Would need to scare additional production space and materials.

In order to do
that, we need their financial help to get started on production inmediately. Our
current system, operating at mximum capacity, would only generate 10,000
gallons of our fracturing fluid additives per month; we need to build capacity
for 10 times that! But because of our small size and stringent credit rules, we
could not obtain the necessary $200000 to invest in early expansin. I said, If
we dont get a financial commitment from you by january 1, we cannot
guarantee delivery by august. the room was silent, and I continued, we need
a mnimum of six months to expand our facilities and produce at mximum
capacity. That timing is simply not negotiable. Weve been through this many
times already with your chemical engineers. The ultimate Price you will pay for
our product will be somewhere between $2 and $4 per gallon.
Sharp and Francis were saked to waitoutside the room, two hours later they
were called back inside. BGN produced a letter-of-intent stating they would
accept responsability for all non-recoverable expansin-related expenses up to
$100000 through March 1. Said Sharp:
We left BNG empowered, amd Little surprised. Now, we had to get to work.
After calling Sam Dudleey to share the good news, Mike and I traveled directly
to AOG to delivery the same pitch. We now knew that, because of the strategic
interest, we simply had to threaten inability to deliver our product to generate
action and financial commitment. We left AOG with a similar agreement in
hand.
Until this point, Dudley had stayed out of negotiations. But once SafeBlend had
firm contractual and financial commitments from both companies, Dudley
joined Sharp in negotiating the terms of the supply contracts, specifically, the
Price per gallon. Said Dudley:
I decided to take a hard-charging approach with BNG. I met with the VP of
strategic relations at BNG and told him that there were two things we must
have in order to do business with them: (1) BNG would have to purchase the
equipment required to expand its manufacturing and give us 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 amount of time.
BNGs sourcing negotiator was shocked, recalled Dudley:
BNG was not happy with me, and the conversation was heated. He said, Is this
a negotiaton? Because this conversation seems very onde sided to me. He
pointed his finger at me. you Young people are always thinking about the short
term. You avoid compromiso even when its for the good of the relationship.
Thats NOT how we do business here in Texas. We left meeting deflated. Part
of me thought the relationship was over.
A few days later, Dudley received a call from BNG. After a detailed analysis of
the risks, costs, and benefits of outsourcing to SafBlend, BNGs strategy team
decided to absorb SafeBlends start-up costs, up to $1 million. AOG agreed to
absorb startup costs up to $ 750000. With funds now readily available,

SafeBlend secured the space and machiney required to increase production

capability.

2010 PRICING NEGOTIATIONS

As SafeBlend embarked on pricing negotiations, Dudley believed his chief
responsability was to convince BNG and AOG that SafeBlends product was
unique and that no other Company could produce it in a timely fashion without
sacrificing quality or environmental effectiveness. Dudley also stressed how
SafeBlends product could help BNG and AOG address the pending regulatory
disclosure requirements currently being debated in congress.

AOGs chemical engineering department, 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
SafeBlends own Premium gelling component (whit came from more expensive
sources). AOGs components performance was just fractionally less effective
(statistically, performance was the same of the SafeBlend component), so
SafeBlend agreed to purchase it for significantly less tan the cost of the gelling
agent used in the formula for BNG. The costs to produce the AOG product
would drop as a result.
The pricing negotiations involved three parties at each Company:
1. Sourcing agents: negotiated directly with Dudley using, as a basis for
negotiation, standard rates of production, estimated general and
administrative expenses, and estimated profit margins. They also relied
on intelligence from their chemical engineers.
2. BNG / AOG chemical engineers: worked with Dudley and SafeBlend to
place a value on proprietary chemical processes, which included
ingredients, equipment, labor and innovation.
3. Strategic relations: Dudleys primary contact at each Company was its
VP of strategy. The VP considered the longer-term strategy benefits of a
relationship with SafeBlend.
Dudley and the SafeBlend chemical engineers worked directly with sourcing
managers at each Company. The sourcing managers assessed costs base don
current market rates for ingredients and processes, and then assigned a value
to the final product.
Said Dudley:
BNGs purchasing department had a formula through which they passed each
component to arrive at a cost; once they had determined the costs, they
depressed that figure so there was room to negotiate upward.
In early February 2010, Dudley obtained, through normal email correspondence
with a BNG chemical engineer, BNGs costing formula. Dudley now knew the
formula by which BNG estimated aceptable cost levels for each component of
SafeBlends fracturing fluid additive. In response, Dudley created his own cost
model; this new model used the BNG cost formula as a basis for calculation,

instead of SafeBlends actual cost of materials, expenses, and labor. Described

Dudley:
Once the BNG cost formula fell into my hands - in an ethical manner, I might
add I framed our costs to match their estimates. In some cases BNG cost
estimates were too low, but other times BNG estimated our costs to be much
higher tan they actually were. It just so happened that the costs for the highvolume ingredients and processes were overestimated by BNG. Once I tweaked
our cost structure to reflect the BNG estimates, I knew we were going to make
a lot of money: some of the BNG costs, like specialty labor, were
underrestimated; but since they were relatively low-volume contributors, we
more than made up for the los son those elements with profits from the highvolumen elements.
When the contracts were signed at the end of February 2010 for the 3Q and
4Q, 2010 year, the prices agreed to for both companies were as follows: