Frac Sand 2015: Will there be blood?

By Kasia Patel
Published: Saturday, 26 September 2015

Frac sand prices likely to fall further as a third of economists predict an additional oil price drop. New technology however is expected to aid weak oil and gas margins.

Delegates at IM’s 3rd Frac Sand conference in Minnesota, US in September warned that they are anticipating further silica (frac) sand price declines and additional waves of cost-cutting and consolidation.

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The grim outlook for the OFM sector did not deter 
industry participants from gathering in Minnesota to 
share views.

Rick Shearer, CEO of Superior Silica Sands, told the meeting that oil prices will remain in the $38-50/barrel range until at least the second half of 2016, preventing a recovery in the upstream oilfield mineral market.

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 boomed. 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 fiercer.

"The pie is so much smaller, but proppant producers are continuing to fight for a piece of that pie," Shearer said.

Low frac sand prices are "the new normal"

Frac sand prices too have declined in step 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 Shearer.

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.

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Delegates heard that prices for oil and frac sand could still 
decline before a recovery takes place.

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 sustainable".

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 the blood-letting."

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 in the US, more needs to be done," he said.


Technology to drive growth

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," Shearer said.

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.

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Technology developments are likely to improve margins and 
drive increased proppant consumption.

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 concluded.

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 big 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.

Logistics no longer a hurdle

Logistics are also driving companies’ ability to compete in the frac sand sector, in a situation of proppant quality versus landed economics, delegates at the conference heard.

"Drilling companies might switch to lower quality local sand if it is cheaper and closer," explained Shearer.

In 2014, logistics companies struggled to keep up with frac sand demand and a lack of railcars hindered deliveries to basins. However, Robinson noted that bottlenecks are no longer an issue in the North American frac sand supply chain.

"There aren’t really any supply chain hurdles anymore, due to the abundant overcapacity of sand," Taylor said, adding that logistics companies have failed to escape the downturn, with the peak $600-700 lease price for rail now cut in half.

"Rail cars – which used to be called cement cars but are now called frac sand cars – are in storage. There are 1.5 years of frac sand backlog capacity, and it will take a few years before the brand new cars that were ordered last year are being used," Taylor said.

Rail companies, which have less flexibility than the frac sand mining industry, are suffering in the wake of lower oil prices and reduced E&P activity across North America’s shale basins.

More than 40,000 new rail cars were ordered to transport frac sand last year, double what was needed, as oil and gas and frac sand companies commissioned new carrying capacity in anticipation of continued high demand.

While in the long term oil demand is still expected to grow, and Taylor expects expansion in high intensity fracking and the potential for oil exports, he said the oil and gas and proppant industries have a long way to go before they bounce back.

"Long term, there will be a lot of successful frac sand stories, but it’s going to be a tough couple of years before then," Taylor said.