Fracking Makes Sand The New Hot Commodity: What You Need To Know

September 03, 2014

What is the connection between delays on Amtrak's "Empire Builder" train between Chicago and Seattle and a $680 million equity and debt investment by KKR?

The answer: sand.

This is not any old sand we're talking about. It's not the sort of sand to send children quietly to sleep at night. It's the sort of sand that's now both raising hackles and money: frac sand.

Why is it so important? Because it's critical for fracking. And there's a fracking boom in the U.S.

Frac sand is what, in the industry, is called a "proppant." Essentially, proppants "prop" or keep open the cracks and pores in the rock after it has been fractured ("fracked") so that the oil, gas and natural gas liquids can be pumped out.

Shale Oil Extraction

ShaleOilExtraction

Source: BBC.com
 

While raw sand is not the only proppant—e.g., ceramic beads of sintered bauxite, kaolin and alumina, and resin-coated sand and ceramics are also used as proppants—it's the most widely used.

U.S. silica estimates that around 90 percent of proppant volume is based on sand and, in March this year, Hi-Crush Partners, a premium monocrystalline sand producer and supplier, based on research from the Freedonia Group, indicated: "Raw sand [is] projected to increase as a percentage of proppant market, averaging at least 80 percent by volume." (With the explosion in fracking and the use of frac sand in just this last year, it's difficult to know how, with the higher consumption figures, the proportions of the different proppants may have changed. But these are useful as indications.)

 

 

Proppant Consumed by Volume

GrowthofRawSandProppantMarket

Source: Hi-Crush Partners, sourced from Freedonia Group, August 2013
 

There are a number of different types of raw fracking sand, including Brady, Brown Sand, Northern White and Texas Gold.

 

Sintered Bauxite

Alumina-Ceramic Beads

SinteredBauxite

CBPAluminaProppants

Source: EC21

Source: CBP Engineering Corp.

To be any good as a proppant, the silica/quartz, or frac, sand needs to be/have:

  • Crush resistant, resisting pressures up of 4,000-6,000 pounds per square inch
  • Low acid solubility – solubles are usually washed out when the sand is processed
  • Low turbidity – silt-clay size minerals in the sand are also usually washed out when the sand is processed
  • Round grained so that there is as little turbulence as possible when it is transported in the hydraulic fracturing liquid. (The current frac sand standard – RP 56 – set by the American Petroleum Institute (API), requires a roundness and sphericity ≥ 0.6 – based on the work of methodology of Krumbein & Sloss)
  • High purity quartz (API: 99+ percent SiO2)
  • Of specified size fractions (see diagram below). Some 90 percent falls within the shaded range

 

Size Fractions

Sieve Opening Sizes (µm) 3350/1700 2360/1180 1700/850 1180/600 850/425 600/300 425/212 212/106
Frac Sand Size Designations b
6/12
b
8/16
a
12/20
b
16/30
a
20/40
b
30/50
a
40/70
b
70/140

 

It also needs to be matched to the particular job—fracs differ for many reasons, e.g., rock type, basin, etc., and having the right proppant is vital.

Any Old Sand & Frac Sand

FracSand

Source: Wisconsin Academy
 

As the fracking industry grows, so does the need for sand, in big numbers: A single well may need anywhere between 1 and 4 million pounds of frac sand with which to be "stimulated." In other words, according to U.S. Silica's CEO, on average, 25 railcars of sand are needed to frack one well.

Why The Sand?

According to estimates from the U.S. Geological Survey (USGS), the U.S. is by far the world's largest producer of industrial sand and gravel. It's also a significant exporter of both, to the tune of some 8.4 percent of the country's domestic production.

 

 

Industrial Sand & Gravel: Estimated World Mine Production – 2013 (Million Tons)

IndustrialSandandGravel

Source: USGS
 

Also according to the USGS, currently the majority of all the sand and gravel the U.S. produces, some 62 percent, is "used as hydraulic fracking sand and well-packing and cementing sand," with industry and government experts estimating a production figure of 25-30 million metric tons for frac sand alone.

Domestic Consumption of Industrial Sand & Gravel in the USA - 2013

SandIllustrations

Source: USGS

 

In 2013, according to the USGS, this sand and gravel was produced in the U.S. by 120 companies with 177 operations in 31 states.

By tonnage produced, the leading states were:

 

 

  • Wisconsin
  • Illinois
  • Texas
  • Minnesota
  • Oklahoma
  • Arkansas
  • Michigan
  • Iowa

In its latest Minerals Yearbook (2012), the USGS describes the Ordovician St. Peter Sandstone in the Midwest as being "a primary source of silica sand for many end uses, including frac sand. Mined in five states, frac sand from the St. Peter Sandstone is within reasonable transport distance to numerous underground shale formations producing natural gas."

St Peter Sandstone Formation

StPeterSandstoneFormation

Source: Industrial Minerals

 

A Growth Market – And Some!

In 2010, Wisconsin could boast only five sand mines and five processing plants. By the end of 2013, it was estimated that 100 sand mines, loading and processing facilities had received permits.

On a countrywide basis, in third quarter 2013, PacWest expected "…US land proppant consumption for well stimulation to increase from 51 billion pounds in 2011 to 83 billion pounds in 2015, equal to an 12.9 percent compound annual growth rate," with sand accounting for "most of the growth in market demand" and proppant consumption to grow at 9 percent per annum between 2013 and 2015.

Not even a full year later, The Wall Street Journal was reporting that "[f]rackers are expected to use nearly 95 billion pounds of sand this year, up nearly 30 percent from 2013 and up 50% from forecasts made by energy-consulting firm PacWest Consulting Partners a year ago."

But even these figures may underestimate the size of the market that PropTester in an update back in June, to its 2013 proppant market report, noted:

"North America, which consumes a vast majority of proppant worldwide, experienced robust activity during the first two quarters of 2014. Despite significant weather related issues during 1Q 2014, demand is trending over 25 percent of annualized 2013 demand and well over 50 percent in select regions. Increases of 30 percent or more in base proppant demand are now expected through the remainder of 2014 in North America (as compared to 2013 annualized demand)."

Its 2013 Proppant Market Report indicated "the proppant market exceeded 45 million tons (90 billion pounds) in 2013, a 28 percent increase compared to 2012."

One reason projected consumption has been jacked up significantly is the discovery that if more sand is used, output rises. And according to energy analysts at RBC Capital Markets (quoted in the same WSJ piece), while "[a]bout a fifth of onshore wells are now being fracked with extra sand, …the technique could expand to 80 percent of all shale wells."

As consumption has increased, so too have sand prices. Back in 2008, most types of industrial silica sand cost an average of $30.82 per ton. By 2012, the price of such sand was an average of $44.78 per ton, with high-quality frac sand costing as much as $55 per ton.

In 2013, the price of this high-quality sand rose to an average of average of $75 per metric ton. According to another article in The Wall Street Journal, having already risen this year, "Laura Fulton, chief financial officer of Hi-Crush Partners L.P., is predicting another 5 percent to 10 percent increase in sand prices before year's end."

 

 

Opportunities?

Sand and gravel producers in the U.S. are a mixture of both private and public companies. Among the largest are:

 

Company Ticker

Badger Mining Corporation

Privately owned

Fairmount Santrol (Fairmount Minerals)

Majority owned by American Securities Capital Partners

Hi-Crush Partners LP

HCLP:US

Pattison Sand Co., LLC

Privately owned

Preferred Sands

Privately owned (recent major investment by KKR)

Premier Silica LLC

Privately owned

Proppant Specialists, LLC

Privately owned

U.S. Silica Holdings, Inc

SLCA:US

Unimin Corp

Privately owned by Sibelco Group, Belgium

 

If you're looking at a direct investment in frac sands, currently there are only a few public companies of any size: Hi-Crush Partners and U.S. Silica. Emerge Energy Services LP (EMES:US), owner of Superior Silica Sands, which, very successfully, went public on the NYSE last year, is both a fuel processing and distribution company and a silica sand producer. But there have been rumors that Fairmount may be looking at an IPO.

Large ceramic proppant producers include CARBO Ceramics Inc. (CRR:US) and Saint-Gobain (SGO:FP).

Smaller frac sand producers include:

Some other companies in the frac sand "space" that may be worth watching are:

 

 

There are also, now, a number of Chinese ceramic proppant manufacturers, Sichuan FultonTec Co. Ltd, for example, which may also be worth keeping an eye on.

As for that debt and equity investment recently made by KKR, that was the $680 million its special situations fund announced at the end of July was going to be pumped into Preferred Sands, one of North America's largest frac sands producers, to keep it in business.

While opportunities to invest directly in frac sands may be circumscribed by the dearth of publicly quoted companies out there, indirect investment opportunities in the frac sands "phenomenon" may not be so circumscribed.

On a number of occasions, particularly in the press, frac sand has been equated in one way or another with gold, and current demand for it a "gold rush." If that's the case, there should be indirect opportunities in the services necessary to support it—as there have been in previous "gold rushes."

Two such services that may offer opportunities are:

Shipping & Logistics

Frac sand resources are often located at a distance from where they are actually needed, e.g., in New Mexico, North Dakota and Pennsylvania. However, oil drillers' preferences may also dictate obtaining frac sand from a particular region and of a particular type such as Wisconsin White, the grains of which are especially round—even if the source of the sand may be nowhere near where they are operating.

However, the sand needs to get to the wells. And the railways in North America are getting it there. Whether Class 1 like BNSF, the Canadian National Railway Company, Union Pacific Railroad or the very much smaller Progressive Railroad, rail companies in the U.S. are shipping many—often thousands—of railcars of frac sand each year. The volume is rising and so, often, is their investment in the sand "boom" among other things in cars, new lines and infrastructure.

That said, though, those who ship by rail are starting to express concerns "that the U.S. rail network won't be able to handle rapidly rising traffic volumes, resulting in higher transportation costs and lost sales." Not least because "[g]rowth in frac sand and oil shipments connected with the domestic energy boom is further pressuring the network."

However, it's not only the freight customers of the railways who are concerned; those who like or need to travel by train are also feeling the effects of this increase in traffic.

 

 

A case in point is the current plight of passengers on Amtrak's "Empire Builder." Effective until Sept. 30 this year, Amtrak has the following advisory on its website: "Passengers traveling aboard Empire Builder trains can encounter significant delays due to very high volumes of freight train traffic along the route. During the two week period ending August 2, 2014, trains encountered delays of approximately three to six hours. While delays to the Empire Builder have primarily been occurring west of St. Paul, MN, passengers should anticipate delays in both directions." As ever, passengers rank behind freight.

Shipping sand, however, is not just railroads: Trains may take it from point C to point D, but the sand might be mined at point A, processed at point B and go down the well at point E.

Getting from A to E may involve such other stages as transfer and transport by truck from processor to rail head (transloading), transfer and transport from rail head to well (transloading), intermediate storage, etc.

Very often these other stages will be the responsibility of specialist logistics companies, for example, Enserco Midstream LLC which, to address just such market opportunities, bought Frac Resources, LLC in January of this year.

Indeed, frac sands logistics is such a booming business that the 2nd Annual Frac Sand Logistics & Market Forecast Summit USA 2014 is will take place in Houston at the end of October.

Conclusion

The fracking boom is going to be here in the U.S. for a while. And frac sand will continue to play an integral part in the exploitation of unconventional resources, as will all the infrastructure that supports it on its journey from mine to well.

There is also every likelihood that the exploitation of unconventional energy resources—particularly fracking—will become more prevalent outside the U.S. If it does, the demand for frac sand will increase further.

Looking for the right opportunities, at the right time, and in the most promising segment(s) of the market should be very interesting.

 

 

Find your next ETF

Reset All