As unconventional oil and gas production is
expected to continue increasing to meet global energy demands,
growth in consumption of silica (frac) sand and other proppants
has been predicted to follow.
The US is the largest producer and consumer of
frac sand in the world, with the Great Lakes Region (mainly
Wisconsin and Minnesota) accounting for 70% of 2014 domestic
frac sand output. Including Canada, North America will continue
to lead growth in consumption and production, owing to the
large amount of domestic hydraulic fracturing (fracking)
activity. Based on growth projections in the energy market,
Cleveland-based research firm The Freedonia Group has estimated
the North American frac sand market will reach 34.4m tonnes
next year and be worth around $2.2bn.
Estimates from the company outline that demand
for proppants will increase to 28.5m tonnes by 2016, or 57.1bn
lbs, valued at $6.1bn.
While Freedonia notes that Russia and China are
also developing their fracking industries, both countries tend
to favour ceramic proppants, which will limit demand growth for
frac sand in these regions.
Frac sand demand is inextricably tied to activity
in the oil and gas sector, with around 72% of US sand
production in 2014 sold for fracking, well-packing and
cementing. Of the remainder, 13% went into the glassmaking
industry, 6% was used a foundry sand, 3% as whole-grain fillers
and building products, 2% as other whole-grain silica, 2% as
ground and unground sand for chemicals, and 2% for other uses,
according to US Geological Survey (USGS) data.
With fracking accounting for such a large part of
the end market, frac sand supply is vulnerable to headwinds in
the oil and gas industry and developments over the last year
– the drop in oil and gas prices, declining rig
counts, the slowing and cancellation of projects and cuts to
workforces by exploration and production (E&P) companies
– have raised questions about whether demand for the
mineral will hold up in the near term.
Rig and well spud counts
2013-2017
|
2013
|
2014
|
2015
|
2016
|
2017
|
2014r
|
2015r
|
2016r
|
2017r
|
Rigs
|
1.69
|
1.79
|
1.01
|
0.98
|
1.07
|
+6%
|
-44%
|
-3%
|
+9%
|
Horizontal rigs
|
1.10
|
1.28
|
0.77
|
0.74
|
0.80
|
+16%
|
-40%
|
-4%
|
+9%
|
Spuds
|
40.5
|
42.4
|
24.6
|
25.7
|
28.3
|
+5%
|
-42%
|
+4%
|
+10%
|
|
Source:
IHS
|
Frac sand deposits in the US
According to the latest research from the USGS,
the most sought after type of frac sand is Northern White and
Ottawa, deposits of which are mainly located in the US Midwest
such as the Middle and Upper Ordovician St Peter Sandstone, the
Upper Cambrian, the Lower Ordovician Jordan Formation and the
upper Cambrian Wonewoc and Mount Simon formations.
Deposits that meet many of the Brady, or Brown,
sandstone specifications are located in areas such as the Upper
Cambrian Hickory Sandstone Member of the Riley Formation and in
central Texas. Research indicates that less economic deposits
are also being used by the fracking industry, and can be found
in the Middle Ordovician Oil Creek Formation of the Simpson
Group in Oklahoma.
Producing and potential frac sand
and resin-coated sand source units
in the conterminous US
|
|
Source: Anna Burack Wilson
and Mary Ellen Benson, USGS
|
"The effort to meet the growing demand for
hydrocarbon industry proppants that meet the requirements of
increasingly deeper wells has fostered the development of a new
industry in alternative proppants," the USGS report, entitled
Hydraulic Fracturing (Frac) Sand Sources and Production in the
United States, outlines.
"These alternative proppants include resin-coated
sand and synthetic proppants engineered from high-strength
ceramic materials such as sintered bauxite. The highly
sophisticated proppants of today result in increasingly optimal
results in hydrocarbon recovery as proppants can be customised
for each particular reservoir, well, or treatment design."
Specifications for frac sand have been determined
by proppant standards outlined by the American Petroleum
Institute (API) and the International Organization for
Standards (ISO), modelled after Northern White sand.
Standards include a higher percentage of silica
content, grain size ranging from medium to coarse, a sphericity
of 0.6 or higher, high crush resistance, low solubility, low
turbidity and good friability.
USGS figures indicate that US apparent consumption of
industrial sand gravel was around 72.3m tonnes in 2014, a 22%
increase from the previous year, as fracking activity across
North America experienced a huge boom. Demand from the oil and
gas industry for sand used in fracking led to companies
upgrading production capacities and continuing with permitting
for new mines, while logistics companies struggled with the
explosion of activity in the industry between 2013 and 2014,
leading to the development of logistics networks and
transportation hubs. Consumption and correlation
with the fracking industry
However, in mid-2014, non-stop production of oil
and gas led to a surplus, and the industry began to reverse and
contract. Beginning in June 2014, the oil price dropped from
$120/barrel (bbl) to below $70/bbl in December 2014, a decline
of 40%. It then dropped further to $45-60/bbl in the first
months of 2015.
As a result, the US and Canadian shale industries
were hit hard and in February 2015, the monthly rig count
published by oilfield services group Baker Hughes reached its
lowest point since January 2010.
World mine sand production
(tonnes)
|
US
|
62,100
|
75,000
|
Italy
|
16,400
|
16,400
|
Turkey
|
15,000
|
15,000
|
Germany
|
7,500
|
7,500
|
France
|
6,290
|
6,300
|
Australia
|
5,500
|
5,500
|
UK
|
3,760
|
3,800
|
Mexico
|
3,590
|
3,590
|
Spain
|
3,400
|
3,400
|
Japan
|
3,000
|
3,000
|
Moldobe
|
3,000
|
3,000
|
Finland
|
2,400
|
2,400
|
Poland
|
2,300
|
2,300
|
South Africa
|
2,110
|
2,100
|
Canada
|
1,690
|
1,800
|
Chile
|
1,360
|
1,400
|
Saudi Arabia
|
1,400
|
1,400
|
Czech Republic
|
1,340
|
1,340
|
India
|
1,210
|
1,200
|
Malaysia
|
1,000
|
1,000
|
Norway
|
1,000
|
1,000
|
Other countries
|
6,690
|
7,000
|
|
Source:
USGS
|
The fracking process
The fracking process consists of both vertical
and horizontal drilling. Frackers drill down to the target
formation and, in horizontal projects, 'kick-off’
at an angle when the shale, or tight rock, is reached.
A perforating gun is then lowered into the
horizontal section, sending off an electric pulse that creates
tiny fractures in the rock. Fracking fluid is then pumped down,
which is where proppants are used to prop open the
fractures.
Frac sand is the most common proppant of choice,
although ceramic proppants, most often manufactured from
sintered bauxite, alumina or kaolin, and resin-coated proppants
(which can be either ceramic or sand) are also used. Natural
hydrocarbons are then free to flow back to the surface for
collection.
Continuing the decline
While companies such as Baker Hughes and
Halliburton have recently predicted that the market has
bottomed out and will hereon in begin a slow recovery, the
latest research from consultancy firm IHS Inc. and PacWest,
which it acquired last year, has indicated that drilling and
completion (D&C) activity will continue to plummet in
2015.
"North American D&C activity, as you might
imagine, will sharply decline in 2015, before recovering only
slightly in 2016 and 2017, along with an anticipated oil price
recovery," Christopher Robart, director of unconventional
resources at IHS, said in a recent webcast.
Predicting substantial reductions in E&P
capital budgets of around 40% and a rig count that will
continue to decline, the firm added that though the number of
frac stages per well in North America is likely to rise, the
increased activity will not be enough to offset an overall
reduction.
"Despite the falling D&C activity, frac
stages in wells in North America will also continue to increase
but the lower activity as well as decrease in rig counts will
result in a total 35% decline of frac stages in 2015," Robart
added.
The company noted that despite some recovery in
oil prices in the first half of 2015, rig count still remains
less than half the level seen in the fourth quarter of
2014. Predictions from IHS also show that the average US
land rig count will fall by 21% between 2015 and 2017, while
well spuds and rig counts are expected to decrease in 2015 by
42% and 44%, respectively.
While increases in fracking capacity announced in
2014 were completed late in the year, many of the increases
scheduled for 2015 have been pushed back, delayed to 2016 or
cancelled.
"Our estimates are that cancellation of orders
amounted to around 300-400,000 of hydraulic horsepower (HHP).
Looking to the question of retirements, we do expect roughly 1m
HHP of retirements, primarily coming from Halliburton retiring
Baker equipment, as a result of the close of that transaction,"
Robart outlined, referring to the recent merger of the oilfield
services companies..
In terms of pricing, IHS believes that frac
pricing will continue its decline, falling by 35% before the
end of 2015, with no significant pricing recovery expected
until at least 2017. According to the company’s
figures, the first major round of pricing concessions at the
start of the year sent frac pricing down by 19%, with further
decreases expected as E&Ps have reported aggressive pricing
behaviour by all service providers.
Industry hindrances
IHS’ pricing forecasts assume a
moderate and incremental recovery in D&C activity,
potentially beginning at the end of 2015, and slowly recovering
through 2016.
US silica sand production uses
(2014)
|
|
Source:
USGS
|
"However, if for example [the] oil price really
starts to climb and D&C activity starts to climb much more
quickly than we’re anticipating, this could lead
to a slightly different pricing forecast and an earlier
increase in these prices," Robart said, although he added that,
given the oil prices and macro production in the US, IHS was
relatively confident in its assessment of a slow and
conservative recovery.
Should a rapid ramp up in activity occur, Robart
said, there could be a number of constraining factors hindering
the industry, one of which is labour, which could lead to
pricing pressure in oil within three to six months.
"If labour does become a constraint, that could
lead to a tightness earlier than we are currently forecasting
right now and lead to a potentially faster pricing recovery,"
according to Robart.
Pump consumables – cold stacked
equipment – may also be a constraining factor, as
these will need to be repaired and tested before being put back
into service, with cannibalisation of parts likely already
occurring. If a large number of orders for fluid ends, valves,
seats, plungers or packing is placed into original equipment
manufacturers (OEMs) in a short space of time, OEMs may
struggle to fulfil these orders.
Proppant logistics and equipment, meanwhile, are
not considered as potentially hindering factors on the
development on the industry. IHS said, currently, there is
sufficient frac sand logistics capacity in the market to
service demand until at least 2017.
"Proppant logistics could be a bottleneck, but
it’s likely to be more of a local bottleneck that
will occur play by play, or even area by area. The bottlenecks
are likely to be the last milestones of proppant logistics
rather than rail or transload logistics as the structure there
has built out pretty significantly over the last two or three
years here," Robart outlined.
Embracing the environment
Another potential hurdle for both oil and gas
developments and for mining frac sand are environmental and
social factors.
In June, New York issued a state-wide ban on
fracking after a seven year review by the state Department of
Environmental Conservation (DEC). The decision followed a
fracking moratorium which has been in place since 2008.
"High-volume [fracking] poses significant adverse
impacts to land; air, water, natural resources and potential
significant public health impacts that cannot be adequately
mitigated," the state’s Environmental Conservation
Commissioner, Joe Martens, said.
Although initially supportive of fracking, New
York State Governor Andrew Cuomo was the first to ban fracking
in a state with large deposits of natural gas, and the decision
has been a political success, as public comment periods
– which drew around 260,000 comments –
heavily supported restrictions on fracking, or an outright ban,
according to the DEC report.
According to Greg Haunschild, principal engineer
at ACS Engineering, environmental regulations are increasingly
getting in the way of mineral mining developments and oil and
gas extraction (see pp 32-33).
Haunschild told IM that the key
is not to battle against environmental regulations and
campaigners, but to engage with potential opposition and
outline mitigation and safety measures that will protect the
environment.
Environmental concern is growing around
industrial activities, even when research has deemed a process
is safe. A case in point was the Environmental Protection
Agency (EPA) report, published just weeks before New
York’s fracking ban, which indicated that fracking
had not negatively impacted drinking water in the US .
Robart, however, disagrees that the environmental
factor is increasing in prominence, telling IM
that it has been "negligible" in terms of fracking
developments.
"Social and environmental factors have been very
minor factors in the downturn in the market. Oil price is the
overwhelming driver," he said.
Flowing against the
tide
While the downturn in the oil and gas industry
has meant a decline in drilling activity and E&P projects
being put on hold, changing fracking techniques requiring more
proppants have meant that demand for some materials has held up
in the downturn.
Some mineral projects have also been slowed or
shelved in response to falling rig counts. But even if demand
falls for drilling minerals, consumption is still at a
historically high rate.
"New and more efficient hydraulic fracturing
techniques, which require more silica sand use per well, will
further increase demand for hydraulic fracturing sand," the
USGS states.
At IM’s Oilfield
Minerals conference held in Houston, Texas in June 2015, Ian
Renkes, vice president of operations for PropTester, an
independent laboratory specialising in the research and testing
of products used in fracking and cement operations, said that
the outlook for ceramic proppants was weak.
Renkes said that proppant pumped increased more
than 15-fold from 8bn lbs (3.62m tonnes) in 2004, to 135bn lbs
(61.2m tonnes) pumped in 2014, while sand has grown its share
of the proppant market at the expense of ceramics.
"Operators were switching to sand in the downturn
because of its availability. The switch has been made from
ceramics because of economics and subsequently the realisation
that sand was performing in some wells better than
anticipated," Renkes said.
The biggest growth has been in what he calls tier
2 – good, brady type – and tier 3 –
marginal, fit for purpose – sands, as tier 1, which
are premium Northern White sands, have largely been accounted
for in the market.
"Changes in completion designs also mean that
more sand is being used, there are more stages to fractures so
sand demand is not exactly directly correlated to rig count one
for one," Renkes noted.
Both Halliburton and PacWest have also
anticipated positive demand for frac sand, owing to rising
interest in refracturing old wells as an alternative source of
revenue for both oilfield minerals suppliers and E&P
companies. Halliburton estimates that up to 5,000 wells have
the potential for re-fracking in North America.