A weighty issue Indian barite exports win out in sluggish market

By William Clarke
Published: Monday, 08 July 2019

Markets for oilfield minerals have had a slow start to the year while global drilling activity remains limited and oil markets repeatedly fail to break new highs.

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iStock 

Oilfield minerals, the clays and proppants used in drilling and extracting oil, are a crucial part of the petrochemical industry. Barite and bentonite are used in drilling fluids, while silica sand is crucial in the fast-growing fracking industry. 

The key proxy for oilfield minerals demand is the number of active drilling rigs worldwide. More active drilling rigs means more mud going down-well, and greater demand for minerals. But as far oilfield mineral markets are concerned, not all wells are created equal. There are far fewer offshore drilling rigs active world-wide, but they are the key driver of demand for high-grade barite.

Onshore oilrig activity in the United States has been highly volatile in recent years. Drilling in the US fell sharply in 2015 after oil prices slumped and the fracking industry ground to a halt. But that changed in 2016, when the oil price stabilized. 

Baker Hughes Rig Count 
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Source: Baker Hughes 

Bentonite, rail hopper cars, crude, bulk (all grades), ex-works Wyoming,
USA, $/s.ton 
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Source: Fastmarkets IM

Since then the number of onshore drilling rigs in the US has trended upward. This trend was supported by the falling cost of drilling and fracking wells in the Permian Basin, in southwestern US. Only in 2019 did the rate of drilling in the US fall, as costs for frackers rose and the local oil price fell. 

But away from the US onshore market, the picture has been one of decline, and then stabilization, with very little movement in drilling rates around the world. This stagnation, particularly in the offshore market, has limited demand for oilfield minerals. 

The primary driver in drilling rates is the oil price. Higher prices push more potential projects into profitability, encouraging more drilling activity. Oil prices have stabilized compared with the lows of 2015 and 2016.

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Barite crystals
MI SWACO 

Brent crude front-month oil futures rose steadily from around $68 a barrel at the start of 2018, to nearly $85 a barrel at the start of October, their highest in nine years. 

Prices were driven by cooling relations between Iran and US, with the return of sanctions expected to restrict the flow of oil out of Iran, and a strengthening world economy.

But the bubble burst in October 2018, with the trajectory of prices moving downward. Pressure came from efforts by the European Union to circumvent sanctions on Tehran, as well as a softening of the US resistance to foreign purchases of Iranian oil. 

At the same time, US oil production continued to grow, driven by the fracking boom in the state of Texas and elsewhere. 

All of this came as global growth fears and falling stock markets threatened the bullish consensus on commodities. 

Brent crude futures tumbled some 38% over the last three months of 2018, to just over $50 a barrel in late December. 

But in the Permian Basin in West Texas, the fastest growing oil region and the center of the US hydraulic fracturing industry, the decline was even sharper. 

Oil prices were not just being hit by weak demand at the end of pipelines, but squeezed capacity at the wellhead.

The rapid growth in Permian production had filled up pipelines out of West Texas, meaning that producers were forced to ship out excess crude oil by road and rail. This regional glut pushed prices there below $40 a barrel by the end of 2019. 

Oil prices recovered over 2019, but are still trading just over $60 a barrel. This makes a stark contrast to the period between 2010 and 2015, when the oil price repeatedly pushed over $100 a barrel, with Brent crude peaking above $120 a barrel in 2012.

Bentonite

Oilfield minerals are used in drilling mud, which is poured into wells as they are being drilled. This mud serves a number of purposes. It lubricates and cools the drill bit, which is crucial to prevent the mechanism overheating. It also carries away cuttings. As the rock is broken away by the drill bit, the mud sinks down into the gap created, carrying away the fragments of rock.

And crucially, drilling mud maintains formation pressure. If this pressure is not managed then hydrocarbons can be pushed back up the well. This type of accident, called a blowout, is enormously costly and environmentally destructive. 

There are two widely used minerals in drilling mud. Bentonite, which is a lubricant, and barite, which is a weighting agent. 

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China is the largest producer of barite, mining 3.2 million
tonnes out of 9.5 million tonnes globally.
MI SWACO 

Bentonite is a so called "swelling clay". It has a number of unique properties which make it suitable for drilling. It is a shear-thinning material, which means that a suspension of bentonite in water is fluid when being agitated by a drill bit, but it thickens when it is not moving. This means that bentonite lubricates when the drill is active, but it does not flow deep into the hydrocarbon formation, and instead forms a "mudcake" between the well and formation. 

Bentonite has a number of other uses, mostly based on its swelling and absorbent qualities. In particular it is valued in cat litter for these reasons. It is also used to clarify beverages, as a bulker in animal feed, and in civil engineering as a groundwater barrier. 

Production of bentonite in the US was down in 2019. According to the United States Geological Survey (USGS), US production totaled 3.7 million tonnes in 2018, compared with 4.3 million tonnes in 2017. 

But prices in the historically stable US bentonite market ticked up slightly in early 2019, as a couple of big producers increased their prices for sodium bentonite mined in the Western US. 

Barite

Barite, also spelled barytes, is made up primarily of barium sulphite. Barite is used as drilling mud because it is soft, non-magnetic, and crucially it is very heavy. The name barite is from the Greek word barus, meaning heavy. Pure barite has a specific gravity (SG) of around 5.0, meaning it is five times heavier than water. Most barite used in drilling has an SG of between 3.8 and 4.5, with the lower-grade material blended with the higher grade to achieve a sufficient density. 

There are few suitable replacements for barite in drilling muds. Some materials, such as ilmenite and calcium carbonate, have been tried but never proved commercial viable. Haematite, a form of iron ore, is the only alternative to have achieved any commercial traction. 

Venezuela’s beleaguered national oil company in 2018 suggested switching to locally mined haematite as an alternative to barite, in order to avoid making dollar-denominated purchases of foreign mined barite. The tumbling Venezuelan currency and a shortage of dollar investments has stalled oilfield activity in the country, despite the fact that it boasts the world’s largest reserves. 

But barite is rarely used in other markets, due to technical issues. Haematite is magnetic, which interferes with the technology used to align the drill bit deep underground. This can result in the drill wandering in the wrong direction. 

Barite has other applications, including as a filler in plastic, as a pigment and in medicine. But use in drilling fluids dwarfs all other applications. 

The International Petroleum Association sets the specifications for drilling-grade barite. The original specifications included an SG of 4.2. This remains the most commonly used grade of barite for offshore drilling. But onshore drillers are more flexible about their requirements, and can use barite of SG 4.1. The USGS launched an SG 4.1 spec in 2010 this market.  Oilfield service companies also buy lower grades of barite, and blend them to achieve the desired SG. 

China is the world’s largest barite producer, mining about 3.2 million tonnes in 2018, according to figures from the USGS, out of a total global production of 9.5 million tonnes. The key role of Chinese barite exports is reflected in the fact that the mineral was excluded from the 25% tariff currently paid on most mineral imports to the US from China. This decision to exclude barite was made after a number of major importers complained that they would be unable to supply the US oil and gas industry without Chinese supplies.

Barite, unground lump, API, bulk, SG 4.2, fob China, $/tonne
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Source: Fastmarkets IM 

Barite, unground lump, API, bulk, SG 4.2, fob Chennai, $/tonne
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Source: Fastmarkets IM 

The other major barite exporting countries are India, Morocco, Mexico, and Turkey. The US, Kazakhstan, Russia, and Iran all mine significant volumes for domestic production.

Chinese material is the most commonly traded, but many drillers in the Middle East prefer Indian material, particularly for offshore applications. The reason is one of consistency and quality. China has hundreds of active barite mines, some with very low capacity. This diversity of origin means that Chinese material is variable in quality. 

Indian barite, on the other hand, is mostly sourced from a single massive mine, the Mangampet project in Andhra Pradesh. This material is of a very predictable quality, a boon for traders, grinders, and end users, who can predict exactly what kind of mineral they will use.

"If we get some material from China, and it is too hard, it’s difficult to grind," one Middle Eastern buyer told Fastmarkets. "Once we bought Chinese material and it was the wrong weight… It’s just easier to buy from India."

Indian exports up until 2017 were stymied by an inflexible price system. The resource at Mangampet belongs to the Andhra Pradesh Mineral Development Corp (APMDC), itself owned by the state government of Andhra Pradesh. This material was made available to exporters on a tender system, which made Indian material expensive relative to China or Morocco. 

Buyers in Saudi Arabia and other Middle Eastern destinations continued to pay a premium for Indian material, helped by the relatively cheap freight rates between those places, but exports of high-SG barite from India to the US stopped almost entirely. 

A reform to the existing tender system was announced in late 2017, empowering the APMDC to review prices more regularly, with input from market participants. 

Indian exporters report that this change in process has come alongside a greater willingness to empower exports, at more competitive prices. 

"India is interested in getting rid of its barite," one market source told Fastmarkets. "They won’t sell it too cheaply, but they want to keep exports high." 

The source went on to speculate that the change in policy was based on a shift in expectations of long-term barite prices. "The APMDC is much more realistic about what is a good price for barite."

Indian prices started to gain market share from China throughout 2018. According the USGS, Indian barite production rose from 1.5 million tonnes in 2017, to 2.0 million tonnes in 2018. 

But Chinese exports took a dip over the same period. Chinese barite exports were just 1.2 million tonnes in 2018, compared with 2.0 million tonnes in 2017, a reflection that Indian exports were winning market share against Chinese in the global marketplace. But Chinese exports picked up a little in 2019. Exports in the first four months of 2019 were around 526,000 tonnes, compared with 374,000 tonnes in the first four months of 2018.


Oilfield minerals 101

Barite and barium compounds

Barite is a clean, soft, inert - but quite heavy - mineral, with a specific gravity of more than 4. It is a weighting agent in the fluid/mud used in drilling deep wells by the rotary method.

Barite makes up around 40% of the mud and can increase the density of oil-based and water-based drilling fluid to 21lb. It can also offset pressure, lower liquid flow into the hole from the formation and keep the hole open.

Barite’s use in drilling accounts for around 95% of barite consumption worldwide.

The basic functions of the drilling fluid include to:
  • Carry cuttings from beneath the bit, transport them up the annulus and permit their separation at the surface
  • Cool and clean the bit
  • Reduce friction between the drilling string and the sides of the hole
  • Maintain the stability of uncased sections of the borehole
  • Prevent the inflow of fluids, oil, gas or water from the permeable rocks penetrated
  • Form a thin, low-permeability filtercake to seal any pores or other openings in formations penetrated by the bit

As well as the above, the fluid needs to be safe and environmentally benign and should not corrode or create excessive wear to the drilling equipment. It should not require unusual or expensive methods of completion of the drilled hole, nor interfere with the normal productivity of the fluid-bearing formation.

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Bentonite (smecite clays)

Smecites are a family of clays that swell when immersed in water or liquids having polar molecules and have a very high cation exchange capacity. Within the group montmorillonite is the most important commercially, in particular bentonite, a rock that is mainly comprised of montmorillonite. That said, in recent year hectorite is also increasingly being used in drilling applications.

When immersed in water, relatively large flakes of sodium bentonite disperse into colloidal particles activating dormant electrochemical energy carried in the crystal lattice and imparting dilatancy (swelling up to 15-30x its original bulk volume), viscosity (resistance to flow) and thixotropy (gelling strength). These properties are used in drilling muds to provide a suspension for weighting agents and drill cuttings, as well as forming an impervious coating on the drill-hole walls and thus prevent liquid or gas migration.

Specifications are covered by the API, based in the US, and OCMA, in Europe. Particularly important criteria includes mud yield – barrels of mud with an apparent viscosity of 15 centipoise produced from a tonne of clay. 

Silica (Frac) sand**

Silica, or silicon dioxide (SiO2), makes up 61% of the earth’s continental crust. Quartz is the main form and there are the polymorphs cristobalite and tridymite and the cryptocrystalline varieties chert, flint, chalcedony and agate. 

Silica sand or 'frac sand’ is a durable, round-grain, crush-resistant material produced for use in the hydraulic fracturing process (otherwise known as 'fracking’). This process is used to gather energy sources, such as oil, natural gas and natural gas liquids, from underground rock formations that lack adequate pore space for these fluids to flow into a well.

Sand used in fracking has to have very specific components. The grade of sand used has to have a round grain and be very hard. The sand is pumped into wells, either horizontally or vertically, along with drilling fluid, to prop open fissures and voids in bedrock and improve the permeability and flow rates of the substance being recovered.

Fracking fluid is made up of 95-99% water, around 2% proppants - either ceramic (see below) or sand - and 0.5% other chemicals and minerals. These include phosphate, diatomite, calcium carbonate, borates and magnesium chloride. 

*Information taken from the Industrial Minerals Handbook, by Peter Harben

**Information taken from Fastmarkets IM and the British Geological Survey

What happens after the shale gale?

Barite and bentonite are traditionally the main oilfield minerals but frac sand is the most volatile and fastest-growing market. 

The US onshore drilling market is the largest single site of drilling activity in the world. And most of these new wells will be fracked. 

Fracking, or hydraulic fracturing, is the injection of fluid into a well under high pressure. This breaks open the hydrocarbon formation, allowing oil or gas to flow out of through myriad tiny cracks. Frac sand is added to this fracking fluid to prevent the cracks closing back up again. This sand is called a "proppant" because it literally props the cracks open. 

Frac sand markets had a slow first half of 2019 while recovering from a rollercoaster 2018. They started last year impressively - demand for frac sand was soaring thanks to a buoyant fracking industry, particularly in West Texas. Not only was the number of wells being drilled up strongly from the lows of 2016 but demand for sand per well was also increasing. Wells grew longer and sand intensity - the volume of sand used per foot of well - rose. 

This trend toward higher sand intensities boosted demand even faster than the increase in drilling would suggest. Demand for frac sand soared to more than 100 million short tons in 2018 from just 24 million short tons in 2016. Indeed, in the summer of 2018 many market observers predicted that demand would exceed 120 million short tons. 

But as 2018 wore on, the picture for sand miners worsened. The upward trend in sand intensity coincided with a shift away from the coarse-grained sands favoured before 2016. Frackers are increasing using finer sands, with 40/70 mesh the favoured grade. Sand of 100 mesh is commonly used; some frackers are experimenting with "ultrafines" of 200 mesh or higher. 

Barite, unground lump, API, bulk, SG 4.2, fob China, $/tonne 
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Source: Fastmarkets IM 

This very fine sand is less prone to crushing than the coarse 20/40 mesh that was once preferred. And that means the strength of the sand is less crucial. Buyers are therefore more willing to forgo top-quality white sand mined in Wisconsin or Minnesota in favour of lower-grade sand mined closer to the well. 

Construction began in 2017 on a slew of new sand mines in the Permian basin. And as 2018 wore on, huge volumes of capacity started to come online while local prices in the Permian started to fall, succumbing to pressure from squeezed pipeline capacity. 

The effect was to roil frac sand prices in August 2018 - they fell from more than $50 per short ton to barely above $20 in a matter of months, market sources reported. The effect on the frac sand industry was devastating. 

"Capacity had to close so it closed," one frac sand distributor told Fastmarkets. 

Frac sand miner Hi-Crush Partners announced in September 2018 that it had suspended dry plant operations at its Whitehall in Wisconsin, citing "recent, temporary softness in [fracking activity] and frac sand demand."

And Covia, the country’s largest frac sand miner, idled some 4.9 million short tons per year of capacity in response to an oversupplied market. 

Sellers weren’t the only ones to regret plans made when prices were higher. Some buyers started to regret the long-term take-or-pay deals they had signed. 

Oilfield service company Liberty in October 2018 scrapped its offtake agreement with Select Sands, which operates frac sand mines in Arkansas. 

And at the start of 2019 Smart Sand initiated legal proceedings against Schlumberger for allegedly falling behind on the pace of its contracted sand purchases.

Fastmarkets began to price frac sand markets late in 2018. The first price reported was northern white frac sand, 20/40 mesh, API, exw Wisconsin, $/short ton, launched in September 2018. This was followed by 100 mesh, 40/70 mesh, and 20/50 mesh prices launched in November 2018. 

Prices have held steady so far in 2019. The trend has been one of increased interest in 40/70 mesh, while all other market hold fast. 

But some frac sand sellers see a brighter picture emerging for 2019. Although one seller said that "there is still too much sand around," rising demand will eat up a large portion of this excess, he added.

Activity in West Texas may have slowed since late 2018 but there is consensus that the US fracking industry will continue to thrive. The all-important "breakeven" point at which it is profitable to drill and frac wells is estimated at $40 or even $30 per barrel. This means that activity can keep going even if oil prices fail to approach their pre-2015 highs. 

And the picture in the Permian basin is improving. Several new pipeline projects are scheduled to come online this year, with larger-capacity projects to follow. The high transport costs faced by frackers will ease, allowing production to accelerate again. 

Sand sellers also report increased interest in quality material after years when the philosophy of frackers was to put as much cheaply priced sand down the well.

"[Frackers] who aren’t in the Permian don’t want to take risks… so they buy tried-and-tested sand," a seller said. "And some of the guys who are in the Permian are saying that the second year isn’t looking as good as the first." 

Output at frackers who reported strong results with low-grade sand in the first year of operation is reportedly declining faster than they had hoped. If this is true, it would be a boon to producers of northern white sand, who might again be able to differentiate themselves by the strength and shape of their product rather than having to compete with regional sand producers on price.