By Emma Hughes and Vasili
A so-called shale gale has swept across the US in
recent years, driving growth in domestic natural oil and gas
generation and increasing the demand for oilfield minerals.
The following seven factors, combined, have been
widely acknowledged as being instrumental in the success of
hydraulic fracturing (fracking) in the US and Canada. These
factors are still in play:
1. Technological developments, including
horizontal drilling and, later, multiple-pad and two-stage
2. Favourable geology for shale;
3. Private individuals’ ownership of
minerals underneath their land;
4. Low population density in resource-rich
5. A prevailing entrepreneurial ("can do")
6. The existence of specialised service companies
with know-how and machinery;
7. The availability of high-quality frac
Two additional factors have been of great
importance, but were not historically discussed because until
mid-2014, they were taken for granted. These factors are high
oil prices and accessible finance.
In the early days of shale, the investment
community provided a significant amount of funding for shale
exploration. The stage was set by low interest rates instituted
by the Federal Reserve during the period 2007-2009.
Banks often used their sell-side equity analysts
to promote the stocks of shale companies, rating them a
'buy’. This turned out to be convenient for both
the operators and some of the banks. The oil and gas industry
engaged in a public relations exercise and operators claimed
shale was a game changer, and proclaimed energy independence
for all. As a result, share prices and natural gas prices
While the seven factors listed above are still in
oil prices and financing conditions have changed
dramatically (and unexpectedly), beginning in June 2014. Since
then, the oil price has dropped from $120/bbl – by 40%
from June to December 2014 – to below $70/bbl. It then
dropped further to $45-60/bbl in the first months of 2015.
As a result, the US and Canadian shale industry
was hit hard and in February 2015, Baker Hughes’
rig count reached its lowest point since January 2010.
As a natural consequence, financing options for
fracking operations became much less accessible.
Figure 1: Effect of falling oil
prices on frac sand producer shares
Source: The Motley
The fall in the price of gas, and then
Both oil and natural-gas prices have fallen in
part because of soaring US production.
The oversupply from the shale drilling bonanza
meant that December 2014 was another record-setting month for
US natural gas production from the Lower 48 states.
As a result, natural gas prices fell from a peak
of about $13.50/m British thermal units (Btu) in 2008 to below
$3/m Btu in the first quarter of 2015 – sinking in
between to a 10-year low of under $2/m Btu in 2012. The
plummeting value of natural gas represented a decline of around
80% over seven years.
However, while some have blamed OPEC for this
drop, others have placed the onus on restoring the oil price
back to an equilibrium on the shoulders of non-OPEC
According to Michele Della Vigna, head of
European energy research at Goldman Sachs, it was non-OPEC
producers that created the oversupply situation that has
weighed on prices.
"I think the market has realised that where we
need to find the adjustment is onshore US and
that’s where the market is focused," Della Vigna
"The adjustment is starting to happen there.
Clearly an OPEC cut would help getting to the equilibrium
faster, but at the end of the day, it is non-OPEC that needs to
sort out the oversupply it has created," he added.
Unlike oil, natural-gas prices are tightly linked
to weather, making winter the peak for demand. Not only does it
heat homes, but it also increasingly fires power plants, which
run at higher rates when people stay inside.
Wholesale natural gas prices have dropped from
about $13.42/m Btu in 2005 to about $2.85/m Btu in February
2015. Prices were still dropping thanks to milder than normal
weather in the northeast US. At those prices, the incentive to
justify further investment in fracking operations in locations
such as the Marcellus Shale is fast deteriorating.
As a result, for the first time in several
decades, the majority of rigs in the US – three
quarters – are drilling for oil. Just three years ago,
that scenario was the exact reverse.
Logistics plays a large role
in the US fracking market.
Falling prices affect financing
Recent oil price declines have, of course, given
consumers considerably more purchasing power. Global consumer
outlays were up markedly in Q1 2015, but this will be partially
offset by slowed capital investment in oil-producing countries
this year and next. On balance, the impact of the oil price
decline on global gross domestic product appears marginally
India and Turkey, both large crude importers, are
among the countries to gain most from falling prices. As is
Japan, which has been importing oil to replace the nuclear
power capacity that was switched off after the Fukushima
disaster in March 2011. China, the US and Europe have also
benefited, but to a lesser degree.
On the other hand, low prices lead to an
investment drought. OPEC’s decisions shape
expectations: if it curbs supply sharply, it can send prices
spiking. Saudi Arabia produces nearly 10m barrels of oil per
day (bbls/d) – a third of the OPEC total.
Great pain is inflicted upon countries where
regimes are dependent on a high oil price to pay for costly
foreign ventures and expensive social programmes. These include
Russia, which has already been hit by Western sanctions
following events in the Ukraine; Venezuela; Iran; Nigeria; and
Azerbaijan, which saw its currency devalued by one third as a
result of the plummeting prices.
Low prices can also have an impact on the
riskiest and most vulnerable sections of the oil industry,
including Western oil companies with high-cost projects
involving drilling in deep water or in the Arctic, or those who
are dealing with maturing and increasingly expensive fields.
Low prices can also affect those working in the US fracking
industry, who have borrowed heavily on the expectation of
continuing high prices.
It is also worth mentioning that these oil and
gas companies comprise approximately 17% of the overall
high-yield debt market. This is a debt market for businesses
with shorter track records of debt service and lower credit
ratings, and offers slightly higher interest rates than
standard investment-grade corporate bond markets in order to
compensate the investor for heightened risk of default.
Some shale oil companies are facing a credit
crunch, as lenders are preparing to cut the credit lines to a
group of junk-rated US shale oil companies by as much as 30%,
dealing another blow as they struggle with a slump in crude
prices. As an example, Sabine Oil & Gas Corp. became one of
the first companies to warn investors that it faces a cash
shortage from a reduced credit line.
Consequences for oil exploration,
production and development
Oil-price slumps usually lead to cuts in energy
firms’ investments. Production eventually falls,
helping prices to stabilise. In 1999, after the Asian financial
crisis, which began in 1997, global investment in oil and gas
production dropped by 20%. A decade later, after the financial
crisis, investment fell by 10%, then recovered.
In 2014-15 some of the pain has been taken by the
big integrated energy firms, such as Exxon Mobil and Shell.
After a decade of investing in prospects in the Arctic and deep
tropical waters with little effect, they began cutting budgets
in 2013. Long-term projects equivalent to about 3% of global
output have been deferred or cancelled, says Oswald Clint of
Sanford C. Bernstein, a research firm. Most "majors" assume an
oil price of $80/bbl when making plans, so deeper cuts are
likely when prices fall below that level.
Much of the burden of adjustment will fall on
America’s shale industry. It has been a big swing
factor in supply, with output rising from 0.5% of the global
total in 2008 to 3.7% today. That has required hefty spending:
shale accounted for at least 20% of global investment in oil
production during 2014. Saudi Arabia, the leading member of
OPEC, has made clear it will tolerate lower prices in order to
negatively impact shale firms’ finances.
Crashing oil prices are also likely to cut
exploration and production (E&P) spending by US
unconventional oil and gas companies, which will impact frac
sand demand in the coming months, according to a report by
rating agency Moody’s. Over the last six months,
Halliburton has axed 9,000 workers as the company copes with
the soft oil market. Similarly, Schlumberger is to cut 11,000
jobs in addition to its previously announced 9,000 layoffs, as
lower activity in the oil and gas drilling sector resulted in a
15% drop in net income for the company year-on-year (y-o-y) in
Impact on US proppant supply and
Although drilling equipment and the people who
operate it are vital to the US fracking industry, so too is
frac sand. If there are fewer wells being drilled, there will
be less demand for sand.
The share prices of frac sand producers like
Hi-Crush Partners LP and US Silica Holdings have plummeted
along with oil (Fig.1), but from a peak as recent as
September 2014. In fact, demand for the product only recently
started to take off with the growth of fracking and has only
really experienced oil prices moving generally higher.
The Department of Natural Resources in Wisconsin,
US, said in January 2015 that "there has not yet been any
indication of a slowdown in frac sand demand despite concerns
that low oil prices could impact consumption of the
State officials from the agency told local news
service The Capital Times that companies were
continuing to press forward, saying it had "not seen any
reduction at this time and from recent conversations with
industry there are still a number of new operations which are
working toward being able to begin production as quickly as
However, in early April 2015, some frac sand
companies were beginning to feel the pinch. Superior Silica
Sand, a wholly-owned subsidiary of Emerge Energy Services,
announced on 7 April that it had cancelled plans for a new
Wisconsin-based frac sand processing facility as a result of
tough market conditions. The company’s CEO, Rick
Shearer, said that this was a "difficult but necessary
decision" that was made owing to the project being no longer
In addition, a report by the Star
Tribune, published in April, found that US sand mines,
including 63 in Wisconsin and six in Minnesota, are projected
to ship significantly less sand to oil drillers in 2015,
compared to numbers seen in 2014. Furthermore, on 14 April
2015, frac sand producer Victory Silica temporarily suspended
production at its Seven Persons (7P) plant in Alberta, Canada,
in response to slower than anticipated frac sand sales.
On a more positive note, Laird Tomalty, deputy
project director at Victory Silica, told IM at
the Prospectors and Developers Association of Canada (PDAC)
2015 conference in Toronto, Canada, in early March, that
fracking-grade silica sand demand is unlikely to suffer as much
from lower oil prices as many in the industry fear.
In addition, Fairmount Santrol reported record
2014 revenue as proppant sales continued to grow. "The volume
growth was driven by continued proppant demand across all
basins," the company said.
While the impact of low oil prices was just
beginning to hit frac sand producers in April 2015, the effects
were felt by ceramic proppant producers much earlier in the
The world’s largest industrial
minerals company, Imerys SA, announced in February that its
Oilfield Solutions business was to close two of its proppants
manufacturing plants in the US and reduce output at another
after orders for its oilfield products were slashed in response
to falling oil prices.
The mothballed facilities are the Andersonville
and Gemini plants, both located in the southern US state of
Georgia. Production will also be cut at its Wrens plant, in
Imerys said it would be shutting the
Andersonville facility for "an undetermined period", but did
not say how long the other plants would be affected and
declined to disclose the precise reduction in its orders for
On 18 March 2015, US-based proppants producer
Carbo Ceramics said it will reduce its workforce and cut its
quarterly dividend following "severe market deterioration" as a
direct result of tumbling oil prices since the end of
The news came just weeks after the company
revealed that it will mothball its proppant manufacturing
facility in McIntyre, Georgia, until market conditions
On 10 February 2015, the International Energy
Agency (IEA), the world’s leading energy
forecaster, published its five-year oil market outlook report.
This predicts non-OPEC oil supply will grow by 3.4m bbls/d to
6m bbls/d by 2020, although this growth is reduced compared to
the average annual addition of 1m bbls/d and significantly
lower than the record 1.9m bbls/d added in 2014.
Oil from the US and Canada is expected to
continue to remain the key resource area for non-OPEC supply.
However, the IEA predicts that the battle for
OPEC’s market share "may only just be starting"
and that the expanding oil market in Iraq and the possible
lifting of Iranian international sanctions are set to challenge
Saudi Arabian dominance of the OPEC market.
Investment in the exploration and development of
oil and gas fields could fall by 20%, or $28bn, by 2017 from
2014, according to analysts at Morgan Stanley, as the industry
protects dividend payouts as cash flows are squeezed.
Nevertheless, the ability of the integrated groups to divest
assets to raise capital and borrow cheaply means they could
withstand the contraction in operating cash flow.
Assume that after the great plummet of 2014
prices travel sideways, moving in a band between $45-65/bbl for
five years. The relative winners over the sideways years are
likely to be the integrated international oil companies such as
Exxon and Shell. These companies have been under investor
pressure to increase return on capital employed since 2013 and
as a result had begun to cut costs and postpone spending before
the oil price drop. Exxon,
Shell and Chevron, three of the largest listed integrated
companies, have strong balance sheets, with net debt near or
just below one times EBITDA**.
In the latest sign that a selloff in crude-oil
prices may be nearing a bottom, the IEA said on 9 February 2015
that a recovery seems "inevitable" and the glut could start to
ease as soon as the second half of 2015. A wave of spending
cuts by oil producers (companies like Royal Dutch Shell,
Chevron, BP and Statoil have slashed their investment
programmes by billions of dollars, moves that analysts say
eventually will dampen production growth) and a sharp decline
in the number of rigs drilling for crude in the US will likely
slow the nation’s oil-output growth, spurring a
rebound in prices, according to the IEA.
The IEA, which coordinates energy policy among
industrialised countries, is adding its voice to the chorus of
experts who say that the global glut is abating. In a separate
report, also released on 9 February 2015, OPEC said demand for
the group’s oil would rise in 2015, reversing an
earlier estimate that predicted a decline.
The conclusions drawn from the IEA and the OPEC
reports indicate that OPEC’s strategy to protect
market share by keeping the spigots open is showing early signs
of success. Led by Saudi Arabia, OPEC surprised markets in
November when it maintained its production levels, a move that
some observers said was aimed at weakening US shale-oil
US oil production will increase both in 2015 and
2016 despite the 60% slide in oil prices since mid-June and an
OPEC policy designed to rein in the North American shale boom,
the US government said. The forecast came as a leading OPEC
producer said the cartel was sticking to its strategy of
maintaining output and testing the mettle of high-cost
producers around the world. The US Energy Department said
output would rise by 600,000 bbls/d in 2015 to 9.3m bbls/d and
by 200,000 bbls/d to 9.5m bbls/d in 2016.
In January 2015, OPEC’s Secretary
General, Abdulla al-Badri, said: "We’ve already
hit bottom – now the prices are around $45-55[/b], and
I think maybe they have reached the bottom and we will see some
rebound very soon (…) If you don’t invest
in oil and gas, you will see more than $200[/bbl]," when it
comes to future oil prices.
While he did not give a timeframe, al-Badri did
note the correlation between investment and future
production. Further, the rig count in the US is plunging,
which is usually key to reaching a bottom in oil prices.
However, in the midst of cutting back as the industry works
through the current oversupply, the Secretary-General is now
warning that the industry is putting future oil supplies at
risk by under-investing today.
Another interesting phenomenon is that some oil
drillers, expecting prices to rebound after the biggest drop in
six years, have come up with an alternative to storing their
crude in tanks: keeping it in the ground.
This is a new twist on an old oil trading
technique, known as a 'contango storage play’, in
which a trader buys cheap crude in an oversupplied market and
saves it to lock in profits at higher future prices. Drillers
who have spent millions boring holes through petroleum-rich
shale rock are just waiting for prices to go up before turning
on the spigot.
"Effectively, the rock is the storage," said Troy
Cook, an analyst with the EIA in Washington DC.
Continental Resources Inc. CEO, Harold Hamm, said
in a 2 March 2015 interview that, "This backlog of un-fracked
wells – call it a fracklog – is one reason
crude output is poised to climb even as companies have idled
more than a third of
the rigs that were drilling for oil in October. About 85% of
US wells aren’t being completed right now."
The future of proppants
Rick Shearer, CEO of frac sand supplier Superior
Silica Sands, explained in January 2015 to the Cap City
Times that, "We certainly expect things will be softer in
2015 than they were in 2014." But he added that, "The good news
is that those who are still drilling are using more sand per
well." The CEO of US Silica shares this perspective.
This view on "sand intensity" is also echoed by
Victory Silica, as Laird Tomalty, the company’s
deputy project director, told IM at the PDAC
2015 conference. Victory Silica said that "sand intensity" per
well has risen by 80% when old completion wells are compared to
new completion wells.
Oil and gas wells typically need four times the
amount of proppants that they used to, thanks to a two-stage
drilling process, with each stage needing double the volume of
proppants, US Silica explained in a presentation in October
2014. Thanks to this new technique, demand for proppants in oil
and gas wells is set to double between 2013 and 2018.
However, according to consultancy and research
firm PacWest, proppant consumption had already seen a decrease
between the second and third quarters of 2014, driven by a
decrease in oil prices, which the company said could depress
the number of wells fracked in North America. Resin-coated sand
and ceramic proppant markets are both expected to decline at 5%
and 17% per year, respectively, to 2016, but supply of all
proppant types is expected to increase moderately over the next
"North America proppant consumption is expected
to slightly increase at 2% per annum through 2016, from 80bn
lbs (3.6m tonnes) in 2013 to 111bn lbs (5m tonnes) in 2016,
with much of the growth occurring in frac sand consumption,"
Prices for frac sand could flatten at rates below
those agreed between sand producers and oilfield services
companies for 2015 as oil and gas prices continue to tank,
market insiders have suggested to IM.
"Many companies which have tied themselves into
[frac sand supply] contracts for 2015 may come to regret being
so hasty," one US source, who preferred not to be named,
said. They added that while oilfield companies will need
the pre-purchased sand to service existing operations for the
foreseeable future, they may find that they could have got
better deals on the spot market come the middle of this
In summary, factors that could negatively affect
the demand for and the price of proppants, directly or
• Fracking bans: in December 2014,
the first ban on new fracking came into effect in the city of
Denton, Texas; Governor Andrew Cuomo announced that fracking
would be banned in New York state; and in Canada, the New
Brunswick government was discussing a moratorium on fracking
"unless five specific conditions are met." Further, in 2015,
Houston County discussed a frac sand mining ban; Litchfield
County town, Washington, proposed the state’s
first fracking ban; and the Maryland House of Delegates
approved a three-year fracking moratorium. On the contrary,
Ontario rejected a fracking moratorium on 26 March 2015
• Lifting of sanctions against
Iran: with large amounts of Iranian oil already in
storage, an injection of hundreds of thousands of barrels a day
into the oil market already struggling with a crude overhang
could depress prices further.
The demand for and the price of proppants could
be positively affected, directly or indirectly, by:
• Intensity: proppant mass per well
has increased in many US plays, lifting proppant intensity, a
key driver of demand. The increase in average proppant mass per
well is driven by increasing well sizes in the Appalachia,
Bakken, Eagle Ford and Permian basins. A further increase in
specific proppant consumption would offer a lifesaving outlet
for proppant producers.
• Lifting of the US oil export ban:
shale oil producers blame the export ban for low US crude
prices, while ConocoPhillips CEO Ryan Lance told a senate
energy committee that the discount for US oil magnified the
impact of the fall in crude prices. Lisa Murkowski, senator
from oil-rich Alaska and chair of the energy committee, said
that 2015 should be "the year of legislation" to lift the 40
year-old ban on exporting most domestic US crude.
Outlook for the world
US Proppants report, the implicit assumption was made
that there would be no major changes in the world economy as a
result of the plummeting oil price.
This is a somewhat brave assumption, given that
the performance of the economies of the US, China and more
recently the European Union, are all under stimulus packages in
the form of record low interest rates coupled with quantitative
easing programmes. It is not easy to predict what will happen
when these programmes lapse.
Furthermore, there is a giant asynchronism: the
US, the Eurozone and China are in very different phases of the
economic cycle and, as a result, their policies are different
(with the Financial Times reporting on 4 March 2015
that "the euro hit an 11-year low on policy divergence").
Divergences can also be noticed inside the Eurozone itself.
However, there is also the view (shared by Nobel laureate Paul
Krugman and others), that it is the other way round: it is
differences in policies that cause differences in economic
The single biggest unknown is China, as many ask
whether this driving force of the last decades will slow down
– or even experience a landing (of the soft or the
hard variety). And, if that happens, whether India could take
over the role of China as the world’s growth
One thing is certain, however. If, despite QEs,
the world economy slows down, energy demand will continue
falling and this could be exacerbated by energy-saving measures
and by greenhouse gas emissions controls.
It is often said that "when the going gets tough,
only the tough get going". In the case of energy, survivors
will be Saudi Arabia and their Gulf allies due to cheap oil and
gas; China and India because of coal and possibly a boost in
nuclear energy; and some major hydropower producers. As for
shale, the most competitive US producers will continue their
strong performance, especially if large-scale exports are
Three drivers for the drop in oil
Changes in world supply and
demand: The call for energy products, as for most
commodities, has slowed because of Europe’s major
economic problems, Japan’s stagnation,
China’s slow down and serious problems in the rest
of the BRICs (Brazil, Russia, India) and South Africa. In
addition, US oil production has significantly reduced the US
imports of crude oil, increased US exports of petroleum
products and changed trade flows globally.
Note: rising oil prices help the US
petrochemicals industry as long as natural gas prices remain
low. If enough domestic natural gas was exported such that US
natural gas prices again moved with oil prices, the US
petrochemicals industry would no longer benefit.
Oversupply from shale
drilling: Since 2008 the US has increased
domestic supply by 50% and has become the world’s
number one producer of natural gas, overtaking Russia in 2011.
Oil production in Oklahoma, Texas and North Dakota has also
doubled in six years. Owing to the fact that the US lacks
sufficient facilities to liquefy and ship natural gas, most of
its production enters the domestic market, meaning that in
2011, it had the largest increase in oil production of any
nation outside of OPEC. As former Federal Reserve Chairman Alan
Greenspan said on 13 March 2015, oil production has not eased
despite low prices and America’s major storage
facility is running out of room.
OPEC: After nearly five
years of stability, on 27 November 2014, OPEC failed to reach
an agreement on production curbs, sending the oil price
tumbling. In turn, the Saudis and their Gulf allies decided not
to sacrifice their own market share to restore the price. They
could curb production sharply, but as the main benefits from a
price increase would go to countries such as Iran and Russia,
as well as to the US fracking industry, Saudi Arabia decided to
tolerate lower oil prices, especially considering it has $900bn
in reserves and its own oil costs are only around $5-6/bbl to
get out of the ground.
It should be noted, however, that the
appreciation of the US dollar causes different economies to see
different percentage drops in oil prices. The fall in the US
was the well-publicised figure of 44% from $108.11 in June 2014
to $61.05 in March 2015, but in other countries it was less (in
local currencies), with Russia seeing only a 19% drop.
*This article is an edited version of Chapter
9, taken from IM Research’s latest report: US
Proppants Market: Raw Material, Supply & Consumption. For
more information on the report contact Emma Hughes, Special
Projects Editor (firstname.lastname@example.org).
**earnings before interest, tax,
depreciation and amortisation