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Santos Managing Director, John Ellice-Flint.

Cooper Basin operations.
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Southern operations.
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Santos’ Gulf of Mexico operations.
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Santos Set To Drill 26 Wildcats In 2003

The 2003 exploration programme, which is aiming at a mean resource potential of about 100 MMboe, follows a $133 MM programme of 18 wildcat wells in 2002 which established a mean resource of 106 MMboe. Overseeing all this exploration activity is Santos' General Manager for Exploration, Jacques Gouadain.

"Last year was our most successful year because we obtained a good result in replacing 119% (proven reserves) of our production by drilling only 18 wells, which is relatively few compared with some previous years", Gouadain said. "We are definitely aiming to go to larger, higher-risk and higher-reward prospects. As we are portfolio driven, we are looking for value and trying to constantly high-grade our portfolio."

Trevor Brown, the New Ventures Manager (core and non-core areas) added: "We are cutting off low-quality elements of our portfolio and replacing them with high-quality exploration opportunities that make sense according to our portfolio needs."

The 2003 exploration budget contains three wells in the offshore Otway basin, including one in deep water, four wells in the Carnarvon basin, one in the Gippsland basin and 11 exploration wells onshore Australia, where some new stratigraphic trapping concepts will be tested.

Overseas, Santos will be drilling two wells in Indonesia, one in PNG, and four in the US, including a move to higher-risk conceptual prospects, particularly in the shallow offshore areas in the Gulf of Mexico. Santos will also be acquiring 4,250 km of 2D seismic and about 2,250 km² of 3D seismic during the year.

Gouadain said Santos' exploration strategy could be summarised into three main points:

1. Extract maximum value from its existing exploration portfolio with "rigour and rapidity".

2. Build a more balanced portfolio by adding high-impact opportunities capable of delivering growth and diversifying Santos'
revenue streams.

3. Long-term growth by building a stronger international business.

"This strategy and the resulting exploration successes obtained by Santos during the last two years are an indication of the dramatic changes occurring within the Adelaide based company under its new leadership", he said. Gouadain said the new organisation consists of highly devoted, small teams reporting to him, giving the company the ability to be efficient and flexible and make key decisions quickly.

A key exploration project for Santos this year is the drilling of three wells in newly awarded blocks offshore Victoria and Tasmania. At least one of the wells will be in deep water. The Santos-led joint venture includes international oil companies UNOCAL and INPEX. UNOCAL is a large independent US oil company and is recognised for its deep water drilling expertise. INPEX is the largest upstream oil company in Japan, with international exploration expertise, including extensive Australian interests.

Santos will be working closely with UNOCAL to apply the appropriate technology for deep water drilling and production. "This is going to broaden the horizons of our explora-tionists", Gouadain said. "The management of this southern Australia deep water exploration campaign has been, even for the new Santos, an example of efficiency in all aspects."

"From the initiation of the joint-venture study, through the seismic acquisition to the planning for the drilling campaign. We were awarded these blocks in August 2002, we shot 2D and 3D seismic before December 2002 and we are already interpreting this seismic in order to be able to drill our wells in the third quarter of 2003".

This will be the biggest petroleum exploration campaign mounted in southern Australia. The total programme could see exploration expenditures of up to $185 MM over a six-year period [from 2002], in four new blocks, extending from south of Portland, Victoria to the northwest corner of Tasmania. Two of the blocks are south of Portland in the Otway Basin, west of the Thylacine, Minerva and Geographe discoveries and close to the expanding onshore pipeline grid servicing the Melbourne and Adelaide energy markets. The third and fourth blocks are about 50 km northwest of Tasmania's west coast in the Sorell Basin.

Santos' Managing Director, John Ellice-Flint, said the frontier blocks were high risk, but they had "high impact exploration potential for both oil and gas." "Strategically, this programme, Santos' first in deep water, is part of the continuing broadening of our interests," he said. "We already have interests in all of Australia's major petroleum basins, as well as in South East Asia and the US."

Santos is looking at further opportunities, including the Middle East and North Africa, to get into some big projects, although Gouadain could not, because of commercial sensitivity, reveal specific details to PESA News when interviewed in late February.

Ellice-Flint said Santos' improving exploration achievements and further progress in gas commercialisation would provide the foundation for future growth. He said it will be a significant challenge for Santos to match its 2002 production performance over the next two years. "2003 and 2004 production, prior to acquisitions, are likely to be around the levels achieved in 2000 and 2001. Sales volumes in 2003 are expected to be slightly down on the 2002 level", he said.

Ellice-Flint said Santos' 2003 exploration programme was a continuation of its strategy to rebalance their exploration portfolio with a risk profile that was more appropriate for a company that produces 57 MMboe per annum.

"Santos recognises that allocating capital well is fundamental to this business", he said. "Our capital management strategy is to restrict our investment programme to an amount where we can maintain our gearing around the current level. That forces us to focus on high grade investments and keeps enough balance sheet capacity for additional growth."

Last year Santos recorded a net profit, after tax and exploration write offs, of $322.1 MM, for 12 months ended December 31st, 2002 from record sales of 57 MMboe and higher average realised oil prices in the second half of 2002. Santos (1P) reserve replacement ratio reached 119%, exceeding annual production for the first time in five years after adding 67 MMboe net of proven reserves at a finding and development cost of $US 6.78 boe.

A total of three oil and nine gas discoveries was made in 2002, comprising the Mutineer and Exeter and oil discoveries, the Bilip oil discovery in PNG, the Maleo gas discovery in East Java, Indonesia, the Casino discovery in southern Australia, the Sardine Creek gas discovery in east Queensland, and six gas discoveries in South Texas.

"During 2002, the exploration portfolio was high graded with a number of exploration permits awarded in Australia", Ellice-Flint said. "The most significant of these were the four deep water blocks in the Otway and Sorrel basins in southern Australia, a new key growth area covering 18,260 km² and a new permit in the Houtman Basin in WA which is frontier acreage and covers 82,880 km²."

In May 2002, Santos' wholly owned US subsidiary, Santos Americas and Europe Corporation, acquired Texas based oil and gas exploration company Esenjay. The acquisition included 32 exploration prospects with an average working interest of 40%, more than 5,000 km² of 3D seismic data, estimated proved and probable reserves of 47.3 MMbbl of oil at year-end 2001, and an additional 16 MMcf equivalent per day of production.

"We were the first Australian company to exploit the opportunities for US deep gas plays and, more importantly, have deep gas fields on production", Ellice-Flint said. "Our increased exposure to the onshore Texas gas business has not been without its challenges, but we've made progress on many fronts. A good example is with drilling costs, where we've lowered the cost per foot by about 30%, with more improvement to come."

"Despite the challenges, the results to date have been good. Through the Esenjay acquisition, we doubled production to 2 MMboe and nearly doubled our reserves from 13 MMboe to over 22 MMboe at the end of 2002. The production outlook for our US operations in 2003 is similar to that achieved in 2002."

One of Santos' major achievements for 2002 was the signing of a 15 year contract to supply Cooper Basin gas to AGL, starting this year. The increased demand from the Cooper Basin has led to Santos carrying out production optimisation work which increased gross capacity by about 75 TJpd. "This rate exceeded the target of 40 TJpd and is a 200% increase over Santos' 2001 performance", Ellice-Flint said.

Total development, delineation and fixed assets expenditure was $627.8 MM in 2002. "These costs reflected the accelerated appraisal of exploration discoveries during the year and ongoing development of the Bayu-Undan liquids project in the Timor Sea", Ellice-Flint said. Other factors contributing to the costs were the continued gas development activity in the Cooper Basin, eastern Queensland and the US, and investment in new information technology platforms and production infrastructure".

"Despite an active 2003 delineation, development and fixed asset programme, total expenditure will ease to $585 MM in 2003 largely as a result of lower delineation activity", he said. "Delineation expenditure is forecast to decline to $46 MM from $90.6 MM and will principally address appraisal of possible reserves (3P), near field exploration and commer-cialisation of contingent resources."

"We will be focusing on fast tracking development projects for early production, as well as optimising production from our existing asset base. In addition, we will remain focused on lowering our overall capital and operating cost structure to maximise profitability."

Santos will also be aiming to make progress on the Bayu-Undan LNG development and to sell more Cooper Basin gas. "We have more than 6 Tcf of contingent gas resources waiting to find a market", he said. Additional activity during 2003 will focus on commercialising the Maleo and Petrel-Tern gas fields and investigating options for developing the Evans Shoal gas field. "To put it into perspective, if we commercialise just 10% of our contingent gas resources, it would add more than 100 MMbbl to our reserve base and boost production over the medium term", Ellice-Flint said.

Ellice-Flint said discoveries such as Kuda-Tasi, Jahal, Bilip, Casino and Corowa were other examples of developments that can be fast tracked utilising existing infrastructure to boost production. "We also have a strengthening growth profile that includes three new projects that were not options at the beginning of the year", he said.

"On top of our near term initiatives, we're actively investigating ways to advance production before 2005 on our significant development projects such as the Mutineer-Exeter oil project." Santos also consolidated its position in offshore Australian production with a 20% interest in the Patricia Baleen gas project.