Oilfield minerals face falling US drilling activity

By William Clarke
Published: Tuesday, 10 March 2020

Markets for oilfield minerals like frac sand and barite are being influenced by national policies and international trade, reports William Clarke.

Lower rig counts have signaled weaker markets for oilfield minerals

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.