WORLDWIDE BARITE SHORTAGES 2015 -2025 WORLDWIDE ENERGY PRODUCTION WILL DRIVE BARITE DEMAND

April 2nd, 2015

Natural Gas; because it’s cleaner and costs significantly less than other fuels, demand for natural gas is increasing worldwide. But a “perfect storm” is fast approaching the barite market that will increase barite prices to unprecedented levels. While many analysts speculate on the price of oil and natural gas, a frequently overlooked factor is that the overwhelming majority of wells require weighted mud systems (barite) to drill for natural gas – whether these wells prove successful or not. With thousands of new wells being drilled each year, the demand for barite, driven by increased natural gas and oil production, will cause barite prices to continue to climb to record levels. The world drilling market has been experiencing increasing barite shortages and the issue has become critical. The U.S. government now lists barite as a National Strategic and Critical Mineral (National Strategic and Critical Minerals Production Act of 2013). EIA estimates that total U.S. natural gas consumption in 2014 was 73.3 Bcf/d. With demand for natural gas steadily increasing, several factors are converging to create increased natural gas demand. This will result in increased drilling and exploration and consequently driving the price for barite even higher. Major factors indicating a higher barite demand and therefore price include:

1. Rig count has fallen below levels to maintain sustainable gas production and forecasts predict rig count will continue to fall into the summer of 2015. New wells will need to be drilled to meet demand – regardless of natural gas prices http://www.forbes.com/sites/greatspeculations/2015/03/10/a-bottom-for-u-s-natural-gas-producers-is-in-sight/2/) (http://seekingalpha.com/article/2823676-falling-rig-count-could-cause-natural-gas-production-decline?page=2

2. “USA natural gas production could experience a net decline of 6 bcf/d over the next 12 to 18 months should growth in the Marcellus not pick up and natural declines continue.” http://oilandgas-investments.com/2015/natural-gas/the-marcellus-is-close-to-peak-production-and-why-this-is-so-important/

3. Approved LNG facilities, under construction, in the USA will increase drilling and therefor barite demand every year to support these facilities.

4. Conversion/Removal of USA coal fired power plants and switching to Natural Gas. Gas now is expected to overtake coal in 2025, five years earlier than had been forecast. Gas is seen rising from a 22% share in 2013 to 33% in 2035. (www.bp.com)

5. Projected 3-Fold increase of U.S. Natural Gas exports to Mexico will require more wells to be drilled in the U.S.

6. Reform of Mexico’s oil and gas industry has set the stage for large foreign investment into the Mexican drilling industry.

7. Major expansion of China’s domestic oil and gas industry with thousands of new wells drilled.

8. A rise in demand from a growing industrial barite market. 9. A return to higher oil prices increasing rig count and corresponding barite demand. 10. Government tax incentive programs for industry to switch to natural gas.

Wild card which could further create barite supply issues:

11. Additional LNG facilities in Canada and the USA pending approval. 12. New energy storage technology utilizing barium based chemistry.

Barite Demand Will Increase Substantially

Worldwide gas demand is forecast to rise in the near future and the North American gas market will be affected by declining gas production rates due to reduced drilling activity. Until recently, a large amount of gas supply was being produced by liquid rich gas plays. In 2011 and 2012, more than 50% of new wells drilled produced both oil and natural gas. http://www.eia.gov/todayinenergy/detail.cfm?id=13571

Declining oil and gas prices have slowed production dramatically as more and more drilling rigs are idled. However, it’s important to consider more than just rig count statistics by themselves as the majority of rigs may drill two to three wells per pad and as many as twelve. Historically, one rig would drill one well and move to the next location which was less efficient than what is occurring today. With newer technologies and faster drilling times per well, the impact of idling one rig has significantly impacted the number of wells drilled. Current oil and gas prices remain low, the current idling of rigs will create a steeper decline in production than has occurred in the past and this may lead to significant short term gas supply leading into 2017.

http://www.resilience.org/stories/2015-01-27/tight-oil-production-will-fade-quickly-the-truth-about-rig-counts

http://seekingalpha.com/article/2823676-falling-rig-count-could-cause-natural-gas-production-decline?page=2

According to Keith Schaefer (http://oilandgas-investments.com/2015/natural-gas/the-marcellus-is-close-

to-peak-production-and-why-this-is-so-important/) “it is not just declining production that will be the source of extreme volatility in coming months–rising demand will help push the US natural gas market to extremes.” The combination of the production declines on the majority of US shale gas fields, the flattening of production from the Marcellus shale basin, a collapse in the drilling market across North America and large demand on the horizon all point to a major increase in the demand for barite due to future drilling requirements.

Chart shows how the rig count for natural gas plunged after 2008 and the focus of oil & gas companies switched to liquid rich plays. Natural gas production was maintained and grew because the majority of liquid plays produced gas. The current plunge in rig count will reduce new production of natural gas.

27.5% Natural Gas demand increase is on the horizon with potential to increase to 54.5%

Replacement of coal power with gas power. 6.8% increase in demand from 2014 levels US natural gas demand to increase up to 5 Bcf/d as coal exits by 2020: S&P Washington (Platts)-- 30Sep2014

LNG USA. 18% increase in demand from 2014 levels

13.22 Bcf/day LNG terminals under construction and approved. (Office of Energy Projects, Feb 5, 2015)

Mexico to triple natural gas imports from the USA,

2.7% increase in demand, 2.0 Bcf/day, in addition drilling in Mexico is set to increase to record levels. (https://www.energyaspects.com/publications/view/mexico-goodbye-or-hello)

Proposed LNG USA and Canada.

27% increase in demand, 20.12 Bcf/day proposed LNG projects (Office of Energy Projects, Feb 5, 2015)

US natural gas production needs to increase by 27.5% over 2014 production levels to meet forecasts for increased demand from 2015-2020. This represents a production increase of 20.22 Bcf/day. Additional potential demand of 20.12 Bcf/day for proposed LNG projects planned during the next ten years combined with actual forecasted demand equates to a potential 54.5% (40Bcf/Day) increase above today’s natural gas production levels. (www.ferc.gov) To try and visualize the wells required we can use the Eagleford Basin to act as an approximate guide for wells required. The Eagle Ford Shale basin maintains 3 Bcf/day of production with a rig count averaging 189 rigs per month while new well completions have averaged 172 wells per month. This equates to 2,064 wells per year to maintain 3Bcf/day of production. Dividing 20.22 Bcf/day of new demand by 3Bcf/day = 6.74 multiplied by 2,064 wells = 13,911 wells per year. Therefore, to satisfy forecasts for increased gas consumption approximately 13,911 new wells will need to be drilled each year, which will place increasing demands on suppliers of barite.

China Factor China produced 4,100,000 tons out of 9,260,000 tons of barite produced worldwide in 2014 and China consumed domestically 1,400,000 tons. China has set a goal to increase its gas production from shale between 6Bcf/day – 10Bcf/day by 2020 in addition to conventional oil and gas drilling. The Chinese have reduced shale gas drilling costs over the last two years and it is now cost effective to drill the more difficult wells in mountainous areas (chinamining.com). The Chinese oil patch is growing at a steady rate and because China is now the largest energy consumer in the world it stands to reason that their domestic oil and gas drilling will continue to grow for many years, perhaps one day approaching or exceeding the scale of the U.S. industry. The wells drilled in China are generally deeper than in the U.S. and require

substantially more barite per well. Increased drilling in China and containment of today’s exported barite will cause a dramatic barite supply issue for the North American drilling market as 80% of the 3,400,000 tons the US imports comes from China (USGS). The Chinese government implemented a cut of 1,500,000mt per year of barite exports several years ago impacting world supplies. In fact, the Chinese Government recently classified barite as a “strategic critical resource” as their current domestic consumption of barite is projected to rise to 2,100,000 tons or 23% of worldwide demand in 2015. Chinese domestic barite consumption for 2015 is estimated: CNPC 950,000mt/yr, Sinopec 650,000mt/yr, COONC 500,000mt/yr (source: Chongqing Jiamei Mining Co.ltd, Feb 2015)

Mexico Factor For the first time in 75 years, Mexico is opening up its oil and gas prospects to foreign investment, projected at greater than $50 billion from private companies by 2018. Mexico's reforms aim to reverse declining production and increasing reliance on imports. According to the Energy Information Administration, Mexico’s wet shale gas reserves are almost on par with those in the United States, while its shale oil reserves are about 22 percent of what is believed to be technically recoverable in the USA. New drilling activity in Mexico will place even greater demands on barite supply.

Growing Industrial Barite Demand High grade barite (4.3sg and higher) sells for a premium price due to the fact that it is extremely rare. It is used in a wide variety of Industrial application in paint and rubber filler, TV screen, glass, ceramics, polymers, vehicle brake pads, medical applications and radiation shielding. As this market grows it places further pressure on barite demand. As the world’s middle class continues to rise in population the demand for industrial barite will continue to grow. Industrial barite is used to manufacture barium carbonate which is used in many industrial applications. One application which needs to be watched closely is the new technological breakthroughs companies are making utilizing BaCO3 in the energy storage sector. If this sector proves successful it will add a new dimension to the barite industry that is currently struggling to meet demand. http://www.zenncars.com/ http://www.eestor.us/

API Lowers Barite Specification to Extend Reserves The American Petroleum Institute lowered the specifications for oilfield grade barite from a density of 4.2 g/cm3 to 4.1g/cm3. This was done to help relieve the major supply constraints that the industry was experiencing during the early 2000’s. This short term measure was implemented in 2007 and eight years later the supply issues have not gotten any better but some would say worse. The API is now considering lowering the API specs to 4.0 g/cm3 in a desperate attempt to further extend reserves worldwide. This measure is widely criticized due to the dangers it creates for the drilling industry who require high density product to control well pressures. What is occurring when barite density is lowered is the ability for the miner to add 20-30% low density waste rock to the barite which extends the mine reserves. This waste rock causes problems with drilling fluid systems as the ultimate goal for any premium drilling fluid system is to have low undesirable solids content.

Barite Demand Is Unsustainable In summary, the future worldwide demand for natural gas and oil leading into 2017 -2025 will correlate to the continuation of higher barite prices due to the current supply constraints in the barite mining industry. When oil prices recover from their current levels the supply problems will be further compounded increasing upward pressure on barite prices. Current North American and Chinese mines are struggling to maintain grade and are nearing the end of their mine lives. Only Halliburton has announced expansion on existing reserves at their Rossi mine and MI Drilling Fluids is currently drilling a new area looking to expand as they wind down production on one of Nevada’s largest producing barite mines, the Greystone mine. An important overlooked supply issue the North American drilling market faces today is China’s plan to expand domestic drilling. China's shale gas resources are the largest in the world, 1.7 times those in the United States. China is now the largest energy consumer in the world and at some point in the future China may surpass the United States for wells drilled per year to support their growing energy requirements. The USA oil patch drilled 37,508 wells 2013 - 2014 and consumed over 3,400,000 tons of barite (usgs). As the Chinese drilling market increases we will continue to have barite supply issue which will continue to move prices to record levels. At some point in the near future, the Chinese government may implement a “worst case scenario” and reduce or halting all barite exports, effectively removing 41% of the world’s supply to protect their nation’s energy security. (China produced 4,100,000 tons out of 9,260,000 tons produced worldwide in 2014)

Author: Mr. Brent Willis, Bsc.Eng, 25 years’ experience in the barite industry. The analysis does not include other major factors effecting barite supply such as demand from the Middle East, other Asian countries, South America, Africa, Europe and Russia. http://oilandgas-investments.com/2015/natural-gas/the-marcellus-is-close-to-peak-production-and-why-this-is-so-important/ http://minerals.usgs.gov/minerals/pubs/commodity/barite/mcs-2015-barit.pdf https://derivative.credit-suisse.com/get.cfm?id=9503A5E4-C5D5-4862-9428-A01BF487F9DF http://www.wsj.com/articles/SB10001424127887323582904578487104065985868 http://eaglefordshale.com/eagle-ford-natural-gas-production/ http://www.resilience.org/stories/2015-01-27/tight-oil-production-will-fade-quickly-the-truth-about-rig-counts https://www.energyaspects.com/publications/view/mexico-goodbye-or-hello http://www.artberman.com/tight-oil-production-will-fall-600000-barrels-per-day-by-june http://en.chinamining.com.cn/News/2015-02-04/1423032184d71201.html http://en.chinamining.com.cn/Companies/2015-03-31/1427766429d71665.html