Oilfield minerals see recovery in demand

By William Clarke
Published: Thursday, 11 March 2021

Low oil prices and consequently much-reduced rig activity depressed demand for oilfield minerals last year, but the industry is staging a recovery in 2021, reports William Clarke

Oilfield markets are seeing a swift recovery in 2021, despite the lingering effects of the Covid-19 pandemic and the threat of tighter regulation.

Demand for oilfield minerals including barite and frac sand has been under heavy pressure from the recent downturn in oilfield activity. But the US onshore drilling market, which drives demand for frac sand and SG 4.1 barite, is starting to show green shoots after a brutal year in 2020.

Rig counts in the United States are still rising, despite short-term weather disruptions in Texas, with the recovery in oil prices spurring further activity. 

The oilfield industry is dealing with short-term concerns, after extreme weather hit Texas in February. The arrival of a polar vortex in February pushed temperatures in many parts of the state below -10 degrees Celsius, putting huge pressure on the state’s deregulated energy grid. The knock-on effects of this affected other utilities, including gas and water, of particular concern to fracking operations, which rely on large amounts of water for their procedures.

The result was a rapid drop in the number of active fracking fleets in Texas, dealing a hard blow to sand demand. But this issue is expected to abate in the weeks to come, with fracking fleets coming back into operation, and the overall picture is supported by a sustained rise in oil prices.

Oil price recovery

The price of benchmark West Texas Intermediate crude oil was more than $62 per barrel in late February 2021, the highest in nearly two years and up by 27% since the start of the year, sparking a boom in oilfield activity.

This marks a full recovery from the sharp oil price slump of 2020, which was driven by the spread of Covid-19 in the US. This briefly saw the unprecedented occurrence of negative prices, with storage capacity in Texas filled up, and pipeline infrastructure struggling to move oil out to American ports.

Oilfield demand is closely tied to oil prices. The breakeven price for fracking, which means the price at which it is profitable to produce oil, varies widely from region to region. But in the Permian Basin in Texas, the center of US fracking, it is usually thought to be around $50 per barrel.

Low prices in 2020 caused a massive drop in frac sand demand in an industry that was already struggling to absorb the large volumes of sand being produced in Texas, meaning that prices were already low at the start of 2020.

The effects of Covid-19 on markets also increased the rate of US Chapter 11 bankruptcies and business restructurings during the course of last year. Frac sand companies including Covia Holdings Corp., Vista Proppants and Logistics LLC and Carbo Ceramics Inc. filed for Chapter 11 bankruptcy protection, as did exploration and production company Chesapeake Energy Corp., one of the pioneers of the 2000s fracking boom.

Green shoots now

Oil drilling, the main driver of onshore barite and frac sand demand in the country, is similarly recovering, although it has yet to catch up to the levels seen before the pandemic began.

On February 26 this year, oilfield services company Baker Hughes reported the number of active oil and gas drilling rigs at 402. This is an increase of five rigs week on week, and compares with a low of 244 in August 2020, although it is still well down from the 796 rigs reported at the start of 2020.

In the Permian Basin, the number of active drilling rigs was reported at 208, compared with a low of 117 in August 2020.

On January 19, Halliburton, the largest oilfield services company active in the US fracking sector, reported North American revenues of $1.24 billion in the fourth quarter of 2020. This was an increase from $984 million in the third quarter, but still well down from revenues of $2.33 billion in the last three months of 2019.

In a call with investors on January 19, Halliburton chief executive Jeff Miller forecast rising numbers of well completions, which include the pumping of frac sand into drilled wells. "We expect completions activity in North America to continue improving in the first half of 2021 with commodity prices remaining supportive and customers completing their backlog of [drilled but uncompleted] wells," Miller said.

"For the full year, provided that the effect of the pandemic moderates, economic activity continues to increase, and oil prices remain solid, I am optimistic that our customers will sustain activity in order to hold their production plant to 2020 exit levels, with completion spend outpacing drilling," Miller said.

Further investment

There are also signs of consolidation in the fracking industry that could spur further investment in the sector.

In October 2020, ConocoPhillips announced that it would buy rival US shale oil producer Concho Resources for $9.7 billion, creating the largest independent oil and gas producer in the US, with a total output of 1.5 million barrels per day.

And in September, Liberty Oilfield Services announced that it would buy Schlumberger’s massive American shale-oil unit. The combined company will have a market capitalization of $1.2 billion. Its 2019 revenue would have been $5.2 billion, making it the third-largest US oilfield services firm by sales.

The frac sand industry is also starting to adjust to the new improving reality. For example, in November, frac sand producer Select Sands reported that demand for its products revived in the third quarter of 2020. Canada-registered Select Sands sold 49,248 short tons of sand during July-September, compared with April-May when the company made no frac sand sales, and just 73 short tons of industrial sand were sold.

Change in administration

This optimism has continued into 2021, despite a change in the US government that many fear could bring in a less supportive regulatory environment for fracking.

The first move by new US President Joe Biden was a change to federal leasing policy that will have little immediate effect on fracking operations. On January 26, he imposed a freeze on new oil and gas leases on federally owned land.

"To the extent consistent with applicable law, the Secretary of the Interior shall pause new oil and natural gas leases on public lands or in offshore waters pending completion of a comprehensive review and reconsideration of Federal oil and gas permitting and leasing practices," an official statement said.

But the immediate effects of this are likely to be limited since only 22% of US oil production takes place on public land, and most of this is offshore production. The large majority of onshore activity such as fracking takes place on private land.

In addition, the pause only affects new leases, and has no effect on either the issuing of new permits, or the drilling of previously permitted wells, on public land.

So while the pause somewhat limits potential areas of expansion for the fracking industry, it does little to undermine current operations, and huge potential exists for growth on private land, particularly in the Permian Basin.

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Other factors

Other questions for the industry have yet to be answered, such as those concerning the administrative burdens of permitting, gas flaring, and protection  of the dune sagebrush lizard.

A key concern for drillers is whether the new US administration will move to disrupt the permitting process. The White House does not have the power to halt this entirely without introducing legislation, but there are concerns in the industry about the potential for permitting of new projects to get tied up in red tape. And if the federal lease process turned into a permanent ban through Biden’s four-year term in office, that could push new activity onshore.

For mineral sands, this would be supportive of demand for frac sand and 4.1SG barite, but would sharply cut US demand for 4.2SG barite, which is used in offshore fracking.

Onshore drillers will have other possible hurdles to negotiate from the new administration, with potentially greater effects on onshore activity.

A longstanding concern for the Texan fracking industry has been the possibility of increased controls on natural gas flaring.

Oil extraction in the Permian Basin produces a large volume of natural gas. Ideally, this would be captured and sold via natural-gas pipe infrastructure. But thanks to years of sustained growth in Texan oil production, and a shortfall of pipe capacity, producers have instead had to burn away excess gas through flaring, which both creates pollution and is economically unrewarding.

This flaring was less common in 2020 because oil activity was slowed, allowing existing pipeline infrastructure to handle the gas produced, but it is rising with the resumption of activity.

Legislators in the state of New Mexico have already proposed a 98% gas capture rule. A similar rule in Texas would leave oil companies in forced inactivity while waiting for new pipeline capacity.

Another unresolved potential threat to the Permian Basin fracking industry is protection of the dune sagebrush lizard and its long march towards status as a federal endangered species.

The lizard is native to the shinnery oak scrubland of west Texas and New Mexico, where it makes its home in the same sand dunes where Permian Basin miners operate.

Over the past decade, there has been slow but steady progress in attempts to have the lizard listed as an endangered species. This would bring in strict legal controls on any attempt to operate within its habitat, which could affect the operations of sand miners and drillers and frackers.

In November 2020, the US Fish & Wildlife Service announced a consultation on a plan to allow permits for some industrial activity on dune sagebrush lizard habitat in west Texas, including sand mining, fracking and pipe construction.

Of particular concern for the industry is a set of dunes near Kermit, in west Texas, which is home to many of the sand mines that have been helping to keep frac sand prices in the state low since 2018.

The proposed permits would protect companies legally should lizards be harmed or killed during operations, and would remain effective even if they were listed federally as an endangered species. But observers wonder whether the recent departure of Fish & Wildlife Service director Aurelia Skipwith, who was appointed during the former presidential administration of Donald Trump, could bring about a change in approach from the federal government. 

President Biden has yet to nominate a new Fish & Wildlife Service director, but his administration is thought unlikely to select a candidate who is particularly receptive to the concerns of the fracking industry.