New Technologies to Reduce Natural Gas Flaring

New Technologies to Reduce Natural Gas Flaring Uday Turaga and Tyler Wilson 2016 GPA Convention This presentation contains information that is proprietary to ADI Analytics LLC. No part of it may be used, circulated, quoted, or reproduced for distribution without written permission from ADIAnalytics LLC.

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Outline 4 About ADI Analytics 4 New Technologies to Reduce Natural Gas Flaring 3

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Outline 4 About ADI Analytics 4 New Technologies to Reduce Natural Gas Flaring 6

Key messages 1 Gas flaring in the oilfield has gone from a problem discussed by the media to one that is attracting increasing regulatory attention. 7

In the past six years, the Bakken has been the main driver behind flaring in the United States U.S. Natural Gas Flaring (Billion Cubic Feet Per Day) 0.5 0.5 0.11 0.12 0.04 0.00 0.04 0.00 0.12 0.12 0.13 0.04 0.01 0.16 CAGR 2009-2014: 11.8% 0.6 0.6 0.03 0.04 0.03 0.12 0.13 0.7 0.03 0.04 0.06 0.09 0.21 0.8 0.03 0.04 0.06 0.08 0.22 CAGR 2014-2015: -16.4% 0.7 0.03 0.04 0.06 0.09 0.22 Other Fed. Offshore New Mexico Wyoming Texas 0.11 0.11 0.07 0.07 0.10 0.14 0.22 0.28 0.35 0.23 North Dakota 2009 2010 2011 2012 2013 2014 2015 Sources: Various state agencies; ADI Analytics research 8

While flaring happens in several states across the United States, the problem is most acute in the Bakken Percentage of Natural Gas Flared (2014) 22% 1.5% North Dakota Wyoming 0.1% 1.7% All Other New Mexico 1.1% Federal Offshore 0.9% Texas Sources: Various state agencies; ADI Analytics research, EIA 9

As unconventional oil production in the Bakken has grown, so has associated gas and correspondingly flaring Bakken Oil Production (Thousand Barrels Per Day) Gas Production and Flaring (Billion Cubic Feet Per Day) 1,019 1,051 794 601 353 236 137 75 2 2 2 2 2 3 6 20 2000 2002 2004 2006 2008 2010 2012 2014 1.2 0.8 0.6 0.5 0.3 0.2 0.2 0.2 0.3 0.3 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.2 0.1 2000 2002 2004 2006 2008 2010 2012 2014 Sold Flared Sources: North Dakota Industrial Commission 10

States have begun responding to the problem with an initial set of regulations that focus on limited periods of flaring Overview of State Regulations on Flaring Wyoming North Dakota May flare during construction and for one year after May apply for exception if reduction is not economic Must pay royalties if regulation is not met Allowed to flare during production tests for 15 days New Mexico Texas Allowed to flare during well construction and for 60 days after Can apply for an exception if ways to reduce flaring are economically unfeasible Flaring allowed during drilling and 10 days after completion May issue flare permits, 45 days at a time, for up to 180 days Sources: Various state agencies; ADI Analytics research 11

North Dakota has met initial flaring limit targets due to new midstream capacity and lower levels of E&P activity Flared Gas Targets Goals Met 26% Operator Penalties 23% 15% 10% 4 Allowed to flare for one year after construction or if gas capture is deemed economically unfeasible 4 Operators must pay royalties if goals are not met 4 If operators are unable to meet flaring goals they will be penalized 4 Well may be restricted to 200 bbl / day of production 4 if that is at least 60% of monthly volume 4 otherwise restriction is 100 bbl /day Oct. 2014 Jan. 2015 Jan. 2016 Oct. 2020 12

Our recent work has looked at whether new technologies and innovation can help operators reduce flaring Monetization Routes Natural gas CNG / LNG Power Fuels CNG use mainly for oilfield equipment LNG may have limited potential Offers the most flexibility around scale Transmission is the key bottleneck Small-scale GTL is still likely costly Seems to be making progress though Gas processing Chemicals Other Traditional derivatives may need scale Emerging technologies are interesting Virtual pipelines Other storage options NGLs Separation Chemicals Small-scale fractionation Aggregation for large plants Conversion to aromatics Other small-scale options 14

Flaring in unconventional oil and gas fields is a complex problem with multiple issues and factors 2 Pricing Differentials 1 4 Price differentials across gas and liquids 4 Some connected gas 3 Infrastructure is still flared Regulatory Drivers 4 Rapidly developing play 4 Lack of gathering lines 4 Limited long haul lines 4 Remote wells 6 Scale Limitations Key issues with flaring in North America 4 Limited regulatory pressure but changing 4 CO, WY, and ND have put rules in place 4 Feedstock Complexity 4 Lack of scale an issue across value chain 4 NGL recovery is mature but needs scale 5 Technology 4 Wide variation in natural gas composition 4 Feedstock varies in time and across wells 4 Most technologies are still immature 4 Severe winters also pose a challenge 15

Scale is a critical challenge as most of the flaring occurs in small volumes across a large number of wells Bakken Flaring Rates by Well and (Thousand Cubic Feet Per Day) Avg. Gas Flared / Sold by Well (Thousand Cubic Feet Per Day) 34 52 59 57 76 73 79 94 Sold 26 22 25 38 41 35 35 17 Flared 2008 2009 2010 2011 2012 2013 2014 2015 Note: Approximate estimates based on averages. Volume of gas not marketed is considered as flared. Sources: North Dakota Industrial Commission; ADI Analytics research 16

Virtual pipeline and gas-to-wire options seem most promising across various dimensions Key Findings by Gas Monetization Option Virtual pipeline Gas to wire Gas to wire Mobility Gas to chemicals Economics Virtual pipeline Gas to chemicals Small-scale GTL Small-scale GTL Small scale fit Market pull 17

Key messages 1 Gas flaring in the oilfield has gone from a problem discussed by the media to one that is attracting increasing regulatory attention. 2 Natural gas flaring is a complex problem with several conceptual solutions that struggle commercially. 3 Gas to produce power is an attractive solution with currently available technologies. 18

Distributed generation is growing and fits the power needs in the oilfield at both well and pad scales Average Demand for Electric Power Per Well (Kilowatts of Demand) 12.6 13.6 56.2 30.0 Well pump for recovery Compressor station Saltwater disposal site Booster pump Well pad Total Source: KLJ, Inc. Study of Williston Basin Power needs, 2012 19

For the near-term, recip engines offer the best scalability with their ability to handle a wide range of feed gas volumes Economic Scales for Various Gas-to-Wire Technologies 5,000 Power generation capacity, kw 4,000 3,000 2,000 1,000 About 75% of the wells flare less than 25 Mcfd at which only recip (and microtubines, marginally) is feasible Recip Gas turbine Microturbine 0 0 100 200 300 400 500 600 700 800 Average flaring, Mcf/day Source: ADI Analytics Research 20

Virtual pipelines enable the aggregation of natural gas from various wells in small volumes before deliver to end users Source: Oscomp, Expert interviews; ADI Analytics research 24

Although promising, the process can be expensive unless supply and demand is limited to a certain geography 1 2 3 4 Pre-treatment Compression Transportation Decompression NGLs, moisture, and sulfur and carbon dioxide has to be removed from gas New compressors claim to need less or minimal treatment Compressors to fill trailers from 2,400 to 3,600 psig or 140-390 Mscf Filling is slow and capacityinefficient Chilled filling raises capacity use from 75% to >90% New materials now allow trailers of 80-600 Mscf capacity Transportation is limited to 50-150 miles Decompression is carried out using modular, mobile solutions 25

The cost of delivering gas via virtual pipelines, however, is quite high driven mainly be capital costs Cost of Delivering CNG via Virtual Pipeline (U.S. $ Per Mcf Excludes Feedstock Cost) $1.45 $0.95 $6.90 $4.50 Capital recovery Opex O&M Opex Transport Total Source: Oscomp, Expert interviews; ADI Analytics research 26