API

BLOGGER CONFERENCE CALL

MODERATOR:
Jane Van Ryan, API

SPEAKERS:
Sara Banaszak, Senior Economist, API
John Felmy, Chief Economist, API
Stephanie Meadows, Senior Policy Advisor, API
Erik Milito, Group Director, Upstream/Industry Operations, API
Richard Ranger, Senior Policy Advisor, API
Andy Radford, Senior Policy Advisor, API

Thursday, March 25, 2010

Transcript by
Federal News Service
Washington, D.C.

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 Bloggers on the call included Bear from The Absurd Report, Bob McCarty from Bob
McCarty Writes, Brian Westenhaus from New Energy and Fuel, Carter Wood from
Shopfloor.org, Dave Summers from Bit Tooth Energy, Gail Tverberg from The Oil Drum, Geoff
Styles from Energy Outlook, Jazz Shaw from The Moderate Voice, Jim Hoeft from Bearing Drift,
Lee Doren from Right Wing News, Michelle Hopkins from Analysis Online, Merv Benson from
Prairie Pundit, Rich Trzupek from Big Journalism, Tim Hurst from Ecopolitology

00:15 JANE VAN RYAN: Well, welcome, everybody. Why don’t we get started? I
have a whole lot of people around the table here with me today who are happy to answer your
questions about horizontal drilling, hydraulic fracturing and what’s happening in various shale
plays today that indeed could have a huge impact on natural gas supplies in the United States and
indeed around the world.

But before we get started, what I need to do is basically – (inaudible, background noise) –
and find out who’s on the call with us. One other thing I would like to say is that if you’re not
answering – planning to ask a question, please put your phone on mute. I sent out directions on
how to do that. What you have to do is hit *6, then you can un-mute it by hitting #6. And also
thank you for those of who have submitted questions in advance. We’ll try to get to those today
as well.

So – (inaudible, background noise) – know how we do this; many of you have been on
these conference calls in the past. (Inaudible, background noise) – we’re going to take the roll,
going to have you all who are on the line with us. You know that everything is being recorded.
We will release a recording and a transcript online so you can look at quotes, gather more
information. I’ll try to get that posted as early as tomorrow afternoon at some point.

And because I know we have quite a few people that expressed an interest in this, I’m
going to ask you to try to keep your questions fairly short and to the point so everybody has an
opportunity to ask a question. So let’s get started. Who do we have on the phone with us today?

01:49 BOB MCCARTY: Bob McCarty at bobmccarty.com.

01:52 MS. VAN RYAN: Great. Welcome Bob.

01:55 LEE DOREN: Lee Doren.

01:56 MS. VAN RYAN: Good. Thanks, Lee.

01:58 MICHELLE HOPKINS: Michelle Hopkins from Plano, Texas.

02:01 MS. VAN RYAN: Good. Thanks, Michelle.

02:03 RICH TRZUPEK: Rich Trzupek with Big Journalism.

02:04 MS. VAN RYAN: Wonderful. Okay, who else?

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 02:06 MERV BENSON: Merv Benson.

02:07 GAIL TVERBERG: This is Gail Tverberg.

02:07 JIM HOEFT: Jim Hoeft.

02:09 MS. VAN RYAN: Okay, I’m getting you all. I’ve got Jim. I’ve got Merv. I’ve
got Gail. Okay.

02:17 GEOFF STYLES: Geoff Styles, Energy Outlook.

02:18 MS. VAN RYAN: Wonderful, Geoff. I’m glad you could join us. I know it was
kind of hard for your schedule.

02:23 MR. STYLES: Thank you.

02:24 MS. VAN RYAN: And who else do we have?

02:24 BRIAN WESTENHAUS: Brian Westenhaus with New Energy and Fuel.

02:27 MS. VAN RYAN: Great. Thanks, Brian.

02:29 JAZZ SHAW: Jazz Shaw with George Phillips’ campaign.

02:31 MS. VAN RYAN: Wonderful. Thanks, Jazz. Who else?

02:36 CARTER WOOD: You’ve got Carter from the NAM.

02:37 MS. VAN RYAN: Good, Carter. And are we missing anybody?

02:42 TIM HURST: Tim Hurst from Ecopolitology.

02:44 MS. VAN RYAN: Good, Tim. That’s wonderful. I’m glad you could join us.
Anybody else? Okay, well let’s get started. We do not have any opening statements for you
today. In fact, we just want to launch into the questions. So who would like to go first?

03:08 MS. TVERBERG: This is Gail. I was going to ask about what happened with all
of these fluids? I’ve heard something about flow back. Does all of it stay underground? Does
some of it come back?

03:24 STEPHANIE MEADOWS: Flow back of the water?

03:27 MS. VAN RYAN: Please identify yourself.

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 03:27 MS. MEADOWS: I’m sorry. This is Stephanie Meadows. I work on
environmental issues here at API. The flow back is the water that comes back up after the
fracturing process has been initiated. And yes, there’s a percentage of it that’s recovered that
comes back out of the ground. And some of the water stays within the well actually for a period
of time. Could be a couple days. Could be several months. Sometimes longer than that. And
will come up intermittently throughout the process of the life of the well. But the typical –

04:02 MS. TVERBERG: Does it only come up there?

04:04 MS. MEADOWS: I’m sorry?

04:06 MS. TVERBERG: Does it only come up in the well? Or can it come up through
fractures farther away, you know, and have dissolved minerals or who knows whatever happens
to be in the ground located near the well?

04:22 MS. MEADOWS: No. It comes up through – back up through the well or will
stay underground in the geologic formation. It does not come back up through the fractures.
And there is a percentage recovery. I mean, just to be clear here. It’s not 100 percent recovery
each time. It can be over time. But I think the average recovery rate is somewhere – depending
on which shale formation you’re speaking of – it’s somewhere between 30 and 70 percent.

04:53 RICHARD RANGER: This is Richard Ranger. Gail, to follow up on Stephanie’s

comment. The reason the water does not come up through the fractures is that first, the fracture
network around a wellbore is a matter of several feet. It doesn’t extend that far. Second, the
fracturing occurs at depth, you know, in the objective formation for gas production, that
formation is under pressure and the weak link, if you will, is the wellbore. And that’s how the
gas flows.

The shale itself – the shale is typically bounded by impermeable rock layers at some
point. So that’s why we’re very confident in saying that the water that is either injected in the
course of fracturing or that may exist in formation, which sometimes is the case, is produced – to
the extent it is produced – through the wellbore.

05:54 MS. TVERBERG: Okay. Thank you.

05:57 MS. VAN RYAN: Who else would like to ask a question? In that case, since
nobody is speaking up, I’ll –

06:06 MR. WOOD: This is Carter from the NAM. I have written quite a bit about the
Bakken Formation and the use of technology there. And I wondered if you could just give me a
brief kind of rundown of the distinctions between hydrofracking and horizontal drilling with
natural gas and oil or – if there is a distinction.

06:26 MR. RANGER: Carter – well, I guess – could I take that one?

06:29 MS. VAN RYAN: Sure, Richard. Of course.

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 06:31 MR. RANGER: Carter, this is Richard Ranger again. And I’ve been out to North
Dakota and have actually attended a workshop out in Williston on the Bakken. From the
standpoint of technology, from the standpoint of method, it’s really the same whether the
objective shale formation is producing natural gas or, as is in the case of Bakken, crude oil.

What they do in the Bakken – the Bakken formation, which is very extensive – a shale
formation that has been estimated to occupy an area roughly the extent of the state of West
Virginia in western North Dakota, parts of Montana, parts of Saskatchewan – is at about 10,000
feet below the surface of the earth and ranges about 30 feet in thickness or 30 feet in vertical
width.

And they had drilled through the Bakken and had encountered through their well logs
information that showed that there was oil, but they really never had a method of producing it
because of the tight shale and the lack of a space for the oil molecules to move. What they do is
they drill a 10,000-foot vertical well. Then, with a motorized drill bit, they essentially turn the
drill bit 90 degrees and drill horizontal tails that run from a mile to as much as two miles in
length.

And it is along those horizontal tails, which are navigated within the Bakken Formation,
that they then, upon completion of drilling to the total measured depth – meaning out to the two-
mile distance or one-mile distance as the case might be – that is when they remove the drilling
equipment and install the series of tools that enable the companies to hydraulically fracture at
intervals along that horizontal extension of the well. And it is through those intervals that the oil
molecules move and the oil is produced from the Bakken well.

08:40 MS. VAN RYAN: Any follow-up questions, Carter?

08:43 MR. WOOD: So is there the same level of horizontal drilling with natural gas or
is that a much simpler – down and then you hydrofrack?

08:54 MR. RANGER: There is both. It’s Richard again. There is both horizontal and
directional drilling. Increasingly, horizontal drilling, because with a lot of the shales, what you
need to optimize the value from your hydraulic fracture operation is well exposure or well
encounter with your objective formation. So it stands to reason – the analogy I like to use – not
being a driller, by the way, I was a land man and a permitter:

Picture a chocolate layer cake. Picture being the 7-year-old kid more interested in the
frosting than in the cake. If you stuck a straw vertically through the cake, you’d only encounter
little bits of the frosting layers between the layers of cake. If you were to stick that straw
horizontally between the layers, you could remove quite a bit of frosting before your mother
caught you.

And so that technique is essentially similar with natural gas and with – as it is with oil.
The length of the horizontal portion of the well – the orientation of that portion of the well –

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varies with the geology and varies with what the engineers and geologists expect is needed to
most effectively produce gas through that particular well from that particular formation.

10:16 MS. VAN RYAN: Anyone else have a question?

10:18 MR. SHAW: Yeah. Just one quick one. This is Jazz again, Jane. As recently as
this week, I was watching Maurice Hinchey, who’s only of several members of Congress, came
out on TV on CNBC and kept repeating these claims that there are quote, “multiple instances of
groundwater contamination from hydrofracking” for natural gas even though the host had stated
right up front that they had investigated and couldn’t find any.

Is there any good resource you could point us to online that has some sort of record of the
investigations of alleged groundwater contamination where they were disproven as I keep
hearing they’ve almost entirely been disproven, but the story keeps getting repeated by a number
of people including members of Congress. And it would be good to have some reference
material to point to in rebuttal of that.

11:14 MS. MEADOWS: Jazz, this is Stephanie Meadows again. Yeah, actually I have a
piece of paper that – and I don’t know how to get this information to them, but Jane will do that.

11:22 MS. VAN RYAN: I’ll do that. I’ll send it.

11:23 MS. MEADOWS: But we have a list of the different studies that have been done
with regard to hydraulic fracturing where they has not yet been a connection made between
hydraulic fracturing operations and any contamination incidents. So hopefully in some of the –
there’s links attached to that. One of them is a PDF study that was just done over the summer by
EPA as a matter of fact.

And unfortunately I don’t know how to get that – I went on their site. That link is not
available. But somehow we’ll make sure you get a copy of that study as well. And that was a
sort of cursory incident review that they had done over the summer and still could not make that
direct link in conclusion of that report. So we’ll get the list to you.

12:07 MR. SHAW: That’d be great. Thanks. Because I’m running a candidate who’s
up against the guy who keeps saying this on the stump over and over and over again. And it
would be nice to have some hard facts to be able to come up in the debates and just say, no,
you’re wrong. (Chuckles.)

12:20 MS. MEADOWS: Understand.

12:22 DAVE SUMMERS: This is Dave Summers at Bit Tooth.

12:24 MS. VAN RYAN: Sure, Dave. Go ahead.

12:26 MR. SUMMERS: And I think in the congressional testimony on hydrofracking,

there was a statement by one of the state agencies that said that they were – they had actually

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written to the states where they’d heard that there were incidents and they got reports back that in
fact that this – the reports weren’t true.

12:47 MS. MEADOWS: I’m not sure if this is exactly the same example that you are
making, but the Ground Water Protection Council has done some conversation with the state
agencies that they work with and have come to that conclusion, that they hadn’t got reports back
on any of the incidents that were reported were directly connected to hydraulic fracturing. And I
think that’s what you’re making reference to.

13:09 MR. SUMMERS: Right.

13:10 MS. MEADOWS: That study is in actually in the list that I’m talking about here.
So we’ll get that to you.

13:14 MS. VAN RYAN: When I send you the audio file and the transcript link
tomorrow, I indeed will send you that document as well.

13:22 MR. RANGER: There have been reported spills at the surface or soil
contamination at the surface. And to the extent we’re aware – we’re not excusing these, by the
way – but to the extent that we’re aware, each of these incidents is traceable to practices
followed or not followed on the surface, on improper connection of lines or pipes, improper
handling of fluids, leaks in tanks, that sort of thing. Things that occur at the surface. Not down
in the formation. Not down in the wellbore.

And actually if I can add, one of the things we have been developing – one of the things
that API does is we publish standards and guidelines documents. And so we have been working
at reexamining certain of those documents, in particular with respect to environmental practices
on drilling locations in order to provide better insurer guidance to industry. And like in many
API standards, these are sometimes used by state regulatory agencies as well as references for
their own regulation.

14:51 MS. VAN RYAN: More questions?

14:54 MS. HOPKINS: This is Michelle. Is there some example you can give us to
quantify the miniscule risk to the water supply in the public’s mind? I like the chocolate cake
example. Something on that order that would get people to understand some comparison in
everyday life of how small the actual risk actually is to the water supply given all the precautions
that are taken and all of the regulations that are in place already?

15:24 MS. VAN RYAN: Hmm, don’t know that there’s a percentage or a number that
we could give you right off hand, Michelle. You should have received, though, an illustration, a
graphic, if you will, that we sent to you and everybody on the call.

15:34 MS. HOPKINS: Right, right.

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 15:35 MS. VAN RYAN: Good, good. I think that certainly explains how the wells are
spudded and how things are done with the casing and the cementing and so on. And it’s clear
that the fracking that occurs, occurs hundreds if not thousands of feet below the aquifer.

15:54 MS. HOPKINS: It’s just that the critics, as the previous speaker mentioned, the
critics come out with this anecdotal supposed evidence of problems that have occurred without
any context, really, and can make a couple of complaints, a few complaints sound like it’s
something that’s happening every day. And I just wondered if there is some way we can put this
in context. Any activity, any human activity involves risk. And we all assess the risk against the
benefits. But then this thing really gets legs in the media and people think there is a really
significant risk to them when nobody is really balancing that out for them.

16:36 MR. MILITO: This is Erik Milito here at API with our upstream department. And
what we have is our history in operations. And we’ve been engaging in hydraulic fracturing
operations for about 60 years. And it has been done in over a million wells. And there are no
instances of water contamination due to the use of hydraulic fracturing.

So that is what we’re providing to opponents. I have the evidence: It’s our history of
good stewardship and our experience with the practice. And it has been 60 years but it improves
like any other technology tremendously over that time.

17:21 MR. FELMY: So this is John Felmy. If you want to quantify that in a really
simple way it’s called zero, zero divided by a million. Now, of course that’s – you know, there
is, as you said, there is no guarantee. But you’re talking about zero divided by a million, okay?
That is an extremely low number. And so if you want to quantify it in that way, it’s as close to it
as what you can get.

17:42 MR. MILITO: And currently it’s estimated that 90 percent of natural gas wells are
drilled using hydraulic fracturing. And it’s hard to imagine that you wouldn’t have a lot of big
news stories about these types of incidents occurring at the frequency that our opponents are
claiming when, in fact, there have been none and it’s just a routine safe practice and it has been
proven to be such.

18:15 MR. RANGER: One thing, too – this is Richard Ranger – if I could add, there was
a July 2009 article in the Oil & Gas Journal that describes that I think because of these concerns
and because of the publicity that various anecdotal stories have achieved, many operators are
now working proactively with state regulators in collecting water samples from public and
private wells prior to commencing drilling and working through procedures to have independent
analyses of the quality of water in those wells really to establish a baseline.

18:56 This isn’t a consistent practice yet, but it is something a number of operators are
doing more or less to ensure themselves – and I guess in the case of certain state regulators – to
address their concerns as well. But the record is what the record is and the measures taken really
assure that this key component of activity to complete wells to be able to produce natural gas or
oil from these tight shale formations happens thousands of feet below the surface of the Earth

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and it is insulated from the surface of the Earth by a wellbore that is encased in steel pipe and
cemented to the rock layers through which it passes.

19:47 MR. TRZUPEK: Rich Trzupek, Big Journalism. Two questions for you: one,
economic impact. If there were regulations in place that inhibited or slowed the ability to drill
the wells and frack for natural gas, have you guys done any studies to look at the economic
impact?

20:08 MS. BANASZAK: Yes, we do. It’s on our Web site.

20:13 MS. VAN RYAN: This is Sara Banaszak, by the way. She is a senior economist
here at API.

20:18 MS. BANASZAK: The study was conducted for us by the consulting company
called Global Insights. And they looked at several scenarios. One would be if we did not
hydraulically fracture any wells going forward and what would be the impact to both production
and our economy if we chose that path.

20:37 So the impact turns out to be about – go ahead.

20:43 MR. MILITO: No fracking I think it gets up to 60 percent production loss and then
it’s well over 2 million, close to 3 million jobs. Is that correct?

20:55 MS. BANASZAK: Correct. Unfortunately, we don’t have the study right in front
of us so we’re going to have to –

21:01 MR. MILITO: I thought it was 2.8 million jobs in the peak year in terms of not
being able to use hydraulic fracturing at all. And then, as you get different levels of restriction,
the impact goes down but it’s still a significant impact on natural gas production domestically
and GDP and jobs.

21:20 MS. BANASZAK: The GDP impact, the impact on our economy amounts – in the
worst years, if you chose that path – to over 100 billion GDP, more than half a percentage –
because you’re talking about removing a huge amount of energy from our economy.

21:34 MR. TRZUPEK: Sure. And an increase in natural gas prices as well, obviously.

21:40 MS. BANASZAK: Right – the approach taken in that was sort of to model the
impact if you remove that energy source.

21:49 MR. TRZUPEK: Okay.

21:51 MS. VAN RYAN: One clarification: We can’t predict price, just so you know.
We’re a trade association. We’re precluded by law from talking about prices individually. So,
just so you know, that’s a question we can’t really give you a definitive answer to.

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 22:05 MR. TRZUPEK: Well, then, I won’t be able to make my investment correctly.
(Laughter.)

22:11 MS. BANASZAK: We can’t help you there, no.

22:13 MR. TRZUPEK: The second question is, you know, I always find it comforts
people who don’t know – if I had a comparison that I can say, it’s just like this other thing that
we’ve been doing. And what occurred to me is, you know, obviously there is a lot of natural gas
storage fields in very deep aquifers that have been running for years.

And it seems to me that the issues – which would all be surface issues, as one of you guys
said, you know, in terms of handling the gas and dehydrating it and handling the liquids – would
be pretty much the same with fracking as with existing storage field operations. Is that a – would
you say that’s a legitimate analogy to make?

22:55 MR. FELMY: Well, this is John. Given that most of the gas storage in the United
States is in Western Pennsylvania, Western New York, in depleted oil reservoirs, yeah, you’re
storing a gas in a reservoir so you have to maintain structural integrity. You’ve got to clearly
have the site – (inaudible, audio interference) – so you don’t have escapes. It’s going to change
as you draw that gas out and put it back in, draw it in.

23:22 So it is somewhat of a comparison, but the fracturing process that you’re talking
about is fluid whereas in terms of gas storage it’s natural gas. So you’ve got that. But you’re
putting things in the ground, clearly, at the same time.

23:35 MR. TRZUPEK: Okay.

23:36 MR. RANGER: I think one of the things, too – and I don’t know if this is exactly
responsive to your question – but many in the public just assume that there is this – you know,
there are a bunch of cowboy drilling operators that are out roaming the country with large
vehicles and they see a place they want to drill and they drill. Whereas the drilling operation,
from really cradle to grave, it’s very closely regulated at a state level by state agencies that
themselves have trained professionals with engineering and/or geological backgrounds, technical
backgrounds, who have the professional expertise and the capability to evaluate the well design
plan, the well engineering plan that is submitted for permit approval by the operating company
and have the ability to come out and to inspect those drilling operations to assure their
conformity with the plan that’s put forward.

There are pretty considerable sanctions that incur if a company is violating the terms of
its permit. Not only that, there is knowledge transfer really across the – from industry to the
agencies and back and from the state agencies among themselves through a couple of
organizations, notably the Interstate Oil and Gas Compact Commission so that experiences that
are developed in a particular state – (inaudible, audio interference) – longer history or a more
recent history of, say, shale gas drilling activity – let’s take Texas for example, the Barnett shale
around Fort Worth.

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 Well, then that’s experience that can be transferred from the regulatory and oversight
perspective to states like, say, West Virginia and Pennsylvania where that drilling may have
become a more recent phenomenon.

So the activity, the drilling activity that the oil and gas – the companies in the oil and gas
industry undertake is very closely watched at the state level by people who are accountable to the
public.

25:42 MR. BENSON: This is Merv Benson. I’m not sure that we have people here who
can talk to the politics of this but it seems to me that the scary thing to many of the people in the
political arena is that we’re going to have all of this cheap gas out there which affects their
ability to push alternative energies.

26:05 Have you all seen anything that would support that proposition?

26:14 MS. VAN RYAN: Merv, can you repeat the question? I’m not sure people could
hear it very well here. Or I could repeat it for you. It really is a political question. Merv says he
is concerned that it’s possible that politicians might be worried about having so much natural gas
because, as the price drops, it could indeed make it more difficult for them to push a renewable
agenda. Is that a fair way of describing it, Merv?

26:42 MR. BENSON: That’s exactly what I said.

26:45 MR. FELMY: This is John Felmy. If I could just give a couple of thoughts on
that. I mean, first of all, let’s be very clear: Natural gas is not going away as a use. No matter
what, it is not going away and so we might as well produce it here.

26:56 We’re going to continue to generate power from natural gas; we’re going to
continue to heat our homes with natural gas. And there is not going to be a substitute in terms of
economics for that in the future. We’re going to continue to use it for petrochemical feedstocks.

27:10 So, yes, the relative cost may affect alternatives, but, remember, those alternatives,
for the most part, aren’t going to displace gas because you – those alternatives are electricity.
And you also have to remember that if you’re going to use a lot of alternatives – whether it be
solar, wind, geothermal, other types of alternatives – you’re going to need natural gas as a
backup because those are intermittent energy sources and they will not exist in a modern
economy, a modern, stable grid without natural gas as a backup – because it happens to be the
most cost effective way to be able to cycle in and out.

27:48 And so, yes, I see your point in terms of the dollars per BTU. But the fact of the
matter is, they are completely compatible.

27:56 The other issue is, remember, if we’re talking about building windmills and solar
panels, they use natural gas as a feedstock into the plastic and the resin materials also. So I see
this as completely compatible if you look at it in a broader context.

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 28:15 MR. HURST: This is Tim Hurst. I have a question about – last week EPA
announced a plan to spend about $2 million on studying the health and environmental impacts of
fracking. I was hoping that – I was wondering if API had taken any sort of official position on
that.

28:36 MS. MEADOWS: This is Stephanie Meadows again. Yes, actually, during that
debate on the Hill, we heard that there was going to be a study. And so the hope was that the
study – if, in fact, it did take place – even though I think our thought had been, a study has
already been performed. But, nonetheless, that process has moved forward and I’m making
reference to the 2004 EPA study.

But now that it’s moving forward – and there was an announcement last week that the
Science Advisory Board is holding their first public hearing on this – certainly API wants to be
involved. We’ll be making a statement on whichever day that they permit the oral statements to
be made, probably going to be the seventh – and hopefully have a well-engaged process
throughout the whole study period.

We would like to work with them, and EPA has made it clear that stakeholders have an
integral part in all of this. So it’s our expectation that we will be working hand in glove with
them from start to finish on that study.

29:42 MS. TVERBERG: This is Gail. I was going to ask about the water that’s used in
this process. Does it come from municipal sources? Or, where does it come from?

29:54 MS. MEADOWS: Gail, it’s Stephanie again. It just sort of depends on the
location of where the well is being drilled. It could come from municipal sources; it could come
from surface-water sources or other groundwater sources. It just depends on where you are and
what water resources are available. And those are things that need to be worked out when the
operator comes into a certain area and has conversations with the water authorities of those
localities and states.

30:26 MR. RANGER: Gail, this is Richard again. There was an article in the Oil & Gas
Journal last year that said that the amount of water to produce 1 million BTUs of natural gas is
about 10 percent of the amount of water required to produce the same million BTUs of coal and
one-tenth of 1 percent of the water that it takes to produce that amount of energy in ethanol. So
yes, water is consumed and used in connection with drilling and hydraulically fracturing a deep
shale gas well. For a 7,000 to 10,000-foot well, that volume has been estimated at around 3
million gallons of water for the drilling and fracturing processes together. That’s the amount of
water used by a typical golf course in one week, irrigating a 5-acre cornfield for one season or
used by a large municipal water district of, say, 8 million people in four minutes.

31:54 MS. MEADOWS: I’d also like to point out that – somebody had already
mentioned here – as the technologies are used more and more, they’re improved upon. And with
regard to water as a resource there is great improvement going on with the reuse and recycling of
water from one operating site to another. Certainly, that was not something that was done quite
as extensively years ago but water is a commodity that’s hard to come by in certain areas so they

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have to make certain that they’re taking care of it and that companies are finding that this reuse
and recycling is something that they can take advantage of more and more.

The water-management issues that we’re talking about are going to be incorporated into
one of the guidance documents. I think Richard made reference to the series of recommended
practices and industry guidance documents that API works on. We’re putting a series of those
together on hydraulic fracturing.

I would welcome you all to visit our Web site where these will be as they’re made
available – available for free to the general public but they’re really intended for industry
operators but certainly we’re not making a secret of them. And you will easily find them there
and download them for your own use. There’s four in the set, two of which are finished. Water
management and service environmental consideration should be done shortly.

33:17 MS. TVERBERG: Thank you.

33:21 MR. SHAW: Has anybody heard anything about any advances? This is slightly
afield but two years ago, we attended the International Automotive Show in New York with the
American Automotive Alliance and they were talking up a lot of work that was going on in
compressed natural gas – CNG – in terms of the general consumer fleet for cars, research and
development work. I haven’t heard a thing about that since, in terms of another way to utilize
this resource to get us off of foreign oil. Have there been any advances there? Anything new
that we can use?

33:55 MS. VAN RYAN: They asked, who’s asking the question?

33:57 MR. SHAW: That was Jazz again, sorry.

33:58 MS. VAN RYAN: Oh, okay, Jazz. Thank you.

34:01 MR. FELMY: Jazz, this is John Felmy. Of course, the developments in Detroit
have been a challenge over the last couple years, given the landscape that the car companies have
had to deal with. I have seen some continued developments of – because I’ve been to a
conference – on, for example, propane use in vehicles. That’s been changing.

I think that virtually everybody concedes that natural gas can play a growing role in terms
of the transportation fleet, particularly with fleet vehicles such as the vans and buses – like,
Super Shuttle, which I believe has been using natural gas for a long time; heavy trucks, that’s
Mr. Pickens’s proposal in terms of using natural gas as a vehicle fuel for that particular segment.

The challenge for the individual car segment is one of, first of all, conversion costs
because I’ve heard conversion costs of five, six, $7,000 to convert an existing vehicle to natural
gas although there is some uncertainty of that because until you do a lot of vehicles, you really
don’t know what the cost would be.

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 And then the issue is the refueling capabilities: How would you refuel those cars in terms
of compressed gas and so on because clearly if it’s compressed gas, filling it in your home would
be a real challenge even if you had gas, and gas doesn’t exist everywhere. So I think that’s a
long way of getting to I think this is another opportunity in terms of a new market for natural gas.
It’s, indeed, very helpful given the relative price of natural gas versus oil and so on. But right
now, we have to deal with the really stark point that we have 250 million cars and trucks in this
country that run on oil and so until you have turnovers of the fleet, until you move to two types
of fuel, it’s going to be incremental. But it is a new market and to the extent it’s economic, we’d
like to see it expand.

36:01 MR. SHAW: Thanks.

36:06: MR. HURST: This is Tim Hurst again. In terms of either the EPA’s plans or their
actual study that they are going to conduct or the frack act which is introduced into Congress,
I’m curious how either the API or some of your constituents feel about sort of, I guess, divulging
what is in the actual chemical makeup of the fracking compound.

There’ve been claims to their sort of proprietary protection up until now. Is that
something that’s going to be coming out or are they going to stick by the “this is proprietary, we
can’t divulge” – (inaudible, cross talk)?

36:52: MR. MILITO: This is Erik Milito again. What I’d like to first point out is that
this is somewhat of a red herring because companies do disclose to the constituents of what is in
the frack fluids. You go to the service-and-supply companies and they put it on their Web sites.
The information is located – at the well locations onsite. And there are states who have taken
measures to put regulations in places to, you know, require that the information be made
available.

So API and our member companies agree that state regulation is appropriate, and as
needed, states are able to collect the information. The rub is this is a business. And these
companies do invest millions of dollars in research and development to put together fracking
fluids to make the technology better so that we can release the gas through the hydraulic
fracturing process. And so there is proprietary information.

And the way we provide the analogy, it’s like buying a can of Coke. You look at the
back of a can of Coke – or, the side of a can of Coke because it’s a cylinder, you’ll see what the
ingredients are but you remember back in the day, when they went about the whole new
Coke/old Coke thing, the big thing in the news was keeping that secret formula confidential.
And that’s all we’re looking to do, is keep it proprietary.

And the way we found the balance is to look at what Colorado has done, where that
formula that really is the intellectual property and the business product and proprietary
information of those companies stays confidential and proprietary, and it’s provided as needed
on an emergency basis to state and emergency responders.

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 So when we’re looking at it, we’re trying to make sure that there is the balance so that the
public understands what’s in frack fluids but the companies are able to protect their business
product.

39:02: MR. SHAW: What it’s worth, if you go to – for one example – this is Jazz again –
in case it’s helpful, if you go to the Pennsylvania Department of Energy and Transportation site –
I don’t have the URL right in front of me – do a quick search on that and it is state law there;
they have a full list of all the chemicals that are used that anybody can see that they’ve been
using for years. The only thing they don’t provide is the actual ratios and the amounts which is,
as the last speaker said, kind of a secret formula. They didn’t want to give that away to their
competition but just to find out what the chemicals are that are involved, those have been made
public.

39:38: MS. VAN RYAN: And this is Jane. I’m going to send you a link tomorrow when
I send you the audio file and the transcript link that will take you to a chart that I discovered this
morning with Richard’s help that really lists a lot of the chemicals that are used in the fracking
fluids. And I was particularly struck when I looked at the chart today by the fact that 99.51
percent of the fracking fluids consist of water and sand because you need the sand as a proppant;
something to prop open those fractures. I think you’ll find that document very helpful, too, and
I’ll be sure you get that tomorrow.

40:18: MR. HURST: Can I just follow up really quick? Would API then support the sort
of – the Colorado model, let’s call it, on a national scale?

40:27: MR. MILITO: Well, I mean, that – we support the Colorado model at the state
level. It gets a little more complicated when you’re getting the federal government involved
because all these activities are best regulated at the state level and I think Richard, who has had
experience as a company person at the state level, can explain why, but there are a lot of
variables that make it such that you can’t have a one-size-fits-all across the board for all states
through federal legislation.

And that even goes to the disclosure requirements because when these companies are
submitting their well-management plans, when they’re working with the state officials, that
information is provided at the state level. And I’d like to turn it over to Richard because he can
talk about the different variables that make it difficult to have a one-size-fits-all approach.

41:16: MR. RANGER: I guess a couple of things. First, the states are considering each
other’s examples and each other’s precedents. The state of New York in the supplemental
environmental document that was prepared by the New York Department of Environmental
Conservation last year listed a considerable number of compounds that were identified as
suitable for use in the state of New York, and really followed an approach very similar to that,
that the state of Colorado adopted a year earlier, which is that the formulation – which is what
has been cited as the concern of some, meaning the specific mix – would be available in the
event of an incident to state regulatory officials and to public health officials to address potential
concerns that might arise from that incident.

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 People say, well, boy, that really sounds like a lot of concern over the specifics of these
formulations. But the art of the service – the providing of the fracking fluid really has to do in
the precision of the formulation offered by the company that is mixing these chemicals in this
99-percent water solution – aqueous solution – to address the geochemistry of the formation
that’s being drilled into, its specific physical properties and so forth.

And that gets to be an area of professional judgment, the application of technology, and I
guess the example I did – another food analogy, it’d be this. Popeye’s, Kentucky Fried, you
know, there’s a number of outfits that sell fried chicken. Each of us knows that the fried chicken
tastes different if you go fast food fried chicken – which maybe not everybody here does. But
you know, there are a lot things that are in recipes that you have the same dish at a different
restaurant and it tastes different because of the precise mix that the chef is offering.

Well, in a manner of speaking, though a lot less tasty, that’s really what’s being provided
as a service, as an area of expertise by the company that is handling the hydraulic fracturing
well-completion operation for its client oil company or gas company. And it’s that – you know,
they want to be able to preserve the commercial value of that effort because that’s the service
they supply; that’s really the expertise that they offer.

44:04: MR. STYLES: This is Geoff Styles. I’ve got a question on a related topic to that.
When I posted on this subject a couple of weeks ago, I got a lot of comments and questions
concerning the use of diesel and attempting to link that to reports of benzene contamination and
things like that. That latter point didn’t make any sense to me from my refinery background but
could you comment on how diesel comes into this process and whether its use actually
introduces anything to the environment that isn’t already found in the hydrocarbons in the
formations they’re drilling into?

44:44: MR. RANGER: Geoff, this is Richard again. Diesel is used in some well
completion operations. It has to do with whether the use of diesel, as opposed to a water-based
completion fluid is more appropriate for the formation, just owing to, again, the geochemistry
and physical properties of the rocks through which you’re moving.

Typically where diesel is used is not as a fracturing fluid, but as the basis for drilling mud
– drilling muds, which are the substances that lubricate the bit. The circulation of the drilling
mud removes the rock cuttings that the bit makes as it moves through the earth, brings those rock
cuttings to the surface – also, cools the drilling operation, cools the drilling bit.

Anyhow, in a number of cases around the country, diesel fluids are used for drilling
muds. Those are completely recycled – in fact, that’s one of diesel’s advantages, is it’s a
reusable material, whereas the water-based drilling mud solutions can break down over time.
The use of diesel, or not, is another subject that is regulated by the state agencies that are
overseeing the particular drilling operation, and those are agencies who have staff who are
familiar with the particular characteristics of the formations being drilled into.

But the idea that diesel is being used in, you know, move through the surface of the earth
is, I think, again a misconception that has been spread. Where it’s chiefly used is in some

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drilling operations for drill lubrication. Those diesel fluids are recovered and they’re reused in
other wells that are drilled in that same drilling program.

46:38: MR. STYLES: Thank you. And just to follow up, are there any statistics on the
quantities of diesel used in that way?

46:47: MR. RANGER: The answer is, there probably is in some of the technical
journals, Geoff. I’m sorry, I don’t know them. It would have to do with the volume of fluid that
you’d have in a wellbore at a given time. I’m sorry I don’t have that information.

47:02 MR. STYLES: Thank you.

47:07 MS. VAN RYAN: More questions? I have a couple that have been submitted.
We could certainly do those, quickly, I think.

47:13 MS. HOPKINS: Jane, this is Michelle. I have a question on the state regulation,
the state oversight of these things.

47:18 MS. VAN RYAN: Yes

47:19 MS. HOPKINS: I was looking at some testimony from 2009, from the
Groundwater Protection Council, in which they called for some benchmarking to point out those
practices used by whatever states that are the best and should be recommended and looked at for
other states, and so forth. Has anything been done in that regard, or do we have any feel for – we
talked a little bit about Colorado – but the distinctions between the regulation done in the states
and how good it is?

47:50 MS. MEADOWS: You know, that was actually one of the recommendations that
the GWPC put forward in that report, and I do not believe that they have done any follow-up on
that yet, although they were talking about a study that would look into that. So I just don’t know.
My sense is, we would have heard about it if that study had been initiated.

48:10 MS. HOPKINS: Okay, thank you.

48:13 MR. RANGER: That may be something – they have a Web site.

48:16 MS. MEADOWS: Exactly – I would just refer you to their Web site and see if
there’s any discussion on the status of that.

48:21 MR. RANGER: GWPC.org, I think.

48:27 MS. VAN RYAN: A question that was submitted by one of the bloggers today
asks kind of an interesting approach – about an interesting approach to hydraulic fracturing. As
you can see by the illustration that we’ve provided, what normally happens, or what often
happens, at least, is that you’ll have the wellbore go down vertically, go off horizontally and
then, at intervals, you’ll have fracking occur.

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 The question that’s been asked of everybody here in the room is, can you have fracturing
that takes place between two wellbores that are close enough to one another so that you’re
actually getting more out of the layer – the play area – than you might otherwise? Is that being
done anywhere? And if it’s being done, how do you then determine how much oil or natural gas
is left in the formation?

49:21 MR. RADFORD: This is Andy Radford. You know, when they drill these wells –
these horizontal wells – they’ll drill them out from a central location. And they’ll go out in
different directions, like the spokes on a wheel. And the wells are designed so that you don’t
have communication between the wells. And the fracturing – the fracture jobs are, you know,
for the most part, computer-simulated before they even do the fracture, based on the knowledge
gained of drilling previous wells and previous frack jobs.

So they’ll simulate these fracturing jobs so they can determine where the fractures are
going to go, and through the pressures and volumes – the pressures at which they pump the fluid
and then the volume of fluids, they can really tell – you know, these are highly controlled
processes, and they’re done in real time from the – during the operation. So they know where
these fracks are going, and it’s a very controlled process.

50:23 MR. RANGER: And the well is really your unit of control.

50:25 MR. RADFORD: Yeah.

50:26 MR. RANGER: It’s really important that you know what you’re going to be able
to produce on a particular well.

50:30 MR. RADFORD: You don’t want these wells and these fractures communicating
with other wells. So they’re designed so they don’t do that. That would not maximize your
production.

You’d lose your pressure control if you did that. And then, based on, you know, the
volumes of gas that – you know, the production rates and the pressures – they can then determine
– you know, they had a sense of what was contained in that reservoir to start with, and based on
the volumes and pressures, they can determine how much has been produced and make an
estimate of how much remains.

So it’s a highly controlled and engineered process, and it’s designed so that these wells
are single units that don’t communicate. Now, when you – there are cases where we do
secondary, tertiary recovery operations, where you have injector wells that are designed to push
the fluids to a producing well. But those are engineered in a different manner and it’s a different
technology that’s used for that.

51:45 MS. TVERBERG: This is Gail. I think in Pennsylvania, and maybe in New
York, too, there have been some very old wells that people have thought maybe were not
properly sealed. But it would sound like, from what you’re saying, that anybody who’s drilling a

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new well would certainly be on the lookout for any old, improperly sealed well that might be in
its area nearby, you know, that you might get some backflow through.

52:13 MR. RADFORD: Yeah, that’s contained in our recommended practice document
on, you know, good practices for hydraulic fracturing. You survey the area for abandoned wells,
because it may have been what we call orphan wells that were not abandoned properly and were
not sealed properly. So you need to know where those things are and –

52:36 MR. RANGER: And make sure of those zones, and –

52:37 MR. RADFORD: And make sure that you have good well integrity through those
zones and just, you know, do what you can to minimize anything involved with an old well.

52:51 MR. RANGER: That’s also subject, too, Gail, where the state agencies become
involved in, you know, conversations with the drilling applicant. You know, they won’t
necessarily be any more familiar with the details of the wells than will the applicant. I mean, you
take precautions – what happens as a result of that dialogue between the company doing the
drilling and the regulating agency. The practices, or the approaches, are developed to ensure that
there isn’t migration or loss through those old wells.

53:28 MS. TVERBERG: Thanks.

53:29 MS. VAN RYAN: Any more questions? I have one more that was submitted to
me, and I’ll kind of – it’s kind of long, so I’ll give you just, kind of, the bottom line here. “How
can we give consumers a realistic context about the integrity of the cases that contain any
residual fracking liquids? And what, if any, monitoring do states do now after the operation is
complete to ENsure there’s no migration of liquids from the cases over many years to come?”

54:03 MR. RANGER: You’re saying complete, meaning at the end of production?

54:07 MS. VAN RYAN: It’s not clear by the question that was submitted.

54:11 MR. RANGER: Well, I’ll take that part of the answer, Jane. Rich again.
Plugging and abandoning a well at the conclusion of its productive life is also an issue that
involves, you know, considerable experience. There are API standards that apply, and there’s
state regulation that applies. So the intent behind completion in production is to assure, really,
exactly the concern of that particular writer to you, which is to assure that whatever may be
below the surface doesn’t flow up through the wellbore to the surface and doesn’t flow, you
know, through any weak spots that may exist into other strata.

So the well design and the well construction program is, itself, developed, reviewed and
inspected to assure that it achieves those objectives through the productive life of the well. And
then, at the time of – when the productive life is over, the proper plugging and abandoning is
another series of steps that are carefully followed to assure integrity through time.

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 55:30 MR. RADFORD: There are techniques that companies can use to monitor the
angular pressures on their wells, to see if there’s any communication between the producing zone
and these other “anyuli” if you will. And you know, I think what they’re asking is, you know –
the way I could put it is, there is no requirement to drill monitoring wells around your well, but
you know, the history – there’s no need to.

We’ve had a long history of drilling wells and producing them using hydraulic fracturing,
and we’ve had no need for that, since the states have not identified that as a problem. So there’s
no regulations on the books that you have to do this type of monitoring.

56:12 MR. RANGER: And there are steps that are taken at intervals in the drilling
process – cement bond logging is – that’s a technical term in the industry. But what that is, is a
means of measuring the integrity and the thoroughness, if you will, of the cementing job – the
cement that is inserted or squeezed, in drilling parlance, between the casing pipe and the
surrounding rock. You know, are you sure you’ve got a complete – you don’t just have a collar
around there, but you have that drill pipe safely surrounded by cement? And there’s a logging
process to verify that, and those logs are inspected.

56:50 MS. VAN RYAN: Any additional questions?

56:53 MS. TVERBERG: I was just – this is Gail again – I was just going to ask, could
you give me sort of an overview of where legislation is right now? That frack legislation that
was introduced last year – is that dead, or is that going to be revived? I guess New York is –
they’re kind of generally looking at this, and they’re kind of in the midst of a long process. Is
that what’s going on? I haven’t been following this quite as closely as, maybe, some others
have.

57:20 MR. MILITO: Well, as our friend, John Felmy, here, likes to say, he never put
odds on Congress, and we’re not going to do that. (Laughter.) You know, it was introduced.
We do have a lot of concerns about it because, you know, as we’ve stated, the states have and
continue to regulate oil drilling activities and natural gas drilling activities as best as anybody
could. So it’s kind of a wait-and-see.

You know, we do have this study that’s going to be commencing that was really done at a
congressional request through the appropriations bill. So our hope would be that they wait to see
how things evolve with the study and then take things based upon, you know, the best available
science and evidence that results from that.

58:06 MR. FELMY: In New York, the question is, they’re reviewing the comments –
the thousands of comments that they got, the hearings that they held, the testimony that they
held. And from what I understand, having just been through Albany, there’s no definite time, in
terms of when that EIS is going to be released. But until it’s released, basically, the industry is –
we’re waiting to move forward, which is really unfortunate, because this is the biggest economic
opportunity these two states have had in 100 years.

20
 As a former dirt-poor country boy from Northern Pennsylvania, this is an opportunity –
the first they’ve had since the lumbering of the 1890s. And so hopefully, we’ll see some
movement forward. Hopefully, we will not see some actions that really stymie what could be a
wonderful opportunity for jobs and revenue and economic development in an area that hasn’t had
any for a very long time.

It’s exciting to me, because I grew up in the ’50s and ’60s there watching seismic trucks
go up and down those river valleys. And I always wondered, what did they find? Did they find
anything? Well, they did. But they couldn’t develop it. And so this new technology is just a
godsend for an area. It could generate 175,000 jobs for Pennsylvania, billions in revenue and
taxes. And the same is true with the developments, potentially, in the southern tier of New York.

So that’s just a quick economic assessment of where we are. We talked a lot about
chemicals. Let’s not forget how this can really affect the folks who need it in that part of the
world.

59:41 MS. TVERBERG: Thank you.

59:42 MS. VAN RYAN: All right. We’ve been going for an hour. Do we have any
additional questions? If not, we’ll close off for the day. I will be sending materials to you and
links to you tomorrow. I think one thing I will add will be the Global Insights study.

01:00:02 MR. RANGER: You know, one thing that you might call their attention to,
too, Jane, is the video that we have on our site – the live video from different drilling operations
in Texas and Colorado.

01:00:20 MS. VAN RYAN: Indeed – we can do that.

01:00:22 MR. MILITO: And the link to “Energy in Depth” is very helpful. They have a
lot of materials there.

01:00:23 MS. VAN RYAN: Yes. In fact, that’s where we found the chart earlier today,
Erik. And “Energy in Depth,” in fact, could be a good resource for all of you. It’s an excellent
Web site. We’re not – it isn’t sponsored directly by API. It’s got some great materials on it,
however. So at any rate, thank you for joining us. I’ll be sending you more materials tomorrow.
And if you have any questions, send them to me by e-mail. I’ll be happy to help. Thanks,
everybody.

(END)

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