US frac sand consumption to continue soaring in 2015: Moody’s

By Wayne Yamada
Published: Thursday, 27 November 2014

2014 frac sand demand slated to be up 50%; producers plan mine expansions; frackers shift to white sand over resin coated

US frac sand demand is expected to continue climbing in 2015 despite falling oil prices, according to ratings agency, Moody’s.

Frac sand consumption will grow due to continued hydraulic fracturing (fracking) for unconventional gas and oil extraction.  Demand for proppant used in fracking from producers US Silica, Fairmount Santrol, Hi-Crush Partners and Preferred Sands is expected to climb in line with increased drilling activity.

Frac sand demand from these four companies will likely increase by 50% in 2014 compared with 2013, with growth also expected in 2015.

"Frac sand demand has increased substantially over the past year due to advancements in hydraulic fracturing technology," Moody’s said in in its latest report on the industry.

"The technology requires a substantial increase in the amount of frac sand consumed per well, with each rig drilling more wells, an increase in the number of fracturing stages within each well, an increase in the length of the horizontal distance covered in lateral wells, and an increase in proppant used per foot completed in each fracturing stage," it added.

US Silica shipped 8.2m tonnes frac sand in 2013, compared with 7.6m tonnes by Fairmount Minerals and 2.5m tonnes by Hi Crush. However, orders for 2014 have already been much higher in volume and contracts are for longer periods.

"Companies have all reported increasing contractual sand volume and extended term lengths. In fact, sand producers have indicated contracted volumes in 2014 have been multiples of previous contracted volumes - in some cases, up to four times," the report said.

To keep up with demand, firms are investing in mines to increase production.   

US Silica plans to add 3.8m tpa of new capacity. This comprised expanding the Pacific plant in Missouri by 800,000 tpa by Q3 2015, and developing a new 3m tpa frac sand mine and processing plant in Wisconsin. The mine is expected to start production by mid-2016.

Meanwhile, Hi-Crush is expected to increase production capacity by 3.6m tpa by the end of this year through expanding its Augusta facility and developing the Whitehall facility in Wisconsin. Fairmount is also looking at some greenfield frac sand facilities and said it may expand its Wedron facility in Illinois.

Shifting to white sand

White frac sand is also becoming the preferred material over resin-coated sand and ceramic proppants, the Moody’s report said.White sand is considered the highest quality frac sand and is mined in Wisconsin, Minnesota and Illinois. Lower quality brown said is primarily from Texas and Arkansas.

Raw white and brown frac sand comprises around 80% of the market and is the cheapest proppant. Early in 2014, higher oil prices saw a spike in demand for the more expensive resin-coated sand. This proppant provides more conductivity and reduces flowback.

However, after the fall in oil prices, oil exploration and production (E&P) firms have reduced orders for resin-coated sand to cut operating costs. Ceramic proppants are the most expensive, and therefore the most sensitive to oil prices.

Oil prices likely to  remain supportive

The oil price is likely to remain supportive of fracking, according to Moody’s. It forecast the WTI US crude benchmark to average $85/bbl through to the end of 2015, which would make shale oil extraction profitable. 

"Longer-term pricing should remain north of $80/bbl, primarily due to expected growth in global demand. This pricing level will support E&P companies’ capital spending pace," it said. 

However, Moody’s also warned that prices falling below $80/bbl for a significant length of time could signal a contraction in proppant demand. WTI fell to around $77/bbl this week on ample crude production from the Middle East and lower demand from emerging economies. 

But with the cost of drilling is also falling due to newer technologies and better fracking experience, which may mean the breakeven WTI oil price could also fall. 

US shale oil production has rocketed over the last few years. The largest shale oil plays are Bakken in North Dakota at around 1.2m b/d output and Eagle Ford in Texas at over 1.6m b/d, according to latest US Energy Information Administration data. This puts the state on par with Opec members Algeria and Angola in terms of crude production.

Logistics key

Logistics are also key to frac sand companies. Up to 80% of the cost of delivering frac sand can be due to transportation. Transportation routes usually comprise rail, road, or sometimes barges. Rail was the cheapest due to the long distances from the mine to drilling site.

"Controlling access to railcars, through company-owned/leased cars, system cars, or customer-owned cars, is important in optimising the supply chain," Moody’s said.

"Due to increasing customer and railroad requests, proppant companies are also seeking to expand unit train capabilities at processing facilities and at terminals."

Frac sand deliveries to E&P firms last winter were hit by freezing weather, with customers now looking for suppliers with reliable delivery infrastructure, Moody’s said.