December 12, 2011 / 2:35 PM / 8 years ago

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

By Selam Gebrekidan and Chen Aizhu
    NEW YORK/BEIJING, 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.
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