News of prospective frac sand miners cropping up all over North America is, now, extremely well documented. The debate between budding miners and un-budging residents has long-dominated the headlines, while swarms of dollar-eyed developers have tabled their plans to mine beaches of sand. But another growing trend could threaten to crash the party.
Vertical integration has been a quietly blossoming feature of the frac sand industry in recent months. Oil and gas companies are starting to wake up to the moneysaving potential of buying out sand companies to secure their own supply, and in so doing soothing the headache of negotiating prices, which have risen sharply in the wake of exploding demand.
Earlier this year, oil and gas giant Pioneer Natural Resources Co. acquired US Carmeuse Industrial Sands (now Premier Silica LLC), in a move that Pioneer forecast would save the company significant cash, as it will provide frac sand at below market prices.
Pioneer has estimated that the acquisition will save $75-80m in capital expenditure (CAPEX) in the coming years. Additionally, in its Q1 2012 financial results, released today, the company remained confident that the acquisition will drive its future oil and gas production, proclaiming that the newly locked-in supply “could cover a substantial portion of its fracture stimulation requirements”.
Pioneer are not the only ones to move in this direction. Texas-based oil and natural gas company EOG Resources Inc. announced that it would start up its own 1.7m tpa frac sand plant, securing its own supply of the proppant mineral.
Industry sources have speculated that this trend will could continue to grow, and it seems only a matter of time before another ‘perfect fit’ frac sand operation is snapped up by a hungry-eyed oil and gas producer.
But money saved by some is money lost by others.
By Carmeuse’s own admission, the company no longer saw its sand division as a core business, so was therefore happy to sell. $297m is, after all, no small figure.
But will similar moves be so beneficial for frac sand-focused companies? If major oil and gas companies lock in their own supply of frac sand, significant segments of demand could be systematically siphoned off, while the lost competition could drive prices down. Additionally, given their wealth, the oil and gas companies hold the lions’ share of the cards.
The focus will not be to grow the frac divisions, but to grow their oil and gas production. Of course, the two are complementary, to an extent, but Pioneer’s words: “frac sand at below market prices,” should be carefully read. If the vertical integration trend continues, all prices will become “below market prices,” – hardly something that wide-eyed frac sand juniors would want to trumpet to potential investors.
The frac sand market is for now still growing at an unprecedented rate. The widely implemented moratoria in the US have started to be lifted, as governing bodies tentatively wheel-out plans to tackle the range of environmental issues associated with mining and haulage.
The wait now though, is not necessarily to see which operations will come online next, but to predict which operation will be snapped up next. An acquisition would spell mega bucks for shareholders in the, at least temporarily, fortunate frac sand operation.
The industry has always asserted that it will be those best-located (ie. next to oil and gas deposits) that will survive in the frac sand market. If the vertical integration trend continues, never will that ring truer.
Listen to experts and informed discussion on the latest trends in the frac sand market at Oilfield Minerals Outlook, 19-21 June 2012, Houston - www.indmin.com/IMRTOilfield