Scientific and Engineering Approaches to Oil and Gas Exploration and Production Dean Malouta, Manager of Technology Shell E&P Americas Region Academy of Medicine, Engineering and Science Conference January 6-7, 2005 Dallas, Texas

Oil and Gas Dependency Despite Government and Industry efforts, Oil and Gas will continue to be the main providers of energy for Transportation, heating and cooling, well into the 21st century. Advances in Seismic Imaging, Low Cost Drilling Technology and Low Cost Production Capability are required to continue to meet our energy needs. Energy Companies must invest in alternative Energy Research for their own and the nation’s energy viability

20 year OIL Forecasts by the US Department of Energy: Category 2003-2004 Annual Average MMBOPD 2025 Expected Average MMBOPD % Change from Today US Oil Demand 20.45 27.93 +37% Mid East Imports 11.78 19.11 From 58% to 68% Opec Production 31 55 +80% Non-Opec Production 49 65 +32% US Oil Production 5.7 4.73 -1%

20 year GAS Forecasts by the US Department of Energy: Category 2003-2004 Annual Average TCF 2025 Expected Average % Change from Today US Natural Gas Demand 21.94 31.47 +43% Alaska Shipments 0.4 2.2 +450% LNG Imports 6.4 +1600% Natural Gas from Canada cannot keep pace with demand. China will increase their demand for Canadian Gas. New Alaska Gas Pipeline expected by 2016. Coal will remain the primary source for electricity through 2025. No new Nuclear Plants will be built by 2025 .

20 year Drilling Forecasts by the US Department of Energy: Category November 2003 Count November 2004 Count % Change TX Rig Count 473 539 +14% Original Permits 894 1177 +31% TX Oil Completions 139 291 +109% TX Gas Completions 490 677 +38% TX Wells Drilled 691 1063 +53% Through an Environmental Protection Agency (EPA) grant, the RRC has created the Brownfields Response Program to identify sites to promote voluntary cleanup by funding site assessments at little to no cost. The EPA and the RRC are making a commitment to revitalize abandoned oil and gas properties by mitigating contamination and health risks and restoring the economic vitality to underutilized areas.

Historical Drilling Activity, US and Texas

Developing & Implementing New Technology In order for any Oil and Gas Technology Innovation and Deployment to be successful, it must satisfy 3 important factors: 1) Increase Production 2) Help Replace Reserves 3) Reduce Costs allowing for additional exploration and development New Energy Source R&D must satisfy a positive Net Present Value Return on Investment

Key To Success: Applying New Technology Profitable growth in onshore gas will be driven by application of technology and operational excellence skills Focus Areas Key Technologies Drilling Driving a step change in cost and cycle time performance Efficient development processes (Lift, facilities) Under-balanced drilling Horizontal UB drilling Casing Drilling Completion Maximize productivity/recovery through mastery of design and diagnostics Fracturing - Job design - Coiled tubing Diagnostics: Microseismics fiber optic temperature surveys Reservoir Characterization Reduce subsurface uncertainty Seismic interpretation: - Azimuthal processing to identify natural fractures - AVO for fractures, stratigraphy, and gas saturation Petrophysical calibration/advances to better characterize porosity, perm

Cost Impact of Well Design Evolution 1989 2003 Cost Impact of Well Design Evolution Conventional Uneconomic $9MM well w/ 1989 design complexity increasing smaller reserve targets UB DWC w/ advancements Conventional $4.1 MM well Economic $3.5MM well OBM PDC Bits Frac optimization Commingling Tubingless HPCT Composite Plugs LC Prevention UB DWC The typical well drilled and completed in 1989, without significant pressure depletion, cost about $4.1MM ($1989). If you add extreme depletion intermixed with virgin pressure and drill the well with 1989 techniques the well would require three additional drilling liners and cost $9MM (ignoring inflation). However, by continually innovating and improving South Texas well designs and practices the same well now costs $3.5MM (2004$). Very few South Texas wells could be justified today without these improvements. The advancements: Oil based mud and PDC bit technology reduce drilling time from 60 days to 40 days. Frac modeling and optimization (BTC) allow reduced gel loading, fit for purpose designs. Commingling eliminates future rig recompletions, increases initial rate and reduces required well bore life. Tubingless design reduces well cost by 15%. Composite plugs speed the multi-staged frac completion process. High Pressure Coiled Tubing (developed by Shell and Schlumberger in South Texas) replaces snubbing units. Lost circulation prevention techniques (mud LCM pretreatments and squeezes) allow overbalances as high as 6000 psi to be handled, eliminating a drilling liner. Under balanced drilling with casing allows higher overbalances (6-10,000 psi) to be handled so another liner can be eliminated.

Design Evolution Example –McAllen “B” Lease Days - Spud to Rig Release Design Evolution Example –McAllen “B” Lease 120 First significant depletion 100 Extreme depletion 80 60 40 20 1965-79 1989-1992 2000-01 2003-04 Conventional w/ Commingling Conventional Tubingless 13-3/8” 9-5/8” 7-5/8” 5-1/2” UB DWC 10-3/4” 7-5/8” 5-1/2” 3-1/2” This plot shows the drilling times at the McAllen “B” Lease over the past 40 years. The “B” lease was originally one of the easiest places to drill Vicksburg wells in South Texas. Since discovery, wells could be drilled to 14,500’ without a drilling liner. A continuous drilling program starting in 1989 showed a classic learning curve until the first depletion was encountered. In 2000, an infill drilling program began and significant depletion was encountered in every well and 1-2 drilling liners were required. In 2003, the infill wells were drilled using under balanced drilling with casing and the liners were eliminated. In 2004, 20-30 day wells are anticipated. 13-3/8” 13-3/8” 9-5/8” 9-5/8” 14,500’ TD 3-1/2” x 2-7/8” 5” 5”

Shell - South Texas Industy Leader 2002 Ziff Energy Study – Drilling Deep High Pressure Wells with Depletion Shell participated in a third-party drilling bench-marking study with twelve other South Texas operators. This graph shows the comparison of deep wells drilled in depleted sands, Shell’s typical well. The red line shows the composite of all the best intervals together. The blue lines are the Shell wells, clearly demonstrating “best in class” performance. This study was done in 2002 and does not reflect the additional improvements due to under balanced drilling with casing. The composite performance technical limit (red line) is now being approached on a regular basis. Study participants: Chevron-Texaco, Conoco, Dominion, EEX, El Paso, Kerr-McGee, Newfield, Phillips, Pioneer, Shell, TFE, TransTexas Shell wells Days

Sidetrack/Deepening DWC Slim-hole Re-entry program underway since 1994 Slimhole opportunities not attempted by competitors in South Texas Getting slimmer in 2004 5” Under balanced Sidetrack - DWC 2 7/8” 5” Convert to Tubingless 2 7/8” Ultra-Slimhole 2 1/16” Sidetracks from 3 ½” Tubingless wells 3 ½” 2 1/16” 5” Underbalanced Deepening DWC 2 7/8” Under balanced Sidetrack/Deepening DWC Casing damage is a common problem for all South Texas operators. Since 1994, Shell’s slimhole re-entry program has been underway on the conventional wells (with 5” and 5 ½” casing) drilled prior to 1994. Slimhole operations allow casing problems to be repaired, lost reserves to be recovered and restimulated, extending wellbore life. In many cases it allows for new reserves to be developed via deepening or testing previously by-passed zones. These jobs are generally half the cost of a new well so smaller opportunities are profitable. These opportunities are not attempted or recognized by our competitors in South Texas. 2 7/8” 5”

Technology Development High Pressure & Temperature Materials & Measurement Tools Advanced, Quantitative Seismic Imaging Unconventional (Heavy, degraded, acidic) Hydrocarbon Development: Crude Upgrading Tight Gas Completions Artificial Lift Under Balanced Drilling Cheap Wells and Facilities Pore Pressure Prediction Expandable Casings and Liners Hydrogen Solar and other renewables

Typical seismic section showing the Vicksburg at Javelina Field Faults – N/S striking, normal, Dipping basinward, small antithetic faults

Sustainable Development Health, Safety and Environmental Protection our # 1 concern in all operations, onshore and offshore. Government R&D Tax Credits allow us to pursue lines of research otherwise unfeasible. hydrogen, solar, renewables Severance Tax Breaks: tax relief for life of well for producing all reservoirs under 1 mDarcy; allow marginally economic wells to be brought on stream Zero Emissions Permitting helps sustain the environment After Flowbacks After Fracs: Capture gas generated in Frac jobs (no release to atmosphere) and sell it: 20-25 Mcf/well per frac job Land Fill Farming: Take cuttings to a landfill site, add microbial degenerators and water, recycle as clean fill.