Hydrocarbons occupy a vital role in our life and continue to play an important role for many more years to come. We need to follow all technological innovations to continue our productivity standards to achieve our production targets. Let us extend our vision to achieve this mission.

Sunday, December 18, 2011

INSIGHT-China quietly finds niche in U.S. shale oil boom

By Selam Gebrekidan and Chen Aizhu

Dec 12 (Reuters) - China has quietly gained a toehold in the U.S. shale oil-and-gas boom.

Even as the Asian nation's giant energy firms only now begin to see the first glimmers of success in their domestic shale fields, a handful of small manufacturers in China have found a quicker way to join the bonanza: supplying ceramic proppants, a key raw material used in hydraulic fracturing.

Over the past three years, China has emerged as a go-to source for the engineered spherical pebbles that, like sand, are injected deep underground to help "prop" open tight shale rocks as part of the controversial fracking process, allowing oil and gas to flow to the surface.

U.S. imports of the proppants from China have surged 12-fold since 2008, data from the U.S. International Trade Commission shows. At year's end, Chinese imports will account for 13 percent of the total North American ceramic proppant market, a $3 billion a year business, by analysts' estimates.

The boom may not last forever. U.S. manufacturers are now gearing up to challenge the Chinese. Prices have surged by 60 percent in two years and eventually experts expect China's own shale revolution to absorb supply.

But for now, U.S. demand is quickening as more and more shale wells are drilled from Ohio to Texas, and more service companies prefer the nearly indestructible properties of the ceramic pebbles over traditional sand -- even at 10 times the price. Private equity investors are circling.

Producers may be hard-pressed to keep up.

"Demand has grown an awful lot and there is only so much production volume in the world," said David G. Gallagher, vice president of Houston-based CARBO Ceramics, the world's largest producer of ceramic proppants, which also has a factory in Louyang, China.

"It's not like you can say 'tomorrow I want to build a ceramic plant' and get it next week. We're talking about a three-year lag," he told Reuters on Friday. A sand mine, on the other hand, can be set up in only six months, he said.

The quiet emergence of the niche industry is the latest sign of how the rapid development of U.S. gas-and-oil shale deposits is reverberating across the globe, forcing energy companies to grapple with new and unexpected challenges.

It is pitting firms like Carbo Ceramics and France's Saint Gobain against a dozen mostly smaller, independent Chinese firms who take advantage of cheap local bauxite -- also the raw material to make alumina -- to scale up quickly.

"It's a profitable business and doesn't require too much investment," says an official with a leading Chinese proppant producer, Guizhou Xinyineng Corp, who declined to be named like many in China's secretive energy sector.

Guizhou is among the producers that are receiving government support to develop new products. The company has also been approached by a U.S. private equity firm that is trying to consolidate U.S. imports, as well as European firms looking for joint-venture partners to develop China's Bauxite mines. The official declined to name the companies.

ALL FIRED UP

All proppants serve a single purpose: They keep fissures in oil and gas wells open after water and chemicals are pumped into the rock in a process commonly known as fracking.

Ceramic proppants, however, are best for drillers looking for uniform size and chemical consistency. They can withstand high temperatures and pressures, and work well either in conjunction with or as replacements for sand, experts say.

"The reason ceramics work better is because it doesn't crush under the pressure in deep wells and the wells in North Dakota are at 10,000 to 12,000 feet depth," says Ryan Leininger, regional manager of Rockwater Energy Solutions, a major supplier of sand and ceramics in the Bakken prospect.

"You can smash it with a hammer on an anvil and it doesn't break. So, by using it you're increasing the life of a well," Leininger added.

Making them is an intense process. In China, producers cook raw bauxite at temperatures ranging from 1,470 to 1,800 degrees Fahrenheit (800 to 1,000 degrees Celsius) and add a ground powder of patented mineral to the mix, which they cook to temperatures above 2,200 degrees Fahrenheit.

They then sell the final product either directly to oil services firms like Halliburton, Baker Hughes and Schlumberger in China or to import and export agencies that ship the proppant in jumbo tote bags to U.S. West Coast ports like Long Beach, California or Seattle, Washington, industry officials in China and the United States say.

There they are shipped by train, typically to North Dakota, where their tough properties are most highly prized. BNSF Railway, the largest rail carrier in North Dakota's oil fields, expects overall ceramic freight volumes to double next year.

As more and more drilling rigs are moved into North Dakota, demand for the ceramic variety has grown faster than the sector at large. Total North American proppants demand has nearly quadrupled to 70 billion pounds (31.8 million metric tons) since 2009, energy investment boutique Howard Weil says. The share of ceramics has risen from 10 to 15 percent in that period as more companies use a more sophisticated multiple-stage fracking process.

BAKKEN BINGE

In the Bakken prospect of North Dakota's prairies, where advances in shale drilling pushed the state's output to a record 488,000 barrels-per-day in October, a typical well uses about 3 million pounds (1,500 tons) of sand and other proppants, of which ceramic proppants have grown to take a 30 percent share.

More companies are using ceramic proppants in the Bakken shale play because sand usually crushes when pumped into deep wells. Those who do not want to pay $4 a pound - versus just 40 U.S. cents a pound for sand - are turning to resin-coated sand, which is engineered to have better strength than more common silica sands.

Nonetheless, demand for sand is growing too in North Dakota as more wells are drilled. The region currently sources coveted Ottawa sands from Wisconsin and Minnesota mines, although both Halliburton and Baker Hughes have said they are setting up their own mines to control costs.

SHRINKING ADVANTAGES

A few months ago, Chinese imports were about 20 percent cheaper in North Dakota than proppants manufactured in the United States, industry operators said. That margin has narrowed recently and might shrink further because of the multiple intermediate sellers that link the factories in China to operators in U.S. oil-and-gas fields.

Monte Besler, who runs a business that provides consulting services for exploration companies on their well completion jobs in North Dakota's Bakken oil fields, says Chinese proppants have quality problems.

"We've had issues with contaminants in the proppants. I found balls and razor blades, some pretty crazy things," he said, adding operators worry about failures on high-pressure pumps because of materials that sneak into proppant shipments as they go through multiple sellers to reach U.S. oil fields.

The price advantage that the imports have enjoyed will dwindle further when China, the world's largest energy consumer, develops its own shale resources more extensively.

Last week, for example, PetroChina confirmed it is producing shale gas in southwestern Sichuan province, in a joint development with Royal Dutch Shell. It could be the country's first commercial shale gas production, although PetroChina said it is struggling to attain stable rates of output.

What is more, rising costs of production in the emerging economy are pushing prices higher. Over the last two years, the price of higher-grade ceramic proppants in China has gone up by 60 percent to $800 a ton, industry sources say.

"The inflation things that are happening in China, most Americans don't understand, but it is large," Gary Kolstad, CEO of Carbo Ceramics said in late October.

"China is no longer the low-cost producer. We know this, because we have a plant there."

Carbo Ceramics is turning instead to the U.S. market. In August, it applied for a permit to build a proppant plant in Millen, Georgia, in addition to the two factories it already operates in that state. Four other firms have filed for permits to set up or expand six ceramic proppant plants in Georgia, Arkansas, South Carolina and Missouri, states rich with minerals like bauxite.

Despite these concerns and the addition of new American plants, the increasing demand for ceramic proppants in North America will ensure a wide enough playing field for everyone.

"So long as the price of oil and gas is high, there will be demand for our products," said Ningfang Liang, chief financial officer of China GengSheng Minerals, a Chinese proppant producer listed in New York.

No comments:

Post a Comment

Thanks for visiting the site and your interest in oil and gas drilling

free counters