Shifting sands

Published: Thursday, 28 June 2018

Soaring frac sand demand is being met by a wave of new supply, but how will traditional sellers fare in a world where quantity, rather than quality, is king, William Clarke, Industrial Minerals reporter, asks.


For US frac sand miners, 2016 started off badly. Demand for the product was ebbing away, in a new world of low oil prices. But the surprising return of the fracking industry resurrected frac sand miners’ fortunes with it, and 2017 became the year of the supply squeeze. Existing mines were at capacity, trains into the US fracking basins were fully loaded with sand, and demand looked insatiable. Now the industry looks set to change again, with a wave of new sand mines opening while buyers tear up the rule book on their quality and origin requirements. The main concern for buyers now is where to source the most sand at the lowest price. 

Frac sand is a key component of the hydraulic fracturing process. Hydraulic fracturing is a way of stimulating oil and gas formations to extract trapped oil. Hydrocarbons can be trapped in pockets inside shale rock formations. These trapped hydrocarbons are termed shale oil, or shale gas, or are sometime called "tight" oil and gas, in reference to the way they are contained in the formation. 

Hydraulic fracturing of tight oil formations has become a major source of oil production in the United States, and increasingly Canada. The process consists of injecting liquids at high pressure into the formation, breaking open pockets of trapped oil or gas. The fracking fluid carries proppants such as frac sand deep into formations. When hydrocarbon extraction begins, the proppants hold open the fractures allowing oil or gas to flow out.

The nature of the fracking fluid depends on the well and the formation. The most common type of fluid used in the US is currently "slick-water". This fluid consists primarily of water, with friction reducing chemicals, and proppants. Gel fracks, in contrast, use a gelled fracking fluid. This method allows larger proppants to be carried deep into the well. Production of these gels requires boron derivatives. 

Surviving the oil price crash

Fracking activity, and frac sand demand, has been trending upward for decades. 

But the oil price crash of 2014 brought all this to a juddering halt. The breakeven point, the price level at which it was profitable to drill and frac a well, was widely estimated at around $70 a barrel in mid-2014, at a time when the West Texas Intermediate price was regularly reaching over $100 a barrel. When oil prices fell below $50 a barrel by the start of 2016, wells were left uncompleted while fracking activity ground to a halt. The Baker Hughes US rig count, which records the number of active drilling rigs, fell to just 404 in May 2016 from 1,929 in November 2014 (See graph). 

US rotary rig count 2014-May 2018 
Source: Baker Hughes 

But the low oil price also forced a change in priorities among those frackers who remained in business. For years, the focus had been on the conductivity of proppants. Conductivity refers to the ability of hydrocarbons inside the formation to flow out between the proppant particles. The theory which predominated was that increasing conductivity was the best way to increase the amount of oil produced per day by the well. 

The quest for high conductivity drove fracking companies to prioritise particle size, roundness, sphericity, and crush strength. Large sand grains, with smooth edges and as close to perfectly spherical as possible, would back together with wide gaps for oil and gas to flow out. A high crush strength, meanwhile, would prevent the sand being broken down under pressure, losing its valuable properties. 

There was only one location in the US where these large, strong, regular sand grains could be economically sourced: parts of Wisconsin and Minnesota. This so-called Northern White sand was for years the gold standard of frac sand. Wisconsin was dubbed the Saudi Arabia of frac sand.

But when oil prices bottomed out in early 2016 to below $30 a barrel, frackers pared their costs in an attempt to make well completions profitable in a new era of low prices.

Frackers began to experiment with lower grade sand, compromising on regularity and crush strength. In addition, a trend toward longer horizontal wells encouraged the use of smaller sand grains with a rising proportion of finer mesh sand and reduced the use of the premium 20/40 and larger mesh sizes. 100 mesh sand, once considered unsuitably fine, became increasingly valued for its ability to "touch more rock", getting deeper into the fractures than coarser sand. 

Smaller mesh sand makes crush strength less critical, allowing further compromise in material quality. 

At the same time, the total volume of sand needed soared, both because wells were getting longer, and the amount of sand used per foot of well was increasing. The sand intensity, or the volume of sand used per well, had been increasing since before the 2014 oil price crash and continued afterward because production returns were so significant. 

"We kept putting more sand down the well […] and we got more oil out," one fracker said. "100,000 [short] tons used to be a huge amount for a well, now it’s seen outside the Permian." 

Transporting over a 100,000 tons of sand into the basin requires an entire fully loaded unit train with over 100 cars, or as one logistics company put it: "that’s a mile of train for a well." 

The process of fracking contains a great deal of trial and error. Frackers began trialling new techniques for extracting oil and gas to bring the cost of production lower. 

"Every formation is trial and error. What works in West Texas doesn’t necessarily work in Bakkan," one operator said. 

This meant when oil prices began to turn a corner in mid-2016, drillers and frackers were ready to ramp up production long before prices recovered to their 2018 peak. As 2016 wore on, oilfield activity in the Permian exploded. The Baker Hughes rig count rose from just 134 in April 2016 to 339 a year later. As of June 2018, there are 477 active rigs in the US. Every active drilling rig means another well to be fracked. 

The combination of rising activity with ever higher sand intensity has led to soaring sand demand.  According to estimates from Credit Suisse last year, frac sand demand reached a high of 56 million short tons in 2014 before sliding to just 34 million short tons in 2016. But the combination of rising sand intensity and renewed fracking activity pushed demand to over 80 million short tons in 2017. Industry estimates for 2018 demand range between 95 and 120 million short tons. 

"The legacy mines are at capacity," one sand miner said. 

Sand storage on a fracking job.

Quantity is king

But this rising demand will to be met by a slew of new frac sand production. Frackers want finer mesh sand in huge volumes that are reasonably priced and are prepared to compromise on its quality to get it. The result has been the trend toward in-basin sand. This shift in the type of sand needed, at the same time as an increased focus on cost, has encouraged buyers to look outside of their traditional sand sources. 

The Permian Basin, where fracking was first developed, remained the most economical for this story of exploitation. A combination of supportive regional administration and low population density, ample pipeline capacity and other infrastructure, and strong technical understanding, allowed frackers to operate profitably after operations in other basins had ground to a halt.

But one downside of the location was the long distance between it and the big Wisconsin mines. In 2017, Northern White sand miners reported average sand prices of $35-45 per short short ton. Prices at well-head, by comparison, were reported at over $120 per ton. 

"We say it’s one third at the mine, a third on the rail freight, and a third "last mile [the cost of transporting the sand from a rail terminal to the well itself]" a logistics company said in late 2017. 

Dealing with the new supply

In 2017 a wave of new projects was announced in the Permian Basin, with miners eyeing up a range of sand dunes in West Texas. Hi-Crush and Alpine Silica were the first out of the gates, with new projects in 2017 of projected capacity of around 3 million short tons per year each. 

Preferred Sand, US Silica, High Roller Sands, Vista Sand, Black Mountain and Aequor have all announced Texan sand capacity. A total of 16 companies have announced projects in the Permian, with a total nameplate capacity of almost 40 million short tons. Permian sand demand, meanwhile, is estimated at around 50 million tons. 

The massive volume of new supply is raising concerns about the impact on sand prices, but this is not the only problem for the in-basin sand miners. Regional logistics are already strained to breaking point, particularly due to the shortage of trucks and road capacity. Moving frac fleets around and ferrying workers and sand from site to site have bought logistical snarl ups to the sparsely inhabited region. 

All this comes alongside new competition for space after the transport of extracted oil moved to trucks and trains. A major reason why the Permian has been such a popular site for oil companies is the existence of previously ample oil pipeline capacity going to other terminals across the country, and to the Gulf of Mexico. But with production soaring, pipeline capacity has been reached and exceeded. The result is oil traveling by rail and road, further stretching logistics. 

"There is most definitely a hard infrastructure shortage," Joel Schneyer, managing director at bank advisory Capstone Headwaters, said. "Who would have thought of daily traffic jams in West Texas?" 

"Money can and will fix the problem," Schneyer said, but added that this will take time.

One problem with the increased use of road freight is the shortage of truck drivers. 

As Taylor Robinson, of freight consultant PLG pointed out, turnover is the sector is extremely high, and there is reluctance to increase wages to the high levels needed to tempt drivers out into West Texas.

"With low national unemployment rates and rising wages, finding responsible drivers has been and will continue to be a major problem," Schneyer said. 

Schneyer suggested that one solution to the logistics snarls could be box-stored sand. 

These sand systems use truck-portable sand boxes, which can be filled up at the mine or rail-head. The boxes can be stored without contamination or loss of sand quality, before being trucked to the well-head.

These systems are prized in densely populated basins such as Denver because they allow quieter delivery of sand, with less dust pollution, but they also offer logistics benefits. Sand can be moved out of the mine or rail depot at a steady pace, preventing traffic jams on access roads caused by frackers trying to get tens of thousands of tons onto a site all at once. 

The system could reduce the "mad rush to deliver frac sand from local mines to the well site," according to Schneyer.  Having an inventory of sand in boxes that needs to be moved just 5 miles to the well site should reduce traffic surges.

Another problem for Permian miners lies in the composition of the frac sand being mined. Each well requires a mix of mesh sizes, with fine mesh sand going deeper down the fractures and coarser sand closer to the lateral. But the West Texas sand mines are predominantly 100 mesh, with a smaller proportion of 30/70 mesh. 

Industry sources agree that continued demand for coarser sand will keep demand for Northern White sand. Some miners are already working to bundle railed 20/40 or 30/50 mesh Northern White sand from their Wisconsin and Minnesota mines with fine mesh sand from their local mines. But the fact remains that planned 100 mesh sand capacity outweighs even the most generous demand forecasts. 

"Because of the mismatch of fine grained sand supply with demand requirements, expect the overhang of extra 100 mesh to drive prices down," Schneyer said. "With the number of new producers entering the market, expect market discipline to erode."  

"In the long term, if that pricing discount is substantial, expect to see some experimentation with using higher percentages of 100 mesh in well designs," he added. 

With the oil price recovery taking hold, the in-basin trend has spread outside the Permian, into other regions.

In May 2018, Preferred Sands announced it will open a new 3 million short ton mine in Oklahoma, serving the mid-continent basin. And in June, Emerge announced another 1.5 million short ton sand mine in Oklahoma. Demand there is expected to exceed 8 million tons in 2018, rising to over 10 million tons in 2019.

"Demand for in-basin fine mesh product is strong, and we have validated the appetite for local Oklahoma sand with several key customers operating in the mid-continent basin," Emerge chief executive officer Rick Shearer said.

New capacity is also coming online around San Antonio to serve the Eagle Ford basin. 

These further regional developments further threaten Northern White miners. "At the moment, Northern White sand is the market in both the Williston Basin and DJ Basin because no regional sand mines have been developed," Schneyer said. But he warned that with producers experimenting with lower quality regional sand, "it raises the question that there may in fact be few if any barriers to entry to produce frac sand from a slip stream associated with most any sand and gravel project already in production."

"Let’s say there is a 2 million ton per sand and gravel mine operating north of Denver in the Platte River Valley.  Could they divert say 500,000 of the 30/70 mesh size for attrition scrubbing, drying and screening to produce a viable frac sand product?  Stay tuned," he added.

Schneyer sees the ample new frac sand supply starting to threaten prices. Producers are pushing for long-term take or pay contracts, but the low barrier to entry could make these deals hard to close. "As there currently still is a sand shortage, sand producers have the upper hand," he said. 

"But as time goes by, expect to see the dynamics shift as both exploration and production companies, and service companies invest in new regional sand mine expansions with both an equity ownership position in the sand mine and 'discounted offtake’ contracts."

Supply endangered?

The fracking industry in the US state of Texas has condemned renewed attempts to list the dune sagebrush lizard as an endangered species because such a move could choke off frac sand supply from the region.

A letter from the United States’ Center for Biological Diversity, delivered on May 8, petitioned the country’s Secretary of the Interior to list the lizard as a threatened or endangered species.

The petition specifically mentioned the threat from frac sand mining. Tens of millions of tonnes of new frac sand capacity have already come online in the Permian Basin this year.

The dune sagebrush lizard is found in West Texas and New Mexico. It makes its home among shinnery oak shrubs that grow on the sand dunes in the region. This habitat often overlaps with areas that frac sand miners want to exploit.

"The threats from uncontrolled oil and gas development are significant, but pale in comparison to the potential habitat destruction and modification from uncontrolled frac sand mining in the Permian Basin," the petition said.

The status of the lizard is of particular interest to frac sand miners and oil and gas companies operating in the Permian Basin,

because the restrictions that could be imposed by US federal law if the lizard were categorized as endangered would put strict limits on road-building and land use in many key fracking areas.

Petroleum industry participants have suggested that the move to protect the lizard was intended to stymie Permian Basin fracking and petrochemical activity overall.

But a spokesman for the Independent Petroleum Association of America downplayed the risk to the dune sagebrush lizard, saying that voluntary conservation efforts would protect the animal.

"Unfortunately, the tactics of environmental groups remain the same, attempting to use the Endangered Species Act to advance an anti-hydrocarbon agenda," he said.

A spokesman for the Texas Oil & Gas Association said that "listing the species remains unwarranted and would shut down significant oil and natural gas production and activity, which is the intent of the groups filing this latest petition."

"Like previous attempts to list the dune sagebrush lizard, this filing has nothing to do with the lizard’s habitat," the second spokesman added, suggesting that the move was instead motivated by "an anti-oil and gas agenda."