Click Here to Add Date February 11, 2015

 Introduction  An Alternative Perspective of Compression  Recycling of Residue Gas  Relative Costs of Dehydration  Q&A 2

An Alternative Perspective of Compression 3

Transportation & Processing Compression BOOSTING COMPRESSI ON CRYO UNIT ARMS-LENGTH THIRD PARTY TRANSPORTATION 100 psig 400 psig 375 psig 750 psig PLANT INLET COMPRESSION RESIDUE COMPRESSOR 700 psig 900 psig 700 psig (Royalty Measurement CDP Point) COMPRESSOR TWO COMPRESSOR ONE 700 psig 7# H2O 2% CO2 300 psig COMPRESSOR FOUR 100 psig 600 psi processing 25 psi tran COMPRESSOR THREE 50 psi tran GAS PLANT PROCESSING GAS MAINLINE TRANSPORTATION FIELD GATHERING SYSTEM 4

Mainline Pressure Requirement Transport Losses Transport Losses Processing Losses Pipeline (Transportation) Plant (Processing) 5

ONRR Methodology:  Compression required to reach mainline pressure is not allowed.  Compression is allowed once mainline pressure is achieved.  Residue “Boosting” compression at plant is not allowed (per regulation). However, ONRR methodology:  Does not consider actual function of compression  Eliminates actual transportation and processing costs which are allowable deductions  Results in different outcomes based on location and arrangement of compressors and/or type of plant  Lessee bears costs for lessor’s value enhancement (i.e., lessee pays twice) 6

Mainline Pressure Requirement Transport Losses Transport Losses Not Allowed: Below Mainline Pressure Not Allowed: “Boosting” Pipeline (Transportation) Plant (Processing) Processing Losses 7 Allowable Compression Per ONRR Methodology

 Allocate compression to: – Meeting mainline pressure requirements – Transportation function – Processing function  Considers “function” of compression regardless of location within the system.  Recognizes the transportation and processing function of compression that exceed the services necessary to place the gas into marketable condition. 8

Pipeline (Transportation) Plant (Processing) Mainline Pressure Requirement Transport Losses Transport Losses Processing Losses Not Allowed: Below Mainline Pressure Allowed: Compression for Transportation & Processing 9 Allowable Compression – Functional Allocation

COMPRESSION Compressor Number Suction Pressure (psig) Discharge Pressure (psig) Pressure Difference (psi) One Two Three Four Total PER ONRR Allowable Calculation Allowed % Not MC0% (750 – 700) % Processing100% “Boosting”0% 225 FUNCTIONAL ALLOCATION Allowable Calculation Allowed % (400 – 300) (400 – 100) 33.33% (750 – 375) 100% Processing100% “Boosting”0% 675

 The ONRR has labeled residue gas recompression as “boosting,” which is not an allowable deduction per the regulations (CFR (b)).  Residue gas recompression is an integral part of many NGL extraction facilities, especially those that incorporate turbo- expand or J-T technology. – Without the recompressors, gas would not flow through the plant, a pressure drop across the expander would not be created, the gas would not refrigerate and NGLs would not condense from the gas stream  Residue gas recompression is used to restore energy lost from processing for NGL extraction.  To the extent that the inlet gas has already achieved marketable condition, residue gas recompression is a processing function. 11

 ONRR’s formula for compressors underestimates allowable percentage. ONRR Formula*: Compressor Two:(750 – 700) = 6.67% 750  Allowable percentage should be based on pressure differential. Compressor Two:(750 – 700) = 13.33% (750 – 375) 12 (Discharge Pressure of Unit – Marketable Condition Pressure) (Discharge Pressure of Unit)* % = * From ONRR “How to Calculate a Transportation UCA.” (Discharge Pressure of Unit – Marketable Condition Pressure) (Discharge Pressure of Unit – Suction Pressure of Unit) % =

13 PER ONRR FormulaPercentage Allowable (750 – 700) % Non- Allowable (700 – 375) % Total50% PRESSURE DIFFERENTIAL Allowable Calculation Percentage Allowable (750 – 700) (750 – 375) 13.33% Non- Allowable (700 – 375) (750 – 375) 86.67% Total100%  Results from a comparison of the two methodologies supports the approach of basing the allowable percentage on the pressure differential.

Questions? 14

Recycling of Residue Gas 15

 Federal regulation (CFR (b)): “A reasonable amount of residue gas shall be allowed royalty free for operation of the processing plant, but no allowance shall be made for boosting residue gas or other expenses incidental to marketing, except as provided in 30 CFR part 1206.”  A basic design characteristic of turbo-expander plants is the necessity to recompress the residue gas due to the substantial pressure drop incurred to achieve cryogenic temperatures.  Since its original development, various improvements to the design of turbo-expander plants have allowed increased recovery of NGLs. 16

 Relative Recovery Ethane Recovery *  Many design improvements utilize the recycling of residue gas back to the demethanizer. 17 * Derived from Figure in Section 16 “Hydrocarbon Recovery” of the Gas Processors Supplier Association Engineering Data Book, 12th Edition Maximum Ethane Recovery Conventional80% Residue Recycle95% Gas Subcooled Process93% Cold Residue Recycle98%

 Conventional turbo-expander flow diagram*: 18 * Figure from Section 16 “Hydrocarbon Recovery” of the Gas Processors Supplier Association Engineering Data Book, 12 th Edition (with PWM adjustments). Residue Compression

 Turbo-expander flow diagram with residue recycle*: 19 * Figure from Section 16 “Hydrocarbon Recovery” of the Gas Processors Supplier Association Engineering Data Book, 12 th Edition

 Amount of residue gas recycled back to the demethanizer can vary from 0% to greater than 25%.  The increase in total residue gas flow (net residue gas to pipeline plus recycle) requires additional residue gas recompression horsepower.  The incremental recompression horsepower should be allowable as a processing cost consistent with ONRR regulations. – i.e. For a gas plant where 25% of the total residue gas recompressor flow is recycled back to the demethanizer, 25% of residue gas recompression costs and fuel are directly associated with processing. 20

Questions? 21

Relative Costs of Dehydration 22

 There are two main technologies utilized to dehydrate natural gas: – Glycol absorption – Molecular sieve adsorption  Glycol absorption – Absorption of water from natural gas through contact with a glycol such as TEG (tri-ethylene glycol) – Practical for bulk water removal – Typically only effective to reduce the water content to about 4-5 lbs. of water / mmscf  Molecular sieve adsorption – Adsorption of water from natural gas through the use of a solid material such as molecular sieve. – Reduces the water content of natural gas to essentially zero (“bone dry”), which is a requirement for cryogenic processing. – Significantly more expensive than glycol absorption (up to 10x). 23

 A typical dehydration system for a turbo-expander or J-T plant might consist of glycol units (either in the field and/or at the plant) upstream of a molecular sieve system (typically at the plant).  The glycol units will typically achieve pipeline water content specification (i.e. 7 lbs./mmscf).  It is not uncommon for processors to forego glycol dehydration and utilize a mole sieve system only.  ONRR’s methodology allows the deduction of dehydration costs once the MCR has been met. 24

 The linear approach suggested by the ONRR tends to allow relatively small percentages of dehydration costs to be deducted.  ONRR’s methodology*:  Example: » 38 lbs. / mmscf inlet » 0 lbs. / mmscf outlet » 7 lbs. / mmscf pipeline specification Allowable Percentage: 25 (Marketable Condition Specification– Outlet Measurement) (Inlet Measurement)** % = (7 - 0) (38) = 18.0% Allowed * From ONRR “How to Calculate a Transportation UCA.” ** The denominator should be ‘(Inlet Measurement – Outlet Measurement)’ to properly allocate.

 The ONRR methodology is based on water content and is not consistent with the relative costs of the dehydration functions  Allowable percentages for dehydration costs should be based on the relative costs to achieve marketable condition and to facilitate cryogenic processing.  Allocating based on relative costs results in a more accurate functional allocation. 26

 Example: Glycol and Molecular Sieve units – 250 mmscfd – 38 lbs. / mmscf inlet – 0 lbs. / mmscf outlet – 7 lbs. / mmscf pipeline specification – Estimated capital cost of a glycol unit to reduce the water content from 38 lbs. / mmscf to 7 lbs. / mmscf: $2,500,000 – Estimated capital cost of a molecular sieve to reduce the water content from 7 lbs. / mmscf to 0 lbs. / mmscf: $10,000,000 – Allowable Percentage:$10,000,000 x 100% = 80.0% (based on relative costs) $12,500,000 – Allowable Percentage:(7 – 0) x 100% = 18.0% (based on ONRR methodology) 38 27

 For a system without upstream glycol units, the relative incremental cost to remove 3-10x as much water should be considered.  The cost of a molecular sieve system is significant, even if a glycol unit is installed upstream of the molecular sieve.  ONRR’s linear methodology is not reflective of dehydration costs associated with MCR and for processing; thus another methodology should be used. 28

 Example: Molecular Sieve Unit Only – 250 mmscfd – 38 lbs. / mmscf inlet – 0 lbs. / mmscf outlet – 7 lbs. / mmscf pipeline specification – Actual capital cost of a molecular sieve to reduce the water content from 38 lbs. / mmscf to 0 lbs. / mmscf: $11,300,000 – Estimated capital cost of a molecular sieve to reduce the water content from 7 lbs. / mmscf to 0 lbs. / mmscf: $10,000,000 – Allowable Percentage:$10,000,000 x 100% = 88.5% (based on relative costs) $11,300,000 – Allowable Percentage:(7 – 0) x 100% = 18.0% (based on ONRR methodology) 38 29

Questions? 30