Annual Report 2018 Energy for the future Santos Limited ABN 80 007 550 923 This 2018 Annual Report is a summary of Santos’ operations, activities and financial position as at 31 December 2018. 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 Financial Overview 4 Message from the Chairman and from the Managing Director and Chief Executive Officer 8 Board of Directors 10 Santos Executive Committee 12 Reserves Statement 16 Directors’ Report 31 Remuneration Report 58 Financial Report 129 Directors’ Declaration 130 Independent Auditor’s Report 135 Auditor’s Independence Declaration 136 Securities Exchange and Shareholder Information 138 Glossary 139 Corporate Directory Cover images clockwise from left: Varanus Island gas hub, WA Ningaloo Vision FPSO, WA Devil Creek gas hub, WA An Australian energy pioneer Santos is an Australian natural gas company. Established in 1954, the Company’s purpose is to provide sustainable returns for our shareholders by supplying reliable, affordable and cleaner energy to improve the lives of people in Australia and Asia. Five core long-life natural gas assets sit at the heart of a clear and consistent strategy to Transform, Build and Grow the business: Western Australia, the Cooper Basin, Queensland & NSW, Northern Australia and Papua New Guinea. Each core asset provides 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. To deliver our vision to be Australia’s leading natural gas company by 2025, we will aspire to: • reduce emissions and improve air quality across Asia and Australia by displacing coal with natural gas, and support the economic development of combined gas and renewable energy solutions • be the leading national supplier of domestic gas in Australia • be a leading regional LNG supplier by increasing LNG sales to our Asian customers to over 4.5 million tonnes per annum • be recognised as the safest and lowest-cost onshore gas developer in Australia • become the market leader in running the safest and lowest-cost facilities and infrastructure operations • contribute positively to the communities in which we operate by providing jobs, energy supply and local partnerships • develop our people and culture to deliver our vision Santos today is a safe, low-cost, reliable and high performance business, proudly delivering the economic and environmental benefits of natural gas to homes and businesses throughout Australia and Asia. Santos Annual Report 2018 / 1 Financial overview Sales volume Sales revenue Production mmboe US$million mmboe 3,641 3,660 84.1 83.4 78.3 3,100 61.6 57.7 59.5 58.9 2,594 54.1 63.7 64.3 2,442 20142015 2016 2017 2018 20142015 2016 2017 2018 2014 2015 2016 2017 2018 Free cash flow Underlying net profit Net profit after tax US$million after tax US$million US$million 727 1,006 630 618 -630 -1,953 -1,047 -360 206 564 -1,591 -739 318 54 75 20142015 2016 2017 2018 20142015 2016 2017 2018 20142015 2016 2017 2018 Unit production costs Capital expenditure Net debt US$ per boe US$million US$million 14.14 3,300 6,128 10.35 4,749 8.45 8.07 8.05 3,492 3,549 1,288 2,731 625 682 759 20142015 2016 2017 2018 20142015 2016 2017 2018 20142015 2016 2017 2018 2 / Santos Annual Report 2018 2018 Sales volumes 2018 Production mmboe mmboe Sales gas and ethane 25.7 LNG 23.1 Own product 57.7 Oil 5.9 Third-party product 20.6 Condensate 3.0 LPG 1.2 2018 Sales revenue Average realised oil price US$million US$ per barrel 103.4 , ethane and LNG 2,518 Sales gas 75.1 Oil 757 53.8 57.8 Condensate 300 46.4 LPG 85 2014 2015 2016 2017 2018 2018 Results 2014 2015 2016 2017 2018 Sales volume mmboe 63.7 64.3 84.1 83.4 78.3 Production mmboe 54.1 57.7 61.6 59.5 58.9 Average realised oil price US$ per barrel 103.4 53.8 46.4 57.8 75.1 Net profit after tax US$million -630 -1,953 -1,047 -360 630 Underlying net profit after tax US$million 564 54 75 318 727 Sales revenue US$million 3,641 2,442 2,594 3,100 3,660 Operating cash flow US$million 1,633 811 840 1,248 1,578 Free cash flow US$million -1,591 -739 206 618 1,006 EBITDAX US$million 2,076 1,454 1,199 1,428 2,160 Total assets US$million 18,281 15,949 15,262 13,706 17,134 Earnings per share US cents -64.4 -169.5 -58.2 -17.3 30.2 Dividends declared A$0.35 A$0.20 - - US$0.097 Number of employees 3,636 2,946 2,366 2,080 2,190 Santos Annual Report 2018 / 3 Message from the Chairman and from the Managing Director and Chief Executive Officer We are of the firm view that Santos’ well- developed strategy, strong management team, highly-skilled workforce and outstanding growth opportunities will deliver superior shareholder value over time. Dear Shareholder, A strong operating performance across During this period we prioritised debt our portfolio of five core assets, including repayment to restore balance sheet Santos today is a safe, low-cost, reliable one month’s production and sales volumes strength and position the Company for and high performance business. The from our Quadrant Energy acquisition in growth. It was therefore very pleasing successful, ongoing implementation of Western Australia, resulted in sales volumes in 2018 that we reached our net debt our Transform, Build, Grow strategy has of 78.3 million barrels of oil equivalent reduction target of $2 billion more than a enabled our Company to generate strong, (mmboe) and production of 58.9 mmboe. year ahead of plan. This milestone gave us stable cash flows through the oil price cycle the flexibility to not only acquire the low and pay a sustainable dividend. Santos is With the turnaround complete and the cost, high-margin conventional assets of now positioned to deliver the significant strategy and Operating Model embedded, Quadrant Energy in Western Australia but growth across our five core long-life natural 2018 marked a significant milestone for the also, very importantly, announce a return gas assets. Company whereby we achieved our first to dividends. full-year net profit after tax since 2013 of Consistent with our disciplined Operating $630 million. In-line with Santos’ stated purpose Model, Santos’ diversified portfolio of five to provide sustainable returns to our core assets each generate free cash flow This successful turnaround was also shareholders through the oil price cycle, at an oil price of less than US$40 per recognised by others in the market when in our new sustainable Dividend Policy targets barrel. Our focus on low-cost, efficient April we received a proposal from a private a payout of free cash flow1 generated per operations ensures that in a lower oil price equity firm to acquire the business. The annum in the range of 10% to 30% as environment Santos can continue to fund Santos Board, however, rejected this offer well as additional returns to shareholders the Transform, Build, Grow strategy and in as it did not represent appropriate value for above the ordinary dividend when business a rising oil price environment, benefit from the Company. In rejecting the bid the Board conditions permit. higher margins. unanimously deemed the offer price to be too low, the control premium inadequate Santos’ full-year results serve to highlight PNG EARTHQUAKE and the highly-leveraged private equity the benefits of a diversified portfolio transaction structure to be complex, of natural gas assets underpinned by a In late February we were deeply saddened high-risk and uncertain. disciplined, cash generative Operating by the loss of life and injuries suffered by Model. In 2018 we delivered: We are of the firm view that Santos’ well- communities in the Southern Highlands developed strategy, strong management and Hela Provinces of Papua New Guinea • a 129% increase in underlying net profit team, highly-skilled workforce and as a result of the severe earthquake in after tax to a record $727 million outstanding growth opportunities will the region and numerous aftershocks. Our • a 63% increase in free cash flow to deliver superior shareholder value over PNG LNG expertise and resources were a record $1 billion time. deployed to assist the humanitarian relief effort and Santos donated $200,000 to • an 18% increase in sales revenue to a CAPITAL MANAGEMENT help provide urgently needed food, water record $3.7 billion, and and medical supplies to more than 30,000 • dividends of US9.7 cents per share, Since 2016 we have simplified the business, people isolated in remote villages. reduced costs, increased efficiencies and fully-franked, including a final dividend We would like to thank and acknowledge delivered on our clear and consistent of US6.2 cents per share. the efforts of our joint-venture partners, strategy to Transform, Build and Grow. 4 / Santos Annual Report 2018 ExxonMobil and Oil Search, on a optimise operations and positions Santos medium to long-term CPI-linked offtake coordinated humanitarian relief and to capture value from backfill and third- agreements.