Oilfield minerals - a shifting landscape

By Emma Hughes, Nilima Choudhury
Published: Tuesday, 27 May 2014

North American demand for oilfield minerals has never been stronger, but now other countries, such as China, are looking to increase their production of oil and gas from shale reserves. As a result, the global proppant and drilling mud industries are seeing changes in traditional supply chain patterns, exacerbated by new regulations and changes to product requirements, Emma Hughes, Deputy Editor and Nilima Choudhury, Chief Reporter, discover.

The landscape for oilfield minerals, used in the extraction of hydrocarbons from underground wells, has shifted over the past five years as an increase in hydraulic fracturing (fracking) worldwide has driven up demand for frac sand, sintered bauxite and kaolin, the main components of oilfield proppants.

Proppants, which are used to literally prop open fractures blasted into shale rock formations, have as a result joined a family of other oilfield minerals, including bentonite and barite (barytes), which have for years been used in conventional drilling processes and are now seeing increased use in fracking.

With the exception of bauxite, which is largely converted to alumina for use in refractories, ceramics or abrasives, oilfield is the main end market for these minerals.

Driving demand is an increased focus on unconventional hydrocarbon recovery through fracking and horizontal drilling.

Unconventional resources extracted using these methods include shale gas, shale oil, tight gas, tight oil and coal bed methane.

According to a recent IM Research report entitled China’s Proppants Market, factors that have helped spur the development of these resources, particularly shale gas, include relatively low cost production, increasing world demand for energy and the emerging establishment of liquefied natural gas (LNG) as the fossil fuel of the future.

To date, the majority of large-scale shale oil and gas development has occurred in North America, in what has been described as a “shale gale” taking place across deposits such as the Bakken, Marcellus, Eagle Ford, Haynesville, Niobrara and Barnett formations, stretching from central Canada to southern Texas.

“US shale gas production has increased from <5bn cubic feet per day (bcf/d) in 2007 to >25 bcf/d since 2012,” IM Research’s China’s Proppants report outlines.

“Natural gas is expected to account for 30% of US energy consumption by fuel in 2040, of which almost 50% is projected to be supplied by shale gas,” the report adds.

Other countries with the potential to tap unconventional oil and gas resources include China, Australia, Mexico, the Middle East, South America, Europe and Russia. However, technical political, logistical and environmental challenges in these regions have hampered their development, compared to the rapid escalation of the industry in the US.



Proppants

As a result of its shale gale, the US’ requirement for frac sand, ceramic proppants and resin-coated versions of each has grown from around 5m tonnes in 2007 to 34.7m tonnes in 2013, according to the China’s Proppants market report.

In terms of market split, frac sand remains the most popular choice of proppant, owing to its low cost in comparison to ceramic proppants, as well as its widespread availability.

At present, frac sand takes up approximately 80-85% of the market share by volume, with ceramic proppants and resin-coated versions taking 10-15%. By value, however, ceramic proppants take a 50% share of the market.

According to figures from the US Geological Survey (USGS), global production of frac sand reached 141m tonnes in 2013, up from 139m tonnes in 2012. The US accounted for the lion’s share of this production, with 44 major companies producing around 50m tpa between them last year.



Frac sand specifications

Like some other oilfield minerals, the type of silica sand suitable for use as frac sand is specified by the American Petroleum Institute (API).

These specifications stipulate that the percentage of quartz (SiO2) must be 99% or more and crush resistance (hardness) must be high so that the sand can withstand compressive stresses of 4,000-6,000 psi.

The permissible amount of fines allowed to be generated as a result of compression under these stresses vary by weight (max. fines wt.%) and are limited to: 14% for 20-40 mesh; 14% for 16-30 mesh; 10% for 30-50 mesh; 6% for 40-70 mesh; and 20% for 6-12 mesh.

Acid solubility must be low and roundness and sphericity must meet API >0.6. Turbidity tests also measure the amount of light that can pass through a wetting fluid. The higher the measurement, the more suspended particles are present. Turbidity is measured in Formazin Turbidity Units (FTU) and the minimum threshold limit is <250 FTU. Producers will look for a lower turbidity rating as high turbidity readings can be an indication of poor proppant manufacturing, transportation, or handling practices, which can lead to interference with the fluid chemistry.



Frac sand concerns

While frac sand has remained the proppant of choice for most fracking operators in North America and further afield, concerns surrounding its possible environmental and health impacts have been raised.

North American proppants manufacturer Preferred Sands told IM that over the last five to 10 years, it has seen “a shift in industry practices towards the utilisation of more environmentally-friendly technologies and proppants.”

“With a heightened awareness of the environment within the industry, including proposed rules such as the OSHA [US Occupational Safety and Health Administration] rule that would reduce the permissible exposure limit (PEL) for respirable silica dust by half, Preferred Sands has seen an increase in customer requests for sustainable products,” a company spokesperson told IM.

Inhalation of respirable crystalline silica particles is dangerous, as it can lead to silicosis - an incurable lung disease caused by breathing in large amounts of silica dust over an extended period of time.

As awareness of the risk of contracting this disease has increased, national legislators and employers in various industries including construction and fracking have been looking for ways to minimise the exposure of their workers to harmful silica dust.

Currently, the US’ OSHA has two standards in place for regulating frac sand exposure, calculated using PEL equations originally adopted in 1971.

Based on these formulas, the PEL for general industry is approximately 100 micrograms per cubic metre (µg/m3), averaged over an eight-hour day. For construction work and shipyards, the PEL is roughly 250 µg/m3.

The new rule would dispense with the PEL equations and set a single PEL applicable to all industries of 50 µg/m3 of air, averaged over an eight-hour day. The new rule would cover all three forms of crystalline silica: quartz, cristobalite and tridymite.

The proposed rule also sets an “action level” of 25 µg/m3 of air. In workplaces where the action level is exceeded, employers would be required to monitor airborne exposure levels.

Given the extent of the proposed reduction in silica PELs, measures are swiftly being taken by companies to ensure compliance ahead of the rule’s introduction, including investing in new technology.

For example, Preferred Technology, an affiliate of Preferred Sands, launched DustPRO - a dust prevention proppant solution for the oilfield industry to help silica sand companies meet and exceed current and future silica dust exposure limits - in April this year.

Despite the introduction of new safety solutions ahead of OSHA amendments, the USGS has warned that the fracking industry should expect local shortages of industrial sand and gravel as a result of the new regulations.

In future, sand and gravel operations are likely to be located at greater distances from high-population centres in an effort to minimise the risks associated with silica sand exposure.



Ceramic proppants

Ceramic proppants are favoured for their suitability for deeper, high pressure wells. Most commonly comprised of sintered bauxite or kaolin - or blends of both - ceramic proppants have proven to be stronger, denser and more uniformly round than frac sand, making the proppant pack more conductive.

Ceramic proppants are graded according to bulk density, which is related to alumina content, which is generally proportional to the proppant’s crush resistance.

Unlike frac sand, which is mainly mined and consumed in the US, the majority of ceramic proppants are manufactured in China, which produces around 4.5m tpa, accounting for 66% of world capacity, according to IM Research.

In the US, until 2012 there were just two main ceramic proppants producers, Carbo Ceramics and Saint-Gobain, before French multinational, Imerys, joined the market, later acquiring PyraMax Ceramics. The US now accounts for 23% of the market with 1.49m tpa, Russia 7% (0.5m tpa) and Brazil 4% (0.3m tpa).

Barite

The word barite is derived from the Greek βαρύς, meaning heavy. Barite can be used in drilling mud to lubricate the drill bit, prevent blowouts of oil and collapse of the drilling-well wall, to carry drill cuttings from the well bottom to the surface or as a weighting agent in fracking operations, aiding proppant suspension.

The high atomic weight of barite (molecular weight = 233.39 gm) is attributed to the presence of barium in the compound. This gives barite an extremely high specific gravity and it is this that makes it a popular choice for use in oilfields.

Barite powder containing a minimum 90% barium sulphate with 4.15 specific gravity is recommended for drilling. For offshore drilling, the specific gravity should be 4.2. At least 97% of ground barite should pass through a 75-micron IS sieve and 95% through a 53-micron IS sieve.

These standards have been set by the API in response to dwindling reserves of high quality barite in the US.

Michael Miller, a geologist at the USGS, told IM that the specifications have been designed to increase production in the US and, had the API not made this change, the industry would have needed an investment of “something like $200m in exploration and development activities”.

The oilfield market accounts for 84% of global barite production, a figure that is expected to increase with the growing amount of fracking taking place in the US, Europe, China and other areas of the world.

In the drilling mud market, alternatives to barite include celestite, ilmenite, iron ore and synthetic hematite, manufactured in Germany. None of these substitutes, however, has had a major impact on the barite drilling mud industry, according to the USGS.



Fracking and the impact on barite

While barite has for years been a staple of the oil and gas extraction industry, a global increase in fracking operations could affect overall demand for this mineral.

Tom Eisenman, general manager at barite and calcium carbonate company, Superior Weighting, told IM that location, formation characteristics, depth and pressure all impact the amount of barite used.

He said that using fracking or horizontal drilling techniques means that wells are under higher amounts of pressure, with tight sands such as the Haynesville Shale in Northwest Louisiana and northeast Texas resulting in barite consumption going up.

As a well is drilled, the bit passes through various formations, each with different characteristics. The deeper the hole, the more barite is needed as a percentage of the total mud mix.

“Fracking, coupled with extended horizontal drilling techniques, has significantly increased the production zones, which normally also increases the barite consumption,” said Eisenman.

The USGS’ Miller told IM that while these alternative techniques might not have a great impact on the amount of barite used as a lubricant, the fact that fracking requires the mineral as a proppant suspension aid is also likely to have an effect on demand. Last year, almost 95% of the barite produced in the US in 2013 was sold for this purpose.

“The use of unconventional drilling [fracking] has certainly expanded the use of barite, but not because it requires more barite per well but because it has opened up more areas to exploration and the number of wells being drilled and the total metres drilled has increased,” he explained.

Conversely, others have suggested that an increase in unconventional drilling could actually reduce the amount of barite consumed in oilfields.

If the wells are shallow, with less pressure and more liquids, such as the Eagle Ford Shale in south Texas, the barite consumption goes down, even though the rig count may increase.

As an example, the Haynesville wells average about 1,500 tonnes barite per well, while the Eagle Ford wells only use 200-300 tonnes barite per well, explained James Vernon, director of supply chain of drilling and completion tools at oilfield services company, Baker Hughes.

Vernon also expects demand for high quality barite to decrease as shale plays do not require barite as heavy as conventional well bores, because the density is not as high when compared with conventional well bores, adding that the higher grade barite of 4.2 SG or above is “a little bit scarcer than it used to be.”

“There is not a lot of pressure on these [shale] formations, so you don’t need a large volume of barite to drill with,” he told IM.

Trade and production

Global demand for barite fell in 2013, according to the USGS, with the US importing 25% less than during 2012. This was a result of possible stockpiling in 2012.

In descending order of production, China, India, Morocco and the US were the leading producers of barite in 2012. These four countries accounted for 82% of estimated world barite production, Miller told IM.

According to figures from the USGS, in 2012, China exported 2.95m tonnes barite, a slight increase on 2011, while the US was by far the country’s leading trading partner, accounting for 64% of the total, with Saudi Arabia and Indonesia accounting for 10% and 5%, respectively.

Miller told IM that China’s barite exports have decreased in recent years as a result of falling mine output and increased domestic consumption, as a result of the country looking to diversify its energy supply from coal to less polluting shale gas.

He added that the US barite industry had become very dependent on China, as well as India, for its barite and failed to act on finding alternative supplies until prices had increased six-fold over the last six to eight years.

Eisenman, general manager at Superior Weighting, told IM that although US domestic production of barite is increasing, this is not enough to keep up with demand, therefore imports will still be the country’s main supply.

According to Eisenman, although China has been the dominant supplier to the US industry for the last three or four years, Morocco is becoming a stronger player, as are Mexico and India.

“If they [China] can roll back their prices back to where they were in 2007/8, they can probably cover part of the market,” he suggested.

“There’s nothing out there right now that [indicates] you’re going to see any radical change. If some of these [countries like China] go on a binge buying spree - that could affect [prices] - but I don’t think it’s going to be big swings - probably curve swings,” he said.

Eisenman added that although China is expected to increase its consumption of barite as a result of shale gas discoveries, it will have very little impact on prices, because the country will meet its demand internally.

“It has been too expensive to export because of where its [barite] located, therefore it probably wouldn’t impact the export barite market. But it’s really hard to get to that information - China’s not very good at exposing what their reserve picture is - either for minerals or natural gas,” he told IM.

In October last year, what could become the largest barite supplier in China was formed between Chinese barite miner Rocky Mountains and Hao Hua Chemical Group.

At present, Rocky Mountains controls the Tianyan barite deposit, covering an area of 0.128km2 with Hao Hua Chemical Group’s deposit covering an area of around 3km2.

The Tianyan deposit of Rocky Mountains currently produces 160,000 tpa while the Hao Hua Chemical Group’s deposit has not yet been mined.

The two mines will be merged under the joint venture (JV), called Tianzhu Chemical Mining Corp., and will cover a total area of 3.22km2.

Speaking to IM, the company’s chairman, Rocky Wu, said this JV would not only extend its mining licence for another 10 years but also produce over 1m tpa barite.

Wu said that consumption of barite will be picking up very quickly as a result of China making headway in tapping into its oil reserves.

He added that China is currently facing competition from India, because India can supply homogenous quality barite, including colour, SG and other chemistry combinations of barite, “but in the long run, China is going to be more competitive because of its huge reserves”.

He cautioned that the government could implement a ban on exports of the commodity in the future, as more plants are being constructed and more barite produced.

“Fees or tax are already being charged to suppliers/exporters of raw barite,” said Wu.

Bentonite: a boring mineral

Bentonite is a clay mineral, largely composed of montmorillonite, which is mainly a hydrous aluminium silicate.

In drilling, bentonite is usually mixed with a measured quantity of water to form drilling mud, which is then pumped into the bore hole during the drilling process.

The purpose of drilling mud is to remove cuttings, control subsurface pressure, suspend drilled cuttings, cool and lubricate tools, to build walls, to support drill strings and casings and control corrosion.

Bentonite clay is generally mixed in with additives such as barium sulfate (barite), calcium carbonate or hematite to form drilling mud.

Other than as an oilfield mineral, bentonite is also used in a variety of applications such as sand casting, iron ore pelletisation, insecticides, pet-litter, pharmaceuticals and cosmetics.

Production

Figures from the USGS put global production of bentonite at 10.3m tonnes in 2013.

During that year, the US was the top producer of the mineral with almost 5m tonnes, although this was less than in 2012, according to data from the USGS.

53% of current bentonite production goes towards absorbents and drilling mud.

Following the economic recession of 2008-9, which impacted many industrial minerals end markets, improving economies led to an increase in bentonite demand from countries such as Canada and Japan, to where 1.02m tonnes, valued at $176m, was exported from the US in 2011.

However, while US exports rose between 2009 and 2012, they fell by almost 9% in 2013.

The world’s second largest producer, Greece, increased production between 2012 and 2013 by 50% from 800,000 tonnes bentonite to 1.2m tonnes in 2013.

Despite these figures, Robert Virta, a geologist with the USGS, told IM that there have not been any major global changes in consumption of production of bentonite.

“In the US, sales for drilling mud increased from the early 1990s until 2010, where it has levelled off a bit. With the increasing global demand for gas and oil, however, sales of bentonite for drilling are not likely to decline for the near future,” Virta explained.

“On the one hand, you are extracting more gas and oil from a single drill hole but you are also drilling holes in locations where there was previously little or no production. It may take a couple of more years to determine any effects. It will also depend on whether or

not the public accepts fracking. While the energy industry likes it, much of the public does not and would like to see it banned,” Virta said.

In terms of supply, Virta told IM that he does not foresee see any issues arising anytime soon, regarding bentonite supply.

“Nor do I see any situation that could cause a sudden increase in pricing (...) I don’t believe that we will see the demise of the bentonite muds anytime soon,” he added.

However, others, including US-based Halliburton, one of the world’s largest oilfield services companies, told IM that the industry is moving away from bentonite as there are similar performing substitutes on the market.

“Halliburton has solutions that require low quantities of bentonite - some have no bentonite at all,” said Steve Gray, resource development at Halliburton, at IM’s 22nd Congress in Vancouver in April.

Leading producers in the bentonite field include AMCOL; India’s largest multi-mineral solutions provider, Ashapura Group; US-based companies Bentonite Performance Minerals, Black Hills Bentonite, S&B Industrial Minerals, Wyo-Ben; Swiss company Clariant, Schlumberger subsidiary, MI Swaco; and Chinese company Zhejiang Clay Chemicals Co.

Earlier this year, AMCOL was the target of a bidding war between speciality minerals and refractories company Minerals Technologies Inc. (MTI) and French industrial minerals multinational, Imerys.

After several months of counter bid after counter bid, US-based MTI finally won the battle and initiated the $1.7bn merger offering $45.75/share.

Increasing energy demand

As the global energy landscape changes, demand for oilfield minerals such as barite and bentonite, as well as minerals used in proppants, is expected to increase as in the majority of cases, there are no reasonable substitutes for these minerals.

In terms of world natural gas production, Linda Doman, senior international energy analyst at the US Energy Information Administration (EIA), told IM that this is likely to increase by 1.7% every year until 2040.

Unconventional gas on the other hand is expected to go up by almost 5% a year between 2010 and 2040, with the majority expected to come out of the US and Canada, she added.

As a result, most of the demand for oilfield minerals is likely to come from the US and North America.

However, another major growth market for unconventional oil and gas is China, said Doman.

China country holds the world’s largest reserves of shale gas and has set a national output target of 6.5bn cubic metres by 2015 and as much as 100bn cubic meters by 2020.

China Petroleum & Chemical Corp., Asia’s largest refiner, known as Sinopec, has recently marked shale gas development as its 2014 priority after doubling its output forecast from a key field in the Sichuan region in the southwest of the country.

“They have very ambitious production targets for the unconventional so it will be interesting to watch and see what they’re able to do but in terms of our outlook right now it’s the geography and water issues is keeping us a little less optimistic than they are,” Doman told IM.

Here, increased domestic consumption of the ceramic proppants the country manufactures is expected, while exports to the US reduce.

Other countries, such as Australia, Mexico, the Middle East, South America, Europe and Russia, are also expected to follow suit as the requirement to switch to more sustainable energy sources increases. However, before this happens technical, political, logistical and environmental challenges will need to be overcome.