Another Growth Cycle in The Frac Sand Industry?
The Frac Sand industry started in 2010 with the improvement of horizontal drilling for oil & gas. One of the critical products needed to “Frac a well” is a proppant, which is a solid material usually made out silica sand, ceramics or treated sand, to keep a hydraulic induced well open.
The Proppant Market
In 2010 the number of proppant suppliers and the volume of material were in limited supply. With supply limited and demand high, frac sand mining companies were paying high prices and offering attractive contracts to get proppants. This market environment created a perfect place for entrepreneurs to jump in. Investment in Silica Sand plants was similar to the great gold rush - people and institutions invested millions of dollars to reap the benefits of this high priced commodity. Within a couple of years not only did the supply of silica sand rapidly increase, so too did the volume of oil in the world market.
In 2013 the average oil price per barrel was $111. With US production increasing, other oil producing countries increased their production dropping the price of oil in 2015 to $60 per barrel.
US Oil companies slowed oil production dropping the demand for silica sand as well. The new production facilities that were built during the boom between 2012 and 2014 were forced to implement cost-cutting measures including incorporating other efficiency initiatives and suspending operations altogether. Within a relatively short business cycle, capitalism was showing how the truths of supply and demand and competition work in every industry. Eventually, all industries are forced to face competitive pressures and incorporate cost cutting measures. Commodities pricing will eventually be close to the cost of capital unless other competitive advantages can be leveraged.
The Future of Frac Sand Mining
With the shine coming off the apple due to the normalizing of margins and current oil prices around $49.00 one could ask if the Frac industry is positioned for consolidation and downsizing. The answer to that question would be maybe, but the expansion of frac sand plants is not over. We are in another growth cycle due to the discovery of sand sources closer to the basins. Freight and logistics are approximately 2/3rds of the overall costs to the completion companies. The new interest in industrial sand plants is primarily focused on addressing these costs which ultimately help the end customers. Previously, oil companies were looking at $65 per barrel to motivate them to drill. With cost reduction initiatives, the motivation to drill is closer to $50 per barrel.
The new growth initiative in the Frac Sand industry may be fueled differently but one fact still remains true – regardless of the motivation, the desire to be first in a market is still the primary goal.