released 14 Feb 2017
Demand for frack sand has surged in recent weeks as US producers rush back to the oil patch, stoking concern that supplies of the key component of drilling may not be able to keep up with demand later this year, industry professionals said.
The growing appetite for frac sand comes as oil producers have added hundreds of rigs in US oilfields from Texas to North Dakota. Last week, the US rig count hit 591, the highest since October 2015 and nearly double the figure seen seven months ago.
Raymond James predicts the number of rigs could approach 1000 by the end of 2018.
"The worm has turned," said Chris Keene, chief executive of Rangeland Energy, a privately held logistics company in Sugar Land, Texas.
US producers pump frack sand and other materials into wells to break up shale rock and produce oil. Wells are getting longer and wider, requiring larger amounts of sand.
The frack sand industry was among the hardest hit during the oil rout of the past two years, as producers slashed capital budgets and looked to shed – or renegotiate – long-term supply contracts with sand companies that had been made during the boom years. Several of the major frack sand companies saw shares plummet amid investor scepticism.
But frack sand producers like Fairmount Santrol Holdings and US Silica Holdings are regaining their price leverage and producers are once again looking to lock in long-term supply contracts amid widespread optimism that global oil production cuts will provide stable, higher prices.
Raymond James, in a January investor note, estimated frack sand demand would hit record levels this year at roughly 55 million tonnes and exceed 80 million tonnes by next year, 60% above 2014 levels, due in large part to producers requiring more sand per well.
Tudor Pickering Holt ran a US demand model early last year that significantly underestimated demand for 2017 and 2018, forcing the bank to revise its forecast in December to predict record demand for 2018. Tudor Pickering says tightening supplies and logistical challenges could send frack sand prices to 2014 levels, when there were 1500 rigs in US oil patches.
Rangeland operates a frack sand terminal in New Mexico that delivers roughly 2 million tonnes of sand annually to producers in the Delaware sub-basin of the Permian in West Texas and New Mexico. Rangeland chief Keene said January frack sand deliveries out of the company's terminal reached record levels.
Taylor Robinson, president of PLG Consulting, which helps companies solve transportation issues, said frack sand demand has "significantly" picked up in the past six weeks, and demand is expected to skyrocket over the next seven months.
"I think people are looking at the potential demand numbers, and, for the first time, people are scared that there will not be enough sand to meet the demand," Robinson said.
"Oil producers are scrambling to lock in long-term contracts to avoid being caught short. People are really gearing up for the next wave."
The increased demand will push sand prices up by 60%, hitting the $40 per tonne range over the next 18 months, Raymond James said. Sand costs are about $25 per tonne today and reached $70 per tonne prior to the downturn and when supplies were short.
Keene said the real concern is the logistical challenges that come with moving high volumes of sand.
Some producers are using a unit train - roughly 75 or more rail cars in a line - on each well, Keene says. He said that presents some significant logistical challenges that could hamper production.
"People are going to have to build large, unit-train scale facilities at these volumes," he said. "Once you start fracking a well, you need to keep sand on it."