SCHEME BOOKLET

Scheme of arrangement between Eastern Star Gas Limited ACN 094 269 780 and its shareholders in relation to the Acquisition of Eastern Star Gas Limited by Santos Limited ACN 007 550 923

The ESG Directors unanimously recommend that ESG Shareholders vote in favour of the Scheme and the TRU Acquisition, in the absence of a Superior Proposal.

The Independent Expert has concluded that the Scheme is in the best interests of ESG Shareholders, in the absence of a Superior Proposal.

THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION.

It should be read in its entirety. If you are in doubt as to the course of action you should follow, you should consult your legal, investment or other professional adviser.

Financial Advisers Lawyers

IMPORTANT NOTICES

You should read this Scheme Booklet in its entirety before making a decision as to how to vote on the resolutions to be considered at the Scheme Meeting and the General Meeting.

Responsibility for information

The Santos Information, including financial information and information as to the attitudes and decisions of the Santos Board, has been provided by Santos and is the responsibility of Santos.

The ESG Information, including financial information and information as to the attitudes and decisions of ESG Directors, has been provided by ESG and is the responsibility of ESG.

None of ESG, its officers or advisers assumes any responsibility for the accuracy or completeness of the Santos Information. None of Santos, its officers or advisers assumes any responsibility for the accuracy or completeness of the ESG Information. The Independent Expert's Report contained in section 7 has been provided by the Independent Expert and is the responsibility of the Independent Expert. None of ESG, Santos, their officers or advisers other than the Independent Expert assumes any responsibility for, or the completeness of, the Independent Expert's Report except in relation to information given by them respectively to the Independent Expert.

The taxation report contained in section 6 has been provided by PKF and is the responsibility of PKF. None of ESG, Santos, their officers or advisers other than PKF assumes any responsibility for the accuracy or the completeness of the taxation report or for the conclusions or opinions stated therein.

The investigating accountant's report contained in section 8 has been provided by Ernst & Young and is the responsibility of Ernst & Young. None of ESG, Santos, their officers or advisers other than Ernst & Young assumes any responsibility for, or the completeness of, the investigating accountant's report except in relation to information given by them respectively to the investigating accountant.

Forward looking statements

Certain statements in this Scheme Booklet relate to the future. Such statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Merged Group to be materially different from future results, performance or achievements expressed or implied by such statements. Such risks, uncertainties and other important factors include, among other things, the matters described in sections 3.6, 4.5 and 5.4. These statements speak only as of the date of this document. Subject to the continuing obligations under the Listing Rules or the Corporations Act, both ESG and Santos disclaim any obligation or undertaking to disseminate after the date of this Scheme Booklet any updates or revisions to any such statements to reflect any change in the expectations or any change in events, conditions or circumstances on which any such statement is based.

Any statement about the future included in the ESG Information has been made on reasonable grounds. Although ESG believes that the views reflected in any statement about the future included in the ESG Information has been made on a reasonable basis, no assurance can be given that such views will prove to have been correct.

Any statement about the future included in the Santos Information has been made on reasonable grounds. Although Santos believes that the views reflected in any statement about the future included in the Santos Information has been made on a reasonable basis, no assurance can be given that such views will prove to have been correct.

None of ESG, Santos, ESG's officers, Santos' officers, any persons named in this Scheme Booklet with their consent or any person involved in the preparation of this Scheme Booklet makes any representation or warranty (express or implied) as to the likelihood of fulfilment of any statement about the future, or any events or results expressed or implied in any statement about the future, except to the extent required by law. You are cautioned not to place undue reliance on any statement about the future.

Investment decision

This Scheme Booklet does not take into account the individual investment objectives, financial situation and particular needs of each ESG Shareholder. You may wish to seek independent legal, financial and taxation advice before making a decision as to whether or not to vote in favour of the Scheme (as applicable to you) and if you are an ESG Shareholder, whether New Santos Shares are an appropriate investment for you.

ASIC and ASX

A copy of this Scheme Booklet has been examined by ASIC. ASIC has been requested to provide a statement, in accordance with section 411(17)(b) of the Corporations Act, that ASIC has no objection to the Scheme. If ASIC provides that statement, then it will be produced to the Court at the Second Court Hearing. Neither ASIC nor any of its officers takes any responsibility for the contents of this Scheme Booklet.

A copy of this Scheme Booklet has been lodged with ASX. Neither ASX nor any of its officers takes any responsibility for the contents of this Scheme Booklet.

Important notice associated with Court order under section 411(1) of the Corporations Act

The fact that under section 411(1) of the Corporations Act the Court has ordered that a meeting be convened and has approved the Explanatory Statement required to accompany the notice of the meeting convening the Scheme Meeting does not mean that the Court:

• has formed any view as to the merits of the Scheme or as to how ESG Shareholders should vote (on this matter, ESG Shareholders must reach their own decision); or
• has prepared, or is responsible for, the content of the Explanatory Statement.

Notice to other persons outside Australia The transaction is subject to the disclosure requirements of Australia. This Scheme Booklet has been prepared in accordance with Australian requirements and style, and differs from the requirements and style in jurisdictions outside Australia for disclosure documents prepared for business combination transactions and offerings of securities. Financial information included in this Scheme Booklet has been prepared in accordance with Australian Accounting

Standards and may not be comparable to the financial statements prepared in accordance with the accounting standards in jurisdictions outside Australia.

Ineligible Overseas Shareholders

If you are an Ineligible Overseas Shareholder (i.e. an ESG Shareholder whose address in the ESG Share Register is a place outside Australia, its external territories and New Zealand), you will not be able to receive New Santos Shares. Ineligible Overseas Shareholders should refer to section 1.2(b).

United States

This Scheme Booklet may not be released or distributed in the United States. This Scheme Booklet does not constitute an offer to sell, or a solicitation of an offer to buy, securities in the United States. Any securities described in this Scheme Booklet have not been, and will not be, registered under the US Securities Act of 1933 and may not be offered or sold in the United States except in transactions exempt from, or not subject to, registration under the US Securities Act of 1933 and applicable US state securities laws. Nominees may not accept New Santos Shares on behalf of persons in the United States.

Privacy

ESG and Santos may collect personal information about you in connection with the Scheme. The personal information may include the names, contact details and details of holdings of ESG Shareholders together with the names and contact details of individuals appointed by ESG Shareholders to act as proxies, attorneys or corporate representatives to vote at the Scheme Meeting and General Meeting.

Such information will be collected for the purpose of the Scheme Meeting, the General Meeting and implementation of the Scheme. The information may be disclosed to ESG, ESG's advisers and service providers, Santos and Santos' advisers and service providers to the extent necessary in connection with the Scheme Meeting, the General Meeting and implementation of the Scheme.

You may have certain rights to access personal information which is collected about you. You should contact the ESG Share Registry in the first instance, should you wish to exercise these rights.

ESG Shareholders who appoint a named person as their proxy, attorney or corporate representative to vote at the Scheme Meeting and the General Meeting should inform that individual of the matters outlined above.

Further information

If you require any further information, please call the ESG information line on 1800 704 395 within Australia or +61 2 8256 3393 outside Australia or visit ESG's website at www.easternstar.com.au

Explanatory Statement

The Explanatory Statement has been prepared pursuant to section 412(1) of the Corporations Act to explain the effect of the Scheme and includes all information that is material to the making of a decision by an ESG Shareholder about how to vote in respect of the Scheme.

The Scheme is set out in Annexure B.

Date of this Scheme Booklet

This Scheme Booklet is dated 22 September 2011.

TABLE OF CONTENTS

Important notices	IFC
Letter from Chairman of Eastern Star Gas Limited	2
Letter from Chairman of Santos Limited	4
Reasons to vote in favour of the Scheme	6
Reasons to vote against the Scheme	7
Important dates	8
Action required by ESG Shareholders	9
Frequently asked questions	10
1.The Scheme – considerations for ESG Shareholders	15
2. Scheme implementation	20
3. Information about Santos	23
4. Profile of ESG	48
5. Profile of the Merged Group	54
6. Taxation implications	60
7. Independent Expert's Report	63
8. Investigating accountant's report	220
9. General Meeting	224
10.Additional information	226
11. Glossary and interpretation	231
Annexure A – Implementation Deed	235
Annexure B – Scheme of Arrangement	278
Annexure C – Deed Poll	291
Annexure D – Notice of Scheme Meeting	297
Annexure E – Notice of General Meeting	299
ESG corporate directory	IBC

Letter from Chairman of Eastern Star Gas Limited

22 September 2011

Dear Fellow ESG Shareholder

On 18 July 2011, your Directors announced that ESG had entered into a scheme implementation deed with Santos under which Santos would acquire all the ordinary shares in ESG not already held by Santos and TRUenergy Investments, through a scheme of arrangement.

Concurrently with the Scheme announcement, Santos announced that it had entered into arrangements with TRUenergy Holdings pursuant to which:

• subject to the approval of ESG Shareholders not associated with Santos or TRUenergy Investments, on the implementation of the Scheme Santos will acquire TRUenergy Investment's 3.76% interest in ESG for a cash price of $0.90 per ESG Share. If shareholder approval is not obtained, the ESG Shares held by TRUenergy Investments will be acquired by Santos under the Scheme; and
• subject to the Scheme becoming Effective and FIRB approval, Santos will on sell to TRUenergy, a wholly owned subsidiary of TRUenergy Holdings, a 20% interest in the Narrabri Gas Project and a 30.77% interest in other assets owned by ESG for $284.3 million

Under the Scheme, ESG Shareholders other than Santos and TRUenergy Investments will receive 0.06881 New Santos Shares for each ESG Share held. Based on Santos' closing share price on the day before the announcement of the Acquisition, the proposal is equivalent to $0.90 per ESG Share1 , and is equivalent to $0.79 per ESG Share based on Santos' closing share price on 21 September 2011, being the day before the date of this Scheme Booklet.

ESG Directors' recommendation

The ESG Directors unanimously recommend that, in the absence of a Superior Proposal, ESG Shareholders vote in favour of both the Scheme and the TRU Acquisition. Each Director intends to vote all ESG Shares controlled by him in favour of the relevant resolutions, in the absence of a Superior Proposal.

Implied premium received by ESG Shareholders

Based on the Santos Share price one day before the announcement of the Acquisition, the implied offer price of $0.90 per ESG Share represents an attractive premium for ESG Shareholders:

• 51% premium to ESG's closing share price on 15 July 2011, the last trading day before the announcement of the Acquisition; and
• 48% premium to the volume weighted average price of ESG Shares for the 30 day period up to and including 15 July 2011.

ESG Shareholders should be aware that the implied value of the Scheme Consideration may increase or decrease before the Implementation Date because of movements in the price of Santos Shares.

Other reasons for the Directors' recommendation

The next stage of ESG's growth poses increased technical and commercial risks. A significant expansion of ESG's capital base together with stronger development skills and capability would be required to secure progress. As a larger company, Santos will be better positioned to provide the necessary capital and expertise to ensure the Narrabri Gas Project is developed to its full potential.

If the Santos proposal is not approved by ESG Shareholders, the alternative will likely involve a significant equity capital raising to ensure ESG is sufficiently funded to progress the next phase of its growth in what could be argued as a more challenging environment since the announcement of the Acquisition. There can be no guarantees in this environment that ESG will be able to achieve its previously stated technical and commercial milestones.

The detailed reasons for the Directors' recommendation are set out in section 1.4.

Independent Expert's conclusion regarding the Scheme

ESG Directors commissioned Grant Samuel & Associates Pty Limited to provide an Independent Expert's Report in relation to the Scheme.

The Independent Expert, whose report is contained in section 7, has concluded that "the Scheme is in the best interests of Eastern Star shareholders, in the absence of a superior proposal".

The Independent Expert attributed value to the scrip consideration under the Scheme in the range $0.79-0.89 per ESG Share2 which falls within its estimated underlying value of ESG, including a control premium, of $0.77-1.00 per ESG Share. The Independent Expert took into account a range of matters in forming its conclusion which are outlined in the report contained in section 7.

ESG Directors note that an evaluation of the reserves and resources associated with PEL 238 is included as part of the technical specialist's report at Appendix 2 of the Independent Expert's Report.

1 Implied offer price based on Santos' closing price of $13.23 on 15 July 2011 (the trading day immediately preceding announcement of the Acquisition, including an adjustment for the dividend declared on 19 August 2011 of $0.15 per Santos Share).

2 Based on a market price for Santos Shares in the range $11.50-13.00 per share.

TRU Acquisition

Based on the Santos Share price on 15 July 2011, the implied value of the scrip consideration offered to ESG Shareholders under the Scheme was $0.90 per ESG Share.

Due to a number of reasons including a downturn in global equities markets and the corresponding fall in the Santos Share price since the announcement of the Acquisition, the implied value of the scrip consideration offered under the Scheme is, at the date of this Scheme Booklet, no longer equal to $0.90 per ESG Share and the current implied value is less than the cash consideration which TRUenergy Investments will receive for its ESG Shares.

When negotiating the Implementation Deed and deciding to agree to recommend that ESG Shareholders vote in favour of the TRU Acquisition, ESG Directors considered that:

• the TRU Acquisition was an integral part of the negotiated position between ESG and Santos and without it, it is unlikely Santos would have agreed to acquire ESG; and
• the overall arrangement between ESG and Santos should be considered in its entirety.

While your Directors note the Independent Expert's conclusion that the TRU Acquisition is neither fair nor reasonable, ESG Directors agreed to recommend that ESG Shareholders approve the TRU Acquisition as part of the arrangements between ESG and Santos, including the Scheme, which the Independent Expert has found to be in the best interest of ESG Shareholders.

Your Directors believe the difference in consideration received by ESG Shareholders other than TRUenergy Investments is not material in the context of the overall transaction.

The detailed reasons for the Directors' recommendation are set out in section 9.3.

Each Director intends to vote all ESG Shares controlled by him in favour of the TRU Acquisition notwithstanding the Independent Expert stating that "the TRU Acquisition is neither fair nor reasonable having regard to the interests of the non associated shareholders" and ESG Directors unanimously recommend that, in the absence of a Superior Proposal, ESG Shareholders vote in favour of the TRU Acquisition.

TRU On-Sale

While the Scheme, the TRU Acquisition and the TRU On-Sale consist Santos' overall transaction, the completion of the TRU On-Sale is dependent on, and subsequent to, the Scheme becoming effective and does not effect ESG Shareholders per se.

The ESG Directors note that the TRU On-Sale will be completed at a cash price equating to $0.90 per ESG Share. This price per ESG Share falls within the Independent Expert's estimate of the full underlying value of ESG and is accordingly on an arm's length basis.

For further details of the TRU On-Sale, see section 5.2(b).

Scheme Meeting and General Meeting

The Scheme requires the approval of ESG Shareholders and will be considered at a meeting of ESG Shareholders to be held at the Grand Ballroom No 2, Shangri-La Hotel, 176 Cumberland Street, The Rocks, Sydney, New South Wales at 10.00 am on 28 October 2011.

The TRU Acquisition will be considered at a general meeting of ESG Shareholders to be held at the Grand Ballroom No 2, Shangri-La Hotel, 176 Cumberland Street, The Rocks, Sydney, New South Wales at 11.00 am on 28 October 2011.

This Scheme Booklet sets out all the information relating to the Scheme and the TRU Acquisition and the reasons for the ESG Directors' unanimous recommendations of the Scheme and the TRU Acquisition.

I encourage you to read it carefully and to vote on the important resolutions to be considered at the meetings.

If, after reading this Scheme Booklet, an ESG Shareholder has any questions about their ESG Shares or any other matter in this Scheme Booklet, they should contact the ESG information line on 1800 704 395 within Australia or +61 2 8256 3393 outside Australia between 9.00 am and 5.00 pm Monday to Friday.

I encourage you to regularly visit ESG's website www.easternstar.com.au between now and the Scheme Meeting for future announcements relating to the Acquisition.

On behalf of the ESG Directors, I thank you for your support and I look forward to your participation in the Scheme Meeting and the General Meeting.

Yours sincerely

The Hon. John Anderson Chairman Eastern Star Gas Limited Scheme

Letter from Chairman of Santos Limited

22 September 2011

Dear ESG Shareholder

On 18 July 2011, Santos and ESG entered into a scheme implementation deed under which Santos proposed to acquire all the ordinary shares in ESG which it did not hold. The Acquisition is proposed to be effected by a scheme of arrangement and the separate acquisition by Santos of ESG Shares from TRUenergy Investments.

Santos has also entered into an agreement with TRUenergy and TRUenergy Holdings pursuant to which, following implementation of the Scheme, TRUenergy will acquire a 20% interest in the underlying ESG permits presently held in joint venture between ESG and Santos as well as an interest in certain of ESG's other assets. TRUenergy Holdings is one of Australia's largest integrated energy companies and represents an appropriate partner to develop ESG's permits in the Gunnedah Basin in joint venture with Santos.

Santos is offering you 0.06881 New Santos Shares for every ESG Share you hold. The implied offer price of $0.90 per ESG Share represents a premium of 51% to ESG's closing price of $0.595 on the trading day preceding the Announcement, and a 48% premium to the volume weighted average price for ESG Shares for the 30 day period up to and including the same date.

In addition to the immediate premium for your ESG Shares, additional benefits for ESG Shareholders include:

• the receipt of a dividend paying stock with an immediate interim dividend now factored into the Scheme Consideration;
• the ability to retain exposure to the growing eastern Australian natural gas market;
• the ability to obtain scrip for scrip CGT roll-over relief for eligible shareholders;
• exposure to Santos' exploration, development and production portfolio, with potential for substantial additional growth; and
• Santos' long track record of project delivery and leadership in community engagement.

Santos is one of Australia's leading natural gas producers, having delivered natural gas domestically for over 40 years. The company has developed major gas, oil and liquids businesses in Australia and operates in all mainland Australian states and the Northern Territory. Santos has also developed a strong international portfolio of exploration, development and production assets focussed on the Asia-Pacific. A key part of this portfolio is Santos' interests in four LNG projects, including the GLNG project in Gladstone, Queensland – a landmark coal seam gas to LNG project for which Santos is the upstream operator.

With regard to the coal seam gas interests of ESG, we believe that Santos' strong balance sheet and project development experience will reduce the commercialisation, development and financing challenges associated with their standalone development, and that the projects will therefore benefit from being part of a much larger and more diversified oil and gas company.

The acquisition of ESG will build on Santos' existing interests in the Gunnedah Basin and, following implementation of the Scheme and the TRU On-Sale, Santos will have the largest natural gas reserves position in New South Wales, with 1,216 PJ of 2P reserves and 2,238 PJ of 3P reserves.

Santos is pleased that the Directors of ESG have unanimously recommended that you vote in favour of the Scheme, and that each ESG Director has stated that he intends to vote the ESG Shares he controls in favour of the Scheme, in the absence of a Superior Proposal. The Independent Expert also concludes that the Scheme is in the best interests of ESG Shareholders, in the absence of a Superior Proposal.

As such, I encourage you to read this Scheme Booklet in full and then to vote in favour of the Scheme at the Scheme Meeting on 28 October 2011 at the Grand Ballroom No 2, Shangri-La Hotel, 176 Cumberland Street, The Rocks, Sydney, New South Wales, or if you are unable to attend, to complete the proxy form accompanying this Scheme Booklet and return it as instructed.

The Santos Board is excited about the future of the combined Santos and ESG businesses. We look forward to welcoming you as a new Santos shareholder on the successful implementation of the Scheme.

Yours sincerely

Peter Coates Chairman, Santos Limited

Reasons to vote in favour of the scheme

ESG Directors unanimously recommend that ESG Shareholders vote in favour of the Scheme, in the absence of a Superior Proposal

The Independent Expert has concluded that the Scheme is in the best interests of ESG Shareholders, in the absence of a Superior Proposal

The Scheme Consideration represents an attractive premium relative to ESG's closing share price on 15 July 2011, the day before the announcement of the Acquisition

Your overall risk associated with the standalone development of the Narrabri Gas Project will be reduced

You will continue to participate in the future of the Merged Group

You will receive Santos Shares which have historically paid attractive dividends

No Superior Proposal has emerged

The price of ESG Shares may fall if the Scheme is not approved

Reasons to vote against the scheme

• ESG Shareholders may not agree with the ESG Directors' unanimous recommendation
• ESG Shareholders may not agree with the Independent Expert's conclusion
• ESG Shareholders may not want their interest in the Narrabri Gas Project diluted
• ESG Shareholders may hold the opinion that the Scheme Consideration undervalues ESG's assets
• The implied value of the Scheme Consideration will vary and on the implementation of the Scheme that implied value may be less than ESG's closing share price on the day before the date of this Scheme Booklet
• ESG Shareholders will no longer be able to hold a direct interest in ESG and will no longer collectively control ESG
• Santos Shares may not be attractive for some ESG Shareholders
• ESG Shareholders may wish to maintain their current investment profile
• ESG Shareholders may believe that a more attractive proposal may be forthcoming in future

IMPORTANT DATES

Date	Event
26 October 2011	Proxy form for the Scheme Meeting and the GeneralMeeting must be received no later than 10.00 am
26 October 2011	Eligibility to vote at the Scheme Meeting and the GeneralMeeting determined at 5.00 pm
28 October 2011	Scheme Meeting to be held at the Grand Ballroom No2, Shangri-La Hotel, 176 Cumberland Street, The Rocks,Sydney, New South Wales commencing at 10.00 am
28 October 2011	General Meeting to be held at the Grand Ballroom No2, Shangri-La Hotel, 176 Cumberland Street, The Rocks,Sydney, New South Wales commencing at 11.00 am, or assoon thereafter as the Scheme Meeting is concluded oradjourned
2 November 2011	Court hearing for approval of the Scheme (if the Schemeis agreed to by ESG Shareholders)
3 November 2011	Effective Date of the Scheme (if approved by the Court)
3 November 2011	Last day of trading ESG Shares
4 November 2011	Commencement of trading in New Santos Shares on adeferred settlement basis
10 November 2011	Scheme Record Date
17 November 2011	Implementation Date and date of the TRU Acquisition
24 November 2011	Mailing of statements confirming issue of New SantosShares

All dates following the date of the Scheme Meeting and General Meeting are indicative only and, among other things, are subject to all necessary approvals from the Court, ASX and ASIC.

Any changes to the above timetable will be notified on ESG's website www.easternstar.com.au

Scheme Booklet 8

Action required by ESG Shareholders

Please read this Scheme Booklet carefully

This Scheme Booklet provides information necessary for ESG Shareholders to make a decision whether or not to vote in favour of the Scheme at the Scheme Meeting and separately, the TRU Acquisition at the General Meeting. The ESG Directors recommend ESG Shareholders read this Scheme Booklet in its entirety.

The Scheme is subject to various Conditions, including the approval of ESG Shareholders and the approval of the Court.

ESG Shareholders are being asked to approve:

• the Scheme at the Scheme Meeting to be held at the Grand Ballroom No 2, Shangri-La Hotel, 176 Cumberland Street, The Rocks, Sydney, New South Wales on 28 October 2011 at 10.00 am; and
• the TRU Acquisition at the General Meeting to be held at the Grand Ballroom No 2, Shangri-La Hotel, 176 Cumberland Street, The Rocks, Sydney, New South Wales on 28 October 2011 at 11.00 am or as soon thereafter as the Scheme Meeting is concluded or adjourned.

The Scheme cannot be implemented unless it is approved by at least 50% of those voting and at least 75% of the total number of votes that are cast on the resolution at the Scheme Meeting by Scheme Shareholders voting in person, by proxy, or attorney or, in the case of a corporation, by a representative authorised in the manner provided in its constitution.

If the Scheme is approved by Scheme Shareholders at the Scheme Meeting, ESG will make an application to the Court to approve the Scheme at the Second Court Hearing.

For the TRU Acquisition to be approved, the TRU Resolution must be approved by a majority of the number of votes cast on the resolution.

If you do not understand any section of this Scheme Booklet or are in any doubt as to the course of action you should follow, you should contact your legal, investment or other professional adviser.

Your vote is important

For the Scheme to be implemented, the Scheme Resolution must be approved by Scheme Shareholders. For this reason, the ESG Directors encourage you to vote in favour of the Scheme Resolution, in the absence of a Superior Proposal.

How to vote – Scheme Meeting and General Meeting

You may vote by attending the Scheme Meeting or General Meeting in person, by attorney or by corporate representative or by completing a proxy form.

Voting in person

To vote in person at the Scheme Meeting, you must attend the Scheme Meeting at the Grand Ballroom No 2, Shangri-La Hotel, 176 Cumberland Street, The Rocks, Sydney, New South Wales on 28 October 2011 at 10.00 am.

To vote in person at the General Meeting, you must attend the General Meeting at the Grand Ballroom No 2, Shangri-La Hotel, 176 Cumberland Street, The Rocks, Sydney, New South Wales on 28 October 2011 at 11.00 am, or as soon thereafter as the Scheme Meeting is concluded or adjourned.

If you are a corporation, your authorised corporate representative may attend and vote at the relevant meeting.

You can appoint an attorney to attend and vote at the relevant meeting.

You, your attorney or corporate representative must disclose his or her name at the point of entry to the relevant meeting. He or she will then be given a voting card and admitted to that meeting.

Voting by proxy

If you cannot attend the Scheme Meeting or General Meeting or otherwise wish to vote by proxy, you may appoint a proxy by completing the personalised proxy form accompanying this Scheme Booklet.

The proxy appointed by you must disclose his or her name at the point of entry to the relevant meeting. He or she will then be given a voting card and admitted to that meeting.

Appointing a proxy will not preclude you from attending the relevant meeting in person and voting at that meeting instead of your proxy.

Return of proxies

If you choose to vote by proxy, please return your proxy form to the ESG Registry by posting it in the reply paid envelope provided (for Australian ESG Shareholders), delivering it to the relevant address below, or by faxing it to (02) 9287 0309 within Australia or +61 2 9287 0309 outside Australia, but you will only be able to exercise your vote by proxy if it is received by 10.00 am on 26 October 2011.

By mail:

Eastern Star Gas Limited C/- Link Market Services Limited Locked Bag A14 SYDNEY SOUTH NSW 1235

or

Eastern Star Gas Limited C/- Company Secretary Level 7, 51 Pitt Street SYDNEY NSW 2000

Voting by internet

Votes may also be lodged on line at the ESG Share Registry's website www.investorcentre.linkmarketservices.com.au in accordance with the instructions given at the website.

What happens if I do not vote?

If approved, the Scheme will bind you whether or not you vote at the Scheme Meeting or General Meeting. Accordingly, you are encouraged to vote at both meetings to ensure that you have your say on the proposal.

By hand delivery:

Eastern Star Gas Limited C/- Link Market Services Limited Level 12, 680 George Street SYDNEY NSW 2000

FREQUENTLY ASKED QUESTIONS

Question	Answer
What is the Scheme?	The Scheme is a scheme of arrangement between ESG and Scheme Shareholders at theScheme Record Date.
	A scheme of arrangement is a statutory procedure that is commonly used to enable onecompany to acquire another company.
	The Scheme and the TRU Acquisition will effect the acquisition of ESG by Santos.
	If the Scheme is approved and implemented, Scheme Shareholders will receive 0.06881New Santos Shares for each Scheme Share they own.
What is the TRU Acquisition?	The TRU Acquisition is the proposed acquisition by Santos of all ESG Shares held byTRUenergy Investments (comprising 3.76% of the issued capital of ESG) for $0.90 cashper ESG Share.
	Further details regarding the TRU Acquisition are contained in section 9.
Who is Santos?	Santos Limited ACN 007 550 923, an ASX listed company, is a leading Australian gasand oil producer. For more information, see section 3.
What do the ESGDirectors recommend?	The ESG Directors unanimously recommend that ESG Shareholders vote in favour of theScheme and the TRU Acquisition, in the absence of a Superior Proposal.
How are the ESG Directorsintending to vote?	Each of the ESG Directors who controls ESG Shares intends to vote in favour of theScheme and the TRU Acquisition, in the absence of a Superior Proposal.
What is the opinion of theIndependent Expert of theScheme?	The Independent Expert has concluded that the Scheme is in the best interests of ESGShareholders, in the absence of a Superior Proposal.
What is the SchemeConsideration?	Scheme Shareholders will receive 0.06881 New Santos Shares for each Scheme Shareheld or if you are an Ineligible Overseas Shareholder, the net proceeds of the sale of theNew Santos Shares to which you would have otherwise been entitled.
How will fractional NewSantos Shares be treated?	If you become entitled to a fraction of a New Santos Share, the number of New SantosShares to which you are entitled will be rounded down to the next whole number.
What is the premium of theScheme Consideration to theESG Share price?	Based on the Santos Share price the day before the announcement of the Acquisition,of $13.23 including adjustment for the dividend declared on 19 August 2011 of $0.15 perSantos Share, the implied offer price of $0.90 per ESG Share represents a:
	51% premium to closing share price of an ESG Share on 15 July 2011;
	48% premium to the 30 day volume weighted average price up to and including 15 July2011; and
	35% premium to the three month volume weighted average price up to and including 15July 2011.
When will I receive myNew Santos Shares?	Your New Santos Shares will be issued to you on or about 17 November 2011.
How will I receive myNew Santos Shares?	You will be sent your statement confirming the issue of your New Santos Shares on orabout 24 November 2011.
When can ESG Shareholdersstart trading their NewSantos Shares?	Once the Scheme becomes Effective, trading in New Santos Shares issued underthe Scheme is expected to commence on ASX on 4 November 2011 on a deferredsettlement basis. Once confirmations of issue for New Santos Shares have beendispatched (which must occur within five Business Days after the Implementation Date),trading in New Santos Shares on ASX will commence on a normal T+3 settlement basis.
	If Scheme Shareholders trade their New Santos Shares during the deferred settlementperiod and before receipt of their confirmation of issue, they do so at their own risk, asthe exact amount of New Santos Shares that will be issued to Scheme Shareholders ifthe Scheme is implemented will not be determined until the Implementation Date.
	Holders of ESG Shares held under the Eastern Star Employee Incentive Plan will not beable to trade New Santos Shares issued as consideration for those ESG Shares until therelevant loan has been repaid. Such holders should refer to section 10.2.

Question	Answer
Can I sell my ESG Sharesnow?	You can sell your ESG Shares on market at any time before the close of trading on ASXon the Effective Date. However, if you do so you will not be entitled to the SchemeConsideration and you may be required to pay brokerage fees.
What are the tax implicationsof receiving the SchemeConsideration?	The taxation consequences of the Scheme being approved and implemented forScheme Shareholders will depend on the specific taxation circumstances of eachScheme Shareholder.
	General information about the likely Australian tax consequences is set out in section 6.
	You should consult your own tax adviser about the tax consequences for you if theScheme is implemented.
Will I have to pay brokerageor stamp duty?	You will not have to pay brokerage fees or stamp duty if your ESG Shares are acquiredunder the Scheme.
How will overseas ESGShareholders be treatedunder the Scheme?	ESG Shareholders who are Ineligible Overseas Shareholders will not receive New SantosShares. The New Santos Shares to which they otherwise would have been entitled, willbe sold and the net proceeds will be sent to those shareholders. Further details arecontained in section 1.2(b).
What will happen if aSuperior Proposal emerges?	If ESG receives a Superior Proposal, the ESG Directors must provide Santos with a threeBusiness Day period during which Santos can put forward a counter proposal. If theESG Directors decide that the counter proposal offers a superior outcome for SchemeShareholders, then that counter proposal will be proposed to Scheme Shareholders.In this circumstance, a reimbursement fee may be payable by ESG to Santos. The ESGDirectors will keep ESG Shareholders informed of such developments in accordancewith ESG's continuous disclosure obligations.
	Since the announcement of the Acquisition on 18 July 2011 and up to the date of thisScheme Booklet, no Superior Proposal has been received.
When and where will theScheme Meeting and theGeneral Meeting be held?	The Scheme Meeting will be held on 28 October 2011 at the Grand Ballroom No 2,Shangri-La Hotel, 176 Cumberland Street, The Rocks, Sydney, New South Wales at 10.00am and the General Meeting will be held on 28 October 2011 at the Grand Ballroom No2, Shangri-La Hotel, 176 Cumberland Street, The Rocks, Sydney, New South Wales at11.00 am or so soon thereafter as the Scheme Meeting is concluded or adjourned.
What vote is required to	For the Scheme to proceed, the Scheme Resolution must be passed by:
approve the Scheme and theTRU Acquisition?	• a majority in number (more than 50%) of ESG Shareholders who vote on the SchemeResolution; and
	• at least 75% of the votes cast on the Scheme Resolution.
	The Court has the discretion to waive the first of these two requirements if it considers itappropriate to do so.
	For the TRU Acquisition to be approved, the TRU Resolution must be passed by amajority of the number of votes cast on the resolution.
Will Santos vote at theScheme Meeting and the	Santos is an Excluded Shareholder for the purpose of the Scheme and will not vote atthe Scheme Meeting.
General Meeting?	Santos is not entitled to vote on the TRU Resolution and will not vote at the GeneralMeeting.
Will TRUenergy Investments	TRUenergy Investments has advised ESG that it will not vote at the Scheme Meeting.
vote at the Scheme Meetingand the General Meeting?	TRUenergy Investments is not entitled to vote on the TRU Resolution and will not voteat the General Meeting.
Am I entitled to vote?	Other than described above, each ESG Shareholder who is registered on the ESG ShareRegister at 5.00 pm on 26 October 2011 is entitled to attend and vote at the SchemeMeeting and the General Meeting.

Scheme Booklet 12

Question	Answer
How do I vote?	You can attend the Scheme Meeting and the General Meeting in person, by attorneyor in the case of a corporation, by corporate representative and cast your vote atthe Scheme Meeting and the General Meeting. If you are not able to attend eithermeeting, you may complete the enclosed personalised proxy form in accordance withthe instructions and return it in the reply paid envelope enclosed (for Australian ESGShareholders), by facsimile or by internet.
	The deadline for lodging your proxy form for the Scheme Meeting and the GeneralMeeting is 10.00 am on 26 October 2011.
Is voting compulsory?	No, voting is not compulsory; however, your vote is important. For the Scheme toproceed, the Scheme Resolution must be approved by the requisite majorities of ESGShareholders. If the Scheme is approved, you will be bound by the Scheme whether ornot you voted.
What are the reasons to votein favour of the Scheme?	The reasons to vote in favour of the Scheme are set out in section 1.4.
Why do we need a SchemeMeeting and separately aGeneral Meeting?	The law requires that scheme meetings only consider scheme business. Therefore, aseparate meeting is being held to consider the TRU Acquisition.
What are the risks associatedwith the Scheme?	The risks associated with the Scheme are set out in section 5.4. There are also risksassociated with holding Santos Shares. These are set out in section 3.6.
Are there any Schemeconditions to be satisfied?	The Scheme must be approved by the requisite majorities of ESG Shareholders and theCourt. The Scheme is also subject to a number of conditions discussed at section 1.1which include:
	• New Santos Shares being approved for official quotation by ASX; and
	• there being no temporary or permanent restraint or injunction or other material legalrestraint being in place at 8.00 am on the Second Court Date.
	The conditions must be satisfied or where applicable waived for the Scheme to proceed.
What happens if theseconditions are not satisfied orthe Implementation Deed is	If the conditions to the Scheme are not satisfied or where applicable waived or theImplementation Deed is terminated, the Scheme will not proceed and no Scheme Shareswill be acquired by Santos as contemplated by the Scheme.
terminated?	In these circumstances, you will retain your ESG Shares, they will not be acquired bySantos and you will not receive the Scheme Consideration.
Is there a reimbursementfee payable?	Under the Implementation Deed, ESG must pay to Santos a reimbursement fee of $9.24million (excluding GST) if certain specified events occur, including if any ESG Directorrecommends or supports a Superior Proposal or Santos terminates the ImplementationDeed because of a material breach of the Implementation Deed by ESG. Please refer tosection 10.8 for further details.
When will the results of theScheme Meeting and theGeneral Meeting be known?	The results of the Scheme Meeting and the General Meeting will be available shortlyafter the conclusion of the meetings and will be announced to ASX once available. Evenif the Scheme Resolution is passed by the Scheme Meeting, the Scheme is subject to theapproval of the Court.
What happens in the eventthe Scheme is not approved?	If the Scheme is not approved by the required majority of ESG Shareholders at theScheme Meeting or by the Court at the Second Court Hearing:
	• Scheme Shareholders will not receive the Scheme Consideration;
	• Scheme Shares will not be transferred to Santos and ESG Shareholders will retain theirdirect interest in ESG;
	• ESG will continue to operate as an independent entity under the management of thecurrent ESG Directors and management;
	• ESG Shareholders will continue to be exposed to the risks associated with aninvestment in ESG; and
	• the ESG Share price may fall.

Question	Answer
What is the opinion of theIndependent Expert of theTRU Acquisition?	The Independent Expert has concluded that the TRU Acquisition is neither fair norreasonable having regard to the interests of ESG Shareholders other than Santos andTRUenergy Investments.
Why are ESG Directorsrecommending the TRUAcquisition?	The ESG Directors unanimously recommend the TRU Acquisition notwithstanding theIndependent Expert's opinion because, in the absence of a Superior Proposal, theyconsider the difference in consideration received by ESG Shareholders other thanTRUenergy Investments is not material in the context of the overall transaction. Whennegotiating the Implementation Deed and deciding to agree to recommend that ESGShareholders vote in favour of the TRU Acquisition, ESG Directors considered that:
	the TRU Acquisition was an integral part of the negotiated position between ESG•and Santos and without it, it is unlikely that Santos would have agreed to acquireESG; and
	the overall arrangement between ESG and Santos should be considered in its•entirety.
What happens if the TRUAcquisition is not approved?	If the TRU Acquisition is not approved, the ESG Shares currently held by TRUenergyInvestments will be Scheme Shares and will, if the Scheme becomes Effective, beacquired by Santos under the Scheme on the same terms as all other Scheme Shares.
Is the Scheme conditionalon the TRU Acquisitionbeing approved?	No, the Scheme is not conditional on the TRU Acquisition being approved.
What is the formaccompanying this Scheme	Enclosed with this Scheme Booklet is a personalised proxy form if you want to appoint aproxy for the Scheme Meeting, the General Meeting or both meetings.
Booklet?	If you want to appoint a proxy for the Scheme Meeting, the General Meeting or bothmeetings, you should complete and return the form in accordance with the instructionson the form.
If the Scheme isimplemented, will I receivethe dividend announced bySantos on 19 August 2011?	You will not receive the dividend of $0.15 per Santos Share announced by Santos on19 August 2011 but the Scheme Consideration has been increased from 0.06803 NewSantos Shares per ESG Share to 0.06881 New Santos Shares per ESG Share as a resultof the dividend declared by Santos.
	This adjustment occurred because Santos and ESG agreed in the Implementation Deedthat if Santos paid a dividend on Santos Shares before the Implementation Date, theScheme Consideration would be recalculated to equal $0.90 divided by the remainderof ($13.23 minus $0.15).
What if I want furtherinformation?	You can call the ESG information line on 1800 704 395 within Australia or +61 2 82563393 outside Australia or visit ESG's website at www.easternstar.com.au

1.1 Introduction

On 18 July 2011, ESG announced the proposed acquisition of ESG by Santos. Under the proposal, Santos will acquire all of the ESG Shares that it does not own on the Implementation Date by way of scheme of arrangement between ESG and its shareholders and the separate acquisition by Santos of ESG Shares from TRUenergy Investments.

The Scheme is subject to certain conditions precedent, being:

• before 8.00 am on the Second Court Date, the New Santos Shares to be issued to ESG Shareholders having been approved for official quotation on ASX;
• ESG Shareholders (other than Excluded Shareholders) approving the Scheme at the Scheme Meeting by the requisite majorities under the Corporations Act;
• the Court approving the Scheme in accordance with section 411(4)(b) of the Corporations Act; and
• no temporary restraining order, preliminary or permanent injunction or other order being issued by any court of competent jurisdiction or Government Agency or other material legal restraint or prohibition being in effect at 8.00 am on the Second Court Date.

At the date of this Scheme Booklet, none of these conditions has been satisfied or waived.

ESG will make a further statement regarding the status of these conditions precedent at the commencement of the Scheme Meeting.

The conditions to the Scheme are set out in full in the Implementation Deed, a copy of which is set out in Annexure A.

If the Scheme is implemented, ESG will become a wholly owned subsidiary of Santos and will be delisted from ASX.

1.2 What you will receive

(a) Overview

Under the Scheme, you will receive as consideration for your Scheme Shares, a number of New Santos Shares.

(b) Ineligible Overseas Shareholders

New Santos Shares which would otherwise be required to be issued to the Ineligible Overseas Shareholders on the Scheme becoming Effective will be issued to the Selling Agent. Santos will cause the Selling Agent to sell those New Santos Shares at such price as the Selling Agent determines and to remit to ESG the proceeds of sale (after deduction of any applicable brokerage, taxes and other costs of sale). ESG will then account to the Ineligible Overseas Shareholders for the proceeds received. Ineligible Overseas Shareholders will receive the proceeds in Australian currency.

(c) Share exchange ratio

You will be entitled to receive 0.06881 New Santos Shares for each Scheme Share you hold.

(d) Fractional entitlements

Entitlements to less than whole numbers of New Santos Shares will be rounded down to the nearest whole number.

Some small ESG Shareholders may receive a less than marketable parcel (as defined in the Listing Rules) of New Santos Shares under the Scheme. Although the Santos constitution allows Santos to undertake a procedure to procure the sale of unmarketable parcels of Santos Shares (unless the shareholder notifies Santos that it wishes to retain the Santos Shares), Santos has indicated that it has no present intention of undertaking this procedure.

(e) Settlement date

Within five Business Days after the Implementation Date, statements confirming the issue of the New Santos Shares issued as Scheme Consideration will be sent by prepaid post to each ESG Shareholder at the holder's address as shown on the ESG Share Register.

The full terms relating to the payment of the Scheme Consideration are contained in the Scheme set out in Annexure B and the Deed Poll set out in Annexure C. Further information concerning New Santos Shares is set out in sections 1.5 and 3 respectively.

1.3 Directors' recommendation

Your Directors believe that the Acquisition is in the best interests of Scheme Shareholders and your Directors unanimously recommend that, in the absence of a Superior Proposal, you vote in favour of the Scheme. The reasons for your Directors' recommendation are outlined below.

All Directors who control ESG Shares intend to vote in favour of the Scheme, in the absence of a Superior Proposal.

Details of the interests of Directors are provided in section 10.1.

1.4 Reasons to vote in favour of the Scheme

(a) Independent Expert

The Independent Expert has concluded that the Scheme is in the best interests of ESG Shareholders, in the absence of a Superior Proposal. In reaching this conclusion, the Independent Expert has made the following statements:

"The value attributed to the scrip consideration ($0.79-0.89 per share) falls within Grant Samuel's estimate of the full underlying value for Eastern Star ($0.77-1.00), albeit in the lower half. Accordingly, the Scheme is fair. As the Scheme

reasonable, it is in the best interests of shareholders."

and

16is fair, it is also reasonable. As the Scheme is fair and "The extent of the uncertainties involved in judgements regarding the value of Eastern Star and of the scrip consideration are such that conclusions relating to the fairness of the Scheme are quite subjective. Nonetheless, in Grant Samuel's opinion, even if the Scheme was not fair it would still clearly be reasonable (and therefore in the best interests of shareholders). In particular:

• the Scheme delivers a significant premium to Eastern Star shareholders;
• in the absence of the Scheme or a similar transaction, it is likely that Eastern Star shares under current market conditions would trade at prices well below $0.79-0.89 (the value attributed to the consideration);
• an acquisition proposal by any other party is unlikely without support from Santos and it is unlikely that alternative bidders would be prepared to offer a price equal to or higher than $0.79-0.89 per share, particularly given Santos' right to match any competing transaction;
• shareholders will exchange their Eastern Star shares for shares in Santos. By doing so, shareholders will:
  • retain the right to participate in the upside associated with the future development of the Narrabri Gas Project, albeit on a highly diluted basis;
  • gain exposure to Santos' substantial exploration, development and production portfolio;
  • receive fully franked dividend income from Santos;
  • incur no transaction costs; and
  • if eligible, be entitled to receive capital gains tax rollover relief.

Conversely, Eastern Star shareholders will:

• receive Santos scrip, not cash. If they wish they will be able to sell into a liquid market for Santos shares, albeit they will incur transaction costs;
• be exposed to the development and general operational risks associated with Santos' portfolio of businesses, in particular its substantial LNG portfolio; and
• dilute their interest in the Narrabri Gas Project and Eastern Star's other assets."

The Independent Expert's Report is set out in full in section 7.

(b) Scheme Consideration premium

The Scheme Consideration represents a premium over the trading prices of ESG Shares before announcement of the Acquisition. Based on the closing price of Santos Shares on 15 July 2011, the last ASX trading day before the announcement of the Acquisition and adjusted for the Santos dividend declared on 19 August 2011, the implied

value of the Scheme Consideration is $0.90 per ESG Share and is represented as follows:

(c) Reduction of standalone risk

The commercialisation, development and financing risks associated with standalone development of the Narrabri Gas Project are reduced due to the benefits of being part of a much larger and more diversified oil and gas company.

(d) Crystallisation of value

ESG Shareholders will be able to crystallise the long term value of ESG now, with the opportunity to continue to participate in the development of ESG's assets through the Scheme Consideration in the form of Santos Shares.

(e) Future participation

ESG Shareholders will have the opportunity to participate in other strategic and financial benefits of the Merged Group, including:

• the ability to retain exposure to the Narrabri Gas Project and growing eastern Australian natural gas market;
• exposure to Santos' exploration, development and production portfolio, with potential for substantial additional growth; and
• Santos' long track record of project delivery and leadership in community engagement.

Details of the profile of Santos and the expected profile of the Merged Group are set out in sections 3 and 5 respectively.

(f) CGT roll-over relief

The Scheme Consideration is expected to satisfy the general requirements of the CGT scrip for scrip roll-over provision of the Income Tax Assessment Act. As a result, CGT roll-over relief should be available to Australian tax resident ESG Shareholders who receive the Scheme Consideration. Further details of the tax implications of the Acquisition are set out in section 6.

Scheme Booklet 16 Scheme Booklet

(h) No Superior Proposal has emerged

(i) The price of ESG Shares may fall if the Scheme is not approved

1.5 Scheme Consideration – other aspects

(a) Other aspects to consider

(a)Other aspects to consider•You should also consider the following:value of your consideration will fluctuate unlike cash,••the value of the Scheme Consideration that ESGShareholders will receive will fluctuate with movementsin the price of Santos Shares. It follows that the value•of the Scheme Consideration issued to ESG Shareholderscould, when issued, be lower or higher than the valueit would have had as at the date of this Scheme Booklet•and the Implementation Date. The fluctuation in valueis illustrated as follows:Implied valueSantos Share priceof consideration($)($ per ESG Share)15.001.03	before the Announcement);Booklet; andof this Scheme Booklet.	closing price range during the three month periodbefore the Announcement and the dates on which thehighest and lowest trading price occurred;closing price on 15 July 2011 (latest recorded sale priceclosing price range since the Announcement to the dateof the last trading day before the date of this Schemeclosing price on the last trading day before the date
	Date	Details	SantosShare price
	18 April 2011 –	Range, (over	$12.92–$15.97
	15 July 2011	three months)pre Announcement
14.501.0014.000.96	15 July 2011	Closing price beforethe Announcement	$13.23
13.500.93	18 July 2011 –	Range, post	$10.91–$13.38
13.080.90	21 September 2011	Announcement
13.000.89	21 September 2011	Closing price	$11.49
12.500.86		(latest recorded sale
12.000.83		price before thedate of this Scheme
11.500.79		Booklet)
11.000.76
10.500.72		The approximate average daily trading volume of Santos
10.000.69		Shares in the period commencing three months before theAnnouncement through to the date of this Scheme Booklet
9.500.65	is 4.9 million.
9.000.62	in the Santos Share price.	No assurance can be given that changes in the SantosShare price historically are indicative of future changes

• different business profile ESG Shareholders will be exposed to a different mix of assets than they are currently exposed to through their shareholdings in ESG. This means that the risk and return characteristics of their investment will be different from those which are currently the case;
• rights attaching to New Santos Shares ESG Shareholders will receive an entitlement to New Santos Shares. A summary of rights attaching to New Santos Shares is set out in section 3.12;
• diluted percentage holding ESG Shareholders will receive a smaller percentage holding in Santos than the percentage holding in ESG represented by the ESG Shares they exchange; and
• no brokerage or stamp duty is payable by Scheme Shareholders on the implementation of the Scheme.

(b) Performance of Santos Shares

• closing price range during the three month period before the Announcement and the dates on which the highest and lowest trading price occurred;
• closing price on 15 July 2011 (latest recorded sale price before the Announcement);
• closing price range since the Announcement to the date of the last trading day before the date of this Scheme Booklet; and
• closing price on the last trading day before the date of this Scheme Booklet.

Date	Details	SantosShare price
18 April 2011 –15 July 2011	Range, (overthree months)pre Announcement	$12.92–$15.97
15 July 2011	Closing price beforethe Announcement	$13.23
18 July 2011 –21 September 2011	Range, postAnnouncement	$10.91–$13.38
21 September 2011	Closing price(latest recorded saleprice before thedate of this SchemeBooklet)	$11.49

(a) Disagreement with ESG Directors' recommendation

ESG Shareholders may not agree with the ESG Directors' unanimous recommendation.

(b) Disagreement with Independent Expert's conclusion

ESG Shareholders may not agree with the Independent Expert's conclusion.

(c) ESG Shareholders will no longer control ESG

ESG Shareholders will no longer be able to hold a direct interest in ESG and will no longer collectively control ESG.

(d) Type of Scheme Consideration may not be attractive

Santos Shares may not be attractive to you either as a form of consideration or because of the risks and other considerations set out in section 3.6.

(e) Implied value of Scheme Consideration

The implied value of the Scheme Consideration will vary with movements in the Santos Share price and on the implementation of the Scheme that implied value may be less than the implied value of $0.90 per ESG Share on 15 July 2011 or the implied value of $0.79 per ESG Share on the day before the date of this Scheme Booklet.

(f) Dilution in interests in ESG's assets

As a consequence of consummation of the Scheme, the TRU Acquisition and the TRU On-Sale, ESG Shareholders interests in the Narrabri Gas Project and ESG's other assets will be diluted and ESG Shareholders may not want their interests in those assets diluted.

(g) Underlying value of ESG

ESG Shareholders may hold the opinion that the Scheme Consideration undervalues ESG and the future prospects of the Narrabri Gas Project.

(h) ESG Shareholders may wish to maintain their current investment profile

181.6 Reasons to vote against the Scheme ESG Shareholders may prefer to hold an interest in an independent company focussed on delivering a standalone project. The risk profile of Santos, as a larger, diverse and production-based company with multi-billion dollar construction projects, provides a significant difference in risk profile as compared to ESG. Accordingly, the Merged Group will be subject to a number of risks to which ESG is not currently exposed, including:

• the uncertainty associated with the operations and exploration activities of other Santos projects; and
• that Santos may not meet its project goals and its development plans may not be realised as planned.

(i) Alternate proposal

ESG Shareholders may believe that a more attractive proposal may be forthcoming in future.

As ESG's largest shareholder, holding approximately 20.92% of ESG's issued ordinary shares, and as a holder of a 35% interest in the Narrabri Gas Project Joint Venture, Santos has strong strategic rationale for the acquisition of ESG to consolidate its Gunnedah Basin interests.

There is no certainty that a more attractive proposal will be forthcoming in future.

The Independent Expert states:

"as Santos has an existing 20.92% shareholding in Eastern Star, an acquisition proposal by any other party is unlikely without the agreement of Santos. No alternative proposal involving a takeover has been considered by Eastern Star and it is unlikely that alternative bidders would be prepared to offer a price equal to or higher than $0.79-0.89 per share, particularly given Santos' right to match any competing bid."

1.7 Other relevant considerations

(a) Implications of voting "no"

If you vote "no", that does not mean that the Scheme will not be implemented. If the Scheme is approved by the requisite majorities of ESG Shareholders and by the Court, you will be treated in the same manner as all other ESG Shareholders as at the Scheme Record Date and, accordingly, your ESG Shares will be transferred to Santos and, you will receive the Scheme Consideration even though you may have voted against the Scheme.

(b) No-talk and no-shop obligations and matching rights

Certain arrangements have been entered into between ESG and Santos in relation to exclusivity. Summaries of these arrangements are set out in section 10.7.

(c) Reimbursement fee

Under certain circumstances, ESG may be obliged to pay Santos a reimbursement fee of $9.24 million (excluding GST) as set out in section 10.8.

proceeding

(a) No payment of consideration

Your Directors have recommended that Scheme Shareholders approve the Scheme for the reasons set out earlier in this section. In particular, if the Scheme does not proceed the Scheme Consideration will not be paid.

(b) ESG Share prices

There is a risk that the ESG Share price will fall if the Acquisition does not proceed.

(c) Conduct capital raising

191.8 Implications of the Scheme not ESG has a cash balance of approximately $46.6 million as at 16 September 2011. If the Scheme does not proceed, ESG will be required to raise additional funds from equity capital markets. The Directors will have a number of equity raising options available but there is a risk that ESG Shareholders may be diluted and any proceeds raised may be at a significant discount to the equivalent of the Scheme Consideration.

(d) Continued ASX listing and intention for ongoing operations

If the Scheme does not proceed, ESG will remain listed on ASX and it would be the ESG Directors' intention to continue operating ESG in line with its previously stated objectives. In these circumstances, ESG Shareholders who retain their ESG Shares will continue to share in any benefits and risks in relation to ESG's ongoing business.

1.9 Deemed warranty

ESG Shareholders' attention is drawn to the warranties in clause 8.2 of the Scheme set out in Annexure B that the Scheme Shareholders will be deemed to have given if the Scheme takes effect.

1.10 Right to inspect and obtain copy of the ESG Share Register

Under the Corporations Act, any ESG Shareholder has a right to inspect and to ask for a copy of the ESG Share Register kept by ESG which contains details of the name and address of all ESG Shareholders. A copy of the ESG Share Register will be made available to an ESG Shareholder on request and payment of the prescribed fee under the Corporations Act.

2.1 Overall effect of the Scheme

If implemented, the Scheme and the TRU Acquisition will result in Santos acquiring all ESG Shares held by ESG Shareholders other than itself, as at the Scheme Record Date.

The effect of the Scheme will be that ESG will become a wholly owned subsidiary of Santos and will be delisted from ASX.

The explanation below does not deal with taxation effects or consequences of the Scheme, further details of which are set out in section 6.

2.2 Classes of shareholders affected by the Scheme

ESG has only one class of shares on issue – ordinary shares. There is only one class of ordinary shareholders who will be affected by the Scheme, namely ESG Shareholders.

The effect of the Scheme on ESG Shareholders is that Scheme Shareholders will cease to be a holder of, or have any interest in, ESG Shares in return for receiving the Scheme Consideration.

2.3 Steps in implementing the Scheme

(a) Implementation Deed

On 18 July 2011, Santos and ESG entered into the Implementation Deed in relation to the Scheme under which ESG agreed to propose the Scheme. A copy of the Implementation Deed is included in Annexure A and a copy of the Scheme is included in Annexure B.

(b) Deed Poll

On 20 September 2011, Santos executed the Deed Poll pursuant to which Santos agreed, subject to the Scheme becoming Effective, to provide to each Scheme Shareholder the Scheme Consideration to which such Scheme Shareholder is entitled under the terms of the Scheme. A copy of the Deed Poll is included in Annexure C.

(c) Convening of Scheme Meeting

On 22 September 2011, the Court ordered that ESG convene a Scheme Meeting of ESG Shareholders other than Excluded Shareholders at the Grand Ballroom No 2, Shangri-La Hotel, 176 Cumberland Street, The Rocks, Sydney, New South Wales on 28 October 2011 at 10.00 am, for the purpose of approving the Scheme.

(d) Application for approval of Scheme

ESG will apply to the Court for an order approving the Scheme if:

• the Scheme is approved by the requisite majorities of ESG Shareholders voting and of votes cast at the Scheme Meeting; and
• all other conditions to the Scheme referred to in clause 3.1 of the Scheme have been satisfied or waived.

(e) ASIC lodgement

If the Court order referred to in paragraph 2.3(d) is obtained, then ESG will lodge with ASIC an office copy of the Court order under section 411 of the Corporations Act approving the Scheme.

(f) Transfer of Scheme Shares

If the Scheme becomes Effective, then on the Implementation Date, all of the Scheme Shares will be transferred to Santos (without the need for any further act by any Scheme Shareholder) by:

• ESG delivering to Santos a duly completed and executed share transfer form or forms to transfer all such Scheme Shares to Santos;
• Santos executing and delivering to ESG the share transfer form or forms; and
• ESG entering the name of Santos in the ESG Share Register as the holder of all of the ESG Shares.

(g) TRU On-Sale

If the Scheme becomes Effective, Santos will sell to TRUenergy a 30.77% interest in ESG's assets, full particulars of which are set out in section 5.2(b), for $284 million. Completion of this sale is expected to be on 21 November 2011.

(h) Lapsing of Scheme

The Scheme will lapse and be of no further force or effect if the Implementation Deed is terminated.

2.4 Termination of the Implementation Deed

The Scheme is conditional on the Implementation Deed not having been terminated as at 8.00 am on the Second Court Date.

The Implementation Deed may be terminated by:

• either ESG or Santos, if:
  • before 8.00 am on the Second Court Date:
    • a party has materially breached its obligations under the Implementation Deed and that party does not remedy the breach within 10 Business Days (or shorter period ending on the day before the Second Court Date) after having received written notice from the other party of the relevant

Scheme implementation 2 Scheme implementation

terminate the Implementation Deed; or

• a court or Government Agency has taken any action permanently restraining or otherwise prohibiting the Scheme or has refused to do anything necessary to permit the Scheme and the action or refusal has become final and cannot be appealed; or
• any event occurs which would prevent any of the conditions precedent being satisfied or there is an occurrence that will prevent any conditions precedent being satisfied by the specified time and date, or if it becomes probable that the Scheme will not become Effective by 1 February 2012 and the parties after consultation in good faith cannot reach agreement as to:
  • whether the Scheme may proceed by way of alternate means or methods;
  • changing the date of the application to be made on the Second Court Date hearing or adjourning the application to a date no later than five Business Days before 1 February 2012; or
  • extending the specified date or extending the end date of 1 February 2012; or
• Santos, if at any time before 8.00 am on the day of the Second Court Date:
  • an ESG Director changes, withdraws or modifies his recommendation that ESG Shareholders vote in favour of the Scheme or makes a public statement indicating that he no longer supports the Scheme or that he supports another transaction;
  • an ESG Material Adverse Change (as defined in the Implementation Deed) occurs, is announced or is otherwise discovered by Santos; or
  • an ESG Prescribed Occurrence (as defined in the Implementation Deed) occurs, is announced or is otherwise discovered by Santos.

2.5 Court ordered meeting

On 22 September 2011, the Court ordered that a meeting of Scheme Shareholders be convened to consider the Scheme. This meeting is to be held at the Grand Ballroom No 2, Shangri-La Hotel, 176 Cumberland Street, The Rocks, Sydney, New South Wales on 28 October 2011 at 10.00 am.

The notice convening this meeting is set out in Annexure D.

Each Scheme Shareholder who is registered on the ESG Share Register at 5.00 pm on 26 October 2011 is entitled to attend and vote at the Scheme Meeting, in person or by proxy or attorney or, in the case of a corporation which is an ESG Shareholder, by its representative authorised in the manner provided in its constitution.

For actions to be taken by Scheme Shareholders who propose to attend and vote at the Scheme Meeting or to appoint a proxy to attend and vote on the shareholder's behalf, refer to the section titled "Action required by ESG Shareholders" earlier.

2.6 Voting majority required

The voting majority to approve the Scheme requires votes in favour of the Scheme to be received from:

• a majority in number of Scheme Shareholders present and voting at the Scheme Meeting; and
• at least 75% of the votes cast on the resolution.

2.7 Opposing the Scheme

Scheme Booklet21circumstances and the stated intention to The Federal Court (Corporations) Rules 2000 provide a procedure for ESG Shareholders to oppose the approval by the Court of the Scheme. If you are an ESG Shareholder and wish to oppose the approval of the Scheme at the Second Court Hearing, you may do so by filing with the Court and serving on ESG a notice of appearance in the prescribed form together with any affidavit on which you wish to rely at the hearing. The notice of appearance and affidavit must be served on ESG before the Second Court Hearing. The Second Court Hearing is currently scheduled to occur on 2 November 2011. Any change to this date will be announced through ASX and notified on ESG's website.

If an ESG Shareholder does not object in accordance with these procedures, such holder may not have a right to appear at the Second Court Hearing, although the Court in its discretion could, and likely would, permit such a holder to state objections to the Court if the holder made a personal appearance at the Second Court Hearing.

If there is an objection to the Scheme, and in such event the Second Court Hearing is continued or adjourned, then the date of the continued or adjourned hearing will be announced through ASX and on ESG's website.

2.8 Effective Date

The Scheme will become Effective on the date when an office copy of the order of the Court approving the Scheme is lodged with ASIC or such earlier date as the Court determines and specifies in the Court order.

ESG will notify ASX on the Scheme becoming Effective.

Once the Scheme becomes Effective, ESG and Santos will become bound to implement, and Santos will procure that ESG implements, the Scheme in accordance with its terms.

2 Scheme implementation

2.9 Determination of persons entitled to Scheme Consideration

(a) Dealings before or on the Scheme Record Date

For the purpose of establishing who are Scheme Shareholders, dealings in ESG Shares will be recognised provided that:

• in the case of dealings of the type to be effected using CHESS, the transferee is registered in the ESG Share Register as a holder of the relevant ESG Shares before or at 5.00 pm on the Scheme Record Date; and
• in all other cases, registrable transfers or transmission applications in respect of those dealings are received before or at 5.00 pm on the Scheme Record Date at the place where the ESG Share Register is kept.

ESG must register transfers or transmission applications of the type referred to above before or at 5.00 pm on the Scheme Record Date.

ESG will not accept for registration or recognise for any purpose any transmission application or transfer in respect of ESG Shares received after 5.00 pm on the Scheme Record Date (other than a transfer of ESG Shares to Santos in the course of implementing the Scheme).

(b) Dealings after Scheme Record Date

For the purpose of determining entitlements to the Scheme Consideration, ESG will, until the Scheme Consideration has been issued in accordance with the Scheme, maintain the ESG Share Register in accordance with the provisions of clause 6.2 of the Scheme, and the ESG Share Register in this form will solely determine entitlements to the Scheme Consideration. After 5.00 pm on the Scheme Record Date, each entry current on the ESG Share Register relating to ESG Shares will cease to be of any effect other than as evidence of entitlement to the Scheme Consideration in respect of the ESG Shares relating to that entry.

All certificates and holding statements for ESG Shares will after 5.00 pm on the Scheme Record Date cease to have any effect as documents of title in respect of such ESG Shares other than for the purpose of registering dealings in the ESG Shares as referred to in this section 2.9.

(c) Provision of information

ESG must give to Santos, no less than one Business Day before the Implementation Date, details of the names, registered addresses and holdings of ESG Shares of every ESG Shareholder as shown in the ESG Share Register at 5.00 pm on the Scheme Record Date, such details to be provided in such form as Santos may reasonably require.

2.10 Provision of Scheme Consideration

Within five Business Days after the Implementation Date, holding statements for New Santos Shares issued as Scheme Consideration will be sent by prepaid post to each Scheme Shareholder at the holder's address as shown on the ESG Share Register.

2.11 Suspension of trading of ESG Shares

If the Court approves the Scheme, ESG will notify ASX of the Court approval on the Second Court Date. It is expected that suspension of trading on ASX in ESG Shares will occur from the close of business on that day.

3.1 Background

Santos' business involves oil and gas exploration and production with interests in every major Australian petroleum province, and in Indonesia, PNG, Vietnam, India, Bangladesh and the Kyrgyz Republic.

In 2010, Santos was the largest producer of gas sold in Australia, supplying 16% of the Australian domestic gas market. As at 30 June 2011, Santos' assets totalled $14,122 million.

Santos produced 49.9 MMboe during 2010 and as at 31 December 2010 had a substantial reserve base of approximately 1,445 MMboe on a 2P basis. Current net production is approximately 600 MMscf/d of gas and approximately 30 kbbls/d of liquids including crude oil, condensate and LPG.

As at 31 December 2010, Santos had approximately 2,400 employees working across its operations and offices in Adelaide, Brisbane, Perth, Gladstone, Roma, Gunnedah and country offices in Jakarta, Port Moresby, Hanoi, New Delhi, Bishkek and Dhaka.

The figure below shows the location of Santos' main operations and assets:

3.2 Overview of Santos

Santos' vision is to be a leading energy company in Australia and Asia. Santos' strategy is to drive performance from its existing base business, deliver a suite of LNG projects and pursue focussed opportunities in Asia.

Australian oil and gas operations

Santos' Australian base business comprises gas and oil production assets in all mainland states and the Northern Territory.

Eastern Australia

Santos' business in Eastern Australia includes interests and joint ventures in the Cooper/Eromanga Basins in central Australia, Surat/Bowen CSG Basins in south-eastern Queensland and Otway/Gippsland Basins offshore Victoria. These basins are the primary source of gas supply into Victoria, New South Wales, the Australian Capital Territory, South Australia and Queensland.

In 2007, Santos acquired acreage in the Gunnedah CSG Basin of New South Wales, and made further acquisitions in this basin in 2009 when it acquired a 35% interest in ESG operated exploration permits and production areas (described further in section 4.1) and a 19.99% shareholding in ESG (20.92% at 30 June 2011).

The Cooper Basin has been the heartland of Santos for more than four decades and still retains significant development potential. Santos believes gas demand in Australia's eastern states will grow significantly as the region seeks cleaner energy through gas-fired power plants and a gas export channel is created through projects like Santos' GLNG Project. Established infrastructure and access to extensive pipeline networks position the Cooper Basin to play a large role in meeting that demand. The Eastern Australia Business Unit is working to unlock its significant gas resources in the Cooper Basin through enhanced recovery and infill drilling and by exploiting unconventional reservoirs.

Oil pipeline Gas pipeline Legend Santos permits

Scheme Booklet 24

Western Australia

Santos is a gas supplier in Western Australia through interests in the Carnarvon Basin, offshore Western Australia, together with several producing oil fields. John Brookes is Santos' major producing gas asset in the Carnarvon Basin and has been producing since 2005, and gas production from the Halyard Spar Project commenced in June 2011.

In addition to the producing assets, Santos has a portfolio of growth opportunities, including the Reindeer Project offshore Western Australia, which is scheduled to commence gas production in the fourth quarter of 2011.

LNG projects

Strong economic growth in Asia, the desire for security of supply, a scarcity of hydrocarbon reserves in importing nations and the need for clean burning fuels have resulted in growing demand in the region for LNG. Santos has a portfolio of four LNG projects at various stages of appraisal, development and operation to service this demand.

Darwin LNG

The Darwin LNG Project, operated by ConocoPhillips, is Santos' first producing LNG asset. The Project involves the export of gas from the Bayu-Undan fields, approximately 500 km North West of Darwin to a 3.6 mtpa LNG plant in Darwin. LNG production commenced in February 2006 with a contract to supply Tokyo Electric Power Company and Tokyo Gas. Santos has an 11.5% working interest in the Project.

PNG LNG

The PNG LNG Project, operated by ExxonMobil, was sanctioned by Santos and its project partners in December 2009 and reached financial close on the associated limited recourse financing in March 2010. The PNG LNG Project will develop the gas and condensate resources in the Hides, Angore and Juha fields and the associated gas resources in the currently producing oil fields of Kutubu, Agogo, Gobe and Moran in the Southern Highlands and Western Provinces of PNG. The gas will be transported by pipeline to a two train LNG facility with an initial capacity of 6.6 mtpa located North West of Port Moresby on the coast of the Gulf of Papua. PNG LNG is the largest ever investment in PNG and is expected to double the country's gross domestic product.

Santos has a 13.5% stake in the PNG LNG Project and an estimated US$2 billion share of the total project capital cost. First LNG is expected to be produced in 2014.

GLNG

The GLNG partners announced the final investment decision on the GLNG Project on 13 January 2011, and construction commenced in the first quarter of 2011. GLNG is a joint venture between Santos (30%) and three of the world's largest LNG companies, PETRONAS (27.5%), Total (27.5%) and KOGAS (15%). GLNG includes the development of CSG resources in the Bowen/Surat Basins in south-east Queensland, the construction of a 435 km gas transmission pipeline from the gas fields to Gladstone, and two LNG trains with a combined nameplate capacity of 7.8 mtpa on Curtis Island. First LNG is expected to be produced in 2015, with a total expected capital cost of US$16 billion from the final investment decision to the end of 2015 when Train 2 is expected to be ready for start up.

Bonaparte LNG

Santos has partnered with France's GDF SUEZ, to develop Bonaparte LNG, a proposed 2.0 mtpa floating LNG project, located in the Timor Sea off the northern coast of Australia.

As part of the partnership, GDF SUEZ has bought 60% of the Petrel, Tern and Frigate gas fields from Santos for up to US$370 million, and will carry all of Santos' share of the costs until a final investment decision, expected in 2014.

Asia

Santos has producing assets in Indonesia and Bangladesh and anticipates first production from the Chim São field in Vietnam in September 2011. In addition, Santos has interests in India and the Kyrgyz Republic. It is further developing its Asian business including through development projects, exploration investment, acquisitions and farm-ins.

Indonesia

Santos holds a 67.5% operating interest in the Madura Offshore production sharing contract, located in offshore East Java which contains the Maleo field. Production commenced from the Maleo Gas Project in September 2006, which now has gross gas production of approximately 110 MMscf/d. Santos also holds a 45% operated interest in the Sampang Production Sharing Contract, also located in offshore East Java. The Oyong field, discovered in 2001, commenced oil production in 2007 and gas production in October 2009. Santos, PT Ogan Interior Gas and PT East Ogan Methane signed a farm-in agreement in August this year, pursuant to which Santos will, subject to the satisfaction of a number of conditions including regulatory consent, become entitled to acquire a 60% interest in, and assume operatorship of, the Ogan Komering 1 and Ogan Komering 2 Coal Bed Methane production sharing contracts in Indonesia's South Sumatra province.

Santos approved the Wortel Project in November 2010, which is a tie back to Oyong. Construction of the Wortel wellhead platform is progressing to plan and first gas is scheduled to be produced at the end of 2011.

Vietnam

In 2006, Santos entered Vietnam via a farm-in to the Nam Con Son Basin and the direct award of an exploration licence in the Song Hong Basin. The Chim São field in the Nam Con Son Basin was discovered in the same year and approved for development in 2009. Santos has a 31.875% interest in the Chim São field with a planned gross production capacity on plateau of 25 kbbls/d of oil. First oil is expected to be produced in September 2011.

Bangladesh

In the Bay of Bengal, Santos holds a 75% interest in and is operator of Block 16 (Sangu Development Area), and is in the process of acquiring the other 25% interest from Halliburton. Santos also holds a 100% interest in Block 16 (Exploration), after acquiring Cairn Energy's stake in 2010.

Production statistics

Total production in 2010 was 49.9 MMboe and sales volume was 59.2 MMboe. Total revenue on these sales was $2,228 million. Details of Santos' production statistics for 2010 and 2009 are set out below:

Table 1: Production statistics – 2010 and 2009 (year ended 31 December)

	Total 2010		Total 2009
	Field units	MMboe	Field units	MMboe
Sales gas, ethane and LNG (PJ)
Cooper	66.6	11.4	79.9	13.7
Surat/Bowen/Denison	34.1	5.9	31.9	5.5
Amadeus	1.6	0.3	10.6	1.8
Otway/Gippsland	19.2	3.3	20.5	3.5
Carnarvon	47.7	8.2	43.5	7.5
Bonaparte	15.0	2.6	16.3	2.8
Indonesia	38.2	6.5	30.2	5.2
Bangladesh	3.8	0.7	5.7	1.0
Total production	226.2	38.9	238.6	41.0
Total sales volume	277.7	47.7	268.2	46.1
Total sales revenue ($million)		1,196.9		1,098.2
Crude oil (kbbls)
Cooper	2,557.8	2.6	3,598.4	3.6
Surat/Denison	84.1	0.1	62.5	0.1
Amadeus	86.3	0.1	106.3	0.1
Legendre	225.7	0.2	288.7	0.3
Thevenard	254.0	0.2	305.7	0.3
Barrow	561.1	0.5	573.5	0.6
Stag	1,430.6	1.4	1,643.9	1.6
Mutineer-Exeter	572.6	0.6	995.0	1.0
Jabiru-Challis	83.0	0.1	105.9	0.1
Indonesia	578.8	0.6	560.3	0.6
SE Gobe	93.2	0.1	148.1	0.1
Total production	6,527.2	6.5	8,388.3	8.4
Total sales volume	6,797.5	6.8	8,604.5	8.6
Total sales revenue ($million)		593.8		678.3
Condensate (kbbls)
Cooper	945.8	0.9	1,095.2	1.0
Surat/Denison	4.3	0.0	7.6	0.0
Amadeus	25.9	0.0	46.6	0.1
Otway	23.5	0.0	23.4	0.0
Carnarvon	474.4	0.5	435.5	0.4
Indonesia	3.8	0.0	0.0	0.0
Bonaparte	1,367.0	1.3	1,552.6	1.5
Bangladesh	0.4	0.0	0.9	0.0
Total production	2,845.1	2.7	3,161.8	3.0
Total sales volume	3,009.1	2.8	3,505.8	3.3
Total sales revenue ($million)		253.1		233.2

	Total 2010			Total 2009
	Field units	MMboe	Field units	MMboe
LPG ('000 t)
Cooper	132.7	1.1	151.2	1.3
Surat/Denison	0.1	0.0	0.3	0.0
Bonaparte	77.7	0.7	88.6	0.7
Total production	210.5	1.8	240.1	2.0
Total sales volume	224.5	1.9	252.6	2.1
Total sales revenue ($million)		184.1		170.8
Total
Production (MMboe)		49.9		54.4
Sales volume (MMboe)		59.2		60.1
Sales revenue ($million)		2,227.9		2,180.5

Source: Santos 2010 Annual Report for the year ended 31 December 2010

Reserves and resources

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

Table 2: Reserves statistics – 2010

Proven plus probable reserves (Santos share) by activity:

	Sales gasPJ	Crude oilMMbbls	CondensateMMbbls	LPG '000tonnes	TotalMMboe
Reserves year end 2009	7,460	74	64	2,848	1,440
Production	(226)	(7)	(3)	(210)	(50)
Additions	897	(2)	9	445	165
Acquisitions/divestments	(642)	1	0	0	(110)
Estimated reserves year end 2010*	7,489	66	70	3,083	1,445

* Year end 2010 reserves were calculated after the sale of a 15% interest in GLNG to Total announced on 9 September 2010 but before the sale of a further 15% interest in GLNG to Total and KOGAS announced on 17 December 2010, as the latter sale transactions were not going to complete until early 2011. Completion resulted in the sale of approximately 110 MMboe of 2P reserves.

Proven plus probable reserves (Santos share) year end 2010 by area:

Area	Sales gasPJ	Crude oilMMbbls	CondensateMMbbls	LPG '000tonnes	TotalMMboe
Eastern Australia
Cooper Basin	868	29	16	1,830	209
Southern Australia	369	0	5	398	71
Queensland CSG	2,883	0	0	0	496
Queensland Conventional	46	1	0	0	9
New South Wales CSG	532	0	0	0	91
Total Eastern Australia	4,698	30	21	2,228	876
Western Australia and Northern Territory
Carnarvon	805	18	8	0	164
Bonaparte	280	0	15	855	69
Amadeus	91	5	1	0	22
Total Western Australia and Northern Territory	1,176	23	24	855	255
Asia-Pacific
PNG	1,219	0	25	0	233
Indonesia	176	1	0	0	31
Vietnam	9	12	0	0	14
Bangladesh	4	0	0	0	1
Total Asia-Pacific	1,408	13	25	0	279
Total	7,282	66	70	3,083	1,410
Beneficial interests*	207	0	0	0	35
Grand total	7,489	66	70	3,083	1,445

* Santos owns a 20.92% interest in ESG, which has a 65% interest in PPL 3, PAL 2, PEL 238, PEL 433 and PEL 434 in New South Wales.

Reserves (Santos share):

(MMboe)	Year end 2009	Production	Additions	Acquisitions/Divestments	Year end 2010
1P reserves	647	(50)	87	(38)	646
2P reserves	1,440	(50)	165	(110)	1,445
2C contingentresources	2,497	0	(106)	(130)	2,261

Source: Santos 2010 Annual Report for the year ended 31 December 2010

3.3 Board and senior management

(a) Santos Board

Peter Roland Coates

AO, BSc (Mining Engineering)

Mr Coates was appointed Santos Chairman on 9 December 2009, having been an independent non-executive director since 18 March 2008. Mr Coates is Chairman of the Nomination Committee of the Santos Board and a member of the People & Remuneration and Finance Committees of the Santos Board.

Mr Coates is a non-executive director of Amalgamated Holdings Limited and Glencore International plc. Mr Coates was made an Officer of the Order of Australia in 2009. He was awarded the 2010 Australasian Institute of Mining and Metallurgy Medal.

David John Wissler Knox

BSc (Hons) Mech Eng, MBA

Mr Knox was appointed Chief Executive Officer and Managing Director of Santos in July 2008. He is a member of the Environment, Health, Safety and Sustainability Committee of the Santos Board. He has 30 years of experience in the global oil and gas industry, including as Managing Director for BP Exploration and Production in Australasia from 2003 to 2007.

Mr Knox joined Santos in September 2007 as Executive Vice President Growth Businesses, responsible for growth in Santos' emerging new businesses including LNG, Geoscience and New Ventures, Indonesia and other strategic projects.

Mr Knox is also a director on the board of Australian Petroleum Production & Exploration Association Ltd and the board of the Botanic Gardens and State Herbarium in South Australia and a Fellow of the Australian Institute of Mechanical Engineering.

Kenneth Charles Borda

LLB, BA

Mr Borda has been an independent non-executive director since 14 February 2007. He is Chairman of the Finance Committee of the Santos Board and a member of the Nomination Committee of the Santos Board.

Mr Borda is also a board member of Fullerton Funds Management, owned by Temasek, Singapore, is Chairman of Leighton Contractors Pty Limited and is a director of Talent2 International Limited. He is also a member of the Asian Advisory Board of Aviva Asia Pte Ltd in Singapore.

Kenneth Alfred Dean

BCom (Hons), FCPA, FAICD

Mr Dean has been an independent non-executive director since 23 February 2005. He is Chairman of the Audit Committee of the Santos Board and a member of the Finance Committee of the Santos Board.

Mr Dean is a non-executive director of BlueScope Steel Limited and Chairman of its Audit and Risk Committee.

Mr Dean has over 30 years' experience in the oil and gas industry and is a Fellow of CPA Australia and the Australian Institute of Company Directors.

Roy Alexander Franklin

OBE, BSc (Hons)

Mr Franklin has been an independent non-executive director since 28 September 2006 and is a member of the Environment, Health, Safety and Sustainability Committee of the Santos Board.

Mr Franklin is Chairman of Keller Group plc and a non-executive director of Statoil ASA and Boart Longyear Limited. He was awarded the OBE in 2004 for services to the UK oil and gas industry.

Richard Michael Harding

MSc

Mr Harding has been an independent non-executive director since 1 March 2004. He is Chairman of the Environment, Health, Safety and Sustainability Committee of the Santos Board and a member of the Audit, Nomination and People & Remuneration Committees of the Santos Board.

Mr Harding is Chairman of Downer EDI Limited.

Gregory John Walton Martin BEc, LLB, FAIM, MAICD

Mr Martin has been an independent non-executive director since 29 October 2009. He is Chairman of the People & Remuneration Committee of the Santos Board and a member of the Environment, Health, Safety and Sustainability Committee of the Santos Board.

Mr Martin is a non-executive director of a number of listed and unlisted companies including Energy Developments Limited and Australian Energy Market Operator Limited and Managing Director of Murchison Metals Limited. He is an Executive Committee Member of the Council on Australia Latin America Relations and Chairman of the Royal Botanic Gardens & Domain Trust of New South Wales.

Jane Sharman Hemstritch

BSc, FCA, FAICD

Ms Hemstritch has been an independent non-executive director since 16 February 2010. She is a member of the Audit and People & Remuneration Committees of the Santos Board.

Ms Hemstritch has broad experience in the oil and gas, telecommunications, government, financial services and manufacturing sectors. She is a non-executive director of the Commonwealth Bank of Australia, Tabcorp Holdings Ltd, Lend Lease Ltd and The Victorian Opera Company, and Deputy Chairman of The Global Foundation. She is also a member of the Research and Policy Council of the Committee for Economic Development of Australia and the Council of the National Library of Australia, a Fellow of the Institutes of Chartered Accountants in Australia and in England and Wales and a member of Chief Executive Women Inc.

(b) Santos' senior leadership team

In addition to Mr Knox, Santos' senior leadership team comprises:

Andrew Seaton

BE (Chem) Hons, GradDipBusAdmin Chief Financial Officer

Andrew is responsible for Santos' corporate finance, accounting, taxation, treasury, investor relations, risk, insurance, audit, information systems and procurement functions.

Andrew has over 20 years' oil and gas experience encompassing finance, banking and engineering roles. Before joining Santos in March 2005, Andrew held senior roles in investment banking with Merrill Lynch and corporate banking with National Australia Bank. Prior to being appointed Chief Financial Officer, he held the position of General Manager, Commercial and Finance for Santos' Eastern Australian Business Unit.

James Baulderstone

LLB (Hons), BSc (Hons) Vice President Eastern Australia

James is responsible for Santos' activities in Eastern Australia. This includes the exploration, production, development and commercialisation of Santos' oil and gas resources in central Australia, the Gunnedah Basin and offshore Victoria.

James joined Santos in January 2007 as General Counsel and Company Secretary after previously holding similar roles at Mayne Group and BlueScope Steel Limited. Prior to his current role, James was Santos' Vice President Corporate and Commercial with responsibility for mergers and acquisitions and commercial excellence. James has extensive legal, commercial and business development experience across many countries including the United States, Germany, the United Kingdom, Malaysia, China and India.

Peter Cleary

BCom, LLB

Vice President Strategy and Corporate Development

Peter is responsible for Santos' commercial, strategy and planning, corporate development, and public affairs functions.

Peter has extensive global experience in the petroleum industry and joined Santos from BP in September 2010. He was most recently President of North West Shelf Australia LNG, the LNG marketing company for the North West Shelf Venture. During his 24 year career with BP, Peter held senior management positions in Australia, Indonesia, Korea, Hong Kong, Abu Dhabi and the United Kingdom.

Petrina Coventry

BEd, PostDipHR, Master Business Ethics Chief Human Resources Officer

Petrina is responsible for human resources strategy and activities throughout Santos, including remuneration and benefits, organisational effectiveness, talent management, learning and development, recruitment and payroll.

Petrina has spent many years working in the United States, Asia and Europe in global human resources management roles for the General Electric Company and The Coca-Cola Company. Her most recent role was Chief Human Resource Officer for a private equity consortium in Singapore. She has a deep industry knowledge across many industrial sectors including renewable energy, oil and gas services, real estate and financial services.

Trevor Brown

BSc (Hons)

Vice President Exploration & Subsurface

Trevor is responsible for implementing Santos' exploration and new ventures strategy, and for building a material portfolio of growth opportunities. Trevor also leads a team of highly qualified geoscientists and subsurface engineers to ensure excellence in subsurface activities across Santos' conventional and unconventional exploration, appraisal and development portfolio.

Trevor joined Santos in 2001 from the US independent oil company Unocal where he was part of a very active exploration team gaining experience across south-east Asia, the United States and South America. His previous roles at Santos include Manager New Ventures, Manager Growth Projects and Vice President Geoscience and New Ventures. Trevor has more than 24 years' experience in the oil and gas industry including 11 years in Indonesia managing onshore and offshore exploration programs.

John Anderson

LLB, BEc, GDCL

Vice President Western Australia and Northern Territory

John is responsible for Santos' activities in Western Australia and Northern Territory, including commercial and finance, business development, exploration, development and operated assets.

John joined Santos in 1996 as Corporate Counsel for the former Queensland Northern Territory Business Unit after 10 years as a solicitor with Freehills. He has held a range of roles at Santos including Manager Legal and Business Services, Group Executive Business Development, Vice President Strategic Projects and most recently Vice President Commercial.

Martyn Eames

BSc (Hons)

Vice President Asia-Pacific

Martyn is responsible for Santos' activities in the Asia-Pacific region. These comprise Santos' business interests in Indonesia, PNG, India, Bangladesh, the Kyrgyz Republic and Vietnam.

Martyn joined Santos in December 2004 as Vice President Corporate and People. Before then, he spent more than 25 years with BP, working in various upstream roles in Angola, Canada, Australia, PNG, Norway, the United Kingdom and the United States.

Mark Macfarlane

BEng (Hons) Mechanical President Santos GLNG

Mark is responsible for the delivery of the GLNG Project in Queensland, including the upstream development, 435 km gas transmission pipeline, the LNG plant, LNG marketing, commercial and operations.

Before his current role, Mark held a number of leadership roles at Santos, including Vice President Eastern Australia and Vice President Development. Mark joined Santos in 1997, following a nine year career with Esso in Australia and Malaysia.

Christian Paech

LLB (Hons), BCom General Counsel

Christian is responsible for Santos' legal function, which supports the corporate team and the business units in joint venture agreements, dispute resolution, statutory compliance, mergers and acquisitions, gas sales and production sharing contracts.

Christian has broad experience in the petroleum industry and joined Santos in 2004 after working in national and international firms in Melbourne and London for 10 years. Before becoming General Counsel, he held the positions of Deputy General Counsel and Senior Corporate Lawyer.

David Lim

BEc, LLB, ChSec Company Secretary

David is responsible for corporate governance, continuous disclosure and compliance with ASX and ASIC requirements, and provides the Santos Board with independent advice and support in relation to these matters.

Prior to joining Santos in 2007, David had over 15 years' experience in commercial legal practice. He is an accredited Chartered Secretary. Before his current role, David held the position of Deputy General Counsel and Assistant Company Secretary.

Diana Hoff

BSc (Petroleum Engineering) Vice President Technical and Engineering

Diana is responsible for drilling and completions, projects, surface engineering, safety and environment. She has nearly 25 years of experience with major and independent operations in the upstream oil and gas industry.

Diana joined Santos in 2010 as General Manager Drilling and Completions. She previously held positions with several oil and gas companies including Chevron, Amoco and Questar. Her career has included drilling and completions operations, engineering and management, and production management with significant focus on regulatory processes including environmental approvals and stakeholder engagement.

3.4 Corporate governance

The Santos Board has established corporate governance policies and charters (Policies). Santos' Policies meet the requirements of both the Corporations Act and the Listing Rules, and, in the opinion of the Santos Board, comply with the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations.

The Policies are published on Santos' website at www.santos.com

(a) Board responsibilities

The Santos Board is responsible for the overall corporate governance of Santos, including approving the strategic direction and financial objectives, overseeing Santos and its management, establishing goals for management and monitoring the attainment of these goals.

To assist the Santos Board with the effective discharge of its duties, the following committees have been established:

• Audit Committee;
• Environment, Health, Safety and Sustainability Committee;
• Finance Committee;
• Nomination Committee; and
• People & Remuneration Committee.

Each committee operates under a specific charter approved by the Santos Board. These charters are published on Santos' website at www.santos.com

(b) Composition

The composition of the Santos Board is determined in accordance with the Santos constitution and the Santos Board guidelines which, among other things, require that:

• the Santos Board comprises a minimum of five Directors (exclusive of the Chief Executive Officer/Managing Director), and a maximum of 10 directors;
• the Santos Board should comprise a substantial majority of independent, non-executive directors;
• there should be a separation of the roles of Chairman and Chief Executive Officer of Santos;
• the Chairman of the Santos Board should be an independent, non-executive director; and
• performance of the Santos Board and its members should be reviewed regularly and objectively.

(c) Conflicts of interest

The Santos Board has an obligation to ensure that Santos Directors avoid conflicts between their duty to Santos and their own personal interests. Santos Directors are required to declare actual or potential conflicts of interest both on their appointment to the Santos Board and on an ongoing basis.

(d) Securities trading policy

Santos Directors, executives and employees (as well as connected persons over whom they may be expected to have control or influence) are prohibited from acquiring, selling or otherwise trading in Santos' securities where they are in possession of material price sensitive information that is not in the public domain.

Directors, executives and employees (and their connected persons) are also prohibited from trading in Santos' securities during defined 'blackout periods', except in exceptional circumstances or where the trade falls within one of the excluded categories under the policy (such as pro rata issues of securities to all shareholders).

The following periods are defined as 'blackout periods' under the policy:

• the period from close of trading on 31 December each year until the trading day following the announcement of Santos' preliminary final statement or full year results (usually in the third week of February of the succeeding year);
• the period from the close of trading on 30 June each year until the trading day following the announcement of Santos' half year results (usually in the third week of August of that year); and
• any other period that Santos specifies from time to time.

Directors, executives and employees are also prohibited from trading Santos' securities on a short term basis, and are not permitted to hedge their securities (including options and SARs) unless those securities have fully vested and are no longer subject to restrictions.

Outside of these circumstances, employees are generally free to trade in Santos' securities, but Directors, the Chief Executive Officer, executives and Company Secretary can only trade if they first provide notice of their intention and receive written clearance from an appropriate senior officer.

Breaches of the policy are subject to appropriate sanctions, which could include disciplinary action or termination of employment.

(e) Communication with Santos shareholders and continuous disclosure

Santos is committed to giving all shareholders timely and equal access to information concerning Santos.

When Santos makes an announcement to the market, that announcement is released to ASX. The Company Secretary and Group Executive Investor Relations are responsible for communications with the exchanges. All material information disclosed to ASX is posted on Santos' website at www.santos.com. This includes ASX announcements, annual reports, notices of meetings, Chief Executive Officer briefings, media releases, and materials presented at

investor, media and analyst briefings. An email alert facility is also offered to shareholders. Webcasting of material presentations, including annual and half yearly results presentations, is provided for the benefit of shareholders, regardless of their location.

(f) Annual general meeting

All Santos shareholders are encouraged to attend and participate in Santos' annual general meeting. Santos shareholders may attend in person or appoint a proxy as their representative.

3.5 Safety and environment

(a) Safety

Santos strives for a high standard of occupational health and safety.

The company-wide environment, health and safety management system provides a structured framework for effective environmental and safety practice across all of Santos' activities and operations. The system, based on the ISO 14001 and AS 4801 standards, has been designed to ensure consistent standards for all employees and contractors. It incorporates industry best practice and includes 17 management standards and more than 30 hazard standards.

Copies of the health and safety vision and policy and the environment, health and safety management system are available at www.santos.com

(b) Environment

Santos endeavours to conduct its activities in a way that avoids and minimises potential impacts on the environment.

The company-wide environment, health and safety management system provides a structured framework for effective environmental and safety practice across all of Santos' activities and operations.

The environmental vision, commitment and policy and the environment, health and safety management system are available at www.santos.com

3.6 Risks relating to Santos' business

Introduction

If the Scheme is implemented, ESG Shareholders will receive New Santos Shares as consideration for their ESG Shares. The value of the transaction to ESG Shareholders will therefore depend upon the future value of Santos Shares.

A number of risks and uncertainties, which are both specific to Santos and of a more general nature, may affect the future operating and financial performance of Santos

and the value of Santos Shares. The risks which are known to Santos and which may have a material adverse impact on the future performance of Santos are described in this document and include the risks set out in this section 3.6.

The risks identified in this Scheme Booklet are not necessarily exhaustive. Santos gives no assurance or guarantee that the risks set out in this Scheme Booklet will not change, or that additional risks will not arise. There may be other material risks which are not disclosed in this Scheme Booklet because they are not known to Santos or were not considered to be material at the date of this Scheme Booklet.

This section 3.6 does not take into account the investment objectives, financial situation or particular needs of individual ESG Shareholders. It is important that ESG Shareholders carefully read this Scheme Booklet and the risks set out below, consider their personal circumstances and seek independent professional advice before deciding how to vote in relation to the Scheme.

Volatility in oil and gas prices

Santos' business relies primarily on the production and sale of oil and gas products (including LNG) to a variety of buyers under a range of short term and long term contracts. International oil and gas prices have fluctuated widely in recent years and may continue to fluctuate significantly in the future. Santos cannot predict future oil and gas prices.

Demand for, and pricing of, LNG remains sensitive to external economic and political factors, including crude oil prices and buyer preferences as between LNG and oil. Crude oil prices are affected by numerous factors beyond Santos' control, including worldwide oil supply and demand, the level of economic activity in the markets that Santos serves, regional political developments and military conflicts in oil producing countries and regions (in particular, the Middle East), the weather, the ability of the Organization of the Petroleum Exporting Countries and other producing nations to influence global production levels and prices, the price and availability of new technology and the availability and cost 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 substantial decline in oil and gas prices or demand for oil and gas, may materially affect Santos' financial condition and results of operations. Increases and decreases in oil and gas prices affect the amount of cash flow available for capital expenditure and Santos' ability to borrow money or raise additional capital. Lower oil and gas prices may also reduce the amount of oil and natural gas that Santos can produce economically.

LNG supply contracts

Santos' market share of LNG supply contracts and, therefore, its profits may be adversely affected by the introduction of new LNG facilities and the expansion, by Santos' competitors, of their existing LNG facilities in the global LNG market. Such new facilities or expansion of existing facilities could increase the global supply of LNG, thereby potentially lowering the price of LNG.

Replacement of existing reserves

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

Acquisition and divestment activities

Santos from time to time evaluates acquisition and divestment opportunities across its range of assets and businesses. Any acquisitions or disposals would lead to a change in the sources of Santos' earnings and result in variability of earnings over time. Any acquisitions or disposals could also lead to changes in future capital and operating expenditure obligations which may impact Santos' funding requirements. They may also give rise to liabilities. Integration of new businesses into the Santos Group may be costly and may occupy a large amount of management's time. There is no certainty that Santos will complete any acquisition or divestment that it has entered into.

Project risks

Santos is investing a significant amount of capital in the PNG LNG and GLNG Projects. These and other 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 other approvals, cost overruns, including as a result of changes to the regulatory and operating environment or as a result of changes to the project scope and timing, decline in LNG prices or demand, equipment and labour shortages, technical and commercial concerns including possible reserves and deliverability difficulties, environmental and water disposal impacts, increases in

operating cost structures, contractual issues associated with joint venture agreements, gas sale agreements or with major engineering procurement and construction contracts, community or industrial actions or other circumstances such as a change to the regulatory framework which may result in the delay, suspension or termination of the projects, the total or partial loss of the investment and a material adverse effect on Santos' business, results of operations, financial condition and credit rating.

In addition, sales contracts with various counterparties are expected to be, or have been, entered into in relation to the PNG LNG and GLNG Projects. The ability of the counterparties to meet their commitments under such an arrangement may impact on Santos' investment in these projects.

Industry wide cost pressures are being experienced across a broad range of projects and reflect stronger producer currencies as well as underlying inflation in raw materials and labour costs and Santos' projects may be adversely affected by this trend.

Project developments in which Santos is, or may become, involved are subject to risks, including technical and commercial risks. Changes in reserves, liquids and gas prices, exchange rates, construction costs and design and scope requirements and delays in construction may adversely affect the commerciality and economics of project development.

Operational risk

Industrial disputes, work stoppages and accidents, natural disasters, drilling and production results, reserve estimates, environmental impacts and other factors all contribute towards operational risk which may have an adverse effect on Santos' profitability and results of operations. Appropriate insurance can only provide protection for some, but not all, of the costs that may arise from unforeseen events.

Counterparty risk

As part of its ongoing commercial activities, Santos enters into sales contracts with various third parties for the sale of natural gas, LNG and other products. If any counterparty were unable to meet its commitments to Santos under such contracts, in whole or in part, and if there is no form of security in place, there is a risk that future anticipated revenues would reduce unless and until Santos was able to secure an alternative customer. Therefore, such failure of a counterparty to a sales contract could materially and adversely affect Santos' financial condition and credit rating. Counterparty risk also arises when Santos enters into contracts for committed lines of credit and derivatives with financial institutions. Santos' exposure to counterparty credit risk is reduced by the implementation

of credit policies that apply to sales contracts, banking arrangements and derivative contracts.

Currency risk

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

Market risk

Santos borrows money domestically and internationally at interest rates that are either fixed or floating. A rise in interest rates, either domestically or internationally, would affect Santos' cost of borrowing and would adversely affect its business and financial condition.

Santos, 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 Santos, it is also possible such activities may limit its upside benefit potential or give rise to additional losses. The management of commodity price risk, exchange rate risk and interest rate risk are governed by treasury policies which are approved by the Santos Board.

Access to capital

Santos' business and, in particular, development of large-scale projects, relies on access to debt and equity financing. Santos' ability to secure financing, or financing on acceptable terms may be materially adversely affected by volatility in the financial markets, globally or affecting a particular geographic region, industry or economic sector, or by a downgrade in its credit rating. Santos is currently rated BBB+ with a negative outlook by Standard & Poor's. For these or other reasons, financing may be unavailable or the cost of financing may be significantly increased. Such inability to obtain, or increase to the costs of obtaining, financing could materially and adversely affect Santos' business, results of operations and financial condition.

Tax risk

Future changes in taxation laws in Australia, including changes in interpretation or application of existing laws by the courts or taxation authorities in Australia, may affect taxation treatment of Santos securities or the holding or disposal of those securities.

Petroleum Resources Rent Tax and other Australian taxes

In addition to the standard level of income tax imposed on all industries, companies in the oil and gas industry are required to pay government royalties, direct and indirect taxes and other imposts in the jurisdictions in which they operate. The profitability of companies in this industry can be affected by changes in government taxation and royalty policies.

On 2 July 2010, the Australian Government announced that it intends to introduce a Minerals Resource Rent Tax and an expanded Petroleum Resource Rent Tax (PRRT) from 1 July 2012. The existing PRRT regime applies to offshore oil and gas projects. The PRRT is intended to apply to onshore and offshore oil, gas and coal seam methane projects. The Federal Government has accepted proposed recommendations prepared by the Policy Transition Group on the form of the expanded PRRT and has recently released draft legislation for comment. The final form of the legislation and whether it will be enacted by Federal Parliament is not yet certain. The possible introduction of the expanded PRRT could adversely affect Santos' financial performance, financial position, cash flows and share price.

Environmental risk

Oil and gas exploration and production can be an environmentally hazardous activity which may give rise to substantial costs for environmental rehabilitation, mitigation and losses.

With increasingly heightened government and public sensitivity to environmental impact and sustainability, particularly in relation to CSG, environmental regulation is becoming increasingly stringent. Santos could be subject to changes in the regulatory framework that:

• operate to limit or restrict the areas that Santos can conduct its oil and gas exploration and production activities. For example, this may occur through prioritising competing land uses over CSG exploration and production activities;
• operate to increase Santos' environmental responsibility and liability, including potentially to limit or restrict Santos' oil and gas exploration and production activities or make them uneconomic; and
• deal with how Santos conducts its upstream drilling operations, air quality, water and noise pollution and other discharges of materials into the environment, plant and wildlife protection, the reclamation and restoration of certain of its properties, greenhouse gas emissions, the storage, treatment and disposal 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 criminal penalties, revocation of permits, reputational issues, increased licence conditions and corrective action orders. These laws sometimes apply retroactively. In addition, a party can be liable for environmental damage without regard to that party's negligence or fault.

Increased costs associated with regulatory compliance and/or with litigation could have a material and adverse effect on Santos' earnings and cash flows.

Carbon emissions

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

The Australian Labor Government, under Prime Minister The Hon. Julia Gillard, has recently released draft legislation to introduce a carbon price mechanism (CPM), which is proposed to commence on 1 July 2012. The key aspects of the proposed CPM that are relevant to Santos' operations are:

• companies operating facilities which emit large quantities of greenhouse gases in a covered sector (which includes oil and gas projects) will be required to surrender permits for those greenhouse gas emissions, but may receive compensation if operating in an emissions-intensive, trade-exposed industry;
• for the first three years, the price of permits will be fixed, before moving to an emissions trading scheme in 2015, where the price will be determined by the market, subject to a government-nominated price floor and price ceiling until 2018;
• natural gas retailers will be liable for the greenhouse gas emissions from the use of natural gas supplied to customers, subject to the mandatory or voluntary transfer of that liability to large users in particular circumstances; and
• transport fuels and synthetic greenhouse gases will not be directly covered by the CPM legislation, rather in some cases an equivalent carbon price will be applied through changes in tax credits, excise and levies.

Based on the proposed CPM from a short and long term perspective, the regulation of greenhouse gas emissions is likely to result in changes in the returns on Santos' greenhouse gas-intensive assets and energy-intensive assets as a result of regulatory impacts on the industry in which Santos 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 (particularly once the flexible price period commences). At this stage, the impact of the proposed CPM on Santos' business, results of operations and financial condition is uncertain.

Government actions and regulatory risk

Santos' business is subject to various national and local laws and regulations, in each of the countries in which it operates, relating to the exploration, development, production, marketing, pricing, transportation and storage of its products. A change in the laws which apply to Santos' business or the way in which it is regulated could have a material adverse effect on its business, results of operations and financial condition. Other changes in the regulatory environment (including applicable accounting standards) may have a material adverse effect on the carrying value of material assets or otherwise have a material adverse effect on Santos' business, results of operations and financial condition.

Santos' operations could also be affected by government actions in Australia and other countries or jurisdictions in which it has interests. These actions include government legislation, government approvals, guidelines and regulations in relation to the environment, the oil and gas industry, competition policy, native title and cultural heritage. Such actions could impact on land access, granting of licences and other oil and gas interests, approval of developments and freedom to conduct operations.

The possible extent of introduction of additional legislation, regulations, guidelines or amendments to existing legislation that might affect Santos' business is difficult to predict. However, there is heightened government and public sensitivity to environmental impact and sustainability, particularly in relation to CSG. As a consequence, regulation of environmental impact and access to land is becoming increasingly stringent.

Any changes to the regulatory framework may impact Santos' reserves. Such changes may also result in the delay, suspension or termination of projects.

Any such government action may require increased capital or operating expenditure and could prevent or delay certain operations and activities by Santos, which could have a material adverse effect on Santos' business and financial condition.

Political risk

Santos is subject to a risk that it may not be able to carry out its operations as it intends to or enter into new operations, nor ensure the security of its assets. In addition, it is subject to risks of, among other things, loss of revenue, property and equipment as a result of hazards such as expropriation, border and territorial disputes, war, insurrection and acts of terrorism and other political risks

and increases in taxes and government royalties. Santos has operations outside Australia in Indonesia, the Kyrgyz Republic, India, Bangladesh, Vietnam, PNG and Timor-Leste.

Santos' interests are subject to political, economic, social and other uncertainties, including the risk of civil rebellion, expropriation, nationalisation, land ownership disputes, renegotiation or termination of existing contracts, licences and permits or other agreements, changes in laws or taxation policies, currency exchange restrictions and changing political conditions. The effects of these factors are difficult to predict and any combination of any of the above may have a material adverse effect on the operation or development of Santos' business and even render it uneconomic.

Joint venture risk

Santos' business is predominantly carried out through joint ventures. Some of these joint venture assets are managed and operated by Santos or its subsidiaries, and some are "non-operated" (i.e. managed and operated by other international and domestic exploration and production companies). The use of joint ventures is common in the exploration and production industry and serves to mitigate the risk and associated cost of exploration, production and operational failure. However, failure of agreement or alignment with joint venture partners or the failure of third party joint venture operators could have a material effect on Santos' business. The failure of joint venture partners to meet their commitments and share of costs and liabilities can result in increased costs to Santos.

Land access and native title

Santos has investments and operations in several countries where title to land and access and other rights with respect to land and resources (including indigenous title) may be complex and unclear. From time to time, these complexities and uncertainties can result in disputes with local groups and/or parties representing local interests.

Similarly, landowners and community action groups, in the jurisdictions in which Santos has interests, may seek to restrain exploration or development activities either by direct action (such as protest) or by challenging in court licences, permits, authorities and consents and refusing land access. The outcome of these disputes may have an adverse impact on Santos' assets (including its ability to develop these assets) in the relevant jurisdictions.

A number of Santos' Australian interests are located within areas which are the subject of one or more claims or applications for native title determinations. Santos does not believe that the outcome of those claims or applications will significantly impact on its asset base. However, compliance with the Native Title Act 1993 (Cth) may result in a requirement to pay compensation and delay the grant of mineral and petroleum tenements and other licences

and consequently may impact generally on the timing of exploration, development and productions operations.

Key personnel

Santos' future success depends on the expertise and continued service of certain key executives and technical personnel. Although Santos enters into employment and incentive arrangements with such personnel to secure their services, Santos cannot guarantee the retention of their services. Should key personnel leave, Santos' business, results of operations and financial condition may be adversely affected.

Estimates of oil and gas resources are uncertain

Calculations of recoverable oil and gas resources contain significant uncertainties, which are inherent in the reservoir geology, the seismic and well data available and other factors such as project development and operating costs, together with commodity prices. This uncertainty is often expressed as a range of resource levels 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 and narrow the range of uncertainty. However, in some cases the stated reserves may move significantly away from the previous estimates, either upwards or downwards.

The exploitation of CSG fields is dependent on the continuous assessment of 2P reserves in the relevant acreage. Continuous drilling programs are required in order to assess the quantity and quality of the 2P reserves. If the quantity and quality of the 2P reserves are not as anticipated this could materially and adversely affect the anticipated revenues of Santos' CSG related projects and operations, and consequently, Santos' results and financial condition.

Authorisations, permits and licences may be withdrawn

Santos' exploration and prospective production are dependent upon the granting and maintenance of appropriate licences, permits and regulatory consents (authorisations) which may not be granted or may be withdrawn or made subject to limitations at the discretion of, among other things, government or regulatory authorities. 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 continued, renewed or granted on no more onerous terms. Moreover, if Santos does not meet its work and/or expenditure obligations under permits and licences, this may lead to dilution of its interest in, or the loss of, such permits and licences.

Santos' existing operations and projects including PNG LNG and GLNG will require renewal of existing and additional governmental, environmental and other approvals and permits during the course of, and for full implementation of, these operations and projects. The failure or delay in receiving these approvals or permits or the grant of these permits on more onerous conditions could adversely affect the economics or returns of these operations or projects.

Risks relating to equity investments and markets

There are risks associated with any investment listed on ASX. The value of Santos Shares may rise or fall depending on the financial condition and operating performance of Santos. Further, the price at which Santos Shares trade on ASX may be affected by a number of factors unrelated to the financial and operating performance of Santos and over which Santos and its Directors have no control. These external factors include:

• economic conditions in Australia and overseas;
• investor sentiment in the local and international equities markets;
• changes in fiscal, monetary, regulatory and other government policies; and
• geo-political conditions such as acts or threats of terrorism or military conflicts.

The historic share price performance of Santos Shares provides no guidance as to its future share price performance.

3.7 Historical financial information

(a) Basis of presentation of historical financial information

The historical financial information below has been extracted from Santos' audited financial statements for 31 December 2010 and 31 December 2009 and the reviewed financial statements for the half year ended 30 June 2011. The information below relates to the Santos Group on a standalone basis and accordingly does not reflect any impact of the Scheme, the TRU Acquisition or the TRU On-Sale.

This information is presented in an abbreviated form and does not contain all of the disclosure that is provided in a half yearly financial report or an annual financial report in accordance with the Corporations Act.

Santos' half year financial report was released to ASX on 19 August 2011 and the 2010 and 2009 annual financial reports were released on 30 March 2011 and 30 March 2010 respectively. Copies of these reports, which include notes to the accounts, are available on Santos' website www.santos.com or from ASX's website www.asx.com.au

(b) Consolidated statement of financial position

Current assetsCash and cash equivalents2,2404,3193,586Trade and other receivables9176651,093Inventories273261306Other financial assets65414Tax receivable242215Total current assets3,5195,2715,014Non-current assetsReceivables102123Investment in an associate177208207Other financial assets136138168Exploration and evaluation assets923962803Oil and gas assets6,3176,9147,605Other land, buildings, plant and equipment200201201Deferred tax assets7954101Total non-current assets7,8428,4989,108Total assets11,36113,76914,122Current liabilitiesTrade and other payables709760755Deferred income839099Interest-bearing loans and borrowings164370369Current tax liabilities2020194Provisions9499144Other financial liabilities10953Total current liabilities1,0801,6151,464Non-current liabilitiesDeferred income171311Interest-bearing loans and borrowings1,6492,7872,941Deferred tax liabilities871843860Provisions768891868Other financial liabilities91715Total non-current liabilities3,3144,5514,695Total liabilities4,3946,1666,159Net assets6,9677,6037,963EquityIssued capital4,9875,5145,571Reserves(283)(330)(403)Retained earnings2,2632,4212,797Equity attributable to owners of Santos6,9677,6057,965Non-controlling interests–(2)(2)Total equity6,9677,6037,963	A$m	31 Dec 2009	31 Dec 2010	30 Jun 2011

(c) Consolidated income statement

A$m	Year ended31 Dec 2009	Year ended31 Dec 2010	Six months ended30 Jun 2011
Product sales	2,181	2,228	1,101
Cost of sales	(1,423)	(1,462)	(693)
Gross profit	758	766	408
Other revenue	70	78	49
Other income	254	344	373
Other expenses	(351)	(400)	(63)
Finance income	85	140	100
Finance expenses	(98)	(133)	(66)
Share of net losses of an associate	(1)	(2)	(1)
Profit before tax	717	793	800
Income tax expense	(205)	(244)	(239)
Royalty-related taxation expense	(78)	(51)	(57)
Total taxation expense	(283)	(295)	(296)
Net profit for the period	434	498	504
Net profit/(loss) attributable to:
Owners of Santos	434	500	504
Non-controlling interests	–	(2)	–
Net profit for the period	434	498	504

(d) Consolidated statement of cash flows

A$m	Year ended31 Dec 2009	Year ended31 Dec 2010	Six months ended30 Jun 2011
Cash flows from operating activities
Receipts from customers	2,311	2,399	1,260
Interest received	85	106	86
Overriding royalties received	8	10	5
Insurance proceeds received	30	7	–
Pipeline tariffs and other receipts	105	102	33
Income taxes refunded	25	89	13
Royalty-related taxes refunded	18	5	–
Payments to suppliers and employees	(914)	(1,076)	(512)
Exploration and evaluation – seismic and studies	(199)	(90)	(35)
Royalty and excise paid	(65)	(50)	(28)
Borrowing costs paid	(80)	(73)	(54)
Income taxes paid	(80)	(18)	(25)
Royalty-related taxes paid	(89)	(144)	(62)
Net cash provided by operating activities	1,155	1,267	681
Cash flows from investing activities
Payments for:
–Exploration and evaluation assets	(98)	(156)	(81)
–Oil and gas assets	(1,182)	(1,518)	(1,494)
–Other land, buildings, plant and equipment	(74)	(26)	(22)
–Acquisitions of oil and gas assets	(363)	–	(8)
–Acquisitions of controlled entities	(17)	(4)	–
–Investment in an associate	(178)	(33)	–
–Restoration	(29)	(13)	(20)
–Advances to related entities	(6)	–	–
Receipts from loans to related entities	–	3	1
Proceeds from disposal of non-current assets	12	819	591
Proceeds from disposal of controlled entities	24	–	–
Income taxes paid on disposal of non-current assets	(497)	(67)	(360)
Borrowing costs paid	–	–	(66)
Other investing activities	(3)	(16)	(3)
Net cash used in investing activities	(2,411)	(1,011)	(1,462)
Cash flows from financing activities
Dividends paid	(297)	(316)	(79)
Drawdown of borrowings	–	1,868	158
Repayments of borrowings	(92)	(272)	(10)
Proceeds from issues of ordinary shares	3,003	490	4
Proceeds from issues of ordinary shares placed on term deposit	(1,176)	–	–
Proceeds from maturity of term deposits	1,116	60	–
Redeemable cumulative preference shares redeemed	(600)	–	–
Net cash provided by financing activities	1,954	1,830	73
Net increase/(decrease) in cash and cash equivalents	698	2,086	(708)
Cash and cash equivalents at the beginning of the period	1,553	2,240	4,319
Effects of exchange rate changes on the balances of cash held	(11)	(7)	(25)
in foreign currencies
Cash and cash equivalents at the end of the period	2,240	4,319	3,586

(e) Consolidated statement of changes in equity

	Equity attributable to owners of Santos
A$m	Issuedcapital	Translationreserve	Fair valuereserve	Hedgingreserve	Retainedearnings	Totalequity	Noncontrollinginterests	Totalequity
Balance at 1 January 2009	2,531	(187)	(2)	–	2,136	4,478	–	4,478
Net profit for the period	–	–	–	–	434	434	–	434
Other comprehensive incomefor the period	–	(94)	–	–	11	(83)	–	(83)
Total comprehensive incomefor the period	–	(94)	–	–	445	351	–	351
Transactions with owners intheir capacity as owners:
Entitlement offer exercised	2,914	–	–	–	–	2,914	–	2,914
Shares issued	138	–	–	–	–	138	–	138
Share options exercised byemployees	4	–	–	–	–	4	–	4
Redeemable cumulativepreference shares redeemed	(600)	–	–	–	–	(600)	–	(600)
Dividends to shareholders	–	–	–	–	(327)	(327)	–	(327)
Share-based paymenttransactions	–	–	–	–	9	9	–	9
Balance at 31 December 2009	4,987	(281)	(2)	–	2,263	6,967	–	6,967
Balance at 1 January 2010	4,987	(281)	(2)	–	2,263	6,967	–	6,967
Net profit for the period	–	–	–	–	500	500	(2)	498
Other comprehensive incomefor the period	–	(48)	(1)	2	(1)	(48)	–	(48)
Total comprehensive incomefor the period	–	(48)	(1)	2	499	452	(2)	450
Transactions with owners intheir capacity as owners:
Institutional placement	493	–	–	–	–	493	–	493
Shares issued	34	–	–	–	–	34	–	34
Dividends to shareholders	–	–	–	–	(350)	(350)	–	(350)
Share-based paymenttransactions	–	–	–	–	9	9	–	9
Balance at 31 December 2010	5,514	(329)	(3)	2	2,421	7,605	(2)	7,603

Equity attributable to owners of Santos
A$m	Issuedcapital	Translationreserve	Fair valuereserve	Hedgingreserve	Retainedearnings	Totalequity	Noncontrollinginterests	Totalequity
Balance at 1 January 2011	5,514	(329)	(3)	2	2,421	7,605	(2)	7,603
Net profit for the period	–	–	–	–	504	504	–	504
Other comprehensiveincome for the period	–	(59)	–	(14)	(2)	(75)	–	(75)
Total comprehensive incomefor the period	–	(59)	–	(14)	502	429	–	429
Transactions with owners intheir capacity as owners:
Shares issued	57	–	–	–	–	57	–	57
Dividends to shareholders	–	–	–	–	(131)	(131)	–	(131)
Share-based paymenttransactions	–	–	–	–	5	5	–	5
Balance at 30 June 2011	5,571	(388)	(3)	(12)	2,797	7,965	(2)	7,963

3.8 Material changes in Santos' financial position since 30 June 2011

The latest published financial statements of Santos are the financial statements for the half year ended 30 June 2011, which were released to ASX on 19 August 2011.

Within the knowledge of Santos Directors, the financial position of the Santos Group has not materially changed since 30 June 2011.

3.9 Santos capital structure and ownership

(a) Santos' capital structure

As at 20 September 2011, Santos had 878,148,624 ordinary shares on issue which are quoted on ASX. In addition, as at that date Santos had the following unquoted securities on issue:

• 35,725 fully paid ordinary shares issued pursuant to the Santos Employee Share Purchase Plan;
• 41,500 Executive Share Plan '0' shares of 25 cents each paid to 1 cent;
• 41,500 Executive Share Plan '2' shares of 25 cents each paid to 1 cent;
• 2,397,094 Share Acquisition Rights (SARs) issued pursuant to the Santos Employee Share Purchase Plan;
• 4,725,237 executive options issued pursuant to the Santos Executive Share Option Plan;
• 901,350 fully paid ordinary shares issued pursuant to the vesting of SARs;
• 46,279 fully paid ordinary shares issued pursuant to the Non-Executive Director Share Plan;
• 633,448 fully paid ordinary shares issued pursuant to the ShareMatch Plan; and
• 633,448 SARs issued pursuant to the ShareMatch Plan.

(b) Substantial shareholders

As at 14 September 2011, there were no substantial shareholders in Santos.

(c) Share plans

Santos currently operates the following general employee share plans:

• Share1000; and
• ShareMatch.

Share1000 is governed by the rules of the Santos Employee Share Acquisition Plan (SESAP). ShareMatch is governed by the rules of the ShareMatch Plan. Both plans were introduced in 2010 and provide a means for employees to acquire shares in Santos.

From 1997 to 2009, general employee offers were made under SESAP and the Santos Employee Share Purchase Plan.

Santos' current Executive Long Term Incentive Programme (LTI Programme) provides for awards to be granted to eligible executives, including executive directors, under the following plan rules:

• the Santos Employee Share Purchase Plan (in respect of offers of SARs); and
• the Santos Employee Share Option Plan (in respect of offers of options).

The 2010 and 2011 LTI Programme offers consisted only of SARs.

Each SAR is a conditional entitlement to a fully paid ordinary share in Santos, subject to the satisfaction of performance or service conditions, on terms and conditions determined by the Santos Board.

In prior years, Santos also operated long term incentive arrangements under the following plans:

• the Santos Executive Share Plan (discontinued in 1997); and
• the Santos Executive Share Purchase Plan (operated in 2003 and 2004).

Further details are available in Santos' 2010 Annual Report.

3.10 Santos' dividend history and policy

The Santos Directors may pay any interim and final dividends that in their judgement, the financial position of the company justifies. The payment of a dividend does not require approval or confirmation by Santos shareholders. Santos Directors aim to strike an appropriate balance between funding the growth of Santos and continuing to pay a meaningful dividend to Santos shareholders.

Period	Interim(cents)	Recorddate	Paymentdate	%franked	Final(cents)	Recorddate	Paymentdate	%franked	Totalfull year(cents)
2011	15	30 Aug 11	30 Sep 11	100%
2010	22	7 Sep 10	6 Oct 10	100%	15	1 Mar 11	31 Mar 11	100%	37
2009	22	1 Sep 09	30 Sep 09	100%	20	2 Mar 10	31 Mar 10	100%	42
2008	22	2 Sep 08	30 Sep 08	100%	20	3 Mar 09	31 Mar 09	100%	42
2007	20	4 Sep 07	2 Oct 07	100%	20	3 Mar 08	31 Mar 08	100%	40
2006	20	5 Sep 06	2 Oct 06	100%	20	5 Mar 07	2 Apr 07	100%	40
2005	18	6 Sep 05	30 Sep 05	100%	20	6 Mar 06	31 Mar 06	100%	38

The following table sets out the dividends which have been paid by Santos since 2005:

The dividend payment history is no indication of future dividend payments or policy.

As stated at its annual general meeting on 5 May 2011, given the significant commitment to funding Santos' key LNG growth projects over the next few years, Santos anticipates that the reduced dividend will remain during the intensive growth phase between now and 2015.

3.11 Recent Santos Share price performance

Santos Shares are granted official quotation on ASX.

The following chart shows the closing price of Santos Shares on ASX over the past 12 months to 16 September 2011.

Santos share price - 12 months to 16 September 2011

The historic share price performance of Santos Shares provides no guidance as to future share price performance.

3.12 Rights attaching to New Santos Shares

New Santos Shares issued as consideration under the Scheme will be issued fully paid and will rank equally with existing Santos Shares from the date of issue.

New Santos Shares will not receive the dividend of $0.15 per Santos Share announced by Santos on 19 August 2011 but the Scheme Consideration has been increased from 0.06803 New Santos Shares per ESG Share to 0.06881 New Santos Shares per ESG Share as a result of the dividend declared by Santos.

The rights and liabilities attaching to New Santos Shares will be the same as those attaching to existing Santos Shares and are set out in the Santos constitution and, in certain circumstances, are regulated by the Corporations Act, Listing Rules, ASX Settlement Operating Rules and general law. Under section 140(1) of the Corporations Act, the Santos constitution has effect as a contract between Santos and each member of Santos and between a member of Santos and each other member. Accordingly, if New Santos Shares are issued to you pursuant to the Scheme, you will, as a result, become liable to comply with the Santos constitution. A copy of Santos' constitution is available at www.santos.com

A summary of the significant rights and liabilities attaching to New Santos Shares is set out below. This summary is not exhaustive and is not a definitive statement of the rights and liabilities of Santos shareholders. Such rights and liabilities involve complex questions of law arising from the interaction of the Santos constitution, Corporations Act, Listing Rules, ASX Settlement Operating Rules and general law. Santos shareholders should seek their own independent advice when trying to establish their rights and liabilities in specific circumstances.

Voting	Subject to the Santos constitution and to any rights/restrictions attached to any shares, at meetingsof Santos shareholders:
	• each Santos shareholder entitled to vote may vote in person, by proxy or attorney or, where theSantos shareholder is a body corporate, by proxy, attorney or representative;
	• on a show of hands, every person present who is a Santos shareholder or a proxy, attorney orrepresentative of a Santos shareholder has one vote; and
	• on a poll, every person present who is a Santos shareholder or proxy, attorney or representativeof a Santos shareholder has one vote for each Santos Share that person holds or represents (asthe case may be).
General meetings andnotices	Each Santos shareholder is entitled to receive notice of, and, if they are entitled to vote at themeeting, attend and vote at, general meetings of Santos.
Dividends	Santos Directors may pay interim and final dividends in accordance with the Corporations Act andListing Rules.
	The payment of a dividend does not require confirmation by a general meeting of Santos.
Issue of further shares	Subject to the Santos constitution, the Listing Rules and the Corporations Act, Santos Directorshave the right to issue shares (including preference shares) or to grant options to such personsat such times and on such terms and conditions and having attached to them such rights or suchrestrictions, as the Santos Directors think fit.
Transfer of Santos Shares	Subject to the Santos constitution and the Corporations Act, Santos Shares are freely transferable.
	Santos Directors may decline to register a transfer of Santos Shares if the registration of the transfermay breach a law of Australia or an employee share plan, where the transfer is not in registrableform or if the Listing Rules or terms of issue of the share permit or require registration of thetransfer to be declined.
Small holdings	Santos may give written notice to a Santos shareholder who holds less than a marketable parcel (asdefined in the Listing Rules) of Santos Shares that it intends to sell the Santos shareholder's SantosShares. If the Santos shareholder does not give notice in writing to Santos before the time specifiedin the notice (to be no earlier than six weeks after the notice was sent), Santos may sell the Santosshareholder's Santos Shares and remit the proceeds of sale to the Santos shareholder in accordancewith the Santos constitution.
Winding up	If Santos is wound up, the liquidator may (with the sanction of a special resolution) divide among theSantos shareholders the whole or any part of the property of Santos and may determine how thedivision is to be carried out as between the shareholders or different classes of shareholders.
Alteration of capital	Santos may reduce or otherwise alter its capital including buying back its shares in any mannerauthorised or permitted by the Corporations Act and Listing Rules.
Variation of rights	If at any time the share capital of Santos is divided into different classes of shares, the rightsattached to any class may (unless otherwise provided by the terms of issue of the shares of thatclass), whether or not Santos is being wound up, be varied or abrogated in any way with the consentin writing of the holders of at least 75% of the issued shares of that class, or with the sanction ofa special resolution of the holders of the shares in that class.
Proportional takeoverapproval	If a proportional takeover bid for Santos shares is made, Santos Directors must ensure thata resolution to approve the bid is voted on prior to the 14th day before the last day of the bid period.Any person, excluding the bidder or any associate of the bidder, who held bid class securities asat the end of the day on which the first offer under the bid was made is entitled to vote on theresolution. The resolution will be passed if more than 50% of the votes are cast in favour of theresolution. If no such resolution is considered as at the end of the day prior to the 14th day beforethe last day of the bid period, a resolution approving the bid is taken to have been passed.
	The proportional takeover provisions in the Santos constitution will expire on the day three yearsfollowing the date of adoption, but may be renewed by a resolution of Santos shareholders.The proportional takeover provisions in the Santos constitution were last adopted by Santosshareholders at the annual general meeting held on 6 May 2009.
Amendments to theSantos constitution	The Santos constitution can only be amended by special resolution passed by at least 75% of Santosshareholders present and voting at a general meeting of Santos.

3.13 Public information available for inspection

As a company listed on ASX and a "disclosing entity" under the Corporations Act, Santos is subject to regular reporting and disclosure obligations. Broadly, these require Santos to announce price sensitive information as soon as it becomes aware of the information, subject to exceptions for certain confidential information. Santos' recent announcements are available from www.asx.com.au Further announcements concerning developments at Santos will continue to be made available on this website after the date of this Scheme Booklet.

Santos is required to prepare and lodge with ASIC and ASX both annual and half yearly financial statements accompanied by a statement and report from Santos Directors and an audit or review report. Santos also lodges quarterly activity reports with ASX.

Copies of these and other documents lodged with ASIC and ASX may be obtained from an ASIC office and are accessible from ASX's website at www.asx.com.au respectively. Copies of these documents will also be made available free of charge on a request in writing at any time before the Implementation Date to Santos' Company Secretary at Santos Limited, Ground Floor, Santos Centre, 60 Flinders Street, Adelaide, South Australia 5000.

4.1 Introduction

Overview

ESG was formed in August 2000 to explore for, develop and produce conventional petroleum in eastern Australia. ESG was listed on ASX in February 2001 with a market capitalisation of $16 million. At the time of this Scheme Booklet, ESG has a market capitalisation of approximately $795 million.

Since listing, ESG has made significant progress and has achieved several significant milestones including:

• taking over operatorship of the Narrabri Gas Project in 2004 and then, in 2007, becoming solely focussed on CSG exploration by divesting conventional petroleum exploration acreage;
• growing its CSG reserves base to over 1,818 PJ of net 3P reserves as at 31 December 2009;
• opening the Brisbane offices in 2007 and expansion of Narrabri, New South Wales in March 2009 to include the Narrabri operations centre resulting in an increase in employees to 84; and
• increasing its share price four and a half times from $0.20 per ESG Share when ESG listed, to the Scheme Consideration at the date of the Announcement, representing $0.90 per ESG Share, representing an average annual compound growth rate of 15.4%.

ESG's largest shareholder is Santos, which in July 2009 acquired a 19.99% interest in ESG from Hillgrove Resources Limited. At the same time, Santos acquired a 35% interest in the Narrabri Gas Project. These interests together with Santos' current shareholding in ESG give Santos an approximate 49% direct and indirect interest in the Narrabri Gas Project.

Currently, ESG operates eight CSG licence areas in the Gunnedah and Southern Bowen Basins, including the Narrabri Gas Project. In addition, ESG operates the Wilga Park power station, which utilises pilot production gas from the Narrabri Gas Project.

Description of assets

Particulars of ESG's licences are set out below.

ESG licence interests
Basin(s)	State	Licence	Area	(km²) ESG interest	Comment
Gunnedah	NSW	PPL 3	26	65% of all petroleum rights	Narrabri CSG Project
		PAL 2	267	100% conventional rights	Overriding royalties exist over this
		PEL 238	7,920	65% of all petroleum rights	acreage of:
					• CSG: 0.855%
					• Conventional: 0.57% otherthan PPL3
Gunnedah	NSW	PEL 433	7,678	65% CSG rights
		PEL 434	7,736
Bowen/Surat	NSW	PEL 6	5,165	77.5%-80% CSG rights	Overriding royalties exist over this
and Northern		PEL 427	7,014	50% CSG rights	acreage of 1.75%-3.5%
Gunnedah		PEL 428	6,021	40% CSG rights
Arckaringa Basin	SA	PEL 117	9,547	Potential to earn 25% CSG rights	Potential to earn further 25% CSG
		PEL 121	9,848		rights
		PEL 122	8,527
Total			69,749

Profile of ESG 4 Profile of ESG

Location of permits and transmission infrastructure

Source: ESG

Major assets

ESG's main activity, the Narrabri Gas Project, is centred on PEL 238, PAL 2 and PPL 3, adjacent to the township of Narrabri, New South Wales. ESG holds the rights to 100% of conventional petroleum production from PEL 238 and PAL 2 (65% in the case of PPL 3) and 65% of CSG production. ESG is the operator of the Narrabri Gas Project. PEL 238, PAL 2 and PPL 3 cover 8,213 km2 of the Gunnedah Basin.

Most of ESG's certified reserves and resources are located within PEL 238. Following receipt of Netherland, Sewell & Associates, Inc.'s report dated 31 December 2009, in January 2010, ESG announced an upgrade of its independently certified 2P and 3P CSG reserves for PEL 238, which increased by 152% to 1,520PJ and 43% to 2,797PJ respectively. The gas reserves estimate took into account flow testing of the multi-lateral production pilots at Bibblewindi and Bibblewindi West, and results from coreholes and appraisal vertical wells drilled across the Dewhurst areas.

Production testing is currently underway at six locations:

• the Bohena pilot comprises three vertical, fracture-stimulated wells which have been operating since 2006. They are located 29.5 km from Narrabri;
• the Bibblewindi 9 spot production pilot is located approximately 36 km from Narrabri and comprises nine vertical, fracture-stimulated production wells that have been on line since early 2007;
• the Bibblewindi multi-lateral pilot first commenced operation in April-May 2009, and comprises two adjacent twinlateral pilots, each of which incorporates three vertical production wells and two shield lateral wells. Following recent initiatives to increase the dewatering capacity of the pilot, to accelerate depressurisation and consequently ramp up gas production from the innermost lateral wells, the Bibblewindi multi-lateral pilot is producing gas at a rate of 1.3 MMscfd;
• the Bibblewindi West pilot incorporates three lateral wells (all drilled from a single location) and four vertical production wells. The pilot was first brought on line in November 2009 and quickly ramped up to achieve a gas production rate of 2.0 MMscfd, which subsequently increased last year when the pilot achieved a peak gas production rate in excess of 2.4 MMscfd. The pilot is currently operating reliably with a gas production rate of around 1.5 MMscfd;
• the Tintsfield pilot is located around 8 km southwest of Narrabri and is the first pilot to target the Hoskissons coal seam. Operations commenced in April 2011 following the completion of water handling facilities and dewatering of the pilot is currently taking place; and

4 Profile of ESG

• the Dewhurst pilot is located 25 km south of Narrabri. The pilot incorporates three parallel lateral wells within the Bohena coal seam. Each lateral well intersects a dedicated vertical production well. Brief production tests have been performed on two of the lateral wells to assess production characteristics and to design water handling facilities which are currently in the design stage.

Since the end of 2009, operations at Narrabri have been adversely affected by above-average and persistent rainfall and flooding. As a result, certain aspects of ESG's work program for 2010 experienced significant delays, including the commencement of the Tintsfield lateral pilot. In addition to the gradual production start at Tintsfield, delays in New South Wales Government drilling approvals have meant that ESG has not been able to carry out routine exploratory work. As disclosed on ASX, these factors have prevented further reserve upgrades in 2011.

Commercialisation of the Narrabri Gas Project

The main focus of ESG's activities has been the development and commercialisation of the Narrabri Gas Project in which it has a 65% interest and is operator. Commercialisation of the Narrabri Gas Project has been focussed on the following opportunities:

• Delivery into domestic NSW gas market
  • to mitigate the need for venting or flaring, gas produced during pilot production activities is transported to the Wilga Park power station, which has a 10 mega watt capacity and which delivers electricity output to Country Energy Limited (arrangements have been agreed for its assignment to Origin Energy Limited following the acquisition of Country Energy Limited's retail business).
• Domestic market opportunities
  • the investigation of the sale of gas to proposed new gas-fired generators in New South Wales as well as to other domestic market opportunities. To this end, ESG entered into a memorandum of understanding (MoU) with ERM Power Limited for the supply of gas from Narrabri to a 600 mega watt power station approved for development at Wellington, around 300 km south of Narrabri. The MoU provides for supply of up to 20 PJ of gas per year over a 20-year period. Further pipeline infrastructure development or expansions are required to take advantage of such opportunities.
• New markets

Scheme Booklet 50

• ESG has been pursuing other large-scale development opportunities, such as its own LNG export facility at the Port of Newcastle and supply of gas into Queensland LNG projects;
• in May 2010, ESG entered into a MoU with Hitachi Limited (Hitachi), Toyo Engineering Corporation (Toyo) and Chart Energy & Chemicals Inc (Chart) to jointly investigate the potential for development of a mid-scale LNG project in Newcastle, New South

Wales using proprietary mid-scale technology provided by Chart. ESG subsequently acquired a 24 hectare parcel of land on Kooragang Island, Newcastle, in April 2011, for $25 million as a site for the a proposed 1.0 mtpa LNG export project, with capacity for potential expansion to around 4.0 mtpa. In October 2010, ESG entered into a MoU with Marubeni Corporation (Marubeni)whereby Marubeni will assist with marketing of LNG from the project with the potential for equity involvement by Marubeni and LNG buyers; and

– in February 2011, ESG appointed Hitachi and Toyo, together with Chart, to undertake front end engineering and design for the project.

New South Wales regulatory issues

The term of PEL 238 expired on 2 August 2011 and as at the date of this Scheme Booklet, it has not yet been renewed. ESG made an application for its renewal within the prescribed time under the Petroleum (Onshore) Act 1991 (New South Wales) and has complied with all requirements under that act for renewal of the licence. As part of the renewal application, ESG submitted a four year work plan. ESG anticipates that PEL 238 will be renewed in due course and notes that the anticipated timing for the renewal of PEL 238 is in line with previous licence renewals in the New South Wales resources sector. The Petroleum (Onshore) Act 1991 (New South Wales) clearly states that PEL 238 will continue to be in force past its expiry date, pending approval of the renewal.

In June 2011, ESG met with senior representatives of the New South Wales Department of Trade and Investment, Regional Infrastructure and Services and the Department of Planning in relation to approvals for routine exploration activity that had been anticipated for several weeks. The time required for these approvals remains unclear.

In recent months, local authorities, both within ESG's sphere of operations and throughout New South Wales, have begun taking a less facilitative approach to CSG activities. While effective communication of the facts about CSG operations can and does address public concerns, the resources and time required to achieve satisfactory outcomes are difficult to predict and, in any case, are more onerous on CSG businesses like ESG than was experienced in previous years.

Profile of ESG 4 Profile of ESG

4.2 Directors of ESG

The Directors in office at the date of this Scheme Booklet are:

Name	Office Held
The Hon.John Duncan Anderson	Chairman
David Andrew Casey	Managing Director
Dr David William King	Non-Executive Director
Alexander Sundich	Non-Executive Director
Christopher Alan Sadler	Non-Executive Director
Peter Barry Lansom	Executive Director – Operations

4.3 ESG securities and substantial shareholders

(a) ESG's issued securities

As at the date of this Scheme Booklet, ESG's issued securities consisted of:

• 992,317,041 fully paid ordinary shares quoted on ASX; and
• 34,230,000 fully paid ordinary shares unquoted.

(b) Substantial shareholders

The table below is an extract from ESG's register of members as at the date of this Scheme Booklet, showing the number of securities in which Santos and TRUenergy Investments each has a Relevant Interest and the voting power represented by those securities.

Shareholder	Number ofESG Shares	Votingpower
Santos	214,768,386	20.92%
TRUenergy Investments	38,546,256	3.76%

As a result of the memorandum of understanding entered into on 18 July 2011 between Santos and TRUenergy Holdings, Santos, TRUenergy Holdings and TRUenergy Investments are associates in respect of ESG. Accordingly, the total voting power of each of Santos and TRUenergy Investments is currently 24.68%.

For further details, refer to sections 9 and 10.4.

4.4 Recent financial position and performance of ESG

(a) Annual and half year reports

The annual financial report from ESG for the year ended 30 June 2010 was lodged with ASIC on 16 September 2010 and provided to ASX on that date. The half year report for ESG for the six months ended 31 December 2010 was provided to ASX on 8 March 2011.

ESG released to ASX its financial results for the 12 months ended 30 June 2011 on 14 September 2011. A copy of the results is available on ESG's website and is made available for inspection from ESG's registered office.

(b) Material changes to ESG's financial position

The last financial statements of ESG that were laid before a general meeting of ESG Shareholders are the financial statements for the year ended 30 June 2010. To the knowledge of the ESG Directors, the financial position of ESG has not materially changed since 30 June 2010 except that:

• in August 2010, ESG completed an equity capital raising of $100 million, providing a net $96.8 million after transaction costs;
• ESG's property plant and equipment has increased in value by $43 million as a consequence of the acquisition of a property on Kooragang Island, Newcastle in April 2011, additional pipeline and expansion of the Wilga Park power station generators;
• the capitalised exploration and evaluation expenditure associated with the development of ESG's tenements during the financial year ended 30 June 2011 increased by $36 million;
• cash at bank during the financial year ended 30 June 2011 increased by $32 million; and
• a $10.95 million loan was entered into on 15 June 2011 repayable in June 2012.

4 Profile of ESG

(c) Recent ESG Share price performance in the three months before and including the Announcement

ESG Share price - 3 months prior to Announcement

The highest recorded trading price at the close of trade of an ESG Share on ASX in the three months before 18 July 2011 was $0.790 on 28 April 2011.

The lowest recorded trading price at the close of trade of an ESG Share on ASX in the last three months before 18 July 2011 was $0.565 on 27 June 2011.

The latest recorded trading price at the close of trade of ESG Shares on ASX before 18 July 2011 was $0.595.

The trading price range at the close of trade of ESG Shares since the Announcement to the last trading date before the date of this Scheme Booklet was $0.66 to $0.90.

The latest recorded trading price of ESG Shares on ASX before the date of this Scheme Booklet was $0.775.

4.5 Risks relating to ESG's business

There are existing risks relating to ESG's business and investment in ESG that will be relevant to ESG Shareholders if the Scheme does not become Effective. These risks include, but are not limited to, the following:

• the possibility of the ESG Share price falling;

Scheme Booklet 52

• the general risks referred to in section 3.6 associated with investments in listed companies on ASX and companies involved in the exploration, development and production of oil and gas;
• the inability to deal with and satisfy the technical and commercial risks associated with the commercialisation of the Narrabri Gas Project and the development of an LNG project in Newcastle;
• the inability to secure, or delays in securing, approvals to continue exploration activity or to develop the Narrabri Gas Project or the Newcastle LNG project;
• the ability to access debt and equity funding on acceptable terms for the development of ESG's business of the Narrabri Gas Project and the Newcastle LNG project; and
• the possibility of PEL 238 not being renewed. New South Wales PELs are granted subject to minimum work and expenditure commitments. The first two years of a licence period are subject to a fixed work program. Reviews are completed on a biannual basis and further, fixed two year work and expenditure program agreed. To keep PELs in good standing, substantial compliance with work and expenditure commitments is required. ESG has comfortably exceeded work and expenditure commitments applicable for PEL 238.

Profile of ESG 4 Profile of ESG

4.6 Continuous disclosure

As a company listed on ASX and a "disclosing entity" under the Corporations Act, ESG is subject to regular reporting and disclosure obligations. Broadly, these require ESG to announce price sensitive information as soon as it becomes aware of the information, subject to exceptions for certain confidential information. ESG's recent announcements are available from www.asx.com.au Further announcements concerning ESG will continue to be made available on this website after the date of this Scheme Booklet.

ESG is required to prepare and lodge with ASIC and ASX both annual and half year financial statements accompanied by a statement and report from ESG's Directors and an audit or review report. ESG also lodges quarterly activity reports with ASX.

Copies of these and other documents lodged with ASIC and ASX may be obtained from an ASIC office and are accessible from ASX's website at www.asx.com.au Copies of these documents will also be made available free of charge on a request in writing at any time before the Implementation Date to ESG's Company Secretary at Level 7, 51 Pitt Street, Sydney, New South Wales 2000.

5.1 Rationale for the Scheme

The Scheme and proposed sale of assets to TRUenergy described in section 5.2(b) will result in Santos assuming operatorship and owning 80% of the petroleum permits which it currently holds in joint venture with ESG (Santos 35%, ESG 65%). TRUenergy will own the remaining 20% of such permits.

Santos is one of Australia's largest domestic natural gas producers and has a long track record of working with local communities to safely and sustainably produce natural gas. In particular, Santos has extensive experience in successfully commercialising and developing CSG projects in Australia, similar to ESG's Narrabri Gas Project.

The Acquisition will build on Santos' existing interests in the Gunnedah Basin, and following implementation of the Scheme and the TRU On-Sale, Santos will have the largest natural gas reserves position in New South Wales, with 1,216 PJ of 2P reserves and 2,238 PJ of 3P reserves. Consolidation of ESG's resources with those of Santos will reduce the commercialisation, development and financing risks associated with the development of the Narrabri Gas Project founded principally on the PEL 238 permit area.

5.2 Intentions for the Merged Group

(a) Overview

This section sets out Santos' intentions for ESG, on the basis of facts and information concerning ESG known to Santos and the general business environment as at the time of preparing this Scheme Booklet, in relation to the following:

• the continuation of the business of ESG;
• any major changes to the business of ESG and any redeployment of the fixed assets of ESG; and
• the future employment of the present employees of ESG.

Decisions on these matters will only be reached in light of all material facts and circumstances as these become known. Accordingly, the statements set out in this section 5.2 are statements of intentions only which may vary as new information becomes available or circumstances change over time.

(b) Proposed sale of certain interests and assets to TRUenergy

Santos has entered into an agreement with TRUenergy and TRUenergy Holdings pursuant to which, following implementation of the Scheme, TRUenergy will acquire a 20% interest in the underlying ESG permits presently held in joint venture with Santos (ESG 65%, Santos 35%). TRUenergy Holdings is one of Australia's largest integrated energy companies and and represents an appropriate

partner to develop ESG's permits in the Gunnedah Basin in joint venture with Santos.

As part of the TRU On-Sale, Santos (80%) and TRUenergy (20%) will form an unincorporated joint venture for the exploration and exploitation of natural gas (and other hydrocarbons) from the permit areas currently held in joint venture between ESG and Santos, including PEL 238. These permit areas are located in northern New South Wales, and activities on them are currently at the pre-development stage. Santos will be the operator under the joint venture. Joint venture costs, including project development costs, will be funded by Santos and TRUenergy in proportion to their joint venture interests. While each of Santos and TRUenergy will have the right and obligation to separately take and dispose of their share of joint venture production, Santos will co-ordinate the marketing of that production, on behalf of the joint venture participants.

The TRU On-Sale involves TRUenergy acquiring approximately 30.8% of the ESG Group's interests in the following assets:

• New South Wales permits PEL 238, PAL 2 and PPL 3, and any property associated with the area covered by PEL 238, PAL 2 and PPL 3 which forms part of the joint property under the PEL 238 joint operating agreement;
• New South Wales permits PEL 433 and PEL 434 and any property associated with the area covered by PEL 433 and PEL 434 which forms part of the joint property under the PEL 433 and PEL 434 joint operating agreements;
• certain freehold estates;
• a shareholding in Orion Petroleum Limited;
• New South Wales permits PEL 6, PEL 427 and PEL 428 and associated rights and agreements; and
• South Australian permits PEL 117, PEL 121 and PEL 122 and associated rights and agreements.

The consideration payable for the assets described above is approximately $284 million which represents approximately 30.8% of the value of ESG implied by the value of Scheme Consideration on 15 July 2011, being the Business Day before the Scheme was announced. This is subject to adjustment, based on the value of assets and liabilities of the ESG group.

Completion of the sale to TRUenergy is conditional on:

• the Scheme becoming Effective; and
• FIRB having no objection to the purchase.

The FIRB condition was satisfied on 6 September 2011.

The Independent Expert has concluded that the TRU On-Sale will be completed at a cash price equating to $0.90 per ESG Share, which falls within the Independent Expert's estimate of the full underlying value of ESG and is accordingly on an arm's length basis.

Completion of the sale is expected to occur on the second Business Day after the Implementation Date.

(c) Intentions regarding assets and operations

It is Santos' intention to continue ESG's operations in the Narrabri Gas Project and to seek to identify ways in which Santos can use its extensive resources and expertise to improve and further develop ESG's business. Following implementation of the Scheme, Santos will conduct a detailed review of ESG's business to evaluate its performance and prospects and to allow it to develop its detailed plans for the management of the ESG assets.

Subject to the results of the abovementioned review, ESG's business will become part of Santos' Eastern Australian Business Unit portfolio. Santos has specific expertise in the development and operation of CSG and conventional gas projects, including in the Gunnedah Basin, New South Wales. Santos intends to apply its expertise and, where appropriate, share infrastructure across the Santos operated CSG projects in the Gunnedah Basin, New South Wales to enhance ESG's business outcomes.

(d) Future employment of present ESG Group employees

Following implementation of the Scheme, Santos will undertake a detailed review of the combined operations. This review will include reviews of human resource requirements to determine the best way to utilise ESG's employees for the benefit of the combined business.

Most of the support and managerial functions of Santos' Gunnedah Basin CSG projects are based in Brisbane, Queensland. ESG's technical activities are managed from Brisbane, Queensland and these activities will be appropriately integrated into Santos' Eastern Australian Business Unit operations. Santos will endeavour to maintain the employment of ESG's technical and operations staff (subject to undertaking a review of their skills and experience).

Without having conducted the abovementioned review, Santos cannot formulate a firm view in relation to employee numbers. Santos considers it will require a number of ESG corporate office employees. Any reduction in employee levels would be achieved through employees being made redundant in compliance with all applicable regulatory requirements and their contractual rights. In cases of redundancy, career transition support would be provided to affected employees. Where appropriate, Santos will seek to offer ESG employees roles within Santos.

(e) ESG board

Following the Second Court Date, Santos will be entitled to have three Santos nominees appointed to the ESG board.

Immediately following the Implementation Date, Santos proposes to reconstitute the ESG board by replacing the existing board with a board comprising all Santos' nominees. Those nominees have not yet been identified. Final decisions on the selection of nominees will be made in light of the circumstances at the relevant time.

(f) Stock exchange listings

Santos intends to cause ESG to be removed from the official list of ASX and International OTCQX following implementation of the Scheme.

(g) Intentions generally

Other than as set out in this section 5.2 and elsewhere in this Scheme Booklet, it is Santos' intention to continue the business of ESG utilising Santos expertise to improve and further develop it.

5.3 Corporate governance and dividend policies

The corporate governance policies and practices of the Merged Group will be the same as Santos' existing policies and practices, as set out in section 3.4.

Santos intends to maintain its current dividend policy as outlined in section 3.10.

5.4 Risks relating to the Merged Group

The following risk factors are in addition to those specific to ESG, as set out in section 4.5, and the Santos Group, as set out in section 3.6:

• Key personnel

The success and growth strategy for Santos depends on its ability to attract and retain key management and operating personnel. Both Santos and ESG have qualified and experienced teams. The loss of any key members of these teams, or Santos' inability to attract the requisite personnel with suitable experience, could have an adverse effect on Santos and the performance of the Merged Group. There is no assurance as to the continued availability of any such key personnel.

• Integration

There are integration risks associated with a merger. The risk exists that any integration may take longer than expected or that the extraction of efficiencies does not occur or may incur additional costs, which would impact the Merged Group's financial performance.

• Quotation and trading of New Santos Shares

Santos will issue a significant number of New Santos Shares under the Scheme. Should ESG Shareholders, who are recipients of these New Santos Shares, or existing Santos Shareholders holding Santos Shares, sell

significant quantities of them on-market soon after the Scheme, there may be an adverse effect on the market price of Santos Shares in the short term.

An application will be made to ASX for official quotation of the New Santos Shares other than those New Santos Shares issued subject to the EIP as set out in section 10.2. While Santos has no basis for expecting quotation will not be granted, it is not guaranteed nor automatic on such applications.

5.5 Pro forma financial information

(a) Financial profile of the Merged Group

The Merged Group pro forma historical financial information provided in this Scheme Booklet comprises a pro forma consolidated statement of financial position as at 31 December 2010 which has been prepared using:

• the Santos consolidated historical statement of financial position as at 31 December 2010, as extracted from the Santos consolidated financial report for the year then ended;
• the ESG consolidated historical statement of financial position as at 31 December 2010, as extracted from the ESG consolidated interim financial report for the half year then ended; and
• relevant acquisition accounting and other adjustments required to present the pro forma consolidated statement of financial position of the Merged Group as if the Scheme had been implemented and the TRU Acquisition and the TRU On-Sale had taken place on 31 December 2010.

(b) Basis of presentation

The Merged Group pro forma historical financial information is provided for illustrative purposes and is prepared on the assumption that the Scheme had been implemented, and the TRU Acquisition and the TRU On-Sale had taken place, on 31 December 2010.

The pro forma consolidated statement of financial position is based on Santos' and ESG's respective financial statements as at 31 December 2010 which were audited by Ernst & Young and reviewed by PKF respectively. Copies of these financial statements can be found on the respective websites, being www.santos.com and www.easternstar.com.au

The financial statements of Santos and ESG were prepared in accordance with Australian Accounting Standards.

The pro forma historical financial information does not incorporate any actual transactions that have occurred subsequent to 31 December 2010, including the sell-down by Santos of a 15% interest in GLNG during the six months ended 30 June 2011. The $348 million before-tax gain on the sale of non-current assets ($246 million after tax) that has been disclosed in Santos' interim financial report for the half year ended 30 June 2011 (which is available from the Santos website www.santos.com) is largely attributable to this transaction.

The Merged Group pro forma historical financial information has been prepared in accordance with the recognition and measurement principles of Australian Accounting Standards, and in accordance with Santos' accounting policies, as set out in the annual financial report of Santos for the year ended 31 December 2010.

Following a review by Santos of the ESG financial report for the year ended 30 June 2010, it was determined that the accounting policies of Santos and ESG differ in some respects and therefore adjustments have been made to the Merged Group pro forma historical financial information to align accounting policies to those of Santos.

The Merged Group pro forma historical financial information has been presented in abbreviated form insofar as it does not include all of the presentation and disclosure requirements of Australian Accounting Standards and other mandatory professional reporting requirements applicable to general purpose financial reports in Australia.

Ernst & Young has provided an investigating accountant's report on the Merged Group pro forma historical financial information which has been included in section 8. ESG Shareholders should note the comments made in relation to the scope and limitations of the report.

(c) Consolidated statement of financial position of the Merged Group

	Santos31 Dec 2010	ESG31 Dec 2010	Pro formaadjustments	Pro forma31 Dec 2010
	$million	$million	$million	$million
Current assets
Cash and cash equivalents	4,319	100	250	4,669
Trade and other receivables	665	3	–	668
Inventories	261	–	–	261
Other financial assets	4	2	–	6
Tax receivable	22	–	–	22
Total current assets	5,271	105	250	5,626
Non-current assets
Receivables	21	–	–	21
Investment in an associate	208	–	(208)	–
Other financial assets	138	3	–	141
Exploration and evaluation assets	962	136	412	1,510
Oil and gas assets	6,914	–	–	6,914
Other land, buildings, plant andequipment	201	20	–	221
Intangible assets	–	10	(10)	–
Deferred tax assets	54	–	–	54
Total non-current assets	8,498	169	194	8,861
Total assets	13,769	274	444	14,487
Current liabilities
Trade and other payables	760	2	–	762
Deferred income	90	–	–	90
Interest-bearing loans and borrowings	370	–	–	370
Current tax liabilities	201	–	–	201
Provisions	99	1	–	100
Other financial liabilities	95	–	–	95
Total current liabilities	1,615	3	–	1,618
Non-current liabilities
Deferred income	13	–	–	13
Interest-bearing loans and borrowings	2,787	–	–	2,787
Deferred tax liabilities	843	–	–	843
Provisions	891	2	17	910
Other financial liabilities	17	–	–	17
Total non-current liabilities	4,551	2	17	4,570
Total liabilities	6,166	5	17	6,188
Net assets	7,603	269	427	8,299
Equity
Issued capital	5,514	316	380	6,210
Reserves	(330)	8	(8)	(330)
Retained earnings	2,421	(55)	55	2,421
Equity attributable to owners of Santos	7,605	269	427	8,301
Non-controlling interests	(2)	–	–	(2)
Total equity	7,603	269	427	8,299

The pro forma historical financial position reflects the historical financial positions of Santos and ESG at 31 December 2010 adjusted for the following pro forma transactions and assumptions:

• 1. The Scheme, based on the Scheme Consideration
• i. Scheme Consideration

Consideration for acquiring the 773,232,399 ESG Shares that are not already owned by Santos or TRUenergy Investments will be the issue of approximately 53,206,121 New Santos Shares. The pro forma information reflects the issue of these New Santos Shares at a value of $13.08 per share, representing a total consideration of $695.9 million and which equates to a value of $0.90 per ESG Share. This amount has been shown as an increase to issued capital.

The actual value of this consideration will fluctuate as the Santos Share price fluctuates during the period through to the Implementation Date.

The potential transaction costs to ESG of $10.5 million and to Santos of $7.0 million have not been reflected in the proforma adjustments and transactions set out above. If the transaction had occured at 31 December 2010, the transaction costs would decrease each of the cash and cash equivalents and retained earnings of the Merged Group by $17.5 million.

ii. Accounting for the Scheme

The pro forma historical financial information assumes that the Scheme is treated as a business combination under AASB 3 Business Combinations. This accounting treatment will be reassessed following a detailed assessment of the operations of ESG at the completion of the Scheme.

In applying the requirements of AASB 3, the following assumptions have been made:

• contingent liabilities previously disclosed in the ESG financial statements of $9.8 million have been recognised as provisions upon acquisition;

• additional restoration provisions of $6.7 million have been recognised to align ESG's accounting policies with Santos' accounting policies;

• the total fair value of the ESG assets acquired and liabilities assumed (including contingent liabilities) is equal to the fair value of the consideration paid. This assumption will be reassessed following the completion of the Scheme and any difference between the fair value of the Scheme Consideration and the fair value of the net assets acquired will be accounted for as goodwill or a bargain purchase as appropriate;

• the fair value of individual ESG assets acquired and liabilities assumed (including contingent liabilities), other than intangible assets and exploration and evaluation assets, is equal to their carrying amounts as at 31 December 2010 adjusted for differences in accounting policies applied. The fair value of intangible assets has been assumed to be nil. The fair value of ESG exploration and evaluation assets acquired has been assumed to be equal to the sum of:

  • the fair value of the consideration paid of $695.9 million; plus
  • the carrying value of Santos' existing investment in ESG of $207.5 million; plus
  • $34.7 million paid to acquire the shares in ESG held by TRUenergy Investments; less
  • the carrying value of the ESG net assets as at 31 December 2010 of $268.5 million, adjusted for changes to the amounts recognised for contingent liabilities ($9.8 million), restoration provisions ($6.7 million) and intangible assets ($9.6 million) noted above.

This has resulted in an increase to exploration and evaluation assets of $695.7 million. Following the completion of the Scheme, the Santos Directors will undertake a comprehensive assessment of the fair values of assets acquired and liabilities assumed at acquisition date and record the asset and liability fair values accordingly;

• Santos holds an existing investment in ESG of 214,768,386 shares which was recorded at a value of $207.5 million as at 31 December 2010. AASB 3 requires this existing investment to be remeasured to its fair value at the date of the acquisition of the additional interest, and any resulting gain or loss is to be recognised in the income statement. For the purposes of the pro forma historical financial information, the fair value of Santos' existing investment in ESG has been assumed to be its carrying value as at 31 December 2010. This will need to be adjusted following the completion of the Scheme once the fair value of the ESG net assets acquired is determined, which may result in a gain or loss being recognised; and
• ESG pre-acquisition equity balances, consisting of issued capital of $315.8 million, reserves of $8.0 million and accumulated losses of $55.3 million, have been eliminated.

Scheme Booklet 58

iii. Tax bases

For the purposes of the pro forma historical financial information, it has been assumed that the tax bases of the assets acquired and the liabilities assumed are equal to the accounting balances allocated as per (ii) above. As a result of this, no deferred tax assets or liabilities are assumed to arise as a result of the Scheme. This position will be reassessed on completion of the Scheme, once a detailed assessment of the nature and valuation of the assets acquired and liabilities assumed has been undertaken. This could result in additional deferred tax liabilities being recognised, with a corresponding increase to goodwill.

2. The TRU Acquisition

The pro forma historical financial information reflects the acquisition by Santos of the 38,546,256 ESG Shares held by TRUenergy Investments for a cash payment of $34.7 million. The pro forma adjustments assume that the TRU Acquisition forms part of Santos' overall acquisition of ESG.

If the TRU Acquisition does not proceed, Santos would not pay cash of $34.7 million, but instead would issue 2,652,367 New Santos Shares, to acquire the 38,546,256 ESG Shares that are held by TRUenergy Investments. This would have the effect of increasing the 31 December 2010 pro forma cash and cash equivalents balance, and reducing the 31 December 2010 pro forma issued capital balance, by $34.7 million.

3. The TRU On-Sale

The pro forma historical financial information assumes the sale of certain assets, as described in section 5.2(b), to TRUenergy for cash consideration of $284.3 million. This transaction is reflected as an increase to cash and cash equivalents and a decrease to exploration and evaluation assets.

The tax base of the interest sold has been assumed to be equal to the consideration received and therefore no taxable gain or loss has been recorded in the pro forma adjustments. Depending on the final assessment of the fair value of the Scheme Consideration, the fair values attributed to ESG assets acquired and liabilities assumed, and the tax bases attributable to those assets and liabilities, the TRU On-Sale could result in a taxable gain or loss. This position will be reassessed on completion of the Scheme, once a detailed assessment of these matters has been undertaken.

5.6 Forecast earnings information

This Scheme Booklet does not include earnings forecasts in relation to Santos or the Merged Group. The Santos Board does not believe a reasonable basis exists to produce reliable and meaningful forecast earnings information, including for the following reasons:

• the volatility of oil and gas prices and its impact on the financial performance of the Merged Group; and
• the impact of foreign exchange volatility on the Merged Group's performance.

Accordingly, Santos believes that the inclusion of earnings forecasts for the Merged Group would be unduly speculative and potentially misleading.

5.7 Capital structure and ownership

If the Scheme is implemented and the TRU Acquisition is approved, Santos will issue approximately 53,206,121 additional shares to Scheme Shareholders which will comprise approximately 5.66% of Santos' diluted share capital.4

If the Scheme is implemented and the TRU Acquisition is not approved, Santos will issue approximately 55,858,488 additional shares to Scheme Shareholders which will comprise approximately 5.92% of Santos' diluted share capital.5

4 Estimated as at 20 September 2011 and subject to rounding.

19 September 2011

The Directors Eastern Star Gas Limited Level 7 51-57 Pitt Street SYDNEY NSW 2000

Dear Sirs

TAXATION IMPLICATIONS OF THE SANTOS SCHEME

This letter has been prepared at the request of the Board of Eastern Star Gas Limited (ESG) for inclusion in the Scheme Booklet relating to the acquisition of ESG shares by Santos Limited (Santos) by means of a scheme of arrangement (the Scheme).

This letter sets out our views on the main Australian income tax and capital gains tax (CGT) implications for shareholders of ESG who receive Santos shares under the Scheme.

This letter is limited to ESG shareholders who are residents in Australia for income tax purposes (excluding employee shareholders of ESG who will receive separate advice). We understand that TRUenergy and ineligible overseas shareholders will receive cash proceeds in relation to the scheme, and so this paper has not set out the tax implications associated with this transaction.

This letter provides advice of a general nature only and does not take into account the specific circumstances of any ESG shareholder. It is based on the Australian taxation laws operative at the date of this letter.

ESG shareholders should seek their own independent taxation advice regarding the income tax and CGT implications arising from participation in the Scheme having regard to the current taxation laws and their own individual circumstances.

1. Implications for ESG Shareholders

1.1. Scrip for scrip roll-over relief

The requirements for an ESG shareholder to elect for scrip for scrip roll-over relief (subdivision 124-M of the Income Tax Assessment Act 1997 (the 1997 Act)) should be met having regard to the Scheme.

Accordingly, Australian resident ESG shareholders should be eligible to choose scrip for scrip rollover relief to the extent that they receive Santos shares in exchange for ESG shares they own, if they would otherwise have made a capital gain from the exchange.

Tel: 61 2 9251 4100 | Fax: 61 2 9240 9821 | www.pkf.com.au PKF | ABN 83 236 985 726 Level 10, 1 Margaret Street | Sydney | New South Wales 2000 | Australia

The PKF East Coast Practice is a member of the PKF International Limited network of legally independent member firms. The PKF East Coast Practice is also a member of the PKF Australia Limited national network of legally independent firms each trading as PKF. PKF East Coast Practice has offices in NSW, Victoria and Brisbane. PKF East Coast Practice does not accept responsibility or liability for the actions or inactions on the part of any other individual member firm or firms.

Liability limited by a scheme approved under Professional Standards Legislation.

An ESG shareholder will not be required to make or lodge a formal election in order to choose scrip for scrip roll-over relief. The way in which an ESG shareholder's income tax return is prepared will be evidence of a scrip for scrip roll-over choice having been made.

1.2. Consequences of choosing scrip for scrip roll-over relief

The consequence of choosing scrip for scrip roll-over relief is that the capital gain made from the disposal of ESG shares is disregarded to the extent an ESG shareholder receives Santos shares. The capital gain is not disregarded to the extent that non-share consideration is received from the disposal.

The cost base of the Santos shares acquired is determined by attributing, on a reasonable basis, the cost base of the ESG shares disposed of, to those Santos shares.

An ESG shareholder who chooses scrip for scrip roll-over is deemed to have acquired the Santos shares at the same time the ESG shareholder acquired the original ESG shares. The deemed acquisition date may be relevant in determining the CGT consequences of any future disposal of Santos shares.

1.3. Consequences of not choosing roll-over relief

A capital gain will result for an ESG shareholder on the disposal of ESG shares if the consideration received exceeds the cost base of the ESG shares.

A capital loss will result for an ESG shareholder on the disposal of ESG shares where the consideration received is less than the reduced cost base of the ESG shares.

The cost base of each Santos share will be the market value of the Santos shares at the time of the disposal. This will be relevant for calculating any capital gain or capital loss on any future disposal of Santos shares.

The ESG shareholders will acquire the Santos shares at the time the shares are allotted under the Scheme.

Individuals, trusts and complying superannuation funds that have held their original ESG shares for at least 12 months prior to the disposal should be eligible to access the general CGT discount (50% for individuals and trusts, 33.3% for superannuation funds) when calculating any capital gain on the disposal. We note that where the shareholder is a trust, the CGT discount may flow through to beneficiaries of the trust, other than beneficiaries that are companies. Shareholders that are trustees should seek specific advice regarding the tax consequences of distributions to beneficiaries attributable to discount capital gains.

Companies are not eligible to access the general CGT discount.

1.4. Shares held as trading stock

If an Australian resident ESG shareholder holds ESG shares as trading stock (eg as a share trader) then the value of the consideration received will be treated as assessable income in the ESG shareholder's hands. No scrip for scrip roll-over relief will apply.

2. GST

No Australian GST is payable by the ESG shareholders in connection with the Scheme.

3. Stamp duty

No Australian stamp duty is payable by the ESG shareholders in connection with the Scheme.

4. Tax file number and Australian business number

If a tax file number (TFN) or Australian Business Number (ABN) is not provided to Santos, tax at the relevant rate (which is currently 46.5%) will be deducted from any unfranked component of dividends paid by Santos. However, these Santos shareholders would be entitled to claim an income tax credit/refund (as applicable) in their income tax returns in respect of the tax withheld.

5. Other matters

This letter does not constitute "financial product advice" for the purposes of the Corporations Act. We are not licensed to provide financial product advice. To the extent this letter includes information about a "financial product", taxation is only one of the matters that should be taken into account before making a decision.

Yours faithfully

Paul Lyon Partner - Tax Consulting

G R A N T S A M U E L & A S S O C I A T E S

L E V E L 1 9 G O V E R N O R M A C Q U A R I E T O W E R 1 F A R R E R P L A C E S Y D N E Y N S W 2 0 0 0 G P O B O X 4 3 0 1 S Y D N E Y N S W 2 0 0 1 T : + 6 1 2 9 3 2 4 4 2 1 1 / F : + 6 1 2 9 3 2 4 4 3 0 1 w w w . g r a n t s a m u e l . c o m . a u

22 September 2011

The Directors Eastern Star Gas Limited Level 7 51 Pitt Street Sydney NSW 2000

Dear Directors

1

Santos Proposal

1 Introduction

On 18 July 2011 Eastern Star Gas Limited ("Eastern Star") announced that it had entered into a scheme implementation deed with Santos Limited ("Santos") under which Santos will acquire all of the issued ordinary shares of Eastern Star other than the shares already held by Santos and TRUenergy Investments Pty Limited ("TRUenergy Investments"), through a scheme of arrangement pursuant to Section 411 of the Corporations Act, 2001 ("Corporations Act") ("the Scheme"). Under the Scheme, Eastern Star shareholders will receive 0.6881 Santos shares for every 10 Eastern Star shares1 .

Concurrent with the Scheme announcement, Santos announced that it had entered into arrangements with TRUenergy Holdings Pty Limited ("TRUenergy Holdings") pursuant to which:

• subject to the approval of Eastern Star shareholders not associated with Santos or TRUenergy Investments ("the non associated shareholders"), on the implementation of the Scheme Santos will acquire TRUenergy Investment's 3.76% interest in Eastern Star for a cash price of $0.90 per share ("the TRU Acquisition"). If shareholder approval is not obtained, the Eastern Star shares held by TRUenergy Investments will be acquired by Santos under the Scheme; and
• subject to implementation of the Scheme and approval under the Foreign Acquisitions and Takeovers Act, 1975 ("FIRB approval"), Santos will on-sell to a wholly owned subsidiary of TRUenergy Holdings a 20% interest in the Narrabri Gas Project and a 30.77% interest in other assets owned by Eastern Star for $284.3 million ("TRU On-Sale").

In this report, the Scheme and the TRU Acquisition are collectively referred to as "the Proposal" and TRUenergy Investments and TRUenergy Holdings and their respective subsidiaries are collectively referred to as "TRUenergy".

The directors of Eastern Star have engaged Grant Samuel & Associates Pty Limited ("Grant Samuel") to prepare an independent expert's report setting out whether, in its opinion:

• the Scheme is in the best interests of shareholders; and
• the TRU Acquisition is fair and reasonable having regard to the interests of the non associated shareholders,

and to state reasons for those opinions. A copy of the report (including this letter) will accompany the Notice of Meeting and Explanatory Memorandum ("Scheme Booklet") to be sent to shareholders by Eastern Star. This letter contains a summary of Grant Samuel's opinion and main conclusions.

In accordance with the scheme implementation deed, as Santos announced an interim dividend of $0.15 per share on 19 August 2011, the ratio of Santos shares for every 10 Eastern Star shares has been adjusted from 0.6803 to 0.6881.

2 Opinion on Scheme

In Grant Samuel's opinion, the Scheme is in the best interests of Eastern Star shareholders, in the absence of a superior proposal.

Grant Samuel's conclusion is based on a comparison of the value attributed to the consideration offered by Santos with the estimated underlying value of Eastern Star. However, current market conditions and economic climate mean that estimates of value are subject to considerable uncertainty. Since July 2011 there has been a material downturn in global equities markets and increased volatility reflecting heightened pessimism for global economic conditions. Although Asian demand for Australian resources is expected to continue to underpin Australian economic activity, Australia is not immune to changes in global market sentiment and economic conditions. Major Australian energy companies such as Santos are now subject to global gas supply and demand factors due to their developing LNG export projects.

It is too early to determine whether market stability is near with volatility showing little sign of abating. Accordingly, it is difficult to make estimates of key value drivers for Eastern Star (such as the demand and price for gas) or to attribute a market value to Santos shares with any degree of reliability. Any conclusions and value judgements need to the considered in this light.

Grant Samuel has estimated the full underlying value of Eastern Star, including a control premium, to be in the range $0.77-1.00 per share. However, the value of Eastern Star is subject to significant uncertainty as it depends on the success of the development of the Narrabri Gas Project which is currently at a relatively early stage of commercialisation. The valuation is also dependent on judgements regarding the recoverability of the resource, the timing and cost of the development and the price received for gas. Shareholders with different views on the future prospects for the Narrabri Gas Project could reasonably reach different conclusions on the value of Eastern Star.

Grant Samuel has attributed value to the scrip consideration under the Scheme in the range $0.79- 0.89 per share based on a market price for Santos shares in the range $11.50-13.00. This range compares to a closing Santos share price on 15 July 2011 of $13.23 and a volume weighted average price for the preceding month of $13.39. In the current market conditions it is not possible to attribute value to Santos shares with any reliability. The Santos share price has recently fallen below $11.50. Although there is no evidence to suggest that Santos shares are trading out of line with the market or its peers, it is not possible to conclude whether the market has over reacted to recent economic fears or whether Santos shares will continue to trade around current levels.

The value attributed to the scrip consideration ($0.79-0.89 per share) falls within Grant Samuel's estimate of the full underlying value for Eastern Star ($0.77-1.00), albeit in the lower half. Accordingly, the Scheme is fair. As the Scheme is fair, it is also reasonable. As the Scheme is fair and reasonable, it is in the best interests of shareholders.

The recent decline in the Santos share price has made evaluation of the Scheme more difficult. At the time of announcement:

• the consideration had a value of $0.88-0.94 (based on share prices up to one month prior to the announcement of the Proposal) which falls within the valuation range for Eastern Star of $0.77-1.00 (although the value range reflects market conditions since July 2011); and
• the exchange ratio represented a substantial premium to pre announcement Eastern Star share prices.

The subsequent decline in the Santos share price has substantially reduced the market value of the consideration and the apparent premium. However, that decline is not Santos specific, sharemarket values and asset values have fallen generally. Accordingly, it is likely that the underlying value of Eastern Star has also declined.

The value of the scrip consideration will vary with movements in the Santos share price. Accordingly, until the Scheme is implemented, Eastern Star shareholders are exposed to any changes that could impact the Santos share price. The actual value of the consideration could therefore ultimately exceed, or be less than $0.79-0.89 per Eastern Star share.

The extent of the uncertainties involved in judgements regarding the value of Eastern Star and of the scrip consideration are such that conclusions relating to the fairness of the Scheme are quite subjective. Nonetheless, in Grant Samuel's opinion, even if the Scheme was not fair it would still clearly be reasonable (and therefore in the best interests of shareholders). In particular:

• the Scheme delivers a significant premium to Eastern Star shareholders;
• in the absence of the Scheme or a similar transaction, it is likely that Eastern Star shares under current market conditions would trade at prices well below $0.79-0.89 (the value attributed to the consideration);
• an acquisition proposal by any other party is unlikely without support from Santos and it is unlikely that alternative bidders would be prepared to offer a price equal to or higher than $0.79-0.89 per share, particularly given Santos' right to match any competing transaction;
• shareholders will exchange their Eastern Star shares for shares in Santos. By doing so, shareholders will:
  • retain the right to participate in the upside associated with the future development of the Narrabri Gas Project, albeit on a highly diluted basis;
  • gain exposure to Santos' substantial exploration, development and production portfolio;
  • receive fully franked dividend income from Santos;
  • incur no transaction costs; and
  • if eligible, be entitled to receive capital gains tax rollover relief.

Conversely, Eastern Star shareholders will:

• receive Santos scrip, not cash. If they wish they will be able to sell into a liquid market for Santos shares, albeit they will incur transaction costs;
• be exposed to the development and general operational risks associated with Santos' portfolio of businesses, in particular its substantial LNG portfolio; and
• dilute their interest in the Narrabri Gas Project and Eastern Star's other assets.

It could be argued that Eastern Star shareholders could potentially realise greater value by deferring a sale of Eastern Star but there can be no guarantee of any significant short to medium term improvement in the external environment. In the interim, Eastern Star would face significant funding, commercialisation and regulatory challenges. In any event, to the extent that future improvement in the external environment is reflected in stronger equity markets, Eastern Star shareholders should also benefit if they continue to hold the Santos shares received as consideration under the Scheme.

• 3 Key Conclusions
  • Eastern Star has been valued in the range of $792.6-1,030.1 million, equivalent to $0.77-1.00 per share

Grant Samuel's valuation of Eastern Star is summarised below:

Eastern Star - Valuation Summary ($ millions)
	Report Section		Value Range
	Reference	Low	High
Narrabri Gas Project (65%)	6.3	650.0	845.0
Other assets and liabilities	6.4	110.0	150.0
Head office costs (net of savings)	6.5	(20.0)	(17.5)
Enterprise value		740.0	977.5
Net cash at 30 June 2011	6.6	52.6	52.6
Value of equity		792.6	1,030.1
Fully diluted shares on issue (millions)		1,026.5	1,026.5
Value per share		$0.77	$1.00

The valuation represents the estimated full underlying value of Eastern Star assuming 100% of the company was available to be acquired and includes a premium for control. The value exceeds the price at which, based on current market conditions, Grant Samuel would expect Eastern Star shares to trade on the Australian Securities Exchange in the absence of a takeover offer.

The value attributed to the Narrabri Gas Project assumes the successful development of the upstream gas project. It specifically excludes any allowance for Eastern Star's participation in downstream activities such as pipeline infrastructure (i.e. pipeline infrastructure is assumed to exist to transport gas from the Narrabri Gas Project to markets) or LNG export activities (i.e. the Newcastle LNG Project is not necessary to commercialise the Narrabri Gas Project).

The TRU Acquisition involves cash consideration of $0.90 per share. This price falls within Grant Samuel's value range. However, although the TRU Acquisition represents a direct valuation benchmark, it is not appropriate to treat $0.90 per share as a meaningful indicator of the value of Eastern Star. The TRU Acquisition was agreed on 18 July 2011 prior to the recent downturn in economic and market conditions and the price of $0.90 per share attributed to TRUenergy's holding in Eastern Star is only one small element in a much wider transaction.

Grant Samuel's value range is relatively wide reflecting:

• the significant uncertainty involved in the valuation of the Narrabri Gas Project; and
• the increasingly pessimistic outlook for global economic conditions and the resulting downturn in equities markets since the beginning of August 2011. The turmoil in equities markets has significant implications for the parameters that investors apply in valuing assets.

As a result of these uncertainties, the valuation analysis should be treated with some caution. These uncertainties mean that it is difficult to make long term (or even short term) forecasts or value judgements with precision. Relatively small changes in key assumptions could lead to material movements in value. Investors with different views as to the future prospects and risk profile of the Narrabri Gas Project could reasonably reach different conclusions as to the value of Eastern Star.

The Narrabri Gas Project has been valued in the range of $1,000-1,300 million

Grant Samuel has estimated Eastern Star's 65% interest in the Narrabri Gas Project to have a value in the range $650-845 million. This is based on a value for 100% of the Narrabri Gas Project of $1,000-1,300 million which includes a premium for control. Grant Samuel considers the value range adequately reflects the significant development risk and the upside potential of the Narrabri Gas Project.

The value attributed to the Narrabri Gas Project is an overall judgement having regard to discounted cash flow ("DCF") analysis and other measures commonly used in the oil and gas sector (i.e. value per GJ of gas reserves). Earnings based valuation methodologies are not appropriate as the Narrabri Gas Project is currently in an early development stage.

The value range of $1,000-1,300 million implies valuation benchmarks of $0.36-0.46 per GJ of 3P reserves and $0.16-0.21 per GJ of 3P reserves plus 2C resources based on reserves and resources as at 31 December 2009 as certified by Netherland, Sewell and Associates, Inc. ("NSAI"). In Grant Samuel's opinion, the implied multiples are appropriate having regard to:

• the characteristics of the Narrabri Gas Project, particularly its early stage of development;
• the value range has been determined by reference to field development/production profiles prepared for Grant Samuel by MHA Petroleum Consultants LLC ("MHA"). These profiles are based on MHA's evaluation of current reserves and resources for the Narrabri Gas Project which are larger than those of NSAI above 3P reserves level (see Appendix 2);
• recent transaction evidence for CSG assets in Australia. The trend in valuation parameters in the CSG sector since 2003 can be observed in the following graph of multiples of 3P reserves:

• Source: Grant Samuel analysis (see Appendix 5).
• Notes: (1) Multiple ranges based on base consideration and conditional consideration (undiscounted basis).
• (2) Excluding transactions where 3P reserve data is not available.
• (3) Transactions which were prices in United States dollars are presented at exchange rates prevailing at the time of announcement.
• (4) $0.36-0.46 per 3P reserves based on NSAI estimates at 31 December 2009.
• (5) Acquisition of 20% of Narrabri Gas Project is subject to implementation of the Scheme and acquisition of Bow Energy is currently a conditional proposal.
• the price to be paid by TRUenergy for a 20% interest in the Narrabri Gas Project in the TRU On-Sale implies a value of $1,140-1,200 million for 100% if value of $142-185 million is attributed to Eastern Star's other assets and liabilities. This value range falls within Grant Samuel's valuation range. However, the TRU On-Sale price should not necessarily be treated as an indicator of today's value of the Narrabri Gas Project as it was agreed prior to the recent downturn in economic and market conditions.

The value of the Narrabri Gas Project is uncertain. It is in an early stage of development with no binding contracts to sell gas, no binding offtake commitments and no means of delivering gas to market. Moreover, the potential value of the Narrabri Gas Project depends on the complex interaction of a range of factors impacting demand and sale prices for gas including changes in the global market for LNG, domestic demand for, and supply of, gas in eastern Australia and the impact of government policies such as carbon prices and resource rent taxes.

The consideration under the Scheme has a value of $0.79-0.89 based on a value range for Santos shares of $11.50-13.00

Grant Samuel has attributed a value to the scrip consideration of $0.79-0.89 per Eastern Star share based on a value range for Santos shares of $11.50-13.00. The short period of time since announcement of the Proposal and the substantial change in market conditions since July 2011 means that it is not possible to attribute a value range to Santos shares with any reliability.

Grant Samuel's judgement is that a Santos share price of $11.50-13.00 provides a reasonable basis for evaluating the Scheme as the price reflects the recent performance of Santos shares as well as current market conditions. Market volatility shows little sign of abating and it is unclear whether stability has returned. The top end of the range is below the Santos share price on 15 July 2011 of $13.23 upon which the Proposal is based. Since July 2011 Santos shares have traded at a volume weighted average price of $11.70.

The value range relative to recent Santos share prices is shown below:

Source: IRESS and Grant Samuel analysis

The value of the scrip consideration will vary with movements in the Santos share price. Accordingly, until the Scheme is implemented, Eastern Star shareholders are exposed to changes in equity market conditions and specific events that could impact the Santos share price. The actual value received could therefore ultimately exceed, or be less than, $0.79-0.89 per Eastern Star share.

The value of the consideration of $0.79-0.89 per share falls within Grant Samuel's estimate of full underlying value and, therefore, the Scheme is fair

The value attributed to the scrip consideration under the Scheme of $0.79-0.89 per share falls within Grant Samuel's estimate of the full underlying value for Eastern Star, albeit in the lower half of the range. Accordingly, the Scheme is fair. As the Scheme is fair, it is also reasonable. As the Scheme is fair and reasonable, it is in the best interests of shareholders.

The relationship between the values and the TRU Acquisition price of $0.90 per share is depicted below:

Source: IRESS and Grant Samuel analysis

Note: The Eastern Star share price and the value of the consideration based on the month prior to 15 July 2011 are before the downturn in equities markets in August 2011.

However, the valuation analysis for both Eastern Star and the scrip consideration should be treated with caution as the value of Eastern Star is subject to significant uncertainty and in current market conditions it is not possible to attribute values to Santos shares with any reliability.

Even if the Scheme was not fair it would still be reasonable

The extent of the uncertainties involved in judgements regarding the value of Eastern Star and of the scrip consideration are such that conclusions relating to the fairness of the Scheme are quite subjective. Nonetheless, in Grant Samuel's opinion, even if the Scheme was not fair it would still clearly be reasonable (and therefore in the best interests of shareholders). In particular:

• the Scheme delivers a significant premium to Eastern Star shareholders. Based on the closing price immediately before announcement of the Scheme and prices for the month preceding the announcement, the premium was approximately 49-51%. The premium over pre announcement prices is lower (30-50%), but still significant, when measured relative to the value attributed to the scrip consideration ($0.79-0.89 per share);

• in the absence of the Scheme or a similar transaction, it is likely that Eastern Star shares under current market conditions would trade at prices well below $0.79-0.89 (the value attributed to the consideration). Eastern Star faces substantial challenges to commercialise the Narrabri Gas Project, including the need to raise $100-150 million as its contribution to the next phase of development and increasingly negative community sentiment. These challenges and the recent downturn in equities markets suggest that Eastern Star could trade at significantly lower prices (possibly below pre announcement prices). Accordingly, the prospect of Eastern Star shares trading above $0.79-0.89 in the foreseeable future is remote;

• as Santos has an existing 20.92% shareholding in Eastern Star, an acquisition proposal by any other party is unlikely without the agreement of Santos. No alternative proposal involving a takeover has been received by Eastern Star and it is unlikely that alternative bidders would be prepared to offer a price equal to or higher than $0.79-0.89 per share, particularly given Santos' right to match any competing bid;

• shareholders will exchange their Eastern Star shares for shares in Santos. By doing so, shareholders will:

• retain the right to participate in the upside associated with the future development of the Narrabri Gas Project, albeit on a highly diluted basis;

• gain exposure to Santos' substantial exploration, development and production portfolio;

• receive fully franked dividend income from Santos;

• incur no transaction costs; and

• if eligible, be entitled to receive capital gains tax rollover relief.

Conversely, Eastern Star shareholders will:

• receive Santos scrip, not cash. If they wish they will be able to sell into a liquid market for Santos shares, albeit they will incur transaction costs;
• be exposed to the development and general operational risks associated with Santos' portfolio of businesses, in particular its substantial LNG portfolio; and
• dilute their interest in the Narrabri Gas Project and Eastern Star's other assets.

4 Opinion on TRU Acquisition

Under the TRU Acquisition Santos will pay TRUenergy $34.7 million for its 3.76% interest in Eastern Star ($0.90 cash per share) while the non associated shareholders will receive Santos scrip under the Scheme. Neither the Scheme nor the TRU On-Sale is conditional on the TRU Acquisition. Both transactions will proceed regardless of whether the TRU Acquisition is approved by the non associated shareholders.

Based on the Santos share price in the month prior to announcement, the value of the scrip consideration under the Scheme was around $0.90 per Eastern Star share and was consistent with the cash price to be paid to TRUenergy. However, the subsequent fall in the Santos share price means that (based on current Santos share prices) TRUenergy will receive a higher price per share than other Eastern Star shareholders.

The TRU Acquisition disadvantages the non associated shareholders because TRUenergy will enjoy both a higher price (based on current Santos share prices) and the certainty of cash consideration. However, this disadvantage is largely theoretical. If non associated shareholders vote down the TRU Acquisition there is no (direct) improvement in the consideration that they will receive under the Scheme.

If the TRU Acquisition is not approved, Santos will acquire TRUenergy's shareholding in Eastern Star under the Scheme. Based on the value attributed by Grant Samuel to the scrip consideration under the Scheme of $0.79-0.89 per share, TRUenergy will be issued Santos shares with a value of $30.5-34.5 million which is $0.2-4.2 million less than the $34.7 million payable under the TRU Acquisition. Accordingly, approval of the TRU Acquisition will result in Santos paying $0.2-4.2 million more for TRUenergy's shareholding in Eastern Star than is necessary, although the impact of this overpayment is not material and is shared by all Santos shareholders. While the overpayment reduces the value of the Santos shares that the non associated shareholders will receive under the Scheme, the reduction is trivial (based on the above data the maximum impact equates to 0.4 cents per Santos share or 0.03 cents per Eastern Star share).

The TRU Acquisition has no advantages or benefits for non associated shareholders because the Scheme and the TRU On-Sale will proceed regardless of whether the TRU Acquisition is approved. On the other hand, the TRU Acquisition will result in Santos paying more for the TRUenergy shareholding than is necessary, which will result in an unnecessary reduction in the value of Santos shares to be received by Eastern Star shareholders (notwithstanding that the reduction is trivial).

Given this disadvantage and because the TRUenergy Acquisition has no advantages for non associated shareholders, the disadvantages of the TRU Acquisition to the non associated shareholders outweigh the advantages. Accordingly (and notwithstanding that the net disadvantage is trivial), the TRU Acquisition is neither fair nor reasonable having regard to the interests of the non associated shareholders.

Grant Samuel understands that, in the context that the net disadvantage to the non associated shareholders is not material, the directors of Eastern Star intend to recommend that the non associated shareholders vote in favour of the TRU Acquisition.

5 O ther Matters s

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Th ex his letter is a xtracted is atta summary of G ached and shou Grant Samuel uld be read in l's opinion. T n conjunction w The full report with this summ t from which mary. this summary y has been

Th he opinion is m made as at the e date of this l etter and refle ects circumsta nces and cond ditions as at th hat date.

9

Yours fai GRANT ithfully SAMUEL & & ASSOCIAT TES PTY LIM MITED

THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY

Scheme Booklet 73

G R A N T S A M U E L & A S S O C I A T E S

L E V E L 1 9 G O V E R N O R M A C Q U A R I E T O W E R 1 F A R R E R P L A C E S Y D N E Y N S W 2 0 0 0 G P O B O X 4 3 0 1 S Y D N E Y N S W 2 0 0 1 T : + 6 1 2 9 3 2 4 4 2 1 1 / F : + 6 1 2 9 3 2 4 4 3 0 1

w w w . g r a n t s a m u e l . c o m . a u

Financial Services Guide

Grant Samuel & Associates Pty Limited ("Grant Samuel") holds Australian Financial Services Licence No. 240985 authorising it to provide financial product advice on securities and interests in managed investments schemes to wholesale and retail clients.

The Corporations Act, 2001 requires Grant Samuel to provide this Financial Services Guide ("FSG") in connection with its provision of an independent expert's report ("Report") which is included in a document ("Disclosure Document") provided to members by the company or other entity ("Entity") for which Grant Samuel prepares the Report.

Grant Samuel does not accept instructions from retail clients. Grant Samuel provides no financial services directly to retail clients and receives no remuneration from retail clients for financial services. Grant Samuel does not provide any personal retail financial product advice to retail investors nor does it provide market-related advice to retail investors.

When providing Reports, Grant Samuel's client is the Entity to which it provides the Report. Grant Samuel receives its remuneration from the Entity. In respect of the Report for Eastern Star in relation to a proposal by Santos Limited ("the Eastern Star Report"), Grant Samuel will receive a fixed fee of $875,000 plus reimbursement of out-of-pocket expenses for the preparation of the Report (as stated in Section of the Eastern Star Report).

No related body corporate of Grant Samuel, or any of the directors or employees of Grant Samuel or of any of those related bodies or any associate receives any remuneration or other benefit attributable to the preparation and provision of the Eastern Star Report.

Grant Samuel is required to be independent of the Entity in order to provide a Report. The guidelines for independence in the preparation of Reports are set out in Regulatory Guide 112 issued by the Australian Securities & Investments Commission on 30 March 2011*.* The following information in relation to the independence of Grant Samuel is stated in Section 10.3 of the Eastern Star Report:

"Grant Samuel and its related entities do not have at the date of this report, and have not had within the previous two years, any business or professional relationship with Eastern Star or Santos or any financial or other interest that could reasonably be regarded as capable of affecting its ability to provide an unbiased opinion in relation to the Proposal. Grant Samuel advises that Mr Greg Martin, a non executive director of Santos, is a minority shareholder in, and chairman of, Grant Samuel Infrastructure Partners Pty Limited, a related company of Grant Samuel.

Grant Samuel commenced analysis for the purposes of a report in May 2010 prior to the announcement of the Proposal. This work did not involve Grant Samuel participating in the setting the terms of, or any negotiations leading to, the Proposal.

Grant Samuel had no part in the formulation of the Proposal. Its only role has been the preparation of this report.

Grant Samuel will receive a total fixed fee of $875,000 for the preparation of this report (including $250,000 for the preliminary work). This fee is not contingent on the outcome of the Proposal. Grant Samuel's out of pocket expenses in relation to the preparation of the report will be reimbursed. Grant Samuel will receive no other benefit for the preparation of this report.

Grant Samuel considers itself to be independent in terms of Regulatory Guide 112 issued by the ASIC on 30 March 2011."

Grant Samuel has internal complaints-handling mechanisms and is a member of the Financial Ombudsman Service, No. 11929. If you have any concerns regarding the Eastern Star Report, please contact the Compliance Officer in writing at Level 19, Governor Macquarie Tower, 1 Farrer Place, Sydney NSW 2000. If you are not satisfied with how we respond, you may contact the Financial Ombudsman Service at GPO Box 3 Melbourne VIC 3001 or 1300 780 808. This service is provided free of charge.

Grant Samuel holds professional indemnity insurance which satisfies the compensation requirements of the Corporations Act, 2001.

Grant Samuel is only responsible for the Eastern Star Report and this FSG. Complaints or questions about the Disclosure Document should not be directed to Grant Samuel which is not responsible for that document. Grant Samuel will not respond in any way that might involve any provision of financial product advice to any retail investor.

1		Details of the Proposal 1
2		Scope of the Report 2
	2.1	Purpose of the Report 2
	2.2	Basis of Evaluation 2
	2.3	Sources of the Information 4
	2.4	Limitations and Reliance on Information 4
3		Australian Natural Gas Sector 7
	3.1	Overview 7
	3.2	Resource Classification 7
	3.3	Demand 8
	3.4	Reserves and Production 9
	3.5	Transmission, Distribution and Retailing 10
	3.6	Coal Seam Gas 11
	3.7	Wholesale Gas Prices 14
4		Profile of Eastern Star Gas Limited 18
	4.1	Background 18
	4.2	Financial Performance 18
	4.3	Financial Position 19
	4.4	Capital Structure and Ownership 20
	4.5	Share Price Performance 21
	4.6	Operations 23
5		Profile of Santos Limited 29
	5.1	Background 29
	5.2	Operations 29
	5.3	Financial Performance 31
	5.4	Financial Position 32
	5.5	Capital Structure and Ownership 34
	5.6	Share Price Performance 34
6		Valuation of Eastern Star Gas Limited 37
	6.1	Summary 37
	6.2	Methodology 38
	6.3	Value of Narrabri Gas Project 40
	6.4	Other Assets and Liabilities 49
	6.5	Corporate Costs 50
	6.6	Net Cash 50
7		Value of the Consideration under the Scheme 51
	7.1	Summary 51
	7.2	Approach 51
	7.3	Analysis of Santos' Share Price Performance 52
	7.4	Impact of the Proposal 56
	7.5	Conclusion 57
8		Evaluation of the Scheme 59
	8.1	Conclusion 59
	8.2	Fairness 60
	8.3	Reasonableness 63
	8.4	Shareholder Decision 69
9		Evaluation of the TRU Acquisition 70
	9.1	Background 70
	9.2	Analysis and Conclusion 70
	9.3	Shareholder Decision 72

1 Details of the Proposal

On 18 July 2011 Eastern Star Gas Limited ("Eastern Star") announced that it had entered into a scheme implementation deed with Santos Limited ("Santos") under which Santos will acquire all of the issued ordinary shares of Eastern Star other than the shares already held by Santos and TRUenergy Investments Pty Limited ("TRUenergy Investments") through a scheme of arrangement under Section 411 of the Corporations Act, 2001 ("Corporations Act") ("the Scheme"). Under the Scheme Eastern Star shareholders will receive 0.6881 Santos shares for every 10 Eastern Star shares1 .

Concurrent with the Scheme announcement, Santos announced that it had entered into arrangements with TRUenergy Holdings Pty Limited ("TRUenergy Holdings") pursuant to which:

• on the implementation of the Scheme, Santos will acquire TRUenergy Investment's 3.76% interest in Eastern Star for a cash price of $0.90 per share ("the TRU Acquisition"); and
• subject to implementation of the Scheme and approval under the Foreign Acquisitions and Takeovers Act, 1975 ("FIRB approval"), Santos will on-sell to a wholly owned subsidiary of TRUenergy Holdings a 20% interest in the Narrabri Gas Project and a 30.77% interest in other assets owned by Eastern Star for $284.3 million ("TRU On-Sale").

The TRU Acquisition is subject to the approval of Eastern Star shareholders not associated with Santos or TRUenergy Investments ("the non associated shareholders") under Item 7 of Section 611 of the Corporations Act. If approval is not obtained, the Eastern Star shares held by TRUenergy Investments will be acquired by Santos under the Scheme.

In this report, the Scheme and the TRU Acquisition are collectively referred to as "the Proposal" and TRUenergy Investments and TRUenergy Holdings and their subsidiaries are referred to as "TRUenergy".

Eastern Star's primary activity in recent years has been the commercialisation of the Narrabri Gas Project in which it has a 65% interest. Santos is a major Australian oil and gas exploration and production company and is listed on the Australian Securities Exchange ("ASX") with a market capitalisation of around $10.0 billion. Santos is Eastern Star's largest shareholder with a 20.92% shareholding and owns 35% of the Narrabri Gas Project. TRUenergy is an Australian integrated energy business wholly owned by CLP Holdings Limited, a Hong Kong listed energy company, and holds a 3.76% interest in Eastern Star.

The Scheme is subject to the satisfaction of a number of conditions (including Eastern Star shareholder approval) which are set out in full in the Notice of Meeting and Explanatory Memorandum ("Scheme Booklet") to be sent by Eastern Star to shareholders.

Other elements of the Scheme include:

• Eastern Star and Santos have agreed to certain exclusivity restrictions including no-talk and no-shop provisions. The no-talk restrictions apply unless the Eastern Star board determines that a bona fide written proposal for a competing transaction is, or could reasonably be expected to be, a superior proposal;
• during the exclusivity period (18 July 2011 to the earlier of the termination of the scheme implementation deed and 1 February 2012) Eastern Star must notify Santos of any approach, proposal made or provision of confidential information in relation to a current or potential competing transaction. Eastern Star must advise Santos of the identity of the parties and the material terms of, or variation to, any such proposal unless the Eastern Star board determines that the provision of such information would be likely to constitute a breach of their fiduciary duties;
• Santos has the right to provide a matching or superior proposal to a competing transaction;
• a reimbursement fee of $9.24 million is payable to Santos by Eastern Star in certain circumstances including if, prior to the end of the exclusivity period, the board or any director withdraws or adversely modifies their support or recommendation in favour of the Scheme, if by 18 July 2012 a transaction resulting from a superior proposal is completed or Santos terminates the scheme implementation deed as a consequence of a material breach by Eastern Star; and
• a sunset date of 1 February 2012.

1

In accordance with the scheme implementation deed, as Santos announced an interim dividend of $0.15 per share on 19 August 2011, the ratio of Santos shares for every 10 Eastern Star shares has been adjusted from 0.6803 to 0.6881.

2 Scope of the Report

2.1 Purpose of the Report

Under Section 411 of the Corporations Act the Scheme must be approved by a majority in number (i.e. at least 50%) of each class of shareholders present and voting (either in person or by proxy) at the meeting, representing at least 75% of the votes cast on the resolution. If approved by Eastern Star shareholders, the Scheme will then be subject to approval by the Federal Court of Australia.

Part 3 of Schedule 8 to the Corporations Regulations prescribes the information to be sent to shareholders in relation to schemes of arrangement pursuant to Section 411. Part 3 of Schedule 8 requires an independent expert's report in relation to a scheme of arrangement to be prepared when a party to a scheme of arrangement has a prescribed shareholding in the company subject to the scheme, or where any of its directors are also directors of the company subject to the scheme. In those circumstances, the independent expert's report must state whether the scheme of arrangement is in the best interests of shareholders subject to the scheme and must state reasons for that opinion. Although there is no requirement in the present circumstances for an independent expert's report pursuant to Section 411, the directors of Eastern Star have decided to engage an independent expert in relation to the Scheme.

Section 606 of the Corporations Act effectively prohibits a person from acquiring a relevant interest in a public company where that person's voting power increases from 20% or below to in excess of 20% or, if that person already has voting power in excess of 20%, their voting power would increase further, except in certain limited circumstances. Item 7 of Section 611 allows non associated shareholders to waive the Section 606 prohibition by passing a resolution in a general meeting. Shareholders voting pursuant to Item 7 of Section 611 are to be provided with a comprehensive analysis of the proposed transaction. The directors of the company may satisfy their obligations to provide such an analysis by commissioning an independent expert's report. The TRU Acquisition increases Santos' relevant interest in Eastern Star from 20.92% to 24.68% and therefore Santos has requested that Eastern Star seek shareholder approval for the TRU Acquisition.

Accordingly, the directors of Eastern Star have engaged Grant Samuel & Associates Pty Limited ("Grant Samuel") to prepare an independent expert's report setting out whether, in its opinion:

• the Scheme is in the best interests of shareholders; and
• the TRU Acquisition is fair and reasonable having regard to the interests of the non associated shareholders,

and to state reasons for those opinions. A copy of the report will accompany the Scheme Booklet to be sent to shareholders by Eastern Star.

This report is general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of individual Eastern Star shareholders. Accordingly, before acting in relation to their investment, shareholders should consider the appropriateness of the advice having regard to their own objectives, financial situation or needs. Shareholders should read the Scheme Booklet issued by Eastern Star in relation to the Proposal.

Voting for or against the Scheme or the TRU Acquisition is a matter for individual shareholders based on their views as to value, their expectations about future market conditions and their particular circumstances including risk profile, liquidity preference, investment strategy, portfolio structure and tax position. Shareholders who are in doubt as to the action they should take in relation to the Proposal should consult their own professional adviser.

Similarly, it is a matter for individual shareholders as to whether to buy, hold or sell shares in Eastern Star or Santos. This is an investment decision independent of a decision to vote for or against the Scheme or the TRU Acquisition upon which Grant Samuel does not offer an opinion. Shareholders should consult their own professional adviser in this regard.

2.2 Basis of Evaluation

There is no legal definition of the expression "in the best interests". However, the Australian

Securities & Investments Commission ("ASIC") has issued Regulatory Guide 111 which establishes guidelines in respect of independent expert's reports. ASIC Regulatory Guide 111 differentiates between the analysis required for control transactions and other transactions. In the context of control transactions (whether by takeover bid, by scheme of arrangement, by the issue of securities or by selective capital reduction or buyback), the expert is required to distinguish between "fair" and "reasonable". A proposal that was "fair and reasonable" or "not fair but reasonable" would be in the best interests of shareholders. For most other transactions the expert is to weigh up the advantages and disadvantages of the proposal for shareholders. If the advantages outweigh the disadvantages, a proposal would be in the best interests of shareholders.

The Scheme is economically the same as a takeover offer. Accordingly, Grant Samuel has evaluated the Scheme as a control transaction and formed a judgement as to whether the proposal is "fair and reasonable".

Fairness involves a comparison of the offer price with the value that may be attributed to the securities that are the subject of the offer based on the value of the underlying businesses and assets. For this comparison, value is determined assuming 100% ownership of the target and a knowledgeable and willing, but not anxious, buyer and a knowledgeable and willing, but not anxious, seller acting at arm's length. Reasonableness involves an analysis of other factors that shareholders might consider prior to accepting an offer such as:

• the offeror's existing shareholding;
• other significant shareholdings;
• the probability of an alternative offer; and
• the liquidity of the market for the target company's shares.

An offer could be considered "reasonable" if there were valid reasons to accept the offer notwithstanding that it was not "fair".

Fairness is a more demanding criteria. A "fair" offer will always be "reasonable" but a "reasonable" offer will not necessarily be "fair". A fair offer is one that reflects the full market value of a company's businesses and assets. An offer that is in excess of the pre-bid market prices but less than full value will not be fair but may be reasonable if shareholders are otherwise unlikely in the foreseeable future to realise an amount for their shares in excess of the offer price. This is commonly the case where the bidder already controls the target company. In that situation the minority shareholders have little prospect of receiving full value from a third party offeror unless the controlling shareholder is prepared to sell its controlling shareholding.

Grant Samuel has determined whether the Scheme is fair by comparing the estimated underlying value range of Eastern Star with the offer price. The Scheme will be fair if it falls within the estimated underlying value range. In considering whether the Scheme is reasonable, the factors that have been considered include:

• the existing shareholding structure of Eastern Star;
• the likelihood of an alternative offer and alternative transactions that could realise fair value;
• the likely market price and liquidity of Eastern Star shares in the absence of the Scheme; and
• other advantages and disadvantages for Eastern Star shareholders of approving the Scheme.

ASIC Regulatory Guide 111 provides that an Item 7 of Section 611 proposal involving the issue of securities should be analysed by an expert as if it were a takeover offer. In contrast, in relation to an Item 7 of Section 611 proposal involving the sale of securities, ASIC Regulatory Guide 111 requires an expert to provide an opinion as to whether the advantages of the proposal outweigh the disadvantages. In this case, the TRU Acquisition involves the sale of Eastern Star shares by TRUenergy to Santos in return for cash of $0.90 per share. The effect of the sale is to increase Santos' relevant interest in Eastern Star from 20.92% to 24.68%. Accordingly, Grant Samuel has evaluated the TRU Acquisition in terms of the advantages and disadvantages of the proposal to non associated shareholders.

In forming its opinion as to whether the advantages of the TRU Acquisition to the non associated shareholders outweigh the disadvantages, Grant Samuel has considered the following:

• the terms of the TRU Acquisition and their impact on shareholders;
• whether TRUenergy is to receive a premium for control;
• whether further transactions are planned between Santos and TRUenergy;
• whether the TRU Acquisition will deter the making of a takeover offer for Eastern Star;
• the impact on ownership and control of Eastern Star;
• any other advantages and benefits arising from the TRU Acquisition; and
• the costs, disadvantages and risks of the TRU Acquisition.

2.3 Sources of the Information

The following information was utilised and relied upon, without independent verification, in preparing this report:

Publicly Available Information

• the Scheme Booklet (including earlier drafts);
• annual reports of Eastern Star for the five years ended 30 June 2010;
• half year announcement of Eastern Star for the six months ended 31 December 2010;
• press releases, public announcements, media and analyst presentation material and other public filings by Eastern Star including information available on its website;
• brokers' reports and recent press articles on Eastern Star and the oil and gas industry (particularly the coal seam gas sector);
• sharemarket data and related information on Australian listed companies engaged in the coal seam gas sector and on acquisitions of companies and businesses in that sector; and
• information relating to the Australian and international energy sectors including supply/demand forecasts and regulatory decisions and pronouncements (as appropriate).

Non Public Information provided by Eastern Star

• management accounts for Eastern Star for the two years ended 30 June 2011;
• the budget for the year ending 30 June 2012 prepared by Eastern Star management;
• a detailed cash flow model including projections for the Narrabri Gas Project dated 11 May 2011 (including an earlier version of the model dated 18 June 2010); and
• other confidential documents, board papers, presentations and working papers.

In preparing this report Grant Samuel has held discussions with, and obtained information from, senior management of Eastern Star and its advisers and Santos' advisers. Grant Samuel has held no discussions with senior management of Santos or representatives of TRUenergy.

2.4 Limitations and Reliance on Information

Grant Samuel believes that its opinion must be considered as a whole and that selecting portions of the analysis or factors considered by it, without considering all factors and analyses together, could create a misleading view of the process underlying the opinion. The preparation of an opinion is a complex process and is not necessarily susceptible to partial analysis or summary.

Grant Samuel's opinion is based on economic, sharemarket, business trading, financial and other conditions and expectations prevailing at the date of this report. These conditions can change significantly over relatively short periods of time. If they did change materially, subsequent to the date of this report, the opinion could be different in these changed circumstances.

This report is also based upon financial and other information provided by Eastern Star and its advisers and Santos. Grant Samuel has considered and relied upon this information. Eastern Star has represented in writing to Grant Samuel that to its knowledge the information provided by it was complete and not incorrect or misleading in any material aspect. Grant Samuel has no reason to believe that any material facts have been withheld.

The information provided to Grant Samuel has been evaluated through analysis, inquiry and review to the extent that it considers necessary or appropriate for the purposes of forming an opinion as to whether the Scheme in the best interests of Eastern Star shareholders and the TRU Acquisition is fair and reasonable having regard to the interests of non associated shareholders. However, Grant Samuel does not warrant that its inquiries have identified or verified all of the matters that an audit, extensive examination or "due diligence" investigation might disclose. While Grant Samuel has made what it considers to be appropriate inquiries for the purposes of forming its opinion, "due diligence" of the type undertaken by companies and their advisers in relation to, for example, prospectuses or profit forecasts, is beyond the scope of an independent expert. In this context, Grant Samuel advises that it is not in a position nor is it practicable to undertake its own "due diligence" investigation of the type undertaken by accountants, lawyers or other advisers.

Accordingly, this report and the opinions expressed in it should be considered more in the nature of an overall review of the anticipated commercial and financial implications rather than a comprehensive audit or investigation of detailed matters.

An important part of the information used in forming an opinion of the kind expressed in this report is comprised of the opinions and judgement of management. This type of information was also evaluated through analysis, inquiry and review to the extent practical. However, such information is often not capable of external verification or validation.

Preparation of this report does not imply that Grant Samuel has audited in any way the management accounts or other records of Eastern Star. It is understood that the accounting information that was provided was prepared in accordance with generally accepted accounting principles and in a manner consistent with the method of accounting in previous years (except where noted).

MHA Petroleum Consultants LLC ("MHA") was appointed as technical specialist to review the oil and gas assets of Eastern Star for Grant Samuel. MHA's review included a review of the reserves and resources, development plans, production profiles, operating costs, capital costs, potential reserve extensions and exploration activities for the Narrabri Gas Project. MHA also prepared valuations of Eastern Star's other oil and gas interests. The report prepared by MHA is attached to and forms part of this report (see Appendix 2).

The information provided to Grant Samuel included:

• the budget for Eastern Star for the year ending 30 June 2012 ("2012 Budget") prepared by management and reviewed by the directors of Eastern Star; and
• a cash flow model reflecting the development plan for the Narrabri Gas Project commencing 1 June 2011.

Eastern Star is responsible for the information contained in the 2012 Budget and the cash flow model ("the forward looking information"). Grant Samuel has (together with MHA in relation to the Narrabri Gas Project) considered and, to the extent deemed appropriate, relied on this information for the purpose of their analysis.

In the case of the Narrabri Gas Project, MHA conducted a detailed review of the significant assumptions and technical factors underlying the forward looking information provided by Eastern Star. This included a review of the basis on which resources and reserves have been estimated, a review of likely future operating and capital costs, a review of likely gas recovery rates, a review of the potential for the conversion of resources to reserves and such other reviews as MHA deemed appropriate. Having regard to these reviews, MHA made independent judgements

valuation of the Narrabri Gas Project ("technical valuation assumptions").

regarding the technical assumptions that can reasonably be adopted for the purposes of the

In relation to the cash flow model more generally Grant Samuel has made adjustments to reflect its judgement on certain matters and to ensure consistent application of assumptions. The major assumptions underlying the forward looking information and the underlying assumptions were reviewed by Grant Samuel in the context of current economic, financial and other conditions. It should be noted that the forward looking information and the underlying assumptions have not been reviewed (nor is there a statutory or regulatory requirement for such a review) by an investigating accountant for reasonableness or accuracy of compilation and application of assumptions.

Subject to these adjustments and limitations, Grant Samuel considers that, based on the inquiries it has undertaken and only for the purposes of its analysis for this report (which do not constitute, and are not as extensive as, an audit or accountant's examination), there are reasonable grounds to believe that the forward looking information has been prepared on a reasonable basis. In forming this view, Grant Samuel has taken into account that senior management of Eastern Star developed the cash flow model in conjunction with Eastern Star's advisers.

Grant Samuel has no reason to believe that the forward looking information reflects any material bias, either positive or negative. However, the achievability of the forward looking information is not warranted or guaranteed by Grant Samuel. Future profits and cash flows are inherently uncertain. They are predictions by management of future events that cannot be assured and are not necessarily based on assumptions, many of which are beyond the control of the company or its management. Actual results may be significantly more or less favourable.

As part of its analysis, Grant Samuel has developed a cash flow model on the basis of the technical valuation assumptions deemed appropriate by MHA. Grant Samuel has reviewed the sensitivity of net present values to changes in key variables. The sensitivity analysis isolates a limited number of assumptions and shows the impact of the expressed variations to those assumptions. No opinion is expressed as to the probability or otherwise of those expressed variations occurring Actual variations may be greater or less than those modelled. In addition to not representing best and worst case outcomes, the sensitivity analysis does not, and does not purport to, show all the possible variations to the business model. The actual performance of the business may be negatively or positively impacted by a range of factors including, but not limited to:

• changes to the assumptions other than those considered in the sensitivity analysis;
• greater or lesser variations to the assumptions considered in the sensitivity analysis than those modelled; and
• combinations of different assumptions may produce outcomes different to those modelled.

In forming its opinion, Grant Samuel has also assumed that:

• matters such as title, compliance with laws and regulations and contracts in place are in good standing and will remain so and that there are no material legal proceedings, other than as publicly disclosed;
• the information set out in the Scheme Booklet sent by Eastern Star to its shareholders is complete, accurate and fairly presented in all material respects;
• the publicly available information relied on by Grant Samuel in its analysis was accurate and not misleading;
• the Proposal will be implemented in accordance with its terms; and
• the legal mechanisms to implement the Proposal are correct and will be effective.

6

To the extent that there are legal issues relating to assets, properties, or business interests or issues relating to compliance with applicable laws, regulations, and policies, Grant Samuel assumes no responsibility and offers no legal opinion or interpretation on any issue.

3 Au stralian Na atural Gas S ector

3. 1 Overvie ew

Natural comprise nitrogen sectors. gas is a fuel es methane b and carbon d l source prod but may also dioxide. It ha duced during contain hydr as a range of the break do rocarbons (su f uses in the i own of organ ch as propan industrial, com nic matter. It ne, butane and mmercial and primarily d ethane), d domestic

There ar typically onshore are also organic renewab sugarcan re two main ty y found in und and offshore) other unconve rich rocks), le sources suc ne residue). ypes of natura derground res ) and coal sea entional form tight gas (co ch as biogas ( al gas produce servoirs trappe am gas ("CSG ms of gas inclu ontained in l (landfill and s ed in Australi ed in rock som G") which is c uding shale ga ow permeabi sewage gas) a ia: convention metimes in ass contained wit s (contained w ility reservoir and biomass ( nal natural ga sociation with thin coal seam within low per r rocks) and (wood, wood s which is h oil (both ms. There rmeability gas from waste and

Convent 1,000 to collected held on involves metres. methane for use o tional natural o 3,000 metre d and process the surface o s the drilling o Water held i e to flow from or sale. gas is extrac es) following ed on the sur of the coal by of a series of n the coal sea the coal into cted by drillin g which the g rface. In com y pressure fro f wells into th am is pumped the productio ng into the ga gas usually fl mparison, CSG om water in he coal seam, d from the we on wells. The as reservoir ( flows under it G is found in the coal seam typically at a ells to reduce CSG is then c (typically at a its own press coal seams w m. Extraction a depth of 200 e pressure whi collected and a depth of sure to be where it is n of CSG 0 to 1,000 ich causes processed

The first 1961. In t commercial n comparison, conventional the first comm gas project w mercial CSG was establishe project was es ed in central s stablished in l southern Quee late 1996. ensland in

3. 2 Resourc ce Classifica ation

Oil and commerc of resour usually u followin gas resource cially recover rce and the de undertaken by ng diagram: es are categor rable. This inc egree to which y external tech rised accordin cludes judgme h extraction is hnical experts ng to the deg ents both as to s commerciall s. The catego gree to which o the level of ly viable. Cer risation system h they are lik certainty of th rtification of r m is summari kely to be he volume reserves is ised in the

	Petroleum Resources Management Systems
						PRODUCTION
		Commercia				RESERVES
				12		2P		3P
			Proved		Probable		Possible
	Discovered Gas				CONTINGENT RESOURCES
				1C		2C		3C
Fotal Gas Initially-in-Place		Uncommercial				UNRECOVERABLE
				LowEstimate	PROSPECTIVE RESOURCES	BestEstimate		HighEstimate
				UNRECOVERABLE

7

Source: So ociety of Petroleu um Engineers

Commercially viable resources (or reserves) are categorised as proved (1P), proved and probable (2P) or proved, probable and possible (3P). The benchmark for commercial contracts for conventional gas in Australia has traditionally been 2P (with 3P reserves being considered in assessing potential upside) although in recent years the focus on 2P reserves has reduced where the producer has a portfolio of gas reserves available to meet contract obligations. Contingent resources are potentially recoverable but do not qualify as economically recoverable due to commercial (e.g. lack of market) or technical issues (such as reliance on technology under development or lack of detailed exploration information).

The market price of gas is a key determinant of the commerciality of extraction. As prices increase, the amount of commercially viable resources generally also increases. Ongoing production and exploration will also result in changes in the quantum and category of reserves and resources. This is referred to as the reserves maturation process.

As CSG fields are typically continuous accumulations, the reserves maturation process for CSG differs from that for conventional gas. The CSG maturation process is based on the initial identification of contingent resources and progresses to the booking of 3P, then 2P and 1P reserves as additional evidence accumulates and production wells are drilled. This evidence is the direct consequence of exploration and production, involving continual drilling of core holes, pilot wells and production wells across the resource, which provides greater certainty about the extent and quality of the resource. In other words, the level of CSG reserves booked depends on the number of wells drilled and tested that have shown commercial flow rates.

Therefore, for CSG, 3P reserves (and in many cases, 2C resources) are considered to reflect the estimated extent of gas rather than the probability that gas exists. While it may be overly pessimistic to define CSG 3P reserves as having only a 10% probability of extraction (as the areal extent and quality of the gas bearing coals may be well understood), reserves may only be classified as 3P because of the lack of appraisal and production drilling.

The ultimate plateau production for a CSG project will depend on the available market, the costs of development, the production profile and ultimate recovery per well. As a result, CSG projects tend to expand capacity incrementally and 2P reserves grow over time (as contingent resources and 3P reserves are converted) until an economic plateau in production is reached.

3.3 Demand

The primary use for natural gas in Australia is electricity generation (30% of consumption in 20092 ). Mining and non-ferrous metals processing accounted for 20% and 11% of consumption respectively while the residential sector (where gas is used for water heating, space heating and cooking) accounted for 11%.

Energy consumption in Australia has grown at an average rate of 1.8% per annum over the last ten years. Natural gas currently accounts for approximately 23% of total primary energy consumption in Australia, behind oil (35%) and coal (38%). Energy consumption is expected to continue to grow in the foreseeable future (by 1.4% per annum to 2030). In line with international trends, demand for gas is expected to grow at a faster rate than demand for non renewable fuels, increasing to 33% of total consumption over this period.

Increased demand from gas fired power generation projects in the eastern states accounts for a significant component of the forecast increase in gas consumption. Key factors driving this demand include the increasing availability of gas (particularly with the continued development of CSG), the increasing relative cost of coal (driven largely by continued demand from China) and

Information in this report on the Australian energy industry is from a range of sources. The major sources are BP Statistical Review of World Energy June 2011, "Energy Update 2011", ABARES, June 2011, "Energy in Australia 2011", ABARES, March 2011, ABARE Research Report 10.02 "Australian Energy Projections to 2029-30", "State of the Energy Markets 2010", Australian Energy Regulator, December 2010, "Australian Energy Resource Assessment", Geoscience Australia and ABARE, July 2010, "Australian Petroleum Production & Exploration Association Limited - Gas Market Report ", KPMG May 2010 and "Australian Coal Seam Gas 2011: From Well to Wharf", EnergyQuest Pty Limited, August 2011.

government initiatives to reduce greenhouse gas emissions (with gas fired generation expected to be used for peaking generation as well as to meet shortfalls in base load demand).

The growth in gas demand differs from the west coast to the east coast. Western Australia consumes more natural gas than any other state, with demand driven by gas fired power generation, liquefied natural gas ("LNG") exports and the mining sector. On the east coast, New South Wales is expected to remain the largest consumer of gas followed by Queensland and Victoria. Queensland is forecast to experience the most rapid growth in gas consumption (other than the Northern Territory which remains relatively small) underpinned by new gas fired generation. Significant additional growth in demand for gas could result if one or more of the proposed LNG export projects in Queensland are commissioned.

3.4 Reserves and Production

Australia has extensive reserves of natural gas. At August 2010 total proved and probable conventional gas reserves were around 78,000PJ3 and proved and probable CSG reserves were around 38,000PJ. Total demonstrated gas resources are estimated to be in excess of 200,000PJ.

Due to the relatively low domestic market price for gas in the eastern states, the absence of cross continental pipelines and the costs associated with transporting LNG, Australia's natural gas market operates as two separate regional markets: the west/north (Western Australia and Northern Territory) and the east/south (other states and territories). Estimated 2P reserves, demonstrated resources and production by region are summarised below:

Australia - Natural Gas Reserves and Domestic Gas Production (PJ)
Region	2P Reserves(31 July 2011)	Production(12 months to 31 Mar 2011)	DemonstratedResources4
Conventional Gas
West/North	70,222	1,460	166,100
East/South	7,334	491	14,300
Total Conventional	77,556	1,951	180,400
Coal Seam Gas
West/North	-	-	-
East/South
- Surat/Bowen Basins	34,986	220	na5
- New South Wales Basins	2,910	6	na
Total CSG	37,896	226	46,590
Total Natural Gas	115,452	2,177	226,9906
Total East/South Gas	45,230	717	60,890

Source: Geoscience Australia/ABARE, EnergyQuest and Grant Samuel analysis

The west/north region accounts for 67% of Australia's 2P natural gas reserves and 73% of contingent resources. At current rates of production, 2P reserves represent approximately 48 years of supply (including for export as LNG). There are also significant contingent resources in the Carnarvon and Bonaparte Basins as well as the currently undeveloped Browse Basin. The bulk of the fields are located in major off-shore reservoirs. There are currently no CSG resources identified in the west/north region.

Eastern state reserves of conventional gas amount to only approximately 15 years of supply at current production levels although considerable potential remains to develop new reserves (e.g. Gippsland Basin, Otway Basin). The relatively low level of conventional gas resources, together with the fact that it is currently uneconomic to deliver Western Australian gas to the east coast,

3 PJ = petajoule

4 Estimated by Geoscience Australia/ABARE using a modified version of the McKelvey resource classification system. Represents economic and sub-economic resources (i.e. excludes inferred resources) and equates to discovered gas under the more generally used oil and gas resource classification system described in Section 3.2. 5

na = not available

6 A further 22,000PJ of conventional gas and 122,020PJ of CSG are estimated by in the inferred category arising from recent discoveries and previous finds requiring further appraisal.

have provided incentive for the development of CSG as an alternative form of natural gas fuel for the eastern states.

CSG reserves now exceed conventional gas reserves on the east coast. The Bowen and Surat Basins in Queensland accounts for the majority of 2P reserves (approximately 92%). Exploration for CSG in New South Wales commenced in 1996 but accounted for only 3% of total CSG production in the year to 31 March 2011. Additional CSG resources have been identified across the eastern states including the Galilee, Maryborough and Ipswich Basins in Queensland and the Gunnedah and Gloucester Basins in New South Wales. Exploration is continuing and additional CSG reserves are expected to continue to be proved up.

CSG production has grown significantly in recent years from 13PJ in 2000 to 226PJ in the year to 31 March 2011 and is expected to be 2,507PJ in 2030. CSG accounted for approximately 32% of east/south region natural gas production and is expected to increase significantly as a source of gas to eastern Australia (88% by 2030). From 2015 it is expected that CSG will also be converted into LNG for export.

All major gas producers/wholesalers supplying the Australian market are privately owned. In the year ended 31 March 2011 total natural gas production was estimated to be 2,177PJ of which around 50% was consumed domestically with the balance exported to markets in Asia from Western Australia in the form of LNG. Domestic consumption of natural gas is forecast to continue to grow due to strong gas demand from electricity generation.

3.5 Transmission, Distribution and Retailing

Large scale commercial gas usage in Australia commenced in the early 1970s. As most Australian gas production fields are located in areas remote from major retail load centres, a high pressure pipeline infrastructure was developed to bring gas to market. Gas distribution networks connect with the transmission system to distribute gas to the premises of residential, commercial and industrial customers. Large industrial users and electricity generators may connect directly to the high pressure transmission network.

All major gas transmission pipelines and the majority of gas distribution networks in Australia are now owned by the private sector. As transmission and distribution networks generally have natural monopoly characteristics, they are subject to a regulatory regime. The major owners of Australian gas transmission pipelines include APA Group, Hastings Diversified Utilities Fund, DUET Group, Singapore Power and Energy Infrastructure Investments (a joint venture of APA Group, Marubeni Corporation and Osaka Gas). The major owners of Australian gas distribution networks include Singapore Power, DUET Group, APA Group and Envestra Limited.

Retailers purchase natural gas from suppliers (producers or wholesalers) and on sell it to residential, commercial and industrial customers. The retail price of gas represents the wholesale cost of gas, transmission and distribution tariffs, the retailer's operating costs and a profit margin. Retail tariffs have historically been subject to a regulated cap reviewed at regular intervals (usually annually). In general, small consumers (residential and small business) are charged the standard tariff (which the retailer may set equal to or lower than the tariff cap) however larger consumers (commercial and industrial) negotiate tariffs with the retailer. In all states full retail contestability for gas has been implemented. The state governments are committed to the removal of retail price caps for gas where effective competition can be demonstrated. It has been determined that competition for gas retailing is effective in Victoria and South Australia and the Victorian government removed retail price caps on 1 January 2009.

At June 2010 there were 12 gas retailers active in the mass market. Private retailers dominate the gas market in all states except Tasmania. The major retailers are private companies AGL Energy Limited ("AGL Energy"), Origin Energy Limited ("Origin Energy"), TRUenergy, Simply Energy (owned by United Kingdom listed International Power plc) and Alinta (owned by a consortium of investors) and state government owned entities Ergon Energy and Aurora Energy.

3.6 Coal Seam Gas

Overview

Production of CSG commenced in North America in the 1920s and 1930s, however, large scale commercial production did not start until the 1970s. Early exploration of CSG in Australia commenced in the Bowen Basin in Queensland in 1976 with the first commercial production established in 1996.

Commercial acceptance of CSG as a reliable fuel source did not occur until the early 2000s with major upstream producers such as Santos and Origin Energy acquiring and developing significant CSG reserves. The growing commercial credibility of CSG was evident in the period to 2007 with a number of major downstream users (e.g. BP plc, Incitec-Pivot Limited and Rio Tinto Limited) entering into long term CSG purchase agreements. Interest in CSG has been driven by the decline of conventional gas resources on the east coast, growing domestic gas demand and growing global demand for LNG, particularly from Asia (see below). This has resulted in considerable corporate activity in the last five years as market participants sought to secure resources and increase scale (see Appendix 5).

Production Parameters

Extraction of CSG involves the drilling of a series of wells into the coal seam. Water held in the coal seam is pumped from the wells to reduce hydrostatic pressure causing methane to desorb and begin to flow from the coal into the wells. The CSG is then collected and processed on the surface. Some coal seams require stimulation to increase the flow and recovery of gas from a well. This process (commonly known as "fraccing") involves the pumping of a fluid (comprised largely of water and sand) under pressure into a coal seam to fracture the seam to provide a pathway for the gas to more easily flow through the coal.

A single CSG field may comprise hundreds of wells (typically in a grid formation) to maximise the total extraction and flow. The production performance of CSG wells depends on a number of factors, including:

• the extent of total gas content (which is in turn affected by factors such as coal rank and the depth and thickness of the seam);
• gas saturation of the coal (with higher saturation reducing the amount of dewatering required to promote desorption); and
• permeability (which affects the ability of the gas to flow through the seam to the well).

Different drilling and well completion techniques can ultimately have very different impacts on well flow rates and field productivity. Advances in drilling (e.g. lateral well methodology) and production as well as the shallow depth of the seams make CSG exploration a relatively low cost exercise compared to conventional gas.

Water produced from CSG wells usually requires treatment. Evaporation ponds are no longer favoured for water handling and the industry is adopting reverse osmosis technology to reduce environmental impacts.

Market Participants

Five years of corporate activity have consolidated ownership of CSG reserves and resources in Australia. There are more than 15 parties actively involved in the exploration, development and production of CSG. However, the proponents of the four major LNG export projects proposed for Queensland7 account for 80% of 3P reserves (although not all of this gas is destined for the LNG projects).

7 The project proponents are BG Group plc ("BG Group")/China National offshore Oil Corporation ("CNOOC")/Tokyo Gas Co., Ltd ("Tokyo Gas"), Origin Energy/ConocoPhillips/China Petrochemical Corporation ("Sinopec"), Santos/Petroliam Nasional Berhad ("Petronas")/Korea Gas Corporation ("KOGAS")/TOTAL S.A. ("TOTAL) and Royal Dutch Shell plc ("Shell")/PetroChina Company Limited ("PetroChina").

Based on public announcements Australian CSG reserves and resources are summarised below by field operator:

	Australian CSG Reserves and Resources by Field Operator (PJ)
	Production	As at 31 July 2011
Field Operator	(12 months to31 Mar 2011)	1P	2P	3P	2C
Queensland
Origin Energy:
- Australia Pacific LNG	68.7	1,527	11,730	14,679	4,041
- other	-	-	166	1,050	-
BG Group	54.6	2,356	8,647	17,320	4,803
Santos:
- Gladstone LNG	41.5	1,432	5,009	7,680	3,732
- other	9.4	-	597	-	553
Arrow LNG	41.7	720	7,597	10,771	8-
Other	4.3	43	1,240	5,072	4,870
	220.2	6,078	34,986	56,571	17,999
New South Wales
Eastern Star	0.4	115	1,520	2,797	3,515
Santos	-	-	-	-	1,011
AGL Energy	5.7	75	962	1,301	9-
Metgasco	-	3	428	2,542	2,512
Dart Energy	-	-	-	-	575
	6.1	193	2,910	6,640	7,612
	226.3	6,271	37,896	63,211	25,611

Source: EnergyQuest and Grant Samuel analysis

Except that listed CSG market participants are subject to the requirements of stock exchange disclosure and the standards adopted by independent resource certifiers, there is no requirement to disclose reserves and resources on a uniform basis. Therefore, the above table should be viewed as no more than an indication of the base CSG resource in Australia.

Proposed LNG Projects

LNG production involves the cooling of natural gas into liquid form thereby reducing the volume of gas by a factor of approximately 600 times and making it more economical to transport. LNG is transported in specially designed tankers for delivery to purpose built inbound terminals, where it is converted back into gas before being used for fuel.

Australia currently has two LNG operations: the North West Shelf Joint Venture located off the north west coast of Western Australia (which commenced export in 1991) and the Darwin LNG Project in the Northern Territory (which commenced export in 2006). In 2010 Australia exported 21.1Mt (972PJ) of LNG (approximately 9% of global LNG demand) to Japan (65% of total), China (20%), South Korea (5%) and Taiwan (5%). Japan and South Korea are the largest LNG importers globally, with limited or no access to indigenous or piped gas. LNG demand in existing Asian markets is expected to continue to grow and new markets (such as Singapore and Thailand) are expected to commence LNG importation. Medium to long term Asian demand remains uncertain but projections range between 165Mtpa10 (8,500PJ) and 260Mtpa (13,000PJ) by 202011.

In 2008 the LNG market moved back towards being a buyer's market as a result of the commissioning of new production capacity (particularly in Qatar) and the easing of demand as a consequence of the global economic downturn. Nevertheless, expected high energy prices and

8 Shell/PetroChina acquired certain of the Australian CSG assets of Arrow Energy Limited ("Arrow") in July/August 2010. Arrow had not previously disclosed contingent resources but the independent expert for the transaction stated that Arrow estimated its gross original gas in place resources in its Australian tenements to be approximately 74,000PJ. 9

AGL Energy has not disclosed contingent resources.

10 Mtpa = million tonnes per annum

11 The high end of the range reflects projections made since the Japanese earthquake in March 2011.

increased demand for LNG in Asia have prompted further investment in the LNG industry in Australia. This includes the expansion of existing projects and new development in Western Australia and the Northern Territory (e.g. the Pluto LNG Project and the Gorgon Project) as well as LNG projects on the east coast based on growing CSG reserves and resources. The period of oversupply resulted in stable prices during the second half of 2009 and 2010. However, the market has tightened during 2011 due to the continued growth in demand in Asia from both traditional and emerging markets. In particular, the loss of power generation capacity in Japan due to the earthquake in March 2011 and the subsequent review of nuclear power programs in Japan, Korea, Taiwan and China is expected to support LNG demand in Asia for some time.

There are currently eight LNG projects proposed in Queensland of which four are backed by major companies. The major projects are summarised below:

Potential Queensland CSG to LNG Projects
Project	QueenslandCurtis LNG	GladstoneLNG	AustraliaPacific LNG	ArrowLNG
Partner	BG Group/	Santos/	Origin Energy/	Shell/
	CNOOC/Tokyo Gas	Petronas/KOGAS/TOTAL	ConocoPhillips/Sinopec	PetroChina
Announced	Feb 2008	July 2007	Sept 2008	May 2007
Location	Curtis Island	Curtis Island	Curtis Island	Curtis Island
Proposed Capacity	8.5Mtpa	7.8Mtpa	9Mtpa	18Mtpa
Number of Trains	2	2	2	4
Project Stage	Construction	Construction	Construction	Pre-FEED12
Final Investment Decision	31 Oct 2010	13 Jan 2011	28 July 201113	na
First Production	2014	2015	2015	2015

Source: Company announcements

There are a number of other proposals to develop CSG to LNG projects on the east coast of Australia including by Liquefied Natural Gas Limited at Fisherman's Landing at Gladstone, Queensland and by Eastern Star at Newcastle, New South Wales.

There are a number of hurdles to the development of the proposed LNG projects:

• project risk: an LNG project requires significant capital investment and (skilled and unskilled) labour resources. Despite recent economic conditions, materials and labour resources remain in tight supply in the mining and infrastructure sectors. Securing resources on a timely and economical basis for an LNG project will be challenging. In addition, raising the necessary capital may also be difficult;
• supply risk: supply of CSG on the scale required to support LNG is currently unproven. It is estimated that a single 3-4Mtpa plant requires around 175-250PJ of gas per annum (up to 30% more than total current CSG production). Accordingly, further exploration will be required in order to provide sufficient security of supply for the projects. As drilling of wells needs to be undertaken in advance of commissioning 'ramp up' gas will be produced which may need to be stored or sold into the domestic market;
• demand risk: projects are dependent on the ability to secure long term gas supply agreements for the LNG produced. With demand for LNG globally (and specifically in Asia) expected to grow significantly, a number of external off take arrangements for CSG LNG have been entered into (e.g. Petronas and KOGAS with Gladstone LNG, Sinopec with Australia Pacific LNG) and more are expected;
• regulatory risk: national environmental and climate change policies and the proposed application of the petroleum resource rent tax ("PRRT") to onshore oil and gas projects will

12 FEED = front end engineering and design

13 Final investment decision approval was given to the first phase of a two train CSG to LNG project. The first phase encompasses the first LNG train and infrastructure to support a second train. Separate approval will be sought for the second train at a later date. Australia Pacific LNG's original proposal contemplated a four train project with a proposed capacity of 18Mtpa.

increase the costs associated with producing LNG. This will impact the competitiveness of Australian LNG in comparison to international producers not subject to similar imposts; and

technical risk: conversion of CSG to LNG has not been previously undertaken. A number of potential technical risks have been identified although none is expected to be a material hurdle to production. In particular, the calorific value of CSG (i.e. the amount of energy released on combustion) is lower than other liquid rich LNG sources. This may impact the price received or require 'spiking' of CSG with higher calorific additives or blending with conventional LNG, adding to delivered cost.

As three of the major Queensland projects (Queensland Curtis LNG, Gladstone LNG and Australia Pacific LNG) have been approved and are commencing construction, the production of CSG for export as LNG is no longer a matter of feasibility but of execution. Nevertheless, considerable risk and uncertainties remain.

Regulatory Issues

The development of the CSG industry has government support but has increasingly attracted negative publicity. In particular, concerns have been raised in relation to land access (e.g. disturbance and compensation) and environmental impacts (e.g. water disposal and impact on acquifer). Consequently, governments have imposed extensive regulatory requirements on CSG development (e.g. in Queensland the state government has imposed a new land access code, proposed legislative protection for strategic cropping land and imposed "make good" obligations and other conditions in relation to acquifer impacts).

There has been greater opposition to CSG development in New South Wales (believed to reflect lesser familiarity with the gas industry) and development approval is more difficult to obtain than in Queensland. In July 2011, following a 60 day moratorium on the granting of new CSG exploration licences, the New South Wales Government announced a range of regulations to apply to CSG developments in addition to increased landholder consultation processes and the requirement for agricultural impact statements. The new regulations include banning evaporation ponds, extending the moratorium on fraccing until 31 December 2011 and banning the use of BTEX chemicals14 in CSG drilling but generally reflect those applied in Queensland.

CSG development is expected to continue to attract community opposition and negative media coverage. This is expected to delay approval processes, particularly in New South Wales.

3.7 Wholesale Gas Prices

Overview

Natural gas markets around the world have developed on a regional basis, resulting in prices being set in different ways and at different levels across the world. Only around 9% of natural gas production is traded internationally as LNG and most of that under long term contracts. Therefore, only a small proportion of LNG is available to respond to regional price movements, although the importance of spot sales is growing. As a consequence, unlike oil, no global pricing benchmarks have developed for natural gas. Nevertheless, gas prices will typically range within the bounds of the cost of production (minimum price) and a price ceiling based on the available alternative fuel sources (maximum price). The actual gas price within this range will be determined by competitive pressures in the market.

Australian market prices for natural gas have historically been low in comparison to international prices. Major factors for this price differential include:

• the abundance of coal available as fuel for electricity generation and therefore comparatively low consumption of gas;
• Australia's geographic isolation from international markets; and
• Australia's extensive natural gas resources.

14 BTEX chemicals are benzene, toluene, ethylbenzene and xylenes.

In Australia gas has historically been sold under confidential long term wholesale contracts based on negotiations between producers and downstream buyers. The price will depend on a number of factors including total contract volume, available reserves, length of contract, price escalations and flexibility and will normally be subject to some adjustment for inflation or periodic price reset. Publicly available gas pricing information is limited15. However, market commentators indicate that historically16:

• west coast domestic gas contract prices moved up significantly from $2.00-2.50 per GJ17 in 2004 to levels approaching $7.00-9.00 per GJ in 2007-2011 reflecting the impact of demand from LNG, the cost of gas field development (as the large gas accumulations are located offshore), competition from users (particularly resource companies) seeking to secure gas supply and a relatively small domestic gas market;
• east coast domestic gas contract prices have been around $3.50-4.50 per GJ since 2007, although the average price received would be higher to the extent that a producer is able to share in increases in electricity prices; and
• average annual spot gas prices in Victoria18 moved down from around $3.00 per GJ in 2007 to around $1.50-2.50 per GJ in 2009 but more recently have increased to around $3.00-4.00 per GJ.

The first long term contracts for CSG in Australia were priced at around $2.00-2.50 per GJ, a discount to conventional gas. The discount reflected factors such as the fact that CSG was unproven as a commercial fuel source, the limited certified CSG reserves at that time and the start up nature of many of the CSG producers. The entry of major producers such as Santos, Origin Energy, BG Group and Shell has added significant commercial credibility to CSG and, as a result, the price differential has narrowed.

Given the long term and confidential nature of the majority of existing contracts, there is little recent information on east coast gas prices. East coast gas contracts have traditionally included partial Consumer Price Index ("CPI") escalation. However, contract parties have recently also exercised their rights under contract provisions for market resets and/or price reopens. The extent of such provisions in the east coast market is not clear.

Outlook for Domestic Gas Prices on the Australian East Coast

It is widely accepted that gas prices on the east coast will increase in real terms over the medium term. However, the timing and extent of any increase is dependent on the interaction of a range of complex factors including:

• the continued growth in demand for energy: as around 30% of natural gas produced in Australia is used in electricity generation, the demand for natural gas is expected to continue to grow at least in line with the growth in consumption of electricity;
• government initiatives to address climate change: as natural gas has lower carbon intensity than coal, government climate change initiatives will further underpin the growth in demand for natural gas. However, the competitiveness of natural gas as a fuel source in comparison to coal will, in part, depend on the price of carbon emissions19 and, as coal is a cheap and abundant fuel source, the transition to gas will take some time;

15 Quarterly production and reserves reports provide details of average gas prices received by industry players but those prices are distorted by factors such as the mix of gas sales (i.e. domestic, LNG and international) and the terms of existing contracts. 16 All gas prices quoted are ex well head prices.

17 GJ = gigajoule

18 Victoria operates a spot market for imbalances in which approximately 10-15% of gas produced is traded. Short term trading markets commenced in New South Wales and South Australia in September 2010 and is due to commence in Queensland in December 2011. However, the prices in such markets reflect market imbalances and small volumes and are not prices that would be agreed under longer term arrangements. 19 On February 2011, the Commonwealth Government announced a plan for a carbon pricing mechanism to start on 1 July 2012 with a

three year fixed price period before transitioning to an emissions trading scheme on 1 July 2015 (with a price ceiling and floor for the first three years). Subsequently, on 10 July 2011, it was announced that the carbon pricing mechanism will apply directly to the largest carbon polluters and that the carbon price will start at $23 per tonne, rising in real terms by 2.5% per annum during the fixed price period. In addition, there is to be a range of industry assistance as well as tax cuts and increases in pensions, allowance and benefits to individuals to assist with the price impacts. The legislation is due to be submitted to Parliament.

• continued growth in demand for LNG in Asia: due to a lack of natural gas resources, Asia is the major importing region for LNG, primarily for power generation. Consequently, despite recent weaker market conditions, demand for LNG imports is also expected to continue to grow. Furthermore, LNG prices in Asia have historically been linked to oil prices (typically the Japanese custom cleared crude oil price) at close to parity. There is no reason to consider that this will not continue;
• commercialisation of CSG on the east coast: the substantial increase in natural gas reserves as a consequence of the proving up of CSG reserves has moved the east coast from a position of relatively limited supply to one with significant resources surplus to domestic requirements. This, together with the high energy price environment and the continued demand for LNG in Asia, has led to a number of proposals to establish LNG export operations on the east coast. The LNG projects and existing domestic contracts are expected to absorb the majority of current 3P CSG reserves, leaving future domestic gas demand (in the absence of further conventional gas discoveries) to be met from contingent resources. Commercialisation of the contingent resources and higher cost, more marginal CSG fields will require higher domestic gas prices.

The export of LNG from the east coast would significantly increase demand for CSG and, as has happened in Western Australia, is expected to place upward pressure on domestic gas prices. In this case, domestic gas prices may move towards a LNG "net back" price (i.e. a notional price of gas reached by taking the LNG price and "netting back" costs such as LNG production, transport and losses on conversion) which are estimated to be at a significant premium to current east coast gas prices. As the largest CSG producers are all participants in the major proposed LNG projects, these producers are more likely to achieve pricing outcomes approaching LNG netback prices. However, smaller producers with limited access to infrastructure or CSG resources of scale may not be able to achieve these higher prices; and

available gas contract price data reflects historical capital and operating costs: east coast contract prices do not reflect the returns needed by producers on more recent capital expenditure and recent increases in operating costs in the resource sector at rates above CPI. These increased costs will need to be factored into future expectations for gas prices.

On the other hand, there are a number of factors that may limit the extent to which gas prices on the east coast increase:

• growth in demand for electricity may moderate: demand for electricity has the potential to fall below currently forecast levels as a result of an increased focus by consumers on energy efficiency as concerns about climate change increase and as the cost of energy increases;
• natural gas may be superseded as the low carbon intensity fuel for generation: significant investment is currently being made in building wind generation capacity and developing and commercialising renewable generation technologies such as geothermal and solar. To the extent that renewable generation is developed, the demand for natural gas for generation may moderate;
• there is no certainty that all of the proposed CSG to LNG projects will proceed: three of the proposed LNG export projects in Queensland have been sanctioned and are under construction and a significant proportion of the remaining CSG reserves is committed to the other project. If any of the projects did not proceed or not be developed to proposed scale, a substantial amount of gas would be stranded without a market, particularly while conventional gas production is sufficient to meet domestic demand. This would place downward pressure on domestic gas prices;
• an increase in east coast gas prices will stimulate competition: projects which are currently marginal (such as lower producing conventional gas basins) may become economic if there is a significant increase in gas prices on the east coast. These projects could add significantly to supply on the east coast and place downward pressure on prices. Furthermore, a sustained rise in gas prices would stimulate new exploration. This, together

with the depth of the east coast domestic market and reasonable access to gas processing plants and pipelines, means that domestic gas pricing is likely to remain competitive;

• there will be significant gas production in advance of LNG plant commissioning: to the extent that well production is not managed by technical means "ramp up" gas will need to be contracted, stored or sold into the domestic market. This may place some downward pressure on gas prices in the period to 2015; and
• impact of proposed onshore PRRT: the application of the PRRT to the onshore oil and gas sector will increase overall project cost and potentially reduce the international competitiveness of Australian LNG. To the extent this results in gas being redirected to the domestic market this will place downward pressure on gas prices.

In the absence of LNG demand, there are reasons to believe that gas prices in the east coast domestic market will move upwards, particularly as existing contracts run off. Pricing outcomes are dependent on a range of factors but the growth in demand for energy will put upward pressure on domestic gas prices (from around $3.50-4.00 per GJ currently) in the medium term.

The existence of LNG as an alternative source of demand for natural gas on the east coast creates further price pressures. If the LNG export projects are commissioned there will be further upward pressure on domestic prices. In any event, the emergence of the LNG projects means that gas producers are reluctant to commit to new long term domestic contracts and, therefore, short term markets will grow in importance. Contracts negotiated in the near term are likely to include market adjustment provisions so that the producer is able to share in increases in the market price for gas over the term of the contract. However, it remains to be seen whether domestic prices will approximate full LNG netback prices, which many commentators predict could exceed $8.00 per GJ. The price obtained by individual producers will depend on a number of factors including the level of competition to supply gas and the commercial leverage of the producer.

4 Profile of Eastern Star Gas Limited

4.1 Background

Eastern Star is focused on the exploration for and the development and production of natural gas in eastern Australia. It was listed on the ASX in February 2001, at which time it held interests in five petroleum exploration licence areas and two licence applications in New South Wales and Victoria plus an option to acquire an interest in PEL238 in the Gunnedah Basin in New South Wales. Subsequently, Eastern Star acquired and divested a number of exploration licences and commissioned the Wilga Park Power Station near Narrabri, New South Wales to assist in commercialising its gas resources.

Today, Eastern Star employs around 85 people (plus up to 150 contractors) and had a market capitalisation of around $600 million prior to announcement of the Proposal. Eastern Star has interests in 11 exploration licences in New South Wales and South Australia, an interest in the Wilga Park Power Station and holds a 22.2% shareholding in ASX listed oil and gas explorer Orion Petroleum Limited ("Orion"). Eastern Star's primary activity in recent years has been commercialisation of the Narrabri Gas Project which has 2,797PJ of certified 3P coal seam gas reserves at 31 December 2009. Eastern Star's operations are described in Section 4.6.

4.2 Financial Performance

Eastern Star is yet to make a profit given its concentration on exploration and appraisal programmes and the development of the Narrabri Gas Project. Its activities have primarily been funded by equity capital raisings in conjunction with asset realisations and interest earned on cash balances. The financial performance of Eastern Star for the five years ended 30 June 2011 is summarised below:

Eastern Star - Financial Performance ($'000)
			Year ended 30 June
	2007200820092010actualactualactualactual				2011actual
Sales revenue	883	375	508	1,438	2,601
EBITDA20	(7,006)	(5,998)	(6,361)	(7,498)	(6,791)
Depreciation and amortisationDevelopment expenditure amortisation	(489)(43)	(311)-	(416)-	(918)-	(1,982)-
EBIT21	(7,538)	(6,309)	(6,777)	(8,416)	(8,773)
Net interest incomeShare of profit/(loss) of associatesSignificant and non-recurring items	347-(6,325)	2,132(4)-	1,857-2,401	1,844-25	4,454--
Operating profit/(loss) before taxIncome tax expense	(13,516)-	(4,181)-	(2,519)-	(6,547)-	(4,319)-
Profit/(loss) after tax attributable toEastern Star shareholders	(13,516)	(4,181)	(2,519)	(6,547)	(4,319)

Source: Eastern Star and Grant Samuel analysis

Sales revenue primarily represents electricity sales by Wilga Park Power Station which have increased recently as the plant has been expanded. Negative EBITDA reflects corporate and employee expenses not directly associated with exploration and development activities (which are otherwise capitalised). Development expenditure amortisation relates to the conventional Coonarah Gas Field which supplied gas to Wilga Park Power Station until April 2010.

Share of profits of associates relates to Eastern Star's 22.2% interest in Orion. As Eastern Star's equity accounted interest in Orion is zero it has not recognised its share of Orion's losses since 2008. At 30 June 2011 Eastern Star's accumulated unrecognised share of Orion's losses is estimated at $3.0 million.

20 EBITDA is earnings before net interest, tax, depreciation and amortisation, investment income and significant and non-recurring items. 21 EBIT is earnings before net interest, tax, investment income and significant and non-recurring items.

Significant and non-recurring items in 2007 relate to the cancellation of an overriding royalty over the CSG rights of PEL238 and in 2009 to the gain on sale of a 35% interest in Wilga Park Power Station, PPL3 assets and related businesses.

4.3 Financial Position

The financial position of Eastern Star as at 30 June 2011 is summarised below:

Eastern Star – Financial Position ($'000)
	As at30 June 2011
Debtors and prepaymentsWell equipmentCreditors, accruals and provisions	3,0022,574(9,243)
Net working capital	(3,667)
Property, plant and equipment (net)Exploration and evaluation expenditure (net)Royalty interestsSoftware (net)Performance bonds (indemnity guarantees)22.2% interest in OrionOther non-current payables and provisionsRestoration and rehabilitation provisionsTotal funds employed	50,173158,7999,3592033,35922-(1,299)(2,561)214,366
Cash at bank and on deposit	63,591
Bank loan	(10,950)
Net cash	52,641
Equity attributable to Eastern Star shareholders	267,007
StatisticsShares on issue at period end (million)Net assets per shareNTA23 per shareGearing24	1,026.5$0.26$0.10(24.6%)

Source: Eastern Star and Grant Samuel analysis

Property, plant and equipment (net) increased by around $41 million in the year ended 30 June 2011 primarily as a result of the project to expand Wilga Park Power Station and the acquisition of a 24 hectare site on Kooragang Island, Newcastle.

Exploration and evaluation expenditure (net) represents the capitalised costs associated with Eastern Star's exploration and appraisal activities. The carrying value of each exploration and evaluation area is dependent on the successful development and commercial exploitation or sale of the respective areas of interest. Most of the carrying value is represented by the Narrabri Gas Project.

In 2007 Eastern Star spent $9.4 million to cancel overriding royalty interests in the CSG produced from PEL238. These payments were capitalised once 185PJ of 2P CSG reserves were certified in PEL238 and will be amortised once commercial production of gas commences (expected 2015).

Performance bonds represent Eastern Star's obligations to the NSW Government in relation to petroleum licences and are secured by term deposits with financial institutions in favour of the NSW Department of Mineral Resources.

Eastern Star's 65% interest in the Narrabri Gas Project and 65% interest in the Wilga Park Power Station are accounted for as joint venture interests as they are not separate legal entities. As a

22 Eastern Star accounts for its interest in Orion on an equity accounted basis. Due to Orion's operating losses the book value for the investment is zero. 23 NTA is net tangible assets which is calculated as net assets less intangible assets (i.e. capitalised exploration and evaluation

expenditure (net), royalty interests and software (net)). 24 Gearing is net cash divided by net assets less net cash.

consequence, the financial statements reflect Eastern Star's share of the assets and liabilities and earnings of each joint venture.

Cash at bank and on deposit reflects the balance of the funds raised in the $100 million institutional placement in August 2010. The bank loan is secured against the land at Kooragang Island, Newcastle and is repayable in June 2012 or upon a change of control.

At 30 June 2011, Eastern Star:

• was required to meet minimum committed expenditure to maintain rights of tenure to exploration licences totalling $17 million ($10.5 million within 12 months);
• had contractual obligations (including in relation to feasibility studies and FEED project) within 12 months totalling $10.9 million; and
• disclosed contingent liabilities for:
  • bankers' guarantees relating to obligations under exploration licences and operating contracts (secured by a charge over cash deposits) ($3.3 million); and
  • termination benefits payable in certain circumstances under employment agreements ($1.7 million);
  • two US$5 million production payments payable to Gastar Exploration Limited when sustainable production of sales gas from PEL238 reaches certain milestones, one when production reaches 25 mcfd25 and one when production reaches 40 mcfd; and
  • the reimbursement fee of $9.24 million that would be payable to Santos in certain circumstances under the scheme implementation agreement.

On 19 February 2009, Eastern Star completed the sale of a 35% interest in Wilga Park Power Station, PPL3 and related businesses for a cash payment of US$3 million. A further US$0.25 million is receivable 12 months after the power station has been expanded to a 7MW capacity and has been operated at full capacity for three months. It is expected that this amount will crystallise by early 2012.

Under the Australian tax consolidation regime, Eastern Star and its wholly owned Australian resident entities have elected to be taxed as a single entity. At 30 June 2011, Eastern Star had carried forward income tax losses of approximately $193 million (none of which are recognised in the balance sheet), no carried forward Australian capital losses and no accumulated franking credits.

At 30 June 2011, loans receivable of $18.2 million relating to shares issued under the terms of Eastern Star Gas Limited Employee Incentive and Contractors Plan26 are not recognised in the balance sheet as the issue of shares using the proceeds of the loans is accounted for as an option grant.

4.4 Capital Structure and Ownership

Eastern Star has 1,026,547,041 ordinary shares on issue including 34,230,000 shares issued under the Eastern Star Gas Limited Employee Incentive and Contractors Plan ("EIP")26 that are not quoted on the ASX. Eastern Star American Depositary Receipts ("ADR") (sourced from ASX listed shares) have been listed on the International OTCQX since January 2009.

25 mcfd = million cubic feet per day

26 Under the EIP the Directors may offer ordinary shares or options to acquire ordinary shares to eligible persons after an annual performance review. The shares are issued at the market value of the shares at the time an offer is made. The Directors may also offer interest free loans for terms of up to five years for the subscription of shares and under such loan Eastern Star holds a lien over the issued shares. The shares rank pari passu with other issued ordinary shares and are not quoted on the ASX while there are loans outstanding. Any loan extended has recourse limited to the proceeds on disposal of the shares. Options are issued free at grant with an exercise price not less than 20 cents per share or the market value of a share at the time of offer. The maximum number of options and shares on issue may not exceed 5% of the issued capital of Eastern Star. There are currently no options on issue under the EIP.

Under the Scheme it has been agreed that the EIP shares will be acquired by Santos but the Santos shares issued will be unquoted. All outstanding loans will remain in force under the terms of the EIP until repaid on the earlier of termination of employment or expiry date. The loans may be repaid earlier at the employee's election.

At 1 September 2011, there were 9,963 registered shareholders in Eastern Star with the top 20 shareholders accounting for approximately 66% of the ordinary shares on issue.

Santos is Eastern Star's largest shareholder with a 20.92% direct interest27. Most of this shareholding was acquired from Hillgrove Resources Limited in July 2009 at the same time as Santos acquired its 35% interest in the Narrabri Gas Project and Wilga Park Power Station from Gastar Exploration Limited. TRUenergy Investments holds a 3.76% direct interest in Eastern Star27. Approximately 12% of issued share capital is held by interests associated with Eastern Star's founders, board, senior management and employees (i.e. including the EIP shares).

The balance of registered shareholders is a mix of institutional and retail in nature. Shareholders with up to 10,000 shares represent around 60% of registered shareholders but account for less than 3% of shares on issue. Eastern Star shareholders are predominantly Australian based investors.

4.5 Share Price Performance

A summary of the price and trading history of Eastern Star since 1 January 2006 is set out below:

Eastern Star - Share Price History
		Share Price (cents)		AverageWeeklyVolume	AverageWeekly
	High	Low	Close	(000's)	Transactions
Year ended 31 December
2006	34.0	8.0	33.5	5,363	130
2007	79.0	21.0	43.0	7,219	395
2008	93.0	19.0	57.5	8,319	742
2009	116.5	42.0	82.5	14,633	2,950
2010	104.5	61.5	80.5	18,046	3,630
Quarter ended
31 March 2011	87.0	61.5	75.5	20,853	3,582
30 June 2011	80.0	55.0	60.5	10,853	2,633
Month ended
31 July 2011	90.0	58.0	85.5	75,774	3,598
31 August 2011	88.5	66.0	79.0	53,447	4,178
30 September 2011 (to 16 September)	82.5	73.5	78.5	17,846	3,325

Source: IRESS

Eastern Star listed in February 2001 raising $10 million through the issue of shares at 20 cents each. Until December 2006 shares in Eastern Star traded broadly around 20 cents. During 2007 Eastern Star moved to control of the Narrabri Gas Project and the initial certification of reserves. This process, together with an increased market profile for Eastern Star and the growing commercial credibility of CSG, resulted in increasing trading volumes and a strengthening of the Eastern Star share price:

Scheme Booklet 97

27 However, as a consequence of the arrangements entered into on 18 July 2011, both Santos and TRUenergy Investments have a 24.68% relevant interest in Eastern Star.

Note: Trading volumes on 18 and 19 July 2011 (the two days following announcement of the Proposal) exceeded 70 million shares and are not shown on graph.

During 2008 the Eastern Star share price rose to a high of 93 cents in June reflecting both progress in the commercialisation of the Narrabri Gas Project and the market re-rating of the CSG sector following BG Group's approach to Origin Energy in April 2008 and Petronas' acquisition of a 40% interest in Santos' Gladstone LNG Project in May 2008. Although the share price fell during the latter part of 2008, in early 2009 Eastern Star shares were trading around 50-60 cents per share.

Eastern Star shares traded in the range of 42 cents to 116.5 cents at a volume weighted average price of 83 cents during 2009 reflecting improved market sentiment, Eastern Star's entry into the S&P/ASX 200 Index in March 2009 and Santos' acquisition of a 19.99% interest in Eastern Star in July 2009 at $1.00 per share. In August 2010 Eastern Star raised $100 million by way of an institutional placement of shares at a price of 84 cents per share to fund the acquisition of land at Newcastle Port and to finance its capital and operating requirements. Subsequently the share price drifted down to around 60 cents possibly due to negative market sentiment about the CSG sector, delays in obtaining approvals and limited progress in the commercialisation of the Narrabri Gas Project.

During 2011 until 15 July 2011 Eastern Star shares traded in the range 55 cents to 87 cents (at a volume weighted average price of 71.3 cents) and closed at 59.5 cents on 15 July 2011 (the last trading day before the announcement of the Proposal). Since then until 16 September 2011, Eastern Star shares have mirrored movements in the Santos share price broadly reflecting the terms of the Scheme and have traded in the range of 66 to 90 cents, at a volume weighted average price of 83 cents.

Eastern Star has a free float of around 70% (i.e. excluding Santos, founders, board, senior management and EIP shares) and has been reasonably liquid. Average weekly volume over the twelve months prior to the announcement of the Proposal represented approximately 1.6% of average shares on issue or annual turnover of around 83% of total average issued capital (125% of free float).

Eastern Star is a member of various indices including the S&P/ASX 200 Index and S&P/ASX 200 Energy Index. Its weighting in these indices is approximately 0.07% and 0.89% respectively. After trading in line with these indices from January to September 2006, Eastern Star has generally outperformed both indices until early 2011. While its performance has mirrored wider market movements, there have been periods of significant over performance, notably during mid 2008 due to positive market sentiment towards the CSG sector and in June 2009 when Santos acquired its shareholding. Since February 2011, Eastern Star has underperformed both indices.

4.6 Operations

4.6.1 Summary of Licence Interests

Eastern Star's direct interests in exploration licences are summarised below and described in the following sections:

Eastern Star – Summary of Licence Interests
Basin/Licence	Rights	Interest	Operator	Partner/s	OverridingRoyalty
Gunnedah Basin
PEL238	Conventional	100%	Eastern Star	-	0.57%
	CSG	65%	Eastern Star	Santos	0.855%
PAL2	Conventional	100%	Eastern Star	-	0.57%
	CSG	65%	Eastern Star	Santos	0.855%
PPL3	Conventional	65%	Eastern Star	-	-
	CSG	65%	Eastern Star	Santos	0.855%
PEL433	Conventional	65%	Eastern Star	-	-
	CSG	65%	Eastern Star	Santos	-
PEL434	Conventional	65%	Eastern Star	-	-
	CSG	65%	Eastern Star	Santos	-
	Bowen/Surat/Northern Gunnedah Basin
PEL6	CSG	80%	Eastern Star	Orion (20%)	1.75%
(Edendale)	Conventional	5%	Orion	Orion (95.0%)	1.75%
PEL6	CSG	77.5%	Eastern Star	Orion (22.5%)	3.5%
(remainder)	Conventional	2.5%	Orion	Orion (97.5%)	3.5%
PEL427	CSG	50%	Eastern Star	Orion (25%)/Comet Ridge (25%)	-
PEL428	CSG	40%	Eastern Star	Orion (20%)/Comet Ridge (40%)	-
Arckaringa Basin
PEL117	CSG	Earning 25%(1)	Linc Energy	Linc Energy	-
PEL121	CSG	Earning 25%(1)	Linc Energy	Linc Energy	-
PEL122	CSG	Earning 25%(1)	Linc Energy	Linc Energy	-

Source: Eastern Star Note (1) Potential to earn a further 25% CSG rights.

Through its equity investment in Orion, Eastern Star also holds an indirect 22.2% interest in the licence interests of Orion.

Eastern Star has interests in exploration licences located in South Australia and New South Wales:

4.6.2 Narrabri Gas Project

Overview

The main focus of Eastern Star's activities is the development and commercialisation of the Narrabri Gas Project in the Gunnedah Basin in New South Wales. Eastern Star holds a 65% interest in the project through two wholly owned subsidiaries, Hillgrove Energy Pty Limited (32.5%) and Eastern Energy Australia Pty Limited (32.5%). The remaining 35% is held by Santos.

Source: Eastern Star

The Narrabri Gas Project comprises the CSG resource of:

• PEL238: a 7,920 km2 exploration licence area to the west and south of Narrabri in north-central New South Wales. PEL238 was granted in 2001 and in 2007 was extended for four years to August 2011. An application for a further four year renewal was lodged in June 2011 and renewal is expected in due course;
• PAL2: a 267 km2 assessment lease which was originally part of PEL238. It was granted in October 2007 for six years to allow extended assessment of the economics of producing CSG from the Bohena Seam in advance of the grant of a production licence; and
• PPL3: a 26.4 km2 petroleum production lease which was originally part of PEL238. It was granted in December 2003 for a 21 year period. It encompasses the conventional Coonarah Gas Field located 20km west of Narrabri as well as a corridor connecting the gas field to the Wilga Park Power Station.

The Narrabri Gas Project is governed by a Joint Operating Agreement. Eastern Star is the operator of the project. Revenue from the Narrabri Gas Project is subject to overriding royalties totalling 0.855%.

Reserves and Resources

Exploration and appraisal activities undertaken prior to 2007 confirmed the existence of two thick and laterally continuous coal measure sequences across a large part of PEL238 (the Early Permian Maules Creek Formation and the Late Permian Black Jack Formation). These formations contain the main coal seams being targeted – the Bohena Seam, the Hoskinsson Seam and the Namoi Seam. Subsequent appraisal work has identified that, unlike typical coals that have a cleated structure, the targeted coal seams tend to be

characterised by a series of parallel, near vertical fractures. As a consequence, the Narrabri Gas Project has adopted lateral well methodology (whereby lateral wells are drilled perpendicular to the natural fracture system of the target coal) and has successfully implemented different lateral well designs for each of the target coal seams.

The exploration and appraisal activities resulted in the first independent certification of CSG reserves in September 2007. Since then drilling of additional coreholes and production pilot wells has been undertaken to prove up reserves and resources. The increase in certified reserves and resources for the Narrabri Gas Project since September 2007 is set out below:

Narrabri Gas Project - Reserves and Resources (PJ) (100% basis)
	31 Dec 2007	31 Dec 2008	31 Dec 2009
Gas Reserves
Proved reserves (1P)	21	21	115
Proved and probable reserves (2P)	185	336	1,520
Proved, probable and possible reserves (3P)	1,300	1,300	2,797
Contingent Resources
Proved resources (1C)		1,195	1,243
Proved and probable resources (2C)		3,053	3,515
Proved, probable and possible resources (3C)		6,128	6,215

Source: Eastern Star, NSAI

Notes: The contingent resources assessment is over and above the 3P reserves.

The reserves and resources have been certified by international petroleum consultant Netherland, Sewell and Associates, Inc. ("NSAI") based on technical, commercial and operational information provided by Eastern Star. NSAI has been used by the major CSG explorers and producers in eastern Australia to determine reserves. Due to the level of production from the Tintsfield pilot (targeting a coal seam which has not previously been included in gas reserves assessment) and delays in drilling approvals from the New South Wales Government, NSAI has confirmed there is not yet sufficient data to warrant an updated reserves report.

The certified reserves and resources relate only to PEL238 and it is envisaged that further increases will occur as exploration and appraisal activities progress. At existing certified levels the Narrabri Gas Project is considered to be a world scale resource.

Project Commercialisation

Field development for the Narrabri Gas Project is underway. The project currently incorporates six production pilot wells (of which five are fully operational) and further exploration and appraisal work (seismic surveys, corehole drilling and production pilots) is continuing in order to underwrite commercialisation of the project.

There are no material gas markets in the immediate vicinity of the Narrabri Gas Project nor is there any gas pipeline infrastructure to deliver gas to markets. Accordingly, a staged approach has been proposed to enable the coordinated development of gas markets, pipeline infrastructure and gas production. In addition, Eastern Star:

• has appointed consultants to carry out a feasibility study and review options for the development of upstream gas production, gathering processing and compression facilities and to identify the development configuration. The study is expected to be completed in August 2011 following which FEED work should commence; and
• is advancing required approval processes, port access arrangements, domestic gas and LNG marketing activities and commercial arrangements. In this regard, detailed work is currently underway and environmental assessments being prepared to secure approval to develop the gas field, gas processing and pipeline components for the project. In addition, a 30 year Occupation Permit has been entered into providing certainty of access to the Pillaga State Forest for the development of the project.

The proposed development stages are:

Stage 1: Create Local Gas Market

Gas produced during pilot production activities (which are necessary to demonstrate technical and commercial viability) is to be transported to the Wilga Park Power Station via new pipeline infrastructure. The Wilga Park Power Station is being progressively expanded as gas production increases.

Stage 2: Delivery into the New South Wales Gas Market

It is proposed that a new pipeline lateral will be developed from PEL238 to the Central Ranges Pipeline to enable gas from the project to be delivered into the New South Wales gas market, albeit at modest rates given the limited capacity of the existing pipeline infrastructure. The Narrabri Gas Project has been investigating options for transportation of gas to markets and is in the process of securing approvals for the development of gas pipeline infrastructure.

Stage 3: Domestic Market Opportunities

The Narrabri Gas Project is investigating the sale of gas to proposed new gas fired generators in New South Wales as well as to other domestic market opportunities. It has signed separate memoranda of understanding with sponsors of three new power stations for up to 1,700PJ. This includes a memorandum of understanding with ERM Power for the supply of up to 20PJ per annum for 20 years to a 600MW power station approved for development at Wellington. Further pipeline infrastructure development or expansion is required to take advantage of such opportunities.

Stage 4: New Markets

As the Narrabri Gas Project has gas resource potential in excess of New South Wales domestic demand, it is seeking to sell gas to major new gas market development opportunities such as LNG, gas to liquids and methanol production. In relation to LNG, Eastern Star could sell gas to one or more of the proposed Queensland CSG to LNG plants and has also been advancing its own plans for a CSG to LNG export project based at Newcastle, New South Wales ("LNG Newcastle Project"). In this regard, Eastern Star has:

• acquired a 24 hectare site on Kooragang Island, Newcastle for $25 million;
• completed a feasibility study with Hitachi Ltd ("Hitachi") and Toyo Engineering Corporation ("Toyo") in late 2010 for the development of a LNG export project using electric motor drives. Subsequently, Hitachi, Toyo and Chart Energy & Chemicals Inc. have been appointed to undertake FEED work for the LNG Newcastle Project. This involves optimisation, design and detailed costing for the project including LNG storage tank, jetty and loading facilities. FEED is expected to be completed in late 2011;
• entered into a memorandum of understanding with Marubeni Corporation ("Marubeni") whereby Marubeni will assist with marketing of LNG from the project with the potential for equity involvement by Marubeni and LNG buyers; and
• commenced detailed work and environmental assessments necessary to secure approval to develop the LNG Newcastle Project. It has also requested clarification of the approvals process that will apply to the project following the termination of the previous approvals regime by the New South Wales Government.

Pipeline infrastructure development is required to take advantage of such opportunities. Options for development of this infrastructure are being investigated and approval processes are underway.

All options for commercialisation of the Narrabri Gas Project are being progressed and, as such, the stages described are progressing in parallel. Subject to obtaining all necessary statutory approvals, a final investment decision is expected early 2012 with the potential for domestic gas supply by 2014 and with the first LNG shipment expected in 2015.

4.6.3 Wilga Park Power Station

The Wilga Park Power Station was commissioned as a gas fired power station in July 2004, sourcing gas from the conventional Coonarah Gas Field. Located 12km west of Narrabri, it is connected to the NEM selling all electricity output (plus NSW Greenhouse Abatement Certificates created) to Country Energy (recently acquired by Origin Energy) under a 10 year power purchase agreement which is currently in its seventh year.

Wilga Park Power Station is owned by Eastern Star (65%) and Santos (35%) and is an important component in the commercialisation process for the Narrabri Gas Project. Approval has been received to progressively expand it to a 40MW capacity and to install a gas gathering systems with compression from PAL2. The existing power station (Wilga Park Power Station A) is to be expanded to 10MW with a staged installation of a new 30MW power station on the same site (Wilga Park Power Station B).

Wilga Park Power Station A currently has a 10MW capacity following the commissioning of 3MW of new capacity in December 2009 and a further 3MW of new capacity in February 2011. It was connected to the CSG pilot wells in December 2009 and the Coonarah Gas Field was disconnected in April 2010. The power station is currently operating on a near continuous basis utilising pilot production gas. Approximately $3.8 million will be spent by October 2011 to install the initial module of Wilga Park Power Station B with capacity of 6MW capacity (taking total installed capacity to 16MW).

4.6.4 Other Exploration Assets

Gunnedah Basin

Eastern Star holds 100% of the conventional gas rights to PEL238 and PAL2 and 65% of the conventional gas rights to PPL3. It is not currently undertaking any field exploration activity in relation to these rights.

Eastern Star (65%) and Santos (35%) hold the CSG and conventional gas rights in licence areas PEL433 and PEL434. PEL433 covers 7,663 km2 , is located south of PEL238 and was due for renewal in February 2011. An application for renewal has been lodged. PEL434 covers 7,736 km2 , is located west of PEL238 and is due for renewal in February 2012 but is subject to some relinquishment requirements pending work completed. Exploration and appraisal activities (including seismic and coreholes) are currently being undertaken as part of the ongoing evaluation of CSG prospectivity in the area. No field exploration activity is currently being undertaken in relation to the conventional rights.

Bowen/Surat/Northern Gunnedah Basin

In August 2008, Eastern Star reached agreement with Orion to farm-in to the CSG rights of PEL6, PEL427 and PEL428 which are located to the north of PEL238. These licence areas cover 18,210 km2 . An application for renewal has been lodged for PEL427 and PEL428 was recently renewed to September 2012. Eastern Star has completed its CSG farm-in commitments and recently acquired an additional 5% interest in PEL6 (for $100,000). Eastern Star now holds 77.5-80% in PEL628, a 50% interest in PEL427 and a 40% interest in PEL428. In March 2011, the first independent assessment of the CSG resources in these licence areas was announced as follows:

28 Eastern Star holds an 80% CSG interest in the Edendale block of PEL6 and a 77.5% CSG interest in the remainder of PEL6.

Independent Assessment of CSG Resources (Gross) (PJ)
Licence Area	Recoverable Contingent Resources	Recoverable Prospective Resources
PEL6	152.8	1,160.5
PEL427	751.1	2,457.8
PEL428	107.3	1,018.9
Total	1,011.2	4,637.2

Source: Eastern Star

The resources have been independently certified by MHA based on technical, commercial and operational information provided by Eastern Star.

Eastern Star also holds 5% of the conventional gas rights in the Edendale block of PEL6 and 2.5% of these rights in the remainder of PEL6. No field exploration activity is currently being undertaken in relation to the conventional rights.

Arckaringa Basin

In February 2008, Eastern Star reached agreement with SAPEX Limited ("SAPEX") for a two stage farm-in to three exploration licences covering almost 28,000 km2 in the Arckaringa Basin near Coober Pedy in South Australia. The first stage of the farm-in involves the drilling of one cored well in each of the three exploration licences and will earn Eastern Star a 25% interest in the CSG rights. Eastern Star could subsequently elect to proceed with the Stage 2 farm-in (involving a five well CSG production pilot) to earn a further 25% interest. Eastern Star also has the right to make an offer or counter offer to farm-in to the CSG rights in another four exploration licences in the Arckaringa Basin.

Subsequent to announcement of the farm-in, SAPEX merged with Linc Energy Limited ("Linc Energy"). The farm-in work programme was delayed by the merger and as Linc Energy is primarily focussed on underground coal gasification opportunities. Eastern Star is working with Linc Energy to develop a new arrangement in relation to the CSG potential of the Arckaringa Basin interests.

4.6.5 Investment in Orion

Eastern Star holds 35,750,000 ordinary shares (22.2%) in Orion. Orion was formed in July 2007 as a wholly owned subsidiary of Eastern Star to hold exploration interests in the Surat-Bowen, Gunnedah and Darling Basins in New South Wales. On 10 December 2007 Orion was listed on the ASX with the funds raised to be used in conventional oil and gas exploration in its licence interests.

Today, Orion operates seven conventional exploration licences in the Surat-Bowen/Gunnedah Basin (PEL6, PEL427, PEL428 and PEL455) and the Darling Basin (PEL422, PEL424 and PEL471). Eastern Star as joint venture operator is also exploring the CSG potential of the four licences in the Surat-Bowen/Gunnedah Basin on behalf of Orion. Orion's share of the initial CSG resource assessment announced in March 2011 is 244PJ of recoverable contingent resources and 1,079PJ of recoverable prospective resources.

Orion has operated at a loss since listing and at 31 December 2010 had net assets of $9.6 million including $7.3 million of cash. Since listing Orion shares have traded in the range 3.5 to 21 cents at a volume weighted average price of 10.0 cents, although during 2011 the volume weighted average price has been lower at around 4.8 cents. Orion's has a market capitalisation of around $5 million.

5 Profile of Santos Limited

5.1 Background

Santos is a major Australian oil and gas exploration and production company based in Adelaide, South Australia. It was founded in 1954 as an energy exploration business and listed on the ASX in the same year. Santos made its first significant discovery of natural gas in the Cooper Basin in 1963, entered into its first commercial gas supply contract in 1966 and first supplied gas in 1969.

Although originally focussed on exploration in South Australia, the Northern Territory and South West Queensland, by the 1990's Santos had expanded its interests to include the Timor Sea and Carnarvon Basin in Australia as well as offshore including in Indonesia and Papua New Guinea. More recently, Santos has focused on developing a portfolio of LNG interests and on expanding its business in Asia, specifically in Vietnam, India, Bangladesh and the Kyrgyz Republic.

Today, Santos employs approximately 2,400 employees (excluding contractors) and, with a market capitalisation of around $11.5 billion, is a top 25 ASX listed company. Santos is seeking to be a leading energy company in Australia and Asia by leveraging its existing base business in Australia to deliver a portfolio of LNG projects and to pursue growth opportunities in Asia.

5.2 Operations

In the year ended 31 December 2010, Santos produced 49.9MMboe29 and sold 59.2MMboe. Although sales gas, ethane and LNG comprised 81% of sales volumes, they provided only 54% of sales revenue:

29 MMboe = million barrels of oil equivalent

At 31 December 2010, Santos had substantial reserves and resources including 1,445MMboe of 2P reserves and 2,261MMboe of contingent resources:

Santos Interests in 2P Reserves – 31 December 2010
Region	Sale GasPJ	Crude OilMMbbl30	CondensateMMbbl	LPG'000 tonnes	TotalMMboe
Eastern Australia	4,90531,32	30	21	2,228	911
Western Australia/Northern Territory	1,176	23	24	855	255
Asia Pacific	1,408	13	25	-	279
Total	7,489	66	70	3,083	1,445
Source: Santos

Detailed descriptions of Santos' businesses are set out in Section 3 of the Scheme Booklet and summarised below.

Australian Oil and Gas

Santos' Australian operations encompass oil and gas production across all mainland states and the Northern Territory. It is the largest producer of natural gas sold in Australia and has the largest exploration portfolio in Australia (146,800km2 ). Domestic oil and gas production is currently Santos' major source of revenue (around 88% of total revenue in 2010) with the majority of oil and gas produced sourced from the Cooper Basin and Carnarvon Basins, the Cooper Basin having been a key focus of Santos for over 40 years.

Santos' Eastern Australian reserves and resources include both conventional and unconventional natural gas (including shale gas, tight gas and CSG). Santos intends to use this gas to meet its existing domestic contractual arrangements, to meet increased domestic demand for natural gas (particularly for electricity generation) and to underpin the Gladstone LNG Project. Santos is continuing to develop its Western Australian and Northern Territory interests to meet domestic demand.

LNG Projects

Santos has interests in four LNG export projects as summarised below:

Santos - LNG Projects
Project	DarwinLNG	PNGLNG	GladstoneLNG	BonaparteLNG
Santos interest	11.5%	13.5%	30.0%	40.0%
Gross capacity	3.6Mtpa	6.6Mtpa	7.8Mtpa	2.0Mtpa
Location	Darwin, NT	Port Moresby, PNG	Gladstone, QLD	Timor Sea
Project stage	Production	Construction	Construction	Pre-FEED
Final investment decision	2003	Dec 2009	Jan 2011	Proposed 2014
First production	2006	2014	2015	na

Source: Santos

Asia Pacific

Since the early 1990s Santos has established exploration and development interests in Vietnam, India, Bangladesh and the Kyrgyz Republic. The Asia Pacific business currently contributes less than 10% of total revenue, with operating interests in two Indonesian projects (Madura and Sampang) the key drivers of historical oil and gas production. Santos expects two projects, the Wortel Project (a gas project in Indonesia) and Chim Sáo (an oil project in Vietnam), to achieve first production by the end of 2011.

30 MMbbl = million barrels

31 Including 3,622PJ of CSG.

32 Including Santos' 35% interest in the Narrabri Gas Project and its 20.92% interest in Eastern Star.

5.3 Financial Performance

The historical financial performance of Santos for the five and a half years ended 30 June 2011 is summarised below:

Santos - Financial Performance ($ millions)
	Year ended 31 December					Six monthsended30 June
	2006actual	2007actual	2008actual	2009actual	2010actual	2011actual
Total sales revenue	2,689	2,458	2,762	2,181	2,228	1,101
EBITDA	2,038	1,858	1,828	1,211	1,235	729
Depreciation and depletion	(668)	(759)	(664)	(619)	(600)	(289)
EBIT	1,370	1,099	1,164	592	635	440
Net finance (expense)/income	(124)	(139)	(90)	(13)	7	34
Share of losses of Eastern Star	-	-	-	(1)	(2)	(1)
Other income/(expenses)	(254)	(176)	1,459	139	153	327
Operating profit before tax	992	784	2,533	717	793	800
Income tax expense	(321)	(195)	(768)	(205)	(244)	(239)
Royalty related taxation expenses	-	(164)	(115)	(78)	(51)	(57)
Operating profit after tax	671	425	1,650	434	498	504
Outside equity interests	-	-	-	-	2	-
Discontinued operations after tax	(28)	(66)	-	-	-	-
Profit after tax attributableto Santos shareholders	643	359	1,650	434	500	504
StatisticsBasic earnings per share	102.8¢	55.2¢	272.9¢	52.0¢	59.8¢	57.4¢
Dividends per share	40.0¢	40.0¢	42.0¢	42.0¢	37.0¢	15.0¢
Dividend payout ratio	39%	60%	15%	81%	62%
Amount of dividend franked	100%	100%	100%	100%	100%	100%
Total sales revenue growth	9.2%	(8.6%)	12.3%	(21.0%)	2.2%
EBITDA growth	17.5%	(8.8%)	(1.6%)	(33.7%)	2.0%
EBIT growth	13.4%	(19.8%)	6.0%	(49.1%)	7.3%
EBITDA marginEBIT margin	75.0%50.4%	74.7%44.1%	65.2%41.5%	53.8%26.3%	53.6%27.5%	63.4%38.3%

Source: Santos and Grant Samuel analysis

Sales revenue primarily relates to the sale of gas, ethane, liquefied gas and crude oil produced in Australia. The decrease in sales revenue and EBITDA during 2009 reflects lower product prices, particularly crude oil. Santos' average realised oil price decreased from $117.45 per barrel in 2008 to $78.83 per barrel in 2009 but has increased to $115.02 per barrel in the first half of 2011.

Other income/(expenses) includes a $1.7 million gain on sale of a 40% interest in the Gladstone LNG Project to Petronas in 2008, the sale of a 15% interest in that project to TOTAL in 2010 and the further sale of 7.5% interests in that project to both TOTAL and KOGAS in 2011.

Outlook

Santos has not publicly released earnings forecasts for the year ending 31 December 2011 or beyond. However, on 19 August 2011 Santos reaffirmed its guidance for 2011 as follows:

• production volume of 47-50MMboe;
• production costs of $550-590 million;
• depreciation, depletion and amortisation expense of $12-13/barrel of oil equivalent;
• royalty related taxation expenses (after tax) of $80-100 million assuming an oil price of $90 per barrel for the remainder of 2011; and
• capital expenditure of $3 billion including $2 billion for LNG projects, $400 million for other sanctioned growth projects and $150 million for conventional exploration.

In December 2010, Santos advised that its dividend for the year ended 31 December 2011 was likely to be 30 cents per share (lower than prior years) and that dividends are expected to remain around this level during its capital intensive growth phase until 2015.

In order to provide an indication of the expected future financial performance of Santos, Grant Samuel has considered brokers' forecasts for Santos as follows:

Santos – Financial Performance ($ millions)
	Year end 31 December
	2010	Broker Consensus (Median)
	actual	2011	2012
Total sales revenue	2,228	2,446	2,853
EBITDA	1,197	1,434	1,651
EBIT	597	816	948
Net profit after tax	500	77233	599

Source: Grant Samuel analysis (see Appendix 1).

5.4 Financial Position

The financial position of Santos as at 31 December 2010 and 30 June 2011 is summarised below:

Santos - Financial Position ($ millions)
	As at 31 December 2010actual	As at 30 June 2011actual
Debtors and prepaymentsInventoriesCreditors, accruals and provisions	668261(961)	1,093306(834)
Net working capital	(32)	565
Oil and gas assets (net)Exploration and evaluation expenditure (net)Other property, plant and equipment (net)Equity accounted investment in Eastern StarProvisions (employee and rehabilitation)Deferred tax liabilities (net)Other assets and liabilities (net)Total funds employedCash and depositsInterest bearing loans and borrowings	6,914962201208(982)(789)(41)6,4414,319(3,157)	7,605803201207(1,012)(759)777,6873,586(3,310)
Net cash	1,162	276
Net assets	7,603	7,963
Outside equity interests	2	2
Equity attributable to Santos shareholders	7,605	7,965
StatisticsShares on issue at period end (million)Net assets per shareNTA per shareGearing	875.1$8.69$7.59(18.0%)	879.4$9.06$8.14(3.6%)

Source: Santos and Grant Samuel analysis

Oil and gas assets (net) represent capitalised costs associated with oil and gas fields in current production in addition to those in development for future production. Exploration and evaluation expenditure (net) reflects Santos' exploration and appraisal activities including costs associated with acquiring interests in new exploration assets and, subject to the success of the well, well

33 Including a gain on the sale of a 15% interest in the Gladstone LNG Project to TOTAL and KOGAS.

exploratory and evaluation costs. All other expenditure is expensed as incurred. Provisions primarily represent rehabilitation provisions which reflect the present value of future costs associated with removing oil and gas wells, facilities, pipelines and restoring the affected areas.

In recent years Santos has adopted a funding strategy in anticipation of the significant capital contributions required to deliver its LNG portfolio projects and other growth projects. At 31 December 2010, interest bearing loans and borrowings comprised:

Santos – Interest Bearing Loans and Borrowings ($ millions)
Type	Currentliability	Non currentliability	Totalliability	Borrowingcurrency	Project
Finance leases	1	2	3	A$	Corporate
Bank loans - secured	-	344	344	US$	PNG LNG
Bank loans - unsecured	20	93	113	US$	Corporate
Medium term notes	349	99	448	A$	Corporate
Long term notes	-	960	960	US$	Corporate
Subordinated notes	-	1,289	1,289	Euro	Corporate
Total	370	2,787	3,157

Source: Santos

Santos also had undrawn bilateral bank loan facilities of $1,450 million and $492 million (US$500 million) at 31 December 2011.

Santos operates the Santos Superannuation Plan. Although all new members receive an accumulation only benefit, a number of employees are entitled to defined benefits under the plan. At 31 December 2010, Santos recognised a net liability of $22 million in relation the plan.

In addition to operating lease and operating expense commitments in the course of its business, at 30 June 2011 Santos had contractual commitments in relation to the Gladstone LNG Project of $3,604 million. In addition, Santos had contractual commitments on other projects, minimum exploration commitments and remuneration commitments under long term employment contracts, the quantum of which have not been disclosed.

In addition, pursuant to a deed of undertaking to the Premier of South Australia dated 16 October 2006 and the enactment of the Santos Limited (Deed of Undertaking) Act 2007 on 29 November 2007, Santos has agreed to:

• pay $60 million over a ten year period under a Social Responsibility and Community Benefits Programme. Approximately $39 million remained to pay at 31 December 2010; and
• maintain the South Australian Cooper Basin assets' head office and operational headquarters together with other roles in South Australia until 29 November 2017. If this condition is not met then Santos is liable to pay around $70 million to the South Australia Government.

Santos is required to make these payments only if the South Australian Government does not reintroduce a shareholder cap on Santos' shares or introduce any other restriction on or in respect of Santos' board or senior management which has an adverse discriminatory effect on Santos relative to other companies domiciled in South Australia.

At 30 June 2011, Santos reported no contingent liabilities.

Under the Australian tax consolidation regime, Santos and its wholly owned Australian resident entities have elected to be taxed as a single entity. At 31 December 2010, Santos had carried forward income tax losses of approximately $245 million, of which $23 million were recognised in the balance sheet. The remaining income tax losses will expire between 2021 and 2028. In addition, Santos had $919 million in accumulated franking credits.

5.5 Capital Structure and Ownership

As at 16 September 2011, Santos had the following securities on issue:

• 879,831,526 ordinary shares including:
  • 878,131,190 ordinary shares quoted on the ASX;
  • 1,617,336 ordinary shares not quoted on the ASX of which:
    • 35,725 were issued pursuant to the Santos Executive Share Purchase Plan;
    • 901,350 were issued pursuant to the Santos Employee Share Purchase Plan;
    • 46,279 were issued pursuant to the Non-Executive Director Share Plan; and
    • 633,982 were issued pursuant to the ShareMatch Plan;
  • 41,500 ordinary shares paid to 1 cent issued pursuant to the Executive Share Plan "0" and not quoted on the ASX; and
  • 41,500 ordinary shares paid to 1 cent issued pursuant to the Executive Share Plan "2" and not quoted on the ASX;
• 4,742,137 options over unissued ordinary shares issued pursuant to the Santos Executive Share Option Plan;
• 2,397,094 share acquisition rights over unissued ordinary shares issued pursuant to the Santos Employee Share Purchase Plan; and
• 633,982 share acquisition rights over unissued ordinary shares issued pursuant to the ShareMatch Plan.

Each option and share acquisition right on issue is exercisable into one ordinary share and has no dividend entitlement or voting right. The options have exercise prices in the range $8.46 and $17.36. No amount is payable on grant or vesting of the share acquisition rights. The ordinary shares paid to 1 cent have no dividend entitlement or voting right but are entitled to participate in bonus or rights issues. These shares were issued prior to 1997 and after a "vesting" period calls could be made for the balance of the issue price, which varies between $2.00 and the market price on the date of the call was being made.

Santos operates a dividend reinvestment plan.

There are around 110,000 registered shareholders in Santos. The top twenty registered shareholders are principally institutional nominee or custodian companies and account for 55-60% of the ordinary shares on issue. Santos has a significant retail investor base with around 85-90% of registered shareholders classified as retail (i.e. 5,000 shares or less) although this represents less than 20% of shares on issue. Santos has received a substantial shareholder notice dated 2 September 2011 from National Australia Limited for a 5.6% interest.

5.6 Share Price Performance

In May 2007 the South Australian Government announced a review of the 15% cap on shareholdings in Santos which had been introduced in 1979 to ensure continuity of gas supply in South Australia. The cap was considered an impediment to Santos' growth as it limited institutional interest. The decision to remove the cap (subject to the undertakings by Santos discussed in Section 5.4) was announced in October 2007 and was effective on 29 November 2008. The removal of the cap increased average weekly trading volumes and transactions in Santos shares in 2007 and 2008 as shown below:

Santos - Share Price History Share Price ($) Average Weekly Volume (000's) Average Weekly High Low Close Transactions Year ended 31 December 2006 12.63 8.85 9.11 12,477 5,097 2007 14.85 8.17 13.04 20,497 9,531 2008 20.63 9.33 13.73 20,686 18,612 2009 16.58 12.32 14.09 21,291 26,950 2010 15.10 11.24 13.15 24,287 25,930 Quarter ended 31 March 2011 15.70 12.86 15.55 20,893 28,818 30 June 2011 16.90 12.87 13.54 19,598 30,761 Month ended 31 July 2011 13.69 12.60 12.88 23,280 29,182 31 August 2011 13.26 10.11 11.75 31,102 44,861 30 September 2011 (to 16 September) 12.19 10.90 11.45 31,919 44,955

Source: IRESS

Note: Share prices on an adjusted basis reflecting rights issues.

The following graph illustrates the movement in the Santos share price and trading volumes since 1 January 2006:

Source: IRESS

The Santos share price increased from around $6.00 to around $10.00 during 2005 and 2006 on the back of Santos' strategy to expand its operations both in Australia and overseas. It strengthened further in 2007 due to increased market interest following the review of the shareholder cap and its announcement of a proposed LNG export project in Queensland based on CSG reserves and resources. The Santos share price rose rapidly during 2008 (particularly following BG Group's initial proposal to merge with Origin Energy in April 2008) to peak at $20.63 on 3 June 2008 following announcement of the Gladstone LNG Project joint venture with Petronas. Market interest in the CSG sector ensured that the Santos share price remained above $15.00 until October 2008 when the stockmarket fell as the implications of the financial crisis for the global economy emerged. The Santos share price recovered relatively quickly to trade broadly around $14.00 during 2009 and 2010.

During 2011 prior to the announcement of the Proposal, Santos shares have traded in the range $12.86 and $16.90 (at a volume weighted average price of $14.27) and closed at $13.23 on 15 July 2011 (the last trading day before the announcement of the Proposal). Since then until 16 September 2011, Santos has traded in the range $10.11 to $13.54, at a volume weighted average price of $12.01.

Santos is in the top 25 companies listed on the ASX, is a member of all major indices and has no limitations on free float. It is a liquid stock and average weekly volume over the twelve months prior to announcement of the Proposal on 18 July 2011 represented approximately 2.2% of average shares on issue or annual turnover of around 115% of total average issued capital.

Santos' weighting in the S&P/ASX 50 Index, ASX All Ordinaries Index and S&P/ASX 200 Energy Index is approximately 1.17%, 0.85% and 11.52% respectively. Given its significant representation in the S&P/ASX 200 Energy Index, Santos shares have generally mirrored movements in that index since 1 January 2006, although there have been periods of under and over performance. In comparison, Santos shares underperformed the All Ordinaries Index until the review of the shareholder cap was announced in May 2007. During 2008 Santos shares outperformed the market given market interest in the CSG sector and outperformed following the market decline in October 2008. Since then Santos has generally traded in line with the All Ordinaries Index although it has underperformed since April 2011:

Source: IRESS

6 Valuation of Eastern Star Gas Limited

6.1 Summary

Eastern Star has been valued in the range $792.6-1,030.1 million which corresponds to a value of $0.77-1.00 per share. The valuation represents the estimated full underlying value of Eastern Star assuming 100% of the company was available to be acquired and includes a premium for control. The value exceeds the price at which, based on current market conditions, Grant Samuel would expect Eastern Star shares to trade on the ASX in the absence of a takeover offer.

The value for Eastern Star is the aggregate of the estimated market value of Eastern Star's 65% interest in the Narrabri Gas Project and Wilga Park Power Station, other exploration interests and other assets less external borrowings and non-trading liabilities. The valuation is summarised below:

Eastern Star - Valuation Summary ($ millions)
	Report	Value Range
	SectionReference	Low	High
Narrabri Gas Project (65%)	6.3	650.0	845.0
Other assets and liabilities	6.4	110.0	150.0
Head office costs (net of savings)	6.5	(20.0)	(17.5)
Enterprise value		740.0	977.5
Net cash at 30 June 2011	6.6	52.6	52.6
Value of equity		792.6	1,030.1
Fully diluted shares on issue (millions)		1,026.5	1,026.5
Value per share		$0.77	$1.00

The value attributed to the Narrabri Gas Project is an overall judgement having regard to discounted cash flow ("DCF") analysis and other measures commonly used in the oil and gas sector (i.e. value per GJ of gas reserves) as discussed in Section 6.3. Earnings based valuation methodologies are not appropriate as the Narrabri Gas Project is currently in a development stage.

The value attributed to the Narrabri Gas Project assumes the successful development of the upstream gas project. It specifically excludes any allowance for Eastern Star's participation in downstream activities such as pipeline infrastructure (i.e. pipeline infrastructure is assumed to exist to transport gas from the Narrabri Gas Project to markets) or LNG export activities (i.e. the Newcastle LNG Project is not necessary to commercialise the Narrabri Gas Project). On that basis, proposed future cash outflows by Eastern Star in relation to downstream initiatives are assumed to represent current value (i.e. net cash of $52.6 million retains value for the purposes of the valuation of Eastern Star) and the land on Kooragang Island, Newcastle is considered a surplus asset of Eastern Star (see Section 6.4 of this report).

The TRU Acquisition involves cash consideration based on a value for Eastern Star of $924 million or $0.90 per share. This price falls within Grant Samuel's valuation range. Although the TRU Acquisition is a direct valuation benchmark, it is not appropriate to treat $0.90 per share as a meaningful indicator of the value of Eastern Star. The TRU Acquisition was agreed prior to the recent downturn in global economic and market conditions and the price of $0.90 per share attributed to TRUenergy's shareholding in Eastern Star is only one element of a much wider transaction.

Grant Samuel's value range is relatively wide reflecting:

the uncertainty involved in the valuation of the Narrabri Gas Project. It is currently under development with no binding contracts to sell gas, no binding offtake commitments and significant development risk exists due to the location of the project (i.e. stranded without direct access to market). Moreover, the potential value of the Narrabri Gas Project depends

on the complex interaction of a range of factors impacting demand and sale prices for gas including changes in the global market for LNG, domestic demand for, and supply of, gas in eastern Australia and the impact of regulatory and government policies such as carbon prices and resource rent taxes; and

the increasingly pessimistic outlook for global economic conditions and the resulting downturn in equities markets since the beginning of August 2011. The turmoil in equities markets has significant implications for parameters that investors would apply in valuing assets.

As a result of these uncertainties, the valuation analysis should be treated with some caution. These uncertainties mean that it is extremely difficult to make long term (or even short term) forecasts or value judgements with a high degree of precision. Relatively small changes in key assumptions could lead to material movements in value. Investors with different views as to the future prospects and risk profile of the Narrabri Gas Project could reasonably reach different conclusions as to the value of Eastern Star.

The value includes a premium for control. The premia implied by the value range over the share price prevailing at the announcement of the Proposal ($0.595) are in the range of 30-69%. Takeover premiums are typically in the range 20-35% depending on the individual circumstances. Synergies available to acquirers such as cost savings through merging operations are normally a significant factor in justifying their ability to pay a meaningful premium over market prices. In this case, the premia implied by Grant Samuel's value are higher than typically observed as, although Eastern Star shares are reasonably liquid, the share price may not have been a good indicator of fair value in recent times due to negative market sentiment towards the CSG sector and limited progress in the commercialisation of the Narrabri Gas Project. Accordingly, the level of premium for control can be expected to be higher than in other takeover situations. However, over the longer term the premia implied by Grant Samuel's value range are lower as Grant Samuel's value range reflects the August 2011 downturn in global economic and market conditions and the Eastern Star share prices relate to the period prior to this downturn (as well as the gradual decline in the share price since 2011).

Eastern Star – Premium Implied over Pre-announcement Prices
Period	Eastern Star	Premium Implied byGrant Samuel's Value Range
	Price/VWAP34	Low	High
15 July 2011 – pre announcement price	$0.595	29.8%	68.7%
1 month prior to 15 July 2011	$0.610	26.6%	64.5%
3 months prior to 15 July 2011	$0.666	15.9%	50.7%
6 months prior to 15 July 2011	$0.706	9.4%	42.1%
12 months prior to 15 July 2011	$0.780	(1.0%)	28.7%

6.2 Methodology

Overview

The most reliable evidence as to the value of a business is the price at which the business or a comparable business has been bought and sold in an arm's length transaction. In the absence of direct market evidence of value, estimates of value are made using methodologies that infer value from other available evidence. There are four primary valuation methodologies that are commonly used for valuing businesses:

capitalisation of earnings or cash flows;

34 VWAP is volume weighted average price.

• discounting of projected cash flows;
• industry rules of thumb; and
• estimation of the aggregate proceeds from an orderly realisation of assets.

Each of these valuation methodologies has application in different circumstances. The primary criterion for determining which methodology is appropriate is the actual practice adopted by purchasers of the type of business involved.

Nevertheless, valuations are generally based on either or both discounted cash flow or multiples of earnings. The principal approach to valuing Eastern Star's assets by Grant Samuel was DCF analysis but some weight has also been given to the implied multiples of reserves and of MW installed capacity which are metrics considered in the energy sector.

Furthermore, the value of Eastern Star's assets has been estimated on the basis of fair market value as a going concern, defined as the maximum price that could be realised in an open market over a reasonable period of time assuming that potential buyers have full information. The valuations are appropriate for the acquisition of the assets as a whole and, accordingly, incorporate a premium for control.

Discounted Cash Flow

Discounting of projected cash flows has a strong theoretical basis. It is the most commonly used method for valuation in a number of industries, including resources, and for the valuation of startup projects where earnings during the first few years can be negative but it is also widely used in the valuation of established industrial businesses. Discounted cash flow valuations involve calculating the net present value of projected cash flows. This methodology is able to explicitly capture depleting resources, development projects (where significant capital expenditure is required before operating cash flows are generated) and fixed terms contracts (which are typical in the resources sector), the effect of a turnaround in the business, the ramp up to maturity or significant changes expected in capital expenditure patterns. The cash flows are discounted using a discount rate which reflects the risk associated with the cash flow stream. This methodology is the commonly used valuation methodology used in the oil and gas industry.

Considerable judgement is required in estimating future cash flows and it is generally necessary to place great reliance on medium to long term projections prepared by management. The discount rate is also not an observable number and must be inferred from other data (usually only historical). None of this data is particularly reliable so estimates of the discount rate necessarily involve a substantial element of judgement. In addition, even where cash flow forecasts are available, the terminal or continuing value is usually a high proportion of value. Accordingly, the multiple used in assessing this terminal value becomes the critical determinant in the valuation (i.e. it is a "de facto" cash flow capitalisation valuation). The net present value is typically extremely sensitive to relatively small changes in underlying assumptions, few of which are capable of being predicted with accuracy, particularly beyond the first two or three years. The arbitrary assumptions that need to be made and the width of any value range mean the results are often not meaningful or reliable. Notwithstanding these limitations, discounted cash flow valuations are commonly used and can at least play a role in providing a check on alternative methodologies, not least because explicit and relatively detailed assumptions as to expected future performance need to be made.

A financial model for the Narrabri Gas Project has been developed by Grant Samuel based on a long term cash flow model prepared by Eastern Star. The model allows the key drivers of revenues, costs and capital expenditure to be modelled. The model is based on a large number of assumptions and is subject to significant uncertainty and contingencies, many of which are outside the control of Eastern Star. A number of different scenarios have been developed and analysed to reflect the impact on value of various key assumptions relating to production, gas sales prices, capital expenditure and other factors. The financial model is discussed in more detail in Section 6.3 of this report.

Capitalisation of Earnings or Cash Flows

Capitalisation of earnings or cash flows is the most commonly used method for valuation of industrial businesses. This methodology is most appropriate for industrial businesses with a substantial operating history and a consistent earnings trend that is sufficiently stable to be indicative of ongoing earnings potential. This methodology is not particularly suitable for start-up businesses, businesses with an erratic earnings pattern or businesses that have unusual capital expenditure requirements. This methodology involves capitalising the earnings or cash flows of a business at a multiple that reflects the risks of the business and the stream of income that it generates. These multiples can be applied to a number of different earnings or cash flow measures including EBITDA, EBIT or net profit after tax. These are referred to respectively as EBITDA multiples, EBIT multiples and price earnings multiples. Price earnings multiples are commonly used in the context of the sharemarket. EBITDA and EBIT multiples are more commonly used in valuing whole businesses for acquisition purposes where gearing is in the control of the acquirer but are also used extensively in sharemarket analysis.

This methodology has not been adopted in determining values for Eastern Star's assets as the Narrabri Gas Project is currently at a relatively early stage of development and is not generating earnings or cash flow. Although Wilga Park Power Station is operating, it is an integral part of the commercialisation of the Narrabri Gas Project and has been valued by reference to multiples of MW installed capacity.

Industry Rules of Thumb

Industry rules of thumb are commonly used in some industries. These are generally used as a "cross check" of the result determined by a capitalised earnings valuation or by discounting cash flows. While they are only used as a cross check in most cases, industry rules of thumb can be the primary basis on which buyers determine prices in some industries. In the case of the energy sector there are a number of rules of thumb adopted including multiples of reserves for oil and gas assets and multiples of MW installed capacity for electricity generation assets and businesses. However, it should be recognised that rules of thumb are usually relatively crude and prone to misinterpretation.

Net Assets/Realisation of Assets

Valuations based on an estimate of the aggregate proceeds from an orderly realisation of assets are commonly applied to businesses that are not going concerns. They effectively reflect liquidation values and typically attribute no value to any goodwill associated with ongoing trading. Such an approach is not appropriate in Eastern Star's case.

6.3 Value of Narrabri Gas Project

Summary

Grant Samuel estimates Eastern Star's 65% interest in the Narrabri Gas Project to be in the range $650-845 million. This is based on a value for 100% of the Narrabri Gas Project of $1,000-1,300 million which includes a premium for control.

The value attributed to the Narrabri Gas Project is an overall judgement having regard to DCF analysis and multiples of reserves in recent transactions in the Australian CSG sector. The primary focus was on DCF analysis. However, the objective of the valuation process is to determine a value that is consistent with market evidence and supported by the DCF analysis having regard to a range of scenarios and their likelihood.

The value allows for the introduction of a price on carbon in the Australian economy and assumes that the cost of carbon is passed through to customers. On the other hand, no allowance is made for the potential for the PRRT to be applied to onshore oil and gas projects. This approach is considered reasonable as any acquirer of energy assets in Australia at the current time would make an allowance for a price on carbon but, due to significantly less certainty as to form and timing, would be unlikely to specifically allow for a PRRT.

Grant Samuel has placed weight on the TRU On-Sale as evidence of market value for the Narrabri Gas Project. The price to be paid by TRUenergy implies a value of $1,140-1,200 million for 100% of the Narrabri Gas Project (if Grant Samuel's value of $142-185 million for Eastern Star's other assets and liabilities is allowed for). This value range falls within Grant Samuel's valuation range. However, it is Grant Samuel's view that the TRU On-Sale should not necessarily be treated as a meaningful indicator of today's value of the Narrabri Gas Project as it is arguable that the transaction would be on different terms if negotiated in current market conditions.

Furthermore, the value of the Narrabri Gas Project is uncertain. It is dependent on judgements regarding the recoverability of the resource and the timing, cost and successful commercialisation of a project that is currently geographically isolated from markets. Investors with different views on the prospects for the Narrabri Gas Project could reasonably reach different conclusions as to its value in current market conditions.

DCF Analysis

A DCF model for the Narrabri Gas Project has been developed by Grant Samuel based on a financial model prepared by Eastern Star. Grant Samuel has made adjustments to the projections based on technical input data provided by MHA and Grant Samuel's economic assumptions.

MHA was commissioned as technical specialist to review development plans, production profiles, operating costs and capital costs for cash flow scenarios for the Narrabri Gas Project. MHA also reviewed the reserve estimates for the project. MHA's report is attached as Appendix 2 to this report.

The DCF model is long term commencing at 1 July 2012. Net present values are calculated on an ungeared after tax basis using a nominal after tax discount rate of 10.5-11.5%. Appendix 3 sets out a detailed analysis of the selection of these discount rates. A corporate tax rate of 30% has been assumed (i.e. carried forward income tax losses are valued separately as appropriate).

DCF analysis has been undertaken by reference to 12 separate field development/production profiles developed by MHA based on five gas demand cases specified by Grant Samuel. These demand cases reflect potential market demand scenarios for east coast gas production that is not already committed to the developing LNG sector. The gas demand cases specified by Grant Samuel are summarised below:

	Gas Demand Cases
Case	Description	Explanation
A	Domestic gas production (low demand)	Limited increase in demand for gas in the domestic marketfrom current levels. No demand for gas from LNG operatorsbeyond that already owned by operators or committed byother producers
B	Domestic gas production (high demand)	Increased demand for gas for power generation to meetgrowing energy demand. No demand for gas from LNGoperators beyond that already owned by operators orcommitted by other producers
C	Domestic gas production with limiteddemand from LNG sector	Reflects high domestic demand for gas (Case B) with somedemand for gas from the LNG sector beyond that alreadycommitted
D	Domestic gas production with increaseddemand from LNG sector	Reflects high domestic demand for gas (Case B) withincreased demand for gas from the LNG sector
E	Domestic gas production with specificdemand from an LNG operator	Reflects high domestic demand for gas (Case B) and a LNGoperator has a requirement for substantial gas supply to meetplant requirements. The gas producer has commercialleverage to obtain sales prices closer to LNG netback prices

Source: Grant Samuel analysis

The field development/production profiles set out projected production and capital and operating costs. In particular, they reflect MHA's judgement as to the source of gas (i.e. which coal seam within PEL238) and category of gas (i.e. which reserve or resource estimate category) having regard to its estimate of reserve and resource for PEL23835. In this regard:

• the production profiles are cumulative. That is, the aggregate of sales gas produced in the twelve profiles (i.e. 7,659PJ) approximates MHA's total reserve and resource estimate for PEL238 (i.e. 7,661PJ);
• the production profiles are unrisked. They assume that all estimated gas can be produced notwithstanding the stage of development of the Narrabri Gas Project and that only 40% of gas estimated for PEL238 is categorised as reserve by MHA; and
• as the Hoskissons seam generally has a higher CO2 content than other seams in PEL238, MHA has assumed that gas resource from other seams is produced ahead of that estimated for the Hoskissons seam. It is, however, possible that Eastern Star's actual production profile may produce gas from the Hoskissons seam earlier than assumed by MHA.

MHA's field development/production profiles relate to Grant Samuel's gas demand cases as follows:

MHA Production Profiles
	Production Profile
GasDemand	Sales GasProportion of MHA EstimateMHA
Case	Profile	Produced(PJ)	3P Reserves36	3P+Contingent Resource36
A	1-2	1,422	47%	19%
B	1-3(a)	2,268	75%	30%
C	1-3(c)	3,365	111%	44%
D	1-6	5,811	191%	76%
E	1-7(c)	7,659	252%	100%

Source: Grant Samuel analysis

The following factors are relevant to consideration of the relationship between the gas demand cases and MHA's production profiles:

• Demand Case A is conservative and possibly unrealistic as the expected introduction of a price on carbon into the Australian economy will underpin growth in demand for natural gas for power generation. Although there remains uncertainty as to its form, terms and impact, it is reasonable to assume that a price on carbon will be introduced in Australia in the short to medium term. In addition, the 1,422PJ produced under Demand Case A effectively only reflects production of certain 2P reserves for PEL238. Consequently, Demand Case A is considered a low scenario for the purposes of DCF analysis;
• the 2,268PJ assumed to be produced under Demand Case B equates to 81% of NSAI's 3P estimate for PEL238 (75% of MHA's 3P estimate). Consequently, it is reasonable to consider Demand Case B as a realistic low production case for the Narrabri Gas Project;
• although it is difficult to accurately assess the extent (if any) of additional demand from the LNG sector, it is generally considered that some will eventuate. On the basis of this demand, MHA has assumed that 3,365PJ is produced which equates to 53% of NSAI's 3P+2C estimate of 6,312PJ for PEL 238 (47% of MHA's 3P+2C estimate). Demand Case C is considered a reasonable gas market demand scenario and, given the reserves maturation process for CSG, a realistic production case for the Narrabri Gas Project; and

35 MHA has estimated total reserve and resource for PEL238 of 7,661PJ (3,041PJ of 3P and 4,620PJ of 3C) (see page 3 of Appendix 2). MHA's estimate is approximately 15% lower than NSAI's certified total reserve and resource estimate at 31 December 2009 of

9,012PJ primarily as a result of lower estimate for resources. 36 MHA has estimated 3P reserves for PEL238 to be 3,041PJ and 3P reserves and 2C resources for PEL238 to be 7,129PJ.

Demand Cases D and E assume that the 2C and 3C resource estimates for PEL238 are produced. Given the level of uncertainty associated with these resource categories these profiles include considerable production which may or may not emerge over time.

In Grant Samuels's opinion, Demand Cases B and C are realistic production cases. In comparison, Demand Case A is conservative while Demand Cases D and E reflect considerable "blue sky".

The production profiles assessed by MHA are unrisked and do not reflect the current stage of development of the Narrabri Gas Project which is at a relatively early stage of commercialisation. It has no contracted gas sales and, in fact, currently has no means of delivering gas to market (i.e. gas pipeline infrastructure is not yet committed). This development risk as well as the uncertainty attached to the "blue sky" production has been taken into consideration by Grant Samuel in assessing a value range for the Narrabri Gas Project for the purposes of this report. However, the DCF analysis below has been undertaken on an unrisked basis.

The outlook for domestic gas prices on the east coast is subject to considerable uncertainty. While it is generally expected that gas prices will increase in the medium term, the quantum and timing of these increases will depend on a range of regulatory, economic and supply/demand factors. Moreover, the interaction of each of these factors in determining gas prices is difficult to assess. A detailed discussion of these factors is set out in Section 3.7.

Grant Samuel has carefully considered the market commentary and expectations for domestic gas and developed gas price path scenarios in conjunction with the gas demand cases as follows:

East Coast Wholesale Domestic Gas Price (ex well head) ($ per GJ, real $2010)
Gas Demand	Gas		Year end 31 December
Case	Price Path	2011-2013	2014-2015	2016 onwards
A	1	$4.50	$4.50	$4.50
B	2	$4.50	$4.50	$5.00
C}D	3	$4.50	$5.50	$6.00
E	4	$4.50	$5.50	$7.00

Source: Grant Samuel analysis

Note: Gas Price Path 3 applies to both Gas Demand Case C and D.

The gas price paths reflect Grant Samuel's judgement taking into consideration the range of available information regarding the various inputs to future gas prices. In particular, they reflect the interplay of pricing pressures as a consequence of the introduction of a price on carbon (2012) and the expected commissioning dates for the proposed LNG plants (2014-2015). Gas Price Path 1 reflects current wholesale contract prices while Gas Price Path 4 assumes that a gas producer will be able to achieve sale prices closer to LNG netback prices. As a consequence, these two price paths reflect the extremes of gas prices assessed for the purposes of Grant Samuel's DCF analysis. However, future gas prices may fall outside the range assessed for the DCF analysis irrespective of the actual gas demand scenario.

The key general and specific operational and asset assumptions underlying the DCF analysis are set out in Appendix 4. Grant Samuel has analysed Gas Demand Case C to examine the sensitivity to changes in the following variables:

• gas price: +/- 5% (i.e. 105% and 95% of Gas Price Path 3);
• capital expenditure: +/- 5% (i.e. 105% and 95%);
• operating expenditure: +/- 5% (i.e. 105% and 95%); and
• raw gas production: +/- one MHA field development/production profile (i.e. 116.6% and 82.5% of production).

The output of the sensitivity analysis is summarised below:

These sensitivities do not, and do not purport to, represent the range of potential value outcomes for the Narrabri Gas Project. They are simply theoretical indicators of the sensitivity of the net present values derived from the DCF analysis. In this regard, the NPV outcomes show a relatively wide range across the different scenarios, highlighting the sensitivity to relatively small changes in assumptions.

Data and modelling constraints inhibit the ability to perform a +/-5% sensitivity on production volume. Therefore, the sensitivity to production volumes is based on the addition/removal of an individual MHA field development/production profile (i.e. the NPV outcomes presented are those for MHA production profiles 3(b) and 4) and represent a +16.6%/-17.5% change in raw gas production volume. Consequently, the sensitivity of NPV outcomes is exaggerated and not directly comparable to the other sensitivity analysis undertaken.

Nevertheless, the sensitivity analysis indicates that:

• the NPV is most sensitive to movements in forecast real gas prices; and
• although operating expenditure represents a similar absolute cash outflow to capital expenditure over the life of the Narrabri Gas Project, movements in capital expenditure have a larger impact on NPV as they are incurred earlier in the project life.

As with any long term projections, there are inherent uncertainties about future events and outcomes and, as shown above, small changes in certain assumptions can have disproportionate impacts on the calculated values. Furthermore, the cash flow model does not fully take into consideration interrelationships between certain key assumptions. Nevertheless, Grant Samuel has considered changes in NPVs for the Narrabri Gas Project based on the gas demand cases developed by Grant Samuel (and the associated MHA production profiles) and the wholesale gas price paths as discussed above.

The output of the unrisked NPV analysis based on the selected discount rates is summarised below:

Narrabri Gas Project – Unrisked NPV Outcomes ($ millions) Discount Rate Gas Price Path Gas Demand Case A (domestic low) B (domestic high) C (limited LNG) D (increased LNG) E (specific LNG) 10.5% 1 (current prices) 477 647 553 821 135 2 (increased domestic prices) 625 885 908 1,438 947 3 (increased domestic prices with LNG) 971 1,424 1,696 2,779 2,697 4 (LNG netback prices) 1,266 1,900 2,405 4,012 4,319 11.5% 1 (current prices) 376 495 359 497 (220) 2 (increased domestic prices) 507 707 675 1,045 501 3 (increased domestic prices with LNG) 819 1,191 1,382 2,246 2,065 4 (LNG netback prices) 1,082 1,615 2,013 3,342 3,506

The range of unrisked NPV outcomes presented above is extremely wide due to the significant uncertainty surrounding the interaction of the range of potential demand scenarios and other pricing pressures. In considering the NPV outcomes, it should be noted that

• the DCF analysis has been undertaken on an unrisked basis and does not reflect the significant development risk currently attaching to the Narrabri Gas Project. On this basis, the analysis assumes that all gas produced can be sold notwithstanding that the project does not currently have gas sale agreements nor any means of delivering gas from the well to market;
• although Gas Demand Case E assumes most reserves and resources are produced, the incremental cost of producing the higher CO2 gas from the Hoskissons seam, means that the NPVs for gas price paths 1 to 3 are lower than under Gas Demand Case D. Furthermore, these costs depress the rate of increase in NPV between Gas Demand Cases D and E under gas price path 4; and
• for Gas Demand Case E when a discount rate of 11.5% is used the NPV is negative under gas price path 1 and therefore the project would not proceed in this scenario.

Grant Samuel's value range of $1,000-1,300 million for 100% of the Narrabri Gas Project can be compared to the results of the unrisked NPV analysis as follows:

The range of unrisked NPV outcomes produced is significantly wider than the value range that Grant Samuel has placed on the Narrabri Gas Project. Depending on the demand case, Grant

Samuel's value range lies around or below the midpoint of the range for the unrisked NPV outcomes except that it overlaps the top of the unrisked NPV outcome for Demand Case A. This is appropriate as:

• the value range reflects Grant Samuel's judgement as to the value impact of the project's current stage of development including:
  • the status of evaluation and production pilot drilling and uncertainty associated with reserve and resource certification (i.e. the last formal certification of reserves and resources was at 31 December 2009);
  • the status of engineering assessments for the project (i.e. the upstream feasibility study is due to be completed but no decision has been made to commence FEED work as yet);
  • the absence of sales agreements or other offtake arrangements;
  • the lack of direct access to market (i.e. the need for infrastructure to be developed to deliver the gas to market); and
  • the status and timing for regulatory approvals (including implications of increasing negative community sentiment and delays in approvals);
• the high end of unrisked NPV outcomes assumes that there is a probability that gas prices will approach LNG netback prices, reflecting substantial growth in gas demand. However, demand for LNG is dependent on global economic activity (particularly Asian activity) and Asian LNG prices are linked to oil prices. Continuing global economic uncertainty and the recent equity market downturn may have significant implications for LNG demand and pricing; and
• future demand for and pricing of gas on the east coast of Australia is highly uncertain and dependent on the interaction of a range of complex factors although it is generally accepted that gas prices will increase from current levels (see Section 3.7 of this report).

Grant Samuel's value range of $1,000-1,300 million is wide reflecting the substantial uncertainty associated with the Narrabri Gas Project. It effectively falls within the unrisked NPV outcomes for Demand Cases B and C (and therefore gas price path which rise in real terms from $4.50/GJ to $5.00-6.00/GJ) which are relatively realistic scenarios. Grant Samuel considers that the value range adequately allows for both the significant development risk and the upside potential of the Narrabri Gas Project.

Reserve Multiple Analysis

Grant Samuel's value range of $1,000-1,300 million for 100% of the Narrabri Gas Project implies the following multiples of reserves:

Narrabri Gas Project – Implied Value Parameters ($ per GJ)
	NSAI Estimate	Value Range
Reserve/Resource Category	(31 Dec 2009)PJ	Low	High
2P	1,520	0.66	0.86
3P	2,797	0.36	0.46
3P+2C	6,312	0.16	0.21

In Grant Samuel's opinion the implied multiples are appropriate having regard to:

• the characteristics of the Narrabri Gas Project, particularly its early stage of development;
• the value range has been determined by reference to field development/production profiles prepared by MHA. These profiles are based on MHA's evaluation of current reserves and resources for the Narrabri Gas Project which are larger above 3P reserves level than those of NSAI (see Appendix 2);

recent transaction evidence for CSG assets in Australia. The trend in valuation parameters in the CSG sector since 2003 can be observed in the following graph of multiples of 3P reserves:

Source: Grant Samuel analysis (see Appendix 5).

• Notes: (1) Multiple range based on base consideration and conditional consideration (undiscounted basis).
  • (2) Excluding transactions where 3P reserve data is not available.
    • (3) Transactions which were prices in United States dollars are presented at exchange rates prevailing at the time of announcement.
    • (4) $0.36-0.46 per 3P reserves based on NSAI estimates as at 31 December 2009.
    • (5) Acquisition of 20% of Narrabri Gas Project is subject to implementation of the Scheme and acquisition of Bow Energy is currently a conditional proposal.

Further details and analysis of these transactions are set out in Appendix 5. The observed trends over this period can be summarised as follows:

• prior to 2006 3P reserve multiples were generally less than $0.20 per GJ and the transactions primarily involved partial interests in relatively undeveloped assets. The formation of the Sydney Gas Joint Venture in September 2005 is not a meaningful data point in this period as it is likely that the consideration paid by AGL did not only reflect the value of the CSG assets;
• by early 2006 with growing acceptance of CSG as a fuel source there was increasing pressure to secure gas supply. Competing proposals for a cornerstone shareholding in Queensland Gas Company Limited ("QGC") resulted in 3P reserve multiples increasing to around $0.50 per GJ;
• the announcement of proposed LNG export projects based on CSG supply from Queensland during 2007 accelerated the need to prove up and secure additional reserves. The initial proposal by BG Group for Origin Energy in April 2008 indicated confidence for the technical feasibility of conversion of CSG into LNG, the attractiveness of the LNG export market in the context of a high oil price, a rapidly approaching carbon trading environment and buyer willingness to pay for reserve prospectivity. This announcement was followed by several landmark transactions further raising confidence in the LNG concept with international groups such as ConocoPhillips, BG Group, Petronas and Shell paying 3P reserve multiples in excess $0.70 per GJ (and in some instances approaching $1.50 per GJ) to participate in these projects. These transactions resulted in the majority of Australian CSG resources coming under the control of the proponents of four major LNG proposals; and

• since 2008 the international LNG market has weakened and the transactions that have occurred reflect the changed market conditions, further consolidation of major CSG resources and strategic positioning by the major LNG proponents. Multiples paid are lower than during the 2007-2008 period with multiples of 3P reserves for control of relatively well developed resources generally in the range of $0.40-0.80 per GJ.

2P or 3P multiples are usually considered the better measures for oil and gas assets as contingent resources, although potentially recoverable, do not qualify as economically recoverable due to commercial or technical issues. However, for CSG assets it is arguable that 3P+2C estimates are a more relevant basis as they reflect the assessed extent of the gas bearing coals rather than the probability that gas exists and purchasers appear to premise their prices more on the basis of 3P+2C estimates than just 3P reserves. Although transaction evidence on this basis is more limited, transactions have generally occurred in the range $0.20-$0.40/GJ of 3P+2C estimates as shown below. The Santos/Petronas and Origin Energy/ConocoPhillips transactions of mid 2008 are excluded as outliers as they reflect establishment of CSG to LNG ventures and Sinopec's acquisition of a 15% interest in the Australia Pacific LNG Project in 2011 at a premium to recent transactions is considered to reflect the substantial value of the resource base of that project:

Source: Grant Samuel analysis (see Appendix 5).

• Notes: (1) Multiple range based on base consideration and conditional consideration (undiscounted basis).
  • (2) Excluding transactions where 3P+2C reserve and resource data is not available. (3) Transactions which were prices in United States dollars are presented at exchange rates prevailing at the time of announcement.
  • (4) $0.16-0.21 per 3P reserves and 2C resources based on NSAI estimates as at 31 December 2009.
  • (5) Acquisition of 20% of Narrabri Gas Project is subject to implementation of the Scheme and acquisition of Bow Energy is currently a conditional proposal.

Given the changes in market conditions since 2008, recent transaction evidence is arguably more indicative of the current value of gas resources than that of the 2007-2008 period. However, reserve multiples are a relatively imprecise valuation metric as the assets acquired and the transactions themselves may differ in material respects. It is necessary to be cautious in relying on them because they are relatively crude rules of thumb influenced by many factors including the location, the extent of additional resources, the timing of reserve and resource certification, the stage of development and the scope and timing of any associated LNG project.

Having regard to limitations of reserve multiples, prior to the announcement of the Proposal the best evidence of value for the Narrabri Gas Project was Santos' acquisition of a 35% interest in the project in July 2009 as:

• this was an arm's length transaction free of any selling pressures;
• the price paid by Santos implies $0.66-0.70 per GJ of 3P reserves and $0.20-0.21 per GJ of 3P+2C estimates as at 31 December 2008. However, further drilling of core holes, pilot wells and production wells during 2009 resulted in a substantial increase in reserve and resources estimates at 31 December 2009. On the basis of these upgraded estimates, the transaction implies $0.31-0.33 per GJ of 3P reserves and $0.13-0.14 per GJ of 3P+2C estimates; and
• although a minority interest without operatorship, this was a strategic acquisition for Santos in the context of its interests in licence areas around PEL238 and the gas requirements of its CSG to LNG project. The strategic nature of the acquisition is highlighted by Santos' concurrent acquisition of a 19.9% interest in Eastern Star at a 25% premium to the prevailing share price.

However, TRUenergy's proposed acquisition of a 20% interest in the Narrabri Gas Project under the TRU On-Sale is a direct valuation benchmark. In this regard:

• this was an arm's length transaction between sophisticated energy companies (free of any selling pressures); and
• Santos announced that the cash price to be paid by TRUenergy ($284.3 million) implied a value of $0.50 per GJ of 3P reserves for the Narrabri Gas Project (or $1,421 million for 100%). However, the calculation of the value implied for 3P reserves does not allow for other Eastern Star assets and liabilities. Allowing for the value that Grant Samuel has attributed to these assets and liabilities ($142-185 million on a 100% basis), the value implied to the Narrabri Gas Project by the TRU On-Sale is $1,140-1,200 million or $0.41-0.43 per GJ of 3P reserves.

6.4 Other Assets and Liabilities

Eastern Star's other assets and liabilities have been valued at $110-150 million and include:

• a 65% interest in Wilga Park Power Station ($10-12 million). This value is based on installed capacity of 16MW at $1.19-1.37 million per MW capacity (which is reasonable based on recent market parameters for gas fired power stations) less amounts payable to complete the expansion by October 2011;

• Eastern Star's interests in PEL6, PEL427 and PEL428 have been assessed by MHA to be $43-70 million in Section II of the MHA report attached as Appendix 2. No value has been attributed by MHA to Eastern Star's interests in PEL433, PEL434 or the Arckaringa Basin, although it intends to spend around $2.3 million on these interests over the next 12 months;

• two US$5 million payments to Gastar Exploration Limited when sustainable production of sales gas from PEL238 reaches certain milestones. As the valuation of the Narrabri Gas Project in Section 6.3 assumes that the project is successfully developed, these payments are assumed to be made by the end of 2013 at A$1.00=US$1.00;

• receipt of US$0.25 million deferred consideration relating to the sale of a 35% interest in Wilga Park Power Station, PPL3 and related businesses due early 2012 at A$1.00=US$1.00;

• value of the land at Kooragong Island, Newcastle which was acquired during the year ended 30 June 2011 for the purposes of Newcastle LNG Project. As the valuation of the Narrabri Gas Project in Section 6.3 only reflects the upstream project, the land represents a surplus asset to Eastern Star. The value adopted is Eastern Star's purchase price for the land before transaction costs (e.g. stamp duty etc.) ($25 million);

• carried forward revenue tax losses of $193 million ($58 million tax shield) at 30 June 2011. Grant Samuel has attributed a present value to the losses based on their expected utilisation and discounted this value to reflect that an acquirer is unlikely to pay full face value;

• the net present value of loans receivable relating to shares issued under the EIP; and

• a 22.2% interest in Orion at a market price of around 4 cents per share ($1.4 million).

6.5 Corporate Costs

Eastern Star's unallocated corporate costs are currently around $9 million per annum. These corporate costs represent the cost of managing Eastern Star including costs associated with:

• the senior executive team (i.e. Chief Executive Officer, Chief Financial Officer, Company Secretary etc.); and
• being a publicly listed company including directors' fees and expenses, annual reports and shareholder communications, share registry and listing fees).

Any acquirer of Eastern Star would be able to save the costs associated with being a listed company (approximately $2 million per annum). Furthermore, a review of the $7 million of residual corporate costs has identified that a potential acquirer of Eastern Star with an existing presence in Australia should also be able to eliminate some of those costs. It is estimated that approximately 60-70% of corporate costs could be saved. On this basis, Grant Samuel has assumed residual corporate costs of $2.5 million per annum for the purposes of valuation and allowed for total capitalised costs of $17.5-20 million.

6.6 Net Cash

Net cash for valuation purposes is $52.6 million. This amount reflects Eastern Star's cash balance of $63.6 million and drawn borrowings of $11 million at 30 June 2011. The projections used to value Narrabri Gas Project in Section 6.3 of this report reflect cash flows from 1 July 2011.

7 Value of the Consideration under the Scheme

7.1 Summary

Under the Scheme, Eastern Star shareholders (other than Santos and TRUenergy) will receive 0.6881 Santos shares for every ten Eastern Star shares1 .

Grant Samuel has attributed a value to the scrip consideration of $0.79-0.89 per Eastern Star share based on a value range for Santos shares of $11.50-13.00.

The value range of $11.50-13.00 per Santos share is relatively wide. Grant Samuel considers this to be appropriate given the uncertainty associated with the recent global economic developments and the repricing of risk by investors reflected in the significant downturn in equity markets in August 2011. The market volatility shows little sign of abating and it is unclear when stability will return. Accordingly, it is important to recognise that in current conditions it is not possible to attribute a market value to Santos shares with any degree of reliability.

The value of the scrip consideration will vary with movements in the Santos share price. Accordingly, until the Scheme is implemented, Eastern Star shareholders are exposed to changes that impact the Santos share price. The actual value of the consideration could therefore ultimately exceed, or be less than $0.79-0.89 per Eastern Star share. Depending on the circumstances, significant (and sustained) movements in the Santos share price could change the evaluation of the Scheme.

7.2 Approach

The Scheme involves a change of control of Eastern Star. For the purposes of takeover analysis, the relevant test for Eastern Star shareholders is the expected market value of the shares in Santos received as consideration. This involves an estimation of the trading price for Santos after the Scheme is implemented (rather than a pre bid price).

It is normal practice to use the post announcement market price as the starting point for estimating the value of a scrip offer. An alternative method is to estimate the underlying value of the combined entity and then to apply a discount to reflect a portfolio interest. However, access to the detailed financial and operational information (such as earnings and operational forecasts or asset plans) of both parties is required to undertake such a fundamental analysis of the value of the consideration. Furthermore, the consensus view of a well traded market is likely to be a more reliable estimate than that of a single external observer. Market prices (particularly for large companies such as Santos that enjoy high levels of market liquidity and are closely followed by a wide range of market analysis) usually incorporate the influence of all publicly available information on a company's prospects, future earnings and risks.

Grant Samuel has had regard to the market price of Santos and addressed the following questions:

• is there any reason why the market price is not a true reflection of the fair market value of Santos shares? For example, there could be:
  • important information about the business which would affect the share price but is not in the public domain;
  • mispricing by the market; and/or
  • abnormal trading activity in Santos shares; and
• will the proposed transaction, if implemented, have a material impact on Santos' financial metrics, growth prospects, risk profile or other factors that would be likely to result in a change in the share price?

In considering these questions, Grant Samuel has:

• analysed the recent trading in Santos shares;
• reviewed broker analyst research on Santos; and
• analysed the impact of the Scheme on Santos' key financial metrics.

7.3 Analysis of Santos' Share Price Performance

Santos is a liquid stock. It is in the top 25 companies listed on the ASX and is a member of all major indices. Santos' share price performance since January 2006 is discussed in Section 5.6 of this report. Since the removal of the shareholding cap became effective on 29 November 2008, Santos shares have traded in the range $11.09-16.90, at a volume weighted average price of $13.95. Trading in Santos shares between 1 January 2011 and 15 July 2011 (the last day of trading prior to announcement of the Scheme) was broadly consistent with the longer term trading (in the range $12.86-16.90, at a volume weighted average price of $14.27) and Santos shares closed at $13.23 on 15 July 2011.

From announcement of the Scheme on 18 July 2011 until 1 August 2011 (when the downturn in global equity markets commenced), Santos shares traded in the range $12.60-13.54, at a volume weighted average price of $13.06. However, since the emergence of heightened economic and market uncertainty at the beginning of August 2011, the Santos share price has declined to below $12.00 and has been subject to significant volatility. Since 1 August 2011, Santos shares have traded in the range $10.11-13.26, at a volume weighted average price of $11.70, and closed at $11.45 on 16 September 2011.

The important question is whether the recent performance and current price reflect the rational view of a well informed market or, alternatively:

• is Santos out of line with its peers or the market?; and/or
• has the market over reacted to the recent economic fears?

Santos Compared to its Peers and the Market

In addressing this issue the following factors have been considered:

the performance of Santos shares relative to that of its energy peers and the market generally. The following graph illustrates the performance of Santos shares since 1 January 2011 relative to the ASX/S&P 200 Energy Index and the All Ordinaries Index:

During 2011 Santos shares have generally mirrored movements in both indices with short periods of outperformance (e.g. following the final investment decision for Gladstone LNG in January 2011). Since the market downturn commenced in August 2011, Santos shares have continued to mirror market movements, although on certain days since 10 August 2011 it has outperformed and on others underperformed:

• the trading multiples of the major Australian oil and gas exploration companies (i.e. Woodside Petroleum Limited ("Woodside"), Oil Search Limited ("Oil Search"), Beach Energy Limited ("Beach Energy") and Santos). The trading multiples are set out in Appendix 6 to this report but are not meaningful for this analysis as there is little consistency between the market ratings of each company. In Grant Samuel's view, this reflects that, in addition to their existing Australian exploration and production activities, three of the companies (Woodside, Oil Search and Santos) are at different stages in the development of major gas export projects while Beach Energy is primarily focused on domestic markets. However, in aggregate these companies account for around 54% of the S&P/ASX 200 Energy Index and therefore the charts above adequately depict their performance relative to the market; and
• at its closing price on 16 September 2011 of $11.45, Santos is trading below broker estimates of its 12 month target price, the median of which is $16.10:

	Santos – Broker Target Prices as at September 2011
Broker	Date of Report	Target Price ($)
Broker 1	19 August 2011	$18.94
Broker 2	19 August 2011	$15.75
Broker 3	19 August 2011	$16.43
Broker 4	19 August 2011	$16.10
Broker 5	19 August 2011	$14.00
Broker 6	19 August 2011	$17.35
Broker 7	19 August 2011	$15.00
Broker 8	19 August 2011	$16.00
Broker 9	22 August 2011	$16.50
Broker 10	5 September 2011	$17.00
Broker 11	7 September 2011	$16.33
Broker 12	12 September 2011	$13.80
Broker 13	14 September 2011	$13.76
Low		$13.76
High		$18.94
Median		$16.10

Source: Brokers' reports (see Appendix 1)

While no clear conclusion can be drawn from this analysis, the broker target prices do provide evidence as to the market expectation for Santos shares following completion of the acquisition of Eastern Star. At a minimum, there is no evidence to suggest that Santos shares are currently overpriced.

Santos is a liquid stock and average weekly volume over the twelve months prior to announcement of the Proposal represented annual turnover of around 115% of total average issued capital. Average weekly volume and transactions for Santos shares since announcement of the Proposal on 18 July 2011 and over prior periods is summarised below:

	Santos – Share Trading
Period	Average WeeklyVolume ('000)	Average WeeklyTransactions
1 August 2011 to 16 September 2011	30,238	43,060
18 July 2011 to 31 July 2011	30,145	33,067
20 June 2011 to 15 July 2011(four weeks prior to announcement)	20,960	29,556
1 January 2011 to 15 July 2011	20,900	31,101
1 December 2008 to 15 July 2011(period after shareholding cap removed)	22,778	27,912

Source: IRESS and Grant Samuel analysis

While the average weekly volume of shares traded and the average weekly number of

transactions increased during July 2011 subsequent to the announcement of the Proposal, this is to be expected following the announcement of a transaction, (although the amount to be paid for the balance of Eastern Star equated to around 6% of Santos' market capitalisation at announcement). However, since July 2011 average weekly transactions in Santos shares are around 30% higher while average weekly volumes are similar to post announcement levels, implying more transactions of smaller volume. This compares to the increased activity on the ASX where in the same period the All Ordinaries Index experienced a 14% increase in average weekly volumes and a 41% increase in transactions.

While trading activity in Santos shares has increased since the announcement of the Proposal and with the decline in (and increased volatility of) equities markets, there is nothing to indicate any specific abnormal trading in Santos shares.

In Grant Samuel's opinion, there is no evidence to suggest that Santos is trading on a basis out of line with the market or its peer group.

Non Public Information

Under ASX Listing Rules, Santos is required to keep the market informed of events and developments in a timely manner as they occur. Once Santos becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of its shares, it must inform the market of that information.

Santos announced its financial results for the six months ended 30 June 2011 (which incorporated disclosure of subsequent events of note) and reaffirmed its guidance for 2011 on 19 August 2011. Consequently, there is no reason to consider that any information relating to Santos' existing business that would have a material impact on its share price has not been publicly disclosed.

It could be argued that the market is not yet fully informed about the Proposal and its impacts and will only be so once the Scheme Booklet is released. However, a reasonable level of information about the Proposal has already been disclosed by Santos and investors have had time to assess its implications for Santos.

Market Issues

The August 2011 downturn in global equity markets reflects increased pessimism for global economic conditions. The recent market fears are an extension of the economic gloom that followed the global economic crisis that commenced in late 2007 and reflect:

• the consequences of government responses to the global financial crisis whereby developed economies bailed out major financial institutions, taking private debt onto public balance sheets and/or launched substantial economic stimulus packages thereby increasing existing budget deficits. This has raised substantial concerns for the sovereign debt position of a number of countries in the European Union (e.g. Ireland, Iceland, Greece, Spain, Italy) and the ability of countries such as the United States of America and the United Kingdom to reduce debt levels;
• the risk of civil unrest following austerity budgets; and
• the economic impact of major events such as the political disruptions in the Middle East and the Japanese earthquake and tsunami of March 2011.

These factors have major implications for the outlook for global growth and there is real concern that recessionary economic conditions will continue or return.

Although demand for its resources will be supported by the internal growth of Asian economies such as China and India, Australia is not immune to the deterioration in global economic conditions and this will be compounded by lower consumer sentiment than that prevailing in 2007-

1. Consequently, Australian equities markets have followed international markets down (albeit sometimes moving in the opposite direction) with increased volatility.

It is, however, too early to determine whether or not a stable level has been reached by the market or whether demand for resources can reverse the downturn in the Australian market. The downturn that occurred in August 2011 and the increased volatility shows little sign of abating. It should also be recognised that the major Australian energy companies are now more dependent on international supply and demand factors due to the focus on developing LNG projects since 2007. Consequently, value parameters that the market will apply to these entities will reflect global rather than domestic energy demand.

A significantly longer period of trading is required to be able to assess market values with any degree of reliability. In Grant Samuel's opinion, it is too early to conclude whether the market has over reacted to recent economic fears or whether a stable level has been reached, either for the market generally or for Santos specifically.

7.4 Impact of the Proposal

The acquisition of Eastern Star by Santos (via the Scheme or the Scheme and the TRU Acquisition) and the TRU On-Sale do not have a significant impact on Santos' operations and financial metrics.

The market has had limited financial information on the merged entity. No detailed financial information on the merged Santos was provided at the time of announcement of the Proposal. The Scheme Booklet only includes pro forma historical financial information for the merged entity for the 12 months ended 31 December 2010 and does not include any projections for Santos.

On the other hand, analysis of the Proposal is reasonably straightforward and there is no real change in the nature of Santos other than the level of its interest in Eastern Star. Under the Scheme (or the Scheme and the TRU Acquisition) Santos' interest in Eastern Star will increase from 20.92% to 100% (and therefore its interest in the Narrabri Gas Project will increase from 35% to 100%) and, if the TRU On-Sale is implemented, its interest in the Narrabri Gas Project will decrease from 100% to 80%.

However, the Proposal has clear strategic benefits for Santos. It:

• consolidates Santos' reserve and resource base in the Gunnedah Basin (Santos becomes the largest holder of CSG reserves in New South Wales);
• strengthens Santos' strategic position in the east coast gas market, providing substantial flexibility to respond to expected increased demand for gas from both the domestic and export markets;
• creates a strategic relationship with TRUenergy, a major integrated energy company in the east coast markets; and
• the TRU On-Sale provides funding to meet incremental capital expenditure in the Gunnedah Basin until the end of 2014.

The proforma impact of the Proposal on the financial position of Santos is set out in Section 5 together with the underlying assumptions. Ernst & Young has reviewed the proforma financial position and its opinion is set out in Section 8 of the Scheme Booklet. In addition, Grant Samuel has prepared an analysis of the proforma impact of the Proposal on the financial performance of Santos and its reserves and resources. This analysis has been prepared on the following basis:

• the Proposal is implemented on 1 January 2010 with the financial performance for Eastern Star being for the twelve months ended 31 December 2011; and
• simple aggregation of financial performance (i.e. no allowance for differences in accounting treatments or cost savings).

The proforma analysis assumes the Proposal is implemented in full (i.e. via the Scheme, the TRU Acquisition and the TRU On-Sale) and is summarised below:

Proforma Impact of Proposal on Financial Parameters
	Year end 31 December 2010
	Santos(actual)	Santos(proforma)
Shares on issue at period end (million)	875.1	933.0
Financial Performance ($ million)
Sales revenue	2,228	2,230
EBITDA	1,235	1,227
EBIT	635	626
Profit after tax attributable to Santos shareholders	500	494
Basic earnings per share	59.8¢	52.9¢
Financial Position ($ million)
Total assets	13,769	14,487
Total liabilities	6,166	6,188
Net assets	7,603	8,299
Shareholders' funds	7,605	8,301
Net assets per share	$8.69	$8.89
NTA per share	$7.59	$7.28
Book gearing	(18.0)%	(22.3)%
Reserves and Resources (PJ)
Total37
- 2P reserves	8,404	8,882
- 2C resources	13,150	14,254
Gunnedah Basin
- 3P reserves	1,359	2,238
- 3P reserves + 2C resources	3,502	5,119

Source: Scheme Booklet and Grant Samuel analysis

This analysis indicates that:

• the non associated Eastern Star shareholders would hold 6.2% of the enlarged Santos issued capital;
• in the absence of cost savings, the acquisition of Eastern Star is dilutive to basic earnings per share;
• net assets per share increases by around 2.3% but NTA per share decreases by 4% because of the increase in intangibles under the Proposal;
• the net cash position of Santos increases primarily as at 31 December 2010 Eastern Star's cash balance reflected the August 2010 capital raising; and
• overall Santos 2P reserves and 2C resources increase by 5.7% and 8.4% respectively. More importantly, Santos' 3P reserves and 3P reserves and 2C resources in the Gunnedah Basin in New South Wales (comprising only CSG interests) increase by around 65% and 41% respectively.

7.5 Conclusion

The short period of time since announcement of the Proposal and the substantial change in market conditions since the beginning of August 2011, means that it is not possible to be definitive about the likely market value of Santos shares after the Proposal is implemented.

37 Includes beneficial interests.

Grant Samuel's judgement is that a Santos share price of $11.50-13.00 is a reasonable estimate which encompasses the recent performance of Santos shares as well as current market conditions. The top end of the range is below the Santos share price on 15 July 2011 of $13.23 upon which the Proposal is based. In this regard, it is important to recognise that Santos shares have only traded above $13.23 on one day since the end of July 2011 (namely 1 August) and have been volatile, trading in a range of $10.11-13.26 at a volume weighted average price of $11.70.

The value range relative to recent Santos share prices is show below:

Source: IRESS

The current share price is below the low end of the range. In addition to the overall market uncertainty, the Santos share price may be affected by market concerns over the magnitude of capital expenditure requirements over the next 4-5 years, recent community opposition to the CSG sector and market concerns in relation to the demand for LNG in the short to medium term. Nevertheless, the median of brokers' target prices ($16.10) indicates a market expectation that the Santos share price will increase from current levels (even given current market conditions). Furthermore, notwithstanding recent trading, a Santos share price of $11.50-13.00 is appropriate for the evaluation of the Scheme as it reflects market condition assumptions consistent with those underlying Grant Samuel's estimate of the full underlying value of Eastern Star.

8 Evaluation of the Scheme

8.1 Conclusion

In Grant Samuel's opinion, the Scheme is in the best interests of Eastern Star shareholders, in the absence of a superior proposal.

Grant Samuel's conclusion is based on a comparison of the value attributed to the consideration offered by Santos with the estimated underlying value of Eastern Star. However, current market conditions and economic climate mean that estimates of value are subject to considerable uncertainty. Since July 2011 there has been a material downturn in global equities markets and increased volatility reflecting heightened pessimism for global economic conditions. Although Asian demand for Australian resources is expected to continue to underpin Australian economic activity, Australia is not immune to changes in global market sentiment and economic conditions. Major Australian energy companies such as Santos are now subject to global gas supply and demand factors due to their developing LNG export projects.

It is too early to determine whether market stability is near with volatility showing little sign of abating. Accordingly, it is difficult to make estimates of key value drivers for Eastern Star (such as the demand and price for gas) or to attribute a market value to Santos shares with any degree of reliability. Any conclusions and value judgements need to the considered in this light.

Grant Samuel has estimated the full underlying value of Eastern Star, including a control premium, to be in the range $0.77-1.00 per share. However, the value of Eastern Star is subject to significant uncertainty as it depends on the success of the development of the Narrabri Gas Project which is currently at a relatively early stage of commercialisation. The valuation is also dependent on judgements regarding the recoverability of the resource, the timing and cost of the development and the price received for gas. Shareholders with different views on the future prospects for the Narrabri Gas Project could reasonably reach different conclusions on the value of Eastern Star.

Grant Samuel has attributed value to the scrip consideration under the Scheme in the range $0.79- 0.89 per share based on a market price for Santos shares in the range $11.50-13.00. This range compares to a closing Santos share price on 15 July 2011 of $13.23 and a volume weighted average price for the preceding month of $13.39. In the current market conditions it is not possible to attribute value to Santos shares with any reliability. The Santos share price has recently fallen below $11.50. Although there is no evidence to suggest that Santos shares are trading out of line with the market or its peers, it is not possible to conclude whether the market has over reacted to recent economic fears or whether Santos shares will continue to trade around current levels.

The value attributed to the scrip consideration ($0.79-0.89 per share) falls within Grant Samuel's estimate of the full underlying value for Eastern Star ($0.77-1.00 per share), albeit in the lower half. Accordingly, the Scheme is fair. As the Scheme is fair, it is also reasonable. As the Scheme is fair and reasonable, it is in the best interests of shareholders.

The recent decline in the Santos share price has made evaluation of the Scheme more difficult. At the time of announcement:

• the consideration had a value of $0.88-0.94 (based on share prices up to one month prior to the announcement of the Proposal) which falls within the valuation range for Eastern Star of $0.77-1.00 (although the valuation range reflects market conditions since July 2011); and
• the exchange ratio represented a substantial premium to pre announcement Eastern Star share prices.

The subsequent decline in the Santos share price has substantially reduced the market value of the consideration and the apparent premium. However, that decline is not Santos specific, sharemarket values and asset values have fallen generally. Accordingly, it is likely that the underlying value of Eastern Star has also declined.

The value of the scrip consideration will vary with movements in the Santos share price. Accordingly, until the Scheme is implemented, Eastern Star shareholders are exposed to any changes that could impact the Santos share price. The actual value of the consideration could therefore ultimately exceed, or be less than $0.79-0.89 per Eastern Star share.

The extent of the uncertainties involved in judgements regarding the value of Eastern Star and of the scrip consideration are such that conclusions relating to the fairness of the Scheme are quite subjective. Nonetheless, in Grant Samuel's opinion, even if the Scheme was not fair it would still clearly be reasonable (and therefore in the best interests of shareholders). In particular:

• the Scheme delivers a significant premium to Eastern Star shareholders;
• in the absence of the Scheme or a similar transaction, it is likely that Eastern Star shares under current market conditions would trade at prices well below $0.79-0.89 (the value attributed to the consideration);
• an acquisition proposal by any other party is unlikely without support from Santos and it is unlikely that alternative bidders would be prepared to offer a price equal to or higher than $0.79-0.89 per share, particularly given Santos' right to match any competing transaction;
• shareholders will exchange their Eastern Star shares for shares in Santos. By doing so, shareholders will:
  • retain the right to participate in the upside associated with the future development of the Narrabri Gas Project, albeit on a highly diluted basis;
  • gain exposure to Santos' substantial exploration, development and production portfolio;
  • receive fully franked dividend income from Santos;
  • incur no transaction costs; and
  • if eligible, be entitled to receive capital gains tax rollover relief.

Conversely, Eastern Star shareholders will:

• receive Santos scrip, not cash. If they wish they will be able to sell into a liquid market for Santos shares, albeit they will incur transaction costs;
• be exposed to the development and general operational risks associated with Santos' portfolio of businesses, in particular its substantial LNG portfolio; and
• dilute their interest in the Narrabri Gas Project and Eastern Star's other assets.

It could be argued that Eastern Star shareholders could potentially realise greater value by deferring a sale of Eastern Star but there can be no guarantee of any significant short to medium term improvement in the external environment. In the interim, Eastern Star would face significant funding, commercialisation and regulatory challenges. In any event, to the extent that future improvement in the external environment is reflected in stronger equity markets, Eastern Star shareholders should also benefit if they continue to hold the Santos shares received as consideration under the Scheme.

8.2 Fairness

Grant Samuel has estimated the full underlying value of Eastern Star, including a control premium, to be in the range $0.77-1.00 per share. The value was estimated having regard to both DCF analysis and multiples of reserves. The value exceeds the price at which Eastern Star shares would be expected to trade on the stock exchange in the absence of the Scheme or some similar transaction. The valuation is set out in Section 6 of this report.

The value attributed to the scrip consideration under the Scheme is $0.79-0.89 per share based on a market value for Santos shares of $11.50-13.00. The value of the consideration is reviewed in Section 7 of this report.

The relationship between the values and the TRU Acquisition price of $0.90 per share is depicted below:

Source: IRESS and Grant Samuel analysis

Note: The Eastern Star share price and the value of the consideration based on the month prior to 15 July 2011 are before the downturn in equities markets in August 2011.

The value attributed to the scrip consideration falls within Grant Samuel's estimate of the full underlying value for Eastern Star, albeit in the lower half of the range. Accordingly, the Scheme is fair. As the Scheme is fair, it is also reasonable. As the Scheme is fair and reasonable, it is in the best interests of shareholders.

However, the valuation analysis for both Eastern Star and the scrip consideration should be treated with caution:

• the value of Eastern Star is subject to significant uncertainty:
  • it assumes success in the development of the Narrabri Gas Project which, although supported by substantial certified coal seam gas reserves and resources, is currently stranded (being a considerable distance from any high volume gas transmission pipeline), at a relatively early stage of commercialisation and in a sector currently subject to significant community opposition;
  • depends on judgements regarding the recoverability of the resource, the timing and cost of the development and the price received for gas produced;
  • commercial amounts of CSG are yet to be produced by the Narrabri Gas Project; and
  • changes in external market conditions (including economic and market conditions) also affect underlying value. Market conditions since the beginning of August 2011 have been volatile.

Shareholders with different views on the future prospects for the Narrabri Gas Project could reasonably reach different conclusions on the value of Eastern Star; and

in current market conditions it is not possible to attribute values to Santos shares with any reliability. Although there is no evidence to suggest that Santos shares are trading out of line with the market or its peers or that any information that would have a material impact on its share price has not been disclosed, it is not possible to conclude whether the market has over reacted to recent economic fears or whether the shares will continue to trade around current

levels. A significantly longer period of trading is required to be able to assess market values with any degree of reliability.

As the Scheme consideration is scrip analysis of relative values provides insights that are at least as relevant as absolute value. In this context, at the time of announcement:

• the consideration had a value of $0.88-0.94 (based on share prices up to one month prior to the announcement of the Proposal) which falls within the valuation range for Eastern Star of $0.77-1.00 (although the valuation range reflects market conditions since July 2011); and
• the exchange ratio represented substantial premiums over pre announcement Eastern Star share prices of approximately 20-50% depending on the period measured (see Section 8.3.1). The premium in the six months prior to announcement is 38-51% while over the longer term (12 months) the premium (19%) is consistent with those typically observed in takeovers.

The subsequent decline in the Santos share price has substantially reduced the value of the consideration and the apparent premium. However, that decline is not Santos specific, sharemarket values generally have declined. To the extent that falling share prices (including in the energy sector) reflect a less optimistic outlook on global economic growth it is arguable that the value of energy assets has also declined.

The value of the scrip consideration will vary with movements in the Santos share price. Accordingly, until the Scheme is implemented, Eastern Star shareholders are exposed to changes in overall equity market conditions and specific events that could impact the Santos share price. The actual value received could therefore ultimately exceed, or be less than, $0.79-0.89 per Eastern Star share. A sustained movement in the Santos share price below $11.50 could change the evaluation of whether the Scheme is fair. The impact of movements in the Santos share price on the consideration is illustrated in the following table:

Scheme – Value of Consideration ($)
SantosShare Price	Value of Consideration(per Eastern Star share)
$15.00	$1.03
$14.50	$1.00
$14.00	$0.96
$13.50	$0.93
$13.00	$0.89
$12.50	$0.86
$12.00	$0.83
$11.50	$0.79
$11.00	$0.76
$10.50	$0.72
$10.00	$0.69
$9.50	$0.65
$9.00	$0.62

The current Santos share price is below the low end of the value range assessed for the scrip consideration (see Section 7.5). While the current Santos share price is well below that of recent months, there is no certainty that any upside in the share price will emerge. Shareholders should therefore monitor movements in the Santos share price in the period prior to the meeting at which they will vote on the Scheme resolution.

The value attributed to the consideration under the Scheme ($0.79-0.89 per share) is now lower than the TRU Acquisition price of $0.90. This reflects that:

• the consideration under the TRU Acquisition is cash whereas other shareholders are to receive Santos shares in return for their Eastern Star shares. As a consequence, the value of the scrip consideration will vary with movements in the Santos share price; and
• since July 2011 there has been a material downturn in equities markets of around 6% (with the S&P/ASX Energy Index declining by around 10%) and increased market volatility which

shows little sign of abating. There is no evidence that equities markets will return to pre August 2011 levels in the near future. This downturn is reflected in the value assessed for the Scheme consideration.

The TRU Acquisition price of $0.90 per share was agreed at the same time as the terms of the Scheme were agreed by Santos and Eastern Star (i.e. before the sharemarket falls of August 2011). It is therefore arguable that the transaction would be on different terms if negotiated in current market conditions. Nevertheless, $0.90 falls within Grant Samuel's value range for Eastern Star ($0.77-1.00 per share).

The volatility in financial markets and the sensitivity of valuation conclusions to a range of assumptions regarding the future of energy markets and the commercialisation of the Narrabri Gas Project mean that valuation conclusions for Eastern Star are subject to considerable uncertainty. In Grant Samuel's view, the relativities between the value attributed to the consideration and the estimated underlying value of Eastern Star are such that the Scheme is fair. However, even if a more conservative approach to estimating the value of the consideration was adopted or more optimistic conclusions reached in relation to the value of Eastern Star (suggesting that the Scheme might not be fair), in Grant Samuel's opinion, the Scheme would clearly still be reasonable (see Section 8.3).

8.3 Reasonableness

8.3.1 Premium for Control

Takeover transactions are commonly analysed by reference to the extent of the control premium paid by the bidder relative to the pre-bid price. Based on the Santos share price in periods prior to the announcement of the Proposal, the consideration represents the following premiums to the price at which Eastern Star shares traded in the same periods:

Eastern Star – Premium over Pre-announcement Prices
Period	SantosPrice/VWAP	ScripConsideration38	Eastern StarPrice/VWAP	Premium
15 July 2011 – Pre-announcement price	$13.23	$0.90	$0.595	51.3%
1 month prior to 15 July 2011	$13.39	$0.91	$0.610	49.3%
3 months prior to 15 July 2011	$14.08	$0.96	$0.666	43.9%
6 months prior to 15 July 2011	$14.35	$0.98	$0.706	38.2%
12 months prior to 15 July 2011	$13.62	$0.93	$0.780	18.8%

Source: IRESS and Grant Samuel analysis

The level of premiums observed in takeovers varies depending on the circumstances of the target and other factors (such as the potential for competing offers) but tends to fall in the range 20-35%. The premium being paid under the Scheme based on prices in the six months to 15 July 2011 is higher than those typically seen in takeover offers but over the longer term (12 months) the premium is more consistent with those typically observed.

The premium based on daily prices over the period from 1 July 2010 can be depicted graphically:

38 Pre announcement scrip consideration calculated based on initial exchange ratio of 0.6803 Santos shares for every 10 Eastern Star shares.

Source: IRESS and Grant Samuel analysis

This analysis shows that the premium has expanded since January 2011 due to the decline in Eastern Star's share price. In Grant Samuel's view, the Eastern Star share price has not been a particularly good indicator of underlying value since January 2011 given negative community sentiment towards the CSG sector and the lack of progress on the commercialisation of the Narrabri Gas Project. Grant Samuel's estimate of the full underlying value of Eastern Star implies higher premia over the share price prevailing prior to 15 July 2011 (see Section 6.1).

On announcement of the Proposal, the Eastern Star share price rose sharply and the shares traded in the range $0.85-0.90, marginally below that implied by the exchange ratio but reflecting the initial decline in the Santos share price that followed the announcement. Since then Eastern Star shares have generally traded in line with Santos shares (even during the recent market downturn):

At the time of announcement the terms of the Scheme represented a significant premium. However, since the announcement on 15 July 2011 the Santos share price has fallen substantially from $13.23 hitting an intraday low of $10.11 on 9 August 2011. It has since recovered to $11.45 (as at 16 September 2011) but this still represents a fall of 13.5% from pre announcement levels. At the same time, it must be recognised that in the same period the equities markets have also fallen significantly:

Australian Equity Market Movements
	Level as at	Change
Index	15 July 2011	16 September 2011	(%)
All Ordinaries Index	4,543	4,230	(6.9%)
S&P/ASX 200	4,474	4,149	(7.3%)
S&P/ASX Energy Index	14,665	13,084	(10.8%)

Source: IRESS

Eastern Star shares would not have been immune to this downturn. In the absence of the Scheme, it is almost certain that the share price would now be lower than it was on 15 July 2011. Although it is not possible to know with certainty what the Eastern Star share price would be in the absence of the Scheme it is Grant Samuel's view that it would have fallen by at least as much as the Santos share price in this period. On this basis, it appears likely that the effective premium percentage being paid by Santos is similar to the apparent premium at the time of the announcement.

The premium over pre announcement prices is lower (30-50%), but not insignificant, when measured relative to the value attributed to the scrip consideration ($0.79-0.89 per share):

Eastern Star – Premium Implied by Value of Scrip Consideration
Period	Value of ScripConsideration	Eastern StarPrice/VWAP	Premium
15 July 2011 – Pre-announcement price	$0.79-0.89	$0.595	33.0-50.3%
1 month prior to 15 July 2011	$0.79-0.89	$0.610	29.7-46.6%
3 months prior to 15 July 2011	$0.79-0.89	$0.666	18.8-34.3%
6 months prior to 15 July 2011	$0.79-0.89	$0.706	12.1-26.7%
12 months prior to 15 July 2011	$0.79-0.89	$0.780	1.5-14.7%

Source: IRESS and Grant Samuel analysis

8.3.2 Share Trading in the absence of the Proposal

The Scheme enables shareholders to realise their investment in Eastern Star at a value which includes a premium. In the absence of the Scheme or a similar transaction, shareholders could only realise their investment by selling on market at a price which does not include any premium and would incur transaction costs (i.e. brokerage). In these circumstances (and assuming there was no speculation as to an alternative or revised proposal), it is likely that Eastern Star shares under current market conditions and its current ownership structure, would trade at prices below $0.79-0.89 (being Grant Samuel's assessed value of the consideration under the Scheme based on a Santos share price of $11.50-13.00). In fact, the recent downturn in the stockmarket and the associated investor uncertainty suggests that Eastern Star shares could trade at significantly lower prices in the foreseeable future.

In this regard, Eastern Star faces substantial challenges to commercialise the Narrabri Gas Project, which are accentuated by the current uncertain and volatile economic and market conditions and increasingly negative community sentiment. In particular, based on statements made by Santos, the capital requirement for the next phase of development of the Narrabri Gas Project to the end of 2014 is around $500 million, of which Eastern Star's share would be approximately $300 million. As a result, Eastern Star's cash resources would need to be replenished by way of a substantial capital raising (in the vicinity of

$100-150 million) before the end of 2011. Current market conditions are not necessarily conducive to raising capital. Even if a capital raising could be completed, it is likely that it would materially dilute existing shareholders.

Accordingly, the prospect of Eastern Star shares trading above $0.79-0.89 in the foreseeable future is remote. In any event, it should be noted that the consideration under the Scheme provides a significant premium over pre-announcement trading prices.

8.3.3 Prospect of an Alternative Proposal

In weighing up any offer, shareholders need to have regard to the alternatives that are realistically available to them.

While Eastern Star has agreed to no-talk and no-shop provisions and Santos has the right to match any competing transaction, there is no impediment to an alternative acquisition proposal being put by any other party. The $9.24 million reimbursement fee (approximately 1 cent per share) is not of a magnitude to represent a barrier to alternative proposals.

However, as Santos has an existing 20.92% direct interest in Eastern Star, an acquisition proposal by any other party could not succeed without the agreement of Santos. Grant Samuel is not aware of any alternative acquisition proposals or that Santos would have any interest in disposing of its shareholding in Eastern Star. Eastern Star has considered approaches from a range of parties in the last 12-24 months. However, these approaches typically involved monetisation of the gas resource (e.g. sale of gas agreements) and/or the acquisition of an interest in the Narrabri Gas Project. No alternative proposal involving a takeover has been received by Eastern Star. In any event, the consideration offered under the Scheme represents a fair price for Eastern Star and it is unlikely that alternative bidders would be prepared to offer a price equal to or higher than $0.79-0.89 per share, particularly given Santos' right to match any competing bid.

Since the announcement of the Proposal on 18 July 2011, there has been an opportunity for any other interested party to make a competing offer. No such offer has been made at the date of this report. Although a competing offer may be made at any time before the meetings for the Scheme, there appears little likelihood that an alternative bidder will make a more attractive offer for Eastern Star.

It would be open to shareholders to vote against the Scheme in the hope that Santos would make a subsequent higher offer. However, this involves significant risks. There is no evidence that Santos would be prepared to pay a higher price. Santos' existing shareholding enables it to prevent an alternative party reaching compulsory acquisition of Eastern Star.

Moreover, shareholders could not be confident of realising a price as high as $0.79-0.89 if they wished to sell on market at a later date. In particular, shareholders should recognise that:

• significant development risks and funding challenges remain for the Narrabri Gas Project; and
• in the absence of the Scheme:
  • Eastern Star faces substantial funding issues over the next six months; and
  • it is likely that Eastern Star shares under current market conditions would trade at prices well below $0.79-0.89 for the foreseeable future.

8.3.4 Other Advantages, Disadvantages and Risks

The Scheme has a number of other advantages, disadvantages and risks for Eastern Star shareholders.

Shareholders will exchange their Eastern Star shares for shares in Santos. In doing so, Eastern Star shareholders will:

• retain the right to participate in the upside associated with the future development of the Narrabri Gas Project (albeit on a highly diluted basis). Moreover, the risk associated with commercialisation will be reduced relative to that of a standalone development of the Narrabri Gas Project. Eastern Star faces substantial challenges to commercialise the project over the next few years and there is no certainty that it will achieve the previously announced project milestones. While the challenges are not insurmountable they are more difficult in the context of a single standalone project business in the short term;
• gain exposure to Santos' substantial exploration, development and production portfolio. Santos is a top 25 ASX listed company and a leading natural gas producer. It has a portfolio of growth opportunities both in Australia and in the Asia Pacific. Although not without risk, Santos' portfolio of growth opportunities provides significant diversification (in terms of geography, natural gas category and end market) and optionality. Therefore, although Eastern Star shareholders will change their investment risk profile, their overall risk will be reduced relative to an investment in Eastern Star;
• receive fully franked dividend income. Santos has paid dividends since 1978 with dividends being fully franked since 1989. Over the last five years the Santos dividend has been in the range 37-42 cents per share but, due to its substantial capital commitments over the next few years, Santos has provided market guidance that dividends (if declared) are more likely to be around 30 cents per share until 2015. In line with this guidance, on 19 August 2011 Santos announced an interim dividend for 2011 of 15 cents per share. Although Eastern Star shareholders are not entitled to this dividend, in accordance with the terms of the Scheme the exchange ratio has been adjusted upwards in compensation;
• incur no transaction costs (i.e. brokerage) to acquire Santos shares. Moreover, as the exchange ratio under the Scheme reflects a premium for control, their interest in Santos will be greater than if they had realised their Eastern Star shares on market and used the sale proceeds (net of transaction costs) to acquire Santos shares on market (also net of transaction costs); and
• if eligible, be entitled to receive capital gains tax scrip for scrip tax rollover relief (see Section 8.3.6).

Conversely, Eastern Star shareholders will:

• receive scrip in Santos, not cash. Some may not want to hold Santos shares and would have preferred to crystallise their investment in Eastern Star in cash. However, Eastern Star shareholders will be able to sell into a liquid market for Santos shares, although there is no certainty that Eastern Star shareholders will be able to realise the scrip received for an amount equivalent to the value attributed to the consideration (e.g. due to transaction costs and the risks associated with any stockmarket investment). In this regard, it should be noted that the agreed exchange ratio adjustment mechanism compensates Eastern Star shareholders only to the extent that the Santos share price was trading cum dividend when the terms of the Scheme were negotiated and not for any other adverse movements in the Santos share price post announcement;
• be exposed to the development and general operational risks associated with Santos' portfolio of businesses, in particular its substantial LNG portfolio. Overall these issues and risk should be well understood by analysts and investors and be reflected in the Santos share price. However, any extreme manifestation of these risks (e.g.

difficulties associated with commissioning the Gladstone LNG Project) may have a material adverse effect on the Santos share price; and

dilute their interest in the Narrabri Gas Project and Eastern Star's other assets significantly. Based on the assessed value of the consideration ($0.79-0.89) and assuming implementation of the Scheme and the TRU Acquisition, Eastern Star shareholders will hold around 5.7% of Santos which (following implementation of the TRU On-Sale) equates to around 4.6% of the Narrabri Gas Project. Furthermore, there is no certainty that Santos will deliver the project in the same time horizon as anticipated by Eastern Star nor is there any certainty that on a standalone basis Eastern Star would have met its targeted project milestones.

8.3.5 Other Matters

Transaction Costs

Eastern Star has estimated that the total transaction costs of the Proposal (including legal and other adviser's fees as well as printing, mailing and meeting costs) will be approximately $10.5 million. Of these costs, approximately $1 million will have been incurred at the time that Eastern Star shareholders vote on the Proposal. If the Scheme is not implemented, Eastern Star will meet these costs as a standalone company. Furthermore, if the board or a director withdraws or adversely modifies their support or recommendation in favour of the Scheme (and no other no similar transaction resulting from a superior proposal is completed by 18 July 2012), Eastern Star will be liable to pay the $9.24 million reimbursement fee to Santos. In the context of Eastern Star's financial position and its near term funding requirements for the development of the Narrabri Gas Project, these amounts are material.

Ineligible Overseas Shareholders

Ineligible overseas shareholders (i.e. Eastern Star shareholders with registered addresses outside of Australia and its external territories and New Zealand including holders of Eastern Star American Depositary Receipts) are not entitled to receive Santos shares. However:

• the Santos shares which they would otherwise receive will be sold on market and they will receive the cash proceeds of sale (after payment of any applicable brokerage, taxes and costs) in Australian dollars;
• they can acquire Santos shares through the ASX if they wish to retain an exposure to the merged entity; and
• shareholders representing approximately 0.3% of Eastern Star's issued shares are expected to be impacted by these provisions.

Small Shareholdings

If the Scheme is implemented, Eastern Star shareholders will receive 0.6881 Santos shares for every 10 Eastern Star shares. Based on the closing Santos share price on 16 September 2011 of $11.45, shareholders holding less than 635 Eastern Star shares will receive a less than marketable parcel of Santos shares (i.e. a parcel of Santos shares with a market value of less than $500). Shareholders who will receive a less than marketable parcel should note that under its constitution Santos is entitled to sell those shares and remit the proceeds to the shareholder. In this context:

• less than 5% of Eastern Star shareholders (representing 0.01% of issued shares) are expected to be impacted; and
• Santos must give at least six weeks written notice of its intention to sell.

Taxation Consequences

Details on the taxation consequences of the Scheme for Australian resident shareholders are set out in Section 6 of the Scheme Booklet. Most shareholders are expected to be eligible to receive capital gains tax scrip for scrip rollover relief if a capital gain would otherwise have been made from the exchange of Eastern Star shares for Santos shares. If shareholders receive rollover relief the capital gain that would otherwise be generated will be deferred until they dispose the Santos shares. For a shareholder who chooses not to receive rollover relief, the capital gains tax provisions will apply. If an Australian resident shareholder holds Eastern Star shares as trading stock no scrip for scrip rollover relief will apply. In any event, the taxation consequences for shareholders will depend upon their individual circumstances. If in any doubt, shareholders should consult their own professional adviser.

8.4 Shareholder Decision

The decision whether to vote for or against the Scheme is a matter for individual shareholders based on each shareholder's views as to value, their expectations about future market conditions and their particular circumstances including risk profile, liquidity preference, investment strategy, portfolio structure and tax position. In particular, taxation consequences may vary from shareholder to shareholder. If in any doubt as to the action they should take in relation to the Scheme, shareholders should consult their own professional adviser.

Similarly, it is a matter for individual shareholders as to whether to buy, hold or sell securities in Eastern Star or Santos. This is an investment decision independent of a decision on whether to vote for or against the Scheme upon which Grant Samuel does not offer an opinion. Shareholders should consult their own professional adviser in this regard.

9 Evaluation of the TRU Acquisition

9.1 Background

On 18 July 2011, Santos entered into a binding memorandum of understanding with TRUenergy pursuant to which:

• on the implementation of the Scheme, Santos will acquire TRUenergy's 3.76% interest in Eastern Star for a cash price of $0.90 per share (a total of $34.7 million). The TRU Acquisition is subject to the approval of non associated shareholders. If the TRU Acquisition is not approved, the Eastern Star shares held by TRUenergy will be acquired by Santos under the Scheme; and
• subject to implementation of the Scheme and FIRB approval, Santos will on-sell to TRUenergy a 30.77% interest in certain assets (and related liabilities) of Eastern Star for a cash price of $284.3 million. In summary, the assets under the TRU On-Sale are:
  • PEL238, PAL2 and PPL3, the CSG rights of which comprise the Narrabri Gas Project;
  • PEL433 and PEL434;
  • PEL6, PEL427, PEL428 and the farm in agreements with Orion;
  • PEL117, PEL121, PEL122 and the farm in agreements with SAPEX;
  • Wilga Park Power Station;
  • the proceeds from the sale of the land on Kooragang Island, Newcastle; and
  • shares in Orion.

The effect of this transaction is that TRUenergy will acquire a 20% interest in the Narrabri Gas Project and interests in the other assets (and related liabilities) based on Eastern Star's existing ownership interest.

The cash price of $284.3 million was calculated as 30.77% of the value for Eastern Star implied by the terms of the Scheme (i.e. $924 million or $0.90 per share). However, the actual cash amount to be paid by TRUenergy will be adjusted to reflect the actual Eastern Star assets and liabilities (including working capital) in which TRUenergy acquires an interest.

The memorandum of understanding may be terminated by written notice of each party as a consequence of a breach of agreed exclusivity arrangements and terminates if the scheme implementation deed between Santos and Eastern Star is terminated or the Scheme becomes effective.

Neither the Scheme nor the TRU On-Sale is conditional on the TRU Acquisition. Both transactions will proceed regardless of whether the TRU Acquisition is approved by the non associated shareholders.

9.2 Analysis and Conclusion

Approval of the TRU Acquisition means that Santos will pay TRUenergy a cash amount of $34.7 million for its 3.76% interest in Eastern Star (based on $0.90 cash per share). If the TRU Acquisition is not approved then Santos will acquire TRUenergy's shares for the value of the scrip consideration under the Scheme or approximately $30.5-34.5 million (based on the value attributed to the scrip consideration of $0.79-0.89 per share). On this basis, if the TRU Acquisition is approved Santos would pay more for TRUenergy's shares in Eastern Star than is necessary (i.e. by approximately $0.2-4.2 million). Non associated shareholders will receive shares under the Scheme and approval of the TRU Acquisition will therefore adversely affect the value of the Santos shares they receive (even if only marginally). However:

the impact on non associated shareholders is not material as any overpayment will be spread across all Santos shareholders. Based on the above data, the maximum impact would equate to 0.4 cents per Santos share or 0.03 cents per Eastern Star share;

• as the value of the scrip consideration under the Scheme will vary with movements in the Santos share price, the impact of the TRU Acquisition will be negative at Santos share prices below $13.08 and positive above that level;
• the TRU Acquisition is an arm's length transaction (free of any selling pressure) between sophisticated energy companies. The consideration to be paid of $0.90 cash per share falls within Grant Samuel's value range for Eastern Star of $0.77-1.00 per share (see Section 6.1) and therefore represents fair value; and
• that TRUenergy is being offered cash is a matter of fact. The certainty of cash is a benefit not available to non associated shareholders. The negative aspects of scrip consideration have been highlighted by the fall in stockmarkets and the Santos share price in August 2011. However, if the Santos share price increases to above $13.08 at implementation of the Scheme, then non associated shareholders would benefit relative to TRUenergy.

TRUenergy will receive a premium for its shares in Eastern Star. The consideration of $0.90 per share represents a 51.3% premium to the price at which Eastern Star last traded prior to the announcement of the Proposal:

TRU Acquisition – Premium over Pre-announcement Prices
Period	Eastern StarPrice/VWAP	ConsiderationunderTRU Acquisition	Premium
15 July 2011 – pre announcement price	$0.595	$0.90	51.3%
1 month prior to 15 July 2011	$0.610	$0.90	47.5%
3 months prior to 15 July 2011	$0.666	$0.90	35.1%
6 months prior to 15 July 2011	$0.706	$0.90	27.5%
12 months prior to 15 July 2011	$0.780	$0.90	15.4%

Source: IRESS and Grant Samuel analysis

Based on current Santos share prices, the premium paid to TRUenergy will be greater than that to be received by the non associated shareholders under the Scheme.

The TRU Acquisition will not occur unless the Scheme is implemented at which time Santos will hold a 96.24% interest in Eastern Star. Following completion of the TRU Acquisition, Santos will hold 100% of Eastern Star. Therefore, the TRU Acquisition delivers 100% ownership of Eastern Star to Santos but at a time when it already controls the company. If the TRU Acquisition is not approved Santos will achieve 100% ownership and control of Eastern Star by way of the Scheme. If the Scheme is not implemented Eastern Star's existing ownership structure will remain and a takeover proposal by any other party is unlikely to succeed without the agreement of Santos due to its 20.92% interest.

The TRU On-Sale is subject only to implementation of the Scheme and FIRB approval. Consequently, even if the non associated shareholders approve the Scheme but reject the TRU Acquisition, providing FIRB approval is obtained, the TRU On-Sale will proceed.

The TRU On-Sale will be completed at a cash price equating to $0.90 per Eastern Star share. This falls within Grant Samuel's estimate of the full underlying value of Eastern Star and is accordingly on an arm's length basis (although it is possible that if the terms of the TRU On-Sale were negotiated under current market conditions a lower price would be agreed). If the Santos share price at implementation of the Scheme is less than $13.08 (or $0.90 per Eastern Star share), Santos will acquire Eastern Star for less than $0.90 per share and will realise a profit on the TRU On-Sale. Based on Grant Samuel's assessed value for the scrip consideration under the Scheme ($0.79-0.89 per share) Santos would realise a before tax profit on sale of $1.7-34.3 million. Non associated shareholders will benefit to the extent that the value of the Santos shares that they receive under the Scheme reflects both the profit on sale (albeit not material in terms of Santos' earnings) and the positive net cash flow from TRUenergy (around $249.9-284.3 million depending on whether of the TRU Acquisition is approved). This cash inflow is expected to fund Santos' incremental capital expenditure in the Gunnedah Basin (including the Narrabri Gas Project) until the end of

2014 (a period during which it faces substantial capital requirements). To the extent that the non associated shareholders retain the Santos shares received under the Scheme, they will participate in any upside that may eventuate. In effect, the TRU On-Sale has facilitated Santos' acquisition of Eastern Star by addressing the funding challenges that Santos would have otherwise faced had it acquired and retained a 100% interest in the Narrabri Gas Project.

The TRU Acquisition disadvantages the non associated shareholders because TRUenergy will enjoy both a higher price (based on current Santos share prices) and the certainty of cash consideration. However, this disadvantage is largely theoretical. If non associated shareholders do not approve the TRU Acquisition there is no (direct) improvement in the consideration that they will receive under the Scheme.

The important factor in assessing the TRU Acquisition is that, given the current Santos share price, it will result in Santos paying more for Eastern Star than is necessary (albeit the impact of this overpayment is not material and is shared by all Santos shareholders). This, by definition, reduces the value of the Santos shares that the non associated shareholders will receive (even if the reduction is trivial). The TRU Acquisition has no advantages or benefits for non associated shareholders because the Scheme and the TRU On-Sale will proceed regardless of whether the TRU Acquisition is approved. Accordingly, in Grant Samuel's opinion, the disadvantages of the TRU Acquisition to the non associated shareholders outweigh the advantages. Therefore (and not withstanding that the net disadvantage is trivial), the TRU Acquisition is neither fair nor reasonable having regard to the interests of the non associated shareholders.

Grant Samuel understands that, in the context that the net disadvantage to the non associated shareholders is not material, the directors of Eastern Star intend to recommend that the non associated shareholders vote in favour of the TRU Acquisition.

9.3 Shareholder Decision

The decision whether to vote for or against the TRU Acquisition is a matter for individual shareholders. If in any doubt as to the action they should take in relation to the TRU Acquisition, shareholders should consult their own professional adviser.

10 Qualifications, Declarations and Consents

10.1 Qualifications

The Grant Samuel group of companies provide corporate advisory services (in relation to mergers and acquisitions, capital raisings, debt raisings, corporate restructurings and financial matters generally), property advisory services, manages specialist funds and provides marketing and distribution services to fund managers. The primary activity of Grant Samuel & Associates Pty Limited is the preparation of corporate and business valuations and the provision of independent advice and expert's reports in connection with mergers and acquisitions, takeovers and capital reconstructions. Since inception in 1988, Grant Samuel and its related companies have prepared more than 455 public independent expert and appraisal reports.

The persons responsible for preparing this report on behalf of Grant Samuel are Caleena Stilwell BBus FCA F Fin and Stephen Cooper BCom (Hons) CA (SA) ACA ACMA. Each has a significant number of years of experience in relevant corporate advisory matters. Lachlan Whittaker BCom (Liberal Studies)(Hons) CA assisted in the preparation of the report. Each of the above persons is an authorised representative of Grant Samuel pursuant to its Australian Financial Services Licence under Part 7.6 of the Corporations Act.

10.2 Disclaimers

It is not intended that this report should be used or relied upon for any purpose other than as an expression of Grant Samuel's opinion as to whether the Scheme is in the best interests of shareholders and the TRU Acquisition is fair and reasonable to the non associated shareholders. Grant Samuel expressly disclaims any liability to any Eastern Star shareholder who relies or purports to rely on the report for any other purpose and to any other party who relies or purports to rely on the report for any purpose whatsoever.

This report has been prepared by Grant Samuel with care and diligence and the statements and opinions given by Grant Samuel in this report are given in good faith and in the belief on reasonable grounds that such statements and opinions are correct and not misleading. However, no responsibility is accepted by Grant Samuel or any of its officers or employees for errors or omissions however arising in the preparation of this report, provided that this shall not absolve Grant Samuel from liability arising from an opinion expressed recklessly or in bad faith.

Grant Samuel has had no involvement in the preparation of the Scheme Booklet issued by Eastern Star and has not verified or approved any of the contents of the Scheme Booklet. Grant Samuel does not accept any responsibility for the contents of the Scheme Booklet (except for this report).

10.3 Independence

Grant Samuel and its related entities do not have at the date of this report, and have not had within the previous two years, any business or professional relationship with Eastern Star or Santos or any financial or other interest that could reasonably be regarded as capable of affecting its ability to provide an unbiased opinion in relation to the Proposal. Grant Samuel advises that Mr Greg Martin, a non executive director of Santos, is a minority shareholder in, and chairman of, Grant Samuel Infrastructure Partners Pty Limited, a related company of Grant Samuel.

Grant Samuel commenced analysis for the purposes of a report in May 2010 prior to the announcement of the Proposal. This work did not involve Grant Samuel participating in the setting the terms of, or any negotiations leading to, the Proposal.

Grant Samuel had no part in the formulation of the Proposal. Its only role has been the preparation of this report.

Grant Samuel will receive a total fixed fee of $875,000 for the preparation of this report (including $250,000 for the preliminary work). This fee is not contingent on the outcome of the Proposal.

Grant S reimburs amuel's out sed. Grant Sa of pocket ex amuel will rece xpenses in re eive no other elation to the benefit for the e preparation e preparation o of the repor of this report. rt will be

Grant Sa ASIC on amuel conside n 30 March 20 ers itself to be 011. e independent t in terms of Regulatory G Guide 112 issu ued by the

10 0.4 Declara ations

Eastern respect o the repor court to Grant Sa officers or proce to the fe have be proportio Star has agre of any liability rt. This indem be primarily amuel. Easte for time spen eding initiated es paid to Gra een grossly n on of such cos eed that it wi y suffered or mnity will no caused by an ern Star has a t and reasonab d by any perso ant Samuel. W negligent or e sts caused by ll indemnify incurred as a ot apply in res ny conduct inv also agreed to able legal cost on. Any claim Where Grant engaged in w its action. Grant Samue result of or in spect of the pr volving gross o indemnify G ts and expense ms by Eastern Samuel or its wilful miscon el and its emp n connection roportion of a negligence o Grant Samuel es incurred in n Star are limi employees an nduct Grant S ployees and o with the prep any liability f or wilful misc and its empl n relation to an ited to an amo nd officers are Samuel shall officers in paration of found by a onduct by oyees and ny inquiry ount equal e found to bear the

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10 0.5 Consen ts

Grant Sa included any part the prior amuel consen d in the Schem of this repor r written conse nts to the issu me Booklet to t nor any refe ent of Grant S uing of this re be sent to sh erence thereto Samuel as to th eport in the fo areholders of o may be inclu he form and c orm and conte Eastern Star. uded in any o ontext in whic ext in which Neither the other documen ch it appears. it is to be whole nor nt without

10 0.6 Other

The acco ompanying let tter dated 22 S September 20 11 and the Ap ppendices form m part of this r report.

Grant Sa Financia amuel has pre al Services Gu epared a Finan uide is set out ncial Services at the beginni s Guide as req ing of this rep quired by the ort. Corporations Act. The

GRANT 22 Septem SAMUEL & mber 2011 & ASSOCIAT TES PTY LIM MITED

Appendix 1

Santos Limited – Broker Consensus Forecasts

Santos has not publicly released earnings forecasts for the year ending 31 December 2011 or beyond. However, on 19 August 2011 Santos reaffirmed its guidance for 2011 as follows:

• production volume of 47-50MMboe;
• production costs of $550-590 million;
• depreciation, depletion and amortisation expense of $12-13/barrel of oil equivalent;
• royalty related taxation expenses (after tax) of $80-100 million assuming an oil price of $90 per barrel for the remainder of 2011; and
• capital expenditure of $3 billion including $2 billion for LNG projects, $400 million for other sanctioned growth projects and $150 million for conventional exploration.

In December 2010, Santos advised that its dividend for the year ended 31 December 2011 was likely to be 30 cents per share (lower than prior years) and that dividends are expected to remain around this level until 2015.

In order to provide an indication of the expected future financial performance of Santos, Grant Samuel has considered brokers' forecasts for Santos as follows:

		Santos – Broker Forecasts for the Year ending 31 December ($ millions)
		Revenue		EBITDA		EBIT		Net Profit after Tax
Broker	Date	ForecastYear 1	ForecastYear 2	ForecastYear 1	ForecastYear 2	ForecastYear 1	ForecastYear 2	ForecastYear 1	ForecastYear 2	Target Priceper share
Broker 1	19-Aug-11	2,481	3,027	1,392	1,853	796	1,219	743	656	$18.94
Broker 2	19-Aug-11	2,492	2,890	1,446	1,622	848	948	814	614	$15.75
Broker 3	19-Aug-11	2,446	2,980	1,463	1,818	862	1,164	809	676	$16.43
Broker 4	19-Aug-11	2,399	2,742	1,440	1,726	816	1,024	772	599	$16.10
Broker 5	19-Aug-11	2,445	2,607	1,464	1,602	846	940	764	555	$14.00
Broker 6	19-Aug-11	2,421	2,622	1,351	1,437	729	807	949	475	$17.35
Broker 7	19-Aug-11	2,357	2,767	1,311	1,497	697	792	732	487	$15.00
Broker 8	19-Aug-11	2,461	2,853	na	na	879	944	809	584	$16.00
Broker 9	22-Aug-11	2,579	3,261	1,716	2,227	1,102	1,582	840	868	$16.50
Broker 10	05-Sep-11	2,492	3,324	1,511	2,075	902	1,432	837	826	$17.00
Broker 11	07-Sep-11	2,387	2,786	1,428	1,628	810	918	743	425	$16.33
Broker 12	12-Sep-11	2,536	3,000	1,285	1,673	667	956	735	680	$13.80
Broker 13	14-Sep-11	2,286	2,607	1,319	1,541	722	892	728	564	$13.76
Minimum		2,286	2,607	1,285	1,437	667	792	728	425	$13.76
Maximum		2,579	3,324	1,716	2,227	1,102	1,582	949	868	$18.94
Median		2,446	2,853	1,434	1,651	816	948	772	599	$16.10
Average		2,445	2,882	1,427	1,725	821	1,048	790	616	$15.92

Source: Brokers' reports, Grant Samuel analysis

When reviewing this data the following should be noted:

• the forecasts presented above represent the latest available broker forecasts for Santos. All brokers presented have published research on Santos following announcement of Santos' results for the half year ending 30 June 2011 on 19 August 2011. Broker 8 has not released an EBITDA forecasts;
• Grant Samuel is aware of five other brokers that follow Santos. These brokers have not released any earnings forecasts for Santos since 19 August 2011;
• as far as it is possible to identify, Grant Samuel believes that the earnings forecasts do not incorporate any one-off adjustments or non-recurring items, except that net profit after tax for the Year 1 forecasts generally includes allowance for a gain on sale of two 7.5% interests in the Gladstone LNG Project; and
• target prices are based on a 12 month time frame from research release date, with the exception of Broker 1 which has a target price for 30 June 2012.

Appendix 2

Report by MHA Petroleum Consultants LLC

19 September, 2011

Caleena Stilwell Director Grant Samuel & Associates Pty Limited Level 19 Governor Macquarie Tower 1 Farrer Place Sydney NSW 2000

Dear Ms. Stilwell,

On 18 July 2011, Eastern Star Gas Limited ("ESG") announced that it had entered into a scheme implementation deed with Santos Limited ("Santos") under which Santos will acquire all of the issued shares of ESG other than the shares already held by Santos and TRUenergy Investments Pty Limited ("the Scheme").

ESG engaged Grant Samuel & Associates Pty Limited ("Grant Samuel") to prepare an independent expert's report on the Scheme. Grant Samuel has subsequently engaged MHA Petroleum Consultants LLC ("MHA") to provide technical advice to Grant Samuel for the purposes of its assessment. In particular, Grant Samuel engaged MHA to provide a specialist's technical report including a description of the assets of ESG and their planned development, MHA's conclusions as to the technical assumptions regarding reserves, resources, production profiles, capital costs and operating costs, as well as an assessment of ESG's other oil and gas interests. This report is to be attached as Appendix 2 to Grant Samuel's independent expert's report.

I. Narrabri Coal Seam Gas Project

Introduction:

ESG's main development project is the Narrabri coal seam gas project located in Petroleum Exploration License 238 adjacent to the township of Narrabri in the state of New South Wales Australia (Figure 1). ESG holds a 65% interest in PEL 238 and is the operator. PEL 238 covers 7,920 square kilometres of the Gunnedah Basin.

Within PEL 238, production testing is underway at six locations; the Bibblewindi vertical pilot, the Bohena vertical pilot, the Bibblewindi West lateral pilot, the Bibblewindi lateral pilot, the Tintsfield lateral pilot and the Dewhurst lateral pilot. Effective 31st December 2009, Netherland Sewell and Associates Inc. ("NSAI") had certified gross 2P reserves in PEL 238 of 1,520 PJ, of which ESG's net interest is 988 PJ. NSAI's certified gross 3P reserves are 2,797 PJ, of which 1,818 PJ is net to ESG. These reserves estimates recognize the flow testing results obtained from the lateral production pilots at Bibblewindi and Bibblewindi West, as well as results from an extensive data base of information obtained from core holes and vertical appraisal wells drilled across the PEL 238 region.

Geology:

The most important structural element within PEL 238 is the Bohena Trough, which covers an area of approximately 3,500 square kilometres. The Bohena Trough contains two well developed coal measure sequences that are the main focus of ESG's coal seam gas exploration and development program (Figure 2). The Late Permian aged Black Jack coal measure contains several minor coal seams in its upper sequence, and one major seam which is approximately 6-10 metres thick known as the Hoskissons seam. The Hoskissons seam is laterally extensive across PEL 238, and lies at a depth of less than 700 metres. Gas composition measurements from Hoskissons seam coal samples have recorded relatively high carbon dioxide contents in numerous areas. As a result, the Hoskissons seam is considered a secondary objective within the overall coal seam gas development program at PEL 238.

The Early Permian aged Maules Creek coal measure contains a 2-5 metre thick upper coal seam, as well as the primary PEL 238 coal seam gas target in the lower part of the sequence known as the Bohena seam. The Bohena seam is laterally extensive across PEL 238, with thickness up to 22 metres at depths of 600 to 1200 metres.

The Bohena seam comprises mostly dull coal that has unusually high permeability for its depth and coal type. This is due to the strength and hardness of the coal, along with the prevalence of open sub-vertical fractures that are generally confined within coal bands. Core analysis results from the Bohena seam indicate good levels of gas saturation. While there have been some local areas where high carbon dioxide levels have been encountered, in general, the gas composition measurements from the Bohena seam indicate high percentages of methane.

Methodology:

The approach used by MHA to conduct this evaluation was as follows:

• 1. A reserves and resource assessment of PEL 238 was conducted to provide an independent confirmation of the previously certified volumes of NSAI. The work conducted by MHA involved a detailed review of all available data within PEL 238, including well logs, core analysis, gas composition, geological interpretations, and production data from the four pilot production areas. The full details of the MHA reserves and resource assessment for PEL 238 are not provided in this document; however, a summary comparing MHA's assessed volumes with those of NSAI is included in this report as Table 1.
• 1. A reservoir simulation model was constructed and calibrated against the 9-well Bibblewindi vertical pilot production history. This particular pilot was chosen because it contains a relatively large number of wells for a pilot program, and due to the long production history (over 4 years) available. The calibrated simulation model was then used to forecast the projected gas production profiles for the MHA field development models.
• 1. A detailed gas production and financial model for PEL 238 was obtained from ESG. This model was reviewed by MHA to evaluate the production capacities, future operating costs and future capital plans assumed in the model.

Scheme Booklet 154

MHA Petroleum Consultants, Inc.

	Independent
7	Expert's Report

1. MHA then constructed numerous field development/production and financial models for delivery to Grant Samuel. These models are additive and represent twelve separate tranches of field development based upon varying demand for gas production from PEL 238. The input assumptions for the MHA models were based upon the work conducted as part of this evaluation. The gas production profiles were obtained from the reservoir simulation modelling work, and the capital cost and operating cost assumptions were based upon information provided by ESG, with appropriate modifications where necessary.

Results and Conclusions

Independent Assessment of PEL 238 Reserves and Resources

MHA conducted an independent evaluation of the reserves and resources associated with PEL 238. The work was conducted to provide an independent confirmation of the previously certified volumes of NSAI. A comparison of the MHA and NSAI volumes are presented below in Table 1:

PEL 238 Reserves and Resources EstimatesAll Volumes in PJ; Gross (8/8ths) 100% Basis
	NSAI			MHA Evaluation (By Seam)			MHA
Category	(All Seams)	Bohena	Namoi	Rutley	Parkes	Hoskissons	(All Seams)
1P	115	120	6	0	0	0	126
2P	1,520	1,423	67	0	0	42	1,532
3P	2,797	2,269	353	33	122	264	3,041
1C	1,243	1,148	97	80	132	699	2,156
2C	3,515	2,584	111	130	211	1,052	4,088
3C	6,215	2,584	111	130	211	1,584	4,620

Table 1 – Comparison of MHA and NSAI Reserves and Resources for PEL 238

Note: NSAI data in the above table was taken from http://www.easternstar.com.au/reserves.html All volumes in the above table include losses due to fuel and shrinkage

Reviewing the total reserves and total resources numbers in the above table, one can see that on a 1P and 2P level, the estimated reserves of both NSAI and MHA are consistent, with MHA's numbers being only slightly larger, most likely due to the volumes assigned to the Maules Creek seams other than the Bohena seam. MHA has estimated considerably more 3P reserves, however, than NSAI. This is important when considering the MHA field development models.

The difference between reserves and contingent resources is commercial viability. Reserves are deemed to be commercially viable at the time of certification, contingent resources are not. Thus, in our evaluation, MHA has made the determination that almost 250 PJ (3,041 versus 2,797) more of recoverable gas volumes in PEL 238 are commercially viable than NSAI. MHA did not have access to the details of the NSAI report, so it is impossible to provide more insight at this time as to the nature of the differences between the two evaluations.

In the contingent resources category, the total 3C (high estimate) volumes estimated by NSAI are larger than the MHA 3C estimate. However, MHA has recognized substantially more 1C (low estimate) and 2C (best estimate) volumes than has NSAI. That difference is due to characterization of the relative uncertainty in the contingent resources categories between MHA and NSAI. It is the opinion of MHA that substantially more contingent resource volumes can be placed in the low estimate and best estimate categories, in comparison to NSAI.

Generation of Future Gas Production Profiles

A reservoir simulation model was constructed and calibrated against the 9-well Bibblewindi vertical pilot production history. This particular pilot was chosen because it contains a relatively large number of wells for a pilot program and has a long production history. Figure 3 illustrates the results from the calibrated simulation model. The graph compares the actual gas production volumes from the pilot with the gas volumes predicted by the simulation model. As Figure 3 shows, the model provides an excellent match to the actual data.

The calibrated simulation model was then used to forecast the projected gas production profiles for the MHA field development models. The well configuration which will be utilized by ESG in the development of the coal seam gas assets in PEL 238 is surface to in-seam ("SIS") horizontal wells. These lateral wells will have a length of up to 1000m drilled perpendicular to the fracture system of the target coal seams.

The approach used by MHA to generate the gas production forecasts was to take the reservoir characterization (coal permeability, isotherm, level of gas saturation, etc.) developed in the history matching phase of the Bibblewindi vertical pilot simulation study, and to apply that same characterization to the evaluation of the horizontal SIS wells. The primary modifications made to the simulation model in moving from history matching mode to prediction mode was to change the well configuration from vertical to horizontal, and to vary the coal thickness to be consistent with the specific coal seam and area within PEL 238 which was being modelled for development.

Four well types were modelled during this exercise and used as the basis for the MHA projections:

• Bohena seam SIS well; 2P reserves region
• Bohena seam SIS well; incremental 3P reserves region
• Upper Maules seam SIS well; 3P region
• Hoskissons seam SIS well; All areas

Projections of predicted gas rate versus time for a 25-year period are shown in Figure 4 for each of the four well types modelled. The predicted cumulative gas production over the 25-year period for the four well types is 9.5 PJ for the Bohena 2P region SIS well, 6.3 PJ for the Bohena incremental 3P region SIS well, 2.3 PJ for the Upper Maules Creek SIS well, 3.5 PJ for the lower (25%) CO2 content Hoskissons SIS well, and 2.3 PJ for the higher (50%) CO2 content Hoskissons SIS well. These well profiles were used in the construction of the MHA field development/production and financial models. In certain cases, slight adjustments were made to these profiles in the MHA field development models so that the gas production from the development models matched, as closely as possible, the volumes shown in Table 1.

MHA Petroleum Consultants, Inc.

Construction of the MHA Field Development / Financial Models for PEL 238

MHA constructed twelve separate field development/production and financial models for delivery to Grant Samuel. The models are additive and represent separate tranches of field development based upon varying demand for gas production from PEL 238. The input assumptions for the MHA models were based upon the work conducted as part of this evaluation. The gas production profiles used in the models were obtained from the reservoir simulation work, and the financial assumptions were taken from information provided by ESG with appropriate modifications where necessary.

MHA was asked by Grant Samuel to construct field development models for the following cases:

• Domestic gas production only; low demand scenario
• Domestic gas production only; high demand scenario
• Domestic gas production and limited LNG supply scenario
• Domestic gas production with increased LNG supply scenario
• Domestic gas production with specific demand for the produced gas from an LNG operator

The approach adopted by MHA to construct the cases requested by Grant Samuel was to couple the assumptions associated with the gas production streams with the independent reserves and resource assessment recently completed by MHA. This was done in the following fashion:

MHA Tranche 1:	21 PJ/a sales gas from 2014 through 2033 inclusiveAdditional 122 PJ ramp and tail gas salesTotal assumed production is 544 PJ sales gasGas source and profile assumed: Bohena seam 2P reserves regionWells required: 68
MHA Tranche 2:	35 PJ/a sales gas from 2015 through 2033Additional 207 PJ ramp and tail gas salesTotal assumed production is 879 PJ sales gasGas source and profile assumed: Bohena seam 2P reserves regionWells required: 112
MHA Tranche 3a:	35 PJ/a sales gas from 2017 through 2034 inclusiveAdditional 218 PJ ramp and tail gas salesTotal assumed production is 846 PJ sales gasGas source and profile assumed: Bohena seam incremental 3P reservesregionWells required: 163
MHA Tranche 3b:	21 PJ/a sales gas from 2017 through 2034 inclusiveAdditional 131 PJ ramp and tail gas salesTotal assumed production is 508 PJ sales gasGas source and profile assumed: U. Maules Creek 3P reserves regionWells required: 270

MHA Tranche 3c:	24 PJ/a sales gas from 2017 through 2034 inclusiveAdditional 151 PJ ramp and tail gas salesTotal assumed production is 589 PJ sales gasGas source and profile assumed: Bohena seam 1C contingent resourceregionWells required: 75
MHA Tranche 4:	23 PJ/a sales gas from 2017 through 2034 inclusiveAdditional 141 PJ ramp and tail gas salesTotal assumed production is 559 PJ sales gasGas source and profile assumed: Bohena seam 1C contingent resourceregionWells required: 67
MHA Tranche 5a:	30 PJ/a sales gas from 2017 through 2034 inclusiveAdditional 186 PJ ramp and tail gas salesTotal assumed production is 718 PJ sales gasGas source and profile assumed: Bohena seam 2C contingent resourceregionWells required: 118
MHA Tranche 5b:	30 PJ/a sales gas from 2017 through 2034 inclusiveAdditional 182 PJ ramp and tail gas salesTotal assumed production is 718 PJ sales gasGas source and profile assumed: Bohena seam 2C contingent resourceregionWells required: 142
MHA Tranche 6:	19 PJ/a sales gas from 2017 through 2034 inclusiveAdditional 113 PJ ramp and tail gas salesTotal assumed production is 452 PJ sales gasGas source and profile assumed:Upper Maules Creek 2C contingentresource regionWells required: 236
MHA Tranche 7a:	40 PJ/a sales gas from 2017 through 2034 inclusiveAdditional 246 PJ ramp and tail gas salesTotal assumed production is 962 PJ sales gasGas source and profile assumed:Hoskissons seam 3P and 1Ccontingent resource regionWells required: 330
MHA Tranche 7b:	15 PJ/a sales gas from 2017 through 2034 inclusiveAdditional 90 PJ ramp and tail gas salesTotal assumed production is 353 PJ sales gasGas source and profile assumed:Hoskissons seam 2C contingentresource regionWells required: 182

MHA Tranche 7c: 22 PJ/a sales gas from 2017 through 2034 inclusive Additional 136 PJ ramp and tail gas sales Total assumed production is 532 PJ sales gas Gas source and profile assumed: Hoskissons seam 3C contingent resource region Wells required: 274

As stated, the above models represent incremental volumes and costs. Thus, they should be layered on top of one another to develop the total gas production, capex, and opex streams. The integration with the MHA assessment of reserves and resources is as follows:

Domestic gas production only; low demand scenario – MHA Tranches 1 and 2. This scenario reflects full development of the entire Bohena seam 2P reserves volumes (1423 PJ of 1423 PJ available).

Domestic gas production only; high demand scenario – MHA Tranches 1, 2 and 3a. This scenario reflects full development of the entire Bohena seam 3P reserves volumes (2269 PJ of 2269 PJ available). Note that 3P reserves volumes include the 2P volumes.

Domestic gas production and limited LNG supply scenario – MHA Tranches 1, 2, 3a, 3b and 3c. This scenario reflects full development of all reserves in the Bohena seam (2269 PJ of 2269 PJ available), full development of all reserves in the Upper Maules Creek seams (508 PJ of 508 PJ available), and partial development of the 1C contingent resources in the Bohena seam (589 PJ of 1148 PJ available).

Domestic gas production with increased LNG supply scenario – MHA Tranches 1, through to 6, inclusive. This scenario reflects full development of all reserves in the Bohena seam (2269 PJ of 2269 PJ available), full development of all reserves in the Upper Maules Creek seams (508 PJ of 508 PJ available), full development of all resources in the Bohena seam (2,584 PJ of 2,584 PJ available), and full development of all resources in the Upper Maules Creek seams (452 PJ of 452 PJ available).

Domestic gas production with specific demand for the produced gas from an LNG operator supply scenario – MHA Tranches 1, through to 7c, inclusive. This final scenario reflects full development of all reserves and resources as estimated by MHA and as shown in Table 1. (7659 PJ of 7661 PJ available).

The summary sheets from the twelve MHA field development models are included as Appendix I to this letter.

The last three field development scenarios constructed by MHA reflect development of the Hoskissons coal seam. The Hoskissons seam generally has higher CO2 content than the Maules Creek coal seams. Based on mapping of gas composition across PEL 238, MHA has assumed an average CO2 content of the Hoskissons seam of 25% in the 3P reserves and 1C contingent resources area. The assumed CO2 content was increased to 50% in all other areas.

MHA Petroleum Consultants, Inc.

Gas production from the Hoskissons seam will either have to be treated to remove the CO2 or be blended with higher quality gas. In the field development scenarios constructed by MHA, it was assumed that the CO2 was removed from the gas stream. The operating costs in those scenarios reflect this assumption. Alternate models which incorporated the costs and operating expenses which might be associated with the blending of the low quality gas were not considered in the MHA development models.

II. Other Assets: Non-Narrabri Coal Seam Gas Areas

Introduction:

ESG further expanded its exploration portfolio through an agreement with Orion Petroleum Limited to farm-in to certain coal seam gas exploration acreage. The farm-in arrangement involves the drilling of three coreholes, one in each of Petroleum Exploration Licenses 6, 427 and 428 (refer to Figure 1), plus acquisition of 100 km of seismic within PEL 6. Subsequently, it has acquired an additional 5% interest in PEL 6. ESG now holds a 40% interest in the coal seam gas rights of PEL 428, a 50% interest in the coal seam gas rights of PEL 427 and an interest of 77.5 – 80.0 % in PEL 6.

Geological investigations carried out since Orion acquired the farm-in permit areas have enabled ESG to delineate multiple, highly-prospective coal seam gas exploration targets. The farm-in areas cover in excess of 18,000 square kilometers to the north and west of ESG's existing, primary exploration acreage in PEL 238. Target coals within the farm-in areas are generally younger than those within PEL 238, and include areas of Walloon coal development.

In addition, ESG owns a 65% interest (Santos owns the remaining 35% interest) in PELs 433 and 434, which are located south and west of PEL 238, respectively (refer to Figure 1). While the early Permian Maules Creek Formation is not present in the northern part of PEL 433, it has been identified in the southwest of the permit (primarily in a north-south oriented graben). Late Permian (Black Jack Formation) coals are prevalent in the north and east of the permit area, but are poorly developed to the southwest. Two coreholes were drilled in PEL 433 during 2007 targeting the late Permian Formation. The coreholes intersected coal essentially as predicted, but failed to identify a commercial resource of gas. PEL 434 is significantly under-explored. The aerial extent and thickness of the coals within this license area are unknown.

ESG also holds interests in the Arkaringa Basin which are not considered in this report.

Estimate of Resource Volumes

Independent Assessment of Contingent and Prospective Resources

MHA conducted an independent evaluation of the resources associated with PELs 6, 427 and 428. It was the opinion of MHA that there was not sufficient information to estimate the resources associated with PELs 433 and 434. The resource volumes estimated by MHA are presented below in Table 2:

MHA Petroleum Consultants, Inc.

Table 2 – Estimated Resources Associated with PELs 6, 427 and 428

PELs 6, 427 and 428 Resources EstimatesAll Volumes in PJ; Gross (8/8ths) 100% Basis
	Southern PEL 427 (PEL 238 Extension)PELs 6/427/428
Category	Maules Creek	Black Jack/Hoskissons	Bungil Seam	Totals
Contingent Resources	467.2	8.1	535.9	1011.2
Prospective Resources	--	--	4637.2	4637.2

Data for recent transactions in Australia involving coal seam gas assets were available in public documents from Credit Suisse (Figure 5). The most recent transactions indicate that a representative range of values to use in evaluating the Contingent Resources as shown in Table 2 would be A$ 0.08/GJ to A$ 0.13/GJ of Contingent Resources volume. While this range of values is substantially lower than the prior values shown in Figure 5, it is the opinion of MHA that the lower range quoted above is more appropriate as the higher value transactions listed in Figure 5 are associated with producing CSG assets. PELs 6, 427 and 428 have no established CSG production. Using the stated range of values, MHA arrived at the estimates of expected value for the Contingent Resources listed in Table 2 as shown below:

	EstimatedValue (A$mln)
Using $A 0.08/GJ	43.3
Using $A 0.13/GJ	70.3

Note: Estimated values above reflect net ESG ownership basis

III. Statement of Risk

The accuracy of reserve estimates, production forecasts, and economic evaluations is always subject to uncertainty. The magnitude of this uncertainty is generally proportional to the quantity and quality of data available for analysis. As wells mature and new information becomes available, revisions may be required which may either increase or decrease the previous reserve assignments, production forecasts, and economic valuations. Sometimes these revisions may result not only in a significant change to the reserves and value assigned to a property, but also may impact the total company reserve and economic status.

The gas profiles and economic assessments contained in this report were based upon a technical analysis of the available data by MHA using accepted engineering principles. However, they must be accepted with the understanding that further information and future reservoir performance subsequent to the date of the estimate may justify their revision. It is MHA's opinion that the estimated gas profiles and economics as specified in this report are reasonable and have been prepared in accordance with generally accepted petroleum engineering and evaluation principles. Notwithstanding the aforementioned opinion, MHA

makes no warranties concerning the data and interpretations of such data. In no event shall MHA be liable for any special or consequential damages arising from Grant Samuel's use of MHA's interpretation, reports, or services produced as a result of its work for Grant Samuel.

MHA is being paid a fee according to its normal per diem rates and out of pocket expenses for the provision of this technical advice to Grant Samuel and the preparation of this report. Neither MHA, nor any of our employees have any interest in the subject properties and neither the employment to do this work, nor the compensation, is contingent on our estimates of gas production, reserves, or economic value for the properties in this report.

The estimates of reserves and resources presented in this report have been prepared in accordance with the definitions and guidelines set forth in the 2007 Petroleum Resources Management System ("PRMS") approved by the Society of Petroleum Engineers. Those definitions are presented at the end of this report in Appendix II.

MHA has not verified the accuracy of the information provided to it during the course of this investigation. However, we have aimed to satisfy ourselves that all of the information provided has been prepared in accordance with proper industry standards and best practice, and is based on data that MHA considers to be of acceptable quality and reliability. Where MHA has not been so satisfied, MHA has made modifications which are reflected in the field development/production and financial models provided to Grant Samuel.

MHA did not perform any field inspection of the properties, nor did we examine the mechanical operation or condition of the wells and their related facilities. MHA did not investigate any possible environmental liabilities related to any of the properties.

The MHA estimates of operating costs were restricted to site based costs. Royalties, taxes, corporate or head office costs have not been reviewed and are not included in this report. All monetary figures in Appendix I are expressed in Australian dollars. All costs are presented on a cash cost basis.

MHA has been previously engaged by ESG to offer independent technical advice, conduct numerical simulation studies, and to perform independent technical reserves and resource estimates of the coal seam gas assets within PEL 238.

It was a pleasure performing this work for Grant Samuel. If you have any questions regarding this review, or if additional information is needed, please do not hesitate to contact me.

Sincerely,

Timothy L. Hower, P.E. Chairman

MHA Petroleum Consultants, Inc.

Certificate

Timothy L. Hower, M. Sc., P. E.

I, Timothy L. Hower, Chairman of MHA Petroleum Consultants LLC, 730 17th Street, Suite 410, Denver, Colorado 80202, declare the following:

• 1. I hold the following degrees:
• a. B. Sc., Petroleum Engineering, 1981, Penn State University
• b. M. Sc., Petroleum Engineering, 1983, Penn State University
• 1. I am a registered professional engineer:
• a. Licensed Professional Engineer, Colorado PE-28053
• b. Licensed Professional Engineer, Wyoming PE-9597
• 1. I am a member of the following professional organization: a. Society of Petroleum Engineers
• 1. I am a qualified reserves evaluator and auditor
• 1. My contribution to the technical specialist's report pertaining to ESG is based on my engineering knowledge and the data provided to me by Grant Samuel, ESG, from public sources, and from the non-confidential files of MHA Petroleum Consultants LLC. I did not undertake a field inspection of the properties.
• 1. I have no interest, direct or indirect, nor do I expect to receive any interest, direct or indirect, in the properties described in the above-named report or in the securities of ESG.

Timothy L. Hower, M.Sc., P. E. Chairman

Figure 1 – Location of PEL 238

Scheme Booklet 164

Figure 2 – Geological Cross-Section through PEL 238

Figure 4 – Gas Profiles Used in Field Development Models

				SIGJ reserves and	Total inv
	CSG takeover bids	SIGU 2P	SIGU 3P	resource	(Alimn)
Jul-11	STO-ESG	$0.94	$0.50		$640
Apr-11	ORG-Sinopec	$0.99	$0.09		$1,500
Dec-10	STO-Kogas	$0.09	$0.50		$005
Sep-10	TOTAL-STO-Pelronas	$1.08	$0.73		$867
Mar-10	Steel/PTC - AOE	$0.93	$0.60		$3,442
Mar-10	WCL-Anglo America	$0.28	$0.16		$27
Dec-09	WCL-Anglo America	$0.38	$0.16		$80
Dec-09	Toyota Tsusho AJL	$2.40	$0.78		$00
$Jul$ 09	Gasstar Exploration - STO (Narrabri)	$2.55	$0.66		$300
Apr 09	Pangasa-ORG		$0.57	$0.40	$660
Apr-09	AOE-DFT (tot payment)	$0.08	$0.36		$400
Apr-09	AOE-BFT (upfront payment)	$0.71	$0.30		$330
Feb-09	PES-BG - 3	$1.97	$0.41	$0.13	$1,026
Feb-09	PES-BG - 2	$1.91	$0.40	$0.12	State.
Feb-09	PES-ADE - 2	$2.26	$0.36	$0.11	$891
Feb-09	PES-BG-1	$2.02	$0.32	$0.10	$796
Dec-08	AGL-SOL	$4.55	$3.46		$187
Dec-08	PES-ADE - 1 (updated PES reserves)	$1.29	$0.27	$0.08	$672
Dec-08	PES-ADE - 1	$1.71	$0.54	$0.33	$672
Dec-08	MPO AJL-AGK	$2.07	$0.98	$0.53	$370
Oct-08	BG-QGC	$1.98	$0.75	$0.61	$4,283
Sep-08	CRG-COP (tot payment)	$4.51	$2.10	$0.82	$10,622
Sep-08	CRG-COP (upfront pymt)	$2.93	$1.36	$0.63	$6,900
Sep-08	000-8HB	$1.91	$0.81	$0.72	$204

Scheme Booklet 166

Appendix I

Summary Sheets from MHA Field Development Models

MHA Petroleum Consultants, Inc.

Table A-1: MHA Tranche 1 Case

		SCENARIO: Case 1 - Domestic Gas Only; Low Demand
							Well
Year	Gas	Condensate	Oil	LPG	Capex	Opex	Abandonment
	TJ/day	kbbl	kbbl	ktonnes	A$MM	A$MM	A$MM
2011	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2012	0.0	0.0	0.0	0.0	$2.3	$0.1	$0.0
2013	35.9	0.0	0.0	0.0	$136.4	$10.7	$0.0
2014	57.9	0.0	0.0	0.0	$162.4	$16.0	$0.0
2015	58.9	0.0	0.0	0.0	$0.0	$15.4	$0.0
2016	57.0	0.0	0.0	0.0	$7.4	$15.7	$0.0
2017	57.3	0.0	0.0	0.0	$11.2	$16.5	$0.0
2018	58.4	0.0	0.0	0.0	$11.2	$16.0	$0.0
2019	58.1	0.0	0.0	0.0	$7.4	$15.9	$0.0
2020	57.2	0.0	0.0	0.0	$7.4	$16.2	$0.0
2021	57.9	0.0	0.0	0.0	$11.2	$16.9	$0.0
2022	57.9	0.0	0.0	0.0	$7.4	$17.0	$0.0
2023	57.2	0.0	0.0	0.0	$7.4	$17.2	$0.0
2024	58.2	0.0	0.0	0.0	$11.2	$18.0	$0.0
2025	58.4	0.0	0.0	0.0	$7.4	$18.2	$0.0
2026	57.9	0.0	0.0	0.0	$7.4	$18.3	$0.0
2027	57.4	0.0	0.0	0.0	$7.4	$18.5	$0.0
2028	57.0	0.0	0.0	0.0	$7.4	$18.8	$0.0
2029	58.3	0.0	0.0	0.0	$11.2	$19.5	$0.0
2030	57.0	0.0	0.0	0.0	$3.7	$19.2	$0.0
2031	57.8	0.0	0.0	0.0	$11.2	$20.0	$0.0
2032	58.2	0.0	0.0	0.0	$7.4	$20.3	$0.0
2033	58.0	0.0	0.0	0.0	$7.4	$20.5	$0.0
2034	54.5	0.0	0.0	0.0	$0.0	$19.6	$0.0
2035	49.8	0.0	0.0	0.0	$0.0	$18.8	$0.0
2036	45.3	0.0	0.0	0.0	$0.0	$17.9	$0.0
2037	41.3	0.0	0.0	0.0	$0.0	$17.1	$0.0
2038	31.5	0.0	0.0	0.0	$0.0	$12.3	$4.4
2039	27.3	0.0	0.0	0.0	$0.0	$10.9	$1.0
2040	24.9	0.0	0.0	0.0	$0.0	$10.6	$0.0
2041	22.3	0.0	0.0	0.0	$0.0	$9.9	$0.4
2042	0.0	0.0	0.0	0.0	$0.0	$0.0	$7.8
2043	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2044	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2045	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2046	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2047	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2048	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2049	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2050	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2051	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
Total	543.8	0.0	0.0	0.0	$453.6	$482.1	$13.6
	PJ	MMbbl	MMbbl	MMt	A$MM	A$MM	A$MM

Table A-2: MHA Tranche 2 Case

		SCENARIO: Case 2 - Second Tranche of Domestic Gas
							Well
Year	Gas	Condensate	Oil	LPG	Capex	Opex	Abandonment
	TJ/day	kbbl	kbbl	ktonnes	A$MM	A$MM	A$MM
2011	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2012	0.0	0.0	0.0	0.0	$2.3	$0.1	$0.0
2013	20.9	0.0	0.0	0.0	$137.3	$10.0	$0.0
2014	48.2	0.0	0.0	0.0	$279.3	$22.5	$0.0
2015	96.1	0.0	0.0	0.0	$96.8	$29.5	$0.0
2016	108.3	0.0	0.0	0.0	$0.0	$26.5	$0.0
2017	102.1	0.0	0.0	0.0	$3.7	$25.9	$0.0
2018	95.3	0.0	0.0	0.0	$7.4	$24.8	$0.0
2019	95.9	0.0	0.0	0.0	$22.3	$25.8	$0.0
2020	95.1	0.0	0.0	0.0	$11.2	$24.4	$0.0
2021	96.1	0.0	0.0	0.0	$18.6	$25.8	$0.0
2022	95.2	0.0	0.0	0.0	$11.2	$26.0	$0.0
2023	96.4	0.0	0.0	0.0	$18.6	$27.3	$0.0
2024	95.8	0.0	0.0	0.0	$11.2	$27.3	$0.0
2025	95.6	0.0	0.0	0.0	$14.9	$28.0	$0.0
2026	96.1	0.0	0.0	0.0	$14.9	$28.6	$0.0
2027	95.2	0.0	0.0	0.0	$11.2	$28.8	$0.0
2028	95.3	0.0	0.0	0.0	$14.9	$29.5	$0.0
2029	96.0	0.0	0.0	0.0	$14.9	$30.2	$0.0
2030	95.3	0.0	0.0	0.0	$11.2	$30.4	$0.0
2031	95.6	0.0	0.0	0.0	$14.9	$31.1	$0.0
2032	96.6	0.0	0.0	0.0	$14.9	$31.9	$0.0
2033	96.0	0.0	0.0	0.0	$11.2	$32.1	$0.0
2034	90.0	0.0	0.0	0.0	$0.0	$30.7	$0.0
2035	82.1	0.0	0.0	0.0	$0.0	$29.4	$0.0
2036	74.7	0.0	0.0	0.0	$0.0	$28.1	$0.0
2037	68.1	0.0	0.0	0.0	$0.0	$26.9	$0.0
2038	58.6	0.0	0.0	0.0	$0.0	$23.6	$2.6
2039	50.3	0.0	0.0	0.0	$0.0	$20.7	$2.4
2040	38.8	0.0	0.0	0.0	$0.0	$15.4	$5.2
2041	35.5	0.0	0.0	0.0	$0.0	$15.0	$0.0
2042	0.0	0.0	0.0	0.0	$0.0	$0.0	$12.2
2043	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2044	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2045	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2046	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2047	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2048	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2049	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2050	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2051	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
Total	878.6	0.0	0.0	0.0	$742.6	$756.4	$22.4
	PJ	MMbbl	MMbbl	MMt	A$MM	A$MM	A$MM

MHA Petroleum Consultants, Inc.

Table A-3: MHA Tranche 3a Case

		SCENARIO: Case 3a - First Tranche of LNG Supply
							Well
Year	Gas	Condensate	Oil	LPG	Capex	Opex	Abandonment
	TJ/day	kbbl	kbbl	ktonnes	A$MM	A$MM	A$MM
2011	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2012	0.0	0.0	0.0	0.0	$2.3	$0.1	$0.0
2013	0.0	0.0	0.0	0.0	$90.2	$4.5	$0.0
2014	14.1	0.0	0.0	0.0	$282.7	$20.0	$0.0
2015	47.6	0.0	0.0	0.0	$93.1	$26.7	$0.0
2016	75.2	0.0	0.0	0.0	$63.3	$29.3	$0.0
2017	96.1	0.0	0.0	0.0	$59.6	$32.5	$0.0
2018	98.2	0.0	0.0	0.0	$11.2	$31.6	$0.0
2019	95.9	0.0	0.0	0.0	$18.6	$31.8	$0.0
2020	94.8	0.0	0.0	0.0	$22.3	$31.5	$0.0
2021	95.6	0.0	0.0	0.0	$26.1	$32.2	$0.0
2022	95.9	0.0	0.0	0.0	$22.3	$32.4	$0.0
2023	94.8	0.0	0.0	0.0	$18.6	$32.9	$0.0
2024	95.8	0.0	0.0	0.0	$26.1	$34.5	$0.0
2025	95.3	0.0	0.0	0.0	$18.6	$34.8	$0.0
2026	95.4	0.0	0.0	0.0	$22.3	$35.8	$0.0
2027	94.8	0.0	0.0	0.0	$18.6	$36.3	$0.0
2028	95.1	0.0	0.0	0.0	$22.3	$37.4	$0.0
2029	95.9	0.0	0.0	0.0	$22.3	$38.3	$0.0
2030	95.6	0.0	0.0	0.0	$18.6	$38.9	$0.0
2031	94.9	0.0	0.0	0.0	$18.6	$39.5	$0.0
2032	95.5	0.0	0.0	0.0	$22.3	$40.6	$0.0
2033	95.3	0.0	0.0	0.0	$18.6	$41.1	$0.0
2034	94.9	0.0	0.0	0.0	$18.6	$41.7	$0.0
2035	88.6	0.0	0.0	0.0	$0.0	$39.9	$0.0
2036	80.7	0.0	0.0	0.0	$0.0	$38.3	$0.0
2037	73.3	0.0	0.0	0.0	$0.0	$36.8	$0.0
2038	66.7	0.0	0.0	0.0	$0.0	$35.4	$0.0
2039	58.6	0.0	0.0	0.0	$0.0	$32.1	$2.4
2040	49.0	0.0	0.0	0.0	$0.0	$27.1	$5.0
2041	41.8	0.0	0.0	0.0	$0.0	$23.5	$3.4
2042	0.0	0.0	0.0	0.0	$0.0	$0.0	$21.8
2043	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2044	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2045	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2046	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2047	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2048	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2049	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2050	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2051	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
Total	845.7	0.0	0.0	0.0	$937.2	$957.6	$32.6
	PJ	MMbbl	MMbbl	MMt	A$MM	A$MM	A$MM

Figure A-4: MHA Tranche 3b Case

		SCENARIO: Case 3b - Second Tranche of LNG Supply
							Well
Year	Gas	Condensate	Oil	LPG	Capex	Opex	Abandonment
	TJ/day	kbbl	kbbl	ktonnes	A$MM	A$MM	A$MM
2011	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2012	0.0	0.0	0.0	0.0	$2.3	$0.1	$0.0
2013	0.0	0.0	0.0	0.0	$54.6	$2.8	$0.0
2014	14.3	0.0	0.0	0.0	$255.7	$19.6	$0.0
2015	28.7	0.0	0.0	0.0	$89.3	$23.9	$0.0
2016	43.1	0.0	0.0	0.0	$104.2	$30.2	$0.0
2017	57.2	0.0	0.0	0.0	$111.7	$36.6	$0.0
2018	57.6	0.0	0.0	0.0	$14.9	$34.4	$0.0
2019	57.3	0.0	0.0	0.0	$40.9	$35.7	$0.0
2020	57.5	0.0	0.0	0.0	$40.9	$36.5	$0.0
2021	57.4	0.0	0.0	0.0	$37.2	$36.7	$0.0
2022	57.3	0.0	0.0	0.0	$37.2	$37.0	$0.0
2023	57.3	0.0	0.0	0.0	$37.2	$38.8	$0.0
2024	57.4	0.0	0.0	0.0	$37.2	$40.2	$0.0
2025	57.6	0.0	0.0	0.0	$37.2	$41.7	$0.0
2026	57.3	0.0	0.0	0.0	$33.5	$42.8	$0.0
2027	57.5	0.0	0.0	0.0	$37.2	$44.4	$0.0
2028	57.4	0.0	0.0	0.0	$33.5	$45.5	$0.0
2029	57.3	0.0	0.0	0.0	$33.5	$46.8	$0.0
2030	57.1	0.0	0.0	0.0	$33.5	$48.0	$0.0
2031	57.6	0.0	0.0	0.0	$37.2	$49.7	$0.0
2032	57.2	0.0	0.0	0.0	$29.8	$50.5	$0.0
2033	57.6	0.0	0.0	0.0	$37.2	$52.3	$0.0
2034	57.3	0.0	0.0	0.0	$29.8	$53.2	$0.0
2035	52.9	0.0	0.0	0.0	$0.0	$50.9	$0.0
2036	47.9	0.0	0.0	0.0	$0.0	$49.4	$0.0
2037	43.3	0.0	0.0	0.0	$0.0	$48.1	$0.0
2038	39.2	0.0	0.0	0.0	$0.0	$46.8	$0.0
2039	33.8	0.0	0.0	0.0	$0.0	$41.0	$6.0
2040	29.3	0.0	0.0	0.0	$0.0	$36.8	$4.8
2041	25.0	0.0	0.0	0.0	$0.0	$32.1	$5.6
2042	0.0	0.0	0.0	0.0	$0.0	$0.0	$37.6
2043	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2044	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2045	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2046	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2047	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2048	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2049	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2050	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2051	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
Total	507.8	0.0	0.0	0.0	$1,205.8	$1,152.6	$54.0
	PJ	MMbbl	MMbbl	MMt	A$MM	A$MM	A$MM

MHA Petroleum Consultants, Inc.

Table A-5: MHA Tranche 3c Case

		SCENARIO: Case 3c - Third Tranche of LNG Supply
							Well
Year	Gas	Condensate	Oil	LPG	Capex	Opex	Abandonment
	TJ/day	kbbl	kbbl	ktonnes	A$MM	A$MM	A$MM
2011	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2012	0.0	0.0	0.0	0.0	$2.3	$0.1	$0.0
2013	0.0	0.0	0.0	0.0	$62.5	$3.1	$0.0
2014	11.4	0.0	0.0	0.0	$191.0	$13.5	$0.0
2015	30.6	0.0	0.0	0.0	$33.5	$15.6	$0.0
2016	47.0	0.0	0.0	0.0	$26.1	$16.8	$0.0
2017	65.3	0.0	0.0	0.0	$37.2	$19.2	$0.0
2018	67.5	0.0	0.0	0.0	$0.0	$18.0	$0.0
2019	66.6	0.0	0.0	0.0	$11.2	$18.4	$0.0
2020	66.7	0.0	0.0	0.0	$11.2	$18.5	$0.0
2021	67.0	0.0	0.0	0.0	$11.2	$18.8	$0.0
2022	67.5	0.0	0.0	0.0	$11.2	$18.9	$0.0
2023	66.5	0.0	0.0	0.0	$7.4	$19.0	$0.0
2024	66.5	0.0	0.0	0.0	$11.2	$19.6	$0.0
2025	67.2	0.0	0.0	0.0	$11.2	$20.1	$0.0
2026	66.5	0.0	0.0	0.0	$7.4	$20.1	$0.0
2027	66.8	0.0	0.0	0.0	$11.2	$20.7	$0.0
2028	67.7	0.0	0.0	0.0	$11.2	$21.4	$0.0
2029	67.2	0.0	0.0	0.0	$7.4	$21.4	$0.0
2030	65.9	0.0	0.0	0.0	$7.4	$21.4	$0.0
2031	66.4	0.0	0.0	0.0	$11.2	$22.1	$0.0
2032	66.0	0.0	0.0	0.0	$7.4	$22.2	$0.0
2033	65.0	0.0	0.0	0.0	$7.4	$22.3	$0.0
2034	65.7	0.0	0.0	0.0	$11.2	$23.0	$0.0
2035	62.3	0.0	0.0	0.0	$0.0	$22.0	$0.0
2036	56.9	0.0	0.0	0.0	$0.0	$21.0	$0.0
2037	51.8	0.0	0.0	0.0	$0.0	$20.0	$0.0
2038	47.2	0.0	0.0	0.0	$0.0	$19.2	$0.0
2039	41.1	0.0	0.0	0.0	$0.0	$17.1	$1.4
2040	35.1	0.0	0.0	0.0	$0.0	$14.8	$1.8
2041	30.2	0.0	0.0	0.0	$0.0	$13.1	$1.4
2042	0.0	0.0	0.0	0.0	$0.0	$0.0	$10.4
2043	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2044	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2045	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2046	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2047	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2048	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2049	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2050	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2051	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
Total	588.6	0.0	0.0	0.0	$508.8	$541.4	$15.0
	PJ	MMbbl	MMbbl	MMt	A$MM	A$MM	A$MM

Table A-6: MHA Tranche 4 Case

		SCENARIO: Case 4 - Fourth Tranche of LNG Supply
							Well
Year	Gas	Condensate	Oil	LPG	Capex	Opex	Abandonment
	TJ/day	kbbl	kbbl	ktonnes	A$MM	A$MM	A$MM
2011	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2012	0.0	0.0	0.0	0.0	$2.3	$0.1	$0.0
2013	0.0	0.0	0.0	0.0	$59.8	$3.0	$0.0
2014	5.2	0.0	0.0	0.0	$169.1	$11.7	$0.0
2015	31.4	0.0	0.0	0.0	$52.1	$15.9	$0.0
2016	47.4	0.0	0.0	0.0	$14.9	$15.6	$0.0
2017	63.5	0.0	0.0	0.0	$33.5	$18.0	$0.0
2018	65.2	0.0	0.0	0.0	$0.0	$17.0	$0.0
2019	62.9	0.0	0.0	0.0	$7.4	$17.1	$0.0
2020	63.0	0.0	0.0	0.0	$11.2	$17.0	$0.0
2021	64.1	0.0	0.0	0.0	$11.2	$17.5	$0.0
2022	63.6	0.0	0.0	0.0	$7.4	$17.2	$0.0
2023	64.2	0.0	0.0	0.0	$11.2	$18.0	$0.0
2024	63.8	0.0	0.0	0.0	$7.4	$18.2	$0.0
2025	62.8	0.0	0.0	0.0	$7.4	$18.2	$0.0
2026	63.7	0.0	0.0	0.0	$11.2	$18.9	$0.0
2027	63.6	0.0	0.0	0.0	$7.4	$19.1	$0.0
2028	62.9	0.0	0.0	0.0	$7.4	$19.2	$0.0
2029	63.9	0.0	0.0	0.0	$11.2	$20.0	$0.0
2030	64.0	0.0	0.0	0.0	$7.4	$20.2	$0.0
2031	63.5	0.0	0.0	0.0	$7.4	$20.3	$0.0
2032	62.9	0.0	0.0	0.0	$7.4	$20.5	$0.0
2033	64.1	0.0	0.0	0.0	$11.2	$21.3	$0.0
2034	62.6	0.0	0.0	0.0	$3.7	$20.9	$0.0
2035	58.1	0.0	0.0	0.0	$0.0	$20.0	$0.0
2036	52.9	0.0	0.0	0.0	$0.0	$19.0	$0.0
2037	48.1	0.0	0.0	0.0	$0.0	$18.2	$0.0
2038	43.9	0.0	0.0	0.0	$0.0	$17.3	$0.0
2039	39.2	0.0	0.0	0.0	$0.0	$16.1	$0.6
2040	31.7	0.0	0.0	0.0	$0.0	$13.0	$2.8
2041	27.9	0.0	0.0	0.0	$0.0	$11.8	$0.8
2042	0.0	0.0	0.0	0.0	$0.0	$0.0	$9.2
2043	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2044	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2045	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2046	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2047	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2048	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2049	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2050	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2051	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
Total	558.8	0.0	0.0	0.0	$469.4	$500.4	$13.4
	PJ	MMbbl	MMbbl	MMt	A$MM	A$MM	A$MM

MHA Petroleum Consultants, Inc.

Table A-7: MHA Tranche 5a Case

		SCENARIO: Case 5a - Fifth Tranche of LNG Supply
							Well
Year	Gas	Condensate	Oil	LPG	Capex	Opex	Abandonment
	TJ/day	kbbl	kbbl	ktonnes	A$MM	A$MM	A$MM
2011	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2012	0.0	0.0	0.0	0.0	$2.3	$0.1	$0.0
2013	0.0	0.0	0.0	0.0	$76.6	$3.8	$0.0
2014	9.7	0.0	0.0	0.0	$228.1	$16.0	$0.0
2015	36.1	0.0	0.0	0.0	$63.3	$20.7	$0.0
2016	60.3	0.0	0.0	0.0	$48.4	$22.9	$0.0
2017	80.8	0.0	0.0	0.0	$48.4	$25.6	$0.0
2018	83.3	0.0	0.0	0.0	$7.4	$24.7	$0.0
2019	80.6	0.0	0.0	0.0	$11.2	$24.6	$0.0
2020	79.0	0.0	0.0	0.0	$14.9	$24.3	$0.0
2021	79.5	0.0	0.0	0.0	$18.6	$24.7	$0.0
2022	80.8	0.0	0.0	0.0	$18.6	$25.2	$0.0
2023	80.9	0.0	0.0	0.0	$14.9	$25.8	$0.0
2024	80.5	0.0	0.0	0.0	$14.9	$26.4	$0.0
2025	80.2	0.0	0.0	0.0	$14.9	$26.9	$0.0
2026	80.1	0.0	0.0	0.0	$14.9	$27.4	$0.0
2027	80.0	0.0	0.0	0.0	$14.9	$28.0	$0.0
2028	80.1	0.0	0.0	0.0	$14.9	$28.6	$0.0
2029	80.2	0.0	0.0	0.0	$14.9	$29.2	$0.0
2030	80.4	0.0	0.0	0.0	$14.9	$29.8	$0.0
2031	80.6	0.0	0.0	0.0	$14.9	$30.4	$0.0
2032	82.3	0.0	0.0	0.0	$18.6	$31.6	$0.0
2033	83.0	0.0	0.0	0.0	$14.9	$32.2	$0.0
2034	83.2	0.0	0.0	0.0	$14.9	$32.8	$0.0
2035	77.8	0.0	0.0	0.0	$0.0	$31.2	$0.0
2036	70.8	0.0	0.0	0.0	$0.0	$29.9	$0.0
2037	64.3	0.0	0.0	0.0	$0.0	$28.5	$0.0
2038	58.4	0.0	0.0	0.0	$0.0	$27.4	$0.0
2039	51.7	0.0	0.0	0.0	$0.0	$25.1	$1.4
2040	43.6	0.0	0.0	0.0	$0.0	$21.4	$3.4
2041	37.1	0.0	0.0	0.0	$0.0	$18.5	$2.6
2042	0.0	0.0	0.0	0.0	$0.0	$0.0	$16.2
2043	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2044	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2045	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2046	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2047	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2048	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2049	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2050	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2051	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
Total	717.9	0.0	0.0	0.0	$720.1	$743.7	$23.6
	PJ	MMbbl	MMbbl	MMt	A$MM	A$MM	A$MM

Table A-8: MHA Tranche 5b Case

		SCENARIO: Case 5b - Sixth Tranche of LNG Supply
							Well
Year	Gas	Condensate	Oil	LPG	Capex	Opex	Abandonment
	TJ/day	kbbl	kbbl	ktonnes	A$MM	A$MM	A$MM
2011	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2012	0.0	0.0	0.0	0.0	$2.3	$0.1	$0.0
2013	0.0	0.0	0.0	0.0	$76.6	$3.8	$0.0
2014	7.1	0.0	0.0	0.0	$224.4	$15.6	$0.0
2015	37.4	0.0	0.0	0.0	$89.3	$22.8	$0.0
2016	64.4	0.0	0.0	0.0	$63.3	$25.5	$0.0
2017	82.1	0.0	0.0	0.0	$48.4	$27.7	$0.0
2018	83.7	0.0	0.0	0.0	$11.2	$27.1	$0.0
2019	81.4	0.0	0.0	0.0	$14.9	$27.4	$0.0
2020	81.2	0.0	0.0	0.0	$22.3	$27.4	$0.0
2021	82.0	0.0	0.0	0.0	$22.3	$27.7	$0.0
2022	81.8	0.0	0.0	0.0	$18.6	$27.8	$0.0
2023	81.4	0.0	0.0	0.0	$18.6	$28.6	$0.0
2024	81.2	0.0	0.0	0.0	$18.6	$29.3	$0.0
2025	81.0	0.0	0.0	0.0	$18.6	$30.0	$0.0
2026	81.1	0.0	0.0	0.0	$18.6	$30.7	$0.0
2027	81.2	0.0	0.0	0.0	$18.6	$31.4	$0.0
2028	81.4	0.0	0.0	0.0	$18.6	$32.2	$0.0
2029	81.6	0.0	0.0	0.0	$18.6	$33.0	$0.0
2030	81.9	0.0	0.0	0.0	$18.6	$33.8	$0.0
2031	81.1	0.0	0.0	0.0	$14.9	$34.0	$0.0
2032	81.1	0.0	0.0	0.0	$18.6	$34.9	$0.0
2033	80.4	0.0	0.0	0.0	$14.9	$35.2	$0.0
2034	80.7	0.0	0.0	0.0	$18.6	$36.1	$0.0
2035	75.4	0.0	0.0	0.0	$0.0	$34.4	$0.0
2036	68.6	0.0	0.0	0.0	$0.0	$33.0	$0.0
2037	62.2	0.0	0.0	0.0	$0.0	$31.7	$0.0
2038	56.6	0.0	0.0	0.0	$0.0	$30.6	$0.0
2039	50.5	0.0	0.0	0.0	$0.0	$28.5	$1.2
2040	41.9	0.0	0.0	0.0	$0.0	$23.7	$4.8
2041	35.4	0.0	0.0	0.0	$0.0	$20.3	$3.4
2042	0.0	0.0	0.0	0.0	$0.0	$0.0	$19.0
2043	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2044	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2045	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2046	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2047	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2048	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2049	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2050	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2051	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
Total	718.0	0.0	0.0	0.0	$809.4	$824.3	$28.4
	PJ	MMbbl	MMbbl	MMt	A$MM	A$MM	A$MM

MHA Petroleum Consultants, Inc.

Table A-9: MHA Tranche 6 Case

		SCENARIO: Case 6 - Seventh Tranche of LNG Supply
							Well
Year	Gas	Condensate	Oil	LPG	Capex	Opex	Abandonment
	TJ/day	kbbl	kbbl	ktonnes	A$MM	A$MM	A$MM
2011	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2012	0.0	0.0	0.0	0.0	$2.3	$0.1	$0.0
2013	0.0	0.0	0.0	0.0	$48.4	$2.5	$0.0
2014	9.7	0.0	0.0	0.0	$202.2	$15.2	$0.0
2015	23.8	0.0	0.0	0.0	$93.1	$21.0	$0.0
2016	37.0	0.0	0.0	0.0	$89.3	$25.9	$0.0
2017	51.6	0.0	0.0	0.0	$111.7	$32.8	$0.0
2018	51.7	0.0	0.0	0.0	$7.4	$29.9	$0.0
2019	51.5	0.0	0.0	0.0	$37.2	$31.6	$0.0
2020	51.3	0.0	0.0	0.0	$33.5	$31.8	$0.0
2021	51.2	0.0	0.0	0.0	$33.5	$32.2	$0.0
2022	51.2	0.0	0.0	0.0	$33.5	$32.3	$0.0
2023	51.3	0.0	0.0	0.0	$33.5	$34.0	$0.0
2024	51.5	0.0	0.0	0.0	$33.5	$35.3	$0.0
2025	52.3	0.0	0.0	0.0	$37.2	$37.1	$0.0
2026	52.2	0.0	0.0	0.0	$29.8	$38.0	$0.0
2027	51.9	0.0	0.0	0.0	$29.8	$39.1	$0.0
2028	51.7	0.0	0.0	0.0	$29.8	$40.1	$0.0
2029	51.5	0.0	0.0	0.0	$29.8	$41.2	$0.0
2030	51.4	0.0	0.0	0.0	$29.8	$42.3	$0.0
2031	51.4	0.0	0.0	0.0	$29.8	$43.4	$0.0
2032	51.4	0.0	0.0	0.0	$29.8	$44.6	$0.0
2033	51.0	0.0	0.0	0.0	$26.1	$45.4	$0.0
2034	50.5	0.0	0.0	0.0	$26.1	$46.3	$0.0
2035	46.7	0.0	0.0	0.0	$0.0	$44.3	$0.0
2036	42.2	0.0	0.0	0.0	$0.0	$43.0	$0.0
2037	38.2	0.0	0.0	0.0	$0.0	$41.9	$0.0
2038	34.6	0.0	0.0	0.0	$0.0	$40.8	$0.0
2039	30.2	0.0	0.0	0.0	$0.0	$36.8	$4.0
2040	26.0	0.0	0.0	0.0	$0.0	$32.5	$5.0
2041	22.2	0.0	0.0	0.0	$0.0	$28.4	$4.8
2042	0.0	0.0	0.0	0.0	$0.0	$0.0	$33.4
2043	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2044	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2045	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2046	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2047	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2048	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2049	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2050	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2051	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
Total	451.9	0.0	0.0	0.0	$1,056.8	$1,009.9	$47.2
	PJ	MMbbl	MMbbl	MMt	A$MM	A$MM	A$MM

Table A-10: MHA Tranche 7a Case

		SCENARIO: Case 7a - Eighth Tranche of LNG Supply
							Well
Year	Gas	Condensate	Oil	LPG	Capex	Opex	Abandonment
	TJ/day	kbbl	kbbl	ktonnes	A$MM	A$MM	A$MM
2011	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2012	0.0	0.0	0.0	0.0	$2.3	$0.1	$0.0
2013	0.0	0.0	0.0	0.0	$103.0	$5.1	$0.0
2014	21.6	0.0	0.0	0.0	$383.4	$28.1	$0.0
2015	54.7	0.0	0.0	0.0	$145.2	$37.3	$0.0
2016	81.8	0.0	0.0	0.0	$115.4	$42.8	$0.0
2017	109.2	0.0	0.0	0.0	$141.4	$51.6	$0.0
2018	108.8	0.0	0.0	0.0	$7.4	$47.5	$0.0
2019	109.0	0.0	0.0	0.0	$55.8	$50.3	$0.0
2020	108.6	0.0	0.0	0.0	$44.7	$50.1	$0.0
2021	108.0	0.0	0.0	0.0	$44.7	$50.6	$0.0
2022	108.3	0.0	0.0	0.0	$48.4	$51.1	$0.0
2023	108.4	0.0	0.0	0.0	$44.7	$53.4	$0.0
2024	109.1	0.0	0.0	0.0	$48.4	$55.4	$0.0
2025	109.4	0.0	0.0	0.0	$44.7	$57.1	$0.0
2026	109.7	0.0	0.0	0.0	$44.7	$58.9	$0.0
2027	109.9	0.0	0.0	0.0	$44.7	$60.7	$0.0
2028	110.3	0.0	0.0	0.0	$44.7	$62.5	$0.0
2029	110.1	0.0	0.0	0.0	$40.9	$63.8	$0.0
2030	108.9	0.0	0.0	0.0	$37.2	$64.9	$0.0
2031	108.5	0.0	0.0	0.0	$40.9	$66.5	$0.0
2032	108.4	0.0	0.0	0.0	$40.9	$68.0	$0.0
2033	108.4	0.0	0.0	0.0	$40.9	$69.6	$0.0
2034	108.5	0.0	0.0	0.0	$40.9	$71.2	$0.0
2035	100.7	0.0	0.0	0.0	$0.0	$68.0	$0.0
2036	91.1	0.0	0.0	0.0	$0.0	$65.8	$0.0
2037	82.2	0.0	0.0	0.0	$0.0	$63.6	$0.0
2038	74.4	0.0	0.0	0.0	$0.0	$61.6	$0.0
2039	64.6	0.0	0.0	0.0	$0.0	$55.1	$6.0
2040	55.1	0.0	0.0	0.0	$0.0	$47.9	$7.8
2041	47.2	0.0	0.0	0.0	$0.0	$42.2	$6.2
2042	0.0	0.0	0.0	0.0	$0.0	$0.0	$46.0
2043	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2044	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2045	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2046	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2047	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2048	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2049	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2050	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2051	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
Total	962.4	0.0	0.0	0.0	$1,605.3	$1,570.7	$66.0
	PJ	MMbbl	MMbbl	MMt	A$MM	A$MM	A$MM

MHA Petroleum Consultants, Inc.

Table A-11: MHA Tranche 7b Case

		SCENARIO: Case 7b - Ninth Tranche of LNG Supply
							Well
Year	Gas	Condensate	Oil	LPG	Capex	Opex	Abandonment
	TJ/day	kbbl	kbbl	ktonnes	A$MM	A$MM	A$MM
2011	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2012	0.0	0.0	0.0	0.0	$2.3	$0.1	$0.0
2013	0.0	0.0	0.0	0.0	$37.4	$1.9	$0.0
2014	7.2	0.0	0.0	0.0	$154.5	$11.6	$0.0
2015	20.4	0.0	0.0	0.0	$89.3	$17.7	$0.0
2016	30.1	0.0	0.0	0.0	$59.6	$20.1	$0.0
2017	39.6	0.0	0.0	0.0	$74.4	$24.7	$0.0
2018	39.8	0.0	0.0	0.0	$7.4	$22.9	$0.0
2019	39.9	0.0	0.0	0.0	$29.8	$24.3	$0.0
2020	40.4	0.0	0.0	0.0	$29.8	$24.6	$0.0
2021	40.0	0.0	0.0	0.0	$22.3	$24.6	$0.0
2022	40.0	0.0	0.0	0.0	$26.1	$24.9	$0.0
2023	40.1	0.0	0.0	0.0	$26.1	$26.3	$0.0
2024	39.8	0.0	0.0	0.0	$22.3	$26.9	$0.0
2025	39.5	0.0	0.0	0.0	$22.3	$27.6	$0.0
2026	39.2	0.0	0.0	0.0	$22.3	$28.4	$0.0
2027	39.5	0.0	0.0	0.0	$26.1	$29.6	$0.0
2028	39.5	0.0	0.0	0.0	$22.3	$30.3	$0.0
2029	39.9	0.0	0.0	0.0	$26.1	$31.6	$0.0
2030	40.4	0.0	0.0	0.0	$26.1	$32.8	$0.0
2031	40.4	0.0	0.0	0.0	$22.3	$33.5	$0.0
2032	40.8	0.0	0.0	0.0	$26.1	$34.8	$0.0
2033	40.8	0.0	0.0	0.0	$22.3	$35.5	$0.0
2034	40.2	0.0	0.0	0.0	$18.6	$35.9	$0.0
2035	37.1	0.0	0.0	0.0	$0.0	$34.4	$0.0
2036	33.6	0.0	0.0	0.0	$0.0	$33.4	$0.0
2037	30.3	0.0	0.0	0.0	$0.0	$32.4	$0.0
2038	27.4	0.0	0.0	0.0	$0.0	$31.5	$0.0
2039	23.9	0.0	0.0	0.0	$0.0	$28.5	$3.0
2040	20.2	0.0	0.0	0.0	$0.0	$24.4	$4.8
2041	17.4	0.0	0.0	0.0	$0.0	$21.7	$3.2
2042	0.0	0.0	0.0	0.0	$0.0	$0.0	$25.4
2043	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2044	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2045	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2046	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2047	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2048	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2049	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2050	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2051	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
Total	353.4	0.0	0.0	0.0	$815.8	$777.2	$36.4
	PJ	MMbbl	MMbbl	MMt	A$MM	A$MM	A$MM

Table A-12: MHA Tranche 7c Case

		SCENARIO: Case 7c - Tenth Tranche of LNG Supply
							Well
Year	Gas	Condensate	Oil	LPG	Capex	Opex	Abandonment
	TJ/day	kbbl	kbbl	ktonnes	A$MM	A$MM	A$MM
2011	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2012	0.0	0.0	0.0	0.0	$2.3	$0.1	$0.0
2013	0.0	0.0	0.0	0.0	$57.2	$2.9	$0.0
2014	11.5	0.0	0.0	0.0	$240.3	$18.1	$0.0
2015	31.9	0.0	0.0	0.0	$137.7	$27.3	$0.0
2016	46.1	0.0	0.0	0.0	$85.6	$30.5	$0.0
2017	60.6	0.0	0.0	0.0	$115.4	$37.9	$0.0
2018	60.4	0.0	0.0	0.0	$7.4	$34.8	$0.0
2019	60.3	0.0	0.0	0.0	$44.7	$37.0	$0.0
2020	60.5	0.0	0.0	0.0	$40.9	$37.0	$0.0
2021	60.3	0.0	0.0	0.0	$37.2	$37.5	$0.0
2022	60.0	0.0	0.0	0.0	$37.2	$37.6	$0.0
2023	60.4	0.0	0.0	0.0	$40.9	$40.0	$0.0
2024	60.5	0.0	0.0	0.0	$37.2	$41.2	$0.0
2025	60.1	0.0	0.0	0.0	$33.5	$42.2	$0.0
2026	60.1	0.0	0.0	0.0	$37.2	$43.8	$0.0
2027	60.4	0.0	0.0	0.0	$37.2	$45.3	$0.0
2028	60.2	0.0	0.0	0.0	$33.5	$46.4	$0.0
2029	59.9	0.0	0.0	0.0	$33.5	$47.6	$0.0
2030	60.2	0.0	0.0	0.0	$37.2	$49.3	$0.0
2031	60.1	0.0	0.0	0.0	$33.5	$50.5	$0.0
2032	60.5	0.0	0.0	0.0	$37.2	$52.1	$0.0
2033	60.0	0.0	0.0	0.0	$29.8	$52.9	$0.0
2034	59.8	0.0	0.0	0.0	$33.5	$54.3	$0.0
2035	55.5	0.0	0.0	0.0	$0.0	$51.9	$0.0
2036	50.2	0.0	0.0	0.0	$0.0	$50.4	$0.0
2037	45.3	0.0	0.0	0.0	$0.0	$48.9	$0.0
2038	41.0	0.0	0.0	0.0	$0.0	$47.7	$0.0
2039	35.7	0.0	0.0	0.0	$0.0	$42.8	$4.8
2040	30.1	0.0	0.0	0.0	$0.0	$36.5	$7.4
2041	26.0	0.0	0.0	0.0	$0.0	$32.5	$4.6
2042	0.0	0.0	0.0	0.0	$0.0	$0.0	$38.0
2043	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2044	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2045	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2046	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2047	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2048	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2049	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2050	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
2051	0.0	0.0	0.0	0.0	$0.0	$0.0	$0.0
Total	532.4	0.0	0.0	0.0	$1,230.3	$1,177.2	$54.8
	PJ	MMbbl	MMbbl	MMt	A$MM	A$MM	A$MM

MHA Petroleum Consultants, Inc.

Appendix II

SPE Petroleum Resources Management System

MHA Petroleum Consultants, Inc.

Ms. Caleena Stilwell 19 September 2011 Page 28

Scheme Booklet 180

Petroleum Resources Management System

Preamble

Petroleum resources are the estimated quantities of hydrocarbons naturally occurring on or within the Earth's crust. Resource assessments estimate total quantities in known and yet-to-bediscovered accumulations; resources evaluations are focused on those quantities that can potentially be recovered and marketed by commercial projects. A petroleum resources management system provides a consistent approach to estimating petroleum quantities, evaluating development projects, and presenting results within a comprehensive classification framework.

International efforts to standardize the definitions of petroleum resources and how they are estimated began in the 1930s. Early guidance focused on Proved Reserves. Building on work initiated by the Society of Petroleum Evaluation Engineers (SPEE), SPE published definitions for all Reserves categories in 1987. In the same year, the World Petroleum Council (WPC, then known as the World Petroleum Congress), working independently, published Reserves definitions that were strikingly similar. In 1997, the two organizations jointly released a single set of definitions for Reserves that could be used worldwide. In 2000, the American Association of Petroleum Geologists (AAPG), SPE, and WPC jointly developed a classification system for all petroleum resources. This was followed by additional supporting documents: supplemental application evaluation guidelines (2001) and a glossary of terms utilized in resources definitions (2005). SPE also published standards for estimating and auditing reserves information (revised 2007).

These definitions and the related classification system are now in common use internationally within the petroleum industry. They provide a measure of comparability and reduce the subjective nature of resources estimation. However, the technologies employed in petroleum exploration, development, production, and processing continue to evolve and improve. The SPE Oil and Gas Reserves Committee works closely with other organizations to maintain the definitions and issues periodic revisions to keep current with evolving technologies and changing commercial opportunities.

This document consolidates, builds on, and replaces guidance previously contained in the 1997 Petroleum Reserves Definitions, the 2000 Petroleum Resources Classification and Definitions publications, and the 2001 "Guidelines for the Evaluation of Petroleum Reserves and Resources"; the latter document remains a valuable source of more detailed background information, and specific chapters are referenced herein. Appendix A is a consolidated glossary of terms used in resources evaluations and replaces those published in 2005.

These definitions and guidelines are designed to provide a common reference for the international petroleum industry, including national reporting and regulatory disclosure agencies, and to support petroleum project and portfolio management requirements. They are intended to improve clarity in global communications regarding petroleum resources. It is expected that this document will be supplemented with industry education programs and application guides addressing their implementation in a wide spectrum of technical and/or commercial settings.

It is understood that these definitions and guidelines allow flexibility for users and agencies to tailor application for their particular needs; however, any modifications to the guidance contained herein should be clearly identified. The definitions and guidelines contained in this document must not be construed as modifying the interpretation or application of any existing regulatory reporting requirements.

This SPE/WPC/AAPG/SPEE Petroleum Resources Management System document, including its Appendix, may be referred to by the abbreviated term "SPE-PRMS" with the caveat that the full title, including clear recognition of the co-sponsoring organizations, has been initially stated.

1.0 Basic Principles and Definitions

The estimation of petroleum resource quantities involves the interpretation of volumes and values that have an inherent degree of uncertainty. These quantities are associated with development projects at various stages of design and implementation. Use of a consistent classification system enhances comparisons between projects, groups of projects, and total company portfolios according to forecast production profiles and recoveries**.** Such a system must consider both technical and commercial factors that impact the project's economic feasibility, its productive life, and its related cash flows.

1.1 Petroleum Resources Classification Framework

Petroleum is defined as a naturally occurring mixture consisting of hydrocarbons in the gaseous, liquid, or solid phase. Petroleum may also contain non-hydrocarbons, common examples of which are carbon dioxide, nitrogen, hydrogen sulfide and sulfur. In rare cases, non-hydrocarbon content could be greater than 50%.

The term "resources" as used herein is intended to encompass all quantities of petroleum naturally occurring on or within the Earth's crust, discovered and undiscovered (recoverable and unrecoverable), plus those quantities already produced. Further, it includes all types of petroleum whether currently considered "conventional" or "unconventional."

Figure 1-1 is a graphical representation of the SPE/WPC/AAPG/SPEE resources classification system. The system defines the major recoverable resources classes: Production, Reserves, Contingent Resources, and Prospective Resources, as well as Unrecoverable petroleum.

Figure 1-1: Resources Classification Framework.

The "Range of Uncertainty" reflects a range of estimated quantities potentially recoverable from an accumulation by a project, while the vertical axis represents the "Chance of Commerciality, that is, the chance that the project that will be developed and reach commercial producing status. The following definitions apply to the major subdivisions within the resources classification:

TOTAL PETROLEUM INITIALLY-IN-PLACE is that quantity of petroleum that is estimated to exist originally in naturally occurring accumulations. It includes that quantity of petroleum that is estimated, as of a given date, to be contained in known accumulations prior to production plus those estimated quantities in accumulations yet to be discovered (equivalent to "total resources").

DISCOVERED PETROLEUM INITIALLY-IN-PLACE is that quantity of petroleum that is estimated, as of a given date, to be contained in known accumulations prior to production.

PRODUCTION is the cumulative quantity of petroleum that has been recovered at a given date. While all recoverable resources are estimated and production is measured in terms of the sales product specifications, raw production (sales plus non-sales) quantities are also measured and required to support engineering analyses based on reservoir voidage (see Production Measurement, section 3.2).

Multiple development projects may be applied to each known accumulation, and each project will recover an estimated portion of the initially-in-place quantities. The projects shall be subdivided into Commercial and Sub-Commercial, with the estimated recoverable quantities being classified as Reserves and Contingent Resources respectively, as defined below.

RESERVES are those quantities of petroleum anticipated to be commercially recoverable by application of development projects to known accumulations from a given date forward under defined conditions. Reserves must further satisfy four criteria: they must be discovered, recoverable, commercial, and remaining (as of the evaluation date) based on the development project(s) applied. Reserves are further categorized in accordance with the level of certainty associated with the estimates and may be sub-classified based on project maturity and/or characterized by development and production status.

CONTINGENT RESOURCES are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations, but the applied project(s) are not yet considered mature enough for commercial development due to one or more contingencies.Contingent Resources may include, for example, projects for which there are currently no viable markets, or where commercial recovery is dependent on technology under development, or where evaluation of the accumulation is insufficient to clearly assess commerciality. Contingent Resources are further categorized in accordance with the level of certainty associated with the estimates and may be subclassified based on project maturity and/or characterized by their economic status.

UNDISCOVERED PETROLEUM INITIALLY-IN-PLACE is that quantity of petroleum estimated, as of a given date, to be contained within accumulations yet to be discovered.

PROSPECTIVE RESOURCES are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects. Prospective Resources have both an associated chance of discovery and a chance of development. Prospective Resources are further subdivided in accordance with the level of certainty associated with recoverable estimates assuming their discovery and development and may be sub-classified based on project maturity.

UNRECOVERABLE is that portion of Discovered or Undiscovered Petroleum Initially-in-Place quantities which is estimated, as of a given date, not to be recoverable by future development projects. A portion of these quantities may become recoverable in the future as commercial circumstances change or technological developments occur; the remaining portion may never be recovered due to physical/chemical constraints represented by subsurface interaction of fluids and reservoir rocks.

Estimated Ultimate Recovery (EUR) is not a resources category, but a term that may be applied to any accumulation or group of accumulations (discovered or undiscovered) to define those quantities of petroleum estimated, as of a given date, to be potentially recoverable under defined technical and commercial conditions plus those quantities already produced (total of recoverable resources).

In specialized areas, such as basin potential studies, alternative terminology has been used; the total resources may be referred to as Total Resource Base or Hydrocarbon Endowment. Total recoverable or EUR may be termed Basin Potential. The sum of Reserves, Contingent Resources, and Prospective Resources may be referred to as "remaining recoverable resources." When such terms are used, it is important that each classification component of the summation also be provided. Moreover, these quantities should not be aggregated without due consideration of the varying degrees of technical and commercial risk involved with their classification.

1.2 Project-Based Resources Evaluations

The resources evaluation process consists of identifying a recovery project, or projects, associated with a petroleum accumulation(s), estimating the quantities of Petroleum Initially-in-Place, estimating that portion of those in-place quantities that can be recovered by each project, and classifying the project(s) based on its maturity status or chance of commerciality.

This concept of a project-based classification system is further clarified by examining the primary data sources contributing to an evaluation of net recoverable resources (see Figure 1-2) that may be described as follows:

Figure 1-2: Resources Evaluation Data Sources.

• The Reservoir (accumulation): Key attributes include the types and quantities of Petroleum Initially-in-Place and the fluid and rock properties that affect petroleum recovery.
• The Project: Each project applied to a specific reservoir development generates a unique production and cash flow schedule. The time integration of these schedules taken to the project's technical, economic, or contractual limit defines the estimated recoverable resources and associated future net cash flow projections for each project. The ratio of EUR to Total Initially-in-Place quantities defines the ultimate recovery efficiency for the development project(s). A project may be defined at various levels and stages of maturity; it may include one or many wells and associated production and processing facilities. One project may develop many reservoirs, or many projects may be applied to one reservoir.
• The Property (lease or license area): Each property may have unique associated contractual rights and obligations including the fiscal terms. Such information allows definition of each participant's share of produced quantities (entitlement) and share of investments, expenses, and revenues for each recovery project and the reservoir to which it is applied. One property may encompass many reservoirs, or one reservoir may span several different properties. A property may contain both discovered and undiscovered accumulations.

In context of this data relationship, "project" is the primary element considered in this resources classification, and net recoverable resources are the incremental quantities derived from each project. Project represents the link between the petroleum accumulation and the decision-making process. A project may, for example, constitute the development of a single reservoir or field, or an incremental development for a producing field, or the integrated development of several fields and associated facilities with a common ownership. In general, an individual project will represent the level at which a decision is made whether or not to proceed (i.e., spend more money) and there should be an associated range of estimated recoverable quantities for that project.

An accumulation or potential accumulation of petroleum may be subject to several separate and distinct projects that are at different stages of exploration or development. Thus, an accumulation may have recoverable quantities in several resource classes simultaneously.

In order to assign recoverable resources of any class, a development plan needs to be defined consisting of one or more projects. Even for Prospective Resources, the estimates of recoverable quantities must be stated in terms of the sales products derived from a development program assuming successful discovery and commercial development. Given the major uncertainties involved at this early stage, the development program will not be of the detail expected in later stages of maturity. In most cases, recovery efficiency may be largely based on analogous projects. In-place quantities for which a feasible project cannot be defined using current, or reasonably forecast improvements in, technology are classified as Unrecoverable.

Not all technically feasible development plans will be commercial. The commercial viability of a development project is dependent on a forecast of the conditions that will exist during the time period encompassed by the project's activities (see Commercial Evaluations, section 3.1). "Conditions" include technological, economic, legal, environmental, social, and governmental factors. While economic factors can be summarized as forecast costs and product prices, the underlying influences include, but are not limited to, market conditions, transportation and processing infrastructure, fiscal terms, and taxes.

The resource quantities being estimated are those volumes producible from a project as measured according to delivery specifications at the point of sale or custody transfer (see Reference Point, section 3.2.1). The cumulative production from the evaluation date forward to cessation of production is the remaining recoverable quantity. The sum of the associated annual net cash flows yields the estimated future net revenue. When the cash flows are discounted according to a defined discount rate and time period, the summation of the discounted cash flows is termed net present value (NPV) of the project (see Evaluation and Reporting Guidelines, section 3.0).

The supporting data, analytical processes, and assumptions used in an evaluation should be documented in sufficient detail to allow an independent evaluator or auditor to clearly understand the basis for estimation and categorization of recoverable quantities and their classification.

2.0 Classification and Categorization Guidelines

To consistently characterize petroleum projects, evaluations of all resources should be conducted in the context of the full classification system as shown in Figure 1-1. These guidelines reference this classification system and support an evaluation in which projects are "classified" based on their chance of commerciality (the vertical axis) and estimates of recoverable and marketable quantities associated with each project are "categorized" to reflect uncertainty (the horizontal axis). The actual workflow of classification vs. categorization varies with individual projects and is often an iterative analysis process leading to a final report. "Report," as used herein, refers to the presentation of evaluation results within the business entity conducting the assessment and should not be construed as replacing guidelines for public disclosures under guidelines established by regulatory and/or other government agencies.

Additional background information on resources classification issues can be found in Chapter 2 of the 2001 SPE/WPC/AAPG publication: "Guidelines for the Evaluation of Petroleum Reserves and Resources," hereafter referred to as the "2001 Supplemental Guidelines."

2.1 Resources Classification

The basic classification requires establishment of criteria for a petroleum discovery and thereafter the distinction between commercial and sub-commercial projects in known accumulations (and hence between Reserves and Contingent Resources).

2.1.1 Determination of Discovery Status

A discovery is one petroleum accumulation, or several petroleum accumulations collectively, for which one or several exploratory wells have established through testing, sampling, and/or logging the existence of a significant quantity of potentially moveable hydrocarbons.

In this context, "significant" implies that there is evidence of a sufficient quantity of petroleum to justify estimating the in-place volume demonstrated by the well(s) and for evaluating the potential for economic recovery. Estimated recoverable quantities within such a discovered (known) accumulation(s) shall initially be classified as Contingent Resources pending definition of projects with sufficient chance of commercial development to reclassify all, or a portion, as Reserves. Where in-place hydrocarbons are identified but are not considered currently recoverable, such quantities may be classified as Discovered Unrecoverable, if considered appropriate for resource management purposes; a portion of these quantities may become recoverable resources in the future as commercial circumstances change or technological developments occur.

2.1.2 Determination of Commerciality

Discovered recoverable volumes (Contingent Resources) may be considered commercially producible, and thus Reserves, if the entity claiming commerciality has demonstrated firm intention to proceed with development and such intention is based upon all of the following criteria:

• Evidence to support a reasonable timetable for development.
• A reasonable assessment of the future economics of such development projects meeting defined investment and operating criteria:
• A reasonable expectation that there will be a market for all or at least the expected sales quantities of production required to justify development.
• Evidence that the necessary production and transportation facilities are available or can be made available:
• Evidence that legal, contractual, environmental and other social and economic concerns will allow for the actual implementation of the recovery project being evaluated.

To be included in the Reserves class, a project must be sufficiently defined to establish its commercial viability. There must be a reasonable expectation that all required internal and external approvals will be forthcoming, and there is evidence of firm intention to proceed with development within a reasonable time frame. A reasonable time frame for the initiation of development depends on the specific circumstances and varies according to the scope of the project. While 5 years is recommended as a benchmark, a longer time frame could be applied where, for example, development of economic projects are deferred at the option of the producer for, among other things, market-related reasons, or to meet contractual or strategic objectives. In all cases, the justification for classification as Reserves should be clearly documented.

To be included in the Reserves class, there must be a high confidence in the commercial producibility of the reservoir as supported by actual production or formation tests. In certain cases, Reserves may be assigned on the basis of well logs and/or core analysis that indicate that

the subject reservoir is hydrocarbon-bearing and is analogous to reservoirs in the same area that are producing or have demonstrated the ability to produce on formation tests.

2.1.3 Project Status and Commercial Risk

Evaluators have the option to establish a more detailed resources classification reporting system that can also provide the basis for portfolio management by subdividing the chance of commerciality axis according to project maturity. Such sub-classes may be characterized by standard project maturity level descriptions (qualitative) and/or by their associated chance of reaching producing status (quantitative).

As a project moves to a higher level of maturity, there will be an increasing chance that the accumulation will be commercially developed. For Contingent and Prospective Resources, this can further be expressed as a quantitative chance estimate that incorporates two key underlying risk components:

• The chance that the potential accumulation will result in the discovery of petroleum. This is referred to as the "chance of discovery."
• Once discovered, the chance that the accumulation will be commercially developed is referred to as the "chance of development."

Thus, for an undiscovered accumulation, the "chance of commerciality" is the product of these two risk components. For a discovered accumulation where the "chance of discovery" is 100%, the "chance of commerciality" becomes equivalent to the "chance of development."

2.1.3.1 Project Maturity Sub-Classes

As illustrated in Figure 2-1, development projects (and their associated recoverable quantities) may be sub-classified according to project maturity levels and the associated actions (business decisions) required to move a project toward commercial production.

Figure 2-1: Sub-classes based on Project Maturity.

Project Maturity terminology and definitions have been modified from the example provided in the 2001 Supplemental Guidelines, Chapter 2. Detailed definitions and guidelines for each Project Maturity sub-class are provided in Table I. This approach supports managing portfolios of opportunities at various stages of exploration and development and may be supplemented by associated quantitative estimates of chance of commerciality. The boundaries between different levels of project maturity may be referred to as "decision gates."

Decisions within the Reserves class are based on those actions that progress a project through final approvals to implementation and initiation of production and product sales. For Contingent Resources, supporting analysis should focus on gathering data and performing analyses to clarify and then mitigate those key conditions, or contingencies, that prevent commercial development.

For Prospective Resources, these potential accumulations are evaluated according to their chance of discovery and, assuming a discovery, the estimated quantities that would be recoverable under appropriate development projects. The decision at each phase is to undertake further data acquisition and/or studies designed to move the project to a level of technical and commercial maturity where a decision can be made to proceed with exploration drilling.

Evaluators may adopt alternative sub-classes and project maturity modifiers, but the concept of increasing chance of commerciality should be a key enabler in applying the overall classification system and supporting portfolio management.

2.1.3.2 Reserves Status

Once projects satisfy commercial risk criteria, the associated quantities are classified as Reserves. These quantities may be allocated to the following subdivisions based on the funding and operational status of wells and associated facilities within the reservoir development plan (detailed definitions and guidelines are provided in Table 2):

• Developed Reserves are expected quantities to be recovered from existing wells and facilities.
  • o Developed Producing Reserves are expected to be recovered from completion intervals that are open and producing at the time of the estimate.
  • o Developed Non-Producing Reserves include shut-in and behind-pipe Reserves.
• Undeveloped Reserves are quantities expected to be recovered through future investments**.**

Where Reserves remain undeveloped beyond a reasonable timeframe, or have remained undeveloped due to repeated postponements, evaluations should be critically reviewed to document reasons for the delay in initiating development and justify retaining these quantities within the Reserves class. While there are specific circumstances where a longer delay (see Determination of Commerciality, section 2.1.2) is justified, a reasonable time frame is generally considered to be less than 5 years.

Development and production status are of significant importance for project management. While Reserves Status has traditionally only been applied to Proved Reserves, the same concept of Developed and Undeveloped Status based on the funding and operational status of wells and producing facilities within the development project are applicable throughout the full range of Reserves uncertainty categories (Proved, Probable and Possible).

Quantities may be subdivided by Reserves Status independent of sub-classification by Project Maturity. If applied in combination, Developed and/or Undeveloped Reserves quantities may be identified separately within each Reserves sub-class (On Production, Approved for Development, and Justified for Development).

2.1.3.3 Economic Status

Projects may be further characterized by their Economic Status. All projects classified as Reserves must be economic under defined conditions (see Commercial Evaluations, section 3.1). Based on assumptions regarding future conditions and their impact on ultimate economic viability, projects currently classified as Contingent Resources may be broadly divided into two groups:

• Marginal Contingent Resources are those quantities associated with technically feasible projects that are either currently economic or projected to be economic under reasonably forecasted improvements in commercial conditions but are not committed for development because of one or more contingencies.
• Sub-Marginal Contingent Resources are those quantities associated with discoveries for which analysis indicates that technically feasible development projects would not be economic and/or other contingencies would not be satisfied under current or reasonably forecasted improvements in commercial conditions. These projects nonetheless should be retained in the inventory of discovered resources pending unforeseen major changes in commercial conditions.

Where evaluations are incomplete such that it is premature to clearly define ultimate chance of commerciality, it is acceptable to note that project economic status is "undetermined." Additional economic status modifiers may be applied to further characterize recoverable quantities; for example, non-sales (lease fuel, flare, and losses) may be separately identified and documented in addition to sales quantities for both production and recoverable resource estimates (see also Reference Point, section 3.2.1). Those discovered in-place volumes for which a feasible development project cannot be defined using current, or reasonably forecast improvements in, technology are classified as Unrecoverable.

Economic Status may be identified independently of, or applied in combination with, Project Maturity sub-classification to more completely describe the project and its associated resources*.*

2.2 Resources Categorization

The horizontal axis in the Resources Classification (Figure 1.1) defines the range of uncertainty in estimates of the quantities of recoverable, or potentially recoverable, petroleum associated with a project. These estimates include both technical and commercial uncertainty components as follows:

• The total petroleum remaining within the accumulation (in-place resources).
• That portion of the in-place petroleum that can be recovered by applying a defined development project or projects.
• Variations in the commercial conditions that may impact the quantities recovered and sold (e.g., market availability, contractual changes).

Where commercial uncertainties are such that there is significant risk that the complete project (as initially defined) will not proceed, it is advised to create a separate project classified as Contingent Resources with an appropriate chance of commerciality*.*

2.2.1 Range of Uncertainty

The range of uncertainty of the recoverable and/or potentially recoverable volumes may be represented by either deterministic scenarios or by a probability distribution (see Deterministic and Probabilistic Methods, section 4.2).

When the range of uncertainty is represented by a probability distribution, a low, best, and high estimate shall be provided such that:

• There should be at least a 90% probability (P90) that the quantities actually recovered will equal or exceed the low estimate.
• There should be at least a 50% probability (P50) that the quantities actually recovered will equal or exceed the best estimate.
• There should be at least a 10% probability (P10) that the quantities actually recovered will equal or exceed the high estimate.

When using the deterministic scenario method, typically there should also be low, best, and high estimates, where such estimates are based on qualitative assessments of relative uncertainty using consistent interpretation guidelines. Under the deterministic incremental (risk-based) approach, quantities at each level of uncertainty are estimated discretely and separately (see Category Definitions and Guidelines, section 2.2.2).

These same approaches to describing uncertainty may be applied to Reserves, Contingent Resources, and Prospective Resources. While there may be significant risk that sub-commercial and undiscovered accumulations will not achieve commercial production, it useful to consider the range of potentially recoverable quantities independently of such a risk or consideration of the resource class to which the quantities will be assigned.

2.2.2 Category Definitions and Guidelines

Evaluators may assess recoverable quantities and categorize results by uncertainty using the deterministic incremental (risk-based) approach, the deterministic scenario (cumulative) approach, or probabilistic methods. (see "2001 Supplemental Guidelines," Chapter 2.5). In many cases, a combination of approaches is used.

Use of consistent terminology (Figure 1.1) promotes clarity in communication of evaluation results. For Reserves, the general cumulative terms low/best/high estimates are denoted as 1P/2P/3P, respectively. The associated incremental quantities are termed Proved, Probable and Possible. Reserves are a subset of, and must be viewed within context of, the complete resources classification system. While the categorization criteria are proposed specifically for Reserves, in most cases, they can be equally applied to Contingent and Prospective Resources conditional upon their satisfying the criteria for discovery and/or development.

For Contingent Resources, the general cumulative terms low/best/high estimates are denoted as 1C/2C/3C respectively. For Prospective Resources, the general cumulative terms low/best/high estimates still apply. No specific terms are defined for incremental quantities within Contingent and Prospective Resources.

Without new technical information, there should be no change in the distribution of technically recoverable volumes and their categorization boundaries when conditions are satisfied sufficiently to reclassify a project from Contingent Resources to Reserves. All evaluations require application of a consistent set of forecast conditions, including assumed future costs and prices, for both classification of projects and categorization of estimated quantities recovered by each project (see Commercial Evaluations, section 3.1).

Table III presents category definitions and provides guidelines designed to promote consistency in resource assessments. The following summarizes the definitions for each Reserves category in terms of both the deterministic incremental approach and scenario approach and also provides the probability criteria if probabilistic methods are applied.

Proved Reserves are those quantities of petroleum, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under defined economic conditions, operating methods, and government regulations. If deterministic methods are used, the term reasonable certainty is intended to express a high degree of confidence that the quantities

will be recovered. If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate.

• Probable Reserves are those additional Reserves which analysis of geoscience and engineering data indicate are less likely to be recovered than Proved Reserves but more certain to be recovered than Possible Reserves. It is equally likely that actual remaining quantities recovered will be greater than or less than the sum of the estimated Proved plus Probable Reserves (2P). In this context, when probabilistic methods are used, there should be at least a 50% probability that the actual quantities recovered will equal or exceed the 2P estimate.
• Possible Reserves are those additional reserves which analysis of geoscience and engineering data suggest are less likely to be recoverable than Probable Reserves. The total quantities ultimately recovered from the project have a low probability to exceed the sum of Proved plus Probable plus Possible (3P) Reserves, which is equivalent to the high estimate scenario. In this context, when probabilistic methods are used, there should be at least a 10% probability that the actual quantities recovered will equal or exceed the 3P estimate.

Based on additional data and updated interpretations that indicate increased certainty, portions of Possible and Probable Reserves may be re-categorized as Probable and Proved Reserves.

Uncertainty in resource estimates is best communicated by reporting a range of potential results. However, if it is required to report a single representative result, the "best estimate" is considered the most realistic assessment of recoverable quantities. It is generally considered to represent the sum of Proved and Probable estimates (2P) when using the deterministic scenario or the probabilistic assessment methods. It should be noted that under the deterministic incremental (risk-based) approach, discrete estimates are made for each category, and they should not be aggregated without due consideration of their associated risk (see "2001 Supplemental Guidelines," Chapter 2.5).

2.3 Incremental Projects

The initial resource assessment is based on application of a defined initial development project. Incremental projects are designed to increase recovery efficiency and/or to accelerate production through making changes to wells or facilities, infill drilling, or improved recovery. Such projects should be classified according to the same criteria as initial projects. Related incremental quantities are similarly categorized on certainty of recovery. The projected increased recovery can be included in estimated Reserves if the degree of commitment is such that the project will be developed and placed on production within a reasonable timeframe.

Circumstances where development will be significantly delayed should be clearly documented. If there is significant project risk, forecast incremental recoveries may be similarly categorized but should be classified as Contingent Resources (see Determination of Commerciality, section 2.1.2).

2.3.1 Workovers, Treatments, and Changes of Equipment

Incremental recovery associated with future workover, treatment (including hydraulic fracturing), re-treatment, changes of equipment, or other mechanical procedures where such projects have routinely been successful in analogous reservoirs may be classified as Developed or Undeveloped Reserves depending on the magnitude of associated costs required (see Reserves Status, section 2.1.3.2).

2.3.2 Compression

Reduction in the backpressure through compression can increase the portion of in-place gas that can be commercially produced and thus included in Reserves estimates. If the eventual installation of compression was planned and approved as part of the original development plan, incremental recovery is included in Undeveloped Reserves. However, if the cost to implement compression is not significant (relative to the cost of a new well), the incremental quantities may be classified as Developed Reserves. If compression facilities were not part of the original approved development plan and such costs are significant, it should be treated as a separate project subject to normal project maturity criteria.

2.3.3 Infill Drilling

Technical and commercial analyses may support drilling additional producing wells to reduce the spacing beyond that utilized within the initial development plan, subject to government regulations (if such approvals are required). Infill drilling may have the combined effect of increasing recovery efficiency and accelerating production. Only the incremental recovery can be considered as additional Reserves; this additional recovery may need to be reallocated to individual wells with different interest ownerships.

2.3.4 Improved Recovery

Improved recovery is the additional petroleum obtained, beyond primary recovery, from naturally occurring reservoirs by supplementing the natural reservoir performance. It includes waterflooding, secondary or tertiary recovery processes, and any other means of supplementing natural reservoir recovery processes.

Improved recovery projects must meet the same Reserves commerciality criteria as primary recovery projects. There should be an expectation that the project will be economic and that the entity has committed to implement the project in a reasonable time frame (generally within 5 years; further delays should be clearly justified).

The judgment on commerciality is based on pilot testing within the subject reservoir or by comparison to a reservoir with analogous rock and fluid properties and where a similar established improved recovery project has been successfully applied.

Incremental recoveries through improved recovery methods that have yet to be established through routine, commercially successful applications are included as Reserves only after a favorable production response from the subject reservoir from either (a) a representative pilot or (b) an installed program, where the response provides support for the analysis on which the project is based.

These incremental recoveries in commercial projects are categorized into Proved, Probable, and Possible Reserves based on certainty derived from engineering analysis and analogous applications in similar reservoirs**.**

2.4 Unconventional Resources

Two types of petroleum resources have been defined that may require different approaches for their evaluations:

Conventional resources exist in discrete petroleum accumulations related to a localized geological structural feature and/or stratigraphic condition, typically with each accumulation bounded by a downdip contact with an aquifer, and which is significantly affected by hydrodynamic influences such as buoyancy of petroleum in water. The petroleum is recovered through wellbores and typically requires minimal processing prior to sale.

	Independent
7	Expert's Report

Unconventional resources exist in petroleum accumulations that are pervasive throughout a large area and that are not significantly affected by hydrodynamic influences (also called "continuous-type deposits"). Examples include coalbed methane (CBM), basin-centered gas, shale gas, gas hydrates, natural bitumen, and oil shale deposits. Typically, such accumulations require specialized extraction technology (e.g., dewatering of CBM, massive fracturing programs for shale gas, steam and/or solvents to mobilize bitumen for in-situ recovery, and, in some cases, mining activities). Moreover, the extracted petroleum may require significant processing prior to sale (e.g., bitumen upgraders).

For these petroleum accumulations that are not significantly affected by hydrodynamic influences, reliance on continuous water contacts and pressure gradient analysis to interpret the extent of recoverable petroleum may not be possible. Thus, there typically is a need for increased sampling density to define uncertainty of in-place volumes, variations in quality of reservoir and hydrocarbons, and their detailed spatial distribution to support detailed design of specialized mining or in-situ extraction programs.

It is intended that the resources definitions, together with the classification system, will be appropriate for all types of petroleum accumulations regardless of their in-place characteristics, extraction method applied, or degree of processing required.

Similar to improved recovery projects applied to conventional reservoirs, successful pilots or operating projects in the subject reservoir or successful projects in analogous reservoirs may be required to establish a distribution of recovery efficiencies for non-conventional accumulations. Such pilot projects may evaluate both extraction efficiency and the efficiency of unconventional processing facilities to derive sales products prior to custody transfer.

Appendix 3

Selection of Discount Rate

1 Overview

A discount rate range of 10.5-11.5% has been selected by Grant Samuel to apply to the forecast nominal ungeared after tax cash flows of the Narrabri Gas Project.

Selection of the appropriate discount rate to apply to the forecast cash flows of any business enterprise is fundamentally a matter of judgement. The valuation of an asset or business involves judgements about the discount rates that may be utilised by potential acquirers of that asset. There is a body of theory which can be used to support that judgement. However, a mechanistic application of formulae derived from that theory can obscure the reality that there is no "correct" discount rate. Despite the growing acceptance and application of various theoretical models, it is Grant Samuel's experience that many companies rely on less sophisticated approaches. Many businesses use relatively arbitrary "hurdle rates" which do not vary significantly from investment to investment or change significantly over time despite interest rate movements. Valuation is an estimate of what real world buyers and sellers of assets would pay and must therefore reflect criteria that will be applied in practice even if they are not theoretically correct. Grant Samuel considers the rates adopted to be reasonable discount rates that acquirers would use irrespective of the outcome or shortcomings of applying any particular theoretical model.

The discount rate that Grant Samuel has adopted is reasonable relative to the rates derived from theoretical models. The discount rate represents an estimate of the weighted average cost of capital ("WACC") appropriate for these assets. Grant Samuel has calculated a WACC based on a weighted average of the cost of equity and the cost of debt. This is the relevant rate to apply to ungeared cash flows. There are three main elements to the determination of an appropriate WACC. These are:

• cost of equity;
• cost of debt; and
• debt/equity mix.

WACC is a commonly used basis but it should be recognised that it has shortcomings in that it:

• represents a simplification of what are usually much more complex financial structures; and
• assumes a constant degree of leverage which is seldom correct.

The cost of equity has been derived from application of the Capital Asset Pricing Model ("CAPM") methodology. The CAPM is probably the most widely accepted and used methodology for determining the cost of equity capital. There are more sophisticated multivariate models which utilise additional risk factors but these models have not achieved any significant degree of usage or acceptance in practice. However, while the theory underlying the CAPM is rigorous the practical application is subject to shortcomings and limitations and the results of applying the CAPM model should only be regarded as providing a general guide. There is a tendency to regard the rates calculated using CAPM as inviolate. To do so is to misunderstand the limitations of the model. For example:

• the CAPM theory is based on expectations but uses historical data as a proxy. The future is not necessarily the same as the past;
• the measurement of historical data such as risk premia and beta factors is subject to very high levels of statistical error. Measurements vary widely depending on factors such as source, time period and sampling frequency;
• the measurement of beta is often based on comparisons with other companies. None of these companies is likely to be directly comparable to the entity for which the discount rate is being calculated and may operate in widely varying markets;
• parameters such as the debt/equity ratio and risk premium are based on subjective judgements; and

there is not unanimous agreement as to how the model should adjust for factors such as taxation. The CAPM was developed in the context of a "classical" tax system. Australia's system of dividend imputation has a significant impact on the measurement of net returns to investors.

In addition, the market upheaval since 2007 (including the downturn and increased market volatility in August 2011) has seen a repricing of risk by investors. The CAPM methodology does not readily allow for those types of events. The addition of further premiums (sometimes referred to as alpha factors), while a practical approach, is inconsistent with the CAPM methodology. An alternative is to consider the cost of equity under the Gordon Growth Model (where the cost of equity equals the forecast dividend yield plus long term growth).

The following sections set out the basis for Grant Samuel's determination of the discount rates for the Narrabri Gas Project and the factors which limit the accuracy and reliability of the estimates.

2 Definition and Limitations of the CAPM and WACC

The CAPM provides a theoretical basis for determining a discount rate that reflects the returns required by diversified investors in equities. The rate of return required by equity investors represents the cost of equity of a company and is therefore the relevant measure for estimating a company's weighted average cost of capital. CAPM is based on the assumption that investors require a premium for investing in equities rather than in risk free investments (such as Australian government bonds). The premium is commonly known as the market risk premium and notionally represents the premium required to compensate for investment in the equity market in general.

The risks relating to a company or business may be divided into specific risks and systematic risks. Specific risks are risks that are specific to a particular company or business and are unrelated to movements in equity markets generally. While specific risks will result in actual returns varying from expected returns, it is assumed that diversified investors require no additional returns to compensate for specific risk, because the net effect of specific risks across a diversified portfolio will, on average, be zero. Portfolio investors can diversify away all specific risk.

However, investors cannot diversify away the systematic risk of a particular investment or business operation. Systematic risk is the risk that the return from an investment or business operation will vary with the market return in general. If the return on an investment was expected to be completely correlated with the return from the market in general, then the return required on the investment would be equal to the return required from the market in general (i.e. the risk free rate plus the market risk premium).

Systematic risk is affected by the following factors:

• financial leverage: additional debt will increase the impact of changes in returns on underlying assets and therefore increase systematic risk;
• cyclicality of revenue: projects and companies with cyclical revenues will generally be subject to greater systematic risk than those with non-cyclical revenues; and
• operating leverage: projects and companies with greater proportions of fixed costs in their cost structure will generally be subject to more systematic risk than those with lesser proportions of fixed costs.

CAPM postulates that the return required on an investment or asset can be estimated by applying to the market risk premium a measure of systematic risk described as the beta factor. The beta for an investment reflects the covariance of the return from that investment with the return from the market as a whole. Covariance is a measure of relative volatility and correlation. The beta of an investment represents its systematic risk only. It is not a measure of the total risk of a particular investment. An investment with a beta of more than one is riskier than the market and an investment with a beta of less than one is less risky. The discount rate appropriate for an investment which involves zero systematic risk would be equal to the risk free rate.

The formula for deriving the cost of equity using CAPM is as follows:

Re = Rf + Beta (Rm – Rf)

Where:
Re	=	the cost of equity capital;
Rf	=	the risk free rate;
Beta	=	the beta factor;
Rm	=	the expected market return; and
Rm - Rf	=	the market risk premium.

The beta for a company or business operation is normally estimated by observing the historical relationship between returns from the company or comparable companies and returns from the market in general. The market risk premium is estimated by reference to the actual long run premium earned on equity investments by comparison with the return on risk free investments.

The formula conventionally used to calculate a WACC under a classical tax system is as follows:

WACC

\n $$ = (Re , x , E/V) + (Rdx , (1-t) , x , D/V) $$ \nWhere:

\n $$ E/V $$ \n $$ = \text{the proportion of equity to total value (where V = D + E);} $$ \n $$ D/V $$ \n $$ = \text{the cost of equity capital;} $$ \n $$ Rd $$ \n $$ = \text{the cost of debt capital; and} $$ \n $$ t $$ \n $$ = \text{the corporate tax rate} $$

The models, while simple, are based on a sophisticated and rigorous theoretical analysis. Nevertheless, application of the theory is not straightforward and the discount rate calculated should be treated as no more than a general guide. The reliability of any estimate derived from the model is limited. Some of the issues are discussed below:

Risk Free Rate

Theoretically, the risk free rate used should be an estimate of the risk free rate in each future period (i.e. the one year spot rate in that year if annual cash flows are used). There is no official "risk free" rate but rates on government securities are typically used as an acceptable substitute. More importantly, forecast rates for each future period are not readily available. In practice, the long term Commonwealth Government Bond rate is used as a substitute in Australia and medium to long term Treasury Bond rates are used in the United States. It should be recognised that the yield to maturity of a long term bond is only an average rate and where the yield curve is strongly positive (i.e. longer term rates are significantly above short term rates) the adoption of a single long term bond rate has the effect of reducing the net present value where the major positive cash flows are in the initial years. The long term bond rate is therefore only an approximation.

The ten year bond rate is a widely used and accepted benchmark for the risk free rate. Where the forecast period exceeds ten years, an issue arises as to the appropriate bond to use. While longer term bond rates are available, the ten year bond market is the deepest long term bond market in Australia and is a widely used and recognised benchmark. There is a very limited market for bonds of more than ten years. In the United States, there are deeper markets for longer term bonds. The 30 year bond rate is a widely used benchmark. However, long term rates accentuate the distortions of the yield curve on cash flows in early years. In any event, a single long term bond rate matching the term of the cash flows is no more theoretically correct than using a ten year rate. More importantly, the ten year rate is the standard benchmark used in practice.

Where cash flows are less than ten years in duration the opposite issue arises. An argument could be made that shorter term, and therefore lower, bond rates should be used in determining the discount rate for there assets. While Grant Samuel believes this is a legitimate argument, an adjustment may give a misleading impression of precision for the whole methodology. In any event, the impact on valuation would usually be trivial.

In practice, Grant Samuel believes acquirers would use a common rate. The ten year bond rate can be regarded as an acceptable standard risk free rate for medium to long term cash flows, particularly given its wide use.

Market Risk Premium

The market risk premium (Rm - Rf) represents the "extra" return that investors require to invest in equity securities as a whole over risk free investments. This is an "ex-ante" concept. It is the expected premium and as such it is not an observable phenomenon. There is no generally accepted approach to estimating a forward looking market risk premia and therefore the historical premium is used as the best available proxy measure. The premium earned historically by equity investments is usually calculated over a time period of many years, typically at least 30 years. This long time frame is used on the basis that short term numbers are highly volatile and that a long term average return would be a fair indication of what most investors would expect to earn in the future from an investment in equities with a 5-10 year time frame.

In the United States it is generally believed that the premium is in the range of 5-6% but there are widely varying assessments (from 3% to 9%). Australian studies have been more limited and mainly derive from the Officer Study1 which was based on data for the period 1883 to 1987 (prior to the introduction of dividend imputation) and indicated that the long run average premium was in the order of 8% using an arithmetic average but subject to significant statistical error2 . More recently, the Officer Study has been updated to 20083 with the long term average declining to 7.1%. However, due to concerns about the earlier market data, Officer now places emphasis on the average risk premium since 1958 which is estimated to be 5.7% ignoring the impact of imputation4 .

In addition, the market risk premium is not constant and changes over time. At various stages of the market cycle investors perceive that equities are more risky than at other times and will increase or decrease their expected premium. Indeed, prior to 2008 there were arguments being put forward that the risk premium was lower than it had been historically while today there is evidence to indicate that current market risk premiums are above historical averages. However, there is no accepted approach to deal with changes in market risk premia for current conditions.

In the absence of controls over capital flows, differences in taxation and other regulatory and institutional differences, it is reasonable to assume that the market risk premium should be approximately equal across markets which exhibit similar risk characteristics after adjusting for the effects of expected inflation differentials. Accordingly, it is reasonable to assume similar market risk premiums for first world countries enjoying political economic stability, such as Australia, New Zealand, the United States, Japan, the United Kingdom and various western European countries.

Beta Factor

The beta factor is a measure of the expected covariance (i.e. volatility and correlation of returns) between the return on an investment and the return from the market as a whole. The expected beta factor cannot be observed. The conventional practice is to calculate an historical beta from past share price data and use it as a proxy for the future but it must be recognised that the expected beta is not necessarily the same as the historical beta. A company's relative risk does change over time.

The appropriate beta is the beta of the company being acquired rather than the beta of the acquirer (which may be in a different business with different risks). Betas for the particular subject company may be utilised. However, it is also appropriate (and may be necessary if the investment is not

1 R.R. Officer in Ball, R., Brown, P., Finn, F. J. & Officer, R. R., "Share Market and Portfolio Theory: Readings and Australian Evidence" (second edition), University of Queensland Press, 1989 ("Officer Study"). 2

The "true" figure lies within a range of approximately 2-10% at a 95% confidence level. 3

R.R. Officer and S. Bishop, "Market Risk Premium: A Review Paper" (August 2008) and "Market Risk Premium: Further Comments" (January 2009), papers prepared for Energy Networks Association, Australian Pipeline Industry Australia and Grid Australia. 4

Where the market return explicitly includes a component for imputation benefits of 1.0 the market risk premium over the same period is 6.4%. Consequently, Officer and Bishop recommend that, if no allowance is made for imputation, the generally accepted level of 6% for the market risk premium is appropriate. In comparison, they recommend that where the market return explicitly includes a component for imputation benefits greater than 0.3 the market risk premium for Australia should be increased to 7%.

listed) to utilise betas for comparable companies and sector averages (particularly as those may be more reliable).

However, there are very significant measurement issues with betas which mean that only limited reliance can be placed on such statistics. There is no "correct" beta. For example:

• over the last two years Eastern Star Gas Limited's ('Eastern Star") beta as measured by the Australian Graduate School of Management ("AGSM") has varied between 1.61 and 1.95, with the top end of this range being measured in March and June 2010; and
• the standard error of the AGSM's estimate of Eastern Star's beta has been in the order of 0.50 to 0.70 meaning that for a beta of, say, 1.75 even at a 68% confidence level, the beta falls somewhere in a range is 1.05 to 2.45.

Debt/Equity Mix

The tax deductibility of the cost of debt means that the higher the proportion of debt the lower the WACC, although this would be offset, at least in part, by an increase in the beta factor as leverage increases.

The debt/equity mix assumed in calculating the discount rate should be consistent with the level implicit in the measurement of the beta factor. Typically, the debt/equity mix changes over time and there is significant diversity in the levels of leverage across companies in a sector. There is a tendency to calculate leverage at a point in time whereas the leverage should represent the average over the period the beta was measured. This can be difficult to assess with a meaningful degree of accuracy.

The measured beta factors for listed companies are "equity" betas and reflect the financial leverage of the individual companies. It is possible to unleverage beta factors to derive asset betas and releverage betas to reflect a more appropriate or comparable financial structure. In Grant Samuel's view this technique is subject to considerable estimation error. Deleveraging and releveraging betas exacerbates the estimation errors in the original beta calculation and gives a misleading impression as to the precision of the methodology. Deleveraging and releveraging is also incorrectly calculated based on debt levels at a single point in time.

In addition, the actual debt and equity structures of most companies are typically relatively complex. It is necessary to simplify this for practical purposes in this kind of analysis.

Finally, it should be noted that, for this purpose, the relevant measure of the debt/equity mix is based on market values not book values.

Specific Risk

The WACC is designed to be applied to "expected cash flows" which are effectively a weighted average of the likely scenarios. To the extent that a business is perceived as being particularly risky, this specific risk should be dealt with by adjusting the cash flow scenarios. This avoids the need to make arbitrary adjustments to the discount rate which can dramatically affect estimated values, particularly when the cash flows are of extended duration or much of the business value reflects future growth in cash flows. In addition, risk adjusting the cash flows requires a more disciplined analysis of the risks that the valuer is trying to reflect in the valuation.

However, it is also common in practice to allow for certain classes of specific risk (particularly sovereign and other country specific risks) in a different way by adjusting the discount rate applied to forecast cash flows.

3 Calculation of WACC for the Narrabri Gas Project

3.1 Cost of Equity Capital

The cost of equity capital has been estimated by reference to the CAPM. Grant Samuel has adopted a cost of equity capital in the range 11.7-12.3%.

Risk-Free Rate

Grant Samuel has adopted a risk free rate of 4.5%. The risk free rate approximates the current yield to maturity on ten year Australian Government bonds. The yield to maturity on ten year Australian Government bonds declined sharply (from around 5%) with the downturn in global capital markets (and the associated increased volatility) in August 2011.

Market Risk Premium

Grant Samuel has consistently adopted a market risk premium of 6% and believes that, particularly in view of the general uncertainty, this continues to be a reasonable estimate. It:

• is not statistically significantly different to the premium suggested by long term historical data;
• is similar to that used by a wide variety of analysts and practitioners (typically in the range 5-7%); and
• makes no explicit allowance for the impact of Australia's dividend imputation system.
• Beta Factor

Grant Samuel has adopted a beta factor in the range 1.2-1.3 for the purposes of valuing the Narrabri Gas Project.

Grant Samuel has considered the beta factors for a range of Australian oil and gas companies (particularly coal seam gas exploration and development companies) in determining an appropriate beta. The betas have been calculated on two bases relative to each company's home exchange index and relative to the Morgan Stanley Capital International Developed World Index ("MSCI"), an international equities market index that is widely used as a proxy for the global stockmarket as a whole.

A summary of betas for selected comparable listed companies is set out below:

	Equity Beta Factors for Selected Australian Listed Oil and Gas Companies
	Market		Monthly Observationsover 4 years	Weekly Observationsover 2 years
Company	Capitalisation5			Bloomberg7		Bloomberg
	($millions)	AGSM6	LocalIndex	MSCI8	LocalIndex	MSCI
Eastern Star	611	1.75	1.40	1.22	1.93	1.73
Coal Seam Gas
Bow Energy	321	1.68	1.46	0.97	1.67	1.58
Molopo	166	1.86	1.29	1.15	1.39	1.43
Metgasco	120	1.62	1.16	1.08	1.76	1.40
Blue Energy	76	2.35	1.86	1.50	1.70	1.47
WestSide	71	1.86	1.39	1.20	1.79	1.58
Minimum		1.62	1.16	0.97	1.39	1.40
Maximum		2.35	1.86	1.50	1.79	1.58
Median		1.86	1.39	1.15	1.70	1.47
Other Oil and Gas
Woodside Petroleum	27,168	1.18	1.10	0.93	1.05	0.92
Santos	10,089	0.97	0.90	0.76	1.11	1.00
Oil Search	8,067	0.79	0.83	0.69	1.03	0.94
Beach Energy	1,368	0.86	0.81	0.70	1.10	1.04
Minimum		0.79	0.81	0.69	1.03	0.92
Maximum		1.18	1.10	0.93	1.11	1.04
Median		0.92	0.86	0.73	1.07	0.97

Source: AGSM, Bloomberg, IRESS

The beta estimates suggests that over a four year period Australian coal seam gas exploration and development companies have betas of significantly over 1.0 (indicating more systematic riskiness than the overall market) while major Australian oil and gas companies have betas of less than 1.

However, in Grant Samuel's view, it is not clear that beta calculations based exclusively on share market data for the last four years will provide reliable estimates of expected systematic riskiness, particularly for resources companies.

For some periods over the last four years resources companies have outperformed broader measures of equity market performance. In particular, Australian companies with coal seam gas interests have performed strongly. This was largely the result of a substantial increase in prices for nearly all commodities, itself the result of the increasing impact of growing Chinese and other developing nations' demand for commodities and energy fuel, supply shortages, significantly increased production costs and other factors. The outperformance from March 2006 to May 2008 was reversed in the second half of 2008 as commodity prices fell precipitously in response to the development of global recessionary conditions. However, since November 2008, resources companies have again outperformed the broader market.

5 Based on share prices as at 16 September 2011, except Eastern Star which is based on its share price as at 15 July 2011 (being the day prior to announcement of the Proposal) and Bow Energy which is based on its share price on 19 August 2011 (being the day prior to receipt of a conditional proposal from Arrow Energy Holdings Pty Ltd). 6

The Australian beta factors calculated by the Australian Graduate School of Management ("AGSM") as at March 2011 over a period of 48 months using ordinary least squares regression or the Scholes-Williams technique where the stock is thinly traded. 7

Bloomberg betas have been calculated up to 16 September 2011. Grant Samuel understands that betas estimated by Bloomberg are not calculated strictly in conformity with accepted theoretical approaches to the estimation of betas (i.e. they are based on regressing total returns rather than the excess return over the risk free rate). However, in Grant Samuel's view the Bloomberg beta estimates can still provide a useful insight into the systematic risks associated with companies and industries. The figures used are the Bloomberg "adjusted" betas.

8 MSCI is calculated using local currency so that there is no impact of currency changes in the performance of the index.

In Grant Samuel's view the estimation of betas based purely on data over the last four years will potentially yield inappropriate results. The share price performance of listed resources companies in the context of what now appears (with the benefit of hindsight) to have been a commodities "bubble" until mid-2008, followed by a sharp correction and another period of strong performance is not necessarily reflective of expectations of future resource company share price performance relative to broader measures of equity markets.

Accordingly, Grant Samuel has had regard to betas estimated over various time periods based on share market data since late 2000. These were estimated in the context of independent expert's reports prepared by Grant Samuel for Shell's proposal to merge with Woodside Petroleum (November 2000), Novus Petroleum's bid for Petroz (November 2000), Origin's bid for Oil Company of Australia (September 2003), Sunov Petroleum's bid for Novus Petroleum and BG Group's bid for Origin (September 2008). This evidence suggests betas for producing oil and gas companies of less than 1 with predominantly exploration and development companies having betas in excess of 1.

Taking these factors into account and the fact that significant capital expenditure is required to develop the project, which results in an increased sensitivity to systematic risks, Grant Samuel believes that a beta in the range 1.2-1.3 is a reasonable estimate of the appropriate beta for the Narrabri Gas Project. This range better reflects beta estimates over a longer period than the last four years and appears broadly consistent with the views of market participants.

Cost of Equity Capital

Using the CAPM formula and the estimates set out above, the cost of equity capital for the Narrabri Gas Project can be calculated as follows:

Cost of Equity Capital Calculations
		Low		High
Formula	Re	= Rf + Beta (Rm-Rf)	Re	= Rf + Beta (Rm-Rf)
	=	4.5% + (1.2 x 6%)	=	4.5% + (1.3 x 6%)
	=	11.7%	=	12.3%

3.2 Cost of Debt

A cost of debt of 9% has been adopted (a margin of 4.5% over the risk free rate). This figure represents the expected future cost of borrowing over the duration of the cash flow model. Grant Samuel believes that this would be a reasonable estimate of an average interest rate, including a margin, that would match the duration of the cash flows assuming that the operations were funded with a mixture of short term and long term debt.

3.3 Debt/Equity Mix

The selection of the appropriate debt/equity ratio involves perhaps the most subjectivity of discount rate selection analysis. In determining an appropriate debt/equity mix, regard was had to gearing levels of Eastern Star and the peer group companies used in the beta analysis.

Gearing levels for these companies for the past four years are set out below:

Gearing Levels for Selected Australian Listed Oil and Gas Companies9
	Net Debt/(Net Debt + Market Capitalisation)
			30 June			4 Year
	2007	2008	2009	2010	Current10	Average11
Eastern Star	(0.3)%	(5.9)%	(8.9)%	(4.6)%	(9.4)%	(4.9)%
Coal Seam Gas
Bow Energy	(3.8)%	(8.1)%	(9.2)%	(35.4)%	(45.3)%	(14.1)%
Molopo	(5.9)%	(4.8)%	(75.9)%	(48.9)%	(120.8)%	(33.9)%
Metgasco	(6.0)%	(2.7)%	(17.5)%	(28.2)%	(24.8)%	(13.6)%
WestSide	(16.5)%	(14.2)%	(35.0)%	(217.8)%	(47.9)%	(70.8)%
Blue Energy	3.3%	(8.7)%	(27.9)%	(48.4)%	(24.5)%	(20.4)%
Minimum	(16.5)%	(14.2)%	(75.9)%	(217.8)%	(120.8)%	(70.8)%
Maximum	3.3%	(2.7)%	(9.2)%	(28.2)%	(24.5)%	(13.6)%
Median	(5.9)%	(8.1)%	(27.9)%	(48.4)%	(45.3)%	(20.4)%
Other Oil and Gas
Woodside Petroleum	3.6%	3.4%	11.9%	11.9%	13.4%	7.7%
Santos	12.9%	9.7%	(3.4%)	(5.0)%	(3.2)%	3.6%
Oil Search	(11.6)%	(5.1)%	(7.9)%	(21.8)%	1.0%	(11.6)%
Beach Energy	12.8%	(11.2)%	(19.4%)	(29.1)%	(14.5)%	(11.7)%
Minimum	(11.6)%	(11.2)%	(19.4%)	(29.1)%	(14.5)%	(11.7)%
Maximum	12.9%	9.7%	11.9%	11.9%	13.4%	7.7%
Median	8.2%	(0.9)%	(5.7)%	(13.4)%	(1.1)%	(4.0)%

Source: Company Reports, Bloomberg

The selection of gearing levels is highly judgemental. The table shows a very wide range of gearing levels, with generally only the major oil and gas companies accessing debt markets. The debt levels should actually be the weighted average measured over the same period as the beta factor rather than just at the current point in time. Moreover, these do not always bear any relationship to the betas of the individual companies.

The coal seam gas exploration and development companies generally have negative gearing (i.e. net cash) reflecting the speculative nature of operations and the lack of access to debt capital markets. However, the evidence indicates that other oil and gas companies (all of which have significant gearing ratios) also do not have substantial gearing reflecting that in most cases debt is reflected at a project rather than corporate level. Woodside Petroleum's gearing has increased to around 11-12% due to a recent debt raisings to pay down short term debt and fund capital expenditure for the Pluto LNG Project. Gearing typically funds project capital expenditure and not the value of the resource and therefore as a percentage of capital expenditure gearing is often high (i.e. in excess of 50%) and lower in comparison to value of the project.

Having regard to the stage of commercialisation of the Narrabri Gas Project, a debt/equity mix has been estimated as 20-25% debt and 75-80% equity.

3.4 WACC

On the basis of the parameters outlined above and assuming a corporate tax rate of 30%, nominal WACC for the Narrabri Gas Project has calculated as follows:

9 All of the companies have 30 June year ends except for Woodside Petroleum, Santos and Oil Search which have 31 December year ends. For these companies the 30 June data is based on their half year reports. 10 Current gearing levels are based on the most recent balance sheet information and on sharemarket prices as at 16 September 2011,

except Eastern Star which is based on its share price as at 15 July 2011 (being the day prior to transaction announcement) and Bow Energy which is based on its share price on 19 August 2011 (being the day prior to receipt of a conditional proposal from Arrow Energy Holdings Pty Ltd).

11 Average gearing levels is the average of the gearing levels for the last four financial years.

	WACC Calculations
	Low	High
Formula	= (Re x E/V) + (Rd x (1-t) x D/V)	= (Re x E/V) + (Rd x (1-t) x D/V)
	= (11.1% x 75%) + (9% x 0.7 x 25%)= 10.4%	= (12.2% x 80%) + (9% x 0.7 x 20%)= 11.1%

This is an after tax discount rate to be applied to nominal ungeared after tax cash flows. However, it must be recognised that this is a very crude calculation based on statistics of limited reliability and involving a multitude of assumptions.

Having regard to these matters, the calculations and data set out above and the uncertainty of the impact on asset values of the market upheaval of August, a discount rate range of 10.5-11.5% has been selected for application in the discounted cash flow analysis.

4 Dividend Imputation

The conventional WACC formula set out above was formulated under a "classical" tax system. The CAPM model is constructed to derive returns to investors after corporate taxes but before personal taxes. Under a classical tax system, interest expense is deductible to a company but dividends are not. Investors are also taxed on dividends received. Accordingly, there is a benefit to equity investors from increased gearing.

Under Australia's dividend imputation system, domestic equity investors now receive a taxation credit (franking credit) for any tax paid by a company. The franking credit attaches to any dividends paid out by a company and the franking credit offsets personal tax. To the extent the investor can utilise the franking credit to offset personal tax, then the corporate tax is not a real impost. It is best considered as a withholding tax for personal taxes. It can therefore be argued that the benefit of dividend imputation should be added into any analysis of value.

There is no generally accepted method of allowing for dividend imputation. In fact, there is considerable debate within the academic community as to the appropriate adjustment or even whether any adjustment is required at all. Some suggest that it is appropriate to discount pre tax cash flows, with an increase in the discount rate to "gross up" the market risk premium for the benefit of franking credits that are on average received by shareholders. On this basis, the discount rate might increase by approximately 2% but it would be applied to pre tax cash flows. However, not all of the necessary conditions for this approach exist in practice:

• not all shareholders can use franking credits. In particular, foreign investors gain no benefit from franking credits. If foreign investors are the marginal price setters in the Australian market there should be no adjustment for dividend imputation.
• not all franking credits are distributed to shareholders; and
• capital gains tax operates on a different basis to income tax. Investors with high marginal personal tax rates will prefer cash to be retained and returns to be generated by way of a capital gain.

Others have proposed a different approach involving an adjustment to the tax rate in the discount rate by a factor reflecting the effective use or value of franking credits. If the credits can be used, the tax rate is reduced towards zero. The proponents of this approach have in the past suggested a factor of up to 50% as representing the appropriate adjustment (gamma). Alternatively, the tax charge in the forecast cash flows can be decreased to incorporate the expected value of franking credits distributed.

There is undoubtedly merit in the proposition that dividend imputation affects value. Over time dividend imputation will become factored into the determination of discount rates by corporations and investors. In Grant Samuel's view, however, the evidence gathered to date as to the value the market attributes to franking credits is insufficient to rely on for valuation purposes. More importantly, Grant Samuel does not believe that such adjustments are widely used by acquirers of assets at present. While acquirers are undoubtedly attracted by franking credits there is no clear evidence that they will actually pay extra for them or build it into values based on long term cash flows. The studies that measure the value attributed to franking credits are based on the immediate value of franking credits distributed and do not address the risk and other issues associated with the ability to utilise them over the longer term. Accordingly, it is Grant Samuel's opinion that it is not appropriate to make any adjustment.

Appendix 4

DCF Model Assumptions

1 General Assumptions

The following general assumptions have been made in the DCF model developed to value the Narrabri Gas Project:

• a discount rate of 10.5%-11.5% applied to nominal ungeared after tax cash flows;
• inflation rate of 3% per annum;
• corporate tax rate of 30%;
• New South Wales petroleum royalties increasing from 6% to 10% of well head value between 2016 to 2020 and no allowance for the proposed Petroleum Resource Rent Tax;
• a cost of carbon is introduced from 1 July 2012 in accordance with the Commonwealth Government's announcement on 10 July 2011;
• overriding royalties due to third parties of 0.855% of revenue;
• no significant changes in legislation or in the policies or procedures of regulatory bodies;
• no impact of movements in foreign exchange rates in forecast period; and
• no material changes to working capital from year to year throughout the forecast period.

2 Wholesale Gas Prices

east coast gas prices (ex well head) used in the cash flow model:

East Coast Wholesale Domestic Gas Price (ex well head) ($ per GJ, real $2011)
Gas	Year end 31 December
Price Path	2011-2013	2014-2015	2016 onwards
1	$4.50	$4.50	$4.50
2	$4.50	$4.50	$5.00
3	$4.50	$5.50	$6.00
4	$4.50	$5.50	$7.00

Source: Grant Samuel analysis (refer Section 6.3 of the report)

gas prices reflect the introduction of a cost on carbon.

3 Production Assumptions

• gas production commences in calendar year 2013 with ramp up to full production between 2014 and 2017 subject to wholesale gas prices;
• wells drilled between 2013 and 2034 and producing gas across the lesser of well economic life (25 years) or Narrabri Gas Project conclusion
• gas production over the economic life and depending on the demand scenario of the Narrabri Gas Project used in the cash flow model include:

Gas Production
Gas Demand Case / Gas Price Path	Sales Gas Produced (PJ)
A/1	1,422
B/2	2,268
C/3	3,365
D/3	5,811
E/4	7,659

• all sales gas production at assumed gas price paths is sold into the east coast market; and
• sales gas is net of fuel and shrinkage assumed at 8% across all MHA field development/production profiles.

4 Capital Expenditure

• exploration and evaluation expenditure prior to the commencement of production at a real cost of $160 million;
• surface to in-seam well drilling and completion costs at a real fixed cost of $3.4 million per well;
• flowline, electrical and trunkline costs associated with well drilling at a real fixed cost approximately $0.2 million per well (excluding the contingency allowance);
• contingency allowance of 10% applied to flowline, electrical and trunkline costs;
• pipeline, fittings, electrical and metering costs incurred between 2013 and 2014 as part of ramp up ranging between $50 million and $773 million, subject to the wholesale gas price paths and the required gas production profile;
• prorated, water treatment and other capital costs incurred between 2012 and 2014 as part of ramp up
• ranging between $150 million and $2.3 billion, subject to the wholesale gas price paths and the required gas production profile;
• well abandonment costs of $0.2 million per well incurred at the earlier of well economic life or Narrabri Gas Project conclusion; and
• capitalised production assets useful life for tax purposes of 15 years.

5 Operating Expenditure

• field operations expenditure at 3.5% of well drilling and completion capital expenditure, adjusted for the quantity of wells in operation;
• well workover and maintenance expenditure at a real cost of $200,000 for the first year of well operation, $82,000 for years two to five of well operation and $21,000 for every year of operation thereafter;
• rotating machinery and CO2 treatment maintenance forecast at 6% of associated capital expenditure incurred to date, adjusted for annual production as percentage of peak production;
• pipeline and other facilities maintenance at 2% of capital expenditure incurred to date, adjusted for annual production as percentage of peak production; and
• administration and management expenditure of $3.0 million per annum.

Appendix 5

Market Evidence – Coal Seam Gas Transactions

Coal seam gas ("CSG") transactions in Australia since 2003 for which there is sufficient information to prepare meaningful market parameters are summarised below:

		Recent Transaction Evidence – Coal Seam Gas
Date	Target	Transaction	GrossConsid	Yearsin		Certified Reserves2(PJ)			Reserves Multiple3(A$/GJ)
			eration1($millions)	Production	2P	3P	3P+2C	2P	3P	3P+2C
Aug 11pending	Bow EnergyLimited	Proposal to acquire100% by Arrow	433	-	238	2,752	5,273	1.82	0.16	0.08
Jul 11pending	Narrabri Gas Project	Acquisition of 20% byTRUenergy	284	-	1,520	2,797	6,312	0.92	0.50	0.22
Apr 11	Australia PacificLNG	Acquisition of 15% byChina PetrochemicalCorporation	1,3954	13		11,262 14,602	18,931	0.83	0.64	0.49
Dec 10	Gladstone LNG	Acquisition of 15% byKOGAS and TOTAL	665	12	751	1,161	1,720	0.89	0.57	0.39
Sep 10	Apollo Gas Limited5	Acquisition by DartEnergy Limited	173	-	-	-	542	-	-	0.32
Sep 10	Gladstone LNG	Acquisition of 15% byTOTAL	650	12	7516	1,1616	1,7206	0.87	0.56	0.38
Mar 10	Arrow EnergyLimited	Acquisition by RoyalDutch Shell plc andPetroChina Company	3,2277	4	3,690	5,781	na	0.87	0.56	na
Mar 10	Dawson SeamgasCSG Fields	Acquisition of 51% byWestside Corporation	27	na8,9	95	171	na	0.28	0.16	na
Dec 09	ATP651	Acquisition of 15% byToyota Tsusho	99	-	41	126	na	2.40	0.78	na
Jul 09	Eastern Gas StarLimited	Acquisition of 19.99%by Santos Limited	162	-	44	169	565	3.72	0.96	0.29
Jul 09	Narrabri Gas Project	Acquisition of 35% bySantos Limited	300-32010	-	118	455	1,524	2.55-2.72	0.66-0.70	0.20-0.21
Apr 09	ATP788P	Acquisition by OriginEnergy Limited	660	-	na	1,150	1,650	na	0.57	0.40
Apr 09	Tipton West JointVenture	Acquisition of 40% byArrow Energy Limited	330-40010	2	467	1,115	na	0.71-0.86	0.30-0.40	na
Feb 09	Pure EnergyResources Limited	Takeover by BGGroup plc	1,013	-	522	2,510	8,159	1.94	0.40	0.12
Dec 08	Sydney Gas Limited	Takeover by AGLEnergy Limited	189	7	6511	na	na	2.93	na	na
Dec 08	Gloucester Project	Acquisition by AGLEnergy Limited	370	-	400-500	700-800	na	0.74-0.93	0.46-0.53	na

1

Proportional interest in certified reserves at date of announcement unless otherwise indicated. 3

Gross consideration for interest acquired unless otherwise indicated. 2

Gross consideration divided by proportional interest in 2P and 3P certified reserves at date of announcement. 4

Based on AUD/USD exchange rate of 1.075 prevailing in April 2011 at the time of signing of binding agreements. 5 Apollo Gas holds interests in seven petroleum exploration licences and two exploration licences targeting geothermal energy in the

Sydney-Gunnedah Basin. It does not yet have certified 2P or 3P reserves. 6 Based on Gladstone LNG internal estimates for 31 December 2010 which reflect a substantial (>30%) increase over actual reserves and

resources at 31 December 2009. TOTAL is likely to have been aware of the magnitude of the increase at the time the deal was announced. 7

Gross consideration is net of an estimated value of $500 million for Arrow's interests in generation and pipeline assets. 8

na = not available

9 There are 73 wells in production in the Dawson Seamgas CSG Fields and contracts until 2015 for 32% of 2P reserves. However, details of the length of time in production are not available. 10 Consideration range is base payment to base payment plus conditional payments (without discounting). 11 Based on 2P reserves reported by AGL Energy as at 30 June 2009.

		Recent Transaction Evidence – Coal Seam Gas
Date	Target	Transaction	GrossConsid	Yearsin		Certified Reserves2(PJ)			Reserves Multiple3(A$/GJ)
			eration1($millions)	Production	2P	3P	3P+2C	2P	3P	3P+2C
Oct 08	Queensland GasCompany Limited	Takeover by BGGroup plc	5,046	2	2,732	6,780	na	1.85	0.74	na
Sep 08	Australia PacificLNG (Origin EnergyCSG assets)	Acquisition of 50% byConocoPhillips	7,088-9,58412	10		2,376 5,069	13,004	2.98-4.03	1.40-1.89	0.55-0.74
Aug 08	Sunshine GasLimited13	Takeover byQueensland GasCompany Limited	754-81212	-	469	1,097	na	1.61-1.73	0.69-0.74	na
Jun 08	Roma PetroleumNL14	Takeover byQueensland GasCompany Limited	48	-	na	na	na	na	na	na
Jun 08	Arrow EnergyLimited (AustralianCSG assets)	Acquisition of 30%interest by RoyalDutch Shell plc	435-64415	4	42916	93816	na	1.01-1.50	0.46-0.69	na
May 08	Gladstone LNGProject (Santos CSGinterests)	Acquisition of 40%interest by PetroliamNasional Berhad	2,11417	10	538	1,600	2,969	3.93	1.32	0.46
Feb 08	Queensland GasCompany Limited(Walloons CSGinterests)	Acquisition of 20%interest by BG Group18	415	2	263	623	1,451	1.58	0.67	0.29
Feb 07	Arrow Energy NL(Australian CSGassets)	Farm-in for 50% byEnergy InfrastructureGroup AB	225	-	na	na	na	na	na	na
Dec 06	Queensland GasCompany Limited	Acquisition of 27.5%by AGL Energy	332	1	25619	75819	na	1.30	0.44	na
Jul 06	Arrow Energy NL	Acquisition of 19.9%by New Hope	41	2	99	553	na	0.42	0.07	na
Jun 06	Moranbah GasProject	50% acquisition byThe Australian GasLight Company	93	2	191	na	na	0.49	na	na
May 06	CH4 Gas Limited	Takeover by ArrowEnergy NL	145	2	191	770	na	0.76	0.19	na
Feb 06	Argyle and LaurenCSG Project	Acquisition of 40.6%by Origin Energy	70	-	117	26020	na	0.60	0.27	na
Sep 05	ATP683P andPL198 interests ofTipton West CSGProject	Farm-in for 40% byBeach PetroleumLimited	35	-	50	811	na	0.71	0.04	na

12 Consideration range is base payment to base payment plus conditional payments (without discounting) and the AUD/USD exchange rate of 0.83 prevailing at the time of announcement. 13 Multiples shown are calculated by dividing the enterprise value (based on net cash of $81 million) by the scrip plus cash and scrip

only consideration respectively based on the pre-announcement price for QGC. 14 Roma did not have certified reserves at time of takeover announcement. 15 Consideration range is base payment to base payment plus conditional payments (without discounting) and the AUD/USD exchange

rate of 0.95 prevailing at the time of announcement. 16 Based on a significant upgrade in reserves announced by Arrow Energy in July 2008 as Shell had access to updated well and reserve

data prior to announcement of the transaction. 17 Consideration based on base payment only (as in September 2010 it was agreed that Petronas was not required to make the proposed

conditional payment) and the AUD/USD exchange rate of 0.95 prevailing at the time of announcement. 18 This acquisition was part of a broader alliance/joint venture transaction. The multiple shown is calculated based on the acquisition of

the 20% interest in the QGC CSG interests only. 19 Reserves data as at 2 March 2007. No increase to 3P reserves was announced on 2 March 2007. 20 Represents 3P reserves for ATP 620P only.

		Recent Transaction Evidence – Coal Seam Gas
Date	Target	Transaction	GrossConsid	Yearsin		Certified Reserves2(PJ)			Reserves Multiple3(A$/GJ)
			eration1($millions)	Production	2P	3P	3P+2C	2P	3P	3P+2C
Sep 05	Origin EnergyLimited (MouraCSG field)	Acquisition by AngloCoal and Mitsui	22	4	52	na	na	0.43	na	na
Sep 05	Sydney Gas JointVenture	Acquisition of 50% byThe Australian GasLight Company	85	4	8321	109	na	1.02	0.78	na
Jul 05	TipperaryCorporation(Fairview CSGfield)	Acquisition by SantosLimited	61222	7	83023	na	na	0.74	na	na
Jul 03	Oil Company ofAustralia Limited	Acquisition of 11.93%by Origin Energy	65	1	47124	2,54824	na	0.6925	0.1325	na

Source: Grant Samuel analysis26

The most common valuation metrics for CSG businesses are multiples of certified 2P and 3P reserves. These multiples are a relatively imprecise valuation metric as the assets acquired and the transactions themselves may differ in material respects. The following limitations should be noted in relation to the reserves multiples in the context of the valuation of CSG assets:

• the multiples are calculated on publically available information based on reserves data released by the company on or around the transaction date. The requirements for reserve certification are stringent. However, the price paid for CSG assets is not necessarily reflective only of the value of the existing (stated) 2P reserves as would be the case in a conventional gas asset. The buyer will have taken a view that some of the contingent resource will be converted to proven reserves over time and, in some cases, the buyer's view may have been formed through a non public due diligence process. The calculated multiple therefore may not recognise that the buyer will have put some value on any potential upside in 3P reserves and/or additional exploration acreage (e.g. contingent resource). The resource potential of these assets is changing so rapidly (through exploration and drilling) such that on the basis of publicly available information it may be difficult to assess what the buyer is assuming for the ultimate resource. Even where the reserves and resources have been recently updated by technical experts prior to the acquisition, an asset owner or potential buyer will not necessarily accept or factor in all that reported resource into its price, for example, if it had a different view on future gas market prices and therefore what resource may become economic at higher prices;
• this imprecision may be accentuated as certain transactions are based on more than just an interest in reserves acquired and the consideration price may be structured to include payments for the assets which are contingent on future events (e.g. upgrades in reserves and resources). To the extent that the asset acquisition is part of a wider transaction (e.g. a strategic alliance or proposal to develop a LNG plant) not all of the price paid may be directly attributed to the CSG reserves and resources acquired; and
• using the reserves multiple for valuation of an asset assumes the tenements to be acquired and those subject of the comparable transactions are similar, for example, at the same stage of development, have the same prospectivity for increases in reserves, and have a similar amount of contracted/uncontracted gas available. This is usually not the case.

21 Reserves as announced as at 31 December 2005.

22 Enterprise value for Tipperary Corporation.

23 Reserves shown based on Tipperary stated 2P reserves of 787BCF (830PJ) as at 31 December 2004 (for its 75% interest) 830PJ. Joint

venture party on the Fairview field Origin Energy's reserves as at June 2004 of 1,009PJ (956BCF). 24 Reserves for coal seam gas only. Oil Company of Australia also had 127PJ of 2P and 277PJ of 3P conventional gas reserves. 25 Calculated using Origin Energy offer of $4.25 per share less the average values determined by the independent expert for non CSG

assets. 26 Grant Samuel analysis based on data obtained from IRESS, Capital IQ, company announcements and transaction documentation.

Valuation parameters in the CSG sector changed rapidly from mid 2006. Prior to 2006, 2P reserve multiples were generally less than $0.70 per GJ (with multiples of 3P reserves less than $0.20 per GJ) with transactions primarily involving partial interests in relatively undeveloped assets. By early 2006 it was clear that with growing acceptance of CSG as a fuel source there was increasing pressure to secure gas supply and this would lead to consolidation of the fragmented CSG market. At this time, a key strategic imperative for gas and electricity retailers was to improve their internally owned upstream hedges. In addition, a growing expectation by the market that the Australia-PNG gas pipeline project was only marginally economic and would not proceed (as confirmed by AGL Energy Limited ("AGL Energy") in August 2006) resulted in a market of tightening gas supply given the declining Cooper Basin reserves. Competing proposals for a cornerstone shareholding in Queensland Gas Company Limited ("QGC") by Santos Limited ("Santos") and AGL Energy and The Trust Company of the West between October 2006 and March 2007 resulted in 2P reserve multiples increasing to around $1.00 per GJ (with 3P reserves above $0.50 per GJ).

By mid 2007 both Santos and LNG Limited (with Arrow Energy Limited ("Arrow") as supplier) had announced proposed LNG export projects based on CSG supply from Queensland (later followed by announcements by Sunshine Gas Limited ("Sunshine"), QGC and Impel Limited for additional projects). These proposals accelerated the need to prove up and secure additional reserves. The initial proposal by BG Group plc ("BG Group") for Origin Energy Limited ("Origin Energy") in April 2008 indicated confidence for the technical feasibility of conversion of CSG into LNG, the attractiveness of the LNG export market in the context of a high oil price, a rapidly approaching carbon trading environment and buyer willingness to pay for reserve prospectivity. The BG Group announcement was followed by several landmark transactions further raising confidence in the LNG concept with international groups such as ConocoPhillips, Petroleum Nasional Berhad ("Petronas") and Royal Dutch Shell plc ("Shell") paying 2P reserve multiples closer to $2.00 per GJ (with 3P reserve multiples approaching $1.50 per GJ), and sometimes higher, to participate in these projects. These transactions resulted in the majority of CSG resources coming under the control of the proponents of four major LNG proposals.

Since 2008, the international LNG market has softened as a result of the commissioning of new production capacity (particularly in Qatar) and easing LNG demand as a consequence of the global economic downturn (although demand for LNG is expected to continue to be strong in Asia). The transactions that have occurred since 2008 reflect both the changed market conditions, further consolidation of major CSG resources (e.g. Shell's acquisition of Arrow, BG Group's acquisition of Pure Energy Resources Limited ("Pure Energy")), strategic positioning by the major LNG proponents (e.g. Santos' investment in Eastern Star Gas Limited ("Eastern Star") and the Narrabri Gas Project) and the need to progress the LNG projects (e.g. TOTAL's acquisition of 20% of the Gladstone LNG Project and Sinopec's acquisition of 15% of the Australia Pacific LNG Project). The reserve multiples implied by these transactions are lower than during the 2007-2008 period with multiples of 3P reserves for control of relatively well developed resources generally in the range of $0.40-0.80 per GJ. This evidence is arguably more indicative of the value of gas resources than that of the 2007-2008 period.

The trend in valuation parameters in the CSG sector can be observed in the following graph. In this graph, the transactions which were priced in United States dollars (i.e. Origin Energy/ConocoPhillips, Santos/Petronas and Arrow/Shell (2008) and APLNG/Sinopec (2011)) are shown at the USD/AUD exchange rate prevailing at the time of announcement:

Notes: (1) Transactions in date order from left (2) Multiple ranges based on payment and undiscounted conditional payments (3) Excluding transactions where 3P reserve data is not available

A brief summary of each transaction is set out below.

Bow Energy Limited / Arrow Energy Holdings Pty Limited

On 22 August 2011 Bow Energy Limited ("Bow") announced that it has received an indicative, non-binding and conditional proposal from Arrow Energy Holdings Pty Limited ("Arrow Energy"), a CSG exploration and development company which is developing the Arrow LNG Project at Gladstone, Queensland. Arrow Energy is jointly owned by PetroChina Company Limited ("PetroChina") and Shell. Under the proposal Arrow Energy would acquire all of the issued capital in Bow for cash consideration of $1.48 per share. The reserve multiples implied by the conditional proposal are relatively low. Although this approach may not result in a definitive transaction it has been included as an indication of value in the uncertain market conditions of August 2011.

Narrabri Gas Project / TRUenergy Holdings Pty Limited

On 18 July 2011 Eastern Star entered into a scheme implementation deed under which Santos would acquire all of the issued ordinary shares of Eastern Star other than the shares other than those held by TRUenergy Holdings Pty Limited ("TRUenergy") on the basis of 0.6803 Santos shares for every 10 Eastern Star shares, implying a value of 90 cents per Eastern Star share. Concurrently Santos announced an arrangement with TRUenergy by which (subject to implementation of the Eastern Star scheme and necessary regulatory approvals):

• on the implementation of the Scheme, Santos would acquire TRUenergy's 3.76% interest in Eastern Star for a cash price of 90 cents per share; and
• TRUenergy would acquire 30.77% interest in all of Eastern Star's assets and liabilities for $284.3 million cash (based on 90 cents per share). This transaction means that TRUenergy will acquire a 20% interest in the Narrabri Gas Project, Wilga Park Power Station, PEL433 and PEL434 and a 30.77% interest in the remaining assets and liabilities.

If no value is attributed to the other assets and liabilities of Eastern Star, the TRUenergy acquisition implies a value for Narrabri Gas Project of $1,421 million, which implies $0.50/GJ of 3 reserves. This transaction is subject to completion of Santos' acquisition of 100% of Eastern Star.

Australia Pacific LNG Project / China Petrochemical Corporation

On 25 February 2011, Australia Pacific LNG Pty Limited ("Australia Pacific LNG") announced that it had signed a heads of agreement with China Petrochemical Corporation ("Sinopec") establishing non-binding key commercial terms for the supply of up to 4.3 million tonnes per annum of LNG for 20 years and for Sinopec to subscribe for a 15% interest in Australian Pacific LNG, thereby reducing both Origin Energy's and ConocoPhillips' interest to 42.5%. These agreements became binding (subject to approval of the Chinese Government and the Australian Foreign Investment Review Board and conditional on Australia Pacific LNG reaching a final investment decision) on 21 April 2011 and it was announced that Sinopec had paid US$1.5 billion for the 15% interest. The reserve multiples are based on Australia Pacific LNG's internal estimates at December 2010. Final investment decision was reached on 28 July 2011.

Gladstone LNG Project / Korea Gas Corporation and TOTAL S.A.

On 17 December 2010, Santos announced binding agreements with Korea Gas Corporation ("KOGAS") and TOTAL S.A. ("TOTAL") which provide for the sale of 3.5 Mtpa of LNG to KOGAS and the sale by Santos of a 7.5% interest in Gladstone LNG Project to TOTAL and a 7.5% interest to KOGAS for a total of $665 million. In parallel, Petronas sold a 7.5% interest to KOGAS. Upon completion of the sales the ownership structure of Gladstone LNG Project will be Santos 30%, Petronas 27.5%, TOTAL 27.5% and KOGAS 15%. The reserve multiples calculated are based on Gladstone LNG Project's internal estimate of reserves at December 2010 (excluding 750 PJ of Gladstone LNG Project dedicated Santos portfolio gas).

Apollo Gas Limited / Dart Energy Limited

On 28 September 2010 Dart Energy Limited ("Dart") announced a recommended takeover offer for the 79% of Apollo Gas Limited ("Apollo Gas") that it did not already hold. Apollo Gas is a coal seam gas exploration and development company with interests in the Sydney and Gunnedah Basins in New South Wales. No reserves have yet been identified for Apollo Gas' interests although contingent resources have been certified in one of its interests. The consideration under the offer is 3 Dart shares for every 4 Apollo Gas shares held. Apollo Gas' directors and major shareholders who together hold 54% have indicated an intention to accept the offer in the absence of a superior proposal within 14 days of the opening of the offer period.

Gladstone LNG Project / TOTAL S.A.

On 9 September 2010 Santos announced the sale of a 15% interest in the Gladstone LNG Project to TOTAL for $650 million and that, in parallel, Petronas had sold a 5% interest to TOTAL such that the ownership structure of the project would be Santos 45%, Petronas 35% and TOTAL 20%. At the same time it was announced that Petronas and TOTAL had signed binding heads of agreement for the sale of 1.5 Mtpa of LNG for a period of 20 years commencing in 2014, that Petronas would no longer make additional payments to Santos upon reaching final investment decisions for expansion trains and that Santos would contribute additional CSG acreage to the Gladstone LNG Project for no additional consideration. The reserve multiples calculated are based on Gladstone LNG Project's internal estimate of reserves at December 2010 (excluding 750 PJ of Gladstone LNG Project dedicated Santos portfolio gas) which indicated a substantial increase (>30%). TOTAL is likely to have been aware of the magnitude of reserve and resource upgrade at the time the deal was announced as it was involved in the negotiations between Santos and KOGAS (see above).

Separately, TOTAL announced that it had acquired a 20% interest in the project for US$750 million (as of 1 June 2010) implying consideration of $900 million at a spot rate of US$1.00=A$0.83. On this basis, the reserve multiples are marginally higher than set out above at $0.90 per 2P reserves and $0.58 per 3P reserves.

Arrow Energy Limited / Royal Dutch Shell plc and PetroChina Company Limited

On 8 March 2010 Arrow announced that it had received a conditional proposal from Shell and PetroChina under which Arrow shareholders would receive cash of $4.45 per share and a share in a new entity comprising Arrow's international business. On 22 March 2010, Arrow confirmed a revised offer from Shell/PetroChina whereby Arrow's international business and certain Australian assets would be demerged as Dart and then Shell/PetroChina would acquire all of the issued capital of Arrow (including its upstream Queensland CSG tenements, midstream pipeline assets and processing facilities and downstream electricity generation assets) for $4.70 per share. Arrow has certified reserves of 3,690PJ of 2P and 5,781PJ of 3P in its tenements located in the Surat and Bowen basins. At the time of the transaction Shell held a 30% interest in Arrow's CSG assets. The multiples are calculated after allowing $500 million for Arrow's interests in generation and pipeline assets.

Dawson Seamgas CSG Fields / WestSide Corporation Limited

On 4 March 2010 WestSide Corporation Limited ("WestSide") announced a joint venture arrangement with Mitsui E&P Australia Pty Ltd ("MEPAU") to acquire the Dawson Seamgas coal seam gas assets ("Dawson gas fields") located in Queensland's Bowen Basin from Anglo American ("Anglo") and Mitsui Moura Investment Pty Ltd ("MMI"). MEPAU and MMI are both subsidiaries of Mitsui & Co. Ltd ("Mitsui"). Under the arrangement WestSide agreed to pay $26.8 million for a 51% interest and the operation rights of the Dawson gas fields. The transaction was subject to a number of conditions and included an option for MEPAU to sell back its interests to WestSide within 24 months in addition to an option for MEPAU to acquire 49% of WestSide's existing interests in the neighbouring Paranui prospect (ATP 769P) and its new Galilee Basin tenements (ATP 974P and ATP 978P). The Dawson gas fields had certified reserves of 186PJ (2P) and 334PJ (3P) at the time of transaction.

WestSide is a coal seam gas exploration, appraisal and producing company with interests in coal seam gas projects in Queensland and Indonesia. WestSide is currently completely an exploratory and appraisal program at ATP 769 (Paranui) and ATP 688P (Tilbrook, Mount Saint Martin and Bald Hill) where it holds a 50% interest. WestSide also has two pending tenements in the Galilee basin which it intends to explore. With Mitsui being a major player in the LNG market and participating in development of nine LNG projects, the joint venture provides upside for WestSide to access the LNG export market upon commercialisation.

On 4 March 2010, following the announcement of WestSide's acquisition of a 51% in the Dawson gas fields, Molopo Energy Limited ("Molopo") announced that it would exercise 100% and 50% of its pre-emptive rights to acquire additional interests in ATP564P and ATP602P, respectively. The quantum of Molopo's additional interests in the tenements was dependent on whether MMI also elected to exercise its pre-emptive rights. On 5 March 2010, subsequent to MMI announcing that it would exercise its pre-emptive rights, Molopo confirmed it would increase its interests in ATP564P from 50% to 67.1% and its interest in ATP602P from 50% to 62.9%. Consideration paid by Molopo for the additional interests totalled $7 million. Molopo's increased certified reserves attributable to the acquired interests totalled 49PJ of 2P and 145PJ of 3P.

ATP651 / Toyota Tsusho Corporation

On 17 December AJ Lucas Group Limited ("AJ Lucas") announced it had entered an agreement to sell a 15% interest in AT651 to Toyota Tsusho Corporation ("TTC") for $98.5 million. ATP651 reserves totalled 41PJ of 2P and 126PJ of 3P. ATP651 is operated by Queensland Gas Company, a subsidiary of BG Group plc, and is located in the Surat Basin in Queensland. TTC is a diversified Japanese industrial company. The acquisition of ATP651 is an addition to TTC's existing portfolio of exploration permits in offshore Western Australia. TTC intends to expand its involvement in upstream gas projects in Australia so as to ultimately establish an upstreamto-downstream gas supply chain.

Eastern Star Gas Limited / Santos Limited

On 2 July 2009 Santos announced the acquisition of a 19.99% interest in Eastern Star from Hillgrove Resources Limited for $176 million, equating to a price of $1.00 per share, a premium of around 25% to the prevailing share price. As part of negotiations Santos agreed to make a contingent payment should Santos or any third party acquire a beneficial interest in excess of 50% in Eastern Star at a price greater than $1.00 within the next 18 months or Santos completes a takeover at a price greater than $1.00 within the next six months. This payment was not required to be made. The reserve multiples presented are based on Eastern Star's share of certified gas reserves for PEL238 at 31 December 2008 (218PJ of 2P, 845PJ of 3P and 2,829PJ of 3P+2C). Based on the significant increase in certified gas reserves at 31 December 2009, the transaction implies multiples of certified gas reserves as follows: $0.82/GJ of 2P reserves, $0.45/GJ of 3P reserves and $0.20/GJ of 3P+2C reserves.

Narrabri Gas Project / Santos Limited

On 2 July 2009 Santos also announced the acquisition of Gastar Exploration Limited's 35% interest in various Gunnedah Basin exploration permits and production areas operated by Eastern Star plus a 35% interest in Wilga Park Power Station (which has approved generating capacity of 40MW) for $300 million plus a further $20 million payment for meeting reserve certification targets by 31 December 2009. The permit interests acquired included PEL238, otherwise referred to as the Narrabri Gas Project, PEL433 and PEL434. PEL238 covers 2.25 million acres of the Gunnedah Basin. The reserve multiples presented are based on certified gas reserves at 31 December 2008 (100% basis: 336PJ of 2P, 1,300PJ of 3P and 4,353PJ of 3P+2C). Based on the significant

increase in certified gas reserves at 31 December 2009, the transaction implies multiples of certified gas reserves as follows: $0.56-0.60/GJ of 2P reserves, $0.31-0.33/GJ of 3P reserves and $0.13-0.14/GJ of 3P+2C reserves.

ATP 788P / Origin Energy Limited

On 22 April 2009 Origin Energy announced the acquisition of ATP788 (acreage within the Undulla Nose coal seam gas province in Queensland) for $660 million from the Pangaea group of companies. Australia Pacific LNG ("APLNG"), Origin Energy's joint venture with ConocoPhillips, held an option to acquire the interest however did not exercise it. Origin Energy anticipated to book proved, probable and possible (3P) CSG reserves of approximately 1,150PJ in relation to ATP 788P. Origin Energy is an Australasian integrated energy company. In September 2008 it executed a joint venture agreement with ConocoPhillips to commercialise its CSG assets and develop a liquefaction facility to gain exposure to the superior pricing of LNG relative to domestic gas.

Tipton West Joint Venture / Arrow Energy Limited

On 3 April 2009 Arrow announced an agreement to acquire Beach Petroleum Limited's ("Beach") 40% interest in the Tipton West Joint Venture coal seam gas project ("Tipton West JV") and surrounding exploration acreage for an upfront cash payment of $260 million and $70 million of Arrow shares. The transaction included a number of contingent payments, including an amount required to be paid for booking of additional gross 3P reserves at a rate of $0.06/GJ up to a total value of $40 million. Additional payments of up to $30 million may also be required should Arrow supply gas sourced from Tipton West JV to any LNG project prior to January 2017.

Shell held an option to acquire 30% of the interests acquired by Arrow (i.e. a 12% interest in Tipton West JV) and did so in August 2009 paying Arrow $49.5 million and agreeing to reimburse Arrow of any future contingent payments (up to $21 million) required to be paid to Beach under terms of the initial sale agreement.

Pure Energy Resources Limited / BG Group plc

On 27 February 2009 BG Group announced an increase in its cash takeover offer for Pure Energy from $8.00 to $8.25 per share. This offer drew to a close a succession of counter bids by Arrow and BG Group which resulted in the price offered escalating from $5.40 per share (the initial cash and scrip bid from Arrow in December 2008) to $8.25 per share. Pure Energy is a coal seam gas exploration and appraisal company with an exploratory portfolio comprising of two major acreages in Queensland and Eastern Tasmania. Drilling and testing programs completed in late 2008 indicated Pure Energy had certified 2P reserves of 522PJ and 3P reserves of 2,510PJ.

Sydney Gas Limited / AGL Energy Limited

On 24 December 2008 Sydney Gas Limited ("Sydney Gas") announced AGL Energy proposal to acquire the outstanding share capital of Sydney Gas for $0.425 cash per share. The takeover bid was timely for Sydney Gas which was in a restricted financial position with significant capital expenditure and financing commitments over the ensuing three years. Sydney Gas is an Australian gas exploration company engaged in the development of CSG resources in New South Wales via a 50/50 joint venture with AGL Energy. At the time of the transaction its most recent reserve certification was three years old (December 2005 Sydney Gas' share of reported reserves totalled 29.5PJ of 1P reserves, 41.4PJ of 2P reserves and 54.4PJ of 3P reserves). AGL Energy subsequently reported 2P reserves of 129PJ at 30 June 2009 (of which Sydney Gas' share would have been 64.5PJ).

Gloucester Project / AGL Energy Limited

On 17 December 2008 AJ Lucas and Molopo announced the sale of their respective 30% and 70% joint venture interests in PEL285 ("Gloucester Project") to AGL Energy for $370 million cash. In February 2008 PEL285 had 175PJ of 2P reserves, representing approximately 26% of New South Wales certified reserves at the time. AGL anticipated the reserves of PEL285 would be upgraded to between 400-500PJ (2P) and 700-800 (3P) within the first half of calendar year 2009 (it subsequently reported 2P reserves at 30 June 2009 of 423PJ. The transaction provided AGL Energy with reserves within close proximity to its core New South Wales gas market.

Queensland Gas Company Limited / BG Group plc

On 28 October 2008 BG Group and QGC announced a transaction whereby BG Group would acquire all of the issued capital in QGC in an on-market takeover at $5.75 per share. QGC is a CSG exploration, development, and production company with approximately 7,103PJ of certified 3P reserves (excluding Sunshine's 1,097PJ of 3P reserves) of which BG Group already held a 20% interest (as a result of its transaction with QGC in February

2008). QGC had been positioning itself for increased demand for CSG having previously announced the acquisitions of both Roma Petroleum NL ("Roma") (June 2008) and Sunshine (August 2008). BG Group expanded into the Australian coal seam gas industry in February 2008 by way of its investment in, and alliance with QGC in relation to the Queensland Curtis Island LNG Project. This takeover of QGC followed its unsuccessful attempt to acquire Origin Energy in the period April- September 2008.

Australia Pacific LNG (Origin Energy CSG assets) / ConocoPhillips

On 8 September 2008 Origin Energy announced it had entered conditional agreements with ConocoPhillips, an international integrated energy company, to invest in a 50/50 joint venture (APLNG) which would own Origin Energy's coal seam gas assets in Queensland and develop a four train liquefaction facility at Gladstone to commercialise the reserves. The transaction was the culmination of a competitive process that followed after an initial proposal from BG Group in April 2008. Consideration for ConocoPhillips' investment in the joint venture included an upfront amount of US$5.0 billion, a fixed contribution of A$1.15 billion to carry Origin Energy's share of development costs up to financial investment decision ("FID") and additional contingent sums of US$500 million at the point of approval for each of the four LNG trains27. At the time of the transaction Origin Energy's certified CSG reserves and resources were the most significant in Australia. The reserve multiples implied by the transaction are high reflecting the status of the resource delineation. On the basis of 3P reserves and 2C resources the multiples implied by the transaction were $0.54-0.74 per GJ.

Sunshine Gas Limited / Queensland Gas Company Limited

On 20 August 2008 QGC and Sunshine announced an agreed merger to be implemented by means of a takeover bid by QGC for all of the issued capital of Sunshine. Sunshine shareholders would receive either five QGC shares for every eight Sunshine shares or $1.65 cash per Sunshine share and two QGC shares for every seven Sunshine shares. Based on the last traded share price for QGC of $4.32 per share, the all scrip alternative represents a total consideration Sunshine at $837 million or $895 million for the cash and scrip alternative.

Sunshine is a Queensland based energy company focused on the exploration, development, and commercialisation of CSG and conventional gas resources. Sunshine is yet to produce or sell any gas. Sunshine's interests include its 100% owned Lacerta CSG project near Roma in the Walloons part of the Surat Basin with certified gas reserves of 469PJ of 2P and 1,097PJ of 3P and is focused on developing the field for gas production. Sunshine also has secondary CSG exploration projects representing ~30,000 km2 of CSG and conventional gas acreage at earlier stages of development. In December 2007 Sunshine had entered a head of agreement for a joint venture with Sojitz Corporation and LNG Japan to evaluate the feasibility of a medium scale (0.5Mtpa train) LNG project in Gladstone to use Sunshine's CSG as fuel.

Roma Petroleum NL / Queensland Gas Company Limited

On 10 June 2008 QGC and Roma announced an agreed offer under which QGC would acquire all of the issued capital of Roma. Under the offer terms Roma shareholders would receive 10 cents cash and 0.0177 QGC shares for every one Roma share. At the date of the announcement QGC had entered into a pre-bid acceptance agreement with a Roma shareholder in respect of 19.16 %. On 17 July 2008, QGC revised the cash component of the Offer to 11 cents per Roma share. The revised offer terms valued each Roma share at 20 cents. On 9 July 2008 Bow announced a competing takeover bid for shares in Roma offering 5 Bow shares for every 7 Roma shares. By 22 August 2008 QGC had obtained a substantial interest in Roma shares of 76.8% and the Board of Roma confirmed that they recommended shareholder accept the QGC offer and reject the Bow bid.

Roma is an oil production and exploration company, and was producing oil at a rate of about 270 barrels a day from its Mirage and Ventura oilfields. Roma also holds a significant interest in PL171 which is located near the proposed pipeline for the Queensland Curtis Island LNG project being under taken by QGC and BG Group. The acreage covered by the permit is located in the northeast Surat basin in Queensland.

Arrow Energy Limited (Australian CSG assets) / Royal Dutch Shell plc

On 2 June 2008 Shell and Arrow announced an alliance to jointly develop CSG projects in Australia, China, Indonesia, Vietnam and India. The alliance included the acquisition by Shell of a 30% interest in Arrow's Australian CSG assets for up to $644 million and the acquisition of 10% of Arrow's international assets in Asia

27 In February 2011 it was announced that Origin Energy and ConocoPhillips had agreed to potentially defer the FID payments for the first two LNG trains until the project pays out an agreed economic return on the total investment by ConocoPhillips in APLNG.

for up to $134 million. The consideration for the acquisition of the coal seam assets is to be made up of an up front payment of $435 million with $140 million payable upon FID for Arrow's Gladstone LNG project in Queensland. Under the transaction a further $70 million is payable by Shell when the project is producing 1Mpta which may only occur in 4 years time.

Arrow's Australian CSG assets are situated in the Bowen and Surat Basins in Queensland, including four producing projects which supply industrial users and power generators. Approximately 70% of reserves and resources represented Surat interests and 61% of 2P and 89% of 3P were uncommitted/uncontracted. At the date of the announcement, Arrow had not commissioned a review of its contingent resources. However, management had previously stated 2P guidance target circa 2,000PJ by end 2008 and Arrow confirmed that Shell had reviewed its well and reserve data prior to signing the deal. Post announcement in July 2008 Arrow announced a significant reserves increase in 2P and 3P reserves.

In contrast to the Santos/Petronas deal, this transaction did not include Shell taking an interest in Arrow's LNG project. However, it included other broader alliance aspects such as the secondment of Shell personnel to Arrow, access to Shell's research capabilities as well as the right for Shell to negotiate an agreement for offtake of LNG produced gas from the CSG operations on market based terms with LNG sellers. Assuming inclusion of the contingent payment, the reserve multiples are similar to that in the QGC/BG Group asset acquisition. However, the transactions are arguably not directly comparable. While both companies have assets in the Surat Basin, there are differences between the assets such as average well deliverability with QGC fields producing substantially higher rates than that achieved by Arrow.

Gladstone LNG Project / Petroliam Nasional Berhad

On 29 May 2008, Petronas announced an agreement to acquire 40% of Santos' Gladstone LNG project comprising an interest in an LNG project as well as reserves/resource. Petronas is a Malaysian Government owned company with over US$50 billion in revenue. Petronas has significant LNG experience as suppler and is the largest LNG supplier/producer in Asia and third largest in the world. Under the agreement, a new 60/40 joint venture company is to be formed which would develop and operate the gas liquefaction facility at Gladstone Queensland, build and operate a 450 kilometre pipeline from jointly owned upstream CSG assets to the facility and undertake marketing activities for the LNG output. Petronas will head marketing for the joint venture. Santos will operate the upstream assets. The consideration comprised a US$2,008 million cash payment with an additional payment of up to US$500 million on FID for a second LNG train28. Under the transaction Santos will sell 538PJ (approximately one third) of 2P reserves, 1,600PJ of 3P reserves plus 2,969PJ of contingent 3C resource and less than 11% of its total oil and gas reserves to the joint venture.

The transaction was the outcome of a global competitive tender process conducted by Santos for a partner for its LNG project which was at evaluation stage at the time of BG Group's initial approach to Origin Energy on 29 April 2008. The reserves multiples achieved were high relative to prior transactions. This may reflect Santos' strong negotiating position based on its then leading asset position, some benefit from the increasing impetus to secure the significant volumes of gas required for LNG projects flowing from the announcement of the BG Group offer for Origin Energy and confidence that 3P reserves and gas resources will be converted to commercial reserves over time (to meet the LNG project's gas requirements) and that project expansion is likely.

Queensland Gas Company Limited / BG Group plc

On 3 February 2008 BG Group announced an $870 million alliance with QGC primarily directed to the development of an export LNG facility. This alliance was the fourth Queensland based export LNG to be announced since mid 2007 and the first significant investment by a major international energy market participant. Under the joint venture BG Group acquired 20% of QGC's existing Walloons CSG fields located in the Surat Basin for $415 million. BG Group has the right to acquire a further 10% share of QGC's interests for $207 million in cash upon the earlier to occur of FID approving the budget for the construction of an LNG facility and the certification of 7,000PJ of 2P reserves. Under the transaction BG Group would acquire a 9.9%29

28 In September 2010 TOTAL acquired a 20% interest in the Gladstone LNG Project from Santos and Petronas. As part of that transaction it was agreed that Petronas would not make this additional payment to Santos. 29 The arrangements entered into by QGC and BG Group in relation to the LNG project includes provisions to limit the dilution of BG

Group's interest in QGC by giving BG Group a right to participate in any non-pro rata issue of QGC shares. In the context of the offers for Roma and Sunshine, QGC has an obligation to offer BG Group such number of QGC shares which will result in BG Group holding 8 per cent of the total number of QGC shares on issue immediately after the issue of QGC shares to Roma and Sunshine shareholders.

shareholding in QGC at a share price of $3.07 per share for $250 million and the right to nominate a director for appointment to the QGC board (subject to QGC shareholder approval)30. Other elements of the alliance include: an agreement for the two companies to cooperate in the further exploration and development of onshore CSG tenements based on a $230 million exploration programme, the companies will develop and build a pipeline from the CSG acreage to the port facility in Gladstone to be owned 50% by BG Group and 50% by QGC; build an LNG production and export facility and port assets on the Queensland coast to be owned 70% by BG Group and 30% by QGC. BG Group and QGC have agreed to enter into certain joint marketing arrangements for the sale of gas to the LNG facility and into the domestic market. BG Group will purchase 100% of the planned resulting LNG produced from the project under a 20 year offtake agreement, expected to be 3-4Mtpa from 2013.

QGC engages in the exploration, evaluation, development, and production of CSG, holding 7,500 square kilometres of production and exploration permits in the Surat Basin. QGC commenced commercial production in 2006 from its Berwyndale South field. QGC supplies CSG from coal seams in the Surat Basin to domestic customers in south east Queensland. As at the date of the announcement, QGC was the third largest holder of 3P reserves after Origin Energy and Santos. Of its reserves, approximately 35% of 2P reserves (467PJ) and 73% of 3P reserves (2,266PJ) were uncontracted. BG Group is a global natural gas business operating in 25 countries and business segments exploration and production, LNG, transmission and distribution and power generation.

Arrow Energy NL / Energy Infrastructure Group AB

On 23 February 2007, Arrow announced it had entered into a letter of intent with Energy Infrastructure Group AB ("EIG") (a privately owned energy company based in Sweden) for a farm-in to a portfolio of predominantly exploration CSG assets in the coastal Queensland and Clarence Moreton basin licences as well as Dundee pilot project and the Daandine Power Project for a consideration up to $225 million. With the exception of the Dundee pilot project and the entitlement to the Daandine Power Project, the tenements to be acquired require further exploration and the development of infrastructure to process and deliver gas. Under the agreement EIG was required to reimburse Arrows's expenses and spend $150 million to earn a 50% interest in a joint venture. In addition, EIG was required to pay up to a further $75 million (increased in April 2007 to $115 million) by way of four milestone bonuses, the first three of which become payable for certification of 250PJ, 500PJ and 750PJ of gross 2P reserves on the portfolio assets (excluding PL230). The earliest payment is 1 January 2009.

Queensland Gas Company Limited / AGL Energy Limited

On 5 December 2006, AGL Energy reached agreement to acquire a 27.5% interest in QGC for $292 million. QGC engages in the exploration, evaluation, development, and production of CSG, holding 7,500 square kilometres of production and exploration permits in the Surat Basin. As part of the transaction, AGL Energy committed to cap its interest at 30% under a planned share buyback by QGC. The share acquisition (and other aspects of the related transactions) formed part of a broader transaction which included a 20 year gas sale agreement at favourable prices for up to 740PJ, a 3 year gas market services development agreement for $22.5 million and Board appointments ("AGL Energy Transaction"). The announcement of the AGL Energy Transaction was made during a takeover offer for QGC by Santos which did not proceed. On 1 March 2007, QGC announced that it had received a conditional cash and scrip takeover offer from Trust Company of the West valued at $1.51 per share which it rejected and a 190.6PJ increase to its 2P reserves. On 2 March 2007 AGL Energy increased their offer to $1.60 per share or $324 million.

Arrow Energy NL / New Hope Corporation Limited

On 26 July 2006 New Hope Corporation Limited ("New Hope") acquired 19.9% of Arrow and 16 million listed options for $48.5 million. Arrow is involved in the exploration, appraisal, development and operation of CSG projects within Queensland and northern New South Wales. Arrow's major reserves include the Moranbah Gas Project in Bowen Basin and the Kogan North Project in the Surat Basin.

Moranbah Gas Project / The Australian Gas Light Company

On 21 June 2006 The Australian Gas Light Company ("AGL") acquired 50% of BHP Billiton Limited's Moranbah Gas Project for $93.3 million. The Moranbah Gas Project is located in the Bowen Basin and was a

30 As a condition of ACCC approval for its bid for Origin Energy, in the event that the takeover was successful BG Group agreed to changes to certain aspects of the QGC alliance, including to the joint marketing arrangements and relinquishment of its QGC Board seat. BG Group announced on 9 September 2008 that it expects its bid for Origin Energy to lapse.

joint venture with CH4, producing approximately 16PJ in 2006. Contracts were in place with energy generators and suppliers Enertrade and Energex over Moranbah's production from 300PJ of its reserves until 2020.

CH4 Gas Limited / Arrow Energy NL

On 4 May 2006 Arrow and CH4 Gas Limited ("CH4") announced a merger. The merger was implemented by means of a takeover bid by Arrow for all of the issued capital of CH4 under which CH4 shareholders would receive 2.15 Arrow shares for every one CH4 share and two Arrow options with an exercise price of $0.75 and expiry date of 1 December 2006 for every five CH4 shares. The merger terms valued each CH4 share at $1.36. CH4 was a Queensland based energy company focused on the exploration, development and commercialisation of CSG resources. It had a 50% share in the Moranbah Project which had 2P reserves of 149PJ and over 7,000 square kilometres of other tenements at earlier stages of development.

Argyle and Lauren CSG Project / Origin Energy Limited

On 1 February 2006 Origin Energy entered into an agreement to acquire a 40.6% interest in the Argyle and Lauren CSG Project held by Pangaea Oil and Gas Pty Limited ("Pangaea") for $70 million. The assets acquired also included other tenements at earlier exploration stages and a pipeline licence to access the Wallumbilla to Brisbane Pipeline. The Argyle and Lauren CSG Project was a joint venture with operator QGC, was not yet at production stage and required development capital of $20 million before production could commence. Pangaea had contracted net sales to Incitec Pivot Limited, with sales scheduled to commence at 3PJ per annum from late 2007.

Tipton West CSG Project / Beach Petroleum Limited

On 12 September 2005 Beach announced a farm-in arrangement with Arrow in relation to its Tipton West CSG Project for $35 million. In return for funding Stage 1 of the project Beach received a 40% interest in the upstream interests in ATP683P and PL198 held by Arrow. Tipton West CSG Project is located in the Surat Basin required Beach's investment to fund the gathering and water handling infrastructure with the target of starting production in late 2006.

Sydney Gas Joint Venture / The Australian Gas Light Company

On 14 September 2005 Sydney Gas and AGL announced the formation of a 50/50 joint venture ("Sydney Gas Joint Venture") to develop coal seam gas across Sydney Gas' existing assets and permits in New South Wales. AGLC paid $42.25 million for its 50% interest. The key focus of the joint venture was to fulfil Sydney Gas' existing Camden gas supply contract and develop high-value opportunities in the Hunter Valley.

Moura CSG Project / Anglo Coal (Moura) Limited and Mitsui Moura Investment Pty Limited

On 7 September 2005 Origin Energy announced that it had sold its interests in the Moura CSG Project to Anglo and MMI for $22 million. The project is in the Bowen Basin and gas production first began in 2001.

Tipperary Corporation / Santos Limited

On 1 July 2005 Santos announced it would acquire Tipperary Corporation ("Tipperary") and 10% of Tipperary Oil and Gas Australia, a 90% subsidiary of Tipperary, for US$466 million. Tipperary was a US listed company whose principal asset was a 75% working interest in the Fairview CSG Project, and approximately 4,000 square kilometres of exploration acreage in the Bowen Basin. Fairview is a high quality CSG field as measured by gas content, permeability, saturation, flow rate, and coal seam thickness. It also has lower production costs than its peer group. Fairview had been in commercial production since 1997.

Oil Company of Australia Limited / Origin Energy Limited

In July 2003, Origin Energy made takeover offers at $4.25 cash for all the issued shares in Oil Company of Australia Limited ("OCA") that it did not already own. At the time of the announcement Origin Energy had a relevant interest in 88.07% of the issued capital of OCA, including 2.9 million shares (2.47% of the issued capital of OCA) in respect of which Santos had agreed to accept the Origin Energy offer pursuant to a pre-bid agreement with Origin Energy. OCA had interests in conventional gas and CSG fields in Queensland.

Appendix 6

Market Evidence – Comparable Listed Companies

The valuation of the Narrabri Gas Project has been considered in the context of the sharemarket ratings of listed Australian oil and gas companies. In particular, companies with coal seam gas ("CSG") exploration, development and production assets have been considered.

	Sharemarket Ratings of Selected Listed Oil and Gas Exploration and Production Companies
Company	MarketCapitalisation1		EBITDA Multiple2(times)			EBIT Multiple3(times)		Reserves4	Certified(PJ)	ReservesMultiple5(A$/GJ)
	($millions)	Historical	ForecastYear 1	ForecastYear 2	Historical	ForecastYear 1	ForecastYear 2	2P	3P	2P	3P
Coal Seam Gas
Bow Energy	321	na6	nmf7	nmf	na	na	na	238	2,752	0.91	0.08
Molopo8	166	na	na	na	na	na	na	341	812	nmf	nmf
Metgasco	120	na	na	na	na	na	na	428	2,542	0.22	0.04
Blue Energy9	76	na	na	na	na	na	na	-	39	na	1.61
WestSide	71	na	na	na	na	na	na	221	262	0.22	0.18
Other Oil and Gas
Woodside	27,168	11.5	11.4	7.3	15.7	14.3	9.7	9,772	na	3.39
Santos	10,089	8.0	6.7	5.8	16.1	11.8	10.2	8,404	na	1.15
Oil Search	8,067	30.4	18.8	21.0	37.1	21.2	24.8	3,484	na	2.42
Beach Energy	1,368	9.5	6.5	4.4	52.8	20.6	11.9	384	na	3.05

Source: Grant Samuel analysis10

The multiples shown above are based on sharemarket prices as at 16 September 2011 and do not reflect a premium for control.

All of the companies have a 30 June year end except for Woodside Petroleum Limited ("Woodside"), Santos Limited ("Santos") and Oil Search Limited ("Oil Search") which have 31 December year ends.

The data analysed for each company included the last two annual historical results plus the subsequent three forecast years. The historical data represents the year ended 31 December 2010 for those companies with a 31 December year end while for companies with a 30 June year end, the historical data is for the year ended 30 June 2011.

The following should be noted in relation to the sharemarket ratings for the CSG focused companies:

none of the CSG companies are currently profitable at EBIT or EBITDA level as they are primarily

1 Market capitalisation based on share prices as at 16 September 2011 except Bow Energy which is based on its share price on 19 August 2011 (being the day prior to receipt of a conditional proposal from Arrow Energy Holdings Pty Ltd). 2

Represents gross capitalisation divided by EBITDA. EBITDA is earnings before net interest, tax, depreciation, amortisation, investment income and significant and non-recurring items. 3

Represents gross capitalisation divided by EBIT. EBIT is earnings before net interest, tax, investment income and significant and non-recurring items. 4

Represents proportionate interest in reserves as at latest announcement. 5

Represents gross capitalisation divided by proportionate interest in reserves. 6

na = not available 7 nmf = not meaningful

8 In April 2011, Molopo announced the completion of a strategic review which would result in Molopo refocusing on unconventional oil and gas exploration and development, particularly in North America. As part of this review Molopo decided to commence the trade sale of its Queensland coal seam gas assets. The market appears to be attributing little value to these assets and its reserves multiples are not meaningful. 9

Blue Energy Limited is focused on the development of CSG resources in the Bowen and Galilee basins in Queensland. It currently has 3C resources of 2,590PJ. 10 Grant Samuel analysis based on data obtained from IRESS, company announcements, transaction documentation and, in the absence

of company published financial forecasts, brokers' reports. Where company financial forecasts are not available, the median of the financial forecasts prepared by a range of brokers has generally been used to derive relevant forecast value parameters. The source, date and number of broker reports utilised for each transaction depends on analyst coverage, availability and corporate activity.

exploration and development companies. Their market capitalisation reflects substantial value attributed to CSG reserves and resources which are under development and from which earnings are yet to emerge;

• the portfolios of CSG assets owned by each of the companies differ across a range of factors which will impact relative valuation metrics. These factors include the stage of development of reserves and resources, the location of the interests, relative scale, quantum and quality of the assets and recoverable gas, the prospects for additional resources, access to markets (e.g. infrastructure), access to expertise or funding of joint venture partners, the extent to which the reserves are contracted or uncontracted (the attractiveness of contract terms) and the target market for the gas;
• the market has typically ascribed higher multiples to companies with potential or planned access to LNG projects. WestSide (Meridian SeamGas field) has reserves in close proximity to Gladstone and has joint venture arrangements with Mitsui and BG Group, established LNG producers. Although Metgasco has reserves in the Clarence-Morton Basin pipeline infrastructure is required to enable access to the Queensland LNG gas market. Following a strategic review in April 2011, Molopo decided to commence the trade sale of its Queensland coal seam gas assets to focus on unconventional oil and gas exploration and development, particularly in North America. The market appears to be attributing little value to these assets; and
• some of the CSG focused companies also hold conventional gas assets and/or have interests in or the development of electricity generation businesses (e.g. Metgasco - Richmond Valley Power Station, Molopo - Mungi Power Station). This approach provides access to net back electricity prices and consequently higher margins than available through domestic gas sales).

In relation to the other oil and gas companies the following should be noted:

• the major conventional oil and gas companies (i.e. Woodside, Santos and Oil Search) have substantial international operations;
• Woodside is one of the world's largest LNG producers and has plans for substantial growth through the development of its Pluto, Sunrise and Browse LNG Projects. Gas production from the first train of the Pluto LNG Project is anticipated in early 2012. Its market capitalisation reflects this growth but no earnings have yet emerged and therefore its earnings multiples are relatively high;
• Santos has a portfolio of LNG growth projects from which earnings are expected to emerge beyond 2012. Its market capitalisation appears not to reflect substantial value for these projects at this time, possibly due to the significant capital commitments over the period to 2014;
• Oil Search's focus has shifted from oil production to gas reserve exploration and the development of its joint venture interest (29%) in the Papua New Guinea ("PNG") LNG Project. The project is currently a 6.6mtpa two train development (with potential for a third train) operated by ExxonMobil and is fully financed. Its market capitalisation reflects this project but as the first LNG sales are not anticipated until 2014, earnings are yet to emerge and therefore its earnings multiples are high; and
• Beach Energy's earnings multiples reflect its smaller scale and near pure conventional oil and gas exposure in the Cooper Basin. More recently, Beach Energy's focus has shifted to include early stage shale gas exploration in the Cooper and Otway Basins.

20 September 2011

The Board of Directors Santos Limited Santos Centre 60 Flinders Street Adelaide SA 5000

Dear Directors

INVESTIGATING ACCOUNTANT'S REPORT ON HISTORICAL AND PRO FORMA FINANCIAL INFORMATION

1. Introduction

We have prepared this Investigating Accountant's Report (the 'Report') on historical and pro forma financial information for inclusion in the Scheme Booklet (the 'Scheme Booklet') to be dated on or about 22 September 2011, and to be issued by Eastern Star Gas Limited ('ESG'), in respect of the acquisition of ESG shares by Santos Limited ('Santos') by way of a Scheme of Arrangement between Eastern Star Gas Limited and its shareholders (the 'Scheme of Arrangement').

Expressions defined in the Scheme Booklet have the same meaning in this Report.

2. Scope

Ernst & Young has been requested by the Santos Board to prepare this Report for inclusion in the Scheme Booklet to cover the following financial information:

Historical Financial Information

Santos

The historical financial information of Santos comprises the consolidated statement of financial position as at 31 December 2010, as set out in section 5.5 of the Scheme Booklet.

(Hereafter the 'Santos Historical Financial Information').

The Santos Historical Financial Information as at 31 December 2010 has been extracted from the Santos consolidated financial report for the year ended 31 December 2010, which was audited by Ernst & Young and on which an unqualified audit opinion was issued.

220Liability limited by a scheme approved under Professional Standards Legislation

Investigating 8 Accountant's Report

ESG

The historical financial information of ESG comprises the consolidated statement of financial position as at 31 December 2010, as set out in section 5.5 of the Scheme Booklet.

(Hereafter the 'ESG Historical Financial Information').

The ESG Historical Financial Information as at 31 December 2010 has been extracted from the ESG consolidated interim financial report for the half-year ended 31 December 2010, which was reviewed by PKF East Coast Practice, and on which an unqualified review conclusion was issued.

(Together, the 'Historical Financial Information').

Pro Forma Financial Information

The pro forma financial information as set out in section 5.5 of the Scheme Booklet comprises the pro forma historical consolidated statement of financial position as at 31 December 2010, which assumes completion of the Scheme, the TRU Acquisition and the TRU On-Sale, as defined in the Scheme Booklet (the 'Pro Forma Transactions').

(Hereafter the 'Pro Forma Financial Information')

(Collectively, together with the Historical Financial Information, the 'Financial Information').

The Pro Forma Financial Information assumes completion of the proposed transactions outlined in section 5.5 of the Scheme Booklet.

The Financial Information is presented in an abbreviated form insofar as it does not include all of the presentation and disclosures required by Australian Accounting Standards and other mandatory professional reporting requirements applicable to general purpose financial reports.

This Report has been prepared for inclusion in the Scheme Booklet. We disclaim any assumption of responsibility for any reliance on this Report or on the Financial Information to which this Report relates for any purposes other than the purpose for which it was prepared. This Report should be read in conjunction with the Scheme Booklet.

3. Directors' Responsibility for the Financial Information

The ESG Directors have prepared and are responsible for the preparation and presentation of the ESG Historical Financial Information.

The Santos Board have prepared and are responsible for the preparation and presentation of the Santos Historical Financial Information and the Pro Forma Financial Information which incorporates the ESG Historical Financial Information provided to Santos by the ESG Directors. The Santos Board are

Investigating 8 Accountant's Report

pdf to be supplied

responsible for the determination of the Pro Forma Transactions and assumptions as set out in section 5.5 of the Scheme Booklet.

4. Our Responsibility for the Financial Information

Our responsibility is to express a conclusion on the Financial Information based on our review. We have conducted an independent review of the Financial Information in order to state whether, on the basis of the procedures described, anything has come to our attention that would cause us to believe that:

• a. The Historical Financial Information does not present fairly the Santos historical consolidated statement of financial position as at 31 December 2010 and the ESG historical consolidated statement of financial position as at 31 December 2010 in accordance with the measurement and recognition requirements (but not all of the presentation and disclosure requirements) of applicable Australian Accounting Standards and other mandatory professional reporting requirements in Australia;
• b. The Pro Forma Transactions and assumptions set out in section 5.5 of the Scheme Booklet do not provide a reasonable basis for the Pro Forma Financial Information;
• c. The Pro Forma Financial Information has not been prepared on the basis of the Pro Forma Transactions and assumptions set out in section 5.5 of the Scheme Booklet; and
• d. The Pro Forma Financial Information does not present fairly the pro forma consolidated statement of financial position as at 31 December 2010 in accordance with the measurement and recognition requirements (but not all of the presentation and disclosure requirements) of applicable Australian Accounting Standards and other mandatory professional reporting requirements in Australia as if the Pro Forma Transactions set out in section 5.5 of the Scheme Booklet had occurred at 31 December 2010.

Our independent review of the Financial Information has been conducted in accordance with Australian Auditing and Assurance Standards applicable to review engagements*.* Our procedures consist of reading of relevant Board minutes, reading of relevant contracts and other legal documents, inquiries of management personnel and directors of Santos and ESG and analytical and other procedures applied to the Santos and ESG accounting records. These procedures do not provide all the evidence that would be required in an audit, thus the level of assurance provided is less than that given in an audit. We have not performed an audit and, accordingly, we do not express an audit opinion on the Financial Information.

5. Review conclusion on the Financial Information

Scheme Booklet 222

Based on our independent review, which is not an audit, nothing has come to our attention which causes us to believe that:

a. The Historical Financial Information does not present fairly the Santos historical consolidated statement of financial position as at 31 December 2010 and the ESG historical consolidated statement of financial position as at 31 December 2010 in accordance with the measurement and recognition requirements (but not all of the presentation and disclosure requirements) of applicable Australian Accounting Standards and other mandatory professional reporting requirements in Australia;

Investigating 8 Accountant's Report

• b. The Pro Forma Transactions and assumptions set out in section 5.5 of the Scheme Booklet do not provide a reasonable basis for the Pro Forma Financial Information;
• c. The Pro Forma Financial Information has not been prepared on the basis of the Pro Forma Transactions and assumptions set out in section 5.5 of the Scheme Booklet; and
• d. The Pro Forma Financial Information does not present fairly the pro forma consolidated statement of financial position as at 31 December 2010 in accordance with the measurement and recognition requirements (but not all of the presentation and disclosure requirements) of applicable Australian Accounting Standards and other mandatory professional reporting requirements in Australia as if the Pro Forma Transactions set out in section 5.5 of the Scheme Booklet had occurred at 31 December 2010.

6. Independence or Disclosure of Interest

Ernst & Young does not have any pecuniary interests that could reasonably be regarded as being capable of affecting its ability to give an unbiased conclusion in this matter. Ernst & Young provides audit and other advisory services to Santos and will receive a professional fee for the preparation of this Report.

Yours faithfully

pdf to be

supplied

Ernst & Young

9 General Meeting

9.1 Background

As discussed in more detail in section 10.4, on 18 July 2011 Santos and TRUenergy Holdings entered into a memorandum of understanding pursuant to which Santos has agreed to buy the 38,546,256 ESG Shares held by TRUenergy Investments for $0.90 cash per ESG Share (TRU Acquisition), subject to ESG Shareholders approving the acquisition for the purposes of item 7 in the table in section 611 of the Corporations Act.

If the TRU Acquisition is approved, TRUenergy Investments' ESG Shares will not be acquired by Santos under the Scheme but will instead be acquired by Santos for $0.90 cash per ESG Share on the Implementation Date (being the same time as Scheme Shares will be acquired under the Scheme). The proceeds payable by Santos to TRUenergy Investments for the acquisition will be setoff from (and thereby reduce) the amount payable by TRUenergy in relation to the TRU On-Sale (see section 5.2(b) for further information regarding the TRU On-Sale). Therefore, while the consideration payable for the acquisition of TRUenergy Investments' ESG Shares is cash, no cash will actually be paid by Santos to TRUenergy Investments in respect of this acquisition.

If the TRU Acquisition is not approved, the ESG Shares currently held by TRUenergy Investments will be Scheme Shares and will, if the Scheme becomes Effective, be acquired by Santos under the Scheme on the same terms as all other Scheme Shares.

All the ESG Directors voted to put the TRU Resolution and the information contained in this Scheme Booklet related to that resolution to ESG Shareholders and no ESG Director has a material personal interest in the outcome of the TRU Resolution other than in his capacity as an ESG Shareholder.

9.2 Regulatory requirements

Section 606(1) of the Corporations Act provides that a person must not acquire a Relevant Interest in issued voting shares in a listed company if the person acquiring the interest does so through a transaction in relation to the securities, entered into by or on behalf of the person and, because of the transaction, that person's or someone else's voting power in the listed company increases:

• from 20% or below to more than 20%; or
• from a starting point that is above 20% and below 90%.

The TRU Acquisition, which will constitute an acquisition of a Relevant Interest in ESG Shares, will result in Santos' Relevant Interest in ESG Shares increasing from 20.92% to 24.68%, and by operation of section 610(3) of the Corporations Act, Santos' voting power in ESG will be taken to have increased from 20.92% to 24.68%.

Section 606(1A) of the Corporations Act provides that a person may acquire a Relevant Interest under one of the exceptions set out in section 611 of the Corporations Act without contravening section 606(1). Under item 7 in the table in section 611, an acquisition that was approved previously by a resolution passed at a general meeting of the company in which the acquisition is made is exempt from section 606(1).

Accordingly, the TRU Resolution seeks ESG Shareholders' approval for the TRU Acquisition, the effect of which is that Santos' Relevant Interest in ESG Shares will increase from 20.92% to 24.68% and the ESG Shares acquired by Santos from TRUenergy Investments will be acquired for cash consideration, rather than New Santos Shares which is the consideration under the Scheme.

Item 7 of section 611 requires the following information to be provided to ESG Shareholders:

• the identity of the person proposing to make the acquisition and their associates

The ESG Shares will be acquired by Santos. Santos' associates for this purpose comprise TRUenergy Investments and TRUenergy Holdings as well as certain bodies corporate that Santos controls. A list of such entities as at 20 July 2011 is included in the notice of change of interests of a substantial holder in respect of ESG lodged by Santos with ASX on 20 July 2011;

• the maximum extent of the increase in that person's voting power in ESG that would result from the TRU Acquisition and the maximum extent of the increase in the voting power of each of Santos' associates that would result from the TRU Acquisition Santos' Relevant Interest in ESG Shares will increase from 20.92% (214,768,386 ESG Shares) to 24.68% (253,314,642 ESG Shares), and by operation of section 610(3) of the Corporations Act, Santos' voting power will be taken to have increased from 20.92% (214,768,386 ESG Shares) to 24.68% (253,314,642 ESG Shares); and
• the voting power Santos and each of their associates would have as a result of the TRU Acquisition

Entity	% votingpower	Number ofESG Shares
Santos and bodiescorporate whichSantos controls	24.68%	253,314,642
TRUenergy Holdings,TRUenergy InvestmentsTRUenergy	0	0

General Meeting 9 General Meeting

9.3 Independent Expert

The Independent Expert concluded that the disadvantages of the TRU Acquisition to Scheme Shareholders (who are referred to as "non associated shareholders" in the Independent Expert's Report) outweigh the advantages and, accordingly, the TRU Acquisition is neither fair nor reasonable having regard to the interest of the Scheme Shareholders.

9.4 Directors' recommendation

Your Directors have considered the Independent Expert's Report but continue to unanimously recommend that Scheme Shareholders vote in favour of the TRU Acquisition, in the absence of a Superior Proposal because when negotiating the Implementation Deed and deciding to agree to recommend that ESG Shareholders vote in favour of the TRU Acquisition, ESG Directors considered that:

• the TRU Acquisition was an integral part of the negotiated position between ESG and Santos and without it, it is unlikely that Santos would have agreed to acquire ESG; and
• the overall arrangement between ESG and Santos should be considered in its entirety.

ESG Directors note:

• the Independent Expert found that:
  • the impact of the overpayment by Santos to TRUenergy Investments under the TRU Acquisition is not material and is shared by all Santos shareholders; and
  • the disadvantage to Scheme Shareholders of the higher price payable to TRUenergy Investments (based on current Santos Share prices) and certainty of cash consideration is largely theoretical because if the TRU Acquisition is not approved there is no direct improvement in the consideration that ESG Shareholders will receive under the Scheme;
• if the TRU Acquisition is not approved, TRUenergy Investments is unlikely to be a long term holder of Santos Shares. Any sale by TRUenergy Investments of the New Santos Shares it receives under the Scheme may not be in the interests of other ESG Shareholders who have also received New Santos Shares under the Scheme; and
• there has been a significant downturn in the global equities market since the signing of the Implementation Deed which has resulted in a lower current implied value of the Scheme Consideration based on Santos' current share price. However, the Santos Share price and the implied value of the Scheme Consideration will vary over time.

Each ESG Director will vote his ESG Shares, and will procure any ESG Shares controlled by him are voted, in favour of the TRU Acquisition, in the absence of a Superior Proposal.

9.5 Additional information for ESG Shareholders

ASIC Regulatory Guide 74: Acquisitions agreed to by shareholders, requires that certain other information be provided to ESG Shareholders.

Such information is either provided in this section 9 or elsewhere in this Scheme Booklet. In particular, ESG Shareholders should read:

• section 5.2 which sets out Santos' intentions for the Merged Group and includes a description of the TRU On-Sale; and
• section 9 of the Independent Expert's Report which provides an analysis of the TRU Acquisition.

10.1 Interests of ESG Directors

a. ESG marketable securities

The number of ESG Shares in which the Directors have a Relevant Interest as at the date of this Scheme Booklet are:

Director	Registered holder	Number ofESG Shares
The Hon. John	John Anderson	540,000
Duncan Anderson	Hon John DuncanAnderson
David Andrew	David Casey	8,098,898
Casey	D.A. Casey & Associatesas trustee for the D. CaseyFamily SuperannuationFund
Dr David	Seistend Pty Limited	19,605,206
William King	Seistend Pty Limited astrustee for the D.W. KingSuper Fund
Alexander Sundich	Alexander Sundich	9,746,420
	Pine Street Trust
	Pine Street SuperannuationFund
ChristopherAlan Sadler	N/A	Nil
Peter BarryLansom	Peter Barry Lansom	7,529,648

Except as set out above, there are no marketable securities of ESG held by or on behalf of any Director or to which such persons are entitled, as at the date of this Scheme Booklet.

b. Directors' payments and benefits

Except as otherwise described in this Scheme Booklet, there is no payment or other benefit that is proposed to be made or given to any director, secretary or executive officer of ESG or its Related Bodies Corporate as compensation for the loss of, or as consideration for or in connection with his retirements from, office in ESG or its Related Bodies Corporate.

c. Santos marketable securities

As at the date of this Scheme Booklet, none of the Directors or their associates holds any interests in marketable securities of Santos other than Peter Barry Lansom who has a Relevant Interest in 700 Santos Shares.

d. Dealings in securities

There has been no dealing by Directors in marketable securities of ESG in the four months preceding the date of this Scheme Booklet, other than:

• on 24 March 2011, David Casey entered into a collar arrangement in respect of 1,250,000 ESG Shares with Credit Suisse AG, Sydney Branch which confers the right to deliver securities to Credit Suisse AG, Sydney. No ESG Shares were disposed of;
• on 6 May 2011, David King transferred 180,000 ESG Shares from Seistend Pty Limited (a company of which Dr King is a director and shareholder) to Seistend Pty Limited as trustee for the D.W. King Super Fund, both being investment vehicles controlled by Dr King. The transfer was an off-market trade for consideration of $0.70 per ESG Share; and
• on 14 June 2011, Alexander Sundich:
  • transferred 220,000 ESG Shares from Pine Street Trust to Pine Street Superannuation Fund, both being investment vehicles controlled by Mr Sundich. The transfer was an on-market trade for consideration of $0.635 per ESG Share; and
  • sold 230,000 ESG Shares in an on-market sale Pine Street Trust for $0.635 per ESG Share.

There has been no dealing by ESG Directors in marketable securities of Santos in the four months preceding the date of this Scheme Booklet.

e. Other interests

Except as set out herein, there are no agreements or arrangements (including arrangements to make payments or provide benefits) made between any ESG Director and any other person in connection with or conditional on the outcome of the Scheme.

No ESG Director has any other interest in a contract entered into by Santos or any other company within the Santos Group.

Except as disclosed in this Scheme Booklet, there are no material interests of any Director in relation to the Scheme.

10.2 Eastern Star Employee Incentive Plan

Between June 2004 and June 2011, ESG made various offers to eligible employees under the Eastern Star Employee Incentive Plan (EIP). The terms of the EIP provide that eligible employees can acquire ESG Shares with a five year interest free limited recourse loan.

There are currently 34,230,000 ESG Shares subject to the EIP. Those ESG Shares are unquoted and cannot be traded until the loan is repaid. The loan must be repaid on the earlier of the employee ceasing employment with the ESG Group, if the participant breaches the rules of the EIP or the expiration of the loan term. Subject to the EIP rules, the employee may otherwise repay the loan earlier at his or her election.

If the Scheme is approved and implemented, all ESG Shares held pursuant to the EIP will be acquired by Santos. The ESG Directors have determined that ESG Shares held under the EIP may be transferred to Santos under the Scheme, despite the terms of the EIP rules, and that any specific trading restriction applying to ESG Shares held under the EIP is waived for the purposes of the Scheme.

New Santos Shares will be issued to the employees for their ESG Shares on the Scheme becoming Effective. These New Santos Shares will be unquoted.

Any outstanding loans applying in respect of ESG Shares under the EIP will continue in force in respect of the New Santos Shares issued to the employees for their ESG Shares. The loan will be repayable to ESG on the earlier of termination with the Santos Group or the expiration of the loan. Subject to the EIP rules, it may be repaid earlier at the employee's election.

The terms of the EIP and the terms of the loan will otherwise continue to apply to the New Santos Shares issued in respect of ESG Shares held pursuant to the EIP. In particular, the New Santos Shares issued in respect of ESG Shares held pursuant to the EIP cannot be traded until the loan is repaid. When the employee's outstanding loan is repaid, Santos will apply for quotation of the relevant New Santos Shares.

10.3 Intentions of the ESG board

If the Scheme becomes Effective and the ESG board is reconstituted by Santos in accordance with section 5.2, it is for the reconstituted board to determine its intentions as to:

• the continuation of the business of ESG;
• any major changes to be made to the business of ESG; and
• the future employment of the present employees of ESG.

The intentions of Santos with respect to these matters are set out in section 5.

If the Scheme does not become Effective, the current ESG Directors presently intend to continue the business of ESG and do not presently intend to make any major changes to the business of ESG, whether in respect of the redeployment of its assets or the future employment of the present employees of ESG or otherwise.

10.4 Santos' interests and dealings in ESG Shares

As at the date of this Scheme Booklet, Santos' voting power in ESG was 24.68% which is comprised of a Relevant Interest it holds in 214,768,386 ESG Shares, and a Relevant

Interest that its associate, TRUenergy Investments, holds in 38,546,256 ESG Shares.

On 18 July 2011, Santos and TRUenergy Holdings entered into a memorandum of understanding pursuant to which Santos has agreed to buy the 38,546,256 ESG Shares held by TRUenergy Investments for $0.90 cash per ESG Share, subject to ESG Shareholders approving the acquisition for the purposes of item 7 in the table in section 611 of the Corporations Act and the Scheme becoming Effective. That agreement also puts certain restrictions on TRUenergy Investments' ability to sell the ESG Shares it holds for a limited period. As a result of the agreements between Santos and TRUenergy Holdings evidenced by the memorandum of understanding, Santos, TRUenergy Investments and TRUenergy Holdings are associates in respect of ESG, and Santos' voting power in ESG includes TRUenergy Investments' Relevant Interest in ESG Shares.

Other than as described above, neither Santos nor any associate of Santos has provided, or agreed to provide, consideration for ESG Shares under any purchase or agreement during the four months before the date of this Scheme Booklet.

10.5 Benefits to holders of ESG Shares

Other than as described elsewhere in this Scheme Booklet, during the period of four months before the date of this Scheme Booklet, neither Santos nor any associate of Santos gave, or offered to give, or agreed to give, a benefit to another person which was likely to induce the other person, or an associate of the other person, to:

• vote in favour of the Scheme; or
• dispose of ESG Shares,

and which is not offered to all holders of ESG Shares.

10.6 Disclosure of fees and other benefits

Except as disclosed below or elsewhere in this Scheme Booklet, no:

• ESG Director;
• Santos Director; or
• person named in this Scheme Booklet as performing a function in a professional, advisory or other capacity in connection with the preparation or distribution of this Scheme Booklet,

holds at the date of this Scheme Booklet or held at any time during the last two years before lodgement of this Scheme Booklet with ASIC, any interest in the offer of New Santos Shares under the Scheme and no amounts have been paid or agreed to be paid and no benefits have been given or agreed to be given to any director of ESG or Santos for services rendered by him or her in connection with the formation or promotion of the Scheme.

As at the date of this Scheme Booklet, Santos Directors had the following interests in Santos Shares and ESG Shares:

Name of director	Number ofSantos Shares	Number ofESG Shares
Peter Coates	31,567	Nil
David Knox	85,000	Nil
Kenneth Borda	71,583	Nil
Kenneth Dean	15,748	Nil
Roy Franklin	Nil	Nil
Richard Harding	2,546	Nil
Jane Hemstritch	14,000	Nil
Greg Martin	10,750	Nil

David Knox also holds 521,464 options granted under the Santos Executive Share Option Plan and 258,038 SARs granted under the Santos Employee Share Purchase Plan.

The persons named in this Scheme Booklet as performing a function in a professional, advisory or other capacity in connection with the preparation or distribution of this Scheme Booklet are:

• Piper Alderman as lawyers to ESG;
• Flagstaff Partners Pty Ltd and J.P. Morgan Australia Limited as financial advisers to ESG;
• PKF as taxation adviser regarding the Scheme;
• Ernst & Young as investigating accountant for Santos;
• Grant Samuel & Associates Pty Limited as the Independent Expert; and
• Link Market Services Limited as ESG Share Registry.

Each of them will be entitled to receive professional fees charged in accordance with their normal basis of charging.

ESG estimates that the total transaction costs associated with the Acquisition (including legal and other advisers' fees as well as printing, mailing and meeting costs) will be approximately $10.5 million.

The non-executive directors of Santos receive directors' fees on commercial market terms during their tenure as a director of Santos.

10.7 No-talk and no-shop and matching rights

ESG has agreed that during the Exclusivity Period, it must ensure that neither it, any of its Representatives, Related Bodies Corporate or any of their Representatives:

• directly or indirectly participates in or continues any discussions or negotiations;

• provides or makes available any material confidential information concerning ESG's operations;
• enters into any arrangement, agreement or understanding; or
• communicates any intention or willingness to do any of these things,

in relation to, or which may reasonably be expected to lead to, a Competing Transaction.

However, ESG, its Related Bodies Corporate and their Representatives may undertake any action, which would otherwise be prohibited by the no-talk obligation, in relation to a bona fide written proposal for a Competing Transaction received after 18 July 2011 which was not brought about as a result of any breach by ESG of its no-shop obligation (as defined below), where the ESG board, acting in good faith and having obtained advice from its legal and financial advisers determines that the Competing Transaction is, or is reasonably likely to be, a Superior Proposal.

ESG has agreed that during the Exclusivity Period, it must ensure that none of it, any of its Related Bodies Corporate or any of their Representatives directly or indirectly, solicits, invites or encourages enquiries, discussions or proposals in relation to, or which may reasonably be expected to lead to, a Competing Transaction, or communicates to any person an intention to do any of those things.

During the Exclusivity Period, ESG must notify Santos in writing if it, any of its Related Bodies Corporate or any of their Representatives becomes aware of any:

• approach or attempt to initiate any negotiations or discussions, or intention to make such an approach or attempt, in respect of an expression of interest, offer or proposal of the kind referred to in the commentary on no-talk obligation or the no-shop obligation, including the identity of the party making the expression of interest, offer or proposal and the material terms and any updates to the expression of interest, offer or proposal;
• proposal made to ESG, its Related Bodies Corporate or their Representatives in connection with or in respect of a Competing Transaction or a proposed or potential Competing Transaction, including the identity of the party making the proposal, its material terms, and any updates to the proposal; or
• provision by ESG, its Related Bodies Corporate or their Representatives of any material confidential information relating to ESG's operations to any person in connection with a Competing Transaction.

However, the notification obligation described above does not apply to the extent that it requires ESG to provide information the ESG board has determined in good faith, and after having obtained written legal advice, that the consequences of providing the relevant information would likely constitute a breach of the fiduciary duties owed by any ESG Directors.

ESG has also agreed:

• not to enter into any legally binding agreement, arrangement or understanding (whether or not in writing) to undertake a Competing Transaction; and
• to use its best endeavours to procure that none of the Directors changes his recommendation in favour of the Acquisition or publicly recommends a Competing Transaction,

unless:

• the ESG Directors acting in good faith determine, after taking advice from their legal and financial advisers, that the Competing Transaction is a Superior Proposal;
• ESG has provided Santos with the material terms and conditions of the Competing Transaction (including price and the identity of the party or parties involved); and
• ESG has given Santos at least three Business Days after the provision of the information required to be given by it to Santos, to provide a matching or superior proposal to the terms of the Competing Transaction.

10.8 Payment of reimbursement fee

ESG has agreed that the amount of $9.24 million (excluding GST) will become payable to Santos if:

• before the end of the Exclusivity Period, the ESG board or any ESG Director withdraws or adversely modifies their support of the Scheme or recommendation that Scheme Shareholders vote in favour of the Scheme, or makes a public statement indicating that they no longer support the Scheme, or they support a Competing Transaction other than as a result of the Independent Expert not concluding that the Scheme is in the best interests of ESG Shareholders (other than where the reason for that opinion (or change of opinion) is a Competing Transaction); or
• within one year from 18 July 2011, a third party completes a transaction resulting from a Superior Proposal; or
• Santos is entitled to terminate the Implementation Deed and has terminated the Implementation Deed because ESG has materially breached the Implementation Deed and such breach has not been remedied by ESG within 10 Business Days (or any shorter period ending at 5.00 pm on the day before the Second Court Date) after having received notice from Santos setting out the circumstances of the breach and stating its intention to terminate the Implementation Deed.

ESG considers it is reasonable and appropriate to agree to the payment of the Reimbursement Fee to secure the participation of Santos and the benefits available to ESG from the Scheme, without which Santos would not have entered the Implementation Deed.

ESG will not be obliged to pay the Reimbursement Fee if the Scheme becomes Effective. ESG will also not be obliged to pay the Reimbursement Fee to the extent that the obligation constitutes unacceptable circumstances as declared by the Takeovers Panel or the obligation is held to be unenforceable by Santos against ESG as determined by the court, in each case after all proper avenues of appeal have been exhausted.

10.9 No unacceptable circumstances

The ESG Directors believe that the Acquisition does not involve any circumstances in relation to the affairs of any ESG Shareholder that could reasonably be characterised as constituting "unacceptable circumstances" for the purposes of section 657A of the Corporations Act.

10.10 Other material information

Otherwise than as contained or referred to in this Scheme Booklet, there is no other information material to the making of a decision by an ESG Shareholder whether or not to vote in favour of the Scheme, being information that is known to ESG and which has not previously been disclosed to ESG Shareholders.

10.11 Consent to be named

The following persons have given and have not, before the time of registration of this Scheme Booklet by ASIC, withdrawn their written consent to be named in this Scheme Booklet in the form and context in which they are named:

• Santos;
• TRUenergy Holdings, TRUenergy Investments and TRUenergy;
• Piper Alderman as lawyers to ESG;
• Flagstaff Partners Pty Ltd as financial adviser to ESG;
• J.P. Morgan Australia Limited as financial adviser to ESG;
• Ernst & Young as investigating accountant for Santos;
• PKF as taxation adviser to ESG;
• Grant Samuel & Associates Pty Limited as the Independent Expert;
• Link Market Services Limited as the ESG Share Registry; and
• Netherland, Sewell & Associates, Inc.

10.12 Consent to the inclusion of statements

This Scheme Booklet contains statements made by, or statements said to be based on statements made by:

• Santos;
• TRUenergy Holdings, TRUenergy Investments and TRUenergy;
• Ernst & Young as the investigating accountant and in respect of its investigating accountant's report;
• Grant Samuel & Associates Pty Limited as the Independent Expert and in respect of its Independent Expert's Report;
• PKF as taxation adviser and in respect of its independent income tax opinion; and
• Netherland, Sewell & Associates, Inc. in respect of its report on ESG's certified reserves.

Each of the persons named above has consented to the inclusion of each statement it has made in the form and context in which the statements appear in this Scheme Booklet, has consented to the references to those statements in the form and context in which they are included in this Scheme Booklet, and has not withdrawn those consents at the date of this Scheme Booklet.

10.13 Disclaimers of responsibility

Each person named in section 10.11:

• has not authorised or caused the issue of this Scheme Booklet;
• does not make, or purport to make, any statement in this Scheme Booklet or any statement on which a statement in this Scheme Booklet is based other than as specified in section 10.12; and
• to the maximum extent permitted by law, expressly disclaims all liability in respect of, makes no representation regarding, and takes no responsibility for, any part of this Scheme Booklet other than a reference to its name and the statement (if any) included in this Scheme Booklet with the consent of that party.

10.14 Reserve and resource information

The reserves and resource information in relation to ESG has been compiled by John Hattner of Netherland, Sewell & Associates, Inc., Dallas, Texas, USA. Mr Hattner is a full time employee of Netherland, Sewell & Associates, Inc. and is a qualified person as defined under Listing Rule 5.11 and has consented to the use of the reserves figures in the form and context in which they appear.

The reserve and resource information in relation to Santos in section 3.2 has been compiled by Greg Horton, a full-time employee of Santos. Greg Horton is qualified in accordance with Listing Rule 5.11 and has consented to the form and context in which this information appears.

11.1 Glossary

In this Scheme Booklet, unless the context requires otherwise, the following terms have the corresponding meaning:

1P	reserves that, to a high degree of certainty (90% confidence), are recoverable. There isrelatively little risk associated with these reserves. Proven developed reserves are reservesthat can be recovered from existing wells with existing infrastructure and operating methods.Proven undeveloped reserves require development
2C	best estimate scenario of contingent resources, being those quantities of hydrocarbonswhich are estimated, on a given date, to be potentially recoverable from knownaccumulations, but which are not currently considered to be commercially recoverable.Contingent resources may be of a significant size, but still have constraints to development.These constraints, preventing the booking of reserves, may relate to lack of gas marketingarrangements or to technical, environmental or political barriers
2P	reserves that analysis of geological and engineering data suggests are more likely than notto be recoverable. There is at least a 50% probability that reserves recovered will exceedproven plus probable reserves
3P	reserves that analysis of geological and engineering data suggests are less likely to berecoverable than probable reserves
Acquisition	the acquisition of ESG by Santos on the terms set out in this Scheme Booklet
Announcement	the announcements dated 18 July 2011 by ESG and Santos to ASX in relation to theAcquisition
ASIC	Australian Securities and Investments Commission
ASX	ASX Limited ACN 008 624 691 and the financial products market, Australian SecuritiesExchange, as the case requires
Business Day	a business day as defined in the Listing Rules
CHESS	the Clearing House Electronic Subregister System, which provides for the electronic transferof securities listed on ASX
Competing Transaction	has the meaning given in the Implementation Deed
Conditions	the conditions precedent to certain obligations of ESG and Santos under clause 3.1 of theImplementation Deed and summarised in sections 1.1 and 2.4 of this Scheme Booklet
Corporations Act	the Corporations Act 2001 (Commonwealth)
Court	the Federal Court of Australia
CSG	coal seam gas
CGT	Australian capital gains tax
Deed Poll	the deed poll executed on 20 September 2011 under which Santos covenants in favour ofthe Scheme Shareholders to perform its obligations under the Scheme, a copy of which iscontained in Annexure C
Director or ESG Director	a director of ESG
Effective	when used in relation to the Scheme, means the coming into effect, pursuant to section411(10) of the Corporations Act, of the order of the Court made under section 411(4)(b) inrelation to the Scheme
Effective Date	when used in relation to the Scheme, means the date on which an office copy of the relevantScheme order is lodged with ASIC pursuant to section 411(10) of the Corporations Act or,if an earlier date is specified in the relevant Scheme order for the coming into effect of theScheme, that earlier date
ESG	Eastern Star Gas Limited ACN 094 269 780
ESG Information	information prepared by ESG for inclusion in this Scheme Booklet, being all information inthis Scheme Booklet other than the Santos Information
ESG Material Adverse Change	has the meaning given in the Implementation Deed

ESG Share Register	the register of ESG Shareholders
ESG Share Registry	Link Market Services Limited ACN 083 214 537
ESG Shareholder	each person who is registered as the holder of ESG Shares
ESG Shares	fully paid ordinary shares in the capital of ESG
Excluded Shareholder	any ESG Shareholder who:
	• is a Santos Group Member; or
	• holds an ESG Share on behalf of any Santos Group Member; or
	• holds an ESG Share in which a Relevant Interest is held by a Santos Group Member andwho is nominated for the purpose of this definition by Santos
Exclusivity Period	the period commencing on and from 18 July 2011 and ending on the earlier of:
	• the termination of the Implementation Deed; and• 1 February 2012
Explanatory Statement	this Scheme Booklet other than Annexure D and Annexure E
FIRB	the Foreign Investment Review Board
General Meeting	the meeting of ESG Shareholders (other than Excluded Shareholders) to be convenedimmediately after the Scheme Meeting pursuant to the Notice of General Meeting set out inAnnexure E
GLNG	Gladstone LNG
Government Agency	has the meaning given in the Implementation Deed
Implementation Date	the day which is five Business Days after the Scheme Record Date or such other date as theparties agree
Implementation Deed	the Scheme Implementation Deed between Santos and ESG dated 18 July 2011, a copy ofwhich is contained in Annexure A
Income Tax Assessment Act	the Income Tax Assessment Act 1936 (Commonwealth) and the Income Tax Assessment Act1997 (Commonwealth)
Independent Expert	Grant Samuel & Associates Pty Limited ACN 050 036 372
Independent Expert's Report	the report prepared by the Independent Expert in relation to the Acquisition, a copy ofwhich is included at section 7
Ineligible Overseas Shareholder	an ESG Shareholder whose address in the ESG Share Register as at 5.00 pm on the SchemeRecord Date is a place outside Australia, its external territories and New Zealand includingholders of ESG's American Depositary Receipts listed on International OTCQX
kbbls	thousand barrels
kbbls/d	thousand barrels per day
Listing Rules	the official listing rules of ASX
LNG	liquefied natural gas
Merged Group	the Santos Group following implementation of the Acquisition, when ESG will become awholly owned subsidiary of Santos
MMbbls	million barrels
MMboe	million barrels of oil equivalent
MMscf/d	million standard cubic feet of gas per day
mtpa	million tonnes per annum
Narrabri Gas Project	the development of gas production wells in prospect areas within PEL 238, PAL 2 and PPL 3,including development of associated infrastructure, including gas and water gatheringinfrastructure, gas processing and compression facilities and water storage and treatmentinfrastructure
New Santos Share	a Santos Share to be issued by Santos as the Scheme Consideration on the Schemebecoming Effective

PAL	petroleum assessment lease
PEL	petroleum exploration licence
PJ	petajoule
PKF	the PKF East Coast Practice, a member of the PKF International Limited network of legallyindependent member firms
PNG	Papua New Guinea
PPL	petroleum production lease
Related Body Corporate	has the meaning given in the Implementation Deed
Relevant Interest	has the meaning given in sections 608 and 609 of the Corporations Act
Representative	has the meaning given in the Implementation Deed
Santos	Santos Limited ACN 007 550 923
Santos Board	the board of directors of Santos
Santos Director	a director of Santos
Santos Group	Santos and each of its Related Bodies Corporate and a reference to a Santos Group Memberor a member of the Santos Group is to Santos or any of its Related Bodies Corporate
Santos Information	the information in this Scheme Booklet contained in:
	• the letter from the Chairman of Santos; and
	• sections 3, 5, 10.4 and 10.5 and parts of section 10.6 which relate to the shareholders ofSantos, Santos Directors and directors' fees received by Santos Directors,
	other than information provided by ESG to Santos or obtained from ESG publicannouncements, in each case for the purpose of Santos preparing information on theerged Group
Santos Share	a fully paid ordinary share in the capital of Santos
Scheme	the scheme of arrangement pursuant to Part 5.1 of the Corporations Act to be madebetween ESG and Scheme Shareholders as described in this Scheme Booklet subject toany alteration or conditions made or required by the Court pursuant to section 411(6) of theCorporations Act a copy of which is contained in Annexure B
Scheme Booklet	this booklet
Scheme Consideration	an amount of 0.06881 New Santos Shares for each Scheme Share held by each SchemeShareholder, being the consideration provided by Santos to each Scheme Shareholder underthe Scheme
Scheme Meeting	the meeting of Scheme Shareholders ordered by the Court to be convened pursuant tosection 411(1) of the Corporations Act in respect to the Scheme notice of which is set out inAnnexure D
Scheme Record Date	5.00 pm on the fifth Business Day after the Effective Date
Scheme Resolution	the resolution to agree the terms of the Scheme
Scheme Share	an ESG Share held by a Scheme Shareholder as at the Scheme Record Date
Scheme Shareholder	ESG Shareholders (other than Excluded Shareholders) as at the Scheme Record Date
Second Court Date	the first day on which an application made to the Court for an order approving the Schemepursuant to section 411(4)(b) of the Corporations Act is heard or, if the application isadjourned for any reason, will mean the date on which the adjourned application is heard
Second Court Hearing	the hearing of the application to the Court for an order pursuant to section 411(4)(b) of theCorporations Act approving the Scheme
Selling Agent	the person appointed by Santos to sell the New Santos Shares to be issued under theScheme to Ineligible Overseas Shareholders
Superior Proposal	has the meaning given in the Implementation Deed
TRU Acquisition	the proposed acquisition by Santos of all ESG Shares held by TRUenergy Investments as atthe date of this Scheme Booklet

TRU On-Sale	the proposed sale of an interest in certain assets of ESG described in section 5.2(b) toTRUenergy
TRU Resolution	the resolution to approve the TRU Acquisition
TRUenergy	TRUenergy Gunnedah Gas Pty Ltd ACN 147 609 729
TRUenergy Holdings	TRUenergy Holdings Pty Ltd ACN 101 876 135
TRUenergy Investments	TRUenergy Investments Pty Ltd ACN 128 557 602.

11.2 Interpretation

Terms used but not defined in this Scheme Booklet have the meaning, if any, given to them in the Corporations Act or the Listing Rules unless that meaning is inconsistent with the context in which the term is used.

In this Scheme Booklet:

• headings are for convenience only and do not affect the meaning of the paragraphs or sections they introduce,

and unless indicated otherwise or the context otherwise requires:

• the singular includes the plural and vice versa;
• words importing any gender include any other genders;
• references to persons include corporations;
• annexures to this Scheme Booklet form part of this Scheme Booklet;
• references to paragraphs or sections are to paragraphs or sections in this Scheme Booklet;
• references to "dollars", "$", "A$" or "cents" are references to Australian currency; and
• references to time are to Sydney, Australia time.

Deed

Scheme Implementation Deed

Santos

ESG

101 Collins Street Melbourne Vic 3000 Australia GPO Box 128A Melbourne Vic 3001 Australia

Sydney Melbourne Perth Brisbane Singapore

Telephone +61 3 9288 1234 Facsimile +61 3 9288 1567 www.freehills.com DX 240 Melbourne

Associated offices in Jakarta Beijing Shanghai Hanoi Ho Chi Minh City

1.1Definitions 21.2Interpretation101.3Business Day 111.4Contra proferentem excluded 112Agreement to proceed with the Transaction113Conditions precedent and pre-implementation steps113.1Conditions precedent 113.2Reasonable endeavours 113.3Benefit and waiver of conditions precedent123.4Termination on failure of condition precedent123.5Certain notices 134Transaction steps134.1Scheme134.2No amendment to the Scheme without consent134.3Scheme Consideration134.4Ineligible Overseas Shareholders13
4.5Santos Shares 14
4.6Treatment of unquoted shares14
5Implementation14
5.1ESG's obligations14
5.2Santos's obligations 16
5.3Conduct of business 175.4Appointment of directors 19
5.5ESG Board recommendation19
5.6Access19
5.7Conduct of Court proceedings 20
5.8Responsibility statement205.9Acquisition resolution 21
6Representations and warranties21
6.1Santos's representations 21
6.2Santos's indemnity21
6.3ESG's representations 22
6.4ESG's indemnity 22
6.5Survival of representations 226.6Survival of indemnities 22
6.7Timing of warranties22
7Releases22
7.1ESG directors and officers22
7.2Santos directors and officers 23
8Public announcement23
8.1Announcement of transaction 23
8.2Public announcements238.3Required disclosure 23

9	No-talk and no-shop obligations	24
	9.1No-talk24
	9.2No-shop24
	9.3Limitation to no-talk24
	9.4ESG warranty and undertakings24
	9.5Notification of approaches 25
	9.6Matching right25
	9.7Compliance with law 26
10	Payment of costs – Reimbursement Fee	26
	10.1Background26
	10.2Payment of Reimbursement Fee by ESG27
	10.3Written demand27
	10.4Nature of payment 27
	10.5Compliance with law 28
11	Termination	28
	11.1Termination 28
	11.2Effect of termination 29
	11.3Santos acknowledgement29
	11.4Terminable in writing29
12	Duty, costs and expenses	30
	12.1Stamp duty30
	12.2Costs and expenses 30
13	GST	30
14	General	31
	14.1No representation or reliance31
	14.2No merger 31
	14.3Consents 31
	14.4Notices 32
	14.5Service of process 33
	14.6Governing law and jurisdiction33
	14.7Waivers 33
	14.8Variation33
	14.9Assignment 34
	14.10 Acknowledgement34
	14.11 No third party beneficiary34
	14.12 Further action34
	14.13 Entire agreement 34
	14.14 Counterparts 34Santos Representations and Warranties	35
	ESG Representations and Warranties	36
	Signing page	38

Scheme Implementation Deed

Date ► 18 July 2011

Between the parties

	Santos Limited
	ACN 007 550 923
	60 Flinders Street, Adelaide, SA 5000
	(Santos)
	Eastern Star Gas Limited
	ACN 094 269 780
	Level 7, 51 Pitt Street, Sydney, NSW, 2000
	(ESG)
Recitals	The parties have agreed that Santos will propose to acquire ESG1by means of a scheme of arrangement under Part 5.1 of theCorporations Act between ESG and Scheme Shareholders.
	The parties have agreed to implement the scheme of2arrangement on the terms of this deed.

This deed witnesses as follows:

1 Definitions and interpretation

1.1 Definitions

The meanings of the terms used in this deed are set out below.

Term	Meaning
ASIC	the Australian Securities and Investments Commission.
Associate	has the meaning set out in section 12 of the Corporations Act.
ASX	ASX Limited ABN 98 008 624 691.
Business Day	a business day as defined in the Listing Rules.
Competing Transaction	a transaction or arrangement to which ESG (or a related bodycorporate) is a party pursuant to which a Third Party will, if thetransaction or arrangement is entered into or completed:
	acquire (whether directly or indirectly) or become the holder of, or1otherwise acquire, have a right to acquire or have an economicinterest in all or a material part of the business of the ESG Group(which, for this purpose, will include an acquisition of rights, or rightto acquire, in respect of 10% or more in the ESG Group'spetroleum interests, by value);
	acquire a Relevant Interest in, become the holder of, or otherwise2acquire, have a right to acquire or have an economic interest in10% or more of the ESG Shares;
	acquire control (as determined in accordance with section 50AA of3the Corporations Act) of ESG; or
	otherwise acquire or merge with ESG;4
	enter into an agreement to purchase from, or sell gas to, a member5of the ESG Group; or
	enter into any agreement, arrangement or understanding requiring6ESG to abandon, or otherwise fail to proceed with, the Transaction
	whether by way of takeover bid, scheme of arrangement, shareholderapproved acquisition, capital reduction or buy back, sale or purchaseof shares or assets, joint venture, dual-listed company structure (orother synthetic merger), or other transaction or arrangement.
condition precedent	each of the conditions set out in clause 3.1.

Term	Meaning
Corporations Act	the Corporations Act 2001 (Cth).
Corporations Regulations	the Corporations Regulations 2001 (Cth).
Court	the Federal Court of Australia or such other court of competentjurisdiction under the Corporations Act agreed to in writing by ESG andSantos.
Deed Poll	a deed poll substantially in the form of Attachment 3 under whichSantos covenants in favour of the Scheme Shareholders to performthe obligations attributed to it under the Scheme.
Effective	the coming into effect, under section 411(10) of the Corporations Act,of the order of the Court made under section 411(4)(b) in relation tothe Scheme.
Effective Date	the date on which the Scheme becomes Effective.
End Date	1 February 2012.
ESG Board	the board of directors of ESG.
ESG Group	ESG and each of its Related Bodies Corporate and a reference to anESG Group Member or a member of the ESG Group is to ESG orany of its Related Bodies Corporate.
ESG Indemnified Parties	ESG and its Related Bodies Corporate and their respective directors,officers and employees.
ESG Information	information regarding the ESG Group prepared by ESG for inclusion inthe Scheme Booklet, being all the contents of the Scheme Bookletother than the Santos Information and the Independent Expert'sReport.
ESG Material AdverseChange	a reduction in ESG's last published reserves by 5% or more;1one or more changes, events, occurrences, conditions,2circumstances or matters which results wholly or substantially froman act or omission of ESG and which (in any such case,individually or when aggregated with all such changes, events,occurrences, conditions, circumstances or matters) has resulted in,

Term	Meaning
	will or is reasonably likely to result in a material adverse change to:
	the business, operations or financial condition (includingcontingent liabilities) of ESG and its Subsidiaries taken as awhole; or
	the ability of ESG to perform its obligations under this deed,
	other than those changes, events, occurrences, conditions,circumstances or matters:
	required or permitted by this deed, the Scheme or the transactions3contemplated by them;
	which took place with the consent of Santos; or4
	which ESG specifically, fully and fairly disclosed in a document5lodged with the ASX or ASIC that was publicly available 2 BusinessDays prior to the date of this deed (but this does not include anygeneral description of risks, or risk factors, sensitivity analysis orsimilar information in such a document).
ESG PrescribedOccurrence	the occurrence of any of the following between the date of this deedand 8.00am on the Second Court Date:
	ESG converting all or any of its shares into a larger or smaller1number of shares;
	ESG resolving to reduce its share capital in any way or2reclassifying, combining, splitting or redeeming or repurchasingdirectly or indirectly any of its shares;
	ESG:3
	entering into a buy-back agreement; or
	resolving to approve the terms of a buy-back agreement underthe Corporations Act;
	ESG declaring, paying or distributing any dividend, bonus or other4extraordinary share of its profits or assets or returning or agreeingto return any capital to its members;
	a member of the ESG Group issuing securities, including without5limitation shares, or granting an option over its shares, or agreeingto make such an issue or grant such an option, other than to ESGor to a direct or indirect wholly owned Subsidiary of ESG;
	a member of the ESG Group issuing or agreeing to issue securities6convertible into shares;
	a member of the ESG Group making any change to its constitution;7
	a member of the ESG Group:8
	acquiring, leasing or disposing of;
	agreeing to acquire, lease or dispose of; or
	irrevocably offering, proposing, announcing a bid or tenderingfor,
	any business, assets, entity or undertaking, the value of whichexceeds $10 million (individually or in aggregate);
	a member of the ESG Group entering into a contract or9

Term Meaning commitment which materially restrains a member of the ESG Group from competing with any person or conducting activities in any material market; 10 a member of the ESG Group creating, or agreeing to create, any mortgage, charge, lien or other encumbrance over the whole, or a substantial part, of its business or property other than a lien which arises by operation of law or legislation securing an obligation that is not yet due (which does not include the granting of security to financiers in the ordinary course over property acquired by a member of the ESG Group); 11 a member of the ESG Group: entering into any contract or commitment with a value in excess of $10 million (individually or in aggregate); (without limiting the foregoing) entering into any gas sale agreement or pipeline agreement; (without limiting the foregoing) incurring or agreeing to incur capital expenditure from the date of this deed of more than $10 million (individually or in aggregate); otherwise than in accordance with joint venture work programs and budgets approved before the date of this deed, or: waiving any material third party default where the financial impact on the ESG Group will be in excess of $10 million (individually or in aggregate); accepting as a compromise of a matter less than the full compensation due to a member of the ESG Group where the result of the compromise is that the member will receive an amount which is more than $10 million (individually or in aggregate) less than the amount of full compensation; or otherwise waiving, releasing, granting or transferring any rights with a value of more than $10 million (individually or in aggregate); 12 a member of the ESG Group incurring any Financial Indebtedness in excess of $10 million (individually or in aggregate); 13 a member of the ESG Group entering into or resolving to enter into a transaction with any related party of ESG (other than a related party which is a member of the ESG Group) as defined in section 228 of the Corporations Act; 14 ESG or any of its Subsidiaries being deregistered as a company or otherwise dissolved; 15 a member of the ESG Group changing any accounting policy applied by them to report their financial position other than any change in policy required by a change in accounting standards; 16 a member of the ESG Group doing anything that would result in a de-consolidation of the ESG consolidated tax group; 17 a member of the ESG Group resolving that it be wound up or the making of an application or order for the winding up or dissolution of any ESG Group Member other than where the application or order (as the case may be) is set aside within 14 days;

18 a liquidator or provisional liquidator of a member of the ESG Group

Term	Meaning
	being appointed;
	19 a court making an order for the winding up of a member of the ESGGroup;
	20 an administrator of a member of the ESG Group being appointedunder the Corporations Act;
	21 a member of the ESG Group is or becomes unable to pay its debtswhen they fall due within the meaning of the Corporations Act or isotherwise presumed to be insolvent under the Corporations Act; or
	22 a member of the ESG Group executing a deed of companyarrangement,
	other than:
	23 as required by this deed, the Scheme or the transactionscontemplated by them; or
	24 with the consent of Santos.
ESG Registry	Link Market Services Limited ACN 083 214 537
ESG Representations andWarranties	the representations and warranties of ESG set out in Schedule 2.
ESG Share	a fully paid ordinary share of ESG.
ESG Shareholders	each person who is registered as the holder of ESG Shares.
Excluded Shareholder	any ESG Shareholder who:
	is a Santos Group Member; or1
	holds an ESG Share on behalf of any Santos Group Member; or2
	holds an ESG Share in which a Relevant Interest is held by a3Santos Group Member and who is nominated for the purpose ofthis definition by Santos.
Exclusivity Period	the period from and including the date of this deed to the earlier of:
	the termination of this deed; and1
	the End Date.2
Financial Adviser	any financial adviser retained by ESG in relation to the Scheme or aCompeting Transaction from time to time.
Financial Indebtedness	any debt or other monetary liability (whether actual or contingent) in

Term	Meaning
	respect of moneys borrowed or raised or any financial accommodationincluding under or in respect of any:
	bill, bond, debenture, note or similar instrument;1
	acceptance, endorsement or discounting arrangement;2
	guarantee;3
	finance or capital lease;4
	agreement for the deferral of a purchase price or other payment in5relation to the acquisition of any asset or service; or
	obligation to deliver goods or provide services paid for in advance6by any financier.
First Court Date	the first day on which an application made to the Court for an orderunder section 411(1) of the Corporations Act convening the SchemeMeeting is heard.
Government Agency	any foreign or Australian government or governmental, semigovernmental, administrative, fiscal or judicial body, department,commission, authority, tribunal, agency or entity, or any minister of theCrown in right of the Commonwealth of Australia or any state, or anyother federal, state, provincial, local or other government, whetherforeign or Australian.
Implementation Date	the fifth Business Day after the Scheme Record Date or such otherday as the parties agree.
Independent Expert	the independent expert appointed by ESG to express an opinion onwhether the Scheme is in the best interests of Scheme Shareholders.
Independent Expert'sReport	the report to be issued by the Independent Expert for inclusion in theScheme Booklet.
Ineligible OverseasShareholder	means a Scheme Shareholder whose Registered Address at theScheme Record Date is a place outside Australia and its externalterritories, New Zealand and other jurisdictions agreed between theparties.
Listing Rules	the official listing rules of the ASX.
Registered Address	in relation to an ESG Shareholder, the address shown in the ShareRegister.

Term	Meaning
Regulator's Draft	the draft of the Scheme Booklet in a form acceptable to both partieswhich is provided to ASIC for approval pursuant to section 411(2) ofthe Corporations Act.
Reimbursement Fee	$9.24 million.
Related Bodies Corporate	has the meaning set out in the Corporations Act.
Relevant Interest	has the meaning given in sections 608 and 609 of the CorporationsAct.
Representative	in respect of a party or its Related Bodies Corporate, each director,1officer, employee, adviser, agent or representative of that party orRelated Body Corporate; and
	in respect of a Financial Adviser, each director, officer, employee2or contractor of that Financial Adviser.
RG 60	Regulatory Guide 60 issued by ASIC on 11 December 2009 relating toschemes of arrangement, the application of section 411(17) of theCorporations Act and ASIC review of schemes of arrangement.
Santos Group	Santos and each of its Related Bodies Corporate and a reference to aSantos Group Member or a member of the Santos Group is toSantos or any of its Related Bodies Corporate.
Santos IndemnifiedParties	Santos, each of its Related Bodies Corporate and their directors,officers and employees.
Santos Information	information regarding the Santos Group provided by Santos to ESG inwriting for inclusion in the Scheme Booklet.
Santos Representationsand Warranties	the representations and warranties of Santos set out in Schedule 1.
Santos Share	a fully paid ordinary share of Santos.
Scheme	the scheme of arrangement under Part 5.1 of the Corporations Actbetween ESG and the Scheme Shareholders, substantially in the formattached as Attachment 2 to this deed, subject to any alterations orconditions made or required by the Court under section 411(6) of the

Term	Meaning
	Corporations Act and agreed to by Santos and ESG.
Scheme Booklet	the information described in clause 5.1(a) to be approved by the Courtand despatched to the ESG Shareholders (other than ExcludedShareholders) and which must include the Scheme, an explanatorystatement in respect of the Scheme complying with the requirementsof the Corporations Act and the Corporations Regulations, anindependent expert's report, notices of meeting and proxy form.
Scheme Consideration	the consideration to be provided by Santos to each SchemeShareholder for the transfer to Santos of each Scheme Share, asdescribed in the Scheme, being 0.06803 Santos Shares for eachScheme Share held by each Scheme Shareholder, subject to clause4.5.
Scheme Meeting	the meeting of ESG Shareholders (other than Excluded Shareholders)ordered by the Court to be convened under section 411(1) of theCorporations Act.
Scheme Record Date	5.00pm on the fifth Business Day after the Effective Date.
Scheme Share	an ESG Share held by a Scheme Shareholder as at the SchemeRecord Date.
Scheme Shareholders	ESG Shareholders (other than Excluded Shareholders) as at theScheme Record Date.
Second Court Date	the first day on which an application made to the Court for an orderunder section 411(4)(b) of the Corporations Act approving the Schemeis heard.
Share Register	the register of members of ESG maintained in accordance with theCorporations Act.
Subsidiary	has the meaning given to that term in the Corporations Act.
Superior Proposal	a bona fide Competing Transaction (and not resulting from a breach byESG of its obligations under clause 9) which the ESG Board, acting ingood faith, and after taking advice from its legal and FinancialAdvisers, determines
	is reasonably capable of being completed in a timely basis taking1into account all aspects of the Competing Transaction, including

Term	Meaning
	without limitation, having regard to legal, regulatory and financialmatters including any conditions precedent; and
	is more favourable to ESG Shareholders (other than Excluded2Shareholders) than the Scheme taking into account all terms andconditions of the Competing Transaction.
Third Party	a person other than Santos and its Associates.
Timetable	the indicative timetable for the implementation of the Transaction setout in Attachment 1.
Transaction	the acquisition of ESG by Santos through implementation of theScheme in accordance with the terms of this deed.

1.2 Interpretation

In this deed, headings are for convenience only and do not affect interpretation and, unless the context requires otherwise:

• (a) words importing the singular include the plural and vice versa;
• (b) words importing a gender include any gender;
• (c) other parts of speech and grammatical forms of a word or phrase defined in this deed have a corresponding meaning;
• (d) a reference to a person includes an individual, the estate of an individual, a corporation, an authority, an association or a joint venture, a partnership, a trust and any Government Agency;
• (e) a reference to a clause, party, attachment, exhibit or schedule is a reference to a clause of, and a party, attachment, exhibit and schedule to this deed, and a reference to this deed includes any attachment, exhibit and schedule;
• (f) a reference to a statute, regulation, proclamation, ordinance or by law includes all statutes, regulations, proclamations, ordinances or by laws amending, consolidating or replacing it, whether passed by the same or another Government Agency with legal power to do so, and a reference to a statute includes all regulations, proclamations, ordinances and by laws issued under that statute;
• (g) a reference to any document (including this deed) is to that document as varied, novated, ratified or replaced from time to time;
• (h) the word "includes" in any form is not a word of limitation;
• (i) a reference to "$", "A$" or "dollar" is to Australian currency;
• (j) a reference to any time is, unless otherwise indicated, a reference to the time in Sydney, New South Wales;
• (k) a term defined in or for the purposes of the Corporations Act has the same meaning when used in this deed; and

(l) a reference to the Listing Rules includes any variation, consolidation or replacement of these rules and is to be taken to be subject to any waiver or exemption granted to the compliance of those rules by a party.

1.3 Business Day

Where the day on or by which any thing is to be done is not a Business Day, that thing must be done on or by the next Business Day.

1.4 Contra proferentem excluded

No term or condition of this deed will be construed adversely to a party solely on the ground that the party was responsible for the preparation of this deed or a provision of it.

2 Agreement to proceed with the Transaction

• (a) ESG agrees to propose the Scheme on and subject to the terms of this deed.
• (b) Santos agrees with ESG to assist ESG to propose the Scheme on and subject to the terms of this deed.

3 Conditions precedent and pre-implementation steps

3.1 Conditions precedent

Subject to this clause 3, the Scheme will not become Effective, and the obligations of Santos under clause 4.3 will not become binding, until each of the following conditions precedent is satisfied or waived to the extent and in the manner set out in clauses 3.2 and 3.3:

• (a) Quotation of Santos Shares: before 8.00am on the Second Court Date, the Santos Shares to be issued to Scheme Shareholders pursuant to the Scheme have been approved for official quotation by ASX (any such approval may be subject to customary conditions and to the Scheme becoming Effective).
• (b) Shareholder approval of the Scheme: ESG Shareholders (other than Excluded Shareholders) agree to the Scheme at the Scheme Meeting by the requisite majorities under the Corporations Act.
• (c) Court approval: the Court approves the Scheme in accordance with section 411(4)(b) of the Corporations Act.
• (d) Restraints: no temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or Government Agency or other material legal restraint or prohibition preventing the Transaction is in effect at 8.00am on the Second Court Date.

3.2 Reasonable endeavours

Each party must use its reasonable endeavours to procure that:

(a) the conditions precedent in clause 3.1 are satisfied; and

(b) there is no occurrence within the control of ESG or Santos (as the context requires) that would prevent any of the conditions precedent in clause 3.1 being satisfied.

3.3 Benefit and waiver of conditions precedent

• (a) The condition precedent in clause 3.1(a) is for the benefit of each party and any breach or non fulfilment of it may only be waived (if capable of waiver) with the written consent of both parties.
• (b) A party entitled to waive a condition precedent pursuant to this clause 3.3 may do so in its absolute discretion. Any waiver of a condition precedent by a party for whose benefit the condition applies must take place on or prior to 8.00am on the Second Court Date.
• (c) If a party waives the breach or non-fulfilment of any of the conditions precedent in clause 3.1, that waiver will not preclude it from suing the other party for any breach of this deed including without limitation a breach that resulted in the nonfulfilment of the condition precedent that was waived.
• (d) The conditions precedent in clauses 3.1(b), 3.1(c) and 3.1(d) cannot be waived.

3.4 Termination on failure of condition precedent

• (a) If any event occurs which would prevent any of the conditions precedent in clause 3.1 being satisfied, or there is an occurrence that will prevent any of the conditions precedent being satisfied by the time and date specified in this deed for its satisfaction or if it becomes probable that the Scheme will not become Effective by the End Date, the parties must consult in good faith to:
  • (1) consider and if agreed determine whether the Transaction may proceed by way of alternative means or methods;
  • (2) consider and if agreed change the date of the application made to the Court for an order under section 411(4)(b) of the Corporations Act approving the Scheme or adjourn that application (as applicable) to another date agreed to in writing by Santos and ESG (being a date no later than 5 Business Days before the End Date); or
  • (3) consider and if agreed extend the relevant date or End Date.
• (b) Subject to clause 3.4(d), if the parties are unable to reach agreement under clause 3.4(a) within 5 Business Days of becoming aware of the relevant occurrence (or, if earlier, by 8.00am on the Second Court Date), then either party may terminate this deed by notice in writing to the other party without any liability to the other party because of that termination, unless the relevant occurrence or the failure of the condition precedent to be satisfied, or the failure of the Scheme to become Effective, arises out of a breach of clauses 3.2 or 3.5 by the terminating party of this deed (for the avoidance of doubt, in such circumstances, the party which is not the terminating party of this deed may still terminate this deed).
• (c) Subject to any rights or obligations arising under or pursuant to clauses that are expressed to survive termination (including by virtue of clause 11.2), on termination of this deed, no party shall have any rights against or obligations to any other party under this deed except for those rights and obligations which accrued prior to termination.
• (d) If the condition precedent in clause 3.1(b) is not satisfied only because of a failure to obtain the majority required by section 411(4)(a)(ii)(A) of the Corporations Act, then either party may by written notice within 3 Business

Days after the date of the conclusion of the Scheme Meeting require the approval of the Court to be sought, pursuant to the Court's discretion in that section, provided the party has in good faith formed the view that the prospect of the Court exercising its discretion in that way is reasonable.

3.5 Certain notices

• (a) If, before the time specified for satisfaction of a condition precedent, an event that will prevent that condition precedent being satisfied occurs, the party with knowledge of that event must immediately give the other party written notice of that event.
• (b) ESG and Santos (as the case may be) must promptly advise each other orally and in writing of any change or event causing, or which, so far as can reasonably be foreseen, would cause:
  • (1) a representation or warranty provided in this deed by a relevant party to be false;
  • (2) a breach or non-fulfilment of any of the conditions precedent; or
  • (3) a material breach of this deed by a relevant party.

4 Transaction steps

4.1 Scheme

ESG must propose a scheme of arrangement under which all of the Scheme Shares will be transferred to Santos and the Scheme Shareholders will be entitled to receive the Scheme Consideration.

4.2 No amendment to the Scheme without consent

ESG must not consent to any modification of, or amendment to, or the making or imposition by a court of any condition in respect of, the Scheme without the prior written consent of Santos.

4.3 Scheme Consideration

• (a) In consideration of the transfer to Santos of each ESG Share held by a Scheme Shareholder under the terms of the Scheme, on the Implementation Date, Santos will:
  • (1) accept that transfer; and
  • (2) provide or procure the provision of the Scheme Consideration in accordance with the Scheme.
• (b) Any fractional entitlement of a Scheme Shareholder to a part of a Santos Share will be rounded in accordance with the terms of the Scheme.

4.4 Ineligible Overseas Shareholders

The Santos Shares to which an Ineligible Foreign Shareholder would otherwise become entitled under the Scheme will be issued to a nominee appointed by Santos who will sell those shares and deal with the proceeds received in accordance with the Scheme. Santos agrees to appoint the nominee at least 2 weeks prior to the Scheme Meeting.

4.5 Santos Shares

Santos covenants in favour of ESG (in its own right and on behalf of each Scheme Shareholder) that:

• (a) the Santos Shares issued as Scheme Consideration will, on their issue, rank equally in all respects with all other Santos Shares;
• (b) it will use best endeavours to ensure that the Santos Shares issued as Scheme Consideration will be listed for quotation on the official list of the ASX with effect from the Business Day after the Effective Date (or such later date as ASX may require), initially on a deferred settlement basis and, with effect from the Business Day following the Implementation Date, on an ordinary (T+3) settlement basis; and
• (c) on issue, each Santos Share will be fully paid and, to the extent within the control of Santos, free from any encumbrance.

If a dividend is paid on Santos Shares after the date of this deed and before the Implementation Date, the Scheme Consideration will be recalculated to be equal to $0.90 divided by the remainder of $13.23, which is the closing price of Santos Shares on the trading day before the date of this deed, minus the amount per share of the dividend. Any calculation will be to five decimal places.

4.6 Treatment of unquoted shares

ESG must ensure that all ordinary shares in ESG that are unquoted as at the date of this deed will be acquired by Santos under the Scheme as Scheme Shares (including procuring that the ESG Board exercise any powers to free those shares of any transfer restrictions).

5 Implementation

5.1 ESG's obligations

ESG must take all necessary steps to implement the Scheme as soon as is reasonably practicable and without limiting the foregoing use reasonable endeavours to ensure that each step in the Timetable is met by the relevant date set out beside that step (and must consult with Santos on a regular basis about its progress in that regard), including doing any acts it is authorised and able to do, on behalf of ESG Shareholders, and including each of the following:

• (a) preparation of Scheme Booklet: subject to clause 5.1(m), prepare and despatch the Scheme Booklet in accordance with all applicable laws and in particular with the Corporations Act, the Corporations Regulations, RG 60 and the Listing Rules;
• (b) directors' recommendation: unless there has been a change of recommendation permitted by clause 5.5, include in the Scheme Booklet a statement by the ESG Board:
  • (1) unanimously recommending that ESG Shareholders (other than Excluded Shareholders) vote in favour of the Scheme in the absence of any Superior Proposal and subject to the Independent Expert concluding that the Scheme is in the best interests of ESG Shareholders (other than Excluded Shareholders); and

• (2) that each ESG Board member will (in the absence of a Superior Proposal and subject to the Independent Expert concluding that the Scheme is in the best interests of ESG Shareholders (other than Excluded Shareholders)) vote, or procure the voting of, any ESG Shares held by or on their behalf in favour of the Scheme;

• (c) section 411(17)(b) statement: apply to ASIC for the production of:

  • (1) an indication of intent letter stating that it does not intend to appear before the Court on the First Court Date; and
  • (2) a statement under section 411(17)(b) of the Corporations Act stating that ASIC has no objection to the Scheme;

• (d) Court direction: apply to the Court for orders pursuant to section 411(1) of the Corporations Act directing ESG to convene the Scheme Meeting;

• (e) Scheme Meeting: convene and hold the Scheme Meeting to agree to the Scheme in accordance with the orders made by the Court pursuant to section 411(1) of the Corporations Act and not adjourn the Scheme Meeting without Santos's prior consent;

• (f) Court documents: consult with Santos in relation to the content of the documents required for the purpose of each of the Court hearings held for the purpose of sections 411(1) and 411(4)(b) of the Corporations Act in relation to the Scheme (including originating process, affidavits, submissions and draft minutes of Court orders) and consider in good faith, for the purpose of amending drafts of those documents, comments from Santos and its Representatives on those documents;

• (g) Court approval: (subject to all conditions precedent in clause 3.1, other than the condition in clause 3.1(c) being satisfied or waived in accordance with this deed) apply to the Court for orders approving the Scheme as agreed to by the ESG Shareholders (other than Excluded Shareholders) at the Scheme Meeting;

• (h) Certificate: at the hearing on the Second Court Date provide to the Court a certificate confirming whether or not the conditions precedent in clause 3.1, other than the condition in clause 3.1(c), have been satisfied in accordance with this deed. A draft of that certificate must be provided by ESG to Santos by 4.00pm on the Business Day prior to the Second Court Date;

• (i) lodge copy of Court order: lodge with ASIC an office copy of the Court order in accordance with section 411(10) of the Corporations Act approving the Scheme on the day such office copy is received (or such later date as agreed in writing by Santos);

• (j) appeal process: if the Court refuses to make any orders directing ESG to convene the Scheme Meeting or approving the Scheme:

  • (1) consult with Santos in good faith as to whether they should appeal the Court's decision; and
  • (2) appeal the Court decision at Santos's cost unless the parties agree otherwise or an independent senior counsel opines that, in his view, an appeal would have no reasonable prospect of success;

• (k) Scheme Consideration: close the Share Register as at the Scheme Record Date and determine entitlements to the Scheme Consideration in accordance with the Scheme and the Deed Poll;

• (l) registration: subject to Santos having issued the Scheme Consideration in accordance with the Scheme and Deed Poll, register all transfers of ESG Shares held by Scheme Shareholders to Santos on the Implementation Date;

• (m) consultation with Santos: consult with Santos as to the content and presentation of the Scheme Booklet including:

  • (1) providing to Santos drafts of the Scheme Booklet for the purpose of enabling Santos to review and comment on those draft documents;
  • (2) taking all comments made by Santos into account in good faith when producing a revised draft of the Scheme Booklet;
  • (3) providing to Santos a revised draft of the Scheme Booklet within a reasonable time before the Regulator's Draft is finalised; and
  • (4) obtaining written approval from Santos for the form and content in which the Santos Information appears in the Scheme Booklet;

• (n) information: provide all necessary information, or procure that the ESG Registry provides all necessary information, in each case in a form reasonably requested by Santos, about the Scheme and ESG Shareholders to Santos and its Representatives which Santos reasonably requires in order to assist Santos to discuss the merits of the Scheme with ESG Shareholders before the Scheme Meeting (including disclosure of any information held by ESG about the beneficial ownership of ESG Shares) and to facilitate the provision by Santos of the Scheme Consideration;

• (o) ASIC and ASX review: keep Santos informed of any matters raised by ASIC or ASX in relation to the Scheme Booklet or the Transaction, and use reasonable endeavours to take into consideration in resolving such matters any issues raised by Santos;

• (p) Independent Expert: promptly appoint the Independent Expert and provide assistance and information reasonably requested by the Independent Expert in connection with the preparation of the Independent Expert's Report for inclusion in the Scheme Booklet (including any updates to that report);

• (q) compliance with laws: do everything reasonably within its power to ensure that the Transaction is effected in accordance with all laws and regulations applicable in relation to the Transaction;

• (r) ESG Prescribed Occurrence: ensure that no ESG Prescribed Occurrence occurs between the date of this deed and 8.00am on the Second Court Date;

• (s) Shareholders support: after the mailing of the Scheme Booklet and subject to the Independent Expert concluding that the Scheme is in the best interests of ESG Shareholders (other than Excluded Shareholders), promote to its shareholders the merits of the Scheme, including, on the reasonable request of Santos, engaging a proxy solicitation firm to solicit proxies to be voted in favour of the Scheme and holding meetings between representatives of ESG and key ESG Shareholders;

• (t) listing: not do anything to cause ESG Shares to cease being quoted on the ASX or to become permanently suspended from quotation prior to completion of the Transaction unless Santos has agreed in writing; and

• (u) information: prepare and promptly provide to Santos any information regarding the ESG Group that Santos reasonably requires to prepare the Santos Information for inclusion in the Scheme Booklet.

5.2 Santos's obligations

Santos must take all necessary steps to implement the Scheme as soon as is reasonably practicable and without limiting the foregoing use reasonable endeavours to ensure that each step in the Timetable is met by the date set out beside that step (and consult with

ESG on a regular basis about its progress in that regard), including doing each of the following:

• (a) Santos Information: prepare and promptly provide to ESG the Santos Information for inclusion in the Scheme Booklet as required by all applicable Australian laws, and in particular by the Corporations Act, the Corporations Regulations, RG 60 and the Listing Rules;
• (b) review of Scheme Booklet: review the drafts of the Scheme Booklet prepared by ESG and provide comments as soon as practicable;
• (c) Independent Expert's report: provide any assistance or information reasonably requested by ESG or by the Independent Expert in connection with the preparation of the Independent Expert's report to be sent together with the Scheme Booklet;
• (d) representation: procure that it is represented by counsel at the Court hearings convened for the purposes of sections 411(1) and 411(4)(b) of the Corporations Act, at which through its counsel, Santos will undertake (if requested by the Court) to do all such things and take all such steps within its power as are necessary in order to ensure the fulfilment of its obligations under this deed and the Scheme;
• (e) Deed Poll: by not later than the Business Day prior to the First Court Date, enter into the Deed Poll;
• (f) accuracy of Santos Information: confirm to ESG the accuracy of the Santos Information in the Scheme Booklet (other than any information regarding the ESG Group contained in, or used in the preparation of, the Santos Information);
• (g) Share transfer: if the Scheme becomes Effective, accept a transfer of the ESG Shares as contemplated by clause 4.3(a)(1);
• (h) compliance with laws: do everything reasonably within its power to ensure that the Transaction is effected in accordance with all laws and regulations applicable in relation to the Transaction; and
• (i) Santos Scheme Consideration: if the Scheme becomes Effective, provide the Scheme Consideration in the manner and amount contemplated by clause 4 and the terms of the Scheme.

5.3 Conduct of business

• (a) Subject to clause 5.3(b), from the date of this deed up to and including the Implementation Date, and without limiting any other obligations of ESG under this deed, ESG must:
  • (1) conduct its business, and must cause each Related Body Corporate to conduct their respective businesses, in the ordinary and proper course of business and in a matter generally consistent with the manner in which each such business has been conducted in the 12 month period prior to the date of this deed;
  • (2) ensure that its, and its Related Bodies Corporates', expenditure in relation to the ESG Group's petroleum titles is in accordance with approved joint venture work programs and budgets;
  • (3) not, without the prior consent of Santos (which must not be unreasonably withheld) and subject to ESG's obligations under clause 5.1(s), make any announcement, media release or other public disclosure or give any external presentations on ESG's operations to brokers, portfolio investors, analysts, industry conferences,

Government Agencies or the like, in each case other than to the extent required by law or the ASX Listing Rules;

• (4) where an action contemplated by clause 5.3(a)(3) is required by law or the ASX Listing Rules, to the extent lawful to consult with Santos prior to taking such action;
• (5) not, and must procure that none of its Related Bodies Corporate:
  • (A) either:
    • (i) enter into a new employment contract with a potential employee of the ESG Group (other than to replace an employee who has ceased to be an employee of the ESG Group);
      • (ii) enter into a new employment contract or amend (other than as part of any annual salary review conducted in the ordinary course, after consultation with Santos) an employment contract with an existing employee of the ESG Group,

in respect of which the total employment costs payable to that existing or potential employee is in excess of $100,000 per annum;

• (B) pay any bonus, termination, severance or retention payments to any employee except in accordance with existing contractual entitlements as at the date of this deed, provided however that the ESG Board may, after consultation with Santos, in its absolute discretion approve any such payments;

• (C) other than as contemplated by clause 4.6, accelerate the rights of any employees of a member of the ESG Group to compensation or benefits of any kind; or

• (D) waive or forgive any loan (or part of a loan) to any employee of the ESG Group other than as required by the 'Eastern Star Employee Incentive Plan' rules; and

• (6) make all reasonable efforts to:

  • (A) keep available the services of their directors, officers and employees;
  • (B) maintain its corporate records in accordance with the procedures in place as at the date of this deed;
  • (C) maintain and preserve its relationships with customers, suppliers, Government Agencies, the community, licensors, licensees and others having business dealings with the ESG Group (including using reasonable endeavours to obtain consents from Third Parties to any change of control provisions which Santos reasonably requests in contracts or arrangements to which a member of the ESG Group is a party); and
  • (D) not enter into any lines of business or other activities in which the ESG Group is not engaged as of the date of this deed.

• (b) Nothing in clause 5.3(a) restricts the ability of ESG to take any action:

• (1) required by this deed, the Scheme or the transactions contemplated by them; or

• (2) which took place with the consent of Santos.

5.4 Appointment of directors

ESG must:

• (a) as soon as practicable after the Second Court Date (provided the Scheme is approved by the Court), take all actions necessary to cause the appointment of 3 nominees of Santos to the ESG Board; and
• (b) on the Implementation Date:
  • (1) ensure that all directors on the ESG Board, other than the Santos nominees appointed pursuant to clause 5.4(a), resign;
  • (2) ensure that all directors on the boards of ESG's Related Bodies Corporate resign; and
  • (3) cause the appointment of additional nominees of Santos (if requested by Santos) to ESG and those boards of its Related Bodies Corporate.

5.5 ESG Board recommendation

• (a) Subject to clause 5.5(b), ESG must use its best endeavours to procure that the ESG Board unanimously recommends that, subject to the Independent Expert concluding that the Scheme is in the best interests of ESG Shareholders (other than the Excluded Shareholders), ESG Shareholders (other than Excluded Shareholders) vote in favour of:
  • (1) the Scheme in the absence of a Superior Proposal; and
  • (2) all of the resolutions in the Scheme Booklet,

and the Scheme Booklet must include a statement by the ESG Board to that effect; provided that, ESG shall not be required to do anything in the foregoing if the Independent Expert does not conclude in the Independent Expert's Report (either initially or in any updated report) that the Scheme is in the best interests of ESG Shareholders.

• (b) ESG must use its best endeavours to procure that the ESG Board collectively, and the members of the ESG Board individually, must not change, withdraw or modify, its or his recommendation in favour of the Scheme, or recommend a Competing Transaction, unless either:
  • (1) the Independent Expert does not conclude in the Independent Expert's Report (either initially or in any updated report) that the Scheme is in the best interests of ESG Shareholders; or
  • (2) a Superior Proposal is publicly recommended by a majority of the ESG Board.

5.6 Access

In the period from the date of this deed to the Implementation Date, ESG must:

(a) procure that representatives of ESG's executive management team are available to meet with Representatives of Santos on a weekly basis to assist with, among other things:

• (1) keeping Santos fully informed of the matters contemplated by clause 5.6(b) below; and
• (2) providing Santos with access to information and people it has requested under clause 5.6(c) below;
• (b) keep Santos fully informed of all material developments relating to the ESG Group and provide to Santos the following:
  • (1) monthly management, financial and operational reports provided to the ESG Board;
  • (2) monthly balance sheets and cashflow statements for the ESG Group;
  • (3) information regarding material regulatory developments including licence renewals, communications with regulatory authorities and Government Agencies;
  • (4) information regarding any new material contracts proposed to be entered into; and
  • (5) all information regarding material acquisition and development proposals;
• (c) promptly following a request by Santos, provide Santos (and its Representatives) with access to:
  • (1) documents and information relating to the ESG Group; and
  • (2) executives and employees of the ESG Group,

which is reasonably required for the purpose of or in connection with:

• (3) planning the transition of the ESG Group and other matters relating to the conduct of the ESG Group following the Implementation Date; and
• (4) otherwise facilitating the Transaction.

5.7 Conduct of Court proceedings

• (a) Santos and ESG are entitled to separate representation at all Court proceedings affecting the Transaction.
• (b) This deed does not give Santos or ESG any right or power to give undertakings to the Court for or on behalf of the other party without that party's written consent.
• (c) Santos and ESG must give all undertakings to the Court in all Court proceedings which are reasonably required to obtain Court approval and confirmation of the Transaction as contemplated by this deed.

5.8 Responsibility statement

The Scheme Booklet will contain a responsibility statement to the effect that:

• (a) Santos is responsible for the Santos Information (other than any information provided by ESG to Santos or obtained from ESG public filings on ASX regarding the ESG Group contained in, or used in the preparation of, the Santos Information) contained in the Scheme Booklet; and
• (b) ESG is responsible for the ESG Information contained in the Scheme Booklet and is also responsible for the information contained in the Scheme Booklet provided by ESG to Santos or obtained from ESG's public filings on ASX regarding the ESG Group contained in, or used in the preparation of, the Santos Information.

5.9 Acquisition resolution

• (a) ESG will convene and hold a general meeting (held on the same day as, and immediately following, the Scheme Meeting) for the purpose of ESG Shareholders considering, and if thought fit, approving (in accordance with item 7 in the table in section 611 of the Corporations Act), the acquisition by Santos at the same time as implementation of the Scheme of 38,546,256 ESG Shares held by TRUenergy Investments Pty Ltd (TRU) for a price of $0.90 per ESG Share (Acquisition Resolution).
• (b) ESG and Santos will prepare an explanatory statement in respect of the Acquisition Resolution complying with the requirements of the Corporations Act and include it in the Scheme Booklet. Santos will provide any information reasonably requested by ESG for inclusion in the Scheme Booklet in respect of the Acquisition Resolution.
• (c) ESG will instruct the Independent Expert to also express an opinion on whether the transaction the subject of the Acquisition Resolution is fair and reasonable to ESG Shareholders (other than Santos, TRU and their Associates).
• (d) ESG will promote to ESG shareholders the merits of the Acquisition Resolution in a manner consistent with its obligations under this deed to promote the Scheme.
• (e) Unless there has been a change of recommendation permitted by clause 5.5, ESG will use its best endeavours to procure that:
  • (1) the ESG Board unanimously recommends that ESG Shareholders (other than Santos, TRU and their Associates) vote in favour of the Acquisition Resolution in the absence of any Superior Proposal; and
  • (2) each ESG Board member (in the absence of a Superior Proposal) votes, or procures the voting of, any ESG Shares held by or on their behalf in favour of the Acquisition Resolution,

and the Scheme Booklet must include statements to that effect.

6 Representations and warranties

6.1 Santos's representations

Santos represents and warrants to ESG (in its own right and separately as trustee or nominee for each of the other ESG Indemnified Parties) each of the Santos Representations and Warranties.

6.2 Santos's indemnity

Santos agrees with ESG (in its own right and separately as trustee or nominee for each of the other ESG Indemnified Parties) to indemnify the ESG Indemnified Parties against any claim, action, damage, loss, liability, cost, expense or payment of whatever nature and however arising which ESG or any of the other ESG Indemnified Parties suffers, incurs or is liable for arising out of any breach of any of the Santos Representations and Warranties.

6.3 ESG's representations

ESG represents and warrants to Santos (in its own right and separately as trustee or nominee for each of the other Santos Indemnified Parties) each of the ESG Representations and Warranties.

6.4 ESG's indemnity

ESG agrees with Santos (in its own right and separately as trustee or nominee for each Santos Indemnified Party) to indemnify Santos and each of the other Santos Indemnified Parties from any claim, action, damage, loss, liability, cost, expense or payment of whatever nature and however arising which Santos or any of the other Santos Indemnified Parties suffers, incurs or is liable for arising out of any breach of any of the ESG Representations and Warranties.

6.5 Survival of representations

Each representation and warranty referred to in clauses 6.1 and 6.3:

• (a) is severable; and
• (b) survives the termination of this deed.

6.6 Survival of indemnities

Each indemnity in this deed (including those in clauses 6.2 and 6.4):

• (a) is severable;
• (b) is a continuing obligation;
• (c) constitutes a separate and independent obligation of the party giving the indemnity from any other obligations of that party under this deed; and
• (d) survives the termination of this deed.

6.7 Timing of warranties

Each representation and warranty made or given under clauses 6.1 or 6.3 is given:

• (a) at the date of this deed;
• (b) again at the date the Scheme Booklet is dispatched to ESG Shareholders;
• (c) again at 8.00am on the date of the Scheme Meeting; and
• (d) again at 8.00am on the Second Court Date,

or where expressed to be given at a particular time, at that time.

7 Releases

7.1 ESG directors and officers

(a) Santos releases its respective rights, and agrees with ESG that it will not make a claim, against any ESG Indemnified Party (other than ESG) as at the date of this deed in connection with:

• (1) any breach of any representations, covenants and warranties of ESG or any member of the ESG Group in this deed; or
• (2) any disclosures containing any statement which is false or misleading whether in content or by omission,

except where the ESG Indemnified Party has not acted in good faith or has engaged in wilful misconduct.

(b) This clause is subject to any Corporations Act restriction and will be read down accordingly. ESG receives and holds the benefit of this clause to the extent it relates to each ESG Indemnified Party as trustee for each of them.

7.2 Santos directors and officers

• (a) ESG releases its rights, and agrees with Santos that it will not make a claim. against any Santos Indemnified Party (other than Santos) as at the date of this deed in connection with:
  • (1) any breach of any representations. covenants and warranties of Santos in this deed; or
  • (2) any disclosure containing any statement which is false or misleading whether in content or by omission,

except where the Santos Indemnified Party has not acted in good faith or has engaged in wilful misconduct.

(b) This clause is subject to any Corporations Act restriction and will be read down accordingly. Santos receives and holds the benefit of this clause to the extent it relates to each Santos Indemnified Party as trustee for each of them.

8 Public announcement

8.1 Announcement of transaction

Immediately after the execution of this deed, ESG and Santos must issue public announcements, in a form previously agreed to in writing between them, which include the recommendation referred to in clause 5.5(a) and a statement that each ESG director will vote the ESG Shares they control in favour of the Scheme, in the absence of a Superior Proposal and subject to the Independent Expert concluding that the Scheme is in the best interests of ESG Shareholders (other than Excluded Shareholders).

8.2 Public announcements

Subject to clause 8.3, no public announcement or disclosure of the Transaction may be made other than in a form approved by each party (acting reasonably), but each party must use all reasonable endeavours to provide such approval as soon as practicable.

8.3 Required disclosure

Where a party is required by applicable law or the ASX Listing Rules to make any announcement or to make any disclosure in connection with the Transaction or any other transaction the subject of this deed or the Scheme, it must use reasonable endeavours, to the extent practicable and lawful to consult with the other party prior to making the relevant disclosure.

9 No-talk and no-shop obligations

9.1 No-talk

Subject to clause 9.3, during the Exclusivity Period, ESG must not, and must ensure that none of its Representatives, Related Bodies Corporate and none of their Representatives:

• (a) directly or indirectly participate in or continue any discussions or negotiations;
• (b) provide or make available any material confidential information concerning ESG's operations;
• (c) enter into any agreement, arrangement or understanding; or
• (d) communicate any intention or willingness to do any of the things referred to in paragraphs (a), (b) or (c),

in relation to, or which may reasonably be expected to lead to, a Competing Transaction.

9.2 No-shop

During the Exclusivity Period, ESG must not, and must ensure that none of its Representatives, Related Bodies Corporate and none of their Representatives:

• (a) directly or indirectly solicit, invite or encourage enquiries, discussions or proposals in relation to, or which would reasonably be expected to lead to, a Competing Transaction; or
• (b) communicate to any person an intention to do any of the things referred to in clause 9.2(a).

9.3 Limitation to no-talk

ESG, its Representatives, its Related Bodies Corporate and their Representatives may undertake any action that would otherwise be prohibited by clause 9.1 in relation to a bona fide written proposal for a Competing Transaction which was not brought about as a result of any breach by it of its obligations under clause 9.2, where the ESG Board acting in good faith determines, after taking advice from its legal and Financial Advisers, that the Competing Transaction is, or is reasonably likely to be, a Superior Proposal.

9.4 ESG warranty and undertakings

• (a) ESG warrants as at the date of this deed:
  • (1) that it has ceased any existing discussions or negotiations with any party which may reasonably be expected to lead to a Competing Transaction; and
  • (2) that it will, as soon as reasonably practicable after the date of this deed, request the return of ESG's confidential information in accordance with the terms of any relevant confidentiality agreement from all Third Parties conducting due diligence investigations on the ESG Group prior to the date of this deed.
• (b) During the Exclusivity Period, ESG must:
  • (1) diligently enforce all its rights under each confidentiality agreement entered into before the date of this deed in connection with a transaction that would constitute under this deed a Competing Transaction or an ESG Prescribed Occurrence, including its rights to

require the return of confidential information as referred to in clause 9.4(a)(2)

• (2) as soon as reasonably practicable, ensure that the electronic data room access granted to any third party prior to the date of this deed in connection with a Competing Transaction is withdrawn; and
• (3) not grant any waivers or agree to any amendments under any confidentiality agreements entered into in connection with a Competing Transaction (before the date of this deed).

9.5 Notification of approaches

• (a) During the Exclusivity Period, ESG must:
  • (1) promptly notify Santos in writing if it, its Representatives or any of its Related Bodies Corporate or any of their Representatives becomes aware of any:
    • (A) approach or attempt to initiate any negotiations or discussions, or intention to make such an approach or attempt to initiate any negotiations or discussions in respect of any expression of interest, offer or proposal of a kind referred to in clause 9.1 or 9.2;
    • (B) proposal made to ESG, its Representatives or any of its Related Bodies Corporate or their Representatives, in connection with, or in respect of any exploration or consummation of, a Competing Transaction or a proposed or potential Competing Transaction (including any variation of such a proposal made prior to the date of this deed); or
    • (C) provision by ESG, its Representatives, its Related Bodies Corporate or their Representatives of any material confidential information concerning ESG's operations to any person in relation to a current or future Competing Transaction.
  • (2) promptly notify Santos in writing of the identity of the party or parties involved in any proposal referred to in clause 9.5(a)(1)(B) and the material terms of such proposal; and
  • (3) following any variation to any proposal referred to in clause 9.5(a)(1)(B), promptly notify Santos in writing of the varied details of such proposal.
• (b) The obligations in clauses 9.5(a)(2) and (3) do not apply to the extent that they require ESG to provide information the ESG Board has determined in good faith, and after having obtained written advice from its legal advisers, that the consequences of providing the relevant information would be likely to constitute a breach of the fiduciary duties owed by any ESG director.

9.6 Matching right

• (a) ESG must not enter into any legally binding agreement, arrangement or understanding (whether or not in writing) to undertake a Competing Transaction; and
• (b) ESG must use its best endeavours to procure that none of its directors change their recommendation in favour of the Transaction or publicly recommend a Competing Transaction,

unless:

• (c) the ESG Board acting in good faith determines, after taking advice from its legal and Financial Advisers, that the Competing Transaction is a Superior Proposal;
• (d) ESG has provided Santos with the material terms and conditions of the Competing Transaction (including price and the identity of the party or parties involved); and
• (e) ESG has given Santos at least 3 Business Days after the provision of the information referred to in paragraph (d) above to provide a matching or superior proposal to the terms of the Competing Transaction.

9.7 Compliance with law

• (a) If it is finally determined by the court, or the Takeovers Panel, that the agreement by ESG under this clause 9 or any part of it:
  • (1) constituted, or constitutes, or would constitute, a breach of the fiduciary or statutory duties of the ESG Board; or
  • (2) constituted, or constitutes, or would constitute, unacceptable circumstances within the meaning of the Corporations Act; or
  • (3) was, or is, or would be, unlawful for any other reason,

then, to that extent (and only to that extent) ESG will not be obliged to comply with that provision of clause 9.

(b) The parties must not make, cause or permit to be made, any application to a court or the Takeovers Panel for or in relation to a determination referred to in clause 9.7(a) and must use all reasonable endeavours to ensure that no such determination is made.

10 Payment of costs – Reimbursement Fee

10.1 Background

This clause 10 has been agreed to in circumstances where:

• (a) ESG and Santos believe the implementation of the Scheme will provide significant benefits to Santos, ESG and their respective shareholders, and ESG and Santos acknowledge that, if they enter into this deed and the Scheme is subsequently not implemented, Santos will incur significant costs, including significant opportunity costs;
• (b) Santos requested provision be made for the payments outlined in this clause 10, without which Santos would not have entered into this deed and the proposal would not have been put to ESG;
• (c) each of Santos's directors and the ESG Board believe that it is reasonable and appropriate for both parties to agree to the payment referred to in this clause 10 to secure Santos's entry into this deed and the benefits to ESG Shareholders from participation in the Transaction; and
• (d) both parties have received legal advice in relation to this deed and the operation of this clause 10.

10.2 Payment of Reimbursement Fee by ESG

Subject to clause 10.5, ESG must pay the Reimbursement Fee to Santos, without set-off or withholding, only if:

• (a) prior to the end of the Exclusivity Period, the ESG Board or any director of the ESG Board:
  • (1) withdraws or adversely modifies their support of or recommendation that ESG Shareholders (other than Excluded Shareholders) vote in favour of the Scheme; or
  • (2) makes a public statement indicating that they no longer support the Scheme, or that they support a Competing Transaction,

unless the Independent Expert does not conclude in the Independent Expert's Report (either initially or in any updated report) that the Scheme is in the best interests of ESG Shareholders (except in circumstances where the Independent Expert reaches that conclusion as a result of a Competing Transaction having been announced or made public);

• (b) within one year of the date of this deed, a Third Party completes a transaction resulting from a Superior Proposal; or
• (c) Santos is entitled to terminate this deed, and has terminated this deed, pursuant to clause 11.1(a)(1).

10.3 Written demand

• (a) If the Reimbursement Fee is payable by ESG to Santos, then ESG must pay the Reimbursement Fee to Santos within 10 Business Days after the date of receiving a written demand from Santos.
• (b) The demand for payment of the Reimbursement Fee can only be made after the occurrence of an event referred to in clause 10.2.
• (c) ESG is only liable to pay the Reimbursement Fee once.

10.4 Nature of payment

• (a) The amount payable by ESG to Santos under clause 10.2 is an amount to compensate Santos for:
  • (1) advisory costs (including costs of advisers other than success fees);
  • (2) costs of management and directors' time;
  • (3) out-of-pocket expenses; and
  • (4) reasonable opportunity costs incurred by Santos in pursuing the Scheme or in not pursuing other alternative acquisitions or strategic initiatives which Santos could have developed to further its business and objectives,

in each case, incurred by Santos directly or indirectly as a result of having entered into this deed and pursuing the Transaction.

• (b) The parties acknowledge that:
  • (1) the amount of fees, costs and losses comprised in the Reimbursement Fee is inherently unascertainable and that, even after termination of this deed, the costs will not be able to be accurately ascertained; and

(2) the amount of the Reimbursement Fee is a genuine and reasonable pre-estimate of those fees, costs and losses (it being acknowledged by the parties that the costs would most likely be in excess of this amount).

10.5 Compliance with law

• (a) This clause 10 does not impose an obligation on ESG to pay the Reimbursement Fee to the extent that the obligation to pay the Reimbursement Fee:
  • (1) constitutes unacceptable circumstances as declared by the Takeovers Panel; or
  • (2) is held to be unenforceable by Santos against ESG as determined by a court,

after all proper avenues of appeal and review, whether judicial or otherwise, have been exhausted. The parties must take all reasonable steps to ensure that any such determination applies to the minimum extent possible.

(b) The parties must not make, cause or permit to be made, any application to a court or the Takeovers Panel for or in relation to a determination referred to in clause 10.5(a) and must use all reasonable endeavours to ensure that no such determination is made.

11 Termination

11.1 Termination

• (a) Without prejudice to any other rights of termination under this deed, either party may terminate this deed by written notice to the other party:
  • (1) at any time before 8.00am on the Second Court Date if the other party has materially breached this deed, the party wishing to terminate has given written notice to the other party in a timely manner setting out the relevant circumstances and stating an intention to terminate this deed, and the relevant circumstances continue to exist 10 Business Days (or any shorter period ending at 5.00pm on the day before the Second Court Date) after the date on which the notice is given;
  • (2) at any time before 8.00am on the Second Court Date if a Court or Government Agency has taken any action permanently restraining or otherwise prohibiting the Transaction, or has refused to do any thing necessary to permit the Transaction, and the action or refusal has become final and cannot be appealed; or
  • (3) in the circumstances set out in, and in accordance with, clause 3.4.
• (b) Santos may terminate this deed by written notice to ESG if at any time before 8.00am on the Second Court Date:
  • (1) an ESG director changes, withdraws or modifies his recommendation that ESG Shareholders (other than Excluded Shareholders) vote in favour of the Scheme, or makes a public statement indicating that it no longer supports the Transaction or that it supports another transaction;

• (2) an ESG Material Adverse Change occurs, is announced or is otherwise discovered by Santos (whether or not it becomes public); or
• (3) an ESG Prescribed Occurrence occurs, is announced or is otherwise discovered by Santos (whether or not it becomes public).

11.2 Effect of termination

If this deed is terminated by either party under clauses 3.4 or 11.1, except to the extent that the termination results from a breach by either party of its obligations under this deed, this deed will become void and have no further force or effect, without any liability or obligation on the part of any party, other than in relation to rights and obligations that accrued prior to termination and other than in relation to the provisions of this clause 11 and of clauses 1, 6.5 to 6.7, 10, 12, 13, 14.2, 14.4, 14.5 and 14.6, which will remain in force after termination.

11.3 Santos acknowledgement

• (a) Santos acknowledges and agrees that, if this deed is terminated by ESG pursuant to clause 11.1(a)(1) due to a material breach by Santos, Santos's liability to ESG may not adequately reflect any loss or damage suffered by ESG's Shareholders (unlike the position that would apply if the Transaction was to be implemented by takeover bid and section 670E of the Corporations Act applied).
• (b) Accordingly, subject to clause 11.3(d), if ESG terminates this deed due to a material breach by Santos pursuant to clause 11.1(a)(1), any ESG Shareholder who:
  • (1) enters into a transaction relating to ESG Shares in reliance on the announcement of the Transaction; and
  • (2) suffers loss or damage as a result of the Transaction not proceeding,
  • may recover the amount of that loss or damage from Santos.
• (c) ESG holds Santos's obligations under clause 11.3(b) as trustee or nominee for each ESG Shareholder who is entitled to recover loss or damage against Santos under that clause.
• (d) Santos is not liable for any such loss or damage if Santos can show that it could not reasonably have been expected to proceed with implementation of the Scheme because:
  • (1) at the time this deed was entered into, circumstances existed affecting ESG which Santos did not know of and could not reasonably be expected to know of; or
  • (2) after the date of this deed, a change in such circumstances has occurred that was not caused, directly or indirectly, by Santos.

11.4 Terminable in writing

This deed is terminable if agreed to in writing by ESG and Santos.

12 Duty, costs and expenses

12.1 Stamp duty

Santos must pay all stamp duties and any fines and penalties with respect to stamp duty in respect of this deed or the Scheme or the steps to be taken under this deed or the Scheme.

12.2 Costs and expenses

Except as otherwise provided in this deed, each party must pay its own costs and expenses in connection with the negotiation, preparation, execution and performance of this deed and the proposed, attempted or actual implementation of this deed and the Transaction.

13 GST

• (a) Any consideration or amount payable under this deed, including any nonmonetary consideration (as reduced in accordance with clause 13(e) if required) (Consideration) is exclusive of GST.
• (b) If GST is or becomes payable on a Supply made under or in connection with this deed, an additional amount (Additional Amount) is payable by the party providing consideration for the Supply (Recipient) equal to the amount of GST payable on that Supply as calculated by the party making the Supply (Supplier) in accordance with the GST Law.
• (c) The Additional Amount payable under clause 13(b) is payable at the same time and in the same manner as the Consideration for the Supply, and the Supplier must provide the Recipient with a Tax Invoice. However, the Additional Amount is only payable on receipt of a valid Tax Invoice.
• (d) If for any reason (including the occurrence of an Adjustment Event) the amount of GST payable on a Supply (taking into account any Decreasing or Increasing Adjustments in relation to the Supply) varies from the Additional Amount payable by the Recipient under clause 13(b):
  • (1) the Supplier must provide a refund or credit to the Recipient, or the Recipient must pay a further amount to the Supplier, as appropriate;
  • (2) the refund, credit or further amount (as the case may be) will be calculated by the Supplier in accordance with the GST Law; and
  • (3) the Supplier must notify the Recipient of the refund, credit or further amount within 14 days after becoming aware of the variation to the amount of GST payable. Any refund or credit must accompany such notification or the Recipient must pay any further amount within 7 days after receiving such notification, as appropriate. If there is an Adjustment Event in relation to the Supply, the requirement for the Supplier to notify the Recipient will be satisfied by the Supplier issuing to the Recipient an Adjustment Note within 14 days after becoming aware of the occurrence of the Adjustment Event.
• (e) Despite any other provision in this deed:
  • (1) if an amount payable under or in connection with this deed (whether by way of reimbursement, indemnity or otherwise) is calculated by

reference to an amount incurred by a party, whether by way of cost, expense, outlay, disbursement or otherwise (Amount Incurred), the amount payable must be reduced by the amount of any Input Tax Credit to which that party is entitled in respect of that Amount Incurred; and

• (2) no Additional Amount is payable under clause 13(b) in respect of a Supply to which s 84-5 of the GST Law applies.
• (f) Any reference in this clause 13 to an Input Tax Credit to which a party is entitled includes an Input Tax Credit arising from a Creditable Acquisition by that party but to which the Representative Member of a GST Group of which the party is a member is entitled.
• (g) Any term starting with a capital letter in this clause 13 that is not defined in this deed has the same meaning as the term has in the A New Tax System (Goods & Services Tax) Act 1999 (Cth).

14 General

14.1 No representation or reliance

• (a) Each party acknowledges that no party (nor any person acting on its behalf) has made any representation or other inducement to it to enter into this deed, except for representations or inducements expressly set out in this deed and (to the maximum extent permitted by law) all other representations, warranties and conditions implied by statute or otherwise in relation to any matter relating to this deed, the circumstances surrounding the parties' entry into it and the transactions contemplated by it are expressly excluded.
• (b) Each party acknowledges that it has performed its own searches, enquiries, investigations and evaluations prior to entering into this deed and has formed its own views on the Transaction, with no targets, projections, forecasts or other forward looking statements having been relied on by that party.
• (c) Each party acknowledges and confirms that it does not enter into this deed in reliance on any representation or other inducement by or on behalf of any other party, except for any representation or inducement expressly set out in this deed.
• (d) Each party acknowledges and confirms that clauses 14.1(a) and 14.1(b) do not prejudice any rights a party may have in relation to information which has been filed by the other party with ASIC or ASX.

14.2 No merger

The rights and obligations of the parties do not merge on completion of the Transaction. They survive the execution and delivery of any assignment or other document entered into for the purpose of implementing the Transaction.

14.3 Consents

Any consent referred to in, or required under, this deed from any party may be withheld at that party's absolute discretion, unless this deed expressly provides for that party to not unreasonably withhold its consent, in which case its consent must not be unreasonably withheld.

14.4 Notices

A notice or other communication including, but not limited to, a request, demand, consent or approval, to or by a party to this deed:

(a)	must be in legible writing and in English;
(b)		may be delivered personally to the addressee, or sent by email to the emailaddress of the addressee given below:
	(1)	if to Santos:
	Address:	60 Flinders Street, Adelaide, SA, 5000
	Attention:	Company Secretary
	Email:	[email protected]
		With a copy to Freehills:
	Address:	Level 43, 101 Collins Street, Melbourne, Victoria 3000
	Attention:	Baden Furphy, Partner
	Email:	[email protected]
	(2)	if to ESG:
	Address:	Level 7, 51 Pitt Street, Sydney, NSW, 2000
	Attention:	Company Secretary
	Email:	[email protected]
		With a copy to Piper Alderman:
	Address:	Level 23, Governor Macquarie Tower, 1 Farrer Place, Sydney NSW 2000
	Attention:	Gordon Grieve

Email: [email protected]

or as specified to the sender by the other party by notice;

• (c) must, if the sender is a company, be signed by an authorised signatory or legal adviser;
• (d) is regarded as being given by the sender and received by the addressee if delivered in person, when delivered to the addressee but if the delivery or receipt is on a day which is not a Business Day or is after 4.00pm (addressee's time), it is regarded as received at 9.00am on the next Business Day;
• (e) if sent by email, is regarded as being sent by the sender and received by the addressee when sent by the sender to the addressee's email address (unless the sender receives a delivery failure notification indicating that the email has not been delivered to the addressee) but if the sending is on a day which is not a Business Day or is after 4.00pm (addressee's time), it is regarded as received at 9.00am on the next Business Day; and
• (f) can be relied on by the addressee, and the addressee is not liable to any other person for any consequences of that reliance, if the addressee believes it is genuine, correct and authorised by the sender.

In this clause 14.4, a reference to an addressee includes a reference to an addressee's officers, agents or employees.

14.5 Service of process

Without preventing any other mode of service, any document in an action (including any writ of summons or other originating process or any third or other party notice) may be served on any party by being delivered to or left for that party at its address for service of notices under clause 14.4.

14.6 Governing law and jurisdiction

• (a) This deed is governed by the laws of New South Wales.
• (b) Each party irrevocably submits to the non-exclusive jurisdiction of the courts of New South Wales and courts competent to hear appeals from those courts.

14.7 Waivers

• (a) Failure to exercise or enforce, a delay in exercising or enforcing, or the partial exercise or enforcement of any right, power or remedy provided by law or under this deed by any party does not in any way preclude, or operate as a waiver of, any exercise or enforcement, or further exercise or enforcement, of that or any other right, power or remedy provided by law or under this deed.
• (b) Any waiver or consent given by any party under this deed is only effective and binding on that party if it is given or confirmed in writing by that party.
• (c) No waiver of a breach of any term of this deed operates as a waiver of another breach of that term or of a breach of any other term of this deed.

14.8 Variation

This deed may only be varied by a document signed by or on behalf of each of the parties.

14.9 Assignment

A party may not assign, novate or otherwise transfer any of its rights or obligations under this deed without the prior written consent of the other party.

14.10 Acknowledgement

Each party acknowledges that the remedy of damages may be inadequate to protect the interests of the parties for a breach of clause 9 and that Santos is entitled to seek and obtain without limitation injunctive relief if ESG breaches clause 9.

14.11 No third party beneficiary

This deed shall be binding on and inure solely to the benefit of each party to it and each of their respective permitted successors and assigns, and nothing in this deed, express or implied, is intended to or shall confer on any other person, other than the Santos Indemnified Parties and the ESG Indemnified Parties to the extent set forth in clause 6, any third party beneficiary rights.

14.12 Further action

Each party will do all things and execute all further documents necessary to give full effect to this deed.

14.13 Entire agreement

This deed supersedes all previous agreements, understandings, negotiations or deeds in respect of its subject matter and embodies the entire agreement between the parties.

14.14 Counterparts

• (a) This deed may be executed in any number of counterparts.
• (b) All counterparts, taken together, constitute one instrument.
• (c) A party may execute this deed by signing any counterpart.

Schedule 1

Santos Representations and Warranties

Santos represents and warrants to ESG (in its own right and separately as trustee or nominee for each of the other ESG Indemnified Parties) that:

• (a) Santos Information: the Santos information contained in the Scheme Booklet:
  • (1) will be prepared and included in the Scheme Booklet in good faith; and
  • (2) will comply in all material respects with the requirements of the Corporations Act, Corporations Regulations, Listing Rules and relevant ASIC regulatory guides;
• (b) Information provided to the Independent Expert: all information provided by Santos to the Independent Expert will be provided in good faith and on the understanding that the Independent Expert will rely on that information for the purposes of preparing its report for inclusion in the Scheme Booklet;
• (c) Scheme Booklet: the Santos Information provided for inclusion in the Scheme Booklet (other than any information regarding the ESG Group contained in, or used in the preparation of, the Santos Information), as at the date of the Scheme Booklet, will not contain any statement which is materially misleading or deceptive including by way of omission from that Santos Information;
• (d) New information: it will, as a continuing obligation, provide to ESG all further or new information which arises after the date of the Scheme Booklet until the Second Court Date which is necessary to ensure that the Santos Information is not misleading or deceptive in any material respect (including because of any material omission);
• (d) Continuous disclosure: Santos has, at the date of this deed, complied in all material respects with its continuous disclosure obligations under Listing Rule 3.1 and, other than in connection with this Transaction or otherwise as disclosed to ESG in writing on or before the date of this deed, it is not relying on the carve-out in Listing Rule 3.1A to withhold any material information from public disclosure;
• (a) Validly existing: it is a validly existing corporation registered under the laws of its place of incorporation;
• (b) Authority: the execution and delivery of this deed has been properly authorised by all necessary corporate action of Santos;
• (c) Power: it has full corporate power and lawful authority to execute, deliver and perform this deed; and
• (d) No default: this deed does not conflict with or result in the breach of or a default under any provision of Santos's constitution or any writ, order or injunction, judgment, law, rule or regulation to which it is party or subject or by which it is bound.

Schedule 2

ESG Representations and Warranties

ESG represents and warrants to Santos (in its own right and separately as trustee or nominee for each of the other Santos Indemnified Parties) that:

• (a) Information in Scheme Booklet: the information contained in the Scheme Booklet (other than the Santos Information and the Independent Expert's Report):
  • (1) will be prepared and included in the Scheme Booklet in good faith; and
  • (2) will comply in all material respects with the requirements of the Corporations Act, Corporations Regulations, Listing Rules and relevant ASIC regulatory guides;
• (b) Information provided to the Independent Expert: all information provided by ESG to the Independent Expert will be provided in good faith and on the understanding that the Independent Expert will rely on that information for the purpose of preparing its report for inclusion in the Scheme Booklet;
• (c) Scheme Booklet: no information (other than the Santos Information) contained in the Scheme Booklet, as at the date of the Scheme Booklet, will contain any statement which is materially misleading or deceptive, including by way of omission from that statement;
• (d) New information: it will, as a continuing obligation, ensure that the Scheme Booklet (but in respect of Santos Information, subject to Santos complying with its obligations to update Santos Information) will be updated by all further or new information which may arise after the date of the Scheme Booklet until the Scheme Meeting which is necessary to ensure that the Scheme Booklet is not misleading or deceptive in any material respect (including because of any material omission);
• (e) Continuous disclosure: ESG has complied in all material respects with its continuous disclosure obligations under Listing Rule 3.1 and, other than in connection with this Transaction or otherwise as disclosed to Santos in writing on or before the date of this deed, it is not relying on the carve-out in Listing Rule 3.1A to withhold any material information from public disclosure;
• (f) Validly existing: it is a validly existing corporation registered under the laws of its place of incorporation;
• (g) Authority: the execution and delivery of this deed has been properly authorised by all necessary corporate action of ESG;
• (h) Power: ESG has full corporate power and lawful authority to execute and deliver this deed;
• (i) Capital structure: as at the date of this deed there are:
  • (1) 991,717,041 quoted ordinary shares on issue; and
  • (2) 34,830,000 unquoted ordinary shares on issue;
• (j) Options: ESG has not issued or agreed to issue any other securities, options, performance rights or instruments which are still outstanding and which may convert into ESG Shares;

Schedule 2 ESG Representations and Warranties

(k) No default: this deed does not conflict with or result in the breach of or default under any provision of ESG's constitution or any writ, order or injunction, judgment, law, rule or regulation to which it is party or subject or by which it is bound;

(l) No change of control provisions:

• (1) no material contract to which a member of the ESG Group is a party contains a provision that would entitle the counterparty to terminate the contract upon the Transaction being implemented without that counterparty's consent;
• (2) no term or condition of any petroleum title held by a member of the ESG Group requires the Minister of Energy and Resources to approve the change of control of the titleholder contemplated by the Scheme,

other than as disclosed by ESG to Santos or its Representative before the date of this deed; and

(m) Prior actions: other than as disclosed by ESG to Santos or its Representative before the date of this deed, between 11 July 2011 and the date of this deed, it has not taken any action, or failed to take any action which if it had taken, or failed to take (as applicable) after the date of this deed it would have been a breach of clause 5.3 of this deed or constituted an ESG Prescribed Occurrence.

	Signed sealed and delivered bySantos Limited
	by
gion hare	Aftomey
	CHRYSTIAN PACCH
ANNA	$N$ $N$ $P$ $\rightarrow$CALLER

	Santos
	Signed sealed and delivered bySantos Limitedby
sign here >
	Attorney
print name	distribution of the
sign here >	Attorney
print name	and the company's company's company's
	ESG
	Signed sealed and delivered on behalf ofESG Limitedby
sign here »	uthanCompany Secretary/DireKirkham
print name
sign here »	Director
print nome

Attachment 1

Indicative Timetable

Event	Target date
Announcement	Monday, 18 July 2011
First complete draft of Scheme Booklet(including expert's report)	Monday, 15 August 2011
Scheme Booklet complete and provided toASIC	Monday, 22 August 2011
First Court hearing	Wednesday, 7 September 2011
Mailing of Scheme Booklet complete	Monday, 12 September 2011
Scheme Meeting	Wednesday, 12 October 2011
Second Court hearing	Friday, 14 October 2011
Effective Date	Friday, 14 October 2011
Scheme Record Date	Friday, 21 October 2011
Implementation Date	Friday, 28 October 2011

Scheme of arrangement

This scheme of arrangement is made under section 411 of the Corporations Act 2001 (Cth)

Between the parties

Eastern Star Gas Limited ACN 094 269 780 of Level 7, 51 Pitt Street, Sydney, NSW, 2000

Each person registered as a holder of fully paid ordinary shares in ESG in the Share Register as at the Scheme Record Date (other than the Excluded Shareholders)

(Scheme Shareholders)

1 Definitions, interpretation and scheme components

1.1 Definitions

The meanings of the terms used in this Scheme are set out below.

Term	Meaning
ASIC	the Australian Securities and Investments Commission.
ASX	ASX Limited ABN 98 008 624 691 and, where the context requires,the financial market that it operates.
Business Day	a business day as defined in the Listing Rules.
CHESS	the Clearing House Electronic Subregister System operated by ASXSettlement Pty Ltd and ASX Clear Pty Limited.
Corporations Act	the Corporations Act 2001 (Cth).
Court	the Federal Court of Australia or such other court of competentjurisdiction under the Corporations Act agreed to in writing by ESGand Santos.

Term	Meaning
Deed Poll	the deed poll under which Santos covenants in favour of the SchemeShareholders to perform its obligations under this Scheme.
Effective	when used in relation to the Scheme, the coming into effect, undersection 411(10) of the Corporations Act, of the Court order madeunder section 411(4)(b) of the Corporations Act in relation to thisScheme.
Effective Date	the date on which this Scheme becomes Effective.
End Date	1 February 2012.
ExcludedShareholder	any ESG Shareholder who:is a Santos Group Member; orwho holds an ESG Share on behalf of any Santos GroupMember; orholds an ESG Share in which a Relevant Interest is held by aSantos Group Member and who is nominated for the purpose ofthis definition by Santos.
Government Agency	any foreign or Australian government or governmental, semigovernmental, administrative, fiscal or judicial body, department,commission, authority, tribunal, agency or entity, or any minister ofthe Crown in right of the Commonwealth of Australia or any state, orany other federal, state, provincial, local or other government,whether foreign or Australian.
ImplementationDeed	the scheme implementation deed dated 18 July 2011 between ESGand Santos relating to the implementation of this Scheme.
Implementation Date	the fifth Business Day after the Scheme Record Date or such otherday as the parties agree.
Ineligible OverseasShareholder	means a Scheme Shareholder whose Registered Address at theScheme Record Date is a place outside Australia and its externalterritories, New Zealand and other jurisdictions agreed between theparties.
New Santos Share	a fully paid ordinary share in Santos to be issued to SchemeShareholders under this Scheme.

Term	Meaning
ESG	Eastern Star Gas Limited ACN 094 269 780 of Level 7, 51 PittStreet, Sydney, NSW, 2000
ESG Registry	Link Market Services Limited ACN 083 214 537.
ESG Shares	a fully paid ordinary share of ESG.
ESG Shareholders	each person who is registered as the holder of ESG Shares.
Registered Address	in relation to an ESG Shareholder, the address shown in the ShareRegister as at the Scheme Record Date.
Sale Agent	the person appointed by Santos to sell the New Santos Shares thatare to be issued under clause 5.3(a)(1) of this Scheme.
Santos	Santos Limited ACN 007 550 923 of 60 Flinders Street, Adeliade, SA5000
Santos Group	Santos and each of its Related Bodies Corporate and a reference toa Santos Group Member or a member of the Santos Group is toSantos or any of its Related Bodies Corporate.
Santos Register	the register of shareholders maintained by Santos or its agent.
Scheme	this scheme of arrangement subject to any alterations or conditionsmade or required by the Court under section 411(6) of theCorporations Act and agreed to by ESG and Santos.
SchemeConsideration	an amount of 0.06881 Santos Shares for each Scheme Share heldby each Scheme Shareholder.
Scheme Record Date	5.00pm on the fifth Business Day after the Effective Date.
Scheme Share	an ESG Share held by a Scheme Shareholder as at the SchemeRecord Date.

Term	Meaning
Scheme Shareholder	ESG Shareholders (other than Excluded Shareholders) as at theScheme Record Date.
Scheme Transfer	a duly completed and executed proper instrument of transfer inrespect of the Scheme Shares for the purposes of section 1071B ofthe Corporations Act, in favour Santos, which may be a mastertransfer of all or part of the Scheme Shares.
Second Court Date	the first day on which an application made to the Court for an orderunder section 411(4)(b) of the Corporations Act approving theScheme is heard.
Share Register	the register of members of ESG maintained in accordance with theCorporations Act.

1.2 Interpretation

In this Scheme:

• (a) headings and bold type are for convenience only and do not affect the interpretation of this Scheme;

• (b) the singular includes the plural and the plural includes the singular;

• (c) words of any gender include all genders;

• (d) other parts of speech and grammatical forms of a word or phrase defined in this Scheme have a corresponding meaning;

• (e) a reference to a person includes any company, partnership, joint venture, association, corporation or other body corporate and any Government Agency as well as an individual;

• (f) a reference to a clause, party or part is a reference to a clause or part of, and a party to, this Scheme;

• (g) a reference to any legislation includes all delegated legislation made under it and amendments, consolidations, replacements or re enactments of any of them;

• (h) a reference to a document (including this Scheme) includes all amendments or supplements to, or replacements or novations of, that document;

• (i) a reference to '$', 'A$' or 'dollar' is to Australian currency unless denominated otherwise;

• (j) a reference to any time is a reference to that time in Melbourne, Victoria;

• (k) a term defined in or for the purposes of the Corporations Act has the same meaning when used in this Scheme;

• (l) a reference to a party to a document includes that party's successors and permitted assignees;

• (m) no provision of this Scheme will be construed adversely to a party because that party was responsible for the preparation of this Scheme or that provision;

• (n) any agreement, representation, warranty or indemnity by two or more parties (including where two or more persons are included in the same defined term) binds them jointly and severally;

• (o) any agreement, representation, warranty or indemnity in favour of two or more parties (including where two or more persons are included in the same defined term) is for the benefit of them jointly and severally; and

• (p) a reference to a body, other than a party to this Scheme (including an institute, association or authority), whether statutory or not:

  • (1) which ceases to exist; or
  • (2) whose powers or functions are transferred to another body,

is a reference to the body which replaces it or which substantially succeeds to its powers or functions.

1.3 Interpretation of inclusive expressions

Specifying anything in this Scheme after the words 'include' or 'for example' or similar expressions does not limit what else is included.

1.4 Business Day

Where the day on or by which any thing is to be done is not a Business Day, that thing must be done on or by the next Business Day

2 Preliminary matters

• (a) ESG is a public company limited by shares, registered in New South Wales and has been admitted to the official list of the ASX.
• (b) As at 22 September 2011:
  • (1) 992,317,041 ESG Shares were on issue which are officially quoted on the ASX; and
  • (2) 34,230,000 ESG Shares were on issue which are not quoted on any stock exchange.
• (c) Santos is a listed public company limited by shares incorporated in South Australia.
• (d) If this Scheme becomes Effective:
  • (1) Santos will provide or procure the provision of the Scheme Consideration to Scheme Shareholders in accordance with this Scheme and the Deed Poll; and
  • (2) all the Scheme Shares, and all the rights and entitlements attaching to them as at the Implementation Date, will be transferred to Santos and ESG will enter the name of Santos in the Share Register in respect of the Scheme Shares.
• (e) ESG and Santos have agreed, by executing the Implementation Deed, to implement this Scheme.
• (f) This Scheme attributes actions to Santos but does not itself impose an obligation on it to perform those actions. Santos has agreed, by executing the Deed Poll, to perform the actions attributed to it under this Scheme, including the providing or procuring the provision of the Scheme Consideration to the Scheme Shareholders.

3 Conditions

3.1 Conditions precedent

This Scheme is conditional on and will have no force or effect until, the satisfaction of each of the following conditions precedent:

• (a) all the conditions in clause 3.1 of the Implementation Deed (other than the condition in the Implementation Deed relating to Court approval of this Scheme) having been satisfied or waived in accordance with the terms of the Implementation Deed by 8.00am on the Second Court Date;
• (b) neither the Implementation Deed nor the Deed Poll having been terminated in accordance with their terms before 8.00am on the Second Court Date;
• (c) approval of this Scheme by the Court under section 411(4)(b) of the Corporations Act, including with any alterations made or required by the Court under section 411(6) of the Corporations Act as are acceptable to Santos and ESG;
• (d) such other conditions made or required by the Court under section 411(6) of the Corporations Act in relation to the Scheme as are acceptable to Santos and ESG; and
• (e) the orders of the Court made under section 411(4)(b) (and, if applicable, section 411(6)) of the Corporations Act approving the Scheme coming into effect, pursuant to section 411(10) of the Corporations Act on or before the End Date (or any later date ESG and Santos agree in writing).

3.2 Certificate

• (a) ESG and Santos will provide to the Court on the Second Court Date a certificate, or such other evidence as the Court requests, confirming (in respect of matters within their knowledge) whether or not all of the conditions precedent in clauses 3.1(a) and 3.1(b) have been satisfied or waived.
• (b) The certificate referred to in clause 3.2(a) constitutes conclusive evidence that such conditions precedent are satisfied, waived or taken to be waived.

4 Implementation of the Scheme

4.1 Lodgement of Court orders with ASIC

ESG will lodge with ASIC, in accordance with section 411(10) of the Corporations Act, an office copy of the Court order approving the Scheme as soon as possible and in any event on the date on which the Court approves the Scheme or the following Business Day.

4.2 Transfer of Scheme Shares

On the Implementation Date:

(a) subject to the provision of the Scheme Consideration in the manner contemplated by clause 5, the Scheme Shares, together with all rights and entitlements attaching to the Scheme Shares as at the Implementation Date, will be transferred to Santos, without the need for any further act by any Scheme Shareholder (other than acts performed by ESG as attorney and agent for Scheme Shareholders under clause 8.5), by:

• (1) ESG delivering to Santos a duly completed Scheme Transfer, executed on behalf of the Scheme Shareholders by ESG, for registration; and
• (2) Santos duly executing the Scheme Transfer, attending to the stamping of the Scheme Transfer (if required) and delivering it to ESG for registration; and
• (b) immediately following receipt of the Scheme Transfer in accordance with clause 4.2(a)(2), ESG must enter, or procure the entry of, the name of Santos in the Share Register in respect of all the Scheme Shares transferred to Santos in accordance with this Scheme.

5 Scheme Consideration

5.1 Provision of Scheme Consideration

Santos must, subject to clauses 5.2,5.3 and 5.4:

• (a) on or before the Implementation Date, issue the New Santos Shares to which each Scheme Shareholder is entitled under this clause 5 and procure that the name and address of each Scheme Shareholder is entered in the Santos Register in respect of those New Santos Shares; and
• (b) procure that on or before the date that is five Business Days after the Implementation Date, a share certificate or holding statement (or equivalent document) is sent to the Registered Address of each Scheme Shareholder representing the number of New Santos Shares issued to the Scheme Shareholder pursuant to this Scheme.

5.2 Joint holders

In the case of Scheme Shares held in joint names:

• (a) the New Santos Shares to be issued under this Scheme must be issued to and registered in the names of the joint holders;
• (b) any cheque required to be sent under this Scheme will be made payable to the joint holders and sent to the holder whose name appears first in the Share Register as at the Scheme Record Date; and
• (c) any other document required to be sent under this Scheme, will be forwarded to the holder whose name appears first in the Share Register as at the Scheme Record Date.

5.3 Ineligible Overseas Shareholders

• (a) Santos will be under no obligation to issue any New Santos Shares under this Scheme to any Ineligible Overseas Shareholder and instead:
  • (1) subject to clause 5.4, Santos must, on or before the Implementation Date, issue the New Santos Shares which would otherwise be required to be issued to the Ineligible Overseas Shareholders under this Scheme to the Sale Agent;
  • (2) Santos must procure that as soon as reasonably practicable after the Implementation Date, the Sale Agent, in consultation with Santos sells or procures the sale of all the New Santos Shares issued to the Sale Agent and remits to ESG the proceeds of the sale (after deduction of any applicable brokerage, stamp duty**,** currency conversion costs and other costs, taxes and charges) (Proceeds);
  • (3) promptly after receiving the Proceeds in respect of the sale of all of the New Santos Shares referred to in clause 5.3(a)(1), ESG must pay, or procure the

payment, to each Ineligible Overseas Shareholder, of the amount 'A' calculated in accordance with the following formula and rounded down to the nearest cent:

A = (B ÷ C) x D

where

B = the number of New Santos Shares that would otherwise have been issued to that Ineligible Overseas Shareholder had it not been an Ineligible Overseas Shareholder and which are issued to the Sale Agent;

C = the total number of New Santos Shares which would otherwise have been issued to all Ineligible Overseas Shareholders and which are issued to the Sale Agent; and

D = the Proceeds (as defined in clause 5.3(a)(2)).

• (b) None of Santos, ESG or the Sale Agent gives any assurance as to the price that will be achieved for the sale of New Santos Shares described in clause 5.3(a).
• (c) ESG must make payments to Ineligible Overseas Shareholders under clause 5.3(a) by either (in the absolute discretion of ESG):
  • (1) where an Ineligible Overseas Shareholder has, before the Scheme Record Date, made a valid election in accordance with the requirements of the ESG Registry to receive dividend payments from ESG by electronic funds transfer to a bank account nominated by the Ineligible Overseas Shareholder, paying, or procuring the payment of, the relevant amount in Australian currency by electronic means in accordance with that election; or
  • (2) otherwise, whether or not the Ineligible Overseas Shareholder has made an election referred to in clause 5.3(c)(1), dispatching, or procuring the dispatch of, a cheque for the relevant amount in Australian currency to the Ineligible Overseas Shareholder by prepaid post to their Registered Address, such cheque being drawn in the name of the Ineligible Overseas Shareholder (or in the case of joint holders, in accordance with the procedures set out in clause 5.2).
• (d) If ESG receives professional advice that any withholding or other tax is required by law to be withheld from a payment to an Ineligible Overseas Shareholder, ESG is entitled to withhold the relevant amount before making the payment to the Ineligible Overseas Shareholder (and payment of the reduced amount shall be taken to be full payment of the relevant amount for the purposes of this Scheme including clause 5.3(a)(3)). ESG must pay any amount so withheld to the relevant taxation authorities within the time permitted by law, and, if requested in writing by the relevant Ineligible Overseas Shareholder, provide a receipt or other appropriate evidence of such payment (or procure the provision of such receipt or other evidence) to the relevant Ineligible Overseas Shareholder.
• (e) Each Ineligible Overseas Shareholder appoints ESG as its agent to receive on its behalf any financial services guide or other notices (including any updates of those documents) that the Sale Agent is required to provide to Ineligible Overseas Shareholders under the Corporations Act.
• (f) Payment of the amount calculated in accordance with clause 5.3(a) to an Ineligible Overseas Shareholder in accordance with this clause 5.3 satisfies in full the Ineligible Overseas Shareholder's right to Scheme Consideration.
• (g) Where the issue of New Santos Shares to which a Scheme Shareholder would otherwise be entitled under this Scheme would result in a breach of law:
  • (1) Santos will issue the maximum possible number of New Santos Shares to the Scheme Shareholder without giving rise to such a breach; and
  • (2) any further New Santos Shares to which that Scheme Shareholder is entitled, but the issue of which to the Scheme Shareholder would give rise to such a

breach, will instead be issued to the Sale Agent and dealt with under the preceding provisions in this clause 5.3, as if a reference to Ineligible Overseas Shareholders also included that Scheme Shareholder and references to that person's New Santos Shares in that clause were limited to the New Santos Shares issued to the Sale Agent under this clause.

5.4 Fractional entitlements and splitting

• (a) Where the calculation of the number of New Santos Shares to be issued to a particular Scheme Shareholder would result in the issue of a fraction of a New Santos Share, the fractional entitlement will be rounded down to the nearest whole number of New Santos Shares.
• (b) If Santos is of the opinion, formed reasonably, that several Scheme Shareholders, each of which holds a holding of ESG Shares which results in a fractional entitlement to New Santos Shares have, before the Scheme Record Date, been party to a shareholding splitting or division in an attempt to obtain an advantage by reference to the rounding provided for in the calculation of each Scheme Shareholder's entitlement to the Scheme Consideration, Santos may direct ESG to give notice to those Scheme Shareholders:
  • (1) setting out the names and Registered Addresses of all of them;
  • (2) stating that opinion; and
  • (3) attributing to one of them specifically identified in the notice the ESG Shares held by all of them,

and, after the notice has been so given, the Scheme Shareholder specifically identified in the notice shall, for the purposes of the Scheme, be taken to hold all those ESG Shares and each of the other Scheme Shareholders whose names are set out in the notice shall, for the purposes of the Scheme, be taken to hold no ESG Shares.

5.5 Unclaimed monies

• (a) ESG may cancel a cheque issued under clause 5.3 if the cheque:
  • (1) is returned to ESG; or
  • (2) has not been presented for payment within six months after the date on which the cheque was sent.
• (b) During the period of one year commencing on the Implementation Date, on request from a Scheme Shareholder, ESG must reissue a cheque that was previously cancelled under this clause.

5.6 Orders of a court

If:

• (a) written notice is given to ESG (or the ESG Registry) of an order made by a court of competent jurisdiction that requires payment to a third party of a sum in respect of Scheme Shares held by a particular Scheme Shareholder, which would otherwise be payable to that Scheme Shareholder by ESG in accordance with clause 5.3, then ESG shall be entitled to procure that payment is made in accordance with that order; or
• (b) written notice is given to ESG (or the ESG Registry) of an order made by a court of competent jurisdiction that prevents ESG from making a payment by ESG to any particular Scheme Shareholder in accordance with clause 5.3, or such payment is otherwise prohibited by applicable law, ESG shall be entitled to retain an amount, in Australian dollars, equal to the number of Scheme Shares held by that Scheme Shareholder multiplied by the Scheme Consideration until such time as payment in accordance with clause 5.3 is permitted by that order or otherwise by law.

6 Dealings in ESG Shares

6.1 Determination of Scheme Shareholders

To establish the identity of the Scheme Shareholders, dealings in ESG Shares or other alterations to the Share Register will only be recognised if:

• (a) in the case of dealings of the type to be effected using CHESS, the transferee is registered in the Share Register as the holder of the relevant ESG Shares on or before the Scheme Record Date; and
• (b) in all other cases, registrable transfer or transmission applications in respect of those dealings, or valid requests in respect of other alterations, are received on or before the Scheme Record Date at the place where the Share Register is kept,

and ESG will not accept for registration, nor recognise for any purpose (except a transfer to Santos pursuant to the Scheme and any subsequent transfer by Santos or its successors in title), any transfer or transmission application or other request received after such times, or received prior to such times but not in registrable or actionable form, as appropriate.

6.2 Register

• (a) ESG must register registrable transmission applications or transfers of the Scheme Shares in accordance with clause 6.1(b) on or before the Scheme Record Date provided that, for the avoidance of doubt, nothing in this clause 6.2(a) requires ESG to register a transfer that would result in an ESG Shareholder holding a parcel of ESG Shares that is less than a 'marketable parcel' (as defined in the Operating Rules of the ASX).
• (b) If the Scheme becomes Effective, a holder of Scheme Shares (and any person claiming through that holder) must not dispose of or purport or agree to dispose of, any Scheme Shares or any interest in them after the Scheme Record Date otherwise than pursuant to this Scheme, and any attempt to do so will have no effect and ESG shall be entitled to disregard any such disposal.
• (c) For the purpose of determining entitlements to the Scheme Consideration, ESG must maintain the Share Register in accordance with the provisions of this clause 6.2 until the Scheme Consideration has been issued to the Scheme Shareholders. The Share Register in this form will solely determine entitlements to the Scheme Consideration.
• (d) All statements of holding for ESG Shares (other than statements of holding in favour of any Excluded Shareholders) will cease to have effect after the Scheme Record Date as documents of title in respect of those shares and, as from that date, each entry current at that date on the Share Register (other than entries on the Share Register in respect of any Excluded Shareholder) will cease to have effect except as evidence of entitlement to the Scheme Consideration in respect of the ESG Shares relating to that entry.
• (e) As soon as possible on or after the Scheme Record Date, and in any event within one Business Day after the Scheme Record Date, ESG will ensure that details of the names, Registered Addresses and holdings of ESG Shares for each Scheme Shareholder as shown in the Share Register are available to Santos in the form Santos reasonably requires.

7 Quotation of ESG Shares

(a) ESG will apply to ASX to suspend trading on the ASX in ESG Shares with effect from the close of trading on the Effective Date.

• (b) On a date on or after the Implementation Date to be determined by Santos, ESG will apply:
  • (1) for termination of the official quotation of ESG Shares on the ASX; and
  • (2) to have itself removed from the official list of the ASX.

8 General Scheme provisions

8.1 Consent to amendments to the Scheme

If the Court proposes to approve the Scheme subject to any alterations or conditions:

• (a) ESG may by its counsel consent on behalf of all persons concerned to those alterations or conditions to which Santos has consented; and
• (b) each Scheme Shareholder agrees to any such alterations or conditions which counsel for ESG has consented to.

8.2 Scheme Shareholders' agreements and warranties

• (a) Each Scheme Shareholder:
  • (1) agrees to the transfer of their ESG Shares together with all rights and entitlements attaching to those ESG Shares in accordance with the Scheme;
  • (2) agrees to the variation, cancellation or modification of the rights attached to their ESG Shares constituted by or resulting from the Scheme;
  • (3) agrees to become a shareholder in Santos and to be bound by the constitution of Santos; and
  • (4) acknowledges that the Scheme binds ESG and all Scheme Shareholders (including those who do not attend the Scheme Meeting or those who do not vote, or vote against the Scheme, at the Scheme Meeting).
• (b) Each Scheme Shareholder is taken to have warranted to ESG and Santos, and appointed and authorised ESG as its attorney and agent to warrant to Santos, that all their ESG Shares (including any rights and entitlements attaching to those shares) which are transferred under the Scheme will, at the date of transfer, be fully paid and free from all mortgages, charges, liens, encumbrances, pledges, security interests and interests of third parties of any kind, whether legal or otherwise, and restrictions on transfer of any kind, and that they have full power and capacity to transfer their ESG Shares to Santos together with any rights attaching to those shares. ESG undertakes that it will provide such warranty to Santos as agent and attorney of each Scheme Shareholder.

8.3 Title to and rights in Scheme Shares

• (a) To the extent permitted by law, the Scheme Shares transferred under the Scheme will be transferred free from all mortgages, charges, liens, encumbrances and interests of third parties of any kind, whether legal or otherwise.
• (b) On and from the Effective Date, Santos will be beneficially entitled to the Scheme Shares to be transferred to it under the Scheme pending registration by ESG of Santos in the Share Register as the holder of the Scheme Shares.

8.4 Appointment of sole proxy

On the Implementation Date, and until ESG registers Santos as the holder of all Scheme Shares in the Share Register, each Scheme Shareholder:

• (a) is deemed to have appointed Santos as attorney and agent (and directed Santos in each such capacity) to appoint any director, officer, secretary or agent nominated by Santos as its sole proxy and, where applicable or appropriate, corporate representative to attend shareholders' meetings, exercise the votes attaching to the Scheme Shares registered in their name and sign any shareholders' resolution;
• (b) no Scheme Shareholder may itself attend or vote at any of those meetings or sign any resolutions, whether in person, by proxy or by corporate representative (other than pursuant to this clause 8.4(a));
• (c) must take all other actions in the capacity of a registered holder of Scheme Shares as Santos reasonably directs; and
• (d) acknowledges and agrees that in exercising the powers referred to in clause 8.4(a), Santos and any director, officer, secretary or agent nominated by Santos under clause 8.4(a) may act in the best interests of Santos as the intended registered holder of the Scheme Shares.

8.5 Authority given to ESG

Each Scheme Shareholder, without the need for any further act:

• (a) on the Effective Date, irrevocably appoints ESG and each of its directors, officers and secretaries (jointly and each of them severally) as its attorney and agent for the purpose of enforcing the Deed Poll against Santos, and ESG undertakes in favour of each Scheme Shareholder that it will enforce the Deed Poll against Santos on behalf of and as agent and attorney for Scheme Shareholders; and
• (b) on the Implementation Date, irrevocably appoints ESG and each of its directors, officers and secretaries (jointly and each of them severally) as its attorney and agent for the purpose of executing any document or doing or taking any other act, necessary, desirable or expedient to give effect to this Scheme and the transactions contemplated by it, including (without limitation) executing the Scheme Transfer,

and ESG accepts each such appointment. ESG as attorney and agent of each Scheme Shareholder, may sub-delegate its functions, authorities or powers under this clause 8.5 to all or any of its directors, officers or employees (jointly, severally or jointly and severally).

8.6 Instructions and elections

If not prohibited by law (and including where permitted or facilitated by relief granted by a Government Agency), all instructions, notifications or elections by a Scheme Shareholder to ESG binding or deemed binding between the Scheme Shareholder and ESG relating to ESG or ESG Shares (including any email addresses, instructions relating to communications from ESG, whether dividends are to be paid by cheque or into a specific bank account, notices of meetings or other communications from ESG) will be deemed from the Implementation Date (except to the extent determined otherwise by Santos in its sole discretion), by reason of this Scheme, to be made by the Scheme Shareholder to Santos and to be a binding instruction, notification or election to, and accepted by, Santos in respect of the New Santos Shares issued to that Scheme Shareholder until that instruction, notification or election is revoked or amended in writing addressed to Santos at its registry.

8.7 Binding effect of Scheme

This Scheme binds ESG and all of the Scheme Shareholders (including those who did not attend the meeting of ESG Shareholders to vote on this Scheme, did not vote at that meeting, or voted against this Scheme at that meeting) and, to the extent of any inconsistency, overrides the constitution of ESG.

9 General

9.1 Stamp duty

Santos will:

• (a) pay all stamp duty and any related fines and penalties in respect of this Scheme and the Deed Poll, the performance of the Deed Poll and each transaction effected by or made under this Scheme and the Deed Poll; and
• (b) indemnify each Scheme Shareholder against any liability arising from failure to comply with clause 9.1.

9.2 Consent

Each of the Scheme Shareholders consents to ESG doing all things necessary or incidental to the implementation of this Scheme.

9.3 Notices

• (a) If a notice, transfer, transmission application, direction or other communication referred to in this Scheme is sent by post to ESG, it will not be taken to be received in the ordinary course of post or on a date and time other than the date and time (if any) on which it is actually received at ESG's registered office or at the office of the ESG Registry.
• (b) The accidental omission to give notice of the Scheme Meeting or the non-receipt of such notice by an ESG shareholder will not, unless so ordered by the Court, invalidate the Scheme Meeting or the proceedings of the Scheme Meeting.

9.4 Governing law

• (a) The Scheme is governed by the laws in force in New South Wales, Australia.
• (b) The parties irrevocably submit to the non-exclusive jurisdiction of courts exercising jurisdiction in New South Wales and courts of appeal from them in respect of any proceedings arising out of or in connection with this Scheme. The parties irrevocably waive any objection to the venue of any legal process in these courts on the basis that the process has been brought in an inconvenient forum.

9.5 Further action

ESG must do all things and execute all documents necessary to give full effect to this Scheme and the transactions contemplated by it.

By	Santos LimitedACN 007 550 923 of 60 Flinders Street, Adelaide, SA, 5000(Santos)
in favour of	each person registered as a holder of fully paid ordinary shares inESG in the Share Register as at the Scheme Record Date (other thanthe Excluded Shareholders).
Recitals	ESG and Santos entered into the Implementation Deed.
	In the Implementation Deed, Santos agreed to enter into this deed2poll.
	Santos is entering into this deed poll for the purpose of3covenanting in favour of the Scheme Shareholders to perform itsobligations under the Implementation Deed and the Scheme.

Attention	Company secretary
Address	60 Flinders Street, Adelaide, SA, 5000
Email address	[email protected]

Method of giving Notice	When Notice is regarded as given and received
By hand to the nominated address	When delivered to the nominated address
By email to the nominated emailaddress	When the email (including any attachment) comes to theattention of the recipient party or a person acting on itsbehalf.

Term	Meaning
conduct	includes delay in the exercise of a right.

Appendix C C Deed Poll

right	any right arising under or in connection with this deed and includes theright to rely on this clause.
waiver	includes an election between rights and remedies, and conduct whichmight otherwise give rise to an estoppel.

	Signed sealed and delivered for
	Santos Limited
by its attorney
aign here >
	Christian John Paech
emen tning
in the presence of
	andraw
sign here >
Witne
amen thing	Tiffany Jane Travers

Scheme Booklet 296

Appendix D D Notice of Scheme Meeting

Eastern Star Gas Limited

ACN 094 269 780

Notice of Scheme Meeting

Notice is given that by an order of the Federal Court of Australia (Court), made on 22 September 2011 pursuant to section 411(1) of the Corporations Act, a meeting of holders of ordinary shares in Eastern Star Gas Limited other than Excluded Shareholders will be held at the Grand Ballroom No 2, Shangri-La Hotel, 176 Cumberland Street, The Rocks, Sydney, New South Wales on 28 October 2011 at 10.00 am.

Business

The purpose of the Scheme Meeting is to consider and, if thought fit, to agree to a scheme of arrangement (with or without modification) to be made between ESG and the holders of its ordinary shares as at 5.00 pm on the Scheme Record Date other than Excluded Shareholders pursuant to Part 5.1 of the Corporations Act. The scheme of arrangement is proposed to be made in respect of the ordinary shares held by those shareholders other than Excluded Shareholders in the form of the scheme contained in Annexure B of the Scheme Booklet of which this notice forms part.

The Explanatory Statement required by section 412 of the Corporations Act in relation to the Scheme is included in the Scheme Booklet.

The Court has directed that The Hon. John Anderson is to act as Chairman of the Scheme Meeting.

Terms used in this notice, including in the resolution set out below, have the meanings ascribed to those terms in the Glossary which is contained in the Scheme Booklet of which this notice forms part.

Resolution

To consider and, if thought fit, to pass the following resolution:

"That, pursuant to and in accordance with section 411 of the Corporations Act, the scheme of arrangement between ESG and its ordinary shareholders which is set out in Annexure B of the Scheme Booklet of which the notice convening this meeting forms part, is agreed to (with or without modification as approved by the Federal Court of Australia)."

Voting and requisite majorities

The resolution to approve the Scheme must be passed at the Scheme Meeting by:

• unless the Court orders otherwise, a majority in number of the holders of ordinary shares of ESG present and voting; and
• at least 75% of the votes cast on the resolution.

The vote will be conducted by poll.

Entitlement to vote

Pursuant to section 411 of the Corporations Act and all other enabling powers, the Court has determined that for the purposes of the Scheme Meeting, all ordinary shares in ESG other than ordinary shares held by Excluded Shareholders will be taken to be held by the persons who held them as registered shareholders at 5.00 pm on 26 October 2011.

All holders of ESG Shares other than Excluded Shareholders at 5.00 pm on 26 October 2011 are entitled to attend and vote at the meeting.

A shareholder entitled to vote who is present in person or by proxy or attorney, or in the case of a corporation, by a representative authorised in the manner provided in its constitution, has one vote on a show of hands and has one vote for each fully paid ordinary share held by the shareholder on a poll.

• A shareholder entitled to attend and vote may appoint not more than two proxies.
• Where two proxies are appointed, each proxy must be appointed to represent a specified proportion of the shareholder's voting rights, otherwise each is entitled to exercise half of the votes.
• A proxy need not be a shareholder of ESG.
• A proxy form accompanies this notice.
• A proxy form and the original or a copy of the power of attorney (if any) under which it was signed must be delivered or lodged by facsimile or internet as set out below before 10.00 am on 26 October 2011.
• Alternatively, you may lodge your vote by the ESG Share Registry's website set out below, before 10.00 am on 26 October 2011.

By mail

Eastern Star Gas Limited C/- Link Market Services Limited Locked Bag A14 SYDNEY SOUTH NSW 1235

By hand delivery

Eastern Star Gas Limited C/- Link Market Services Limited Level 12 680 George Street SYDNEY NSW 2000

or

Eastern Star Gas Limited C/- Company Secretary Level 7 51 Pitt Street SYDNEY NSW 2000

Appendix D D Notice of Scheme Meeting

By facsimile transmission

Within Australia: (02) 9287 0309 Outside Australia: +61 2 9287 0309

By internet

www.investorcentre.linkmarketservices.com.au

The proxy form sent to you with this notice can be used for both the Scheme Meeting and the General Meeting. If you wish to appoint a proxy, you must sign the proxy form and return it to the above address or facsimile number by 10.00 am on 26 October 2011. A reply paid envelope for Australian ESG Shareholders has been provided.

Court approval

The Scheme (with or without modification) is subject to subsequent approval by the Court. If the resolution put to the Scheme Meeting is approved by the requisite majority, ESG intends to apply to the Court for an order to give effect to the Scheme.

Ian Kirkham

Company Secretary 22 September 2011

Appendix E E Notice of General Meeting

Eastern Star Gas Limited

ACN 094 269 780

Notice of General Meeting

Notice is given that a general meeting of the holders of the ordinary shares in Eastern Star Gas Limited will be held at the Grand Ballroom No 2, Shangri-La Hotel, 176 Cumberland Street, The Rocks, Sydney, New South Wales on 28 October 2011 at 11.00 am or as soon thereafter as the Scheme Meeting is concluded or adjourned.

Business

Approval of acquisition

To consider and, if thought fit, to pass the following resolution as an ordinary resolution of the shareholders of ESG:

"For the purposes of item 7 in the table in section 611 of the Corporations Act, the acquisition of 38,546,256 ESG Shares held by TRUenergy Investments Pty Ltd ACN 128 557 602 by Santos Limited ACN 007 550 923 for the price of $0.90 cash per ESG Share be approved."

This notice of meeting should be read in conjunction with this Scheme Booklet of which this notice forms part, in particular section 9 and the Independent Expert's Report contained in section 7.

Terms used in this notice have the meaning ascribed to those terms in the Glossary which is contained in the Scheme Booklet of which this notice forms part.

Voting and requisite majorities

The above resolution must be passed by a majority of the number of votes cast on the resolution. The vote will be conducted by poll.

Entitlement to vote

ESG Shares will be taken to be held by the persons who held them as registered on the ESG Share Register at 5.00 pm on 26 October 2011.

Pursuant to item 7 in the table in section 611 of the Corporations Act, all holders of ESG Shares other than Santos and TRUenergy Investments and any of their respective associates at 5.00 pm on 26 October 2011 are entitled to attend and vote at the meeting.

A shareholder entitled to vote who is present in person or by proxy or attorney, or in the case of a corporation, by a representative authorised in the manner provided in its constitution, has one vote on a show of hands and has one vote for each fully paid ordinary share held by the shareholder on a poll.

• A shareholder entitled to attend and vote may appoint not more than two proxies.
• Where two proxies are appointed, each proxy must be appointed to represent a specified proportion of the shareholder's voting rights, otherwise each is entitled to exercise half of the votes.
• A proxy need not be a shareholder of ESG.
• A proxy form accompanies this notice.
• A proxy form and the original or a copy of the power of attorney (if any) under which it was signed must be delivered or lodged by facsimile or internet as set out below, before 10.00 am on 26 October 2011.
• Alternatively, you may lodge your vote by ESG Share Registry's website set out below, before 10.00 am on 26 October 2011.

By mail

Eastern Star Gas Limited C/- Link Market Services Limited Locked Bag A14 SYDNEY SOUTH NSW 1235

By hand delivery

Eastern Star Gas Limited C/- Link Market Services Limited Level 12 680 George Street SYDNEY NSW 2000

or

Eastern Star Gas Limited C/- Company Secretary Level 7 51 Pitt Street SYDNEY NSW 2000

By facsimile transmission

Within Australia: (02) 9287 0309 Outside Australia: +61 2 9287 0309

By internet

www.investorcentre.linkmarketservices.com.au

The proxy form sent to you with this notice can be used for both the Scheme Meeting and the General Meeting. If you wish to appoint a proxy, you must sign the proxy form and return it to the above address or facsimile number by 10.00 am on 26 October 2011. A reply paid envelope for Australian ESG Shareholders has been provided.

Ian Kirkham Company Secretary 22 September 2011

Corporate directory

Directors

The Hon. John Anderson, Chairman David Casey, Managing Director Dr David King, Non-Executive Director Alex Sundich, Non-Executive Director Christopher Sadler, Non-Executive Director Peter Lansom, Executive Director – Operations

Company Secretary

Ian Kirkham

Registered office

Level 7 51 Pitt Street SYDNEY NSW 2000

Telephone: (02) 9251 5599 Facsimile: (02) 9251 2299 Email: [email protected] Website: www.easternstar.com.au

ESG Share Registry

Link Market Services Limited Level 12 680 George Street SYDNEY NSW 2000

Locked Bag A14 SYDNEY SOUTH NSW 1235

Telephone: 1800 680 188 within Australia +61 2 8280 7929 outside Australia General facsimile: +61 2 9287 0303 Email: [email protected] Website: http://www.linkmarketservices.com.au

Financial advisers

Flagstaff Partners Pty Ltd Level 20 101 Collins Street MELBOURNE VIC 3000

J.P. Morgan Australia Limited Level 25, Grosvenor Place 225 George Street SYDNEY NSW 2000

Lawyers

Piper Alderman Level 23, Governor Macquarie Tower 1 Farrer Place SYDNEY NSW 2000

Auditor

The PKF East Coast Practice Level 10 1 Margaret Street SYDNEY NSW 2000

www.easternstar.com.au