Mining, processing and delivering over 30 million metric tonnes (MT) of frac sand proppant to US oil and gas shale drilling sites is a serious business. Speedier drilling, increased lateral length and more fraccing stages are driving demand for the critical proppant that holds open fractures to let hydrocarbons flow to the well. Large companies with efficient distribution logistics and agreements with the railroads dominate the business – helping to bring down completion costs per well. Today we take a closer look at the frac sand business.
Earlier this year Taylor Robinson from PLG Logistics contributed a blog describing the logistics operations surrounding horizontal drilling and hydraulic fracturing (fracking) in US oil and gas shale plays (see “Long Train Running – Bringing Drilling Supplies to the Shale-Rail Revolution”). A great deal of those logistics – once the well is drilled – are to do with providing fracking materials to the well site. The largest bulk item that has to be carried long distances to get to the drill site is frac sand – also known as proppant. The fracking process involves high pressure stimulation using water and sand to create small cracks in tight shale rock that allow oil and natural gas trapped in the formation to flow more easily into the well and up to the surface (see Tales of the Tight Sands Laterals). When the pressure is released, the fractures attempt to close but the sand contained in the fluid keeps them open, making a ready path for oil and gas to flow into the well. Fracking is carried out in multiple stages along the horizontal laterals once a well is drilled. A shale well can require as much as 10,000 MT of frac sand to complete.
Currently three types of proppants are used for hydraulic fracturing: frac sand, resin-coated silica sand, and ceramic proppants made from sintered kaolin or bauxite. The most popular variety is frac sand (made from processed quartz silica) because of its general availability and low price. Raw frac sand must be processed at the mine or at a secondary facility before it can be used as a proppant. The raw sand is washed, dried and sorted to remove unwanted material (see picture of processed quartz silica below). Some specialized processing plants also apply a resin coating to the sand to improve its flow qualities and crush strength (more on these qualities in a minute). Resin coated frac sand and ceramic proppants are more expensive than regular frac sand and are only used when absolutely needed.
Source: Minnesota Department of Environmental Quality, Report on Silica Sand, March 2013
Frac sand isn't just any old sand that you can pick up at your local beach. Drilling service companies require frac sand to meet rigorous industry standards. The American Petroleum Institute (API) sets specifications in the US and the current standard is API RP 56. According to that standard frac sand has to be >99% quartz or silica and the granules should conform to one of 4 “mesh” sizes - the most common being 20/40. Mesh size refers to the number of equal size openings in a 1-inch square of mesh. So a 10-mesh size has 10 large openings and a 100 mesh has 100 smaller holes. A 20/40 mesh size therefore includes granules that will fit through a 20 mesh but not a 40 mesh. The API also recommends sphericity and roundness of 0.6 or larger because more rounded grains offer higher permeability to facilitate hydrocarbon passage through the formation. It is also critical that frac sand be crush resistant to a given range of pressure starting at 4000 pounds per square inch (psi) and increasing to over 10,000 psi for deeper wells. Resin coated frac sand and ceramics are used in deeper wells requiring higher crush resistance – accounting for about 15% and 10% of demand by volume respectively – the other 75% being frac sand. Reservoir engineers determine the particular grade of frac sand needed for each well, based on rock formation and pressures.
The tight specifications – especially in relation to roundness and sphericity – make many deposits unsuitable for frac sand. Although Texas and Illinois top the list of US industrial sand producers, thanks to their large processing operations, most of the sand for fracking comes from the Midwest, primarily Wisconsin and Minnesota. Wisconsin in particular has experienced a “sand rush” mining boom because suitable sand deposits are found near to the surface and close to existing railroad infrastructure – the State supplies 75% of US frac sand. There are also frac sand mines in central Texas.
An estimated 30-40 million metric tons of frac sand will be mined this year (2013). That's a double-digit increase from last year and the year before that (source: National Geographic). Demand for proppant continues to increase at a rate greater than rig count because of improved drilling rig productivity, resulting in more wells drilled per rig per year, increases in the length of the typical horizontal wellbore, increases in the number of fracture stages per foot in the typical completed horizontal wellbore, and increases in the volume of proppant used per fracturing stage.
The cost of raw frac sand mining and processing is low compared to the cost of transport to the wellhead. As a result the leading players in the frac sand industry are now paying close attention to delivery logistics in their operations. Rail is the only economic option to deliver frac sand over long distances – no need to worry about pipelines in this business. So although there are plenty of Wisconsin sand mines - the ones that count have rail loading facilities onsite. Using trucks to haul frac sand from the mine to a rail-loading terminal is expensive. Just as we have seen in the growing crude-by-rail business, efficiency means using unit trains of 100 cars or more instead of manifest shipments of a few cars at a time. Each rail car in a unit train carries 100 MT – meaning a unit train carries 10,000 MT. Loading unit trains at the mine means that special delivery terminals are required to transload sand at the destination. The most efficient of these terminals include silo storage capacity for different grades of sand. Trucks drive through these silos for rapid loading from above.
Success in the frac sand business therefore now requires, sand mines, rail access, shipping agreements with the railroads and distribution terminals in the major shale drilling regions. The largest player in the US market is Unimin Corporation a privately held company that is part of the Sibelco Group that operates more than 250 mines and plants in 41 countries on five continents. Unimin produces and distributes frac sand and resin coated proppants throughout the US with 22 rail delivery terminals in Texas, Oklahoma, Colorado, Utah, Pennsylvania, Ohio, West Virginia and Alberta. The company has a long-term agreement with Canadian Pacific railroad to deliver its frac sand. Unimin recently opened a new rail distribution terminal in Lubbock, TX – serving the Permian Basin. The second largest frac sand company in the US is the publically traded US Silica Inc. that supplied about 0.7 million MT of frac sand to the US market in Q2 2012. US Silica also has a distribution network of transload rail terminals in the major shale basins. The latest US Silica terminal opened south of San Antonio in May 2013 to serve the Eagle Ford. The Von Ormy terminal is a joint development with BNSF railroad (see picture below). US Silica invested $8-10 million for the transloading equipment and silos that can store 15,000 MT and distribute 3 sizes of frac sand. BNSF invested $40 million in the land and a 2 mile rail loop to handle unit trains. BNSF will bring in 100-car trains carrying 10,000 MT of sand every two days for unloading at the site. The facility has four loading docks for trucks to take the sand to drilling sites. Up to 80 trucks a day can be accommodated and trucks can be loaded in six to eight minutes (Source: US Silica).
Source: US Silica Investor Day 2013 presentation
The majority of the frac sand produced by companies like Unimin and US Silica is delivered under long term contracts to one of the main oil service companies that perform fraccing services at the wellhead (Weatherford, Schlumberger, Baker Hughes, Halliburton, and FTS International). But one oil and gas producer at least has developed a proprietary frac sand supply. That company is EOG Resources – already a pioneer in the crude-by-rail business in North Dakota. EOG owns sand mines – they bought their first in 2008 in Texas and have purchased several mines in Wisconsin as well. EOG’s portfolio includes significant oil production assets in North Dakota and the Eagle Ford in South Texas. The company has built its own sand processing plant in Chippewa Falls, WS that delivers sand to distribution terminals close to drilling sites. For example, the company shipped 70 unit trains with 100 cars each of sand to its Refugio, TX storage and distribution terminal in the Eagle Ford during 2012. EOG has also installed a resin coating plant at Refugio to coat frac sand for added crush resistance. Although numbers are hard to come by, it is clear from EOG’s continued investment, that the company has significantly reduced its frac sand costs by becoming its own supplier.
The mining, processing and delivery of frac sand proppant to US shale gas and oil plays continues to be a booming business. Larger industrial players that have developed efficient production and delivery infrastructure to reduce transportation costs now dominate. The railroads are also partnering with the large players and investing in terminal infrastructure. Oil and gas producers should benefit from the increased competition that will lower their well completion costs. Companies like EOG Resources - who always seem to be thinking outside the box - will continue to benefit from a smart investment in their own supply chain.