Proppant Market On The Way Toward Consolidation

North American proppant suppliers could be on the path of a shakeup if commodity prices keep shale operators from fracking more wells.

Link to AnYiCheng

The proppant market is currently swimming in a surplus of product. Concurrently, demand continues to drop due to reduced drilling and completions activity among operators. This strain will likely lead to more M&A activity in the proppant market in the near future, said Samir Nangia, managing director of PacWest Consulting Partners, an IHS company.

However, Nangia said one bright spot remains for the North American proppant market: the trend of operators saving money by boosting frack sand per well.

Frack sand makes up for 95% of proppant use, which also includes resin-coated sand and ceramics. The Eagle Ford, Permian Basin and Appalachia account for 69% of total frack sand demand in the North American market in . Canada composes 8% of the market.

The demand for frack sand is set to decrease by 21% in . Overall proppant consumption in North America will also decrease by 23% in , followed by gradual recovery in-line with oil prices and drilling and completions activity.

Meanwhile, proppant supply, especially frack sand, has remained strong, resulting in a current weak price environment. PacWest forecasts that proppant prices will decline by 9% per annum over the next three years.

Consolidation

Due to the price environment, Nangia said he expects M&A activity in the sand supplier market to heat up.

The current frack sand supplier landscape is barely consolidated, he said. The top 10 sand suppliers account for 55% of total capacity, while more than 40 companies make up the remaining percentage.

According to PacWest, EOG Resources Inc. (EOG) is the fourth largest sand supplier by capacity. The Houston company&#;s sand operations in Texas and Wisconsin satisfy the majority of its internal demand.

&#;We do see a lot of consolidation going on in the industry, and as a result many of these smaller mines could either be close or consolidated by the top producers,&#; he said.

Several large deals have already dropped within the past year.

In July , U.S. Silica Holdings Inc. (SLCA), the third largest sand supplier, bought Cadre Services Inc. for $98 million. Cadre is a major supplier of brown sand in the Permian Basin.

Also in , KKR & Co. LP acquired Preferred Sands LLC, a large producer of sand and resin-coated proppant in North America, through a recapitalization deal worth $680 million.

Frack Sand Boost

Despite the bleak forecast, Nangia said increasing frack sand consumption per horizontal well is a silver lining.

Over the trailing four quarters, frack sand consumption per horizontal well has increased 15%.

&#;This could be as a result of some recent trends in frack design in general which tend to favor higher proppant mass per foot, and obviously sand is the cheapest for that,&#; Nangia said.

PacWest expects slower adoption of new technologies and innovation due to lower oil prices. Producers will more likely focus on cutting costs rather than adopting more advanced well completion techniques to boost production.

Turning toward using more frack sand per horizontal well may be the answer for some operators to stay on budget.

Operators have leaned hard on service providers to reduce costs and are using the opportunity to add more sand to horizontal wells, particularly in the upper Woodford Shale, according to a recent Hart Energy Market Intelligence Series report.

For example, Midcontinent operators have been ramping up use of sand per well as low commodity prices reinforce a transition in completions to massive slickwater treatment, another recent Hart Energy Market Intelligence Series report said.

Metrics on stage spacing, number of stages and fracture stimulation technique have not changed during the downturn. Rather, operators in the region have started taking advantage of the low service costs to extend lateral lengths and increase the volume of proppant downhole.

The average proppant use among survey respondents in the Woodford Shale was 10 million pounds per well vs. 7.7 million pounds at the beginning of the year.

Sand Only

In some cases, E&Ps have shifted toward fracking wells exclusively with sand, Nangia said.

Sand only proppant design accounted for 80% of horizontal wells in the first quarter of . The remaining 20% of horizontal wells used some resin-coated sand or ceramic.

While companies stay focused on cutting costs, the percentage of wells using sand only will likely continue to increase, Nangia said.

Already the average amount of frack sand used for a horizontal well has grown across the U.S., driven by increasing well sizes in the Bakken, Permian Basin, Eagle Ford and Appalachia.

During the past year, sand intensity in the Eagle Ford grew by 25% and in Appalachia by 19%. The increase is less in the Bakken with 7% and also in the Permian with 10%.

The top five operators in the Eagle Ford, Permian and Marcellus use more sand on average per well than other operators in these plays, Nangia said.

In the Eagle Ford, the top five operators used about 11 million pounds of sand per well vs. 6 million for other operators, which is six times the average well size today, he said.

The number of operators who are use a higher amount of frack sand per well has also increased. For example, there were only four operators in the Marcellus and Utica shales who used more than 10 million pounds of frack sand for a horizontal well in . Today, that number has jumped to about 12-13 operators.

&#;Even though we&#;ve seen mass per well go up significantly&#;as I mentioned 15% over the last four quarters and the trend continues to be up&#;there could be some more room to go up if more E&Ps adopt this greater mass per well paradigm,&#; Nangia said.

Contact the author, Emily Moser, at .

Despite appearances, we are running out of sand. While that might seem farfetched&#;sand is seemingly everywhere&#;there is not only a thriving international trade in the commodity, but it&#;s the second-most heavily exploited natural resource after water and, by volume, the most heavily extracted solid material in the world.

Like any commodity, sand requires uniformity. Uniform sand, or "aggregate," includes gravel, crushed stone and concrete, each of which has unique applications. Specialty sands, with a high concentration of silica and oxygen, also exist for industries such as golf, volleyball, sports fields, and playgrounds, as well as retail and technical services. Each has unique shape, size, hardness and color specifications.

Contact us to discuss your requirements of sourcing oil fracturing proppant. Our experienced sales team can help you identify the options that best suit your needs.

Key Takeaways

• Sand is the second most-heavily exploited natural resource in the world after water, subject to broad international demand and a thriving global trade.
• Uniform, or aggregate sand&#;that includes gravel, crushed stone and concrete&#;is used for building roads, parking lots, homes, buildings and landscapes.
• Specialty sand is used for golf, volleyball, sports fields, playgrounds, and other surfaces. Large quantities of sand are used in hydraulic fracturing as well.
• However, the commodity's supply is dwindling, as it is being extracted much faster than it can possibly be renewed, creating the risk of a global shortage.
• For a savvy investor, the scarcity translates to price appreciation, which could make it a good buy, depending on how it's approached.
• Investors can't buy or sell sand futures, like they can with other commodities, but they can invest in companies that are connected with sand production.

From Playgrounds to Fracking Wells

Sand is formed by erosive processes over thousands of years and, according to a UN Environmental Program (UNEP) report, is being extracted far more quickly than it can be renewed. According to the United States Geological Survey, the U.S. imports only about 0.5% of the total sand that it uses. However, countries like China (13.1%) and Canada (9.42%) import significantly larger quantities of the world's sand imports. Sand's scarcity translates to price appreciation, which makes investing in sand compelling.

The U.S. Geological Survey reports that the price of sand and gravel has increased dramatically in the United States, from $3.96 per ton in to $9.90 in . Specialty sands generate even higher prices: frac sand is used in the process of extracting oil through hydraulic fracturing. According to Rytsad Energy, costs in have skyrocketed nearly 185% higher than the previous year, between $40&#;$45 per tonne, due to import constraints on Russia because of the war in Ukraine.

But investing in sand is challenging. Sand&#;s weight relative to its value makes it expensive and challenging to move and store. Investors are also unable to buy or sell futures contracts tied to sand, as they would with other commodities, such as soybeans or oil. As a result, investors interested in deepening their exposure to sand need to look to equity in companies associated with sand production. 

Fueling Construction Growth

Conservative estimates in place world sand consumption in excess of 50 billion tonnes a year, according to UNEP. That number is twice that of the annual amount of sediment carried by all of the rivers of the world, which means that mankind is the largest transforming agent in the world with respect to aggregates. Demand is asymmetric: increasing demand is predominantly tied to urban growth in Asia, though it is worth noting that information on global sand consumption, particularly in emerging and frontier markets, is scarce.

Aggregate is the main constituent of both concrete and asphalt. It is also the primary foundation for building roads, parking lots and runways, homes, buildings and landscapes. For each cubic meter of cement used, the construction industry needs about 150 liters of water, 250kg of cement, and 1,900kg or sand and gravel.

In , according to the Global Cement and Concrete Association, China produces 52% of the world's cement, followed by India (6.2%) and the European Union (5.3%). Global cement production is expected to increase from 5.17 BMT in to 6.08 BMT by .

Frac Sand Boom and Bust

Energy Exploration and Production (E&P) also consumes vast quantities of sand, mostly due to its use as a primary proppant in hydraulic fracturing. Proppants are mixed with a liquid to keep fracking wells open and facilitate the removal of oil and natural gas. For scale, individual fracking wells often use seven million pounds of sand, with some requiring up to three times as much. Wells have grown longer and wider since modern-day hydraulic fracking came about in the s.

Frac sand suppliers are highly fragmented, with some 50 producers globally. In addition to energy producers themselves, frac sand suppliers were among the hardest hit by the shale oil bust beginning mid-, as drilling activity plummeted.  Major oil and gas producers saw their market halve, but the carnage among sand suppliers was worse. With the steep decline in rig counts, sand suppliers like Emerge Energy Services (EMES) and Hi-Crush Partners (HCLP) saw their stock prices depreciate drastically from their highs.

But by , the U.S. frac sand market heated up, even as oil prices remained depressed, due to the increasing size of wells. Producers also increased the number of fractured stages per well, which fueled a boom in the amount of sand used to drill. As U.S. crude continues to recover in price, coupled with high demand for U.S. natural gas, frac sand demand should continue to surge. 

Among those producers that are publicly traded, is U.S. Silica Holdings (SLCA) the largest pure-play fracking sand provider. Bison Merger Sub I (FMSA) also has a significant business for mining and quarrying nonmetallic minerals. Hi-Crush Partners and Emerge Energy Services are structured as master limited partnerships. EOG Resources (EOG) is a large producer but uses all of the sand it mines in its own wells.

The barriers to entry for frac sand producers are high. Not only does it take time, expertise and capital to build a new mine, but it&#;s also difficult to time the market exactly. Furthermore, there can be supply limitations due to infrastructure or shipping constraints.

Environmental issues are also a concern. Sand extraction lowers water tables and decreases sediment supply, resulting in the destruction of ecosystems like fisheries. Sand extraction has also been linked to inland and coastal land loss, water contamination, and river embankment and coastal infrastructure damage. 

Limits on Infrastructure Development 

Furthermore, the planned expansion of infrastructure in many parts of the world is more ambitious than had previously been estimated. India's current more than $52 billion building boom making has placed sand in such high demand that illegal mining has engendered a sand mafia. In October , Saudi Arabia, which already made headlines for importing sand despite its desert locale, announced a plan to build Neom, a $500 billion mega-city spanning 10,230 square miles.

Sand mining and dredging have been largely ignored by policymakers. But as climate change's ramifications on coastal cities become more evident, this too will likely change. Today, in the U.S., the fastest-growing use of sand includes fortifying shorelines eroded from rising sea levels and increasingly powerful ocean storms, particularly after recent powerful hurricanes. Inland uses include temporary sand dams and sandbag installations to protect residents and property from surging lakes and rivers, as well as mudslides, like those that impacted California in .

While sand substitutes exist, they are expensive. Increasingly, producers have begun to turn to recycled asphalt and cement, although comparative usage is quite small.

In addition to producers, investors looking to make a play on sand could look into dredging companies and dredging/blasting equipment manufacturers, given recent advancements in robotic crushing technologies. For investors concerned about the long-term effects of a sand shortage, glassmakers (windows, glassware and cell screens), water filtration, septic systems, swimming pools, solar panels, and wind turbine manufacturers all rely on the material. Sand is used in the railroad industry, as well as for molds in foundries that make everything from airplane and cruise missile parts to artificial hips.

If you are looking for more details, kindly visit sourcing frac proppant manufacturing.