The primary products of the industry are crude oil, natural gas liquids, and natural gas. Crude oil is a mixture of many different hydrocarbon compounds that must be processed to produce a wide range of products. U.S. refinery processing of crude oil yields, on average, motor gasoline (approximately 40 percent), diesel fuel and home heating oil (20 percent), jet fuels (10 percent), waxes, asphalts and other nonfuel products (5 percent), feedstocks for the petrochemical industry (3 percent), and other lesser components. Volumes of oil and refined products typically are reported in barrels (bbl), which are equal to 42 gallons.
The oil and gas extraction industry is an important link in the energy supply of the United States. Petroleum and natural gas supply 65 percent of the energy consumed in the United States, and domestic producers supply approximately 40 percent of the petroleum and 90 percent of the natural gas [EIA and Independent Petroleum Association of America (IPAA), 1999]. According to the 1992 Census of Mining Industries, the industry employed 345,000 people and had yearly revenues of $112 billion.
Several factors influence the size of the industry, including technology development and crude oil prices (which are set in world markets) (EIA, 1999). Employment in the industry is also affected by the recent trend in mergers and consolidation among companies in the industry.
Companies in this industry develop mine sites; mine and quarry coal, metal ores, and nonmetallic minerals; and prepare extracted materials. Major companies include US-based Freeport-McMoRan, Newmont Mining, and Peabody Energy, as well as Barrick Gold (Canada), BHP Billiton (Australia), Coal India, Glencore (Switzerland), Grupo Mexico, Nornickel (Russia), Rio Tinto (UK), and Vale (Brazil).
Australia, Brazil, China, India, and Russia are the top five largest iron ore producing countries in 2022, according to Statista. The world”s most exploited commodities are iron ore, coal, potash, and copper, according to Statista. China is the world”s leading country in the mine production of gold, and is becoming the top mining country, especially for rare earths, producing about 60% of the global production in 2022.
The US mining industry includes about 6,000 establishments (single-location companies and units of multi-location companies) with combined annual revenue of about $85 billion.
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The industry’s talent profile is changing. Traditional disciplines such as subsurface and surface engineering are still important, but they must be balanced against new demand for expertise in digital operations. As companies build their capabilities in software engineering and data science for example, senior executives in talent management will need to figure out the right weighting of technical (engineers) versus technological (data scientists and software engineers) staff and how the sector can attract the latter. Moreover, as companies become more efficient through the application of digital solutions and the likelihood of sustained lower oil prices, it is unclear if head counts return to pre-2014 levels.
Mining industry wages in the US are slightly higher than the national average as sophisticated equipment and machinery require technical skills and training. Stone mining and quarrying wages are moderately higher than the national average.
However, safety is still a major issue. An explosion killed 29 miners in 2010 at the Upper Big Branch mine in West Virginia (then owned by Massey Energy, but later acquired by Alpha Natural Resources). The explosion and the ensuing investigation, which resulted in hefty fines, a prison sentence for Massey”s then-CEO, and considerable media attention, renewed interest in miner safety. Internationally, mine fires, floods, and cave-ins still trap and kill dozens of miners each year. In developing nations many mines are illegal and run without safety precautions, adding to the risks.
Irrespective of near-term uncertainty, the 2019 energy conversation is expected to increasingly include long-term issues. Sustainability is no longer a niche issue for energy companies. It is moving to the center of strategy and investment decisions. Major oil companies are investing in renewable energy; natural gas producers, shippers, and consumers are increasing their focus on mitigating methane emissions; and chemicals producers are ramping up their efforts to find solutions to plastic waste, through recycling and use of new materials and processes. Some countries are also stepping up efforts to reduce the environmental and carbon footprints of their energy and industrial sectors, with China, in particular, taking major steps to close down polluting factories and shift towards cleaner energy. Moreover, technology is not standing still—the scope and pace of growth for low-carbon energy, autonomous and electric vehicles, energy efficiency, and distributed energy is becoming not just a topic for futurologists, but a focus of decision-making throughout the oil and gas and chemicals value chains.
The abundance of moderately priced natural gas in North America, like that from the Marcellus and Permian Basins, does not get as much attention as the oil sector. And yet it is enabling very material long-term change in US and global energy markets. Natural gas continues to grow as a source of lower-carbon power generation here and abroad. The wave of new investment in petrochemical facilities would not be possible without the growing US natural gas and NGL supply. Moreover, the United States is now a major player in global LNG markets, with two facilities in operation, at Sabine Pass and Cove Point, and four more due to start up in 2019. This is expected to shape global prices, trade flows, and business models. Although uncertainty exists, the recent decision to take final investment decision (FID) on another major North American LNG project (LNG Canada in Western Canada) is a strong vote of confidence in the viability of North American gas supply.
Oil and gas and chemicals companies are not newcomers to the sustainability agenda. They have been reporting and communicating on environmental footprints, impact mitigation, and sustainability for some years now. However, increasing consumer awareness of environmental and climate impacts and societal expectations are driving more and more companies to embrace sustainability as a core part of business strategy, rather than a niche add-on activity. And it’s not just about plans and communications. Major oil and gas and chemicals companies are making increasingly sizable investments in companies and technologies that bring renewable, low-carbon energy to consumers and to reduce their own environmental and carbon footprints.
As alluded to in the 2018 Oil and Gas Industry Outlook,6 opportunities from digital technologies are becoming increasingly apparent and have the potential to unlock new value. More and more companies are looking hard at deployment of artificial intelligence, analytics, robotics, and blockchain to increase efficiency, productivity, reliability, and predictability of operations.
However, implementation at scale can be complex in the capital-intensive oil and gas and chemicals environment where the challenges of legacy equipment and the large number of suppliers should be addressed. Refining and petrochemicals have been in the vanguard of process automation for many years, but we are now seeing signs that the other sectors are turning their attention to digital opportunities. Those that succeed could be well-equipped to thrive through business cycles and be responsive to customer and societal expectations.
Regional & International Issues
China is the top mining country for many commodities, producing about 60% of global production in 2022, according to Statista. Major mining companies located outside the US include Barrick Gold (Canada), BHP Billiton (Australia), Coal India, Glencore (Switzerland), Grupo Mexico, Nornickel (Russia), Rio Tinto (UK), and Vale (Brazil).
Coal mining companies around the world produced more than 8,000 metric tons of coal in 2022. The world”s most mined nonmetallic minerals are lime, salt, and phosphate rock. Some of the world”s most mined metals are iron ore, coal, potash, and copper, according to Statista.
Global coal consumption is expected to flatten by 2025 at about 8 billion tons, after a 7% decline between 2018 and 2020. Countries with growing economies and large mineral resources, such as China and India are poised for the most growth in the minerals industry. The expansion of infrastructure in developed countries will continue to drive growth in demand for nonmetallic minerals through 2030, according to Euler Hermes. China and India are securing an adequate supply of coal to support economy growth and imports through various government initiatives.
China and India produced about 70% of the world”s almost 8 billion tons of coal in 2021, according to BP. The US, Europe, and Russia follow in coal production; however, their production is minimal compared to China”s.
In recent decades, foreign direct investment (FDI) has increased among some of the world”s largest mining regions. Both China and Brazil now encourage FDI, which can create capital for technological improvements to modernize mines, improve efficiency, and expand exploration. Lower exploration and labor costs and favorable tax structures can make both countries attractive to foreign investors. However, concerns over poor miner safety, environmental risks, illegal mining, and mine theft could thwart future FDI expansion.
Working conditions are a problem in the mining industry, particularly in less developed countries or those with fewer regulations. Asbestos remains one of the most mined nonmetallic minerals in the world, although its use is banned or restricted in only 67 out of 195 countries.
Diamond mining in Africa has long been associated with labor abuses. The international community has attempted to eliminate the illicit diamond trade by creating the Kimberley Process, which certifies diamonds are conflict-free. Critics contend that the process is flawed and labor abuses in diamond mines are still problematic. Diamond company De Beers and other diamond producers are experimenting with blockchain, an open ledger technology, to trace a stone from mine to retailer. Miners of all types may soon be using blockchain to bring efficiency and transparency to global supply chains.
In the US, coal is mined across various states, but reserves are concentrated in three areas: the Appalachian Coal Region, the Western Coal Region, and the Interior Coal Region. Some of the largest coal mines in the world are located in the Powder River Basin (PRB) in the Western Coal Region. About 70% of total US coal is produced in Wyoming, West Virginia, Pennsylvania, Illinois, and North Dakota. Wyoming is the largest producer, accounting for about 40% of US production. West Virginia ranks second, accounting for about 15% of production.
The US mineral quarrying industry is local; every state has quarrying operations. The leading US states for overall nonmetallic mineral production by number of establishments are Texas, Pennsylvania, California, Missouri, and Ohio. Texas is the top producer of stone, crushed and broken limestone, and sand and gravel. Major salt-producing states include Kansas, Louisiana, Michigan, New York, Ohio, Texas, and Utah, which together produce about 95% of the salt in the US. Florida and North Carolina together account for about 75% of US phosphate production.
In the US, the metals mining industry is concentrated in the West. Nevada, Alaska, Colorado, Arizona, and California are among the top states with the most metal ore mines.
Oil and natural gas systems encompass wells, gas gathering and processing facilities, storage, and transmission and distribution pipelines. These components are all important aspects of the natural gas cycle—the process of getting natural gas out of the ground and to the end user. Natural gas systems encompass the following industry segments:
When crude oil is first brought to the surface, it may contain a mixture of natural gas and produced fluids such as salt water and both dissolved and suspended solids. On land (and at many offshore operations) Natural gas is separated at the well site and is processed for sale if natural gas pipelines (or other transportation vehicles) are nearby, or is flared as a waste (at onshore operations only). Water (which can be more than 90 percent of the fluid extracted in older wells) is separated out, as are solids. Only about one-third of the production platforms offshore in the Gulf of Mexico separate water. The other offshore Gulf platforms transport full well stream, sometimes great distances, to central processing facilities. The crude oil is at least 98 percent free of solids after it passes through this onsite treatment and is prepared for shipment to storage facilities and ultimately refineries (Sittig, 1978).
Natural gas can be produced from oil wells (called associated gas), or wells can be drilled with natural gas as the primary objective (called non-associated gas). Methane is the predominant component of natural gas (approximately 85 percent), but ethane (10 percent), propane, and butane are also significant components. The heavier components, including propane and butane, exist as liquids when cooled and compressed; these are often separated and processed as natural gas liquids.
Less frequently, oil and gas can be produced by other methods. Oil can be found in tar sands, which are porous rock (sandstone) structures on the surface to 100 meters deep. The material is fairly viscous and also is fairly high in sulfur and metals. Although the Athabasca region in Canada is the primary area of significant tar sand mining, there are some deposits in the western United States.
Oil may also be extracted from oil shale. These deposits may be 10 to 800 feet below the surface and can be removed by surface mining or subsurface excavation. The oil, in a highly viscous form called kerogen, is usually heated to allow it to flow. Because only approximately 30 gallons (less than a barrel) are produced per ton of shale, the process is costly, and the oil shale mining industry is currently only a minor contribution to the domestic oil supply.
A small but increasingly significant source of natural gas is coalbed methane. In all coal deposits, methane is found as a byproduct of the coalification process and is loosely bound to coal surface areas. This methane historically was considered a safety hazard in the coal mining process and was vented, but recently it has been recovered in conjunction with mining or produced independently via wells in deposits that are too deep for mining. Generally, coalbed methane is collected by drilling a well similar to those used for conventional oil and gas deposits, but with some adaptations to accommodate mining operations and different rock characteristics (EPA, 1992). In 1997, coal bed methane production accounted for six percent of the total U.S. natural gas production (EIA, 1998).
Methane hydrates are another form of natural gas, for which economically viable recovery methods are still in development. Methane hydrates are structures in which methane molecules are trapped within a lattice of ice. They are found principally in cold and/or pressurized conditions: on land in permafrost regions, or beneath the ocean at depths greater than 1,500 feet below the water surface. These eventually could be an immense resource; estimated amounts of methane in these structures in the United States is 200,000 trillion cubic feet, compared to an estimated 1,400 trillion cubic feet in conventional natural gas deposits. A goal of the U.S. Department of Energy methane hydrates research program is to develop a commercial production system by the year 2015 (U.S. DOE, 1998).
Transmission: Delivery of natural gas from the wellhead and processing plant to city gate stations or industrial end users. Transmission occurs through a vast network of high pressure pipelines. Natural gas storage falls within this sector. Natural gas is typically stored in depleted underground reservoirs, aquifers, and salt caverns.
Distribution: Delivery of natural gas from the major pipelines to the end users (e.g., residential, commercial and industrial).
In the oil industry, some underground crude contains natural gas that is entrained in the oil at high reservoir pressures. When oil is removed from the reservoir, associated natural gas is produced.
Major products of mining companies typically include coal, nonmetallic minerals, and metal ores. The mining of processed bituminous coal accounts for about 20% of industry revenue, while gold ore and copper and nickel ore mining account for about 10% each. Within the coal sector, primary products are bituminous coal, sub-bituminous coal, and lignite. Major nonmetallic minerals are crushed and broken limestone; construction sand and gravel; crushed and broken granite; potash, soda, and borate; and phosphate rock. Crushed stone, sand, and gravel are also referred to as?aggregates. Copper and nickel, gold ore, and iron ore are major metallic ore products.
Coal, minerals, and metal ores are produced either from underground mines (generally 1,000 feet deep or more) or surface mines (up to about 200 feet deep). Almost all US mineral and metal ore mining companies use open-pit mines, or surface mines, where the surface is blasted to reach mineral and ore deposits. About 60% of US coal in 2019 came from surface mines.
In underground mines, minerals and ores are removed using either room-and-pillar or longwall mining techniques. In surface mines, minerals and ore are extracted by drilling holes or cutting benches in the rock for explosives. After blasting, the mineral or ore is removed using huge earthmoving equipment such as power shovels and draglines. Smaller shovels are used to load it into trucks, rail cars, and conveyors for transport for further processing.
Many mining operations include preparation plants where the coal is crushed to the proper size for customers, so that the delivered product can be used directly. Processing is called beneficiation and involves removing unwanted parts to improve the quality and purity of the metal, mineral, or coal. Steps include crushing, washing, filtering, sorting, sizing, separating, and acid leaching.
Waste material, created by mining and processing, can account for a majority of the rock volume in the case of precious metals, such as gold and silver. Mine tailings contain impurities and chemical residues that were used in beneficiation. Acid drainage into groundwater, caused by leakage or seepage during leaching, can be an environmental problem. US environmental regulations?require companies to return abandoned quarries back to their original look and use.
Because coal, metals, and minerals are bulky and costly to ship, transportation from mine to customer is an important consideration, as customers usually pay those costs. Since it is cheaper to move electricity than coal, for example, utility companies, the primary coal customer, often locate generation facilities close to mining areas.
Operators sometimes own the land they mine, but most often hold leases that allow them to remove the ore in exchange for royalty payments. Some operators mine minerals and ores under contract to the owners. The value of a mine depends on the amount of recoverable reserves it contains.
Technology investments focus on production improvements and exploration efficiency. Metal and mineral mining companies are increasingly using global positioning, communications, and imaging satellites to improve exploration, production, and reclamation efforts. A global positioning system (GPS) is used with mining machinery to make delivery of metals and minerals more efficient and safer, and to help place explosives for maximum precision in blasting holes.
Improvements in management information systems enable better production tracking and enhance scheduling of workers and machines. In addition to efficiency improvements, investments are also being made in microturbines to produce electricity from coalbed methane (CBM), a form of natural gas trapped within coal seams.
Drones have also become a key tool for miners. The devices, also known as unmanned aerial vehicles (UAVs), can fly over mines or potential mining sites to capture high-resolution images and other information used to create 3-D topographic blueprints. They can also be used to monitor equipment and stockpiles and for search and rescue operations. UAVs can provide information on hard-to-reach areas at less expense than helicopters and faster than ground exploration.
Mining companies are further maximizing the use of drones in operations through incorporating the use of interconnected sensors. Some companies deploy drones with InSAR sensors that enable then to perform in-site scanning. Companies such as Rio Tinto is making use of automation in their operations, developing cargo ships as well as driverless trucks that is equipped with Automatic Haulage System (AHS).
Demand for coal comes mainly from generators of electricity. Metal ore demand is driven by industrial production. Nonmetallic mineral demand is driven by construction spending and agricultural spending on fertilizers. Large companies can afford to discover and develop new deposits and increase reserves. Small companies typically own just one mine, limit exploration to that one property, and operate it as efficiently as possible.
The US imports minerals and ores primarily from Canada, Australia, Peru, Colombia, and Brazil. Imports account for about 10% of the US market. Mineral and ore exports account for about 20% of US production. Major export destinations include Canada, China, Japan, Mexico, and South Korea.
If there is one constant in energy markets, it is change, as prices shift and companies adapt. Separately, the chemicals industry has enjoyed positive growth and margins for the past few years, so we will be watching to see if signs of a slowdown emerge. Although no one can truly claim to know what will happen in the next 12 months, it is useful to try to understand how the business environment might evolve.
In oil markets, the depths of the post-2014 downturn seem to be behind us. Oil prices have recovered from the $40 2016 annual average WTI (West Texas Intermediate) price low. It breached $50 in 2017, and through September 2018 it averaged just shy of $67, though many producers in Canada and the Permian saw lower prices due to widening differentials. This recovery has been a result of various factors, including sustained success of the production restraint agreement between OPEC (the Organization of the Petroleum Exporting Countries) and non-OPEC countries in force since the beginning of 2017, less oil coming to market from challenged producers, and continued strong global oil demand growth estimated by the Energy Information Administration at about 1.6 million b/d in 2018. These forces together have brought global oil inventory levels down by more than 175 million barrels since 2016 and buoyed prices.1
These more positive signals have helped US crude oil and natural gas liquids (NGL) production enjoy another impressive growth year, adding an estimated two million b/d in 2018, led by the prolific Permian Basin. Natural gas is a different story, as 2018 prices in the United States remained anchored around $3, as plentiful, low-cost US supply continued to meet growing demand in domestic and export markets.2
Indeed, across oil, natural gas, and chemicals, increasing US exports are helping to bolster activity, with all showing continued growth in shipping to international markets. The United States has been a major producer, but now it is consolidating its position as a leading exporter of crude oil, refined products, and natural gas, thereby becoming a big influence in global market trends.
Upstream capital expenditures have not yet recovered commensurately with prices in 2018 as companies remain cautious, at least for the time being. At the moment, their focus seems to be more on demonstrating returns rather than investing for new growth.
In the chemicals industry, at this stage of the capital cycle, major new capacity in base chemicals is expected to be commissioned now or in the near future. An area of risk may be whether this might lead to lower margins by getting ahead of demand trends. However, the industry could well avoid anything more than a mild downturn by phasing in ramp-ups in the new capacity, selling to the North American market, which is still quite robust, and taking advantage of improved US port facilities to export more efficiently to international markets. So, even with a possible slowing of emerging market growth, and a shift to more reuse of plastics, the chemicals industry in the United States looks reasonably well-shielded from significant downside risk.
Sales & Marketing
Companies that generate electricity are the primary customers of mining companies in the coal industry. Coal companies also sell coal to industrial customers to produce steam for various manufacturing processes and to the steel industry to make coke for steelmaking.
Most coal is sold directly to end-users through long-term supply contracts and the remainder is either sold in the spot market or through brokers. The terms of long-term contracts vary significantly among customers and usually include provisions for price adjustments, coal quality and quantity, and a variety of renegotiation and termination conditions. Mining operators depend highly on their customers, as many sell to just a few large customers, and small operations may sell to just one.
For nonmetallic minerals mining companies, the major customer is the local construction industry. In 2020, about 70% of crushed stone was used as construction aggregates for projects such as road construction and maintenance, and about 25% was used to make cement and lime.
Marketing and advertising expenses are low for nonmetallic mineral mining, relative to other administrative costs. Companies respond to public works requests for competitive bids and develop close relationships with local builders to learn of upcoming construction projects.
Metal ore customers are metal traders, wholesalers, and refiners/processors that purchase unrefined metals to produce gold bullion, silver ingots, and refined copper, nickel, and other metals.
Metals are internationally traded commodities. Prices are effectively determined by three major metal exchanges – the New York Commodity Exchange (COMEX); the London Metal Exchange (LME); and the Shanghai Futures Exchange (SHFE). Prices generally reflect the worldwide balance of supply and demand, but are also significantly influenced by currency and bullion speculation. Contracts are generally for one year.
The 2018 recovery in commodity prices and cash flows has been good news for the sector. The challenge now will likely be to translate that into sustainable profitability and returns. The downturn saw tremendous gains in cost containment, capital high-grading, and operating efficiency. Will this discipline be maintained? Some costs will inevitably rise, not only to restore margins in the service sector, but also due to rising materials costs. The question is whether acceptable returns can be generated through the commodity price cycle. Learnings from the oil and gas industry downturn should not be forgotten, and continuous improvement in technologies and operating practices will go on, as they always have. Industry players could focus on two key lessons: adopting a disciplined approach to capital investment decisions and leveraging digital technologies to achieve higher capital productivity.
Building and expanding pipelines, processing facilities, import and export terminals, storage facilities, and LNG plants is a vital but often underappreciated part of the value chain. Crude oil price discounts have at times topped $20 in the Permian Basin and $50 in Western Canada because pipeline build-out lagged wellhead activity.5 The phenomenal growth in natural gas production in the Marcellus Basin has often outstripped pipeline capacity, depressing prices for producers. Planning, permitting, and constructing infrastructure seems to be getting longer and more complex and is more often litigated by opposing groups. There are major infrastructure projects moving forward, but delay can be costly. No one in oil and gas or chemicals development can afford to ignore how this plays out, impacting price spreads and physical capacity to move products.
Cash flow for mining companies can be uneven due to dependence on end-use industries, such as utilities or the construction industry. The mining industry is capital-intensive: average annual revenue per employee in the US is about $460,000.
Ongoing capital investments are required to replace, modernize, and expand equipment and facilities. Exploration to find new mining reserves also requires significant investment. Operating costs are higher for underground mines than for surface mines. For the industry in the US, property, plant, and equipment typically account for about 35% of a company”s assets.
The mining industry in the US is heavily regulated by the US Geological Survey (USGS), the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE), the Office of Surface Mining Reclamation and Enforcement (OSMRE), and the US Environmental Protection Agency (EPA), as well as state and local agencies. Water discharge is regulated by the Clean Water Act. The Clean Air Act regulates dust pollution and also regulates coal companies indirectly by tightening allowable emissions for electricity generation plants that use coal. Reclamation requirements dictate mine waste disposal and mine property restoration. Companies pay into the Abandoned Mine Land Fund to remediate damage of acid drainage from abandoned mines. Coal companies also must assure medical expenses for miners with “black lung” disease, under the Black Lung Benefits Act (BLBA).
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