Bentonite supply and demand in drilling. Suzanne Shaw Senior Analyst Roskill Information Services

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1 Bentonite supply and demand in drilling Suzanne Shaw Senior Analyst Roskill Information Services

2 Summary Overview of global bentonite supply and demand Bentonite supply and demand in drilling mud The role of bentonite in drilling mud Trends in the oilfield drilling industry Trends in energy demand Future supply and demand of bentonite

3 Overview of global bentonite supply and demand

4 Bentonite supply in 2014 Global bentonite production of 17.51Mt plus an additional 3.65Mt of fuller s earth USA and China are the largest producers World: Production of bentonite by country, 2014 (%) Others 24% USA 27% Turkey 3% Russia 3% Mexico 5% Greece 7% India 8% China 23% Source: Roskill Bentonite: Global Industry Markets and Outlook, 12th edition 2015

5 Historical production of bentonite Increasing production in China and India Production in USA and Europe fairly steady in recent years World: Production of bentonite by region, 2004 to 2014 (kt) 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, NAFTA Asia Europe CIS Africa and Middle East South and Central America Oceania Source: Roskill Bentonite: Global Industry Markets and Outlook, 12th edition 2015

6 Historical demand for bentonite Demand growing at 2%py - strongest in Asia and South America at 4-5%py North American demand much lower but still the largest consuming region World: Demand for bentonite by region, 2004 to 2014 (kt) 25,000 20,000 15,000 10,000 5, Asia Europe North America Central and South America Africa and Middle East Source: Roskill Bentonite: Global Industry Markets and Outlook, 12th edition 2015

7 Bentonite demand by application, 2014 Global demand of around 20.43Mt plus an additional 5.30Mt for fuller s earth Drilling mud is the fourth largest market, behind foundries, pet litter and IOP World: Demand for bentonite by application, 2014 (%) Refining 4% Civil engineering 10% Industrial Absorbents 2% Agriculture 1% Other 5% Foundry Sands 34% Drilling Mud 11% Pet litter 11% Iron Ore Pelletising 22% Source: Roskill Bentonite: Global Industry Markets and Outlook, 12th edition 2015

8 Historical demand for bentonite by application Demand from drilling muds increased by 3-4%py over the last decade One of the largest growing end-uses World: Demand for bentonite by end-use, 2004 to 2014 (kt) 25,000 20,000 15,000 10,000 5, Foundry Sands Iron Ore Pelletising Pet litter Drilling Mud Civil engineering Other Refining Industrial Absorbents Agriculture Source: Roskill Bentonite: Global Industry Markets and Outlook, 12th edition 2015

9 Bentonite supply and demand in drilling mud

10 Bentonite demand by application and region, 2014 Bentonite demand varies widely with region Demand from the drilling market is largest in North America World: Demand for bentonite and fuller s earth by application and region, 2014 North America Asia Europe Central and South America 0% 20% 40% 60% 80% 100% Foundry Sands Pet litter Iron Ore Pelletising Drilling Mud Civil engineering Refining Industrial Absorbents Agriculture Other Source: Roskill Bentonite: Global Industry Markets and Outlook, 12th edition 2015

11 Focus on North America Drilling consistently accounted for just over 20% of US bentonite consumption until recent increases lifted its share to over 30%; this is expected to fall in the future The USA represents around a third of the global supply of bentonite Supply assured Drilling activity fallen off in ,000 5,000 4,000 3,000 2,000 1,000 0 USA: Demand for bentonite by end-use, 2004 to 2014 (kt) Consumption in drilling mud Bentonite production Consumption in other applications Source: USGS

12 Exports Focus on North America USA bentonite production and exports USA: Bentonite production and exports, (kt) 1,600 1,400 1,200 1, ,000 5,000 4,000 3,000 2,000 1,000 Canada Japan Saudi Arabia China Other US production 0 Production The USA is the second-largest exporter, accounting for 19% of global bentonite exports it was overtaken by India for first time in 2013 It accounts for 18% of world bentonite consumption The USA consumes the majority of what it produces around 3.6Mt Rise in tight oil and gas production from late 2000s Source: GTA, Roskill

13 The role of bentonite in drilling mud

14 Why is bentonite used in drilling? Cool and lubricate the drill-bit, tubing and rig Remove cuttings from the bottom of the well and transport them to the surface Hold cuttings in suspension if drilling is halted Control subsurface pressure Seal the borehole by depositing low-permeability filter cake on the walls of the well bore to prevent the loss of circulation fluids Source: 3M Stabilise the well bore without damaging the formation

15 Specifications for drilling-grade bentonite Set by API, OCMA API specification 13A for bentonite and allied clays, 18 th edition August 2010 Bentonite Viscometer dial 600rpm 30 minimum Yield point/plastic viscosity ratio 3 maximum Filtrate volume 15.0ml maximum Residue >75µm 4.0% maximum mass fraction OCMA bentonite Viscometer dial 600rpm 30 minimum Yield point/plastic viscosity ratio 6 maximum Filtrate volume mm 16.0 maximum Residue >75µm 2.5% maximum mass fraction Non-treated bentonite Yield point/plastic viscosity ratio 1.5 maximum Dispersed plastic viscosity millipascal-seconds 10 minimum Dispersed filtrate volume mm 12.5 maximum Attapulgite and sepiolite Viscometer dial 600rpm 30 minimum Residue >75µm 8.0% maximum mass fraction Moisture 16.0% maximum mass fraction Source: Industrial Minerals

16 Where is bentonite used in drilling? Bentonite is mainly used in water-based drilling muds easier to dispose of /more natural used in most traditional wells Increasing use of oil-based muds in deeper wells - much smaller amounts of bentonite are used in the form of organophilic clays Water-based muds Water/brine 76% Baryte 14% Clay/polymer 6% Other 4% Oil-based muds Non-aqueous fluid 46% Baryte 33% Brine 18% Emulsifiers 2% Gellants 1% Synthetic-based muds Dry gas Mist Foam Gasified mud Increasing drilling for unconventional oil and gas resources These may require alternative drilling products to be developed increasing use of artificial materials? Hectorite is an example of alternative natural product that may be used in harsher conditions, at higher depth and temperature current market is very small Source: S&M Industrial Minerals

17 Trends in the oilfield drilling industry

18 Global distribution of oil and gas production World: Oil and gas production, 2013 (7.2Bnt oil equivalent) Asia Pacific 12% Africa 8% South and Central America 7% Middle East 26% North America 22% Europe and Eurasia 25% Source: BP Statistical Review of World Energy, June 2014

19 Global production of oil and gas North America and ROW North America and ROW: Production of oil and gas, 2003 to 2013 (Mt oil equivalent) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, Oil (ROW) Oil (N. America) Natural gas (ROW) Natural gas (N. America) Source: BP Statistical Review of World Energy, June 2014

20 Rig count Global rig count 4,000 3,500 3,000 2,500 2,000 1,500 1, World: Average monthly oil and natural gas rig count by region, 2000 to 2015 ytd (number of rigs) ytd USA Middle East South and Central America Canada Asia Pacific Europe Africa Bentonite consumption 2,500 2,000 1,500 1, Bentonite consumption (kt) Source: Baker Hughes Notes: Mexico included in South and Central America; 2015 ytd Jan. to May

21 Focus on North America oil and gas production Year-on-year change in oil and gas production, 2004 to 2013 (%py) 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% North America World Source: BP Statistical Review of World Energy, June 2014

22 Focus on North America - US crude oil production USA: Field production of crude oil, 1981 to 2013 (thousand barrels) 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000 0 Gulf Coast (PADD 3) Midwest (PADD 2) West Coast (PADD 5) Rocky Mountain (PADD 4) East Coast (PADD 1) Source: US Energy Information Administration

23 Focus on North America trends in tight oil consumption Sources: US Energy Information Administration tight oil and shale gas production estimates, Canadian National Energy Board

24 Focus on North America increased horizontal drilling USA: Average annual drilling rig activity by type, 2000 to ,400 1,200 1, Directional Horizontal Vertical Sources: Baker Hughes

25 Focus on North America increased horizontal drilling USA: Average monthly rig count and consumption of bentonite in drilling mud, 2000 to ,500 2,000 1,500 1, Average monthly rig count Consumption of bentonite (kt) Sources: Baker Hughes; USGS, Roskill estimates

26 Trends in energy demand

27 Global distribution of oil and gas consumption World: Oil and gas consumption, 2013 (7.2Bnt oil equivalent) Middle East 11% South and Central America 6% Africa 4% Asia Pacific 28% Europe and Eurasia 25% North America 26% Source: BP Statistical Review of World Energy, June 2014

28 Global consumption of primary energy Global energy consumption has increased by 52% over the last 20 years and by 30% over the last 10 years World: Historical consumption of primary energy by type, 2003 to 2013 (Mt oil equivalent) 14,000 12,000 10,000 8,000 6,000 4,000 2, Oil Natural gas Coal Nuclear Hydroelectricity Other renewables Source: BP Statistical Review of World Energy, June 2014

29 Focus on North America trends in oil/gas consumption Oil and gas as a proportion of primary energy consumption, 2003 to 2013 (%) 70% 65% 60% 55% 50% 45% 40% 35% 30% World Asia North America Source: BP Statistical Review of World Energy, June 2014

30 Future distribution of oil and gas consumption Global energy consumption to rise by 37% in total to Slower than in previous decades increasing energy efficiency. 96% of consumption growth will come from emerging economies (more than half from China and India). Consumption in mature economies of North America and Europe forecast to grow slowly and decline in the long-term. Fossil fuels (oil, natural gas and coal) expected to account for 81% of demand by Natural gas - strongest growth in demand of the fossil fuels at 1.9%py to Coal - weakest growth in demand of the fossil fuels at 0.8%py to World: Forecast consumption of primary energy by type Source: BP Energy Outlook 2035, January 2014

31 Significant energy production growth in India and China Overall global energy production is forecast to grow at 1.5%py. Growth concentrated in non-oecd countries, accounting for nearly 80% of the volume increases. Fastest growth in Asia-Pacific at 2.1% py Middle East and North America next largest growth areas. North American energy production will grow by 1%py to 2035, and it is on the path to achieve self-sufficiency by Growth in all regions except for Europe World: Forecast production of primary energy by region, Mnt oil equiv. 30,000 25,000 20,000 15,000 10,000 5, OECD Non-OECD Europe FSU USA China India Source: BP Energy Outlook 2035, January 2015

32 Future supply and demand of bentonite

33 Bentonite supply and demand in 2020 Global production could rise at a rate of 4%py to reach 22.3Mt of bentonite and 4.2Mt of fuller s earth by China is expected to become the largest producer of bentonite worldwide, overtaking the USA. Global demand for bentonite is forecast to reach 25.1Mt plus an additional 6.1Mt for fuller s earth by 2020 Drilling mud could become the third-largest application Refining 4% Pet litter 10% Civil engineering 10% World: Demand for bentonite by application, 2020 (%) Drilling Mud 11% Industrial Absorbents 2% Agriculture 1% Other 5% Iron Ore Pelletising 22% Foundry Sands 35% Source: Roskill Bentonite: Global Industry Markets and Outlook, 12th edition 2015

34 Demand for bentonite by application and region, 2020 Drilling will continue to be an important market for bentonite in North America Consumption of bentonite in drilling will increase in Asia and South America World: Demand for bentonite and fuller s earth by application and region, 2020 Asia N. America Europe C and S. America 0% 20% 40% 60% 80% 100% Pet litter Foundry Sands Iron Ore Pelletising Drilling Mud Civil engineering Agriculture Industrial Absorbents Refining Other Source: Roskill Bentonite: Global Industry Markets and Outlook, 12th edition 2015

35 Summary Global energy demand increasing at 1.4%py Growth in natural gas and oil still be strong. New exploration and production rigs will increase demand for bentonite by ~3%py North America will continue to be the largest bentonite consuming region in drilling The jury is still out on the future of unconventional fields. This could drive changes in drilling product specifications to adapt to harsher environments bentonite may loose some ground to alternative products Bentonite is still the best material for the job in most cases relatively cheap, natural and consistent.

36 Are you facing major decisions involving metals or minerals? Roskill Consulting. Approachable. Independent. Expert. Contact Suzanne Shaw

37 Disclaimer The statements in this presentation represent the considered views of Roskill Information Services Ltd. It includes certain statements that may be deemed "forward-looking statements. All statements in this presentation, other than statements of historical facts, that address future market developments, government actions and events, are forward-looking statements. Although Roskill Information Services Ltd. believes the outcomes expressed in such forward-looking statements are based on reasonable assumptions, such statements are not guarantees of future performance and actual results or developments may differ materially from those in forward-looking statements. Factors that could cause actual results to differ materially from those in forward-looking statements include changes in general economic, market or business conditions. While Roskill Information Services Ltd. has made every reasonable effort to ensure the veracity of the information presented it cannot expressly guarantee the accuracy and reliability of the estimates, forecasts and conclusions contained herein. Accordingly, the statements in the presentation should be used for general guidance only.