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Frac Sand Usage Undergoes Step Change, Delivery Delays Ease

Oct 22 2014 Basic Materials, Chemicals

Research Question: Will sand companies continue to benefit from increased demand in the fraccing market, or will logistical bottlenecks hamper deliveries and delay sales revenue?

Companies: BAS, BHI, BRK.A, CJES, CRR, EMES, FMSA, HAL, HCLP, LON:WEIR, KKR, KSU, NOV, RES, SLB, SLCA, TSE:CFW, TSE:TCW, UNP


By: Reverdy Johnson & Janis Johnson

Click here to download the report (.pdf)

 

Summary of Findings

  • The North American fraccing market has undergone a permanent structural change in which the use of natural sand to frac wells has greatly surpassed the use of ceramic proppants. This has benefited key sand suppliers S. Silica Holdings Inc. (SLCA) and Hi-Crush Partners LP (HCLP).
  • Eighteen of 21 sources said demand for natural sand rose in the mid-double digits on average during the third quarter year to year. Fourteen sources also projected an increase through year’s end on a quarterly basis, but several sources are uncertain how the recent drop in oil prices will affect sand demand.
  • Seventeen sources said natural sand pricing rose in the mid-double digits on average during the third quarter year to year, and 10 expect an increase in the high single digits during the fourth quarter. Pricing for one of the most popular sand types—100-mesh—increased in the high double digits year to year. Still, other sources said long-term contracts mitigate price hikes.
  • Logistical bottlenecks in the supply chain include rail delivery delays related to a shortage of railcars and engines, deliveries made by truck, and tight sand supplies at mines. However, 17 sources said rail and trucking delays are being resolved and that deliveries have been timelier.
  • Twelve sources said fraccing service providers suffer the most when frac jobs are postponed as a result of sand delivery delays. Small providers have the biggest disadvantage because of their lack of resources, but top-tier players like Halliburton Co. (HAL), Schlumberger Ltd. (SLB) and Baker Hughes Inc. (BHI) already are creating delivery solutions.

 

Silo Summaries

1) Fraccing Service Providers

All seven sources said natural sand demand for fraccing wells was up in the mid-double digits on average during the third quarter year to year. They also said the use of great quantities of natural sand instead of ceramic proppants represents a structural change in the industry. Sand prices rose in the mid- to high double digits during Q3 y-y and may increase again during the Q4. Ceramic proppant pricing has been flat. Heavy sand usage in many oil-producing regions has caused rail and trucking congestion and delayed sand deliveries, though many logistical issues are being resolved. Fraccing service providers stand to suffer the most if deliveries are delayed, though top-tier providers HAL, SLB and BHI have solutions to offset bottlenecks. SLCA is six of the seven sources’ top sand supplier.

2) Oil & Gas Companies

Five of these eight sources said demand for natural sand to frac wells rose in the low double digits during Q3 y-y, and four of the eight expect flat demand by year’s end q-q. Seven said the use of high volumes of sand to frac wells represents a structural change in the industry. Sand prices increased in the low double digits during Q3 y-y but should be flat through year’s end. Slow sand deliveries via railways has caused some fraccing jobs to be delayed. A lack of railcars is partially to blame, but this issue is being addressed by fraccing service providers. HAL in particular stands to benefit because it has overcome obstacles in the supply chain.

3) Sand Companies

All four sources said natural sand usage for fraccing wells increased in the mid-double digits during Q3 y-y and should rise further during Q4 if oil prices stabilize. Currently, 100-mesh sand is in highest demand. Overall sand prices rose nearly 40% during Q3, and likely will increase in the low double digits through year’s end. Delivery delays on the rails, mainly due to a shortage of railcars and engines, are being cleared up. UNP and BNSF have been the primary beneficiaries from sand shipments because of their network in oil basins.

4) Rail Companies

Both rail sources said sand shipments increased greatly during Q3 y-y, but both also were uncertain about Q4 shipments based on the recent oil price drop. The Permian Basin and northern Oklahoma have received significant deliveries of frac sand since both regions are known for their oil plays. A shortage of railcars had caused delivery delays, but shipments now are more timely. UNP has been the most aggressive in its rail pricing strategies.

 

Background

The proppant market was estimated to be about 45.1 million tons in 2013, and is projected to reach 84.2 million tons and be worth $19 billion by 2019. Fraccers are expected to use nearly 95 billion pounds of sand in 2014, up nearly 30% from 2013. North America holds almost 78% of the world’s proppant production market. Western U.S. rail companies like Union Pacific Corp. (UNP) are now shipping more than 20 million tons of silica sand annually to oil service companies, which equates to 200,000 railcar loads of frac sand per year, a 26% jump from the prior year. Companies like U.S. Silica, Emerge Energy Services LP (EMES), and Hi-Crush Partners have seen their revenue and stock prices skyrocket in the last two years as a result. All plan to raise their sand pricing and expect the gap between demand and supply to widen over the next year.

U.S. oil and gas companies are running out of sand. Sand prices could rise as much as 50% in the near term, which may lead to well cost hikes of 20% and ultimate recovery cost hikes of 40% to 60%. Increases in the aggregate number of fraccing operations have led to higher sand demand, but so has a recent discovery in a new fraccing technique: Using more sand during the hydraulic pumping process leads to a 30% increase in the amount of oil reserves extracted from the ground. A year ago, the average well used roughly 2,500 tons of sand. Today’s wells often use double that amount. The best sand for fraccing, Northern White, is found in Wisconsin and Minnesota and now is seriously short in supply. Emerge Energy Services expects demand for its Northern White sand to be at least 25% higher than it can supply for the rest of this year. Another sand segment growing exponentially is frac sand storage silos and distribution centers, which will be utilized by fraccers to fine-tune logistical procedures, in part because of congested railways.

Upper-Midwest residents in mining and railway towns have begun complaining about sand pollution and railway-related traffic jams. Rail traffic will continue to grow into 2015, leading to more freight and passenger train delays, hour-long roadblocks at crossings, safety concerns and noise pollution. In response, Wisconsin and Minnesota local and state governments have created regulations to slow the process of opening new sand mines. Wisconsin experienced a 63% increase in freight rail revenue from 2002 and 2012, partially caused by rapid growth in frac sand mining.

Blueshift Research’s July 11 fraccing equipment report discovered growth in the fraccing market that was driven by both new build orders and equipment replacement cycles. An increased number of orders was occurring sooner than anticipated. Well stimulation prices had risen 5% to 10% in the previous six months leading up to July. Utilization rates for pressure pumping equipment were reported near the 90% mark, much because of the multi-well pad trend. Large and midsized fraccing service providers were growing their fleets organically. Sources for Blueshift’s June 20 railcar report cited pent-up demand for non-crude railcars, including covered hoppers that haul sand for fraccing. The extensive demand for fraccing sand had slowed rail speeds throughout the railway system.

 

Current Research

In this next study, Blueshift Research assessed whether sand companies would continue to benefit from increased demand in the fraccing industry or if logistical bottlenecks would hamper deliveries and delay sales revenue. We employed our pattern mining approach to establish four independent silos, comprising 21 primary sources:

  • Fraccing service providers (7)
  • Oil & gas companies (8)
  • Sand companies (4)
  • Rail companies (2)

 

Next Steps

Blueshift Research will investigate which companies are benefiting from the infrastructure buildout and which are introducing solutions or products to assist in the distribution of sand to the oil & gas markets.

 

Silos

 

1) Fraccing Service Providers

All seven sources said natural sand demand for fraccing wells was up in the mid-double digits on average during the third quarter year to year. They also said the use of great quantities of natural sand instead of ceramic proppants represents a structural change in the industry. Sand prices rose in the mid- to high double digits on average during the third quarter year to year and may increase again during the fourth quarter. Ceramic proppant pricing has been flat. Heavy sand usage in many oil-producing regions has caused rail and trucking congestion and delayed sand deliveries, though many logistical issues are being resolved. Fraccing service providers stand to suffer the most if deliveries are delayed, though top-tier providers like Halliburton, Schlumberger and Baker Hughes have solutions in place to offset bottlenecks. U.S. Silica Holdings is six of the seven sources’ top sand supplier.

 

KEY SILO FINDINGS

Use of Sand/Proppants

  • 7 of 7 sources said demand for natural sand increased in the third quarter year to year, ranging from 15% to 70%.
  • All 7 also expect demand to rise 10% to 25% during the fourth quarter compared with the third quarter.
  • 7 said the use of great quantities of natural sand is a structural change in the fraccing industry; 98% of fracced wells use natural sand while only 2% use ceramic proppants.
  • The heavy usage of sand continues to cause excessive wear and tear on pumping equipment, the same as in Blueshift’s July pressure pumping report. National-Oilwell Varco Inc. (NOV) and The Weir Group plc’s (LON:WEIR) Weir SPM are benefiting from aftermarket sales of fluid ends and pumps, respectively.

Proppant Pricing

  • All 7 said sand prices rose an average 60% during the third quarter year to year.
  • 5 of 7 expect prices to rise again during the fourth quarter compared with the third quarter. 2 said they had locked in prices on long-term contracts so no increase was expected.
  • 4 of 7 said ceramic proppant prices were flat during the third quarter because of low demand and an abundance of supply; no price increases are expected during the fourth quarter.

Supply Chain/Logistical Issues

  • 7 said heavy sand usage in most U.S. oil basins has caused rail and trucking congestion and delayed deliveries, though bottlenecks in the supply chain system are being resolved.
  • 7 said fraccing service providers would suffer if frac jobs are delayed, though top-tier providers like Halliburton, Schlumberger and Baker Hughes have solutions in place to overcome logistical bottlenecks.
  • 6 of 7 named U.S. Silica as their sand supplier of choice; 4 of 7 named Hi-Crush Partners as well.

 

1) Mid-continent area resource manager for a top-tier fraccing service provider

Demand for natural sand used in fraccing wells in the Mid-continent region rose 40% to 50% during the third quarter year to year and is likely to go up an additional 10% to 20% during the fourth quarter compared with the third quarter. The ratio of proppants used for wells in the area is 98% natural sand and 2% ceramic proppants. The large sand volumes used in completions are a permanent change and are seeing good results. Sand prices rose an estimated 70% during the third quarter year to year and continue to increase. Ceramic proppant pricing is flat year to year, however. Supply from various mines is tight, and rail deliveries are slow. Some service companies are building new silos and transship facilities to alleviate bottlenecks. Although all sand companies are benefiting from the high demand, the source’s company uses Hi-Crush because of a long-term commitment. Fraccing service providers like Halliburton, Baker Hughes and Schlumberger, along with smaller players, will suffer revenue delays if supplies are not delivered on time.

Use of Sand/Proppants

  • “Demand for sand is up 40% to 50% year to year. Enhanced completions using more natural sand work well and will likely continue.”
  • “Demand will likely continue to increase another 10% to 20% this quarter with the attention certain plays in our area are getting now.”
  • “Proppant demand is approximately 98% natural sand. Some use some ceramics and gel, but it is not a large amount currently.”
  • “The use of heavy sand volumes is eating up fluid ends. Manufacturers of fluid ends, like Weir and [KKR & Co. LP’s/KKR] Gardner Denver, can hardly keep up and are raising prices too.”

Proppant Pricing

  • “Proppant sand prices are up at least 70% year to year.”
  • “Pricing will likely rise again next quarter, but I have no estimate of how much.”
  • “Ceramic pricing is flat here since most demand is for natural sand.”
  • “Demand continues to climb. How high prices will climb is a function of when supply and demand achieve a balance. I am not sure when that will happen.”

Supply Chain/Logistical Issues

  • “Bottlenecks seem to involve both supply at the mine and rail delivery schedules.”
  • “Silos and transship locations are being built by the larger providers to try and alleviate the bottlenecks.”
  • “All sand providers like U.S. Silica and Emerge Energy are benefiting from current demand because everyone seems to buy from any company with availability. We also buy from Hi-Crush Partners under a long-term agreement.”

 

2) Reservoir geologist for a top-tier fraccing service provider in the Mid-continent region

Sand usage increased more than 40% during the third quarter year to year and should rise another 25% during the fourth quarter based on new demand in the region. Proppant demand is almost exclusively natural sand. The large increase in sand volume per each stage is becoming a structural change in the industry as it continues to yield increased production results. The heavy sand usage also results in much higher maintenance costs for service providers like Halliburton, Baker Hughes and Schlumberger and more orders to manufacturers like Weir and Gardner Denver. Prices for all sand types continue to increase and have more than doubled for some types. The source forecast an additional 10% price increase for the fourth quarter. Slow response times are occurring at both mines and rail locations. However, the major service providers are building better distribution channels to help alleviate bottlenecks. This will give them a logistical advantage over smaller service providers. All sand companies are benefiting from high demand as most providers are buying sand wherever they can find available supply. Smaller frac service providers, such as GoFrac, cannot resolve sand supply issues or get timely deliveries, and may post revenue losses as a result.

Use of Sand/Proppants

  • “Demand for sand is up more than 40% year over year. Most completions use tremendous volumes of sand. This helps to increase production and will certainly continue.”
  • Demand for 20/40 [mesh] sand has been so high that it is hard to get in the region in the last 30 days. Clients have moved to 30/50 or 40/70 to keep enough sand to complete wells.”
  • “Almost 100% of current demand is for natural sand.”
  • “The damage to fluid ends with high-volume sand is much greater, shortening the life cycle for fluid ends and increasing demand for new and rebuilt fluid ends.”
  • “Fluid end manufacturers like Weir are enjoying increased sales from the increased demand.”

Proppant Pricing

  • “Some sand types have doubled in price this year based on demand, and those increases have not stabilized yet.”
  • “The expectation is for another 10% price increase for sand this quarter.”

Supply Chain/Logistical Issues

  • “Both the supply at mines and rail delivery seem to be slow.”
  • “Most of the larger providers are busy upgrading storage and transload facilities to resolve supply issues.”
  • “High demand seems to favor large-tier service providers and their clients since most of their supply chain issues have been or are being resolved. Smaller providers have difficulty coming up with solutions to resolve logistics issues in-house.”
  • “All sand companies with good logistics, like Emerge and U.S. Silica, seem to be benefiting from current demand.”

 

3) Mid-continent sales manager for a midtier pressure pumping service provider

Demand for frac sand increased by more than 50% during the third quarter year to year and is expected to rise another 10% quarter to quarter by year’s end. A total of 95% of demand is for natural sand. Large volumes of natural sand are utilized in completions in the horizontal area plays, and this trend is expected to continue as production rates favor the practice. Fluid ends have a much shorter life cycle in the heavy sand/slickwater frac environment. Manufacturers and rebuilders of fluid ends like National-Oilwell Varco and Kerr Pumps are benefiting from the booming demand. The price of sand has increased 50% to 70% year to year and likely will increase another 20% by year’s end. Ceramic proppants account for only 5% of total proppants used in the area, and their pricing is fairly stable as lower-cost Chinese products are readily available. Trucking and rail costs are increasing, and availability is sometimes an issue. More transship locations are being built to help with distribution and supply. Slow delivery of sand for completions can have negative consequences for fraccing service providers. Berkshire Hathaway Inc. (BRK.A) BNSF Railway is benefiting from increased crude oil and sand shipments. Meanwhile, U.S. Silica is being helped by the close proximity of its yards to well locations.

Use of Sand/Proppants

  • “Demand for sand is up 50% year to year. We see demand continuing to grow this quarter by an additional 10%.”
  • “Ninety-five percent of current proppant demand is for natural sand.”
  • “Demand for ceramic is 5% or less of the total mix.”
  • “Heavy sand concentrations continue to be rough on fluid end life cycles.”
  • “Manufacturers and rebuilders like National Oilwell Varco and Kerr Pumps have a booming business trying to meet demand.”

Proppant Pricing

  • “Depending on size, sand prices have increased by 50% to 70% since last year.”
  • “Low demand for ceramics and the competition from Chinese suppliers has kept ceramic prices flat.”
  • “Prices on trucking and rail continue to increase.”

Supply Chain/Logistical Issues

  • “Many service providers are increasing their storage and shipping solutions to keep up with sand demand.”
  • “The biggest players benefiting from increase sand sales are [Sibelco Group’s] Unimin, U.S. Silica and Emerge Energy.”
  • “BNSF Railway has increased cars for sand and oil in order to service the oil industry in this area and elsewhere.”
  • “Emerge may have a competitive advantage due to its proximity to the Mid-continent.”
  • “Bottlenecks could cause some loss of potential revenue for service providers if [frac] jobs are delayed, so most companies are stockpiling and working to stay ahead of bottlenecks.”

 

4) Frac sales manager for a midsized fraccing service provider in the Haynesville Shale

Demand for sand has been steady year to year because drilling and fraccing have not ramped in this gas-prone area. However, sand demand is expected to grow during the fourth quarter compared with the third because of accelerated activity in the nearby Tuscaloosa Marine Shale. Increased fraccing will be hard on pumps and fluid ends, such as those manufactured by Weir and National-Oilwell Varco, respectively. Sand prices have jumped in the high double digits year to year and are likely to increase again quarter to quarter. Rail companies like Kansas City Southern (KSU) and Union Pacific are benefiting from sand shipments in the area. Top-tier fraccing service providers Halliburton, Schlumberger and Baker Hughes will benefit the most because the volume of sand shipments they place among sand suppliers and railroads grants them preferential treatment. Because of its national footprint, U.S. Silica is the preferred sand supplier in the area, followed by locally owned United Proppants Group.

Use of Sand/Proppants

  • “Demand for sand is probably fairly stable here compared to other plays because demand hasn’t risen in the dry gas plays like it has elsewhere.”
  • “Demand in other plays has made supplies a tight market, but fortunately our supply chain has stayed ahead of our demand and avoided delays.”
  • “The new Tuscaloosa Marine Shale activity will bolster demand for sand in our area as drilling and completions grow. This will be hard on pumping units and fluid ends. Weir and National-Oilwell may benefit from increased aftermarket sales.”

Proppant Pricing

  • “The high demand in the oil plays has caused our price to go up here as well. Sand, rail and trucking prices have all increased.”
  • “Sand prices are up 70% the third quarter year to year.”
  • “I expect prices to increase again with more activity.”

Supply Chain/Logistical Issues

  • “All logistics have been strained. It takes advanced planning now, but most of them are being resolved.”
  • “To alleviate bottlenecks, new railcars and new transship loading locations are being added to the network. That includes barge transship loading locations too.”
  • “Kansas City Southern and Union Pacific are benefiting from increased sand shipments in Louisiana.”
  • “Fraccing service providers benefiting the most in our area are Halliburton, Schlumberger and Baker Hughes. Those companies have higher volumes of work.”
  • “U.S. Silica is benefiting the most from sand shipments because they are the largest supplier.”
  • “United Proppants Group is benefiting from sand sales because they are a local supplier.”
  • “Fraccing service providers will suffer the most if they can’t get sand delivered and it delays frac jobs.”

 

5) Frac sales manager for top-tier fraccing service provider in Oklahoma

Frac sand demand increased 25% during the third quarter year to year and is expected to rise another 10% during the fourth quarter. Most customers now use 95% sand and only 5% ceramics to frac wells. This is causing aftermarket sales of fluid ends manufactured by National-Oilwell and pumps by Weir to accelerate rapidly. Sand prices rose 40% during the third quarter year to year and are likely to increase again during the fourth quarter. Meanwhile, ceramic proppant prices are expected to remain steady through the fourth quarter. Heavy congestion on the rails as a result of increased sand shipments has caused a logistical bottleneck, and deliveries by truck also have been slow. Rail companies are adding new railcars and engines to offset the bottlenecks, and trucking companies are hiring new labor at higher wages to keep supplies moving. Union Pacific is best positioned in this source’s market, though BNSF and Kansas City Southern also are benefiting. Sand companies U.S. Silica and Hi-Crush Partners stand to gain from the strong demand because of their large operational footprints. Fraccing service providers will suffer if sand or proppants are not delivered in a timely manner and frac jobs are delayed.

Use of Sand/Proppants

  • “Demand for sand is up over 25% year to year. Many oil completions now use double the volume of sand, and it affects sand supply everywhere. High demand will certainly continue into 2015.”
  • “We expect increased demand for sand will affect pricing and supply this quarter.”
  • “Wells here use 95% sand and 5% ceramic proppants.”
  • “High-volume sand fracs are shortening the life cycle for fluid ends and increasing demand for new and rebuilt fluid ends.”
  • “Fluid end manufacturers like Weir and National-Oilwell Varco are reaping increased business for aftermarket parts.”

Proppant Pricing

  • “Some sand types have doubled in price this year based on demand, and we are expecting more increases.”
  • “Ceramic prices are flat year to year because demand has been low. We expect more of the same next quarter.”

Supply Chain/Logistical Issues

  • “Slow rail and trucking deliveries have caused supply chain issues. But the rail companies are adding cars and engines, and trucking companies are hiring truckers again.”
  • “Ceramic prices are flat year to year because demand has been low. We expect more of the same next quarter.”
  • “BNSF, Kansas City Southern and Union Pacific are showing increased sand shipments in Louisiana.”
  • “Hi-Crush and U.S. Silica always benefit from high demand.”
  • “If fraccers can’t get frac jobs done because they are waiting for supplies, they will be hurt. Small fraccing companies have suffered the most because they don’t have the logistical network setup like large fraccers do.”

 

6) Pressure pumping sales representative with a top-tier service provider in the ArkLaTex region

Sand demand increased by at least 20% to 30% throughout the region during the third quarter year to year and is expected to increase by year’s end quarter to quarter. Natural sand represents 98% of demand. The high-volume sand frac jobs represent a structural change in the industry. These fracs are very hard on pumps, and companies like Weir, National-Oilwell and Kerr Pumps are benefiting from strong aftermarket sales. Sand prices increased an average 40% during the third quarter year to year. Near-term prices have stabilized, however, as most all of this source’s customers have signed long-term supply contracts. Ceramic prices will remain flat for the foreseeable future. The main bottleneck in the supply chain has been sluggish deliveries by trucking and rail companies. However, the rail companies have upgraded equipment, and delivery times are improving. Union Pacific is benefiting most from sand shipments, while Hi-Crush Partners and U.S. Silica have both experienced a boom in demand for sand. Fraccing service providers have suffered the most from delivery delays and are working hard to improve supply chain issues.

Use of Sand/Proppants

  • “Demand for sand has increased throughout the region by at least 20% to 30% since last year.”
  • “We expect demand to continue to increase into 2015.”
  • “Demand is 98% natural sand at present, and the increased demand is a structural or permanent change.”
  • “We see the increased demand for fluid ends affecting Weir, National-Oilwell and Kerr Pump.”

Proppant Pricing

  • “Third-quarter prices are an average 40% more this year than last.”
  • “Near-term prices should hold since we have good long-term contracts, but trucking and logistic issues continue to add some additional costs.”
  • “The price for ceramics is flat due to lower demand, and should continue flat next year.”

Supply Chain/Logistical Issues

  • “The main bottlenecks have been trucking and rail.”
  • “Rail companies have been upgrading and resolving issues.”
  • “Transload facilities in more locations are helping to ease trucking issues.”
  • “Union Pacific is booming.”
  • “Hi-Crush Partners and U.S. Silica have both experienced a boom in demand.”
  • “Fraccing service providers seem to suffer most from delivery delays and are working hard to improve supply chain issues.”

 

7) Frac sales manager for a midsized fraccing company in the ArkLaTex region

Demand for frac sand increased 70% during the third quarter year to year and is expected to rise further by year’s end quarter to quarter. Natural sand is 95% of current demand, while ceramics account for 5%—a structural change in the industry. Prices are flat for ceramics but have jumped 45% for sand year to year. Rail and trucking costs have risen as well. Bottlenecks in the supply chain include shipment delays at sand mines, congested rail traffic and trucking delays. However, these bottleneck issues are being resolved as railroads have added more cars and engines and as more storage facilities have been built. BNSF and Union Pacific have benefitted from high demand and have added more cars and engines to the network. U.S. Silica and Hi-Crush Partners also have been beneficiaries. Fraccing service providers are hurt the most by delivery delays and have worked hard to address logistical issues.

Use of Sand/Proppants

  • “Demand for sand increased 70% during the third quarter year to year. It should increase again this quarter.”
  • Sand use has increased much more in the oil plays than the gas plays.”
  • “The volume of sand used in frac jobs is a structural change.”

Proppant Pricing

  • “Natural sand is 95% of proppant demand, and only 5% is for ceramics. This has caused pricing to be flat for ceramic but higher for natural sand.”
  • “While pricing for sand is steady with our long-term contracts in place, customers are paying more because transportation costs are rising.”

Supply Chain/Logistical Issues

  • “Bottlenecks have been an issue with mines, rails and trucks.”
  • “Most of the logistical issues are resolved now. The kinks have been worked out. We have been planning better, ordering earlier and have more storage facilities.”
  • “Railroads added cars and engines. BNSF and Union Pacific have both benefitted from high demand and ramped up for it.”
  • “U.S. Silica and Hi-Crush Partners have both benefitted from high demand as they are the largest suppliers.”
  • “Fraccing service providers are hurt the most when there are delays.”

 

 

2) Oil & Gas Companies

Five of these eight sources said demand for natural sand to frac wells rose in the low double digits during the third quarter year to year, and four of the eight expect flat demand by year’s end quarter to quarter. Seven said the use of high volumes of sand to frac wells represents a structural change in the industry. Sand prices increased in the low double digits during the third quarter year to year but should be flat through year’s end. Slow sand deliveries via railways has caused some fraccing jobs to be delayed. A lack of railcars is partially to blame, but this issue is being addressed by fraccing service providers. Halliburton in particular stands to benefit because it has overcome certain obstacles in the supply chain.

 

KEY SILO FINDINGS

Use of Sand/Proppants

  • 5 of 8 said demand for natural sand to frac wells rose 5% to 30% during the third quarter year to year.
  • 4 of 8 expect demand to be flat during the fourth quarter compared with the third, 3 expect increases, and 1 expects a decrease in gas basins.
  • 7 of 8 said natural sand is used in 98% of all wells and that the trend to use more sand and fewer ceramic proppants is a structural industry change.

Proppant Pricing

  • 6 of 8 said sand prices increased from 3% to 50% during the third quarter year to year.
  • 6 of 8 expect sand prices to be flat quarter to quarter, and 2 expect prices to rise 3% to 5% through year’s end.

Supply Chain/Logistical Issues

  • 7 of 8 agreed that slow deliveries of sand via railways caused some frac jobs to be delayed.
  • 4 of 8 said the main culprit was a shortage of railcars, but the shortages are being addressed, with more fraccing service providers purchasing cars.

Preferred Vendors/Suppliers

  • 5 of 8 said top-tier fraccing service providers were preferred vendors because they have overcome certain obstacles in the supply chain.
  • 5 of 8 said smaller fraccing companies were likely to suffer from the transportation bottlenecks because they do not have the resources needed to address the issue.

 

1) Completions manager for a large, private independent operator in the Eagle Ford Shale play

Natural sand demand increased 15% during the third quarter year to year and is expected to increase another 15% through year’s end quarter to quarter. Demand for finer sand grains is increasing even more, pushing down demand and pricing for ceramic proppants. This source uses only natural sand. The price for natural sand increased 5% in the third quarter year to year but is expected to remain flat during the next three months. Slow transportation via railways and trucking are major bottlenecks in the proppant supply chain. As long as oil is in high demand, the bottlenecks will remain. Fraccing service providers will feel the greatest impact on revenue if delivery delays continue. No fraccing service providers, railways, or sand companies has benefited or suffered more than others; they are all equally vulnerable to transportation delays. The best-quality fraccing sand, such as produced by U.S. Silica, is located in the northern part of the United States and is available, but the transportation bottleneck must be overcome since the Eagle Ford area and other fraccing opportunities are located in the South.

Use of Sand/Proppants

  • “Natural sand demand increased 15% in the third quarter compared with the third quarter in 2013, and I expect it to increase another 15% by the fourth quarter, quarter to quarter.”
  • “We use 100% natural sand so I don’t know much about ceramic proppants, but I expect demand for them to have declined year to year and to continue to decline over the next quarter.”
  • “Fine grains of sand are in even higher demand, which makes ceramic proppants less viable since they do not have those features and would be even more expensive if they found a way to create it.”

Proppant Pricing

  • “The price of natural sand has increased 5% in the third quarter year to year, but will remain flat in the next three months. I don’t know much about ceramic proppants since we don’t even consider them, but I imagine that pricing and usage have declined over the past year and will continue to decline in the next quarter. Ceramic proppant pricing would have to decrease significantly for us to even consider using it.”

Supply Chain/Logistical Issues

  • “Transportation in general and railways as well as trucking in particular continue to be major bottlenecks.”
  • “I don’t see any major innovations from anywhere that would cause any changes in this problem. I believe it will be around for a while, as long as demand for oil remains high.”
  • “Fraccing service providers will probably suffer the most from continued transportation delays because they will be limited in the ability to service both current customers as well as potential new business.”

Preferred Vendors/Suppliers

  • “No one particular company will benefit or be hurt the most from increased sand shipments because they are all in the same boat.”
  • “The highest-quality sand from U.S. Silica is available in the North, but the major problem is finding a way to get it to the South where it is needed.”

 

2) Engineering manager for an independent oil & gas company in the Marcellus Shale play

Demand for sand dropped 10% in the third quarter year to year because of less demand for natural gas, and is expected to decrease another 10% in the fourth quarter. The source uses only natural sand because of the cost of ceramic proppants and the lack of viability of ceramics in the Marcellus. The source also cited no major changes in regards to proppant use in the region. Still, sand prices increased 5% in the third quarter year to year and should remain stable into the fourth quarter. The use of railways to deliver sand has hit major roadblocks. Some suppliers and oil companies are trying to alleviate this problem by purchasing their own railcars and increasing the number of rail spurs (a short rail branch). This source was uncertain which railroad, fraccing service provider or sand supplier was benefiting or hurting when transportation bottlenecks occur, but said railroads never suffer from such issues because they are the first in the supply chain to raise prices.

Use of Sand/Proppants

  • “The demand for sand has declined 10% compared to this time last year due to the decline in demand for natural gas, and I expect it to decline another 10% in the next three months in the Marcellus area.”
  • “We only use natural sand due to the high cost of ceramic proppants and the fact that work in the Marcellus does not call for high-strength proppants.”
  • “There have been no major structural changes in the use of proppants. Folks who have been experimenting with proppants for a few years have finally settled on what they think will work for them and are not looking to change.”

Proppant Pricing

  • “Natural sand pricing has gone up 5% since the third quarter of 2013, but I expect it to remain flat for the next three months. I am not sure of what’s happening in the ceramic market since I am not active in it.”

Supply Chain/Logistical Issues

  • “Railroads have continued to experience bottlenecks. Some sand suppliers have added rail spurs and purchased their own railcars so they can park the sand and store it.”
  • “The bottleneck situation has improved somewhat because of initiatives made by sand suppliers and the decrease in demand for sand in general due to low natural gas prices.”
  • “Rail pricing used to be a problem, but more recently it has stagnated.”

Preferred Vendors/Suppliers

  • “I am not sure about what companies are being hurt or helped by the present situation. I do not get involved in that part of the business.”

 

3) President of a consulting company working for a Permian Basin oil company

Demand for sand increased 10% to 15% in the third quarter year to year and is expected to rise another 5% to 10% in the next three months based on the amount of fraccing work being done in the Permian Basin. Ceramic proppants are not used much in this area because of cost. Pricing for natural sand rose 2% to 3% during the third quarter year to year and is expected to post a similar increase in the next three months. Delivery problems are a main source of bottlenecks within the sand proppant industry. Problems with railways out of New Mexico appear to be the biggest issue. A new terminal was scheduled to alleviate these problems, but the source reported little progress in the terminal being built. Rail companies, sand companies and fraccing service providers are all being adversely affected by this bottleneck.

Use of Sand/Proppants

  • “There is a lot of work going on in the Permian Basin, with demand for sand increasing 10% to 15% in the past year, and it should go up another 5% to 10% in the next three months.”
  • “It is impossible for me to give hard figures in regards to natural sand usage vs. ceramic proppants, but I can safely say that there is a lot more usage of sand in the Permian Basin than ceramics due mostly to the price difference. Because of that, the way sand and ceramics are being used has remained static for a while now.”

Proppant Pricing

  • “The price of sand compared to last year at this time has gone up 2% to 3%, and I would say it will increase by that much or perhaps a little bit less in the next three months.”
  • “I couldn’t speak much to the pricing of ceramics since its usage is somewhat rare in the Permian Basin. But I do know that ceramic proppants are just too expensive here to be considered a real alternative to natural sand.”

Supply Chain/Logistical Issues

  • “Delivery problems via railroads are a problem, particularly out of New Mexico. I have seen how stacked sand is on the rail. I understand that they were talking about building another railway terminal there to handle the bottleneck and backlog, but I am not sure how that is progressing or if it is progressing at all.”

Preferred Vendors/Suppliers

  • “I consult with several companies involved in the fraccing business, and I don’t see anyone standing out in any type of business, be it railways, sand companies or fraccing service providers. They are all in the same situation.”
  • “I have even seen sand mining activity in Texas to the point where landowners are calling for sand mining to cease in their area. It is obviously an easy way to avoid the railway problems if you can mine the sand close to where it needs to go. But the quality of the sand is another thing, and there is a tremendous amount of overburden stacked all over areas where it is being mined.”

 

4) Operations manager for an independent oil company active in the Bakken Shale play and Permian Basin

Sand demand rose 5% to 10% during the third quarter year to year and is expected to be flat or down 2% through year’s end because of weather issues. Natural sand continues to be used at a much higher rate than ceramics in both the Bakken and Permian Basin. Structural changes within the industry include a move to white and resin-coated sand, which helps to cut costs and increases the strength of the fracturing process. Sand prices were 5% higher year to year during the third quarter, but should be flat during the next three months quarter to quarter. Ceramic proppants may have declined slightly in price, which should continue into the coming quarter based on an influx in supply from overseas. Bottlenecks are being alleviated, thanks to extended planning. In addition, terminals and new methods of transportation, such as “sand boxes” (portable containers for onsite storage) are being implemented. Railway cost increases are unknown since they are usually absorbed by the fraccing companies. These same service providers are most likely to be saddled with revenue declines in light of delivery problems. Halliburton, FTS International and Baker Hughes are benefiting the most from increased fraccing activity and are addressing delivery issues. Smaller fraccing companies are less likely to have resources to resolve logistical issues.

Use of Sand/Proppants

  • “Demand for sand has gone up 5% to 10% since a year ago, but it will decline slightly in the next three months due to weather issues.”
  • “Very few companies use ceramic proppants in the Bakken and Permian.”
  • “There is a major move toward white and resin-coated sand due to cost and higher strength.”

Proppant Pricing

  • “The price of natural sand has gone up about 5% over the past year, but it should remain flat in the next three months as finding and acquiring new sand mines may become an issue over time.”
  • “The ceramics market has been flooded with suppliers from overseas. Over the past year, ceramic proppant cost has probably declined slightly and will be flat over the next three months.”

Supply Chain/Logistical Issues

  • “Supply chain and delivery issues have actually gotten a little better over the last year. There is better planning and scheduling far in advance that has helped things a bit. New terminals and better transportation modes such as ‘sand boxes’ have made moving the sand cheaper, easier and quicker.”
  • “I have confidence in American know-how when it comes to logistical issues. When you have as many people looking at this situation as we have now, there is no doubt that things will continue to get better.”

Preferred Vendors/Suppliers

  • “Increased costs of railroads are absorbed by the frac companies and are figured into their bidding process.”
  • “Halliburton, Baker Hughes and FTS International will always have an edge due to the relationships they have with their affiliates. The smaller companies will have trouble due to the lack of these affiliations and may find some difficulties during bottlenecks.”

 

5) Completions manager for an independent oil company active in the Bakken Shale

Demand for sand proppants has increased 25% to 30% year to year, but may be flat during the next three months. Very little sand is being used to frac this source’s wells. Instead, the source uses ceramic proppants for his frac work and said ceramic usage is at 98%. His wells call for a lot more strength for each lateral, which has led to the need for ceramic proppants. The price for natural sand has risen 50% in the past year, but probably will be flat during the next three months. Ceramic proppant prices have dropped during the past year because of imports, including from China. Most companies have lines of ceramic proppants, supply is abundant, and prices likely will remain flat during the next three months. Railways continue to bogged down in delivery, but frac companies like Halliburton and Schlumberger are supplying their own railcars. Everybody in the supply chain is being hurt equally. Schlumberger, Halliburton and fraccing companies as a whole deal directly with the railroads, and operators have little to do with rail negotiations. Weather and road restrictions also could delay delivery.

Use of Sand/Proppants

  • “Demand for proppants have increased 25% to 30% over the past year, but will remain flat over the next three months.”
  • “We have used ceramic proppants almost exclusively for the last three years. Demand is up because there is not only an increase in wells that need to be completed, but the necessity for increased intensity and strength is high as well.”

Proppant Pricing

  • “The price of sand has probably increased close to 50% over the past year. What happens in the fourth quarter will depend on what operators do and what they are actually pumping, but I expect pricing will stay flat.”
  • “The price of ceramic proppant has fallen during the past year because everybody seems to have a line of it. That means it has been plentiful for a while now, and year-to-year pricing has probably declined 10%.”
  • “Pricing for ceramic proppants will remain flat in the next three months.”

Supply Chain/Logistical Issues

  • “Frac companies such as Halliburton and Schlumberger are supplying their own railcars, and railroads like BNSF are doing their best to get cars moving because the more cars they can get through the system the more revenue they bring in.”
  • “We would be happy to pay the railroads more if they could move more cars. As it is, everybody is being hurt equally by the delays.”

Preferred Vendors/Suppliers

  • “Schlumberger, Halliburton and Baker Hughes are benefiting the most in this kind of atmosphere while the smaller companies are suffering.”
  • “Weather delays and road restrictions also cause delivery delays.”

 

6) Chief of completions for a large oil & gas company in the Niobrara Shale play

Demand for proppants, including sand, was flat during the third quarter year to year, and will continue to be stagnant because of the regulatory and community environment. Natural sand is the proppant of choice 98% of the time since the shallow drilling depths and conductivity issues preclude the use of ceramic proppants. Ceramic cost also is an issue as companies cannot afford the extra $1 million to $2 million extra required to frac a well with the proppant. Sand pricing has increased 10% over the last year, causing some oil & gas companies to procure their own sand supplies. The price for sand likely will increase by 5% through year’s end. Rails and trucking logistics are resulting in delivery delays. Better planning and solutions put in place by fraccing service providers are helping to overcome bottlenecks, though timelines for each area will differ depending on circumstances. The oil companies are affected the most by the delay, while the sand suppliers can continue to sell as much sand as they want. Fraccing service providers simply pass on higher costs, and the rail companies are not as motivated as the operators to deal with the problem. Fraccing companies benefiting the most from the situation are Calfrac Well Services Ltd. (TSE:CFW), Schlumberger, Halliburton, Baker Hughes and other larger companies. The smaller fraccing companies are hurt by the delivery issues, but few of them are in the Niobrara.

Use of Sand/Proppants

  • “Regulatory issues and the community environment have kept demand for proppants flat, and demand will continue to be flat into the fourth quarter.”
  • “Shallow depths and conductivity issues do not call for the use of ceramic proppants.”

Proppant Pricing

  • “Sand pricing has increased 10% over the past year and may go up by another 5% in the next three months.”
  • “Many companies have procured their own sand supplies due to increasing prices. Owning equity in sand helps with potential logistics problems as well as keeping an affordable supply of sand available.”
  • “Ceramic proppants have basically priced themselves out of the market. Companies just can’t afford to pay an extra $1 million to $2 million to frac a well.”

Supply Chain/Logistical Issues

  • “Rails and trucking continue to be the sources for bottlenecks and delivery delays.”
  • “Frac companies involved in this supply chain are working hard on this issue. There is increased effort to get the sand to the sites quicker and cheaper. “
  • “In addition, some companies are planning way, way out—as much as 18 months—to avoid this problem. This involves forecasting projections that are much further out to avoid the delays.”
  • “Each area will be different when it comes to solving the logistical problems since each situation is unique. Companies have shown a lot of innovation when it comes to dealing with this situation. They can come up with ways to deal with this. The situation is getting better, and it certainly won’t be getting any worse.”

Preferred Vendors/Suppliers

  • “Bigger companies such as Calfrac, Baker Hughes, Schlumberger and Halliburton will always benefit in an environment where there are delays because they have the connections to get what they need. It is the smaller companies who will suffer, if there are any of them left.”

 

7) Completions manager for large, public oil & gas company active in the Eagle Ford Shale

Demand for proppants has risen 10% to 15% year to year and should go up another 10% to 15% in the next three months. Natural sand is used in all fraccing jobs because of the cost of ceramic proppants. This source’s company has a long-term contract for sand supply, so his prices have remained steady year to year. However, the source reported increasing upward price pressure as usage is increasing and supplies are tight. Demand is not as strong for ceramic proppants as it is natural sand since the former costs about $1 million more to use on a well. Demand for particular types of natural sand may continue to drive up the price, so the search will be on for an alternative. Natural sand pricing will never get as high as ceramic proppant pricing, but a more concerted move to resin-coated sand may take place. Fraccing companies that do not have good relationships with transportation companies—both rail and trucking—could end up with no sand. The situation is getting better, however, thanks to an increasing number of storage areas. Companies such as FMSA Holdings Inc.’s (FMSA) Fairmount Santrol and Carbo Ceramics Inc. (CRR) that have been in the business for a while will be fine. To alleviate bottlenecks, more companies are buying railcars, more rail spurs are being built, and upgrades are being made to terminals. Railways in turn have increased their rates 1% to 5% year to year. Union Pacific and BNSF are the preferred rail companies and are in enviable positions since they can pass on increased expenses. Larger fraccing companies like Halliburton will get preferential treatment in dealing with logistical issues. Another buildout of the infrastructure could occur, but many are waiting to see if the demand for sand will continue.

Use of Sand/Proppants

  • “Demand for sand proppants has increased 10% to 15% over the past year and will go up another 10% to 15% in the next three months.”
  • “We use natural sand only due to the high cost of ceramic proppants and the fact that our drilling situation does not call for that kind of proppant.”

Proppant Pricing

  • “We are on contract, so sand pricing does not affect us as our prices are locked in. But I am sure it went up over the past year and will continue to increase into the fourth quarter. Sand is hard to get in general.”
  • “I am not sure about ceramic proppant prices, but they have probably gone up over the past year but not at the same rate as natural sand since the market would not let that happen. It costs $1 million more to frac a well with ceramic proppant as it is right now. They couldn’t afford to raise it much more.”
  • Demand for particular kinds of sand may drive up the price to the extent that we may have to look at resin-coated sand more. However, we would not even consider ceramic proppant as an alternative due to cost. Even modified natural sand will never get as high as ceramics.”

Supply Chain/Logistical Issues

  • “Railways continue to be a huge source of bottlenecks. Companies have ordered 100 cars of sand and have ended up with just 60 due to the stress on demand. Trucking is also a problem. Companies have ordered 10 trucks to deliver sand and have ended up with just eight as the other two found better deals.”
  • “Companies with good relationships will do fine. The situation is getting better with more upgrades to terminals, better planning and more dedication to quicker delivery by the railroads.”
  • “Some smaller fraccers end up with no sand and/or no trucks.”
  • “More rail spurs are being added, stimulation companies are buying their own cars, and sand companies are upgrading operations at their warehouses.”
  • “The end users [oil companies] are the ones who are taking it on the chin. The railroads get theirs upfront and costs pass down through the rest of the supply chain.”
  • “Our goal is to get as much oil out of a well as possible while also making sure that effort is economically viable.”

Preferred Vendors/Suppliers

  • “Union Pacific and BNSF Railways are railroads of choice. Other companies that are benefiting within the supply chain are Carbo Ceramics, Trican [Well Service Ltd./TSE:TCW] and Halliburton. Meanwhile, the smaller companies that don’t have the connections or the wherewithal to withstand the delivery situation are hurt the most.”
  • “Tier-1 fraccing companies will do fine. It’s the tier-2 and tier-3 companies that will be hurt the most.”

 

8) Senior vice president of drilling and completions for an independent oil & gas company in the Marcellus Shale play

Demand for sand proppants was flat during the third quarter year to year and will remain steady through year’s end quarter to quarter. Natural sand is always the proppant of choice since the Marcellus play does not call for higher-strength proppants such as ceramics. Natural sand pricing has been steady year to year. Ceramics pricing is unknown due to lack of usage. Supply chain problems are not an issue since the frac companies are keeping supplies under control. However, if sand deliveries become problematic, oil companies will be most affected because they do not have anyone to pass on higher costs. The transportation issue eventually will be solved. Large fraccing companies, such as Halliburton and Schlumberger, seem to be outpacing others in the Marcellus. A sand supply issue would an extremely worrisome development that could ultimately result in very expensive solutions.

Use of Sand/Proppants

  • “Demand for sand proppant has been steady over the past year, and that trend will continue into the fourth quarter.”
  • “We use natural sand exclusively since we don’t need high strength proppant in the Marcellus. If we come across a situation where we do need a little more strength, we can achieve that through modification of natural sand.”
  • “There has been some discussion about what happens if we begin to experience a sand supply problem. More and more sand is being used to increase well production, and the increased use of sand could put a stress on the supply.”

Proppant Pricing

  • “The price of natural sand has been steady over the past year, and that should continue into the fourth quarter.”

Supply Chain/Logistical Issues

  • “We don’t have any supply chain issues. The frac companies are doing a good job handling that for us.”

Preferred Vendors/Suppliers

  • “Large frac providers, like Halliburton and Schlumberger, are in good shape in the Marcellus. I am not involved enough with the railroad situation to comment on it, and I don’t know where the sand companies stand.”

 

 

3) Sand Companies

All four sources said natural sand usage for fraccing wells increased in the mid-double digits during the third quarter year to year and should rise further during the fourth quarter if oil prices stabilize. Currently, 100-mesh sand is in highest demand. Overall sand prices rose nearly 40% during the third quarter, and likely will increase in the low double digits through year’s end. Delivery delays on the rails, mainly due to a shortage of railcars and engines, are being cleared up. Union Pacific and BNSF Railways have been the primary beneficiaries from the sand shipments because of their vast network in oil basins.

 

KEY SILO FINDINGS

Use of Sand

  • 4 of 4 said natural sand usage for fraccing wells had increased an average 50% during the third quarter year to year and should increase further during the fourth quarter.
  • 100-mesh is one of the most requested sand types, and demand is rising faster for it than for other types.

Sand Pricing

  • Overall sand prices rose an average 40% during the third quarter year to year.
  • 3 of 4 expect fourth-quarter prices to increase 10% to 15% quarter to quarter.

Supply Chain/Logistical Issues

  • Delays on the rails were mainly because a shortage of railcars and engines, but bottlenecks are being alleviated.
  • 3 of 4 sources said Union Pacific and BNSF Railways were benefiting the most from sand shipments because of their vast network in oil basins.

 

1) General manager for a Gulf Coast frac sand company

Demand for sand from oil & gas customers rose 50% during the third quarter year to year and is expected to grow 10% during the fourth quarter. Key demand regions are Texas and Oklahoma. The most requested sand product is 100-mesh. Overall sand prices rose an average 45% year to year and are expected to gain 10% quarter to quarter. Price increases ranged 20% to 40% for most grades of sand but were 50% to 70% for 100-mesh. Recent sand delivery bottlenecks included barge, railcar and locomotive. However, these issues have been alleviated, and shipments now are delivered in a more timely manner. BNSF, Union Pacific and Kansas City Southern are seeing increased traffic from sand shipments.

Use of Sand

  • “Demand for sand has continued to keep ahead of our ability to increase production capacity since coming on line in 2012. Demand increased by 50% this year, and we have increased production to keep up.”
  • “We plan to increase production another 10% this quarter based on current demand.”
  • “If drilling continues at the same pace, demand will continue to grow because of the increasing sand volumes for completions.”
  • “We prefer to sell a variety of sand that represents a balance of all our sand grades rather than all one type. Buyers that can do that are given preference. This helps manage supply and bulk storage of the various types of sand. We produce 20/40, 40/70, 30/50 [mesh], and 100-mesh.”

Sand Pricing

  • “We try to be aggressive in pricing without offering long-term price-lock contracts. This gives opportunity to independents and smaller buyers and protects our margin by allowing us to follow rising prices. We prefer to price no further out than 90 days.”
  • “The price for 100-mesh sand is up 50% to 70% year to year.”
  • “The price for other grades of sand is up 20% to 40% year to year.”

Supply Chain/Logistical Issues

  • “There have been some issues with both railcar and barge availability as frac sand volumes increased across the country.”
  • “Railroads have been adding engines and sand cars, and marine shippers have been adding barges to keep up.”
  • “Most of the bottlenecks were worked out last quarter.”
  • “Competition for railroad engines has been a battle between crude and sand shippers.”
  • “Union Pacific, Kansas City Southern and BNSF are all experiencing the sand boom, along with smaller local companies in the various plays.”
  • “BNSF and Union Pacific railroads probably have the most to gain because of the size of their networks across the country.”

 

2) Sales manager for a small Texas-based sand company

Demand for sand has increased 60% year to year and is expected rise further quarter to quarter, though lower oil prices may be a concern. The most requested sand type is 100-mesh, for which pricing has increased 100% year to year. Pricing of other sand types has risen 10% to 20% year to year and may gain another 10% through year’s end quarter to quarter. This source’s company owns its own rail spurs at each operating facility, which has helped alleviate nearby rail congestion. Union Pacific has added engines to better serve the oil and gas market, especially in Texas.

Use of Sand

  • “Demand for frac sand increased 60% in the third quarter year to year.”
  • “We expect demand to continue to rise at an unknown rate this quarter. We currently produce 16/30, 20/50, 40/70, and 100 mesh.”
  • “Demand is up in all of Texas, especially in the oil plays.”

Sand Pricing

  • “100-mesh sand prices have increased by 100% in 12 months.”
  • “Prices for most sizes increased by 10% to 20% and another 10% gain is expected this quarter, but we’re watching oil prices now.”

Supply Chain/Logistical Issues

  • “Rail has had issues with timely deliveries.”
  • “Union Pacific rail has been booming from oil & gas. They have been adding equipment because the shortage of engines became a bottleneck to timely delivery of sand.”
  • “The rail company benefiting most in our region is Union Pacific.”

 

3) Sales manager for a small Texas-based sand and transloading company

Demand for sand increased by 100% in the third quarter year to year, mainly because of more drilling and fraccing in the Eagle Ford Shale and the Permian Basin. Sand demand will continue to rise during through year’s end and throughout 2015. Overall sand prices have increased 20% to 50% year to year, based on type. Current prices range from $130 per ton for 100-mesh to $170 per ton for premium 20/40-mesh sand. Prices could rise another $20 to $30 per ton—or 15%—in the near term. Long-term contracts can lock in pricing, however. Sand shipments via rail deliveries have improved after most major rail companies added more engines and cars. Because of the size of their rail networks, BNSF and Union Pacific are benefiting the most from industry demand.

Use of Sand

  • “Demand for sand doubled since last year.”
  • “Demand is likely to increase again into 2015.”

Sand Pricing

  • “Sand prices have increased 20% to 50% year to year based on type.”
  • “Prices could rise another $20 to $30 per ton in the near term as mines react to demand.”
  • “Long-term contracts will lock in pricing.”

Supply Chain/Logistical Issues

  • “Several major rail companies have added more engines to increase service for oil & gas demand.”
  • “BNSF and Union Pacific have ramped up capabilities to improve sand logistics.”

 

4) Vice president of sales for a midsized sand company serving most major shale plays

Demand for frac sand increased 50% in the third quarter year to year, and surged so much this year that this source’s production capacity is sold out until 2016, mainly because of several large fraccing service providers negotiating long-term contracts. New mines and capacity could come on line soon. On average, prices increased 50% across all types of sand during the third quarter year to year, but more than doubled for 100-mesh. The biggest bottleneck has been slow rail deliveries. More yards with better connections have been added to rail networks. In addition, rail companies have added sand cars and engines. BNSF and Union Pacific are benefiting the most from increased shipments to oil & gas regions. The Texas-New Mexico Railroad, or TNMR, has been a beneficiary in the Permian Basin.

Use of Sand

  • “Demand increased across the board, and we are running at maximum capacity.”
  • Demand increased to the point that our future stock is sold out until 2016.”
  • “Demand became so high that several major frac companies negotiated long-term contracts through 2015 that has taken all of our current capacity.”

Sand Pricing

  • “Pricing of natural sand has increased in the third quarter year to year by an average 50%.”
  • “100-mesh sand more than doubled in price.”

Supply Chain/Logistical Issues

  • “Rail has sometimes been a bottleneck at some yards.”
  • “New yards are being built and rail companies are adding sand cars.”
  • “BNSF and Union Pacific are benefiting the most from the oil and gas industry. In the Permian Basin, Texas New Mexico Railroad is benefiting from the boom.”

 

 

4) Rail Companies

Both rail sources said sand shipments increased greatly during the third quarter year to year, but both also were uncertain about fourth-quarter shipments based on the recent oil price drop. The Permian Basin and northern Oklahoma have received significant deliveries of frac sand since both regions are known for their oil plays. A shortage of railcars had caused delivery delays, but shipments now are more timely. Union Pacific has been the most aggressive in its rail pricing strategies.

 

KEY SILO FINDINGS

Deliveries of Sand

  • Both sources said shipments of frac sand via rail delivery increased greatly during the third quarter year to year, but said uncertainty over oil prices could dampen fourth-quarter shipments.
  • Both said the highest deliveries of frac sand went to oil provinces in Texas and northern Oklahoma.

Delivery/Logistical Issues

  • A shortage of railcars had caused delivery delays, but deliveries now are running smoother as many companies have added cars to the rail system.

Rail Pricing

  • Union Pacific has been the most aggressive in its rail pricing strategies.

 

1) Vice president operations of a midsized rail company serving the west Texas market

Demand for shipments of frac sand via rail delivery has increased greatly since the same time last year. This source expects 2015 to see strong demand, but is watching crude prices and corresponding reverberations among customers after oil prices dropped recently. His company serves the booming Permian Basin, which he described as having some of the strongest sand demand. Bottlenecks can be attributed to a shortage of railcars over the past year. This source reported a recent limitation in railcar growth. However, he believes the logistical bottlenecks will clear up by early 2015. Class I rail pricing has gone up year to year, but no big changes have occurred in short-line rail pricing.

Deliveries of Sand

  • “Customer requirements for deliveries of sand are way up since this time last year.”
  • “Depending on what crude does, I would say shipments of sand next year will increase again.”
  • “The Permian Basin has been booming.”

Delivery/Logistical Issues

  • “Bottlenecks have occurred because there have not been enough railcars.”
  • “There has been a limitation on railcar growth. That’s been part of the problem.”
  • “We believe the logistical problems will be resolved in early 2015.”
  • “Competition from shipping crude on the rails has impacted deliveries of sand.”
  • “Rail movement of coal has been going down. That’s helped alleviate some of the congestion.”

Rail Pricing

  • “Class I rails, including Union Pacific and BNSF Railways, have been driving prices up quite a bit since last year.”
  • “There’s been no big change in prices on the short lines.”

 

2) General manager of a small rail company serving the Oklahoma market

Demand for frac sand via rail delivery is up year to year. This source said more deliveries of frac sand have been made to northern Oklahoma, an oil play region, than to southern Oklahoma, a gas-prone area. A shortage of railcars has caused some delivery problems, but top-tier fraccing company Halliburton has enough cars to keep deliveries running smoothly. Some of the mines in Wisconsin have had trouble getting empty cars returned to them because customers are keeping them at well locations to warehouse frac sand for up to 60 days. In addition, other mines in Wisconsin are not set up to load unit trains. Rail prices increased an average 25% to 30% during the third quarter year to year. Union Pacific has been the most aggressive in its pricing strategies in the sand markets while KCS’ pricing has remained competitive.

Deliveries of Sand

  • Delivery/Logistical Issues“Deliveries of frac sand have been up since last year.”

    • “Northern Oklahoma has had more deliveries of frac sand than southern Oklahoma.”
    • “There has been a shortage of railcars lately that’s caused some problems.”
    • “Halliburton’s deliveries have run smoothly. They are OK on cars and have the wherewithal to stay ahead of problems.”
    • “Another problem we’ve seen is that some of the sand mines in Wisconsin are not set up to run unit trains.”
    • “Some of the Wisconsin mines have had trouble getting empties back to their yards. Companies have been using the cars as rolling warehouses and are keeping them onsite at well locations for 30 to 60 days, when they should be returned.”

    Rail Pricing

    • “Rail prices have increased 25% to 30% year to year.”
    • “Union Pacific is the most aggressive in their pricing strategies. They have their core pricing initiative, and sometimes they try to run off smaller customers in favor of large shippers.”
    • “KCS has very competitive rates, and they are flat year to year.”

     


    Additional research by David Wright and Scott Johnson