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 its difficult to stay on top of them, not to
mention ahead of the curve. In the last 5 years, weve 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 populations 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.
Lets 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 increaseacross
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 wasnt 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 fuels
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)
03 The Case for LNG Fueling Solutions for Drilling and Completion
Nowand 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 Lindes 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, Apaches 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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Linde North America, Inc.
575 Mountain Ave., Murray Hill, NJ 07974 USA
Phone +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.
04 The Case for LNG Fueling Solutions for Drilling and Completion