Annual Report
2018
Energy for
the future
CONTENTS
1 About Santos2 Financial Overview4 Message from the Chairman and from the
Managing Director and Chief Executive Ocer8 Board of Directors10 Santos Executive Committee12 Reserves Statement16 Directors’ Report31 Remuneration Report58 Financial Report129 Directors’ Declaration130 Independent Auditor’s Report135 Auditor’s Independence Declaration136 Securities Exchange and Shareholder Information138 Glossary139 Corporate Directory
This 2018 Annual Report is a summary of Santos’ operations,activities and nancial position as at 31 December 2018.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
Cover images clockwise from left:
Varanus Island gas hub, WANingaloo Vision FPSO, WADevil Creek gas hub, WA
Santos Limited ABN 80 007 550 923
Santos Annual Report 2018 / 1
An Australianenergy pioneer
Santos is an Australian natural gas company.Established in 1954, the Company’s purpose istoprovide sustainable returns for our shareholdersbysupplying 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, Queensland& NSW, Northern Australia and Papua New Guinea. Each core asset provides stableproduction, 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 iswell positioned 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
with natur al gas, and support the economic development of combined gas andr enewable energy solutions? be the leading national supplier of domestic gas in Australia? be a leading regional LNG supplier by increasing LNG sales to our Asian customers to
over 4.5 million tonnes per annum? be recognised as the safest and lowest-cost onshore gas developer in Australia? become the market leader in running the safest and lowest-cost facilities and
infr astructure operations? contribute positively to the communities in which we operate by providing jobs,
ener gy supply and local partnerships? develop our people and culture to deliver our visionSantos today is a safe, low-cost, reliable and high performance business, proudlydelivering the economic and environmental benets of natural gas to homes andbusinesses throughout Australia and Asia.
Financial overview
1,591-739
1,006
20162015201420172018
| Free cash ow |
10.35
8.45
8.078.05
20162015201420172018
| Unit production costs | 3,300 |
1,288
20162015201420172018
| 8.052018Capital expenditure | 6 |
,128
4,749
3,492
2,731
3,
20162015201420172018
| 2018Net debt |
63.764.3
84.183.4
78.3
20162015201420172018
5475
20162015201420172018
Sales volumeUnderlying net prot after tax
Underlying net prot after tax
,641
2,442
2,594
3,100
| 3,660 |
20162015201420172018
-630-1,953-1,047-360
20162015201420172018
Sales revenue
2018
Net prot after tax
54.1
57.7
61.6
59.558.9
201620152014
2018
Net prot after taxProduction
20172018
Sales volume
mmboe
Sales revenue
US$million
Production
mmboe
Free cash ow
US$million
Underlying net protafter tax
US$million
Net prot after tax
US$million
Unit production costs
US$ per boe
Capital expenditure
US$million
Net debt
US$million
Santos Annual Report 2018 / 3
53.8
46.4
57.8
75.1
201620152014
| Oil |
20172018
20142015201620172018Sales volumemmboe 63.7 64.3 84.1 83.4 78.3Productionmmboe 54.1 57.7 61.6 59.5 58.9A v erage realised oil priceUS$ per barrel 103.4 53.8 46.4 57.8 75.1Net prot after taxUS$million-630 -1,953 -1,047 -360 630Underlying net prot after taxUS$million 564 54 75 318 727Sales r e v enueUS$million 3,641 2,442 2,594 3,100 3,660Opera ting cash o wUS$million 1,633 811 840 1,248 1,578Fr ee cash o wUS$million-1,591 -739 206 618 1,006EBITDAXUS$million 2,076 1,454 1,199 1,428 2,160Total assetsUS$million 18,281 15,949 15,262 13,706 17,134Earnings per shar eUS cents-64.4 -169.5 -58.2 -17.3 30.2Dividends declar ed A$0.35 A$0.20 - - US$0.097Number of employ ees 3,636 2,946 2,366 2,080 2,190
2018 Results
Own product 57.7Third-party product 20.6
Sales gas, ethane and LNG 2,518Oil 757Condensate 300LPG 85
Sales gas and ethane 25.7LNG 23.1Oil 5.9Condensate 3.0LPG 1.2
2018 Sales volumes
mmboe
2018 Production
mmboe
2018 Sales r e v enue
US$million
Average realised oil price
US$ per barrel
Message from the Chairman and from theManaging Director and Chief Executive Ocer
Dear Shar eholder,Santos today is a safe, low-cost, reliableand high performance business. Thesuccessful, ongoing implementation ofour Transform, Build, Grow strategy hasenabled our Company to generate strong,stable cash ows through the oil price cycleand pay a sustainable dividend. Santos isnow positioned to deliver the signicantgrowth across our ve core long-life naturalgas assets.Consistent with our disciplined OperatingModel, Santos’ diversied portfolio of vecore assets each generate free cash owat an oil price of less than US$40 perbarrel. Our focus on low-cost, ecientoperations ensures that in a lower oil priceenvironment Santos can continue to fundthe Transform, Build, Grow strategy and ina rising oil price environment, benet fromhigher margins.Santos’ full-year results serve to highlightthe benets of a diversied portfolioof natural gas assets underpinned by adisciplined, cash generative OperatingModel. In 2018 we delivered:
? a 129% increase in underlying net prot
aft er tax to a record $727 million? a 63% increase in free cash ow to
a r ecord $1 billion? an 18% increase in sales revenue to a
r ecord $3.7 billion, and? dividends of US9.7 cents per share,
fully-franked, including a nal dividend
of US6.2 cents per share.
A strong operating performance acrossour portfolio of ve core assets, includingone month’s production and sales volumesfrom our Quadrant Energy acquisition inWestern Australia, resulted in sales volumesof 78.3million barrels of oil equivalent(mmboe) and production of 58.9 mmboe.With the turnaround complete and thestrategy and Operating Model embedded,2018 marked a signicant milestone for theCompany whereby we achieved our rstfull-year net prot after tax since 2013 of$630 million.This successful turnaround was alsorecognised by others in the market when inApril we received a proposal from a privateequity rm to acquire the business. TheSantos Board, however, rejected this oeras it did not represent appropriate value forthe Company. In rejecting the bid the Boardunanimously deemed the oer price to betoo low, the control premium inadequateand the highly-leveraged private equitytransaction structure to be complex,high-risk and uncertain.We are of the rm view that Santos’ well-developed strategy, strong managementteam, highly-skilled workforce andoutstanding growth opportunities willdeliver superior shareholder value overtime.
CAPITAL MANAGEMENT
Since 2016 we have simplied the business,reduced costs, increased eciencies anddelivered on our clear and consistentstrategy to Transform, Build and Grow.
During this period we prioritised debtrepayment to restore balance sheetstrength and position the Company forgrowth. It was therefore very pleasingin 2018 that we reached our net debtreduction target of $2 billion more than ayear ahead of plan. This milestone gave usthe exibility to not only acquire the lowcost, high-margin conventional assets ofQuadrant Energy in Western Australia butalso, very importantly, announce a returntodividends.In-line with Santos’ stated purposeto provide sustainable returns to ourshareholders through the oil price cycle,our new sustainable Dividend Policy targetsa payout of free cash ow
generated perannum in the range of 10% to 30% aswell as additional returns to shareholdersabove the ordinary dividend when businessconditions permit.
PNG EARTHQUAKE
In late February we were deeply saddenedby the loss of life and injuries suered bycommunities in the Southern Highlandsand Hela Provinces of Papua New Guineaas a result of the severe earthquake inthe region and numerous aftershocks. OurPNG LNG expertise and resources weredeployed to assist the humanitarian reliefeort and Santos donated $200,000 tohelp provide urgently needed food, waterand medical supplies to more than 30,000people isolated in remote villages.We would like to thank and acknowledgethe eorts of our joint-venture partners,
We are of the rm view that Santos’ well-developed strategy, strong management team,highly-skilled workforce and outstanding growthopportunities will deliver superior shareholdervalue overtime.
Santos Annual Report 2018 / 5
ExxonMobil and Oil Search, on acoordinated humanitarian relief andrecovery program in conjunction with ourcommunity partners, aid agencies and thePNG and Australian governments.The gas plant maintained integritythroughout the earthquake period andthere were no releases of hydrocarbonsand no signicant injuries to personnel.Production was safely resumed within twomonths of the rst earthquake and fullrates were achieved by the end of April.
QUADRANT ENERGY ACQUISITION
On 22 August 2018, Santos announcedthe acquisition of Quadrant Energy inWestern Australia for $2.15 billion. Priorto the acquisition, Santos had enjoyeda long-established joint-venture partnerr ela tionship with Quadr an t. The acquisitionis fully aligned with Santos’ Transform,Build, Grow strategy to pursue strategicallyaligned, value accretive acquisitionopportunities – it builds on our existingcore Western Australian natural gas assetsand brings strong growth potential.Acquiring Quadr an t gives San tos increasedownership and operatorship of a highquality portfolio of low-production cost,long-life Western Australian naturalgas and oil assets. Quadrant deliversoperatorship of Santos’ existing gas hubsin Western Australia, providing exibility to
optimise operations and positions Santosto capture value from backll and third-party gas opportunities. Santos knowsQuadrant and its assets well. Quadrant hasexcellent oshore conventional operationsexperience that Santos can leverageas we grow. Specically, it strengthensSantos’ oshore operating expertise andcapabilities to drive growth in our oshoreWestern Australia and Northern Australianassets.Quadrant’s portfolio also includes a largeinventory of discovered resources tobackll existing infrastructure and a leadingposition in an emerging exploration play inthe highly prospective Bedout Basin. Thisinventory includes the recent signicant oildiscovery at Dorado which provides near-term development opportunity and thebasis for material exploration upside.
OPERATING PERFORMANCE
With a focus on operational excellencewe are constantly looking at ways toeliminate waste and ineciency and setnew, higher standards and ways of working.In Western Australia, production andsales volumes were higher in 2018 dueto a strong operating performance andthe commencement of two new salescontr ac t s . The acquisition of QuadrantEnergy further strengthens the Santosportfolio as the assets are backed by
medium to long-term CPI-linked otakeagreements. As Santos enters a periodof major growth project delivery, theseagreements provide strong and stablecash ows and provide balance anddiversication to Santos’ predominantlyoil-linked revenues.In the Cooper Basin our low-cost, ecientoperations have not only halted long-termproduction decline but contributed to 8%production growth in 2018, including ourhighest daily oil production rates since2009. Drilling activity increased 40%over the course of the year to 85 wellsand a fourth rig was added within thedisciplined framework of our OperatingModel. A renewed focus on exploration andappraisal remains in place as we seek tocommercialise the vast discovered resourcethat remains undeveloped.In line with our plans to grow the CooperBasin, we successfully executed the‘Moomba South’ appraisal drilling campaign,the rst of several large scale projectappraisal programs focused on deliveringresource conversion to support futureproduction growth.With improved capital eciency, in 2019 weexpect to drill ~100 wells, targeting higherproduction and reserves additions overtime. Strong fundamentals in the CooperBasin continue to support our purposeto supply reliable, aordable and cleaner
1 Free cash ow is operating cash ow less investing cash ow (including all sustaining capital expenditure, exploration spend and interest payments). The Board will have the discretion
to adjust free cash ow for individually material items, including major growth spend (for example, capital expenditure associated with the proposed Barossa development and PNG LNGexpansion projects), and asset acquisitions and disposals.
Message from the Chairman and from theManaging Director and Chief Executive Ocercontinued
energy to the east coast domestic marketand benet from the strong demand forLNG in Asia.At GLNG our low-cost, ecient operationscontinue to support an accelerateddevelopment plan to unlock more gas overtime. In 2018 we drilled a record 305 wells,77% higher than 2017. During the year the~480-well Roma East eld developmentwas sanctioned with 121 wells drilled byyear-end and the Scotia CF1 eld projectdelivered 85 wells one year ahead ofschedule and 16% under budget. The148-well Arcadia Phase 1 developmentwas also sanctioned during the year withthe rst wells due to come on-line in therst quarter of 2019. We remain on trackto meet our ~6 mtpa annualised sales run-rate, including LNG volumes redirected tothe domestic market, by the end of 2019.In New South Wales we are focusedon securing approval of the NarrabriGas Project to unlock the wealth of thisresource for the people of NSW, deliveringnatural gas to the state’s industries andproviding jobs, small business opportunitiesand community investment for the peopleof the Narrabri region. The Narrabri GasProject is currently being assessed by theNSW Department of Planning ahead of adecision of the NSW Independent PlanningCommission. One hundred per cent ofNarrabri gas would go into the domesticmarket, potentially supplying up to half ofNSW natural gas demand, helping to putdownward pressure on energy prices.
In Northern Australia, Darwin LNG remainsan important and strategic infrastructureproject for the future development ofonshore and oshore resources. Plantperformance in 2018 was again strong withLNG production higher than 2017 despite aone month planned maintenance shutdown.In the upstream, the 3-well Bayu Undaninll program was delivered 40% underbudget and the nal well was broughton-line over three months ahead schedule.The successful program resulted in higherliquids production and increased oshorewell capacity. With the Bayu Undan eldexpected to cease production early nextdecade, the Barossa project is beingprogressed as the lead candidate to backllDarwin LNG. In 2018 we entered FrontEnd Engineering and Design, with detailedengineering design being advanced acrossa number fronts. The development of theBarossa project would more than doubleSantos’ production in Northern Australia.At PNG LNG, plant optimisation activities,including planned upgrades at both theHides Gas Conditioning Plant and LNGplant, were undertaken during downtime asa result of the earthquake. These upgradesresulted in record daily production ratesequivalent to 9.2 mtpa being achieved inthe second half of the year.In May 2018 we announced the sale ofourAsian asset portfolio for $221 million.The sale was consistent with Santos’strategy to realise value from its late-lifenon-core assets.
RELIABLE, AFFORDABLE ANDCLEANER ENERGY SUPPLY
For more than 60 years, Santos hasbeen working in partnership with localcommunities to safely and sustainablydevelop Australia’s natural gas, now morethan ever, the fuel for the future. Betweennow and 2040, the International EnergyAgency expects natural gas to grow to amarket share of approximately a quarter ofall global energy demand. In Asia, demandcontinues to grow as countries switch fromcoal to natural gas to reduce air pollutionand greenhouse gas emissions.Leading the way is China, where airpollution in 62 cities tracked by the WorldHealth Organisation dropped by an averageof 30% between 2013 and 2016. Cleaner air(with lower particulates) is being driven bylarge-scale replacement of coal with gas inindustry and household heating. When usedfor power generation, natural gas is 50%less emissions intensive than coal. China’s“Blue Sky Defence” policy will continue tosupport coal to gas replacement and drivenatural gas demand through the 2020s.In Australia, natural gas is the perfect cleanenergy partner for renewables, providingreliable power 24/7. In line with our long-term aspirational target to achieve net-zeroemissions from our operations by 2050,Santos is actively identifying step-changetechnologies and pursuing projects toreduce fuel use and emissions.
With a focus on operational excellence we areconstantly looking at ways to eliminate wasteand ineciency and set new, higher standardsand ways of working.
Santos Annual Report 2018 / 7
In 2018 we announced a new program toconvert more than 200 oil well pumps inthe Cooper Basin to run on solar powerand batteries. Using solar power will deliverenvironmental and commercial benetsby reducing crude oil consumption, longdistance fuel haulage and emissionsassociated with burning crude oil. Alsoin the Cooper Basin, we announcedanappraisal program that could leadto the development of Australia’s rstcommercial-scale use of carbon capture,utilisation andstorage (CCUS) forenhanced oil recovery and contribute toasignicant reduction in CO
emissions.To nd out more about these projectsand our approach to climate change, wewould encourage you to download our 2019Climate Change Report, available on ourwebsite at www.santos.com/sustainabilitySantos remains focused on the deliveryof natural gas because we believe ithas a critical role to play in deliveringclean and reliable energy for Australianhouseholds and manufacturers alongsidea thriving gasexport industry. Our activeparticipationin the domestic wholesalecommercial and industrial markets addsto competition and helps to delivermore competitive natural gas prices andterms for Australian industry. In 2018 twonew gas sales contracts commenced inWestern Australia and three signicantnew direct-sales agreements were signedwith companies on the east coast, furtherdemonstrating our commitment to securethe future of Australian resource andmanufacturing jobs.
LOOKING AHEAD
We are excited about the company’sfuture prospectsand remain dedicatedto providing an inclusive workplace andorganisational culture that embracesdiversity. In 2019, we will continueto execute our clear and consistentTransform, Build, Grow strategy todeliver a safe, low-cost, reliable andhighperformancebusiness.In PNG we will seek to complete thefarm-in to the P’nyang acreage, furtheraligning Santos with our joint-venturepartners in the PNG LNG project, andevaluate potential browneld LNG plantexpansion opportunities. In NorthernAustralia we are working toward theFinal Investment Decision in late 2019 /early 2020 on the Barossa project in theBonaparte Basin to backll Darwin LNGfrom around 2023. In onshore Australia wewill continue to implement our developmentplans as we target ramping-up GLNGsales to ~6 mtpa by 2019 year-end. In theCooper Basin we will leverage our strongtechnical expertise and subsurface focusto drill ~100 wells. In Western Australia wewill continue to realise signicant synergiesfollowing the acquisition of QuadrantEnergy and will appraise the excitingDorado oil discovery inthe Bedout Basin.In addition, our renewed exploration focuswill see the drilling of the Roc South-1near eld exploration well adjacent theDorado well, oshore Western Australia,the Dukas-1 wildcat well in the AmadeusBasin, central Australia, and a 2-well
program in the McArthur Basin, onshoreNorthern Territory, to test the deliverabilityof the largest and most promising shalegas opportunity in Australia, subject toregulatory approval.Finally, we would like to thank you, ourshareholders for your ongoing support.Santos is now positioned for disciplinedgrowth across each of our ve corelong-life natural gas assets as we targetproduction of more than 100 mmboe by2025, almost double the levels in 2018.Yours sincerely,
KEITH SPENCE
Chairman
KEVIN GALLAGHER
Managing Dir ec tor and Chief ExecutiveOcer
Board of Directors
KEITH SPENCE
ChairmanBSc (First Class Honours inGeophysics), FAIMMr Spence is an independent non-executive Director. He joined theBoard on 1 January 2018 and becameChairman on 19 February 2018.He is Chairman of Santos FinanceLimited and Chair of the NominationCommittee.Mr Spence has over 40 years’experience in managing and governingoil and gas operations in Australia,Papua New Guinea, the Netherlandsand Africa.A geologist and geophysicist bytraining, Mr Spence commenced hiscareer as an exploration geologistwith Woodside Petroleum Limited in1977. He subsequently joined Shell(Development) Australia, where heworked for 18 years. In 1994 he wasseconded to Woodside to lead theNorth West Shelf Exploration team.In 1998, he left Shell to join Woodside.He retired from Woodside in 2008after a 14-year tenure in top executivepositions in the company. He hasexpertise in exploration and appraisal,development, project construction,operations and marketing.Upon his retirement he took up severalboard positions, working in oil and gas,energy, mining, and engineering andconstruction services and renewableenergy. This included Clough Limited,where he served as Chairman from2010 to 2013, Geodynamics Limitedwhere he served as a non-executiveDirector from 2008 to 2016 (includingas Chairman from 2010 to 2016) andOil Search Limited, where he servedas a non-executive Director from2012 to 2017. Mr Spence is also apast Chair of the National OshorePetroleum Safety and EnvironmentalManagement Authority Board and ledthe Commonwealth Gov ernmen t ’sCarbon Storage Taskforce.Other Curren t Directorships:
Chairman of Base Resources Limited(since 2015); Non-executive Directorof Independence Group NL (since2014) and Murray and RobertsHoldings Limited (since 2015).Former Directorships in the last3years: Oil Search Limited (2012 to2017)
KEVIN GALLAGHER
Managing Director and ChiefExecutive OcerBEng (Mechanical) Hons, FIEAustMr Gallagher joined Santos asManaging Director and Chief ExecutiveOcer on 1 February 2016, bringingmore than 25 years’ internationalexperience in managing oil and gasoperations. Mr Gallagher is a memberof the Environment, Health, Safety andSustainability Committee and is also aDirector of Santos Finance Limited.Mr Gallagher commenced his careeras a drilling engineer with MobilNorth Sea, before joining WoodsideinAustralia in 1998.At Woodside, Mr Gallagher led thedrilling organisa tion through rapidgro wth, deliv ering sev er al A ustr alian andinterna tional de v elopmen t projects andexplora tion campaigns , before leadingthe Australian oil business . Then, asCEO of the North West Shelf Venture,he was r esponsible for productionfrom A ustralia’s rst ever LNG project,which underpinned a new domestic gasmarket, fuelling the mining sec tor andother industries in Western Australia.In 2011 Mr Gallagher joined CloughLimited as CEO and Managing Directorwhere, over four years, he transformedthe business and delivered recordnancial results. He oversaw thedevelopment o f inno vative programs toimprove safety and drive productivityand executed an internationalexpansion strategy.Since joining Santos with a strongtrack record in transformingunderperforming operations,MrGallagher has restructuredthe company and implemented adisciplined low-cost operating model.He has signicantly strengthenedthe balance sheet, improvedproduction and nancial performance,and positioned the company on asustainable growth trajectory. UnderMr Gallagher’s leadership, Santos isfocussed on a long-life portfolio ofnatural gas assets with some excitingoil and liquids opportunities, and is wellpositioned with strong cash ows tofund debt reduction, sustaining capital,growth, exploration, and sustainablereturns to shareholders throughout theoil price cycle.Other Curren t Directorships: NilFormer Directorships in the last3years: Nil
YASMIN ALLEN
BCom FAICDMs Allen is an independent non-executive Director. She joined theBoard on 22 October 2014 and is theChair of the People and RemunerationCommittee and a member of the Auditand Risk Committee and NominationCommittee.Ms Allen has extensive experiencein nance and investment banking,including senior roles at Deutsche BankAG, ANZ and HSBC Group Plc, asformer Chairman of Macquarie GlobalInfrastructure Funds, and a formerDirector of EFIC (Export, Finance andInsurance Corporation). Ms Allen wasappointed a member of the AustralianGovernment Takeovers Panel in March2017, is a member (and former Councilmember) of Chief Executive Womenand a former non-executive Directorof Insurance Australia Group (2004to 2015).Other Curren t Directorships:
Director of Cochlear Limited (since2010), National Portrait Gallery (since2013), The George Institute for GlobalHealth (since 2014), ASX Limited andASX Clearing and Settlemen t boards(since 2015) and Chair of Advance(since 2018).Former Directorships in the last3 years: National Director (2010 to2016) and acting Chair (2015 to 2016)of the Australian Institute of CompanyDirectors.
GUY COWAN
BSc (Hons), Engineering,FCA (UK) MAICDMr Cowan is an independent non-executive Director. He joined the Boardon 10 May 2016 and is the Chair ofthe Audit and Risk Committee and aDirector of Santos Finance Limited.Mr Cowan had a 23-year career withShell International in various seniorcommercial and nancial roles. His lasttwo roles were as CFO and Director ofShell Oil US and CFO of Shell Nigeria.He was CFO of Fonterra Co-operativeLimited between 2005 and 2009.Mr Cowan was a Director of LudowiciLimited (2009 to 2012) where hechaired the Audit and Risk Committeeand was also a Shell appointedalternative Director of Woodsidebetween 1992 and 1995.Other Curren t Directorships:
Chairman of Queensland Sugar Limited(since 2015) and Buderim GingerLimited (since 2018) and Director ofWinson Group Pty Ltd (since 2014).Former Directorships in thelast 3years: Director of UGLLimited (2008 to 2017) and CoeyInternational (2012 to 2016).
Santos Annual Report 2018 / 9
HOCK GOH
BEng (Hons) Mech EngMr Goh is an independent non-executive Director. He joined the Boardon 22 October 2012 and is a memberof the Environment, Health, Safetyand Sustainability Committ ee , A uditand Risk Committee and NominationCommittee.Mr Goh has more than 35 years’experience in the global oil and gasindustry, having spent 25 years withSchlumberger Limited, includingas President of Network andInfrastructure Solutions division inLondon, President of Asia, and VicePresident and General Manager ofChina. He previously held managerialand sta positions in Asia, the MiddleEast and Europe. Mr Goh commencedhis career as a eld engineer on therigs in Indonesia and subsequently inRoma and Sale in Australia. Mr Goh isa former Operating Partner of BairdCapital Partners Asia, based in China,(2007 to 2012) and non-executiveDirector of Xaloy Holding Inc in the US(2006 to 2008) and BPH Energy Ltd
(2007 to 2015).
Other Curren t Directorships:
Non-executive Director of Stora EnsoOyj (Finland) (since 2012), AB SKF(Sweden) (since 2014) and VesuviusPLC (UK) (since 2015).Former Directorships in the last3years: Chairman of MEC Resources(2005 to 2018) and Director ofHarbour Energy (2015 to 2018).
DR VANESSA GUTHRIE
Hon DSc, PhD, BSc (Hons)Dr Guthrie is an independent non-executive Director. She joined theBoard on 1 July 2017 and is a memberof the People and RemunerationCommittee and Environment, Health,Safe ty and Sustainability Commit tee.Dr Guthrie has more than 30years’ experience in the resourcessector in diverse roles such asoperations, environment, communityand indigenous aairs, corporatedevelopment and sustainability.She has qualications in geology,environment, law and businessmanagement including a PhD inGeology. She was awarded anHonorary Doctor of Science fromCurtin University in 2017 for hercontribution to sustainability,innovation and policy leadership in theresources industry. She is an activemember of the Australian Instituteof Company Dir ec tors and ChiefExecutive Women, and a Fellow of theAustralian Academy of TechnologicalSciences and Engineering.Other Curren t Directorships:
Director of Australian BroadcastingCorporation (since 2017) and AdelaideBrighton Limited (since 2018), Chair ofMinerals Council of Australia, DeputyChair of Western Australian CricketAssociation, Council member of CurtinUniversity.Former Directorship in the last3 years: Managing Director and CEOof Toro Energy Limited (2013 to 2016),Director of Vimy Resources Limited(October 2017 to November 2018).
PETER HEARL
BCom. (UNSW With Merit), FAICDMr Hearl is an independent non-executive Director. He joined theBoard on 10 May 2016 and is Chair ofthe Environment, Health, Safety andSustainability Committee, a memberof the People and RemunerationCommittee and the NominationCommittee; having earlier servedon the Company’s Audit and RiskCommittee.During an 18-year career in the oilindustry with Exxon in Australia andthe USA, he held a variety of seniormarketing, operations, logisticsand strategic planning positions.MrHearl joined YUM Brands(formerly PepsiCo) as KFC Australia’sDirector of Operations in 1991 andsubsequently had several seniorinternational leadership roles as wellas being President of Pizza Hut USA,before assuming the global role ofYUM Brands’ Chief Operations andDevelopment Ocer in 2006, based inDallas, Texas and Louisville, Kentucky,and from where he retired in 2008.Other Curren t Directorships:
Director of Telstra Limited (since 2014)and Member of Investment Committeeof the Stepping Stone Foundation, aSydney based NFP (since 2018).Former Directorships in the last3 years: Director of Treasury WineEstates (2012 to 2017).
EUGENE SHI
MBA in International BusinessMr Shi is a non-executive Director. Hejoined the Board on 26 June 2017 as anominee of a substantial shareholder.Mr Shi is a member of the People andRemuneration Committee and theAudit and Risk Committee.Mr Shi has more than 20 years ofprofessional experience, including veyears in management consultancy and15 years in senior management roles.His industry experience covers energy,health care, retail and nance inEurope and Asia-Pacic. His specialtiesinclude M&A and restructuring,strategy, value management, and costoptimisation.Mr Shi has held the role of VicePresident, ENN Ecological sinceFebruary 2017. His previous rolesinclude Department Head of BusinessPerformance Service with KPMGChina and Transformation Service withKPMG Europe.Other Curren t Directorships: Nil.Former Directorships in the last3years: Nil.
COMMITTEES OF THE BOARDAudit and Risk Committee
Mr G Cowan ( Chair)Ms Y AllenMr H GohMr E Shi
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 E Shi
Environment, Health,Saf e ty and SustainabilityCommittee
Mr P Hearl (Chair)Mr K GallagherMr H GohDr V Guthrie
Santos Ex ecutiv e Commit tee
KEVIN GALLAGHER
Managing Directorand Chief ExecutiveOcer
Mr Gallagher’s biograph ycan be read on page 8.
DAVID BANKS
Executive Vice PresidentOnshore UpstreamBE (Hons), MBA, GAICDMr Banks joined Santos in2018 and is responsible forSantos’ onshore upstreambusiness.Mr Banks has over25years’ international anddomestic experience inthe upstream oil and gasindustry. He started hiscareer with Schlumbergerin south-east Asia beforejoining BHP in Australiain 1994. Whilst at BHP,Mr Banks’ roles includedoperational, technical andfunctional leadership rolesincluding General ManagerShale Oil, Vice PresidentHSE, Vice President ShaleDrilling and Completionand Bass Strait AssetManager. Beyond businessand function leadership,MrBanks led BHP’sPetroleum Transformationand was IntegrationManager for USshaleassets.
PHILIP BYRNE
Executive Vice PresidentMarketing, Trading andCommercialMA (Natural Science),MSc, DIC (PetroleumGeology)Mr Byrne joined Santosin August 2017 and hasresponsibility for themarketing and trading ofall of Santos gas, LNG andliquid hydrocarbon productsas well as the commercialfunction.Mr Byrne has over35years’ experience inthe international oil andgas industry, starting hiscareer as a PetroleumGeologist in the North Seawith Hamilton Brothers Oil& Gas. He subsequentlyspent 14 years with the BGGroup in senior commercialand exploration leadershiproles in the UK, Europe,Tunisia and India. He spenta further seven years withBHP Petroleum includingGeneral Manager Pakistan,Presiden t Gas Marke tingAsia/Australia, and CountryManager PetroleumAustralia. MrByrne wasthen seconded as Presiden tof the North West ShelfAustralia LNG organisation,which is the marketing armof the North West ShelfLNG project.Most recently, Mr Byrnewas Managing Director andChief Executive Ocer ofNido Petroleum, an ASXlisted company with oilproduction and explorationacreage in the Philippines.
BRETT DARLEY
Executive Vice PresidentOshoreBEng (Civil), SPEMr Darley joined Santosin December 2018. Hehas more than 28 years’experience in the upstreamoil and gas industry, bothin Australia and overseas,with technical, operational,commercial andmanagement experienceacross varied assets,onshore and oshore.Before moving to Santos,Mr Darley held seniorleadership roles includingChief Executive Ocerof Quadran t Energy,Managing Director andRegion Vice President forApache Energy Limited,Vice President of Drillingand Completions atWoodside Energy andDrilling Manager at Santos.Mr Darley holds a Bachelorof Civil Engineering degreefrom the University ofQueensland and is aChartered Engineer. He isa current member of theCurtin Business SchoolAdvisory Council, anelected member of theGeneral Council of theChamber of Commerceand Industry of WA, anda member of the Societyof Petroleum Engineers(SPE).
ANGUS JAFFRAY
Executive VicePresident PeopleandSustainabilityBA (Hons) Geography,MBAMr Jaray joinedSantos in 2016 and isresponsible for HumanResources, Remunerationand Performance,Organisational and LearningDevelopment, Sustainabilityand Organisa tionalIntegration.He previously held theroles of Executive VicePresiden t OrganisationalIntegration and ExecutiveVice President S trategy,Business Development&Technology.Mr Jaray has over20years’ of leadershipand consulting experienceas a Director of AzureConsulting, a Partner atThe Boston ConsultingGroup and a Supply ChainManager with the globalpackaging group CrownCork and Seal.At Azure ConsultingMr Jaray supportedcompanies in developingstrategy and drivingorganisational change.At BCG Angus set upthe Perth oce, led theAustralian Operationspractice and was a coremember of both the Mining& Metals practice andthe Energy Practice. As aSupply Chain Manager MrJaray was accountablefor procurement, planning,logistics and productdelivery.
Santos Annual Report 2018 / 11
NAOMI JAMES
Executive VicePresident MidstreamInfrastructureLLB (Hons), MLMMs James joined Santosin 2016 and is responsiblefor maximising theutilisation and valueof Sant os’ midstreaminfrastructure, includingoil and gas processingfacilities at Moomba andPort Bonython and LNGfacilities in the GLNG andDLNG projects.Previously Ms James wasExecutive Vice PresidentEHS and Governance,with responsibility forSantos’ risk and audit,legal, company secretary,sustainability, safety,environment and accessfunctions.Prior to joining Santos,Ms James held a rangeof functional and lineleadership roles with Arriumincluding Chief Executiveof the Group’s non-integrated steel businesses,Chief Legal Ocer andChief Executive, Strategy,leading major acquisitionsand divestments,business restructuringand turnaround and thelegal, company secretary,government aairs andstrategy functions.Ms James has previouslyworked in private practiceat law rms in Australia andthe UK.
ANTHONY NEILSON
Chief Financial OcerBComm, MBA, FFin, FACAMr Neilson joined Santosas Chief Financial Ocerin 2016, and is responsiblefor the nance, tax,treasury, planning, businessdevelopment, investorrelations and IT functions.He brings over 20 years’experience in charteredaccounting, bankingand corporate nancialroles including 15year s’experience in the upstreamand downstream oil andgas industry.Prior to joining Santos,MrNeilson was CEO ofRoc Oil Company Limit ed(ROC), which was acquiredin 2014 by Hong Kong-listed investor FosunInternational Limited.Previously, Mr Neilson wasChief Financial Ocer ofROC (ASX listed) and hasheld commercial, nanceand business servicesroles at Caltex Australia,Credit Suisse First Boston(London) and ArthurAndersen (Sydney).Mr Neilson holds a Mastersof Business Administrationfrom AGSM and is a Fellowof the Financial ServicesInstitute of Australasiaand a Fellow of CharteredAccountants Australia andNew Zealand.
BILL OVENDEN
Executive Vice PresidentExploration andNew VenturesBSc (Hons) Geology andGeophysicsMr Ovenden joinedSantos in 2002, and isaccountable for developingand executing a targetedexploration and appraisalstrategy across Santos’core asset hubs, whileidentifying new high-valueexploration targets.Mr Ovenden is a geologistwith over 30 years ofexperience in the oil andgas industry. He hasworked on explorationprojects in Australia, Centraland South-East Asia, NorthAfrica, the Middle East andSouth America, with SunOil, Kufpec, ExxonMobiland Ampolex. He joinedSantos after working forExxonMobil in Indonesia.Mr Ovenden is a memberof the APPEA ExplorationCommittee.
VINCESANTOSTEFANO
Chief Opera tions OcerOperations ServicesBEng (Civil), SPEMr Santostefano joinedSantos in March of 2016and is responsible for theprovision of technical andoperational services toincrease the scale andstrategic value of Santos’assets.Mr Santostefano retiredfrom Woodside Energy inNovember 2013 as ChiefOperating Ocer. AsCOO he was responsiblefor Woodside’s producingbusiness units; theProduction Functionincluding 6 LNG trainswith associated oshoreinfrastructure, four FPSOs,the Marine Division andthe Brownelds ProjectsGroup. During 2014 and2015, Mr Santostefano wasengaged in Board work asa non-executive Directorand various management-consulting assignments.Mr Santostefano hasa deep and respectedknowledge of the industry,with signicant experiencein onshore and oshoreoperations and assetmanagement. He hasa proven capability tomanage a demandingworkload and to drivecultural change.
BRETT WOODS
Executive Vice PresidentDevelopmentsBSc (Hons) GeologyandGeophysicsMr Woods joined Santosin February 2013 andis accountable forDevelopment acrossSantos’ onshore andoshore assets, includingmajor capital projects,drilling and completions,and reservoir development,as well as Energy Solutionsand Technology andoverseeing San tos’ jointventure in PNG LNG.At Santos, Mr Woods haspreviously held the roles ofExecutive Vice PresidentOnshore Upstream, andVice President, EasternAustralia. Mr Woodshas held other roleswithin Santos includingresponsibilities forexploration in WesternAustralia and the NorthernTerritory, leading theWestern Australian oshoreoperations includingdevelopment of FletcherFinucane, Darwin LNG andthe domestic gas business.Mr Woods has over 24yearsof oil and gas industryexperience including seniormanagement, technical andbusiness development rolesat Woodside Energy and asCEO and Managing Dir ec t orof Rialto Energy. He has atrack record of deliveringprojec t s and ecien t E&Poperations and has bo thdomestic and interna tionalexperience. MrWoods isa graduate of the HarvardBusiness School AdvancedManagement Pr ogr am, anAPPEA Board Director andChairman of the APPEAExploration Commit t ee.
Reserv es S t a tementfor the year ended 31 December 2018
RESERVES AND RESOURCES
Proved plus probable (2P) reserves increased by 20% to 1,022 million barrels of oil equivalent (mmboe) at the end of 2018, the highestlevel in four years. The 2P reserves replacement ratio was 395%.Net acquisitions and divestments added 192 mmboe during the year, primarily due to the acquisition of Quadrant Energy partially osetby the sale of the non-core Asian assets.Successful appraisal and development activity added 41 mmboe to 2P reserves during the year, primarily in the Cooper Basin,Queensland and Western Australia.2C contingent resources increased to 1.8 billion barrels of oil equivalent due to the acquisition of Quadrant Energy accompanied byexploration and appraisal success in the Cooper Basin and Papua New Guinea.
RESERVES AND 2C CONTINGENT RESOURCES (SANTOS SHARE AS AT 31 DECEMBER)
Santos shareUnit20182017% changeProved reservesmmboe58647025Proved plus probable reservesmmboe1,022848202C contingent resourcesmmboe1,8001,58913
RESERVES AND 2C CONTINGENT RESOURCES BY PRODUCT (SANTOS SHARE AS AT 31 DECEMBER 2018)
Santos share
Sales gas
PJ
Crude oil
mmbbl
Condensate
mmbbl
LPG000 tonnes
TotalmmboeProved reserves3,1232323562586Proved plus probable reserves5,40845391,2591,0222C contingent resources9,0551161162,2811,800
KEY METRICS
Annual proved reserves replacement ratio298%Annual proved plus probable reserves replacement ratio395%Two-year proved plus probable reserves replacement ratio213%Organic annual proved plus probable reserves replacement ratio69%Organic two-year proved plus probable reserves replacement ratio66%Developed proved plus probable reserves as a proportion of total reserves57%Reserves life
14 years
1 2P reserves life as at 31 December 2018 using proforma 2018 Santos and Quadrant Energy production of 75 mmboe.
Santos Annual Report 2018 / 13
PROVED RESERVESSantos share as at 31 December 2018
Asset
Sales gas
PJ
Crude oil
mmbbl
Condensate
mmbbl
LPG000 tonnes
All products
mmboeDevelopedUndevelopedTotalCooper Basin28784523471865Queensland and NSW
799---10334137PNG83209-9853152Northern Australia28-1396-6Western Australia1,177159-15472226Total 1P3,1232323562408178586Percentage of total proved reserves that are unconventional24%
1 Queensland proved sales gas reserves include 642 PJ GLNG and 157 PJ other Santos non-operated Eastern Queensland assets.
Proved reserves reconciliation
ProductUnit2017Production
Revisions
andextensions
Netacquisitions
anddivestments2018Sales gasPJ2,491(284)2017143,123Crude oilmmbbl18(6)9123Condensatemmbbl20(3)1523LPG000 tonnes577(146)131-562Total 1P mmboe470(59)46129586
Reserv es S t a tementfor the year ended 31 December 2018
PROVED PLUS PROBABLE RESERVESSantos share as at 31 December 2018
Asset
Sales gas
PJ
Crude oil
mmbbl
Condensate
mmbbl
LPG000 tonnes
All products
mmboeDeveloped Undeveloped TotalCooper Basin6011891,1869841139Queensland and NSW
1,906---103225328PNG1,176014-14175215Northern Australia41-1739-9Western Australia1,6852715-23595331Total 2P5,40845391,2595864361,022Percentage of total proved plus probable reserves that are unconventional32%
1 Queensland proved plus probable sales gas reserves include 1,463 PJ GLNG and 443 PJ other Santos non-operated Eastern Queensland assets.
Proved plus probable reserves reconciliation
ProductUnit2017Production
Revisions
andextensions
Netacquisitions
anddivestments2018Sales gasPJ4,496(284)162 1,0345,408Crude oilmmbbl33(6)11645Condensatemmbbl33(3)1939LPG000 tonnes1,302(146)103-1,259Total 2P mmboe848(59)411921,022
2C CONTINGENT RESOURCESSantos share as at 31 December 2018
Asset
Sales gas
PJ
Crude oil
mmbbl
Condensate
mmbbl
LPG000 tonnes
All products
mmboeCooper Basin1,35529192,281299Queensland and NSW2,57200-442PNG419-3-75Northern Australia2,934-41-543Western Australia1,7758753-442Total 2C9,0551161162,2811,800
2C Contingent resources reconciliation
Product2017Production
Revisions
andextensions
Discoveries
Netacquisitions
anddivestments2018Total 2C (mmboe)1,589-(141)592941,800
1 Includes 31 mmboe of 2C contingent resources commercialised to 2P reserves in 2018.
Santos Annual Report 2018 / 15
Notes1. This reserves statement:
a. is based on, and fairly represents, information and
supporting documentation prepared by, or under thesupervision of, the qualied petroleum reserves andresources evaluators listed in note 14 of thisReserves Statement. Details of each qualiedpetroleum reserves and resources evaluator’semployment and professional organisationmembership are set out in note 14 of this reservesstatement; 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 contingent
resources contained in this reserves statement are as at31 December 2018.3. 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 believed thatthe expectations of petroleum reserves and contingentresources reected in this statement are reasonable, butthey may be aected by a range of variables which couldcause actual results or trends to dier materially,including but not limited to: price uctuations, actualdemand, currency uctuations, geotechnical factors,drilling and production results, gas commercialisation,development progress, operating results, engineeringestimates, loss of market, industry competition,environmental risks, physical risks, legislative, scal andregulatory developments, economic and nancial marketsconditions in various countries, approvals and costestimates.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 (GCA), Netherland, Sewell & Associates, Inc.(NSAI) and RISC Advisory Pty Ltd (RISC) to audit and/orevaluate reserves and contingent resources. Each auditorfound, based on the outcomes of its respective audit andevaluation, and its understanding of the estimationprocesses employed by Santos, that Santos’ 31December 2018 petroleum reserves and contingentresources quantities in aggregate compare reasonably tothose estimates prepared by each auditor. Thus, in theaggregate, the total volumes summarised in the tablesincluded in this reserves statement represent areasonable estimate of Santos’ petroleum reserves andcontingent resources position as at 31 December 2018.7. 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 and
contingent 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 and, asa 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. Petroleum reserves replacement ratio is the ratio of the
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 rounded tothe nearest whole number. Some totals in the tables maynot add due to rounding. Items that round to zero arerepresented by the number 0, while items that areactually zero are represented with a dash “-“.14. Qualied petroleum reserves and resources evaluators:
NameEmployer
ProfessionalorganisationB PribylSantos LtdSPEM LaurentSantos LtdSPEB CamacSantos LtdSPE, PESAE KlettkeSantos LtdSPE, APEGAN PinkSantos LtdSPES LawtonSantos LtdSPEC HarwoodSantos LtdPESA, AAPGD SmithNSAISPEP StephensonRISCSPESPE: Society of Petroleum EngineersAPEGA: The Association of Professional Engineers andGeoscientists of AlbertaPESA: Petroleum Exploration Society of AustraliaAAPG: American Association of Petroleum GeologistsAbbreviations and conversion factorsAbbreviations1Pproved reserves2Pproved plus probable reservesGJgigajoulesLNGliqueed natural gasLPGliqueed petroleum gasmmbblmillion barrelsmmboemillion barrels of oil equivalentNGLsnatural gas liquidsPJpetajoulestcftrillion cubic feetTJterajoulesConversion factorsSales gas and ethane, 1 PJ171,937 boeCrude oil, 1 barrel1 boeCondensate, 1 barrel0.935 boeLPG, 1 tonne8.458 boe
Directors’ Report
DIRECTORS’ REPORT
The Directors present their report together with the consolidated nancial report of the consolidated entity, being Santos Limited(“Santos” or “the Company”) and its controlled entities, for the nancial year ended 31December2018, 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’ Shareholdings
The 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 Michael25,000GallagherKevin Thomas619,563GohHock67,215GuthrieVanessa Ann5,000HearlPeter Roland48,808ShiEugene-SpenceKeith William (Chairman)65,000The above-named Directors held oce during the nancial year. Mr Keith Spence was appointed as a Director on 1 January 2018, and asChairman on 19 February 2018. Mr Peter Coates was a Director and Chairman until his retirement on 19 February 2018. There were noother persons who acted as Directors at any time during the nancial year and up to the date of this report. All shareholdings are of fullypaid 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 2,093,144 share acquisition rights (SARs) and 93,735 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 pages8and 9 of this Annual Report. This information includes details of other listed company directorships held during the last three years.
Directors’ Report
Santos Annual Report 2018 / 17
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
Director
Directors’ Meeting
Audit & RiskCommittee
EnvironmentHealth, Sa fety& Sust ainability
Committee
People &Remuneration
Committee
NominationCommitteeAttended/Held
Attended/Held
Attended/Held
Attended/Held
Attended/Held
AllenYasmin A.16 of 173 of 4n/a3 of 43 of 3Coates
Peter R.n/a1 of 1n/an/an/aCowanGuy M.16 of 174 of 4n/an/an/aGallagherKevin T.17 of 17n/a4 of 4n/an/aGoh
Hock11 of 173 of 43 of 4n/a2 of 3Guthrie
Vanessa A.17 of 17n/a4 of 43 of 3n/aHearlPeter R.17 of 17n/a4 of 44 of 43 of 3Shi
Eugene8 of 173 of 4n/a3 of 4n/aSpenceKeith W.17 of 17n/an/an/a3 of 3
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 P Coates retired from the Board on 19 February 2018.3 Mr H Goh was on a leave of absence until early March 2018 due to a conict of interest arising from his position as a Director of Harbour Energy. Mr Goh resigned from the Board of
Harbour Energy eective 2 March 2018.4 Dr VA Guthrie was appointed as a member of the People and Remuneration Committee on 30 March 2018.5 Mr Shi did not attend Board meetings related to the Harbour Energy proposal due to a conict of interest arising from his role at ENN.
Directors’ Report
OPERATING AND FINANCIAL REVIEW
Santos’ principal activities during 2018 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
2018mmboe
2017mmboe
Variance
%Production volume 58.959.5(1)Sales volume78.383.4(6)
US$millionUS$millionProduct sales 3,6603,10018EBITDAX
2,1601,42851Exploration and evaluation expensed(105)(94)12Depreciation and depletion(667)(742)(10)Net impairment loss(100)(938)(89)Change in future restoration assumptions463148EBIT
1,334(315)523Net nance costs(228)(270)(16)Taxation (expense)/benet(476)225312Net prot/(loss) for the period and attributable to equity holders of Santos Limited630(360)275Underlying prot for the period
727318129Underlying earnings per share (cents)
34.915.3128
1 EBITDAX (earnings before interest, tax, depreciation, depletion, exploration and evaluation and impairment), 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 asset acquisitions, disposals andimpairments, as well as items that are subject to signicant variability from one period to the next, including the eects of fair value adjustments and uctuations in exchange rates. Pleaserefer to page 22 for the reconciliation from net loss to underlying prot for the period. Underlying earnings per share represents underlying prot for the period divided by the weightedaverage number of shares on issue during the year. The non-IFRS nancial information is unaudited, however the numbers have been extracted from the audited nancial statements.
Sales volume
63.764.3
84.183.4
78.3
20162015201420172018Sales volumes of 78.3 million barrels of oilequivalent (mmboe) were 6% lower thanthe previous year primarily due to lowerthird-party volumes, lower LNG volumesdue to the PNG earthquake, and the sale ofSantos’ non-core Asian assets.
Product sales revenue
3,641
2,442
2,594
3,100
| Sales volume | 3,660 |
20162015201420172018
Sales revenue increased 18% compared tothe previous year to $3.7 billion, primarilydue to higher oil and LNG prices partiallyoset by lower sales volumes. The averagerealised oil price increased 30% to US$75/bbl and the average realised LNG priceincreased 36% to US$10.08/mmBtu.
Production volume
54.1
57.7
61.6
59.558.9
201620152014
| Sales revenue | Production |
20172018Production was 1% lower than theprevious year primarily due to the PNGearthquake and sale of the non-coreAsian assets (which reduced productionby approximately 4 mmboe in aggregate),partially oset by higher production in theCooper Basin and Queensland, and theacquisition of Quadrant Energy.
Directors’ Reportcontinued
Santos Annual Report 2018 / 19
Revie w of Operations
Santos’ operations are focused on ve core, long-life natural gas assets: Cooper Basin, Queensland & NSW, Papua New Guinea,Northern Australia and Western Australia.
Cooper Basin
The Cooper Basin produces natural gas, gas liquids and crude oil. Gas is sold primarily to domestic retailers, industry and for theproduction of liqueed natural gas, while gas liquids and crude oil are sold in domestic and export markets.Santos’ strategy in the Cooper Basin is to deliver future production growth by being a low-cost business, increasing reserves, investingin new technology to lower development and exploration costs, and increasing utilisation of infrastructure including the Moomba plant.Cooper Basin20182017Production (mmboe)15.514.4Sales volume (mmboe)21.621.0Revenue (US$m) 1,146851Production cost (US$/boe) 8.17 9.31EBITDAX (US$m) 518329Capex (US$m)245198Cooper Basin EBITDAX was $518 million, 57% higher than 2017 primarily due to higher sales revenue impacted by higher oil prices, inaddition to lower production costs resulting from cost eciencies.Santos’ share of Cooper Basin sales gas and ethane production of 60.6 petajoules (PJ) was 4% higher than the previous year (58.4 PJ)as new development activity more than oset the impact of natural eld decline.
Queensland & NSW
GLNG produces liqueed natural gas (LNG) for export to global markets from the LNG plant at Gladstone. Gas is also sold into thedomestic market. Santos has a 30% interest in GLNG.The LNG plant has two LNG trains with a combined nameplate capacity of 7.8 mtpa. Production from Train 1 commenced in September2015 and Train 2 in May 2016. Feed gas is sourced from GLNG’s upstream elds, Santos portfolio gas and third-party suppliers.The LNG plant produced 4.8 million tonnes of LNG in 2018 and shipped 80 cargoes. Annual LNG production was lower than the previousyear (5.4 million tonnes) as the GLNG joint venture partners diverted gas originally slated for export to the domestic market.Santos aims to build GLNG gas supply through upstream development, seek opportunities to extract value from existing infrastructureand drive eciencies to operate at lowest cost.Queensland and NSW20182017Production (mmboe)12.211.7Sales volume (mmboe)22.022.6Revenue (US$m) 1,016 769Production cost (US$/boe)5.77 5.81EBITDAX (US$m) 570322Capex (US$m) 244190Queensland and NSW EBITDAX of $570 million increased 77% compared to 2017. This was a result of higher sales revenue reecting theramp-up of upstream production and higher LNG prices and lower costs.
20 / San t os Annual Report 2018
Directors’ Report
Papua New Guinea
Santos’ business in PNG is centred on the PNG LNG project. Completed in 2014, PNG LNG produces LNG for export to global markets,as well as sales gas and gas liquids. Santos has a 13.5% interest in PNG LNG.The LNG plant near Port Moresby has two LNG trains with the combined capacity to produce more than eight million tonnes perannum. Production from both trains commenced in 2014.PNG LNG production and sales were signicantly impacted by a severe earthquake that struck the PNG Highlands region in February2018. PNG LNG was safely shut-in and there were no releases of hydrocarbons or signicant injuries to personnel. Productionrecommenced in April and resumed full rates in May.The LNG plant produced 7.4 million tonnes of LNG in 2018 and shipped 98 cargoes. Annual LNG production was lower than the previousyear (8.3 million tonnes) due to the earthquake.Santos’ strategy in PNG is to work with its partners to align interests, and support and participate in backll and expansion opportunitiesat PNG LNG. Santos, along with the other PNG LNG parties, are in discussions to build alignment for the proposed construction ofthree additional LNG trains at the PNG LNG site, one for the PNG LNG project (Santos 13.5% interest) and two for the Papua LNGproject (inwhich Santos does not have an equity interest). Santos expects to earn an access fee from the Papua LNG project for useof existing PNG LNG infrastructure. Santos is also in discussions regarding a proposal received for Santos to farm-in to PRL 3 whichcontains the multi-tcf P’nyang eld.PNG20182017Production (mmboe)11.212.6Sales volume (mmboe)10.812.0Revenue (US$m) 630534Production cost (US$/boe)6.23 4.37EBITDAX (US$m) 506432Capex (US$m)3932PNG EBITDAX of $506 million increased 17% compared to 2017, mainly due to higher LNG prices.
Northern Australia
Santos’ business in Northern Australia is focused on the Bayu-Undan/Darwin LNG (DLNG) project. In operation since 2006, DLNGproduces LNG and gas liquids for export to global markets. Santos has an 11.5% interest in DLNG.The LNG plant near Darwin has a single LNG train with a nameplate capacity of 3.7 mtpa. The plant produced 3.3 million tonnes of LNGin 2018 and shipped 54 cargoes. Annual LNG production was in line with the previous year.Santos’ strategy in Northern Australia is to support plans to progress Darwin LNG backll, expand the Company’s acreage footprint andappraise the onshore McArthur Basin.In April 2018, Santos announced that agreement had been reached with its joint venture partners to enter the front-end engineering anddesign (FEED) phase for the development of the Barossa project to backll Darwin LNG. A nal investment decision is targeted towardsthe end of 2019 or early 2020. Santos has a 25% interest in Barossa and successful development would extend the operating life ofDarwin LNG by more than 20 years, and more than double Santos’ current production in Northern Australia.Northern Australia20182017Production (mmboe)3.74.0Sales volume (mmboe)3.64.0Revenue (US$m) 183153Production cost (US$/boe) 20.17 18.75EBITDAX (US$m) 11687Capex (US$m)6663Northern Australia EBITDAX of $116 million was 33% higher than 2017.
Directors’ Reportcontinued
Santos Annual Report 2018 / 21
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 August 2018, Santos announced the acquisition of Quadrant Energy for US$2.15 billion plus potential contingent payments related tothe Bedout Basin. The acquisition was completed on 27 November 2018.Quadrant Energy held natural gas and oil production, and near- and medium-term development, appraisal and exploration assets,predominantly in the Carnarvon Basin, oshore Western Australia. Quadrant’s conventional natural gas assets included signicantportfolio overlap with Santos, including the Varanus Island and Devil Creek gas hubs, providing opportunity to realise signicantcombination synergies.Quadrant’s portfolio also included a leading position in the highly prospective Bedout Basin, including the signicant oil discovery atDorado (Santos 80%) which provides near-term development opportunity, subject to appraisal.Western Australia20182017Production (mmboe)12.510.5Sales volume (mmboe)13.010.8Revenue (US$m) 422352Production cost (US$/boe)8.68 10.19EBITDAX (US$m) 283224Capex (US$m)9379
Quadrant Energy included from completion of the acquisition on 27 November 2018.
Western Australia EBITDAX of $283 million was 26% higher than 2017.Santos’ share of Western Australia gas and condensate production was 63.1 PJ and 0.7 mmbbl respectively.
Asia
In May 2018, Santos announced the sale of its Asian asset portfolio to Ophir Energy plc for US$221 million. The asset sale wascompleted on 6 September 2018.Asia20182017Production (mmboe)3.76.1Sales volume (mmboe)3.66.1Revenue (US$m) 181256Production cost (US$/boe) 11.36 11.15EBITDAX (US$m) 179 177Capex (US$m) 8 34Asia production was lower than 2017 due to the completion of the sale of the assets in September 2018.
Directors’ Report
Net prot/(loss)
The 2018 net prot attributable to equity holders of Santos Limited of $630 million is $990 million higher than the net loss of $360million in 2017. This increase is primarily due to lower impairment losses of $94 million after tax ($703 million in 2017) and higher salesrevenue as a result of favourable product prices and volumes.Net prot includes items before tax of $115 million ($97 million after tax), as referred to in the reconciliation of net prot to underlyingprot below. Underlying prot was $727 million, $409 million higher than 2017.
Reconciliation of net prot/(loss) to underlying prot
2018 US$million2017 US$millionGrossTaxNetGrossTaxNetNet prot/(loss) after tax attributable to equity
holders of Santos Limited 630(360)Add/(deduct) the following:
Net gains on sales of non-current assets(112)18(94)(79)20(59)
Impairment losses100(6)94938(235)703
Fair value adjustments on embedded
derivatives and hedges2-2(14)4(10)
Fair value adjustments on commodity hedges67(21)4663(19)44
Costs associated with acquisitions
anddisposals58(9)49---
115(18)97908(230)678Underlying prot
727318
1 Underlying prot is a non-IFRS measure that is presented to provide an understanding of the underlying performance of Santos’ operations. Themeasure excludes the impacts of asset
acquisitions, disposals and impairments, and the impact of hedging. The calculation of underlying prot has changed from prior periods, to simplify the denition of underlying prot toenhance comparability to peer companies. Prior period underlying prot has been restated to a like-for-like basis. The non-IFRS nancial information is unaudited, however the numbers havebeen extracted from the nancial statements which have been subject to audit by the Company’s auditor.
Financial positionSummary of nancial position
2018US$million
2017US$million
VarianceUS$millionExploration and evaluation assets1,004459545Oil and gas assets and other land, buildings, plant and equipment11,3439,6621,681Restoration provision(2,093)(1,528)(565)Other net assets/(liabilities)
492120372Total funds employed 10,7468,7132,033Net debt
(3,549)(2,731)(818)
Net tax assets/(liabilities)
821,169(1,087)Net assets/equity7,2797,151128
1 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.
Directors’ Reportcontinued
Santos Annual Report 2018 / 23
Impairment of assets
During the Company’s regular review of asset carrying values, Santos undertook an impairment review as part of the preparation of its2018 full-year accounts.At 31 December 2018, non-cash after-tax impairment losses of $18 million were recognised in addition to the non-cash after-taximpairment of $76 million recognised at 30 June 2018. The total after-tax impairment losses of $94 million for the year mainly relate tothe impairment of exploration and evaluation assets.
Exploration and evaluation assets
Exploration and evaluation assets were $1,004 million compared to $459 million at the end of 2017, an increase of $545million, dueto the acquisition of Quadrant Energy, 2018 capital expenditure, including drilling in Papua New Guinea, Cooper Basin and BarossaCaldita, along with evaluation studies, in addition to acquisition costs comprising interests in Tern Frigate and Muruk Farm-in; osetbyimpairment losses before tax of $129 million and exploration and evaluation expenses of $10 million.
Oil and gas assets and other land, buildings, plant and equipment
Oil and gas assets and other land and buildings, plant and equipment of $11,343 million were $1,681 million higher than in 2017 mainly dueto the acquisition of Quadrant Energy and 2018 capital expenditure, oset by depreciation and depletion charges.
Restoration provision
Restoration provision balances have increased by $565 million to $2,093 million mainly due to the acquisition of Quadrant Energy, osetby revised restoration cost estimates and favorable exchange dierences.
Net debt
Net debt of $3,549million was $818 million higher than at the end of 2017 primarily as a result of additional funding for the acquisition ofQuadrant Energy, oset by free cash ow before asset acquisitions and divestments of $1,006 million and proceeds from asset sales of$152 million.
Net tax assets/(liabilities)
Net tax assets of $82 million have decreased by $1,087 million primarily as a result of the acquisition of Quadrant Energy and theutilisation of carry-forward tax losses recognised by the Group.
Net assets/equity
Total equity increased by $128 million to $7,279 million at year end. The increase primarily reects the net prot after tax attributable toowners of Santos of $630 million, partially oset by the movements in the translation reserve of $437 million and payments of dividendsto shareholders of $73 million.
Future commitments
Due 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.Santos leases LNG carriers and tug facilities under nance leases. The leases have terms of between 10 and 20 years with varyingrenewal options. At the reporting date, nance lease liabilities for a purpose-built LNG carrier and tug boats were recorded on thebalance sheet. Santos also leases oating production, storage and otake facilities, oating storage ooading facilities, LNG carriersand mobile oshore production units under operating leases. These leases typically run for a period of four to six years and may have anoption to renew after that time. The group also leases building oce space and a warehouse under operating leases. These leases aregenerally for a period of 10 years, with an option to renew the lease after that date.
Oil price hedging
The 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 2018, the Company had total combined 2019 hedging of 4.9 million barrels. Of this, 3.4 million barrels of productionis hedged using zero cost collars with a oor price of $45.00/bbl and a ceiling price of $79.27/bbl. In addition, Quadrant Energy 2019hedging of 1.5 million barrels via swaps and participating forwards with an average oor price of $64.59/bbl has been novated to Santos.
24 / San t os Annual Report 2018
Directors’ Report
Business strategy and prospects for future nancial yearsBusiness strategy
Santos has a clear and consistent strategy to drive shareholder value which sees ve core, long-life natural gas assets at the heart ofthe Company’s operations, each with signicant upside potential.The Company’s strategy has three phases:
Transform
? Diverse and balanced portfolio of ve core, long-life natural gas assets;? Robust balance sheet;? Lowest-cost onshore operator in Australia; and? Disciplined, low-cost operating model, portfolio free cash ow breakeven at <$40 oil price.
Build
? Develop low-risk, browneld growth prospects across the core portfolio;? Pursue strategically aligned, value-accretive acquisition opportunities;? Leverage facilities and infrastructure operations strategic capability; and? Maximise margins through Marketing and Trading business.
Grow
? Execute and bring on-line growth opportunities across the core portfolio;? Focused exploration strategy to identify new high-value targets and unlock future core assets; and? Generate new revenue through low-carbon Energy Solutions projects.
Prospects for future nancial years
Santos 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 assets. This focus willenable Santos to remain a low-cost and high-performing business with signicant upside opportunities across the portfolio.The Company will increasingly focus on disciplined growth by:
? completing the P’nyang farm-in in PNG and entering FEED for expansion;? completing FEED on Barossa backll for Darwin LNG and progressing to FID;? delivering the Dorado appraisal program and entering FEED;? driving synergies in Western Australia resulting from the Quadrant acquisition;? growing production in the onshore assets consistent with the disciplined operating model; and? optimising the portfolio through strategically aligned acquisitions, farm-outs and disposals.Santos expects 2019 sales volumes to be in the range of 88-98 mmboe and production to be in the range of 71-78 mmboe. Capitalexpenditure is expected to be approximately $1.1 billion.Santos remains condent in the long-term underlying demand for energy and particularly natural gas on the back of Asian economicgrowth, the rising global population and rapid urbanisation in developing economies.
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 Policy.This summary refers to signicant risks identied at a whole of entity level relevant to Santos. It is not an exhaustive list of all risks thatmay aect the Company, nor have they been listed in any particular order of importance.
Directors’ Reportcontinued
Santos Annual Report 2018 / 25
Strategic risks
Volatility 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 has been 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 ar e aected by numerous factors beyond the Company’s control and historically these have uctuated widely. Santos’ three-tier ed str a t egy, Operating Model and Hedging Policy introduced in 2016 directly address oil price risk to build resilience to oil price uctuations.This includes a clear focus on cash o w management, operational and cost eciencies, debt reduction and production growth opportunities.Santos’ acquisition of Quadrant in 2018 adds conventional domestic natural gas assets backed by medium to long-term CPI-linkedotake contracts to compliment 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 reservoir geology,seismic and well dat a available and other factors such as project development and operating costs, together with commodity prices.Afailure to successfully develop existing reserves may impact Santos’ ability to fully supply LNG, gas or oil under customer contracts.Sant os has adopt ed a reserves management process that is consistent with the Society of Petroleum Engineers’ Petroleum ResourceManagement S yst em. The Compan y ’ s reserves and resources estimations are subject to independent audits and evaluations on a rolling basis.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 12–15).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 processes 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 many reasons, including unanticipated economic, nancial, operational, engineering, technical,environmental, contractual, regulatory, community 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 and risk management and reporting systems in place. Progress and performance of material projectsis 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.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.
Directors’ Report
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 which 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 relevant governments, communities, landowners and indigenous groupsto ensure all concerns are fairly addressed and managed, and Santos’ operations benet from their support. In addition, Santos and itsoperating joint venture partners develop and employ security and risk management plans, and are committed to conducting operationsin 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’ Reportcontinued
Santos Annual Report 2018 / 27
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 obligations tostakeholders. Financial risk management is carried out by a central treasury department which operates in line with a Board-approvedpolicy and framework. The framework and principles for overall nancial risk management address specic nancial risks, such as foreignexchange risk, interest rate risk and credit risk, approved derivative and non-derivative nancial instruments, 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 annualcapital expenditure 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, borrowings denominated in currencies other than US$ and capital and operating expenditure incurred in currencies other thanUS$, principally A$. Santos also holds investment interests in domestic and foreign operations whose net assets are exposed to foreigncurrency 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 aects maybe global or aecting a particular geographic region, industry or economic sector. Access to debt and equity funding may also be undulyaected by a downgrade in its credit rating.Santos had $3.3 billion in liquidity (cash and undrawn bilateral bank facilities) available as at 31 December 2018.
Contract and counterparty risks
As 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.
Directors’ Report
Political and legal risks
Political, 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 ofoperations 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 statements
This 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 or likelihood of fullling of 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 24 to 28) refers to risks which, if materialised, may have a signicant eect on the state ofaairs of the Company.
Dividends
On 20February2019, the Directors resolved to pay a fully franked nal dividend of US6.2 cents per fully paid ordinary share on28 March 2019 to shareholders registered in the books of the Company at the close of business on 27 February 2019 (“Record Date”).This nal dividend amounts to approximately US$128 million. The Board also resolved that the Dividend Reinvestment Plan will not be inoperation for the 2018 nal dividend.In addition, a fully franked interim dividend of US3.5 cents per share was paid to members on 27 September 2018. The DRP was not inoperation for the interim dividend.
Directors’ Reportcontinued
Santos Annual Report 2018 / 29
Environmental Regulation
The 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 Environmental Management System. Environmental complianceperformance is monitored on a regular basis and in various forms, including audits conducted by regulatory authorities and by theCompany, either through internal or external resources.On 4 May 2018, Santos received a penalty infringement notice and $12,615 ne from the Queensland Department of Environment andScience for a release of euent to the environment.On 19 July 2018, Santos received a $68,000 ne from the Queensland Department of Environment and Science for the unauthorisedrelease of hydrocarbons to land.On 12 October 2018, Santos received a penalty infringement notice and $1,500 ne from the New South Wales Environment ProtectionAuthority for using produced water treated at the Leewood Treatment Plant for irrigation.The consolidated entity undertook corrective measures in respect of the infringements to prevent re-occurrences.
POST BALANCE DATE EVENTS
On 20 February 2019, the Directors of Santos Limited resolved to pay a nal dividend on ordinary shares in respect of the 2018 nancialyear. The nancial eect of these dividends has not been brought to account in the full-year nancial report for the year ended 31December 2018.
SHARES UNDER OPTION AND UNVESTED SHARE ACQUISITION RIGHTS (SARS)Options
Unissued ordinary shares of Santos Limited under option at the date of this report are as follows:
Date options grantedExpiry dateIssue price of shares
Number of options2 March 20092 March 2019$14.8150,549
50,549
1 This is the exercise price payable by the option holder.
Options do not confer an entitlement to participate in a bonus or rights issue, prior to the exercise of the option.
Unvested SARs
Unissued ordinary shares of Santos Limited under unvested SARs at 31 December 2018 are as follows:
Dat e S AR s gr an tedNumber of shares under unvested SARs14 June 20163,862,73431 August 2016570,07121 March 20173,522,05119 May 2017671,64129 Sept ember 2017516,32821 March 20182,755,9411 April 2018743,0787 May 2018520,1839 July 2018427,3445 November 201815,299
13,604,670Since 31 December 2018, no additional SARs have been granted over unissued ordinary shares of Santos Limited and 9,636 SARspursuant to the ShareMatch plan have lapsed.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 31 of this report and in note 7.2 to the nancial report.
Directors’ Report
SHARES ALLOCATED ON THE EXERCISE OF OPTIONS AND ON THE VESTING OF SARSOptions
No options were exercised during the year ended 31 December 2018 or up to the date of this report.
Vested SARs
The following ordinary shares of Santos Limited were allocated during the year ended 31 December 2018 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.Dat e S AR s gr an tedNumber of shares allocated28 July 2015568,1701 February 2016166,91111 July 201642,58531 August 2016 28,08319 April 201780,57129 Sept ember 201714,3009 July 20184,918
905,538Since 31 December 2018, no ordinary shares of Santos Limited have been allocated on the vesting of SARs granted under the SEEIP andShareMatch.
DIRECTORS’ AND SENIOR EXECUTIVES’ REMUNERATION
Details of the Company’s remuneration policies and the nature and amount of the remuneration of the Directors and senior management(including shares, options and SARs granted during the nancial year) are set out in the Remuneration Report commencing on page 31of this report and in notes 7.2 and 7.3 to the nancial report.
Directors’ Reportcontinued
Santos Annual Report 2018 / 31
The Directors of Santos present this Remuneration Report for the consolidated entity for the year ended 31December2018. 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 2018 and remuneration information pertaining to thekey management personnel (KMP) of the consolidated entity for the purposes of the Corporations Act and Accounting Standards, asset out below. These are the personnel who have authority and responsibility for planning, directing and controlling the activities of theCompany’s major nancial, commercial and operating divisions.
KEY MANAGEMENT PERSONNEL COVERED BY THE REMUNERATION REPORT
NamePosition Term as KMP in FY2018Non-executive DirectorsK eith William Spence
Independent non-executiv e ChairFull yearPe ter R oland Coa tesIndependent non-executive Chair 1 January 2018 to 19 February 2018Yasmin Anita AllenIndependent non-executive DirectorFull yearGuy Michael CowanIndependent non-executive DirectorFull yearHock GohIndependent non-executive DirectorFull yearVanessa Ann GuthrieIndependent non-executive DirectorFull yearPeter Roland HearlIndependent non-executive DirectorFull yearEugene ShiNon-executive DirectorFull yearExecutive DirectorK e vin Thomas Gallagher Managing Director and Chief Executive Ocer (CEO)Full yearSenior ExecutivesDavid Maxwell BanksExecutive Vice President (EVP) Onshore Upstream
prior to commencing in this role Mr Banks was Vice President Onshore
Upstream Projects
From 1 December 2018Philip Ambrose ByrneEVP Marketing, Trading and CommercialFull yearBrett Anthony DarleyEVP OshoreFrom 28 November 2018Anthony Myles NeilsonChief Financial Ocer (CFO)Full yearVincent SantostefanoChief Operations Ocer (COO)Full yearBrett Kenneth WoodsEVP Developments
prior to commencing in this newly created role on 1 December Mr Woods wasEVP Onshore Upstream
Full yearBruce ClementEVP Conventional Oil and Gas
prior to commencing in this role Mr Clement was Vice President Asia,NSW & WA Oil Assets
From 1 February 2018 to
27 November 2018
1 Mr Spence was appointed to the Board on 1 January 2018 and appointed Chair on 19 February 2018.
REPORTING CURRENCY
Remuneration is disclosed in US$ (unless otherwise indicated) with all remuneration components having been converted from A$ toUS$ using an average rate of $0.7475 for 2018 and $0.7667 for 2017. This means year-on-year changes in remuneration amounts statedin US$ may be at least partly attributable to exchange rate variations and not necessarily a change in policy intent concerning theamount to be paid in A$.
Remuneration Report
Directors’ Report
OVERVIEW OF RESULTS - DELIVERING STRONG PERFORMANCE
Since 2016 Santos has simplied the business, reduced costs, increased eciencies and delivered on the clear and consistent Transform,Build, Grow strategy. The successful execution of Santos’ strategy delivered a strong nancial performance in 2018 including:
? 129% increase in underlying net prot after tax to $727 million,? 63% increase in free cash ow to $1 billion,? 18% increase in sales revenue to a record $3.7 billion, and? sales volumes of 78.3 million barrels of oil equivalent (mmboe) and production of 58.9 mmboe across the portfolio of ve core
long-life na tural gas assets.In 2018 the company achieved its net debt reduction target of $2 billion more than one year ahead of plan. This milestone provided theexibility to return to dividends and acquire the low-cost, high-margin conventional assets of Quadrant Energy in Western Australia. Thevalue accretive acquisition of Quadrant Energy in Western Australia for US$2.15 billion aligned not only with our production growth planbut also our strategy to build on existing infrastructure positions around our core long-life natural gas assets.Our strong operating and nancial results in 2018 reect the benets of a cash generative core asset portfolio and low-cost, disciplinedoperating model. Santos’ portfolio is now positioned for disciplined growth, targeting production of more than 100 mmboe by 2025,almost double the levels in 2018.While our nancial performance and growth outcomes have been very strong in 2018, our results in relation to personal and processsafety have not met our high expectations, though there have been improvements made from the previous year’s performance,particularly in personal safety. The Board and Executive team are focussed on continuing to improve this performance in 2019 and arecommitted to preventing harm to people and the environment.
ALIGNING REMUNERATION AND COMPANY PERFORMANCE
In 2018, we strengthened the alignment of Executive remuneration with the interests of shareholders by:
? including appropriate nancial and operational performance measures in the Company Scorecard, at an overall 50% weighting of the
to tal result, including production, unit production costs, underlying prot and Free Cash Flow Breakeven Point (FCFBP) measures;? setting more challenging stretch performance goals and increasing Executive STI opportunities for high performance, while holding
incentives for “on-target” performance at pre-existing levels;? increasing the portion of Executive STI deferred in equity for two years from 30% to 50% of total STI, subject to positive free cash
ow (FCF ), and requiring that the portion deferred in equity be 100% if FCF is not positive;? focussing the CEO and Senior Executives on ongoing shareholder returns through the equity-based LTI plan, particularly through the
r elative TSR and return on capital performance hurdles.Despite strong operational performance during 2018, no Long-Term Incentive (LTI) awards vested because the Company did not achievethe required relative Total Shareholder Return (TSR) performance over the four years since the 2015 LTI was awarded. This is the eighthconsecutive year that relative TSR-tested LTI awards have not vested, reecting the clear link between long-term shareholder returnsand Senior Executive remuneration.In light of the Company’s performance in 2018, the Board has approved a Company Scorecard result of 138.8% of its target performancelevel, which will be used to determine Short-Term Incentive (STI) awards. Further detail on the KPIs and performance assessment isavailable in Table 2: “2018 Company Scorecard – KPI performance” on page 41.
Remuneration Reportcontinued
Santos Annual Report 2018 / 33
ACTUALLY REALISED REMUNERATION
The Actually Realised Remuneration table below shows remuneration “actually realised” by the CEO and Senior Executives in relation to2018, namely:
? cash payments on account of Total Fixed Remuneration (TFR);? cash STI awards earned in respect of 2018 performance;? deferred STI awards in respect of prior performance years which vested in 2018; and? SARs granted as part of the LTI program, only if they vest, valued on the basis of their closing price on the date of vesting.These amounts dier from the amounts reported in Table 5 and other statutory tables which are prepared in accordance with theCorporations Act and Accounting Standards. This is because the Accounting Standards require a value to be placed on “share-basedpayments” at the time of grant, and for that “accounting value” to be reported as remuneration, even though the CEO and SeniorExecutives may ultimately not realise any actual value from the “share-based payments” e.g. because the performance conditions arenot satised, as was the case for the 2015 four-year LTI award tested at the end of 2018.Termination payments, leave entitlements and cashing out of leave entitlements, where allowable under legislation, are not includedin the table below. The total remuneration amounts determined in accordance with the requirements of the Corporations Act andAccounting Standards are set out in Table 5 “2017 and 2018 Senior Executive remuneration details” (see page 50).The Actually Realised Remuneration shown in Table 1 will continue to be disclosed in Australian dollars to enable simpler year-on-yearcomparisons without the impact of currency changes.
Table 1: Actually realised remuneration (unaudited and non-IFRS)
Year
TFR
A$
Cash STI
A$
2016Def erred STI
that vested
in 2018
A$
LTI
A$
Othervestedgrants
A$
Other
A$
Total
A$CURRENTKT Gallagher
CEO
20181,890,0001,175,600608,488–851,246
6,082 4,531,41620171,800,0001,159,200––667,6445,3413,632,185DM Banks
EVP Onshore Upstream
201858,33322,300––– – 80,633PA Byrne
EVP Marketing, Trading andCommercial
2018700,000286,700–––6,082 992,782
2017271,370129,400–––9,804410,574BA Darley
EVP Oshore
201877,00031,200–––1,094109,294AM Neilson
Chief Financial Ocer
2018822,500347,800–––– 1,170,300
2017800,000423,600––122,2142,6261,348,440V Sant ostefano
Chief Operations Ocer
2018859,562361,500207,528–6,082 1,434,672
2017850,000379,300–––2,6841,231,984BK Woods
EVP Developments
2018742,500327,900172,938–6,082 1,249,420
2017695,000355,600297,330––6,4081,354,338FORMERB Clement
EVP Conventional Oil and Gas
2018577,500446,900
–––1,024,400
1 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 2018 performance for continuing Executives that will be paid in cash. The remaining 50% will be awarded as equity restricted
for two years.3 The deferred restricted equity from the 2016 STI award that vested on 31 December 2018, at a closing share price of A$5.48.4 No LTI vested in 2018. For the value of share-based payments calculated in accordance with the Accounting Standards, see Table 5 “2017 and 2018 CEO and Senior Executive remuneration”
on page50.5 “Other” comprises ad hoc payments treated as remuneration, such as assignment and mobilisation allowances and other non-monetary benets.6 This gure represents the second tranche of the CEO’s sign-on grant (166,911 SARs) that vested on 31 January 2018. The amount reected is based on a closing share price of A$5.10 on
31January 2018.7 Mr Clement’s 2018 STI will be delivered wholly in cash in accordance with his contract, as he will not be an ongoing employee.
Directors’ Report
REMUNERATION GOVERNANCEPeople and Remuneration Committee
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 advice
The Board has adopted a protocol for engaging and seeking advice from remuneration consultants. In 2018 some remunerationbenchmarking exercises were undertaken to provide information on market remuneration levels for KMP, however no remunerationrecommendations were provided by remuneration consultants.
Clawback
The share plan rules give the Company the discretion to lapse or forfeit unvested deferred shares or SARs awarded under the STI or LTIprograms, and claw back 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.
Remuneration Reportcontinued
Santos Annual Report 2018 / 35
REMUNERATION APPROACH
The fundamental purpose of Santos’ remuneration policy is to develop and maintain an eective remuneration framework whichsupports and reinforces successful execution of the Transform, Build, Grow business strategy.
Attracting and retaining talented andqualied executives
Focusing executives to strive forsuperior performance
Aligning executive and shareholderinterests
Remuneration policy objective
Total Fixed Remuneration (TFR)(base plus superannuation)? Remuneration levels are market-
aligned against similar r oles incomparable companies .? Individual remuneration is set with
r egard to the executive’s role andr esponsibilities and also theindividual’s e xperience andcompetencies.? Fixed Remuneration levels ensure
that the Compan y oerscompetitive remuneration thatenables it to a ttract and retain theskills it needs without payingexcessiv ely, in line with itscostfocus.
Short-term incentive (STI)? A signicant component of
r emuneration is “at risk”. The valueto the e xecutive is dependent onthe Company and individualmeeting challenging targets.? Short-term incentive outcomes
ar e based on annual performancemeasur es that deliver immediateoutcomes for the Company acrossa range o f nancial, safety,environment, growth andcultureKPIs.? Half (50%) of executives’ STI
aw ards is delivered as cashfollo wing the end of theperformance y ear.? 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 achie vingperformance hurdles that arealigned with cr eation of long-termshar eholder value (relative totalshar eholder return, return oncapital employ ed and freecashow).? Executives cannot hedge equity
incentives tha t are unvested orsubject t o restrictions. Theseincentives are also subject toclawback.
Enabled through the Company’s remuneration framework
Remuneration timeline
The timing of Executive remuneration payments and delivery mechanisms is summarised in the following diagram.TFR
Year 1Delivered as cash
| Delivered as equity |
Year 2Year 3Year 4
50% cash50% equity
100% equity
* This is an increase in the deferred equity portion for 2018, up from 30% in previous years.
Directors’ Report
Key questions relating to Incentives FrameworkShort-term incentive
What is the purpose of STI?STI aligns Executive interests to the delivery of the Company’s short-term operational and nancial goals
for the year. Goals are chosen to drive outcomes and behaviours that support the safe operation anddelivery of the business and lead to long-term growth in shareholder value.What is the relevantperformance period?
STI award is based on performance for a one-year period. At least 50% of the award is provided asrestricted equity held for two years. This is an increase from previous years when 30% of the award wasprovided as deferred equity.In what form is the incentivemade and when is theincentive realised?
The STI award is subject to a free cash ow gate, such that:
? if FCF for the year was positive, 50% of STI is paid in cash in the next available payroll run. The other
50% is def erred in shares or share acquisition rights (SARs) for two years;? if FCF was negative, all of the STI is deferred in equity for two years.Deferred STI is forfeited if the Executive leaves the Company during the vesting period due to resignationor summary dismissal (including for fraud or misconduct). STI awards are subject to clawback.How is the STI pooldetermined?
The STI pool size is capped at the sum of individuals’ maximum STI levels. The actual STI pool for the yearis set by reference to the Company Scorecard result (2018 results are outlined in Table 2 on page 41). TheScorecard result is generally applied as a percentage of the target pool size (subject to the application ofany Board discretion).How is individualperformance consideredindet ermining S TI?
For the CEO and Senior Executives, STI awards are determined with reference to the assessment ofCompany performance against the Company Scorecard, as well as individual performance in that year.The CEO sets individual KPIs with each Senior Executive at the start of the performance year, as relevantto their specic role and contribution to Company deliverables.The CEO assesses Senior Executive performance and determines STI award proposals which arethen formally endorsed by the People and Remuneration Committee. The Board assesses the CEO’sperformance and determines his STI award.
Remuneration Reportcontinued
Santos Annual Report 2018 / 37
Long-term incentive
What is the purpose of LTI?LTI aligns the interests of Executives with the creation of long-term shareholder value.
The relative TSR performance criteria provide for vesting when there are strong shareholder returnsagainst the relevant markets. The FCFBP and ROACE measures vest when the Company demonstratesunderlying operational eciency to generate free cash ow throughout the oil price cycle, and disciplineduse of capital to generate shareholder returns over a four-year period.What is the relevantperformance period?
SARs issued under the annual LTI program have a four-year performance period. This period representsan appropriate balance between providing a genuine and foreseeable incentive to executives andfostering a long-term view of shareholder interests.In what form is the incentivemade and when is theincentive realised?
LTI amounts are based on a set percentage of the executive’s TFR allocated on a face value basis, anddelivered in SARs. SARs are a conditional entitlement to a fully paid ordinary share at zero price, subject tosatisfaction of the performance condition.Nothing is payable by executives if and when SARs vest. Following vesting of SARs, shares areautomatically allocated to the executive. Trading in these shares is subject to compliance with theCompany’s Securities Dealing Policy.The Board has discretion to settle the SARs in cash if they vest.What performancemeasures have beenchosenand why?
Vesting of the LTI is assessed against four equally weighted performance measures:
WeightingPerformance measuresDescription and rationale25%Relative TSR measured against
companies of the ASX100
The calculation of TSR takes into account share priceand dividend yield and is therefore a robust and objectivemeasure of shareholder returns.TSR continues to eectively align the interests ofindividual Senior Executives with that of the Company’sshareholders by motivating Senior Executives to achievesuperior shareholder outcomes relative to Santos’competitors for investor capital and its energy sectorpeers.25%Relative TSR measured against
companies of the S&P GlobalEnergy Index (GEI)25%Free Cash Flow Breakeven
Point (FCFBP)
FCFBP is the US$ oil price at which cash ows fromoperating activities equal cash ows from investingactivities, as published in the Company’s nancialstatements. As the aim of the performance hurdle is tomeasure the performance of the underlying business, theBoard has discretion to adjust the FCFBP for individualmaterial items including asset acquisitions and disposalsthat may otherwise distort the measurement.25%Return on Average Capital
Employed (ROACE) comparedwith Weighted Cost of Capital(WACC)
ROACE is measured as the underlying earnings beforeinterest and tax (EBIT) divided by the average capitalemployed, being shareholders’ equity plus net debt, aspublished in the Company’s nancial statements.The use of ROACE as a performance measure alignsSenior Executives with shareholder interests by focusingon the ecient and disciplined use of capital to generateshareholder returns.
Directors’ Report
What is the vesting scalefor LTI?
Each performance measure has a vesting scale which provides for:
? 0% vesting below a lower performance hurdle? 100% vesting at or above an upper performance hurdle? Pro rata vesting from 50% to 100% between the lower and upper hurdles.The vesting scales below apply to both the CEO’s and Senior Executives’ 2018 LTI performancegrants. There is no re-testing of the performance condition. SARs that do not vest upon testing of theperformance condition will lapse.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%
Free Cash Flow Breakeven Point (FCFBP)
% of grant vestingAbove $US40 /bbl 0%Equal to US$40/bbl 50%
straight line pro-rata vesting in betweenEqual to or below US$35/bbl100%
Return On Average Capital Employed (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%How is performance onthese measures assessed?
Relative TSR performance, being a market-based measure, is tested by an independent third party andreviewed by the Board prior to vesting. The Board has discretion to adjust the TSR comparator groups,for example to take account of takeovers, mergers and demergers that occur during the performanceperiod.FCFBP and ROACE, being non-market measures, are tested and audited internally, and all resultsexternally audited as part of the Annual Report release. The Board has discretion to make adjustments tothe results on these measures, based on the agreed methodology.What happens to on-footequity on cessation ofemployment?
Generally, if an executive resigns or is summarily dismissed their unvested SARs will lapse. In all othercircumstances (including death, total and permanent disability, redundancy and termination by mutualagreement), unvested SARs remain on foot and will vest or lapse in accordance with their original terms,unless the Board determines otherwise.What happens to on-footequity on change of control?
Where there is a change in control, the Board may determine whether, and the extent to which, SARsmay vest.
Remuneration Reportcontinued
Santos Annual Report 2018 / 39
LINK BETWEEN PERFORMANCE AND REMUNERATION
The remuneration mix indicates the extent to which Executive remuneration is variable and “at risk” and, within this, the balancebetween short-term and long-term incentives.The charts below show the year-on-year comparison of remuneration outcomes for the CEO and Senior Executives at dierentperformance levels:
? target – reecting incentive payments for achieving expected (“on-target”) annual and long-term performance
;? stretch – reecting incentive payments for achieving stretch performance against both short-term and long-term goals; i.e. the
maximum earning opportunity.These charts set out the opportunity levels available within the remuneration framework. The actual remuneration mix in any year varieswith actual performance and incentive outcomes.In summary, the charts illustrate that:
? at stretch performance the maximum STI component increased relative to TFR and LTI between 2017 and 2018, to be more in line
with market peer s;? at all levels of performance the proportion of remuneration that is deferred and delivered in equity increased between years, owing to
STI deferral increasing from 30% to 50% of STI;? compared with the other Executives, the CEO has a higher proportion of remuneration at risk and more of the at-risk remuneration
focussed on the long term.The charts below depict remuneration mix at target and stretch performance levels, expressed as a percentage of total remuneration.
2018201720182017
At targetAt stretch
2018201720182017
TFRSTI cashSTI equityLTI
23%15%15%48%23%9%21%48%28%18%18%35%30%9%22%38%
34%14%14%38%34%8%20%38%40%17%17%27%43%9%20%29%
1 For this purpose “target” LTI is a notional gure of 60% of face value LTI. This approximates the average long-run vested value of allocated LTI, when the expected impact of performance
vesting conditions is taken into account.
Note: The whole numbers shown in these charts may not total 100% exactly, due to rounding.
Directors’ Report
COMPANY PERFORMANCE OUTCOMESPerformance against 2018 Compan y Scorecard
How does the Companymeasure its annualperformance?
The Company’s annual performance is monitored and assessed using the Company Scorecard. TheScorecard contains a balanced blend of nancial and operational KPIs which support execution of thebusiness strategy and drive business performance. In 2018 Scorecard KPIs covered a range of areasincluding production, operating eciency, safety, growth and culture.These measures include lagging indicators to assess the Company’s past performance, as well asforward-looking indicators to ensure the Company is positioning itself eectively for future growth. TheBoard believes that this Scorecard is balanced and focuses CEO and Senior Executives on achieving thekey outcomes necessary to deliver stronger returns to shareholders.Who assesses Companyperformance?
The People and Remuneration Committee formally assesses the Company’s performance against theoverall Scorecard at the end of each nancial year, and this forms the basis of a recommendation to theBoard.What has changed in 2018compared with 2017?
In the Company’s 2017 Remuneration Report it was announced that the Board had approved, eectivefrom 2018, an increase in Executives’ maximum STI opportunities to enable greater upside opportunityfor exceptional performance and ensure competitiveness with the market. This was matched with morechallenging stretch performance goals associated with STI payouts at these higher opportunity levels.Threshold and target performance goals and associated STI payouts remain comparable with previousyears.As a result of the increased degree of diculty built into the 2018 Scorecard, performance levels betweentarget and stretch are no longer directly comparable with previous years’ performance
, however targetperformance level is still comparable over time.To simplify year-on-year comparisons and more clearly outline the change in performance levels overtime, the Board has determined that from 2018 onwards, Company performance will be expressed relativeto the Company’s target performance level of 100%, such that:
? Scorecard results above 100% reect performance above target, and? Scorecard results below 100% reect performance below target.How is the Scorecard resultcalculated?
The Company Scorecard is comprised of a range of KPIs with set threshold, target and stretch goalsagreed with the Board at the start of the performance year. The relative importance of each KPI isdetermined and assigned a proportionate weighting of the total Scorecard 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 Scorecardresult is a weighted average of KPI scores. The 2018 Scorecard has a maximum result of 167% of target.This increased maximum result can only be achieved for exceptional Company performance.The Board believes the above method of assessment is rigorous and provides a balanced assessment ofthe Company’s performance.What is the overallScorecard result for 2018?
The Company’s performance against the 2018 Company Scorecard, as assessed by the Board on thenew scoring basis, resulted in an outcome of 138.8% relative to target. This outcome is used to set theavailable STI pool. Individual STI outcomes will depend on executives’ contractual entitlements andindividual performance during the year, as detailed on page 46.Table 2 provides further details of Scorecard KPIs and the Company’s performance against them.
Remuneration Reportcontinued
1 In previous years, performance was expressed as a score out of 100%, whereby 100% represented stretch performance, and the target performance level was set at 75% of that 100%
maximum.
Santos Annual Report 2018 / 41
Table 2: 2018 Company Scorecard – KPI performance
KPIRationalePerformance
Result(relativeto targetof 100%)
Safety, Environment and Culture (20%)
Personal safetyMeasured by the number oflost time injuries per millionhours worked over the12-month period
The Company is committed to providing aworkplace without injury or illness.
Lost time injury frequency rate(LTIFR) of 0.65. Although there havebeen improvements made from theprevious year, particularly in personalsafety, threshold performance levelwas not achieved.
50%
Environment andProcesssafetyMeasured by the number ofTier 1 loss of containmentof hydrocarbon incidents.Measured by the numberof environmental incidentsof moderate or greaterconsequence.
The integrated target for Environment andPr ocess Sa fety represents the Company’scommitment to reducing the number ofprocess safety related incidents with potentialfor high-impact consequences, and theoccurrence of signicant environmentalincidents.
There were four Tier 1 and twelveTier 2 loss of containment incidents(LOCI) a result that was equivalent to2017 and below the 2018 target. Therewere no environmental incidents ofmoderate or greater consequence,resulting in threshold performance.
Implementation ofCulture Plan, includingSantos Values
Included to reinforce the importance of culturalimprovement and the roll-out of the SantosValues as a foundation for the organisation.
Santos Pulse survey launchedsuccessfully to the entire businessand leader training implementedto facilitate discussion of localimprovement opportunities. Valuesare embedded in all learningprograms, employee communicationsand individual performance anddevelopment review frameworks.Target performance level achieved.
Financial and Operating Eciency (50%)
Production (adjustedfordisposals) mmboe
Production is critical to the Company’sprotability, and is a key measure of theCompany’s overall performance, underpinningannual earnings and cashow.
Production of 58.9 mmboe exceededstretch performance.
166%
Fr ee Cash FlowBreakeven Point(FCFBP)(US$/bbl)
Included to ensure continual reduction intheCompany’s cost base and to reinforce Santos’disciplined operating model.
Free cash ow breakeven point wasUS$31.30/bbl per barrel. Above target(near stretch) performance wasachieved.Underlying net protafter tax (NPAT)(notadjusted foroilprice US$
Included to deliver earning improvement forthe business.
Stretch performance achieved dueto higher revenue from favourableoilprice, partly oset by higherthird-party purchase costs and lowerproduction. Final underlying NPATresult of US$727m exceeded stretchperformance.Unit production cost(US$/boe)
Included to ensure that the Company maintainsits cost and eciency focus for every unitofproduction
Unit pr oduc tion cost s o f US$8.05/boeexceeded stretch performance.
Directors’ Report
KPIRationalePerformance
Result(relativeto targetof 100%)
Growth (30%)
2P organic reservesreplacement ratio (RRR)two-year rolling average
The 2P organic RRR measures the amount of2P added to Santos’ reserves during the yearthrough exploration and development (ratherthan by acquisition) relative to the amount ofgas and oil produced. The RRR should be atleast 100% for the long-term sustainability ofthe Company.
Year-end position of 66% 2P RRR(organic two-year average) is abovethreshold but did not achieve targetof 100%.
152%
2C resource add two-year rolling average(% of cumulativetwo-year production)
The 2C resource replacement measures theamount of 2C added during the year throughexploration, appraisal, development andacquisition, relative to the amount of gas andoil produced. The 2C resources are potentialfuture development opportunities.
Year-end position of 515% exceededstr e tch performance 150%.
Build & Gr ow Initiatives This metric is focussed on increasing the value
of the Company’s core asset portfolio throughthe delivery of commercial, operational andeciency improvements.
Achievement of stretch performancelevel for the Build & Grow Initiativesdriven by strong performance on WASales Gr o wth, Cooper ProductionGrowth and WA Reserve andResource Growth.
PERFORMANCE RESULTS FOR 2015 LTI
The performance outcomes for both the ASX100 and S&P Global Energy Index tranches of the 2015 LTI grant (75% and 25% weightingrespectively) reect performance below the 51
st
percentile. As a result, none of the SARs granted to the recipients in 2015 vestedas part of the four-year grant. This reects the alignment of the Company’s LTI program with the interests and long-term returnsofshareholders.Details about how performance targets are set and tested for the purpose of LTI awards are set out on page 38.
Remuneration Reportcontinued
Santos Annual Report 2018 / 43
SUMMARY OF 5 -YEAR COMPANY PERFORMANCE
Table 3 sets out the Company’s performance over the past ve years in respect of several key nancial and non-nancial indicators andthe STI and LTI awards during this period. As discussed previously, owing to the change in increased degree of diculty applied to thestretch performance level of the 2018 Company Scorecard. Scorecard results for 2018 are not directly comparable to previous yearswhen expressed relative to maximum. As such, the 2018 result is shown relative to target, and indicative results on this basis are shownfor previous years to enable some degree of year-on-year comparisons.
Table 3: Key metrics of Company performance 2014 – 2018
20142015201620172018Injury frequencytotal recordable case frequency rate3.52.82.23.54.5lost time injury frequency rate
(three-year
rolling average)
0.70.50.40.40.6Production (mmboe)54.157.761.659.558.9Reserve replacement rate – 2P organic (one-year average %)00196269Net prot/(loss) after tax
($m)US$(630)US$(1,953)US$(1,047)US$(360)US$630Dividends per ordinary share (cents) A$ 3520005Share price – closing price on rst trading day of year A$14.63A$8.25A$3.68A$4.02A$5.45
LTI performance (% vesting) –shown against nal year of performance period0%0%0%0%0%Company Scorecard resultexpressed as % of target of 100%
4,5
77.3%89.3%115.3%118.0%138.8%
1 From the 2015 performance year onwards the gures reect a rolling three-year average.2 2014 – 2015 NPAT gures have been translated from A$ to US$ at an applicable exchange rate for the year for comparison purposes following the change in the Company’s presentation
currency in 2016.3 Closing share price at 31 December 2018 was A$5.48.4 From 2018, the Company will report its performance relative to a target of 100% (with a maximum score of 167% of target). For comparative purposes in this transitionary year, Table 3
presents prior year results for 2014 to 2017 restated relative to target (noting that prior years the maximum score was 133% of target). The previously reported scores were 2014: 58%;
2015: 67%; 2016: 86.5% and 2017: 88.5%. For 2018, the equivalent outcome would be 89.5%.
Directors’ Report
CEO REMUNERATION
TFRWhat TFR incr easeswere received in2018?
Following an independent external remuneration benchmarking review, and in consideration of the signicanttransformation of the Company over his then two-year tenure, the Board decided to increase the CEO’s TFRby 5% to A$1,890,000 (US$1,412,775) per annum, eective 1 January 2018. This was the rst time the CEOreceived a TFR increase since his commencement in February 2016.
STIWhat is the targetand maximum STIpaymen t the CEOmay receive?
As foreshadowed in the 2017 Remuneration Report, the CEO’s maximum STI level was increased in 2018 toaddress the market competitiveness of maximum STI relative to target STI. Maximum STI opportunity is now167% of target STI opportunity, compared with 133% in previous years. The increased maximum STI level enablesgreater upside incentive opportunity for exceptional performance, while the target STI level remains unchanged,as shown in the table below.
20182017Target STI75% of TFR75% of TFRMaximum STI125% of TFR100% of TFRAs part of this change for the 2018 performance year, the cash component of any STI award for the CEO wasreduced from 70% to 50%, and the deferred equity component was increased from 30% to 50%, restricted fortwo years.How is the CEO’sSTIpaymentcalculated?
The CEO’s performance is primarily assessed using the Company Scorecard. In determining the CEO’s nal STIpayment for 2018, the Board considered the Company’s overall performance, including outcomes outside of theScorecard. In consideration of these broader outcomes and the leadership shown by the CEO through 2018,as detailed below, the Board assessed Mr Gallagher’s performance as outstanding and awarded his 2018 STIat99.5% of his maximum opportunity.What individualperformanceoutcomes wereconsidered indetermining theCEO’s STI for 2018?
The Board considered the CEO’s performance against a number of categories that were additional contributionsbeyond the Company Scorecard:
Leadership: The Board considers Mr Gallagher’s leadership as a critical factor in the Company’s success. Theorganisational culture has improved during the last two years and Mr Gallagher continues to create a compellingvision for the Company internally and externally. The organisation has laid a foundation for talent and successiondevelopment and increasing diversity in the Company.The CEO plays a key role in safety leadership, setting the tone for the organisation. There has been improvementin personal safety and environmental performance compared with 2017, and continued focus on ‘lifting thebar’ as reected through the more challenging KPIs that were set. Mr Gallagher has demonstrated a resolutecommitment driving improvements, implementing company-wide safety and integrity standards and processesand addressing unresolved legacy issues, which is setting a solid foundation for future safety performance.Corporate activity: Mr Gallagher led the business successfully through some signicant corporate events in2018, while continuing the Company’s fundamental transformation and exceptional nancial performance. Boththe Harbour Energy and Quadrant Energy corporate actions were highly signicant for Santos and commandedasignicant amount of CEO leadership and attention in 2018.Growing shareholder value: Mr Gallagher continues to lead the creation of shareholder value throughimproved nancial results, increased reserves, and lowering operating costs through improved eciency, manyofwhich are captured in the Scorecard result. Additionally the CEO has delivered substantial value throughstrategic and commercial outcomes he has driven, including asset disposals and acquisitions.Stakeholder engagement: Mr Gallagher was very active in his stakeholder interactions in 2018, ensuring thecompany has a social licence to operate and advocating for the Company and industry to improve understandingwith the community and government. In 2018, circumstances required the CEO to address some specicstakeholder challenges to successfully manage the Harbour defence and Quadrant Energy acquisition.Future-proong the business: In responding to increased community concerns about climate change,MrGallagher has led the business to improve emissions standards, monitoring and reporting, including improvedtransparency in the Company’s climate change reporting. He has set the Company on a path to deliverinnovative projects that will lead to economic and sustainable emission reductions for the Company. Theseinclude pilots using solar and battery energy to power wells; and investing in the appraisal of enhanced recoveryand carbon capture, utilisation and storage.A number of these ar eas relating to sustainability have been incorporated in the Company Scorecard for 2019.
Remuneration Reportcontinued
Santos Annual Report 2018 / 45
STI (Continued)How much STI willthe CEO r eceiv ein respect of 2018performance?
The STI amount for 2018 awarded to the CEO is US$1,757,522, which represents 99.5% of maximum STIopportunity.Half (50%) of this STI will be delivered as cash, and the other 50% will be awarded as Deferred Shares,restricted for two years.
LTIHow much LTI wasgranted to the CEOin 2018?
The CEO has a maximum LTI opportunity of 150% of TFR allocated on a face value basis. In accordance with theapproval of shareholders at the May 2018 Annual General Meeting (AGM), the CEO was granted 520,183 SARs inrespect of his 2018 LTI.The performance conditions of the CEO’s grant are outlined on pages 37–38 and are the same as the SeniorExecutives’ grant.Note, the CEO had no LTI scheduled to vest in 2018.
OtherremunerationmattersWhat sign-on grantsof equity wereprovided to theCEO at the timeof appointmenttoSantos?
Mr Gallagher received a sign-on grant of SARs when he commenced employment with Santos in 2016 inrecognition of previous incentives foregone from his former employer. The second and nal tranche of thesesign-on SARs vested in 2018 and have been exercised into shares. Mr Gallagher was not required to pay anyamount on conversion of the SARs. This completes the vesting of Mr Gallagher’s sign-on grant.Has the Board madeany changes to theCEO’s remunerationfor 2019?
In light of recent market benchmarking and sustained high performance by the CEO, the Board has approved anincrease of 3.5% for the CEO’s TFR for the 2019 salary review. The review also indicated that an increase to theCEO’s target STI level was required to address market competitiveness. As such, the Board agreed to increasethe CEO’s STI target for the 2019 performance year to 90% of TFR, with corresponding increase to maximumSTI opportunity to 150% of TFR (maintaining the maximum STI level at 167% of target STI).
TerminationprovisionsWhat is the CEO’snotice period fortermination ofemployment?
The CEO’s contract has no xed term and may be terminated with 12 months’ notice by either party.Employment may be ended immediately in certain circumstances including misconduct, incapacity, and mutualagreement or in the event of a fundamental change in the CEO’s role or responsibility.What entitlementsare associated withtermination of theCEO’s employment?
The Company may elect to pay the CEO in lieu of any unserved notice period. If termination is by mutualagreement, the CEO will receive a payment of A$1,500,000 (US$1,121,250).In the case of death, incapacity or fundamental change, the CEO is entitled to a payment equivalent to12months’ base salary.
Directors’ Report
SENIOR EXECUTIVE REMUNERATION
Fixed remunerationWhat TFR increases werereceived in 2018?
Mr Neilson, Mr Santostefano and Mr Woods received TFR increases of between 1.5% and 4.2% as aresult of market benchmarking of their roles, and changes to their roles and responsibilities. All otherSenior Executive TFR levels remained the same.
STIWhat are the target andmaximum STI pa ymen t sExecutives may receive?
In 2018, the maximum STI levels for Senior Executives was increased in response to market benchmarkingwhich indicated maximum levels were low relative to target STI. Maximum STI opportunity is now167% of target STI opportunity, compared with 133% in previous years. The increase to maximum STIprovides greater upside opportunity for exceptional performance, but the target STI opportunity remainssubstantially unchanged from 2017, as shown in the table below.
20182017Target STI54% to 63% of TFR
*
53% to 64% of TFRMaximum STI90% to 105% of TFR70% to 85% of TFR
* There is a slight change in target STI for Senior Executives (<1%) due to rounding applied to the increased maximum STI value
As part of this STI change for the 2018 performance year, the cash component of any STI award forSenior Executives was reduced from 70% to 50%, and the deferred equity component was increasedfrom 30% to 50%, restricted for two years.How are STI paymentscalculated?
All Senior Executives (except Mr Neilson) have STI based on 60% Company and 40% individualperformance. As CFO, Mr Neilson has STI based on 80% Company and 20% individual performance.The Company performance result is based on the Company Scorecard outcomes outlined above. Theindividual performance assessment is based on performance against a number of nancial, operationaland qualitative objectives.All Senior Executives had KPIs relating to environment, health, safety, culture and leadership. Role-specicKPIs by Senior Executive are set out in Table 3 below.How much STI will bereceived in respect of 2018performance?
The Company’s performance against the 2018 STI Scorecard, as assessed by the Board, resulted in ascore of 138.8% of target.STI outcomes for the Senior Executives ranged from 74% to 83% of their maximum opportunity,depending on their individual performance contribution. Further details of each individual SeniorExecutive’s remuneration is provided in Table 5 “2017 and 2018 CEO and Senior Executive remunerationdetails” on page 50 and at Table 6 “Senior Executive 2018 STI outcomes” on page 51.
LTIHow much LTI was grantedto Executives in 2018?
SARs to the face value of 80% of TFR.What proportion of prioryear LTI grants vested in2018?
Nil.
Contractual detailsWhat notice periods areapplicable for termination ofemployment?
Senior Executives’ service agreements are ongoing until termination by the Company or by the Senior
Executive with the provision of six months’ notice (with the exception of Mr Clement, who is employed
on a two-year xed-term contract terminable on three months’ notice).What termination benetsapply to all SeniorExecutives?
In a Company-initiated termination, the Company may make a payment in lieu of notice equivalent to the
TFR that the Senior Executive would have received over the notice period.
All Senior Executives’ service agreements may be terminated immediately for cause, whereupon no
payments in lieu of notice or other termination payments are payable under the agreement.
Remuneration Reportcontinued
Santos Annual Report 2018 / 47
Table 3: Senior Executive role-specic KPIs
Note, some KPIs contain commercially sensitive information that cannot be detailed here.Senior ExecutiveKMP roleRole-specic KPIsBK WoodsEVP Onshore Upstream From 1 Jan to 30 November
? Production volume? Production cost? Development cost? 2C to 2P conversion rate? Wells drilled and connected? Growth strategy implementationFrom 1 December, Mr Woods transitioned into new role of EVP DevelopmentsDM BanksEVP Onshore Upstream
from 1 December
? KPIs as shown above for Brett Woods in same roleBA DarleyEVP Oshore
from 28 November
? Production volume
? Production cost
? Capex
? Transition of Quadrant to SantosB ClementEVP Conventional Oil andGas
from 1 February to27November
? Production volume
? Production cost
? Capex
? Capital project milestone delivery
? Growth strategy implementationPA ByrneEVP Marketing,
TradingandCommercial
? Sales (LNG, Domestic Gas and Liquids)
? LNG trading
? Improvements in commercial arrangementsAM NeilsonChief Financial Ocer? Corporate cost reduction
? Balance sheet improvement
? Capital management
? Finance and supply chain systems and structure
? Investor relations outcomesV Sant ostefanoChief Operations Ocer? Operated processing costs
? Low-cost operations and maintenance service delivery
? Emissions and wastage reduction programs
? Implement operations services functional model
Directors’ Report
TRANSITION OF QUADRANT EMPLOYEES
With the completion of the successful acquisition of Quadrant on 27 November 2018, Santos has commenced the integration ofQuadrant’s business and sta, including the former Quadrant CEO, Brett Darley.Santos will honour Quadrant’s obligations under Quadrant’s legacy short-term and long-term incentive plans and will make paymentsunder those plans in accordance with their terms, including to Mr Darley.Following completion, Mr Darley was appointed as EVP Oshore and became a Santos Limited employee and KMP from 28 November2018. Mr Darley has been transitioned to Santos’ remuneration arrangements. Accordingly, he will receive a pro-rated Santos STI awardand Santos intends to award him a pro-rated Santos LTI award for the period from completion to 31 December 2018
.Mr Darley and a number of other Quadrant employees were the benecial owners of a portion of the Quadrant shares that Santosacquired. The sale proceeds received by Mr Darley do not form part of his remuneration with Santos Limited.In addition to upfront sale proceeds, Mr Darley’s capital ownership in Quadrant entitled him to participate in potential future contingentand royalty payments relating to the Bedout Basin. To ensure his interests are fully aligned with those of Santos’ shareholders, MrDarley(and other relevant employees who transitioned to employment with Santos Limited) have been asked to extinguish their rights tocontingent consideration payments (excluding royalty payments) in exchange for grants of SARs. SARs under these grants werenotallotted in the 2018 year and hence do not appear in the audited tables in this Report. They will be shown in the 2019 Report.
NON-EXECUTIVE DIRECTOR REMUNERATIONRemuneration policy
The diagram below shows the key objectives of Santos’ non-executive Director remuneration policy and how these are implementedthrough the Company’s remuneration framework. In 2018, the Board reviewed its minimum shareholding requirement and, in order tobetter align the interests of its non-executive directors and shareholders, updated the requirement such that non-executive directorsmust acquire (over a four year period) and maintain a shareholding in the Company equal in value to at least one year’s remuneration(base fee and committee fees).
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
to the performance of theCompany or individual Directorperformance from year to year.? Non-executive Directors’
performance is assessed a t thetime of re-election.
? Santos encourages its non-
executiv e Directors to build along-term stake in the Company? Non-executive Directors are
r equired to acquire and maintainashar eholding in the Companyequivalent in v alue to one year’sremuneration.
Securing and retaining talented,
qualied Directors
Promoting independence
andimpartiality
Aligning Director andshareholder interests
Remuneration Reportcontinued
1 As part of Mr Darley’s transition to Santos’ remuneration arrangements, it has been agreed that Mr Darley’s unvested Santos SARs will remain on foot if he resigns in the rst three years of
his employment with Santos.
Santos Annual Report 2018 / 49
Maximum aggregate amount
Total fees paid to all non-executive Directors in a year, including Board Committee fees, must not exceed A$2,600,000 (US$1,943,500),being the amount approved by shareholders at the 2013 AGM.
Remuneration
In 2018 a benchmarking review of non-executive Director fees was undertaken by an external remuneration provider to ensure marketcompetitiveness, given fees had been unchanged since October 2013. As a result of the benchmarking review, the Directors resolvedto increase the fees for Environment, Health, Safety and Sustainability (EHSS) Committee and People and Remuneration Committee(PRC) Chair and members with eect from 1 April 2018, as shown in Table 4 below.
Table 4: Non-executive Directors’ annual fee structure
Chair
MemberUS$US$Board$374,343$123,183Audit and Risk Committee$31,395$15,698Environment, Health, Safety and Sustainability Committee
$21,678$14,203Nomination Committee
N/A$7,475People and Remuneration Committee
$29,153$15,698
1 Fees are shown exclusive of superannuation.2 The Chair of the Board does not receive any additional fees for serving on or chairing any Board committee.3 EHSS Committee fees for 1 January – 31 March 2018 (prior to benchmarking adjustment) were Chair US$16,445; Member US$11,213.4 The Chair of the Board is the Chair of the Nomination Committee, in accordance with its Charter.5 PRC fees for 1 January – 31 March 2018 (prior to benchmarking adjustment) were: Chair US$22,425; Member US$11,960.
Directors may also be paid additional fees for special duties or exertions, and are entitled to be reimbursed for all business-relatedexpenses. The total remuneration provided to each non-executive Director is shown in Table 12 “2018 and 2017 non-executive DirectorRemuneration details” on page 54.
Superannuation and retirement benets
Superannuation contributions are made on behalf of non-executive Directors in accordance with the requirements of the Company’sstatutory superannuation obligations. Non-executive Directors are not entitled to retirement benets (other than mandatory statutoryentitlements).
Directors’ Report
DETAILED REMUNERATION INFORMATIONTable 5 presents summarised details of the remuneration for the KMPs in 2017 and 2018 as required under the Corporations Act. The current KMPs are the Executives thatSantos considers to have the requisite authority and responsibility to meet the denition of key management personnel as required under the Corporations Act.All remuneration components have been converted from A$ to US$ using an average rate of $0.7475 for 2018 and $0.7667 for 2017.Table 5: 2017 and 2018 CEO and Senior Executive remuneration details
Short-term employee benets
Post-
employmentShare-based payments
Base salarySTI
Other
Superannuation
contributionsLTIDeferred STI
Options
Total
share-based
paymentsTermination
Other long-
term benets(long service)
TotalTotal
“at risk”
US$US$US$US$US$US$US$US$US$US$US$%
KT Gallagher20181,394,088 878,7614,54618,6881,043,352501,708-1,545,060-19,0113,860,15463%
20171,357,059888,7594,09523,001910,807222,472-1,133,234-15,5593,421,70759%
DM Banks201839,461 16,669-4,1434,3604,960-9,320-- 69,59337%PA Byrne
2018504,563214,3084,54618,68852,90083,609-136,509-5,907884,52140%2017198,89999,2117,5179,161-13,530-13,530--328,31834%
BA Darley 2018 55,844 23,3228181,713-702-702-8,390 90,78926%AM Neilson2018596,131 259,981-18,688138,018126,918-264,936-8,528 1,148,26446%
2017592,276324,7742,01321,084155,04644,274-199,320-6,6491,146,11646%
V Sant ostefano2018623,836 270,2214,54618,688 216,353159,771-376,124-8,439 1,301,85450%
2017630,611290,8092,05821,084154,85874,193-229,051-7,3471,180,96044%
BK Woods2018536,331245,1054,54618,688 215,798143,543-359,341-17,3821,181,39351%
2017511,772272,6394,09521,084192,764119,951-312,715-14,3001,136,60552%
B Clement2018419,170 334,058-12,51143,45320,573-64,02631,1455,238 866,14846%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.
Theamount 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 determinedinaccordance with 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 2018, which will be paid during March 2019.3 “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 of
performance 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 the
respective reporting dates.
6 Figures shown for Mr Byrne in 2017 are for the period 14 August 2017 to 31 December 2017.
Remuneration Reportcontinued
Santos Annual Report 2018 / 51
Table 6 presents the individual STI outcomes for Senior Executives in 2018, as a percentage of their maximum STI opportunity.
Table 6: Senior Executive 2018 STI outcomes
Senior Executive
Company : Individual weightingof total performance outcome
STI outcome as a% of maximum STICompanyComponent
IndividualComponentDM Banks60%40%83%PA Byrne60%40%78%BA Darley 60%40%76%AM Neilson80%20%80%V Sant ostefano60%40%80%BK Woods60%40%83%B Clement60%40%74%
Tables 7 and 8 contain details of the number and value of SARs and shares granted, vested and lapsed for the CEO in 2018.
Table 7: 2018 SARs outcomes for CEO
GrantedVested
LapsedNumber
Maximum
value
Number ValueNumberUS$US$SARs520,1831,967,514166,911636,306-
1 The number of SARs granted to the CEO relate to his 2018 LTI performance grant as approved at the 2018 Annual General Meeting (AGM). This grant relates to the LTI award for the
four-year performance period ending on 31 December 2021.2 Maximum value represents the fair value of LTI grants received in 2018 determined in accordance with AASB 2 Share-based Payment. The fair values of the grant as at the grant date
of7May 2018 is weighted at a fair value of A$5.06. Details of the assumptions underlying the valuations are set out in note 7.2 to the nancial statements. The minimum total value of the
grant to the CEO, if the applicable vesting conditions are not met, is nil in all cases. All values have been converted to US$.3 The SARs vested for the CEO relate to the second tranche of his 2016 sign-on grant (vested on 1 February 2018) of which 100% vested. The value of SARs uses the share price of
A$5.10on the vesting date. All values have been converted to US$.
Table 8: 2018 Share outcomes for CEO
GrantedVestedLapsedNumber
Maximum
valueNumber
ValueNumberUS$US$Shares93,735332,117111,038454,845-
1 The restricted shares granted to the CEO relate to his 2017 STI award. The maximum value is the fair value of the 2017 STI grant of deferred shares received in 2018 determined with
AASB2 Share-based Payment. The fair value of the deferred 2017 STI grant as at the grant date of 14 March 2018 was A$4.74. The minimum total value of the restricted shares grantedtothe CEO is nil. All values have been converted to US$.2 This relates to the 2016 STI grant that was deferred for two years from 1 January 2017 to 31 December 2018 and vested in full on 31 December 2018.
Directors’ Report
Tables 9 and 10 contain details of the number and value of SARs and shares granted, vested and lapsed for Senior Executives in 2018.No Senior Executive had any options granted, vesting or lapsing in 2018. No options were exercised in 2018.
Table 9: 2018 SARs outcomes for Senior Executives
Granted
Vested
LapsedNumber
Maximum
value
NumberValueNumber
US$US$DM Banks102,752304,924---PA Byrne102,752304,924---BA Darley-----AM Neilson121,834361,552---V Sant ostefano126,642375,82037,870155,127-BK Woods 110,091326,703--(53,444)B Clement102,752304,924---Total 666,8231,978,84737,870155,127(53,444)
1 This relates to the 2018 LTI award.2 Maximum value represents the fair value of LTI grants received in 2018 determined in accordance with AASB 2 Share-based Payment. The fair values of the grant as at the grant date of
21March 2018 is weighted at a fair value of A$3.97. Details of the assumptions underlying the valuations are set out in note 7.2 to the nancial statements. The minimum total value of thegrant to the Senior Executives, if the applicable vesting conditions are not met, is nil in all cases. All values have been converted to US$.3 The number vested is the 2016 STI deferred equity component delivered to Mr Santostefano as SARs, which vested on 31 December 2018. The value of Mr Santostefano’s 2016 deferred
STI is based on the share price of A$5.48 at the vesting date of 31 December 2018, converted to US$.4 Lapsed SARs relate to the 2015 four-year LTI grant.
Table 10: 2018 share outcomes for Senior Executives
Granted
Vested
LapsedNumber
Maximum
value
NumberValueNumberUS$US$DM Banks -----PA Byrne10,47137,100---BA Darley-----AM Neilson34,264121,402---V Sant ostefano30,679108,700---BK Woods28,754101,88031,558129,271-B Clement21,24575,274---Total 125,413444,35631,558129,271-
1 This relates to the 2017 STI award delivered as restricted shares.2 For the restricted shares, maximum value represents the fair value of 2017 STI shares determined in accordance with AASB 2 Share-based Payment. The fair value of the deferred STI grant
as at the grant date of 14 March 2018 was A$4.74. The minimum total value of the grant, if the applicable vesting conditions are not met, is nil. All values have been converted to US$.3 This relates to the 2016 STI grant that was deferred for two years from 1 January 2017 to 31 December 2018 and vested in full on 31 December 2018. The value of the 2016 deferred STI
grant is shown using a share price of A$5.48 on 31 December 2018 converted to US$.
Remuneration Reportcontinued
Santos Annual Report 2018 / 53
Table 11 outlines the LTI grants that were tested or still in progress in 2018.
Table 11: LTI grants
Grant yearGrant typeVesting condition(s)
Performance/ vestingperiodStatus2015Four-year
Performance Award
Relative TSR performance againstASX100 companies (75%)Relativ e T SRperformance against S&PGlobal Energy Index (GEI) companies(25%)
1 January 2015 to31December 2018
Testing complete.Resulted in 0% ofthegrant vesting.2016Four-year
Performance Award
Relative TSR performance againstASX 100 companies (25%)Relative TSR performance againstS&PGEI companies (25%)FCFBP (25%)ROACE (25%)
1 January 2016 to31December 2019
In progress.
2016CEO sign-on grant Service basedSecond Tranche
(24 months) –
1 February 2016 to31 January 2018
Vested.2017Four-year
Performance Award
Relative TSR performance againstASX100 companies (25%)Relative TSR performance againstS&PGEI companies (25%)FCFBP (25%)ROACE (25%)
1 January 2017 to31December 2020
In progress.
2018Four-year Performance
Award
Relative TSR performance againstASX100 companies (25%)Relative TSR performance againstS&PGEI companies (25%)FCFBP (25%)ROACE (25%)
1 January 2018 to31December 2021
In progress.
Full details of all grants made prior to 2018 can be found in note 7.2 to the nancial statements and in prior Remuneration Reports.
Directors’ Report
Details of the fees and other benets paid to non-executive Directors in 2018 are set out in Table 12. Other than the committee feeincreases noted on page 49, dierences in fees received between 2017 and 2018 reect changes in roles and responsibilities (i.e. Chairor Committee appointments), superannuation payments and currency uctuations. No share-based payments were made to any non-executive Directors.
Table 12: 2018 and 2017 non-executive Director remuneration details
DirectorShort-term benets
Retirement
benetsDirectorYear
Directors’ fees(incl. committee
fees)
Fees forspecial duties
or exertionsOtherSuperannuation
Share-based
paymentsTotalUS$US$US$US$US$US$YA Allen2018174,007--15,167-189,174
2017156,693--14,631-171,324PR Coat es
201851,329--3,746-55,075
2017384,495--15,205-399,700GM Cowan2018154,759--14,702-169,461
2017159,085--15,068-174,153H Goh2018174,748--410-175,158
2017170,629--489-171,118V Guthrie
2018148,667--14,123-162,790
201765,501--6,223-71,724PR Hearl2018165,971--15,167-181,138
2017148,734--14,087-162,821E Shi
2018153,824--15,167-168,991
201771,757--7,074-78,831K Spence
2018339,523--15,167-354,690
2017------
1 Includes superannuation guarantee payments. Superannuation guarantee payments are made to Mr Goh only in relation to days worked in Australia.2 Mr Coates retired from the Board on 19 February 2018.3 Dr Guthrie joined the Board on 1 July 2017 and was appointed as a member of the People and Remuneration Committee on 30 March 2018.4 Mr Shi joined the Board on 26 June 2017 and was appointed as a member of the PRC on 21 September 2017 and the Audit and Risk Committee on 25 October 2017.5 Mr Spence joined the Board on 1 January 2018 and appointed Chair on 19 February 2018.
Remuneration Reportcontinued
Santos Annual Report 2018 / 55
KEY MANAGEMENT PERSONNEL EQUITY(a) Options, SARs and deferred shareholdings
There are no options held by KMPs. Table 13 sets out the movement during the reporting period in the number of SARs and
deferred shares of the Company held directly, indirectly or benecially, by each KMP, including their related parties:
Table 13: 2018 movements in SARs and deferred shareholdings for KMPs
OpeningbalanceGranted
Equityvested
Otherchanges
Sold/transferred
ClosingbalanceSARsExecutive DirectorKT Gallagher1,739,872520,183(166,911)--2,093,144Senior ExecutivesDM Banks
-103,552---103,552PA Byrne-102,752---102,752BA Darley------AM Neilson199,004121,834---320,838V Sant ostefano383,644126,642(37,870)--472,416BK Woods326,697110,091(700)
(53,444)-382,644
B Clement-102,752-(102,752)--Total2,649,2171,187,806(205,481)(156,196)-3,475,346Deferred sharesExecutive DirectorKT Gallagher111,03893,735(111,038)--93,735Senior ExecutivesDM Banks------PA Byrne-10,471---10,471BA Darley------AM Neilson-34,264---34,264V Sant ostefano-30,679---30,679BK Woods31,55828,754(31,558)--28,754B Clement-21,245-(21,245)--Total142,596219,148(142,596)(21,245)-197,903
1 SARs and deferred shares granted to the CEO and Senior Executives are disclosed in Tables 6 and 7.2 All SARs that vested during the year were automatically vested into ordinary shares, with the exception of 116,911 SARs that vested for the CEO. These SARs vested on 1 February 2018 and
were subsequently exercised by the CEO.3 Other changes include SARs that did not vest due to the non-fullment of vesting conditions and were forfeited during the year, deferred shares that were forfeited, and changes resulting
from individuals ceasing to be and becoming KMPs during the period.4 Mr Banks previously participated in the Company’s general employee share plan prior to becoming a KMP on 1 December 2018, receiving 800 SARs.5 Mr Woods previously participated in the Company’s general employee share plan prior to becoming a KMP in August 2015. In 2018 a total of 700 SARs vested.
Directors’ Report
(b) Share holdingsTable 14 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
Table 14: 2018 movements in ordinary shareholdings for KMPs
Opening
balance
Received
vesting of
SARsPurchased
SoldDef erred 2016 STI
that vested on
31December 2018
Other
changes
Closingbalance
Balance held
nominally at
end of the year
Ordinary shares – fully paidNon-executive DirectorsYA Allen15,883-33,000---48,883-PR Coat es
131,870----(131,870)--
GM Cowan15,000-10,000---25,000-H Goh37,215-30,000---67,215-V Guthrie--5,000---5,000-PR Hearl48,808-----48,808-E Shi --------K Spence 65,000-----65,000-Executive DirectorKT Gallagher341,614166,911--111,038-619,563-Senior ExecutivesDM Banks
-----800800-
PA Byrne5,804-----5,804-BA Darley--------AM Neilson23,777-----23,777-V Sant ostefano24,17937,870----62,049-BK Woods76,919700--31,558-109,177-B Clement--------Total786,069205,48178,000-142,596(131,070)1,081,076-1 Includes purchases on market during trading windows.2 Mr Coates’ changes result from ceasing to be KMP during the period.3 Mr Banks received 800 shares through participation in the Company’s general share plan prior to becoming a KMP.(c) 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 time throughout the year to any KMP,
including to their related party.
Remuneration Reportcontinued
Santos Annual Report 2018 / 57
INDEMNIFICATION
Rule 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 31December2018 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 2018, 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 2019. 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 SERVICES
Amounts paid or payable to the Company’s auditor, Ernst & Young, for non-audit services provided during the year were:
Taxation and other services $1,708,000Assurance services $212,000The 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 they donot 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 onpage135.
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 20 February 2019 in accordance with a resolution of the Directors.
Director
Directors’ Reportcontinued
Financial Report
Consolidat ed Income St a tement 59Consolidat ed S t a tement of Comprehensive Income 60Consolidated Statement of Financial Position 61Consolidat ed S t a tement of Cash Flows 62Consolidated Statement of Changes in Equity 63Notes to the Consolidated Financial Statements 64
SECTION 1BASIS OF PREPARATION PAGE
1.1 Statement of compliance 641.2 Key events in the current period 641.3 Signicant accounting judgements,
estimates and assumptions 651.4 Foreign currency 66
SECTION 2FINANCIAL PERFORMANCE PAGE
2.1 Segment information 672.2 Revenue from contracts with customers 702.3 Expenses 722.4 Taxation 732.5 Earnings per share 762.6 Dividends 772.7 Other income 78
SECTION 3CAPITAL EXPENDITURE, OPERATING ASSETSAND RESTORATION OBLIGATIONS PAGE
3.1 Exploration and evaluation assets 793.2 Oil and gas assets 803.3 Impairment of non-current assets 833.4 Restoration obligations and other provisions 873.5 Commitments for expenditure 88
SECTION 4WORKING CAPITAL MANAGEMENT PAGE
4.1 Cash and cash equivalents 894.2 Trade and other receivables 904.3 Inventories 914.4 Trade and other payables 91Directors’ Declaration 129Independent Auditor’s Report 130Auditor’s Independence Declaration 135
SECTION 5FUNDING AND RISK MANAGEMENT PAGE
5.1 Interest-bearing loans and borrowings 925.2 Net nance costs 955.3 Issued capital 965.4 Reserves and retained earnings 975.5 Financial risk management 97
SECTION 6GROUP STRUCTURE PAGE
6 .1 Consolidated entities 1066.2 Acquisitions and disposals of subsidiaries 1096.3 Joint arrangements 1126.4 Parent entity disclosures 1156 .5 Deed o f Cross Guarantee 116
SECTION 7PEOPLE PAGE
7.1 Employee benets 1187.2 Share-based payment plans 1197.3 Key management personnel disclosures 125
SECTION 8OTHER PAGE
8 .1 Contingent liabilities 1268.2 Events after the end of the reporting period 1268.3 Remuneration of auditors 1268.4 Accounting policies 127
Santos Annual Report 2018 / 59
Consolidated Income S t a tementfor the year ended 31 December 2018
(Restated)2018 2017Note US$million US$millionRevenue from contracts with customers – Product sales 2.2 3,660 3,100Cost of sales 2.3 (2,329) (2,303)Gross prot 1,331 797Revenue from contracts with customers – Other 2.2 113 98Other income 2.7 180 125Impairment of non-current assets 3.3 (100) (938)Other expenses 2.3 (194) (408)Finance income 5.2 30 24Finance costs 5.2 (258) (294)Share of net prot of joint ventures 6.3(c) 4 11Prot/(loss) before tax1,106 (585)Income tax (expense)/benet 2.4(a) (439) 211Royalty-related tax (expense)/benet 2.4(b) (37) 14Total tax (expense)/benet (476) 225Net prot/(loss) for the period attributable to owners of Santos Limited 630 (360)Earnings per share attributable to the equity holders of Santos Limited (?)Basic prot/(loss) per share 2.5 30.2 (17.3)Diluted prot/(loss) per share 2.5 30.0 (17.3)Dividends per share (?)Paid during the period 2.6 3.5 –Declared in respect of the period 2.6 9.7 –The consolidated income statement is to be read in conjunction with the notes to the consolidated nancial statements.
Financial Report
Consolidated Statement of Comprehensive Incomefor the year ended 31 December 2018
2018 2017US$million US$millionNet prot/(loss) for the period 630 (360)Other comprehensive income, net of taxItems to be reclassied to prot or loss in subsequent periodsExchange (loss)/gain on translation of foreign operations (245) 168Foreign currency translation reserve recycled to the income statement (72)–Tax eect – –
(317) 168
(Loss)/gain on foreign currency loans designated as hedges ofnet investments in foreign operations (171) 191Tax eect 51 (57)
(120) 134
Gain/(loss) on derivatives designated as cash ow hedges 4 (3)Tax eect (1) 13 (2)Net other comprehensive (loss)/income to be reclassied toprot or loss in subsequent periods (434) 300Items not to be reclassied to prot or loss in subsequent periodsRemeasurement of dened benet obligation 3 –Tax eect (1) –2 –Loss on nancial liabilities at fair value through othercomprehensive income (FVOCI) – (32)Tax eect – 11– (21)Net other comprehensive income/(loss) not to be reclassiedto prot or loss in subsequent periods 2 (21)Other comprehensive (loss)/income, net of tax (432) 279Total comprehensive income/(loss) attributable to owners of Santos Limited 198 (81)The consolidated statement of comprehensive income is to be read in conjunction with the notes to the consolidated nancialstatements.
Santos Annual Report 2018 / 61
Consolidated Statement of Financial Positionas at 31 December 2018
2018 2017Note US$million US$millionCurrent assetsCash and cash equivalents 4.1 1,316 1,231Trade and other receivables 4.2 521 440Prepayments 32 28Inventories 4.3 288 266Other nancial assets 5.5(g) 28 –T ax receivable 13 7Total current assets 2,198 1,972Non-current assetsPrepayments 16 17Contract assets 2.2(b) 137 –Investments in joint ventures 6.3(b) 31 43Other nancial assets 5.5(g) 31 134Exploration and evaluation assets 3.1 1,004 459Oil and gas assets 3.2 11,224 9,536Other land, buildings, plant and equipment 119 126Deferred tax assets 2.4(d) 1,746 1,419Goodwill 6.2(a) 628 –Total non-current assets 14,936 11,734Total assets 17,134 13,706Current liabilitiesTrade and other payables 4.4 661 495Other liabilities 3 –Contract liabilities 2.2(b) 32 8Interest-bearing loans and borrowings 5.1 967 207Current tax liabilities 63 17Provisions 3.4 116 142Other nancial liabilities 5.5(g) 6 82Total current liabilities 1,848 951Non-current liabilitiesOther liabilities 2 1Contract liabilities 2.2(b) 268 113Interest-bearing loans and borrowings 5.1 3,952 3,736Deferred tax liabilities 2.4(d) 1,614 240Provisions 3.4 2,147 1,494Other nancial liabilities 5.5(g) 24 20Total non-current liabilities 8,007 5,604Total liabilities 9,855 6,555Net assets 7,279 7,151EquityIssued capital 5.3 9,031 9,034Reserves 5.4 607 51Accumulated losses 5.4 (2,359) (1,934)Equity attributable to owners of Santos Limited 7,279 7,151Total equity 7,279 7,151The consolidated statement of nancial position is to be read in conjunction with the notes to the consolidated nancial statements.
Financial Report
Consolidated Statement of Cash Flowsfor the year ended 31 December 2018
2018 2017Note US$million US$millionCash ows from operating activitiesReceipts from customers 3,740 3,217Dividends received 6 12Pipeline taris and other receipts 106 66Payments to suppliers and employees (1,816) (1,611)Restoration expenditure (36) (37)Exploration and evaluation seismic and studies (98) (71)Royalty and excise paid (85) (57)Borrowing costs paid (194) (254)Income taxes paid (69) (28)Royalty-related taxes paid (13) (15)Other operating activities 37 26Net cash provided by operating activities 4.1(b) 1,578 1,248Cash ows from investing activitiesPa yments for:
Exploration and evaluation assets (66) (146)Oil and gas assets (490) (483)Other land, buildings, plant and equipment (10) (5)Acquisitions of oil and gas assets (10) (49)Acquisition of subsidiary, net of cash acquired 6.2(a) (1,933) –Costs associated with acquisition of subsidiaries (10) –Proceeds from disposal of non-current assets 2.7 26 145Proceeds from disposal of subsidiaries 6.2(b) 126 –Borrowing costs paid (6) (6)Other investing activities – 10Net cash used in investing activities (2,373) (534)Cash ows from nancing activitiesDividends paid (73) –Drawdown of borrowings 1,193 783Repayment of borrowings (220) (2,442)Net proceeds from issues of ordinary shares – 149Purchase of shares on-market (Treasury shares) (10) (8)Net cash provided by/(used in) nancing activities 890 (1,518)Net increase/(decrease) in cash and cash equivalents 95 (804)Cash and cash equivalents at the beginning of the period 1,231 2,026Eects of exchange rate changes on the balances of cash held in foreign currencies (10) 9Cash and cash equivalents at the end of the period 4.1 1,316 1,231The consolidated statement of cash ows is to be read in conjunction with the notes to the consolidated nancial statements.
Santos Annual Report 2018 / 63
Consolidated Statement of Changes in Equityfor the year ended 31 December 2018
Equity attributable to owners of Santos Limited
Financial Accum-liabilities ulated Accum-Issued Translation Hedging at prots ulated Totalcapital reserve reserve FVOCI reserve losses equityNote US$million US$million US$million US$million US$million US$million US$million
Balance at 1 January 2017 8,883 (830) 7 – 313 (1,298) 7,075Transfer retained prots to accumulatedprots reserve 5.4 – – – – 282 (282) –Items of comprehensive incomeLoss for the period – – – – – (360) (360)Other comprehensive income/(loss)for the period – 302 (2) (21) – – 279Total comprehensive income/(loss)for the period – 302 (2) (21) – (360) (81)Transactions with owners in theircapacity as ownersShares issued 5.3 151 – – – – – 151On-market share purchase(Treasury shares) 5.3 (8) – – – – – (8)Share-based payment transactions 7.2 8 – – – – 6 14Balance at 31 December 2017 9,034 (528) 5 (21) 595 (1,934) 7,151Balance at 1 January 2018 9,034 (528) 5 (21) 595 (1,934) 7,151Transfer retained prots to accumulatedprots reserve 5.4 – – – – 1,063 (1,063) –Items of comprehensive incomeProt for the period – – – – – 630 630Other comprehensive (loss)/incomefor the period – (437) 3 – – 2 (432)Total comprehensive (loss)/incomefor the period – (437) 3 – – 632 198Transactions with owners in theircapacity as ownersDividends paid 2.6 – – – – (73) – (73)On-market share purchase(Treasury shares) 5.3 (10) – – – – – (10)Share-based payment transactions 7.2 7 – – – – 6 13Balance at 31 December 2018 9,031 (965) 8 (21) 1,585 (2,359) 7,279The consolidated statement of changes in equity is to be read in conjunction with the notes to the consolidated nancial statements.
Financial Report
Notes to the Consolidated Financial Statementsfor the year ended 31 December 2018Section 1: Basis of Preparation
This section provides information about the basis of preparation of the nancial report, and certain accounting policies that arenot disclosed elsewhere in the nancial report. Accounting policies specic to individual elements of the nancial statementsare located within the relevant section of the report.
1.1 STATEMENT OF COMPLIANCE
The consolidated nancial report of Santos Limited (“the Company”) for the year ended 31 December 2018 was authorised for issue inaccordance with a resolution of the Directors on 20 February 2019.The consolidated nancial report of the Company for the year ended 31 December 2018 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 in the Group. The Group is a for-prot entityfor the purpose of preparing the nancial report. The nature of the operations and principal activities of the Group are described in theDirectors’ Report.This consolidated nancial report is:
? a general purpose nancial report which 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 ande ective for reporting periods beginning on or after 1 January 2018;? presented in United States dollars (“US$”);? prepared on the historical cost basis except for derivative nancial instruments, xed-rate notes that are hedged by an interest
ra te swap or a cross-currency swap, and nancial assets not recorded at amortised cost, which are measured at fair value; and? rounded to the nearest million dollars, unless otherwise stated, in accordance with ASIC Corporations (Rounding in Financial/
Dir ectors’ 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 58.9 mmboe (2017: 59.5 mmboe), and sales of 78.3 mmboe (2017: 83.4 mmboe);? sale of non-core assets resulting in $152 million in proceeds with a gain on disposal of $112 million;? average realised oil price of $75.05 per barrel compared to $57.85 per barrel in 2017;? net debt increased to $3,549 million at 31 December 2018, from $2,731 million at 31 December 2017; and? acquisition of 100% of the shares in Quadrant Energy Holdings Pty Ltd (“Quadrant Energy”), which completed on 27 November
2018 f or purchase consideration of$2.15 billion.
Santos Annual Report 2018 / 65
1.3 SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
The carrying amounts of certain assets and liabilities are often determined based on management’s judgement regarding estimatesand assumptions of future events. The key judgements, estimates and assumptions that have a signicant risk of causing a materialadjustment to the carrying amount of certain assets and liabilities within the next annual reporting period are disclosed in the followingnotes:
? Note 2.2 Revenue from contracts with customers? Note 2.4 Taxation? Note 3.1 Exploration and evaluation assets? Note 3.2 Oil and gas assets? Note 3.3 Impairment of non-current assets? Note 3.4 Restoration obligations and other provisions? Note 6.2 Acquisitions and disposals of subsidiariesIn addition to the signicant judgements referenced above, other areas of estimation and judgement are highlighted throughout thenancial report.
Financial Report
1.4 FOREIGN CURRENCYFunctional and presentation currency
The Group’s nancial statements are presented in United States dollars (“US$”), 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 is Australian dollars (“A$”).The assets, liabilities, income and expenses of non-US dollar denominated functional operations are translated into US dollars using thefollowing applicable exchange rates:
Foreign currency amountApplicable exchange rateIncome and expensesAverage rate prevailing for the relevant periodAssets and liabilitiesPeriod-end rateEquityHistorical rateReservesHistorical and period-end rateStatement of cash owsAverage rate prevailing for the relevant period
Foreign exchange dierences resulting from translation to presentation currency are initially recognised in the foreign currencytranslation reserve and subsequently transferred to the income statement on disposal of the operation.The period-end exchange rate used was A$/US$ 1:0.7044 (2017: 1:0.7809).
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 retranslated 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 in terms of historical cost in currencies other than an entity’s functional currencyare translated using the exchange rate at the date of the initial transaction. Non-monetary assets and liabilities denominated incurrencies other than an entity’s functional currency that are stated at fair value are translated to the functional currency at foreignexchange rates ruling at the dates the fair value was determined.
Group companies
The results of subsidiaries with a functional currency other than Australian dollars (the functional currency of the Parent) are translatedto Australian dollars as at the date of each transaction. The assets and liabilities are translated to Australian dollars at foreign exchangerates ruling at the reporting date. Foreign exchange dierences arising on retranslation 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) Foreign currency risk for further details on the net investment hedge in place.
Notes to the Consolidated Financial StatementsSection 1: Basis of Preparation
Santos Annual Report 2018 / 67
Notes to the Consolidated Financial StatementsSection 2: Financial Performance
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, and Western Australia, based on the nature and geographical location of the assets,plus Asia 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.The assets acquired as part of the Quadrant acquisition have been incorporated into the Western Australia segment, since aquisitiondate 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 information
As at 1 January 2018, the “Other” reporting segment was restructured to comprise Santos’ Asian assets only. New South Wales enteredthe core portfolio and is now reported under the segment “Queensland & NSW” and WA Oil is now reported under the segment“Western Australia”. Comparative disclosures have been restated to a consistent basis.
Financial Report
2.1 SEGMENT INFORMATION (CONTINUED)
Corporate,exploration,Cooper Queensland Northern Western eliminationsBasin & NSW PNG Australia Australia Asia & other TotalUS$million 2018 2018 2018 2018 2018 2018 2018 2018
RevenueSales to external customers 975 957 621 183 408 181 335 3,660Inter-segment sales
105 47 – – – – (152) –Revenue – other from external customers 66 12 9 – 14 – 12 113Total segment revenue 1,146 1,016 630 183 422 181 195 3,773CostsProduction costs (127) (71) (70) (74) (108) (42) 18 (474)Other operating costs (68) (80) (52) – (17) (11) (87) (315)Third-party product purchases (421) (293) – – – – (133) (847)Inter-segment purchases
(3) (33) – – – – 36 –
Other (9) 31 (2) 7 (14) 51 (41) 23EBITDAX 518 570 506 116 283 179 (12) 2,160Depreciation and depletion (196) (167) (123) (51) (99) (13) (18) (667)Exploration and evaluation expensed – – – – – – (105) (105)Net impairment loss – (12) (33) – (8) (47) – (100)Change in future restoration assumptions – 22 – – 24 – – 46EBIT 322 413 350 65 200 119 (135) 1,334Net nance costs (228) (228)Prot before tax 1,106Income tax expense (439) (439)Royalty-related tax benet/(expense) 5 6 – 1 (56) – 7 (37)Net prot 630Asset additions and acquisitions:
Exploration and evaluation assets 18 14 30 35 613 – 5 715Oil and gas assets
215 195 47 30 2,230 – 2 2,719233 209 77 65 2,843 – 7 3,434
1 Inter-segment pricing is determined on an arm’s length basis. Inter-segment sales and purchases are eliminated on consolidation.2 Includes impact on restoration assets following changes in future restoration provision assumptions (refer note 3.4).
by geographical location
US$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$million
Australia 9,551Papua New Guinea 2,705Other 122Total 12,378
Notes to the Consolidated Financial StatementsSection 2: Financial Performance
Santos Annual Report 2018 / 69
2.1 SEGMENT INFORMATION (CONTINUED)
Corporate,exploration,Cooper Queensland Northern Western eliminationsBasin & NSW PNG Australia Australia Asia & other TotalUS$million 2017 2017 2017 2017 2017 2017 2017 2017
RevenueSales to external customers 746 729 526 153 324 256 366 3,100Inter-segment sales
50 29 – – – – (79) –Revenue – other from external customers 55 11 8 – 28 – (4) 98Total segment revenue 851 769 534 153 352 256 283 3,198CostsProduction costs (134) (68) (55) (75) (107) (68) 26 (481)Other operating costs (88) (73) (46) – (20) (12) (71) (310)Third-party product purchases (230) (275) (1) – – – (221) (727)Inter-segment purchases
(1) (34) – – – – 35 –
Other (69) 3 – 9 (1) 1 (195) (252)EBITDAX 329 322 432 87 224 177 (143) 1,428Depreciation and depletion (195) (196) (113) (54) (91) (69) (24) (742)Exploration and evaluation expensed – – – – – – (94) (94)Net impairment reversal/(loss) 479 (1,248) (4) – (6) (154) (5) (938)Change in future restoration assumptions – 5 1 – 25 – – 31EBIT 613 (1,117) 316 33 152 (46) (266) (315)Net nance costs (270) (270)Loss before tax (585)Income tax benet 211 211Royalty-related tax benet/(expense) 5 4 – 20 (32) – 17 14Net loss (360)Asset additions and acquisitions:
Exploration and evaluation assets 11 15 58 44 (1) 10 5 142Oil and gas assets
146 198 9 (5) 90 9 (1) 446157 213 67 39 89 19 4 588
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).
by geographical location
US$million
Australia 2,408Papua New Guinea 534Vietnam 138Indonesia 118Total 3,198
| 2017 Revenue from external customers | 2017 Non-current assets by geographical location |
(excluding nancial and deferred tax assets)
US$million
Australia 7,020Papua New Guinea 2,784Other 360Total 10,164
70 / San t os Annual Report 2018
Financial Report
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.
Product sales
Sales revenue is recognised using the “sales method” of accounting. The sales method results in revenue being recognised basedon volumes sold under contracts with customers, at the point in time where performance obligations are considered met. Generally,regarding the sale of hydrocarbon products, the performance obligation will be met when the product is delivered to the speciedmeasurement point (gas) or point of loading/unloading (liquids). No adjustments are made to revenue for any dierences betweenvolumes sold to customers and unsold volumes which 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 unsatisied 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 $489 million (2017: $358 million), arising from sales from one segment of the Group.
Contract liabilities
A 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.On acquisition of Quadrant Energy (refer note 6.2), pre-existing revenue contracts were fair valued, resulting in contract liabilities beingrecognised. The contract liabilities represent the dierential in contract pricing and market price, and will be realised as performanceobligations are considered met in the underlying revenue contract. To the extent the contract liability represents the fair value dierentialbetween contract price and market price, it will be unwound through “other revenue”.
Contract assets
On acquisition of Quadrant Energy (refer note 6.2), pre-existing revenue contracts were fair valued, resulting in contract assets beingrecognised. 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. These amounts have been shownseparately in the table below.
Notes to the Consolidated Financial StatementsSection 2: Financial Performance
Santos Annual Report 2018 / 71
2.2 REVENUE FROM CONTRACTS WITH CUSTOMERS (CONTINUED)
(Restated)(a) Revenue from contracts with customers 2018 2017US$million US$millionProduct salesGas, ethane and liqueed natural gas 2,518 2,198Crude oil 757 579Condensate and naphtha 300 235Liqueed petroleum gas 85 88Total product sales
3,660 3,100Revenue – otherLiquidated damages 11 28Pipeline tolls and taris 84 54Other 18 16Total revenue – other 113 98Total revenue from contracts with customers 3,773 3,198
1 Total product sales include third-party product sales of $997 million (2017: $926 million).
(b) Assets and liabilities related to contracts with customers
The Group has recognised the following assets and liabilities related to contracts with customers:
2018 2017US$million US$millionContract assetsNon-currentAcquired contract assets 137 –Total contract assets 137 –Contract liabilitiesCurrentDeferred revenue 7 8Acquired deferred revenue 25 –32 8Non-currentDeferred revenue 124 113Acquired deferred revenue 111 –Acquired contract liabilities 33 –268 113Total contract liabilities 300 121The following table illustrates the revenue recognised in the current reporting period relating to carried-forward
deferred revenue balances:
Deferred revenue 2018 2017US$million US$millionRevenue recognised that was included in the deferred revenue balancesat the beginning of the period:
Gas, ethane and liqueed natural gas 4 –Total 4 –
Financial Report
2.3 EXPENSES
(Restated)2018 2017US$million US$millionCost of salesProduction costsProduction expenses 436 412Production facilities – operating leases 38 69Total production costs 474 481Other operating costsLNG plant costs 64 63Pipeline taris, processing tolls and other 133 181Movements in onerous contracts 18 (16)Royalty and excise 82 64Shipping costs 18 18Total other operating costs 315 310Total cash cost of production 789 791Depreciation and depletionDepreciation of plant, equipment and buildings 417 472Depletion of subsurface assets 248 268Total depreciation and depletion 665 740Third-party product purchases 847 727Decrease in product stock 28 45Total cost of sales 2,329 2,303Other expensesSelling 14 15Corporate 75 84Costs associated with aquisitions and disposals 58 –Depreciation 2 2Foreign exchange (gains)/losses (146) 153Fair value hedges losses/(gains)On the hedging instrument 17 43On the hedged item attributable to the hedged risk (15) (57)Fair value losses on commodity derivatives (oil hedges) 67 63Exploration and evaluation expensed 105 94Other 17 11Total other expenses 194 408
Notes to the Consolidated Financial StatementsSection 2: Financial Performance
Santos Annual Report 2018 / 73
2.4 TAXATIONIncome 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, provisionsinclude 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 amount oftax payable to be reimbursed, the expense relating to the income tax payable is presented in the statement of prot or loss 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 tax
Pe troleum Resource Rent Tax (“PRRT”), Resource Rent Royalty and Timor Leste’s and PNG’s Additional Prots Tax are accounted for asincome tax.
7 4 / San t os Annual Report 2018
Financial Report
2.4 TAXATION (CONTINUED)
Current income tax and royalty-related tax recognised in the income statement for the Group are as follows:
2018 2017US$million US$million
(a) Income tax expense/(benet)
Current tax expense/(benet)Current year 70 144Adjustments for prior years (4) (5)66 139Deferred tax expense/(benet)Origination and reversal of temporary dierences 365 (336)Adjustments for prior years 8 (14)373 (350)Total income tax expense/(benet) 439 (211)
(b) Royalty-related tax expense/(benet)
Current tax expenseCurrent year 36 936 9Deferred tax expense/(benet)Origination and reversal of temporary dierences 1 (23)1 (23)Total royalty-related tax expense/(benet) 37 (14)
(c) Numerical reconciliation between pre-tax net prot/(loss)
and tax expense/(benet)
Prot/(loss) before tax 1,106 (585)Prima facie income tax expense/(benet) at 30% (2017: 30%) 332 (176)Increase/(decrease) in income tax expense/(benet) due to:
Foreign losses not recognised 4 51Non-deductible expenses 3 5Exchange and other translation variations 99 (71)Tax adjustments relating to prior years 4 (19)Other (3) (1)Income tax expense/(benet) 439 (211)Royalty-related tax expense/(benet) 37 (14)Total tax expense/(benet) 476 (225)
Notes to the Consolidated Financial StatementsSection 2: Financial Performance
Santos Annual Report 2018 / 75
2.4 TAXATION (CONTINUED)(d) Deferred tax assets and liabilities
Deferred tax is determined using the statement of nancial position approach, providing for temporary dierences between the
carrying 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 assets
and liabilities, using tax rates enacted or substantively enacted at the reporting date.
Signicant judgement – Deferred taxes recognised
The 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 against
which the asset can be utilised. Future taxable prots are estimated by internal budgets and forecasts. Deferred tax assets are
reduced to the extent that it is no longer probable that the related tax benet will be realised.
Assets Liabilities NetRecognised deferred tax assets 2018 2017 2018 2017 2018 2017and liabilities US$million US$million US$million US$million US$million US$millionExploration and evaluation assets 57 49 (47) (46) 10 3Oil and gas assets 1 116 (179) – (178) 116Other assets 26 75 (52) (115) (26) (40)Derivative nancial instruments – 6 (16) – (16) 6Interest-bearing loans and borrowings 126 66 – – 126
Provisions 56 51 – – 56 51Royalty-related tax – – (25) (15) (25) (15)Other items – – (69) (54) (69) (54)
Provisional deferred tax arising
on acquisition 699 – (1,327) – (628) –Tax value of carry-forwardlosses recognised 882 1,046 – – 882 1,046Tax assets/(liabilities) 1,847 1,409 (1,715) (230) 132 1,179Set-o of tax (101) 10 101 (10) – –Net tax assets 1,746 1,419 (1,614) (240) 132 1,179
Financial Report
2.4 TAXATION (CONTINUED)(d) Deferred tax assets and liabilities (continued)Accounting judgement and estimate – Deferred taxes unrecognised
Deferred tax assets have not been recognised in respect of the following items set out below, because it is not probable that the
temporary dierences will reverse in the future and that there will be sucient future taxable prots against which the benetscan be utilised. There are no tax losses (2017: $65 million) which will expire between 2021 and 2028. The remaining deductibletemporary dierences and tax losses do not expire under current tax legislation.
Unrecognised deferred tax assets 2018 2017US$million US$millionDeferred tax assets have not been recognised in respect of the following items:
Temporary dierences in relation to investments in subsidiaries 4,500 4,705Deductible temporary dierences relating to royalty-related tax (net of income tax) 5,858 5,751Other deductible temporary dierences – 162Tax losses 228 32710,586 10,945
2.5 EARNINGS PER SHARE
Basic earnings per share amounts are calculated by dividing net prot or loss for the year attributable to ordinary equity holders ofSantos Limited by the weighted average number of ordinary shares outstanding during the year.Diluted earnings per share amounts are calculated by adjusting basic earnings per share by the weighted average number of ordinaryshares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.Earnings used in the calculation of basic and diluted earnings per share reconciles to the net prot or loss after tax in the incomestatement as follows:
2018 2017US$million US$millionEarnings used in the calculation of basic and diluted earnings per share 630 (360)The weighted average number of shares used for the purpose of calculating diluted earnings per share reconciles to the number used tocalculate basic earnings per share as follows:
2018 2017Number of shares Number of sharesBasic earnings per share 2,083,028,582 2,078,858,067Dilutive potential ordinary shares
15,065,580 –Diluted earnings per share 2,098,094,162 2,078,858,067Earnings per share attributable to the equity holders of Santos Limited 2018 2017? ?Basic earnings per share 30.2 (17.3)Diluted earnings per share 30.0 (17.3)
1 Due to a net loss after tax in 2017, potential ordinary shares are anti-dilutive and therefore excluded from the calculation of diluted earnings per share.
Notes to the Consolidated Financial StatementsSection 2: Financial Performance
Santos Annual Report 2018 / 77
2.6 DIVIDENDS
Dividends are recognised as a liability at the time the Directors resolve to pay or declare the dividend.DividendDividends recognised during the year Franked/ per share Totalunfranked US? US$million2018Interim 2018 ordinary – paid on 27 September 2018 Franked 3.5 733.5 732017No dividends were recognised during 2017.DividendDividends declared in respect of the year Franked/ per share Totalunfranked US? US$million2018Final dividend per ordinary share Franked 6.2 129Interim dividend per ordinary share Franked 3.5 73
9.7 202
2017No dividends were declared in respect of 2017.Dividend franking account 2018 2017US$million US$million30% franking credits available to the shareholders of Santos Limitedfor future distribution, after adjusting for franking credits which willarise from the refund of the current tax receivable at 31 December 331 399
Financial Report
2.7 OTHER INCOME
Other income is recognised at the fair value of the consideration received or receivable, when signicant risks and rewards have beentransferred to the buyer or when the service has been performed.Gain or loss arising on disposal of a non-current asset is included as other income at the date control of the asset passes to the buyer.(Restated)2018 2017Note US$million US$millionOther incomeChange in future restoration assumptions 3.4 46 31Gain on sale of non-current assets 56 79Gain on disposal of subsidiaries 6.2(b) 56 –Other 22 15Total other income180 125Net gain on sale of non-current assets:
Proceeds on disposals 26 145Adjusted for:
Book value of exploration and evaluation liabilities disposed – 2Book value of oil and gas liabilities/(assets) disposed 34 (62)Book value of other land, buildings, plant and equipment disposed (4) (4)Book value of working capital disposed – (2)Total net gain on sale of non-current assets 56 79Comprising:
Net gain on sale of exploration and evaluation assets – 10Net gain on sale of oil and gas assets 52 60Net gain/(loss) on sale of other land, buildings, plant and equipment 4 (1)Net gain on liquidation of controlled entities – 1056 79Reconciliation to cash inows from proceeds on disposal of non-current assets:
Proceeds after recoupment of current year exploration and evaluation expenditure 26 145Amounts receivable – –Amounts received from disposals 26 145Total proceeds on disposal of non-current assets 26 145Comprising:
Proceeds from disposal of exploration and evaluation assets – 3Proceeds from disposal of oil and gas assets 18 134Proceeds from disposal of other land, buildings, plant and equipment 8 826 145
Notes to the Consolidated Financial StatementsSection 2: Financial Performance
Santos Annual Report 2018 / 79
Notes to the Consolidated Financial StatementsSection 3: Capital Expenditure, Operating Assetsand Rest oration Obligations
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 A SSETSExploration and evaluation expenditure
Exploration 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 interestare current and either:
? such expenditure is expected to be recovered through successful development and commercial exploitation of the area of
int erest 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 the
exist ence of economically recoverable reserves and active and signicant operations in, or in relation to, the area of interest are
continuing.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 giv en, 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 witha right to explore in an existing exploration area are capitalised and amortised over the term of the permit.
Financial Report
3.1 EXPLORATION AND EVALUATION A SSETS (CONTINUED)Signicant judgement – Exploration and evaluation
The 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.2018 2017US$million US$millionCost 1,546 2,012Less: Impairment (542) (1,553)Balance at 31 December 1,004 459Reconciliation of movementsBalance at 1 January 459 495Acquisitions 628 48Additions 87 94Disposals (2) –Expensed (10) (17)Impairment losses (129) (163)Transfer to oil and gas assets in production – (13)Exchange dierences (29) 15Balance at 31 December 1,004 459Comprising:
Acquisition costs 687 95Successful exploration wells 221 253Pending determination of success 96 1111,004 459
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 development
When 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 includethecosts 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 thecoal seam 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 Rest oration Obligations
Santos Annual Report 2018 / 81
3.2 OIL AND GAS ASSETS (CONTINUED)Producing assets
The 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 activities
Often 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 note in 3.1.Exploration and evaluation amounts capitalised in respect of oil and gas assets are separately disclosed in the table below.
Depreciation and depletion
Depreciation 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 quantities
The 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 charges
Depletion 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.
Financial Report
3.2 OIL AND GAS ASSETS (CONTINUED)
2018 2017Subsurface Plant and Subsurface Plant andassets equipment Total assets equipment TotalUS$million US$million US$million US$million US$million US$millionCost 9,457 16,112 25,569 8,985 15,442 24,427Less: Accumulated depreciation,depletion and impairment (6,365) (7,980) (14,345) (6,847) (8,044) (14,891)Balance at 31 December 3,092 8,132 11,224 2,138 7,398 9,536Reconciliation of movementsAssets in developmentBalance at 1 January 73 46 119 71 19 90Additions
16 73 89 1 28 29Transfer to oil and gas assetsin production – – – (1) (1) (2)Exchange dierences (1) – (1) 2 – 2Balance at 31 December 88 119 207 73 46 119Producing assetsBalance at 1 January 2,065 7,352 9,417 1,706 8,602 10,308Additions
212 177 389 297 120 417Acquisition 1,192 1,049 2,241 – – –Transfer from exploration andevaluation assets – – – 13 – 13Transfer from oil and gas assetsin development – – – 1 1 2Disposals (148) (8) (156) – (4) (4)Depreciation and depletion (239) (405) (644) (268) (450) (718)Net impairment reversals/(losses) 29 – 29 255 (1,020) (765)Exchange dierences (107) (152) (259) 61 103 164Balance at 31 December 3,004 8,013 11,017 2,065 7,352 9,417Total oil and gas assets 3,092 8,132 11,224 2,138 7,398 9,536Comprising:
Exploration and evaluation expenditurepending commercialisation 86 5 91 90 5 95Other capitalised expenditure 3,006 8,127 11,133 2,048 7,393 9,4413,092 8,132 11,224 2,138 7,398 9,536
1 Includes impact on restoration assets following changes in future restoration provision assumptions (refer note 3.4).
Notes to the Consolidated Financial StatementsSection 3: Capital Expenditure, Operating Assetsand Rest oration Obligations
Santos Annual Report 2018 / 83
3.3 IMPAIRMENT OF NON-CURRENT ASSETSImpairment of oil and gas assets
The carrying amounts of the Group’s oil and gas assets are reviewed at each reporting date to determine whether there is any indicationof impairment or impairment reversal. Where an indicator of impairment exists, a formal estimate of the recoverable amount is made.
a) Indicators of impairment – Exploration and evaluation assets
The carrying amounts of the Group’s exploration and evaluation assets are reviewed at each reporting date, to determine whether
any 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 or
planned; 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 and
evalua tion asset is unlikely to be recovered in full from successful development or from sale.
b) Cash-generating units – Oil and gas assets
Oil and gas assets, land, buildings, plant and equipment are assessed for impairment on a cash-generating unit (“CGU”) basis. A
CGU is the smallest grouping of assets that generates independent cash inows, and generally represents an individual oil or gaseld, or oil and gas elds, that are being produced through a common facility. Impairment losses recognised in respect of CGUs areallocated to reduce the carrying amount of the assets in the CGU on a pro-rata basis.Individual assets within a CGU may become impaired if their ongoing use changes or if the benets to be obtained from ongoing
use 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 of goodwill
Goodwill arises as a result of a business combination, and has an indenite useful life which is not subject to amortisation. It is tested atleast annually for impairment and more frequently if events or changes in circumstances indicate that it might be impaired.
Recoverable amount
The 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.
Financial Report
3.3 IMPAIRMENT OF NON-CURRENT ASSETS (CONTINUED)Signicant judgement – Impairment of oil and gas assets
For 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. In mostcases, 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:
2019202020212022
2023
2024
65.0066.3067.6374.2875.7777.29
1 Based on US$70/bbl (2019 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 rate applied is A$1/US$0.75.The discount rates applied to the future forecast cash ows are based on the weighted average cost of capital, adjusted for risks whereappropriate, including functional currency of the asset, and risk prole of the countries in which the asset operates. The range of pre-taxdiscount rates that have been applied to non-current assets is between 11% and 17%.In the event that future circumstances vary from these assumptions, the recoverable amount of the Group’s oil and gas assets couldchange materially and result in impairment losses or the reversal of previous impairment losses.Due to the interrelated nature of the assumptions, movements in any one variable can have an indirect impact on others and individualvariables rarely change in isolation. Additionally, management can be expected to respond to some movements, to mitigate downsidesand take advantage of upsides, as circumstances allow. Consequently, it is impracticable to estimate the indirect impact that a changein one assumption has on other variables and hence, on the likelihood, or extent, of impairments, or reversals of impairments, underdierent sets of assumptions in subsequent reporting periods.
Notes to the Consolidated Financial StatementsSection 3: Capital Expenditure, Operating Assetsand Rest oration Obligations
Santos Annual Report 2018 / 85
3.3 IMPAIRMENT OF NON-CURRENT ASSETS (CONTINUED)
Impairment expense 2018 2017US$million US$millionCurrent assetsAssets held for sale, subsequently disposed of 6.2(b) 47 –Other receivables – 5Total impairment of current assets 47 5
Non-current assetsExploration and evaluation assets 53 163Oil and gas assets – 765Land and buildings – 5Total impairment of non-current assets 53 933Total impairment100 938Recoverable amounts and resulting impairment losses recognised in the year ended 31 December 2018:
Subsurface Plant and Recoverableassets equipment Total amount
2018 Segment US$million US$million US$million US$millionExploration and evaluation assets:
Gunnedah Basin Queensland & NSW 12 – 12 nil
PNG – PPL 426 PNG 29 – 29 nil
PNG – PPL 261 PNG 4 – 4 nil
WA-214 (Davis 1) Western Australia 8 – 8 nil
Total impairment of explorationand evaluation assets 53 – 53
1 Recoverable amounts represent the carrying values of assets before deducting the carrying value of restoration liabilities. All producing oil and gas asset amounts are calculated using the
VIU method, whilst all exploration and evaluation asset amounts use the FVLCD method.2 Impairment of exploration and evaluation assets relates to certain individual licences/areas of interest that have been impaired to nil.
Exploration and evaluation assets
The impairment of PNG – PPL 426 and PNG – PPL 261 has arisen mainly from the impact of uncertainty around access to necessaryinfrastructure and viability and timing of future third-party export routes.
Financial Report
3.3 IMPAIRMENT OF NON-CURRENT ASSETS (CONTINUED)
Recoverable amounts and resulting impairment write-downs/(reversals) recognised in the year ended 31 December 2017 were:
Subsurface Plant and Recoverableassets equipment Total amount
2017 Segment US$million US$million US$million US$millionExploration and evaluation assets:
Ande Ande Lumut – Indonesia Asia 149 – 149 nil
Gunnedah Basin Queensland & NSW 10 – 10 nil
PNG – PPL 287 PNG 4 – 4 nil
Total impairment of explorationand evaluation assets 163 – 163Oil and gas assets – producing:
GLNG Queensland & NSW – 1,238 1,238 4,099Barrow Western Australia – 6 6 nilCooper – unconventional resources
Cooper Basin 1 – 1 nilCooper Basin Cooper Basin (256) (224) (480) 1,388Total impairment of oil and gas assets (255) 1,020 765Total impairment of exploration andevaluation and oil and gas assets (92) 1,020 928
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 the
VIU method, whilst all exploration and evaluation asset amounts use the FVLCD method.2 Impairment of exploration and evaluation assets relates to certain individual licences/areas of interest that have been impaired to nil.3 Cooper – unconventional resources comprises exploration and evaluation expenditure pending commercialisation within oil and gas assets – producing assets. The impairment relates to the
Basin Centered Gas e xploration.
Notes to the Consolidated Financial StatementsSection 3: Capital Expenditure, Operating Assetsand Rest oration Obligations
Santos Annual Report 2018 / 87
3.4 RESTORATION OBLIGATIONS AND OTHER PROVISIONS
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 restoration
The 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:
2018 2017US$million US$millionCurrent provision 59 85Non-current provision 2,034 1,4432,093 1,528Movements in the provision during the nancial year are set out below:
Total restorationUS$millionBalance at 1 January 2018 1,528Provisions made and changes to assumptions during the year (140)Provisions used during the year (37)Provisions disposed of (125)Provisions acquired 903Unwind of discount 46Change in discount rate 43Exchange dierences (125)Balance at 31 December 2018 2,093Payments made into escrow accounts relating to future restoration obligations of $nil (2017: $68 million) are included within othernon-current nancial assets (note 5.5(g)).
Financial Report
3.4 RESTORATION OBLIGATIONS AND OTHER PROVISIONS (CONTINUED)Other provisions
In addition to the provision for restoration shown above, other items for which a provision has been recorded are:
2018 2017Note US$million US$millionCurrentEmployee benets 7.1 55 49Onerous contracts 2 857 57Non-currentEmployee benets 7.1 9 8Dened benet obligations 7.1 1 1Onerous contracts 29 42Other provisions 74 –113 51
3.5 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 leases LNG carriers, storage and otake facilities, marine vessels and mobile oshore production units under operatingleases. The leases typically run for a period of four to six years, and may have an option to renew after that time.The Group also leases building oce space and warehouses under operating leases. The leases are generally for a period of 10 years,with an option to renew the lease after that date. The lease payments typically increase annually by the Consumer Price Index.During the year ended 31 December 2018, the Group recognised $38 million (2017: $69 million) as an expense in the income statementin respect of operating leases.The Group has the following commitments for expenditure for which no liabilities have been recorded in the nancial statements as thegoods or services have not been received, including non-cancellable operating lease rentals:
Capital Minimum exploration Operating leaseCommitments 2018 2017 2018 2017 2018 2017US$million US$million US$million US$million US$million US$millionNot later than one year 112 124 180 46 34 65Later than one year but not laterthan ve years 12 18 417 334 106 128Later than ve years – – 3 13 102 78124 142 600 393 242 271
Notes to the Consolidated Financial StatementsSection 3: Capital Expenditure, Operating Assetsand Rest oration Obligations
Santos Annual Report 2018 / 89
Notes to the Consolidated Financial StatementsSection 4: Working Capital Management
This section provides information about the Group’s working capital balances and management, including cash owinformation. Cash ow management is a signicant consideration in running our business in an ecient and resourcefulmanner. We also consider inventories which contribute to the business platform for generating prots and revenues.
4.1 CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise cash balances and short-term deposits that are readily convertible to cash, are subject to aninsignicant risk of changes in value, and generally have an original maturity of three months or less.The carrying amounts of cash and cash equivalents represent fair value. Bank balances and short-term deposits earn interest at oatingrates based upon market rates.2018 2017US$million US$millionCash at bank and in hand 467 384Short-term deposits 849 8471,316 1,231
(a) Restricted cash balances
In accordance with the terms of the PNG LNG project nancing, cash relating to the Group’s interest in undistributed cash
owsfrom the PNG LNG project is required to be held in restricted bank accounts. As at 31 December 2018 $147 million(2017:$135 million) was held in these accounts.(b) Reconciliation of cash ows from operating activities 2018 2017US$million US$millionProt/(loss) after income tax 630 (360)Add/(deduct) non-cash items:
Depreciation and depletion 667 742Exploration and evaluation expensed 10 17Net impairment loss 100 938Net loss on fair value derivatives 69 49Share-based payment expense 11 10Unwind of the eect of discounting on provisions 46 45Foreign exchange (gain)/losses (146) 153Gain on sale of sale of non-current assets and subsidiaries (112) (79)Other (2) (28)Net cash provided by operating activities before changes in assets or liabilities 1,273 1,487Add/(deduct) change in operating assets or liabilities, net of acquisitionsor disposals of businesses:
Increase in trade and other receivables – (62)Decrease in inventories 13 55Decrease in other assets 4 14Increase/(decrease) in net deferred tax assets 336 (292)Increase in current tax liabilities 25 21(Decrease)/increase in trade and other payables (60) 46Decrease in provisions (13) (21)Net cash provided by operating activities 1,578 1,248
Financial Report
4.1 CASH AND CASH EQUIVALENTS (CONTINUED)(d) Reconciliation of liabilities arising from nancing activities to nancing cash ows
Liabilities AssetsFinance held to held toShort-term Long-term lease hedge hedgeborrowings borrowings liabilities borrowings borrowings TotalUS$million US$million US$million US$million US$million US$millionBalance at 1 January 2017 419 4,755 65 349 (84) 5,504Financing cash ows
(432) (1,010) – (217) – (1,659)Non-cash changes:
Eect of changes in exchange rates – 144 – (144) – –Changes in fair values (6) (14) (2) 12 23 13Reclassication to current liability 222 (222) – – – –Other 3 21 – – – 24Balance at 31 December 2017 206 3,674 63 – (61) 3,882Balance at 1 January 2018 206 3,674 63 – (61) 3,882Financing cash ows
(220) 1,193 – – – 973
Non-cash changes:
Changes in fair values – (19) (1) – 27 7Reclassication to current liability 977 (977) – – – –Other 3 20 – – – 23Balance at 31 December 2018 966 3,891 62 – (34) 4,885
1 Financing cash ows consist of the net amount of proceeds from borrowings and repayments of borrowings in the statement of cash ows.
4.2 TRADE AND OTHER RECEIVABLES
Trade and other receivables are initially recognised at transaction price, which in practice is the equivalent of cost, less any impairmentlosses.Long-term receivables are initially recognised at fair value and are subsequently stated at amortised cost, less any impairment losses.Trade receivables are non-interest-bearing and settlement terms are generally within 30 days. Trade receivables that are neither pastdue nor impaired relate to a number of independent customers for whom there is no recent history of default.2018 2017US$million US$millionTrade receivables 368 334Other receivables 153 106521 440Due to the nature of the Group’s receivables, their carrying amount is considered to approximate their fair value.The Group applies the simplied approach to providing for expected credit losses for all trade receivables as set out in note 5.5(e).
Notes to the Consolidated Financial StatementsSection 4: Working Capital Management
Santos Annual Report 2018 / 91
4.3 INVENTORIES
Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinarycourse of business, less the estimated costs of completion and selling expenses. Cost is determined as follows:
? drilling and maintenance stocks, which include plant spares, consumables and maintenance and drilling tools used for ongoing
opera tions, are valued at weighted average cost; and? petroleum products, which comprise extracted crude oil, liqueed petroleum gas, condensate and naphtha stored in tanks and
pipeline syst ems and processed sales gas and ethane stored in subsurface reservoirs, are valued using the absorption cost
method.2018 2017US$million US$millionPetroleum products 173 167Drilling and maintenance stocks 115 99Total inventories at lower of cost and net realisable value 288 266Inventories included above that are stated at net realisable value 37 29
4.4 TRADE AND OTHER P AYABLES
Trade and other payables are recognised when the related goods or services are received, at the amount of cash or cash equivalentsthat will be required to discharge the obligation, gross of any settlement discount oered. Trade payables are non-interest-bearing andare settled on normal terms and conditions.2018 2017US$million US$millionTrade payables 503 416Non-trade payables 158 79661 495The carrying amounts of trade and other payables are considered to approximate their fair values, due to their short-term nature.
Financial Report
Notes to the Consolidated Financial StatementsSection 5: Funding and Risk 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 objectives
The 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 2018 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 nance leases.All interest-bearing loans and borrowings, with the exception of secured bank loans and nance leases, are borrowed through SantosFinance Limited, which is a wholly-owned subsidiary of Santos Limited. All interest-bearing loans and borrowings by Santos FinanceLimited are guaranteed by Santos Limited.2018 2017Ref US$million US$millionCurrentBank loans – secured (a) 156 141Bank loans – unsecured (b) 657 65Long-term notes (c) 153 –Finance leases (d) 1 1967 207Non-currentBank loans – secured (a) 1,318 1,475Bank loans – unsecured (b) 1,535 992Long-term notes (c) 1,038 1,207Finance leases (d) 61 623,952 3,736
Santos Annual Report 2018 / 93
5.1 INTEREST-BEARING LOANS AND BORROWINGS (CONTINUED )
The Group’s weighted average interest rate on interest-bearing liabilities was 5.28% for the year ended 31 December 2018 (2017: 5.15%).
(a) Bank loans – secured
Facility PNG LNGCurrency US dollarsLimit $1,537 million (2017: $1,692 million)Drawn principal $1,537 million (2017: $1,692 million)Accounting balance $1,474 million (2017: $1,616 million) including prepaid amountsEective interest rate 6.10% (2017: 5.37%)Maturity 2024–2026Other Loan 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 areprovided 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 participants
in respect of the project. The total carrying value of the Group’s assets pledged assecurity is $2,762 million at 31 December 2018 (2017: $2,852 million).As referred to in note 4.1, under the terms of the project nancing, cash relating to the
Group’s interest in undistributed project cash ows is required to be held in secured bankaccounts.
(b) Bank loans – unsecured
Facility Term bank loansCurrency US dollarsLimit $1,200 million (2017: nil)Drawn principal $1,200 million (2017: nil)Accounting balance $1,194 million (2017: nil) including prepaid amountsEective interest rate 4.18% (2017: N/A)Maturity 2020 and 2024Other During 2018 Santos completed a $700 million 5.5-year syndicated term loan facility and a
$500 million 2-year bridge facility. Both facilities bear oating interest rates.Facility Export credit agency supported loan facilitiesCurrency US dollarsLimit $1,001 million (2017: $1,065 million)Drawn principal $1,001 million (2017: $1,065 million)Accounting balance $998 million (2017: $1,057 million) including prepaid amountsEective interest rate 3.02% (2017: 2.83%)Maturity 2019–2024Other Loan facilities are supported by various export credit agencies.
Financial Report
5.1 INTEREST-BEARING LOANS AND BORROWINGS (CONTINUED )(c) Long-term notes
Facility US private placement notesCurrency US dollarsLimit $377 million (2017: $377 million)Drawn principal $377 million (2017: $377 million)Accounting balance $405 million (2017: $424 million) including fair value accounting measurement
and prepaid amountsEective interest rate 1.58% (2017: 1.84%)Maturity 2019–2027Other Long-term notes bear a xed interest rate of 6.30% to 6.81% (2017: 6.05% to 6.81%),
which have been swapped to oating rate commitments.Facility Regulation-S bondCurrency US dollarsLimit $800 million (2017: $800 million)Drawn principal $800 million (2017: $800 million)Accounting balance $786 million (2017: $783 million) including prepaid amountsEective interest rate 4.40% (2017: 4.39%)Maturity 2027Other The bond bears a xed interest rate of 4.125%.
(d) Finance leases
Finance lease commitments are payable as follows:
2018 2017US$million US$millionNot later than one year 9 10Later than one year but not later than ve years 37 37Later than ve years 106 115Minimum lease payments 152 162Future nance charges (90) (99)Leases not commenced at reporting date – –Total lease liabilities 62 63The Group participates in nance leases of LNG carriers and tug facilities. The leases have terms of between 10 and 20 years with
varying renewal options. Title does not pass to the Group on expiration of the relevant lease period.
Notes to the Consolidated Financial StatementsSection 5: Funding and Risk Management
Santos Annual Report 2018 / 95
5.2 NET FINANCE COSTSBorrowing costs
Borrowing costs relating to major oil and gas assets under development are capitalised as a component of the cost of development.Where funds are borrowed specically for qualifying projects, the actual borrowing costs incurred are capitalised. Where the projects arefunded through general borrowings, the borrowing costs are capitalised based on the weighted average cost of borrowing. Borrowingcosts incurred after commencement of commercial operations are expensed to the income statement.All other borrowing costs are recognised in the income statement in the period in which they are incurred.
Interest income
Interest income is recognised in the income statement as it accrues using the eective interest method.2018 2017US$million US$millionFinance incomeInterest income 30 24Total nance income30 24Finance costsInterest paid to third parties 218 255Deduct borrowing costs capitalised (6) (6)212 249Unwind of the eect of discounting on provisions 46 45Total nance costs 258 294Net nance costs 228 270
Financial Report
5.3 ISSUED CAPITALOrdinary share capital
Ordinary 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 2018 was A$5.48 (2017: A$5.45).
Transaction costs
Transaction costs of an equity transaction are accounted for as a deduction from equity, net of any related income tax benet. During2018 no transaction costs in respect of capital raisings completed have been deducted from equity (2017: $2 million).2018 2017Movement in ordinary shares Number of Number of 2018 2017Note shares shares US$million US$millionBalance at 1 January 2,083,070,879 2,032,389,675 9,034 8,883Share purchase plan, net of costs – 50,847,537 – 151Shares purchased on-market (Treasury shares) – – (10) (8)Utilisation of Treasury shares on vesting of employeeshare schemes – – 7 8Shares issued on vesting of Share Acquisition Rights (“SARs”) 7.2 – 5,365 – –Replacement of ordinary shares with sharespurchased on-market (91,534) (171,698) – –Balance at 31 December 2,082,979,345 2,083,070,879 9,031 9,034Included within the Group’s ordinary shares at 31 December 2018 are 10,000 (2017: 25,000) ordinary shares paid to one cent with a valueof nil (2017: nil).
Treasury shares
Treasury shares are purchased primarily for use on vesting of employee share schemes. Shares are accounted for at weighted averagecost. During the period, $10 million (2017: $8 million) of Treasury shares were purchased on-market.Movement in Treasury shares 2018 2017Note Number of shares Number of sharesBalance at 1 January 587,993 –Shares purchased on-market 2,500,000 2,600,000Treasury shares utilised:
Santos Employee Share1000 Plan 7.2 (176,480) (301,584)Santos Employee ShareMatch Plan 7.2 (439,664) (553,416)Utilised on vesting of SARs 7.2 (615,471) (378,945)Executive STI (deferred shares) 7.2 (312,731) (261,011)Executive STI (ordinary shares) – (193,977)2016 Executive sign-on grants (209,496) (190,688)Santos Employee Share1000 Plan (relinquished shares) 4,093 39,312Replacement of partially paid shares with shares purchased on-market (15,000) –Replacement of ordinary shares with shares purchased on-market (91,534) (171,698)Balance at 31 December 1,231,710 587,993
Notes to the Consolidated Financial StatementsSection 5: Funding and Risk Management
Santos Annual Report 2018 / 97
5.4 RESERVES AND RETAINED EARNINGS
The Group’s reserves and retained earnings balances, and movements during the period, are disclosed in the statement of changes inequity.
Translation reserve
The translation reserve comprises all foreign exchange dierences arising from the following:
? the translation of the nancial statements of foreign operations where their functional currency is dierent from the functional
curr ency of the Parent entity;? the translation of liabilities that hedge the Company’s net investment in a foreign subsidiary;? exchange dierences that arise on the translation of the monetary items that form part of the net investment in a foreign
opera tion; and? the impact of translation of the Group from Australian dollar to US dollar presentation currency.
Hedging reserve
The hedging reserve comprises the eective portion of the cumulative net change in the fair value of cash ow hedging instrumentsrelated to hedged transactions that have not yet occurred.
Financial liabilities at fair value through other comprehensive income (“FVOCI”) reserve
The nancial liabilities at FVOCI reserve includes the component of fair value movements in the Group’s nancial liabilities measured atfair value that result from changes in the Group’s own credit risk.
Accumulated prots reserve
The accumulat ed prots reserve acts to quarantine prots generated in current and prior periods. The reserve was established during 2015.
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 Flowat 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 instruments
The Group classies its nancial instruments in the following categories: nancial assets at amortised cost, nancial assets at fair
value 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 purposeforwhich the nancial instruments were acquired, which is determined at initial recognition based upon the business model oftheGroup.
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.
Financial Report
5.5 FINANCIAL RISK MANAGEMENT (CONTINUED)(a) Financial instruments (continued)Financial assets at fair value through prot or loss
The 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 protorloss.
Financial assets at fair value through other comprehensive income
Financial assets at fair value through other comprehensive income comprise debt securities where the contractual cash ows are
solely 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 liabilities
On initial recognition, the Group measures a nancial liability at its fair value minus, in the case of a nancial liability not at fair value
through 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 liabilities classied at fair value through prot or loss, the
element of gains or losses attributable to changes in the Group’s own credit risk are recognised in other comprehensive income.Policies for the recognition and subsequent measure of derivative liabilities are as outlined below.
Derivative instruments
Derivative nancial instruments entered into by the Group for the purpose of managing its exposures to changes in foreign
exchange rates and interest rates arising in the normal course of business qualify for hedge accounting. The principal derivatives
that may be used are forward foreign exchange contracts, cross-currency swaps and interest rate swaps. Commodity derivatives
are also used to manage the Group’s exposure to changes in oil prices. The use of derivative nancial instruments is subject to a set
of policies, procedures and limits approved by the Board of Directors. The Group does not trade in derivative nancial instruments
for speculative purposes.The Group holds the following nancial instruments:
Financial assets2018 2017US$million US$millionFinancial assets at amortised costCash and cash equivalents 1,316 1,231Trade receivables 521 440Amounts held in escrow
– 68Financial assets at FVTPLEquity investments 2 2Derivative nancial instruments 53 611,892 1,802
1 Amounts represent cash held in escrow for future restoration obligations relating to certain assets and these assets were disposed of during 2018.
Notes to the Consolidated Financial StatementsSection 5: Funding and Risk Management
Santos Annual Report 2018 / 99
5.5 FINANCIAL RISK MANAGEMENT (CONTINUED)(a) Financial instruments (continued)
Financial liabilities 2018 2017US$million US$millionFinancial liabilities at amortised costTrade and other payables 675 495Borrowings at amortised cost 4,514 3,519Financial liabilities at FVTPLBorrowings at FVTPL 405 424Derivative nancial instruments – 79Other 30 235,624 4,540
The Group’s nancial instruments resulted in the following income, expenses, gains and losses recognised in the income statement:
2018 2017US$million US$millionInterest on cash investments 30 24Interest on debt held at FVTPL (24) (29)Interest on debt held at amortised cost (218) (277)Interest on derivative nancial instruments 30 57Amounts reclassied from other comprehensive income to prot or loss – (7)Fair value gains on debt held at FVTPL 15 31Fair value gains on debt held at amortised cost – 26Fair value losses on derivative nancial instruments (81) (106)Net impairment expense recognised on trade receivables – (5)Net foreign exchange gains/(losses) 146 (153)
(102) (439)
(b) Liquidity
The Group adopts a prudent liquidity risk management strategy and seeks to maintain sucient liquid assets and available
committed credit facilities to meet short-term to medium-term liquidity requirements. The Group’s objective is to maintain exibilityin funding to meet ongoing operational requirements, exploration and development expenditure, and other corporate initiatives.The following tables analyse the contractual maturities of the Group’s nancial assets and liabilities held to manage liquidity risk.
The relevant maturity groupings are based on the remaining period to the contractual maturity date, as at 31 December. Theamounts disclosed in the table are the contractual undiscounted cash ows comprising principal and interest repayments.Estimated variable interest expense is based upon appropriate yield curves as at 31 December.
Financial Report
5.5 FINANCIAL RISK MANAGEMENT (CONTINUED)(b) Liquidity (continued)
Less than 1 to 2 2 to 5 More thanFinancial assets and liabilities held to manage liquidity risk 1 year years years 5 years2018 US$million US$million US$million US$millionCash and cash equivalents 1,316 – – –Derivative nancial assetsInterest rate swap contracts 24 15 31 4Non-derivative nancial liabilitiesTrade and other payables (675) – – –Obligations under nance leases (9) (9) (28) (106)Bank loans (933) (797) (1,024) (1,414)Long-term notes (207) (48) (342) (951)
(484) (839) (1,363) (2,467)
Less than 1 to 2 2 to 5 More thanFinancial assets and liabilities held to manage liquidity risk 1 year years years 5 years2017 US$million US$million US$million US$millionCash and cash equivalents 1,231 – – –Derivative nancial assetsInterest rate swap contracts 16 20 45 5Non-derivative nancial liabilitiesTrade and other payables (495) – – –Obligations under nance leases (10) (10) (27) (115)Bank loans (305) (898) (920) (1,070)Long-term notes (57) (207) (356) (985)380 (1,095) (1,258) (2,165)
(c) Foreign currency risk
Foreign exchange risk arises from commercial transactions and valuations of assets and liabilities that are denominated in a
currency 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 operating
expenditure 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 currency
translation risk.All foreign currency denominated borrowings of Australian dollar functional currency companies are either designated as a hedge
of US dollar-denominated investments in foreign operations (2018: $2,607 million; 2017: $1,407 million), or oset by US dollar-
denominated cash balances (2018: $771 million; 2017: $835 million). As a result, there were no net foreign currency gains or losses
arising from translation of US dollar-denominated borrowings recognised in the income statement in 2018.Monetary items, including nancial assets and liabilities, denominated in currencies other than the functional currency of an
operation, are periodically restated to US dollar equivalents, and the associated gain or loss is taken to the income statement. The
exception is foreign exchange gains or losses on foreign currency provisions for restoration at operating sites that are capitalised in
oil and gas assets.
Sensitivity to foreign currency movement
Based on the Group’s net nancial assets and liabilities at 31 December 2018, the estimated impact of a ±15 cent movement in the
Australian dollar exchange rate (2017: ±15 cent) against the US dollar, with all other variables held constant, is $21 million (2017: $22
million) on post-tax prot and $1,550 million (2017: $1,374 million) on equity.
Notes to the Consolidated Financial StatementsSection 5: Funding and Risk Management
Santos Annual Report 2018 / 101
5.5 FINANCIAL RISK MANAGEMENT (CONTINUED)(d) Market riskCash ow and fair value interest rate risk
The Group’s interest rate risk arises from its borrowings. Borrowings issued at variable rates expose the Group to cash ow interest
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 oating
rate basis. Interest rate swaps have been entered into as fair value hedges of long-term notes. When transacted, these swaps had
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 $1,577 million (2017: $1,577 million) and a net fair value of
$34 million (2017: $61 million). The net fair value amounts were recognised as fair value derivatives.
Sensitivity to interest rate movement
Based on the net debt position as at 31 December 2018, taking into account interest rate swaps, it is estimated that if the US dollar
London Interbank Oered Rate (“LIBOR”) interest rates changed by ±0.50% (2017: ±0.50%), and the Australian Bank Bill Swap
reference rate (“BBSW”) changed by ±0.50% (2017: ±0.50%), with all other variables held constant, the impact on post-tax prot
is $4 million (2017: nil).This assumes that the change in interest rates is eective from the beginning of the nancial year and the net debt position
and xed/oating mix is constant over the year. However, interest rates and the debt prole of the Group are unlikely to remain
constant and therefore the above sensitivity analysis will be subject to change.
Commodity price risk exposure
The 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 2018, the
Group has 4.9 million barrels of open oil price swap and option contracts (2017: 12.5 million), covering 2019 exposures, which are
designated in cash ow hedge relationship. The 3-way collar option structure utilised to hedge 2018 oil exposures did not qualify for
hedge accounting, resulting in movement in fair value being recorded in the income statement.
(e) Credit risk
Credit risk represents the potential nancial loss if counterparties fail to complete their obligations under nancial instrument or
customer contracts. Santos employs credit policies which include monitoring exposure to credit risk on an ongoing basis through
management 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 13% of sales revenue.The Group considers the probability of default upon initial recognition of the asset and whether there has been a signicant
depreciation in credit quality on an ongoing basis throughout each reporting period. A signicant decrease in credit quality is dened
as a debtor being greater than 30 days past due in making a contractual payment.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 receivable
for write-o when a debtor fails to make contractual repayments greater than 120 days past due. Where loans or receivables
have been written-o, the Group continues to engage in enforcement activity to attempt to recover the receivable due. Where
recoveries are made, these are recognised in prot or loss.At 31 December 2018 there were no signicant concentrations of credit risk within the Group and nancial instruments are spread
amongst a number of nancial institutions to minimise the risk of counterparty default.The maximum exposure to nancial institution credit risk is represented by the sum of all cash deposits plus accrued interest, bank
account balances and fair value of derivative assets.The Group applies the simplied approach to providing for expected credit losses prescribed by AASB 9, which permits the use of
the lifetime expected loss provision for all trade receivables. Under this method, determination of the loss allowance provision and
expected loss rate incorporates past experience and forward-looking information, including the outlook for market demand and
forward-looking interest rates. As the expected loss rate at 31 December 2018 is nil (2017: nil), no loss allowance provision has been
recorded at 31 December 2018 (2017: nil).
Financial Report
5.5 FINANCIAL RISK MANAGEMENT (CONTINUED)(f) Fair values
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:
Derivatives
The 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. Where these cash ows are in aforeign currency, the present value is converted to US dollars at the foreign exchange spot rate prevailing at the reportingdate.
Financial liabilities
Fair 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 atthe foreign exchange spot rate prevailing at the reporting date.
Interest rates used for determining fair value
The 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:
2018 2017% %Derivatives 1.5 – 2.8 1.4 – 2.5Loans and borrowings 1.5 – 2.8 1.4 – 2.5The 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
Santos Annual Report 2018 / 103
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 arecognised asset or liability.
A derivative or nancial instrument designatedto hedge the e xposure to variability in cash owsattributable to a particular risk associated withan asset, liability or forecast transaction.Recognition dateAt the date the instrument is entered into.At the date the instrument is entered into.MeasurementMeasured at fair value, being the estimated
amount that the Group would receive or pay toterminate the contracts at the reporting date.
Measured at fair value, being the estimatedamount that the Group would receive or pay toterminate the contracts at the reporting date.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 eectiveportion of interest rate swaps hedging xed-rate borrowings is recognised in the incomestatement within nance costs, together withthe loss or gain in the fair value of the hedgedxed-rate borrowings attributable to interestrate risk.The gain or loss relating to the ineectiveportion is recognised in the income statementwithin other income or other expenses.If the hedge no longer meets the criteria forhedge accounting, the adjustment to thecarrying amount of a hedged item for which theeective interest method is used is amortisedto the income statement over the period tomaturity using a recalculated eective interestrate.
Changes in the fair value of derivativesdesignated as cash ow hedges are recogniseddirectly in other comprehensive income andaccumulated in equity in the hedging reservetothe extent that the 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, atthe same 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 transactionoccurs.When a forecast transaction is no longerexpected to occur, the cumulative gain or lossthat was reported in equity is immediatelytransferred to the 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 Groupenters into hedge relationships where the critical terms of the hedging instrument match exactly with the terms of the hedgeditem, and so a qualitative assessment of eectiveness is performed. If changes in circumstances aect the terms of the hedgeditem such that the critical terms no longer match exactly with the critical terms of the hedging instrument, the Group uses thehypothetical derivative method is to assess eectiveness.
104 / Sant os Annual Report 2018
Financial Report
5.5 FINANCIAL RISK MANAGEMENT (CONTINUED)(g) Derivatives and hedging activity (continued)Hedge of monetary assets and liabilities
When 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 operation
The 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.The table below contains all “other nancial assets and liabilities” as shown in the statement of nancial position, including
derivative nancial instruments used for hedging:
2018 2017US$million US$millionCurrent assetsCommodity derivatives (oil hedges) 19 –Interest rate swap contracts 8 –Other 1 –28 –Non-current assetsInterest rate swap contracts 26 61Equity investments 2 2Amounts held in escrow – 68Dened benet surplus 3 331 134Current liabilitiesCommodity derivatives (oil hedges) – 79Other 6 36 82Non-current liabilitiesOther 24 2024 20
Notes to the Consolidated Financial StatementsSection 5: Funding and Risk Management
Santos Annual Report 2018 / 105
5.5 FINANCIAL RISK MANAGEMENT (CONTINUED)(g) Derivatives and hedging activity (continued)
The eects of applying hedge accounting on the Group’s nancial position and performance are as follows:
Derivative nancial instruments – Interest rate swap contracts 2018 2017US$million US$millionCarrying amount 34 61Notional amount 1,577 1,577Maturity date 2019–2027 2019–2027Hedge ratio
1:1 1:1Change in value of outstanding hedging instruments since 1 January (27) (23)Change in value of hedged item used to determine hedge eectiveness 27 23Weighted average hedged rate 1.10% 1.10%Derivative nancial instruments – Oil derivative contracts 2018 2017US$million US$millionCarrying amount 19 –Notional amount (mmbbl) 4.9 –Maturity date 2019 –Hedge ratio
1:1 –Change in value of outstanding hedging instruments since 1 January 19 –Change in value of hedged item used to determine hedge eectiveness (19) –Weighted average hedged rate $50.88 –Reserves – Cash ow hedge reserve 2018 2017US$million US$millionBalance at 1 January (5) (7)Add: Change in fair value of hedging instrument recognised in OCI
for the year (eective portion) (4) 3Less: Deferred tax 1 (1)Balance at 31 December (8) (5)Reserves – FVOCI reserve 2018 2017US$million US$millionBalance at 1 January 21 –Add: Change in fair value of hedging instrument recognised in OCI
for the year (eective portion) – 32Less: Deferred tax – (11)Balance at 31 December 21 21Reserves – Foreign currency hedge reserve 2018 2017US$million US$millionBalance at 1 January 573 707Add: Change in fair value of hedging instrument recognised in OCI
for the year (eective portion) 171 (191)Less: Deferred tax (51) 57Balance at 31 December 693 573
1 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.
Financial Report
Notes to the Consolidated Financial StatementsSection 6: Group Structure
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 prot or loss.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 prot or loss or as a charge to other comprehensive income. If the contingent consideration is classied as equity,it shall not be remeasured until it is nally settled within equity. In instances where the contingent consideration does not fall within thescope 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.
Santos Annual Report 2018 / 107
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 Asia Pacic Pty Ltd
AUSControlled entities of Santos Asia Pacic Pty LtdSantos (Sampang) Pty Ltd
AUSSantos (Warim) Pty Ltd
AUSSantos Australian Hydrocarbons Pty Ltd AUSSantos (BOL) Pty Ltd
AUSControlled entity of Santos (BOL) Pty LtdBridge 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 LtdSantos GLNG Corp USASantos (Globe) Pty Ltd
AUSSantos International Holdings Pty Ltd AUSControlled entities of Santos International Holdings Pty LtdBarracuda Ltd PNGLavana Ltd PNGSanro Insurance Pte Ltd SGPSantos Americas and Europe Corporation USAControlled entities of Santos Americas
and Europe CorporationSantos TPY Corp USAControlled entities of Santos TPY CorpSantos Queensland Corp USASantos TOG Corp USAControlled entities of Santos TOG CorpSantos TPY CSG Corp USASantos TOGA Pty Ltd AUDSantos Bangladesh Ltd GBRSantos Baturaja Pty Ltd
AUS
Name Country of incorporationControlled entities of Santos International
Holdings Pty Ltd (cont)Santos (BBF) Pty Ltd AUSControlled entities of Santos (BBF) Pty LtdSantos (SPV) Pty Ltd
AUSControlled entity of Santos (SPV) Pty LtdSantos (Madura Oshore) Pty Ltd
AUSSantos Belida Pty Ltd
AUSSantos EOM Pty Ltd
AUSSantos Hides Ltd PNGSantos International Pte Ltd
SGPSantos International Operations Pty Ltd
AUSSantos OIG Pty Ltd
AUSSantos P’nyang Ltd PNGSantos Sabah Block R Limited
GBRSantos Sangu Field Ltd GBRSantos (UK) Limited GBRControlled entities of Santos (UK) LimitedSantos Northwest Natuna B.V. NLDSantos Petroleum Ventures B.V.
NLDSantos Vietnam Pty Ltd AUSSantos (JPDA 91–12) Pty Ltd AUSSantos (NARNL Cooper) Pty Ltd
AUSSantos NSW Pty Ltd AUSControlled entities of Santos NSW Pty LtdSantos NSW (Betel) Pty Ltd AUSSantos NSW (Hillgrove) Pty Ltd AUSSantos NSW (Holdings) Pty Ltd AUSControlled entities of Santos NSW (Holdings) Pty LtdSantos NSW (LNGN) Pty Ltd AUSSantos NSW (Pipeline) Pty Ltd AUSSantos NSW (Narrabri Energy) Pty Ltd AUSControlled entity of Santos NSW(Narrabri Energy) Pty LtdSantos NSW (Eastern) Pty Ltd AUSSantos NSW (Narrabri Power) Pty Ltd AUSSantos NSW (Operations) Pty Ltd AUSSantos (N.T.) Pty Ltd AUSControlled entity of Santos (N.T.) Pty LtdBonaparte Gas & Oil Pty Ltd AUSSantos Oshore Pty Ltd
AUSSantos Petroleum Pty Ltd
AUSSantos QLD Upstream Developments Pty LtdSantos QNT Pty Ltd
AUSControlled entities of Santos QNT Pty LtdOutback Energy Hunter Pty Ltd
Financial Report
6.1 CONSOLIDATED ENTITIES (CONTINUED)
Name Country of incorporationControlled entities of Santos QNT Pty Ltd (cont)Santos QNT (No. 1) Pty Ltd
AUSControlled entities of Santos QNT (No. 1) Pty LtdSantos Petroleum Management Pty Ltd
AUSTMOC Exploration Proprietary Limited AUSSantos QNT (No. 2) Pty Ltd AUSControlled entities of Santos QNT (No. 2) Pty LtdMoonie Oil Pty Ltd
AUSPetromin Pty Ltd AUSSantos (299) Pty Ltd
AUSSantos TPC Pty Ltd AUSSantos Wilga Park Pty Ltd AUSSantos Resources 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 LtdSantos WA AEC Pty Ltd
AUSSantos WA Energy Holdings Pty Ltd
AUSControlled entities of Santos WA Energy
Holdings Pty LtdSantos WA Asset Holdings Pty Ltd
5, 8
AUSControlled entities of Santos WA Asset
Holdings Pty LtdSantos WA Lowendal Pty Limited
5, 8
AUSSantos WA International Pty Ltd
5, 8
AUSHarriet (Onyx) Pty Ltd
5, 8
AUSSantos WA Energy Limited
5, 8
AUSControlled entities of Santos WA Energy LimitedNingaloo Vision Holdings Pte. Ltd
SGPNorthwest Jetty Services Pty Ltd
5, 8
AUSSantos WA (Exmouth) Pty Ltd
5, 8
AUSSantos WA East Spar Pty Limited
5, 8
AUSSantos WA Julimar Holdings Pty Ltd
5, 8
AUS
Name Country of incorporationControlled entities of Santos WA Holdings Pty Ltd (cont)Santos WA Kersail Pty Ltd
5, 8
AUSSantos WA LNG Pty Ltd
5, 8
AUSSantos WA Northwest Pty Ltd
5, 8
Santos WA Onshore Holdings Pty Ltd
5, 8
AUSSantos WA Southwest Pty Limited
5, 8
AUSSantos WA Varanus Island Pty Ltd
5, 8
AUSSantos WA Management Pty Ltd
5, 8
AUSControlled entities of Santos Management
Pty LtdSantos WA Finance Holdings Pty Limited
5, 8
AUSControlled entities of Santos WA Finance
Holdings Pty LimitedSantos WA Finance General Partnership
AUSSantos WA PVG Holdings Pty Ltd
5, 8
AUSControlled entities of Santos WA PVG
Holdings Pty LtdSantos WA PVG Pty Ltd
5, 8
AUSSESAP Pty Ltd AUSShaw River Power Station Pty Ltd
AUSVamgas Pty Ltd
AUS
Notes1 Company is party to a Deed of Cross Guarantee (refer note 6.5)2 Liquidated 6 November 20183 Company struck o 4 December 20184 Companies sold5 Companies acquired through the acquisition of Quadrant Energy (refer note 6.2)6 Companies deregistered7 Companies incorporated8 Company is party to a Deed of Cross Guarantee held by
Santos WA Energy Holdings Pty LtdCountry of incorporationAUS – AustraliaGBR – United KingdomNLD – NetherlandsPNG – Papua New GuineaSGP – SingaporeUSA – United States of America
Notes to the Consolidated Financial StatementsSection 6: Group Structure
Santos Annual Report 2018 / 109
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. This
acquisition delivers increased ownership and operatorship of a high quality portfolio of low-cost, long-life conventional WesternAustralian natural oil and gas assets, and importantly signicantly strengthens the Group’s oshore operating capability and accessto exploration opportunities.Details of the purchase consideration, the net identiable assets acquired and goodwill are as follows:
Fair value of net identiable assets and goodwill acquired, on acquisition date US$millionCash 174Trade and other receivables 148Contract assets 104Inventories 52Exploration and evaluation assets 610Oil and gas assets 2,241Other land, buildings and equipment 23Trade and other payables (76)Deferred revenue (136)Restoration provision (903)Employee provisions (32)Other provisions (74)Current tax liability (24)Interest-bearing liabilities (533)Deferred tax assets
Deferred tax liabilities(1,327)Deferred tax (628)Net identiable assets acquired 946Goodwill arising on acquisition (provisional) 628Purchase consideration transferred 1,574Purchase consideration US$millionPurchase consideration transferred 1,574Less: Cash acquired on acquisition (174)Add: Debt repaid on acquisition 533Net cash ow on acquisition 1,933
Revenue and contribution to the Group
The acquired business contributed revenues of $80 million and EBITDAX of $60 million to the Group for the period from
27November 2018 to 31 December 2018.If the acquisition had occurred on 1 January 2018, the acquired business’ contribution to the consolidated pro-forma revenue and
EBITDAX for the year ended 31 December 2018 would have been $714 million and $590 million respectively. It is impractical to
estimate the impact the acquisition would have had if applied from 1 January 2018, at a net prot after tax level, due to the impact
of deferred taxes and depreciation.
Financial Report
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 assets
acquired 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 there is minimal tax base acquired on acquisition, as the assets acquiredare subject to the PRRT regime, and the historical expenditure incurred has already been deducted for PRRT purposes. The PRRTdeferred tax liability is deductible for income tax purposes and a corresponding income tax deferred tax asset arises on acquisition.Goodwill is initially measured at cost and is subsequently measured at cost less any accumulated impairment losses. For the
purposes of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of theGroup’s cash-generating units that are expected to benet from the combination, irrespective of whether other assets or liabilitiesof the acquiree are assigned to those units. Goodwill that is created on acquisition as a consequence of deferred tax balances istested for impairment net of those associated deferred tax balances.Where goodwill has been allocated to a cash-generating unit (CGU) and part of the operation within that unit is disposed of, the
goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain orloss on disposal. Furthermore goodwill is not amortised for accounting but will be annually assessed for impairment in accordancewith the accounting policy set out in Note 3.3.
Business combination accounting
The Company typically uses a discounted cash ow model to estimate the expected future cash ows of the oil and gas assets
acquired, 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 fair value, taking into account the risks associated with the specic restoration
obligations. Other provisions are measured by estimating amounts expected to be paid to settle the obligations if it is probable thatan outow of resources embodying economic benets will be required to settle the obligation, and a reliable estimate can be madeof 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. In addition,
under one of the customer contracts, security is in place by way of a subordinated oating charge over certain assets of QuadrantEnergy subsidiaries. As at the date of this report the Group expects to meet all current obligations under the contracts and as aresult, no provision has been recognised in the nancial statements for these guarantees.Due to the size, complexity and timing of the acquisition, the acquisition accounting is not yet nalised and accordingly the assets
acquired and liabilities assumed are measured on a provisional basis. If new information obtained within the twelve months fromacquisition date about facts and circumstances that existed at the acquisition date identies adjustments to fair values; or anyadditional provisions that existed at the acquisition date; then the accounting for the acquisition will be revised.There were no acquisitions of subsidiaries during 2017.
Notes to the Consolidated Financial StatementsSection 6: Group Structure
Santos Annual Report 2018 / 111
6.2 ACQUISITIONS AND DISPOSALS OF SUBSIDIARIES (CONTINUED)(b) Disposals
Following the Group’s announcement on 3 May 2018 to divest its interest in its Asian assets, the associated assets and liabilities
attributed to the Asia segment were presented as held for sale in the 2018 half-year nancial statements. A net impairment loss of$47 million attributed to the write-down/(reversal) of the Asian assets held for sale to their fair value less costs of disposal wasrecognised at 30 June 2018.On 6 September 2018 the sale of the producing assets was completed and resulted in the disposal of the following wholly-owned
subsidiaries:
? Santos Petroleum Ventures B.V.? Santos (SPV) Pty Ltd? Santos Madura Oshore Pty Ltd? Santos Asia Pacic Pty Ltd? Santos Sampang Pty LtdOn 4 December 2018 the sale of the wholly-owned subsidiary Santos Sabah Block R Limited was also completed.Disposals of subsidiaries 2018 2017Note US$million US$millionConsideration received or receivable:
Cash 146 –Disposal costs (20) –Total net proceeds on disposal of subsidiaries 126 –Carrying amount of net assets sold 142 –Loss on sale before income tax and reclassicationof foreign currency translation reserve (16) –Foreign currency translation reserve
72 –Net gain on disposal before tax 2.7 56 –Income tax expense on gain – –Gain on sale after income tax 56 –
1 Represents the amount recycled into the income statement on reversal of associated amounts previously deferred in the foreign currency translation reserve.
There were no disposals of subsidiaries during 2017.
Financial Report
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 assets contributedto, or acquired for the purpose of, the jointoperation. The assets are used to obtain benetsfor the parties to the joint operation and arededicated to that purpose.
The Group has interests in joint ventures,whereby the venturers have contractualarrangements that establish joint controlover the economic activities of the entities.Rights and obligationsEach party has control over its share of future
economic benets through its share of thejoint operation, and has rights to the assets,and obligations for the liabilities, relating to thearrangement.
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 the Group’sshare of jointly controlled assets, share ofexpenses and liabilities incurred, and the incomefrom its share of the production of the jointoperation.
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’s netinvestment 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.
Notes to the Consolidated Financial StatementsSection 6: Group Structure
Santos Annual Report 2018 / 113
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 2018 2017Joint operation unit/area of interest Principal activities % Interest % InterestBarrow Island Barrow Oil production 28.6 28.6Bayu-Undan Bayu-Undan Gas and liquids production 11.5 11.5Chim Sáo/Dua
Vietnam (Block 12W) Oil and gas production – 31.9Fairview GLNG Gas production 22.8 22.8GLNG Downstream GLNG LNG facilities 30.0 30.0Halyard/Spar
Varanus Island Gas production 100.0 45.0Harriet
Barrow-HJV Oil and gas production 100.0 –John Brookes
Varanus Island Gas production 100.0 45.0Madura Oshore
Madura PSC Gas production – 67.5Macedon/ Pyrenees
North Carnarvon Oil and gas production 28.6 -PNG LNG PNG LNG Gas and liquids production 13.5 13.5Reindeer
Reindeer Gas production 100.0 45.0Roma GLNG Gas production 30.0 30.0SA Fixed Factor Area Cooper Basin Oil and gas production 66.6 66.6Sampang
Sampang PSC Oil and gas production – 45.0SWQ Unit Cooper Basin Gas production 60.1 60.1Exploration and evaluation assetsBlock R
Sabah Block R PSC Oil and gas exploration – 20.0Caldita/Barossa Bonaparte Basin Contingent gas resource 25.0 25.0EP161, EP162 and EP189 McArthur Basin Contingent gas resource 75.0 75.0WA-435-P, WA-437-P
Bedout Contingent oil and gas 80.0 –WA-436-P, WA-438-P
Bedout Oil and gas exploration 70.0 –WA-58-R (WA-274-P) Bonaparte Basin Gas development 30.0 30.0WA-80-R Browse Contingent gas resource 47.8 47.8WA-281-P
Browse Gas and liquids exploration 70.5 47.8Muruk 1 PNG Gas and liquids exploration 20.0 20.0Petrel Bonaparte Basin Contingent gas resource 40.3 35.0PRL-9 PNG Gas and liquids exploration 40.0 40.0Tern, Frigate
Bonaparte Basin Contingent gas resource 46.0 40.0
1 Company sold 6 September 20182 Company sold 4 December 20183 Through acquisition of Quadrant Energy on 27 November 2018, the interest in this joint operation became 100% owned by Santos4 Participation in joint operation is as a result of the acquisition of Quadrant Energy on 27 November 20185 Two joint venture partners resolved to withdraw from the permit in 2018 resulting in Santos’ interest increasing to 70.5%6 Santos acquired an additional 6% interest in Tern and Frigate during 2018 resulting in Santos’ interest increasing to 46%
Financial Report
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 currently
processes gas from the Bayu-Undan gas elds.Summarised nancial information of the joint venture, based on the amounts presented in its nancial statements, and a
reconciliation to the carrying amount of the investment in the consolidated nancial statements, are set out below:
Share of investment in Darwin LNG Pty Ltd 2018 2017US$million US$millionReconciliation to carrying amount:
Opening net assets 1 January 375 490Prot for the period 38 93Reduction in capital (120) (115)Dividends paid (26) (93)Closing net assets 31 December 267 375Group’s share (%) 11.5% 11.5%Group’s share of closing net assets ($million) 31 43Carrying amount of investments in joint ventures ($million) 31 43
Summarised statement of comprehensive income:
Prot for the period 38 93Other comprehensive income – –Total comprehensive income 38 93Group’s share of prot 4 11Dividends received from joint venture 3 11The following are the joint ventures in which the Group has an interest, including those which are immaterial:
Joint venture 2018 2017% Interest % InterestDarwin LNG Pty Ltd 11.5 11.5GLNG Operations Pty Ltd 30.0 30.0GLNG Property Pty Ltd 30.0 30.0
(c) Income from all joint ventures
A reconciliation of the Group’s total income from all joint ventures:
2018 2017US$million US$millionShare of Darwin LNG Pty Ltd net prots 4 11Total share of net prots 4 11At 31 December 2018 the Group reassessed the carrying amount of its investments in joint ventures for indicators of
impairment. As a result, no impairment was recorded (2017: nil).
Notes to the Consolidated Financial StatementsSection 6: Group Structure
Santos Annual Report 2018 / 115
6.4 PARENT ENTITY DISCLOSURES
Selected nancial information of the ultimate parent entity in the Group, Santos Limited, is as follows:
2018 2017US$million US$millionNet prot for the period 1,082 282Total comprehensive income 1,084 282Current assets 353 344Total assets 10,512 11,897Current liabilities 309 474Total liabilities 2,912 4,564Issued capital 9,036 9,034Accumulated prots reserve 1,585 595Other reserves (1,306) (556)Accumulated losses (1,715) (1,740)Total equity 7,600 7,333
Commitments of the parent entity
The parent entity’s capital expenditure commitments and minimum exploration commitments are:
Capital expenditure commitments 42 44Minimum exploration commitments 25 10
Guarantees entered into by the parent entity in relation to the debts of its subsidiaries
All interest-bearing loans and borrowings, as disclosed in note 5.1, with the exception of the nance leases 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 entity
Contingent 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 nancial report.
Financial Report
6.5 DEED OF CROSS GUARANTEE
Pursuant to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 (“the Instrument”), the Company and each of thewholly-owned subsidiaries within the Closed Group (collectively, “the Closed Group”) are relieved from the Corporations Act 2001 (Cth)requirements 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 (Cth). 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 2018 of the Closed Group.2018 2017US$million US$millionConsolidated income statementProduct sales 1,585 1,193Cost of sales (1,149) (1,038)Gross prot 436 155Other revenue 95 122Other income 465 98Other expenses (187) (130)Impairment of non-current assets 242 328Interest income 43 15Prot before tax 1,094 588Income tax expense (123) (232)Royalty-related tax expense (23) (1)Total tax expense (146) (233)Net prot for the period 948 355
Consolidated statement of comprehensive incomeNet prot for the period 948 355Other comprehensive income, net of tax:
Net actuarial gain on dened benet plan 2 –Total comprehensive income 950 355Summary of movements in the Closed Group’s accumulated losses:
Accumulated losses at 1 January (2,153) (2,256)Opening balance adjustment on adoption of new accounting standard – 5Adjusted accumulated losses at 1 January (2,153) (2,251)Transfer to accumulated prots reserve (1,063) (282)Net prot for the period 948 355Net actuarial gain on dened benet plan 2 –Share-based payment transactions 6 6Less: Accumulated losses of companies removed during the period – 19Accumulated losses at 31 December (2,260) (2,153)
Notes to the Consolidated Financial StatementsSection 6: Group Structure
Santos Annual Report 2018 / 117
6.5 DEED OF CROSS GUARANTEE (CONTINUED)
Set out below is a consolidated statement of nancial position as at 31 December 2018 of the Closed Group.2018 2017US$million US$millionCurrent assetsCash and cash equivalents 98 89Trade and other receivables 2,856 3,121Other current assets 147 168Total current assets3,101 3,378Non-current assets
Other nancial assets 8,221 15,736Exploration and evaluation assets 192 166Oil and gas assets 2,064 2,372Other non-current assets 650 524Total non-current assets11,127 18,798Total assets14,228 22,176Current liabilitiesTrade and other payables 2,500 4,971Other current liabilities 100 146Total current liabilities2,600 5,117Non-current liabilities
Interest-bearing loans and borrowings 3,713 9,188Provisions 842 1,010Other non-current liabilities 114 101Total non-current liabilities4,669 10,299Total liabilities 7,269 15,416Net assets6,959 6,760EquityIssued capital 9,036 9,036Reserves 183 (123)Accumulated losses (2,260) (2,153)Total equity 6,959 6,760
Financial Report
Notes to the Consolidated Financial StatementsSection 7: People
This section includes information relating to the various programs the Group uses to reward and recognise our people. Itincludes details of our employee benets, share-based payment schemes and key management personnel.
7.1 EMPLOYEE BENEFITSWages, 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 plan
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 in retained earnings.Dened benet members of the Santos Superannuation Plan receive a lump sum benet on retirement, death, disablement orwithdrawal. The dened benet section of the plan is closed to new employees. All new employees receive accumulation-only benets.During the period, an expense of $4 million (2017: $1 million) was recorded in relation to the dened benet plan.The Group expects to contribute $nil to the dened benet superannuation plan in 2019 (2018: $1 million).
Dened contribution plans
The 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 $8 million (2017: $10 million).The following amounts are recognised in the Group’s statement of nancial position in relation to employee benets:
2018 2017US$million US$millionNon-current assetsDened benet surplus 3 3Current provisionsEmployee benets 55 49Non-current provisionsEmployee benets 9 8Dened benet obligations 1 1Total non-current provisions 10 9Total employee benets provisions 65 58
Santos Annual Report 2018 / 119
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:
2018 2017Note US$000 US$000Employee expenses:
General employee share plans:
Share1000 Plan 7.2(a)(i) (824) (948)ShareMatch Plan (matched SARs) 7.2(a)(i) (1,947) (2,300)Executive Long-Term Incentive share-based payment plans –equity-settled 7.2(a)(ii) (5,693) (6,120)Executive Short-Term Incentive share-based payment plans –equity-settled 7.2(a)(iii) (2,244) (1,005)
(10,708) (10,373)
The net impact on retained earnings from share-based payment plans, net of Treasury shares utilised in the current year, is $6 million.The net impact on retained earnings from share-based payment plans in 2017 was $6 million.
120 / San t os Annual Report 2018
Financial Report
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 plans
Santos 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 ExecutiveCommittee (“Excom”), Directors of the Company, casual employees, employees on xed-term contracts and employeeson international assignment are 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 2018 was A$1,000 per
employee (2017: A$1,000).
The ShareMatch Plan allows for thepurchase of shares through salarysacricing up to A$5,000 over amaximum 12-month period, and toreceive matched SARs at a 1:1 ratioor as otherwise set by the Board.The employee’s ownership and rightto deal with them
Subject to restrictions until the earlier
of the expiration of the three-year
restriction period and the time
when the employee ceases to be in
employment.
Upon vesting, subject to restrictionsuntil the earlier of the expiration of therestriction period (which will be three orseven years from the date of the oer,depending on any election made by theemployee) and the time when he or sheceases to be an employee.How is the fair value recognised?The fair value of these shares is
recognised as an employee expense
with a corresponding increase in
issued capital, and the fair value per
share is determined by the Volume
Weighted Average Price (“VWAP”)
of ordinary Santos shares on the ASX
during the week up to and including
the date of issue of the shares.
The fair value of the shares isrecognised as an increase in issuedcapital and a corresponding increase inloans receivable. The fair value per shareis determined by the VWAP of ordinarySantos shares on the ASX during theweek up to and including the date ofissue of the shares.The fair value of services requiredin return for matched SARs grantedis measured by reference to the fairvalue of matched SARs granted. Theestimate of the fair value of the servicesreceived is measured by discounting theshare price on the grant date using theassumed dividend yield and recognisedas an employee expense for the term ofthe matched S AR s .The following shares were issued pursuant to the employee share plans during the period:
Share1000 Plan ShareMatch PlanIssued Fair value Issued Fair valueshares per share shares per shareYear Issue date No. A$ No. A$2018 9 July 2018 176,480 6.24 439,664 6.242017 20 October 2017 244 4.23 – –2017 28 September 2017 301,340 4.10 553,416 4.10
Notes to the Consolidated Financial StatementsSection 7: People
Santos Annual Report 2018 / 121
7.2 SHARE-BASED PAYMENT PLANS (CONTINUED)i. General employee share plans (continued)
The number of SARs outstanding, and movements throughout the nancial year are:
Beginning of End ofthe year Granted Lapsed Vested the yearYear No. No. No. No. No.2018 Total 1,764,952 439,664 (75,402) (615,471) 1,513,7432017 Total 1,665,931 553,416 (70,085) (384,310) 1,764,952The inputs used in the valuation of the SARs are as follows:
Matched SARs grant 2018Share price on grant date (A$) 6.37Exercise price (A$) nilRight life (weighted average, years) 3Expected dividends (% p.a.) 1.3Fair value at grant date (A$) 6.13The loan arrangements relating to the ShareMatch Plan are as follows:
During the year the Company utilised $2 million of Treasury shares (2017: $2 million) under the ShareMatch Plan,
with $2 million (2017: $2 million) received from employees under loan arrangements. The movements in loansreceivable from employees are:
2018 2017US$000 US$000Employee loans at 1 January 1,327 1,350Treasury shares utilised during the year 2,040 1,779Cash received during the year (2,152) (1,869)Foreign exchange movement (111) 67Employee loans at 31 December 1,104 1,327
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 is aconditional 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 2018 LTI Program oers consisted only of SARs. Performance Awards were granted to eligible executives in 2018
who were granted one four-year grant (1 January 2018 – 31 December 2021).
Financial Report
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
ASX 100 companies (“ASX 100 comparator group”);? 25% are subject to Santos’ TSR relative to the performance of the Standard & Poor’s Global 1200 Energy Index
companies (“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, measured
at 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 yearYear No. No. No. No. No.2018 Total 11,498,252 3,300,981 (3,466,683) – 11,332,5502017 Total 9,402,644 4,291,977 (2,196,369) – 11,498,252The SARs granted during 2018 totalling 3,300,981 were issued across the following four tranches, each with varying valuations:
Senior Executive LTI – granted 21 March 2018
2018Performance Awards P1 P2 P3 P4Performance index ASX 100 S&P GEI FCFBP ROACEFair value at grant date (A$) 3.05 3.18 4.82 4.82Share price on grant date (A$) 5.07 5.07 5.07 5.07Exercise price (A$) nil nil nil nilExpected volatility (weighted average, % p.a.) 46 46 46 46Right life (weighted average, years) 4 4 4 4Expected dividends (% p.a.) 1.3 1.3 1.3 1.3Risk-free interest rate (% p.a.) 2.2 2.2 2.2 2.2Total granted (No.) 695,221 695,209 695,192 695,176
CEO LTI – granted 7 May 2018
2018Performance Awards P1 P2 P3 P4Performance index ASX 100 S&P GEI FCFBP ROACEFair value at grant date (A$) 4.18 4.39 5.84 5.84Share price on grant date (A$) 6.12 6.12 6.12 6.12Exercise price (A$) nil nil nil nilExpected volatility (weighted average, % p.a.) 47 47 47 47Right life (weighted average, years) 4 4 4 4Expected dividends (% p.a.) 1.3 1.3 1.3 1.3Risk-free interest rate (% p.a.) 2.2 2.2 2.2 2.2Total granted (No.) 130,046 130,046 130,046 130,045The 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
Santos Annual Report 2018 / 123
7.2 SHARE-BASED PAYMENT PLANS (CONTINUED)ii. Executive Long-Term Incentive share-based payment plans (continued)Vesting of Performance Awards
All 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 2018vests in accordance with the following vesting schedule:
TSR percentile ranking% of grant vesting< 51st percentile0%= 51st percentile 50%52nd to 75th percentile Further 2.0% for each percentile over 51st≥ 76th percentile100%
Restriction period
Shares allocated on vesting of SARs granted in 2012 may be subject to additional restrictions on dealing for ve
or seven years after the original grant date, depending on whether the executive elected to extend the tradingrestrictions period beyond the vesting date. Shares allocated on the vesting of SARs that were granted priorto 2012will be subject to further restrictions on dealing for a maximum of 10 years after the original grant date.Noamount is payable on grant or vesting of the SARs.
iii. Executive Deferred Short-Term Incentives (“STIs”)Deferred shares
Deferred 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 ofthe year Granted Lapsed Vested the yearYear No. No. No. No. No.2018 Total 261,011 312,731 – (261,011) 312,7312017 Total 308,163 261,011 – (308,163) 261,011On 14 March 2018 the Company issued 312,731 deferred shares to eligible executives. The share price on the grant date
was A$4.86 and the fair value was A$4.74 after applying a 1.4% dividend yield assumption to the valuation.
Share acquisition rights
On 19 April 2017 the Company issued 80,571 SARs subject to a 24-month continuous service condition starting on
1January 2017 and ending and vested on 31 December 2018. The share price on the grant date was A$3.66 and thefair value was A$3.57 after applying a 1.4% dividend yield assumption to the valuation. The issued SARs representedtheportion of 2016 deferred STI which was allocated to eligible executives as SARs rather than deferred shares.
124 / San t os Annual Report 2018
Financial Report
7.2 SHARE-BASED PAYMENT PLANS (CONTINUED)iv. Executive and other equity grants
a. On 11 February 2016 the Company issued 166,911 SARs subject to a 24-month continuous service condition starting
on 1 February 2016 and ending on 31 January 2018, which vested on 1 February 2018.The share price on the grant date was A$3.05 and the fair value was A$2.86 after applying a 3.3% dividend yield
assumption to the valuation.b. On 11 July 2016 the Company issued 42,585 SARs subject to a 24-month continuous service condition starting on
1May 2016 and ending on 30 April 2018, which vested on 1 May 2018.The share price on the grant date was A$4.80 and the fair value was A$4.61 after applying a 2.2% dividend yield
assumption to the valuation.c. On 1 April 2018 the Company issued 235,878 SARs, subject to a 24-month continuous service condition starting on
1 April 2018 and ending on 31 March 2020. During 2018, 7,981 SARs lapsed, leaving 227,897 SARs remaining at the
end of 2018. If this service condition is satised, the remaining SARs will vest on 1 April 2020.The share price on the grant date was A$5.89 and the fair value was A$5.76 after applying a 1.3% dividend yield
assumption to the valuation.d. On 1 April 2018 the Company issued 515,181 SARs, subject to a 36-month continuous service condition starting on
1April 2018 and ending on 31 March 2021. If this service condition is satised, the SARs will vest on 1 April 2021.The share price on the grant date was A$5.89 and the fair value was A$5.68 after applying a 1.3% dividend yield
assumption to the valuation.e. On 5 November 2018 the Company issued 7,650 SARs, subject to a 12-month continuous service condition starting
on 5 November 2018 and ending on 4 November 2019. If this service condition is satised, the SARs will vest on
5November 2019.The share price on the grant date was A$6.37 and the fair value was A$6.28 after applying a 1.3% dividend yield
assumption to the valuation.f. On 5 November 2018 the Company issued 7,649 SARs, subject to a 24-month continuous service condition starting
on 5 November 2018 and ending on 4 November 2020. If this service condition is satised, the SARs will vest on
5November 2020.The share price on the grant date was A$6.37 and the fair value was A$6.20 after applying a 1.3% dividend yield
assumption to the valuation.
Notes to the Consolidated Financial StatementsSection 7: People
Santos Annual Report 2018 / 125
7.2 SHARE-BASED PAYMENT PLANS (CONTINUED)(b) Options
The Company has not granted options over unissued shares under the Executive Long-Term Incentive share-based payment plans
since 2009. The information as set out below relates to options issued under the Executive Long-Term Incentive share-basedpayment plans in 2009 and earlier that have vested in prior years:
ExercisableBeginning End of at end ofof the year Lapsed Exercised the year the yearNo. No. No. No. No.2018Vested in prior years 807,988 (757,439) – 50,549 50,549Weighted average exercise price (A$) 15.55 15.60 – 14.81 14.812017Vested in prior years 1,159,288 (351,300) – 807,988 807,988Weighted average exercise price (A$) 15.01 13.76 – 15.55 15.55
(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 2018 2017US$000 US$000Short-term employee benets 7,794 7,306Post-employment benets 205 195Other long-term benets 73 80Termination benets 31 288Share-based payments 2,757 2,27710,860 10,146
(b) Loans to key management personnel
There have been no loans made, guaranteed or secured, directly or indirectly, by the Group or any of its subsidiaries at any time
throughout the year to any key management person, including their related parties.
Financial Report
Notes to the Consolidated Financial StatementsSection 8: Other
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 nancial report.
8.2 EVENTS AFTER THE END OF THE REPORTING PERIOD
On 20 February 2019, the Directors of Santos Limited resolved to pay a nal dividend of US6.2 cents in respect of the 2018 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 2018. Refer to note 2.6 for details.
8.3 REMUNERATION OF AUDITORS
The auditor of Santos Limited is Ernst & Young.
(a) Audit and review services
Amounts received or due and receivable for an audit or review of the nancial report of the entity and any other entity in the Group by:
2018 2017US$000 US$000Ernst & Young (Australia) 2,014 1,566Overseas network rms of Ernst & Young (Australia) 57 1162,071 1,682
(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:
2018 2017US$000 US$000Ernst & Young (Australia) for other assurance services 212 401Ernst & Young (Australia) for taxation and other services 1,708 341Overseas network rms of Ernst & Young (Australia) for taxation services – 141,920 756
Santos Annual Report 2018 / 127
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 beginning
1 January 2018:
? AASB 2016-5 Amendments to Australian Accounting Standards – Classication and Measurement of Share-based
Paymen t TransactionsThe adoption of this amendment did not have any impact on the amounts recognised in prior periods and will also not aect the
current or future periods.In addition, several other standard amendments and interpretations were applicable for the rst time in 2018, but were not
relevant to the Company and do not impact the Group’s annual consolidated nancial statements or half-year condensed nancial
statements.
(b) Adoption of AASB 15 Revenue from Contracts with Customer s
AASB 15 establishes a comprehensive framework for determining whether, how much, and when revenue is recognised. AASB 15
establishes a ve-step model to be applied to all contracts with customers. The Group has adopted AASB 15 from 1 January 2018.
In accordance with the transition provisions of AASB 15, the Group has adopted the full retrospective transition approach, where
any adjustment to historical revenue transactions (that impacts net prot) has been recorded against opening retained earnings as
at 1 January 2017. Comparatives for the 2017 reporting period have been restated.The Group undertook a detailed review of its revenue contracts that were entered into during the transition period and concluded
that there were no adjustments required to net prot or opening retained earnings on transition. No transition practical expedients
were applied.Application of AASB 15 has resulted in the following insignicant transition adjustments:
i. reclassication of other income and other revenues to revenue from contracts with customers; andii. adjustments of equal or similar amounts to product sales and cost of sales line items, arising from gas swap arrangements.The total impact of transition adjustments on 31 December 2017 reported revenue is as follows:
(Restated)31 December Transition 31 December2017 adjustment 2017Revenue from contracts with customers – Product sales 3,107 (7) 3,100Cost of sales (2,272) (31) (2,303)Gross prot 835 (38) 797Revenue from contracts with customers – Other 65 33 98Other income 123 2 125Other expenses (411) 3 (408)Total –The Group has elected to change from the “entitlements method” to the “sales method” of accounting for sales revenue. Previously
under the entitlements method, sales revenue was recognised on the basis of the Group’s interest in a producing eld. Under
the sales method, revenue will be recognised based on volumes sold under contracts with customers, at the point in time where
performance obligations are considered met. Refer to note 2.2 for further details of the Group’s revenue accounting policy.No other changes arising from the adoption of AASB 15 have had a material eect on the nancial reporting of the Group.
Financial Report
8.4 ACCOUNTING POLICIES (CONTINUED)(b) New standards and interpretations not yet adopted
A number of new standards, amendments to standards and interpretations are eective for annual reporting periods beginning on
or after 1 January 2019, 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 16 LeasesDescriptionAASB 16 provides a new lessee accounting model which requires a lessee to recognise a right of
use asset representing its right to use the underlying asset and lease liabilities, for all leases with aterm of more than 12 months, unless the underlying asset is of a low value. The depreciation of theright of use asset and interest on the lease liability will be recognised in the consolidated incomestatement.Impact on Group
nancialreport
The Group operates predominantly as a lessee. The standard will aect primarily the accounting forthe Group’s operating leases, with no signicant impact expected for the Group’s nance leases.A project team was established comprising appropriate leasing subject matter specialists, with adetailed review of AASB 16 and relevant industry guidance being performed. In addition, the Groupundertook a detailed identication and assessment exercise, to identify and quantify the impact ofleasing arrangements that existed as at the transition date of the standard.The Group expects to apply the modied retrospective transition approach, with election of theoption to retrospectively measure the right-of-use asset using the transition discount rate.Furthermore, the Group plans to elect the following transition practical expedients:
i. lease arrangements with a short remaining term from date of initial application;ii. discount rates applied to a portfolio of leases with similar characteristics; andiii. use of hindsight with regards to determination of the lease term.The cumulative eect of adopting AASB 16 will be recognised as an adjustment to the openingbalance of retained earnings at 1 January 2019, with no restatement of comparative information.Notwithstanding the impact of the IFRIC tentative agenda decision relating to AASB 16 Leases,having consideration for AASB 11 Joint Arrangements, and based on the information currentlyavailable, the Group estimates the following impact on its consolidated statement of nancialposition as at 31 December 2018:
Estimated impact on Consolidated Statement of Financial Position
US$millionRight-of-use assets264Lease liabilities294
1 The net eect of the lease liabilities and right-of-use assets, adjusted for deferred tax will be recognised against retained earnings.
The Group does not expect the adoption of AASB 16 to impact its ability to comply with debtcovenants.As at the reporting date, the Group has non-cancellable operating lease commitments of $242million (refer note 3.5).Application of standard1 January 2019
Notes to the Consolidated Financial StatementsSection 8: Other
Santos Annual Report 2018 / 129
8.4 ACCOUNTING POLICIES (CONTINUED)(b) New standards and interpretations not yet adopted (continued)
ii) AASB 2018–6 Amendments to Australian Accounting Standards – Denition of a BusinessDescriptionThis standard applies to annual reporting periods beginning on or after 1 January 2020 but is
available for early adoption.Impact on Group
nancialreport
This is a prospective application of the standard and will provide further clarity on the accounting
treatment for future acquisition transactions.Application of standard1 January 2019 (early adoption)
Several other amendments to standards and interpretations will apply on or after 1 January 2019, and have not yet been applied,
howe ver they are not expected to impact the Group’s annual consolidated nancial statements or half-year condensed consolidatednancial statements.
Financial Report
Directors’ Declarationfor the year ended 31 December 2018
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 2018 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 2018.3. 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 Cross
Guarantee between the Company and those members of the Closed Group pursuant to ASIC Corporations (Wholly owned
Companies) Instrument 2016/785.Dated this 20th day of February 2019On behalf of the Board:
Director
Santos Annual Report 2018 / 131
Independent Auditor’s Reportto the Members of Santos Limited
REPORT ON THE AUDIT OF THE FINANCIAL REPORTOpinion
We have audited the nancial report of Santos Limited (the Company) and its subsidiaries (collectively the Group), which comprisesthe consolidated statement of nancial position as at 31 December 2018, 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 nancial 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 2018 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 Opinion
We 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 nancial 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 Matters
Key audit matters are those matters that, in our professional judgment, were of most signicance in our audit of the nancial report ofthe current year. These matters were addressed in the context of our audit of the nancial report as a whole, and in forming our opinionthereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressedthe 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 nancial 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 nancial report.
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Financial Report
Acquisition of Quadrant Energy Holdings Pty LtdWhy signicantHow our audit addressed the key audit matter
On 27 November 2018 the Group completed the acquisition ofQuadrant Energy Holdings Pty Ltd (“Quadrant”). As disclosed inNote 6.2 of the nancial report, the Group acquired total assets of$4,679m, assumed total liabilities of $3,105m and recognised totalgoodwill of $628m.As outlined in Note 6.2, the acquisition accounting remainsprovisional as at 31 December 2018, as permitted by AustralianAccounting S t andards.The acquisition is signicant and complex due to the value of theassets acquired and consideration paid and the judgment requiredby the Group to measure the fair values of the following assetsacquired and liabilities assumed:
? oil and gas assets;? exploration and evaluation assets;? decommissioning and restoration liabilities;? contractual assets and liabilities;? contingent liabilities, commitments and any associated
indemnication asset s;? deferred tax assets and liabilities;? contingent consideration; and? working capital balances.
Our audit procedures included the following:
? considered the accounting acquisition date applied with
r eference to the achievement of control over the acquiredbusiness int erests.? evaluated the Group’s determination of the purchase
considera tion with reference to the underlying share saleagr eements and cash consideration paid.? evaluated the qualications, competence and objectivity of
ext ernal and internal experts used by the Group to determinethe oil and gas r eserves and resources, and the fair value of oiland gas assets , exploration and evaluation assets, andr estoration liabilities.? assessed the fair value of oil and gas assets and exploration
and evalua tion assets, with the assistance of our valuationspecialists, including:
? considered whether the modelling methodology applied
was in accordance with the requirements of AustralianAccounting S tandards;? performed valuation cross checks on the acquired oil and
gas assets and e xploration and evaluation assets withr eference to reserves and/or contingent and prospectiver esource multiples;? assessed the assumptions used by comparing key
assumptions such as oil and gas prices, discount rates,ination rates, and foreign exchange rates to gas salesagr eements and external market data;? assessed the operating cost forecasts and capital
expenditure forecasts against costs incurred historicallyand tr end analysis.? assessed decommissioning and restoration provision fair
values, with the assistance of our restoration specialists, asfollows:
? examined third party restoration cost estimates;? assessed the cost estimate methodologies adopted and
contingency rates included;? assessed legislative/regulatory requirements;? assessed the discount rate applied.? involved our taxation specialists in the assessment of the fair
value determinations as follows:
? considered the current and deferred tax eects of both
income tax and pe troleum resource rent tax on the
accounting f or the acquisition;? assessing tax contingencies.? assessed the identication and measurement of acquired
contingent liabilities .? agreed the working capital balances, including adjustments to
r ecognise these balances at fair value, to bank statements,
invoices , operator statements and underlying books and
records.
Independent Auditor’s Reportto the Members of Santos Limited(continued)
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Santos Annual Report 2018 / 133
Estimation of oil and gas reserves and resourcesWhy signicantHow our audit addressed the key audit matter
Estimation of oil and gas reserves and resources was conductedfor the Group, by specialist engineers, requiring signicantjudgment and the use of a number o f assumptions, particularlythose disclosed in Not e 3.2 of the nancial report.These estimates can have a material impact on the nancialstatements and the results of the Group, primarily in the followingareas:
? capitalisation and classication of expenditure as exploration
and evalua tion assets (refer Note 3.1), or oil and gas assets(Not e 3.2);? valuation of oil and gas assets and impairment testing (Note
3.3);? valuation of assets on acquisition, as was the case with the
acquisition of Quadrant Energy Holdings Pty Limited during
2018 (Note 6.2);? calculation of depreciation, depletion and amortisation of
assets (No te 3.2); and? the calculation of decommissioning and restoration provisions
(Not e 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 undertak en was appropriate.? considered the Group’s reserves estimation process and
controls, including Santos’ internal certication process for
technical and commercial experts who are responsible for
r eserves, and the design of Santos Reserves Guidelines and
Reserves Managemen t Process and its alignment with the
guidelines pr epared by the Society of Petroleum Engineers
(SPE).? assessed the Group’s controls over the estimation process, to
assess and appr ove the reserves and resources volumes in
accor dance 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
explor ation and evaluation and oil and gas assets, where
applicable.? analysed the reasons for reserve revisions or the absence of
r eserves revisions where expected, and assessed changes in
r eserves 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 inf ormation, including the calculation of depreciation,
depletion and amortisation and v aluation of assets and
impairment t esting, as applicable.
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Financial Report
Recovery of carrying value of exploration and evaluation and oil and gas assetsWhy signicantHow our audit addressed the key audit matter
Australian 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. At 31 December 2018, the Group has concluded, basedon its impairment indicators assessment, that there were noindicators of impairment or reversals of previous impairmentsforany of its oil and gas cash generating units (CGUs).The Group identied impairment indicators during the period inrespect of certain exploration and evaluation assets. Impairmenttesting was undertaken which resulted in an impairment charge of$53m being recorded during the year, as set out in Note 3.3 ofthenancial 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 cash generating units. In determining whetherthere was an indicator of impairment or impairment reversal,theGroup considered where there was any signicant changesinexternal and internal factors.
We evaluated the assessment of indicators performed by theGroup and whether there had been any signicant changes in theexternal and internal factors which would indicate an impairmentor reversal of impairment existed.We involved our valuation specialists to assist in these procedures.Specically, we evaluated the following external and internalfactors, assessing for signicant changes:
? evaluated movements in commodity price assumptions with
reference 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,applicable tax rates, market risk and country risk premia,broker consensus, and historical performance.? understood operational performance of the cash generating
units relative to plan;? compared future production proles compared to latest
reserves and resources estimates, as outlined in the key audit
matter above; and? examined the reasons for changes to recoverable amounts
relative to previous assessments.Our procedures focused on assessing the impact changes in theseexternal and internal factors would have on the conclusions drawnby management with respect to the presence of impairmentor impairment reversal indicators, and any changes from theimpairment assessments of previous years.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 nancial reportdisclosures regarding the assumptions, key estimates andjudgements applied by management for the Group’s assessmentof indicators of impairment and reversal of impairment for oil andgas and exploration and evaluation assets, and the recoverableamount of the Group’s assets.
Independent Auditor’s Reportto the Members of Santos Limited(continued)
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Santos Annual Report 2018 / 135
Decommissioning and restoration provisionsWhy signicantHow our audit addressed the key audit matter
The calculation of decommissioning and restoration provisionsmade by the Group is conducted using by both internal andexternal specialist engineers and requires judgment in respectof asset lives, timing of restoration work being undertaken,environmental legislative requirements, the extent of restorationactivities required and estimation of future costs.The judgments and estimates made can have a material impact onthe nancial report. The Group has recognised decommissioningand restoration provisions of US$2.1 billion at 31 December 2018which are disclosed in Note 3.4 of the nancial report.
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
whether their work was appropriate.? evaluated the Group’s decommissioning and restoration
estimation processes.? assessed the Group’s controls over the restoration estimation
process.? tested the consistency of the application of principles and
assumptions to other areas of the audit, such as reserves
estimation and impairment testing.? tested the mathematical accuracy of the Group’s present
value calculations and considered the appropriateness of the
discount rate applied in the calculation.? agreed the calculations to the nancial report.
Accounting for deferred tax, Petroleum Resource Rent Tax and uncertain tax positionsWhy signicantHow our audit addressed the key audit matter
The nancial 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 taxes andPRRT is judgmental, due to the interpretation of PRRT andincome tax legislation, as well as the estimation of future taxableincome.There may be changes in, or uncertainties with respect, to theapplication of tax legislation, which requires the Group to makeassumptions, judgments and estimates in assessing the impacts oftax legislation on the Group. The actual tax outcomes may dierfrom the estimates made by management.The Group recognised a net deferred tax asset of US$132 millionat 31 December 2018 in respect of corporate income tax, which isdisclosed in Note 2.4 of the nancial 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 and those used in the Group’s assetimpairment testing.We evaluated the assessment of uncertain tax positions,estimates and assumptions made through enquiries with theGroup’s taxation department, reviewed correspondence with taxauthorities and advisers, and involved our tax specialists, whereappropriate, to assess 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 nancial report.
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Financial Report
Information Other than the Financial Report and Auditor’s Report Thereon
The directors are responsible for the other information. The other information comprises the information included in the Company’s 2018Annual Report, but does not include the nancial report and our auditor’s report thereon.Our opinion on the nancial 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 nancial report, our responsibility is to read the other information and, in doing so, consider whetherthe other information is materially inconsistent with the nancial 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 Report
The directors of the Company are responsible for the preparation of the nancial 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 nancial report that gives a true and fair view and is free from material misstatement,whether due to fraud or error.In preparing the nancial 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 either intend toliquidate the Group or to cease operations, or have no realistic alternative but to do so.
Auditor’s Responsibilities for the Audit of the Financial Report
Our objectives are to obtain reasonable assurance about whether the nancial 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 nancial 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 nancial 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 our opinion.The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud mayinvolve 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 disclosures
made by the directors.? Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events or conditions that may cast signicant doubt on the Group’s ability
to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s
report to the related disclosures in the nancial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions
are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause
the Group to cease to continue as a going concern.? Evaluate the overall presentation, structure and content of the nancial report, including the disclosures, and whether the nancial
report 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 Group
to express an opinion on the nancial 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.
Independent Auditor’s Reportto the Members of Santos Limited(continued)
A member rm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards Legislation
Santos Annual Report 2018 / 137
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.From the matters communicated to the directors, we determine those matters that were of most signicance in the audit of thenancial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless lawor regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter shouldnot be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh thepublic interest benets of such communication.
REPORT ON THE AUDIT OF THE REMUNERATION REPORTOpinion on the Remuneration Report
We have audited the Remuneration Report included in pages 31 to 56 of the directors’ report for the year ended 31 December 2018.In our opinion, the Remuneration Report of Santos Limited for the year ended 31 December 2018, 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 PartnerAdelaide20 February 2019
A member rm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards Legislation
Financial Report
As lead auditor for the audit of Santos Limited for the nancial year ended 31 December 2018, I declare to the best of my knowledgeand 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 Limited and the entities it controlled during the nancial year.
Ernst & Young
R J CurtinPartnerAdelaide20 February 2019
Auditor’s Independence Declarationto the Directors of Santos Limited
A member rm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards Legislation
Santos Annual Report 2018 / 139
Listed on the Australian Securities Exchange at 31 January 2019 were 2,082,911,041 fully paid ordinary shares. Unlisted were 5,000partly paid Plan 0 shares, 5,000 partly paid Plan 2 shares, 41,250 restricted fully paid ordinary shares issued to eligible Senior Executivespursuant to the Santos Employee Share Purchase Plan (“SESPP”) and 27,054 fully paid ordinary shares issued with further restrictionspursuant to the ShareMatch Plan.There were 115,810 holders of all classes of issued ordinary shares, including: 1 holder of Plan 0 shares; 1 holder of Plan 2 shares;11holders of restricted shares pursuant to the SESPP; and 26 holders of ShareMatch shares with further restrictions. This comparedwith 132,026 holders of all classes of issued ordinary shares a year earlier.As at the date of this report there are also: 9 holders of 50,549 Options granted pursuant to the Santos Executive Share Option Plan;140 holders of 12,090,927 Share Acquisition Rights pursuant to the SESPP and 769 holders of 1,504,107 Share Acquisition Rightspursuant to the ShareMatch Plan.The listed issued ordinary shares plus the ordinary shares issued pursuant to the SESPP, 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 74.37% of the total voting power in Santos (68.41% on 31 January 2018). The largest shareholders of fully paid ordinary sharesin Santos as shown in the Company’s Register of Members at 31 January 2019 were:
Name/Address 1Balance as at 31-01-2019%HSBC Custody Nominees (Australia) Limited534,293,01725.65%Citicorp Nominees Pty Limited453,437,73721.77%J P Morgan Nominees Australia Pty Limited329,555,52115.82%National Nominees Limited109,068,2505.24%BNP Paribas Nominees Pty Ltd <Agency Lending DRP A/c>50,807,7102.44%BNP Paribas Noms Pty Ltd <DRP>13,088,3150.63%Argo Investments Limited10,942,0140.53%Citicorp Nominees Pty Limited <Colonial First State Inv A/c> 9,702,4690.47%HSBC Custody Nominees (Australia) Limited <NT-Comnwlth Super Corp A/c>9,470,7770.45%AMP Life Limited5,693,2270.27%UBS Nominees Pty Ltd3,391,0110.16%UBS Nominees Pty Ltd2,660,0000.13%HSBC Custody Nominees (Australia) Limited-GSCO ECA2,423,6840.12%BNP Paribas Nominees Pty Ltd <IB AU Noms Retailclient DRP>2,416,5780.12%UBS Nominees Pty Ltd2,321,1540.11%HSBC Custody Nominees (Australia) Limited - A/c 22,097,4090.10%Netwealth Investments Limited <Wrap Services A/c>2,096,6900.10%BNP Paribas Nominees Pty Ltd <HUB24 Custodial Serv Ltd DRP>2,094,2450.10%Nulis Nominees (Australia) Limited <Navigator Mast Plan Sett A/c>1,830,8480.09%Custodial Services Limited <Beneciaries Holding A/c>1,695,1330.08%Total Securities of Top 20 Holdings1,549,085,78974.37%Total of Securities2,082,911,041
Securities Exchangeand Shareholder In formation
ANALYSIS OF SHARES – RANGE OF SHARES HELD
Holdings RangesHoldersTotal Units%1-1,00040,68019,099,0690.9171,001-5,00049,828125,437,9616.0225,001-10,00014,305103,198,0554.95510,001-100,00010,447220,389,05410.581100,001-99,999,999,9992851,614,786,90277.525Totals115,5452,082,911,041100.000Substantial Shareholders as disclosed by notices received by the Company as at 20 February 2019:
Name
Number of voting
shares held Date of NoticeHony Partners Group, L.P. and others309,734,518*5 May 2017ENN Ecological Holdings Co Ltd and others314,734,518*5 May 2017Santos Limited318,192,274*27 June 2017
* 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 reason of
anActing 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 16 of this Annual Report.
VOTING RIGHTS
Every 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.
Santos Annual Report 2018 / 141
barrel/bblThe standard unit of measurement for alloil and 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 whichare estimated, on a given date, to bepotentially recoverable from knownaccumulations, but which are notcurrently considered to be commerciallyrecoverable. Contingent resources maybe of a signicant size, but still haveconstraints to development. Theseconstraints, 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, depreciation,depletion, exploration and impairment.explorationDrilling, seismic or technical studiesundertaken to identify and evaluate regionsor prospects with the potential to containhydrocarbons.hydrocarbonCompounds containing only the elementshydrogen and carbon, which may exist assolids, liquids or gases.joulesJoules are the metric measurement unitfor energy.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 ina persons disability, or time lost from workof one day shift or more.LPGLiqueed petroleum gas. A mixture oflight hydrocarbons derived from oilbearingstrata which is gaseous at normaltemperatures but which has been liqueedby refrigeration or pressure to store ortransport it. Generally, LPG comprisesmainly 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 ofcertainty (90% condence), arerecoverable. There is relatively little riskassociated with these reserves. Proveddeveloped reserves are reserves thatcan be recovered from existing wellswith existing infrastructure and operatingmethods. Proved undeveloped reservesrequire development.
proved plus probable reserves (2P)Reserves that analysis of geological andengineering data suggests are more likelythan not to be recoverable. There is atleast a 50% probability that reservesrecovered will exceed proved plus probablereserves.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 conversioncalculat or tool, please visit our homepage atwww.santos.com
Santos Limited ABN 80 007 550 923
SECURITIES EXCHANGE LISTING
Santos Limited. Incorporated in Adelaide, South Australia, on18 March 1954.Quoted on the ocial list of the Australian Securities Exchange(ordinary shares code STO).
COMPANY SECRETARY
Christian Paech joined Santos in 2004 and was appointed to therole of General Counsel in 2010 and Company Secretary in 2017.He has over 20 years’ experience in commercial and corporate lawand governance, including in private practice with Herbert SmithFreehills and Ashurst. He holds a Bachelor of Commerce and aBachelor of Laws (Honours) from the University of Adelaide.Amanda Devonish joined Santos in 2012 and was appointed tothe role of Company Secretary in 2017. She has over 15 years’experience in commercial and corporate legal practice. She holds aBachelor of Commerce and Bachelor of Laws from the Universityof Adelaide.
REGISTERED AND HEAD OFFICE
Gr ound Floor Santos Centre60 Flinders StreetAdelaide SA 5000AustraliaGPO Box 2455Adelaide SA 5001AustraliaTelephone: +61 8 8116 5000Facsimile: +61 8 8116 5050Website: www.santos.com
SHARE REGISTER
Boardroom Pty LimitedGrosvenor PlaceL e v el 12, 22 5 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)
Corporate Directory
Santos Annual Report 2018 / 143
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