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1998 Second Quarter Activities Report

Second Quarter Highlights

The following results were achieved compared with the 1997 second quarter:

  • Production volume increased by 5.7% to 10.9 million boe
  • Sales volume increased by 0.9% to 10.7 million boe
  • Sales revenue decreased by 7.4% to $180.4 million

Comment by Mr Ross Adler, Managing Director

The 5.7% increase in production positively reflects a range of growth projects undertaken by the company. During the quarter oil production commenced from the Stag and SE Gobe oil fields and the contract to supply gas to MIM Holdings Limited at Mt Isa commenced.

During the quarter US dollar oil prices and the US/Australian dollar exchange rate declined to their lowest levels in 12 years, resulting in a 13.8% decline in the Australian dollar oil price, quarter on quarter. The 7.4% reduction in sales revenue for the second quarter 1998 as compared to the corresponding period in 1997 reflects that the company’s sales mix includes a significant proportion of gas sales.

In March 1998, Santos advised its expectation that results in the half year to 30 June 1998 would be somewhat lower compared with 1997, reflecting the lower oil and liquids prices then prevailing.

It has transpired that since March, the price of oil has declined further. In US dollar terms, the average oil price realised by Santos was 32.0% lower in the first half of 1998 compared to the first half of 1997. The average US dollar LPG price was 41.7% lower. The lower US/Australian dollar exchange rate has only partially mitigated this decline, and in Australian dollar terms, the average oil price realised by Santos was 19.5% lower than in the first half of 1997 and the average LPG price 29.3% lower.

As a result, as shown in the statistical summary, total sales revenue for the first half 1998 is $35.7 million lower than the first half 1997 and it is currently expected that operating profit after income tax for the six months ended 30 June 1998 will be approximately 18% below the corresponding 1997 result. This is after taking into account the profit on sale of Santos’ UK assets of approximately $7 million after tax.

Santos’ expectation in March was that results for the full 1998 year would be similar to or exceed 1997 results, with a significant increase in production forecast in the second half from new projects expected to compensate for the adverse effect of lower liquid prices.

It is now considered unlikely that the 1998 full year results will be similar to the 1997 results. This is due both to the further decline in oil prices since March and to delays in achieving forecast production rates from the two new oil fields which have recently come on stream:

The 7.4% reduction in sales revenue for the quarter was expected considering the depressed liquids prices.

The Stag oil field commenced production on 8 May 1998. Since that time, production of the gas cap associated with this field has constrained the rate of oil production. The average daily rate of production through 30 June from the field was 6,700 barrels of oil per day and the current rate of production is 10,400 barrels of oil per day. These rates are lower than what the operator had previously forecast. Initially, the amount of gas that could be flared (and hence amount of oil produced) was reduced while the jackup drilling rig was on site.

On 6 July the drilling rig was released and in mid July a second gas flare installed. The operator, Apache, currently forecasts that the production rate should continue to increase to 23,000 barrels of oil per day in the fourth quarter of the year following proposed workovers to alter pump configurations on some wells. This is slightly behind the operator’s pre-development estimate of 26,200 barrels of oil per day over the first full year of production.
On 20 July 1998 the Elang/Kakatua oil fields commenced production but limited production has been achieved to date due to start up problems. The operator, BHP Petroleum, forecasts that the production rate from the field should stabilise at 32,500 barrels of oil per day by September and continue to produce at that rate for the balance of the year.

Based on the operators’ present production forecasts for the Stag and Elang/Kakatua oil fields, Santos’ 1998 full year production and sales volumes should exceed 1997 levels by approximately 10%. However, as a result of the lower oil and LPG prices realised to date and assuming an oil price of US$14.00 per barrel (AUD$22.50 per barrel) for the second half, earnings for the 1998 full year are now expected to be approximately 12.5% below the 1997 record financial results.

Clearly, the final results for 1998 will depend upon the production volumes and oil prices actually achieved in the second half. It is therefore possible that the actual results will vary from the current expectation, either positively or negatively.

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