Frac sand, which is added to fracking fluid in order to prop
open cracks in the rock formation, has seen one of the most
remarkable boom-and-bust cycles of any industrial minerals over
the past ten years.
Demand for frac sand has risen from under 30 million short
tons per year in 2010 to over 100 million short tons in 2019.
But the price of this commodity has been very volatile over the
same period; the grade and size of sand favored varied wildly,
supply boomed, and the prospects of the fracking industry
fluctuated with every development in the oil market.
Now frac sand miners are reporting quickly diminishing
prospects, and laying off employees at a rapid pace, as the
entire industry faces an uncertain future.
Oil prices started to tumble in February, while the Covid-19
shutdown slowed activity in China, and the world adjusted to
the possibility that the outbreak could become a pandemic. The
fall was accelerated in March by the breakdown of an agreement
between Organization of the Petroleum Exporting Countries
(Opec) members and other oil producers, particularly Russia.
This informal grouping of oil exporting countries had
cooperated on cuts to production since 2016.
But the news that Russia would not support further supply
cuts caused a breakdown in supply discipline, leading Saudi
Arabia to announce heavy price reductions and planned increases
in output. Brent crude oil, the most widely used benchmark,
fell from over $65 a barrel at the start of 2020 to a low of
less than $16 a barrel in April, the lowest level in over 20
Further talks in April allowed the two countries to reverse
direction, with mutual cuts agreed, but this did little to lift
prices out of their depression. At the time of writing, prices
were still below $35 a barrel.
This fall in oil prices significantly disincentives new
drilling activity, the key driver of oilfield demand.
Drilling rate drop
On May 1 oilfield services company Baker Hughes reported its
monthly estimate of global drilling rates in April. The number
of active drilling rigs in the world excluding North America
plunged to 915, down from 1,059 a month earlier. This was the
lowest rate of drilling activity since 2006.
This drop in oil drilling is also cutting demand for barite,
which is used as a weighting agent in drilling fluid.
Barite, a natural form of barium sulphate, is used in
drilling fluid due to its high weight, low cost and
non-magnetic nature. The weight of the barite slurry helps
drilling fluid to sink to the bottom of well holes, carrying
away rock cuttings, and to maintain the pressure of the
Offshore drilling, which is more technically difficult than
conventional onshore drilling, is particularly hard hit by
lower oil prices. Offshore drillers are the main buyers of
high-grade barite, using material of specific gravity 4.2 or
higher, meaning that it is at least 4.2 times heavier than
But if the outlook is poor for barite demand, the picture
for frac sand is even more uncertain, as the US onshore market
takes a hammering. Although conventional onshore drilling is
usually cheaper than offshore, fracking is more expensive,
leaving it especially vulnerable to low prices.
Into this vulnerability the Covid-19 generated shutdown
added an unusually large spread between US inland oil prices
and international markets. On April 20 the US oil market saw
the unprecedented occurrence of negative prices, thanks to a
"perfect storm" of oversupply, falling demand and glutted
This negative price was preceded by a long-term shortage of
oil offtake capacity due to the increase in production in Texas
and elsewhere. With oil pipelines running at capacity, there
has been no way to move oil out of the region, leading to low
prices close to wellheads.
A number of large pipeline projects are currently under
construction, but offtake capacity is struggling to meet
supply. And while the US economy shut down to slow the spread
of the Covid-19 pandemic domestic oil demand plummeted,
reducing the rate of offtake from domestic fuel
This glut across the oil network finally hit Cushing,
Oklahoma, which is the main hub of the US oil industry, and the
point at which West Texas Intermediate oil futures must be
delivered when they expire.
The result was that the tanks at Cushing finally filled up,
just as the May futures contract neared its expiry date,
leaving traders scrambling to avoid being left to take
ownership of oil when there was no capacity to store it. This
game of hot potato saw the expiring May contract collapse from
$18 per barrel to -$38 per barrel in the final few hours of
trading. The price has bounced back since then, but remains at
just under $32 a barrel, compared with over $60 a barrel at the
start of the year.
Fracking markets rocked
The negative WTI price rocked fracking markets. The breakeven
price for fracking, which means the price at which it is
profitable to produce oil, varies widely from region to region.
But in the Permian Basin in Texas, the center of US
fracking, it is usually thought to be around $50 a
As a result, the downturn in US oil prices is stalling
fracking activity. According to the consultancy Rystad Energy,
the total number of wells being fracked in major oil basins
fell to 162 in April, compared with 550 in March and 807 in
In a note to investors in March, the broker Raymond James
warned that the downturn in fracking activity will be "far more
drastic than in previous down cycles" due to the high levels of
debt held by companies in the sector, who are still struggling
with loans taken out after the 2015 oil price crash. The US rig
count could fall by as much as 70% in six months, Raymond James
In fact, low oil prices and such financial circumstances for
fracking are already weighing on the drilling rates. The latest
weekly figures for US drilling, released by Baker Hughes on May
15, showed active US drilling rigs at a record low of just 329,
compared with 792 two months ago. The fastest drop has been
seen in the Permian Basin, where the total number of active
rigs has fallen to 175, compared with 418 two months
Oilfield service companies are painting a gloomy picture for
the rest of 2020. In a conference call with investors in April,
Halliburton chief executive Jeff Miller said that North
American oil-patch spending could halve year on year in 2020.
"The market in North America is experiencing the most dramatic
and rapid activity decline in recent history," he
"Since mid-March US land rig count has fallen 34% and is
expected to continue declining from here. With prices at the
wellhead near cash breakeven levels, we expect activity in
North America land to further deteriorate during the second
quarter and remain depressed through year-end impacting all
basins," he added.
Olivier Le Peuch, chief executive of the world's largest
oilfield service company, Schlumberger, was similarly downbeat.
"We anticipate both rig activity and frac completion activity
to continue to decline sharply during the second quarter, to
reach a sequential decline of 40% to 60%, which matches the
full-year budget adjustment guidance shared by most operators
in North America," Le Peuch told investors during a conference
call in April.
"This would represent the most severe decline in drilling
and completion activity in a single quarter in several
decades," he added.
For frac sand producers, the blow to demand comes on the heels
of a protracted supply glut, which meant profits were down when
volumes were booming.
Frac sand markets have been moribund since 2018, when a
long-term boom was ended by rising supply.
Demand for frac sand has jumped since 2016, and for some
time the main beneficiaries were miners based in Wisconsin and
But the high cost of transporting sand, as well as a shift
in approach that led frackers to favor using higher volumes of
lower grade sand, led to a sand rush in West Texas and other
regions closer to the fracking sites.
On March 10 the miner Covia, formed in 2018 by a merger
between Unimin and Fairmont Santrol, and now one of the largest
frac sand sellers, reported sales of 3.3 million short tons for
the last quarter of 2019, down by 21% on the previous
three-month period. In a conference call with investors on
March 10, Covia chief executive Richard Navarre warned that the
effects of the recent slump in oil prices was likely to weigh
further on results.
US Silica, another major frac sand seller, reported a sharp
drop in sales in the first three months of 2020. Total sales
volumes in the company’s proppants segments fell
by 17% year on year in the first quarter of 2020, at 3.2
million short tons. US Silica also reported frac sand prices
sharply down at $48.63 per tonne, compared with $67.41 in the
first quarter of 2019.
"These decreases are a result of the shift to in-basin sand,
overall decrease in demand due to current environmental
conditions related to the Covid-19 pandemic, as well as overall
supply being greater than demand," US Silica said.
"During the first quarter of 2020, there was an
unprecedented drop in global demand combined with the breakdown
of the Opec+ agreement to restrict oil production that led to
one of the largest annual crude oil inventory builds in
history," US Silica said. "This led to sharp reductions in
global crude oil prices."
"Containment measures and other economic, travel, and
business disruptions caused by Covid-19 also affected refinery
activity and future demand for crude oil, and consequently, the
services and products of our oil and gas proppants segment,"
the company added.
Smart Sand, meanwhile, announced first-quarter sales of
757,000 short tons. This was an increase from sales of 648,000
short tons in the first quarter of 2019, but revenues fell by
8% over the same period due to a sharp drop in prices. "[The]
Covid-19 coronavirus pandemic has caused a global decrease in
all means of travel, the closure of borders between countries
and a general slowing of economic activity worldwide which has
decreased the demand for oil," Smart Sand said.
This drop in revenues has already triggered a slew of
redundancies. US Silica has already sharply cut capacity over
the last year, with seven facilities idled and capacity reduced
at six more. In April the company laid off another 105 people.
Fort Worth, Texas-based Black Mountain Sand has laid off 167
people, in Oklahoma and Texas, while Covia has laid off 82
people in Texas.
Fastmarkets’ price assessment for frac sand,
northern white,100 mesh, API, exw Wisconsin, was $25-30 per
short ton on April 23, down from $27-32 a month earlier.