High demand for frac sand

Have you noticed you’re paying a little extra at the gas pump lately?

At midsummer, the national average price of regular gasoline was $2.87 per gallon, according to AAA Gas Prices. That’s an increase of more than 60 cents per gallon from the same period in 2017, when the national average price of regular gasoline was $2.26 per gallon.

It’s no secret: As the price of foreign oil imports increases, so, too, does the price you pay to fill your vehicle.

That’s where the world of hydraulic fracturing – more commonly known as “fracking” – comes into play. With the cost of foreign oil imports steadily increasing, the domestic energy industry is further motivated to achieve oil independence, and even position the U.S. as a net exporter – not importer – of oil.

To achieve oil independence, an increase in domestic fracking is necessary. An increase in fracking activity, in turn, increases the demand for frac sand, a crush-resistant, rounded type of sand used in fracking fluid that has experienced a recent resurgence in the market.

“I think Americans are very fond of the idea of being independent from foreign oil, and this is how it’s going to happen,” says Bob Archibald, CEO of Q4 Impact, which provides management consulting and financial strategy services to the mining and minerals industries.

What’s driving demand?

The price of crude oil skyrocketed to as high as $161 per barrel at the beginning of the economic downturn in 2008, but it dropped to $50 per barrel by January 2009.

By May 2011, crude oil prices again escalated, exceeding $114 per barrel and driving demand for fracking and, in turn, frac sand. This spike in demand led to a multi-year period of robust activity in the industry.

“It’s profit-driven,” Archibald says. “Frac sand started out as a high-margin resource where you could make a higher margin per ton in that industry mineral than any other mineral. The profit margin got everybody’s attention from 2012-14.”

With foreign oil prices through the roof, domestic frac sand production doubled from 2010 to 2011 – 12 million tons to 24 million tons. Domestic frac sand production increased to 31 million tons in 2012 and surpassed 40 million tons in 2013.

As the U.S. economy slowly recovered, however, that $114-per-barrel figure from May 2011 was slashed in half by the end of 2014 to just over $57 per barrel. As the price of oil dropped, so, too, did the demand for frac sand.

“The last peak in demand for frac sand was 2014,” says Michael Lawson, vice president of investor relations and corporate communications at U.S. Silica, a producer of sand proppants and industrial minerals.

The lull in the frac sand industry remained steady through January 2016, when the price of oil shrunk to as low as $30 per barrel. Since then, however, the price of imported oil has steadily risen and is now approaching $70 per barrel as of June 2018.

Once again, as the price of crude oil has increased, so has the demand for frac sand.

“At present time, oil prices continue to rise, which is, of course, supporting the boom in hydraulic fracking,” says Eoin Heron, business development director at CDE, a manufacturer of frac sand processing equipment. “The North American market is incredibly strong in terms of growth.”

Fracking factors

Another key factor in the decline of frac sand demand after 2014 is the cost of transportation to get the product – which historically has been found in Wisconsin, Michigan and Illinois – to oil wells in Texas, Oklahoma and surrounding areas.

“The transportation cost is what put a lull in the bubble for a while,” says Mark Krause, managing director of North America at McLanahan Corp., a manufacturer of frac sand processing equipment. “Trying to get that barge from Wisconsin to Texas is expensive.”

For decades, the industry belief was that only the Midwestern states involved had the sand quality necessary for fracking. That school of thought changed only recently following a discovery of passable sand in Texas.

“What’s been happening the last year or so, new sand mines or sources have been discovered in the Permian Basin,” Lawson says. “There are wind-blown dunes that people thought were not suitable for hydraulic fracturing.”

That discovery, coupled with rising foreign oil prices, spurred the resurgence of frac sand demand and opened the floodgates for producers.

“Texas is just off the charts,” Krause says. “The frac sand world right now is just slammed trying to get their plants started. The cost to extract it is cheaper, and it’s much closer to where they need it. There’s decent, quality sand that’s much closer to the source.”

While the frac sand in Texas may not be of the same quality as that of Wisconsin, Michigan or Illinois, it’s more than sufficient and also lessens transportation costs significantly.

“Wisconsin could be considered the ‘home’ of frac sand, but in the last two years, Texas has undoubtedly been the area of focus in terms of investment,” Heron says. “There are many frac sand plants operational in Texas at present and more either in design or building stages, meaning the volumes of sand being produced will exponentially increase in the coming months.”

How much demand?

It’s clear the frac sand industry is booming once again, but exactly how much demand for product is there compared to the last boom? The numbers might surprise you.

“With oil prices hovering around $70 [per barrel], we’re on a run rate [of frac sand demand] around 110 million tons [this year],” Lawson says. “We expect to end the year around 120 million tons.”

While that number seems like a lot of sand – well more than double the amount of frac sand produced during the last peak in 2013 – Lawson isn’t alone in his projections.

“I think the demand will exceed 100 million tons this year,” says Archibald, referring specifically to the U.S. market.

The increased demand for frac sand isn’t just specific to the United States, either.

“If you look at what’s going on in Western Canada, you can almost see it starting to mirror what’s happening in West Texas,” Archibald says. “You’re going to see this mad rush of activity in Western Canada as well.”

Athabasca Minerals, a frac sand producer headquartered in Edmonton, Alberta, Canada, has seen firsthand the increase in frac sand demand.

“There has been an uptick in demand over the last few years, now that we’re out of the downturn,” says Anshul Vishal, vice president of business and project development at Athabasca Minerals. “A lot of the frac sand in the Canadian market still comes out of the [United] States. We estimate about 70 percent of [frac] sand was imported from the states.”

Athabasca Minerals, which expects to be in production in 2019, estimates total Canadian frac sand demand in 2017 to be 6.1 million tons, based on the ScotiaBank Frac-Book report, and only expects that number to increase in the coming years.

“We think there’s going to be a 40 percent increase in demand going from 2017 to 2019,” says Robert Beekhuizen, CEO of Athabasca Minerals.

The future of fracking

As manufacturers and producers alike scramble to meet increased demand for frac sand, Athabasca Minerals suggests there are three steps to bring a new operation into play: finding a good, quality deposit; locating washing and drying operations in close proximity; and planning the logistics of getting sand to the market.

“We’ve heard from various end users that they’re planning on increased activity,” Vishal says. “We are getting feedback in the market that would align [with that]. We’re excited for the next few years.”

Optimism for the near future is a common theme among both foreign and domestic manufacturers and producers.

“Demand has not shown signs of slowing,” Heron says. “We have noticed an increased focus on efficiency in terms of getting the sand from the mine to the drill well locations [while] also producing the highest quality output sand.”

Still, no matter the price of foreign oil imports, it’s unlikely domestic frac sand demand will continue to increase at its current rate forever. Lawson, for one, expects demand for frac sand to continue into the coming years, yet at a slower pace.

“We still see good growth in the market in the next two to three years, but after that, the crystal ball becomes a bit more cloudy,” Lawson says.

Archibald, who has more than 40 years of experience in industrial minerals, also forecasts a continued increase to eventually be followed by a bit of a dip. But he is adamant about the role of fracking in the U.S. eventually achieving oil independence.

“It’s going to continue to increase for at least two to three years, then it will probably level off and perhaps drop a little bit before another climb,” Archibald says. “Fracking is here to stay, I don’t think there’s any question about that.”