SANTOS LIMITED — AGM Information 2003

Apr 29, 2003

CHAIRMAN'S ADDRESS TO THE

ANNUAL GENERAL MEETING

OF SANTOS LTD

BY

MR STEPHEN GERLACH

CHAIRMAN

30 April 2003

I am pleased to deliver my second Chairman's address to shareholders and to report that Santos has had another year of substantial progress.

Strong results were achieved for 2002

We delivered record production and sales volumes.

In 2002 we produced 57.3 million barrels of oil equivalent.

Gas production was a record 231 petajoules, 5% higher than in 2001. Cooper Basin production was steady and production increased in the United States, Victoria, Eastern Queensland, Western Australia and the Northern Territory.

Oil production declined slightly by 4% to 12.1 million barrels, reflecting natural field decline.

Condensate and LPG production both remained steady.

Profit, before exploration write-offs, was $392 million.

This was 13% lower than in 2001, largely as a result of the higher non cash-charges for depreciation, depletion and amortisation and higher operating costs as new fields were brought on to production. In particular, the depletion charge increased by $34 million, reflecting increased production and higher than expected future development costs.

During the year Santos undertook a review of its accounting policies, particularly as they related to asset carrying values. More objective and conservative quidelines for carrying forward assets in evaluation were introduced, particularly as regards the likelihood and timing of commercial development. This more conservative approach led to the decision to

write-off on an after tax basis exploration expenditure of $70 million incurred in previous years.

Profit after tax was $322 million, or 51 cents per share, after taking into account the exploration write-offs just mentioned.

Notwithstanding the fact that earnings were below those in 2001, the profit, both before and after exploration write-offs, was still one of the Company's best results ever.

Operating cash flow was up by 15% to $821 million.

These solid results enabled the Board to declare a dividend of 30 cents a share, fully franked, for the year. This is a yield of around 5%. On earnings per share of 51 cents this equates to a pay-out ratio of 60 per cent.

This provides a good balance between paying dividends and retaining sufficient profits to deal with our future growth requirements. Our payout ratio is below the ASX100 average for 2002 while our yield is higher and fully franked.

Total shareholder return, comprising changes in share price from the beginning to the end of the year, plus dividends paid during the year, was 2%.

This return is obviously below our long-term target and is disappointing as it reflects negative share price growth.

However it is important to remember that 2002 was a difficult year for share markets in Australia and elsewhere in the world which have reflected substantial downturns in a bear market. As a consequence our share price was impacted by uncontrollable market conditions such as reduced investor confidence in the market and a weaker economic climate.

In the market conditions which have prevailed over the past twelve months we consider our market performance reasonable when compared with other companies.

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In the event Santos Total Shareholder Return outperformed the Australian Stock Exchange Energy Index by 5 per cent, the Australian Stock Exchange 200 Index by 11% and the index of US oil producers by 28%.

We might have expected oil and gas shares to be positively affected by high oil prices but this has not been the case. Rather investors appear to have been waiting for prices to return to lower levels and investing in more defensive shares, such as utilities.

We might also have expected some of our significant successes achieved during the year to be reflected in the share price but, for reasons already mentioned, this has not happened.

At the same time, it is worth noting that, in the 12 months since we last met, Total Return to Santos shareholders has been about 6%.

During the year we invested $133 million in exploration, $628 million in development and delineation and $153 million in acquisitions, a total of $914 million.

Our exploration program was the most successful for a number of years delivering 106 million barrels of resource potential.

Maior discoveries were the Mutineer Exeter oil discovery in the Carnarvon Basin and the Maleo gas discovery in East Java, Indonesia.

We replaced 119% of our reserves on a proven basis with significant contributions from exploration and gas commercialisation.

This is the first time for several years that we have replaced more than we have produced and signals the improvement in our exploration and development performance over the last two years and the increase in our available opportunities.

Another key development during the year was the signing of the major new Cooper Basin gas contract with AGL. The Company continues to actively market Cooper Basin gas.

As well as growing the business we continued to make significant progress on managing our resources. I am pleased to report that our cost cutting objective of $50 million of reductions in capital and operating costs by the end of 2003 was met twelve months ahead of schedule at the end of 2002.

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We are also developing an exciting suite of growth projects, which will increase production in the medium term and contribute towards us achieving our long-term objective of 5 to 8 percent annual production growth.

The Managing Director will say more about these matters in his presentation.

While I know financial and operational performance is important to all shareholders, increasingly shareholders want to know more about a company than just its financial bottom line, critical as that is.

More and more shareholders want to know is the company doing the right thing? Are its Corporate Governance arrangements appropriate and being implemented? What about its environmental and social performance?

As we have seen over the past 12 months, these are important matters and ones of increasing concern. Your Directors are committed to Santos being not only a top quartile operational and financial performer but also top quartile in Corporate Governance and economic and social responsibilities.

Let me therefore turn first to the issue of corporate governance.

Good corporate governance

Good corporate governance is about providing sound and responsible management, and in providing confidence, transparency and accountability. In essence it's about making sure the right checks and balances are in place.

There has been considerable discussion over the past twelve months on the subject of corporate governance, particularly in view of some notable corporate failures often involving failure to achieve acceptable standards of behaviour and indeed dishonesty.

Corporate governance and its implementation has therefore taken on a greater importance although, I am pleased to say in my experience, most public companies in Australia do practice good corporate governance.

At Santos we take the issue of corporate governance very seriously, and did so even before the events of the past couple of years.

Indeed an independent study conducted in October 2002 by the University of Newcastle and accounting firm Horwath ranked Santos equal first among the top 250 companies for corporate governance in Australia.

Santos was one of only nine companies to receive the highest five star rating.

Your Board of Directors is responsible for ensuring that corporate governance at Santos is always of the highest standard and its performance is reviewed regularly.

The Santos Board is committed to good governance and for a number of years we have had formal guidelines in place.

Essentially, these guidelines regulate the Board's relationship with the shareholders, the conduct of Board affairs and the Board's relationship with the Chief Executive Officer and management and their delegated authority.

I would like to take a moment to highlight some of the features of our corporate governance guidelines which will interest you as shareholders.

• All non-executive Board members, including the Chairman, are 'independent' Directors and there is nothing which materially interferes with any non-executive Director's ability to act in the best interests of Santos and its shareholders. There must be a separation of the roles of Chairman and Chief Executive Officer. The Chairman must be a non-executive Director. This has been the case with Santos for almost all of its history.
• Board membership is determined in accordance with the Company's $\bullet$ Constitution and Board guidelines. This includes the requirement that the Board comprise a minimum of five and a maximum of ten Directors and that a substantial majority of Board members must be non-executive Directors.

The current Santos Board comprises seven non-executive Directors and one executive Director, the Chief Executive Officer.

• In early 2002 changes were made to ensure that non-executive Directors are to be appointed on the basis that their nomination for reelection is subject to review and must be supported by the Board. The Board also agreed that the contribution of the Board, and individual non-executive Directors, would be subject to formal review and discussion on a biennial and annual basis, respectively.
• The Board, through the Remuneration Committee, is responsible for reviewing the remuneration policies and practices of the Company. and non-executive Directors are not permitted to participate in any of Santos' share or option plans. The Committee is currently reviewing the Board's retirement arrangements and the Board succession

planning is also being reviewed with regard to the appointment of further Directors.

• All members of the Audit Committee must be 'independent' nonexecutive Board members and financially literate.

Further information on these guidelines is set out in Santos' 2002 Annual Report. I encourage you to take a look at them.

Santos does have a high standard of corporate governance.

But we cannot rest on our laurels. We can all improve and aim higher and we will. In this regard, Santos notes the best practice recommendations of the Australian Stock Exchange Corporate Governance Council released in March this year.

Time does not permit me to outline all of the recommendations which will set the new higher standards for corporate governance in Australia. The best practice guidelines aim to optimise corporate performance and accountability in the interests of shareholders and the broader community something we all agree on.

I am pleased to tell you that Santos' existing corporate governance practice and procedures are in substantive conformity with the ASX best practice recommendations. As noted in the 2002 Annual Report, Santos' future corporate governance statements will report against the ASX best practice recommendations.

Sustainability

Another issue that is growing in importance in the corporate sector is the issue of sustainability.

Sustainability, which focuses on a company's economic, environmental and social responsibility, is gaining currency.

Changing community attitudes have made businesses re-think their role as citizens of the communities in which they operate.

Santos' reputation in the areas of social and environmental responsibility is improving. In line with the growing importance of this area, you will have noted that our 2002 Annual Report has a new section dedicated to sustainability.

Santos has always endeavoured to operate as a good corporate citizen and in particular we have a very proud history as environmental managers of the Cooper Basin. Working closely with communities-of-interest and other stakeholders was important to Santos well before it became fashionable.

However, we know that we can always do things better. Consequently, in 2002 considerable effort was made in addressing areas of sustainability as part of our company-wide approach of leaving no stone unturned to improve our business.

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A significant achievement was a baseline study conducted to ascertain Santos' position with respect to a wide-range of sustainable growth indicators. The results of this study will be used to prioritise and address the immediate long-term sustainability objectives.

This study is very important for the way forward.

Some of the highlights in this area during the past twelve months were:

• Santos' sponsorship of the School of Petroleum Engineering and Management at the University of Adelaide which was officially opened last year by the Prime Minister of Australia, the Hon John Howard. This is an excellent example of Santos working to put something back into the community.
• During the year we signed a re-negotiated agreement with the traditional owners of the Mereenie field in the Amadeus Basin near Alice Springs. We had previously been working under an agreement signed before Santos became involved in the Mereenie field. As well as a royalty program, the new agreement will address the important issue of indigenous employment.
• The Coongie Lakes Memorandum of Understanding with South $\bullet$ Australian conservation groups was also a significant achievement for Santos and symbolises our commitment to protecting the environment in which we operate. Nearly two years ago Santos approached the conservation groups to negotiate a mutually beneficial way to lock-up and protect the environment of the Coongie Lakes in northern South Australia. Our agreement was set down in a

Memorandum of Understanding which has subsequently been presented to the South Australian government for action.

Occupational Health, Safety and Employee Relations

Being a sustainable company also embraces the relationship it has with its employees.

Santos' success is directly related to the quality and dedication of its workforce, two factors that are significantly influenced by providing a safe workplace and properly remunerating and acknowledging employees.

In 2002 Santos continued to focus on improving its performance in the area of human resources, especially the areas of safety and employee wellbeing.

Santos strives for the highest standards of health and safety. Our vision is that everyone goes home from work without injury or illness. This will be achieved by continually reviewing and improving policies on health and safety management.

During 2002 highlights included:

• Undertaking a risk-management analysis program throughout the company's operations.

• Developing company-wide Environment, Health and Safety standards.

• Introduction of performance based remuneration for middle and $\bullet$ senior management. In addition, the Remuneration Committee of the Board is reviewing executive remuneration at Santos, in particular the use of appropriate long term incentives, including share options, to help attract and retain good staff.

• Employee turnover dropping by 7%, with geoscience employee turnover down from 22% in 2001 to just 4% in 2002; and

• Acknowledgement from the Equal Opportunity for Women in the Workplace Agency of our policies to attract and retain more female professionals to help increase diversity in the workplace.

2003 Outlook

Santos' prospects moving forward are excellent although for 2003 and much of 2004 our major future growth providers will be in the development stage. Accordingly 2003 will probably see a marginal decline in production and sales volumes and oil prices during the remainder of 2003 will obviously impact on our revenue and profit line. We have however made a solid start to the year as is reflected in our report to the Australian Stock Exchange for the first quarter.

Appreciation

Ladies and gentlemen, 2002 has been one of the most productive and exciting years in Santos' history. On behalf of the Board of Directors I wish to acknowledge and thank all of Santos' employees. Without their commitment and vision none of this would be possible. We employ a diverse group of people from all over the world. Their collective input is delivering for Santos.

I also thank you as shareholders for your support and confidence. I know many of you have been long time shareholders watching our company grow from a fledgling company exploring in outback South Australia.

My final thanks go to my fellow Board members for their hard work and commitment. I appreciate their efforts in what has been a very busy year. Last October the Board visited Barrow Island off the Western Australian coast and then in March this year we held our first board meeting in Darwin. Both visits were very useful to see first hand the outstanding

environmental management of Barrow Island and to view Wickham Point, in Darwin Harbour, the future site for the Bayu Undan LNG plant and meet with the Northern Territory Chief Minister.

As you can see, much has happened at Santos in the past year. It is my pleasure to now introduce the Managing Director, John Ellice-Flint to tell you a bit more about the operational activities of the past twelve months and, importantly, to outline our plans for the future.