Saturday, August 9, 2014

Wall Street Journal article: "Demand for Sand Takes Off Thanks to Fracking--Companies Race to Build New Mines as Prices Rise"

"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