DEVEX 2006 Heavy oil - a growth business for small companies

Steve Jenkins CEO Nautical Petroleum plc 18 May 2006

Outline of presentation

Requirements for Small Company Growth - can they be met? Portfolio Building and Adding Value Drilling - Increasing reserve certainty Production - Early Revenue through Phased Development Marketing - Options for Achieving the Best Crude Price Challenges - Not all Plain Sailing Conclusions

Requirements for Growth (1)

UKCS Undeveloped, Heavy Oil offers: Access to Large Resource Base over 4 main areas Great quality reservoirs at shallow depth Opportunities to assemble a balanced asset portfolio - oil in the ground, appraisal/development, low risk, large prospects Assets at a reasonable price through purchase, swops and licence rounds Evaluate areas using low cost proprietary seismic and well data

Requirements for Growth (2)

Small Companies need to: Evaluate their portfolio at low cost and add value Share the exploration/appraisal risk Achieve early cash flow and mitigate production risk Identify diverse outlets for crude to maximise return Make use of the wide pool of contractor expertise to supplement in-house skills

UKCS Heavy Oil Provinces

Billion Barrel (oil in place)

Developed Discovered, Undeveloped Yet to find

2.2 5 5-6

A Shoal of Minnows (East Shetland Platform)

Undeveloped Discoveries:
Mariner E. Mariner Bressay Kraken Bentley Bluebeard Skipper (Chevron, ENI & Nautical) (Chevron, ENI & OMV) (Chevron, Shell & Statoil) Nautical Xcite Xmar Xmar

Portfolio Building and Adding Value

Assemble a Broad Range of opportunities - investors/stakeholders do not like one shot companies Near term development - unloved, appraised discoveries at reasonable cost e.g. Mariner and Bressay Unappraised discoveries - Kraken, Bluebeard, Funnel and Skipper Prospects - add value by acquiring/reprocessing/interpreting seismic. Prospects should be low risk, large and robust

Nauticals Portfolio

Mariner (9/11a) - Discovered & appraised oil

Reservoirs: Depth to Top Reservoir: Oil: P50(in place):

Heimdal Sand Maureen Fm. Paleocene 1220mss (Heimdal) 1414mss (Maureen) 14.5API
2 KMS

400+mmbo (Heimdal) 395 mmbo (Maureen)

10 vertical wells drilled 6 High angle/ horizontal wells drilled Wells produced 1000 1595 bopd Extended well test (EWT) produced 662000 barrels oil over 63 days at a maximum rate of 14991 bopd

Kraken (9/2b) - Discovered Oil

Depth (mss)

Reservoir:

Heimdal Fm. Paleocene

Min closure 1170m (ODT)

Depth to Crest: 1110mss (3640ft) Oil: P50(in place): 15.3API 331mmbo 27 bcf Kraken

ML closure 1185m (ODT+15m)

Max closure 1200m (ODT+30m)

9/2-1

Top Reservoir Depth Map

5 KMS

Seismic Before and After Reprocessing

BEFORE

Heavy amplitudes
Improved multiple attenuation

Better structural definition

AFTER

Kraken (9/2b)
Inline 3315

Improved Imaging of Reservoir

Inline 3315
9/2- 1 T45 Dornoch T50 Balder H-Sand

X-line 7904

High amplitude gas effect? T34 Lista

Base Tertiary T33 (Heimdal III) Base Heimdal Sand Main Basement Fault

Kraken (9/2b)
Inline 3315

Crestal High Amplitude Anomaly

T45 Dornoch

T50 Balder

X-line 7904

X-line 7904

High amplitude gas effect? T34 Lista T33 (Heimdal III)

Base Heimdal Sand

Base Tertiary Main Basement Fault

Selkie / Kelpie (8/25a)

Elements of Skipper Cluster

Depth (mss)

Reservoir:

Dornoch Fm. Paleocene

Depth to Crest: 1034mss P50(in place): 350 mmbo Selkie

Min closure

ML closure)

Skipper Kelpie
Top Upper Dornoch Sandstone Depth Map
5 KMS

Max closure

Mermaid (9/11c)

Mariner Analogue
Depth (mss)

Reservoir:

Maureen Fm. Paleocene

Mariner

Depth to Crest: 1455mss Oil: P50(in place): 14.5API 562mmbo

Min closure ML closure) Max closure

Mermaid

Top Maureen Sandstone Depth Map

5 KMS

Drilling - Increasing reserve certainty

Wells - shallow (<1500m), simple well design, lower cost Aligned Contractor - e.g. Estimate well costs (PI) Search for and secure rig slots Deliver complete well construction service Drill well

Small company must have the core competence to bridge and maintain contractor alignment

Production - Early Revenue through Phased Development

Swift, sound decision to develop Develop using existing, proven technology Phased development minimizes upfront CAPEX Start in core area and move out on success Wells can deliver high volumes
- Mariner EWT up to 15,000 bopd

BUT, Extraction costs 30% higher than a Brent Barrel High water volumes sooner in field life

(high well count, need for artificial lift and sand control)

EWT/EPS
Semi-submersible Rig with processing plant & gas flare

OK when rates $100,000/day

Storage Tanker Collecting the produced oil

2 x Producers 1 x Water Injector

Flexible pipeline 1.5km long

T.C.M.S Moored Tanker Three anchor legs

Rig - Flowline - Tanker Layout

Phased Production

Some Alternatives

FPSO - conventional monohull limited turret on vessel

Sevan Stabilised Platform

Well head platform Minimum facilities/unmanned (advantage - drytrees)

Production Technology
Proven

Proven and Field Tested

Artificial - ESPs and HSPs easily deployed (wireline, coiled or jointed tubing) can handle 20,000 blpd (Captain) - ESP - reliable (5+ years run life) in a low gas environment - HSP - High performance, flexible and robust. Power fluid required Sand control - screens, gravel packing and expandable screens
Field Tested

Viscosity reduction (Proflux)-flow assurance of heavy oil in well operations

Marketing - Options for Achieving the Best Crude Price Crude Quality Heavy 9 - 15 API High Acid 2 - 9 tan But, Low sulphur 0.5 - 1.3% Multiple Options Base Revenue - LSFO Increased Revenue - Emulsified Fuel Unknown Revenue - U.K. Upgrader
Benefit to producer may decrease as end user costs increase

Brent vs LSFO

80.00
History Forward Swaps

70.00

60.00

50.00

$/bbl 40.00

30.00

20.00

10.00

0.00 Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 Q4 Q1 Q2 Q3 05 05 06 06 06 Period (Quarterly Average) Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08

LSFO (1%) NWE

Dated Brent $/bbl

Splitting the Barrel Premium $8.5 bbl Crude Oil API 14.5o 70% volume
Light Product

Sold into Existing Oil Markets Used as feedstock for power generation

30% volume

Heavy Residue

Whole Oil Light Product Power Feedstock Combined Value

US$/BBL 100% 70% 30%

Brent (Discount) / Marker Premium 55.00 (15.00) 55.00 1.00 55.00 (24.00)

Value 40.00 56.00 31.00

Net Value 40.00 39.20 9.30 48.50

Challenges - not all plain sailing For a small public company: Positive Newsflow is king Spreading the news that heavy oil production is not a technical adventure Heavy oil production - higher cost and lower recovery factor Ever changing fiscal regime and lack of crude differentiation not a great catalyst No small company has produced heavy oil in the UKCS, the majors have the experience

Nautical Share Price

16 15 14

Growth, not a straight line

Pence per share

13 12 11 10 9 8 7 6
05 05 05 06 06 06 06 06 05 05 05 05 05 05 2/ 1/ 0/ 3/ 4/ 5/ 2/ 1/ 8/ 9/ 7/ 6/ 5/ 4/ 1 1 1 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/

Share Price

Conclusions
Heavy oil offers a growth opportunity for small companies who can:

Build a balanced, low cost, low risk portfolio which will yield recoverable reserves Access the knowhow of contractors to progress from prospect to production

Market the crude to maximise revenue Assure investors that production technology is proven