SafeBlend fracturing

On the morning of September 30, 2011, Sam Dudley, 37, and CEO of SafeBlend
Technologies, under pressure to set a price for their companies' liquid additive part
fractured respectfully for their next contract with their largest customer, Bristol Gas
Natural (BNG). The contract expired at the end of 2011; Both SafeBlend and BNG were
willing to negotiate the terms now contract that set the price for 2012 calendar year.

There were many factors influencing the Dudleys pricing decision: competition was the
most pressing of them. Perceiving an opportunity to exploit, a number of producers of
"green" fracture fluid additives had recently jumped onto the market and have been
prepared to supply their product - at a much lower price - to natural gas companies in
2012. Dudley believes that some Of these competitors would submit competitive bidding
for the BNG by the year 2012. In addition, the proposed federal regulations were getting
closer to ecoming federal law (see Annex 1). If passed, the regulations would order
companies to fracture publicly to reveal all chemical and non-chemical components
contained in fracturing fluids; Similar regulations are being adopted at the state level
across the US. As a result, Dudley projects that SafeBlend's fracturing fluid demand,
which contained only natural ingredients, would double by 2013:

The production and consumption of natural gas are at their highest point in the US, and
with it the demand for our natural fracturing additive. The revenues expected for the
company in 2011 are 64.9 million dollars - increase of 47% from 2010, when there was a
strong demand for our product and there is no decent competition. Now, however, I have
to consider two challenges when I think about the future prices of BNG, our main
customer: (1) Should we reduce the price of what is today to 2013 contract negotiations
in anticipation of reducing offers - Maybe up to 50% lower- of competitors and (2) if
competitor does not, in fact, secure a share of BNG's 2012 business, we will be able to
present a 2013 budget for the BNG which is both competitive And profitable for our
company?

Shale Gas and Hydraulic Fracking: General Information and Industry Risks

Natural gas bags are found in "unconventional" and "conventional" locations.

Conventional gas locations are easy to access and extract, but unconventional locations
require sophisticated and costly mining procedures. Examples of unconventional gas
sources include deep gas; Methane in carbon layers; And the slate that is trapped in
pockets of shale porous rock thousands of feet below the surface of the earth.

After decades of research and investments heavily sponsored by the US government, the
extraction of consumable gas from slate rock, through a process known as "hydraulic
fracturing", became economically viable gas by the end of 1990. Between the years 2000
and 2006, in the USA Shale gas production grew at an annual rate of 17%. Continuous
advances in technology and extraction methods throughout this period reduced
investment costs; Between 2006 and 2010 the production of shale gas in the United
States. Grew at an average annual rate of 48%.

Projections predicted that, due to advances in drilling, fracturing, gas capture, and
ongoing transportation processes, American natural gas production would grow steadily
until 2035, with shale gas becoming An increasing share of total natural gas production.
In 2009, gas from shale accounted for 16% of total natural gas production. Projections
projected that, by 2035, shale gas would be the source of 47% of total natural gas
production in US hydraulic fracturing.

Hydraulic fracturing process

Commonly referred to as shelving-captured bags of natural gas, trapped within layers of

slate rock far below the surface of the earth. Many visualizations of this porous practice
can be found by looking for "hydraulic fracking diagram" in any good search engine).
The process has three stages:
1. Mine Configuration: Drilling and installation of a well to reach the slate rock, generally
between 5,000 and 8,000 meters deep.

2. Access to trapped gas bags: By pumping a special liquid-known, highly pressurized as fluid
fracturing into the rock formations of schists below, the designated rock is cracked and split. The
gas, which is trapped inside inner pockets of the rock, escapes and moves upward through the
well to the surface, where it is then stored.

3. Cleaning site: Cleaning includes the treatment and / or disposal / recycling of the fracturing
fluid used (sometimes contaminated) from the site once it has been returned to the surface.
Composition of a fracturing fluid is slightly different for each client, in response to site variables.
In 2009, the vast majority of shale gas explorers used fluid fracturing consisting of 99% water
and sand; The pressurized, water-borne liquids forced open cracks in the gas could arise. The
remaining 1% fluid fracturing was made from chemical additives intended for capacity. Additives
serve different purposes. One type of additive could prevent bacteria from growing in fractures,
while another could prevent corrosion of the shell.

The most notable environmental concern was the threat of chemicals and gases released
during the process after hydraulic fracturing or land and near drinking. The chemical
contamination of the water could come from leaching underground, or, more likely, from a spill
on the ground of the chemically fluid fracturing treaty that reached nearby water sources. Other
environmental concerns include:

1. The levels of air pollution in the vicinity of hydraulic fracturing sites

2. The scarcity of water and energy dedicated to water transport: large volumes of water are
needed to cover the mile of depth and so, after use, water must be treated, transported, and
disposed of far from the site.

3. Potential for earthquakes and / or surface earthquakes caused by soil disturbance

SafeBlend Technologies: Company Background

SafeBlend Technologies was founded in 1998 by Sam Dudley, a young entrepreneur focused
on "green" technology, and Sarah Winter, a chemical engineer. Dudley and Winter founded
SafeBlend a set of environmentally safe, chemical-free alternatives to replace existing ones
and, in their minds, unnecessarily toxic solutions in agriculture and manufacturing industries. Its
chemical engineers deconstructed in solutions for existing (toxic) pest control or plastic coating,
for example - and alternatives built from natural sources. The company specialized in citrus -
solutions that met or exceeded the effectiveness of the original solutions, against the most toxic.

Dudley's friends and colleagues described him as "a classic entrepreneurial type, free-spirited,
very confident, decisive and driven ... He is ambitious, quick to see and take advantage of an
opportunity, and he will not be discouraged or black down." Dudley's ambition, by car, and the
belief that his company was compensated for his lack of professional experience. He was a
vocal spokesperson for both SafeBlend and the industry in general, speaking to the media and
serving as a panelist at thematic conferences. As society's interest in environmentally-friendly
products and services grew in the 2000s, SafeBlend's revenues did so. But in the economic
recession the company was struggling: revenues fell from a high of $ 46 million in 2005 to $ 27
million in 2008

Expansion to hydraulic fracturing

The last few years declined Dudley's enthusiastic income tax, but not its resolution. In an effort
to expand into new markets, in early 2009 Dudley attended an industry conference for shale gas
explorers and mining companies. After talking to the executives and chemical engineers of
several family-owned companies with hydraulic fracturing. Dudley was inspired. With renewed
energy and momentum, Dudley focused on developing a non-toxic solution for the industry. A
small team of engineers was commissioned to create a fluid citrus fracturing additive that
contained no chemicals harmful to the environment. After five months of development, the team
had a prepared sample: the ingredients of the patented additive consisted of citrus oil, and other
natural, food-based components.
Dudley asked Megan Sharp, SafeBlend's vice president of sales, to meet the two large and
small shale gas companies to assess interest for the new product.

As a result of the Sharp meetings, samples of SafeBlend's fracture fluid additive were ordered
by and sent to three different shale gas companies, including BNG, in July 2009. Dudley and
Sharp doubted the applications could reach anything in The short term. Usually large and
bureaucratic, gas companies use their supply departments to search for and evaluate potential
suppliers; The process usually includes a formal Request for Proposal (RFP) and then months -
or even years - of follow-up. Dudley's research showed that many gas companies produced
fracture internal fluid additives, or purchased them from a third party as part of a larger contract
with a drilling supplier.

In September 2009, Sharp scheduled a follow-up meeting with BNG vice president of chemical
engineering at Texas headquarters at BNG. Strong named Dudley immediately after the
morning meeting:

We were wrong to assume BNG was just some curiosity about our product. BNG only relied on
a fair trial filed by the owner of a building near one of the BNG fracturing sites. The owner of the
property claims that its groundwater is contaminated with fracturing fluid chemicals from the
BNG. BNG is concerned - not only about financial liability in case of losing the case, but also,
and perhaps more importantly, the negative publicity of the BNG. BNG is expanding, and as of
August 2010, they are expecting new wells at a rate of 15 per quarter. Each well requires 8
million gallons of water and 40,000 gallons of additives. BNG is sincerely interested in our
product because it is the only one at all for now. I think they would buy large volumes of it, and
in the short term, if we could meet their demand. As you know, our current capacity is only
10,000 gallons per month.

Encouraged by the positive response from BNG, Dudley and Sharp decided to take a risk. They
felt fracture fluid additives offer the most potential for short-term growth for your company. He
also believes that in the long term, SafeBlend could potentially provide additional products and
services to the industry. As a result, they agreed to make BNG's business the top priority of the
company. They also pursued a slightly smaller (in terms of revenue) of the company, Adley Oil
and Gas (AOG), whose interest in additives was equally high. (See Annex 2 for projected
annual fracture fluid requirements per customer).

Said Dudley:

In the fall of 2009, the political sensitivity surrounding the fracture and groundwater pollution
was high. Videos were being posted on social networking sites that showed residents near
lighting sites of their faucets in the fracturing fire. The videos fueled a publicity nightmare for
those in the gas industry. I knew that BNG, and companies like BNG, want to do whatever they
can, now, to minimize future damage. It was a unique opportunity to grow our business - if we
act quickly.

Ensure a financial commitment

Dudley sent two of his high-level chemical engineers to central Texas in October 2009. He put
them in the long-term housing and they the task of working alongside chemical engineers BNG
to find a way to modify and produce Needed by BNG in the third quarter of 2010. Said Dudley:

It seemed that BNG wanted to spare no expense to ensure quality and effectiveness. When
presented with a choice of two ingredients it should have delivered essentially the same result.
BNG systematically opted for the higher price option; They wanted to be absolutely sure that no
shortcuts were taken in terms of efficacy or toxicity.

Our guys established a great relationship with the BNG's chemical engineering team, who
believed in our product. There was a strong professional collaboration as well as a good
personal relationship, more than once team members were invited to BNG homeowners
engineers of authentic Texas barbecue.

Dudley had spent the shortage of resources in the BNG project and knew that time is running
out. It is time to get a firm commitment from BNG and AOG. On December 1, 2009, Sharp and
the BNG's lead chemical engineer Mike Francis met with the company's managers. Sharp
recalled:

There was a room full of people, a few engineers and chemists, but several strategic leaders. I
said, "We are deeply committed to your business. We will move our best chemical engineers
from Texas and the rest of the company is on standby, ready to work overtime to set up what
you need for Q3 and Q4. " Then I told them that in order to generate the amount of liquid they
needed between August and December 2010, we would have to guarantee space and
additional production materials. To do that, we need your financial help to start working on
production right away. Our current systems, operating to their maximum capacity, would only
generate 10,000 gallons of our fracturing fluid additives per month; We needed to build capacity
for 10 times! But because of our small size and strict credit rules, we could not get the
necessary $ 200,000 to invest in early expansion. I said, "If we do not get a financial
commitment from you by January 1, we can not guarantee delivery in August." The room was
quiet, and I continued, "We need a minimum of six months to expand our facilities and produce
to their maximum capacity." That time is not simply negotiable. Which will pay for our product
will be between $ 2 and $ 4 per gallon. "

Sharp and Francis were asked to wait outside the room; Two hours later they were called in.
BGN submitted a letter of intent stating that they would accept responsibility for all expenses
related to non-recoverable expansion up to $ 100,000 through March 1, Sharp said:

We left BNG empowered, and a little surprised. Now, we've had to go to work. After calling Sam
Dudley to share the good news, Mike and I traveled directly to AOG to deliver the same tone.
Now he knew that because of strategic interest, we simply had to threaten the inability to offer
our product to generate action and financial commitment. We left AOG with a similar agreement
in hand.

Up to this point, Dudley had kept out of the negotiations. But once SafeBlend had firm
contractual and financial commitments from both companies, Dudley was keen to negotiate the
terms of the supply contracts, specifically the price per gallon. Dudley said

I decided to take a hard load approach with the BNG. I met with VP of Strategic Relationships at
BNG and told him that there were too many things we should have in order to do business with
them: (1) BNG would have to buy the necessary equipment to expand its production and give
title to it and 2) BNG would have to reimburse us the money we spent building and setting up
the expanded facility in a short period of time.

The BNG negotiator was surprised, Dudley recalled:

BNG was not happy with me, and the conversation heated up. He said, "Is this a negotiation?
Because this conversation seems very one-sided to me." He pointed with his finger. "You young
people are always thinking in the short term, you avoid compromise, even when it's for the sake
of the relationship, that's no way to do business here in Texas." We left the meeting flat. Part of
me thought the relationship was over.

A few days later, Dudley received a call from the BNG. After a detailed analysis of the risks,
costs and benefits of SafeBlend's outsourcing, BNG's strategy team decided to absorb
SafeBlend start-up costs, up to $ 1 million. AOG committed to absorb startup costs of up to $
750,000. Now with readily available funds. SafeBlend secured the space and machinery needed
to increase production capacity.

2010 The price negotiations

As SafeBlend embarked on price negotiations, Dudley believed that his primary responsibility
was to convince BNG and AOG that SafeBlend's product was unique and that no other
company could produce it in a timely manner and without sacrificing quality or environmental
effectiveness. Dudley also highlighted how SafeBlend's product could help BNG and AOG
address the pending regulatory disclosure requirements currently under discussion in Congress.

The Chemical Engineering Department of AOG, before aligning with SafeBlend, had purchased
large quantities of a non-toxic component (a "gelling agent") and wanted SafeBlend to use this
component in the additive formula instead of SafeBlend's premium gelling component. Came
from own more expensive sources). Yield component of AOG was only marginally less effective
(statistically, the yield was the same as that of the SafeBlend component), so SafeBlend agreed
to buy for much less than the gelling agent used in the BNG formula. The costs to produce the
AOG product would fall as a result.

Price negotiations involve three parts in each company:

1. Supply agents: negotiated directly with Dudley, using the standard production rates as the
basis for negotiation, estimate the general and administrative expenses and the estimated profit
margins. He also relied on information from his chemical engineers

2. Chemical Engineers BNG / AOG: worked with Dudley and SafeBlend to assign value to
patented chemical processes, which included ingredients, equipment, labor and innovation.

3. Strategic Relations: Dudley's main contact in each company was his vice president of
strategy. The vice president considered the longer-term strategic benefits of a relationship with
SafeBlend.

Dudley and the chemical engineers SafeBlend worked directly with the supply managers in
each company. Supply managers evaluated costs based on current market rates for ingredients
and processes and then assigned a value to the final product.

Dudley said:

The purchasing department of the BNG had a formula that they passed each draft to arrive at a
cost: once they had determined the cost, they sank that figure, so we had to negotiate room up.

In early February 2010, Dudley obtained, through normal e-mail correspondence with a
chemical engineer BNG, formula for calculating the BNG cost. Dudley now knew the formula by
which BNG estimates the acceptable cost levels for each component of SafeBlend's fracturing
fluid additive. In response, Dudley created his own cost model: this new model uses the BNG
cost formula as the basis for the calculation, rather than the actual cost of materials, expenses,
and the work of SafeBlend. Described Dudley.

Once the BNG cost formula fell into my hands - in an ethical way, it could add up - I framed our
costs to match your estimates. In some cases the estimated costs of BNG were too low, but
other times BNG estimated our costs to be much higher than they actually are. It so happened
that the cost of high-volume ingredients and processes was overestimated by BNG, we knew
that we would make a lot of money: some BNG costs, such as specialized labor, were
underestimated; But as they were relatively low-volume contributors, they more than offset the
loss in those items with the profits coming from high-volume items.

When the contracts were signed at the end of February 2010 for the 3Q and 4Q, 2010, the
prices agreed for both companies were as follows:

AOG BNG
Precio por galon Margen bruto por galon Precio por galon Margen bruto por galon
1.4 0.67 2.8 1.01

Competition

While the interest in green fracturing additives was high, there were only three
competitors that Dudley felt realistic could deliver a competitive product in 2010

1. GGWorks - Private, $ 25 Million in Revenue. Like SafeBlend, it produces

organic solvents for agriculture and aquaculture.

1. Bixon Companies - A public oil and gas corporations, $ 75 million in revenue,

with its own group of chemical engineers. Produced chemically infused fracturing
additives for internal use. In a recent profit report, the CEO noted that the
production of a green fracture additive was a company priority for 2011.

2. FloatWise Solutions - Private company, $ 20 million in revenue, new property

fracturing agent that produces a (as opposed to water-based) fracturing fluid that
is harmless to the environment-based liquid propane.

With pockets full, Bixon would not suffer the resource or capacity limitations that
Safe Blend faced in the early stages of production. Bixon, Dudley felt, could
potentially offer a competing product in early 2011. However, Bixon claimed he
was not interested in selling to third parties. FloatWise submitted a proposal from
the BNG in March 2010, but the company was unable to aggressively pursue the
opportunity. BNG was fully concerned with listing its fracturing sites and working
with SafeBlend for late 2010 deployment. Dudley presumed FloatWise either did
not know or failed to understand the importance of BNG's awaiting trial and
strong desire to minimize environmental damage.

GGWorks approached BNG in March 2010 were offered at lower prices than
SafeBlend fracturing fluids by 20%. However, GGWorks said it would need
financial and engineering assistance from BNG, which was unwilling to help
GGWorks. "You bring your product to us, ready for service, and let's consider it,"
said BNG executives. In the summer of 2010, SafeBlend was fully integrated into
BNG operations. No other supplier was close to being ready to negotiate and
supply BNG with fracturing fluid for 2011 year

Duration of the contract

Relations with both BNG and AOG during the first five months of the contractual
relationship (August 1 to December 31, 2010) were healthy and productive. (See
Annex 3 for 2010 variable costs per customer) SafeBlend delivery and provision
on time to work overtime to meet production demands in the first months of the
contract given its fruits. As a result, SafeBlend insured 100% of each company's
business following you 2011.Said Dudley:

An average shale gas well incurs between $ 4 and $ 6 million in startup costs;
There is a lot of risk up front. What happens if we pump a damaging product into
 those wells? Our customers relied on us, mainly because of the relationships we
had built during the course of the previous year during the negotiations and
acceleration. The project was professional but also personal. We worked
overtime and the BNG people were there along with us, overtime work too. It was
a real team effort, and we got it.

In June 2011, after more than a year of collaboration and on-time delivery, BNG
vice president of strategy told Dudley that collaboration with his company's
strategy and engineering teams was no longer necessary. Instead, Trip Barstow,
a purchasing manager. Would be "maintaining the relationship." Unlike team
members over the previous year, which attracted BNG's top strategic and
chemical talents, Trip Barstow was a mid to low level employee according to
Dudley .:

Barstow was ex-military, rather mundane and uncharismatic. He was a decision

maker who sought management approval for most tasks. Barstow organized a lot
of meetings, and wrote many long emails, but never seemed to get anywhere. I
was used to working with the most talented BNG people, who, like me, got things
done and made the decisions. We had been in commissioning mode for the past
year and then, all of a sudden, it was as if we were stuck in the mud, with no end
waiting for the approvals. Barstow implied that he had taken advantage of the
BNG in the past and that he was here to restore order. It was very hard for me not
to take it personally. I was frustrated, and I will admit that my relationship with
Barstow was tense.

Negotiations for 2012 Contract with BNG

In August 2011, Dudley decided to take a step forward in 2012 negotiations. Now that
competitors knew market interest was high, Dudley hopes BNG and AOG would consider
several offers for 2012 and beyond. Also, through industry conferences, BNG engineers
were aware of the successful implementation of AOG's non-premium "gelling agent," and
BNG wanted the same ingredient used in their 2012 product. Although SafeBlend in 2011
reduced its Price to BNG (as of 2010 prices) Dudley predicted competitive proposals in
2012 would be, on average, 50% of what SafeBlend had quoted BNG in 2011:

I knew that BNG would not give 100% of its 2012 business to a new, untested source,
even if the price was half of what we were paid in 2011. It was simply too risky. The real
question, in my mind, was not that I would get the company in 2012 but how we could
use our 2012 proposal to help BNG insurance companies in 2013 and 2014 when the
competition was sure to be fierce.

Over the next few weeks, Dudley sent three different proposals to BNG via e-mail, listing
prices at different levels of supply. Each time, Barstow emailed a response indicating
that the BNG was unwilling to enter into negotiations yet. Dudley took this as a sign that
Barstow was buying time to evaluate competitive bids.

Meanwhile, in August 2011, Sharp, who had cultivated a healthy relationship with AOG,
informed Dudley that, after a few negotiations, AOG had selected SafeBlend to supply
fracturing fluid and 60% of its wells in 2012 at Following terms:

2012 AOG Contract

Costo estimado
variable por galon Precio por galon
0.33 0.73

The remaining 40% of AOG's supply would come from GGWorks. Dudley knew GGWorks
would be concerned in the short term with satisfying production requirements for AOG 2012,
and thus was of minimal threat to business with BNG in 2012. However, once production at
GGWorks was in March, Dudley expects the company to pursue BNG business in 2013.
BNG Request for Proposal

Dudley received a call from Barstow on 20 September 2011:

Sam, you know we've been satisfied with his performance to date. We would like to request
quotes for you for the following 2012 scenarios: 50% of the business, 75% of the business, and
100% of the business. Can you get me those numbers in ten days - by October 1st?

Dudley was surprised by the prompt response request. BNG seemed to be leaving very little
time for a competitor to prepare for BNG production, if necessary. Since GGWorks was working
with AOG, and Bixon remained uninterested in selling their product, Dudley suspected BNG was
looking for FloatWise as a possible second source. Dudley thought-but he could not be sure-
that chances of getting more than 25 percent of FloatWise's business were slim because
Floatwise required a six-month runtime, or so he thought. Is it possible that I have
underestimated FloatWise's ability to meet supply levels? Dudley wondered. BNG has identified
an additional source that I have not considered?

Dudley projects 2,012 variable BNG costs - composed of material. Labor costs, and factory
direct - and estimated the following variable costs per gallon for 2012 product

BNG Projected Costs 2012

BNG Projected costs 2012

2012 2011 year (for comparison)
Cost per gallon Cost per gallon Price per gallon
0.44 0.55 1.46

Dudley's sales, general and administrative costs projected for 2011 would be close to $
1.2 million. (See Annex 4 for 2011 Projected Income Statement) As he reviewed the
internal cost estimates for 2012 (see Annex 5), and wondered what strategy to follow for
the upcoming negotiations, Dudley considered the following:

Competition: Through one of BNG's engineers, Dudley had learned that in 2011.
Floatwise had approached BNG and offered to supply BNG to break up fluid additives
for 50% of any charged SafeBlend price per gallon in exchange for 50% Of BNGs 2011
business. Dudley had met CEO FloatWise, and believed that he desperately wanted
BNG's business and was willing "to pay substantially for it."

Regulation: Proposed in 2009, the FRAC Act (Responsible Fracture and Chemical
Awareness Act) would require energy companies to disclose the chemical additives
used in fracturing fluid. At the state level, three states had passed similar legislation,
and eight Were considering it. Dudley hopes that the trend will continue at the state
level and that, at some point in the future, such disclosure may be mandatory in all
states.

Alternative Technology: Water-based fracturing fluid was just a way to recover trapped
shale gas. Other ecological approaches then under development used propane and
nitrogen based agents, rather than water, as the main ingredient of fracturing fluid.
Dudley hopes further developments would emerge in the coming years

New customers: A two-year relationship with the BNG meant that SafeBlend was now
a proven supplier. New business investigations were increasing. Specifically, a
company similar in size to BNG - oil and gas boiler - was in close contact with Sharp on
supply by 2014. Caldera's future demand would be considerable. The company had
secured rights to develop 500 new shale gas sites by the end of 2016.
The proposal

Dudley got up from his desk and peered through the glass wall of his office to his
colleagues.

The talent, unity and collaboration of our employees resulted in the success of
SafeBlend in recent years, and now it is up to me to preserve this success. This BNG
proposal is of vital importance to our company, but the short and long term
consequences are substantial. I can not imagine any of our employees being
concluded, but that is what I will have to do if I present an offer that is 50% of what I am
now charging. On the other hand, what is the benefit of extending our Current prices if
doing so jeopardizes the customer's future sources of revenue, and puts our company's
reputation as a valuable risk-sharing provider?