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US Oil and Gas Outlook and the Demand for Frac Sand

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Proppant Today had the honor of interviewing Dr. Bernard Weinstein of the Maguire Energy Institute and Cox School of Business at Southern Methodist University, who will be speaking on Sheiks vs. Shale: New Economics of Energy & Implications for the Frac Sand Industry at the upcoming 4th Annual Frac Sand Supply & Logistics Conference on September 24 and 25th in San Antonio.

 

What is the current outlook for the Frac Sand Market?

Oil prices are down 50% from 2014; the cost of producing oil is down by 30%. Day rates for labor have decreased, trucking rates have come down and the volume and price of supplies including frac sand have decreased as well. As long as WTI remains in the $40s, hydraulic fracturing activity for oil will remain subdued. In oil, we see that hydraulic fracturing activity in 2015 is continuing to decline from 2014, however, a more significant decline is coming in 2016, as much as 20 to 25% from 2015. However in the Marcellus and Utica, operators are selling in the $2 to 3 per mcf range and are continuing to produce.

On the brighter side, there is a greater demand of frac sand per well in both oil and natural gas completions. Up to 20% of the frac fluid is proppant, double what it was in 2014. Drilling has been ongoing while oil prices have been depressed to hold on to leases. If WTI reaches the low to mid $50s, frac sand demand will grow rapidly. There are close to 3,000 drilled but uncompleted wells in the Eagle Ford, the Permian and the Bakken, waiting to be completed at a breakeven price of $50 oil. In the long term, I think the demand for frac sand is robust. If you look at oil futures markets, contracts for delivery are closer to the low $60s for a five-year contract.

What are the impacts of oil in the $40s?

In the past, OPEC managed output so there was never an oversupply of oil. But in 2014, they changed their policy because North America was growing the pool. OPEC, basically Saudi Arabia, assessed that they could cut price, not production, to reduce the volume put out by hydraulic fracturing. Lower prices are causing a ripple effect in terms of restructuring, mergers and acquisitions and asset sales. It’s going to get tougher throughout 2016, especially for small companies, those that are highly leveraged and for manufacturers of drilling equipment.

In Texas, oil and gas is only 15% of the economy, however, we are seeing thousands of layoffs and government revenues will be impacted. At the local level, towns that are more dependent on oil and gas will be harder hit. North Dakota, which has really agriculture and the Bakken, will suffer more, as will West Virginia which has already experienced a decline in coal and is more exposed to the downturn in hydraulic fracturing. State economies that have a manufacturing base, especially those that use petroleum products in their feedstocks like the chemical plants we have in Houston, are benefitting from lower prices for oil and natural gas.

What trends do you see around fracking bans?

Recently the State of Texas said that energy production is in the purview of the state, overriding local authority of municipalities that imposed fracking bans. A similar issue is playing out in Colorado right now. Banning fracking in North Dakota is not an issue, I assure you. New York State is not going to reverse their position on fracking anytime soon, which is fine because supply is adequate out of Pennsylvania, Ohio and West Virginia in the Marcellus and Utica. Overall, the Federal government should stay out of the way, legislation regarding hydraulic fracturing should be left to the states.

Frac Sand & Logistics Conference

Proppant Today appreciates the opportunity to interview Dr. Weinstein about the hydraulic fracturing industry and its impacts on the proppant demand. Hear Dr. Weinstein speak at the 4th Annual Frac Sand Supply & Logistics Conference on September 24 and 25th in San Antonio.

 

 

About Proppant Today, LLC

Proppant Today, LLC serves the proppant market by providing deep insights into proppant and frac sand use and demand in the unconventional oil and gas industry. At Proppant Today’s website, read our blog and daily news feed and purchase the US Proppant Market and Forecast Report: 2015 to 2020.

– Holly Bellmund, President, Proppant Today, LLC

www.ProppantToday.com

 

Join us at the Frac Sand Supply & Logistics Conference

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Proppant Today will be at the 4th Annual Frac Sand Supply & Logistics Conference on September 24 and 25th in San Antonio. The event, sponsored by Petroleum Connection, features guests and speakers from each part of the frac sand supply chain and from the demand side in the oilfield services sector as well.

The conference has a strong interest in representing innovation in the frac sand supply chain. Frac sand producers and logistics providers are teaming up to share insights on moving frac sand by rail, truck, barge and even by pipeline. GE and Statoil will be sharing the results of their Grand Challenge focused on addressing the use of sand in unconventional operations.

The conference features speakers like Jen Casebier of Downhole Trader who will be providing Update on Frac Sand Industry Trends, and Dr. Bernard “Bud” Weinstein, Maguire Energy Institute and Cox School of Business at Southern Methodist University, who will speak on the Sheiks vs. Shale: New Economics of Energy & Implications for the Frac Sand Industry.

There are additional talks and roundtables on transportation, technology usage, exporting, international supply and demand, importing proppants, health & safety issues, regulatory updates, procurement trends and more.

If you are involved in building a more efficient supply chain for frac sand, please join us.

See you in San Antonio!

 – Holly Bellmund, President, Proppant Today, LLC

 

About Proppant Today, LLC

Proppant Today, LLC serves the proppant market by providing deep insights into proppant and frac sand use and demand in the unconventional oil and gas industry. At Proppant Today’s website, read our blog and daily news feed and purchase the US Proppant Market and Forecast Report: 2015 to 2020.

 

www.ProppantToday.com

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Proppant Industry Responds to Lower Oil Prices

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The unconventional oil and gas industry has grown dramatically over the last decade and the US has grown in importance as an energy producer worldwide. The US is now number one in global oil and gas production. Over one million horizontal wells have been drilled in the US to date. New natural gas production in Tcf/day per rig has increased over 700% from 2007 to 2015 and new oil production in bbl/day per rig has increased 1200%, all due to the increased efficiencies from horizontal drilling and hydraulic fracturing.

E&P companies are continuing to refine and gain further efficiencies even as the oil glut dampens prices. During the first half of 2015 companies such as Pioneer Natural Resources and Noble Energy and a host of others have reduced drilling and completion schedules, focused drilling investment on highest productivity areas, and slashed capital budgets.

The most recent fall in oil prices, with WTI dropping to near $43 per barrel in August and futures indicating further price depression in September, signals that the downturn may be longer lasting than we first thought. World supply concerns and China’s changing growth picture are making a quick recovery less likely. E&P companies are continuing to develop efficiencies and prepare to operate in a lower price environment rather than shutting down more production which some say would hasten the price recovery. New projects are being evaluated at $50 oil rather than $75 oil.

The US rotary rig count is stabilizing. After dropping to a low of 857 on July 17, it has remained in the range of 874 to 884 for the past three weeks. For the week ending August 7, only the Permian saw an increase in rigs, up by six. All other basins had zero or minimal change.

Sand intensity per well is increasing. Sand intensity growth varies by company and by shale play but it is not likely to return to lower levels for those companies that have found greater productivity with more sand. If anything, others will follow as the technology is refined and results are proven. Longer laterals and more stages per lateral is likely to continue.

In this context, what is the outlook for proppant, a key material used in hydraulic fracturing?  

Proppant producers are reducing cost by shuttering some locations, reallocating employees, negotiating with suppliers, better matching of origins and destinations, etc. But some consolidation of proppant suppliers will take place as higher cost companies and those that cannot operate within cash flow may be squeezed out. This includes companies whose mines are not located strategically to serve the centers of demand. For example, the vast majority of proppant moving by rail is headed to Texas. For proppant producing sites located in the upper Midwest, serving Texas basins by rail remains a disadvantage if they are not on a Class I rail line.

Proppant companies are developing of higher value added proppants which may be more insulated from price cuts. Preferred Sands has developed a treated proppant designed to reduce silica dust during handling; Emerge Energy on its most recent earnings call announced Superior Silica’s reduced dust proppant to be available in the fourth quarter of 2015, and mentioned a future technology-driven product still in development which they describe as producing greater yield for the customer. Hexion and Fairmount Santrol have both recently developed advanced proppants that they say can impact production results as well.

Proppant companies like E&P companies are adapting to this challenging environment. We expect to see the bulk of the impact in 2016. So far for 2015, the impact of fewer wells drilled and fewer completions more than offset growth in sand usage. Long term, the outlook for growth in the proppant industry is remains positive.

 

To fully understand this complex market, one needs to understand the type of proppants used and the factors that affect proppant demand, plus the supply chain challenges on moving this heavy material across the country into different oil and gas plays.

US Proppant Market & Forecast Report: 2015 to 2020: Providing deep insights into proppant use and demand in the unconventional oil and gas industry.

Proppant Industry: 3rd Quarter Outlook

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The proppant industry continues to struggle as WTI dipped below $45 a barrel on August 5. Proppant plants are operating on a reduced schedule or are being or shut down by producers including in Wisconsin, the number one producing state for frac sand. Despite the bleak news, publicly held producers like US Silica returned a profit in the second quarter through aligning their supply chain with demand from the oilfield. Volatility in oil prices are expected to continue to put pressure on proppant pricing, as major oilfield customers like Baker Hughes described decremental margins — profit lost per dollar of revenue lost — in second quarter earnings. Trends for the third quarter include a shift from receiving proppant at the in-basin transloads to picking up at the mine site, promotion of technologically-advanced coated proppants by Hexion and Fairmount Santrol that improve the yield of oil and gas, and an anticipated increase in mergers and acquisitions among proppant producers and oilfield service companies.

 

About Proppant Today, LLC

Proppant Today, LLC serves the proppant market by providing deep insights into proppant and frac sand use and demand in the unconventional oil and gas industry. At Proppant Today’s website, read our blog and daily news feed and purchase the US Proppant Market and Forecast Report: 2015 to 2020.

– Holly Bellmund, President, Proppant Today, LLC

www.ProppantToday.com

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Getting Better All the Time: Efficiencies in US oilfields drive global competitiveness

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A drilling rig worker. Focus is on the instruments.
A drilling rig worker. Focus is on the instruments.

Efficiencies in horizontal well completions have accelerated over the past six months driven by the need for E&P companies to preserve return on capital in a low price oil environment. Some exploration and production (E&P) companies are showing significant efficiency and productivity gains. Expectations are that more will be achieved during 2015.

E&P Efficiencies Improving well productivity is a key focus for EOG Resources. EOG reports that well costs and well productivity both are exceeding targets for 2015. The company says that the economics of their business are better at $65 oil today than at $95 oil in 2012. Chesapeake Energy, in a June 23 investor presentation, shows a decrease in average drilling days down to 12 in Q1 2015 from 17 in 2014 and 25 in 2013. Chesapeake Energy reports an average cost of $205 per drilled foot, down almost 7% from $220 in 2014.

EIA Drilling & Productivity Trends This trend is also being reflected in government assumptions regarding productivity and output.  The June 2015 EIA Drilling Productivity Report for the Eagle Ford estimates the increase in new (first full month) production per rig for the first half of 2015 to be 17% and 14% for oil and gas respectively.  For both oil and gas, the total percent productivity increase for first half 2015 is the same as the full year 2014 increase in productivity. In other words we are producing more, with fewer resources.

Other oilfield plays are showing the same trend. This is in part due to greater efficiencies achieved by the E&P companies, and also likely due to the shuttering of equipment that lacks the capacity to drill and frack longer laterals and conduct enhanced completion techniques. The overall impact is the strengthening of the US position in shale oil and gas.

US Leads the Way In a recent report by Harvard Business School and The Boston Consulting Group, authors Michael E. Porter, David S. Gee, and Gregory J. Pope put forth that the US has a 10 to 15 year lead in commercializing hydraulic fracturing technology and that the industry’s efficiency efforts driven by the oil price decline may extend that advantage.

The report further estimates that “unconventional energy development contributes more than $430 billion to annual U.S. GDP and supports more than 2.7 million American jobs” and the US should make a more coordinated effort to take advantage of this energy opportunity.

Outlook for Proppant Demand The long term expectations for global and US energy demand are strong and proppant will be a necessary component to meeting those needs through fracking in US shale plays. Proppant Today sees a 40% increase in the market for proppant 2014 to 2020.

 

About Proppant Today, LLC

Proppant Today, LLC serves the proppant market by providing deep insights into proppant and frac sand use and demand in the unconventional oil and gas industry. We provide a daily news update at www.proppanttoday.com. We blog on frac sand, manufactured and coated proppant and its role in the supply chain of the unconventional oil and gas industry. Proppant Today will release the US Proppant Market and Forecast Report: 2015 to 2020 in July 2015.

– Laurie Parker, Senior Analyst, Proppant Today, LLC

www.ProppantToday.com

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South Dakota Proppants: an Interview with Patric Galvin, CEO

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Proppant Today caught up with Patric Galvin, CEO of South Dakota Proppants, to learn more about his company and the steps he is taking to open the site.

About South Dakota Proppants, LLC

South Dakota Proppants is developing a frac sand mine and production facility in Pennington County, South Dakota. The site, called the Hill City Silica Mine, is slated to produce one million tons of frac sand per year.

According to Galvin, “From the Hill City Silica Mine we have a logistical advantage to serve the Niobrara in Colorado, the Powder River play in Wyoming and also the Bakken.” Although the site has access to rail, frac sand will primarily be trucked to the shale plays. South Dakota Proppants expects to begin delivering frac sand by the third quarter of 2017. The company plans to employ 320 people including truck drivers who will deliver the frac sand to the unconventional oil and gas plays in the neighboring states.

South Dakota Proppants proximity to Western US oil and gas plays
South Dakota Proppants: proximity to Western US oil and gas plays. Image provided by South Dakota Proppants.

Frac Sand Resource

Galvin located the frac sand resource with the assistance of the USGS and drove to the location to scout it out. Because part of the site had been a historic mine, Galvin was able to view the face of the sandstone and sample it. Following a formal drilling and testing campaign, the company acquired the historic mining leases and added additional acreage, now totaling 1,754 acres. The resource includes both Cambrian and early to late Ordovician deposits in horizons ranging from 65 to 95 ft. The indicated resource is 250 million tons of frac sand which is expected to increase following further drilling and testing.

South Dakota Proppants will offer a 30/50 frac sand with a crush resistance of 7k and a 40/70 frac sand with a crush resistance of 8k. The mine will also yield the larger diameter 16/20 and 20/40 frac sand products.

WSG 40-70 Composite
40/70 frac sand from the Hill City Silica Mine under development. Image provided by South Dakota Proppants.

Outlook on the Frac Sand Market

The rise in unconventional oil and gas in the US caused an inventory disruption on a global scale. In Galvin’s opinion, the oversupply of oil will be rebalanced as the OPEC member nations adjust their production to return to a stable price of $85 to $90 per barrel. Once the prices lift, according to Galvin, there are 4,000 wells drilled but not completed in the US which will consume ten million tons of sand to complete at the same time that new drilling activities will resume.

According to Galvin, frac sand prices are the lowest they have been in six years. Galvin sees this as an opportunity for frac sand purchasers to enter into contracts with producers either through partnerships or other long-term supply agreements like take or pay agreements or firm fixed contracts. Says Galvin, “In 2015 a lot of Wisconsin frac sand projects have been shelved or cancelled due to lower demand which I see as temporary. I think it’s important for far-sighted exploration and production companies and oilfield service companies to tie up sand supplies while prices are low.”

Current Activities

South Dakota Proppant is actively meeting with frac sand buyers with an intent of pre-selling 50% of its planned capacity. The company is also engaged with community and governmental stakeholders, and conducting site investigation permitting and fundraising activities.

A 2013 study of the economic impact of mining in LaSalle County, Illinois, which includes five frac sand producers, the employment multiplier of mining jobs is 2.4, meaning the site is expected to add more than 750 new jobs to the area. The Hill City Silica Mine will bring full-time and year-round work to an economy largely based on seasonal tourism.

 

About Proppant Today, LLC

Thanks to Patric Galvin for sharing his vision of South Dakota Proppants and his views on the dynamic frac sand market. For more information, visit the South Dakota Proppants company website.

Proppant Today, LLC serves the proppant market by providing deep insights into proppant and frac sand use and demand in the unconventional oil and gas industry. We provide a daily news update at www.ProppantToday.com. We blog on frac sand, manufactured and coated proppant and its role in the supply chain of the unconventional oil and gas industry. Proppant Today will release the US Proppant Market and Forecast Report: 2015 to 2020 in July 2015.

 

– Holly Bellmund, President, Proppant Today, LLC

www.ProppantToday.com

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A Call for a National Common Ground on Fracking

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The US has an opportunity to increase our energy independence through the country’s unconventional resources. Natural gas poses a realistic way for industry to lower greenhouse gas emissions, enable the growth of renewables while remaining cost competitive in a global market.

According to this study by Harvard Business School and Boston Consulting Group, hydraulic fracturing of hydrocarbons represents an “unprecedented opportunity for increasing U.S. competitiveness and growing well paying jobs that are accessible to the average citizen.” The authors, Michael E. Porter of HBS and David S. Gee and Gregory J. Pope of BCG, make it plain that the country must develop a common ground for industry, environmentalists and local and state governments to move forward.

 

– Holly Bellmund, President, Proppant Today, LLC

www.ProppantToday.com

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Trends in the Global Proppant Market: Brian Leeners, CEO of Phoenix Metals Corp.

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Recently Proppant Today caught up with Brian Leeners, the CEO and Director of Phoenix Metals Corporation, (TSXV: PHC and Q: AKAVF). We asked Brian to tell us about Phoenix Metals Corporation, his vision for the company as a global proppant supplier, trends in proppant demand and the growing worldwide market.

Phoenix Metals Corporation: a global proppant vision

Phoenix Metals Corporation is acquiring frac sand reserves and proppant assets while energy prices are low. We currently have a reserve in northwestern Alberta called the Peace River Frac Sand Project and are in the midst of targeting frac sand reserves in the Western US to serve the local basins. Phoenix Metals has a joint venture with Hallmark Minerals, a ceramic proppant producer, with one plant in Pune, India. We are also looking in other countries to locate reserves and proppant assets to deliver to developing unconventional oil and gas resources around the world.

What trends are you observing in proppant demand?

Currently proppants and guar are sourced independently and prices for each are negotiated with the oil service company, not the E&P company, to minimize cost of well development. This forces proppant to be priced as a commodity. To differentiate going forward, producers who work with the oil and gas companies to develop a customized proppant recipe will have a value added service. This customization allows the proppant supplier to partner with the operator to develop the science behind the exact specifications of frac sand, ceramic and coated proppants and even guar powder to yield optimal production. The future approach will enhance the repeatability of well performance, simplify the procurement structure, and improve yield.

Where do you see the global proppant market going?

In the US there has been strong growth in the past five years, however, the industry is nascent in terms of its understanding the science of how to remove hydrocarbons with hydraulic fracturing. Because the US has an extensive rail network that happens to cross through the frac sand reserves in Wisconsin, Minnesota and Illinois, vast amounts of frac sand have been moved to the oil and gas fields. This in-country transportation of frac sand will not be as easily repeated in other places including Canada, Australia and also in Africa and South America where oil and gas reserves are being identified.

New plays are being evaluated and announced with frequency. Canada has active plays in the Bakken and also in the Duverney and Montney in northern Alberta. In May 2015, Canadian government agencies announced oil and gas reserves in two new plays, the Canol and the Bluefish, in the central Northwest Territories. These reserves are not currently reachable by the rail system.

Australia will be turning to fracking as the LNG facilities are built. The country is in the midst of a boom in development of seven LNG facilities to supply the Asian market. Australia will supply natural gas from its offshore drilling and will need to frack its onshore coal bed methane plays to meet design capacity. At present, the known location of frac sand resources in Australia are not in proximity to the country’s unconventional basins and a potential import of proppants is indicated.

Phoenix Metals Corporation will remain focused on growing a global proppant supply to serve our clients in both established and emerging oil and gas fields.

About Proppant Today, LLC

Thanks to Brian Leeners for taking a moment to share his vision for Phoenix Metals Group and the global proppant market. Please visit Brian’s blog at Nexvu Capital.

Proppant Today, LLC serves the proppant market by providing deep insights into proppant use and demand in the unconventional oil and gas industry. We provide a daily news update at www.proppant.today. We blog on frac sand, manufactured and coated proppant and its role in the supply chain of the unconventional oil and gas industry. Proppant Today will release the US Proppant Market and Forecast Report: 2015 to 2020 in June 2015.

 

– Holly Bellmund, President, Proppant Today, LLC

www.ProppantToday.com

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GE, Statoil Pose Innovation Challenge to Reduce Frac Sand

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GE and Statoil have partnered to host an open innovation exchange on frac sand logistics and use in the unconventional plays. Costs and logistics of frac sand acquisition can be 10% of the overall cost of the well.  This percentage is likely to be much higher in other countries that lack the rail and transport infrastructure to move frac sand (also called proppant) from the mine to the wellhead. The goal of the collaboration is to crowdsource business solutions to reduce frac sand consumption and transport in the unconventional plays.  GE and Statoil will announce winners of the open innovation in June 2015.

 

– Holly Bellmund, President, Proppant Today, LLC

www.ProppantToday.com

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