Frac sand demand holds out in drilling decline

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. 

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.

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.