Oilfield minerals: Year in Review 2015

By IM Staff
Published: Monday, 21 December 2015

A roundup of the year's main events in the global oilfield minerals industries.

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.