The high-profile frac sand market is experiencing growing pains, but aggregates producers should take note: the long-term opportunity is too good to pass up.
By Mark S. Kuhar
Many aggregates producers have heard about the explosive growth of the frac sand market in the United States, and the potential for international growth as well. Frac sand plants are currently being operated by everyone from giant corporations with extensive resources and high-tech equipment, all the way down to wildcat producers with a small deposit and mobile equipment.
Make no mistake, the frac sand market is here to stay. And while historic price-per-ton levels are a thing of the past, the product is in demand and the payback is still lucrative.
The U.S. market for frac sand is in the midst of a major economic boom with significant growth continuing for the foreseeable future. The International Energy Agency predicts that more than a half-million new wells will be drilled in the United States by 2035, creating the need for a steady stream of high-quality frac sand. According to PropTester Inc. and KELRIK, LLC from its 2011 Proppant Market Report, as reported in the Wall Street Journal, production jumped to 28.7 million metric tons in 2011.
U.S. demand for well stimulation materials such as frac sand is forecast to rise 10.2 percent annually to nearly $12 billion in 2016, according to a study offered by Cleveland-based The Freedonia Group. Growth will be driven by continued advances in hydraulic fracturing technology designed to increase the productivity of both new and existing wells. Proppants (another name for frac sand), gases, and base fluid materials will be among the fastest growing products.
Ongoing growth in horizontal drilling activity and development of shale resources will boost demand for proppants and the fluids used to deliver them into formation fractures. In the early portion of the forecast period, use in oil well drilling will provide most of the impetus for growth, as oil prices are high by historical standards and natural gas prices are not. However, shale gas development activity was strong in 2009, 2010 and 2011, despite low prices.
Growth in shale plays has been supported by companies looking to establish a shale gas presence and the desire of existing producers to develop already acquired leases, as well as by hedges on production made when prices were high. Through the forecast period, shale gas producers will continue to embrace innovations such as multiple-well drilling pad systems and advanced hydraulic fracturing materials in order to improve drilling efficiencies and increase per-well output, all of which will benefit well stimulation material demand.
Well stimulation technologies have had a commercial presence for more than 60 years, but for much of that time these techniques were used fairly selectively. A number of factors have combined to transform well stimulation in the U.S. from a niche technology to one of the most common oilfield activities.
Technological advances have improved well stimulation techniques to the point that their use – and cost – is nearly always justified by increased well productivity. Going forward, gains for well stimulation materials will remain strong, despite some deceleration in growth. A decade or two ago, most wells drilled in the U.S. were not fractured. That is no longer the case.
Moreover, much of the recent growth in demand for well stimulation materials has been attributable to the emergence of horizontal drilling and multistage fracturing. Horizontal drilling allows for greater reservoir contact, and therefore faster and fuller well productivity. Multistage fracturing allows for a larger number of fractures to be created at specific locations within a single wellbore. Where fracturing jobs usually included two or three stages, they can now include up to a few dozen stages. Although it is expected that the number of stages per fracturing job will continue to grow, it is anticipated that this growth will be slower than the pace seen in the past several years.
Meeting Demand an Issue
Hi-Crush Partners L.P., a Wisconsin producer of frac sand, kicked off an Initial Public Offering (IPO) on August 16. The company, in its prospectus released prior to the IPO, documented some of the supply-line challenges the company and others like it face in the future.
The company concluded, “As demand for raw frac sand has increased dramatically in recent years, the supply of raw frac sand has failed to keep pace, resulting in a supply-demand disparity. While a number of existing and new competitors have announced supply expansions and greenfield projects, we do not expect the magnitude of these expansions to meet expected demand.”
The company noted that there are several key constraints to increasing raw frac sand production on an industry-wide basis, including:
- The difficulty of finding frac sand reserves that meet API specifications.
- The difficulty of securing contiguous frac sand reserves large enough to justify the capital investment required to develop a processing facility.
- The challenges of identifying reserves with the above characteristics that either are located in close proximity to oil and natural gas reservoirs or have rail access needed for low-cost transportation to major shale basins.
- The hurdles to securing mining, production, water, air, refuse and other federal, state and local operating permits from the proper authorities.
- Local opposition to development of facilities, especially those that require the use of on-road transportation, including moratoria on raw frac sand facilities in multiple counties in Wisconsin that hold potential sand reserves.
- The long lead time required to design and construct sand processing facilities that can efficiently process large quantities of high quality frac sand.
The Over-Supply Rumor
The buzz among some people analyzing the frac sand market is that the industry is about to become over-supplied. “An over-supplied commodity will price to a level that reduces supply enough to balance the market by forcing producers out of business. While we have not come across a frac sand project with cash operating costs north of $35 per ton, we consider that to be a reasonable base-case level for where pricing will return to in the coming quarters. This would represent a decline of more than 50 percent from current levels,” said one analyst, writing on the website SeekingAlpha.com.
Other analysts disagree. Sara Joyce, of Badger Mining Corp., concludes in her presentation “What is Happening with Sand Supply,” that:
- High frac sand demand will continue.
- Average frac sand prices remain well above other industrial users.
- Suppliers are diverting capacity to frac sand.
- Suppliers are adjusting their processes to create more frac sand.
- New capacity coming on line will be dedicated entirely to frac sand.
This is not to say there will not be issues with frac sand mining. According to Joyce, issues facing current and future plants include:
- Meeting quality/specification requirements.
- Public backlash due to environmental concerns, damage to local infrastructure and hours of operation.
What does this mean for aggregates producers? It means if you have the right deposit and the right equipment – and most importantly, the transportation logistics to get the product to the key markets where it is being used – you will have a viable and profitable product line for a long time, and one that is not tied to construction or federal infrastructure spending.