Shale Oil Boom Drives The Demand For Frac Sand
$PXD, $HAL, $BHI, $EMES, $FMSA, $HCLP
It can take up to 4-M/lbs of sand to frack one well, that demand is outpacing supply and frac sand producers are becoming the biggest behind-the-scenes beneficiaries of the American Crude Oil and Nat Gas boom.
Demand is exploding for “frac sand” a durable, high-purity quartz sand used to help produce petroleum fluids and prop up man-made fractures in shale rock formations through which Crude Oil and Nat Gas flows, turning this segment into the top driver of value in the shale Oil revolution.
One of the major producers in the Eagle Ford play says it is short 6-M tons of 100 mesh alone in Y 2014 and they do not know where to get it. And that’s just one player.
Frac sand exponentially increases the return on investment for a well, and Oil and Gas companies are expected to use some 95-B/lbs of frac sand this year, up nearly 30% from Y 2013 and up 50% from forecasts made last year.
Pushing demand up is the trend for wider, shorter fracs, which require 2X as much sand.
The practice of downspacing, or decreasing the space between wells means a big increase in the amount of frac sand used. The industry has gone from drilling 4 wells per sqm to up to 16 using shorter, wider fracs. In the process, they have found that the more tightly spaced wells do not reduce production from surrounding wells.
This all puts frac sand in the ‘drivers’ seat’ of the next phase of America’s Oil boom, and it is a commodity that has already seen its price increase up to 20% over the past year.
Frac sand is set for even more significant gains over the mid-term, with long-term contracts locking in a lucrative future as exploration and production companies experiment with using even more sand per well.
Pioneer Natural Resources Inc. (NYSE: PXD) says the output of wells is up to 30% higher when they are blasted with more sand.
According to the data approximately 20% of onshore wells are now being fracked with extra sand, while the trend could spread to 80% of all shale wells.
Oilfield services giants such as Halliburton Co. (NYSE: HAL) and Baker Hughes Inc. (NYSE: BHI) are stockpiling sand now, hoping to shield themselves from rising costs of the high-demand product, according to a recent Reuters report. They are also buying more sand under contract, a trend that will lead to more long-term contracts and a longer-term boost for frac sand producers.
In this environment, the new game is about quality product and location.
Frac sand extraction could spread to a dozen US states that have largely untapped deposits, but the biggest winners will be the biggest deposits that are positioned closest to major shale plays such as Eagle Ford, the Permian Basin, Barnett, Haynesville and the Tuscaloosa marine shale play.
The state of Wisconsin has been a major frac sand venue, with over 100 sand mines, loading and processing facilities permitted as of Y 2013, compared to only 5 sand mines and 5 processing plants in Y 2010.
But with the surge in demand for this product, companies are looking a bit closer to shale center to cut down on transportation costs and improve the bottom line.
One of the hottest new frac sand venues is in Arkansas’ Ozark Mountains, which is not only closer by half to the major shale plays, saving at least 25% per ton on transportation costs, but also allows for year-round production that will fill the gap in shortages when Winter prevents mining in northern states.
Professional Logistics Group Inc. found in Y 2012 that transportation represented 58% of the cost of frac sand, today the costs are between 66-75%.
The competition is stiff, but this game is still unfolding, as increased demand is reshaping the playing field.
US Silica Holdings Inc. says demand for its own volumes of sand could 3X in the next 5 yrs, and its 3 publicly-traded rivals: Emerge Energy Services (NYSE: EMES), Fairmount Santrol (NYSE: FMSA) and Hi-Crush Partners (NYSE: HCLP), have also made strong Wall Street debuts over the past 2 yrs.