Oilfield minerals: Drums in the deep

By Davide Ghilotti
Published: Monday, 18 July 2016

High volatility in energy prices shook commodity markets over the past year, with oil taking a dive headfirst to lows that had not been reached for over a decade. This had negative consequences for oilfield service operators as well as mineral suppliers, who saw demand and prices falling for proppants and barite, while bentonite was, to an extent, spared.

oil drums_sarah tz via flickr
Source: Ben Alexander


At the start of 2016, some timid indicators suggested that a degree of improvement in oil prices, however feeble, may be in the offing, although it is too early to guess how this may reflect on oilfield mineral businesses.

Since June 2014, Brent crude – the main international benchmark for oil commodities – lost over half of its value and hit price levels that had not been seen for some 15 years. The downtrend quickly infected mineral markets correlated with oil extraction activities. Sluggish demand and price pressures were seen in silica (frac) sand and ceramic proppants, as well as in barite, while bentonite was less affected.

In a pricing rollercoaster ride, Brent crude stalled at some $115/barrel (bbl), then fell to $50/bbl in January 2015, subsequently dropping further to below $30/bbl in January this year. In the first six months of 2016, the price has gradually edged up and remained stable for some weeks at around $50/bbl, prompting cautious hopes on the part of operators.

The index was abruptly hit by panic following the UK’s referendum, which resulted in a vote to leave the European Union (EU) – an outcome that sent shockwaves through the global stock markets and Brent dipped once again to below $50/bbl, closing at the time of writing at $47/bbl.

The oil price decline has been attributed to a number of factors that converged to limit demand while supply continued unabated. 

Large emerging markets such as China, which consumes a lot of oil, reduced demand as economic growth slowed. In parallel, other Asian countries began cutting energy subsidies, leading to higher fuel costs and decelerating consumption growth, as seen in India with the reduction of diesel subsidies.

In Europe, sluggish economic activity led to a slowdown in manufacturing and consumer purchasing power, once again reducing demand for oil.

Hydraulic fracturing (fracking) operations expanded in North America, taking hold between 2010 and 2014. This progressively curtailed US imports of crude from abroad, which shrank from some 9.4m barrels per day (bpd) in 2010, down to 4.7m bpd last year – a decline of 51%.

On the supply side, production from Libya – an important supplier to southern Europe – increased following a few years of disruptions during the Arab spring. 

More significantly, the Organization of the Petroleum Exporting Countries (OPEC), which represents the largest exporters of the commodity, did not act swiftly to counteract global oversupply and OPEC output remained unchanged at over 32m bpd. 

Brent crude oil price ($/barrel)

Brent crude price GRAPH.JPG (41.4 KB) 

Source: Investing.com 

Refusing to cut output as prices went through the floor was part of OPEC’s strategy to maintain market share in the face of an expanding US fracking industry. 

However, this price war was not without its victims among some of the more vulnerable OPEC members. In Venezuela for example, revenues from oil exports make up over 50% of the country’s GDP and the fall of crude prices liquefied its main source of income, triggering skyrocketing inflation.

The pattern of the global rig count – a regular census of the number of rigs active in producing countries, put together by oilfield service provider Baker Hughes Inc. – makes for disheartening viewing, particularly for operators left completely exposed to the oil price decline. 

It took a decade for the rig count to reach its 2014 peak – a steady climb that brought it from below 2,400 sites active in December 2004 to close to 3,600 sites 10 years later (+49%), with a significant slowdown only seen in 2009/10 at the height of the financial crisis. Nevertheless, in the course of the last year alone, the rig count slumped to 2,337 in December, lower than in both 2008 and 2004.

Oilfield service providers

Some of the casualties of the oil price decline were oilfield service providers, which offer services such as evaluation, drilling, construction, assembly and maintenance. With oil and gas commodities as their core – and sometimes only – revenue source, oilfield services firms could not escape the downturn.

"It’s been devastating," Brian Teutsch, product line manager at Baker Hughes, told IM.

This is not an overstatement. The North American oilfield services provider closed 2015 with a $2bn net loss, compared with a net income of $1.7bn the year before. US-based Halliburton Corp., one of the world’s largest oilfield service providers, meanwhile reported a deepening of its net loss to $2.42bn in the first quarter of 2016, compared with a loss of $641m for the same period the previous year, as a result of prolonged negative market conditions.

Teutsch told IM that oilfield service companies were forced to kick-start "a process to reevaluate the status quo", shrink in size where possible, innovate and generally lose weight. This translated into high profile lay-offs, cost-cutting programmes and capacity scale-downs.

Drilling activity – and demand for its associated services – was impacted right away, as investments were cancelled overnight for work that had yet to start or was in progress. 

Production took longer to feel the impact of lower prices, and was less affected overall. As funding dried up for new projects, operators tried to maximise output from the fewer rigs that remained in operation.

To counteract the weak market conditions, Halliburton and Baker Hughes entered into merger discussions in November 2014, however the deal was scrapped earlier this year as the two parties failed to secure approval from antitrust regulators.

Proppants: frac sand and ceramic 

Used in fracking operations, proppants are injected with fracking fluid down horizontal wells and prop open fissures created during the fracturing of the rock, allowing for shale oil or gas to be extracted.

Frac sand Fairmount Santrol 
Frac sand (above) is a more affordable proppant choice than ceramic proppants (Source: Fairmount Santrol)
Frac sand, resin-coated sands and ceramic proppants are the three main types of proppant on the market and have witnessed a rapid increase in demand leading up to 2014, as fracking took hold. This was particularly accentuated in North America, which decisively embraced fracking as other regions, like Europe, resisted the practice.


In terms of cost, frac sand is the most affordable proppant available. Ceramic proppants, which are made from bauxite, kaolin or a blend of both, command a premium price. However, as exploration and production (E&P) companies became more confident in their approach and drilled deeper wells, ceramic proppant market share began to grow.

The situation changed as oil prices headed down and the economic viability of shale production decreased.

Ceramic proppants lost the market share they had previously gained, as users switched back to cheaper frac sand. For this reason and due the long-term nature of frac sand supply contracts at the time, producers of frac sand continued to post profits despite the decline in activity. While ceramic proppants were hit instantly, the negative effect on frac sand
was delayed.

Imerys Refractory Minerals’ energy solutions and specialities division saw a €11.7m ($13m*) decrease in sales in Q1 2016, down 3.7% y-o-y, as a result of weakness in ceramic proppants and steel. 

Asked by IM at the time whether the company expects a further slowdown in proppants sales, CEO Gilles Michel said: "The market remains flat, so we’ve adjusted our industrial tools and paired down our structures and our costs [moving sales and marketing resources away from proppants]."

"The knock-on effect of [the] sharp decline [in proppants sales] last year was €24m, and this year will not exceed that number. We’re ready for it," he added.

Ceramic proppants producer Carbo Ceramics Inc. worked to realign its business in 2015 with muted market demand for its products, but sales remained depressed. Carbo first reduced its workforce in March last year and by September 2015 has started to idle capacity. 2016 is expected to see spend on capex at levels six times lower.  

Raw and coated frac sand supplier Fairmount Santrol Holdings Inc. reported a Q1 net loss of $11.78m, down from net income of $30.76m for the same period the previous year, as revenues almost halved. Despite a focus on cost cutting – its latest staff reduction of 10% last May meant staff had been reduced by 40% since 2015 – average proppant prices fell 5% sequentially in the last quarter of 2015. 

According to Houston-based Hi-Crush Partners LP, its average frac sand sale price in Q4 2015 had fallen to $52/tonne, down from $57/tonne in Q3 and $67/tonne in Q2 – a drop of 22%.

Canada also saw a decline from around 7.4m tonnes traded in 2014, frac sand volumes dropped 23% to 5.7m tonnes in 2015. This year, demand is expected to pick up marginally, possibly to 6.4m tonnes, according to IM sources, although this is far from certain.

Opportunities in the decline

As with every crisis, windows of opportunities are arising in the frac sand market, despite the present concerns.

Untimely as it may sound, Canada-based Brilliant Sands Inc. is gearing up to establish a frac sand operation, sourcing locally and serving the domestic market.

The idea is being well received by market participants, Brilliant Sands’ president and CEO, Mark Andrews, told IM: "We are receiving a large amount of interest and enquiries."

Brilliant Sands is aiming to position itself as an alternative supplier of frac sand for Canadian companies, hoping to tap into the customer base so far covered by Wisconsin-produced sand, which supplies practically the entire market.

Andrews said his product would compete with Wisconsin’s, as production would be closer to the Canadian end users, thus reducing freight costs – which make up a significant part of the final sale price – and as customers would buy in their own currency, rather than using Canadian dollars to buy US dollar-priced product.

"There is a huge market also in North Dakota [that we could reach], which is closer to us than to the US producers," he added.

Admittedly, it has become harder to secure financing for the project, due to the tough conditions in the sector, Andrews said. On the other hand, he added that, paradoxically it is the tight scenario in the industry that is driving interest in Brilliant Sands’ business idea: "Companies are tightening their belts, trying to cut costs and are paying much more attention towards being efficient."

While the market was booming, operators were willing to accept offered prices without question, Andrews said. Now companies are paying attention to smaller details.

In shallow wells, operators have started experimenting with Tier 2 sand, which is cheaper and more readily available, whereas Tier 1 sand was previously employed for all types of wells.

Another notable trend is the volume of sand used per well. While the number of wells in operation has dwindled with market activity, the volume of sand used in operating wells has increased. According to mining consultant Roskill, proppant consumption rose from 5m lb/well (2,268 tonnes/well) in 2010-12 to 16m lb/well (7,258 tonnes/well) currently.

The practice of re-fracking (fracking existing wells to extract any leftover resources) is also gathering traction as a valuable method to keep going through hard times. This is something that majors like Halliburton and Baker Hughes are looking into.

The bottom line is that cost-performance ratios are being stretched to the limit.

"The longer [the market] stays this way, people will continue to pursue efficiency," Andrews said.

Barite

Aside from its application as a filler in paper and rubber making, and in x-ray technology, barite is used in oilfield applications as a component of drilling muds. In the US, up to 97% of the mineral ends up in oil fields, used as a weighing agent in drilling fluids, to cool the drill bit, carry rock cuttings upwards and help to prevent blow-backs. 

Since oil and gas is by far the core end use for barite, its market is strictly related to the performance of fossil fuel commodities.

Global trade of the commodity peaked in 2014, when 6.79m tonnes barite were exported globally, generating revenues of $977.3m.

Customs data for the same year shows the uptrend in trade coinciding with a peak in global rig count, which hit 3,578 on the back of strong investment in fracking operations in the US and elsewhere.

Throughout 2014, Brent crude oil topped $116/bbl and stayed over $80/bbl until November. 

Barite exports plateaued in 2014, but in the course of a single year, deliveries slumped back down by 29% to 4.85m tonnes in 2015. In value terms, 2015 global trade generated some $250m less – a drop of 25%.

By July/August 2015, oil prices plunged and the rig count was in freefall. The correlation with barite export trends is evident.

Global barite exports volume and value

Barite exports GRAPH.JPG (41.3 KB)  

Source: Customs/ITC 

The behaviour of individual barite producing origins was nevertheless different. China was, and still is, the largest unrivalled producer, dwarfing second-largest exporter Morocco and other origins such as India, Mexico, Turkey and the US.

Chinese foreign deliveries of barite have been subjected to high volatility in recent years, following closely global macroeconomic events. With the financial shock of 2008, Chinese exports halved, from close to 4m tpa to 1.8m tpa. These gradually recovered in the years leading up to 2012, once again narrowing 3m tpa. In the last three years, more downward volatility was seen on the Chinese export market, which had lost another 1m tonnes by the end of 2015.

Part of the gap left by declining volumes out of China was filled by other producers, although China still churns out as much as three times more barite than India.

Between 2010 and 2014, India tripled its barite exports hitting 1.45m tonnes, but the increase was short-lived: in the two years to 2015, exports lost pretty much all they had previously gained.

In contrast with the sharp downturn in India, Morocco saw its exports climb in 2013-14 almost in parallel as India’s fell. As of December last year, Morocco had settled at below 800,000 tonnes exported. The country was also affected by the general downturn of the past year.

Movement in Mexico, Turkey and the US has been more moderate, although the three producers did see an increase in volumes exported, more specifically in the run-up to 2014. As for the other origins, the slump in oil and gas of 2015 nullified any growth that had taken place with these exporters.

In terms of prices, the last 18 months saw barite quotes declining steadily worldwide as drilling activity slowed. More recently, IM sources said prices may have bottomed out, and may be looking at a gradual recovery next year.

Drilling grade barite FOB Morocco (ground, SG 4.22, bagged) at the end of June stood at $100-$150/tonne according to the IM Pricing Database, while drilling grade product FOB Chennai (unground lump, SG 4.2) was priced at $125-$135/tonne.

Bentonite

With uses as diverse as metal casting, oil well drilling, iron ore pelletising (IOP), paper, ceramics, detergents and cat litter, it is hard to single out patterns in the share of bentonite used solely in oilfield applications.

In 2015, global bentonite production was estimated by the USGS at some 16m tonnes. Metal casting and IOP account for 50% of global consumption; a further 15% goes into cat litter, and civil engineering takes another 10%. Drilling mud accounts for some 10% of total output.

As regards market share, about one-third of production originates in the US, followed by China with 20% and India with 10%. Additional notable output comes from Greece, Mexico, Brazil, Russia, Iran, Japan and Germany, plus a myriad of minor producers.

When it comes to exports, on the other hand, it is India and the US that shape the world market.

Global exports of bentonite climbed over the last few years. Between 2005-15, global trade rose by 1.5m tonnes in volume, to last year’s 4.6m tonnes exported throughout world markets.

Bentonite exports volume and value 

Bentonite.JPG (44.3 KB)  

Source: Customs/ITC 

Growth in exports of the mineral was driven by higher demand in oil drilling, together with increased consumption in foundry and IOP applications. 

Due to its variety of end market uses, bentonite was able to buck the downtrend evident in other oilfield minerals, where performance is more strictly tied to fossil fuel prices.

Over the last five years, bentonite trade peaked twice in volume, to 4.8m tonnes in 2013 and again last year. In value terms it performed well, staying firmly over the $600m mark every year since 2011. The sharp decline that affected barite in 2014-15 was notably absent in bentonite. Export values decreased marginally, although this was due to a contraction in prices, specifically, rather than a drop in demand (volumes traded actually increased).

In a matter of years, India went from being a medium-sized supplier to the largest exporter of bentonite. From a yearly output of some 400,000 tpa (2009), Indian exports rose by 250% to 1.4m tonnes by 2015. The growth rate was rapid and continuous, with only a slight dip in 2014. India has taken today the share of the market that was previously held by the US – which was the unrivalled global supplier until the mid-2000s.

US exports followed a different trend, peaking in 2007 at 1.4m tonnes, which gave way to a subsequent decline in the coming years. Between 2010-15, deliveries from the country were characterised by a degree of volatility, although trade rebounded in 2015 after two slow years.

Output from Turkey and China, respectively the third and fourth-largest exporters of bentonite, remained overall more stable compared with the two other origins. While Turkish exports gradually increased in the past decade to just over 410,000 tonnes last year, Chinese shipments had a bumpier ride and settled at 200,000-220,000 tpa in 2015.

Industrial-grade bentonite prices range from as low as approximately $30/tonne for cat litter to $220/tonne for foundry-grade, according to IM data, while other specialised grades command higher prices.

During the closing months of 2015, bentonite prices for drilling, cat litter and foundry grades remained stable on the US market, sources told IM at the time.

Selling rates generally held up over the course of 2015, staving off market weakness led by the oil price decline. Cat litter bentonite (ex-works Wyoming) was offered at $47-58/s.ton ($52-64/tonne at the then conversion rate) and prices for drilling (API) grade bentonite (bagged, rail car, ex-works Wyoming) stood at $86-125/s.ton ($95-137.5/tonne) by the end of last year.

Stabilisation on the way?

Industry operators remain cautious about the significance of the recent uptick in oil prices on the long-term, and activity in the oil and gas sector is unlikely to strengthen until a sustained price increase materialises.

Most sources canvassed by IM suggested that the strengthening of crude indexes is having more of a psychological effect on the sector, giving the impression of a gradual stabilisation of the market, rather than a tangible one with actual improvement taking place on the ground.

"There has been some improvement in world pricing, but not an increase in activity," pointed out one source. "To see some real market uptake we’ll need to have crude stable at over $55/barrel."

"This is not a magic moment," another contact added. "This is a psychological increase more than a fundamental one. It would give the market some confidence [to edge up further]."

Although the market remains volatile, both sources agreed that further oil price strengthening may be on the way between now and the end of the year, gathering more force into 2017, when activity on the ground would follow.

Operators expect oil exporting countries in the Middle East to be the first to experience a more solid recovery, due to their lower production cost profile. This would then give way to progressive improvement in activity in other areas, notably north America.

In a recent interview with the Houston Chronicle, Khalid al-Falih, Saudi Arabia’s new energy minister, said "the oversupply has disappeared" from the oil market.

Baker Hughes’ Brian Teutsch is also cautiously positive towards the rig count: "The bleeding has almost stopped. Hopefully we’ll start seeing some plus signs there."

At the Proppants Investment Forum held in London in April this year, delegates stated that oil prices have to be over $60/barrel to justify the economic viability of shale production. 

While crude markets have mainly been on the up since the start of the year, there is still quite a way to go before reaching – and, more importantly, maintaining – the $60+ level.

Most industry sources speaking to IM believe the worst might be over for oilfield mineral producers, and that the future holds gradual improvements. This may well be the case, but the road to recovery is likely to be slower and more arduous than initially anticipated. 

*Conversion made June 2016