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
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
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.
The fall in the number of
drilling rigs in the US, especially horizontal rigs, appears to
be slowing. Source: Baker Hughes.
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
Frac sand is avoiding the
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
"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
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
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.
Breakdown of drill rig counts
worldwide, excluding the US and Canada. Source: Baker
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
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
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