33,356 shares (2007: 14,847) were allocated to participating Directors as follows:

Number Price Date of shares per share 4 April 2008 7,376 14.8361 3 July 2008 6,590 20.7745 7 October 2008 8,566 17.8867 30 December 2008 10,824 14.1676

The amounts recognised in the financial statements of the Group and the Company in relation to the NED Share Plan during the year were:

Consolidated Santos Ltd 2008 2007 2008 2007 $million $million $million $million Employee expenses 0.5 0.2 0.5 0.2 Issued ordinary share capital 0.5 0.2 0.5 0.2

32. KEY MANAGEMENT PERSONNEL DISCLOSURES (A) KEY MANAGEMENT PERSONNEL COMPENSATION

Short-term employee benefits 10.4 10.7 10.4 10.7 Post-employment benefits 1.7 1.8 1.7 1.8 Other long-term benefits 0.2 0.1 0.2 0.1 Termination benefits 2.7 – 2.7 – Share-based payment 4.6 3.3 4.6 3.3 19.6 15.9 19.6 15.9

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER Vested Vested and Vested but not Vested the year the year end of the year end of the at end of at exercisable at exercisable Balance year the 6

Other Other at end of changes changes 5 Options Options vested vested 1,2,3,4

exercised/rights Granted Granted l]\ÛgfÛ ÛAmdqÛ Û`Yn]ÛYfÛ]phajYlagfÛ\Yl]Ûg^ÛÛAmdqÛ~ ÛYf\Ûn]klÛoal`ÛDjÛ;ÛAÛNÛBfgpÛ^gjÛfgÛ[gfka\]jYlagfÛ8lÛl`]Û\Yl]Ûg^Û_jYflÛl`]ÛJ8IkÛ_jYfl]\Û`Yn]ÛYÛ^YajÛnYdm]Û – – – – – – – – – – – – – – – – – – – – – 27,000 – – – 27,000 – – – – 27,000 – – – 27,200 – 27,000 – 27,200 71,500 71,500 – (9,800) (9,800) 51,900 – – – 62,100 18,115 (8,850) (8,850) 62,515 62,515 (8,850) (8,850) 18,115 62,100 – – – 24,600 – – – 24,600 – – – – 24,600 – 24,600 50,000 41,678 – – 91,678 – – – 91,678 – 41,678 – – 108,682 50,000 44,982 – 50,000 53,667 63,700 – – – 186,779 – (25,000) 78,667 25,000 25,000 – 136,779 – 50,000 38,000 17,668 36,600 (4,500) (4,500) 46,668 83,600 23,220 (11,800) (11,800) 83,220 – (4,800) – (4,800) 27,000 – – – – – – – – 105,244 105,244 45,537 (12,744) 123,637 (14,400) 14,400 14,400 – 100,000 444,974 – – 544,974 – – – 544,974 – 444,974 100,000 43,017 109,400 29,000 29,000 138,017 (14,400) – – 420,600 195,782 (39,750) 536,882 (39,750) – – – beginning Balance at of the year of the 2,978,344 2,978,344 673,855 (2,553,800) (12,744) 1,085,655 2,568,400 2,568,400 – 2,500,000 – – (2,500,000) – 2,500,000 2,500,000 – `]Û[mjj]flÛq]YjÛo]j]Û_jYf are met, all of the options are exercisable no earlier than 1 Januaryare met, all of the options 2011. exercisable no earlier than 1 January 2011. exercisable no earlier than 1 January 2012. exercisable no earlier than 1 January 2013.

_jYfl]\Û`Yn]ÛYÛ^YajÛnYdm]Ûg^ÛÛh]jÛghlagfÛ¨~~Ûghlagfk©ÛYf\ÛÛh]jÛghlagfÛ¨ Ûghlagfk©ÛK`]ÛghlagfkÛo]j]Ûhjgna\]\ÛYlÛfgÛ[gklÛlgÛl`]Ûj][aha]flkÛGjgna\af_Ûn]klaf_Û[gf\alagfkÛYj]Ûe]lÛl`]ÛghlagfkÛYj]Û]p]j[akYZd]Û no earlier than 1 January 2011. Ûg^Ûl`]ÛJ8IkÛ_jYfl]\Û`Yn]ÛYÛ^YajÛnYdm]Ûg^Û~~Ûh]jÛJ8IÛYf\Û~Ûg^Ûl`]ÛJ8IkÛ_jYfl]\Û`Yn]ÛYÛ^YajÛnYdm]Ûg^Û~Ûh]jÛJ8I g^Û~Ûh]jÛJ8IÛ¨ÛJ8Ik©Û Û¨ÛJ8Ik©ÛYf\Û Û¨ÛJ8Ik© with the Company. personnel disclosure when they terminate management employment holding from the key equity of an employee’s removal person, including their related parties, is as follows: Total Total ~Û ÛNal`Ûl`]Û]p[]hlagfÛg^ÛDjÛ;ÛAÛNÛBfgpÛghlagfkÛ_jYfl]\ÛlgÛ]p][mlan]kÛafÛl`]Û[mjj]flÛq]YjÛo]j]Û_jYfl]\ÛgfÛÛDYqÛ Û`Yn]ÛYfÛ]phajYlagfÛ\Yl]Ûg^ÛÛDYqÛ~ ÛYf\ÛYfÛ]p]j[ak]Ûhja[]Ûg^Û~Û8lÛl`]Û\Yl]Ûg^Û_jYflÛl`]ÛghlagfkÛ 2008 32. KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) KEY MANAGEMENT 32. (B) PERSONNEL EQUITY HOLDINGS OF KEY MANAGEMENT Options and rights holdings duringThe movement the reporting period in the number of rights indirectly or beneficially, and options ordinary over by each key management shares of the held directly, Company Options Directors Ellice-Flint, John Charles Executives John Wissler David Knox, Anderson, John Hugh Baulderstone, James Leslie John Trevor Brown, Eames, Martyn Edward James Maxwell Kennett, Roger Macfarlane, Mark Stuart Peter Christopher Wasow, Wilkinson, Richard John Rights Directors Executives John Wissler David Knox, Anderson, John Hugh Baulderstone, James Leslie John Trevor Brown, Eames, Martyn Edward James Maxwell Kennett, Roger Macfarlane, Mark Stuart Peter Christopher Wasow, Wilkinson, Richard John Û 2 as follows: in the current granted to Mr D J W Knox year were granted Options ÛÛ ¨a©Û Û

126 Santos Annual Report 2008

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– (46,369) (29,000) 109,400 –

39,500 32,000 – – 71,500 – – – 71,500 32,000 – 39,500 50,000 – – – 50,000 – – 50,000 – – 50,000 184,769 184,769 beginning Balance at of the year of the Granted James James Leslie – 50,000 – – 50,000 – – 50,000 – 50,000 – – Leslie – – 24,600 – 24,600 – Leslie John – – – – – – – – – – John – – 62,100 (17,700) 28,200 – 51,600 John Wissler – 50,000 – – 50,000 – – 50,000 – 50,000 – – Wissler Wissler – 100,000 – – 100,000 – – – 100,000 – 100,000 – Wissler Stuart 19,200 27,000 – (9,600) 36,600 – – 36,600 – (9,600) – 27,000 19,200 Stuart Stuart 63,700 – – – 63,700 – – 63,700 – – 63,700 Stuart Charles 2,500,000 – – – 2,500,000 125,000 125,000 – 125,000 125,000 2,500,000 – 2,500,000 Charles Terence 52,000 39,000 – (26,000) 65,000 – – 65,000 – (26,000) 39,000 – 52,000 Terence Terence 93,200 – – – 93,200 – – 93,200 – – 93,200 Terence Hugh – 27,000 – – 27,000 – – – 27,000 – 27,000 – Hugh Maxwell 28,800 18,200 – (9,000) 38,000 – – 38,000 – (9,000) – 18,200 28,800 Maxwell Maxwell – – – – – – – – – – Maxwell Edward Edward James James John – 27,200 – – 27,200 – – – 27,200 – 27,200 John – Christopher 70,200 37,000 – (23,600) 83,600 – – 83,600 – (23,600) – 37,000 70,200 Christopher Christopher – – – – – – – – – – Christopher John John Mark Mark John Richard Richard John Roger Roger Roger Roger Peter Peter 261,300 310,200 – (85,900) 485,600 – – 485,600 – (85,900) – 310,200 261,300 Trevor Trevor Martyn Martyn Jonathon Jonathon David David David David

3,071,544 152,244 152,244 150,000 3,025,713 (46,369) (57,800) – per option. The options were provided at no cost to the recipients. Providing vesting conditions are met, the options are exercisable no earlier than 1 January are exercisable conditions are met, the options vesting Providing 2010. at no cost to the recipients. provided were The options per option. 2010. earlier than 3 September are exercisable no conditions are met, all of the options vesting Providing at no cost to Mr D J W Knox. provided were options `Yn]ÛYÛ^YajÛnYdm]Ûg^ÛÛh]jÛJ8IÛYf\Û~~Ûg^Ûl`]ÛJ8IkÛ_jYfl]\Û`Yn]ÛYÛ^YajÛnYdm]Ûg^Û~ Ûh]jÛJ8I SAR. with the Company. personnel disclosure when they terminate management employment holding from the key equity of an employee’s removal Eames, Kennett, Knox, Macfarlane, Wasow, Wilkinson, Young, Ellice-Flint, Baulderstone, Eames, Total Anderson, Baulderstone, Brown, Total ~Û ÛNal`Ûl`]Û]p[]hlagfÛg^ÛDjÛ;ÛAÛNÛBfgpÛghlagfkÛo]j]Û_jYfl]\ÛlgÛ]p][mlan]kÛgfÛ~ÛAmdqÛÛ`Yn]ÛYfÛ]phajYlagfÛ\Yl]Ûg^Û~ÛAmdqÛ~ÛYf\ÛYfÛ]p]j[ak]Ûhja[]Ûg^Û~~Û8lÛl`]Û\Yl]Ûg^Û_jYflÛl`]ÛghlagfkÛ_jYfl]\Û`Yn]ÛYÛ^YajÛnYdm]Ûg^ÛÛ 6 on the expiry may include the lapse of options Other changes of the exercise period, entitlements due to performance reductions in SARs being met, forfeiture conditions not when service of SARs met, or the conditions are not Kennett, Knox, Macfarlane, Wilkinson, Young, Wasow, Wasow,

32. KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) KEY MANAGEMENT 32. (B) PERSONNEL (CONTINUED) EQUITY HOLDINGS OF KEY MANAGEMENT 2007 Executives Anderson, John Hugh John Brown, Trevor 134,044 Rights Executives The per option. of $1.97 a fair value have granted all of the options the date of grant, At and an exercise price of $12.81. 2 2017 an expiration date of 3 September have 2007, on 3 September to Mr D J W Knox granted were Options granted of the SARs 130,100 the date of grant, with the recipient forAt no consideration. and vest 3 an expiration2017, date of 1 July have 2007, on 1 July to executives granted were SARs of Mr D J W Knox, With the exception Û Û ÛJ8IkÛo]j]Û_jYfl]\ÛlgÛDjÛ;ÛAÛNÛBfgpÛgfÛÛJ]hl]eZ]jÛÛ`Yn]ÛYfÛ]phajYlagfÛ\Yl]Ûg^ÛÛJ]hl]eZ]jÛ~ÛYf\Ûn]klÛoal`ÛDjÛ;ÛAÛNÛBfgpÛ^gjÛfgÛ[gfka\]jYlagfÛ8lÛl`]Û\Yl]Ûg^Û_jYflÛYddÛg^Ûl`]ÛJ8IkÛ_jYfl]\Û`Yn]ÛYÛ^YajÛnYdm]Ûg^Û~Ûh]jÛ Û Û Û

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER year the year end of the 1 Balance held Balance Other Other at end of at nominally

on Received Received – – – – – 7,440 7,440 7,440 – 7,440 – – – – – – – – – – – – – 9,800 – – – – – – – 9,800 – – 165 – – – – – 165 165 – – – 165 195 – – – – – 195 195 – – – 195 608 – – – – 1,149 1,757 – 1,757 1,149 – – 608 – – (225) – – 225 360 – (225) – – 585 4,145 – – – – 2,723 6,868 – 2,723 – – 4,145 6,243 6,243 – 12,744 – – 19,018 31 – 3,204 – – 4,800 – – 8,004 – – 4,800 – 3,204 27,934 – – 11,800 – – 39,734 39,734 – – 11,800 – 27,934 21,441 – – 8,850 – – 30,291 30,291 – – 8,850 – 21,441 49,210 – – – – 5,154 54,364 – 5,154 – – 49,210 10,639 – – – – 9,496 20,135 20,135 – 9,496 – – 10,639 35,207 – – – – 9,965 45,172 – 45,172 9,965 – – 35,207 59,795 – – 4,500 – – 64,295 – – 4,500 – 59,795 246,369 – – – – – 246,369 246,369 – – – 246,369 4,578,139 4,578,139 – 12,744 39,750 – (4,077,386) 553,247 – beginning as Granted exercise on vesting 4,113,344 – – – – (4,113,344) – – (4,113,344) – – 4,113,344 Balance at Balance of the year of the compensation of options of rights Redeemed changes

Total Total parties, is as follows: 1 include: Other changes Directors Ordinary paid – fully shares Borda, Kenneth Charles Coates, Peter Roland Dean, Kenneth Alfred Ellice-Flint, John Charles Alexander Franklin, Roy Gerlach, Stephen Harding, Richard Michael John Wissler David Knox, Executives Sloan, Judith Anderson, John Hugh Baulderstone, James Leslie John Trevor Brown, Eames, Martyn Edward James Maxwell Kennett, Roger Macfarlane, Mark Stuart Peter Christopher Wasow, Wilkinson, Richard John convertible Redeemable Directors shares preference Ellice-Flint, John Charles Executives Sloan, Judith Maxwell Kennett, Roger 32. KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) KEY MANAGEMENT 32. (B) PERSONNEL (CONTINUED) EQUITY HOLDINGS OF KEY MANAGEMENT holdings Share duringThe movement the reporting period indirectly or beneficially, each key management person, including their by of the in the held directly, related Company number of shares 2008 Name Û (i) Û Plan (“DRP”) share allocations. Director (“NED”) Share Plan and Dividend Reinvestment Non-executive ¨aa©Û ÛI]egnYdÛg^ÛDjÛAÛ:Û

128 Santos Annual Report 2008

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– – – – – 46,369 on Received Received – – – 200,000 beginning as Granted exercise on vesting Balance at of the year of the compensation of options of rights Redeemed changes James – – – – – – – – – James Leslie – – – – – – – – – Leslie John 21,441 – – – – – 21,441 – 21,441 – – – 21,441 John Wissler – – – – – – – – – Wissler Stuart 3,204 – – – – – 3,204 – – – – 3,204 Stuart Charles 4,037,940 – – – – 75,404 4,113,344 – 4,113,344 75,404 – – 4,037,940 Charles 225 – – – – 225 Charles Terence 280,183 – – – – (100,000) 180,183 – 180,183 (100,000) – – 280,183 Terence Michael – – – – – 608 608 – 608 – – – Michael Hugh 6,175 – – – – 68 6,243 – 6,243 68 – – 6,175 Hugh Maxwell 59,795 – – – – – 59,795 – – – – 59,795 Maxwell – 165 – – – 165 Maxwell Alfred 3,000 – – – – 1,145 4,145 – 4,145 1,145 – – 3,000 Alfred Edward James Christopher 27,934 – – – – – 27,934 – 27,934 – – – 27,934 Christopher Alexander – – – – – – – – – Alexander John Mark John John Richard John Roy Roy Richard Roger Roger Roger Stephen 44,880 – – – – 4,330 49,210 – 49,210 4,330 – – 44,880 Stephen Peter 4,689,552 – 46,369 – – 22,401 4,758,322 – 4,758,322 22,401 – 46,369 – – 4,689,552 585 – – – – 585 Martyn Jonathon Judith 5,000 – – – – 5,639 10,639 – 10,639 5,639 Judith – – 5,000 Judith – 195 – – – 195 Kenneth David David

Young, Young, Wilkinson, Macfarlane, Wasow, Dean, Ellice-Flint, Franklin, Gerlach, Harding, Sloan, Anderson, Baulderstone, Eames, Kennett, Knox, Total Ellice-Flint, Sloan, Kennett, Total including their related parties. 1 Plan (“DRP”) share allocations. Director (“NED”) Share Plan and Dividend Reinvestment include Non-executive Other changes

Directors Ordinary paid – fully shares Borda, Kenneth Charles Executives John Brown, Trevor convertible Redeemable Directors shares preference Executives 32. KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) KEY MANAGEMENT 32. (B) PERSONNEL (CONTINUED) EQUITY HOLDINGS OF KEY MANAGEMENT 2007 Name PERSONNEL KEY MANAGEMENT TO LOANS (C) by the Group or any of its subsidiaries been no loans made, guaranteedor indirectly, There have or secured, directly time throughout at any the year with any key management person,

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

33. RELATED PARTIES Identity of related parties Santos Ltd and its controlled entities engage in a variety of related party transactions in the ordinary course of business. These transactions are conducted on normal terms and conditions.

Details of related party transactions and amounts are set out in:

Note 6 as to interest charged to/by controlled entities; Note 10 as to tax related balances and other amounts owing by controlled entities and other related entities; Notes 20 and 21 as to amounts owing to controlled entities; Note 21 as to guarantees by Santos Ltd of the financing facilities of controlled entities; Note 22 as to Non-executive Directors’ retirement benefits; Notes 18 and 26 as to investments in controlled entities; Note 28 as to interests in joint ventures; and Note 32 as to disclosures relating to key management personnel.

Consolidated Santos Ltd 2008 2007 2008 2007 34. REMUNERATION OF AUDITORS $000 $000 $000 $000 The auditor of Santos Ltd is Ernst & Young. Amounts received or due and receivable by Ernst & Young (Australia): An audit or review of the financial report of the entity and any other entity in the consolidated group 1,061 1,181 813 827 Other assurance services 368 244 292 183 Other services: Taxation 5 – 4 – Other 38 – 38 – 1,472 1,425 1,147 1,010

Amounts received or due and receivable by overseas related practices of Ernst & Young (Australia) for: External audit 122 – – – Assurance 20 – – – Taxation 33 15 – – Other services 4 – – – 179 15 – –

Amounts received or due and receivable by overseas non-Ernst & Young audit firm for: Audit of financial reports for subsidiaries incorporated in Papua New Guinea 62 – – –

Amounts received or due and receivable by related Australian practice of non-Ernst & Young audit firm for: Assurance 60 – 42 – Taxation 297 – 69 – Other services 190 – 133 – 547 – 244 –

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Consolidated Santos Ltd 2008 2007 2008 2007 35. COMMITMENTS FOR EXPENDITURE $million $million $million $million The Group has the following commitments for expenditure:

(A) CAPITAL COMMITMENTS

Capital expenditure contracted for at balance date for which no amounts have been provided in the financial statements, payable: Not later than one year 330.4 324.2 109.1 199.1 Later than one year but not later than five years 150.2 89.0 22.8 53.8 Later than five years 3.7 – – – 484.3 413.2 131.9 252.9

Santos Ltd has guaranteed the capital commitments of certain controlled entities (refer note 36 for further details).

(B) MINIMUM EXPLORATION COMMITMENTS

Minimum exploration commitments for which no amounts have been provided in the financial statements or capital commitments, payable: Not later than one year 269.6 350.1 3.8 46.2 Later than one year but not later than five years 162.2 185.4 9.3 10.6 Later than five years – 29.1 – – 431.8 564.6 13.1 56.8

Non-cancellable operating lease rentals are payable as follows: Not later than one year 94.0 92.2 38.4 38.7 Later than one year but not later than five years 167.3 204.5 67.9 81.1 Later than five years 49.1 52.8 46.0 34.2 310.4 349.5 152.3 154.0

The Group leases floating production, storage and offtake facilities, floating storage offloading facilities and mobile offshore production units under operating leases. The leases typically run for a period of four to six years, and may have an option to renew after that time.

The Group also leases building office space and a warehouse under operating leases. The leases are generally for a period of ten years, with an option to renew the lease after that date. The lease payments typically increase by 5.0% per annum.

During the year ended 31 December 2008 the Group recognised $88.4 million (2007: $59.3 million) as an expense in the income statement in respect of operating leases.

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

Consolidated Santos Ltd 2008 2007 2008 2007 35. COMMITMENTS FOR EXPENDITURE (CONTINUED) $million $million $million $million (D) FINANCE LEASE COMMITMENTS

Finance lease commitments are payable as follows: Not later than one year 0.5 – 0.5 – Later than one year but not later than five years 1.4 – 1.4 – Later than five years 1.3 – 1.3 – Total minimum lease payments 3.2 – 3.2 – Less amounts representing finance charges (1.5) – (1.5) – Present value of minimum lease payments 1.7 – 1.7 –

The Group has finance leases for various items of plant and equipment with a carrying amount of $3.2 million (2007: $nil) for both the Group and the Company. The leases generally have terms of between three to twelve years with no escalation clauses and no option to renew. Title to the assets passes to the Group at the expiration of the relevant lease periods.

(E) COMMITMENT ON REMOVAL OF SHARE CAP

Pursuant to a Deed of Undertaking to the Premier of South Australia dated 16 October 2006 and as a consequence of the enactment of the Santos Caeal]\Û¨;]]\Ûg^ÛLf\]jlYcaf_©Û8[lÛ on 29 November 2007, Santos has agreed to:

Û ÝÛ Û:gflafm]ÛlgÛeYc]ÛhYqe]flkÛmf\]jÛalkÛ]paklaf_ÛJg[aYdÛI]khgfkaZadalqÛYf\Û:geemfalqÛ9]f]âlkÛGjg_jYee]Ûkh][aâ]\ÛafÛl`]Û;]]\ÛlglYddaf_Û $60.0 million over a ten-year period from the date the legislation was enacted. As at 31 December 2008, approximately $52.9 million remains to be paid over the next nine years. Û ÝÛ Û:gflafm]ÛlgÛeYaflYafÛl`]ÛJgml`Û8mkljYdaYfÛ:ggh]jÛ9YkafÛYkk]l¿kÛ?]Y\ÛF^â[]ÛYf\ÛFh]jYlagfYdÛ?]Y\imYjl]jkÛlg_]l`]jÛoal`Ûgl`]jÛjgd]kÛafÛJgml`Û Australia for ten years subsequent to the date the legislation was enacted. At 31 December 2008, if this condition had not been met, the Company would have been liable to pay approximately $90.0 million to the State Government of South Australia.

Santos is required to make these payments only if the State Government of South Australia does not reintroduce a shareholder cap on the Company’s shares or introduce any other restriction on or in respect of the Company’s Board or senior management which have an adverse discriminatory effect in their application to the Company relative to other companies domiciled in South Australia.

Consolidated Santos Ltd 2008 2007 2008 2007 $million $million $million $million (F) REMUNERATION COMMITMENTS

Commitments for the payment of salaries and other remuneration under the long-term employment contracts in existence at the reporting date but not recognised in liabilities, payable:

Not later than one year 6.6 8.2 6.6 8.2

Amounts included as remuneration commitments include commitments arising from the service contracts of Directors and executives referred to in the Remuneration Report of the Directors’ Report that are not recognised as liabilities and are not included in the compensation of key management personnel.

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Consolidated Santos Ltd 2008 2007 2008 2007 36. CONTINGENT LIABILITIES $million $million $million $million The Directors are of the opinion that provisions are not required in respect of these matters, as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement.

Santos Ltd and its controlled entities have the following contingent liabilities arising in respect of: The Group: Performance guarantees 28.7 23.2 10.3 10.2 Actual and possible legal claims and proceedings 17.3 12.1 2.6 2.4 The Group’s share of contingent liabilities of joint venture operations: Performance guarantees 13.0 5.8 2.9 2.9 Litigation and proceedings 4.5 – 1.8 – 63.5 41.1 17.6 15.5

Legal advice in relation to the actual and possible legal claims and proceedings referred to above indicates that on the basis of available information, any liability in respect of these claims is unlikely to exceed $13.7 million on a consolidated basis.

A number of the Australian interests of the Group are located within areas the subject of one or more claims or applications for native title determination. Whatever the outcome of those claims or applications, it is not believed that they will significantly impact the Group’s asset base. Compliance with the “future act” provisions of the Native Title Act 1993 (Cth) can delay the grant of mineral and petroleum tenements and consequently impact generally the timing of exploration, development and production operations. An assessment of the impact upon the timing of particular operations may require consideration and determination of complex legal and factual issues.

Guarantees provided by Santos Ltd for borrowings in respect of controlled entities are disclosed in note 21.

Santos Ltd has provided parent company guarantees in respect of:

(a) the funding and performance obligations of a number of subsidiary companies, relating to:

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(b) a subsidiary company’s obligations to meet distribution charges for gas retail customers.

A subsidiary company has provided a letter of performance guarantee in respect of the performance obligations of its subsidiary company relating to a production sharing contract.

A subsidiary company has provided a letter of comfort in respect of payment obligations of associated entities.

The total expenditure commitment under these transactions and which are the subject of a parent company guarantee is $245.8 million.

Varanus Island incident A pipeline rupture and subsequent fire at Varanus Island on 3 June 2008 damaged gas processing and export facilities. As a result, total production ceased both from the East Spar Joint Venture (processing and exporting gas from the John Brookes gas field) and the Harriet Joint Venture (processing and exporting gas from various Harriet fields). Santos (BOL) Pty Ltd, a controlled entity of Santos Ltd, has a 45% interest in the John Brookes gas field and the East Spar Joint Venture. Partial production by the East Spar Joint Venture recommenced on 6 August 2008, but Santos (BOL) Pty Ltd remains unable to meet the entirety of its firm gas commitments to customers under its various Gas Sales Agreements, and continues to rely on the force majeure provisions of those Agreements. It is too early to provide an estimate of the costs of managing and responding to the incident, or the potential liability (if any) to third party claims under Gas Sales Agreements or otherwise as a result of the incident.

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

36. CONTINGENT LIABILITIES (CONTINUED) Sidoarjo mudflow incident On 11 December 2008, Santos Brantas Pty Ltd (“Santos Brantas”) announced that it had agreed to transfer its 18% minority interest in the Brantas Production Sharing Contract (“Brantas PSC”) in Indonesia to Minarak Labuan Co (L) Ltd (“Minarak”), a company associated with Lapindo Brantas Inc (“Lapindo”) which is the operator and majority owner of the Brantas PSC.

The transfer was approved by BPMIGAS, the relevant regulatory body of the Indonesian government.

The Brantas PSC includes the Banjar-Panji 1 onshore exploration well in Sidoarjo, the site of a major mudflow incident which commenced in May 2006.

Santos Brantas will pay US$22.5 million to Minarak, (US$20.0 million paid at the date of this report) with these funds to be used to support the long-term mud management programme. Santos Brantas and its related parties received a release from each of its former Brantas PSC participants and Minarak. The release covers any past, present or future claims that any of those parties may have against Santos in relation to the Brantas PSC or otherwise in connection with the incident.

The transaction does not remove possible third party claims directly against Santos Brantas. Whilst it is possible that Santos Brantas could be subjected to such claims in the future, it believes it would be able to successfully defend those claims, if ever made.

37. DEED OF CROSS GUARANTEE Pursuant to Class Order 98/1418, the wholly-owned subsidiaries listed below are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of their financial reports.

As a condition of the Class Order the Company and each of the listed subsidiaries (“the Closed Group”) have entered into a Deed of Cross Guarantee. The effect of the Deed is that the Company has guaranteed to pay any deficiency in the event of winding up of any of the subsidiaries under certain provisions of the Corporations Act 2001. The subsidiaries have also given a similar guarantee in the event that the Company is wound up.

The subsidiaries subject to the Deed are:

Alliance Petroleum Australia Pty Ltd Bridge Oil Developments Pty Limited Reef Oil Pty Ltd Santos (BOL) Pty Ltd Santos Darwin LNG Pty Ltd Santos (NARNL Cooper) Pty Ltd (became a party to the Deed on 28 November 2008) Santos Offshore Pty Ltd Santos Petroleum Management Pty Ltd Santos Petroleum Pty Ltd Santos QNT Pty Ltd Santos QNT (No. 1) Pty Ltd Santos QNT (No. 2) Pty Ltd Vamgas Pty Ltd

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Closed Group 2008 2007 37. DEED OF CROSS GUARANTEE (CONTINUED) $million $million The consolidated income statement and balance sheet of the entities that are members of the Closed Group are as follows:

Consolidated income statement Profit before tax 324.0 1,213.5 Income tax expense (154.4) (130.9) Royalty related taxation expense (48.1) (90.6) Profit after tax 121.5 992.0 Retained earnings at the beginning of the year 1,556.3 1,218.9 Adjustment to retained earnings for company added to Deed during the year 130.6 – Adjustment to retained earnings on initial adoption of Interpretation 1003 Australian Petroleum Resource Rent Tax – (164.4) Dividends to shareholders (286.3) (268.6) Share buy-back (245.0) (231.2) Share-based payment transactions 8.3 5.2 Actuarial (loss)/gain on defined benefit plan, net of tax (25.5) 4.4 Retained earnings at the end of the year 1,259.9 1,556.3

Consolidated balance sheet Current assets Cash and cash equivalents 1,422.9 46.6 Trade and other receivables 3,023.3 557.9 Inventories 256.3 215.7 Other 2.7 5.6 Total current assets 4,705.2 825.8 Non-current assets Receivables 30.7 61.5 Exploration and evaluation assets 208.8 169.7 Oil and gas assets 4,172.1 3,725.7 Other land, buildings, plant and equipment 109.7 107.4 Other investments 2,507.7 2,672.8 Deferred tax assets 179.8 8.0 Other – 5.9 Total non-current assets 7,208.8 6,751.0 Total assets 11,914.0 7,576.8 Current liabilities Trade and other payables 757.8 507.6 Deferred income 50.0 11.9 Interest-bearing loans and borrowings 0.6 – Current tax liabilities 623.8 28.7 Provisions 38.4 43.2 Total current liabilities 1,470.6 591.4 Non-current liabilities Deferred income 6.3 8.8 Interest-bearing loans and borrowings 5,560.4 2,294.8 Deferred tax liabilities 370.5 340.0 Provisions 707.0 463.1 Total non-current liabilities 6,642.2 3,106.7 Total liabilities 8,114.8 3,698.1 Net assets 3,799.2 3,878.7

Equity Issued capital 2,530.8 2,331.6 Reserves 8.5 (9.2) Retained earnings 1,259.9 1,556.3 Total equity 3,799.2 3,878.7

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

38. FINANCIAL RISK MANAGEMENT Exposure to foreign currency risk, interest rate risk, commodity price risk, credit risk, and liquidity risk arises in the normal course of the Group’s business. The Group’s overall financial risk management strategy is to seek to ensure that the Group is able to fund its business plans. 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 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”) under policies approved by the Board of Directors. The Board provides written principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk and credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity.

(A) FOREIGN CURRENCY RISK

Foreign exchange risk arises from commercial transactions and recognised assets and liabilities that are denominated in a currency that is not the entity’s functional currency. The risk is measured using cash flow forecasting and Cash Flow at Risk analysis.

The Group is exposed to foreign currency risk principally through the sale of liquid petroleum products denominated in US dollars, US dollar borrowings and US dollar expenditure. In order to economically hedge this foreign currency risk, the Group has from time to time entered into forward foreign exchange, foreign currency swap and foreign currency option contracts.

All US dollar denominated borrowings of AUD functional currency companies (2008: US$1,140.6 million; 2007: US$1,155.8 million) are either designated as a hedge of US dollar denominated investments in foreign operations, or swapped using cross-currency swaps to Australian dollars in order to achieve an economic hedge. As a result, there were no net foreign currency gains or losses arising from translation of US denominated dollar borrowings recognised in the income statements in 2008.

The Group’s risk management policy is to hedge between 0% and 50% of forecasted cash flows in US dollars for the current financial year.

Based on the Group’s net financial assets and liabilities at 31 December 2008, the following table demonstrates the estimated sensitivity to a ±10 cent movement in the US dollar exchange rate (2007: ±10 cents) with all other variables held constant, on post-tax profit and equity:

Consolidated Santos Ltd 2008 2007 2008 2007 $million $million $million $million Impact on post-tax profit: AUD/USD +10 cents (0.6) 10.6 – – AUD/USD –10 cents 0.8 (13.3) – – Impact on equity: AUD/USD +10 cents (0.6) 10.6 – – AUD/USD –10 cents 0.8 (13.3) – –

The above sensitivity should be used with care as the Group’s financial asset and liability profile will not remain constant.

The ±10 cent sensitivity is the Group’s estimate of reasonably possible changes in the US dollar exchange rate over the following financial year, based on recent volatility experienced in the market.

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38. FINANCIAL RISK MANAGEMENT (CONTINUED) (B) MARKET RISK

Cash flow and fair value interest rate risk The Group’s main interest rate risk arises from long-term 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, denominated in Australian dollars and US dollars, have been entered into as fair value hedges of medium-term notes and long-term notes respectively. When transacted, these swaps have maturities ranging from one to 20 years, and align with the maturity of the related notes. At 31 December 2008, the Group had interest rate swaps with a notional contract amount of $1,302.0 million (2007: $1,067.7 million).

The net fair value of swaps at 31 December 2008 was $303.5 million (2007: $67.3 million), comprising assets of $303.5 million and liabilities of $nil. These amounts were recognised as fair value derivatives.

Based on the net debt position as at 31 December 2008, taking into account interest rates swaps, it is estimated that if interest rates changed by +0.25%/–2.0% (2007: ±1%), with all other variables held constant, the estimated impact on post-tax profit and equity would have been:

Consolidated Santos Ltd 2008 2007 2008 2007 $million $million $million $million Impact on post-tax profit: Interest rates +0.25% (2007: +1%) (0.5) (11.6) – – Interest rates –2.0% (2007: –1%) 3.9 11.6 – – Impact on equity: Interest rates +0.25% (2007: +1%) (0.5) (11.6) – – Interest rates –2.0% (2007: –1%) 3.9 11.6 – –

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 should be used with care.

The +0.25%/–2.0% sensitivity is the Group’s estimate of reasonably possible changes in interest rates over the following financial year, based on recent interest rate trends.

Changes in interest rates over the following year may be greater or less than the +0.25%/–2.0% sensitivity employed in the estimates above.

Commodity price risk exposure The Group is exposed to commodity price fluctuations through the sale of petroleum products denominated in US dollars. The Group may enter into commodity crude oil price swap and option contracts to manage its commodity price risk.

At 31 December 2008 the Group has no open oil price swap contracts (2007: nil), and therefore is not exposed to movements in commodity prices on financial instruments. The Group continues to monitor oil price volatility and to assess the need for commodity price hedging.

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

38. FINANCIAL RISK MANAGEMENT (CONTINUED) (C) CREDIT RISK

Credit risk arises from 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, and represents the potential financial loss if counterparties fail to perform as contracted. Management has credit policies in place and the exposure to credit risk is monitored on an ongoing basis. The majority of Santos’ gas contracts are spread across major Australian energy retailers and industrial users. Contracts exist in every mainland state whilst the largest customer accounts for less than 20% of contracted gas.

The Group controls credit risk by setting minimum creditworthiness requirements of counterparties, which for banks and financial institutions is a Standard & Poor’s rating of A or better.

Approved Total Total Exposure Rating counterparties credit limit exposure * range $million $million $million AA, AA– 7 2,437.2 1,669.0 37.2 – 380.9 A+ 5 663.5 542.4 10.3 – 298.3 * Cash deposits plus accrued interest, bank account balances and the mark-to-market gain and percentage of notional value weighted by term on derivatives.

If customers are independently rated these ratings are used, otherwise the credit quality of the customer is assessed by taking into account its financial position, past experience and other factors including credit support from a third party. Individual risk limits for banks and financial institutions are set based on external ratings in accordance with limits set by the Board. Limits for customers are determined within contract terms. The daily nomination of gas demand by customers and the utilisation of credit limits by customers is monitored by line management.

In addition, receivables balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant. The Group does not hold collateral, nor does it securitise its trade and other receivables.

At the balance sheet date 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 default by counterparties.

The maximum exposure to credit risk is represented by the carrying amount of financial assets of the Group, excluding investments, which have been recognised on the balance sheet.

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38. FINANCIAL RISK MANAGEMENT (CONTINUED) (D) LIQUIDITY RISK

Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. The Group aims at maintaining flexibility in funding to meet ongoing operational requirements, exploration and development expenditure, and small-to-medium-sized opportunistic projects and investments, by keeping committed credit facilities available.

The following table analyses the contractual maturities of the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows comprising principal and interest repayments, except for interest rate swaps. Estimated variable interest expense is based upon appropriate yield curves existing as at 31 December 2008.

Less than 1 to 2 2 to 5 More than 1 year years years 5 years $million $million $million $million Consolidated 2008 Non-derivative financial liabilities Trade and other payables 604.8 – – – Obligations under finance leases 0.5 0.5 1.0 1.3 Bank loans 54.5 34.1 82.1 118.7 Commercial paper – – – – Medium-term notes 18.3 16.9 375.6 118.8 Long-term notes 140.5 259.5 374.5 1,432.4 Derivative financial assets Cross-currency swap contracts (55.9) (30.6) – – Interest rate swap contracts (42.4) (57.9) (73.7) (184.1) 720.3 222.5 759.5 1,487.1

2007 Non-derivative financial liabilities Trade and other payables 609.7 – – – Obligations under finance leases – – – – Bank loans 41.1 40.8 259.2 133.7 Commercial paper 65.0 – – – Medium-term notes 27.8 6.5 19.6 469.5 Long-term notes 75.2 111.7 502.9 1,151.4 Derivative financial liabilities/(assets) Cross-currency swap contracts 12.6 11.8 7.6 – Interest rate swap contracts (9.5) (21.3) (31.9) (27.0) 821.9 149.5 757.4 1,727.6

Santos Ltd 2008 Trade and other payables 723.0 – – – Obligations under finance leases 0.5 0.5 1.0 1.3 Amounts owing to controlled entities – – – 4,082.8 723.5 0.5 1.0 4,084.1

2007 Trade and other payables 625.1 – – – Obligations under finance leases – – – – Amounts owing to controlled entities – – – 2,478.2 625.1 – – 2,478.2

Amounts owing to controlled entities are shown at their carrying value as any interest charged on the loans is added to the loan balance. The loans are made in the ordinary course of business on normal market terms and conditions and are not repayable for a minimum of nine years.

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Notes to the Consolidated Financial Statements FORTHEYEARENDED$ECEMBER

38. FINANCIAL RISK MANAGEMENT (CONTINUED) (E) FAIR VALUES

The financial assets and liabilities of the Group and the Company are recognised on the balance sheets at their fair value in accordance with the accounting policies in note 1, except for long-term notes that are not swapped to a variable interest rate, and bank borrowings, which are recognised at face value. The carrying value of these long-term notes is US$156.5 million and their fair value is estimated at US$169.4 million based on discounting the future cash flows excluding the credit spread at the time of issue. The discount rate used is the interest rate swap rate for the remaining term to maturity of the note as at 31 December 2008. The carrying value of the bank borrowings approximates fair value as it is a floating rate instrument.

Basis for determining fair values The following summarises the significant methods and assumptions used in estimating the fair values of financial instruments:

Trade and other receivables The carrying value less impairment provision of trade receivables is a reasonable approximation of their fair values due to the short-term nature of trade receivables.

Available-for-sale financial assets The fair value of available-for-sale financial assets is determined by reference to their quoted bid price at the reporting date.

Derivatives The fair value of interest rate swaps is calculated by discounting estimated future cash flows based on the terms of maturity of each contract and using market interest rates for a similar instrument at the reporting date. Where these cash flows are in a foreign currency the present value is converted to Australian dollars at the foreign exchange spot rate prevailing at reporting date.

Financial liabilities Fair value is calculated based on the present value of future principal and interest cash 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 Australian dollars at the foreign exchange spot rate prevailing at reporting date.

Interest rates used for determining fair value The interest rates used to discount estimated future cash flows, where applicable, are based on the market yield curve at the reporting date. The dealt credit spread is assumed to be the same as the market rate for the credit as at reporting date as allowed under AASB 139 Financial Instruments: Recognition and Measurement. The interest rates including credit spreads used to determine fair value were as follows:

2008 2007 % % Derivatives 1.3 – 4.3 5.4 – 7.8 Loans and borrowings 1.7 – 4.9 5.8 – 9.1

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Directors’ Declaration FORTHEYEARENDED$ECEMBER

In accordance with a resolution of the Directors of Santos Ltd (“the Company”) we state that:

1. In the opinion of the Directors:

(a) the financial statements and notes of the Company and of the consolidated entity are in accordance with the Corporations Act 2001, including:

(i) giving a true and fair view of the Company’s and consolidated entity’s financial position as at 31 December 2008 and of their performance for the year ended on that date; and

(ii) complying with Accounting Standards and the Corporations Regulations 2001; and

(b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

2. This declaration has been made after receiving the declarations required to be made to the Directors in accordance with section 295A of the Corporations Act 2001 for the financial period ending 31 December 2008.

3. As at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identified in note 37 will be able to meet any obligations or liabilities to which they are or may become subject, by virtue of the Deed of Cross Guarantee between the Company and those members of the Closed Group pursuant to Class Order 98/1418.

Dated this 19th day of February 2009

On behalf of the Board:

Director Director

Adelaide

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Auditor’s Independence Declaration to the Directors of Santos Ltd

In relation to our audit of the financial report of Santos Ltd and the entities it controlled for the year ended 31 December 2008, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct.

Ernst & Young R J Curtin Partner

Adelaide Ernst & Young 19 February 2009

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Independent Audit Report

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS Independence OF SANTOS LTD In conducting our audit we have met the independence requirements of Report on the financial report the Corporations Act 2001. We have given to the Directors of the Company a written Auditor’s Independence Declaration, a copy of which is referred We have audited the accompanying financial report of Santos Ltd, to in the directors’ report. In addition to our audit of the financial report, which comprises the balance sheet as at 31 December 2008, and the we were engaged to undertake the services disclosed in the notes to the income statement, statement of recognised income and expense and financial statements. The provision of these services has not impaired our cash flow statement for the year ended on that date, a summary of independence. significant accounting policies, other explanatory notes and the directors’ declaration of the consolidated entity comprising the company and the Auditor’s opinion entities it controlled at the year’s end or from time to time during the financial year. In our opinion:

Directors’ responsibility for the financial report 1. the financial report of Santos Ltd is in accordance with the Corporations Act 2001, including: The Directors of the Company are responsible for the preparation and fair presentation of the financial report in accordance with the (i) giving a true and fair view of the financial position of Santos Ltd Australian Accounting Standards (including the Australian Accounting and the consolidated entity at 31 December 2008 and of their Interpretations) and the Corporations Act 2001. This responsibility performance for the year ended on that date; and includes establishing and maintaining internal controls relevant to the preparation and fair presentation of the financial report that is (ii) complying with Australian Accounting Standards (including free from material misstatement, whether due to fraud or error; selecting the Australian Accounting Interpretations) and the Corporations and applying appropriate accounting policies; and making accounting Regulations 2001. estimates that are reasonable in the circumstances. In note 1(A), the 2. the financial report also complies with International Financial Directors also state that the financial report, comprising the financial Reporting Standards as issued by the International Accounting statements and notes, complies with International Financial Reporting Standards Board. Standards as issued by the International Accounting Standards Board. Report on the remuneration report Auditor’s responsibility We have audited the remuneration report included in pages 50 to 69 of Our responsibility is to express an opinion on the financial report the annual report for the year ended 31 December 2008. The Directors of based on our audit. We conducted our audit in accordance with Australian the company are responsible for the preparation and presentation of the Auditing Standards. These Auditing Standards require that we comply with remuneration report in accordance with section 300A of the Corporations relevant ethical requirements relating to audit engagements and plan and Act 2001. Our responsibility is to express an opinion on the remuneration perform the audit to obtain reasonable assurance whether the financial report, based on our audit conducted in accordance with Australian report is free from material misstatement. Auditing Standards. An audit involves performing procedures to obtain audit evidence Auditor’s opinion about the amounts and disclosures in the financial report. The procedures selected depend on our judgement, including the assessment of the risks In our opinion the remuneration report of Santos Ltd for the year ended of material misstatement of the financial report, whether due to fraud 31 December 2008, complies with section 300A of the Corporations Act or error. In making those risk assessments, we consider internal controls 2001. relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Directors, as well as evaluating the overall presentation of the financial report. Ernst & Young R J Curtin We believe that the audit evidence we have obtained is sufficient and Partner appropriate to provide a basis for our audit opinion. Adelaide 19 February 2009

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CONSOLIDATED FINANCIAL STATEMENTS, DIRECTORS’ REPORT AND AUDITOR’S REPORT FOR THE GUARANTOR FOR THE YEAR ENDED 31 DECEMBER 2009

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DIRECTORS’ STATUTORY REPORT 42 REMUNERATION IN BRIEF 50 REMUNERATION REPORT 52 FINANCIAL REPORT INCOME STATEMENTS 70 STATEMENTS OF COMPREHENSIVE INCOME 71 STATEMENTS OF FINANCIAL POSITION 72 STATEMENTS OF CASH FLOWS 73 STATEMENTS OF CHANGES IN EQUITY 74 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 Signiﬁcant Accounting Policies 75 2 Segment Information 89 3 Revenue and Other Income 91 4 Expenses 92 5 Earnings 93 6 Net Financing Costs 93 7 Taxation Expense 94 8 Cash and Cash Equivalents 95 9 Trade and Other Receivables 95 10 Inventories 96 11 Other Financial Assets 96 12 Available-For-Sale Financial Assets 96 13 Exploration and Evaluation Assets 97 14 Oil and Gas Assets 98 15 Other Land, Buildings, Plant and Equipment 100 16 Impairment of Cash-Generating Units 101 17 Deferred Tax Assets and Liabilities 102 18 Trade and Other Payables 103 19 Interest-Bearing Loans and Borrowings 103 20 Provisions 106 21 Other Liabilities 107 22 Capital and Reserves 107 23 Earnings per Share 110 24 Consolidated Entities 111 25 Acquisitions of Subsidiaries 112 26 Disposal of Subsidiaries 113 27 Investment in an Associate 113 28 Interests in Joint Ventures 114 29 Notes to the Statements of Cash Flows 115 30 Employee Beneﬁts 116 31 Share-Based Payment Plans 119 32 Key Management Personnel Disclosures 129 33 Related Parties 134 34 Remuneration of Auditors 134 35 Commitments for Expenditure 135 36 Contingent Liabilities 137 37 Deed of Cross Guarantee 138 38 Financial Risk Management 142 39 Events After the End of the Reporting Period 147 DIRECTORS’ DECLARATION 148 AUDITOR’S INDEPENDENCE DECLARATION 149 INDEPENDENT AUDIT REPORT 150

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The Directors present their report together with the financial report of Santos Limited (Santos or the Company) and the consolidated financial report of the consolidated entity, being the Company and its controlled entities, for the financial year ended 31 December 2009, and the auditor’s report thereon. Information in the Annual Report referred to by page number in this report, including the Remuneration Report, or contained in a Note to the financial statements referred to in this report is to be read as part of this report.

DIRECTORS, DIRECTORS’ SHAREHOLDINGS AND DIRECTORS’ MEETINGS Directors’ Shareholdings The names of Directors of the Company in ofﬁce at the date of this report and details of the relevant interest of each of those Directors in shares in the Company at that date are as set out below:

Surname Other Names Shareholdings in Santos Ltd Ordinary Shares Borda Kenneth Charles 67,308 Coates Peter Roland 19,714 Dean Kenneth Alfred 11,638 Franklin Roy Alexander – Harding Richard Michael 2,441 Hemstritch Jane Sharman 14,000 Knox David John Wissler 3,550 Martin Gregory John Walton 3,250

The above named Directors held office during and since the end of the financial year, except for Mr GJW Martin, who was appointed a Director of the Company on 29 October 2009, and Ms JS Hemstritch, who was appointed on 16 February 2010. Professor J Sloan held office as a Director of the Company until her retirement on 6 May 2009. Mr S Gerlach held office as Chairman of the Board until 9 December 2009 and as a Director of the Company until his retirement on 31 December 2009. All shareholdings are of fully paid ordinary shares. At the date of this report, Mr DJW Knox holds 544,974 options and 186,779 share acquisition rights (SARs) under the Santos Executive Share Option Plan and Santos Employee Share Purchase Plan, respectively, and subject to the further terms described in Note 31 to the financial statements. Details of the options and SARs granted to Mr Knox during the year are set out in the Remuneration Report on page 52. Details of the qualifications, experience and special responsibilities of each Director and the Company Secretary are set out on the Directors’ and Executives’ biography pages of the Annual Report. This information includes details of other directorships held during the last three years.

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Directors’ Statutory Report (continued)

Directors’ Meetings The number of Directors’ Meetings and meetings of committees of Directors held during the ﬁnancial year and the number of meetings attended by each Director are as follows:

Environment, Health, Safety and Directors’ Audit Sustainability Remuneration Finance Nomination Surname Other Names Meetings2 Committee Committee Committee Committee Committee

No. of No. of No. of No. of No. of No. of No. of No. of No. of No. of No. of No. of Mtgs Mtgs Mtgs Mtgs Mtgs Mtgs Mtgs Mtgs Mtgs Mtgs Mtgs Mtgs Held1 Attended Held1 Attended Held1 Attended Held1 Attended Held1 Attended Held1 Attended Borda Kenneth Charles 12 12------55-- Coates Peter Roland 12 12 4 4 - - 4 4 - - 2 2 Dean Kenneth Alfred 12 12 4 4----55-- Franklin Roy Alexander 12 12 - - 4 4------Gerlach Stephen 12 12 - -44445533 Harding Richard Michael 12 10444444 - -33 Knox David John Wissler 12 12 - - 4 4------Martin Gregory John Walton 2 2------Sloan Judith 3 3------11

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 In addition to formal meetings, the Board participated in a site visit to Jakarta and the Oyong field in Indonesia.

At the date of this report, the Company had an Audit Committee of the Board of Directors. Particulars of the Company’s corporate governance practices appear in the Corporate Governance Statement in the Annual Report.

PRINCIPAL ACTIVITIES The principal activities of the consolidated entity during the ﬁnancial year were: petroleum exploration, the production, treatment and marketing of natural gas, crude oil, condensate, naphtha, liquid petroleum gas, and the transportation by pipeline of crude oil. No signiﬁcant change in the nature of these activities has occurred during the year.

REVIEW AND RESULTS OF OPERATIONS A detailed review of the operations of the consolidated entity during the financial year, the results of those operations and the financial position of the consolidated entity as at the end of the financial year is contained in the reports by the Chairman, Chief Executive Officer and Chief Financial Officer in the Annual Report. Further details regarding the operations, results and business strategies of the consolidated entity appear in the Annual Report. In summary, the consolidated net profit of $434 million after tax for the year ended 31 December 2009 is $1.2 billion or 74% lower than the net profit for 2008, which included a $1.2 billion profit from the sale of a 40% interest in the GLNG project to PETRONAS. The 2009 result includes profits of $180 million after tax from asset sales. The sale of 60% of the Petrel, Tern and Frigate fields to GDF SUEZ announced in August 2009 contributed $139 million of this amount. Underlying net profit after tax in 2009 of $257 million was 53% lower than the prior year. Sales revenue of $2,181 million was down $581 million or 21% from 2008, mainly due to lower international crude oil, condensate and LPG prices, which had a significant impact on the underlying 2009 result.

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Total revenue for the Eastern Australia segment was $1,082 million, an 18% decrease from the 2008 result of $1,319 million. The Western Australia and Northern Territory segment recorded a total revenue decline of 23% from 2008 to $864 million. The Asia-Pacific segment recorded a total revenue decline of 31% from 2008 to $167 million and the Gladstone LNG segment recorded a 25% growth in total revenue to $141 million from 2008. Total production of 54.4 million barrels of oil equivalent (mmboe) remained the same as 2008 production. Natural field decline, asset sales and unscheduled downtime were offset by increased production contributions from the John Brookes, Maleo, Sampang and Fairview fields.

NET PROFIT The 2009 net profit of $434 million is $1,216 million lower than in 2008 and includes the net profit/(loss) items before tax of $197 million (after tax $177 million), referred to below. Underlying Profit Table1 The following amounts are included in the calculation of underlying profit for the year ending 31 December:

2009 $million 2008 $million Tax Tax Gross effect Net Gross effect Net Underlying profit 257 548 Net gains/(losses) on sales and impairment losses 211 (48) 163 1,481 (433) 1,048 Foreign currency gains/(losses) (28) 7 (21) 24 (6) 182 Fair value adjustments on embedded derivatives and hedges 10 (4) 6 (5) 2 (3)2 Remediation costs and contract losses, net of related insurance recoveries 4 (2) 2 4 7 11 Investment allowances, capital losses and other tax adjustments - 27 27 - 28 28 197 (20) 177 1,504 (402) 1,102 Net profit after tax (NPAT) 434 1,650

1 This table has been prepared in accordance with the AICD/Finsia principles for reporting underlying proﬁt. 2 Adjustment to prior year to ensure comparability with current year.

SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS The Directors consider that matters or circumstances that have significantly affected, or may significantly affect, the operations, results of operations or the state of affairs of the Company in subsequent financial years are: • the approval of the Papua New Guinea liquefied natural gas (PNG LNG) project in December 2009, marking the next step in the delivery of Santos’ transformational LNG growth strategy. Santos has a 13.5% interest in the 6.6 million tonne per annum (mtpa) PNG LNG project. First LNG is expected in 2014; • the Gladstone LNG (GLNG®) project signed a binding Heads of Agreement in July 2009 to sell 2 mtpa of LNG to PETRONAS with an option for an additional 1 mtpa; • the acquisition in July 2009 of significant additional acreage in the Gunnedah Basin in northern New South Wales and an investment in leading local coal seam gas company Eastern Star Gas Limited; and • Santos announced a strategic partnership with GDF SUEZ, one of the world’s leading LNG companies, to develop a floating LNG project in the Bonaparte Basin offshore northern Australia. Santos sold a 60% interest in the Petrel, Tern and Frigate gas fields to GDF SUEZ for US$200 million. GDF SUEZ will lead the development of a 2 mtpa floating LNG project. GDF SUEZ will carry Santos’ share of pre-front end engineering design (FEED) and FEED costs and make an additional payment of US$170 million upon a final investment decision of the project.

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Directors’ Statutory Report (continued)

DIVIDENDS On 18 February 2010, the Directors resolved to pay a fully franked final dividend of 20 cents per fully paid ordinary share on 31 March 2010 to shareholders registered in the books of the Company at the close of business on 2 March 2010. This final dividend amounts to approximately $166 million. A fully franked final dividend of $117 million (20 cents per fully paid ordinary share) was paid on 31 March 2009 on the 2008 results. Indication of this dividend payment was disclosed in the 2008 Annual Report. In addition, a fully franked interim dividend of $182 million (22 cents per fully paid ordinary share) was paid to members on 30 September 2009. In accordance with the Terms of Issue, a fully franked final dividend of $2.9989 per Franked Unsecured Equity Listed Security amounting to approximately $18 million was paid on 31 March 2009. Indication of this dividend payment was disclosed in the 2008 Annual Report. A fully franked interim dividend of $1.6191 per Franked Unsecured Equity Listed Securities amounting to approximately $10 million was paid on 30 September 2009.

ENVIRONMENTAL REGULATION The consolidated entity’s Australian operations are subject to various environmental regulations under Commonwealth, State and Territory legislation. Applicable legislation and requisite environmental licences are specified in the entity’s EHS Compliance Database, which forms part of the consolidated entity’s overall Environmental Management System. Compliance performance is monitored on a regular basis and in various forms, including environmental audits conducted by regulatory authorities and by the Company, either through internal or external resources. During the financial year, the consolidated entity did not receive any fines and was not subject to prosecution or other enforcement action in respect of applicable environmental regulations or environmental protection legislation, except as set out below: • on 15 January 2009, the Queensland Environmental Protection Agency issued an Infringement Notice under the Environmental Protection Act 1994 (Qld) and imposed a $2,000 penalty for unauthorised vegetation clearance on the proposed GLNG plant site on Curtis Island. The Company had earlier reported the vegetation clearance (which was carried out by its geotechnical contractors) to the Agency as a potential non-compliance matter. No criminal conviction was recorded against the Company and appropriate corrective measures have been taken to preclude a re-occurrence; and • hydrocarbons were identified in the groundwater at Port Bonython during routine quality testing undertaken in April 2009. An extensive and thorough source identification program has been undertaken, and recovery and remediation plans have been finalised following endorsement by an independent third party auditor. Communications with the regulator, the South Australian Environment Protection Authority, have been ongoing and actions have been incorporated into site environmental licence conditions. In September 2009, the Authority notified the Company of its intention to conduct a formal investigation to determine what, if any, breaches of the Environment Protection Act 1993 (SA) may have occurred and what enforcement action should be taken if a breach is determined.

EVENTS SUBSEQUENT TO BALANCE DATE Except as mentioned below, in the opinion of the Directors there has not arisen in the interval between the end of the financial year and the date of this report any matter or circumstance that has significantly affected or may significantly affect the operations of the consolidated entity, the results of those operations or the state of affairs of the consolidated entity in future financial years. Dividends declared after 31 December 2009 are set out above and in Note 22 to the financial statements.

LIKELY DEVELOPMENTS Certain likely developments in the operations of the consolidated entity and the expected results of those operations in future financial years are referred to in the reports in the Annual Report by the Chairman, Chief Executive Officer and Chief Financial Officer. Further information about likely developments in the operations of the consolidated entity and the expected results of those operations in future financial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the consolidated entity. Further details regarding likely developments appear in the individual reports providing more detailed discussion of business activities and outlook in the Annual Report.

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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 52 of this report.

INDEMNIFICATION Rule 61 of the Company’s Constitution provides that the Company indemnifies, on a full indemnity basis and to the full extent permitted by law, officers of the Company for all losses or liabilities incurred by the person as an officer of the Company, a related body corporate or trustee of a company-sponsored superannuation fund. Rule 61 does not indemnify an officer for any liability involving a lack of good faith. Rule 61 also permits the Company to purchase and maintain a Directors’ and Officers’ insurance policy. No indemnity has been granted to an auditor of the Company in their capacity as auditor of the Company. In conformity with Rule 61, the Company is party to Deeds of Indemnity in favour of each of the Directors referred to in this report who held office during the year and certain 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 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 ending 31 December 2009 and since the end of the year the Company has paid, or agreed to pay, premiums in respect of such contracts for the year ending 31 December 2010. The insurance contracts insure against certain liability (subject to exclusions) persons who are or have been directors or 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 During the year the Company’s auditor, Ernst & Young, was paid the following amounts in relation to non-audit services it provided:

Taxation services $73,000 Assurance services $533,000 Other services $4,000

The Directors are satisﬁed, based on the advice of the Audit Committee, that the provision of the non-audit services detailed above by Ernst & Young is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001 (Cth). The reason for forming this opinion is that all non-audit services have been reviewed by the audit committee to ensure they do not impact the impartiality and objectivity of the auditor. A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 (Cth) is set out on page 149 of the Annual Report.

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Directors’ Statutory Report (continued)

SHARES UNDER OPTION AND UNVESTED SARS Options Unissued ordinary shares of Santos Limited under option at the date of this report are as follows:

Date options granted Expiry date Issue price of shares1 Number under option 23 May 2005 22 May 2015 $8.46 8,350 23 May 2005 22 May 2015 $8.46 77,100 24 October 2006 24 October 2016 $10.48 435,800 4 May 2006 3 May 2016 $11.36 2,500,000 1 July 2007 30 June 2017 $14.14 225,968 1 July 2007 30 June 2017 $14.14 59,800 3 September 2007 2 September 2017 $12.81 100,000 3 May 2008 2 May 2018 $15.39 641,791 3 May 2008 2 May 2018 $15.39 281,573 28 July 2008 27 July 2018 $17.36 94,193 28 July 2008 27 July 2018 $17.36 131,976 28 July 2008 27 July 2018 $17.36 131,976 2 March 2009 2 March 2019 $14.81 207,988 2 March 2009 2 March 2019 $14.81 67,896 4,964,411

1 This is the exercise price payable by the option holder.

Options do not confer an entitlement to participate in a bonus or rights issue, prior to the exercise of the option. SARs Unissued ordinary shares of Santos Limited under unvested SARs at the date of this report are as follows:

Date SARs granted Number of shares under unvested SARs 6 August 2007 331,500 18 December 2007 50,000 6 August 2007 319,700 23 June 2008 131,119 4 August 2008 35,973 4 August 2008 50,403 4 August 2008 50,403 23 June 2008 71,625 2 March 2009 399,516 2 March 2009 170,621 2 March 2009 114,377 1,725,237

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No amount is payable on the vesting of SARs. SARs do not confer an entitlement to participate in a bonus or rights issue, prior to the vesting of the SAR. Further details regarding the SARs (including when they will lapse) are contained in the Remuneration Report commencing on page 52 of this report.

SHARES ISSUED ON THE EXERCISE OF OPTIONS AND ON THE VESTING OF SARS Options The following ordinary shares of Santos Limited were issued during the year ended 31 December 2009 on the exercise of options granted under the Santos Executive Share Option Plan. No further shares have been issued since then on the exercise of options granted under the Santos Executive Share Option Plan. No amounts are unpaid on any of the shares.

Date options granted Issue price of shares Number of shares issued 15 June 2004 $6.95 50,000 23 May 2005 $8.46 14,500 23 May 2005 $8.46 82,350 24 October 2006 $10.48 280,200 427,050

SARS The following ordinary shares of Santos Limited were issued during the year ended 31 December 2009 on the vesting of SARs granted under the Santos Employee Share Purchase Plan. No further shares have been issued since then on the vesting of SARs granted under the Santos Employee Share Purchase Plan. No amount is payable on the vesting of SARs and accordingly no amounts are unpaid on any of the shares.

Date SARs granted Number of shares issued 8 December 2006 249,000 6 August 2007 20,414 6 August 2007 17,787 23 June 2008 9,917 23 June 2008 4,178 2 March 2009 579 2 March 2009 1,210 303,085

ROUNDING Australian Securities and Investments Commission Class Order 98/100, dated 10 July 1998, applies to the Company and, accordingly, amounts have been rounded off in accordance with that Class Order, unless otherwise indicated. This report is made on 18 February 2010 in accordance with a resolution of the Directors.

Director Director 2010 2010

Santos Annual Report 2009 49

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This Remuneration in Brief is an addition to Santos Limited’s (Santos or the Company) reporting framework, which describes Santos’ remuneration in a clear and transparent manner. The Remuneration in Brief outlines the key remuneration decisions made by the Company in 2009, and discloses the actual amount of remuneration paid to the Company’s senior executives. It should be read in conjunction with the Remuneration Report on pages 52 to 69, which provides disclosure of the remuneration framework of the Company in accordance with statutory obligations and accounting standards.

KEY REMUNERATION DRIVERS AND ACTIONS IN 2009 Exercising restraint The Company’s remuneration practices in 2009 were commensurate with the business conditions resulting from the economic downturn. Accordingly: • there was no increase to the Managing Director and Chief Executive Officer’s (CEO) remuneration, which was set on 28 July 2008; • except for adjustments due to changes in roles and responsibilities and other exceptional reasons, pay was frozen in 2009 at April 2008 levels for Senior Executives and Australian non-award employees; • there was no increase to non-executive Directors’ fees, which were last adjusted on 1 July 2008; • allowances paid to field-based employees, normally adjusted annually by the inflation rate, were frozen. These measures resulted in cash savings in excess of $10 million, and were among the most decisive among employers in the Australian exploration and production industry. Rewarding strong performance While exercising restraint in respect of pay increases, the Board upheld the principle of rewarding performance and the delivery of shareholder value. First, strong achievement against short-term objectives set for the Company in 2009 was recognised through the payment of a short-term incentive at 80% of maximum. Determination of the payout percentage was based on a focused set of performance measures and delivery of strategic milestones, including the Company’s profitability in 2009. Secondly, there was full vesting of the long-term incentive grant covering the 2007–2009 period, during which Santos’ Total Shareholder Return of 69.6%, or 19.3% per annum compound, was in the top 12% of the comparator group of Australian and international exploration and production companies. The external environment In setting and reviewing its remuneration arrangements, Santos has regard to the external environment, including market practice and prevailing regulatory and governance standards. During 2009, Santos participated in various general and industry-specific remuneration surveys, as well as a review of the performance of its outsourced superannuation arrangements. In addition, the Company actively monitored the tax, regulatory and governance activities which impacted remuneration in 2009, in particular the Productivity Commission’s inquiry into Executive Remuneration. In reviewing its approach to remuneration, Santos’ aim was to maintain a responsible and measured approach to remuneration, while ensuring that the Company continued to be able to secure the skills it needs for project delivery in an exploration and production labour market that, after a brief hiatus in 2009, has rebounded to pre-downturn buoyancy.

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Remuneration outcomes for the CEO and Senior Executives The remuneration values for the CEO and Senior Executives, contained on pages 57 and 63 of the Remuneration Report, are calculated in accordance with statutory obligations and accounting standards, and are theoretical. To make the information more meaningful to shareholders, the following table discloses the actual “dollar value” of remuneration received by the Company’s CEO and Senior Executives during 2009 in a clear and concise way (including prior year awards where the executive “realised” value from these awards in 2009).

Fixed remuneration1 STI2 LTI3 Other4 Total DJW Knox $1,750,000 $1,400,000 $0 $500,0005 $3,650,000 Managing Director and Chief Executive Officer JH Anderson $540,000 $223,800 $0 $22,435 $786,235 Vice President Western Australia and Northern Territory JL Baulderstone $546,063 $254,000 $0 - $800,063 Vice President Corporate Development and Legal, Company Secretary and General Counsel MEJ Eames $621,860 $258,000 $266,660 - $1,146,520 Vice President Asia Pacific MS Macfarlane $532,460 $199,600 $0 - $732,060 Vice President Eastern Australia PC Wasow $1,000,000 $562,300 $308,200 - $1,870,500 Chief Financial Officer and Executive Vice President RJ Wilkinson $559,801 $232,000 $217,080 $16,800 $1,025,681 President GLNG and Queensland

1 Comprising base salary and superannuation. 2 This figure represents the amount of the short-term incentive or bonus paid to the executive for 2009 performance. For further details of the Company’s short-term incentive program, please see pages 55 and 59 of the Remuneration Report. 3 This figure represents the value of vested Share Acquisition Rights (SARs), which vested in 2009 based on the closing share price of $13.40 on the date of vesting (23 January 2009) and options that were exercised (if any) in 2009 based on the difference between the exercise price and the closing share price on the date of exercise. No options were exercised by the Senior Executives in 2009. Although shares allocated under Share Acquisition Rights are subject to a further restriction on dealing of up to 10 years after the grant date and can be forfeited for misconduct, their full value is included here. For further details of the Company’s LTI program, please see pages 56 to 57 and 59 to 62 of the Remuneration Report. 4 Comprised of ad hoc payments treated as remuneration such as relocation allowance. 5 Mr Knox received a once-only retention bonus for continued employment between 25 March 2008, the date of his appointment as Acting Chief Executive Officer, and 25 March 2009.

Santos Annual Report 2009 51

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The Directors of Santos Limited (Santos or the Company) present this Remuneration Report for the Company and its controlled entities for the year ended 31 December 2009. The information provided in the Remuneration Report has been audited as required by section 308(3C) of the Corporations Act 2001 (Cth). The Remuneration Report forms part of the Directors’ Statutory Report. The Remuneration Report sets out remuneration information pertaining to the Company’s Directors and Senior Executives, who are the key management personnel of the consolidated entity for the purposes of the Corporations Act and the Accounting Standards. They include the ﬁve highest remunerated executives of the Company and Group for the 2009 ﬁnancial year, and are listed in Table 1 below. Table 1: Directors and Senior Executives

Executive Non-Executive Name Position Name Position DJW Knox Managing Director and Chief Executive Officer PR Coates Deputy Chairman (Chairman from 9 December 2009) JH Anderson Vice President Western Australia KC Borda Director and Northern Territory JL Baulderstone Vice President Corporate Development and KA Dean Director Legal, Company Secretary and General Counsel MEJ Eames Vice President Asia-Pacific RA Franklin Director MS Macfarlane Vice President Eastern Australia RM Harding Director PC Wasow Chief Financial Officer and GJW Martin Director1 Executive Vice President RJ Wilkinson President GLNG and Queensland Former S Gerlach Chairman (until 8 December 2009)2 J Sloan Director3

1 Appointed 29 October 2009. 2 Retired 31 December 2009. 3 Retired 6 May 2009.

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Senior Executive Remuneration

REMUNERATION POLICY The diagram below shows the key objectives of Santos’ remuneration policy for Senior Executives and how these are implemented through the Company’s remuneration framework.

ATTRACTING AND ENCOURAGING EXECUTIVES ALIGNING EXECUTIVE AND RETAINING TALENTED, TO STRIVE FOR SUPERIOR SHAREHOLDER INTERESTS QUALIFIED EXECUTIVES PERFORMANCE

• Remuneration levels are market- • A signiﬁcant component of • The long-term incentive aligned against similar roles remuneration is “at risk” under component of remuneration in comparable companies. short-term and long-term incentive is delivered through equity • Individual performance targets plans. Value to the executive instruments linked to Santos determine 30% of the short-term is dependent on meeting ordinary shares. incentive award for Senior challenging targets. • Vesting of performance-based Executives. • Consistently high-performing long-term incentive awards is • The deferred component of the executives are also rewarded contingent on delivery of superior long-term incentive plan promotes through higher base remuneration. shareholder returns. retention and rewards loyalty. • Executives cannot hedge equity instruments that are unvested or subject to restrictions.

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Remuneration Report (continued)

LINKING REMUNERATION STRUCTURES TO CORPORATE OBJECTIVES Santos’ executive remuneration structures support the Company’s vision to be a leading energy company for Australia and Asia. The diagram below highlights the links between the Company’s remuneration systems and its corporate objectives.

Santos Corporate objective DELIVERING THE TAPPING OUR BEING A GREAT, SAFE DELIVERING BASE BUSINESS RESOURCE RICHES PLACE TO WORK SUPERIOR RETURNS TO SHAREHOLDERS

Link to remuneration Senior Executives Performance measures Remuneration A signiﬁcant proportion structures with oversight of the for Senior Executives frameworks reward of remuneration for existing base businesses in strategic roles and collaboration and the CEO and Senior are rewarded for growth businesses are reinforce safety as a Executives is “at risk” delivering sustained linked to delivery of priority for employees based on delivery of performance and growth growth targets. at all levels. superior shareholder in core operations. returns.

Examples of measures used • Individual • Key Performance • Short-term incentive • The long-term to reinforce link performance Indicators for the measures for Senior incentive plan measures for CEO’s 2009 short- Executives are links a significant relevant executives term incentive weighted towards component of are linked to included: overall company pay for the CEO delivery of strategic –Santos’ strategic performance and other Senior milestones and positioning in to encourage Executives to performance targets. Australia and collaboration. delivery of superior • Financial key Asia; and • Safety and returns. performance –furtherance environmental • Long-term incentive indicators for Senior of Santos’ performance is a grants lapse (and Executives under the LNG projects. key performance participants receive short-term incentive indicator that no value) if Santos’ plan include safety • Senior Executives impacts on the total shareholder and environmental with responsibility short-term incentive return does not performance for the growth LNG award for the meet at least the production, profit, businesses (PNG CEO and Senior median for ASX 100 cash flow, capital LNG and GLNG) Executives. companies. have strategic invested, reserve • Remuneration • Full vesting of performance targets growth and reserve targets are fair, performance awards linked to delivery replacement cost. challenging, clearly under the long- of key project understood and term incentive plan milestones. within the control only occurs where of employees. Santos outperforms all other ASX 100 companies in its total shareholder return performance.

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CEO REMUNERATION ARRANGEMENTS Remuneration components and their relative weightings Total remuneration for the Managing Director and Chief Executive Ofﬁcer (CEO), Mr DJW Knox, is made up of the following components: • Base remuneration – comprising salary and superannuation; • Short-term Incentive (STI) – an annual bonus linked to Company performance and achievement of strategic objectives; and • Long-term Incentive (LTI) – equity grants tied to vesting conditions dependent on Santos’ achievement of superior performance relative to the ASX 100. The Board received external advice on Mr Knox’s remuneration package, which is benchmarked against the remuneration paid to CEOs of comparable companies in the industry. In line with the Company’s general pay freeze, Mr Knox’s remuneration did not change in 2009 and, in fact, has not changed since his appointment in 2008. The relative weightings of the three components comprising the CEO’s total remuneration are set out in Table 2 below. Table 2: Relative weightings of remuneration components1

% of total remuneration (annualised) Fixed remuneration Performance-based remuneration STI LTI CEO 37% 26% 37%

1 These ﬁgures do not reﬂect the relative value derived by the CEO from each of the components, which is dependent on actual performance against targets for the “at risk” components. This is discussed in the STI and LTI sections below.

Base remuneration Mr Knox is paid Total Fixed Remuneration (TFR), which includes the Company’s contributions into his accumulation superannuation fund of at least the minimum statutory amount. He may, if he wishes, salary sacrifice part of his TFR for additional superannuation contributions. Mr Knox’s TFR for 2009 (as set out in Table 4 below) was $1,750,000. Short-term Incentive Mr Knox has a maximum annual STI opportunity of 100% of TFR, subject to delivery of strategic milestones and performance targets set by the Board. Mr Knox’s performance measures comprise a combination of strategic, financial and operational targets, all of which are directly related to strategic objectives agreed with the Board. The Board believes that this method of setting performance targets focuses the CEO’s attention on achieving the key conditions and milestones necessary to deliver Santos’ strategic plan. At the end of each financial year, the Remuneration Committee assesses performance against the objectives set by the Board, and makes recommendations to the Board regarding Mr Knox’s performance and the appropriate level of STI award. The Board believes this method of assessment provides a balanced assessment of the CEO’s overall performance. As outlined above, for the 2009 performance period, Mr Knox’s STI targets were based on agreed objectives linked to Company performance targets and delivery of its strategic growth initiatives. Consistent with his role as CEO, these performance measures for 2009 included the Company’s strategic positioning in Australia and Asia, delivery of financial and operational performance targets, in particular, from the base business, achievement of specific milestones in the GLNG and PNG LNG projects in furtherance of the Company’s vision to achieve transformational growth through its LNG portfolio and achievement of safety and environmental performance milestones. Based on performance against these targets during the year, Mr Knox was awarded an STI payment of $1,400,000 or 80% of the maximum STI payable. The difference between actual STI paid and maximum STI will not be carried forward.

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Remuneration Report (continued)

Long-term Incentive No new LTI grant was made to the CEO in 2009 as the grants made to Mr Knox in 2008 constitute his LTI entitlement for the 2008, 2009 and 2010 years. The 2008 grants comprised: • a performance-based equity award made to Mr Knox in his capacity as Executive Vice President, Growth Projects (Performance Award); • a service-based equity award made to Mr Knox in his capacity as Executive Vice President, Growth Projects (Deferred Award); and • a further performance-based equity award made to Mr Knox upon his appointment as CEO to supplement the grants already made to him in his Senior Executive capacity (CEO Performance Award). Mr Knox elected to receive his equity awards as a combination of options and share acquisition rights (SARs). The key terms of Mr Knox’s awards are as follows: • The LTI grants made in 2008 were structured to provide Mr Knox with an annual LTI opportunity of 100% of TFR (based on the 2008 level of $1.75 million) for each of the 2008, 2009 and 2010 years, subject to achieving applicable vesting conditions. • Mr Knox was able to elect to receive his LTI grant as either SARs, market value options or a combination of the two. He chose to take a combination of the two. • All of the performance-based LTIs are subject to hurdles based on the Company’s Total Shareholder Return (TSR) relative to the ASX 100 over a three-year performance period. There is no retesting of performance conditions. • The CEO Performance Award is divided into three tranches: – Tranche 1 Tested over the period from 1 January 2008 to 31 December 2010; – Tranche 2 Tested over the period from 1 January 2009 to 31 December 2011; and – Tranche 3 Tested over the period from 1 January 2010 to 31 December 2012. • Each tranche of the CEO Performance Award vests in accordance with the following vesting schedule:

TSR percentile ranking % of grant vesting < 50th percentile 0% = 50th percentile 37.5% 51st to 75th percentile 39%-75% 76th to 100th percentile 76%-100%

• None of the grants have vested as none of their performance periods have been completed. • Upon vesting of SARs, ordinary shares in Santos will automatically be allocated to Mr Knox. These shares will be subject to restrictions until the earlier of ten years from the grant date, cessation of employment, or if the Board approves, at Mr Knox’s request, the removal of the restrictions. • Options may be exercised at any time between the vesting date and the expiry date (27 July 2018), subject to payment of the exercise price of $17.36 per option (being the volume weighted average price in the week up to and including the grant date). • Full details of the equity grants made to Mr Knox in 2008 are contained in the 2008 Remuneration Report.

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Table 3 contains details of the number and value of SARs and options granted to Mr Knox in 2008. Table 3: SARs and options granted to Mr Knox in 20081

Grant name Number of SARs granted Number of options granted Maximum value of grant2 CEO Performance Award Tranche 1 35,973 Tranche 1 94,193 Tranche 1 $1,040,640 Tranche 2 50,403 Tranche 2 131,976 Tranche 2 $990,405 Tranche 3 50,403 Tranche 3 131,976 Tranche 3 $990,066 2008 Awards prior to CEO Appointment Performance Award - 64,992 $341,208 Deferred Award - 21,837 $159,410

1 These grants constitute Mr Knox’s full LTI awards for the 2008, 2009 and 2010 financial years. As the SARs and options only vest on satisfaction of service and/or performance conditions to be tested in future financial years, none of the SARs or options detailed above were forfeited during the year. 2 Maximum value represents the fair value of the LTI awards as at their grant date (being 3 May 2008 for the Performance Award and Deferred Award and 28 July 2008 for the CEO Performance Award). The fair value per instrument at the grant date was: CEO Performance Award Tranche 1: SARs – $13.82 Options – $5.77 Tranche 2: SARs – $8.60 Options – $4.22 Tranche 3: SARs – $8.41 Options – $4.29 Performance Award Options – $5.25 Deferred Award Options – $7.30 Monte Carlo simulation was used to determine the value of the SARs and options granted. Details of the assumptions underlying the valuation are set out in Note 31 to the financial statements. The minimum total value of the grant, if the applicable vesting conditions are not met, is nil in all cases.

2009 Remuneration details for Mr DJW Knox Table 4: 2008 and 2009 remuneration details for Mr DJW Knox

Other Post- Share-based long-term Year Short-term employee benefits employment payments1,2 Termination benefits3 Total % at risk Super- Base salary STI Other annuation $ $ $ $$$$$ 2009 1,735,897 1,400,0004 500,0005 14,103 1,486,8736 - 29,891 5,166,7647 56% 2008 1,200,115 1,100,000 - 54,745 800,206 - 19,826 3,174,892 60%

1 In accordance with the requirements of the Accounting Standards, remuneration includes a proportion of the theoretical value of equity linked compensation determined as at the grant date and progressively expensed over the vesting period. The amount allocated as remuneration is not related to or indicative of the actual benefit (if any) that Mr Knox may ultimately realise should the equity instruments vest. The theoretical value of equity linked compensation was determined in accordance with AASB 2 Share-based payment applying the Monte Carlo simulation method. Details of the assumptions underlying the valuation are set out in Note 31 to the financial statements. 2 Of the total remuneration for Mr Knox for the year, 23% consisted of SARs and options. 3 “Other long-term benefits” represent the movement in the CEO’s long service leave entitlements measured as the present value of the estimated future cash outflows to be made in respect of the CEO’s service between the respective reporting dates. 4 This amount represents the STI award made for the 2009 year, which will be paid in March 2010. 5 Mr Knox received a once-only retention bonus for continued employment between 25 March 2008, the date of his appointment as Acting Chief Executive Officer, to 25 March 2009. 6 “Share-based payments” in 2009 consists of the following equity linked theoretical compensation and, as a consequence of the rights issue in May 2009, now includes a cash-settled component. This matter is discussed further on page 61. SARs Options Cash-settled $553,452 $634,898 $298,523 7 The difference between Mr Knox’s total remuneration for 2009 and 2008 is principally a consequence of his appointment as CEO in July 2008, which resulted in (1) an increase in his base salary since that time and (2) the granting of additional SARs and options as part of his CEO remuneration package.

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Remuneration Report (continued)

Service Agreement The Company entered into a service agreement with the CEO on 28 July 2008, which is ongoing until termination by the CEO or the Company. The service agreement provides that the Company may terminate the CEO’s employment on giving 12 months notice. Where the Company exercises this general right to terminate, it must make a payment to the CEO equivalent to his TFR for the full notice period. Pro-rata STI entitlements, subject to performance, will apply to the date of termination and the Board retains discretion to vest any outstanding LTI, having regard to performance and reasons for termination. The Company may terminate the CEO’s employment at any time for cause. No payment in lieu of notice, nor any payment in respect of STI or LTI will be made in this circumstance. Mr Knox may initiate termination of his service agreement by giving the Company six months’ notice, in which case he will be entitled to payment of TFR in respect of the notice period and pro-rata STI to the date of termination, subject to performance. The Board retains discretion to vest any outstanding LTI, having regard to performance and reasons for termination. Mr Knox may also initiate termination of his service agreement immediately if there is a fundamental change in his role or responsibilities without his consent. In this circumstance the service agreement provides for payment of 12 months’ TFR, full STI for the year in which employment is terminated and a pro rata portion of the following year’s STI, subject to current year performance. Pro-rata vesting of outstanding LTI will apply, based on the expired portion of the performance period and performance achieved to the termination date.

SENIOR EXECUTIVE REMUNERATION ARRANGEMENTS Remuneration components and their relative weightings Total remuneration for Senior Executives is made up of the following components: • Base remuneration – comprising salary and superannuation; • Short-term incentives (STI) – annual bonuses tied to individual and Company performance; and • Long-term incentives (LTI) – equity grants tied to vesting conditions tested over a three-year period. Santos’ executive remuneration structure is consistent with the Company’s “reward performance” policy. The relative weightings of the three components comprising the Senior Executives’ total remuneration are provided in Table 5 below. Table 5: Relative weightings of remuneration components1

% of total remuneration (annualised) Fixed remuneration Performance-based remuneration TFR STI LTI Chief Financial Ofﬁcer and Executive Vice President 52% 27% 21% Other Senior Executives 57% 20% 23%

1 These ﬁgures do not reﬂect the actual value derived by Senior Executives from each of the components, which is dependent on actual performance against targets for the “at risk” components. This is discussed in the STI and LTI sections below.

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Base remuneration

Salary and superannuation Senior Executives are paid TFR, out of which the Company makes contributions into their superannuation funds of at least the minimum statutory amount. They may, if they wish, salary sacrifice part of their TFR for additional superannuation contributions or other benefits such as novated car leases. Benefits Senior Executives do not receive any benefits in addition to TFR. Market alignment Executive remuneration levels are market-aligned by comparison to similar roles in ASX 100 energy, materials and utilities companies, excluding BHP Billiton and Rio Tinto due to their disproportionately larger size and market capitalisation. This broad industry group is used, as there are too few Australian exploration and production companies of similar size to Santos for benchmarking purposes.

Short-term Incentive

Frequency STI is assessed and paid annually. Maximum STI 75% of TFR for Chief Financial Officer and Executive Vice President. 50% of TFR for other Senior Executives. Performance measures To promote collaboration among Senior Executives and to focus their efforts towards the overall benefit of the Company, 70% of their STI is based on Company performance. The remaining 30% is based on the executive’s individual performance. A range of Company performance measures is used in order to drive balanced business performance. These measures include lagging indicators to assess the Company’s past performance, as well as forward-looking indicators to ensure the Company is positioning itself effectively for future growth. The areas covered by the measures include reserve growth, reserve replacement cost, production, margin, new growth options, shareholder value creation, people, environment, health and safety, and continuous improvement. Individual performance is assessed against targets set within each executive’s own area of responsibility. Assessment of Individual performance is assessed by the CEO. performance Company performance is assessed by the Remuneration Committee. Each metric is assessed against target and assigned a score on a five-point scale. The average of these scores forms the basis of the overall Company performance score. The Board believes the above methods of assessment are rigorous and transparent, and provide a balanced assessment of the executive’s performance. Payment method Cash. STI awarded in 2009 Company performance against the measures in 2009 resulted in an average STI of 80% of maximum payable to all eligible employees. 2009 STI awards made to individual Senior Executives ranged from 75% to 92% of maximum. The difference between actual STI paid and maximum STI will not be carried forward.

Long-term Incentives During the year, the Company made equity grants to its Senior Executives as the LTI component of their remuneration for 2009. The grants comprised: • a performance-based component, equal to 75% of the total grant value (Performance Award); and • a service-based component, equal to 25% of the total grant value (Deferred Award). All LTI grants were delivered, at the executive’s election, in the form of either: • SARs – a conditional entitlement to a fully paid ordinary share at zero price, subject to satisfaction of vesting conditions; or • Options – an entitlement to acquire a fully paid ordinary share at a predetermined price, subject to satisfaction of vesting conditions. Grant sizes were market-aligned.

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Remuneration Report (continued)

Vesting details of the Performance and the Deferred Awards are summarised in Table 6 below. In addition, Table 6 contains details of the number and value of SARs and options granted to Senior Executives in 2009 under the Performance and the Deferred Awards. Table 6: Performance Award and Deferred Award vesting details Performance Award Deferred Award Vesting period 1 January 2009 to 31 December 2011. 2 March 2009 to 1 March 2012. Vesting condition Vesting of this grant is based on relative TSR against ASX 100 companies Vesting of the Deferred Award as at 1 January 2009. is based on continuous service The Board believes the chosen performance hurdle effectively aligns the to 1 March 2012, or three years interests of the individual executives with that of the Company’s from the grant date. shareholders, as TSR is a fair measure of shareholder returns and the ASX 100 represents the companies in which most of the Company’s shareholders could invest as an alternative to Santos. Vesting schedule Vesting commences when Santos’ TSR performance equals the median for 0% if the continuous service ASX 100 companies, with one-third of the total grant vesting at this level condition is not met. of performance. 100% if the continuous service A further 1.33% of the grant vests for each percentile improvement in Santos’ condition is met. TSR ranking, with full vesting only occurring if Santos is the top-performing ASX 100 company based on its TSR growth over the vesting period. There is no re-testing of the performance condition if it is not satisﬁed. Santos TSR percentile ranking % of grant vesting < 50th percentile 0% = 50th percentile 33.33% 51st to 99th percentile Further 1.33% for each percentile improvement 100th percentile 100% Exercise price $14.81 for options, being the volume weighted average price in the week As for Performance Award. up to and including the grant date of 2 March 2009. SARs have no exercise price. Exercise period Options may be exercised at any time between the vesting date and the As for Performance Award. expiry date. Upon vesting of SARs, shares will automatically be allocated to the executive. These shares will be subject to restrictions until the earlier of ten years from the grant date, cessation of employment or the date at which the Board approves the removal of the restrictions. Expiry/lapse SARs and options that do not vest upon testing of the performance SARs and options will lapse if the condition will lapse. service condition is not satisﬁed. Vested options will expire if not exercised before 2 March 2019. Vested options will expire if not exercised before 2 March 2019. Cessation/change Upon cessation of employment, SARs which have not already vested and As for Performance Award. of control options which are not exercisable will, in general, lapse and be forfeited. However, if cessation occurs due to death, disability or redundancy, or in special circumstances approved by the Board, then a proportion of the SARs and options may vest and become exercisable. Where there is a change in control, the Board may determine whether, and the extent to which, SARs and options may vest. Hedging Policy Consistent with the objective of creating a meaningful alignment of interests, As for Performance Award. Directors and Senior Executives are not permitted to hedge their shareholdings or LTIs unless those securities have fully vested and are no longer subject to restrictions. Breaches of this policy will be subject to appropriate sanctions, which could include disciplinary action or termination of employment.

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Table 7: SARs and Options granted to Senior Executives in 20091

Executive Grant name Number of SARs granted Number of options granted Maximum value of grant2 JH Anderson Performance Award 13,359 - 115,823 Deferred Award 4,168 - 60,228 JL Baulderstone Performance Award 13,450 - 116,612 Deferred Award 5,057 - 73,074 MEJ Eames Performance Award 15,744 - 136,500 Deferred Award 4,471 - 64,606 MS Macfarlane Performance Award 13,481 - 116,880 Deferred Award 4,152 - 59,996 PC Wasow Performance Award 25,320 - 219,524 Deferred Award 8,305 - 120,007 RJ Wilkinson Performance Award 14,175 - 122,897 Deferred Award 5,160 - 74,562

1 The grants made to the Senior Executives during the year constitute their full LTI awards for the 2009 financial year. As the SARs and options only vest on satisfaction of service and/or performance conditions to be tested in future financial years, none of the SARs or options detailed above were forfeited during the year. 2 Maximum value represents the fair value of the Performance Award and Deferred Award as at their grant date (being 2 March 2009). The fair value per instrument at the grant date was: Performance Award SARs – $8.67, Options – $4.54 Deferred Award SARs – $14.45, Options – $6.75 Monte Carlo simulation was used to determine the value of the SARs and options granted. Details of the assumptions underlying the valuation are set out in Note 31 to the financial statements. The minimum total value of the grant, if the applicable vesting conditions are not met, is nil in all cases.

Preserving alignment under the LTI Plan in response to equity issue During the year the Company raised $2.914 billion through a two-for-ﬁve rights issue. Each new share was issued at a price of $12.50, representing a 26.9% discount to the closing price of the shares before the announcement of the rights issue. Employees who held unvested SARs and options were unable to participate in the rights issue and there was no adjustment to the applicable exercise price or the number of underlying shares to which each SAR or option was entitled. The ASX Listing Rules do allow an adjustment to the exercise price of options to reﬂect the impact of discounted rights issues but the terms of the grant need to expressly refer to the formula in ASX Listing Rule 6.22.2 and the Listing Rules do not contemplate (nor provide a mechanism for adjusting) SARs. Accordingly, in order to ensure the rights issue would neither unfairly disadvantage or advantage executives and so as to avoid a misalignment between the incentives of management (through the LTI component of their remuneration) and a capital raising which was considered by the Board to be in the best interests of the Company and shareholders, the Board determined, in respect of existing LTI grants: • to use TSR data which takes into account the impact of rights issues and other capital management activities on both Santos and comparator group companies when testing the satisfaction of TSR performance hurdles that apply to Santos LTI awards; and • subject to the SARs and options vesting following satisfaction of applicable hurdles (and, in the case of options, being exercised), to make a future cash remuneration payment to executives equal to the value of the right to participate in the rights issue (calculated at $1.31 for each underlying share in accordance with the formula in ASX Listing Rule 6.22.2). The intention is to “keep whole” the executives in respect of SARs and options that actually vest in due course. No cash payment will be made in respect of SARs that do not vest or options that do not vest or are not exercised. These future cash remuneration payments apply to LTI participants with grants that were yet to vest at the time of the rights issue, including the CEO and Senior Executives. No changes have been made to the performance hurdles or testing dates. Despite the intention to “keep whole” the LTI participants, the future cash remuneration payments did not fully compensate for the loss in the value of the unvested SARs and options. The overall value of the future cash remuneration payments for the CEO and Senior Executives is $89,556 less than the loss in value of the SARs and options, both determined in accordance with AASB 2 Share-based payments. The value of these future cash remuneration payments has been expensed in accordance with AASB 2, over the period from 8 May 2009 (the last trading day prior to the announcement of the rights issue; closing price of $17.09) to the end of their performance or vesting periods.

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Remuneration Report (continued)

LTI grants to Senior Executives The following LTI grants were still in progress or were tested during 2009. Table 8: LTI grants to Senior Executives

Grant year Grant type Vesting condition(s) Performance/vesting period Status 2007 Performance • Relative TSR performance against 1 January 2007 to Grant tested after the end of the Award Australian and international E&P 31 December 2009 ﬁnancial year resulting in full companies (50% of grant) vesting of the grant. • Absolute TSR target of 11% per annum compound (50% of grant) Deferred Continuous service DJW Knox1: In progress. Award 3 September 2007 to 2 September 2010 Senior Executives: 1 July 2007 to 30 June 2010 2008 Performance Relative TSR performance against 1 January 2008 to In progress. Award ASX 100 companies 31 December 2010 Deferred Continuous service 3 May 2008 to 2 May 2011 In progress. Award 2009 Performance Relative TSR performance against 1 January 2009 to In progress. Award ASX 100 companies 31 December 2011 Deferred Continuous service 2 March 2009 to In progress. Award 1 March 2012

1 Options and SARs granted to Mr Knox in his capacity as a Senior Executive prior to his appointment as CEO.

Service Agreements – Senior Executives The Company has entered into service agreements with the Senior Executives. The service agreements are ongoing until termination by the Company upon giving 12 months’ notice or the Senior Executive upon giving six months’ notice. In a Company-initiated termination, the Company may make a payment in lieu of notice equivalent to the TFR the executive would have received over the notice period. All Senior Executives’ service agreements may be terminated immediately for cause, whereupon no payments in lieu of notice or other termination payments apply.

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2009 Senior Executive Remuneration Details Table 9: 2009 Senior Executive remuneration details

Share-based Other Post- payments1,2 long-term Executive Short-term employee benefits employment (LTI) Termination benefits4 Total % at risk Super- Base salary3 STI5 Other annuation $ $ $ $$$$$ JH Anderson 489,116 223,800 22,4356 50,884 262,336 - 10,111 1,058,682 46% JL Baulderstone7 512,621 254,000 - 33,441 365,017 - 9,597 1,174,676 53% MEJ Eames 585,296 268,000 - 36,564 308,127 - 12,577 1,210,564 48% MS Macfarlane 500,145 199,600 - 32,314 261,079 - 6,698 999,836 46% PC Wasow8 985,897 562,300 - 14,103 358,269 - 37,801 1,958,370 47% RJ Wilkinson 488,533 232,000 16,8009 71,267 257,492 - 6,488 1,072,580 46%

1 The percentage of each Senior Executive’s total remuneration for the year that consisted of SARs and options is as follows:

JH Anderson 20% MS Macfarlane 21% JL Baulderstone 21% PC Wasow 15% MEJ Eames 20% RJ Wilkinson 20%

2 “Share-based payments” consist of the following equity linked theoretical compensation and, as a consequence of the rights issue in May 2009, now includes a cash-settled component.

Executive SARs Options Cash-settled JH Anderson $126,470 $80,240 $55,626 JL Baulderstone $122,994 $126,768 $115,255 MEJ Eames $147,935 $94,566 $65,626 MS Macfarlane $126,705 $79,049 $55,325 PC Wasow $296,065 - $62,204 RJ Wilkinson $210,646 - $46,846

3 The base salaries for Mr JH Anderson, Mr MS Macfarlane, Mr MEJ Eames and Mr RJ Wilkinson were frozen in 2009 at April 2008 levels. They are higher than the base salary figures in Table 10 “2008 Senior Executive remuneration details” because the base salary figures in the 2008 table include the lower pre-April 2008 amounts. 4 “Other long-term benefits” represent the movement in the Senior Executive’s long service leave entitlements measured as the present value of the estimated future cash outflows to be made in respect of the Senior Executive’s service between the respective reporting dates. 5 This amount represents the STI award made for the 2009 year, which will be paid in March 2010. 6 Mr Anderson received an allowance of $22,435 for relocating from Adelaide to Perth to head up the Western Australian Business Unit subsequent to commencing the role of Vice President Western Australia and Northern Territory. 7 Effective 5 January 2009, Mr Baulderstone’s role was expanded to include responsibility for the Corporate Development and Commercial Excellence functions. Mr Baulderstone’s remuneration increased in 2009 commensurate with the increased responsibilities of his new role. 8 In recognition of his seniority and strategic leadership, Mr Wasow was promoted to the position of Executive Vice President (in addition to his role as Chief Financial Officer) effective 1 July 2008. Mr Wasow’s remuneration increased in 2009 commensurate with the increased responsibilities of his new role. 9 Mr Wilkinson received an Incidentals Allowance of $16,800 for commuting between Adelaide and Brisbane in relation to the GLNG project.

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Remuneration Report (continued)

2008 Senior Executive remuneration details Table 10: 2008 Senior Executive remuneration details

Share-based Other Post- payments1,2 long-term Executive Short-term employee benefits employment (LTI) Termination benefits3 Total % at risk Super- Base salary STI4 Other annuation $ $ $ $$$$$ JH Anderson 468,021 205,000 - 48,689 203,594 - 16,351 941,655 43% JL Baulderstone 465,734 250,000 - 46,326 231,473 - 5,963 999,496 48% MEJ Eames 551,505 220,000 - 57,455 241,862 - 20,213 1,091,035 42% MS Macfarlane 471,282 205,000 - 49,029 202,553 - 17,536 945,400 43% PC Wasow 830,548 585,000 - 13,289 265,239 - 68,629 1,762,705 48% RJ Wilkinson 485,676 255,000 5,2825 90,260 201,462 - 18,192 1,055,872 43%

1 The percentage of total remuneration for the year that consisted of SARs and options is as follows:

DJW Knox 25% MEJ Eames 22% PC Wasow 15% JH Anderson 22% MS Macfarlane 21% RJ Wilkinson 19% JL Baulderstone 23%

2 “Share-based payments” consisted of the following equity linked theoretical compensation:

Executive SARs Options Executive SARs Options JH Anderson $122,742 $80,852 MS Macfarlane $122,742 $79,811 JL Baulderstone $111,832 $119,641 PC Wasow $265,239 - MEJ Eames $173,306 $68,556 RJ Wilkinson $201,462 - 3 “Other long-term benefits” represent the movement in the Senior Executive’s long service leave entitlements measured as the present value of the estimated future cash outflows to be made in respect of the Senior Executive’s service between the respective reporting dates. 4 This amount represents the STI award made for the 2008 financial year, paid in March 2009. 5 This amount represents an Incidentals Allowance for Mr Wilkinson for commuting between Adelaide and Brisbane in relation to the GLNG project.

LINK BETWEEN COMPANY PERFORMANCE AND SENIOR EXECUTIVE REMUNERATION OUTCOMES Table 11 sets out the Group’s performance over the past five years in respect of the key financial and non-financial indicators used to measure year-on-year performance. Table 11 also shows how the size of the STI pool available to Senior Executives has varied over this period based on the level of performance achieved each year across these key indicators. Table 11: Key indicators of Company performance 2005–2009

Key Indicator 2005 2006 2007 2008 2009 Safety (total recordable case frequency rate) 4.9 6.4 5.3 5.8 3.6 Production (mmboe) 56.0 61.0 59.1 54.4 54.4 Reserve replacement cost – 1P (A$/boe) 13 15 13 13 9 Reserve replacement rate – 1P (%) 218 143 175 160 336 Proven plus probable reserves – 2P 774 819 879 1,013 1,441 Netback (A$/boe) 30 33 33 36 23 Net proﬁt after tax $m 762 643 359 1,650 434 Earnings per share (cents) 124 103 55 273 52 Dividends per ordinary share (cents) 36 40 40 42 42 Size of STI pool (% of maximum) 85 70 80 80 80

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As set out earlier, Company performance in 2009 against the STI measures (detailed on page 59) resulted in an average STI award of 80% of the maximum payable to all eligible employees. Performance against key metrics was on target in 2009, including the achievement of key strategic milestones such as: • sanction of PNG LNG on schedule in December 2009 in furtherance of the Company’s vision to achieve transformational growth through an LNG portfolio; • the GDF Suez–Bonaparte LNG partnership, resulting in the commercialisation of substantial contingent resources in the Petrel, Tern and Frigate fields; • the signing of the binding LNG offtake Heads of Agreement with PETRONAS for 2 mtpa plus a further 1 mtpa at GLNG’s option, underpinning the development of the first GLNG train; • the successful $3 billion capital raising in May 2009. The graphs below show the relationship over the past five years between the Company’s TSR and share price growth, being two key indicators of long-term Company performance, and the percentage of LTI grants to Senior Executives that vested. The graphs demonstrate how the level of Senior Executive reward derived from their LTI grants is dependent upon the delivery of sustained above-average returns to shareholders.

TSR OF SANTOS, ASX100 AND AUSTRALIAN AND INTERNATIONAL EXPLORATION AND PRODUCTION COMPANIES 2005-2009 % 140 120 100 80 60 40 20 0 -20 -40 2005 2006 2007 2006 2007 2008 2007 2008 2009 Santos ASX 100 E&P Santos ASX 100 E&P Santos ASX 100 E&P

LTI vesting for 2005-2007 LTI vesting for 2006-2008 LTI vesting for 2007-2009 performance period = 50% performance period = 100% performance period = 100%

SANTOS SHARE PRICE 2005-2009 $

2005 2006 2007 2008 2009

The TSR growth shown above incorporates dividends and capital returns the Company made to shareholders during the past ﬁve years. Dividends paid by the Company in the past ﬁve years are as follows: (Dividends per ordinary share)

2005 $0.36 2006 $0.40 2007 $0.40 2008 $0.42 2009 $0.42

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Remuneration Report (continued)

The following capital returns were made in the 2005–2009 period: • On 30 June 2007, the Company bought back 24,671,275 fully paid ordinary shares, representing 4.10% of fully paid ordinary shares on issue at that date, at a price of $12.16 per share. • On 6 October 2008, the Company bought back 18,487,305 fully paid ordinary shares, representing 3.07% of fully paid shares on issue at that date, at a price of $16.23 per share. • On 30 September 2009, the Company redeemed the 6,000,000 Franked Unsecured Equity Listed Securities (FUELS) on issue at the price of $100 each. As noted above, Santos’ superior TSR performance compared to the Australian and international exploration and production companies over the period from 1 January 2007 to 31 December 2009 resulted in full vesting of the 2007 Performance Award. The value derived by Senior Executives during 2009 in respect of LTIs granted in previous ﬁnancial years (i.e. prior year awards which vested and/or were exercised during 2009) is set out in Table 12 below. Table 12 also contains details of prior year LTIs that lapsed or were forfeited during 2009. Table 12: Senior Executives’ LTI remuneration outcomes in 2009

Vested Exercised Forfeited/Lapsed Number Value1 Number Value2 Number Value DJW Knox SARs ------Options ------JH Anderson SARs ------Options 63,700 224,224 - - - - JL Baulderstone SARs ------Options ------MEJ Eames SARs 19,900 288,351 - - - - Options ------MS Macfarlane SARs ------Options 63,700 224,224 - - - - PC Wasow SARs 23,000 333,270 - - - - Options ------RJ Wilkinson SARs 16,200 234,738 - - - - Options ------Total SARs 59,100 856,359 - - - - Total Options 127,400 448,448 - - - -

1 The value of each SAR on the date of vesting is based on the closing market price of Santos Limited shares on the ASX on the preceding trading day. The value of each option on the date of vesting is based on the difference between the closing market price of Santos Limited shares on the ASX on the preceding trading day and the relevant exercise price. 2 The value of each option exercised during the year is based on the difference between the closing market price of Santos Limited shares on the ASX on the preceding trading day and the relevant exercise price.

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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 PROMOTING INDEPENDENCE ALIGNING DIRECTOR AND TALENTED, QUALIFIED DIRECTORS AND IMPARTIALITY SHAREHOLDER INTERESTS

Fee levels are set with regard to: • Fee levels do not vary according • Santos encourages its non- to the performance of the Company executive Directors to build a • time commitment and workload; or individual Director performance long-term stake in the Company. • the risk and responsibility attached from year to year. • Traditionally, this has been to the role; • Santos’ market capitalisation facilitated through the non- • experience and expertise; and is considered in setting the executive Director share plan. • market benchmarking. aggregate fee pool and in benchmarking of Board and committee fees.

REMUNERATION ARRANGEMENTS Maximum aggregate amount Total non-executive Directors’ fees paid in a year, including Board committee fees, cannot exceed $2,100,000. This amount was approved by shareholders at the Annual General Meeting held on 2 May 2008. Directors may also be paid additional fees for special duties or exertions, and are entitled to be reimbursed for all business-related expenses. These payments are not included in the maximum aggregate amount approved by shareholders. No additional fees were paid during the year. 2009 Non-executive Directors’ fees In line with the Company’s general pay freeze, there was no increase to non-executive Directors’ fees, which were last adjusted on 1 July 2008. Directors’ fee rates are provided in Table 13 below. Table 13: Non-executive Directors’ fees per annum

Board Committees Chair1 Deputy Chair1 Member Chair Member Annual Fees $435,000 $217,500 $145,000 $12,000-$30,000 $5,000-$15,000

1 The Chairman and Deputy Chairman of the Board do not receive any additional fees for serving on or chairing any Board committee.

Superannuation Superannuation contributions are made on behalf of non-executive Directors in accordance with the requirements of the Company’s statutory superannuation obligations.

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Remuneration Report (continued)

Retirement benefits Professor J Sloan and Mr S Gerlach, who were appointed prior to 1 January 2004, were contractually entitled to receive benefits upon their retirement under the agreements entered into at their appointment, the terms of which were approved by shareholders at the 1989 Annual General Meeting. These retirement benefits were frozen with effect from 30 June 2004, at which time their entitlements ceased to accrue. However, to prevent erosion in the real value of the frozen benefits, the Board determined that from 1 July 2007 the benefits would be indexed annually against the five-year Australian Government Bond Rate. Non-executive Directors appointed after 1 January 2004 are not entitled to receive a benefit upon retirement (other than statutory entitlements). Both Professor Sloan and Mr Gerlach retired during 2009. Table 14 below shows the increase in Professor Sloan’s and Mr Gerlach’s frozen benefits as a result of indexation in 2009 and the final retirement benefits paid to them upon retirement. Table 14: Non-executive Director retirement benefits

Benefit as at Increase as a result Final benefit as Director 1 January 2009 of indexation at retirement S Gerlach $1,208,547 $62,421 $1,270,9681 J Sloan $370,617 $5,469 $376,0862

1 Mr Gerlach retired on 31 December 2009. 2 Professor Sloan retired on 6 May 2009.

Non-executive Director Share Plan The Non-executive Director Share Plan (NED Share Plan) was introduced in July 2007, following shareholder approval at the 2007 Annual General Meeting. Participation in the NED Share Plan is voluntary and all present and future non-executive Directors are eligible to participate. Under the NED Share Plan, Directors elect to sacriﬁce all or part of their pre-tax fees in return for an allocation of shares of equivalent value. The NED Share Plan, therefore, does not involve any additional remuneration for participating Directors. Shares are allocated quarterly and are either issued as new shares or purchased on the ASX at the prevailing market price. The shares are registered in the name of the participating Director, but are subject to a restriction on dealing. In the absence of exceptional circumstances, the restriction will apply until the Director ceases to hold ofﬁce or until ten years have elapsed since the allocation of the shares, whichever is earlier. Following the changes to employee share schemes introduced by the Government in 2009, the Directors were able to elect to withdraw from the NED Share Plan in the second half of 2009. Details of the shares allocated to Directors under the NED Share Plan during the year are set out in Table 15 below. Table 15: 2009 NED Share Plan allocations

Director Q1 2009 allocation1 Q2 2009 allocation2 Q3 2009 allocation3 Q4 2009 allocation4 Total KC Borda 2,284 2,753 2,598 2,824 10,459 PR Coates 1,655 1,907 - - 3,562 KA Dean 665 802 - - 1,467 S Gerlach 949 1,144 - - 2,093 RM Harding 284 343 - - 627 J Sloan5 2,182---2,182

1 Shares were allocated to the participating Directors on 7 April 2009 at $17.1811 per share. 2 Shares were allocated to the participating Directors on 29 June 2009 at $14.2552 per share. 3 Shares were allocated to the participating Directors on 7 October 2009 at $15.1076 per share. 4 Shares were allocated to the participating Directors on 23 December 2009 at $13.8947 per share. 5 Retired 6 May 2009.

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Details of remuneration paid to non-executive Directors Details of the fees and other beneﬁts paid to Directors during 2009 are set out in Table 16 below. Table 16: 2009 Non-executive Director remuneration details

Share-based Short-term benefits Retirement benefits payments Total Directors’ fees Fees for Super- Increase to (incl. committee special duties annuation retirement NED Share fees)1 or exertions Other2 contributions3 benefit4 Plan $ $ $ $ $ $$ S Gerlach5 402,375 - 4,629 14,103 62,421 32,625 516,153 KC Borda 0 - - 13,937 - 157,000 170,937 PR Coates 178,528 - - 14,103 - 55,626 248,257 KA Dean 160,125 - - 14,103 - 22,875 197,103 RA Franklin 158,500 - - 898 - - 159,398 RM Harding 185,963 - - 14,103 - 9,788 209,854 GJW Martin 25,425 - - 2,288 - - 27,713 J Sloan6 14,301 - - 4,662 5,469 37,500 61,932

1 Refer to Table 13 above for details of annual Directors’ fees and Committee fees. Figure shown is after fee sacrifice to NED Share Plan. 2 This figure represents the value of car parking provided to the Chairman in the Company’s head office in Adelaide. 3 Includes superannuation guarantee payments. Superannuation guarantee payments are made to Mr Franklin only in relation to days worked in Australia. 4 This shows the increase to retirement benefits during the year. See Table 14 for details of retirement benefits paid out. 5 Retired 31 December 2009. 6 Retired 6 May 2009.

Details of the fees and other beneﬁts paid to Directors during 2008 are set out in Table 17 below. Table 17: 2008 Non-executive Director remuneration details

Share-based Short-term benefits Retirement benefits payments Total Directors’ fees Fees for Super- Increase to (incl. committee special duties annuation retirement NED fees)1 or exertions Other2 contributions3 benefit Share Plan $ $ $ $ $ $$ S Gerlach 350,625 - 4,796 13,437 39,897 61,875 470,630 KC Borda 0 - - 13,060 - 147,141 160,201 PR Coates 0 - - 10,246 - 124,644 134,890 KA Dean 130,687 - - 13,437 - 43,563 187,687 RA Franklin 150,250 - - 813 - - 151,063 RM Harding 167,287 - - 6,872 - 18,588 192,747 J Sloan 0 - - 13,376 12,235 157,342 182,953

1 Refer to Table 13 above for details of annual Directors’ fees and committee fees. Figure shown is after fee sacrifice to NED Share Plan. 2 This figure represents the value of car parking provided to the Chairman in the Company’s head office in Adelaide. 3 Includes superannuation guarantee payments. Superannuation guarantee payments are made to Mr Franklin only in relation to days worked in Australia.

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Income Statements for the year ended 31 December 2009

Consolidated Santos Ltd 2009 2008 2009 2008 Note $million $million $million $million

Product sales 3 2,181 2,762 681 873 Cost of sales 4 (1,423) (1,423) (463) (521) Gross profit 758 1,339 218 352 Other revenue 3 70 43 34 64 Other income 3 254 1,735 49 1 Other expenses 4 (351) (493) (164) (211) Interest income 6 85 63 197 183 Finance expenses 6 (98) (154) (133) (286) Share of net losses of an associate 27 (1) – – – Profit before tax 717 2,533 201 103 Income tax expense 7 (205) (768) (62) (51) Royalty-related taxation (expense)/benefit 7 (78) (115) 3 (32) Total taxation expense (283) (883) (59) (83) Net profit for the period 434 1,650 142 20

Net proﬁt attributable to: Owners of Santos Ltd 434 1,650 142 20 Minority interests – – – – 434 1,650 142 20

Earnings per share attributable to the ordinary equity holders of Santos Ltd (¢) Basic earnings per share 23 52.1 251.9

Diluted earnings per share 23 51.9 242.8

Dividends per share ($) Ordinary shares 22 0.42 0.42

Redeemable preference shares 22 4.6180 6.3348

The income statements are to be read in conjunction with the notes to the consolidated ﬁnancial statements.

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Statements of Comprehensive Income for the year ended 31 December 2009

Consolidated Santos Ltd 2009 2008 2009 2008 Note $million $million $million $million

Net profit for the period 434 1,650 142 20 Other comprehensive income: Net exchange (loss)/gain on translation of foreign operations (294) 271 – – Tax effect 7 – – – – (294) 271 – – Net gain/(loss) on foreign currency loans designated as hedges of net investments in foreign operations 286 (259) – – Tax effect 7 (86) 82 – – 200 (177) – – Net change in fair value of available-for-sale financial assets – (13) – (13) Tax effect 7 – 4 – 4 – (9) – (9) Net actuarial gain/(loss) on the defined benefit plan 16 (37) 16 (37) Tax effect 7 (5) 11 (5) 11 30 11 (26) 11 (26) Other comprehensive (losses)/income, net of tax (83) 59 11 (35) Total comprehensive income 351 1,709 153 (15)

Total comprehensive income attributable to: Owners of Santos Ltd 351 1,709 153 (15) Minority interests – – – – 351 1,709 153 (15)

The statements of comprehensive income are to be read in conjunction with the notes to the consolidated ﬁnancial statements.

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Statements of Financial Position as at 31 December 2009

Consolidated Santos Ltd 2009 2008 2009 2008 Note $million $million $million $million

Current assets Cash and cash equivalents 8 2,240 1,553 2,031 1,403 Trade and other receivables 9 917 581 357 694 Inventories 10 273 290 139 136 Other financial assets 11 65 59 60 – Tax receivable 24 – 7 – Total current assets 3,519 2,483 2,594 2,233 Non-current assets Receivables 9 10 18 9 17 Available-for-sale financial assets 12 2 2 2 2 Investment in an associate 27 177 – – – Other financial assets 11 134 345 5,748 4,724 Exploration and evaluation assets 13 923 493 30 43 Oil and gas assets 14 6,317 6,190 1,722 1,778 Other land, buildings, plant and equipment 15 200 160 134 110 Deferred tax assets 17 79 111 – – Total non-current assets 7,842 7,319 7,645 6,674 Total assets 11,361 9,802 10,239 8,907 Current liabilities Trade and other payables 18 709 605 778 723 Deferred income 83 55 7 2 Interest-bearing loans and borrowings 19 164 99 1 1 Tax liabilities 20 469 – 454 Provisions 20 94 117 70 66 Other liabilities 21 10 8 – – Total current liabilities 1,080 1,353 856 1,246 Non-current liabilities Deferred income 17 54 – – Interest-bearing loans and borrowings 19 1,649 2,356 3,600 4,085 Deferred tax liabilities 17 871 744 103 134 Provisions 20 768 808 258 311 Other liabilities 21 9 9 – – Total non-current liabilities 3,314 3,971 3,961 4,530 Total liabilities 4,394 5,324 4,817 5,776 Net assets 6,967 4,478 5,422 3,131

Equity Issued capital 22 4,987 2,531 4,987 2,531 Reserves (283) (189) (2) (2) Retained earnings 2,263 2,136 437 602 Equity attributable to equity holders of Santos Ltd 6,967 4,478 5,422 3,131 Minority interests – – – – Total equity 6,967 4,478 5,422 3,131

The statements of ﬁnancial position are to be read in conjunction with the notes to the consolidated ﬁnancial statements.

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Statements of Cash Flows for the year ended 31 December 2009

Consolidated Santos Ltd 2009 2008 2009 2008 Note $million $million $million $million

Cash flows from operating activities Receipts from customers 2,308 3,101 710 985 Interest received 85 49 81 39 Overriding royalties received 8 15 12 24 Insurance proceeds received 30 13 – – Pipeline tariffs and other receipts 93 64 12 41 Payments to suppliers and employees (899) (1,089) (286) (402) Exploration and evaluation expenditure – seismic and studies (199) (88) (19) (11) Royalties and excise paid (65) (102) (26) (47) Borrowing costs paid (80) (134) (2) – Income taxes paid (55) (292) (24) (229) Royalty-related taxes paid (71) (152) (25) (35) Net cash provided by operating activities 29 1,155 1,385 433 365 Cash flows from investing activities Payments for: Exploration and evaluation expenditure (98) (266) (27) (73) Oil and gas assets expenditure (1,182) (1,179) (355) (359) Other land, buildings, plant and equipment (74) (40) (49) (14) Acquisitions of oil and gas assets (363) – – (1) Acquisitions of controlled entities (17) (7) – (6) Restoration expenditure (29) (55) – (3) Acquisition of investment in an associate (178) – (178) – Advances to related entities (6) (6) – – Proceeds from disposal of non-current assets 12 2,080 – 1 Proceeds from disposal of controlled entities 24 – – – Proceeds from disposal of other investments – 1 – 1 Income taxes paid on disposal of non-current assets (497) – (497) – Other investing activities (3) 4 (4) 3 Net cash (used in)/provided by investing activities (2,411) 532 (1,110) (451) Cash flows from financing activities Dividends paid (297) (251) (297) (251) Proceeds from issues of ordinary shares 3,003 220 3,003 220 Proceeds from share issues placed on term deposits (1,176) – (1,176) – Proceeds from maturity of term deposits 1,116 – 1,116 – Redeemable cumulative preference shares redeemed (600) – (600) – Off-market buy-back of ordinary shares – (302) – (302) Repayments of borrowings (92) (751) (1) (1) Drawdown of borrowings – 500 – – Receipts from controlled entities – – 759 2,817 Payments to controlled entities – – (1,492) (1,052) Net cash provided by/(used in) financing activities 1,954 (584) 1,312 1,431 Net increase in cash and cash equivalents 698 1,333 635 1,345 Cash and cash equivalents at the beginning of the year 1,553 200 1,403 57 Effects of exchange rate changes on the balances of cash held in foreign currencies (11) 20 (7) 1 Cash and cash equivalents at the end of the year 8 2,240 1,553 2,031 1,403

The statements of cash ﬂows are to be read in conjunction with the notes to the consolidated ﬁnancial statements.

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Statements of Changes in Equity for the year ended 31 December 2009

Issued Translation Fair value Retained Total capital reserve reserve earnings equity Note $million $million $million $million $million

Consolidated Balance at 1 January 2009 2,531 (187) (2) 2,136 4,478 Total comprehensive income for the period – (94) – 445 351 Transactions with owners in their capacity as owners: Share options exercised by employees 22 4 – – – 4 Entitlement offer exercised 22 2,914 – – – 2,914 Shares issued 22 138 – – – 138 Redeemable cumulative preference shares redeemed 22 (600) – – – (600) Dividends to shareholders 22 – – – (327) (327) Share-based payment transactions 31 – – – 9 9 Equity attributable to equity holders of Santos Ltd 4,987 (281) (2) 2,263 6,967 Equity attributable to minority interests – – – – – Balance at 31 December 2009 4,987 (281) (2) 2,263 6,967

Balance at 1 January 2008 2,331 (281) 7 1,035 3,092 Total comprehensive income for the period – 94 (9) 1,624 1,709 Transactions with owners in their capacity as owners: Share options exercised by employees 22 3 – – – 3 Shares issued 22 253 – – – 253 Off-market buy-back 22 (56) – – (245) (301) Dividends to shareholders 22 – – – (286) (286) Share-based payment transactions 31 – – – 8 8 Equity attributable to equity holders of Santos Ltd 2,531 (187) (2) 2,136 4,478 Equity attributable to minority interests – – – – – Balance at 31 December 2008 2,531 (187) (2) 2,136 4,478

Santos Ltd Balance at 1 January 2009 2,531 – (2) 602 3,131 Total comprehensive income for the period – – – 153 153 Transactions with owners in their capacity as owners: Share options exercised by employees 22 4 – – – 4 Entitlement offer exercised 22 2,914 – – – 2,914 Shares issued 22 138 – – – 138 Redeemable cumulative preference shares redeemed 22 (600) – – – (600) Dividends to shareholders 22 – – – (327) (327) Share-based payment transactions 31 – – – 9 9 Balance at 31 December 2009 4,987 – (2) 437 5,422

Balance at 1 January 2008 2,331 – 7 1,131 3,469 Total comprehensive income for the period – – (9) (6) (15) Transactions with owners in their capacity as owners: Share options exercised by employees 22 3 – – – 3 Shares issued 22 253 – – – 253 Off-market buy-back 22 (56) – – (245) (301) Dividends to shareholders 22 – – – (286) (286) Share-based payment transactions 31 – – – 8 8 Balance at 31 December 2008 2,531 – (2) 602 3,131

The statements of changes in equity are to be read in conjunction with the notes to the consolidated ﬁnancial statements.

74 Santos Annual Report 2009

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

1. SIGNIFICANT ACCOUNTING POLICIES

The financial report of Santos Ltd (“the Standards Board and International amendments, which became applicable Company”) for the year ended 31 December Financial Reporting Standards (“IFRS”) as on 1 January 2009. Adoption of these 2009 was authorised for issue in accordance issued by the International Accounting standards and interpretations has only with a resolution of the Directors on Standards Board. affected the presentation and disclosure 18 February 2010. in these financial statements. There has (B) BASIS OF PREPARATION been no impact on the financial position Santos Ltd (the parent) is a company limited The financial report is presented in or performance of the Company. by shares incorporated in Australia whose Australian dollars. shares are publicly traded on the Australian • AASB 8 Operating Segments Securities Exchange (“ASX”) and is the The financial report is prepared on • AASB 101 Presentation of Financial ultimate parent entity in the Group. The the historical cost basis, except for Statements consolidated financial report of the Company derivative financial instruments, fixed for the year ended 31 December 2009 rate notes that are hedged by an interest • AASB 2008-1 Amendments to comprises the Company and its controlled rate swap and available-for-sale financial Australian Accounting Standard entities (“the Group”). assets, which are measured at fair value. – Share-based Payments: Vesting Conditions and Cancellations The nature of the operations and principal The Company is of a kind referred to in activities of the Group are described in the ASIC Class Order 98/100 dated 10 July • AASB 2008-5 Amendments to Directors’ Statutory Report. 1998 (updated by Class Order 05/641 Australian Accounting Standards arising effective 28 July 2005), and in from the Annual Improvements Project (A) STATEMENT OF COMPLIANCE accordance with that Class Order • AASB 2008-7 Amendments to The financial report is a general purpose amounts in the financial report and Australian Accounting Standards – Cost financial report which has been prepared Directors’ Statutory Report have been of an Investment in a Subsidiary, in accordance with the requirements of rounded to the nearest million dollars, Jointly Controlled Entity or Associate the Corporations Act 2001, Australian unless otherwise stated. Accounting Standards and other • AASB 2009-2 Amendments to Adoption of new accounting standards authoritative pronouncements of the Australian Accounting Standards and interpretations Australian Accounting Standards Board. – Improving Disclosures about Financial The financial report complies with From 1 January 2009, the Company has Instruments Australian Accounting Standards as adopted the following standards and • AASB 2009-6 Amendments to issued by the Australian Accounting interpretations, and all consequential Australian Accounting Standards

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective have not been adopted by the Group for the annual reporting period ended 31 December 2009. These are outlined in the following table:

Effective for annual reporting Impact on periods Group beginning on ﬁnancial Application Reference Title Summary or after report date for Group

AASB 3 Business Combinations Adopts the acquisition method to account for 1 July 2009 Will impact 1 January 2010 business combinations; acquisition costs recognition expensed; contingent consideration recognised of future at fair value on acquisition date. acquisitions AASB 9 Financial Instruments AASB 9 includes requirements for the 1 January 2013 Unlikely to 1 January 2013 classification and measurement of financial have material assets resulting from the first part of phase 1 of impact the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement (AASB 139 Financial Instruments: Recognition and Measurement). These requirements improve and simplify the approach for classification and measurement of financial assets compared with the requirements of AASB 139. AASB 127 Consolidated and Changes in a parent’s ownership in a subsidiary 1 July 2009 Unlikely to 1 January 2010 Separate Financial that result in a loss of control requires reserves have impact Statements to be recycled and remaining ownership interest to be measured at fair value; changes that do not result in a loss of control are accounted for as equity transactions. AASB 2008-3 Amendments to Consequential amendments to a number of 1 July 2009 No impact 1 January 2010 Australian Accounting standards following the issue of the revised Standards arising AASB 3 Business Combinations and AASB 127 from AASB 3 and Consolidated and Separate Financial Statements. AASB 127 AASB 2008-6 Further Amendments Extends scope of AASB 5 Non-current Assets 1 July 2009 No impact 1 January 2010 to Australian Held for Sale and Discontinued Operations to Accounting Standards require where entity is committed to sale plan arising from the involving loss of control of a subsidiary but Annual Improvements retains a partial investment in the disposed Project subsidiary, in which case all of the subsidiary’s assets and liabilities are classified as held for sale; also includes minor terminology or editorial amendments to other standards. AASB 2008-8 Amendments to Clarifies the hedge accounting provisions of 1 July 2009 No impact 1 January 2010 Australian Accounting AASB 139 Financial Instruments: Recognition Standards – Eligible and Measurement to address inflation in a Hedged Items financial hedged item, and one-sided risk in a hedged item.

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1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Effective for annual reporting Impact on periods Group beginning on ﬁnancial Application Reference Title Summary or after report date for Group

AASB 2008-13 Amendments to Amends AASB 5 Non-current Assets Held for Sale 1 July 2009 No impact 1 January 2010 Australian Accounting and Discontinued Operations in respect of the Standards arising from classification, presentation and measurement AASB Interpretation of non-current assets held for distribution to 17 – Distributions of owners in their capacity as owners and Non-cash Assets to AASB 110 Events after the Reporting Period for Owners the disclosure requirements for dividends that are declared after the reporting period but before the financial statements are authorised for issue. AASB 2009-4 Amendments to Amends scope of AASB 2 Share-based Payment 1 July 2009 No impact 1 January 2010 Australian Accounting to exclude business combinations from scope; Standards arising there are additional consequential amendments from the Annual to AASB 138 Intangible Assets arising from Improvements Project revised AASB 3 Business Combinations. AASB 2009-5 Further Amendments Includes a number of other amendments to 1 July 2009 No impact 1 January 2010 to Australian existing standards which are not expected to Accounting Standards have a material impact. Will amend arising from the classification of exploration expenditure in Annual Improvements statement of cash flows. Project AASB 2009-7 Amendments to Various minor editorial amendments to a 1 July 2009 No impact 1 January 2010 Australian Accounting number of standards and an interpretation to Standards correct errors that occurred in AASB 2008-12, AASB 2008-13 and AASB Interpretation 17 Distributions of Non-cash Assets to Owners and other amendments reflect changes made by the IASB to its pronouncements. AASB 2009-8 Amendments to The amendments clarify the scope of AASB 2 1 January 2010 No impact 1 January 2010 Australian Accounting Share-based Payment by requiring an entity Standards – Group that receives goods or services in a share-based Cash-settled payment arrangement to account for those Share-based Payment goods or services no matter which entity in the Transactions group settles the transaction, and no matter whether the transaction is settled in shares or cash. AASB 2009-9 Amendments to Provides additional exemptions and 1 January 2010 No impact 1 January 2010 Australian Accounting modifications on transition to Australian Standards – Accounting Standards in relation to certain oil Additional Exemptions and gas and lease assessments under for First-time Adopters Interpretation 4 Determining whether an Arrangement contains a Lease.

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Effective for annual reporting Impact on periods Group beginning on ﬁnancial Application Reference Title Summary or after report date for Group

AASB 2009-10 Amendments to Amends AASB 132 Financial Instruments: 1 February 2010 No impact 1 January 2011 Australian Accounting Presentation to require a financial instrument Standards – that gives the holder the right to acquire a Classification of fixed number of the entity’s own equity Rights Issues instruments for a fixed amount of any currency to be classified as an equity instrument if, and only if, the entity offers the financial instrument pro-rata to all of its existing owners of the same class of its own non-derivative equity instruments. Before this amendment, rights issues (rights, options, or warrants), denominated in a currency other than the functional currency of the issuer, were accounted for as derivative instruments. AASB 2009-11 Amendments to This standard gives effect to consequential 1 January 2013 Unlikely to 1 January 2013 Australian Accounting changes arising from the issuance of AASB 9. have material Standards arising impact from AASB 9 AASB 2009-12 Amendments to The amendment to AASB 8 requires an entity 1 January 2011 No impact 1 January 2011 Australian Accounting to exercise judgement in assessing whether a Standards government and entities known to be under the control of that government are considered a single customer for the purposes of certain operating segment disclosures. AASB 2009-13 Amendments to The objective of this Standard is to make 1 July 2010 No impact 1 January 2011 Australian Accounting amendments to AASB 1 First-time Adoption of Standards arising from Australian Accounting Standards as a Interpretation 19 consequence of the issuance of Interpretation 19 Extinguishing Financial Liabilities with Equity Instruments. Interpretation 17 Distributions of Provides guidance on when and how a liability 1 July 2009 No impact 1 January 2010 Non-cash Assets to for certain distributions of non-cash assets is Owners recognised and measured, and how to account for that liability. Does not apply to common control transactions. Interpretation 18 Transfers of Assets Provides guidance on transfers of property, 1 July 2009 No impact 1 January 2010 from Customers plant and equipment for entities that receive such contributions from their customers. Interpretation 19 Extinguishing This interpretation addresses the accounting by 1 July 2010 No impact 1 January 2011 Financial Liabilities an entity when the terms of a financial liability with Equity are renegotiated and result in the entity Instruments issuing equity instruments to a creditor of the entity to extinguish all or part of the financial liability.

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1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Group has changed the classification impairment charges, in the Company’s benefits through its share of jointly of exploration and evaluation financial statements. controlled assets. expenditure in the statement of cash Intragroup balances and any unrealised The interests of the Company and of the flows such that only exploration and gains and losses or income and expenses Group in unincorporated joint ventures evaluation expenditure that results in arising from intragroup transactions are are brought to account by recognising the initial recognition of an exploration eliminated in preparing the consolidated in the financial statements the Group’s and evaluation asset is included in financial statements. share of jointly controlled assets, share investing activities. Exploration and of expenses and liabilities incurred, and evaluation expenditure that is expensed Minority interests the income from the sale or use of its as incurred (generally seismic and study Minority interests in the net assets share of the production of the joint activities) is classified in operating of consolidated entities are allocated venture in accordance with the revenue activities. As a result, $88 million of their share of net profit after tax in the policy in note 1(X). exploration and evaluation expenditure income statement, and are identified was transferred from cash flows from Jointly controlled entities separately from the Group’s equity investing activities to cash flows from in those entities. Minority interests The Group has interests in joint ventures operating activities for the Group and consist of the amount of those interests which are jointly controlled entities, $11 million for Santos Ltd in the prior at the date of the original business whereby the venturers have contractual year ended 31 December 2008. combination and the minority’s share of arrangements that establish joint control The accounting policies set out below changes in equity since the date of the over the economic activities of the have been applied consistently to all combination. Where the minority interest entities. The Group recognises its periods presented in the consolidated has losses greater than its equity interest in jointly controlled entities financial report. interest in the consolidated subsidiary, using proportionate consolidation, the excess and any further losses by combining its share of the assets, The accounting policies have been applicable to the minority interest are liabilities, income and expenses of the consistently applied by the Group. allocated against the Group’s interest. joint venture with similar line items in (C) BASIS OF CONSOLIDATION If the minority interest subsequently the consolidated financial statements. reports profits, the profits are allocated Subsidiaries Investment in an associate to the Group until the minority’s share of Subsidiaries are entities controlled by losses previously absorbed by the Group The Group’s investment in an associate is the Company. Control exists when the have been fully recovered. accounted for using the equity method Company has the power, directly or of accounting in the consolidated Jointly controlled assets indirectly, to govern the financial and financial statements and at cost in the operating policies of an entity so as Santos’ exploration and production parent. An associate is an entity over to obtain benefits from its activities. activities are often conducted through which the Group has significant influence In assessing control, potential voting joint venture arrangements governed by and that is neither a subsidiary nor a rights that presently are exercisable joint operating agreements, production joint venture. The Group generally has or convertible are taken into account. sharing contracts or similar contractual significant influence if it has between The financial statements of subsidiaries relationships. A summary of the Group’s 20% and 50% of the voting rights of are included in the consolidated financial interests in its significant joint ventures an entity. statements from the date that control is included in note 28. Under the equity method, the investment commences until the date that A joint venture characterised as a jointly in an associate is carried in the control ceases. controlled asset involves the joint consolidated statement of financial The acquisition of subsidiaries is control, and often the joint ownership, position at cost plus post-acquisition accounted for using the purchase method by the venturers of one or more assets changes to the Group’s share of net of accounting, which involves allocating contributed to, or acquired for the assets of the associate. Goodwill relating the cost of the business combination to purpose of, the joint venture and to the associate is included in the the fair value of the assets acquired and dedicated to the purposes of the joint carrying amount of the investment and the liabilities and contingent liabilities venture. The assets are used to obtain is not amortised. After application of the assumed at the date of acquisition benefits for the venturers. Each venturer equity method, the Group determines (refer note 1(G)). may take a share of the output from the whether it is necessary to recognise any assets and each bears an agreed share impairment loss with respect to the Investments in subsidiaries are carried of expenses incurred. Each venturer has Group’s net investment in the associate. at their cost of acquisition, less any control over its share of future economic

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Group’s share of the associate’s a foreign operation are recognised in stated at fair value. Where derivatives post-acquisition profits or losses is equity in the consolidated financial qualify for hedge accounting, recognition recognised in the income statement, and statements. of any resultant gain or loss depends its share of post-acquisition movements on the nature of the item being Non-monetary assets and liabilities that in reserves is recognised in the hedged; otherwise the gain or loss are measured in terms of historical cost statement of changes in equity and, on remeasurement to fair value is in a foreign currency are translated using when applicable, in the statement of recognised immediately in profit or loss. the exchange rate at the date of the comprehensive income. The cumulative initial transaction. Non-monetary assets The fair value of interest rate swaps is post-acquisition movements are recorded and liabilities denominated in foreign the estimated amount that the Group against the carrying amount of the currencies that are stated at fair value would receive or pay to terminate the investment. Dividends receivable from are translated to the functional currency swap at the reporting date, taking into the associate are recognised in the at foreign exchange rates ruling at the account current interest rates and the parent entity’s income statement, while dates the fair value was determined. current creditworthiness of the swap in the consolidated financial statements counterparties. The fair value of forward the Group reduces the carrying amount Group companies exchange contracts is their quoted of the investment. The results of subsidiaries with a market price at the reporting date, being When the Group’s share of losses in an functional currency of United States the present value of the quoted forward associate equals or exceeds its interest dollars are translated to Australian dollars price. The fair value of commodity swap in the associate, including any unsecured as at the date of each transaction. The and option contracts is their quoted long-term receivables and loans, the assets and liabilities are translated to market price at the reporting date. Group does not recognise further losses, Australian dollars at foreign exchange Embedded derivatives unless it has incurred obligations or rates ruling at the reporting date. made payments on behalf of the Foreign exchange differences arising on Derivatives embedded in other financial associate. The reporting dates of the retranslation are recognised directly in instruments or other host contracts are associate and the Group are identical the foreign currency translation reserve. treated as separate derivatives when and the associate’s accounting policies their risks and characteristics are not Exchange differences arising from the conform to those used by the Group for closely related to those of the host translation of the net investment in like transactions and events in similar contract and the host contracts are not foreign operations and of related hedges circumstances. measured at fair value with changes in are taken to the foreign currency fair value recognised in profit or loss. (D) FOREIGN CURRENCY translation reserve. They are released into the income statement upon disposal (F) HEDGING Functional and presentation currency of the foreign operation. Hedge effectiveness Both the functional and presentation (E) DERIVATIVE FINANCIAL currency of Santos Ltd is Australian Hedge accounting (see below) is only INSTRUMENTS dollars. Some subsidiaries have a applied where the derivative financial functional currency of United States The Group frequently uses derivative instrument provides an effective hedge dollars which is translated to the financial instruments to hedge its of the hedged item. Where a derivative presentation currency (see below). exposures to changes in foreign financial instrument provides a partially exchange rates, commodity prices and effective hedge, any gain or loss on Transactions and balances interest rates arising in the normal the ineffective part is recognised Transactions in foreign currencies are course of business. The principal immediately in the income statement. initially recorded in the functional derivatives that may be used are forward Fair value hedge currency by applying the exchange rate foreign exchange contracts, foreign ruling at the date of the transaction. currency swaps and options, interest rate Where a derivative financial instrument Monetary assets and liabilities swaps and commodity crude oil price hedges the changes in fair value of denominated in foreign currencies are swap and option contracts. Their use a recognised asset or liability or an retranslated at the foreign exchange is subject to a comprehensive set of unrecognised firm commitment (or an rate ruling at the reporting date. policies, procedures and limits approved identified portion of such asset, liability Foreign exchange differences arising by the Board of Directors. The Group or firm commitment), any gain or loss on on translation are recognised in the does not trade in derivative financial the hedging instrument is recognised in income statement. instruments for speculative purposes. the income statement. The hedged item is stated at fair value in respect of the Foreign exchange differences that arise Derivative financial instruments are risk being hedged, with any gain or loss on the translation of monetary items recognised initially at fair value. being recognised in the income that form part of the net investment in Subsequent to initial recognition, statement. derivative financial instruments are

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1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Cash flow hedge exchange exposure of a recognised and liabilities and contingent liabilities monetary asset or liability, hedge assumed in a business combination are Where a derivative financial instrument is accounting is not applied and any gain measured initially at their fair values at designated as a hedge of the variability or loss on the hedging instrument is the acquisition date. The excess of the in cash flows of a recognised asset or recognised in the income statement. costs of the business combination over liability, or a highly probable forecast the net fair value of the identifiable transaction, any gain or loss on the Hedge of net investment in a net assets of the Group’s share of the derivative financial instrument is foreign operation identifiable net assets acquired is recognised directly in equity. When the The gain or loss on an instrument used recognised as goodwill. If the cost of forecast transaction subsequently results to hedge a net investment in a foreign acquisition is less than the Group’s share in the recognition of a non-financial operation is recognised directly in equity. of the net fair value of the identifiable asset or non-financial liability, or the On disposal of the foreign operation, the net assets of the subsidiary, the forecast transaction for a non-financial cumulative value of any such gains or difference is recognised as a gain in asset or non-financial liability becomes losses recognised directly in equity is the income statement, but only after a a firm commitment for which fair value transferred to profit or loss. reassessment of the identification and hedging is applied, the associated measurement of the net assets acquired. cumulative gain or loss is removed from (G) ACQUISITION OF ASSETS equity and included in the initial cost or Where settlement of any part of the All assets acquired are recorded at their other carrying amount of the consideration is deferred, the amounts cost of acquisition, being the amount of non-financial asset or non-financial payable in the future are discounted to cash or cash equivalents paid, and the liability. If a hedge of a forecast their present value as at the date of fair value of assets given, shares issued transaction subsequently results in the exchange. The discount rate used is the or liabilities incurred. The cost of an recognition of a financial asset or a entity’s incremental borrowing rate, asset comprises the purchase price financial liability, the associated gains being the rate at which a similar including any incidental costs directly and losses that were recognised directly borrowing could be obtained from an attributable to the acquisition; any costs in equity are reclassified into profit or independent financier under comparable directly attributable to bringing the asset loss in the same period or periods during terms and conditions. to the location and condition necessary which the asset acquired or liability for it to be capable of operating; and the (H) EXPLORATION AND EVALUATION assumed affects profit or loss. estimate of the costs of dismantling and EXPENDITURE For cash flow hedges, other than those removing the asset and restoring the site Exploration and evaluation expenditure covered by the preceding paragraph, the on which it is located determined in in respect of each area of interest is associated cumulative gain or loss is accordance with note 1(Q). accounted for using the successful removed from equity and recognised in Business combinations efforts method of accounting. The the income statement in the same period successful efforts method requires all or periods during which the hedged The purchase method of accounting exploration and evaluation expenditure forecast transaction affects profit or loss. is used to account for all business to be expensed in the period it is combinations regardless of whether When a hedging instrument expires or incurred, except the costs of successful equity instruments or other assets are is sold, terminated or exercised, or the wells and the costs of acquiring interests acquired. Cost is measured as the fair entity revokes designation of the hedge in new exploration assets, which are value of the assets given, shares issued relationship, but the hedged forecast capitalised as intangible exploration or liabilities incurred or assumed at the transaction is still expected to occur, and evaluation. The costs of wells are date of exchange plus costs directly the cumulative gain or loss at that point initially capitalised pending the results attributable to the combination. Where remains in equity and is recognised in of the well. equity instruments are issued in a accordance with the above policy when business combination, the fair value An area of interest refers to an individual the transaction occurs. If the hedged of the instruments is their published geological area where the presence of transaction is no longer expected to take market price as at the date of exchange. oil or a natural gas field is considered place, the cumulative unrealised gain or Transaction costs arising on the issue favourable or has been proved to exist, loss recognised in equity is recognised of equity instruments are recognised and in most cases will comprise an immediately in the income statement. directly in equity. individual prospective oil or gas field. Hedge of monetary assets and Except for non-current assets or disposal liabilities groups classified as held for sale (which When a derivative financial instrument is are measured at fair value less costs used to hedge economically the foreign to sell), all identifiable assets acquired

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Exploration and evaluation expenditure (iv) sufficient data exists to indicate expand or replace plant and equipment is recognised in relation to an area of that although a development is and any associated land and buildings. interest when the rights to tenure of the likely to proceed, the carrying These costs are subject to depreciation area of interest are current and either: amount of the exploration and and depletion in accordance with evaluation asset is unlikely to be (i) such expenditure is expected to note 1(K). recovered in full from successful be recovered through successful development or from sale. Ongoing exploration and development and commercial evaluation activities exploitation of the area of interest, Where an indicator of impairment exists, or alternatively, by its sale; or a formal estimate of the recoverable Often the initial discovery and amount is made and any resultant development of an oil or gas asset will (ii) the exploration activities in the area impairment loss is recognised in the lead to ongoing exploration for, and of interest have not yet reached a income statement. evaluation of potential new oil or gas stage which permits reasonable fields in the vicinity with the intention assessment of the existence of When a discovered oil or gas field enters of producing any near field discoveries economically recoverable reserves the development phase the accumulated using the infrastructure in place. and active and significant exploration and evaluation expenditure operations in, or in relation to, the is transferred to oil and gas assets – Exploration and evaluation expenditure area of interest are continuing. assets in development. associated with oil and gas assets is accounted for in accordance with the Where an ownership interest in an (I) OIL AND GAS ASSETS policy in note 1(H). Exploration and exploration and evaluation asset is Oil and gas assets are usually single oil evaluation expenditure amounts exchanged for another, the transaction is or gas fields being developed for future capitalised in respect of oil and gas recognised by reference to the carrying production or which are in the production assets are separately disclosed in value of the original interest. Any cash phase. Where several individual oil or note 14. consideration paid, including transaction gas fields are to be produced through costs, is accounted for as an acquisition (J) LAND, BUILDINGS, PLANT AND common facilities, the individual oil or of exploration and evaluation assets. EQUIPMENT gas fields and the associated production Any cash consideration received, net facilities are managed and reported as a Land and buildings are measured at of transaction costs, is treated as a single oil and gas asset. cost less accumulated depreciation on recoupment of costs previously capitalised buildings, less any impairment losses with any excess accounted for as a gain Assets in development recognised. on disposal of non-current assets. When the technical and commercial Plant and equipment is stated at cost The carrying amounts of the Group’s feasibility of an undeveloped oil or gas less accumulated depreciation and any exploration and evaluation assets are field has been demonstrated, the field accumulated impairment losses. Such reviewed at each reporting date, in enters its development phase. The costs cost includes the cost of rotable spares conjunction with the impairment review of oil and gas assets in the development and insurance spares that are purchased process referred to in note 1(P), to phase are separately accounted for for back up or rotation with specific determine whether any of the following as tangible assets and include past plant and equipment items. Similarly, indicators of impairment exists: exploration and evaluation costs, the cost of major cyclical maintenance development drilling and other (i) tenure over the licence area has is recognised in the carrying amount of subsurface expenditure, surface plant expired during the period or will the related plant and equipment as a and equipment and any associated land expire in the near future, and is not replacement only if it is eligible for and buildings. expected to be renewed; or capitalisation. Any remaining carrying When commercial operation commences amount from the cost of the previous (ii) substantive expenditure on further the accumulated costs are transferred to major cyclical maintenance is exploration for and evaluation of oil and gas assets – producing assets. derecognised. All other repairs and mineral resources in the specific maintenance are recognised in profit area is not budgeted or planned; or Producing assets or loss as incurred. (iii) exploration for and evaluation of The costs of oil and gas assets in Depreciation on buildings, plant and resources in the specific area has production are separately accounted equipment is calculated in accordance not led to the discovery of for as tangible assets and include past with note 1(K). commercially viable quantities exploration and evaluation costs, of resources, and the Group has pre-production development costs and decided to discontinue activities the ongoing costs of continuing to in the specific area; or develop reserves for production and to

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1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(K) DEPRECIATION AND DEPLETION Depletion is not charged on costs carried practice is the equivalent of cost, forward in respect of assets in the less any impairment losses. Depreciation charges are calculated development stage until production to write off the depreciable value of Long-term receivables are discounted commences. buildings, plant and equipment over and are stated at amortised cost, less their estimated economic useful lives to (L) AVAILABLE-FOR-SALE FINANCIAL impairment losses. the Group. Each component of an item ASSETS Trade and other receivables are assessed of buildings, plant and equipment with a Financial instruments held by the Group for indicators of impairment at each cost that is significant in relation to the and the Company which are classified as reporting date. Where a receivable is total cost of the asset is depreciated being available for sale are stated at fair impaired the amount of the impairment separately. The residual value, useful life value, with any resultant gain or loss is the difference between the asset’s and depreciation method applied to an being recognised directly in equity. carrying value and the present value of asset is reviewed at the end of each estimated future cash flows, discounted annual reporting period. The fair value of financial instruments at the original effective interest rate. classified as available for sale is their Depreciation of onshore buildings, plant The carrying amount of the receivable is quoted bid price at the close of business and equipment and corporate assets is reduced through the use of an allowance on the reporting date. calculated using the straight-line method account. Changes in the allowance of depreciation on an individual asset Financial instruments classified as account are recognised in profit or loss. basis from the date the asset is available available for sale are recognised or (O) CASH AND CASH EQUIVALENTS for use. derecognised by the Group and the Company on the date it commits to Cash and cash equivalents comprise cash The estimated useful lives for each class purchase or sell the investments. balances and short-term deposits that of onshore assets for the current and When these investments are are readily convertible to known amounts comparative periods are generally as derecognised, the cumulative gain or of cash, are subject to an insignificant follows: loss previously recognised directly in risk of changes in value, and generally • Buildings 20 – 50 years equity is recognised in profit or loss. have an original maturity of three • Plant and equipment months or less. – Computer equipment 3 – 5 years (M) INVENTORIES (P) IMPAIRMENT – Motor vehicles 4 – 7 years Inventories are stated at the lower – Furniture and fittings 10 – 20 years of cost and net realisable value. Net The carrying amounts of the Group’s – Pipelines 10 – 30 years realisable value is the estimated selling assets, other than inventories and – Plant and facilities 10 – 50 years price in the ordinary course of business, deferred tax assets, are reviewed at each less the estimated costs of completion reporting date to determine whether Depreciation of offshore plant and and selling expenses. Cost is determined there is any indication of impairment. equipment is calculated using the as follows: Where an indicator of impairment exists, units of production method on a a formal estimate of the recoverable cash-generating unit basis (refer (i) drilling and maintenance stocks, amount is made. note 1(P)) from the date of which include plant spares, commencement of production. consumables and maintenance and Oil and gas assets, land, buildings, drilling tools used for ongoing plant and equipment are assessed for Depletion charges are calculated using operations, are valued at weighted impairment on a cash-generating unit a unit of production method based on average cost; and (“CGU”) basis. A cash-generating unit heating value which will amortise the is the smallest grouping of assets that cost of carried forward exploration, (ii) petroleum products, which comprise generates independent cash inflows, and evaluation and subsurface development extracted crude oil, liquefied generally represents an individual oil or expenditure (“subsurface assets”) over petroleum gas, condensate and gas field. Impairment losses recognised the life of the estimated Proven plus naphtha stored in tanks and in respect of cash-generating units are Probable (“2P”) reserves in a pipeline systems and processed allocated to reduce the carrying amount cash-generating unit, together with sales gas and ethane stored in of the assets in the unit on a future subsurface costs necessary to subsurface reservoirs, are valued pro-rata basis. develop the hydrocarbon reserves in the using the absorption cost method respective cash-generating units. in a manner which approximates Exploration and evaluation assets are specific identification. assessed for impairment in accordance The heating value measurement used for with note 1(H). the conversion of volumes of different (N) TRADE AND OTHER RECEIVABLES hydrocarbon products is barrels of oil equivalent. Trade and other receivables are initially recognised at fair value, which in

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

An impairment loss is recognised in impaired asset. An impairment loss is of the future expenditure required to the income statement whenever the reversed only to the extent that the settle the restoration obligation at the carrying amount of an asset or its asset’s carrying amount does not exceed reporting date, based on current legal cash-generating unit exceeds its the carrying amount that would have requirements. Future restoration costs recoverable amount. been determined, net of depreciation are reviewed annually and any changes or depletion, if no impairment loss had in the estimate are reflected in the Where a decline in the fair value of an been recognised. present value of the restoration available-for-sale financial asset has been provision at the reporting date, with a recognised directly in equity and there Impairment losses recognised in profit or corresponding change in the cost of the is objective evidence that the asset is loss on equity instruments classified as associated asset. impaired, the cumulative loss that had available-for-sale financial assets are not been recognised directly in equity is reversed through profit or loss. The amount of the provision for future recognised in profit or loss even though restoration costs relating to exploration, (Q) PROVISIONS the financial asset has not been development and production facilities is derecognised. The amount of the A provision is recognised in the capitalised and depleted as a component cumulative loss that is recognised in statement of financial position when the of the cost of those activities. profit or loss is the difference between Group has a present legal or constructive Remediation the acquisition cost and current fair obligation as a result of a past event value, less any impairment loss on that and it is probable that an outflow of Provisions for remediation costs are financial asset previously recognised in resources embodying economic benefits recognised where there is a present profit or loss. will be required to settle the obligation obligation as a result of an unexpected and a reliable estimate can be made of event that occurs outside of the planned Calculation of recoverable amount the amount of the obligation. operations of an asset. The recoverable amount of an asset is the Provisions are measured at the present The provision for future remediation greater of its fair value less costs to sell value of management’s best estimate of costs is the best estimate of the present and its value in use. In assessing value the expenditure required to settle the value of the future expenditure required in use, an asset’s estimated future cash present obligation using a discounted to settle the remediation obligation at flows are discounted to their present cash flow methodology. If the effect of the reporting date, based on current value using a pre-tax discount rate that the time value of money is material, the legal requirements. Future remediation reflects current market assessments of provision is discounted using a current costs are reviewed annually and any the time value of money and the risks pre-tax rate that reflects current market changes in the estimate are reflected specific to the asset. Where an asset does assessments of the time value of money in the present value of the remediation not generate cash flows that are largely and, where appropriate, the risks specific provision at the reporting date, with a independent from other assets or groups to the liability. The increase in the corresponding charge to the income of assets, the recoverable amount is provision resulting from the passage of statement. determined for the cash-generating unit time is recognised in finance costs. to which the asset belongs. (R) EMPLOYEE BENEFITS Restoration For oil and gas assets the estimated Wages, salaries, annual leave and future cash flows are based on estimates Provisions for future environmental sick leave of hydrocarbon reserves, future production restoration are recognised where there Liabilities for wages and salaries, profiles, commodity prices, operating is a present obligation as a result of including non-monetary benefits, costs and any future development costs exploration, development, production, and annual leave that are expected to necessary to produce the reserves. transportation or storage activities be settled within twelve months of the Estimates of future commodity prices having been undertaken, and it is reporting date are recognised in respect are based on contracted prices where probable that an outflow of economic of employees’ services up to the applicable or based on forward market benefits will be required to settle the reporting date. They are measured at the prices where available. obligation. The estimated future amounts expected to be paid when the obligations include the costs of removing Reversals of impairment liabilities are settled. Expenses for facilities, abandoning wells and restoring non-vesting sick leave are recognised An impairment loss is reversed if there the affected areas. when the leave is taken and are has been an increase in the estimated The provision for future restoration costs measured at the rates paid or payable. recoverable amount of a previously is the best estimate of the present value

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1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Long-term service benefits respect of the plan are recognised which the SARs were granted. The directly in retained earnings. amount recognised as an expense is only A liability for long service leave is adjusted when the SARs do not vest due recognised and measured as the present When the calculation results in plan to non-market-related conditions. value of the estimated future cash assets exceeding liabilities to the Group, outflows to be made in respect of the recognised asset is limited to the net The Group recognises the fair value employees’ services up to the reporting total of any unrecognised actuarial of cash-settled share-based payment date. The obligation is calculated using losses and past service costs and the transactions as an employee expense expected future increases in wage and present value of any future refunds with a corresponding increase in the salary rates, experience of employee from the plan or reductions in future liability for employee benefits. The fair departures and periods of service. contributions to the plan. value of the liability is measured initially, Expected future payments are discounted and at the end of each reporting period Past service cost is the increase in the using the rates attached to the until settled, at the fair value of the present value of the defined benefit Commonwealth Government bonds at the cash-settled share-based payment obligation for employee services in prior reporting date which have maturity dates transaction, by using the Monte Carlo periods, resulting in the current period approximating the terms of the Group’s simulation method, taking into account from the introduction of, or changes to, obligations. the terms and conditions on which post-employment benefits or other the cash-settled share-based payment Defined contribution plans long-term employee benefits. Past transactions were granted, and the extent service costs may either be positive The Company and its controlled entities to which the employees have rendered (where benefits are introduced or contribute to several defined contribution service to date. improved) or negative (where existing superannuation plans. Obligations for benefits are reduced). The fair value of shares issued to eligible contributions are recognised as an employees under the Santos Employee expense in the income statement Share-based payment transactions Share Acquisition Plan, to eligible as incurred. The Santos Executive Share Option Plan executives and employees under the Defined benefit plan allows eligible executives to acquire Santos Employee Share Purchase Plan, shares in the capital of the Company. and new shares issued to Non-executive The Group’s net obligation in respect of The fair value of options granted is Directors under the Non-executive the defined benefit superannuation plan recognised as an employee expense with Director Share Plan, is recognised as an is calculated by estimating the amount a corresponding increase in equity. The increase in issued capital on grant date. of future benefit that employees have fair value is measured at grant date and earned in return for their service in the Shares issued under the Santos Employee recognised over the period during which current and prior periods; that benefit Share Acquisition Plan to employees the executive becomes unconditionally is discounted to determine its present of subsidiaries are recognised in the entitled to the options. The fair value of value, and the fair value of any plan Company’s separate financial statements the options granted is measured using assets is deducted. as an additional investment in the the Monte Carlo simulation method, subsidiary with a corresponding credit The discount rate is the yield at the taking into account the terms and to equity. As a result, the expense reporting date on Government bonds market conditions upon which the recognised by the Company in relation that have maturity dates approximating options were granted. The amount to equity-settled awards only represents the terms of the Group’s obligations. The recognised as an expense is only the expense associated with grants to calculation is performed by a qualified adjusted when the options do not vest employees of the Company. The expense actuary using the projected unit credit due to non-market-related conditions. recognised by the Group is the total method. The fair value of Share Acquisition Rights expense. When the benefits of the plan are (“SARs”) issued to eligible executives (S) INTEREST-BEARING BORROWINGS improved, the portion of the increased under the Executive Long-term Incentive benefit relating to past service by Programme is recognised as an employee Interest-bearing borrowings are employees is recognised as an expense in expense with a corresponding increase recognised initially at fair value, net of the income statement on a straight-line in equity. The fair value is measured transaction costs incurred. Subsequent basis over the average period until the at grant date and recognised over the to initial recognition, interest-bearing benefits become vested. To the extent period during which the executive borrowings are stated at amortised cost that the benefits vest immediately, the becomes unconditionally entitled to the with any difference between cost and expense is recognised immediately in the SARs. The fair value of the SARs granted redemption value being recognised in income statement. is measured using the Monte Carlo the income statement over the period simulation method, taking into account of the borrowings on an effective Actuarial gains or losses that arise in the terms and market conditions upon interest basis. calculating the Group’s obligation in

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Fixed rate notes that are hedged by an dividends are discretionary, or it is with the terms of the overriding royalty interest rate swap are recognised at fair redeemable only at the Company’s agreements. value (refer note 1(F)). option. Dividends on preference Pipeline tariffs and processing tolls share capital classified as equity are (T) BORROWING COSTS recognised as distributions within equity. Tariffs and tolls charged to other entities Borrowing costs, including interest and for use of pipelines and facilities owned Dividends finance charges relating to major oil and by the Group are recognised as revenue gas assets under development up to the Dividends are recognised as a liability at as they accrue in accordance with the date of commencement of commercial the time the Directors resolve to pay or terms of the tariff and tolling operations, are capitalised as a declare the dividend. agreements. component of the cost of development. Transaction costs Trading revenue Where funds are borrowed specifically for qualifying projects the actual borrowing Transaction costs of an equity Trading revenue represents the net costs incurred are capitalised. Where the transaction are accounted for as a revenue derived from the purchase and projects are funded through general deduction from equity, net of any related subsequent sale of hydrocarbon products borrowings the borrowing costs are income tax benefit. from third parties where the risks and capitalised based on the weighted benefits of ownership of the product (X) REVENUE average borrowing rate (refer note 19). do not pass to the Group, or where the Borrowing costs incurred after Revenue is recognised in the income Group acts as an agent or broker with commencement of commercial operations statement when the significant risks compensation on a commission or are expensed. and rewards of ownership have been fee basis. transferred to the buyer. Revenue is All other borrowing costs are recognised (Y) INTEREST INCOME recognised and measured at the fair value in the profit or loss in the period in of the consideration or contributions Interest income is recognised in the which they are incurred. received, net of goods and services tax or income statement as it accrues, using (U) DEFERRED INCOME similar taxes, to the extent it is probable the effective interest method. This is a that the economic benefits will flow method of calculating the amortised cost A liability is recorded for obligations to the Group and the revenue can be of a financial asset and allocating the under sales contracts to deliver natural reliably measured. interest income over the relevant period gas in future periods for which payment using the effective interest rate, which is has already been received. Sales revenue the rate that exactly discounts estimated Deferred income is also recognised on Sales revenue is recognised on the basis future cash receipts through the expected asset sale agreements where consideration of the Group’s interest in a producing life of the financial asset to the net is received prior to all conditions field (“entitlements” method), when the carrying amount of the financial asset. precedent being fulfilled. physical product and associated risks (Z) OTHER INCOME and rewards of ownership pass to the (V) TRADE AND OTHER PAYABLES purchaser, which is generally at the time Other income is recognised in the Trade and other payables are recognised of ship or truck loading, or on the income statement at the fair value of when the related goods or services are product entering the pipeline. the consideration received or receivable, received, at the amount of cash or cash net of goods and services tax, when the Revenue earned under a production equivalent that will be required to significant risks and rewards of ownership sharing contract (“PSC”) is recognised on discharge the obligation, gross of any have been transferred to the buyer or a net entitlements basis according to the settlement discount offered. Trade when the service has been performed. terms of the PSC. payables are non-interest-bearing and The gain or loss arising on disposal of are settled on normal terms and Dividends a non-current asset is included as other conditions. Dividend revenue from controlled entities income at the date control of the asset (W) SHARE CAPITAL is recognised as the dividends are passes to the buyer. The gain or loss on declared, and from other parties as disposal is calculated as the difference Ordinary share capital the dividends are received. between the carrying amount of the asset at the time of disposal and the Ordinary share capital is classified Overriding royalties as equity. net proceeds on disposal. Royalties recognised on farmed-out Preference share capital operating lease rights are recognised as Preference share capital is classified as revenue as they accrue in accordance equity if it is non-redeemable and any

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1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(AA) LEASES Receivables and payables are stated settlement of the carrying amount of with the amount of GST included. assets and liabilities, using tax rates The determination of whether an The net amount of GST recoverable from, enacted or substantively enacted at the arrangement is or contains a lease or payable to, the ATO is included as a reporting date. is based on the substance of the current asset or liability in the statement arrangement and requires an assessment A deferred tax asset is recognised only of financial position. of whether the fulfilment of the to the extent that it is probable that arrangement is dependent on the use Cash flows are included in the statement future taxable profits will be available of a specific asset or assets and the of cash flows on a gross basis. The GST against which the asset can be utilised. arrangement conveys a right to use components of cash flows arising from Deferred tax assets are reduced to the the asset. investing and financing activities which extent that it is no longer probable that are recoverable from, or payable to, the related tax benefit will be realised. Leases are classified as finance leases the ATO are classified as operating when the terms of the lease transfer The Company and all its wholly-owned cash flows. substantially all the risks and rewards Australian resident entities are part of a incidental to ownership of the leased Similar taxes in other tax jurisdictions tax-consolidated group under Australian asset to the lessee. All other leases are are accounted for in a like manner. taxation law. Santos Ltd is the head classified as operating leases. entity in the tax-consolidated group. (AC) TAXATION Current tax expense/benefit, deferred Finance leases are capitalised at the Royalty-related taxation tax liabilities and deferred tax assets lease’s inception at the fair value of the arising from temporary differences of the leased property or, if lower, the present Petroleum resource rent tax, resource members of the tax-consolidated group value of the minimum lease payments. rent royalty and additional profits tax are allocated amongst the members of The corresponding liability to the lessor are recognised as an income tax under the tax-consolidated group using a is included in the statement of financial AASB 112 Income Taxes. “stand-alone taxpayer” approach in position as a finance lease obligation. Income tax accordance with Interpretation 1052 Lease payments are apportioned between Tax Consolidation Accounting and are finance charges and reduction of the lease Income tax on the profit or loss for the recognised in the separate financial obligation so as to achieve a constant year comprises current and deferred tax. statements of each entity. Current tax rate of interest on the remaining balance Income tax is recognised in the income liabilities and assets and deferred tax of the liability. Assets under finance lease statement except to the extent that it assets arising from unused tax losses are depreciated over the shorter of the relates to items recognised directly in and tax credits of the members of the estimated useful life of the asset and equity, in which case it is recognised tax-consolidated group are recognised the lease term if there is no reasonable in equity. by the Company (as head entity in the certainty that the Group will obtain Current tax is the amount of income tax tax-consolidated group). ownership by the end of the lease term. payable on the taxable profit or loss The Company and the other entities in Operating lease payments are recognised for the year, using tax rates enacted or the tax-consolidated group have entered as an expense on a straight-line basis substantively enacted at the reporting into a tax funding agreement. Tax over the lease term, except where another date, and any adjustment to tax payable contribution amounts payable under the systematic basis is more representative in respect of previous years. tax funding agreement are recognised of the time pattern in which economic Deferred tax is determined using the as payable to or receivable by the benefits from the leased asset are statement of financial position approach, Company and each other member of the consumed. Contingent rentals arising providing for temporary differences tax-consolidated group. Where the tax under operating leases are recognised between the carrying amounts of assets contribution amount recognised by each as an expense in the period in which and liabilities for financial reporting member of the tax-consolidated group they are incurred. purposes and the appropriate tax bases. for a particular period under the tax (AB) GOODS AND SERVICES TAX The following temporary differences are funding agreement is different from the not provided for: the initial recognition aggregate of the current tax liability or Revenues, expenses and assets are of assets or liabilities that affect neither asset and any deferred tax asset arising recognised net of the amount of goods accounting nor taxable profit; and from unused tax losses and tax credits in and services tax (“GST”), except where differences relating to investments in respect of that period assumed by the the amount of GST incurred is not subsidiaries to the extent it is probable Company, the difference is recognised as recoverable from the Australian Taxation that they will not reverse in the a contribution from (or distribution to) Office (“ATO”). In these circumstances foreseeable future. The amount of equity participants. the GST is recognised as part of the cost deferred tax provided is based on the of acquisition of the asset or as part of expected manner of realisation or the expense.

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company and the other entities in (AE) SIGNIFICANT ACCOUNTING Exploration and evaluation the tax-consolidated group have also JUDGEMENTS, ESTIMATES AND The Group’s policy for exploration and entered into a tax sharing agreement ASSUMPTIONS evaluation expenditure is discussed in pursuant to which the other entities may The carrying amounts of certain assets note 1(H). The application of this be required to contribute to the tax and liabilities are often determined policy requires management to make liabilities of the Company in the event of based on management’s judgement certain estimates and assumptions as default by the Company or upon leaving regarding estimates and assumptions of to future events and circumstances, the tax-consolidated group. future events. The reasonableness of particularly in relation to the (AD) DISCONTINUED OPERATIONS estimates and underlying assumptions assessment of whether economic AND NON-CURRENT ASSETS HELD are reviewed on an ongoing basis. quantities of reserves have FOR SALE Revisions to accounting estimates are been found. Any such estimates and recognised in the period in which the assumptions may change as new A discontinued operation is a component estimate is revised if the revision affects information becomes available. If, of the Group that has been disposed of, only that period or in the period of the after having capitalised exploration or is classified as held for sale, and that revision and future periods if the revision and evaluation expenditure, represents a separate major line of affects both current and future periods. management concludes that the business or geographical area of The key judgements, estimates and capitalised expenditure is unlikely to operations, and is part of a single assumptions that have a significant risk be recovered by future exploitation or coordinated plan to dispose of such a of causing a material adjustment to the sale, then the relevant capitalised line of business or area of operations. carrying amount of certain assets and amount will be written off to the The results of discontinued operations liabilities within the next annual income statement. The carrying are presented separately on the face of reporting period are: amount of exploration and evaluation the income statement and the assets and assets is disclosed in note 13. liabilities are presented separately on Estimates of reserve quantities the statement of financial position. Provision for restoration The estimated quantities of Proven Non-current assets and disposal groups plus Probable hydrocarbon reserves The Group estimates the future are classified as held for sale and reported by the Group are integral to removal and restoration costs of oil measured at the lower of their carrying the calculation of depletion and and gas production facilities, wells, amount and fair value less costs to sell if depreciation expense and to pipelines and related assets at the their carrying amount will be recovered assessments of possible impairment of time of installation of the assets and principally through a sale transaction. assets. Estimated reserve quantities reviews these assessments periodically. They are not depreciated or amortised. are based upon interpretations of In most instances the removal of these For an asset or disposal group to be geological and geophysical models and assets will occur many years in the classified as held for sale, it must be assessments of the technical future. The estimate of future removal available for immediate sale in its feasibility and commercial viability of costs therefore requires management present condition and its sale must be producing the reserves. These to make judgements regarding the highly probable. assessments require assumptions to be removal date, future environmental made regarding future development legislation, the extent of restoration An impairment loss is recognised for any and production costs, commodity activities required and future removal initial or subsequent write-down of the prices, exchange rates and fiscal technologies. asset (or disposal group) to fair value regimes. The estimates of reserves may less costs to sell. A gain is recognised The carrying amount of the provision change from period to period as the for any subsequent increases in fair for restoration is disclosed in note 20. economic assumptions used to value less costs to sell of an asset (or estimate the reserves can change from Impairment of oil and gas assets disposal group) but not in excess of any period to period, and as additional cumulative impairment loss previously The Group assesses whether oil and geological data is generated during recognised. A gain or loss not previously gas assets are impaired on a the course of operations. Reserves recognised by the date of the sale of the semi-annual basis. This requires an estimates are prepared in accordance non-current asset (or disposal group) is estimation of the recoverable amount with the Group’s policies and recognised at the date of derecognition. of the cash-generating unit to which procedures for reserves estimation the assets belong. The carrying which conform to guidelines prepared amount of oil and gas assets and the by the Society of Petroleum Engineers. assumptions used in the estimation of recoverable amount are discussed in notes 14 and 16 respectively.

88 Santos Annual Report 2009

F-149 Level: 0 – From: 0 – Friday, September 17, 2010 – 22:56 – eprint3 – 4262 Section 07a (883) (115) (768) (154) (216) (179) (664) Total 1,650 2,533 63 2,624 $million 3,683 2,805 43 2008 – 2,762 – 85 70 (78) (98) (37) 434 717 730 (283) (205) (202) (619) 2009 1,588 2,251 2,181 $million (768) (154) (235) (179) (13) (42) 6 (32) – 63 (1) $million $million 7 2008 31 – – Other and and Other (3) 85 14 26 unallocated unallocated (98) (18) (51) (43) (205) (271) (202) 2009 $million

(22) GLNG – 1,733 – – $million $million 1,755 113 1 7 2008 105 – 8 – – 38 13 28 (30) 141 100 2009 $million

(51) – 9 (148) – $million $million 208 242 – – 2008 242 – – 1 – 15 (29) 105 119 167 166 2009 $million

(111) – (168) 694 – 862 $million $million 1,125 1 25 2008 1,099 – 4 WA & NT WA Pacific Asia 15 (71) (43) 631 857 864 845 (183) 2009 $million (4) (67) (410) 423 – 900 $million $million 1,319 34 – 2008 1,285 Eastern – – Australia Australia (7) (9) 38 257 625 (359) 2009 1,082 1,044 with effect from 1 January 2009. AASB 8 requires operating segments to be identified on the basis of internal reports about reports internal basis of on the to be identified segments operating 2009. AASB 8 requires 1 January with effect from $million

5 3 Note Note Operating Segments Operating

Net profit for the period the for profit Net Total taxation expense expense 7 taxation Total Royalty-related taxation expense expense taxation Royalty-related Income tax expense expense tax Income Profit before tax before Profit Finance expenses expenses Finance Interest income income Interest Earnings before interest and and interest before Earnings tax (“EBIT”) Net impairment (loss)/reversal (loss)/reversal impairment Net gas assets oil and of Exploration and evaluation expensed expensed evaluation and Exploration Depreciation and depletion depletion and Depreciation Results tax, interest, before Earnings depletion, depreciation, impairment and exploration (“EBITDAX”) Total segment revenue revenue segment Total

Other revenue from external external from revenue Other customers Inter-segment sales Inter-segment 2. SEGMENT INFORMATION 2. AASB 8 has adopted Group The to assess its performance. and segment to the to allocate resources in order maker decision operating chief by the reviewed regularly that are Group the of components LNG Gladstone and Pacific, & NT”), Asia (“WA Territory Northern and Australia Western Eastern Australia, units of business four to be the segments its operating has identified Group The by the undertaken activities comprises the segment unallocated and other The regions. assets within those similarity of the and regions geographical different (“GLNG®”), based on the and performance assessing Officer for Executive Chief to the provided are reports internal basis on which This is the groups. functional corporate and exploration technical, Group’s Group. within the resources of allocation the determining Egypt. and Republic Kyrgyz Bangladesh, India, Vietnam, Guinea, New Papua in Indonesia, operations includes segment operating Pacific Asia The gas sale of the from is derived Revenue hydrocarbons. of marketing and transportation production, development, exploration, the namely business, in one primarily operates Group The oil. crude of transportation the and hydrocarbons liquid and Revenue customers Sales to external

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009 – – 1,802 – 48 1,409 345 – 5,324 9,802 $million (32) 36 2008 1,697 Total 8 69 13 (18) (14) 178 589 177 262 2009 1,942 1,106 4,394 11,361 $million 358 – 44 11 303 – 3,793 2,890 – $million $million – – 2008 – – 6 – – – – – 39 Other and and Other 723 178 500 177 unallocated unallocated 2009 2,887 3,869 $million

– 319 – – 277 42 – 143 995 $million $million – – – 2008 1,697 GLNG – – – – – 1 (2) 26 89 311 196 123 2009 1,238 $million

– – 145 – 4 141 – – 94 660 $million $million – 27 2008 – – 2 – – 9 – 34 270 (16) (14) 268 149 807 2009 $million

314 – – 314 – – 711 1,928 – – $million $million – – 2008 – – 2 – – – – – – WA & NT WA Paciﬁc Asia 231 229 747 227 2009 2,005 $million 666 – – 666 – – 583 3,329 – (32) $million $million 9 – 2008 – – – – – – 4 8 – – Eastern Australia Australia 407 407 488 2009 $million

3,442

27 15 14 27

Note Note $2,300 million (2008: $1,553 million) of cash and cash equivalents and term deposits as a result of cash received from the 2009 Entitlement offer and the proceeds from disposal of non-current assets in 2008; and non-current disposal of from proceeds the and offer 2009 Entitlement the from cash received of as a result term deposits and cash equivalents cash and of (2008: $1,553 million) $2,300 million

Investment in an associate in an associate Investment Other land, buildings, plant and and plant buildings, land, Other equipment Oil and gas assets Oil and Additions and acquisitions of of acquisitions and Additions assets non-current assets evaluation and Exploration 13 Investments accounted for using using for accounted Investments equity method the Total segment liabilities segment Total Total segment assets* segment Total losses contracting for Provision remediation of in provisions Change incidents related and (CONTINUED) from recoveries Insurance incidents entity controlled Loss on sale of SEGMENT INFORMATION 2. before in proﬁt included Amounts because of unusual tax that are size or incidence: nature, their gas assets oil and Gain on sale of * assets include: segment unallocated and other Total • • assets. evaluation and exploration of (2008: $428 million) $792 million

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Consolidated Santos Ltd 2009 2008 2009 2008 2. SEGMENT INFORMATION (CONTINUED) Note $million $million $million $million

Revenue from external customers by geographical location of production Australia 2,084 2,563 Other countries 167 242 Total revenue 3 2,251 2,805

During the year revenue from two separate customers amounted to $512 million (2008: $770 million) and $253 million (2008: $539 million) respectively, arising from sales from all segments of the Group.

Non-current assets by geographical location Australia 6,620 5,738 Other countries 997 1,105 7,617 6,843

Non-current assets by geographical location comprises: Exploration and evaluation assets 13 923 493 Oil and gas assets 14 6,317 6,190 Other land, buildings, plant and equipment 15 200 160 Investment in an associate 27 177 – 7,617 6,843

3. REVENUE AND OTHER INCOME

Product sales: Gas, ethane and liqueﬁed gas 1,098 1,052 310 301 Crude oil 679 1,151 250 407 Condensate and naphtha 233 321 58 81 Liqueﬁed petroleum gas 171 238 63 84 2,181 2,762 681 873 Other revenue: Overriding royalties 8 16 12 24 Pipeline tariffs and tolls 30 9 2 4 Trading revenue 18 13 19 8 Dividends from controlled entities – – – 27 Other 14 5 1 1 70 43 34 64 Total revenue 2,251 2,805 715 937

Other income: Insurance recoveries 8 36 – – Net gain on sale of non-current assets 260 1,699 49 1 Net loss on sale of controlled entities (14) – – – 254 1,735 49 1

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

Consolidated Santos Ltd 2009 2008 2009 2008 4. EXPENSES $million $million $million $million

Cost of sales: Cash cost of production Production costs: Production expenses 460 465 95 155 Production facilities operating leases 72 78 29 30 532 543 124 185 Other operating costs: Pipeline tariffs, tolls and other 91 84 29 21 Royalties and excise 61 101 25 43 152 185 54 64 Total cash cost of production 684 728 178 249 Depreciation and depletion 612 662 250 273 Third party gas purchases 117 62 35 7 Decrease/(increase) in product stock 10 (29) – (8) Total cost of sales 1,423 1,423 463 521

Other expenses: Selling 10 18 4 11 Corporate 77 97 86 87 Depreciation 7 2 3 – 94 117 93 98 Foreign exchange losses/(gains) 28 (24) 7 (6) Change in fair value of ﬁnancial assets designated as at fair value through proﬁt or loss (6) 12 – – Fair value hedges, losses/(gains): On the hedging instrument 134 (236) – – On the hedged item attributable to the hedged risk (138) 229 – – Exploration and evaluation expensed 202 179 32 22 Net impairment loss of oil and gas assets 37 216 35 71 Impairment reversal of receivables due from controlled entities – – (8) (24) Net impairment loss of investments in controlled entities – – 5 50 351 493 164 211

Proﬁt before tax includes the following: Depreciation and depletion: Depletion of subsurface assets 348 402 147 181 Depreciation of plant and equipment 268 257 105 90 Depreciation of buildings 3 5 1 2 Total depreciation and depletion 619 664 253 273 Employee beneﬁts expense 243 217 223 210 Net write-down of inventories – 1 – – Operating lease rentals: Minimum lease payments 85 88 41 39

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Consolidated Santos Ltd 2009 2008 2009 2008 5. EARNINGS $million $million $million $million

EBITDAX is calculated as follows: Proﬁt before tax 717 2,533 201 103 Add back: Net ﬁnancing costs/(income) 13 91 (64) 103 EBIT 730 2,624 137 206 Add back: Depreciation and depletion 619 664 253 273 Exploration and evaluation expensed 202 179 32 22 Net impairment loss on oil and gas assets 37 216 35 71 Impairment reversal on receivables due from controlled entities – – (8) (24) Net impairment loss on investments in controlled entities – – 5 50 EBITDAX 1,588 3,683 454 598

6. NET FINANCING COSTS

Interest income: Controlled entities – – (117) (129) Other entities (85) (63) (80) (54) Interest income (85) (63) (197) (183) Interest expense: Controlled entities – – 121 276 Other entities 69 132 1 1 Less borrowing costs capitalised (9) (10) – – 60 122 122 277 Unwind of the effect of discounting on provisions 38 32 11 9 Finance expenses 98 154 133 286 Net ﬁnancing costs/(income) 13 91 (64) 103

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

Consolidated Santos Ltd 2009 2008 2009 2008 7. TAXATION EXPENSE $million $million $million $million

Recognised in the income statement: Income tax expense Current tax expense Current year 79 727 74 (8) Adjustments for prior years (15) (9) 9 14 64 718 83 6 Deferred tax expense Origination and reversal of temporary differences 116 90 (21) 42 Beneﬁt of tax losses recognised – (28) – (28) Adjustments for prior years 25 (12) – 31 141 50 (21) 45 Total income tax expense 205 768 62 51

Royalty-related taxation expense Current tax expense Current year 72 79 4 28 Adjustments for prior years (1) 7 – 2 71 86 4 30 Deferred tax expense Origination and reversal of temporary differences 6 29 (7) 2 Adjustments for prior years 1 – – – 7 29 (7) 2 Total royalty-related taxation expense 78 115 (3) 32

Numerical reconciliation between tax expense and pre-tax net profit: Profit before tax 717 2,533 201 103 Prima facie income tax at 30% (2008: 30%) 215 760 60 31 Increase in income tax expense due to: Investment allowance (21) – (10) – Net impairment loss of investments in controlled entities – – 2 15 Net impairment reversal of receivables from controlled entities – – – (7) Benefit arising from previously unrecognised tax losses or temporary differences that are used to reduce current tax expense (7) (2) – – Foreign losses not recognised 25 26 – – Dividends from controlled entities – – – (10) Tax losses recognised/(derecognised) 15 (28) – (28) Benefits arising from previously unrecognised tax bases in assets upon change in use (32) – – – Under-provided in prior years 10 19 9 45 Other – (7) 1 5 Income tax expense 205 768 62 51 Royalty-related taxation expense 78 115 (3) 32 Total taxation expense 283 883 59 83

Deferred tax charged/(credited) directly to equity: Gain/(loss) on foreign currency loans designated as hedges of net investments in foreign operations 86 (82) – – Change in fair value of available-for-sale financial assets – (4) – (4) Off-market buy-back transaction costs – (1) – (1) Entitlement offer transaction costs (23) – (23) – Actuarial gain/(loss) on defined benefit plan 5 (11) 5 (11) 68 (98) (18) (16)

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Consolidated Santos Ltd 2009 2008 2009 2008 8. CASH AND CASH EQUIVALENTS $million $million $million $million

Cash at bank and in hand 234 273 58 155 Short-term deposits 2,006 1,280 1,973 1,248 Cash and cash equivalents in the statements of cash ﬂows 2,240 1,553 2,031 1,403

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. The Group’s usual cash management process includes investing cash in short-term deposits with an original maturity of three months or less. However, much of the proceeds from the 2009 Entitlement offer have been invested in short-term deposits with longer maturities to take advantage of higher available yields. As at 31 December 2009, $1,583 million was placed in term deposits with original maturities of 4 to 18 months. All deposits are held with a range of high creditworthy financial institutions and are readily convertible to cash with commensurate interest adjustments if required. Restricted cash balances Barracuda Limited, a wholly-owned subsidiary incorporated in Papua New Guinea, has cash and cash equivalents at 31 December 2009 of US$16 million (2008: US$10 million) which can only be repatriated to Australia with the permission of the Internal Revenue Commission of Papua New Guinea in accordance with the financing plan submitted in respect of PDL 3. Wholly-owned Australian subsidiaries, Santos (BBF) Pty Ltd and Santos (SPV) Pty Ltd, have total cash and cash equivalents at 31 December 2009 of US$18 million (2008: US$20 million) that are held to cover obligations under a reserve-based facility.

Consolidated Santos Ltd 2009 2008 2009 2008 9. TRADE AND OTHER RECEIVABLES $million $million $million $million

Current receivables Trade receivables 324 327 119 121 Allowance for impairment loss – – – – 324 327 119 121 Tax-related balances owing by controlled entities – – – 533 Other receivables and prepayments 593 254 238 40 917 581 357 694

Non-current receivables Other receivables 10 18 9 17

The ageing of trade receivables at the reporting date is as follows: Trade receivables not yet due 286 307 113 121 Past due not impaired: Less than one month 11 3 1 – One to three months 17 11 2 – Three to six months 3 2 – – Six to twelve months 4 3 3 – Greater than twelve months 3 1 – – Considered impaired: Greater than twelve months – – – – 324 327 119 121

Trade receivables are non-interest-bearing and settlement terms are generally within 30 days. Trade receivables that are neither past due nor impaired relate to a number of independent customers for whom there is no recent history of default. Impaired receivables An allowance for impairment loss is recognised when there is objective evidence that an individual trade receivable is impaired. No impairment loss was recognised by the Group or the Company during the year.

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

Consolidated Santos Ltd 2009 2008 2009 2008 10. INVENTORIES $million $million $million $million

Petroleum products 147 164 85 82 Drilling and maintenance stocks 126 126 54 54 Total inventories at lower of cost and net realisable value 273 290 139 136

Inventories included above that are stated at net realisable value 39 29 24 18

11. OTHER FINANCIAL ASSETS

Current other ﬁnancial assets Term deposits 60 – 60 – Interest rate swap contracts 3 – – – Cross-currency swap contracts – 59 – – Other 2 – – – 65 59 60 –

Non-current other ﬁnancial assets Interest rate swap contracts 123 304 – – Cross-currency swap contracts – 33 – – Receivables due from controlled entities: Non-interest-bearing – – 147 108 Interest-bearing – – 1,848 1,193 Receivables due from other related entities 10 6 – – Investments in controlled entities – – 3,575 3,422 Investment in an associated entity – – 178 – Other 1 2 – 1 134 345 5,748 4,724

Receivables due from controlled entities are shown net of impairment losses of nil (2008: $8 million). Receivables due from controlled entities are for loans made in the ordinary course of business for an indeﬁnite period. Interest-bearing amounts owing by controlled entities are at normal market terms and conditions. Receivables due from other related entities are for loans made in the ordinary course of business for a term of ﬁve years, and interest is calculated on normal market terms and conditions.

12. AVAILABLE-FOR-SALE FINANCIAL ASSETS

Equity securities available for sale 2 2 2 2

Investments in equity securities available for sale consist of investments in ordinary shares listed on the Australian Securities Exchange, and have no ﬁxed maturity date or coupon rate.

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2009 Balance at 31 December 2009 783 140 923 30 – 30

Reconciliation of movements Balance at 1 January 2009 451 42 493 43 – 43 Acquisition of controlled entities – 8 8 – – – Acquisition of exploration and evaluation assets 351 – 351 – – – Additions 140 90 230 16 – 16 Exploration and evaluation expensed (63) – (63) (13) – (13) Disposals and recoupment of exploration and evaluation expenditure (24) – (24) (23) – (23) Transfer to oil and gas assets (38) – (38) 7 – 7 Exchange differences (34) – (34) – – – Balance at 31 December 2009 783 140 923 30 – 30

Comprising: Acquisition-related costs 527 8 535 7 – 7 Successful exploration wells 199 – 199 23 – 23 Exploration and evaluation assets pending determination of success* 57 132 189 – – – 783 140 923 30 – 30

2008 Balance at 31 December 2008 451 42 493 43 – 43

Reconciliation of movements Balance at 1 January 2008 332 – 332 16 – 16 Acquisition of controlled entities 15 – 15 – – – Acquisition of exploration and evaluation assets 28 – 28 – – – Additions 260 42 302 81 – 81 Exploration and evaluation expensed (82) – (82) (22) – (22) Net impairment losses (1) – (1) – – – Transfer to oil and gas assets (160) – (160) (32) – (32) Exchange differences 59 – 59 – – – Balance at 31 December 2008 451 42 493 43 – 43

Comprising: Acquisition-related costs 218 – 218 12 – 12 Successful exploration wells 106 – 106 23 – 23 Exploration and evaluation assets pending determination of success* 127 42 169 8 – 8 451 42 493 43 – 43

* Amounts related to plant and equipment includes costs capitalised for the evaluation of the GLNG facilities.

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

Consolidated Santos Ltd Subsurface Plant and Subsurface Plant and assets equipment Total assets equipment Total 14. OIL AND GAS ASSETS $million $million $million $million $million $million

2009 Cost at 31 December 2009 8,090 6,423 14,513 3,007 2,474 5,481 Less accumulated depreciation, depletion and impairment (4,886) (3,310) (8,196) (2,199) (1,560) (3,759) Balance at 31 December 2009 3,204 3,113 6,317 808 914 1,722

Reconciliation of movements Assets in development Balance at 1 January 2009 464 123 587 – – – Additions 217 118 335 – – – Recoupment of exploration and evaluation expenditure (48) – (48) – – – Transfer from exploration and evaluation assets 1 – 1 – – – Exchange differences (96) (11) (107) – – – Balance at 31 December 2009 538 230 768 – – – Producing assets Balance at 1 January 2009 2,727 2,876 5,603 862 916 1,778 Acquisition of oil and gas assets 7 2 9 – – – Additions 360 402 762 130 86 216 Transfer from exploration and evaluation assets 37 – 37 (7) – (7) Disposals (43) (5) (48) – (2) (2) Depreciation and depletion expense (348) (242) (590) (147) (81) (228) Net impairment losses (24) (13) (37) (30) (5) (35) Exchange differences (50) (137) (187) – – – Balance at 31 December 2009 2,666 2,883 5,549 808 914 1,722 Total oil and gas assets 3,204 3,113 6,317 808 914 1,722

Comprising: Exploration and evaluation expenditure pending commercialisation 31 – 31 – – – Other capitalised expenditure 3,173 3,113 6,286 808 914 1,722 3,204 3,113 6,317 808 914 1,722

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2008 Cost at 31 December 2008 7,838 6,121 13,959 2,885 2,392 5,277 Less accumulated depreciation, depletion and impairment (4,647) (3,122) (7,769) (2,023) (1,476) (3,499) Balance at 31 December 2008 3,191 2,999 6,190 862 916 1,778

Reconciliation of movements Assets in development Balance at 1 January 2008 220 1 221 – – – Additions 93 122 215 – – – Transfer from exploration and evaluation assets 113 – 113 – – – Exchange differences 38 – 38 – – – Balance at 31 December 2008 464 123 587 – – – Producing assets Balance at 1 January 2008 2,907 2,457 5,364 750 900 1,650 Acquisition of oil and gas assets – – – 1 – 1 Additions 593 601 1,194 301 117 418 Transfer from exploration and evaluation assets 47 – 47 32 – 32 Disposals (351) (1) (352) – – – Depreciation and depletion expense (402) (239) (641) (181) (71) (252) Net impairment losses (138) (77) (215) (41) (30) (71) Exchange differences 71 135 206 – – – Balance at 31 December 2008 2,727 2,876 5,603 862 916 1,778 Total oil and gas assets 3,191 2,999 6,190 862 916 1,778

Comprising: Exploration and evaluation expenditure pending commercialisation 223 1 224 – – – Other capitalised expenditure 2,968 2,998 5,966 862 916 1,778 3,191 2,999 6,190 862 916 1,778

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

2009 Cost at 31 December 2009 37 344 381 7 296 303 Less accumulated depreciation (4) (177) (181) (1) (168) (169) Balance at 31 December 2009 33 167 200 6 128 134

Reconciliation of movements Balance at 1 January 2009 32 128 160 5 105 110 Additions 2 67 69 1 48 49 Depreciation (1) (28) (29) – (25) (25) Balance at 31 December 2009 33 167 200 6 128 134

2008 Cost at 31 December 2008 35 276 311 5 248 253 Less accumulated depreciation (3) (148) (151) – (143) (143) Balance at 31 December 2008 32 128 160 5 105 110

Reconciliation of movements Balance at 1 January 2008 25 110 135 5 103 108 Additions 8 40 48 – 23 23 Depreciation (1) (22) (23) – (21) (21) Balance at 31 December 2008 32 128 160 5 105 110

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16. IMPAIRMENT OF CASH-GENERATING UNITS

At 31 December 2009 the Group reassessed the carrying amount of its oil and gas assets for indicators of impairment such as changes in future prices, future costs and reserves. As a result, the recoverable amounts of some cash-generating units were formally reassessed, resulting in an impairment loss of $37 million (2008: $216 million). Estimates of recoverable amounts are based on the asset’s value in use, determined by discounting each asset’s estimated future cash flows at asset-specific discount rates. The pre-tax discount rates applied were equivalent to post-tax discount rates between 9.1% and 15.8% (2008: 8.8% and 15.8%), depending on the nature of the risks specific to each asset. Where an asset does not generate cash flows that are largely independent of other assets or groups of assets, the recoverable amount is determined for the cash-generating unit (“CGU”) to which the asset belongs. Consolidated Santos Ltd Subsurface Plant and Subsurface Plant and CGU Segment Description assets equipment Total assets equipment Total $million $million $million $million $million $million

Consolidated 2009 Mutineer-Exeter WA & NT Oil field 27 4 31 31 5 36 Thevenard WA & NT Oil field 2 6 8 – – – Palm Valley WA & NT Gas field 4 – 4 (1) – (1) Moonie to Brisbane pipeline Eastern Australia Pipeline – 9 9 – – – Sampang Asia Pacific Oil and gas field (6) (6) (12) – – – Sangu Asia Pacific Gas field (3) – (3) – – – Total impairment loss 24 13 37 30 5 35

2008 Sampang Asia Pacific Oil and gas field 97 31 128 – – – Sangu Asia Pacific Gas field 20 – 20 – – – Other Asia Pacific Gas field 1 – 1 – – – Cooper Basin Eastern Australia Oil and gas field – 45 45 – 24 24 Patricia Baleen Eastern Australia Gas field 21 1 22 10 1 11 Mutineer-Exeter WA & NT Oil field – – – 31 5 36 Total impairment loss 139 77 216 41 30 71

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

Assets Liabilities Net 17. DEFERRED TAX ASSETS 2009 2008 2009 2008 2009 2008 AND LIABILITIES $million $million $million $million $million $million

Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Consolidated Exploration and evaluation assets – – (192) (73) (192) (73) Oil and gas assets – – (241) (289) (241) (289) Other land, buildings, plant and equipment 36 46 – – 36 46 Available-for-sale ﬁnancial assets 1 1 – – 1 1 Trade receivables – – (6) (4) (6) (4) Other receivables – – (4) (4) (4) (4) Inventories – – (30) (27) (30) (27) Prepayments – – – (2) – (2) Derivative ﬁnancial instruments – – (35) (117) (35) (117) Other assets – – (16) (10) (16) (10) Equity-raising costs 19 1 – – 19 1 Interest-bearing loans and borrowings – 86 (71) – (71) 86 Other liabilities – – (1) (3) (1) (3) Provisions 57 66 – – 57 66 Royalty-related taxes – – (269) (258) (269) (258) Other items – – (49) (52) (49) (52) Tax value of carry-forward losses recognised 9 6 – – 9 6 Tax assets/(liabilities) 122 206 (914) (839) (792) (633) Set-off of tax (43) (95) 43 95 – – Net tax assets/(liabilities) 79 111 (871) (744) (792) (633)

Santos Ltd Exploration and evaluation assets – – (2) (10) (2) (10) Oil and gas assets – – (48) (77) (48) (77) Other land, buildings, plant and equipment – – (21) (9) (21) (9) Available-for-sale ﬁnancial assets 1 1 – – 1 1 Trade receivables – – (6) (3) (6) (3) Other receivables – – (4) (5) (4) (5) Inventories – – (17) (15) (17) (15) Other assets 1 1 – – 1 1 Equity-raising costs 19 1 – – 19 1 Provisions 41 46 – – 41 46 Royalty-related taxes – – (61) (61) (61) (61) Other items – – (6) (3) (6) (3) Tax assets/(liabilities) 62 49 (165) (183) (103) (134) Set-off of tax (62) (49) 62 49 – – Net tax liabilities – – (103) (134) (103) (134)

Consolidated Santos Ltd Unrecognised deferred tax assets 2009 2008 2009 2008 $million $million $million $million

Deferred tax assets have not been recognised in respect of the following items: Temporary differences in relation to investments in subsidiaries 578 915 – – Deductible temporary differences 110 74 – – Tax losses 35 46 – – 723 1,035 – –

Deferred tax assets have not been recognised in respect of these items because it is not probable that the temporary differences will reverse in the future and that there will be sufficient future taxable profits against which the benefits can be utilised. Unrecognised deductible temporary differences and tax losses of $35 million (2008: $46 million) will expire between 2021 and 2028. The remaining deductible temporary differences and tax losses do not expire under current tax legislation. 102 Santos Annual Report 2009

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Consolidated Santos Ltd 2009 2008 2009 2008 18. TRADE AND OTHER PAYABLES $million $million $million $million

Trade payables 430 391 129 132 Non-trade payables and accrued expenses 279 214 70 65 Tax-related balances owing to controlled entities – – 62 – Amounts owing to controlled entities – – 517 526 709 605 778 723

19. INTEREST-BEARING LOANS AND BORROWINGS

This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings. For more information about the Group’s exposure to interest rate and foreign currency risk, see note 38. Current liabilities Obligations under ﬁnance leases 1 1 1 1 Bank loans – secured 11 24 – – Bank loans – unsecured 22 28 – – Long-term notes 130 46 – – 164 99 1 1

Non-current liabilities Amounts owing to controlled entities – – 3,598 4,082 Obligations under ﬁnance leases 2 3 2 3 Bank loans – secured 8 20 – – Bank loans – unsecured 128 194 – – Medium-term notes 448 457 – – Long-term notes 1,063 1,682 – – 1,649 2,356 3,600 4,085

The amounts owing to controlled entities are for loans made in the ordinary course of business on normal market terms and conditions and are not repayable for a minimum of nine years. The Group has entered into interest rate swap contracts to manage the exposure to interest rates. This has resulted in a weighted average interest rate on interest-bearing liabilities of 3.58% as at 31 December 2009 (2008: 5.74%). All borrowings are unsecured, with the exception of the secured bank loan, and arranged through a controlled entity, Santos Finance Ltd, and guaranteed by Santos Ltd.

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

19. INTEREST-BEARING LOANS AND BORROWINGS (CONTINUED)

Details of major credit facilities (A) BANK LOANS – SECURED A reserve-based lending facility for US$65 million was entered into in the 2006 reporting period which bears a floating rate of interest. The facility is secured by a first charge over the Group’s interests in the Maleo assets in Indonesia with a carrying amount at 31 December 2009 of A$86 million. The average rate for the year was 6.33%, and A$19 million was outstanding at the reporting date (2008: A$44 million). The facility is available until 2012, and the current amount drawn down is expected to be fully repaid by 2011. Committed loan facilities for the PNG LNG project were entered into by the joint venture participants on 15 December 2009 and are currently subject to the satisfaction of conditions precedent scheduled for the first quarter of 2010. The facilities include security over shares in Santos’ project participants and the assets and entitlements of those participants in the project including their shares in the jointly owned borrowing entity Papua New Guinea Liquefied Natural Gas Global Company LDC. Under the financing arrangements, Santos’ entities are entitled to on-loans from the jointly-owned borrowing entity to fund 70% of project costs representing up to 13.5% of the total loan commitments of US$14 billion which equates to A$2.1 billion. The facilities were provided by 17 commercial banks and six export credit agencies, bear fixed and floating rates of interest and have estimated final maturity dates (subject to the date of completion of the project) of December 2024 and December 2026 respectively. (B) BANK LOANS – UNSECURED The Group has access to the following committed revolving credit bank facilities with a number of financial institutions: Year of maturity Currency 2009 2008 A$million A$million

2011 Multi-currency 225 225 2012 Multi-currency 375 375 2013 Multi-currency 100 100 700 700

Revolving credit facilities bear interest at the relevant interbank reference rate plus a margin. The amount drawn at 31 December 2009 is nil (2008: nil). Term bank loans Year of maturity Currency 2009 2008 A$million A$million

2009 USD – 28 2010 USD 22 28 2011 USD 22 29 2012 USD 19 25 2013 USD 16 21 2014 USD 17 22 2015 USD 17 22 2016 USD 18 23 2017 USD 19 24 150 222

Term bank loans bear interest at the relevant interbank reference rate plus a margin of up to 0.75%. The amount outstanding at 31 December 2009 is US$134 million (A$150 million) (2008: US$153 million (A$222 million)) at a weighted average annual effective interest rate of 2.30% (2008: 5.03%).

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19. INTEREST-BEARING LOANS AND BORROWINGS (CONTINUED)

Details of major credit facilities (continued) (C) COMMERCIAL PAPER The Group has an $800 million (2008: $800 million) Australian commercial paper programme supported by the revolving credit facilities referred to in (B) above. At 31 December 2009, no commercial paper is on issue (2008: nil). (D) MEDIUM-TERM NOTES The Group has a $1,000 million (2008: $1,000 million) Australian medium-term note programme under which the following were issued in 2005:

Effective Year of issue Year of maturity interest rate 2009 2008 % $million $million

2005 2011 4.65* 349 349 2005 2015 4.21 99 108 448 457

* Floating rate of interest. (E) LONG-TERM NOTES The Group has issued long-term notes in the US Private Placement market with varying maturities. The Group has the following long-term notes on issue:

Effective Year of issue Year of maturity interest rate 2009 2008 2009 2008 % US$million US$million A$million A$million

2000 2010 to 2015 3.75 203 211 227 306 2002 2010 to 2022 2.83 286 337 320 487 2007 2017 to 2027 0.85 578 646 646 935 1,067 1,194 1,193 1,728

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

Consolidated Santos Ltd 2009 2008 2009 2008 20. PROVISIONS $million $million $million $million

Current Liability for employee beneﬁts 72 62 66 61 Restoration 12 32 1 3 Remediation 7 21 – – Non-executive Directors’ retirement beneﬁts 1 2 1 2 Other 2 – 2 – 94 117 70 66

Non-current Liability for employee benefits 5 4 5 4 Liability for defined benefit obligations (refer note 30) 34 62 34 62 Restoration 728 742 218 245 Remediation 1 – 1 – 768 808 258 311

Movements in each class of provision during the financial year, other than provisions relating to employee benefits, are set out below: Total Non-executive Directors’ Total Total retirement restoration remediation benefits Other Total $million $million $million $million $million

Consolidated Balance at 1 January 2009 774 21 2 – 797 Provisions made during the year 22 (5) – 2 19 Provisions used during the year (15) (8) (1) – (24) Unwind of discount 38 – – – 38 Change in discount rate (53) – – – (53) Exchange differences (26) – – – (26) Balance at 31 December 2009 740 8 1 2 751

Santos Ltd Balance at 1 January 2009 248 – 2 – 250 Provisions made during the year (12) 1 – 2 (9) Provisions used during the year (2) – (1) – (3) Unwind of discount 11 – – – 11 Change in discount rate (23) – – – (23) Exchange differences (3) – – – (3) Balance at 31 December 2009 219 1 1 2 223

Restoration Provisions for future removal and restoration costs are recognised where there is a present obligation as a result of exploration, development, production, transportation or storage activities having been undertaken, and it is probable that an 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. Remediation Provisions for remediation costs are recognised where there is a present obligation as a result of an unexpected event that occurs outside of the planned operations of an asset. Non-executive Directors’ retirement benefits Agreements exist with Non-executive Directors appointed prior to 1 January 2004 providing for the payment of a sum on retirement from office as a Director in accordance with shareholder approval at the 1989 Annual General Meeting. Such benefits ceased to accrue with effect from 30 June 2004. These benefits have been fully provided for by the Company. In June 2007, the Board resolved to adopt a policy of indexation of these frozen benefits to prevent further erosion of the real value. The entitlements are annually indexed to the five-year Government bond rate.

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Consolidated Santos Ltd 2009 2008 2009 2008 21. OTHER LIABILITIES $million $million $million $million

Current Interest rate swap contracts 1 – – – Cross-currency swap contracts 7 – – – Embedded derivatives – 6 – – Other 2 2 – – 10 8 – –

Non-current Other 9 9 – –

22. CAPITAL AND RESERVES

Issued capital 831,834,626 (2008: 584,812,875) ordinary shares, fully paid 4,987 1,947 4,987 1,947 88,000 (2008: 88,000) ordinary shares, paid to one cent – – – – Nil (2008: 6,000,000) redeemable convertible preference shares – 584 – 584 4,987 2,531 4,987 2,531

Balance at the beginning of the year 584,812,875 585,964,352 1,947 1,747 Santos Employee Share Acquisition Plan 31(a) 101,376 111,153 2 1 Santos Employee Share Purchase Plan 31(a) 18,400 300,100 – 3 Shares issued on exercise of options 31(b) 427,050 303,583 4 3 Shares issued on vesting of Share Acquisition Rights 31(b) 303,085 141,330 – – Santos Executive Share Plan 31(c) – – – – Non-executive Director Share Plan 31(d) 20,390 33,356 – 1 Entitlement offer 22(a) 237,287,762 – 2,914 – Dividend Reinvestment Plan (“DRP”) 22(b) 2,005,880 2,323,249 30 35 DRP underwriting agreement 22(b) 6,857,808 14,123,057 106 213 Off-market buy-back 22(c) – (18,487,305) – (56) Transfer from redeemable convertible preference shares 22(d) – – (16) – Balance at the end of the year 831,834,626 584,812,875 4,987 1,947

Redeemable convertible preference shares Balance at the beginning of the year 22(d) 6,000,000 6,000,000 584 584 Redeemable convertible preference shares bought back at face value and cancelled 22(d) (6,000,000) – (600) – Transfer to fully paid ordinary shares 22(d) – – 16 – Balance at the end of the year – 6,000,000 – 584

Fully paid ordinary shares carry one vote per share, which entitles the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. The market price of the Company’s ordinary shares on 31 December 2009 was $14.09 (2008: $14.87).

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

22. CAPITAL AND RESERVES (CONTINUED)

(A) ENTITLEMENT OFFER On 11 May 2009 the Company launched a two for five accelerated pro-rata non-renounceable entitlement offer (“Entitlement offer”) at an offer price of $12.50 per share. As a result, 140,040,844 ordinary shares (fully paid) were allotted to institutional investors of the Company on 22 May 2009 and 97,246,918 ordinary shares (fully paid) were allotted to retail investors of the Company on 16 June 2009. The entitlement offer to the retail investors was fully underwritten. $2,966 million was credited and transaction costs, net of tax of $52 million was debited to the Company’s capital account. (B) DIVIDEND REINVESTMENT PLAN The Santos Dividend Reinvestment Plan is in operation. Shares are allocated at the daily weighted average market price of the Company’s shares on the ASX over a period of seven business days commencing on the business day after the Dividend Record Date. At this time, the Board has determined that no discount will apply. The Dividend Reinvestment Plan is currently not underwritten. (C) OFF-MARKET BUY-BACK On 6 October 2008, the Company bought back 18,487,305 fully paid ordinary shares, representing 3.07% of fully paid ordinary shares on issue at that date, at a price of $16.23 per share. $56 million was debited against the Company’s capital account (including $1 million transaction costs, net of tax) and $245 million was debited against retained earnings. (D) REDEEMABLE CONVERTIBLE PREFERENCE SHARES On 30 September 2009, the Company redeemed 6,000,000 redeemable convertible preference shares at their face value of $100, which resulted in an amount of $600 million being debited to the Company’s capital account. The accumulated transaction costs, net of tax, of $16 million were transferred to ordinary share capital. Nature and purpose of reserves Translation reserve The foreign currency translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations where their functional currency is different to the presentation currency of the reporting entity, as well as from the translation of liabilities that hedge the Company’s net investment in a foreign subsidiary and exchange differences that arise on the translation of monetary items that form part of the net investment in a foreign operation. Fair value reserve The fair value reserve includes the cumulative net change in the fair value of available-for-sale financial assets until the financial asset is derecognised. Capital risk management The Group’s objective when managing capital is to safeguard its ability to continue as a going concern in order to meet its objectives with various stakeholders, and to maintain an efficient capital structure. In order to maintain a prudent long-term capital structure the Group may adjust its distribution policy, return capital to shareholders, issue new shares or undertake corporate initiatives. The Group manages its capital with a primary objective to maintain investment grade credit rating. One of the measures which is used to monitor capital is the gearing ratio. The Group undertakes this on a forecast and actual results basis. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total interest-bearing loans and borrowings less cash and cash equivalents and value of financial derivatives used to hedge net debt. Total capital is calculated as total equity as shown in the statement of financial position plus net debt. Equity in 2008 included redeemable convertible preference shares which were redeemed in September 2009 (refer note 22(D) above). During 2009 the Group’s target was to maintain a gearing ratio below 45% and a BBB+ Standard & Poor’s credit rating. The gearing ratios at 31 December 2009 and 31 December 2008 were as follows:

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Consolidated 2009 2008 22. CAPITAL AND RESERVES (CONTINUED) $million $million

Total interest-bearing loans and borrowings (note 19) 1,813 2,455 Less: Cash and cash equivalents (note 8) (2,240) (1,553) Term deposits (note 11) (60) – Net fair value of ﬁnancial derivatives used to hedge debt (notes 11 and 21): Cross-currency swap contracts 7 (92) Interest rate swap contracts (125) (304) Net (assets)/debt (605) 506 Total equity 6,967 4,478 Total capital 6,362 4,984

Gearing ratio (9.5%) 10.2%

The decrease in the Group gearing ratio resulted primarily from the proceeds received from the Entitlement offer issued during the year. Dividends Dividends recognised during the year by the Company are: Dividend Franked/ Payment per share Total unfranked date $ $million

2009 Interim 2009 redeemable preference 1.6191 10 Franked 30 Sep 2009 Final 2008 redeemable preference 2.9989 18 Franked 31 Mar 2009 Interim 2009 ordinary 0.22 182 Franked 30 Sep 2009 Final 2008 ordinary 0.20 117 Franked 31 Mar 2009 327

2008 Interim 2008 redeemable preference 3.3365 20 Franked 30 Sep 2008 Final 2007 redeemable preference 2.9983 18 Franked 31 Mar 2008 Interim 2008 ordinary 0.22 131 Franked 30 Sep 2008 Final 2007 ordinary 0.20 117 Franked 31 Mar 2008 286

Franked dividends paid during the year were franked at the tax rate of 30%. After the reporting date the following dividends were proposed by the Directors. The dividends have not been provided for and there are no income tax consequences. Final 2009 ordinary 0.20 166 Franked 31 Mar 2010 166

The financial effect of these dividends has not been brought to account in the financial statements for the year ended 31 December 2009 and will be recognised in subsequent financial reports. Santos Ltd 2009 2008 $million $million

Dividend franking account 30% franking credits available to shareholders of Santos Ltd for future distribution, after adjusting for franking credits which will arise from the payment of the current tax liability at 31 December 2009 965 1,062

The ability to utilise the franking credits is dependent upon there being sufﬁcient available proﬁts to declare dividends. The impact on the dividend franking account of dividends proposed after the reporting date but not recognised as a liability is to reduce it by $71 million (2008: $58 million).

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

23. EARNINGS PER SHARE

Basic earnings per share amounts are calculated by dividing net proﬁt for the year attributable to ordinary equity holders of Santos Ltd (after deducting dividends paid on redeemable convertible preference shares) by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing the net proﬁt attributable to ordinary equity holders of Santos Ltd (after adding back the dividends paid on redeemable convertible preference shares) by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares. Consolidated 2009 2008 $million $million

Earnings used in the calculation of basic and diluted earnings per share reconciles to the net proﬁt after tax in the income statement as follows: Net proﬁt attributable to ordinary equity holders of Santos Ltd 434 1,650 Dividends paid on redeemable convertible preference shares (28) (38) Earnings used in the calculation of basic earnings per share 406 1,612 Dividends paid on redeemable convertible preference shares – 38 Earnings used in the calculation of diluted earnings per share 406 1,650

The weighted average number of shares used for the purposes of calculating diluted earnings per share reconciles to the number used to calculate basic earnings per share as follows: 2009 2008 Number of shares

Basic earnings per share 779,217,946 639,831,571 Partly paid shares 69,842 71,222 Executive share options 890,143 1,446,209 Share acquisition rights 2,445,269 1,694,044 Redeemable convertible preference shares – 36,650,691 Diluted earnings per share 782,623,200 679,693,737

Partly paid shares outstanding issued under the Santos Executive Share Plan, options outstanding issued under the Santos Executive Share Option Plan and Share Acquisition Rights (“SARs”) issued to eligible executives and redeemable convertible preference shares have been classiﬁed as potential ordinary shares and included in the calculation of diluted earnings per share in 2009. The number of shares included in the calculation are those assumed to be issued for no consideration, being the difference between the number that would have been issued at the exercise price and the number that would have been issued at the average market price. The weighted average number of shares used for the purposes of calculating diluted earnings per share in 2008 was retrospectively adjusted for the effect of the Entitlement offer (refer note 22(A)). During the year, 427,050 (2008: 303,583) options and 303,085 (2008: 141,330) SARs were converted to ordinary shares. The diluted earnings per share calculation includes that portion of these options, SARs and partly paid shares assumed to be issued for nil consideration, weighted with reference to the date of conversion. The weighted average number included is 197,097 (2008: 181,447). 24,690 (2008: 460,385) options and 61,961 (2008: 236,426) SARs lapsed during the year. The diluted earnings per share calculation includes that portion of these options and SARs assumed to be issued for nil consideration, weighted with reference to the date the options or SARs lapsed. The weighted average number included is 45,570 (2008: 177,527). The redeemable convertible preference shares on issue during 2009 were not included in the 2009 diluted earnings per share calculation as they were anti-dilutive for that period.

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24. CONSOLIDATED ENTITIES

Name Country of incorporation Name Country of incorporation Santos Ltd (Parent Entity) AUST Santos International Ventures Pty Ltd AUST Controlled entities1: Santos Niugini Exploration Limited PNG Alliance Petroleum Australia Pty Ltd2 AUST Santos (Nth Bali 1) Pty Ltd AUST Basin Oil Pty Ltd AUST Santos (Papalang) Pty Ltd AUST Boston L.H.F. Pty Ltd AUST Santos (Popodi) Pty Ltd AUST Bridgefield Pty Ltd AUST Santos Vietnam Pty Ltd AUST Bridge Oil Developments Pty Limited2 AUST Zhibek Resources Limited1 UK Bronco Energy Pty Limited AUST Controlled entity of Zhibek Resources Limited Canso Resources Pty Ltd AUST CJSC KNG Hydrocarbons1 KGZ Coveyork Pty Ltd AUST Santos (JBJ1) Pty Ltd AUST Doce Pty Ltd AUST Controlled entities of Santos (JBJ1) Pty Ltd Fairview Pipeline Pty Ltd AUST Santos (JBJ2) Pty Ltd AUST Farmout Drillers Pty Ltd AUST Controlled entity of Santos (JBJ2) Pty Ltd Gidgealpa Oil Pty Ltd AUST Shaw River Power Station Pty Ltd AUST Kipper GS Pty Ltd AUST Santos (JPDA 06-104) Pty Ltd AUST Controlled entity of Kipper GS Pty Ltd Santos (JPDA 91-12) Pty Ltd AUST Santos Carbon Pty Ltd AUST Santos (NARNL Cooper) Pty Ltd2 AUST Moonie Pipeline Company Pty Ltd AUST Santos (N.T.) Pty Ltd AUST Reef Oil Pty Ltd2 AUST Controlled entity of Santos (N.T.) Pty Ltd Santos Asia Pacific Pty Ltd AUST Bonaparte Gas & Oil Pty Limited AUST Controlled entities of Santos Asia Pacific Pty Ltd Santos Offshore Pty Ltd2 AUST Santos (Sampang) Pty Ltd AUST Santos Oil Exploration (Malaysia) Sdn Bhd (in liquidation) MY Santos (Warim) Pty Ltd AUST Santos Petroleum Pty Ltd2 AUST Santos Australian Hydrocarbons Pty Ltd AUST Santos QNT Pty Ltd2 AUST Santos (BOL) Pty Ltd2 AUST Controlled entities of Santos QNT Pty Ltd Controlled entity of Santos (BOL) Pty Ltd Gastar Power Pty Ltd3 AUST Bridge Oil Exploration Pty Limited AUST Santos QNT (No. 1) Pty Ltd2 AUST Santos CSG Pty Ltd AUST Controlled entities of Santos QNT (No. 1) Pty Ltd Santos Darwin LNG Pty Ltd2 AUST Santos Petroleum Management Pty Ltd2 AUST Santos Direct Pty Ltd AUST Santos Petroleum Operations Pty Ltd AUST Santos Facilities Pty Ltd AUST TMOC Exploration Proprietary Limited AUST Santos Finance Ltd AUST Santos QNT (No. 2) Pty Ltd2 AUST Santos GLNG Pty Ltd AUST Controlled entities of Santos QNT (No. 2) Pty Ltd Santos (Globe) Pty Ltd AUST Moonie Oil Pty Ltd AUST Santos International Holdings Pty Ltd AUST Petromin Pty Ltd AUST Controlled entities of Santos International Holdings Pty Ltd Santos (299) Pty Ltd (in liquidation) AUST Barracuda Limited PNG Santos Exploration Pty Ltd AUST CJSC South Petroleum Company1 KGZ Santos Gnuco Pty Ltd AUST Lavana Limited PNG Transoil Pty Ltd AUST Santos Petroleum Ventures B.V. NL Santos Resources Pty Ltd AUST Sanro Insurance Pte Ltd SG Santos (TGR) Pty Ltd AUST Santos Americas and Europe Corporation USA Santos Timor Sea Pipeline Pty Ltd AUST Controlled entities of Santos Americas and Europe Corporation Sesap Pty Ltd AUST Santos TPY Corp USA Vamgas Pty Ltd2 AUST Controlled entities of Santos TPY Corp Notes Santos Queensland Corp USA 1 Beneficial interests in all controlled entities are 100%, except: Santos TOG Corp USA • CJSC South Petroleum Company (70%); Controlled entities of Santos TOG Corp • CJSC KNG Hydrocarbons (54%); and, Santos TOGA Pty Ltd AUST • Zhibek Resources Limited (75%). 2 Company is party to a Deed of Cross Guarantee. Refer note 37. Controlled entity of Santos TOGA Pty Ltd 3 Company acquired during the year. Refer note 25. Santos TPC Pty Ltd AUST Santos TPY CSG Corp USA Country of incorporation Santos Bangladesh Limited UK AUST – Australia Santos (Bawean) Pty Ltd AUST KGZ – Kyrgyz Republic Santos (BBF) Pty Ltd AUST MY – Malaysia Controlled entities of Santos (BBF) Pty Ltd NL – Netherlands Santos (SPV) Pty Ltd AUST PNG – Papua New Guinea Controlled entities of Santos (SPV) Pty Ltd SG – Singapore Santos (Madura Offshore) Pty Ltd AUST UK – United Kingdom SB Jethro Pty Ltd (previously Santos Brantas Pty Ltd) AUST USA – United States of America Santos (Donggala) Pty Ltd AUST In the financial statements of the Company, investments in Santos Egypt Pty Ltd AUST controlled entities are recognised at cost, less any impairment Santos Hides Ltd PNG losses. Santos International Operations Pty Ltd AUST

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

25. ACQUISITIONS OF SUBSIDIARIES

During the financial year the following controlled entities were acquired and their operating results have been included in the income statement from the date of acquisition: Contribution to Beneficial Purchase consolidated profit Name of entity Date of acquisition interest acquired consideration since acquisition % $million $million

Gastar Power Pty Ltd 2 July 2009 100 8 –

Gastar Power Pty Ltd owns a 35% share of the Wilga Park Power Station. The operator and owner of the remaining 65% is Narrabri Power Pty Ltd, which is a wholly-owned subsidiary of Eastern Star Gas Limited. If the acquisition had occurred on 1 January 2009, revenue and net proﬁt would not have been affected. The acquisitions had the following effect on the Group’s assets and liabilities: Carrying Fair value Recognised amounts adjustments values $million $million $million

Plant and equipment 7 1 8 Net identiﬁable assets and liabilities 7 1 8

The cash outﬂow on acquisition of controlled entities is as follows: Cash paid 8 Net cash acquired with subsidiaries – Total cash paid for current year acquisition 8 Deferred consideration paid* 9 Net consolidated cash outﬂow 17

* Deferred consideration paid in 2009 comprises: • $8 million to fund phase 2 of the exploration programme relating to the 2006 acquisition of CJSC South Petroleum Company; and • $1 million to fund phase 1 of the exploration programme relating to the 2008 acquisition of Zhibek Resources Limited.

In 2008, the Group acquired beneﬁcial interest in the following controlled entities: Beneﬁcial interest Purchase Name of entity Date of acquisition acquired consideration % $million

Zhibek Resources Limited 17 November 2008 75 – CJSC KNG Hydrocarbons 17 November 2008 54 –

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26. DISPOSAL OF SUBSIDIARIES

On 10 May 2009, the Group disposed of the wholly-owned subsidiaries Santos UK (Kakap) Limited and Novus Nominees Pty Ltd for US$18 million (A$24 million), resulting in a loss on sale of $14 million. The amount of foreign currency translation reserve recycled into proﬁt and loss is nil. The major classes of assets and liabilities of Santos UK (Kakap) Limited and Novus Nominees Pty Ltd at the date of disposal were as follows: 10 May 2009 $million

Trade and other receivables 2 Inventories 1 Exploration and evaluation assets 38 Interest-bearing loan receivable 14 Trade and other payables (3) Tax liabilities (2) Provisions (1) Deferred tax liabilities (11) Net assets attributable to the disposed entities 38

The cash inﬂow on disposal of controlled entities is as follows: Cash received 24 Net cash and cash equivalents disposed with subsidiaries – Net consolidated cash inﬂow 24

27. INVESTMENT IN AN ASSOCIATE

Ownership interest Consolidated Company Country Principal activity 2009 2008 2009 2008 % % $million $million

Eastern Star Gas Limited Australia Oil and gas 19.42 – 177 –

Movement in the carrying amount of the Group’s investment in an associate Balance at beginning of the year – – Purchase of investment in associate 178 – Share of losses, after tax (1) – Balance at end of the year 177 –

Fair value of the Group’s investment in listed associate Market value of the Group’s investment in Eastern Star Gas Limited based on the closing share price on 31 December 2009 145 –

The Company believes that the Group’s investment in Eastern Star Gas Limited will be recovered through ongoing exploration and evaluation of the associated company’s underlying assets in which the Group also holds a direct interest. Summarised financial information* The following table illustrates the summarised financial information relating to the Group’s associate: The Group’s share of the associate’s statement of financial position Total assets 181 – Total liabilities (4) – Net assets 177 –

The Group’s share of the associate’s income statement Revenue – – Net loss after tax (1) –

* The Group’s share of the associate’s summarised ﬁnancial information is estimated based on the Eastern Star Gas Limited’s 30 June 2009 annual ﬁnancial report and the latest ASX releases.

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

28. INTERESTS IN JOINT VENTURES

(A) The following are the signiﬁcant joint ventures in which the Group is a joint venturer: Joint venture Cash-generating unit Principal activities % interest

Oil and gas assets – Producing assets Bayu-Undan Liquids Bayu-Undan Gas production 11.4 Bayu-Undan LNG Bayu-Undan Gas production 11.4 Casino Casino Gas production 50.0 Fairview Fairview Gas (CSG) production 45.7 Madura PSC (Maleo) Madura PSC Gas production 67.5 Mereenie Mereenie Oil and gas production 65.0 John Brookes John Brookes Gas production 45.0 Mutineer-Exeter Mutineer-Exeter Oil production 33.4 Sampang PSC (Oyong, Wortel) Sampang PSC Oil and gas production 45.0 Sangu Sangu PSC Gas production 37.5 Stag Stag Oil and gas production 66.7 SA Fixed Factor Area Cooper Basin Oil and gas production 66.6 SWQ Unit Cooper Basin Gas production 60.1 Oil and gas assets – Assets in development PNG LNG PNG LNG Gas development 13.5 Kipper Kipper Gas development 35.0 Reindeer Reindeer Gas development 45.0 Chim Sao Vietnam (Block 12) Gas development 31.9 Exploration and evaluation assets Evans Shoal – Contingent gas resource 40.0 Gunnedah – Contingent gas (CSG) resource 35.0 PEL1 and 12 – Contingent gas (CSG) resource 25.0

(B) The Group recognises its interests in the following jointly controlled entities using the proportionate consolidation method of accounting: Joint venture entity % interest

Darwin LNG Pty Ltd 11.4 Papua New Guinea Liqueﬁed Natural Gas Global Company LDC 13.5 Easternwell Drilling Services Holdings Pty Ltd 50.0 GLNG Operations Pty Ltd 60.0

Consolidated Santos Ltd 2009 2008 2009 2008 $million $million $million $million

The Group’s share of the assets, liabilities, income and expenses of the jointly controlled entities, which are included in the consolidated ﬁnancial statements using the proportionate consolidation method of accounting, are as follows: Current assets 64 50 – – Non-current assets 164 194 – – 228 244 – – Current liabilities (21) (98) – – Non-current liabilities (24) (15) – – Net assets 183 131 – –

Revenue 216 238 – – Expenses (189) (214) – – Proﬁt before income tax 27 24 – –

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Consolidated Santos Ltd 2009 2008 2009 2008 28. INTERESTS IN JOINT VENTURES (CONTINUED) $million $million $million $million

(C) The Group’s share of capital expenditure commitments and minimum exploration commitments in respect of joint ventures are: Capital expenditure commitments 2,113 366 104 93 Minimum exploration commitments 157 187 9 7

29. NOTES TO THE STATEMENTS OF CASH FLOWS

(A) RECONCILIATION OF CASH FLOWS FROM OPERATING ACTIVITIES Profit after income tax 434 1,650 142 20 Add/(deduct) non-cash items: Depreciation and depletion 619 664 253 273 Net impairment loss on investment in controlled entities – – 5 50 Net impairment reversal on receivables due from controlled entities – – (8) (24) Dividends distributed by controlled entities – – – (27) Net borrowing costs charged by controlled entities – – 4 147 Exploration and evaluation expensed 64 83 13 12 Net impairment loss on oil and gas assets 37 216 35 71 Net gains on fair value hedges (5) (7) – – Share-based payments expense 11 8 11 8 Borrowing costs capitalised (9) (10) – – Unwind of the effect of discounting on provisions 38 32 11 9 Change in fair value of financial assets designated as at fair value through profit or loss (5) 12 – – Defined benefit plan expense 3 3 2 2 Foreign exchange losses/(gains) 28 (24) 7 (6) Net gain on sale of non-current assets (260) (1,699) (49) (1) Share of net loss in an associate 1 – – – Net loss on sale of controlled entities 14 – – – Net cash provided by operating activities before changes in assets or liabilities 970 928 426 534 Add/(deduct) change in operating assets or liabilities net of acquisitions or disposals of businesses: Decrease/(increase) in trade and other receivables 17 11 (16) 49 Decrease/(increase) in inventories 17 (58) (1) (20) (Increase)/decrease in other assets (8) (1) 1 (7) Net increase/(decrease) in deferred tax assets and deferred tax liabilities 63 74 (34) 40 Increase/(decrease) in current tax liabilities 95 398 28 (174) Increase/(decrease) in trade and other payables 14 (18) 26 (63) (Decrease)/increase in provisions (13) 51 3 6 Net cash provided by operating activities 1,155 1,385 433 365

(B) NON-CASH FINANCING AND INVESTING ACTIVITIES Dividend Reinvestment Plan 31 35 31 35 Dividends distributed by controlled entities – – – 27 Share subscriptions in controlled entities – – (158) (14) Income tax transferred from controlled entities – – 40 613 Net borrowing costs charged by controlled entities – – (4) (147)

(C) TOTAL TAXATION PAID Income tax paid Cash outflow from operating activities (55) (292) (24) (229) Cash outflow from investing activities (497) – (497) – Royalty-related tax paid Cash outflow from operating activities (71) (152) (25) (35) (623) (444) (546) (264) Santos Annual Report 2009 115

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

Consolidated Santos Ltd 2009 2008 2009 2008 30. EMPLOYEE BENEFITS $million $million $million $million

(A) DEFINED BENEFIT PLAN Defined benefit members of the Santos Superannuation Plan receive a lump sum benefit on retirement, death, disablement and withdrawal. The defined benefit section of the plan is closed to new members. All new members receive accumulation only benefits. Amount recognised in the statements of financial position: Deficit in plan recognised in non-current provisions (refer note 20) 34 62 34 62 Non-current receivables (refer note 9) (9) (17) (9) (17) 25 45 25 45

Movements in the liability for net defined benefit obligations recognised in the statements of financial position Liability at the beginning of the year 45 11 45 11 Expense recognised in income statement 3 3 2 2 Amount capitalised in oil and gas assets 1 2 1 1 Amount recognised in retained earnings (16) 37 (16) 37 Defined benefit receivable from controlled entities – – 1 2 Employer contributions (8) (8) (8) (8) Liability at the end of the year 25 45 25 45

Expense recognised in the income statements Service cost 4 3 2 2 Interest cost 3 4 2 2 Expected return on plan assets (4) (4) (2) (2) 3 3 2 2

The expense is recognised in the following line items in the income statements: Cost of sales 3 – 2 – Other expenses – 3 – 2 3 3 2 2

Amounts recognised in the statements of comprehensive income Actuarial gain/(loss) in the year 16 (37) 16 (37) Tax effect (5) 11 (5) 11 Net actuarial gain/(loss) in the year 11 (26) 11 (26)

Cumulative actuarial gain/(loss) recognised in the statements of comprehensive income, net of tax 8 (23) 8 (23)

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30. EMPLOYEE BENEFITS (CONTINUED)

(A) DEFINED BENEFIT PLAN (CONTINUED) Historical information for the current and previous periods 2009 2008 2007 2006 2005 $million $million $million $million $million

Consolidated Present value of defined benefit obligations 170 175 162 158 129 Fair value of plan assets (136) (113) (146) (132) (113) Deficit in plan 34 62 16 26 16

Experience adjustments (gain)/loss on plan assets (9) 43 (4) (6) (8) Experience adjustments (gain)/loss on plan liabilities (7) (14) (1) 18 –

Santos Ltd Present value of defined benefit obligations 170 175 162 158 129 Fair value of plan assets (136) (113) (146) (132) (113) Deficit in plan 34 62 16 26 16

Experience adjustments (gain)/loss on plan assets (9) 43 (4) (6) 8 Experience adjustments (gain)/loss on plan liabilities (7) (14) (1) 18 –

Consolidated Santos Ltd 2009 2008 2009 2008 $million $million $million $million

Reconciliation of the present value of the defined benefit obligations Opening defined benefit obligations 175 162 175 162 Service cost 8 8 8 8 Interest cost 7 9 7 9 Contributions by plan participants 8 8 8 8 Actuarial (gains)/losses (14) 7 (14) 7 Benefits paid (3) (16) (3) (16) Taxes and premiums paid (3) (3) (3) (3) Curtailments (1) – (1) – Settlements (7) – (7) – Closing defined benefit obligations 170 175 170 175

Reconciliation of the fair value of plan assets Opening fair value of plan assets 113 145 113 145 Expected return on plan assets 8 10 8 10 Actuarial gains/(losses) 9 (43) 9 (43) Employer contributions 11 12 11 12 Contributions by plan participants 8 8 8 8 Beneﬁts paid (3) (16) (3) (16) Taxes and premiums paid (3) (3) (3) (3) Settlements (7) – (7) – Closing fair value of plan assets 136 113 136 113

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

Consolidated Santos Ltd 2009 2008 2009 2008 30. EMPLOYEE BENEFITS (CONTINUED) % % % %

(A) DEFINED BENEFIT PLAN (CONTINUED) Plan assets The percentage invested in each asset class at the reporting date: Australian equity 32 28 32 28 International equity 29 27 29 27 Fixed income 10 10 10 10 Property 9 13 9 13 Other 7 10 7 10 Cash 13 12 13 12

Fair value of plan assets The fair value of plan assets includes no amounts relating to: • any of the Group’s own ﬁnancial instruments; or • any property occupied by, or other assets used by, the Group. Consolidated Santos Ltd 2009 2008 2009 2008 Actual return on plan assets $million $million $million $million

Actual return on plan assets – gain/(loss) 12 (24) 12 (24)

Expected rate of return on plan assets The expected return on assets assumption is determined by weighting the expected long-term return for each asset class by the target allocation of assets to each asset class and allowing for the correlations of the investment returns between asset classes. The returns used for each asset class are net of investment tax and investment fees. An allowance for asset-based administration expenses has been deducted from the expected return. Principal actuarial assumptions at the reporting date (expressed as weighted average) 2009 2008 % p.a. % p.a.

Discount rate 4.8 4.0 Expected rate of return on plan assets 7.0 7.0 Expected average salary increase rate over the life of the plan 6.0 6.0

The expected rate of return on Plan assets includes a reduction to allow for the administrative expenses of the plan. Expected contributions The Group expects to contribute $8 million to the defined benefit superannuation plan in 2010. (B) DEFINED CONTRIBUTION PLANS The Group makes contributions to several defined contribution plans. The amount recognised as an expense for the year was $8 million (2008: $6 million).

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31. SHARE-BASED PAYMENT PLANS

(A) CURRENT GENERAL EMPLOYEE SHARE PLANS The Company currently operates two general employee share plans: • the Santos Employee Share Acquisition Plan (“SESAP”); and • the Santos Employee Share Purchase Plan (“SESPP”). Both of these plans have operated since 1997. SESAP Broadly, SESAP provides for permanent eligible employees with at least a minimum period of service determined by Directors as at the offer date (one year of completed service) to be entitled to acquire shares under this Plan. Executives participating in the Executive Long-term Incentive Programme in 2009, casual employees and Directors of the Company are excluded from participating in this Plan. Employees are not eligible to participate under the Plan while they are resident overseas unless the Board decides otherwise. The Plan provides for grants of fully paid ordinary shares in the capital of the Company up to a value determined by the Board being $1,000 per annum per eligible employee. A trustee is funded by the Group to acquire shares directly from the Company or on market. The shares are then held by the trustee on behalf of eligible employees who participate in the Plan. The employee’s ownership of shares allocated under the Plan, and his or her right to deal with them, are subject to restrictions until the earlier of the expiration of the restriction period determined by the Board (being three years) and the time when he or she ceases to be an employee. Participants are entitled to instruct the trustee as to the exercise of voting rights, receive dividends and participate in bonus and rights issues during the restriction period. At the end of the reporting period shares are granted to eligible employees at no cost to the employee. Summary of share movements in the SESAP during 2009 (and comparative 2008 information): Opening Granted Distributions Closing balance during the year during the year balance

Fair value Fair value Fair value Grant date per share aggregate aggregate Number Number $ Number $ Number $

2009 17 November 2006 97,980 – – 97,980 1,495,791 – – 20 November 2007 92,625 – – 6,150 95,780 86,475 1,218,433 21 November 2008 110,679 – – 7,189 111,436 103,490 1,458,174 20 November 2009 – 101,376 15.11 594 8,602 100,782 1,420,018 301,284 101,376 111,913 1,711,609 290,747 4,096,625

2008 18 November 2005 89,848 – – 89,848 1,164,977 – – 17 November 2006 105,156 – – 7,176 117,648 97,980 1,456,963 20 November 2007 99,825 – – 7,200 119,379 92,625 1,377,334 21 November 2008 – 111,153 12.62 474 6,621 110,679 1,656,797 294,829 111,153 104,698 1,408,625 301,284 4,491,094

Shares are allocated at a price equal to the weighted average sale price of the Company’s ordinary shares on the ASX during the one-week period up to and including the grant date. This is shown as fair value per share for shares granted during the year. The fair value of shares distributed from the trust during the year and remaining in the trust at the end of the ﬁnancial year is the market price of shares of the Company on the ASX as at close of trading on the respective dates. Distributions during the year occurred at various dates throughout the year and therefore have not been separately listed.

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

31. SHARE-BASED PAYMENT PLANS (CONTINUED)

(A) CURRENT GENERAL EMPLOYEE SHARE PLANS (CONTINUED) The amounts recognised in the ﬁnancial statements of the Group and the Company in relation to SESAP during the year were: Consolidated Santos Ltd 2009 2008 2009 2008 $000 $000 $000 $000

Employee expenses 1,532 1,403 1,532 1,403 Issued ordinary share capital 1,532 1,403 1,532 1,403

At 31 December 2009, the total number of shares acquired under the Plan since its commencement was 2,408,566. SESPP The general employee offer under SESPP is open to all employees (other than a casual employee or Director of the Company) determined by the Board who are continuing employees at the date of the offer. However, employees who are not resident in Australia at the time of an offer under the Plan and those who have participated in the Executive Long-term Incentive Programme during the year will not be eligible to participate in that offer unless the Board otherwise decides. Under the Plan, eligible employees may be offered the opportunity to subscribe for or acquire fully paid ordinary shares in the capital of the Company at a discount to market price, subject to restrictions, including on disposal, for a period determined by the Board (one year). The subscription or acquisition price is Market Value (being the weighted average sale price of the Company’s ordinary shares on the ASX during the one-week period up to and including the offer date) less any discount determined by the Board (5%). Under the Plan, at the discretion of the Board, ﬁnancial assistance may be provided to employees to subscribe for and acquire shares under the Plan. The 5% discount constitutes ﬁnancial assistance for these purposes. Participants are entitled to vote, receive dividends and participate in bonus and rights issues during the restriction period. On 20 November 2009, the Company issued 18,400 ordinary shares to 36 eligible employees at a subscription price of $14.86 per share under the Plan, being a 5% discount on the Market Value of $15.641 (calculated by reference to the weighted average sales price of those shares listed on the ASX during the one-week period up to and including the offer date, 23 October 2009). The total market price of those shares on the issue date was $276,368, based on the market price of $15.02 at the close of trade on the date of issue. The total amount received from employees for those shares was $273,424. A summary of share movements in the SESPP are set out below: Opening Granted Distributions Closing balance during the year during the year balance

Fair value Grant date per share Number Number $ Number Date Number

2009 21 November 2008 300,100 – – 300,100 20 November 2009 – 20 November 2009 – 18,400 15.64 – – 18,400 300,100 18,400 300,100 18,400

2008 20 November 2007 400 – – 400 20 November 2008 – 21 November 2008 – 300,100 11.48 – – 300,100 400 300,100 400 300,100

The fair value per share for shares granted during the year is Market Value (as deﬁned above). The consideration received by the Company per share is Market Value less the discount of 5% referred to above.

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31. SHARE-BASED PAYMENT PLANS (CONTINUED)

(A) CURRENT GENERAL EMPLOYEE SHARE PLANS (CONTINUED) The amounts recognised in the ﬁnancial statements of the Group and the Company in relation to the general employee offer under the SESPP during the year were: Consolidated Santos Ltd 2009 2008 2009 2008 $000 $000 $000 $000

Issued ordinary share capital 273 3,274 273 3,274

At 31 December 2009, the total number of shares acquired under the general employee offer of the Plan since its commencement was 1,140,800. (B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME The Company’s Executive Long-term Incentive (“LTI”) Programme provides for invitations to be extended to eligible executives selected by the Board. The Programme currently consists of an offer of securities under: • the Santos Employee Share Purchase Plan (“SESPP”); and • the Santos Executive Share Option Plan (“SESOP”). SESOP has operated since 1997 and the SESPP has been used as a component of executive compensation since 2003. Share Acquisition Rights and options Each Share Acquisition Right (“SAR”) and option is a conditional entitlement to a fully paid ordinary share, subject to the satisfaction of performance conditions, on terms and conditions determined by the Board. SARs and options carry no voting or dividend rights until the performance conditions are satisfied and, in the case of options, when the options are exercised or, in the case of SARs, when the SARs vest. Chief Executive Officer and Managing Director No new LTI grant was made to the Chief Executive Officer (“CEO”) in 2009 as the grants made to Mr D J W Knox in 2008 constitute his LTI entitlement for the 2008, 2009 and 2010 years. The 2008 grants comprised: • a performance-based equity award made to Mr Knox in his capacity as Executive Vice President, Growth Projects (“Performance Award”); • a service-based equity award made to Mr Knox in his capacity as Executive Vice President, Growth Projects (“Deferred Award”); and • a further performance-based equity award made to Mr Knox upon his appointment as CEO to supplement the grants already made to him in his Senior Executive capacity (“CEO Performance Award”). Mr Knox elected to receive his equity awards as a combination of options and share acquisition rights (SARs). The key terms of Mr Knox’s awards are as follows: • The LTI grants made in 2008 were structured to provide Mr Knox with an annual LTI opportunity of 100% of Total Fixed Remuneration (“TFR”) (based on the 2008 level of $1.75 million) for each of the 2008, 2009 and 2010 years, subject to achieving applicable vesting conditions. • Mr Knox was able to elect to receive his LTI grant as either SARs, market value options or a combination of the two. He chose to take a combination of the two. • All of the performance-based LTIs are subject to hurdles based on the Company’s Total Shareholder Return (“TSR”) relative to the ASX 100 over a three-year performance period. There is no retesting of performance conditions.

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

31. SHARE-BASED PAYMENT PLANS (CONTINUED)

(B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME (CONTINUED) • The CEO Performance Award is divided into three tranches: Tranche 1: Tested over the period from 1 January 2008 to 31 December 2010; Tranche 2: Tested over the period from 1 January 2009 to 31 December 2011; and Tranche 3: Tested over the period from 1 January 2010 to 31 December 2012. • Each tranche of the CEO Performance Award vests in accordance with the following vesting schedule: TSR percentile ranking % of grant vesting

< 50th percentile 0% = 50th percentile 37.5% 51st to 75th percentile 39% to 75% 76th to 100th percentile 76% to 100% • None of the grants has vested as the period over which the performance hurdles are tested has not expired. • Upon vesting of SARs, ordinary shares in Santos will automatically be allocated to Mr Knox. These shares will be subject to restrictions until the earlier of 10 years from the grant date, cessation of employment, or the date at which the Board approves, at Mr Knox’s request, the removal of the restrictions. • Options may be exercised at any time between the vesting date and the expiry date (27 July 2018), subject to payment of the exercise price of $17.36 per option (being the volume weighted average price in the week up to and including the grant date). • Full details of the equity grants made to Mr Knox in 2008 are contained in the 2008 Remuneration Report. During the ﬁnancial year, the Company granted nil (2008: 444,974) options over unissued shares to the CEO as set out below: 2009 2008 Weighted Weighted average average exercise exercise price price $ Number $ Number

Outstanding at the beginning of the year 16.98 444,974 – – Granted during the year – – 16.98 444,974 Outstanding at the end of the year 16.98 444,974 16.98 444,974

Exercisable at the end of the year – – – –

The options outstanding at 31 December 2009 have an exercise price in the range of $15.39 to $17.36, and a weighted average contractual life of 8.55 years. During the year no options were exercised (2008: nil). The fair value of shares issued as a result of exercising the options or vesting of SARs during the reporting period at their issue date is the market price of shares of the Company on the ASX as at close of trading. The fair value of services received in return for share options granted is measured by reference to the fair value of share options granted. The estimate of the fair value of the services received is measured based on the Monte Carlo simulation method. The contractual life of the option is used as an input into this model. Expectations of early exercise are incorporated into the models.

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31. SHARE-BASED PAYMENT PLANS (CONTINUED)

(B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME (CONTINUED) 2008

Performance Deferred Award Award CEO Performance Awards

Option grant F1 F2 F3 F4 F5

Fair value at grant date ($) 5.25 7.30 5.77 4.22 4.29 Share price on grant date ($) 17.71 17.71 17.40 17.40 17.40 Exercise price ($) 15.39 15.39 17.36 17.36 17.36 Expected volatility (weighted average, %p.a.) 30.7 30.7 30.9 30.9 30.9 Option life (weighted average) 10 years 10 years 10 years 10 years 10 years Expected dividends (%p.a.) 2.3 2.3 2.3 2.3 2.3 Risk-free interest rate (based on Australian Government bond yields, %p.a.) 6.29 6.29 6.05 6.05 6.05

The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share options), adjusted for any expected changes to future volatility due to publicly available information. During the ﬁnancial year, the Company granted nil (2008: 136,779) SARs to the CEO as set out below. Shares allocated on vesting of SARs will be subject to further restrictions on dealing for a maximum of ten years after the original grant date. No amount is payable on grant or vesting of the SARs. Number of SARs 2009 2008

Outstanding at the beginning of the year 136,779 – Granted during the year – 136,779 Outstanding at the end of the year 136,779 136,779

Exercisable at the end of the year – –

The fair value of services received in return for SARs granted is measured by reference to the fair value of SARs granted. The estimate of the fair value of the services received is measured based on the Monte Carlo simulation method. The contractual life of the SARs is used as an input into this model. Expectations of early exercise are incorporated into the Monte Carlo simulation method. The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share rights), adjusted for any expected changes to future volatility due to publicly available information. 2008 CEO Performance Award

SARs grant F3 F4 F5

Fair value at grant date ($) 13.82 8.60 8.41 Share price on grant date ($) 17.40 17.40 17.40 Exercise price ($) – – – Expected volatility (weighted average, %p.a.) 30.9 30.9 30.9 Right life (weighted average) 10 years 10 years 10 years Expected dividends (%p.a.) 2.3 2.3 2.3 Risk-free interest rate (based on Australian Government bond yields, %p.a.) 6.05 6.05 6.05

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

31. SHARE-BASED PAYMENT PLANS (CONTINUED)

(B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME (CONTINUED) Former CEO Mr J C Ellice-Flint retired on 25 March 2008. Consistent with the terms of his service agreement, 2,312,500 of Mr Ellice-Flint’s options, which had not previously vested, were vested and became exercisable upon cessation of his employment. Each option entitles Mr Ellice-Flint to acquire one fully paid ordinary share in the Company at a predetermined price, subject to satisfaction of vesting conditions. The grant size is determined by reference to the median grant size given to executives in similar roles in comparable companies. No options have been granted to Mr Ellice-Flint since 2006. At 31 December 2009, the 2,500,000 options are on issue, and are exercisable. The exercise price for the options granted is $11.36, being the volume weighted average price in the ten days up to and including 9 March 2006 as approved by shareholders on 4 May 2006. The options have a contractual life of ten years. Eligible senior executives – SARs and options During 2009, the Company made equity grants to its Senior Executives as the LTI component of their remuneration for 2009. The grants comprised: • a performance-based component, equal to 75% of the total grant value (“Performance Award”); and • a service-based component, equal to 25% of the total grant value (“Deferred Award”). Both the Performance Award and the Deferred Award were delivered, at the executive’s election, in the form of either SARs (under the SESPP) or options (under the SESOP). SARs and options were granted at no cost to the executives with the number of SARs awarded being determined by dividing the amount of the award by the volume weighted average price of the Company’s shares over the week up to and including the award date. The number of options awarded is of equivalent value calculated by an independent expert based on an acceptable valuation method. Vesting details of the Performance Award and the Deferred Award are summarised below: Performance Award

Vesting period 1 January 2009 to 31 December 2011. Vesting condition Vesting of the Performance Award is based on relative TSR against ASX 100 companies as at 1 January 2009. Vesting schedule Relative TSR condition Santos TSR percentile ranking % of grant vesting < 50th percentile 0% = 50th percentile 33.33% 51st to 99th percentile Further 1.33% for each percentile 100th percentile 100% Exercise price $14.81 for options, being the volume weighted average price in the week up to and including the grant date of 2 March 2009. SARs have no exercise price. Expiry/lapse Upon cessation of employment, SARs which have not already vested and options which are not exercisable will, in general, lapse and be forfeited. There is no retesting of the performance conditions if they are not satisﬁed.

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31. SHARE-BASED PAYMENT PLANS (CONTINUED)

(B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME (CONTINUED) Deferred Award

Vesting period 2 March 2009 to 1 March 2012. Vesting condition Vesting of the Deferred Award is based on continuous service to 1 March 2012, or three years from the grant date. Vesting schedule 0% if the continuous service condition is not met. 100% if the continuous service condition is met. Exercise price As for Performance Award. Expiry/lapse As for Performance Award. Upon cessation of employment, SARs which have not already vested and options which are not exercisable will, in general, lapse and be forfeited. However, if cessation occurs due to death, disability or redundancy, or in special circumstances approved by the Board, then a proportion of the SARs and options may vest and become exercisable. Where there is a change in control, the Board may determine whether, and the extent to which, SARs and options may vest. During the ﬁnancial year, the Company granted 275,884 (2008: 880,533) options over unissued shares as set out below: 2009 2008 Weighted Weighted average average exercise exercise price price $ Number $ Number

Outstanding at the beginning of the year 12.70 2,195,293 10.27 2,078,728 Granted during the year 14.81 275,884 15.39 880,533 Forfeited during the year 11.34 (24,690) 9.71 (460,385) Exercised during the year 9.61 (427,050) 8.41 (303,583) Outstanding at the end of the year 13.65 2,019,437 12.70 2,195,293

Exercisable at the end of the year 10.15 521,250 8.14 232,300

The options outstanding at 31 December 2009 have an exercise price in the range of $8.46 to $15.39, and a weighted average remaining contractual life of 7.9 years. During the year 427,050 (2008: 303,583) options were exercised. The weighted average share price at the dates of exercise was $14.40 (2008: $17.81). The fair value of shares issued as a result of exercising the options or vesting of SARs during the reporting period at their issue date is the market price of shares of the Company on the ASX as at close of trading. The amounts recognised in the ﬁnancial statements of the Group and the Company in relation to executive share options exercised during the ﬁnancial year were: Consolidated Santos Ltd 2009 2008 2009 2008 $000 $000 $000 $000

Issued ordinary share capital 4,103 2,553 4,103 2,553

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

31. SHARE-BASED PAYMENT PLANS (CONTINUED)

(B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME (CONTINUED) The fair value of services received in return for share options granted is measured by reference to the fair value of share options granted. The estimate of the fair value of the services received is measured based on the Monte Carlo simulation method. The contractual life of the option is used as an input into this model. Expectations of early exercise are incorporated into the models. 2009 2008

Performance Deferred Performance Deferred Award Award Award Award Option grant G1 G2 F1 F2

Fair value at grant date ($) 4.54 6.75 5.25 7.30 Share price on grant date ($) 15.00 15.00 17.71 17.71 Exercise price ($) 14.81 14.81 15.39 15.39 Expected volatility (weighted average, %p.a.) 46.5 46.5 30.7 30.7 Option life (weighted average) 10 years 10 years 10 years 10 years Expected dividends (%p.a.) 2.6 2.6 2.3 2.3 Risk-free interest rate (based on Australian Government bond yields, %p.a.) 2.94 2.94 6.29 6.29

The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share options), adjusted for any expected changes to future volatility due to publicly available information. During the ﬁnancial year, the Company granted 723,792 (2008: 241,668) SARs to eligible senior executives as set out below. Shares allocated on vesting of SARs will be subject to further restrictions on dealing for a maximum of ten years after the original grant date. No amount is payable on grant or vesting of the SARs. Number of SARs 2009 2008

Outstanding at the beginning of the year 1,229,712 1,365,800 Granted during the year 723,792 241,668 Forfeited during the year (61,961) (236,426) Vested during the year (303,085) (141,330) Outstanding at the end of the year 1,588,458 1,229,712

Exercisable at the end of the year – –

Performance Performance Deferred Award Deferred Award Award Award SARs grant G1 G2 G3 F1 F2

Fair value at grant date ($) 8.67 14.45 14.45 11.23 16.73 Share price on grant date ($) 15.00 15.00 15.00 17.71 17.71 Exercise price ($) – – – – – Expected volatility (weighted average, %p.a.) 46.5 46.5 46.5 30.7 30.7 Right life (weighted average) 10 years 10 years 10 years 10 years 10 years Expected dividends (%p.a.) 2.6 2.6 2.6 2.3 2.3 Risk-free interest rate (based on Australia Government bond yields, %p.a.) 2.94 2.94 2.94 6.29 6.29

126 Santos Annual Report 2009

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31. SHARE-BASED PAYMENT PLANS (CONTINUED)

(B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME (CONTINUED) Cash-settled share-based payments During the year the Company raised $2,914 million through a two for five rights issue (refer note 22(A)). Each new share was issued at a price of $12.50 representing a 26.9% discount to the closing price of the shares before the announcement of the rights issue. Executives, being the CEO and eligible senior executives, who held unvested SARs and options, were unable to participate in the rights issue and there was no adjustment to the applicable exercise price or the number of underlying shares to which each SAR or option was entitled. The ASX Listing Rules do allow an adjustment to the exercise price of options to reflect the impact of discounted rights issues but the terms of the grant need to expressly refer to the formula in ASX Listing Rule 6.22.2 and the Listing Rules do not contemplate (nor provide a mechanism for adjusting) SARs. Accordingly, in order to ensure the rights issue would neither unfairly disadvantage or advantage executives and so as to avoid a misalignment between the incentives of management (through the LTI component of their remuneration) and a capital raising which was considered by the Board to be in the best interests of the Company and shareholders, the Board determined, in respect of existing LTI grants: • to use TSR data which takes into account the impact of rights issues and other capital management activities on both Santos and comparator group companies when testing the satisfaction of TSR performance hurdles that apply to Santos LTI awards; and • subject to the SARs and options vesting following satisfaction of applicable hurdles (and, in the case of options, being exercised), to make a future cash remuneration payment to executives equal to the value of the right to participate in the rights issue (calculated at $1.31 for each underlying share in accordance with the formula in ASX Listing Rule 6.22.2). The intention is to “keep whole” the executives in respect of SARs and options that actually vest in due course. No cash payment will be made in respect of SARs that do not vest or options that do not vest or are not exercised. These future cash remuneration payments apply to LTI participants with grants that were yet to vest at the time of the rights issue, including the CEO. No changes have been made to the performance hurdles or testing dates. Despite the intention to “keep whole” the executives, the future cash remuneration payments did not fully compensate for the loss in the value of the unvested SARs and options. The overall value of the future cash remuneration payments is $166,523 less than the loss in value of the SARs and options, both determined in accordance with AASB 2 Share-based Payment. The value of these future cash remuneration payments has been expensed in accordance with AASB 2, over the period from 8 May 2009 (the last trading day prior to the announcement of the rights issue; closing price of $17.09) to the end of their performance or vesting periods. Financial statement impact of Executive Long-term Incentive Programme The amounts recognised in the financial statements of the Group and the Company, during the financial year in relation to equity grants issued under the Executive Long-term Incentive Programme were: Consolidated Santos Ltd 2009 2008 2009 2008 $000 $000 $000 $000

Employee expenses: CEO and Managing Director options 635 418 635 418 CEO and Managing Director SARs 553 382 553 382 Former CEO options – 1,667 – 1,667 Eligible senior executive options 2,260 1,723 2,260 1,723 Eligible senior executive SARs 5,099 4,125 5,099 4,125 Cash-settled share-based payments 2,084 – 2,084 – 10,631 8,315 10,631 8,315

Retained earnings 8,547 8,315 8,547 8,315 Liability for employee beneﬁts 2,084 – 2,084 – 10,631 8,315 10,631 8,315

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

31. SHARE-BASED PAYMENT PLANS (CONTINUED)

(B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME (CONTINUED) Eligible senior executives – Shares No shares have been issued under the executive long-term incentive component of the SESPP since 2004. At 31 December 2009, the total number of shares acquired under the executive long-term incentive component of the Plan since its commencement was 220,912. The shares allocated pursuant to the SESPP were allotted to a trustee at no cost to participants, to be held on their behalf. The allocation price is Market Value (as defined above) and the trustee was funded by the Company to subscribe for the shares. In general the shares were restricted for a period of one year from the date of allotment. If a participating executive ceased employment during this period, the Board in its discretion could determine that a lesser restriction on transfer and dealing applied, having regard to the circumstances of the cessation. The shares can remain on trust for up to ten years from the date of allotment, during which time the shares are subject to forfeiture if participants act fraudulently or dishonestly or in breach of their obligations to any Group company. Participants are entitled to instruct the trustee as to the exercise of voting rights, receive dividends and participate in bonus and rights issues while the shares are held on trust. (C) LEGACY PLAN – SANTOS EXECUTIVE SHARE PLAN The Santos Executive Share Plan operated between 1987 and 1997, when it was discontinued. Under the terms of the Plan, shares were issued as partly paid to one cent. While partly paid, the Plan shares are not transferable, carry no voting right and no entitlement to dividend but are entitled to participate in any bonus or rights issue. After a “vesting” period, calls could be made for the balance of the issue price of the shares, which varied between $2.00 and the market price of the shares on the date of the call being made. Shares were issued principally on: 22 December 1987; 7 February and 5 December 1989; and 24 December 1990. At the beginning of the financial year there were 88,000 Plan shares on issue. During the financial year no Plan shares were fully paid and no aggregate proceeds were received by the Company. As at 31 December 2009 there were 88,000 Plan shares outstanding. (D) NON-EXECUTIVE DIRECTOR SHARE PLAN In accordance with shareholder approval given at the 2007 Annual General Meeting, the Non-executive Director (“NED”) Share Plan was introduced in July 2007. Participation in the NED Share Plan is voluntary and all present and future Non-executive Directors are eligible to participate. Under the NED Share Plan, Directors elect to sacrifice all or part of their fees in return for an allocation of fully paid ordinary shares of equivalent value. The NED Share Plan therefore does not involve any additional remuneration for participating Directors. Shares are allocated quarterly and are either issued as new shares or purchased on the ASX at the prevailing market price. The shares are registered in the name of the participating Director, but are subject to a restriction on dealing. In the absence of exceptional circumstances, the restriction will apply until the Director ceases to hold office or until ten years have elapsed since the allocation of the shares, whichever is earlier.

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31. SHARE-BASED PAYMENT PLANS (CONTINUED)

(D) NON-EXECUTIVE DIRECTOR SHARE PLAN (CONTINUED) In 2009, 20,390 (2008: 33,356) shares were allocated to participating Directors as follows: Shares Price Date issued per share Number $

7 April 2009 8,019 17.1811 29 June 2009 6,949 14.2552 7 October 2009 2,598 15.1076 23 December 2009 2,824 13.8947

The amounts recognised in the ﬁnancial statements of the Group and the Company in relation to the NED Share Plan during the year were: Consolidated Santos Ltd 2009 2008 2009 2008 $000 $000 $000 $000

Employee expenses 315 553 315 553 Issued ordinary share capital 315 553 315 553

32. KEY MANAGEMENT PERSONNEL DISCLOSURES

(A) KEY MANAGEMENT PERSONNEL COMPENSATION Short-term employee benefits 10,106 10,442 10,106 10,442 Post-employment benefits 399 1,739 399 1,739 Other long-term benefits 113 259 113 259 Termination benefits – 2,705 – 2,705 Share-based payments 3,615 4,619 3,615 4,619 14,233 19,764 14,233 19,764

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009 Vested Vested and Vested but not Vested the year the year the of end year the of end at end of of at end at exercisable at exercisable Balance Balance the year the at end of of at end

Other Other changes changes 2 Options Options vested 1

exercised/rights Granted Granted – – – 91,678 – – – 91,678 – 91,678 – 78,667 – – – 78,667 25,000 25,000 – 25,000 78,667 78,667 – 27,000 17,527 – – 44,527 – 17,527 – 27,000 24,600 18,507 – – 43,107 – 18,507 – 24,600 27,200 – – (27,200) – (27,200) 27,200 – 51,900 20,215 (19,900) – 52,215 – – (19,900) 20,215 51,900 46,668 – – (46,668) – (46,668) 46,668 – 27,000 17,633 – – 44,633 – 17,633 – 27,000 83,220 33,625 (23,000) – 93,845 – – (23,000) 33,625 83,220 62,515 19,335 (16,200) – 65,650 – – (16,200) 19,335 62,515 beginning beginning 544,974 – – – 544,974 – 544,974 – 123,637 – – – 123,637 78,100 78,100 – 78,100 123,637 123,637 – 137,917 – – (137,917) – (137,917) 137,917 – 108,682 – – – 108,682 63,700 63,700 – 63,700 108,682 108,682 – 186,779 – – – 186,779 – 186,779 – 536,882 126,842 (59,100) (73,868) 530,756 – (73,868) (59,100) 126,842 536,882 Balance at Balance of the year the of 1,085,555 – – (137,917) 947,638 166,800 166,800 – 166,800 947,638 (137,917) 1,085,555 –

Due to a company restructure, Mr T J Brown and Mr R M Kennett ceased to be key management personnel in 2009. personnel management ceased to be key Mr R M Kennett and Mr T J Brown restructure, Due to a company Each option exercised or SAR vested results in the issue of one ordinary share of the Company to the recipient. There are no amounts unpaid on the shares issued as a result of the exercise of options and vesting of SARs. of vesting and options of exercise the of issued as a result shares on the unpaid amounts no are There recipient. to the Company the of share ordinary one issue of in the vested results or SAR exercised Each option SARs granted to executives in the current year were granted on 2 March 2009, have an expiration date of 2 March 2019, and vest with the recipient for no consideration. At the date of grant, 95,529 of the SARs granted have granted SARs the 95,529 of grant, of date the At consideration. no for recipient vest with the 2019, and 2 March of date 2009, have an expiration on 2 March granted year were current in the to executives granted SARs $14.45 per SAR. value of have a fair granted SARs the 31,313 of and $8.67 per SAR, value of a fair 1

Total Total Options and rights holdings rights and Options management by each key or beneﬁcially, indirectly directly, held Company the of shares over ordinary options and rights of number in the period reporting the during movement The is as follows: parties, related their person, including 31(B). in note included are recipient vest with the SARs and options the before be met that must conditions performance and service the Details regarding 3 3 2 2 32. KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) KEY MANAGEMENT 32. (B) PERSONNEL EQUITY HOLDINGS OF KEY MANAGEMENT 2009 Options Directors Wissler John David Knox, Anderson, John Hugh Hugh Executives John Anderson,

Baulderstone, James Leslie Leslie James Baulderstone, Brown, Trevor John John Trevor Brown, Name Name James Edward Martyn Eames, Kennett, Roger Maxwell Maxwell Roger Kennett, Macfarlane, Mark Stuart Stuart Mark Macfarlane, Wasow, Peter Christopher Christopher Peter Wasow, Wilkinson, Richard John John Richard Wilkinson,

Rights Directors Wissler John David Knox, Anderson, John Hugh Hugh Executives John Anderson, Baulderstone, James Leslie Leslie James Baulderstone, Brown, Trevor John John Trevor Brown, James Edward Martyn Eames, Kennett, Roger Maxwell Maxwell Roger Kennett, Macfarlane, Mark Stuart Stuart Mark Macfarlane, Wasow, Peter Christopher Christopher Peter Wasow, Wilkinson, Richard John John Richard Wilkinson,

130 Santos Annual Report 2009

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Other Other changes changes 5 – (2,500,000) – (14,500) 137,917 29,000 29,000 – (25,000) 78,667 Options Options vested 1,2,3,4

exercised/rights – 53,667 Granted Granted 71,500 – (9,800) (9,800) 51,900 – (9,800) (9,800) 71,500 – beginning beginning Balance at Balance of the year the of 2,978,344 1,085,555 2,568,400 673,855 (2,553,900) (12,744) – James James Leslie 50,000 41,678 – – 91,678 – 41,678 – 50,000 Leslie Leslie 24,600 – – – 24,600 – 24,600 – Leslie John – John Wissler 100,000 444,974 – – 544,974 – 444,974 – 100,000 Wissler Wissler 50,000 136,779 – – 186,779 – 136,779 – 50,000 Wissler Stuart 63,700 44,982 – – 108,682 – 44,982 – 63,700 Stuart Stuart 36,600 – (4,800) (4,800) 27,000 – (4,800) (4,800) 36,600 – Stuart Hugh 27,000 – – – 27,000 – 27,000 – Hugh Maxwell – Maxwell Edward Edward John 27,200 – – – 27,200 – 27,200 – John James James James James Christopher – Christopher John John John John Mark Mark Mark Mark Richard Richard John John Roger Roger Peter Peter Trevor Trevor Martyn Martyn Executive grant on 3 May 2008: expiration date of 2 May 2018, exercise price of $15.39, fair value per option on the date of grant of $5.25 (for 64,992 options) and $7.30 (for 21,837 options). Providing vesting vesting Providing 21,837 options). $7.30 (for and 64,992 options) $5.25 (for of grant of date on the value per option $15.39, fair of price 2018, exercise 2 May of date 2008: expiration on 3 May grant Executive 2011. than 1 January earlier no exercisable are options the all of met, are conditions the all of met, are conditions vesting Providing (94,193 options). $5.83 per option of grant of date value on the $17.36, fair of price 27 July 2018, exercise date 1: expiration on 28 July 2008, tranche CEO grant 2011. than 1 January earlier no exercisable are options CEO grant on 28 July 2008, tranche 2: expiration date 27 July 2018, exercise price of $17.36, fair value on the date of grant of $4.25 per option (131,976 options). Providing vesting conditions are met, all of the options options the all of met, are conditions vesting Providing (131,976 options). $4.25 per option of grant of date value on the $17.36, fair of price 27 July 2018, exercise date 2: expiration on 28 July 2008, tranche CEO grant 2012. than 1 January earlier no exercisable are CEO grant on 28 July 2008, tranche 3: expiration date 27 July 2018, exercise price of $17.36, fair value on the date of grant of $4.32 per option (131,976 options). Providing vesting conditions are met, all of the options options the all of met, are conditions vesting Providing (131,976 options). $4.32 per option of grant of date value on the $17.36, fair of price 27 July 2018, exercise date 3: expiration on 28 July 2008, tranche CEO grant 2013. than 1 January earlier no exercisable are David David David David

420,600 195,782 (39,750) (39,750) 536,882 – (39,750) (39,750) 195,782 420,600 Other changes may include the lapse of options on the expiry of the exercise period, reductions in SARs entitlements due to performance conditions not being met, forfeiture of SARs when service conditions are not met, or the or the met, not are conditions service when SARs of forfeiture met, being not conditions to performance due entitlements in SARs reductions period, exercise the of expiry on the options lapse of the include may changes Other Company. with the employment terminate they when disclosure personnel management key the from an employee’s equity holding of removal Each option exercised or SAR vested results in the issue of one ordinary share of the Company to the recipient. There are no amounts unpaid on the shares issued as a result of the exercise of options and vesting of SARs. of vesting and options of exercise the of issued as a result shares on the unpaid amounts no are There recipient. to the Company the of share ordinary one issue of in the vested results or SAR exercised Each option SARs granted to Mr D J W Knox in the current year were granted on 28 July 2008, have an expiration date of 27 July 2018, and vest with Mr D J W Knox for no consideration. At the date of grant, the SARs granted have a fair have a fair granted SARs the grant, of date the At consideration. no for vest with Mr D J W Knox 27 July 2018, and of date on 28 July 2008, have an expiration granted year were current in the to Mr D J W Knox granted SARs $8.44 (50,403 SARs). and $8.65 (50,403 SARs) (35,973 SARs), $14.07 per SAR value of With the exception of Mr D J W Knox, options granted to executives in the current year were granted on 3 May 2008 have an expiration date of 2 May 2018 and an exercise price of $15.39. At the date of grant, the options options the grant, of date the $15.39. At of price an exercise 2018 and 2 May of date 2008 have an expiration on 3 May granted year were current in the to executives granted options Mr D J W Knox, of exception With the are options the met, are conditions vesting Providing recipients. cost to the at no provided were options The (54,268 options). $7.30 per option and (174,613 options) $5.25 per option value of have a fair granted 2011. than 1 January earlier no exercisable grant, of date the At consideration. no for recipient vest with the 2018, and 2 May of date 2008, have an expiration on 3 May granted year were current in the to executives granted SARs Mr D J W Knox, of exception With the $16.73 per SAR. value of have a fair granted SARs the 14,573 of and $11.23 per SAR, value of have a fair granted SARs the 44,430 of Knox, Knox, Baulderstone, Baulderstone, Kennett, Kennett, Macfarlane, Macfarlane, Wasow, Wasow, Wilkinson, Wilkinson, Total Knox, Knox, Anderson, Anderson, Baulderstone, Baulderstone, Brown, Brown, Eames, Eames, Macfarlane, Macfarlane, Total 1 Details regarding the service and performance conditions that must be met before the options and SARs vest with the recipient are included in note 31(B). in note included are recipient vest with the SARs and options the before be met that must conditions performance and service the Details regarding

6 6 (i) (i) (ii) 5 2 as follows: granted year were current in the to Mr D J W Knox granted Options 4 32. KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) KEY MANAGEMENT 32. (B) PERSONNEL (CONTINUED) EQUITY HOLDINGS OF KEY MANAGEMENT 2008 Options Charles Directors John Ellice-Flint, 2,500,000 (iii) 3 cost to Mr D J W Knox. at no provided were options The (iv) (iv)

Anderson, John Hugh Hugh Executives John Anderson, 105,244 45,537 (12,744) (14,400) 123,637 14,400 14,400

Name Name Brown, Trevor John John Trevor Brown, 109,400 43,017 James Edward Martyn Eames, 50,000

Rights Directors

Executives

Kennett, Roger Maxwell Maxwell Roger Kennett, 38,000 17,668 (4,500) (4,500) 46,668

Wasow, Peter Christopher Christopher Peter John Wasow, Richard Wilkinson, 83,600 62,100 23,220 18,115 (11,800) (8,850) (11,800) (8,850) 83,220 62,515

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009 Balance held Balance

offer offer ¹ changes year the year the of end

Entitlement Other of at end at nominally on Received on Received on Purchased

– – – – – 3,500 – – 50 3,550 – 50 3,500 – – – – – – 3,250 – – – 3,250 3,250 – – – 195 – – – – (195) – (195) 195 – 165 – – – – (165) – (165) 165 – 360 – – – – (360) – (360) 360 – 6,868 – – – – – 3,049 1,721 11,638 – 1,721 3,049 6,868 – 1,757 – – – – – – 684 2,441 – 684 1,757 – 9,800 – – 19,900 – (11,800) 11,880 – 29,780 – 11,880 – (11,800) 19,900 – 9,800 – 8,004 – – – – – 3,203 – 11,207 – 3,203 – 8,004 – 45,172 – – – – (9,000) 19,217 11,919 67,308 – 11,919 19,217 (9,000) 45,172 – 10,816 – – – – – 5,028 3,870 19,714 – 3,870 5,028 10,816 – 54,364 – – – – – 13,673 3,813 71,850 – 3,813 13,673 54,364 – 20,135 – – – – – – (20,135) – (20,135) 20,135 – 19,018 – – – – – 7,608 – 26,626 – 7,608 – 19,018 – 64,295 – – – – – – (64,295) – (64,295) 64,295 – 39,734 – – 23,000 – (20,000) 25,094 – 67,828 – 25,094 – (20,000) 23,000 – 39,734 – 30,291 – – 16,200 – – 18,597 – 65,088 – 18,597 – 16,200 – 30,291 – 246,369 – – – – – – (246,369) – (246,369) 246,369 – 556,623 – – 59,100 6,750 (40,800) 107,349 (308,742) 380,280 – beginning beginning as Granted exercise vesting Balance at Balance of the year the of compensation options of rights of market Redeemed Removal of Professor J Sloan’s equity holding from the key management personnel disclosure as a result of her ceasing to be a Director of the Company on 6 May 2009. on 6 May Company the of to be a Director ceasing her of as a result disclosure personnel management key the from J Sloan’s equity holding Professor of Removal

1 include: changes Other 2009 Total Total Share holdings Share related their person, including management by each key or beneﬁcially, indirectly directly, held Company the of shares of number in the period reporting the during movement The is as follows: parties, (ii) (i) allocations. Plan share Reinvestment Dividend Plan and NED Share (iii) restructure. to a company in 2009 due personnel management to be key ceasing Mr R M Kennett and Mr T J Brown executives, of In respect 32. KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) KEY MANAGEMENT 32. (B) PERSONNEL (CONTINUED) EQUITY HOLDINGS OF KEY MANAGEMENT Charles Directors Kenneth – fully paid shares Ordinary Borda,

Coates, Peter Roland Roland Peter Coates, Dean, Kenneth Alfred Alfred Kenneth Dean,

Franklin, Roy Alexander Alexander Roy Franklin, Name Gerlach, Stephen Stephen Gerlach, Harding, Richard Michael Michael Richard Harding, Wissler John David Knox, Walton John Gregory Martin, Sloan, Judith Judith Sloan, Anderson, John Hugh Hugh Executives John Anderson, Baulderstone, James Leslie Leslie James Baulderstone, Brown, Trevor John John Trevor Brown, James Edward Martyn Eames, Kennett, Roger Maxwell Maxwell Roger Kennett, Macfarlane, Mark Stuart Stuart Mark Macfarlane, Wasow, Peter Christopher Christopher Peter Wasow, Wilkinson, Richard John John Richard Wilkinson,

Redeemable convertible convertible Redeemable shares preference Directors Judith Sloan, Kennett, Roger Maxwell Maxwell Executives Roger Kennett,

132 Santos Annual Report 2009

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Other Other changes ¹ changes on market market vesting vesting of rights rights of

exercise exercise Received on Received on Purchased 585 – – – – (225) 360 – (225) 585 – beginning beginning as Granted Balance at Balance of the year the of compensation options of 4,578,139 556,623 (4,077,386) – 12,744 39,750 – 3,376 James – – – 9,800 – – 9,800 – 9,800 – – James Leslie – Leslie John 21,441 – – 8,850 – – 30,291 – 8,850 – 21,441 – John Wissler – Wissler Charles 4,113,344 – – – – (4,113,344) – (4,113,344) 4,113,344 – Charles Charles 225 – – – – (225) – (225) 225 – Charles Stuart 3,204 – – 4,800 – – 8,004 – 4,800 – 3,204 – Stuart Michael 608 – – – – 1,149 1,757 – 1,149 608 – Michael Hugh 6,243 – 12,744 – – 31 19,018 – 31 12,744 – 6,243 – Hugh Charles 35,207 – – – – 9,965 45,172 – 9,965 35,207 – Charles Maxwell 59,795 – – 4,500 – – 64,295 – 4,500 – 59,795 – Maxwell Maxwell 165 – – – – – 165 – 165 – Maxwell Alfred 4,145 – – – – 2,723 6,868 – 2,723 4,145 – Alfred Edward Edward John 246,369 – – – – – 246,369 – 246,369 – John James James Roland – – – – 3,376 7,440 10,816 – 7,440 3,376 Roland – Alexander – Alexander Christopher 27,934 – – 11,800 – – 39,734 – 11,800 – 27,934 – Christopher John John John John John John Mark Mark Richard Richard John John Roy Roger Roger Roger Roger Richard Richard Stephen 49,210 – – – – 5,154 54,364 – 5,154 49,210 – Stephen Peter Peter Peter Peter Trevor Trevor Martyn Martyn Removal of Mr J C Ellice-Flint’s equity holding from the key management personnel disclosure as a result of his ceasing to be a Director of the Company on 25 March 2008. on 25 March Company the of to be a Director his ceasing of as a result disclosure personnel management key the from equity holding Mr J C Ellice-Flint’s of Removal Kenneth Kenneth Judith 10,639 – – – – 9,496 20,135 – 9,496 Judith 10,639 – Judith Judith 195 – 195 – Kenneth Kenneth David David

(i) (i) allocations. Plan share Reinvestment Dividend Plan and NED Share Borda, Borda, Coates, Coates, Dean, Ellice-Flint, Ellice-Flint, Franklin, Franklin, Gerlach, Harding, Harding, Knox, Knox, Sloan, Anderson, Anderson, Baulderstone, Baulderstone, Brown, Brown, Eames, Eames, Kennett, Kennett, Macfarlane, Macfarlane, Wasow, Wasow, Wilkinson, Wilkinson, Total Ellice-Flint, Ellice-Flint, Sloan, Kennett, Kennett, Total 1 include: changes Other 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 with any key management person, management key year with any the throughout time at any its subsidiaries of or any Group by the or indirectly, directly or secured, guaranteed made, loans have been no There parties. related their including

(ii) 32. KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) KEY MANAGEMENT 32. (B) PERSONNEL (CONTINUED) EQUITY HOLDINGS OF KEY MANAGEMENT 2008 Directors – fully paid shares Ordinary (C) PERSONNEL KEY MANAGEMENT TO LOANS

Name

Executives

Redeemable convertible convertible Redeemable shares preference Directors

Executives

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

33. RELATED PARTIES

Identity of related parties Santos Ltd and its controlled entities engage in a variety of related party transactions in the ordinary course of business. These transactions are conducted on normal terms and conditions. Details of related party transactions and amounts are set out in: • note 6 as to interest charged to/by controlled entities; • note 11 as to amounts owing by controlled entities and other related entities; • notes 18 and 19 as to amounts owing to controlled entities; • notes 19 and 36 as to Santos Ltd’s parent company guarantees (including ﬁnancing facilities) provided for its controlled entities; • note 20 as to Non-executive Directors’ retirement beneﬁts; • notes 11 and 24 as to investments in controlled entities; • note 28 as to interests in joint ventures; and • note 32 as to disclosures relating to key management personnel.

Consolidated Santos Ltd 2009 2008 2009 2008 34. REMUNERATION OF AUDITORS $000 $000 $000 $000

The auditor of Santos Ltd is Ernst & Young. Amounts received or due and receivable by Ernst & Young (Australia) for: An audit or review of the ﬁnancial report of the entity and any other entity in the consolidated group 1,035 1,061 725 813 Other assurance services 513 368 433 292 Other services: Taxation – 5 – 4 Other – 38 – 38 1,548 1,472 1,158 1,147

Amounts received or due and receivable by overseas related practices of Ernst & Young (Australia) for: External audit 143 122 – – Assurance 20 20 – – Taxation 73 33 – – Other services 4 4 – – 240 179 – –

Amounts received or due and receivable by overseas non-Ernst & Young audit ﬁrms for: Audit of ﬁnancial reports for subsidiaries incorporated in Papua New Guinea 40 62 – –

Amounts received or due and receivable by related Australian practices of non-Ernst & Young audit ﬁrms for: Assurance 195 60 137 42 Taxation 657 297 151 69 Other services 35 190 25 133 887 547 313 244

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Consolidated Santos Ltd 2009 2008 2009 2008 35. COMMITMENTS FOR EXPENDITURE $million $million $million $million

The Group has the following commitments for expenditure: (A) CAPITAL COMMITMENTS Capital expenditure contracted for at balance date for which no amounts have been provided in the financial statements, payable: Not later than one year 935 330 124 109 Later than one year but not later than five years 1,285 150 – 23 Later than five years 10 4 – – 2,230 484 124 132

Santos Ltd has guaranteed the capital commitments of certain controlled entities (refer note 37 for further details). (B) MINIMUM EXPLORATION COMMITMENTS Minimum exploration commitments for which no amounts have been provided in the financial statements or capital commitments, payable: Not later than one year 76 270 6 4 Later than one year but not later than five years 270 162 6 9 Later than five years 8 – 8 – 354 432 20 13

The Group has certain obligations to perform minimum exploration work and expend minimum amounts of money pursuant to the terms of the granting of petroleum exploration permits in order to maintain rights of tenure. These commitments may be varied as a result of renegotiations of the terms of the exploration permits, licences or contracts or alternatively upon their relinquishment. The minimum exploration commitments are less than the normal level of exploration expenditures expected to be undertaken by Santos Ltd and its controlled entities. (C) OPERATING LEASE COMMITMENTS Non-cancellable operating lease rentals are payable as follows: Not later than one year 82 94 37 38 Later than one year but not later than ﬁve years 245 167 70 68 Later than ﬁve years 130 49 36 46 457 310 143 152

The Group leases floating production, storage and offtake facilities, floating storage offloading facilities and mobile offshore production units under operating leases. The leases typically run for a period of four to six years, and may have an option to renew after that time. The Group also leases building office space and a warehouse under operating leases. The leases are generally for a period of ten years, with an option to renew the lease after that date. The lease payments typically increase annually by CPI. During the year ended 31 December 2009 the Group recognised $85 million (2008: $88 million) as an expense in the income statement in respect of operating leases.

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

Consolidated Santos Ltd 2009 2008 2009 2008 35. COMMITMENTS FOR EXPENDITURE (CONTINUED) $million $million $million $million

(D) FINANCE LEASE COMMITMENTS Finance lease commitments are payable as follows: Not later than one year 1 1 1 1 Later than one year but not later than five years 2 1 2 1 Later than five years 1 1 1 1 Total minimum lease payments 4 3 4 3 Less amounts representing finance charges (1) (1) (1) (1) Present value of minimum lease payments 3 2 3 2

The Group has finance leases for various items of plant and equipment with a carrying amount of $3 million (2008: $3 million) for both the Group and the Company. The leases generally have terms of between three to twelve years with no escalation clauses and no option to renew. Title to the assets passes to the Group at the expiration of the relevant lease periods. (E) COMMITMENT ON REMOVAL OF SHAREHOLDER CAP Pursuant to a Deed of Undertaking to the Premier of South Australia dated 16 October 2006 and as a consequence of the enactment of the Santos Limited (Deed of Undertaking) Act 2007 on 29 November 2007, Santos has agreed to: • Continue to make payments under its existing Social Responsibility and Community Benefits Programme specified in the Deed totalling $60 million over a ten-year period from the date the legislation was enacted. As at 31 December 2009, approximately $48 million remains to be paid over the next eight years. • Continue to maintain the South Australian Cooper Basin asset’s Head Office and Operational Headquarters together with other roles in South Australia for ten years subsequent to the date the legislation was enacted. At 31 December 2009, if this condition had not been met, the Company would have been liable to pay approximately $90 million to the State Government of South Australia. Santos is required to make these payments only if the State Government of South Australia does not reintroduce a shareholder cap on the Company’s shares or introduce any other restriction on or in respect of the Company’s Board or senior management which have an adverse discriminatory effect in their application to the Company relative to other companies domiciled in South Australia. Consolidated Santos Ltd 2009 2008 2009 2008 $million $million $million $million

(F) REMUNERATION COMMITMENTS Commitments for the payment of salaries and other remuneration under the long-term employment contracts in existence at the reporting date but not recognised in liabilities, payable: Not later than one year 6 7 6 7

Amounts included as remuneration commitments include commitments arising from the service contracts of Directors and executives referred to in the Remuneration Report of the Directors’ Statutory Report that are not recognised as liabilities and are not included in the compensation of key management personnel.

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Consolidated Santos Ltd 2009 2008 2009 2008 36. CONTINGENT LIABILITIES $million $million $million $million

The Directors are of the opinion that provisions are not required in respect of these matters, as it is not probable that a future sacriﬁce of economic beneﬁts will be required or the amount is not capable of reliable measurement. Santos Ltd and its controlled entities have the following contingent liabilities arising in respect of: The Group: Performance guarantees* 18 29 8 10 Actual and possible legal claims and proceedings 30 17 15 3 The Group’s share of contingent liabilities of joint venture operations: Performance guarantees 21 13 6 3 Litigation and proceedings 2 5 – 2 71 64 29 18

* Performance guarantees in the nature of bank guarantees provided to secure statutory and contractual commitments such as leases or work commitments in respect of exploration permits and pipelines.

Legal advice in relation to the actual and possible legal claims and proceedings referred to above indicates that, on the basis of available information, any liability in respect of these claims is unlikely to exceed $7 million on a consolidated basis. A number of the Australian interests of the Group are located within areas the subject of one or more claims or applications for native title determination. Whatever the outcome of those claims or applications, it is not believed that they will significantly impact the Group’s asset base. Compliance with the “future act” provisions of the Native Title Act 1993 (Cth) can delay the grant of mineral and petroleum tenements and consequently impact generally the timing of exploration, development and production operations. An assessment of the impact upon the timing of particular operations may require consideration and determination of complex legal and factual issues. Guarantees provided by Santos Ltd for borrowings of controlled entities are disclosed in note 19. Santos Ltd has provided parent company guarantees in respect of obligations estimated at $2,379 million which include: (a) the funding and performance obligations of a number of subsidiary companies relating to: • a floating storage and offloading facilities agreement for the Sampang Production Sharing Contract; • a mobile offshore production unit agreement for the Madura Production Sharing Agreement; • the development of a jetty, marine offloading facilities and in relation to the acquisition of land development and LNG facilities for the GLNG project; and • performance obligations under Production Sharing Contracts in India; (b) a subsidiary company’s obligations to meet distribution charges for gas retail customers; (c) the financial obligations of subsidiary companies relating to: • floating production storage and offloading vessel charter agreement for the Chim Sao development in Block 12 W, offshore Vietnam; and • subsidiary companies’ share (13.5%) of the US$14 billion financing for the PNG LNG Project. Subsidiary companies have provided parent or related company guarantees in respect of obligations estimated at $225 million which include: (a) the performance obligations of their subsidiary or related companies in relation to: • the sale of certain interest in the Bonaparte Basin; • the sale of certain interests in the KAKAP PSC; and • the acquisition of interest from Gastar Exploration USA Inc. and Gastar Exploration New South Wales, Inc.; and (b) the payment obligations of a controlled entity in respect of mudlogging services in the Kyrgyz Republic.

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

37. DEED OF CROSS GUARANTEE

Pursuant to Class Order 98/1418, the wholly-owned subsidiaries listed below are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of their ﬁnancial reports. As a condition of the Class Order the Company and each of the listed subsidiaries (“the Closed Group”) have entered into a Deed of Cross Guarantee. The effect of the Deed is that the Company has guaranteed to pay any deﬁciency in the event of winding up of any of the subsidiaries under certain provisions of the Corporations Act 2001. The subsidiaries have also given a similar guarantee in the event that the Company is wound up. The subsidiaries subject to the Deed are: • Alliance Petroleum Australia Pty Ltd; • Bridge Oil Developments Pty Limited; • Reef Oil Pty Ltd; • Santos (BOL) Pty Ltd; • Santos Darwin LNG Pty Ltd; • Santos (NARNL Cooper) Pty Ltd (became a party to the Deed on 28 November 2008); • Santos Offshore Pty Ltd; • Santos Petroleum Management Pty Ltd; • Santos Petroleum Pty Ltd; • Santos QNT Pty Ltd; • Santos QNT (No. 1) Pty Ltd; • Santos QNT (No. 2) Pty Ltd; and • Vamgas Pty Ltd.

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37. DEED OF CROSS GUARANTEE (CONTINUED)

The consolidated income statement, statement of comprehensive income, statement of ﬁnancial position and statement of changes in equity of the entities that are members of the Closed Group are as follows: Closed Group 2009 2008 $million $million

Consolidated income statement Product sales 1,865 2,233 Cost of sales (1,411) (1,412) Gross profit 454 821 Other revenue 53 106 Other income 132 (6) Other expenses (178) (414) Interest income 82 56 Finance expenses (127) (221) Share of net profits of an associate – – Profit before tax 416 342 Income tax expense (89) (154) Royalty-related taxation expense (39) (48) Total taxation expense (128) (202) Net profit for the period 288 140

Consolidated statement of comprehensive income Net profit for the period 288 140 Other comprehensive income: Exchange losses on translation of foreign operations, net of tax (22) 26 Change in fair value of available-for-sale financial assets, net of tax – (9) Actuarial gain/(loss) on defined benefit plan, net of tax 11 (26) Total comprehensive income 277 131

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

Closed Group 2009 2008 37. DEED OF CROSS GUARANTEE (CONTINUED) $million $million

Consolidated statement of ﬁnancial position Current assets Cash and cash equivalents 2,048 1,342 Trade and other receivables 938 1,046 Inventories 254 256 Other ﬁnancial assets 63 – Tax receivable 9 – Total current assets 3,312 2,644

Non-current assets Receivables 9 17 Available-for-sale ﬁnancial assets 2 2 Other ﬁnancial assets 2,471 2,124 Exploration and evaluation assets 601 209 Oil and gas assets 4,410 4,439 Other land, buildings, plant and equipment 134 110 Deferred tax assets 6 9 Total non-current assets 7,633 6,910 Total assets 10,945 9,554 Current liabilities Trade and other payables 471 769 Deferred income 31 50 Interest-bearing loans and borrowings 1 1 Tax liabilities 9 444 Provisions 94 38 Total current liabilities 606 1,302 Non-current liabilities Deferred income 4 6 Interest-bearing loans and borrowings 3,125 3,434 Deffered tax liabilities 452 380 Provisions 618 707 Total non-current liabilities 4,199 4,527 Total liabilities 4,805 5,829 Net assets 6,140 3,725

Equity Issued capital 4,987 2,531 Reserves – 22 Retained earnings 1,153 1,172 Total equity 6,140 3,725

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Closed Group Issued Translation Fair value Retained Total capital reserve reserve earnings equity 37. DEED OF CROSS GUARANTEE (CONTINUED) $million $million $million $million $million

Consolidated statement of changes in equity Balance at 1 January 2009 2,531 24 (2) 1,172 3,725 Total comprehensive income for the period – (22) – 299 277 Transactions with owners in their capacity as owners: Share options exercised by employees 4 – – – 4 Entitlement offer exercised 2,914 – – – 2,914 Shares issued 138 – – – 138 Redeemable cumulative preference shares redeemed (600) – – – (600) Dividends to shareholders – – – (327) (327) Share-based payment transactions – – – 9 9 Balance at 31 December 2009 4,987 2 (2) 1,153 6,140

Balance at 1 January 2008 2,331 (2) 7 1,205 3,541 Total comprehensive income for the period – 26 (9) 114 131 Adjustment to retained earnings for company added to Deed during the year – – – 131 131 Transactions with owners in their capacity as owners: Share options exercised by employees 3 – – – 3 Shares issued 253 – – – 253 Transaction costs, net of tax (56) – – – (56) Dividends to shareholders – – – (286) (286) Share-based payment transactions – – – 8 8 Balance at 31 December 2008 2,531 24 (2) 1,172 3,725

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

38. FINANCIAL RISK MANAGEMENT

Exposure to foreign currency risk, interest rate risk, commodity price risk, credit risk, and liquidity risk arises in the normal course of the Group’s business. The Group’s overall financial risk management strategy is to seek to ensure that the Group is able to fund its business plans. 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) FOREIGN CURRENCY RISK Foreign exchange risk arises from commercial transactions and valuations in assets and liabilities that are denominated in a currency that is not the entity’s functional currency. The risk is measured using cash flow forecasting and Cash Flow at Risk analysis. The Group is exposed to foreign currency risk principally through the sale of products denominated in US dollars, foreign currency borrowings and expenditure. In order to economically hedge foreign currency risk, the Group has from time to time entered into forward foreign exchange, foreign currency swap and foreign currency option contracts. All US dollar (“USD”) denominated borrowings of Australian dollar (“AUD”) functional currency companies (2009: US$1,090 million; 2008: US$1,141 million) are either designated as a hedge of US dollar denominated investments in foreign operations, or swapped using cross-currency swaps to Australian dollars in order to achieve an economic hedge. As a result, there were no net foreign currency gains or losses arising from translation of US dollar denominated borrowings recognised in the income statements in 2009. The Group’s risk management policy is to hedge between 0% and 50% of forecasted cash flows in US dollars for the current financial year. Based on the Group’s net financial assets and liabilities at 31 December 2009, the following table demonstrates the estimated sensitivity to a +/–13 cent movement in the US dollar exchange rate (2008: +/–10 cents) with all other variables held constant, on post-tax profit and equity: Consolidated Santos Ltd 2009 2008 2009 2008 $million $million $million $million

Impact on post-tax proﬁt: AUD/USD +13 cents (2008: +10 cents) – (1) – – AUD/USD –13 cents (2008: -10 cents) – 1 – – Impact on equity: AUD/USD +13 cents (2008: +10 cents) – (1) – – AUD/USD –13 cents (2008: -10 cents) – 1 – –

The above sensitivity will vary depending on the Group’s financial asset and liability profile over time. The +/–13 cent sensitivity is the Group’s estimate of reasonably possible changes in the US dollar exchange rate over the following financial year, based on recent volatility experienced in the market.

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38. FINANCIAL RISK MANAGEMENT (CONTINUED)

(B) 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, denominated in Australian dollars and US dollars, have been entered into as fair value hedges of medium-term notes and long-term notes respectively. When transacted, these swaps have maturities ranging from 1 to 20 years, and align with the maturity of the related notes. At 31 December 2009, the Group had interest rate swaps with a notional contract amount of $1,028 million (2008: $1,302 million). The net fair value of swaps at 31 December 2009 was $125 million (2008: $304 million), comprising assets of $126 million and liabilities of $1 million. These amounts were recognised as fair value derivatives. Based on the net debt position as at 31 December 2009, taking into account interest rate swaps, it is estimated that if interest rates changed by US London Inter-Bank Offer Rate (“LIBOR”) +0.13%/–0.13% and Australian Bank Bill Swap reference rate (“BBSW”) +1.14%/–1.14% (2008: +0.25%/–2.0%), with all other variables held constant, the estimated impact on post-tax profit and equity would have been: Consolidated Santos Ltd 2009 2008 2009 2008 $million $million $million $million

Impact on post-tax proﬁt: Interest rates +US 0.13%/+AU 1.14% (2008: +0.25%) 14 (1) – – Interest rates –US 0.13%/–AU 1.14% (2008: –2.0%) (14) 4 – – Impact on equity: Interest rates +US 0.13%/+AU 1.14% (2008: +0.25%) 14 (1) – – Interest rates –US 0.13%/–AU 1.14% (2008: –2.0%) (14) 4 – –

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. The sensitivity analysis is based on the Group’s reasonable estimate of changes in interest rates over the following financial year and reflects annual interest rate volatility. Changes in interest rates over the following year may be greater or less than the US LIBOR +0.13%/–0.13% and the Australian BBSW +1.14%/–1.14% sensitivity employed in the estimates above. Commodity price risk exposure The Group is exposed to commodity price fluctuations through the sale of petroleum products and other oil-price-linked contracts. The Group may enter into commodity crude oil price swap and option contracts to manage its commodity price risk. At 31 December 2009 the Group has no open oil price swap contracts (2008: nil), and therefore is not exposed to movements in commodity prices on financial instruments. The Group continues to monitor oil price volatility and to assess the need for commodity price hedging.

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

38. FINANCIAL RISK MANAGEMENT (CONTINUED)

(C) CREDIT RISK Credit risk arises from investments in cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers including outstanding receivables and committed transactions, and represents the potential financial loss if counterparties fail to perform as contracted. Management has Board-approved credit policies and the exposure to credit risk is monitored on an ongoing basis. The majority of Santos’ gas contracts are spread across major Australian energy retailers and industrial users. Contracts exist in every mainland state whilst the largest customer accounts for less than 20% of contracted gas. The Group controls credit risk by setting minimum creditworthiness requirements of counterparties, which for banks and financial institutions is a Standard & Poor’s rating of A or better. Approved Total Total Exposure Rating counterparties credit limit exposure* range $million $million $million

AA, AA– 6 3,400 2,356 0 – 653 A+ 7 1,300 203 0 – 152

* Cash deposits plus accrued interest, bank account balances and the mark-to-market gain and percentage of notional value weighted by term on derivatives.

If customers are independently rated these ratings are used, otherwise the credit quality of the customer is assessed by taking into account its financial position, past experience and other factors including credit support from a third party. Individual risk limits for banks and financial institutions are set based on external ratings in accordance with limits set by the Board. Limits for customers are determined within contract terms. The daily nomination of gas demand by customers and the utilisation of credit limits by customers is monitored by line management. In addition, receivables balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant. The Group does not hold collateral, nor does it securitise its trade and other receivables. At the reporting date 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 default by counterparties. The maximum exposure to credit risk is represented by the carrying amount of financial assets of the Group, excluding investments, which have been recognised on the statement of financial position.

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38. FINANCIAL RISK MANAGEMENT (CONTINUED)

(D) LIQUIDITY RISK 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 table analyses the contractual maturities of the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows comprising principal and interest repayments, except for interest rate swaps. Estimated variable interest expense is based upon appropriate yield curves existing as at 31 December 2009. Less than 1 to 2 2 to 5 More than 1 year years years 5 years $million $million $million $million

Consolidated 2009 Non-derivative financial liabilities Trade and other payables 709 – – – Obligations under finance leases 1 1 1 1 Bank loans 32 38 54 51 Medium-term notes 24 372 13 113 Long-term notes 199 59 278 1,056 Derivative financial liabilities/(assets) Cross-currency swap contracts 5 – – – Interest rate swap contracts (50) (34) (32) (35) 920 436 314 1,186

2008 Non-derivative financial liabilities Trade and other payables 605 – – – Obligations under finance leases 1 1 1 1 Bank loans 54 34 82 119 Medium-term notes 18 17 376 119 Long-term notes 141 260 375 1,432 Derivative financial assets Cross-currency swap contracts (56) (31) – – Interest rate swap contracts (42) (58) (74) (184) 721 223 760 1,487

Santos Ltd 2009 Trade and other payables 778 – – – Obligations under ﬁnance leases 1 1 1 1 Amounts owing to controlled entities – – – 3,598 779 1 1 3,599

2008 Trade and other payables 723 – – – Obligations under ﬁnance leases 1 1 1 1 Amounts owing to controlled entities – – – 4,082 724 1 1 4,083

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Notes to the Consolidated Financial Statements for the year ended 31 December 2009

38. FINANCIAL RISK MANAGEMENT (CONTINUED)

(E) FAIR VALUES The financial assets and liabilities of the Group and the Company are recognised in the statement of financial position at their fair value in accordance with the accounting policies in note 1, except for long-term notes that are not swapped to a variable interest rate, and bank borrowings, which are recognised at face value. The carrying value of these long-term notes is US$125 million and their fair value is estimated at US$131 million based on discounting the future cash flows excluding the credit spread at the time of issue. The discount rate used is the interest rate swap rate for the remaining term to maturity of the note as at 31 December 2009. The carrying value of the bank borrowings approximates fair value as it is a floating rate instrument. Basis for determining fair values The following summarises the significant methods and assumptions used in estimating the fair values of financial instruments: Trade and other receivables The carrying value less impairment provision of trade receivables is a reasonable approximation of their fair values due to the short-term nature of trade receivables. Available-for-sale financial assets The fair value of available-for-sale financial assets is determined by reference to their quoted bid price at the reporting date. Derivatives The fair value of interest rate swaps is calculated by discounting estimated future cash flows based on the terms of maturity of each contract and using market interest rates for a similar instrument at the reporting date. Where these cash flows are in a foreign currency the present value is converted to Australian dollars at the foreign exchange spot rate prevailing at reporting date. Financial liabilities Fair value is calculated based on the present value of future principal and interest cash 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 Australian dollars at the foreign exchange spot rate prevailing at reporting date. Interest rates used for determining fair value The interest rates used to discount estimated future cash flows, where applicable, are based on the market yield curve at the reporting date. The dealt credit spread is assumed to be the same as the market rate for the credit as at reporting date as allowed under AASB 139 Financial Instruments: Recognition and Measurement. The interest rates including credit spreads used to determine fair value were as follows: 2009 2008

Derivatives 0.4% – 6.3% 1.3% – 4.3% Loans and borrowings 0.4% – 6.9% 1.7% – 4.9%

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38. FINANCIAL RISK MANAGEMENT (CONTINUED)

(E) FAIR VALUES (CONTINUED) Fair value hierarchy As at 31 December 2009, the Group held the following financial instruments measured at fair value. 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 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. Total Level 1 Level 2 Level 3 $million $million $million $million

Assets measured at fair value Financial assets at fair value through profit and loss: Interest rate swap contracts 126 – 126 – Available-for-sale financial assets: Equity shares 2 2 – – Liabilities measured at fair value Financial liabilities at fair value through profit and loss: Long-term notes (1,193) – (1,193) – Medium-term notes (99) – (99) – Cross-currency swap contracts (7) – (7) – Interest rate swap contracts (1) – (1) –

During the reporting period ended 31 December 2009, there were no transfers between level 1 and level 2 fair value measurements, and no transfers into or out of level 3 fair value measurements.

39. EVENTS AFTER THE END OF THE REPORTING PERIOD

On 18 February 2010, the Directors of Santos Ltd declared a ﬁnal dividend on ordinary shares in respect of the 2009 ﬁnancial year. Refer to note 22 for dividends declared after 31 December 2009.

Santos Annual Report 2009 147

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Directors’ Declaration For the year ended 31 December 2009

In accordance with a resolution of the Directors of Santos Ltd (“the Company”), we state that:

1. In the opinion of the Directors: (a) the ﬁnancial statements and notes of the Company and of the consolidated entity are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Company’s and consolidated entity’s ﬁnancial position as at 31 December 2009 and of their performance for the year ended on that date; and (ii) complying with Accounting Standards and the Corporations Regulations 2001; and (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

2. This declaration has been made after receiving the declarations required to be made to the Directors in accordance with section 295A of the Corporations Act 2001 for the ﬁnancial year ended 31 December 2009.

3. As at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identiﬁed in note 37 will be able to meet any obligations or liabilities to which they are or may become subject, by virtue of the Deed of Cross Guarantee between the Company and those members of the Closed Group pursuant to Class Order 98/1418.

Dated this 18th day of February 2010

On behalf of the Board:

Director Director Adelaide

148 Santos Annual Report 2009

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Auditor’s Independence Declaration to the Directors of Santos Ltd

In relation to our audit of the ﬁnancial report of Santos Ltd and the entities it controlled for the year ended 31 December 2009, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct.

Ernst & Young R J Curtin Partner Adelaide Ernst & Young 18 February 2010

Liability limited by a scheme approved under Professional Standards Legislation

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Independent Audit Report to the members of Santos Ltd

Report on the Financial Report Independence We have audited the accompanying financial report of Santos Ltd, In conducting our audit we have met the independence requirements which comprises the statement of financial position as at 31 December of the Corporations Act 2001. We have given to the Directors of the 2009, and the income statement, statement of comprehensive income, Company a written Auditor’s Independence Declaration, a copy of statement of cash flows and statement of changes in equity for the which is included on page 149 of the Annual Report and is referred year ended on that date, a summary of significant accounting policies, to in the directors’ statutory report. In addition to our audit of the other explanatory notes and the directors’ declaration of the consolidated financial report, we were engaged to undertake the services disclosed entity comprising the Company and the entities it controlled at the in the notes to the financial statements. The provision of these year’s end or from time to time during the financial year. services has not impaired our independence. Directors’ responsibility for the financial report Auditor’s opinion The Directors of the Company are responsible for the preparation In our opinion: and fair presentation of the financial report in accordance with the 1. the financial report of Santos Ltd is in accordance with the Australian Accounting Standards (including the Australian Accounting Corporations Act 2001, including: Interpretations) and the Corporations Act 2001. This responsibility (i) giving a true and fair view of the financial position of Santos includes establishing and maintaining internal controls relevant to the Ltd and the consolidated entity at 31 December 2009 and preparation and fair presentation of the financial report that is free of their performance for the year ended on that date; and from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting (ii) complying with Australian Accounting Standards (including the estimates that are reasonable in the circumstances. In note 1(A), the Australian Accounting Interpretations) and the Corporations Directors also state that the financial report, comprising the financial Regulations 2001. statements and notes, complies with International Financial Reporting 2. the financial report also complies with International Financial Standards as issued by the International Accounting Standards Board. Reporting Standards as issued by the International Accounting Auditor’s responsibility Standards Board. Our responsibility is to express an opinion on the financial report based Report on the Remuneration Report on our audit. We conducted our audit in accordance with Australian We have audited the remuneration report included in pages 52 to 69, Auditing Standards. These Auditing Standards require that we comply within the directors’ statutory report for the year ended 31 December with relevant ethical requirements relating to audit engagements and 2009. The Directors of the Company are responsible for the preparation plan and perform the audit to obtain reasonable assurance whether and presentation of the remuneration report in accordance with section the financial report is free from material misstatement. 300A of the Corporations Act 2001. Our responsibility is to express an An audit involves performing procedures to obtain audit evidence about opinion on the remuneration report, based on our audit conducted in the amounts and disclosures in the financial report. The procedures accordance with Australian Auditing Standards. selected depend on our judgment, including the assessment of the Auditor’s opinion risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, we consider internal In our opinion the remuneration report of Santos Ltd for the year controls relevant to the entity’s preparation and fair presentation of the ended 31 December 2009, complies with section 300A of the financial report in order to design audit procedures that are appropriate Corporations Act 2001. in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Directors, as well as evaluating the overall presentation of the financial report. Ernst & Young RJ Curtin We believe that the audit evidence we have obtained is sufficient and Partner appropriate to provide a basis for our audit opinion. Adelaide 18 February 2010

Liability limited by a scheme approved under Professional Standards Legislation

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CONSOLIDATED FINANCIAL STATEMENTS, DIRECTORS’ REPORT AND AUDITOR’S REPORT (REVIEW OPINION) FOR THE GUARANTOR FOR THE SIX MONTHS ENDED 30 JUNE 2010

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HALF-YEAR REPORT INCORPORATING APPENDIX 4D Santos Limited and its controlled entities For the period ended 30 June 2010, under Listing Rule 4.2.

To be read in conjunction with the 2009 Annual Report

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ABN 80 007 550 923

Results for announcement to the market Appendix 4D for the period ended 30 June 2010

$million Revenue from ordinary activities Up 8.2% to 1,134 Underlying profit after tax Up 121.1% to 210 Profit from ordinary activities after tax attributable to members Up 94.1% to 198 Net profit for the period attributable to members Up 94.1% to 198

Franked amount per Interim Dividends Amount per security security at 30% tax Ordinary securities 22.0¢ 22.0¢

Record date for determining entitlements to the dividend 7 September 2010 Comparison period ended is 30 June 2009

Contents About Santos Half-year Report 30 June 2010 An Australian energy pioneer since 1954, Santos is one of the Country’s leading gas producers, supplying Australian and Asian customers. Directors’ Report 2 Santos has been providing Australia with natural gas Strategy 2 from the remote outback for more than 40 years. The company today is the largest producer of natural gas to Review and Results of Operations 2 the Australian domestic market, supplying 17% of the Directors 5 nation’s gas needs. Santos has also developed major oil and liquids Rounding 6 businesses in Australia and operates in all mainland Auditor’s Independence Declaration 6 Australian states and the Northern Territory. From this base, Santos is pursuing a transformational Half-year Financial Report 8 liquefied natural gas (“LNG”) strategy with interest in Income Statement 8 four exciting LNG projects. ® Statement of Comprehensive Income 9 This strategy is led by the cornerstone GLNG project in Queensland – a leading project in converting coal seam Statement of Financial Position 10 gas into LNG. Also in Santos’ LNG portfolio are the PNG Statement of Cash Flows 11 LNG project, which was formally approved in December 2009, Bonaparte LNG, a proposed floating LNG project Statement of Changes in Equity 12 in the Timor Sea, and Darwin LNG, Santos’ first LNG venture, which began production in 2006. Notes to the Half-year Financial 13 Statements Santos has built a strong and reliable production business in Indonesia and is further developing its Asian Directors’ Declaration 24 business through development projects and exploration Independent Auditor’s Report 25 investment. Santos has about 2,200 employees working across its Appendix 4D continued 27 operations in Australia and Asia.

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Directors’ Report

The Directors present their report together with the financial report of the consolidated entity, being Santos Limited (“Company”) and its controlled entities, for the half-year ended 30 June 2010 and the auditor’s review report thereon. 1. Strategy Santos’ vision is to be a leading energy company in Australia and Asia. We have a simple and robust strategy to achieve this: drive performance in the base business, deliver a suite of LNG projects and pursue focussed opportunities in Asia. 2. Review and Results of Operations A review of the operations and of the results of those operations of the consolidated entity during the half-year is as follows:

Summary of results

2010 2009 Variance MMboe MMboe % Production volume 24.2 26.7 (9.4) Sales volume 28.5 29.0 (1.7) $million $million Product sales 1,091 1,024 6.5 EBITDAX 655 647 1.2 Exploration and evaluation expensed (55) (113) (51.3) Depreciation and depletion (279) (317) (12.0) Net impairment loss (38) (8) EBIT 283 209 35.4 Net finance income/(costs) 10 (12) Taxation expense (95) (95) - Net profit for the period 198 102 94.1 Underlying profit for the period* 210 95 121.0

*Please refer to page 4 for the reconciliation from net profit to underlying profit for the period.

Base Business First half production of 24.2 million barrels of oil equivalent (“MMboe”) was 9% lower compared to the first half of 2009, primarily due to major wet weather and flood events in Central Australia impacting Cooper Basin operations (2.0 MMboe), partially offset by stronger gas production in Western Australia and Indonesia.

Sales volumes for the first half, of 28.5 MMboe, were in line with the first half of 2009. Withdrawal of gas from storage, supplemented by gas purchases, was utilised to meet customer gas demand ex the Cooper Basin.

Higher commodity prices were evident across the Santos portfolio in the first half of 2010. The average realised oil price was A$86.99 per barrel, 19% higher than the first half of 2009, while the average gas price of A$4.37 per gigajoule was 4% higher. Product sales revenue was $1,091 million, 7% higher than the first half of 2009.

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LNG Projects Santos is building a material LNG business with interests in four LNG projects.

> GLNG (Santos 60%) GLNG involves the production of LNG using coal seam gas sourced from the GLNG gas fields in the Bowen and Surat Basins in Queensland. GLNG is making significant progress towards a final investment decision in 2010 with first LNG deliveries scheduled to begin in 2014. The design contemplates a two-train development with a capacity of 7.2 million tonnes per annum (“mtpa”) of LNG.

In May 2010, GLNG became Australia’s first major coal seam gas to LNG project to receive environmental approval from the Queensland Government. The environmental approval process is continuing with Federal Government consideration of the project. Engineering design works for the project are nearing completion.

GLNG has signed a binding heads of agreement to sell 2 mtpa of LNG to project partner PETRONAS with a sellers’ option for an additional 1 mtpa. PETRONAS, the largest LNG producer in Asia, owns 40% of GLNG.

> PNG LNG (Santos 13.5%) Sanctioned in December 2009, the PNG LNG project will develop the gas and condensate resources in the Hides, Angore and Juhu fields and the associated gas resources in the currently operating oil fields of Kutubu, Agogo, Gobe and Moran in the Southern Highlands and Western Provinces of Papua New Guinea. The gas will be transported by pipeline to an LNG facility with a capacity of 6.6 mtpa located northwest of Port Moresby on the coast of the Gulf of Papua.

Early works construction commenced prior to sanction and continues at the upstream and LNG plant locations and for supporting infrastructure.

All of the project’s production capacity has been committed with four major LNG buyers in the Asia Pacific region. First LNG deliveries are scheduled to begin in 2014.

> Darwin LNG (Santos 11.5%) The Darwin LNG project, Santos’ first producing LNG asset, commenced production in 2006. During the first half of 2010, the asset completed a planned shutdown during which LNG production capacity was upgraded to 3.6 mtpa. Santos’ interest in the project has increased this year from 11.4% to 11.5%, subject to regulatory approval.

> Bonaparte LNG (Santos 40%) Santos has partnered with France’s GDF SUEZ to study the development of Bonaparte LNG, a proposed floating LNG project located in the Timor Sea off the northern coast of Australia. GDF SUEZ will carry Santos’ share of costs until a final investment decision.

Asia The Company’s focused Asia strategy continues to progress, with producing assets delivering strong performance and multiple options for growth. Indonesia continues to be a source of growth with record production from the two operated assets in East Java and the Wortel project progressing towards a final investment decision later in 2010. Construction is progressing to plan on Santos’ first oil project in Vietnam, Chim Sao, with first oil expected in the second half of 2011.

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Net Profit The 2010 first half net profit of $198 million is $96 million higher than in 2009, mainly due to higher revenues driven by higher product prices, lower exploration and evaluation expenses, partially offset by current year impairment losses.

As a result of the Company’s regular impairment review of assets, the recoverable amount of some assets was assessed to be impaired and impairment losses of $38 million pre-tax ($25 million after tax) have been recognised in the 2010 financial report. The impairments primarily relate to increased restoration obligations for the Jabiru/Challis and Legendre assets.

Net profit includes net loss items before tax of $42 million (after tax $12 million), referred to in the underlying profit table below.

Underlying Profit Table 2010 $million 2009 $million Gross Tax Net Gross Tax Net Underlying profit 210 95 Net (losses)/gains on sales and impairment losses (40) 13 (27) 14 2 16 Foreign currency gains/(losses) 5 (2) 3 (19) 4 (15) Fair value adjustments on embedded derivatives and hedges* (13) 4 (9) 8 (2) 6 Remediation costs and contract losses, net of related insurance recoveries* 6 (2) 4 (8) (2) (10) Investment allowance - 17 17 - 10 10 (42) 30 (12) (5) 12 7 Net profit after tax 198 102

This table has been prepared in accordance with the AICD/Finsia principles for reporting underlying profit. *Adjustment to prior year to ensure comparability with current year.

Equity Attributable to Equity Holders of Santos Limited / Dividends Equity attributable to equity holders of Santos Limited at 30 June 2010 was $7,021 million.

On 26 August 2010, the Directors resolved that a fully franked interim dividend of 22 cents per fully paid ordinary share be paid on 6 October 2010 to shareholders registered in the books of the Company at the close of business on 7 September 2010.

The 2010 interim dividend of 22 cents per fully paid ordinary share is comparable with the 2009 interim dividend which was also 22 cents per share, fully franked.

Cash Flow The net cash inflow from operating activities of $537 million was 8% higher than the first half of 2009. This increase is principally attributable to higher cash receipts from customers driven by higher product prices and lower exploration and evaluation expenses, partially offset by increased cash payments to suppliers and employees and income tax and royalty related tax payments.

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Portfolio Management Santos announced the sale of its interest in the NT/P 48 (Evans Shoal) permit in the Bonaparte Basin offshore northern Australia to Magellan Petroleum Australia Limited for up to $200 million. The sale has not been recognised in the financial report at 30 June 2010 pending completion later in the year. The transaction is a further outcome of Santos’ ongoing review of commercialisation options for its gas assets in the Bonaparte Basin and follows the sale of 60% of the Petrel, Tern and Frigate fields to GDF SUEZ for up to US$370 million announced in August 2009.

Outlook Santos maintains production guidance in the range of 49 to 52 MMboe for 2010.

Petroleum Resource Rent Tax The Australian Federal Government recently proposed that the current Petroleum Resource Rent Tax regime will be extended to all Australian onshore and offshore oil and gas projects to apply from 1 July 2012. The proposal is subject to extensive negotiation, drafting of legislation and approval by Parliament.

Post Balance Day Events The following events occurred subsequent to 30 June 2010, the financial effects of which have not been brought to account in the half-year financial report for the six months ended 30 June 2010:

> On 19 July 2010 Santos announced it had executed a $2,000 million bilateral bank loan facility. This new facility will be used to replace and extend Santos’ existing $700 million of undrawn bilateral bank facilities that matures between 2011 and 2013 and to increase liquidity. The weighted average term of the new facility is five years; and > On 26 August 2010, the Directors of Santos Limited declared an interim dividend on ordinary shares in respect of the 2010 financial year. Refer to note 14 to the Financial Statements for the details of the dividends declared.

3. Directors The names of Directors of the Company in office during or since the end of the half year are:

Surname Other Names Borda Kenneth Charles Coates Peter Roland (Chairman) Dean Kenneth Alfred Franklin Roy Alexander Harding Richard Michael Hemstritch Jane Sharman Knox David John Wissler (Managing Director) Martin Gregory John Walton

Each of the above named Directors held office during and since the end of the half year, except for Ms Hemstritch, who was appointed to the Board on 16 February 2010.

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4. Rounding Australian Securities and Investments Commission Class Order 98/100, dated 10 July 1998, applies to the Company. Accordingly, amounts have been rounded off in accordance with that Class Order, unless otherwise indicated.

5. Auditor’s Independence Declaration A copy of the auditor’s independence declaration as required by section 307C of the Corporations Act 2001 is set out on page 7 and forms part of this report.

This report is made out on 26 August 2010 in accordance with a resolution of the Directors.

Director Director

26 August 2010

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Auditor’s Independence Declaration to the Directors of Santos Limited

In relation to our review of the financial report of Santos Limited for the half-year ended 30 June 2010 to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct.

Ernst & Young

R J Curtin Partner Adelaide, South Australia 26 August 2010

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INCOME STATEMENT

FOR THE SIX MONTHS ENDED 30 JUNE 2010

Consolidated 30 June 30 June 2010 2009 Note $million $million Product sales 4 1,091 1,024 Cost of sales 5 (704) (691) Gross profit 387 333 Other revenue 4 43 24 Other income 4 3 28 Other expenses 5 (149) (176) Finance incomes 6 55 34 Finance expenses 6 (45) (46) Share of net losses of an associate (1) - Profit before tax 293 197 Income tax expense (81) (67) Royalty related taxation expense (14) (28) Total taxation expense (95) (95) Net profit for the period attributable to the equity holders of Santos Limited 198 102

Earnings per share attributable to the equity holders of Santos Limited (¢) Basic earnings per share 23.8 12.4 Diluted earnings per share 23.7 12.3

Dividends per share ($) Ordinary shares 14 0.20 0.20 Redeemable preference shares 14 - 2.9989

The income statement is to be read in conjunction with the notes to the half-year financial statements.

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STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED 30 JUNE 2010

Consolidated 30 June 30 June 2010 2009 $million $million Net profit for the period 198 102

Other comprehensive income, net of tax: Net exchange gain/(loss) on translation of foreign operations 43 (192) Tax effect - - 43 (192)

Net (loss)/gain on foreign currency loans designated as hedges of net investments in foreign operations (55) 179 Tax effect 17 (54) (38) 125

Net change in fair value of available-for-sale financial assets (1) - Tax effect - - (1) -

Net actuarial (loss)/gain on the defined benefit plan (3) 13 Tax effect 1 (4) (2) 9 Other comprehensive income, net of tax 2 (58) Total comprehensive income 200 44

The statement of comprehensive income is to be read in conjunction with the notes to the half-year financial statements.

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STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE 2010

Consolidated 30 June 31 December 2010 2009 Note $million $million Current assets Cash and cash equivalents 8 2,375 2,240 Trade and other receivables 640 917 Inventories 288 273 Other financial assets 9 35 65 Tax receivable 59 24 Total current assets 3,397 3,519 Non-current assets Receivables 10 10 Investment in an associate 178 177 Other financial assets 9 186 136 Exploration and evaluation assets 10 975 923 Oil and gas assets 11 6,879 6,317 Other land, buildings, plant and equipment 12 214 200 Deferred tax assets 71 79 Total non-current assets 8,513 7,842 Total assets 11,910 11,361 Current liabilities Trade and other payables 803 709 Deferred income 117 83 Interest-bearing loans and borrowings 163 164 Current tax liabilities 40 20 Provisions 104 94 Other financial liabilities 6 10 Total current liabilities 1,233 1,080 Non-current liabilities Deferred income 14 17 Interest-bearing loans and borrowings 1,957 1,649 Deferred tax liabilities 851 871 Provisions 826 768 Other financial liabilities 8 9 Total non-current liabilities 3,656 3,314 Total liabilities 4,889 4,394 Net assets 7,021 6,967 Equity Issued capital 13 5,003 4,987 Reserves (279) (283) Retained earnings 2,297 2,263 Total equity 7,021 6,967

The statement of financial position is to be read in conjunction with the notes to the half-year financial statements.

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STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED 30 JUNE 2010

Consolidated 30 June 30 June 2010 2009 Note $million $million Cash flows from operating activities Receipts from customers 1,205 1,060 Interest received 45 32 Overriding royalties received 5 4 Insurance proceeds received 6 27 Pipeline tariffs and other receipts 23 44 Payments to suppliers and employees (530) (420) Exploration and evaluation - seismic and studies (55) (129) Royalty and excise paid (26) (30) Borrowing costs paid (23) (49) Income taxes paid (30) (1) Royalty related taxes paid (83) (39) Net cash provided by operating activities 537 499 Cash flows from investing activities Payments for: Exploration and evaluation assets (87) (46) Oil and gas assets (548) (695) Other land, buildings, plant and equipment (32) (31) Acquisitions of oil and gas assets (4) (18) Acquisitions of controlled entities (3) (6) Investment in an associate (2) - Restoration (6) (13) Income taxes paid on disposal of non-current assets - (497) Proceeds from disposal of non-current assets 222 14 Proceeds from disposal of controlled entities - 25 Other investing activities - (1) Net cash used in investing activities (460) (1,268) Cash flows from financing activities Dividends paid (151) (124) Drawdown of borrowings 181 - Repayments of borrowings (10) (45) Proceeds from maturity of term deposits 30 - Proceeds from issues of ordinary shares - 3,002 Proceeds from issues placed on term deposits - (1,176) Net cash provided by financing activities 50 1,657 Net increase in cash and cash equivalents 127 888 Cash and cash equivalents at the beginning of the period 2,240 1,553 Effects of exchange rate changes on the balances of cash held in foreign currencies 8 (24) Cash and cash equivalents at the end of the period 8 2,375 2,417

The statement of cash flows is to be read in conjunction with the notes to the half-year financial statements.

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STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 30 JUNE 2010

Issued Translation Fair value Retained Total capital reserve reserve earnings equity $million $million $million $million $million Consolidated Balance at 1 January 2010 4,987 (281) (2) 2,263 6,967 Net profit for the period - - - 198 198 Other comprehensive income for the period - 5 (1) (2) 2 Total comprehensive income for the period - 5 (1) 196 200 Transactions with owners in their capacity as owners: Shares issued 16 - - - 16 Dividends to shareholders - - - (166) (166) Share-based payment transactions - - - 4 4 Balance at 30 June 2010 5,003 (276) (3) 2,297 7,021

Balance at 1 January 2009 2,531 (187) (2) 2,136 4,478 Profit for the period - - - 102 102 Other comprehensive income - (67) - 9 (58) Total comprehensive income for the period - (67) - 111 44 Transactions with owners in their capacity as owners: Share options exercised by employees 4 - - - 4 Entitlement offer exercised 2,914 - - - 2,914 Shares issued 117 - - - 117 Dividends to shareholders - - - (135) (135) Share-based payment transactions - - - 5 5 Balance at 30 June 2009 5,566 (254) (2) 2,117 7,427

The statement of changes in equity is to be read in conjunction with the notes to the half-year financial statements.

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NOTES TO THE HALF-YEAR FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 30 JUNE 2010

1. Corporate Information Santos Limited (“the Company”) is a company limited by shares incorporated in Australia whose shares are publicly traded on the Australian Securities Exchange (“ASX”) and is the ultimate parent entity in the Group. The consolidated financial report of the Company for the six months ended 30 June 2010 comprises the Company and its controlled entities (“the Group”). The financial report was authorised for issue in accordance with a resolution of the Directors on 26 August 2010.

2. Basis of Preparation and Significant Accounting Policies Basis of preparation This general purpose condensed financial report for the half-year ended 30 June 2010 has been prepared in accordance with AASB 134 Interim Financial Reporting and the Corporations Act 2001. The half-year financial report does not include all notes of the type normally included within the annual financial report and therefore cannot be expected to provide as full an understanding of the financial performance, financial position and financing and investing activities of the Group as the full financial report. It is recommended that the half-year financial report be read in conjunction with the annual report for the year ended 31 December 2009 and considered together with any public announcements made by Santos Limited during the half-year ended 30 June 2010 in accordance with the continuous disclosure obligations of the ASX listing rules. Significant accounting policies The accounting policies adopted in the half-year financial report are consistent with those applied in the preparation of the Group’s financial report for the year ended 31 December 2009, except for the following. The Group has adopted the following revised standards which have an impact on the Group's accounting policies and presentation and disclosure of the financial report: x The Group adopted the revised standard AASB 3 Business Combinations from 1 January 2010 which introduces significant changes in the accounting for business combinations occurring after this date. Changes affect the valuation of non-controlling interests, the accounting for transaction costs, the initial recognition and subsequent measurement of contingent consideration and business combinations achieved in stages. These changes impact the reported results in the period when an acquisition occurs and future reported results; and x The Group adopted the revised standard AASB 127 Consolidated and Separate Financial Statements from 1 January 2010 which requires the ownership interest in a subsidiary (without a change in control) be accounted for as a transaction with owners in their capacity as owners. Therefore such transactions will no longer give rise to a gain or loss in the statement of comprehensive income. Furthermore, the revised standard changes the accounting for losses incurred by a partially owned subsidiary as well as the loss of control of a subsidiary. The changes in AASB 3 and AASB 127 will affect future acquisitions, changes in and loss of control of subsidiaries and transactions with non-controlling interests. The changes in accounting policies were applied prospectively.

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NOTES TO THE HALF-YEAR FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 30 JUNE 2010

2. Basis of Preparation and Significant Accounting Policies (continued) Significant accounting policies (continued) The following standards and interpretations and all consequential amendments, which became applicable from 1 January 2010, have also been adopted by the Group. These standards and interpretations have not impacted on the accounting policies, financial position or performance of the Group, or on presentation or disclosure in the financial report: x AASB 2008-3 Amendments to Australian Accounting Standards arising from AASB 3 and AASB 127; x AASB 2008-6 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project; x AASB 2008-8 Amendments to Australian Accounting Standards – Eligible Hedged Items; x AASB 2008-13 Amendments to Australian Accounting Standards arising from AASB Interpretation 17 – Distributions of Non-cash Assets to Owners; x AASB 2009-4 Amendments to Australian Accounting Standards arising from the Annual Improvements Process; x AASB 2009-5 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project; x AASB 2009-7 Amendments to Australian Accounting Standards; x AASB 2009-8 Amendments to Australian Accounting Standards – Group Cash-settled Share- based Payment Transactions; x AASB 2009-9 Amendments to Australian Accounting Standards – Additional Exemptions for First-time Adopters; x Interpretation 17 Distributions of Non-cash Assets to Owners; and x Interpretation 18 Transfers of Assets from Customers. The Group has not elected to early adopt any new standards or amendments that are issued but not yet effective. Significant accounting judgements, estimates and assumptions The significant accounting judgments, estimates and assumptions adopted in the half-year financial report are consistent with those applied in the preparation of the Group’s financial report for the year ended 31 December 2009. The Australian Federal Government recently proposed that the current Petroleum Resource Rent Tax regime will be extended to all Australian onshore and offshore oil and gas projects to apply from 1 July 2012. The proposal is subject to extensive negotiation, drafting of legislation and approval by Parliament. Consequently the financial statements have been prepared in accordance with current tax legislation. 3. Segment Information The Group has identified its operating segments to be the four business units of Eastern Australia, Western Australia and Northern Territory (“WA & NT”), Asia Pacific, and Gladstone LNG (“GLNG®”), based on the different geographical regions and the similarity of assets within those regions. The other and unallocated segment comprises the activities undertaken by the Group’s technical, exploration and corporate functional groups. 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. The Asia Pacific operating segment includes operations in Indonesia, Papua New Guinea, Vietnam, India, Bangladesh, Kyrgyz Republic and Egypt. The Group operates primarily in one business, namely the exploration, development, production, transportation and marketing of hydrocarbons. Revenue is derived primarily from the sale of gas and liquid hydrocarbons.

Page 14

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Asia Pacific 2010 $million 2009 $million 2010 FOR THESIX MONTHS ENDEDJUNE 30 2010 $million NOTES HALF-YEAR THE FINANCIAL TO STATEMENTS 2009 $million ------(55) (113) (55) (113) - - 5 6 - - 43 13 (48) (19) - - - - (34) (8) (4) - - - - - (38) (8) 2 (2) (16) (26) ------(14) (28) 544 482 423 386 90 88 10 51 24 17 1,091 1,024 278 303 312 285 64 75 15 6 (14) (22) 655 647 568 498 432 393 90 89 61 68 (17) - 1,134 1,048 2010 (153) (191) (78) (83) (21) (21) (19) (14) (8) (8) (279) (317) EasternAustralia WA & NT $million Exploration andevaluation expensed Netimpairment loss Depreciation anddepletion e 15 3. (continued) Information Segment g Inter-segmentsales Otherrevenue fromexternal customers 24tax, interest, before Earnings and exploration depletion, depreciation, 16impairment(“EBITDAX”) 4 1Profit before tax -Royaltyrelated taxation expense Total taxationexpense 1 8 4 7 2 43 24 Revenue Salesexternalto customers Results Earningsbefore interest and (“EBIT”) tax Finance income expenses 125Finance Incomeexpensetax 112 200 the period for Net profit 194 39 54 (4) (8) (77) (143) 283 209 Total segmentTotal revenue Pa

F-228 Level: 0 – From: 0 – Friday, September 17, 2010 – 22:59 – eprint3 – 4262 Section 08a 2009 $million Total 2010 $million 2009 $million Other and and Other unallocated 2010 $million 2009 $million GLNG 2010 $million 2009 $million

Asia Pacific 2010 $million 2009 $million 2010 FOR THESIX MONTHS ENDEDJUNE 30 2010 $million - - - (1) 34 - 1 (2) - (3) 35 - - - - (13) - - - - - (13) - - - - (15) - (1) - - - (16) NOTES HALF-YEAR THE FINANCIAL TO STATEMENTS 2009 $million - -3------3 - 66------66 2010 EasternAustralia WA & NT $million and related incidents related and (Loss)/gain on sale of oil and oil assetssale of on gas (Loss)/gain - Loss on saleLoss controlledof entity Insurancerecoveries from incidents Change in provisions of remediation remediation of provisions in Change Provisionfor contracting losses 3. (continued) Information Segment tax that are unusual because of incidence: size or nature, their Amounts included in profit before in profit included Amounts Page 16 Page

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NOTES TO THE HALF-YEAR FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 30 JUNE 2010

Consolidated 30 June 30 June 2010 2009 $million $million 4. Revenue and Other Income Product sales: Gas, ethane and liquefied gas 584 540 Crude oil 297 308 Condensate and naphtha 122 91 Liquefied petroleum gas 88 85 1,091 1,024 Other revenue: Overriding royalties 4 3 Pipeline tariffs and processing tolls 25 10 Trading revenue 8 7 Other 64 43 24 Total revenue 1,134 1,048 Other income: Insurance recoveries 6 6 Net loss on sale of controlled entities - (13) Net (loss)/gain on sale of non-current assets (2) 35 Other (1) - 3 28

5. Expenses Cost of sales: Cash cost of production: Production costs: Production expenses 234 231 Production facilities operating leases 42 35 276 266 Other operating costs: Pipeline tariffs, processing tolls and other 55 37 Royalty and excise 21 25 76 62 Total cash cost of production 352 328 Depreciation and depletion 277 314 Third party gas purchases 70 56 Decrease/(increase) in product stock 5 (7) Total cost of sales 704 691

Page 17

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NOTES TO THE HALF-YEAR FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 30 JUNE 2010

Consolidated 30 June 30 June 2010 2009 $million $million 5. Expenses (continued) Other expenses: Selling 6 4 Corporate 40 37 Depreciation 2 3 48 44 Foreign exchange (gains)/losses (5) 19 Losses/(gains) from change in fair value of derivative financial assets designated as at fair value through profit or loss 4 (4) Fair value hedges, (gains)/losses: On the hedging instrument (45) 121 On the hedged item attributable to the hedged risk 54 (125) Exploration and evaluation expensed 55 113 Net impairment loss on oil and gas assets 27 8 Net impairment loss on receivables 11 - Total other expenses 149 176

6. Net Finance Costs Interest income (55) (34) Finance income (55) (34)

Interest paid to third parties 26 43 Less borrowing costs capitalised - (14) 26 29 Unwind of the effect of discounting on provisions 19 17 Finance expense 45 46 Net finance (income)/costs (10) 12

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NOTES TO THE HALF-YEAR FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 30 JUNE 2010

Consolidated 30 June 30 June 2010 2009 $million $million 7. Earnings EBITDAX is calculated as follows: Profit before tax 293 197 Deduct: Net financing income/(costs) 10 (12) EBIT 283 209 Add back: Depreciation and depletion 279 317 Exploration and evaluation expensed 55 113 Net impairment loss on oil and gas assets 27 8 Net impairment loss on receivables 11 - EBITDAX 655 647

30 June 31 December 2010 2009 $million $million 8. Cash and Cash Equivalents Cash at bank and in hand 249 234 Short-term deposits 2,126 2,006 2,375 2,240

9. Other Financial Assets Current – other financial assets Term deposits 30 60 Interest rate swap contracts 1 3 Cross currency swap contracts 1 - Other 3 2 35 65

Non-current – other financial assets Interest rate swap contracts 177 123 Receivables due from other related entities 7 10 Available-for-sale investment 1 2 Other 1 1 186 136

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NOTES TO THE HALF-YEAR FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 30 JUNE 2010

Consolidated 30 June 31 December 2010 2009 $million $million 10. Exploration and Evaluation Assets Balance at the beginning of the period 923 493 Acquisitions of controlled entities - 8 Acquisitions of exploration and evaluation assets 3 351 Additions 84 230 Exploration and evaluation expensed (7) (63) Disposals and recoupment - (24) Transfer to oil and gas assets (33) (38) Exchange differences 5 (34)

Balance at the end of the period 975 923 Comprising: Acquisition related costs 515 535 Successful exploration wells 214 199 Exploration and evaluation assets pending determination of success 246 189

975 923

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NOTES TO THE HALF-YEAR FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 30 JUNE 2010

Consolidated Six months Twelve ended months ended 30 June 31 December 2010 2009 $million $million 11. Oil and Gas Assets Assets in development Balance at the beginning of the period 768 587 Additions 420 335 Disposal and recoupment - (48) Transfer from exploration and evaluation assets 29 1 Exchange differences 41 (107) Balance at the end of the period 1,258 768 Producing assets Balance at the beginning of the period 5,549 5,603 Acquisition of oil and gas assets - 9 Additions 324 762 Transfer from exploration and evaluation assets 4 37 Disposals - (48) Depreciation and depletion expense (264) (590) Net impairment losses (27) (37) Exchange differences 35 (187) Balance at the end of the period 5,621 5,549 Total oil and gas assets 6,879 6,317 Comprising: Exploration and evaluation expenditure related to these assets pending commercialisation 34 31 Other capitalised expenditure 6,845 6,286 6,879 6,317

12. Other Land, Buildings, Plant and Equipment Balance at the beginning of the period 200 160 Additions 29 69 Depreciation (15) (29) Balance at the end of the period 214 200

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NOTES TO THE HALF-YEAR FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 30 JUNE 2010

Consolidated 30 June 31 December 2010 2009 $million $million 13. Issued Capital Ordinary Shares 5,003 4,987 Redeemable convertible preference shares - - 5,003 4,987

Six months Twelve months Six months Twelve months ended ended ended ended 30 June 31 December 30 June 31 December 2010 2009 2010 2009 Number of Shares $million $million Movement in fully paid ordinary shares Balance at the beginning of the period 831,834,626 584,812,875 4,987 1,947 Santos Employee Share Acquisition Plan - 101,376 - 2 Santos Employee Share Purchase Plan - 18,400 - - Shares issued on exercise of options 9,668 427,050 - 4 Shares issued on vesting of Share Acquisition Rights 381,500 303,085 - - Santos Executive Share Plan - - - - Non-executive Director Share Plan 1,671 20,390 - - Entitlement offer - 237,287,762 - 2,914 Dividend Reinvestment Plan (“DRP”) 1,123,176 2,005,880 16 30 DRP underwriting agreement - 6,857,808 - 106 Transfer from redeemable convertible preference shares - - - (16) Balance at the end of the period 833,350,641 831,834,626 5,003 4,987

Redeemable convertible preference shares

Balance at the beginning of the period - 6,000,000 - 584 Redeemable convertible preference shares bought back at face value and cancelled - (6,000,000) - (600) Transfer to fully paid ordinary shares - - - 16 Balance at the end of the period - - - -

Page 22

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NOTES TO THE HALF-YEAR FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 30 JUNE 2010

Dollars Total Franked/ Payment per share $million unfranked date

14. Dividends Dividends recognised in the current period by the Company are: 2010 Final 2009 ordinary $0.20 166 Franked 31 Mar 2010 2009 Final 2008 redeemable preference $2.9989 18 Franked 31 Mar 2009 Final 2008 ordinary $0.20 117 Franked 31 Mar 2009 135 Franked dividends paid during the period were franked at the tax rate of 30%.

After the end of the reporting period the following dividends were proposed by the Directors. The dividends have not been provided for and there are no income tax consequences. Interim 2010 ordinary 0.22 183 Franked 6 Oct 2010

The financial effect of these dividends has not been brought to account in the financial report for the six months ended 30 June 2010 and will be recognised in subsequent financial reports.

15. Acquisitions / Disposals of Controlled Entities There were no acquisitions or disposals of controlled entities during the six months ended 30 June 2010.

16. Commitments The PNG LNG Joint Venture entered into operating leases of LNG tankers and drilling rigs during the six months ended 30 June 2010. The Group’s share of the minimum operating lease commitment is $121 million extending for 15 years from delivery date. There has been no other material change to the commitments disclosed in the most recent annual financial statements.

17. Contingent Liabilities There has been no material change to the contingent liabilities disclosed in the most recent annual financial statements.

18. Financial Risk Management There has been no material change to the fair values of the financial instruments disclosed in the most recent annual financial report.

19. Events After the End of the Reporting Period The following events occurred subsequent to 30 June 2010, the financial effects of which have not been brought to account in the half-year financial report for the six months ended 30 June 2010: (a) On 19 July 2010 Santos announced it had executed a $2,000 million bilateral bank loan facility. This new facility will be used to replace and extend Santos’ existing $700 million of undrawn bilateral bank facilities that mature between 2011 and 2013 and to increase liquidity. The weighted average term of the new facility is five years; and (b) On 26 August 2010, the Directors of Santos Limited declared an interim dividend on ordinary shares in respect of the 2010 financial year. Refer to note 14 above for the details of the dividends declared after 30 June 2010.

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DIRECTORS’ DECLARATION

FOR THE SIX MONTHS ENDED 30 JUNE 2010

In accordance with a resolution of the Directors of Santos Limited, we state that:

In the opinion of the Directors of Santos Limited:

1. The financial statements and notes of the consolidated entity are in accordance with the Corporations Act 2001, including:

(a) Giving a true and fair view of the consolidated entity’s financial position as at 30 June 2010 and the performance for the half-year ended on that date; and

(b) Complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001; and

2. There are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

Dated this 26th day of August 2010.

On behalf of the Board

Director Director

Adelaide, South Australia

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To the members of Santos Limited

Report on the Half-year Financial Report

We have reviewed the accompanying half-year financial report of Santos Limited, which comprises the statement of financial position as at 30 June 2010, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the half-year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the consolidated entity comprising the Company and the entities it controlled at the half-year end or from time to time during the half-year.

Directors’ Responsibility for the Half-year Financial Report The Directors and the Company are responsible for the preparation of the half-year 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 half-year financial report that is free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility Our responsibility is to express a conclusion on the half-year financial report based on our review. We conducted our review in accordance with Auditing Standard on Review Engagements ASRE 2410 Review of Interim and Other Financial Reports Performed by the Independent Auditor of the Entity, in order to state whether, on the basis of the procedures described, we have become aware of any matter that makes us believe that the financial report is not in accordance with the Corporations Act 2001 including: giving a true and fair view of the consolidated entity’s financial position as at 30 June 2010 and its performance for the half-year ended on that date; and complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001 . As the auditor of Santos Limited and the entities it controlled during the half-year, ASRE 2410 requires that we comply with the ethical requirements relevant to the audit of the annual financial report.

A review of a half-year financial report consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Independence In conducting our review, we have complied with the independence requirements of the Corporations Act 2001. We have given to the Directors of the Company a written auditor’s independence declaration, a copy of which is included in the directors’ report.

Liability limited by a scheme approved under Professional Standards Legislation Page 25

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Conclusion Based on our review, which is not an audit, we have not become aware of any matter that makes us believe that the half-year financial report of Santos Limited is not in accordance with the Corporations Act 2001, including:

a) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2010 and of its performance for the half- year ended on that date; and

b) complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001.

Ernst & Young

RJ Curtin Partner Adelaide, South Australia 26 August 2010

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Appendix 4D for the period ended 30 June 2010

For ‘Results for Announcement to the Market’ refer to page 1 of this Half-year Financial Report. NTA backing

30 June 2010 30 June 2009

Net tangible asset backing per ordinary security N/A N/A

Change in ownership of controlled entities There were no entities over which the Group gained or lost control during the period ended 30 June 2010. Dividends Refer to note 14 in the Half-year Financial Report for the dividends paid and payable during the period. None of these dividends are foreign sourced. Dividend Reinvestment Plan The Santos Dividend Reinvestment Plan is in operation. Shares are allocated at the daily weighted average market price of the Company’s shares on the Australian Stock Exchange over a period of seven business days commencing on the business day after the Dividend Record Date. The Board has determined that no discount will apply. The last date for receipt of election notices for the dividend reinvestment plan is 7 September 2010. Details of joint venture entities and associates Joint venture entities Percentage of ownership interest held at end of period or date of disposal Name of entity 30 June 2010 30 June 2009 Darwin LNG Pty Ltd* 11.5% 11.4% Papua New Guinea Liquefied Natural Gas Global Company LDC 13.5% N/A Easternwell Drilling Services Holdings Pty Ltd 50.0% 50.0% GLNG Operations Pty Ltd 60.0% 60.0%

*Santos’ interest in Darwin LNG Pty Ltd has increased this year from 11.4% to 11.5%, subject to regulatory approval.

Associates Percentage of ownership interest held at end of period or date of disposal Name of entity 30 June 2010 30 June 2009 Eastern Star Gas Limited 19.8% N/A

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FINANCIAL STATEMENTS, DIRECTORS’ REPORT AND AUDITOR’S REPORT FOR THE ISSUER FOR THE YEAR ENDED 31 DECEMBER 2008

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SANTOS FINANCE LTD

A.B.N. 81 002 799 537

(INCORPORATED IN NEW SOUTH WALES ON 6 JULY 1984)

SPECIAL PURPOSE FINANCIAL REPORT

31 DECEMBER 2008

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-2-

SANTOS FINANCE LTD

INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2008

2008 2007 Note $000 $000

Interest revenue 182,057 165,955 Finance costs (142,054) (142,467) Net financing income 2 40,003 23,488 Other income 2,363 - Intercompany debt forgiveness expense - (144,301) (Impairment write-down)/reversal of impairment write- down of receivables due from related entities (66,850) 32,511 Foreign exchange (losses)/gains (250,806) 90,318 Other expenses (4,461) (1,825)

(Loss)/profit before tax 3 (279,751) 191 Income tax benefit/(expense) 50,150 (27,961)

Loss after income tax attributable to equity holders of Santos Finance Ltd (229,601) (27,770)

This income statement is to be read in conjunction with the notes to the financial statements.

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-3-

SANTOS FINANCE LTD

BALANCE SHEET AS AT 31 DECEMBER 2008

2008 2007 Note $000 $000

Assets Cash and cash equivalents 4 9,659 37,419 Trade and other receivables 5 2,073,854 2,257,980 Other financial assets 6 395,537 77,167 Total assets 2,479,050 2,372,566 Liabilities Trade and other payables 7 31,741 44,319 Interest-bearing loans and borrowings 8 2,549,971 2,117,699 Deferred tax liabilities 31,809 95,029 Other financial liabilities 9 - 20,389 Total liabilities 2,613,521 2,277,436 Net (liabilities)/assets (134,471) 95,130

Equity Issued capital 10 100,000 100,000 Accumulated losses 11 (234,471) (4,870)

Total equity attributable to equity holders of Santos Finance Ltd (134,471) 95,130

This balance sheet is to be read in conjunction with the notes to the financial statements.

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-4-

SANTOS FINANCE LTD

CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2008

2008 2007 Note $000 $000

Cash flows from operating activities Interest received 788 165,926 Borrowing costs paid (118,579) (142,109) Operating costs received/(paid) 291 (3,972) Net cash (used in)/provided by operating activities 12 (117,500) 19,845

Cash flows from financing activities Drawdown of borrowings 500,000 2,191,326 Repayment of borrowings (733,983) (1,688,401) Receipts from related entities 363,803 46,050 Payments to related entities (23,780) (554,164) Net cash provided by/(used in) financing activities 106,040 (5,189) Net (decrease)/increase in cash (11,460) 14,656 Cash and cash equivalents at the beginning of the year 37,419 18,699 Effects of exchange rate changes on the balances of cash held in foreign currencies (16,300) 4,064

Cash and cash equivalents at the end of the year 4 9,659 37,419

This cash flow statement is to be read in conjunction with the notes to the financial statements.

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-5-

SANTOS FINANCE LTD

STATEMENT OF RECOGNISED INCOME AND EXPENSE

FOR THE YEAR ENDED 31 DECEMBER 2008

2008 2007 $000 $000

Net income/(expense) recognised directly in -- equity Loss for the period (229,601) (27,770) Total recognised income and expense for the period attributable to equity holders of Santos Finance Ltd (229,601) (27,770)

Other movements in equity arising from transactions with owners as owners are set out in notes 10 and 11.

This statement of recognised income and expense is to be read in conjunction with the notes to the financial statements.

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6 SANTOS FINANCE LTD NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008

1. Significant Accounting Policies

Santos Finance Limited (“the Company”) is a company incorporated and domiciled in Australia.

The address of the registered office is:

Ground Floor Santos Centre 60 Flinders Street Adelaide SA 5000.

The financial report was authorised for issue by the Directors on 30 March 2009.

(a) Statement of compliance

This special purpose financial report has been prepared for distribution to the members to fulfil the directors’ financial reporting requirements under the Corporations Act 2001. The accounting policies used in the preparation of this financial report, as described below, are consistent with previous years, and are, in the opinion of the directors’, appropriate to meet the needs of the members.

The disclosure requirements of Accounting Standards and other financial reporting requirements in Australia do not have mandatory applicability to Santos Finance Ltd because it is not a reporting entity. However, the Directors have prepared the financial report in accordance with Accounting Standards, Interpretations, and other financial reporting requirements in Australia with the following disclosure exemptions:

x AASB 7 Financial Instruments: Disclosure x AASB 112 Income Taxes x AASB 114 Segment Reporting x AASB 121 The Effects of Changes in Foreign Exchange Rates x AASB 123 Borrowing Costs x AASB 124 Related Party Disclosures x AASB 136 Impairment of Assets x AASB 137 Provisions, Contingent Liabilities and Contingent Assets

(b) Basis of preparation

The financial report has been prepared on a historical cost basis, except for derivative financial instruments and fixed rate notes that are hedged by an interest rate swap, which are measured at fair value.

The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars, unless otherwise stated under the option available to the Company under ASIC Class order 98/100 dated 10 July 1998 (updated by Class Order 05/641 effective 28 July 2005). The Company is an entity to which the class order applies.

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7 SANTOS FINANCE LTD NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008

1. Significant Accounting Policies (continued)

(b) Basis of preparation (continued)

From 1 January 2008, the Company has adopted the following standards and interpretations, and all consequential amendments, which became applicable on 1 January 2008. Adoption of these standards and interpretations has only affected the disclosure in these financial statements. There has not been any impact on the financial position or performance of the Company.

x AASB 2007-1 Amendments to Australian Accounting Standards arising from AASB Interpretation 11 x AASB 2007-7 Amendments to Australian Accounting Standards x AASB 2008-10 Amendments to Australian Accounting Standards – Reclassification of Financial Assets x AASB 2008-12 Amendments to Australian Accounting Standards – Reclassification of Financial Assets – Effective Date and Transition x Interpretation 11 AASB 2 Group and Treasury Share Transactions

Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective have not been adopted by the Company for the annual reporting period ending 31 December 2008. These are outlined in the following table:

F-248 Level: 0 – From: 0 – Friday, September 17, 2010 – 23:03 – eprint3 – 4262 Section 09a for Company Applicationdate 1 January 2009 1 January Impact on financial report financial statements will change. or after beginning on 1 January 20091 January No impact. 20091 January 2009 1 January Presentation of 20091 January 20091 July No impact. 2009 1 January No impact. 2010 1 January 1 July 20091 July No impact. 2010 1 January reporting periods Effective for annual their performance. g -8- Summary assets. g SANTOS FINANCE LTD FINANCE SANTOS ments and in assessin g Segment disclosure based on components of an that managemententity monitors in making decisions about allocating resources to se Changes the titles of financial statements; requires all non-owner changes be in equity presented in statement of comprehensive income; additional statement of financial position at beginning of earliest comparative period required for changes in accountingor policy reclassifications; income tax relating to each component of comprehensive income to be disclosed. Removes option to expense borrowing costs related to qualifyin Changes in a parent’s ownership in a subsidiary that result in a loss of control requires reserves remainingand recycled be to ownership interest to be measured at fair value; changes that do not result in a loss of control are accounted for transactions.as equity Adopts the acquisition method to account for business combinations; acquisition costs expensed; contingent consideration recognised at fair value on acquisition date. NOTES STATEMENTS TO THE FINANCIAL FOR ENDED 31 DECEMBER THE YEAR 2008 Title (issued in Presentation of Financial Statements September 2007) CostsBorrowing Consolidated and Separate Financial Statements Operating Segments Business Combinations Reference AASB 101 AASB 123 AASB 127 AASB 8 AASB 3 (b) (continued) of preparation Basis 1. (continued) Policies Accounting Significant

F-249 Level: 0 – From: 0 – Friday, September 17, 2010 – 23:03 – eprint3 – 4262 Section 09a for Company Application date Impact on financial report or after beginning on 1 January 20091 January No impact. 2009 1 January 1 January 20091 January No impact. 20091 January No impact. 2009 1 January 2009 1 January 20091 January No impact. 20091 January 2009 1 January No impact. 2009 1 January 1 January 20091 January No impact. 2009 1 January reporting periods Effective for annual Operating in -9- Summary . SANTOS FINANCE LTD FINANCE SANTOS Consequential amendments to number of standards following release of AASB 8 Segments. Consequential amendments to number of standards following release of AASB 123 CostsBorrowing Consequential amendments to a number of standards following issue of a revised AASB 101 Presentation of Financial Statements September 2007 Changes term terminology in Australian Accounting Standards IFRS. to align with Clarifies the definition of vesting conditions; introduces concept of non-vesting conditions; requires non-vesting conditions to be reflected in grant date fair value; provides the accounting treatment for non-vesting conditions and cancellations. Introduces exception to the definition of financial to classify certainliability puttable financial instruments instruments. as equity NOTES STATEMENTS TO THE FINANCIAL FOR THE YEAR ENDED 31 DECEMBERFOR THE 2008 YEAR Title Amendments to Australian Accounting Standards arising from AASB 8 Amendments to Australian Accounting Standards arising from AASB 123 Amendments to Australian Accounting Standards arising from AASB 101 Further Amendments to Australian Accounting Standards arising from AASB 101 Amendments to Australian Accounting Standards – Puttable Financial Instruments and Obligations arising on Liquidation Amendments to Australian Accounting Standard – Share- based Payments: Vesting Conditions and Cancellations Reference AASB 2007-3 AASB 2007-6 AASB 2007-8 AASB 2007-10 AASB 2008-2 AASB 2008-1 (b) (continued) of preparation Basis Significant Accounting Policies (continued) Policies Accounting Significant

F-250 Level: 0 – From: 0 – Friday, September 17, 2010 – 23:03 – eprint3 – 4262 Section 09a for Company Application date Impact on financial report or after beginning on 1 January 20091 January No impact. 2009 1 January 1 January 20091 January No impact. 2009 1 January 1 2009 July No impact. 2010 1 January 1 July 20091 July No impact. 2010 1 January reporting periods Effective for annual roup. g and AASB 127 ); additional disclosures 136 Impairment of Summary -10- ; requires all dividends from Consolidated and Separate Financial SANTOS FINANCE LTD FINANCE SANTOS Business Combinations ). Terminology or editorial amendments to eight standards that are expected to have no or minimal effects on accounting practices. Removes the definition of the cost method in AASB 127 Statements subsidiaries, controlled jointly entities or associates to be recognised as income; receipt of be indicator dividend may of impairment if certain criteria met; specified accounting for certain formed transactions newly where entity becomes in a parent of another entity Amends fifteen standards, including entity where committed to sale plan involving loss of control of then all of subsidiary subsidiary’s assets and liabilities are classified as held for sale (AASB 5 Non-current Assets Held for Sale and Discontinued Operations recoverablewhere amount is based on fair value less costs to sell (AASB Assets Consequential amendments to number of standards following the issue of the revised 3 AASB Consolidated and Separate Financial Statements. NOTES STATEMENTS TO THE FINANCIAL FOR ENDED 31 DECEMBER THE YEAR 2008 Title Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project Amendments to Australian Accounting Standards – Cost of Amendments to Australian Accounting Standards arising from the Annual Improvements Project an Investment in a Subsidiary, Jointly Controlled Entity or Associate Amendments to Australian Accounting Standards arising from AASB 3 and 127 Reference AASB 2008-6 AASB 2008-7 AASB 2008-5 AASB 2008-3 (b)(continued) preparation of Basis Significant Accounting Policies (continued) Policies Accounting Significant

F-251 Level: 0 – From: 0 – Friday, September 17, 2010 – 23:03 – eprint3 – 4262 Section 09a for Company Application date Impact on financial report or after beginning on 1 July 2009 July 1 impact. No 2010 January 1 1 July 2009 July 1 impact. No 2010 January 1 1 July 20091 July No impact. 2010 1 January reporting periods Effective for annual Summary -11- to address inflation in a Financial Instruments: Recognition SANTOS FINANCE LTD FINANCE SANTOS ed item. g Consequential amendments to existing standardsissuefollowingthe of Interpretation 17 Distributions of Non-Cash Assets to Owners. Provides guidance on net investment hedging. Provides a liability guidance and how on when 1 October 2008for certain distributions of non-cash assets is recognised and measured, to account and how to common Does for not apply that liability. No impact.control transactions. 2009 1 January Clarifies the hedge accounting provisions of AASB 139 and Measurement financial hedged item, and one-sided risk in a hed NOTES STATEMENTS TO THE FINANCIAL FOR ENDED 31 DECEMBER THE YEAR 2008 Title Distributions of Non-Cash Assets to Owners Amendments to Australian Accounting Standards arising from AASB Interpretation 17 Distributions of Non-Cash Assets to Owners Hedges of net investments in foreign operations Amendments to Australian Accounting Standards – Eligible Hedged Items Reference Interpretation 17 AASB 2008-13 Interpretation 16 AASB 2008-8 (b) (continued) preparation of Basis Significant Accounting Policies (continued) Policies Accounting Significant

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SANTOS FINANCE LTD

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2008

1. Significant Accounting Policies (continued)

(b) Basis of preparation (continued)

The accounting policies set out below have been applied consistently to all periods presented in the Company’s financial report. The accounting policies have been applied consistently by the Company.

Functional and presentation currency Items included in the financial statements of the Company are measured using the currency of the primary economic environment in which it operates (“the functional currency”). The financial statements are presented in Australian dollars which is the Company’s functional and presentation currency.

Transactions and balances Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the foreign exchange rate ruling at the balance sheet date. Foreign exchange differences arising on translation are recognised in the income statement.

(d) Derivative financial instruments

The Company uses derivative financial instruments to hedge its exposure to changes in foreign exchange rates, commodity prices and interest rates arising in the normal course of business. The principal derivatives that may be used are forward foreign exchange contracts, foreign currency swaps, interest rate swaps and commodity crude oil price swap and option contracts. Their use is subject to a comprehensive set of policies, procedures and limits approved by the Board of Directors. The Company does not trade in derivative financial instruments for speculative purposes.

Derivative financial instruments are recognised initially at fair value. Subsequent to initial recognition, derivative financial instruments are stated at fair value. Where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged, otherwise the gain or loss on re-measurement to fair value is recognised immediately in profit or loss.

The fair value of interest rate swaps is the estimated amount that the Company would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. The fair value of commodity swap and option contracts is their quoted market price at the balance sheet date.

Embedded derivatives Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contract and the host contracts are not measured at fair value with changes in fair value recognised in profit or loss.

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SANTOS FINANCE LTD

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2008

1. Significant Accounting Policies (continued)

(e) Hedging

Fair value hedge Where a derivative financial instrument hedges the changes in fair value of a recognised asset or liability or an unrecognised firm commitment (or an identified portion of such asset, liability or firm commitment), any gain or loss on the hedging instrument is recognised in the income statement. The hedged item is stated at fair value in respect of the risk being hedged, with any gain or loss being recognised in the income statement.

Cash flow hedge Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity. When the forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, or the forecast transaction for a non-financial asset or non-financial liability becomes a firm commitment for which fair value hedging is applied, the associated cumulative gain or loss is removed from equity and included in the initial cost or other carrying amount of the non-financial asset or non- financial liability.

If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, the associated gains and losses that were recognised directly in equity are reclassified into profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss (i.e. when interest income or expense is recognised).

For cash flow hedges, other than those covered by the preceding paragraph, the associated cumulative gain or loss is removed from equity and recognised in the income statement in the same period or periods during which the hedged forecast transaction affects profit or loss. The ineffective part of any gain or loss is recognised immediately in the income statement.

When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation of the hedge relationship, but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss recognised in equity is recognised immediately in the income statement.

Hedge of monetary assets and liabilities When a derivative financial instrument is used to hedge economically the foreign exchange exposure of a recognised monetary asset or liability, hedge accounting is not applied and any gain or loss on the hedging instrument is recognised in the income statement.

(f) Trade and other receivables

Receivables are initially recognised at fair value, which in practice is the equivalent of cost, less any impairment losses.

Long-term receivables are discounted and are stated at amortised cost, less impairment losses.

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SANTOS FINANCE LTD

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2008

1. Significant Accounting Policies (continued)

(f) Trade and other receivables (continued)

Other receivables are assessed for indicators of impairment at each balance sheet date. Where a receivable is impaired the amount of the impairment is the difference between the assets’ carrying value and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the receivable is reduced through the use of an allowance account. Changes in the allowance account are recognised in profit or loss.

(g) Cash and cash equivalents

Cash and cash equivalents comprises cash balances and short-term deposits that are readily convertible to known amounts of cash, are subject to an insignificant risk of changes in value, and have an original maturity of three months or less.

Bank overdrafts that are repayable on demand and form an integral part of the Company’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Bank overdrafts are included within interest-bearing loans and borrowings in current liabilities on the balance sheet.

(h) Impairment

The carrying amounts of the Company’s assets, other than deferred tax assets, are reviewed at each balance sheet date to determine whether there is any indication of impairment. Where an indicator of impairment exists a formal estimate of the recoverable amount is made.

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.

Calculation of recoverable amount The recoverable amount of an asset is the greater of its fair value less costs to sell and its value in use. In assessing value in use, an asset’s estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Where an asset does not generate cash flows that are largely independent from other assets or groups of assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

Reversals of impairment An impairment loss is reversed if there has been an increase in the estimated recoverable amount of a previously impaired asset. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined if no impairment loss had been recognised.

(i) Interest-bearing loans and borrowings

Interest-bearing borrowings are recognised initially at fair value, net of transaction costs incurred. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis.

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SANTOS FINANCE LTD

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2008

1. Significant Accounting Policies (continued)

(i) Interest-bearing loans and borrowings (continued)

Fixed rate notes that are hedged by an interest rate swap are recognised at fair value (refer note 1(e)).

(j) Trade and other payables

Trade and other payables are recognised when the related goods or services are received, at the amount of cash or cash equivalent that will be required to discharge the obligation, gross of any settlement discount offered. Trade payables are non-interest bearing and are settled on normal terms and conditions.

(k) Share capital

Ordinary share capital Ordinary share capital is classified as equity.

Dividends Dividends are recognised as a liability at the time the Directors resolve to pay or declare the dividend.

(l) Revenue

Interest revenue is recognised as it accrues, using the effective interest rate method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period, using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial assets to the net carrying amount of the financial asset.

(m) Finance costs

Finance costs comprise interest paid or payable on borrowings calculated using the effective interest rate method. Finance costs are recognised in the income statement in the period in which they are incurred..

(n) Goods and services tax

Revenues, expenses and assets are recognised net of the amount of goods and services tax (“GST”), except where the amount of GST incurred is not recoverable from the Australian Taxation Office (“ATO”). In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of the expense.

Receivables and payables are stated with the amount of GST included.

The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the balance sheet.

Cash flows are included in the cash flow statement on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows.

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SANTOS FINANCE LTD

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2008

1. Significant Accounting Policies (continued)

(o) Income tax

Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the amount of income tax payable on the taxable profit or loss for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax is determined using the balance sheet approach, providing for temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the appropriate tax bases. The following temporary differences are not provided for: the initial recognition of assets or liabilities that affect neither, accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent it is probable that they will not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Santos Ltd is the head entity in the tax-consolidated group, under Australian taxation law,of which Santos Finance Ltd is a member. Current tax expense/income, deferred tax liabilities, and deferred tax assets arising from temporary differences of the members of the tax-consolidated group are allocated among the members of the tax-consolidated group using a “stand-alone taxpayer” approach in accordance with Interpretation 1052 Tax Consolidation Accounting and are recognised in the separate financial statements of each entity. Current tax liabilities and assets and deferred tax assets arising from unused tax losses and tax credits of the members of the tax-consolidated group are recognised by Santos Ltd (as head entity in the tax-consolidated group).

Santos Ltd and the other entities in the tax-consolidated group have entered into a tax funding agreement. Tax contribution amounts payable under the tax funding agreement are recognised as payable or receivable from Santos Ltd and each member of the tax- consolidated group. Where the tax contribution amount recognised by each member of the tax-consolidated group for a particular period under the tax funding agreement is different to the aggregate of the current tax liabilty or asset and any deferred tax asset arising from unused tax losses and tax credits in respect of that period assumed by Santos Ltd, the difference is recognised as a contribution to (or distribution from) Santos Ltd.

Santos Ltd and the other entities in the tax-consolidated group have also entered into a tax sharing agreement pursuant to which the other entities may be required to contribute to the tax liabilities of Santos Ltd in the event of default by Santos Ltd or upon leaving the tax-consolidated group.

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SANTOS FINANCE LTD

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2008

1. Significant Accounting Policies (continued)

(p) Significant accounting judgements, estimates and assumptions

The carrying amounts of certain assets and liabilities are often determined based on management’s judgement regarding estimates and assumptions of future events. The reasonableness of estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

The financial report does not include any assets and liabilities where the carrying amounts are based on management’s judgement regarding estimates and assumptions of future events.

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SANTOS FINANCE LTD

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2008

2008 2007 $000 $000

2. Net Financing Income Interest revenue: Related entities 181,295 165,955 Other Entities 762 - Financial income 182,057 165,955 Interest expense: Related entities (16,454) - Other entities (125,600) (142,467) Finance costs (142,054) (142,467) Net financing income 40,003 23,488

3. Loss for the Year Loss for the year has been arrived at after crediting/ (charging) the following items of income and expense: Intercompany debt forgiveness expense - (144,301) (Impairment write-down)/reversal of impairment write- down of receivables due from related entities (66,850) 32,511 Foreign exchange (losses)/gains (250,806) 90,318

4. Cash and Cash Equivalents Cash at bank and in hand 9,659 13,465 Call deposits - 23,954 Cash and cash equivalents in the cash flow statement 9,659 37,419

5. Trade and Other Receivables Receivables from related entities 2,073,854 2,257,955 Prepayments - 25 2,073,854 2,257,980

6. Other Financial Assets Interest rate swap contracts 303,539 77,167 Cross currency swaps 91,998 - 395,537 77,167

7. Trade and Other Payables Other payables 21,555 22,462 Amounts owing to related entities 10,186 21,857

31,741 44,319

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SANTOS FINANCE LTD

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2008

2008 2007 $000 $000

8. Interest-Bearing Loans and Borrowings Amounts owing to related entities 142,653 69,534 Bank loans 221,496 321,796 Commercial paper - 64,563 Medium-term notes 457,222 458,650 Long-term notes 1,728,600 1,203,156 2,549,971 2,117,699

9. Other Financial Liabilities Interest rate swap contracts - 9,881 Cross-currency swap contracts - 10,508 - 20,389

10. Issued and Authorised Capital Share capital 100,000,000 (2007:100,000,000) fully paid ordinary shares 100,000 100,000

In accordance with changes to the Corporations Law effective 1 July 1998, the shares issued do not have a par value and there is no limit on the authorised share capital of the Company. Movement in issued and fully paid ordinary shares 2008 2007 2008 2007 Number of Shares $000 $000 Balance at the beginning of the year 100,000,000 100,000,000 100,000 100,000 Shares issued - - -- Balance at the end of the year 100,000,000 100,000,000 100,000 100,000 During the year nil (2007: nil) ordinary shares were issued to the Company’s parent entity.

Capital risk management

The Company’s objective when managing capital is to safeguard the ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders, and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

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SANTOS FINANCE LTD

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2008

2008 2007 $000 $000 11. Accumulated Losses Balance at the beginning of the year (4,870) 22,900 Net loss after income tax and attributable to shareholders (229,601) (27,770) Balance at the end of the year (234,471) (4,870)

Dividends No dividends have been paid or declared during the financial year and no dividends have been proposed or declared by the Directors after the balance sheet date.

12. Reconciliation of Cash Flows from Operating Activities (a) Loss after income tax (229,601) (27,770) Add/(deduct) non-cash items: Intercompany debt forgiveness expense - 144,301 Impairment write-down/(reversal of impairment write-down of receivables due from related entities) 66,850 (32,511) Foreign currency fluctuations 356,694 (91,455) Net borrowing income charged to related entities (164,841) - Interest rate hedges and bonds revaluation 4,477 869 Cross currency swaps revaluation (102,505) 1,486 Net cash used in operating activities before change in assets or liabilities (68,926) (5,071) (Deduct)/add change in operating assets or liabilities net of acquisitions of businesses: Income tax (receivable)/payable allocated to Santos Ltd under tax funding agreement 13,071 22,105 Net (increase)/ decrease in deferred tax asset and deferred tax liability (63,221) 4,871 Decrease/(increase) in receivables 26 (2,004) Decrease/(increase) in other assets 1,320 (1,342) Increase/(decrease) in trade and other payables 230 1,286 Net cash (used in)/provided by operating activities (117,500) 19,845 (b) Non-cash financing and investing activities Income tax receivable allocated to Santos Ltd under tax funding agreement 13,071 22,105

Borrowing income charged to related entities 181,295 Borrowing costs charged by related entities (16,454) 164,841 -

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SANTOS FINANCE LTD

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2008

13. Remuneration of Auditors

Audit fees are borne by the ultimate parent entity, Santos Ltd.

14. Contingent Liabilities

There are no contingent liabilities.

15. Parent Entity

The parent entity and ultimate parent entity is Santos Ltd.

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SANTOS FINANCE LTD

DIRECTORS’ DECLARATION

FOR THE YEAR ENDED 31 DECEMBER 2008

In accordance with a resolution of the Directors of Santos Finance Ltd (“the Company”), I state that in the opinion of the Directors:

(a) the Company is not a reporting entity;

(b) the financial statements and notes of the Company are in accordance with the Corporations Act 2001, including:

(i) giving a true and fair view of the Company’s financial position as at 31 December 2008 and of its performance for the year ended on that date, in accordance with the basis of preparation described in Note 1; and

(ii) complying with Accounting Standards in Australia, to the extent described in Note 1 and the Corporations Regulations 2001; 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.

Dated at Adelaide this 30th day of March 2009.

...... ………………… Director

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Independent auditor’s report to the members of Santos Finance Ltd

We have audited the accompanying special purpose financial report of Santos Finance Ltd, which comprises the balance sheet as at 31 December 2008, and the income statement, statement of recognised income and expense and cash flow statement for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration.

Directors’ Responsibility for the Financial Report The directors of the company are responsible for the preparation and fair presentation of the financial report and have determined that the accounting policies described in Note 1 to the financial statements, which form part of the financial report, are appropriate to meet the financial reporting requirements of the Corporations Act 2001 and are appropriate to meet the needs of the members. This responsibility includes establishing and maintaining internal controls relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. These policies do not require the application of all Accounting Standards and other mandatory financial reporting requirements in Australia.

Auditor’s Responsibility Our responsibility is to express an opinion on the financial report based on our audit. No opinion is expressed as to whether the accounting policies used are appropriate to the needs of the members. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on our judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, we consider internal controls relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.

The financial report has been prepared for distribution to the members for the purpose of fulfilling the directors’ financial reporting requirements under the Corporations Act 2001. We disclaim any assumption of responsibility for any reliance on this report or on the financial report to which it relates to any person other than the members, or for any purpose other than that for which it was prepared.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Liability limited by a scheme approved under Professional Standards Legislation

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Auditor’s Opinion In our opinion the financial report of Santos Finance Ltd is in accordance with the Corporations Act 2001, including:

a) giving a true and fair view of the financial position of Santos Finance Ltd as at 31 December 2008 and of its performance for the year ended on that date in accordance with the accounting policies described in Note 1 to the financial statements; and

b) complying with Australian Accounting Standards to the extent described in Note 1 to the financial statements and complying with the Corporations Regulations 2001.

Ernst & Young

R J Curtin Partner Adelaide 30 March 2009

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Auditor’s Independence Declaration to the Directors of Santos Finance Ltd

In relation to our audit of the financial report of Santos Finance Ltd for the financial year ended 31 December 2008, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct.

Ernst & Young

R J Curtin Partner 30 March 2009

Liability limited by a scheme approved under Professional Standards Legislation

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SANTOS FINANCE LTD

DIRECTORS’ REPORT

The Directors present their report together with the financial report of the Company for the financial year ended 31 December 2008 and the auditor’s report thereon.

1. Directors

The names of the Directors in office at the date of this report are: Knox, David John Wissler Gerlach, Stephen Dean, Kenneth Alfred

Stephen Gerlach and Kenneth Alfred Dean held their office at all times since the beginning of the financial year. David John Wissler Knox was appointed a Director on 24 April 2008. John Charles Ellice-Flint ceased to be a Director on 25 March 2008.

2. Principal Activities

The principal activity of the Company during the financial year was to provide centralised finance activities for the Santos Ltd group. No significant change in the nature of this activity has occurred during the year.

3. Review and Results of Operations

During the year, the Company continued to manage external borrowings for the Santos Ltd group and provide funding for the parent entity and its controlled entities. The net loss for the financial year after providing for income tax was $229,601,109.

4. Dividends

No dividends have been paid or declared during the financial year and no dividends have been recommended by the Directors.

5. State of Affairs

In the opinion of the Directors, there were no significant changes in the state of affairs of the Company that occurred during the financial year.

6. Events Subsequent to Balance Date

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 Company, the results of those operations, or the state of affairs of the Company in future financial years.

7. Likely Developments

With respect to likely developments in the operations of the Company in future financial years, it is expected that the Company will continue its principal activity as set out above.

Further information about likely developments in the operations of the Company and the expected results of those operations in future financial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the Company.

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SANTOS FINANCE LTD

DIRECTORS’ REPORT

8. Indemnification

Rule 12 of the Company’s Constitution provides that the Company indemnifies each person who is or who has been an “officer” of the Company against any liability to another person (other than the Company or a related body corporate) arising from their position as such officer, unless the liability arises out of conduct involving a lack of good faith. Rule 12 also provides for an indemnity in favour of an officer or auditor (Ernst & Young) in relation to costs incurred in defending proceedings in which judgment is given in their favour or in which they are acquitted or the Court grants relief.

For the purpose of Rule 12, “officer” has the meaning given in Rule 12.1 but limited to such officers appointed from the date that the Company became a subsidiary of Santos Ltd.

In addition, Santos Limited pays premiums in respect of Directors’ and Officers’ Liability and Legal Expenses insurance contracts on behalf of the Group. The insurance contracts insure against certain liability (subject to exclusions) persons who are or have been directors or officers of the Company. A condition of these contracts is that the nature of the liability indemnified and the premium payable not be disclosed.

9. Rounding

10. Auditor’s Independence Declaration

The auditor's independence declaration is set out on page 25 and forms part of the directors' report for the 2008 financial year.

This report is made on 30th March 2009 in accordance with a resolution of the Directors.

Director

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FINANCIAL STATEMENTS, DIRECTORS’ REPORT AND AUDITOR’S REPORT FOR THE ISSUER FOR THE YEAR ENDED 31 DECEMBER 2009

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SANTOS FINANCE LTD

A.B.N. 81 002 799 537

(INCORPORATED IN NEW SOUTH WALES ON 6 JULY 1984)

SPECIAL PURPOSE FINANCIAL REPORT

31 DECEMBER 2009

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SANTOS FINANCE LTD

INCOME STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2009

2009 2008 Note $000 $000

Interest revenue 91,699 182,057 Finance costs (69,307) (142,054) Net financing income 2 22,392 40,003 Other income 32 2,363 Intercompany debt forgiveness expense (54,279) - Impairment reversal / (loss) on receivables due from related entities 70,930 (66,850) Foreign exchange gains/(losses) 265,412 (250,806) Gains/(losses) on fair value hedges 5,132 (4,461)

Profit / (loss) before tax 3 309,619 (279,751) Income tax (expense)/benefit (96,667) 50,150

Profit / (loss) after income tax attributable to equity holders of Santos Finance Ltd 212,952 (229,601)

This income statement is to be read in conjunction with the notes to the financial statements.

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SANTOS FINANCE LTD

STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2009

2009 2008 $000 $000 Net profit/(loss) for the period 212,952 (229,601)

Other comprehensive income, net of tax - - Total comprehensive income 212,952 (229,601)

This statement of comprehensive income is to be read in conjunction with the notes to the financial statements.

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SANTOS FINANCE LTD

STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2009

2009 2008 Note $000 $000

Current assets Cash and cash equivalents 4 103,713 9,659 Trade and other receivables 5 1 - Other financial assets 6 2,768 59,223 Total current assets 106,482 68,882 Non-current assets Other financial assets 6 2,241,723 2,410,168

Total non-current assets 2,241,723 2,410,168 Total assets 2,348,205 2,479,050 Current Liabilities Trade and other payables 7 95,049 31,741 Interest-bearing loans and borrowings 8 151,460 46,317 Other financial liabilities 9 7,266 - Total current liabilities 253,775 78,058 Non-current liabilities Interest-bearing loans and borrowings 8 1,773,983 2,503,654 Deferred tax liabilities 106,473 31,809 Other financial liabilities 9 1,022 - Total non-current liabilities 1,881,478 2,535,463 Total liabilities 2,135,253 2,613,521 Net assets/(liabilities) 212,952 (134,471)

Equity Issued capital 10 234,471 100,000 Accumulated losses (21,519) (234,471)

Total equity attributable to equity holders of Santos Finance Ltd 212,952 (134,471)

This statement of financial position is to be read in conjunction with the notes to the financial statements.

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SANTOS FINANCE LTD

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2009

2009 2008 Note $000 $000

Cash flows from operating activities Interest received 28 788 Borrowing costs paid (77,893) (118,579) Operating costs (paid)/received (156) 291 Net cash used in operating activities 12 (78,021) (117,500)

Cash flows from financing activities Drawdown of borrowings - 500,000 Repayment of borrowings (60,146) (733,983) Receipts from related entities 419,804 363,803 Payments to related entities (181,900) (23,780) Net cash provided by financing activities 177,758 106,040 Net increase/(decrease) in cash 99,737 (11,460) Cash and cash equivalents at the beginning of the year 9,659 37,419 Effects of exchange rate changes on the balances of cash held in foreign currencies (5,683) (16,300) Cash and cash equivalents at the end of the year 4 103,713 9,659

This statement of cash flows is to be read in conjunction with the notes to the financial statements.

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SANTOS FINANCE LTD

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2009

Share Accumulated capital losses Total equity $000 $000 $000 Balance at 1 January 2009 100,000 (234,471) (134,471) Total comprehensive income for the period, net of tax - 212,952 212,952

Transactions with owners in their capacity as owners: Shares issued 134,471 - 134,471 Dividends to shareholders - - -

Balance at 31 December 2009 234,471 (21,519) 212,952

Balance at 1 January 2008 100,000 (4,870) 95,130 Total comprehensive income for the period, net of tax - (229,601) (229,601)

Transactions with owners in their capacity as owners - - - Balance at 31 December 2008 100,000 (234,471) (134,471)

This statement of changes in equity is to be read in conjunction with the notes to the financial statements.

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-6- SANTOS FINANCE LTD NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2009

1. Significant Accounting Policies

Santos Finance Limited (“the Company”) is a company incorporated and domiciled in Australia.

The address of the registered office is:

Ground Floor Santos Centre 60 Flinders Street Adelaide SA 5000.

The financial report was authorised for issue by the Directors on 22 March 2010.

(a) Statement of compliance

This special purpose financial report has been prepared for distribution to the members to fulfil the directors’ financial reporting requirements under the Corporations Act 2001. The accounting policies used in the preparation of this financial report, as described below, are consistent with previous years, and are, in the opinion of the Directors’, appropriate to meet the needs of the members.

x AASB 7 Financial Instruments: Disclosure x AASB 8 Segment Reporting x AASB 112 Income Taxes x AASB 121 The Effects of Changes in Foreign Exchange Rates x AASB 123 Borrowing Costs x AASB 124 Related Party Disclosures x AASB 136 Impairment of Assets x AASB 137 Provisions, Contingent Liabilities and Contingent Assets

(b) Basis of preparation

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-7- SANTOS FINANCE LTD NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2009

1. Significant Accounting Policies (continued)

(b) Basis of preparation (continued)

Adoption of new accounting standards and interpretations From 1 January 2009, the Company has adopted the following standards and interpretations, and all consequential amendments, which became applicable on 1 January 2009. Adoption of these standards and interpretations has only affected the disclosure in these financial statements. There has not been any impact on the financial position or performance of the Company.

x AASB 101 Presentation of Financial Statements x AASB 2008-5 Amendments to Australian Accounting Standards arising from the Annual Improvements Project x AASB 2009-6 Amendments to Australian Accounting Standards

F-277 Level: 0 – From: 0 – Friday, September 17, 2010 – 23:06 – eprint3 – 4262 Section 10a 1 January 2013 1 January 2010 1 January Application date for Company material impact impact Impact on Company financial report 1 January 20131 January to have Unlikely 20091 July to have Unlikely 20091 July No impact 2010 1 January 1 2009 July No Impact 2010 1 January Effective for annual reporting periods beginning on or after o be Business Recognition and Consolidated and ). These requirements Financial Instruments: 8 (AASB 139 and AASB 127 SANTOS FINANCESANTOS LTD Financial Instruments: NOTES STATEMENTS TO THE FINANCIAL FOR ENDED 31 DECEMBER THE YEAR 2009 AASB 9 includes requirements forclassification the and measurement of financial assets resultingfrom the first part of Phase 1 of the IASB’s project to replace IAS 39 Measurement Recognition and Measurement improve and simplify the approach forclassification and measurement of financial assets compared with the requirements of AASB 139. Changes in a parent’s ownership in a subsidiary that result in a loss of control requires reserves to be and remainingrecycled ownership interest t measured at fair value; changes that do not result in a loss of control are accounted for as equity transactions. Consequential amendments to number of standards following the issue of the revised AASB 3 Combinations Separate Financial Statements. Adopts the acquisition methodaccountforbusiness to combinations; acquisition costs expensed; contingent consideration recognised at fairacquisition value on date. Summary Financial Instruments Consolidated and Separate Financial Statements Amendments to Australian Accounting Standards arising from AASB 3 and 127 AASB Business Combinations AASB 127 AASB 2008-3 AASB 9 ReferenceAASB 3 Title (b) (continued) of preparation Basis Significant Policies Accounting (continued)

F-278 Level: 0 – From: 0 – Friday, September 17, 2010 – 23:06 – eprint3 – 4262 Section 10a 1 January 2010 1 January 1 January 2010 1 January Application date for Company No impact No impact Impact on Company financial report Effective for annual reporting periods beginning on or after 2009 1 July 1 July 2009 1 July 20091 July No impact 2010 1 January Events after the to require where in respect of the Non-current Assetsfor Held 9 ed item. g for the disclosure requirements for Non-current Assetsand Sale Held for SANTOS FINANCESANTOS LTD NOTES STATEMENTS TO THE FINANCIAL FOR THE YEAR ENDED 31 DECEMBERFOR THE 2009 YEAR Extends scope of AASB 5 Sale and Discontinued Operations disposedof in whichthe subsidiary, caseall subsidiary’s assets and liabilities are classifiedheld as for sale; also includes minor terminology or editorial amendments to other standards. entity is committedentity to sale plan involving loss ofcontrol of a but retainssubsidiary a partial investment in the Clarifies the hedge accounting provisions of AASB 139 Financial Instruments: Recognition and Measurement to address inflationin afinancial hedged item, and one-sided risk in a hed Amends AASB 5 Discontinued Operations classification, presentation and measurement ofnon- current assets held for distribution to owners in their as capacity owners and AASB 110 Reporting Period dividends that are declared after the reportingperiod but before the financial statements are authorised for issue. Summary Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project Amendments to Australian Accounting Standards – Eligible Hedged Items Amendments to Australian Accounting Standards arising from AASB Interpretation 17 – Distributions of Non-cash Assets to Owners AASB 2008-6 Reference Title AASB 2008-8 AASB 2008-13 (b) (continued) preparation of Basis Significant Policies (continued) Accounting

F-279 Level: 0 – From: 0 – Friday, September 17, 2010 – 23:06 – eprint3 – 4262 Section 10a Application date for Company Impact on Company financial report Effective for annual reporting periods beginning on or after 1 July 20091 July No impact 2010 1 January 1 July 20091 July No impact 20091 July 2010 1 January No impact 20101 January 2010 1 January No impact 2010 1 January to Share- based payment Share-based Payment 10 arising from revised AASB 3 Distributions of Non-Cash Assets to by requiring an entity that receives that requiring an entity by SANTOS FINANCESANTOS LTD and other amendments reflect changes made NOTES STATEMENTS TO THE FINANCIAL FOR THE YEAR ENDED 31 DECEMBERFOR THE 2009 YEAR exclude business combinations fromare scope;there additional consequential amendments to AASB 138 Intangible Assets Amends scope of AASB 2 Business Combinations. Includes a number of other amendmentsexistingto standards which are not expected to have a material impact. Will amend classification of exploration expenditure in statement of cash flows. Various minor editorial amendmentsnumber to a of standards and an interpretation to correcterrors that occurred in AASB 2008-12, AASB 2008-13 and AASB Interpretation 17 Owners the IASB to its pronouncements.by The amendments clarify the scope of AASB 2 based Payment goods or services in a share- arrangement to account for those goods or servicesno matter settles in the Company the entity which transaction, and no matter the transaction whether is settled in shares or cash. Summary Amendments to Australian Accounting Standards arising from the Annual Improvements Process Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project Amendments to Australian Accounting Standards – Company Cash-settled Share-based Payment Transactions Amendments to Australian Accounting Standards ReferenceAASB 2009-4 Title AASB 2009-5 AASB 2009-8 AASB 2009-7 (b) (continued) preparation of Basis Significant Policies (continued) Accounting

F-280 Level: 0 – From: 0 – Friday, September 17, 2010 – 23:06 – eprint3 – 4262 Section 10a Application date for Company 2010 1 January 1 January 2013 1 January any future any acquisitions material impact Impact on Company financial report Effective for annual reporting periods beginning on or after 20101 January Recognition of 1 February 20101 February No impact 2011 1 January 20131 January to have Unlikely 20111 January No impact 2011 1 January truments. Before this . Financial Instruments: Determining whether an 11 SANTOS FINANCESANTOS LTD to require a financial instrument that gives NOTES STATEMENTS TO THE FINANCIAL FOR THE YEAR ENDED 31 DECEMBERFOR THE 2009 YEAR Provides additional exemptionsmodifications and on transition to Australian Accounting Standards in relation to certain oil and gas and lease assessments under Interpretation 4 Arrangement contains a Lease Amends AASB 132 Presentation the holder the right to acquire a fixed number of the instruments equity own forentity's a fixed amount of instrument currency to be classifiedif, equity any as an offers if, the entity and only the financial instrument pro rata to all of its existing owners of the sameclass ofits ins non-derivativeown equity amendment, rights issues (rights,or options, warrants),the denominated than other currency a in functional currency ofaccountedfor the issuer, were as derivative instruments. This Standard gives effect to consequentialchanges arising from the issuance of AASB 9. The amendment to to AASB 8 requires an entity exercise judgement in assessing a whether government and entities known to be under the control of that government are considered a single customer for the purposes of certain operating segment disclosures. Summary Amendments to Australian Accounting Standards - Additional Exemptions for First-time Adopters Amendments to Australian Accounting Standards - Classification of Rights Issues Amendments to Australian Accounting Standards arising from AASB 9 Amendments to Australian Accounting Standards ReferenceAASB 2009-09 Title AASB 2009-10 AASB 2009-11 AASB 2009-12 (b) (continued) preparation of Basis Significant Policies (continued) Accounting

F-281 Level: 0 – From: 0 – Friday, September 17, 2010 – 23:06 – eprint3 – 4262 Section 10a Application date for Company 1 January 2010 1 January 1 January 2011 1 January 1 January 2010 1 January 2011 1 January Impact on financialCompany report No impact Effective for annual reporting periods beginning on or after 20101 July No impact 1 July 20091 July No impact 2009 1 July 20101 July No impact as a cash assets is is assets cash First-time Adoption of 12 SANTOS FINANCESANTOS LTD The objective ofmake thisto is Standard amendments to AASB 1 Australian Accounting Standards consequence of the issuance of Interpretation19 Extinguishing Financial Liabilities with Equity Instruments. Provides guidance on when and how a liability Provides a liability guidance and how on when for certain distributions of non- recognised and measured, to accountand how for to common Does not apply that liability. control transactions. Provides guidance on transfers plant of property, and equipment for entities that receive such contributions from their customers. This Interpretation addresses the accountingby the terms when an entity of are a financial liability renegotiated issuingand result in the entity instrumentsequity to to a creditor ofentity the extinguish all or part of the financial liability. Summary NOTES STATEMENTS TO THE FINANCIAL FOR THE YEAR ENDED 31 DECEMBERFOR THE 2009 YEAR Amendments to Australian Accounting Standards arising from Interpretation 19 Distributions of Non-Cash Assets to Owners Transfers of Assets from Customers Extinguishing Financial Liabilities with Equity Instruments ReferenceAASB 2009-13 Title Interpretation 17 Interpretation 18 Interpretation 19 (b) (continued) preparation of Basis Significant Policies (continued) Accounting

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SANTOS FINANCE LTD

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2009

1. Significant Accounting Policies (continued)

(b) Basis of preparation (continued)

(d) Derivative financial instruments

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SANTOS FINANCE LTD

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2009

1. Significant Accounting Policies (continued)

(e) Hedging

(f) Trade and other receivables

Receivables are initially recognised at fair value, which in practice is the equivalent of cost, less any impairment losses.

Long-term receivables are discounted and are stated at amortised cost, less impairment losses.

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SANTOS FINANCE LTD

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2009

1. Significant Accounting Policies (continued)

(f) Trade and other receivables (continued)

(g) Cash and cash equivalents

(h) Impairment

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.

(i) Interest-bearing loans and borrowings

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SANTOS FINANCE LTD

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2009

1. Significant Accounting Policies (continued)

(i) Interest-bearing loans and borrowings (continued)

Fixed rate notes that are hedged by an interest rate swap are recognised at fair value (refer note 1(e)).

(j) Trade and other payables

(k) Share capital

Ordinary share capital Ordinary share capital is classified as equity.

Dividends Dividends are recognised as a liability at the time the Directors resolve to pay or declare the dividend.

(l) Revenue

(m) Finance costs

(n) Goods and services tax

Receivables and payables are stated with the amount of GST included.

The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the balance sheet.

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SANTOS FINANCE LTD

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2009

1. Significant Accounting Policies (continued)

(o) Income tax

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SANTOS FINANCE LTD

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2009

1. Significant Accounting Policies (continued)

(p) Significant accounting judgements, estimates and assumptions

Impairment of receivables from related entities The Company assesses whether receivables from related entities are impaired on an annual basis. This requires an estimation of the recoverable amount of the related entity’s assets and liabilities and comparing it to the carrying value of the receivables from related entity to determine whether or not the receivable is impaired.

The carrying amount of the receivables from related entities is disclosed in note 6 Other Financial Assets.

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SANTOS FINANCE LTD

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2009

2009 2008 $000 $000

2. Net Financing Income Interest revenue: Related entities 91,671 181,295 Other entities 28 762 Financial income 91,699 182,057 Interest expense: Related entities (3,422) (16,454) Other entities (65,885) (125,600) Finance costs (69,307) (142,054) Net financing income 22,392 40,003

3. Profit / (Loss) for the Year Profit/(loss) for the year has been arrived at after crediting/ (charging) the following items of income and expense: Intercompany debt forgiveness expense (54,279) - Impairment reversal/(loss) on receivables due from related entities 70,930 (66,850) Foreign exchange gains/(losses) 265,412 (250,806)

4. Cash and Cash Equivalents Cash at bank and in hand 103,713 9,659 Cash and cash equivalents in the cash flow statement 103,713 9,659

5. Trade and Other Receivables Other receivables 1 - 1 -

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SANTOS FINANCE LTD

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2009

2009 2008 $000 $000

6. Other Financial Assets Current Interest rate swap contracts 2,768 - Cross-currency swap contracts - 59,223 2,768 59,223 Non-current Interest rate swap contracts 123,335 303,539 Cross-currency swap contracts - 32,775 Amounts owing from related entities 2,118,388 2,073,854 2,241,723 2,410,168

7. Trade and Other Payables Other payables 7,775 21,555 Amounts owing to related entities 87,274 10,186

95,049 31,741

8. Interest-Bearing Loans and Borrowings Current Bank loans 21,793 - Long-term notes 129,667 46,317 151,460 46,317 Non-current Amounts owing to related entities 134,143 142,653 Bank loans 128,232 221,496 Medium-term notes 448,116 457,222 Long-term notes 1,063,492 1,682,283 1,773,983 2,503,654

9. Other Financial Liabilities Current Cross-currency swap contracts 7,266 - 7,266 - Non-current Interest rate swap contracts 1,022 - 1,022 -

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SANTOS FINANCE LTD

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2009

2009 2008 $000 $000

10. Issued and Authorised Capital Share capital 234,470,555 (2008:100,000,000) fully paid ordinary shares 234,471 100,000

In accordance with changes to the Corporations Law effective 1 July 1998, the shares issued do not have a par value and there is no limit on the authorised share capital of the Company. Movement in issued and fully paid ordinary shares 2009 2008 2009 2008 Number of Shares $000 $000 Balance at the beginning of the year 100,000,000 100,000,000 100,000 100,000 Shares issued 134,470,555 - 134,471 - Balance at the end of the year 234,470,555 100,000,000 234,471 100,000 During the year 134,470,555 (2008: nil) ordinary shares were issued to the Company’s parent entity.

Capital risk management The Company’s objective when managing capital is to safeguard the ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders, and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

11. Dividends No dividends have been paid or declared during the financial year and no dividends have been proposed or declared by the Directors after the balance sheet date.

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SANTOS FINANCE LTD

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2009

2009 2008 $000 $000

12. Reconciliation of Cash Flows from Operating Activities

(a) Profit / (loss) after income tax 212,952 (229,601) Add/(deduct) non-cash items: Intercompany debt forgiveness expense 54,279 - Impairment (reversal)/loss on receivables due from related entities (70,930) 66,850 Foreign exchange (gains)/losses (350,292) 356,710 Net borrowing income charged to related entities (88,249) (164,841) Net (gain)/loss on fair value hedges (5,132) 4,461 Cross-currency swaps revaluation 87,127 (102,505) Net cash used in operating activities before change in assets or liabilities (160,245) (68,926) (Deduct)/add change in operating assets or liabilities net of acquisitions of businesses: Income tax payable allocated to Santos Ltd under tax funding agreement 22,003 13,071 Net decrease/(increase) in deferred tax asset and deferred tax liability 74,664 (63,221) (Increase)/decrease in receivables (1) 26 (Increase)/decrease in other assets (676) 1,320 (Decrease)/increase in trade and other payables (13,766) 230 Net cash used in operating activities (78,021) (117,500) (b) Non-cash financing and investing activities Income tax payable allocated to Santos Ltd under 22,003 13,071 tax funding agreement

Borrowing income charged to related entities 91,671 181,295 Borrowing costs charged by related entities (3,422) (16,454) 88,249 164,841

13. Remuneration of Auditors

Audit fees are borne by the ultimate parent entity, Santos Ltd.

14. Contingent Liabilities

There are no contingent liabilities.

15. Parent Entity

The parent entity and ultimate parent entity is Santos Ltd.

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SANTOS FINANCE LTD

DIRECTORS’ DECLARATION

FOR THE YEAR ENDED 31 DECEMBER 2009

In accordance with a resolution of the Directors of Santos Finance Ltd (“the Company”), I state that in the opinion of the Directors:

(a) the Company is not a reporting entity;

(b) the financial statements and notes of the Company are in accordance with the Corporations Act 2001, including:

(i) giving a true and fair view of the Company’s financial position as at 31 December 2009 and of its performance for the year ended on that date, in accordance with the basis of preparation described in Note 1; and

(ii) complying with Accounting Standards in Australia, to the extent described in Note 1 and the Corporations Regulations 2001; 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.

Dated at Adelaide this 4th day of May 2010.

...... ………………… Director

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Independent auditor’s report to the members of Santos Finance Ltd

We have audited the accompanying special purpose financial report of Santos Finance Ltd, which comprises the statement of financial position as at 31 December 2009, the income statement and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration.

We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, we consider internal controls relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Independence In conducting our audit we have met the independence requirements of the Corporations Act 2001. We have given to the directors of the company a written Auditor’s Independence Declaration, a copy of which is referred to in the directors’ report. The Auditor’s Independence Declaration would have been expressed in the same terms if it had been given to the directors at the date this auditor’s report was signed.

Liability limited by a scheme approved under Professional Standards Legislation

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Auditor’s Opinion In our opinion the financial report of Santos Finance Ltd is in accordance with the Corporations Act 2001, including:

a) giving a true and fair view of the financial position of Santos Finance Ltd as at 31 December 2009 and of its performance for the year ended on that date in accordance with the accounting policies described in Note 1 to the financial statements; and

b) complying with Australian Accounting Standards to the extent described in Note 1 to the financial statements and complying with the Corporations Regulations 2001.

Ernst & Young

R J Curtin Partner Adelaide 4 May 2010

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Auditor's Independence Declaration to the Directors of Santos Finance Ltd

In relation to our audit of the financial report of Santos Finance Ltd for the year ended 31 December 2009, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct.

Ernst & Young

R J Curtin Partner Adelaide Ernst & Young 4 May 2010

Liability limited by a scheme approved under Professional Standards Legislation

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SANTOS FINANCE LTD

A.B.N. 81 002 799 537

DIRECTORS’ REPORT

The Directors present their report together with the financial report of the Company for the financial year ended 31 December 2009 and the auditor’s report thereon.

1. Directors

The names of the Directors in office at the date of this report are: Knox, David John Wissler Dean, Kenneth Alfred Gerlach, Stephen (Resigned 31st December 2009) Coates, Peter Roland (Appointed 1st January 2010)

Unless otherwise stated above, the Directors have held their office at all times since the beginning of the financial year.

2. Principal Activities

3. Review and Results of Operations

During the year, the Company continued to manage external borrowings for the Santos Ltd group and provide funding for the parent entity and its controlled entities. The net profit for the financial year after providing for income tax was $212,952,122.

4. Dividends

No dividends have been paid or declared during the financial year and no dividends have been recommended by the Directors.

5. State of Affairs

In the opinion of the Directors, there were no significant changes in the state of affairs of the Company that occurred during the financial year.

6. Events Subsequent to Balance Date

7. Likely Developments

With respect to likely developments in the operations of the Company in future financial years, it is expected that the Company will continue its principal activity as set out above.

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SANTOS FINANCE LTD

A.B.N. 81 002 799 537

DIRECTORS’ REPORT

8. Indemnification

For the purpose of Rule 12, “officer” has the meaning given in Rule 12.1 but limited to such officers appointed from the date that the Company became a subsidiary of Santos Ltd.

9. Rounding

10. Auditor’s Independence Declaration

The auditor's independence declaration is set out on page 26 and forms part of the directors' report for the 2009 financial year.

This report is made on 4 May 2010 in accordance with a resolution of the Directors.

...... ……………. Director

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THE ISSUER Santos Finance Limited Ground Floor Santos Centre 60 Flinders Street Adelaide, South Australia 5000 Australia

THE GUARANTOR Santos Limited Ground Floor Santos Centre 60 Flinders Street Adelaide, South Australia 5000 Australia

JOINT LEAD MANAGERS UBS Limited Deutsche Bank AG, London Branch 1 Finsbury Avenue Winchester House, London EC2M 2PP 1 Great Winchester Street United Kingdom London EC2N 2DB (Structuring Adviser) United Kingdom

TRUSTEE BNY CORPORATE TRUSTEE SERVICES LIMITED One Canada Square London E14 5AL United Kingdom

PRINCIPAL PAYING AGENT THE BANK OF NEW YORK MELLON, LONDON BRANCH One Canada Square London E14 5AL United Kingdom

LEGAL ADVISERS To the Issuer and the Guarantor To the Issuer and the Guarantor as to Australian law as to English law Freehills Linklaters LLP MLC Centre, 19 Martin Place One Silk Street Sydney NSW 2000 London EC2Y 8HQ Australia United Kingdom

To the Managers and the Trustee as to English law Allen & Overy LLP One Bishops Square London E1 6AD United Kingdom Level: 3 – From: 3 – Monday, September 20, 2010 – 17:16 – eprint3 – 4262 Section 11

TAX ADVISER To the Issuer and the Guarantor as to Australian taxation law Greenwoods & Freehills MLC Centre, 19 Martin Place Sydney NSW 2000 Australia

AUDITORS To the Issuer and the Guarantor Ernst & Young Ernst & Young Building 121 King William Street Adelaide SA 5000 Australia Level: 3 – From: 3 – Monday, September 20, 2010 – 17:16 – eprint3 – 4262 Section 11

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