Executive Viewpoint
In July, the U.S. rig count plateaued at 953 rigs after 15 months of solid gains. While some remain optimistic about oil price gains, the majority of companies predict crude will trade in the $45 to $52/bbl range for the remainder of the year. While these traditional barometers give an indication of the industry’s health, they do not capture the essence of the challenges facing the shale industry.
Proppants play a key role. The current business environment and supply-side issues prevalent in the U.S. shale plays have yet to be adequately defined. Logistics, and the ability to efficiently deliver proppants to the wellhead, are now key differentiators. Operators are more concerned with frac sand production and consumption, and there are a number of good reasons for increased diligence. Simply put, the demand for proppant sand is not eroding in correlation with these other traditional indicators. Sand consumption is rising, and capital expenditure programs for E&P companies continue to grow.
Fracturing a single well can easily require several hundred truckloads of sand. Before the downturn, 600 lb/lateral ft was considered an ideal reference formula. Not anymore. In some cases, horizontal wells are being treated with 2,500–3,000 lb of frac sand/lateral ft. This ratio requires each well to be treated with several million pounds of proppant. Efficiently supplying these large volumes is one of the key ingredients to any successful proppant manufacturing strategy. Transportation of proppants to the field is one of the primary costs associated with the overall expense of fracture treatment.
Supply and demand. As the demand for frac sand rises, so does the price. For sand providers to remain competitive, they need to deliver sand at affordable rates that positively impact stimulation and well production. The question is, will sand providers be able to supply frac sand at the rates oil producers require to remain profitable? Reports of new sand mines or production enhancements continue to make industry headlines, and shale support is no different.
Market indicators continue to give confidence to move forward with a two-million-ton/year production increase. By the end of October, our sand producing company, Shale Support, will have production capacity of three million tons/year. This increase is expected to meet the greater demand expected in the second half of the year.
After solving the increased supply issue, the next challenge is to reduce costs associated with transporting proppant from the source to the wellsite. When oil prices were $100/bbl, the cost of trucking large volumes of sand was not a significant issue. However, as oil prices hover in the $45-to-$49/bbl range, alternative transportation methods are required.
Diverging strategies. Several companies are building sand mining facilities in West Texas, to reduce the distance between product origination and the wellsite. Others are increasing their logistical infrastructure as a long-term solution. We believe the latter is the better solution.
For those considering sourcing local sand, there are several concerns that need to be considered. First of all, not all sand is created equal. Only a small percentage of the total sand concentration in the U.S. qualifies to API standards. Most of the sand produced in or near the Permian basin will fall into two categories, which represent approximately 20% to 30% of that market’s consumption. Other product types will still need to be sourced “out of the basin.”
Additionally, mining sand in West Texas is not volume-efficient. For every 100 tons of earth mined, only 30 tons of silica is produced. The other 70 tons is waste. This inefficiency raises costs and creates logistical and manufacturing problems. Also, mining large amounts of earth requires a considerable quantity of water to maintain viability. These factors have drawn negative attention from environmental groups, water conservationists and local political structures. This combination could cause considerable pushback and slow production of a West Texas sand mining operation.
Although locally sourced sand reduces logistical issues and the overall cost of shipping, the risks outweigh the potential benefits when other strategies are still in play.
Logistics. We believe our logistical Eagle Ford model can be duplicated in the Permian. By building a local infrastructure for the Eagle Ford and Permian basin plays, sand shipments can be streamlined, to enable ample supply and deliver the proppant to the wellsite on time. This strategy also allows us to maintain strict quality control, because the same Mississippi mine will be the source of proppant. The manufacturing resources will be kept local to improve efficiencies. Finally, the source of qualified labor is larger in this area of the U.S., and it will be easy to hire the right employees when expanding. To help operators remain profitable at $50 oil, it is necessary to control manufacturing costs and ensure a consistent, high-quality product, delivered at the lowest possible cost. 
