Managing Director’s Review continued Western Australian coast, in which Santos has a one-third interest, is the first offshore oil field development which we operate and is also the first of five more offshore production projects due to commence over the next 18 months, three of which are operated by Santos.  Several projects in Indonesia – Maleo (gas) and Oyong (oil  and gas) – have entered the development pipeline at a design phase. These projects are now joined by Jeruk which, subject  to further appraisal drilling and commercial issues, has early production potential.  that we are on track to meet them within the timeframe set out. All our financial measures representing shareholder return were favourable, being close to targets which, given the difficult start to the year, was an exceptional result. Production was down, as expected, but was further reduced by the effects of the Moomba incident. However, as previously stated, we expect this trend to  be reversed in 2005. CONTINUOUS IMPROVEMENT IMPORTANT Reserve replacement has been strong over the past three years, averaging about 130%. While this is below our long-term goal of greater than 140%, it does not include the recent Jeruk discovery and is a solid result against the industry average of less  than 100%. Our primary goal is to produce higher returns for our shareholders and, in our drive to do so, it is important to identify ways in which we might achieve more efficient and cost-effective outcomes.  Our Sole, Kipper and Golden Beach gas assets in the Gippsland Basin, where we recently completed acquisitions to increase our interests and become operator of the strategic Orbost processing plant, are also at the early development stage. Mutineer-Exeter appraisal delivered a lower than expected outcome in terms of reserves. Conversely, at Bayu-Undan, where the LNG project continues to make steady progress towards start-up in the first half of 2006, Santos' fortunes went the other way, as development drilling upgraded Proven plus Probable (2P) gas and liquids reserves  by 14 million boe.  In all, Santos has an impressive and exciting development outlook over the next few years. Similarly, our reserve replacement cost for 2004 is above our target due mainly to the high level  of expenditure on major development projects during the year. On a three-year average basis, which is more representative of the nature  of the business, the result is  a reserve replacement cost of US$7.19 – much more in line  with our target. In last year’s Annual Report,  I foreshadowed a series of performance measures, together with target levels for the 2004  to 2006 period. At the time, I highlighted that it was unlikely that all of the targets would be achieved in any one year, and needed to be measured over  the long run. The good news for the Mutineer- Exeter project is that the field has been developed under budget and production is starting three months ahead of schedule.  PERFORMANCE AGAINST TARGETS As a result, an important initiative has been the introduction of a continuous improvement program. The organisational restructure implemented during 2004 yielded dividends with savings recorded in the past year of $38 million for program outlays of $22 million. These programs will continue to contribute at even higher levels going forward for even less cost.  A PART OF OUR COMMUNITY Santos engages with many stakeholders and we believe it  is important to have rewarding relationships with the communities to which we belong.  The achievements in developing Mutineer-Exeter are world class and provide further evidence  of the ability of Australian companies to more than hold their own on the global discovery and development stage. Our performance over 2004 is summarised in the table below, and while not all of the targets were achieved, we are confident The netback achieved in 2004  was an improvement over 2003 and was on target due largely to higher average product prices, but also reflected the results of the continuous improvement program. We sponsor a wide range  of educational, cultural and community events and programs. As projects like Minerva, Mutineer-Exeter and Bayu-Undan emerge from our development pipeline, other projects enter  and continue to advance.  With contracts in place to supply gas to customers in Western Australia, we expect a mid-2005 start-up for the John Brookes project in the offshore Carnarvon Basin. Meanwhile, the Casino gas field off the Victorian coast is  on schedule to produce first gas  in 2006, just four years after  its discovery. PERFORMANCE AGAINST TARGETS Long-term 2004 Comments target performance Production growth 6-8% -13.1% Moomba incident impact Reserve replacement ratio >140% 121% Excludes Jeruk  exploration success Reserve replacement cost per boe <US$5.50 US$12.37 Impacted by development focus  in 2004 Netback >A$22 A$21 On target EBITDA growth per share >10% 8.8% Improving trend Return on capital employed >10% 9.4% Improving trend Annual Report 2004 6