WITH OIL PRICES ON THE RISE, IS THE MARKET FOR FRAC SAND ABOUT TO HEAT UP AGAIN?
By Mark S. Kuhar
It’s all about oil prices. The dramatic drop in the price of a barrel of oil over the past year has had the frac sand industry scrambling to make ends meet. With drilling at a standstill, only wells currently in production were driving progress.
According to Wisconsin Public Radio, despite oil prices hitting their lowest point in more than a decade in January, some frac sand market analysts expect prices to improve this year and demand for Wisconsin sand to grow.
For the first time since 2003, the price of crude oil dipped below $27 a barrel, sending stock prices tumbling with it. But Samir Nangia, an oilfield services analyst, said that things are looking up in the long term.
“You don’t just look at the spot price,” he said. “You look at the next 18-to-24 months’ prices, and those do show an upward sloping price for oil.” Nangia said his firm, IHS, has forecast oil prices to average above $40 a barrel through 2016. At that price, he said, fracking oil wells in Texas and parts of North Dakota can still be profitable, meaning demand for Wisconsin frac sand could be on the rise. Nangia also stated that if prices exceed their forecast, energy producers will respond.
“So, as soon as oil prices hit $60 a barrel, most people expect that the U.S. will turn the production back on, and within a period of 12 months to 18 months, after that you’ll have a serious supply response,” said Nangia.
Indeed there appears to be positive change brewing.
Oil prices in March did rise after a top energy monitor said that prices might have bottomed on hopes that falling supply would help alleviate the global glut of crude. The International Energy Agency said that prices have been supported by easing supply around the globe but cautioned that the recent rally might not be sustainable as the demand outlook remains uncertain.
Crude prices rebounded by around 40 percent since their lows earlier in the year. Brent crude, the global oil benchmark, rose 1.7 percent to $40.76 a barrel on London’s ICE Futures exchange. On the New York Mercantile Exchange, West Texas Intermediate futures were trading up 2.4 percent at $38.76 a barrel. Both benchmarks are up around 14 percent last month.
Oil prices could move back above $50 a barrel within the year in the view of Qatar’s energy minister, Mohammed bin Saleh al-Sada, who also holds the rotating presidency of OPEC. “At the moment the best possible feasible proposal is to freeze at the level of production of January,” al-Sada said in an exclusive interview with CNN Money. “We think [a production freeze] will gather more and more approval because it is [in] the interest of all parties.”
Five of OPEC’s 13 members – Saudi Arabia, Kuwait, UAE, Qatar and Venezuela – plus Russia, have agreed to keep output steady. The idea is that by freezing production the countries will be able to fight a global supply glut, and save their endangered economies. But oil markets continue to be rattled by chaos within OPEC. Iran has blasted the production freeze as a “joke,” and Saudi Arabia says it is not prepared to cut output.
Market Spotlight
PropTester Inc. and KELRIK LLC announced the release of the latest Proppant Market Report. The 2015 Proppant Market Report is a detailed overview of the global proppant market in relation to prior years.
Producers of frac sand, ceramic proppants and resin-coated proppants indicate that approximately 110 billion lb. (55 million tons) were supplied in 2015. Despite significantly reduced rig count activity and depressed energy prices, 2015 ranks as the second largest year in terms of total proppant volumes supplied.
North America continued to drive demand. Over 60 sand, ceramic and resin coat companies were actively engaged in proppant production in North America alone, with the five largest producers accounting for over 50 percent of total demand.
Whereas all proppant types experienced constriction compared to the 135 billion lb. supplied in 2014, frac sand was the least impacted. High proppant intensity completions and product substitution toward lower cost natural proppants benefitted sand producers.
Frac sand accounted for more than 92 percent of the 2015 market, whereas ceramic proppant and resin-coated proppant volumes both declined significantly to levels not seen since 2010. All proppant types have and continue to feel the impact of excess capacity and pricing weakness.
The global proppants market is expected to grow at a CAGR of 13.68 percent to reach $115.68 billion by 2022, according to another new study by market consulting firm Stratistics NRC. Industrial shift toward alternative energy resources is the key factor favoring the market growth.
An increasing demand for energy and unconventional gas are the key drivers, whereas high logistics cost is inhibiting proppant market growth. Future growth lies in potential explorable reserves, the company said.
Producers Speak
Frac sand producers have been struggling, but some are still bullish on the market.
“We are proud of how our entire team has responded to such a challenging market, as declining oil prices and rig counts continued to drive down frac sand demand throughout 2015,” said Ted W. Beneski, chairman of the board of directors of the general partner of Emerge Energy. “We are still confident that the general oil and gas market and the frac sand market will recover, and we now believe that recovery may occur in 2017.”
“The Sand segment generated adjusted EBITDA of $2.5 million for the fourth quarter and $46.9 million for the year,” said Rick Shearer, CEO of Emerge Energy. “Our fourth quarter volumes were down approximately 27 percent from the third quarter of 2015, and market pricing, as well as the prices we have negotiated with our customers, have continued to decline. While our team has been very successful in lowering our production costs, and believe we will continue to do so in the near future, our fixed rail expense remains significant. We are taking a number of steps to reduce that cost, such as cancelling or pushing out in-service dates for future railcars, seeking rate relief, and aggressively pursuing opportunities to sublease a portion of our idle railcars.
“2016 is expected to be another challenging year for our industry, but the Emerge Energy team sees this time as an opportunity to further build our position as one of the elite frac sand companies in the industry through our excellent customer service, product quality, and the introduction of exciting, industry-leading new technology,” Shearer said. “When this market ultimately recovers, we expect to be one of the top sand companies positioned to quickly respond to our customers’ needs and enjoy rapid growth yet again.”
“The fourth quarter of 2015 was very challenging,” said Robert E. Rasmus, chief executive officer of Hi-Crush. “These difficult conditions have extended into the first quarter of 2016, and while pricing has not deteriorated further, it has not improved. We anticipate that the lower levels of activity we experienced late in the fourth quarter will continue at least through the first half of the year. Although, the trend forward into 2016 reflects the impact of further oil price declines with fewer wells being completed, we remain confident that the long-term fundamentals of the industry remain strong.”
If transloading is any indication, the industry still has some life despite lower production.
Dakota Plains Holdings Inc. announced that it transloaded 605,000 tons of frac sand in 2015, an increase of approximately 251 percent compared to 2014. The company commenced sand transloading operations in June of 2014.
Revenue from frac sand transloading was $1.1 million for the fourth quarter of 2015 compared to $0.6 million for the same period of 2014. The increase in revenue was driven by volume as the company transloaded approximately 159,000 tons of frac sand during the fourth quarter of 2015 compared to approximately 81,000 tons during the same period of 2014, a 97 percent increase. The cost of revenue related to frac sand transloading was $0.1 million compared to $0.3 million for the fourth quarter of 2014. The decrease was due to improved efficiencies as a result of bringing the transloading operations in-house during the second quarter of 2015.
Craig McKenzie, chief executive officer of Dakota Plains, said: “The energy industry, including the U.S. midstream segment, experienced a significant downturn in 2015. Despite this challenge, we were able to increase throughput volumes in both oil and sand transloading, and gain significant market share in both businesses. In addition, by materially reducing our operating costs, we were able to increase our cash margin for operations and delivered a 151 percent increase in EBITDA.”
McKenzie continued, “Notwithstanding the recent uptick in oil prices, future development and production levels in the Bakken remain uncertain. We are maintaining diligent oversight of our operations, as well as our financials, while we also pursue strategic alternatives.”
Twin Eagle Sand Logistics LLC announced that it has commenced commercial operations at the Permian Rail Park, the newest addition to its terminal network. The Permian Rail Park is located on the Union Pacific Railway approximately eight miles west of the city of Big Spring, Texas. The 530-acre rail park is Twin Eagle’s fifth terminal development and is centrally located to serve the Eastern side of the Permian known as the Midland Basin.
Phase I of the project comprised more than 33,000 ft. of rail track, which will be initially used for rail-to-truck frac sand trans-loading services. Twin Eagle also has Phase II plans to develop a loop track capable of supporting crude-by-rail market activity as well as infrastructure to handle trucking solutions for both crude and frac sand.
“Our customers continue to demand centrally located unit train capable terminals, which reduce both rail and last mile costs of well completion. We believe the Permian Rail Park is ideally situated to efficiently serve the eastern side of the Permian Basin for many years to come,” said Griff Jones, Twin Eagle’s chief executive officer. “The Permian Rail Park, which is supported by a sand trans-loading contract with a major E&P anchor tenant, is another terminal in our growing portfolio that serves our customers’ needs by providing the potential for lower ‘landed in’ sand costs driven by faster trans-loading times and lower demurrage charges.”
Plants Still Opening
New frac sand plants are still being seen through to completion despite the market malaise, especially in Texas. Halliburton officially opened its Elmendorf South Texas Sand Plant with a ribbon-cutting ceremony. It is the largest Halliburton sand facility in the world and represents a $35.7 million investment.
The facility, with eight silos and a laboratory, is located at the Alamo Junction Rail Park in Elmendorf, about seven miles from the company’s South Texas Operations Center in southern Bexar County. It has the capability to offload 150 railcars and load 450-500 trucks daily.
“This is good for our customers, and gives Halliburton a competitive, long-term advantage in this South Texas market,” said Paul Sheppard, vice president, Halliburton Southeast Area.
Participating in the event were representatives from Halliburton, the city of Elmendorf, and Alamo Junction Rail Park companies.
Permian Frac Sand has opened a location three miles east of Voca, Texas, on State Highway 71. Operations at the new state-of-the-art facility have just begun, according to the Midland Reporter Telegram.
Investors are opening a frac sand mine despite a dramatic industry slowdown that has seen the nation’s rig count sink 60 percent. Though fewer wells are being drilled, those that are being drilled require more sand for frac jobs, said Richard Coats, who is investing in Permian Frac Sand along with Kip Agar and Don Smith of Smith Brothers Pipe.
“Historically, a frac job required 1 million lb. of sand; now it’s 8 million or 12 million lb. of sand,” Coats said. “Twelve million lb. of sand used to cover 12 wells; now it covers one well. The rig count may be half what it was, but sand quantity per well is up,” he said.
The mine will have initial capacity of 100 tph, and will offer 20/40, 30/50, 40/70 and 100 mesh Brady Brown sand from the Hickory formation. The company said that they’re learning the area’s geology and that some areas yield more 20/40 sand, and another more 30/50 sand.
The three believe the mine’s proximity to Permian Basin oil fields offers them an advantage. “A lot of the sand historically comes from the north, from Wisconsin or northern Illinois,” Agar said. “It’s gotten so expensive, people are looking for local sources. We believe we have a cost advantage because of transportation costs.”
New Frac Sand Study Focuses on Social Impacts
A new policy study, “Social Impacts of Industrial Sand (Frac Sand) Mining: Land Use and Values,” was released by The Heartland Institute. According to the group, “It is intended to help local policymakers and the general public better understand the potential impacts of industrial sand operations on property values in the vicinity of sand-mining operations.”
The study was written by Mark Krumenacher, a senior principal and senior vice president of GZA GeoEnvironmental Inc., and Isaac Orr, a research fellow at The Heartland Institute.
The conclusion of the study is that mining is an indispensable part of life. It is not a threat to tourism, scenic beauty or property values.
The Heartland Institute hopes it will join the other policy studies in this series as a resource for understanding the concerns, potential impacts and benefits associated with industrial sand mining.
Previous studies included:
- Environmental Impacts of Industrial Silica Sand (Frac Sand) Mining #137 (May 2015).
- Economic Impacts of Industrial Silica Sand (Frac Sand) Mining #138 (June 2015).
- Roadway Impacts of Industrial Silica Sand (Frac Sand) Mining #139 (September 2015).
Health Impacts of Industrial Sand
The Institute for Wisconsin’s Health, an independent, non-partisan public health institute, released a Health Impact Assessment (HIA) researching the potential health impacts of industrial sand mining in western Wisconsin.
“Prior to this assessment, there had not been a comprehensive study that looked at the potential health risks and benefits of industrial sand mining on a community level. We are grateful for the assistance of all the business, community, and scientific representatives that assisted us with this effort and are very pleased to share the report with our project partners and the public. We hope that it will be a valuable resource for policy makers and community members alike,” said Nancy Young, executive director of the Institute for Wisconsin’s Health.
The Institute for Wisconsin’s Health collaborated with 14 local health departments, the Ho-Chunk Nation Department of Health, the University of Iowa’s Environmental Health Research Center, sand mining industry representatives, expert reviewers and community members over the past year to gather and analyze information on the potential health benefits and risks of industrial sand mining in western Wisconsin.
Participating health departments include Barron, Buffalo, Chippewa, Clark, Dunn, Eau Claire, Ho-Chunk Nation, Jackson, LaCrosse, Monroe, Pepin, Pierce, St. Croix, Rusk, and Trempealeau counties.
“Our health department is committed to keeping our community informed and healthy. This assessment takes a fair and balanced look at the health impacts of industrial sand mining in our area and adds an important voice to the discussion. We plan to use its findings to inform our citizens and to help ensure that Trempealeau County remains a healthy place to live, work and play,” said Sherry Rhoda, Trempealeau County Health Department health officer.
Health Impact Assessments examine potential risks and benefits to the health of communities and factors in the perspectives of people and organizations that may have very different opinions.
“At the beginning of this assessment process, we committed to providing an unbiased and scientific assessment of the potential positive and negative health impacts of industrial sand mining. Community members as well as health and environmental experts contributed to this process and developed recommendations that will support community health,” added Audrey Boerner, Health Impact Assessment Specialist with the Institute for Wisconsin’s Health.
The Institute for Wisconsin’s Health’s HIA, “Health Impact of Industrial Sand Mining in Western Wisconsin,” can be found at www.instituteforwihealth.org/hia.html.