2015 was a tough year for oilfield minerals as declining oil
prices forced exploration and production companies to rein in
spending and cut projects. Silica (frac) sand, barite
(barytes), bentonite, kaolin and bauxite associated with oil
and gas extraction all saw a consumption decline in oilfield
applications as a result of the depressed hydraulic fracturing
(fracking) market.
SUPPLY SECURITY
As oil and gas prices began to deteriorate in mid-2014 and
towards the end of the year, frac sand suppliers maintained
that prices and demand were unlikely to be hit in the short
term owing to the nature of long term silica sand
contracts.
However, by the start of 2015, rig counts had begun to show
a concerted decline while oil prices showed no sign of a
rebound. In the situation of oversupply, OPEC refused to cut
crude output to maintain prices, sending the US crude benchmark
West Texas Intermediate (WTI) plummeting to $48/barrel (bbl) in
mid-January, half of its value six months earlier. The result
was that demand for oilfield minerals began to contract
throughout the year.
Ceramic proppant suppliers were hardest hit as drilling
budget cuts meant operators were opting for cheaper proppants
such as frac sand, and bauxite and kaolin-based ceramic
proppant manufacturing facilities had to cut production or come
offline entirely throughout 2015 as the market environment
rendered them unprofitable. While frac sand’s
market share expanded, production capacity also came offline as
producers reported losses and the market shrank as a whole.
Barite is used as a weighting agent in drilling fluids to
prevent blow outs and downhole pressure in the extraction of
oil and gas. Supply constraints for higher specific gravity
(SG) barite as higher grades were depleted, disparity in prices
between grades and the decline in drilling activity all
resulted in more lower grade barite on the market.
As 4.2 barite supplies tightened and prices rose, consumers
began to question the need to use higher grades, with much of
the industry now using 4.1, and a small percentage of companies
using sub-4.1 grades. In the near future, barite supply for
oilfield applications is likely to come from a variety of
blended barite grades.
MARKET DEMAND
Since reaching its peak in 2014, proppant demand fell 40% by
mid-2015, with only 2.8m tonnes sand sold in June 2015 and
silica sand production running at just 50% of capacity, figures
which persisted throughout the remainder of the year while
competition in the industry got fiercer. While the overall
market size for proppants has contracted together with the
falling rig count, frac sand’s market share has
grown. An estimated 21% drop in frac sand consumption for 2015
was, in part, mitigated by a 15% increase in frac sand usage
per well, according to PacWest figures.
Proppant producers throughout the year also focused on
developing new technologies that encourage higher rates of oil
production in order to attract E&P firms looking to get
more for less from wells. However, the overwhelming trend of
producers shifting to frac sand from ceramic proppants has not
yet seen a reversal, despite optimism from some companies.
The revival of old wells – re-fracking, which uses
the same amount of proppant and weighting agent as new wells
– also offered some respite for oilfield minerals,
with oilfield services company Halliburton taking a particular
interest in the practice. The company estimates that there are
up to 5,000 wells with the potential for re-fracking in North
America, the choice to do so could be more beneficial for oil
and gas producers looking to cut less lucrative projects.
In barite, with 90% of all wells around the world requiring
a weighting agent, the mineral is still essential to the
market. Although both ilmenite and calcium carbonate have been
considered as alternatives to the mineral, hematite has priced
itself out of the market and there are currently no viable and
cheap alternatives to barite.
In the US, 4.1 SG barite is used for land based drilling
projects, though 4.2 is still used for offshore projects. In
2015 there were reports of 4.0 SG barite being used in some
areas, however. The Middle East was the only area throughout
the year to exclusively use 4.2 SG barite in its drilling,
however companies in the region may switch to lower grade
blends in order to cut costs, creating more demand for lower,
cheaper grades.
PRICE TRENDS
Although frac sand’s share of the proppants
market has grown over the last year, prices for both coarse and
fine grades of sand have fallen significantly,
Frac sand prices too have declined in step with the prices
of oil and gas. US selling prices for sand, which averaged
around $58-68/tonne in 2014, fell to $31-32/tonne by mid-2015,
with prices expected finish 2015 at levels 26% lower than the
previous year.
While barite prices proved reasonably resilient to the
decline in oil prices and corresponding drop in drilling
activity in the first half of the year, prices began to come
under pressure in the second half, with some customers pushing
for discounts as high as 20%.
MARKET OUTLOOK
The downturn in the oil and gas industry has been more
pronounced than expected, with many industry participants
saying a recovery is unlikely before 2017. Even with
re-fracking, additional well stages and new technology, real
demand growth for oilfield mineral supply is unlikely to occur
until oil prices recover.
OPEC meanwhile, has resisted capping its production output
in order to balance oil prices. Following OPEC’s
decision to forgo its formal production ceiling in December,
investors are predicting that the oil price will stay lower for
longer, with US crude futures for delivery nearly 10 years away
below $60/bbl. As a result, prices for North American shale oil
and gas producers are also likely to remain low.
The delay in publishing new regulations on lower permissible
crystalline silica exposure levels by the US Occupational
Safety and Health Administration (OSHA) may have cast doubt on
the measures coming into effect, but the final rule is likely
to be published in late 2016, as OSHA strives to push the
guidelines through before the end of the present government
administration. With many frac sand producers already running
at below 50% capacity utilisation, the new OSHA standards are
likely to put an added strain on producers.