Attention ASX Company Announcements Platform Lodgement of Open Briefing

corporatefile.com.au

Date of lodgement: 23-Feb-2005

Title: Open Briefing, Santos. Dec 2004 Profit & Outlook

Record of interview:

corporatefile.com.au

Santos Limited today reported a 16% rise in net profit after tax to $380 million for the 12 months to end December 2004. Can you give a waterfall analysis of the result compared with 2003?

MD John Ellice-Flint

Sales revenue was up by $36 million reflecting higher prices, partially offset by lower volumes primarily due to the Moomba incident. Other revenue increased by $130 million, primarily due to an accrual for insurance recoveries relating to the Moomba incident.

Operating expenses increased by $68 million, reflecting primarily higher production costs of $45 million and higher royalties of $27 million.

Selling and administration expenses were down by $6 million, gains on sales of non-current assets and controlled entities were down by $7 million and writedowns were down by $42 million.

DD&A increased by $8 million, pushed up by reserve revisions and higher future development costs.

There was a once-off pre-tax restructuring cost of $22 million, borrowing costs fell slightly ($1 million) and income tax expenses increased by $57 million due to higher profit and lower tax consolidation credits.

corporatefile.com.au

What growth in underlying earnings did you achieve? What were the main significant items?

MD John Ellice-Flint

Underlying earnings increased by 19%. There were $34 million of one-off gains in 2004 against $37 million in 2003. The main one-off items were gains on asset sales ($49 million in 2004 compared with $46 million in 2003), tax consolidation ($20 million benefit in 2004 compared with $55 million benefit in 2003), writedowns ($21 million in 2004 compared with $64 million in 2003) and restructuring charges ($15 million in 2004).

We were very pleased with the growth in underlying earnings and other achievements this year considering the large amount of management time that needed to be spent on the Moomba incident. During the year we further streamlined the company and reduced operating and capital costs, we made a major new discovery in Jeruk to further establish a new core area in Indonesia, we commercialised more of our gas reserves, we sharpened our portfolio through some acquisitions and asset sales and we increased dividends.

corporatefile.com.au

Can you reiterate the profit and cash flow impact from the Moomba incident, including insurance, in 2004 and the expected impact in 2005?

MD John Ellice-Flint

In 2004 there was a positive profit impact of $1m, due to the treatment of insurance recoveries under accounting standards. If the property damage component of the insurance proceeds of $117 million had been accounted for as a reduction in capital expenditure, there would have been a negative impact on profit of $16 million. Revenue (net of royalties) was down by $107 million due to the incident. Production costs were up by $17 million, EBITDAX down by $16 million and DD&A down by $25 million.

There was a negative impact on operating eash flow of $131 million in 2004. In 2005 we expect the insurance claim to be finalised and received. There is no other impact in 2005.

corporatefile.com.au

The final dividend has been lifted from 15 cents to a fully franked 18 cents per share. Are you targeting that rate of growth in dividends in the future? Are you positioning the company as a yield stock?

MD John Ellice-Flint

No, the Board aims to maintain a balance between growth and dividends. Indeed, the increase in dividend is an indication of the Board's confidence in the Company's future growth prospects.

corporatefile.com.au

In 2004, Santos reported full year production of 47.1 million barrels of oil equivalent (mmboe), down from 54.2 mmboe in 2003 and you expect 2005 production to be up by some 15% to around 54 mmboe. Can you outline the maior influences such as field decline, optimisation initiatives and new field production in 2004 and for 2005?

MD John Ellice-Flint

2004 ended better than we expected at the interim mainly due to better production from Bayu-Undan, the Stag infill program and a slightly better than expected performance from East Spar.

2004 was always going to be the low point for production, and it was exacerbated by the Moomba incident. The good news is that our growth projects are starting to come on line and have begun to reverse the decline we have been experiencing for the last 3 years. While the declines were full year impacts, the 1.7 mmboe we produced from Bayu-Undan and the 800,000 boe from the Novus assets represent only part year contributions.

For 2005, we now expect our production to improve by around 15%, or $4%$ excluding the impact of Moomba. We now expect production to be around 54 mmboe with the following notable variances from previous guidance:

• Stag is likely to improve by up to 1 million barrels as a result of the $\bullet$ successful infill drilling program.
• East Spar is watering out as predicted, but will be down by a further $\bullet$ 1mmboe. Production through Varanus Island is therefore heavily dependent on the timing of the John Brookes start-up, but is expected to be in the range of 2 to 3 mmboe.
• $\bullet$ Some onshore gas development in Eastern Queensland and in the Cooper Basin was not successful, lowering our estimate of production by about 1 mmboe. Offsetting this loss, the OMV acquisition brings onshore gas production back to previous levels.

On balance we're still within the range provided at our interim results in August, but at the lower end. Of course start-up dates and production performance for Mutineer Exeter and John Brookes will impact the outcome.

As we flagged last week, 2006 production will be impacted by Mutineer Exeter but we're still expecting more than 10% volume growth above 2005. The final result will be subject to a number of variables, such as when we start up Maleo, production performance at Oyong and the results of onshore gas development.

corporatefile.com.au

For 2004, Santos achieved proven reserves (1P) replacement of 57 mmboe or 121% of production and proven plus probable reserves (2P) replacement of 54 mmboe or 114% of production. As at 31 December 2004, 1P reserves were 348 mmboe and 2P reserves were 643 mmboe. Can you talk through the highlights and disappointments of the reserves replacement program?

MD John Ellice-Flint

There was a range of positive developments which, in combination, added 75 mmboe of 1P reserves and 103 mmboe of 2P.

These included first bookings or positive revisions from John Brookes, Maleo, the Novus acquisition, Bayu-Undan, Casino, Patricia Baleen and Legendre.

In the Cooper Basin and the US, there were negative revisions in 2P reserves (17) mmboe) but positive revisions in 1P (14 mmboe).

Negative revisions of both 1P and 2P were limited to Mutineer-Exeter, Barrow Island, Thevenard and East Spar (totalling 18 mmboe of 1P and 32 mmboe of 2P). The downward revision in Mutineer Exeter was offset by Bayu Undan increases, where the liquids production also has high netbacks.

We manage our reserves as a portfolio. In any year, the work we do will increase the reserves of some fields, while others will fall. We saw this during the past year with the impact of our development drilling program resulting in both increases and reductions. It's the overall movement in value that counts.

And while on the subject of value I would like to make a couple of points. 2004 was a year where our capital programme focussed more on developing existing proven and probable reserves rather than on adding reserves per se. This program significantly increased the value of reserves but did not add much to the total volume, most of these reserves having been previously booked. Secondly, on a 2P basis, we had to reduce reserves in PSCs because we use the industry standard net entitlement basis. This means that higher prices are reflected in lower entitlements and therefore fewer barrels. The value of the reserves did not go away; it is merely reflected in fewer barrels, each with a higher value.

The point is that reserves are an important but only rough guide to value.

corporatefile.com.au

You mentioned a 44% success rate in exploration for 2004 with Jeruk the most significant. Can you rank the importance of some of the other exploration successes? What is the current timetable and objectives to progress Jeruk?

MD John Ellice-Flint

We discovered hydrocarbons in seven of the 16 wildcat wells that we drilled giving us a success rate of 44%.

The most significant of these results so far is the Jeruk oil discovery, but in addition to Jeruk we had a string of successes from our Cooper Basin wildcat program.

We also had success in the Otway Basin where we discovered gas at Martha, near the Casino field, and this is being further evaluated to determine its commercial significance. In the US, we discovered gas at Torres and we were selling hydrocarbons only two months after the well was completed.

It's too early to consider reserves in the Jeruk discovery. We have an oil-in-place distribution and are now considering the issues that will impact on the recovery factor. These include both the lateral extent of the accumulation which will be better defined by the 3D seismic we are currently acquiring and the development scenarios. Shallow water and the benign climate are positives for the development scenarios and cost. It needs to be appreciated that Jeruk is very early in the appraisal stage.

corporatefile.com.au

Can you explain why the recent appraisal drilling results on Mutineer-Exeter led to a substantial reduction in reserves compared with the initial estimate?

MD John Ellice-Flint

Appraisal drilling results prior to project sanction were generally better than expected and provided the basis for the original reserves estimate.

The appraisal drilling program carried out in conjunction with the development drilling was aimed at better defining the reservoirs and the range of reserves. The expectation, based on the results of the 2002 campaign, was that any downside appraisal well results would be balanced by upside results in other parts of the fields.

This proved not to be the case and the downside well results are now incorporated into the revised reserves estimate.

corporatefile.com.au

Is there a risk of further downside on the Mutineer-Exeter production given the disappointing results from the latest appraisal drilling?

MD John Ellice-Flint

Four high productivity horizontal development wells have been completed and they are expected to produce at high initial rates. These wells were all flow tested through the final completions at high rates prior to hook up to the FPSO. Well results from the recent drilling campaign have been integrated into updated evaluations of the fields to provide the best understanding of the likely production performance from these wells. As always there are remaining production risks related to reserves uncertainties, reservoir behaviour and factors such as oil price. However, the expected field life remains around 7 years.

corporatefile.com.au

How do the current economics of the Mutineer-Exeter project compare with the economics at the time you announced the development go ahead in late 2003?

MD John Ellice-Flint

The major cost involved in any development, especially offshore, is the production facility. Designing a production facility is always a balance between the upside and low side production cases as this flexibility adds to the cost. Our engineers have done a great job designing and constructing the Mutineer-Exeter

facility to be able to adjust to the low case reserve outcome with no significant penalty for still being able to cope with an upside outcome. This will be of great value should we be able to add additional production through successful appraisal or near field exploration. The facility was also built in record time and under budget, to further enhance the economics for the reserves that are there.

As with all costly development projects, an extensive assessment of the economics of the Mutineer-Exeter development was carried out prior to sanction to ensure that the project was robust within the range of potential downside scenarios, including reserves. The expected reserves based on the current estimate are still well above the economic threshold based on the oil price at the time of sanction. In addition to the project being completed earlier and cheaper, the oil price has also increased substantially. These positive aspects have added substantial value to the project which results in the current economics for Mutineer-Exeter being similar to the economic value at the time of sanction despite the reduction in reserves.

corporatefile.com.au

In 2004, sales revenue rose 2.5% to a record $1,501 million. To what extent did currency and price hedging boost revenue particularly in relation to Bayu-Undan? What amount of hedging remains in place?

MD John Ellice-Flint

Seeking to protect the Australian dollar returns, the company hedged US$99 million of currency at an average exchange rate of 57 cents realising a gain of A$39 million. US$78 million related to Bayu Undan. US$134 million (Bayu Undan US$113 million) is hedged in 2005 at an average exchange rate of 66 cents.

1.6 million barrels is hedged in 2005 at an average price of US$36.00 per barrel.

corporatefile.com.au

Cash flow from operating activities after interest and tax fell by 33% to $605 million. Can vou explain why it fell so much? What are your capital development and exploration budgets for this year?

MD John Ellice-Flint

While we had a strong profit year, this is not fully reflected in cash flows. The first cause is working capital movements. Unusually low trade debtors at the end of 2003, and high trade debtors at the end of 2004, reflecting the timing of liftings and the payments for them are the primary cause.

The second is the recording of the Moomba insurance claim, for which we have not yet been paid. The quantification is progressing and some progress payments are being processed, but at the end of the year, the money was still owed to us and so is not a part of our operating cash flow.

corporatefile.com.au

What success did Santos have with gas commercialisation during the year? What's the outlook and how can you further improve gas commercialisation?

MD John Ellice-Flint

Gas commercialisation was an important part of our successes in 2004. The year was marked by innovation and new markets. The main features of the year were:

• Innovative gas swaps: Santos' unique spread of assets across key gas $\bullet$ hubs enables value opportunities such as transport savings to be realised.
  • The CSM swap moved East Oueensland gas to Moomba allowing our counterparty to avoid a significant pipeline investment and for Santos to capture a share of that saving.
  • An East Queensland to Gippsland swap moved gas through 3 states and 5 joint ventures, expanding market horizons for partners and providing backup options to customers.
• New Casino contracts: The sale of gas pre-appraisal for Casino, a first for $\bullet$ this market, significantly changed the risk of the programme. Postappraisal extensions to the original Casino volumes and optimisation of the production profile were agreed, which further enhanced the value of the project.
• Western Australian contracts were won: New Western Australian gas $\bullet$ contracts allowed Santos to sanction John Brookes and provide further supply options to gas customers. These included the supply to the Telfer gold mine in the Pilbara and the EDL West Kimberley power project.
• Price Reviews: Positive results were realised in contract price reviews. $\bullet$ These increases were realised without the need for formal arbitration.

corporatefile.com.au

What do you hope to achieve with progressing your various growth projects this year?

MD John Ellice-Flint

We aim to commence production from Mutineer-Exeter next month, John Brookes in the middle of the year, hopefully oil production from Oyong towards the end of the year and, in the first half 2006, we expect first production from Casino, Bayu-Undan LNG and Maleo. This is a very substantial number of new projects to be bringing into production; projects that will significantly change the Santos profile.

John Brookes' gas marketing efforts continue to focus on contracting the balance of the 1P reserve. Subject to this outcome, consideration will also be given to progressing the Reindeer commercialisation. Reindeer field could be contracted into the future decline profile for John Brookes, if commercially attractive markets can be captured.

Sole and Kipper's commercialisation efforts are continuing to target an expected supply gap in the market towards the end of the decade.

We're working with Power and Water in the NT to deliver a long term gas supply for the NT electricity generation and this will require the commercialisation of Petrel and/or Tern. PowerWater is keen to resolve this supply issue this year

Evans Shoal will form part of our developing LNG strategy which will unfold over the next few years in conjunction with first LNG production next year from Darwin LNG and our gas exploration well in the northern Timor Sea area.

We are also looking at early production options for Jeruk and we are appraising the Hiu Aman discovery.

Altogether this is a very substantial suite of growth projects. Importantly, we will continue to drill and bring into production quickly smaller reserves in our Cooper Basin, Denison Trough, Surat Basin and Gulf of Mexico operations. As we have seen in the last four years, you can expect to see organic growth as well as strategic acquisitions.

corporatefile.com.au

You've previously stated that the key potential implications for Santos for the transition to International Financial Reporting Standards (IFRS) are in the area of exploration and evaluation expenditure, employee benefits, financial instruments, impairment of assets and provisions. Will adopting IFRS disadvantage Santos in any way against other world oil and gas companies?

MD John Ellice-Flint

No. I do not believe so.

The worth of an oil and gas company is the quantity and quality of its underlying oil and gas reserves. There is nothing in adopting IFRS which will impact either the quantity or quality (and hence value) of our reserves.

Likewise, IFRS will not impact on our underlying business of finding, developing and producing oil and gas reserves. We do not expect IFRS to have any impact on our future cash flows, our current borrowing facilities, the ability of the Santos Group to raise additional finance for normal business expansion or to pay dividends consistent with past practice.

corporatefile.com.au

Thank you John.

For further information on Santos please visit www.santos.com or call Media Adviser Kathryn Mitchell (Media inquiries) on (08) 8218 5260 or CFO Peter Wasow (Investor inquiries) on (08) 8218 5231.

To read other Open Briefings, or to receive future Open Briefings by email, please visit www.corporatefile.com.au

DISCLAIMER: Corporate File Pty Ltd has taken reasonable care in publishing the information contained in this Open Briefing. It is information given in a summary form and does not purport to be complete. The information contained is not intended to be used as the basis for making any investment decision and you are solely responsible for any use you choose to make of the information. We strongly advise that you seek independent professional advice before making any investment decisions. Corporate File Pty Ltd is not responsible for any consequences of the use you make of the information, including any loss or damage you or a third party might suffer as a result of that use.