Oilfield minerals, the clays and proppants used in
drilling and extracting oil, are a crucial part of the
petrochemical industry, and demand for these minerals
correlates closely to drilling rates. 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. The Baker
Hughes rig count, produced by one of the largest oilfield
services companies in the world, is widely used as a
measure of oilfield activity, and therefore as a proxy for
oilfield mineral demand.
The progress of the figures in the Baker Hughes rig
count painted a gloomy picture for frac sand demand in the
US over 2019, but the situation for high-grade barite was
more positive. The number of active drilling rigs in the
Permian Basin, the center of the US fracking industry,
was reported at 408 on February 14 this year, down by 14%
year on year. The total number of active drilling rigs
across the entire US had fallen to 790 on February 14, down
by 25% year on year and the lowest level since early
2017.
This fall in activity, particularly in the Permian basin,
is bad news for frac sand demand. Frac sand is a key
element of the hydraulic fracking process. It is injected
into the well at high pressure, creating fissures in the
rock. The sand props open the cracks, allowing oil or gas
to flow out.
Permian problems
The Permian fracking industry has faced a range of problems
quite separate from global oil prices. One issue dogging
the region has been a shortage of offtake capacity. With
oil pipelines running at capacity, there has been no way to
move more oil out of the region for refining. This has led
to a shortage of local storage, and plummeting prices at
the wellhead.
Another issue has been gas offtake. Fracked Permian
wells tend to produce mostly oil at first, but as they age
they produce ever more gas. Owing to the shortage of gas
pipelines in the region, most of this gas is "flared,"
meaning that it is burned off. Or sometimes it is simply
vented into the air. Until 2019, environmental limits on
gas flaring had put another cap on oil production,
discouraging new projects.
In 2019 these restrictions were eased by the
administration of US President Donald Trump, as it rolled
back the country’s Waste Prevention Rule.
Since then, gas flaring and venting has been at near-record
levels, but legislators in the US states of Texas and New
Mexico have been stepping into the gap left by federal
regulators, adding another risk to new oil projects.
This problem will be eased by a planned increase in gas
pipeline capacity, but this is taking longer to deliver
than expected. In October 2019, oilfield infrastructure
company Kinder Morgan pushed back the expected opening of
its massive Permian Highway gas pipeline to 2021, citing
red tape. Another issue troubling Permian production has
been very high costs for road freight, as well as a host of
other logistical bottlenecks, including a shortage of hotel
rooms for oilfield workers.
This muted demand outlook, combined with a lingering
overhang of supply from the production boom in 2018,
weighed heavily on frac sand prices last year.
Fastmarkets’ latest price assessment for frac
sand, northern white, 40/70 mesh, API, exw Wisconsin, was
$29-34 per short ton in February 2020. This was less than
half the value that was widely reported in early 2018
before Fastmarkets began assessing the price in 2019.
This has taken a toll on frac sand producers, and in
2019 there was a slew of mine closures and bankruptcies,
which shows no sign of abating in 2020.
In July 2019, Emerge Energy Services, which mines frac
sand through its subsidiary Superior Silica Sands, filed
for Chapter 11 bankruptcy. In August that same year,
another US-based producer Shale Support announced it would
also file for Chapter 11. Shale Support has a total frac
sand capacity of 5 million stpy and has operations in the
US states of Oklahoma, West Virginia, Louisiana,
Pennsylvania and Ohio.
Also in August, the sand miner and logistics company
Hi-Crush announced it was mothballing its production
facility in Whitehall, Wisconsin, US, which has 2.8 million
short tons per year of capacity.
Better for barite
The picture for other oilfield minerals going into 2020
looks more positive. The Baker Hughes international rig
count, issued monthly, has seen a slight increase over the
past year.
The total number of active rigs in the world, excluding
North America, was reported at 1,104 in December 2019. This
was an increase from 1,024 a year earlier, and from 954 at
the end of 2017. In particular, there has been strong
growth in offshore drilling, with 257 active rigs in
December 2019, compared with 191 two years before that,
which is supportive for barite demand.
Barite is used for drilling mud because it is soft,
non-magnetic, and crucially it is very heavy. The heaviness
of barite helps to maintain pressure in the hydrocarbon
formation that is being drilled into. If this pressure is
not managed then oil or gas can be pushed back up the well
in a catastrophic blowout.
The International Petroleum Association sets the
specifications for drilling-grade barite. The original
specifications included a specific gravity (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
US Geological Survey launched an SG 4.1 spec in 2010 for
this market. Oilfield service companies also buy lower
grades of barite, and blend them to achieve the desired
SG.
For this reason, large offshore drilling projects are
the main driver of demand for API-grade SG4.2 barite.
Onshore activity tends to use SG4.1 or lower-grade
barite.
But despite good demand, barite prices have been kept in
check by the availability of high-quality Indian material.
Indian barite exports are running at nearly twice the pace
of Chinese sales, according to the latest customs data,
marking a sharp reversal from only two years earlier, when
China was the largest exporter.
In the period between April and December 2019, India
exported 1.51 million tonnes of lump barite. China imported
just 823,420 tonnes over the same period.
In the year starting April 2018, India exported 2.1
million tonnes of barite, compared with Chinese exports of
1.31 million tonnes. This marks a sharp change in export
rates from the previous year. In the 12 months to March
2018, Indian exports were just 1.65 million tonnes,
compared with Chinese exports of 1.99 million tonnes. Back
in 2014-15, Indian exports were just 652,000 tonnes,
compared with Chinese exports of 2.48 million
tonnes.
Chinese barite is increasingly less competitive in
international markets, due to higher domestic consumption
pushing up prices. Fastmarkets assessed the price of
barite, API, SG 4.2, unground lump, bulk, fob China at
$94-100 per tonne on January 30, up from $89-93 per tonne
in the prior month.
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.
Indian exports up until 2017 were stymied by an
inflexible price system. The resource at Mangampet belongs
to the Andhra Pradesh Mineral Development Corporation
(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.
Fastmarkets assessed the price of barite, API, SG 4.2,
unground lump, bulk, fob Chennai, at $89-92 per tonne on
January 30, narrowing upward by $1 from $88-92 per tonne a
month earlier.