Annual Transform Report Build 2016 Grow Santos Limited ABN 80 007 550 923 This 2016 Annual Report is a summary of Santos’ operations, activities and financial position as at 31 December 2016. All references to dollars, cents or $ in this document are to US currency, unless otherwise stated. An electronic version of this report is available on Santos’ website, www.santos.com Santos’ Corporate Governance Statement can be viewed at: www.santos.com/who-we-are/corporate-governance CONTENTS 1 About Santos 2 Corporate Directory 4 Message from the Chairman and from the Managing Director and Chief Executive Officer 6 Board of Directors 8 Santos Executive Committee 10 Reserves statement 16 Directors’ Report 29 Remuneration in brief 31 Remuneration Report 51 Financial Report 115 Directors’ Declaration 116 Independent Auditor’s Report 121 Auditor’s Independence Declaration 122 Securities Exchange and shareholder information 124 Glossary An Australian energy pioneer Santos is an Australian natural gas company. Established in 1954, the company is proud to deliver the economic and environmental benefits of natural gas to homes and businesses throughout Australia and Asia. Five core long-life natural gas assets sit at the heart of a disciplined, focused strategy to drive sustainable shareholder value: the Cooper Basin, GLNG, Papua New Guinea, Northern Australia and Western Australia Gas. Each of these core assets provide stable production, long-term revenue streams and significant upside opportunities. With one of the largest exploration and production acreages in Australia, a significant and growing footprint in Papua New Guinea and a strategic infrastructure position, Santos is well positioned to benefit from the growing global demand for energy. The Santos turnaround is now well underway. A three phase strategy to Transform, Build and Grow the business will drive returns as we continue to focus on the exploration, development, production and sale of natural gas. Santos is focused on driving sustainable shareholder value by becoming a low-cost, reliable and high performance business with the financial flexibility to build and grow the business through the oil price cycle. Santos Annual Report 2016 / 1 Corporate Directory Santos Limited ABN 80 007 550 923 SECURITIES EXCHANGE LISTING Santos Limited. Incorporated in Adelaide, South Australia, on 18 March 1954. Quoted on the official list of the Australian Securities Exchange (ordinary shares code STO). COMPANY SECRETARY David Lim joined Santos in 2007 and was appointed to the role of Company Secretary in 2010. He has over 20 years of experience in commercial and corporate legal practice. He is an accredited Chartered Secretary, and holds a Bachelor of Economics and a Bachelor of Laws from the University of Adelaide. REGISTERED AND HEAD OFFICE Ground Floor Santos Centre 60 Flinders Street Adelaide SA 5000 Australia GPO Box 2455 Adelaide SA 5001 Australia Telephone: +61 8 8116 5000 Facsimile: +61 8 8116 5050 Website: www.santos.com SHARE REGISTER Computershare Investor Services Pty Ltd Yarra Falls, 452 Johnston Street Abbotsford VIC 3067 Australia GPO Box 2975 Melbourne VIC 3001 Australia Online enquiries: www.investorcentre.com/contact Website: www.investorcentre.com/sto Telephone: 1300 017 716 (within Australia) +61 3 9938 4343 (international) 2 / Santos Annual Report 2016 Moomba plant, Cooper Basin. Santos Annual Report 2016 / 3 Message from the Chairman and from the Managing Director and Chief Executive Officer Peter Coates and Kevin Gallagher Dear Shareholder, OPERATIONAL PERFORMANCE Consistent with the company’s immediate focus to strengthen the balance sheet 2016 was a year of transformational Operations continued to perform well, and reduce net debt, the Board resolved change for Santos. With the oil price with annual sales volumes up 31% to a not to pay a final dividend. Whilst we trading at less than US$30 per barrel record 84.1 million barrels of oil equivalent understand that some shareholders will at the start of the year, decisive action (mmboe) reflecting a ramp up in LNG from be disappointed, it is our firm view that was taken to stabilise the business and GLNG train 1 and first LNG from train 2 a disciplined focus on debt reduction is increase operating cash flow. The aim in May 2016. Record annual production of the most responsible course of action was to be free cash flow breakeven at 61.6 mmboe was also reported, up 7% on in the circumstances. With the strong US$35-40 per barrel on a portfolio basis. 2015. progress being made in reducing costs The key strategic imperative was to create and improving free cash flow, the Board is shareholder value by becoming a low-cost, A statutory net loss after tax, of $1,047 confident in the company’s ability to return reliable, high performance business and million was recorded which included after to paying dividends and will next review position Santos to deliver positive cash tax impairments of $1,050 million on this position at the 2017 half-year results. returns through the cycle. GLNG, announced earlier in the year. The impairment was due to the scaling back A new leadership team with strong SAFETY of activity in the field in response to lower technical expertise was established. oil prices, which impacted the ramp-up of Stronger levels of governance and central The company recorded its lowest production. Combined with an increase in controls were also implemented around key three-year rolling average lost time injury the price of third party gas, this resulted decision making and planning processes. frequency rate on record. It is a credit to in the need to update long-term operating A new operating model was embraced all Santos employees that they have stayed assumptions for the asset. to focus on our primary business of focused during the restructuring of the exploration, development, production and Excluding impairments and other organisation and indeed have embraced sales of natural gas both onshore and significant items, underlying net profit a low-cost, high performance mindset offshore. after tax was $63 million, 29% higher to re-establish Santos as a strong and than the prior year. sustainable business with a proud history. As a result of the changes implemented by the Board and management, Santos Excellent progress has been made over STRONGER BALANCE SHEET is beginning to turnaround. The free cash the past twelve months in sustainably flow breakeven oil price was reduced from taking costs out of the business and has Strengthening the balance sheet was US$47 per barrel at the start of the year to contributed to a 51% reduction in capital a significant focus for the organisation US$36.50 per barrel by year-end. Santos expenditure to $625 million and an 18% in 2016. Net debt was reduced by $1.3 generated $370 million positive free cash reduction in upstream unit production billion to $3.5 billion via a combination flow over the last eight months of 2016 costs to $8.45 per barrel of oil equivalent. of assets sales, free cash flow and the resulting in a net $206 million of free cash successful completion of the A$1,040 In 2015 the Board announced a new flow for the full-year, before asset sales. million institutional placement in December. dividend framework to reflect Santos’ Whilst these results are pleasing and faster The decision to raise capital was not taken exposure to oil-linked LNG pricing and than anticipated, we recognise that there lightly. It was deemed necessary to enable the cyclical characteristics of global oil is still more to do and we will continue to the company to operate in a lower oil price markets. This framework states that focus on sustainably driving costs out of environment and to provide the financial dividends are expected to be a minimum of the business in the coming year. flexibility to build and grow the business in 40 percent of underlying net profit, subject 2017 and beyond. to business conditions. 4 / Santos Annual Report 2016 We will continue to adopt a disciplined This focus is not only driving improved is a director of Telstra Corporation and approach to capital management and will performance and further productivity gains Treasury Wine Estates. Guy also has over target a further $1.5 billion reduction in but also providing a clear line-of-sight to 30 years’ experience, including 25 years in net debt by the end of 2019 through free higher-margin growth opportunities and the oil and gas industry with Shell and is cash flow, asset sales and monetisation of the delivery of Australia’s lowest-cost Chairman of Queensland Sugar Limited. infrastructure assets. onshore operations. These new appointments underscore $447 million in proceeds from asset sales Our remaining assets are being run the Board renewal process with more than were received in 2016, including the sale separately as a stand-alone business. half the Directors appointed within the last of the Kipper asset offshore Victoria, Stag Bruce Clement, ex-CEO of AWE, has been 3 years. asset offshore Western Australia and appointed Vice President Asia, NSW and Thank you for your continued support pastoral holdings in the Cooper Basin. WA Oil Assets to manage these assets for Santos. We enter 2017 with a clear with a mid-tier oil and gas company The sale of the company’s Gippsland and strategy, a new leadership team and a mindset to maximise value. Otway Basin assets offshore Victoria were solid platform off which we can build and announced in October and completed Under the Build phase we are building the grow. We are confident that we have in early January 2017, with proceeds of portfolio of development and exploration the strategy, assets, people and growth A$61 million received. A A$118 million opportunities across the five core long-life options to drive future success and deliver abandonment liability was removed from natural gas assets to maximise production, shareholder value.