US fracturing sand business faces stress

Some US sand mining companies supplying a key ingredient for hydraulic fracturing oil and gas formations are idling capacity or halting expansions, another possible sign of a deceleration in onshore drilling.

Proppant such as sand is used along with water and certain chemicals to fracture shale formations to extract oil and natural gas. Onshore drilling and completion activity has accelerated since the second half of last year amid stable oil prices, while producers drilled longer lateral wells to improve recovery while capping costs.

These developments led to higher demand for sand, triggering many expansions of sand mining companies. This included the development of in-basin sand mines, especially in regions like the Permian, to lower costs. The region's in-basin use more than doubled last year to about 23mn t, Permian producer Black Mountain Sand said. Before these local facilities came up, about 75pc of sand was shipped by trucks or rail from mines in the upper midcontinent, commonly referred to as "northern white sand".

But the market has turned since the middle of this year. The surge in sand production met improvements in drilling technology that require less sand and water, as well as a slowdown in completion activity in the Permian amid a growing pipeline takeaway capacity shortage. Overall fracturing sand demand has declined to 70mn-80mn t/yr in September from about 100mn-110mn t/yr in June, according to US bank Tudor Pickering Holt (TPH). And the outlook for miners is only set to worsen with pricing pressure persisting. "It is a fool's errand to tactically get excited about the group until completions activity turns around," TPH said of sand mining firms.

Evidence supporting the growing stress on proppant demand is building. The number of drilled but uncompleted (DUC) wells in major US shale basins continued to rise, up by 238 from July to 8,269 in August, according to the Energy Information Administration (EIA). Proppant isn't used until later in the process, during well completion.

The rise in DUCs marked the highest monthly total in the agency's database, which dates back to December 2013. The increase was driven by the Permian, where the count rose by 211 to 3,630 in August. DUC wells in the Eagle Ford in south Texas increased by 28 to 1,545. But North Dakota's Williston basin has bucked the trend because of ample pipeline access, with the total declining by four to 751.

As headwinds gather over the Permian, the Federal Reserve Bank of Dallas' latest survey showed oil and gas activity slowed slightly in the third quarter. The business activity index — the broadest measure of conditions facing companies based in the Eleventh Federal Reserve district — fell to 43.3 from 44.5 in the second quarter. And the index for oilfield services firms fell to 45.9 from 54.2, suggesting a slight deceleration in growth for those firms.

Amid that backdrop, sand producer Hi-Crush, with a total output capacity of 13.4mn t/yr, has idled its dry plant operations at its 2.9mn t/yr Whitehall facility in Wisconsin because of "temporary softness in completions activity and frac sand demand," chief financial officer Laura Fulton said. Such a plant dries the sand once it is washed to remove silt, debris and clay particles. The company pared its third-quarter sales volume guidance to 2.8mn-3mn t from 3mn-3.2mn t given earlier as a result. It is meeting customer demand from existing inventory, while its 3mn t/yr Permian in-basin mine in Kermit, Texas, continues to run above its nameplate capacity.

Fellow producer Covia has also idled capacity in states including Minnesota, Missouri and reduced operations in Texas. In total, it is paring annual capacity by 3.3mn t to 32mn t.

Vancouver-based Select Sands, which owns mines in Arkansas, expects third-quarter sales of fracturing and industrial sand to dip to 65,000-90,000t compared with 165,000t in the second quarter, which was a record for the company. The decline in sales comes as Liberty Oilfield Services terminated a fracturing supply agreement, leading Select to halt a previously-announced project to expand annual output capacity to 1mn t/yr from about 600,000 t/yr. "We feel it is prudent to coincide the timing of the expansion project and its completion with increased basin activity and proppant demand," chief executive Zig Vitols said.

But the downturn in proppant demand may be short lived. TPH said the trend could reverse in 2019 "... as E&P budgets are reloaded and Permian infrastructure issues abate later in the year."