"Demand for Sand Takes Off Thanks to Fracking--Companies
Race to Build New Mines as Prices Rise"
Frackers are expected to use
nearly 95 billion pounds of sand this year. A sand mine in Garnavillo, Iowa.
Stephen Mally for The Wall Street Journal
Sand prices are rising and
companies are racing to build new mines in South Dakota and other locations as
demand intensifies for the silica crystals that energy companies use to frack
oil and gas wells.
Sand is a key ingredient in items from solar panels to
smartphones, but in recent years billions of pounds of it have been poured down
wells to help coax more fuel out of the ground. In hydraulic fracturing, sand is
mixed in a slurry of water and chemicals, then pumped down a hole to crack open
dense rocks so oil and gas can escape to the surface.
Frackers are
expected to use nearly 95 billion pounds of sand this year, up nearly 30% from
2013 and up 50% from forecasts made by energy-consulting firm PacWest Consulting
Partners a year ago.
It can take four million pounds of sand to frack a
single well, but several companies are experimenting with using more. Companies
like Pioneer Natural Resources Inc., PXD -5.32% which recently received a ruling
from the U.S. Commerce Department allowing it to export unrefined ultralight oil
produced from shale formations, are finding that the output of wells is up to
30% higher when they're blasted with more sand. About a fifth of onshore wells
are now being fracked with extra sand, but the technique could expand to 80% of
all shale wells, according to energy analysts at RBC Capital
Markets.
That's great news for sand miners, but it's heating up
competition between energy buyers and other big industrial users.
U.S.
Silica Holdings Inc., SLCA -1.17% one of the largest industrial-sand companies,
has already raised prices for some frack sand, and it said recently that it
would also start charging 10% to 20% more for the finer grades of sand typically
used to make glass and various industrial products as it diverts some of this
supply to oil producers. The best sand is dubbed Northern White because the
round crystal, which can withstand serious heat and pressure underground, is
found in states like Wisconsin and Minnesota. The company expects demand for
sand will be at least 25% higher than supply for the rest of this
year.
"Northern White is in short supply, so people are using basically
whatever they can get their hands on to complete their wells," said Michael
Lawson, a spokesman for U.S. Silica.
Oil companies' insatiable appetite
has even generated renewed interest in second-tier deposits of lower-quality
brown sand in places like Texas and Arkansas.
Preferred Sands, which
announced last month it has received backing from private-equity firm KKR KKR
-0.81% & Co., plans to increase sand production by next summer with new and
expanded mines in places like Wisconsin and Minnesota, said Chief Executive
Michael O'Neill, though he added that it's becoming tough to find available
railcars to move the sand from mines to oil fields.
Jamie Weinstein,
co-head of KKR's special solutions team, said the trend toward using more sand
per well will mean sand producers will keep growing. The firm is extending $680
million in debt and equity to Preferred Sands to restructure the company's
balance sheet.
"We believe the incremental demand for sand over time is
only going to increase," Mr. Weinstein said.
Frack-sand producers are hot
stocks. Emerge Energy Services EMES +0.48% LP was last year's most successful
public offering, according to Dealogic, with a share price that has shot up 558%
since its debut. Investors want more. They may get it from private-equity-backed
Fairmount Minerals, a major U.S. sand miner, which has enlisted bankers to
explore an IPO, according to people familiar with the matter.
Laura
Fulton, chief financial officer of Hi-Crush Partners L.P., is predicting another
5%-to-10% increase in sand prices before year's end. Hi-Crush recently signed
seven new long-term contracts at higher prices—and for greater volumes—with
oil-field service firms including Halliburton Co. HAL -3.22% , which help
exploration outfits pump more oil and gas.
"There's really no limit on
the demand side," she said.
But there are growing restraints on sand
supplies. By the end of this year, new and expanded mines capable of producing
10 million pounds of sand annually will be up and running, but future projects
could face delays, Cowen & Co. analyst Marc Bianchi said.
Dozens of
new sand-mine permits were issued over the last three to four years in places
like Wisconsin, Minnesota and Illinois, triggering a massive public backlash
about the truck traffic, dust and breathing problems these operations can
create. Now many state and county-level health officials are trying to slow the
sector's expansion.
A few companies are skirting those efforts by teaming
up with towns hungry for jobs and tax dollars, as well as more regulatory
control. In Wisconsin, the cities of Independence and White Hall last year
annexed land in Trempealeau County so that Hi-Crush could move ahead with its
new mine. Those cities' zoning rules governing sand operations supersede the
county's regulations, including its temporary ban on permits, so Hi- Crush's
site can go into service later this year. Local officials in Minnesota and
Illinois are taking similar steps.
As the good sand becomes increasingly
difficult to find, one company is turning next door to South Dakota. Pat Galvin
is chief executive of South Dakota Proppants LLC, which aims to resurrect a
1950s-era mine on federal lands about 40 miles from Mount Rushmore. Located in
the Black Hills National Forest, the abandoned mine is filled with the same type
of high-quality sand frackers have come to count on, and it could generate up to
one million tons annually, he said.
The company is getting ready to pull
together an environmental-impact statement to present to the federal government,
which controls the site. But oil companies are already asking about supply
contracts, Mr. Galvin said. The proximity to fracking operations in North
Dakota's Bakken formation and Colorado's Niobrara Shale could trim delivery
costs by as much as $50 a ton, he said.
The South Dakota site has another
key advantage: no neighbors. And shipments can be routed to avoid tourists
bustling around Mount Rushmore.
"We're in the middle of nowhere compared
to Wisconsin, where you've got farming and everything else going on," Mr. Galvin
said.
—Ryan Dezember contributed to this article.
Write to Alison
Sider at alison.sider@wsj.com
