## Meeting Summary

T opic : Conference Call with BLX , Inc Regarding Shale Gas Extraction

Operations in Pennsylvania

Meeting D ate : 1 5 May 201 2

Participants : Brian D’Amico, Lisa Biddle , Erik Helm ( EPA/EAD )

Betsy Bicknell, Meghan Camp, Brent Ruminski (ERG) Richard Brewer (BLX)

On 15 May 201 2

, the U.S. Environmental Protection Agency (EPA ) held a conference

call with BLX, Inc. (BLX) to discuss their Marcellus Shale Gas operation s in Pennsylvania

. Discussion topics included:

 Company Background ;

 Marcellus Project Investment Structure ; and

 Marcellus Well Operations

.

Attachment 1 lists the meeting participants

. Attachment 2 provides a summary of costs for

BLX’s Marcellus wells and wastewater management.

Company Background

BLX is an independent natural gas producer that operates approximately 700 gas wells in the Appalachian Basin. The company has drilled conventional wells since 1986 and decided to

drill their first Marcellus well i n 2006 . To date, BLX has drilled 18 vertical Marcellus wells and

no horizontal wells. Due to the low gas prices, BLX is not currently drilling new wells. BLX fractured the first 16 wells using slickwater techniques and the last two using high

- pressure nitr ogen. BLX explained that most small producers active in the Marcellus tend to drill vertical

wells. BLX does not drill horizontal wells because they r equire relatively large capital investments. In addition, horizontal wells require larger gas pipeline capacity than vertical wells due to enhanced production rates. BLX explained that the natural gas pipeline infrastructure is limited in the Marcellus region where they operate.

Figure 1 shows all BLX oil and gas wells (Marcellus shale and other oil and gas) located northwest of Pittsburg h

, Pennsylvania using EPA’s Geoplatform mapping tool and coordinates from DrillingInfo, Inc’s HPDI data base and PA DEP’s database

. 1 BLX’s Marcellus shale wells

are located in Armst rong, Butler, and Indiana Counties. Figure 1 also sho ws the centralized waste treaters ( CWTs ) that have treat ed BLX ’s shale gas wastewater (see Wastew ater Management )

.

1 HPDI database last updated in December 2011.Meeting Summary Page 2 of 12

Source s : DrillingInfo, Inc’s HPDI database , PA DEP database, EPA’s GeoPlatform maping tool.

Figure 1 . BLX Shale Gas Wells ( yellow ) , Other Oil and Gas Wells ( red ), and

Treatment/ Disposal Sites ( green )

Marcellus Project Investment Structure

BLX explained that investments for new wells are grouped into projects consisting of two to ten wells (approximately $15 million total for project). Up

- front costs include:

 Land leases ;

 Well pad construction ;

 Drilling ; and

 Hydraulic fracturing and well completion

.

Typically , BLX covers 25 percent of the initial capital cost to develop the project while investors pay for the remaining 75 percent of the cost. BLX stated that this type of investment structure is typical for small producers.

Once the well begins producing gas

, BLX no longer pays a land lease, and instead pays royalties to the land owner. For a recent project, BLX paid approximately 12.5 percent of its

revenue directly to the landowner

. BLX noted that royal ties have risen since their last project andMeeting Summary Page 3 of 12

are now in the range of 15 to 18 percent of total revenue and these royalty increases are becoming common in the industry

. After royalties are deducted , the investors and BLX split the remaining revenue at the s ame ratio in which they invested. For example, if BLX covered 25 percent of the initial capital cost, they keep 25 percent of the remaining revenue after t he landowner is paid

. Figure 2 illustrates this structure.

Figure 2

. Overview of Marcellus Project Investments and Revenues

Marcellus Well Operations

This section describes the portion of the discussion on BLX’s Marcellus shale gas well

de velopment process. Table A

- 2 in Attachment 2 provides a summary of costs BLX provided during this discussion. The processes discussed include :

 Geologi cal survey and land leasing ;

 Source water m anagement;

 Well pad construction and drilling;

 Hydraulic f

racturing ;

 Well completion; and

 Production.

Geological Survey and L and L easing

BLX uses geological survey data to identify potentially active areas in the Marcellus for drilling. BLX stated that that they have found the survey data to be quite accurate. However, there is a lot of uncertainty regarding gas production despite the geological data accuracy

. BLX explai ned that they have often observed significant differences in gas production between wells

that have been drilled in the same area and geological conditions

.Meeting Summary Page 4 of 12

Once BLX identifies an area to drill, they set up a lease agreement with the land owner. As part of this agreement, BLX pays a land lease 2 until the well begins producing gas. Once the well starts to produce gas, BLX pays royalties to the land owner, as described in the previous

section.

Well Pad Construction and Drilling

Figure 3 shows a diagram of a BLX well pad as described on the conference call. A BLX well pad, designed for one verti cal well, is typically 4.5 acres and includes a one million gallon pond for freshwater and wastewater storage lined with 30 mil liner. The wellhead must be located at least 350 feet from the property line. BLX did not discuss other well pad requirements such as primary or secondary containments or stormwater management. Each well pad costs approximately $50,000 to construct. BLX provided the following approximate cost breakdown :

 Geological survey

— $1,500;

 Permits

— $2,500;

 Access road construction

— $10,000 to $15,000; and

 Storage pond

— $25,000 to $30,000.

On average, BLX drills vertical Marcellus well s to 7,000 feet. The cost for BLX to drill a vertical well is approximately ten dollars per foot of vertical depth. After additional costs (e.g., installing casing, cementing) , the final cost to drill each vertical well is approximately $90,000

.

Figure 3. BLX Marcellus Well Pad

Source Water Mana gement

BLX currently withdrawals water from the following sources to use in the drilling and hydraulic fracturing processes :

 Public access to waterways (e.g., Allegheny River);

2 BLX reported a land cost of $10 per acre. However, according to Pennsylvania’s Department of Conservation and Natural Resources, the lowest lease bid for state land in 2010 was $2,000 per acre. Available onl ine at: http://www.dcnr.state.pa.us/forestry/naturalgasexploration/faq/index.htm

.Meeting Summary Page 5 of 12

 Private property access to waterways (e.g., rivers, streams); and

 Purchase from municipality.

BLX also reuses treated flowback for hydraulic fracturing. BLX did not mention the typical blending ratios for slickwater fracturing jobs, but noted that their most recent nitrogen fracturing jobs were completed using 100 percent recycl ed flowback, which was tre ated at the McC utcheon

CWT prior to reuse

.

Freshwater is trucked from the water source to the well pad where it is stored in lined ponds. BLX reported transporting the water from the source to the pad is typically a 2 to 3 hour

r ound trip. The trucking companies typically charge $80 per hour on the road and each truck holds approximately 100 barrels. Using these cost assumptions; BLX pays $1.60 to $2.40 per

barrel to haul fresh water from the source to the well site. Assuming that each sl ick water and nitrogen

- fractured well requires 900,000 and 180,000 gallons

, respectively

, BLX pays $7,000 to $51,000 for trucking per fracturing job.

In addition to the cost to truck fresh water, BLX may pay a onetime fee for water

withdrawals. For example, when using private property to withdrawal from a source, BLX typically pays the landowner per fracturing job. BLX estimated this cost at $1,000 per fracturing job. BLX also withdrawals fresh water from a boat ramp owned by a local municipality. Th is municipality is now considering charging BLX $25,000 per year for use of boat ramp. In addition to rivers and streams, BLX has purchased treated municipal wastewater.

Well Completion: Hydraulic Fracturing

As described previously, BLX has fractured 16 wells using slick water fracturing fluid and 2 wells using compressed ni trogen. Both types of fracturing fluids require make

- up water ; however, the nitrogen fracturing fluid requires sign ificantly less water than slick water fluids. For example , fracturing one vertical Marcellus well in western Pennsylvania typically requires approximately 900,000 ga llons of water when using slick water techniques. In contrast, the nitrogen fracturing technique only required approximately 180,000 gallons of water per well

.

BLX commented that the major benefit of nitrogen fracturing is the reduced environmental footprint, including:

 Reduced pond and well pad size;

 Reduced fresh water requirements; and

 Reduced wastewater disposal.

BLX noted that there may also be production benefits to nitrogen fracturing, but because the nitrogen

- fractured wells are fairly new, the y do not have enough production data to fully

evaluate these benefit s. BLX has observed that the initial production is slightly higher than the average slickwater

- fractured well. However, to accurate ly compare nitrogen

- fractured wells to

slickwater

- fractured wells, they will need a five

- year decline curve.Meeting Summary Page 6 of 12

Figure 4 shows a diagram of a typical BLX well pad during hydraulic fracturing. The

fresh water is pumped from the storage pond to a blender where it is mixed with chemicals and

prop pant a s it is injected into the well. BLX estimates that the cracks created by the pressurized fluid extend approximately 700 feet from the well bore.

Figure 4. BLX Well Pad During Hyrdaulic Fracturing

Well Completion: Flowback

Figure 5 shows a diagram of a typical BLX well pad during the flowback portion of the completion process. Both slick water and nitrogen

- fractured wells flowback approximately 40 percent of the total injected fracturing fluid volume within 30 to 90 days . Because the volume of inject ed fractu ring fluid is less for nitrogen

- fractured wells (180,000 gallons compared to 900,000 gallons) , they in turn generate less flowback

. According to BLX, typical flowback TDS concentrations start at 20,000 mg/L and gradually increase to 50,000 mg/L. Because TDS concentrations in flowback are relatively low compared to produced water, most flowback can be

reused with out significant treatment. BLX did not provide specific reuse criteria because a fracturing service provider typically determines if the w ater quality is suitable for hydraulic fracturing and determines the appropriate mixture and quantities of chemical additives

.

Because BLX operates outside of the Susquehanna and Delaware River Basins, they are subject to Pennsylvania Department of Enviro nmental Protection ( PA DEP ) requirements, and not the more stringent Susquehanna River Basin Commission and Delaware River Basin

Commission requirements. PA DEP does not require operators to store flowback or produced

water in closed tanks. Therefore, BLX can use the same lined pond that was used for freshwater storage during drilling and hydraulic fracturing, to store flowback and produced water. FlowbackMeeting Summary Page 7 of 12

flows directly from the wellhead to the lined pond

. All gas present in the flow back is flared. 3

Once the pond is full, trucks haul the wastewater to t he ultimate disposal facility . The wastewater destination is determined in part by BLX’s drilling activity. For example, if BLX is actively drilling and fracturing wells and has a need for freshwater, BLX wi ll send wastewater to

McCutcheon for treatment and reuse. If BLX is not actively drilling or fracturing wells (as was the case during EPA’s conference call), BLX will send the wastewater to RES for treatment and disposal or to underground injection wells.

Figure 3 . BLX Well Pad During Flow back

Production

The well is switched into production mode o nce the well begins producing flowback containing around 100% percent gas

. This involves the removal of flowback equipment (e.g., flaring units ) and installation of producti on equipment (i.e., dehydrators, final connection of gas to sales line). Figure 6 shows a diagram of a typical BLX well pad during well production. During production phase, wastewater flo ws decrease to approximately 6.5 barrels per day (200 bbl/month)

.

Gas production from BLX’s vertical Marcellus wells ranges from 50,000 cubic feet per day to 400 ,000 thousand cubic feet per day. It was estimated that fractures protrude 700 feet,

which is far enough to drain approximately 35 acres ( 0.06 sq miles). BLX’s estimates that

vertical Marcellus wells have a 70 percent production decline after two years. When asked what the expected life of a vertical Marcellus well, BLX explained it is difficult to answer because all

3 BLX has not used any reduced emissions completions or analyzed projected costs. The New Emissions Standards for Hazardous Air Pollutants requires reduced emissions completion for sources constructed after 1/15/2015.Meeting Summary Page 8 of 12

Marcellus wells are only a few years old. However, if Marcellus wells are similar to D evonian

wells

, they may produce for up to 100 years. BLX also noted that it is possible to refracture

Marcellus wells after approximately ten years
, but because all of their wells are relatively new, they do not currently have plans to refracture

.

BLX provided an overview of o perating cost s once a well goes into production mode. BLX charges the well owner approximately $500 to $700 per month to keep t he well producing gas. This service includes sending a technician to the site daily to check equipment and perform basic maintenance. In addition to this basic maintenance, BLX charges the well owner for water hauling and any extra work to fix mechanical b reakdowns

. BLX passes t hese additional costs directly to the well owner and estimated them as $300 per month.

Figure 4 . BLX Well Pad During Production

Wastew ater Management

BLX manages it s Marcellus wastewater using three options:

 Treatment for Reuse: If BLX is planning to fracture a well in the near future, they

will send the wastewater to Mc C utcheon

. T his company charges 10 cents per gallon , and requires their customers to take a load of treated wastewater equal to the wastewater volume that the customer dropped off for treatment . Th e

wastewater treatment facility removes bromides

, bacteria

, and some TDS

.

 Treatment for Disposal: If BLX does not need treated wastewater for reuse , they

send the wastewater to a CWT that does not require their customers to ta ke a load

of treated wastewater . On the conference call, BLX stated that, in these cases,Meeting Summary Page 9 of 12

they send their wastewater to RES who charges 12.5 cents per gallon

. 4 However,
PA DEP’s statewide waste data 5 indicate BLX only hauled Marcellus wastewater

to McCutcheon and four other CWTs in 2011 including:

 PA Brine Treatment, Inc. (Josep h plant in Indiana County, PA);

 Tunnelton Liquids Company;

 Patriot Water Treatment, Inc. 6 (Warren, OH); and

 Advanced Waste Services (New Castle, PA)

.

 Underground Injection: If BLX does not need treated wastewater for reuse

, they may also haul t heir wastewater to underground injection wells in Ohio for disposal . This management practice requires BLX to hire a t rucking company to

haul the wastewater across state lines. Typical costs include $1.30 per barrel for injection and $6.3 0 per barrel for trucking. The $1.30 per barrel fee includes $1.10 to the underground injection company and a $0.20 state fee. The total cost is approximately $8.50 per barrel for injection and trucking

. According to BLX,

s ome of the companies that own and operate underground injection wells in Ohio

include:

 DBD Energy Disposal (Trumble County, OH); and

 Northstar Disposal (Youngstown, OH)

.

BLX noted that it is not difficult to find Ohio injection wells with available capacity.
However, BLX did have a p roblem using underground injection once when they detected

bacteria levels in their flowback exceeding the Ohio injection well acceptance criteria . After trying several treatment methods including aeration and biodegradable chemicals, BLX eventually hauled this wastewater to McC utcheon

. After treatment, BLX hauled the wastewater to Ohio for injection. BLX did not suggest this is a common occurrence for Marcellus shale gas wastewater but it is a potential problem.

According to PA DEP’s oil and gas reporting data, BLX managed 60 percent of its wastewater through CWT s in 2011 compared to the statewide percent of 56 percent (PA DEP).

Table 1 provides an overview of the 2011 practices BLX used to manage shale gas was tewater in Pennsylvania with statewide management practices.

4 Reserved Environmental, Inc is a CWT with that treats shale gas wastewater using chemical precipitation and

filtration. T he facility has a NPDES permit to discharge but currently returns treated wastewater to operators for reuse in fracturing. This facility offers two types of services: recycling (i.e., operators drop a load off and pick a treated load up) and dumping (i.e., operators drop a load off). Recycling costs 9.5 cents per gallon and dumping costs 12.5 cents per gallon.

5 Available online at: https://www.paoi landgasreporting.state.pa.us/publicreports/Modules/DataExports/DataExports.aspx

6 According to their website, Patriot Water Treatment accepts low TDS wastewater (i.e., flowback) for treatment. Treated wastewater may be reused in fracturing or is hauled to the City of Warren POTW. More information is

available online at: http://www.pwtllc.net/index.html

.Meeting Summary Page 10 of 12

Table 1

. BLX’s 2011 Shale Gas Wastewater Management

Practices in Pennsylvania

Management

Practice BLX All Marcellus Wastewater in Pennsylvania

Percentage (%) Volume

(bbls) a Percentage

(%) Volume

(bbls) a

Reuse 0 0 35 11,161,367

Underground Injection 40 16,932 b 7 2,252,615

Centralized Waste

Treatment 60 25,379 56 17,639,443

Publicly Owned

Treatment Works 0 0 < 1 47,629

Other (unknown) 0 0 1 397,318

Total 100 42,311 100 31,533,305

a

— Wastewater volumes include produced water, flowback, and drilling fluids.

b

— Several underground injection wells in PA DEP’s database are inadvertently

listed as CWTs. The data was analyzed assuming they are underground injection

we lls

. The facility names include “ MILLER & CO #3 SWIW #28 ” and “ B & B OILFIELD SERVICE, INC MILLER & CO #3 .” Source: PA DEP’s Oil and Gas Reporting database.Meeting Summary Page 11 of 12

Attachment 1

Table A

- 1. List of Meeting Participants

Name Affiliation Phone Email

Richard Brewer BLX 724

- 859

- 9835 rbrewer_blxrmd@windstream.net

Stan Berdell BLX 724

- 543

- 5743 sberdell_blxrmd@windstream.net

Brian D’Amico US EPA 202

- 566

- 1069 Damico.Brian @epamail.epa.gov

Lisa Biddle US EPA 202

- 566

- 0350 Biddle.Lisa@epamail.epa.gov

Erik Helm US EPA 202

- 566

- 1049 Helm.Erik@epa.gov Betsy Bicknell ERG 703

- 633

- 1612 betsy.bicknell@erg.com Meghan Camp ERG 703

- 633

- 1684 meghan.camp@erg.com

Brent Ruminski ERG 703

- 633

- 1701 brent.ruminski@erg.comMeeting Summary Page 12 of 12

Attachment 2

Table A

- 2. Typical Costs for Vertical Marcellus Wells

Type of Cost Reported Cost (Dollars) Notes

Well Pad Construction Permitting 2,500 Geological survey 1,500

Access road 10,000

— 15,000

Lease 10 This is the cost per acre per year. Most BLX well pads require 15 acres.

Pond ( slickwater ) 20,000

— 30,000 Slickwater

- fractured wells require more water. These ponds are approximately 1 million gallons in capacity.

Pond (nitrogen) 8,000

— 10,000 Nitrogen

- fractured wells require less

water. The se ponds are approximately 200,000 gallons in capacity. Total well pad construction 50,000 Well Construction and Drilling General cost per foot of well

drilled 10

Total drilling cost 90,000 Hydraulic Fracturing Nitrogen fracturing 325,000 Includes water costs.

Slickwater fracturing 300,000

Total Cost of Well Total cost of well pad, drilling, and fracturing 1,100,000

— 1,200,000 Includes well pad construction, drilling,

and fracturing. On Going Costs

Basic well maintenance 500

— 700 This is the cost per month that BLX charges to the well owner for normal production operations (e.g., sending technician to well pad for routine checks)

. Water hauling and other

maintenance 300 This is the average cost per month for hauling water off site per well.
Wastewater Management Costs (Dollars per barrel)

Disposal

Cost Trucking

Cost Total Cost Notes

Truck to injection well

in Ohio 1.10 +

0.20 (state fee) 6.30 8.50 Trucking cost may vary depending on

well location but this cost is representative for trucking from this

area to Ohio.

McCutcheon 4.20 Varies 4.20 + trucking This facility requires the user to take a

load of treated wastewater

.

RES 5.25 Varies 5.25 + trucking The cost reported is for treatment only.

This facility gives the option of taking a

load of treated wastewater.

General trucking cost Varies with

distance $80 per

hour Varies with

distance Cost per hour. Each truck holds 100

bbls of wastewater.