Flash back for frac sand

By Kasia Patel
Published: Friday, 09 June 2017

Improvements in oil and gas drilling activity in North America have paved the way for recovery in demand for oilfield minerals such as frac sand, barite and bentonite, but as Kasia Patel, IM Correspondent, reports, the rebound has tested suppliers’ ability to respond.

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Since the end of last year, improving rig counts, particularly in North America, have prompted industrial mineral suppliers to the oil and gas sector to cautiously suggest that market recovery is imminent. Although the uptick in exploration and production (E&P) activity since 2016 has so far not translated into increases in profit across the board for oilfield mineral producers, analysts anticipate that a year of stable oil prices in 2017 could bolster industry margins.

The oil and gas sector consumes a range of industrial minerals including barite (barytes), bentonite, calcium carbonate, graphite, gilsonite and proppants made from kaolin, bauxite and silica (frac) sand. 

While rig counts have traditionally been a solid indicator of mineral consumption by the sector, changes in technology have changed the way oilfield minerals are used. 

This is most clearly reflected in the use of proppants, which have seen various sharp shifts in usage trends over recent years. Frac sand production capacity was being pulled offline as recently as last year in response to low demand and prices, but market participants are now concerned about potential shortages in the US.

North America 

In March, consultancy firm Douglas Westwood (DW) revised up its forecast for the oilfield equipment market to 2021, following a recovery in US shale production. DW now predicts expenditure of almost $385bn between 2017 and 2021, compared with a previous estimate of $371bn between 2016 and 2020.

At the end of November 2016, the Organization of the Petroleum Exporting Countries (OPEC) agreed to curb oil supply for the first time in eight years, with plans to reduce output to 32.5m barrels a day (bbl/day) compared with an average of 33.64m bbl/day in October. At the time IM  went to press in mid-May, OPEC was considering extending its production cuts this year in order to bolster oil prices in the wake of US shale’s resurgence.

The cartel’s initial round of cuts drove oil above $55/bbl at the start of 2017, prompting US producers to ramp up drilling. The subsequent increase in the North American rig count and a loss of nerve by oil traders saw prices plunge back to around $45/bbl at the start of May.

But as OPEC grudgingly responded to the volatility by admitting it may need to maintain production limits, US shale producers’ resilience to lower prices means they have little incentive to reduce supply.

Following OPEC’s November meeting, a number of non-OPEC countries, including Russia, also  agreed to cut oil output for up to 12 months to help stabilise the market.

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Measuring up? Frac sand producers report an uptick
in demand, while ceramic proppants lag. This is
part of a drill core of the Jordan formation. 

Since November, the world rig count rose from 1,678 to a high of 2,027, before settling at 1,917 in April. US rig count increased from 580 in November to 853 in April – almost double the 437 rigs active on the continent in April 2016.

The latest major downturn in the global oil market, which began when oil prices collapsed from their $100/bbl highs in mid-2014, left behind a more streamlined and technologically advanced oilfield services sector, with new products and techniques making it profitable to extract oil at $45/bbl.

Michael Lawson, vice president of investor relations at New York-listed frac sand producer US Silica Holdings Inc., said that better technology has enabled North American oil and gas producers to be more flexible.

"I think Saudi Arabia may have done the US shale industry a favour in November 2014, when they announced their shift from trying to protect pricing to trying to protect market share," he told IM. "It forced a lot of folks to get much leaner – to figure out how they could do more with less."

According to Lawson, the recovery in North American oil and gas activity is due to a combination of demand growth and technology proven to lower costs.

"Some of those costs will come back but some [of the reductions] are structural and will remain in place, keeping US shale competitive in the global market," he said. "I think today, a lot of people would say that the swing producer on the world stage is US shale."

Average proppant per foot 
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Source: Energent Group 


Trumped up

The election of Republican President Donald Trump in the US in November 2016 was generally viewed as a positive development for the country’s oil and gas sector. 

For fracking, although individual states can regulate the practice, Trump’s policies to cut red tape and reduce US dependence on foreign energy sources have been praised by the oil industry. The American Petroleum Institute (API) said that Trump’s first 100 days in office highlighted his commitment to an American energy renaissance.

"We are heartened by the president’s emphasis on right-sizing America’s energy policy to encourage responsible domestic energy development that creates well-paying American jobs and helps to lower costs for consumers," the API said. 

It also expressed its support for progress made on two major domestic energy infrastructure projects, the Keystone XL Pipeline and the Dakota Access Pipeline, and the removal of regulations which it claimed hindered energy production without benefiting the environment, economy or consumers.

According to US Silica’s Lawson, the Trump administration’s attitude towards developing domestic energy has been encouraging.

"There seems to be a positive attitude towards US energy development and energy independence, and also economic stimulation through energy and jobs that are created in that space," he told IM.

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A drill rig evaluates a frac sand deposit. This image was taken at the height of the
so called "shale gale" in 2013 when frac sand producers were springing up around the US. 


Proppants: Quick turnaround 

At the height of the fracking boom in North America, oil and gas producers had the luxury of being able to experiment with various proppant mixes to determine what kind of material was most effective in terms of cost and production. High oil and gas prices facilitated the use of expensive ceramic proppants, commonly manufactured from a blend of kaolin and bauxite, which yielded higher production at wells.

Once the oil price began to decline in June 2014, ceramic proppant producers were the first to feel the pinch as E&P firms looked to cut costs. While some are confident that a rebound in oil and gas prices will rebuild demand for ceramic proppants, others have suggested that the trend away from using these products is non-reversible.

Michael O’Neill, CEO of Pennsylvania-headquartered Preferred Sands, told IM that ceramic proppants are likely to become extinct.

"Ceramic proppants are very expensive; they’re something producers experimented with and believed they needed, but they weren’t getting better production [from them]," he said.

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One of the largest issues during the shale gale of 2013-14 was the lack of
available rail car space. Many operations overcame this by investing in
their own infrastructure. When the market plummeted, these rail cars and
trucks had to be put into storage, costing around $4-5m per quarter. Now,
however, every car available is on the road and logistical issues are once
again arising. 

There was more of a lag before frac sand producers began to see their orders decline as a result of lower oil prices. Many had long-term supply contracts in place by mid-2014, owing to earlier concerns of a frac sand shortage caused by logistical bottlenecks, meaning that buyers were obliged to continue taking deliveries at set prices even as their earnings from oil fell.

Over the two years that followed, however, much of North America’s frac sand capacity was idled as demand ebbed. In 2016, 10 frac sand producers accounted for over half of global supply, but their production utilisation stood below 30% for most of the year.

North American onshore oil and gas activity fell by 30% in 2015 and dropped a further 20% the following year as the rig count hit a low of 417 in mid-2016. Things began to improve by the final quarter of the year, however, as oil prices recovered to $50/bbl.

Having been one of the last segments to feel the effects of the downturn, frac sand was also one of the first sectors to spring back with the rebound in US fracking activity. New techniques requiring more sand per well have even led some in the industry to warn of a possible US frac sand shortage by the third quarter of 2017.

Consultants at DW have noted the significance of multi-well pad drilling in the Permian Basin, in the southeast of the US, which has driven frac sand demand to new highs.

"In 2016, 42% of the wells completed in the Permian were drilled on multi-well pads compared to only 22% of wells in 2015," a DW report outlined at the end of April.

"High-intensity completions (mega fracs) use increased amounts of frac sand, fluid and chemicals to stimulate the near wellbore rock, further contributing to a potential shortfall in frac sand supply," the company added. DW cited figures from oil and gas research firm Energent Group, showing that the majority of new Delaware Basin completions use on average 1,900lbs (861.8kg) of frac sand per lateral foot.

Longer laterals – drill holes that do not go straight down into the ground – are also a major demand driver for frac sand, with DW forecasting that the two mile lateral will become increasingly common in 2017.

Rig count 
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Source: Baker Hughes 


Back in the black

Increasing demand and changing trends have yielded tangible improvements in first quarter 2017 results for a number of frac sand companies.

US Silica returned to profit during the period 2017 with net income of $2.5m, up from a loss of $6.9m in the fourth quarter of 2016 and a loss of $11m in the corresponding quarter last year, while quarterly revenue increased 100% year-on-year (y-o-y) to $244.8m.

Lawson told IM that the recovery in the company’s financials was due to a rebound in silica sand prices as well as volumes, a trend which is expected to continue into 2018.

"We pushed pricing sequentially up about 20% on average at the mine gate across all grades in the first quarter of 2017," he said. "We expect a further 15-20% increase in pricing in Q2 over Q1 based on the continued strong demand for our proppant products, particularly the fine grades, [assuming oil prices remain] north of $45-$50/bbl."

 If Lawson’s predictions materialise, it is likely that the company will sell out of proppant products by the third quarter of this year, he said, adding that a US frac sand shortage is a real possibility. 

"Our customers want to sign multi-year supply agreements – they really are concerned about shortages," Lawson told IM. "We think the market’s going to be pretty tight all the way through 2017 and probably through to 2018, despite some newly announced capacity – ours included – coming on to the market place."

Lawson quotes figures indicating that frac sand demand is likely to reach 70-75m tonnes this year, around double the volume consumed in 2016.

For 2018, forecasts range from 100-147m tonnes, based on rising rig count and the trend towards using more proppant per well, Lawson added.

New supply

US Silica is looking at a handful of brownfield expansions to add around 4m tonnes frac sand to its existing 12m tonne capacity, which accounts for around 20% of the North American market. The company is also considering greenfield expansions and possible mergers or acquisitions to add another 4-5m tonnes to its supply capabilities.

Despite failing to turn a profit in the first three months of this year, Texas-based proppants producer Hi-Crush Partners LP did manage to narrow its loss to $6.8m in Q1, compared with a loss of $8.1m the previous quarter and a loss of $52.5m for Q1 2016.

Regardless of its strained financials, during the first quarter of 2016 the company completed acquisitions of Permian Basin Sand LLC, the Whitehall LLC frac sand processing facility and the remaining 2% interest it did not own in Hi-Crush Augusta LLC, consolidating a sizeable chunk of southeast US frac sand capacity. It is also on track to finish a 3m tpa expansion in the Permian Basin this year. 

Additional proppant capacity also looks set to come from a handful of new entrants to the market. Edmonton, Canada-based Athabasca Minerals Inc., which currently operates the Susan Lake Aggregate Operation, the largest open gravel pit in Canada, is developing silica sand products for fracking and plans to have sand available for sale in late 2017 or early 2018.

A spokesperson for the company told IM that, currently, large amounts of frac sand used in western Canada are imported from the US, including both Northern White and brown sand. 

"There are relatively few frac sand producers in western Canada, and we believe that our project, with a large resource and closer proximity to users compared to US players, and with the US/Canadian dollar [exchange rate] making imports more expensive, may be in a good position [to supply local fracking operations]," the company said. 

Changing customer demand

One of the biggest shifts among frac sand consumers has been the move away from ceramic proppants and even premium Northern White sand in favour of using more, less-costly brown sand.
"We definitely see an increase in demand for brown sand, as pressure pumpers find [they get] strong results from using a lower tier sand," Athabasca told IM. The company noted, however, that an increase in fracking activity will likely lead to higher consumption of all kinds of frac sand.

According to Preferred Sands’ O’Neill, frac sand users will from now on monitor what they spend on sand.

"Producers found when they used [brown] sand, the difference was so marginal that they weren’t getting anything for the additional dollars they were spending [on white sand]," O’Neill told IM.

Lawson points to a shift towards buyers starting to favour local in-basin sand, due to the reduced logistical costs compared with transporting material over long distances. However, some customers remain staunch advocates of Northern White sand.

"It really depends on the energy company. If they are interested in initial production rates and cash flows of their wells, maybe they’ll use a cheaper product. But, if they are more concerned about the life of their well and enhancing their ultimate recovery, then they will probably choose to use a higher quality sand proppant because they get better conductivity from the well site," he told IM.

US Silica has also seen a trend toward more direct purchases of sand, with end customers choosing to self-source material rather than buying from large oilfield services companies.

Logistics

Rising demand for proppants and moves by customers to buy locally has once again thrown the industry’s logistics into the spotlight.

The initial rapid rollout of fracking in North America in 2013-14 created a number of logistical bottlenecks for frac sand supply. This led to the development of new logistics networks and an increase in railcar capacity, much of which was rendered idle following the oil price crash.

"We had to put railcars in storage during the downturn, and that cost us around $4-5m per quarter," Lawson told IM. "We’ve pulled every car out of storage now and they’re all full of sand going somewhere."

With the recovery in US shale activity, rail car availability for frac sand supply is reported to be tightening again.
"There aren’t enough trucks, there aren’t enough drivers and with more sand going into wells, the proppant intensity aspect just exacerbates the trucking issue," Lawson said.

According to Athabasca, those fracking firms who got stung by logistical holdups during the last shale boom are more likely to source locally this time around.

"The biggest challenge for all frac sand suppliers is providing stable frac sand supply in a cost-effective manner," Athabasca told IM. "This is directly related to transportation costs – the further you go, the more expensive it is – we view our western Canadian frac sand as being easily accessible to regional customers."

Drilling fluids

While the frac sand industry has been quick to respond to the uptick in oil and gas drilling in the US, consumption of drilling mud minerals such as barite and bentonite has been slower to recover.

Around 90% of barite production in the US is consumed by the oil and gas sector. According to the US Geological Survey (USGS), around 316,000 tonnes barite were mined in the US in 2016, but with rig counts sinking to record lows in the middle of last year, US sales of barite were estimated to have been their weakest since the 1990s.

Barite production 2015 vs 2016 
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Source: USGS 


US barite producers Baker Hughes and Halliburton Inc. announced net losses for the first quarter of 2017, although both sounded optimistic about a recovery.

"Revenue for our upstream chemicals business, which represents approximately one-quarter of our North America revenue, grew in line with production volumes and is poised for additional growth as production increases," Baker Hughes said. 

The company said that while the North American rig count has rebounded, the industry is still working to absorb excess service capacity.

China, the world’s largest producer of barite, reported that exports of the mineral in the first three months of 2017 fell 20.5% y-o-y to 307,076 tonnes – the weakest quarter in four years, according to Chinese data.

For bentonite, around 31% of production in the US was consumed in drilling mud applications in 2016. Exports of the mineral fell by around 36% during the year, and while total US clay sales increased slightly, bentonite sales shrank by 6%, driven by the decline in oil and gas.

Bentonite 2015 vs 2016 production 
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Source: USGS 

New York-headquartered Minerals Technologies Inc. (MTI), which acquired bentonite producer AMCOL in 2014, reported a Q1 2017 increase in sales in its performance materials segment, which supplies bentonite and synthetic materials for industrial and consumer markets and for non-residential construction applications. But sales to the oil and gas sector have collapsed. 

"The energy services business has been cut way back because of the oil and gas decline. Bentonite is only a small proportion of the business, and most of that goes into metalcasting," an MTI spokesperson told IM.

A delicate balance

The US Energy Information Agency (EIA) forecasts US oil production will average 9.2m bbl/day in 2017 and 9.7m bbl/day in 2018, up from 8.9m bbl/day in 2016.

While OPEC cut its production in an effort to support oil prices, US producers have continued to ramp up and rig counts in the US show no sign of abating.

At the time IM went to press, OPEC seemed to be in favour of maintaining production curbs, but with global oil output expected to increase this year and next, it is far from certain that the price of oil will hold up enough to support even the streamlined US fracking firms. 

For oilfield minerals, this means a nervous waiting game but also potentially continued innovation of the kind that has seen frac sand companies bounce back from near-oblivion in a persistently unpredictable energy sector.