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Pace of US drill rig count decline softens

By James Sean Dickson
Published: Thursday, 11 June 2015

The worst of the effects of the oil prices on oil exploration and thus industrial mineral demand from drilling activity appears to have passed. With high-cost rigs now removed from the demand equation, the decline in the drill rig count has slowed, a rare positive development in a depressed oilfield minerals market.

The steep decline in the number of drilling rigs in the US appears to be moderating, according to the latest count compiled by oilfield services company Baker Hughes Inc.

Widely considered to be a metric for the health of the oil industry, the precipitous drop in the number of drilling rigs, observed since the beginning of 2015, is beginning to level off, suggesting that most high cost wells have been wiped out, leaving only more resilient borderline or profitable wells.

This could be of substantial importance to the extractors and suppliers of oilfield minerals like silica (frac) sand, kaolin, barite (barytes) and bentonite, among others, which are used in drilling muds or to prop open pathways in fractured shale formations.

A softening of the downward trend in rig numbers could indicate that the market is approaching its natural bottom, meaning that it is less likely that industrial mineral demand will suffer any more substantial negative demand influences in the medium term.

 US Rig Direction

The fall in the number of drilling rigs in the US, especially horizontal rigs, appears to be slowing. Source: Baker Hughes.

Rig Count Curve

In the graph to the right, it can be seen that the curve minimum, at which the rate of rate loss was highest, ran from approximately late January to early February 2015. Today, the rate of rig numbers decline has softened to the smallest loss figures since around late November to early December 2014, a development that may give comfort to oilfield minerals suppliers.

Frac sand is avoiding the worst

The majority of the decline in the US well count has been seen in horizontal rigs, which are mostly used in the hydraulic fracturing (fracking) industry.

Because fracking is an unconventional and less efficient method of oil extraction, it has been the first industry to feel the effects of the decline in oil prices as cost margins fall on high opex figures.

According to the US Department of Energy (DoE) Energy Information Administration (EIA), West Texas Intermediate crude oil futures stand at $61.43/barrel (bbl), down 41%, or $42.92/bbl year-on-year (y-o-y).

Oil prices have recovered since their 17 May low of $43.46/bbl, but only slightly, by 37% – to an average of around $59.37/bbl, in the last two weeks.

The frac sand industry has been insulated from the worst of the effects of the oil price decline because on a per-well basis, sand intensity is increasing.

Laird Tomalty, Victory Silica’s deputy project director told IM that sand intensity has increased by up to 80% in modern wells compared to the wells drilled in the earlier days of fracking at the Prospectors and Developers Association of Canada (PDAC) conference in Toronto, Canada in March this year.

But the industry has still suffered. Sources in North America recently told IM that falling prices in the spot market are driving down margins.

"Frac sand is particularly hard hit right now (…) a lot of current drilled wells are not being completed," one source said.

A second factor is the increasing prevalence of re-fracking, a process used to increase the returns on a pre-fracked well by revisiting the site to extract any remaining hydrocarbons.

Decline is worldwide, not just US-based

Rig Count Worldwide

Worldwide drill rig count. Source: Baker Hughes.

The picture of the decline in the number of drilling rigs is not just being painted in the US, with a similar picture being illustrated by a secular decline in rig figures woldwide.

According to The Economist, the recent uptick in oil prices is only attributable to short-term issues, including instability in the Middle East.

Demand in China, and in the US, where consumers are now driving longer distances owing to cheap prices, is up, and crude oil inventories are falling, albeit from extremely high levels.

Nevertheless, continued oversupply means that positive demand factors are unlikely to see the oil industry return to health in the short to medium term.

Saudi Arabia pumped out a record 10.3m bbl oil in April, according to The Economist, and some areas of the US are still producing more oil owing to operational efficiencies and innovative techniques.

Bentonite stands to ride out the effects of recent and forecast oil prices owing to the growing cat litter industry.

"On the bentonite end, oilfield usage is not the business driver it once was. Now it is cat litter," one source told IM recently.

The clay mineral has diverged from its fellow drilling mud additive, barite (barytes), which has suffered disproportionately because the vast majority – more than 90% — of its demand comes from the oil industry.

Drilling Rigs Worldwide Breakdown

Breakdown of drill rig counts worldwide, excluding the US and Canada. Source: Baker Hughes.

While the fall in the US numbers accounts for a substantial amount of the worldwide decline in drilling activity, Canada, Africa, the Asia Pacific region and Central and South America have seen similar falls in rig count figures.

Canada

Drill rig count in Canada. Source: Baker Hughes.

Canada also appears to have ended a long term trend of sudden spikes in winter drilling activity in 2015.

Spring tends to see drilling fall to a minimum, as meltwaters from the Canadian winter result in soft fields and, combined with the melting of ice roads, the logistics of drilling become much more difficult.

In the 2014-2015 winter, where ground is frozen, hard, and easy to work over, however, drilling activity never picked up, with operators choosing not to explore only a quarter after the oil price decline began, in the late summer of 2014.