Santos to Steer Eastern Star Gas

- Santos to Steer Eastern Star Gas

Wednesday, July 20, 2011
Santos Ltd.

Santos has reached binding agreements to give effect to:

• the acquisition of 100% of the outstanding ordinary shares in Eastern Star Gas Limited (ESG); and
• the subsequent sale of a 20% working level interest in ESG's permits in the Gunnedah Basin, northern New South Wales, for A$284 million to TRUenergy Holdings Pty Ltd (TRUenergy).

Pursuant to these transactions, Santos will assume operatorship and own 80% of ESG's coal seam gas (CSG) permits with TRUenergy owning the remaining 20%.

The acquisition of ESG will be conducted via a recommended Scheme of Arrangement (Scheme) under which ESG shareholders will receive 0.06803 Santos shares for every ESG share held.

Based on Santos' closing price of A$13.23 on July 15, the transaction values ESG at A$0.90 per ESG share or A$924 million, and represents a 3P reserves multiple of A$0.50 per gigajoule.

The acquisition of ESG builds on Santos' existing interests in the Gunnedah Basin. Following completion, Santos will have the largest natural gas reserves position in NSW, with 1,216 PJ of 2P reserves and 2,238 PJ of 3P reserves.

TRUenergy, a leading energy retailer with significant power generation interests in Eastern Australia, represents an ideal partner to develop ESG's permits in joint venture with Santos.

Santos is one of Australia's largest domestic natural gas producers and has a long track record of working with local communities to safely and sustainably produce natural gas.

Santos Chief Executive, David Knox, said, "This transaction represents the next major step in Santos' eastern Australia gas strategy and positions the company to meet the expected increase in demand for natural gas from both domestic power generation and export LNG markets."

"The acquisition of ESG is a unique opportunity to consolidate our Gunnedah Basin interests and establish the leading position in Australia's next major natural gas province."

"Santos has been working in regional Australia for more than 50 years, including 15 years exploring for and developing coal seam gas."

"Santos is committed to developing the coal seam gas industry in the Gunnedah Basin without impacting the important role the region plays as an agricultural producer. The growth of the natural gas industry in the Gunnedah Basin will bring new jobs and additional investment to local communities across the region," Mr. Knox said.

Proposed Acquisition of ESG

Santos and ESG have entered into a Scheme Implementation Deed (SID) under which it is proposed that Santos will acquire all of the issued and outstanding ordinary shares of ESG, other than the shares already held by Santos and TRUenergy.

Santos currently owns approximately 20.9% of the issued and outstanding ordinary shares of ESG and TRUenergy owns approximately 3.8%.

Proposed Joint Venture arrangements with TRUenergy

Santos has entered into a series of binding arrangements with TRUenergy, which give effect to:

• the sale by TRUenergy of its 39 million shares in ESG to Santos at A$0.90 per share resulting in proceeds of approximately A$35 million; and
• the acquisition by TRUenergy of a 20% interest in ESG's CSG permits and a pro rata share of other assets previously owned by ESG for approximately A$284 million

resulting in net cash consideration to Santos of approximately A$249 million. The sale will take effect on the second business day following completion of the Scheme.

The cash proceeds from TRUenergy fully cover Santos' anticipated incremental capital expenditure to fund its share of the ongoing development of the Gunnedah Basin to the end of 2014.

The agreements with TRUenergy are conditional on the successful completion of the Scheme and regulatory approvals.

Mr. Knox said, "Santos welcomes TRUenergy, one of Australia's largest integrated energy companies, as our joint venture partner in developing this major natural gas province."

TRUenergy's Managing Director, Richard McIndoe, said, "We are pleased to become joint venture partners in the Gunnedah Basin with Santos. With such a qualified partner developing and operating the field, TRUenergy can focus on its core strengths of power generation and retailing with confidence that our equity gas will be available when we need it in the future."

Santos' position in the Gunnedah Basin

Santos first acquired interests in the Gunnedah Basin in 2007, and in 2009 acquired a 20% holding in ESG and a 35% equity interest in various exploration permits operated by ESG.

In addition to the permits held by ESG, Santos' other Gunnedah Basin assets (for which it is already operator) include:

• 25% of PELs 1 and 12 (Santos can increase its interest to 65% via farm-in);
• 15% of PEL 456 (Santos can increase its interest to 50% via farm-in); and
• 100% of PELs 450, 452 and 462.

Assumption of operatorship and majority interest in the various CSG permits will allow Santos to undertake coordinated development of its Gunnedah Basin acreage.

Santos Vice President Eastern Australia James Baulderstone said, "Santos will develop our coal seam gas business working in cooperation with farmers and existing rural businesses in the region, continuing our 50-year track record of building beneficial partnerships with landowners and local communities."

"We are aware of a number of important issues raised by local farmers and other land users concerning the longer term development of the Gunnedah Basin, one of which is the proposed Narrabri to Wellington pipeline. We are confident we can address community concerns in that regard and we will be explaining these plans to the community in the near future, once we have completed our review of Eastern Star's plans."

"We also look forward to ESG staff joining Santos and the important role they will play in developing our assets in NSW," Mr. Baulderstone said.

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