Expandable Technologies –Economic evaluation of the installations Scuola Enrico Mattei Master Medea year 2003-2004 Expandable Technologies –Economic evaluation of the installations Students: Alessandro Di Nisio Marco Gazzola Jeremias Guitarte Cristian Masini Marina Muratore Mariangela Perna Tutors: Domenico Di Renzo Alberto Marsala Giorgio Vicini San Donato Milanese, 28th June 2004

Agenda Technological introduction Reference scenario Case A – Expandable Technologies: dual zone application Case B – Expandable Screen in horizontal well Case C – Expandable Casing Technological introduction Reference scenario Case A – Expandable Technologies: dual zone application Case B – Expandable Screen in horizontal well Case C – Expandable Casing Conclusions After a brief technological introduction, in which we’ll take a look at how expandable screens and casing work, We’ll consider the reference scenario, in which we assumed the hypothesis as to the fundamental variables for the economic evaluation, and thus referring to production, oil and gas sale prices, and other macroeconomic variables (inflation, WACC, exchange rate €/$) Later on, we’ll see 3 installation of E.T. which have been introduced in the fields operated by Eni – and we’ll try an excercise of economic evaluation of these, in terms of differential cash flows which are generated in comparison with traditional technologies and in term of differential NPV (obtained by discounting these cash flow to the WACC). At the end, we’ll introduce further hypothesis as to the schedule with which E.T. we’ll be Introduced within fields operated by Eni, thus calculating the total economic values.

SOLID CASING EXPANSION Cased hole remediation system for casing repair, perforation shut-off, corroded casing, …... Blank pipes coupled with expandable screens The first example, expandable casing, consists of a portion of casing which is positioned at the setting depth and then is expanded by an expansion tool through a plastic deformation of the steel. The installations in which expandable casing are used regard repair of portion of casing which are either mechanically damaged or corroded, and as a cost effective alternative to other interventions for perforation isolation. The main advantage, for the whole category of expandable tools, consists in the possibility of expanding the tool only once it has reached the setting depth, thus losing only a tiny fraction of the diameter. This system guarantees a large hole, which in turn ensures further interventions on lower perforations.

SOLID CASING EXPANSION Cased hole remediation system for casing repair, perforation shut-off, corroded casing, …... Blank pipes coupled with expandable screens

SOLID CASING EXPANSION Cased hole remediation system for casing repair, perforation shut-off, corroded casing, …... Blank pipes coupled with expandable screens

EXPANDABLE SCREENS TECHNOLOGY Courtesy: Baker Perforated base pipe Effective sand control Formation support (eliminate/reduce annulus) Larger ID for easier well intervention access Expandable screens provide: Effective sand control Formation support (eliminate/reduce annulus) Larger ID for easier well intervention access Enables accurate production logging Courtesy: Weatherford Slotted base pipe The other category of expandable tools which will be introduced is the expandable screen, which are available in the 2 version, perforated base pipe and slotted. These represent a valid alternative to traditional gravel packs, of which they possess all the main goods (effective sand-control, formation support, reduction/elimination of the annulus between tool and formation walls), without the traditional bads typical of gravel packs. Among these, we remember the ID reduction, and the permeability reduction due to the flux of circulating fluids for gravel positioning.

SCENARIOS’ HYPOTHESIS Inflation rate 2,5% WACC 8,1% Income Tax 36% Royalties 8% R&D Investments (K€) 570 Depletion rate 10% 12% 12%(+1%/a) Gas price ($/MMBTU) 1,5 1,25 1 Oil price ($/bbl) 24 21 18 Exchange rate €/$ 1,05 1,17 In this slide, we summarise all the base hipothesys with regard to the variables (macroeconomic, technical/productive, fiscal). These hipothesys will be adopted for the economic evaluation of 3 examples of E.T. tools installed by Eni. We can observe that some of these variables (oil & gas sale price, exchange rate) are expressed 3 times; that’s because we want to consider 3 different scenarios (good, fair and bad). Other parameters, like inflation rate, WACC, fiscal regime have been supposed constant throughout the scenarios.

Case A – Expandable Technologies in dual zone application Insufficient gravel quantity Abandonment of main well and side-tracking Expandable Technologies as alternative to Gravel Pack CASE A: ADDITIONAL HYPOTHESIS Production (Sm3/g) 670.000 Productivity increase 20% Workover cost (K$) 1.250 Probability of shorter longevity (need for a workover on 10th year) Operating costs ($/boe) 2,2 The case A regard the technical situation of a well in which they were introduced a whole series of expandable tools (casing, screens, blank pipes). We made further assumptions (mainly technical/productive), which were supplied by Eni personnel. So in the case A, It was observed that after the installation, there was a 20% increase in the production (with respect to the base technological solution – OHGP), which was increased up to 1,000,000 Sm3/g. An interesting feature is the so called probability of reduced longevity: given the quite recent adoption of E.T., we do not yet know its longevity. Thus, we assumed a probability of 20% that within 10 years, it will take a W.O. intervention, for an estimated cost of 1,250,000 $. What came out, was not only a production increase, but also a cost cutting of 350,000€, due to minor cost of E.T. installation compared to alternative technological solutions. (i.e. reinstallation of OHGP)

Case A – Economic Evaluations Worst Case Normal case DNPV @ 10 anni 3.800.000 € Here we observe the differential cash flows (for 10 years) generated in the 3 scenarios. Synthetically, in the normal case and discounting the cash flows at the WACC, we obtain a differential Net Present Value of 3,800,000 € at 10 years. We must underline that E.T. are an optimum solution, not only for production reasons (greater production because of larger ID), but also shows a minor cost (E.T. installation saved 350,000 €, with respect to a traditional Gravel Pack). We can see that there are no negative differential cash flows - and because of this, we have not been able to calculate, not here nor in other examples, the classic parameters (IRR or payback period) – clearly, because this technology pays off immediately, right after only one installation, since it combines higher production and lower costs.

Case B – Expandable Screen in horizontal well Horizontal well with OHGP Bad event: swelling shales Side-tracking with expandable screen CASE B: ADDITIONAL HYPOTHESIS Production (bbl/g) 6.000 Productivity increase 10% Workover costs (K$) 1.250 Probability of shorter longevity (need for a workover on 10th year) 20% Operating costs ($/bbl) 3,5 Intervention costs (K$) 1.700 Probability of swelling shales actually occuring 25% 33% 50% Let’s now consider the economic evaluations of this second example. Some parameters have already been considered – production increase, probability of shorter longevity). We consider here also another variable: the probability that there will occur the swelling of a shale interval which is intercepted by the well. In the hypothesis, one will need to do operations for a total amount of 1,700,000 USD In order to consider 3 scenarios, we assumed that the probability that this event will take place is variable between 25% (1 well every 4) and 50% (1 well every 2).

Case B – Economic Evaluations Normal case DNPV @ 10 anni 9.500.000 € Trend of differential cash flows in this 2nd example. Still, we see that cash flows are always positive. The DNPV after 10 years for each installation of this kind is equal to 9,500,000 €.

Case C – Solid Casing Expansion Need for insulating the upper interval (cladding) No production increase Need for insulating the upper interval (cladding) No production increase Unique differential Cash flow is cost saving of 850,000$ Let’s briefly consider the technical details. The well intercepted 2 formations, separated by a shale interval. Though, the upper formation was to be insulated, eliminating hydraulic communication with the well. Thus, a portion of expandable casing was lowered, creating what is called a cladding intervention

Adoption of Expandable Technologies at 10 years The schedule of adoption of Expandable Technologies in 10 years, divided by the 3 types of installations.

Synthesys within Eni group Normal case DNPV 10 years 163.300.000 €

Synthesys within Eni group Normal case: DNPV 10 years After taxes 163.300.000 € No taxes 277.000.000 € This conclusion might be conservative. A major E&P company announced a double value creation (320 M€) with almost the same number of installations considering the schedale for the installation of E.T. in next 10 years and the timing of the cash flows, we evaluated the economical impact of E.T. within Eni. The result was that with a total amount of 65 installations in 10 years (in the normal scenario) we obtain a differential NPV of 160 M€. This result is considered to be quite conservative. Indeed, a major E&P recently announced a double value creation with a comparable number of installations

Conclusions Main features of Expandable Technologies: Increase in production due to larger ID downhole Cost savings in comparison with alternative solutions Though, need to confirm technology’s longevity Anyway, Expandables are already considered a breakthrough technology The most ambitious application – in drilling – is the development of the monodiameter well-bore Increase in production due to larger ID downhole Cost savings in comparison with alternative solutions Though, need to confirm technology’s longevity Anyway, Expandables are already considered a breakthrough technology Main features of Expandable Technologies: Increase in production due to larger ID downhole Cost savings in comparison with alternative solutions Though, need to confirm technology’s longevity Anyway, Expandables are already considered a breakthrough technology The most ambitious application – in drilling – is the development of the monodiameter well-bore

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