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2012 was the year of drilling efficiency gains. The spread of fast moving, highly
capable new gen land rigs started to cut average drilling times per well significantly.
We heard alot about the "bifurcation between well count and rig count" in 2012.
2013 was the year of pad drilling. Operators embraced the pad concept en masse
and well counts continued to diverge from rig counts.
2014 is looking like the year of more frac sand. As a result of downhole intensity
increases, more frac sand is being pumped per well. Frac stage spacing is tightening
and sand loading per stage is rising as operators seek to maximize reservoir contact.
Surface advances like drilling efficiency and pad drilling are still trending and very
important. But the real incremental gains in shale are happening sub-surface this year.
The independent E&Ps that have led the shale charge are now experimenting with ever
greater downhole intensity in all unconventional basin across the Lower 48. If 2012 and
2013 were about more finesse at the surface, 2014 is surely about more brute force within
the tight formations themselves.
To put it bluntly, the industry is taking a sledge hammer to unconventional resources this
year. Oil service companies are confirming that some massive fracs are taking place - think
single wells completed with 80 stages and 20-30 million pounds of sand. And the data
shows that bigger fracs are outperforming.
Well IPs, NPVs, ROIs, and EUR estimates are all moving up as a result of downhole
intensity increases. Oil service firms are evaluating their game plans in order to keep up and
stay on the cutting edge of this fast-moving trend.
Frac Sand Mining Facility
In this post, we explore the impact more sand is having in shale, meet the sand miners, look
at logistics, and discuss the trends and outlook in this now essential link in the oilfield value
chain. We also include a short proppant primer for those seeking a bit more background on
what frac sand is all about.
We've also complied a slideshow of sand discussion points from industry leaders. These
quotes are must-reads for anyone working with onshore unconventional development. In
the series of quotes, you'll hear how rapidly things are changing. From downhole intensity's
impact on oil service, to white sand replacing ceramic proppant, to frac stage spacing
changes, we've documented what industry authorities have to say about sand.
Click to go straight to shale bosses talking sand, or scroll down for in-depth sand
analysis >>
volume estimates, most will agree that consumption has been growing at a compound
annual growth rate of around 30% per year since the early-2000s. This remarkable growth
is correlated with the rise of horizontal drilling.
Proppant Primer
What is proppant? Proppant is mined and processed sand or manufactured artificial sand
that is blended with frac fluid at the well-site to form a "slurry." Slurry is pumped downhole
in the hydraulic fracturing process at high pressures, fracturing rock downhole. The
proppant fills these cracks, "propping" them open. Once the pumping stops, the excess
slurry is removed and the proppants stay downhole, forming channels in otherwise
impermeable rock.
Why is proppant used? Fracture stimulation is key to unconventional development.
Unconventional development literally means producing oil and gas from source rock,
which is by nature highly impermeable. Without fracturing, it does not produce
hyrdrocarbon. And without proppant, fracturing is pointless as the channels, or fractures,
created in the pumping process would close up after the pressure was removed without
proppant to hold them open. The products of proppant (and fracing) are a) conductivity the flow capacity created to allow fluid to move through the fracture, and b) reservoir
contact - the fractures spread the well's access to bigger areas of the formation.
Conductivity is correlated with proppant quality while reservoir contact is correlated with
proppant volume. Proppant has been used in stimulation practice for many years, but until
shale, its use was not as widespread and nor as critical to production. Rapidly rising sand
consumption is primarily a North American shale phenomena.
What are the different types of proppant? Raw sand is the most often used proppant
type, accounting for 80-90% of global proppant volume pumped, and it is the cheapest.
Northern white is the highest quality raw sand followed by southern white and brady /
brown sand, which is lower quality. Resin coated sand (RCS) is basically raw sand treated
with a resin coating to enhance its effectiveness. RCS is more expensive and accounts for
5-10% of volume pumped. Ceramic is the premium proppant, and is generally used in
higher pressure formations. While these different proppant types serve the same purpose,
they are very different businesses - from supply, to demand, to price, to use... trends vary
widely.
image credit: ceramic-proppant.com
Where does proppant come from? Sand is mined, processed, and dried before being
shipped to the well site. Most sand mines in the US are located in the upper midwestern
states, and rail cars and trucks carry sand into shale plays. Sand deposits are prevalent, but
very few deposits have the characteristics needed to make good proppant. And permitting
new sand mines can be a difficult and lengthy process. Ceramic proppant is manufactured
in facilities around the world from clay.
image credit: U.S. Silica
In fact, as you'll see in the accompanying slideshow, some operators are actually changing
their game plan entirely to focus on fracs that maximize stimulated rock volume rather than
trying to improve conductivity. In other words, they are actually low-grading their proppant
mix (dropping ceramic) and instead increasing their loadings of raw sand. Not only is this
cheaper, but it is also driving well production gains for some E&Ps. The long term effects
of this practice on oil recovery are not yet fully understood.
SM Energy Is Improving Well Economics By Simply Dropping Ceramic and
Increasing Sand Loadings
source: SM Energy
An industry-wide commitment shift to reservoir contact seems unlikely to become the norm
at this point - some E&Ps will continue to cling to conductivity above all else. But we do
expect almost all shale E&Ps to experiment with increasing reservoir contact variables like
lateral length, tighter spacing, and more sand/stage for the rest of the year and into 2015.
They may still trail ceramics into their proppant mix, but they will surely increase sand
volume.
The biggest increases could be seen in the Permian, where operators are still fully in
experimentation mode. But in all unconventional plays, high-intensity completions are
going to become a lot more prevalent. And higher sand quantities just might prove to be the
next step in manufacturing better unconventional wells.
Frac sand demand has grown at an average rate of about 30% per year for over 10 years
now. Although it only goes for about 10 cents per pound, the tremendous volume demand
growth from shale has made mining frac sand an extremely lucrative trade.
Sand is so in demand that some E&P companies are now requiring that their service
providers (think Halliburton, Schlumberger, and Baker Hughes) must have term contracts
ensuring adequate sand access before the operators will allow these contractors to bid on
new completions work.
This is a requirement that is new in 2014. And it is leading to record contract signings for
the sand miners. SLCA recently said that their average contract portfolio expiration date is
now out in 2Q18. The demand for SLCA's sand is so strong that one service company
recently paid them $100 mm up front to secure a long-term take-or-pay contractthe
$100mm payment will be applied to future sales.
Silica miners SLCA and Hi-Crush Partners (HCLP) each went public in 2012. And their
stock price performance since then says it all. On average, these two stocks are up 340%
over the past two years, dwarfing the 27% gain printed by the oil service and drilling stock
index. SLCA recently said they are sold out of all sand grades.
Mining frac sand seems easy enough. After all, sand is everywhere. But in reality, there are
a few giant barriers to entry.
First, not every sand deposit can be mined for frac use. Northern White sand with a
range of coarse to fine grains is in high demand. Most of these deposits are in the
midwestern states.
Third, you need distribution and sales outlets to industrial consumers as well. Not
all sand mined can be sold to frac customers, and margins will suffer without
distribution options for non-frac raw sand.
Fourth, you have to go through a arduous permitting process on new mines, and
building them is a capital intensive effort.
That said, smaller frac sand miners have popped up to try and capitalize on overall market
growth. According to a study conducted in 2012 by the US Geological Survey, there were
87 producers of commercial silica with a combined 159 active operations across 33 states
within the US. Since the survey was conducted, more producers have joined the game, and
more mines have opened. Both SLCA and HCLP are bringing additional capacity online.
Even with the new capacity, prices are still moving higher. Because proppant is a relatively
small portion of unconventional well cost (we estimate about 5-10% of cost if sand is used),
sand cost increases may be less scrutinized than other well cost components. If there is a
shortage, buyers will be more willing to pay up to secure what they need as it is a relatively
small line item in their budget (see guar analog from a few years ago).
Hi-Crush Partners raised their sand prices 5-10% in March, and now they've done a second
round of pricing increases and believe they'll be able to increase prices again later this year
- probably a further 5-10% in the next round.
Rail is the primary transportation method for sand. As much as 95% of the journey is often
completed via rail. Increased sand shipments are competing for rail car space with
agriculture products and crude oil, which is increasingly being shipped by rail as pipelines
are overwhelmed by new production. US railways are increasingly congested - and on-time
sand delivery at the wellhead has been a real problem for the frac industry. This is a big
reason why operators are now requiring their service contractors to show proof of sand
access before bidding on new frac work.
Lead times on newbuild sand cars have become extended due to heightened demand and
currently stand at about 24 months from order to delivery. HCLP has 5,000 rail cars and is
adding another 1,500 rail cars over the course of the next year. But its not just how many
rail cars the sand miner operates, its also how efficiently they can operate them, how fast
cars are turned over, and how well planned routes and basin unloading points are.
Covered Hoppers Carry Sand - 24-Month Lead Time On New Orders
image
credit: http://wisconsinwatch.org/
Historically, most frac sand sales were made FOB (freight-on-board), which means the
buyer took responsibility for transportation, liability, and logistics at the seller's doorstep
(or in this case mine). The buyer's rail cars would pull up to the mine, the sand miner would
load the cars, and the transaction would conclude. HCLP still completes about 2/3rds of its
sales this way.
How Sand Gets From Mine To Well
The miners are increasingly becoming transportation companies, operating rail cars and
installing transload facilities in the key shale plays. Customers are afforded the convenience
of simply pulling up their trucks to fill up on sand at the miner's in-basin receiving
terminals, which receive and temporarily store rail shipments. This convenience comes at a
premium. Transportation costs can total 30-40% of the total cost of Northern White frac
sand, and transport is a high margin service.
Northern White Frac Sand Transload Terminal
Finally, frac sand industry consolidation in the medium-term seems highly likely. Service
companies are always trying to deal with fewer suppliers. But in the case of sand provision,
supplier consolidation is not just a matter of competitive advantage for the service
companies. More scale in the sand supply trade directly improves service and it improves
logistics. Scale means more effective rail car management and less congestion in the shale
plays themselves.
While the industry leaders have emerged, the frac sand market remains one of the most
fragmented in the entire oilfield value chain, and this is truly a business where size matters.
Stay tuned for M&A over the next 12-18 months.