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Santos Ltd ABN 80 007 550 923 Ground Floor, Santos Centre 60 Flinders Street Adelaide South Australia 5000 GPO Box 2455 Adelaide South Australia 5001 Direct: + 61 8 8116 5000 Facsimile: + 61 8 8116 6723 TO: Company Announcements Office ASX Limited FROM: Company Secretary DATE: 7 June 2011 SUBJECT: Address by Peter Cleary during the Asian Oil and Gas Conference Please find attached an address by Peter Cleary, Vice President Strategy & Corporate Development, presented during the Asian Oil and Gas Conference in Kuala Lumpur during June 2011. David Lim Company Secretary

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  • Santos Ltd ABN 80 007 550 923 Ground Floor, Santos Centre 60 Flinders Street Adelaide South Australia 5000

    GPO Box 2455 Adelaide South Australia 5001

    Direct: + 61 8 8116 5000 Facsimile: + 61 8 8116 6723

    TO: Company Announcements Office ASX Limited FROM: Company Secretary DATE: 7 June 2011 SUBJECT: Address by Peter Cleary during the Asian Oil and Gas Conference Please find attached an address by Peter Cleary, Vice President Strategy & Corporate Development, presented during the Asian Oil and Gas Conference in Kuala Lumpur during June 2011. David Lim Company Secretary

  • 1

    Evolution in LNG

    Address to Asian Oil and Gas Conference

    Peter Cleary, VP Corporate Strategy & Development, Santos

    7 June 2011

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    Thank you for your kind introduction Datuk Anuar Ahmad.

    It is a pleasure indeed to be here in Kuala Lumpur for the 16th Asia Oil & Gas Conference

    and an honour to be invited to present.

    AOGC has become a major annual event for the oil & gas industry. I pay tribute to

    PETRONAS, and in particular Dato’ Shamshul Azhar Abbas, for the management and

    organisation of the conference, along with co-managers the Malaysian Institute of Economic

    Research and The Conference Connection.

    In the 26 years I have been in the oil and gas industry, I have witnessed this dynamic

    industry challenge the boundaries of technology and create innovative commercial structures

    that extended the reach of LNG.

    For the next 10 years and beyond I do not see the pace of this change slowing.

    History has shown that the LNG industry has not only grown, but is an engine for

    considerable technological and commercial adaptation and innovation.

    What do I see as the catalyst for further evolution?

  • 2

    1. Global demand for LNG has strong drivers, but Asian fundamentals will continue to

    underpin long term demand.

    2. The need for Security of supply – and this has many forms – will intensify.

    Globalisation of the trade will grow and provide flexibility to buyers and sellers this in

    turn will encourage the use of LNG.

    3. Demand for cleaner burning fuels will provide a greater role for natural gas.

    4. The industry’s ability to innovate whether through technology or commerce. Gas

    reserves are plentiful, but getting this gas to market remains challenging. New gas

    plays such as Coal Seam Methane and Shale gas will provide both competition and

    contributions to LNG supply.

    These are the themes I’d like to examine today.

    I’ll also take the chance to show you that Santos is a great example of the new face of LNG

    – in all forms of supply and uses of technology. But more of that later.

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    We know change will happen in the LNG world over the next 10 years and beyond. We only

    have to take a quick look back on the past 30 years when the LNG world changed from

    stable point to point trade between a few buyers (mostly in Japan) and a small number of

    mainly Asian suppliers to what we see today.

    The growth of the LNG industry over the last 30 years has been remarkable – and has

    transformed the energy markets of the 24 countries which rely on liquefied natural gas for a

    share of their fuel mix.

    In 1980, LNG trades represented just 2% of global gas consumption. By 2010, LNG trades

    represented 10% of global gas consumption and are set to increase further.

  • 3

    My first taste of the LNG business was in 1980’s when I worked on the shipping

    arrangements for Australia’s North West Shelf project. The parties spent months debating

    whether ships would be built in France or Japan. Clearly with 8 Japanese buyers it was no

    surprise the ships were built in Japan. However at that point in time, there were no signs of

    the soon to be mighty Korean ship yards.

    The pace of change picked up in the 1990s, however the conservative forces of LNG were

    still in play. With oil prices at around $18/bbl, the LNG price debate was around cents on or

    off the constant, not about different indexation to oil.

    However, in 1990 we saw the beginnings of bigger change with Korea and Qatar entering

    the LNG business and the first signs of LNG being traded away from long term markets.

    The 21st century really shook up the conservative image of the LNG industry. Everyone fell in

    love with China and as love struck sellers we said yes to everything we were asked.

    Traders entered the market attracted by the price arbitrage between Asian and Atlantic gas

    prices.

    In the past decade we have seen: African LNG producers, floating regasification, Chinese

    ship yards, the might of Qatar and the rush to approve US import terminals.

    From this perspective it very easy to see that in this current decade and beyond we will

    continue to witness significant change in our industry. We have already seen the first Coal

    Seam Gas LNG projects sanctioned and recently the first floating LNG project was approved

    – all in Australia.

    We will see new entrants and growing need to balance between export and domestic gas

    demands in supplying countries.

    Wood Mackenzie forecasts that the global LNG trade will grow from 218mtpa in 2010 to 345

    million tonnes by 2020 – equating to a compound annual growth rate of almost 5%.

    This growth rate would require 72 mtpa of not yet sanctioned capacity to be operational by

    2020. And this does not include capacity required to offset the decline from existing LNG

    suppliers.

  • 4

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    Taking a closer look at the global LNG demand outlook, Wood Mackenzie’s forecast has

    fallen due to the boom in North American unconventional gas, but Asian demand is proving

    to be better than expected. From the 2008 prediction of over 400mtpa of LNG in 2020

    suggestions are that we are more likely to see about 350mtpa effectively a reduction in

    CAGR from 8% to 6%.

    As Fereidun Fesharaki commented in one of his bulletins “there is no such thing as a smooth

    curve in LNG”. Why…

    • The tragic events in Japan this year made us realise that not all factors which impact

    the supply-demand outlook are predictable. The consequences of the natural

    disasters in Japan will add in the order of 10mtpa, and possibly up to 20mtpa, to

    Japanese LNG demand.

    • The role of nuclear power is now being questioned. Who would have thought six

    months ago that Germany would shutdown all of its 17 nuclear power plants by 2020.

    Any decline in nuclear power generation is likely to increase long-term demand for

    natural gas.

    • Not many predicted the impact US shale gas would have on the US appetite for LNG.

    The question now is whether there is more indigenous gas supply from shale ready

    to enter the market over the next decade. With countries as diverse as China,

    Argentina and Poland all assessing their unconventional capabilities we are bound to

    see an impact – the question is when and whether this indigenous gas production will

    compliment or offset LNG imports?

    • Furthermore, the emergence of new demand centres, for example, the Middle East,

    which is expected to account for about 20mtpa of LNG demand by 2020 – this is a

    seemingly apparent contradiction given the enormous natural gas resources in the

    region.

  • 5

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    However it is worth examining more closely why the Asian region’s fundamentals will still be

    the key driver for the growth of the LNG industry.

    I believe there are 3 major factors at play:

    (i) First, Asia’s energy needs will continue to grow. Asia is the global growth engine. These

    forecasts are from the Energy Information Administration, the statistical arm of the US

    Department of Energy.

    These forecasts show that from 2007 to 2035:

    • Asia is expected to account for 48% of global population growth.

    • For 52% of global GDP growth.

    • And a remarkable 64% of growth in primary energy consumption.

    (ii) Secondly, I see that security of supply will become increasingly important:

    • Countries reliant on imported energy are aiming to diversify their sources of supply,

    minimise political risk and build closer, stronger relationships with their suppliers

    (iii) Lastly, in a carbon constrained world, natural gas has a bigger role to play in reducing

    power generation emissions and LNG is a key source of this cleaner energy. For every

    tonne of CO2 emitted in the production of LNG in Australia, four tonnes of CO2

    emissions are saved in Asia, if the LNG displaces coal to fuel power generation. I don’t

    believe we have yet to fully appreciate or price the environmental advantages of gas

    however we can expect this to become an increasing focus in the coming decade.

  • 6

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    Whilst Australia ranks 14th in the world’s top proven gas reserves holders, there are a

    number of important factors to consider when evaluating it as an attractive source of energy:

    • Australia’s low sovereign risk and relatively stable fiscal regime;

    • Its proximity to the growing markets of Asia;

    • Australia’s world-scale undeveloped conventional and unconventional gas

    resources; and

    • The access to reserves and production which Australia offers international oil

    companies, thereby encouraging the LNG developments we see today.

    Right now Australia produces 20 million tonnes per annum, less than 10% of the world’s

    needs.

    By 2016, we could see this increasing to over 60mtpa and by 2035, a third of all planned

    production – from projects sanctioned or proposed – could come from Australia. In the past

    12 months there have been approximately 16mtpa of Coal Seam Gas to LNG projects

    sanctioned, in addition to 25mtpa LNG supply currently under construction from Gorgon,

    Pluto and Prelude FLNG.

    Not all the planned LNG projects will be developed – in Australia or elsewhere – but clearly

    Australia’s significance in the global LNG marketplace is expanding.

  • 8

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    Looking more closely at the Asian LNG markets we see three distinct demand groups.

    (i) The first group is the established LNG markets of Japan, South Korea and Taiwan.

    These countries are seeking security of supply and diversification by fuel type. They

    have effectively locked in LNG demand, growing at steady incremental rates of

    between 1% and 3% a year.

    (ii) The second group is the growing mega-markets of China and India.

    These are markets that only kicked off less than 10 years ago but are forecast to grow

    at 10% per annum, and could soon be as significant as the current established

    markets.

    (iii) The third group is emerging markets of South-East Asia: Singapore, Thailand, Malaysia,

    Indonesia, Vietnam and the Philippines.

    This group of emerging buyers include some of Asia’s “bedrock” producers who are now

    becoming importers, as is the case with PETRONAS purchasing 3.5 mtpa from the

    Gladstone LNG project in which Santos, PETRONAS, Total and Kogas are partners..

  • 9

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    I’d like to say a few words on how Santos fits into this picture.

    At Santos our vision is simple: to be a leading independent E&P company meeting

    Australia’s and Asia’s energy needs. Our strategy is to safely deliver our Australian base

    business, grow our LNG business, and pursue focused growth in Asia.

    Santos remain Australia’s largest domestic gas producer. In Asia we have gas projects

    targeting domestic consumption in Indonesia, Vietnam, and Bangladesh.

    From this base you can see how Santos – a mid-sized company – can leverage from its

    strengths in gas supply and experience in Asia to grow into a significant supplier of LNG to

    the region.

  • 10

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    The title to this slide is to hide the fact that I am going to address a question I am often

    asked.

    I am often asked will LNG prices converge around a single “market” price in the near future.

    Whilst any future LNG exports from the US will impact trade flows, I believe that Asia’s

    demand for secure supplies from neighbouring sources will preserve oil-linked prices for the

    foreseeable future.

    Oil-linked pricing of LNG has been the commercial driver required to build real scale and

    tackle challenging gas developments. Oil-linked pricing has worked in Asia because buyers

    are comfortable that oil is an established, well understood and globally traded commodity.

    Oil is often the alternative liquid fuel for many LNG importing countries, so it makes sense to

    the have LNG price linked to the substitute fuel price.

    Producers also support oil-linked pricing. Strong prices are required to underpin new

    projects.

    I appreciate the arguments around spot trade and price being set at the margin, but I

    strongly believe that convergence of the various regional hub prices is still sometime away.

    Although we are confident that the long-term LNG price will remain linked to oil price for the

    foreseeable future, the way in which LNG is traded has rapidly evolved.

    The spot market, and short term market, now account for around 20% of all traded LNG

    volume. The volume, depth and liquidity of the short term market give project proponents the

    confidence to proceed with LNG supply projects without the need to lock in long-term

    customers for their entire output.

  • 11

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    As this map shows, 30 years ago LNG trades were simple.

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    As we can see the LNG market is deeper, busier and more liquid than anyone would have

    anticipated.

    It is important to note this is a trade flow map. This picture also demonstrates that many of

    the trades are from market participants who are not physical suppliers of LNG, but actively

    trade LNG cargoes.

  • 12

    Furthermore, we have suppliers who active trade a portfolio of LNG supplies. Portfolio sales

    allow LNG suppliers to:

    • Participate in more of the value chain.

    • Arbitrage the market and take advantage of the short term market movements.

    • Act as an enabler for future projects as it reduces reliance on off-take agreements to

    sanction projects.

    Short term sales typically go to traditional established buyers in Japan, Korea and Taiwan.

    Spot sales flow to highest netback market, generally in North and South East Asia.

    The development of spot and short term trades have been helpful to Asian buyers as a more

    flexible way to balance demand and supply, however I do not believe that buyers will be

    comfortable with a total reliance on short-term supply. For security of supply reasons, we

    believe buyers will continue to look for long-term contracts to meet the majority of their

    needs.

  • 13

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    On the supply side in Australia we have seen the rapid rise in Coal Seam Gas exploration,

    development and now production.

    The rapid development of drilling and production technology has caused a revolution in coal

    seam methane (commonly known as coal seam gas or CSG in Australia). This has resulted

    in 16mtpa of LNG supply from CSG being sanctioned in the past year and perhaps another

    project may well be sanctioned later this year.

    These projects must meet four key challenges:

    1. First, accessing sufficient high-quality gas reserves.

    2. Secondly, adopting an approach to upstream gas production that enables efficient and

    economic drilling and operation of a large number of wells simultaneously.

    3. Thirdly, managing the logistics of bringing a large number of wells into production

    ahead of the first shipments of LNG, then operating these wells for at least 20 years

    4. And finally, doing all this in a responsible manner, whether it be in regard to water,

    environmental management or genuine community engagement

  • 14

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    The technical innovation I have referred to is not confined to LNG production and export.

    Advancements across the industry are delivering the next phase of LNG evolution.

    On the demand side, there has been a rapid rise in floating reagasification storage, which

    allows importing countries to rapidly establish import facilities in approximately ~18 months

    and connect gas directly into existing distribution networks, as well as overcome potential

    port access and community constraints.

    Over the last six years, 13 floating regas units have come online.

    And, over the next four years, the number of operational floating regas units will double.

    The emergence of floating LNG with Shell’s sanctioning of the Prelude development last

    month, is one of the biggest game changers our industry will see. FLNG will unlock stranded

    gas fields, making these reserves commercially viable. At Santos, we are confident our

    Bonaparte LNG venture with GDF Suez will be another pioneering project in this field.

  • 15

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    I suggest Santos is a good example of the changing face of LNG.

    With the widening LNG landscape and the changing roles of market participants companies

    without the scale of the majors or NOCs can still play an important role in the LNG trade.

    Santos has access to both the LNG liquefaction technology and the conventional and

    unconventional upstream gas reserves. . But in this complex and very capital intensive world

    we are fortunate to have great partnerships to bring these projects to market.

  • 16

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    • Looking ahead we will continue to see an evolving market landscape

    o Exporters will become importers

    o Partnerships with National Oil Companies will become increasingly important.

    o We will see increased market liquidity and trade flow complexities

    o And, new technologies enabling the development of CSG, Shale gas, floating

    LNG and regasification and storage.

    • Security of supply and energy policy will continue to drive change.

    o LNG exporting nations will balance their domestic gas market needs with

    export opportunities.

  • 17

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    Our customers and partners will continue to play a fundamental role in the transformation of

    Santos from an Australian E&P company to a leading natural gas producer providing energy

    to Australia and Asia.

    In conclusion, we believe natural gas offers a cleaner burning fuel that’s available now and

    affordable. Australia has a vital role to play in providing natural gas to Asia.

    I thank you for this opportunity to address the prestigious Asian Oil & Gas Conference.

    ENDS.

  • 18

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