IM’s 3rd Frac Sand
conference in Minnesota, US warned that they are anticipating
further silica (frac) sand price declines and additional waves
of cost-cutting and consolidation.
Rick Shearer, CEO of Superior Silica Sands, told the meeting
that the oil price will remain in the $38-50/barrel range until
at least the second half of 2016, restraining a recovery in the
upstream oilfield mineral market.
|The number of frac sand mines
in Wisconsin shot up from five to 63 between 2010 and
2014 and the region is now feeling the pinch of the
downturn in the oil and gas drilling market (source:
Those held hostage by the weak market will
hold off from making important decisions until oil prices can
demonstrate a sustained revival.
With the explosion of fracking in the US
over the last five years, frac sand mining
also experienced a boom. In 2010, there were five frac sand
mines in Minnesota, growing modestly to a total of eight in
2014, while in Wisconsin, an initial five mines five years ago
mushroomed to 63 in 2014.
Since reaching its peak last year,
proppant demand has fallen by 40%, with only 2.8m tonnes sand
sold in June 2015 and production running at just 50% of
capacity. Shearer expects these figures to persist for the
remainder of the year, with competition in the industry getting
"The pie is so much smaller, but proppant
producers are continuing to fight for a piece of that pie,"
Low frac sand prices are "the new
Frac sand prices too have declined with
the prices of oil and gas. US selling prices for sand, which
averaged around $58-68/tonne last year, currently stand at
$31-32/tonne, and are likely to continue to sink, said
According to Taylor Robinson, president of
PLG Consulting, "this is the new normal".
"One third of economists believe that oil
prices will continue to fall and get down into the $30/barrel
range," Robinson said.
Shearer suggested that the US market would
"get to a bottoming out maybe next quarter," but added that
"margins are razor thin now and we’ve heard people
selling at cost – that’s not
Scott Sustacek, CEO of Jordan Sands, which
began shipping proppants in December 2014, painted a more
positive picture, telling delegates that frac sand is becoming
increasingly basin-focused, with customers making fast
decisions and demanding sand in a short space of time, creating
short term sand shortages.
"We don’t expect things to go
further south," Sustacek said.
On the sidelines of the conference,
delegates were less optimistic, however, with one telling
IM: "Hold onto your shorts and get ready for
Another warned: "If you thought the second
quarter was bad, the next one will be a bloodbath."
There was disagreement regarding the
impact the actions of the Organization of Petroleum Exporting
Countries (OPEC) have had on oil prices. Some, like Shearer,
maintained that OPEC overestimated its influence over the
market. "OPEC underestimated us. Fracking is here to stay.
We’ve shown in the US that we can compete on a
global basis," he said.
The CEO of Black Ridge Oil & Gas, Ken
DeCubelis, meanwhile emphasised the need to do more to combat
oversupply in the oil industry.
"Of course OPEC has influence, they
refused to cut production and oil prices went down. We need to
cut the rig count more, and
cut costs further. Despite everything we’re
doing the US, more needs to be done," he said.
Technology to drive
The importance of developments in
technology, driven by a need to reduce costs, should not be
underestimated as a market driver in fracking, Shearer said,
noting that evolving technology means that more proppants are
being used as E&P firms opt to frack more stages.
"We’re going to see proppants
go from a commodity to a technology (…) People are
designing specific proppants to drive costs down, or in
response to regulation, such as dust reduction requirements,"
In the wake of lower oil prices, oil and
gas companies have turned to
cheaper frac sand to lower drilling costs, with Shearer
estimating that coated and ceramic proppants –
typically produced from bauxite and kaolin – have lost
half their market share.
However, rather than limiting proppant
choice, Shearer anticipates that raw sand will be just one of
four or five market segments, as proppant suppliers focus on
developing increasingly sophisticated products.
"We see the downturn as an opportunity
– now is not a time to hide in the weeds," Shearer
DeCubelis also emphasised the importance
of technology, noting that drilling companies are figuring out
how to complete wells with new designs, in some cases using
additional stages or slickwater frack jobs and doubling
estimated ultimate recovery (EUR).
"We need high EURs, which technology and
new designs can achieve," he said.
The shift in design and completions now
means that rig count is becoming a less accurate indicator of
proppant demand. In some cases, demand for proppants is up per
well but on the whole fewer wells are being drilled.
In other cases, however, putting off
completing wells means there is an oil supply backlog, which
could slow the pace of market recovery when released.
"The decision to drill but not complete
wells is the right thing to do," DeCubelis said. "It could put
a cap on oil prices as a shock absorber but it’s
not that bid of a deal, it isn’t going to cause a
12-month lag on prices or anything."
According to Matt Andre, refracturing
could potentially be a short term source of demand for frac
sand, as fracking an existing well could cost $2m, compared
with $8m for new fracks. However, PLG’s Robinson
does not anticipate this being a widespread trend.
"I don’t believe refracturing
will be a big thing because I don’t see the
leaders going there – if you want to know where the
industry is going, watch the leaders," he said.
While the wider outlook for
oilfield mineral demand is appears subdued, according to
Shearer, pockets of demand could emerge suddenly as companies
are bidding job to job. This means that frac sand suppliers
need to be flexible and reactive.
He said that consolidation and
bankruptcies in the frac sand industry are likely to continue
throughout 2016, though this could be viewed as a positive
development, helping to balance out supply and demand.