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

COST OF CONTROL COST OF CONTROL How does it work? 1

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, 3 rd Party Equipment on Well site, including rig legal liability, sound location. 2

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! What Affects Losses? 3

Blowout! 4

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 $100,000 Retention Insured will pay costs related to Well Control. Policy Limit $3MM Each Occurrence (For 100% Interest) CCC Limit $500,000 5

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. Costs of Control Fighting the Fire $500k Policy Limit $3MM Each Occurrence Retention: $100,000 (For 100% Interest) CCC Limit $500,000 6

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. Costs of Control Fighting the Fire $500k Seepage & Pollution $350k Policy Limit $3MM Each Occurrence Retention: $100,000 (For 100% Interest) CCC Limit $500,000 7

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. Seepage & Pollution $350k Restoration Redrill $1.8m $500k Costs of Control Fighting the Fire Policy Limit $3MM Each Occurrence Retention: $100,000 (For 100% Interest) CCC Limit $500,000 8

Restoration Redrill $1.8mCare, Custody & Control $450k 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. Seepage & Pollution Costs of Control Fighting the Fire $350k $500k Policy Limit $3MM Each Occurrence Retention: $100,000 (For 100% Interest) CCC Limit $500,000 9

CCC – 3 rd Party Equipment on Site 10

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: What Insured Paid Versus What Insured Got Paid: 11 $ 3,050,000 $ 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)

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 $250,000 Retention $100,000 in respect of CCC. Policy Limit $15MM Each Occurrence (For 100% Interest) CCC Limit $1,000,000 12

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

Day 50-57Spud Redrill Well, Set Surface 2719’. 14 Drill to 7197’. 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. Drill out of int. casing lose full returns, squeeze cement and kick off 6775’, all abnormal operations. Circulate gas cut mud, drill to 7873’, non routine drilling. Day Day Day Day Day Scenario 2 – “Non-Typical” Claim

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

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

17 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.

18 Scenario 3 – “Non-Typical” Claim Day 1 Well out of control above ground. Well was at 20,406’ depth. 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. Extensive well control effort. Move rig off location, a side track of the original well. Rig up snubbing unit on another barge. Snubbing operation. Fishing operations. Day 2-26 Day Day Day Day

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

1 st Costs of Well Control: Seepage and Pollution / Clean-up and Containment: Sidetrack, Restoration, Redrilling Expenses: 1 st OEE Claim: 2 nd Cost of Control / Redrill: Care, Custody, & Control (CCC): TOTAL RECOVERY: RECOVERY: 20 $ 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 1 st layer]

 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 Limits – How Much??? 21

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