Control of Well Limits

1. Control of Well Limits How Much is Enough? Presented by: Special Thanks to: and G.S. Bryan & Associates, Inc.

2. COST OF CONTROLHow does it work? 1

3. Overview of Well Control Policy and Main Policy Sections • What and who does the policy cover? • Unregulated forms; they all vary slightly – but generally the same • Sections • Well out of Control • S&P • Redrill • Sub limit for Care, Custody, & Control, 3rd Party Equipment on Well site, including rig legal liability, sound location. 2

4. What Affects Losses? As product prices rise, then it is incentive to drill. So Operators drill more wells, So they can sell more product, So they can make more money, So they can hire more rigs, So they can drill more wells, Which requires still more rigs, Which “thins out” crews, and Wears out rigs………… All of which leads to more losses – And they are more costly than ever! 3

5. Blowout! 4

6. Scenario 1 – “Typical” Claim: Exploratory Well #1 TVD: 10,000 Feet AFE: $1,000,000 Dry Hole Cost 100% Working Interest Insured by Operator Client (Insured) Rate: $0.50 pfd = $5,000 Premium Policy Limit $3MM Each Occurrence (For 100% Interest) CCC Limit $500,000 $100,000 Retention Insured will pay costs related to Well Control. 5

7. WEEKS ONE and TWO: Expenses after the Blowout A Snubbing crew arrives, then after three days, operator hires a Well Control Contractor. Total bills already $500,000 in the first two weeks. $500k Policy Limit $3MM Each Occurrence Retention: $100,000 (For 100% Interest) CCC Limit $500,000 Costs of Control Fighting the Fire 6

8. WEEKS THREE & FOUR:Expenses after the Blowout An environmental remediation contractor is hired to clean up Farmer Brown’s cattle tanks, fishing creek, and Hog pens. The invoice totals $350,000. $350k Seepage & Pollution Policy Limit $3MM Each Occurrence Retention: $100,000 (For 100% Interest) CCC Limit $500,000 $500k Costs of Control Fighting the Fire 7

9. WEEKS FIVE through TEN:Expenses after the Blowout Well is under control. TX RRC leaves the operator alone, but the joint venture partners want the operator to replace the well to get whatever blew it out in the first place. After fishing and sidetracking for ten days the operator gives up, skids the rig over and starts over –another $1,800,000 to reach T.D. $1.8m Restoration Redrill $350k Seepage & Pollution Policy Limit $3MM Each Occurrence Retention: $100,000 (For 100% Interest) CCC Limit $500,000 $500k Costs of Control Fighting the Fire 8

10. WEEK ELEVEN: Expenses after the Blowout Well achieves TD. Rental tool companies and various vendors to the original well ask the operator to pay for their equipment that was never recovered. “CCC” endorsement pays because the CGL won’t - $450,000. $450k $1.8m Care, Custody & Control Restoration Redrill $350k Seepage & Pollution Policy Limit $3MM Each Occurrence Retention: $100,000 (For 100% Interest) CCC Limit $500,000 $500k Costs of ControlFighting the Fire 9

11. CCC – 3rd Party Equipment on Site 10

12. What Insured Paid Versus What Insured Got Paid: COST: Premium Paid for this Well: Retention born by Insured: Total Costs: RECOVERY: Costs of Well Control: Seepage and Pollution / Clean-up and Containment: Sidetrack, Restoration, Redrilling Expenses: Care, Custody, & Control (CCC): Less CCC Deductible: TOTAL RECOVERY: $ 5,000 $ 100,000 $ 105,000 $ 500,000 $ 350,000 $ 1,800,000 $ 2,650,000 [Policy Limit was $3,000,000 excess of the Retention] $ 450,000 [CCC Limit was $500,000] $ (50,000) $ 3,050,000 11

13. Scenario 2 – “Non-Typical” Claim: Well #2 TVD: 8,000 Feet TMD: 8,911 Feet AFE: $1,850,000 Dry Hole Cost 100% Working Interest Insured by Operator Policy Limit $15MM Each Occurrence (For 100% Interest) CCC Limit $1,000,000 $250,000 Retention $100,000 in respect of CCC. 12

14. Scenario 2 – “Non-Typical” Claim Day 1-5 Well out of control below ground. Day 5-9 Well out of control above ground. Day 10-15 Fishing under pressure from the well. Rig Released, more fishing with snubbing unit. Day 16-45 Operations suspended due to hurricane. Day 46-48 Cement plugging, well pressure required multiple attempts. Well pressure required full plug and abandonment without salvaging original well bore. Day 49-77 13

15. Scenario 2 – “Non-Typical” Claim Day 50-57 Spud Redrill Well, Set Surface Casing @ 2719’. Day 58-60 Drill to 7197’. Day 61-73 Circulate well flow, open hole squeeze to counter lost circulation, no further progress drilling. Run 7 5/8’ int. casing to 6668’, cement, nipple up B.O.P’s, change out drill pipe, normal operations. Day 74-79 Day 80-88 Drill out of int. casing lose full returns, squeeze cement and kick off plug @ 6775’, all abnormal operations. Day 89-93 Circulate gas cut mud, drill to 7873’, non routine drilling. 14

16. Scenario 2 – “Non-Typical” Claim Run 5 ½’ int. liner casing and cement same, varies from original well plan but required for hole stability and pressure integrity. Day 94-96 Day 97 Drill out of liner casing, shoe test failed, squeeze cement liner casing seat. Reinitiated drilling & encountered problems with liner hanger seal assembly. Day 98 Day 133 Finally remedied & drilled to original loss depth 19 weeks after original loss date. 15

17. RECOVERY: Costs of Well Control: $ 8,139,000 Seepage and Pollution / Clean-up and Containment: $ -0- Sidetrack, Restoration, Redrilling Expenses: $ 4,443,000 $ 12,582,000 [Policy Limit $15,000,000 excess of Retention] Care, Custody, & Control (CCC): $ 750,000 [CCC Limit was $1,000,000] TOTAL RECOVERY: $ 13,332,000 [Original AFE was $1,850,000] 16

18. Scenario 3 – “Non-Typical” Claim: Well #3 TVD: 21,000 Feet TMD: 21,900 Feet AFE: $28,740,000 Dry Hole Cost 100% Working Interest Insured by Operator Policy Limit $75MM Each Occurrence (For 100% Interest) CCC Limit $1,000,000 $750,000 Retention $100,000 in respect of CCC. 17

19. Scenario 3 – “Non-Typical” Claim Well out of control above ground. Well was at 20,406’ depth. Day 1 Day 2-26 Extensive well control effort. Day 26-40 Move rig off location, a side track of the original well. Day 41-52 Rig up snubbing unit on another barge. Snubbing operation. Day 52-94 Day 95-289 Fishing operations. At this point, $72,500,000 had been expended in Control of Well costs. The Insured approached Underwriters to reinstate the policy limits prior to the redrill. 18

20. Scenario 3 – “Non-Typical” Claim Redrill to original loss depth. Redrill began 9 ½ months after original loss. This Redrill cost $21,700,00. Day 290-430 While redrilling below the 1st redrill depth, the redrill well lost control. Second occurrence. Day 477 Day 586 Second loss depth reached. Overall, the Redrill involved 2 sidetracks. 19

21. RECOVERY: 1st Costs of Well Control: Seepage and Pollution / Clean-up and Containment: Sidetrack, Restoration, Redrilling Expenses: 1st OEE Claim: 2nd Cost of Control / Redrill : Care, Custody, & Control (CCC): TOTAL RECOVERY: $ 72,500,000 $ -0- $ 21,700,000 $ 94,200,000 [Policy Limit $75,000,000 excess of Retention] $ 22,685,000 $ 1,900,000 $ 23,585,000 [Policy Limit $75,000,000 excess of Retention. Contained in 1st layer] 20

22. Limits – How Much??? • What is an “AFE” and how is it used to establish a Well Control Limit? • Other considerations for determining a limit. • Location • Well Pressure • Depth • Offset Well Data • Intangibles 21

23. “Anything that can go wrong, will go wrong.” - Murphy’s Law Oilman = Optimist Hopes for the best Underwriter = Pessimist Expects the worst Plan, Design, Plan Some More 22