2012 Annual Corporate Update

© Chartered Secretaries Australia Ltd 2012

Prepared and presented by Santos Limited.

2012 Annual Corporate Update

Understanding the Business impacts of theCarbon Pricing Mechanism

Susie Smith, Santos Limited



Disclaimer

All reasonable effort has been made to provide accurate information in this presentation.

As the Carbon Pricing Mechanism is constantly evolving, with updates to legislation, regulation and determinations, this presentation should not be relied upon for any decision making.



Agenda

• Introduction• Overview of the Australian Carbon Pricing

Mechanism• Emissions Measurement and Reporting• Standard Carbon Clauses• Flow-on Impacts of Carbon Pricing



Australia’s carbon emissions

Source: Securing a clean energy future: The Australian Government’s Climate Change Plan, 2011



Bipartisan support for 5% emissions reduction



Different policies proposed to deliver same target Government’s Clean

Energy LegislationCoalition’s Direct Action

Plan

Target 5% reduction by 2020 5% reduction by 2020

Start date 1 July 2012 t.b.c.

Scheme Cap and trade ETS~ 2/3 of Australia’s emissions covered

Proposed Direct Action policy- government selection

Carbon Price YR1 $23; YR2 $24.15; YR3 $25.40

Flexible price trading commencing YR4

Price Collars for 3 years of flexible price

No penalty for ‘Business as Usual (BAU)’ emissions- penalties not defined yet- BAU methodology not defined yet

Permit allocation / funding

-Emissions Intensive, Trade Exposed industries i.e. where competitor countries do not have a similar carbon impost-Funding for Renewables, Clean Energy-Energy Security Fund (coal fired power generators)-Household Assistance Package

Funding through a tender process- government selection

International linking

Only in flexible price period (post 2015)Up to 50% international units

No details



Carbon politics is finely balancedAs at 1/7/2011

House of Reps Senate

Australian Labor Party

72 31

Liberal Party of Australia

60 28

The Nationals 12 6

Australian Greens 1 9

Independent / Other

5 2

Total 150 76

Minority ALP government was formed on 21 Aug 2010 with support from Independents and Greens

Opposition has pledged to repeal the carbon tax

Repealing the carbon tax in itself would not increase policy certainty, as there will be an economic cost to lower carbon emissions in the future

Lower House requires 76 votes to pass legislation.Senate requires 39 votes to pass legislation.



Overview of the Australian Carbon Pricing Mechanism



Greenhouse gas emissions include

Intent of the Carbon Pricing Mechanism is that the end user pays …



Santos’ carbon emissionsDirect liability (Scope 1 emissions):

• Direct operated reported emissions of ~3.6 mtCO2e for 2010-11

Electricity purchases (Scope 2):

• Indirect emissions from operated sites ~0.04 mtCO2e

• These costs associated with scope 2 emissions will be passed through to Santos via higher electricity prices

Customer use of natural gas (Scope 3):

• Embodied emissions of ~16.6 mtCO2e (assumes that all products are combusted)

• Embodied emissions from natural gas are transferred to the buyer through an OTN (obligation transfer number)

• Supplier is not liable for embodied emissions in liquid fuels. Depending on its use, an equivalent carbon price may be applied for the user of the liquid fuels



Implementation of Carbon Policy

2012 2013 2014 2015 2016

FY 11/12 FY 12/13 (yr1) FY 13/14 (yr2) FY 14/15 (yr3) FY 15/16 (yr4)

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2012-13 75%

acquittal 15 Jun

2012-13 Final

acquittal 1 Feb

2013-14 75%

acquittal

2013-14 Final

acquittal

2014-15 75%

acquittal

2014-15

Final acquitt

alJOA $C cash call

JOA $C cash call

JOA $C cash call

JOA $C cash call

JOA $C cash call

JOA $C cash call

30 Mar NPI

31 Oct NGER

20 Dec EEO

30 Mar NPI

31 Oct NGER

20 Dec EEO

30 Mar NPI

31 Oct NGER

20 Dec EEO

30 Mar NPI

31 Oct NGER

20 Dec EEO

30 Mar NPI

Australian election due

Government permit auctioning scheduled to commence*

FLEXIBLE PRICE(floor/ceiling for 3-years)

FIXED PRICE($23.00; $24.15; $25.40 per tonne of CO2e)

Clean Energy Bill commences(1 July 2012)

Carbon trading* commences(1 July 2015)

*Carbon trading will commence earlier than 2015, with the govt likely to release vintages of permits from 2014, however these ‘flexible’ permits will only be eligible for surrender from the 2015/16 compliance period.Compliance reports include: NGER =National Greenhouse and Energy Reporting; EEO = Energy Efficiency Opportunities; NPI = National Pollution Inventory.



Joint Operating Agreement

Intent of carbon pricing mechanism is to embed carbon pricing into the sale

of goods and services

Operator acquires permits on behalf of

the Joint Venture and surrenders to

government to meet liability

Sales to Customers

Su

rrender P

ermits

$

Gas Sales Agreement

$Operator reports

NGERS and Clean Energy data on

behalf of the Joint Venture

Govern

men

t R

eporting

e.g. Facility

JVP 1

JVP 2

JVP 3

JVP 4

Join

t Ve

ntu

re

Pa

rtne

rs

Operator prepares GHG reports and manages permit liability via JOA

Carbon Pricing Mechanism: worked example

Compliance obligations



Emissions Measurement & Reporting



Mapping emissions sources

WellsWells FacilitiesFacilities PlantPlant

OPERATED FACILITIES

Fuel, Flare, Vent

Fugitives

Fuel, Flare, Vent

Fugitives

Emissions are split across multiple products based on their nature:- e.g. Sales gas, ethane, LPG, condensate

Sales by product

Fuel, Flare, Vent



Robust GHG data and reporting system

Emissions determined in accordance with

legislative requirements and audited annually

Santos’ GHG data systems support three different functions developed to meet regulatory and business requirements.



Flow-on impacts of Carbon Pricing



About two thirds of Australia’s emissions are covered bythe carbon pricing scheme


Covered

Partially Covered

Excluded

Partially CoveredExcludedCovered

Covered

Covered



Overall impactTreasury modelling suggest that carbon pricing will increase aggregate consumer prices in 2012-13 by 0.7 per cent

A further 0.2% increase is expected in 2015-16, once emissions trading starts, bringing the total CPI impact to 0.9 per cent over 4 years

Source: Treasury modelling, 2011



ElectricityTreasury modelling estimates that household electricity prices will increase ~10%. The majority of this increase is attributed to electricity generation.

The average carbon intensity of the National Electricity Market (NEM) is ~0.9tCO2e/MWh equating to the increase of ~$20/MWh

In theory, impact on electricity costs will vary based on the carbon intensity of the source, though many other factors at play




Liquid FuelsHouseholds and on-road business use of light vehicles will not face a carbon price on fuel

Rail, shipping, domestic aviation, off-road transport (eg on mine sites) and non transport liquid fuels will face an effective carbon price, through changes to the current fuel tax regime

Heavy on-road vehicles will not face a carbon price, but the Government intends to apply an effective carbon price on heavy on-road vehicles from 1 July 2014

There is a mechanism to ‘opt-in’ under the carbon pricing scheme rather than the fuel tax system, but Santos does not see any benefits in this

Source: Clean Energy Plan, Transport Fuels factsheet, DCCEE 2011



Questions ?

Documents

2012 Annual Corporate Update