White Paper.

The Case for LNG Fueling Solutions for Drilling and Completion.

Background.

The LNG Revolution.

Strategic Drivers.

These are exciting times for the oil and gas industry and for suppliers of goods, services and technologies for this industry. The changes are happening so quickly that it’s difficult to stay on top of them, not to mention ahead of the curve. In the last 5 years, we’ve seen the natural gas industry turned on its head three or four times, with widespread expansion of horizontal drilling and fraccing techniques from the Barnett to other gas plays, the number of U.S. gas rigs expand to 1,600, with gas prices subsequently falling back to as low as $2 and the current - early

2013 - natural gas rig count now down 75% from its 2008 peak. (1) The crude oil side of the business has been no less volatile since horizontal drilling/fraccing techniques have been applied there also, and the rig count for oil drilling is at a relative high. Overlaying this, the traditional distinction between “oil majors” and “natural gas independents” has broken down due to acquisitions, joint ventures and the simple fact that businesses tend to ‘follow the money’ and right now the money is with oil.

Over this same period of time, a smaller revolution has been advancing pertaining to the use of liquefied natural gas (LNG) and other forms of natural gas in exploration & production. In this revolution, LNG has been used in three fueling applications, where it displaces diesel: drilling rig engines and gensets, pressure pumping equipment for fraccing, and trucks that deliver goods like water to the rig. Fortunately, LNG is a domestically-produced fuel made from domestically-produced natural gas.

Converting to LNG fuel is affordable and easy. The cost of conversion is typically recouped in less than a year. There are other technical options to supply natural gas to drilling rigs and frac crews, such as compressed natural gas (CNG) and field gas. We are open to supplying both of these options but, in our opinion, LNG is the premium option because it is the easiest to store the necessary volumes on-site, the fastest to deploy

(rig up and rig down) and the best long-term solution for widespread adoption of natural gas fuel in fraccing operations.

Linde has been involved in LNG for roughly a century and has technology, production, supply and application capabilities, and we believe this change to LNG is as significant as any previous development in the area. The first major conclusion is: We are undergoing a fundamental shift to LNG use in traditional off-road diesel applications.

Perhaps the first adopter of LNG use for these uses was the Canadian-based company Encana (2), but Chesapeake Energy, Noble Energy and Apache were also quick to test this out. All of those companies could be classified historically as coming from the “natural gas independent” side of O&G but, as noted above, the lines have blurred.

Interestingly, O&G operators and service companies have raced to be able to announce breakthroughs in this field-especially in the past year. For example, working with Linde, EQT was the first to announce the use of LNG for drilling in the Marcellus, relying on dual-fueled LNG/diesel engines, while Seneca Resources was the first to announce using 100% LNG-fueled engines in that play, Baker-Hughes announced using LNG in frac pressure pumping equipment and Apache and Haliburton, with Linde, have announced the first conversion of a complete frac fleet using LNG in every pressure pumper. It appears that many decisions to pursue

LNG fueling were predominantly “top-down”, emerging from C-level suites and board rooms and appears to transcend simple cost savings. This leads to the second major conclusion: Interest in LNG is at least partly strategically driven. Operating companies have been able to demonstrate leadership to their stakeholders by embracing this “new” fuel. Similarly, O&G service companies recognize that their market position can be enhanced by serving the interests of the operators. We expect this trend to continue as new horizons are seen and as “fast followers” and others play catch-up.

02 The Case for LNG Fueling Solutions for Drilling and Completion

Of course, fuel swapping costs are only part of the story. Even If there were a significant, unexpected reduction in the oil-gas spread, there are other drivers of LNG fuel. Primary among these is the lower inherent emissions produced. Air quality standards are driven by the Federal government, and non-attainment with these standards for any of the major criteria pollutants can result in a state losing federal highway funds, not to mention affecting the local population’s health. LNG combustion produces inherently-lower NOx, particulate, SOx and carcinogen emissions than diesel. So, significant benefits can be gained by switching to LNG for drilling and completion operations.

Let’s focus on one pollutant: ozone or O3. Ozone is often referred to as smog and it is a hazard to respiratory health. The EPA has standards for 1-hour and 8-hour periods, and too many excursions above that level will cause a region to fall into some level of non-attainment. Ozone is not directly emitted from combustion but is instead a product of the reaction of NOx and non-methane organic compound (NMOC) emissions. Fortunately, emissions using LNG in off-road engines are lower than diesel. The following map shows non-attainment areas based on “8-hour” ozone levels. It clearly indicates that the Marcellus/Utica, Barnett, Niobrara, Green River and Kern/Monterey basins are affected. Furthermore, there is a growing body of evidence that O&G activities have a direct impact on regional air quality. For example, the San Antonio area has had high ozone readings the past few summers and “Increased air pollution from the oil and gas boom of the Eagle Ford Shale is believed to be a factor”. (4) Looking at another major O&G play, “In 2020, we estimate that Marcellus activities will contribute about 12%

to both regional NOx and VOC emissions. The model predicts significant ozone changes in the Marcellus region with a uniform increase…across a wide region of the Northeast.” (5) If oil and gas companies can reduce their emissions, it stands to reason that they can continue to expand development of plays without contributing to excessive levels of ozone. Thus, the fourth major conclusion is: Reducing emissions using LNG can be a tool to avoid future constraints on regional drilling activity.

Projected Prices of Oil and Natural Gas

8-Hour Ozone Nonattainment Areas (2008 Standard)

Economic Drivers.

Environmental Drivers.

There must be an economic pay-off to sustain the continued growth of LNG usage in drilling and completion. This is quite simple; the spread between natural gas and crude oil prices has grown and stayed at levels that suggest a fundamental paradigm shift. It has taken some time for this to sink in; we watched the divergence in prices occur beginning around 2008, but it wasn’t until a few years later that the potential longevity of that divergence became widely accepted, and the view is more widely held today because petroleum prices will continue to be driven by global pricing and natural gas pricing will be driven mainly by domestic supply and demand. There will be volatility in both fuel’s prices, for sure, but the long-term nature of the spread is quite clear, which yields the third conclusion: There is sufficient momentum for significant conversion from diesel to LNG so that once end users spend the nominal amounts to convert to dual-fuel or dedicated LNG engines, they are not likely to switch back to diesel even with fuel cost parity.

Source: (3)

03The Case for LNG Fueling Solutions for Drilling and Completion

Now…and in the Future, Linde is There.

Interest in LNG for drilling and completion is rapidly ramping up from virtually nothing a few years ago to widespread and growing interest across North America. We recognize that safety will be paramount and Linde has a world-class culture of safety consistent with O&G industry standards.

As our first customer for the supply of LNG solutions for drilling, David Ross, Director of Business Development for EQT Corporation, said, “We chose Linde as a partner for our pilot program because of its excellent safety record and long-standing expertise in the industrial gas business.”

Additional resources and supplies will be needed to sustain growth. Linde has already contracted with numerous existing LNG sources across the U.S. and we are adding from these supplies on an ongoing basis. Linde will also use our know-how and experience in building-owning and operating LNG plants around the world to develop new LNG sources in, and close to, O&G basins. We will continue to expand our already sizable fleet of equipment to serve this market and deploy logistics and service personnel from Linde’s other operations into this market. This includes leveraging the experience from Linde's supply of 10,000 truckloads per year of cryogenic gases used in energized gas fraccing. (6)

We are the leading global industrial gas company, with 100 years of involvement in LNG and the only company with extensive experience in cryogenic liquids performing this type of service. In sum, our last conclusion is: Linde is committed to safely, reliably, efficiently and economically serving the oil and gas community with the best LNG solutions.

Lindes committment is reflected in Apaches statement: “Taking advantage of the abundance of clean-burning, inexpensive natural gas in the U.S. is good for our economy and our environment,” said Mike Bahorich, Apache’s executive vice president and chief technology officer. “We selected Linde for this challenging assignment based on its broad experience in supplying LNG to oil and gas operations and its focus on safety and operational excellence. Linde went the extra mile to ensure the success of this first, full conversion of a hydraulic fracturing fleet to a combination of LNG and diesel fuel.”

References

(1) Smith U.S. Historical Rig Count and Macquarie Bank.

(2) “Natural Gas for Transportation: Industry Led Opportunities”, David Hill, Encana, October 28, 2010, Calgary.

(3) Deloitte MarketPoint LLC, “Perspectives on the Future Price Spread Between Oil and Gas”, HHP Summit, 2012

(4) “San Antonio Violates Federal Air Quality Standards”, www.mysanantonio.com (August, 23, 2012)

(5) Anirban Ray et. al. “Predictions of the Impacts of Future Marcellus Shale Natural Gas Development on Regional Ozone”, AGU Fall Meeting Poster Session, December 3-7, 2012.

(6) For more information: www.lindeoilandgas.com

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3Linde North America, Inc.575 Mountain Ave., Murray Hill, NJ 07974 USAPhone +1.800.755-9277, www.lindelng .com

Linde North America Inc. is a member of The Linde Group. Linde is a trading name used by companies within the Linde Group. The Linde logo is a trademark of The Linde Group. © The Linde Group 2013.

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