AES 09089043-3-1, Rev 0 September 2009

OLEODUCTO DE CRUDOS PESADOS ECUADOR S.A. PIPELINE COST ANALYSIS (Final Report)

APTECH Engineering (Alberta) Ltd. (A wholly owned subsidiary of Intertek) Prepared by Ray Masrour Jim C. Towers Phillip G. Nidd

Prepared for Oleoducto de Crudos Pesados S.A. Amazonas y Naciones Unidas Edificio Banco La Previsora, Torre A - Piso 3 Quito, Ecuador Attention: Mr. Fabian Sanchez Transmitted Via Email: fsanchez@ocp-ec.com

INTRODUCTION

APTECH Engineering (Alberta) Ltd, a wholly owned subsidiary of Intertek (Intertek-APTECH), is a full service Engineering Consulting Company specializing in Asset Integrity Management and Life Cycle Management of infrastructure, facilities, and equipment. The petrochemical group is located in Houston, Texas to provide a direct focus on Asset Integrity Management solutions to the oil and gas industries. We offer such specialized services by using advanced technology and world class expertise and providing specialists and engineering support in all areas of Asset Integrity Management including design, corrosion and metallurgy, root cause failure analysis, stress analysis, safety and mechanical integrity management solutions and risk analysis.

Furthermore our services take us into almost every field imaginable, such as textiles, electronics, building, heating, pharmaceuticals, petroleum, materials, food and cargo scanning. We operate a global network of more than 1,000 laboratories and offices and over 23,000 people in 110 countries around the world.

The petrochemical Group provides asset integrity management services to the following industries:

Offshore and Shipping Pipeline Chemical and Petrochemical Refineries and Gas Processing LNG and LPG Manufacturing

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We offer the following key services: Asset Integrity Management Services Design, Design Verification, Material Selection Inspection (Advanced Technologies) Maintenance and Inspection Strategies Risk Analysis, Risk Based Inspection Risk Based Inspection Software Process Safety and Mechanical Integrity Services Corrosion and Metallurgical Support Business and Financing Modeling Training and Audits

Additionally Intertek-APTECH helps customers to assess their products and commodities against a wide range of safety, regulatory, quality and performance standards. Our services include testing, certification, audition, safety, inspection, quality assurance, evaluation, analytical, advisory, training, outsourcing, risk management, and security services.

Our customers include some of the worlds leading brands, major global and local companies and governments, Shell, Canon, Canadian Natural Resources, Ltd., McDonalds, BP, IKEA, Nestle, ExxonMobil, LG, GAP Inc., Valero, Panasonic, Tesco, Chevron Texaco, Marks & Spencer and Levi Strauss are Intertek-APTECH customers. More than twenty governments including Bangladesh, Mozambique, and Saudi Arabia are also customers.

Intertek-APTECH adds value to the products and processes of our customers, facilitating their success in the global marketplace and providing confidence-inspiring expertise.

Resumes for Ray Masrour, Jim C. Towers, and Phillip G. Nidd are referenced in Appendix A of this report.

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EXECUTIVE SUMMARY

APTECH Engineering (Alberta) Ltd, a wholly owned subsidiary of Intertek (Intertek-APTECH) has been requested by Oleoducto de Crudos Pesados Ecuador S. A. (OCP) to prepare a proposal for development of an Engineering, Procurement and Construction (EPC) project cost estimate for the 484.6 km OCP Pipeline and related facilities, using 2009 labor and equipment costs. Intertek-APTECH reviewed material and component information that was made available by OCP, in an effort to establish a clear view of the pipeline system. The cost estimate is presented in 2009 dollars and is considered to be within 15 to 20% accuracy.

The final estimate of the Total Installed Cost (TIC) in 2009 dollars, as derived from analysis of project benchmark comparison costs, including line fill and Value Added Taxes (VAT) is $2,033,104,087. A list of vendor quoted cost of various pipeline components was also reviewed as an additional source.

Intertek-APTECH examined available design and construction benchmark data for pipeline system projects constructed in various countries around the globe over a span of 9 years from 2001 to 2009. The selected projects, which constitute the basis for this estimate, were similar to the OCP pipeline system in overall project size, pipeline length and diameter, number of associated facilities and general Right-Of-Way (ROW) terrain and environmental conditions. The degree of difficulty associated with the construction of the OCP project was taken into account by first defining the elements which impact construction activities, i.e. number of crossings, ruggedness of the terrain, type of soil, etc. and then adopting a industry acceptable cost upgrade factor to arrive at the accuracy level required for the estimate.

This report is based on many document reviews including the following:

Oil and Gas Journal. articles concerning similar pipeline projects Data marketed by Penwell Publishing Incorporated concerning Worldwide Pipeline Construction Cost between 2001 and 2009

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Publications by Gulf Publishing containing information regarding cost estimating for pipeline systems and marine facilities.

2009 vendor quotations for selected components

This estimate prepared by Intertek-APTECH meets the requirements of a Class 4 estimate as defined in the internationally recognized AACE International Recommended Practice No. 18R97 Cost Estimate Classification System As applied in Engineering, Procurement, and Construction of the Process Industries. Even though the relative broad base of data available for the study and used by Intertek-APTECH supports assigning the accuracy range of 15 to 20% to this estimate, variables and unknown circumstances such as weather, customs delays, labor shortages, material shortages, environmental or geotechnical conditions, and regulatory requirements could increase the final estimated cost beyond this accuracy range. The estimates provided in this report assume favorable market trends at the time of material purchase and construction. In addition proper engineering and design work, detailed material, equipment and construction specifications, timely equipment and material purchases and deliveries, tight construction inspection in compliance with project specs, standards, are considered as achievable projector targets. Class 4 estimates are usually used in feasibility study and feasibility analysis.

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Section 1 BACKGROUND

1.1

AS BUILT PROJECT DESCRIPTION

The following information concerning the existing pipeline system was collected and analyzed in order to provide an overall basis for a 2009 dollar estimate inclusive of the design and construction elements utilized in completing the original 2001 pipeline system. The 484.6 km Pipeline System is entirely located within the country of Ecuador. The route of the pipeline initiates within the Ecuadorian Amazon region and extends through the Andes Mountains to the coastal area of Ecuador. In-Line-Inspection (ILI) tool launch and/or receiver facilities are located at each of the Pipeline System pump or reducing stations as follows:

Amazonas (PS-1-KmP 0.00) Cayagama (PS-2-KmP 67.4) Sardinas (PS-3-KmP 148.2) Paramo (PS-4-KmP 188.9) Chiquilpe (PRS-1-KmP 275.0) Puerto Quito (PRS-2- KmP 327.2)

A marine off-loading terminal (Marine Terminal) is located at KmP 484.6. The pipeline consists of 4 different diameters ranging from NPS 24 to 36, 15 different wall thicknesses, and 32 associated diameter / wall thickness combinations (refer to Tables 1-1, 1-2, and 1-3). Table 1-2 specifically reflects the diameter, wall thickness and length of pipeline sections installed for the project. The pipe steel cost of $202,000,000.00 was calculated on the basis of $1922.00 per ton (present day value). This value is strictly material and manufacturing costs and does not include coating, transportation, and other related costs which form the total pipe steel cost of $469,405,754.

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Table 1-1 PIPE SECTION DIAMETER LENGTH SUMMARY SECTION NO. 1 2 3 4 5 6 Total Length SECTION PS 1-PS2 PS2-PS3 PS3-PS4 PS4-PRS1 PRS 1-PRS2 PRS2-MT PIPELINE OD (IN) 32 34 34 32 24 36 LENGTH (KM) 67.4 80.8 37.7 89.3 52.1 157.3 484.6

Table 1-2 PIPELINE SYSTEM DIAMETER/WALL THICKNESS / INVENTORY SUMMARY OD [IN] 24 WALL THICKNESS [IN] 0.312 0.375 0.500 0.562 0.625 0.688 0.750 0.812
Subtotal

32

0.344 0.375 0.438 0.469 0.500 0.562 0.625 0.750 0.812 0.875 0.938 1.062
Subtotal

INSTALLED LENGTH [M] 5,435.20 8,046.07 6,872.75 5,070.97 5,444.34 5,006.64 8,798.56 7,514.43 52,188.95 12,355.09 3,922.82 9,626.67 9,760.06 4,453.52 33,552.63 46,500.28 9,652.93 11,290.42 4,729.57 9,245.87 1,494.34 156,584.21

INVENTORY CALC. BARRELS

9,470.51 13,869.06 11,593.21 8,461.91 8,985.15 8,171.51 14,203.45 11,997.16 38,626.45 12,215.63 29,736.11 30,028.15 13,647.22 101,996.66 140,204.88 28,633.61 33,219.16 13,800.34 26,754.10 4,253.16

SHORT TONS OF PIPE

704.79 1,250.68 1,416.87 1,171.95 1,395.52 1,408.88 2,691.88 2,482.42

MILES OF PIPE

INCH MILES

32.41 1,764.03 609.76 1,743.10 1,889.85 918.13 7,754.33 11,919.22 2,953.28 3,729.84 1,679.08 3,509.20 638.69 97.24

777.82

3111.6

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OD [IN] 34

WALL THICKNESS [IN] 0.344 0.375 0.469 0.500 0.562 0.625 0.688
Subtotal

INSTALLED LENGTH [M] 12,773.68 22,519.93 24,781.73 9,108.00 30,012.15 7,236.14 12,034.23 118,465.86 LENGTH [M]

INVENTORY CALC. BARRELS

45,199.62 79,390.34 86,378.80 31,627.74 103,436.16 24,748.39 40,842.29

SHORT TONS OF PIPE

1,823.80 3,500.51 4,798.50 1,877.68 6,936.09 1,854.81 3,386.47

MILES OF PIPE

INCH MILES

73.57

2501.3

36

0.375 0.406 0.438 0.500 0.562

Subtotal

64,892.72 27,744.67 5,708.15 6,064.61 52,949.30 157,359.44 484,598.47

257,117.44 109,543.36 22,455.39 23,689.52 205,367.11 1,589,663.59

10,086.95 4,663.03 1,033.58 1,250.26 12,237.08 97.72 105,080.25 Total Inch Mile 3517.9 9908.7

Total

2009 Costs Pipe Cost Only

$1,922 $202,000,000

$/ton 2009 cost estimate for pipe only

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Table 1-3 PIPELINE SYSTEM KEY INFORMATION SUMMARY PARAMETER Year of Construction Pipe Material Design Pressure (*) MAOP (*) MOP (*) Coating type Right of Way Access Cleaning frequency Type of Cleaning Pig Product Type Wax Content Operating temperature BS&W Content Product velocity 2001-2003 X-70 3,200 psi (max) (Varies by pipe section) 3,200 psi (max) 2,900 psi (max) Fusion Bonded Epoxy (FBE) 4x4, walk Monthly Conventional cups, discs and metal brushes Heavy crude oil (19 API) Insignificant Can be controlled at no less than 110F (176F max) Less than 0.5% Can be controlled from 0.25 m/s (36 inch at minimum flow) to 4.15 m/s (24 inch at maximum flow). Slack conditions may be present at some areas 1,200,000 barrels at the Amazonas Terminal 3,750,000 barrels at the Marine Terminal DATA

Storage Facilities

The route generally follows the SOTE pipeline with adjustments and deviations to maintain the integrity of the pipeline systems and extends from the receiving facilities at Amazonas in the Oriente Region Ecuador to the OCP Marine Terminal near Esmeraldas Ecuador. The sustainable design throughput capacity is not less than 410,000 barrels daily of 180 API crude oil. There is an injection point approximately 151 kilometers downstream from the Amazonas Terminal where AGIP provided all necessary facilities to inject up to 60,000 barrels per day into the passing stream.

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Section 2 METHODOLOGY

2.1 2.1.1

STEPS TAKEN IN COST MODELING DEVELOPMENT OF BENCHMARK COST

The study employed comparison of actual historical pipeline construction costs (parametric) techniques and indexing to produce a realistic cost estimate. The preparation of the parametric cost estimate is based on publically available World Wide Pipeline Cost Data from PennWell Corporation (1421 S. Sheridan Rd., Tulsa, Okla. www.pennwell.com). This data was supplemented with information published in the Oil and Gas Journal, obtained from relevant web sites, and John S. Pages book entitled, Cost Estimating Manual for Pipeline and Marine Structures, the foremost publication on the subject of estimating. As a part of compiling the cost basis, the World Wide data was filtered to focus the parametric model on pipelines that were known to be constructed in environmental and geotechnical conditions similar to the OCP project, which included an unstable soil, remote sites, rugged terrain and other relevant factors.

These costs were validated by knowledge gained through field reconnaissance. The general field observation considered OCP facilities to be of better quality and the pipelines to traverse a more difficult terrain than the majority of the pipeline systems used as benchmarks for the parametric estimate.

The pipeline project information extracted from above sources included the countries where the projects were constructed, pipeline diameter, length, and total installed cost. The Oil and Gas Journal generated and presented for public information a breakdown of the relative costs for land, right-of-way, pipe fittings, construction, buildings, pumping equipment, tanks delivery facilities communications equipment offices and furnishings vehicles and other incidentals for ten pipeline projects. These costs were averaged and expressed in percentages of the Total Installed Cost. A comparison between these projects showed that the cost of any one activity
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was within a few percentiles of each other confirming that an average of such cost percentages and the application of its indexed values to this estimating task would produce results within the required accuracy of the project.

The details related to countries, year of construction, and costing details are shown in Appendix B of this report.

Some of the calculated benchmarked data were also subjected to a factored increase in order to reflect the degree of difficulty associated with the OCP project which was considered as high in construction rating due to the impact of location, environmental and geotechnical conditions. The ratings are explained in Table 2-1.

Table 2-1 PROJECT TERRAIN RATING DESCRIPTIONS

DIFFICULTY RATING High (H) DESCRIPTION Mountains, unstable, more than 1 river crossing per mile, congested areas, multiple road, rail, levee crossings, environmentally challenged (virgin area, senic resources, archeologically significant or indigenous traditional lands, inclement weather conditions, seasonal restrictions on construction, poor access. Rolling to flat terrain, few major crossings of roads, rivers, etc., long summer construction seasons, stable soils, farm lands or other previously disturbed areas. Parallel to existing power lines or roads with easy access and logistics, Near existing infrastructure. Flat terrain Deserts, with road access and adequate infrastructure, few or no crossings, and no significant environmental, social, or other impediments.

Medium (M)

Low (L)

2.1.2

2009 VENDOR MATERIAL QUOTATIONS

A summary of selected pipeline system component and service costs, as provided and was reviewed. These costs include construction materials, equipment i.e. pumps, tanks, valves as well as services such as land acquisition, testing, construction that are directly applicable to the OCP project. All the data used in both estimating approaches are available in an Excel File and are delivered in Appendix B of this report.

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Once the parametric estimate was compiled it was further adjusted for additional costs that had to be considered for the OCP Pipeline System, as follows:

1.

OCP had to purchase its pipeline product (line fill). Since most pipelines are simply carriers, the owners of the inventory are typically the producers of the crude and thus such costs are normally not included in the pipeline construction cost. The original line fill cost was calculated at a per barrel cost of $45.53. The cost of replacing that inventory today would be much higher. The current value is calculated assuming a cost of $88.07 per barrel (anticipating a continued rise in price through the end of 2009 to near the $100/barrel level again).

2.

OCP did not receive an exemption status from VAT taxes for this construction project. This alone increased the cost of OCP by 27 to 30% above benchmark projects constructed in other countries which normally receive tax exemptions benefit. Benchmark countries such as Russia, Kazakhstan, etc. typically exempt developed projects from VAT taxes since such projects bring new opportunities and jobs, and enable the monetization of otherwise stranded resources ripe for exploitation.

OCP also incurred additional cost in improving community infrastructure and providing educational and recreational facilities in remote and largely inaccessible areas of the country. Furthermore OPC spent substantial sums in training of a large workforce preparing them for projects difficult geographic and environmental conditions as well as the operational challenges they would encounter.

Since the Worldwide data was used as a basis for this estimating work, it is likely that these costs are already included in the base data used for these projections.

The final benchmark comparison cost estimate is summarized below in Table 2-2.

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Table 2-2 BENCHMARK COST ESTIMATE IN 2009 $ (CONSIDERED TO BE WITHIN 15-20% ACCURACY)
ITEM Land R.O.W. Line pipe Line pipe fittings Pipeline construction Buildings Pumping equipment Machine tools, machinery Other station equip. Oil tanks Delivery facilities Communications systems Office furn. and equip. Vehicles, other work equip. Other TOTAL Add Ecuador Taxes Add Line Fill GRAND TOTAL ESTIMATE FOR OCP 2009 $ $7,031,408 $36,759,467 $469,405,754 $42,140,936 $575,083,042 $39,989,068 $78,587,181 $90,687 $114,071,445 $83,344,942 $26,259,183 $6,223,127 $3,045,317 $7,000,088 $4,487,521 $1,493,519,166 $399,584,920 $140,000,000 $2,033,104,087

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