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.
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