G r o w t h c o n t i n u e d a s p r o d u c t i o n a n d r e v e n u e r o s e R E V I E W B Y J O H N E L L I C E - F L I N T , M A N A G I N G D I R E C T O R
Santos achieved excellent operational results in 2006 with record production during a period of sustained high oil prices and encouraging signs of strengthening gas prices.
We also made a successful new country entry, in Vietnam, where we have three potential development projects which will be the subject of further appraisal and studies in 2007.
Tempering these positive features of 2006 were the Banjar Panji mudflow incident in Indonesia, an event of significant concern to the Company at all levels, and the disappointing appraisal of the Jeruk oil discovery.
Looking ahead, Santos’ Cooper Basin Oil Project and the eastern Australian coal seam gas initiatives are reinvigorating one legacy asset and establishing another. These opportunities represent two of the Company’s most important growth engines.
The emergence of a robust political and public debate over climate change in Australia also has profound implications for future energy use and Santos’ role as a significant gas supplier to domestic and international markets.
Throughout a dynamic period of change, one constant is the energy and commitment of Santos’ employees. The Company’s values and goals are being widely embraced by employees and, with a move to a new corporate headquarters in early 2007, Santos is entering an exciting phase as an emerging international oil and gas producer.
I would like to record my appreciation for the positive contribution made by the Santos team to the Company’s success in 2006.
SAFETY A PRIORITY
In 2006, our employee injury frequency rate continued to fall for the fifth successive year but the contractor injury frequency rate increased, resulting in the total recordable case frequency rate increasing from 4.9 to 6.4 recordable injuries per million hours worked.
We have put systems, processes and training in place to improve our future safety performance.
STRONG OPERATIONAL RESULTS
Santos achieved its highest ever production in 2006 of 61 mmboe, up 9% on the previous year.
With higher prices lifting sales revenue 12% to $2.8 billion and unit production costs down 3% to $6.41 per barrel, Santos’ earnings before interest, tax, depreciation and amortisation increased by 17% to $2.14 billion.
For the third year in a row, we increased our 2P reserves base, with year-end reserves of 819 mmboe, an increase of 6%, even after production of 61 mmboe.
Contingent resources also rose by 14% and now stand at 2,248 mmboe. Commercialising these reserves is an important focus across the Company.
BANJAR PANJI INCIDENT
In May 2006 an incident occurred at the Banjar Panji-1 exploration well located near Surabaya, in East Java, in which Santos holds an 18% non-operated interest.
Hot, non-toxic mud started flowing to the surface through vents near the drillhole and continues unabated. By early 2007, the mud had covered
an area in excess of 450 hectares and, in doing so, has had a significant impact on the local community, environment and economy.
A large number of people have been displaced and the process of relocating the affected communities is ongoing. Santos is very concerned about the impact of this incident and has made a significant contribution toward the response efforts led by the Indonesian Government-appointed National Team.
Uncertainty surrounding the liability and insurance aspects of this incident has clearly had a significant impact on share market sentiment towards Santos in the latter part of 2006 and into 2007.
Santos has provisioned $89 million as at 31 December 2006 in relation to the Banjar Panji incident which reflects the current best estimate of drilling, mud management and other costs. Offsetting this, the Company has recognised an amount of $22 million as insurance proceeds, leading to a net expense of $67 million.
GROWTH ON FIVE FRONTS
Cooper Basin Oil Project – Santos is one year into a five-year, 1000-well project which is expected to increase Cooper Basin oil production from 10,000 barrels to 30,000 barrels a day of oil by the end of the decade.
Initial results exceeded expectations in 2006 with 108 wells drilled, adding 15 million barrels of Proven plus Probable (2P) reserves: double the extra reserves anticipated.
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