Since the end of last year, improving rig counts,
particularly in North America, have prompted industrial mineral
suppliers to the oil and gas sector to cautiously suggest that
market recovery is imminent. Although the uptick in exploration
and production (E&P) activity since 2016 has so far not
translated into increases in profit across the board for
oilfield mineral producers, analysts anticipate that a year of
stable oil prices in 2017 could bolster industry margins.
The oil and gas sector consumes a range of industrial
minerals including barite (barytes), bentonite, calcium
carbonate, graphite, gilsonite and proppants made from kaolin,
bauxite and silica (frac) sand.
While rig counts have traditionally been a solid indicator
of mineral consumption by the sector, changes in technology
have changed the way oilfield minerals are used.
This is most clearly reflected in the use of proppants,
which have seen various sharp shifts in usage trends over
recent years. Frac sand production capacity was being pulled
offline as recently as last year in response to low demand and
prices, but market participants are now concerned about
potential shortages in the US.
North America
In March, consultancy firm Douglas Westwood (DW) revised up
its forecast for the oilfield equipment market to 2021,
following a recovery in US shale production. DW now predicts
expenditure of almost $385bn between 2017 and 2021, compared
with a previous estimate of $371bn between 2016 and 2020.
At the end of November 2016, the Organization of the
Petroleum Exporting Countries (OPEC) agreed to curb oil supply
for the first time in eight years, with plans to reduce output
to 32.5m barrels a day (bbl/day) compared with an average of
33.64m bbl/day in October. At the
time IM went to press in mid-May,
OPEC was considering extending its production cuts this year in
order to bolster oil prices in the wake of US
shale’s resurgence.
The cartel’s initial round of cuts drove oil
above $55/bbl at the start of 2017, prompting US producers to
ramp up drilling. The subsequent increase in the North American
rig count and a loss of nerve by oil traders saw prices plunge
back to around $45/bbl at the start of May.
But as OPEC grudgingly responded to the volatility by
admitting it may need to maintain production limits, US shale
producers’ resilience to lower prices means they
have little incentive to reduce supply.
Following OPEC’s November meeting, a number of
non-OPEC countries, including Russia, also agreed to cut
oil output for up to 12 months to help stabilise the
market.
|
Measuring up? Frac
sand producers report an uptick
in demand, while ceramic proppants lag. This is
part of a drill core of the Jordan
formation. |
Since November, the world rig count rose from 1,678 to a
high of 2,027, before settling at 1,917 in April. US rig count
increased from 580 in November to 853 in April –
almost double the 437 rigs active on the continent in April
2016.
The latest major downturn in the global oil market, which
began when oil prices collapsed from their $100/bbl highs in
mid-2014, left behind a more streamlined and technologically
advanced oilfield services sector, with new products and
techniques making it profitable to extract oil at $45/bbl.
Michael Lawson, vice president of investor relations at New
York-listed frac sand producer US Silica Holdings Inc., said
that better technology has enabled North American oil and gas
producers to be more flexible.
"I think Saudi Arabia may have done the US shale industry a
favour in November 2014, when they announced their shift from
trying to protect pricing to trying to protect market share,"
he told IM. "It forced a lot of folks to get
much leaner – to figure out how they could do more
with less."
According to Lawson, the recovery in North American oil and
gas activity is due to a combination of demand growth and
technology proven to lower costs.
"Some of those costs will come back but some [of the
reductions] are structural and will remain in place, keeping US
shale competitive in the global market," he said. "I think
today, a lot of people would say that the swing producer on the
world stage is US shale."
| Average proppant per foot
|
|
| Source: Energent
Group |
Trumped up
The election of Republican President Donald Trump in the US
in November 2016 was generally viewed as a positive development
for the country’s oil and gas sector.
For fracking, although individual states can regulate the
practice, Trump’s policies to cut red tape and
reduce US dependence on foreign energy sources have been
praised by the oil industry. The American Petroleum Institute
(API) said that Trump’s first 100 days in office
highlighted his commitment to an American energy
renaissance.
"We are heartened by the president’s emphasis
on right-sizing America’s energy policy to
encourage responsible domestic energy development that creates
well-paying American jobs and helps to lower costs for
consumers," the API said.
It also expressed its support for progress made on two major
domestic energy infrastructure projects, the Keystone XL
Pipeline and the Dakota Access Pipeline, and the removal of
regulations which it claimed hindered energy production without
benefiting the environment, economy or consumers.
According to US Silica’s Lawson, the Trump
administration’s attitude towards developing
domestic energy has been encouraging.
"There seems to be a positive attitude towards US energy
development and energy independence, and also economic
stimulation through energy and jobs that are created in that
space," he told IM.
|
A drill rig evaluates a frac sand
deposit. This image was taken at the height of the
so called "shale gale" in 2013 when frac sand producers
were springing up around the US.
|
Proppants: Quick turnaround
At the height of the fracking boom in North America, oil and
gas producers had the luxury of being able to experiment with
various proppant mixes to determine what kind of material was
most effective in terms of cost and production. High oil and
gas prices facilitated the use of expensive ceramic proppants,
commonly manufactured from a blend of kaolin and bauxite, which
yielded higher production at wells.
Once the oil price began to decline in June 2014, ceramic
proppant producers were the first to feel the pinch as E&P
firms looked to cut costs. While some are confident that a
rebound in oil and gas prices will rebuild demand for ceramic
proppants, others have suggested that the trend away from using
these products is non-reversible.
Michael O’Neill, CEO of
Pennsylvania-headquartered Preferred Sands, told IM that
ceramic proppants are likely to become extinct.
"Ceramic proppants are very expensive; they’re
something producers experimented with and believed they needed,
but they weren’t getting better production [from
them]," he said.
|
One of the largest issues during the
shale gale of 2013-14 was the lack of
available rail car space. Many operations overcame this
by investing in
their own infrastructure. When the market plummeted,
these rail cars and
trucks had to be put into storage, costing around $4-5m
per quarter. Now,
however, every car available is on the road and
logistical issues are once
again arising. |
There was more of a lag before frac sand producers began to
see their orders decline as a result of lower oil prices. Many
had long-term supply contracts in place by mid-2014, owing to
earlier concerns of a frac sand shortage caused by logistical
bottlenecks, meaning that buyers were obliged to continue
taking deliveries at set prices even as their earnings from oil
fell.
Over the two years that followed, however, much of North
America’s frac sand capacity was idled as demand
ebbed. In 2016, 10 frac sand producers accounted for over half
of global supply, but their production utilisation stood below
30% for most of the year.
North American onshore oil and gas activity fell by 30% in
2015 and dropped a further 20% the following year as the rig
count hit a low of 417 in mid-2016. Things began to improve by
the final quarter of the year, however, as oil prices recovered
to $50/bbl.
Having been one of the last segments to feel the effects of
the downturn, frac sand was also one of the first sectors to
spring back with the rebound in US fracking activity. New
techniques requiring more sand per well have even led some in
the industry to warn of a possible US frac sand shortage by the
third quarter of 2017.
Consultants at DW have noted the significance of multi-well
pad drilling in the Permian Basin, in the southeast of the US,
which has driven frac sand demand to new highs.
"In 2016, 42% of the wells completed in the Permian were
drilled on multi-well pads compared to only 22% of wells in
2015," a DW report outlined at the end of April.
"High-intensity completions (mega fracs) use increased
amounts of frac sand, fluid and chemicals to stimulate the near
wellbore rock, further contributing to a potential shortfall in
frac sand supply," the company added. DW cited figures from oil
and gas research firm Energent Group, showing that the majority
of new Delaware Basin completions use on average 1,900lbs
(861.8kg) of frac sand per lateral foot.
Longer laterals – drill holes that do not go
straight down into the ground – are also a major
demand driver for frac sand, with DW forecasting that the two
mile lateral will become increasingly common in 2017.
| Rig count |
|
| Source: Baker
Hughes |
Back in the black
Increasing demand and changing trends have yielded tangible
improvements in first quarter 2017 results for a number of frac
sand companies.
US Silica returned to profit during the period 2017 with net
income of $2.5m, up from a loss of $6.9m in the fourth quarter
of 2016 and a loss of $11m in the corresponding quarter last
year, while quarterly revenue increased 100% year-on-year
(y-o-y) to $244.8m.
Lawson told IM that the recovery in the
company’s financials was due to a rebound in
silica sand prices as well as volumes, a trend which is
expected to continue into 2018.
"We pushed pricing sequentially up about 20% on average at
the mine gate across all grades in the first quarter of 2017,"
he said. "We expect a further 15-20% increase in pricing in Q2
over Q1 based on the continued strong demand for our proppant
products, particularly the fine grades, [assuming oil prices
remain] north of $45-$50/bbl."
If Lawson’s predictions materialise, it
is likely that the company will sell out of proppant products
by the third quarter of this year, he said, adding that a US
frac sand shortage is a real possibility.
"Our customers want to sign multi-year supply agreements
– they really are concerned about shortages," Lawson
told IM. "We think the market’s going to be pretty
tight all the way through 2017 and probably through to 2018,
despite some newly announced capacity – ours included
– coming on to the market place."
Lawson quotes figures indicating that frac sand demand is
likely to reach 70-75m tonnes this year, around double the
volume consumed in 2016.
For 2018, forecasts range from 100-147m tonnes, based on
rising rig count and the trend towards using more proppant
per well, Lawson added.
New supply
US Silica is looking at a handful of brownfield expansions
to add around 4m tonnes frac sand to its existing 12m tonne
capacity, which accounts for around 20% of the North American
market. The company is also considering greenfield expansions
and possible mergers or acquisitions to add another 4-5m tonnes
to its supply capabilities.
Despite failing to turn a profit in the first three months
of this year, Texas-based proppants producer Hi-Crush Partners
LP did manage to narrow its loss to $6.8m in Q1, compared with
a loss of $8.1m the previous quarter and a loss of $52.5m for
Q1 2016.
Regardless of its strained financials, during the first
quarter of 2016 the company completed acquisitions of Permian
Basin Sand LLC, the Whitehall LLC frac sand processing facility
and the remaining 2% interest it did not own in Hi-Crush
Augusta LLC, consolidating a sizeable chunk of southeast US
frac sand capacity. It is also on track to finish a 3m tpa
expansion in the Permian Basin this year.
Additional proppant capacity also looks set to come from a
handful of new entrants to the market. Edmonton, Canada-based
Athabasca Minerals Inc., which currently operates the Susan
Lake Aggregate Operation, the largest open gravel pit in
Canada, is developing silica sand products for fracking and
plans to have sand available for sale in late 2017 or early
2018.
A spokesperson for the company told IM
that, currently, large amounts of frac sand used in western
Canada are imported from the US, including both Northern White
and brown sand.
"There are relatively few frac sand producers in western
Canada, and we believe that our project, with a large resource
and closer proximity to users compared to US players, and with
the US/Canadian dollar [exchange rate] making imports more
expensive, may be in a good position [to supply local fracking
operations]," the company said.
Changing customer demand
One of the biggest shifts among frac sand consumers has been
the move away from ceramic proppants and even premium
Northern White sand in favour of using more, less-costly
brown sand.
"We definitely see an increase in demand for brown sand, as
pressure pumpers find [they get] strong results from using a
lower tier sand," Athabasca told IM.
The company noted, however, that an increase in fracking
activity will likely lead to higher consumption of all kinds
of frac sand.
According to Preferred Sands’
O’Neill, frac sand users will from now on monitor
what they spend on sand.
"Producers found when they used [brown] sand, the difference
was so marginal that they weren’t getting
anything for the additional dollars they were spending [on
white sand]," O’Neill
told IM.
Lawson points to a shift towards buyers starting to favour
local in-basin sand, due to the reduced logistical costs
compared with transporting material over long distances.
However, some customers remain staunch advocates of Northern
White sand.
"It really depends on the energy company. If they are
interested in initial production rates and cash flows of their
wells, maybe they’ll use a cheaper product. But,
if they are more concerned about the life of their well and
enhancing their ultimate recovery, then they will probably
choose to use a higher quality sand proppant because they get
better conductivity from the well site," he
told IM.
US Silica has also seen a trend toward more direct purchases
of sand, with end customers choosing to self-source material
rather than buying from large oilfield services companies.
Logistics
Rising demand for proppants and moves by customers to buy
locally has once again thrown the industry’s
logistics into the spotlight.
The initial rapid rollout of fracking in North America in
2013-14 created a number of logistical bottlenecks for frac
sand supply. This led to the development of new logistics
networks and an increase in railcar capacity, much of which was
rendered idle following the oil price crash.
"We had to put railcars in storage during the downturn, and
that cost us around $4-5m per quarter," Lawson
told IM. "We’ve pulled every
car out of storage now and they’re all full of
sand going somewhere."
With the recovery in US shale activity, rail car availability
for frac sand supply is reported to be tightening again.
"There aren’t enough trucks, there
aren’t enough drivers and with more sand going
into wells, the proppant intensity aspect just exacerbates
the trucking issue," Lawson said.
According to Athabasca, those fracking firms who got stung
by logistical holdups during the last shale boom are more
likely to source locally this time around.
"The biggest challenge for all frac sand suppliers is
providing stable frac sand supply in a cost-effective
manner," Athabasca told IM. "This is
directly related to transportation costs – the
further you go, the more expensive it is – we view
our western Canadian frac sand as being easily accessible to
regional customers."
Drilling fluids
While the frac sand industry has been quick to respond to
the uptick in oil and gas drilling in the US, consumption of
drilling mud minerals such as barite and bentonite has been
slower to recover.
Around 90% of barite production in the US is consumed by the
oil and gas sector. According to the US Geological Survey
(USGS), around 316,000 tonnes barite were mined in the US in
2016, but with rig counts sinking to record lows in the middle
of last year, US sales of barite were estimated to have been
their weakest since the 1990s.
| Barite production 2015 vs 2016
|
|
| Source: USGS |
US barite producers Baker Hughes and Halliburton Inc.
announced net losses for the first quarter of 2017, although
both sounded optimistic about a recovery.
"Revenue for our upstream chemicals business, which
represents approximately one-quarter of our North America
revenue, grew in line with production volumes and is poised for
additional growth as production increases," Baker Hughes
said.
The company said that while the North American rig count has
rebounded, the industry is still working to absorb excess
service capacity.
China, the world’s largest producer of barite,
reported that exports of the mineral in the first three months
of 2017 fell 20.5% y-o-y to 307,076 tonnes – the
weakest quarter in four years, according to Chinese data.
For bentonite, around 31% of production in the US was
consumed in drilling mud applications in 2016. Exports of the
mineral fell by around 36% during the year, and while total US
clay sales increased slightly, bentonite sales shrank by 6%,
driven by the decline in oil and gas.
| Bentonite 2015 vs 2016
production |
|
| Source: USGS |
New York-headquartered Minerals Technologies Inc. (MTI),
which acquired bentonite producer AMCOL in 2014, reported a Q1
2017 increase in sales in its performance materials segment,
which supplies bentonite and synthetic materials for industrial
and consumer markets and for non-residential construction
applications. But sales to the oil and gas sector have
collapsed.
"The energy services business has been cut way back because
of the oil and gas decline. Bentonite is only a small
proportion of the business, and most of that goes into
metalcasting," an MTI spokesperson told
IM.
A delicate balance
The US Energy Information Agency (EIA) forecasts US oil
production will average 9.2m bbl/day in 2017 and 9.7m bbl/day
in 2018, up from 8.9m bbl/day in 2016.
While OPEC cut its production in an effort to support oil
prices, US producers have continued to ramp up and rig counts
in the US show no sign of abating.
At the time IM went to press, OPEC seemed
to be in favour of maintaining production curbs, but with
global oil output expected to increase this year and next, it
is far from certain that the price of oil will hold up enough
to support even the streamlined US fracking firms.
For oilfield minerals, this means a nervous waiting game but
also potentially continued innovation of the kind that has
seen frac sand companies bounce back from near-oblivion in a
persistently unpredictable energy sector.