Media enquiries Investor enquiries - Santos · Media enquiries Investor enquiries Matthew Doman Andrew Nairn +61 8 8116 5260 / +61 (0) 421 888 858 +61 8 8116 5314 / +61 (0) 437 166

Santos Limited ABN 80 007 550 923 GPO Box 2455, Adelaide SA 5001

Telephone: +61 8 8116 5000 Facsimile: +61 8 8116 5131 www.santos.com

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Media enquiries Investor enquiries Matthew Doman Andrew Nairn +61 8 8116 5260 / +61 (0) 421 888 858 +61 8 8116 5314 / +61 (0) 437 166 497 [email protected] [email protected]

22 September 2010

Euro Subordinated Notes Prospectus Santos announced on 17 September 2010 an issue of Euro denominated Fixed to Floating Rate Subordinated Notes. The Prospectus for the Subordinated Notes has been approved by the United Kingdom Listing Authority and lodged with the London Stock Exchange. A copy of the Prospectus is attached to this release. Ends.

PROSPECTUS DATED 21 SEPTEMBER 2010

SANTOS FINANCE LIMITED(incorporated with limited liability in Australia, ACN 002 799 537)

€650,000,000 Fixed to Floating Rate Subordinated Notes due 2070(with an option for the issue of a further €65,000,000 in aggregate principal amount of Notes)

unconditionally and irrevocably guaranteed by

SANTOS LIMITED(incorporated with limited liability in Australia, ACN 007 550 923)

Issue price: 100 per cent.The €650,000,000 Fixed to Floating Rate Subordinated Notes due 2070 (the Notes) are issued by Santos Finance Limited (the Issuer)and unconditionally and irrevocably guaranteed by Santos Limited (the Guarantor, which term shall unless the context requiresotherwise, include the Optional Notes (as defined below).

The Notes will bear interest, payable semi-annually in arrear on 22 March and 22 September in each year, from and including 22September 2010 (the Issue Date) to but excluding 22 September 2017 (the Optional Redemption Date) at the rate of 8.25 per cent.per annum. From and including the Optional Redemption Date, the Notes will bear interest at a rate of 6.851 per cent. per annumabove three-month EURIBOR, payable quarterly in arrear on the Floating Interest Payment Dates. Interest payments must bedeferred in certain circumstances in the case of a Trigger Event. See Condition 4 of “Terms and Conditions of the Notes“ for detailsas to how and when Deferred Interest Payments may be made.

The Notes mature in 2070, subject as described in “Terms and Conditions of the Notes”. However, the Issuer may redeem the Noteson the Optional Redemption Date or on any Floating Interest Payment Date thereafter at their Principal Amount (plus any accruedinterest and any outstanding Deferred Interest Payments, including any amount of interest accrued thereon). If a Gross-Up Event ora Change of Control Event occurs, the Issuer may redeem the Notes prior to (but excluding) the Optional Redemption Date (in thecase of a Gross-Up Event) or at any time (in the case of a Change of Control Event) at their Principal Amount (plus any accruedinterest and any outstanding Deferred Interest Payments, including any amount of interest accrued thereon). The Issuer may alsoredeem the Notes prior to (but excluding) the Optional Redemption Date at the Early Redemption Amount on the occurrence of aTax Event, a Capital Event or an Accounting Event. In addition, the Issuer may elect to redeem the Notes at any time prior to theOptional Redemption Date at their Early Redemption Amount, or on, or on any Floating Interest Payment Date after, the OptionalRedemption Date at their Principal Amount (plus any accrued interest and any outstanding Deferred Interest Payments, includingany amount of interest accrued thereon), if the outstanding aggregate principal amount of the Notes falls to or below 20 per cent. ofthe aggregate principal amount of the Notes originally issued. See Condition 5.6 of “Terms and Conditions of the Notes” for furtherdetail. If the Issuer does not choose to redeem the Notes upon the occurrence of a Change of Control Event, and a Rating Downgradehas also occurred, Noteholders will have the right to require the Issuer to redeem or (at the Issuer’s option) purchase that Noteholder’sNotes in the circumstances described in Condition 5.7 of “Terms and Conditions of the Notes”.

Application has been made to the Financial Services Authority in its capacity as competent authority under the Financial Services andMarkets Act 2000 (the UK Listing Authority) for up to €715,000,000 in principal amount of Notes to be admitted to the OfficialList of the UK Listing Authority and to the London Stock Exchange plc (the London Stock Exchange) for the Notes to be admittedto trading on the London Stock Exchange’s regulated market. The London Stock Exchange’s regulated market is a regulated marketfor the purposes of Directive 2004/39/EC (the Markets in Financial Instruments Directive).

The Notes will be rated BB by Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies Inc. A rating is not arecommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigningrating organisation.

Pursuant to the Subscription Agreement (as defined in “Subscription and Sale”) the Managers have agreed jointly and severally,subject as provided herein, to subscribe or procure subscriptions for €650,000,000 in principal amount of the Notes. In addition, theIssuer has granted to the Managers in the Subscription Agreement an option (the Option) exercisable on a date on or before23 September 2010 to subscribe or procure subscribers for up to an additional €65,000,000 in principal amount of the Notes (theOptional Notes). The Notes will initially be represented by a temporary global note (the Temporary Global Note), without interestcoupons, which will be deposited on or about 22 September 2010 (the Closing Date) with a common depositary for Euroclear BankSA/NV (Euroclear) and Clearstream Banking, société anonyme (Clearstream, Luxembourg). Interests in the Temporary Global Notewill be exchangeable for interests in a permanent global note (the Permanent Global Note and, together with the Temporary GlobalNote, the Global Notes), without interest coupons, on or after 2 November 2010 (the Exchange Date), upon certification as to non-U.S. beneficial ownership. Interests in the Permanent Global Note will be exchangeable for definitive Notes only in certain limitedcircumstances – see “Summary of Provisions relating to the Notes while represented by the Global Notes”.

Word and expressions defined in “Terms and Conditions of the Notes” and not otherwise defined in this Prospectus shall have thesame meanings when used in the remainder of this Prospectus. An investment in Notes involves certain risks. Prospective investorsshould have regard to the factors described under the heading “Risk Factors” on page 11.

Joint Lead ManagersUBS Investment Bank Deutsche Bank(Structuring Adviser)

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This Prospectus comprises a prospectus for the purposes of Article 5.4 of Directive 2003/71/EC (theProspectus Directive) and for the purpose of giving information with regard to the Issuer, the Guarantor andits subsidiaries and affiliates taken as a whole (the Group), the Guarantor and the Notes which accordingto the particular nature of the Issuer, the Guarantor and the Notes, is necessary to enable investors to makean informed assessment of the assets and liabilities, financial position, profit and losses and prospects of theIssuer and the Guarantor.

The Issuer and the Guarantor accept responsibility for the information contained in this Prospectus. To thebest of the knowledge and belief of each of the Issuer and the Guarantor (each having taken all reasonablecare to ensure that such is the case) the information contained in this Prospectus is in accordance with thefacts and does not omit anything likely to affect the import of such information.

Neither the Managers (as described under “Subscription and Sale”, below) nor the Trustee haveindependently verified the information contained herein. Accordingly, no representation, warranty orundertaking, express or implied, is made and no responsibility or liability is accepted by the Managers orthe Trustee as to the accuracy or completeness of the information contained or incorporated in thisProspectus or any other information provided by the Issuer or the Guarantor in connection with the offeringof the Notes. Neither the Managers nor the Trustee accepts any liability in relation to the informationcontained in this Prospectus or any other information provided by the Issuer or the Guarantor in connectionwith the offering of the Notes or their distribution. Advisors named in this Prospectus have not caused theissue of, and take no responsibility for, this Prospectus, have acted pursuant to the terms of their respectiveengagements and do not make, and should not be taken to have verified, any statement or information inthis Prospectus unless expressly stated otherwise.

No person is or has been authorised by the Issuer, the Guarantor or the Trustee to give any information orto make any representation not contained in or not consistent with this Prospectus and, if given or made,such information or representation must not be relied upon as having been authorised by or on behalf ofthe Issuer, the Guarantor, any of the Managers or the Trustee.

Neither this Prospectus nor any other information supplied in connection with the offering of the Notes (a)is intended to provide the basis of any credit or other evaluation or (b) should be considered as arecommendation by the Issuer, the Guarantor, any of the Managers or the Trustee that any recipient of thisProspectus or any other information supplied in connection with the offering of the Notes should purchaseany Notes. This Prospectus does not take into account the objectives, financial situation or needs of anypotential investor. Each investor contemplating purchasing any Notes should make its own independentinvestigation of the financial condition and affairs, and its own appraisal of the creditworthiness, of theIssuer and/or the Guarantor. Neither this Prospectus nor any other information supplied in connection withthe offering of the Notes constitutes an offer or invitation by or on behalf of the Issuer, the Guarantor, anyof the Managers or the Trustee to any person to subscribe for or to purchase any Notes.

Neither the delivery of this Prospectus nor the offering, sale or delivery of the Notes shall in anycircumstances imply that there has been no change in the affairs of the Issuer or the Guarantor since thedate hereof or the date upon which this Prospectus has been most recently amended or supplemented or thatthere has been no adverse change in the financial position of the Issuer or the Guarantor since the datehereof or the date upon which this Prospectus has been most recently amended or supplemented or that theinformation contained herein or any other information supplied in connection with the Notes is correct atany time subsequent to the date on which it is supplied or, if different, the date indicated in the documentcontaining the same. The Managers and the Trustee expressly do not undertake to review the financialcondition or affairs of the Issuer or the Guarantor during the life of the Notes or to advise any investor inthe Notes of any information coming to their attention. The Notes and the Guarantee have not been andwill not be registered under the United States Securities Act of 1933, as amended (the Securities Act) andare subject to U.S. tax law requirements. Subject to certain exceptions, the Notes and the Guarantee maynot be offered, sold or delivered within the United States or to U.S. persons. For a further description ofcertain restrictions on the offering and sale of the Notes and on distribution of this document, see“Subscription and Sale” below.

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This Prospectus does not constitute an offer to sell or the solicitation of an offer to buy any of the Notes inany jurisdiction to any person to whom it is unlawful to make the offer or solicitation in such jurisdiction.The distribution of this Prospectus and the offer or sale of Notes may be restricted by law in certainjurisdictions. None of the Issuer, the Guarantor, the Managers or the Trustee represents that this Prospectusmay be lawfully distributed, or that the Notes may be lawfully offered, in compliance with any applicableregistration or other requirements in any such jurisdiction, or pursuant to an exemption availablethereunder, or assumes any responsibility for facilitating any such distribution or offering. In particular, noaction has been taken by the Issuer, the Guarantor, the Managers or the Trustee which is intended to permita public offering of the Notes or the distribution of this Prospectus in any jurisdiction where action for thatpurpose is required. Accordingly, no Notes may be offered or sold, directly or indirectly, and neither thisProspectus nor any advertisement or other offering material may be distributed or published in anyjurisdiction, except under circumstances that will result in compliance with any applicable laws andregulations. Persons into whose possession this Prospectus or any Notes may come must inform themselvesabout, and observe, any such restrictions on the distribution of this Prospectus and the offering and sale ofNotes. For a description of further restrictions on the distribution of this Prospectus and the offer or sale ofNotes in the United States, the European Economic Area (including the United Kingdom) and Australia, see“Subscription and Sale”.

This Prospectus has not been, and will not be, lodged with the Australian Securities and InvestmentsCommission and is not, and does not purport to be, a document containing disclosure to investors for thepurposes of Part 6D.2 or Part 7.9 of the Corporations Act 2001 of the Commonwealth of Australia (theCorporations Act). It is not intended to be used in connection with any offer for which such disclosure isrequired and does not contain all the information that would be required by those provisions if they applied.It is not to be provided to any ‘retail client’ as defined in section 761G of the Corporations Act. The Issuerand the Guarantor are not licensed to provide financial product advice in respect of the Notes or theGuarantee. Cooling off rights do not apply to the acquisition of the Notes.

This Prospectus does not constitute an offer to sell or the solicitation of an offer to buy any of the Notes inany jurisdiction to any person who is an associate of the Issuer within the meaning of subsection 128F(9)of the Income Tax Assessment Act 1936 of the Commonwealth of Australia and is: (a) a resident ofAustralia that would acquire the Note through a permanent establishment outside Australia, or a non-resident that would not acquire the Note through a permanent establishment in Australia; and (b) is notacting in the capacity of a dealer, manager or underwriter in relation to the placement of the relevant Notes,or a clearing house, custodian, funds manager or responsible entity of a registered managed investmentscheme for the purposes of the Corporations Act.

The Managers, the Trustee and the Principal Paying Agent have received, or will receive, fees from the Issuerin connection with their participation in the offer and may hold interests in the Notes for their own account.In addition, certain of the Managers, the Trustee and the Principal Paying Agent and their affiliates haveengaged, and may in the future engage, in investment banking and/or commercial banking transactionswith, or may provide services to, the Issuer and/or the Guarantor.

IN CONNECTION WITH THE ISSUE OF THE NOTES, UBS LIMITED AS STABILISING MANAGER(THE STABILISING MANAGER) (OR PERSONS ACTING ON BEHALF OF THE STABILISINGMANAGER) MAY OVER ALLOT NOTES OR EFFECT TRANSACTIONS WITH A VIEW TOSUPPORTING THE MARKET PRICE OF THE NOTES AT A LEVEL HIGHER THAN THAT WHICHMIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS NO ASSURANCE THAT THE STABILISINGMANAGER (OR PERSONS ACTING ON BEHALF OF THE STABILISING MANAGER) WILLUNDERTAKE STABILISATION ACTION. ANY STABILISATION ACTION MAY BEGIN ON ORAFTER THE DATE ON WHICH ADEQUATE PUBLIC DISCLOSURE OF THE TERMS OF THEOFFER OF THE NOTES IS MADE AND, IF BEGUN, MAY BE ENDED AT ANY TIME, BUT IT MUSTEND NO LATER THAN THE EARLIER OF 30 DAYS AFTER THE ISSUE DATE OF THE NOTES AND60 DAYS AFTER THE DATE OF THE ALLOTMENT OF THE NOTES. ANY STABILISATIONACTION OR OVER-ALLOTMENT MUST BE CONDUCTED BY THE STABILISING MANAGER (ORPERSONS ACTING ON BEHALF OF ANY STABILISING MANAGER) IN ACCORDANCE WITH ALLAPPLICABLE LAWS AND RULES.

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All references in this document to AUD and A$ refer to the currency of the Commonwealth of Australiaand to euro and € refer to the currency introduced at the start of the third stage of European economic andmonetary union pursuant to the Treaty establishing the European Community, as amended.

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CONTENTSPage

Overview.................................................................................................................................... 6

Risk Factors .............................................................................................................................. 11

Conditions of the Notes ............................................................................................................ 21

Summary of provisions relating to the Notes while represented by the Global Notes................ 41

Use of Proceeds .......................................................................................................................... 44

Description of the Issuer ............................................................................................................ 45

Description of the Guarantor .................................................................................................... 46

Taxation .................................................................................................................................... 57

Subscription and Sale ................................................................................................................ 62

Australian Accounting Standards and Financial Statements ...................................................... 64

General Information .................................................................................................................. 65

Glossary .................................................................................................................................... 67

Financial Information ................................................................................................................ 69

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OVERVIEWThis overview must be read as an introduction to this Prospectus and any decision to invest in the Notesshould be based on a consideration of this Prospectus as a whole.

Words and expressions defined in “Conditions of the Notes” shall have the same meanings in this section.

Issuer: Santos Finance Limited

Guarantor: Santos Limited

Description of Notes: €650,000,000 Fixed to Floating Rate Subordinated Notes due 2070(the Notes), to be issued by the Issuer on 22 September 2010 (theIssue Date). Pursuant to the Subscription Agreement the Managershave agreed jointly and severally, subject as provided herein, tosubscribe or procure subscriptions for €650,000,000 in principalamount of the Notes. In addition, the Issuer has granted to theManagers in the Subscription Agreement an option (the Option)exercisable on a date on or before 23 September 2010 to subscribe orprocure subscribers for the Optional Notes, being up to an additional€65,000,000 in principal amount of the Notes. The date of issue (theSecond Closing Date) of any Optional Notes may not be later than thetenth London business day after the date of exercise of the Option.

Trustee: BNY Corporate Trustee Services Limited

Structuring Adviser: UBS Limited

Managers: Deutsche Bank AG, London Branch

UBS Limited

Maturity Date: The Floating Interest Payment Date falling in September 2070.

The Notes will be redeemed on the Maturity Date, unless redeemedby the Issuer beforehand, at their Principal Amount plus any interestaccrued up to (but excluding) the Maturity Date and any outstandingDeferred Interest Payments (including any amount of interest accruedthereon in accordance with Condition 4.3).

Guarantee: Payments of the principal and interest in respect of the Notes and allother moneys payable by the Issuer under or pursuant to the TrustDeed will be unconditionally and irrevocably guaranteed by theGuarantor. The obligations of the Guarantor under its guarantee willbe direct, unconditional, subordinated and unsecured obligations ofthe Guarantor. The rights and claims of the Noteholders andCouponholders in respect of the Guarantee will rank as set out inCondition 3.2 of “Terms and Conditions of the Notes”.

Status of the Notes: The Notes and the Coupons will constitute direct, unconditional,subordinated and unsecured obligations of the Issuer and will rankpari passu, without any preference among themselves. The rights andclaims of the Noteholders and the Couponholders will rank as set outin Condition 2.2 of “Terms and Conditions of the Notes”.

Subordination: Payments in respect of the Notes and the Guarantee will besubordinated as described in Conditions 2.2, 2.3 and 3.2 of “Termsand Conditions of the Notes”.

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Interest: Subject to the limitations as described in Condition 4 of “Terms andConditions of the Notes”, the Notes bear interest at:

(a) from (and including) the Issue Date to (but excluding) theOptional Redemption Date, a fixed rate of 8.25 per cent. perannum; and

(b) thereafter at a rate per annum reset quarterly of 6.851 per cent.Per annum above three-month EURIBOR.

Interest Payment Dates: Interest payments in respect of the Notes will be payable:

(a) from (and including) 22 September 2010 to (and including) theOptional Redemption Date semi-annually in arrear in equalinstalments on 22 September and 22 March in each year,commencing on 22 March 2011; and

(b) thereafter, subject to adjustment for non-business days, on 22March, 22 June, 22 September and 22 December in each year,commencing on 22 December 2017.

If, on any day which is 8 Business Days prior to any Interest PaymentDate, a Trigger Event exists and the Issuer fulfils the S&P RatingCriteria, the Interest Amount falling due on such Interest PaymentDate will not be due and payable or be paid until the relevantPayment Reference Date and will constitute a Deferred InterestPayment. A Trigger Event exists if the corporate credit rating assignedby Standard & Poor’s to the Guarantor (and the Issuer, if it has beenassigned such a credit rating) as published by Standard & Poor’s isBB+ or lower. The Issuer fulfils the S&P Rating Criteria if the Issueror the Guarantor is rated by Standard & Poor’s and the Notes areeligible for the same or higher category of equity credit as wasattributed to the Notes at the Issue Date (as notified from time to timeto the Issuer by Standard & Poor’s).

The Holders will have no entitlement or claim in respect of anyInterest Payment so deferred, other than in accordance with theprovisions below relating to the payment of Deferred InterestPayments.

All Deferred Interest Payments (including interest thereon whichaccrues as provided in “Terms and Conditions of the Notes”) must bepaid in full on the Payment Reference Date, being the earliest of:

(i) the Business Day falling 5 Business Days after the date on whichthe Trigger Event is no longer subsisting;

(ii) the date which is the fifth anniversary of the date on which anyof the then outstanding Deferred Interest Payments was initiallydeferred;

(iii) the Maturity Date;

(iv) the date on which the Notes are otherwise redeemed; and

(v) the date on which the Trustee takes any action in respect of anEvent of Default which results from an order being made forthe winding-up of the Issuer or the Guarantor.

Mandatory Deferral ofInterest Payments:

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OVERVIEW


Early Redemption: The Notes will mature on the Maturity Date unless redeemed earlier.

Prior to the Maturity Date, the Issuer may redeem the Notes (in wholebut not in part) on the Optional Redemption Date or on anysubsequent Floating Interest Payment Date at their Principal Amount(plus any accrued interest up to (but excluding) the Early RedemptionDate and any outstanding Deferred Interest Payments, including anyamount of interest accrued thereon in accordance with Condition4.3).

Following a Gross-up Event or a Change of Control Event, all of theNotes may at the option of the Issuer be redeemed (in the case of aGross-up Event, prior to (but excluding) the Optional RedemptionDate and, in the case of a Change of Control Event, at any time) attheir Principal Amount (plus any accrued interest up to (butexcluding) the Early Redemption Date and any outstanding DeferredInterest Payments, including any amount of interest accrued thereonin accordance with Condition 4.3).

Following a Tax Event, a Capital Event or an Accounting Event, all ofthe Notes may at the option of the Issuer be redeemed at any timeprior to (but excluding) the Optional Redemption Date at their EarlyRedemption Amount.

For further details, see Condition 5 of “Terms and Conditions of theNotes”.

If both a Change of Control Event and a Rating Downgrade occursand are subsisting following the end of the Change of Control Period,and the Issuer chooses not to exercise its right to redeem the Notes,Noteholders will have the option to require the Issuer to redeem or, atthe Issuer’s option, purchase (or procure the purchase of), the Notesof that Noteholder at their Principal Amount plus any interest accruedup to (but excluding) the Put Date and any outstanding DeferredInterest Payments (including any amount of interest accrued thereonin accordance with Condition 4.3).

For further details, see Condition 5.7 of “Terms and Conditions of theNotes”.

Purchases: The Issuer, the Guarantor or any of its Wholly Owned Subsidiariesmay, in compliance with applicable laws, at any time following31 December 2015, purchase Notes in any manner and at any price.Such acquired Notes may be surrendered for cancellation or held orresold. In the event that the Issuer, the Guarantor and/or any WhollyOwned Subsidiary has, individually or in aggregate, purchased (andnot resold) or redeemed Notes equal to or in excess of 80 per cent. ofthe aggregate Principal Amount of the Notes issued on the Issue Date,the Issuer may redeem the remaining Notes (in whole but not in part):(i) at any time prior to the Optional Redemption Date, at the EarlyRedemption Amount; and (ii) on or on any Floating Interest PaymentDate after the Optional Redemption Date, at their Principal Amount(plus any accrued and outstanding interest and any Deferred InterestPayments).

Replacement capital covenant: The Issuer and the Guarantor intend to enter into a replacementcapital covenant for the benefit of one or more designated series of theIssuer’s debt securities. It is anticipated that the terms of such

Put Option on a Changeof Control:

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OVERVIEW


replacement capital covenant will provide that neither the Issuer northe Guarantor, during the period from the Issue Date until thetermination of the replacement capital covenant (and subject tocertain circumstances in which it will cease to apply), will redeem orpurchase any Notes, and the Guarantor will not permit anySubsidiary to purchase any Notes, unless and to the extent that theaggregate redemption or purchase price is equal to or less than the netproceeds received by the Issuer, the Guarantor or its Subsidiariesduring the 12 months prior to such redemption or purchase date,from new issuances of qualifying securities (subject to certainexemptions).

The Issuer will pay such Additional Amounts as may be necessary inorder that the net payment received by each Noteholder in respect ofthe Notes, after withholding for any taxes imposed by tax authoritiesin the Relevant Jurisdiction upon payments made by or on behalf ofthe Issuer in respect of the Notes, will equal the amount which wouldhave been received in the absence of any such withholding taxes,subject to customary exceptions, as described in Condition 7 of theConditions of the Notes.

Meetings of Noteholders: The Conditions of the Notes and the Trust Deed contain provisionsfor calling meetings of Noteholders to consider matters affecting theirinterests generally. These provisions permit defined majorities to bindall Noteholders including Noteholders who did not attend and vote atthe relevant meeting and Noteholders who voted in a mannercontrary to the majority.

The Trustee may, without the consent of Noteholders, agree to (i) anymodification of, or to the waiver or authorisation of any breach orproposed breach of, any of the provisions of Notes or (ii) thesubstitution of the Guarantor or a subsidiary of the Guarantor asprincipal debtor under any Notes in place of the Issuer, in each case,in the circumstances and subject to the conditions described inConditions 14 and 15 of “Terms and Conditions of the Notes”.

Listing and admission to trading: Application has been made to the UK Listing Authority for€715,000,000 in principal amount of Notes to be admitted to theOfficial List and to the London Stock Exchange for the Notes to beadmitted to trading on the London Stock Exchange’s regulatedmarket.

Governing Law: The Notes will be governed by, and construed in accordance with,English law, with the exception that the subordination provisions willbe construed in accordance with the laws of Australia.

Form: The Notes will be issued in bearer form in denominations of €50,000and integral multiples of €1,000 in excess thereof.

Credit Rating: The Notes are expected to be assigned on issue a rating of BB byStandard & Poor’s Ratings Services, a division of The McGraw-HillCompanies Inc. A credit rating is not a recommendation to buy, sellor hold securities and may be subject to suspension, reduction orwithdrawal at any time by the assigning rating agency.

Selling Restrictions: The Notes and the Guarantee have not been and will not be registeredunder the Securities Act and, subject to certain exceptions, may not beoffered or sold within the United States. The Notes may be sold in

Modification, Waiver andSubstitution:

Withholding Tax andAdditional Amounts:

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OVERVIEW


other jurisdictions (including Australia) only in compliance withapplicable laws and regulations. See “Subscription and Sale” below.

Use of Proceeds: The proceeds of the issue of the Notes will be applied by the Issuer forits general corporate purposes and (in whole or in part) to fund itsgrowth strategy.

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OVERVIEW


RISK FACTORSEach of the Issuer and the Guarantor believes that the following factors may affect its ability to fulfil itsobligations under the Notes. All of these factors are contingencies which may or may not occur and neitherthe Issuer nor the Guarantor is in a position to express a view on the likelihood of any such contingencyoccurring.

In addition, factors that are material for the purpose of assessing the market risks associated with the Notesare described below.

Each of the Issuer and the Guarantor believes that the factors described below represent the principal risksinherent in investing in the Notes, but the inability of the Issuer or the Guarantor to pay interest, principalor other amounts on or in connection with the Notes may occur for other reasons which may not beconsidered significant risks by the Issuer and the Guarantor based on information currently available tothem or which they may not currently be able to anticipate. Prospective investors should also read thedetailed information set out elsewhere in this Prospectus and reach their own views prior to making anyinvestment decision.

Please refer to “Description of the Guarantor” and “Glossary” for definitions of terms used but nototherwise defined in this section.

Factors that may affect the Issuer’s ability to fulfil its obligations under the Notes and theGuarantor’s ability to fulfil its obligations under the Guarantee

The risk factors described below apply in the context of the Guarantor and the Group and are alsoapplicable to the Issuer.

Finance vehicle

The Issuer is a finance vehicle and acts as the principal finance company for the Group. The Issuer’s solebusiness is raising debt to be on-lent to companies within the Group and to fund their investmentprogrammes and to manage cash generated from Group operations. Accordingly, substantially all the assetsof the Issuer are loans and advances made to other members of the Group. The ability of the Issuer to satisfyits obligations in respect of the Notes will depend upon payments made to it by other members of the Groupin respect of loans and advances made by it.

Volatility in oil and gas prices

The Guarantor’s business relies primarily on the production and sale of oil and gas products (includingLNG) to a variety of buyers under a range of short-term and long-term contracts. International oil and gasprices have fluctuated widely in recent years and may continue to fluctuate significantly in the future. TheGuarantor cannot predict future oil and gas prices.

Demand for, and pricing of, LNG remains sensitive to external economic and political factors, includingcrude oil prices and buyer preferences as between LNG and oil. Crude oil prices are affected by numerousfactors beyond the Guarantor’s control, including worldwide oil supply and demand, the level of economicactivity in the markets that the Guarantor serves, regional political developments and military conflicts inoil producing countries and regions (in particular, the Middle East), the weather, the ability of theOrganization of the Petroleum Exporting Countries (OPEC) and other producing nations to influenceglobal production levels and prices, the price and availability of new technology and the availability andcost of alternative sources of energy. The international price for crude oil has historically been volatile.Accordingly, it is impossible to predict future crude oil price movements with certainty.

Fluctuations in the global oil and global and domestic gas market, in particular, any extended or substantialdecline in oil and gas prices or demand for oil and gas, may materially affect the Guarantor’s financialcondition and results of operations. Increases and decreases in oil and gas prices affect the amount of cashflow available for capital expenditure and the Guarantor’s ability to borrow money or raise additional

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capital. Lower oil and gas prices may also reduce the amount of oil and natural gas that the Guarantor canproduce economically.

LNG supply contracts

The Guarantor’s market share of LNG supply contracts and, therefore, its profits may be adversely affectedby the introduction of new LNG facilities and the expansion, by the Guarantor’s competitors, of theirexisting LNG facilities in the global LNG market. Such new facilities or expansion of existing facilities couldincrease the global supply of LNG, thereby potentially lowering the price of LNG.

Replacement of existing reserves

The Guarantor’s future long-term results are directly related to the success of efforts to replace existing oiland gas reserves as they are utilised, either through exploration or acquisition. In general, the volume ofproduction from oil and gas properties declines as reserves are depleted, although the rate of declinedepends on the characteristics of a particular reserve. The Guarantor’s reserves will decline as they areutilised unless the Guarantor acquires properties with proved reserves or conducts successful explorationand development activities. The Guarantor’s aim is to continue to replace its utilised reserves but given thatexploration is a high risk endeavour subject to geological, technological and environmental hazards and thatthere is no certainty that acquisitions will continue to be made, no assurance can be given that theGuarantor will be able to continue to replace its utilised reserves with additional proved reserves.

Acquisition and divestment activities

The Guarantor from time to time evaluates acquisition and divestment opportunities across its range ofassets and businesses. Any acquisitions or disposals would lead to a change in the sources of the Guarantor’searnings and result in variability of earnings over time. Any acquisitions or disposals could also lead tochanges in future capital and operating expenditure obligations which may impact the Guarantor’s fundingrequirements. They may also give rise to liabilities. Integration of new businesses into the Santos group maybe costly and may occupy a large amount of management’s time. There is no certainty that the Guarantorwill complete any acquisition or divestment that it has entered into, including the sale of its Evans Shoalinterests to Magellan announced on 26 March 2010. On 9 September 2010, the Guarantor announced thesale of a 15 per cent. interest in the GLNG Project to Total E&P Australia which is subject to certaincustomary conditions including the approval of the Australian Foreign Investment Review Board. While itis expected that these conditions will be satisfied to allow completion to occur, there is no certainty that suchapprovals will be forthcoming and a failure to complete this sale would have an adverse impact on theGuarantor’s future funding requirements. The Guarantor has also announced the possibility of a further selldown of an interest in the GLNG Project, but there is no certainty that it will be successful in doing so.

Projects risks

The Guarantor is investing a significant amount of capital in the PNG LNG and GLNG Projects. These andother projects may be delayed or be unsuccessful for many reasons, including unanticipated financial,operational or political events, the failure to receive state and federal government environmental and otherapprovals, whether a final investment decision is reached, cost overruns, decline in LNG prices or demand,equipment and labour shortages, technical concerns including possible reserves and deliverabilitydifficulties, environmental and water disposal impacts, increases in operating cost structures, contractualissues associated with GLNG upstream joint venture alignment or with major engineering procurement andconstruction contracts, community or industrial actions or other circumstances which may result in thedelay, suspension or termination of the projects, the total or partial loss of the investment and a materialadverse effect on the Guarantor’s business, results of operations, financial condition and credit rating.

In addition, sales contracts with various counterparties are expected to be entered into in relation to thePNG LNG and GLNG projects. The ability of the counterparties to meet their commitments under such anarrangement may impact on the Guarantor’s investment in these projects.

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Project developments in which the Guarantor is, or may become, involved are subject to risks, includingtechnical risk. Changes in reserves, liquids and gas prices, exchange rates, construction costs, designrequirements and delays in construction may adversely affect the commerciality and economics of projectdevelopment.

Operational risk

Industrial disputes, work stoppages and accidents, natural disasters, drilling and production results, reserveestimates, environmental impacts and other factors all contribute towards operational risk which may havean adverse effect on the Guarantor’s profitability and results of operations. Appropriate insurance can onlyprovide protection for some, but not all, of the costs that may arise from unforeseen events.

Counterparty risk

As part of its ongoing commercial activities, the Guarantor enters into sales contracts with various thirdparties for the sale of natural gas, LNG and other products. If any counterparty were unable to meet itscommitments to the Guarantor under such contracts, in whole or in part, and if there is no form of securityin place, there is a risk that future anticipated revenues would reduce unless and until the Guarantor wasable to secure an alternative customer. Therefore, such failure of a counterparty to a sales contract couldmaterially and adversely affect the Guarantor’s financial condition and credit rating. Counterparty risk alsoarises when the Guarantor enters into contracts for committed lines of credit and derivatives with financialinstitutions. The Guarantor’s risk to counterparty credit risk is reduced by the implementation of creditpolicies that apply to sales contracts, banking arrangements and derivative contracts.

Currency risk

The functional and presentational currency of the Guarantor is the Australian dollar. Some subsidiaries havea functional currency of U.S. dollars and the results of their operations are translated into Australian dollars.The Guarantor may incur expenditure in the local currencies of the countries in which it operates or in othercurrencies for supplies of materials and services. The Guarantor is exposed to foreign exchange ratefluctuations in the Australian dollar value of foreign currency-denominated revenues, expenses, assets andliabilities. Accordingly, a change in the value of the Australian dollar relative to the relevant local currencyand/or U.S. dollar may have an effect on the net asset value and profit and loss of the Guarantor inAustralian dollars.

Market risk

The Guarantor borrows money domestically and internationally on interest rates that are either fixed orfloating. A rise in interest rates, either domestically or internationally, would affect the Guarantor’s cost ofborrowing and would adversely affect its business and financial condition.

The Guarantor, from time to time, hedges some of its commodity price, exchange rate and interest rate risks.While such hedging activities may provide downside risk protection for the Guarantor, it is also possiblesuch activities may limit its upside benefit potential or give rise to additional losses. The management ofinterest rate risk, foreign exchange risk and commodity risks are governed by treasury policies which areapproved by the Board of the Guarantor.

Access to capital

The Guarantor’s business and, in particular, development of large scale projects, relies on access to debt andequity financing. The Guarantor’s ability to secure financing, or financing on acceptable terms may bematerially adversely affected by volatility in the financial markets, globally or affecting a particulargeographic region, industry or economic sector, or by a downgrade in its credit rating (the Guarantor iscurrently rated BBB+ by S&P). For these or other reasons, financing may be unavailable or the cost offinancing may be significantly increased. Such inability to obtain, or increase to the costs of obtaining,financing could materially and adversely affect the Guarantor’s business, results of operations and financialcondition.

RISK FACTORS

Mineral Resources Rent Tax and other Australian taxes

In addition to the standard level of income tax imposed on all industries, companies in the petroleum andgas industries are required to pay government royalties, direct and indirect taxes and other imposts in thejurisdictions in which they operate. The profitability of companies in these industries can be affected bychanges in government taxation and royalty policies or in the interpretation or application of such policies.On 2 July 2010, the Australian Labor government announced that it intends to introduce a MineralsResource Rent Tax (MRRT) and an expanded Petroleum Resource Rent Tax (PRRT) from 1 July 2012. Theexisting PRRT regime applies to offshore oil and gas projects. The MRRT was stated to be intended to applyto iron ore and coal in Australia, with all other minerals excluded, whilst the expanded PRRT was statedto be intended to apply to onshore and offshore oil, gas and coal seam methane projects. The recentAustralian federal election on 21 August 2010 initially produced an inconclusive result as neither majorparty was able to secure the requisite number of seats in the House of Representatives to form a governmentin its own right. On 7 September 2010, the Australian Labor Party secured the support of a further twoindependent members of Parliament such that it had the requisite backing to form a minority government.Accordingly, it is unclear whether and to what extent the MRRT and expanded PRRT will be implemented.Further, assuming implementation, exact details concerning the proposed changes to the tax regime remainuncertain and the extent to which they may impact on the Guarantor and/or its operations is yet to bedetermined. The possible introduction of the expanded PRRT has the potential to increase the Guarantor’seffective tax rate, which could adversely affect the Guarantor’s financial performance, financial position,cash flows and share price.

Environmental risk

Oil and gas exploration and production is an environmentally hazardous activity which may give rise tosubstantial costs for environmental rehabilitation, damage control and losses.

With increasingly heightened government and public sensitivity to environmental sustainability,environmental regulation is becoming more stringent. The Guarantor could be subject to increasingenvironmental responsibility and liability, including laws and regulations dealing with air quality, water andnoise pollution and other discharges of materials into the environment, plant and wildlife protection, thereclamation and restoration of certain of its properties, greenhouse gas emissions, the storage, treatment anddisposal of wastes and the effects of its business on the water table and groundwater quality.

Sanctions for non-compliance with these laws and regulations may include administrative, civil and criminalpenalties, revocation of permits, reputational issues, increased licence conditions and corrective actionorders. These laws sometimes apply retroactively. In addition, a party can be liable for environmentaldamage without regard to that party’s negligence or fault.

Increased costs associated with regulatory compliance and/or with litigation could have a material andadverse effect on the Guarantor’s earnings and cash flows.

Carbon emissions

There is growing recognition that greenhouse gas emissions potentially contribute to global warming,greenhouse effects and climate change. A number of governments or governmental bodies, including thosein Australia, have introduced, or are contemplating, regulatory change in response to the potential impactsof climate change and greenhouse gas emissions.

The Australian Labor government, under former Prime Minister Kevin Rudd, proposed a national emissionstrading scheme (the Carbon Pollution Reduction Scheme (CPRS)). The proposed CPRS would requirecertain carbon emitters to purchase permits which reflect their emissions volume, subject to price caps. Ifthe CPRS is introduced in the form previously proposed (which is not certain), the Guarantor may beexposed to additional operating costs which will have an adverse impact on its financial performance. TheCPRS legislation was not passed by the Australian parliament. On 27 April 2010, the Australian Laborgovernment announced the delay of the implementation of the CPRS until after the end of the currentcommitment period of the Kyoto Protocol, at the end of 2012, or until the domestic and international

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political circumstances improve. In the lead up to the recent federal election, the Australian Labor Partymaintained its commitment to a CPRS following that delay, but also proposed further public consultationmeasures. The Coalition (comprised of a coalition of the centre-right Liberal Party of Australia and thecentre-right National Party of Australia) has proposed an alternative ‘direct action’ approach. TheAustralian Greens support stronger responses. A carbon tax is a further alternative, including as an interimmeasure before an emissions trading scheme operates. Likely global action is also uncertain.

The recently formed minority Labor government has released an agreement that was signed with theregional Independents Rob Oakeshott MP and Tony Windsor MP. Amongst the issues canvassed in theagreement is detail regarding the formation of a Climate Change Committee, which will encompass expertsand parliamentary representatives. The Climate Change Committee will review carbon pricing and conductpublic forums to discuss social and economic impacts of climate change and climate change mitigationpolicies.

Although the precise terms of any potential legislation are unclear, from a medium and long-termperspective, the regulation of greenhouse gas emissions is likely to become more stringent and there arelikely to be changes in the returns on the Guarantor’s greenhouse gas-intensive assets and energy-intensiveassets as a result of regulatory impacts on the industry in which the Guarantor operates. It will depend on,among other things, the final form of greenhouse gas emissions regulation, commercial arrangements,energy efficiency, the development of low emissions technology and the carbon price.

Until the final form of greenhouse gas emissions regulation is known, the impact on the Guarantor’sbusiness, results of operations and financial condition is uncertain.

Government actions and regulatory risk

The Guarantor’s business is subject to various national and local laws and regulations, in each of thecountries in which it operates, relating to the development, production, marketing, pricing, transportationand storage of its products. A change in the laws which apply to the Guarantor’s business or the way inwhich it is regulated could have a material adverse effect on its business, results of operations and financialcondition. Other changes in the regulatory environment (including applicable accounting standards) mayhave a material adverse effect on the carrying value of material assets or otherwise have a material adverseeffect on the Guarantor’s business, results of operations and financial condition.

The Guarantor’s operations could also be affected by government actions in Australia and other countriesor jurisdictions in which it has interests. These actions include government legislation, governmentapprovals, guidelines and regulations in relation to the environment, the petroleum and gas industries,competition policy, native title and cultural heritage. Such actions could impact on land access, the grantingof licences and other petroleum and gas interests, the approval of developments and freedom to conductoperations.

The possible extent of introduction of additional legislation, regulations, guidelines or amendments toexisting legislation that might affect the Guarantor’s business is difficult to predict. Any such governmentaction may require increased capital or operating expenditures and could prevent or delay certainoperations by the Guarantor, which could have a material adverse effect on the Guarantor’s business andfinancial condition.

Political risk

The Guarantor is subject to a risk that it may not be able to carry out its operations as it intends to or enterinto new operations, nor ensure the security of its assets. In addition, it is subject to risks of, among otherthings, loss of revenue, property and equipment as a result of hazards such as expropriation, border andterritorial disputes, war, insurrection and acts of terrorism and other political risks and increases in taxesand government royalties. The Guarantor has operations outside Australia in Indonesia, Kyrgyz Republic,India, Bangladesh, Vietnam, Papua New Guinea and Timor-Leste.

The Guarantor’s interests are subject to political, economic, social and other uncertainties, including the riskof civil rebellion, expropriation, nationalisation, land ownership disputes, renegotiation or termination of

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existing contracts, licences and permits or other agreements, changes in laws or taxation policies, currencyexchange restrictions and changing political conditions. The effects of these factors are difficult to predictand any combination of one or other of the above may have a material adverse effect on the operation ordevelopment of the Guarantor’s business and even render it uneconomic.

Joint venture risk

The Guarantor’s business is carried out through joint ventures. Some of these joint venture assets aremanaged and operated by the Guarantor or its subsidiaries, and some are “non-operated” (that is, managedand operated by other international and domestic exploration and production companies). The use of jointventures is common in the exploration and production industry and serves to mitigate the risk andassociated cost of exploration, production and operational failure. However, failure of agreement oralignment with joint venture partners or the failure of third party joint venture operators could have amaterial effect on the Guarantor’s business. The failure of joint venture partners to meet their commitmentsand share of costs and liabilities can result in increased costs to the Guarantor.

Land resource and tenure

The Guarantor has investments and operations in several countries where title to land and access and otherrights with respect to land and resources (including indigenous title) may be complex and unclear. Fromtime to time, these complexities and uncertainties can result in disputes with local groups and/or partiesrepresenting local interests. The outcome of these disputes may have an adverse impact on the Guarantor’sassets (including its ability to develop these assets) in the relevant jurisdictions. A number of the Guarantor’sAustralian interests are located within areas which are the subject of one or more claims or applications fornative title determinations. The Guarantor does not believe that the outcome of those claims or applicationswill significantly impact on its asset base, however, native title decisions have the potential to introduceroyalty payments and delay in the grant of mineral and petroleum tenements and other licences andconsequently may impact generally on the timing of exploration, development and productions operations.

Banjar Panji-1 Well Incident

In May 2006, a non-toxic mudflow incident occurred at the Banjar Panji-1 Well near Surabaya, East Java.The incident resulted in significant property damage, the interruption of local infrastructure and the needto relocate a significant number of local villages. In December 2008, the Guarantor’s subsidiary (SantosBrantas) transferred its 18 per cent. non-operating interest in the project to Minarak Labuan Co (L) Ltd(Minarak), with approval from the relevant Indonesian regulator. The transaction also included a releasefrom the remaining joint venturers in the project from all liability (if any) to them in relation to the projectand the mudflow incident. However, the transaction did not release Santos Brantas from liability to thirdparties. There are currently no third party claims pending and no matters have come to the Guarantor’sattention to indicate that a third party has or is likely to claim against Santos Brantas in respect of theincident. Consistent with the Guarantor’s view that the chance of a third party claim being made is unlikelyand, if such a claim were made, it would be able to successfully defend those claims, no provision for anyfuture costs in relation to the incident and no contingent liability disclosures were made in the Guarantor’s30 June 2010 financial statements.

Key Personnel

The Guarantor’s future success depends on the expertise and continued service of certain key executives andtechnical personnel. Although the Guarantor enters into employment and incentive arrangements with suchpersonnel to secure their services, the Guarantor cannot guarantee the retention of their services. Should keypersonnel leave, the Guarantor’s business, its results of operations and financial condition may be adverselyaffected.

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Estimates of oil and gas resources are uncertain

Calculations of recoverable oil and gas resources contain significant uncertainties, which are inherent in thereservoir geology, the seismic and well data available and other factors such as project development andoperating costs, together with commodity prices. This uncertainty is often expressed as a range of resourcelevels with associated probabilities. During the course of appraisal, development and continuing operations,the increased quantity and variety of data will generally improve the accuracy of the resource estimate andnarrow the range of uncertainty. However, in some cases the stated reserves may move significantly awayfrom the previous estimates, either upwards or downwards.

Exploration and production licences may be withdrawn

The Guarantor’s exploration and prospective production are dependent upon the granting and maintenanceof appropriate licences, permits and regulatory consents (authorisations) which may not be granted or maybe withdrawn or made subject to limitations at the discretion of, inter alia, government or regulatoryauthorities. Although the authorisations may be renewed following expiry or granted (as the case may be),there can be no assurance that such authorisations will be continued, renewed or granted or as to the termsof such renewals or grants. Moreover, if the Guarantor does not meet its work and/or expenditureobligations under permits and licences, this may lead to dilution of its interest in, or the loss of, such permitsand licences.

Factors which are material for the purpose of assessing the market risks associated with theNotes

The Notes may not be a suitable investment for all investors

Each potential investor in the Notes must determine the suitability of that investment in light of its owncircumstances. In particular, each potential investor should:

(i) have sufficient knowledge and experience to make a meaningful evaluation of the Notes, the meritsand risks of investing in the Notes and the information contained in this Prospectus or any applicablesupplement;

(ii) have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of itsparticular financial situation, an investment in the Notes and the impact the Notes will have on itsoverall investment portfolio;

(iii) have sufficient financial resources and liquidity to bear all of the risks of an investment in the Notes,including where the currency for principal or interest payments is different from the potentialinvestor’s currency;

(iv) understand thoroughly the terms of the Notes and be familiar with the behaviour of any relevantfinancial markets; and

(v) be able to evaluate (either alone or with the help of a financial adviser) possible scenarios foreconomic, interest rate and other factors that may affect its investment and its ability to bear theapplicable risks.

The Notes are complex investment securities. Sophisticated institutional investors generally do not purchasecomplex investment securities as stand-alone investments. They purchase complex investment securities asa way to reduce risk or enhance yield with an understood, measured, appropriate addition of risk to theiroverall portfolios. A potential investor should not invest in the Notes unless it has the expertise (either aloneor with a financial adviser) to evaluate how the Notes will perform under changing conditions, the resultingeffects on the value of the Notes and the impact this investment will have on the potential investor’s overallinvestment portfolio.

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The Notes are subordinated obligations

The Notes will be subordinated obligations of the Issuer and the Notes will rank pari passu with each otherin a winding-up of the Issuer. Upon the occurrence of any winding-up proceedings of the Issuer, paymentson the Notes will be subordinated in right of payment to the prior payment in full of all other liabilities ofthe Issuer, except for obligations which rank equally with the Notes.

Similarly, the Guarantor’s obligations under the Guarantee are subordinated obligations of the Guarantor.Upon the occurrence of any winding-up proceedings of the Guarantor, the Guarantor’s obligations underthe Guarantee will be subordinated in right of payment to the prior payment in full of all other liabilities ofthe Issuer, except for obligations which rank equally with the Guarantee.

Holders of the Notes are advised that unsubordinated liabilities of the Issuer or the Guarantor may alsoarise out of events that are not reflected on the balance sheet of the Issuer or the Guarantor (as the case maybe), including, without limitation, the issuance of guarantees on an unsubordinated basis. Claims madeunder such guarantees will become unsubordinated liabilities of the Issuer or the Guarantor (as the case maybe) that in a winding-up of the Issuer or the Guarantor (as the case may be) will need to be paid in fullbefore the obligations under the Notes or the Guarantee (as the case may be) may be satisfied.

Under certain conditions, interest payments under the Notes must be deferred

If there is a Trigger Event and the S&P Rating Criteria is satisfied, the Issuer will be obliged to defer interestpayments whilst that Trigger Event is continuing (as defined and further described in Condition 4.3 of“Terms and Conditions of the Notes“). Deferred Interest Payments will only be satisfied in certaincircumstances (as set out in Condition 4.4 of “Terms and Conditions of the Notes”). While the deferral ofinterest payments continues, the Issuer may make payments on any instrument ranking senior, pari passu orsubordinated to the Notes.

Any deferral of interest payments will likely have an adverse effect on the market price of the Notes. Inaddition, as a result of the interest deferral provision of the Notes, the market price of the Notes may bemore volatile than the market prices of other debt securities on which interest accrues that are not subjectto such deferrals and may be more sensitive generally to adverse changes in the Issuer’s financial condition.

The Notes are long-dated securities

The Notes will mature on the Floating Interest Payment Date falling in September 2070 and, although theIssuer may redeem the Notes in certain circumstances prior to such date, the Issuer is under no obligationto do so. Further, the Issuer and the Guarantor have entered into a replacement capital covenant (asdescribed in “General Information“) which may limit the circumstances in which the Issuer may choose toredeem the Notes. The Holders have no right to call for the redemption of Notes except in the limitedcircumstances following a Change of Control Event (as set out in Condition 5.7 of “Terms and Conditionsof the Notes”). Holders can only declare the Notes due and payable in certain circumstances relating topayment default and insolvent winding-up of the Issuer or the Guarantor (see Condition 10 of “Terms andConditions of the Notes“). Therefore, Holders should be aware that they may be required to bear thefinancial risks associated with an investment in long-term securities.

The Issuer may redeem the Notes under certain circumstances

Holders should be aware that the Notes may be redeemed at the option of the Issuer (in whole but not inpart) at their Principal Amount (plus any accrued and outstanding interest and any outstanding DeferredInterest Amounts) on 22 September 2017 or on any Floating Interest Payment Date thereafter. The Notesare also subject to redemption (in whole but not in part) at the Issuer’s option upon the occurrence of aGross-Up Event, Change of Control Event, Tax Event, Capital Event or Accounting Event (each as definedin Condition 5 of “Terms and Conditions of the Notes”) or if the outstanding Principal Amount of theNotes falls below 20 per cent. of the original outstanding Principal Amount. The relevant redemptionamount may be less than the then current market value of the Notes.

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No limitation on issuing senior or pari passu securities

There is no restriction on the amount of securities or other liabilities which the Issuer or the Guarantor mayissue or incur and which rank senior to, or pari passu with, the Notes or the Guarantee (as the case maybe). The issue of any such securities or the incurrence of any such other liabilities may reduce the amount(if any) recoverable by Holders on a winding-up of the Issuer or the Guarantor (as the case may be) and/ormay increase the likelihood of a deferral of Interest Payments under the Notes.

Fixed rate securities have a market risk

The Notes will bear interest at a fixed rate until 22 September 2017. A holder of a security with a fixedinterest rate is exposed to the risk that the price of such security falls as a result of changes in the currentinterest rate on the capital market (the Market Interest Rate). While the nominal interest rate of a securitywith a fixed interest rate is fixed during the life of such security or during a certain period of time, theMarket Interest Rate typically changes on a daily basis. A change of the Market Interest Rate causes theprice of such security to change. If the Market Interest Rate increases, the price of such security typicallyfalls. If the Market Interest Rate falls, the price of a security with a fixed interest rate typically increases.Investors should be aware that movements of the Market Interest Rate can adversely affect the price of theNotes and can lead to losses for the Holders if they sell the Notes.

Floating rate securities may suffer a decline in interest rate

If not previously redeemed, from 22 September 2017 until their redemption the Notes will bear interest ata floating rate. A holder of a security with a floating interest rate is exposed to the risk of fluctuating interestrate levels and uncertain interest income. Fluctuating interest rate levels make it impossible to determine theyield of such securities in advance.

Risks related to the Notes generally

Set out below is a brief description of certain risks relating to the Notes generally:

Modification, waivers and substitution

The conditions of the Notes and the Trust Deed contain provisions for calling meetings of Noteholders toconsider matters affecting their interests generally. These provisions permit defined majorities to bind allNoteholders including Noteholders who did not attend and vote at the relevant meeting and Noteholderswho voted in a manner contrary to the majority.

The conditions of the Notes also provide that the Trustee may, without the consent of Noteholders, agreeto (i) any modification of, or to the waiver or authorisation of any breach or proposed breach of, any of theprovisions of Notes or (ii) determine without the consent of the Noteholders that any Event of Default orPotential Event of Default shall not be treated as such or (iii) the substitution of the Guarantor or asubsidiary of the Guarantor as principal debtor under any Notes in place of the Issuer, in the circumstancesdescribed in Conditions 14 and 15 of “Terms and Conditions of the Notes“.

Change of law

The conditions of the Notes are based on laws in effect as at the date of this Prospectus. No assurance canbe given as to the impact of any possible judicial decision or change to relevant law or administrativepractice after the date of this Prospectus.

Denominations involve integral multiples: definitive Notes

The Notes have denominations consisting of a minimum of €50,000 plus one or more higher integralmultiples of €1,000. It is possible that the Notes may be traded in amounts that are not integral multiplesof €50,000. In such a case a holder who, as a result of trading such amounts, holds an amount which is lessthan €50,000 in his account with the relevant clearing system at the relevant time may not receive a

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RISK FACTORS

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definitive Note in respect of such holding (should definitive Notes be printed) and would need to purchasea principal amount of Notes such that its holding amounts to €50,000.

If definitive Notes are issued, holders should be aware that definitive Notes which have a denomination thatis not an integral multiple of €50,000 may be illiquid and difficult to trade.

Risks related to the market generally

Set out below is a brief description of the principal market risks, including liquidity risk, exchange rate riskand credit risk:

The secondary market generally

The Notes may have no established trading market when issued, and one may never develop. If a marketdoes develop, it may not be very liquid. Illiquidity may have a severely adverse effect on the market valueof the Notes. Investors may not be able to sell their Notes easily or at prices that will provide them with ayield comparable to similar investments that have a developed secondary market.

Exchange rate risks and exchange controls

The Issuer will pay principal and interest on the Notes, and the Guarantor will make any payments underthe Guarantee, in euro. This presents certain risks relating to currency conversions if an investor’s financialactivities are denominated principally in a currency or currency unit (the Investor’s Currency) other thaneuro. These include the risk that exchange rates may significantly change (including changes due todevaluation of the euro or revaluation of the Investor’s Currency) and the risk that authorities withjurisdiction over the Investor’s Currency may impose or modify exchange controls. An appreciation in thevalue of the Investor’s Currency relative to euros would decrease (1) the Investor’s Currency-equivalent yieldon the Notes, (2) the Investor’s Currency equivalent value of the principal payable on the Notes and (3) theInvestor’s Currency equivalent market value of the Notes.

Government and monetary authorities may impose (as some have done in the past) exchange controls thatcould adversely affect an applicable exchange rate. As a result, investors may receive less interest orprincipal than expected, or no interest or principal.

Credit ratings may not reflect all risks

S&P have assigned a credit rating to the Notes. The rating may not reflect the potential impact of all risksrelated to structure, market, additional factors discussed above, and other factors that may affect the valueof the Notes. A credit rating is not a recommendation to buy, sell or hold securities and may be revised orwithdrawn by the rating agency at any time.

Legal investment considerations may restrict certain investments

The investment activities of certain investors are subject to investment laws and regulations, or review orregulation by certain authorities. Each potential investor should consult its legal advisers to determinewhether and to what extent (1) the Notes are legal investments for it, (2) the Notes can be used as collateralfor various types of borrowing and (3) other restrictions apply to its purchase or pledge of the Notes.Financial institutions should consult their legal advisers or the appropriate regulators to determine theappropriate treatment of the Notes under any applicable risk-based capital or similar rules.

CONDITIONS OF THE NOTESThe following, subject to alteration, are the terms and conditions of the Notes which will be endorsed oneach Note in definitive form (if issued).

The issue of the €650,000,000* Fixed to Floating Rate Subordinated Notes due 2070 (the Notes, whichexpression, unless the context otherwise requires, includes any further notes issued pursuant to Condition9 and forming a single series with the Notes) of Santos Finance Limited (the Issuer) are constituted by aTrust Deed dated 22 September 2010 (the Trust Deed) made between the Issuer, Santos Limited (theGuarantor) as guarantor and BNY Corporate Trustee Services Limited (the Trustee, which expressionincludes its successor(s)) as trustee for the holders of the Notes (the Noteholders) and the holders of theinterest coupons appertaining to the Notes (the Couponholders and the Coupons respectively, whichexpression, unless the context otherwise requires, includes the talons for further interest coupons (theTalons) and the holders of the Talons).

The statements in these Conditions include summaries of, and are subject to, the detailed provisions of theTrust Deed. Copies of the Trust Deed and the agency agreement dated 22 September 2010 (the AgencyAgreement) made between the Issuer, the Guarantor, The Bank of New York Mellon, London branch asinitial principal paying agent (in such capacity, the Principal Paying Agent, which expression includes anysuccessor thereto) and initial interest calculation agent (in such capacity, the Interest Calculation Agent,which expression includes any successor thereto) and the Trustee. Copies of the Trust Deed, the AgencyAgreement and the Calculation Agency Agreement (if any) are available for inspection during normalbusiness hours by the Noteholders and the Couponholders at the specified office of the Trustee, the PrincipalPaying Agent and of each of the other paying agents appointed under the Agency Agreement (together withthe Principal Paying Agent, the Paying Agents). The Noteholders and Couponholders are entitled to thebenefit of, are bound by, and are deemed to have notice of all the provisions of the Trust Deed and aredeemed to have notice of all of the provisions of the Agency Agreement and the Calculation AgencyAgreement (if any) applicable to them.

1. FORM, DENOMINATION AND TITLE

1.1 Form and denomination

The Notes are in bearer form, serially numbered, in the denominations of €50,000 and integral multiples of€1,000 in excess thereof (the Principal Amount) with Coupons and one Talon attached on issue.

1.2 Title

Title to the Notes and the Coupons will pass by delivery.

1.3 Noteholder absolute owner

The Issuer, the Guarantor, any Paying Agent and the Trustee may (to the fullest extent permitted byapplicable laws) deem and treat the bearer of any Note or Coupon as the absolute owner for all purposes(whether or not the Note or Coupon is overdue and notwithstanding any notice of ownership or writing onthe Note or Coupon or any notice of previous loss or theft of the Note or Coupon or of any trust or interesttherein) and will not be required to obtain any proof thereof or as to the identity of such bearer.

2. STATUS AND SUBORDINATION

2.1 Status

The Notes and the Coupons constitute direct, unconditional, unsecured and subordinated obligations of theIssuer and will at all times rank pari passu without any preference among themselves. The rights and claimsof the Noteholders and the Couponholders are subordinated as described in Condition 2.2.

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* If the Option is exercised this may increase to €715,000,000.

2.2 Subordination

The Noteholder Claims, including any claim in respect of Deferred Interest Payments, will, in the event thatan order is made, an effective resolution is passed or other action is taken for the Winding-Up of the Issuer(subject to and to the extent permitted by applicable law), rank in such Winding-Up:

(a) junior to the rights and claims of all Senior Creditors of the Issuer;

(b) pari passu with each other and with the rights and claims of any Parity Creditors or holders of ParityShares of the Issuer; and

(c) senior to the rights and claims of holders of the Issuer’s shares other than Parity Shares,

and, for the purposes of giving effect to the foregoing, in any Winding-Up of the Issuer the NoteholderClaims:

(i) are subordinated and postponed and subject in right of payment to payment in full of the rights andclaims of Senior Creditors of the Issuer, and may only be proved (to the extent otherwise provable)as a debt which is subject to and contingent upon prior payment in full of the rights and claims ofSenior Creditors of the Issuer; and

(ii) are further limited as to the amount provable (to the extent otherwise provable) in any winding-upof the Issuer to the extent necessary to ensure that, after the satisfaction of the Noteholder Claims (asso limited), the distribution payable in respect of the rights and claims of any holder of Parity Sharesin the Issuer is equal to the amount that would be payable in respect of such rights and claims if theMaximum Amount in respect of such shares was a debt provable in the winding-up of the Issuer withwhich the Noteholder Claims ranked equally under Condition 2.2(b).

In these conditions, references to the Maximum Amount in respect of a share is a reference to the maximumamount the holder of such a share would be entitled to receive (whether by way of return of capital,participation in any profits or surplus, payment of any debt due to the holder in its capacity as a memberor otherwise) in respect of such share assuming the Issuer or Guarantor (as the case may be) had sufficientassets to satisfy that entitlement after satisfaction of all claims ranking in priority to it.

In these Conditions, Winding-Up includes receivership or other appointment of a controller, deregistration,compromise, deed of arrangement, amalgamation, administration, reconstruction, winding up, dissolution,assignment for the benefit of creditors, arrangement or compromise with creditors or bankruptcy.

2.3 No set-off

To the extent and in the manner permitted by applicable law, no Noteholder or Couponholder may exercise,claim or plead any right of set-off, counterclaim, compensation or retention in respect of any amount owedto it by the Issuer in respect of, or arising from, the Notes and each Noteholder and Couponholder will, byvirtue of his holding of any Note, be deemed to have waived all such rights of set-off, counterclaim,compensation or retention.

3. GUARANTEE

3.1 Guarantee

The payment of the principal and interest in respect of the Notes and all other moneys payable by the Issuerunder or pursuant to the Trust Deed has been unconditionally and irrevocably guaranteed by the Guarantor(the Guarantee) in the Trust Deed.

3.2 Status of the Guarantee

The obligations of the Guarantor under the Guarantee constitute direct, unconditional, unsecured andsubordinated obligations of the Guarantor. The Noteholder Claims, including any claim under theGuarantee in respect of Deferred Interest Payments, will, in the event that an order is made or an effective

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CONDITIONS OF THE NOTES

resolution is passed or other action is taken for the Winding-Up of the Guarantor (subject to and to theextent permitted by applicable law), rank in such Winding-Up:

(a) junior to the rights and claims of all Senior Creditors of the Guarantor;

(b) pari passu with the rights and claims of any Parity Creditors or holders of Parity Shares of theGuarantor; and

(c) senior to the rights and claims of the holders of the Guarantor’s shares other than Parity Shares,

and, for the purposes of giving effect to the foregoing, in any Winding-Up of the Guarantor the NoteholderClaims:

(i) are subordinated and postponed and subject in right of payment to payment in full of the rights andclaims of Senior Creditors of the Guarantor, and may only be proved (to the extent otherwiseprovable) as a debt which is subject to and contingent upon prior payment in full of the rights andclaims of Senior Creditors of the Guarantor; and

(ii) are further limited as to the amount provable (to the extent otherwise provable) in any winding-upof the Guarantor to the extent necessary to ensure that, after the satisfaction of the NoteholderClaims (as so limited), the distribution payable in respect of the rights and claims of any holder ofParity Shares in the Guarantor is equal to the amount that would be payable in respect of such rightsand claims if the Maximum Amount in respect of such shares was a debt provable in the winding-upof the Guarantor with which the Noteholder Claims ranked equally under Condition 3.2(b).

3.3 No set-off

To the extent and in the manner permitted by applicable law, no Noteholder nor Couponholder mayexercise, claim or plead any right of set-off, counterclaim, compensation or retention in respect of anyamount owed to it by the Guarantor in respect of, or arising from, the Notes and each Noteholder andCouponholder will, by virtue of his holding of any Note, be deemed to have waived all such rights of set-off, counterclaim, compensation or retention.

4. INTEREST

4.1 Fixed Interest Periods

Unless previously redeemed in accordance with these Conditions and subject to the further provisions ofthis Condition 4, interest on the Notes from and including the Issue Date to but excluding the OptionalRedemption Date will be paid as follows:

(a) The Notes bear interest at the Fixed Rate of Interest on their Principal Amount. Such interest will bepayable semi-annually in arrear on 22 March and 22 September of each year commencing on 22March 2011 (each a Fixed Interest Payment Date). The amount of interest payable on each FixedInterest Payment Date is €2062.50 per €50,000 in principal amount of the Notes.

(b) When interest is required to be calculated in respect of a period of less than a full half-year, it shallbe calculated on the basis of (a) the actual number of days in the period from and including the datefrom which interest begins to accrue (the Accrual Date) to but excluding the date on which it fallsdue divided by (b) the actual number of days from and including the Accrual Date to but excludingthe next following Interest Payment Date multiplied by two.

4.2 Floating Interest Periods

Unless previously redeemed in accordance with these Conditions and subject to the further provisions ofthis Condition 4, interest on the Notes will be paid from and including the Optional Redemption Date to,but excluding, the calendar day of redemption of the Notes as follows:

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(a) The Notes will bear interest at a rate determined by the Interest Calculation Agent pursuant toCondition 4.2(d) below, payable quarterly in arrear on each Floating Interest Payment Date.

(b) If any Floating Interest Payment Date would otherwise fall on a calendar day which is not a BusinessDay, the Floating Interest Payment Date will be postponed to the next calendar day which is aBusiness Day unless it would thereby fall into the next calendar month, in which case the relevantFloating Interest Payment Date will be the immediately preceding Business Day.

(c) The rate of interest for each Floating Interest Period (the Floating Rate of Interest) will, except asprovided below, be the offered quotation (expressed as a percentage rate per annum) for three-monthdeposits in euro for that Floating Interest Period which appears on the Screen Page as of 11.00 a.m.(Central European Time) on the Interest Determination Date, plus the Floating Margin, all asdetermined by the Interest Calculation Agent.

If the Screen Page is not available or if no such quotation is available, the Interest Calculation Agentwill request each of the Reference Banks selected by the Issuer to provide the Interest CalculationAgent with its offered quotation (expressed as a percentage rate per annum) for the relevant FloatingInterest Period in an amount that is representative for a single transaction in the relevant market atthe relevant time to leading banks in the interbank market of the participating Member States in thethird stage of the Economic and Monetary Union, as contemplated by the Treaty on the Functioningof the European Union, for three-month deposits in euro. The offered quotations will be those offeredat approximately 11.00 a.m. (Central European Time) on the relevant Interest Determination Date.As long as two or more of the selected Reference Banks provide the Interest Calculation Agent withsuch offered quotations, the relevant Floating Rate of Interest for such Floating Interest Period willbe the arithmetic mean of such offered quotations (rounded if necessary to the nearest one thousandthof a percentage point, with 0.0005 being rounded upwards), plus the Floating Margin, all asdetermined by the Interest Calculation Agent.

If the Floating Rate of Interest cannot be determined in accordance with the foregoing provisions, theFloating Rate of Interest will be the offered quotation on the Screen Page, as described above, on thelast calendar day preceding the Interest Determination Date on which such quotation was displayed,plus the Floating Margin, all as determined by the Interest Calculation Agent.

Floating Margin means 6.851 per cent. per annum.

Screen Page means Reuters Page EURIBOR01 (or such other screen page of Reuters or such otherinformation service which is the successor to Reuters Page EURIBOR01 for the purpose of displayingsuch rates).

(d) The Interest Calculation Agent will, on or as soon as practicable after each Interest DeterminationDate, determine the Floating Rate of Interest for each Note and calculate the amount of interestpayable per Note for the relevant Floating Interest Period (the Floating Interest Amount). EachFloating Interest Amount will be calculated by multiplying the Floating Rate of Interest by the DayCount Fraction and the Principal Amount per Note and rounding the resulting figure to the nearestcent (with 0.5 or more of a cent being rounded upwards).

Day Count Fraction means, in respect of the calculation of the Floating Interest Amount for anyFloating Interest Period, or part thereof, the actual number of calendar days in that period divided by360.

(e) The Interest Calculation Agent will cause the Floating Rate of Interest, the Floating Interest Amountfor each €1,000 in principal amount of Notes for each Floating Interest Period, the relevant FloatingInterest Payment Date, and each Floating Interest Period (as the case may be), to be notified to theIssuer, the Guarantor and the Trustee promptly and, if required by the rules of any stock exchange onwhich the Notes are listed from time to time, to be notified to such stock exchange and to theNoteholders in accordance with Condition 13 without undue delay, but, in any case, not later thanon the fourth Business Day after their determination.

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(f) All notifications, opinions, determinations, certificates, calculations, quotations and decisions given,expressed, made or obtained for the purposes of the provisions of these Conditions, whether by theReference Banks (or any of them) or the Interest Calculation Agent will (in the absence of negligence,default or bad faith) be binding upon the Issuer, the Guarantor, the Trustee, the Interest CalculationAgent, the Paying Agents and all Noteholders and Couponholders and (in the absence of negligence,default or bad faith) no liability to the Issuer, the Guarantor or the Noteholders or the Couponholderswill attach to the Reference Banks (or any of them) or the Interest Calculation Agent in connectionwith the exercise or non-exercise by any of them of their powers, duties and discretions pursuant tosuch provisions.

4.3 Mandatory Deferral of Interest Payments

(a) If, on any day which is 8 Business Days prior to any Interest Payment Date, a Trigger Event existsand the Issuer fulfils the S&P Rating Criteria, the Interest Amount falling due on such InterestPayment Date will not be due and payable or be paid until the relevant Payment Reference Date andwill constitute a Deferred Interest Payment. Interest will accrue on each Deferred Interest Payment forso long as such Deferred Interest Payment remains outstanding at the same rate of interest as thePrincipal Amount of the Notes bears at such time and will be added to such Deferred Interest Payment(and thereafter bear interest accordingly) on each Interest Payment Date. Each Deferred InterestPayment and interest thereon will be payable in accordance with Condition 4.4.

(b) The Issuer will notify the Noteholders (in accordance with Condition 13.1), the Trustee and thePrincipal Paying Agent of the existence of the Trigger Event not less than 5 Business Days prior to therelevant Interest Payment Date. Deferral of interest pursuant to this Condition 4.3 will not constitutean Event of Default or a default of the Issuer or the Guarantor or any other breach of their respectiveobligations under the Notes or the Trust Deed or for any other purpose.

(c) A Trigger Event will exist if the corporate credit rating assigned by Standard & Poor’s to theGuarantor (and the Issuer, if it has been assigned such a credit rating), as published by Standard &Poor’s, is BB+ or lower.

(d) The Issuer fulfils the S&P Rating Criteria if:

(i) the Issuer or the Guarantor is rated by Standard & Poor’s; and

(ii) the Notes are eligible for the same or higher category of equity credit as was attributed to theNotes at the Issue Date, as notified from time to time to the Issuer by Standard & Poor’s.

4.4 Payment of Deferred Interest Payments

(a) A Deferred Interest Payment will become due and payable, and the Issuer must pay such DeferredInterest Payment (including any amount of interest accrued thereon in accordance with Condition4.3), on the relevant Payment Reference Date (in accordance with Condition 6), on the giving of atleast one Business Day’s prior notice to the Noteholders (in accordance with Condition 13), theTrustee and the Principal Paying Agent.

(b) Payment Reference Date means the date which is the earliest of:

(i) the Business Day falling 5 Business Days after the date on which the Trigger Event is no longersubsisting;

(ii) the date which is the fifth anniversary of the date on which any of the then outstandingDeferred Interest Payments was initially deferred;

(iii) the Maturity Date;

(iv) the date on which the Notes are otherwise redeemed; and

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Level: 3 – From: 3 – Tuesday, September 21, 2010 – 07:08 – leonardgreenham – 4262 Section 02


(v) the date on which the Trustee takes any action in respect of an Event of Default which resultsfrom an order being made for the winding-up of the Issuer or the Guarantor as described inCondition 10(b).

4.5 Accrual of interest

The Notes will cease to bear interest from the beginning of the calendar day on which they are due forredemption. If the Issuer fails to redeem the Notes upon due presentation and surrender thereof when due,interest will continue to accrue as provided in the Trust Deed.

5. REDEMPTION AND PURCHASE

5.1 Maturity

Unless redeemed earlier in accordance with these Conditions, the Notes will be redeemed on the FloatingInterest Payment Date falling in September 2070 (the Maturity Date) at their Principal Amount plus anyinterest accrued up to (but excluding) the Maturity Date and any outstanding Deferred Interest Payments(including any amount of interest accrued thereon in accordance with Condition 4.3).

5.2 Early Redemption at the option of the Issuer

The Issuer may redeem the Notes (in whole but not in part) on 22 September 2017 (the OptionalRedemption Date) or on any subsequent Floating Interest Payment Date at their Principal Amount, plus anyinterest accrued up to (but excluding) the relevant Early Redemption Date and any outstanding DeferredInterest Payments (including any amount of interest accrued thereon in accordance with Condition 4.3), onthe giving of not less than 30 and not more than 60 calendar days’ irrevocable notice of redemption to theNoteholders in accordance with Condition 13.1.

5.3 Early Redemption due to a Gross-up Event or Change of Control Event

(a) If a Gross-up Event or a Change of Control Event occurs, the Issuer may redeem the Notes (in wholebut not in part) (in the case of a Gross-up Event, prior to (but excluding) the Optional RedemptionDate and, in the case of a Change of Control Event, at any time), at their Principal Amount, plus anyinterest accrued up to (but excluding) the relevant Early Redemption Date and any outstandingDeferred Interest Payments (including any amount of interest accrued thereon in accordance withCondition 4.3), on the giving of not less than 30 and not more than 60 calendar days’ irrevocablenotice of redemption to the Noteholders in accordance with Condition 13.

(b) In the case of a Gross-up Event:

(i) no such notice of redemption may be given earlier than 45 calendar days prior to the earliestcalendar day on which the Issuer or, as the case may be, the Guarantor would be for the firsttime obliged to pay the Additional Amounts in question on payments due in respect of theNotes; and

(ii) prior to the giving of any such notice of redemption, the Issuer will deliver or procure that thereis delivered to the Trustee:

(A) a certificate signed by any one duly Authorised Signatory of the Issuer stating that theIssuer is entitled to effect such redemption and setting out a statement of facts showingthat the conditions to the exercise of the right of the Issuer to redeem have been satisfiedand that the obligation to pay Additional Amounts cannot be avoided by the Issuer or,as the case may be, the Guarantor taking reasonable measures available to it; and

(B) an opinion of an independent legal or tax adviser of recognised standing to the effect thatthe Issuer or, as the case may be, the Guarantor has or will become obliged to pay theAdditional Amounts in question as a result of a Gross-up Event,

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27



and the Trustee shall be entitled to accept the above certificate and opinion as sufficientevidence of the satisfaction of the conditions precedent set out above, in which event it shall beconclusive and binding on the Noteholders and the Couponholders.

(c) In the case of a Change of Control Event, such notice of redemption may only be given simultaneouslywith or after a notification by the Issuer in accordance with Condition 13.1 that a Change of ControlEvent has occurred.

(d) Gross-up Event means that as a result of any change in, or amendment to, the laws (or any rules orregulations thereunder) of the Relevant Jurisdiction, or any change in or amendment to any officialinterpretation or application of those laws or rules or regulations, which change or amendmentbecomes effective on or after the Issue Date (i) the Issuer has or will become obliged to pay AdditionalAmounts; or (ii) the Guarantor has or will become obliged to pay Additional Amounts provided that(in either case) the payment obligation cannot be avoided by the Issuer or, as the case may be, theGuarantor taking reasonable measures available to it.

A Change of Control Event will occur if:

(i) the Issuer ceases to be a Wholly Owned Subsidiary of the Guarantor; or

(ii) the Guarantor becomes a Subsidiary of another person (Relevant Person),

provided that a Change of Control Event will not have occurred if: (A) the shareholders of theRelevant Person holding, directly or indirectly, more than 50 per cent. of the issued voting sharecapital of the Relevant Person are also, or immediately prior to the event which would otherwiseconstitute a Change of Control Event were, shareholders of the Guarantor who held, directly orindirectly, more than 50 per cent. of the issued voting share capital of the Guarantor; or (B) the eventwhich would otherwise constitute a Change of Control Event occurs as part of a SolventReorganisation of the Issuer or the Guarantor.

5.4 Early Redemption due to a Tax Event, Capital Event or Accounting Event

(a) If a Tax Event, a Capital Event or an Accounting Event occurs, the Issuer may redeem the Notes (inwhole but not in part) at any time prior to but excluding the Optional Redemption Date at their EarlyRedemption Amount, on the giving of not less than 30 and not more than 60 calendar days’irrevocable notice of redemption to the Noteholders in accordance with Condition 13.1.

(b) Such notice of redemption may only be given simultaneously with or after a notification by the Issuerin accordance with Condition 13 that a Tax Event, a Capital Event or an Accounting Event (as thecase may be) has occurred.

(c) Tax Event means that:

(i) in the opinion of a recognised independent tax adviser (such opinion to have been obtained bythe Guarantor and delivered to the Trustee), on or after the Issue Date, as a result of:

(A) any amendment to, or change in, the laws (or any rules or regulations thereunder) of theCommonwealth of Australia or any political subdivision or any taxing authority thereofor therein which is enacted, promulgated, issued or becomes effective otherwise on orafter the Issue Date; or

(B) any amendment to, or change in, an official and binding interpretation of any such laws,rules or regulations by any legislative body, court, governmental agency or regulatoryauthority (including the enactment of any legislation and the publication of any judicialdecision or regulatory determination) which is enacted, promulgated, issued or becomeseffective otherwise on or after the Issue Date; or

(C) any generally applicable official interpretation or pronouncement that provides for aposition with respect to such laws or regulations that differs from the previous generallyaccepted position which is issued or announced on or after the Issue Date,

payments by the Issuer on the Notes and by the Guarantor pursuant to the Guarantee wouldno longer, or within 90 calendar days of the date of that opinion will no longer, be fullydeductible (or the entitlement to make such deduction shall be materially reduced) by the Issueror (as applicable) the Guarantor for Australian corporate income tax purposes; and

(ii) such risk cannot be avoided by the Issuer or, as the case may be, the Guarantor takingreasonable measures available to it (as certified to the Trustee by any one duly AuthorisedSignatory of the Issuer).

The Trustee shall be entitled to accept such opinion and certification as sufficient evidence of thesatisfaction of the conditions precedent set out above, in which event it shall be conclusive andbinding on the Noteholders and the Couponholders.

A Capital Event will occur if the Issuer or the Guarantor has been notified by Standard & Poor’s, orhas become aware following a publication by Standard & Poor’s, that the Notes will no longer beeligible for the same or higher category of equity credit as was attributed to the Notes at the IssueDate.

An Accounting Event will occur if the obligations of the Issuer under the Notes or of the Guarantorunder the Trust Deed may no longer be recorded as a “financial liability” in the audited consolidatedfinancial statements of the Issuer or the Guarantor prepared in accordance with AustralianInternational Financial Reporting Standards or other recognised accounting standards that the Issueror (as the case may be) the Guarantor may adopt from time to time for the preparation of its auditedconsolidated financial statements.

5.5 Early Redemption Amount

The Early Redemption Amount will be calculated by the Calculation Agent on the Redemption CalculationDate as the greater of the Principal Amount of the Notes and the Make-Whole Amount of the Notes, ineach case plus interest accrued thereon until (but excluding) the relevant Early Redemption Date and anyoutstanding Deferred Interest Payments (including any amount of interest accrued thereon in accordancewith Condition 4.3), where:

The Adjusted Comparable Yield will be equal to the yield at the Redemption Calculation Date on the euro-denominated benchmark security selected by the Calculation Agent, after consultation with the Issuer, ashaving a maturity comparable to the remaining term of the Notes to the Optional Redemption Date thatwould be utilised, at the time of selection and in accordance with customary financial practice, in pricingnew issues of corporate debt securities of comparable maturity to the Optional Redemption Date.

The Make-Whole Amount will be calculated by the Calculation Agent, and will be equal to the sum of thePresent Values on the relevant Early Redemption Date of: (i) the Principal Amount of the Notes; and (ii) theremaining scheduled interest payments on the Notes up to and including the Optional Redemption Date(not including any Deferred Interest Payments or any interest amount accrued thereon or the portion of anyscheduled interest payment in respect of which interest has already accrued prior to the relevant EarlyRedemption Date). In performing such calculation, it will be assumed that the Principal Amount of theNotes is due and payable on the Optional Redemption Date and that all interest payments that have notbeen paid prior to the relevant Early Redemption Date are due and payable in full.

The Present Values will be calculated by the Calculation Agent by discounting the Principal Amount of theNotes and the remaining scheduled interest payments to and including the Optional Redemption Date usingthe Adjusted Comparable Yield plus 1.75 per cent. per annum. If interest is to be calculated for a period ofless than one year, it will be calculated on the basis of the actual number of calendar days in the relevantperiod divided by the actual number of days in the relevant year (365 or 366).

Redemption Calculation Date means the fourth Business Day prior to the relevant Early Redemption Date.

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5.6 Purchase of Notes

The Issuer, the Guarantor or any Wholly Owned Subsidiary of the Guarantor may, in compliance withapplicable laws, at any time following 31 December 2015 purchase Notes (provided that all unmaturedCoupons and unexchanged Talons appertaining to the Notes are purchased with the Notes) in any mannerand at any price. Such acquired Notes may be surrendered for cancellation or held or resold.

In the event that the Issuer, the Guarantor and/or any Wholly Owned Subsidiary of the Guarantor has,individually or in aggregate, purchased (and not resold) or redeemed Notes equal to or in excess of 80 percent. of the aggregate Principal Amount of the Notes issued on the Issue Date, the Issuer may redeem theremaining Notes (in whole but not in part):

(a) at any time prior to the Optional Redemption Date, at the Early Redemption Amount; or

(b) on, or on any Floating Interest Payment Date after, the Optional Redemption Date, at their PrincipalAmount plus any interest accrued and outstanding up to (but excluding) the Early Redemption Dateand any Deferred Interest Payments (including any amount of interest accrued thereon in accordancewith Condition 4.3),

on the giving of not less than 30 and not more than 60 calendar days’ irrevocable notice of redemption tothe Noteholders in accordance with Condition 13.1.

5.7 Optional Noteholder redemption upon a Change of Control Event

(a) If both a Rating Downgrade and a Change of Control Event have occurred and are subsisting, theIssuer shall within 14 days after the end of the Change of Control Period relating to that Change ofControl give notice thereof to the Noteholders in accordance with Condition 13 (a Change of ControlNotice). Such notice shall contain a statement confirming whether or not the Issuer intends to exerciseits right to redeem the Notes pursuant to Condition 5.3 and, if the Issuer does not intend to exerciseits right to redeem the Notes pursuant to Condition 5.3, of the Noteholders’ entitlement to exercisetheir rights pursuant to Condition 5.7(b) below. The Change of Control Notice will also specify, ifrelevant: (i) the material facts comprising the Change of Control Event; (ii) the Put Date; (iii) thenames and specified offices of all Paying Agents; and (iv) that a Put Notice, once validly given, maynot be withdrawn.

(b) If the Change of Control Notice specifies that the Issuer does not intend to exercise its right to redeemthe Notes pursuant to Condition 5.3, a Noteholder may require the Issuer to redeem or, at the Issuer’soption, purchase (or procure the purchase of), the entire aggregate principal amount of the Notes heldby such Noteholder on the Put Date at their Principal Amount plus any interest accrued up to (butexcluding) the Put Date and any outstanding Deferred Interest Payments (including any amount ofinterest accrued thereon in accordance with Condition 4.3), on the giving of not less than 30 and notmore than 60 calendar days’ notice (which shall be irrevocable) after the delivery of a Change ofControl Notice to the Issuer in accordance with Condition 13.2 and this Condition 5.7 (a Put Notice).

(c) The Put Notice must include:

(i) the name and address of the Noteholder;

(ii) the aggregate principal amount of the Notes held by such Noteholder;

(iii) the details of the euro cash account to which payments can be made; and

(iv) confirmation that such Noteholder authorises the production of such Put Notice in anyapplicable administrative proceedings.

(d) If, subsequent to a Noteholder exercising its rights under Condition 5.7(b), the Issuer chooses toexercise its right to redeem the Notes pursuant to Condition 5.2, 5.3, 5.4 or 5.6, all Notes will beredeemed in accordance with Condition 5.2, 5.3, 5.4 or 5.6 (as relevant) and not in accordance withCondition 5.7(b). In such circumstances, all Put Notices will be disregarded.

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(e) Change of Control Period means the period:

(i) commencing on the date that is the earlier of: (A) the date of the relevant Change of ControlEvent; and (B) the date of the earliest Relevant Potential Change of Control Announcement (ifany); and

(ii) ending 90 days after the Date of Announcement.

Date of Announcement means the date of the public announcement by the Issuer or the Guarantorthat a Change of Control Event has occurred.

Put Date means the Business Day which is, or immediately follows, the two month anniversary of thelast day of the Change of Control Period.

Rating Downgrade means, within the Change of Control Period:

(i) any rating (other than an unsolicited rating) assigned to the Notes by any rating agency iswithdrawn;

(ii) the Guarantor (and the Issuer, if it has been assigned a credit rating) ceases to hold a creditrating from any rating agency (other than a rating agency that has provided an unsolicitedrating); or

(iii) any credit rating assigned to the Guarantor (and the Issuer, if it has been assigned a creditrating) is lowered by at least one full rating notch by any rating agency (other than a ratingagency that has provided an unsolicited rating) and the lowered credit rating is lower than‘BBB+’ (or equivalent thereof) in the case of Standard & Poor’s or the nearest equivalent in thecase of any other rating agency,

provided that no Rating Downgrade will occur by virtue of a particular withdrawal of, or reductionin, rating within the Change of Control Period unless the rating agency withdrawing or making thereduction in the rating announces or confirms that the withdrawal or reduction was the result, inwhole or in part, of the relevant Change of Control Event and does not reinstate the rating thatapplied prior to the withdrawal or reduction prior to the end of the Change of Control Period.

Relevant Potential Change of Control Announcement means any formal public announcement orstatement by or on behalf of the Issuer or Guarantor, or any actual or potential bidder or any advisorthereto relating to any potential Change of Control Event where, within 90 days of the date of suchannouncement or statement, a Change of Control Event occurs.

5.8 Cancellations

All Notes which are (a) redeemed or (b) purchased by or on behalf of the Issuer, the Guarantor or any ofthe Guarantor’s Subsidiaries and which the Issuer elects to cancel will forthwith be cancelled, together withall relevant unmatured Coupons and unexchanged Talons attached to the Notes or surrendered with theNotes, and accordingly may not be held, reissued or resold.

6. PAYMENTS AND EXCHANGE OF TALONS

6.1 Payments in respect of Notes

Payment of principal and interest in respect of each Note will be made against presentation and surrender(or, in the case of part payment only, endorsement) of the Note, except that payments of interest due on anInterest Payment Date will be made against presentation and surrender (or in the case of part payment only,endorsement) of the relevant Coupon, in each case at the specified office outside the United States of any ofthe Paying Agents.

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6.2 Method of payment

Payments will be made by credit or transfer to a euro account (or any other account to which euro may becredited or transferred) specified by the payee or, at the option of the payee, by euro cheque.

6.3 Missing Unmatured Coupons

Each Note should be presented for payment together with all relative unmatured Coupons (whichexpression will, for the avoidance of doubt, include Coupons falling to be issued on exchange of maturedTalons). Upon the date on which any Note becomes due and repayable, all unmatured Couponsappertaining to the Note (whether or not attached) will become void and no payment will be made inrespect of such Coupons.

6.4 Payments subject to applicable laws

Payments in respect of principal and interest on the Notes are subject in all cases to any fiscal or other lawsand regulations applicable in the place of payment, but without prejudice to the provisions of Condition 7.

6.5 Payment only on a Presentation Date

A holder will be entitled to present a Note or Coupon for payment only on a Presentation Date and willnot, except as provided in Condition 4.3, be entitled to any further interest or other payment if aPresentation Date is after the due date.

Presentation Date means a day which (subject to Condition 8):

(a) is or falls after the relevant due date;

(b) is a Payment Business Day in the place of the specified office of the Paying Agent at which the Noteor Coupon is presented for payment; and

(c) in the case of payment by credit or transfer to a euro account as referred to above, is a Business Day.

In this Condition, Payment Business Day means, in relation to any place, a day on which commercial banksand foreign exchange markets settle payments and are open for general business (including dealing inforeign exchange and foreign currency deposits) in that place.

6.6 Exchange of Talons

On and after the Interest Payment Date on which the final Coupon comprised in any Coupon sheet matures,the Talon comprised in the Coupon sheet may be surrendered at the specified office of any Paying Agent inexchange for a further Coupon sheet (including any appropriate further Talon), subject to the provisions ofCondition 8. Each Talon will, for the purposes of these Conditions, be deemed to mature on the InterestPayment Date on which the final Coupon comprised in the relative Coupon sheet matures.

6.7 Initial Paying Agents

The name of the initial Principal Paying Agent and its specified office is set out below. In accordance withthe Agency Agreement, the Issuer reserves the right, subject to the prior written approval of the Trustee, atany time to vary or terminate the appointment of, and to appoint additional or other, Paying Agents,provided that:

(a) there will at all times be a Principal Paying Agent;

(b) there will at all times be at least one Paying Agent (which may be the Principal Paying Agent) havingits specified office in a European city which so long as the Notes are admitted to official listing on theLondon Stock Exchange shall be London or such other place as the UK Listing Authority mayapprove;

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(c) there will at all times be at least one Paying Agent having its specified office in a European city; and

(d) the Issuer undertakes that it will ensure that it maintains a Paying Agent in a Member State of theEuropean Union that is not obliged to withhold or deduct tax pursuant to European CouncilDirective 2003/48/EC or any law implementing or complying with, or introduced in order to conformto, such Directive.

Notice of any termination or appointment and of any change in specified office will be given to theNoteholders promptly by the Issuer in accordance with Condition 13.

7. TAXATION AND GROSS-UP

7.1 Payment without withholding

All payments in respect of the Notes by or on behalf of the Issuer or the Guarantor will be made withoutwithholding or deduction for, or on account of, any present or future taxes, duties, assessments orgovernmental charges of whatever nature (Taxes) imposed or levied by or on behalf of the RelevantJurisdiction, unless the withholding or deduction of the Taxes is required by law. In that event, the Issueror, as the case may be, the Guarantor, will pay such additional amounts (Additional Amounts) as may benecessary in order that the net amounts received by the Noteholders and Couponholders after thewithholding or deduction will equal the respective amounts which would otherwise have been receivable inrespect of the Notes or, as the case may be, the Coupons in the absence of the withholding or deduction;except that no additional amounts will be payable in relation to any payment in respect of any Note orCoupon:

(a) presented for payment by or on behalf of a Noteholder who is liable to the Taxes in respect of suchNote or Coupon by reason of their having some connection with the Commonwealth of Australiaother than the mere holding of the Note or Coupon;

(b) presented for payment by, or by a third party on behalf of, a Noteholder or Couponholder who isliable to Taxes in respect of the Note or Coupon by reason of that person being an associate of theIssuer for the purposes of Section 128F of the Tax Act;

(c) where such withholding or deduction is imposed on a payment to an individual and is required to bemade pursuant to European Council Directive 2003/48/EC or any law implementing or complyingwith, or introduced in order to conform to, such Directive;

(d) presented for payment by or on behalf of a Noteholder or a Couponholder who would have been ableto avoid such withholding or deduction by presenting the relevant Note or Coupon to another PayingAgent in a Member State of the European Union;

(e) presented for payment more than 30 days after the Relevant Date (as defined below) except to theextent that a holder of such Note or Coupon would have been entitled to such Additional Amountson presenting the same for payment on the last day of the period of 30 days assuming, whether ornot such is in fact the case, that day to have been a Presentation Date (as defined in Condition 6);

(f) to, or to a third party on behalf of, a holder who could lawfully avoid (but has not so avoided) suchdeduction or withholding by complying or procuring that any third party complies with any statutoryrequirements or by making or procuring that any third party makes a declaration of non-residence orother similar claim for exemption to any tax authority in the place where the relevant Note orCoupon is presented for payment;

(g) in respect of any tax, duty, assessment, withholding or other governmental charge that is imposed,deducted or withheld by reason of a failure of a holder or beneficial owner of a Note or Coupon (i)to provide certification, information, or documentation concerning the nationality, residence, identityor connection with the Commonwealth of Australia of the holder or beneficial owner (including,without limitation, the supplying of an Australian Business Number (if relevant), any appropriate taxfile number or other appropriate exemption details), if and to the extent that furnishing suchinformation would have reduced or eliminated any taxes, duties, assessments, withholdings or other

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governmental charges as to which additional amounts would have otherwise been payable to suchholder or beneficial owner, or (ii) to make any certification, declaration or other similar claim orsatisfy any information, documentation, statement or reporting requirement, which, in the case of (i)or (ii), is required or imposed by a statute, treaty, rule, regulation or administrative practice of theCommonwealth of Australia (or any territories or political subdivisions or any taxing authoritythereof or therein) as a condition or precondition to relief or exemption from all or part of such tax,duty, assessment, withholding or other governmental charge; or

(h) presented for payment in the Commonwealth of Australia.

7.2 Interpretation

In these Conditions:

(a) The Relevant Date means the date on which the payment first becomes due but, if the full amount ofthe money payable has not been received by the Principal Paying Agent or the Trustee on or beforethe due date, it means the date on which, the full amount of the money having been so received, noticeto that effect has been duly given to the Noteholders by the Issuer in accordance with Condition 13.

(b) The Relevant Jurisdiction means the Commonwealth of Australia or any political subdivision or anyauthority thereof or therein having power to tax or, in the event of any substitution, SolventReorganisation or other corporate action resulting in either the Issuer or the Guarantor (as the casemay be) being incorporated in any other jurisdiction, that other jurisdiction or any politicalsubdivision or any authority thereof or therein having power to tax.

7.3 Additional Amounts, principal and interest

Any reference in these Conditions to any amounts in respect of the Notes will be deemed also to refer toany Additional Amounts which may be payable under this Condition 7 or under any undertakings given inaddition to, or in substitution for, this Condition pursuant to the Trust Deed. Unless the context otherwiserequires, any reference in these Conditions to “principal” includes any instalment amount or redemptionamount and any other amounts in the nature of principal payable pursuant to these Conditions and“interest” includes all amounts payable pursuant to Condition 4 and any other amounts in the nature ofinterest payable pursuant to these Conditions.

8. PRESCRIPTION

Notes and Coupons (which for this purpose does not include the Talons) will become void unless presentedfor payment within periods of 10 years (in the case of principal) and five years (in the case of interest) fromthe Relevant Date in respect of the Notes or, as the case may be, the Coupons, subject to the provisions ofCondition 6. There may not be included in any Coupon sheet issued upon exchange of a Talon any Couponwhich would be void upon issue under this Condition 8 or Condition 6.

9. FURTHER ISSUES

The Issuer is at liberty from time to time without the consent of the Noteholders or Couponholders to createand issue further notes or bonds either (a) ranking pari passu in all respects (or in all respects save for thefirst payment of interest thereon) and so that the same will be consolidated and form a single series with theNotes or (b) upon such terms as to ranking, interest, conversion, redemption and otherwise as the Issuermay determine at the time of the issue. Any further notes which are to form a single series with the Noteswill be constituted by a deed supplemental to the Trust Deed. Any further notes or bonds not forming asingle series with the Notes will not be constituted by the Trust Deed.

10. EVENTS OF DEFAULT

If any of the following events occurs (each an Event of Default) then the Trustee may, and shall if so directedby an Extraordinary Resolution of the Noteholders or so requested in writing by the holders of at least one-

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quarter in principal amount of the Notes then outstanding (subject in each case to being indemnified and/orsecured and/or prefunded to its satisfaction): (i) serve notice on the Issuer and the Guarantor that they are(and they shall upon the service of such notice be) in default under the Trust Deed, the Notes and theCoupons and the Trustee, (ii) notwithstanding Condition 11, institute proceedings for the winding-up of theIssuer and/or the Guarantor and/or prove in the winding-up of the Issuer and/or the Guarantor and/or (iii)claim in the liquidation of the Issuer and/or the Guarantor for the payment referred to in paragraph (a)below and/or give notice to the Issuer and the Guarantor that the Notes are, and they shall immediatelybecome, due and payable at their Principal Amount together with any accrued and unpaid interest to suchdate and any outstanding Deferred Interest Payments (including any amount of interest accrued thereon inaccordance with Condition 4.3), as provided in the Trust Deed:

(a) neither the Issuer nor the Guarantor pays any principal or interest or other amount due and payablein respect of the Notes or any of them in full within 30 days of its due date; or

(b) an order is made (other than an order successfully appealed or permanently stayed within 30 days)by a State or Federal Court in the Commonwealth of Australia or a resolution is passed by theshareholders of the Issuer or the Guarantor, as the case may be, for the winding up of the Issuer orthe Guarantor (other than for the purposes of Solvent Reorganisation of the Issuer or the Guarantor).

11. ENFORCEMENT

11.1 Enforcement by the Trustee

Without prejudice to Condition 10, the Trustee may at any time, at its discretion (subject to the nextfollowing sentence) and without further notice institute such proceedings against the Issuer and/or theGuarantor as it may think fit to enforce any term or condition binding on the Issuer or the Guarantor underthe Trust Deed, the Notes or the Coupons (other than any payment obligation of the Issuer or the Guarantorunder or arising from the Trust Deed, the Notes or the Coupons, including, without limitation, payment ofany principal or interest in respect of the Notes or the Coupons and including damages awarded for thebreach of any obligations) but in no event shall the Issuer or the Guarantor, by virtue of the institution ofany such proceedings, be obliged to pay any sum or sums in cash or otherwise, sooner than the same wouldotherwise have been payable by it. The Trustee will not be bound to take any such proceedings or any otheraction in relation to the Trust Deed, the Notes or the Coupons unless (a) it has been so directed by anExtraordinary Resolution of the Noteholders or so requested in writing by the holders of at least one-quarter in principal amount of the Notes then outstanding and (b) it has been indemnified and/or securedand/or prefunded to its satisfaction.

11.2 Enforcement by the Noteholders

No Noteholder or Couponholder will be entitled to proceed directly against the Issuer or the Guarantorunless the Trustee, having become bound so to proceed, fails so to do within a reasonable period and thefailure is continuing.

12. REPLACEMENT OF NOTES AND COUPONS

Should any Note or Coupon be lost, stolen, mutilated, defaced or destroyed it may be replaced at thespecified office of the Principal Paying Agent upon payment by the claimant of the expenses incurred inconnection with the replacement and on such terms as to evidence and indemnity as the Issuer mayreasonably require. Mutilated or defaced Notes or Coupons must be surrendered before replacements willbe issued.

13. NOTICES

13.1 Notification in newspapers

All notices to the Noteholders will be valid if published in a leading English language daily newspaperpublished in London (expected to be the Financial Times) or such other English language daily newspaper

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with general circulation in Europe as the Trustee may approve. The Issuer will also ensure that notices areduly published in a manner which complies with the rules and regulations of any stock exchange or therelevant authority on which the Notes are for the time being listed. Any such notice will be deemed to havebeen given on the date of the first publication or, where required to be published in more than onenewspaper, on the date of the first publication in all required newspapers. If publication as provided aboveis not practicable, notice will be given in such other manner, and will be deemed to have been given on suchdate, as the Trustee may approve. Couponholders will be deemed for all purposes to have notice of thecontents of any notice given to the Noteholders in accordance with this paragraph.

13.2 Notices from the Noteholders

Notices to be given by any Noteholder must be in writing and given by lodging the same, together with therelative Note or Notes, with the Principal Paying Agent or, if the Notes are held in a clearing system, maybe given through the clearing system in accordance with its standard rules and procedures.

14. SUBSTITUTION

The Trustee may, without the consent of the Noteholders or Couponholders, agree with the Issuer and theGuarantor to the substitution in place of the Issuer (or of any previous substitute under this Condition) asthe principal debtor under the Notes, the Coupons and the Trust Deed of the Guarantor or any of its otherSubsidiaries, subject to:

(a) except in the case of the substitution of the Guarantor, the Notes being unconditionally andirrevocably guaranteed by the Guarantor;

(b) the Trustee being satisfied that the interests of the Noteholders will not be materially prejudiced bythe substitution; and

(c) compliance with certain other conditions set out in the Trust Deed.

15. MEETINGS OF NOTEHOLDERS, MODIFICATION, WAIVER, AUTHORISATION ANDDETERMINATION

15.1 Meetings of Noteholders

The Trust Deed contains provisions for convening meetings of the Noteholders to consider any matteraffecting their interests, including the modification or abrogation by Extraordinary Resolution of any ofthese Conditions or any of the provisions of the Trust Deed. The quorum at any meeting for passing anExtraordinary Resolution will be one or more persons present holding or representing more than 50 percent. in principal amount of the Notes for the time being outstanding, or at any adjourned such meeting oneor more persons present whatever the principal amount of the Notes held or represented by him or them,except that, at any meeting the business of which includes the modification or abrogation of certain of theprovisions of these Conditions and certain of the provisions of the Trust Deed, the necessary quorum forpassing an Extraordinary Resolution will be one or more persons present holding or representing not lessthan two-thirds, or at any adjourned such meeting not less than one-third, of the principal amount of theNotes for the time being outstanding. An Extraordinary Resolution passed at any meeting of theNoteholders will be binding on all Noteholders, whether or not they are present at the meeting, and on allCouponholders.

15.2 Modification, Waiver, Authorisation and Determination

The Trustee may agree, without the consent of the Noteholders or Couponholders, to any modification of,or to the waiver or authorisation of any breach or proposed breach of, any of these Conditions or any ofthe provisions of the Trust Deed, or determine, without any such consent as aforesaid, that any Event ofDefault or Potential Event of Default (as defined in the Trust Deed) will not be treated as such (providedthat, in any such case, it is not, in the opinion of the Trustee, materially prejudicial to the interests of theNoteholders) or may agree, without any such consent as aforesaid, to any modification which, in itsopinion, is of a formal, minor or technical nature or to correct a manifest or proven error.

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15.3 Trustee to have Regard to Interests of Noteholders as a Class

In connection with the exercise by it of any of its trusts, powers, authorities and discretions (including,without limitation, any modification, waiver, authorisation, determination or substitution), the Trusteemust have regard to the general interests of the Noteholders as a class but must not have regard to anyinterests arising from circumstances particular to individual Noteholders or Couponholders (whatever theirnumber) and, in particular but without limitation, must not have regard to the consequences of any suchexercise for individual Noteholders or Couponholders (whatever their number) resulting from their beingfor any purpose domiciled or resident in, or otherwise connected with, or subject to the jurisdiction of, anyparticular territory or any political sub-division thereof and the Trustee will not be entitled to require, norwill any Noteholder or Couponholder be entitled to claim, from the Issuer, the Guarantor, the Trustee orany other person any indemnification or payment in respect of any tax consequence of any such exerciseupon individual Noteholders or Couponholders except to the extent already provided for in Condition 7and/or any undertaking given in addition to, or in substitution for, Condition 7 pursuant to the Trust Deed.

15.4 Notification to the Noteholders

Any modification, waiver, authorisation, determination or substitution agreed to by the Trustee will bebinding on the Noteholders and the Couponholders and, unless the Trustee agrees otherwise, anymodification or substitution will be notified by the Issuer to the Noteholders as soon as practicablethereafter in accordance with Condition 13.

16. INDEMNIFICATION OF THE TRUSTEE AND ITS CONTRACTING WITH THE ISSUERAND THE GUARANTOR

16.1 Indemnification of the Trustee

The Trust Deed contains provisions for the indemnification of the Trustee and for its relief fromresponsibility, including provisions relieving it from taking action unless indemnified to its satisfaction.

16.2 Trustee Contracting with the Issuer and the Guarantor

The Trust Deed also contains provisions pursuant to which the Trustee is entitled, inter alia, (a) to enter intobusiness transactions with the Issuer and/or the Guarantor and/or any of the Guarantor’s Subsidiaries andto act as trustee for the holders of any other securities issued or guaranteed by, or relating to, the Issuerand/or the Guarantor and/or any of the Guarantor’s Subsidiaries, (b) to exercise and enforce its rights,comply with its obligations and perform its duties under or in relation to any such transactions or, as thecase may be, any such trusteeship without regard to the interests of, or consequences for, the Noteholdersor Couponholders, and (c) to retain and not be liable to account for any profit made or any other amountor benefit received thereby or in connection therewith.

17. GOVERNING LAW AND SUBMISSION TO JURISDICTION

17.1 Governing law

The Trust Deed, the Notes and the Coupons, and any non-contractual obligations arising out or inconnection with the Trust Deed, the Notes or the Coupons, are governed by and must be construed inaccordance with, English law, with the exception that Conditions 2.2 and 3.2 must be construed inaccordance with the laws of Australia.

17.2 Jurisdiction of English courts

(a) Each of the Issuer and the Guarantor has, in the Trust Deed, irrevocably agreed for the benefit of theTrustee, the Noteholders and the Couponholders that the courts of England are to have non-exclusivejurisdiction to settle any disputes which may arise out of or in connection with the Trust Deed, theNotes or the Coupons (including any dispute relating to any non-contractual obligations arising out

of or in connection with the Trust Deed, the Notes or the Coupons) and has accordingly submittedto the non-exclusive jurisdiction of the English courts.

(b) Each of the Issuer and the Guarantor has, in the Trust Deed, waived any objection to the courts ofEngland on the grounds that they are an inconvenient or inappropriate forum. The Trustee, theNoteholders and the Couponholders may take any suit, action or proceeding arising out of, or inconnection with the Trust Deed, the Notes or the Coupons respectively (including any suit, action orproceeding relating to any non-contractual obligations arising out of or in connection with the TrustDeed, the Notes or the Coupons respectively) (referred to as Proceedings) against the Issuer or theGuarantor in any other court of competent jurisdiction and concurrent Proceedings in any number ofjurisdictions.

17.3 Appointment of process agent

Each of the Issuer and the Guarantor has, in the Trust Deed, irrevocably and unconditionally appointed LawDebenture Corporate Services Limited at the latter’s registered office for the time being as its agent forservice of process in England in respect of any Proceedings and has undertaken that in the event of suchagent ceasing so to act it will appoint such other person as the Trustee may approve as its agent for thatpurpose.

18. RIGHTS OF THIRD PARTIES

No rights are conferred on any person under the Contracts (Rights of Third Parties) Act 1999 to enforceany term of this Note, but this does not affect any right or remedy of any person which exists or is availableapart from that Act.

19. DEFINITIONS

Unless the context otherwise requires, the following terms will have the following meanings in theseConditions:

Accounting Event has the meaning specified in Condition 5.4(c).

Additional Amounts has the meaning specified in Condition 7.1.

Adjusted Comparable Yield has the meaning specified in Condition 5.5.

Agency Agreement has the meaning specified in the preamble to these Conditions.

Authorised Signatory has the meaning given to it in the Trust Deed.

Business Day means a day on which the Trans-European Automated Real-Time Gross Settlement ExpressTransfer (TARGET2) System is open.

Calculation Agency Agreement means any agreement entered into by the Issuer, the Guarantor and theCalculation Agent in respect of the appointment of the Calculation Agent to perform the functionsexpressed to be performed by the Calculation Agent under these Conditions.

Calculation Agent means the independent investment bank or financial institution, appointed on the termsof a Calculation Agency Agreement selected by the Issuer for the purposes of performing the functionsexpressed to be performed by it under these Conditions.

Capital Event has the meaning specified in Condition 5.4(c).

Change of Control Event has the meaning specified in Condition 5.3(d).

Change of Control Notice has the meaning specified in Condition 5.7(a).

Change of Control Period has the meaning specified in Condition 5.7(e).

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Conditions means these terms and conditions of the Notes.

Corporations Act means the Corporations Act 2001 (Cth).

Couponholders has the meaning specified in the preamble to these Conditions.

Date of Announcement has the meaning specified in Condition 5.7(e).

Day Count Fraction has the meaning specified in Condition 4.2(d).

Deferred Interest Payment has the meaning specified in Condition 4.3(a).

Early Redemption Amount has the meaning specified in Condition 5.5.

The Early Redemption Date is the date on which the Notes are to be redeemed as specified in any notice ofredemption given to Noteholders pursuant to Condition 5.

Fixed Interest Amount means the amount due on each Note on a Fixed Interest Payment Date.

Fixed Interest Payment Date has the meaning specified in Condition 4.1(a).

Fixed Rate of Interest means 8.25 per cent. per annum.

Floating Interest Amount has the meaning specified in Condition 4.2(d).

Floating Interest Payment Date means, subject to Condition 4.2(b), 22 March, 22 June, 22 September and22 December in each year, commencing on the first such date following the Optional Redemption Date.

Floating Interest Period means each period from and including the Optional Redemption Date to butexcluding the first Floating Interest Payment Date and, thereafter, from and including each Floating InterestPayment Date to but excluding the immediately following Floating Interest Payment Date.

Floating Margin has the meaning specified in Condition 4.2(c).

Floating Rate of Interest has the meaning specified in Condition 4.2(c).

Gross-up Event has the meaning specified in Condition 5.3(d) .

Guarantee has the meaning specified in Condition 3.1.

Guarantor means Santos Limited.

Interest Amount means the Fixed Interest Amount and the Floating Interest Amount, as the case may be,and will include any interest accrued on such Interest Amount pursuant to Condition 4.3(a) and Condition4.3(b).

Interest Calculation Agent has the meaning specified in the preamble to these Conditions.

Interest Determination Date means the second Business Day prior to the commencement of the relevantFloating Interest Period.

Interest Payment Date means any Fixed Interest Payment Date and any Floating Interest Payment Date, asthe case may be.

Issue Date means 22 September 2010.

Issuer means Santos Finance Limited.

Make-Whole Amount has the meaning specified in Condition 5.5.

Maturity Date has the meaning specified in Condition 5.1.

Noteholder Claims means:

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(a) when used in Condition 2.2, the rights and claims of the Trustee (in respect of the principal of andinterest on the Notes) and of the Noteholders and the Couponholders in respect of the Notes and theCoupons; and

(b) when used in Condition 3.2, the rights and claims of the Trustee (in respect of the principal of andinterest on the Notes) and of the Noteholders and Couponholders in respect of the Guarantee.

Noteholders has the meaning specified in the preamble to these Conditions.

Notes has the meaning specified in the preamble to these Conditions.

Optional Redemption Date has the meaning specified in Condition 5.2.

Parity Creditor means, with respect to the Issuer or the Guarantor, any creditor of the Issuer or theGuarantor, as the case may be, whose claim is expressed to rank pari passu with the Issuer’s obligationsunder the Notes or, as the case may be, the Guarantor’s obligations under the Guarantee.

Parity Shares means preference shares in the capital of the Issuer or the Guarantor (as the case may be) thatare expressed to rank equally with the Notes or the Guarantee (as the case may be) for return of capital.

Paying Agent has the meaning specified in the preamble to these Conditions.

Payment Business Day has the meaning specified in Condition 6.5.

Payment Reference Date has the meaning specified in Condition 4.4(b).

Present Values has the meaning specified in Condition 5.5.

Principal Amount has the meaning specified in Condition 1.1.

Principal Paying Agent has the meaning specified in the preamble to these Conditions.

Proceedings has the meaning specified in Condition 17.2(b).

Put Date has the meaning specified in Condition 5.7(e).

Put Notice has the meaning specified in Condition 5.7(b).

Rating Downgrade has the meaning specified in Condition 5.7(e).

Redemption Calculation Date has the meaning specified in Condition 5.5.

Redemption Date means the day on which the Notes become due for redemption in accordance with theseConditions.

Reference Banks means four major banks in the euro-zone inter-bank market.

Relevant Date has the meaning specified in Condition 7.2.

Relevant Jurisdiction has the meaning specified in Condition 7.2.

Relevant Person has the meaning specified in Condition 5.3(d).

Relevant Potential Change of Control Announcement has the meaning specified in Condition 5.7(e).

S&P Rating Criteria has the meaning specified in Condition 4.3(d).

Screen Page has the meaning specified in Condition 4.2(c).

Senior Creditors means, with respect to the Issuer or the Guarantor, all creditors (including subordinatedcreditors) of the Issuer or the Guarantor (as the case may be) other than the Trustee (in respect of theprincipal of and interest on the Notes), the Noteholders and the Couponholders, any Parity Creditors of theIssuer or the Guarantor (as the case may be) and the holders of the Issuer’s or the Guarantor’s (as the casemay be) shares.

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Solvent Reorganisation means, with respect to the Issuer or the Guarantor (as the case may be), solventwinding-up, deregistration, dissolution, scheme of arrangement or other reorganisation of the Issuer or theGuarantor (as the case may be) solely for the purposes of a consolidation, amalgamation, merger orreconstruction, the terms of which have been approved by the shareholders of the Issuer or the Guarantor(as the case may be) or by a court of competent jurisdiction under which the continuing or resultingcorporation effectively assumes the obligations of the Issuer under the Notes and the Trust Deed or of theGuarantor under the Guarantee and the Trust Deed (as the case may be).

Standard & Poor’s means Standard & Poor’s Ratings Services, a Division of The McGraw-Hill CompaniesInc. or any successor in business thereto from time to time.

Subsidiary has the meaning given in the Corporations Act.

Talon has the meaning specified in the preamble to these Conditions.

Tax Act means the Income Tax Assessment Act 1936 of Australia.

Tax Event has the meaning specified in Condition 5.4.

Trigger Event has the meaning specified in Condition 4.3(c).

Trust Deed has the meaning specified in the preamble to these Conditions.

Trustee has the meaning specified in the preamble to these Conditions.

Wholly Owned Subsidiary has the meaning given in the Corporations Act.

Winding-Up has the meaning specified in Condition 2.2.

SUMMARY OF PROVISIONS RELATING TO THE NOTES WHILEREPRESENTED BY THE GLOBAL NOTESThe following is a summary of the provisions to be contained in the Trust Deed to constitute the Notes andin the Global Notes which will apply to, and in some cases modify, the Conditions of the Notes while theNotes are represented by the Global Notes.

1. Exchange

The Notes will be represented initially by a Temporary Global Note in bearer form without Couponsor Talons which will be deposited outside the United States for a common depositary for Euroclearand Clearstream, Luxembourg on or about the Issue Date. Any Optional Notes will also berepresented initially by a Temporary Global Note, if the Second Closing Date occurs after the IssueDate. Such Temporary Global Note will also be deposited with the same common depositary on theSecond Closing Date. Each Temporary Global Note will be exchangeable in whole or in part (free ofcharge to the holder) for interests in a Permanent Global Note in bearer form without Coupons orTalons on or after a date which is 40 days after the later of the Issue Date and the Second ClosingDate, upon certification as to non-U.S. beneficial ownership as required by U.S. Treasury regulationsand as described in each Temporary Global Note.

The Permanent Global Note will be exchangeable in whole but not in part (free of charge to theholder) for definitive Notes only:

(a) upon the happening of any of the events defined in the Trust Deed as “Events of Default”;

(b) if the Issuer has been notified that both Euroclear and Clearstream, Luxembourg have beenclosed for business for a continuous period of 14 days (other than by reason of holiday,statutory or otherwise) or have announced an intention permanently to cease business or havein fact done so and no successor clearing system satisfactory to the Trustee is available; or

(c) if the Issuer has or will become subject to adverse tax consequences which would not besuffered were the Notes represented by the Permanent Global Note in definitive form and acertificate to such effect signed by one Authorised Signatory of the Issuer is given to the Trustee.

Thereupon (in the case of (a) and (b) above) the holder of the Permanent Global Note (acting on theinstructions of one or more of the Accountholders (as defined below)) or the Trustee may give noticeto the Issuer and (in the case of (c) above) the Issuer may give notice to the Trustee and theNoteholders, of its intention to exchange the Permanent Global Note for definitive Notes on or afterthe Exchange Date (as defined below).

On or after the Exchange Date the holder of the Permanent Global Note may or, in the case of (c)above, shall surrender the Permanent Global Note to or to the order of the Principal Paying Agent.In exchange for the Permanent Global Note the Issuer will deliver, or procure the delivery of, an equalaggregate principal amount of definitive Notes (having attached to them all Coupons in respect ofinterest which has not already been paid on the Permanent Global Note), security printed inaccordance with any applicable legal and stock exchange requirements and in or substantially in theform set out in the Trust Deed. On exchange of the Permanent Global Note, the Issuer will procurethat it is cancelled and, if the holder so requests, returned to the holder together with any relevantdefinitive Notes.

For these purposes, Exchange Date means a day specified in the notice requiring exchange falling notless than 60 days after that on which such notice is given and being a day on which banks are openfor general business in the place in which the specified office of the Principal Paying Agent is locatedand, except in the case of exchange pursuant to (b) above, in the place in which the relevant clearingsystem is located.

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2. Payments

On and after 2 November 2010 or if later 40 days after the Second Closing Date, no payment will bemade on a Temporary Global Note unless exchange for an interest in the Permanent Global Note isimproperly withheld or refused. Payments of principal and interest in respect of Notes representedby a Global Note will, subject as set out below, be made to the bearer against presentation of suchGlobal Note and, if no further payment falls to be made in respect of the Notes, against surrender ofsuch Global Note to the order of the Principal Paying Agent or such other Paying Agent as shall havebeen notified to the Noteholders for such purposes. A record of each payment made will be endorsedon the appropriate part of the schedule to the relevant Global Note by or on behalf of the PrincipalPaying Agent, which endorsement shall be prima facie evidence that such payment has been made inrespect of the Notes. Payments of interest on a Temporary Global Note (if permitted by the firstsentence of this paragraph) will be made only upon certification as to non-U.S. beneficial ownershipunless such certification has already been made.

3. Notices

For so long as all of the Notes are represented by a Global Note and such Global Note is held onbehalf of Euroclear and/or Clearstream, Luxembourg, notices to Noteholders may be given bydelivery of the relevant notice to Euroclear and/or Clearstream, Luxembourg (as the case may be) forcommunication to the relative Accountholders rather than by publication as required by Condition13. Any such notice shall be deemed to have been given to the Noteholders on the second day afterthe day on which such notice is delivered to Euroclear and/or Clearstream, Luxembourg (as the casemay be) as aforesaid.

Whilst any of the Notes held by a Noteholder are represented by a Global Note, notices to be givenby such Noteholder may be given by such Noteholder (where applicable) through Euroclear and/orClearstream, Luxembourg and otherwise in such manner as the Principal Paying Agent and Euroclearand Clearstream, Luxembourg may approve for this purpose.

4. Accountholders

For so long as all of the Notes are represented by a Global Note and such Global Note is held onbehalf of Euroclear and/or Clearstream, Luxembourg, each person (other than Euroclear orClearstream, Luxembourg) who is for the time being shown in the records of Euroclear orClearstream, Luxembourg as the holder of a particular principal amount of such Notes (each anAccountholder) (in which regard any certificate or other document issued by Euroclear orClearstream, Luxembourg as to the principal amount of such Notes standing to the account of anyperson shall, in the absence of manifest error, be conclusive and binding for all purposes) shall betreated as the holder of such principal amount of such Notes for all purposes (including but notlimited to, for the purposes of any quorum requirements of, or the right to demand a poll at, meetingsof the Noteholders and giving notice to the Issuer pursuant to Condition 10 and Condition 5.7) otherthan with respect to the payment of principal and interest on such principal amount of such Notes,the right to which shall be vested, as against the Issuer and the Trustee, solely in the bearer of therelevant Global Note in accordance with and subject to its terms and the terms of the Trust Deed.Each Accountholder must look solely to Euroclear or Clearstream, Luxembourg, as the case may be,for its share of each payment made to the bearer of the relevant Global Note.

5. Prescription

Claims against the Issuer and the Guarantor in respect of principal and interest on the Notesrepresented by a Global Note will be prescribed after 10 years (in the case of principal) and five years(in the case of interest) from the Relevant Date (as defined in Condition 7).

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SUMMARY OF PROVISIONS RELATING TO THE NOTES WHILE REPRESENTED BY THE GLOBAL NOTES

6. Cancellation

Cancellation of any Note represented by a Global Note and required by the Conditions of the Notesto be cancelled following its redemption or purchase will be effected by endorsement by or on behalfof the Principal Paying Agent of the reduction in the principal amount of the relevant Global Note onthe relevant part of the schedule thereto.

7. Put Option

For so long as all of the Notes are represented by one or both of the Global Notes and such GlobalNote(s) is/are held on behalf of Euroclear and/or Clearstream, Luxembourg, the option of theNoteholders provided for in Condition 5.7 may be exercised by an Accountholder giving notice to thePrincipal Paying Agent in accordance with the standard procedures of Euroclear and Clearstream,Luxembourg (which may include notice being given on his instructions by Euroclear or Clearstream,Luxembourg or any common depositary for them to the Principal Paying Agent by electronic means)of the principal amount of the Notes in respect of which such option is exercised and at the same timepresenting or procuring the presentation of the relevant Global Note to the Principal Paying Agentfor notation accordingly within the time limits set forth in that Condition.

8. Euroclear and Clearstream, Luxembourg

References in the Global Notes and this summary to Euroclear and/or Clearstream, Luxembourg shallbe deemed to include references to any other clearing system approved by the Trustee.

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SUMMARY OF PROVISIONS RELATING TO THE NOTES WHILE REPRESENTED BY THE GLOBAL NOTES

USE OF PROCEEDSThe proceeds of the issue of the Notes will be applied by the Issuer for its general corporate purposes and(in whole or in part) to fund its growth strategy.

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DESCRIPTION OF THE ISSUER

Introduction

Santos Finance Ltd (ACN 002 799 537) (the Issuer) was incorporated with limited liability in Sydney, NewSouth Wales on 6 July 1984 and is registered under the Corporations Act 2001 of Australia. Its principaland registered office is located at Ground Floor, Santos Centre, 60 Flinders Street, Adelaide, South Australia5000, Australia. The telephone number of its registered office is +61 8 8116 5000.

The issued share capital of the Issuer is AUD234,470,555 which is fully paid up and divided into234,470,555 ordinary shares which are fully held by the Guarantor.

Business

The Issuer is a wholly owned subsidiary of the Guarantor and acts as the principal finance company for theGroup. Its sole business is raising debt to be on-lent to companies within the Group to fund their investmentprogrammes and to manage cash generated from Group operations. The Issuer has issued bonds and notespreviously and has had no other industrial or commercial activities.

Board of Directors of the Issuer

Board of Directors Other Directorships and principal activities outside the Group–––––––––––––––– –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Peter Coates Minara Resources Limited (Chairman)Amalgamated Holdings LimitedMember of the NSW Minerals Ministerial Advisory CouncilMember of the Business Council of Australia

Kenneth Dean BlueScope Steel LimitedFellow of the Australian Society of Certified Practising AccountantsMember of the LaTrobe University Council

David Knox Botanic Gardens and State Herbarium, South AustraliaFellow of the Australian Institute of Mechanical Engineering

There are no potential conflicts of interest between the duties to the Issuer of the persons listed above andtheir private interests or other duties.

The business address of each of the Directors is Ground Floor, Santos Centre, 60 Flinders Street, Adelaide,South Australia 5000, Australia.

Major Shareholder

The sole shareholder of the Issuer is the Guarantor.

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DESCRIPTION OF THE GUARANTORPlease refer to “Glossary” for definitions of technical terms used but not otherwise defined in this section.

Introduction

Santos Ltd (ACN 007 550 923) (the Guarantor or Santos) was incorporated with limited liability inAdelaide, South Australia on 18 March 1954 and is registered under the Corporations Act 2001 ofAustralia. Its principal and registered office is located at Ground Floor, Santos Centre, 60 Flinders Street,Adelaide, South Australia 5000, Australia. The telephone number of its registered office is +61 8 81165000.

Santos has its ordinary shares listed on the Australian Securities Exchange (ASX). As at 8 September 2010,Santos had a market capitalisation of A$11.5 billion, making it one of Australia’s 30 largest listedcompanies by market capitalisation.

History and Development

Founded in 1954, Santos was originally South Australia Northern Territory Oil Search and has been activein the energy business for more than 50 years. Santos acquired exploration leases covering over 325,000square kilometres in South Australia and South West Queensland in 1954.

Santos made its first significant discovery of natural gas in the Cooper Basin with the Gidgealpa 2 well in1963. The Moomba 1 discovery in 1966 confirmed this region as a major petroleum province. As a resultof these discoveries, Santos had a commercially viable quantity of gas and entered into Gas SalesAgreements with the South Australian Gas Company, the Electricity Trust of South Australia and theAustralian Gas Light Company. Gas supplies commenced in 1969.

The 1980s saw Santos develop a major liquids business following the discovery of oil at Tirrawarra in theearly 1970s. A liquids recovery plant was built at Moomba, along with a fractionation and load-out facilityat Port Bonython.

By the 1990s Santos had become a major Australian operating enterprise with interests beyond the CooperBasin in emerging areas such as the Timor Sea and Carnarvon Basin in Western Australia. A number ofacquisitions in the 1990s provided Santos with additional opportunities onshore and offshore Australia,Indonesia and Papua New Guinea.

Since 2000, Santos has continued to build its business in South East Asia and Australia, while undertakingexploration activities and developing new projects to drive production and earnings growth.

More recently, Santos has focussed on expanding its LNG portfolio. The first of the LNG projects, theConocoPhillips operated Darwin LNG project commenced first export of LNG in 2006. In 2009, theExxonMobil operated PNG LNG project was formally approved for development. The project has signedbinding long-term LNG sales agreements with four Asian buyers and first sales are expected in 2014. Afinal investment decision is expected in late 2010 for the Gladstone Liquefied Natural Gas (GLNG) project.A fourth proposed LNG project, the Bonaparte floating LNG project, was announced in partnership withGDF SUEZ in 2009. An investment decision in respect of this project is expected in 2014.

Santos’ strategy is further outlined below under “Business Operations and Strategy“.

Business Overview

Santos’ business involves oil and gas exploration and production with interests in every major Australianpetroleum province, and in Indonesia, Papua New Guinea (PNG), Vietnam, India, Bangladesh and KyrgyzRepublic.

Santos is the largest producer of gas sold in Australia, supplying 17 per cent. of the Australian domestic gasmarket in 2010. Santos supplies sales gas to all mainland Australian states and territories and ethane to

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Sydney. It sells oil and gas liquids to a number of domestic and international customers. As at 31 December2009, Santos’ assets totalled A$11,361 million. Santos produced approximately 54.4 mmboe during 2009and, as at 31 December 2009 had a substantial reserve base of approximately 1,440 mmboe on a 2P basis.Current production is approximately 600 mmscf/d of gas and approximately 40 kbbls/d of liquids.

As at 31 December 2009, Santos had 2,096 employees excluding contractors working across its operationsand offices in Adelaide, Brisbane, Perth, Gladstone, Roma, Gunnedah and country offices in Jakarta, PortMoresby, Hanoi, New Delhi, Bishkek and Dhaka.

Figure 1 below shows the location of Santos’ main operations and assets referred to in this document.

Figure 1: Guarantor’s main operations and assets referred to in this document

Business Operations and Strategy

Santos’ vision is to be a leading energy company in Australia and Asia. Santos’ strategy is to driveperformance from its existing base business, deliver a suite of LNG projects and pursue focussedopportunities in Asia.

Australian Oil & Gas Operations.

Santos’ Australian base business comprises gas and oil production assets in all mainland states and theNorthern Territory. Solid production combined with sanctioned projects and the potential of untappedreserves firmly places Santos in a position to serve the growing demand for natural gas and help Australiamove towards a cleaner energy future.

Eastern Australian Gas

Santos’ business in Eastern Australia includes interests and joint ventures in the Cooper/Eromanga Basinsin central Australia, Surat/Bowen CSG Basins in south-eastern Queensland and Otway/Gippsland Basins inoffshore southern Australia. These basins are the primary source of gas supply into Victoria, NSW, ACT,South Australia and Queensland.

The Cooper Basin has been the heartland of Santos for more than four decades and still retains significantdevelopment potential. Santos believes gas demand in Australia’s eastern states will grow significantly as

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DESCRIPTION OF THE GUARANTOR

the region seeks cleaner energy through gas-fired power plants and a gas export channel is created throughprojects like Santos’ GLNG project. Established infrastructure and access to extensive pipeline networkspositions the Cooper Basin to play a large role in meeting that demand. Santos is working to unlock itssignificant gas resources through enhanced recovery and infill drilling and by exploiting unconventionalreservoirs.

Development work is also progressing on the ExxonMobil operated Kipper project in Victoria with firstproduction expected in second half of 2011.

Santos took the next major step in its CSG strategy when it acquired significant additional acreage in theGunnedah Basin of New South Wales and invested in leading local CSG Company Eastern Star Gas. Santosand Eastern Star’s total combined area of petroleum permits in the Gunnedah Basin in about 45,000 squarekilometres.

Western Australian Oil and Gas

Santos is a leading gas supplier in Western Australia, having supplied gas there for over 20 years throughinterests in the Carnarvon Basin, offshore Western Australia, together with several small producing oil fieldsin the Timor Sea and Timor Gap. John Brookes is Santos’ major producing gas asset in the Carnarvon Basinand has been producing since 2005.

In addition to the producing assets, Santos has a portfolio of quality growth opportunities. Development ofthe Reindeer project offshore Western Australia was approved in 2008, with first gas scheduled for thefourth quarter of 2011. On 30 August 2010, Santos announced the development of the Halyard field, thelatest Western Australian domestic gas project with production targeted to start in mid 2011.

LNG Projects:

Strong economic growth and primary energy demand in Asia alongside the desire for security of supply, ascarcity of hydrocarbon reserves in importing nations and the need for clean burning fuels has resulted ingrowing demand in the region for LNG. Santos has a strategic portfolio of four LNG projects in Asia atvarious stages of appraisal, development and operation to service this demand.

The Asia Pacific LNG market is characterised by binding offtake contracts between buyers and producerswith a duration typically between 15 to 25 years and with pricing formulae agreed prior to production.

Darwin LNG – In operation since 2006

The Darwin LNG Project, operated by ConocoPhillips, is Santos’ first producing LNG asset. The projectinvolves the export of gas from the Bayu-Undan fields, situated in 80 metres of water approximately 500kilometres north-west of Darwin to a 3.6 mtpa LNG plant in Darwin. LNG production commenced inFebruary 2006 with a contract to supply leading Asian utilities. Santos holds an 11.5 per cent. stake in theproject. The Bayu-Undan fields in the Timor Gap produce approximately 1,100 MMscf/d of raw gas (gross)and approximately 103,000 bbl/d of liquids (gross).

PNG LNG – Approved in 2009

The PNG LNG Project, operated by ExxonMobil, was formally approved by Santos and project partners inDecember 2009 with financial close being achieved in March 2010. The PNG LNG project will develop thegas and condensate resources in the Hides, Angore and Juhu fields and the associated gas resources in thecurrently operating oil fields of Kutubu, Agogo, Gobe and Moran in the Southern Highlands and WesternProvinces of Papua New Guinea. The gas will be transported by pipeline to a two train LNG facility withan initial capacity of 6.6 mtpa located northwest of Port Moresby on the coast of the Gulf of Papua. PNGLNG is the largest ever investment in PNG and is expected to double the country’s gross domestic product.

Santos has a 13.5 per cent. stake in the PNG LNG Project and a U.S.$2 billion share of the estimated totalproject capital cost which is funded as to approximately 70 per cent. by a completed project financing debtfacility. The first LNG cargo is expected to be shipped in 2014 with plateau production of approximately

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9 mmboe per annum net to Santos. Offtake agreements have been signed for all expected production, andwill supply Sinopec, TEPCO, Osaka Gas and CPC Taiwan. Early works construction commenced prior tosanction and continues at the upstream and LNG plant locations and for supporting infrastructure. Furthergrowth could arise from debottlenecking or from additional resources giving rise to a potential third LNGtrain.

GLNG – Expected approval in 2010

Santos’ proposed GLNG Project involves the production of LNG using CSG sourced from the GLNG gasfields in the Bowen and Surat Basins in Queensland. The Fairview Field in the Bowen Basin has beenproducing gas since 1995.

GLNG is making significant progress towards a final investment decision in 2010 with first LNG deliveriesscheduled to begin in 2014. There is no certainty that a final investment decision will be reached for GLNG.The design contemplates a two-train development with a capacity of 7.2 mtpa of LNG.

In May 2010, GLNG became Australia’s first major CSG to LNG project to receive environmental approvalfrom the Queensland Government. The environmental approval process is continuing with FederalGovernment consideration of the project. Engineering design works for the project are nearing completion.

In September 2010, Santos announced that it had entered into an agreement to sell 15 per cent. equity inGLNG to Total E&P Australia. Additionally, Santos announced the sale of 1 mtpa of LNG from Train 1and 0.5 mtpa of LNG from Train 2 to Total E&P Australia and the further sale of LNG to PETRONASalong with a re-configuration of the LNG volumes previously sold to PETRONAS such that PETRONAS’offtake from GLNG would be 2.33 mtpa from Train 1 and 1.17 mtpa from Train 2. In parallel,PETRONAS also entered into an agreement to sell a 5% interest in GLNG to Total E&P Australia.

Upon completion of the Santos and PETRONAS sale transactions, the ownership structure of GLNG willbe: Santos 45 per cent.; PETRONAS 35 per cent.; and Total E&P Australia 20 per cent.

Santos and GLNG remain in detailed ongoing discussions with a number of Asian parties in relation tofurther potential LNG sales and equity in the project. These parties include KOGAS, the world’s largestLNG buyer.

Bonaparte LNG – Expected approval in 2014

Santos has partnered with France’s GDF SUEZ, to develop Bonaparte LNG, a proposed 2 mtpa floatingLNG project, located in the Timor Sea off the northern coast of Australia.

As part of the partnership, GDF SUEZ has bought 60 per cent. of the Petrel, Tern and Frigate gas fieldsfrom Santos for up to U.S.$370 million, and will carry all of Santos’ share of the costs until a finalinvestment decision, expected in 2014. The resource is approximately 2.1 trillion cubic feet (TCF) gross.

Asia

Santos has built a strong and reliable production business in Indonesia and is further developing its Asianbusiness through development projects and exploration investment in Indonesia, Vietnam, India,Bangladesh and Kyrgyz Republic.

PNG

In addition to its interest in the PNG LNG development, Santos has interests in PNG that produced 0.1mmboe net to Santos in 2009.

Indonesia

Santos first acquired interests in Indonesia in 1993. Santos holds a 67.5 per cent. operating interest in theMadura Offshore Production Sharing Contract (PSC), located in offshore east Java which contains the

49



Maleo field. Production commenced from the Maleo gas project in September 2006, which now has grossgas production of approximately 110 mmscf/d.

Santos also holds a 45 per cent. operating interest in the Sampang PSC, also located in offshore East Java.The Oyong field was discovered in 2001 and oil production commenced in 2007. The existing offshorefacilities have been modified with the construction of a 60 kilometre pipeline to a new onshore gasprocessing facility and first gas production commenced in October 2009.

Santos is expected to approve the Wortel Project in 2010, which is a tie back to Oyong, with first gasforecasted in second half of 2011.

Vietnam

In 2006, Santos entered Vietnam via a farm-in to the Nam Con Son and Hong Song Basins. The Chim Saofield in the Nam Con Son basin was discovered in the same year and approved for development in 2009.The development of this field is proceeding on track with first oil expected in the second half of 2011 witha net plateau production of approximately 8,000 bbl/d.

India and Bangladesh

During May 2007, Santos was awarded a 100 per cent. working interest and operatorship of blockscovering approximately 16,500 square kilometres in the Bengal Basin, in the northern Bay of Bengal,offshore India. An extensive 3D seismic program began in 2008 and is largely complete. Santos’ ability toconduct operations (including the completion of the 3D seismic program) in certain areas within the blockshas, however, been directly affected by circumstances arising in connection with the maritime boundarydispute between India and Bangladesh. Bangladesh commenced arbitration proceedings (under the UnitedNations Convention on the Law of the Sea) against India with respect to its maritime boundary claims inOctober 2009. The award of the tribunal will be binding on each of the States and the arbitrationproceedings are expected to take approximately 3 to 5 years to finish. This timing is not certain, however,and it is also possible that negotiations between India and Bangladesh may result in a binding settlementbeing reached with respect to the dispute prior to the conclusion of the arbitration proceedings.

Santos acquired assets in Bangladesh in October 2007 from Cairn Energy PLC (Cairn). Santos acquired a37.5 per cent. non-operating interest in the producing Sangu Development Area and a 37.5 per cent. Nonoperating interest in the Block 16 exploration acreage.

Kyrgyz Republic

Santos has established a substantial acreage position in the Fergana Basin in the south of the KyrgyzRepublic. Santos holds interests in six prospecting licences covering approximately 2,700 square kilometresin the proven oil and gas province. 2D seismic work has been completed and shallow drilling occurred in2009. Deeper drilling is planned for 2011 to further evaluate the potential of these assets.

The Fergana Basin covers an area of 63,000 square kilometres and has been producing hydrocarbons sincethe early 1900s.

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Production Statistics

Details of Santos’ production statistics for 2009 are set out in Table 1 below:

Table 1: Production statistics – 2009Total 2009 Total 2008

–––––––––––––––––––– ––––––––––––––––––––Field Units mmboe Field Units mmboe

––––––––– ––––––––– ––––––––– –––––––––Sales gas, ethane and LNG (PJ)Cooper ............................................................................ 79.9 13.7 90.2 15.5Surat/Bowen/Denison ...................................................... 31.9 5.5 32.8 5.6Amadeus.......................................................................... 10.6 1.8 12.2 2.1Otway/Gippsland ............................................................ 20.5 3.5 21.0 3.6Carnarvon ...................................................................... 43.5 7.5 27.3 4.7Bonaparte ........................................................................ 16.3 2.8 16.3 2.8Indonesia ........................................................................ 30.2 5.2 24.2 4.2Bangladesh ...................................................................... 5.7 1.0 6.3 1.1

––––––––– ––––––––– ––––––––– –––––––––Total production.............................................................. 238.6 41.0 230.3 39.6

––––––––– ––––––––– ––––––––– –––––––––Total sales volume .......................................................... 268.2 46.1 237.9 40.9

––––––––– ––––––––– ––––––––– –––––––––Total sales revenue(A$ million) .................................................................... 1,098.2 1,051.6

––––––––– –––––––––––––––––– –––––––––Crude oil (‘000 bbls)Cooper ............................................................................ 3,598.4 3.6 3,945.7 4.0Surat/Denison .................................................................. 62.5 0.1 71.1 0.1Amadeus.......................................................................... 106.3 0.1 127.9 0.1Legendre .......................................................................... 288.7 0.3 299.6 0.3Thevenard........................................................................ 305.7 0.3 339.8 0.3Barrow ............................................................................ 573.5 0.6 617 0.6Stag.................................................................................. 1,643.9 1.6 1,627.9 1.6Mutineer-Exeter .............................................................. 995.0 1.0 1,254.6 1.3Jabiru-Challis .................................................................. 105.9 0.1 142.0 0.1Indonesia ........................................................................ 560.3 0.6 983.4 1.0SE Gobe .......................................................................... 148.1 0.1 188.2 0.2

––––––––– ––––––––– ––––––––– –––––––––Total production.............................................................. 8,388.3 8.4 9,597.2 9.6

––––––––– ––––––––– ––––––––– –––––––––Total sales volume .......................................................... 8,604.5 8.6 9,796.8 9.8

––––––––– ––––––––– ––––––––– –––––––––Total sales revenue(A$ million) .................................................................... 678.3 1,150.6

––––––––– –––––––––––––––––– –––––––––Condensate (‘000 bbls)Cooper ............................................................................ 1,095.2 1.0 1,295.1 1.2Surat/Denison .................................................................. 7.6 0.0 17.4 0.0Amadeus.......................................................................... 46.6 0.1 67.4 0.1Otway.............................................................................. 23.4 0.0 22.1 0.0Carnarvon ...................................................................... 435.5 0.4 291.4 0.3Bonaparte ........................................................................ 1,552.6 1.5 1,594.7 1.5Bangladesh ...................................................................... 0.9 0.0 1.2 0.0

––––––––– ––––––––– ––––––––– –––––––––Total production.............................................................. 3,161.8 3.0 3,289.3 3.1

––––––––– ––––––––– ––––––––– –––––––––Total sales volume .......................................................... 3,505.8 3.3 3,173.9 3.0

––––––––– ––––––––– ––––––––– –––––––––Total sales revenue(A$ million) .................................................................... 233.2 321.2

––––––––– –––––––––––––––––– –––––––––

Total 2009 Total 2008–––––––––––––––––––– ––––––––––––––––––––

Field Units mmboe Field Units mmboe––––––––– ––––––––– ––––––––– –––––––––

LPG (‘000 t)Cooper ............................................................................ 151.2 1.3 162.0 1.4Surat/Denison .................................................................. 0.3 0.0 1.3 0.0Bonaparte ........................................................................ 88.6 0.7 88.1 0.7

––––––––– ––––––––– ––––––––– –––––––––Total production.............................................................. 240.1 2.0 251.4 2.1

––––––––– ––––––––– ––––––––– –––––––––Total sales volume .......................................................... 252.6 2.1 250.5 2.1

––––––––– ––––––––– ––––––––– –––––––––Total sales revenue(A$ million) .................................................................... 170.8 238.4

––––––––– –––––––––––––––––– –––––––––TotalProduction(mmboe) .......................................................................... 54.4 54.4Sales volume(mmboe) .......................................................................... 60.1 55.8Sales revenue(A$ million) .................................................................... 2,180.5 2,761.8

Reserves and Resources

Santos has in place an evaluation and reporting process that is in line with international industry practiceand is in general conformity with reserves definitions and resource classification systems published by theSociety of Petroleum Engineers, World Petroleum Congress and the American Association of PetroleumGeologists.

Santos has the largest Australian exploration portfolio by area (133,800 square kilometres) and asubstantial Asian asset base. At the end of 2009, Santos had 2P reserves of 1,440 mmboe. Over the pastfive years Santos has more than doubled 2P reserves despite producing almost 300 million barrels of oilequivalent in this period. At the current rate of production, Santos has an average reserve life ofapproximately 26 years based upon 2P reserves. Santos has added reserves and resources at a compoundannual growth rate of 14% from 2004 to 2009.

Santos now has almost half of its reserves targeted at the higher margin LNG business, and about a thirdof those are conventional reserves at PNG LNG and Darwin LNG.

Details of Santos’ 2009 Reserves statistics are set out in Table 2 below.

Table 2: Reserves statistics – 2009

Proven plus probable reserves (Santos share) by activity

Sales gas(incl. ethane Crude Oil Condensate LPG ‘000 Total

& LNG) PJ mmbbl mmbbl tonnes mmboe–––––––––––– –––––––––––– –––––––––––– –––––––––––– ––––––––––––

Reserves year end 2008................................ 5,039 83 42 2,989 1,013Production .................................................. (239) (8) (3) (240) (54)Additions .................................................... 2,857 2 32 109 525Acquisitions/divestments .............................. (197) (3) (7) (10) (44)Estimated reserves year end 2009 ................ 7,460 74 64 2,848 1,440

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Proven plus probable reserves (Santos share) year end 2009 by area

Sales gas(incl. ethane Crude Oil Condensate LPG ‘000 Total

& LNG) PJ mmbbl mmbbl tonnes mmboe–––––––––––– –––––––––––– –––––––––––– –––––––––––– ––––––––––––

AreaEastern Australia

Cooper Basin............................................ 762 31 11 1,607 186Southern Australia .................................. 465 0 5 398 88Qld CSG .................................................. 3,024 0 0 0 520Qld conventional...................................... 56 0 0 0 10NSW CSG................................................ 532 0 0 0 91

–––––––––––– –––––––––––– –––––––––––– –––––––––––– ––––––––––––Total EA ...................................................... 4,839 31 16 2,005 895

–––––––––––– –––––––––––– –––––––––––– –––––––––––– ––––––––––––

Western Australia and Northern TerritoryCarnarvon................................................ 742 24 5 0 155Bonaparte ................................................ 278 0 17 843 71Amadeus .................................................. 95 5 1 0 23

–––––––––––– –––––––––––– –––––––––––– –––––––––––– ––––––––––––Total WA and NT ........................................ 1,115 29 23 843 249

–––––––––––– –––––––––––– –––––––––––– –––––––––––– ––––––––––––

Asia PacificPNG ........................................................ 1,130 1 25 0 218Indonesia.................................................. 168 1 0 0 30Vietnam.................................................... 9 12 0 0 14Bangladesh .............................................. 7 0 0 0 1

–––––––––––– –––––––––––– –––––––––––– –––––––––––– ––––––––––––Total AP ...................................................... 1,314 14 25 0 263

–––––––––––– –––––––––––– –––––––––––– –––––––––––– ––––––––––––Total ............................................................ 7,268 74 64 2,848 1,407

–––––––––––– –––––––––––– –––––––––––– –––––––––––– ––––––––––––Beneficial interests(*) .................................. 192 0 0 0 33

–––––––––––– –––––––––––– –––––––––––– –––––––––––– ––––––––––––Grand total .................................................. 7,460 74 64 2,848 1,440

–––––––––––– –––––––––––– –––––––––––– –––––––––––– ––––––––––––

Reserves (Santos share)

Year end Year end2008 Production Additions Acq/Div 2009

–––––––––––– –––––––––––– –––––––––––– –––––––––––– ––––––––––––

(mmboe)1P reserves .................................................. 518 54 230 (46) 6472P reserves .................................................. 1,013 54 525 (44) 1,4402C contingent resources .............................. 2,849 0 (260) (92) 2,497

Group Structure

As at 30 June 2010, the Guarantor was the parent of 85 wholly-owned subsidiaries, and eight partly-ownedsubsidiaries: CJSC South Petroleum Company (70%); CJSC KNG Hydrocarbons (54%); Zhibek Resourceslimited (75%); Easternwell Drilling Services Holdings Pty Ltd and its subsidiaries (50%); Lohengrin Pty Ltd(50%) and GLNG Operations Pty Ltd (60%); Darwin LNG Pty Ltd (11.5%); and Papua New GuineaLiquefied Natural Gas Global Company LDC (13.5%).

The Group structure comprises four asset-based business units:

• Eastern Australia;

• Western Australia and Northern Territory;

• Asia; and

• GLNG.

These business units are backed by a corporate centre comprising: Strategy and Corporate Development;Finance; Legal; and Human Resources. In addition, Santos has two specialist disciplines: Technical; andExploration.

Applicable Regulatory Issues

Australia

Taxation

Excise and royalty on the production of hydrocarbons is levied via a regime of excise, royalties andpetroleum resource rent tax.

Onshore, federal excise is levied on the net volume of oil and condensate removed (after removal of waterand gas) from a producing field in excess of the first 30 mmbbL of production, which is excise free.Thereafter, excise is charged on an annual sliding scale of marginal rates for oil ranging from nil (up to 3.15mmbbL) to 30 per cent. (above 5.03 mmbbL). Lesser rates of excise apply to condensate. State royalty ispayable as a percentage of the wellhead value of all production (gross value of petroleum less approved postwellhead costs). The royalty rate currently payable by the Issuer in South Australia, Queensland and theNorthern Territory is 10 per cent.

In relation to its offshore operations, excise and royalty of 10 per cent. apply to production licences onThevenard Island. Barrow Island is covered by the Resource Rent Royalty (RRR) tax regime which isunique to the island and replaced the well-head royalty and excise regime described above. RRR is chargedat a rate of 40 per cent. of the net cashflow from annual production (the accumulated value of sales lesseligible deductions).

In addition, the Petroleum Resource Rent Tax (PRRT) applies in all Commonwealth waters, other than theNorth West Shelf permits. PRRT is charged at a rate of 40 per cent. of the taxable profit of a project. Forfurther details, see “Risk Factors - Mineral Resources Rent Tax and other Australian taxes”.

Exploration and Production Licences

Petroleum resources within Australia are the property of the Crown and rights to explore and produce areconferred by statutory titles granted by legislation of the relevant State or Territory, the most significant ofwhich are exploration and production leases or licences.

The ownership and operation of gas transportation pipelines is regulated by State, Territory andCommonwealth legislation. Petroleum operations in Australian territorial waters are subject to theOffshore Petroleum and Greenhouse Gas Storage Act 2006 (OPGGSA) in respect of operations inCommonwealth waters and the various State and Territory Acts in respect of operations in areas adjacentto the respective State or Territory. These legislations regulate exploration and development operationsincluding the grant of key titles, such as Exploration Permits, Retention Leases, Production Licenses andPipeline Licences.

Exploration licences are usually subject to the condition that a prescribed minimum work programme becarried out, and to progressive acreage relinquishment after the elapse of prescribed periods. Productionlicences generally enure for the full productive life of all fields, including those developed after theproduction licence is granted.

Joint Petroleum Development Area

The Joint Petroleum Development Area (formerly known as the Timor Gap Zone of Co-operation) issubject to an international agreement between Australia and the Timor-Leste.

Under the Bayu-Undan PSCs, Santos and its contractors are entitled to a share of first tranche petroleum,which is a 10 per cent. portion of gross revenue “distributed” prior to cost recovery, equal to 60 per cent.of revenue from LPG and gas and 50 per cent. of revenue from condensate, an investment credit equal to

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127 per cent. of eligible exploration and capital costs, recovery of costs (operating costs, intangiblesexpensed and depreciation of tangibles at 20 per cent. straight line) and a share of remaining “profit oil orgas”. Profit oil is split on a sliding scale from 50 per cent. of the first 50,000 barrels per day to 30 per cent.over 150,000 barrels per day, contractors’ share. Profit gas and LPG is 60 per cent. and profit condensateis 50 per cent. contractors’ share. In addition, income tax and additional profits tax is applicable in TimorLeste on 90 per cent. of income and income tax is applicable in Australia on 10 per cent. of income.

Indonesia

The development of Indonesia’s natural resources is based on the philosophy enshrined in Article 33 of theConstitution that all natural resources fall under the jurisdiction of the State. Upon being granted a PSC,the contractor is committed to a minimum level of exploration activity. If commercial hydrocarbons arefound, the contractor must apply for commerciality of the block to the government and will be required tosubmit a plan of development.

Post tax profit share for oil is typically 85:15 in favour of the State, and for gas 70:30 or 65:35 in favourof the State. At tax rates of 44 per cent. to 48 per cent., these splits generate a pre tax profit share to thecontractor of between 26.8 per cent. and 28.8 per cent. for oil and between 53.6 per cent. and 62.5 per cent.for gas.

All PSCs in Indonesia are subject to a domestic market obligation (DMO) for oil. This obligation occursfive years after first oil production for new fields and the contractor is required to supply a percentage ofoil to the domestic market at a reduced price. No DMO is applicable on gas production. The price at whichthe domestic crude is sold depends on the date of signing the PSC and is typically between 10 per cent. and25 per cent. of the export price.

Vietnam

Santos is a party to a number of PSCs entered into with Vietnam Oil and Gas Corporation (PetroVietnam),the State owned national oil company with authority under Article 14 of the Petroleum Law (1993) to enterinto PSCs.

Contractors are subject to income tax of 32 per cent. and export duty of 4 per cent. on oil exports. Thecontractors are also required to make bonus payments to PetroVietnam upon commercial discovery and onreaching various production rates.

The Board and Management of the Guarantor

The directors of the Guarantor, and a brief description of their activities outside the group, as at the date ofthis Prospectus, are as follows:

Other Directorships and principal activities outside the Group

Peter Coates (Chairman) Minara Resources Limited (Chairman)Amalgamated Holdings LimitedMember of the NSW Minerals Ministerial Advisory CouncilMember of the Business Council of Australia

Botanic Gardens and State Herbarium, South AustraliaFellow of the Australian Institute of Mechanical Engineering

APPEA LimitedFellow of the Australian Society of Certified Practising Accountants

Kenneth Borda Fullerton Funds ManagementIthmaar Bank (Bahrain)Leighton Contactors Plc LtdTalent2 International LtdAsian Advisory Board of Aviva Pte Ltd (Singapore)

Peter Wasow (Chief FinancialOfficer)*

David Knox (Chief ExecutiveOfficer and Managing Director)

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56

Kenneth Dean BlueScope Steel LimitedFellow of the Australian Society of Certified Practising AccountantsMember of the LaTrobe University Council

Roy Franklin Keller Group plc (Chairman)StatoilHydro ASA

Richard Harding Clough LtdDowner EDI Limited

Gregory Martin Energy Developments LimitedAustralian Energy Market Operator LimitedEverest Financial GroupGas Valpo S.A. (Chile)Chairman of The Royal Botanic Gardens & Domain Trust of NewSouth Wales

Jane Hemstritch Commonwealth Bank of AustraliaThe Global FoundationTabcorp Holdings LtdMember of the Research and Policy Council and Advisory Committeefor Economic Development of AustraliaFellow of the Institutes of Chartered Accountants in Australia and inEngland and Wales

David Lim (Company Secretary) Member of Chartered Secretaries AustraliaMember of Australian Corporate Lawyers Association

*Mr Wasow will retire from the Guarantor on 31 December 2010.

There are no potential conflicts of interest between the duties to the Guarantor of the persons listed aboveand their private interests or other duties.

The business address of each of the Directors is Ground Floor, Santos Centre, 60 Flinders Street, Adelaide,South Australia 5000, Australia.

TAXATION

Australian Taxation

The following is a general summary of the taxation treatment under the Income Tax Assessment Act 1936and the Income Tax Assessment Act 1997 (together, the “Tax Act”) and any relevant regulations, rulings orjudicial or administrative pronouncements, at the date of this Prospectus, of payments of interest andcertain other amounts on the Notes and certain other matters.

Tax considerations which may arise for investors who are in the business of trading or dealing in securities,or otherwise hold Notes on revenue account have not been considered in this tax summary.

This summary is not exhaustive and is not intended to be, nor should it be construed as, legal or tax adviceto any particular investor. Prospective Noteholders should consult their professional advisers on the taximplications of an investment in the Notes in their particular circumstances.

1. Interest withholding tax

Absent the exemptions discussed below, payments of interest on the Notes would be within the scope ofAustralia’s rules on interest withholding tax. Division 11A of Part III of the Tax Act provides that a paymentof interest by an Australian resident, not acting through a permanent establishment outside Australia, to anon-resident, not acting through a permanent establishment in Australia; or to an Australian resident actingthrough a permanent establishment outside Australia, is ordinarily subject to withholding tax at the rate of10%.

For the purposes of Division 11A, subsection 128(1AB) provides that interest includes amounts in thenature of interest. A premium on redemption of a security would generally be treated as an amount in thenature of interest. A payment by the Guarantor to a Noteholder in respect of accrued interest on a Notemay also be interest, or in the nature of interest, for these purposes.

A payment in consideration of the transfer of certain securities can be deemed to be interest:

• under section 128AA where the transfer price of a ‘qualifying security’ exceeds the issue price; or

• where the security is disposed of to an Australian resident prior to the payment of interest with thesole or dominant purpose of avoiding withholding tax on that interest (a ‘washing arrangement’).

Section 128F exemption

Under section 128F of the Tax Act, an exemption from Australian interest withholding tax applies providedall prescribed conditions are met. The exemption under section 128F extends to interest under subsection128(1AB) paid by an issuer and, where applicable, deemed interest on transfer of a qualifying security undersection 128AA.

The relevant conditions to be satisfied in respect of the Notes are:

• the Issuer is a resident of Australia when it issues the Notes and when interest is paid in respect of theNotes;

• interest is not paid to an associate of the Issuer of the kind described below;

• the Notes are debentures; and

• the Notes are offered for issue in a manner which satisfies the public offer test.

In broad terms, an issue of the Notes will satisfy the public offer test where there are:

• offers to 10 or more unrelated financiers or securities dealers;

57


• offers to 100 or more persons that are reasonable to regard as having acquired similar instruments inthe past, or as being likely to be interested in acquired the Notes;

• offers of Notes as a result of them having been accepted for listing on a stock exchange;

• offers via publicly available information sources; or

• offers to a dealer, manager or underwriter who offers to sell those Notes within 30 days by one of thepreceding methods.

The public offer test will not be satisfied if, at the time of issue, the Issuer knew or had reasonable groundsto suspect that the Notes were being or would later be acquired directly or indirectly by an associate of theIssuer (within the meaning of subsection 128F(9)) that is:

• a resident of Australia that would acquire the Note through a permanent establishment outsideAustralia, or a non-resident that would not acquire the Note through a permanent establishment inAustralia; and

• is not acting in the capacity of a dealer, manager or underwriter in relation to the placement of therelevant Notes, or a clearing house, custodian, funds manager or responsible entity of a registeredmanaged investment scheme.

Even if the public offer is satisfied, a payment of interest will not be exempt from withholding tax if it is infact paid to an associate of the Issuer within the meaning of subsection 128F(9) that is:

• a resident of Australia that would acquire the Note through a permanent establishment outsideAustralia, or a non-resident that would not acquire the Note through a permanent establishment inAustralia; and

• is not acting in the capacity of a clearing house, paying agent, custodian, funds manager orresponsible entity of a registered managed investment scheme.

The Commissioner of Taxation accepts that where payments by a guarantor would be interest forwithholding tax purposes, the exemption in section 128F will be available in respect of such payments(provided the requirements of section 128F are satisfied).

Although the section 128F interest withholding tax exemption does not apply to deemed interest under a‘washing arrangement’ where interest in respect of the Notes is otherwise exempt from interest withholdingtax, a Noteholder could not be taken to have a purpose of avoiding withholding tax by transfer of the Notesand so these provisions should not apply.

The taxation of financial arrangements (TOFA) provisions in Division 230 of the Tax Act do not affect theavailability of the section 128F interest withholding tax exemption.

Compliance with the section 128F exemption

The Issuer intends to issue the Notes in a manner that will satisfy the conditions for the application of theinterest withholding tax exemption in section 128F. In particular, and pursuant to an agreement betweenthe Issuer and the Managers, it is expected that Notes will not be issued or sold to an associate of the Issuerin a manner that would cause the failure of the public offer test in the section 128F exemption.

Where section 128F applies, payments of interest (and principal) on the Notes will not be subject toAustralian interest withholding tax, where the Noteholder is a non-resident and does not hold the Notes inthe course of carrying on a business through a permanent establishment in Australia.

Other exemptions

In the event that the section 128F exemption did not apply to a payment of interest in respect of the Notes,a payment to a person outside Australia may nonetheless be exempt from interest withholding tax if:

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TAXATION

• the Noteholder is a pension or superannuation fund for non-residents that is exempt from income taxin its country of residence;

• the Noteholder is entitled to the benefit of the sovereign immunity doctrine; or

• the Noteholder is a resident of a country with which Australian has concluded a double tax treatyand is entitled to the benefits of an exemption under that treaty.

Payment of additional amounts

As set out in more detail in the Terms and Conditions, if the Issuer or the Guarantor is at any time requiredby law to deduct or withhold an amount in respect of any withholding taxes imposed or levied by theCommonwealth of Australia in respect of the Notes, the Issuer or Guarantor must, subject to certainexceptions, pay such additional amounts as may be necessary in order to ensure that the net amountsreceived by the holders of those Notes after such deduction or withholding are equal to the respectiveamounts which would have been received had no such deduction or withholding been required.

A payment of an additional amount in these circumstances is not itself interest, or in the nature of interest,and so should not be subject to additional withholding tax.

If the Issuer or Guarantor is compelled by law in relation to any Notes to deduct or withhold an amount inrespect of any withholding taxes, the Issuer will have the option to redeem those Notes in accordance withthe Terms and Conditions.

2. Income Tax

Non-residents

Where a Noteholder is a non-resident, and the Noteholder does not hold the Notes through a permanentestablishment in Australia, interest paid in respect of the Notes should not be included in the assessableincome of the Noteholder.

A gain arising to a non-resident Noteholder from disposal of Notes should only be subject to Australiantax, and a loss should only be deductible, if:

• the non-resident Noteholder is resident of a country with which Australia has concluded acomprehensive double tax treaty and the Notes are held through a permanent establishment throughwhich the Noteholder is doing business in Australia; or

• the non-resident Noteholder is not resident of a country with which Australia has concluded acomprehensive double tax treaty and the gain has an Australian source. Where a non-residentNoteholder makes a gain from a disposal of a Note to another non-resident, and the relevantnegotiations are undertaken and the transaction is documented outside of Australia, the gain wouldnot ordinarily an have an Australian source.

Australian residents

Interest derived by an Australian resident Noteholder in respect of the Notes, and any gains upon disposalor redemption, should be included in their assessable income, subject to any specific exemption applicableto that Noteholder.

The manner and timing of inclusion of such amounts in assessable income will depend upon the specific taxrules applying to the Noteholder, including whether and how the TOFA rules in Division 230 of the TaxAct apply to the Noteholder. Where the TOFA rules do not apply, a Noteholder will need to consider theapplication of the rules dealing with ‘traditional securities’ and the foreign exchange tax rules in Division775 and Subdivision 960-C of the Tax Act.

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TAXATION

3. Other Australian tax matters

Debt interests

The Notes should be ‘debt interests’, rather than ‘equity interests’, for the purposes of Australian debt/equitytax rules. Accordingly, interest paid on the Notes should not be treated as dividends for the purposes ofAustralia’s dividend imputation (franking) system and dividend withholding tax rules.

Stamp duty

Subject to the Notes being ‘debt interests’ as described above, no ad valorem stamp, issue, registration orsimilar taxes are payable in Australia on the issue or transfer of any Notes.

Goods and services tax (GST)

Neither the issue of the Notes, the payment of interest in respect of the Notes, nor the redemption of theNotes will give rise to a liability for GST in Australia. Dealings in respect of the Notes will comprise eitheran input taxed financial supply or (in the case of an offshore Noteholder) a GST-free supply.

Bearer debentures withholding tax

Where a company pays interest on a bearer debenture to an Australian resident, or to a non-resident holderthat holds the bearer debenture through a permanent establishment in Australia, and the issuing companydoes not give the Commissioner of Taxation the name and address of the holder, then the issuing companyis liable to pay tax on that interest at the rate of 45%, pursuant to section 126 of the Tax Act to non-residents. No such tax is payable where the section 128F exemption applies to payments of interest. Ifsection 126 applies to a Note, the Issuer is authorized by subsection 126(2) of the Tax Act to deduct theamount of this tax from the interest otherwise payable to the Noteholder.

For these purposes, the Issuer intends to treat the operator of a clearing system that holds the physical Notesas being the holder of the Notes for these purposes.

TFN Withholding tax

A Noteholder that does not provide their tax file number, Australian Business Number or exemptioncategory may have an amount of tax deducted from any interest in respect of the Notes equal to the topmarginal tax rate for individuals plus the Medicare levy (currently 46.5%). A Noteholder that is a non-resident and does not hold the Notes through a permanent establishment in Australia is exempt fromquoting a tax file number.

Supply withholding tax

Payments in respect of the Notes can be made free and clear of the “supply withholding tax” imposed undersection 12-190 of Schedule 1 to the Taxation Administration Act 1953 of Australia (TaxationAdministration Act).

Additional withholdings from certain payments to non-residents

Section 12-315 of Schedule 1 to the Taxation Administration Act gives the Governor-General power tomake regulations requiring withholding from certain payments to non-residents of Australia. However,section 12 315 expressly provides that the regulations will not apply to interest and other payments whichare already subject to Division 11A of Part III of the Tax Act or specifically exempt from those rules.Further, regulations may only be made if the responsible Minister is satisfied the specified payments are ofa kind that could be reasonably related to the assessable income of foreign residents. The existingregulations made pursuant to section 12-315 are not relevant to any payments in respect of the Notes andit is not anticipated that any future regulations would apply in respect of such payments.

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TAXATION

Garnishee notices

The Commissioner of Taxation may issue a notice requiring any person who owes, or who may later owe,money to a taxpayer who has a tax-related liability, to pay to him the money owed to the taxpayer. If theIssuer or the Guarantor is served with such a notice in respect of a Noteholder, then the Issuer or theGuarantor (as the case may be) will comply with that notice.

Death duties

No Notes will be subject to death, estate or succession duties imposed by Australia, or by any politicalsubdivision or authority therein having power to tax, if held at the time of death.

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TAXATION

SUBSCRIPTION AND SALEUBS Limited and Deutsche Bank AG, London Branch (the Managers) have, pursuant to a SubscriptionAgreement (the Subscription Agreement) dated 21 September 2010, jointly and severally agreed to subscribeor procure subscribers for the Notes at the issue price of 100 per cent. of the principal amount of the Notes,less a combined selling, management and underwriting commission. In addition, the Issuer has granted tothe Managers in the Subscription Agreement an option (the Option) exercisable on a date on or before 23September 2010 to subscribe or procure subscribers for the Optional Notes, being up to an additional€65,000,000 in principal amount of the Notes also at 100 per cent. of their principal amount, less acombined selling, management and underwriting commission. The Issuer will also reimburse the Managersin respect of certain of their expenses, and has agreed to indemnify the Managers against certain liabilities,incurred in connection with the issue of the Notes. The Subscription Agreement may be terminated incertain circumstances prior to payment of the Issuer.

United States

The Notes and the Guarantee have not been and will not be registered under the Securities Act and may notbe offered or sold within the United States or to, or for the account or benefit of, U.S. persons except incertain transactions exempt from the registration requirements of the Securities Act.

The Notes are subject to U.S. tax law requirements and may not be offered, sold or delivered within theUnited States or its possessions or to a United States person, except in certain transactions permitted by U.S.tax regulations. Terms used in this paragraph have the meanings given to them by the U.S. Internal RevenueCode of 1986 and regulations thereunder.

Each Manager has agreed that, except as permitted by the Subscription Agreement, it will not offer, sell ordeliver the Notes and the Guarantee (a) as part of their distribution at any time or (b) otherwise until 40days after (i) the later of the commencement of the offering and (ii) the later of the Closing Date and anySecond Closing Date within the United States or to, or for the account or benefit of, U.S. persons and thatit will have sent to each dealer to which it sells any Notes and the Guarantee during the distributioncompliance period a confirmation or other notice setting forth the restrictions on offers and sales of theNotes and the Guarantee within the United States or to, or for the account or benefit of, U.S. persons. Termsused in this paragraph have the meanings given to them by Regulation S under the Securities Act.

In addition, until 40 days after the commencement of the offering, an offer or sale of Notes or the Guaranteewithin the United States by any dealer that is not participating in the offering may violate the registrationrequirements of the Securities Act.

United Kingdom

Each Manager has represented and agreed that:

(a) it has only communicated or caused to be communicated and will only communicate or cause to becommunicated an invitation or inducement to engage in investment activity (within the meaning ofSection 21 of the FSMA) received by it in connection with the issue or sale of any Notes incircumstances in which Section 21(1) of the FSMA does not apply to the Issuer or the Guarantor; and

(b) it has complied and will comply with all applicable provisions of the FSMA with respect to anythingdone by it in relation to any Notes in, from or otherwise involving the United Kingdom.

Commonwealth of Australia

No prospectus or other disclosure document (as defined in the Corporations Act of Australia 2001(Corporations Act)) in relation to the Notes has been or will be lodged with the Australian Securities &Investments Commission (ASIC). Each Manager has represented and agreed that it:

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(a) has not (directly or indirectly) offered, and will not offer for issue or sale and has not invited, and willnot invite, applications for issue, or offers to purchase, the Notes (including interests or rights inNotes held in Euroclear or Clearstream, Luxembourg or any other clearing system) in, to or fromAustralia (including an offer or invitation which is received by a person in Australia); and

(b) has not distributed or published, and will not distribute or publish, any information memorandum,advertisement or other offering material relating to the Notes in Australia,

unless (i) the aggregate consideration payable by each offeree or invitee is at least A$500,000 (or itsequivalent in any other currency, but disregarding moneys lent by the offeror or its associates) or the offeror invitation otherwise does not require disclosure to investors in accordance with Part 6D.2 or 7.9 of theCorporations Act or Australia, (ii) such action complies with all applicable laws, regulations and directives(including without limitation the licensing requirements set out in Chapter 7 of the Corporations Act), (iii)such action does not require any document to be lodged with ASIC and (iv) the offer or invitation is notmade to a person who is a “retail client” within the meaning of section 761G of the Corporations Act.

General

No action has been taken by the Issuer, the Guarantor or any of the Managers that would, or is intendedto, permit a public offer of the Notes in any country or jurisdiction where any such action for that purposeis required. Accordingly, each Manager has undertaken that it will not, directly or indirectly, offer or sellany Notes or have in its possession, distribute or publish any offering circular, prospectus, form ofapplication, advertisement or other document or information in any country or jurisdiction except undercircumstances that will, to the best of its knowledge and belief, result in compliance with any applicablelaws and regulations and all offers and sales of Notes by it will be made on the same terms.

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SUBSCRIPTION AND SALE

AUSTRALIAN ACCOUNTING STANDARDS AND FINANCIALSTATEMENTSThe Guarantor and the Issuer prepare financial statements in accordance with Australian AccountingStandards which are compliant with International Financial Reporting Standards as issued by theInternational Accounting Standards Board, with the exception of certain disclosure exemptions applicableto the Issuer which are detailed in Note 1(a) of the financial statements of the Issuer included in theProspectus on pages F-247 and F-276. Under Australian law, the Issuer has been classified as a “non-reporting entity” which must prepare its financial statements in accordance with Australian AccountingStandards, and therefore IFRS standards generally, but is exempted from making all of the detaileddisclosures required by Australian Accounting Standards and IFRS in the notes to its financial statements.There are no differences between the Issuer’s reported results, financial position or cash flows preparedunder Australian Accounting Standards and the results, financial position or cash flows the Issuer wouldhave reported under IFRS because the measurement and recognition criteria of IFRS and AustralianAccounting Standards are consistent. When the Notes are issued, the Issuer will no longer be considered a“non-reporting entity” and will be required to prepare general purpose financial statements incorporatingall of the presently exempted financial statement note disclosure requirements.

The Guarantor and the Issuer prepare annual financial statements as at 31 December each year which aresubject to audit by the Group’s auditors. The Guarantor also prepares six-month consolidated financialstatements as at 30 June each year which are subject to review by the Group’s auditors.

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GENERAL INFORMATION

Authorisation

1. The issue of the Notes was duly authorised by a resolution of the Board of Directors of the Issuerdated 14 September 2010 and the giving of the Guarantee was duly authorised by a resolution of theBoard of Directors of the Guarantor dated 14 September 2010.

Listing

2. It is expected that official listing will be granted on or about 23 September 2010 in respect of€650,000,000 in aggregate principal value of the Notes, subject only to the issue of a TemporaryGlobal Note. It is expected that listing will be granted on or about the date of issue of any OptionalNotes, again subject to the issue of a Temporary Global Note in respect of such Notes. Applicationhas been made to the UK Listing Authority for the Notes to be admitted to the Official List and tothe London Stock Exchange for such Notes to be admitted to trading on the London StockExchange’s regulated market. The total expenses related to the admission to trading are estimated tobe £4,200.

Clearing Systems

3. The Notes have been accepted for clearance through Euroclear and Clearstream, Luxembourg. TheISIN for this issue is XS0543710395 and the Common Code is 054371039.

The address of Euroclear is Euroclear Bank SA/NV, 1 Boulevard du Roi Albert II, B-1210 Brussselsand the address of Clearstream, Luxembourg is Clearstream Banking, 42 Avenue JF Kennedy, L 1855Luxembourg.

No significant change

4. Save as disclosed under the heading “Acquisition and divestment activities” on page 12 and under theheading “GLNG – Expected approval in 2010” on page 49 of this Prospectus, there has been nosignificant change in the financial or trading position of the Issuer since 31 December 2009 or of theGroup since 30 June 2010 and there has been no material adverse change in the prospects of eitherthe Issuer or the Group since 31 December 2009.

Litigation

5. Neither the Issuer nor the Guarantor nor any other member of the Group is or has been involved inany governmental, legal or arbitration proceedings (including any such proceedings which arepending or threatened of which the Issuer or the Guarantor are aware) in the 12 months precedingthe date of this document which may have or have in such period had a significant effect on thefinancial position or profitability of the Issuer, the Guarantor or the Group.

Auditors

6. The auditors of the Issuer and the Guarantor are Ernst & Young, whose audit partners are membersof the Institute of Chartered Accountants in Australia, who have audited the financial statements ofboth the Issuer and the Guarantor, without qualification, in accordance with Australian AuditingStandards for each of the two financial years ended on 31 December 2009 and 31 December 2008.The auditors of the Issuer and the Guarantor have no material interest in the Issuer or the Guarantor.Australian auditing requirements have no significant departures from International Standards onAuditing.

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U.S. tax

7. The Notes and Coupons will contain the following legend: “Any United States person who holds thisobligation will be subject to limitations under the United States income tax laws, including thelimitations provided in Sections 165(j) and 1287(a) of the Internal Revenue Code.”

Documents Available

8. For the period of 12 months following the date of this Prospectus, copies of the following documentswill be available for inspection from the registered office of the Issuer and from the specified office ofthe Paying Agent for the time being in London:

(a) the constitution of the Issuer and the constitution of the Guarantor;

(b) the audited financial statements of the Issuer and the Guarantor in respect of the years ended31 December 2008 and 31 December 2009 and the consolidated financial statements of theGuarantor in respect of the financial years ended 31 December 2008 and 31 December 2009and the consolidated financial statements of the Guarantor for the half-year end 30 June 2010(unaudited);

(c) the most recently published audited annual financial statements of the Issuer and the Guarantorand the most recently published unaudited interim financial statements (if any) of theGuarantor, together with any audit or review reports prepared in connection therewith. TheIssuer currently prepares audited financial statements on an annual basis and the Guarantorcurrently prepares audited consolidated and non consolidated accounts on an annual basis andunaudited financial statements for each half-year;

(d) the Trust Deed and the Agency Agreement; and

(e) this Prospectus.

Managers transacting with the Issuer and the Guarantor

9. Certain of the Managers and their affiliates have engaged, and may in the future engage, in investmentbanking and/or commercial banking transactions with, and may perform services to the Issuer, theGuarantor and/or their affiliates in the ordinary course of business.

Replacement Capital Covenant

10. The Issuer and the Guarantor intend to enter into a deed poll to be dated the Issue Date containinga replacement capital covenant for the benefit of one or more designated series of the Guarantor’sdebt securities. It is anticipated that the terms of such replacement capital covenant will provide thatneither the Issuer nor the Guarantor, during the period from the Issue Date until the termination ofthe replacement capital covenant (and subject to certain circumstances in which it shall cease toapply), will redeem or purchase any Notes, and the Guarantor will not permit any Subsidiary topurchase any Notes, unless and to the extent that the aggregate redemption or purchase price is nogreater than the net proceeds received by the Issuer, the Guarantor or any Subsidiary during thetwelve months prior to such redemption or purchase date, from new issuances of certain qualifyingsecurities described in the replacement capital covenant and that the covenant will terminate on theredemption of the Notes if not terminated earlier in accordance with its terms. The replacementcapital covenant will continue to be effective following any substitution or variation of the Notes inaccordance with their terms.

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GENERAL INFORMATION

GLOSSARYbarrel/bbl The standard unit of measurement for all production and sales. One

barrel = 159 litres or 35 imperial gallons.

boe Barrels of oil equivalent. The factor used by Santos to convertvolumes of different hydrocarbon production to barrels of oilequivalent.

condensate A natural gas liquid that occurs in association with natural gas and ismainly composed of propane, butane, pentane and heavierhydrocarbon fractions.

contingent resources Those quantities of hydrocarbons which are estimated, on a givendate, to be potentially recoverable from known accumulations, butwhich are not currently considered to be commercially recoverable.Contingent resources may be of a significant size, but still haveconstraints to development. These constraints, preventing the bookingof reserves, may relate to lack of gas marketing arrangements or totechnical, environmental or political barriers.

crude oil A general term for unrefined liquid petroleum or hydrocarbons.

CSG Coal seam gas.

exploration Drilling, seismic or technical studies undertaken to identify andevaluate regions or prospects with the potential to containhydrocarbons.

hydrocarbons Solid, liquid or gas compounds of the elements hydrogen and carbon.

liquids A sales product in liquid form; for example, condensate and LPG.

LNG Liquefied natural gas. Natural gas that has been liquefied byrefrigeration to store or transport it. Generally, LNG comprisesmainly methane.

LPG Liquefied petroleum gas, the name given to propane and butane intheir liquid state.

market capitalisation A measurement of a company’s stock market value at a given date.Market capitalisation is calculated as the number of shares on issuemultiplied by the closing share price on that given date.

mmbbl Million barrels.

mmboe Million barrels of oil equivalent.

mtpa Million tonnes per annum.

oil A mixture of liquid hydrocarbons of different molecular weights.

PJ Petajoules. Joules are the metric measurement unit for energy. Apetajoule is equal to 1 joule x 1015.

proven plus probable reserves (2P) Reserves that analysis of geological and engineering data suggests aremore likely than not to be recoverable. There is at least a 50%probability that reserves recovered will exceed Proven plus Probablereserves.

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GLOSSARY

68

proven reserves (1P) Reserves that, to a high degree of certainty (90% confidence), arerecoverable. There is relatively little risk associated with thesereserves. Proven developed reserves are reserves that can be recoveredfrom existing wells with existing infrastructure and operatingmethods. Proven undeveloped reserves require development.

sales gas Natural gas that has been processed by gas plant facilities and meetsthe required specifications under gas sales agreements.

tcf Trillion cubic feet.

Conversion Crude oil 1 barrel = 1 boe

Sales gas 1 petajoule = 171,937 boe

Condensate/naphtha 1 barrel = 0.935

LPG 1 tonne = 8.458

FINANCIAL INFORMATIONConsolidated Financial Statements, Directors’ Report and Auditor's Report for theGuarantor for the Year Ended 31 December 2008 .................................................................... F-1

Consolidated Financial Statements, Directors’ Report and Auditor's Report for theGuarantor for the Year Ended 31 December 2009 .................................................................... F-102

Consolidated Financial Statements, Directors’ Report and Auditor's Report(Review Opinion) for the Guarantor for the Six Months Ended 30 June 2010 ........................ F-212

Financial Statements, Directors’ Report and Auditor's Report for the Issuer for theYear Ended 31 December 2008.................................................................................................. F-241

Financial Statements, Directors’ Report and Auditor's Report for the Issuer for theYear Ended 31 December 2009.................................................................................................. F-269

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CONSOLIDATED FINANCIAL STATEMENTS, DIRECTORS’REPORT AND AUDITO’S REPORT FOR THE GUARANTOR FORTHE YEAR ENDED 31 DECEMBER 2008

Level: 0 – From: 0 – Friday, September 17, 2010 – 23:10 – eprint3 – 4262 Section 06

F-1

Level: 0 – From: 0 – Friday, September 17, 2010 – 22:54 – eprint3 – 4262 Section 06a

F-2

44 Santos Annual Report 2008

Financial Report

DIRECTORS’ STATUTORY REPORT 45REMUNERATION REPORT 50FINANCIAL REPORTINCOME STATEMENTS 68BALANCE SHEETS 69CASH FLOW STATEMENTS 70STATEMENTS OF RECOGNISED INCOME AND EXPENSE 71NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 Significant Accounting Policies 72

2 Segment Information 85

3 Revenue and Other Income 87

4 Expenses 87

5 Earnings 89

6 Net Financing Costs 89

7 Taxation Expense 90

8 Discontinued Operations 91

9 Cash and Cash Equivalents 91

10 Trade and Other Receivables 91

11 Inventories 92

12 Derivative Financial Instruments 92

13 Exploration and Evaluation Assets 93

14 Oil and Gas Assets 94

15 Other Land, Buildings, Plant and Equipment 96

16 Impairment of Cash-Generating Units 97

17 Available-For-Sale Financial Assets 97

18 Other Financial Assets 97

19 Deferred Tax Assets and Liabilities 98

20 Trade and Other Payables 99

21 Interest-Bearing Loans and Borrowings 99

22 Provisions 102

23 Other Liabilities 103

24 Capital and Reserves 103

25 Earnings per Share 107

26 Consolidated Entities 109

27 Acquisitions of Subsidiaries 110

28 Interests in Joint Ventures 111

29 Notes to the Cash Flow Statements 112

30 Employee Benefits 113

31 Share-Based Payment Plans 116

32 Key Management Personnel Disclosures 125

33 Related Parties 130

34 Remuneration of Auditors 130

35 Commitments for Expenditure 131

36 Contingent Liabilities 133

37 Deed of Cross Guarantee 134

38 Financial Risk Management 136

DIRECTORS’ DECLARATION 141AUDITOR’S INDEPENDENCE DECLARATION 142INDEPENDENT AUDIT REPORT 143

Contents


F-3

Santos Annual Report 2008 45

Directors’ Statutory Report

The Directors present their report together with the financial report of Santos Limited (Santos or Company) and the consolidated financial report of the consolidated entity, being the Company and its controlled entities, for the financial year ended 31 December 2008, and the auditor’s report thereon. Information in the Annual Report referred to by page number in this report, including the Remuneration Report, or contained in a Note to the financial statements referred to in this report is to be read as part of this report.

1. DIRECTORS, DIRECTORS’ SHAREHOLDINGS AND DIRECTORS’ MEETINGS

The names of Directors of the Company in office at the date of this report and details of the relevant interest of each of those Directors in

shares in the Company at that date are as set out below:

Surname Other Names Shareholdings in Santos Ltd

Ordinary Shares

Franked Unsecured Equity Listed Securities

Borda Kenneth Charles 45,172 -

Coates Peter Roland 7,440 -

Dean Kenneth Alfred 6,868 -

Franklin Roy Alexander - -

Gerlach (Chairman) Stephen 54,364 -

Harding Richard Michael 1,757 -

Knox David John Wissler - -

Sloan Judith 20,135 195

The above named Directors held office during and since the end of the financial year, except for Mr P R Coates, who was appointed a Director

of the Company on 18 March 2008 and Mr D J W Knox, who was appointed Managing Director of the Company on 6 August 2008.

Mr J C Ellice-Flint held office as Managing Director of the Company until his retirement on 25 March 2008.

Except where otherwise indicated, all shareholdings are of fully paid ordinary shares.

At the date of this report, Mr D J W Knox holds 544,974 options under the Santos Executive Share Option Plan and subject to the further

terms described in Note 31 to the financial statements. Details of the options granted to Mr Knox during the year are set out in the

Remuneration Report on page 56.

Details of the qualifications, experience and special responsibilities of each Director and the Company Secretary are set out on the Directors’

and Executives’ biography pages of the Annual Report on pages 26 to 29. This information includes details of other directorships held during

the last three years.


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Directors’ Meetings

The number of Directors’ Meetings and meetings of committees of Directors held during the financial year and the number of meetings

attended by each Director are as follows:

Surname Other Names

Directors’ Meetings**

Audit Committee

Environment, Health, Safety

and Sustainability

Committee

Remuneration Committee

Finance Committee

Nomination Committee

No. of Mtgs

Held*

No. of Mtgs

Attended

No. of Mtgs

Held*

No. of Mtgs

Attended

No. of Mtgs

Held*

No. of Mtgs

Attended

No. of Mtgs

Held*

No. of Mtgs

Attended

No. of Mtgs

Held*

No. of Mtgs

Attended

No. of Mtgs

Held*

No. of Mtgs

Attended

Borda Kenneth Charles 12 12 - - - - - - 4 4 - -

Coates Peter Roland 10 8 2 2 - - 1 1 - - - -

Dean Kenneth Alfred 12 12 5 5 - - - - 4 4 - -

Ellice-Flint John Charles 2 2 - - 1 1 - - - - - -

Franklin Roy Alexander 12 12 - - 4 4 - - - - - -

Gerlach Stephen 12 12 - - 4 4 5 5 4 4 1 1

Harding Richard Michael 12 10 5 4 4 4 5 5 - - 1 1

Knox David John Wissler 5 5 - - 3 3 - - - - - -

Sloan Judith 12 11 3 3 - - 4 4 - - 1 1

* Reflects the number of meetings held during the time the Director held office, or was a member of the Committee, during the year.

** In addition to formal meetings, the Board participated in a site visit to the PETRONAS operations in Malaysia. (PETRONAS is the joint venture partner for GLNG.)

As at the date of this report, the Company had an Audit Committee of the Board of Directors.

Particulars of the Company’s corporate governance practices appear in the Corporate Governance Statement commencing on page 30 of the

Annual Report.

2. PRINCIPAL ACTIVITIES

The principal activities of the consolidated entity during the financial year were: petroleum exploration, the production, treatment and

marketing of natural gas, crude oil, condensate, naphtha, liquid petroleum gas, and the transportation by pipeline of crude oil. No

significant change in the nature of these activities has occurred during the year.

3. REVIEW AND RESULTS OF OPERATIONS

A detailed review of the operations of the consolidated entity during the financial year, the results of those operations and the financial

position of the consolidated entity as at the end of the financial year is contained in the reports by the Chairman, Chief Executive Officer and

Chief Financial Officer in the Annual Report. Further details regarding the operations, results and business strategies of the consolidated

entity appear in the individual reports providing more detailed discussion of business activities and outlook in the Annual Report.

In summary, the consolidated net profit after income tax attributable to the shareholders was $1,650.1 million, a 359.3% increase from the

previous period comparative result of $359.3 million. Sales revenue was a record $2,761.8 million, up 11.0% from 2007.

In particular, total revenue for the Australian segment was $2,563.4 million, an 8.8% increase from the 2007 result of $2,356.4 million.

International operations recorded revenue growth of 49.5% from 2007 to $241.6 million in 2008.

Total production was down by 8.0% to 54.4 million barrels of oil equivalent (mmboe), reflecting natural field decline, Mutineer Exeter FPSO

down time, the Varanus Island plant incident and the Stag shut-in, partially offset by commencement of production from the Sampang field,

increased production contributions from Maleo, the acquisition of the Sangu field and increased contributions from Cooper Oil.



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4. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS

The Directors consider that matters or circumstances that have significantly affected, or may significantly affect, the operations, results

of operations or the state of affairs of the Company in subsequent financial years are:

PETRONAS, one of the world’s largest LNG producers, to be the Company’s 40% partner in the development, operation

and marketing of the Company’s proposed GLNG project;

to a company associated with the operator of the PSC;

formally entering into Front End Engineering Design (FEED); and

shares was repealed effective 29 November 2008.

5. DIVIDENDS

On 19 February 2009, the Directors:

(i) resolved to pay a fully franked final dividend of $0.20 per fully paid ordinary share on 31 March 2009 to shareholders registered in the

books of the Company at the close of business on 3 March 2009. This final dividend amounts to approximately $117.0 million; and

(ii) declared that in accordance with the Terms of Issue, a fully franked dividend of $2.9989 per Franked Unsecured Equity Listed Security

be paid on 31 March 2009 to holders registered in the books of the Company at the close of business on 3 March 2009, amounting to

$18.0 million.

A fully franked final dividend of $117.2 million (20 cents per share) was paid on 31 March 2008 on the 2007 results. Indication of this

dividend payment was disclosed in the 2007 Annual Report. In addition, a fully franked interim dividend of $131.1 million (22 cents per

fully paid ordinary share) was paid to members on 30 September 2008.

In accordance with the Terms of Issue, a fully franked final dividend of $2.9983 per Franked Unsecured Equity Listed Security ($18.0 million)

was paid on 31 March 2008. Indication of this dividend payment was disclosed in the 2007 Annual Report. A fully franked interim dividend

of $3.3365 per Franked Unsecured Equity Listed Securities ($20.0 million) was paid on 30 September 2008.

6. ENVIRONMENTAL REGULATION

The consolidated entity’s Australian operations are subject to various environmental regulations under Commonwealth, State and Territory

legislation, including under applicable petroleum legislation, under authorisations in respect of its South Australian operations (numbers EPA

888, 1259, 2164, 2569, 14145, 14427, 45080036, 45080037, 45080038 and 45080092 issued under the Environment Protection Act 1993), its

Queensland operations (numbers EA 150029, 150101, 150125, 150224, 150225, 150238, 150245, 150271, 150275, 150288, 150313, 150347,

150351, 150343, 150355, 150359, 150368, 150381, 150382, 150274, 150166, 150390, 170526, 170533, 170562, and numbers EA PEN

2000018207, 2000054807, 2000054007, 200054107, 200214208, 200196508, 10021028, 100188208, 200039307, 200196208, 200196308,

200196408, 100030807, 200194208, 200196608, 200012400, 200214308, 2100214408 and 100090007 issued under the Environmental Protection Act 1994) and its Victorian operations (number LA 54626 issued under the Environment Protection Act 1970). Applicable legislation

and requisite environmental licences are specified in the entity’s EHS Compliance Database, which forms part of the consolidated entity’s

overall Environmental Management System. Compliance performance is monitored on a regular basis and in various forms, including

environmental audits conducted by regulatory authorities and by the Company, either through internal or external resources.

During the financial year, no fines were imposed and no prosecutions were instituted in respect of the above-referenced environmental

regulations. Since the end of the financial year, Santos has received a minor infringement notice for a breach of the Environmental Protection Act 1994 (Qld). Apart from this, Santos has not been the subject of any enforcement action under the environmental protection legislation to

which its operations are subject. Appropriate corrective measures have been taken to preclude a recurrence of the circumstances which led to

the issuing of this notice. In February 2008, Santos received a notice of non-compliance from the Department of Primary Industries and

Resources South Australia in relation to the disturbance of cultural heritage sites during clear and grade activities on the Jackson to Moomba

Pipeline right of way. This incident was formally investigated by Santos and appropriate corrective measures have been taken to preclude a

recurrence.


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7. EVENTS SUBSEQUENT TO BALANCE DATE

Except as mentioned below, in the opinion of the Directors there has not arisen in the interval between the end of the financial year and the

date of this report any matter or circumstance that has significantly affected or may significantly affect the operations of the consolidated

entity, the results of those operations, or the state of affairs of the consolidated entity in future financial years.

Dividends declared after 31 December 2008 are set out in Item 5 of this Directors’ Report and Note 24 to the financial statements.

8. LIKELY DEVELOPMENTS

Certain likely developments in the operations of the consolidated entity and the expected results of those operations in future financial years

are referred to in the reports in the Annual Report by the Chairman, Chief Executive Officer and Chief Financial Officer on pages 4 to 9.

Further information about likely developments in the operations of the consolidated entity and the expected results of those operations in

future financial years has not been included in this report because disclosure of the information would be likely to result in unreasonable

prejudice to the consolidated entity. Further details regarding likely developments appear in the individual reports providing more detailed

discussion of business activities and outlook in the Annual Report.

9. 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 and options granted during the financial year) are set out in the Remuneration Report commencing on page 50 of this report.

10. INDEMNIFICATION

Rule 61 of the Company’s Constitution provides that the Company indemnifies, on a full indemnity basis and to the full extent permitted by

law, officers of the Company for all losses or liabilities incurred by the person as an officer of the Company, a related body corporate or

trustee of a company-sponsored superannuation fund. Rule 61 does not indemnify an officer for any liability involving a lack of good faith.

Rule 61 also permits the Company to purchase and maintain a Directors’ and Officers’ insurance policy. No indemnity has been granted to an

auditor of the Company in their capacity as auditor of the Company.

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 who held

office during the year and certain senior executives of the consolidated entity. The indemnities operate to the full extent permitted by 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 or since the

financial year under the Deeds of Indemnity.

During the year, the Company paid premiums in respect of Directors’ and Officers’ Liability and Legal Expenses insurance contracts for the

year ending 31 December 2008 and since the end of the year the Company has paid, or agreed to pay, premiums in respect of such contracts

for the year ending 31 December 2009. The insurance contracts insure against certain liability (subject to exclusions) persons who are or have

been directors or officers of the Company and its controlled entities. A condition of the contracts is that the nature of the liability

indemnified and the premium payable not be disclosed.

11. NON-AUDIT SERVICES

During the year the Company’s auditor, Ernst & Young, was paid the following amounts in relation to non-audit services it provided:

Taxation services $38,000

Assurance services $388,000

Other services $42,000

The Directors are satisfied, based on the advice of the Audit Committee, that the provision of the non-audit services detailed above by Ernst &

Young is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001.

The reason for forming this opinion is that all non-audit services have been reviewed by the Audit Committee to ensure they do not impact the

impartiality and objectivity of the auditor.

A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 142 of the

financial statements.



F-7


12. SHARES UNDER OPTION

Unissued ordinary shares of Santos Ltd under option at the date of this report are as follows:

Date options granted Expiry date Issue price of shares* Number under option

15 June 2004 14 June 2009 $6.95 50,000

23 May 2005 22 May 2015 $8.46 22,850

23 May 2005 22 May 2015 $8.46 159,450

24 October 2006 24 October 2016 $10.48 736,000

4 May 2006 3 May 2016 $11.36 2,500,000

1 July 2007 30 June 2017 $14.14 227,500

1 July 2007 30 June 2017 $14.14 59,800

3 September 2007 2 September 2017 $12.81 100,000

3 May 2008 2 May 2018 $15.39 644,949

3 May 2008 2 May 2018 $15.39 281,573

28 July 2008 27 July 2018 $17.36 94,193

28 July 2008 27 July 2018 $17.36 131,976

28 July 2008 27 July 2018 $17.36 131,976

5,140,267

* 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.

13. SHARES ISSUED ON THE EXERCISE OF OPTIONS

The following ordinary shares of Santos Ltd were issued during the year ended 31 December 2008 on the exercise of options granted under

the Santos Executive Share Option Plan. No further shares have been issued since then on the exercise of options granted under the Santos

Executive Share Option Plan. No amounts are unpaid on any of the shares.

Date options granted Issue price of shares Number of shares issued15 June 2004 $6.95 50,000

15 June 2004 $6.95 46,178

23 May 2005 $8.46 11,100

23 May 2005 $8.46 132,100

24 October 2006 $10.48 64,205

303,583

14. ROUNDING

Australian Securities and Investments Commission Class Order 98/100, dated 10 July 1998, applies to the Company and accordingly amounts

have been rounded off in accordance with that Class Order, unless otherwise indicated.

This report is made on 19 February 2009 in accordance with a resolution of the Directors.

Director Director


F-8


Remuneration Report

The Directors of Santos Limited present the Remuneration Report for the Company and its controlled entities for the year ended 31 December

2008. The information provided in this Remuneration Report has been audited as required by section 308(3C) of the Corporations Act. This

Remuneration Report forms part of the Directors’ Report.

In order to achieve its objective of delivering top quartile strategic operating and shareholder value performance compared to its peers in

the Australian and international exploration and production industry, the Company needs to have highly capable staff. Consistent with this

objective, the Company’s remuneration strategy is designed to attract and retain appropriately qualified and experienced directors, executives

and staff with the necessary skills and attributes to lead and manage the Company. The Company’s remuneration strategy is therefore critical

to the delivery of the Company’s overall strategic objectives.

In addition to attracting and retaining talent, Santos’ remuneration strategy also aims to encourage its employees to strive for superior

performance by rewarding the achievement of targets that are fair, challenging, clearly understood and within the control of employees

to achieve through their own actions. For the Company’s most senior staff, performance targets are primarily aligned with long-term

shareholder value creation.

The Remuneration Report sets out remuneration information for the Company’s non-executive Directors, Managing Director and Senior

Executives who are the key management personnel accountable for planning, directing and controlling the affairs of the consolidated entity.

They include the five highest remunerated executives of the Company and Group for the 2008 financial year, and are listed in Table 1 below.

TABLE 1: NON-EXECUTIVE DIRECTORS, MANAGING DIRECTOR AND SENIOR EXECUTIVES

Executive

Name Position

D J W Knox Managing Director

and Chief Executive Officer1

J H Anderson Vice President Commercial2

J L Baulderstone General Counsel and Company Secretary

T J Brown Vice President Geoscience and New Ventures

M E J Eames Vice President Corporate and People

R M Kennett Vice President Operations3

M S Macfarlane Vice President Development

P C Wasow Chief Financial Officer

R J Wilkinson Vice President GLNG4

Former

J C Ellice-Flint Managing Director

and Chief Executive Officer5

Non-Executive

Name Position

S Gerlach Chairman

K C Borda Director

P R Coates Deputy Chairman6

K A Dean Director

R A Franklin Director

R M Harding Director

J Sloan Director

1 Appointed on 28 July 2008, formerly Acting Chief Executive Officer (from 25 March 2008 to 27 July 2008) and Executive Vice President Growth Businesses

(until 24 March 2008).

2 Appointed on 1 September 2008, formerly Vice President Strategic Projects.

3 Seconded to GLNG Operations Pty Ltd on 24 July 2008.

4 Appointed on 1 September 2008, formerly Vice President Commercial.

5 Departed 25 March 2008.

6 Appointed Director on 18 March 2008. Appointed Deputy Chairman on 10 December 2008.

DELIVERING ON PERFORMANCE CRITERIA

2008 was an important year in Santos’ history, during which the achievement of key milestones shaped the Company’s future. The Company’s

ambition to be a significant supplier of energy to Asia took a major step forward through two significant achievements. First, the sale of a 40%

interest in the Company’s GLNG project, and the resultant joint venture with PETRONAS, the leading LNG player in the region. Second, the entry

into FEED in the PNG LNG project. These achievements, together with the Company meeting its production guidance, placed Santos as one of

the premium growth stocks on the ASX as well as in the broader energy sector. Santos was one of only eight ASX 100 companies whose share

price grew during the severe stock market downturn in 2008 and was also one of the top performing exploration and production companies

internationally. The achievement of these significant milestones was an important aspect in the Company’s 2008 remuneration deliberations.


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David Knox assumed the position of Acting Chief Executive Officer upon the retirement of John Ellice-Flint on 25 March 2008, and was

subsequently appointed Managing Director and Chief Executive Officer (CEO) on 28 July 2008, following an international search by the

Company. The terms of Mr Knox’s appointment were outlined in an ASX release dated 29 July 2008, and are summarised on pages 54 to 57.

Details of Mr Ellice-Flint’s retirement package were communicated to the market on 14 May 2008 and are summarised on page 65.

REMUNERATION POLICY

The Company’s remuneration policy as set by the Board is summarised below.

Policy objective Implementation approach

Non-executive Directors To enable the Company to prudently secure and

retain the services of suitable individuals to serve

as Directors.

Directors’ fees are set taking into account, among

other things, fees paid for similar roles in comparable

companies, the commitment, risk and responsibility

accepted by non-executive Directors, and recognition

of their commercial expertise and experience.

To promote independence and impartiality. Non-executive Director remuneration does not vary

according to the performance of the Company.

To align non-executive Director and shareholder

interests by encouraging the creation of long-term

shareholder value.

Purchase of the Company’s shares by Directors is

facilitated via the Non-executive Director Share Plan.

Managing Director and Senior

Executives

To enable the Company to prudently secure and

retain the services of suitable individuals able to

contribute towards meeting its strategic objectives.

Executive remuneration levels are market-aligned by

comparison against similar roles in comparable

companies.

To encourage executives to strive for superior

performance by rewarding achievement

of targets that are fair, challenging, clearly

understood and within the control of employees

to achieve through their own actions.

A significant component of executive remuneration is

driven by Company and individual performance

through the Company’s short-term and long-term

incentive programs. These components of

remuneration are “at risk”, so executives only derive

value from participating in these programs where

they satisfy challenging performance hurdles.

Individual performance also affects base

remuneration. The Board intends the base

remuneration of consistently high-performing

executives to be higher, in market terms, than that of

others.

To align executive and shareholder

interests by encouraging the creation

of long-term shareholder value.

Part of executive remuneration is delivered

in share-based payments, in order to align executive

and shareholder interests.

Consistent with the objective of creating a

meaningful alignment of interests, Directors and

Senior Executives are not permitted to hedge their

shareholdings or Long-term Incentives (LTIs) unless

those securities have fully vested and are no longer

subject to restrictions. Breaches of this policy will

be subject to appropriate sanctions, which could

include disciplinary action or termination of

employment.


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DETAILS OF REMUNERATION POLICY IMPLEMENTATION IN 2008

Non-executive Director remuneration

Maximum aggregate amount

Total non-executive Directors’ fees paid in a year, including Board committee fees, cannot exceed $2,100,000. This amount was approved by

shareholders at the Annual General Meeting held on 2 May 2008. Directors may also be paid additional fees for special duties or exertions,

and are entitled to be reimbursed for all business-related expenses. These payments are not included in the maximum aggregate amount

approved by shareholders. No additional fees were paid during the year.

2008 non-executive Directors’ fees

Within the maximum aggregate amount approved by shareholders, fees are set for Board and Committee responsibilities. An external

review of Directors’ fees was undertaken by Egan Associates in December 2007, which included benchmarking comparisons of non-executive

Directors’ fees for similar companies and consideration of the responsibilities and time commitments required from each Director to discharge

their duties. Recommendations arising from this review resulted in approval by the Board of a revised scale of payment, effective from 1 July

2008. An extension of this review, conducted in January 2009 by Egan Associates, also provided benchmark data for remuneration for the

new Deputy Chairman’s role. The Board adopted the recommended fees with effect from the date of appointment of the Deputy Chairman on

10 December 2008. Directors’ fee rates are provided in Table 2 below.

TABLE 2: NON-EXECUTIVE DIRECTORS’ FEES PER ANNUM

Board Committees

Chair1 Deputy Chair1 Member Chair Member

Annual fees $435,000 $217,500 $145,000 $12,000-$30,000 $5,000-$15,000

1 The Chairman and Deputy Chairman of the Board do not receive any additional fees for serving on or chairing any Board committee.

Superannuation and retirement benefits

Superannuation contributions are made on behalf of non-executive Directors in accordance with the requirements of the Company’s statutory

superannuation obligations.

Non-executive Directors appointed prior to 1 January 2004 (Participating Directors) are contractually entitled to receive benefits upon their

retirement pursuant to agreements entered into upon their appointment, the terms of which were approved by shareholders at the 1989 AGM.

Non-executive Directors appointed after 1 January 2004 are not entitled to receive a benefit upon retirement other than statutory

entitlements.

The retirement benefits of Participating Directors were frozen with effect from 30 June 2004, at which time their entitlements ceased to

accrue. However, to prevent erosion in the real value of the frozen benefits, the Board determined that from 1 July 2007 the benefits would

be indexed annually against the five-year Australian Government Bond Rate.

Table 3 below shows the increase in Participating Directors’ frozen benefits as a result of indexation in 2008. Full provision has been made for

these retirement benefits.

TABLE 3: NON-EXECUTIVE DIRECTOR RETIREMENT BENEFITS

Director Benefit as at 1 January 2008

Increase as a result of indexation

Benefit as at 31 December 2008

S Gerlach $1,168,650 $39,897 $1,208,547

J Sloan $358,382 $12,235 $370,617

Non-executive Director Share Plan

The Non-executive Director Share Plan (NED Share Plan) was introduced in July 2007 following shareholder approval at the 2007 Annual

General Meeting. Participation in the NED Share Plan is voluntary and all present and future non-executive Directors are eligible to

participate. Under the NED Share Plan, Directors elect to sacrifice all or part of their pre-tax fees in return for an allocation of shares of

equivalent value. The NED Share Plan therefore does not involve any additional remuneration for participating Directors.

Remuneration Report


F-11


Shares are allocated quarterly and are either issued as new shares or purchased on the ASX at the prevailing market price. The shares are

registered in the name of the participating Director, but are subject to a restriction on dealing. In the absence of exceptional circumstances, the

restriction will apply until the Director ceases to hold office or until ten years have elapsed since the allocation of the shares, whichever is earlier.

Details of the shares allocated to Directors under the NED Share Plan during the year are set out in Table 4 below.

TABLE 4: 2008 NED SHARE PLAN ALLOCATIONS

Director Q1 2008 allocation1 Q2 2008 allocation2 Q3 2008 allocation3 Q4 2008 allocation4 Total

K C Borda 2,316 1,654 2,188 2,770 8,928

P R Coates 336 1,564 2,412 3,105 7,417

K A Dean 697 497 639 807 2,640

S Gerlach 985 703 911 1,151 3,750

R M Harding 296 211 273 345 1,125

J Sloan 2,746 1,961 2,143 2,646 9,496

1 Shares were allocated to the participating Directors on 4 April 2008 at $14.8381 per share.

2 Shares were allocated to the participating Directors on 3 July 2008 at $20.7745 per share.

3 Shares were allocated to the participating Directors on 7 October 2008 at $17.8867 per share.

4 Shares were allocated to the participating Directors on 30 December 2008 at $14.1676 per share.

Details of remuneration paid to non-executive Directors

Details of the fees and other benefits paid to Directors during 2008 are set out in Table 5 below.

TABLE 5: 2008 NON-EXECUTIVE DIRECTOR REMUNERATION DETAILS

Short-term benefits

Retirement benefits

Share-based payments

Directors’ fees (incl. Committee

fees)1

Fees for special duties or

exertions

Other2

Superannuation

contributions3

Increase to retirement

benefit

NED Share

Plan

Total

S Gerlach $350,625 - $4,796 $13,437 $39,897 $61,875 $470,630

K C Borda $0 - - $13,060 - $147,141 $160,201

P R Coates $0 - - $10,246 - $124,644 $134,890

K A Dean $130,687 - - $13,437 - $43,563 $187,687

R A Franklin $150,250 - - $813 - - $151,063

R M Harding $167,287 - - $6,872 - $18,588 $192,747

J Sloan $0 - - $13,376 $12,235 $157,342 $182,953

1 Refer Table 2 above for details of annual Directors’ fees and Committee fees. Figure shown is after fee sacrifice to NED Share Plan.

2 This figure represents the value of car parking provided to the Chairman in the Company’s head office in Adelaide.

3 Includes superannuation guarantee payments. Superannuation guarantee payments are made to Mr Franklin only in relation to days worked in Australia.


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TABLE 6: 2007 NON-EXECUTIVE DIRECTOR REMUNERATION DETAILS

Short-term benefits

Retirement benefits


Directors’ fees (incl. Committee

fees)1

Fees for special duties or

exertions

Other2

Superannuation

contributions3


benefit

NED Share

Plan

Total

S Gerlach $252,229 - $4,788 $111,678 $37,925 $39,000 $445,620

K C Borda $51,704 - - $10,672 - $68,750 $131,126

K A Dean $107,575 - - $54,282 - $16,550 $178,407

R A Franklin $140,512 - - $3,195 - - $143,707

R M Harding $39,600 - - $136,440 - $8,800 $184,840

C J Recny4 $19,589 - - $1,763 - - $21,352

J Sloan $0 - - $94,407 $11,630 $81,500 $187,537

1 Figure shown is after fee sacrifice to superannuation and/or NED Share Plan.


3 Includes superannuation guarantee payments and any voluntary fee sacrifice to superannuation.

4 Payment to deceased estate.

Managing Director and CEO remuneration

Remuneration components and their relative weightings

Total remuneration for the Managing Director and CEO, Mr D J W Knox, is made up of the following components:

to the ASX 100.

The Board received external advice on Mr Knox’s remuneration package, which is benchmarked against the remuneration paid to Managing

Directors/CEOs of comparable companies in the industry.

The relative weightings of the three components comprising the Managing Director and CEO’s total remuneration are provided below.

TABLE 7: RELATIVE WEIGHTINGS OF REMUNERATION COMPONENTS1

% of total remuneration (annualised)

Fixed remuneration Performance-based remuneration

STI LTI

Managing Director 37% 26% 37%

1 These figures reflect the annualised weightings of the Managing Director and CEO’s remuneration components (based on target performance for the “at risk”

components). The figures do not reflect the relative weightings of the remuneration components paid to Mr Knox in 2008, as Mr Knox did not serve as Managing

Director for the full period. These figures do not reflect the relative value derived by Mr Knox from each of the components, which is dependent on actual

performance against targets for the “at risk” components. This is discussed in the STI and LTI sections below.

Base remuneration

Mr Knox is paid Total Fixed Remuneration (TFR), out of which the Company makes contributions into his accumulation superannuation fund

of at least the minimum statutory amount. He may, if he wishes, salary sacrifice part of his TFR for additional superannuation contributions

or other benefits such as a novated car lease. Under his service agreement, TFR for the Managing Director and CEO is set at $1.75 million per

annum, subject to annual review. Mr Knox’s TFR for the 2008 financial year (as set out in Table 9 below) was pro-rated according to the

various roles he held during the period.

Remuneration Report


F-13


Short-term Incentive (STI)

The Managing Director and CEO has a maximum annual STI opportunity of 100% of TFR, subject to achievement of applicable performance

targets set by the Board. For the 2008 financial year, Mr Knox’s maximum STI was pro-rated for the various roles he held during the period

(that is, his maximum STI amount of $1,358,167 reflects a pro-rated portion of the maximum amount he could have earned from the roles

held during the year).

Consistent with his role as Managing Director and CEO, Mr Knox’s performance measures comprise a combination of financial and operational

targets, all of which are directly related to strategic objectives set by the Board. The Board believes that this method of setting performance

targets focuses the Managing Director and CEO’s attention on achieving the key conditions and milestones necessary to achieve the Board’s

strategic plan for the Company.

At the end of each financial year, the Remuneration Committee assesses performance against the objectives set by the Board, and makes

recommendations to the Board regarding Mr Knox’s performance and the appropriate level of STI award. The Board believes this method

of assessment provides a balanced assessment of the Managing Director and CEO’s overall performance.

For the 2008 performance period, as outlined above, Mr Knox’s STI targets were based on agreed objectives linked to Company performance

targets and delivery of its strategic growth initiatives. Consistent with his role as Managing Director and CEO, these performance measures

for 2008 included the Company’s strategic positioning in Australia and Asia, furtherance of its LNG projects (including formation of a

strategic joint venture for its GLNG project) and achievement of financial, operational and safety performance milestones.

Based on performance against these targets during the year, Mr Knox was awarded an STI payment of $1,100,000 or 81% of the maximum

STI payable. The difference between actual STI paid and maximum STI was forfeited.

Long-term Incentive (LTI)

Overview of grants made to Mr Knox in 2008

On 3 May 2008, the Company made equity grants to its Senior Executives for the Long-term Incentive (LTI) component of their remuneration

for 2008. Mr Knox participated in these grants in his capacity as Acting Chief Executive Officer. The grants comprised:

The key terms of the Performance Award and Deferred Award are set out on pages 59 to 60.

Upon his formal appointment as CEO, Mr Knox received a further grant of equity awards (CEO Performance Award) to supplement the grants

already made to him in his Senior Executive capacity.

The grants made to Mr Knox in 2008 constitute his full LTI entitlement for the 2008, 2009 and 2010 financial years.

All LTI grants were delivered in the form of:

conditions; or

Table 8 below contains details of the number and value of SARs and options granted to Mr Knox in 2008.


F-14


TABLE 8: SARS AND OPTIONS GRANTED TO MR KNOX IN 20081

Grant name Number of SARs granted Number of Options granted Maximum value of grant2

CEO Performance Award Tranche 1 35,973 Tranche 1 94,193 Tranche 1 $1,040,640

Tranche 2 50,403 Tranche 2 131,976 Tranche 2 $990,405


2008 Awards prior to CEO AppointmentPerformance Award - 64,992 $341,208

Deferred Award - 21,837 $159,410

1 The grants made to Mr Knox during the year constitute his full LTI awards for the 2008, 2009 and 2010 financial years. As the SARs and options only vest on satisfaction

of service and/or performance conditions to be tested in future financial years, none of the SARs or options detailed above were forfeited during the year.

2 Maximum value represents the fair value of the LTI Awards as at their grant date (being 3 May 2008 for the Performance Award and Deferred Award and 28 July 2008

for the CEO Performance Award). The fair value per instrument at the grant date was:

Performance Award Options - $5.25

Deferred Award Options - $7.30

Monte Carlo simulation was used to determine the value of the SARs and options granted. Details of the assumptions underlying the valuation are set out in Note 31

to the financial statements. The minimum total value of the grant, if the applicable vesting conditions are not met, is nil in all cases.

These grants have been structured to provide Mr Knox with an annual LTI opportunity of 100% of TFR (based on the 2008 level of $1.75

million) for each of the 2008, 2009 and 2010 years, subject to achieving applicable vesting conditions.

Summary of CEO Performance Award

The CEO Performance Award operates on the same terms as the performance-based LTI granted to other Senior Executives described on pages

56 to 60 below, that is, it is subject to performance hurdles based on the Company’s TSR relative to the ASX 100 over a three-year

performance period. The Board believes the chosen performance hurdles effectively align the CEO’s interests with that of the Company’s

shareholders, as TSR is a fair measure of shareholder returns and the ASX 100 represents the companies in which most of the Company’s

shareholders could invest as an alternative to Santos.

As the CEO Performance Award forms part of the Managing Director and CEO’s remuneration for each of the 2008, 2009 and 2010 financial

years, it is divided into 3 tranches as follows:

Tranche 1: Tested over the period from 1 January 2008 to 31 December 2010

Tranche 2: Tested over the period from 1 January 2009 to 31 December 2011

Tranche 3: Tested over the period from 1 January 2010 to 31 December 2012.

Depending on Santos’ relative TSR over the applicable performance period, each tranche of the CEO Performance Award will vest in

accordance with the following schedule:

TSR percentile ranking % of grant vesting

< 50th percentile 0%

= 50th percentile 37.5%

51st to 75th percentile 39% to 75%

76th to 100th percentile 76% to 100%

Full vesting of the CEO Performance Award will only occur where Santos’ TSR growth over the performance period exceeds that of all other

companies in the comparator group, and therefore requires exceptional performance.

There is no re-testing of the performance conditions. SARs or options which remain unvested following testing of the performance condition will lapse.

Remuneration Report


F-15


Upon vesting of SARs, ordinary shares in Santos will automatically be allocated to Mr Knox. These shares will be subject to restrictions until

the earlier of ten years from the grant date, cessation of employment, or the date at which the Board approves, at Mr Knox’s request, the

removal of the restrictions. Options may be exercised at any time between the vesting date and the expiry date (27 July 2018), subject to

payment of the exercise price of $17.36 per option (being the volume weighted average price in the week up to and including the grant date).

2008 Remuneration details for Mr DJW Knox

TABLE 9: 2008 REMUNERATION DETAILS FOR MR DJW KNOX1

Short-term employee benefits

Post-

employment

Share-based payments2

Termination

Other long-term

benefits3

Total

%

at risk

Base salary

STI4

Other

Super-annuation

SARs

Options

$1,200,115 $1,100,000 - $54,745 $381,824 $418,382 - $39,593 $3,194,659 59%

1 Remuneration paid to Mr Knox in 2008 varied according to each of the three positions he held during the year.

2 In accordance with the requirements of the Accounting Standards, remuneration includes a proportion of the notional value of equity compensation granted or

outstanding during the year. The notional value of equity instruments which do not vest during the reporting period is determined as at the grant date and is

progressively allocated over the vesting period. The amount included as remuneration is not related to or indicative of the benefit (if any) that Mr Knox may

ultimately realise should the equity instruments vest. The notional value of SARs and options as at their date of grant was determined in accordance with

AASB 2 “Share Based Payment” applying the Monte Carlo simulation method. Details of the assumptions underlying the valuation are set out in Note 31 to the

financial statements. Of the total remuneration for Mr Knox for the year, 25% consisted of SARs and options.

3 This amount represents the value of long service leave accrued in 2008.

4 This amount represents the STI award made for the 2008 financial year, which will be paid in March 2009.

Service agreement

The Company entered into a service agreement with the Managing Director and CEO on 28 July 2008, which is ongoing until termination by

the Managing Director and CEO, or the Company.

The service agreement provides that the Company may terminate the Managing Director and CEO’s employment on giving 12 months’ notice.

Where the Company exercises this general right to terminate, it must make a payment to the Managing Director and CEO equivalent to his TFR

for the full notice period. Pro-rata STI entitlements, subject to performance, will apply to the date of termination and the Board retains

discretion to vest any outstanding LTI, having regard to performance and reasons for termination.

The Company may terminate the Managing Director and CEO’s employment at any time for cause. No payment in lieu of notice, nor any

payment in respect of STI or LTI will be made in this circumstance.

Mr Knox may initiate termination of his service agreement by giving the Company six months’ notice, in which case he will be entitled to

payment of TFR in respect of the notice period and pro-rata STI to the date of termination, subject to performance. The Board retains

discretion to vest any outstanding LTI, having regard to performance and reasons for termination. Mr Knox may also initiate termination of

his service agreement immediately if there is a fundamental change in his role or responsibilities without his consent. In this circumstance

the service agreement provides for payment of 12 months’ TFR, full STI for the year in which employment is terminated and a pro rata portion

of the following year’s STI, subject to current year performance. Pro-rata vesting of outstanding LTI will apply, based on the expired portion

of the performance period and performance achieved to the termination date.

Senior Executive remuneration


Total remuneration for Senior Executives is made up of the following components:

Santos’ executive remuneration structure is consistent with the Company’s “pay for performance” policy.

The relative weightings of the three components comprising the Senior Executives’ total remuneration are provided in Table 10 below.


F-16


TABLE 10: RELATIVE WEIGHTINGS OF REMUNERATION COMPONENTS1



TFR STI LTI

Executive Vice Presidents

and Chief Financial Officer

52% 27% 21%

Other Senior Executives 57% 20% 23%

1 These figures reflect the relative weightings used by the Company to determine the size of STI and LTI allocations to Senior Executives. The figures do not reflect the

relative value derived by Senior Executives from each of the components, which is dependent on actual performance against targets for the “at risk” components.

Base remuneration

Salary and superannuation Senior Executives are paid Total Fixed Remuneration (TFR), out of which the Company makes contributions

into their superannuation funds of at least the minimum statutory amount. They may, if they wish, salary

sacrifice part of their TFR for additional superannuation contributions or other benefits such as novated

car leases.

Benefits Senior Executives do not receive any benefits in addition to TFR.

Market alignment Executive remuneration levels are market-aligned by comparison to similar roles in ASX 100 energy,

materials and utilities companies, excluding BHP Billiton and Rio Tinto due to their disproportionately

larger size and market capitalisation. This broad industry group is used as there are too few Australian

exploration and production companies of similar size to Santos for benchmarking purposes.

Short-term Incentive

Frequency STI is assessed and paid annually.

Maximum STI 75% of TFR for Executive Vice Presidents.

50% of TFR for other Senior Executives.

Performance measures To promote collaboration among Senior Executives and to focus their efforts towards the overall benefit of

the Company, 70% of their STI is based on Company performance. The remaining 30% is based on the

executive’s individual performance.

A range of Company performance metrics is used in order to drive balanced business performance. These

metrics include lagging indicators to assess the Company’s past performance, as well as forward-looking

indicators to ensure the Company is positioning itself effectively for future growth. The metrics include

reserve growth, reserve replacement cost, production, margin, new growth options, shareholder value

creation, people, environment, health and safety and continuous improvement. Individual performance

is assessed against targets set within each executive’s area of responsibility.

Assessment of performance Individual performance is assessed by the Managing Director and CEO.

Company performance is assessed by the Remuneration Committee. Each metric is assessed against target

and assigned a score on a five-point scale. The average of these scores forms the overall Company

performance score.

The Board believes the above methods of assessment are rigorous and transparent and provide a balanced

assessment of the executive’s performance.

Payment method Cash.

STI awarded in 2008 Company performance against the metrics in 2008 resulted in an average STI of 80% of maximum payable

to all eligible employees.

2008 STI awards made to individual Senior Executives ranged from 56% to 94% of maximum. The difference

between actual STI paid and maximum STI was forfeited.

Remuneration Report


F-17


Long-term Incentives

During the year, the Company made equity grants to its Senior Executives as the Long-term Incentive (LTI) component of their remuneration

for 2008. The grants comprised:

All LTI grants were delivered, at the executive’s election, in the form of either:

conditions; or

Grant sizes were market-aligned.

For the Performance Award, an additional 50% of the award was added to the standard grant for Relative TSR performance above the

75th percentile, up to the 100th percentile of the comparator group. Consistent with its remuneration philosophy, the Board believes it is

appropriate to provide executives with an additional incentive to strive for exceptional performance, recognising that executives will only

benefit from the additional 50% where Santos achieves a ranking in the top quartile of its comparator group. Executives will only receive

the full benefit of this additional component where Santos outperforms all other companies in the comparator group in delivering superior

returns to shareholders.

Vesting details of the Performance Award and the Deferred Award are summarised in Table 11 below. In addition, Table 12 contains details

of the number and value of SARs and options granted to Senior Executives in 2008 under the Performance Award and the Deferred Award.

TABLE 11: PERFORMANCE AWARD AND DEFERRED AWARD VESTING DETAILS

Performance Award Deferred Award

Vesting period 1 January 2008 to 31 December 2010. 3 May 2008 to 2 May 2011.

Vesting condition Vesting of this grant is based on relative TSR

against ASX 100 companies as at 1 January 2008.

Vesting of the Deferred Award is based on continuous

service to 2 May 2011, or three years from the grant

date.

Vesting schedule Santos TSR percentile ranking

< 50th percentile

= 50th percentile

51st to 75th percentile

76th to 100th percentile

% of standard grant vesting

0%

50%

52% to 100%

102% to 150%

0% if the continuous service condition is not met.

100% if the continuous service condition is met.

Exercise price $15.39 for options, being the volume weighted

average price in the week up to and including the

grant date of 3 May 2008.

SARs have no exercise price.

As for Performance Award.

Exercise period Options may be exercised at any time between

the vesting date and the expiry date.

Upon vesting of SARs, shares will automatically

be allocated to the executive.



F-18



Expiry/lapse SARs and options that do not vest upon testing

of the performance condition will lapse. There is

no re-testing of the performance condition if it

is not satisfied.

Vested options will expire if not exercised before

3 May 2018.

SARs and options will lapse where the service

condition is not satisfied.

Vested options will expire if not exercised before

3 May 2018.

Cessation/change of control Upon cessation of employment, SARs which have

not already vested and options which are not

exercisable will, in general, lapse and be forfeited.

However, if cessation occurs due to death, disability

or redundancy, or in special circumstances approved

by the Board, then a proportion of the SARs and

options may vest and become exercisable.

Where there is a change in control, the Board may

determine whether, and the extent to which, SARs

and options may vest.


TABLE 12: SARS AND OPTIONS GRANTED TO SENIOR EXECUTIVES IN 20081

Executive

Grant name

Number of SARs granted

Number of Options granted

Maximum value of grant2

J H Anderson Performance Award - 34,290 180,023

Deferred Award - 11,247 82,103

J L Baulderstone Performance Award - 31,384 164,766


T J Brown Performance Award - 33,925 178,106


M E J Eames Performance Award - 40,412 212,163


R M Kennett Performance Award 13,304 - 149,404

Deferred Award 4,364 - 73,010

M S Macfarlane Performance Award - 34,602 181,661


P C Wasow Performance Award 17,485 - 196,357


R J Wilkinson Performance Award 13,641 - 153,188


1 The grants made to the Senior Executives during the year constitute their full LTI awards for the 2008 financial year. As the SARs and options only vest on satisfaction

of service and/or performance conditions to be tested in future financial years, none of the SARs or options detailed above were forfeited during the year.

2 Maximum value represents the fair value of the Performance Award and Deferred Award as at their grant date (being 3 May 2008). The fair value per instrument at

the grant date was:

Performance Award Deferred Award Monte Carlo simulation was used to determine the value of the SARs and options granted. Details of the assumptions underlying the valuation are set out in Note 31

to the financial statements. The minimum total value of the grant, if the applicable vesting conditions are not met, is nil in all cases.

Remuneration Report


F-19


Prior year LTI grants to Senior Executives

The following LTI grants were still in progress or were tested during 2008:

Grant year Grant type Vesting condition(s) Performance/vesting period Status

2005 Performance Award

against ASX 100 companies

(50% of grant)

against Australian and

international E&P companies

(50% of grant)

1 January 2005 to

31 December 2007

Grant tested during the year,

resulting in:

as the Company’s TSR ranked

at the 75th percentile of the

ASX 100 comparator group; and

as the Company ranked below

the 50th percentile of the E&P

comparator group.



(50% of grant)



(50% of grant)

1 January 2006 to

31 December 2008

Grant tested after the end of

financial year resulting in full

vesting of the grant as the

Company’s TSR ranked above

the 75th percentile of both the

ASX 100 comparator group and

the E&P comparator group.




(50% of grant)

annum compound (50% of

grant)

1 January 2007 to

31 December 2009

Still in progress.

Deferred Award Continuous service 1 July 2007 to 30 June 2010 Still in progress.

2008 Performance Award Relative TSR performance


1 January 2008 to

31 December 2010

Still in progress.

Deferred Award Continuous service 3 May 2008 to 2 May 2011 Still in progress.

The value derived by Senior Executives during 2008 in respect of LTIs granted in previous financial years is set out in Table 13 below. Table 13

also contains details of prior year LTIs that lapsed or were forfeited during 2008.


F-20


TABLE 13: SENIOR EXECUTIVES’ LTI REMUNERATION OUTCOMES IN 2008

Vested Exercised1 Forfeited/Lapsed

Number Value2 Number Value3 Number Value4

J H Anderson

SARs

Options

-

14,400

-

74,592

-

12,744

-

188,611

-

14,400

-

16,560

J L Baulderstone

SARs

Options

-

-

-

-

-

-

-

-

-

-

-

-

T J Brown

SARs

Options

-

14,400

-

74,592

-

-

-

-

-

14,400

-

16,560

M E J Eames

SARs

Options

9,800

-

133,672

-

-

-

-

-

9,800

25,000

45,374

28,750

R M Kennett

SARs

Options

4,500

-

61,380

-

-

-

-

-

4,500

-

20,835

-

M S Macfarlane

SARs

Options

4,800

-

65,472

-

-

-

-

-

4,800

-

22,224

-

P C Wasow

SARs

Options

11,800

-

160,952

-

-

-

-

-

11,800

-

54,634

-

R J Wilkinson

SARs

Options

8,850

-

120,714

-

-

-

-

-

8,850

-

40,976

-

Total SARs Total options

39,750 28,800

542,190 149,184

- 12,744

188,611 -

39,750 53,800

184,043 61,870

1 For each option exercised during the year, the relevant executive received one fully paid ordinary share in the Company. Options were exercised on 20 June 2008,

at an exercise price of $6.95 per option.

2 The value of each SAR on the date of vesting is based on the closing market price of Santos Limited shares on ASX on the preceding trading day. The value of each

option on the date of vesting is based on the difference between the closing market price of Santos Limited shares on ASX on the preceding trading day and the

relevant exercise price.

3 The value of each option exercised during the year is based on the difference between the closing market price of Santos Limited shares on ASX on the preceding

trading day and the relevant exercise price.

4 The value of a SAR or option on the day it lapsed represents the benefit foregone as determined by the Monte Carlo valuation method at the date the SAR or

option was granted.

Remuneration Report


F-21


2008 Senior Executive Remuneration Details

TABLE 14: 2008 SENIOR EXECUTIVE REMUNERATION DETAILS


Post-

employment


(LTI)

Termin-

ation

Other long-term

benefits3

Total

%

at riskBase

salary

STI4

Other

Super- annuation

SARs

Options

J H Anderson $468,021 $205,000 - $48,689 $122,742 $80,852 - $12,228 $937,532 44%

J L Baulderstone $465,734 $250,000 - $46,326 $111,832 $119,641 - $12,030 $1,005,563 48%

T J Brown $500,023 $145,000 - $18,5231 $123,651 $77,719 - $11,803 $876,720 40%

M E J Eames $551,505 $220,000 - $57,455 $173,306 $68,556 - $14,078 $1,084,901 43%

R M Kennett5 $484,297 $235,000 $22,4306 $64,3151 $147,201 - - $12,983 $966,226 40%

M S Macfarlane $471,282 $205,000 - $49,029 $122,742 $79,811 - $12,056 $939,919 43%

P C Wasow $830,548 $585,000 - $13,289 $265,239 - - $22,639 $1,716,716 50%

R J Wilkinson $485,676 $255,000 $5,2826 $90,260 $201,462 - - $11,681 $1,049,361 43%

1 This amount reflects the accounting value ascribed to the superannuation benefit reflecting the services provided during the period. The actual contribution made

during 2008 by the Company in respect of the current and future entitlements of T J Brown and R M Kennett was $13,289 and $57,526 respectively.



progressively allocated over the vesting period. The amount included as remuneration is not related to or indicative of the benefit (if any) that individual executives

may ultimately realise should the equity instruments vest. The notional value of SARs and options as at their date of grant was determined in accordance with

AASB 2 “Share Based Payment” applying the Monte Carlo valuation method. Details of the assumptions underlying the valuation are set out in Note 31 to the

financial statements. The amounts set out above include a proportion of the value of SARs and Options granted during 2008 under the Performance Award and

Deferred Award as well as a proportion of the value of SARs and options granted in previous financial years that had not vested as at 1 January 2008. The percentage

of each Senior Executive’s total remuneration for the year that consisted of SARs and options is as follows:

J H Anderson 22% R M Kennett 15%

J L Baulderstone 23% M S Macfarlane 22%

T J Brown 23% P C Wasow 15%

M E J Eames 22% R J Wilkinson 19%

3 These amounts represent Senior Executives’ long service leave accruals in 2008.

4 This amount represents the STI award made for the 2008 financial year, which will be paid in March 2009.

5 R M Kennett was seconded to GLNG Operations Pty Ltd on 24 July 2008. Figures in this table represent his remuneration for the full 2008 year.

6 This amount represents allowances paid to R M Kennett for relocation to Brisbane and for incidental expenses for R J Wilkinson relating to commuting

between Adelaide and Brisbane.


F-22



TABLE 15: 2007 SENIOR EXECUTIVE REMUNERATION DETAILS


Post-

employment


(LTI)

Termin-

ation

Other long-term

benefits4

Total

% at

riskBase

salary

STI

Other1

Super- annuation

SARs

Options

J H Anderson $426,902 $199,500 $1,944 $44,542 $61,371 $35,458 - $10,961 $780,678 38%

J L Baulderstone $379,833 $167,000 $1,463 $38,340 $55,916 $33,200 - - $675,751 38%

T J Brown $465,358 $163,700 $1,944 $17,6272 $61,826 $36,330 - $11,031 $757,816 35%

M E J Eames $505,228 $235,100 $1,944 $52,766 $135,576 $22,181 - $ 12,916 $965,711 41%

R M Kennett $391,597 $187,500 $1,976 $66,0822 $72,549 - - $10,304 $730,008 36%

D J W Knox5 $230,403 $143,300 - $21,792 $65,429 $28,143 - - $489,067 48%

M S Macfarlane $426,902 $180,700 $1,944 $44,542 $78,517 $22,682 - $10,961 $766,248 37%

P C Wasow $631,261 $406,900 $1,944 $12,686 $158,421 - - $14,904 $1,226,117 46%

R J Wilkinson $411,455 $207,800 $1,944 $81,752 $118,370 - - $10,524 $831,846 39%

1 These amounts represent the cost of car parking provided partly in the Company’s old head office premises in Adelaide and partly in its current premises, up to 30

April 2007. On 1 May 2007, the cost of parking in the Company’s current head office was added to TFR, and from then on executives were required to obtain parking

via salary sacrifice.

2 This amount reflects the accounting value ascribed to the superannuation benefit reflecting the services provided during the period. The actual contributions

made during 2007 by the Company in respect of the current and future entitlements of TJ Brown and RM Kennett were $12,686 and $51,180 respectively.

3 In accordance with the requirements of the Accounting Standards, remuneration includes a proportion of the notional value of equity compensation granted

or outstanding during the year. The notional value of equity instruments which do not vest during the reporting period is determined as at the grant date and is

progressively allocated over the vesting period. The amount included as remuneration is not related to or indicative of the benefit (if any) that individual executives

may ultimately realise should the equity instruments vest. The notional value of SARs and options as at their date of grant was determined in accordance with

AASB 2 “Share Based Payment” applying the Monte Carlo valuation method. Details of the assumptions underlying the valuation are set out in Note 31 to the

financial statements. The amounts set out above include a proportion of the value of SARs and Options granted during 2007 under the Performance Grant

and Growth Awards as well as a proportion of the value of SARs and options granted in previous financial years that had not vested as at 1 January 2007.

The percentages of each Senior Executive’s total remuneration for the year that consisted of SARs and options are as follows:

J H Anderson 11% R M Kennett 19%

J L Baulderstone 13% D J W Knox 12%

T J Brown 12% P C Wasow 12%

M E J Eames 16% R J Wilkinson 13%

M S Macfarlane 8%

4 These amounts represent Senior Executives’ long service leave accruals in 2007.

5 Mr D J W Knox was appointed on 3 September 2007.

Service Agreements – Senior Executives

The Company has entered into service agreements with the Senior Executives. The service agreements are ongoing until termination by

the Company upon giving 12 months’ notice or the Senior Executive upon giving six months’ notice. In a Company-initiated termination,

the Company may make a payment in lieu of notice equivalent to the TFR the 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 apply.

Remuneration Report


F-23


Former Managing Director and CEO

Mr J C Ellice-Flint retired as Managing Director and CEO on 25 March 2008.

Consistent with the terms of his service agreement, Mr Ellice-Flint received the following benefits upon cessation of his employment:

approved by shareholders, these options are exercisable, at an exercise price of $11.36 per option, until 3 May 2016; and

Whilst Mr Ellice-Flint officially stepped down as CEO on 25 March 2008, he continued to provide services to the Company until 30 June 2008

in a consultancy capacity, for which he was paid $492,337.

Details of Mr Ellice-Flint’s remuneration are shown in Table 16 below.

TABLE 16: DETAILS OF 2007 AND 2008 REMUNERATION FOR MR J C ELLICE-FLINT


Post-

employment


(LTI)

Base salary

STI

Other

Super-

annuation1

Options2

Termination

Other long-term

benefits4

Total

%

at risk2008 $433,135 $520,312 - $1,172,553 $1,570,522 $2,705,262 - $6,401,784 33%

2007 $1,702,694 $1,950,000 $1,9443 $987,357 $1,898,273 - $42,601 $6,582,869 58%

1 This amount reflects the accounting value ascribed to the superannuation benefit reflecting the services provided during the period. The actual contribution made

by the Company in respect of Mr Ellice-Flint’s entitlements was $1,094,334 in 2007 and $208,250 in 2008.



progressively allocated over the vesting period. The notional value of SARs and options as at their date of grant was determined in accordance with AASB 2 “Share

Based Payment” applying the Monte Carlo valuation method. Details of the assumptions underlying the valuation are set out in Note 31 to the financial statements.

The amounts set out above include a proportion of the value of options granted to Mr Ellice-Flint in 2006 that had not vested as at 1 January 2007 and 1 January

2008. Of Mr Ellice-Flint’s total remuneration for the year, 29% consisted of options in 2007 and 25% consisted of options in 2008.

head office was paid by the Managing Director.

4 This amount represents long service leave accrued in 2007.


F-24


LINK BETWEEN COMPANY PERFORMANCE, SHAREHOLDER WEALTH AND REMUNERATION 2004–2008

Table 17 sets out the Group’s performance over the past five years in respect of the key financial and non-financial indicators used to measure

year-on-year performance. Table 17 also shows how the size of the STI pool available to Senior Executives has varied over this period based

on the level of performance achieved each year across these key indicators.

TABLE 17: KEY INDICATORS OF SHORT-TERM COMPANY PERFORMANCE 2004–2008

2004 2005 2006 2007 2008

Safety (total recordable case frequency rate) 6.4 4.9 6.4 5.3 5.8

Production (mmboe) 47.1 56.0 61.0 59.1 54.4

17 13 15 13 13

121 218 143 175 160

643 774 819 879 1,013

Netback (A$/boe) 20 30 33 33 36

Net profit after tax ($m) 355 762 643 359 1,650

Earnings per share (cents) 54 124 103 55 273

Dividends per ordinary share (cents) 30 36 40 40 42

Size of STI pool (% of maximum) 80.0 85.0 70.0 80.0 80.0

The graphs below show the relationship over the past five years between the Company’s TSR and share price growth, being two key indicators

of long-term Company performance, and the percentage of LTI grants to Senior Executives that vested. The graphs demonstrate how the level

of Senior Executive reward derived from their LTI grants is dependent upon the delivery of sustained above-average returns to shareholders.

0

4

8

12

16

20

2004 2005 2006 2007 2008

LTI vesting for 2004–2006performance period = 0%



Santos ASX100 E&P Santos ASX100 E&P Santos ASX100 E&P

-20

0

20

40

60

80

100

120

140

160

2004 2005 200620072006 2008200720062005

TSR OF SANTOS, ASX100 AND AUSTRALIAN AND INTERNATIONAL EXPLORATION AND PRODUCTION COMPANIES 2004–2008%

SANTOS SHARE PRICE 2004–2008$

Remuneration Report


F-25


The TSR growth shown above incorporates dividends and capital returns the Company made to shareholders during the past five years.

Dividends paid by the Company in the past five years are as follows:

(Dividends per ordinary share)

2004 $0.30

2005 $0.36

2006 $0.40

2007 $0.40

2008 $0.42

Company redeemed and bought back the entire 3,500,000 Reset Convertible Preference Shares on issue at that date. 2,865,821 were

redeemed at face value and reinvested in FUELS, 489,774 shares were bought back for $105 each and cancelled, and 144,405 were

redeemed at face value.

on issue at that date, at a price of $12.16 per share.

at that date, at a price of $16.23 per share.


F-26


Income Statements

Consolidated Consolidated Santos Ltd 2008 2007 2008 2007

Continuing Discontinued Total Continuing Discontinued Total

Note $million $million $million $million $million $million $million $million

Product sales 3 2,761.8 – 2,761.8 2,458.4 30.1 2,488.5 872.5 974.3

Cost of sales 4 (1,422.6) – (1,422.6) (1,329.1) (5.8) (1,334.9) (520.7) (603.1)

Gross profit 1,339.2 – 1,339.2 1,129.3 24.3 1,153.6 351.8 371.2

Other revenue 3 43.2 – 43.2 29.5 – 29.5 64.3 901.3

Other income 3 1,734.6 – 1,734.6 81.7 (69.6) 12.1 1.1 15.6

Other expenses 4 (493.4) – (493.4) (317.8) (20.5) (338.3) (210.6) 169.7

Operating profit/(loss) before net financing costs 2,623.6 – 2,623.6 922.7 (65.8) 856.9 206.6 1,457.8

Financial income 6 63.3 – 63.3 13.6 0.8 14.4 183.0 188.8

Financial expenses 6 (153.7) – (153.7) (152.7) – (152.7) (286.4) (294.4)

Net financing (costs)/income (90.4) – (90.4) (139.1) 0.8 (138.3) (103.4) (105.6)

Profit/(loss) before tax 2,533.2 – 2,533.2 783.6 (65.0) 718.6 103.2 1,352.2

Income tax expense 7 (768.4) – (768.4) (195.1) (0.6) (195.7) (51.4) (50.1)

Royalty related taxation expense 7 (114.7) – (114.7) (163.6) – (163.6) (31.7) (31.9)

Total taxation expense (883.1) – (883.1) (358.7) (0.6) (359.3) (83.1) (82.0)

Net profit/(loss) for the period attributable to equity holders of Santos Ltd 1,650.1 – 1,650.1 424.9 (65.6) 359.3 20.1 1,270.2

Earnings per share attributable to the ordinary equity holders of Santos Ltd (¢)Basic earnings per share 25 272.9 272.9 66.3 55.2

Diluted earnings per share 25 261.7 261.7 66.0 54.9

Dividends per share ($)Ordinary shares 24 0.42 0.40

Redeemable preference shares 24 6.3348 5.5864

The income statements are to be read in conjunction with the notes to the consolidated financial statements.


F-27


Balance Sheets

Consolidated Santos Ltd 2008 2007 2008 2007

Note $million $million $million $million

Current assetsCash and cash equivalents 9 1,552.9 200.5 1,402.9 56.8

Trade and other receivables 10 581.6 607.4 693.9 208.5

Inventories 11 289.7 241.5 136.0 115.9

Derivative financial instruments 12 59.2 6.9 – –

Total current assets 2,483.4 1,056.3 2,232.8 381.2

Non-current assetsReceivables 10 6.0 – 1,300.9 1,304.8

Derivative financial instruments 12 336.3 77.2 – –

Exploration and evaluation assets 13 427.5 332.4 42.7 15.5

Oil and gas assets 14 6,254.8 5,584.4 1,777.7 1,650.1

Other land, buildings, plant and equipment 15 159.9 134.8 109.7 107.4

Available-for-sale financial assets 17 2.1 15.6 2.1 15.6

Other financial assets 18 20.9 32.7 3,440.8 3,488.6

Deferred tax assets 19 111.0 86.8 – –

Total non-current assets 7,318.5 6,263.9 6,673.9 6,582.0

Total assets 9,801.9 7,320.2 8,906.7 6,963.2

Current liabilitiesTrade and other payables 20 604.8 609.7 723.0 625.1

Deferred income 55.2 12.0 1.8 1.7

Interest-bearing loans and borrowings 21 98.6 103.1 0.6 –

Current tax liabilities 469.2 71.7 454.2 46.5

Provisions 22 116.7 112.4 65.8 65.1

Other current liabilities 23 8.1 15.4 – –

Total current liabilities 1,352.6 924.3 1,245.4 738.4

Non-current liabilitiesDeferred income 54.1 8.8 – –

Interest-bearing loans and borrowings 21 2,355.8 1,992.9 4,085.4 2,478.2

Deferred tax liabilities 19 744.1 743.0 134.0 109.2

Provisions 22 808.0 543.6 310.9 167.8

Other non-current liabilities 23 9.0 14.5 – –

Total non-current liabilities 3,971.0 3,302.8 4,530.3 2,755.2

Total liabilities 5,323.6 4,227.1 5,775.7 3,493.6

Net assets 4,478.3 3,093.1 3,131.0 3,469.6

EquityIssued capital 24 2,530.8 2,331.6 2,530.8 2,331.6

Reserves 24 (188.8) (272.9) (2.0) 7.4

Retained earnings 24 2,136.0 1,034.4 602.2 1,130.6

Equity attributable to equity holders of Santos Ltd 4,478.0 3,093.1 3,131.0 3,469.6

Equity attributable to minority interests 24 0.3 – – –

Total equity 4,478.3 3,093.1 3,131.0 3,469.6

The balance sheets are to be read in conjunction with the notes to the consolidated financial statements.


F-28


Cash Flow Statements



Cash flows from operating activitiesReceipts from customers 3,100.9 2,555.1 985.3 1,036.6

Dividends received – – – 874.0

Interest received 48.8 14.2 39.4 188.7

Overriding royalties received 14.8 14.7 24.2 22.0

Insurance proceeds received 12.5 18.3 – –

Pipeline tariffs and other receipts 64.3 83.0 41.4 2.0

Payments to suppliers and employees (1,089.0) (808.4) (401.7) (313.4)

Royalty and excise paid (102.2) (76.3) (47.5) (33.9)

Borrowing costs paid (133.5) (128.4) (0.3) (280.6)

Income taxes paid (291.8) (384.6) (229.0) (231.1)

Royalty related taxes paid (151.6) (73.7) (35.4) (22.4)

Net cash provided by operating activities 29 1,473.2 1,213.9 376.4 1,241.9

Cash flows from investing activitiesPayments for:

Exploration and evaluation expenditure (353.5) (279.8) (84.7) (80.5)

Oil and gas assets expenditure (1,178.5) (919.4) (358.9) (324.3)

Other land, buildings, plant and equipment (39.6) (58.5) (13.8) (47.7)

Acquisitions of oil and gas assets – (33.5) (0.7) –

Acquisitions of controlled entities (7.5) (75.7) (6.2) (4.5)

Restoration expenditure (54.9) (34.4) (2.6) (2.7)

Share subscriptions in controlled entities – – – (245.2)

Advances to related entities (6.0) – – –

Other investing activities 3.9 3.5 3.2 (1.8)

Proceeds from disposal of non-current assets 2,080.0 0.6 1.2 –

Proceeds from disposal of discontinued operations:

Non-current assets – 6.1 – –

Controlled entities – 73.4 – –

Proceeds from disposal of other investments 0.4 52.2 0.4 23.8

Net cash provided by/(used in) investing activities 444.3 (1,265.5) (462.1) (682.9)

Cash flows from financing activitiesDividends paid (251.2) (217.0) (251.2) (217.0)

Proceeds from issues of ordinary shares 220.5 93.8 220.5 93.8

Off-market buy-back of ordinary shares (301.9) (302.0) (301.9) (302.0)

Repayments of borrowings (752.2) (1,703.1) (0.7) –

Drawdown of borrowings 500.0 2,182.6 – –

Receipts from controlled entities – – 2,816.7 166.8

Payments to controlled entities – – (1,052.6) (296.4)

Net cash (used in)/provided by financing activities (584.8) 54.3 1,430.8 (554.8)

Net increase in cash 1,332.7 2.7 1,345.1 4.2

Cash and cash equivalents at the beginning of the year 200.5 200.0 56.8 52.8

Effects of exchange rate changes on the balances of cash held in

foreign currencies 19.7 (2.2) 1.0 (0.2)

Cash and cash equivalents at the end of the year 9 1,552.9 200.5 1,402.9 56.8

The cash flow statements are to be read in conjunction with the notes to the consolidated financial statements.


F-29


Statements of Recognised Income and Expense



Adjustment to retained earnings on initial adoption of

Interpretation 1003 Australian Petroleum Resource Rent Tax – (136.1) – (51.3)

Adjustment to retained earnings on initial adoption of

Interpretation 11 AASB 2 Group and Treasury Share Transactions – – – 0.2

Exchange differences on translation of foreign operations 269.0 (101.8) – –

(Loss)/gain on foreign currency loans designated as hedges of

net investments in foreign operations (177.0) 62.6 – –

Change in fair value of available-for-sale financial assets,

net of tax (9.3) 17.4 (9.3) 14.7

Share-based payment transactions 31 8.3 5.2 8.3 5.2

Actuarial (loss)/gain on defined benefit plan, net of tax 30 (25.5) 4.4 (25.5) 4.4

Net income/(expense) recognised directly in equity 65.5 (148.3) (26.5) (26.8)

Transfers (net of any related tax):

Transfer to profit on sale of available-for-sale financial assets (0.1) (23.6) (0.1) (9.7)

Transfer to profit on disposal of foreign operation 1.5 (27.2) – –

Profit for the period 1,650.1 359.3 20.1 1,270.2

Total recognised income and expense for the period attributable to equity holders of Santos Ltd 1,717.0 160.2 (6.5) 1,233.7

Other movements in equity arising from transactions with owners as owners are set out in note 24.

The statements of recognised income and expense are to be read in conjunction with the notes to the consolidated financial statements.


F-30


Notes to the Consolidated Financial Statements

1. SIGNIFICANT ACCOUNTING POLICIES

The financial report of Santos Ltd (“the

Company”) for the year ended 31 December

2008 was authorised for issue in accordance

with a resolution of the Directors on

19 February 2009.

Santos Ltd (the parent) is a company limited by

shares incorporated in Australia whose shares

are publicly traded on the Australian Securities

Exchange (“ASX”) and is the ultimate parent

entity in the Group. The consolidated financial

report of the Company for the year ended

31 December 2008 comprises the Company

and its controlled entities (“the Group”).

The nature of the operations and principal

activities of the Group are described in the

Directors’ Report.

(A) STATEMENT OF COMPLIANCE

The financial report is a general purpose

financial report which has been prepared

in accordance with the requirements of

the Corporations Act 2001, Australian

Accounting Standards and other

authoritative pronouncements of the

Australian Accounting Standards Board.

The financial report complies with

Australian Accounting Standards as issued

by the Australian Accounting Standards

Board and International Financial Reporting

Standards (“IFRS”) as issued by the

International Accounting Standards Board.

(B) BASIS OF PREPARATION

The financial report is presented in

Australian dollars.

The financial report is prepared on the

historical cost basis, except for derivative

financial instruments, fixed rate notes that

are hedged by an interest rate swap and

available-for-sale financial assets, which

are measured at fair value.

The Company is of a kind referred to in ASIC

Class Order 98/100 dated 10 July 1998

(updated by Class Order 05/641 effective

28 July 2005), and in accordance with that

Class Order amounts in the financial report

and Directors’ Report have been rounded to

the nearest hundred thousand dollars,

unless otherwise stated.

Change in accounting policy

From 1 January 2008 the Group has adopted

Interpretation 1003 Australian Petroleum Resource Rent Tax, which is applicable for

annual reporting periods ending on or after

30 June 2008.

The adoption of Interpretation 1003 has

resulted in the Group recognising some

royalty-based taxes, including petroleum

resource rent tax, resource rent royalty and

additional profits tax as an income tax

under AASB 112 Income Taxes. This change

has been accounted for by adjusting the

opening balance of current and deferred

tax liabilities and retained earnings at

1 January 2007.

The effect of the change in the accounting

policy for these royalty-based taxes from

1 January 2007 is shown below:

Consolidated Santos Ltd Impact of Impact of change in change in accounting Restated accounting Restated policy amount policy amount $million $million $million $million $million $million

31 December 2007Cost of sales 1,452.5 (117.6) 1,334.9 643.3 (40.2) 603.1

Profit before tax 601.0 117.6 718.6 1,312.0 40.2 1,352.2

Income tax expense 160.4 35.3 195.7 38.0 12.1 50.1

Royalty related taxation expense – 163.6 163.6 – 31.9 31.9

Profit after tax 440.6 (81.3) 359.3 1,274.0 (3.8) 1,270.2

Basic earnings per share (¢) 68.9 (13.7) 55.2 – – –

Diluted earnings per share (¢) 68.7 (13.8) 54.9 – – –

Trade and other payables 650.9 (41.2) 609.7 642.9 (17.8) 625.1

Current tax liabilities 30.5 41.2 71.7 28.7 17.8 46.5

Deferred tax liabilities 525.6 217.4 743.0 54.1 55.1 109.2

Retained earnings 1,251.8 (217.4) 1,034.4 1,185.7 (55.1) 1,130.6

1 January 2007Trade and other payables 441.8 (12.5) 429.3 562.9 – 562.9

Current tax liabilities 213.5 12.5 226.0 207.8 – 207.8

Deferred tax liabilities 517.5 136.1 653.6 65.3 51.3 116.6

Retained earnings 1,301.4 (136.1) 1,165.3 401.7 (51.3) 350.4


F-31


1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Adoption of new accounting standards and interpretations

The Group has also adopted the following standards and interpretations, which became applicable on 1 January 2008. Adoption of these standards

and interpretations has only affected the disclosure in these financial statements. There has not been any impact on the financial position or

performance of the Group.

Amendments to Australian Accounting Standards arising from AASB Interpretation 11

Amendments to Australian Accounting Standards

Amendments to Australian Accounting Standard – Key Management Personnel Disclosures by Disclosing Entities

Amendments to Australian Accounting Standards – Reclassification of Financial Assets

Amendments to Australian Accounting Standards – Reclassification of Financial Assets – Effective Date and Transition

AASB 2 Group and Treasury Share Transactions

AASB 119 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction.

The adoption of Interpretation 11 had a minor impact on the 2007 opening retained earnings of the Company ($0.2 million) for shares issued to

employees of subsidiaries (refer note 1(R)).

Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective have not been adopted by

the Group for the annual reporting period ending 31 December 2008. These are outlined in the following table:

Reference Title Summary

Effective for annual reporting periods beginning on or after

Impact on Group financial report

Application date for Group

AASB 3 Business Combinations Adopts the acquisition method to account for

business combinations; acquisition costs expensed;

contingent consideration recognised at fair value

on acquisition date.

1 July 2009 Recognition

of future

acquisitions.

1 January 2010

AASB 8 Operating Segments Segment disclosure based on components of an

entity that management monitors in making

decisions about allocating resources to segments

and in assessing their performance.

1 January 2009 Minor

disclosure

impact.

1 January 2009

AASB 101 Presentation of Financial Statements (issued in

September 2007)

Changes the titles of financial statements; requires

all non-owner changes in equity be presented in

statement of comprehensive income; additional

statement of financial position at beginning of

earliest comparative period required for changes in

accounting policy or reclassifications; income tax

relating to each component of comprehensive

income to be disclosed.

1 January 2009 Minor impact.

Presentation of

financial

statements will

change from

2009 onwards.

1 January 2009

AASB 123 Borrowing Costs Removes option to expense borrowing costs related

to qualifying assets.

1 January 2009 No impact. 1 January 2009

AASB 127 Consolidated and Separate Financial Statements

Changes in a parent’s ownership in a subsidiary that

result in a loss of control requires reserves to be

recycled and remaining ownership interest to be

measured at fair value; changes that do not result in

a loss of control are accounted for as equity

transactions.

1 July 2009 Unlikely to

have impact.

1 January 2010

AASB 2007-3 Amendments to Australian Accounting Standards arising from AASB 8

Consequential amendments to a number of

standards following release of AASB 8 Operating Segments.



F-32










standards following release of AASB 123 Borrowing Costs.



Consequential amendments to a number

of standards following issue of a revised AASB 101

Presentation of Financial Statements in September

2007.


AASB 2007-10 Further Amendments to Australian Accounting Standards arising from AASB 101

Changes terminology in Australian Accounting

Standards to align with IFRS.


AASB 2008-1 Amendments to Australian Accounting Standard – Share-based Payments: Vesting Conditions and Cancellations

Clarifies the definition of vesting conditions;

introduces concept of non-vesting conditions;

requires non-vesting conditions to be reflected in

grant date fair value; provides the accounting

treatment for non-vesting conditions and

cancellations.


AASB 2008-2 Amendments to Australian Accounting Standards – Puttable Financial Instruments and Obligations arising on Liquidation

Introduces exception to the definition of financial

liability to classify certain puttable financial

instruments as equity instruments.


AASB 2008-3 Amendments to Australian Accounting Standards arising from AASB 3 and AASB 127


standards following the issue of the revised AASB 3

Business Combinations and AASB 127 Consolidated and Separate Financial Statements.

1 July 2009 No impact. 1 January 2010

AASB 2008-5 Amendments to Australian Accounting Standards arising from the Annual Improvements Project

Amends 15 standards, including where entity

committed to sale plan involving loss of control of

subsidiary then all of subsidiary’s assets and

liabilities are classified as held for sale (AASB 5

Non-current Assets Held for Sale and Discontinued Operations); additional disclosures where

recoverable amount is based on fair value less costs

to sell (AASB 136 Impairment of Assets).

1 January 2009 Unlikely to

have material

impact.

1 January 2009

AASB 2008-6 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project

Terminology or editorial amendments to eight

standards that are expected to have no or minimal

effects on accounting practices.



F-33







AASB 2008-7 Amendments to Australian Accounting Standards – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate

Removes the definition of the cost method in

AASB 127 Consolidated and Separate Financial Statements; requires all dividends from subsidiaries,

jointly controlled entities or associates to be

recognised as income; receipt of dividend may be

indicator of impairment if certain criteria met;

specified accounting for certain transactions where

newly formed entity becomes parent of another

entity in a group.

1 January 2009 No Group

impact.

Potential

impairment

impact on

investments

held by the

Company if

intercompany

dividends are

received.

1 January 2009

AASB 2008-8 Amendments to Australian Accounting Standards – Eligible Hedged Items

Clarifies the hedge accounting provisions of

AASB 139 Financial Instruments: Recognition and Measurement to address inflation in a financial

hedged item, and one-sided risk in a hedged item.


AASB 2008-13 Amendments to Australian Accounting Standards arising from AASB Interpretation 17 Distributions of Non-Cash Assets to Owners

Consequential amendments to existing standards

following the issue of Interpretation 17

Distributions of Non-Cash Assets to Owners.


Interpretation 16 Hedges of net investments in foreign operations

Provides guidance on net investment hedging. 1 October 2008 No impact. 1 January 2009

Interpretation 17 Distributions of Non-Cash Assets to Owners

Provides guidance on when and how a liability for

certain distributions of non-cash assets is

recognised and measured, and how to account for

that liability. Does not apply to common control

transactions.



F-34




The accounting policies set out below have

been applied consistently to all periods

presented in the consolidated financial

report.

The accounting policies have been

consistently applied by the Group.

(C) BASIS OF CONSOLIDATION

Subsidiaries

Subsidiaries are entities controlled by the

Company. Control exists when the Company

has the power, directly or indirectly, to

govern the financial and operating policies

of an entity so as to obtain benefits from

its activities. In assessing control, potential

voting rights that presently are exercisable

or convertible are taken into account.

The financial statements of subsidiaries

are included in the consolidated financial

statements from the date that control

commences until the date that control

ceases.

The acquisition of subsidiaries is

accounted for using the purchase method

of accounting, which involves allocating

the cost of the business combination to the

fair value of the assets acquired and the

liabilities and contingent liabilities assumed

at the date of acquisition (refer note 1(G)).

Investments in subsidiaries are carried

at their cost of acquisition, less any

impairment charges, in the Company’s


Intragroup balances and any unrealised

gains and losses or income and expenses

arising from intragroup transactions are

eliminated in preparing the consolidated


Minority interests

Minority interests in the net assets

of consolidated entities are allocated their

share of net profit after tax in the income

statement, and are identified separately

from the Group’s equity in those entities.

Minority interests consist of the amount of

those interests at the date of the original

business combination and the minority’s

share of changes in equity since the date

of the combination. Where the minority

interest has losses greater than its equity

interest in the consolidated subsidiary, the

excess and any further losses applicable to

the minority interest are allocated against

the Group’s interest. If the minority interest

subsequently reports profits, the profits are

allocated to the Group until the minority’s

share of losses previously absorbed by the

Group have been fully recovered.

Jointly controlled assets

Santos’ exploration and production

activities are often conducted through

joint venture arrangements governed by

joint operating agreements, production

sharing contracts or similar contractual

relationships. A summary of the Group’s

interests in its significant joint ventures is

included in note 28.

A joint venture characterised as a jointly

controlled asset involves the joint control,

and often the joint ownership, by the

venturers of one or more assets contributed

to, or acquired for the purpose of, the joint

venture and dedicated to the purposes of

the joint venture. The assets are used to

obtain benefits for the venturers. Each

venturer may take a share of the output

from the assets and each bears an agreed

share of expenses incurred. Each venturer

has control over its share of future economic

benefits through its share of jointly

controlled assets.

The interests of the Company and of the

Group in unincorporated joint ventures are

brought to account by recognising in the

financial statements the Group’s share of

jointly controlled assets, share of expenses

and liabilities incurred, and the income from

the sale or use of its share of the production

of the joint venture in accordance with the

revenue policy in note 1(X).

Jointly controlled entities

The Group has interests in joint ventures

which are jointly controlled entities,

whereby the venturers have contractual

arrangements that establish joint control

over the economic activities of the entities.

The Group recognises its interest in jointly

controlled entities using proportionate

consolidation, by combining its share of the

assets, liabilities, income and expenses of

the joint venture with similar line items in

the consolidated financial statements.

(D) FOREIGN CURRENCY

Functional and presentation currency

Both the functional and presentation

currency of Santos Ltd is Australian dollars.

Some subsidiaries have a functional

currency of United States dollars which is

translated to presentation currency

(see below).

Transactions and balances

Transactions in foreign currencies are

initially recorded in the functional currency

by applying the exchange rate ruling at the

date of the transaction. Monetary assets

and liabilities denominated in foreign

currencies are retranslated at the foreign

exchange rate ruling at the balance sheet

date. Foreign exchange differences arising

on translation are recognised in the income

statement.

Foreign exchange differences that arise on

the translation of monetary items that form

part of the net investment in a foreign

operation are recognised in equity in the

consolidated financial statements.

Non-monetary assets and liabilities that are

measured in terms of historical cost in a

foreign currency are translated using the

exchange rate at the date of the initial

transaction. Non-monetary assets and

liabilities denominated in foreign currencies

that are stated at fair value are translated

to the functional currency at foreign

exchange rates ruling at the dates the

fair value was determined.

Group companies

The results of subsidiaries with a functional

currency of United States dollars are

translated to Australian dollars as at the

date of each transaction. The assets and

liabilities are translated to Australian

dollars at foreign exchange rates ruling at

the balance sheet date. Foreign exchange

differences arising on retranslation

are recognised directly in the foreign

currency translation reserve.

Exchange differences arising from the

translation of the net investment in foreign

operations and of related hedges are taken

to the foreign currency translation reserve.

They are released into the income statement

upon disposal of the foreign operation.


F-35



(E) DERIVATIVE FINANCIAL INSTRUMENTS

The Group uses derivative financial

instruments to hedge its exposure to

changes in foreign exchange rates,

commodity prices and interest rates arising

in the normal course of business. The

principal derivatives that may be used are

forward foreign exchange contracts, foreign

currency swaps and options, interest rate

swaps and commodity crude oil price swap

and option contracts. Their use is subject

to a comprehensive set of policies,

procedures and limits approved by the

Board of Directors. The Group does not

trade in derivative financial instruments

for speculative purposes.

Derivative financial instruments are

recognised initially at fair value. Subsequent

to initial recognition, derivative financial

instruments are stated at fair value. Where

derivatives qualify for hedge accounting,

recognition of any resultant gain or loss

depends on the nature of the item being

hedged; otherwise the gain or loss

on re-measurement to fair value is

recognised immediately in profit or loss.

The fair value of interest rate swaps is the

estimated amount that the Group would

receive or pay to terminate the swap at the

balance sheet date, taking into account

current interest rates and the current

creditworthiness of the swap counterparties.

The fair value of forward exchange contracts

is their quoted market price at the balance

sheet date, being the present value of the

quoted forward price. The fair value of

commodity swap and option contracts is

their quoted market price at the balance

sheet date.

Embedded derivatives

Derivatives embedded in other financial

instruments or other host contracts are

treated as separate derivatives when their

risks and characteristics are not closely

related to those of the host contract and

the host contracts are not measured at fair

value with changes in fair value recognised

in profit or loss.

(F) HEDGING

Fair value hedge

Where a derivative financial instrument

hedges the changes in fair value of

a recognised asset or liability or an

unrecognised firm commitment (or an

identified portion of such asset, liability or

firm commitment), any gain or loss on the

hedging instrument is recognised in the

income statement. The hedged item is

stated at fair value in respect of the risk

being hedged, with any gain or loss being

recognised in the income statement.

Cash flow hedge

Where a derivative financial instrument is

designated as a hedge of the variability in

cash flows of a recognised asset or liability,

or a highly probable forecast transaction,

the effective part of any gain or loss on

the derivative financial instrument is

recognised directly in equity. When the

forecast transaction subsequently results

in the recognition of a non-financial asset

or non-financial liability, or the forecast

transaction for a non-financial asset or

non-financial liability becomes a firm

commitment for which fair value hedging is

applied, the associated cumulative gain or

loss is removed from equity and included in

the initial cost or other carrying amount of

the non-financial asset or non-financial

liability. If a hedge of a forecast transaction

subsequently results in the recognition of

a financial asset or a financial liability,

the associated gains and losses that were

recognised directly in equity are reclassified

into profit or loss in the same period or

periods during which the asset acquired

or liability assumed affects profit or loss

(that is, when interest income or expense

is recognised).

For cash flow hedges, other than those

covered by the preceding paragraph,

the associated cumulative gain or loss

is removed from equity and recognised in

the income statement in the same period

or periods during which the hedged

forecast transaction affects profit or loss.

The ineffective part of any gain or loss

is recognised immediately in the

income statement.

When a hedging instrument expires or

is sold, terminated or exercised, or the

entity revokes designation of the hedge

relationship, but the hedged forecast

transaction is still expected to occur,

the cumulative gain or loss at that point

remains in equity and is recognised in

accordance with the above policy when

the transaction occurs. If the hedged

transaction is no longer expected to take

place, the cumulative unrealised gain or

loss recognised in equity is recognised

immediately in the income statement.

Hedge of monetary assets and liabilities

When a derivative financial 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 income statement.

Hedge of net investment in a foreign operation

The portion of the gain or loss on

an instrument used to hedge a net

investment in a foreign operation that

is determined to be an effective hedge

is recognised directly in equity. Any

ineffective portion is recognised

immediately in the income statement.

On disposal of the foreign operation, the

cumulative value of any such gains or losses

recognised directly in equity is transferred

to profit or loss.

(G) 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

of assets given, shares issued or liabilities

incurred. The cost of an asset comprises the

purchase price including any incidental costs

directly attributable to the acquisition;

any costs directly attributable to bringing

the asset to the location and condition

necessary for it to be capable of operating;

and the estimate of the costs of dismantling

and removing the asset and restoring the

site on which it is located determined in

accordance with note 1(Q).


F-36




Business combinations

The purchase method of accounting is used

to account for all business combinations

regardless of whether equity instruments or

other assets are acquired. Cost is measured

as the fair value of the assets given, shares

issued or liabilities incurred or assumed at

the date of exchange plus costs directly

attributable to the combination.

Where equity instruments are issued in a

business combination, the fair value of the

instruments is their published market price

as at the date of exchange. Transaction

costs arising on the issue of equity

instruments are recognised directly

in equity.

Except for non-current assets or disposal

groups classified as held for sale (which are

measured at fair value less costs to sell), all

identifiable assets acquired and liabilities

and contingent liabilities assumed in a

business combination are measured initially

at their fair values at the acquisition date.

The excess of the costs of the business

combination over the net fair value of the

identifiable net assets of the Group’s share

of the identifiable net assets acquired is

recognised as goodwill. If the cost of

acquisition is less than the Group’s share

of the net fair value of the identifiable net

assets of the subsidiary, the difference

is recognised as a gain in the income

statement, but only after a reassessment of

the identification and measurement of the

net assets acquired.

Where settlement of any part of the

consideration is deferred, the amounts

payable in the future are discounted to their

present value as at the date of exchange.

The discount rate used is the entity’s

incremental borrowing rate, being the

rate at which a similar borrowing could be

obtained from an independent financier

under comparable terms and conditions.

(H) EXPLORATION AND EVALUATION EXPENDITURE

Exploration and evaluation expenditure in

respect of each area of interest is accounted

for using the successful efforts method of

accounting. The successful efforts method

requires all exploration and evaluation

expenditure to be expensed in the period it

is incurred, except the costs of successful

wells and the costs of acquiring interests

in new exploration assets, which are

capitalised as intangible exploration

and evaluation. The costs of wells are

initially capitalised pending the results

of the well.

An area of interest refers to an individual

geological area where the presence of oil or

a natural gas field is considered favourable

or has been proved to exist, and in most

cases will comprise an individual prospective

oil or gas field.

Exploration and evaluation expenditure is

recognised in relation to an area of interest

when the rights to tenure of the area of

interest are current and either:

(i) such expenditure is expected to

be recovered through successful

development and commercial

exploitation of the area of interest,

or alternatively, by its sale; or

(ii) the exploration activities in the area of

interest have not yet reached a stage

which permits reasonable assessment

of the existence of economically

recoverable reserves and active and

significant operations in, or in relation

to, the area of interest are continuing.

The carrying amounts of the Group’s

exploration and evaluation assets are

reviewed at each balance sheet date, in

conjunction with the impairment review

process referred to in note 1(P), to

determine whether any of the following

indicators of impairment exist:

(i) tenure over the licence area has expired

during the period or will expire in

the near future, and is not expected

to be renewed;

(ii) substantive expenditure on further

exploration for and evaluation of

mineral resources in the specific area

is not budgeted or planned;

(iii) exploration for and evaluation of

resources in the specific area has not

led to the discovery of commercially

viable quantities of resources, and the

Group has decided to discontinue

activities in the specific area; or

(iv) sufficient data exists to indicate that

although a development is likely to

proceed the carrying amount of the

exploration and evaluation asset is

unlikely to be recovered in full from

successful development or from sale.

Where an indicator of impairment exists a

formal estimate of the recoverable amount

is made, and any resultant impairment loss

is recognised in the income statement.

When a discovered oil or gas field enters

the development phase the accumulated

exploration and evaluation expenditure is

transferred to oil and gas assets – assets in

development.

(I) OIL AND GAS ASSETS

Oil and gas assets are usually single oil or

gas fields being developed for future

production or which are in the production

phase. Where several individual oil or gas

fields are to be produced through common

facilities, the individual oil or gas fields

and the associated production 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 field

has been demonstrated, the field enters

its development phase. The costs of oil and

gas assets in the development phase are

separately accounted for as tangible assets

and include past exploration and evaluation

costs, development drilling and other

subsurface expenditure, surface plant

and equipment and any associated land

and buildings.


F-37



When commercial operation commences the

accumulated costs are transferred to oil and

gas assets – producing assets.

Producing assets

The costs of oil and gas assets in production

are separately accounted for as tangible

assets and include past exploration

and evaluation costs, pre-production

development costs and the ongoing

costs of continuing to develop reserves for

production and to expand or replace plant

and equipment and any associated land

and buildings.

These costs are subject to depreciation and

depletion in accordance with note 1(K).

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 oil or gas fields in the vicinity with

the intention of producing any near field

discoveries using the infrastructure in place.

Exploration and evaluation expenditure

associated with oil and gas assets is

accounted for in accordance with the policy

in note 1(H). Exploration and evaluation

expenditure amounts capitalised in respect

of oil and gas assets are separately disclosed

in note 14.

(J) LAND, BUILDINGS, PLANT AND EQUIPMENT

Land and buildings are measured at cost less

accumulated depreciation on buildings, less

any impairment losses recognised.

Plant and equipment is stated at cost

less accumulated depreciation and any

accumulated impairment losses. Such cost

includes the cost of rotable spares and

insurance spares that are purchased for

back up or rotation with specific plant and

equipment items. Similarly, the cost of

major cyclical maintenance is recognised in

the carrying amount of the related plant

and equipment as a replacement only if it is

eligible for capitalisation. Any remaining

carrying amount from the cost of the

previous major cyclical maintenance is

derecognised. All other repairs and

maintenance are recognised in profit or

loss as incurred.

Depreciation on buildings, plant and

equipment is calculated in accordance with

note 1(K).

(K) DEPRECIATION AND DEPLETION

Depreciation charges are calculated to

write off the depreciable value of buildings,

plant and equipment over their estimated

economic useful lives to the Group.

Each component of an item of buildings,

plant and equipment with a cost that is

significant in relation to the total cost of

the asset is depreciated separately. The

residual value, useful life and depreciation

method applied to an asset is reviewed at

the end of each annual reporting period.

Depreciation of onshore buildings, plant

and equipment and corporate assets

is calculated using the straight-line method

of depreciation on an individual asset basis

from the date the asset is available for use.

The estimated useful lives for each class of

onshore assets for the current and

comparative periods are as follows:

– Computer equipment 3 – 5 years

– Motor vehicles 4 – 7 years

– Furniture and

fittings 10 – 20 years

– Pipelines 10 – 30 years

– Plant and facilities 10 – 50 years

Depreciation of offshore plant and

equipment is calculated using the units of

production method on a cash-generating

unit basis (refer note 1(P)) from the date of

commencement of production.

Depletion charges are calculated using

a unit of production method based on

heating value which will amortise the cost

of carried forward exploration, evaluation

and subsurface development expenditure

(“subsurface assets”) over the life of the

estimated Proven plus Probable (“2P”)

reserves in a cash-generating unit, together

with future subsurface costs necessary to

develop the hydrocarbon reserves in the

respective cash-generating units.

The heating value measurement used for

the conversion of volumes of different

hydrocarbon products is barrels of oil

equivalent.

Depletion is not charged on costs carried

forward in respect of assets in the

development stage until production

commences.

(L) AVAILABLE-FOR-SALE FINANCIAL ASSETS

Financial instruments held by the Group and

the Company which are classified as being

available for sale are stated at fair value,

with any resultant gain or loss being

recognised directly in equity.

The fair value of financial instruments

classified as available for sale is their

quoted bid price at the close of business

on the balance sheet date.

Financial instruments classified as available

for sale are recognised/derecognised by the

Group and the Company on the date it

commits to purchase/sell the investments.

When these investments are derecognised,

the cumulative gain or loss previously

recognised directly in equity is recognised

in profit or loss.

(M) INVENTORIES

Inventories are stated at the lower of cost

and net realisable value. Net realisable

value is the estimated selling price in the

ordinary course of business, less the

estimated costs of completion and selling

expenses. Cost is determined as follows:

(i) drilling and maintenance stocks, which

include plant spares, consumables and

maintenance and drilling tools used

for ongoing operations, are valued at

weighted average cost; and

(ii) petroleum products, which comprise

extracted crude oil, liquefied petroleum

gas, condensate and naphtha stored

in tanks and pipeline systems and

processed sales gas and ethane stored

in subsurface reservoirs, are valued

using the absorption cost method in a

manner which approximates specific

identification.


F-38




(N) TRADE AND OTHER RECEIVABLES

Trade and other receivables are initially

recognised at fair value, which in practice is

the equivalent of cost, less any impairment

losses.

Long-term receivables are discounted and

are stated at amortised cost, less

impairment losses.

Trade and other receivables are assessed for

indicators of impairment at each balance

sheet date. Where a receivable is impaired

the amount of the impairment is the

difference between the asset’s carrying

value and the present value of estimated

future cash flows, discounted at the original

effective interest rate. The carrying amount

of the receivable is reduced through the use

of an allowance account. Changes in the

allowance account are recognised in profit

or loss.

(O) CASH AND CASH EQUIVALENTS

Cash and cash equivalents comprise cash

balances and short-term deposits that are

readily convertible to known amounts of

cash, are subject to an insignificant risk

of changes in value, and generally have an

original maturity of three months or less.

(P) IMPAIRMENT

The carrying amounts of the Group’s assets,

other than inventories and deferred tax

assets, are reviewed at each balance sheet

date to determine whether there is any

indication of impairment. Where an

indicator of impairment exists a formal

estimate of the recoverable amount is made.

Oil and gas assets, land, buildings,

plant and equipment are assessed for

impairment on a cash-generating unit

(“CGU”) basis. A cash-generating unit is the

smallest grouping of assets that generates

independent cash inflows, and generally

represents an individual oil or gas field.

Impairment losses recognised in respect

of cash-generating units are allocated to

reduce the carrying amount of the assets in

the unit on a pro-rata basis.

Exploration and evaluation assets are

assessed for impairment in accordance with

note 1(H).

An impairment loss is recognised in the

income statement whenever the carrying

amount of an asset or its cash-generating

unit exceeds its recoverable amount.

Where a decline in the fair value of an

available-for-sale financial asset has been

recognised directly in equity and there

is objective evidence that the asset is

impaired, the cumulative loss that had been

recognised directly in equity is recognised

in profit or loss even though the financial

asset has not been derecognised. The

amount of the cumulative loss that is

recognised in profit or loss is the difference

between the acquisition cost and current

fair value, less any impairment loss on that

financial asset previously recognised in

profit or loss.

Calculation of recoverable amount

The recoverable amount of an asset is the

greater of its fair value less costs to sell and

its value in use. In assessing value in use,

an asset’s estimated future cash flows are

discounted to their present value using a

pre-tax discount rate that reflects current

market assessments of the time value of

money and the risks specific to the asset.

Where an asset does not generate cash

flows that are largely independent from

other assets or groups of assets, the

recoverable amount is determined for

the cash-generating unit to which the

asset belongs.

For oil and gas assets the estimated future

cash flows are based on estimates of

hydrocarbon reserves, future production

profiles, commodity prices, operating costs

and any future development costs necessary

to produce the reserves. Estimates of future

commodity prices are based on contracted

prices where applicable or based on forward

market prices where available.

Reversals of impairment

An impairment loss is reversed if there

has been an increase in the estimated

recoverable amount of a previously impaired

asset. An impairment loss is reversed only to

the extent that the asset’s carrying amount

does not exceed the carrying amount that

would have been determined, net of

depreciation or depletion, if no impairment

loss had been recognised.

Impairment losses recognised on equity

instruments classified as available-for-sale

financial assets are not reversed.

(Q) PROVISIONS

A provision is recognised in the balance

sheet when the Group has a present legal or

constructive obligation as a result of a past

event and it is probable that an outflow of

resources embodying economic benefits will

be required to settle the obligation and a

reliable estimate can be made of the amount

of the obligation.

Provisions are measured at the present

value of management’s best estimate of the

expenditure required to settle the present

obligation using a discounted cash flow

methodology. If the effect of the time value

of money is material, the provision is

discounted using a current pre-tax rate

that reflects current market assessments

of the time value of money and, where

appropriate, the risks specific to the

liability. The increase in the provision

resulting from the passage of time is

recognised in finance costs.

Restoration

Provisions for future environmental

restoration are recognised where there is a

present obligation as a result of exploration,

development, production, transportation or

storage activities having been undertaken,

and it is probable that an outflow of

economic benefits will be required to

settle the obligation. The estimated future

obligations include the costs of removing

facilities, abandoning wells and restoring

the affected areas.

The provision for future restoration costs is

the best estimate of the present value of the

future expenditure required to settle the

restoration obligation at the reporting date,

based on current legal requirements. Future

restoration costs are reviewed annually and

any changes in the estimate are reflected

in the present value of the restoration

provision at the balance sheet date, with

a corresponding change in the cost of the

associated asset.


F-39



The amount of the provision for future

restoration costs relating to exploration,

development and production facilities is

capitalised and depleted as a component

of the cost of those activities.

(R) EMPLOYEE BENEFITS

Wages, salaries, annual leave and sick leave

Liabilities for wages and salaries, including

non-monetary benefits, and annual leave

that are expected to be settled within

twelve months of the reporting date are

recognised in respect of employees’ services

up to the reporting date. They are measured

at the amounts expected to be paid when

the liabilities are settled. Expenses for

non-vesting sick leave are recognised when

the leave is taken and are measured at the

rates paid or payable.

Long-term service benefits

A liability for long service leave is

recognised and measured as the present

value of the estimated future cash outflows

to be made in respect of employees’ services

up to the balance sheet date. The obligation

is calculated using expected future increases

in wage and salary rates, experience of

employee departures and periods of service.

Expected future payments are discounted

using the rates attached to the

Commonwealth Government bonds at the

balance sheet date which have maturity

dates approximating the terms of the

Group’s obligations.

Defined contribution plans

The Company and its controlled entities

contribute to several defined contribution

superannuation plans. Obligations for

contributions are recognised as an expense

in the income statement as incurred.

Defined benefit plan

The Group’s net obligation in respect of the

defined benefit superannuation plan is

calculated by estimating the amount of

future benefit that employees have earned

in return for their service in the current and

prior periods; that benefit is discounted to

determine its present value, and the fair

value of any plan assets is deducted.

The discount rate is the yield at the balance

sheet date on government bonds that have

maturity dates approximating the terms of

the Group’s obligations. The calculation is

performed by a qualified actuary using the

projected unit credit method.

When the benefits of the plan are improved,

the portion of the increased benefit relating

to past service by employees is recognised

as an expense in the income statement on a

straight-line basis over the average period

until the benefits become vested. To the

extent that the benefits vest immediately,

the expense is recognised immediately in

the income statement.

Actuarial gains or losses that arise in

calculating the Group’s obligation in respect

of the plan are recognised directly in

retained earnings.

When the calculation results in plan assets

exceeding liabilities to the Group, the

recognised asset is limited to the net total

of any unrecognised actuarial losses and

past service costs and the present value

of any future refunds from the plan or

reductions in future contributions to

the plan.

Past service cost is the increase in the

present value of the defined benefit

obligation for employee services in prior

periods, resulting in the current period

from the introduction of, or changes to,

post-employment benefits or other

long-term employee benefits. Past service

costs may either be positive (where benefits

are introduced or improved) or negative

(where existing benefits are reduced).

Share-based payment transactions

The Santos Executive Share Option Plan

allows eligible executives to acquire shares

in the capital of the Company. The fair

value of options granted 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 to the

options. The fair value of the options

granted is measured using the Monte Carlo

simulation method, taking into account the

terms and market conditions upon which

the options were granted. The amount

recognised as an expense is only adjusted

when the options do not vest due to

non-market related conditions.

The fair value of Share Acquisition Rights

(“SARs”) issued to eligible executives under

the Executive Long-term Incentive

Programme 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 to the SARs. The

fair value of the SARs granted is measured

using the Monte Carlo simulation method,

taking into account the terms and market

conditions upon which the SARs were

granted. The amount recognised as an

expense is only adjusted when the SARs

do not vest due to non-market-related

conditions.

The fair value of shares issued to eligible

employees under the Santos Employee Share

Acquisition Plan, to eligible executives and

employees under the Santos Employee

Share Purchase Plan, and new shares

issued to Non-executive Directors under

the Non-executive Director Share Plan, is

recognised as an increase in issued capital

on grant date.

Shares issued under the Santos Employee

Share Acquisition Plan to employees

of subsidiaries are recognised in the

Company’s separate financial statements as

an additional investment in the subsidiary

with a corresponding credit to equity.

As a result, the expense recognised by

the Company in relation to equity-settled

awards only represents the expense

associated with grants to employees of the

Company. The expense recognised by the

Group is the total expense.

(S) INTEREST-BEARING BORROWINGS

Interest-bearing borrowings are recognised

initially at fair value, net of transaction

costs incurred. Subsequent to initial

recognition, interest-bearing borrowings

are stated at amortised cost with any

difference between cost and redemption

value being recognised in the income

statement over the period of the borrowings

on an effective interest basis.


F-40




Fixed rate notes that are hedged by an

interest rate swap are recognised at fair

value (refer note 1(F)).

(T) BORROWING COSTS

Borrowing costs, including interest and

finance charges relating to major oil and

gas assets under development up to the

date of commencement of commercial

operations, are capitalised as a component

of the cost of development. Where funds are

borrowed specifically for qualifying projects

the actual borrowing costs incurred are

capitalised. Where the projects are funded

through general borrowings the borrowing

costs are capitalised based on the weighted

average borrowing rate (refer note 21).

Borrowing costs incurred after

commencement of commercial operations

are expensed.

All other borrowing costs are recognised in

the profit or loss in the period in which they

are incurred.

(U) DEFERRED INCOME

A liability is recorded for obligations under

sales contracts to deliver natural gas in

future periods for which payment has

already been received.

Deferred income is also recognised on asset

sale agreements where consideration is

received prior to all conditions precedent

being fulfilled.

(V) TRADE AND OTHER PAYABLES

Trade and other payables are recognised

when the related goods or services are

received, at the amount of cash or cash

equivalent that will be required to discharge

the obligation, gross of any settlement

discount offered. Trade payables are

non-interest-bearing and are settled on

normal terms and conditions.

(W) SHARE CAPITAL

Ordinary share capital

Ordinary share capital is classified as equity.

Preference share capital

Preference share capital is classified as

equity if it is non-redeemable and any

dividends are discretionary, or it is

redeemable only at the Company’s option.

Dividends on preference share capital

classified as equity are recognised as

distributions within equity.

Dividends

Dividends are recognised as a liability at the

time the Directors resolve to pay or declare

the dividend.

Transaction costs

Transaction costs of an equity transaction

are accounted for as a deduction from

equity, net of any related income tax

benefit.

(X) REVENUE

Revenue is recognised in the income

statement when the significant risks

and rewards of ownership have been

transferred to the buyer. Revenue is

recognised and measured at the fair value of

the consideration or contributions received,

net of goods and services tax, to the extent

it is probable that the economic benefits

will flow to the Group and the revenue can

be reliably measured.

Sales revenue

Sales revenue is recognised on the basis of

the Group’s interest in a producing field

(“entitlements” method), when the physical

product and associated risks and rewards

of ownership pass to the purchaser, which

is generally at the time of ship or truck

loading, or on the product entering the

pipeline.

Revenue earned under a production sharing

contract (“PSC”) is recognised on a net

entitlements basis according to the terms

of the PSC.

Dividends

Dividend revenue from controlled entities

is recognised as the dividends are declared,

and from other parties as the dividends

are received.

Overriding royalties

Royalties recognised on farmed-out

operating lease rights are recognised as

revenue as they accrue in accordance with

the terms of the overriding royalty

agreements.

Pipeline tariffs and processing tolls

Tariffs and tolls charged to other entities for

use of pipelines and facilities owned by the

Group are recognised as revenue as they

accrue in accordance with the terms of the

tariff and tolling agreements.

Trading revenue

Trading revenue represents the net revenue

derived from the purchase and subsequent

sale of hydrocarbon products from third

parties where the risks and benefits of

ownership of the product do not pass to the

Group, or where the Group acts as an agent

or broker with compensation on a

commission or fee basis.

(Y) OTHER INCOME

Other income is recognised in the income

statement at the fair value of the

consideration received or receivable, net of

goods and services tax, when the significant

risks and rewards of ownership have been

transferred to the buyer or when the service

has been performed.

The 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. The gain or loss on

disposal is calculated as the difference

between the carrying amount of the asset

at the time of disposal and the net proceeds

on disposal.

Interest income is recognised in the income

statement as it accrues, using the effective

interest method. This is a method of

calculating the amortised cost of a financial

asset and allocating the interest income

over the relevant period using the effective

interest rate, which is the rate that exactly

discounts estimated future cash receipts

through the expected life of the financial

asset to the net carrying amount of the

financial asset.


F-41



(Z) LEASES

The determination of whether an

arrangement is or contains a lease is based

on the substance of the arrangement and

requires an assessment of whether the

fulfilment of the arrangement is dependent

on the use of a specific asset or assets and

the arrangement conveys a right to use

the asset.

Leases are classified as finance leases when

the terms of the lease transfer substantially

all the risks and rewards incidental to

ownership of the leased asset to the

lessee. All other leases are classified as

operating leases.

Finance leases are capitalised at the lease’s

inception at the fair value of the leased

property or, if lower, the present value

of the minimum lease payments. The

corresponding liability to the lessor is

included in the balance sheet as a finance

lease obligation. Lease payments are

apportioned between finance charges and

reduction of the lease obligation so as to

achieve a constant rate of interest on the

remaining balance of the liability. Assets

under finance lease are depreciated over

the shorter of the estimated useful life of

the asset and the lease term if there is no

reasonable certainty that the Group will

obtain ownership by the end of the

lease term.

Operating lease payments are recognised as

an expense on a straight-line basis over the

lease term, except where another systematic

basis is more representative of the time

pattern in which economic benefits from

the leased asset are consumed. Contingent

rentals arising under operating leases are

recognised as an expense in the period in

which they are incurred.

(AA) GOODS AND SERVICES TAX

Revenues, expenses and assets are

recognised net of the amount of goods

and services tax (“GST”), except where the

amount of GST incurred is not recoverable

from the Australian Taxation Office (“ATO”).

In these circumstances the GST is recognised

as part of the cost of acquisition of the asset

or as part of the expense.

Receivables and payables are stated with

the amount of GST included. The net amount

of GST recoverable from, or payable to, the

ATO is included as a current asset or liability

in the balance sheet.

Cash flows are included in the cash flow

statement on a gross basis. The GST

components of cash flows arising from

investing and financing activities which are

recoverable from, or payable to, the ATO are

classified as operating cash flows.

(AB) TAXATION

Royalty related taxation

Petroleum resource rent tax, resource rent

royalty and additional profits tax are

recognised as an income tax under

AASB 112 Income Taxes.

Income tax

Income tax on the profit or loss for the year

comprises current and deferred tax. Income

tax is recognised in the income statement

except to the extent that it relates to items

recognised directly in equity, in which case

it is recognised in equity.

Current tax is the amount of income tax

payable on the taxable profit or loss for

the year, using tax rates enacted or

substantively enacted at the balance sheet

date, and any adjustment to tax payable in

respect of previous years.

Deferred tax is determined using the

balance sheet approach, providing for

temporary differences between the carrying

amounts of assets and liabilities for

financial reporting purposes and the

appropriate tax bases. The following

temporary differences are not provided

for: the initial recognition of assets or

liabilities that affect neither accounting nor

taxable profit; and differences 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 balance sheet date.

A deferred tax asset is recognised only to

the extent that it is probable that future

taxable profits will be available against

which the asset can be utilised. Deferred tax

assets are reduced to the extent that it is no

longer probable that the related tax benefit

will be realised.

The Company and all its wholly-owned

Australian resident entities are part of a

tax-consolidated group under Australian

taxation law. Santos Ltd is the head entity

in the tax-consolidated group. Current tax

expense/income, deferred tax liabilities and

deferred tax assets arising from temporary

differences of the members of the

tax-consolidated group are allocated among

the members of the tax-consolidated group

using a “stand-alone taxpayer” approach

in accordance with Interpretation 1052

Tax Consolidation Accounting and are

recognised in the separate financial

statements of each entity. Current tax

liabilities and assets and deferred tax

assets arising from unused tax losses

and tax credits of the members of the

tax-consolidated group are recognised

by the Company (as head entity in the

tax-consolidated group).

The Company and the other entities in the

tax-consolidated group have entered into

a tax funding agreement. Tax contribution

amounts payable under the tax funding

agreement are recognised as payable to or

receivable by the Company and each other

member of the tax-consolidated group.

Where the tax contribution amount

recognised by each member of the

tax-consolidated group for a particular

period under the tax funding agreement is

different from the aggregate of the current

tax liability or asset and any deferred tax

asset arising from unused tax losses and tax

credits in respect of that period assumed by

the Company, the difference is recognised

as a contribution from (or distribution to)

equity participants.

The Company and the other entities in the

tax-consolidated group have also entered

into a tax sharing agreement pursuant to

which the other entities may be required

to contribute to the tax liabilities of the

Company in the event of default by the

Company or upon leaving the

tax-consolidated group.


F-42




(AC) DISCONTINUED OPERATIONS AND NON-CURRENT ASSETS HELD FOR SALE

A discontinued operation is a component

of the Group that has been disposed of,

or is classified as held for sale, and that

represents a separate major line of business

or geographical area of operations, and

is part of a single coordinated plan to

dispose of such a line of business or area

of operations. The results of discontinued

operations are presented separately on the

face of the income statement and the assets

and liabilities are presented separately on

the balance sheet.

Non-current assets and disposal groups are

classified as held for sale and measured

at the lower of their carrying amount and

fair value less costs to sell if their carrying

amount will be recovered principally

through a sale transaction. They are not

depreciated or amortised. For an asset or

disposal group to be classified as held for

sale, it must be available for immediate sale

in its present condition and its sale must be

highly probable.

An impairment loss is recognised for any

initial or subsequent write-down of the

asset (or disposal group) to fair value less

costs to sell. A gain is recognised for any

subsequent increases in fair value less costs

to sell of an asset (or disposal group) but

not in excess of any cumulative impairment

loss previously recognised. A gain or loss

not previously recognised by the date of the

sale of the non-current asset (or disposal

group) is recognised at the date of

derecognition.

(AD) SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS

The carrying amounts of certain assets and

liabilities are often determined based

on management’s judgement regarding

estimates and assumptions of future events.

The reasonableness of estimates and

underlying assumptions are reviewed on

an ongoing basis. Revisions to accounting

estimates are recognised in the period in

which the estimate is revised if the revision

affects only that period or in the period of

the revision and future periods if the

revision affects both current and future

periods. The key judgements, estimates and

assumptions that have a significant risk

of causing a material adjustment to the

carrying amount of certain assets and

liabilities within the next annual reporting

period are:

Estimates of reserve quantities

The estimated quantities of Proven plus

Probable hydrocarbon reserves reported by

the Company are integral to the calculation

of depletion and depreciation expense and

to assessments of possible impairment of

assets. Estimated reserve quantities are

based upon interpretations of geological

and geophysical models and assessments

of the technical feasibility and commercial

viability of producing the reserves. These

assessments require assumptions to be

made regarding future development and

production costs, commodity prices,

exchange rates and fiscal regimes.

The estimates of reserves may change

from period to period as the economic

assumptions used to estimate the reserves

can change from period to period, and as

additional geological data is generated

during the course of operations. Reserves

estimates are prepared in accordance with

the Company’s policies and procedures for

reserves estimation which conform to

guidelines prepared by the Society of

Petroleum Engineers.

Exploration and evaluation

The Group’s policy for exploration and

evaluation expenditure is discussed in

note 1(H). 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 reserves have been

found. Any such estimates and assumptions

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

relevant capitalised amount will be written

off to the income statement.

The carrying amount of exploration and

evaluation assets is disclosed in note 13.

Provision for restoration

The Group estimates the future removal and

restoration costs of oil and gas production

facilities, wells, pipelines and related assets

at the time of installation of the assets.

In most instances the removal of these

assets will occur many years in the future.

The estimate of future removal costs

therefore requires management to make

judgements regarding the removal date,

future environmental legislation, the extent

of restoration activities required and future

removal technologies.

The carrying amount of the provision for

restoration is disclosed in note 22.

Impairment of oil and gas assets

The Group assesses whether oil and gas

assets are impaired on a semi-annual

basis. This requires an estimation of the

recoverable amount of the cash-generating

unit to which the assets belong. The

carrying amount of oil and gas assets and

the assumptions used in the estimation of

recoverable amount are discussed in notes

14 and 16 respectively.


F-43


2. S

EG

ME

NT

INFO

RM

AT

ION

The

Gro

up

op

era

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pre

do

min

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tly

in o

ne

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2008

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F-44



Di

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IN

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2008

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Prim

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be

ma

de

.


F-45




3. REVENUE AND OTHER INCOME $million $million $million $million $million $million $million $million

Product sales:

Gas, ethane and liquefied gas 1,051.6 – 1,051.6 920.8 23.3 944.1 301.3 311.6

Crude oil 1,150.6 – 1,150.6 1,034.4 2.4 1,036.8 407.2 497.2

Condensate and naphtha 321.2 – 321.2 325.7 4.4 330.1 80.5 94.1

Liquefied petroleum gas 238.4 – 238.4 177.5 – 177.5 83.5 71.4

2,761.8 – 2,761.8 2,458.4 30.1 2,488.5 872.5 974.3

Other revenue:

Overriding royalties 16.1 – 16.1 13.3 – 13.3 23.9 20.2

Pipeline tariffs and tolls 9.3 – 9.3 4.4 – 4.4 3.5 –

Trading revenue 12.5 – 12.5 6.6 – 6.6 8.4 6.1

Dividends from controlled entities – – – – – – 27.0 874.0

Other 5.3 – 5.3 5.2 – 5.2 1.5 1.0

43.2 – 43.2 29.5 – 29.5 64.3 901.3

Total revenue 2,805.0 – 2,805.0 2,487.9 30.1 2,518.0 936.8 1,875.6

Other income:

Insurance recoveries 35.8 – 35.8 2.4 – 2.4 – –

Net gain on redetermination of

unitised field – – – 46.8 – 46.8 – –

Net gain on sale of available-for-sale

financial assets 0.3 – 0.3 33.4 – 33.4 0.3 13.9

Net loss on sale of discontinued

operations* – – – – (67.7) (67.7) – –

Net gain on sale of non-current

assets 1,698.5 – 1,698.5 (0.9) (1.9) (2.8) 0.8 1.7

1,734.6 – 1,734.6 81.7 (69.6) 12.1 1.1 15.6

* Includes impairment loss on measurement to fair value less costs to sell of $97.6 million, net of $27.2 million gain recycled into profit and loss on the reversal of associated amounts previously deferred in the foreign currency translation reserve.

4. EXPENSES

Cost of sales:

Cash cost of production

Production costs:

Production expenses 464.8 – 464.8 377.9 3.0 380.9 155.3 115.3

Production facilities operating

leases 78.6 – 78.6 67.9 – 67.9 29.4 27.7

543.4 – 543.4 445.8 3.0 448.8 184.7 143.0

Other operating costs:

Pipeline tariffs, tolls and other 84.1 – 84.1 68.9 – 68.9 20.8 23.1

Royalty and excise 100.5 – 100.5 71.3 2.8 74.1 43.4 30.8

184.6 – 184.6 140.2 2.8 143.0 64.2 53.9

Total cash cost of production 728.0 – 728.0 586.0 5.8 591.8 248.9 196.9

Depreciation and depletion 661.5 – 661.5 756.8 – 756.8 272.9 418.2

Third party gas purchases 62.0 – 62.0 20.1 – 20.1 7.4 3.7

Increase in product stock (28.9) – (28.9) (33.8) – (33.8) (8.5) (15.7)

Total cost of sales 1,422.6 – 1,422.6 1,329.1 5.8 1,334.9 520.7 603.1


F-46





4. EXPENSES (CONTINUED) $million $million $million $million $million $million $million $million

Other expenses:

Selling 17.6 – 17.6 12.5 – 12.5 10.5 7.5

Corporate 97.0 – 97.0 62.8 11.8 74.6 87.3 64.3

Depreciation 2.4 – 2.4 2.5 – 2.5 0.4 1.1

117.0 – 117.0 77.8 11.8 89.6 98.2 72.9

Foreign exchange (gains)/losses (24.4) – (24.4) (0.4) – (0.4) (7.1) 0.7

Change in fair value of financial assets

designated as at fair value

through profit or loss 12.5 – 12.5 11.9 – 11.9 – 1.3

Fair value hedges, (gains)/losses:

On the hedging instrument (236.2) – (236.2) (56.7) – (56.7) – –

On the hedged item attributable

to the hedged risk 228.9 – 228.9 59.1 – 59.1 – –

Exploration and evaluation expensed 179.0 – 179.0 226.1 8.7 234.8 22.2 54.2

Net impairment loss on oil and gas assets 216.2 – 216.2 – – – 71.2 56.6

Net impairment loss on receivables 0.4 – 0.4 – – – 0.3 –

Impairment (reversal)/loss on receivables

due from controlled entities – – – – – – (23.8) 25.3

Net impairment loss/(reversal) on

investments in controlled entities – – – – – – 49.6 (380.7)

493.4 – 493.4 317.8 20.5 338.3 210.6 (169.7)

Profit before tax includes the following: Depreciation and depletion:

Depletion of subsurface assets 401.7 – 401.7 431.3 – 431.3 181.2 265.7

Depreciation of plant and equipment 256.6 – 256.6 323.6 – 323.6 89.7 151.3

Depreciation of buildings 5.6 – 5.6 4.4 – 4.4 2.4 2.3

Total depreciation and depletion 663.9 – 663.9 759.3 – 759.3 273.3 419.3

Employee benefits expense 216.7 – 216.7 173.8 6.5 180.3 210.4 176.8

Net write-down of inventories 0.6 – 0.6 0.2 – 0.2 0.2 0.3

Operating lease rentals:

Minimum lease payments 88.4 – 88.4 59.1 0.2 59.3 39.0 41.1

Contingent rentals 0.4 – 0.4 0.5 – 0.5 0.2 0.1


F-47




5. EARNINGS $million $million $million $million $million $million $million $million

Earnings before interest, tax, depreciation,

depletion, exploration and impairment

(“EBITDAX”) is calculated as follows:

Profit/(loss) before tax 2,533.2 – 2,533.2 783.6 (65.0) 718.6 103.2 1,352.2

Add back:

Net financing costs/(income) 90.4 – 90.4 139.1 (0.8) 138.3 103.4 105.6

Earnings before interest and tax (“EBIT”) 2,623.6 – 2,623.6 922.7 (65.8) 856.9 206.6 1,457.8

Add back:

Depreciation and depletion 663.9 – 663.9 759.3 – 759.3 273.3 419.3

Exploration and evaluation expensed 179.0 – 179.0 226.1 8.7 234.8 22.2 54.2

Net impairment loss on oil and

gas assets 216.2 – 216.2 – – – 71.2 56.6

Net impairment loss on receivables 0.4 – 0.4 – – – 0.3 –

Impairment (reversal)/loss on

receivables due from entities – – – – – – (23.8) 25.3

Net impairment loss/(reversal) on

investments in controlled entities – – – – – – 49.6 (380.7)

EBITDAX 3,683.1 – 3,683.1 1,908.1 (57.1) 1,851.0 599.4 1,632.5

Amounts that are unusual because of their nature, size, or incidence: Net gain on sale of non-current assets

includes the gain on sale of 40%

interest in Fairview and Roma assets

to PETRONAS 1,697.4 – 1,697.4 – – – – –

Remediation and related costs of the

Moonie to Brisbane pipeline incidents (31.5) – (31.5) (38.0) – (38.0) – –

6. NET FINANCING COSTS

Interest income:

Controlled entities – – – – – – (129.2) (186.2)

Other entities (63.3) – (63.3) (13.6) (0.8) (14.4) (53.8) (2.6)

Financial income (63.3) – (63.3) (13.6) (0.8) (14.4) (183.0) (188.8)

Interest expense:

Controlled entities – – – – – – 276.1 279.7

Other entities 131.5 – 131.5 129.5 – 129.5 1.2 0.6

Less borrowing costs capitalised (9.5) – (9.5) (6.3) – (6.3) – –

122.0 – 122.0 123.2 – 123.2 277.3 280.3

Unwind of the effect of discounting

on provisions 31.3 – 31.3 23.9 – 23.9 8.7 8.5

Interest component of finance leases 0.4 – 0.4 – – – 0.4 –

Other – – – 5.6 – 5.6 – 5.6

Financial expenses 153.7 – 153.7 152.7 – 152.7 286.4 294.4

Net financing costs/(income) 90.4 – 90.4 139.1 (0.8) 138.3 103.4 105.6


F-48




7. TAXATION EXPENSE $million $million $million $million

Recognised in the income statement: Income tax expense Current tax expense Current year 726.7 236.2 (8.0) 48.5

Adjustments for prior years (8.5) (23.2) 13.6 10.7

718.2 213.0 5.6 59.2

Deferred tax expense Origination and reversal of temporary differences 89.6 12.1 42.4 1.5

Benefit of tax losses recognised (27.9) (19.2) (27.9) –

Adjustments for prior years (11.5) (10.2) 31.3 (10.6)

50.2 (17.3) 45.8 (9.1)

Total income tax expense 768.4 195.7 51.4 50.1

Royalty related taxation expense Current tax expense Current year 79.3 94.8 27.8 28.1

Adjustments for prior years 6.7 (12.5) 2.0 –

86.0 82.3 29.8 28.1

Deferred tax expense Origination and reversal of temporary differences 28.7 81.3 1.9 3.8

Total royalty related taxation expense 114.7 163.6 31.7 31.9

Numerical reconciliation between tax expense and pre-tax net profit: Profit before tax 2,533.2 718.6 103.2 1,352.2

Prima facie income tax at 30% (2007: 30%) 760.0 215.6 31.0 405.7

Increase in income tax expense due to:

Non-deductible depreciation and depletion 2.9 3.5 1.7 25.5

Net impairment loss/(reversal) of investments in controlled entities – – 14.8 (114.2)

Net impairment loss/(reversal) of receivables from controlled entities – – (7.1) 7.6

Benefit arising from previously unrecognised tax losses or temporary

differences that is used to reduce current tax expense (2.1) (10.1) – (6.6)

Foreign losses not recognised 26.4 38.5 – –

Dividends from controlled entities – – (10.2) (262.2)

Tax losses recognised (27.9) (19.2) (27.9) –

Under/(over) provided in prior years 19.1 (33.4) 44.9 0.1

Other (10.0) 0.8 4.2 (5.8)

Income tax expense 768.4 195.7 51.4 50.1

Royalty related taxation expense 114.7 163.6 31.7 31.9

Total taxation expense 883.1 359.3 83.1 82.0

Total taxation expense is attributable to:

Continuing operations 883.1 358.7 83.1 82.0

Discontinued operations – 0.6 – –

883.1 359.3 83.1 82.0

Deferred tax (credited)/charged directly to equity: (Loss)/gain on foreign currency loans designated as hedges of

net investments in foreign operations (82.0) 26.8 – –

Change in fair value of available-for-sale financial assets (4.0) (3.3) (4.0) 1.5

Off-market share buy-back transaction costs (0.6) (0.6) (0.6) (0.6)

Actuarial (loss)/gain on defined benefit plan (11.0) 1.9 (11.0) 1.9

(97.6) 24.8 (15.6) 2.8


F-49


8. DISCONTINUED OPERATIONS

During 2007, the Group disposed of its exploration and production activities in the United States for US$70.0 million (A$85.6 million). The results of the

discontinued operations for 2007 are disclosed in the income statement, with further details provided in notes 3, 4 and 6.


9. CASH AND CASH EQUIVALENTS $million $million $million $million

Cash at bank and in hand 273.2 128.6 154.5 49.3

Short-term deposits 1,279.7 71.9 1,248.4 7.5

Cash and cash equivalents in the cash flow statements 1,552.9 200.5 1,402.9 56.8

The carrying amounts of cash and cash equivalents represent fair value. Bank balances and short-term deposits earn interest at floating rates based

upon market rates.

Short-term deposits generally have an original maturity of three months or less. The Group currently has a significant amount of funds invested in

numerous short-term deposits that are held with a range of different counterparties, and that have varying maturity dates of between three to six

months based on when the cash is likely to be required and to take advantage of a range of investment yields. These funds are managed as part of the

Group’s total cash management procedures and are readily convertible to cash if required.

Restricted cash balancesBarracuda Ltd, a wholly-owned subsidiary incorporated in Papua New Guinea, has cash and cash equivalents at 31 December 2008 of US$10.2 million

(2007: US$14.5 million) which can only be repatriated to Australia with the permission of the Internal Revenue Commission of Papua New Guinea in

accordance with the financing plan submitted in respect of PDL 3.

Santos (BBF) Pty Ltd, a wholly-owned Australian subsidiary, has cash and cash equivalents at 31 December 2008 of US$20.4 million

(2007: US$23.7 million) that are held to cover obligations under a reserve-based facility.


10. TRADE AND OTHER RECEIVABLES $million $million $million $million

Current receivablesTrade receivables 327.6 429.0 121.3 145.2

Allowance for impairment loss (0.4) – (0.3) –

327.2 429.0 121.0 145.2

Tax related balances owing by controlled entities – – 532.8 20.0

Non-trade receivables and prepayments 254.4 178.4 40.1 43.3

581.6 607.4 693.9 208.5

The ageing of trade receivables at the reporting date is as follows:

Past due not impaired:

Less than one month 310.0 394.0 121.0 143.7

One to three months 11.2 20.1 – 0.7

Three to six months 2.4 13.3 – –

Six to twelve months 2.9 – – 0.1

Greater than twelve months 0.7 1.6 – 0.7

Considered impaired:

Greater than twelve months 0.4 – 0.3 –

327.6 429.0 121.3 145.2

Trade receivables are non-interest-bearing and settlement terms are generally within 30 days.

Trade receivables that are neither past due nor impaired relate to a number of independent customers for whom there is no recent history of default.

Impaired receivablesAn allowance for impairment loss is recognised when there is objective evidence that an individual trade receivable is impaired. An impairment loss of

$0.4 million was recognised by the Group during the year ($0.3 million by the Company), in relation to a disputed invoice ($0.3 million) and balances

owed from companies that have gone into receivership ($0.1 million).


F-50




10. TRADE AND OTHER RECEIVABLES (CONTINUED) $million $million $million $million

Non-current receivablesReceivables due from controlled entities:

Non-interest-bearing – – 108.0 29.1

Interest-bearing – – 1,192.9 1,275.7

Receivables due from other related entities 6.0 – – –

6.0 – 1,300.9 1,304.8

Receivables due from controlled entities are shown net of impairment losses of

$7.8 million (2007: $31.6 million).

Receivables due from controlled entities are for loans made in the ordinary

course of business for an indefinite period. Interest-bearing amounts owing

by controlled entities are at normal market terms and conditions.

Receivables due from other related entities are for loans made in the ordinary

course of business for a term of five years, and interest is calculated on normal

market terms and conditions.

11. INVENTORIES

Petroleum products 163.4 165.4 82.0 86.7

Drilling and maintenance stocks 126.3 76.1 54.0 29.2

Total inventories at the lower of cost and net realisable value 289.7 241.5 136.0 115.9

Drilling and maintenance stocks included above that are stated at

net realisable value 106.2 59.7 53.3 28.6

12. DERIVATIVE FINANCIAL INSTRUMENTS

Current derivative financial instrumentsCross-currency swap contracts 59.2 – – –

Fair value of embedded derivatives – 6.9 – –

59.2 6.9 – –

Non-current derivative financial instrumentsCross-currency swap contracts 32.8 – – –

Interest rate swap contracts 303.5 77.2 – –

336.3 77.2 – –


F-51


Consolidated Santos Ltd Subsurface Plant and Subsurface Plant and 13. EXPLORATION AND assets equipment Total assets equipment Total

EVALUATION ASSETS $million $million $million $million $million $million

Balance at 31 December 2008 427.4 0.1 427.5 42.6 0.1 42.7


Reconciliation of movementsBalance at 1 January 2008 332.3 0.1 332.4 15.4 0.1 15.5Acquisition of controlled entities 15.0 – 15.0 – – –Acquisition of exploration and evaluation assets 27.8 – 27.8 – – –Additions 357.1 – 357.1 81.4 – 81.4Exploration and evaluation expensed (179.0) – (179.0) (22.2) – (22.2)Disposals (0.1) – (0.1) – – –Net impairment losses (1.1) – (1.1) – – –Transfer to oil and gas assets (182.9) – (182.9) (32.0) – (32.0)Exchange differences 58.3 – 58.3 – – –


Balance at 1 January 2007 359.7 0.6 360.3 20.6 0.1 20.7

Acquisition of controlled entities 56.3 – 56.3 – – –

Acquisition of exploration and evaluation assets 11.5 – 11.5 – – –

Additions 311.9 – 311.9 95.2 – 95.2

Exploration and evaluation expensed (226.1) – (226.1) (54.2) – (54.2)

Disposals (1.0) (0.5) (1.5) – – –

Transfer to oil and gas assets (163.3) – (163.3) (46.2) – (46.2)

Exchange differences (16.7) – (16.7) – – –



F-52



Consolidated Santos Ltd Subsurface Plant and Subsurface Plant and assets equipment Total assets equipment Total 14. OIL AND GAS ASSETS $million $million $million $million $million $million

2008Cost at 31 December 2008 7,811.1 6,070.8 13,881.9 2,809.0 2,377.4 5,186.4Less accumulated depreciation, depletion

and impairment (4,555.8) (3,071.3) (7,627.1) (1,947.7) (1,461.0) (3,408.7)

Balance at 31 December 2008 3,255.3 2,999.5 6,254.8 861.3 916.4 1,777.7

Reconciliation of movementsAssets in developmentBalance at 1 January 2008 220.4 0.4 220.8 – – –Additions 133.8 123.5 257.3 – – –Transfer from exploration and evaluation assets 135.8 – 135.8 – – –Exchange differences 38.5 (0.8) 37.7 – – –

Balance at 31 December 2008 528.5 123.1 651.6 – – –

Producing assetsBalance at 1 January 2008 2,906.6 2,457.0 5,363.6 749.8 900.3 1,650.1Acquisition of oil and gas assets – – – 0.7 – 0.7Additions 593.2 600.5 1,193.7 301.1 117.3 418.4Transfer from exploration and evaluation assets 47.1 – 47.1 32.0 – 32.0Disposals (350.7) (0.7) (351.4) – 0.4 0.4Depreciation and depletion expense (401.6) (239.5) (641.1) (181.2) (71.5) (252.7)Net impairment losses (138.0) (77.1) (215.1) (41.1) (30.1) (71.2)Exchange differences 70.2 136.2 206.4 – – –


Total oil and gas assets 3,255.3 2,999.5 6,254.8 861.3 916.4 1,777.7

Comprising: Exploration and evaluation expenditure

pending commercialisation 222.9 0.7 223.6 – – – Other capitalised expenditure 3,032.4 2,998.8 6,031.2 861.3 916.4 1,777.7

3,255.3 2,999.5 6,254.8 861.3 916.4 1,777.7


F-53


Consolidated Santos Ltd Subsurface Plant and Subsurface Plant and assets equipment Total assets equipment Total 14. OIL AND GAS ASSETS (CONTINUED) $million $million $million $million $million $million

2007Cost at 31 December 2007 7,143.2 5,212.1 12,355.3 2,475.2 2,259.7 4,734.9

Less accumulated depreciation, depletion

and impairment (4,016.2) (2,754.7) (6,770.9) (1,725.4) (1,359.4) (3,084.8)


Reconciliation of movementsAssets in developmentBalance at 1 January 2007 204.6 2.9 207.5 – – –

Additions 52.1 14.6 66.7 – – –

Transfer from exploration and evaluation assets 109.6 – 109.6 – – –

Transfer to producing assets (133.0) (14.1) (147.1) – – –

Exchange differences (12.9) (3.0) (15.9) – – –

Balance at 31 December 2007 220.4 0.4 220.8 – – –

Producing assetsBalance at 1 January 2007 2,651.9 2,373.3 5,025.2 856.3 863.2 1,719.5

Acquisition of controlled entities 50.5 – 50.5 – – –

Acquisition of oil and gas assets 20.9 – 20.9 – – –

Additions 447.8 413.2 861.0 160.4 176.4 336.8

Transfer from assets in development 133.0 14.1 147.1 – – –

Transfer from exploration and evaluation assets 53.7 – 53.7 46.2 – 46.2

Depreciation and depletion expense (431.3) (303.2) (734.5) (265.7) (130.1) (395.8)

Net impairment losses – – – (47.4) (9.2) (56.6)

Exchange differences (19.9) (40.4) (60.3) – – –


Total oil and gas assets 3,127.0 2,457.4 5,584.4 749.8 900.3 1,650.1

Comprising: Exploration and evaluation expenditure

pending commercialisation 197.3 0.4 197.7 – – –

Other capitalised expenditure 2,929.7 2,457.0 5,386.7 749.8 900.3 1,650.1

3,127.0 2,457.4 5,584.4 749.8 900.3 1,650.1


F-54



Consolidated Santos Ltd Land and Plant and Land and Plant and 15. OTHER LAND, BUILDINGS, buildings equipment Total buildings equipment Total

PLANT AND EQUIPMENT $million $million $million $million $million $million

Cost at 31 December 2008 35.6 275.5 311.1 5.1 247.6 252.7Less accumulated depreciation (3.2) (148.0) (151.2) (0.6) (142.4) (143.0)


Cost at 31 December 2007 27.1 236.1 263.2 4.8 224.9 229.7

Less accumulated depreciation (2.5) (125.9) (128.4) (0.6) (121.7) (122.3)


Reconciliation of movementsBalance at 1 January 2008 24.6 110.2 134.8 4.2 103.2 107.4Additions 8.5 39.4 47.9 0.3 22.6 22.9Depreciation (0.7) (22.1) (22.8) – (20.6) (20.6)


Balance at 1 January 2007 20.0 97.2 117.2 4.3 89.9 94.2

Additions 5.1 37.3 42.4 – 36.7 36.7

Depreciation (0.5) (24.3) (24.8) (0.1) (23.4) (23.5)



F-55


16. IMPAIRMENT OF CASH-GENERATING UNITS

At 31 December 2008 the Group reassessed the carrying amount of its oil and gas assets for indicators of impairment such as changes in future prices,

future costs and reserves. As a result of the significant decrease in the oil price, decreases in reserves and increases in the discount rates applied,

the recoverable amounts of some cash-generating units were formally reassessed resulting in an impairment loss of $216.2 million.

Estimates of recoverable amounts are based on the asset’s value in use, determined by discounting each asset’s estimated future cash flows at asset

specific discount rates. The pre-tax discount rates applied were equivalent to post-tax discount rates between 8.8% and 15.8% (2007: 8.0% and 10.6%)

depending on the nature of the risks specific to each asset. Where an asset does not generate cash flows that are largely independent of other assets or

groups of assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

Consolidated Santos Ltd Subsurface Plant and Subsurface Plant and assets equipment Total assets equipment Total CGU Description $million $million $million $million $million $million

2008Sampang Oil field 97.5 30.9 128.4 – – –Sangu Gas field 20.0 – 20.0 – – –Other – impairment losses 1.1 – 1.1 – – –

International 118.6 30.9 149.5 – – –

Cooper Basin Oil and gas field – 44.6 44.6 – 24.4 24.4Patricia Baleen Gas field 20.5 1.6 22.1 9.7 0.7 10.4Mutineer-Exeter Oil field – – – 31.4 5.0 36.4

Australia 20.5 46.2 66.7 41.1 30.1 71.2

Total impairment loss 139.1 77.1 216.2 41.1 30.1 71.2

2007Mutineer-Exeter Oil field – – – 39.3 8.6 47.9

Other – impairment losses – – – 8.1 0.6 8.7

Australia – – – 47.4 9.2 56.6

Total impairment loss – – – 47.4 9.2 56.6


17. AVAILABLE-FOR-SALE FINANCIAL ASSETS $million $million $million $million

Equity securities available for sale 2.1 15.6 2.1 15.6

Investments in equity securities available for sale consist of investments in ordinary shares listed on the Australian Securities Exchange, and have no

fixed maturity date or coupon rate.

18. OTHER FINANCIAL ASSETS

Investments in controlled entities – – 3,421.9 3,472.5

Other 20.9 32.7 18.9 16.1

20.9 32.7 3,440.8 3,488.6


F-56



Assets Liabilities Net

19. DEFERRED TAX ASSETS 2008 2007 2008 2007 2008 2007

AND LIABILITIES $million $million $million $million $million $million

Recognised deferred tax assets and liabilitiesDeferred tax assets and liabilities are attributable

to the following:

ConsolidatedExploration and evaluation assets – – (73.5) (18.5) (73.5) (18.5)

Oil and gas assets – – (289.2) (351.5) (289.2) (351.5)

Other land, buildings, plant and equipment 46.4 63.5 – – 46.4 63.5

Other investments 0.8 – – (3.3) 0.8 (3.3)

Trade receivables – – (3.6) (5.7) (3.6) (5.7)

Other receivables – – (4.4) (0.1) (4.4) (0.1)

Inventories – – (26.7) (20.1) (26.7) (20.1)

Prepayments – – (1.9) (2.2) (1.9) (2.2)

Derivative financial instruments – – (117.0) (19.1) (117.0) (19.1)

Other assets – – (9.6) – (9.6) –

Equity-raising costs 0.8 0.6 – – 0.8 0.6

Trade payables – 6.5 – – – 6.5

Interest-bearing loans and borrowings 85.8 – – (87.1) 85.8 (87.1)

Employee benefits 21.3 19.3 – – 21.3 19.3

Defined benefit obligation 13.3 3.4 – – 13.3 3.4

Other liabilities – – (3.4) – (3.4) –

Provisions 31.9 11.1 – – 31.9 11.1

Royalty related taxes – – (257.7) (217.4) (257.7) (217.4)

Other items – – (52.1) (54.1) (52.1) (54.1)

Tax value of carry-forward losses recognised 5.7 18.5 – – 5.7 18.5

Tax assets/(liabilities) 206.0 122.9 (839.1) (779.1) (633.1) (656.2)

Set-off of tax (95.0) (36.1) 95.0 36.1 – –

Net tax assets/(liabilities) 111.0 86.8 (744.1) (743.0) (633.1) (656.2)

Santos LtdExploration and evaluation assets – – (10.2) (4.5) (10.2) (4.5)

Oil and gas assets – – (77.2) (71.7) (77.2) (71.7)

Other land, buildings, plant and equipment – – (9.0) (7.7) (9.0) (7.7)

Other investments 0.8 – – (3.3) 0.8 (3.3)

Trade receivables – – (3.0) (5.0) (3.0) (5.0)

Other receivables – – (4.4) – (4.4) –

Inventories – – (15.3) (12.5) (15.3) (12.5)

Other assets 1.2 2.7 – – 1.2 2.7

Equity-raising costs 0.8 0.6 – – 0.8 0.6

Employee benefits 20.3 18.3 – – 20.3 18.3

Defined benefit obligation 13.3 3.4 – – 13.3 3.4

Provisions 12.2 8.2 – – 12.2 8.2

Other liabilities – – (0.2) – (0.2) –

Royalty related taxes – – (60.8) (55.1) (60.8) (55.1)

Other items – 8.4 (2.5) – (2.5) 8.4

Tax value of carry-forward losses recognised – 9.0 – – – 9.0

Tax assets/(liabilities) 48.6 50.6 (182.6) (159.8) (134.0) (109.2)

Set-off of tax (48.6) (50.6) 48.6 50.6 – –

Net tax liabilities – – (134.0) (109.2) (134.0) (109.2)


F-57


Consolidated Santos Ltd19. DEFERRED TAX ASSETS 2008 2007 2008 2007

AND LIABILITIES (CONTINUED) $million $million $million $million

Unrecognised deferred tax assetsDeferred tax assets have not been recognised in respect of the following items:

Temporary differences in relation to investments in subsidiaries 1,017.1 834.4 – –

Deductible temporary differences 73.7 75.8 – –

Tax losses 45.9 72.8 – 27.8

1,136.7 983.0 – 27.8

Deferred tax assets have not been recognised in respect of these items because it is

not probable that the temporary differences will reverse in the future and that there

will be sufficient future taxable profits against which the benefits can be utilised.

Unrecognised deductible temporary differences and tax losses of $45.8 million

(2007: $44.9 million) will expire between 2009 and 2028. The remaining deductible

temporary differences and tax losses do not expire under current tax legislation.

20. TRADE AND OTHER PAYABLES

Trade payables 391.3 432.4 132.0 180.6

Non-trade payables and accrued expenses 213.5 177.3 64.8 55.3

Amounts owing to controlled entities – – 526.2 389.2

604.8 609.7 723.0 625.1

21. INTEREST-BEARING LOANS AND BORROWINGS

This note provides information about the contractual terms of the Group’s

interest-bearing loans and borrowings. For more information about the

Group’s exposure to interest rate and foreign currency risk, see note 38.

Current liabilitiesObligations under finance leases 0.6 – 0.6 –

Bank loans – secured 24.1 1.4 – –

Bank loans – unsecured 27.6 17.3 – –

Commercial paper – 64.6 – –

Medium-term notes – 19.8 – –

Long-term notes 46.3 – – –

98.6 103.1 0.6 –

Non-current liabilitiesAmounts owing to controlled entities – – 4,082.8 2,478.2

Obligations under finance leases 2.6 – 2.6 –

Bank loans – secured 19.7 46.4 – –

Bank loans – unsecured 194.0 304.5 – –

Medium-term notes 457.2 438.8 – –

Long-term notes 1,682.3 1,203.2 – –

2,355.8 1,992.9 4,085.4 2,478.2

The amounts owing to controlled entities are for loans made in the ordinary course of business on normal market terms and conditions and are not

repayable for a minimum of nine years.

The Group has entered into interest rate swap contracts to manage the exposure to interest rates. This has resulted in a weighted average interest rate

on interest-bearing liabilities of 5.74% as at 31 December 2008 (2007: 6.62%). All borrowings are unsecured, with the exception of the secured bank

loan, and arranged through a controlled entity, Santos Finance Ltd, and guaranteed by Santos Ltd.


F-58



21. INTEREST-BEARING LOANS AND BORROWINGS (CONTINUED)

Details of major credit facilities(A) BANK LOANS – SECURED

A reserve-based lending facility for US$65.0 million was entered into in the 2006 reporting period which bears a floating rate of interest. The facility

is secured by a first charge over the Group’s interests in the Maleo and Kakap assets in Indonesia with a carrying amount at 31 December 2008 of

A$122.3 million. The average rate for the year was 7.04%, and A$43.8 million was outstanding at the balance sheet date (2007: A$47.8 million).

The facility is available until 2012, and the current amount drawn down is expected to be fully repaid by 2011.

(B) BANK LOANS – UNSECURED

The Group has access to the following committed revolving bank facilities:

2008 2007 Year of maturity Currency A$million A$million

2011 Multi-currency 225.0 225.0



700.0 700.0

Revolving bank facilities bear interest at the relevant interbank reference rate plus 0.15% to 0.20%. The amount drawn at 31 December 2008 is $nil

(2007: $130.0 million).

Term bank loans

2008 2007 Year of maturity Currency A$million A$million

2008 USD – 17.3

2009 USD 27.6 21.4

2010 USD 28.1 22.2

2011 USD 29.1 22.9

2012 USD 25.0 19.7

2013 USD 20.9 16.4

2014 USD 22.0 17.3

2015 USD 22.4 17.7

2016 USD 22.8 18.0

2017 USD 23.7 18.9

221.6 191.8

Term bank loans bear interest at the relevant interbank reference rate plus a margin of up to 0.75%. The amount outstanding at 31 December 2008

is US$153.1 million (A$221.6 million) (2007: US$168.1 million (A$191.8 million)) at a weighted average annual effective interest rate of 5.03%

(2007: 5.99%).

(C) COMMERCIAL PAPER

The Group has an $800.0 million (2007: $800.0 million) Australian commercial paper programme supported by the revolving bank facilities referred

to in (B) above. At 31 December 2008, no commercial paper is on issue (2007: $64.6 million) and the weighted average annual effective interest

rate is nil (2007: 7.59%).


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Details of major credit facilities (continued)(D) MEDIUM-TERM NOTES

The Group has a $1,000.0 million (2007: $1,000.0 million) Australian medium-term note programme.

Medium-term notes on issue

Effective 2008 2007 Year of issue Year of maturity interest rate $million $million

1998 2008 – – 19.8

2005 2011 4.63% * 349.4 349.0

2005 2015 8.10% 107.8 89.8

457.2 458.6

* Floating rate of interest.

(E) LONG-TERM NOTES

Long-term notes on issue

Effective 2008 2007 2008 2007 Year of issue Year of maturity interest rate US$million US$million A$million A$million

2000 2007 to 2015 5.72% 211.5 203.1 306.1 231.8

2002 2009 to 2022 5.39% 336.6 307.3 487.1 350.7

2007 2017 to 2027 3.81% 646.3 544.0 935.4 620.7

1,194.4 1,054.4 1,728.6 1,203.2


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22. PROVISIONS $million $million $million $million

CurrentLiability for annual leave 23.5 23.7 22.7 22.9

Liability for long service leave 39.0 35.7 38.3 35.2

Restoration 52.6 51.5 3.2 5.5

Non-executive Directors’ retirement benefits 1.6 1.5 1.6 1.5

116.7 112.4 65.8 65.1

Non-currentLiability for long service leave 4.2 3.5 4.1 3.2

Liability for defined benefit obligations (refer note 30) 61.5 16.3 61.5 16.3

Restoration 742.3 523.8 245.3 148.3

808.0 543.6 310.9 167.8

Movements in each class of provision during the financial year, other than provisions relating to employee benefits, are set out below:

Total Non-executive Directors’ Total retirement restoration benefits Total $million $million $million

ConsolidatedBalance at 1 January 2008 575.3 1.5 576.8Provisions made during the year 148.8 0.1 148.9Provisions used during the year (73.4) – (73.4)Unwind of discount 31.3 – 31.3Change in discount rate 100.9 – 100.9Exchange differences 12.0 – 12.0

Balance at 31 December 2008 794.9 1.6 796.5

Santos LtdBalance at 1 January 2008 153.8 1.5 155.3Provisions made during the year 55.5 0.1 55.6Provisions used during the year (2.6) – (2.6)Unwind of discount 8.7 – 8.7Change in discount rate 33.1 – 33.1

Balance at 31 December 2008 248.5 1.6 250.1

Restoration Provisions for future removal and restoration costs are recognised where there is a present obligation as a result of exploration, development,

production, transportation or storage activities having been undertaken, and it is probable that an outflow of economic benefits will be required to

settle the obligation. The estimated future obligations include the costs of removing facilities, abandoning wells and restoring the affected areas.

Non-executive Directors’ retirement benefits Agreements exist with the Non-executive Directors appointed prior to 1 January 2004 providing for the payment of a sum on retirement from office as a

Director in accordance with shareholder approval at the 1989 Annual General Meeting. Such benefits ceased to accrue with effect from 30 June 2004.

These benefits have been fully provided for by the Company.

In June 2007, the Board resolved to adopt a policy of indexation of these frozen benefits to prevent further erosion of the real value. The entitlements

are annually indexed to the five-year government bond rate.


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23. OTHER LIABILITIES $million $million $million $million

CurrentCross-currency swap contracts – 3.4 – –

Interest rate swap contracts – 9.9 – –

Fair value of embedded derivatives 5.6 – – –

Other 2.5 2.1 – –

8.1 15.4 – –

Non-currentCross-currency swap contracts – 7.1 – –

Other 9.0 7.4 – –

9.0 14.5 – –

24. CAPITAL AND RESERVES

Reconciliation of movement in capital and reserves attributable to equity holders of Santos Ltd

Share Translation Fair value Retained Total capital reserve reserve earnings equity $million $million $million $million $million

ConsolidatedBalance at 1 January 2008 2,331.6 (280.3) 7.4 1,034.4 3,093.1Movement per recognised income and expense statement – 93.5 (9.4) 1,632.9 1,717.0Share options exercised by employees 2.5 – – – 2.5Shares issued 253.1 – – – 253.1Share buy-back (56.4) – – (245.0) (301.4)Dividends to shareholders – – – (286.3) (286.3)

Equity attributable to equity holders of Santos Ltd 2,530.8 (186.8) (2.0) 2,136.0 4,478.0Equity attributable to minority interests 0.5 – – (0.2) 0.3

Balance at 31 December 2008 2,531.3 (186.8) (2.0) 2,135.8 4,478.3

Balance at 1 January 2007 2,254.4 (213.9) 13.6 1,301.4 3,355.5

Movement per recognised income and expense statement – (66.4) (6.2) 232.8 160.2

Share options exercised by employees 3.0 – – – 3.0

Shares issued 144.4 – – – 144.4

Share buy-back (70.2) – – (231.2) (301.4)

Dividends to shareholders – – – (268.6) (268.6)

Balance at 31 December 2007 2,331.6 (280.3) 7.4 1,034.4 3,093.1

Santos LtdBalance at 1 January 2008 2,331.6 – 7.4 1,130.6 3,469.6Movement per recognised income and expense statement – – (9.4) 2.9 (6.5)Share options exercised by employees 2.5 – – – 2.5Shares issued 253.1 – – – 253.1Share buy-back (56.4) – – (245.0) (301.4)Dividends to shareholders – – – (286.3) (286.3)

Balance at 31 December 2008 2,530.8 – (2.0) 602.2 3,131.0

Balance at 1 January 2007 2,254.4 – 2.4 401.7 2,658.5

Movement per recognised income and expense statement – – 5.0 1,228.7 1,233.7

Share options exercised by employees 3.0 – – – 3.0

Shares issued 144.4 – – – 144.4

Share buy-back (70.2) – – (231.2) (301.4)

Dividends to shareholders – – – (268.6) (268.6)

Balance at 31 December 2007 2,331.6 – 7.4 1,130.6 3,469.6


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24. CAPITAL AND RESERVES (CONTINUED)

Translation reserveThe foreign currency translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign

operations where their functional currency is different to the presentation currency of the reporting entity, as well as from the translation of liabilities

that hedge the Company’s net investment in a foreign subsidiary and exchange differences that arise on the translation of monetary items that form

part of the net investment in a foreign operation.

Fair value reserveThe fair value reserve includes the cumulative net change in the fair value of available-for-sale investments until the investment is derecognised.


$million $million $million $million

Share capital584,812,875 (2007: 585,964,352) ordinary shares, fully paid 1,946.4 1,747.2 1,946.4 1,747.2

88,000 (2007: 88,000) ordinary shares, paid to one cent – – – –

6,000,000 (2007: 6,000,000) redeemable convertible preference shares 584.4 584.4 584.4 584.4

2,530.8 2,331.6 2,530.8 2,331.6

In accordance with changes to the Corporations Law effective 1 July 1998, the shares issued do not have a par value and there is no limit on the

authorised share capital of the Company.

2008 2007 2008 2007

Note Number of shares $million $million

Movement in fully paid ordinary sharesBalance at the beginning of the year 585,964,352 598,524,106 1,747.2 1,670.0

Santos Employee Share Acquisition Plan 31(A) 111,153 100,650 1.4 1.3

Santos Employee Share Purchase Plan 31(A) 300,100 400 3.3 –

Shares issued on exercise of options 31(B) 303,583 455,398 2.5 3.0

Shares issued on vesting of Share Acquisition Rights 31(B) 141,330 – – –

Santos Executive Share Plan 31(C) – – – –

Non-executive Director Share Plan 31(D) 33,356 14,847 0.5 0.2

Dividend Reinvestment Plan (“DRP”) 24(A) 2,323,249 4,695,296 35.1 51.6

DRP underwriting agreement 24(A) 14,123,057 6,844,930 212.8 91.3

Off-market buy-back 24(B) (18,487,305) (24,671,275) (56.4) (70.2)

Balance at the end of the year 584,812,875 585,964,352 1,946.4 1,747.2

Redeemable convertible preference sharesBalance at the beginning and end of the year 24(C) 6,000,000 6,000,000 584.4 584.4

Fully paid ordinary shares carry one vote per share, entitle the holder to participate in dividends and the proceeds on winding up of the Company in

proportion to the number of and amounts paid on the shares held. This is subject to the prior entitlements of the redeemable convertible preference

shares. The market price of the Company’s ordinary shares on 31 December 2008 was $14.87 (2007: $14.12).

(A) DIVIDEND REINVESTMENT PLAN

The Santos Dividend Reinvestment Plan is in operation. Shares are allocated at the daily weighted average market price of the Company’s shares

on the ASX over a period of seven business days commencing on the business day after the Dividend Record Date. At this time, the Board has

determined that no discount will apply. The Dividend Reinvestment Plan has been fully underwritten since payment of the 2007 interim dividend.


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(B) OFF-MARKET BUY-BACK

On 6 October 2008, the Company bought back 18,487,305 fully paid ordinary shares, representing 3.07% of fully paid ordinary shares on issue at

that date, at a price of $16.23 per share. $56.4 million was debited against the Company’s capital account (including $1.3 million transaction costs,

net of tax) and $245.0 million was debited against retained earnings.

On 30 June 2007, the Company bought back 24,671,275 fully paid ordinary shares, representing 4.10% of fully paid ordinary shares on issue at that

date, at a price of $12.16 per share. $70.2 million was debited against the Company’s capital account (including $1.4 million transaction costs, net

of tax) and $231.2 million was debited against retained earnings.

(C) REDEEMABLE CONVERTIBLE PREFERENCE SHARES

On 30 September 2004, the Company issued 6,000,000 redeemable convertible preference shares at $100 each, which resulted in an amount of

$600,000,000 being credited to the Company’s capital account before deducting the costs of issue.

Redeemable convertible preference shareholders receive a floating preferential, non-cumulative dividend which incorporates the value of franking

credits (i.e. it is on a grossed-up basis), set at the Bank Bill Swap Rate for 180-day bills plus a margin. Dividends on redeemable convertible

preference shares are in priority to any dividend declared on ordinary class shares. Redeemable convertible preference shareholders are not entitled

to vote at any general meetings, except in the following circumstances:

(i) on a proposal:

(1) to reduce the share capital of the Company;

(2) that affects rights attached to the redeemable convertible preference shares;

(3) to wind up the Company; or

(4) for the disposal of the whole of the property, business and undertaking of the Company;

(ii) on a resolution to approve the terms of a buy-back agreement;

(iii) during a period in which a dividend or part of a dividend on the redeemable convertible preference shares is in arrears; or

(iv) during the winding up of the Company.

In the event of the winding up of the Company, redeemable convertible preference shares will rank for repayment of capital behind all creditors of

the Company, but ahead of the ordinary class shares.

The redeemable convertible preference shares may, at the sole discretion of the Company, be converted into ordinary class shares

and/or exchanged.

Capital risk managementThe Group’s objective when managing capital is to safeguard the ability to continue as a going concern, so that it can continue to provide returns for

shareholders and benefits for other stakeholders, and to maintain an efficient capital structure.

In order to maintain or adjust the capital structure the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders,

issue new shares or sell assets to reduce debt.

Consistently with others in the industry, the Group monitors capital on the basis of the gearing ratio. The Group undertakes this on a forecast and

actual results basis. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total interest-bearing loans and borrowings

less cash and cash equivalents and value of financial derivatives used to hedge net debt. Total capital is calculated as total equity as shown in the

balance sheet plus net debt. Equity includes redeemable convertible preference shares.


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24. CAPITAL AND RESERVES (CONTINUED) $million $million $million $million

During 2008 the Group’s target was to maintain a gearing ratio below 45% and a

BBB+ Standard & Poor’s credit rating. The gearing ratios at 31 December 2008

and 31 December 2007 were as follows:

Total interest-bearing loans and borrowings (note 21) 2,454.4 2,096.0 4,086.0 2,478.2

Less:

Cash and cash equivalents (note 9) (1,552.9) (200.5) (1,402.9) (56.8)

Net fair value of financial derivatives used to hedge debt (notes 12 and 23):

Cross-currency swap contracts (92.0) 10.5 – –

Interest rate swap contracts (303.5) (67.3) – –

Net debt 506.0 1,838.7 2,683.1 2,421.4

Total equity 4,478.3 3,093.1 3,131.0 3,469.6

Total capital 4,984.3 4,931.8 5,814.1 5,891.0

Gearing ratio 10.2% 37.3% 46.1% 41.1%

The decrease in the Group gearing ratio resulted primarily from the receipt of proceeds from the sell-down of the Gladstone LNG project during the year.

DividendsDividends recognised during the year by the Company are:

Dollars Total Franked/ Payment per share $million unfranked date

2008 Interim 2008 redeemable preference $3.3365 20.0 Franked 30 Sep 2008 Final 2007 redeemable preference $2.9983 18.0 Franked 31 Mar 2008 Interim 2008 ordinary $0.22 131.1 Franked 30 Sep 2008 Final 2007 ordinary $0.20 117.2 Franked 31 Mar 2008

286.3

2007 Interim 2007 redeemable preference $2.8592 17.1 Franked 2 Oct 2007

Final 2006 redeemable preference $2.7272 16.4 Franked 2 Apr 2007

Interim 2007 ordinary $0.20 115.4 Franked 2 Oct 2007

Final 2006 ordinary $0.20 119.7 Franked 2 Apr 2007

268.6

Franked dividends paid during the year were franked at the tax rate of 30%.

After the balance sheet date the following dividends were proposed by the Directors.

The dividends have not been provided for and there are no income tax consequences.

Final 2008 redeemable preference $2.9989 18.0 Franked 31 Mar 2009Final 2008 ordinary $0.20 117.0 Franked 31 Mar 2009

135.0

The financial effect of these dividends has not been brought to account in the financial statements for the year ended 31 December 2008 and will be

recognised in subsequent financial reports.


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Santos Ltd 2008 2007

24. CAPITAL AND RESERVES (CONTINUED) $million $million

Dividend franking account30% franking credits available to shareholders of Santos Ltd for future distribution, after

adjusting for franking credits which will arise from the payment of the current

tax liability at 31 December 2008 1,061.6 661.6

The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends.

The impact on the dividend franking account of dividends proposed after the balance sheet date but not recognised as a liability is to reduce it by

$57.9 million (2007: $57.9 million).

25. EARNINGS PER SHARE

Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of Santos Ltd (after deducting

dividends paid on redeemable convertible preference shares) by the weighted average number of ordinary shares outstanding during the year.

Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders of Santos Ltd (after adding back the

dividends paid on redeemable convertible preference shares) by the weighted average number of ordinary shares outstanding during the year plus the

weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.

Consolidated 2008 2007

$million $million

Earnings used in the calculation of basic and diluted earnings per share

reconciles to the net profit after tax in the income statement as follows:

Net profit attributable to ordinary equity holders of Santos Ltd from

continuing operations 1,650.1 424.9

Net loss attributable to ordinary equity holders of Santos Ltd from

discontinued operations – (65.6)

Net profit attributable to ordinary equity holders of Santos Ltd 1,650.1 359.3

Dividends paid on redeemable convertible preference shares (38.0) (33.5)

Earnings used in the calculation of basic earnings per share 1,612.1 325.8

Dividends paid on redeemable convertible preference shares 38.0 33.5

Earnings used in the calculation of diluted earnings per share 1,650.1 359.3

2008 2007

Number of shares

The weighted average number of shares used for the purposes of

calculating diluted earnings per share reconciles to the number used

to calculate basic earnings per share as follows:

Basic earnings per share 590,706,516 590,505,305

Partly paid shares 71,222 65,864

Executive share options 1,446,209 818,109

Share acquisition rights 1,694,044 1,846,671

Redeemable convertible preference shares 36,650,691 –

Diluted earnings per share 630,568,682 593,235,949


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25. EARNINGS PER SHARE (CONTINUED)

Partly paid shares outstanding issued under the Santos Executive Share Plan, options outstanding issued under the Santos Executive Share Option Plan,

Share Acquisition Rights (“SARs”) issued to eligible executives and redeemable convertible preference shares have been classified as potential ordinary

shares and included in the calculation of diluted earnings per share in 2008. The number of shares included in the calculation are those assumed to be

issued for no consideration, being the difference between the number that would have been issued at the exercise price and the number that would

have been issued at the average market price.

Redeemable convertible preference shares have not been included in the calculation of diluted earnings per share for 2007 as their impact was not dilutive.

During the year, 303,583 options (2007: 455,398) and 141,330 SARs (2007: nil) were converted to ordinary shares. The diluted earnings per share

calculation includes that portion of these options, SARs and partly paid shares assumed to be issued for nil consideration, weighted with reference to

the date of conversion. The weighted average number included is 181,447 (2007: 321,982).

460,385 options (2007: 335,900) and 236,426 SARs (2007: 273,100) lapsed during the year. The diluted earning per share calculation includes that

portion of these options and SARs assumed to be issued for nil consideration, weighted with reference to the date the options or SARs lapsed.

The weighted average number included is 177,527 (2007: 104,179).

To calculate earnings per share amounts for the discontinued operations, the loss figure used in the numerator and the weighted average number of

ordinary shares for both basic and diluted amounts are per the above tables.

Consolidated 2008 2007

cents cents

Earnings per share for continuing and discontinued operationsBasic earnings per share:

From continuing operations 272.9 66.3

From discontinued operations – (11.1)

272.9 55.2

Diluted earnings per share:

From continuing operations 261.7 66.0

From discontinued operations – (11.1)

261.7 54.9


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26. CONSOLIDATED ENTITIES

Country of Name incorporationSantos Ltd (Parent Entity) AUSTControlled entities1:Alliance Petroleum Australia Pty Ltd2 AUSTBasin Oil Pty Ltd AUSTBoston L.H.F. Pty Ltd AUSTBridgefield Pty Ltd AUSTBridge Oil Developments Pty Limited2 AUSTBronco Energy Pty Limited AUSTCanso Resources Pty Ltd AUSTCoveyork Pty Ltd AUSTDoce Pty Ltd AUSTFairview Pipeline Pty Ltd AUSTFarmout Drillers Pty Ltd AUSTGidgealpa Oil Pty Ltd AUSTKipper GS Pty Ltd AUSTControlled entity of Kipper GS Pty Ltd Santos Carbon Pty Ltd AUSTMoonie Pipeline Company Pty Ltd AUSTReef Oil Pty Ltd2 AUSTSantos Asia Pacific Pty Ltd AUSTControlled entities of Santos Asia Pacific Pty Ltd Santos (Sampang) Pty Ltd AUST Santos (Warim) Pty Ltd AUSTSantos Australian Hydrocarbons Pty Ltd AUSTSantos (BOL) Pty Ltd2 AUSTControlled entity of Santos (BOL) Pty Ltd Bridge Oil Exploration Pty Limited AUSTSantos CSG Pty Ltd AUSTSantos Darwin LNG Pty Ltd2 AUSTSantos Direct Pty Ltd AUSTSantos Facilities Pty Ltd AUSTSantos Finance Ltd AUSTSantos GLNG Pty Ltd3 AUSTControlled entity of Santos GLNG Pty Ltd GLNG Operations Pty Ltd1, 3 AUSTSantos (Globe) Pty Ltd AUSTSantos International Holdings Pty Ltd AUSTControlled entities of Santos International Holdings Pty Ltd Barracuda Limited PNG CJSC South Petroleum Company1 KGZ Lavana Limited PNG Santos Petroleum Ventures B.V. (previously Petroleum Ventures B.V.) NL Sanro Insurance Pte Ltd SG Santos Americas and Europe Corporation USA Controlled entities of Santos Americas and Europe Corporation Santos TPY Corp USA Controlled entities of Santos TPY Corp Santos Queensland Corp USA Santos TOG Corp USA Controlled entities of Santos TOG Corp Santos TOGA Pty Ltd AUST Controlled entity of Santos TOGA Pty Ltd Santos TPC Pty Ltd AUST Santos TPY CSG Corp USA Santos Bangladesh Limited (previously Cairn Energy

Bangladesh Limited) UK Santos (Bawean) Pty Ltd AUST Santos (BBF) Pty Ltd AUST Controlled entities of Santos (BBF) Pty Ltd Santos (SPV) Pty Ltd AUST Controlled entities of Santos (SPV) Pty Ltd Novus Nominees Pty Ltd AUST Santos Brantas Pty Ltd AUST Santos (Madura Offshore) Pty Ltd AUST Santos UK (Kakap 2) Limited UK Santos (Donggala) Pty Ltd AUST Santos Egypt Pty Ltd AUST Santos Hides Ltd PNG Santos International Operations Pty Ltd AUST

Country of Name incorporation Santos International Ventures Pty Ltd AUST Santos Niugini Exploration Limited PNG Santos (Nth Bali 1) Pty Ltd AUST Santos (Papalang) Pty Ltd AUST Santos (Popodi) Pty Ltd AUST Santos Vietnam Pty Ltd AUST Zhibek Resources Limited1, 4 UK Controlled entity of Zhibek Resources Limited CJSC KNG Hydrocarbons1, 4 KGZSantos (JBJ1) Pty Ltd AUSTControlled entities of Santos (JBJ1) Pty Ltd Santos (JBJ2) Pty Ltd AUST Controlled entity of Santos (JBJ2) Pty Ltd Shaw River Power Station Pty Ltd (previously Santos (JBJ3) Pty Ltd) AUSTSantos (JPDA 06-104) Pty Ltd AUSTSantos (JPDA 91-12) Pty Ltd AUSTSantos (NARNL Cooper) Pty Ltd2 AUSTSantos (N.T.) Pty Ltd AUSTControlled entity of Santos (N.T.) Pty Ltd Bonaparte Gas & Oil Pty Limited AUSTSantos Offshore Pty Ltd2 AUSTSantos Oil Exploration (Malaysia) Sdn Bhd (in liquidation) MYSantos Petroleum Pty Ltd2 AUSTSantos QNT Pty Ltd2 AUSTControlled entities of Santos QNT Pty Ltd Santos QNT (No. 1) Pty Ltd2 AUST Controlled entities of Santos QNT (No. 1) Pty Ltd Santos Petroleum Management Pty Ltd2 AUST Santos Petroleum Operations Pty Ltd AUST TMOC Exploration Proprietary Limited AUST Santos QNT (No. 2) Pty Ltd2 AUST Controlled entities of Santos QNT (No. 2) Pty Ltd Moonie Oil Pty Ltd AUST Petromin Pty Ltd AUST Santos (299) Pty Ltd (in liquidation)5 AUST Santos Exploration Pty Ltd AUST Santos Gnuco Pty Ltd AUST Transoil Pty Ltd AUSTSantos Resources Pty Ltd AUSTSantos (TGR) Pty Ltd AUSTSantos Timor Sea Pipeline Pty Ltd AUSTSesap Pty Ltd AUSTVamgas Pty Ltd2 AUST

Notes1 Beneficial interests in all controlled entities are 100%, except:

2 Company is party to a Deed of Cross Guarantee. Refer note 37.3 Company incorporated during the year.

6 Associated Petroleum Pty Ltd and Santos (NGA) Pty Ltd were liquidated on 12 December 2008.

Country of incorporationAUST – Australia

KGZ – Kyrgyz Republic

MY – Malaysia

NL – Netherlands

PNG – Papua New Guinea

SG – Singapore

UK – United Kingdom

USA – United States of America

In the financial statements of the Company, investments in controlled

entities are recognised at cost, less any impairment losses.


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27. ACQUISITIONS OF SUBSIDIARIES

During the financial year the following controlled entities were acquired and their operating results have been included in the income statement from

the date of acquisition:

Contribution to Beneficial Purchase consolidated profit interest acquired consideration since acquisition Name of entity Date of acquisition % $million $million

Zhibek Resources Limited 17 November 2008 75 0.1 –

CJSC KNG Hydrocarbons 17 November 2008 54 – (0.7)

CJSC KNG Hydrocarbons is a subsidiary of Zhibek Resources Limited and is engaged in exploration for oil in the Kyrgyz Republic, both have no operating

revenues. If the acquisition had occurred on 1 January 2008, there would be no impact on Group revenue and net profit.

The consideration for the acquisition comprises an initial payment of £31,200 (A$73,265), and deferred consideration of US$1.3 million (A$2.0 million),

being the commitment to fund the minority interest’s share of phase 1 of the exploration programme over 2009.

The Group has the right to withdraw from the exploration programme either within 60 days of completion of the seismic programme and subject

to paying US$3.0 million to Xtract International Ltd, the original owner of Zhibek Resources Limited, or within 60 days after completion of phase 2, or

within 60 days after the drilling and completion of the first qualifying well or if the Tashkumyr licence is not renewed or extended.

During the year, the Group committed to fund the minority interest’s share of phase 2 of the exploration programme associated with the 2006

acquisition of CJSC South Petroleum Company. Accordingly an increase in the exploration and evaluation assets acquired and deferred consideration

payable of $11.6 million has been recognised during the current year.

The acquisitions had the following effect on the Group’s assets and liabilities:

Carrying Fair value Recognised amounts adjustments values $million $million $million

Cash and cash equivalents 0.1 – 0.1

Trade and other receivables 1.1 – 1.1

Exploration and evaluation assets 0.5 14.5 15.0

Trade and other payables (1.0) – (1.0)

Deferred tax liabilities – (1.6) (1.6)

Net identifiable assets and liabilities 0.7 12.9 13.6

The cost of the acquisitions is as follows:

Cash paid 0.1

Deferred consideration 13.5

Total cost of the acquisitions 13.6

The cash outflow on acquisition of controlled entities is as follows:

Cash paid (0.1)

Net cash acquired with subsidiaries 0.1

Deferred consideration paid* (7.5)

Net consolidated cash outflow (7.5)

* Deferred consideration paid in 2008 comprises:

assets acquired has been decreased by $1.8 million accordingly.

Group committing to fund the minority interests’ share of phase 2 of the exploration programme.


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27. ACQUISITIONS OF SUBSIDIARIES (CONTINUED)

In 2007, the Group acquired 100% beneficial interest in the following controlled entities:

Purchase consideration Name of entity Date of acquisition $million

Petroleum Ventures B.V. 22 January 2007 14.1

Gidgealpa Oil Pty Ltd 7 June 2007 1.7

Bronco Energy Pty Limited 25 June 2007 10.7

Cairn Energy Bangladesh Limited 25 October 2007 62.9

28. INTERESTS IN JOINT VENTURES

(A) The following are the significant joint ventures in which the Group is a joint venturer:

Joint venture Cash-generating unit Principal activities % interest

Oil and gas assets – Producing assets Bayu-Undan Liquids Bayu-Undan Gas production 11.4

Bayu-Undan LNG Bayu-Undan Gas production 11.4

Casino Casino Gas production 50.0

Fairview Fairview Gas production 45.7*

Madura PSC (Maleo) Madura PSC Gas production 67.5

Mereenie Mereenie Oil and gas production 65.0

John Brookes John Brookes Gas production 45.0

Mutineer-Exeter Mutineer-Exeter Oil production 33.4

Sampang PSC (Oyong, Wortel, Jeruk) Sampang PSC Oil and gas production 45.0

Sangu Sangu PSC Gas production 37.5

Stag Stag Oil and gas production 66.7

SA Fixed Factor Area Cooper Basin Oil and gas production 66.6

SWQ Unit Cooper Basin Gas production 60.1

Oil and gas assets – Assets in development Hides Hides Gas development 31.0

Kipper Kipper Gas development 50.0

Reindeer Reindeer Gas development 45.0

Exploration and evaluation assets Evans Shoal – Contingent gas resource 40.0

*

(B) The Group recognises its interests in the following jointly controlled entities using the proportionate consolidation method of accounting:

Joint venture entity % interest

Darwin LNG Pty Ltd 11.4

Easternwell Drilling Services Holdings Pty Ltd 50.0

Fairview Power Pty Ltd (in liquidation) 50.0

GLNG Operations Pty Ltd 60.0


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28. INTERESTS IN JOINT VENTURES (CONTINUED) $million $million $million $million

The Group’s share of the assets, liabilities, income and expenses of

the jointly controlled entities, which are included in the consolidated

financial statements using the proportionate consolidation method

of accounting, are as follows:

Current assets 49.8 46.1 – –

Non-current assets 194.7 148.8 – –

244.5 194.9 – –

Current liabilities (98.0) (63.1) – –

Non-current liabilities (15.3) (4.3) – –

Net assets 131.2 127.5 – –

Revenue 237.5 120.0 – –

Expenses (213.7) (96.0) – –

Profit before income tax 23.8 24.0 – –

(C) The Group’s share of capital expenditure commitments and minimum

exploration commitments in respect of joint ventures are:

Capital expenditure commitments 366.3 287.4 93.0 154.4

Minimum exploration commitments 186.5 336.0 7.2 35.0

29. NOTES TO THE CASH FLOW STATEMENTS

(A) RECONCILIATION OF CASH FLOWS FROM OPERATING ACTIVITIES

Profit after income tax 1,650.1 359.3 20.1 1,270.2

Add/(deduct) non-cash items:

Depreciation and depletion 663.9 759.3 273.3 419.3

Net impairment loss/(reversal) on investment in controlled entities – – 49.6 (380.7)

Net impairment (reversal)/loss on receivables due from controlled entities – – (23.8) 25.3

Net impairment loss on receivables 0.4 – 0.3 –

Dividends distributed by controlled entities – – (27.0) –

Net borrowing costs charged by controlled entities – – 146.9 –

Exploration and evaluation expensed 179.0 234.8 22.2 54.2

Net impairment loss on oil and gas assets 216.2 – 71.2 56.6

Net (gains)/losses on fair value hedges (7.3) 2.4 – –

Share-based payments expense 8.3 5.2 8.3 5.2

Borrowing costs capitalised (9.5) (6.3) – –

Unwind of the effect of discounting on provisions 31.3 23.9 8.7 8.5

Change in fair value of financial assets designated as at fair value

through profit or loss 12.5 11.9 – 1.3

Defined benefit plan expense 3.0 5.6 1.8 5.6

Foreign exchange (gains)/losses (24.4) (0.4) (7.1) 0.7

Net (gain)/loss on sale of non-current assets (1,698.5) 2.8 (0.8) (1.7)

Net gain on sale of available-for-sale financial assets (0.3) (33.4) (0.3) (13.9)

Net loss on sale of discontinued operations – 67.7 – –

Net cash provided by operating activities before changes in

assets or liabilities 1,024.7 1,432.8 543.4 1,450.6

Add/(deduct) change in operating assets or liabilities net of

acquisitions or disposals of businesses:

Decrease/(increase) in trade and other receivables 10.5 (90.2) 49.4 (0.9)

Increase in inventories (58.4) (49.8) (20.1) (38.8)

(Increase)/decrease in other assets (0.5) 2.1 (7.0) (1.9)

Net increase/(decrease) in deferred tax assets and deferred tax liabilities 73.5 34.5 39.9 (10.7)

Increase/(decrease) in current tax liabilities 398.0 (181.2) (174.4) (178.5)

(Decrease)/increase in trade and other payables (25.5) 59.6 (60.8) 19.4

Increase in provisions 50.9 6.1 6.0 2.7

Net cash provided by operating activities 1,473.2 1,213.9 376.4 1,241.9


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29. NOTES TO THE CASH FLOW STATEMENTS (CONTINUED) $million $million $million $million

(B) NON-CASH FINANCING AND INVESTING ACTIVITIES

Dividend Reinvestment Plan 35.1 51.6 35.1 51.6

Dividends distributed by controlled entities – – 33.9 –

Share subscriptions in controlled entities – – (13.6) –

Income tax transferred from controlled entities – – 612.9 –

Net borrowing costs charged by controlled entities – – (146.9) –

30. EMPLOYEE BENEFITS

(A) LIABILITY FOR DEFINED BENEFIT OBLIGATIONS

Defined benefit members of the Santos Superannuation Plan receive a

lump sum benefit on retirement, death, disablement and withdrawal.

The defined benefit section of the Plan is closed to new members.

All new members receive accumulation only benefits.

Defined benefit plan Amount recognised in the balance sheet:

Deficit in plan recognised in non-current provisions (refer note 22) 61.5 16.3 61.5 16.3

Other financial assets (refer note 18) (17.1) (4.9) (17.1) (4.9)

44.4 11.4 44.4 11.4

Movements in the liability for net defined benefit obligations recognised in the balance sheet Liability at the beginning of the year 11.4 18.4 11.4 18.4

Expense recognised in income statement 3.0 5.6 1.8 5.6

Amount capitalised in oil and gas assets 2.3 – 1.2 –

Amount recognised in retained earnings 36.5 (6.3) 36.5 (6.3)

Defined benefit receivable from controlled entities – – 2.3 –

Employer contributions (8.8) (6.3) (8.8) (6.3)

Liability at the end of the year 44.4 11.4 44.4 11.4

Expense recognised in the income statements Service cost 3.5 6.4 2.1 6.4

Interest cost 3.6 5.6 2.2 5.6

Expected return on Plan assets (4.1) (6.4) (2.5) (6.4)

3.0 5.6 1.8 5.6

The expense is recognised in the following line items in the income statements: Other expenses 3.0 – 1.8 –

Financial expenses – 5.6 – 5.6

3.0 5.6 1.8 5.6

Amounts recognised in statements of recognised income and expense Actuarial (loss)/gain in the year (36.5) 6.3 (36.5) 6.3

Tax effect 11.0 (1.9) 11.0 (1.9)

Net actuarial (loss)/gain in the year (25.5) 4.4 (25.5) 4.4

Cumulative actuarial (loss)/gain recognised in the statement of

recognised income and expense, net of tax (23.4) 2.1 (23.4) 2.1


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30. EMPLOYEE BENEFITS (CONTINUED)

(A) LIABILITY FOR DEFINED BENEFIT OBLIGATIONS (CONTINUED)

Historical information for the current and previous periods 2008 2007 2006 2005 2004

$million $million $million $million $million

Consolidated Present value of defined benefit obligations 174.8 161.8 158.2 129.5 126.5

Fair value of Plan assets (113.3) (145.5) (131.9) (113.4) (108.7)

Deficit in Plan 61.5 16.3 26.3 16.1 17.8

Experience adjustments loss/(gain) on Plan assets 43.2 (4.0) (6.3) (8.0) (5.5)

Experience adjustments (gain)/loss on Plan liabilities (13.7) (1.2) 17.5 (0.1) (4.5)

Santos Ltd Present value of defined benefit obligations 174.8 161.8 158.2 129.5 126.5

Fair value of Plan assets (113.3) (145.5) (131.9) (113.4) (108.7)

Deficit in Plan 61.5 16.3 26.3 16.1 17.8

Experience adjustments loss/(gain) on Plan assets 43.2 (4.0) (6.3) (8.0) (5.5)

Experience adjustments (gain)/loss on Plan liabilities (13.7) (1.2) 17.5 (0.1) (4.5)



Reconciliation of the present value of the defined benefit obligations Opening defined benefit obligations 161.8 158.2 161.8 158.2

Service cost 8.4 9.1 8.4 9.1

Interest cost 8.7 8.0 8.7 8.0

Contributions by Plan participants 7.9 9.1 7.9 9.1

Actuarial losses/(gains) 6.8 (5.0) 6.8 (5.0)

Benefits paid (16.2) (15.7) (16.2) (15.7)

Taxes and premiums paid (2.7) (2.2) (2.7) (2.2)

Transfers in 0.1 0.3 0.1 0.3

Closing defined benefit obligations 174.8 161.8 174.8 161.8

Reconciliation of the fair value of Plan assets Opening fair value of Plan assets 145.5 131.9 145.5 131.9

Expected return on Plan assets 10.0 9.1 10.0 9.1

Actuarial (losses)/gains (43.2) 4.0 (43.2) 4.0

Employer contributions 11.9 9.0 11.9 9.0

Contributions by Plan participants 7.9 9.1 7.9 9.1

Benefits paid (16.2) (15.7) (16.2) (15.7)

Taxes and premiums paid (2.7) (2.2) (2.7) (2.2)

Transfers in 0.1 0.3 0.1 0.3

Closing fair value of Plan assets 113.3 145.5 113.3 145.5


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30. EMPLOYEE BENEFITS (CONTINUED) % % % %

(A) LIABILITY FOR DEFINED BENEFIT OBLIGATIONS (CONTINUED)

Plan assets The percentage invested in each asset class at the balance sheet date:

Australian equity 28 33 28 33

International equity 27 28 27 28

Fixed income 10 13 10 13

Property 13 9 13 9

Other 10 – 10 –

Cash 12 17 12 17

Fair value of Plan assets The fair value of Plan assets includes no amounts relating to:


Actual return on Plan assets $million $million $million $million

Actual return on Plan assets (24.2) 9.2 (24.2) 9.2

Expected rate of return on Plan assets The expected return on assets assumption is determined by weighting the expected long-term return for each asset class by the target allocation of

assets to each asset class and allowing for the correlations of the investment returns between asset classes. The returns used for each asset class are

net of investment tax and investment fees. An allowance for asset-based administration expenses has been deducted from the expected return.

Principal actuarial assumptions at the balance sheet date (expressed as weighted average)

2008 2007

% pa % pa

Discount rate 4.0 5.3

Expected rate of return on Plan assets 7.0 6.9

Expected average salary increase rate over the life of the Plan 6.0 6.0

The expected rate of return on Plan assets includes a reduction to allow for the administrative expenses of the Plan.

Expected contributions The Group expects to contribute $8.3 million to the defined benefit superannuation plan in 2009.

(B) DEFINED CONTRIBUTION PLANS

The Group makes contributions to several defined contribution plans. The amount recognised as an expense for the year was $8.4 million

(2007: $8.5 million).


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31. SHARE-BASED PAYMENT PLANS

(A) CURRENT GENERAL EMPLOYEE SHARE PLANS

The Company currently operates two general employee share plans:

Both of these plans have operated since 1997.

SESAP Broadly, SESAP provides for permanent eligible employees with at least a minimum period of service determined by Directors as at the offer date

(one year of completed service for issues so far) to be entitled to acquire shares under this Plan. Executives participating in the Executive Long-term

Incentive Programme in 2008, and casual employees and Directors of the Company are excluded from participating in this Plan. Employees are not

eligible to participate under the Plan while they are resident overseas unless the Board decides otherwise.

The Plan provides for grants of fully paid ordinary shares in the capital of the Company up to a value determined by the Board which, to date,

has been $1,000 per annum per eligible employee. A trustee is funded by the Group to acquire shares directly from the Company or on market.

The shares are then held by the trustee on behalf of eligible employees who participate in the Plan.

The employee’s ownership of shares allocated under the Plan, and his or her right to deal with them, are subject to restrictions until the earlier

of the expiration of the restriction period determined by the Board (being three years) and the time when he or she ceases to be an employee.

Participants are entitled to instruct the trustee as to the exercise of voting rights, receive dividends and participate in bonus and rights issues

during the restriction period. Shares are granted to eligible employees at no cost to the employee.

Summary of share movements in the SESAP during 2008 (and comparative 2007 information):

Opening Granted Distributions Closing balance during the year during the year balance

Fair value Fair value Fair value Grant date per share aggregate aggregate Number Number $ Number $ Number $

2008 18 November 2005 89,848 – – 89,848 1,164,977 – – 17 November 2006 105,156 – – 7,176 117,648 97,980 1,456,963 20 November 2007 99,825 – – 7,200 119,379 92,625 1,377,334 21 November 2008 – 111,153 12.62 474 6,621 110,679 1,656,797

294,829 111,153 104,698 1,408,625 301,284 4,491,094

2007 22 November 2004 127,002 – – 127,002 1,679,902 – –

18 November 2005 96,272 – – 6,424 81,065 89,848 1,268,654

17 November 2006 113,620 – – 8,464 107,105 105,156 1,484,803

20 November 2007 – 100,650 13.33 825 11,471 99,825 1,409,529

336,894 100,650 142,715 1,879,543 294,829 4,162,986

Shares are allocated at a price equal to the weighted average sale price of the Company’s ordinary shares on the ASX during the one-week period up

to and including the Grant Date. This is shown as fair value per share for shares granted during the year. The fair value of shares distributed from

the trust during the year and remaining in the trust at the end of the financial year is the market price of shares of the Company on the ASX as at

close of trading on the respective dates.

Distributions during the year occurred at various dates throughout the year and therefore have not been separately listed.


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31. SHARE-BASED PAYMENT PLANS (CONTINUED)

(A) CURRENT GENERAL EMPLOYEE SHARE PLANS (CONTINUED)

The amounts recognised in the financial statements of the Group and the Company in relation to SESAP during the year were:



Employee expenses 1.4 1.3 1.4 1.3

Issued ordinary share capital 1.4 1.3 1.4 1.3

At 31 December 2008, the total number of shares acquired under the Plan since its commencement was 2,307,190.

SESPP The general employee offer under SESPP is open to all employees (other than a casual employee or Director of the Company) determined by the

Board who are continuing employees at the date of the offer. However, employees who are not resident in Australia at the time of an offer under the

Plan and those who have participated in the Executive Long-term Incentive Programme during the year will not be eligible to participate in that

offer unless the Board otherwise decides.

Under the Plan, eligible employees may be offered the opportunity to subscribe for or acquire fully paid ordinary shares in the capital of the

Company at a discount to market price, subject to restrictions, including on disposal, determined by the Board (which has been a period of one year

for issues so far). The subscription or acquisition price is Market Value (being the weighted average sale price of the Company’s ordinary shares on

the ASX during the one-week period up to and including the offer date) less any discount determined by the Board (5% for issues so far). Under the

Plan, at the discretion of the Board, financial assistance may be provided to employees to subscribe for and acquire shares under the Plan. The 5%

discount constitutes financial assistance for these purposes. Participants are entitled to vote, receive dividends and participate in bonus and rights

issues while the shares are restricted.

On 21 November 2008, the Company issued 300,100 ordinary shares to 397 eligible employees at a subscription price of $10.91 per share under the

Plan, being a 5% discount on the Market Value of $11.48. The total market price of those shares on the issue date was $3,766,255, based on the

market price at the close of trade on the date of issue $12.55. The total amount received from employees for those shares was $3,274,091.

A summary of share movements in the SESPP are set out below:

Opening Granted Restriction ceased Closing balance during the year during the year balance

Fair value Grant date per share Number Number $ Number Date Number

2008 20 November 2007 400 – – 400 20 November 2008 – 21 November 2008 – 300,100 11.48 – – 300,100

400 300,100 400 300,100

2007 17 November 2006 62,900 – – 62,900 17 November 2007 –

20 November 2007 – 400 15.72 – – 400

62,900 400 62,900 400

The fair value per share for shares granted during the year is Market Value (as defined above). The consideration received by the Company per share

is Market Value less the discount of 5% referred to above.


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The amounts recognised in the financial statements of the Group and the Company in relation to the general employee offer under the SESPP during

the year were:



Issued ordinary share capital 3.3 – 3.3 –

At 31 December 2008, the total number of shares acquired under the general employee offer of the Plan since its commencement was 1,122,400.

(B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME

The Company’s Executive Long-term Incentive Programme provides for invitations to be extended to eligible executives selected by the Board.

The Programme currently consists of an offer of securities under:

SESOP has operated since 1997 and the SESPP has been used as a component of executive compensation since 2003.

SARs and options Each SAR and option is a conditional entitlement to a fully paid ordinary share, subject to the satisfaction of performance conditions, on terms and

conditions determined by the Board.

SARs and options carry no voting or dividend rights until the performance conditions are satisfied and, in the case of options, when the options are

exercised or, in the case of SARs, when the SARs vest.

Chief Executive Officer (“CEO”) and Managing Director Mr D J W Knox was appointed as CEO and Managing Director on 28 July 2008.

On 3 May 2008, the Company made equity grants to its Senior Executives for the long-term incentive (“LTI”) component of their remuneration for

2008. Mr Knox participated in these grants in his capacity as Acting Chief Executive Officer. The grants comprised:

The key terms of the Performance Award and Deferred Award are set out in the Eligible Senior Executives section below.

Upon his formal appointment as CEO, Mr Knox received a further grant of equity awards (“CEO Performance Award”) to supplement the grants

already made to him in his Senior Executive capacity.

The grants made to Mr Knox in 2008 constitute his full LTI entitlement for the 2008, 2009 and 2010 financial years.

All LTI awards were granted, at Mr Knox’s election, as either Share Acquisition Rights (“SARs”) (under SESPP) or options (under SESOP).

SARs and options were granted at no cost to the CEO, with the number of SARs awarded being determined by dividing the amount of the award by

the volume weighted average price of the Company’s shares over the week up to and including the award date. The number of options awarded is of

equivalent value calculated by an independent expert based on an acceptable valuation method.

The CEO Performance Award operates on the same terms as the performance-based LTI granted to other Senior Executives described below, that is,

it is subject to performance hurdles based on the Company’s Total Shareholder Return (“TSR”) relative to the ASX 100 over a three-year performance

period. The Board believes the chosen performance hurdles effectively align the CEO’s interests with that of the Company’s shareholders, as TSR is

a fair measure of shareholder returns and the ASX 100 represents the companies in which most of the Company’s shareholders could invest as an

alternative to Santos.


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(B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME (CONTINUED)

As the CEO Performance Award forms part of the CEO’s remuneration for each of the 2008, 2009 and 2010 financial years, it is divided into three

tranches as follows:

Tranche 1: Tested over the period from 1 January 2008 to 31 December 2010;

Tranche 2: Tested over the period from 1 January 2009 to 31 December 2011;

Tranche 3: Tested over the period from 1 January 2010 to 31 December 2012.

The following numbers of SARs and options were granted to the CEO in 2008:

SARs Options

Performance Award (F1) – 64,992

Deferred Award (F2) – 21,837

CEO Performance Award:

Tranche 1 (F3) 35,973 94,193

Tranche 2 (F4) 50,403 131,976

Tranche 3 (F5) 50,403 131,976

Total 136,779 444,974

Depending on Santos’ relative TSR over the applicable performance period, each tranche of the CEO Performance Award will vest in accordance with

the following schedule:






Full vesting of the CEO Performance Award will only occur where Santos’ TSR growth over the performance period exceeds that of all other

companies in the comparator group, and therefore requires exceptional performance.

There is no re-testing of the performance conditions. SARs or options which remain unvested following testing of the performance condition will lapse.

Upon vesting of SARs, ordinary shares in Santos will automatically be allocated to Mr Knox. These shares will be subject to restrictions until the

earlier of 10 years from the grant date, cessation of employment, or the date at which the Board approves, at Mr Knox’s request, the removal of the

restrictions. Options may be exercised at any time between the vesting date and the expiry date (27 July 2018), subject to payment of the exercise

price of $17.36 per option (being the volume weighted average price in the week up to and including the grant date).

During the financial year, the Company granted 444,974 options over unissued shares to the CEO as set out below:

2008 2007

Weighted Weighted

average average

exercise exercise

price price

$ Number $ Number

Outstanding at the beginning of the year – – – –

Granted during the year 16.98 444,974 – –

Outstanding at the end of the year 16.98 444,974 – –

Exercisable at the end of the year – – – –

The options outstanding at 31 December 2008 have an exercise price in the range of $15.39 to $17.36, and a weighted average contractual life of

ten years.


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During the year no options were exercised (2007: nil).

The fair value of shares issued as a result of exercising the options or vesting of SARs during the reporting period at their issue date is the market

price of shares of the Company on the ASX as at close of trading.

The fair value of services received in return for share options granted is measured by reference to the fair value of share options granted. The

estimate of the fair value of the services received is measured based on the Monte Carlo simulation method. The contractual life of the option

is used as an input into this model. Expectations of early exercise are incorporated into the models.

2008 2007

Performance Deferred Award Award CEO Performance Awards

Option grant F1 F2 F3 F4 F5

Fair value at grant date ($) 5.25 7.30 5.77 4.22 4.29 –

Share price on grant date ($) 17.71 17.71 17.40 17.40 17.40 –

Exercise price ($) 15.39 15.39 17.36 17.36 17.36 –

Expected volatility (weighted average, % pa) 30.7 30.7 30.9 30.9 30.9 –

Option life (weighted average) 10 years 10 years 10 years 10 years 10 years –

Expected dividends (% pa) 2.3 2.3 2.3 2.3 2.3 –

Risk-free interest rate (based on Australian

government bond yields) (% pa) 6.29 6.29 6.05 6.05 6.05 –

The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share options), adjusted

for any expected changes to future volatility due to publicly available information.

During the financial year, the Company granted 136,779 SARs to the CEO as set out below. Shares allocated on vesting of SARs will be subject to

further restrictions on dealing for a maximum of ten years after the original grant date. No amount is payable on grant or vesting of the SARs.

Number of SARs 2008 2007

Outstanding at the beginning of the year – –

Granted during the year 136,779 –

Outstanding at the end of the year 136,779 –

Exercisable at the end of the year – –

The fair value of services received in return for SARs granted is measured by reference to the fair value of SARs granted. The estimate of the fair

value of the services received is measured based on the Monte Carlo simulation method. The contractual life of the SARs is used as an input into this

model. Expectations of early exercise are incorporated into the Monte Carlo simulation method.

The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share rights), adjusted for

any expected changes to future volatility due to publicly available information.

2008 2007

CEO Performance Award

SARs grant F3 F4 F5

Fair value at grant date ($) 13.82 8.60 8.41 –

Share price on grant date ($) 17.40 17.40 17.40 –

Exercise price ($) – – – –

Expected volatility (weighted average, % pa) 30.9 30.9 30.9 –

Right life (weighted average) 10 years 10 years 10 years –

Expected dividends (% pa) 2.3 2.3 2.3 –

Risk-free interest rate (based on Australian government bond

yields) (% pa) 6.05 6.05 6.05 –


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Former CEO Mr J C Ellice-Flint retired on 25 March 2008. Consistent with the terms of his service agreement, 2,312,500 of Mr Ellice-Flint’s options which had not

previously vested, were vested and became exercisable upon cessation of his employment.

Each option entitles Mr Ellice-Flint to acquire one fully paid ordinary share in the Company at a predetermined price, subject to satisfaction of

vesting conditions. The grant size is determined by reference to the median grant size given to executives in similar roles in comparable companies.

No options have been granted to Mr Ellice-Flint since 2006.

At the 2006 AGM, shareholder approval was given for the grant of three tranches of options to Mr Ellice-Flint as follows:

Tranche Number of options Performance period

1 500,000 4 May 2006 – 26 August 2007

2 1,000,000 4 May 2006 – 26 August 2008

3 1,000,000 4 May 2006 – 26 August 2009

At 31 December 2008, the 2,500,000 options are on issue, and are exercisable. The exercise price for the options granted is $11.36, being the

volume weighted average price in the ten days up to and including 9 March 2006 as approved by shareholders on 4 May 2006. The options have a

contractual life of ten years.

Eligible senior executives – SARs and options During 2008, the Company made equity grants to its Senior Executives as the LTI component of their remuneration for 2008. The grants comprised:

For the Performance Award, an additional 50% of the award was added to the standard grant for Relative TSR performance above the

75th percentile, up to the 100th percentile of the comparator group. Consistent with its remuneration philosophy, the Board believes it is

appropriate to provide executives with an additional incentive to strive for exceptional performance, recognising that executives will only benefit

from the additional 50% where Santos achieves a ranking in the top quartile of its comparator group. Executives will only receive the full benefit of

this additional component where Santos outperforms every other company in the comparator group in delivering superior returns to shareholders.

Both the Performance Award and the Deferred Award were delivered, at the executive’s election, in the form of either SARs (under the SESPP) or

options (under the SESOP).

SARs and options were granted at no cost to the executives with the number of SARs awarded being determined by dividing the amount of the award

by the volume weighted average price of the Company’s shares over the week up to and including the award date. The number of options awarded is

of equivalent value calculated by an independent expert based on an acceptable valuation method.


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Vesting details of the Performance Award and the Deferred Award are summarised below:

Performance Award

Vesting period 1 January 2008 to 31 December 2010.

Vesting condition Vesting of the Performance Award is based on relative TSR against ASX 100 companies as at 1 January 2008.

Vesting schedule Relative TSR condition

Santos TSR percentile ranking % of grant vesting < 50th percentile 0%

= 50th percentile 50%



Exercise price $15.39 for options, being the volume weighted average price in the week up to and including the grant date of

3 May 2008.


Expiry/lapse Upon cessation of employment, SARs which have not already vested and options which are not exercisable will,

in general, lapse and be forfeited.

There is no re-testing of the performance conditions if they are not satisfied.

Deferred Award

Vesting period 3 May 2008 to 2 May 2011.

Vesting condition Vesting of the Deferred Award is based on continuous service to 2 May 2011, or three years from the grant date.

Vesting schedule 0% if the continuous service condition is not met.


Exercise price As for Performance Award.

Expiry/lapse As for Performance Award.

Upon cessation of employment, SARs which have not already vested and options which are not exercisable will, in general, lapse and be forfeited.

However, if cessation occurs due to death, disability or redundancy, or in special circumstances approved by the Board, then a proportion of the

SARs and options may vest and become exercisable.

Where there is a change in control, the Board may determine whether, and the extent to which, SARs and options may vest.

During the financial year, the Company granted 880,533 options over unissued shares as set out below:

2008 2007

Weighted Weighted

average average

exercise exercise

price price

$ Number $ Number

Outstanding at the beginning of the year 10.27 2,078,728 8.76 2,448,826

Granted during the year 15.39 880,533 13.82 421,200

Forfeited during the year 9.71 (460,385) 8.75 (335,900)

Exercised during the year 8.41 (303,583) 6.57 (455,398)

Outstanding at the end of the year 12.70 2,195,293 10.27 2,078,728

Exercisable at the end of the year 8.14 232,300 7.23 180,128


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The options outstanding at 31 December 2008 have an exercise price in the range of $6.95 to $15.39, and a weighted average contractual life of

9.88 years.

During the year 303,583 options were exercised (2007: 455,398). The weighted average share price at the dates of exercise was $17.81

(2007: $13.96).

The fair value of shares issued as a result of exercising the options or vesting of SARs during the reporting period at their issue date is the market

price of shares of the Company on the ASX as at close of trading.

The amounts recognised in the financial statements of the Group and the Company in relation to executive share options exercised during the

financial year were:




The fair value of services received in return for share options granted is measured by reference to the fair value of share options granted. The

estimate of the fair value of the services received is measured based on the Monte Carlo simulation method. The contractual life of the option

is used as an input into this model. Expectations of early exercise are incorporated into the models.

2008 2007

Performance Deferred Performance

Award Award Award Growth Award

Option grant F1 F2 E1 GA1 GA2

Fair value at grant date ($) 5.25 7.30 3.32 3.87 1.97

Share price on grant date ($) 17.71 17.71 13.94 13.94 13.25

Exercise price ($) 15.39 15.39 14.14 14.14 12.81

Expected volatility (weighted average, % pa) 30.7 30.7 24.2 24.2 23.9

Option life (weighted average) 10 years 10 years 10 years 10 years 10 years

Expected dividends (% pa) 2.3 2.3 3.5 3.5 3.5

Risk-free interest rate (based on government bond yields):

Australia (% pa) 6.29 6.29 6.26 6.26 6.26

United States (% pa) n/a n/a 5.00 n/a n/a

United Kingdom (% pa) n/a n/a 5.36 n/a n/a

The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share options), adjusted

for any expected changes to future volatility due to publicly available information.

During the financial year, the Company granted 241,668 SARs to eligible senior executives as set out below. Shares allocated on vesting of SARs will

be subject to further restrictions on dealing for a maximum of ten years after the original grant date. No amount is payable on grant or vesting of

the SARs.

Number of SARs 2008 2007

Outstanding at the beginning of the year 1,365,800 758,900

Granted during the year 241,668 880,000

Forfeited during the year (236,426) (273,100)

Vested during the year (141,330) –

Outstanding at the end of the year 1,229,712 1,365,800



F-82





The fair value of services received in return for SARs granted is measured by reference to the fair value of SARs granted. The estimate of the fair

value of the services received is measured based on the Monte Carlo simulation method. The contractual life of the SARs is used as an input into this

model. Expectations of early exercise are incorporated into the Monte Carlo simulation method.

The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share rights), adjusted for

any expected changes to future volatility due to publicly available information.

2008 2007

Performance Deferred Growth

Award Award Performance Award Award

SARs grant F1 F2 E1 E2 GA1

Fair value at grant date ($) 11.23 16.73 9.95 9.16 12.78

Share price on grant date ($) 17.71 17.71 13.94 13.25 13.94

Exercise price ($) – – – – –

Expected volatility (weighted average, % pa) 30.7 30.7 24.2 23.9 24.2

Right life (weighted average) 10 years 10 years 10 years 10 years 10 years

Expected dividends (% pa) 2.3 2.3 3.5 3.5 3.5

Risk-free interest rate (based on government bond yields):

Australia (% pa) 6.29 6.29 6.26 6.26 6.26

United States (% pa) n/a n/a 5.00 4.55 n/a

United Kingdom (% pa) n/a n/a 5.36 5.75 n/a

The amounts recognised in the income statements of the Group and the Company during the financial year in relation to equity grants issued under

the Executive Long-term Incentive Programme were:



Employee expenses:

CEO share options 0.3 – 0.3 –

CEO SARs 0.3 – 0.3 –

Former CEO share options 1.7 1.9 1.7 1.9

Executive share options 1.7 0.7 1.7 0.7

Executive SARs 4.3 2.6 4.3 2.6

8.3 5.2 8.3 5.2

Eligible senior executives – Shares No shares have been issued under the executive long-term incentive component of the SESPP since 2004. At 31 December 2008, the total number of

shares acquired under the executive long-term incentive component of the Plan since its commencement was 220,912.

The shares allocated pursuant to the SESPP were allotted to a trustee at no cost to participants, to be held on their behalf. The allocation price is

Market Value (as defined below) and the trustee was funded by the Company to subscribe for the shares.

In general the shares were restricted for a period of one year from the date of allotment. If a participating executive ceased employment during this

period, the Board in its discretion could determine that a lesser restriction on transfer and dealing applied, having regard to the circumstances of

the cessation. The shares can remain on trust for up to ten years from the date of allotment, during which time the shares are subject to forfeiture if

participants act fraudulently or dishonestly or in breach of their obligations to any Group company. Participants are entitled to instruct the trustee

as to the exercise of voting rights, receive dividends and participate in bonus and rights issues while the shares are held on trust.


F-83



(C) LEGACY PLAN – SANTOS EXECUTIVE SHARE PLAN

The Santos Executive Share Plan operated between 1987 and 1997, when it was discontinued. Under the terms of the Plan, shares were issued as

partly paid to one cent. While partly paid, the Plan shares are not transferable, carry no voting right and no entitlement to dividend but are entitled

to participate in any bonus or rights issue. After a “vesting” period, calls could be made for the balance of the issue price of the shares, which

varied between $2.00 and the market price of the shares on the date of the call being made. Shares were issued principally on: 22 December 1987;

7 February and 5 December 1989; and 24 December 1990.

At the beginning of the financial year there were 88,000 Plan shares on issue. During the financial year no Plan shares were fully paid and no

aggregate proceeds were received by the Company. As at 31 December 2008 there were 88,000 Plan shares outstanding.

(D) NON-EXECUTIVE DIRECTOR (“NED”) SHARE PLAN

In accordance with shareholder approval given at the 2007 Annual General Meeting, the Non-executive Director (“NED”) Share Plan was introduced

in July 2007. Participation in the NED Share Plan is voluntary and all present and future Non-executive Directors are eligible to participate. Under

the NED Share Plan, Directors elect to sacrifice all or part of their pre-tax fees in return for an allocation of fully paid ordinary shares of equivalent

value. The NED Share Plan therefore does not involve any additional remuneration for participating Directors.

Shares are allocated quarterly and are either issued as new shares or purchased on the ASX at the prevailing market price. The shares are registered

in the name of the participating Director, but are subject to a restriction on dealing. In the absence of exceptional circumstances, the restriction

will apply until the Director ceases to hold office or until ten years have elapsed since the allocation of the shares, whichever is earlier.

In 2008, 33,356 shares (2007: 14,847) were allocated to participating Directors as follows:

Number Price Date of shares per share

4 April 2008 7,376 14.8361

3 July 2008 6,590 20.7745

7 October 2008 8,566 17.8867

30 December 2008 10,824 14.1676

The amounts recognised in the financial statements of the Group and the Company in relation to the NED Share Plan during the year were:



Employee expenses 0.5 0.2 0.5 0.2


32. KEY MANAGEMENT PERSONNEL DISCLOSURES

(A) KEY MANAGEMENT PERSONNEL COMPENSATION

Short-term employee benefits 10.4 10.7 10.4 10.7

Post-employment benefits 1.7 1.8 1.7 1.8

Other long-term benefits 0.2 0.1 0.2 0.1

Termination benefits 2.7 – 2.7 –

Share-based payment 4.6 3.3 4.6 3.3

19.6 15.9 19.6 15.9


F-84



32. K

EY

MA

NA

GE

ME

NT

PE

RSO

NN

EL

DIS

CL

OSU

RE

S (C

ON

TIN

UE

D)

(B)

EQU

ITY

HO

LDIN

GS

OF

KEY

MA

NA

GEM

ENT

PER

SON

NEL

Op

tion

s an

d ri

ghts

hol

ding

s

The

mo

vem

en

t d

uri

ng

th

e r

ep

ort

ing

pe

rio

d i

n t

he

nu

mb

er

of

rig

hts

an

d o

pti

on

s o

ver

ord

ina

ry s

ha

res

of

the

Co

mp

an

y h

eld

dir

ect

ly,

ind

ire

ctly

or

be

ne

fici

all

y, b

y e

ach

ke

y m

an

ag

em

en

t

pe

rso

n,

incl

ud

ing

th

eir

re

late

d p

art

ies,

is

as

foll

ow

s:

20

08

Ba

lanc

e at

Optio

ns

Ba

lanc

e Ve

sted

Ve

sted

and

Ve

sted

but

not

be

ginn

ing

ex

erci

sed/

righ

ts

Othe

r at

end

of

at e

nd o

f ex

erci

sabl

e at

ex

erci

sabl

e at

Nam

e

of th

e ye

ar

Gran

ted 1,

2,3,

4 ve

sted

5 ch

ange

s 6 th

e ye

ar

the

year

en

d of

the

year

en

d of

the

year

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tion

s

Dire

ctor

s

Ell

ice

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nt,

Jo

hn

Ch

arl

es

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ox,

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vid

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hn

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r 10

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0 44

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Ex

ecut

ives

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nd

ers

on

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hn

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gh

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au

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rsto

ne

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me

s Le

slie

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row

n,

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vor

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n

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– (1

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00

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me

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art

yn E

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ard

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me

s 50

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en

ne

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ge

r M

axw

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cfa

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ark

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aso

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ter

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rist

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he

r –

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kin

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ich

ard

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hn

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tal

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978,

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utiv

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n 1

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ary

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.

2 Op

tion

s gr

ante

d to

Mr D

J W

Kno

x in

the

curr

ent y

ear w

ere

gran

ted

as fo

llow

s:

are

met

, all

of th

e op

tion

s ar

e ex

erci

sabl

e no

ear

lier t

han

1 Ja

nuar

y 20

11.

exer

cisa

ble

no e

arlie

r tha

n 1

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ary

2011

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exer

cisa

ble

no e

arlie

r tha

n 1

Janu

ary

2012

.

exer

cisa

ble

no e

arlie

r tha

n 1

Janu

ary

2013

.

Th

e op

tion

s w

ere

prov

ided

at n

o co

st to

Mr D

J W

Kno

x.

3 W

ith

the

exce

ptio

n of

Mr D

J W

Kno

x, S

ARs

gran

ted

to e

xecu

tive

s in

the

curr

ent y

ear w

ere

gran

ted

on 3

May

200

8, h

ave

an e

xpira

tion

dat

e of

2 M

ay 2

018,

and

ves

t wit

h th

e re

cipi

ent f

or n

o co

nsid

erat

ion.

At t

he d

ate

of g

rant

,

6

Othe

r cha

nges

may

incl

ude

the

laps

e of

opt

ions

on

the

expi

ry o

f the

exe

rcis

e pe

riod

, red

ucti

ons

in S

ARs

enti

tlem

ents

due

to p

erfo

rman

ce c

ondi

tion

s no

t bei

ng m

et, f

orfe

itur

e of

SAR

s w

hen

serv

ice

cond

itio

ns a

re n

ot m

et, o

r the

re

mov

al o

f an

empl

oyee

’s e

quit

y ho

ldin

g fr

om th

e ke

y m

anag

emen

t per

sonn

el d

iscl

osur

e w

hen

they

term

inat

e em

ploy

men

t wit

h th

e Co

mpa

ny.

D

eta

ils

reg

ard

ing

th

e s

erv

ice

an

d p

erf

orm

an

ce c

on

dit

ion

s th

at

mu

st b

e m

et

be

fore

th

e o

pti

on

s a

nd

SA

Rs

vest

wit

h t

he

re

cip

ien

t a

re i

ncl

ud

ed

in

no

te 3

1(B

).


F-85


32. K

EY

MA

NA

GE

ME

NT

PE

RSO

NN

EL

DIS

CL

OSU

RE

S (C

ON

TIN

UE

D)

(B)

EQU

ITY

HO

LDIN

GS

OF

KEY

MA

NA

GEM

ENT

PER

SON

NEL

(C

ON

TIN

UED

)

20

07

Op

tion

s

Ba

lanc

e at

exer

cise

d/

Ba

lanc

e Ve

sted

Ve

sted

and

Ve

sted

but

not

be

ginn

ing

ri

ghts

Ot

her

at e

nd o

f at

end

of

exer

cisa

ble

at

exer

cisa

ble

at

Na

me

of

the

year

Gr

ante

d 1,

2,3,

4 ve

sted

5 ch

ange

s 6 th

e ye

ar

the

year

en

d of

the

year

en

d of

the

year

Op

tion

s

Dire

ctor

s

Ell

ice

-Fli

nt,

Jo

hn

Ch

arl

es

2,5

00

,00

0

–

–

–

2,5

00

,00

0

12

5,0

00

1

25

,00

0

–

Ex

ecut

ives

A

nd

ers

on

, Jo

hn

Hu

gh

1

34

,04

4

–

–

(28

,80

0)

10

5,2

44

1

2,7

44

1

2,7

44

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au

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rsto

ne

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me

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–

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row

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vor

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n

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am

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en

ne

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ge

r M

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no

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ha

rd J

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tal

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(57,

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ives

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nd

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on

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hn

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gh

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–

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7,0

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au

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me

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vor

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n

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am

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en

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ge

r M

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ter

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ha

rd J

oh

n

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00

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un

g,

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ath

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0

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tal

2

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00

3

10

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0

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(85

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0)

48

5,6

00

–

–

–

per o

ptio

n. T

he o

ptio

ns w

ere

prov

ided

at n

o co

st to

the

reci

pien

ts. P

rovi

ding

ves

ting

con

diti

ons

are

met

, the

opt

ions

are

exe

rcis

able

no

earli

er th

an 1

Jan

uary

201

0.

2 Op

tion

s w

ere

gran

ted

to M

r D J

W K

nox

on 3

Sep

tem

ber 2

007,

hav

e an

exp

irati

on d

ate

of 3

Sep

tem

ber 2

017

and

an e

xerc

ise

pric

e of

$12

.81.

At t

he d

ate

of g

rant

, all

of th

e op

tion

s gr

ante

d ha

ve a

fair

valu

e of

$1.

97 p

er o

ptio

n. T

he

opti

ons

wer

e pr

ovid

ed a

t no

cost

to M

r D J

W K

nox.

Pro

vidi

ng v

esti

ng c

ondi

tion

s ar

e m

et, a

ll of

the

opti

ons

are

exer

cisa

ble

no e

arlie

r tha

n 3

Sept

embe

r 201

0.

3 W

ith

the

exce

ptio

n of

Mr D

J W

Kno

x, S

ARs

wer

e gr

ante

d to

exe

cuti

ves

on 1

Jul

y 20

07, h

ave

an e

xpira

tion

dat

e of

1 J

uly

2017

, and

ves

t wit

h th

e re

cipi

ent f

or n

o co

nsid

erat

ion.

At t

he d

ate

of g

rant

, 130

,100

of t

he S

ARs

gran

ted

SAR.

6

Othe

r cha

nges

may

incl

ude

the

laps

e of

opt

ions

on

the

expi

ry o

f the

exe

rcis

e pe

riod

, red

ucti

ons

in S

ARs

enti

tlem

ents

due

to p

erfo

rman

ce c

ondi

tion

s no

t bei

ng m

et, f

orfe

itur

e of

SAR

s w

hen

serv

ice

cond

itio

ns a

re n

ot m

et, o

r the

re

mov

al o

f an

empl

oyee

’s e

quit

y ho

ldin

g fr

om th

e ke

y m

anag

emen

t per

sonn

el d

iscl

osur

e w

hen

they

term

inat

e em

ploy

men

t wit

h th

e Co

mpa

ny.

D

eta

ils

reg

ard

ing

th

e s

erv

ice

an

d p

erf

orm

an

ce c

on

dit

ion

s th

at

mu

st b

e m

et

be

fore

th

e o

pti

on

s a

nd

SA

Rs

vest

wit

h t

he

re

cip

ien

t a

re i

ncl

ud

ed

in

no

te 3

1(B

).


F-86



32. K

EY

MA

NA

GE

ME

NT

PE

RSO

NN

EL

DIS

CL

OSU

RE

S (C

ON

TIN

UE

D)

(B)

EQU

ITY

HO

LDIN

GS

OF

KEY

MA

NA

GEM

ENT

PER

SON

NEL

(C

ON

TIN

UED

)

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are

hold

ings

Th

e m

ove

me

nt

du

rin

g t

he

re

po

rtin

g p

eri

od

in

th

e n

um

be

r o

f sh

are

s o

f th

e C

om

pa

ny

he

ld d

ire

ctly

, in

dir

ect

ly o

r b

en

efi

cia

lly,

by

ea

ch k

ey

ma

na

ge

me

nt

pe

rso

n,

incl

ud

ing

th

eir

re

late

d

pa

rtie

s, i

s a

s fo

llo

ws:

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08

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lanc

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Rece

ived

on

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lanc

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ld

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nnin

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ante

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at e

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min

ally

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me

of

the

year

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mpe

nsat

ion

of o

ptio

ns

of r

ight

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deem

ed

chan

ges 1

the

year

en

d of

the

year

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dina

ry s

hare

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fully

pai

d

Dire

ctor

s

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rda

, K

en

ne

th C

ha

rle

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ate

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me

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nn

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acf

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rk S

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tal

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(4,0

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553,

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deem

able

con

vert

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pref

eren

ce s

hare

s

Dire

ctor

s

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ice

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nt,

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hn

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arl

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225

– –

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(225

) –

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195

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ecut

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360

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1 Ot

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n-ex

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ctor

(“N

ED”)

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re P

lan

and

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dend

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nves

tmen

t Pla

n (“

DRP”

) sh

are

allo

cati

ons.


F-87


32. K

EY

MA

NA

GE

ME

NT

PE

RSO

NN

EL

DIS

CL

OSU

RE

S (C

ON

TIN

UE

D)

(B)

EQU

ITY

HO

LDIN

GS

OF

KEY

MA

NA

GEM

ENT

PER

SON

NEL

(C

ON

TIN

UED

)

20

07

Ba

lanc

e at

Rece

ived

on

Rece

ived

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lanc

e Ba

lanc

e he

ld

begi

nnin

g Gr

ante

d as

ex

erci

se

on v

esti

ng

Ot

her

at e

nd o

f no

min

ally

at

Na

me

of

the

year

co

mpe

nsat

ion

of o

ptio

ns

of r

ight

s Re

deem

ed

chan

ges 1

the

year

en

d of

the

year

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dina

ry s

hare

s –

fully

pai

d

Dire

ctor

s

Bo

rda

, K

en

ne

th C

ha

rle

s –

–

–

–

–

3

5,2

07

3

5,2

07

–

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ea

n,

Ke

nn

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red

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–

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n C

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an

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8

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loa

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ith

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ctor

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Othe

r cha

nges

incl

ude

Non-

exec

utiv

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rect

or (

“NED

”) S

hare

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n an

d Di

vide

nd R

einv

estm

ent P

lan

(“DR

P”)

shar

e al

loca

tion

s.

(C) L

OA

NS

TO K

EY M

AN

AG

EMEN

T P

ERSO

NN

EL

Th

ere

ha

ve b

ee

n n

o l

oa

ns

ma

de

, g

ua

ran

tee

d o

r se

cure

d,

dir

ect

ly o

r in

dir

ect

ly,

by

the

Gro

up

or

an

y o

f it

s su

bsi

dia

rie

s a

t a

ny

tim

e t

hro

ug

ho

ut

the

ye

ar

wit

h a

ny

key

ma

na

ge

me

nt

pe

rso

n,

incl

ud

ing

th

eir

re

late

d p

art

ies.


F-88



33. RELATED PARTIES

Identity of related partiesSantos Ltd and its controlled entities engage in a variety of related party transactions in the ordinary course of business. These transactions are

conducted on normal terms and conditions.

Details of related party transactions and amounts are set out in:

Note 6 as to interest charged to/by controlled entities;

Note 10 as to tax related balances and other amounts owing by controlled entities and other related entities;

Notes 20 and 21 as to amounts owing to controlled entities;

Note 21 as to guarantees by Santos Ltd of the financing facilities of controlled entities;

Note 22 as to Non-executive Directors’ retirement benefits;

Notes 18 and 26 as to investments in controlled entities;

Note 28 as to interests in joint ventures; and

Note 32 as to disclosures relating to key management personnel.


34. REMUNERATION OF AUDITORS $000 $000 $000 $000

The auditor of Santos Ltd is Ernst & Young.

Amounts received or due and receivable by Ernst & Young (Australia):

An audit or review of the financial report of the entity and any

other entity in the consolidated group 1,061 1,181 813 827

Other assurance services 368 244 292 183

Other services:

Taxation 5 – 4 –

Other 38 – 38 –

1,472 1,425 1,147 1,010

Amounts received or due and receivable by overseas related practices

of Ernst & Young (Australia) for:

External audit 122 – – –

Assurance 20 – – –

Taxation 33 15 – –

Other services 4 – – –

179 15 – –

Amounts received or due and receivable by overseas non-Ernst & Young

audit firm for:

Audit of financial reports for subsidiaries incorporated in

Papua New Guinea 62 – – –

Amounts received or due and receivable by related Australian practice of

non-Ernst & Young audit firm for:

Assurance 60 – 42 –

Taxation 297 – 69 –

Other services 190 – 133 –

547 – 244 –


F-89



35. COMMITMENTS FOR EXPENDITURE $million $million $million $million

The Group has the following commitments for expenditure:

(A) CAPITAL COMMITMENTS

Capital expenditure contracted for at balance date for which no

amounts have been provided in the financial statements, payable:

Not later than one year 330.4 324.2 109.1 199.1

Later than one year but not later than five years 150.2 89.0 22.8 53.8

Later than five years 3.7 – – –

484.3 413.2 131.9 252.9

Santos Ltd has guaranteed the capital commitments of certain

controlled entities (refer note 36 for further details).

(B) MINIMUM EXPLORATION COMMITMENTS

Minimum exploration commitments for which no amounts have been

provided in the financial statements or capital commitments, payable:



Later than five years – 29.1 – –

431.8 564.6 13.1 56.8

The Group has certain obligations to perform minimum exploration

work and expend minimum amounts of money pursuant to the terms

of 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 or alternatively upon their relinquishment. The minimum

exploration commitments are less than the normal level of exploration

expenditures expected to be undertaken by Santos Ltd and its

controlled entities.

(C) OPERATING LEASE COMMITMENTS

Non-cancellable operating lease rentals are payable as follows:



Later than five years 49.1 52.8 46.0 34.2

310.4 349.5 152.3 154.0

The Group leases floating production, storage and offtake facilities, floating storage offloading facilities and mobile offshore production units

under operating leases. 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 office space and a warehouse under operating leases. The leases are generally for a period of ten years, with an

option to renew the lease after that date. The lease payments typically increase by 5.0% per annum.

During the year ended 31 December 2008 the Group recognised $88.4 million (2007: $59.3 million) as an expense in the income statement in

respect of operating leases.


F-90




35. COMMITMENTS FOR EXPENDITURE (CONTINUED) $million $million $million $million

(D) FINANCE LEASE COMMITMENTS

Finance lease commitments are payable as follows:

Not later than one year 0.5 – 0.5 –

Later than one year but not later than five years 1.4 – 1.4 –

Later than five years 1.3 – 1.3 –

Total minimum lease payments 3.2 – 3.2 –

Less amounts representing finance charges (1.5) – (1.5) –

Present value of minimum lease payments 1.7 – 1.7 –

The Group has finance leases for various items of plant and equipment with a carrying amount of $3.2 million (2007: $nil) for both the Group and

the Company. The leases generally have terms of between three to twelve years with no escalation clauses and no option to renew. Title to the assets

passes to the Group at the expiration of the relevant lease periods.

(E) COMMITMENT ON REMOVAL OF SHARE CAP

Pursuant to a Deed of Undertaking to the Premier of South Australia dated 16 October 2006 and as a consequence of the enactment of the Santos on 29 November 2007, Santos has agreed to:

$60.0 million over a ten-year period from the date the legislation was enacted. As at 31 December 2008, approximately $52.9 million remains to

be paid over the next nine years.

Australia for ten years subsequent to the date the legislation was enacted. At 31 December 2008, if this condition had not been met, the

Company would have been liable to pay approximately $90.0 million to the State Government of South Australia.

Santos is required to make these payments only if the State Government of South Australia does not reintroduce a shareholder cap on the Company’s

shares or introduce any other restriction on or in respect of the Company’s Board or senior management which have an adverse discriminatory effect

in their application to the Company relative to other companies domiciled in South Australia.



(F) REMUNERATION COMMITMENTS

Commitments for the payment of salaries and other remuneration

under the long-term employment contracts in existence at the

reporting date but not recognised in liabilities, payable:


Amounts included as remuneration commitments include commitments arising from the service contracts of Directors and executives referred to in

the Remuneration Report of the Directors’ Report that are not recognised as liabilities and are not included in the compensation of key management

personnel.


F-91



36. CONTINGENT LIABILITIES $million $million $million $million

The Directors are of the opinion that provisions are not required in

respect of these matters, as it is not probable that a future sacrifice

of economic benefits will be required or the amount is not capable of

reliable measurement.

Santos Ltd and its controlled entities have the following contingent

liabilities arising in respect of:

The Group:

Performance guarantees 28.7 23.2 10.3 10.2

Actual and possible legal claims and proceedings 17.3 12.1 2.6 2.4

The Group’s share of contingent liabilities of joint venture operations:

Performance guarantees 13.0 5.8 2.9 2.9

Litigation and proceedings 4.5 – 1.8 –

63.5 41.1 17.6 15.5

Legal advice in relation to the actual and possible legal claims and proceedings referred to above indicates that on the basis of available information,

any liability in respect of these claims is unlikely to exceed $13.7 million on a consolidated basis.

A number of the Australian interests of the Group are located within areas the subject of one or more claims or applications for native title

determination. Whatever the outcome of those claims or applications, it is not believed that they will significantly impact the Group’s asset base.

Compliance with the “future act” provisions of the Native Title Act 1993 (Cth) can delay the grant of mineral and petroleum tenements and consequently

impact generally the timing of exploration, development and production operations. An assessment of the impact upon the timing of particular

operations may require consideration and determination of complex legal and factual issues.

Guarantees provided by Santos Ltd for borrowings in respect of controlled entities are disclosed in note 21.

Santos Ltd has provided parent company guarantees in respect of:

(a) the funding and performance obligations of a number of subsidiary companies, relating to:

(b) a subsidiary company’s obligations to meet distribution charges for gas retail customers.

A subsidiary company has provided a letter of performance guarantee in respect of the performance obligations of its subsidiary company relating to a

production sharing contract.

A subsidiary company has provided a letter of comfort in respect of payment obligations of associated entities.

The total expenditure commitment under these transactions and which are the subject of a parent company guarantee is $245.8 million.

Varanus Island incidentA pipeline rupture and subsequent fire at Varanus Island on 3 June 2008 damaged gas processing and export facilities. As a result, total production

ceased both from the East Spar Joint Venture (processing and exporting gas from the John Brookes gas field) and the Harriet Joint Venture (processing

and exporting gas from various Harriet fields). Santos (BOL) Pty Ltd, a controlled entity of Santos Ltd, has a 45% interest in the John Brookes gas field

and the East Spar Joint Venture. Partial production by the East Spar Joint Venture recommenced on 6 August 2008, but Santos (BOL) Pty Ltd remains

unable to meet the entirety of its firm gas commitments to customers under its various Gas Sales Agreements, and continues to rely on the force

majeure provisions of those Agreements. It is too early to provide an estimate of the costs of managing and responding to the incident, or the potential

liability (if any) to third party claims under Gas Sales Agreements or otherwise as a result of the incident.


F-92



36. CONTINGENT LIABILITIES (CONTINUED)

Sidoarjo mudflow incidentOn 11 December 2008, Santos Brantas Pty Ltd (“Santos Brantas”) announced that it had agreed to transfer its 18% minority interest in the Brantas

Production Sharing Contract (“Brantas PSC”) in Indonesia to Minarak Labuan Co (L) Ltd (“Minarak”), a company associated with Lapindo Brantas Inc

(“Lapindo”) which is the operator and majority owner of the Brantas PSC.

The transfer was approved by BPMIGAS, the relevant regulatory body of the Indonesian government.

The Brantas PSC includes the Banjar-Panji 1 onshore exploration well in Sidoarjo, the site of a major mudflow incident which commenced in May 2006.

Santos Brantas will pay US$22.5 million to Minarak, (US$20.0 million paid at the date of this report) with these funds to be used to support the

long-term mud management programme. Santos Brantas and its related parties received a release from each of its former Brantas PSC participants and

Minarak. The release covers any past, present or future claims that any of those parties may have against Santos in relation to the Brantas PSC or

otherwise in connection with the incident.

The transaction does not remove possible third party claims directly against Santos Brantas. Whilst it is possible that Santos Brantas could be subjected

to such claims in the future, it believes it would be able to successfully defend those claims, if ever made.

37. DEED OF CROSS GUARANTEE

Pursuant to Class Order 98/1418, the wholly-owned subsidiaries listed below are relieved from the Corporations Act 2001 requirements for preparation,

audit and lodgement of their financial reports.

As a condition of the Class Order the Company and each of the listed subsidiaries (“the Closed Group”) have entered into a Deed of Cross Guarantee.

The effect of the Deed is that the Company has guaranteed to pay any deficiency in the event of winding up of any of the subsidiaries under certain

provisions of the Corporations Act 2001. The subsidiaries have also given a similar guarantee in the event that the Company is wound up.

The subsidiaries subject to the Deed are:

Alliance Petroleum Australia Pty Ltd

Bridge Oil Developments Pty Limited

Reef Oil Pty Ltd

Santos (BOL) Pty Ltd

Santos Darwin LNG Pty Ltd

Santos (NARNL Cooper) Pty Ltd (became a party to the Deed on 28 November 2008)

Santos Offshore Pty Ltd

Santos Petroleum Management Pty Ltd

Santos Petroleum Pty Ltd

Santos QNT Pty Ltd

Santos QNT (No. 1) Pty Ltd

Santos QNT (No. 2) Pty Ltd

Vamgas Pty Ltd


F-93


Closed Group 2008 2007

37. DEED OF CROSS GUARANTEE (CONTINUED) $million $million

The consolidated income statement and balance sheet of the entities that are members of the Closed Group are as follows:

Consolidated income statementProfit before tax 324.0 1,213.5

Income tax expense (154.4) (130.9)

Royalty related taxation expense (48.1) (90.6)

Profit after tax 121.5 992.0

Retained earnings at the beginning of the year 1,556.3 1,218.9

Adjustment to retained earnings for company added to Deed during the year 130.6 –

Adjustment to retained earnings on initial adoption of Interpretation 1003 Australian Petroleum Resource Rent Tax – (164.4)

Dividends to shareholders (286.3) (268.6)

Share buy-back (245.0) (231.2)

Share-based payment transactions 8.3 5.2

Actuarial (loss)/gain on defined benefit plan, net of tax (25.5) 4.4

Retained earnings at the end of the year 1,259.9 1,556.3

Consolidated balance sheetCurrent assetsCash and cash equivalents 1,422.9 46.6

Trade and other receivables 3,023.3 557.9

Inventories 256.3 215.7

Other 2.7 5.6

Total current assets 4,705.2 825.8

Non-current assetsReceivables 30.7 61.5

Exploration and evaluation assets 208.8 169.7

Oil and gas assets 4,172.1 3,725.7

Other land, buildings, plant and equipment 109.7 107.4

Other investments 2,507.7 2,672.8

Deferred tax assets 179.8 8.0

Other – 5.9

Total non-current assets 7,208.8 6,751.0

Total assets 11,914.0 7,576.8

Current liabilitiesTrade and other payables 757.8 507.6

Deferred income 50.0 11.9

Interest-bearing loans and borrowings 0.6 –

Current tax liabilities 623.8 28.7

Provisions 38.4 43.2

Total current liabilities 1,470.6 591.4

Non-current liabilitiesDeferred income 6.3 8.8

Interest-bearing loans and borrowings 5,560.4 2,294.8

Deferred tax liabilities 370.5 340.0

Provisions 707.0 463.1

Total non-current liabilities 6,642.2 3,106.7

Total liabilities 8,114.8 3,698.1

Net assets 3,799.2 3,878.7

EquityIssued capital 2,530.8 2,331.6

Reserves 8.5 (9.2)

Retained earnings 1,259.9 1,556.3

Total equity 3,799.2 3,878.7


F-94



38. 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 the Group’s

business. The Group’s overall financial risk management strategy is to seek to ensure that the Group is able to fund its business plans. Derivative

financial instruments may be used to hedge exposure to fluctuations in foreign exchange rates, interest rates, and commodity prices.

The Group uses various methods to measure the types of risk to which it is exposed. These methods include Cash Flow at Risk analysis in the case of

interest rate, foreign exchange and commodity price risk, and ageing analysis for credit risk.

Financial risk management is carried out by a central treasury department (“Treasury”) under policies approved by the Board of Directors. The Board

provides written principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk and

credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity.

(A) FOREIGN CURRENCY RISK

Foreign exchange risk arises from commercial transactions and recognised assets and liabilities that are denominated in a currency that is not the

entity’s functional currency. The risk is measured using cash flow forecasting and Cash Flow at Risk analysis.

The Group is exposed to foreign currency risk principally through the sale of liquid petroleum products denominated in US dollars, US dollar

borrowings and US dollar expenditure. In order to economically hedge this foreign currency risk, the Group has from time to time entered into

forward foreign exchange, foreign currency swap and foreign currency option contracts.

All US dollar denominated borrowings of AUD functional currency companies (2008: US$1,140.6 million; 2007: US$1,155.8 million) are either

designated as a hedge of US dollar denominated investments in foreign operations, or swapped using cross-currency swaps to Australian dollars

in order to achieve an economic hedge. As a result, there were no net foreign currency gains or losses arising from translation of US denominated

dollar borrowings recognised in the income statements in 2008.

The Group’s risk management policy is to hedge between 0% and 50% of forecasted cash flows in US dollars for the current financial year.

Based on the Group’s net financial assets and liabilities at 31 December 2008, the following table demonstrates the estimated sensitivity to a

±10 cent movement in the US dollar exchange rate (2007: ±10 cents) with all other variables held constant, on post-tax profit and equity:



Impact on post-tax profit:

AUD/USD +10 cents (0.6) 10.6 – –

AUD/USD –10 cents 0.8 (13.3) – –

Impact on equity:

AUD/USD +10 cents (0.6) 10.6 – –

AUD/USD –10 cents 0.8 (13.3) – –

The above sensitivity should be used with care as the Group’s financial asset and liability profile will not remain constant.

The ±10 cent sensitivity is the Group’s estimate of reasonably possible changes in the US dollar exchange rate over the following financial year,

based on recent volatility experienced in the market.


F-95


38. FINANCIAL RISK MANAGEMENT (CONTINUED)

(B) MARKET RISK

Cash flow and fair value interest rate risk The Group’s main interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest

rate risk. Borrowings issued at fixed 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 floating rate basis. Interest

rate swaps, denominated in Australian dollars and US dollars, have been entered into as fair value hedges of medium-term notes and long-term notes

respectively. When transacted, these swaps have maturities ranging from one to 20 years, and align with the maturity of the related notes.

At 31 December 2008, the Group had interest rate swaps with a notional contract amount of $1,302.0 million (2007: $1,067.7 million).

The net fair value of swaps at 31 December 2008 was $303.5 million (2007: $67.3 million), comprising assets of $303.5 million and liabilities of $nil.

These amounts were recognised as fair value derivatives.

Based on the net debt position as at 31 December 2008, taking into account interest rates swaps, it is estimated that if interest rates changed by

+0.25%/–2.0% (2007: ±1%), with all other variables held constant, the estimated impact on post-tax profit and equity would have been:



Impact on post-tax profit:

Interest rates +0.25% (2007: +1%) (0.5) (11.6) – –

Interest rates –2.0% (2007: –1%) 3.9 11.6 – –

Impact on equity:

Interest rates +0.25% (2007: +1%) (0.5) (11.6) – –

Interest rates –2.0% (2007: –1%) 3.9 11.6 – –

This assumes that the change in interest rates is effective from the beginning of the financial year and the net debt position and fixed/floating mix

is constant over the year. However, interest rates and the debt profile of the Group are unlikely to remain constant and therefore the above

sensitivity analysis should be used with care.

The +0.25%/–2.0% sensitivity is the Group’s estimate of reasonably possible changes in interest rates over the following financial year, based on

recent interest rate trends.

Changes in interest rates over the following year may be greater or less than the +0.25%/–2.0% sensitivity employed in the estimates above.

Commodity price risk exposure The Group is exposed to commodity price fluctuations through the sale of petroleum products denominated in US dollars. The Group may enter into

commodity crude oil price swap and option contracts to manage its commodity price risk.

At 31 December 2008 the Group has no open oil price swap contracts (2007: nil), and therefore is not exposed to movements in commodity prices on

financial instruments. The Group continues to monitor oil price volatility and to assess the need for commodity price hedging.


F-96




(C) CREDIT RISK

Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as

credit exposures to customers, including outstanding receivables and committed transactions, and represents the potential financial loss if

counterparties fail to perform as contracted. Management has credit policies in place and the exposure to credit risk is monitored on an ongoing

basis. The majority of Santos’ gas contracts are spread across major Australian energy retailers and industrial users. Contracts exist in every

mainland state whilst the largest customer accounts for less than 20% of contracted gas.

The Group controls credit risk by setting minimum creditworthiness requirements of counterparties, which for banks and financial institutions is a

Standard & Poor’s rating of A or better.

Approved Total Total Exposure Rating counterparties credit limit exposure * range $million $million $million

AA, AA– 7 2,437.2 1,669.0 37.2 – 380.9

A+ 5 663.5 542.4 10.3 – 298.3

* Cash deposits plus accrued interest, bank account balances and the mark-to-market gain and percentage of notional value weighted by term on derivatives.

If customers are independently rated these ratings are used, otherwise the credit quality of the customer is assessed by taking into account its

financial position, past experience and other factors including credit support from a third party. Individual risk limits for banks and financial

institutions are set based on external ratings in accordance with limits set by the Board. Limits for customers are determined within contract terms.

The daily nomination of gas demand by customers and the utilisation of credit limits by customers is monitored by line management.

In addition, receivables balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant.

The Group does not hold collateral, nor does it securitise its trade and other receivables.

At the balance sheet date there were no significant concentrations of credit risk within the Group and financial instruments are spread amongst a

number of financial institutions to minimise the risk of default by counterparties.

The maximum exposure to credit risk is represented by the carrying amount of financial assets of the Group, excluding investments, which have

been recognised on the balance sheet.


F-97



(D) LIQUIDITY RISK

Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate

amount of committed credit facilities and the ability to close out market positions. The Group aims at maintaining flexibility in funding to meet

ongoing operational requirements, exploration and development expenditure, and small-to-medium-sized opportunistic projects and investments,

by keeping committed credit facilities available.

The following table analyses the contractual maturities of the Group’s financial liabilities into relevant maturity groupings based on the remaining

period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows

comprising principal and interest repayments, except for interest rate swaps. Estimated variable interest expense is based upon appropriate yield

curves existing as at 31 December 2008.

Less than 1 to 2 2 to 5 More than 1 year years years 5 years $million $million $million $million

Consolidated 2008 Non-derivative financial liabilities Trade and other payables 604.8 – – – Obligations under finance leases 0.5 0.5 1.0 1.3 Bank loans 54.5 34.1 82.1 118.7 Commercial paper – – – – Medium-term notes 18.3 16.9 375.6 118.8 Long-term notes 140.5 259.5 374.5 1,432.4 Derivative financial assets Cross-currency swap contracts (55.9) (30.6) – – Interest rate swap contracts (42.4) (57.9) (73.7) (184.1)

720.3 222.5 759.5 1,487.1

2007 Non-derivative financial liabilities Trade and other payables 609.7 – – –

Obligations under finance leases – – – –

Bank loans 41.1 40.8 259.2 133.7

Commercial paper 65.0 – – –

Medium-term notes 27.8 6.5 19.6 469.5

Long-term notes 75.2 111.7 502.9 1,151.4

Derivative financial liabilities/(assets) Cross-currency swap contracts 12.6 11.8 7.6 –

Interest rate swap contracts (9.5) (21.3) (31.9) (27.0)

821.9 149.5 757.4 1,727.6

Santos Ltd 2008 Trade and other payables 723.0 – – – Obligations under finance leases 0.5 0.5 1.0 1.3 Amounts owing to controlled entities – – – 4,082.8

723.5 0.5 1.0 4,084.1

2007 Trade and other payables 625.1 – – –

Obligations under finance leases – – – –

Amounts owing to controlled entities – – – 2,478.2

625.1 – – 2,478.2

Amounts owing to controlled entities are shown at their carrying value as any interest charged on the loans is added to the loan balance. The loans

are made in the ordinary course of business on normal market terms and conditions and are not repayable for a minimum of nine years.


F-98




(E) FAIR VALUES

The financial assets and liabilities of the Group and the Company are recognised on the balance sheets at their fair value in accordance with

the accounting policies in note 1, except for long-term notes that are not swapped to a variable interest rate, and bank borrowings, which are

recognised at face value. The carrying value of these long-term notes is US$156.5 million and their fair value is estimated at US$169.4 million based

on discounting the future cash flows excluding the credit spread at the time of issue. The discount rate used is the interest rate swap rate for the

remaining term to maturity of the note as at 31 December 2008. The carrying value of the bank borrowings approximates fair value as it is a floating

rate instrument.

Basis for determining fair values The following summarises the significant methods and assumptions used in estimating the fair values of financial instruments:

Trade and other receivables The carrying value less impairment provision of trade receivables is a reasonable approximation of their fair values due to the short-term nature

of trade receivables.

Available-for-sale financial assets The fair value of available-for-sale financial assets is determined by reference to their quoted bid price at the reporting date.

Derivatives The fair value of interest rate swaps is calculated by discounting estimated future cash flows based on the terms of maturity of each contract and

using market interest rates for a similar instrument at the reporting date. Where these cash flows are in a foreign currency the present value is

converted to Australian dollars at the foreign exchange spot rate prevailing at reporting date.

Financial liabilities Fair value is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the

reporting date. Where these cash flows are in a foreign currency the present value is converted to Australian dollars at the foreign exchange

spot rate prevailing at reporting date.

Interest rates used for determining fair value The interest rates used to discount estimated future cash flows, where applicable, are based on the market yield curve at the reporting date.

The dealt credit spread is assumed to be the same as the market rate for the credit as at reporting date as allowed under AASB 139 Financial Instruments: Recognition and Measurement. The interest rates including credit spreads used to determine fair value were as follows:

2008 2007

% %

Derivatives 1.3 – 4.3 5.4 – 7.8

Loans and borrowings 1.7 – 4.9 5.8 – 9.1


F-99


Directors’ Declaration

In accordance with a resolution of the Directors of Santos Ltd (“the Company”) we state that:

1. In the opinion of the Directors:

(a) the financial statements and notes of the Company and of the consolidated entity are in accordance with the Corporations Act 2001, including:

(i) giving a true and fair view of the Company’s and consolidated entity’s financial position as at 31 December 2008 and of their performance

for the year ended on that date; and

(ii) complying with Accounting Standards and the Corporations Regulations 2001; and

(b) 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 for the financial period ending 31 December 2008.

3. As at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identified in note 37 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 Class Order 98/1418.

Dated this 19th day of February 2009

On behalf of the Board:

Director Director

Adelaide


F-100


In relation to our audit of the financial report of Santos Ltd and the entities it controlled for the year ended 31 December 2008, to the best of my

knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable

code of professional conduct.

Ernst & Young R J Curtin Partner

Adelaide

Ernst & Young

19 February 2009

Auditor’s Independence Declaration to the Directors of Santos Ltd


F-101


Independent Audit Report

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF SANTOS LTD

Report on the financial report

We have audited the accompanying financial report of Santos Ltd,

which comprises the balance sheet as at 31 December 2008, and the

income statement, statement of recognised income and expense and

cash flow statement for the year ended on that date, a summary of

significant accounting policies, other explanatory notes and the directors’

declaration of the consolidated entity comprising the company and the

entities it controlled at the year’s end or from time to time during the

financial year.

Directors’ responsibility for the financial report

The Directors of the Company are responsible for the preparation

and fair presentation of the financial report in accordance with the

Australian Accounting Standards (including the Australian Accounting

Interpretations) and the Corporations Act 2001. This responsibility

includes establishing and maintaining internal controls relevant to

the preparation and fair presentation of the financial report that is

free from material misstatement, whether due to fraud or error; selecting

and applying appropriate accounting policies; and making accounting

estimates that are reasonable in the circumstances. In note 1(A), the

Directors also state that the financial report, comprising the financial

statements and notes, complies with International Financial Reporting

Standards as issued by the International Accounting Standards Board.

Auditor’s responsibility

Our responsibility is to express an opinion on the financial report

based on our audit. We conducted our audit in accordance with Australian

Auditing Standards. These Auditing Standards require that we comply with

relevant ethical requirements relating to audit engagements and plan and

perform the audit to obtain reasonable assurance whether the financial

report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence

about the amounts and disclosures in the financial report. The procedures

selected depend on our judgement, including the assessment of the risks

of material misstatement of the financial report, whether due to fraud

or error. In making those risk assessments, we consider internal controls

relevant to the entity’s preparation and fair presentation of the financial

report in order to design audit procedures that are appropriate in

the circumstances, but not for the purpose of expressing an opinion

on the effectiveness of the entity’s internal controls. An audit also

includes evaluating the appropriateness of accounting policies used

and the reasonableness of accounting estimates made by the Directors,

as well as evaluating the overall presentation of the financial report.

We believe that the audit evidence we have obtained is sufficient and

appropriate to provide a basis for our audit opinion.

Independence

In conducting our audit we have met the independence requirements of

the Corporations Act 2001. We have given to the Directors of the Company

a written Auditor’s Independence Declaration, a copy of which is referred

to in the directors’ report. In addition to our audit of the financial report,

we were engaged to undertake the services disclosed in the notes to the

financial statements. The provision of these services has not impaired our

independence.

Auditor’s opinion

In our opinion:

1. the financial report of Santos Ltd is in accordance with the

Corporations Act 2001, including:

(i) giving a true and fair view of the financial position of Santos Ltd

and the consolidated entity at 31 December 2008 and of their

performance for the year ended on that date; and

(ii) complying with Australian Accounting Standards (including

the Australian Accounting Interpretations) and the Corporations Regulations 2001.

2. the financial report also complies with International Financial

Reporting Standards as issued by the International Accounting

Standards Board.

Report on the remuneration report

We have audited the remuneration report included in pages 50 to 69 of

the annual report for the year ended 31 December 2008. The Directors of

the company are responsible for the preparation and presentation of the

remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration

report, based on our audit conducted in accordance with Australian

Auditing Standards.

Auditor’s opinion

In our opinion the remuneration report of Santos Ltd for the year ended

31 December 2008, complies with section 300A of the Corporations Act 2001.

Ernst & Young R J Curtin Partner

Adelaide

19 February 2009

CONSOLIDATED FINANCIAL STATEMENTS, DIRECTORS’REPORT AND AUDITOR’S REPORT FOR THE GUARANTORFOR THE YEAR ENDED 31 DECEMBER 2009


F-102


Santos Annual Report 200942

DIRECTORS’ STATUTORY REPORT 42

REMUNERATION IN BRIEF 50

REMUNERATION REPORT 52

FINANCIAL REPORT

INCOME STATEMENTS 70

STATEMENTS OF COMPREHENSIVE INCOME 71

STATEMENTS OF FINANCIAL POSITION 72

STATEMENTS OF CASH FLOWS 73

STATEMENTS OF CHANGES IN EQUITY 74

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 Significant Accounting Policies 752 Segment Information 893 Revenue and Other Income 914 Expenses 925 Earnings 936 Net Financing Costs 937 Taxation Expense 948 Cash and Cash Equivalents 959 Trade and Other Receivables 9510 Inventories 9611 Other Financial Assets 9612 Available-For-Sale Financial Assets 9613 Exploration and Evaluation Assets 9714 Oil and Gas Assets 9815 Other Land, Buildings, Plant and Equipment 10016 Impairment of Cash-Generating Units 10117 Deferred Tax Assets and Liabilities 10218 Trade and Other Payables 10319 Interest-Bearing Loans and Borrowings 10320 Provisions 10621 Other Liabilities 10722 Capital and Reserves 10723 Earnings per Share 11024 Consolidated Entities 11125 Acquisitions of Subsidiaries 11226 Disposal of Subsidiaries 11327 Investment in an Associate 11328 Interests in Joint Ventures 11429 Notes to the Statements of Cash Flows 11530 Employee Benefits 11631 Share-Based Payment Plans 11932 Key Management Personnel Disclosures 12933 Related Parties 13434 Remuneration of Auditors 13435 Commitments for Expenditure 13536 Contingent Liabilities 13737 Deed of Cross Guarantee 13838 Financial Risk Management 14239 Events After the End of the Reporting Period 147

DIRECTORS’ DECLARATION 148

AUDITOR’S INDEPENDENCE DECLARATION 149

INDEPENDENT AUDIT REPORT 150

Financial Report

F-103




The Directors present their report together with the financial report of Santos Limited (Santos or the Company) and the consolidated financial report of the consolidated entity, being the Company and its controlled entities, for the financial year ended 31 December 2009, and the auditor’s report thereon. Information in the Annual Report referred to by page number in this report, including the Remuneration Report, or contained in a Note to the financial statements referred to in this report is to be read as part of this report.

DIRECTORS, DIRECTORS’ SHAREHOLDINGS AND DIRECTORS’ MEETINGS

Directors’ Shareholdings

The names of Directors of the Company in office at the date of this report and details of the relevant interest of each of those Directors in shares in the Company at that date are as set out below:

Surname Other Names Shareholdings in Santos Ltd Ordinary Shares

Borda Kenneth Charles 67,308

Coates Peter Roland 19,714

Dean Kenneth Alfred 11,638

Franklin Roy Alexander –

Harding Richard Michael 2,441

Hemstritch Jane Sharman 14,000

Knox David John Wissler 3,550

Martin Gregory John Walton 3,250

The above named Directors held office during and since the end of the financial year, except for Mr GJW Martin, who was appointed a Director of the Company on 29 October 2009, and Ms JS Hemstritch, who was appointed on 16 February 2010.

Professor J Sloan held office as a Director of the Company until her retirement on 6 May 2009. Mr S Gerlach held office as Chairman of the Board until 9 December 2009 and as a Director of the Company until his retirement on 31 December 2009.

All shareholdings are of fully paid ordinary shares.

At the date of this report, Mr DJW Knox holds 544,974 options and 186,779 share acquisition rights (SARs) under the Santos Executive Share Option Plan and Santos Employee Share Purchase Plan, respectively, and subject to the further terms described in Note 31 to the financial statements. Details of the options and SARs granted to Mr Knox during the year are set out in the Remuneration Report on page 52.

Details of the qualifications, experience and special responsibilities of each Director and the Company Secretary are set out on the Directors’ and Executives’ biography pages of the Annual Report. This information includes details of other directorships held during the last three years.

F-104



Directors’ Meetings

The number of Directors’ Meetings and meetings of committees of Directors held during the financial year and the number of meetings attended by each Director are as follows:

Surname Other NamesDirectors’ Meetings2

Audit Committee

Environment, Health,

Safety and Sustainability

CommitteeRemuneration

CommitteeFinance

CommitteeNomination Committee

No. of

Mtgs

Held1

No. of

Mtgs

Attended

No. of

Mtgs

Held1

No. of

Mtgs

Attended

No. of

Mtgs

Held1

No. of

Mtgs

Attended

No. of

Mtgs

Held1

No. of

Mtgs

Attended

No. of

Mtgs

Held1

No. of

Mtgs

Attended

No. of

Mtgs

Held1

No. of

Mtgs

Attended

Borda Kenneth Charles 12 12 - - - - - - 5 5 - -

Coates Peter Roland 12 12 4 4 - - 4 4 - - 2 2

Dean Kenneth Alfred 12 12 4 4 - - - - 5 5 - -

Franklin Roy Alexander 12 12 - - 4 4 - - - - - -

Gerlach Stephen 12 12 - - 4 4 4 4 5 5 3 3

Harding Richard Michael 12 10 4 4 4 4 4 4 - - 3 3

Knox David John Wissler 12 12 - - 4 4 - - - - - -

Martin Gregory John Walton 2 2 - - - - - - - - - -

Sloan Judith 3 3 - - - - - - - - 1 1

1 Reflects the number of meetings held during the time the Director held office, or was a member of the Committee, during the year. 2 In addition to formal meetings, the Board participated in a site visit to Jakarta and the Oyong field in Indonesia.

At the date of this report, the Company had an Audit Committee of the Board of Directors.

Particulars of the Company’s corporate governance practices appear in the Corporate Governance Statement in the Annual Report.

PRINCIPAL ACTIVITIES

The principal activities of the consolidated entity during the financial year were: petroleum exploration, the production, treatment and marketing of natural gas, crude oil, condensate, naphtha, liquid petroleum gas, and the transportation by pipeline of crude oil. No significant change in the nature of these activities has occurred during the year.

REVIEW AND RESULTS OF OPERATIONS

A detailed review of the operations of the consolidated entity during the financial year, the results of those operations and the financial position of the consolidated entity as at the end of the financial year is contained in the reports by the Chairman, Chief Executive Officer and Chief Financial Officer in the Annual Report. Further details regarding the operations, results and business strategies of the consolidated entity appear in the Annual Report.

In summary, the consolidated net profit of $434 million after tax for the year ended 31 December 2009 is $1.2 billion or 74% lower than the net profit for 2008, which included a $1.2 billion profit from the sale of a 40% interest in the GLNG project to PETRONAS.

The 2009 result includes profits of $180 million after tax from asset sales. The sale of 60% of the Petrel, Tern and Frigate fields to GDF SUEZ announced in August 2009 contributed $139 million of this amount.

Underlying net profit after tax in 2009 of $257 million was 53% lower than the prior year. Sales revenue of $2,181 million was down $581 million or 21% from 2008, mainly due to lower international crude oil, condensate and LPG prices, which had a significant impact on the underlying 2009 result.

Directors’ Statutory Report (continued)

F-105



Total revenue for the Eastern Australia segment was $1,082 million, an 18% decrease from the 2008 result of $1,319 million. The Western Australia and Northern Territory segment recorded a total revenue decline of 23% from 2008 to $864 million. The Asia-Pacific segment recorded a total revenue decline of 31% from 2008 to $167 million and the Gladstone LNG segment recorded a 25% growth in total revenue to $141 million from 2008.

Total production of 54.4 million barrels of oil equivalent (mmboe) remained the same as 2008 production. Natural field decline, asset sales and unscheduled downtime were offset by increased production contributions from the John Brookes, Maleo, Sampang and Fairview fields.

NET PROFIT

The 2009 net profit of $434 million is $1,216 million lower than in 2008 and includes the net profit/(loss) items before tax of $197 million (after tax $177 million), referred to below.

Underlying Profit Table1

The following amounts are included in the calculation of underlying profit for the year ending 31 December:

2009 $million 2008 $million

GrossTax

effect Net GrossTax

effect Net

Underlying profit 257 548

Net gains/(losses) on sales and impairment losses 211 (48) 163 1,481 (433) 1,048

Foreign currency gains/(losses) (28) 7 (21) 24 (6) 182

Fair value adjustments on embedded derivatives and hedges 10 (4) 6 (5) 2 (3)2

Remediation costs and contract losses, net of related insurance recoveries 4 (2) 2 4 7 11

Investment allowances, capital losses and other tax adjustments - 27 27 - 28 28

197 (20) 177 1,504 (402) 1,102

Net profit after tax (NPAT) 434 1,650

1 This table has been prepared in accordance with the AICD/Finsia principles for reporting underlying profit.

2 Adjustment to prior year to ensure comparability with current year.

SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS

The Directors consider that matters or circumstances that have significantly affected, or may significantly affect, the operations, results of operations or the state of affairs of the Company in subsequent financial years are:

• the approval of the Papua New Guinea liquefied natural gas (PNG LNG) project in December 2009, marking the next step in the delivery of Santos’ transformational LNG growth strategy. Santos has a 13.5% interest in the 6.6 million tonne per annum (mtpa) PNG LNG project. First LNG is expected in 2014;

• the Gladstone LNG (GLNG®) project signed a binding Heads of Agreement in July 2009 to sell 2 mtpa of LNG to PETRONAS with an option for an additional 1 mtpa;

• the acquisition in July 2009 of significant additional acreage in the Gunnedah Basin in northern New South Wales and an investment in leading local coal seam gas company Eastern Star Gas Limited; and

• Santos announced a strategic partnership with GDF SUEZ, one of the world’s leading LNG companies, to develop a floating LNG project in the Bonaparte Basin offshore northern Australia. Santos sold a 60% interest in the Petrel, Tern and Frigate gas fields to GDF SUEZ for US$200 million. GDF SUEZ will lead the development of a 2 mtpa floating LNG project. GDF SUEZ will carry Santos’ share of pre-front end engineering design (FEED) and FEED costs and make an additional payment of US$170 million upon a final investment decision of the project.

F-106



DIVIDENDS

On 18 February 2010, the Directors resolved to pay a fully franked final dividend of 20 cents per fully paid ordinary share on 31 March 2010 to shareholders registered in the books of the Company at the close of business on 2 March 2010. This final dividend amounts to approximately $166 million.

A fully franked final dividend of $117 million (20 cents per fully paid ordinary share) was paid on 31 March 2009 on the 2008 results. Indication of this dividend payment was disclosed in the 2008 Annual Report. In addition, a fully franked interim dividend of $182 million (22 cents per fully paid ordinary share) was paid to members on 30 September 2009.

In accordance with the Terms of Issue, a fully franked final dividend of $2.9989 per Franked Unsecured Equity Listed Security amounting to approximately $18 million was paid on 31 March 2009. Indication of this dividend payment was disclosed in the 2008 Annual Report. A fully franked interim dividend of $1.6191 per Franked Unsecured Equity Listed Securities amounting to approximately $10 million was paid on 30 September 2009.

ENVIRONMENTAL REGULATION

The consolidated entity’s Australian operations are subject to various environmental regulations under Commonwealth, State and Territory legislation. Applicable legislation and requisite environmental licences are specified in the entity’s EHS Compliance Database, which forms part of the consolidated entity’s overall Environmental Management System. Compliance performance is monitored on a regular basis and in various forms, including environmental audits conducted by regulatory authorities and by the Company, either through internal or external resources.

During the financial year, the consolidated entity did not receive any fines and was not subject to prosecution or other enforcement action in respect of applicable environmental regulations or environmental protection legislation, except as set out below:

• on 15 January 2009, the Queensland Environmental Protection Agency issued an Infringement Notice under the Environmental Protection Act 1994 (Qld) and imposed a $2,000 penalty for unauthorised vegetation clearance on the proposed GLNG plant site on Curtis Island. The Company had earlier reported the vegetation clearance (which was carried out by its geotechnical contractors) to the Agency as a potential non-compliance matter. No criminal conviction was recorded against the Company and appropriate corrective measures have been taken to preclude a re-occurrence; and

• hydrocarbons were identified in the groundwater at Port Bonython during routine quality testing undertaken in April 2009. An extensive and thorough source identification program has been undertaken, and recovery and remediation plans have been finalised following endorsement by an independent third party auditor. Communications with the regulator, the South Australian Environment Protection Authority, have been ongoing and actions have been incorporated into site environmental licence conditions. In September 2009, the Authority notified the Company of its intention to conduct a formal investigation to determine what, if any, breaches of the Environment Protection Act 1993 (SA) may have occurred and what enforcement action should be taken if a breach is determined.

EVENTS SUBSEQUENT TO BALANCE DATE

Except as mentioned below, in the opinion of the Directors there has not arisen in the interval between the end of the financial year and the date of this report any matter or circumstance that has significantly affected or may significantly affect the operations of the consolidated entity, the results of those operations or the state of affairs of the consolidated entity in future financial years.

Dividends declared after 31 December 2009 are set out above and in Note 22 to the financial statements.

LIKELY DEVELOPMENTS

Certain likely developments in the operations of the consolidated entity and the expected results of those operations in future financial years are referred to in the reports in the Annual Report by the Chairman, Chief Executive Officer and Chief Financial Officer.

Further information about likely developments in the operations of the consolidated entity and the expected results of those operations in future financial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the consolidated entity. Further details regarding likely developments appear in the individual reports providing more detailed discussion of business activities and outlook in the Annual Report.


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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 financial year) are set out in the Remuneration Report commencing on page 52 of this report.

INDEMNIFICATION

Rule 61 of the Company’s Constitution provides that the Company indemnifies, on a full indemnity basis and to the full extent permitted by law, officers of the Company for all losses or liabilities incurred by the person as an officer of the Company, a related body corporate or trustee of a company-sponsored superannuation fund. Rule 61 does not indemnify an officer for any liability involving a lack of good faith.

Rule 61 also permits the Company to purchase and maintain a Directors’ and Officers’ insurance policy. No indemnity has been granted to an auditor of the Company in their capacity as auditor of the Company.

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 who held office during the year and certain senior executives of the consolidated entity. The indemnities operate to the full extent permitted by 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 or since the financial year under the Deeds of Indemnity.

During the year, the Company paid premiums in respect of Directors’ and Officers’ Liability and Legal Expenses insurance contracts for the year ending 31 December 2009 and since the end of the year the Company has paid, or agreed to pay, premiums in respect of such contracts for the year ending 31 December 2010. The insurance contracts insure against certain liability (subject to exclusions) persons who are or have been directors or officers of the Company and its controlled entities. A condition of the contracts is that the nature of the liability indemnified and the premium payable not be disclosed.

NON-AUDIT SERVICES

During the year the Company’s auditor, Ernst & Young, was paid the following amounts in relation to non-audit services it provided:

Taxation services $73,000Assurance services $533,000Other services $4,000

The Directors are satisfied, based on the advice of the Audit Committee, that the provision of the non-audit services detailed above 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 committee to ensure they do not impact the impartiality and objectivity of the auditor.

A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 (Cth) is set out on page 149 of the Annual Report.

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SHARES UNDER OPTION AND UNVESTED SARS

Options

Unissued ordinary shares of Santos Limited under option at the date of this report are as follows:

Date options granted Expiry date Issue price of shares1 Number under option

23 May 2005 22 May 2015 $8.46 8,350

23 May 2005 22 May 2015 $8.46 77,100

24 October 2006 24 October 2016 $10.48 435,800

4 May 2006 3 May 2016 $11.36 2,500,000

1 July 2007 30 June 2017 $14.14 225,968

1 July 2007 30 June 2017 $14.14 59,800

3 September 2007 2 September 2017 $12.81 100,000

3 May 2008 2 May 2018 $15.39 641,791

3 May 2008 2 May 2018 $15.39 281,573

28 July 2008 27 July 2018 $17.36 94,193

28 July 2008 27 July 2018 $17.36 131,976

28 July 2008 27 July 2018 $17.36 131,976

2 March 2009 2 March 2019 $14.81 207,988

2 March 2009 2 March 2019 $14.81 67,896

4,964,411

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.

SARs

Unissued ordinary shares of Santos Limited under unvested SARs at the date of this report are as follows:

Date SARs granted Number of shares under unvested SARs

6 August 2007 331,500

18 December 2007 50,000

6 August 2007 319,700

23 June 2008 131,119

4 August 2008 35,973

4 August 2008 50,403

4 August 2008 50,403

23 June 2008 71,625

2 March 2009 399,516

2 March 2009 170,621

2 March 2009 114,377

1,725,237


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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 the vesting of the SAR.

Further details regarding the SARs (including when they will lapse) are contained in the Remuneration Report commencing on page 52 of this report.

SHARES ISSUED ON THE EXERCISE OF OPTIONS AND ON THE VESTING OF SARS

Options

The following ordinary shares of Santos Limited were issued during the year ended 31 December 2009 on the exercise of options granted under the Santos Executive Share Option Plan. No further shares have been issued since then on the exercise of options granted under the Santos Executive Share Option Plan. No amounts are unpaid on any of the shares.

Date options granted Issue price of shares Number of shares issued

15 June 2004 $6.95 50,000

23 May 2005 $8.46 14,500

23 May 2005 $8.46 82,350

24 October 2006 $10.48 280,200

427,050

SARS

The following ordinary shares of Santos Limited were issued during the year ended 31 December 2009 on the vesting of SARs granted under the Santos Employee Share Purchase Plan. No further shares have been issued since then on the vesting of SARs granted under the Santos Employee Share Purchase Plan. No amount is payable on the vesting of SARs and accordingly no amounts are unpaid on any of the shares.

Date SARs granted Number of shares issued

8 December 2006 249,000

6 August 2007 20,414

6 August 2007 17,787

23 June 2008 9,917

23 June 2008 4,178

2 March 2009 579

2 March 2009 1,210

303,085

ROUNDING

Australian Securities and Investments Commission Class Order 98/100, dated 10 July 1998, applies to the Company and, accordingly, amounts have been rounded off in accordance with that Class Order, unless otherwise indicated.

This report is made on 18 February 2010 in accordance with a resolution of the Directors.

Director Director 2010 2010

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This Remuneration in Brief is an addition to Santos Limited’s (Santos or the Company) reporting framework, which describes Santos’ remuneration in a clear and transparent manner. The Remuneration in Brief outlines the key remuneration decisions made by the Company in 2009, and discloses the actual amount of remuneration paid to the Company’s senior executives.

It should be read in conjunction with the Remuneration Report on pages 52 to 69, which provides disclosure of the remuneration framework of the Company in accordance with statutory obligations and accounting standards.

KEY REMUNERATION DRIVERS AND ACTIONS IN 2009

Exercising restraint

The Company’s remuneration practices in 2009 were commensurate with the business conditions resulting from the economic downturn. Accordingly:

• there was no increase to the Managing Director and Chief Executive Officer’s (CEO) remuneration, which was set on 28 July 2008;

• except for adjustments due to changes in roles and responsibilities and other exceptional reasons, pay was frozen in 2009 at April 2008 levels for Senior Executives and Australian non-award employees;

• there was no increase to non-executive Directors’ fees, which were last adjusted on 1 July 2008;

• allowances paid to field-based employees, normally adjusted annually by the inflation rate, were frozen.

These measures resulted in cash savings in excess of $10 million, and were among the most decisive among employers in the Australian exploration and production industry.

Rewarding strong performance

While exercising restraint in respect of pay increases, the Board upheld the principle of rewarding performance and the delivery of shareholder value.

First, strong achievement against short-term objectives set for the Company in 2009 was recognised through the payment of a short-term incentive at 80% of maximum. Determination of the payout percentage was based on a focused set of performance measures and delivery of strategic milestones, including the Company’s profitability in 2009.

Secondly, there was full vesting of the long-term incentive grant covering the 2007–2009 period, during which Santos’ Total Shareholder Return of 69.6%, or 19.3% per annum compound, was in the top 12% of the comparator group of Australian and international exploration and production companies.

The external environment

In setting and reviewing its remuneration arrangements, Santos has regard to the external environment, including market practice and prevailing regulatory and governance standards.

During 2009, Santos participated in various general and industry-specific remuneration surveys, as well as a review of the performance of its outsourced superannuation arrangements.

In addition, the Company actively monitored the tax, regulatory and governance activities which impacted remuneration in 2009, in particular the Productivity Commission’s inquiry into Executive Remuneration. In reviewing its approach to remuneration, Santos’ aim was to maintain a responsible and measured approach to remuneration, while ensuring that the Company continued to be able to secure the skills it needs for project delivery in an exploration and production labour market that, after a brief hiatus in 2009, has rebounded to pre-downturn buoyancy.

Remuneration in Brief

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Remuneration outcomes for the CEO and Senior Executives

The remuneration values for the CEO and Senior Executives, contained on pages 57 and 63 of the Remuneration Report, are calculated in accordance with statutory obligations and accounting standards, and are theoretical.

To make the information more meaningful to shareholders, the following table discloses the actual “dollar value” of remuneration received by the Company’s CEO and Senior Executives during 2009 in a clear and concise way (including prior year awards where the executive “realised” value from these awards in 2009).

Fixed remuneration1 STI2 LTI3 Other4 Total

DJW Knox Managing Director and Chief Executive Officer

$1,750,000 $1,400,000 $0 $500,0005 $3,650,000

JH Anderson Vice President Western Australia and Northern Territory

$540,000 $223,800 $0 $22,435 $786,235

JL Baulderstone Vice President Corporate Development and Legal, Company Secretary and General Counsel

$546,063 $254,000 $0 - $800,063

MEJ Eames Vice President Asia Pacific

$621,860 $258,000 $266,660 - $1,146,520

MS Macfarlane Vice President Eastern Australia

$532,460 $199,600 $0 - $732,060

PC Wasow Chief Financial Officer and Executive Vice President

$1,000,000 $562,300 $308,200 - $1,870,500

RJ Wilkinson President GLNG and Queensland

$559,801 $232,000 $217,080 $16,800 $1,025,681

1 Comprising base salary and superannuation.

2 This figure represents the amount of the short-term incentive or bonus paid to the executive for 2009 performance. For further details of the Company’s short-term incentive program, please see pages 55 and 59 of the Remuneration Report.

3 This figure represents the value of vested Share Acquisition Rights (SARs), which vested in 2009 based on the closing share price of $13.40 on the date of vesting (23 January 2009) and options that were exercised (if any) in 2009 based on the difference between the exercise price and the closing share price on the date of exercise. No options were exercised by the Senior Executives in 2009. Although shares allocated under Share Acquisition Rights are subject to a further restriction on dealing of up to 10 years after the grant date and can be forfeited for misconduct, their full value is included here. For further details of the Company’s LTI program, please see pages 56 to 57 and 59 to 62 of the Remuneration Report.

4 Comprised of ad hoc payments treated as remuneration such as relocation allowance.

5 Mr Knox received a once-only retention bonus for continued employment between 25 March 2008, the date of his appointment as Acting Chief Executive Officer, and 25 March 2009.

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Remuneration Report

The Directors of Santos Limited (Santos or the Company) present this Remuneration Report for the Company and its controlled entities for the year ended 31 December 2009. The information provided in the Remuneration Report has been audited as required by section 308(3C) of the Corporations Act 2001 (Cth). The Remuneration Report forms part of the Directors’ Statutory Report.

The Remuneration Report sets out remuneration information pertaining to the Company’s Directors and Senior Executives, who are the key management personnel of the consolidated entity for the purposes of the Corporations Act and the Accounting Standards. They include the five highest remunerated executives of the Company and Group for the 2009 financial year, and are listed in Table 1 below.

Table 1: Directors and Senior Executives

Executive Non-Executive

Name Position Name Position

DJW Knox Managing Director and Chief Executive Officer PR Coates Deputy Chairman (Chairman from 9 December 2009)

JH Anderson Vice President Western Australia and Northern Territory

KC Borda Director

JL Baulderstone Vice President Corporate Development and Legal, Company Secretary and General Counsel

KA Dean Director

MEJ Eames Vice President Asia-Pacific RA Franklin Director

MS Macfarlane Vice President Eastern Australia RM Harding Director

PC Wasow Chief Financial Officer and Executive Vice President

GJW Martin Director1

RJ Wilkinson President GLNG and Queensland Former

S Gerlach Chairman (until 8 December 2009)2

J Sloan Director3

1 Appointed 29 October 2009.

2 Retired 31 December 2009.

3 Retired 6 May 2009.

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Senior Executive RemunerationREMUNERATION POLICY

The diagram below shows the key objectives of Santos’ remuneration policy for Senior Executives and how these are implemented through the Company’s remuneration framework.

ATTRACTING AND RETAINING TALENTED, QUALIFIED EXECUTIVES

ENCOURAGING EXECUTIVES TO STRIVE FOR SUPERIOR PERFORMANCE

ALIGNING EXECUTIVE AND SHAREHOLDER INTERESTS

• Remuneration levels are market-aligned against similar roles in comparable companies.

• Individual performance targets determine 30% of the short-term incentive award for Senior Executives.

• The deferred component of the long-term incentive plan promotes retention and rewards loyalty.

• A significant component of remuneration is “at risk” under short-term and long-term incentive plans. Value to the executive is dependent on meeting challenging targets.

• Consistently high-performing executives are also rewarded through higher base remuneration.

• The long-term incentive component of remuneration is delivered through equity instruments linked to Santos ordinary shares.

• Vesting of performance-based long-term incentive awards is contingent on delivery of superior shareholder returns.

• Executives cannot hedge equity instruments that are unvested or subject to restrictions.

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LINKING REMUNERATION STRUCTURES TO CORPORATE OBJECTIVES

Santos’ executive remuneration structures support the Company’s vision to be a leading energy company for Australia and Asia. The diagram below highlights the links between the Company’s remuneration systems and its corporate objectives.

Santos Corporate objective DELIVERING THE

BASE BUSINESSTAPPING OUR RESOURCE RICHES

BEING A GREAT, SAFE PLACE TO WORK

DELIVERING SUPERIOR RETURNS TO SHAREHOLDERS

Link to remuneration structures

Senior Executives with oversight of the existing base businesses are rewarded for delivering sustained performance and growth in core operations.

Performance measures for Senior Executives in strategic roles and growth businesses are linked to delivery of growth targets.

Remuneration frameworks reward collaboration and reinforce safety as a priority for employees at all levels.

A significant proportion of remuneration for the CEO and Senior Executives is “at risk” based on delivery of superior shareholder returns.

Examples of measures used to reinforce link

• Individual performance measures for relevant executives are linked to delivery of strategic milestones and performance targets.

• Financial key performance indicators for Senior Executives under the short-term incentive plan include safety and environmental performance production, profit, cash flow, capital invested, reserve growth and reserve replacement cost.

• Key Performance Indicators for the CEO’s 2009 short- term incentive included:

– Santos’ strategic positioning in Australia and Asia; and

– furtherance of Santos’ LNG projects.

• Senior Executives with responsibility for the growth LNG businesses (PNG LNG and GLNG) have strategic performance targets linked to delivery of key project milestones.

• Short-term incentive measures for Senior Executives are weighted towards overall company performance to encourage collaboration.

• Safety and environmental performance is a key performance indicator that impacts on the short-term incentive award for the CEO and Senior Executives.

• Remuneration targets are fair, challenging, clearly understood and within the control of employees.

• The long-term incentive plan links a significant component of pay for the CEO and other Senior Executives to delivery of superior returns.

• Long-term incentive grants lapse (and participants receive no value) if Santos’ total shareholder return does not meet at least the median for ASX 100 companies.

• Full vesting of performance awards under the long-term incentive plan only occurs where Santos outperforms all other ASX 100 companies in its total shareholder return performance.

Remuneration Report (continued)

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CEO REMUNERATION ARRANGEMENTS


Total remuneration for the Managing Director and Chief Executive Officer (CEO), Mr DJW Knox, is made up of the following components:

• Base remuneration – comprising salary and superannuation;

• Short-term Incentive (STI) – an annual bonus linked to Company performance and achievement of strategic objectives; and

• Long-term Incentive (LTI) – equity grants tied to vesting conditions dependent on Santos’ achievement of superior performance relative to the ASX 100.

The Board received external advice on Mr Knox’s remuneration package, which is benchmarked against the remuneration paid to CEOs of comparable companies in the industry. In line with the Company’s general pay freeze, Mr Knox’s remuneration did not change in 2009 and, in fact, has not changed since his appointment in 2008.

The relative weightings of the three components comprising the CEO’s total remuneration are set out in Table 2 below.

Table 2: Relative weightings of remuneration components1



STI LTI

CEO 37% 26% 37%

1 These figures do not reflect the relative value derived by the CEO from each of the components, which is dependent on actual performance against targets for the “at risk” components. This is discussed in the STI and LTI sections below.

Base remuneration

Mr Knox is paid Total Fixed Remuneration (TFR), which includes the Company’s contributions into his accumulation superannuation fund of at least the minimum statutory amount. He may, if he wishes, salary sacrifice part of his TFR for additional superannuation contributions.

Mr Knox’s TFR for 2009 (as set out in Table 4 below) was $1,750,000.


Mr Knox has a maximum annual STI opportunity of 100% of TFR, subject to delivery of strategic milestones and performance targets set by the Board.

Mr Knox’s performance measures comprise a combination of strategic, financial and operational targets, all of which are directly related to strategic objectives agreed with the Board. The Board believes that this method of setting performance targets focuses the CEO’s attention on achieving the key conditions and milestones necessary to deliver Santos’ strategic plan.

At the end of each financial year, the Remuneration Committee assesses performance against the objectives set by the Board, and makes recommendations to the Board regarding Mr Knox’s performance and the appropriate level of STI award. The Board believes this method of assessment provides a balanced assessment of the CEO’s overall performance.

As outlined above, for the 2009 performance period, Mr Knox’s STI targets were based on agreed objectives linked to Company performance targets and delivery of its strategic growth initiatives. Consistent with his role as CEO, these performance measures for 2009 included the Company’s strategic positioning in Australia and Asia, delivery of financial and operational performance targets, in particular, from the base business, achievement of specific milestones in the GLNG and PNG LNG projects in furtherance of the Company’s vision to achieve transformational growth through its LNG portfolio and achievement of safety and environmental performance milestones.

Based on performance against these targets during the year, Mr Knox was awarded an STI payment of $1,400,000 or 80% of the maximum STI payable. The difference between actual STI paid and maximum STI will not be carried forward.

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Long-term Incentive

No new LTI grant was made to the CEO in 2009 as the grants made to Mr Knox in 2008 constitute his LTI entitlement for the 2008, 2009 and 2010 years.

The 2008 grants comprised:

• a performance-based equity award made to Mr Knox in his capacity as Executive Vice President, Growth Projects (Performance Award);

• a service-based equity award made to Mr Knox in his capacity as Executive Vice President, Growth Projects (Deferred Award); and

• a further performance-based equity award made to Mr Knox upon his appointment as CEO to supplement the grants already made to him in his Senior Executive capacity (CEO Performance Award).

Mr Knox elected to receive his equity awards as a combination of options and share acquisition rights (SARs).

The key terms of Mr Knox’s awards are as follows:

• The LTI grants made in 2008 were structured to provide Mr Knox with an annual LTI opportunity of 100% of TFR (based on the 2008 level of $1.75 million) for each of the 2008, 2009 and 2010 years, subject to achieving applicable vesting conditions.

• Mr Knox was able to elect to receive his LTI grant as either SARs, market value options or a combination of the two. He chose to take a combination of the two.

• All of the performance-based LTIs are subject to hurdles based on the Company’s Total Shareholder Return (TSR) relative to the ASX 100 over a three-year performance period. There is no retesting of performance conditions.

• The CEO Performance Award is divided into three tranches:

– Tranche 1 Tested over the period from 1 January 2008 to 31 December 2010;

– Tranche 2 Tested over the period from 1 January 2009 to 31 December 2011; and

– Tranche 3 Tested over the period from 1 January 2010 to 31 December 2012.

• Each tranche of the CEO Performance Award vests in accordance with the following vesting schedule:




51st to 75th percentile 39%-75%

76th to 100th percentile 76%-100%

• None of the grants have vested as none of their performance periods have been completed.

• Upon vesting of SARs, ordinary shares in Santos will automatically be allocated to Mr Knox. These shares will be subject to restrictions until the earlier of ten years from the grant date, cessation of employment, or if the Board approves, at Mr Knox’s request, the removal of the restrictions.

• Options may be exercised at any time between the vesting date and the expiry date (27 July 2018), subject to payment of the exercise price of $17.36 per option (being the volume weighted average price in the week up to and including the grant date).

• Full details of the equity grants made to Mr Knox in 2008 are contained in the 2008 Remuneration Report.


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Table 3 contains details of the number and value of SARs and options granted to Mr Knox in 2008.

Table 3: SARs and options granted to Mr Knox in 20081

Grant name Number of SARs granted Number of options granted Maximum value of grant2

CEO Performance Award Tranche 1 35,973 Tranche 1 94,193 Tranche 1 $1,040,640



2008 Awards prior to CEO Appointment

Performance Award - 64,992 $341,208

Deferred Award - 21,837 $159,410

1 These grants constitute Mr Knox’s full LTI awards for the 2008, 2009 and 2010 financial years. As the SARs and options only vest on satisfaction of service and/or performance conditions to be tested in future financial years, none of the SARs or options detailed above were forfeited during the year.

2 Maximum value represents the fair value of the LTI awards as at their grant date (being 3 May 2008 for the Performance Award and Deferred Award and 28 July 2008 for the CEO Performance Award). The fair value per instrument at the grant date was:

CEO Performance Award Tranche 1: SARs – $13.82 Options – $5.77 Tranche 2: SARs – $8.60 Options – $4.22 Tranche 3: SARs – $8.41 Options – $4.29

Performance Award Options – $5.25

Deferred Award Options – $7.30

Monte Carlo simulation was used to determine the value of the SARs and options granted. Details of the assumptions underlying the valuation are set out in Note 31 to the financial statements. The minimum total value of the grant, if the applicable vesting conditions are not met, is nil in all cases.

2009 Remuneration details for Mr DJW Knox

Table 4: 2008 and 2009 remuneration details for Mr DJW Knox

Year Short-term employee benefitsPost-

employmentShare-based payments1,2 Termination

Other long-term benefits3 Total % at risk

Base salary $

STI $

Other $

Super-annuation

$ $ $ $ $

2009 1,735,897 1,400,0004 500,0005 14,103 1,486,8736 - 29,891 5,166,7647 56%

2008 1,200,115 1,100,000 - 54,745 800,206 - 19,826 3,174,892 60%

1 In accordance with the requirements of the Accounting Standards, remuneration includes a proportion of the theoretical value of equity linked compensation determined as at the grant date and progressively expensed over the vesting period. The amount allocated as remuneration is not related to or indicative of the actual benefit (if any) that Mr Knox may ultimately realise should the equity instruments vest. The theoretical value of equity linked compensation was determined in accordance with AASB 2 Share-based payment applying the Monte Carlo simulation method. Details of the assumptions underlying the valuation are set out in Note 31 to the financial statements.

2 Of the total remuneration for Mr Knox for the year, 23% consisted of SARs and options.

3 “Other long-term benefits” represent the movement in the CEO’s long service leave entitlements measured as the present value of the estimated future cash outflows to be made in respect of the CEO’s service between the respective reporting dates.

4 This amount represents the STI award made for the 2009 year, which will be paid in March 2010.

5 Mr Knox received a once-only retention bonus for continued employment between 25 March 2008, the date of his appointment as Acting Chief Executive Officer, to 25 March 2009.

6 “Share-based payments” in 2009 consists of the following equity linked theoretical compensation and, as a consequence of the rights issue in May 2009, now includes a cash-settled component. This matter is discussed further on page 61.

SARs Options Cash-settled

$553,452 $634,898 $298,523

7 The difference between Mr Knox’s total remuneration for 2009 and 2008 is principally a consequence of his appointment as CEO in July 2008, which resulted in (1) an increase in his base salary since that time and (2) the granting of additional SARs and options as part of his CEO remuneration package.

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Service Agreement

The Company entered into a service agreement with the CEO on 28 July 2008, which is ongoing until termination by the CEO or the Company.

The service agreement provides that the Company may terminate the CEO’s employment on giving 12 months notice. Where the Company exercises this general right to terminate, it must make a payment to the CEO equivalent to his TFR for the full notice period. Pro-rata STI entitlements, subject to performance, will apply to the date of termination and the Board retains discretion to vest any outstanding LTI, having regard to performance and reasons for termination.

The Company may terminate the CEO’s employment at any time for cause. No payment in lieu of notice, nor any payment in respect of STI or LTI will be made in this circumstance.

Mr Knox may initiate termination of his service agreement by giving the Company six months’ notice, in which case he will be entitled to payment of TFR in respect of the notice period and pro-rata STI to the date of termination, subject to performance. The Board retains discretion to vest any outstanding LTI, having regard to performance and reasons for termination. Mr Knox may also initiate termination of his service agreement immediately if there is a fundamental change in his role or responsibilities without his consent. In this circumstance the service agreement provides for payment of 12 months’ TFR, full STI for the year in which employment is terminated and a pro rata portion of the following year’s STI, subject to current year performance. Pro-rata vesting of outstanding LTI will apply, based on the expired portion of the performance period and performance achieved to the termination date.

SENIOR EXECUTIVE REMUNERATION ARRANGEMENTS


Total remuneration for Senior Executives is made up of the following components:

• Base remuneration – comprising salary and superannuation;

• Short-term incentives (STI) – annual bonuses tied to individual and Company performance; and

• Long-term incentives (LTI) – equity grants tied to vesting conditions tested over a three-year period.

Santos’ executive remuneration structure is consistent with the Company’s “reward performance” policy.

The relative weightings of the three components comprising the Senior Executives’ total remuneration are provided in Table 5 below.

Table 5: Relative weightings of remuneration components1



TFR STI LTI

Chief Financial Officer and Executive Vice President 52% 27% 21%

Other Senior Executives 57% 20% 23%

1 These figures do not reflect the actual value derived by Senior Executives from each of the components, which is dependent on actual performance against targets for the “at risk” components. This is discussed in the STI and LTI sections below.


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Base remuneration

Salary and superannuation Senior Executives are paid TFR, out of which the Company makes contributions into their superannuation funds of at least the minimum statutory amount. They may, if they wish, salary sacrifice part of their TFR for additional superannuation contributions or other benefits such as novated car leases.

Benefits Senior Executives do not receive any benefits in addition to TFR.

Market alignment Executive remuneration levels are market-aligned by comparison to similar roles in ASX 100 energy, materials and utilities companies, excluding BHP Billiton and Rio Tinto due to their disproportionately larger size and market capitalisation. This broad industry group is used, as there are too few Australian exploration and production companies of similar size to Santos for benchmarking purposes.


Frequency STI is assessed and paid annually.

Maximum STI 75% of TFR for Chief Financial Officer and Executive Vice President.

50% of TFR for other Senior Executives.

Performance measures To promote collaboration among Senior Executives and to focus their efforts towards the overall benefit of the Company, 70% of their STI is based on Company performance. The remaining 30% is based on the executive’s individual performance.

A range of Company performance measures is used in order to drive balanced business performance. These measures include lagging indicators to assess the Company’s past performance, as well as forward-looking indicators to ensure the Company is positioning itself effectively for future growth. The areas covered by the measures include reserve growth, reserve replacement cost, production, margin, new growth options, shareholder value creation, people, environment, health and safety, and continuous improvement. Individual performance is assessed against targets set within each executive’s own area of responsibility.

Assessment of performance

Individual performance is assessed by the CEO.

Company performance is assessed by the Remuneration Committee.

Each metric is assessed against target and assigned a score on a five-point scale. The average of these scores forms the basis of the overall Company performance score.

The Board believes the above methods of assessment are rigorous and transparent, and provide a balanced assessment of the executive’s performance.

Payment method Cash.

STI awarded in 2009 Company performance against the measures in 2009 resulted in an average STI of 80% of maximum payable to all eligible employees.

2009 STI awards made to individual Senior Executives ranged from 75% to 92% of maximum. The difference between actual STI paid and maximum STI will not be carried forward.

Long-term Incentives

During the year, the Company made equity grants to its Senior Executives as the LTI component of their remuneration for 2009. The grants comprised:

• a performance-based component, equal to 75% of the total grant value (Performance Award); and

• a service-based component, equal to 25% of the total grant value (Deferred Award).

All LTI grants were delivered, at the executive’s election, in the form of either:

• SARs – a conditional entitlement to a fully paid ordinary share at zero price, subject to satisfaction of vesting conditions; or

• Options – an entitlement to acquire a fully paid ordinary share at a predetermined price, subject to satisfaction of vesting conditions.

Grant sizes were market-aligned.

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Vesting details of the Performance and the Deferred Awards are summarised in Table 6 below. In addition, Table 6 contains details of the number and value of SARs and options granted to Senior Executives in 2009 under the Performance and the Deferred Awards.

Table 6: Performance Award and Deferred Award vesting details


Vesting period 1 January 2009 to 31 December 2011. 2 March 2009 to 1 March 2012.

Vesting condition Vesting of this grant is based on relative TSR against ASX 100 companies as at 1 January 2009.

The Board believes the chosen performance hurdle effectively aligns the interests of the individual executives with that of the Company’s shareholders, as TSR is a fair measure of shareholder returns and the ASX 100 represents the companies in which most of the Company’s shareholders could invest as an alternative to Santos.

Vesting of the Deferred Award is based on continuous service to 1 March 2012, or three years from the grant date.

Vesting schedule Vesting commences when Santos’ TSR performance equals the median for ASX 100 companies, with one-third of the total grant vesting at this level of performance.

A further 1.33% of the grant vests for each percentile improvement in Santos’ TSR ranking, with full vesting only occurring if Santos is the top-performing ASX 100 company based on its TSR growth over the vesting period.

There is no re-testing of the performance condition if it is not satisfied.

0% if the continuous service condition is not met.


Santos TSR percentile ranking % of grant vesting

< 50th percentile = 50th percentile 51st to 99th percentile 100th percentile

0% 33.33% Further 1.33% for each percentile improvement 100%

Exercise price $14.81 for options, being the volume weighted average price in the week up to and including the grant date of 2 March 2009.



Exercise period Options may be exercised at any time between the vesting date and the expiry date.

Upon vesting of SARs, shares will automatically be allocated to the executive. These shares will be subject to restrictions until the earlier of ten years from the grant date, cessation of employment or the date at which the Board approves the removal of the restrictions.


Expiry/lapse SARs and options that do not vest upon testing of the performance condition will lapse.

Vested options will expire if not exercised before 2 March 2019.

SARs and options will lapse if the service condition is not satisfied.

Vested options will expire if not exercised before 2 March 2019.

Cessation/change of control

Upon cessation of employment, SARs which have not already vested and options which are not exercisable will, in general, lapse and be forfeited.

However, if cessation occurs due to death, disability or redundancy, or in special circumstances approved by the Board, then a proportion of the SARs and options may vest and become exercisable.



Hedging Policy Consistent with the objective of creating a meaningful alignment of interests, Directors and Senior Executives are not permitted to hedge their shareholdings or LTIs unless those securities have fully vested and are no longer subject to restrictions. Breaches of this policy will be subject to appropriate sanctions, which could include disciplinary action or termination of employment.



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Table 7: SARs and Options granted to Senior Executives in 20091

Executive Grant name Number of SARs granted Number of options granted Maximum value of grant2

JH Anderson Performance Award 13,359 - 115,823


JL Baulderstone Performance Award 13,450 - 116,612


MEJ Eames Performance Award 15,744 - 136,500


MS Macfarlane Performance Award 13,481 - 116,880


PC Wasow Performance Award 25,320 - 219,524


RJ Wilkinson Performance Award 14,175 - 122,897


1 The grants made to the Senior Executives during the year constitute their full LTI awards for the 2009 financial year. As the SARs and options only vest on satisfaction of service and/or performance conditions to be tested in future financial years, none of the SARs or options detailed above were forfeited during the year.

2 Maximum value represents the fair value of the Performance Award and Deferred Award as at their grant date (being 2 March 2009). The fair value per instrument at the grant date was:

Performance Award SARs – $8.67, Options – $4.54

Deferred Award SARs – $14.45, Options – $6.75

Monte Carlo simulation was used to determine the value of the SARs and options granted. Details of the assumptions underlying the valuation are set out in Note 31 to the financial statements. The minimum total value of the grant, if the applicable vesting conditions are not met, is nil in all cases.

Preserving alignment under the LTI Plan in response to equity issue

During the year the Company raised $2.914 billion through a two-for-five rights issue. Each new share was issued at a price of $12.50, representing a 26.9% discount to the closing price of the shares before the announcement of the rights issue.

Employees who held unvested SARs and options were unable to participate in the rights issue and there was no adjustment to the applicable exercise price or the number of underlying shares to which each SAR or option was entitled. The ASX Listing Rules do allow an adjustment to the exercise price of options to reflect the impact of discounted rights issues but the terms of the grant need to expressly refer to the formula in ASX Listing Rule 6.22.2 and the Listing Rules do not contemplate (nor provide a mechanism for adjusting) SARs.

Accordingly, in order to ensure the rights issue would neither unfairly disadvantage or advantage executives and so as to avoid a misalignment between the incentives of management (through the LTI component of their remuneration) and a capital raising which was considered by the Board to be in the best interests of the Company and shareholders, the Board determined, in respect of existing LTI grants:

• to use TSR data which takes into account the impact of rights issues and other capital management activities on both Santos and comparator group companies when testing the satisfaction of TSR performance hurdles that apply to Santos LTI awards; and

• subject to the SARs and options vesting following satisfaction of applicable hurdles (and, in the case of options, being exercised), to make a future cash remuneration payment to executives equal to the value of the right to participate in the rights issue (calculated at $1.31 for each underlying share in accordance with the formula in ASX Listing Rule 6.22.2). The intention is to “keep whole” the executives in respect of SARs and options that actually vest in due course. No cash payment will be made in respect of SARs that do not vest or options that do not vest or are not exercised.

These future cash remuneration payments apply to LTI participants with grants that were yet to vest at the time of the rights issue, including the CEO and Senior Executives. No changes have been made to the performance hurdles or testing dates.

Despite the intention to “keep whole” the LTI participants, the future cash remuneration payments did not fully compensate for the loss in the value of the unvested SARs and options. The overall value of the future cash remuneration payments for the CEO and Senior Executives is $89,556 less than the loss in value of the SARs and options, both determined in accordance with AASB 2 Share-based payments. The value of these future cash remuneration payments has been expensed in accordance with AASB 2, over the period from 8 May 2009 (the last trading day prior to the announcement of the rights issue; closing price of $17.09) to the end of their performance or vesting periods.

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LTI grants to Senior Executives

The following LTI grants were still in progress or were tested during 2009.

Table 8: LTI grants to Senior Executives

Grant year Grant type Vesting condition(s) Performance/vesting period Status


• Relative TSR performance against Australian and international E&P companies (50% of grant)

• Absolute TSR target of 11% per annum compound (50% of grant)

1 January 2007 to 31 December 2009

Grant tested after the end of the financial year resulting in full vesting of the grant.

Deferred Award

Continuous service DJW Knox1:3 September 2007 to 2 September 2010

Senior Executives: 1 July 2007 to 30 June 2010

In progress.


Relative TSR performance against ASX 100 companies


In progress.

Deferred Award

Continuous service 3 May 2008 to 2 May 2011 In progress.


Relative TSR performance against ASX 100 companies


In progress.

Deferred Award

Continuous service 2 March 2009 to 1 March 2012

In progress.

1 Options and SARs granted to Mr Knox in his capacity as a Senior Executive prior to his appointment as CEO.

Service Agreements – Senior Executives

The Company has entered into service agreements with the Senior Executives. The service agreements are ongoing until termination by the Company upon giving 12 months’ notice or the Senior Executive upon giving six months’ notice. In a Company-initiated termination, the Company may make a payment in lieu of notice equivalent to the TFR the 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 apply.


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Table 9: 2009 Senior Executive remuneration details

Executive Short-term employee benefitsPost-

employment

Share-based payments1,2

(LTI) Termination


Base salary3

$STI5

$Other

$

Super-annuation

$ $ $ $ $

JH Anderson 489,116 223,800 22,4356 50,884 262,336 - 10,111 1,058,682 46%

JL Baulderstone7 512,621 254,000 - 33,441 365,017 - 9,597 1,174,676 53%

MEJ Eames 585,296 268,000 - 36,564 308,127 - 12,577 1,210,564 48%

MS Macfarlane 500,145 199,600 - 32,314 261,079 - 6,698 999,836 46%

PC Wasow8 985,897 562,300 - 14,103 358,269 - 37,801 1,958,370 47%

RJ Wilkinson 488,533 232,000 16,8009 71,267 257,492 - 6,488 1,072,580 46%

1 The percentage of each Senior Executive’s total remuneration for the year that consisted of SARs and options is as follows:

JH Anderson 20% MS Macfarlane 21%JL Baulderstone 21% PC Wasow 15%MEJ Eames 20% RJ Wilkinson 20%

2 “Share-based payments” consist of the following equity linked theoretical compensation and, as a consequence of the rights issue in May 2009, now includes a cash-settled component.

Executive SARs Options Cash-settled

JH Anderson $126,470 $80,240 $55,626JL Baulderstone $122,994 $126,768 $115,255MEJ Eames $147,935 $94,566 $65,626MS Macfarlane $126,705 $79,049 $55,325PC Wasow $296,065 - $62,204RJ Wilkinson $210,646 - $46,846

3 The base salaries for Mr JH Anderson, Mr MS Macfarlane, Mr MEJ Eames and Mr RJ Wilkinson were frozen in 2009 at April 2008 levels. They are higher than the base salary figures in Table 10 “2008 Senior Executive remuneration details” because the base salary figures in the 2008 table include the lower pre-April 2008 amounts.

4 “Other long-term benefits” represent the movement in the Senior Executive’s long service leave entitlements measured as the present value of the estimated future cash outflows to be made in respect of the Senior Executive’s service between the respective reporting dates.

5 This amount represents the STI award made for the 2009 year, which will be paid in March 2010.

6 Mr Anderson received an allowance of $22,435 for relocating from Adelaide to Perth to head up the Western Australian Business Unit subsequent to commencing the role of Vice President Western Australia and Northern Territory.

7 Effective 5 January 2009, Mr Baulderstone’s role was expanded to include responsibility for the Corporate Development and Commercial Excellence functions. Mr Baulderstone’s remuneration increased in 2009 commensurate with the increased responsibilities of his new role.

8 In recognition of his seniority and strategic leadership, Mr Wasow was promoted to the position of Executive Vice President (in addition to his role as Chief Financial Officer) effective 1 July 2008. Mr Wasow’s remuneration increased in 2009 commensurate with the increased responsibilities of his new role.

9 Mr Wilkinson received an Incidentals Allowance of $16,800 for commuting between Adelaide and Brisbane in relation to the GLNG project.

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2008 Senior Executive remuneration details

Table 10: 2008 Senior Executive remuneration details

Executive Short-term employee benefitsPost-

employment

Share-based payments1,2

(LTI) Termination


Base salary $

STI4

$Other

$

Super-annuation

$ $ $ $ $

JH Anderson 468,021 205,000 - 48,689 203,594 - 16,351 941,655 43%

JL Baulderstone 465,734 250,000 - 46,326 231,473 - 5,963 999,496 48%

MEJ Eames 551,505 220,000 - 57,455 241,862 - 20,213 1,091,035 42%

MS Macfarlane 471,282 205,000 - 49,029 202,553 - 17,536 945,400 43%

PC Wasow 830,548 585,000 - 13,289 265,239 - 68,629 1,762,705 48%

RJ Wilkinson 485,676 255,000 5,2825 90,260 201,462 - 18,192 1,055,872 43%

1 The percentage of total remuneration for the year that consisted of SARs and options is as follows:

DJW Knox 25% MEJ Eames 22% PC Wasow 15%JH Anderson 22% MS Macfarlane 21% RJ Wilkinson 19%JL Baulderstone 23%

2 “Share-based payments” consisted of the following equity linked theoretical compensation:

Executive SARs Options Executive SARs Options

JH Anderson $122,742 $80,852 MS Macfarlane $122,742 $79,811JL Baulderstone $111,832 $119,641 PC Wasow $265,239 -MEJ Eames $173,306 $68,556 RJ Wilkinson $201,462 -

3 “Other long-term benefits” represent the movement in the Senior Executive’s long service leave entitlements measured as the present value of the estimated future cash outflows to be made in respect of the Senior Executive’s service between the respective reporting dates.

4 This amount represents the STI award made for the 2008 financial year, paid in March 2009.

5 This amount represents an Incidentals Allowance for Mr Wilkinson for commuting between Adelaide and Brisbane in relation to the GLNG project.

LINK BETWEEN COMPANY PERFORMANCE AND SENIOR EXECUTIVE REMUNERATION OUTCOMES

Table 11 sets out the Group’s performance over the past five years in respect of the key financial and non-financial indicators used to measure year-on-year performance. Table 11 also shows how the size of the STI pool available to Senior Executives has varied over this period based on the level of performance achieved each year across these key indicators.

Table 11: Key indicators of Company performance 2005–2009

Key Indicator 2005 2006 2007 2008 2009

Safety (total recordable case frequency rate) 4.9 6.4 5.3 5.8 3.6

Production (mmboe) 56.0 61.0 59.1 54.4 54.4

Reserve replacement cost – 1P (A$/boe) 13 15 13 13 9

Reserve replacement rate – 1P (%) 218 143 175 160 336

Proven plus probable reserves – 2P 774 819 879 1,013 1,441

Netback (A$/boe) 30 33 33 36 23

Net profit after tax $m 762 643 359 1,650 434

Earnings per share (cents) 124 103 55 273 52

Dividends per ordinary share (cents) 36 40 40 42 42

Size of STI pool (% of maximum) 85 70 80 80 80


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As set out earlier, Company performance in 2009 against the STI measures (detailed on page 59) resulted in an average STI award of 80% of the maximum payable to all eligible employees. Performance against key metrics was on target in 2009, including the achievement of key strategic milestones such as:

• sanction of PNG LNG on schedule in December 2009 in furtherance of the Company’s vision to achieve transformational growth through an LNG portfolio;

• the GDF Suez–Bonaparte LNG partnership, resulting in the commercialisation of substantial contingent resources in the Petrel, Tern and Frigate fields;

• the signing of the binding LNG offtake Heads of Agreement with PETRONAS for 2 mtpa plus a further 1 mtpa at GLNG’s option, underpinning the development of the first GLNG train;

• the successful $3 billion capital raising in May 2009.

The graphs below show the relationship over the past five years between the Company’s TSR and share price growth, being two key indicators of long-term Company performance, and the percentage of LTI grants to Senior Executives that vested. The graphs demonstrate how the level of Senior Executive reward derived from their LTI grants is dependent upon the delivery of sustained above-average returns to shareholders.

The TSR growth shown above incorporates dividends and capital returns the Company made to shareholders during the past five years. Dividends paid by the Company in the past five years are as follows:

(Dividends per ordinary share)

2005 $0.36 2006 $0.40 2007 $0.40 2008 $0.42 2009 $0.42

0

4

8

12

16

20

2005 2006 2007 2008 2009

LTI vesting for 2005-2007performance period = 50%



Santos ASX 100 E&P Santos ASX 100 E&P Santos ASX 100 E&P

-40

-20

0

20

40

60

80

100

120

140

2005 2006 200720082007 2009200820072006

TSR OF SANTOS, ASX100 AND AUSTRALIAN AND INTERNATIONAL EXPLORATION AND PRODUCTION COMPANIES 2005-2009%

SANTOS SHARE PRICE 2005-2009$

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The following capital returns were made in the 2005–2009 period:

• On 30 June 2007, the Company bought back 24,671,275 fully paid ordinary shares, representing 4.10% of fully paid ordinary shares on issue at that date, at a price of $12.16 per share.

• On 6 October 2008, the Company bought back 18,487,305 fully paid ordinary shares, representing 3.07% of fully paid shares on issue at that date, at a price of $16.23 per share.

• On 30 September 2009, the Company redeemed the 6,000,000 Franked Unsecured Equity Listed Securities (FUELS) on issue at the price of $100 each.

As noted above, Santos’ superior TSR performance compared to the Australian and international exploration and production companies over the period from 1 January 2007 to 31 December 2009 resulted in full vesting of the 2007 Performance Award.

The value derived by Senior Executives during 2009 in respect of LTIs granted in previous financial years (i.e. prior year awards which vested and/or were exercised during 2009) is set out in Table 12 below. Table 12 also contains details of prior year LTIs that lapsed or were forfeited during 2009.

Table 12: Senior Executives’ LTI remuneration outcomes in 2009

Vested Exercised Forfeited/Lapsed

Number Value1 Number Value2 Number Value

DJW Knox

SARs Options

- -

- -

- -

- -

- -

- -

JH Anderson

SARs Options

-

63,700

-

224,224

- -

- -

- -

- -

JL Baulderstone

SARs Options

- -

- -

- -

- -

- -

- -

MEJ Eames

SARs Options

19,900

-

288,351

-

- -

- -

- -

- -

MS Macfarlane

SARs Options

-

63,700

-

224,224

- -

- -

- -

- -

PC Wasow

SARs Options

23,000

-

333,270

-

- -

- -

- -

- -

RJ Wilkinson

SARs Options

16,200

-

234,738

-

- -

- -

- -

- -

Total SARs 59,100 856,359 - - - -

Total Options 127,400 448,448 - - - -

1 The value of each SAR on the date of vesting is based on the closing market price of Santos Limited shares on the ASX on the preceding trading day. The value of each option on the date of vesting is based on the difference between the closing market price of Santos Limited shares on the ASX on the preceding trading day and the relevant exercise price.

2 The value of each option exercised during the year is based on the difference between the closing market price of Santos Limited shares on the ASX on the preceding trading day and the relevant exercise price.


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Non-executive Director RemunerationREMUNERATION POLICY

The diagram below shows the key objectives of Santos’ non-executive Director remuneration policy and how these are implemented through the Company’s remuneration framework.

REMUNERATION ARRANGEMENTS

Maximum aggregate amount

Total non-executive Directors’ fees paid in a year, including Board committee fees, cannot exceed $2,100,000. This amount was approved by shareholders at the Annual General Meeting held on 2 May 2008. Directors may also be paid additional fees for special duties or exertions, and are entitled to be reimbursed for all business-related expenses. These payments are not included in the maximum aggregate amount approved by shareholders. No additional fees were paid during the year.

2009 Non-executive Directors’ fees

In line with the Company’s general pay freeze, there was no increase to non-executive Directors’ fees, which were last adjusted on 1 July 2008. Directors’ fee rates are provided in Table 13 below.

Table 13: Non-executive Directors’ fees per annum

Board Committees

Chair1 Deputy Chair1 Member Chair Member

Annual Fees $435,000 $217,500 $145,000 $12,000-$30,000 $5,000-$15,000

1 The Chairman and Deputy Chairman of the Board do not receive any additional fees for serving on or chairing any Board committee.

Superannuation

Superannuation contributions are made on behalf of non-executive Directors in accordance with the requirements of the Company’s statutory superannuation obligations.

SECURING AND RETAINING TALENTED, QUALIFIED DIRECTORS

PROMOTING INDEPENDENCE AND IMPARTIALITY

ALIGNING DIRECTOR AND SHAREHOLDER INTERESTS

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 the Company or individual Director performance from year to year.

• Santos’ market capitalisation is considered in setting the aggregate fee pool and in benchmarking of Board and committee fees.

• Santos encourages its non-executive Directors to build a long-term stake in the Company.

• Traditionally, this has been facilitated through the non-executive Director share plan.

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Retirement benefits

Professor J Sloan and Mr S Gerlach, who were appointed prior to 1 January 2004, were contractually entitled to receive benefits upon their retirement under the agreements entered into at their appointment, the terms of which were approved by shareholders at the 1989 Annual General Meeting. These retirement benefits were frozen with effect from 30 June 2004, at which time their entitlements ceased to accrue. However, to prevent erosion in the real value of the frozen benefits, the Board determined that from 1 July 2007 the benefits would be indexed annually against the five-year Australian Government Bond Rate.

Non-executive Directors appointed after 1 January 2004 are not entitled to receive a benefit upon retirement (other than statutory entitlements).

Both Professor Sloan and Mr Gerlach retired during 2009. Table 14 below shows the increase in Professor Sloan’s and Mr Gerlach’s frozen benefits as a result of indexation in 2009 and the final retirement benefits paid to them upon retirement.

Table 14: Non-executive Director retirement benefits

DirectorBenefit as at

1 January 2009Increase as a result

of indexationFinal benefit as

at retirement

S Gerlach $1,208,547 $62,421 $1,270,9681

J Sloan $370,617 $5,469 $376,0862

1 Mr Gerlach retired on 31 December 2009.

2 Professor Sloan retired on 6 May 2009.

Non-executive Director Share Plan

The Non-executive Director Share Plan (NED Share Plan) was introduced in July 2007, following shareholder approval at the 2007 Annual General Meeting. Participation in the NED Share Plan is voluntary and all present and future non-executive Directors are eligible to participate. Under the NED Share Plan, Directors elect to sacrifice all or part of their pre-tax fees in return for an allocation of shares of equivalent value. The NED Share Plan, therefore, does not involve any additional remuneration for participating Directors.

Shares are allocated quarterly and are either issued as new shares or purchased on the ASX at the prevailing market price. The shares are registered in the name of the participating Director, but are subject to a restriction on dealing. In the absence of exceptional circumstances, the restriction will apply until the Director ceases to hold office or until ten years have elapsed since the allocation of the shares, whichever is earlier.

Following the changes to employee share schemes introduced by the Government in 2009, the Directors were able to elect to withdraw from the NED Share Plan in the second half of 2009.

Details of the shares allocated to Directors under the NED Share Plan during the year are set out in Table 15 below.

Table 15: 2009 NED Share Plan allocations

Director Q1 2009 allocation1 Q2 2009 allocation2 Q3 2009 allocation3 Q4 2009 allocation4 Total

KC Borda 2,284 2,753 2,598 2,824 10,459

PR Coates 1,655 1,907 - - 3,562

KA Dean 665 802 - - 1,467

S Gerlach 949 1,144 - - 2,093

RM Harding 284 343 - - 627

J Sloan5 2,182 - - - 2,182

1 Shares were allocated to the participating Directors on 7 April 2009 at $17.1811 per share.

2 Shares were allocated to the participating Directors on 29 June 2009 at $14.2552 per share.

3 Shares were allocated to the participating Directors on 7 October 2009 at $15.1076 per share.

4 Shares were allocated to the participating Directors on 23 December 2009 at $13.8947 per share.



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Details of remuneration paid to non-executive Directors


Table 16: 2009 Non-executive Director remuneration details

Short-term benefits Retirement benefitsShare-based payments Total

Directors’ fees (incl. committee

fees)1

$

Fees for special duties

or exertions $

Other2

$

Super- annuation

contributions3

$


benefit4

$

NED Share Plan

$ $

S Gerlach5 402,375 - 4,629 14,103 62,421 32,625 516,153

KC Borda 0 - - 13,937 - 157,000 170,937

PR Coates 178,528 - - 14,103 - 55,626 248,257

KA Dean 160,125 - - 14,103 - 22,875 197,103

RA Franklin 158,500 - - 898 - - 159,398

RM Harding 185,963 - - 14,103 - 9,788 209,854

GJW Martin 25,425 - - 2,288 - - 27,713

J Sloan6 14,301 - - 4,662 5,469 37,500 61,932

1 Refer to Table 13 above for details of annual Directors’ fees and Committee fees. Figure shown is after fee sacrifice to NED Share Plan.



4 This shows the increase to retirement benefits during the year. See Table 14 for details of retirement benefits paid out.

5 Retired 31 December 2009.



Table 17: 2008 Non-executive Director remuneration details

Short-term benefits Retirement benefitsShare-based payments Total

Directors’ fees (incl. committee

fees)1

$

Fees for special duties

or exertions $

Other2

$

Super- annuation

contributions3

$


benefit $

NED Share Plan

$ $

S Gerlach 350,625 - 4,796 13,437 39,897 61,875 470,630

KC Borda 0 - - 13,060 - 147,141 160,201

PR Coates 0 - - 10,246 - 124,644 134,890

KA Dean 130,687 - - 13,437 - 43,563 187,687

RA Franklin 150,250 - - 813 - - 151,063

RM Harding 167,287 - - 6,872 - 18,588 192,747

J Sloan 0 - - 13,376 12,235 157,342 182,953

1 Refer to Table 13 above for details of annual Directors’ fees and committee fees. Figure shown is after fee sacrifice to NED Share Plan.



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Consolidated Santos Ltd

2009 2008 2009 2008 Note $million $million $million $million

Product sales 3 2,181 2,762 681 873Cost of sales 4 (1,423) (1,423) (463) (521)

Gross profit 758 1,339 218 352Other revenue 3 70 43 34 64Other income 3 254 1,735 49 1Other expenses 4 (351) (493) (164) (211)Interest income 6 85 63 197 183Finance expenses 6 (98) (154) (133) (286)Share of net losses of an associate 27 (1) – – –

Profit before tax 717 2,533 201 103

Income tax expense 7 (205) (768) (62) (51)Royalty-related taxation (expense)/benefit 7 (78) (115) 3 (32)

Total taxation expense (283) (883) (59) (83)

Net profit for the period 434 1,650 142 20

Net profit attributable to: Owners of Santos Ltd 434 1,650 142 20 Minority interests – – – –

434 1,650 142 20

Earnings per share attributable to the

ordinary equity holders of Santos Ltd (¢)

Basic earnings per share 23 52.1 251.9

Diluted earnings per share 23 51.9 242.8

Dividends per share ($)

Ordinary shares 22 0.42 0.42

Redeemable preference shares 22 4.6180 6.3348

The income statements are to be read in conjunction with the notes to the consolidated financial statements.

Income Statementsfor the year ended 31 December 2009

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Net profit for the period 434 1,650 142 20

Other comprehensive income:

Net exchange (loss)/gain on translation of foreign operations (294) 271 – – Tax effect 7 – – – –

(294) 271 – –

Net gain/(loss) on foreign currency loans designated as hedges of net investments in foreign operations 286 (259) – – Tax effect 7 (86) 82 – –

200 (177) – –

Net change in fair value of available-for-sale financial assets – (13) – (13) Tax effect 7 – 4 – 4

– (9) – (9)

Net actuarial gain/(loss) on the defined benefit plan 16 (37) 16 (37) Tax effect 7 (5) 11 (5) 11

30 11 (26) 11 (26)

Other comprehensive (losses)/income, net of tax (83) 59 11 (35)

Total comprehensive income 351 1,709 153 (15)

Total comprehensive income attributable to: Owners of Santos Ltd 351 1,709 153 (15) Minority interests – – – –

351 1,709 153 (15)

The statements of comprehensive income are to be read in conjunction with the notes to the consolidated financial statements.

Statements of Comprehensive Incomefor the year ended 31 December 2009

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Statements of Financial Positionas at 31 December 2009

Current assets

Cash and cash equivalents 8 2,240 1,553 2,031 1,403Trade and other receivables 9 917 581 357 694Inventories 10 273 290 139 136Other financial assets 11 65 59 60 –Tax receivable 24 – 7 –

Total current assets 3,519 2,483 2,594 2,233

Non-current assets

Receivables 9 10 18 9 17Available-for-sale financial assets 12 2 2 2 2Investment in an associate 27 177 – – –Other financial assets 11 134 345 5,748 4,724Exploration and evaluation assets 13 923 493 30 43Oil and gas assets 14 6,317 6,190 1,722 1,778Other land, buildings, plant and equipment 15 200 160 134 110Deferred tax assets 17 79 111 – –

Total non-current assets 7,842 7,319 7,645 6,674

Total assets 11,361 9,802 10,239 8,907

Current liabilities

Trade and other payables 18 709 605 778 723Deferred income 83 55 7 2Interest-bearing loans and borrowings 19 164 99 1 1Tax liabilities 20 469 – 454Provisions 20 94 117 70 66Other liabilities 21 10 8 – –

Total current liabilities 1,080 1,353 856 1,246

Non-current liabilities

Deferred income 17 54 – –Interest-bearing loans and borrowings 19 1,649 2,356 3,600 4,085Deferred tax liabilities 17 871 744 103 134Provisions 20 768 808 258 311Other liabilities 21 9 9 – –

Total non-current liabilities 3,314 3,971 3,961 4,530

Total liabilities 4,394 5,324 4,817 5,776

Net assets 6,967 4,478 5,422 3,131

Equity

Issued capital 22 4,987 2,531 4,987 2,531Reserves (283) (189) (2) (2)Retained earnings 2,263 2,136 437 602

Equity attributable to equity holders of Santos Ltd 6,967 4,478 5,422 3,131Minority interests – – – –

Total equity 6,967 4,478 5,422 3,131

The statements of financial position are to be read in conjunction with the notes to the consolidated financial statements.

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Cash flows from operating activities

Receipts from customers 2,308 3,101 710 985Interest received 85 49 81 39Overriding royalties received 8 15 12 24Insurance proceeds received 30 13 – –Pipeline tariffs and other receipts 93 64 12 41Payments to suppliers and employees (899) (1,089) (286) (402)Exploration and evaluation expenditure – seismic and studies (199) (88) (19) (11)Royalties and excise paid (65) (102) (26) (47)Borrowing costs paid (80) (134) (2) –Income taxes paid (55) (292) (24) (229)Royalty-related taxes paid (71) (152) (25) (35)

Net cash provided by operating activities 29 1,155 1,385 433 365

Cash flows from investing activities

Payments for: Exploration and evaluation expenditure (98) (266) (27) (73) Oil and gas assets expenditure (1,182) (1,179) (355) (359) Other land, buildings, plant and equipment (74) (40) (49) (14) Acquisitions of oil and gas assets (363) – – (1) Acquisitions of controlled entities (17) (7) – (6) Restoration expenditure (29) (55) – (3) Acquisition of investment in an associate (178) – (178) –Advances to related entities (6) (6) – –Proceeds from disposal of non-current assets 12 2,080 – 1Proceeds from disposal of controlled entities 24 – – –Proceeds from disposal of other investments – 1 – 1Income taxes paid on disposal of non-current assets (497) – (497) –Other investing activities (3) 4 (4) 3

Net cash (used in)/provided by investing activities (2,411) 532 (1,110) (451)

Cash flows from financing activities

Dividends paid (297) (251) (297) (251)Proceeds from issues of ordinary shares 3,003 220 3,003 220Proceeds from share issues placed on term deposits (1,176) – (1,176) –Proceeds from maturity of term deposits 1,116 – 1,116 –Redeemable cumulative preference shares redeemed (600) – (600) –Off-market buy-back of ordinary shares – (302) – (302)Repayments of borrowings (92) (751) (1) (1)Drawdown of borrowings – 500 – –Receipts from controlled entities – – 759 2,817Payments to controlled entities – – (1,492) (1,052)

Net cash provided by/(used in) financing activities 1,954 (584) 1,312 1,431

Net increase in cash and cash equivalents 698 1,333 635 1,345Cash and cash equivalents at the beginning of the year 1,553 200 1,403 57Effects of exchange rate changes on the balances of cash held in foreign currencies (11) 20 (7) 1

Cash and cash equivalents at the end of the year 8 2,240 1,553 2,031 1,403

The statements of cash flows are to be read in conjunction with the notes to the consolidated financial statements.

Statements of Cash Flowsfor the year ended 31 December 2009

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Consolidated

Balance at 1 January 2009 2,531 (187) (2) 2,136 4,478

Total comprehensive income for the period – (94) – 445 351

Transactions with owners in their capacity as owners: Share options exercised by employees 22 4 – – – 4

Entitlement offer exercised 22 2,914 – – – 2,914

Shares issued 22 138 – – – 138

Redeemable cumulative preference shares redeemed 22 (600) – – – (600)

Dividends to shareholders 22 – – – (327) (327)

Share-based payment transactions 31 – – – 9 9

Equity attributable to equity holders of Santos Ltd 4,987 (281) (2) 2,263 6,967

Equity attributable to minority interests – – – – –

Balance at 31 December 2009 4,987 (281) (2) 2,263 6,967

Balance at 1 January 2008 2,331 (281) 7 1,035 3,092Total comprehensive income for the period – 94 (9) 1,624 1,709Transactions with owners in their capacity as owners: Share options exercised by employees 22 3 – – – 3 Shares issued 22 253 – – – 253 Off-market buy-back 22 (56) – – (245) (301) Dividends to shareholders 22 – – – (286) (286) Share-based payment transactions 31 – – – 8 8

Equity attributable to equity holders of Santos Ltd 2,531 (187) (2) 2,136 4,478Equity attributable to minority interests – – – – –

Balance at 31 December 2008 2,531 (187) (2) 2,136 4,478

Santos Ltd

Balance at 1 January 2009 2,531 – (2) 602 3,131

Total comprehensive income for the period – – – 153 153

Transactions with owners in their capacity as owners: Share options exercised by employees 22 4 – – – 4

Entitlement offer exercised 22 2,914 – – – 2,914

Shares issued 22 138 – – – 138

Redeemable cumulative preference shares redeemed 22 (600) – – – (600)

Dividends to shareholders 22 – – – (327) (327)

Share-based payment transactions 31 – – – 9 9

Balance at 31 December 2009 4,987 – (2) 437 5,422

Balance at 1 January 2008 2,331 – 7 1,131 3,469Total comprehensive income for the period – – (9) (6) (15)Transactions with owners in their capacity as owners: Share options exercised by employees 22 3 – – – 3 Shares issued 22 253 – – – 253 Off-market buy-back 22 (56) – – (245) (301) Dividends to shareholders 22 – – – (286) (286) Share-based payment transactions 31 – – – 8 8

Balance at 31 December 2008 2,531 – (2) 602 3,131

The statements of changes in equity are to be read in conjunction with the notes to the consolidated financial statements.

Issued Translation Fair value Retained Total

capital reserve reserve earnings equity

Note $million $million $million $million $million

Statements of Changes in Equityfor the year ended 31 December 2009

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The financial report of Santos Ltd (“the Company”) for the year ended 31 December 2009 was authorised for issue in accordance with a resolution of the Directors on 18 February 2010.

Santos Ltd (the parent) is a company limited by shares incorporated in Australia whose shares are publicly traded on the Australian Securities Exchange (“ASX”) and is the ultimate parent entity in the Group. The consolidated financial report of the Company for the year ended 31 December 2009 comprises the Company and its controlled entities (“the Group”).

The nature of the operations and principal activities of the Group are described in the Directors’ Statutory Report.

(A) STATEMENT OF COMPLIANCE

The financial report is a general purpose financial report which has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. The financial report complies with Australian Accounting Standards as issued by the Australian Accounting

Standards Board and International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board.

(B) BASIS OF PREPARATION

The financial report is presented in Australian dollars.

The financial report is prepared on the historical cost basis, except for derivative financial instruments, fixed rate notes that are hedged by an interest rate swap and available-for-sale financial assets, which are measured at fair value.

The Company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 (updated by Class Order 05/641 effective 28 July 2005), and in accordance with that Class Order amounts in the financial report and Directors’ Statutory Report have been rounded to the nearest million dollars, unless otherwise stated.

Adoption of new accounting standards

and interpretations

From 1 January 2009, the Company has adopted the following standards and interpretations, and all consequential

amendments, which became applicable on 1 January 2009. Adoption of these standards and interpretations has only affected the presentation and disclosure in these financial statements. There has been no impact on the financial position or performance of the Company.

• AASB 8 Operating Segments

• AASB 101 Presentation of Financial Statements

• AASB 2008-1 Amendments to Australian Accounting Standard – Share-based Payments: Vesting Conditions and Cancellations

• AASB 2008-5 Amendments to Australian Accounting Standards arising from the Annual Improvements Project

• AASB 2008-7 Amendments to Australian Accounting Standards – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate

• AASB 2009-2 Amendments to Australian Accounting Standards – Improving Disclosures about Financial Instruments

• AASB 2009-6 Amendments to Australian Accounting Standards

1. SIGNIFICANT ACCOUNTING POLICIES

Notes to the Consolidated Financial Statementsfor the year ended 31 December 2009

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Effective for

annual

reporting

periods

beginning on

or after

Impact on

Group

financial

report

Application

date for Group

AASB 3 Business Combinations Adopts the acquisition method to account for business combinations; acquisition costs expensed; contingent consideration recognised at fair value on acquisition date.

1 July 2009 Will impact recognition of future acquisitions

1 January 2010

AASB 9 Financial Instruments AASB 9 includes requirements for the classification and measurement of financial assets resulting from the first part of phase 1 of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement (AASB 139 Financial Instruments: Recognition and Measurement). These requirements improve and simplify the approach for classification and measurement of financial assets compared with the requirements of AASB 139.

1 January 2013 Unlikely to have material impact

1 January 2013

AASB 127 Consolidated and Separate Financial Statements

Changes in a parent’s ownership in a subsidiary that result in a loss of control requires reserves to be recycled and remaining ownership interest to be measured at fair value; changes that do not result in a loss of control are accounted for as equity transactions.

1 July 2009 Unlikely to have impact

1 January 2010

AASB 2008-3 Amendments to Australian Accounting Standards arising from AASB 3 and AASB 127

Consequential amendments to a number of standards following the issue of the revised AASB 3 Business Combinations and AASB 127 Consolidated and Separate Financial Statements.

1 July 2009 No impact 1 January 2010


Extends scope of AASB 5 Non-current Assets Held for Sale and Discontinued Operations to require where entity is committed to sale plan involving loss of control of a subsidiary but retains a partial investment in the disposed subsidiary, in which case all of the subsidiary’s assets and liabilities are classified as held for sale; also includes minor terminology or editorial amendments to other standards.


AASB 2008-8 Amendments to Australian Accounting Standards – Eligible Hedged Items

Clarifies the hedge accounting provisions of AASB 139 Financial Instruments: Recognition and Measurement to address inflation in a financial hedged item, and one-sided risk in a hedged item.


Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective have not been adopted by the Group for the annual reporting period ended 31 December 2009. These are outlined in the following table:

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Effective for

annual

reporting

periods

beginning on

or after

Impact on

Group

financial

report

Application

date for Group

AASB 2008-13 Amendments to Australian Accounting Standards arising from AASB Interpretation 17 – Distributions of Non-cash Assets to Owners

Amends AASB 5 Non-current Assets Held for Sale and Discontinued Operations in respect of the classification, presentation and measurement of non-current assets held for distribution to owners in their capacity as owners and AASB 110 Events after the Reporting Period for the disclosure requirements for dividends that are declared after the reporting period but before the financial statements are authorised for issue.


AASB 2009-4 Amendments to Australian Accounting Standards arising from the Annual Improvements Project

Amends scope of AASB 2 Share-based Payment to exclude business combinations from scope; there are additional consequential amendments to AASB 138 Intangible Assets arising from revised AASB 3 Business Combinations.



Includes a number of other amendments to existing standards which are not expected to have a material impact. Will amend classification of exploration expenditure in statement of cash flows.


AASB 2009-7 Amendments to Australian Accounting Standards

Various minor editorial amendments to a number of standards and an interpretation to correct errors that occurred in AASB 2008-12, AASB 2008-13 and AASB Interpretation 17 Distributions of Non-cash Assets to Owners and other amendments reflect changes made by the IASB to its pronouncements.


AASB 2009-8 Amendments to Australian Accounting Standards – Group Cash-settled Share-based Payment Transactions

The amendments clarify the scope of AASB 2 Share-based Payment by requiring an entity that receives goods or services in a share-based payment arrangement to account for those goods or services no matter which entity in the group settles the transaction, and no matter whether the transaction is settled in shares or cash.

1 January 2010 No impact 1 January 2010

AASB 2009-9 Amendments to Australian Accounting Standards – Additional Exemptions for First-time Adopters

Provides additional exemptions and modifications on transition to Australian Accounting Standards in relation to certain oil and gas and lease assessments under Interpretation 4 Determining whether an Arrangement contains a Lease.


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Effective for

annual

reporting

periods

beginning on

or after

Impact on

Group

financial

report

Application

date for Group

AASB 2009-10 Amendments to Australian Accounting Standards – Classification of Rights Issues

Amends AASB 132 Financial Instruments: Presentation to require a financial instrument that gives the holder the right to acquire a fixed number of the entity’s own equity instruments for a fixed amount of any currency to be classified as an equity instrument if, and only if, the entity offers the financial instrument pro-rata to all of its existing owners of the same class of its own non-derivative equity instruments. Before this amendment, rights issues (rights, options, or warrants), denominated in a currency other than the functional currency of the issuer, were accounted for as derivative instruments.

1 February 2010 No impact 1 January 2011


This standard gives effect to consequential changes arising from the issuance of AASB 9.

1 January 2013 Unlikely to have material impact

1 January 2013


The amendment to AASB 8 requires an entity to exercise judgement in assessing whether a government and entities known to be under the control of that government are considered a single customer for the purposes of certain operating segment disclosures.


AASB 2009-13 Amendments to Australian Accounting Standards arising from Interpretation 19

The objective of this Standard is to make amendments to AASB 1 First-time Adoption of Australian Accounting Standards as a consequence of the issuance of Interpretation 19 Extinguishing Financial Liabilities with Equity Instruments.


Interpretation 17 Distributions of Non-cash Assets to Owners

Provides guidance on when and how a liability for certain distributions of non-cash assets is recognised and measured, and how to account for that liability. Does not apply to common control transactions.


Interpretation 18 Transfers of Assets from Customers

Provides guidance on transfers of property, plant and equipment for entities that receive such contributions from their customers.


Interpretation 19 Extinguishing Financial Liabilities with Equity Instruments

This interpretation addresses the accounting by an entity when the terms of a financial liability are renegotiated and result in the entity issuing equity instruments to a creditor of the entity to extinguish all or part of the financial liability.


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The Group has changed the classification of exploration and evaluation expenditure in the statement of cash flows such that only exploration and evaluation expenditure that results in the initial recognition of an exploration and evaluation asset is included in investing activities. Exploration and evaluation expenditure that is expensed as incurred (generally seismic and study activities) is classified in operating activities. As a result, $88 million of exploration and evaluation expenditure was transferred from cash flows from investing activities to cash flows from operating activities for the Group and $11 million for Santos Ltd in the prior year ended 31 December 2008.

The accounting policies set out below have been applied consistently to all periods presented in the consolidated financial report.

The accounting policies have been consistently applied by the Group.

(C) BASIS OF CONSOLIDATION

Subsidiaries

Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

The acquisition of subsidiaries is accounted for using the purchase method of accounting, which involves allocating the cost of the business combination to the fair value of the assets acquired and the liabilities and contingent liabilities assumed at the date of acquisition (refer note 1(G)).

Investments in subsidiaries are carried at their cost of acquisition, less any

impairment charges, in the Company’s financial statements.

Intragroup balances and any unrealised gains and losses or income and expenses arising from intragroup transactions are eliminated in preparing the consolidated financial statements.

Minority interests

Minority interests in the net assets of consolidated entities are allocated their share of net profit after tax in the income statement, and are identified separately from the Group’s equity in those entities. Minority interests consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since the date of the combination. Where the minority interest has losses greater than its equity interest in the consolidated subsidiary, the excess and any further losses applicable to the minority interest are allocated against the Group’s interest. If the minority interest subsequently reports profits, the profits are allocated to the Group until the minority’s share of losses previously absorbed by the Group have been fully recovered.

Jointly controlled assets

Santos’ exploration and production activities are often conducted through joint venture arrangements governed by joint operating agreements, production sharing contracts or similar contractual relationships. A summary of the Group’s interests in its significant joint ventures is included in note 28.

A joint venture characterised as a jointly controlled asset involves the joint control, and often the joint ownership, by the venturers of one or more assets contributed to, or acquired for the purpose of, the joint venture and dedicated to the purposes of the joint venture. The assets are used to obtain benefits for the venturers. Each venturer may take a share of the output from the assets and each bears an agreed share of expenses incurred. Each venturer has control over its share of future economic

benefits through its share of jointly controlled assets.

The interests of the Company and of the Group in unincorporated joint ventures are brought to account by recognising in the financial statements the Group’s share of jointly controlled assets, share of expenses and liabilities incurred, and the income from the sale or use of its share of the production of the joint venture in accordance with the revenue policy in note 1(X).

Jointly controlled entities

The Group has interests in joint ventures which are jointly controlled entities, whereby the venturers have contractual arrangements that establish joint control over the economic activities of the entities. The Group recognises its interest in jointly controlled entities using proportionate consolidation, by combining its share of the assets, liabilities, income and expenses of the joint venture with similar line items in the consolidated financial statements.

Investment in an associate

The Group’s investment in an associate is accounted for using the equity method of accounting in the consolidated financial statements and at cost in the parent. An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor a joint venture. The Group generally has significant influence if it has between 20% and 50% of the voting rights of an entity.

Under the equity method, the investment in an associate is carried in the consolidated statement of financial position at cost plus post-acquisition changes to the Group’s share of net assets of the associate. Goodwill relating to the associate is included in the carrying amount of the investment and is not amortised. After application of the equity method, the Group determines whether it is necessary to recognise any impairment loss with respect to the Group’s net investment in the associate.

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The Group’s share of the associate’s post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in the statement of changes in equity and, when applicable, in the statement of comprehensive income. The cumulative post-acquisition movements are recorded against the carrying amount of the investment. Dividends receivable from the associate are recognised in the parent entity’s income statement, while in the consolidated financial statements the Group reduces the carrying amount of the investment.

When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any unsecured long-term receivables and loans, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. The reporting dates of the associate and the Group are identical and the associate’s accounting policies conform to those used by the Group for like transactions and events in similar circumstances.

(D) FOREIGN CURRENCY

Functional and presentation currency

Both the functional and presentation currency of Santos Ltd is Australian dollars. Some subsidiaries have a functional currency of United States dollars which is translated to the presentation currency (see below).

Transactions and balances

Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the foreign exchange rate ruling at the reporting date. Foreign exchange differences arising on translation are recognised in the income statement.

Foreign exchange differences that arise on the translation of monetary items that form part of the net investment in

a foreign operation are recognised in equity in the consolidated financial statements.

Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the initial transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to the functional currency at foreign exchange rates ruling at the dates the fair value was determined.

Group companies

The results of subsidiaries with a functional currency of United States dollars are translated to Australian dollars as at the date of each transaction. The assets and liabilities are translated to Australian dollars at foreign exchange rates ruling at the reporting date. Foreign exchange differences arising on retranslation are recognised directly in the foreign currency translation reserve.

Exchange differences arising from the translation of the net investment in foreign operations and of related hedges are taken to the foreign currency translation reserve. They are released into the income statement upon disposal of the foreign operation.

(E) DERIVATIVE FINANCIAL INSTRUMENTS

The Group frequently uses derivative financial instruments to hedge its exposures to changes in foreign exchange rates, commodity prices and interest rates arising in the normal course of business. The principal derivatives that may be used are forward foreign exchange contracts, foreign currency swaps and options, interest rate swaps and commodity crude oil price swap and option contracts. Their use is subject to a comprehensive set of policies, procedures and limits approved by the Board of Directors. The Group does not trade in derivative financial instruments for speculative purposes.

Derivative financial instruments are recognised initially at fair value. Subsequent to initial recognition, derivative financial instruments are

stated at fair value. Where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged; otherwise the gain or loss on remeasurement to fair value is recognised immediately in profit or loss.

The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The fair value of forward exchange contracts is their quoted market price at the reporting date, being the present value of the quoted forward price. The fair value of commodity swap and option contracts is their quoted market price at the reporting date.

Embedded derivatives

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contract and the host contracts are not measured at fair value with changes in fair value recognised in profit or loss.

(F) HEDGING

Hedge effectiveness

Hedge accounting (see below) is only applied where the derivative financial instrument provides an effective hedge of the hedged item. Where a derivative financial instrument provides a partially effective hedge, any gain or loss on the ineffective part is recognised immediately in the income statement.

Fair value hedge

Where a derivative financial instrument hedges the changes in fair value of a recognised asset or liability or an unrecognised firm commitment (or an identified portion of such asset, liability or firm commitment), any gain or loss on the hedging instrument is recognised in the income statement. The hedged item is stated at fair value in respect of the risk being hedged, with any gain or loss being recognised in the income statement.

F-141




Cash flow hedge

Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, any gain or loss on the derivative financial instrument is recognised directly in equity. When the forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, or the forecast transaction for a non-financial asset or non-financial liability becomes a firm commitment for which fair value hedging is applied, the associated cumulative gain or loss is removed from equity and included in the initial cost or other carrying amount of the non-financial asset or non-financial liability. If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, the associated gains and losses that were recognised directly in equity are reclassified into profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss.

For cash flow hedges, other than those covered by the preceding paragraph, the associated cumulative gain or loss is removed from equity and recognised in the income statement in the same period or periods during which the hedged forecast transaction affects profit or loss.

When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation of the hedge relationship, but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss recognised in equity is recognised immediately in the income statement.

Hedge of monetary assets and

liabilities

When a derivative financial 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 income statement.

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 profit or loss.

(G) 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 of assets given, shares issued or liabilities incurred. The cost of an asset comprises the purchase price including any incidental costs directly attributable to the acquisition; any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating; and the estimate of the costs of dismantling and removing the asset and restoring the site on which it is located determined in accordance with note 1(Q).

Business combinations

The purchase method of accounting is used to account for all business combinations regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, shares issued or liabilities incurred or assumed at the date of exchange plus costs directly attributable to the combination. Where equity instruments are issued in a business combination, the fair value of the instruments is their published market price as at the date of exchange. Transaction costs arising on the issue of equity instruments are recognised directly in equity.

Except for non-current assets or disposal groups classified as held for sale (which are measured at fair value less costs to sell), all identifiable assets acquired

and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the costs of the business combination over the net fair value of the identifiable net assets of the Group’s share of the identifiable net assets acquired is recognised as goodwill. If the cost of acquisition is less than the Group’s share of the net fair value of the identifiable net assets of the subsidiary, the difference is recognised as a gain in the income statement, but only after a reassessment of the identification and measurement of the net assets acquired.

Where settlement of any part of the consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions.

(H) EXPLORATION AND EVALUATION EXPENDITURE

Exploration and evaluation expenditure in respect of each area of interest is accounted for using the successful efforts method of accounting. The successful efforts method requires all exploration and evaluation expenditure to be expensed in the period it is incurred, except the costs of successful wells and the costs of acquiring interests in new exploration assets, which are capitalised as intangible exploration and evaluation. The costs of wells are initially capitalised pending the results of the well.

An area of interest refers to an individual geological area where the presence of oil or a natural gas field is considered favourable or has been proved to exist, and in most cases will comprise an individual prospective oil or gas field.

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Exploration and evaluation expenditure is recognised in relation to an area of interest when the rights to tenure of the area of interest are current and either:

(i) such expenditure is expected to be recovered through successful development and commercial exploitation of the area of interest, or alternatively, by its sale; or

(ii) the exploration activities in the area of interest have not yet reached a stage which permits reasonable assessment of the existence of economically recoverable reserves and active and significant 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 reference to the carrying value of the original interest. Any cash consideration paid, including transaction costs, is accounted for as an acquisition of exploration and evaluation assets. Any cash consideration received, net of transaction costs, is treated as a recoupment of costs previously capitalised with any excess accounted for as a gain on disposal of non-current assets.

The carrying amounts of the Group’s exploration and evaluation assets are reviewed at each reporting date, in conjunction with the impairment review process referred to in note 1(P), to determine whether any of the following indicators of impairment exists:

(i) 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

(ii) substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is not budgeted or planned; or

(iii) exploration for and evaluation of resources in the specific area has not led to the discovery of commercially viable quantities of resources, and the Group has decided to discontinue activities in the specific area; or

(iv) sufficient data exists to indicate that although a development is likely to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or from sale.

Where an indicator of impairment exists, a formal estimate of the recoverable amount is made and any resultant impairment loss is recognised in the income statement.

When a discovered oil or gas field enters the development phase the accumulated exploration and evaluation expenditure is transferred to oil and gas assets – assets in development.

(I) OIL AND GAS ASSETS

Oil and gas assets are usually single oil or gas fields being developed for future production or which are in the production phase. Where several individual oil or gas fields are to be produced through common facilities, the individual oil or gas fields and the associated production facilities are managed and reported as a single oil and gas asset.


When the technical and commercial feasibility of an undeveloped oil or gas field has been demonstrated, the field enters its development phase. The costs of oil and gas assets in the development phase are separately accounted for as tangible assets and include past exploration and evaluation costs, development drilling and other subsurface expenditure, surface plant and equipment and any associated land and buildings.

When commercial operation commences the accumulated costs are transferred to oil and gas assets – producing assets.

Producing assets

The costs of oil and gas assets in production are separately accounted for as tangible assets and include past exploration and evaluation costs, pre-production development costs and the ongoing costs of continuing to develop reserves for production and to

expand or replace plant and equipment and any associated land and buildings.

These costs are subject to depreciation and depletion in accordance with note 1(K).

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 oil or gas fields in the vicinity with the intention of producing any near field discoveries using the infrastructure in place.

Exploration and evaluation expenditure associated with oil and gas assets is accounted for in accordance with the policy in note 1(H). Exploration and evaluation expenditure amounts capitalised in respect of oil and gas assets are separately disclosed in note 14.

(J) LAND, BUILDINGS, PLANT AND EQUIPMENT

Land and buildings are measured at cost less accumulated depreciation on buildings, less any impairment losses recognised.

Plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses. Such cost includes the cost of rotable spares and insurance spares that are purchased for back up or rotation with specific plant and equipment items. Similarly, the cost of major cyclical maintenance is recognised in the carrying amount of the related plant and equipment as a replacement only if it is eligible for capitalisation. Any remaining carrying amount from the cost of the previous major cyclical maintenance is derecognised. All other repairs and maintenance are recognised in profit or loss as incurred.

Depreciation on buildings, plant and equipment is calculated in accordance with note 1(K).

F-143




(K) DEPRECIATION AND DEPLETION

Depreciation charges are calculated to write off the depreciable value of buildings, plant and equipment over their estimated economic useful lives to the Group. Each component of an item of buildings, plant and equipment with a cost that is significant in relation to the total cost of the asset is depreciated separately. The residual value, useful life and depreciation method applied to an asset is reviewed at the end of each annual reporting period.

Depreciation of onshore buildings, plant and equipment and corporate assets is calculated using the straight-line method of depreciation on an individual asset basis from the date the asset is available for use.

The estimated useful lives for each class of onshore assets for the current and comparative periods are generally as follows:

• Buildings 20 – 50 years • Plant and equipment – Computer equipment 3 – 5 years – Motor vehicles 4 – 7 years – Furniture and fittings 10 – 20 years – Pipelines 10 – 30 years – Plant and facilities 10 – 50 years

Depreciation of offshore plant and equipment is calculated using the units of production method on a cash-generating unit basis (refer note 1(P)) from the date of commencement of production.

Depletion charges are calculated using a unit of production method based on heating value which will amortise the cost of carried forward exploration, evaluation and subsurface development expenditure (“subsurface assets”) over the life of the estimated Proven plus Probable (“2P”) reserves in a cash-generating unit, together with future subsurface costs necessary to develop the hydrocarbon reserves in the respective cash-generating units.

The heating value measurement used for the conversion of volumes of different hydrocarbon products is barrels of oil equivalent.

Depletion is not charged on costs carried forward in respect of assets in the development stage until production commences.

(L) AVAILABLE-FOR-SALE FINANCIAL ASSETS

Financial instruments held by the Group and the Company which are classified as being available for sale are stated at fair value, with any resultant gain or loss being recognised directly in equity.

The fair value of financial instruments classified as available for sale is their quoted bid price at the close of business on the reporting date.

Financial instruments classified as available for sale are recognised or derecognised by the Group and the Company on the date it commits to purchase or sell the investments. When these investments are derecognised, the cumulative gain or loss previously recognised directly in equity is recognised in profit or loss.

(M) INVENTORIES

Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Cost is determined as follows:

(i) drilling and maintenance stocks, which include plant spares, consumables and maintenance and drilling tools used for ongoing operations, are valued at weighted average cost; and

(ii) petroleum products, which comprise extracted crude oil, liquefied petroleum gas, condensate and naphtha stored in tanks and pipeline systems and processed sales gas and ethane stored in subsurface reservoirs, are valued using the absorption cost method in a manner which approximates specific identification.

(N) TRADE AND OTHER RECEIVABLES

Trade and other receivables are initially recognised at fair value, which in

practice is the equivalent of cost, less any impairment losses.

Long-term receivables are discounted and are stated at amortised cost, less impairment losses.

Trade and other receivables are assessed for indicators of impairment at each reporting date. Where a receivable is impaired the amount of the impairment is the difference between the asset’s carrying value and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the receivable is reduced through the use of an allowance account. Changes in the allowance account are recognised in profit or loss.

(O) CASH AND CASH EQUIVALENTS

Cash and cash equivalents comprise cash balances and short-term deposits that are readily convertible to known amounts of cash, are subject to an insignificant risk of changes in value, and generally have an original maturity of three months or less.

(P) IMPAIRMENT

The carrying amounts of the Group’s assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. Where an indicator of impairment exists, a formal estimate of the recoverable amount is made.

Oil and gas assets, land, buildings, plant and equipment are assessed for impairment on a cash-generating unit (“CGU”) basis. A cash-generating unit is the smallest grouping of assets that generates independent cash inflows, and generally represents an individual oil or gas field. Impairment losses recognised in respect of cash-generating units are allocated to reduce the carrying amount of the assets in the unit on a pro-rata basis.

Exploration and evaluation assets are assessed for impairment in accordance with note 1(H).

F-144





An impairment loss is recognised in the income statement whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount.

Where a decline in the fair value of an available-for-sale financial asset has been recognised directly in equity and there is objective evidence that the asset is impaired, the cumulative loss that had been recognised directly in equity is recognised in profit or loss even though the financial asset has not been derecognised. The amount of the cumulative loss that is recognised in profit or loss is the difference between the acquisition cost and current fair value, less any impairment loss on that financial asset previously recognised in profit or loss.

Calculation of recoverable amount

The recoverable amount of an asset is the greater of its fair value less costs to sell and its value in use. In assessing value in use, an asset’s estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Where an asset does not generate cash flows that are largely independent from other assets or groups of assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

For oil and gas assets the estimated future cash flows are based on estimates of hydrocarbon reserves, future production profiles, commodity prices, operating costs and any future development costs necessary to produce the reserves. Estimates of future commodity prices are based on contracted prices where applicable or based on forward market prices where available.

Reversals of impairment

An impairment loss is reversed if there has been an increase in the estimated recoverable amount of a previously

impaired asset. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or depletion, if no impairment loss had been recognised.

Impairment losses recognised in profit or loss on equity instruments classified as available-for-sale financial assets are not reversed through profit or loss.

(Q) PROVISIONS

A provision is recognised in the statement of financial position when the Group has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation using a discounted cash flow methodology. If the effect of the time value of money is material, the provision is discounted using a current pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. The increase in the provision resulting from the passage of time is recognised in finance costs.

Restoration

Provisions for future environmental restoration are recognised where there is a present obligation as a result of exploration, development, production, transportation or storage activities having been undertaken, and it is probable that an outflow of economic benefits will be required to settle the obligation. The estimated future obligations include the costs of removing facilities, abandoning wells and restoring the affected areas.

The provision for future restoration costs is the best estimate of the present value

of the future expenditure required to settle the restoration obligation at the reporting date, based on current legal requirements. Future restoration costs are reviewed annually and any changes in the estimate are reflected in the present value of the restoration provision at the reporting date, with a corresponding change in the cost of the associated asset.

The amount of the provision for future restoration costs relating to exploration, development and production facilities is capitalised and depleted as a component of the cost of those activities.

Remediation

Provisions for remediation costs are recognised where there is a present obligation as a result of an unexpected event that occurs outside of the planned operations of an asset.

The provision for future remediation costs is the best estimate of the present value of the future expenditure required to settle the remediation obligation at the reporting date, based on current legal requirements. Future remediation costs are reviewed annually and any changes in the estimate are reflected in the present value of the remediation provision at the reporting date, with a corresponding charge to the income statement.

(R) EMPLOYEE BENEFITS

Wages, salaries, annual leave and

sick leave

Liabilities for wages and salaries, including non-monetary benefits, and annual leave that are expected to be settled within twelve months of the reporting date are recognised in respect of employees’ services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Expenses for non-vesting sick leave are recognised when the leave is taken and are measured at the rates paid or payable.

F-145




Long-term service benefits

A liability for long service leave is recognised and measured as the present value of the estimated future cash outflows to be made in respect of employees’ services up to the reporting date. The obligation is calculated using expected future increases in wage and salary rates, experience of employee departures and periods of service. Expected future payments are discounted using the rates attached to the Commonwealth Government bonds at the reporting date which have maturity dates approximating the terms of the Group’s obligations.

Defined contribution plans

The Company and its controlled entities contribute to several defined contribution superannuation plans. Obligations for contributions are recognised as an expense in the income statement as incurred.

Defined benefit plan

The Group’s net obligation in respect of the defined benefit superannuation plan is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and the fair value of any plan assets is deducted.

The discount rate is the yield at the reporting date on Government bonds that have maturity dates approximating the terms of the Group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method.

When the benefits of the plan are improved, the portion of the increased benefit relating to past service by employees is recognised as an expense in the income statement on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognised immediately in the income statement.

Actuarial gains or losses that arise in calculating the Group’s obligation in

respect of the plan are recognised directly in retained earnings.

When the calculation results in plan assets exceeding liabilities to the Group, the recognised asset is limited to the net total of any unrecognised actuarial losses and past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan.

Past service cost is the increase in the present value of the defined benefit obligation for employee services in prior periods, resulting in the current period from the introduction of, or changes to, post-employment benefits or other long-term employee benefits. Past service costs may either be positive (where benefits are introduced or improved) or negative (where existing benefits are reduced).

Share-based payment transactions

The Santos Executive Share Option Plan allows eligible executives to acquire shares in the capital of the Company. The fair value of options granted 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 to the options. The fair value of the options granted is measured using the Monte Carlo simulation method, taking into account the terms and market conditions upon which the options were granted. The amount recognised as an expense is only adjusted when the options do not vest due to non-market-related conditions.

The fair value of Share Acquisition Rights (“SARs”) issued to eligible executives under the Executive Long-term Incentive Programme 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 to the SARs. The fair value of the SARs granted is measured using the Monte Carlo simulation method, taking into account the terms and market conditions upon

which the SARs were granted. The amount recognised as an expense is only adjusted when the SARs do not vest due to non-market-related conditions.

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 benefits. The fair value of the liability is measured initially, and at the end of each reporting period until settled, at the fair value of the cash-settled share-based payment transaction, by using the Monte Carlo simulation method, taking into account the terms and conditions on which the cash-settled share-based payment transactions were granted, and the extent to which the employees have rendered service to date.

The fair value of shares issued to eligible employees under the Santos Employee Share Acquisition Plan, to eligible executives and employees under the Santos Employee Share Purchase Plan, and new shares issued to Non-executive Directors under the Non-executive Director Share Plan, is recognised as an increase in issued capital on grant date.

Shares issued under the Santos Employee Share Acquisition Plan to employees of subsidiaries are recognised in the Company’s separate financial statements as an additional investment in the subsidiary with a corresponding credit to equity. As a result, the expense recognised by the Company in relation to equity-settled awards only represents the expense associated with grants to employees of the Company. The expense recognised by the Group is the total expense.

(S) INTEREST-BEARING BORROWINGS

Interest-bearing borrowings are recognised initially at fair value, net of transaction costs incurred. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis.

F-146




Fixed rate notes that are hedged by an interest rate swap are recognised at fair value (refer note 1(F)).

(T) BORROWING COSTS

Borrowing costs, including interest and finance charges relating to major oil and gas assets under development up to the date of commencement of commercial operations, are capitalised as a component of the cost of development. Where funds are borrowed specifically for qualifying projects the actual borrowing costs incurred are capitalised. Where the projects are funded through general borrowings the borrowing costs are capitalised based on the weighted average borrowing rate (refer note 19). Borrowing costs incurred after commencement of commercial operations are expensed.

All other borrowing costs are recognised in the profit or loss in the period in which they are incurred.

(U) DEFERRED INCOME

A liability is recorded for obligations under sales contracts to deliver natural gas in future periods for which payment has already been received.

Deferred income is also recognised on asset sale agreements where consideration is received prior to all conditions precedent being fulfilled.

(V) TRADE AND OTHER PAYABLES

Trade and other payables are recognised when the related goods or services are received, at the amount of cash or cash equivalent that will be required to discharge the obligation, gross of any settlement discount offered. Trade payables are non-interest-bearing and are settled on normal terms and conditions.

(W) SHARE CAPITAL

Ordinary share capital

Ordinary share capital is classified as equity.

Preference share capital

Preference share capital is classified as equity if it is non-redeemable and any

dividends are discretionary, or it is redeemable only at the Company’s option. Dividends on preference share capital classified as equity are recognised as distributions within equity.

Dividends

Dividends are recognised as a liability at the time the Directors resolve to pay or declare the dividend.

Transaction costs

Transaction costs of an equity transaction are accounted for as a deduction from equity, net of any related income tax benefit.

(X) REVENUE

Revenue is recognised in the income statement when the significant risks and rewards of ownership have been transferred to the buyer. Revenue is recognised and measured at the fair value of the consideration or contributions received, net of goods and services tax or similar taxes, to the extent it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured.

Sales revenue

Sales revenue is recognised on the basis of the Group’s interest in a producing field (“entitlements” method), when the physical product and associated risks and rewards of ownership pass to the purchaser, which is generally at the time of ship or truck loading, or on the product entering the pipeline.

Revenue earned under a production sharing contract (“PSC”) is recognised on a net entitlements basis according to the terms of the PSC.

Dividends

Dividend revenue from controlled entities is recognised as the dividends are declared, and from other parties as the dividends are received.

Overriding royalties

Royalties recognised on farmed-out operating lease rights are recognised as revenue as they accrue in accordance

with the terms of the overriding royalty agreements.

Pipeline tariffs and processing tolls

Tariffs and tolls charged to other entities for use of pipelines and facilities owned by the Group are recognised as revenue as they accrue in accordance with the terms of the tariff and tolling agreements.

Trading revenue

Trading revenue represents the net revenue derived from the purchase and subsequent sale of hydrocarbon products from third parties where the risks and benefits of ownership of the product do not pass to the Group, or where the Group acts as an agent or broker with compensation on a commission or fee basis.

(Y) INTEREST INCOME

Interest income is recognised in the income statement as it accrues, using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset.

(Z) OTHER INCOME

Other income is recognised in the income statement at the fair value of the consideration received or receivable, net of goods and services tax, when the significant risks and rewards of ownership have been transferred to the buyer or when the service has been performed.

The 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. The gain or loss on disposal is calculated as the difference between the carrying amount of the asset at the time of disposal and the net proceeds on disposal.


F-147




(AA) LEASES

The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

Leases are classified as finance leases when the terms of the lease transfer substantially all the risks and rewards incidental to ownership of the leased asset to the lessee. All other leases are classified as operating leases.

Finance leases are capitalised at the lease’s inception at the fair value of the leased property or, if lower, the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Assets under finance lease are depreciated over the shorter of the estimated useful life of the asset and the lease term if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term.

Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred.

(AB) GOODS AND SERVICES TAX

Revenues, expenses and assets are recognised net of the amount of goods and services tax (“GST”), except where the amount of GST incurred is not recoverable from the Australian Taxation Office (“ATO”). In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of the expense.

Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the statement of financial position.

Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows.

Similar taxes in other tax jurisdictions are accounted for in a like manner.

(AC) TAXATION

Royalty-related taxation

Petroleum resource rent tax, resource rent royalty and additional profits tax are recognised as an income tax under AASB 112 Income Taxes.

Income tax

Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the amount of income tax payable on the taxable profit or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is determined using the statement of financial position approach, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the appropriate tax bases. The following temporary differences are not provided for: the initial recognition of assets or liabilities that affect neither accounting nor taxable profit; and differences 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.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

The Company and all its wholly-owned Australian resident entities are part of a tax-consolidated group under Australian taxation law. Santos Ltd is the head entity in the tax-consolidated group. Current tax expense/benefit, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax-consolidated group are allocated amongst the members of the tax-consolidated group using a “stand-alone taxpayer” approach in accordance with Interpretation 1052 Tax Consolidation Accounting and are recognised in the separate financial statements of each entity. Current tax liabilities and assets and deferred tax assets arising from unused tax losses and tax credits of the members of the tax-consolidated group are recognised by the Company (as head entity in the tax-consolidated group).

The Company and the other entities in the tax-consolidated group have entered into a tax funding agreement. Tax contribution amounts payable under the tax funding agreement are recognised as payable to or receivable by the Company and each other member of the tax-consolidated group. Where the tax contribution amount recognised by each member of the tax-consolidated group for a particular period under the tax funding agreement is different from the aggregate of the current tax liability or asset and any deferred tax asset arising from unused tax losses and tax credits in respect of that period assumed by the Company, the difference is recognised as a contribution from (or distribution to) equity participants.

F-148




The Company and the other entities in the tax-consolidated group have also entered into a tax sharing agreement pursuant to which the other entities may be required to contribute to the tax liabilities of the Company in the event of default by the Company or upon leaving the tax-consolidated group.

(AD) DISCONTINUED OPERATIONS AND NON-CURRENT ASSETS HELD FOR SALE

A discontinued operation is a component of the Group that has been disposed of, or is classified as held for sale, and that represents a separate major line of business or geographical area of operations, and is part of a single coordinated plan to dispose of such a line of business or area of operations. The results of discontinued operations are presented separately on the face of the income statement and the assets and liabilities are presented separately on the statement of financial position.

Non-current assets and disposal groups are classified as held for sale and measured at the lower of their carrying amount and fair value less costs to sell if their carrying amount will be recovered principally through a sale transaction. They are not depreciated or amortised. For an asset or disposal group to be classified as held for sale, it must be available for immediate sale in its present condition and its sale must be highly probable.

An impairment loss is recognised for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell. A gain is recognised for any subsequent increases in fair value less costs to sell of an asset (or disposal group) but not in excess of any cumulative impairment loss previously recognised. A gain or loss not previously recognised by the date of the sale of the non-current asset (or disposal group) is recognised at the date of derecognition.

(AE) SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS

The carrying amounts of certain assets and liabilities are often determined based on management’s judgement regarding estimates and assumptions of future events. The reasonableness of estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The key judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amount of certain assets and liabilities within the next annual reporting period are:

Estimates of reserve quantities

The estimated quantities of Proven plus Probable hydrocarbon reserves reported by the Group are integral to the calculation of depletion and depreciation expense and to assessments of possible impairment of assets. Estimated reserve quantities are based upon interpretations of geological and geophysical models and assessments of the technical feasibility and commercial viability of producing the reserves. These assessments require assumptions to be made regarding future development and production costs, commodity prices, exchange rates and fiscal regimes. The estimates of reserves may change from period to period as the economic assumptions used to estimate the reserves can change from period to period, and as additional geological data is generated during the course of operations. Reserves estimates are prepared in accordance with the Group’s policies and procedures for reserves estimation which conform to guidelines prepared by the Society of Petroleum Engineers.

Exploration and evaluation

The Group’s policy for exploration and evaluation expenditure is discussed in note 1(H). 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 reserves have been found. Any such estimates and assumptions 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 relevant capitalised amount will be written off to the income statement. The carrying amount of exploration and evaluation assets is disclosed in note 13.

Provision for restoration

The Group estimates the future removal and restoration costs of oil and gas production facilities, wells, pipelines and related assets at the time of installation of the assets and reviews these assessments periodically. In most instances the removal of these assets will occur many years in the future. The estimate of future removal costs therefore requires management to make judgements regarding the removal date, future environmental legislation, the extent of restoration activities required and future removal technologies.

The carrying amount of the provision for restoration is disclosed in note 20.

Impairment of oil and gas assets

The Group assesses whether oil and gas assets are impaired on a semi-annual basis. This requires an estimation of the recoverable amount of the cash-generating unit to which the assets belong. The carrying amount of oil and gas assets and the assumptions used in the estimation of recoverable amount are discussed in notes 14 and 16 respectively.


F-149



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F-150




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F-151




2009 2008 2009 20082. SEGMENT INFORMATION (CONTINUED) Note $million $million $million $million

Revenue from external customers by geographical location of

production

Australia 2,084 2,563Other countries 167 242

Total revenue 3 2,251 2,805

During the year revenue from two separate customers amounted to $512 million (2008: $770 million) and $253 million (2008: $539 million) respectively, arising from sales from all segments of the Group.

Non-current assets by geographical location

Australia 6,620 5,738Other countries 997 1,105

7,617 6,843

Non-current assets by geographical location comprises:

Exploration and evaluation assets 13 923 493 Oil and gas assets 14 6,317 6,190 Other land, buildings, plant and equipment 15 200 160 Investment in an associate 27 177 –

7,617 6,843

3. REVENUE AND OTHER INCOME

Product sales: Gas, ethane and liquefied gas 1,098 1,052 310 301 Crude oil 679 1,151 250 407 Condensate and naphtha 233 321 58 81 Liquefied petroleum gas 171 238 63 84

2,181 2,762 681 873

Other revenue: Overriding royalties 8 16 12 24 Pipeline tariffs and tolls 30 9 2 4 Trading revenue 18 13 19 8 Dividends from controlled entities – – – 27 Other 14 5 1 1

70 43 34 64

Total revenue 2,251 2,805 715 937

Other income: Insurance recoveries 8 36 – – Net gain on sale of non-current assets 260 1,699 49 1 Net loss on sale of controlled entities (14) – – –

254 1,735 49 1

F-152





2009 2008 2009 20084. EXPENSES $million $million $million $million

Cost of sales: Cash cost of production Production costs: Production expenses 460 465 95 155 Production facilities operating leases 72 78 29 30

532 543 124 185

Other operating costs: Pipeline tariffs, tolls and other 91 84 29 21 Royalties and excise 61 101 25 43

152 185 54 64

Total cash cost of production 684 728 178 249 Depreciation and depletion 612 662 250 273 Third party gas purchases 117 62 35 7 Decrease/(increase) in product stock 10 (29) – (8)

Total cost of sales 1,423 1,423 463 521

Other expenses: Selling 10 18 4 11 Corporate 77 97 86 87 Depreciation 7 2 3 –

94 117 93 98 Foreign exchange losses/(gains) 28 (24) 7 (6) Change in fair value of financial assets designated as at fair value through profit or loss (6) 12 – – Fair value hedges, losses/(gains): On the hedging instrument 134 (236) – – On the hedged item attributable to the hedged risk (138) 229 – – Exploration and evaluation expensed 202 179 32 22 Net impairment loss of oil and gas assets 37 216 35 71 Impairment reversal of receivables due from controlled entities – – (8) (24) Net impairment loss of investments in controlled entities – – 5 50

351 493 164 211

Profit before tax includes the following:

Depreciation and depletion: Depletion of subsurface assets 348 402 147 181 Depreciation of plant and equipment 268 257 105 90 Depreciation of buildings 3 5 1 2

Total depreciation and depletion 619 664 253 273 Employee benefits expense 243 217 223 210 Net write-down of inventories – 1 – – Operating lease rentals: Minimum lease payments 85 88 41 39

F-153




2009 2008 2009 20085. EARNINGS $million $million $million $million

EBITDAX is calculated as follows: Profit before tax 717 2,533 201 103 Add back: Net financing costs/(income) 13 91 (64) 103

EBIT 730 2,624 137 206 Add back: Depreciation and depletion 619 664 253 273 Exploration and evaluation expensed 202 179 32 22 Net impairment loss on oil and gas assets 37 216 35 71 Impairment reversal on receivables due from controlled entities – – (8) (24) Net impairment loss on investments in controlled entities – – 5 50

EBITDAX 1,588 3,683 454 598

6. NET FINANCING COSTS

Interest income: Controlled entities – – (117) (129) Other entities (85) (63) (80) (54)

Interest income (85) (63) (197) (183)

Interest expense: Controlled entities – – 121 276 Other entities 69 132 1 1 Less borrowing costs capitalised (9) (10) – –

60 122 122 277Unwind of the effect of discounting on provisions 38 32 11 9

Finance expenses 98 154 133 286

Net financing costs/(income) 13 91 (64) 103

F-154





2009 2008 2009 20087. TAXATION EXPENSE $million $million $million $million

Recognised in the income statement:

Income tax expense

Current tax expense

Current year 79 727 74 (8) Adjustments for prior years (15) (9) 9 14

64 718 83 6

Deferred tax expense

Origination and reversal of temporary differences 116 90 (21) 42 Benefit of tax losses recognised – (28) – (28) Adjustments for prior years 25 (12) – 31

141 50 (21) 45

Total income tax expense 205 768 62 51

Royalty-related taxation expense

Current tax expense

Current year 72 79 4 28 Adjustments for prior years (1) 7 – 2

71 86 4 30

Deferred tax expense

Origination and reversal of temporary differences 6 29 (7) 2 Adjustments for prior years 1 – – –

7 29 (7) 2

Total royalty-related taxation expense 78 115 (3) 32

Numerical reconciliation between tax expense and pre-tax net profit:

Profit before tax 717 2,533 201 103

Prima facie income tax at 30% (2008: 30%) 215 760 60 31 Increase in income tax expense due to: Investment allowance (21) – (10) – Net impairment loss of investments in controlled entities – – 2 15 Net impairment reversal of receivables from controlled entities – – – (7) Benefit arising from previously unrecognised tax losses or temporary differences that are used to reduce current tax expense (7) (2) – – Foreign losses not recognised 25 26 – – Dividends from controlled entities – – – (10) Tax losses recognised/(derecognised) 15 (28) – (28) Benefits arising from previously unrecognised tax bases in assets upon change in use (32) – – – Under-provided in prior years 10 19 9 45 Other – (7) 1 5

Income tax expense 205 768 62 51 Royalty-related taxation expense 78 115 (3) 32

Total taxation expense 283 883 59 83

Deferred tax charged/(credited) directly to equity:

Gain/(loss) on foreign currency loans designated as hedges of net investments in foreign operations 86 (82) – – Change in fair value of available-for-sale financial assets – (4) – (4) Off-market buy-back transaction costs – (1) – (1) Entitlement offer transaction costs (23) – (23) – Actuarial gain/(loss) on defined benefit plan 5 (11) 5 (11)

68 (98) (18) (16)

F-155




2009 2008 2009 20088. CASH AND CASH EQUIVALENTS $million $million $million $million

Cash at bank and in hand 234 273 58 155Short-term deposits 2,006 1,280 1,973 1,248

Cash and cash equivalents in the statements of cash flows 2,240 1,553 2,031 1,403

The carrying amounts of cash and cash equivalents represent fair value. Bank balances and short-term deposits earn interest at floating rates based upon market rates.

The Group’s usual cash management process includes investing cash in short-term deposits with an original maturity of three months or less. However, much of the proceeds from the 2009 Entitlement offer have been invested in short-term deposits with longer maturities to take advantage of higher available yields. As at 31 December 2009, $1,583 million was placed in term deposits with original maturities of 4 to 18 months. All deposits are held with a range of high creditworthy financial institutions and are readily convertible to cash with commensurate interest adjustments if required.

Restricted cash balances

Barracuda Limited, a wholly-owned subsidiary incorporated in Papua New Guinea, has cash and cash equivalents at 31 December 2009 of US$16 million (2008: US$10 million) which can only be repatriated to Australia with the permission of the Internal Revenue Commission of Papua New Guinea in accordance with the financing plan submitted in respect of PDL 3.

Wholly-owned Australian subsidiaries, Santos (BBF) Pty Ltd and Santos (SPV) Pty Ltd, have total cash and cash equivalents at 31 December 2009 of US$18 million (2008: US$20 million) that are held to cover obligations under a reserve-based facility.


2009 2008 2009 20089. TRADE AND OTHER RECEIVABLES $million $million $million $million

Current receivables

Trade receivables 324 327 119 121Allowance for impairment loss – – – –

324 327 119 121Tax-related balances owing by controlled entities – – – 533Other receivables and prepayments 593 254 238 40

917 581 357 694

Non-current receivables

Other receivables 10 18 9 17

The ageing of trade receivables at the reporting date is as follows: Trade receivables not yet due 286 307 113 121 Past due not impaired: Less than one month 11 3 1 – One to three months 17 11 2 – Three to six months 3 2 – – Six to twelve months 4 3 3 – Greater than twelve months 3 1 – – Considered impaired: Greater than twelve months – – – –

324 327 119 121

Trade receivables are non-interest-bearing and settlement terms are generally within 30 days. Trade receivables that are neither past due nor impaired relate to a number of independent customers for whom there is no recent history of default.

Impaired receivables

An allowance for impairment loss is recognised when there is objective evidence that an individual trade receivable is impaired. No impairment loss was recognised by the Group or the Company during the year.

F-156





2009 2008 2009 200810. INVENTORIES $million $million $million $million

Petroleum products 147 164 85 82Drilling and maintenance stocks 126 126 54 54

Total inventories at lower of cost and net realisable value 273 290 139 136

Inventories included above that are stated at net realisable value 39 29 24 18

11. OTHER FINANCIAL ASSETS

Current other financial assets

Term deposits 60 – 60 –Interest rate swap contracts 3 – – –Cross-currency swap contracts – 59 – –Other 2 – – –

65 59 60 –

Non-current other financial assets

Interest rate swap contracts 123 304 – –Cross-currency swap contracts – 33 – –Receivables due from controlled entities: Non-interest-bearing – – 147 108 Interest-bearing – – 1,848 1,193Receivables due from other related entities 10 6 – –Investments in controlled entities – – 3,575 3,422Investment in an associated entity – – 178 –Other 1 2 – 1

134 345 5,748 4,724

Receivables due from controlled entities are shown net of impairment losses of nil (2008: $8 million).

Receivables due from controlled entities are for loans made in the ordinary course of business for an indefinite period. Interest-bearing amounts owing by controlled entities are at normal market terms and conditions.

Receivables due from other related entities are for loans made in the ordinary course of business for a term of five years, and interest is calculated on normal market terms and conditions.

12. AVAILABLE-FOR-SALE FINANCIAL ASSETS

Equity securities available for sale 2 2 2 2

Investments in equity securities available for sale consist of investments in ordinary shares listed on the Australian Securities Exchange, and have no fixed maturity date or coupon rate.

F-157




Subsurface Plant and Subsurface Plant and

13. EXPLORATION AND assets equipment Total assets equipment Total

EVALUATION ASSETS $million $million $million $million $million $million

2009

Balance at 31 December 2009 783 140 923 30 – 30

Reconciliation of movements

Balance at 1 January 2009 451 42 493 43 – 43

Acquisition of controlled entities – 8 8 – – –

Acquisition of exploration and evaluation assets 351 – 351 – – –

Additions 140 90 230 16 – 16

Exploration and evaluation expensed (63) – (63) (13) – (13)

Disposals and recoupment of exploration and evaluation expenditure (24) – (24) (23) – (23)

Transfer to oil and gas assets (38) – (38) 7 – 7

Exchange differences (34) – (34) – – –


Comprising:

Acquisition-related costs 527 8 535 7 – 7

Successful exploration wells 199 – 199 23 – 23

Exploration and evaluation assets pending determination of success* 57 132 189 – – –

783 140 923 30 – 30

2008



Balance at 1 January 2008 332 – 332 16 – 16Acquisition of controlled entities 15 – 15 – – –Acquisition of exploration and evaluation assets 28 – 28 – – –Additions 260 42 302 81 – 81Exploration and evaluation expensed (82) – (82) (22) – (22)Net impairment losses (1) – (1) – – –Transfer to oil and gas assets (160) – (160) (32) – (32)Exchange differences 59 – 59 – – –


Comprising:

Acquisition-related costs 218 – 218 12 – 12 Successful exploration wells 106 – 106 23 – 23 Exploration and evaluation assets pending determination of success* 127 42 169 8 – 8

451 42 493 43 – 43

* Amounts related to plant and equipment includes costs capitalised for the evaluation of the GLNG facilities.

F-158






assets equipment Total assets equipment Total

14. OIL AND GAS ASSETS $million $million $million $million $million $million

2009

Cost at 31 December 2009 8,090 6,423 14,513 3,007 2,474 5,481

Less accumulated depreciation, depletion and impairment (4,886) (3,310) (8,196) (2,199) (1,560) (3,759)

Balance at 31 December 2009 3,204 3,113 6,317 808 914 1,722



Balance at 1 January 2009 464 123 587 – – –

Additions 217 118 335 – – –

Recoupment of exploration and evaluation expenditure (48) – (48) – – –

Transfer from exploration and evaluation assets 1 – 1 – – –

Exchange differences (96) (11) (107) – – –

Balance at 31 December 2009 538 230 768 – – –

Producing assets

Balance at 1 January 2009 2,727 2,876 5,603 862 916 1,778

Acquisition of oil and gas assets 7 2 9 – – –

Additions 360 402 762 130 86 216

Transfer from exploration and evaluation assets 37 – 37 (7) – (7)

Disposals (43) (5) (48) – (2) (2)

Depreciation and depletion expense (348) (242) (590) (147) (81) (228)

Net impairment losses (24) (13) (37) (30) (5) (35)

Exchange differences (50) (137) (187) – – –


Total oil and gas assets 3,204 3,113 6,317 808 914 1,722

Comprising:

Exploration and evaluation expenditure pending commercialisation 31 – 31 – – –

Other capitalised expenditure 3,173 3,113 6,286 808 914 1,722

3,204 3,113 6,317 808 914 1,722

F-159





assets equipment Total assets equipment Total

14. OIL AND GAS ASSETS (CONTINUED) $million $million $million $million $million $million

2008

Cost at 31 December 2008 7,838 6,121 13,959 2,885 2,392 5,277Less accumulated depreciation, depletion and impairment (4,647) (3,122) (7,769) (2,023) (1,476) (3,499)




Balance at 1 January 2008 220 1 221 – – –Additions 93 122 215 – – –Transfer from exploration and evaluation assets 113 – 113 – – –Exchange differences 38 – 38 – – –

Balance at 31 December 2008 464 123 587 – – –

Producing assets

Balance at 1 January 2008 2,907 2,457 5,364 750 900 1,650Acquisition of oil and gas assets – – – 1 – 1Additions 593 601 1,194 301 117 418Transfer from exploration and evaluation assets 47 – 47 32 – 32Disposals (351) (1) (352) – – –Depreciation and depletion expense (402) (239) (641) (181) (71) (252)Net impairment losses (138) (77) (215) (41) (30) (71)Exchange differences 71 135 206 – – –


Total oil and gas assets 3,191 2,999 6,190 862 916 1,778

Comprising:

Exploration and evaluation expenditure pending commercialisation 223 1 224 – – – Other capitalised expenditure 2,968 2,998 5,966 862 916 1,778

3,191 2,999 6,190 862 916 1,778

F-160





Land and Plant and Land and Plant and

15. OTHER LAND, BUILDINGS, buildings equipment Total buildings equipment Total

PLANT AND EQUIPMENT $million $million $million $million $million $million

2009

Cost at 31 December 2009 37 344 381 7 296 303

Less accumulated depreciation (4) (177) (181) (1) (168) (169)

Balance at 31 December 2009 33 167 200 6 128 134


Balance at 1 January 2009 32 128 160 5 105 110

Additions 2 67 69 1 48 49

Depreciation (1) (28) (29) – (25) (25)


2008

Cost at 31 December 2008 35 276 311 5 248 253Less accumulated depreciation (3) (148) (151) – (143) (143)



Balance at 1 January 2008 25 110 135 5 103 108Additions 8 40 48 – 23 23Depreciation (1) (22) (23) – (21) (21)


F-161



16. IMPAIRMENT OF CASH-GENERATING UNITS

At 31 December 2009 the Group reassessed the carrying amount of its oil and gas assets for indicators of impairment such as changes in future prices, future costs and reserves. As a result, the recoverable amounts of some cash-generating units were formally reassessed, resulting in an impairment loss of $37 million (2008: $216 million).

Estimates of recoverable amounts are based on the asset’s value in use, determined by discounting each asset’s estimated future cash flows at asset-specific discount rates. The pre-tax discount rates applied were equivalent to post-tax discount rates between 9.1% and 15.8% (2008: 8.8% and 15.8%), depending on the nature of the risks specific to each asset. Where an asset does not generate cash flows that are largely independent of other assets or groups of assets, the recoverable amount is determined for the cash-generating unit (“CGU”) to which the asset belongs.



CGU Segment Description assets equipment Total assets equipment Total

$million $million $million $million $million $million

Consolidated

2009

Mutineer-Exeter WA & NT Oil field 27 4 31 31 5 36

Thevenard WA & NT Oil field 2 6 8 – – –

Palm Valley WA & NT Gas field 4 – 4 (1) – (1)

Moonie to Brisbane pipeline Eastern Australia Pipeline – 9 9 – – –

Sampang Asia Pacific Oil and gas field (6) (6) (12) – – –

Sangu Asia Pacific Gas field (3) – (3) – – –

Total impairment loss 24 13 37 30 5 35

2008

Sampang Asia Pacific Oil and gas field 97 31 128 – – –Sangu Asia Pacific Gas field 20 – 20 – – –Other Asia Pacific Gas field 1 – 1 – – –Cooper Basin Eastern Australia Oil and gas field – 45 45 – 24 24Patricia Baleen Eastern Australia Gas field 21 1 22 10 1 11 Mutineer-Exeter WA & NT Oil field – – – 31 5 36

Total impairment loss 139 77 216 41 30 71

F-162




Assets Liabilities Net

17. DEFERRED TAX ASSETS 2009 2008 2009 2008 2009 2008 AND LIABILITIES $million $million $million $million $million $million

Recognised deferred tax assets and liabilities

Deferred tax assets and liabilities are attributable to the following:

Consolidated

Exploration and evaluation assets – – (192) (73) (192) (73) Oil and gas assets – – (241) (289) (241) (289) Other land, buildings, plant and equipment 36 46 – – 36 46 Available-for-sale financial assets 1 1 – – 1 1 Trade receivables – – (6) (4) (6) (4) Other receivables – – (4) (4) (4) (4) Inventories – – (30) (27) (30) (27) Prepayments – – – (2) – (2) Derivative financial instruments – – (35) (117) (35) (117) Other assets – – (16) (10) (16) (10) Equity-raising costs 19 1 – – 19 1 Interest-bearing loans and borrowings – 86 (71) – (71) 86 Other liabilities – – (1) (3) (1) (3) Provisions 57 66 – – 57 66 Royalty-related taxes – – (269) (258) (269) (258) Other items – – (49) (52) (49) (52) Tax value of carry-forward losses recognised 9 6 – – 9 6

Tax assets/(liabilities) 122 206 (914) (839) (792) (633) Set-off of tax (43) (95) 43 95 – –

Net tax assets/(liabilities) 79 111 (871) (744) (792) (633)

Santos Ltd

Exploration and evaluation assets – – (2) (10) (2) (10) Oil and gas assets – – (48) (77) (48) (77) Other land, buildings, plant and equipment – – (21) (9) (21) (9) Available-for-sale financial assets 1 1 – – 1 1 Trade receivables – – (6) (3) (6) (3) Other receivables – – (4) (5) (4) (5) Inventories – – (17) (15) (17) (15) Other assets 1 1 – – 1 1 Equity-raising costs 19 1 – – 19 1 Provisions 41 46 – – 41 46 Royalty-related taxes – – (61) (61) (61) (61) Other items – – (6) (3) (6) (3)

Tax assets/(liabilities) 62 49 (165) (183) (103) (134) Set-off of tax (62) (49) 62 49 – –

Net tax liabilities – – (103) (134) (103) (134)


Unrecognised deferred tax assets 2009 2008 2009 2008 $million $million $million $million

Deferred tax assets have not been recognised in respect of the following items: Temporary differences in relation to investments in subsidiaries 578 915 – – Deductible temporary differences 110 74 – – Tax losses 35 46 – –

723 1,035 – –

Deferred tax assets have not been recognised in respect of these items because it is not probable that the temporary differences will reverse in the future and that there will be sufficient future taxable profits against which the benefits can be utilised. Unrecognised deductible temporary differences and tax losses of $35 million (2008: $46 million) will expire between 2021 and 2028. The remaining deductible temporary differences and tax losses do not expire under current tax legislation.

F-163




2009 2008 2009 2008

18. TRADE AND OTHER PAYABLES $million $million $million $million

Trade payables 430 391 129 132Non-trade payables and accrued expenses 279 214 70 65Tax-related balances owing to controlled entities – – 62 –Amounts owing to controlled entities – – 517 526

709 605 778 723

19. INTEREST-BEARING LOANS AND BORROWINGS

This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings. For more information about the Group’s exposure to interest rate and foreign currency risk, see note 38.

Current liabilities

Obligations under finance leases 1 1 1 1Bank loans – secured 11 24 – –Bank loans – unsecured 22 28 – –Long-term notes 130 46 – –

164 99 1 1


Amounts owing to controlled entities – – 3,598 4,082Obligations under finance leases 2 3 2 3Bank loans – secured 8 20 – –Bank loans – unsecured 128 194 – –Medium-term notes 448 457 – –Long-term notes 1,063 1,682 – –

1,649 2,356 3,600 4,085

The amounts owing to controlled entities are for loans made in the ordinary course of business on normal market terms and conditions and are not repayable for a minimum of nine years.

The Group has entered into interest rate swap contracts to manage the exposure to interest rates. This has resulted in a weighted average interest rate on interest-bearing liabilities of 3.58% as at 31 December 2009 (2008: 5.74%). All borrowings are unsecured, with the exception of the secured bank loan, and arranged through a controlled entity, Santos Finance Ltd, and guaranteed by Santos Ltd.

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Details of major credit facilities

(A) BANK LOANS – SECURED

A reserve-based lending facility for US$65 million was entered into in the 2006 reporting period which bears a floating rate of interest. The facility is secured by a first charge over the Group’s interests in the Maleo assets in Indonesia with a carrying amount at 31 December 2009 of A$86 million. The average rate for the year was 6.33%, and A$19 million was outstanding at the reporting date (2008: A$44 million). The facility is available until 2012, and the current amount drawn down is expected to be fully repaid by 2011.

Committed loan facilities for the PNG LNG project were entered into by the joint venture participants on 15 December 2009 and are currently subject to the satisfaction of conditions precedent scheduled for the first quarter of 2010. The facilities include security over shares in Santos’ project participants and the assets and entitlements of those participants in the project including their shares in the jointly owned borrowing entity Papua New Guinea Liquefied Natural Gas Global Company LDC. Under the financing arrangements, Santos’ entities are entitled to on-loans from the jointly-owned borrowing entity to fund 70% of project costs representing up to 13.5% of the total loan commitments of US$14 billion which equates to A$2.1 billion. The facilities were provided by 17 commercial banks and six export credit agencies, bear fixed and floating rates of interest and have estimated final maturity dates (subject to the date of completion of the project) of December 2024 and December 2026 respectively.

(B) BANK LOANS – UNSECURED

The Group has access to the following committed revolving credit bank facilities with a number of financial institutions:

Year of maturity Currency 2009 2008 A$million A$million

2011 Multi-currency 225 225 2012 Multi-currency 375 375 2013 Multi-currency 100 100

700 700

Revolving credit facilities bear interest at the relevant interbank reference rate plus a margin. The amount drawn at 31 December 2009 is nil (2008: nil).

Term bank loans

Year of maturity Currency 2009 2008 A$million A$million

2009 USD – 28 2010 USD 22 28 2011 USD 22 29 2012 USD 19 25 2013 USD 16 21 2014 USD 17 22 2015 USD 17 22 2016 USD 18 23 2017 USD 19 24

150 222

Term bank loans bear interest at the relevant interbank reference rate plus a margin of up to 0.75%. The amount outstanding at 31 December 2009 is US$134 million (A$150 million) (2008: US$153 million (A$222 million)) at a weighted average annual effective interest rate of 2.30% (2008: 5.03%).

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Details of major credit facilities (continued)

(C) COMMERCIAL PAPER

The Group has an $800 million (2008: $800 million) Australian commercial paper programme supported by the revolving credit facilities referred to in (B) above. At 31 December 2009, no commercial paper is on issue (2008: nil).

(D) MEDIUM-TERM NOTES

The Group has a $1,000 million (2008: $1,000 million) Australian medium-term note programme under which the following were issued in 2005:

Effective

Year of issue Year of maturity interest rate 2009 2008 % $million $million

2005 2011 4.65* 349 349 2005 2015 4.21 99 108

448 457

* Floating rate of interest.

(E) LONG-TERM NOTES

The Group has issued long-term notes in the US Private Placement market with varying maturities. The Group has the following long-term notes on issue:

Effective

Year of issue Year of maturity interest rate 2009 2008 2009 2008 % US$million US$million A$million A$million

2000 2010 to 2015 3.75 203 211 227 306 2002 2010 to 2022 2.83 286 337 320 487 2007 2017 to 2027 0.85 578 646 646 935

1,067 1,194 1,193 1,728

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2009 2008 2009 200820. PROVISIONS $million $million $million $million

Current

Liability for employee benefits 72 62 66 61Restoration 12 32 1 3Remediation 7 21 – –Non-executive Directors’ retirement benefits 1 2 1 2Other 2 – 2 –

94 117 70 66

Non-current

Liability for employee benefits 5 4 5 4Liability for defined benefit obligations (refer note 30) 34 62 34 62Restoration 728 742 218 245Remediation 1 – 1 –

768 808 258 311

Movements in each class of provision during the financial year, other than provisions relating to employee benefits, are set out below:

Total

Non-executive

Directors’

Total Total retirement

restoration remediation benefits Other Total


Consolidated

Balance at 1 January 2009 774 21 2 – 797

Provisions made during the year 22 (5) – 2 19

Provisions used during the year (15) (8) (1) – (24)

Unwind of discount 38 – – – 38

Change in discount rate (53) – – – (53)

Exchange differences (26) – – – (26)

Balance at 31 December 2009 740 8 1 2 751

Santos Ltd

Balance at 1 January 2009 248 – 2 – 250

Provisions made during the year (12) 1 – 2 (9)

Provisions used during the year (2) – (1) – (3)

Unwind of discount 11 – – – 11

Change in discount rate (23) – – – (23)

Exchange differences (3) – – – (3)

Balance at 31 December 2009 219 1 1 2 223

Restoration

Provisions for future removal and restoration costs are recognised where there is a present obligation as a result of exploration, development, production, transportation or storage activities having been undertaken, and it is probable that an outflow of economic benefits will be required to settle the obligation. The estimated future obligations include the costs of removing facilities, abandoning wells and restoring the affected areas.

Remediation

Provisions for remediation costs are recognised where there is a present obligation as a result of an unexpected event that occurs outside of the planned operations of an asset.

Non-executive Directors’ retirement benefits

Agreements exist with Non-executive Directors appointed prior to 1 January 2004 providing for the payment of a sum on retirement from office as a Director in accordance with shareholder approval at the 1989 Annual General Meeting. Such benefits ceased to accrue with effect from 30 June 2004. These benefits have been fully provided for by the Company. In June 2007, the Board resolved to adopt a policy of indexation of these frozen benefits to prevent further erosion of the real value. The entitlements are annually indexed to the five-year Government bond rate.

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2009 2008 2009 200821. OTHER LIABILITIES $million $million $million $million

Current

Interest rate swap contracts 1 – – –Cross-currency swap contracts 7 – – –Embedded derivatives – 6 – –Other 2 2 – –

10 8 – –

Non-current

Other 9 9 – –

22. CAPITAL AND RESERVES

Issued capital

831,834,626 (2008: 584,812,875) ordinary shares, fully paid 4,987 1,947 4,987 1,94788,000 (2008: 88,000) ordinary shares, paid to one cent – – – –Nil (2008: 6,000,000) redeemable convertible preference shares – 584 – 584

4,987 2,531 4,987 2,531

In accordance with changes to the Corporations Law effective 1 July 1998, the shares issued do not have a par value and there is no limit on the authorised share capital of the Company.

Movement in fully paid ordinary shares

2009 2008 2009 2008 Note Number of shares $million $million

Balance at the beginning of the year 584,812,875 585,964,352 1,947 1,747Santos Employee Share Acquisition Plan 31(a) 101,376 111,153 2 1Santos Employee Share Purchase Plan 31(a) 18,400 300,100 – 3Shares issued on exercise of options 31(b) 427,050 303,583 4 3Shares issued on vesting of Share Acquisition Rights 31(b) 303,085 141,330 – –Santos Executive Share Plan 31(c) – – – –Non-executive Director Share Plan 31(d) 20,390 33,356 – 1Entitlement offer 22(a) 237,287,762 – 2,914 –Dividend Reinvestment Plan (“DRP”) 22(b) 2,005,880 2,323,249 30 35DRP underwriting agreement 22(b) 6,857,808 14,123,057 106 213Off-market buy-back 22(c) – (18,487,305) – (56)Transfer from redeemable convertible preference shares 22(d) – – (16) –

Balance at the end of the year 831,834,626 584,812,875 4,987 1,947

Redeemable convertible preference shares

Balance at the beginning of the year 22(d) 6,000,000 6,000,000 584 584Redeemable convertible preference shares bought back at face value and cancelled 22(d) (6,000,000) – (600) –Transfer to fully paid ordinary shares 22(d) – – 16 –

Balance at the end of the year – 6,000,000 – 584

Fully paid ordinary shares carry one vote per share, which entitles the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. The market price of the Company’s ordinary shares on 31 December 2009 was $14.09 (2008: $14.87).

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(A) ENTITLEMENT OFFER

On 11 May 2009 the Company launched a two for five accelerated pro-rata non-renounceable entitlement offer (“Entitlement offer”) at an offer price of $12.50 per share. As a result, 140,040,844 ordinary shares (fully paid) were allotted to institutional investors of the Company on 22 May 2009 and 97,246,918 ordinary shares (fully paid) were allotted to retail investors of the Company on 16 June 2009. The entitlement offer to the retail investors was fully underwritten. $2,966 million was credited and transaction costs, net of tax of $52 million was debited to the Company’s capital account.

(B) DIVIDEND REINVESTMENT PLAN

The Santos Dividend Reinvestment Plan is in operation. Shares are allocated at the daily weighted average market price of the Company’s shares on the ASX over a period of seven business days commencing on the business day after the Dividend Record Date. At this time, the Board has determined that no discount will apply. The Dividend Reinvestment Plan is currently not underwritten.

(C) OFF-MARKET BUY-BACK

On 6 October 2008, the Company bought back 18,487,305 fully paid ordinary shares, representing 3.07% of fully paid ordinary shares on issue at that date, at a price of $16.23 per share. $56 million was debited against the Company’s capital account (including $1 million transaction costs, net of tax) and $245 million was debited against retained earnings.

(D) REDEEMABLE CONVERTIBLE PREFERENCE SHARES

On 30 September 2009, the Company redeemed 6,000,000 redeemable convertible preference shares at their face value of $100, which resulted in an amount of $600 million being debited to the Company’s capital account. The accumulated transaction costs, net of tax, of $16 million were transferred to ordinary share capital.

Nature and purpose of reserves

Translation reserve

The foreign currency translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations where their functional currency is different to the presentation currency of the reporting entity, as well as from the translation of liabilities that hedge the Company’s net investment in a foreign subsidiary and exchange differences that arise on the translation of monetary items that form part of the net investment in a foreign operation.

Fair value reserve

The fair value reserve includes the cumulative net change in the fair value of available-for-sale financial assets until the financial asset is derecognised.

Capital risk management

The Group’s objective when managing capital is to safeguard its ability to continue as a going concern in order to meet its objectives with various stakeholders, and to maintain an efficient capital structure.

In order to maintain a prudent long-term capital structure the Group may adjust its distribution policy, return capital to shareholders, issue new shares or undertake corporate initiatives.

The Group manages its capital with a primary objective to maintain investment grade credit rating. One of the measures which is used to monitor capital is the gearing ratio. The Group undertakes this on a forecast and actual results basis. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total interest-bearing loans and borrowings less cash and cash equivalents and value of financial derivatives used to hedge net debt. Total capital is calculated as total equity as shown in the statement of financial position plus net debt. Equity in 2008 included redeemable convertible preference shares which were redeemed in September 2009 (refer note 22(D) above).

During 2009 the Group’s target was to maintain a gearing ratio below 45% and a BBB+ Standard & Poor’s credit rating. The gearing ratios at 31 December 2009 and 31 December 2008 were as follows:

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Consolidated

2009 200822. CAPITAL AND RESERVES (CONTINUED) $million $million

Total interest-bearing loans and borrowings (note 19) 1,813 2,455 Less: Cash and cash equivalents (note 8) (2,240) (1,553) Term deposits (note 11) (60) – Net fair value of financial derivatives used to hedge debt (notes 11 and 21): Cross-currency swap contracts 7 (92) Interest rate swap contracts (125) (304)

Net (assets)/debt (605) 506 Total equity 6,967 4,478

Total capital 6,362 4,984

Gearing ratio (9.5%) 10.2%

The decrease in the Group gearing ratio resulted primarily from the proceeds received from the Entitlement offer issued during the year.

Dividends

Dividends recognised during the year by the Company are:

Dividend Franked/ Payment

per share Total unfranked date

$ $million

2009

Interim 2009 redeemable preference 1.6191 10 Franked 30 Sep 2009

Final 2008 redeemable preference 2.9989 18 Franked 31 Mar 2009

Interim 2009 ordinary 0.22 182 Franked 30 Sep 2009

Final 2008 ordinary 0.20 117 Franked 31 Mar 2009

327

2008

Interim 2008 redeemable preference 3.3365 20 Franked 30 Sep 2008 Final 2007 redeemable preference 2.9983 18 Franked 31 Mar 2008 Interim 2008 ordinary 0.22 131 Franked 30 Sep 2008 Final 2007 ordinary 0.20 117 Franked 31 Mar 2008

286

Franked dividends paid during the year were franked at the tax rate of 30%.

After the reporting date the following dividends were proposed by the Directors. The dividends have not been provided for and there are no income tax consequences.

Final 2009 ordinary 0.20 166 Franked 31 Mar 2010

166

The financial effect of these dividends has not been brought to account in the financial statements for the year ended 31 December 2009 and will be recognised in subsequent financial reports.

Santos Ltd

2009 2008 $million $million

Dividend franking account

30% franking credits available to shareholders of Santos Ltd for future distribution, after adjusting for franking credits which will arise from the payment of the current tax liability at 31 December 2009 965 1,062

The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends.

The impact on the dividend franking account of dividends proposed after the reporting date but not recognised as a liability is to reduce it by $71 million (2008: $58 million).

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23. EARNINGS PER SHARE

Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of Santos Ltd (after deducting dividends paid on redeemable convertible preference shares) by the weighted average number of ordinary shares outstanding during the year.

Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders of Santos Ltd (after adding back the dividends paid on redeemable convertible preference shares) by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.

Consolidated


Earnings used in the calculation of basic and diluted earnings per share reconciles to the net profit after tax in the income statement as follows: Net profit attributable to ordinary equity holders of Santos Ltd 434 1,650 Dividends paid on redeemable convertible preference shares (28) (38)

Earnings used in the calculation of basic earnings per share 406 1,612 Dividends paid on redeemable convertible preference shares – 38

Earnings used in the calculation of diluted earnings per share 406 1,650

The weighted average number of shares used for the purposes of calculating diluted earnings per share reconciles to the number used to calculate basic earnings per share as follows:

2009 2008 Number of shares

Basic earnings per share 779,217,946 639,831,571

Partly paid shares 69,842 71,222 Executive share options 890,143 1,446,209 Share acquisition rights 2,445,269 1,694,044 Redeemable convertible preference shares – 36,650,691

Diluted earnings per share 782,623,200 679,693,737

Partly paid shares outstanding issued under the Santos Executive Share Plan, options outstanding issued under the Santos Executive Share Option Plan and Share Acquisition Rights (“SARs”) issued to eligible executives and redeemable convertible preference shares have been classified as potential ordinary shares and included in the calculation of diluted earnings per share in 2009. The number of shares included in the calculation are those assumed to be issued for no consideration, being the difference between the number that would have been issued at the exercise price and the number that would have been issued at the average market price. The weighted average number of shares used for the purposes of calculating diluted earnings per share in 2008 was retrospectively adjusted for the effect of the Entitlement offer (refer note 22(A)).

During the year, 427,050 (2008: 303,583) options and 303,085 (2008: 141,330) SARs were converted to ordinary shares. The diluted earnings per share calculation includes that portion of these options, SARs and partly paid shares assumed to be issued for nil consideration, weighted with reference to the date of conversion. The weighted average number included is 197,097 (2008: 181,447).

24,690 (2008: 460,385) options and 61,961 (2008: 236,426) SARs lapsed during the year. The diluted earnings per share calculation includes that portion of these options and SARs assumed to be issued for nil consideration, weighted with reference to the date the options or SARs lapsed. The weighted average number included is 45,570 (2008: 177,527).

The redeemable convertible preference shares on issue during 2009 were not included in the 2009 diluted earnings per share calculation as they were anti-dilutive for that period.

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24. CONSOLIDATED ENTITIES

Name Country of incorporation

Santos Ltd (Parent Entity) AUSTControlled entities1:Alliance Petroleum Australia Pty Ltd2 AUSTBasin Oil Pty Ltd AUSTBoston L.H.F. Pty Ltd AUSTBridgefield Pty Ltd AUSTBridge Oil Developments Pty Limited2 AUSTBronco Energy Pty Limited AUSTCanso Resources Pty Ltd AUSTCoveyork Pty Ltd AUSTDoce Pty Ltd AUSTFairview Pipeline Pty Ltd AUSTFarmout Drillers Pty Ltd AUSTGidgealpa Oil Pty Ltd AUSTKipper GS Pty Ltd AUSTControlled entity of Kipper GS Pty Ltd Santos Carbon Pty Ltd AUSTMoonie Pipeline Company Pty Ltd AUSTReef Oil Pty Ltd2 AUSTSantos Asia Pacific Pty Ltd AUSTControlled entities of Santos Asia Pacific Pty Ltd Santos (Sampang) Pty Ltd AUST Santos (Warim) Pty Ltd AUSTSantos Australian Hydrocarbons Pty Ltd AUSTSantos (BOL) Pty Ltd2 AUSTControlled entity of Santos (BOL) Pty Ltd Bridge Oil Exploration Pty Limited AUSTSantos CSG Pty Ltd AUSTSantos Darwin LNG Pty Ltd2 AUSTSantos Direct Pty Ltd AUSTSantos Facilities Pty Ltd AUSTSantos Finance Ltd AUSTSantos GLNG Pty Ltd AUSTSantos (Globe) Pty Ltd AUSTSantos International Holdings Pty Ltd AUSTControlled entities of Santos International Holdings Pty Ltd Barracuda Limited PNG CJSC South Petroleum Company1 KGZ Lavana Limited PNG Santos Petroleum Ventures B.V. NL Sanro Insurance Pte Ltd SG Santos Americas and Europe Corporation USA Controlled entities of Santos Americas and Europe Corporation Santos TPY Corp USA Controlled entities of Santos TPY Corp Santos Queensland Corp USA Santos TOG Corp USA Controlled entities of Santos TOG Corp Santos TOGA Pty Ltd AUST Controlled entity of Santos TOGA Pty Ltd Santos TPC Pty Ltd AUST Santos TPY CSG Corp USA Santos Bangladesh Limited UK Santos (Bawean) Pty Ltd AUST Santos (BBF) Pty Ltd AUST Controlled entities of Santos (BBF) Pty Ltd Santos (SPV) Pty Ltd AUST Controlled entities of Santos (SPV) Pty Ltd Santos (Madura Offshore) Pty Ltd AUST SB Jethro Pty Ltd (previously Santos Brantas Pty Ltd) AUST Santos (Donggala) Pty Ltd AUST Santos Egypt Pty Ltd AUST Santos Hides Ltd PNG Santos International Operations Pty Ltd AUST

Name Country of incorporation

Santos International Ventures Pty Ltd AUST Santos Niugini Exploration Limited PNG Santos (Nth Bali 1) Pty Ltd AUST Santos (Papalang) Pty Ltd AUST Santos (Popodi) Pty Ltd AUST Santos Vietnam Pty Ltd AUST Zhibek Resources Limited1 UK Controlled entity of Zhibek Resources Limited CJSC KNG Hydrocarbons1 KGZSantos (JBJ1) Pty Ltd AUSTControlled entities of Santos (JBJ1) Pty Ltd Santos (JBJ2) Pty Ltd AUST Controlled entity of Santos (JBJ2) Pty Ltd Shaw River Power Station Pty Ltd AUSTSantos (JPDA 06-104) Pty Ltd AUSTSantos (JPDA 91-12) Pty Ltd AUSTSantos (NARNL Cooper) Pty Ltd2 AUSTSantos (N.T.) Pty Ltd AUSTControlled entity of Santos (N.T.) Pty Ltd Bonaparte Gas & Oil Pty Limited AUSTSantos Offshore Pty Ltd2 AUSTSantos Oil Exploration (Malaysia) Sdn Bhd (in liquidation) MYSantos Petroleum Pty Ltd2 AUSTSantos QNT Pty Ltd2 AUSTControlled entities of Santos QNT Pty Ltd Gastar Power Pty Ltd3 AUST Santos QNT (No. 1) Pty Ltd2 AUST Controlled entities of Santos QNT (No. 1) Pty Ltd Santos Petroleum Management Pty Ltd2 AUST Santos Petroleum Operations Pty Ltd AUST TMOC Exploration Proprietary Limited AUST Santos QNT (No. 2) Pty Ltd2 AUST Controlled entities of Santos QNT (No. 2) Pty Ltd Moonie Oil Pty Ltd AUST Petromin Pty Ltd AUST Santos (299) Pty Ltd (in liquidation) AUST Santos Exploration Pty Ltd AUST Santos Gnuco Pty Ltd AUST Transoil Pty Ltd AUSTSantos Resources Pty Ltd AUSTSantos (TGR) Pty Ltd AUSTSantos Timor Sea Pipeline Pty Ltd AUSTSesap Pty Ltd AUSTVamgas Pty Ltd2 AUSTNotes

1 Beneficial interests in all controlled entities are 100%, except: • CJSC South Petroleum Company (70%); • CJSC KNG Hydrocarbons (54%); and, • Zhibek Resources Limited (75%).2 Company is party to a Deed of Cross Guarantee. Refer note 37.3 Company acquired during the year. Refer note 25.

Country of incorporationAUST – AustraliaKGZ – Kyrgyz RepublicMY – MalaysiaNL – NetherlandsPNG – Papua New GuineaSG – SingaporeUK – United KingdomUSA – United States of America

In the financial statements of the Company, investments in controlled entities are recognised at cost, less any impairment losses.

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25. ACQUISITIONS OF SUBSIDIARIES

During the financial year the following controlled entities were acquired and their operating results have been included in the income statement from the date of acquisition:

Contribution to

Beneficial Purchase consolidated profit

Name of entity Date of acquisition interest acquired consideration since acquisition

% $million $million

Gastar Power Pty Ltd 2 July 2009 100 8 –

Gastar Power Pty Ltd owns a 35% share of the Wilga Park Power Station. The operator and owner of the remaining 65% is Narrabri Power Pty Ltd, which is a wholly-owned subsidiary of Eastern Star Gas Limited. If the acquisition had occurred on 1 January 2009, revenue and net profit would not have been affected.

The acquisitions had the following effect on the Group’s assets and liabilities:

Carrying Fair value Recognised

amounts adjustments values

$million $million $million

Plant and equipment 7 1 8

Net identifiable assets and liabilities 7 1 8

The cash outflow on acquisition of controlled entities is as follows: Cash paid 8

Net cash acquired with subsidiaries –

Total cash paid for current year acquisition 8

Deferred consideration paid* 9

Net consolidated cash outflow 17

* Deferred consideration paid in 2009 comprises: • $8 million to fund phase 2 of the exploration programme relating to the 2006 acquisition of CJSC South Petroleum Company; and • $1 million to fund phase 1 of the exploration programme relating to the 2008 acquisition of Zhibek Resources Limited.

In 2008, the Group acquired beneficial interest in the following controlled entities:

Beneficial

interest Purchase

Name of entity Date of acquisition acquired consideration

% $million

Zhibek Resources Limited 17 November 2008 75 – CJSC KNG Hydrocarbons 17 November 2008 54 –

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26. DISPOSAL OF SUBSIDIARIES

On 10 May 2009, the Group disposed of the wholly-owned subsidiaries Santos UK (Kakap) Limited and Novus Nominees Pty Ltd for US$18 million (A$24 million), resulting in a loss on sale of $14 million. The amount of foreign currency translation reserve recycled into profit and loss is nil.

The major classes of assets and liabilities of Santos UK (Kakap) Limited and Novus Nominees Pty Ltd at the date of disposal were as follows:

10 May 2009

$million

Trade and other receivables 2

Inventories 1

Exploration and evaluation assets 38

Interest-bearing loan receivable 14

Trade and other payables (3)

Tax liabilities (2)

Provisions (1)

Deferred tax liabilities (11)

Net assets attributable to the disposed entities 38

The cash inflow on disposal of controlled entities is as follows: Cash received 24

Net cash and cash equivalents disposed with subsidiaries –

Net consolidated cash inflow 24

27. INVESTMENT IN AN ASSOCIATE

Ownership interest Consolidated

Company Country Principal activity 2009 2008 2009 2008 % % $million $million

Eastern Star Gas Limited Australia Oil and gas 19.42 – 177 –

Movement in the carrying amount of the Group’s investment in an associate

Balance at beginning of the year – –Purchase of investment in associate 178 –Share of losses, after tax (1) –

Balance at end of the year 177 –

Fair value of the Group’s investment in listed associate

Market value of the Group’s investment in Eastern Star Gas Limited based on the closing share price on 31 December 2009 145 –

The Company believes that the Group’s investment in Eastern Star Gas Limited will be recovered through ongoing exploration and evaluation of the associated company’s underlying assets in which the Group also holds a direct interest.

Summarised financial information*

The following table illustrates the summarised financial information relating to the Group’s associate: The Group’s share of the associate’s statement of financial position

Total assets 181 – Total liabilities (4) –

Net assets 177 –

The Group’s share of the associate’s income statement

Revenue – – Net loss after tax (1) –

* The Group’s share of the associate’s summarised financial information is estimated based on the Eastern Star Gas Limited’s 30 June 2009 annual financial report and the latest ASX releases.

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28. INTERESTS IN JOINT VENTURES

(A) The following are the significant joint ventures in which the Group is a joint venturer:

Joint venture Cash-generating unit Principal activities % interest

Oil and gas assets – Producing assets

Bayu-Undan Liquids Bayu-Undan Gas production 11.4 Bayu-Undan LNG Bayu-Undan Gas production 11.4 Casino Casino Gas production 50.0 Fairview Fairview Gas (CSG) production 45.7 Madura PSC (Maleo) Madura PSC Gas production 67.5 Mereenie Mereenie Oil and gas production 65.0 John Brookes John Brookes Gas production 45.0 Mutineer-Exeter Mutineer-Exeter Oil production 33.4 Sampang PSC (Oyong, Wortel) Sampang PSC Oil and gas production 45.0 Sangu Sangu PSC Gas production 37.5 Stag Stag Oil and gas production 66.7 SA Fixed Factor Area Cooper Basin Oil and gas production 66.6 SWQ Unit Cooper Basin Gas production 60.1

Oil and gas assets – Assets in development

PNG LNG PNG LNG Gas development 13.5 Kipper Kipper Gas development 35.0 Reindeer Reindeer Gas development 45.0 Chim Sao Vietnam (Block 12) Gas development 31.9

Exploration and evaluation assets

Evans Shoal – Contingent gas resource 40.0 Gunnedah – Contingent gas (CSG) resource 35.0 PEL1 and 12 – Contingent gas (CSG) resource 25.0

(B) The Group recognises its interests in the following jointly controlled entities using the proportionate consolidation method of accounting:

Joint venture entity % interest

Darwin LNG Pty Ltd 11.4 Papua New Guinea Liquefied Natural Gas Global Company LDC 13.5 Easternwell Drilling Services Holdings Pty Ltd 50.0 GLNG Operations Pty Ltd 60.0


2009 2008 2009 2008 $million $million $million $million

The Group’s share of the assets, liabilities, income and expenses of the jointly controlled entities, which are included in the consolidated financial statements using the proportionate consolidation method of accounting, are as follows: Current assets 64 50 – – Non-current assets 164 194 – –

228 244 – – Current liabilities (21) (98) – – Non-current liabilities (24) (15) – –

Net assets 183 131 – –

Revenue 216 238 – – Expenses (189) (214) – –

Profit before income tax 27 24 – –

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2009 2008 2009 200828. INTERESTS IN JOINT VENTURES (CONTINUED) $million $million $million $million

(C) The Group’s share of capital expenditure commitments and minimum exploration commitments in respect of joint ventures are: Capital expenditure commitments 2,113 366 104 93 Minimum exploration commitments 157 187 9 7

29. NOTES TO THE STATEMENTS OF CASH FLOWS

(A) RECONCILIATION OF CASH FLOWS FROM OPERATING ACTIVITIES

Profit after income tax 434 1,650 142 20 Add/(deduct) non-cash items: Depreciation and depletion 619 664 253 273 Net impairment loss on investment in controlled entities – – 5 50 Net impairment reversal on receivables due from controlled entities – – (8) (24) Dividends distributed by controlled entities – – – (27) Net borrowing costs charged by controlled entities – – 4 147 Exploration and evaluation expensed 64 83 13 12 Net impairment loss on oil and gas assets 37 216 35 71 Net gains on fair value hedges (5) (7) – – Share-based payments expense 11 8 11 8 Borrowing costs capitalised (9) (10) – – Unwind of the effect of discounting on provisions 38 32 11 9 Change in fair value of financial assets designated as at fair value through profit or loss (5) 12 – – Defined benefit plan expense 3 3 2 2 Foreign exchange losses/(gains) 28 (24) 7 (6) Net gain on sale of non-current assets (260) (1,699) (49) (1) Share of net loss in an associate 1 – – – Net loss on sale of controlled entities 14 – – –

Net cash provided by operating activities before changes in assets or liabilities 970 928 426 534 Add/(deduct) change in operating assets or liabilities net of acquisitions or disposals of businesses: Decrease/(increase) in trade and other receivables 17 11 (16) 49 Decrease/(increase) in inventories 17 (58) (1) (20) (Increase)/decrease in other assets (8) (1) 1 (7) Net increase/(decrease) in deferred tax assets and deferred tax liabilities 63 74 (34) 40 Increase/(decrease) in current tax liabilities 95 398 28 (174) Increase/(decrease) in trade and other payables 14 (18) 26 (63) (Decrease)/increase in provisions (13) 51 3 6

Net cash provided by operating activities 1,155 1,385 433 365

(B) NON-CASH FINANCING AND INVESTING ACTIVITIES

Dividend Reinvestment Plan 31 35 31 35 Dividends distributed by controlled entities – – – 27 Share subscriptions in controlled entities – – (158) (14) Income tax transferred from controlled entities – – 40 613 Net borrowing costs charged by controlled entities – – (4) (147)

(C) TOTAL TAXATION PAID

Income tax paid

Cash outflow from operating activities (55) (292) (24) (229) Cash outflow from investing activities (497) – (497) – Royalty-related tax paid

Cash outflow from operating activities (71) (152) (25) (35)

(623) (444) (546) (264)

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2009 2008 2009 200830. EMPLOYEE BENEFITS $million $million $million $million

(A) DEFINED BENEFIT PLAN

Defined benefit members of the Santos Superannuation Plan receive a lump sum benefit on retirement, death, disablement and withdrawal. The defined benefit section of the plan is closed to new members. All new members receive accumulation only benefits.

Amount recognised in the statements of financial position:

Deficit in plan recognised in non-current provisions (refer note 20) 34 62 34 62 Non-current receivables (refer note 9) (9) (17) (9) (17)

25 45 25 45

Movements in the liability for net defined benefit obligations

recognised in the statements of financial position

Liability at the beginning of the year 45 11 45 11 Expense recognised in income statement 3 3 2 2 Amount capitalised in oil and gas assets 1 2 1 1 Amount recognised in retained earnings (16) 37 (16) 37 Defined benefit receivable from controlled entities – – 1 2 Employer contributions (8) (8) (8) (8)

Liability at the end of the year 25 45 25 45

Expense recognised in the income statements

Service cost 4 3 2 2 Interest cost 3 4 2 2 Expected return on plan assets (4) (4) (2) (2)

3 3 2 2

The expense is recognised in the following line items in

the income statements:

Cost of sales 3 – 2 – Other expenses – 3 – 2

3 3 2 2

Amounts recognised in the statements of comprehensive income

Actuarial gain/(loss) in the year 16 (37) 16 (37) Tax effect (5) 11 (5) 11

Net actuarial gain/(loss) in the year 11 (26) 11 (26)

Cumulative actuarial gain/(loss) recognised in the statements of comprehensive income, net of tax 8 (23) 8 (23)

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30. EMPLOYEE BENEFITS (CONTINUED)

(A) DEFINED BENEFIT PLAN (CONTINUED)

Historical information for the current and previous periods

2009 2008 2007 2006 2005 $million $million $million $million $million

Consolidated

Present value of defined benefit obligations 170 175 162 158 129 Fair value of plan assets (136) (113) (146) (132) (113)

Deficit in plan 34 62 16 26 16

Experience adjustments (gain)/loss on plan assets (9) 43 (4) (6) (8) Experience adjustments (gain)/loss on plan liabilities (7) (14) (1) 18 –

Santos Ltd

Present value of defined benefit obligations 170 175 162 158 129 Fair value of plan assets (136) (113) (146) (132) (113)

Deficit in plan 34 62 16 26 16

Experience adjustments (gain)/loss on plan assets (9) 43 (4) (6) 8 Experience adjustments (gain)/loss on plan liabilities (7) (14) (1) 18 –



Reconciliation of the present value of the defined benefit obligations

Opening defined benefit obligations 175 162 175 162 Service cost 8 8 8 8 Interest cost 7 9 7 9 Contributions by plan participants 8 8 8 8 Actuarial (gains)/losses (14) 7 (14) 7 Benefits paid (3) (16) (3) (16) Taxes and premiums paid (3) (3) (3) (3) Curtailments (1) – (1) – Settlements (7) – (7) –

Closing defined benefit obligations 170 175 170 175

Reconciliation of the fair value of plan assets

Opening fair value of plan assets 113 145 113 145 Expected return on plan assets 8 10 8 10 Actuarial gains/(losses) 9 (43) 9 (43) Employer contributions 11 12 11 12 Contributions by plan participants 8 8 8 8 Benefits paid (3) (16) (3) (16) Taxes and premiums paid (3) (3) (3) (3) Settlements (7) – (7) –

Closing fair value of plan assets 136 113 136 113

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2009 2008 2009 200830. EMPLOYEE BENEFITS (CONTINUED) % % % %

(A) DEFINED BENEFIT PLAN (CONTINUED)

Plan assets

The percentage invested in each asset class at the reporting date: Australian equity 32 28 32 28 International equity 29 27 29 27 Fixed income 10 10 10 10 Property 9 13 9 13 Other 7 10 7 10 Cash 13 12 13 12

Fair value of plan assets

The fair value of plan assets includes no amounts relating to:

• any of the Group’s own financial instruments; or

• any property occupied by, or other assets used by, the Group.


2009 2008 2009 2008 Actual return on plan assets $million $million $million $million

Actual return on plan assets – gain/(loss) 12 (24) 12 (24)

Expected rate of return on plan assets

The expected return on assets assumption is determined by weighting the expected long-term return for each asset class by the target allocation of assets to each asset class and allowing for the correlations of the investment returns between asset classes. The returns used for each asset class are net of investment tax and investment fees. An allowance for asset-based administration expenses has been deducted from the expected return.

Principal actuarial assumptions at the reporting date (expressed as weighted average)

2009 2008 % p.a. % p.a.

Discount rate 4.8 4.0 Expected rate of return on plan assets 7.0 7.0 Expected average salary increase rate over the life of the plan 6.0 6.0

The expected rate of return on Plan assets includes a reduction to allow for the administrative expenses of the plan.

Expected contributions

The Group expects to contribute $8 million to the defined benefit superannuation plan in 2010.

(B) DEFINED CONTRIBUTION PLANS

The Group makes contributions to several defined contribution plans. The amount recognised as an expense for the year was $8 million (2008: $6 million).

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31. SHARE-BASED PAYMENT PLANS

(A) CURRENT GENERAL EMPLOYEE SHARE PLANS

The Company currently operates two general employee share plans:

• the Santos Employee Share Acquisition Plan (“SESAP”); and

• the Santos Employee Share Purchase Plan (“SESPP”).

Both of these plans have operated since 1997.

SESAP

Broadly, SESAP provides for permanent eligible employees with at least a minimum period of service determined by Directors as at the offer date (one year of completed service) to be entitled to acquire shares under this Plan. Executives participating in the Executive Long-term Incentive Programme in 2009, casual employees and Directors of the Company are excluded from participating in this Plan. Employees are not eligible to participate under the Plan while they are resident overseas unless the Board decides otherwise.

The Plan provides for grants of fully paid ordinary shares in the capital of the Company up to a value determined by the Board being $1,000 per annum per eligible employee. A trustee is funded by the Group to acquire shares directly from the Company or on market. The shares are then held by the trustee on behalf of eligible employees who participate in the Plan.

The employee’s ownership of shares allocated under the Plan, and his or her right to deal with them, are subject to restrictions until the earlier of the expiration of the restriction period determined by the Board (being three years) and the time when he or she ceases to be an employee. Participants are entitled to instruct the trustee as to the exercise of voting rights, receive dividends and participate in bonus and rights issues during the restriction period. At the end of the reporting period shares are granted to eligible employees at no cost to the employee.

Summary of share movements in the SESAP during 2009 (and comparative 2008 information):

Opening Granted Distributions Closing

balance during the year during the year balance

Fair value Fair value Fair value

Grant date per share aggregate aggregate

Number Number $ Number $ Number $

2009

17 November 2006 97,980 – – 97,980 1,495,791 – –

20 November 2007 92,625 – – 6,150 95,780 86,475 1,218,433

21 November 2008 110,679 – – 7,189 111,436 103,490 1,458,174

20 November 2009 – 101,376 15.11 594 8,602 100,782 1,420,018

301,284 101,376 111,913 1,711,609 290,747 4,096,625

2008

18 November 2005 89,848 – – 89,848 1,164,977 – – 17 November 2006 105,156 – – 7,176 117,648 97,980 1,456,963 20 November 2007 99,825 – – 7,200 119,379 92,625 1,377,334 21 November 2008 – 111,153 12.62 474 6,621 110,679 1,656,797

294,829 111,153 104,698 1,408,625 301,284 4,491,094

Shares are allocated at a price equal to the weighted average sale price of the Company’s ordinary shares on the ASX during the one-week period up to and including the grant date. This is shown as fair value per share for shares granted during the year. The fair value of shares distributed from the trust during the year and remaining in the trust at the end of the financial year is the market price of shares of the Company on the ASX as at close of trading on the respective dates.

Distributions during the year occurred at various dates throughout the year and therefore have not been separately listed.

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The amounts recognised in the financial statements of the Group and the Company in relation to SESAP during the year were:


2009 2008 2009 2008 $000 $000 $000 $000

Employee expenses 1,532 1,403 1,532 1,403 Issued ordinary share capital 1,532 1,403 1,532 1,403

At 31 December 2009, the total number of shares acquired under the Plan since its commencement was 2,408,566.

SESPP

The general employee offer under SESPP is open to all employees (other than a casual employee or Director of the Company) determined by the Board who are continuing employees at the date of the offer. However, employees who are not resident in Australia at the time of an offer under the Plan and those who have participated in the Executive Long-term Incentive Programme during the year will not be eligible to participate in that offer unless the Board otherwise decides.

Under the Plan, eligible employees may be offered the opportunity to subscribe for or acquire fully paid ordinary shares in the capital of the Company at a discount to market price, subject to restrictions, including on disposal, for a period determined by the Board (one year). The subscription or acquisition price is Market Value (being the weighted average sale price of the Company’s ordinary shares on the ASX during the one-week period up to and including the offer date) less any discount determined by the Board (5%). Under the Plan, at the discretion of the Board, financial assistance may be provided to employees to subscribe for and acquire shares under the Plan. The 5% discount constitutes financial assistance for these purposes. Participants are entitled to vote, receive dividends and participate in bonus and rights issues during the restriction period.

On 20 November 2009, the Company issued 18,400 ordinary shares to 36 eligible employees at a subscription price of $14.86 per share under the Plan, being a 5% discount on the Market Value of $15.641 (calculated by reference to the weighted average sales price of those shares listed on the ASX during the one-week period up to and including the offer date, 23 October 2009). The total market price of those shares on the issue date was $276,368, based on the market price of $15.02 at the close of trade on the date of issue. The total amount received from employees for those shares was $273,424.

A summary of share movements in the SESPP are set out below:

Opening Granted Distributions Closing

balance during the year during the year balance

Fair value

Grant date per share

Number Number $ Number Date Number

2009

21 November 2008 300,100 – – 300,100 20 November 2009 –

20 November 2009 – 18,400 15.64 – – 18,400

300,100 18,400 300,100 18,400

2008

20 November 2007 400 – – 400 20 November 2008 – 21 November 2008 – 300,100 11.48 – – 300,100

400 300,100 400 300,100

The fair value per share for shares granted during the year is Market Value (as defined above). The consideration received by the Company per share is Market Value less the discount of 5% referred to above.

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The amounts recognised in the financial statements of the Group and the Company in relation to the general employee offer under the SESPP during the year were:


2009 2008 2009 2008 $000 $000 $000 $000

Issued ordinary share capital 273 3,274 273 3,274

At 31 December 2009, the total number of shares acquired under the general employee offer of the Plan since its commencement was 1,140,800.

(B) EXECUTIVE LONG-TERM INCENTIVE PROGRAMME

The Company’s Executive Long-term Incentive (“LTI”) Programme provides for invitations to be extended to eligible executives selected by the Board.

The Programme currently consists of an offer of securities under:

• the Santos Employee Share Purchase Plan (“SESPP”); and

• the Santos Executive Share Option Plan (“SESOP”).

SESOP has operated since 1997 and the SESPP has been used as a component of executive compensation since 2003.

Share Acquisition Rights and options

Each Share Acquisition Right (“SAR”) and option is a conditional entitlement to a fully paid ordinary share, subject to the satisfaction of performance conditions, on terms and conditions determined by the Board.

SARs and options carry no voting or dividend rights until the performance conditions are satisfied and, in the case of options, when the options are exercised or, in the case of SARs, when the SARs vest.

Chief Executive Officer and Managing Director

No new LTI grant was made to the Chief Executive Officer (“CEO”) in 2009 as the grants made to Mr D J W Knox in 2008 constitute his LTI entitlement for the 2008, 2009 and 2010 years.

The 2008 grants comprised:

• a performance-based equity award made to Mr Knox in his capacity as Executive Vice President, Growth Projects (“Performance Award”);

• a service-based equity award made to Mr Knox in his capacity as Executive Vice President, Growth Projects (“Deferred Award”); and

• a further performance-based equity award made to Mr Knox upon his appointment as CEO to supplement the grants already made to him in his Senior Executive capacity (“CEO Performance Award”).

Mr Knox elected to receive his equity awards as a combination of options and share acquisition rights (SARs).

The key terms of Mr Knox’s awards are as follows:

• The LTI grants made in 2008 were structured to provide Mr Knox with an annual LTI opportunity of 100% of Total Fixed Remuneration (“TFR”) (based on the 2008 level of $1.75 million) for each of the 2008, 2009 and 2010 years, subject to achieving applicable vesting conditions.

• Mr Knox was able to elect to receive his LTI grant as either SARs, market value options or a combination of the two. He chose to take a combination of the two.

• All of the performance-based LTIs are subject to hurdles based on the Company’s Total Shareholder Return (“TSR”) relative to the ASX 100 over a three-year performance period. There is no retesting of performance conditions.

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• The CEO Performance Award is divided into three tranches:

Tranche 1: Tested over the period from 1 January 2008 to 31 December 2010; Tranche 2: Tested over the period from 1 January 2009 to 31 December 2011; and Tranche 3: Tested over the period from 1 January 2010 to 31 December 2012.

• Each tranche of the CEO Performance Award vests in accordance with the following vesting schedule:


< 50th percentile 0% = 50th percentile 37.5% 51st to 75th percentile 39% to 75% 76th to 100th percentile 76% to 100%

• None of the grants has vested as the period over which the performance hurdles are tested has not expired.

• Upon vesting of SARs, ordinary shares in Santos will automatically be allocated to Mr Knox. These shares will be subject to restrictions until the earlier of 10 years from the grant date, cessation of employment, or the date at which the Board approves, at Mr Knox’s request, the removal of the restrictions.

• Options may be exercised at any time between the vesting date and the expiry date (27 July 2018), subject to payment of the exercise price of $17.36 per option (being the volume weighted average price in the week up to and including the grant date).

• Full details of the equity grants made to Mr Knox in 2008 are contained in the 2008 Remuneration Report.

During the financial year, the Company granted nil (2008: 444,974) options over unissued shares to the CEO as set out below:

2009 2008 Weighted Weighted average average exercise exercise price price $ Number $ Number

Outstanding at the beginning of the year 16.98 444,974 – – Granted during the year – – 16.98 444,974

Outstanding at the end of the year 16.98 444,974 16.98 444,974

Exercisable at the end of the year – – – –

The options outstanding at 31 December 2009 have an exercise price in the range of $15.39 to $17.36, and a weighted average contractual life of 8.55 years.

During the year no options were exercised (2008: nil).

The fair value of shares issued as a result of exercising the options or vesting of SARs during the reporting period at their issue date is the market price of shares of the Company on the ASX as at close of trading.

The fair value of services received in return for share options granted is measured by reference to the fair value of share options granted. The estimate of the fair value of the services received is measured based on the Monte Carlo simulation method. The contractual life of the option is used as an input into this model. Expectations of early exercise are incorporated into the models.

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2008

Performance Deferred Award Award CEO Performance Awards

Option grant F1 F2 F3 F4 F5

Fair value at grant date ($) 5.25 7.30 5.77 4.22 4.29 Share price on grant date ($) 17.71 17.71 17.40 17.40 17.40 Exercise price ($) 15.39 15.39 17.36 17.36 17.36 Expected volatility (weighted average, %p.a.) 30.7 30.7 30.9 30.9 30.9 Option life (weighted average) 10 years 10 years 10 years 10 years 10 years Expected dividends (%p.a.) 2.3 2.3 2.3 2.3 2.3 Risk-free interest rate (based on Australian Government bond yields, %p.a.) 6.29 6.29 6.05 6.05 6.05

The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share options), adjusted for any expected changes to future volatility due to publicly available information.

During the financial year, the Company granted nil (2008: 136,779) SARs to the CEO as set out below. Shares allocated on vesting of SARs will be subject to further restrictions on dealing for a maximum of ten years after the original grant date. No amount is payable on grant or vesting of the SARs.

Number of SARs

2009 2008

Outstanding at the beginning of the year 136,779 – Granted during the year – 136,779

Outstanding at the end of the year 136,779 136,779


The fair value of services received in return for SARs granted is measured by reference to the fair value of SARs granted. The estimate of the fair value of the services received is measured based on the Monte Carlo simulation method. The contractual life of the SARs is used as an input into this model. Expectations of early exercise are incorporated into the Monte Carlo simulation method.

The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share rights), adjusted for any expected changes to future volatility due to publicly available information.

2008 CEO Performance Award

SARs grant F3 F4 F5

Fair value at grant date ($) 13.82 8.60 8.41 Share price on grant date ($) 17.40 17.40 17.40 Exercise price ($) – – – Expected volatility (weighted average, %p.a.) 30.9 30.9 30.9 Right life (weighted average) 10 years 10 years 10 years Expected dividends (%p.a.) 2.3 2.3 2.3 Risk-free interest rate (based on Australian Government bond yields, %p.a.) 6.05 6.05 6.05

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Former CEO

Mr J C Ellice-Flint retired on 25 March 2008. Consistent with the terms of his service agreement, 2,312,500 of Mr Ellice-Flint’s options, which had not previously vested, were vested and became exercisable upon cessation of his employment.

Each option entitles Mr Ellice-Flint to acquire one fully paid ordinary share in the Company at a predetermined price, subject to satisfaction of vesting conditions. The grant size is determined by reference to the median grant size given to executives in similar roles in comparable companies.

No options have been granted to Mr Ellice-Flint since 2006.

At 31 December 2009, the 2,500,000 options are on issue, and are exercisable. The exercise price for the options granted is $11.36, being the volume weighted average price in the ten days up to and including 9 March 2006 as approved by shareholders on 4 May 2006. The options have a contractual life of ten years.

Eligible senior executives – SARs and options

During 2009, the Company made equity grants to its Senior Executives as the LTI component of their remuneration for 2009. The grants comprised:

• a performance-based component, equal to 75% of the total grant value (“Performance Award”); and

• a service-based component, equal to 25% of the total grant value (“Deferred Award”).

Both the Performance Award and the Deferred Award were delivered, at the executive’s election, in the form of either SARs (under the SESPP) or options (under the SESOP).

SARs and options were granted at no cost to the executives with the number of SARs awarded being determined by dividing the amount of the award by the volume weighted average price of the Company’s shares over the week up to and including the award date. The number of options awarded is of equivalent value calculated by an independent expert based on an acceptable valuation method.

Vesting details of the Performance Award and the Deferred Award are summarised below:

Performance Award

Vesting period 1 January 2009 to 31 December 2011.

Vesting condition Vesting of the Performance Award is based on relative TSR against ASX 100 companies as at 1 January 2009.

Vesting schedule Relative TSR condition

Santos TSR percentile ranking % of grant vesting

< 50th percentile 0% = 50th percentile 33.33% 51st to 99th percentile Further 1.33% for each percentile 100th percentile 100%

Exercise price $14.81 for options, being the volume weighted average price in the week up to and including the grant date of 2 March 2009.


Expiry/lapse Upon cessation of employment, SARs which have not already vested and options which are not exercisable will, in general, lapse and be forfeited.

There is no retesting of the performance conditions if they are not satisfied.

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Deferred Award

Vesting period 2 March 2009 to 1 March 2012.

Vesting condition Vesting of the Deferred Award is based on continuous service to 1 March 2012, or three years from the grant date.

Vesting schedule 0% if the continuous service condition is not met. 100% if the continuous service condition is met.

Exercise price As for Performance Award.

Expiry/lapse As for Performance Award.

Upon cessation of employment, SARs which have not already vested and options which are not exercisable will, in general, lapse and be forfeited. However, if cessation occurs due to death, disability or redundancy, or in special circumstances approved by the Board, then a proportion of the SARs and options may vest and become exercisable.


During the financial year, the Company granted 275,884 (2008: 880,533) options over unissued shares as set out below:

2009 2008 Weighted Weighted average average exercise exercise price price $ Number $ Number

Outstanding at the beginning of the year 12.70 2,195,293 10.27 2,078,728 Granted during the year 14.81 275,884 15.39 880,533 Forfeited during the year 11.34 (24,690) 9.71 (460,385) Exercised during the year 9.61 (427,050) 8.41 (303,583)

Outstanding at the end of the year 13.65 2,019,437 12.70 2,195,293

Exercisable at the end of the year 10.15 521,250 8.14 232,300

The options outstanding at 31 December 2009 have an exercise price in the range of $8.46 to $15.39, and a weighted average remaining contractual life of 7.9 years.

During the year 427,050 (2008: 303,583) options were exercised. The weighted average share price at the dates of exercise was $14.40 (2008: $17.81).

The fair value of shares issued as a result of exercising the options or vesting of SARs during the reporting period at their issue date is the market price of shares of the Company on the ASX as at close of trading.

The amounts recognised in the financial statements of the Group and the Company in relation to executive share options exercised during the financial year were:


2009 2008 2009 2008 $000 $000 $000 $000

Issued ordinary share capital 4,103 2,553 4,103 2,553

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The fair value of services received in return for share options granted is measured by reference to the fair value of share options granted. The estimate of the fair value of the services received is measured based on the Monte Carlo simulation method. The contractual life of the option is used as an input into this model. Expectations of early exercise are incorporated into the models.

2009 2008

Performance Deferred Performance Deferred Award Award Award Award Option grant G1 G2 F1 F2

Fair value at grant date ($) 4.54 6.75 5.25 7.30 Share price on grant date ($) 15.00 15.00 17.71 17.71 Exercise price ($) 14.81 14.81 15.39 15.39 Expected volatility (weighted average, %p.a.) 46.5 46.5 30.7 30.7 Option life (weighted average) 10 years 10 years 10 years 10 years Expected dividends (%p.a.) 2.6 2.6 2.3 2.3 Risk-free interest rate (based on Australian Government bond yields, %p.a.) 2.94 2.94 6.29 6.29

The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share options), adjusted for any expected changes to future volatility due to publicly available information.

During the financial year, the Company granted 723,792 (2008: 241,668) SARs to eligible senior executives as set out below. Shares allocated on vesting of SARs will be subject to further restrictions on dealing for a maximum of ten years after the original grant date. No amount is payable on grant or vesting of the SARs.

Number of SARs

2009 2008

Outstanding at the beginning of the year 1,229,712 1,365,800 Granted during the year 723,792 241,668 Forfeited during the year (61,961) (236,426) Vested during the year (303,085) (141,330)

Outstanding at the end of the year 1,588,458 1,229,712


The fair value of services received in return for SARs granted is measured by reference to the fair value of SARs granted. The estimate of the fair value of the services received is measured based on the Monte Carlo simulation method. The contractual life of the SARs is used as an input into this model. Expectations of early exercise are incorporated into the Monte Carlo simulation method.

The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share rights), adjusted for any expected changes to future volatility due to publicly available information.

2009 2008

Performance Performance Deferred Award Deferred Award Award Award SARs grant G1 G2 G3 F1 F2

Fair value at grant date ($) 8.67 14.45 14.45 11.23 16.73 Share price on grant date ($) 15.00 15.00 15.00 17.71 17.71 Exercise price ($) – – – – – Expected volatility (weighted average, %p.a.) 46.5 46.5 46.5 30.7 30.7 Right life (weighted average) 10 years 10 years 10 years 10 years 10 years Expected dividends (%p.a.) 2.6 2.6 2.6 2.3 2.3 Risk-free interest rate (based on Australia Government bond yields, %p.a.) 2.94 2.94 2.94 6.29 6.29

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Cash-settled share-based payments

During the year the Company raised $2,914 million through a two for five rights issue (refer note 22(A)). Each new share was issued at a price of $12.50 representing a 26.9% discount to the closing price of the shares before the announcement of the rights issue.

Executives, being the CEO and eligible senior executives, who held unvested SARs and options, were unable to participate in the rights issue and there was no adjustment to the applicable exercise price or the number of underlying shares to which each SAR or option was entitled. The ASX Listing Rules do allow an adjustment to the exercise price of options to reflect the impact of discounted rights issues but the terms of the grant need to expressly refer to the formula in ASX Listing Rule 6.22.2 and the Listing Rules do not contemplate (nor provide a mechanism for adjusting) SARs.

Accordingly, in order to ensure the rights issue would neither unfairly disadvantage or advantage executives and so as to avoid a misalignment between the incentives of management (through the LTI component of their remuneration) and a capital raising which was considered by the Board to be in the best interests of the Company and shareholders, the Board determined, in respect of existing LTI grants:

• to use TSR data which takes into account the impact of rights issues and other capital management activities on both Santos and comparator group companies when testing the satisfaction of TSR performance hurdles that apply to Santos LTI awards; and

• subject to the SARs and options vesting following satisfaction of applicable hurdles (and, in the case of options, being exercised), to make a future cash remuneration payment to executives equal to the value of the right to participate in the rights issue (calculated at $1.31 for each underlying share in accordance with the formula in ASX Listing Rule 6.22.2). The intention is to “keep whole” the executives in respect of SARs and options that actually vest in due course. No cash payment will be made in respect of SARs that do not vest or options that do not vest or are not exercised.

These future cash remuneration payments apply to LTI participants with grants that were yet to vest at the time of the rights issue, including the CEO. No changes have been made to the performance hurdles or testing dates.

Despite the intention to “keep whole” the executives, the future cash remuneration payments did not fully compensate for the loss in the value of the unvested SARs and options. The overall value of the future cash remuneration payments is $166,523 less than the loss in value of the SARs and options, both determined in accordance with AASB 2 Share-based Payment. The value of these future cash remuneration payments has been expensed in accordance with AASB 2, over the period from 8 May 2009 (the last trading day prior to the announcement of the rights issue; closing price of $17.09) to the end of their performance or vesting periods.

Financial statement impact of Executive Long-term Incentive Programme

The amounts recognised in the financial statements of the Group and the Company, during the financial year in relation to equity grants issued under the Executive Long-term Incentive Programme were:


2009 2008 2009 2008 $000 $000 $000 $000

Employee expenses: CEO and Managing Director options 635 418 635 418 CEO and Managing Director SARs 553 382 553 382 Former CEO options – 1,667 – 1,667 Eligible senior executive options 2,260 1,723 2,260 1,723 Eligible senior executive SARs 5,099 4,125 5,099 4,125 Cash-settled share-based payments 2,084 – 2,084 –

10,631 8,315 10,631 8,315

Retained earnings 8,547 8,315 8,547 8,315 Liability for employee benefits 2,084 – 2,084 –

10,631 8,315 10,631 8,315

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Eligible senior executives – Shares

No shares have been issued under the executive long-term incentive component of the SESPP since 2004. At 31 December 2009, the total number of shares acquired under the executive long-term incentive component of the Plan since its commencement was 220,912.

The shares allocated pursuant to the SESPP were allotted to a trustee at no cost to participants, to be held on their behalf. The allocation price is Market Value (as defined above) and the trustee was funded by the Company to subscribe for the shares.

In general the shares were restricted for a period of one year from the date of allotment. If a participating executive ceased employment during this period, the Board in its discretion could determine that a lesser restriction on transfer and dealing applied, having regard to the circumstances of the cessation. The shares can remain on trust for up to ten years from the date of allotment, during which time the shares are subject to forfeiture if participants act fraudulently or dishonestly or in breach of their obligations to any Group company. Participants are entitled to instruct the trustee as to the exercise of voting rights, receive dividends and participate in bonus and rights issues while the shares are held on trust.

(C) LEGACY PLAN – SANTOS EXECUTIVE SHARE PLAN

The Santos Executive Share Plan operated between 1987 and 1997, when it was discontinued. Under the terms of the Plan, shares were issued as partly paid to one cent. While partly paid, the Plan shares are not transferable, carry no voting right and no entitlement to dividend but are entitled to participate in any bonus or rights issue. After a “vesting” period, calls could be made for the balance of the issue price of the shares, which varied between $2.00 and the market price of the shares on the date of the call being made. Shares were issued principally on: 22 December 1987; 7 February and 5 December 1989; and 24 December 1990.

At the beginning of the financial year there were 88,000 Plan shares on issue. During the financial year no Plan shares were fully paid and no aggregate proceeds were received by the Company. As at 31 December 2009 there were 88,000 Plan shares outstanding.

(D) NON-EXECUTIVE DIRECTOR SHARE PLAN

In accordance with shareholder approval given at the 2007 Annual General Meeting, the Non-executive Director (“NED”) Share Plan was introduced in July 2007. Participation in the NED Share Plan is voluntary and all present and future Non-executive Directors are eligible to participate. Under the NED Share Plan, Directors elect to sacrifice all or part of their fees in return for an allocation of fully paid ordinary shares of equivalent value. The NED Share Plan therefore does not involve any additional remuneration for participating Directors.

Shares are allocated quarterly and are either issued as new shares or purchased on the ASX at the prevailing market price. The shares are registered in the name of the participating Director, but are subject to a restriction on dealing. In the absence of exceptional circumstances, the restriction will apply until the Director ceases to hold office or until ten years have elapsed since the allocation of the shares, whichever is earlier.

F-189




(D) NON-EXECUTIVE DIRECTOR SHARE PLAN (CONTINUED)

In 2009, 20,390 (2008: 33,356) shares were allocated to participating Directors as follows:

Shares Price

Date issued per share

Number $

7 April 2009 8,019 17.1811 29 June 2009 6,949 14.2552 7 October 2009 2,598 15.1076 23 December 2009 2,824 13.8947

The amounts recognised in the financial statements of the Group and the Company in relation to the NED Share Plan during the year were:


2009 2008 2009 2008 $000 $000 $000 $000

Employee expenses 315 553 315 553 Issued ordinary share capital 315 553 315 553

32. KEY MANAGEMENT PERSONNEL DISCLOSURES

(A) KEY MANAGEMENT PERSONNEL COMPENSATION

Short-term employee benefits 10,106 10,442 10,106 10,442 Post-employment benefits 399 1,739 399 1,739 Other long-term benefits 113 259 113 259 Termination benefits – 2,705 – 2,705 Share-based payments 3,615 4,619 3,615 4,619

14,233 19,764 14,233 19,764

F-190




32. K

EY

MA

NA

GE

ME

NT

PE

RS

ON

NE

L D

ISC

LO

SU

RE

S (

CO

NT

INU

ED

)

(B)

EQU

ITY

HO

LDIN

GS

OF

KEY

MA

NA

GEM

ENT

PER

SON

NEL

Opti

ons

and r

ights

hold

ings

The

mov

emen

t du

ring

the

rep

orti

ng p

erio

d in

the

num

ber

of r

ight

s an

d op

tion

s ov

er o

rdin

ary

shar

es o

f th

e Co

mpa

ny h

eld

dire

ctly

, in

dire

ctly

or

bene

ficia

lly,

by e

ach

key

man

agem

ent

pers

on,

incl

udin

g th

eir

rela

ted

part

ies,

is a

s fo

llow

s:

Bal

ance

at

O

ptio

ns

Bal

ance

Ve

sted

Ve

sted

and

Ve

sted

but

not

be

ginn

ing

ex

erci

sed/

righ

ts

Oth

er

at e

nd o

f at

end

of

exer

cisa

ble

at

exer

cisa

ble

at

N

ame

of t

he y

ear

Gra

nted

1

vest

ed 2

chan

ges

3

the

year

th

e ye

ar

end

of

the

year

e

nd o

f th

e ye

ar

2009

O

pti

ons

D

irect

ors

Kn

ox,

Davi

d Jo

hn W

issl

er

544,9

74

–

–

–

544,9

74

–

–

–

Exe

cuti

ves

An

ders

on,

John

Hug

h 123,6

37

–

–

–

123,6

37

78,1

00

78,1

00

–

Ba

ulde

rsto

ne,

Jam

es L

eslie

91,6

78

–

–

–

91,6

78

–

–

–

Br

own,

Tre

vor

John

137,9

17

–

–

(137,9

17)

–

–

–

–

Ea

mes

, M

arty

n Ed

war

d Ja

mes

78,6

67

–

–

–

78,6

67

25,0

00

25,0

00

–

Ke

nnet

t, R

oger

Max

wel

l –

–

–

–

–

–

–

–

M

acfa

rlane

, M

ark

Stua

rt

108,6

82

–

–

–

108,6

82

63,7

00

63,7

00

–

W

asow

, Pe

ter

Chri

stop

her

–

–

–

–

–

–

–

–

W

ilkin

son,

Ric

hard

Joh

n –

–

–

–

–

–

–

–

To

tal

1,0

85,5

55

–

–

(137,9

17)

947,6

38

166,8

00

166,8

00

–

Rig

hts

D

irect

ors

Kn

ox,

Davi

d Jo

hn W

issl

er

186,7

79

–

–

–

186,7

79

–

–

–

Exe

cuti

ves

An

ders

on,

John

Hug

h 27,0

00

17,5

27

–

–

44,5

27

–

–

–

Ba

ulde

rsto

ne,

Jam

es L

eslie

24,6

00

18,5

07

–

–

43,1

07

–

–

–

Br

own,

Tre

vor

John

27,2

00

–

–

(27,2

00)

–

–

–

–

Ea

mes

, M

arty

n Ed

war

d Ja

mes

51,9

00

20,2

15

(19,9

00)

–

52,2

15

–

–

–

Ke

nnet

t, R

oger

Max

wel

l 46,6

68

–

–

(46,6

68)

–

–

–

–

M

acfa

rlane

, M

ark

Stua

rt

27,0

00

17,6

33

–

–

44,6

33

–

–

–

W

asow

, Pe

ter

Chri

stop

her

83,2

20

33,6

25

(23,0

00)

–

93,8

45

–

–

–

W

ilkin

son,

Ric

hard

Joh

n 62,5

15

19,3

35

(16,2

00)

–

65,6

50

–

–

–

To

tal

536,8

82

126,8

42

(59,1

00)

(73,8

68)

530,7

56

–

–

–

1

SARs

gra

nted

to

exec

utiv

es in

the

cur

rent

yea

r w

ere

gran

ted

on 2

Mar

ch 2

009,

hav

e an

exp

iratio

n da

te o

f 2

Mar

ch 2

019,

and

ves

t w

ith

the

reci

pien

t fo

r no

con

side

ratio

n. A

t th

e da

te o

f gr

ant,

95,

529

of t

he S

ARs

gran

ted

have

a

fair

valu

e of

$8.

67 p

er S

AR,

and

31,3

13 o

f th

e SA

Rs g

rant

ed h

ave

a fa

ir va

lue

of $

14.4

5 pe

r SA

R.

2 Ea

ch o

ptio

n ex

erci

sed

or S

AR v

este

d re

sults

in t

he is

sue

of o

ne o

rdin

ary

shar

e of

the

Com

pany

to

the

reci

pien

t. T

here

are

no

amou

nts

unpa

id o

n th

e sh

ares

issu

ed a

s a

resu

lt of

the

exe

rcis

e of

opt

ions

and

ves

ting

of

SARs

.

3 Du

e to

a c

ompa

ny re

stru

ctur

e, M

r T

J Br

own

and

Mr

R M

Ken

nett

cea

sed

to b

e ke

y m

anag

emen

t pe

rson

nel i

n 20

09.

Deta

ils r

egar

ding

the

ser

vice

and

per

form

ance

con

diti

ons

that

mus

t be

met

bef

ore

the

opti

ons

and

SARs

ves

t w

ith

the

reci

pien

t ar

e in

clud

ed in

not

e 31

(B).

F-191



32. K

EY

MA

NA

GE

ME

NT

PE

RS

ON

NE

L D

ISC

LO

SU

RE

S (

CO

NT

INU

ED

)

(B)

EQU

ITY

HO

LDIN

GS

OF

KEY

MA

NA

GEM

ENT

PER

SON

NEL

(C

ON

TIN

UED

)

Bal

ance

at

O

ptio

ns

Bal

ance

Ve

sted

Ve

sted

and

Ve

sted

but

not

begi

nnin

g

exer

cise

d/ri

ghts

O

ther

at

end

of

at e

nd o

f ex

erci

sabl

e at

ex

erci

sabl

e at

N

ame

of t

he y

ear

Gra

nted

1,2

,3,4

vest

ed 5

chan

ges

6

the

year

th

e ye

ar

end

of t

he y

ear

end

of t

he y

ear

2008

O

pti

ons

D

irect

ors

El

lice-

Flin

t, J

ohn

Char

les

2,50

0,00

0 –

– (2

,500

,000

) –

2,50

0,00

0 2,

500,

000

–

Knox

, Da

vid

John

Wis

sler

10

0,00

0 44

4,97

4 –

– 54

4,97

4 –

– –

Exe

cuti

ves

An

ders

on,

John

Hug

h 10

5,24

4 45

,537

(1

2,74

4)

(14,

400)

12

3,63

7 14

,400

14

,400

–

Ba

ulde

rsto

ne,

Jam

es L

eslie

50

,000

41

,678

–

– 91

,678

–

– –

Br

own,

Tre

vor

John

10

9,40

0 43

,017

–

(14,

500)

13

7,91

7 29

,000

29

,000

–

Ea

mes

, M

arty

n Ed

war

d Ja

mes

50

,000

53

,667

–

(25,

000)

78

,667

25

,000

25

,000

–

Ke

nnet

t, R

oger

Max

wel

l –

– –

– –

– –

–

Mac

farla

ne,

Mar

k St

uart

63

,700

44

,982

–

– 10

8,68

2 –

– –

W

asow

, Pe

ter

Chri

stop

her

– –

– –

– –

– –

W

ilkin

son,

Ric

hard

Joh

n –

– –

– –

– –

–

To

tal

2,97

8,34

4 67

3,85

5 (1

2,74

4)

(2,5

53,9

00)

1,08

5,55

5 2,

568,

400

2,56

8,40

0 –

Rig

hts

D

irect

ors

Kn

ox,

Davi

d Jo

hn W

issl

er

50,0

00

136,

779

– –

186,

779

– –

–

Exe

cuti

ves

An

ders

on,

John

Hug

h 27

,000

–

– –

27,0

00

– –

–

Baul

ders

tone

, Ja

mes

Les

lie

24,6

00

– –

– 24

,600

–

– –

Br

own,

Tre

vor

John

27

,200

–

– –

27,2

00

– –

–

Eam

es,

Mar

tyn

Edw

ard

Jam

es

71,5

00

– (9

,800

) (9

,800

) 51

,900

–

– –

Ke

nnet

t, R

oger

Max

wel

l 38

,000

17

,668

(4

,500

) (4

,500

) 46

,668

–

– –

M

acfa

rlane

, M

ark

Stua

rt

36,6

00

– (4

,800

) (4

,800

) 27

,000

–

– –

W

asow

, Pe

ter

Chri

stop

her

83,6

00

23,2

20

(11,

800)

(1

1,80

0)

83,2

20

– –

–

Wilk

inso

n, R

icha

rd J

ohn

62,1

00

18,1

15

(8,8

50)

(8,8

50)

62,5

15

– –

–

To

tal

420,

600

195,

782

(39,

750)

(3

9,75

0)

536,

882

– –

–

1

Wit

h th

e ex

cept

ion

of M

r D

J W

Kno

x, o

ptio

ns g

rant

ed t

o ex

ecut

ives

in t

he c

urre

nt y

ear

wer

e gr

ante

d on

3 M

ay 2

008

have

an

expi

ratio

n da

te o

f 2

May

201

8 an

d an

exe

rcis

e pr

ice

of $

15.3

9. A

t th

e da

te o

f gr

ant,

the

opt

ions

gr

ante

d ha

ve a

fai

r va

lue

of $

5.25

per

opt

ion

(174

,613

opt

ions

) an

d $7

.30

per

optio

n (5

4,26

8 op

tions

). T

he o

ptio

ns w

ere

prov

ided

at

no c

ost

to t

he re

cipi

ents

. Pr

ovid

ing

vest

ing

cond

itio

ns a

re m

et,

the

optio

ns a

re

exer

cisa

ble

no e

arlie

r th

an 1

Jan

uary

201

1.

2 Op

tions

gra

nted

to

Mr

D J

W K

nox

in t

he c

urre

nt y

ear

wer

e gr

ante

d as

fol

low

s:

(i

) Ex

ecut

ive

gran

t on

3 M

ay 2

008:

exp

iratio

n da

te o

f 2

May

201

8, e

xerc

ise

pric

e of

$15

.39,

fai

r va

lue

per

optio

n on

the

dat

e of

gra

nt o

f $5

.25

(for

64,

992

optio

ns)

and

$7.3

0 (f

or 2

1,83

7 op

tions

). P

rovi

ding

ves

ting

co

ndit

ions

are

met

, al

l of

the

optio

ns a

re e

xerc

isab

le n

o ea

rlier

tha

n 1

Janu

ary

2011

.

(i

i)

CEO

gran

t on

28

July

200

8, t

ranc

he 1

: ex

pira

tion

date

27

July

201

8, e

xerc

ise

pric

e of

$17

.36,

fai

r va

lue

on t

he d

ate

of g

rant

of

$5.8

3 pe

r op

tion

(94,

193

optio

ns).

Pro

vidi

ng v

esti

ng c

ondi

tions

are

met

, al

l of

the

op

tions

are

exe

rcis

able

no

earli

er t

han

1 Ja

nuar

y 20

11.

(iii)

CE

O gr

ant

on 2

8 Ju

ly 2

008,

tra

nche

2:

expi

ratio

n da

te 2

7 Ju

ly 2

018,

exe

rcis

e pr

ice

of $

17.3

6, f

air

valu

e on

the

dat

e of

gra

nt o

f $4

.25

per

optio

n (1

31,9

76 o

ptio

ns).

Pro

vidi

ng v

esti

ng c

ondi

tions

are

met

, al

l of

the

optio

ns

are

exer

cisa

ble

no e

arlie

r th

an 1

Jan

uary

201

2.

(i

v)

CEO

gran

t on

28

July

200

8, t

ranc

he 3

: ex

pira

tion

date

27

July

201

8, e

xerc

ise

pric

e of

$17

.36,

fai

r va

lue

on t

he d

ate

of g

rant

of

$4.3

2 pe

r op

tion

(131

,976

opt

ions

). P

rovi

ding

ves

ting

con

ditio

ns a

re m

et,

all o

f th

e op

tions

ar

e ex

erci

sabl

e no

ear

lier

than

1 J

anua

ry 2

013.

The

optio

ns w

ere

prov

ided

at

no c

ost

to M

r D

J W

Kno

x.

3 W

ith

the

exce

ptio

n of

Mr

D J

W K

nox,

SAR

s gr

ante

d to

exe

cuti

ves

in t

he c

urre

nt y

ear

wer

e gr

ante

d on

3 M

ay 2

008,

hav

e an

exp

iratio

n da

te o

f 2

May

201

8, a

nd v

est

wit

h th

e re

cipi

ent

for

no c

onsi

dera

tion.

At

the

date

of

gran

t,

44,4

30 o

f th

e SA

Rs g

rant

ed h

ave

a fa

ir va

lue

of $

11.2

3 pe

r SA

R, a

nd 1

4,57

3 of

the

SAR

s gr

ante

d ha

ve a

fai

r va

lue

of $

16.7

3 pe

r SA

R.

4 SA

Rs g

rant

ed t

o M

r D

J W

Kno

x in

the

cur

rent

yea

r w

ere

gran

ted

on 2

8 Ju

ly 2

008,

hav

e an

exp

iratio

n da

te o

f 27

Jul

y 20

18,

and

vest

wit

h M

r D

J W

Kno

x fo

r no

con

side

ratio

n. A

t th

e da

te o

f gr

ant,

the

SAR

s gr

ante

d ha

ve a

fai

r va

lue

of $

14.0

7 pe

r SA

R (3

5,97

3 SA

Rs),

$8.

65 (

50,4

03 S

ARs)

and

$8.

44 (

50,4

03 S

ARs)

.

5 Ea

ch o

ptio

n ex

erci

sed

or S

AR v

este

d re

sults

in t

he is

sue

of o

ne o

rdin

ary

shar

e of

the

Com

pany

to

the

reci

pien

t. T

here

are

no

amou

nts

unpa

id o

n th

e sh

ares

issu

ed a

s a

resu

lt of

the

exe

rcis

e of

opt

ions

and

ves

ting

of

SARs

.

6 Ot

her

chan

ges

may

incl

ude

the

laps

e of

opt

ions

on

the

expi

ry o

f th

e ex

erci

se p

erio

d, re

duct

ions

in S

ARs

enti

tlem

ents

due

to

perf

orm

ance

con

ditio

ns n

ot b

eing

met

, fo

rfei

ture

of

SARs

whe

n se

rvic

e co

ndit

ions

are

not

met

, or

the

re

mov

al o

f an

em

ploy

ee’s

equi

ty h

oldi

ng f

rom

the

key

man

agem

ent

pers

onne

l dis

clos

ure

whe

n th

ey t

erm

inat

e em

ploy

men

t w

ith

the

Com

pany

.

Deta

ils r

egar

ding

the

ser

vice

and

per

form

ance

con

diti

ons

that

mus

t be

met

bef

ore

the

opti

ons

and

SARs

ves

t w

ith

the

reci

pien

t ar

e in

clud

ed in

not

e 31

(B).

F-192




32. K

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NA

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NT

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ON

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RE

S (

CO

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)

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ITY

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OF

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num

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of s

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s of

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pany

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d di

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ly,

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ly o

r be

nefic

ially

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h ke

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, in

clud

ing

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r re

late

d pa

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as

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ance

at

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F-193



32. K

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MA

NA

GE

ME

NT

PE

RS

ON

NE

L D

ISC

LO

SU

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S (

CO

NT

INU

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)

(B)

EQU

ITY

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LDIN

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OF

KEY

MA

NA

GEM

ENT

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SON

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UED

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d

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as

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ther

at

end

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inal

ly a

t

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ame

of t

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ear

com

pens

atio

n of

opt

ions

of

rig

hts

mar

ket

chan

ges

¹ th

e ye

ar

end

of t

he y

ear

2008

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rdin

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ear

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t pe

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r re

late

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rtie

s.

F-194




33. RELATED PARTIES

Identity of related parties

Santos Ltd and its controlled entities engage in a variety of related party transactions in the ordinary course of business. These transactions are conducted on normal terms and conditions.

Details of related party transactions and amounts are set out in:

• note 6 as to interest charged to/by controlled entities;

• note 11 as to amounts owing by controlled entities and other related entities;

• notes 18 and 19 as to amounts owing to controlled entities;

• notes 19 and 36 as to Santos Ltd’s parent company guarantees (including financing facilities) provided for its controlled entities;

• note 20 as to Non-executive Directors’ retirement benefits;

• notes 11 and 24 as to investments in controlled entities;

• note 28 as to interests in joint ventures; and

• note 32 as to disclosures relating to key management personnel.


2009 2008 2009 200834. REMUNERATION OF AUDITORS $000 $000 $000 $000

The auditor of Santos Ltd is Ernst & Young.Amounts received or due and receivable by Ernst & Young (Australia) for: An audit or review of the financial report of the entity and any other entity in the consolidated group 1,035 1,061 725 813 Other assurance services 513 368 433 292 Other services: Taxation – 5 – 4 Other – 38 – 38

1,548 1,472 1,158 1,147

Amounts received or due and receivable by overseas related practices of Ernst & Young (Australia) for: External audit 143 122 – – Assurance 20 20 – – Taxation 73 33 – – Other services 4 4 – –

240 179 – –

Amounts received or due and receivable by overseas non-Ernst & Young audit firms for: Audit of financial reports for subsidiaries incorporated in Papua New Guinea 40 62 – –

Amounts received or due and receivable by related Australian practices of non-Ernst & Young audit firms for: Assurance 195 60 137 42 Taxation 657 297 151 69 Other services 35 190 25 133

887 547 313 244

F-195




2009 2008 2009 200835. COMMITMENTS FOR EXPENDITURE $million $million $million $million

The Group has the following commitments for expenditure:

(A) CAPITAL COMMITMENTS

Capital expenditure contracted for at balance date for which no amounts have been provided in the financial statements, payable: Not later than one year 935 330 124 109 Later than one year but not later than five years 1,285 150 – 23 Later than five years 10 4 – –

2,230 484 124 132

Santos Ltd has guaranteed the capital commitments of certain controlled entities (refer note 37 for further details).

(B) MINIMUM EXPLORATION COMMITMENTS

Minimum exploration commitments for which no amounts have been provided in the financial statements or capital commitments, payable: Not later than one year 76 270 6 4 Later than one year but not later than five years 270 162 6 9 Later than five years 8 – 8 –

354 432 20 13

The Group has certain obligations to perform minimum exploration work and expend minimum amounts of money pursuant to the terms of 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 or alternatively upon their relinquishment. The minimum exploration commitments are less than the normal level of exploration expenditures expected to be undertaken by Santos Ltd and its controlled entities.

(C) OPERATING LEASE COMMITMENTS

Non-cancellable operating lease rentals are payable as follows: Not later than one year 82 94 37 38 Later than one year but not later than five years 245 167 70 68 Later than five years 130 49 36 46

457 310 143 152

The Group leases floating production, storage and offtake facilities, floating storage offloading facilities and mobile offshore production units under operating leases. 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 office space and a warehouse under operating leases. The leases are generally for a period of ten years, with an option to renew the lease after that date. The lease payments typically increase annually by CPI.

During the year ended 31 December 2009 the Group recognised $85 million (2008: $88 million) as an expense in the income statement in respect of operating leases.

F-196





2009 2008 2009 200835. COMMITMENTS FOR EXPENDITURE (CONTINUED) $million $million $million $million

(D) FINANCE LEASE COMMITMENTS

Finance lease commitments are payable as follows: Not later than one year 1 1 1 1 Later than one year but not later than five years 2 1 2 1 Later than five years 1 1 1 1

Total minimum lease payments 4 3 4 3 Less amounts representing finance charges (1) (1) (1) (1)

Present value of minimum lease payments 3 2 3 2

The Group has finance leases for various items of plant and equipment with a carrying amount of $3 million (2008: $3 million) for both the Group and the Company. The leases generally have terms of between three to twelve years with no escalation clauses and no option to renew. Title to the assets passes to the Group at the expiration of the relevant lease periods.

(E) COMMITMENT ON REMOVAL OF SHAREHOLDER CAP

Pursuant to a Deed of Undertaking to the Premier of South Australia dated 16 October 2006 and as a consequence of the enactment of the Santos Limited (Deed of Undertaking) Act 2007 on 29 November 2007, Santos has agreed to:

• Continue to make payments under its existing Social Responsibility and Community Benefits Programme specified in the Deed totalling $60 million over a ten-year period from the date the legislation was enacted. As at 31 December 2009, approximately $48 million remains to be paid over the next eight years.

• Continue to maintain the South Australian Cooper Basin asset’s Head Office and Operational Headquarters together with other roles in South Australia for ten years subsequent to the date the legislation was enacted. At 31 December 2009, if this condition had not been met, the Company would have been liable to pay approximately $90 million to the State Government of South Australia.

Santos is required to make these payments only if the State Government of South Australia does not reintroduce a shareholder cap on the Company’s shares or introduce any other restriction on or in respect of the Company’s Board or senior management which have an adverse discriminatory effect in their application to the Company relative to other companies domiciled in South Australia.



(F) REMUNERATION COMMITMENTS Commitments for the payment of salaries and other remuneration

under the long-term employment contracts in existence at the reporting date but not recognised in liabilities, payable:

Not later than one year 6 7 6 7

Amounts included as remuneration commitments include commitments arising from the service contracts of Directors and executives referred to in the Remuneration Report of the Directors’ Statutory Report that are not recognised as liabilities and are not included in the compensation of key management personnel.

F-197




2009 2008 2009 200836. CONTINGENT LIABILITIES $million $million $million $million

The Directors are of the opinion that provisions are not required in respect of these matters, as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement.

Santos Ltd and its controlled entities have the following contingent liabilities arising in respect of: The Group: Performance guarantees* 18 29 8 10 Actual and possible legal claims and proceedings 30 17 15 3 The Group’s share of contingent liabilities of joint venture operations: Performance guarantees 21 13 6 3 Litigation and proceedings 2 5 – 2

71 64 29 18

* Performance guarantees in the nature of bank guarantees provided to secure statutory and contractual commitments such as leases or work commitments in respect of exploration permits and pipelines.

Legal advice in relation to the actual and possible legal claims and proceedings referred to above indicates that, on the basis of available information, any liability in respect of these claims is unlikely to exceed $7 million on a consolidated basis.

A number of the Australian interests of the Group are located within areas the subject of one or more claims or applications for native title determination. Whatever the outcome of those claims or applications, it is not believed that they will significantly impact the Group’s asset base. Compliance with the “future act” provisions of the Native Title Act 1993 (Cth) can delay the grant of mineral and petroleum tenements and consequently impact generally the timing of exploration, development and production operations. An assessment of the impact upon the timing of particular operations may require consideration and determination of complex legal and factual issues.

Guarantees provided by Santos Ltd for borrowings of controlled entities are disclosed in note 19.

Santos Ltd has provided parent company guarantees in respect of obligations estimated at $2,379 million which include:

(a) the funding and performance obligations of a number of subsidiary companies relating to:

• a floating storage and offloading facilities agreement for the Sampang Production Sharing Contract;

• a mobile offshore production unit agreement for the Madura Production Sharing Agreement;

• the development of a jetty, marine offloading facilities and in relation to the acquisition of land development and LNG facilities for the GLNG project; and

• performance obligations under Production Sharing Contracts in India;

(b) a subsidiary company’s obligations to meet distribution charges for gas retail customers;

(c) the financial obligations of subsidiary companies relating to:

• floating production storage and offloading vessel charter agreement for the Chim Sao development in Block 12 W, offshore Vietnam; and

• subsidiary companies’ share (13.5%) of the US$14 billion financing for the PNG LNG Project.

Subsidiary companies have provided parent or related company guarantees in respect of obligations estimated at $225 million which include:

(a) the performance obligations of their subsidiary or related companies in relation to:

• the sale of certain interest in the Bonaparte Basin;

• the sale of certain interests in the KAKAP PSC; and

• the acquisition of interest from Gastar Exploration USA Inc. and Gastar Exploration New South Wales, Inc.; and

(b) the payment obligations of a controlled entity in respect of mudlogging services in the Kyrgyz Republic.

F-198




37. DEED OF CROSS GUARANTEE

Pursuant to Class Order 98/1418, the wholly-owned subsidiaries listed below are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of their financial reports.

As a condition of the Class Order the Company and each of the listed subsidiaries (“the Closed Group”) have entered into a Deed of Cross Guarantee. The effect of the Deed is that the Company has guaranteed to pay any deficiency in the event of winding up of any of the subsidiaries under certain provisions of the Corporations Act 2001. The subsidiaries have also given a similar guarantee in the event that the Company is wound up.

The subsidiaries subject to the Deed are:

• Alliance Petroleum Australia Pty Ltd;

• Bridge Oil Developments Pty Limited;

• Reef Oil Pty Ltd;

• Santos (BOL) Pty Ltd;

• Santos Darwin LNG Pty Ltd;

• Santos (NARNL Cooper) Pty Ltd (became a party to the Deed on 28 November 2008);

• Santos Offshore Pty Ltd;

• Santos Petroleum Management Pty Ltd;

• Santos Petroleum Pty Ltd;

• Santos QNT Pty Ltd;

• Santos QNT (No. 1) Pty Ltd;

• Santos QNT (No. 2) Pty Ltd; and

• Vamgas Pty Ltd.

F-199



37. DEED OF CROSS GUARANTEE (CONTINUED)

The consolidated income statement, statement of comprehensive income, statement of financial position and statement of changes in equity of the entities that are members of the Closed Group are as follows:

Closed Group


Consolidated income statement

Product sales 1,865 2,233Cost of sales (1,411) (1,412)

Gross profit 454 821Other revenue 53 106Other income 132 (6)Other expenses (178) (414)Interest income 82 56Finance expenses (127) (221)Share of net profits of an associate – –

Profit before tax 416 342

Income tax expense (89) (154)Royalty-related taxation expense (39) (48)

Total taxation expense (128) (202)

Net profit for the period 288 140

Consolidated statement of comprehensive income

Net profit for the period 288 140Other comprehensive income: Exchange losses on translation of foreign operations, net of tax (22) 26 Change in fair value of available-for-sale financial assets, net of tax – (9) Actuarial gain/(loss) on defined benefit plan, net of tax 11 (26)

Total comprehensive income 277 131

F-200




Closed Group

2009 200837. DEED OF CROSS GUARANTEE (CONTINUED) $million $million

Consolidated statement of financial position

Current assets

Cash and cash equivalents 2,048 1,342Trade and other receivables 938 1,046Inventories 254 256Other financial assets 63 –Tax receivable 9 –

Total current assets 3,312 2,644

Non-current assets

Receivables 9 17Available-for-sale financial assets 2 2Other financial assets 2,471 2,124Exploration and evaluation assets 601 209Oil and gas assets 4,410 4,439Other land, buildings, plant and equipment 134 110Deferred tax assets 6 9

Total non-current assets 7,633 6,910

Total assets 10,945 9,554

Current liabilities

Trade and other payables 471 769Deferred income 31 50Interest-bearing loans and borrowings 1 1Tax liabilities 9 444Provisions 94 38

Total current liabilities 606 1,302


Deferred income 4 6Interest-bearing loans and borrowings 3,125 3,434Deffered tax liabilities 452 380Provisions 618 707

Total non-current liabilities 4,199 4,527

Total liabilities 4,805 5,829

Net assets 6,140 3,725

Equity

Issued capital 4,987 2,531Reserves – 22Retained earnings 1,153 1,172

Total equity 6,140 3,725

F-201



Closed Group

Issued Translation Fair value Retained Total

capital reserve reserve earnings equity

37. DEED OF CROSS GUARANTEE (CONTINUED) $million $million $million $million $million

Consolidated statement of changes in equity

Balance at 1 January 2009 2,531 24 (2) 1,172 3,725

Total comprehensive income for the period – (22) – 299 277

Transactions with owners in their capacity as owners: Share options exercised by employees 4 – – – 4

Entitlement offer exercised 2,914 – – – 2,914

Shares issued 138 – – – 138

Redeemable cumulative preference shares redeemed (600) – – – (600)

Dividends to shareholders – – – (327) (327)

Share-based payment transactions – – – 9 9

Balance at 31 December 2009 4,987 2 (2) 1,153 6,140

Balance at 1 January 2008 2,331 (2) 7 1,205 3,541Total comprehensive income for the period – 26 (9) 114 131Adjustment to retained earnings for company added to Deed during the year – – – 131 131Transactions with owners in their capacity as owners: Share options exercised by employees 3 – – – 3 Shares issued 253 – – – 253 Transaction costs, net of tax (56) – – – (56) Dividends to shareholders – – – (286) (286) Share-based payment transactions – – – 8 8

Balance at 31 December 2008 2,531 24 (2) 1,172 3,725

F-202




38. 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 the Group’s business. The Group’s overall financial risk management strategy is to seek to ensure that the Group is able to fund its business plans. Derivative financial instruments may be used to hedge exposure to fluctuations in foreign exchange rates, interest rates and commodity prices.

The Group uses various methods to measure the types of financial risk to which it is exposed. These methods include Cash Flow at Risk analysis in the case of interest rate, foreign exchange and commodity price risk, and ageing 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 covers specific financial risks, such as foreign exchange risk, interest rate risk and credit risk, approved derivative and non-derivative financial instruments, and liquidity management.

(A) FOREIGN CURRENCY RISK

Foreign exchange risk arises from commercial transactions and valuations in assets and liabilities that are denominated in a currency that is not the entity’s functional currency. The risk is measured using cash flow forecasting and Cash Flow at Risk analysis.

The Group is exposed to foreign currency risk principally through the sale of products denominated in US dollars, foreign currency borrowings and expenditure. In order to economically hedge foreign currency risk, the Group has from time to time entered into forward foreign exchange, foreign currency swap and foreign currency option contracts.

All US dollar (“USD”) denominated borrowings of Australian dollar (“AUD”) functional currency companies (2009: US$1,090 million; 2008: US$1,141 million) are either designated as a hedge of US dollar denominated investments in foreign operations, or swapped using cross-currency swaps to Australian dollars in order to achieve an economic hedge. As a result, there were no net foreign currency gains or losses arising from translation of US dollar denominated borrowings recognised in the income statements in 2009.

The Group’s risk management policy is to hedge between 0% and 50% of forecasted cash flows in US dollars for the current financial year.

Based on the Group’s net financial assets and liabilities at 31 December 2009, the following table demonstrates the estimated sensitivity to a +/–13 cent movement in the US dollar exchange rate (2008: +/–10 cents) with all other variables held constant, on post-tax profit and equity:



Impact on post-tax profit: AUD/USD +13 cents (2008: +10 cents) – (1) – – AUD/USD –13 cents (2008: -10 cents) – 1 – – Impact on equity: AUD/USD +13 cents (2008: +10 cents) – (1) – – AUD/USD –13 cents (2008: -10 cents) – 1 – –

The above sensitivity will vary depending on the Group’s financial asset and liability profile over time.

The +/–13 cent sensitivity is the Group’s estimate of reasonably possible changes in the US dollar exchange rate over the following financial year, based on recent volatility experienced in the market.

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(B) MARKET RISK

Cash flow 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 flow interest rate risk. Borrowings issued at fixed 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 floating rate basis. Interest rate swaps, denominated in Australian dollars and US dollars, have been entered into as fair value hedges of medium-term notes and long-term notes respectively. When transacted, these swaps have maturities ranging from 1 to 20 years, and align with the maturity of the related notes. At 31 December 2009, the Group had interest rate swaps with a notional contract amount of $1,028 million (2008: $1,302 million).

The net fair value of swaps at 31 December 2009 was $125 million (2008: $304 million), comprising assets of $126 million and liabilities of $1 million. These amounts were recognised as fair value derivatives.

Based on the net debt position as at 31 December 2009, taking into account interest rate swaps, it is estimated that if interest rates changed by US London Inter-Bank Offer Rate (“LIBOR”) +0.13%/–0.13% and Australian Bank Bill Swap reference rate (“BBSW”) +1.14%/–1.14% (2008: +0.25%/–2.0%), with all other variables held constant, the estimated impact on post-tax profit and equity would have been:



Impact on post-tax profit: Interest rates +US 0.13%/+AU 1.14% (2008: +0.25%) 14 (1) – – Interest rates –US 0.13%/–AU 1.14% (2008: –2.0%) (14) 4 – – Impact on equity: Interest rates +US 0.13%/+AU 1.14% (2008: +0.25%) 14 (1) – – Interest rates –US 0.13%/–AU 1.14% (2008: –2.0%) (14) 4 – –

This assumes that the change in interest rates is effective from the beginning of the financial year and the net debt position and fixed/floating mix is constant over the year. However, interest rates and the debt profile of the Group are unlikely to remain constant and therefore the above sensitivity analysis will be subject to change.

The sensitivity analysis is based on the Group’s reasonable estimate of changes in interest rates over the following financial year and reflects annual interest rate volatility. Changes in interest rates over the following year may be greater or less than the US LIBOR +0.13%/–0.13% and the Australian BBSW +1.14%/–1.14% sensitivity employed in the estimates above.

Commodity price risk exposure

The Group is exposed to commodity price fluctuations through the sale of petroleum products and other oil-price-linked contracts. The Group may enter into commodity crude oil price swap and option contracts to manage its commodity price risk. At 31 December 2009 the Group has no open oil price swap contracts (2008: nil), and therefore is not exposed to movements in commodity prices on financial instruments. The Group continues to monitor oil price volatility and to assess the need for commodity price hedging.

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(C) CREDIT RISK

Credit risk arises from investments in cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers including outstanding receivables and committed transactions, and represents the potential financial loss if counterparties fail to perform as contracted. Management has Board-approved credit policies and the exposure to credit risk is monitored on an ongoing basis. The majority of Santos’ gas contracts are spread across major Australian energy retailers and industrial users. Contracts exist in every mainland state whilst the largest customer accounts for less than 20% of contracted gas.

The Group controls credit risk by setting minimum creditworthiness requirements of counterparties, which for banks and financial institutions is a Standard & Poor’s rating of A or better.

Approved Total Total Exposure

Rating counterparties credit limit exposure* range

$million $million $million

AA, AA– 6 3,400 2,356 0 – 653 A+ 7 1,300 203 0 – 152

* Cash deposits plus accrued interest, bank account balances and the mark-to-market gain and percentage of notional value weighted by term on derivatives.

If customers are independently rated these ratings are used, otherwise the credit quality of the customer is assessed by taking into account its financial position, past experience and other factors including credit support from a third party. Individual risk limits for banks and financial institutions are set based on external ratings in accordance with limits set by the Board. Limits for customers are determined within contract terms. The daily nomination of gas demand by customers and the utilisation of credit limits by customers is monitored by line management.

In addition, receivables balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant. The Group does not hold collateral, nor does it securitise its trade and other receivables.

At the reporting date there were no significant concentrations of credit risk within the Group and financial instruments are spread amongst a number of financial institutions to minimise the risk of default by counterparties.

The maximum exposure to credit risk is represented by the carrying amount of financial assets of the Group, excluding investments, which have been recognised on the statement of financial position.

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(D) LIQUIDITY RISK

The Group adopts a prudent liquidity risk management strategy and seeks to maintain sufficient liquid assets and available committed credit facilities to meet short-term to medium-term liquidity requirements. The Group’s objective is to maintain flexibility in funding to meet ongoing operational requirements, exploration and development expenditure, and other corporate initiatives.

The following table analyses the contractual maturities of the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows comprising principal and interest repayments, except for interest rate swaps. Estimated variable interest expense is based upon appropriate yield curves existing as at 31 December 2009.

Less than 1 to 2 2 to 5 More than

1 year years years 5 years


Consolidated

2009

Non-derivative financial liabilities

Trade and other payables 709 – – –

Obligations under finance leases 1 1 1 1

Bank loans 32 38 54 51

Medium-term notes 24 372 13 113

Long-term notes 199 59 278 1,056

Derivative financial liabilities/(assets)

Cross-currency swap contracts 5 – – –

Interest rate swap contracts (50) (34) (32) (35)

920 436 314 1,186

2008

Non-derivative financial liabilities

Trade and other payables 605 – – – Obligations under finance leases 1 1 1 1 Bank loans 54 34 82 119 Medium-term notes 18 17 376 119 Long-term notes 141 260 375 1,432 Derivative financial assets

Cross-currency swap contracts (56) (31) – – Interest rate swap contracts (42) (58) (74) (184)

721 223 760 1,487

Santos Ltd

2009

Trade and other payables 778 – – –

Obligations under finance leases 1 1 1 1

Amounts owing to controlled entities – – – 3,598

779 1 1 3,599

2008

Trade and other payables 723 – – – Obligations under finance leases 1 1 1 1 Amounts owing to controlled entities – – – 4,082

724 1 1 4,083

Amounts owing to controlled entities are shown at their carrying value as any interest charged on the loans is added to the loan balance. The loans are made in the ordinary course of business on normal market terms and conditions and are not repayable for a minimum of nine years.

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(E) FAIR VALUES

The financial assets and liabilities of the Group and the Company are recognised in the statement of financial position at their fair value in accordance with the accounting policies in note 1, except for long-term notes that are not swapped to a variable interest rate, and bank borrowings, which are recognised at face value. The carrying value of these long-term notes is US$125 million and their fair value is estimated at US$131 million based on discounting the future cash flows excluding the credit spread at the time of issue. The discount rate used is the interest rate swap rate for the remaining term to maturity of the note as at 31 December 2009. The carrying value of the bank borrowings approximates fair value as it is a floating rate instrument.

Basis for determining fair values

The following summarises the significant methods and assumptions used in estimating the fair values of financial instruments:

Trade and other receivables

The carrying value less impairment provision of trade receivables is a reasonable approximation of their fair values due to the short-term nature of trade receivables.

Available-for-sale financial assets

The fair value of available-for-sale financial assets is determined by reference to their quoted bid price at the reporting date.

Derivatives

The fair value of interest rate swaps is calculated by discounting estimated future cash flows based on the terms of maturity of each contract and using market interest rates for a similar instrument at the reporting date. Where these cash flows are in a foreign currency the present value is converted to Australian dollars at the foreign exchange spot rate prevailing at reporting date.

Financial liabilities

Fair value is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. Where these cash flows are in a foreign currency the present value is converted to Australian dollars at the foreign exchange spot rate prevailing at reporting date.

Interest rates used for determining fair value

The interest rates used to discount estimated future cash flows, where applicable, are based on the market yield curve at the reporting date. The dealt credit spread is assumed to be the same as the market rate for the credit as at reporting date as allowed under AASB 139 Financial Instruments: Recognition and Measurement. The interest rates including credit spreads used to determine fair value were as follows:

2009 2008

Derivatives 0.4% – 6.3% 1.3% – 4.3% Loans and borrowings 0.4% – 6.9% 1.7% – 4.9%

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(E) FAIR VALUES (CONTINUED)

Fair value hierarchy

As at 31 December 2009, the Group held the following financial instruments measured at fair value.

The Group uses the following hierarchy for determining and disclosing the fair value of financial 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 significant effect on the recorded fair value are observable, either directly or indirectly.

Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.

Total Level 1 Level 2 Level 3


Assets measured at fair value

Financial assets at fair value through profit and loss: Interest rate swap contracts 126 – 126 –

Available-for-sale financial assets: Equity shares 2 2 – –

Liabilities measured at fair value

Financial liabilities at fair value through profit and loss: Long-term notes (1,193) – (1,193) –

Medium-term notes (99) – (99) –

Cross-currency swap contracts (7) – (7) –

Interest rate swap contracts (1) – (1) –

During the reporting period ended 31 December 2009, there were no transfers between level 1 and level 2 fair value measurements, and no transfers into or out of level 3 fair value measurements.

39. EVENTS AFTER THE END OF THE REPORTING PERIOD

On 18 February 2010, the Directors of Santos Ltd declared a final dividend on ordinary shares in respect of the 2009 financial year. Refer to note 22 for dividends declared after 31 December 2009.

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Directors’ Declaration For the year ended 31 December 2009

In accordance with a resolution of the Directors of Santos Ltd (“the Company”), we state that:

1. In the opinion of the Directors:

(a) the financial statements and notes of the Company and of the consolidated entity are in accordance with the Corporations Act 2001, including:

(i) giving a true and fair view of the Company’s and consolidated entity’s financial position as at 31 December 2009 and of their performance for the year ended on that date; and

(ii) complying with Accounting Standards and the Corporations Regulations 2001; and

(b) 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 for the financial year ended 31 December 2009.

3. As at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identified in note 37 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 Class Order 98/1418.

Dated this 18th day of February 2010

On behalf of the Board:

Director Director Adelaide

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In relation to our audit of the financial report of Santos Ltd and the entities it controlled for the year ended 31 December 2009, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct.

Ernst & Young R J Curtin

Partner Adelaide Ernst & Young 18 February 2010

Liability limited by a scheme approved under Professional Standards Legislation

Auditor’s Independence Declaration to the Directors of Santos Ltd

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Report on the Financial Report

We have audited the accompanying financial report of Santos Ltd, which comprises the statement of financial position as at 31 December 2009, and the income statement, statement of comprehensive income, statement of cash flows and statement of changes in equity for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration of the consolidated entity comprising the Company and the entities it controlled at the year’s end or from time to time during the financial year.

Directors’ responsibility for the financial report

The Directors of the Company are responsible for the preparation and fair presentation of the financial report in accordance with the Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal controls relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. In note 1(A), the Directors also state that the financial report, comprising the financial statements and notes, complies with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Auditor’s responsibility

Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, we consider internal controls relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Directors, as well as evaluating the overall presentation of the financial report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Independence

In conducting our audit we have met the independence requirements of the Corporations Act 2001. We have given to the Directors of the Company a written Auditor’s Independence Declaration, a copy of which is included on page 149 of the Annual Report and is referred to in the directors’ statutory report. In addition to our audit of the financial report, we were engaged to undertake the services disclosed in the notes to the financial statements. The provision of these services has not impaired our independence.

Auditor’s opinion

In our opinion:

1. the financial report of Santos Ltd is in accordance with the Corporations Act 2001, including:

(i) giving a true and fair view of the financial position of Santos Ltd and the consolidated entity at 31 December 2009 and of their performance for the year ended on that date; and

(ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001.

2. the financial report also complies with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Report on the Remuneration Report

We have audited the remuneration report included in pages 52 to 69, within the directors’ statutory report for the year ended 31 December 2009. The Directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards.

Auditor’s opinion

In our opinion the remuneration report of Santos Ltd for the year ended 31 December 2009, complies with section 300A of the Corporations Act 2001.

Ernst & Young RJ Curtin

Partner Adelaide 18 February 2010


Independent Audit Report to the members of Santos Ltd

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CONSOLIDATED FINANCIAL STATEMENTS, DIRECTORS’REPORT AND AUDITOR’S REPORT (REVIEW OPINION)FOR THE GUARANTOR FOR THE SIX MONTHS ENDED30 JUNE 2010


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HALF-YEAR REPORTINCORPORATING APPENDIX 4DSantos Limited and its controlled entitiesFor the period ended 30 June 2010, under Listing Rule 4.2.

To be read in conjunction with the 2009 Annual Report

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Page 1

Results for announcement to the market Appendix 4D for the period ended 30 June 2010

$million

Revenue from ordinary activities Up 8.2% to 1,134

Underlying profit after tax Up 121.1% to 210

Profit from ordinary activities after tax attributable to members Up 94.1% to 198

Net profit for the period attributable to members Up 94.1% to 198

Interim Dividends Amount per security Franked amount per security at 30% tax

Ordinary securities 22.0¢ 22.0¢

Record date for determining entitlements to the dividend 7 September 2010

Comparison period ended is 30 June 2009

Contents Half-year Report 30 June 2010

About Santos An Australian energy pioneer since 1954, Santos is one of the Country’s leading gas producers, supplying Australian and Asian customers.

Santos has been providing Australia with natural gas from the remote outback for more than 40 years. The company today is the largest producer of natural gas to the Australian domestic market, supplying 17% of the nation’s gas needs.

Santos has also developed major oil and liquids businesses in Australia and operates in all mainland Australian states and the Northern Territory.

From this base, Santos is pursuing a transformational liquefied natural gas (“LNG”) strategy with interest in four exciting LNG projects.

This strategy is led by the cornerstone GLNG® project in Queensland – a leading project in converting coal seam gas into LNG. Also in Santos’ LNG portfolio are the PNG LNG project, which was formally approved in December 2009, Bonaparte LNG, a proposed floating LNG project in the Timor Sea, and Darwin LNG, Santos’ first LNG venture, which began production in 2006.

Santos has built a strong and reliable production business in Indonesia and is further developing its Asian business through development projects and exploration investment.

Santos has about 2,200 employees working across its operations in Australia and Asia.

Directors’ Report 2

Strategy 2

Review and Results of Operations 2

Directors 5

Rounding 6

Auditor’s Independence Declaration 6

Half-year Financial Report 8

Income Statement 8

Statement of Comprehensive Income 9

Statement of Financial Position 10

Statement of Cash Flows 11

Statement of Changes in Equity 12

Notes to the Half-year Financial Statements

13

Directors’ Declaration 24

Independent Auditor’s Report 25

Appendix 4D continued 27

ABN 80 007 550 923

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Page 2

Directors’ Report

The Directors present their report together with the financial report of the consolidated entity, being Santos Limited (“Company”) and its controlled entities, for the half-year ended 30 June 2010 and the auditor’s review report thereon.

1. Strategy Santos’ vision is to be a leading energy company in Australia and Asia. We have a simple and robust strategy to achieve this: drive performance in the base business, deliver a suite of LNG projects and pursue focussed opportunities in Asia.

2. Review and Results of Operations A review of the operations and of the results of those operations of the consolidated entity during the half-year isas follows:

Summary of results

2010 2009 Variance

MMboe MMboe %

Production volume 24.2 26.7 (9.4)

Sales volume 28.5 29.0 (1.7)

$million $million

Product sales 1,091 1,024 6.5

EBITDAX 655 647 1.2

Exploration and evaluation expensed (55) (113) (51.3)

Depreciation and depletion (279) (317) (12.0)

Net impairment loss (38) (8)

EBIT 283 209 35.4

Net finance income/(costs) 10 (12)

Taxation expense (95) (95) -

Net profit for the period 198 102 94.1

Underlying profit for the period* 210 95 121.0

*Please refer to page 4 for the reconciliation from net profit to underlying profit for the period.

Base Business First half production of 24.2 million barrels of oil equivalent (“MMboe”) was 9% lower compared to the first half of 2009, primarily due to major wet weather and flood events in Central Australia impacting Cooper Basin operations (2.0 MMboe), partially offset by stronger gas production in Western Australia and Indonesia.

Sales volumes for the first half, of 28.5 MMboe, were in line with the first half of 2009. Withdrawal of gas from storage, supplemented by gas purchases, was utilised to meet customer gas demand ex the Cooper Basin.

Higher commodity prices were evident across the Santos portfolio in the first half of 2010. The average realised oil price was A$86.99 per barrel, 19% higher than the first half of 2009, while the average gas price of A$4.37 per gigajoule was 4% higher. Product sales revenue was $1,091 million, 7% higher than the first half of 2009.

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LNG Projects Santos is building a material LNG business with interests in four LNG projects.

> GLNG (Santos 60%)

GLNG involves the production of LNG using coal seam gas sourced from the GLNG gas fields in the Bowen and Surat Basins in Queensland. GLNG is making significant progress towards a final investment decision in 2010 with first LNG deliveries scheduled to begin in 2014. The design contemplates a two-train development with a capacity of 7.2 million tonnes per annum (“mtpa”) of LNG.

In May 2010, GLNG became Australia’s first major coal seam gas to LNG project to receive environmental approval from the Queensland Government. The environmental approval process is continuing with Federal Government consideration of the project. Engineering design works for the project are nearing completion.

GLNG has signed a binding heads of agreement to sell 2 mtpa of LNG to project partner PETRONAS with a sellers’ option for an additional 1 mtpa. PETRONAS, the largest LNG producer in Asia, owns 40% of GLNG.

> PNG LNG (Santos 13.5%)

Sanctioned in December 2009, the PNG LNG project will develop the gas and condensate resources in the Hides, Angore and Juhu fields and the associated gas resources in the currently operating oil fields of Kutubu, Agogo, Gobe and Moran in the Southern Highlands and Western Provinces of Papua New Guinea. The gas will be transported by pipeline to an LNG facility with a capacity of 6.6 mtpa located northwest of Port Moresby on the coast of the Gulf of Papua.

Early works construction commenced prior to sanction and continues at the upstream and LNG plant locations and for supporting infrastructure.

All of the project’s production capacity has been committed with four major LNG buyers in the Asia Pacific region. First LNG deliveries are scheduled to begin in 2014.

> Darwin LNG (Santos 11.5%)

The Darwin LNG project, Santos’ first producing LNG asset, commenced production in 2006. During the first half of 2010, the asset completed a planned shutdown during which LNG production capacity was upgraded to 3.6 mtpa. Santos’ interest in the project has increased this year from 11.4% to 11.5%, subject to regulatory approval.

> Bonaparte LNG (Santos 40%)

Santos has partnered with France’s GDF SUEZ to study the development of Bonaparte LNG, a proposed floating LNG project located in the Timor Sea off the northern coast of Australia. GDF SUEZ will carry Santos’ share of costs until a final investment decision.

Asia The Company’s focused Asia strategy continues to progress, with producing assets delivering strong performance and multiple options for growth. Indonesia continues to be a source of growth with record production from the two operated assets in East Java and the Wortel project progressing towards a final investment decision later in 2010. Construction is progressing to plan on Santos’ first oil project in Vietnam, Chim Sao, with first oil expected in the second half of 2011.

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Page 4

Net Profit The 2010 first half net profit of $198 million is $96 million higher than in 2009, mainly due to higher revenues driven by higher product prices, lower exploration and evaluation expenses, partially offset by current year impairment losses.

As a result of the Company’s regular impairment review of assets, the recoverable amount of some assets was assessed to be impaired and impairment losses of $38 million pre-tax ($25 million after tax) have been recognised in the 2010 financial report. The impairments primarily relate to increased restoration obligations for the Jabiru/Challis and Legendre assets.

Net profit includes net loss items before tax of $42 million (after tax $12 million), referred to in the underlying profit table below.

Underlying Profit Table

2010 $million 2009 $million

Gross Tax Net Gross Tax Net

Underlying profit 210 95

Net (losses)/gains on sales and impairment losses (40) 13 (27) 14 2 16

Foreign currency gains/(losses) 5 (2) 3 (19) 4 (15)

Fair value adjustments on embedded derivatives and hedges* (13) 4 (9) 8 (2) 6

Remediation costs and contract losses, net of related insurance recoveries* 6 (2) 4 (8) (2) (10)

Investment allowance - 17 17 - 10 10

(42) 30 (12) (5) 12 7

Net profit after tax 198 102

This table has been prepared in accordance with the AICD/Finsia principles for reporting underlying profit.*Adjustment to prior year to ensure comparability with current year.

Equity Attributable to Equity Holders of Santos Limited / Dividends Equity attributable to equity holders of Santos Limited at 30 June 2010 was $7,021 million.

On 26 August 2010, the Directors resolved that a fully franked interim dividend of 22 cents per fully paid ordinary share be paid on 6 October 2010 to shareholders registered in the books of the Company at the close of business on 7 September 2010.

The 2010 interim dividend of 22 cents per fully paid ordinary share is comparable with the 2009 interim dividend which was also 22 cents per share, fully franked.

Cash Flow The net cash inflow from operating activities of $537 million was 8% higher than the first half of 2009. This increase is principally attributable to higher cash receipts from customers driven by higher product prices and lower exploration and evaluation expenses, partially offset by increased cash payments to suppliers and employees and income tax and royalty related tax payments.

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Page 5

Portfolio Management Santos announced the sale of its interest in the NT/P 48 (Evans Shoal) permit in the Bonaparte Basin offshore northern Australia to Magellan Petroleum Australia Limited for up to $200 million. The sale has not been recognised in the financial report at 30 June 2010 pending completion later in the year. The transaction is a further outcome of Santos’ ongoing review of commercialisation options for its gas assets in the Bonaparte Basin and follows the sale of 60% of the Petrel, Tern and Frigate fields to GDF SUEZ for up to US$370 million announced in August 2009.

Outlook Santos maintains production guidance in the range of 49 to 52 MMboe for 2010.

Petroleum Resource Rent Tax The Australian Federal Government recently proposed that the current Petroleum Resource Rent Tax regime will be extended to all Australian onshore and offshore oil and gas projects to apply from 1 July 2012. The proposal is subject to extensive negotiation, drafting of legislation and approval by Parliament.

Post Balance Day Events The following events occurred subsequent to 30 June 2010, the financial effects of which have not been brought to account in the half-year financial report for the six months ended 30 June 2010:

> On 19 July 2010 Santos announced it had executed a $2,000 million bilateral bank loan facility. This new facility will be used to replace and extend Santos’ existing $700 million of undrawn bilateral bank facilities that matures between 2011 and 2013 and to increase liquidity. The weighted average term of the new facility is five years; and

> On 26 August 2010, the Directors of Santos Limited declared an interim dividend on ordinary shares in respect of the 2010 financial year. Refer to note 14 to the Financial Statements for the details of the dividends declared.

3. Directors The names of Directors of the Company in office during or since the end of the half year are:

Surname Other Names

Borda Kenneth Charles

Coates Peter Roland (Chairman)

Dean Kenneth Alfred

Franklin Roy Alexander

Harding Richard Michael

Hemstritch Jane Sharman

Knox David John Wissler (Managing Director)

Martin Gregory John Walton

Each of the above named Directors held office during and since the end of the half year, except for Ms Hemstritch, who was appointed to the Board on 16 February 2010.

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Page 6

4. Rounding Australian Securities and Investments Commission Class Order 98/100, dated 10 July 1998, applies to the Company. Accordingly, amounts have been rounded off in accordance with that Class Order, unless otherwise indicated.

5. Auditor’s Independence Declaration A copy of the auditor’s independence declaration as required by section 307C of the Corporations Act 2001 is set out on page 7 and forms part of this report.

This report is made out on 26 August 2010 in accordance with a resolution of the Directors.

Director Director

26 August 2010

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Auditor’s Independence Declaration to the Directors of Santos Limited In relation to our review of the financial report of Santos Limited for the half-year ended 30 June 2010 to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct. Ernst & Young R J Curtin Partner Adelaide, South Australia 26 August 2010

Page 7

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INCOME STATEMENT

FOR THE SIX MONTHS ENDED 30 JUNE 2010

The income statement is to be read in conjunction with the notes to the half-year financial statements.

Consolidated30 June

201030 June

2009Note $million $million

Product sales 4 1,091 1,024Cost of sales 5 (704) (691)

Gross profit 387 333

Other revenue 4 43 24

Other income 4 3 28

Other expenses 5 (149) (176)

Finance incomes 6 55 34

Finance expenses 6 (45) (46)

Share of net losses of an associate (1) -


Income tax expense (81) (67)

Royalty related taxation expense (14) (28)

Total taxation expense (95) (95)

Net profit for the period attributable to the equity holders of Santos Limited 198 102

Earnings per share attributable to the equity holders of Santos Limited (¢)

Basic earnings per share 23.8 12.4

Diluted earnings per share 23.7 12.3

Dividends per share ($)

Ordinary shares 14 0.20 0.20

Redeemable preference shares 14 - 2.9989

Page 8

F-221


STATEMENT OF COMPREHENSIVE INCOME


The statement of comprehensive income is to be read in conjunction with the notes to the half-year financial statements.

Consolidated30 June

2010$million

30 June2009

$million

Net profit for the period 198 102

Other comprehensive income, net of tax:Net exchange gain/(loss) on translation of foreign

operations 43 (192)Tax effect - -

43 (192)

Net (loss)/gain on foreign currency loans designated as hedges of net investments in foreign operations (55) 179

Tax effect 17 (54)

(38) 125

Net change in fair value of available-for-sale financial assets (1) -

Tax effect - -

(1) -

Net actuarial (loss)/gain on the defined benefit plan (3) 13Tax effect 1 (4)

(2) 9

Other comprehensive income, net of tax 2 (58)

Total comprehensive income 200 44

Page 9

F-222


STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE 2010

The statement of financial position is to be read in conjunction with the notes to the half-year financial statements.

Page 10

Consolidated

Note

30 June2010

$million

31 December2009

$million

Current assetsCash and cash equivalents 8 2,375 2,240Trade and other receivables 640 917Inventories 288 273Other financial assets 9 35 65Tax receivable 59 24


Non-current assetsReceivables 10 10Investment in an associate 178 177Other financial assets 9 186 136Exploration and evaluation assets 10 975 923Oil and gas assets 11 6,879 6,317Other land, buildings, plant and equipment 12 214 200Deferred tax assets 71 79

Total non-current assets 8,513 7,842

Total assets 11,910 11,361

Current liabilitiesTrade and other payables 803 709Deferred income 117 83Interest-bearing loans and borrowings 163 164Current tax liabilities 40 20Provisions 104 94Other financial liabilities 6 10

Total current liabilities 1,233 1,080

Non-current liabilitiesDeferred income 14 17Interest-bearing loans and borrowings 1,957 1,649Deferred tax liabilities 851 871Provisions 826 768Other financial liabilities 8 9

Total non-current liabilities 3,656 3,314

Total liabilities 4,889 4,394

Net assets 7,021 6,967

EquityIssued capital 13 5,003 4,987Reserves (279) (283)Retained earnings 2,297 2,263

Total equity 7,021 6,967

F-223


STATEMENT OF CASH FLOWS


The statement of cash flows is to be read in conjunction with the notes to the half-year financial statements.

Page 11

Consolidated

Note

30 June2010

$million

30 June2009

$million

Cash flows from operating activitiesReceipts from customers 1,205 1,060Interest received 45 32Overriding royalties received 5 4Insurance proceeds received 6 27Pipeline tariffs and other receipts 23 44Payments to suppliers and employees (530) (420)Exploration and evaluation - seismic and studies (55) (129)Royalty and excise paid (26) (30)Borrowing costs paid (23) (49)Income taxes paid (30) (1)Royalty related taxes paid (83) (39)

Net cash provided by operating activities 537 499

Cash flows from investing activitiesPayments for:

Exploration and evaluation assets (87) (46)Oil and gas assets (548) (695)Other land, buildings, plant and equipment (32) (31)Acquisitions of oil and gas assets (4) (18)Acquisitions of controlled entities (3) (6)Investment in an associate (2) -Restoration (6) (13)

Income taxes paid on disposal of non-current assets - (497)Proceeds from disposal of non-current assets 222 14Proceeds from disposal of controlled entities - 25Other investing activities - (1)

Net cash used in investing activities (460) (1,268)

Cash flows from financing activitiesDividends paid (151) (124)Drawdown of borrowings 181 -Repayments of borrowings (10) (45)Proceeds from maturity of term deposits 30 -Proceeds from issues of ordinary shares - 3,002Proceeds from issues placed on term deposits - (1,176)

Net cash provided by financing activities 50 1,657

Net increase in cash and cash equivalents 127 888

Cash and cash equivalents at the beginning of the period 2,240 1,553

Effects of exchange rate changes on the balances of cash held in foreign currencies 8 (24)

Cash and cash equivalents at the end of the period 8 2,375 2,417

F-224


STATEMENT OF CHANGES IN EQUITY


The statement of changes in equity is to be read in conjunction with the notes to the half-year financial statements.

Page 12

Issued capital

Translation reserve

Fair value reserve

Retained earnings

Total equity


Consolidated


Net profit for the period - - - 198 198

Other comprehensive income for the period - 5 (1) (2) 2

Total comprehensive income for the period - 5 (1) 196 200

Transactions with owners in their capacity as owners:

Shares issued 16 - - - 16

Dividends to shareholders - - - (166) (166)

Share-based payment transactions - - - 4 4

Balance at 30 June 2010 5,003 (276) (3) 2,297 7,021


Profit for the period - - - 102 102

Other comprehensive income - (67) - 9 (58)

Total comprehensive income for the period - (67) - 111 44

Transactions with owners in their capacity as owners:

Share options exercised by employees 4 - - - 4

Entitlement offer exercised 2,914 - - - 2,914

Shares issued 117 - - - 117

Dividends to shareholders - - - (135) (135)

Share-based payment transactions - - - 5 5

Balance at 30 June 2009 5,566 (254) (2) 2,117 7,427

F-225


NOTES TO THE HALF-YEAR FINANCIAL STATEMENTS


Page 13

1. Corporate Information

Santos Limited (“the Company”) is a company limited by shares incorporated in Australia whose shares are publicly traded on the Australian Securities Exchange (“ASX”) and is the ultimate parent entity in the Group. The consolidated financial report of the Company for the six months ended 30 June 2010 comprises the Company and its controlled entities (“the Group”).

The financial report was authorised for issue in accordance with a resolution of the Directors on 26 August 2010.

2. Basis of Preparation and Significant Accounting Policies

Basis of preparationThis general purpose condensed financial report for the half-year ended 30 June 2010 has been prepared in accordance with AASB 134 Interim Financial Reporting and the Corporations Act 2001.

The half-year financial report does not include all notes of the type normally included within the annual financial report and therefore cannot be expected to provide as full an understanding of the financial performance, financial position and financing and investing activities of the Group as the full financial report.

It is recommended that the half-year financial report be read in conjunction with the annual report for the year ended 31 December 2009 and considered together with any public announcements made by Santos Limited during the half-year ended 30 June 2010 in accordance with the continuous disclosure obligations of the ASX listing rules.

Significant accounting policiesThe accounting policies adopted in the half-year financial report are consistent with those applied in the preparation of the Group’s financial report for the year ended 31 December 2009, except for the following.

The Group has adopted the following revised standards which have an impact on the Group's accounting policies and presentation and disclosure of the financial report:

The Group adopted the revised standard AASB 3 Business Combinations from 1 January 2010which introduces significant changes in the accounting for business combinations occurring after this date. Changes affect the valuation of non-controlling interests, the accounting for transaction costs, the initial recognition and subsequent measurement of contingent consideration and business combinations achieved in stages. These changes impact the reported results in the period when an acquisition occurs and future reported results; and

The Group adopted the revised standard AASB 127 Consolidated and Separate Financial Statements from 1 January 2010 which requires the ownership interest in a subsidiary (without a change in control) be accounted for as a transaction with owners in their capacity as owners. Therefore such transactions will no longer give rise to a gain or loss in the statement of comprehensive income. Furthermore, the revised standard changes the accounting for losses incurred by a partially owned subsidiary as well as the loss of control of a subsidiary.

The changes in AASB 3 and AASB 127 will affect future acquisitions, changes in and loss of control of subsidiaries and transactions with non-controlling interests. The changes in accounting policies were applied prospectively.

F-226




Page 14

2. Basis of Preparation and Significant Accounting Policies (continued)

Significant accounting policies (continued)The following standards and interpretations and all consequential amendments, which became applicable from 1 January 2010, have also been adopted by the Group. These standards and interpretations have not impacted on the accounting policies, financial position or performance of the Group, or on presentation or disclosure in the financial report:

AASB 2008-3 Amendments to Australian Accounting Standards arising from AASB 3 and AASB 127;

AASB 2008-6 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project;

AASB 2008-8 Amendments to Australian Accounting Standards – Eligible Hedged Items;AASB 2008-13 Amendments to Australian Accounting Standards arising from AASB

Interpretation 17 – Distributions of Non-cash Assets to Owners;AASB 2009-4 Amendments to Australian Accounting Standards arising from the Annual

Improvements Process;

AASB 2009-5 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project;

AASB 2009-7 Amendments to Australian Accounting Standards;

AASB 2009-8 Amendments to Australian Accounting Standards – Group Cash-settled Share-based Payment Transactions;

AASB 2009-9 Amendments to Australian Accounting Standards – Additional Exemptions for First-time Adopters;

Interpretation 17 Distributions of Non-cash Assets to Owners; andInterpretation 18 Transfers of Assets from Customers.

The Group has not elected to early adopt any new standards or amendments that are issued but not yet effective.

Significant accounting judgements, estimates and assumptionsThe significant accounting judgments, estimates and assumptions adopted in the half-year financial report are consistent with those applied in the preparation of the Group’s financial report for the year ended 31 December 2009.

The Australian Federal Government recently proposed that the current Petroleum Resource Rent Tax regime will be extended to all Australian onshore and offshore oil and gas projects to apply from 1 July 2012. The proposal is subject to extensive negotiation, drafting of legislation and approval by Parliament. Consequently the financial statements have been prepared in accordance with current tax legislation.

3. Segment Information

The Group has identified its operating segments to be the four business units of Eastern Australia, Western Australia and Northern Territory (“WA & NT”), Asia Pacific, and Gladstone LNG (“GLNG®”), based on the different geographical regions and the similarity of assets within those regions. The other and unallocated segment comprises the activities undertaken by the Group’s technical, exploration and corporate functional groups. This is the basis on which internal reports are provided to the Chief Executive Officer for assessing performance and determining the allocation of resources within the Group.

The Asia Pacific operating segment includes operations in Indonesia, Papua New Guinea, Vietnam, India, Bangladesh, Kyrgyz Republic and Egypt.

The Group operates primarily in one business, namely the exploration, development, production, transportation and marketing of hydrocarbons. Revenue is derived primarily from the sale of gas and liquid hydrocarbons.

F-227


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F-228


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F-229




Page 17

Consolidated30 June

201030 June

2009$million $million

4. Revenue and Other Income

Product sales:

Gas, ethane and liquefied gas 584 540

Crude oil 297 308

Condensate and naphtha 122 91

Liquefied petroleum gas 88 85

1,091 1,024Other revenue:

Overriding royalties 4 3

Pipeline tariffs and processing tolls 25 10

Trading revenue 8 7

Other 6 4

43 24

Total revenue 1,134 1,048

Other income:

Insurance recoveries 6 6

Net loss on sale of controlled entities - (13)

Net (loss)/gain on sale of non-current assets (2) 35

Other (1) -

3 28

5. Expenses

Cost of sales:

Cash cost of production:

Production costs:

Production expenses 234 231

Production facilities operating leases 42 35

276 266Other operating costs:

Pipeline tariffs, processing tolls and other 55 37

Royalty and excise 21 25

76 62

Total cash cost of production 352 328

Depreciation and depletion 277 314

Third party gas purchases 70 56

Decrease/(increase) in product stock 5 (7)

Total cost of sales 704 691

F-230




Page 18

Consolidated

30 June2010

30 June2009

$million $million

5. Expenses (continued)

Other expenses:

Selling 6 4

Corporate 40 37

Depreciation 2 3

48 44

Foreign exchange (gains)/losses (5) 19

Losses/(gains) from change in fair value of derivative financial assets designated as at fair value through profit or loss 4 (4)

Fair value hedges, (gains)/losses:

On the hedging instrument (45) 121

On the hedged item attributable to the hedged risk 54 (125)

Exploration and evaluation expensed 55 113

Net impairment loss on oil and gas assets 27 8

Net impairment loss on receivables 11 -

Total other expenses 149 176

6. Net Finance Costs

Interest income (55) (34)

Finance income (55) (34)

Interest paid to third parties 26 43

Less borrowing costs capitalised - (14)

26 29

Unwind of the effect of discounting on provisions 19 17

Finance expense 45 46

Net finance (income)/costs (10) 12

F-231




Page 19

Consolidated

30 June2010

30 June2009

$million $million

7. Earnings

EBITDAX is calculated as follows:


Deduct:

Net financing income/(costs) 10 (12)

EBIT 283 209Add back:

Depreciation and depletion 279 317

Exploration and evaluation expensed 55 113

Net impairment loss on oil and gas assets 27 8

Net impairment loss on receivables 11 -

EBITDAX 655 647

30 June2010

31 December 2009

$million $million

8. Cash and Cash Equivalents

Cash at bank and in hand 249 234

Short-term deposits 2,126 2,006

2,375 2,240

9. Other Financial Assets

Current – other financial assets

Term deposits 30 60

Interest rate swap contracts 1 3

Cross currency swap contracts 1 -

Other 3 2

35 65

Non-current – other financial assets

Interest rate swap contracts 177 123

Receivables due from other related entities 7 10

Available-for-sale investment 1 2

Other 1 1

186 136

F-232




Page 20

Consolidated

30 June2010

31 December 2009

$million $million

10. Exploration and Evaluation Assets

Balance at the beginning of the period 923 493

Acquisitions of controlled entities - 8

Acquisitions of exploration and evaluation assets 3 351

Additions 84 230

Exploration and evaluation expensed (7) (63)

Disposals and recoupment - (24)

Transfer to oil and gas assets (33) (38)

Exchange differences 5 (34)

Balance at the end of the period 975 923Comprising:

Acquisition related costs 515 535

Successful exploration wells 214 199

Exploration and evaluation assets pending determination of success 246 189

975 923

F-233




Page 21

Consolidated

Six months ended

30 June 2010

$million

Twelve months ended 31 December

2009$million

11. Oil and Gas AssetsAssets in development


Additions 420 335

Disposal and recoupment - (48)

Transfer from exploration and evaluation assets 29 1


Balance at the end of the period 1,258 768

Producing assets

Balance at the beginning of the period 5,549 5,603

Acquisition of oil and gas assets - 9

Additions 324 762

Transfer from exploration and evaluation assets 4 37

Disposals - (48)

Depreciation and depletion expense (264) (590)

Net impairment losses (27) (37)


Balance at the end of the period 5,621 5,549

Total oil and gas assets 6,879 6,317

Comprising:

Exploration and evaluation expenditure related to these assetspending commercialisation 34 31

Other capitalised expenditure 6,845 6,286

6,879 6,317

12. Other Land, Buildings, Plant and Equipment


Additions 29 69

Depreciation (15) (29)

Balance at the end of the period 214 200

F-234




Page 22

Consolidated

30 June 2010

$million

31 December 2009

$million

13. Issued Capital

Ordinary Shares 5,003 4,987

Redeemable convertible preference shares - -

5,003 4,987

Six monthsended

30 June2010

Twelve monthsended

31 December2009

Six monthsended

30 June2010

Twelve monthsended

31 December2009

Number of Shares $million $million

Movement in fully paid ordinary shares

Balance at the beginning of the period 831,834,626 584,812,875 4,987 1,947

Santos Employee Share Acquisition Plan - 101,376 - 2

Santos Employee Share Purchase Plan - 18,400 - -

Shares issued on exercise of options 9,668 427,050 - 4

Shares issued on vesting of Share Acquisition Rights 381,500 303,085 - -

Santos Executive Share Plan - - - -

Non-executive Director Share Plan 1,671 20,390 - -

Entitlement offer - 237,287,762 - 2,914

Dividend Reinvestment Plan (“DRP”) 1,123,176 2,005,880 16 30

DRP underwriting agreement - 6,857,808 - 106

Transfer from redeemable convertible preference shares - - - (16)

Balance at the end of the period 833,350,641 831,834,626 5,003 4,987

Redeemable convertible preference shares

Balance at the beginning of the period - 6,000,000 - 584

Redeemable convertible preference shares bought back at face value and cancelled - (6,000,000) - (600)

Transfer to fully paid ordinary shares - - - 16

Balance at the end of the period - - - -

F-235




Page 23

Dollarsper share

Total$million

Franked/unfranked

Paymentdate

14. DividendsDividends recognised in the current period by the Company are:

2010Final 2009 ordinary $0.20 166 Franked 31 Mar 20102009Final 2008 redeemable preference $2.9989 18 Franked 31 Mar 2009Final 2008 ordinary $0.20 117 Franked 31 Mar 2009

135Franked dividends paid during the period were franked at the tax rate of 30%.

After the end of the reporting period the following dividends were proposed by the Directors. The dividends have not been provided for and there are no income tax consequences.Interim 2010 ordinary 0.22 183 Franked 6 Oct 2010

The financial effect of these dividends has not been brought to account in the financial report for the six months ended 30 June 2010 and will be recognised in subsequent financial reports.

15. Acquisitions / Disposals of Controlled Entities

There were no acquisitions or disposals of controlled entities during the six months ended 30 June 2010.

16. CommitmentsThe PNG LNG Joint Venture entered into operating leases of LNG tankers and drilling rigs during the six months ended 30 June 2010. The Group’s share of the minimum operating lease commitment is $121 million extending for 15 years from delivery date. There has been no other material change to the commitments disclosed in the most recent annual financial statements.

17. Contingent LiabilitiesThere has been no material change to the contingent liabilities disclosed in the most recent annual financial statements.

18. Financial Risk ManagementThere has been no material change to the fair values of the financial instruments disclosed in the most recent annual financial report.

19. Events After the End of the Reporting PeriodThe following events occurred subsequent to 30 June 2010, the financial effects of which have not been brought to account in the half-year financial report for the six months ended 30 June 2010:

(a) On 19 July 2010 Santos announced it had executed a $2,000 million bilateral bank loan facility. This new facility will be used to replace and extend Santos’ existing $700 million of undrawn bilateral bank facilities that mature between 2011 and 2013 and to increase liquidity. The weighted average term of the new facility is five years; and

(b) On 26 August 2010, the Directors of Santos Limited declared an interim dividend on ordinary shares in respect of the 2010 financial year. Refer to note 14 above for the details of the dividends declared after 30 June 2010.

F-236


DIRECTORS’ DECLARATION


In accordance with a resolution of the Directors of Santos Limited, we state that:

In the opinion of the Directors of Santos Limited:

1. The financial statements and notes of the consolidated entity are in accordance with the Corporations Act 2001, including:

(a) Giving a true and fair view of the consolidated entity’s financial position as at 30 June 2010and the performance for the half-year ended on that date; and

(b) Complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001; and

2. There are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

Dated this 26th day of August 2010.

On behalf of the Board

Director Director

Adelaide, South Australia

Page 24

F-237



Page 25

To the members of Santos Limited

Report on the Half-year Financial Report

We have reviewed the accompanying half-year financial report of Santos Limited, which comprises the statement of financial position as at 30 June 2010, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the half-year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the consolidated entity comprising the Company and the entities it controlled at the half-year end or from time to time during the half-year.

Directors’ Responsibility for the Half-year Financial Report The Directors and the Company are responsible for the preparation of the half-year financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the Directors determine is necessary to enable the preparation of the half-year financial report that is free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility Our responsibility is to express a conclusion on the half-year financial report based on our review. We conducted our review in accordance with Auditing Standard on Review Engagements ASRE 2410 Review of Interim and Other Financial Reports Performed by the Independent Auditor of the Entity, in order to state whether, on the basis of the procedures described, we have become aware of any matter that makes us believe that the financial report is not in accordance with the Corporations Act 2001 including: giving a true and fair view of the consolidated entity’s financial position as at 30 June 2010 and its performance for the half-year ended on that date; and complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001 . As the auditor of Santos Limited and the entities it controlled during the half-year, ASRE 2410 requires that we comply with the ethical requirements relevant to the audit of the annual financial report.

A review of a half-year financial report consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Independence In conducting our review, we have complied with the independence requirements of the Corporations Act 2001. We have given to the Directors of the Company a written auditor’s independence declaration, a copy of which is included in the directors’ report.

F-238


Page 26

Conclusion Based on our review, which is not an audit, we have not become aware of any matter that makes us believe that the half-year financial report of Santos Limited is not in accordance with the Corporations Act 2001, including:

a) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2010 and of its performance for the half-year ended on that date; and

b) complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001.

Ernst & Young RJ Curtin Partner Adelaide, South Australia 26 August 2010

F-239


Appendix 4D for the period ended 30 June 2010

For ‘Results for Announcement to the Market’ refer to page 1 of this Half-year Financial Report.

NTA backing 30 June 2010 30 June 2009

Net tangible asset backing per ordinary security N/A N/A

Change in ownership of controlled entities There were no entities over which the Group gained or lost control during the period ended 30 June 2010.

Dividends Refer to note 14 in the Half-year Financial Report for the dividends paid and payable during the period. None of these dividends are foreign sourced.

Dividend Reinvestment Plan The Santos Dividend Reinvestment Plan is in operation. Shares are allocated at the daily weighted average market price of the Company’s shares on the Australian Stock Exchange over a period of seven business days commencing on the business day after the Dividend Record Date. The Board has determined that no discount will apply. The last date for receipt of election notices for the dividend reinvestment plan is 7 September 2010.

Details of joint venture entities and associates Joint venture entities

Percentage of ownership interest held at end of period or date of disposal

Name of entity 30 June 2010 30 June 2009

Darwin LNG Pty Ltd* 11.5% 11.4%

Papua New Guinea Liquefied Natural Gas Global Company LDC 13.5% N/A

Easternwell Drilling Services Holdings Pty Ltd 50.0% 50.0%

GLNG Operations Pty Ltd 60.0% 60.0%

*Santos’ interest in Darwin LNG Pty Ltd has increased this year from 11.4% to 11.5%, subject to regulatory approval.

Associates

Name of entity

Percentage of ownership interest held at end of period or date of disposal

30 June 2010 30 June 2009

Eastern Star Gas Limited 19.8% N/A

Page 27

F-240

FINANCIAL STATEMENTS, DIRECTORS’ REPORT ANDAUDITOR’S REPORT FOR THE ISSUER FOR THE YEARENDED 31 DECEMBER 2008


F-241


F-242

SANTOS FINANCE LTD

A.B.N. 81 002 799 537

(INCORPORATED IN NEW SOUTH WALES ON 6 JULY 1984)

SPECIAL PURPOSE FINANCIAL REPORT

31 DECEMBER 2008


F-243

- 2 -

SANTOS FINANCE LTD

INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2008

This income statement is to be read in conjunction with the notes to the financial statements.

Note2008$000

2007$000

Interest revenue 182,057 165,955Finance costs (142,054) (142,467)

Net financing income 2 40,003 23,488

Other income 2,363 -Intercompany debt forgiveness expense - (144,301)(Impairment write-down)/reversal of impairment write-

down of receivables due from related entities (66,850) 32,511Foreign exchange (losses)/gains (250,806) 90,318Other expenses (4,461) (1,825)

(Loss)/profit before tax 3 (279,751) 191Income tax benefit/(expense) 50,150 (27,961)

Loss after income tax attributable to equity holders of Santos Finance Ltd (229,601) (27,770)


F-244

- 3 -

SANTOS FINANCE LTD

BALANCE SHEET AS AT 31 DECEMBER 2008

This balance sheet is to be read in conjunction with the notes to the financial statements.

Note2008$000

2007$000

AssetsCash and cash equivalents 4 9,659 37,419Trade and other receivables 5 2,073,854 2,257,980Other financial assets 6 395,537 77,167

Total assets 2,479,050 2,372,566

LiabilitiesTrade and other payables 7 31,741 44,319Interest-bearing loans and borrowings 8 2,549,971 2,117,699Deferred tax liabilities 31,809 95,029Other financial liabilities 9 - 20,389

Total liabilities 2,613,521 2,277,436

Net (liabilities)/assets (134,471) 95,130

EquityIssued capital 10 100,000 100,000Accumulated losses 11 (234,471) (4,870)

Total equity attributable to equity holders of Santos Finance Ltd (134,471) 95,130


F-245

- 4 -

SANTOS FINANCE LTD

CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2008

This cash flow statement is to be read in conjunction with the notes to the financial statements.

Note2008$000

2007$000

Cash flows from operating activitiesInterest received 788 165,926Borrowing costs paid (118,579) (142,109)Operating costs received/(paid) 291 (3,972)

Net cash (used in)/provided by operating activities 12 (117,500) 19,845

Cash flows from financing activitiesDrawdown of borrowings 500,000 2,191,326Repayment of borrowings (733,983) (1,688,401)Receipts from related entities 363,803 46,050Payments to related entities (23,780) (554,164)

Net cash provided by/(used in) financing activities 106,040 (5,189)

Net (decrease)/increase in cash (11,460) 14,656

Cash and cash equivalents at the beginning of the year 37,419 18,699

Effects of exchange rate changes on the balances of cash held in foreign currencies (16,300) 4,064

Cash and cash equivalents at the end of the year 4 9,659 37,419


F-246

- 5 -

SANTOS FINANCE LTD

STATEMENT OF RECOGNISED INCOME AND EXPENSE

FOR THE YEAR ENDED 31 DECEMBER 2008

This statement of recognised income and expense is to be read in conjunction with the notes to the financial statements.

2008$000

2007$000

Net income/(expense) recognised directly in equity

- -

Loss for the period (229,601) (27,770)

Total recognised income and expense for the period attributable to equity holders of Santos Finance Ltd (229,601) (27,770)

Other movements in equity arising from transactions with owners as owners are set out in notes 10 and 11.


F-247

6

SANTOS FINANCE LTD

NOTES TO THE FINANCIAL STATEMENTS


1. Significant Accounting Policies

Santos Finance Limited (“the Company”) is a company incorporated and domiciled in Australia.

The address of the registered office is:

Ground Floor Santos Centre60 Flinders StreetAdelaide SA 5000.

The financial report was authorised for issue by the Directors on 30 March 2009.

(a) Statement of compliance

This special purpose financial report has been prepared for distribution to the members tofulfil the directors’ financial reporting requirements under the Corporations Act 2001. The accounting policies used in the preparation of this financial report, as described below, are consistent with previous years, and are, in the opinion of the directors’, appropriate to meet the needs of the members.

The disclosure requirements of Accounting Standards and other financial reporting requirements in Australia do not have mandatory applicability to Santos Finance Ltd because it is not a reporting entity. However, the Directors have prepared the financial report in accordance with Accounting Standards, Interpretations, and other financial reporting requirements in Australia with the following disclosure exemptions:

AASB 7 Financial Instruments: DisclosureAASB 112 Income TaxesAASB 114 Segment ReportingAASB 121 The Effects of Changes in Foreign Exchange RatesAASB 123 Borrowing CostsAASB 124 Related Party DisclosuresAASB 136 Impairment of AssetsAASB 137 Provisions, Contingent Liabilities and Contingent Assets

(b) Basis of preparation

The financial report has been prepared on a historical cost basis, except for derivative financial instruments and fixed rate notes that are hedged by an interest rate swap, which are measured at fair value.

The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars, unless otherwise stated under the option available to the Company under ASIC Class order 98/100 dated 10 July 1998 (updated by Class Order 05/641 effective 28 July 2005). The Company is an entity to which the class order applies.


F-248

7

SANTOS FINANCE LTD



1. Significant Accounting Policies (continued)

(b) Basis of preparation (continued)

From 1 January 2008, the Company has adopted the following standards and interpretations, and all consequential amendments, which became applicable on 1 January 2008. Adoption of these standards and interpretations has only affected the disclosure in these financial statements. There has not been any impact on the financial position or performance of the Company.

AASB 2007-1 Amendments to Australian Accounting Standards arising from AASB Interpretation 11


AASB 2008-10 Amendments to Australian Accounting Standards –Reclassification of Financial Assets

AASB 2008-12 Amendments to Australian Accounting Standards –Reclassification of Financial Assets – Effective Date and Transition

Interpretation 11 AASB 2 Group and Treasury Share Transactions

Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective have not been adopted by the Company for the annual reporting period ending 31 December 2008. These are outlined in the following table:


F-249

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F-253

- 12 -

SANTOS FINANCE LTD





The accounting policies set out below have been applied consistently to all periods presented in the Company’s financial report. The accounting policies have been applied consistently by the Company.

(c) Foreign currency

Functional and presentation currencyItems included in the financial statements of the Company are measured using the currency of the primary economic environment in which it operates (“the functional currency”). The financial statements are presented in Australian dollars which is the Company’s functional and presentation currency.

Transactions and balancesTransactions in foreign currencies are initially recorded in the functional currency by applying the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the foreign exchange rate ruling at the balance sheet date. Foreign exchange differences arising on translation are recognised in the income statement.

(d) Derivative financial instruments

The Company uses derivative financial instruments to hedge its exposure to changes in foreign exchange rates, commodity prices and interest rates arising in the normal course of business. The principal derivatives that may be used are forward foreign exchange contracts, foreign currency swaps, interest rate swaps and commodity crude oil price swap and option contracts. Their use is subject to a comprehensive set of policies, procedures and limits approved by the Board of Directors. The Company does not trade in derivative financial instruments for speculative purposes.

Derivative financial instruments are recognised initially at fair value. Subsequent to initial recognition, derivative financial instruments are stated at fair value. Where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged, otherwise the gain or loss on re-measurement to fair value is recognised immediately in profit or loss.

The fair value of interest rate swaps is the estimated amount that the Company would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. The fair value of commodity swap and option contracts is their quoted market price at the balance sheet date.

Embedded derivativesDerivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contract and the host contracts are not measured at fair value with changes in fair value recognised in profit or loss.


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SANTOS FINANCE LTD




(e) Hedging

Fair value hedgeWhere a derivative financial instrument hedges the changes in fair value of a recognised asset or liability or an unrecognised firm commitment (or an identified portion of such asset, liability or firm commitment), any gain or loss on the hedging instrument is recognised in the income statement. The hedged item is stated at fair value in respect of the risk being hedged, with any gain or loss being recognised in the income statement.

Cash flow hedgeWhere a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity. When the forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, or the forecast transaction for a non-financial asset or non-financial liability becomes a firm commitment for which fair value hedging is applied, the associated cumulative gain or loss is removed from equity and included in the initial cost or other carrying amount of the non-financial asset or non-financial liability.

If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, the associated gains and losses that were recognised directly in equity are reclassified into profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss (i.e. when interest income or expense is recognised).

For cash flow hedges, other than those covered by the preceding paragraph, the associated cumulative gain or loss is removed from equity and recognised in the income statement in the same period or periods during which the hedged forecast transaction affects profit or loss. The ineffective part of any gain or loss is recognised immediately in the income statement.


Hedge of monetary assets and liabilitiesWhen a derivative financial 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 income statement.

(f) Trade and other receivables

Receivables are initially recognised at fair value, which in practice is the equivalent of cost, less any impairment losses.



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SANTOS FINANCE LTD




(f) Trade and other receivables (continued)

Other receivables are assessed for indicators of impairment at each balance sheet date. Where a receivable is impaired the amount of the impairment is the difference between the assets’ carrying value and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the receivable is reduced through the use of an allowance account. Changes in the allowance account are recognised in profit or loss.

(g) Cash and cash equivalents

Cash and cash equivalents comprises cash balances and short-term deposits that are readily convertible to known amounts of cash, are subject to an insignificant risk of changes in value, and have an original maturity of three months or less.

Bank overdrafts that are repayable on demand and form an integral part of the Company’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Bank overdrafts are included within interest-bearing loans and borrowings in current liabilities on the balance sheet.

(h) Impairment

The carrying amounts of the Company’s assets, other than deferred tax assets, are reviewed at each balance sheet date to determine whether there is any indication of impairment. Where an indicator of impairment exists a formal estimate of the recoverable amount is made.


Calculation of recoverable amountThe recoverable amount of an asset is the greater of its fair value less costs to sell and its value in use. In assessing value in use, an asset’s estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Where an asset does not generate cash flows that are largely independent from other assets or groups of assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

Reversals of impairmentAn impairment loss is reversed if there has been an increase in the estimated recoverable amount of a previously impaired asset. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined if no impairment loss had been recognised.

(i) Interest-bearing loans and borrowings



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SANTOS FINANCE LTD




(i) Interest-bearing loans and borrowings (continued)

Fixed rate notes that are hedged by an interest rate swap are recognised at fair value (refer note 1(e)).

(j) Trade and other payables

Trade and other payables are recognised when the related goods or services are received, at the amount of cash or cash equivalent that will be required to discharge the obligation, gross of any settlement discount offered. Trade payables are non-interest bearing and are settled on normal terms and conditions.

(k) Share capital

Ordinary share capitalOrdinary share capital is classified as equity.

DividendsDividends are recognised as a liability at the time the Directors resolve to pay or declare the dividend.

(l) Revenue

Interest revenue is recognised as it accrues, using the effective interest rate method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period, using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial assets to the net carrying amount of the financial asset.

(m) Finance costs

Finance costs comprise interest paid or payable on borrowings calculated using the effective interest rate method. Finance costs are recognised in the income statement in the period in which they are incurred..

(n) Goods and services tax


Receivables and payables are stated with the amount of GST included.

The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the balance sheet.

Cash flows are included in the cash flow statement on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows.


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SANTOS FINANCE LTD




(o) Income tax


Current tax is the amount of income tax payable on the taxable profit or loss for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax is determined using the balance sheet approach, providing for temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the appropriate tax bases. The following temporary differences are not provided for: the initial recognition of assets or liabilities that affect neither, accounting nor taxable profit, and differences 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 balance sheet date.


Santos Ltd is the head entity in the tax-consolidated group, under Australian taxation law,of which Santos Finance Ltd is a member. Current tax expense/income, deferred tax liabilities, and deferred tax assets arising from temporary differences of the members of the tax-consolidated group are allocated among the members of the tax-consolidated group using a “stand-alone taxpayer” approach in accordance with Interpretation 1052 Tax Consolidation Accounting and are recognised in the separate financial statements of each entity. Current tax liabilities and assets and deferred tax assets arising from unused tax losses and tax credits of the members of the tax-consolidated group are recognised by Santos Ltd (as head entity in the tax-consolidated group).

Santos Ltd and the other entities in the tax-consolidated group have entered into a tax funding agreement. Tax contribution amounts payable under the tax funding agreement are recognised as payable or receivable from Santos Ltd and each member of the tax-consolidated group. Where the tax contribution amount recognised by each member of the tax-consolidated group for a particular period under the tax funding agreement is different to the aggregate of the current tax liabilty or asset and any deferred tax asset arising from unused tax losses and tax credits in respect of that period assumed by Santos Ltd, the difference is recognised as a contribution to (or distribution from) Santos Ltd.

Santos Ltd and the other entities in the tax-consolidated group have also entered into a tax sharing agreement pursuant to which the other entities may be required to contribute to the tax liabilities of Santos Ltd in the event of default by Santos Ltd or upon leaving the tax-consolidated group.


F-258

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SANTOS FINANCE LTD




(p) Significant accounting judgements, estimates and assumptions

The carrying amounts of certain assets and liabilities are often determined based on management’s judgement regarding estimates and assumptions of future events. The reasonableness of estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

The financial report does not include any assets and liabilities where the carrying amounts are based on management’s judgement regarding estimates and assumptions of future events.


F-259

- 18 -

SANTOS FINANCE LTD



2008$000

2007$000

2. Net Financing IncomeInterest revenue:

Related entities 181,295 165,955Other Entities 762 -

Financial income 182,057 165,955

Interest expense:Related entities (16,454) -Other entities (125,600) (142,467)

Finance costs (142,054) (142,467)

Net financing income 40,003 23,488

3. Loss for the YearLoss for the year has been arrived at after crediting/ (charging) the following items of income and expense:

Intercompany debt forgiveness expense - (144,301)(Impairment write-down)/reversal of impairment write-

down of receivables due from related entities (66,850) 32,511Foreign exchange (losses)/gains (250,806) 90,318

4. Cash and Cash EquivalentsCash at bank and in hand 9,659 13,465Call deposits - 23,954

Cash and cash equivalents in the cash flow statement 9,659 37,419

5. Trade and Other ReceivablesReceivables from related entities 2,073,854 2,257,955Prepayments - 25

2,073,854 2,257,980

6. Other Financial AssetsInterest rate swap contracts 303,539 77,167Cross currency swaps 91,998 -

395,537 77,167

7. Trade and Other Payables

Other payables 21,555 22,462Amounts owing to related entities 10,186 21,857

31,741 44,319


F-260

- 19 -

SANTOS FINANCE LTD



2008$000

2007$000

8. Interest-Bearing Loans and BorrowingsAmounts owing to related entities 142,653 69,534Bank loans 221,496 321,796Commercial paper - 64,563Medium-term notes 457,222 458,650Long-term notes 1,728,600 1,203,156

2,549,971 2,117,699

9. Other Financial LiabilitiesInterest rate swap contracts - 9,881Cross-currency swap contracts - 10,508

- 20,389

10. Issued and Authorised CapitalShare capital100,000,000 (2007:100,000,000) fully paid ordinary

shares 100,000 100,000


Movement in issued and fully paid ordinary shares

2008 2007 2008 2007Number of Shares $000 $000

Balance at the beginning of the year 100,000,000 100,000,000 100,000 100,000Shares issued - - - -


During the year nil (2007: nil) ordinary shares were issued to the Company’s parent entity.

Capital risk management

The Company’s objective when managing capital is to safeguard the ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders, and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.


F-261

- 20 -

SANTOS FINANCE LTD



2008$000

2007$000

11. Accumulated LossesBalance at the beginning of the year (4,870) 22,900Net loss after income tax and attributable to

shareholders (229,601) (27,770)

Balance at the end of the year (234,471) (4,870)

DividendsNo dividends have been paid or declared during the financial year and no dividends have been proposed or declared by the Directors after the balance sheet date.

12. Reconciliation of Cash Flows from Operating Activities

(a) Loss after income tax (229,601) (27,770)


Intercompany debt forgiveness expense - 144,301Impairment write-down/(reversal of impairment

write-down of receivables due from related entities) 66,850 (32,511)

Foreign currency fluctuations 356,694 (91,455)Net borrowing income charged to related entities (164,841) -Interest rate hedges and bonds revaluation 4,477 869Cross currency swaps revaluation (102,505) 1,486

Net cash used in operating activities before change in assets or liabilities (68,926) (5,071)

(Deduct)/add change in operating assets or liabilities net of acquisitions of businesses:

Income tax (receivable)/payable allocated to Santos Ltd under tax funding agreement 13,071 22,105

Net (increase)/ decrease in deferred tax asset and deferred tax liability (63,221) 4,871

Decrease/(increase) in receivables 26 (2,004)Decrease/(increase) in other assets 1,320 (1,342)Increase/(decrease) in trade and other payables 230 1,286

Net cash (used in)/provided by operating activities (117,500) 19,845

(b) Non-cash financing and investing activities

Income tax receivable allocated to Santos Ltd undertax funding agreement

13,071 22,105

Borrowing income charged to related entities 181,295

Borrowing costs charged by related entities (16,454)

164,841 -


F-262

- 21 -

SANTOS FINANCE LTD



13. Remuneration of Auditors

Audit fees are borne by the ultimate parent entity, Santos Ltd.

14. Contingent Liabilities

There are no contingent liabilities.

15. Parent Entity

The parent entity and ultimate parent entity is Santos Ltd.


F-263

- 22 -

SANTOS FINANCE LTD



In accordance with a resolution of the Directors of Santos Finance Ltd (“the Company”), I state that inthe opinion of the Directors:

(a) the Company is not a reporting entity;

(b) the financial statements and notes of the Company are in accordance with the Corporations Act 2001, including:

(i) giving a true and fair view of the Company’s financial position as at31 December 2008 and of its performance for the year ended on that date, in accordance with the basis of preparation described in Note 1; and

(ii) complying with Accounting Standards in Australia, to the extent described in Note 1 and the Corporations Regulations 2001; 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.

Dated at Adelaide this 30th day of March 2009.

.............…………………Director


F-264


Independent auditor’s report to the members of Santos Finance Ltd We have audited the accompanying special purpose financial report of Santos Finance Ltd, which comprises the balance sheet as at 31 December 2008, and the income statement, statement of recognised income and expense and cash flow statement for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration.

Directors’ Responsibility for the Financial Report The directors of the company are responsible for the preparation and fair presentation of the financial report and have determined that the accounting policies described in Note 1 to the financial statements, which form part of the financial report, are appropriate to meet the financial reporting requirements of the Corporations Act 2001 and are appropriate to meet the needs of the members. This responsibility includes establishing and maintaining internal controls relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. These policies do not require the application of all Accounting Standards and other mandatory financial reporting requirements in Australia.

Auditor’s Responsibility Our responsibility is to express an opinion on the financial report based on our audit. No opinion is expressed as to whether the accounting policies used are appropriate to the needs of the members. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on our judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, we consider internal controls relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. The financial report has been prepared for distribution to the members for the purpose of fulfilling the directors’ financial reporting requirements under the Corporations Act 2001. We disclaim any assumption of responsibility for any reliance on this report or on the financial report to which it relates to any person other than the members, or for any purpose other than that for which it was prepared. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.


F-265

2

Independence In conducting our audit we have met the independence requirements of the Corporations Act 2001. We have given to the directors of the company a written Auditor’s Independence Declaration, a copy of which is referred to in the directors’ report.

Auditor’s Opinion In our opinion the financial report of Santos Finance Ltd is in accordance with the Corporations Act 2001, including:

a) giving a true and fair view of the financial position of Santos Finance Ltd as at 31 December 2008 and of its performance for the year ended on that date in accordance with the accounting policies described in Note 1 to the financial statements; and

b) complying with Australian Accounting Standards to the extent described in Note 1 to the financial statements and complying with the Corporations Regulations 2001.

Ernst & Young R J Curtin Partner Adelaide 30 March 2009


F-266


Auditor’s Independence Declaration to the Directors of Santos Finance Ltd

In relation to our audit of the financial report of Santos Finance Ltd for the financial year ended 31 December 2008, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct.

Ernst & Young

R J CurtinPartner30 March 2009


F-267

SANTOS FINANCE LTD

DIRECTORS’ REPORT

The Directors present their report together with the financial report of the Company for the financial year ended 31 December 2008 and the auditor’s report thereon.

1. Directors

The names of the Directors in office at the date of this report are:Knox, David John WisslerGerlach, StephenDean, Kenneth Alfred

Stephen Gerlach and Kenneth Alfred Dean held their office at all times since the beginning of the financial year. David John Wissler Knox was appointed a Director on 24 April 2008. John Charles Ellice-Flint ceased to be a Director on 25 March 2008.

2. Principal Activities

The principal activity of the Company during the financial year was to provide centralised finance activities for the Santos Ltd group. No significant change in the nature of this activity has occurred during the year.

3. Review and Results of Operations

During the year, the Company continued to manage external borrowings for the Santos Ltd group and provide funding for the parent entity and its controlled entities. The net loss for the financial year after providing for income tax was $229,601,109.

4. Dividends

No dividends have been paid or declared during the financial year and no dividends have been recommended by the Directors.

5. State of Affairs

In the opinion of the Directors, there were no significant changes in the state of affairs of the Company that occurred during the financial year.

6. Events Subsequent to Balance Date

In the opinion of the Directors there has not arisen in the interval between the end of the financial year and the date of this report any matter or circumstance that has significantly affected or may significantly affect the operations of the Company, the results of those operations, or the state of affairs of the Company in future financial years.

7. Likely Developments

With respect to likely developments in the operations of the Company in future financial years, it is expected that the Company will continue its principal activity as set out above.

Further information about likely developments in the operations of the Company and the expected results of those operations in future financial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the Company.


SANTOS FINANCE LTD

DIRECTORS’ REPORT

8. Indemnification

Rule 12 of the Company’s Constitution provides that the Company indemnifies each person who is or who has been an “officer” of the Company against any liability to another person (other than the Company or a related body corporate) arising from their position as such officer, unless the liability arises out of conduct involving a lack of good faith. Rule 12 also provides for an indemnity in favour of an officer or auditor (Ernst & Young) in relation to costs incurred in defending proceedings in which judgment is given in their favour or in which they are acquitted or the Court grants relief.

For the purpose of Rule 12, “officer” has the meaning given in Rule 12.1 but limited to such officers appointed from the date that the Company became a subsidiary of Santos Ltd.

In addition, Santos Limited pays premiums in respect of Directors’ and Officers’ Liability and Legal Expenses insurance contracts on behalf of the Group. The insurance contracts insure against certain liability (subject to exclusions) persons who are or have been directors or officers of the Company. A condition of these contracts is that the nature of the liability indemnified and the premium payable not be disclosed.

9. Rounding

Australian Securities and Investments Commission Class Order 98/100, dated 10 July 1998, applies to the Company and accordingly amounts have been rounded off in accordance with that Class Order, unless otherwise indicated.

10. Auditor’s Independence Declaration

The auditor's independence declaration is set out on page 25 and forms part of the directors' report for the 2008 financial year.

This report is made on 30th March 2009 in accordance with a resolution of the Directors.

Director

F-268

FINANCIAL STATEMENTS, DIRECTORS’ REPORT ANDAUDITOR’S REPORT FOR THE ISSUER FOR THE YEARENDED 31 DECEMBER 2009


F-269


F-270

SANTOS FINANCE LTD

A.B.N. 81 002 799 537

(INCORPORATED IN NEW SOUTH WALES ON 6 JULY 1984)

SPECIAL PURPOSE FINANCIAL REPORT

31 DECEMBER 2009


- 1 -

SANTOS FINANCE LTD

INCOME STATEMENT


This income statement is to be read in conjunction with the notes to the financial statements.

Note2009$000

2008$000

Interest revenue 91,699 182,057Finance costs (69,307) (142,054)

Net financing income 2 22,392 40,003

Other income 32 2,363Intercompany debt forgiveness expense (54,279) -Impairment reversal / (loss) on receivables due from

related entities 70,930 (66,850)Foreign exchange gains/(losses) 265,412 (250,806)Gains/(losses) on fair value hedges 5,132 (4,461)

Profit / (loss) before tax 3 309,619 (279,751)Income tax (expense)/benefit (96,667) 50,150

Profit / (loss) after income tax attributable to equity holders of Santos Finance Ltd 212,952 (229,601)

F-271


F-272

- 2 -

SANTOS FINANCE LTD

STATEMENT OF COMPREHENSIVE INCOME


This statement of comprehensive income is to be read in conjunction with the notes to the financial statements.

2009$000

2008$000

Net profit/(loss) for the period 212,952 (229,601)

Other comprehensive income, net of tax - -

Total comprehensive income 212,952 (229,601)


- 3 -

SANTOS FINANCE LTD

STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2009

This statement of financial position is to be read in conjunction with the notes to the financial statements.

Note2009$000

2008$000

Current assetsCash and cash equivalents 4 103,713 9,659Trade and other receivables 5 1 -Other financial assets 6 2,768 59,223


Non-current assetsOther financial assets 6 2,241,723 2,410,168

Total non-current assets 2,241,723 2,410,168

Total assets 2,348,205 2,479,050

Current LiabilitiesTrade and other payables 7 95,049 31,741Interest-bearing loans and borrowings 8 151,460 46,317Other financial liabilities 9 7,266 -

Total current liabilities 253,775 78,058

Non-current liabilitiesInterest-bearing loans and borrowings 8 1,773,983 2,503,654Deferred tax liabilities 106,473 31,809Other financial liabilities 9 1,022 -

Total non-current liabilities 1,881,478 2,535,463

Total liabilities 2,135,253 2,613,521

Net assets/(liabilities) 212,952 (134,471)

EquityIssued capital 10 234,471 100,000Accumulated losses (21,519) (234,471)

Total equity attributable to equity holders of Santos Finance Ltd 212,952 (134,471)

F-273


F-274

- 4 -

SANTOS FINANCE LTD

STATEMENT OF CASH FLOWS


This statement of cash flows is to be read in conjunction with the notes to the financial statements.

Note2009$000

2008$000

Cash flows from operating activitiesInterest received 28 788Borrowing costs paid (77,893) (118,579)Operating costs (paid)/received (156) 291

Net cash used in operating activities 12 (78,021) (117,500)

Cash flows from financing activitiesDrawdown of borrowings - 500,000Repayment of borrowings (60,146) (733,983)Receipts from related entities 419,804 363,803Payments to related entities (181,900) (23,780)

Net cash provided by financing activities 177,758 106,040

Net increase/(decrease) in cash 99,737 (11,460)

Cash and cash equivalents at the beginning of the year 9,659 37,419

Effects of exchange rate changes on the balances of cash held in foreign currencies (5,683) (16,300)

Cash and cash equivalents at the end of the year 4 103,713 9,659


- 5 -

SANTOS FINANCE LTD

STATEMENT OF CHANGES IN EQUITY


This statement of changes in equity is to be read in conjunction with the notes to the financial statements.

Share capital

Accumulated losses Total equity

$000 $000 $000

Balance at 1 January 2009 100,000 (234,471) (134,471)

Total comprehensive income for the period, net of tax - 212,952 212,952

Transactions with owners in their capacity as owners:Shares issued 134,471 - 134,471Dividends to shareholders - - -

Balance at 31 December 2009 234,471 (21,519) 212,952

Balance at 1 January 2008 100,000 (4,870) 95,130

Total comprehensive income for the period, net of tax - (229,601) (229,601)

Transactions with owners in their capacity as owners - - -

Balance at 31 December 2008 100,000 (234,471) (134,471)

F-275


F-276

- 6 -

SANTOS FINANCE LTD



1. Significant Accounting Policies

Santos Finance Limited (“the Company”) is a company incorporated and domiciled in Australia.

The address of the registered office is:

Ground Floor Santos Centre60 Flinders StreetAdelaide SA 5000.

The financial report was authorised for issue by the Directors on 22 March 2010.

(a) Statement of compliance

This special purpose financial report has been prepared for distribution to the members tofulfil the directors’ financial reporting requirements under the Corporations Act 2001. The accounting policies used in the preparation of this financial report, as described below, are consistent with previous years, and are, in the opinion of the Directors’, appropriate to meet the needs of the members.

The disclosure requirements of Accounting Standards and other financial reporting requirements in Australia do not have mandatory applicability to Santos Finance Ltd because it is not a reporting entity. However, the Directors have prepared the financial report in accordance with Accounting Standards, Interpretations, and other financial reporting requirements in Australia with the following disclosure exemptions:

AASB 7 Financial Instruments: DisclosureAASB 8 Segment ReportingAASB 112 Income TaxesAASB 121 The Effects of Changes in Foreign Exchange RatesAASB 123 Borrowing CostsAASB 124 Related Party DisclosuresAASB 136 Impairment of AssetsAASB 137 Provisions, Contingent Liabilities and Contingent Assets

(b) Basis of preparation

The financial report has been prepared on a historical cost basis, except for derivative financial instruments and fixed rate notes that are hedged by an interest rate swap, which aremeasured at fair value.

The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars, unless otherwise stated under the option available to the Company under ASIC Class order 98/100 dated 10 July 1998 (updated by Class Order 05/641 effective 28 July 2005). The Company is an entity to which the class order applies.


- 7 -

SANTOS FINANCE LTD





Adoption of new accounting standards and interpretationsFrom 1 January 2009, the Company has adopted the following standards and interpretations, and all consequential amendments, which became applicable on 1 January 2009. Adoption of these standards and interpretations has only affected the disclosure in these financial statements. There has not been any impact on the financial position or performance of the Company.

AASB 101 Presentation of Financial StatementsAASB 2008-5 Amendments to Australian Accounting Standards arising from the Annual

Improvements ProjectAASB 2009-6 Amendments to Australian Accounting Standards

Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective have not been adopted by the Company for the annual reporting period ending 31 December 2009. These are outlined in the following table:

F-277


F-278

8

SAN

TOS

FIN

ANC

ELT

D

NO

TES

TO T

HE

FIN

ANC

IAL

STAT

EMEN

TS

FOR

TH

E YE

AR E

ND

ED 3

1 D

ECEM

BER

200

9

Sign

ifica

ntAc

coun

ting

Polic

ies

(con

tinue

d)

(b)

Bas

is o

f pre

para

tion

(con

tinue

d)

Ref

eren

ceT

itle

Sum

mar

y

Eff

ectiv

e fo

r an

nual

re

port

ing

perio

ds

begi

nnin

g on

or a

fter

Impa

ct o

nC

ompa

ny

finan

cial

rep

ort

App

licat

ion

date

for

Com

pany

AA

SB

3B

usin

ess

Com

bina

tions

Ado

pts

the

acqu

isiti

on m

etho

d to

acc

ount

for

bus

ines

s co

mbi

natio

ns;

acqu

isiti

on c

osts

exp

ense

d; c

ontin

gent

co

nsid

erat

ion

reco

gnis

ed a

t fa

ir va

lue

on a

cqui

sitio

n da

te.

1Ju

ly 2

009

No

Impa

ct1

Janu

ary

2010

AA

SB

9Fi

nanc

ial I

nstru

men

tsA

AS

B 9

inc

lude

s re

quire

men

ts f

or t

he c

lass

ifica

tion

and

mea

sure

men

t of

fin

anci

al a

sset

s re

sulti

ng f

rom

th

e fir

st p

art o

f Pha

se 1

of t

he IA

SB

’s p

roje

ct to

rep

lace

IAS

39

Fi

nanc

ial

Inst

rum

ents

:R

ecog

nitio

n an

d M

easu

rem

ent

(AA

SB

13

9 Fi

nanc

ial

Inst

rum

ents

: R

ecog

nitio

n an

d M

easu

rem

ent).

The

se r

equi

rem

ents

im

prov

e an

d si

mpl

ify t

he a

ppro

ach

for

clas

sific

atio

n an

d m

easu

rem

ent

of f

inan

cial

ass

ets

com

pare

d w

ith

the

requ

irem

ents

of A

AS

B 1

39.

1 Ja

nuar

y 20

13U

nlik

ely

to h

ave

mat

eria

l im

pact

1 Ja

nuar

y 20

13

AA

SB

127

Con

solid

ated

and

S

epar

ate

Fina

ncia

l S

tate

men

ts

Cha

nges

in

a pa

rent

’s o

wne

rshi

p in

a s

ubsi

diar

y th

at

resu

lt in

a

loss

of

co

ntro

l re

quire

s re

serv

es

to

be

recy

cled

an

d re

mai

ning

ow

ners

hip

inte

rest

to

be

m

easu

red

at f

air

valu

e; c

hang

es t

hat

do n

ot r

esul

t in

a

loss

of

co

ntro

l ar

e ac

coun

ted

for

as

equi

ty

tran

sact

ions

.

1 Ju

ly 2

009

Unl

ikel

y to

hav

e im

pact

1 Ja

nuar

y 20

10

AA

SB

200

8-3

Am

endm

ents

to A

ustra

lian

Acc

ount

ing

Sta

ndar

ds

aris

ing

from

AA

SB

3 a

nd

AA

SB

127

Con

sequ

entia

l am

endm

ents

to

num

ber

of s

tand

ards

fo

llow

ing

the

issu

e of

the

rev

ised

AA

SB

3 B

usin

ess

Com

bina

tions

and

AA

SB

12

7 C

onso

lidat

ed

and

Sep

arat

e Fi

nanc

ial S

tate

men

ts.

1 Ju

ly 2

009

No

impa

ct1

Janu

ary

2010


9

SAN

TOS

FIN

ANC

ELT

D

NO

TES

TO T

HE

FIN

ANC

IAL

STAT

EMEN

TS

FOR

TH

E YE

AR E

ND

ED 3

1 D

ECEM

BER

200

9

Sign

ifica

nt A

ccou

ntin

g Po

licie

s (c

ontin

ued)

(b)

Bas

is o

f pre

para

tion

(con

tinue

d)

Ref

eren

ceT

itle

Sum

mar

y

Effe

ctiv

e fo

r an

nual

re

port

ing

perio

ds

begi

nnin

g on

or

afte

r

Impa

ct o

n C

ompa

ny

finan

cial

rep

ort

App

licat

ion

date

for

Com

pany

AA

SB

200

8-6

Furth

er A

men

dmen

ts to

A

ustra

lian

Acc

ount

ing

Sta

ndar

ds a

risin

g fro

m th

e A

nnua

l Im

prov

emen

ts

Pro

ject

Ext

ends

sco

pe o

f A

AS

B 5

Non

-cur

rent

Ass

ets

Hel

d fo

r S

ale

and

Dis

cont

inue

d O

pera

tions

to r

equi

re w

here

en

tity

is c

omm

itted

to s

ale

plan

invo

lvin

g lo

ss o

f con

trol

of

a s

ubsi

diar

y bu

t re

tain

s a

part

ial

inve

stm

ent

in t

he

disp

osed

su

bsid

iary

, in

w

hich

ca

se

all

of

the

subs

idia

ry’s

ass

ets

and

liabi

litie

s ar

e cl

assi

fied

as h

eld

for

sale

; al

so i

nclu

des

min

or t

erm

inol

ogy

or e

dito

rial

amen

dmen

ts to

oth

er s

tand

ards

.

1 Ju

ly 2

009

No

impa

ct1

Janu

ary

2010

AA

SB

200

8-8

Am

endm

ents

to A

ustra

lian

Acc

ount

ing

Sta

ndar

ds –

Elig

ible

Hed

ged

Item

s

Cla

rifie

s th

e he

dge

acco

untin

g pr

ovis

ions

of

AA

SB

139

Fi

nanc

ial

Inst

rum

ents

: R

ecog

nitio

n an

d M

easu

rem

ent

to a

ddre

ss i

nfla

tion

in a

fin

anci

al h

edge

d ite

m,

and

one-

side

d ris

k in

a h

edge

d ite

m.

1 Ju

ly 2

009

No

impa

ct1

Janu

ary

2010

AA

SB

200

8-13

Am

endm

ents

to A

ustra

lian

Acc

ount

ing

Sta

ndar

ds

aris

ing

from

AA

SB

In

terp

reta

tion

17 –

Dis

tribu

tions

of N

on-c

ash

Ass

ets

to O

wne

rs

Am

ends

AA

SB

5 N

on-c

urre

nt A

sset

s H

eld

for S

ale

and

Dis

cont

inue

d O

pera

tions

in

re

spec

t of

th

e cl

assi

ficat

ion,

pre

sent

atio

n an

d m

easu

rem

ent

of n

on-

curr

ent

asse

ts h

eld

for

dist

ribut

ion

to o

wne

rs i

n th

eir

capa

city

as

owne

rs a

nd A

AS

B 1

10E

vent

s af

ter

the

Rep

ortin

g P

erio

dfo

r th

e di

sclo

sure

req

uire

men

ts f

or

divi

dend

s th

at a

re d

ecla

red

afte

r th

e re

port

ing

perio

d bu

t be

fore

the

fin

anci

al s

tate

men

ts a

re a

utho

rised

for

is

sue.

1 Ju

ly 2

009

No

impa

ct1

Janu

ary

2010

F-279


F-280

10

SAN

TOS

FIN

ANC

ELT

D

NO

TES

TO T

HE

FIN

ANC

IAL

STAT

EMEN

TS

FOR

TH

E YE

AR E

ND

ED 3

1 D

ECEM

BER

200

9

Sign

ifica

nt A

ccou

ntin

g Po

licie

s (c

ontin

ued)

(b)

Bas

is o

f pre

para

tion

(con

tinue

d)

Ref

eren

ceT

itle

Sum

mar

y

Effe

ctiv

e fo

r an

nual

rep

ortin

g pe

riods

beg

inni

ng

on o

r af

ter

Impa

ct o

n C

ompa

ny

finan

cial

rep

ort

App

licat

ion

date

for

Com

pany

AA

SB

200

9-4

Am

endm

ents

to A

ustra

lian

Acc

ount

ing

Sta

ndar

ds

aris

ing

from

the

Ann

ual

Impr

ovem

ents

Pro

cess

Am

ends

sco

pe o

f A

AS

B 2

Sha

re-b

ased

Pay

men

tto

ex

clud

e bu

sine

ss c

ombi

natio

ns f

rom

sco

pe;

ther

e ar

e ad

ditio

nal

cons

eque

ntia

l am

endm

ents

to

A

AS

B

138

Inta

ngib

le

Ass

ets

aris

ing

from

re

vise

d A

AS

B

3 B

usin

ess

Com

bina

tions

.

1 Ju

ly 2

009

No

impa

ct1

Janu

ary

2010

AA

SB

200

9-5

Furth

er A

men

dmen

ts to

A

ustra

lian

Acc

ount

ing

Sta

ndar

ds a

risin

g fro

m th

e A

nnua

l Im

prov

emen

ts

Pro

ject

Incl

udes

a n

umbe

r of

oth

er a

men

dmen

ts t

o ex

istin

g st

anda

rds

whi

ch a

re n

ot e

xpec

ted

to h

ave

a m

ater

ial

impa

ct.

Will

am

end

clas

sific

atio

n of

ex

plor

atio

n ex

pend

iture

in s

tate

men

t of c

ash

flow

s.

1 Ju

ly 2

009

No

impa

ct1

Janu

ary

2010

AA

SB

200

9-7

Am

endm

ents

to A

ustra

lian

Acc

ount

ing

Sta

ndar

dsV

ario

us m

inor

edi

toria

l am

endm

ents

to

a nu

mbe

r of

st

anda

rds

and

an i

nter

pret

atio

n to

cor

rect

err

ors

that

oc

curr

ed i

n A

AS

B 2

008-

12,

AA

SB

200

8-13

and

AA

SB

In

terp

reta

tion

17 D

istri

butio

ns o

f N

on-C

ash

Ass

ets

to

Ow

ners

and

oth

er a

men

dmen

ts r

efle

ct c

hang

es m

ade

by th

e IA

SB

to it

s pr

onou

ncem

ents

.

1 Ju

ly 2

009

No

impa

ct1

Janu

ary

2010

AA

SB

200

9-8

Am

endm

ents

to A

ustra

lian

Acc

ount

ing

Sta

ndar

ds –

Com

pany

Cas

h-se

ttled

S

hare

-bas

edP

aym

ent

Tran

sact

ions

The

am

endm

ents

cla

rify

the

scop

e of

AA

SB

2 S

hare

-ba

sed

Pay

men

tby

req

uirin

g an

ent

ity t

hat

rece

ives

go

ods

or

serv

ices

in

a

shar

e-ba

sed

paym

ent

arra

ngem

ent t

o ac

coun

t for

thos

e go

ods

or s

ervi

ces

no

mat

ter

whi

ch

entit

y in

th

e C

ompa

ny

settl

es

the

tran

sact

ion,

and

no

mat

ter

whe

ther

the

tra

nsac

tion

is

settl

ed in

sha

res

or c

ash.

1 Ja

nuar

y 20

10N

o im

pact

1 Ja

nuar

y 20

10


11

SAN

TOS

FIN

ANC

ELT

D

NO

TES

TO T

HE

FIN

ANC

IAL

STAT

EMEN

TS

FOR

TH

E YE

AR E

ND

ED 3

1 D

ECEM

BER

200

9

Sign

ifica

nt A

ccou

ntin

g Po

licie

s (c

ontin

ued)

(b)

Bas

is o

f pre

para

tion

(con

tinue

d)

Ref

eren

ceT

itle

Sum

mar

y

Effe

ctiv

e fo

r an

nual

re

port

ing

perio

ds

begi

nnin

g on

or a

fter

Impa

ct o

n C

ompa

ny

finan

cial

rep

ort

App

licat

ion

date

for

Com

pany

AA

SB

200

9-09

Am

endm

ents

to A

ustra

lian

Acc

ount

ing

Sta

ndar

ds -

Add

ition

al E

xem

ptio

ns fo

r Fi

rst-t

ime

Ado

pter

s

Pro

vide

s ad

ditio

nal

exem

ptio

ns a

nd m

odifi

catio

ns o

n tr

ansi

tion

to

Aus

tral

ian

Acc

ount

ing

Sta

ndar

ds

in

rela

tion

to c

erta

in o

il an

d ga

s an

d le

ase

asse

ssm

ents

un

der

Inte

rpre

tatio

n 4

Det

erm

inin

g w

heth

er

an

Arr

ange

men

t con

tain

s a

Leas

e.

1 Ja

nuar

y 20

10R

ecog

nitio

n of

an

y fu

ture

ac

quis

ition

s

1 Ja

nuar

y 20

10

AA

SB

200

9-10

Am

endm

ents

to A

ustra

lian

Acc

ount

ing

Sta

ndar

ds -

Cla

ssifi

catio

n of

Rig

hts

Issu

es

Am

ends

A

AS

B

132

Fina

ncia

l In

stru

men

ts:

Pre

sent

atio

nto

req

uire

a fi

nanc

ial i

nstr

umen

t tha

t giv

es

the

hold

er t

he r

ight

to

acqu

ire a

fix

ed n

umbe

r of

the

en

tity'

s ow

n eq

uity

ins

trum

ents

for

a f

ixed

am

ount

of

any

curr

ency

to b

e cl

assi

fied

as a

n eq

uity

inst

rum

ent i

f, an

d on

ly if

, the

ent

ity o

ffers

the

finan

cial

inst

rum

ent p

ro

rata

to a

ll of

its

exis

ting

owne

rs o

f th

e sa

me

clas

s of

its

own

non-

deriv

ativ

e eq

uity

in

stru

men

ts.

Bef

ore

this

am

endm

ent,

right

s is

sues

(r

ight

s,

optio

ns,

or

war

rant

s),

deno

min

ated

in

a cu

rren

cy o

ther

tha

n th

e fu

nctio

nal

curr

ency

of

the

issu

er,

wer

e ac

coun

ted

for

as d

eriv

ativ

e in

stru

men

ts.

1 F

ebru

ary

2010

No

impa

ct1

Janu

ary

2011

AA

SB

200

9-11

Am

endm

ents

to A

ustra

lian

Acc

ount

ing

Sta

ndar

ds

aris

ing

from

AA

SB

9

Thi

s S

tand

ard

give

s ef

fect

to

cons

eque

ntia

l ch

ange

s ar

isin

g fr

om th

e is

suan

ce o

f AA

SB

9.

1 Ja

nuar

y 20

13U

nlik

ely

to h

ave

mat

eria

l im

pact

1 Ja

nuar

y 20

13

AA

SB

200

9-12

Am

endm

ents

to A

ustra

lian

Acc

ount

ing

Sta

ndar

dsT

he

amen

dmen

t to

A

AS

B

8 re

quire

s an

en

tity

to

exer

cise

ju

dgem

ent

in

asse

ssin

g w

heth

er

a go

vern

men

t an

d en

titie

s kn

own

to b

e un

der

the

cont

rol

of t

hat

gove

rnm

ent

are

cons

ider

ed a

sin

gle

cust

omer

fo

r th

e pu

rpos

es

of

cert

ain

oper

atin

g se

gmen

t di

sclo

sure

s.

1 Ja

nuar

y 20

11N

o im

pact

1 Ja

nuar

y 20

11

F-281


F-282

12

SAN

TOS

FIN

ANC

ELT

D

NO

TES

TO T

HE

FIN

ANC

IAL

STAT

EMEN

TS

FOR

TH

E YE

AR E

ND

ED 3

1 D

ECEM

BER

200

9

Sign

ifica

nt A

ccou

ntin

g Po

licie

s (c

ontin

ued)

(b)

Bas

is o

f pre

para

tion

(con

tinue

d)

Ref

eren

ceT

itle

Sum

mar

y

Effe

ctiv

e fo

r an

nual

re

port

ing

perio

ds

begi

nnin

g on

or a

fter

Impa

ct o

n C

ompa

ny fi

nanc

ial

repo

rtA

pplic

atio

n da

te

for

Com

pany

AA

SB

200

9-13

Am

endm

ents

to A

ustra

lian

Acc

ount

ing

Sta

ndar

ds a

risin

g fro

m In

terp

reta

tion

19

The

ob

ject

ive

of

this

S

tand

ard

is

to

mak

e am

endm

ents

to

AA

SB

1 F

irst-t

ime

Ado

ptio

n of

A

ustra

lian

Acc

ount

ing

Sta

ndar

dsas

a

cons

eque

nce

of th

e is

suan

ce o

f In

terp

reta

tion

19

Ext

ingu

ishi

ng

Fina

ncia

l Li

abilit

ies

with

E

quity

In

stru

men

ts.

1 Ju

ly 2

010

No

impa

ct1

Janu

ary

2011

Inte

rpre

tatio

n 17

Dis

tribu

tions

of N

on-C

ash

Ass

ets

to O

wne

rsP

rovi

des

guid

ance

on

whe

n an

d ho

w a

lia

bilit

y fo

r ce

rtai

n di

strib

utio

ns

of

non-

cash

as

sets

is

re

cogn

ised

and

mea

sure

d, a

nd h

ow t

o ac

coun

t fo

r th

at

liabi

lity.

Doe

s no

t ap

ply

to

com

mon

co

ntro

l tra

nsac

tions

.

1 Ju

ly 2

009

No

impa

ct1

Janu

ary

2010

Inte

rpre

tatio

n 18

Tran

sfer

s of

Ass

ets

from

C

usto

mer

sP

rovi

des

guid

ance

on

tran

sfer

s of

pro

pert

y, p

lant

an

d eq

uipm

ent

for

entit

ies

that

re

ceiv

e su

ch

cont

ribut

ions

from

thei

r cu

stom

ers.

1 Ju

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- 13 -

SANTOS FINANCE LTD





The accounting policies set out below have been applied consistently to all periods presented in the Company’s financial report. The accounting policies have been applied consistently by the Company.

(c) Foreign currency

Functional and presentation currencyItems included in the financial statements of the Company are measured using the currency of the primary economic environment in which it operates (“the functional currency”). The financial statements are presented in Australian dollars which is the Company’s functional and presentation currency.

Transactions and balancesTransactions in foreign currencies are initially recorded in the functional currency by applying the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the foreign exchange rate ruling at the balance sheet date. Foreign exchange differences arising on translation are recognised in the income statement.

(d) Derivative financial instruments

The Company uses derivative financial instruments to hedge its exposure to changes in foreign exchange rates, commodity prices and interest rates arising in the normal course of business. The principal derivatives that may be used are forward foreign exchange contracts, foreign currency swaps, interest rate swaps and commodity crude oil price swap and option contracts. Their use is subject to a comprehensive set of policies, procedures and limits approved by the Board of Directors. The Company does not trade in derivative financial instruments for speculative purposes.

Derivative financial instruments are recognised initially at fair value. Subsequent to initial recognition, derivative financial instruments are stated at fair value. Where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged, otherwise the gain or loss on re-measurement to fair value is recognised immediately in profit or loss.

The fair value of interest rate swaps is the estimated amount that the Company would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. The fair value of commodity swap and option contracts is their quoted market price at the balance sheet date.

Embedded derivativesDerivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contract and the host contracts are not measured at fair value with changes in fair value recognised in profit or loss.

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SANTOS FINANCE LTD




(e) Hedging

Fair value hedgeWhere a derivative financial instrument hedges the changes in fair value of a recognised asset or liability or an unrecognised firm commitment (or an identified portion of such asset, liability or firm commitment), any gain or loss on the hedging instrument is recognised in the income statement. The hedged item is stated at fair value in respect of the risk being hedged, with any gain or loss being recognised in the income statement.

Cash flow hedgeWhere a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity. When the forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, or the forecast transaction for a non-financial asset or non-financial liability becomes a firm commitment for which fair value hedging is applied, the associated cumulative gain or loss is removed from equity and included in the initial cost or other carrying amount of the non-financial asset or non-financial liability.

If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, the associated gains and losses that were recognised directly in equity are reclassified into profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss (i.e. when interest income or expense is recognised).

For cash flow hedges, other than those covered by the preceding paragraph, the associated cumulative gain or loss is removed from equity and recognised in the income statement in the same period or periods during which the hedged forecast transaction affects profit or loss. The ineffective part of any gain or loss is recognised immediately in the income statement.


Hedge of monetary assets and liabilitiesWhen a derivative financial 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 income statement.

(f) Trade and other receivables

Receivables are initially recognised at fair value, which in practice is the equivalent of cost, less any impairment losses.



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SANTOS FINANCE LTD




(f) Trade and other receivables (continued)

Other receivables are assessed for indicators of impairment at each balance sheet date. Where a receivable is impaired the amount of the impairment is the difference between the assets’ carrying value and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the receivable is reduced through the use of an allowance account. Changes in the allowance account are recognised in profit or loss.

(g) Cash and cash equivalents

Cash and cash equivalents comprises cash balances and short-term deposits that are readily convertible to known amounts of cash, are subject to an insignificant risk of changes in value, and have an original maturity of three months or less.

Bank overdrafts that are repayable on demand and form an integral part of the Company’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Bank overdrafts are included within interest-bearing loans and borrowings in current liabilities on the balance sheet.

(h) Impairment

The carrying amounts of the Company’s assets, other than deferred tax assets, are reviewed at each balance sheet date to determine whether there is any indication of impairment. Where an indicator of impairment exists a formal estimate of the recoverable amount is made.


Calculation of recoverable amountThe recoverable amount of an asset is the greater of its fair value less costs to sell and its value in use. In assessing value in use, an asset’s estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Where an asset does not generate cash flows that are largely independent from other assets or groups of assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

Reversals of impairmentAn impairment loss is reversed if there has been an increase in the estimated recoverable amount of a previously impaired asset. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined if no impairment loss had been recognised.

(i) Interest-bearing loans and borrowings


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F-286

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SANTOS FINANCE LTD




(i) Interest-bearing loans and borrowings (continued)

Fixed rate notes that are hedged by an interest rate swap are recognised at fair value (refer note 1(e)).

(j) Trade and other payables

Trade and other payables are recognised when the related goods or services are received, at the amount of cash or cash equivalent that will be required to discharge the obligation,gross of any settlement discount offered. Trade payables are non-interest bearing and are settled on normal terms and conditions.

(k) Share capital

Ordinary share capitalOrdinary share capital is classified as equity.

DividendsDividends are recognised as a liability at the time the Directors resolve to pay or declare the dividend.

(l) Revenue

Interest revenue is recognised as it accrues, using the effective interest rate method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period, using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial assets to the net carrying amount of the financial asset.

(m) Finance costs

Finance costs comprise interest paid or payable on borrowings calculated using the effective interest rate method. Finance costs are recognised in the income statement in the period in which they are incurred..

(n) Goods and services tax


Receivables and payables are stated with the amount of GST included.

The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the balance sheet.

Cash flows are included in the cash flow statement on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows.


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SANTOS FINANCE LTD




(o) Income tax


Current tax is the amount of income tax payable on the taxable profit or loss for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax is determined using the balance sheet approach, providing for temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the appropriate tax bases. The following temporary differences are not provided for: the initial recognition of assets or liabilities that affect neither, accounting nor taxable profit, and differences 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 balance sheet date.


Santos Ltd is the head entity in the tax-consolidated group, under Australian taxation law,of which Santos Finance Ltd is a member. Current tax expense/income, deferred tax liabilities, and deferred tax assets arising from temporary differences of the members of the tax-consolidated group are allocated among the members of the tax-consolidated group using a “stand-alone taxpayer” approach in accordance with Interpretation 1052 Tax Consolidation Accounting and are recognised in the separate financial statements of each entity. Current tax liabilities and assets and deferred tax assets arising from unused tax losses and tax credits of the members of the tax-consolidated group are recognised by Santos Ltd (as head entity in the tax-consolidated group).

Santos Ltd and the other entities in the tax-consolidated group have entered into a tax funding agreement. Tax contribution amounts payable under the tax funding agreement are recognised as payable or receivable from Santos Ltd and each member of the tax-consolidated group. Where the tax contribution amount recognised by each member of the tax-consolidated group for a particular period under the tax funding agreement is different to the aggregate of the current tax liabilty or asset and any deferred tax asset arising from unused tax losses and tax credits in respect of that period assumed by Santos Ltd, the difference is recognised as a contribution to (or distribution from) Santos Ltd.

Santos Ltd and the other entities in the tax-consolidated group have also entered into a tax sharing agreement pursuant to which the other entities may be required to contribute to the tax liabilities of Santos Ltd in the event of default by Santos Ltd or upon leaving the tax-consolidated group.

F-287


F-288

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SANTOS FINANCE LTD




(p) Significant accounting judgements, estimates and assumptions

The carrying amounts of certain assets and liabilities are often determined based on management’s judgement regarding estimates and assumptions of future events. The reasonableness of estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The key judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amount of certain assets and liabilities within the next annual reporting period are:

Impairment of receivables from related entitiesThe Company assesses whether receivables from related entities are impaired on an annual basis. This requires an estimation of the recoverable amount of the related entity’s assets and liabilities and comparing it to the carrying value of the receivables from related entity to determine whether or not the receivable is impaired.

The carrying amount of the receivables from related entities is disclosed in note 6 Other Financial Assets.


- 19 -

SANTOS FINANCE LTD



2009$000

2008$000

2. Net Financing IncomeInterest revenue:

Related entities 91,671 181,295Other entities 28 762

Financial income 91,699 182,057

Interest expense:Related entities (3,422) (16,454)Other entities (65,885) (125,600)

Finance costs (69,307) (142,054)

Net financing income 22,392 40,003

3. Profit / (Loss) for the YearProfit/(loss) for the year has been arrived at after crediting/ (charging) the following items of income and expense:

Intercompany debt forgiveness expense (54,279) -Impairment reversal/(loss) on receivables due from

related entities 70,930 (66,850)Foreign exchange gains/(losses) 265,412 (250,806)

4. Cash and Cash EquivalentsCash at bank and in hand 103,713 9,659

Cash and cash equivalents in the cash flow statement 103,713 9,659

5. Trade and Other ReceivablesOther receivables 1 -

1 -

F-289


F-290

- 20 -

SANTOS FINANCE LTD



2009$000

2008$000

6. Other Financial AssetsCurrentInterest rate swap contracts 2,768 -Cross-currency swap contracts - 59,223

2,768 59,223

Non-currentInterest rate swap contracts 123,335 303,539Cross-currency swap contracts - 32,775

Amounts owing from related entities 2,118,388 2,073,854

2,241,723 2,410,168

7. Trade and Other Payables

Other payables 7,775 21,555Amounts owing to related entities 87,274 10,186

95,049 31,741

8. Interest-Bearing Loans and BorrowingsCurrentBank loans 21,793 -Long-term notes 129,667 46,317

151,460 46,317

Non-currentAmounts owing to related entities 134,143 142,653Bank loans 128,232 221,496Medium-term notes 448,116 457,222Long-term notes 1,063,492 1,682,283

1,773,983 2,503,654

9. Other Financial LiabilitiesCurrentCross-currency swap contracts 7,266 -

7,266 -

Non-currentInterest rate swap contracts 1,022 -

1,022 -


- 21 -

SANTOS FINANCE LTD



2009$000

2008$000

10. Issued and Authorised CapitalShare capital234,470,555 (2008:100,000,000) fully paid ordinary

shares 234,471 100,000


Movement in issued and fully paid ordinary shares

2009 2008 2009 2008Number of Shares $000 $000

Balance at the beginning of the year 100,000,000 100,000,000 100,000 100,000Shares issued 134,470,555 - 134,471 -


During the year 134,470,555 (2008: nil) ordinary shares were issued to the Company’s parent entity.

Capital risk managementThe Company’s objective when managing capital is to safeguard the ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders, and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

11. DividendsNo dividends have been paid or declared during the financial year and no dividends have been proposed or declared by the Directors after the balance sheet date.

F-291


F-292

- 22 -

SANTOS FINANCE LTD



2009$000

2008$000

12. Reconciliation of Cash Flows from Operating Activities

(a) Profit / (loss) after income tax 212,952 (229,601)


Intercompany debt forgiveness expense 54,279 -Impairment (reversal)/loss on receivables due

from related entities (70,930) 66,850Foreign exchange (gains)/losses (350,292) 356,710Net borrowing income charged to related entities (88,249) (164,841)Net (gain)/loss on fair value hedges (5,132) 4,461Cross-currency swaps revaluation 87,127 (102,505)

Net cash used in operating activities before change in assets or liabilities (160,245) (68,926)

(Deduct)/add change in operating assets or liabilities net of acquisitions of businesses:

Income tax payable allocated to Santos Ltd under tax funding agreement 22,003 13,071

Net decrease/(increase) in deferred tax asset and deferred tax liability 74,664 (63,221)

(Increase)/decrease in receivables (1) 26(Increase)/decrease in other assets (676) 1,320(Decrease)/increase in trade and other payables (13,766) 230

Net cash used in operating activities (78,021) (117,500)

(b) Non-cash financing and investing activities

Income tax payable allocated to Santos Ltd under tax funding agreement

22,003 13,071

Borrowing income charged to related entities 91,671 181,295Borrowing costs charged by related entities (3,422) (16,454)

88,249 164,841

13. Remuneration of Auditors

Audit fees are borne by the ultimate parent entity, Santos Ltd.

14. Contingent Liabilities

There are no contingent liabilities.

15. Parent Entity

The parent entity and ultimate parent entity is Santos Ltd.


- 23 -

SANTOS FINANCE LTD



In accordance with a resolution of the Directors of Santos Finance Ltd (“the Company”), I state that inthe opinion of the Directors:

(a) the Company is not a reporting entity;

(b) the financial statements and notes of the Company are in accordance with the Corporations Act 2001, including:

(i) giving a true and fair view of the Company’s financial position as at31 December 2009 and of its performance for the year ended on that date, in accordance with the basis of preparation described in Note 1; and

(ii) complying with Accounting Standards in Australia, to the extent described in Note 1 and the Corporations Regulations 2001; 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.

Dated at Adelaide this 4th day of May 2010.

.............…………………Director

F-293


F-294


Independent auditor’s report to the members of Santos Finance Ltd

We have audited the accompanying special purpose financial report of Santos Finance Ltd, which comprises the statement of financial position as at 31 December 2009, the income statement and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration.

Directors’ Responsibility for the Financial Report

The directors of the company are responsible for the preparation and fair presentation of the financial report and have determined that the accounting policies described in Note 1 to the financial statements, which form part of the financial report, are appropriate to meet the financial reporting requirements of the Corporations Act 2001 andare appropriate to meet the needs of the members. This responsibility includes establishing and maintaining internal controls relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditor’s Responsibility

Our responsibility is to express an opinion on the financial report based on our audit. No opinion is expressed as to whether the accounting policies used are appropriate to the needs of the members.

We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, we consider internal controls relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.

The financial report has been prepared for distribution to the members for the purpose of fulfilling the directors’ financial reporting requirements under the Corporations Act 2001. We disclaim any assumption of responsibility for any reliance on this report or on the financial report to which it relates to any person other than the members, or for any purpose other than that for which it was prepared.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Independence

In conducting our audit we have met the independence requirements of the Corporations Act 2001. We have given to the directors of the company a written Auditor’s Independence Declaration, a copy of which is referred to in the directors’ report. The Auditor’s Independence Declaration would have been expressed in the same terms if it had been given to the directors at the date this auditor’s report was signed.


2

Auditor’s Opinion

In our opinion the financial report of Santos Finance Ltd is in accordance with the Corporations Act 2001, including:

a) giving a true and fair view of the financial position of Santos Finance Ltd as at 31 December 2009and of its performance for the year ended on that date in accordance with the accounting policies described in Note 1 to the financial statements; and

b) complying with Australian Accounting Standards to the extent described in Note 1 to the financial statements and complying with the Corporations Regulations 2001.

Ernst & Young

R J CurtinPartnerAdelaide4 May 2010

F-295


F-296


Auditor's Independence Declaration to the Directors of Santos FinanceLtd

In relation to our audit of the financial report of Santos Finance Ltd for the year ended 31 December 2009,to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct.

Ernst & Young

R J CurtinPartnerAdelaide Ernst & Young4 May 2010


SANTOS FINANCE LTD

A.B.N. 81 002 799 537

DIRECTORS’ REPORT

The Directors present their report together with the financial report of the Company for the financial year ended 31 December 2009 and the auditor’s report thereon.

1. Directors

The names of the Directors in office at the date of this report are:Knox, David John WisslerDean, Kenneth AlfredGerlach, Stephen (Resigned 31st December 2009)Coates, Peter Roland (Appointed 1st January 2010)

Unless otherwise stated above, the Directors have held their office at all times since the beginning of the financial year.

2. Principal Activities

The principal activity of the Company during the financial year was to provide centralised finance activities for the Santos Ltd group. No significant change in the nature of this activity has occurred during the year.

3. Review and Results of Operations

During the year, the Company continued to manage external borrowings for the Santos Ltd group and provide funding for the parent entity and its controlled entities. The net profit for the financial year after providing for income tax was $212,952,122.

4. Dividends

No dividends have been paid or declared during the financial year and no dividends have been recommended by the Directors.

5. State of Affairs

In the opinion of the Directors, there were no significant changes in the state of affairs of the Company that occurred during the financial year.

6. Events Subsequent to Balance Date

In the opinion of the Directors there has not arisen in the interval between the end of the financial year and the date of this report any matter or circumstance that has significantly affected or may significantly affect the operations of the Company, the results of those operations, or the state of affairs of the Company in future financial years.

7. Likely Developments

With respect to likely developments in the operations of the Company in future financial years, it is expected that the Company will continue its principal activity as set out above.

Further information about likely developments in the operations of the Company and the expected results of those operations in future financial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the Company.

F-297


F-298

SANTOS FINANCE LTD

A.B.N. 81 002 799 537

DIRECTORS’ REPORT

8. Indemnification

Rule 12 of the Company’s Constitution provides that the Company indemnifies each person who is or who has been an “officer” of the Company against any liability to another person (other than the Company or a related body corporate) arising from their position as such officer, unless the liability arises out of conduct involving a lack of good faith. Rule 12 also provides for an indemnity in favour of an officer or auditor (Ernst & Young) in relation to costs incurred in defending proceedings in which judgment is given in their favour or in which they are acquitted or the Court grants relief.

For the purpose of Rule 12, “officer” has the meaning given in Rule 12.1 but limited to such officers appointed from the date that the Company became a subsidiary of Santos Ltd.

In addition, Santos Limited pays premiums in respect of Directors’ and Officers’ Liability and Legal Expenses insurance contracts on behalf of the Group. The insurance contracts insure against certain liability (subject to exclusions) persons who are or have been directors or officers of the Company. A condition of these contracts is that the nature of the liability indemnified and the premium payable not be disclosed.

9. Rounding

Australian Securities and Investments Commission Class Order 98/100, dated 10 July 1998, applies to the Company and accordingly amounts have been rounded off in accordance with that Class Order, unless otherwise indicated.

10. Auditor’s Independence Declaration

The auditor's independence declaration is set out on page 26 and forms part of the directors' report for the 2009 financial year.

This report is made on 4 May 2010 in accordance with a resolution of the Directors.

.............……………. Director

THE ISSUER

Santos Finance LimitedGround Floor Santos Centre

60 Flinders StreetAdelaide, South Australia 5000

Australia

THE GUARANTOR

Santos LimitedGround Floor Santos Centre

60 Flinders StreetAdelaide, South Australia 5000

Australia

JOINT LEAD MANAGERS

UBS Limited Deutsche Bank AG, London Branch1 Finsbury Avenue Winchester House,London EC2M 2PP 1 Great Winchester Street

United Kingdom London EC2N 2DB(Structuring Adviser) United Kingdom

TRUSTEE

BNY CORPORATE TRUSTEE SERVICES LIMITEDOne Canada Square

London E14 5ALUnited Kingdom

PRINCIPAL PAYING AGENT

THE BANK OF NEW YORK MELLON, LONDON BRANCHOne Canada Square

London E14 5ALUnited Kingdom

LEGAL ADVISERS

To the Issuer and the Guarantor To the Issuer and the Guarantoras to Australian law as to English law

Freehills Linklaters LLPMLC Centre, 19 Martin Place One Silk Street

Sydney NSW 2000 London EC2Y 8HQAustralia United Kingdom

To the Managers and the Trustee as to English law

Allen & Overy LLPOne Bishops Square

London E1 6ADUnited Kingdom


TAX ADVISER

To the Issuer and the Guarantor as to Australian taxation law

Greenwoods & FreehillsMLC Centre, 19 Martin Place

Sydney NSW 2000Australia

AUDITORS

To the Issuer and the Guarantor

Ernst & YoungErnst & Young Building 121 King William Street

Adelaide SA 5000Australia


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