ENERFLEX SYSTEMS LTD. ANNUAL INFORMATION FORM For the ...

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ENERFLEX SYSTEMS LTD. – ANNUAL INFORMATION FORM The following section provides an overview of the compression, production and processing, and power markets and applications. Compression Natural gas, including coal-bed methane gas, (together “natural gas”) is found in underground reservoirs and coal seams. The pressure of the gas at the wellhead is generally too low to enable it to be transported to its destination for consumption. Virtually every cubic foot of natural gas requires compression at some point in the transportation and processing cycles. Compression equipment is used to increase the pressure within gas gathering systems and processing plants. Generally several compressors are required to sustain the pressure necessary to deliver gas from a typical field to the main line high pressure transmission facility and to its end use. Demand for compression occurs when new wells are drilled or when reservoir pressures decline in existing fields. A combination of additional compression and development drilling is invariably required to offset the decline in reservoir pressures. This is particularly evident in shallow gas reservoirs and coal-bed methane gas fields, where production can be brought on quickly and with relatively low capital costs, but will usually experience low initial production pressure or rapid production declines. Enerflex packages and services reciprocating and screw type compressors. A typical compressor package consists of a steel or concrete skid, gas compressor, driver such as a reciprocating engine, gas turbine or electric motor, gas cooler, liquid or particulate separation, piping and a control system. In colder climates the equipment is enclosed in an insulated building. Compression is required both in land and offshore applications. The following are some of the more common compression applications: Land Based Applications • Wellhead Compression – Compression at or near the wellhead is almost always required to boost the pressure of produced gas to slightly more than the pressure in the transmission pipeline. • Gas Gathering – Mid to large horsepower (“HP”) compressors (800 to 6,000 HP) deployed at a central field location, are used to boost gas pressure from several wells. • Gas Storage and Withdrawal – Natural gas is often stored in underground facilities such as depleted oil or gas reservoirs or salt caverns. This is done to balance production with seasonal demand. Compression is required both to inject gas into the storage reservoir and to subsequently withdraw the gas for reinjection into the pipeline. Storage facilities typically use compressors in increments of 2,000 to 3,000 HP. • Coal-Bed Methane – Methane trapped in coal-beds or seams occurs naturally at low pressures. Its production requires a combination of reciprocating and screw compression near the wellhead. • Fuel Gas Boosting – Most large gas turbine power generation plants require compressors to boost the fuel gas pressure from the low (30 PSI) pressure delivered by the local utility, up to the much higher pressures (350 – 650 PSI) required by the turbine. These units typically are driven by electric motors. Their control systems are highly sophisticated to regulate a proper flow of fuel while the turbine undergoes load changes. • Gas Lift – Compressors are used to increase oil production by injecting gas into the oil reservoir. This increases reservoir pressure and facilitates the oil flow. At the surface, the gas is separated from the oil, recompressed and then re-injected in a continuous cycle. Local conservation and environmental regulations often make reinjection mandatory. • Enhanced Oil Recovery (EOR) – This process involves the injection of carbon dioxide or other gases by means of compression. Operators use EOR to decrease the viscosity of oil to enable it to flow from the reservoir formation. • Gas Processing – Gas plants typically require mid to large HP compressors for processing and boosting the pressure between inlet and outlet supply pipelines. Offshore Applications Compression equipment is used on FPSO (Floating Production, Storage & Offloading) vessels and other offshore units to re-inject gas associated with oil production back into the reservoir. Most offshore operating regulations prohibit the flaring of gas. Re-injection may also be necessary to increase production, or where pipeline access is unavailable or uneconomic. Reciprocating compression equipment is gaining market acceptance for offshore gas re-injection projects where the gas volumes are generally lower and the required differential pressures are high. PAGE 8
ENERFLEX SYSTEMS LTD. – ANNUAL INFORMATION FORM Production and Processing The Company designs and fabricates equipment and facilities that process and purify oil and natural gas coming from the wellhead. These facilities remove impurities such as hydrogen sulphide (“H 2S”), carbon dioxide (“CO 2”), hydrocarbon liquids (propane, butane and liquefied propane gas (“LPG”)), and water from oil and natural gas before they enter a pipeline. For the natural gas production and processing sector, the Company manufactures products ranging from hydrocarbon dew point control and liquid petroleum gas recovery, to H 2S and CO 2 removal and natural gas dehydration facilities. Oil products designed and manufactured include everything from oil emulsion treaters and oil stabilization and fractionation systems, to direct fired crude oil heaters and separator packages. The Company can build small components such as separators and heaters, or design a turnkey oil and natural gas facility from initial concept to start-up. Power A typical power generation unit is comprised of a natural gas reciprocating engine or turbine driver, generator and control devices. Power generation equipment may operate on natural gas, landfill gas, digester fuel, propane, diesel or a combination of these fuels. Enerflex’s power systems are used for the generation of prime, standby or peak shaving power and cogeneration. In the latter process, waste heat, produced by the driver, is captured and used for water or space heating, steam production or for cooling via absorption refrigeration. The Company manufactures high specification modular and portable power generation units. Outputs range from 15 kW to 10MW. Multiple set configurations can also be provided. Enerflex has designed and installed plants with power outputs of up to 13 MW. Customer applications outside the petroleum industry include industrial plants, medical centres, office buildings, municipal landfill operators and independent power producers. Turnkey design, fabrication and installation, including permitting, are also available. Segmented Revenue Details The Company’s external revenue by business and geographic segment are illustrated in the following table: Business Segment Service Fabrication Leasing 2004 Revenue $ 000 % 248,635 280,043 28,399 557,077 44.63 50.27 5.10 100.00 2003 Revenue $ 000 % 256,418 236,914 22,196 515,528 49.74 45.95 4.31 100.00 Geographic Segment Domestic International 409,373 147,704 557,077 73.49 26.51 100.00 386,922 128,606 515,528 75.05 24.95 100.00 Competitive Conditions As a Canadian-based provider of equipment and services to the global oil and natural gas industry, Enerflex’s business prospects are influenced by several market factors. These include the business outlook for oil and natural gas producers, prospects for natural gas infrastructure development, as well as the business outlook and competitive environment within the oil and natural gas service industry. PAGE 9
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