OFM Houston 2015: Minerals hold up in slow oil and gas recovery

By Kasia Patel
Published: Friday, 26 June 2015

Predictions of a recovery point in the oil and gas markets vary between the end of 2015 and some point in 2016. So far, oilfield minerals have been relatively resilient. Although ceramic proppants have been the hardest hit, frac sand has gained market share due to its availability, price, and changing trends in fracking. Barite meanwhile remains essential as a weighting agent and prices are holding steady.

Pumping Jack Odessa Texas_mkw87 
Dark times: Pumping oil in Texas (source: Jack Odessa)

Attendees at the Oilfield Minerals Conference in Houston, US, this week disagreed on how long a recovery in the oil and gas sector might take. However, the general consensus was that demand for most minerals that supply the drilling industry was still surpassing expectations.

While Baker Hughes’ director of fluids supply chain and manufacturing, Jim Vernon, said that the continual loss of rig count indicates recovery will be slow, Halliburton’s technology manager, Neil Stegent noted that "things have stopped heading south".

Some mineral projects have been slowed or put on hold in response to falling rig counts, but owing to the growth in the market over the last few years, even if demand falls for drilling minerals, consumption is still at a historically high rate.

"The outlook for ceramic proppants is weak because of market conditions," said PropTester Inc.’s vice president of operations, Ian Renkes.

"However, even if ceramic proppants drop by 50%, it’s still a larger market than it was 10 years ago."

PropTester, an independent laboratory specialising in the research and testing of products used in hydraulic fracturing (fracking) and cement operations, has seen a number of trends in the industry since 2004.

Proppant production last 10 years_ PropTester via OFM Houston conference 
Proppant market at 135bn lbs (source: PropTester presentation at the Oilfield Minerals conference in Houston, Texas)

Among these are a general growth in the proppants market and an expansion in proppant supply. Silica (frac) sand production has shifted from a situation where four primary suppliers accounted for 85% of the market to a new, highly diversified upstream, with 64 frac sand suppliers in 2014, leaving the four majors with just 50% of the market.

Ceramic proppant supply, meanwhile, has grown from three primary producers in 2004 accounting for 95% of the market to over 40 US and international suppliers carving up the industry. Resin coated proppant production, which ten years ago was dominated by just two producers, has expanded to include 15 North American manufacturers.

Proppant pumped, meanwhile, increased more than 15-fold from 8bn lbs (3.62m tonnes) pumped to 135bn lbs (61.2m tonnes) pumped last year.

Shifting sands

According to Renkes, sand has grown its share of the proppant market, while ceramics have lost ground. Despite this, growth in the market as a whole means that total ceramics production and consumption has increased.

"Operators were switching to sand in the downturn because of its availability. The switch has been made from ceramics because of economics and subsequently the realisation that sand was performing in some wells better than anticipated," Renkes said.

The biggest growth has been in what he calls tier 2 – good, brady type – and tier 3 – marginal, fit for purpose – sands, as tier 1, which are premium Northern White sands, have largely been accounted for in the market.

He added that owing to a number of factors, there have been shifts in the grades and fineness of proppants used in the industry, with a large push to begin pumping finer grades as a result of changing well conditions and other market factors.

"10 years ago, 100 mesh wasn’t even used as a propping agent, but it’s become more common and this is, according to my theory anyway, because smaller grains get further into the fracture," Renkes said. "I think this trend will continue of using finer grades."

Sand grades have shifted from 20/40 as the primary sand grade to a mixture of 20/40, 30/50, 40/70 and 100 mesh, while ceramic proppant demand has shifted from just two products to multiple grades.

Changing techniques to push up sand demand

As oil prices began to fall unexpectedly from June 2014 falling from $120/barrel (bbl) to $70/bbl from June to December 2014, and then to $45-60/bbl in the first months of 2015, ceramic proppant suppliers began to feel the effects early in the year.

The world’s largest industrial minerals company, Imerys SA, announced in February that its Oilfield Solutions business was to close two of its proppants manufacturing plants in the US and reduce output at another after orders for its oilfield products were slashed in response to falling oil prices. In March, US-based proppants producer Carbo Ceramics said it would reduce its workforce and cut its quarterly dividend following "severe market deterioration".

US Silica Holdings, one of the US’s largest frac sand producers, recently told Jefferies Equities Research that it expects to see a 15% drop in sand demand during this year.

"However, changes in completion designs also mean that more sand is being used, there are more stages to fractures so sand demand is not exactly directly correlated to rig count one for one," Renkes noted.

On a comparative basis, Renkes said that 10 years ago, the majority of wells were vertical or unconventional wells using gel fluids with single to few stages, while the current trend of horizontal or unconventional wells with between 12 and 50 stages, using slickwater and hybrids, means that some proppant demand is likely to be offset.

While Halliburton’s Stegent said that forecasts from research firm PacWest for total proppant pumped and frac sand demand were positive for the near future, with increases for both expected at the start of 2016, he hailed refracturing old wells as an alternative source of revenue for both oilfield minerals suppliers and exploration and production companies.

"We can see re-fracks being the next upcoming thing to help us through this slump," he told delegates, adding that Halliburton estimates there are up to 5,000 wells with the potential for re-fracking in North America.

OFM Houston_Kasia Patel 
Despite the downturn, the mood was surprisingly upbeat at this years' Oilfield Minerals conference in Houston, Texas.
"Re-fracking has been shown to be lower risk, and existing examples have demonstrated a chance in the EUR and the decline curve. Costs of re-fracking could be around $2m compared with $8m for a new well," Stegent said.

Scope for new products

The development of non-standard proppants such as liquids and synthetics was also discussed briefly in Houston, as well as the potential for waterless (gel) fracking.

"In the downturn, companies have had time to step back and really focus on research and development (R&D) of new products," Renkes said, adding that operators and service companies have been looking into proppant and fluid interaction.

Research companies have also been examining the use of buoyant proppants or those with a specific gravity (SG) of 1.0.

Barite still essential 

Barite (barytes), of which 90% of production is used in weighting applications in oil and gas, has also remained relatively steady in terms of prices and demand, Baker Hughes' Vernon told delegates.

As with frac sand, analysis carried on barite prices over the last 13 years has shown that there is a disconnect in the correlation between barite value and the falling rig count, with prices resisting drops so far, although Vernon noted that customers were pushing for discounts as high as 20% in some cases. 

However, Vernon conceded that with 90% of all wells around the world requiring a weighting agent, barite is still essential to the market, and both demand and prices are likely to hold out.

Barite, used as a weighting agent in drilling fluids, provides a mud density of 22lb/gallon, which is a major factor in preventing blow outs and downhole pressure in the extraction of oil and gas.

Chinese proppants

Proppant producers in China were also feeling the strain of lower activity in oil and gas, ChangQing Proppant Corp.’s president, Viviana Trevino, said.

With proppants accounting for a large proportion of total expenditure in a typical frack job, Trevino said that end users were putting pressure on their suppliers to grant pricing discounts.

"Operators are asking for cuts and great reductions to their service companies, and service companies are then looking to suppliers – of course all of us need to reduce our costs and prices in this environment," said Trevino.

Challenges faced by the oil and gas industry in China echoed some of the problems that western producers were having with operators looking to optimise sustainable production, service companies seeking new technologies and logistics improvements, while suppliers were all focusing on the optimisation of the production process, aiming for "zero fail products".

 Energy consumption SOURCE DELOITTE via ChangQing OFM presentation 2015 Houston
Projected energy consumption. Source: Deloitte via ChangQing

According to Deloitte analysis, China became the world’s largest consumer of energy in 2010 and the country’s energy demand growth is estimated at around 4% compound annual growth rate (CAGR) out to 2020.

However, despite factors such as rapid economic growth, industrial structure upgrade, urbanisation and inefficient albeit improving energy use, China is facing a number of challenges unique to the country with the development of its shale resources, Trevino said.

She outlined that, in comparison with North America, shale is deeper while the terrain is more difficult in the country. Technology additionally needs to be imported at a higher cost while horizontal well drilling is associated with high risks, costing around Chinese renmimbi (Rmb) 20m ($3.2m*).

Trevino added that mineral licences and exploration rights are also monopolised, with a highly consolidated and less developed pipeline infrastructure.

Water shortages and the use and disposal of fracking fluid are also hindering fracking developments, and so the demand for oilfield minerals. 

*Conversion made June 2015

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