Annual Report2019
ABN 80 007 550 923This 2019 Annual Report is a summary of Santos’ operations,activities and nancial position as at 31 December 2019.All references to dollars, cents or $ in this document aretoUScurrency, unless otherwise stated.An electronic version of this report is available on Santos’ website,www.santos.comSantos’ Corporate Governance Statement can be viewed at:
www.santos.com/who-we-are/corporate-governance
CONTENTS
1 About Santos2 Financial Overview4 Message from the Chairman and from theManaging Director & Chief Executive Ocer8 Board of Directors11 Santos Leadership Team14 Reserves Statement18 Directors’ Report32 Remuneration Report59 Financial Report135 Directors’ Declaration136 Independent Auditor’s Report142 Auditor’s Independence Declaration143 Securities Exchange and Shareholder Information145 Glossary146 Corporate Directory
Cover image:
Darwin LNG, Wickham Point, Northern Territory
About SantosAn Australian energy pioneer
Santos is an Australian natural gas company.Established in 1954, the Company’s purpose isto provide sustainable returns for our shareholdersby supplying reliable, aordable and cleaner energyto 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 toTransform, Build and Grow the business: Western Australia, the Cooper Basin, Queenslandand NSW, Northern Australia and Timor-Leste, and Papua New Guinea. Each core assetprovides stable production, long-term revenue streams and signicant upside opportunities.With one of the largest exploration and production acreages in Australia, a signicant andgrowing footprint in Papua New Guinea and a strategic infrastructure position, Santos is wellpositioned to benet 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 withnatural gas, and support the economic development of combined gas and renewableenergy 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 andinfrastructure 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 deliveringthe economic and environmental benets of natural gas to homes and businessesthroughout Australia and Asia.
Santos Annual Report 2019 / 1Santos Annual Report 2019 / 1
Financial Overview
Sales volume
mmboe
Sales revenueUS$million
Production
mmboe
Free cash ow
US$million
Underlying net protafter tax
US$million
Net prot after tax
US$million
Unit production costsUS$ per boe
Capital expenditure
US$million
Net debt
US$million
64.3
84.1
83.4
78.3
| 94.5 |
20172016201520182019
2,442
2,594
3,100
3,660
4,033
20172016201520182019
Sales revenue
| Underlying net prot after tax |
20172016201520182019
1,288
1,016
20172016201520182019
57.7
61.6
59.5
58.9
Capital expenditure
75.5
Production
20172016201520182019
75.5
Production-1,953
-1,047-360
| 674 Net prot after tax |
20172016201520182019
3,492
2,7313,5493,325
| Net debt |
20172016201520182019
-739
1,006
20172016201520182019
1,138Free cash ow 10.35
8.45
8.07
8.05
7.24
| Unit production costs |
20172016201520182019
20152016201720182019Sales volumemmboe 64.3 84.1 83.4 78.3 94.5Productionmmboe 57.7 61.6 59.5 58.9 75.5Average realised oil priceUS$ per barrel 53.8 46.4 57.8 75.1 72.0Net prot after taxUS$million-1,953 -1,047 -360 630 674Underlying net prot after taxUS$million 54 75 318 727 719Sales revenueUS$million 2,442 2,594 3,100 3,660 4,033Operating cash owUS$million 811 840 1,248 1,578 2,046Free cash owUS$million-739 206 618 1,006 1,138EBITDAXUS$million 1,454 1,199 1,428 2,160 2,457Total assetsUS$million 15,949 15,262 13,706 16,811 16,509Earnings per shareUS cents-169.5 -58.2 -17.3 30.2 32.4Dividends declared A20cps – – US9.7cps US11cpsNumber of employees 2,946 2,366 2,080 2,190 2,178
2019 Results
Own product 73.5Third-party product 21.0
LNG 1,515Sales gas and ethane 1,172Oil 927Condensate 335LPG 84
Sales gas and ethane 37.2LNG 25.3Oil 7.7Condensate 4.0LPG 1.3
2019 Sales volumesmmboe
2019 Productionmmboe
2019 Sales revenueUS$million
Average realised oil priceUS$ per barrel
53.8
46.4
57.8
72.0
20172016201520182019
Santos Annual Report 2019 / 3Santos Annual Report 2019 / 3
Message from the Chairman and from theManaging Director & Chief Executive Ocer
Dear Shareholder,In 2016 Santos unveiled a new corporatestrategy to Transform, Build and Growthe business to restore and driveshareholder value.Over the past four years, the successfulimplementation of this strategy hasresulted in a simplied and high-gradedportfolio of ve core long-life assethubs. Non-core assets have been soldand value accretive acquisitions havedelivered operatorship of low-cost,strategic domestic gas assets and LNGinfrastructure.Our disciplined Operating Model andfocus on safe, low-cost, ecientoperations has underpinned ourcompetitive advantage and providedthe framework for the continuedgeneration of strong and stable cashows. Dividends have been reinstated andour strengthened balance sheet remainssupportive of our disciplined growthstrategy.In 2019, the ongoing successful executionof the Transform, Build and Grow strategydelivered:
? Record free cash ow of$1,138 million? Record sales volumes of 94.5 mmboe? Record production volumes
75.5 mmboe
? Underlying net prot after taxof $719 million, and? Dividends of US11 cents per share,fully franked, which includes the nal2019 dividend of US5 cents per shareOur portfolio of assets are nowgeographically diverse and balancedbetween onshore and oshore operations,between natural gas and liquids and our
sales volumes between oil price-linkedand CPI-linked contracts. Not only arewe a leading national supplier of domesticgas across both the east and westcoast markets here in Australia, but ourLNG projects are beneting from rapidurbanisation and the switch from coalto natural gas as Asian countries seek toreduce air pollution and lower greenhousegas emissions.Our disciplined Operating Modelcontinues to ensure that the wholeCompany remains focused on continuousimprovement. With each of our vecore long-life asset hubs required togenerate free cash ow at an oil priceof less than US$40 per barrel, we areconstantly looking at ways to challengethe status quo to drive eciencies anddeliver greater shareholder value. In 2019,our relentless focus on safe, low-cost,ecient operations resulted in a free cashow breakeven oil price of US$29 perbarrel, before hedging.The successful implementation of ourdisciplined Operating Model enablesSantos to continue to fund the Transform,Build and Grow strategy in a lower oilprice environment and importantly,benet from signicant cash generation ina higher oil price environment. Free cashow generation is critical to the continuedsuccess of our business as theseproceeds are used to pay sustainabledividends, reduce debt, replace reservesand resources, and fund majorgrowth projects.Our acquisition of ConocoPhillips’northern Australia assets, coming just12 months after we bought QuadrantEnergy in Western Australia, is testamentto the strength of the Company andthe hard work of our people to turn thebusiness around and drive shareholder
value. The value accretive acquisition isfully aligned with our growth strategy tobuild on existing infrastructure positionsand delivers operatorship and control ofstrategic LNG infrastructure at Darwin.
OPERATING PERFORMANCEOur focus on safe, low-cost, ecientoperations continued to drive strongresults across each of our ve corelong-life asset hubs in 2019.
Western Australia
The successful integration of QuadrantEnergy into the Santos business overthe course of 2019 transformed the scaleof our operations in Western Australiaand also signicantly strengthenedour oshore operating expertiseand capabilities.As a result of the acquisition and strongoperating performance, sales volumesincreased 134% to 30.4 mmboe andproduction volumes 147% to 30.9 mmboe.A successful appraisal program in theshallow, shelf-waters of the Bedoutand Carnarvon Basins conrmed largerthan anticipated resource volumesand signicantly de-risked futuredevelopment options.The Dorado appraisal program resultedin a signicant resource upgrade andproved the Bedout Basin, where Santoshas a controlling position, to be a worldclass liquids-rich petroleum system withhigh quality reservoirs. Developmentoptions for the Dorado discovery arecurrently being worked through and areexpected to result in an initial oil andcondensate development followed by afuture gas phase development. Front EndEngineering and Design (FEED) for theproject is targeted to commence in thesecond quarter of 2020.
Building on our exploration andappraisal success in the Bedout Basin,in September we were pleased to beawarded new acreage on-trend with theDorado discovery in a joint venture withBP. We are excited at the opportunityto increase our exposure to this highlyprospective region, leveraging our shallowwater oshore operating expertiseto build on the success of our 2019drilling campaign.In the Carnarvon Basin, the drilling of theCorvus-2 gas appraisal well conrmed oneof the largest columns ever discoveredacross the North West Shelf. With 100%ownership of two gas plants in the region,near-term development opportunitiesare consistent with our browneldgrowth strategy to build on existinginfrastructure positions.Western Australia is now Santos’ largestasset hub where our high-margin,conventional, natural gas assets arebacked by medium- to long-termCPI-linked contracts and our heavy sweetcrude oil is commanding a signicantpremium to the Brent oil price due to thehigh demand for viscous, low sulfur crudeon the back of cleaner global ship-fuelstandards.Cooper BasinIn the Cooper Basin our low-costdisciplined Operating Model continues tounderpin our capital allocation decisionssupporting more ecient outcomes. In2019, drilling activity increased 35% to 115wells and production grew for the secondconsecutive year to 15.8 mmboe.Advances in drilling technology drovedevelopment costs down further andcontributed to enhanced reservoirdeliverability. Project cycle times wereagain a focus with the fastest ever total
well execution recorded of 4 days,rig release to rig release.The opportunity sets within the Basincontinue to grow now that we havesignicantly reduced the cost base of theasset. The appraisal of Moomba Southwas the rst of several large-scale projectappraisal programs focused on resourceconversion. In 2019 our drilling activitycombined with the successful appraisalprogram at Moomba South delivereda 183% 2P reserves replacement. Thisis the rst time since 2012 that theCooper has more than replaced itsannual production.With current resources of approximately300 million barrels of oil equivalent, theCooper Basin will remain a high-valueswing producer supportive of east coastgas markets as well as the strong Asiandemand for LNG for decades to come.
Queensland & NSWIn Queensland a record 393 wells weredrilled across the GLNG acreage, a 29%increase on 2018. Well cost disciplinewas maintained despite the higher levelof activity as we continued to maximisevalue from our regional expertise andlow-cost Operating Model.Upstream gas production continued tobuild throughout the year and in October,GLNG achieved its targeted sales run-rateof 6 mtpa. With the right rigs in place,experienced crews and high volume,repeatable drilling program in motion,we are condent that upstream eldperformance will continue to improve andunderpin our new sales run-rate target of~6.2 mtpa from 2020.In New South Wales, we remain focusedon securing approval for the Narrabri GasProject. Manufacturers on the east coastare calling for more gas supply and more
competition will put downward pressureon gas prices. We have committed 100percent of Narrabri gas to the domesticmarket, enough to supply up to half ofNSW’s needs and help support about300,000 jobs in NSW that rely on naturalgas. Santos is awaiting a decision onits Environmental Impact Assessmentsubmission which is expected in therst-half of 2020.
Northern Australia & Timor-Leste
In Northern Australia & Timor-Leste,Darwin LNG continued its strongoperating performance in 2019, producing
2.9 million tonnes of LNG.
On 14 October, we announced the valueaccretive acquisition of ConocoPhillips’northern Australia business, deliveringshareholders operating interests inlong-life, low-cost natural gas assets andstrategic LNG infrastructure.The acquisition is supportive of a FinalInvestment Decision (FID) on the lowrisk, browneld Barossa project tosupply backll gas to Darwin LNG. TheBarossa project is expected to extendthe operating life of Darwin LNG by morethan 20 years and more than doubleSantos’ production in Northern Australia& Timor-Leste.The Bayu-Undan eld is expected tocome to the end of its eld life in late2022 with life extension works plannedat Darwin LNG plant prior to backllproduction coming online in late 2024. Inlight of this, Santos is also working withour joint venture partners to evaluate inlldrilling opportunities to extend the life ofthe Bayu-Undan reservoirs.Onshore, following the successfulstimulation of the Tanumbrini-1 well inthe McArthur Basin and the approvalof environmental plans by the Northern
Santos Annual Report 2019 / 5Santos Annual Report 2019 / 5
Message from the Chairman and from theManaging Director & Chief Executive Ocercontinued
Territory government, we now expect todrill two appraisal wells in 2020 followingthe wet season. The McArthur Basinhas signicant gas resources and hasthe potential to provide feed gas tosupport future backll and/or expansionopportunities through Darwin LNG.PNGPNG LNG continues to be a well-run,high-performing asset in our portfolio,delivering 8.5 million tonnes of LNGin 2019, up 15% following the severeearthquake that impacted the SouthernHighland and Hela Provinces in 2018.Santos’ acreage position in PNG issupportive of our long-term commitmentto the region as we look to work withour joint-venture partners and the PNGGovernment to continue to align intereststo support and participate in opportunitiesthrough the PNG LNG project.RESILIENCE AND OPPORTUNITIESIN A LOWER CARBON FUTURE
Natural gas today remains a crucial part ofthe energy mix if we are to solve the twinchallenges of reducing carbon emissionswhile meeting the growing demand forsecure and reliable power generation.Santos is committed to a lower-carbonfuture and our Climate Change Policyguides the Company’s activities to reducecarbon emissions as it produces thereliable, a?ordable and cleaner energyrequired to meet domestic and globaldemand. Through the commitments madein our Climate Change Policy, Santosis striving to contribute to the globalaspiration to limit temperature rise toless than 2 degrees Celsius.We have set medium-term targets thatalign to these objectives and have seta pathway to achieving our long-termaspiration of net-zero emissions by 2050.
The transition to a lower-carbon futurealso creates opportunities for Santos withnatural gas expected to account for aquarter of total global energy demand by2040 in all IEA (International Energy Agency)World Energy Outlook 2018 scenarios.In 2016 Santos set up an Energy Solutionsbusiness to build resilience and identifyand create opportunities for a lowercarbon future. Since then, more than100,000 tonnes of annual CO
emissionsreduction have been delivered with manymore opportunities identied.In 2019 we made signicant investmentsto deploy renewable energy and recoverwaste heat across our operations, as wellas test for large scale commercial carboncapture and storage (CCS) in the CooperBasin, which has the potential to store 20million tonnes of carbon dioxide per year.Australia could be a world leader in CCSand create an exciting new industrysupporting hydrogen production andensuring the sustainability of existingindustries including oil and gas, steel, coal,cement and chemicals.Australia has a competitive advantagein CCS, built on the availability of vast,high quality storage reservoirs; the skills,technology, expertise and infrastructureof the oil and gas industry; and a strongreputation for environmental regulationand carbon measurement and accountingintegrity.We think CCS is an exciting opportunityfor Santos and in the future, for ourcustomers as well.To learn more about the Company’sresilience as well as the opportunities in alower carbon future, we would encourageyou to read our third Climate ChangeReport, available on our website atwww.santos.com
LOOKING AHEAD
It has been 50 years since the very rstmolecule of natural gas from our Moombaprocessing plant in the Cooper Basinarrived in suburban Blair Athol, less than10 kilometres from the Adelaide CBD.As an Australian energy pioneer, we areproud that from these humble beginnings,our Company has now grown into aleading supplier of secure and reliableenergy for homes and industry across thenation and LNG into Asia.As we look to build on our recent success,it was pleasing to see our 2020 Graduate,Apprenticeship and Traineeship programsattract exceptional talent and for Santosto increasingly be considered an employerof choice.Female representation was strong acrossall the programs accounting for 60% ofour Apprenticeship intake and 50% ofour Traineeship intake. Of the Graduateprogram, 45% of the intake were female,the highest proportion since the programwas launched.In order to continue to attract and retaintalent within the organisation and supportemployees to better balance work andfamily life, in 2019 Santos increased itspaid parental leave and introduced achild care subsidy. This initiative buildson Santos’ leadership in this area, havingintroduced paid maternity leave overa decade ago, and being the rst, andstill one of only a few companies in theresources sector to oer ‘superannuationtop-ups’ for periods of unpaid maternityleave.In 2020 we will continue to executeour clear and consistent strategy toTransform, Build and Grow the businessto deliver a safe, low-cost, reliable andhigh performance business.
? In Northern Australia & Timor-Lestewe will look to complete theConocoPhillips acquisition and take aFinal Investment Decision (FID) onthe Barossa project to supply backllgas to Darwin LNG.? In Western Australia we are targeting
Front End Engineering and Design(FEED) on our Dorado oil andcondensate development to bringthese resources to market.? In Papua New Guinea we continue towork with our joint-venture partnersand the PNG Government to safelycommercialise the country’s gasresources and provide support tolocal communities across a widerange of economic and socialprograms.? In Queensland & New South Waleswe are targeting sales of ~6.2 mtpaat GLNG and expect a determinationfor the Narrabri Gas Project from theNSW Department of Planning aheadof a decision by the IndependentPlanning Commission.? In the Cooper Basin, in addition to ourfocus on improved capital eciencyto unlock additional resources, we areseeking to advance our carboncapture and storage project to osetemissions and generate new sourcesof revenue.In summary, our clear and consistentstrategy to focus on low-cost, long lifeassets utilising our existing infrastructurepositions to generate sustainable freecash ow through the oil price cyclecontinues to deliver strong shareholderreturns. Our balance sheet is positionedto deliver these growth opportunitiesin our portfolio. Record nancialperformance, good cost control, resourcegrowth and the successful integration
of Quadrant Energy highlight a businessthat has transformed and is positioned forfurther success.Santos remains committed to our statedpurpose which is to provide sustainablereturns for our shareholders by supplyingreliable, aordable and cleaner energyto improve the lives of people in Australiaand Asia.On behalf of the Board, we would liketo thank you, our shareholders, for yourcontinued support. We remain committedto driving shareholder value as we targetproduction of 120 mmboe by 2025.Yours sincerely,
KEITH SPENCE
Chairman
KEVIN GALLAGHERManaging Directorand Chief Executive Ocer
Santos Annual Report 2019 / 7Santos Annual Report 2019 / 7
Board of Directors
KEITH SPENCEChairman
BSc (First Class Honours in Geophysics),FAIMMr Spence is an independent non-executiveDirector. He joined the Board on 1 January2018 and became Chairman on 19 February2018. He is Chairman of Santos Finance Ltdand Chair of the Nomination Committee.Mr Spence has over 40 years’ experiencein managing and governing oil and gasoperations in Australia, Papua New Guinea,the Netherlands and Africa.A geologist and geophysicist by training,Mr Spence commenced his career as anexploration geologist with Woodside PetroleumLimited in 1977. He subsequently joined Shell(Development) Australia, where he workedfor 18 years. In 1994, he was seconded toWoodside to lead the North West ShelfExploration team. In 1998, he left Shell tojoin Woodside. He retired from Woodside in2008 after a 14-year tenure in top Executivepositions in the company. He has expertise inexploration and appraisal, development, projectconstruction, operations and marketing.Upon his retirement he took up several boardpositions, working in oil and gas, energy,mining, engineering and construction servicesand renewable energy. This included CloughLimited, where he served as Chairman from2010 to 2013, Geodynamics Limited, wherehe served as a non-executive Director from2008 to 2016 (including as Chairman from2010 to 2016) and Oil Search Limited, wherehe served as a non-executive Director from2012 to 2017. Mr Spence is also a past Chairof the National Oshore Petroleum Safety andEnvironmental Management Authority Boardand led the Commonwealth Government’sCarbon Storage Taskforce.Other Current Directorships: Chair ofBase Resources Limited (since 2015), non-executive Director of Independence Group NL(since 2014) and Murray and Roberts HoldingsLimited (since 2015).Former Directorships in the last 3 years:
Oil Search Limited (2012 to 2017).
KEVIN GALLAGHERManaging Director andChief Executive Ocer
BEng (Mechanical) Hons, FIEAustMr Gallagher joined Santos as ManagingDirector and Chief Executive Ocer on1 February 2016, bringing more than 25 years’international experience in managing oil andgas operations. Mr Gallagher is a memberof the Environment, Health, Safety andSustainability Committee and is also a Directorof Santos Finance Limited.Mr Gallagher commenced his career as adrilling engineer with Mobil North Sea, beforejoining Woodside in Australia in 1998.At Woodside, Mr Gallagher led the drillingorganisation through rapid growth, deliveringseveral Australian and internationaldevelopment projects and explorationcampaigns, before leading the Australianoil business. Then, as CEO of the NorthWest Shelf Venture, he was responsible forproduction from Australia’s rst ever LNGproject, which underpinned a new domesticgas market, fuelling the mining sector andother industries in Western Australia.In 2011, Mr Gallagher joined Clough Limitedas CEO and Managing Director where, overfour years, he transformed the business anddelivered record nancial results. He oversawthe development of innovative programs toimprove safety and drive productivity andexecuted an international expansion strategy.Since joining Santos, Mr Gallagher hasdelivered a Transform, Build, Grow strategythat has instituted a disciplined low-costoperating model, strengthened the balancesheet and improved production. UnderMr Gallagher’s leadership, Santos is nowfocused on a long-life portfolio of naturalgas assets with some exciting oil and liquidsopportunities and is well positioned to deliversignicant growth and sustainable returns toshareholders throughout the oil price cycle.Other Current Directorships:
Chair of APPEA (since 2019).Former Directorships in the last 3 years:
Nil.
YASMIN ALLEN
BCom, FAICDMs Allen is an independent non-executiveDirector. She joined the Board on 22 October2014 and is the Chair of the People andRemuneration Committee and a member ofthe Audit and Risk Committee and NominationCommittee.Ms Allen has extensive experience in nanceand investment banking, including senior rolesat Deutsche Bank AG, ANZ and HSBC GroupPlc, as former Chairman of Macquarie GlobalInfrastructure Funds, and a former Directorof EFIC (Export, Finance and InsuranceCorporation). Ms Allen was appointed amember of the Australian GovernmentTakeovers Panel in March 2017 and ispresently the Acting President, is a member(and former Council member) of ChiefExecutive Women and a former non-executiveDirector of Insurance Australia Group (2004to 2015).Other Current Directorships: Directorof Cochlear Limited (since 2010), NationalPortrait Gallery (since 2013), The GeorgeInstitute for Global Health (since 2014), ASXLimited and ASX Clearing and Settlementboards (since 2015), Chair of Advance (since2018), member of the Australian GovernmentTakeovers Panel (since 2017), and Chair ofthe Digital Technology Skills Organisation Pilot(since 2020).Former Directorships in the last 3 years:
Nil.
GUY COWANBSc (Hons), Engineering, FCA (UK), MAICDMr Cowan is an independent non-executiveDirector. He joined the Board on 10 May2016 and is the Chair of the Audit and RiskCommittee and a Director of Santos FinanceLimited.Mr Cowan had a 23-year career with ShellInternational in various senior commercial andnancial roles. His last two roles were as CFOand Director of Shell Oil US and CFO of ShellNigeria. He was CFO of Fonterra Co-operativeLtd between 2005 and 2009. Mr Cowanwas a Director of Ludowici Limited (2009 to2012) where he chaired the Audit and RiskCommittee and was also a Shell-appointedalternate Director of Woodside between 1992and 1995.Other Current Directorships: Chair ofQueensland Sugar Limited (since 2015) andBuderim Ginger Ltd (since 2018), Director ofWinson Group Pty Ltd (since 2014).Former Directorships in the last 3 years:
Director of UGL Limited (2008 to 2017).
HOCK GOH
BEng (Hons) Mech EngMr Goh is an independent non-executiveDirector. He joined the Board on 22 October2012 and is a member of the Environment,Health, Safety and Sustainability Committee,Audit and Risk Committee and NominationCommittee.Mr Goh has more than 35 years’ experiencein the global oil and gas industry, having spent25 years with Schlumberger Limited, includingas President of Network and InfrastructureSolutions division in London, President of Asia,and Vice President and General Managerof China. He previously held managerial andsta positions in Asia, the Middle East andEurope. Mr Goh commenced his career asa eld engineer on the rigs in Indonesia andsubsequently in Roma and Sale in Australia.Mr Goh is a former Operating Partner of BairdCapital Partners Asia, based in China, (2007to 2012) and non-executive Director of XaloyHolding Inc in the US (2006 to 2008) andBPH Energy Ltd (2007 to 2015).Other Current Directorships: Non-executive Director of Stora Enso Oyj (Finland)(since 2012), AB SKF (Sweden) (since 2014)and Vesuvius PLC (UK) (since 2015).Former Directorships in the last 3 years:
Chair of MEC Resources (2005 to 2018) andDirector of Harbour Energy (2015 to 2018).
YU GUAN
MSc, E&E EMBAMr Guan is a non-executive Director. He joinedthe Board on 3 May 2019 as a nominee of asubstantial shareholder and is a member ofthe People and Remuneration Committee.Mr Guan has more than 22 years ofprofessional experience, including ve yearsin China’s Ministry of Power and State PowerCooperation, and 18 years in managementroles in multi-national companies. Hisindustry experience covers power andenergy in China and the US. His specialtiesinclude corporate management, businessmanagement, corporate M&A, and investmentand construction management for large-scalepower and energy infrastructures.Other Current Directorships: Presidentand Board member of ENN Ecological (since2018).Former Directorships in the last 3 years:
Nil.
Santos Annual Report 2019 / 9Santos Annual Report 2019 / 9
COMMITTEES OF THE BOARDAudit and Risk Committee
Mr G Cowan (Chair)Ms Y AllenMr H GohMs J McArdle
Nomination Committee
Mr K Spence (Chair)Ms Y AllenMr H GohMr P Hearl
People and RemunerationCommittee
Ms Y Allen (Chair)Dr V GuthrieMr P HearlMr Y Guan
Environment, Health,Safety and SustainabilityCommitteeMr P Hearl (Chair)Mr K GallagherMr H GohDr V Guthrie
VANESSA GUTHRIEHon DSc, PhD, BSc (Hons)Dr Guthrie is an independent non-executiveDirector. She joined the Board on 1 July2017 and is a member of the People andRemuneration Committee and Environment,Health, Safety and Sustainability Committee.Dr Guthrie has more than 30 years’ experiencein the resources sector in diverse roles suchas operations, environment, community andindigenous aairs, corporate development andsustainability.She has qualications in geology, environment,law and business management including aPhD in geology. She was awarded an HonoraryDoctor of Science from Curtin University in2017 for her contribution to sustainability,innovation and policy leadership in theresources industry. She is an active member ofthe Australian Institute of Company Directorsand Chief Executive Women, and a Fellowof the Australian Academy of TechnologicalSciences and Engineering.Other Current Directorships: Directorof Australian Broadcasting Corporation(since 2017), Adelaide Brighton Limited(since 2018) and Tronox Holding PLC (since2019), member of the Association of Miningand Exploration Companies, Deputy Chairof Western Australian Cricket Association,Council member of Curtin University, memberof the Australia–India Council and member ofthe Vocational Education and Training ExpertSkills Panel.Former Directorships in the last 3 years:
Director of Vimy Resources Limited (2017to 2018).
PETER HEARL
BCom. (UNSW With Merit), FAICD, MAIM,MAMAMr Hearl is an independent non-executiveDirector. He joined the Board on 10 May 2016and is Chair of the Environment, Health,Safety and Sustainability Committee, amember of the People and RemunerationCommittee and the Nomination Committee.He previously served on the Company’s Auditand Risk Committee.During an 18-year career in the oil industrywith Exxon in Australia and the USA, he helda variety of senior marketing, operations,logistics and strategic planning positions. MrHearl joined YUM Brands (formerly PepsiCoRestaurants) as KFC Australia’s Director ofOperations in 1991. He subsequently hadseveral senior international leadership roles,as well as being President of Pizza Hut USA,before assuming the global role of YUMBrands’ Chief Operations and DevelopmentOcer in 2006, based in Dallas, Texas andLouisville, Kentucky, and from where he retiredin 2008.Other Current Directorships: Director ofTelstra Ltd (since 2014), Chairman-Elect ofEndeavour Group Ltd (since 2019), Member ofInvestment Committee of the Stepping StoneFoundation, a Sydney based NFP (since 2018).Former Directorships in the last 3 years:
Chair of Woolworths Petrol Pty Ltd (2018),Director of Treasury Wine Estates (2012to 2017).
JANINE MCARDLE
BS (Chemical Engineering), MBAMs McArdle is an independent non-executiveDirector. She joined the Board on 23 October2019 and is a member of the Audit and RiskCommittee.Ms McArdle has more than 30 years’experience in the global oil and gas industry.She most recently spent 13 years withApache Corporation in the United States,where she held roles including ExecutiveOcer, Senior Vice President of Global GasMonetization, President of Kitimat LNGCo, and Vice President, Worldwide Oil andGas Marketing. Prior to joining Apache, sheworked with Acquila Energy for nine years inthe United States and United Kingdom, in asenior leadership position with responsibilitiesacross trading, mergers and acquisition ande-commerce. Ms McArdle is also the Founder,CEO and President of Apex Strategies, aglobal consultancy business providing advisoryservices to companies engaged in midstreamand downstream operations within the energyindustry.Other Current Directorships: Memberof University of Nebraska’s College ofEngineering Advisory Board (since 2017).Former Directorships in the last 3 years:
Director of Halcon Resources (2018 to 2019)and Palmer Drug Abuse Program in Houston,Texas (2003 to 2018).
Board of Directorscontinued
KEVIN GALLAGHERManaging Director andChief Executive OcerBEng (Mechanical) Hons, FEIAustMr Gallagher’s biography canbe read on page 8.
DAVID BANKS
Executive Vice PresidentOnshore Oil and GasBE (Hons), MBA, GAICDDavid joined Santos in 2018 andis responsible for Santos’ onshoreupstream business.David has over 25 years’international and domesticexperience in the upstream oiland gas industry. He started hiscareer with Schlumberger inSoutheast Asia before joining BHPin Australia in 1994. Whilst at BHP,David’s roles included operational,technical and functionalleadership roles including GeneralManager Shale Oil, Vice PresidentHSE, Vice President Shale Drillingand Completion and Bass StraitAsset Manager. Beyond businessand function leadership, David ledBHP’s Petroleum Transformationand was Integration Manager forUS shale assets.
BRETT DARLEY
Executive Vice PresidentOshore Oil and GasBEng (Civil), SPEBrett joined Santos in 2018.He has more than 30 years’experience in the upstream oiland gas industry, both in Australiaand overseas, with technical,operational, commercial andmanagement experience acrossvaried assets, onshore andoshore.Before moving to Santos, Brettheld senior leadership rolesincluding Chief Executive Ocerof Quadrant Energy, ManagingDirector and Region VicePresident for Apache EnergyLimited, Vice President of Drillingand Completions at WoodsideEnergy and Drilling Manager atSantos.Brett holds a Bachelor of CivilEngineering degree from theUniversity of Queensland andis a Chartered Engineer. He is acurrent member of the CurtinBusiness School Advisory Council,an elected member of the GeneralCouncil of the Chamber ofCommerce and Industry of WA,and a member of the Society ofPetroleum Engineers.
JODIE HATHERLY
General Counsel and VicePresident Legal, Risk andGovernanceBA, LLBJodie joined Santos in 2019.She is the General Counseland Company Secretary of theSantos Group and is responsiblefor legal, company secretariat,risk, governance and corporateenvironment, health and safetyacross the business. Jodie joinedSantos from INPEX Australia,where she was General Counseland General Manager Legal forthe Ichthys LNG project andINPEX’s Australia business.Jodie brings to the table ademonstrated history of deliveringsome of the biggest projects inthe oil and gas industry.Jodie commenced her career inthe legal private sector beforetaking on senior in-house roles inthe oil and gas industry. Jodie alsoserves on the advisory board ofthe Curtin University Law Schoolas well as Muscular DystrophyWA. Jodie was recognised on TheLegal 500 GC Powerlist Australiain 2018.
Santos Leadership Team
Santos Annual Report 2019 / 11Santos Annual Report 2019 / 11
ANGUS JAFFRAY
Executive Vice PresidentPeople and SustainabilityBA (Hons) Geography, MBAAngus joined Santos in 2016and was appointed ExecutiveVice President People andSustainability in February 2019,with responsibility for humanresources, remuneration andperformance, organisationaland learning development,public aairs, sustainability,and organisational integration.He previously held the rolesof Executive Vice PresidentStrategy, Business Developmentand Technology and ExecutiveVice President OrganisationalIntegration.Angus has over 20 years ofleadership and consultingexperience as a Director of AzureConsulting, a Partner at TheBoston Consulting Group and aSupply Chain Manager with theglobal packaging group CrownCork and Seal.At Azure Consulting, Angussupported companies indeveloping strategy and drivingorganisational change. At BCG,Angus set up the Perth oce,led the Australian Operationspractice and was a core memberof both the Mining and Metalspractice and the Energy Practice.He served clients in Australia,New Zealand, Asia, Europeand North America buildingstrong capabilities in strategy,operational eciency and runningtransformation programs. As aSupply Chain Manager, Anguswas accountable for procurement,planning, logistics and productdelivery.
NAOMI JAMES
Executive Vice PresidentMidstream Infrastructureand Energy SolutionsLLB (Hons), MLMNaomi joined Santos in 2016 andis responsible for Santos’ oil, gasand LNG processing facilities atMoomba, Port Bonython andDarwin and for Santos’ EnergySolutions team established topursue new low-carbon revenueand growth opportunities.Previously Naomi was ExecutiveVice President EHS andGovernance, with responsibilityfor Santos’ risk and audit, legal,company secretary, sustainability,safety, environment and accessfunctions.Prior to joining Santos, Naomiheld a range of functional andline leadership roles with Arriumincluding Chief Executive of theGroup’s non-integrated steelbusinesses, Chief Legal Ocerand Chief Executive, Strategy,leading major acquisitionsand divestments, businessrestructuring and turnaround andthe legal, company secretary,government aairs and strategyfunctions.Naomi has previously worked inprivate practice at law rms inAustralia and the UK.
ANTHONY NEILSON
Chief Financial OcerB.Comm; MBA; FFin; FCAAnthony joined Santos as ChiefFinancial Ocer in 2016 andis responsible for the nance,tax, treasury, strategy, businessdevelopment, investor relationsand IT functions. He brings over25 years’ experience in charteredaccounting, banking andcorporate nancial roles includingover 15 years’ experience in theupstream and downstream oil andgas industry.Prior to joining Santos, Anthonywas CEO of Roc Oil CompanyLtd (ROC), which was acquired in2014 by Hong Kong-listed investorFosun International Limited.Previously, Anthony was ChiefFinancial Ocer of ROC (ASXlisted) and has held commercial,nance and business servicesroles at Caltex Australia, CreditSuisse First Boston (London) andArthur Andersen (Sydney).Anthony holds a Masters ofBusiness Administration fromAustralian Graduate School ofManagement and is a Fellow ofthe Financial Services Instituteof Australasia and a Fellow ofChartered Accountants Australiaand New Zealand.
BILL OVENDEN
Executive Vice PresidentExploration and New VenturesBSc (Hons) Geology andGeophysicsBill joined Santos in 2002 and isaccountable for developing andexecuting a targeted explorationand appraisal strategy acrossSantos’ core asset hubs, whileidentifying new high-valueexploration targets.Bill is a geologist with over 30years of experience in the oil andgas industry. He has worked onexploration projects in Australia,Central and South East Asia,North Africa, the Middle Eastand South America, with Sun Oil,Kufpec, ExxonMobil and Ampolex.He joined Santos after workingfor ExxonMobil in Indonesia.Bill is a member of the APPEAExploration Committee.
Santos Leadership Teamcontinued
VINCE SANTOSTEFANOExecutive Vice PresidentProduction OperationsBEng (Civil), SPEVince joined Santos in 2016 andis responsible for the provision oftechnical and operational servicesto increase the scale and strategicvalue of Santos’ assets.Vince retired from WoodsideEnergy in November 2013 asChief Operating Ocer. As COOhe was responsible for Woodside’sproducing Business Units; theProduction Function includingsix LNG trains with associatedoshore infrastructure, fourFPSOs, the Marine Division andthe Brownelds Projects Group.During 2014 and 2015, Vincewas engaged in Board work asa non-executive Director andvarious management-consultingassignments. Vince has a deepand respected knowledge ofthe industry, with signicantexperience in onshore andoshore operations and assetmanagement. He has a provencapability to manage a demandingworkload and to drive culturalchange.
PETTER UNDEM
Executive Vice PresidentMarketing, Trading andCommercialMSc (PE), MBA (High Hons)Petter joined Santos in August2019 and has responsibility forthe marketing and trading ofall Santos gas, LNG and liquidhydrocarbon products as well asthe commercial and procurementfunctions.Petter has over 32 years’experience in the oil and gasindustry both overseas andin Australia and joined Santosfrom Total, Paris, where he heldthe position of Deputy VicePresident New Ventures E&P.Petter commenced his careeras a petroleum engineer withTotal and held engineering andmanagement positions in bothExploration and Production.From 2009 to 2011, Petter wasBusiness Development Directorof Total E&P UK before joiningTotal Austral in Argentina in thesame position, where he wasresponsible for technical studiesfor new development projects,corporate planning and strategy,new business ventures, jointventure partners, commercialsales and commercial gasstrategy. From 2015 to 2018,Petter was Managing Director(Country Chair) for Total E&PAustralia.Petter has a Master of Sciencein Petroleum Engineering fromthe Norwegian Institute ofTechnology and a Master ofBusiness Administration in GeneralAdministration and Finance fromthe Booth School of Business,University of Chicago, USA.
TRACEY WINTERS
Strategic Adviser ExternalAairsBSc (AustralianEnvironmental Studies)Tracey joined Santos in 2017and is responsible for governmentengagement and strategiccommunications.Tracey joined Santos with 30years of experience in the oiland gas industry, in diverseroles including governmentand regulatory aairs,media and communications,environment, land access, projectcommercialisation, constructionand asset management. Traceyheld a senior role in federalresources and energy policy andpolitics for seven years and overmore than a decade built andran a successful consultancyserving some of Australia’sbiggest resources companies anddelivering major project approvalsfor some of the nation’s biggestgas and pipeline projects. From2011 to 2016, Tracey drove theenvironmental approvals and landaccess processes to deliver theQCLNG project.Prior to joining Santos, Traceywas an adviser to Caltex onpublic aairs and strategic issuesmanagement, in particular wageunderpayment by franchisees.
BRETT WOODS
Executive Vice PresidentDevelopmentsBSc (Hons) Geologyand GeophysicsBrett joined Santos in 2013 andis accountable for developmentacross Santos’ onshore andoshore assets, includingmajor capital projects, drillingand completions, and reservoirdevelopment, as well asoverseeing Santos’ jointventure in PNG LNG.At Santos, Brett has previouslyheld the roles of Executive VicePresident Onshore Upstream, andVice President, Eastern Australia.Brett has held other roles withinSantos including responsibilitiesfor exploration in WesternAustralia and the NorthernTerritory, leading the WesternAustralian oshore operationsincluding development of FletcherFinucane, Darwin LNG and thedomestic gas business.Brett has 25 years of oil and gasindustry experience includingsenior management, technicaland business development rolesat Woodside Energy and as CEOand Managing Director of RialtoEnergy. He has a track record ofdelivering projects and ecientexploration and productionoperations and has both domesticand international experience.Brett is a graduate of the HarvardBusiness School AdvancedManagement Program.
Santos Annual Report 2019 / 13Santos Annual Report 2019 / 13
Reserves Statementfor the year ended 31 December 2019
RESERVES AND RESOURCES
Proved plus probable (2P) reserves increased by 42 million barrels of oil equivalent (mmboe) before production in 2019. The annual 2Preserves replacement ratio (RRR) was 56% and the three-year RRR 152%.Successful appraisal and development activity in the Australian onshore assets added 36 mmboe to 2P reserves during the year. TheCooper Basin achieved 183% RRR by adding 29 mmboe 2P reserves before production (including 18 mmboe from the successfulMoomba South project) and 7 mmboe was added in Queensland including the successful Arcadia appraisal. A net 6 mmboe was addedin the Western Australia oshore assets.2C contingent resources increased to over 1.9 billion barrels of oil equivalent, primarily due to increases in Dorado (+46 mmboe) andBarossa (+34 mmboe), and a maiden booking in the Northern Territory McArthur Basin shale (+22 mmboe).Santos’ acquisition of ConocoPhillips’ business in northern Australia and Timor-Leste announced in October 2019 is expected tocomplete in the rst quarter of 2020, subject to third-party consents and regulatory approvals. Had the acquisition completed on 31December 2019, it would have increased 2019 2P reserves by 39 mmboe to 1,028 mmboe (106% 2P RRR) and 2C contingent resourcesby 480 mmboe to 2,400 mmboe (before any sell-down of the acquired interests).RESERVES AND 2C CONTINGENT RESOURCES (SANTOS SHARE AS AT 31 DECEMBER)Santos shareUnit20192018%changeProved reservesmmboe548586(7%)Proved plus probable reservesmmboe9891,022(3%)2C contingent resourcesmmboe1,9201,8007%RESERVES AND 2C CONTINGENT RESOURCES BY PRODUCT (SANTOS SHARE AS AT 31 DECEMBER 2019)Santos share
Sales gasPJ
Crude oil
mmbbl
Condensate
mmbbl
LPG000 tonnes
TotalmmboeProved reserves2,9302021526548Proved plus probable reserves5,27738361,1699892C contingent resources9,5061501252,2171,920
KEY METRICS
Annual proved reserves replacement ratio49%Annual proved plus probable reserves replacement ratio56%Three-year proved plus probable reserves replacement ratio152%Organic annual proved plus probable reserves replacement ratio56%Organic three-year proved plus probable reserves replacement ratio62%Developed proved plus probable reserves as a percentage of total reserves55%Reserves life
13 years1 2P reserves life as at 31 December 2019 using annual production of 75 mmboe.
PROVED RESERVESSantos share as at 31 December 2019
All productsSales gasCrude oilCondensateLPGmmboeAssetPJmmbblmmbbl000 tonnesDeveloped Undeveloped TotalCooper Basin27184502481462Queensland & NSW
830-0-10142143PNG77008-8653140Northern Australia &Timor-Leste20-0244-4Western Australia1,039128-15147198Total 1P2,9302021526390157548Percentage of total proved reserves that are unconventional26%1 Queensland proved sales gas reserves include 655 PJ GLNG and 175 PJ other Santos non-operated Eastern Queensland assets.
Proved reserves reconciliationProductUnit2018Production
Revisionsandextensions
Netacquisitions
anddivestments2019Sales gasPJ3,123(363)171-2,930Crude oilmmbbl23(8)5-20Condensatemmbbl23(4)2-21LPG000 tonnes562(151)115-526Total 1P mmboe586(75)37-548
Santos Annual Report 2019 / 15Santos Annual Report 2019 / 15
PROVED PLUS PROBABLE RESERVESSantos share as at 31 December 2019
Sales gasCrude oilCondensateLPG
All productsmmboeAssetPJmmbblmmbbl 000 tonnesDeveloped Undeveloped TotalCooper Basin6901691,1329854153Queensland & NSW
1,871-0-102220322PNG1,108013-12875203Northern Australia &Timor-Leste30-1376-6Western Australia1,5782114-20997306Total 2P5,27738361,169543446989Percentage of total proved plus probable reserves that are unconventional33%1 Queensland proved plus probable sales gas reserves include 1,441 PJ GLNG and 430 PJ other Santos non-operated Eastern Queensland assets.Proved plus probable reserves reconciliationProductUnit2018Production
Revisions and
extensions
Netacquisitions
anddivestments2019Sales gasPJ5,408(363)232 -5,277Crude oilmmbbl45(8)1-38Condensatemmbbl39(4)1-36LPG000 tonnes1,259(151)61-1,169Total 2P mmboe1,022(75)42-989
2C CONTINGENT RESOURCESSantos share as at 31 December 2019
Asset
Sales gasPJ
Crude oilmmbbl
Condensatemmbbl
LPG000 tonnes
All products
mmboeCooper Basin1,30833182,217294Queensland & NSW2,64800-455PNG405-3-72Northern Australia & Timor-Leste3,341-49-620Western Australia1,80511755-479Total 2C9,5061501252,2171,920
2C Contingent resources reconciliation
Product2018Production
Revisions and
extensionsDiscoveries
Netacquisitions
anddivestments2019Total 2C (mmboe)1,800-1729741,920
Reserves Statementfor the year ended 31 December 2019continued
Notes1 This reserves statement:
a is based on, and fairly represents, information andsupporting documentation prepared by, or under thesupervision of, the qualied petroleum reserves andresources evaluators listed in note 14 of this reservesstatement. Details of each qualied petroleumreserves and resources evaluator’s employment andprofessional organisation membership are set out innote 14 of this reserves statement; andb as a whole has been approved by Barbara Pribyl,who is a qualied petroleum reserves and resourcesevaluator and whose employment and professionalorganisation membership details are set out in note14 of this reserves statement; andc is issued with the prior written consent of Barbara
Pribyl as to the form and context in which theestimated petroleum reserves and contingentresources and the supporting information arepresented.2 The estimates of petroleum reserves and contingentresources contained in this reserves statement areas at 31 December 2019.3 Santos prepares its petroleum reserves and contingent
resources estimates in accordance with the 2007Petroleum Resources Management System (PRMS)sponsored by the Society of Petroleum Engineers (SPE).4 This reserves statement is subject to risk factors
associated with the oil and gas industry. It is believedthat the expectations of petroleum reserves andcontingent resources reected in this statement arereasonable, but they may be aected by a range ofvariables that could cause actual results or trendsto dier materially, including but not limited to: priceuctuations, actual demand, currency uctuations,geotechnical factors, drilling and production results,gas commercialisation, development progress, operatingresults, engineering estimates, loss of market, industrycompetition, environmental risks, physical risks,legislative, scal and regulatory developments, economicand nancial markets conditions in various countries,approvals and cost estimates.5 All estimates of petroleum reserves and contingent
resources reported by Santos are prepared by, or underthe supervision of, a qualied petroleum reserves andresources evaluator or evaluators. Processes aredocumented in the Santos Reserves Policy, which isoverseen by a Reserves Committee. The frequency ofreviews is dependent on the magnitude of the petroleumreserves and contingent resources and changes indicatedby new data. If the changes are material, they arereviewed by the Santos internal technical leaders andexternally audited.6 Santos engages independent experts Ganey, Cline &
Associates, Netherland, Sewell & Associates, Inc. andRISC Advisory Pty Ltd to audit and/or evaluate reservesand contingent resources. Each auditor found, based onthe outcomes of its respective audit and evaluation, andits understanding of the estimation processes employedby Santos, that Santos’ 31 December 2019 petroleumreserves and contingent resources quantities inaggregate compare reasonably to those estimatesprepared by each auditor. Thus, in the aggregate, thetotal volumes summarised in the tables included in thisreserves statement represent a reasonable estimate ofSantos’ petroleum reserves and contingent resourcesposition as at 31 December 2019.7 Unless otherwise stated, all references to petroleum
reserves and contingent resources quantities in thisreserves statement are Santos’ net share.8 Reference points for Santos’ petroleum reserves andcontingent resources and production are dened pointswithin Santos’ operations where normal exploration andproduction business ceases, and quantities of producedproduct are measured under dened conditions prior tocustody transfer. Fuel, are and vent consumed to thereference points are excluded.9 Petroleum reserves and contingent resources are
aggregated by arithmetic summation by category andas a result, proved reserves may be a very conservativeestimate due to the portfolio eects of arithmeticsummation.
10 Petroleum reserves and contingent resources are
typically prepared by deterministic methods with supportfrom probabilistic methods.11 Any material concentrations of undeveloped petroleum
reserves that have remained undeveloped for more than5 years: (a) are intended to be developed when requiredto meet contractual obligations; and (b) have not beendeveloped to date because they have not yet beenrequired to meet contractual obligations.12 The petroleum reserves replacement ratio is the ratio ofthe change in petroleum reserves (excluding production)divided by production. Organic reserves replacementratio excludes net acquisitions and divestments.13 Information on petroleum reserves and contingent
resources quoted in this reserves statement is roundedto the nearest whole number. Some totals in the tablesmay not add due to rounding. Items that round to zeroare represented by the number 0, while items that areactually zero are represented with a dash “-“.14 Qualied Petroleum Reserves and Resources EvaluatorsNameEmployer
ProfessionalOrganisationB PribylSantos LtdSPEJ BunzSantos LtdAPEGAB CamacSantos LtdSPE, PESAC HarwoodSantos LtdPESA, AAPGS LawtonSantos LtdSPED NicolsonSantos LtdSPEN PinkSantos LtdSPED SmithNSAISPEA WhiteSantos LtdSPESPE: Society of Petroleum EngineersAPEGA: The Association of Professional Engineers andGeoscientists of AlbertaPESA: Petroleum Exploration Society of AustraliaAAPG: American Association of Petroleum GeologistsAbbreviations1Pproved reserves2Pproved plus probable reservesGJgigajoulesLNGliqueed natural gasLPGliqueed petroleum gasmmbblmillion barrelsmmboemillion barrels of oil equivalentNGLsnatural gas liquidsPJpetajoulestcftrillion cubic feetTJterajoules
Conversion factorsSales gas and ethane, 1 PJ171,937 boeCrude oil, 1 barrel1 boeCondensate, 1 barrel0.935 boeLPG, 1 tonne8.458 boe
Santos Annual Report 2019 / 17Santos Annual Report 2019 / 17
Directors’ Report
DIRECTORS’ REPORTThe Directors present their report together with the consolidated Financial Report of the consolidated entity, being Santos Limited(“Santos” or “the Company”) and its controlled entities, for the nancial year ended 31 December 2019, and the Auditor’s Reportthereon. Information in the Annual Report referred to in this report, including the Remuneration Report, or contained in a note to thenancial statements referred to in this report, forms part of, and is to be read as part of, this report.DIRECTORS, DIRECTORS’ SHAREHOLDINGS AND DIRECTORS’ MEETINGSDirectors and Directors’ shareholdingsThe names of Directors of the Company in oce at the date of this report and details of the relevant interest of each of those Directorsin shares in the Company at that date are as set out below:
SurnameOther NamesShareholdings in Santos LimitedAllenYasmin Anita48,883CowanGuy Michael33,600GallagherKevin Thomas713,298GohHock67,215GuanYu–GuthrieVanessa Ann16,437HearlPeter Roland48,808McArdleJanine Marie5,000ShiEugene–SpenceKeith William (Chairman)65,000The above-named Directors held oce during the nancial year. Mr Eugene Shi retired as a Director on 2 May 2019. Mr Yu Guan wasappointed as a Director on 3 May 2019. Ms Janine McArdle was appointed as a Director on 23 October 2019.There were no other persons who acted as Directors at any time during the nancial year and up to the date of this report. Allshareholdings are of fully paid ordinary shares. No Director holds a relevant interest in a related body corporate of Santos Limited.At the date of this report, Mr Gallagher holds 2,628,586 share acquisition rights (SARs) and 220,149 restricted deferred shares. No otherDirector holds options or SARs.Details of the qualications, experience and special responsibilities of each Director are set out in the Directors’ biographies on pages 8,9 and 10 of this Annual Report. This information includes details of other listed company directorships held during the last three years.
Directors’ Report
Santos Annual Report 2019 / 19
Directors’ meetings
The number of Directors’ meetings and meetings of committees of Directors held during the nancial year and the number of meetingsattended by each Director are set out below:
Table of Directors’ meetings
Directors’Meeting
Audit & RiskCommittee
EnvironmentHealth, Safety& SustainabilityCommittee
People &RemunerationCommittee
NominationCommitteeDirectorAttended/Held
Attended/Held
Attended/Held
Attended/Held
Attended/Held
AllenYasmin A.7 of 74 of 4n/a4 of 44 of 4CowanGuy M.7 of 73 of 4n/an/an/aGallagherKevin T.7 of 7n/a4 of 4n/an/aGohHock7 of 74 of 44 of 4n/a4 of 4Guan
Yu4 of 4n/an/a2 of 2n/aGuthrieVanessa A.7 of 7n/a4 of 44 of 4n/aHearlPeter R.7 of 7n/a4 of 44 of 44 of 4McArdle
Janine M.2 of 2n/an/an/an/aShi
Eugene0 of 31 of 1n/a1 of 1n/aSpenceKeith W.7 of 7n/an/an/a4 of 4
1 Reects the number of meetings held during the time the Director held oce, or was a member of the committee, during the year.2 Mr Yu Guan was appointed as a Director on 3 May 2019 and as a member of the People and Remuneration Committee on 21 August 2019.3 Ms Janine Marie McArdle was appointed as a Director on 23 October 2019 and as a member of the Audit and Risk Committee on 28 November 2019.4 Mr Eugene Shi retired as a Director on 2 May 2019.
Directors’ ReportDirectors’ Reportcontinued
OPERATING AND FINANCIAL REVIEW
Santos’ principal activities during 2019 were the exploration for, and development, production, transportation and marketing of,hydrocarbons. There were no signicant changes in the nature of these activities during the year. Revenue is derived primarily from thesale of gas and liquid hydrocarbons.A review of the operations and of the results of those operations of the consolidated entity during the year is as follows:
Summary of results table
2019mmboe
2018mmboe
Variance%Production volume 75.558.928Sales volume94.578.321
US$millionUS$millionProduct sales 4,0333,66010EBITDAX
2,4572,16014Exploration and evaluation expensed(103)(105)(2)Depreciation and depletion(1,000)(667)50Net impairment loss(61)(100)(39)Change in future restoration assumptions246(96)EBIT
1,2951,334(3)Net nance costs(277)(228)21Taxation (expense)/benet(344)(476)(28)Net prot/(loss) for the period and attributable to equity holders of Santos6746307Underlying prot for the period
719727(1)Underlying earnings per share (cents)
34.534.9(1)
1 EBITDAX (earnings before interest, tax, impairment, depreciation (or depletion), amortisation and exploration and evaluation expense), EBIT (earnings before interest and tax) and underlying
prot are non-IFRS measures that are presented to provide an understanding of the underlying performance of Santos’ operations. Underlying prot excludes the impacts of assetacquisitions, disposals and impairments, as well as items that are subject to signicant variability from one period to the next, including the eects of fair value adjustments and uctuationsin exchange rates. Please refer to page 23 for the reconciliation from net prot to underlying prot for the period. Underlying earnings per share represents underlying prot for the perioddivided by the weighted average number of shares on issue during the year. The non-IFRS nancial information is unaudited, however the numbers have been extracted from the auditednancial statements.
Sales volumemmboe
64.3
84.1
83.4
78.3
| 94.5 |
20172016201520182019Sales volumes of 94.5 million barrels ofoil equivalent (mmboe) were 21% higherthan the previous year reecting a full-year contribution from the acquisitionof Quadrant Energy combined withhigher volumes in the Cooper Basin andQueensland. PNG volumes recoveredfollowing the Highlands earthquake in 2018.
Product sales revenue$million
2,442
2,594
3,100
3,660
4,033
20172016201520182019Sales revenue increased 10% compared tothe previous year to $4 billion, primarily dueto higher sales volumes partially oset bylower realised prices. The average realisedoil price decreased 4% to US$72/bbl andthe average realised domestic gas pricedecreased 14% to US$4.31/GJ. LNG priceswere stable at US$9.77/mmBtu.
Production volumemmboe
57.7
61.6
59.5
58.9
Sales revenue
75.5
Production
20172016201520182019Production was up 28% to a record 75.5mmboe primarily due to the Quadrantacquisition, higher production in the CooperBasin and Queensland, and recovery inPNG production following the Highlandsearthquake in 2018. This was partially osetby the sale of Santos’ Asian assets in thesecond half of 2018.
Santos Annual Report 2019 / 21Santos Annual Report 2019 / 21
Review of operations
Santos’ operations are focused on ve core, long-life asset hubs: Cooper Basin, Queensland and NSW, Papua New Guinea, NorthernAustralia and Timor-Leste, and Western Australia.
Cooper Basin
The Cooper Basin produces natural gas, gas liquids and crude oil. Gas is sold primarily to domestic retailers, industry and for theproduction of liqueed natural gas, while gas liquids and crude oil are sold in domestic and export markets.Santos’ strategy in the Cooper Basin is to deliver production growth by being a low-cost business, increasing reserves, investing innew technology to lower development and exploration costs, increasing utilisation of infrastructure including the Moomba plant andassessing the signicant potential for carbon capture and storage.Cooper Basin20192018Production (mmboe)15.815.5Sales volume (mmboe)23.221.6Revenue (US$m) 1,1641,146Production cost (US$/boe) 7.77 8.17EBITDAX (US$m) 529518Capex (US$m)308245Cooper Basin EBITDAX of $529 million is 2% higher than 2018, primarily due to higher volumes and lower costs.Cooper Basin production increased for the second consecutive year to 15.8 mmboe. Santos’ share of sales gas and ethane productionof 61.5 petajoules (PJ) was 2% higher than the previous year (60.6 PJ) as new development activity more than oset the impact ofnatural eld decline. Santos’ share of crude oil production of 3.2 mmbbl was in-line with the previous year.
Queensland and NSWGLNG produces liqueed natural gas (LNG) for export to global markets from the LNG plant at Gladstone. Gas is also sold into thedomestic market. Santos has a 30% interest in GLNG.The LNG plant has two LNG trains with a combined capacity of 8.6 mtpa. Production from Train 1 commenced in September 2015 andTrain 2 in May 2016. Feed gas is sourced from GLNG’s upstream elds, Santos portfolio gas and third-party suppliers.The LNG plant produced 5.2 million tonnes of LNG in 2019 and shipped 87 cargoes. Annual LNG production was higher than theprevious year (4.9 million tonnes) due to the ramp-up in GLNG upstream equity gas supply.Santos aims to build GLNG gas supply through upstream development, seek opportunities to extract value from existing infrastructureand drive eciencies to operate at lowest cost.Queensland and NSW20192018Production (mmboe)13.012.2Sales volume (mmboe)22.422.0Revenue (US$m) 1,055 1,016Production cost (US$/boe) 5.51 5.77EBITDAX (US$m) 624570Capex (US$m)260244Queensland and NSW EBITDAX of $624 million increased by 9% compared to 2018. This was a result of higher volumes and lower costs.
Directors’ ReportDirectors’ ReportcontinuedPapua New GuineaSantos’ business in PNG is centred on the PNG LNG project. Completed in 2014, PNG LNG produces LNG for export to global markets,as well as sales gas and gas liquids. Santos has a 13.5% interest in PNG LNG.The LNG plant near Port Moresby has two LNG trains with the combined capacity to produce more than eight million tonnes perannum. Production from both trains commenced in 2014.The LNG plant produced 8.5 million tonnes of LNG in 2019 and shipped 111 cargoes. Annual LNG production was higher than theprevious year (7.4 million tonnes) due to recovery from the 2018 earthquake.Santos’ strategy in PNG is to work with its partners to align interests, and support and participate in backll and expansion opportunitiesat PNG LNG.PNG20192018Production (mmboe)12.811.2Sales volume (mmboe)12.110.8Revenue (US$m) 663630Production cost (US$/boe)6.236.23EBITDAX (US$m) 540506Capex (US$m)5139PNG EBITDAX of $540 million increased 7% compared to 2018, mainly due to the resumption of normal operations during 2019, notinterrupted by the earthquake that occurred in 2018.Northern Australia and Timor-LesteSantos’ business in northern Australia is focused on the Bayu-Undan/Darwin LNG (DLNG) project. In operation since 2006, DLNGproduces LNG and gas liquids for export to global markets. Santos has an 11.5% interest in DLNG.The LNG plant near Darwin has a single LNG train with a capacity of 3.7 mtpa. The plant produced 2.9 million tonnes of LNG in 2019 andshipped 46 cargoes. Annual LNG production was lower than the previous year (3.3 million tonnes), in-line with the shipping schedule.Santos’ strategy in northern Australia is to support plans to progress Darwin LNG backll, expand the Company’s acreage footprint andappraise the onshore McArthur Basin.In October 2019, Santos announced the acquisition of ConocoPhillips’ business in northern Australia and Timor-Leste, includingDarwin LNG, Bayu-Undan, Barossa and Poseidon for $1.39 billion plus a $75 million contingent payment subject to FID on Barossa.The acquisition provides operating interests in long-life, low-cost natural gas assets and strategic LNG infrastructure consistent withSantos’ core asset growth strategy. The acquisition will increase Santos’ interests in DLNG to 68.4% and Barossa to 62.5%, beforeany subsequent sell-downs. Completion is expected around the end of the rst quarter of 2020, subject to third-party consents andregulatory approvals.The Barossa project is planned to backll Darwin LNG. Successful development of Barossa would extend the operating life of DarwinLNG for more than 20 years and signicantly increase Santos’ production in northern Australia.Santos also intends to appraise the onshore gas potential of the McArthur Basin in the Northern Territory in 2020 with two horizontalwells planned.Northern Australia and Timor-Leste20192018Production (mmboe)3.13.7Sales volume (mmboe)3.13.6Revenue (US$m) 165183Production cost (US$/boe) 21.75 20.17EBITDAX (US$m) 102116Capex (US$m)5066Northern Australia and Timor-Leste EBITDAX of $102 million was 12% lower than 2018 due to lower sales volumes and lower realisedLNG pricing.
Santos Annual Report 2019 / 23Santos Annual Report 2019 / 23
Western Australia
Santos is one of the largest producers of domestic natural gas in Western Australia and is also a signicant producer of oil and naturalgas liquids.In late 2018, Santos completed the acquisition of Quadrant Energy for $2.15 billion plus contingent payments related to the BedoutBasin. Quadrant signicantly strengthened Santos’ position in Western Australia, including 100% ownership and operatorship of theVaranus Island and Devil Creek domestic gas hubs, and a leading position in the highly prospective Bedout Basin.Santos successfully completed the appraisal of the Dorado eld (Santos 80% interest) in the Bedout Basin in 2019. A FEED-entrydecision for a potential Dorado development is targeted for the second quarter of 2020.Western Australia20192018Production (mmboe)30.912.5Sales volume (mmboe)30.413.0Revenue (US$m) 955422Production cost (US$/boe)7.308.68EBITDAX (US$m) 684283Capex (US$m)27093Western Australia EBITDAX of $684 million was 142% higher than 2018.Gas and liquids production in Western Australia was signicantly higher in 2019 due to the Quadrant acquisition. Santos’ share of gasproduction was up 130% to 145 PJ, while oil production increased by 370% to 4.5 mmbbl.
Net prot
The 2019 net prot attributable to equity holders of Santos Limited of $674 million is $44 million higher than the net prot of $630million in 2018. This increase is primarily due to lower impairment losses of $46 million after tax ($94 million in 2018) and higher salesrevenue as a result of higher volumes, partly oset by lower realised pricing.Net prot includes items before tax of $59 million ($45 million after tax), as referred to in the reconciliation of net prot to underlyingprot below. Underlying prot was $719 million, $8 million lower than 2018.
Reconciliation of net prot/(loss) to underlying prot
2019 US$million2018 US$millionGrossTaxNetGrossTaxNetNet prot after tax attributable to equity holders of Santos Limited 674630Add/(deduct) the following:
Net gains on sales of non-current assets(12)4(8)(112)18(94) Impairment losses61(15)46100(6)94Fair value adjustments on embedded derivatives and hedges4(1)32-2 Fair value adjustments on commodity hedges6(2)467(21)46 Costs associated with acquisitions and disposals–––58(9)49
59(14)45115(18)97Underlying prot
7197271 Underlying prot is a non-IFRS measure that is presented to provide an understanding of the underlying performance of Santos’ operations. The measure excludes the impacts of assetacquisitions, disposals and impairments, as well as items that are subject to signicant variability from one period to the next, including the eects of fair value adjustments and uctuationsin exchange rates. The non-IFRS nancial information is unaudited, however the numbers have been extracted from the nancial statements which have been subject to audit by theCompany’s auditor.
Directors’ Report
Financial positionSummary of nancial position
2019US$million
2018US$million
VarianceUS$millionExploration and evaluation assets1,187981206Oil and gas assets and other land, buildings, plant and equipment11,61911,402217Restoration provision(2,282)(2,093)(189)Other net assets/(liabilities)
456308148Total funds employed 10,98010,598382Net debt
(3,325)(3,549)224Net tax assets/(liabilities)
21230(209)Net assets/equity7,6767,2793971 Other net assets/(liabilities) comprises trade and other receivables, prepayments, inventories, other nancial assets, share of investments in joint ventures, oset by trade and other
payables, deferred income, provisions and other nancial liabilities.2 Net debt reects the net borrowings position and includes interest-bearing loans, net of cash and interest rate and cross-currency swap contracts.3 Net tax assets/(liabilities) comprises deferred tax assets and tax receivable, oset by deferred tax liabilities and current tax payable.Impairment of assetsDuring the Company’s regular review of asset carrying values, Santos undertook an impairment review as part of the preparation of its2019 full-year accounts.At 31 December 2019, non-cash, after-tax impairment losses of $46 million were recognised. The total after-tax impairment losses relateto the impairment of late-life producing assets and exploration and evaluation assets.Exploration and evaluation assets
Exploration and evaluation assets were $1,187 million compared to $981 million at the end of 2018, a increase of $206 million, due to theacquisition of Quadrant Energy, 2019 capital expenditure, including drilling in Dorado, Roc South-1, Barossa Caldita and South Amadeus,along with evaluation studies, in addition to acquisition costs comprising interests in Muruk and South Nicholson; oset by impairmentlosses before tax of $24 million and exploration and evaluation expenses of $24 million.Oil and gas assets and other land, buildings, plant and equipmentOil and gas assets and other land and buildings, plant and equipment of $11,619 million were $217 million higher than in 2018 mainly dueto the right-of-use assets raised as a result of the adoption of AASB 16 Leases accounting standard, and 2019 capital expenditure acrossCooper Basin, GLNG, WA Oshore and PNG; oset by depreciation and depletion charges.Restoration provisionRestoration provision balances have increased by $189 million to $2,282 million mainly due to a change in discount rates, oset byrevised restoration cost estimates and favourable exchange dierences.Net debt
Net debt of $3,325 million was $224 million lower than at the end of 2018 primarily as a result of the repayment of debt facilities during2019, oset by the issue of a new Reg-S bond and free cash ow before asset acquisitions and divestments of $1,138 million.
Net tax assets/(liabilities)Net tax assets/(liabilities) of $21 million have decreased by $209 million in comparison to 2018 primarily as a result of the nalisation ofthe acquisition of Quadrant Energy and associated tax bases, and the utilisation of carry-forward tax losses recognised by the group.Net assets/equity
Total equity increased by $397 million to $7,676 million at year end. The increase primarily reects the net prot after-tax attributable toowners of Santos of $674 million, partially oset by payments of dividends to shareholders of $251 million.Future commitmentsDue to the nature of Santos’ operations, the Company has future obligations for capital expenditure, for which no amounts have beenprovided in the nancial statements. Santos also has certain requirements to perform minimum exploration work and spend minimumamounts of money pursuant to the terms of the granting of petroleum exploration permits in order to maintain rights of tenure. Theminimum exploration commitments are less than the normal level of exploration expenditures expected to be undertaken by theCompany.
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Santos Annual Report 2019 / 25Santos Annual Report 2019 / 25
Oil price hedgingThe objectives of Santos’ oil price hedging policy are to reduce the eect of commodity price volatility and support annual capitalexpenditure plans. The Company will continue to monitor commodity market conditions and will enter hedging transactions asappropriate.As at 31 December 2019, the Company has hedged 6.2 million barrels of production, using a re-participating three-way option structurewith an average oor price of $54.19/bbl, a temporary ceiling of $69.03/bbl and re-participation at $76.78/bbl.Business strategy and prospects for future nancial yearsBusiness strategySantos’ clear and consistent Transform, Build, Grow strategy drives shareholder value by utilising a disciplined, low-cost operating modelto deliver strong cash ows through the oil price cycle. Five core, long-life asset hubs sit at the heart of the Company’s operations, eachwith signicant upside potential.The successful execution of the strategy since 2016 has transformed the Company into a safe, reliable and low-cost producer positionedfor disciplined growth and sustainable shareholder returns.Disciplined execution combined with targeted acquisitions have reduced the Company’s breakeven oil price, which was approximatelyUS$29 per barrel in 2019, and delivered operated interests in long-life, low-cost assets and strategic LNG infrastructure.The Company is now positioned for disciplined growth leveraging existing infrastructure in all ve core asset hubs and is targeting annualproduction of 120 mmboe by 2025, more than double the output in 2018.This disciplined growth portfolio includes:
? Barossa LNG? Dorado liquids? PNG LNG expansion? GLNG ramp-up to ~6.2 mtpa sales from 2020? Cooper Basin production growthSantos is also executing a focused exploration strategy to identify new high-value targets and unlock future core assets.The Company is also focused on generating new revenue through maximising utilisation of its infrastructure and implementing low-carbon energy solutions projects such as carbon capture and storage.Prospects for future nancial yearsSantos has a clear strategy and a solid platform for growth. The business focus is aligned with the strategy as the Company continuesto drive eciencies through the low-cost operating model and progress growth opportunities across the ve core asset hubs. This focuswill enable Santos to remain a low-cost and high-performing business with signicant upside opportunities across the portfolio.Natural gas is expected to supply a quarter of the world’s total energy demand by 2040, according to forecasts from the InternationalEnergy Agency. Santos remains condent in the long-term underlying demand for energy and particularly natural gas due to Asianeconomic growth, the rising global population, rapid urbanisation in developing economies and growing demand for lower-emissionsfuels. Through its Energy Solutions business, Santos is also investing in projects to lower emissions and assessing the signicantpotential for carbon capture and storage in the Cooper Basin.Santos expects 2020 sales volumes to be in the range of 99–107 mmboe and production to be in the range of 79–87 mmboe. Capitalexpenditure is expected to be approximately $1.5 billion. 2020 guidance assumes completion of the acquisition of ConocoPhillips’business in Northern Australia and Timor-Leste and expected sell-down of 25% interests in Bayu-Undan and Darwin LNG both occur atthe end of the rst quarter of 2020.Material business risks
The achievement of Santos’ purpose and vision, business strategy, production growth outlook and future nancial performance issubject to various risks including the material business risks summarised below. Santos undertakes steps to identify, assess and managethese risks and operates under a Board-approved enterprise-wide Risk Management Framework.This summary is not an exhaustive list of all risks that may aect the Company, nor have they been listed in any particular order ofmateriality.
Directors’ Report
Strategic risksVolatility in oil and gas pricesSantos’ business relies primarily on the production and sale of oil and gas products (including LNG) to a variety of buyers under a rangeof short-term and long-term contracts. The majority of oil and gas produced (or to be produced) in Santos’ portfolio will be sold undersales contracts where the sale price is linked to the global price of oil. Lower global oil prices will therefore reduce Santos’ revenues andthe protability of its operations.Global oil prices are aected by numerous factors beyond the Company’s control and historically these have uctuated widely. Santos’three-tiered strategy, Operating Model and Hedging Policy introduced in 2016 directly address oil price risk to build resilience to oil priceuctuations. This includes a clear focus on cash ow management, operational and cost eciencies, debt reduction and productiongrowth opportunities.Santos’ acquisition of Quadrant in 2018 adds conventional domestic natural gas assets backed by medium- to long-term CPI-linkedotake contracts to complement Santos’ predominantly oil-linked revenues.Oil and gas reserves developmentCalculations of recoverable oil and gas reserves and resources contain signicant uncertainties, which are inherent in the reservoirgeology, seismic and well data available and other factors such as project development and operating costs, together with commodityprices. A failure to successfully develop existing reserves may impact Santos’ ability to fully support LNG, gas or oil under customercontracts.Santos has adopted a reserves management process that is consistent with the Society of Petroleum Engineers’ Petroleum ResourceManagement System. The Company’s reserves and resources estimations are subject to independent audits and evaluations on a rollingbasis.Santos applies an integrated management system across all aspects of business performance, including reserves estimation and delivery.Progress against key reserves metrics is routinely reviewed by senior management and the Board, and reserves estimates are publishedannually (pages 14 to 17).Exploration and reserves replacementSantos’ long-term prospects are also directly related to the success of eorts to replace existing oil and gas reserves as they aredepleted through production, from either exploration or acquisition. Exploration activities are subject to geological and technologicaluncertainties and the failure to replace utilised reserves is a risk inherent in the industry.Exploration risks are managed through an established exploration prospect evaluation methodology and risking process. In addition,business development processes identify, review and progress opportunities to build reserves through acquisition in support of theCompany’s strategy to Transform, Build and Grow the business.Demand and marketThe demand for oil, gas, LNG and other products Santos markets may be adversely aected by a range of external factors includingcompetition from alternative suppliers or other sources of energy supply, and changes in consumer behaviour or government policy.A robust business strategy development and review process considers independent oil, gas and LNG market forecasts, and otherrelevant macro-economic factors, to assess the Company’s portfolio under a range of scenarios, to enable the delivery of plans insupport of the Company’s purpose and vision.Project developmentInvestment is undertaken in a variety of oil and gas projects to extract, process and supply oil and gas to a variety of customers,including long-term high-volume contracts to supply feedstock gas to the GLNG project. Failure to deliver or protracted delays indelivering projects may occur for various reasons, including unanticipated economic, nancial, operational, engineering, technical,environmental, contractual, regulatory, community and/or political events. Delays, changes in scope, cost increases or poor performanceoutcomes pose risks that may impact the Company’s nancial performance.Santos has comprehensive project management and governance, risk management and reporting practices in place. Progress andperformance of material projects is regularly reviewed by senior management and the Board.Joint venture arrangementsMuch of Santos’ business is carried out through joint ventures. The use of joint ventures is common in the oil and gas exploration andproduction 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 materialimpact on Santos’ business. The failure of joint venture partners to meet their commitments and share costs and liabilities can result inincreased costs to Santos.
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Santos Annual Report 2019 / 27Santos Annual Report 2019 / 27
Santos has dened critical expectations and requirements for participation in and operation of joint ventures in order to optimise theCompany’s commercial and operational interests. The Company works closely with its joint venture partners to reduce the risk ofmisalignment in joint venture activities.Operational risks
Technical and engineeringSantos is exposed to risks in relation to its ongoing oil and gas exploration and production activities, such as failure of drilling andcompletions equipment, pipeline and facilities integrity failures, major processing or transportation incidents, release of hydrocarbonsor other substances, security incidents and other well control and process safety risks, which may have an adverse eect on Santos’protability and results of operations.An integrated management system is applied across all operational activities to manage and monitor operations performance andmaterial risk controls. The management system includes all relevant technical, operational, asset reliability and integrity standards andincident management standards and competency requirements. The system is designed to ensure the Company meets regulatory andindustry standards in all operations.Access and licence to operateSantos has interests in areas that may be subject to claims by communities and landowners, who may have concerns over the social orenvironmental impacts of oil and gas operations or the distribution of oil and gas royalties and access to mining- and petroleum-relatedbenets. This has the potential to impact on land access or result in community unrest and activism and may adversely impact on theCompany’s reputation.A number of Santos interests are subject to one or more claims or applications for native title determination. In Australia, compliancewith the requirements of the Native Title Act 1993 (Cth) can delay the grant of mineral and petroleum tenements and subsequenttiming of exploration, development and production activities.Santos and its operating joint venture partners work closely with all relevant stakeholders, including governments, communities,landowners and indigenous groups, to ensure all concerns are fairly addressed and managed, and Santos’ operations benet from theirsupport. In addition, Santos and its operating joint venture partners develop and employ security and risk management plans, and arecommitted to conducting operations in a way that protects the security of its personnel, facilities and operations.Santos has a long history of safe and sustainable operations working with communities and landholders across the country. Land accessagreements are in place and a team of experienced community and land access representatives work with Aboriginal stakeholders,landholders and communities to ensure that issues are understood and addressed appropriately.Cyber securityCyber security risks, including threats to information and operational systems from computer viruses, unauthorised access, cyber-attackand other similar disruptions, have evolved rapidly and can impact all sectors of the economy, including the energy sector. The increasingtechnological advances in operations require monitoring and protection to ensure cyber security threats are appropriately managedand prevented. Cyber security risks may lead to disruption of critical business processes, a breach of privacy and theft of commerciallysensitive information. A cyber event may lead to adverse impacts on Santos’ protability and reputation.Focused cyber security risk management is incorporated into Santos’ risk management and assurance processes and practices acrossthe Company’s business and operational information management systems.WorkforceSantos’ future success is signicantly inuenced by the expertise and continued service of certain key executives and technicalpersonnel. An inability to attract or retain such personnel could adversely aect business continuity and, as such, employmentarrangements and succession plans are designed to secure and retain the services of key personnel. Key workforce metrics andsuccession plans are routinely reviewed by senior management and the Board.
Environmental, safety and sustainability risks
Health, safety and environmentThe size, nature and complexity of Santos’ operations pose risks in relation to the health and safety of employees and contractors, and arange of environmental risks exist when carrying out exploration and production activities. Environmental incidents, and real or perceivedthreats to the environment or the amenity of local communities, could result in a loss of Santos’ licence to operate, leading to delays,disruption or the shut-down of exploration and production activities.Santos has a comprehensive approach to management of health, safety and environmental risks. The Company’s management systemintegrates technical and engineering requirements with personal health and safety requirements to comprehensively manage health,safety and environmental risks within Company operations.
Directors’ Report
Climate changeSantos anticipates its activities will be subject to increasing regulation and costs associated with climate change and the management ofcarbon emissions.Strategic, regulatory and operational risks and opportunities associated with climate change are incorporated into policy, strategy andrisk management processes and practices. The Company actively monitors current and emerging climate change risk and proactivelytakes steps to prevent and mitigate any impacts on its objectives and activities. Reduction of waste and emissions is an integral part ofdelivery of cost eciencies and forms part of the Company’s routine operations.Financial risks
The nancial risk management strategy seeks to ensure that Santos is able to fund its corporate objectives and meet its obligationsto stakeholders. Financial risk management is carried out by a central treasury department that operates in line with a Board-approved policy and framework. The framework and principles for overall nancial risk management address specic nancial risks,such as commodity price risk, foreign exchange risk, interest rate risk and credit risk, approved derivative and non-derivative nancialinstruments, and liquidity management.An oil price hedging policy is in place with the objective of reducing the eect of commodity price volatility and to support annual capitalexpenditure plans. Santos continues to monitor commodity market conditions and will enter hedging transactions as appropriate.Foreign currencyForeign exchange risk arises from commercial transactions and valuations of assets and liabilities that are denominated in a currencythat is not the entity’s functional currency.Exposure to foreign currency risk arises principally through the sale of products denominated in currencies other than the functionalcurrency, and capital and operating expenditure incurred in currencies other than US$, principally A$. Santos also holds investmentinterests in domestic operations whose net assets are exposed to foreign currency translation risk.A foreign currency hedging policy is in place with the objective of reducing the eect of foreign currency exchange rate volatility andto support annual capital expenditure plans. Santos continues to monitor foreign currency market conditions and will enter hedgingtransactions as appropriate.CreditCredit risk represents a potential nancial loss if counterparties fail to perform as contracted, and arises from investments in cash andcash equivalents, derivative nancial instruments and deposits with banks and nancial institutions. Credit exposures exist to customersin the form of outstanding receivables and committed transactions.Access to capital and liquiditySantos’ business and, in particular, the development of large-scale projects, relies on access to debt and equity nancing. The ability tosecure nancing, or nancing on acceptable terms, may be adversely aected by volatility in the nancial markets. These eects may beglobal or aecting a particular geographic region, industry or economic sector. Access to debt and equity funding may also be negativelyaected by a downgrade in its credit rating.Santos had $3.0 billion in liquidity (cash and undrawn bilateral bank facilities) available as at 31 December 2019.Contract and counterparty risksAs part of its ongoing commercial activities, Santos is party to a number of material contracts including nance agreements,infrastructure access agreements, agreements for the sale and purchase of hydrocarbon, transportation agreements, joint ventureagreements, and engineering, procurement and construction (EPC) contracts. Santos also enters into sale and purchase contracts withthird parties for the sale and purchase of natural gas, LNG and other products.The economic eects of these contracts over their term may be impacted by uctuations in commodity prices, price reviews,operational performance and other market conditions. Failure to perform material obligations under these contracts by Santos and/orthe applicable counterparties, or to secure any extensions or amendments to these contracts, may result in a material impact on Santos’operations and nancial results.Santos tracks key contractual obligations and monitors performance across its material contracts.
Political and legal risksPolitical, legal and regulatorySantos’ business is subject to various laws and regulations in each of the jurisdictions in which it operates that relate to thedevelopment, production, marketing, pricing, transportation and storage of its products. A change in the laws which apply to theCompany’s business, or the way in which it is regulated, could have a materially adverse eect on Santos’ business, on the results of
Directors’ Reportcontinued
Santos Annual Report 2019 / 29Santos Annual Report 2019 / 29
operations and the Company’s nancial performance. For example, a change in taxation laws, environmental laws or land access lawscould have a material eect on the Company.The domestic gas business and GLNG project, including its ability to purchase gas, develop future growth projects and meet supplycommitments’, may also be adversely impacted by any governmental intervention, including limitations on LNG export volumes and theredirection of gas from export to domestic markets. Any such intervention may also have broader implications for the future of the gasindustry in Australia.Continuous monitoring of legislative and regulatory changes and associated risks is undertaken and regular engagement with regulatorsand governments supports the management of risks arising from these changes.Litigation and disputeThe nature of Santos’ business means that it is likely to be involved in litigation or regulatory actions arising from a wide range ofmatters. Santos may also be involved in investigations, inquiries or disputes, debt recoveries, commercial and contractual disputes, nativetitle claims, land tenure and access disputes, environmental claims or occupational health and safety claims. Any of these claims oractions could result in delays, increase costs or otherwise adversely impact Santos’ assets and operations, and adversely impact Santos’nancial performance and future nancial prospects.Santos has an experienced legal team that monitors and manages potential and actual claims, actions and disputes.Material prejudice
As permitted by sections 299(3) and 299A(3) of the Corporations Act 2001 (Cth), Santos has omitted some information from the aboveOperating and Financial Review in relation to the Company’s business strategy, future prospects and likely developments in operationsand the expected results of those operations in future nancial years on the basis that such information, if disclosed, would be likely toresult in unreasonable prejudice (for example, because the information is premature, commercially sensitive, condential or could give athird party a commercial advantage). The omitted information typically relates to internal budgets, forecasts and estimates, details of thebusiness strategy, and contractual pricing.Forward-looking statementsThis report contains forward-looking statements, including statements of current intention, opinion and predictions regarding theCompany’s present and future operations, possible future events and future nancial prospects. While these statements reectexpectations at the date of this report, they are, by their nature, not certain and are susceptible to change. Santos makes norepresentation, assurance or guarantee as to the accuracy of or likelihood of fullling any such forward-looking statements (whetherexpress or implied) and, except as required by applicable law or the ASX Listing Rules, disclaims any obligation or undertaking to publiclyupdate such forward-looking statements.SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS
The Material Business Risks section (pages 25 to 29) refers to risks which, if materialised, may have a signicant eect on the state ofaairs of the Company.
Dividends
On 19 February 2020, the Directors resolved to pay a fully franked nal dividend of US5 cents per fully paid ordinary share on 26 March2020 to shareholders registered in the books of the Company at the close of business on 26 February 2020 (“Record Date”). This naldividend amounts to approximately US$104 million. The Board also resolved that the Dividend Reinvestment Plan (DRP) will not be inoperation for the 2019 nal dividend.In addition, a fully franked interim dividend of US6 cents per share was paid to members on 26 September 2019. The DRP was not inoperation for the interim dividend.
Environmental regulationThe consolidated entity’s Australian operations are subject to various environmental regulations under Commonwealth, state andterritory legislation. Applicable legislation and requisite environmental licences are specied in the consolidated entity’s EHS ComplianceDatabase, which forms part of the consolidated entity’s overall management system. Environmental compliance performance ismonitored on a regular basis and in various forms, including audits conducted by regulatory authorities and by the Company, eitherthrough internal or external resources.On 19 March 2019, Santos received a penalty infringement notice and $12,615 ne from the Queensland Department of Environmentand Science for a loss of pond hydraulic integrity incident.On 27 June 2019, Santos received two penalty infringement notices and two nes totalling $26,100 from the Queensland Department ofEnvironment and Science for an unauthorised release of contaminants to land and failure to operate measures, plant and equipment in aproper and eective manner.
Directors’ Report
On 20 September 2019, Santos received a penalty infringement notice and $13,055 ne from the Queensland Department ofEnvironment and Science for a produced water release to a watercourse.On 8 November 2019, Santos received a penalty infringement notice and $13,345 ne from the Queensland Department of Environmentand Science for a black smoke release causing an environmental nuisance.The consolidated entity undertook corrective measures in respect of the infringements to prevent re-occurrences.POST BALANCE DATE EVENTSOn 19 February 2020, the Directors of Santos Limited resolved to pay a nal dividend on ordinary shares in respect of the 2019 nancialyear. The nancial eect of these dividends has not been brought to account in the full-year Financial Report for the year ended31 December 2019.SHARES UNDER OPTION AND UNVESTED SHARE ACQUISITION RIGHTS (SARS)Options
There are no unissued ordinary shares of Santos Limited under options at the date of this report.Unvested SARsUnissued ordinary shares of Santos Limited under unvested SARs at 31 December 2019 are as follows:
Date SARs grantedNumber of shares under unvested SARs14 June 20163,828,28617 March 20173,506,50719 May 2017671,64129 September 2017492,66021 March 20182,737,4551 April 2018700,4527 May 2018520,1839 July 2018407,33614 November 20187,64915 March 20192,595,42312 April 201948,23418 April 2019469,9879 May 2019637,6317 June 201949,77218 July 201910,73424 July 2019567,87620 August 201926,36430 August 20191,271,5494 October 2019238,023
18,787,762Since 31 December 2019, 28,923 additional SARs have been granted over unissued ordinary shares of Santos Limited.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 thevesting of the SAR. Further details regarding the SARs (including when they will lapse) are contained in the Remuneration Reportcommencing on page 32 of this report and in note 7.2 to the Financial Report.
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Santos Annual Report 2019 / 31Santos Annual Report 2019 / 31
SHARES ISSUED ON THE EXERCISE OF OPTIONS AND ON THE VESTING OF SARSOptionsNo options were exercised during the year ended 31 December 2019 or up to the date of this report.Vested SARsThe following ordinary shares of Santos Limited were allocated during the year ended 31 December 2019 on the vesting of SARs grantedunder the Santos Employee Equity Incentive Plan (SEEIP) (formerly known as the Santos Employee Share Purchase Plan (SESPP)) andShareMatch Plan (ShareMatch). No amount is payable on the vesting of SARs and accordingly no amounts are unpaid on any of theshares.Date SARs grantedNumber of shares issued31 August 2016560,56019 April 201780,57129 September 201715,3729 July 201810,53214 November 20187,65024 July 20191,636
676,321Since 31 December 2019, no ordinary shares of Santos Limited have been allocated on the vesting of SARs granted under the SEEIP andShareMatch.
DIRECTORS’ AND SENIOR EXECUTIVES’ REMUNERATIONDetails 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 nancial year) are set out in the Remuneration Report commencing on page 32of this report and in notes 7.2 and 7.3 to the Financial Report.
Directors’ Report
MESSAGE FROM YASMIN ALLEN, PEOPLE AND REMUNERATION COMMITTEE CHAIRDear fellow Shareholders,On behalf of the Board, I am pleased to introduce Santos’ Remuneration Report for 2019.The purpose of this introductory message is to summarise key remuneration outcomes for 2019 and the link to Santos’ performance.
I also want to ag the outcomes of a review of Santos’ Executive Reward Strategy and some changes to reward arrangements for2020 onwards, which will further align Executive reward at Santos with performance and shareholder interests.Your Company has performed very strongly in 2019 including the delivery of:
? improved safety and environmental performance;? record annual production, sales volumes and sales revenue;? strong onshore performance driven by the continued focus on our disciplined operating model;? successful appraisal of the Dorado eld oshore Western Australia adding signicant resources;? record free cash ow and lower production costs; and? announcement of the acquisition of ConocoPhillips’ northern Australia and Timor-Leste assets.Following assessment of the Company’s performance in 2019, the Board has approved a Company Scorecard result of 120% of its targetperformance level out of a possible 167%. This has been used to determine Short-Term Incentive (STI) awards. Further detail on the KPIsand performance assessment is available in Table 3 on page 41.Long-Term Incentive (LTI) awards granted in 2016 were tested following the end of their four-year performance period at 31 December2019. The Company delivered Total Shareholder Return outcomes which placed it in the top quartile against both the ASX100 and the S&PGlobal 1200 Energy Index comparator groups. The Company also achieved Free Cash Flow Breakeven Point of US$23.72 in 2019, comparedto the circa US$50/boe at the time of grant and a Return on Average Capital Employed of 139% of Weighted Average Cost of Capital. As aresult 100% of the 2016 LTI awards vested. This followed eight consecutive years of the LTI not vesting and reects the strong turnaroundachieved since 2016.Realised Remuneration outcomes for 2019 are shown in Table 11 on page 47. Realised Remuneration includes the value of equity-relatedawards which vested during the year, valued at the share price on the vesting date, which includes the value of share price appreciationbetween award and vesting.Nearly three-quarters (72%) of the CEO’s Realised Remuneration for 2019 as disclosed in Table 11 resulted from performance related equityawards which vested in full. The value at vesting included signicant share price appreciation between the awards being granted (in 2016 inrespect of the LTI and 2018 in respect of the Deferred 2017 STI) and vesting, demonstrating strong alignment with shareholders.The Board believes that total remuneration outcomes are aligned with the Company’s performance in 2019 and the signicant value whichhas been generated for shareholders.EXECUTIVE REWARD STRATEGY REVIEW AND CHANGES TO REWARD ARRANGEMENTS FOR 2020 ONWARDSA holistic review of the Company’s Reward Strategy was conducted during 2019. The review identied several opportunities to strengthen thealignment of Executives and shareholders and further drive a performance culture which will be implemented for 2020 including the following:
? A Minimum Shareholding Requirement has been introduced which will require the CEO and Executive Vice Presidents to build over a
ve-year period and then maintain, a minimum shareholding of Santos shares. The minimum shareholding is set as a xed number of shareswhich for the CEO is approximately three times annual Total Fixed Remuneration (TFR) and for Executive Vice Presidents is approximatelyone and a half times the average TFR. These levels of minimum shareholdings are signicant, compared to typical market practice.? The proportion of pay at risk and linked to performance will be increased within the overall mix. The target xed pay positioning forExecutive remuneration will be set below market median, with incentives set at a level that delivers competitive total remunerationcontingent on the delivery of Santos’ disciplined operating model and the challenging performance targets on the Company Scorecardand Long-Term Incentive awards. The impact of these changes is described further in section 4 of the Remuneration Report.? The Free Cash Flow Breakeven Point (FCFBP) and Return on Average Capital Employed (ROACE) performance conditions attaching
to 2020 LTI awards are being made more challenging to reect the signicant improvements in company performance realised in recentyears. For the 2020 LTI award, the FCFBP at which full vesting is achieved is being reduced from US$35/boe to US$30/boe. Thresholdvesting of the ROACE component will only occur if ROACE is more than 110% of Weighted Average Cost of Capital (it was 100% for the2019 awards) and 100% vesting will only be achieved if ROACE is equal to or greater than 140% of Weighted Average Cost of Capital(compared to 120% for the 2019 awards).Thank you for taking the time to review our Remuneration Report.
Yasmin Allen
Chair, People and Remuneration Committee
Remuneration Report
Santos Annual Report 2019 / 33Santos Annual Report 2019 / 33
The Directors of Santos present this Remuneration Report for the consolidated entity for the year ended 31 December 2019. Theinformation provided in this Report has been audited as required by section 308(3C) of the Corporations Act 2001 (Cth) (CorporationsAct) and forms part of the Directors’ Report.The Remuneration Report outlines the Company’s key remuneration activities in 2019 and remuneration information for KeyManagement Personnel (KMP) of the consolidated entity for the purposes of the Corporations Act and Accounting Standards, as setout below.Remuneration is disclosed in US$ (unless otherwise indicated) with all remuneration components having been converted from A$ toUS$ using an average rate of $0.6880 for 2019 and $0.7475 for 2018. This means year-on-year changes in remuneration amounts whenstated in US$ are partly attributable to exchange rate variations and not necessarily a change in the amount paid in A$.
Report structureThe Remuneration Report is set out in the following sections
1. KMP covered by the Remuneration Report and summary of 5-year Company performance
2. Remuneration governance
3. Executive remuneration approach
4. Remuneration mix
5. Short-Term Incentive framework and 2019 outcomes
6. Long-Term Incentive and vesting outcomes
7. Realised Remuneration (non-IFRS and non-audited)
8. Statutory remuneration for Executive KMP
9. KMP equity
10. Key terms of Executive KMP employment contracts
11. Non-executive Director (NED) Remuneration
Directors’ Report
1. KMP COVERED BY THE REMUNERATION REPORT AND SUMMARY OF 5-YEAR COMPANY PERFORMANCE
KMP are the personnel who had authority and responsibility for planning, directing and controlling the activities of the Company’s majornancial, commercial and operating divisions during 2019. The KMP for 2019 are set out in Table 1.Table 1: 2019 Key management personnelExecutive KMPNon-executive DirectorsKevin Thomas Gallagher,Managing Director and Chief Executive Ocer (CEO)David Maxwell Banks, EVP Onshore Oil and GasBrett Anthony Darley, EVP Oshore Oil and GasAnthony Myles Neilson, Chief Financial Ocer (CFO)Vincent Santostefano, EVP Production OperationsPetter Undem, EVP Marketing, Trading and Commercial
Brett Kenneth Woods, EVP DevelopmentsPhilip Ambrose Byrne, EVP Marketing, Trading and Commercial
Keith William Spence, Independent non-executive ChairYasmin Anita Allen, Independent non-executive DirectorGuy Michael Cowan, Independent non-executive DirectorHock Goh, Independent non-executive DirectorYu Guan, non-executive Director
Vanessa Ann Guthrie, Independent non-executive DirectorPeter Roland Hearl, Independent non-executive DirectorJanine Marie McArdle, Independent non-executive Director
Eugene Shi, non-executive Director
1 Petter Undem commenced as KMP on 5 August 20192 Philip Byrne ceased being KMP on 4 August 20193 Yu Guan commenced as KMP on 3 May 20194 Janine McArdle commenced as KMP on 23 October 20195 Eugene Shi ceased being KMP on 2 May 2019
Table 2 sets out the Company’s performance over the past ve years in respect of key nancial and non-nancial indicators and the STIand LTI awards during this period.
Table 2: Key metrics of Company performance 2015 – 2019
20152016201720182019Injury frequency:
Total recordable case frequency2.82.23.54.54.3 Lost time injury rate
0.50.40.40.60.6 Moderate harm rate
---0.40.3Production (mmboe)57.761.659.558.975.5Reserve replacement rate – 2P organic (one-year average %)019626956Net prot/(loss) after tax
(US$m)(1,953)(1,047)(360)630674Dividends per ordinary share (cents)A 2000US 5US 11Share price – closing price on last trading day of year
(A$)3.684.025.455.488.18Company Scorecard result expressed as % of target of 100%89.3%115.3%118.0%138.8%120.0%LTI performance (% vesting) – shown against nal year of performance period0%0%0%0%100%
1 The outcome for 2018 and prior years is presented as a 3-year average. Annual performance reporting applied in 2019.2 Moderate harm rate was introduced in 2018 as the Company adopted a harm-based approach, in addition to lost time reporting for injury classication.3 2015 Net Prot After Tax (NPAT) gures have been translated from A$ to US$ at an applicable exchange rate for the year for comparison purposes following the change in the Company’s
presentation currency in 2016.4 The closing share price on the last trading day of 2014 was A$7.18.
Remuneration Reportcontinued
Santos Annual Report 2019 / 35Santos Annual Report 2019 / 35
2. REMUNERATION GOVERNANCE
The People and Remuneration Committee (Committee) oversees and formulates recommendations to the Board on the remunerationpolicies and practices of the Company generally (including the remuneration of non-executive Directors, the CEO and SeniorExecutives) and reviewing whether they are aligned to the Company’s values, strategic direction and risk appetite.The Committee operates under a Charter approved by the Board and regularly conducts a review of its performance, structure,objectives and purpose. The Committee Charter is available on the Company’s website at www.santos.com.External advisors and remuneration adviceThe Board has adopted a protocol for engaging and seeking advice from independent remuneration consultants. In 2019, someremuneration benchmarking exercises were undertaken to provide information on market remuneration levels for KMP, however noremuneration recommendations were provided by remuneration consultants.
Directors’ Report
3. EXECUTIVE REMUNERATION APPROACH
The fundamental purpose of Santos’ remuneration policy is to develop and maintain an eective remuneration framework whichsupports and reinforces the ongoing successful execution of the Transform, Build, Grow business strategy and the delivery of Vision2025. The following diagram includes adjustments to the remuneration approach which are applicable from 2020.
Attracting, motivating and retainingtalented and qualied Executives
Focusing Executives to deliversuperior performance
Align Executive and shareholderinterestsRemuneration policy objective
Total Fixed Remuneration (TFR)(base salary plus superannuation)? Remuneration levels are market-aligned against similar roles incomparable companies.? Individual remuneration is set withregard to the Executive’s role andresponsibilities and also theindividual’s experience andcompetencies.? The target market position for
xed remuneration for Executivesis below market median in linewith the Company’s cost focus.
Short-term incentive (STI)
? A signicant component of
remuneration is “at risk”. The valueto the Executive is dependent onthe Company and individualmeeting challenging targets.? Short-Term Incentive levels are set
to ensure that total compensationappropriately rewards the deliveryof Santos’ operating model andthe increasingly demanding STIscorecard metrics.? Short-term incentive outcomes
are based on a balanced scorecardof annual performance measuresaimed at delivering challengingoutcomes for the Companyacross a range of nancial, safety,environment, growth andculture KPIs.? Half (50%) of Executives’ STI
award is delivered as cashfollowing the end of theperformance year.? The other 50% is delivered in
equity, subject to a furthertwo-year restriction period.
Long-term incentive (LTI)
? Long-term incentives are delivered
as Share Acquisition Rights(SARs).? Vesting of long-term incentives is
contingent on achievingperformance hurdles that arealigned with creation of long-termshareholder value (Relative TotalShareholder Return, Return OnAverage Capital Employed and thegeneration of strong stable cashows through the oil price cycle).? Executives cannot hedge equity
incentives that are unvested orsubject to restrictions. Theseincentives are also subject toclawback.
Enabled through the Company’s Executive remuneration framework
Remuneration Reportcontinued
Santos Annual Report 2019 / 37Santos Annual Report 2019 / 37
4. REMUNERATION MIX
The remuneration mix indicates the extent to which Executive remuneration is:
? xed and not at risk;? variable and at risk.The charts below show the remuneration mix for the CEO and Senior Executives at the following performance levels:
? Minimum comprises TFR for the year only;? Target comprises TFR for the year, STI at the target level (provided half in cash and half in deferred equity vesting two years afterthe end of the performance year) and target LTI. LTI awards are allocated on a face value basis. Vesting of awards is subject to theachievement of the relevant performance conditions. The target LTI values in the charts below are shown on a “fair value” basis byapplying a 40% discount to the face value of the award; and? Maximum comprises TFR, STI at the maximum level (provided half in cash and half in deferred equity vesting two years after the endof the performance year) and the maximum LTI being the face value of the award.The value of the STI deferred equity award and LTI does not include the impact of future share price movements or dividend payments.The actual remuneration mix in any year varies with actual performance and incentive outcomes.2019 CEO remuneration quantum and mixThe remuneration quantum and mix for the CEO at minimum, target and maximum performance for 2019 is shown in Chart 1.Chart 1: 2019 CEO remuneration quantum and mix
Minimum
TargetMaximum
| 2019 CEO Remuneration |
100%1,956
02,00010,0008,0006,000
A$’0004,000
36%16%16%32%5,47725%19%19%37%7,830
? Minimum: 2019 TFR of A$1,956,150.? Target: 2019 TFR, STI at the target level (a cash award of 45% of TFR and a deferred equity award of 45% of TFR) and target LTI of90% of TFR.? Maximum: 2019 TFR, STI at the maximum level (a cash award of 75% of TFR and a deferred equity award of 75% of TFR) and the
maximum LTI award of 150% of TFR.
Directors’ Report
2019 Senior Executive remuneration mix and quantum
The remuneration quantum and mix for Senior Executives at minimum, target and maximum performance for 2019 is shown in Chart 2.Chart 2: 2019 Senior Executive remuneration quantum and mix
Multiple of TFR
Minimum
TargetMaximum
100%1.00
0.000.503.502.002.503.001.501.00
47%15%15%23%2.1135%18%18%29%2.85
Quantum is expressed as a multiple of TFR as Senior Executives have dierent TFRs.? Minimum: 2019 TFR only.? Target: 2019 TFR, STI at the target level (a cash award of 31.5% of TFR and a deferred equity award of 31.5% of TFR) and target LTIaward of 48% of TFR.? Maximum: 2019 TFR, STI at the maximum level (a cash award of 52.5% of TFR and a deferred equity award of 52.5% of TFR) andthe maximum LTI award of 80% of TFR.The STI opportunity in Mr Banks’ 2019 incentive structure diers from other Senior Executives. This is set out in Table 5.Changes to remuneration mix for 2020Following the Executive reward strategy review conducted in 2019 the incentive arrangements for the CEO and Senior Executives wererecalibrated to place a greater proportion of Executive remuneration at risk and aligned with Company performance.2020 CEO remuneration quantum and mixThe remuneration quantum and mix for the CEO at minimum, target and maximum performance for 2020 is shown in Chart 3.Chart 3: 2020 CEO remuneration quantum and mix
2019 Senior Executive Remuneration
TFRSTI CashSTI Deferred EquityLTI
2020 CEO Remuneration
A$’000
| TFRSTI CashSTI Deferred EquityLTI |
Minimum
TargetMaximum
100%2,010
02,00010,0008,0006,0004,000
32%16%16%36%6,19122%19%19%40%8,985
? Minimum: 2020 TFR of A$2,010,000.? Target: 2020 TFR, STI at the target level (a cash award of 50% of TFR and a deferred equity award of 50% of TFR) and target LTIof 108% of TFR.? Maximum: 2020 TFR, STI at the maximum level (a cash award of 83.5% of TFR and a deferred equity award of 83.5% of TFR) and
the maximum LTI award of 180% of TFR.
Remuneration Reportcontinued
Santos Annual Report 2019 / 39Santos Annual Report 2019 / 39
2020 Senior Executive remuneration quantum and mixThe remuneration quantum and mix for Senior Executives at minimum, target and maximum performance for 2020 is shown in Chart 4.Chart 4: 2020 Senior Executive remuneration quantum and mix
Multiple of TFR
| TFRSTI CashSTI Deferred EquityLTI |
Minimum
TargetMaximum
100%1.00
0.000.503.502.002.503.001.501.00
43%16%16%25%2.3531%19%19%31%3.25
Quantum is expressed as a multiple of TFR as Senior Executives have dierent TFRs? Minimum: 2020 TFR only.? Target: 2020 TFR, STI at the target level (a cash award of 37.5% of TFR and a deferred equity award of 37.5% of TFR) and targetLTI of 60% of TFR.? Maximum: 2020 TFR, STI at the maximum level (a cash award of 62.5% of TFR and a deferred equity award of 62.5% of TFR) and
the maximum LTI award of 100% of TFR.
Directors’ Report
5. SHORT-TERM INCENTIVE FRAMEWORK AND 2019 OUTCOMES
The STI framework aligns Executive interests with the delivery of the operating model and the Company’s challenging short-termoperational and nancial goals for the year. Goals are chosen to drive outcomes and behaviours that support safe operations and thedelivery of the business outcomes which will delight shareholders and lead to long-term growth in shareholder value.STI award is based on performance for a one-year period. Half (50%) of the award is provided as deferred equity, restricted for twoyears. Deferral provides increased alignment with shareholders and encourages longer-term thinking given the equity exposure.Deferred STI is forfeited if the Executive leaves the Company during the vesting period due to resignation or summary dismissal(including for fraud or misconduct). STI awards are also subject to clawback.The Company’s annual performance is assessed using the Company Scorecard. The Scorecard contains a balance of challengingnancial and operational KPIs which support the execution of the business strategy and which drive business performance. In 2019,Scorecard KPIs covered a range of areas including production, operating eciency, safety, growth and culture.The measures include lagging indicators to assess the Company’s past performance, as well as forward-looking indicators to ensure theCompany is positioning itself eectively for future growth. The Board believes that this Scorecard is balanced and focuses the CEO andSenior Executives on achieving the key outcomes necessary to deliver stronger returns to shareholders.The STI award is subject to a free cash ow gate that requires that the Company is free cash ow positive for an STI award to be made,regardless of performance against all other KPIs. This is aligned with the Company’s position to its shareholders under the DividendPolicy which is to deliver strong cash ows through the oil price cycle.The actual STI pool for the year is set by reference to the Company Scorecard result (2019 results are outlined in Table 3 on page 41).The Scorecard result is generally applied as a percentage of the target pool size (subject to the application of any Board discretion).The Company Scorecard is comprised of a range of KPIs with set threshold, target and stretch goals agreed with the Board at thestart of the performance year. The relative importance of each KPI is determined and assigned a proportionate weighting of the totalScorecard result.Each KPI receives a percentage score relative to target performance, as follows:
? 0% for performance below threshold,? 67–100% for performance between threshold and target,? 100–167% for performance between target and stretch, and? 167% for performance at or above stretch.The KPI weightings are then applied to these scores to derive a rating for each KPI. The overall Scorecard result is a weighted averageof KPI scores.The 2019 Scorecard has a maximum result of 167% of target. This maximum result can only be achieved for exceptional Companyperformance. The Board believes the above method of assessment is rigorous and provides a balanced assessment of the Company’sperformance.The People and Remuneration Committee formally assesses the Company’s performance against the overall Scorecard at the end ofeach nancial year, and this forms the basis of a recommendation to the Board.The CEO assesses Senior Executive performance and determines STI award proposals which are then formally endorsed by the Peopleand Remuneration Committee. The Board assesses the CEO’s performance and determines his STI award.
Remuneration Reportcontinued
Santos Annual Report 2019 / 41Santos Annual Report 2019 / 41
Performance against 2019 Company ScorecardThe Company’s performance against the 2019 Company Scorecard, as assessed by the Board resulted in an outcome of 120% of target.This outcome is used to set the available STI pool. Individual STI outcomes will depend on Executives’ contractual entitlements andindividual performance during the year, as detailed in Table 5 on page 43.Table 3 provides further details of Scorecard KPIs and the Company’s performance against them.Table 3: 2019 Company Scorecard – KPI performance
KPIRationalePerformance
Result(relativeto targetof 100%)
Production(30%)Production (mmboe)(adjusted for disposals)
Production is critical to theCompany’s protability which is a keymeasure of the Company’s overallperformance, underpinning annualearnings and cash ow.
Production of 75.5 mmboe deliveredat Target performance.
100%
Cost(20%)Unit production cost(US$/boe)(adjusted for disposals)
Included to ensure that the Companymaintains its cost and eciency focusfor every unit of production
Unit Production Cost US$7.24/boeexceeds Stretch performance.
167%(capped)Free cash ow breakevenpoint (FCFBP)(US$/bbl)
Included to ensure continual reductionin the Company’s cost base and toreinforce Santos’ disciplined operatingmodel.
Free Cash Flow Breakeven PointUS$23.72/bbl (including impactof hedges) exceeds Stretchperformance.
Reserves &Resources (20%)
Company 2P reserves life(years)A viable reserves position and trackrecord for maintaining and growingreserves life ensures the Companyis a more attractive and sustainablebusiness.
Company 2P Reserves Life is 13 yearsand below Threshold.
70%Cooper 2P + 2C reserves &resources life (years)
Cooper Reserves and Resources Lifeis 23 years, which is between Targetand Stretch performance.
Safety & Environment
(30%)
Personal safetyMeasured by the number ofmoderate harm injuries per millionhours worked over the 12-monthperiod.
The Company is committed toproviding a workplace without injuryor illness.
Moderate harm rate of 0.28 and nosevere harm incidents yielded stretchperformance. Moderate harm isdened as temporary disablementor medium-term impairment.Lost time injury rate was 0.57.
167%(capped)Process safety & environmentMeasured by the number ofTier 1 and Tier 2 loss ofcontainment of hydrocarbonincidents.Measured by the number ofenvironmental incidents ofmoderate or greater consequence.
The integrated target for Environmentand Process Safety represents theCompany’s commitment to reducingthe number of process safety-related incidents with potentialfor high impact consequences,and the occurrence of signicantenvironmental incidents.
There were four Tier 1 and fourTier 2 loss of containmentincidents, which is a signicantimprovement on 2018. There were noenvironmental incidents of moderateor greater consequence. Combined,the outcome exceeds Stretchperformance.
Directors’ Report
KPIRationalePerformance
Result(relativeto targetof 100%)
Sustainability (10%)
CommunityThe Company aims to make
meaningful, positive long-termcontributions in the communities itoperates.
Community sentiment remains strongin the Port Bonython, Cooper Basin,Roma and Gladstone communities,with areas requiring the greatestimprovement being Narrabri,Exmouth/Karratha and Darwin.Threshold performance was achieved.
93%
EmissionsThe Company is held to account on
emissions to air, land and water withintargets and transparent reporting, inline with the recommendations of theG20 Task Force on Climate-relatedFinancial Disclosures.
Projects implemented withinoperations resulting in 1.5% (101ktCO
e) emissions reduction. FEEDentry has been achieved for CarbonCapture and Storage, a step changeemissions reduction project. Stretchperformance was achieved.Culture and capabilityIncluded to reinforce the importance
of cultural improvement andemployee engagement as well as thedevelopment of capability to supportfuture business growth.
Capability plans were developed foreach of the business and corporatefunctions. The program for leadership,culture and diversity was agreedand the 2019 employee survey wasdelivered. This resulted in Thresholdperformance.Continuous improvementIncluded to ensure business activity
complies within the Company’s policies,procedures and management standards,and continuous improvement thereof.
Internal audits rendered an outcomeat Threshold performance.
2019 STI OUTCOME FOR THE CEO
The CEO’s performance is primarily assessed using the Company Scorecard. In determining the CEO’s nal STI payment for 2019, the Boardalso considered outcomes outside of the Scorecard and the impact of the CEO’s personal performance and leadership on corporate activitieswhich have grown shareholder value, future proofed the business, and improved leadership, culture and stakeholder engagement.Key elements that comprise the CEO’s performance include:
? the successful integration of Quadrant Energy into Santos and the realisation of signicant value accretive synergies;? strong stakeholder engagement and industry thought leadership; and? improvement of organisational capability and safety leadership.The STI amount for 2019 represents an outcome which is 132% of the target amount (79% of maximum STI opportunity). This representsa moderated amount which is slightly above the Company Scorecard outcome of 120% of target. This delivers an STI amount for 2019 ofUS$1,598,847, of which half will be awarded as cash, and the other half will be awarded as Deferred Shares, restricted for two years.2019 STI outcomes for Senior Executives
The Company performance result based on the Company Scorecard outcomes outlined above sets the size of the pool. Individual allocationsof the pool are then modied to reect individual performance and demonstration of the Santos Values.The Company’s performance against the 2019 STI Scorecard, as assessed by the Board, resulted in a score of 120% of target (72% of maximum).The 2019 STI outcomes for the Senior Executives ranged from 89% to 150% of target (53% to 90% of their maximum opportunity),depending on their individual performance contribution. Half (50%) of STI outcomes will be delivered as cash, and the other half (50%) willbe awarded as Restricted Shares, restricted for two years.Further detail of each individual Senior Executive’s outcome is provided in Table 5 on page 43.All Senior Executives had KPIs relating to environment, health, safety, culture and leadership. Role-specic KPIs by Senior Executive are setout in Table 4 below.
Remuneration Reportcontinued
Santos Annual Report 2019 / 43Santos Annual Report 2019 / 43
Table 4: Senior Executive role-specic KPIs
Note, some KPIs contain commercially sensitive information that cannot be detailed here.Senior ExecutiveKMP RoleRole-specic KPIsDM BanksEVP Onshore Oil and Gas ? Production volume and cost
? Development cost? 2C to 2P conversion rate? Wells drilled and connected? Growth strategy implementation? Achieved emission redirection targetsBA DarleyEVP Oshore Oil and Gas ? Production volume and cost
? WA and NT Capex projects? Transition of Quadrant to Santos? Achieved emission redirection targetsAM NeilsonChief Financial Ocer ? Corporate cost reduction
? Balance sheet improvement? Capital management? Finance and supply chain systems and structure? Investor relations outcomesV SantostefanoChief Operations Ocer ? Operated processing costs
? Low-cost operations and maintenance service delivery? Production support and optimisationBK WoodsEVP Developments ? Major Growth Project production targets
? Resource to reserves maturation? Operational cost eciency? Progressed Energy Solutions emission reduction projectincluding Carbon Capture and StorageP UndemFrom 5 August 2019
EVP Marketing,Trading and Commercial
? Sales (LNG, Domestic Gas and Liquids)? LNG trading? Improvements in commercial arrangementsPA ByrneFrom 1 January to 4 August 2019
EVP Marketing,Trading and Commercial
? Sales (LNG, Domestic Gas and Liquids)? LNG trading? Improvements in commercial arrangementsTable 5 sets out the individual STI outcomes for Senior Executives in 2019, as a percentage of their STI target and maximum STI opportunity.Table 5: Senior Executive 2019 STI outcomes
Target 2019 STI
(% of TFR)
Actual 2019 STI
(% of TFR)
2019 STI as a %
of Maximum
% of Maximum
STI forfeitedDirectorsKT Gallagher90%118.8%79.2%20.8%Senior ExecutivesDM Banks54%81.0%90.0%10.0%BA Darley63%79.4%75.6%24.4%AM Neilson63%90.7%86.4%13.6%V Santostefano63%71.8%68.4%31.6%P Undem
63%30.2%57.6%42.4%BK Woods63%75.6%72.0%28.0%Former Senior ExecutivePA Byrne63%55.9%53.3%46.7%1 Mr Undem's 2019 STI award is pro-rated for six months based on his appointment terms.
Directors’ Report
6. LONG-TERM INCENTIVE AND VESTING OUTCOMES
The LTI aligns the interests of Senior Executives with the creation of long-term shareholder value.The relative TSR performance criteria provide for vesting when there are strong shareholder returns against relevant peer groups. TheFCFBP and ROACE measures vest when the Company demonstrates underlying operational eciency which generates free cash owthroughout the oil price cycle, and disciplined use of capital to generate shareholder returns over a four-year period.LTI amounts are based on a set percentage of the Executive’s TFR allocated on a face value basis and provided in the form of ShareAcquisition Rights (SARs). SARs are a conditional entitlement to a fully paid ordinary share at zero price, subject to satisfaction of therelevant performance conditions.If SARs vest, shares are automatically allocated to the Executive. Nothing is payable by Executives if SARs vest. Trading in these sharesis subject to compliance with the Company’s Securities Dealing Policy and the Minimum Shareholding Requirement.The Board has discretion to settle the value of vesting SARs in cash.Share Acquisition Rights have a four-year performance period. This period represents an appropriate balance between providinga genuine and foreseeable incentive to Senior Executives and fostering a long-term view of shareholder interests.Vesting of the 2019 LTI is assessed against four equally weighted performance measures described in Table 6.Table 6: LTI performance measures and rationaleWeightingPerformance measuresDescription and Rationale25%Relative TSR measured
against companies of theASX100
The calculation of TSR takes into account share price and dividend yield andis therefore a robust and objective measure of shareholder returns.TSR continues to eectively align the interests of individual Senior Executiveswith that of the Company’s shareholders by motivating Senior Executives toachieve superior shareholder outcomes relative to Santos’ competitors forinvestor capital and its energy sector peers.25%Relative TSR measured
against companies of theS&P Global 1200 EnergyIndex (GEI)25%Free Cash Flow Breakeven
Point (FCFBP)
FCFBP is the US$ oil price at which cash ows from operating activitiesequal cash ows from investing activities, as published in the Company’snancial statements. As the aim of the performance hurdle is to measure theperformance of the underlying business, the Board has discretion to adjustthe FCFBP for individual material items including asset acquisitions anddisposals that may otherwise distort the measurement.25%Return on Average Capital
Employed (ROACE)compared with weightedaverage cost of capital(WACC)
ROACE is measured as the underlying earnings before interest and tax (EBIT)divided by the average capital employed, being shareholders’ equity plus netdebt, as published in the Company’s nancial statements.The use of ROACE as a performance measure aligns Senior Executives withshareholder interests by focusing on the ecient and disciplined use of capitalto generate shareholder returns.
Remuneration Reportcontinued
Santos Annual Report 2019 / 45Santos Annual Report 2019 / 45
The vesting scales set out in the tables below apply to both the CEO’s and Senior Executives’ LTI performance grants. SARs that do notvest upon testing of the performance condition lapse. There is no re-testing of the performance condition.Table 7: Relative TSR against the ASX100 and S&P GEITSR percentile ranking% of grant vestingBelow 51st percentile0%51st percentile50%
straight line pro-rata vesting in between76th percentile and above100%
Table 8: Free Cash Flow Breakeven Point (FCFBP)
FCFBP% of grant vestingAbove US$40/bbl 0%Equal to US$40/bbl 50%
straight line pro-rata vesting in betweenEqual to or below US$35/bbl100%When the FCFBP hurdle was introduced in 2016, Santos’ FCFBP was approximately US$50/bbl. There was concern from someshareholders that this KPI could result in under investment in onshore drilling activity leading to further production decline and reservesliquidation. However, over the past four years Santos has increased investment in drilling across Queensland and Cooper Basin onshoreoperations year on year and in 2019 achieved a record drilling activity level of more than 500 wells drilled. Production has also increasedin Queensland and the Cooper basin during this period with resource and reserves growth also achieved in the Cooper basin.FCFBP being a non-market measure is tested and audited internally and all results externally audited as part of the Annual Reportrelease. The Board has discretion to adjust the results on this measure, based on the agreed methodology.Table 9: Return On Average Capital Employed (ROACE)
ROACE% of grant vestingBelow 100% of WACC0%Equal to 100% of WACC50%
straight line pro-rata vesting in betweenEqual to or above 120% of WACC100%ROACE being a non-market measure is tested and audited internally and all results externally audited as part of the Annual Reportrelease. The Board has discretion to adjust the results on this measure, based on the agreed methodology.Changes to vesting schedules for 2020 awards
For 2020 LTI awards, the stretch level to achieve full vesting of the FCFBP component will be set at equal to or below US$30/bbl. Thisbetter reects the signicantly improved cost base of the business but recognises that there is an optimal level of investment requiredto sustain the business.In addition, the ROACE targets will also be lifted. The gate-opener to achieve any vesting will be increased so that Santos’ ROACE mustbe at least equal to 110% of WACC and if that measure is satised, then vesting will be determined using the scale in Table 10 below. Fullvesting of the ROACE component will be achieved for an outcome of equal to or greater than 140% of WACC, compared to equal to orgreater than 120% of WACC for the 2019 award.Table 10: Return On Average Capital Employed (ROACE) for 2020 awardsROACE percentile ranking% of grant vestingSantos ROACE <= 110% of WACC0%Santos ROACE > 110% of WACC then:50%
straight line pro rata vesting in betweenRelative ROACE >= 140% of WACC100% vesting
Directors’ Report
Treatment on termination and change of controlGenerally, if an Executive resigns or is summarily dismissed, their unvested SARs will lapse. In all other circumstances (including death,total and permanent disability, redundancy and termination by mutual agreement), unvested SARs remain on foot and will vest or lapsein accordance with their original terms, unless the Board determines otherwise.Where there is a change in control, the Board may determine whether, and the extent to which, SARs may vest.ClawbackThe share plan rules give the Company the discretion to lapse or forfeit unvested equity awards under the STI or LTI programs, and clawback any vested shares or cash paid in certain circumstances.These circumstances include dishonest or fraudulent conduct, breach of material obligations, miscalculation or error, a materialmisstatement or omission in the accounts of a group company or events which require re-statement of the group’s nancial accounts incircumstances where an LTI or deferred STI award would not otherwise have been granted or would not have vested. This is in additionto any rights the Company has under the plan rules and general legal principles to seek to recover payments made in error.Securities hedging
Under the Company’s Securities Dealing Policy, Directors, Executives and employees cannot enter into hedging or other nancialarrangements which operate to limit the economic risk associated with holding Santos securities prior to the vesting of those securitiesor while they are subject to a holding lock or restriction on dealing.Performance results for the 2016 LTI award
The 2016 LTI award was tested over the four-year performance period 1 January 2016 to 31 December 2019.For the 2016 LTI grant, a base share price of A$3.85 was used instead of the 2015 year-end share price which was lower. This wasthe price shareholders paid to exercise their entitlements under the accelerated pro-rata renounceable rights issue announced by theCompany on 9 November 2015. The CEO who joined the Company in February 2016 agreed to adopt the same starting share price foralignment with the Executives.Santos achieved an adjusted Total Shareholder Return of 129% over the performance period, placing it at the 79th percentile againstthe ASX100 comparator group and at the 96th percentile against the S&P Global 1200 Energy Index comparator group.Chart 5: TSR Performance against ASX100 and S&P Global 1200 Energy Index
Dec 15Jun 16Dec 16Jun 17Dec 17Jun 18Dec 18Jun 19Dec 19
Santos $8.18TSR 129%
S&P ASX100S&P Global Energy Index
Santos’ FCFBP for the FCFBP component was US$23.72 (including the impact of hedging). ROACE was 139% of WACC.This means 100% of each of these components has vested.As a result, the 2016 LTI awards vested in full. This followed eight consecutive years of the LTI not vesting.
Remuneration Reportcontinued
Santos Annual Report 2019 / 47Santos Annual Report 2019 / 47
7. REALISED REMUNERATION
Table 11 shows Realised Remuneration for the CEO and Senior Executives in 2018 and 2019.Realised Remuneration diers from statutory remuneration reported in Table 12 and other statutory tables which are prepared inaccordance with the Corporations Act and Accounting Standards which require a value to be placed on share-based payments at thetime of grant, and to be reported as remuneration, even though the CEO and Senior Executives may ultimately not realise any actualvalue from the share-based payments.The Realised Remuneration table is shown in Australian dollars (the currency in which remuneration is paid), whereas the statutorytables are shown in US dollars which is the Company’s reporting currency. Showing remuneration in Australian dollars removes theimpact of exchange rate movements.Realised Remuneration has been calculated as:
? TFR paid in the year;? Cash STI awards earned in respect of performance for the year (albeit paid after the end of the year);? Deferred STI awards from prior years which vested in the year; and? LTI SARs which were tested at 31 December in the year.Vesting deferred STI awards and SARs are valued at the closing share price on 31 December of the respective year. Terminationpayments and leave movements are not included in the table below.Table 11: Realised Remuneration (non-IFRS and non-audited)
YearTFR
Cash STI
2017DeferredSTI thatvested in
2019
LTI
OthervestedgrantsOther
TotalA$A$A$A$A$A$A$Executive DirectorKT Gallagher
Managing Director andChief Executive Ocer
20191,956,1501,161,953766,7527,372,798–6,06911,263,72220181,890,0001,175,600608,488–851,2466,0824,531,416Senior ExecutivesDM Banks
EVP Onshore Oil & Gas
2019715,755290,600––––1,006,355201858,33322,300––––80,633BA Darley
EVP Oshore Oil & Gas
2019840,000333,400–––11,6141,185,014201877,00031,200–––1,094109,294AM Neilson
Chief Financial Ocer (CFO)
2019853,771408,200280,280–––1,542,2512018822,500347,800––––1,170,300V Santostefano
EVP Production Operations
2019878,927317,600250,9541,444,752–6,0692,898,3022018859,562361,500207,528––6,0821,434,672P UndemEVP Marketing, Trading and Commercial
2019307,85356,700–––60,417424,9702018–––––––BK Woods
EVP Developments
2019764,063290,600235,2081,138,820–6,0692,434,7602018742,500327,900172,938––6,0821,249,420Former Senior ExecutivePA Byrne
EVP Marketing, Trading and Commercial
2019419,686237,48285,653––3,758746,5792018700,000286,700–––6,082992,7821 TFR comprises base salary and superannuation. The amounts shown here are actually received TFR, i.e. they are pro-rated amounts for the period that Executives were in KMP roles.2 The “Cash STI” column reects the 50% of the STI award for 2019 performance for continuing Executives that will be paid in cash. The remaining 50% will be awarded as equity restrictedfor two years.3 The deferred restricted equity from the 2017 STI award that vested on 31 December 2019, at a closing share price of A$8.18.4 The 2016 LTI was tested at the end of its performance period on 31 December 2019 and 100% of awards vested. The value shown in the table is based on the closing share price on31 December 2019 of A$8.18. For the value of share-based payments calculated in accordance with the Accounting Standards, see Table 12 “Statutory Executive KMP remuneration details”on page 49.5 “Other” comprises ad hoc payments treated as remuneration, such as assignment and mobilisation allowances and other non-monetary benets.
Directors’ Report
Notes on Mr Gallagher’s Realised Remuneration for 2019Mr Gallagher’s Realised Remuneration for 2019 included the following at-risk performance related elements:
? The cash component of Mr Gallagher’s Short-Term Incentive award based on 2019 performance;? The value of Mr Gallagher’s deferred Short-Term Incentive award from 2017 which vested on 31 December 2019; and? The value of Mr Gallagher’s Long-Term Incentive award from 2016 which was tested at 31 December 2019.Mr Gallagher’s 2019 STI award was awarded at 132% of target in line with the Company Scorecard outcome. This will be delivered half incash and half in deferred Santos equity. The basis for this award is described in section 5 above.Mr Gallagher’s 2017 STI was awarded two thirds in cash and one third in Restricted Shares. The Restricted Shares vested on 31December 2019. The award was allocated at A$5.30 and the closing price on 31 December 2019 was A$8.18.
Chart 6: Realised value of Mr Gallagher’s 2017 deferred STI
0.50
0.75
0.25
0.00
Value at grantShare price growthValue at vesting
0.50
0.27
0.77
Chart 7: Realised value of Mr Gallagher’s 2016 LTI
A$m
1.00
8.0
6.0
4.0
2.0
0.0
Value at grantA$m
Share price growthValue at vesting
2.7
4.7
7.4
As noted above, Santos achieved top quartile performance against both TSR comparator groups and achieved stretch outcomes on theFBFBP and ROACE measures, meaning 100% of the 2016 LTI vested.Mr Gallagher’s 2016 LTI allocation had a face value at grant of A$2.7m, being 150% of his then TFR. The value based on the closingshare price on 31 December 2019 of A$8.18 was A$7.37m, meaning 63.4% of the value delivered from the 2016 LTI came from shareprice growth over the 4-year vesting period.
Remuneration Reportcontinued
Santos Annual Report 2019 / 49Santos Annual Report 2019 / 49
8. STATUTORY REMUNERATION FOR EXECUTIVE KMP
Table 12 presents summarised details of the remuneration for Executive KMPs in 2018 and 2019 as required under the Corporations Act. The current KMPs are the Executivesthat have the requisite authority and responsibility to meet the denition of key management personnel as required under the Corporations Act.All remuneration components have been converted from A$ to US$ using an average rate of $0.6880 for 2019 and $0.7475 for 2018.Table 12: Statutory Executive KMP remuneration details
Short-term employee benets
Post-employmentShare-based payments
Base salarySTI
Other
SuperannuationcontributionsLTIDeferred STI
Options
Total
share-basedpaymentsTermination
Other long-term benets(long service)
TotalTotal
“at risk”
US$US$US$US$US$US$US$US$US$US$US$%
Executive DirectorKT Gallagher20191,328,631799,4244,17617,2001,604,578711,809–2,316,387–34,6744,500,49269%
20181,394,088878,7614,54618,6881,043,352501,708–1,545,060–19,0113,860,15463%
Senior ExecutivesDM Banks
2019444,009199,933–46,621132,154137,325–269,479–7,828967,87048%201839,46116,669–4,1434,3604,960–9,320––69,59337%
BA Darley2019560,720229,3797,99117,200315,59185,327–400,918–8,0161,224,22451%
201855,84423,3228181,713–702–702–8,39090,78926%
AM Neilson2019570,194280,842–17,200247,018232,403–479,421–16,6111,364,26856%
2018596,131259,981–18,688138,018126,918–264,936–8,5281,148,26446%
V Santostefano2019587,502218,5094,17617,200351,999211,767–563,766–15,5361,406,68956%
2018623,836270,2214,54618,688216,353159,771–376,124–8,4391,301,85450%
P Undem2019204,63639,01041,5677,16734,21015,817–50,027––342,40726%
2018–––––-––––––
BK Woods 2019508,475199,9334,17617,200290,665193,693–484,358–25,3521,239,49455%
2018536,331245,1054,54618,688215,798143,543–359,341–17,3821,181,39351%
Former Senior ExecutivesPA Byrne
2019278,578163,3882,58510,166118,20756,382–174,58943,3766,758679,44050%2018504,563214,3084,54618,68852,90083,609–136,509–5,907884,52140%
1 In accordance with the requirements of the Accounting Standards, remuneration includes a proportion of the value of the equity-linked compensation determined as at the grant date and progressively expensed over the vesting period. The
amount allocated as remuneration is not relative to or indicative of the actual benet (if any) that the Executives may ultimately realise should the equity instruments vest. The value of equity-linked compensation was determined in accordancewith AASB 2 Share-based Payments applying the Monte Carlo simulation method. Details of the assumptions underlying the valuation are set out in note 7.2 to the nancial statements.2 This amount represents the cash portion of the STI performance award for 2019, which will be paid during March 2020.3 “Other” comprises ad hoc payments treated as remuneration, such as assignment and mobilisation allowance and other non-monetary benets.4 This amount represents a proportion of the estimated value of the deferred STI, determined in accordance with the requirements of AASB 2 Share-based Payment and progressively expensed over a three-year vesting period being the year ofperformance and a two-year period of service to which the grant relates. The amount allocated as remuneration is not relative to or indicative of the actual benet (if any) that the Senior Executives may ultimately realise should the equityinstruments vest. The value has been calculated in accordance with AASB 2 Share-based Payment based on an estimate of the fair value of the equity instruments.5 “Other long-term benets” represents the movement in the Executive’s long service leave entitlements measured as the present value of the estimated future cash outows to be made in respect of the Senior Executive’s service between therespective reporting dates.6 Figures shown for Mr Banks in 2018 are for the period from commencement as KMP on 1 December 2018 to 31 December 2018.7 Figures shown for Mr Byrne in 2019 are for the period 1 January 2019 to cessation as KMP on 4 August 2019.
Directors’ Report
Tables 13 and 14 contain details of the number and value of SARs and shares granted, vested and lapsed for the CEO in 2019.
Table 13: 2019 SARs outcomes for the CEO GrantedVested
LapsedNumber
Maximumvalue
Number ValueNumberUS$US$SARs535,4422,151,363901,3205,072,485–
1 The SARs granted to the CEO relate to his 2019 LTI performance grant as approved at the 2019 Annual General Meeting (AGM). This grant relates to the LTI award for the four-yearperformance period ending on 31 December 2022.2 Maximum value represents the fair value of LTI grants received in 2019 determined in accordance with AASB 2 Share-based Payment. The fair value of each SAR as at the grant date of9 May 2019 is A$5.84. Details of the assumptions underlying the valuations are set out in note 7.2 to the nancial statements. The minimum total value of the grant to the CEO, if theapplicable vesting conditions are not met, is nil in all cases. All values have been converted to US$.3 The number of SARs vested for the CEO relates to the CEO's 2016 LTI performance grants as approved at the 2016 Annual General Meeting. This was tested based on performance to
31 December 2019 with 100% of the award vested as described in section 6.Table 14: 2019 Restricted Shares outcomes for the CEO GrantedVestedLapsed
Number
MaximumvalueNumber
ValueNumberUS$US$Shares220,1491,032,97493,735527,526–
1 The restricted shares granted to the CEO relate to his 2018 STI award. The maximum value is the fair value of the 2018 STI grant of deferred shares received in 2018 determined with AASB
2 Share-based Payment. The fair value of the deferred 2018 STI grant as at the grant date of 15 March 2019 was A$6.82. The minimum total value of the restricted shares granted to theCEO is nil. All values have been converted to US$.2 This relates to the 2017 STI grant that was deferred for two years from 1 January 2018 to 31 December 2019 and vested in full on 31 December 2019.Tables 15 and 16 contain details of the number and value of SARs and shares granted, vested and lapsed for Senior Executives in 2019.No Senior Executive had any options granted, vesting or lapsing in 2019.Table 15: Movements in SARs for Senior Executives
Granted
Vested
LapsedNumber
Maximum
value
NumberValueNumberUS$US$Senior ExecutivesDM Banks104,744426,618–––BA Darley306,873
1,345,550
–––AM Neilson124,197505,849–––V Santostefano129,097525,807176,620993,989–P Undem109,489464,023
–––BK Woods112,226457,092139,220783,508–Former Senior ExecutivesPA Byrne104,744426,618–––Total991,3704,151,557315,8401,777,497–
1 This relates to the 2019 LTI award.2 Maximum value represents the fair value of LTI grants received in 2019 determined in accordance with AASB 2 Share-based Payment. The fair value of each SAR as at the grant dateof 15 March 2019 is A$5.92. Details of the assumptions underlying the valuations are set out in note 7.2 to the nancial statements. The minimum total value of the grant to the SeniorExecutives, if the applicable vesting conditions are not met, is nil in all cases. All values have been converted to US$.3 Vesting of SARs that relates to the 2016 LTI award. The value is determined by the share price of A$8.18 on the date of vesting at 31 December 2019.4 Number of SARs comprises a sign-on grant of 88,879, a 2018 LTI award of 95,367 and a 2019 LTI award of 122,627.5 Fair value of LTI grants dier as they relate to separate time periods in 2018 and 2019. The value of Mr Darley’s sign-on grant was based on the fair value unit price of A$6.89,the 2018 LTI award on A$6.21 and the 2019 LTI award on A$6.13. The grant date and fair valuation for all three grants was 18 April 2019.6 The fair value for Mr Undem’s 2019 LTI award was determined A$6.16 as at 4 October 2019.
Remuneration Reportcontinued
Santos Annual Report 2019 / 51Santos Annual Report 2019 / 51
Table 16: Movements in Restricted Shares for Senior Executives
Granted
VestedLapsedNumber
Maximumvalue
NumberValueNumberUS$US$DM Banks45,355212,813–––BA Darley5,82327,322–––AM Neilson65,112305,51634,264192,832–V Santostefano67,677317,55130,679172,657–P Undem–––––BK Woods61,404288,11728,754161,823–PA Byrne53,670251,82810,471
58,929–Total299,0411,403,147104,168586,241–1 This relates to the 2018 STI award delivered as Restricted Shares.2 For the Restricted Shares, maximum value represents the fair value of 2018 STI shares determined in accordance with AASB 2 Share-based Payment. The fair value of the deferred STIgrant as at the grant date of 15 March 2019 was A$6.82. The minimum total value of the grant, if the applicable vesting conditions are not met, is nil. All values have been converted to US$.3 This relates to the 2017 STI grant that was deferred for two years from 1 January 2018 to 31 December 2019 and vested in full on 31 December 2019 after cessation of Mr Byrne’s term asKMP on 4 August 2019.
Directors’ Report
9. KMP EQUITY
Ordinary shareholdingsTable 17 sets out the movements during the reporting period in the number of fully paid ordinary shares of the Company held directly, indirectly or benecially, by each KMP,including their related parties, is as follows.Full details of all outstanding equity awards can be found in note 7.2 to the nancial statements and in prior Remuneration Reports.Table 17: 2019 movements in ordinary shareholdings for KMP
Openingbalance
Receivedvestingof SARs
Purchased Sold
Deferred 2017 STIthat vested on
31 December2019
OtherChanges
ClosingbalanceBalance held
nominallyat end of
the year
Ordinary shares – fully paidNon-executive DirectorsYA Allen48,883–––––48,883–GM Cowan25,000–8,600–––33,600–H Goh67,215–––––67,215–Y Guan––––––––V Guthrie5,000–11,437–––16,437–PR Hearl48,808–––––48,808–J McArdle––5,000–––5,000–K Spence65,000–––––65,000–Former Non-executive DirectorE Shi––––––––Executive DirectorKT Gallagher619,563–––93,735–713,298–Senior ExecutivesDM Banks800–––––800–BA Darley––––––––AM Neilson23,777–––34,264–58,041–V Santostefano62,049–––30,679–92,728–P Undem ––––––––BK Woods109,177–––28,754–137,931–Former Senior Executives–PA Byrne5,804–––10,471
–16,275–
Total1,081,076–25,037–197,903–1,304,016–1 Mr Byrne’s 2017 Deferred STI grant vested on 31 December 2019 after cessation of his term as KMP on 4 August 2019.2 The 2016 LTI was tested at the end of its performance period on 31 December 2019 and 100% vested. The vested SARs convert to ordinary shares after 31 December 2019.
Remuneration Reportcontinued
Santos Annual Report 2019 / 53Santos Annual Report 2019 / 53
Executive KMP SARs and Restricted Shares
Tables 18 and 19 set out the movement during the reporting period in the number of SARs and deferred shares of the Company helddirectly, indirectly or benecially, by each KMP, including their related parties. There are no options held by KMPs.Table 18 – Movement in Executive KMP SARs
Grantdate
Balance at1 Jan 2019
Rightsgranted
Rightsvested
Rightslapsed
Balance at31 Dec 2019
%Vestedin theyear
%Forfeitedin the
year
Financial
year ofvestingDirectorsKT Gallagher29/6/16901,320–(901,320)––100%0%201919/5/17671,641–––671,641 20207/5/18520,183–––520,183 20219/5/19–535,442 ––535,442 2022Total2,093,144 535,442 (901,320)–1,727,266Senior ExecutivesDM Banks21/3/18102,752–––102,752 20219/7/18800–––800 202115/3/19–104,744 ––104,744 2022Total103,552 104,744 ––208,296BA Darley 18/4/19–88,879
––88,879 202118/4/19–95,367
––95,367 202118/4/19–122,627
––122,627 2022Total–306,873 ––306,873AM Neilson 17/3/17199,004–––199,004 202021/3/18121,834–––121,834 202115/3/19–124,197 ––124,197 2022Total320,838 124,197 ––445,035V Santostefano29/6/16176,620–(176,620)––100%0%201917/3/17169,154–––169,154 202021/3/18126,642–––126,642 202115/3/19–129,097 ––129,097 2022Total472,416 129,097 (176,620)–424,893P Undem4/10/19–109,489 ––109,489 2022Total–109,489 ––109,489BK Woods 29/6/16139,220–(139,220)––100%0%201917/3/17133,333–––133,333 202021/3/18110,091–––110,091 202115/3/19–112,226 ––112,226 2022Total382,644 112,226 (139,220)–355,650Former Senior ExecutivesPA Byrne
21/3/18102,752–––102,752 202115/3/19–104,744 ––104,744 2022Total102,752 104,744 ––207,4961 Rights Vested represents SARs that had satised their vesting performance conditions at 31 December 2019. The rights vested do not convert to ordinary shares until 2020.2 Mr Darley received a sign on award to compensate him for interests forgone upon commencement with Santos which will vest three years after his commencement subject to continued
employment at the vesting date.3 Mr Darley commenced employment with Santos following the acquisition of Quadrant Energy. Mr Darley received an LTI award for 2018 from Santos which was granted following hiscommencement on similar terms to other Santos executives. Mr Darley did not receive an LTI award from Quadrant Energy in respect of 2018.4 Mr Darley’s LTI award for 2019.
Directors’ Report
Table 19 – Movements in Executive KMP Restricted Shares
Grantdate
Balance at1 Jan 2019
Restricted
Sharesgranted
RestrictedSharesvested
RestrictedSharesforfeited
Balance at31 Dec 2019
%Vestedin the
year
%Forfeited
in the
year
Financial
year ofvestingDirectorsKT Gallagher5/3/1893,735 –(93,735)––100%0%2019
15/3/19–220,149 ––220,149 2020Total93,735 220,149 (93,735)–220,149Senior ExecutivesDM Banks
15/3/19–45,355––45,355 2020Total–45,355 ––45,355BA Darley
15/3/19–5,823 ––5,823 2020Total–5,823 ––5,823AM Neilson5/3/1834,264 –(34,264)––100%0%2019
15/3/19–65,112 ––65,112 2020Total34,264 65,112 (34,264)–65,112V Santostefano5/3/1830,679 –(30,679)––100%0%2019
15/3/19–67,677 ––67,677 2020Total30,679 67,677 (30,679)–67,677P Undem
–––––Total–––––BK Woods5/3/1828,754 –(28,754)––100%0%2019
15/3/19–61,404 ––61,404 2020Total28,754 61,404 (28,754)–61,404Former Senior ExecutivesPA Byrne
5/3/1810,471 –(10,471)
––100%0%201915/3/19–53,670 ––53,670 2020Total10,471 53,670 (10,471)
–53,670 1 Mr Byrne’s 2017 Deferred STI grant vested on 31 December 2019 after cessation of his term as KMP on 4 August 2019.Loans to key management personnelThere have been no loans made, guaranteed or secured, directly or indirectly, by the Company or any of its subsidiaries at any timethroughout the year to any KMP, including to their related party.
Remuneration Reportcontinued
Santos Annual Report 2019 / 55Santos Annual Report 2019 / 55
10. KEY TERMS OF EMPLOYMENT CONTRACTS FOR EXECUTIVE KMP
The main terms of employment contracts for Executive KMP are set out in Table 20.Table 20 – Executive KMP contract terms
Contractduration
Notice period –Company
Notice Period –IndividualTermination provisionKT GallagherOngoing12 months12 monthsEmployment may be ended
immediately in certaincircumstances includingmisconduct, incapacity andmutual agreement or in theevent of a fundamentalchange in the CEO’s roleor responsibility.The Company may elect topay the CEO in lieu of anyunserved notice period. Iftermination is by mutualagreement the CEO willreceive a payment of $1.5m.In the case of death,incapacity or fundamentalchange the CEO is entitledto a payment equivalent to12 months’ base salary.Other KMPOngoing6 months6 monthsIn a company-initiated
termination, the Companymay make a payment in lieuof notice equivalent to theTFR that the Senior Executivewould have received overthe notice period. All SeniorExecutives’ service agreementsmay be terminated immediatelyfor cause whereupon nopayments in lieu of notice orother termination payments arepayable under the agreement.
Directors’ Report
11. NON-EXECUTIVE DIRECTOR REMUNERATION
Remuneration policyThe key objectives of Santos’ non-executive Director remuneration policy and how these are implemented through the Company’sremuneration framework are as follows:
Securing and retaining talented,qualied Directors
Promoting independenceand impartiality
Aligning Directorand shareholder interest
Remuneration policy objective
Fee levels are set with regard to:
? time commitment and workload;? the risk and responsibility attached
to the role;? experience and expertise; and? market benchmarking.
Fee levels do not vary according tothe performance of the Company orindividual Director performance fromyear to year.Non-executive Director's performanceis assessed at the time of re-election.
Santos encourages its non-executiveDirectors to build a long-term stake inthe CompanyNon-executive Directors are requiredto acquire and maintain a shareholdingin the Company equivalent in value toone year’s remuneration
Enabled through the non-executive Director Remuneration Framework
Under the Minimum Shareholding Requirement, non-executive Directors must acquire (over a four-year period) and maintain ashareholding in the Company equal in value to at least one year’s remuneration (base fee and committee fees).Maximum aggregate amountTotal fees paid to all non-executive Directors in a year, including Board Committee fees, must not exceed A$2,600,000, being theamount approved by shareholders at the 2013 AGM.
RemunerationFees paid to non-executive Directors are reviewed periodically and are xed by the Board. Table 21 summarises the current fee structurefor main Board and committees.
Table 21: Non-executive Directors’ annual fee structure
Chair
MemberA$A$Board521,325185,325Audit and Risk Committee42,00021,000Environment, Health, Safety and Sustainability Committee29,00019,000Nomination Committee
N/A10,000People and Remuneration Committee39,00021,000
1 Fees are shown inclusive of superannuation.2 The Chair of the Board does not receive any additional fees for serving on or chairing any Board committee.3 The Chair of the Board is the Chair of the Nomination Committee, in accordance with its Charter.Directors may also be paid additional fees for special duties or exertions and are entitled to be reimbursed for all business-relatedexpenses. The total remuneration provided to each non-executive Director in 2018 and 2019 is shown in Table 22.
Remuneration Reportcontinued
Santos Annual Report 2019 / 57Santos Annual Report 2019 / 57
Superannuation and retirement benetsSuperannuation contributions are made on behalf of non-executive Directors in accordance with the requirements of the Company’sstatutory superannuation obligations. Non-executive Directors are not entitled to retirement benets (other than mandatory statutoryentitlements).
Statutory remuneration for non-executive DirectorsDetails of the fees and other benets paid to non-executive Directors in 2019 are set out in Table 22. Dierences in fees receivedbetween 2018 and 2019 reect changes in roles and responsibilities (i.e. Chair or Committee appointments) and currency movementsas fees are paid in Australian dollars but disclosed in US dollars.No share-based payments were made to any non-executive Director.Table 22: 2019 and 2018 non-executive Director remuneration
Short-term benetsRetirement benetsDirectorYear
Directors’ fees(incl. committee fees)
Fees for specialduties or exertionsOtherSuperannuation
Share-basedpaymentsTotalUS$US$US$US$US$US$YA Allen2019161,376––14,288–175,664
2018174,007––15,167–189,174GM Cowan2019142,112––13,501–155,613
2018154,759––14,702–169,461H Goh2019161,312––591–161,903
2018174,748––410–175,158Y Guan
201980,444––8,407–88,851
2018––––––V Guthrie2019140,736––13,370–154,106
2018148,667––14,123–162,790PR Hearl2019154,496––14,288–168,784
2018165,971––15,167–181,138J McArdle
201921,682––2,060–23,742
2018––––––K Spence2019344,384––14,288–358,672
2018339,523––15,167–354,690Former Director
E Shi
201948,042––4,716–52,758
2018153,824––15,167–168,991
1 Includes superannuation guarantee payments. Superannuation guarantee payments are made to Mr Goh and Ms McArdle only in relation to days worked in Australia.2 Mr Guan joined the Board on 3 May 2019 and was appointed as a member of the People and Remuneration Committee on 21 August 2019.3 Ms McArdle joined the Board on 23 October 2019 and was appointed as a member of the Audit and Risk Committee on 28 November 2019.4 Mr Shi retired from the Board on 2 May 2019.
Directors’ Report
INDEMNIFICATIONRule 61 of the Company’s Constitution provides that the Company indemnies, on a full indemnity basis and to the full extent permittedby law, ocers of the Company for all losses or liabilities incurred by the person as an ocer of the Company, a related body corporateor trustee of a company-sponsored superannuation fund. Rule 61 does not permit the Company to indemnify an ocer for any liabilityinvolving a lack of good faith.Rule 61 also permits the Company to purchase and maintain a Directors’ and ocers’ insurance policy.In conformity with Rule 61, the Company is party to Deeds of Indemnity in favour of each of the Directors referred to in this report whoheld oce during the year and certain Senior Executives of the consolidated entity. The indemnities operate to the full extent permittedby 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 orsince the nancial year ending 31 December 2019 under the Deeds of Indemnity.During the year, the Company paid premiums in respect of Directors’ and ocers’ liability and legal expenses insurance contracts forthe year ended 31 December 2019, and since the end of the year the Company has paid, or agreed to pay, premiums in respect of suchcontracts for the year ending 31 December 2020. The insurance contracts insure against certain liability (subject to exclusions) personswho are or have been Directors or ocers of the Company and its controlled entities. A condition of the contracts is that the nature ofthe liability indemnied and the premium payable not be disclosed.NON-AUDIT SERVICESAmounts paid or payable to the Company’s auditor, Ernst & Young, for non-audit services provided during the year were:
Taxation and other services $2,592,000Assurance services not required to beperformed by the Company's auditor $226,000Other assurance services required by legislationto be performed by the Company’s auditor $47,000The Directors are satised, based on the advice of the Audit and Risk Committee, that the provision of the non-audit services detailedabove 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 and Risk Committee to ensure theydo 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 onpage 142.ROUNDING
Australian Securities and Investments Commission Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 appliesto the Company. Accordingly, amounts have been rounded o in accordance with that Instrument, unless otherwise indicated.This report is made out on 19 February 2020 in accordance with a resolution of the Directors.
Director
Financial Report
Consolidated Income Statement 60Consolidated Statement of Comprehensive Income 61Consolidated Statement of Financial Position 62Consolidated Statement of Cash Flows 63Consolidated Statement of Changes in Equity 64Notes to the Consolidated Financial Statements 65SECTION 1BASIS OF PREPARATION PAGE
1.1 Statement of compliance 65
1.2 Key events in the current period 65
1.3 Signicant accounting judgements,
estimates and assumptions 66
1.4 Foreign currency 67SECTION 2FINANCIAL PERFORMANCE PAGE
2.1 Segment information 68
2.2 Revenue from contracts with customers 71
2.3 Expenses 74
2.4 Taxation 75
2.5 Earnings per share 78
2.6 Dividends 79
2.7 Other income 80SECTION 3CAPITAL EXPENDITURE, OPERATING ASSETSAND RESTORATION OBLIGATIONS PAGE
3.1 Exploration and evaluation assets 81
3.2 Oil and gas assets 82
3.3 Impairment of non-current assets 85
3.4 Restoration obligations and other provisions 89
3.5 Leases 90
3.6 Commitments for expenditure 93SECTION 4WORKING CAPITAL MANAGEMENT PAGE
4.1 Cash and cash equivalents 94
4.2 Trade and other receivables 95
4.3 Inventories 96
4.4 Trade and other payables 96
SECTION 5FUNDING AND RISK MANAGEMENT PAGE
5.1 Interest-bearing loans and borrowings 97
5.2 Net nance costs 99
5.3 Issued capital 100
5.4 Reserves and accumulated losses 101
5.5 Financial risk management 101SECTION 6GROUP STRUCTURE PAGE
6.1 Consolidated entities 110
6.2 Acquisitions and disposals of subsidiaries 113
6.3 Joint arrangements 115
6.4 Parent entity disclosures 118
6.5 Deed of Cross Guarantee 119
SECTION 7PEOPLE PAGE
7.1 Employee benets 121
7.2 Share-based payment plans 122
7.3 Key management personnel disclosures 128
SECTION 8OTHER PAGE
8.1 Contingent liabilities 129
8.2 Events after the end of the reporting period 129
8.3 Remuneration of auditors 129
8.4 Accounting policies 130Directors’ Declaration 135Independent Auditor’s Report 136Auditor’s Independence Declaration 142
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Financial ReportConsolidated Income Statementfor the year ended 31 December 2019
2019 2018 Note US$million US$millionRevenue from contracts with customers – Product sales 2.2 4,033 3,660Cost of sales 2.3 (2,714) (2,329)Gross prot 1,3191,331Revenue from contracts with customers – Other 2.2 153 113Other income 2.7 109
Impairment of non-current assets 3.3 (61) (100)Other expenses 2.3 (233) (194)Finance income 5.2 37 30Finance costs 5.2 (314) (258)Share of net prot of joint ventures 6.3(c) 8 4Prot before tax 1,0181,106Income tax expense 2.4(a) (341) (439)Royalty-related tax expense 2.4(b) (3) (37)Total tax expense (344)(476)Net prot for the period attributable to owners of Santos Limited 674 630
Earnings per share attributable to the equity holders of Santos Limited (?)Basic prot per share 2.5 32.4 30.2Diluted prot per share 2.5 32.1 30.0
Dividends per share (?)Paid during the period 2.6 12.2 3.5Declared in respect of the period 2.6 11.0 9.7The Consolidated Income Statement is to be read in conjunction with the notes to the consolidated nancial statements.
Consolidated Statement of Comprehensive Incomefor the year ended 31 December 2019
2019 2018 US$million US$millionNet prot for the period 674 630Other comprehensive income/(loss), net of taxItems to be reclassied to the income statement in subsequent periods Exchange loss on translation of foreign operations – (245) Foreign currency translation reserve recycled to the income statement – (72) Tax eect – – – (317)Loss on foreign currency loans designated as hedges of net investments in foreign operations – (171) Tax eect – 51 – (120) (Loss)/gain on derivatives designated as cash ow hedges (8) 4 Tax eect 2 (1) (6) 3Net other comprehensive income/(loss) to be reclassied to the income statement in subsequent periods (6) (434)Items not to be reclassied to the income statement in subsequent periods Remeasurement of dened benet obligation – 3 Tax eect – (1) – 2Fair value changes on nancial liabilities designated at fair value due to own credit risk (6) – Tax eect 1 – (5) –Net other comprehensive (loss)/income not to be reclassied to the income statement in subsequent periods (5) 2 Other comprehensive loss, net of tax (11) (432)Total comprehensive income attributable to owners of Santos Limited 663 198The Consolidated Statement of Comprehensive Income is to be read in conjunction with the notes to the consolidated nancialstatements.
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Financial Report
(Restated) 2019 2018 Note US$million US$millionCurrent assetsCash and cash equivalents 4.1 1,067 1,316Trade and other receivables 4.2 554 521Prepayments 40 32Contract assets 2.2(b) 23 28Inventories 4.3 301 288Other nancial assets 5.5(g) 195 28Current tax assets – 13Total current assets 2,180 2,226Non-current assetsPrepayments – 16Contract assets 2.2(b) 130 157Investments in joint ventures 6.3(b) 13 31Other nancial assets 5.5(g) 29 31Exploration and evaluation assets 3.1 1,187 981Oil and gas assets 3.2 11,396 11,283Other land, buildings, plant and equipment 223 119Deferred tax assets 2.4(d) 870 1,486Goodwill 6.2(a) 481 481Total non-current assets 14,329 14,585Total assets 16,509 16,811Current liabilitiesTrade and other payables 4.4 719 661Other liabilities – 3Contract liabilities 2.2(b) 125 38Lease liabilities 3.5 114 1Interest-bearing loans and borrowings 5.1 196 966Current tax liabilities 38 63Provisions 3.4 122 116Other nancial liabilities 5.5(g) 5 6Total current liabilities 1,319 1,854Non-current liabilitiesOther liabilities 1 2Contract liabilities 2.2(b) 233 335Lease liabilities 3.5 311 61Interest-bearing loans and borrowings 5.1 3,800 3,891Deferred tax liabilities 2.4(d) 811 1,206Provisions 3.4 2,329 2,159Other nancial liabilities 5.5(g) 29 24Total non-current liabilities 7,514 7,678Total liabilities 8,833 9,532Net assets 7,676 7,279EquityIssued capital 5.3 9,010 9,031Reserves 5.4 759 607Accumulated losses 5.4 (2,093) (2,359)Equity attributable to owners of Santos Limited 7,676 7,279Total equity 7,676 7,279The Consolidated Statement of Financial Position is to be read in conjunction with the notes to the consolidated nancial statements.
Consolidated Statement of Financial Positionas at 31 December 2019
2019 2018 Note US$million US$millionCash ows from operating activitiesReceipts from customers 4,266 3,740Interest received 37 30Dividends received 15 6Pipeline taris and other receipts 146 106Payments to suppliers and employees (1,892) (1,816)Restoration expenditure (24) (36)Exploration and evaluation seismic and studies (83) (98)Royalty and excise paid (90) (85)Borrowing costs paid (227) (194)Income taxes paid (30) (69)Royalty-related taxes paid (97) (13)Insurance proceeds 28 3Other operating activities (3) 4Net cash provided by operating activities 4.1(b) 2,046 1,578Cash ows from investing activitiesPayments for:
Exploration and evaluation assets (222) (66) Oil and gas assets (619) (490) Other land, buildings, plant and equipment (18) (10) Acquisitions of exploration and evaluation assets (18) (10) Acquisition of subsidiary, net of cash acquired (177) (1,933) Costs associated with acquisition of subsidiaries (5) (10)Proceeds from disposal of non-current assets 2.7 10 26Proceeds from disposal of subsidiaries – 126Net proceeds associated with disposal 18 –Borrowing costs paid (15) (6)Return of capital – investment in joint ventures 13 –Net cash used in investing activities (1,033) (2,373)Cash ows from nancing activitiesDividends paid 2.6 (251) (73)Drawdown of borrowings 592 1,193Repayment of borrowings (1,474) (220)Repayment of lease liabilities (87) –Purchase of shares on-market (Treasury shares) 5.3 (31) (10)Net cash (used in)/provided by nancing activities (1,251) 890Net (decrease)/increase in cash and cash equivalents (238) 95Cash and cash equivalents at the beginning of the period 1,316 1,231Eects of exchange rate changes on the balances of cash held in foreign currencies (11) (10)Cash and cash equivalents at the end of the period 4.1 1,067 1,316The Consolidated Statement of Cash Flows is to be read in conjunction with the notes to the consolidated nancial statements.
Consolidated Statement of Cash Flowsfor the year ended 31 December 2019
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Equity attributable to owners of Santos LimitedForeigncurrency Accum-trans- ulated Accum-Issued lation Hedging prots ulated TotalUS$million Note capital reserve reserve reserve losses equityBalance at 1 January 2018 9,034 (528) (16) 595 (1,934) 7,151Transfer retained prots to accumulated prots reserve – – – 1,063 (1,063) –Items of comprehensive income Net prot for the period – – – – 630 630Other comprehensive (loss)/income for the period – (437) 3 – 2 (432)Total comprehensive (loss)/income for the period – (437) 3 – 632 198Transactions with owners in their capacityas owners Dividends paid 2.6 – – – (73) – (73)On-market share purchase (Treasury shares) 5.3 (10) – – – – (10) Share-based payment transactions 7 – – – 6 13Balance at 31 December 2018 9,031 (965) (13) 1,585 (2,359) 7,279Opening balance adjustment on adoption of new accounting standard (refer note 8.4(c)) – – – – (6) (6)Balance at 1 January 2019 9,031 (965) (13) 1,585 (2,365) 7,273Transfer retained prots to accumulated prots reserve – – – 400 (400) –Reclassication of own credit risk reserve – – 14 – (14) –Items of comprehensive income Net prot for the period – – – – 674 674Other comprehensive loss for the period – – (11) – – (11)Total comprehensive (loss)/income for the period – – (11) – 674 663Transactions with owners in their capacityas owners Shares issued 5.3 1 – – – – 1 Dividends paid 2.6 – – – (251) – (251)On-market share purchase (Treasury shares) 5.3 (31) – – – – (31) Share-based payment transactions 9 – – – 12 21Balance at 31 December 2019 9,010 (965) (10) 1,734 (2,093) 7,676The Consolidated Statement of Changes in Equity is to be read in conjunction with the notes to the consolidated nancial statements.
Consolidated Statement of Changes in Equityfor the year ended 31 December 2019
This section provides information about the basis of preparation of the Financial Report, and certain accounting policiesthat are not disclosed elsewhere in the Financial Report. Accounting policies specic to individual elements of the nancialstatements are located within the relevant section of the report.
1.1 STATEMENT OF COMPLIANCE
The consolidated Financial Report of Santos Limited (“the Company”) for the year ended 31 December 2019 was authorised for issue inaccordance with a resolution of the Directors on 19 February 2020.The consolidated Financial Report of the Company for the year ended 31 December 2019 comprises the Company and its controlledentities (“the Group”). Santos Limited (“the Parent”) is a company limited by shares incorporated in Australia, whose shares are publiclytraded on the Australian Securities Exchange (“ASX”), and is the ultimate parent entity of the Group. The Group is a for-prot entity forthe purpose of preparing the Financial Report. The nature of the operations and principal activities of the Group are described in theDirectors’ Report.This consolidated Financial Report is:
? a general purpose Financial Report that has been prepared in accordance with the requirements of the Corporations Act 2001(Cth), Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board(“AASB”);? compliant with Australian Accounting Standards as issued by the AASB and International Financial Reporting Standards (“IFRS”)
as issued by the International Accounting Standards Board, including new and amended accounting standards issued andeective for reporting periods beginning on or after 1 January 2019;? presented in United States dollars (“US$”);? prepared on the historical cost basis except for derivative nancial instruments and other nancial instruments measured at fair
value; and? rounded to the nearest million dollars, unless otherwise stated, in accordance with ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191.
1.2 KEY EVENTS IN THE CURRENT PERIOD
The nancial position and performance of the Group was particularly impacted by the following events and transactions during the year:
? production of 75.5 mmboe (2018: 58.9 mmboe), and sales of 94.5 mmboe (2018: 78.3 mmboe);? average realised oil price of $71.99 per barrel compared to $75.05 per barrel in 2018;? net prot after tax of $674 million for 2019 (2018: $630 million);? free cash ow generated of $1,138 million for 2019 (2018: $1,006 million); and? net debt decreased to $3,325 million at 31 December 2019, from $3,549 million at 31 December 2018.
Notes to the Consolidated Financial Statementsfor the year ended 31 December 2019Section 1: Basis of Preparation
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1.3 SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
The carrying amounts of certain assets and liabilities are often determined based on management’s judgement regarding estimates andassumptions of future events. The key judgements, estimates and assumptions that have a signicant risk of causing a material adjustmentto the carrying amount of certain assets and liabilities within the next annual reporting period are disclosed in the following notes:
? Note 2.4 Taxation? Note 3.1 Exploration and evaluation assets? Note 3.2 Oil and gas assets? Note 3.3 Impairment of non-current assets? Note 3.4 Restoration obligations and other provisions? Note 3.6 Leases? Note 6.2 Acquisitions and disposals of subsidiariesIn addition to the signicant judgements referenced above, other areas of estimation and judgement are highlighted throughout theFinancial Report.
Notes to the Consolidated Financial StatementsSection 1: Basis of Preparation
1.4 FOREIGN CURRENCY
Functional and presentation currencyThe Group’s nancial statements are presented in United States dollars (“US$”), as that presentation currency most reliably reects theglobal business performance of the Group as a whole and is more comparable with our peers.The functional currency of the Parent changed from Australian dollars (“A$”) to United States dollars, eective 1 January 2019 (refernote 8.4(b)).The assets, liabilities, income and expenses of non-US dollar denominated functional operations are translated into US dollars using thefollowing applicable exchange rates:
Foreign currency amountApplicable exchange rateIncome and expensesAverage rate prevailing for the relevant periodAssets and liabilities Period-end rateEquityHistorical rateReservesHistorical and period-end rateStatement of cash ows Average rate prevailing for the relevant period
Foreign exchange dierences resulting from translation to presentation currency are initially recognised in the foreign currencytranslation reserve and subsequently transferred to the income statement on disposal of the operation.The period-end exchange rate used was A$/US$ 1:0.7000 (2018: 1:0.7044).Transactions and balances
Transactions in currencies other than an entity’s functional currency are initially recorded in the functional currency by applying theexchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in currencies other than an entity’sfunctional currency are translated at the foreign exchange rate ruling at the reporting date. Foreign exchange dierences arising ontranslation are recognised in the income statement.Foreign exchange dierences that arise on the translation of monetary items that form part of the net investment in a foreign operationare recognised in the translation reserve in the consolidated nancial statements.Non-monetary assets and liabilities that are measured at historical cost in currencies other than an entity’s functional currency aretranslated using the exchange rate at the date of the initial transaction. Non-monetary assets and liabilities denominated in currenciesother than an entity’s functional currency that are stated at fair value are translated to the functional currency at foreign exchange ratesruling at the dates the fair value was determined.Group companiesThe results of subsidiaries with a functional currency other than US$ (the functional currency of the Parent) are translated to US$ asat the date of each transaction. The assets and liabilities are translated to US$ at foreign exchange rates ruling at the reporting date.Foreign exchange dierences arising on translation are recognised directly in the translation reserve.Exchange dierences arising from the translation of the net investment in foreign operations and of related hedges are recognised in thetranslation reserve. They are released into the income statement upon disposal of the foreign operation.Also refer to note 5.5(c) for further details on the net investment hedge in place.
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This section focuses on the operating results and nancial performance of the Group. It includes disclosures of segmentalnancial information, taxes, dividends and earnings per share, including the relevant accounting policies adopted in each area.
2.1 SEGMENT INFORMATION
The Group has identied its operating segments to be the ve key assets/operating areas of the Cooper Basin, Queensland & NSW,Papua New Guinea (“PNG”), Northern Australia & Timor-Leste, and Western Australia, based on the nature and geographical locationof the assets, and “Other” non-core assets. This is the basis on which internal reports are provided to the Chief Executive Ocer forassessing performance and determining the allocation of resources within the Group.In the prior period, the assets acquired as part of the Quadrant Energy acquisition were incorporated into the Western Australiasegment, since acquisition date of 27 November 2018.Segment performance is measured based on earnings before interest, tax, impairment, exploration and evaluation, depletion,depreciation and amortisation (“EBITDAX”). Corporate and exploration expenditure and inter-segment eliminations are included in thesegment disclosure for reconciliation purposes.Changes to segment informationAs at 1 January 2019, the “Asia” reporting segment was no longer required, due to the divestment of the majority of the assets that werereported under that segment. Further, the “Northern Australia” reporting segment has been renamed “Northern Australia & Timor-Leste” following the signing of the new maritime boundary between Australia and Timor-Leste during 2019. Comparative disclosureshave been restated to a consistent basis.
Notes to the Consolidated Financial StatementsSection 2: Financial Performance
2.1 SEGMENT INFORMATION (CONTINUED)
Corporate,Northern exploration, Queens- Australia & elimin-Cooper land Timor- Western ations Basin & NSW PNG Leste Australia & other TotalUS$million 2019 2019 2019 2019 2019 2019 2019RevenueProduct sales to external customers 951 960 652 165 921 384 4,033Inter-segment sales
151 62 – – – (213) –Revenue – other from external customers 62 33 11 – 34 13 153Total segment revenue 1,164 1,055 663 165 955 184 4,186CostsProduction costs (123) (71) (80) (67) (225) 20 (546)Other operating costs (74) (87) (51) – (13) (81) (306)Third-party product purchases (475) (242) (1) – – (167) (885)Inter-segment purchases
(2) (72) – – – 74 –Other 39 41 9 4 (33) (52) 8EBITDAX 529 624 540 102 684 (22) 2,457Depreciation and depletion (207) (274) (135) (48) (320) (16) (1,000)Exploration and evaluation expensed – – – – – (103) (103)Net impairment loss (2) (11) (10) – (36) (2) (61)Change in future restoration assumptions – – – – 2 – 2EBIT 320 339 395 54 330 (143) 1,295Net nance costs (277) (277)Prot before tax 1,018Income tax expense (341) (341)Royalty-related tax (expense)/benet (13) (1) – 5 6 – (3)Net prot 674Asset additions and acquisitions:
Exploration and evaluation assets 8 13 12 52 120 55 260Oil and gas assets
2, 3
418 401 119 5 200 – 1,143 426 414 131 57 320 55 1,403
1 Inter-segment pricing is determined on an arm’s length basis. Inter-segment sales and purchases are eliminated on consolidation.2 Includes impact on restoration assets following changes in future restoration provision assumptions (refer note 3.4).3 Includes impact of AASB 16 recognition of right-of-use assets (refer note 3.5).
by geographical location
US$million
Australia 3,519Papua New Guinea 663Other 4Total 4,186
| 2019 Revenue from external customers | 2019 Non-current assets by geographical location |
(excluding nancial and deferred tax assets)
US$million
Australia 10,176Papua New Guinea 2,691Other 82Total 12,949
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2.1 SEGMENT INFORMATION (CONTINUED)
Corporate,Northern exploration, Queens- Australia & elimin-Cooper land Timor- Western ations Basin & NSW PNG Leste Australia & other TotalUS$million 2018 2018 2018 2018 2018 2018 2018RevenueProduct sales to external customers 975 957 621 183 408 516 3,660Inter-segment sales
105 47 – – – (152) –Revenue – other from external customers 66 12 9 – 14 12 113Total segment revenue 1,146 1,016 630 183 422 376 3,773CostsProduction costs (127) (71) (70) (74) (108) (24) (474)Other operating costs (68) (80) (52) – (17) (98) (315)Third-party product purchases (421) (293) – – – (133) (847)Inter-segment purchases
(3) (33) – – – 36 –Other (9) 31 (2) 7 (14) 10 23EBITDAX 518 570 506 116 283 167 2,160Depreciation and depletion (196) (167) (123) (51) (99) (31) (667)Exploration and evaluation expensed – – – – – (105) (105)Net impairment loss – (12) (33) – (8) (47) (100)Change in future restoration assumptions – 22 – – 24 – 46EBIT 322 413 350 65 200 (16) 1,334Net nance costs (228) (228)Prot before tax 1,106Income tax expense (439) (439)Royalty-related tax benet/(expense) 5 6 – 1 (56) 7 (37)Net prot 630Asset additions and acquisitions:
Exploration and evaluation assets 18 14 30 34 591 5 692Oil and gas assets
215 195 47 30 2,230 61 2,778 233 209 77 64 2,821 66 3,4701 Inter-segment pricing is determined on an arm’s length basis. Inter-segment sales and purchases are eliminated on consolidation.2 Includes impact on restoration assets following changes in future restoration provision assumptions (refer note 3.4).
Notes to the Consolidated Financial StatementsSection 2: Financial Performance
by geographical locationUS$million
Australia 2,962Papua New Guinea 630Vietnam 124Indonesia 57Total 3,773
| 2018 Revenue from external customers | 2018 Non-current assets by geographical location |
(excluding nancial and deferred tax assets)
US$million
Australia 9,760Papua New Guinea 2,705Other 122Total 12,587
2.2 REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue from contracts with customers is recognised in the income statement when the performance obligations are considered met,which is when control of the hydrocarbon products or services provided are transferred to the customer. Revenue is recognised at anamount that reects the consideration the Group expects to be entitled to, net of goods and services tax or similar taxes.Revenue from contracts with customers – Product salesRevenue from contracts with customers – product sales is recognised using the “sales method” of accounting. The sales method resultsin revenue being recognised based on volumes sold under contracts with customers, at the point in time where performance obligationsare considered met. Generally, regarding the sale of hydrocarbon products, the performance obligation will be met when the product isdelivered to the specied measurement point (gas) or point of loading/unloading (liquids). No adjustments are made to revenue for anydierences between volumes sold to customers and unsold volumes that the Group is entitled to sell based on its working interest.The Group’s sales of crude oil, liqueed natural gas, ethane, condensate, LPG, and in some contractual arrangements, natural gas, arebased on market prices. In contractual arrangements with market-based pricing, at the time of the delivery, there is only a minimal risk ofa change in transaction price to be allocated to the product sold. Accordingly, at the point of sale where there is not a signicant risk ofrevenue reversal relative to the cumulative revenue recognised, there is no constraining of variable consideration.The Group applies the allocation exception that allows an entity to allocate the market price to product sales as delivered, rather thanrecognising an average price over the term of the contract. For those contractual arrangements based on market pricing, the aggregatetransaction price allocation to unsatised performance obligations is fully constrained at the end of the reporting period. Revenue forexisting contracts will be recognised over varying contract tenures.During the year, revenue from one customer amounted to $651 million (2018: $489 million), arising from sales from one segment of theGroup.
Contract liabilitiesOn acquisition of Quadrant Energy (refer note 6.2(a)), pre-existing revenue contracts were fair valued, resulting in contract liabilitiesbeing recognised. The contract liabilities represent the dierential in contract pricing and market price, and will be realised asperformance obligations are considered met in the underlying revenue contract. To the extent the contract liability represents thefair value dierential between contract price and market price, it will be unwound through “revenue – other” upon satisfaction of theperformance obligation.Contract liabilities – Deferred revenueA contract liability for deferred revenue is recorded for obligations under sales contracts to deliver natural gas in future periods for whichpayment has already been received. Where the period between when payment is received and performance obligations are consideredmet, is more than 12 months, an assessment will be made for whether a signicant nancing component is required to be accounted for.Deferred revenue liabilities unwind as “revenue from contracts with customers”, upon settlement of the obligation, and if a signicantnancing component associated with deferred revenue exists, this will be recognised as “interest expense” over the life of the contract.Contract assets
On acquisition of Quadrant Energy (refer note 6.2(a)), pre-existing revenue contracts were fair valued, resulting in contract assetsbeing recognised. The contract assets represent the dierential in contract pricing and market price, and will be realised as performanceobligations are considered met in the underlying revenue contract. The contract asset will be unwound through other expenses. Wheredierent tranches exist within a contractual arrangement, individual contracts acquired may contain both a contract liability in respect ofdeferred revenue and a contract asset arising from revenue contracts being fair valued on acquisition.
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2.2 REVENUE FROM CONTRACTS WITH CUSTOMERS (CONTINUED)
(a) Revenue from contracts with customers 2019 2018 US$million US$millionProduct sales Gas, ethane and liqueed natural gas 2,687 2,518 Crude oil 927 757 Condensate and naphtha 335 300 Liqueed petroleum gas 84 85Total product sales
4,033 3,660Revenue – other Liquidated damages 26 11 Pipeline tolls & taris 76 84 Contract liabilities – recognised on settlement of obligation 7 – Other 44 18Total revenue – other 153 113Total revenue from contracts with customers 4,186 3,773
1 Total product sales include third-party product sales of $1,022 million (2018: $997 million).
(b) Assets and liabilities related to contracts with customersThe Group has recognised the following assets and liabilities related to contracts with customers:
(Restated) 2019 2018 US$million US$millionAcquired contract assetsCurrent Acquired contract assets 23 28 23 28Non-current Acquired contract assets 130 157 130 157Total acquired contract assets 153 185Contract liabilitiesCurrent Acquired contract liabilities 6 6 Deferred revenue 119 32 125 38Non-current Acquired contract liabilities 20 27 Deferred revenue 213 308 233 335Total contract liabilities 358 373
Notes to the Consolidated Financial StatementsSection 2: Financial Performance
2.2 REVENUE FROM CONTRACTS WITH CUSTOMERS (CONTINUED)
(b) Assets and liabilities related to contracts with customers (continued)The following table illustrates the movement in contract asset and contract liability balances for the current reporting period:
(Restated) 2019 2018 Note US$million US$millionAcquired contract assets Opening balance 185 – Contract assets arising from acquisition – 185 Other expenses 2.3 (32) –Total acquired contract assets 153 185Acquired contract liabilities Opening balance 33 – Contract liabilities arising from acquisition – 33 Revenue – other 2.2(a) (7) – 26 33Contract liabilities – Deferred income Opening balance 340 131 Deferred revenue arising from acquisition – 209 Additional receipts in advance 45 – Revenue from contracts with customers – product sales (65) – Interest accretion for nancing component 5.2 18 – Other (6) – 332 340Total contract liabilities 358 373
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2.3 EXPENSES
2019 2018 US$million US$millionCost of sales:
Production costs Production expenses 546 436 Production facilities – operating leases – 38 Total production costs 546 474Other operating costs LNG plant costs 56 64 Pipeline taris, processing tolls and other 158 169 Movements in onerous contracts (16) (18) Royalty and excise 97 82 Shipping costs 11 18 Total other operating costs 306 315 Total cash cost of production 852 789Depreciation and depletion:
Depreciation of plant, equipment and buildings 622 417 Depletion of subsurface assets 377 248 Total depreciation and depletion 999 665 Third-party product purchases 885 847 (Increase)/decrease in product stock (22) 28Total cost of sales 2,714 2,329Other expenses Selling 12 14 General & administration 54 75 Costs associated with acquisitions and disposals – 58 Depreciation 1 2 Foreign exchange losses/(gains) 11 (146)Fair value hedges losses/(gains) On the hedging instrument 9 17 On the hedged item attributable to the hedged risk (5) (15) Fair value losses on commodity derivatives (oil hedges) 6 67 Exploration and evaluation expensed 103 105Contract assets recognised upon satisfaction of the performance obligation 32 – Other 10 17Total other expenses 233 194
Notes to the Consolidated Financial StatementsSection 2: Financial Performance
2.4 TAXATION
Income tax
Income tax on the prot or loss for the year comprises current and deferred tax. Income tax is recognised in the income statementexcept in relation to items recognised directly in equity.Current tax is the amount of income tax payable on the taxable prot or loss for the year, using tax rates enacted or substantivelyenacted at the reporting date, and any adjustment to tax payable in respect of previous years.Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from,or paid to, the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantivelyenacted at the reporting date in the countries where the Group operates and generates taxable income. Where applicable, tax balancesinclude an estimate of any amounts expected to be paid to settle uncertain tax positions if it is probable that an amount will settle theobligation, and a reliable estimate can be made of the amount of the obligation. When the Group expects some or all of an amountof tax payable to be reimbursed, the expense relating to the income tax payable is presented in the income statement net of anyreimbursement that is virtually certain. If the eect of the time value of money is material, current tax payable is discounted.The Company and all of its wholly-owned Australian resident entities are part of a tax-consolidated group under Australian taxation law.Santos Limited is the head entity in the tax-consolidated group. The head entity and the controlled entities in the tax-consolidated groupcontinue to account for their own current and deferred tax amounts. Current tax liabilities and assets and deferred tax assets arisingfrom unused tax losses and tax credits of the members of the tax-consolidated group are recognised by the Company (as head entity inthe tax-consolidated group).The Company and the other entities in the tax-consolidated group have entered into a tax funding agreement and a tax sharingagreement.Royalty-related taxPetroleum Resource Rent Tax (“PRRT”), Resource Rent Royalty and Timor-Leste’s and PNG’s Additional Prots Tax are accounted foras income tax.
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2.4 TAXATION (CONTINUED)
Income tax and royalty-related tax recognised in the income statement for the Group are as follows:
2019 2018 US$million US$million(a) Income tax expense
Current tax expense/(benet) Current year 44 70 Adjustments for prior years (3) (4) 41 66Deferred tax expense Origination and reversal of temporary dierences 264 365 Adjustments for prior years 36 8 300 373 Total income tax expense 341 439
(b) Royalty-related tax expenseCurrent tax expense Current year 78 36 78 36Deferred tax (benet)/expense Origination and reversal of temporary dierences (75) 1 (75) 1 Total royalty-related tax expense (net of income tax benet) 3 37
(c) Numerical reconciliation between pre-tax net prot and tax expense Prot before tax 1,018 1,106 Prima facie income tax expense at 30% (2018: 30%) 305 332Increase/(decrease) in income tax expense due to:
Foreign losses not recognised (4) 4 Non deductible expenses 6 3 Exchange and other translation variations – 99 Tax adjustments relating to prior years 33 4 Other 1 (3) Income tax expense 341 439 Royalty-related tax expense (net of income tax benet) 3 37 Total tax expense 344 476
Notes to the Consolidated Financial StatementsSection 2: Financial Performance
2.4 TAXATION (CONTINUED)
(d) Deferred tax assets and liabilitiesDeferred tax is determined using the statement of nancial position approach, providing for temporary dierences between thecarrying amounts of assets and liabilities for nancial reporting purposes and the appropriate tax bases.The following temporary dierences are not provided for:
? the initial recognition of assets or liabilities that aect neither accounting or taxable prot; nor? dierences 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 assetsand liabilities, using tax rates enacted or substantively enacted at the reporting date. Signicant judgement – Uncertain tax positionsThe calculation of the Group’s tax charge involves a degree of estimation and judgement in respect of certain items for which the
ultimate tax determination is uncertain.The Group recognises deferred tax assets only to the extent that it is probable that future taxable prots will be available againstwhich the asset can be utilised. Future taxable prots are estimated by internal budgets and forecasts. Deferred tax assets arereduced to the extent that it is no longer probable that the related tax benet will be realised. Assets Liabilities Net (Restated) (Restated) (Restated) Recognised deferred tax 2019 2018 2019 2018 2019 2018 assets and liabilities US$million US$million US$million US$million US$million US$million Exploration and evaluation assets 58 64 (289) (85) (231) (21) Oil and gas assets 647 644 (801) (668) (154) (24) Other assets 34 88 (90) (111) (56) (23) Derivative nancial instruments 18 – (20) (16) (2) (16) Interest-bearing loans and borrowings 184 126 – – 184 126 Provisions 44 73 – – 44 73 Royalty-related tax – 397 (479) (947) (479) (550) Other items 2 19 – (186) 2 (167)Tax value of carry-forward losses recognised 751 882 – – 751 882 Tax assets/(liabilities) 1,738 2,293 (1,679) (2,013) 59 280 Set-o of tax (868) (807) 868 807 – – Net tax assets 870 1,486 (811) (1,206) 59 280
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2.4 TAXATION (CONTINUED)
(d) Deferred tax assets and liabilities (continued)Accounting judgement and estimate – Deferred taxes unrecognisedDeferred tax assets have not been recognised in respect of the following items set out below, because it is not probable that thetemporary dierences will reverse in the future and that there will be sucient future taxable prots against which the benets canbe utilised. There are no tax losses which are expected to expire. The remaining deductible temporary dierences and tax losses donot expire under current tax legislation. Unrecognised deferred tax assets 2019 2018 US$million US$millionDeferred tax assets have not been recognised in respect of the following items:
Temporary dierences in relation to investments in subsidiaries 3,814 4,500 Deductible temporary dierences relating to royalty-related tax (net of income tax) 1,428 5,858 Tax losses 440 228 5,682 10,586
2.5 EARNINGS PER SHARE
Basic earnings per share amounts are calculated by dividing net prot or loss for the year attributable to ordinary equity holders ofSantos Limited by the weighted average number of ordinary shares outstanding during the year.Diluted earnings per share amounts are calculated by adjusting basic earnings per share by the weighted average number of ordinaryshares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.Earnings used in the calculation of basic and diluted earnings per share reconciles to the net prot or loss after tax in the incomestatement as follows:
2019 2018 US$million US$million Earnings used in the calculation of basic and diluted earnings per share 674 630The weighted average number of shares used for the purpose of calculating diluted earnings per share reconciles to the number used tocalculate basic earnings per share as follows:
2019 2018 Number of shares Number of shares Basic earnings per share 2,083,007,100 2,083,028,582 Dilutive potential ordinary shares 16,499,100 15,065,580 Diluted earnings per share 2,099,506,200 2,098,094,162Earnings per share attributable to the equity holders of Santos Limited 2019 2018 ? ?Basic earnings per share 32.4 30.2Diluted earnings per share 32.1 30.0
Notes to the Consolidated Financial StatementsSection 2: Financial Performance
2.6 DIVIDENDS
Dividends are recognised as a liability at the time the Directors resolve to pay or declare the dividend. DividendDividends recognised during the year Franked/ per share Total unfranked US? US$million20192018 Final ordinary dividend – paid on 28 March 2019 Franked 6.2 1272019 Interim ordinary dividend – paid on 26 September 2019 Franked 6.0 124 12.2 25120182018 Interim ordinary dividend – paid on 27 September 2018 Franked 3.5 73 3.5 73DividendDividends declared in respect of the year Franked/ per share Total unfranked US? US$million2019Final ordinary dividend Franked 5.0 104Interim ordinary dividend Franked 6.0 124 11.0 2282018Final ordinary dividend Franked 6.2 127Interim ordinary dividend Franked 3.5 73 9.7 200Dividend franking account 2019 2018 US$million US$million30% franking credits available to the shareholders of Santos Limited for future distribution 232 331
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2.7 OTHER INCOME
2019 2018 Note US$million US$millionOther incomeChange in future restoration assumptions 3.4 2 46Gain on sale of non-current assets 12 56Gain on disposal of subsidiaries – 56Other income associated with lease arrangements 3.5 42 –Insurance recoveries 28 3Overriding royalties 13 9Dividend income 2 3Other 10 7Total other income 109 180Net gain on sale of non-current assets:
Proceeds on disposals 10 26Adjusted for:
Book value of oil and gas liabilities disposed – 34 Book value of other land, buildings, plant and equipment disposed – (4) Book value of working capital disposed 2 – Total net gain on sale of non-current assets 12 56Comprising:
Net gain on sale of oil and gas assets 12 52 Net gain on sale of other land, buildings, plant and equipment – 4 12 56Reconciliation to cash inows from proceeds on disposal of non-current assets:
Proceeds after recoupment of current year exploration and evaluation expenditure 10 26 Amounts received from disposals 10 26 Total proceeds on disposal of non-current assets 10 26Comprising:
Proceeds from disposal of oil and gas assets 12 18 Proceeds from disposal of other land, buildings, plant and equipment – 8 Proceeds from disposal of working capital (2) – 10 26
Notes to the Consolidated Financial StatementsSection 2: Financial Performance
This section includes information about the assets used by the Group to generate prots and revenue, specically informationrelating to exploration and evaluation assets, oil and gas assets, associated restoration obligations, and commitments for capitalexpenditure not yet recognised as a liability.The life cycle of the Group’s assets is summarised as follows:
Explorationand evaluation
Appraisal drillingDevelopmentProductionDecommissioning
Abandonmentand restoration
3.1 EXPLORATION AND EVALUATION ASSETS
Exploration and evaluation expenditureExploration and evaluation activity involves the search for hydrocarbon resources, the determination of technical feasibility and theassessment of commercial viability of an identied resource. Expenditure in respect of each area of interest is accounted for using thesuccessful eorts method of accounting.The successful eorts method requires all exploration and evaluation expenditure to be expensed in the period it is incurred, exceptthe costs of acquiring interests in new exploration and evaluation assets, the cost of successful wells and appraisal costs relating todetermining development feasibility, which are capitalised as intangible exploration and evaluation assets.Exploration and evaluation expenditure is recognised in relation to an area of interest when the rights to tenure of the area of interest arecurrent and either:
? such expenditure is expected to be recovered through successful development and commercial exploitation of the area ofinterest or, alternatively, by its sale; or? the exploration activities in the area of interest have not yet reached a stage that permits reasonable assessment of theexistence of economically recoverable reserves and active and signicant operations in, or in relation to, the area of interest arecontinuing.Where an ownership interest in an exploration and evaluation asset is exchanged for another, the transaction is recognised by referenceto the carrying value of the original interest. Any cash consideration paid, including transaction costs, is accounted for as an acquisitionof exploration and evaluation assets. Any cash consideration received, net of transaction costs, is treated as a recoupment of costspreviously capitalised with any excess accounted for as a gain on disposal of non-current assets.No amortisation is charged during the exploration and evaluation phase.Acquisition of assets
All assets acquired are recorded at their cost of acquisition, being the amount of cash or cash equivalents paid, and the fair value ofassets given, shares issued or liabilities incurred. The cost of an asset comprises the purchase price including any incidental costs directlyattributable to the acquisition, any costs directly attributable to bringing the asset to the location and condition necessary for it to becapable of operating, and the estimate of the costs of dismantling and removing the asset and restoring the site on which it is located.Exploration licence and leasehold property acquisition costs are capitalised as intangible assets. Licence costs paid in connection with aright to explore in an existing exploration area are capitalised and amortised over the term of the permit.
Notes to the Consolidated Financial StatementsSection 3: Capital Expenditure, Operating Assetsand Restoration Obligations
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3.1 EXPLORATION AND EVALUATION ASSETS (CONTINUED)
Signicant judgement – Exploration and evaluationThe application of this policy requires management to make certain estimates and assumptions as to future events and circumstances,particularly in relation to the assessment of whether economic quantities of resources have been found. Any such estimates andassumptions may change as new information becomes available. If, after having capitalised exploration and evaluation expenditure,management concludes that the capitalised expenditure is unlikely to be recovered by future exploitation or sale, then the relevantcapitalised amount will be impaired through the income statement. (Restated) 2019 2018 US$million US$millionCost 2,527 2,530Less: Impairment (1,340) (1,549)Balance at 31 December 1,187 981Reconciliation of movementsBalance at 1 January 981 459Acquisitions 18 606Additions 242 86Disposals – (2)Expensed relating to unsuccessful wells (24) (10)Impairment losses (24) (129)Transfer to oil and gas assets in production (6) –Exchange dierences – (29)Balance at 31 December 1,187 981Comprising:
Acquisition costs 675 667 Successful exploration wells 440 242 Pending determination of success 72 72 1,187 981
3.2 OIL AND GAS ASSETS
Oil and gas assets are usually single oil or gas elds being developed for future production or that are in the production phase. Whereseveral individual oil or gas elds are to be produced through common facilities, the individual oil or gas eld and the associatedproduction facilities are managed and reported as a single oil and gas asset.
Assets in developmentWhen the technical and commercial feasibility of an undeveloped oil or gas eld has been demonstrated and approval of commercialdevelopment occurs, the eld enters its development phase from the exploration and evaluation phase. Expenditure on the construction,installation or completion of infrastructure facilities such as platforms, pipelines, and the drilling of development wells, as well asexploration and evaluation costs, are capitalised as tangible assets within oil and gas assets. Other subsurface expenditures include thecosts of de-watering coal seam gas elds to provide access to coal seams to enable production from coal seam gas reserves. De-watering costs include the costs of extracting, transporting, treating and disposing of water during the development phase of the coalseam gas elds.When commercial operation commences, the accumulated costs are transferred to oil and gas producing assets.
Notes to the Consolidated Financial StatementsSection 3: Capital Expenditure, Operating Assetsand Restoration Obligations
3.2 OIL AND GAS ASSETS (CONTINUED)
Producing assetsThe costs of oil and gas assets in production are separately accounted for as tangible assets and include past exploration and evaluationcosts, pre-production development costs and the ongoing costs of continuing to develop reserves for production and to expand orreplace plant and equipment and any associated land and buildings.
Ongoing exploration and evaluation activitiesOften the initial discovery and development of an oil or gas asset will lead to ongoing exploration for, and evaluation of, potential new oilor gas elds in the vicinity with the intention of producing any near-eld discoveries using the infrastructure in place.Exploration and evaluation expenditure associated with oil and gas assets is accounted for in accordance with the policy in note 3.1.Exploration and evaluation amounts capitalised in respect of oil and gas assets are separately disclosed in the table below.Depreciation and depletionDepreciation charges are calculated to write-o the value of buildings, plant and equipment over their estimated economic useful lives tothe Group. Each component of an item of buildings, plant and equipment with a cost that is signicant in relation to the total cost of theasset is depreciated separately.Depreciation of onshore buildings, plant and equipment and corporate assets is calculated using the straight-line method of depreciationfrom the date the asset is available for use, unless a units of production method represents a more reasonable allocation of the asset’sdepreciable value over its economic useful life.The estimated useful lives for each class of onshore assets for the current and comparative periods are generally as follows:
? Buildings 20 – 50 years? Pipelines 10 – 30 years? Plant and facilities 10 – 50 yearsDepreciation of oshore plant and equipment is calculated using the units of production method from the date of commencement ofproduction.Depletion charges are calculated to amortise the depreciable value of carried forward exploration, evaluation and subsurfacedevelopment expenditure over the life of the estimated Proved plus Probable (“2P”) reserves for a hydrocarbon reserve, together withfuture subsurface costs necessary to develop the respective hydrocarbon reserve.Signicant judgement – Estimates of reserve quantitiesThe estimated quantities of Proved plus Probable (“2P”) hydrocarbon reserves reported by the Group are integral to the calculationof depletion and depreciation expense and incorporated into the assessment of impairment of assets. Estimated reserve quantities arebased upon interpretations of geological and geophysical models and assessments of the technical feasibility and commercial viabilityof producing the reserves. These assessments require assumptions to be made regarding future development and production costs,commodity prices, exchange rates and scal regimes. The estimates of reserves may change from period to period as the economicassumptions used to estimate the reserves can change from period to period, and as additional geological data is generated during thecourse of operations. Reserves estimates are prepared in accordance with the Group’s policies and procedures for reserves estimationwhich conform to guidelines prepared by the Society of Petroleum Engineers.Accounting judgement and estimate – Depletion chargesDepletion and certain depreciation charges are calculated using the units of production method. This is based on barrels of oil equivalentwhich will amortise the cost of carried-forward exploration, evaluation and subsurface development expenditure (“subsurface assets”)over the life of the estimated 2P hydrocarbon reserves for an asset or group of assets, together with future subsurface costs necessaryto develop the hydrocarbon reserves in the respective asset or group of assets.
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3.2 OIL AND GAS ASSETS (CONTINUED)
(Restated) 2019 2018Subsurface Plant and Subsurface Plant and assets equipment Total assets equipment Total US$million US$million US$million US$million US$million US$millionCost 9,646 16,544 26,190 9,441 16,187 25,628Less: Accumulated depreciation, depletion and impairment (6,506) (8,288) (14,794) (6,365) (7,980) (14,345)Balance at 31 December 3,140 8,256 11,396 3,076 8,207 11,283Reconciliation of movementsAssets in developmentBalance at 1 January 134 156 290 119 65 184Additions
10 21 31 16 91 107Transfer to oil and gas assets in production (90) (123) (213) – – –Exchange dierences – – – (1) – (1)Balance at 31 December 54 54 108 134 156 290Producing assetsBalance at 1 January 2,942 8,051 10,993 2,019 7,333 9,352Additions
1,2 428 684 1,112 212 159 371Acquisition – – – 1,176 1,124 2,300Transfer from exploration and evaluation assets 6 – 6 – – –Transfer from oil and gas assets in development 90 123 213 – – –Disposals – – – (148) (8) (156)Depreciation and depletion (377) (622) (999) (239) (405) (644)Net impairment (losses)/reversals (3) (34) (37) 29 – 29Exchange dierences – – – (107) (152) (259)Balance at 31 December 3,086 8,202 11,288 2,942 8,051 10,993Total oil and gas assets 3,140 8,256 11,396 3,076 8,207 11,283Comprising:
Exploration and evaluationexpenditure pending commercialisation 55 6 61 86 5 91 Other capitalised expenditure 3,085 8,250 11,335 2,990 8,202 11,192 3,140 8,256 11,396 3,076 8,207 11,283
1. Includes impact on restoration assets following changes in future restoration provision assumptions (refer note 3.4).
2. Includes impact of AASB 16 recognition of right-of-use assets (refer note 3.5).
Notes to the Consolidated Financial StatementsSection 3: Capital Expenditure, Operating Assetsand Restoration Obligations
3.3 IMPAIRMENT OF NON-CURRENT ASSETS
Impairment of goodwill
Goodwill arises as a result of a business combination and has an indenite useful life which is not subject to amortisation. Goodwill isinitially measured at cost and is subsequently measured at cost less any accumulated impairment losses. For the purposes of impairmenttesting, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generatingunits (“CGU”) that are expected to benet from the combination, irrespective of whether other assets or liabilities of the acquiree areassigned to those units. Goodwill that is created on acquisition as a consequence of deferred tax balances is tested for impairment netof those associated deferred tax balances. Goodwill is tested at least annually for impairment and more frequently if events or changesin circumstances indicate that it might be impaired.Where goodwill has been allocated to a CGU and part of the operation within that unit is disposed of, the goodwill associated with thedisposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal.
Impairment of oil and gas assetsThe carrying amounts of the Group’s oil and gas assets are reviewed at each reporting date to determine whether there is anyindication of impairment or impairment reversal. Where an indicator of impairment or impairment reversal exists, a formal estimate of therecoverable amount is made.a) Indicators of impairment – Exploration and evaluation assetsThe carrying amounts of the Group’s exploration and evaluation assets are reviewed at each reporting date, to determine whetherany of the following indicators of impairment exists:
? tenure over the licence area has expired during the period or will expire in the near future, and is not expected to be renewed; or? substantive expenditure on further exploration for, and evaluation of, mineral resources in the specic area is not budgeted orplanned; or? exploration for, and evaluation of, resources in the specic area have not led to the discovery of commercially viable quantities of
resources, and the Group has decided to discontinue activities in the specic area; or? sucient data exists to indicate that although a development is likely to proceed, the carrying amount of the exploration andevaluation asset is unlikely to be recovered in full from successful development or from sale.b) Cash-generating units – Oil and gas assetsOil and gas assets, land, buildings, plant and equipment are assessed for impairment on a CGU basis. A CGU is the smallestgrouping of assets that generates independent cash inows, and generally represents oil and gas elds, that are being producedthrough a common facility.Individual assets within a CGU may become impaired if their ongoing use changes or if the benets to be obtained from ongoinguse are likely to be less than the carrying value of the individual asset. An impairment loss is recognised in the income statementwhenever the carrying amount of an asset or its CGU exceeds its recoverable amount.Impairment losses or reversal of impairment lossesAn impairment loss is recognised in the income statement whenever the carrying amount of an asset or its CGU (including any amountof allocated goodwill) exceeds its recoverable amount. Impairment losses recognised in respect of CGUs are allocated to reduce goodwillrst (if goodwill is included within the carrying amount of the CGU) and then allocated to reduce the carrying amount of the assets inthe CGU on a pro-rata basis.A reversal of impairment losses is recognised in the income statement when the recoverable amount of an asset or CGU exceedsits carrying amount. An impairment loss is reversed only to the extent that the assets carrying amount does not exceed the carryingamount that would have been determined, if no impairment loss had been recognised.
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3.3 IMPAIRMENT OF NON-CURRENT ASSETS (CONTINUED)
Recoverable amountThe recoverable amount of an asset or CGU is the greater of its fair value less costs of disposal (“FVLCD”) (based on level 3 fair valuehierarchy) and its value-in-use (“VIU”), using an asset’s estimated future cash ows (as described below) discounted to their presentvalue using a pre-tax discount rate that reects current market assessments of the time value of money and the risks specic to theasset.Signicant judgement – Impairment of oil and gas assetsFor oil and gas assets, the expected future cash ow estimation is based on a number of factors, variables and assumptions, the mostimportant of which are estimates of reserves, future production proles, commodity prices, costs and foreign exchange rates. Currentclimate change legislation is also factored into the calculation and future uncertainty around climate change risks continue to bemonitored. In most cases, the present value of future cash ows is most sensitive to estimates of future oil price and discount rates.The estimated future cash ows for the VIU calculation are based on estimates, the most signicant of which are hydrocarbon reserves,future production proles, commodity prices, operating costs including third-party gas purchases and any future development costsnecessary to produce the reserves. Under a FVLCD calculation, future cash ows are based on estimates of hydrocarbon reserves inaddition to other relevant factors such as value attributable to additional resource and exploration opportunities beyond reserves basedon production plans.Estimates of future commodity prices are based on the Group’s best estimate of future market prices with reference to external marketanalysts’ forecasts, current spot prices and forward curves. Future commodity prices are reviewed at least annually. Where volumes arecontracted, future prices are based on the contracted price.Future Brent prices (US$/bbl) used were:
202020212022
2023
2024
2025
65.0066.3072.8374.2875.7777.29
1 Based on US$70/bbl (2020 real) from 2022 escalated at 2.0% p.a.
Forecasts of the exchange rate for foreign currencies, where relevant, are estimated with reference to observable external market dataand forward values, including analysis of broker and consensus estimates. The future estimated rates applied were (A$/US$):
2020202120222023
0.700.720.720.75
1 From 2023 the long-term exchange rate assumption remains at A$:US$0.75.
The discount rates applied to the future forecast cash ows are based on the weighted average cost of capital, adjusted for risks whereappropriate, including functional currency of the asset, and risk prole of the countries in which the asset operates. The range of pre-taxdiscount rates that have been applied to non-current assets is between 11% and 19%.In the event that future circumstances vary from these assumptions, the recoverable amount of the Group’s oil and gas assets couldchange materially and result in impairment losses or the reversal of previous impairment losses.Due to the interrelated nature of the assumptions, movements in any one variable can have an indirect impact on others and individualvariables rarely change in isolation. Additionally, management can be expected to respond to some movements, to mitigate downsidesand take advantage of upsides, as circumstances allow. Consequently, it is impracticable to estimate the indirect impact that a changein one assumption has on other variables and hence, on the likelihood, or extent, of impairments, or reversals of impairments, underdierent sets of assumptions in subsequent reporting periods.
Notes to the Consolidated Financial StatementsSection 3: Capital Expenditure, Operating Assetsand Restoration Obligations
3.3 IMPAIRMENT OF NON-CURRENT ASSETS (CONTINUED)
Impairment expense 2019 2018 US$million US$millionCurrent assetsAssets held for sale, subsequently disposed of – 47Total impairment of current assets – 47
Non-current assetsExploration and evaluation assets 24 53Oil and gas assets 37 –Total impairment of non-current assets 61 53Total impairment 61 100Recoverable amounts and resulting impairment write-downs recognised in the year ended 31 December 2019:
Subsurface Plant and Recoverable assets equipment Total amount
2019 Segment US$million US$million US$million US$millionOil and gas assets – producing:
Barrow Western Australia – 34 34 nil Other Various 3 – 3 nilTotal impairment of oil and gas assets 3 34 37
Exploration and evaluation assets:
Gunnedah Basin Queensland & NSW 11 – 11 nil
PNG – PPL 395 & PPL 464 PNG 9 – 9 nil
Other Various 4 – 4 nil
Total impairment of exploration and evaluation assets 24 – 24Total impairment of oil and gas assets and exploration andevaluation assets 27 34 61
1 Recoverable amounts represent the carrying values of assets before deducting the carrying value of restoration liabilities. All producing oil and gas asset amounts are calculated using thevalue-in-use (“VIU”) method, whilst all exploration and evaluation asset amounts use the fair value less costs of disposal (“FVLCD”) method.2 Impairment of exploration and evaluation assets relates to certain individual licenses/areas of interest that have been impaired to nil.Oil and gas assetsBarrowThe impairment of Barrow has arisen due to an increase in oil and gas asset carrying values, following remeasurement of restorationobligations. The recoverable amount of the asset is nil.
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3.3 IMPAIRMENT OF NON-CURRENT ASSETS (CONTINUED)
Recoverable amounts and resulting impairment write-downs recognised in the year ended 31 December 2018:
Subsurface Plant and Recoverable assets equipment Total amount2018 Segment US$million US$million US$million US$millionExploration and evaluation assets:
Gunnedah Basin Queensland & NSW 12 – 12 nil
PNG – PPL 426 PNG 29 – 29 nil
PNG – PPL 261 PNG 4 – 4 nil
WA-214 (Davis 1) Western Australia 8 – 8 nil
Total impairment of exploration and evaluation assets 53 – 531 Impairment of exploration and evaluation assets relates to certain individual licences/areas of interest that have been impaired to nil.
Exploration and evaluation assetsThe impairment of PNG – PPL 426 and PNG – PPL 261 has arisen mainly from the impact of uncertainty around access to necessaryinfrastructure and viability and timing of future third-party export routes.
Notes to the Consolidated Financial StatementsSection 3: Capital Expenditure, Operating Assetsand Restoration Obligations
3.4 RESTORATION OBLIGATIONS AND OTHER PROVISIONS
Provisions recognised for the period are as follows:
(Restated)2019 2018 Note US$million US$millionCurrent Restoration obligations 59 59 Other provisions 63 57 122 116Non-current Restoration obligations 2,223 2,034 Other provisions 106 125 2,329 2,159
Restoration obligations
Provisions for future removal and environmental restoration costs are recognised where there is a present obligation as a result ofexploration, development, production, transportation or storage activities having been undertaken, and it is probable that future outowof economic benets will be required to settle the obligation. The estimated future obligations include the costs of removing facilities,abandoning wells and restoring the aected areas and is the best estimate of the present value of the future expenditure required tosettle the restoration obligation at the reporting date, based on current legal requirements or observed industry analogs. Any changesin the estimate are reected in the present value of the restoration provision at the reporting date, with a corresponding change in thecost of the associated asset. In the event the restoration provision is reduced, the cost of the related oil and gas asset is reduced by anamount not exceeding its carrying value. If the decrease in restoration provision exceeds the carrying amount of the asset, the excess isrecognised immediately in the income statement as other income.The amount of the provision for future restoration costs relating to exploration, development and production facilities is capitalised anddepleted as a component of the cost of those activities.
Signicant judgement – Provision for restorationThe Group estimates the future removal and restoration costs of oil and gas production facilities, wells, pipelines and related assets atthe time of installation of the assets and reviews these assessments periodically. In most instances the removal of these assets willoccur many years in the future. The estimate of future removal costs therefore requires management to make judgements regarding theremoval date, future environmental legislation, and the extent of restoration activities required.The Group has recorded provisions for restoration obligations as follows:
2019 2018 US$million US$million Current provision 59 59 Non-current provision 2,223 2,034 2,282 2,093Movements in the provision during the nancial year are set out below:
Total restoration US$million Balance at 1 January 2019 2,093 Provisions made and changes to assumptions during the year (156) Provisions used during the year (35) Unwind of discount 48 Change in discount rate 342 Exchange dierences (10) Balance at 31 December 2019 2,282
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3.4 RESTORATION OBLIGATIONS AND OTHER PROVISIONS (CONTINUED)
Other provisions
In addition to the provision for restoration shown above, other items for which a provision has been recorded are:
(Restated) 2019 2018 Note US$million US$millionCurrent Employee benets 7.1 56 55 Onerous contracts 2 2 Other provisions 5 – 63 57Non-current Employee benets 7.1 12 9 Dened benet obligations 7.1 – 1 Onerous contracts 8 29 Remediation provision 21 – Other provisions 65 86 106 125
3.5 LEASES
Denition of a leaseThe Group has adopted AASB 16 Leases from 1 January 2019 (refer note 8.4(c) for related transition disclosures).The Group assesses whether a contract is or contains a lease based on the new denition of a lease. Under AASB 16, a contractis, or contains a lease, if the contract conveys a right to control the use of an identied asset for a period of time in exchange forconsideration.The Group as a lesseeRecognition of lease liabilities and right-of-use assetsUnder AASB 16, as a lessee the Group will recognise a right-of-use asset, representing its right to use the underlying asset, and a leaseliability, for all leases with a term of more than 12 months; exempting those leases where the underlying asset is deemed to be of alow value.The Group recognises a right-of-use asset and a lease liability at the lease commencement date, i.e. when the underlying asset isrst available for use. The right-of-use asset is initially measured to be equal to the lease liability and adjusted for any lease incentivesreceived, initial direct costs and estimates of costs to dismantle or remove the underlying leased asset. Subsequently the right-of-useasset is measured at cost less any accumulated depreciation and impairment losses, and adjusted for certain remeasurements of thelease liability.The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date,discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowingrate, adjusted for asset-specic factors.The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments made. It isremeasured when there is a change in future lease payments arising from a change in an index or rate, a change in the estimate of theamount expected to be payable under a residual value guarantee, or as appropriate, changes in the assessment of whether purchase,renewal or termination options are reasonably certain to be exercised.The Group has applied judgement to determine the lease term for some lease contracts in which it is a lessee that include purchase,renewal or termination options. The assessment of whether the Group is reasonably certain to exercise such options impacts the leaseterm, which aects the value of lease liabilities and right-of-use assets recognised.
Notes to the Consolidated Financial StatementsSection 3: Capital Expenditure, Operating Assetsand Restoration Obligations
3.5 LEASES (CONTINUED)
Modications to lease arrangementsIn the event that there is a modication to a lease arrangement, a determination of whether the modication results in a separate leasearrangement being recognised needs to be made.Where the modication does result in a separate lease arrangement needing to be recognised, due to an increase in scope of a leasethrough additional underlying leased assets and a commensurate increase in lease payments, the measurement requirements asdescribed above need to be applied.Where the modication does not result in a separate lease arrangement, from the eective date of the modication, the Groupwill remeasure the lease liability using the redetermined lease term, lease payments and applicable discount rate. A correspondingadjustment will be made to the carrying amount of the associated right-of-use asset. Additionally, where there has been a partial or fulltermination of a lease, the Group will recognise any resulting gain or loss in the income statement.Lease impact on joint operating arrangementsWhere lease arrangements impact the Group’s joint operating arrangements (“JOA”), the facts and circumstances of each leasearrangement in a JOA are assessed to determine the Group’s rights and obligations associated with the lease arrangement.The Group applies judgement in its determination of which party directs the use of a leased asset. Outlined below are a number ofscenarios that could exist for lease arrangements which impact the Group’s JOAs:
1) Where it has been determined that the Group directs the use of the leased asset, and is the only party with legal obligation
to pay the lessor, the Group will recognise the full lease liability and right-of-use asset on its statement of nancial position.Depreciation is then recognised on the entire right-of-use asset, however, other income would be recognised for any amount of the lease payments that are recoverable from other parties, representing other income associated with lease arrangements; or
2) If it has been determined that the leased asset is either jointly controlled by all parties in a joint operation, or is utilised by a single
joint operation, and the Group is the only party with a legal obligation to pay the lessor, the Group will recognise the full lease liability, its net share of the right-of-use asset, a receivable for the amounts recoverable from other parties; or
3) In instances where it has been determined that all parties to the joint arrangement jointly have the right to control the leased
asset and all parties have a legal obligation to make lease payments to the lessor, the Group will recognise only its net share of the lease liability and right-of-use asset on its consolidated statement of nancial position.
The Group’s leasing activitiesThe Group leases a number of dierent types of assets, including properties and plant and production equipment, such as oil rigs. Thelease arrangements have varying renewal and termination options. Lease terms for major categories of leased asset are shown below:
? Oil rigs 1 – 5 years? Marine vessels, including LNG tankers 3 – 30 years? Helicopters 1 – 5 years? Building oce space 10 – 20 years? Other plant and production equipment 2 – 20 yearsThe Group presents the following in relation to AASB 16, within its consolidated statement of nancial position:
? “Other land, buildings, plant and equipment” or “Oil and gas assets” – right-of-use assets are presented in either,depending on the type of leased asset;? “Lease liabilities” – Lease liabilities; and? “Other nancial assets” – Sublease receivables.Set out below are the carrying amounts of right-of-use assets recognised and their movements during the period:
Other land, Oil and gas buildings, plant US$million assets and equipment Total31 December 2018 – assets relating to previously recognised nance leases 54 – 54 Transition – right-of-use assets recognised 1 January 2019 185 79 264 Additions 140 32 172 Depreciation (84) (6) (90) Balance at 31 December 2019 295 105 400
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3.5 LEASES (CONTINUED)
Where the payments made under a lease contract would previously have been capitalised, the depreciation on the corresponding right-of-use asset is capitalised in lieu. During the period, $26 million of depreciation on right-of-use assets has been capitalised and forms acomponent of additions to “Oil and gas assets”, this capitalisation results in a dierence between the amount of depreciation expenserecorded during the period and the movement in accumulated depreciation.Set out below are the carrying amounts of lease liabilities and the movements during the period:
Lease liabilities US$million 31 December 2018 – lease liabilities relating to previously recognised nance leases 62 Transition – lease liabilities recognised 1 January 2019 280 Additions 172 Accretion of interest 19 Payments (106) Foreign exchange gain on lease liabilities (2) Balance at 31 December 2019 425Set out below are the maturity of the lease liabilities:
2019 2018 US$million US$million Not later than one year 117 9 Later than one year but not later than ve years 241 37 Later than ve years 217 106 Minimum lease payments 575 152 Future nance charges (150) (90) Total lease liabilities
425 62
Lease liabilities Current 114 1 Non-current 311 61 Total lease liabilities at 31 December 2019 425 621 For leases not yet commenced at reporting date refer to note 3.6.
Short-term and low-value lease asset exemptions
The Group had total cash outows for leases of $286 million in 2019, including outows for short-term leases, leases of low-value assets,and variable lease payments.For the 12-month period ended 31 December 2019, the following payments have been made for lease arrangements that have beenclassied as short-term or for low-value assets:
2019 US$millionShort-term leases 55Leases for low-value assets 56Total payments made 111
Notes to the Consolidated Financial StatementsSection 3: Capital Expenditure, Operating Assetsand Restoration Obligations
3.5 LEASES (CONTINUED)
Variable lease paymentsThe Group holds lease contracts which contain variable payments based on the usage prole of the leased asset. The type andquantum of activities undertaken utilising these assets (primarily oil rigs) is entirely at the Group’s discretion in response to operationalrequirements.The lease liability and corresponding right-of-use asset for these lease contracts is calculated based on the xed rental paymentcomponents of the contracts. The table below indicates the relative magnitude of variable payments to xed payments made during theyear ended 31 December 2019, for those lease contracts which contain a variable payment component. 2019 US$millionFixed payments (included in calculation of lease liability) 105Variable payments 70Total payments made for leases with a variable payment component 175
Other income associated with lease arrangements
Where it has been determined that the Group directs the use of the leased asset, and is the only party with legal obligation to pay thelessor, the Group recognises other income for any amount of the lease payments that are recoverable from other parties, representing“other income associated with lease arrangements” in the income statement. For the year ending 31 December 2019, the amountrecognised was $42 million (2018: $nil).
3.6 COMMITMENTS FOR EXPENDITURE
The Group has certain obligations to perform minimum exploration work and expend minimum amounts of money pursuant to the termsof the granting of petroleum exploration permits in order to maintain rights of tenure.These commitments may be varied as a result of renegotiations of the terms of the exploration permits, licences or contracts oralternatively upon their relinquishment. The minimum exploration commitments are less than the normal level of exploration expendituresexpected to be undertaken by the Group.The Group has the following commitments for expenditure for which no liabilities have been recorded in the nancial statements as thegoods or services have not been received, including commitments for non-cancellable lease arrangements where the lease term has notcommenced:
Capital Minimum exploration LeasesCommitments 2019 2018 2019 2018 2019 2018
US$million US$million US$million US$million US$million US$millionNot later than one year 106 112 71 180 1 34Later than one year but not later than ve years 98 12 251 417 3 106Later than ve years – – 2 3 – 102 204 124 324 600 4 242
1 Refer to note 8.4(c) for a reconciliation of lease commitments disclosed to the lease liability recognised on transition to AASB 16 Leases.
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This section provides information about the Group’s working capital balances and management, including cash owinformation. Cash ow management is a signicant consideration in running our business in an ecient and resourcefulmanner. We also consider inventories which contribute to the business platform for generating prots and revenues.
4.1 CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise cash balances and short-term deposits that are readily convertible to cash, are subject to aninsignicant risk of changes in value, and generally have an original maturity of three months or less.The carrying amounts of cash and cash equivalents represent fair value. Bank balances and short-term deposits earn interest at oatingrates based upon market rates. 2019 2018 US$million US$millionCash at bank and in hand 344 467Short-term deposits 723 849 1,067 1,316
(a) Restricted cash balances
In accordance with the terms of the PNG LNG project nancing, cash relating to the Group’s interest in undistributed cashows from the PNG LNG project is required to be held in restricted bank accounts. As at 31 December 2019 $99 million(2018: $147 million) was held in these accounts.
(b) Reconciliation of cash ows from operating activities 2019 2018 US$million US$million Net prot after income tax 674 630Add/(deduct) non-cash items:
Depreciation and depletion 1,000 667 Exploration and evaluation expensed – unsuccessful wells 24 10 Net impairment loss 61 100 Net loss on fair value derivatives 10 69 Share-based payment expense 12 11 Unwind of the eect of discounting on provisions 53 46 Foreign exchange losses/(gains) 11 (146) Gain on sale of non-current assets and subsidiaries (12) (112) Other income associated with disposal (7) – Other (2) (2) Net cash provided by operating activities before changes in assets or liabilities 1,824 1,273Add/(deduct) change in operating assets or liabilities, net of acquisitionsor disposals of businesses:
Increase in trade and other receivables (1)– (Increase)/decrease in inventories (13) 13 Decrease in other assets 8 4 Increase in net deferred tax assets 221 336 (Decrease)/increase in net current tax liabilities (12) 25 Increase/(decrease) in trade and other payables 32 (60) Decrease in provisions (13) (13) Net cash provided by operating activities 2,046 1,578
Notes to the Consolidated Financial StatementsSection 4: Working Capital Management
4.1 CASH AND CASH EQUIVALENTS (CONTINUED)
(c) Reconciliation of liabilities arising from nancing activities to nancing cash ows
Assets held Short-term Long-term Lease to hedgeUS$million borrowings borrowings liabilities borrowings TotalBalance at 1 January 2018 206 3,674 63 (61) 3,882Financing cash ows
(220) 1,193 – – 973Non-cash changes:
Changes in fair values – (19) (1) 27 7 Reclassication to current liability 977 (977) – – – Other 3 20 – – 23Balance at 31 December 2018 966 3,891 62 (34) 4,885Balance at 1 January 2019 966 3,891 62 (34) 4,885Lease liabilities recognised on transition to AASB 16 – – 280 – 280Financing cash ows
(974) 92 (87) – (969)Non-cash changes:
Changes in fair values 7 (3) – 8 12 Reclassication to current liability 210 (210) – – – Additions to lease liabilities – – 172 – 172 Other (13) 30 (2) – 15Balance at 31 December 2019 196 3,800 425 (26) 4,3951 Financing cash ows consist of the net amount of proceeds from borrowings, repayments of borrowings and repayment of lease liabilities in the statement of cash ows.
4.2 TRADE AND OTHER RECEIVABLES
Trade and other receivables are initially recognised at transaction price, which in practice is the equivalent of cost, less any impairmentlosses.Long-term receivables are initially recognised at fair value and are subsequently stated at amortised cost, less any impairment losses.Trade receivables are non-interest-bearing and settlement terms are generally within 30 days. 2019 2018 US$million US$millionTrade receivables 348 368Other receivables 206 153 554 521Due to the nature of the Group’s receivables, their carrying amount is considered to approximate their fair value.The Group applies the simplied approach to providing for expected credit losses for all trade receivables as set out in note 5.5(e).
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4.3 INVENTORIES
Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinarycourse of business, less the estimated costs of completion and selling expenses. Cost is determined as follows:
? drilling and maintenance stocks, which include plant spares, consumables and maintenance and drilling tools used for ongoing
operations, are valued at weighted average cost; and? petroleum products, which comprise extracted crude oil, liqueed petroleum gas, condensate and naphtha stored in tanks andpipeline systems and processed sales gas and ethane stored in subsurface reservoirs, are valued using the absorption costmethod. 2019 2018 US$million US$millionPetroleum products 186 173Drilling and maintenance stocks 115 115Total inventories at lower of cost and net realisable value 301 288Inventories included above that are stated at net realisable value 20 9
4.4 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 equivalentsthat will be required to discharge the obligation, gross of any settlement discount oered. Trade payables are non-interest-bearing andare settled on normal terms and conditions. 2019 2018 US$million US$millionTrade payables 507 503Non-trade payables 212 158 719 661The carrying amounts of trade and other payables are considered to approximate their fair values, due to their short-term nature.
Notes to the Consolidated Financial StatementsSection 4: Working Capital Management
Our business has exposure to capital, credit, liquidity and market risks. This section provides information relating to ourmanagement of, as well as our policies for measuring and managing, these risks.Capital risk management objectivesThe Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, allowing returns toshareholders and benets for other stakeholders to be maintained, and to retain an ecient capital structure. In order to optimise thecapital structure, the Group may adjust its dividend distribution policy, return capital to shareholders, issue new shares, draw or repaydebt or undertake other corporate initiatives consistent with its strategic objectives.In applying these objectives, the Group aims to:
? minimise the weighted average cost of capital whilst retaining appropriate nancial exibility;? ensure ongoing access to a range of debt and equity markets; and? maintain an investment-grade credit rating.A range of nancial metrics are used to monitor the capital structure including ratios measuring gearing, funds from operations to debt(“FFO-to-Debt”) and debt to earnings before interest, tax, depreciation and amortisation (“Debt-to-EBITDA”). The Group monitorsthese capital structure metrics on both an actual and forecast basis.At 31 December 2019 Santos Limited’s corporate credit rating was BBB- (stable outlook) from Standard & Poor’s.
5.1 INTEREST-BEARING LOANS AND BORROWINGS
Interest-bearing loans and borrowings are recognised initially at fair value, net of transaction costs incurred. Subsequent to initialrecognition, interest-bearing loans and borrowings are stated at amortised cost with any dierence between cost and redemption valuebeing recognised in the income statement over the period of the borrowings on an eective interest basis. The carrying values of theGroup’s interest-bearing loans and borrowings are shown below.Fixed-rate notes that are hedged by interest rate swaps are recognised at fair value.All borrowings are unsecured, with the exception of the secured bank loans and lease liabilities.All interest-bearing loans and borrowings, with the exception of secured bank loans and lease liabilities, are borrowed through SantosFinance Ltd, which is a wholly-owned subsidiary of Santos Limited. All interest-bearing loans and borrowings by Santos Finance Ltd areguaranteed by Santos Limited. Refer to note 3.5 for disclosures related to leases. 2019 2018 Ref US$million US$millionCurrentBank loans – secured (a) 136 156Bank loans – unsecured (b) 60 657Long-term notes (c) – 153 196 966Non-currentBank loans – secured (a) 1,187 1,318Bank loans – unsecured (b) 978 1,535Long-term notes (c) 1,635 1,038 3,8003,891
Notes to the Consolidated Financial StatementsSection 5: Funding and Risk Management
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5.1 INTEREST-BEARING LOANS AND BORROWINGS (CONTINUED)
The Group’s weighted average interest rate on interest-bearing liabilities was 5.47% for the year ended 31 December 2019 (2018:
5.28%).
(a) Bank loans – securedFacility PNG LNGCurrencyUS dollarsLimit$1,371 million (2018: $1,537 million)Drawn principal$1,371 million (2018: $1,537 million)Accounting balance$1,323 million (2018: $1,474 million) including prepaid amountsEective interest rate6.45% (2018: 6.10%)Maturity2024 and 2026OtherLoan facilities for the PNG LNG project, in which Santos entities hold an equity interest of
13.5%, were entered into by the joint venture participants on 15 December 2009 and are
provided by commercial banks and export credit agencies, bear xed and oating rates ofinterest and have nal maturity dates of June 2024 and June 2026 respectively.Assets pledged as security and restricted cashThe PNG LNG facilities include security over assets and entitlements of the participantsin respect of the project. The total carrying value of the Group’s assets pledged assecurity is $2,738 million at 31 December 2019 (2018: $2,762 million).As referred to in note 4.1, under the terms of the project nancing, cash relating to theGroup’s interest in undistributed project cash ows is required to be held in secured bankaccounts.
(b) Bank loans – unsecuredFacility Term bank loansCurrencyUS dollarsLimit$700 million (2018: $1,200 million)Drawn principal$700 million (2018: $1,200 million)Accounting balance$695 million (2018: $1,194 million) including prepaid amountsEective interest rate4.08% (2018: 4.18%)Maturity2024OtherTerm bank loans bear a oating interest rate. During 2019 Santos repaid the $500 million
2-year bridge facility.Facility Export credit agency supported loan facilitiesCurrencyUS dollarsLimit$343 million (2018: $1,001 million)Drawn principal$343 million (2018: $1,001 million)Accounting balance$343 million (2018: $998 million) including prepaid amountsEective interest rate3.75% (2018: 3.02%)Maturity2020–2024OtherLoan facilities are supported by various export credit agencies and bear a oating
interest rate. During 2019 Santos repaid the remaining $600 million balance of the
uncovered facility.
Notes to the Consolidated Financial StatementsSection 5: Funding and Risk Management
5.1 INTEREST-BEARING LOANS AND BORROWINGS (CONTINUED)
(c) Long-term notesFacility US private placement notesCurrencyUS dollarsLimit$227 million (2018: $377 million)Drawn principal$227 million (2018: $377 million)Accounting balance$255 million (2018: $405 million) including fair value accounting measurement and prepaid
amountsEective interest rate2.89% (2018: 1.58%)Maturity2022 and 2027OtherLong-term notes bear a xed interest rate of 6.45% to 6.81% (2018: 6.30% to 6.81%),
which have been swapped to oating rate commitments.Facility Regulation-S bondCurrencyUS dollarsLimit$1,400 million (2018: $800 million)Drawn principal$1,400 million (2018: $800 million)Accounting balance$1,380 million (2018: $786 million) including prepaid amountsEective interest rate4.79% (2018: 4.40%)Maturity2027 and 2029OtherBoth bonds bear xed interest rates.
5.2 NET FINANCE COSTS
Borrowing costs
Borrowing costs relating to major oil and gas assets under development are capitalised as a component of the cost of development.Where funds are borrowed specically for qualifying projects, the actual borrowing costs incurred are capitalised. Where the projects arefunded through general borrowings, the borrowing costs are capitalised based on the weighted average cost of borrowing. Borrowingcosts incurred after commencement of commercial operations are expensed to the income statement.All other borrowing costs are recognised in the income statement in the period in which they are incurred.Interest incomeInterest income is recognised in the income statement as it accrues using the eective interest method. 2019 2018 US$million US$millionFinance income Interest income 37 30Total nance income 37 30Finance costs Interest paid to third parties 239 210 Interest on lease liabilities 19 8 Deduct borrowing costs capitalised (15) (6) 243 212 Unwind of the eect of discounting on contract liabilities – deferred revenue 18 – Unwind of the eect of discounting on provisions 53 46Total nance costs 314 258Net nance costs 277 228
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5.3 ISSUED CAPITAL
Ordinary share capitalOrdinary share capital is classied as equity. The issued shares do not have a par value and there is no limit on the authorised sharecapital of the Company.Fully paid ordinary shares carry one vote per share, which entitles the holder to participate in dividends and the proceeds on windingup of the Company in proportion to the number of, and amounts paid on, the shares held. The market price of the Company’s ordinaryshares on 31 December 2019 was A$8.18 (2018: A$5.48).
Transaction costsTransaction costs of an equity transaction are accounted for as a deduction from equity, net of any related income tax benet. During2019 no transaction costs in respect of capital raisings completed have been deducted from equity (2018: $nil). 2019 2018Movement in ordinary shares Number of Number of 2019 2018
Note shares shares US$million US$millionBalance at 1 January 2,082,979,345 2,083,070,879 9,031 9,034Issue of new shares 155,000 – 1 –Shares purchased on-market (Treasury shares) – – (31) (10)Utilisation of Treasury shares on vesting of employee share schemes – – 9 7Replacement of ordinary shares with shares purchased on-market (37,719) (91,534) – –Balance at 31 December 2,083,096,626 2,082,979,345 9,010 9,031Included within the Group’s ordinary shares at 31 December 2019 are 10,000 (2018: 10,000) ordinary shares paid to one cent with avalue of $nil (2018: $nil).Treasury sharesTreasury shares are purchased primarily for use on vesting of employee share schemes. Shares are accounted for at weighted averagecost. During the period, $31 million (2018: $10 million) of Treasury shares were purchased on-market. 2019 2018Movement in Treasury shares Number of Number of
Note shares sharesBalance at 1 January 1,231,710 587,993Shares purchased on-market 5,750,000 2,500,000Treasury shares utilised:
Santos Employee Share1000 Plan 7.2 (150,192) (176,480) Santos Employee ShareMatch Plan 7.2 (572,196) (439,664) Utilised on vesting of SARs 7.2 (588,100) (615,471) Executive STI (deferred shares) 7.2 (696,921) (312,731) Executive STI (ordinary shares) (88,221) – 2016 Executive sign-on grants – (209,496) Santos Employee Share1000 Plan (relinquished shares) 2,227 4,093 Replacement of partially paid shares with shares purchased on-market – (15,000) Issue of new shares 155,000 – Replacement of ordinary shares with shares purchased on-market (37,719) (91,534)Balance at 31 December 5,005,588 1,231,710
Notes to the Consolidated Financial StatementsSection 5: Funding and Risk Management
5.4 RESERVES AND ACCUMULATED LOSSES
The balance of the Group’s reserves and accumulated losses and movements during the period, are disclosed in the statement ofchanges in equity.Foreign currency translation reserveThe Foreign currency translation reserve is used to record foreign exchange dierences arising from the translation of the nancialstatements of foreign entities from their functional currency to the Group's presentation currency.Prior to 1 January 2019, the Parent entity (Santos Limited) and certain entities within the Group had a functional currency of Australiandollars as a result of the economic environment in which they were operating. These entities were translated into the presentation currencyof the Group (US dollars), with exchange dierences arising on translation taken to the foreign currency translation reserve in equity.Eective 1 January 2019, the Parent entity and certain entities within the Group changed functional currency to US dollars, the samecurrency as the presentation currency of the Group.Foreign exchange dierences resulting from translation to presentation currency are recognised in the foreign currency translationreserve and subsequently transferred to the income statement on disposal of the operation.Hedging reserveThe hedging reserve comprises of the cash ow hedge reserve and the own credit revaluation reserve. The cash ow hedge reservecomprises the eective portion of the cumulative net change in the fair value of cash ow hedging instruments related to hedgedtransactions that have not yet occurred. The own credit risk revaluation reserve comprises the cumulative changes in the fair valueof the nancial liabilities designated at fair value through prot or loss attributable to changes in the Group’s own credit risk. Refer tonote 5.5(g) for a reconciliation and movement of cash ow hedge reserve and own credit revaluation reserve.Accumulated prots reserveThe accumulated prots reserve acts to quarantine prots generated in current and prior periods. The reserve was established during 2015.Accumulated lossesAccumulated losses represents the cumulative net prots/(losses) that have been generated across the Group.
5.5 FINANCIAL RISK MANAGEMENT
Exposure to foreign currency risk, interest rate risk, commodity price risk, credit risk and liquidity risk arises in the normal course of theGroup’s business. The Group’s overall nancial risk management strategy is to seek to ensure that the Group is able to fund its corporateobjectives and meet its obligations to stakeholders. Derivative nancial instruments may be used to hedge exposure to uctuations inforeign exchange rates, interest rates and commodity prices.The Group uses various methods to measure the types of nancial risk to which it is exposed. These methods include cash owat risk and sensitivity analysis in the case of foreign exchange, interest rate and commodity price risk, and ageing and credit ratingconcentration 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 cover specic nancial risks, such as foreignexchange risk, interest rate risk and credit risk, approved derivative and non-derivative nancial instruments, and liquidity management.
(a) Financial instrumentsThe Group classies its nancial instruments in the following categories: nancial assets at amortised cost, nancial assets at fairvalue through prot or loss (“FVTPL”), nancial assets at fair value through other comprehensive income (“FVOCI”), nancialliabilities at amortised cost, nancial liabilities at FVTPL and derivative instruments. The classication depends on the purpose forwhich the nancial instruments were acquired, which is determined at initial recognition based upon the business model of theGroup. Financial assets at amortised cost
The Group classies its nancial assets at amortised cost if the asset is held with the objective of collecting contractual cash
?ows and the contractual terms give rise on specied dates to cash ?ows that are solely payments of principal and interest. Theseinclude trade receivables and bank term deposits. Bank term deposits are non-derivative nancial assets with xed or determinablepayments that are not quoted in an active market. They are nancial assets at amortised cost and are included in current assets,except for those with maturities greater than 12 months after the reporting date.
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5.5 FINANCIAL RISK MANAGEMENT (CONTINUED)
(a) Financial instruments (continued)Financial assets at fair value through prot or lossThe Group classies its nancial assets at fair value through prot or loss if they are acquired principally for the purpose of selling
in the short term, i.e. are held for trading. The Group has not elected to designate any nancial assets at fair value through prot orloss.
Financial assets at fair value through other comprehensive incomeFinancial assets at fair value through other comprehensive income comprise debt securities where the contractual cash ows aresolely principal and interest and the objective of the Group’s business model is achieved both by collecting contractual cash owsand selling nancial assets. Upon disposal, any balance within the OCI reserve for these debt investments is reclassied to retainedearnings.Financial liabilitiesOn initial recognition, the Group measures a nancial liability at its fair value minus, in the case of a nancial liability not at fair valuethrough prot or loss, transaction costs that are directly attributable to the issue of the nancial liability.After initial recognition, trade payables and interest-bearing loans and borrowings are stated at amortised cost. Fixed-rate notes
that are hedged by an interest rate swap are recognised at fair value. For nancial liabilities classied as fair value through prot orloss, the element of gains or losses attributable to changes in the Group’s own credit risk are recognised in other comprehensiveincome.Policies for the recognition and subsequent measure of derivative liabilities are as outlined below.Derivative instrumentsDerivative nancial instruments entered into by the Group for the purpose of managing its exposures to changes in foreignexchange rates and interest rates arising in the normal course of business qualify for hedge accounting. The principal derivativesthat may be used are forward foreign exchange contracts, cross-currency swaps and interest rate swaps. Commodity derivativesare also used to manage the Group’s exposure to changes in oil prices. The use of derivative nancial instruments is subject to a setof policies, procedures and limits approved by the Board of Directors. The Group does not trade in derivative nancial instrumentsfor speculative purposes. The Group holds the following nancial instruments:
Financial assets 2019 2018 US$million US$millionFinancial assets at amortised cost Cash and cash equivalents 1,067 1,316 Trade receivables 554 521 Amounts held in escrow – acquisitions
150 – Amounts related to acquisitions 39 – Other 7 1Financial assets at FVTPL Equity investments – 2 Derivative nancial instruments 28 53 1,845 1,893
1 Amounts represent cash held in escrow for pending acquisitions of assets that have yet to complete as at 31 December.
Notes to the Consolidated Financial StatementsSection 5: Funding and Risk Management
5.5 FINANCIAL RISK MANAGEMENT (CONTINUED)
(a) Financial instruments (continued) Financial liabilities 2019 2018 US$million US$millionFinancial liabilities at amortised cost Trade and other payables 719 661Borrowings at amortised cost 3,741 4,452 Lease liabilities 425 62Financial liabilities at FVTPLBorrowings designated at FVTPL 255 405 Derivative nancial instruments – 6 Other 34 24 5,174 5,610
The Group’s nancial instruments resulted in the following income, expenses, gains and losses recognised in the income statement:
2019 2018 US$million US$million Interest on cash investments 37 30 Interest on debt held at FVTPL (20) (24) Interest on debt held at amortised cost (219) (210) Interest on derivative nancial instruments 15 30 Interest accretion on lease liabilities (19) (8) Fair value gains on debt held at FVTPL 5 15 Fair value losses on derivative nancial instruments (15) (84) Net foreign exchange (losses)/gains (11) 146 (227) (105)
(b) Liquidity
The Group adopts a prudent liquidity risk management strategy and seeks to maintain sucient liquid assets and available
committed credit facilities to meet short-term to medium-term liquidity requirements. The Group’s objective is to maintain exibilityin funding to meet ongoing operational requirements, exploration and development expenditure, and other corporate initiatives.The following tables analyse the contractual maturities of the Group’s nancial assets and liabilities held to manage liquidity risk. Therelevant maturity groupings are based on the remaining period to the contractual maturity date, as at 31 December. The amountsdisclosed in the table are the contractual undiscounted cash ows comprising principal and interest repayments. Estimated variableinterest expense is based upon appropriate yield curves as at 31 December.
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5.5 FINANCIAL RISK MANAGEMENT (CONTINUED)
(b) Liquidity (continued)
Financial assets and liabilities held to manage liquidity risk Less than 1 to 2 2 to 5 More than 1 year years years 5 years 2019 US$million US$million US$million US$million Cash and cash equivalents 1,067 – – –Derivative nancial assets Interest rate swap contracts 13 15 17 3Non-derivative nancial liabilities Trade and other payables (719) – – – Lease liabilities (117) (87) (154) (217) Bank loans (289) (305) (1,697) (391) Long-term notes (79) (79) (422) (1,659) (124) (456) (2,256) (2,264)
Financial assets and liabilities held to manage liquidity risk Less than 1 to 2 2 to 5 More than 1 year years years 5 years 2018 US$million US$million US$million US$million Cash and cash equivalents 1,316 – – –Derivative nancial assets Interest rate swap contracts 24 15 31 4Non-derivative nancial liabilities Trade and other payables (675) – – – Lease liabilities (9) (9) (28) (106) Bank loans (933) (797) (1,024) (1,414) Long-term notes (207) (48) (342) (951) (484) (839) (1,363) (2,467)(c) Foreign currency riskForeign exchange risk arises from commercial transactions and valuations of assets and liabilities that are denominated in acurrency that is not the entity’s functional currency.The Group is exposed to foreign currency risk principally through the sale of products, borrowings and capital and operatingexpenditure incurred in currencies other than the entity’s functional currency. In order to economically hedge foreign currency risk,the Group may enter into forward foreign exchange, foreign currency swap and foreign currency option contracts.The Group also has certain investments in domestic and foreign operations whose net assets are exposed to foreign currencytranslation risk. All external borrowings of the Group are denominated in US dollars.On 1 January 2019, Santos Limited adopted US dollars as its functional currency. US dollar denominated borrowings, previouslyheld by AU dollar functional currency companies, are now held by US dollar functional currency companies (refer to note 8.4(b)for further detail). All associated hedges of US dollar denominated investments in foreign operations ($1,407 million principal value)were terminated on 1 January 2019. As a result, there were no net foreign currency gains or losses arising from translation of USdollar denominated borrowings recognised in the income statement in 2019.The Group has AU dollar denominated lease liabilities, and other monetary items, including nancial assets and liabilities,denominated in currencies other than the functional currency of an operation. These items are restated to US dollar equivalentsat each period end, and the associated gain or loss is taken to the income statement. The exception is foreign exchange gains orlosses on foreign currency provisions for restoration at operating sites that are capitalised in oil and gas assets.
Notes to the Consolidated Financial StatementsSection 5: Funding and Risk Management
5.5 FINANCIAL RISK MANAGEMENT (CONTINUED)
(c) Foreign currency risk (continued) Sensitivity to foreign currency movementBased on the Group’s net nancial assets and liabilities at 31 December 2019, the estimated impact of a ±15 cent movementin the Australian dollar exchange rate (2018: ±15 cent) against the US dollar, with all other variables held constant is $13 million(2018: $21 million) on post-tax prot and $13 million (2018: $1,550 million) on equity.(d) Market risk Cash ow and fair value interest rate riskThe Group’s interest rate risk arises from its borrowings. Borrowings issued at variable rates expose the Group to cash owinterest rate risk. Borrowings issued at xed 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 oatingrate basis. Interest rate swaps have been entered into as fair value hedges of long-term notes. When transacted, these swapshad maturities ranging from 1 to 20 years, aligned with the maturity of the related notes.The Group’s interest rate swaps have a notional contract amount of $227 million (2018: $1,577 million) and a net fair value of$26 million (2018: $34 million). The net fair value amounts were recognised as fair value derivatives. Sensitivity to interest rate movementBased on the net debt position as at 31 December 2019, taking into account interest rate swaps, it is estimated that if the USdollar London Interbank Oered Rate (“LIBOR”) interest rates changed by ±0.50% (2018: ±0.50%) and Australian Bank Bill Swapreference rate (“BBSW”) changed by ±0.50% (2018: ±0.50%), with all other variables held constant, the impact on post-tax protis $3 million (2018: $4 million).This assumes that the change in interest rates is eective from the beginning of the nancial year and the net debt positionand xed/oating mix is constant over the year. However, interest rates and the debt prole of the Group are unlikely to remainconstant and therefore the above sensitivity analysis will be subject to change.Commodity price risk exposureThe Group is exposed to commodity price uctuations through the sale of petroleum products and other oil price linked contracts.The Group may enter into crude oil price swap and option contracts to manage its commodity price risk. At 31 December 2019,the Group has 6.2 million barrels of open oil price swap and option contracts (2018: 4.9 million), covering 2020 exposures, whichare designated in cash ow hedge relationships. The 3-way collar option structure utilised to hedge 2018 oil exposures did notqualify for hedge accounting, resulting in movement in fair value being recorded in the income statement during 2018.(e) Credit riskCredit risk represents the potential nancial loss if counterparties fail to complete their obligations under nancial instrument orcustomer contracts. Santos employs credit policies which include monitoring exposure to credit risk on an ongoing basis throughmanagement of concentration risk and ageing analysis.The majority of Santos’ gas contracts are spread across major energy retailers and industrial users. Contracts exist in every
mainland state, whilst the largest customer accounts for less than 16% of sales revenue.The Group considers the probability of default upon initial recognition of the asset and whether there has been a signicantdepreciation in credit quality on an ongoing basis throughout each reporting period. A signicant decrease in credit quality isdened as a debtor being greater than 30 days past due in making a contractual payment. The Group applies the simpliedapproach to providing for expected credit losses prescribed by AASB 9, which permits the use of the lifetime expected lossprovision for all trade receivables and contract assets.A default on a nancial asset is when the counterparty fails to make contractual payments within 60 days of when they fall due.Financial assets are written-o when there is no reasonable expectation of recovery. The Group categorises a loan or receivablefor write-o when a debtor fails to make contractual repayments greater than 120 days past due. Where loans or receivableshave been written-o, the Group continues to engage in enforcement activity to attempt to recover the receivable due. Whererecoveries are made, these are recognised in the income statement.At 31 December 2019, there were no signicant concentrations of credit risk within the Group and nancial instruments are spreadamongst a number of nancial institutions to minimise the risk of counterparty default.
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5.5 FINANCIAL RISK MANAGEMENT (CONTINUED)
(e) Credit risk (continued)The maximum exposure to nancial institution credit risk is represented by the sum of all cash deposits plus accrued interest, bankaccount balances and fair value of derivative assets. The Group’s counterparty credit policy limits this exposure to commercial andinvestment banks, according to approved credit limits based on the counterparty’s credit rating. The minimum credit rating is A-from Standard & Poor’s.Under the simplied approach, determination of the loss allowance provision and expected loss rate incorporates past experienceand forward-looking information, including the outlook for market demand and forward-looking interest rates. As the expected lossrate at 31 December 2019 is nil (2018: nil), no loss allowance provision has been recorded at 31 December 2019 (2018: $nil).
(f) Fair valuesFair value is the price that would be received to sell an asset or the price that would be paid to transfer a liability in an orderlytransaction between market participants at the measurement date. The fair value measurement is based on the presumption thatthe transaction to sell the asset or transfer the liability takes place either:
? in the principal market for the asset or liability; or? in the absence of a principal market, in the most advantageous market for the asset or liability that is accessible bythe Group.The nancial assets and liabilities of the Group are all initially recognised in the statement of nancial position at their fair values.Receivables, payables, interest-bearing liabilities and other nancial assets and liabilities, which are not subsequently measured atfair value, are carried at amortised cost. The following summarises the signicant methods and assumptions used in estimating thefair values of nancial instruments:
DerivativesThe fair value of interest rate swaps is calculated by discounting estimated future cash ows based on the terms of maturity
of each contract, using market interest rates for a similar instrument at the reporting date.The fair value of oil derivative contracts is determined by estimating the dierence between the relevant market prices and
the contract strike price, for the notional volumes of the derivative contracts. Financial liabilitiesFair value is calculated based on the present value of future principal and interest cash ows, discounted at the market rate of
interest at the reporting date. Where these cash ows are in a foreign currency, the present value is converted to US dollars at
the foreign exchange spot rate prevailing at the reporting date. Interest rates used for determining fair valueThe interest rates used to discount estimated future cash ows, where applicable, are based on the market yield curve and
credit spreads at the reporting date. The interest rates including credit spreads used to determine fair value were as follows:
2019 2018 % % Derivatives 1.5 – 2.1 1.5 – 2.8 Loans and borrowings 1.5 – 2.1 1.5 – 2.8
The Group uses the following hierarchy for determining and disclosing the fair value of nancial instruments by valuation technique:
Level 1: quoted (unadjusted) prices in active markets for identical assets and liabilities;Level 2: other techniques for which all inputs which have a signicant eect on the recorded fair value are observable,
either directly or indirectly;Level 3: techniques which use inputs which have a signicant eect on the recorded fair value that are not based on
observable market data. All of the Group’s nancial instruments were valued using the Level 2 valuation technique.
Notes to the Consolidated Financial StatementsSection 5: Funding and Risk Management
5.5 FINANCIAL RISK MANAGEMENT (CONTINUED)
(g) Derivatives and hedging activity The Group’s accounting policy for fair value and cash ow hedges are as follows:
Types of hedgesFair value hedgesCash ow hedgesWhat is it?A derivative or nancial instrument designated as
hedging the change in fair value of a recognisedasset or liability.
A derivative or nancial instrument designatedto hedge the exposure to variability in cash owsattributable to a particular risk associated with anasset, liability or forecast transaction.Recognition dateAt the date the instrument is designated as a
hedging instrument.
At the date the instrument is designated as ahedging instrument.MeasurementMeasured at fair value (refer to note 5.5(f)). Measured at fair value (refer to note 5.5(f)).Changes in fair valueThe gains or losses on both the derivative or
nancial instrument and hedged asset or liabilityattributable to the hedged risk are recognised inthe income statement immediately.The gain or loss relating to the eective portion ofinterest rate swaps hedging xed-rate borrowingsis recognised in the income statement withinnance costs, together with the loss or gain inthe fair value of the hedged xed-rate borrowingsattributable to interest rate risk.The gain or loss relating to the ineective portionis recognised in the income statement withinother income or other expenses.If the hedge no longer meets the criteria forhedge accounting, the adjustment to the carryingamount of a hedged item, for which the eectiveinterest method is used, is amortised to theincome statement over the period to maturityusing a recalculated eective interest rate.Movements in fair value of liabilities designatedat FVTPL due to changes in the Group’s owncredit risk are recorded in the own credit reservethrough OCI and do not get recycled to theincome statement.
Changes in the fair value of derivatives designatedas cash ow hedges are recognised directly inother comprehensive income and accumulated inequity in the hedging reserve to the extent thatthe hedge is eective.Ineectiveness is recognised on a cash owhedge where the cumulative change in thedesignated component value of the hedginginstrument exceeds on an absolute basis thechange in value of the hedged item attributableto the hedged risk. In hedges of foreign currencypurchases this may arise if the timing of thetransaction changes from what was originallyestimated.To the extent that the hedge is ineective,changes in fair value are recognised immediatelyin the income statement within other income orother expenses.Amounts accumulated in equity are transferredto the income statement or the statement ofnancial position, for a non-nancial asset, at thesame time as the hedged item is recognised.When a hedging instrument expires or is sold,terminated or exercised, or when a hedge nolonger meets the criteria for hedge accounting,any cumulative gain or loss existing in equity atthat time remains in equity and is recognisedwhen the underlying forecast transaction occurs.When a forecast transaction is no longer expectedto occur, the cumulative gain or loss that wasreported in equity is immediately transferred tothe income statement.
Hedge eectiveness is determined at the inception of the hedge relationship, and through periodic prospective eectiveness
assessments to ensure that an economic relationship exists between the hedged item and hedging instrument. The Group entersinto hedge relationships where the critical terms of the hedging instrument match exactly with the terms of the hedged item, andso a qualitative assessment of eectiveness is performed. If changes in circumstances aect the terms of the hedged item suchthat the critical terms no longer match exactly with the critical terms of the hedging instrument, the Group uses the hypotheticalderivative method to assess eectiveness.
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5.5 FINANCIAL RISK MANAGEMENT (CONTINUED)
(g) Derivatives and hedging activity (continued) Hedge of monetary assets and liabilitiesWhen a derivative nancial 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 incomestatement. Hedge of net investment in a foreign operationThe gain or loss on an instrument used to hedge a net investment in a foreign operation is recognised directly in equity. On disposal
of the foreign operation, the cumulative value of any such gains or losses recognised directly in equity is transferred to the incomestatement. There was no such hedging activity during 2019. Other nancial assets and liabilitiesThe table below contains all other nancial assets and liabilities as shown in the statement of nancial position, including derivativenancial instruments used for hedging:
2019 2018 US$million US$millionCurrent assets Commodity derivatives (oil hedges) 2 19 Interest rate swap contracts – 8 Amounts held in escrow – acquisitions 150 – Amounts related to acquisitions 39 – Other 4 1 195 28Non-current assets Interest rate swap contracts 26 26 Equity investments – 2 Dened benet surplus – 3 Other 3 – 29 31Current liabilitiesCommodity derivatives (oil hedges) – 6 Other 5 – 5 6Non-current liabilities Lease incentive 7 – Other 22 24 29 24
Notes to the Consolidated Financial StatementsSection 5: Funding and Risk Management
5.5 FINANCIAL RISK MANAGEMENT (CONTINUED)
(g) Derivatives and hedging activity (continued)The eects of applying hedge accounting on the Group’s nancial position and performance are as follows:
Fair value hedge: Derivative nancial instruments – Interest rate swap contracts 2019 2018 US$million US$million Carrying amount 26 34 Notional amount 227 1,577 Maturity date 2022–2027 2019–2027 Hedge ratio
1:1 1:1 Change in value of outstanding hedging instruments since 1 January (8) (27) Change in value of hedged item used to determine hedge eectiveness 8 27 Weighted average hedged rate 1.75% 1.10% Cash ow hedge: Derivative nancial instruments – Oil derivative contracts 2019 2018 US$million US$million Carrying amount 2 19Notional amount (mmbbl) 6.2
4.9
Maturity date 2020 2019 Hedge ratio
1:1 1:1 Change in value of outstanding hedging instruments since 1 January (17) 19 Change in value of hedged item used to determine hedge eectiveness 17 (19)Weighted average hedged rate $54.19$50.88 Reserves – Cash ow hedge reserve 2019 2018 US$million US$million Balance at 1 January (8) (5)Add: Change in fair value of hedging instrument recognised in OCI for the year (eective portion) 8 (4) Less: Deferred tax (2) 1 Balance at 31 December (2) (8) Reserves – Own credit revaluation reserve 2019 2018 US$million US$million Balance at 1 January 21 21Add: Fair value changes on nancial liabilities designated at fair value due to own credit risk 6 –Less: Deferred tax (1) – Less: Reclassied to retained earnings (14) – Balance at 31 December 12 211 The value of the derivative contract is the same as the value of the underlying instrument that is being hedged. Therefore, the hedge ratio is 1:1.
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This section provides information which will help users understand how the Group structure aects the nancial positionand performance of the Group as a whole. Specically, it contains information about consolidated entities, acquisitions anddisposals of subsidiaries, joint arrangements as well as parties to the Deed of Cross Guarantee under which each companyguarantees the debts of others.
6.1 CONSOLIDATED ENTITIES
Subsidiaries are entities controlled by the Company. Control exists when the Company is exposed to, or has the rights to, variablereturns from its involvement with an entity and has the ability to aect those returns through its power over the entity. The nancialstatements of subsidiaries are included in the consolidated nancial statements from the date that control commences until the datethat control ceases.Acquisitions of subsidiaries are accounted for using the acquisition method of accounting. The cost of an acquisition is measured as theaggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest inthe acquiree. For each business combination, the Group measures the non-controlling interest in the acquiree at the lower of either fairvalue or the proportionate share of the acquiree’s identiable net assets.When the Group acquires a business, it assesses the nancial assets and liabilities assumed for appropriate classication and designationin accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date.If the business combination is achieved in stages, the previously held equity interest is remeasured at its acquisition date fair value andany resulting gain or loss is recognised in the income statement.Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequentchanges to the fair value of the contingent consideration which is deemed to be an asset or liability will be recognised in accordancewith AASB 9 either in the income statement or as a charge to other comprehensive income. If the contingent consideration is classiedas equity, it shall not be remeasured until it is nally settled within equity. In instances where the contingent consideration does not fallwithin the scope of AASB 9, it is measured in accordance with the appropriate AASB standard.A change in ownership interest of a subsidiary that does not result in the loss of control is accounted for as an equity transaction.Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-group transactions are eliminated inpreparing the consolidated nancial statements.
Notes to the Consolidated Financial StatementsSection 6: Group Structure
6.1 CONSOLIDATED ENTITIES (CONTINUED)
Name Country of incorporationSantos Limited
(Parent Company) AUSControlled entities:
Alliance Petroleum Australia Pty Ltd
AUSBasin Oil Pty Ltd
AUSBridgeeld Pty Ltd AUSBridge Oil Developments Pty Ltd
AUSBronco Energy Pty Ltd
AUSDoce Pty Ltd AUSFairview Pipeline Pty Ltd
AUSGidgealpa Oil Pty Ltd AUSMoonie Pipeline Company Pty Ltd AUSReef Oil Pty Ltd
AUSSantos Australian Hydrocarbons Pty Ltd AUSSantos (BOL) Pty Ltd
AUSControlled entity of Santos (BOL) Pty Ltd Bridge Oil Exploration Pty Ltd AUSSantos Browse Pty Ltd AUSSantos CSG Pty Ltd
AUSSantos Darwin LNG Pty Ltd AUSSantos Direct Pty Ltd AUSSantos Finance Ltd AUSSantos GLNG Pty Ltd AUSControlled entity of Santos GLNG Pty Ltd Santos GLNG Corp USASantos Infrastructure WA Holdings Pty Ltd
1,2 AUSControlled entities of Santos Infrastructure WAHoldings Pty Ltd Santos Devil Creek Pty Ltd
1,2 AUS Santos Resources Pty Ltd AUSSantos International Holdings Pty Ltd AUSControlled entities of Santos International HoldingsPty Ltd Barracuda Ltd PNG Lavana Ltd PNG Sanro Insurance Pte Ltd SGP Santos Americas and Europe LLC
USAControlled entities of Santos Americas andEurope LLC Santos TPY LLC
USAControlled entities of Santos TPY LLC Santos Queensland LLC
USA Santos TOG LLC
USAControlled entities of Santos TOG LLC Santos TPY CSG LLC
USA Santos TOGA Pty Ltd AUS Santos Bangladesh Ltd GBR Santos (BBF) Pty Ltd AUS Santos Hides Ltd PNG Santos P’nyang Ltd PNG
Name Country of incorporation Santos Sangu Field Ltd GBR Santos (UK) Limited GBRControlled entities of Santos (UK) Limited Santos Northwest Natuna B.V. NLD Santos Vietnam Pty Ltd AUSSantos (JPDA 91–12) Pty Ltd AUSSantos (NARNL Cooper) Pty Ltd
AUSSantos NSW Pty Ltd AUSControlled entities of Santos NSW Pty Ltd Santos NSW (Betel) Pty Ltd AUS Santos NSW (Hillgrove) Pty Ltd AUS Santos NSW (Holdings) Pty Ltd AUSControlled entities of Santos NSW (Holdings)Pty Ltd Santos NSW (LNGN) Pty Ltd AUS Santos NSW (Pipeline) Pty Ltd AUS Santos NSW (Narrabri Energy) Pty Ltd AUSControlled entity of Santos NSW (Narrabri Energy)Pty Ltd Santos NSW (Eastern) Pty Ltd AUS Santos NSW (Narrabri Power) Pty Ltd AUS Santos NSW (Operations) Pty Ltd AUSSantos (N.T.) Pty Ltd AUSControlled entity of Santos (N.T.) Pty Ltd Bonaparte Gas & Oil Pty Ltd AUSSantos Oshore Pty Ltd
AUSSantos Petroleum Pty Ltd
AUSSantos QLD Upstream Developments Pty Ltd AUSSantos QNT Pty Ltd
AUSControlled entities of Santos QNT Pty Ltd Outback Energy Hunter Pty Ltd AUS Santos QNT (No. 1) Pty Ltd
AUSControlled entities of Santos QNT (No. 1) Pty Ltd TMOC Exploration Proprietary Limited AUS Santos QNT (No. 2) Pty Ltd AUSControlled entity of Santos QNT (No. 2) Pty Ltd Petromin Pty Ltd AUS Santos TPC Pty Ltd AUS Santos Wilga Park Pty Ltd AUSSantos (TGR) Pty Ltd AUSSantos Timor Sea Pipeline Pty Ltd AUSSantos Ventures Pty Ltd AUSSantos WA Holdings Pty Ltd
AUSControlled entities of Santos WA Holdings Pty Ltd Santos KOTN Holdings Pty Ltd
AUSControlled entities of Santos KOTNHoldings Pty Ltd Santos KOTN Pty Ltd
AUS Santos WA AEC Pty Ltd
AUS
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Name Country of incorporation Santos WA Energy Holdings Pty Ltd
AUSControlled entities of Santos WA Energy HoldingsPty Ltd Santos WA Asset Holdings Pty Ltd
AUSControlled entities of Santos WA AssetHoldings Pty Ltd Santos WA Lowendal Pty Limited AUS Santos WA International Pty Ltd AUS Harriet (Onyx) Pty Ltd
AUS Santos WA Energy Limited
AUSControlled entities of Santos WAEnergy Limited Ningaloo Vision Holdings Pte. Ltd SGP Northwest Jetty Services Pty Ltd AUS Santos WA DC Pty Ltd
AUS Santos WA (Exmouth) Pty Ltd AUS Santos WA East Spar Pty Limited
AUS Santos WA Julimar Holdings Pty Ltd AUS Santos WA Kersail Pty Ltd
AUS Santos WA LNG Pty Ltd AUS Santos WA Northwest Pty Ltd
AUS Santos WA Onshore Holdings Pty Ltd AUS Santos WA Southwest Pty Limited
AUS Santos WA Varanus Island Pty Ltd AUS
Name Country of incorporation Santos WA Management Pty Ltd AUSControlled entities of Santos Management
Pty LtdSantos WA Finance Holdings Pty Limited AUSControlled entities of Santos WA
Finance Holdings Pty LimitedSantos WA Finance General
Partnership AUS Santos WA PVG Holdings Pty Ltd
AUSControlled entities of Santos WA PVG Holdings
Pty Ltd Santos WA PVG Pty Ltd
AUS SESAP Pty Ltd AUS Vamgas Pty Ltd
AUS
Notes1 Company is party to a Deed of Cross Guarantee (refer note 6.5).2 Companies incorporated during the 2019 nancial year.3 Companies changed from Corporations to Limited Liability Companies.Country of incorporationAUS – AustraliaGBR – United KingdomNLD – NetherlandsPNG – Papua New GuineaSGP – SingaporeUSA – United States of America
Notes to the Consolidated Financial StatementsSection 6: Group Structure
6.2 ACQUISITIONS AND DISPOSALS OF SUBSIDIARIES
(a) Acquisitions
On 27 November 2018 the Group acquired 100% of the shares in Quadrant Energy, an Australian oil and gas producer. Finalisationof the purchase price accounting was completed within the 12-month measurement period, resulting in changes to the provisionalfair values presented in the 31 December 2018 Financial Report.Details of the revised purchase consideration, net identiable assets acquired and goodwill are as follows:
Fair value of net identiable assets and goodwill acquired on acquisition date Final Provisional US$million US$million Cash 174 174 Trade and other receivables 148 148 Net contract assets 152 104 Inventories 52 52 Exploration and evaluation assets 588 610 Oil and gas assets 2,300 2,241 Other land, buildings and equipment 23 23 Trade and other payables (76) (76) Deferred revenue (209) (136) Restoration provision (903) (903) Employee provisions (32) (32) Other provisions (86) (74) Current tax liability (24) (24) Interest-bearing liabilities (533) (533)
Deferred tax assets 695 699 Deferred tax liabilities (1,176) (1,327)
Net deferred tax liability (481) (628) Net identiable assets acquired 1,093 946 Goodwill arising on acquisition 481 628 Purchase consideration transferred 1,574 1,574The nalisation of acquisition accounting resulted in a number of fair value adjustments completed during the measurement
period, including a $147 million reduction in the deferred tax liability (and corresponding reduction in the goodwill balance
recorded). This relates to the nalisation of tax bases associated with the acquired net assets. Other adjustments were not
signicant and did not impact the total fair value of net identied assets acquired.The prior year balances have been restated to reect the nal fair value adjustments, to the extent these were identied
during the measurement period. Due to the osetting nature of adjustments there is no impact on reported net assets, prot
after tax, or comprehensive income as previously disclosed for the comparative period.
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6.2 ACQUISITIONS AND DISPOSALS OF SUBSIDIARIES (CONTINUED)
(a) Acquisitions (continued) Goodwill
Goodwill arising from the acquisition has been recognised as the excess of consideration paid above the fair value of the assetsacquired and liabilities assumed as part of the business combination. The goodwill is attributable solely to the net deferred taxliability recognised on acquisition, in accordance with accounting standards. The deferred tax liability that leads to the goodwillbeing created primarily arises as a consequence of PRRT being treated as an income tax in accordance with Australian AccountingStandards. The deferred income tax liability arises because the assets acquired are subject to the PRRT regime, and the historicalexpenditure incurred has already been deducted for PRRT purposes. The PRRT deferred tax liability is deductible for income taxpurposes and a corresponding income tax deferred tax asset arises on acquisition. Refer to note 3.3 for accounting policy with regards to impairment of goodwill. Business combination accountingThe Company typically uses a discounted cash ow model to estimate the expected future cash ows of the oil and gas assetsacquired, based on 2P reserves at acquisition date. The expected future cash ows are based on estimates of future productionand commodity prices, operating costs, and forecast capital expenditures using the life-of-eld models as at the acquisition date.Contingent and prospective resources are separately valued using methods including expected future cash ow models and
resource multiples established by evaluating recent comparable transactions. These amounts are included in “Exploration andevaluation assets”.Contractual assets and liabilities are recognised in respect of gas sales agreements ("GSAs") and other contractual arrangements,which are required to be recognised at fair value under the accounting standards. Valuations of contracts are calculated taking intoaccount the dierence between the market prices and contract prices, adjusted for the time value of money.Restoration provisions are recognised on acquisition at fair value, taking into account the risks associated with the specicrestoration obligations. Other provisions are measured by estimating amounts expected to be paid to settle the obligations if it isprobable that an outow of resources embodying economic benets will be required to settle the obligation, and a reliable estimatecan be made of the amount of the obligation.Contingent assets and liabilities arising in a business combination are accounted for in accordance with AASB 3 Business
Combinations. For contingent liabilities an amount is recognised at fair value at acquisition date if there is a present obligation,arising from a past event that can be reliably measured, even if it is not probable that an outow of resources will be requiredto settle the obligation. Under AASB 3 an indemnication asset in a business combination is measured on the same basis as theindemnied item, subject to any valuation allowance recorded.A number of performance guarantees were in place, over subsidiaries acquired, for fullment of obligations on contracts. There
is a oating charge in place over certain assets of those subsidiaries, which ranks subordinate to the external debt in place. As atthe date of this report the Group expects to meet all current obligations under the contracts and as a result, no provision has beenrecognised in the nancial statements for these guarantees.(b) Disposals There were no disposals of subsidiaries during 2019.
Notes to the Consolidated Financial StatementsSection 6: Group Structure
6.3 JOINT ARRANGEMENTS
The Group’s investments in joint arrangements are classied as either joint operations or joint ventures depending on the contractualrights and obligations each investor has, rather than the legal structure of the joint arrangement. Santos’ exploration and productionactivities are often conducted through joint arrangements governed by joint operating agreements, production sharing contracts orsimilar contractual relationships.The dierences between joint operations and joint ventures are as follows:
Types of arrangementJoint operationJoint ventureCharacteristicsA joint operation involves the joint control,
and often the joint ownership, of assetscontributed to, or acquired for the purposeof, the joint operation. The assets are usedto obtain benets for the parties to the jointoperation and are dedicated to that purpose.
The Group has interests in joint ventures,whereby the venturers have contractualarrangements that establish joint control overthe economic activities of the entities.Rights and obligationsEach party has control over its share of
future economic benets through its shareof the joint operation, and has rights to theassets, and obligations for the liabilities,relating to the arrangement.
Parties that have joint control of thearrangement have rights to the net assetsof the arrangement.Accounting methodThe interests of the Group in joint operations
are brought to account by recognising theGroup’s share of jointly controlled assets,share of expenses and liabilities incurred,and the income from its share of theproduction of the joint operation.
The Group recognises its interest in jointventures using the equity method of accounting.Under the equity method, the investmentin a joint venture is initially recognised in theGroup’s statement of nancial position at costand adjusted thereafter to recognise the post-acquisition changes to the Group’s share of netassets of the joint venture. After applicationof the equity method, the Group determineswhether it is necessary to recognise anyimpairment loss with respect to the Group’snet investment in the joint venture.The Group’s share of the joint venture’s post-acquisition prots or losses is recognised inthe income statement and its share of post-acquisition movements in reserves is recognisedin the statement of changes in equity and, whenapplicable, in the statement of comprehensiveincome. Dividends receivable from the jointventure reduce the carrying amount of theinvestment in the consolidated nancialstatements of the Group.
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6.3 JOINT ARRANGEMENTS (CONTINUED)
(a) Joint operations The following are the material joint operations in which the Group has an interest:
Area of cash-generating 2019 2018 Joint operation unit/area of interest Principal activities % Interest % InterestOil and gas assets – Producing assets Barrow Island Barrow Oil production 28.6 28.6 Bayu-Undan Bayu-Undan Gas and liquids production 11.5
11.5
Combabula GLNG Gas production 7.3 7.3 Fairview GLNG Gas production 22.8 22.8 GLNG Downstream GLNG LNG facilities 30.0 30.0 Halyard/Spar Varanus Island Gas production 100.0 100.0 Harriet Barrow-HJV Oil and gas production 100.0 100.0 John Brookes Varanus Island Gas production 100.0 100.0 Macedon/Pyrenees North Carnarvon Oil and gas production 28.6 28.6 PNG LNG PNG LNG Gas and liquids production 13.5 13.5 Reindeer Reindeer Gas production 100.0 100.0 Roma GLNG Gas production 30.0 30.0 SA Fixed Factor Area Cooper Basin Oil and gas production 66.6 66.6 SWQ Unit Cooper Basin Gas production 60.1 60.1Exploration and evaluation assets
Caldita/Barossa Bonaparte Basin Contingent gas resource 25.0 25.0 EP161, EP162 and EP189 McArthur Basin Contingent gas resource 75.0 75.0 WA-435-P, WA-437-P Bedout Contingent oil and gas 80.0 80.0 WA-436-P, WA-438-P Bedout Oil and gas exploration 70.0 70.0 WA-58-R (WA-274-P) Bonaparte Basin Gas development 30.0 30.0 WA-80-R Browse Contingent gas resource 47.8 47.8 WA-281-P Browse Gas and liquids exploration 70.5 70.5 Muruk 1 PNG Gas and liquids exploration 20.0 20.0 Petrel Bonaparte Basin Contingent gas resource 40.3 40.3 PRL-9 PNG Gas and liquids exploration 40.0 40.0 Tern, Frigate
Bonaparte Basin Contingent gas resource 100.0 46.0
1 Santos acquired an additional 54% interest in Tern and Frigate during 2019, resulting in Santos’ interest increasing to 100%.
Notes to the Consolidated Financial StatementsSection 6: Group Structure
6.3 JOINT ARRANGEMENTS (CONTINUED)
(b) Share of investments in joint ventures
The Group’s only material joint venture is Darwin LNG Pty Ltd, which operates the Darwin LNG liquefaction facility that currentlyprocesses gas from the Bayu-Undan gas elds.Summarised nancial information of the joint venture, based on the amounts presented in its nancial statements, and areconciliation to the carrying amount of the investment in the consolidated nancial statements, are set out below:
Share of investment in Darwin LNG Pty Ltd 2019 2018 US$million US$millionReconciliation to carrying amount:
Opening net assets 1 January 267 375 Net prot for the period 70 38 Reduction in capital (113) (120) Dividends paid (108) (26) Closing net assets 31 December 116 267 Group’s share (%) 11.5% 11.5% Group’s share of closing net assets 13 31 Carrying amount of investments in joint ventures 13 31
Summarised statement of comprehensive income:
Net prot for the period 70 38 Other comprehensive income – – Total comprehensive income 70 38 Group’s share of net prot 8 4 Dividends received from joint venture 12 3 The following are the joint ventures in which the Group has an interest, including those which are immaterial:
2019 2018 Joint venture % Interest % Interest Darwin LNG Pty Ltd 11.5 11.5 GLNG Operations Pty Ltd 30.0 30.0 GLNG Property Pty Ltd 30.0 30.0
(c) Income from all joint ventures
A reconciliation of the Group’s total income from all joint ventures:
2019 2018 US$million US$million Share of Darwin LNG Pty Ltd net prots 8 4 Total share of net prots 8 4At 31 December 2019, the Group reassessed the carrying amount of its investments in joint ventures for indicators of impairment.As a result, no impairment was recorded (2018: $nil).
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6.4 PARENT ENTITY DISCLOSURES
Selected nancial information of the ultimate parent entity in the Group, Santos Limited, is as follows:
2019 2018 US$million US$million Net prot for the period 594 1,082 Total comprehensive income 594 1,084 Current assets 632 353 Total assets 8,608 10,512 Current liabilities 241 309 Total liabilities 652 2,912 Issued capital 9,037 9,036 Accumulated prots reserve 1,734 1,585 Other reserves (1,306) (1,306) Accumulated losses (1,509) (1,715) Total equity 7,956 7,600Commitments of the parent entity
The parent entity’s commitments are:
Capital expenditure commitments 38 42 Minimum exploration commitments 12 25
Guarantees entered into by the parent entity in relation to the debts of its subsidiariesAll interest-bearing loans and borrowings, as disclosed in note 5.1, with the exception of the lease liabilities and secured bank loans, arearranged through Santos Finance Ltd, which is a wholly-owned subsidiary of Santos Limited. All interest-bearing loans and borrowings ofSantos Finance Ltd are guaranteed by Santos Limited.Contingent liabilities of the parent entityContingent liabilities arise in the ordinary course of business through claims against Santos Limited, including contractual, third-party andcontractor claims. In most instances it is not possible to reasonably predict the outcome of these claims, and as at reporting date SantosLimited believes that the aggregate of such claims will not materially impact the Company’s Financial Report.
Notes to the Consolidated Financial StatementsSection 6: Group Structure
6.5 DEED OF CROSS GUARANTEE
Pursuant to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 (“the Instrument”), the Company and each ofthe wholly-owned subsidiaries identied in note 6.1 (collectively, “the Closed Group”) are relieved from the Corporations Act 2001requirements for preparation, audit and lodgement of their nancial reports.As a condition of the Instrument, the Closed Group has entered into a Deed of Cross Guarantee (“the Deed”). The eect of the Deed isthat the Company has guaranteed to pay any deciency in the event of winding up of any of the subsidiaries under certain provisions ofthe Corporations Act 2001. The subsidiaries have also given a similar guarantee in the event that the Company is wound up.Set out below is a consolidated income statement, consolidated statement of comprehensive income and summary of movements inconsolidated accumulated losses for the year ended 31 December 2019 of the Closed Group. 2019 2018 US$million US$millionConsolidated income statementProduct sales 2,288 1,585Cost of sales (1,683) (1,149)Gross prot 605 436Other revenue 101 95Other income 176 465Other expenses (111) (187)Reversal of impairment of non-current assets 342 242Interest income 12 43Finance costs (217) –Prot before tax 908 1,094Income tax expense (108) (123)Royalty-related tax expense (22) (23)Total tax expense (130) (146)Net prot for the period 778 948
Consolidated statement of comprehensive incomeNet prot for the period 778 948Other comprehensive income, net of tax:
Net actuarial gain on dened benet plan – 2Total comprehensive income 778 950Summary of movements in the Closed Group’s accumulated losses:
Accumulated losses at 1 January (2,260) (2,153) Opening balance adjustment on adoption of new accounting standard (6) – Adjusted accumulated losses at 1 January (2,266) (2,153) Transfer to accumulated prots reserve (400) (1,063) Net prot for the period 778 948 Net actuarial gain on dened benet plan – 2 Share-based payment transactions 12 6 Adjustments for companies added to the Deed during the year (705) –Accumulated losses at 31 December (2,581) (2,260)
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6.5 DEED OF CROSS GUARANTEE (CONTINUED)
Set out below is a consolidated statement of nancial position as at 31 December 2019 of the Closed Group. 2019 2018 US$million US$millionCurrent assetsCash and cash equivalents 119 98Trade and other receivables 4,159 2,856Other current assets 245 147Total current assets 4,523 3,101Non-current assetsOther nancial assets 6,768 8,221Exploration and evaluation assets 986 192Oil and gas assets 4,440 2,064Other non-current assets 1,422 650Total non-current assets 13,616 11,127Total assets 18,139 14,228Current liabilitiesTrade and other payables 6,072 2,500Other current liabilities 269 100Total current liabilities 6,341 2,600Non-current liabilities
Interest-bearing loans and borrowings 2,817 3,713Provisions 1,926 842Other non-current liabilities 281 114Total non-current liabilities 5,024 4,669Total liabilities 11,365 7,269Net assets 6,774 6,959EquityIssued capital 9,037 9,036Reserves 318 183Accumulated losses (2,581) (2,260)Total equity 6,774 6,959
Notes to the Consolidated Financial StatementsSection 6: Group Structure
This section includes information relating to the various programs the Group uses to reward and recognise our people.It includes details of our employee benets, share-based payment schemes and key management personnel.
7.1 EMPLOYEE BENEFITS
Wages, salaries and sick leave
Liabilities for wages and salaries, including non-monetary benets that are expected to be settled within 12 months of the reportingdate, are recognised in respect of employee service up to the reporting date. They are measured at the amounts expected to be paidwhen the liabilities are settled. Expenses for non-vesting sick leave are recognised when the leave is taken and are measured at therates paid or payable.
Long-term service benets
Liabilities for long service leave and annual leave that is not expected to be taken within 12 months of the respective service beingprovided, are recognised and measured at the present value of the estimated future cash outows to be made in respect of employeeservice up to the reporting date.
Dened benet planEective 31 October 2019, the dened benet entitlements under the dened benet fund were converted to accumulation benetsunder the existing Santos Superannuation Plan. The dened benet plan has therefore been closed.The Group’s net obligation in respect of the dened benet superannuation plan is calculated by estimating the discounted amount offuture benets that employees have earned in relation to their service in the current and prior periods and deducting the fair value ofany plan assets. Actuarial gains or losses that arise in calculating the Group’s obligation in respect of the plan are recognised directly inretained earnings.Dened benet members of the Santos Superannuation Plan receive a lump sum benet on retirement, death, disablement orwithdrawal. During the period, an expense of $nil (2018: $4 million) was recorded in relation to the dened benet plan, up to the date ofconversion.The remaining net dened benet surplus of $4 million, at the date of conversion, will be utilised to fund contributions to the SantosSuperannuation Plan accumulation fund, of which $1 million has been used to 31 December 2019. There will be no further contributionsmade to the dened benet superannuation plan as this has been closed.Dened contribution plansThe Group makes contributions to several dened contribution superannuation plans. Obligations for contributions are recognised as anexpense in the income statement as incurred. The amount incurred during the year was $10 million (2018: $8 million).The following amounts are recognised in the Group’s statement of nancial position in relation to employee benets:
2019 2018 US$million US$millionCurrent assets Dened contribution surplus 3 – Non-current assets
Dened benet surplus – 3 Current provisions
Employee benets 56 55 Non-current provisions
Employee benets 12 9 Dened benet obligations – 1 Total non-current provisions 12 10 Total employee benets provisions 68 65
Notes to the Consolidated Financial StatementsSection 7: People
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7.2 SHARE-BASED PAYMENT PLANS
The Group provides benets to employees of the Group through share-based incentives. Employees are paid for their services orincentivised for their performance in part through shares or rights over shares.There are two main share-based payment plans: equity-settled share-based payment plans and cash-settled share-based paymentplans. The equity-settled plans consist of the general employee share-based payment plans, Executive Long-Term Incentive share-basedpayment plans and Executive Short-Term Incentive share-based payment plans.The amounts recognised in the income statement of the Group during the nancial year in relation to shares issued under the shareplans are summarised as follows:
2019 2018 US$000 US$000Employee expenses:
General employee share plans:
Share1000 Plan (724) (824) ShareMatch Plan (matched SARs) (1,857) (1,947)Executive Long-Term Incentive share-based payment plans – equity settled (11,068) (5,693)Executive Short-Term Incentive share-based payment plans – equity settled (3,194) (2,244) (16,843) (10,708)The net impact on accumulated losses from share-based payment plans, net of Treasury shares utilised in the current year, is $12 million.The net impact on accumulated losses from share-based payment plans in 2018 was $6 million.
Notes to the Consolidated Financial StatementsSection 7: People
7.2 SHARE-BASED PAYMENT PLANS (CONTINUED)
(a) Equity-settled share-based payment plans
The cost of equity-settled transactions is determined by the fair value at the grant date using an appropriate valuation model.
The cost is recognised, together with a corresponding increase in other capital reserves in equity, over the period in which theperformance and/or service conditions are met. Currently, the Company has four equity-settled share-based payment plans inoperation, the details of which are as follows:
i. General employee share plansSantos operates two general employee share plans, the Share1000 Plan and the ShareMatch Plan. Eligible employees have the
option to participate in either the Share1000 Plan or the ShareMatch Plan. Members of the Executive Committee (“Excom”),Directors of the Company, casual employees, employees on xed-term contracts and employees on international assignmentare excluded from participating in the Share1000 Plan and the ShareMatch Plan.
Share1000ShareMatchWhat is it?The Share1000 Plan provides for grants of fully
paid ordinary shares up to a value determined
by the Board, which in 2019 was A$1,000 per
employee (2018: A$1,000).
The ShareMatch Plan allows for the purchase ofshares through salary sacricing up to A$5,000over a maximum 12-month period, and to receivematched SARs at a 1:1 ratio or as otherwise set bythe Board.The employee’sownership and rightto deal with them
Subject to restrictions until the earlier of the
expiration of the three-year restriction period
and the time when the employee ceases to be
in employment.
Upon vesting, subject to restrictions untilthe earlier of the expiration of the three-yearrestriction period and the time when he or sheceases to be an employee.How is the fairvalue recognised?
The fair value of these shares is recognised
as an employee expense with a corresponding
increase in issued capital, and the fair value per
share is determined by the Volume Weighted
Average Price (“VWAP”) of ordinary Santos
shares on the ASX during the week up to and
including the date of issue of the shares.
The fair value of the shares is recognised as anincrease in issued capital and a correspondingincrease in loans receivable. The fair value pershare is determined by the VWAP of ordinarySantos shares on the ASX during the week up toand including the date of issue of the shares.The fair value of services required in return formatched SARs granted is measured by referenceto the fair value of matched SARs granted. Theestimate of the fair value of the services receivedis measured by discounting the share price on thegrant date using the assumed dividend yield andrecognised as an employee expense for the termof the matched SARs. The following shares were issued pursuant to the employee share plans during the period:
Share1000 Plan ShareMatch Plan Fair value Fair value Issued shares per share Issued shares per share Year Issue date No. A$ No. A$ 2019 24 July 2019 150,192 6.94 572,196 6.94 2018 9 July 2018 176,480 6.24 439,664 6.24
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7.2 SHARE-BASED PAYMENT PLANS (CONTINUED)
i. General employee share plans (continued) The number of SARs outstanding, and movements throughout the nancial year are:
Beginning of End of the the year Granted Lapsed Vested year Year No. No. No. No. No. 2019 Total 1,513,743 572,196 (29,967) (588,100) 1,467,872 2018 Total 1,764,952 439,664 (75,402) (615,471) 1,513,743
The inputs used in the valuation of the SARs are as follows:
Matched SARs grant 2019 Share price on grant date (A$) 7.00 Exercise price (A$) nil Right life (weighted average, years) 2.4 Expected dividends (% p.a.) 1.9 Fair value at grant date (A$) 6.69
The loan arrangements relating to the ShareMatch Plan are as follows:
During the year the Company utilised $3 million of Treasury shares (2018: $2 million) under the ShareMatch Plan,
with $2 million (2018: $2 million) received from employees under loan arrangements. The movements in loansreceivable from employees are:
2019 2018 US$000 US$000 Employee loans at 1 January 1,104 1,327 Treasury shares utilised during the year 2,798 2,040 Cash received during the year (2,188) (2,152) Foreign exchange movement (43) (111) Employee loans at 31 December 1,671 1,104 ii. Executive Long-Term Incentive share-based payment plans
The Company’s Executive Long-Term Incentive Program (“LTI Program”) provides for eligible executives selected by
the Board to receive SARs upon the satisfaction of set market and non-market performance conditions. Each SAR isa conditional entitlement to a fully paid ordinary share, subject to the satisfaction of performance or service conditions,on terms and conditions determined by the Board. The Board has the discretion to cash-settle SARs granted under theamended Santos Employee Equity Incentive Plan.The fair value of SARs is recognised as an employee expense with a corresponding increase in equity. The fair value is
measured at grant date and recognised over the period during which the executive becomes unconditionally entitled tothe SARs. The fair value of the performance-based SARs granted is measured using a Monte Carlo simulation method,taking into account the terms and market conditions upon which the SARs were granted. The fair value of the deferredSARs granted is measured by discounting the share price on the grant date using the assumed dividend yield for the termof the SAR. The amount recognised as an expense is only adjusted when SARs do not vest due to non-market-relatedconditions.The 2019 LTI Program oers consisted only of SARs. Performance Awards were granted to eligible executives in 2019
who were granted one four-year grant (1 January 2019 – 31 December 2022).
Notes to the Consolidated Financial StatementsSection 7: People
7.2 SHARE-BASED PAYMENT PLANS (CONTINUED)
ii. Executive Long-Term Incentive share-based payment plans (continued) Vesting of the grants is based on the following performance targets:
? 25% of the SARs are subject to Santos’ Total Shareholder Return (“TSR”) relative to the performance of the ASX100 companies (“ASX 100 comparator group”);? 25% are subject to Santos’ TSR relative to the performance of the Standard & Poor’s Global 1200 Energy Indexcompanies (“S&P GEI comparator group”);? 25% are subject to Santos’ Free Cash Flow Breakeven Point (“FCFBP”) relative to internal targets; and? 25% are subject to Santos’ Return on Average Capital Employed (“ROACE”) relative to internal targets, measuredat the end of the performance period. The numbers of SARs outstanding at the end of, and movements throughout, the nancial year are:
Beginning of End ofthe year Granted Lapsed Vested the year Year No. No. No. No. No. 2019 Total 11,332,550 3,783,073 (68,478) (3,828,286) 11,218,859 2018 Total 11,498,252 3,300,981 (3,466,683) – 11,332,550
The SARs granted during 2019 totalling 3,783,073 were issued across the following four tranches, each with
varying valuations:
Senior Executive LTI – granted 15 March 2019
2019 Performance Awards Q1 Q2 Q3 Q4 Performance index ASX 100 S&P GEI FCFBP ROACE Fair value at grant date (A$) 5.26 5.31 6.56 6.56 Share price on grant date (A$) 7.05 7.05 7.05 7.05 Exercise price (A$) nil nil nil nil Expected volatility (weighted average, % p.a.) 46 46 46 46 Right life (weighted average, years) 4 4 4 4 Expected dividends (% p.a.) 1.9 1.9 1.9 1.9 Risk-free interest rate (% p.a.) 1.5 1.5 1.5 1.5 Total granted (No.) 631,602 631,588 631,568 631,553 Senior Executive LTI – granted 18 April 2019
2019 Performance Awards Q1 Q2 Q3 Q4 Performance index ASX 100 S&P GEI FCFBP ROACE Fair value at grant date (A$) 5.48 5.57 6.77 6.77 Share price on grant date (A$) 7.22 7.22 7.22 7.22 Exercise price (A$) nil nil nil nil Expected volatility (weighted average, % p.a.) 46 46 46 46 Right life (weighted average, years) 4 4 4 4 Expected dividends (% p.a.) 1.9 1.9 1.9 1.9 Risk-free interest rate (% p.a.) 1.5 1.5 1.5 1.5 Total granted (No.) 95,282 95,277 95,276 95,273
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7.2 SHARE-BASED PAYMENT PLANS (CONTINUED)
ii. Executive Long-Term Incentive share-based payment plans (continued) CEO and Senior Executive LTI – granted 9 May 2019 2019 Performance Awards Q1 Q2 Q3 Q4 Performance index ASX 100 S&P GEI FCFBP ROACE Fair value at grant date (A$) 5.19 5.19 6.49 6.49 Share price on grant date (A$) 6.96 6.96 6.96 6.96 Exercise price (A$) nil nil nil nil Expected volatility (weighted average, % p.a.) 46 46 46 46 Right life (weighted average, years) 4 4 4 4 Expected dividends (% p.a.) 1.9 1.9 1.9 1.9 Risk-free interest rate (% p.a.) 1.3 1.3 1.3 1.3 Total granted (No.) 159,409 159,408 159,407 159,407
Senior Executive LTI – granted 4 October 2019 2019 Performance Awards Q1 Q2 Q3 Q4Performance index ASX 100 S&P GEI FCFBP ROACEFair value at grant date (A$) 5.59 5.61 6.72 6.72Share price on grant date (A$) 7.28 7.28 7.28 7.28Exercise price (A$) nil nil nil nilExpected volatility (weighted average, % p.a.) 43 43 43 43Right life (weighted average, years) 4 4 4 4Expected dividends (% p.a.) 2.5 2.5 2.5 2.5Risk-free interest rate (% p.a.) 0.6 0.6 0.6 0.6 Total granted (No.) 59,509 59,507 59,504 59,503The above tables include the valuation assumptions used for Performance Awards SARs granted during the current year. The expectedvesting period of the SARs is based on historical data and current expectations and is not necessarily indicative of exercise patternsthat may occur. The expected volatility reects the assumption that the historical volatility over a period similar to the life of the SARs isindicative of future trends, which may not necessarily be the actual outcome.
Notes to the Consolidated Financial StatementsSection 7: People
7.2 SHARE-BASED PAYMENT PLANS (CONTINUED)
ii. Executive Long-Term Incentive share-based payment plans (continued) Vesting of Performance AwardsAll Performance Awards are subject to hurdles based on the Company’s TSR relative to both the ASX 100 and S&P GEI
comparator group over the performance period, as well as the FCFBP and ROACE at the end of the vesting period. Thereis no re-testing of performance conditions. Each tranche of the Performance Awards subject to TSR granted during 2019vests in accordance with the following vesting schedule:
TSR percentile ranking % of grant vesting < 51st percentile 0% = 51st percentile 50% 52nd to 75th percentile Further 2.0% for each percentile over 51st ≥ 76th percentile 100% Restriction periodShares allocated on vesting of SARs granted in 2014 onwards are subject to additional restrictions on dealing for four
years after the original grant date. Shares allocated on vesting of SARs granted in 2013 may be subject to additionalrestrictions on dealing for three or seven years after the original grant date, depending on whether the executiveelected to extend the trading restrictions period beyond the vesting date. Shares allocated on the vesting of SARsthat were granted prior to 2010 will be subject to further restrictions on dealing for a maximum of 10 years after theoriginal grant date. No amount is payable on grant or vesting of the SARs. iii. Executive Deferred Short-Term Incentives (“STIs”)Deferred sharesDeferred STIs represent a proportion of the total executive STI of the applicable year that has been deferred into shares.
The deferred shares are subject to a 24-month continuous service period following the year to which the STI related. Thenumber of deferred STIs outstanding at the end of, and movements throughout, the nancial year are:
Beginning of End of the the year Granted Lapsed Vested year Year No. No. No. No. No. 2019 Total 312,731 696,921 – (312,731) 696,921 2018 Total 261,011 312,731 – (261,011) 312,731
On 15 March 2019 the Company issued 696,921 deferred shares to eligible executives. The share price on the grant date
was A$7.05 and the fair value was A$6.82 after applying a 1.9% dividend yield assumption to the valuation. iv. Other equity grantsThe SARs in the table below are subject to varying continuous service periods, depending on the specic grant. The other
SARs granted during the year are as follows:
2019Continuous Service PeriodGrant DateGrant Date
SARsGrantedCommencingExpiring
VestingDate
SharePrice
FairValue
DividendYield15 Mar 201949,77211 Feb 201910 Feb 202111 Feb 20217.056.771.9%15 Mar 201919,3401 Jan 201931 Dec 20211 Jan 20227.056.591.9%12 Apr 20199,1171 Apr 201931 Mar 20201 Apr 20207.036.921.9%12 Apr 20199,1171 Apr 201931 Mar 20211 Apr 20217.036.721.9%12 Apr 201930,0001 Jan 201931 Dec 20211 Jan 20227.036.771.9%18 Apr 201988,87927 Nov 201826 Nov 202127 Nov 20217.226.891.9%7 Jun 201949,7721 Jun 201931 Dec 20211 Jan 20226.796.161.9%18 Jul 201910,73410 Jul 20199 Jul 202210 Jul 20226.926.342.5%20 Aug 201926,36412 Aug 201911 Aug 202212 Aug 20226.896.312.5%30 Aug 2019635,74126 Aug 201915 Sep 202216 Sep 20227.216.592.5%30 Aug 2019635,80826 Aug 201915 Sep 202316 Sep 20237.216.402.5%
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7.2 SHARE-BASED PAYMENT PLANS (CONTINUED)
iv. Executive and other equity grants (continued)
2018Continuous Service PeriodGrant DateGrant Date
SARsGrantedCommencingExpiring
Vesting
Date
SharePrice
FairValue
Dividend
Yield1 Apr 2018
235,8781 Apr 201831 Mar 20201 Apr 20205.895.761.3%1 Apr 2018
515,1811 Apr 201831 Mar 20211 Apr 20215.895.681.3%14 Nov 20187,6505 Nov 20184 Nov 20195 Nov 20196.376.281.3%14 Nov 20187,6495 Nov 20184 Nov 20205 Nov 20206.376.201.3%1 During 2018, 7,981 SARs lapsed, leaving 227,897 SARs remaining at 31 December 2019.2 During 2019, 42,626 SARs lapsed, leaving 472,555 SARs remaining at 31 December 2019.(b) OptionsThe Company has not granted options over unissued shares under the Executive Long-Term Incentive share-based payment planssince 2009. The information as set out below relates to options issued under the Executive Long-Term Incentive share-basedpayment plans in 2009 and earlier that have vested in prior years:
Exercisable Beginning End of the at end of of the year Lapsed Exercised year the year No. No. No. No. No.2019 Vested in prior years 50,549 (50,549) – – – Weighted average exercise price (A$) 14.81 14.81 – – –2018 Vested in prior years 807,988 (757,439) – 50,549 50,549 Weighted average exercise price (A$) 15.55 15.60 – 14.81 14.81
(c) Cash-settled share-based payment plans
The Group recognises the fair value of cash-settled share-based payment transactions as an employee expense with a
corresponding increase in the liability for employee benets. The fair value of the liability is measured initially, and at the end ofeach reporting period until settled, at the fair value of the cash-settled share-based payment transaction, by using a Monte Carlosimulation method.
7.3 KEY MANAGEMENT PERSONNEL DISCLOSURES
(a) Key management personnel compensation 2019 2018 US$000 US$000 Short-term benets 7,932 7,794 Retirement benets 236 205 Other long-term benets 115 73 Termination benets 43 31 Share-based payments 4,739 2,757 13,065 10,860(b) Loans to key management personnel
There have been no loans made, guaranteed or secured, directly or indirectly, by the Company or any of its subsidiaries at any time
throughout the year to any key management personnel, including their related parties.
Notes to the Consolidated Financial StatementsSection 7: People
This section provides information that is not directly related to the specic line items in the nancial statements, includinginformation about contingent liabilities, events after the end of the reporting period, remuneration of auditors and changes toaccounting policies and disclosures.
8.1 CONTINGENT LIABILITIES
Contingent liabilities arise in the ordinary course of business through claims against the Group, including contractual, third-party andcontractor claims. In most instances it is not possible to reasonably predict the outcome of these claims, and as at reporting date theGroup believes that the aggregate of such claims will not materially impact the Group’s Financial Report.
8.2 EVENTS AFTER THE END OF THE REPORTING PERIOD
On 19 February 2020, the Directors of Santos Limited resolved to pay a nal dividend of US5.0 cents in respect of the 2019 nancialyear. Consequently, the nancial eect of these dividends has not been brought to account in the full-year nancial statements for theyear ended 31 December 2019. Refer to note 2.6 for details.
8.3 REMUNERATION OF AUDITORS
The auditor of Santos Limited is Ernst & Young.(a) Audit and review servicesAmounts received or due and receivable for an audit or review of the Financial Report of the entity and any other entity in theGroup by:
2019 2018 US$000 US$000 Audit of statutory report of Santos Limited Group 1,361 1,558 Audit of statutory report of controlled entities 274 265 1,635 1,823(b) Other services
Amounts received or due and receivable for other services in relation to the entity and any other entity in the Group by:
2019 2018 US$000 US$000Ernst & Young for other assurance services required by legislation, to be performed by the auditor 47 66Ernst & Young (Australia) for other assurance services, not required to be performed by the auditor 226 394 Ernst & Young (Australia) for taxation and other services 2,592 1,708 2,865 2,168
Notes to the Consolidated Financial StatementsSection 8: Other
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8.4 ACCOUNTING POLICIES
(a) Changes in accounting policies and disclosures
The Group applied the following amendments to accounting standards applicable for the rst time for the nancial year beginning1 January 2019:
? AASB 16 Leases? AASB 2018-6 Amendments to Australian Accounting Standards – Denition of a Business? IFRIC 23 Uncertainty Over Income Tax Treatments The adoption of these standards and other new accounting policies are disclosed in more detail below.In addition, several other standard amendments and interpretations were applicable for the rst time in 2019, but were notrelevant to the Company and do not impact the Group’s annual consolidated nancial statements or half-year condensed nancialstatements.(b) Functional currencyThe Group performed a reassessment of the functional currency of the Parent entity (Santos Limited) and certain entities withinthe Group, resulting in it changing functional currency to US dollars, eective 1 January 2019. Prior to 1 January 2019, SantosLimited and these entities had a functional currency of Australian dollars.The change in functional currency was driven by a reassessment of the primary and where necessary, secondary indicators ofeconomic environment that impacts the cash inows and outows of the companies. This included factors such as a change in mixof income stream and in some instances where companies were acting as extensions of the Parent. The US dollar was determinedto be the currency that predominantly impacted each of the companies. The presentation currency of the Group remains US dollars.
(c) Adoption of AASB 16 Description
AASB 16 introduced a single, on-balance sheet accounting model for lessees, which replaced AASB 117 Leases and AASB
Interpretation 4 Determining Whether an Arrangement contains a Lease. As a result, the Group, as a lessee, has recognisedright-of-use assets representing its right to use the underlying asset, and lease liabilities, representing its obligation to make leasepayments.The Group has applied AASB 16 using the modied retrospective approach, under which the cumulative eect of initial applicationis recognised in retained earnings at 1 January 2019. Accordingly, the comparative information presented for 2018 has not beenrestated – i.e. it is presented as previously reported under AASB 117 and related interpretations. The details of the change inaccounting policy are disclosed below.
TransitionThe Group previously classied leases as operating or nance leases based on its assessment of whether the lease transferred
substantially all of the risks and rewards of ownership. Under AASB 16, the Group as a lessee recognises right-of-use assetsand lease liabilities for contracts that convey a right to control the use of an identied asset for a period of time in exchange forconsideration.The Group applied the modied retrospective transition approach, resulting in the cumulative eect of adopting AASB 16 as anadjustment to opening retained earnings at 1 January 2019, with no restatement to comparative information. At transition, for leases classied as operating leases under AASB 117:
? lease liabilities were measured at present value of the remaining lease payments, discounted using the determinedincremental borrowing rate, as appropriate for each identied lease arrangement, as at 1 January 2019, given the rateimplicit within each identied lease arrangement was not readily determinable;? right-of-use assets were measured at either: (i) their carrying amount as if AASB 16 had been applied since thecommencement date, discounted using the lessee’s incremental borrowing rate at the date of initial application; or (ii) anamount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments; and? in addition, the Group elected to apply the option to adjust the carrying amount of the right-of-use assets for any onerouslease provisions that had been recognised on the Group's statement of nancial position as at 31 December 2018.
Notes to the Consolidated Financial StatementsSection 8: Other
8.4 ACCOUNTING POLICIES (CONTINUED)
(c) Adoption of AASB 16 (continued) The impact on transition is summarised below:
1 January 2019 US$million Oil and gas assets – right-of-use assets 185 Other land, buildings, plant and equipment – right-of-use assets 79 Other nancial assets – net investment in sub-lease 4 Reduction of onerous lease provision 4 Lease liabilities (280) Net impact on accumulated losses, before tax (8) Deferred tax asset 2 Net impact on accumulated losses, after tax (6)When measuring lease liabilities for leases that were previously classied as operating leases, the Group discounted lease paymentsusing its incremental borrowing rate at 1 January 2019. The weighted-average rate applied is 4.68%. Transition practical expedients:
The Group elected to apply the following transition practical expedients:
i. exemption for lease arrangements with a short-remaining-term from the date of initial application;ii. discount rates applied to a portfolio of leases with similar characteristics;iii. exemption for leases where the value of the underlying leased asset is deemed to be low-value; and iv. use of hindsight with regards to determination of the lease term. With the application of the above transition practical expedients, the Group recognises the lease payments associated with short-remaining-term and low-value leases as an expense on a straight-line basis over the lease term. The disclosed operating leasecommitments in note 3.5 of the Group’s annual nancial statements for the year ended 31 December 2018, included amountsrelated to such leases.Leases that were classied as nance leases under AASB 117 will continue to be recognised in the statement of nancial positionunder AASB 16. The carrying amount of the right-of-use asset and the lease liability at 1 January 2019 were determined to be thecarrying amount of the lease asset and lease liability under AASB 117 immediately before that date.The table below reconciles the Group’s operating lease commitments at 31 December 2018 to the transition lease liabilitiesrecognised at 1 January 2019:
1 January 2019 US$million Operating lease commitment at 31 December 2018 242Adjusted for:
Short-remaining-term leases exemption (4) Low-value leases exemption (3) Leases with a commencement date post 1 January 2019 (11) Arrangements reassessed as service-type arrangements (26) Gross lease liabilities at 1 January 2019 198 Eect of discounting (51) Redetermination of lease term 42 Lease arrangements previously disclosed within capital commitments 91 Lease liability recognised on adoption of AASB 16 at 1 January 2019 280 Present value of existing nance leases at 31 December 2018 62 Total lease liabilities recognised at 1 January 2019 342
Santos Annual Report 2019 / 131
Financial Report
8.4 ACCOUNTING POLICIES (CONTINUED)
(c) Adoption of AASB 16 (continued) Current period
The Group leases a number of dierent types of assets, including properties and plant and production equipment, such as oil rigs.The Group presents the following in relation to AASB 16:
? Depending on the type of leased asset, right-of-use assets are presented in either ‘Other land, buildings, plant and equipment’ or‘Oil and gas assets’; and? Lease liabilities in ‘Lease liabilities’ in the statement of nancial position.The table below provides a summary of the impact of AASB 16 on the Group’s consolidated income statement, consolidatedstatement of nancial position and consolidated statement of cash ows for the year ended 31 December 2019:
31 December 2019 Ref US$millionConsolidated income statementExpenses Depreciation 16 Depreciation, related to JOA recoveries a. 42Production expenses b. (9)Shipping costs b. (9) Other expenses b. (2) Finance cost 11Income Other income, related to JOA recoveries a. 42 Foreign exchange gain 2 Net expense recognised in the income statement 5
Formerly under AASB 117, operating lease costs were either expensed as operating expenses (predominantly production costs)
or capitalised as part of non-current assets.
31 December 2019 US$millionConsolidated statement of nancial positionAssets Oil and gas assets – right-of-use assets 244 Other land, buildings, plant and equipment – right-of-use assets 105 Other nancial assets – net investment in sublease 3 Deferred tax asset 2 Reduction in value capitalised to oil and gas assets (4)Liabilities Lease liabilities 363 Onerous lease provisions (2) Net impact on net assets (11)Equity Income statement impact related to leases for the period (5) Net impact on retained earnings on transition to AASB 16 (6) Total impact on equity (11)
Notes to the Consolidated Financial StatementsSection 8: Other
8.4 ACCOUNTING POLICIES (CONTINUED)
(c) Adoption of AASB 16 (continued) 31 December 2019 Note US$millionConsolidated statement of cash owsOperating cash ows Pipeline taris and other receipts (Inow) a. 42 Payments to suppliers and employees (Inow) c. 29 Payment of lease liability nancing costs (Outow) (10)
Investing cash ows Oil and gas assets (Inow) c. 26
Financing cash ows Repayment of lease liabilities (Outow) (87) Net impact on cash ows –
Notes:
a. Where the Group has recognised the gross right-of-use asset and is the only party with a legal obligation to pay the lessor, depreciation is recognised on the entire right-of-use asset
and a nance cost is recognised on the lease liability. Any recovery of the lease payments from other parties is recognised as other income – related to JOA recoveries in the income statement. This results in an insignicant impact to the income statement and an operating cash inow for any recovery of these lease payments.b. The decrease in operating expenses represents the operating lease costs that were previously expensed under AASB 117, now capitalised as part of the right-of-use asset under AASB 16, which will be depreciated.c. The impact on operating cash ows and investing cash ows is the removal of the payments for operating lease costs incurred (previously under AASB 117), which were either expensed through operating costs or capitalised to non-current assets. These cash ows are now presented as nancing cash outows related to lease liability payments.(d) AASB 2018-6 Amendments to Australian Accounting Standards – Denition of a Business DescriptionThe eect of these changes is that the new denition of a business is narrower. The new denition claries that to be considereda business, the acquired set of activities and assets should at minimum include an input and substantive process, that togethersignicantly contribute to the ability to create outputs.This could result in fewer business combinations being recognised, more specically where acquisitions and disposals relate toexploration and evaluation assets. Whilst the amendments provide additional guidance, it introduces a number of considerations anddecision points which need to be assessed to apply the new denition. The standard also provides an optional ‘asset concentrationtest’, which when applied oers a simplied assessment of whether the acquisition is a business or not. ImpactThe recognition criteria and other considerations will be applied to any acquisition and disposal transactions from 1 January 2019
onwards.
Santos Annual Report 2019 / 133
Financial Report
8.4 ACCOUNTING POLICIES (CONTINUED)
(e) IFRIC 23 – Uncertainty Over Income Tax Treatments DescriptionThe Group have applied IFRIC 23 from 1 January 2019 and it serves to clarify how to apply the recognition and measurementrequirements of AASB 112 Income Taxes, when there are uncertain tax positions ("UTP"). When there is a UTP, the interpretation addresses the following:
? Recognition and measurement using either a:
(i) ‘most likely amount’ methodology – when the outcome is binary or concentrated to a specic matter; or (ii) ‘expected value’ or probability-weighted methodology – when there is a range of possible outcomes;
? Additional disclosure considerations, more specically, around the judgements and estimates/assumptions used indetermining tax related balances; and? Whether UTPs are to be assessed separately or bundled together. ImpactThe recognition, measurement and disclosure requirements of the standard have been applied to any UTPs which were underconsideration for the year ended 31 December 2019.Where UTPs have required signicant estimates and judgements to be made around determination of related tax balances, thesewill be disclosed.(f) New standards and interpretations not yet adopted
A number of new standards, amendments to standards and interpretations are eective for annual reporting periods beginning onor after 1 January 2020, and have not been applied in preparing these consolidated nancial statements. The Group’s assessment ofthe impact of these new standards, amendments to standards and interpretations is set out below.i) AASB 2019-1 Amendments to References to Conceptual Framework in AASB StandardsDescriptionThe main changes to the Framework’s principles have implications for how and when assets
and liabilities are recognised and derecognised in the nancial statements.Some of the concepts in the revised Framework are entirely new – such as the ‘practical ability’approach to liabilities. There is some uncertainty with regards to challenges preparersof nancial statements may face as a result.Impact on Group Financial ReportThere is not expected to be an immediate impact on the Group’s results as a result of the
amendments to the Conceptual Framework.Application of standard1 January 2020ii) AASB 2019-3 Amendments to Australian Accounting Standards – Interest Rate Benchmark ReformDescriptionThe amendments provide mandatory temporary reliefs which enable hedge accounting to
continue during the period of uncertainty before the replacement of an existing interest rate
benchmark with an alternative nearly risk-free interest rate.Impact on Group Financial ReportIt is not expected that there will be a material impact to the Group as a result of this
amendment to the standard.Application of standard 1 January 2020iii) AASB 2014-10 Amendments to Australian Accounting Standards – Sale or Contribution of Assets between an
Investor and its Associate or Joint VentureDescriptionThe amendments clarify the accounting treatment for sales or the contribution of assets
between an investor and its associates or joint ventures. The accounting treatment dependson whether the non-monetary assets sold or contributed to an associate or joint ventureconstitutes a ‘business’ (as dened in AASB 3 Business Combinations) and if so, how the gainor loss will be recognised by the investor.Impact on Group Financial ReportIt is yet to be determined what the impact on the Group would be as a result of this
amendment to the standard.Application of standard1 January 2022Several other amendments to standards and interpretations will apply on or after 1 January 2020, and have not yet been applied,however they are not expected to impact the Group’s annual consolidated nancial statements.
Notes to the Consolidated Financial StatementsSection 8: Other
In accordance with a resolution of the Directors of Santos Limited (“the Company”), we state that:
1. In the opinion of the Directors:
(a) the nancial statements and notes of the consolidated entity are in accordance with the Corporations Act 2001 (Cth),
including:
(i) giving a true and fair view of the consolidated entity’s nancial position as at 31 December 2019 and of its performance
for the year ended on that date; and (ii) complying with Accounting Standards and the Corporations Regulations 2001 (Cth); and (b) the nancial statements and notes comply with International Financial Reporting Standards as disclosed in note 1.1 and(c) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and
payable.
2. This declaration has been made after receiving the declarations required to be made to the Directors in accordance with section
295A of the Corporations Act 2001 (Cth) for the nancial year ended 31 December 2019.
3. As at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identied in
note 6.5 will be able to meet any obligations or liabilities to which they are or may become subject by virtue of the Deed of CrossGuarantee between the Company and those members of the Closed Group pursuant to ASIC Corporations (Wholly ownedCompanies) Instrument 2016/785.Dated this 19th day of February 2020On behalf of the Board:
Director
Directors’ Declarationfor the year ended 31 December 2019
Santos Annual Report 2019 / 135
Financial Report
REPORT ON THE AUDIT OF THE FINANCIAL REPORTOpinionWe have audited the Financial Report of Santos Limited (the Company) and its subsidiaries (collectively the Group), which comprisesthe consolidated statement of nancial position as at 31 December 2019, the consolidated income statement, consolidated statement ofcomprehensive income, consolidated statement of changes in equity and consolidated statement of cash ows for the year then ended,notes to the nancial statements, including a summary of signicant accounting policies, and the directors declaration.In our opinion, the accompanying Financial Report of the Group is in accordance with the Corporations Act 2001, including:
a) giving a true and fair view of the consolidated nancial position of the Group as at 31 December 2019 and of its consolidated
nancial performance for the year ended on that date; andb) complying with Australian Accounting Standards and the Corporations Regulations 2001.Basis for OpinionWe conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are furtherdescribed in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of theGroup in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of theAccounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that arerelevant to our audit of the Financial Report in Australia. We have also fullled our other ethical responsibilities in accordance with theCode.We believe that the audit evidence we have obtained is sucient and appropriate to provide a basis for our opinion.Key Audit MattersKey audit matters are those matters that, in our professional judgment, were of most signicance in our audit of the Financial Reportof the current year. These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming ouropinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our auditaddressed the matter is provided in that context.We have fullled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of ourreport, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to ourassessment of the risks of material misstatement of the Financial Report. The results of our audit procedures, including the proceduresperformed to address the matters below, provide the basis for our audit opinion on the accompanying Financial Report.
Independent Auditor’s Reportto the Members of Santos Limited
A member rm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards Legislation
Ernst & Young121 King William StreetAdelaide SA 5000 AustraliaGPO Box 1271 Adelaide SA 5001
Tel: +61 8 8417 1600Fax: +61 8 8417 1775
ey.com/au
Estimation of oil and gas reserves and resourcesWhy signicantHow our audit addressed the key audit matterEstimation of oil and gas reserves and resources was conductedfor the Group, by experts, being specialist engineers, requiringsignicant judgment and the use of a number of assumptions,particularly those disclosed in Note 3.2 of the Financial Report.These estimates can have a material impact on the nancialstatements and the results of the Group, primarily in thefollowing areas:
? capitalisation and classication of expenditure as explorationand evaluation assets (refer Note 3.1), or oil and gas assets(Note 3.2);? valuation of oil and gas assets and impairment testing
(Note 3.3);? calculation of depreciation, depletion and amortisation ofassets (Note 3.2); and? calculation of decommissioning and restoration provisions
(Note 3.4).
Our audit procedures focused on the work of the Group’s expertsand included the following:
? assessed the qualications, competence and objectivity of
both the Group’s internal and external experts involved in theestimation process.? evaluated the adequacy of the experts’ work to determine if
the work undertaken was appropriate.? considered the Group’s reserves estimation process andcontrols, including its internal certication process for technicaland commercial experts who are responsible for reserves, andthe design of Santos Reserves Guidelines and ReservesManagement Process and its alignment with the guidelinesprepared by the Society of Petroleum Engineers (SPE).? assessed the Group’s controls over the estimation process,
to assess and approve the reserves and resources volumes
in accordance with the guidelines prepared by the SPE.? assessed whether key economic assumptions used in the
estimation of reserves and resources volumes were consistent
with those utilised by the Group in the impairment testing of
exploration and evaluation and oil and gas assets, where
applicable.? analysed the reasons for reserve revisions or the absence of
reserves revisions where expected, and assessed changes in
reserves or lack of changes in reserves for consistency with
other information that we obtained throughout the audit.? agreed the reserves and resources volumes to the applicable
nancial information, including the calculation of depreciation,
depletion and amortisation and valuation of assets and
impairment testing, as applicable.
A member rm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards Legislation
Santos Annual Report 2019 / 137
Financial Report
Recovery of carrying value of exploration and evaluation and oil and gas assetsWhy signicantHow our audit addressed the key audit matterAustralian Accounting Standards, require the Group to assessthroughout the reporting period whether there is any indicationthat an asset may be impaired, or that reversal of a previouslyrecognised impairment may be required. If any such indicationexists, an entity shall estimate the recoverable amount of theasset.The Group identied impairment indicators in respect of certainoil and gas cash generating units (CGUs). Impairment testingwas undertaken which resulted in an impairment chargeof $37m being recorded during the year, as set out inNote 3.3 of the Financial Report.
We evaluated the assessment of indicators of impairment, andimpairment testing performed by the Group. Our procedures onthe Group’s assessment of indicators of impairment focused onwhether there had been any signicant changes in the external andinternal factors which would indicate an impairment or reversal ofimpairment existed.When an indicator of impairment was present and impairmenttesting was performed, we assessed the discounted cash owmodels and other data supporting the Group’s assessment. Weinvolved our valuation specialists to assist in these procedures.Our audit procedures included evaluating the assumptions,methodologies and conclusions used by the Group, in particular,those relating to the determination of CGUs, forecast cash ows,and inputs used to formulate them. We evaluated external andinternal factors, assessed for signicant changes, and gathered andreconciled to supporting documentation as appropriate. Dependingon the CGU, these procedures included:
? reconciled future production proles compared to latestreserves and resources estimates (as outlined in the key auditmatter above), current sanctioned development budgets,long-term asset plans, and historical operations.? evaluated movements in commodity price assumptions withreference to contractual arrangements, market prices (whereavailable), broker consensus, analyst views and historicalperformance.? evaluated movements in discount rates and foreign exchange
rates with reference to risk free rates, market indices, marketrisk, broker consensus, and historical performance.? understood operational performance of the CGUs relative to
plan, comparing future operating and development expenditureto current sanctioned budgets, historical expenditure andlong-term asset plans, and ensured variations were inaccordance with our expectations based upon other informationobtained throughout the audit.? examined the reasons for changes to recoverable amounts
relative to previous assessments.? tested the mathematical accuracy of the Group’s discountedcash ow models.For exploration and evaluation assets, we assessed whether anyimpairment indicators, as set out in AASB 6: Exploration for andEvaluation of Mineral Resources, were present, and assessed theconclusions reached by management.We also focused on the adequacy of the Financial Reportdisclosures regarding the assumptions, key estimates andjudgements applied by management for the Group’s assessmentofindicators of impairment and reversal of impairment for oil andgas and exploration and evaluation assets, and the recoverableamount of the Group’s assets.
The Group identied impairment indicators in respect of certainexploration and evaluation assets. Impairment testing wasundertaken which resulted in an impairment charge of $24mbeing recorded during the year, as set out in Note 3.3of the Financial Report.The assessment for indicators of impairment and reversal ofimpairment is judgmental, and includes assessing a range ofexternal and internal factors which could impact the recoverableamount of the CGUs. In determining whether there was anindicator of impairment or impairment reversal, the Groupconsidered where there was any signicant changes in externaland internal factors.Where impairment indicators are identied, the impairment testingprocess can be complex and highly judgmental. Assumptionsand estimates are aected by expected future performance andmarket conditions. Key assumptions, judgments and estimatesused in the formulation of the Group’s impairment assessment areset out in the Financial Report in Note 3.3
A member rm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards Legislation
Independent Auditor’s Reportto the Members of Santos Limited(continued)
Accounting for deferred tax, Petroleum Resource Rent Tax and uncertain tax positionsWhy signicantHow our audit addressed the key audit matterThe Financial Report of the Group includes deferred tax assetsarising from income taxes, including in respect of incometax losses, and Petroleum Resource Rent Tax (PRRT). Thedetermination of the quantum, likelihood and timing of therealisation of deferred tax assets arising from income taxesand PRRT is judgmental, due to the interpretation of PRRTand income tax legislation, as well as the estimation of futuretaxable income.There may be changes in, or uncertainties with respect of theapplication of tax legislation, which requires the Group to makeassumptions, judgments and estimates in assessing the impactsof tax legislation on the Group. The actual tax outcomes maydier from the estimates made by management.On 27 November 2018 the Group completed the acquisitionof Quadrant Energy Holdings Pty Ltd (Quadrant). As outlinedin Note 6.2 the acquisition accounting was nalised duringthe period. The nal net deferred tax liability recognised uponthe acquisition was $481 million compared to a provisional netdeferred tax liability of $628 million at 31 December 2018.The Group recognised a deferred tax asset of $870 millionat 31 December 2019, which is disclosed in Note 2.4 of theFinancial Report.
We assessed the Group’s determination of tax payable now andin the future. We involved our taxation specialists to assist in thisassessment.We considered the Group’s methodologies, assumptions andestimates in relation to the calculation of current taxes and thegeneration of future taxable prots to support the recognition ofdeferred tax assets. We considered forecasts of taxable protsand the consistency of these forecasts with the Group’s budgetsapproved by the Board.We have assessed new information obtained, about facts andcircumstances that existed at acquisition date of Quadrant, whichcould lead to a material change in the fair value of the deferred taxliability. We have involved our tax specialists to assist in evaluatingthe impact of any changes made since the provisional values werecalculated including on deferred tax outcomes, and the provision oftax contingencies included in the acquisition balances.We evaluated the assessment of uncertain tax positions, estimatesand assumptions made through enquiries with the Group’s taxationdepartment, reviewed correspondence with tax authorities andadvisers, and involved our tax specialists, where appropriate, toassess the associated provisions and disclosures.We assessed the Group’s disclosures in respect of PRRT andIncome Taxes, included in the summary of signicant accountingpolicies in Note 2.4 of the Financial Report.
A member rm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards Legislation
Santos Annual Report 2019 / 139
Financial Report
Information Other than the Financial Report and Auditor’s Report ThereonThe Directors are responsible for the other information. The other information comprises the information included in the Company’s2019 Annual Report, but does not include the Financial Report and our auditor’s report thereon.Our opinion on the Financial Report does not cover the other information and accordingly we do not express any form of assuranceconclusion thereon, with the exception of the Remuneration Report and our related assurance opinion.In connection with our audit of the Financial Report, our responsibility is to read the other information and, in doing so, consider whetherthe other information is materially inconsistent with the Financial Report or our knowledge obtained in the audit or otherwise appears tobe materially misstated.If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are requiredto report that fact. We have nothing to report in this regard.Responsibilities of the Directors for the Financial ReportThe Directors of the Company are responsible for the preparation of the Financial Report that gives a true and fair view in accordancewith Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the Directors determine isnecessary to enable the preparation of the Financial Report that gives a true and fair view and is free from material misstatement,whether due to fraud or error.In preparing the Financial Report, the Directors are responsible for assessing the Group’s ability to continue as a going concern,disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the Directors eitherintend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.Auditor's Responsibilities for the Audit of the Financial ReportOur objectives are to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement,whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level ofassurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect amaterial misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in theaggregate, they could reasonably be expected to inuence the economic decisions of users taken on the basis of this Financial Report.As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain professionalscepticism throughout the audit. We also:
? Identify and assess the risks of material misstatement of the Financial Report, whether due to fraud or error, design and perform
audit procedures responsive to those risks, and obtain audit evidence that is sucient and appropriate to provide a basis for ouropinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraudmay involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.? Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the eectiveness of the Group’s internal control.? Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosuresmade by the Directors.? Conclude on the appropriateness of the Directors’ use of the going concern basis of accounting and, based on the audit evidenceobtained, whether a material uncertainty exists related to events or conditions that may cast signicant doubt on the Group’s abilityto continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’sreport to the related disclosures in the Financial Report or, if such disclosures are inadequate, to modify our opinion. Our conclusionsare based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause theGroup to cease to continue as a going concern.? Evaluate the overall presentation, structure and content of the Financial Report, including the disclosures, and whether the FinancialReport represents the underlying transactions and events in a manner that achieves fair presentation.? Obtain sucient appropriate audit evidence regarding the nancial information of the entities or business activities within the Groupto express an opinion on the Financial Report. We are responsible for the direction, supervision and performance of the Group audit.We remain solely responsible for our audit opinion.We communicate with the Directors regarding, among other matters, the planned scope and timing of the audit and signicant auditndings, including any signicant deciencies in internal control that we identify during our audit.We also provide the Directors with a statement that we have complied with relevant ethical requirements regarding independence, andto communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and whereapplicable, related safeguards.
A member rm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards Legislation
Independent Auditor’s Reportto the Members of Santos Limited(continued)
From the matters communicated to the Directors, we determine those matters that were of most signicance in the audit of theFinancial Report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unlesslaw or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a mattershould not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweighthe public interest benets of such communication.REPORT ON THE AUDIT OF THE REMUNERATION REPORTOpinion on the Remuneration ReportWe have audited the Remuneration Report included in pages 32 to 57 of the Directors' Report for the year ended 31 December 2019.In our opinion, the Remuneration Report of Santos Limited for the year ended 31 December 2019, complies with section 300A of theCorporations Act 2001.Responsibilities
The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance withsection 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our auditconducted in accordance with Australian Auditing Standards.
Ernst & Young
R J Curtin L A CarrPartner PartnerAdelaide19 February 2020
A member rm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards Legislation
Santos Annual Report 2019 / 141
Financial Report
Auditor’s Independence Declarationto the Directors of Santos Limited
As lead auditor for the audit of the Financial Report of Santos Ltd for the nancial year ended 31 December 2019, I declare to the bestof my knowledge and belief, there have been:
a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; andb) no contraventions of any applicable code of professional conduct in relation to the audit.This declaration is in respect of Santos Ltd and the entities it controlled during the nancial year.
Ernst & Young
R J CurtinPartnerAdelaide19 February 2020
A member rm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards Legislation
Ernst & Young121 King William StreetAdelaide SA 5000 AustraliaGPO Box 1271 Adelaide SA 5001
Tel: +61 8 8417 1600Fax: +61 8 8417 1775
ey.com/au
Listed on the Australian Securities Exchange at 31 January 2020 were 2,083,066,041 fully paid ordinary shares. Unlisted were 5,000partly paid Plan 0 shares, 5,000 partly paid Plan 2 shares, 19,273 restricted fully paid ordinary shares issued to eligible Senior Executivespursuant to Santos Employee Equity Incentive Plan (“SEEIP”) (formerly known as the Santos Employee Share Purchase Plan(“SESPP”)) and 11,312 fully paid ordinary shares issued with further restrictions pursuant to the ShareMatch Plan.There were 105,653 holders of all classes of issued ordinary shares, including: 1 holder of Plan 0 shares: 1 holder of Plan 2 shares:
6 holders of restricted shares pursuant to the SESPP: 14 holders of ShareMatch shares with further restrictions. This compared with115,810 holders of all classes of issued ordinary shares a year earlier.As at the date of this report there were also: 252 holders of 17,348,813 Share Acquisition Rights pursuant to the SEEIP and 975 holdersof 1,482,704 Share Acquisition Rights pursuant to the ShareMatch Plan.The listed issued ordinary shares plus the ordinary shares issued pursuant to the SEEIP, and the restricted shares issued pursuant tothe SESPP and ShareMatch Plan represent all of the voting power in Santos. The holdings of the 20 largest holders of ordinary sharesrepresent 77.45% of the total voting power in Santos (74.37% on 31 January 2019). The largest shareholders of fully paid ordinary sharesin Santos as shown in the Company’s Register of Members at 31 January 2020 were:
NameBalance as at 31-01-2020%HSBC Custody Nominees587,902,01428.22%Citicorp Nominees Pty Limited467,690,08522.45%J P Morgan Nominees Australia Pty Limited310,304,40814.90%National Nominees Limited105,213,9255.05%BNP Paribas Nominees Pty Ltd <Agency Lending DRP A/c>46,755,9232.24%Citicorp Nominees Pty Limited <Colonial First State Inv A/c> 23,984,7321.15%BNP Paribas Noms Pty Ltd18,815,0580.90%Argo Investments Limited 10,942,0140.53%HSBC Custody Nominees (Australia) Limited <NT-Comnwlth Super Corp A/c>8,251,6570.40%AMP Life Limited5,845,3390.28%Sesap Pty Ltd4,983,7920.24%HSBC Custody Nominees4,300,2710.21%Netwealth Investments Limited <Wrap Services A/c>2,849,5920.14%National Nominees Pty Ltd2,742,5000.13%BNP Paribas Nominees Pty Ltd2,498,3800.12%Warbont Nominees Pty Ltd2,306,6740.11%BNP Paribas Nominees Pty Ltd2,197,6000.11%UBS Nomnees Pty Ltd 2,136,6500.10%HSBC Custody Nominees (Australia) Limited – A/c 21,862,9780.09%HSBC Custody Nominees (Australia) Limited1,815,2050.09%Total:1,613,398,79777.45%
Securities Exchangeand Shareholder Information
Santos Annual Report 2019 / 143
ANALYSIS OF SHARES – RANGE OF SHARES HELD
Fully paid ordinary
shares (holders)% of holders% of shares held1-1,00038,39636.34%0.8501,001-5,00045,14642.73%5.4505,001-10,00012,81712.13%4.43010,001-100,0009,0458.56%9.140100,001 and over 2490.24%80.130Total105,653100.00100.000Less than a marketable parcel of $5003,322Substantial Shareholders as disclosed by notices received by the Company as at 31 January 2020:
Name
Number of voting
shares heldDate of NoticeHony Partners Group, L.P. and others309,734,518*5 May 2017ENN Ecological Holdings Co Ltd and others314,734,518*21 September 2018Santos Limited318,192,274*27 June 2017* As at 27 June 2017, Hony held approximately 4.8% of Santos’ issued capital and ENN held approximately 10.31%. Hony and ENN have a relevant interest in each other’s shares by reasonofActing in Concert agreement dated 27 April 2017. Santos has a relevant interest in the shareholdings of Hony and ENN by reason of the Strategic Relationship agreement announcedbySantos on 27 June 2017.For Directors’ shareholdings see the Directors’ Report as set out on page 18 of this Annual Report.VOTING RIGHTSEvery member present in person or by an attorney, a proxy or a representative shall on a show of hands, have one vote and upon a poll,one vote for every fully paid ordinary share held. Pursuant to the Rules of the Santos Executive Share Plan, Plan 2 and Plan 0 shares donot carry any voting rights except on a proposal to vary the rights attached to Plan shares.
Securities Exchangeand Shareholder Information(continued)
barrel/bblThe standard unit of measurement for all oiland condensate production. One barrel =159 litres or 35 imperial gallons.boeBarrels of oil equivalent.the CompanySantos Ltd and all its subsidiaries.condensateA natural gas liquid that occurs inassociation with natural gas and is mainlycomposed of pentane and heavierhydrocarbon fractions.contingent resources (2C)Those quantities of hydrocarbons that areestimated, on a given date, to be potentiallyrecoverable from known accumulations,but that are not currently considered tobe commercially recoverable. Contingentresources may be of a signicant size,but still have constraints to development.These constraints, preventing the bookingof reserves, may relate to lack of gasmarketing arrangements or to technical,environmental or political barriers.crude oilA general term for unrened liquidpetroleum or hydrocarbons.EBITDAXEarnings before interest, tax, impairment,depreciation (or depletion), amortisationand exploration and evaluation expense.explorationDrilling, seismic or technical studiesundertaken to identify and evaluate regionsor prospects with the potential to containhydrocarbons.FEEDFront end engineering design.FIDFinal investment decision.hydrocarbonCompounds containing only the elementshydrogen and carbon, which may exist assolids, liquids or gases.joulesJoules are the metric measurement unit forenergy.A gigajoule (GJ) is equal to 1 joule × 10
A terajoule (TJ) is equal to 1 joule × 10
A petajoule (PJ) is equal to 1 joule × 10
liquid hydrocarbons (liquids)A sales product in liquid form; for example,condensate and LPG.LNGLiqueed natural gas. Natural gas that hasbeen liqueed by refrigeration to storeor transport it. Generally, LNG comprisesmainly methane.lost-time injury frequency rate (LTIFR)A statistical measure of health and safetyperformance, calculated by the numberof hours worked. A lost-time injury is awork-related injury or illness that results in aperson’s disability, or time lost from work ofone day shift or more.LPGLiqueed petroleum gas. A mixture of lighthydrocarbons derived from oilbearing stratathat is gaseous at normal temperatures butthat has been liqueed by refrigeration orpressure to store or transport it. Generally,LPG comprises mainly propane and butane.market capitalisationA measurement of a company’s stockmarket value at a given date. Marketcapitalisation is calculated as the numberof shares on issue multiplied by the closingshare price on that given date.mmbblmillion barrelsmmboemillion barrels of oil equivalent.mmBtumillion British thermal unitsmtpamillion tonnes per annumoilA mixture of liquid hydrocarbons ofdierent molecular weights.proved reserves (1P)Reserves that, to a high degree of certainty(90% condence), are recoverable. Thereis relatively little risk associated with thesereserves. Proved developed reservesare reserves that can be recovered fromexisting wells with existing infrastructureand operating methods. Provedundeveloped reserves require development.
proved plus probable reserves (2P)Reserves that analysis of geological andengineering data suggests are more likelythan not to be recoverable. There is at leasta 50% probability that reserves recoveredwill exceed proved plus probable reserves.sales gasNatural gas that has been processed bygas plant facilities and meets the requiredspecications under gas sales agreements.SantosSantos Limited and its subsidiaries.seismic surveyData used to gain an understanding of rockformations beneath the earth’s surfaceusing reected sound waves.ttonnes
Glossary
Conversion factorsSales gasand ethane1 PJ = 171.937 boe x 10?Crude oil1 barrel = 1 boeCondensate1 barrel = 0.935 boeLPG1 tonne = 8.458 boeLNG1 PJ = 18,040 tonnesLNG1 tonne = 52.54 mmBtuFor a comprehensive online conversioncalculator tool, please visit our homepage atwww.santos.com
Santos Annual Report 2019 / 145
Santos Limited ABN 80 007 550 923SECURITIES EXCHANGE LISTINGSantos Limited. Incorporated in Adelaide, South Australia, on18 March 1954.Quoted on the ocial list of the Australian Securities Exchange(ordinary shares code STO).COMPANY SECRETARYJodie Hatherly
General Counsel and Vice President Legal, Risk and GovernanceBA, LLBJodie joined Santos in 2019 and is the General Counsel and CompanySecretary of the Santos Group and is responsible for Legal, CompanySecretariat, Risk, Governance and, Corporate Environment, Healthand Safety across the business.Amanda DevonishSenior Corporate Lawyer and Assistant Company SecretaryBCom, LLB (with Hons)Amanda joined Santos in 2012 and was appointed to the role ofCompany Secretary in 2017. She has over 15 years’ experience incommercial and corporate legal practice.REGISTERED AND HEAD OFFICEGround Floor, Santos Centre60 Flinders StreetAdelaide SA 5000AustraliaGPO Box 2455Adelaide SA 5001AustraliaTelephone: +61 8 8116 5000Facsimile: +61 8 8116 5050Website: www.santos.comSHARE REGISTER
Boardroom Pty LimitedGrosvenor PlaceLevel 12, 225 George StreetSydney NSW 2000AustraliaGPO Box 3993Sydney NSW 2001AustraliaWebsite: www.boardroomlimited.com.auShareholder Access: www.investorserve.com.auTelephone: 1300 096 259 (within Australia)
+61 2 8016 2832 (International)
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