LOW OIL PRICES HAVE TAKEN THEIR TOLL, BUT FRAC SAND PRODUCTION CONTINUES AND THERE ARE POSITIVE SIGNALS AHEAD.
By Mark S. Kuhar
There is no denying that low oil prices have put a crimp in the once-thriving frac sand industry. Now that the price of oil has dropped by 50 percent or more – down to around $45 a barrel as of this writing – frac sand production in the hotbed state of Wisconsin has dropped by 50 percent, according to a report on Wisconsin Public Radio.
But that’s not to say there is no good news. Six-year-low crude oil prices may have decimated new drilling activity, but market indicators show there is a more intense use of frac sand in the new wells that remain in the Eagle Ford in Texas and other shale plays. A report from global investment bank Jefferies shows that use per well has been steadily increasing over the past three years.
According to the investment website Seeking Alpha, long term, the market dynamics for frac sand are still in place. “The amount of frac sand per well seems to be increasing for now based on the fact drillers are using more stages per well,” analysts said. “As prices fall, drillers are incentivized to increase the amount of frac sand they use per well to increase the Internal Rate of Return (IRR).”
Many drillers have shifted from a “total production at all cost” strategy to an IRR-focused strategy, which means they will likely keep increasing the amount of sand used per well. Short term, the number of wells drilled but awaiting completion may drive demand, but it is very uncertain if this will prove to be a lasting trend.
Major Producers Speak
Major frac sand producers are certainly feeling the pinch. In Hi-Crush Partners’ second quarter report, Robert E. Rasmus, co-chief executive officer, said, “The increasingly negative impacts of rig count and sand price declines in the second quarter more than offset positive trends of increased frac intensity. We now believe low levels of completion activity and sand demand will persist in the third quarter, pushing a recovery of demand and price increases further into the future. We believe in the long-term fundamentals driving increased sand demand, and are taking steps to further improve our competitive position.”
That view is reiterated by another major producer. “We are proud of the way the entire Fairmount Santrol organization has responded to the very challenging conditions in the oil and gas market,” said Jenniffer Deckard, president and chief executive officer. “Our focus is on reducing costs, maximizing efficiencies, developing differentiated products and gaining market share by helping our customers to lower costs and improve productivity. We and our customers continue to benefit from our terminal network, with 70 percent of our frac sand products sold in basin in the second quarter. This footprint differentiates Fairmount Santrol, allowing us to gain share and to realize solid returns on our logistics investments.”
Despite the market lull, projects are moving forward. Brilliant Sands President and CEO Marc J. Andrews commented, “Development work continues on schedule at all three of our frac sand properties and we expect to have our exploration reports completed by the third quarter of 2015, with our primary economic analysis finalized in early 2016. Once the exploration reports are finalized, the company will be able to market its findings and sign pre-sale contracts with potential customers.”
Andrews continued, “Low oil prices and the use of higher quantities of sand in fracking wells have put a profit squeeze on oil and gas producers. Canadian companies by and large have not cut their capital expenditures and continue to drill wells. As a result, Canadian oil and gas producers are especially eager to identify lower cost/high quality frac sand contracts. We believe that our exploration expenditures in the near-term will position the company to benefit from this increasing global demand.”
Market Outlook
Headwaters MB released its mid-year 2015 Oilfield Services Outlook, and in the report it notes that 2015 has thus far been a retrenchment year, with the number of land-based drilling rigs dropping by approximately 50 percent since November 2014 and companies in the oil services sector reacting to the new oil price deck reality.
In the proppant section, the report states that while increased demand for proppants over the last several years was driven by the growth in hydraulic fracturing, concurrent with the drop in oil prices, proppant demand is projected to drop from 110.1 billion lb. (55.1 million tons) consumed in 2014 to 79.6 billion lb. (39.8 million tons) in 2015. Those basins forecast to be affected most are the Eagle Ford and the Bakken, the Permian and Marcellus forecast to be least affected.
In 2014, 91.7 percent of the proppant mass consumed (101.0 billion lb.) was sand, which represents 65 percent capacity utilization based on current estimates of 85 million tons of sand currently available. Note that 66 percent of the available sand capacity is held by the top 10 sand suppliers. Unimin, holding the largest market share of capacity represents 12.6 percent of the total market, while U.S. Silica has recently surpassed Fairmount Santrol to represent 11.0 percent of the total market.
Private equity continues to have a high interest as investors and drivers in the frac sand space. Of the top 10 sand suppliers, six of these have ties to private equity (Chieftain, Hi-Crush, Preferred, Superior, Fairmount Santrol, U.S. Silica). E&P companies, in partnership with oilfield service companies, continue to refine their well design and hydraulic fracturing techniques to maximize hydrocarbon recovery from each well.
These techniques vary based on formation and well geology, but some of the more pervasive recent trends include longer lateral drilling lengths coupled with an increased number of hydraulic fracturing stages per well. E&P and oilfield service companies have also been increasing the amount of proppant used per frac stage and, together, these techniques have greatly increased the volume of proppant used in the completion of each well, which should positively impact sand volumes sold.
Coupled with pad drilling (and closer well spacing) and the potential re-fracking of old wells, proppant demand is expected to increase over the long term. Smaller grained sand is also increasing in use with 40/70 and 100 mesh product increasingly mined, particularly from Missouri and Arkansas, which is closer to the Eagle Ford and Permian end markets and has a delivered cost advantage to Texas over Wisconsin and Minnesota sourced sand.
While the long term looks promising, in the near term frac sand miners are feeling the pinch. Spot sand is currently selling for $35 to $40 per ton FOB Wisconsin, down from $50 to $60 per ton less than a year ago. EBITDA margins continue to drop, with the estimated average EBITDA per ton of sand sold for Q2 2015 to be in the $20 per ton range.
Demand to Increase
While the frac sand market currently rides out its lull, The Freedonia Group – a Cleveland-based industry market research firm – released a new report, “Proppants in North America.” The results may be surprising to some.
Demand for proppants in North America is forecast to increase 7.6 percent annually through 2019 to 162 billion lb., valued at $8.2 billion. With oil and gas prices expected to remain subdued in the near term, demand for proppants will decelerate from the extremely rapid growth posted between 2004 and 2014 and future gains will result primarily from increases in proppant loadings in unconventional well completions, the report states.
In addition to growth in unconventional drilling and completion activity, dramatic increases in the volume of proppants used per well have also supported rising proppant demand and a changing product mix, the report states, reiterating the general consensus of most industry analyses. According to analyst Jason Carnovale, “As oil and gas companies have gained experience in optimizing hydraulic fracturing design, they have increasingly shifted away from premium resin coated sand and ceramic proppants toward using much larger volumes of raw frac sand.”
While a period of high and relatively stable oil prices between 2011 and 2014 led to growth in well completion and hydraulic fracturing activity in the United States and Canada, prices have fallen substantially since and are not expected to recover fully until after 2019.
| NORTH AMERICAN PROPPANT DEMAND (million lb.) | |||||
| % Annual Growth | |||||
| Item | 2009 | 2014 | 2019 | 2009-2014 | 2014-2019 |
| Proppant Demand | 19430 | 112200 | 161900 | 42.0 | 7.6 |
| Raw Frac Sand | 17430 | 104000 | 151000 | 42.9 | 7.7 |
| Resin Coated Sand | 1020 | 3800 | 5200 | 30.1 | 6.5 |
| Ceramic | 980 | 4400 | 5700 | 35.0 | 5.3 |
| Source: 2015 by The Freedonia Group Inc. | |||||
As a result, drilling activity in liquids- rich unconventional plays is expected to be constrained through 2019, with export opportunities for natural gas providing some incentive to drilling in gas bearing formations. Improvements in drilling efficiency and falling well costs will allow for modest increases nonetheless. In large part, well productivity has increased as a direct result of the use of greater volumes of proppants in fracturing operations.
A number of specific unconventional resource plays are expected to see significant future growth in well completions, creating above average opportunities for proppants.
Among the largest proppant markets in the United States, Colorado, North Dakota and Oklahoma are expected to hold the best short-term prospects for volume demand growth, while Texas and Pennsylvania are forecast to grow more slowly.
In large part, this will result from the relative maturity of the Eagle Ford shale in Texas and the Marcellus shale in Pennsylvania when compared to the less developed unconventional plays in the former states. Canada is expected to see very strong growth, as the country holds a large volume of tight oil and shale gas resources yet lags the United States in their development, having focused investment more heavily on oil sands resources to date.
Facing Future Factors
According to Roskill’s latest report, “Frac Sands & Proppants North America: Industry, Markets & Outlook 2015,” the current market challenges should not detract from the overall key trends in the frac sands and proppant industries.
The hectic pace of shale hydrocarbon exploitation in the United States and Canada within the last 10 years has reversed the decline in exploitable oil and gas reserves and pushed so-called peak oil (and gas) decades into the future. The key to unlocking vast shale oil and gas resources so quickly in North America was the explosive expansion in output of hydraulic fracturing proppants, particularly natural frac sand, according to the report.
The tempo of development is unprecedented in the mineral extractive industry. Industrial sand production in the U.S. had reached a 30-year plateau of 20-25 Mtpy by 1970 with frac sand for conventional oil and gas wells accounting for 1 percent of its usage. Since then, a 200-fold increase in frac sand volume has occurred – most of it since 2002. By the end of 2014, natural frac sand accounted for over two-thirds of the U.S.’s 75 Mtpy production of industrial sand.
Demand for proppants, however, has not been a simple linear function of oil and gas development. Rapid changes in drilling technology and the evolution of hydraulic fracturing techniques have accelerated the rate of proppant application per hole drilled and the full potential is still to be realized.
A major innovation of the proppants industry has been to take control of the logistics chain from plant loading, long-distance transportation, portable storage near the destination market, transloading and “last mile” trucking to the shale drilling project. This practice for successful proppant suppliers is driving consolidation toward large, experienced companies. Small companies are becoming suppliers of washed or crude sand to some of the big operators.
Another key development in the industry has been the vertical integration of a few major petroleum companies into frac sand mining and processing to ensure timely delivery of supplies.
Novel analysis techniques have been developed by Roskill to forecast the variable decline in demand and prices for the three proppant types and their expected recovery periods and future prices.
This also served to identify the beginning of a major change in the dynamics of future oil and gas prices as a result of the success of hydraulic fracturing. This change might be described as the “commoditisation” of oil and gas.
In the future, with the expansion of shale exploitation outside of North America, many of North America’s existing proppants producers will be in a good position to supply foreign projects and return to full capacity, the report concludes.
Bank on the Future
A new Policy Study from The Heartland Institute shows industrial sand mining has been “a significant driver of economic growth across the Upper Midwest.” If done in an environmentally responsible manner, the study finds, “it can be an important source of employment and earnings for decades to come.”
“Economic Impacts of Industrial Silica Sand (Frac Sand) Mining” is the second in a series of studies by Heartland Institute Research Fellow Isaac Orr and geologist Mark Krumenacher, principal and senior vice president of GZA GeoEnvironmental Inc., addressing the mining of frac sand.
Krumenacher was a speaker at the first Frac Sand Insider Conference hosted by Rock Products magazine and Mining Media International.
“Industrial sand mining has been a big economic stimulus to Western Wisconsin,” said Orr. “When I started college at the University of Wisconsin Eau Claire in 2006, people there were still talking about how the town had never really recovered from the UniRoyal Tire factory closing in town, even though the tire factory closed in 1991. Now, thousands of people have high-paying jobs in the area.
“Oil and natural gas currently account for 35 and 28 percent of our total energy consumption, respectively, and we will continue to need increasing amounts of these resources in the future,” Orr continued. “Shale gas already accounts for 40 percent of our total natural gas production, and this figure is likely to grow, meaning frac sand mining will continue to be an important part of the Western Wisconsin economy for decades to come.”
Demand for frac sand has led many counties and municipalities to process applications for new mines and processing facilities. Policymakers and citizens in these communities need the information in this new Heartland Policy Study to make informed decisions about the economic benefits and costs of industrial sand mining. They should know:
- The benefits of silica sand mining include high-paying opportunities for employment, increasing regional economic activity, generating tax revenues for state and local governments, and improving economic diversity in rural communities that rely heavily on agriculture for household income.
- The costs include asserted negative effects on tourism and agriculture, and whether mining might result in “boom or bust” economic cycles and may thus not be a sound foundation for long-term economic prosperity.
- The authors focused their analysis on Wisconsin, the largest producer of industrial silica sand in the nation, noting the state “has strong agricultural and tourism sectors and therefore provides valuable insight into claims industrial sand mining could negatively affect these industries.”
Tech Talk
Solaris Oilfield Infrastructure LLC announced the initial deployment of the company’s 5-million-lb. Mobile Sand Silo System. This new 12-silo system recently was used to successfully complete a “zipper” frac of two wells on a pad in the Permian Basin.
The system delivered sand at an average rate of nearly 23,000 lb. per min. into two blenders simultaneously. The Solaris system was used to complete 34 frac stages and deliver 30 million lb. of sand during the four-day completion of both wells. During a single 24-hour period, the system delivered nearly 9 million lb. of sand to the wells. The 12-silo system enabled 22 frac sand trucks to simultaneously unload sand at the well site, resulting in an effective truck offload rate of approximately 1.65 million lb. per hour and eliminating truck demurrage on site.
Solaris also deployed its new, state-of-the-art Sand Controls System. The Solaris Sand Controls System monitors multiple proppant delivery data points in real time from any location, including inside a frac technician’s data van. The system samples more than 1,400 data points, aggregating and trending proppant inventory levels and consumption rates in real time. The Solaris Sand Controls System provides superior control of sand flow by indicating real-time sand storage levels and broadcasting a live feed of comprehensive data to a durable touch screen located outdoors
QuakeMonitor is a cost-effective SmartSensor-based system that is easy to deploy and inexpensive to operate for companies looking to avoid potentially expensive complications such as damage to structures and the environment when they tap large reserves of oil and gas from shale formations, according to Weir-Jones and Associates.
The system significantly reduces the potential for frac-induced earthquakes and gives operators the tools to remain compliant with the recent proliferation of protective regulations, while providing information to remediate their operations when required.
QuakeMonitor gives regulators, interested third parties and the public greater piece of mind that frac operations can work within acceptable norms and regulatory requirements.
It’s a stand-alone system designed, developed and implemented by a team of earth scientists and engineers who have worked in the induced seismicity monitoring and regulatory sector in the United States, Canada and overseas for more than 40 years.
The frac monitoring service starts at about $3,000 per month, including the equipment, monitoring and near real-time reporting of all relevant seismic activity.