2014 Is The Year Of Sand In US Shale

Plays [Analysis & Slides]

During the past several years, massive step changes have occurred in shale development
methods. I mean truly remarkable, once-in-a-lifetime type changes. These advances are
now unlocking extraordinarily difficult-to-access O&G resources at a pace unimaginable
only five years ago.
The three biggest advances became apparent and accelerated during back-to-back ~12month adoption phases:

2012 was the year of drilling efficiency gains. The spread of fast moving, highly
capable new gen land rigs started to cut average drilling times per well significantly.
We heard alot about the "bifurcation between well count and rig count" in 2012.

2013 was the year of pad drilling. Operators embraced the pad concept en masse
and well counts continued to diverge from rig counts.

2014 is looking like the year of more frac sand. As a result of downhole intensity
increases, more frac sand is being pumped per well. Frac stage spacing is tightening
and sand loading per stage is rising as operators seek to maximize reservoir contact.

Surface advances like drilling efficiency and pad drilling are still trending and very
important. But the real incremental gains in shale are happening sub-surface this year.
The independent E&Ps that have led the shale charge are now experimenting with ever
greater downhole intensity in all unconventional basin across the Lower 48. If 2012 and
2013 were about more finesse at the surface, 2014 is surely about more brute force within
the tight formations themselves.
To put it bluntly, the industry is taking a sledge hammer to unconventional resources this
year. Oil service companies are confirming that some massive fracs are taking place - think
single wells completed with 80 stages and 20-30 million pounds of sand. And the data
shows that bigger fracs are outperforming.
Well IPs, NPVs, ROIs, and EUR estimates are all moving up as a result of downhole
intensity increases. Oil service firms are evaluating their game plans in order to keep up and
stay on the cutting edge of this fast-moving trend.
Frac Sand Mining Facility

image credit: Hi-Crush Partners

In this post, we explore the impact more sand is having in shale, meet the sand miners, look
at logistics, and discuss the trends and outlook in this now essential link in the oilfield value
chain. We also include a short proppant primer for those seeking a bit more background on
what frac sand is all about.
We've also complied a slideshow of sand discussion points from industry leaders. These
quotes are must-reads for anyone working with onshore unconventional development. In
the series of quotes, you'll hear how rapidly things are changing. From downhole intensity's
impact on oil service, to white sand replacing ceramic proppant, to frac stage spacing
changes, we've documented what industry authorities have to say about sand.
Click to go straight to shale bosses talking sand, or scroll down for in-depth sand
analysis >>

How Much Sand?

When it comes the consumables used to complete shale wells, sand volume is second only
to water.
To put frac sand use in context, we made some generalized assumptions about sand weight
and size and concluded that a well fraced with 5 million pounds of sand sees about one
trillion grains of sand go downhole.
To put this in perspective, consider an average sized children's backyard sandbox. One
trillion grains (or one average well's use) is equivalent to 10,000 backyard sandboxes.
That's enough sand to fill up 25 rail cars and 100 tractor trailers. And today's biggest shale
wells are using 4 times that muchit's no wonder Halliburton is building sandcastles!
Halliburton's sandcastles are vertical frac storage solutions designed to conserve

precious well-site space as sand volume needs grow

Not too long ago, 5 million pounds of sand might have been a lot for a well. But these days
we are increasingly hearing about 15 million, 20 million, and even 30 million pounds of
sand being used in some individual wells. Sand generally comprises anywhere from 5-20%
of the frac slurry pumped downhole. And slickwater fracs allow greater percentages of sand
to be blended in the mix by including friction reducers, which also enable higher speedpumping.
The formula for finding total proppant consumption is simple: Total Demand = Stages
Frac'ed Per Well X Proppant Per Stage X Wells Completed. But estimating these variables
is complicated, and quantifying total sand use is not an exact science - estimates vary. Our
industry sources suggest that annual NAM proppant consumption approaches 40 million
tons, which is up from under 10 million tons only five years ago. While some may differ on

volume estimates, most will agree that consumption has been growing at a compound
annual growth rate of around 30% per year since the early-2000s. This remarkable growth
is correlated with the rise of horizontal drilling.
Proppant Primer

What is proppant? Proppant is mined and processed sand or manufactured artificial sand
that is blended with frac fluid at the well-site to form a "slurry." Slurry is pumped downhole
in the hydraulic fracturing process at high pressures, fracturing rock downhole. The
proppant fills these cracks, "propping" them open. Once the pumping stops, the excess
slurry is removed and the proppants stay downhole, forming channels in otherwise
impermeable rock.
Why is proppant used? Fracture stimulation is key to unconventional development.
Unconventional development literally means producing oil and gas from source rock,
which is by nature highly impermeable. Without fracturing, it does not produce
hyrdrocarbon. And without proppant, fracturing is pointless as the channels, or fractures,
created in the pumping process would close up after the pressure was removed without
proppant to hold them open. The products of proppant (and fracing) are a) conductivity the flow capacity created to allow fluid to move through the fracture, and b) reservoir
contact - the fractures spread the well's access to bigger areas of the formation.
Conductivity is correlated with proppant quality while reservoir contact is correlated with
proppant volume. Proppant has been used in stimulation practice for many years, but until
shale, its use was not as widespread and nor as critical to production. Rapidly rising sand
consumption is primarily a North American shale phenomena.
What are the different types of proppant? Raw sand is the most often used proppant
type, accounting for 80-90% of global proppant volume pumped, and it is the cheapest.
Northern white is the highest quality raw sand followed by southern white and brady /
brown sand, which is lower quality. Resin coated sand (RCS) is basically raw sand treated
with a resin coating to enhance its effectiveness. RCS is more expensive and accounts for
5-10% of volume pumped. Ceramic is the premium proppant, and is generally used in
higher pressure formations. While these different proppant types serve the same purpose,
they are very different businesses - from supply, to demand, to price, to use... trends vary
widely.
image credit: ceramic-proppant.com

Where does proppant come from? Sand is mined, processed, and dried before being
shipped to the well site. Most sand mines in the US are located in the upper midwestern
states, and rail cars and trucks carry sand into shale plays. Sand deposits are prevalent, but
very few deposits have the characteristics needed to make good proppant. And permitting

new sand mines can be a difficult and lengthy process. Ceramic proppant is manufactured
in facilities around the world from clay.
image credit: U.S. Silica

How is proppant quality determined? Proppant quality is synonymous with

"conductivity." Conductivity is a function of strength, uniformity in size and shape, and
thermal stamina. Strength, a key quality metric, is measured in a crush test where load is
increasingly applied to proppant and the amount of fines (ie crushed material) is assessed
for pressure tolerance.
What about mesh sizes? Mesh size is a granular categorization measure. It refers to the
size if each grain as tested by sifting through progressively tighter screens. Mesh is quoted
as a range of size with two numbers. So 40/70 sand means the proppant will pass through a
40 mesh screen, but not a 70 mesh screen. Common proppant types include 20/40, 30/50,
16/30, 40/70, and 100 mesh (which is becoming more popular). Oil wells tend to require
coarser grades, and nat gas wells perform better with fine grades, although fines are being
increasingly applied in oil plays these days.
What proppant is used where? Here is what a typical well might look like across various
well-known unconventional plays:

New Industry Theory: More Sand Means Better Wells

After aggressive gains in surface efficiencies the past few years, the industry has increased
its experimental focus downhole in 2014. This is to be expected, as the industry now has
alot more experience (and several years of well data) in the major shale plays. Science has
progressed, and we understand shale formations materially better than we did just 2-3 years
ago. When you think about it, prolific oil shale drilling is really only about six years old,
and well design is getting better every year.
When it comes to low-permeability wells, there are two big downhole "levers" that E&P
companies can pull to impact well performance. They can try to increase reservoir contact
area, and they can try to increase frac conductivity. Pulling the reservoir contact lever
generally means more sand. Pulling the frac conductivity lever generally means better sand.
These days, E&Ps are pulling both levers. However, increasing reservoir contact seems to
be yielding the best results and is becoming the preferred lever.

In fact, as you'll see in the accompanying slideshow, some operators are actually changing
their game plan entirely to focus on fracs that maximize stimulated rock volume rather than
trying to improve conductivity. In other words, they are actually low-grading their proppant
mix (dropping ceramic) and instead increasing their loadings of raw sand. Not only is this
cheaper, but it is also driving well production gains for some E&Ps. The long term effects
of this practice on oil recovery are not yet fully understood.
SM Energy Is Improving Well Economics By Simply Dropping Ceramic and
Increasing Sand Loadings
source: SM Energy

An industry-wide commitment shift to reservoir contact seems unlikely to become the norm
at this point - some E&Ps will continue to cling to conductivity above all else. But we do
expect almost all shale E&Ps to experiment with increasing reservoir contact variables like
lateral length, tighter spacing, and more sand/stage for the rest of the year and into 2015.
They may still trail ceramics into their proppant mix, but they will surely increase sand
volume.
The biggest increases could be seen in the Permian, where operators are still fully in
experimentation mode. But in all unconventional plays, high-intensity completions are
going to become a lot more prevalent. And higher sand quantities just might prove to be the
next step in manufacturing better unconventional wells.

Enter Sandman: Forget Gold, Mine Silica

For hundreds of years, silica (sand) mining was a sleepy industry plodding ahead slowly
alongside industrial growth. Silica miners served glass makers, builders, foundries,
chemical plants, and other industrial purposes with slowly evolving demand trends. That
has all changed, and demand for sand is increasing at the fastest rate in mining history.
This chart shows the rapid pace of change in the end markets served by US Silica (SLCA),
a leading sand miner and distributor with over a century of operating history in the mining
trade. Frac sand sales are skyrocketing while industrial sales have stayed roughly the same.
In 2008, frac sand sales were about 16% of U.S. silica's business. Today, frac sand
comprises about 75% of U.S. Silica's business.

Frac sand demand has grown at an average rate of about 30% per year for over 10 years
now. Although it only goes for about 10 cents per pound, the tremendous volume demand
growth from shale has made mining frac sand an extremely lucrative trade.

Wisconsin Frac Sand Mine

image credit: http://winneshiekcountyprotectors.com/

Sand is so in demand that some E&P companies are now requiring that their service
providers (think Halliburton, Schlumberger, and Baker Hughes) must have term contracts
ensuring adequate sand access before the operators will allow these contractors to bid on
new completions work.
This is a requirement that is new in 2014. And it is leading to record contract signings for
the sand miners. SLCA recently said that their average contract portfolio expiration date is
now out in 2Q18. The demand for SLCA's sand is so strong that one service company
recently paid them $100 mm up front to secure a long-term take-or-pay contractthe
$100mm payment will be applied to future sales.
Silica miners SLCA and Hi-Crush Partners (HCLP) each went public in 2012. And their
stock price performance since then says it all. On average, these two stocks are up 340%
over the past two years, dwarfing the 27% gain printed by the oil service and drilling stock
index. SLCA recently said they are sold out of all sand grades.

Mining frac sand seems easy enough. After all, sand is everywhere. But in reality, there are
a few giant barriers to entry.

First, not every sand deposit can be mined for frac use. Northern White sand with a
range of coarse to fine grains is in high demand. Most of these deposits are in the
midwestern states.

Second, you have to have transportation infrastructure, particularly access to rail

lines and rail cars. Sand has an extremely low value-per-pound ratio, and efficient
transportation to delivery points is critical - more on this later.

Third, you need distribution and sales outlets to industrial consumers as well. Not
all sand mined can be sold to frac customers, and margins will suffer without
distribution options for non-frac raw sand.

Fourth, you have to go through a arduous permitting process on new mines, and
building them is a capital intensive effort.

That said, smaller frac sand miners have popped up to try and capitalize on overall market
growth. According to a study conducted in 2012 by the US Geological Survey, there were
87 producers of commercial silica with a combined 159 active operations across 33 states

within the US. Since the survey was conducted, more producers have joined the game, and
more mines have opened. Both SLCA and HCLP are bringing additional capacity online.
Even with the new capacity, prices are still moving higher. Because proppant is a relatively
small portion of unconventional well cost (we estimate about 5-10% of cost if sand is used),
sand cost increases may be less scrutinized than other well cost components. If there is a
shortage, buyers will be more willing to pay up to secure what they need as it is a relatively
small line item in their budget (see guar analog from a few years ago).
Hi-Crush Partners raised their sand prices 5-10% in March, and now they've done a second
round of pricing increases and believe they'll be able to increase prices again later this year
- probably a further 5-10% in the next round.

From Mine to Wellhead

Shale well construction has become a manufacturing operation. "Well factories" spend
several weeks at the well-site and then move on. Millions of tons of consumables are used
in each productionpipe, water, sand. Shale E&P has become the most logistically
complex manufacturing operation on earth.
Supply chain factors are critical to success like never before. And sand is one of the most
important and complicated elements in the supply chain. Millions of pounds of sand have to
show up at the right place at the right time or very expensive NPT will pile up.
Most frac sand mines are located in the midwestern states, particularly Wisconsin. With the
exception of the Bakken, most of this sand has to travel south. Sand is typically sold
directly to oil service contractors, who then charge a small markup and bill the cost to the
operators.
Sand Originating in Key Midwestern Producing States Like Wisconsin Travels Mostly
South
image credit: http://wisconsinwatch.org/

Rail is the primary transportation method for sand. As much as 95% of the journey is often
completed via rail. Increased sand shipments are competing for rail car space with
agriculture products and crude oil, which is increasingly being shipped by rail as pipelines
are overwhelmed by new production. US railways are increasingly congested - and on-time
sand delivery at the wellhead has been a real problem for the frac industry. This is a big
reason why operators are now requiring their service contractors to show proof of sand
access before bidding on new frac work.
Lead times on newbuild sand cars have become extended due to heightened demand and
currently stand at about 24 months from order to delivery. HCLP has 5,000 rail cars and is
adding another 1,500 rail cars over the course of the next year. But its not just how many

rail cars the sand miner operates, its also how efficiently they can operate them, how fast
cars are turned over, and how well planned routes and basin unloading points are.
Covered Hoppers Carry Sand - 24-Month Lead Time On New Orders

image

credit: http://wisconsinwatch.org/
Historically, most frac sand sales were made FOB (freight-on-board), which means the
buyer took responsibility for transportation, liability, and logistics at the seller's doorstep
(or in this case mine). The buyer's rail cars would pull up to the mine, the sand miner would
load the cars, and the transaction would conclude. HCLP still completes about 2/3rds of its
sales this way.
How Sand Gets From Mine To Well

source: Hi-Crush Partners

The miners are increasingly becoming transportation companies, operating rail cars and
installing transload facilities in the key shale plays. Customers are afforded the convenience
of simply pulling up their trucks to fill up on sand at the miner's in-basin receiving
terminals, which receive and temporarily store rail shipments. This convenience comes at a
premium. Transportation costs can total 30-40% of the total cost of Northern White frac
sand, and transport is a high margin service.
Northern White Frac Sand Transload Terminal

image credit: U.S. Silica

What's Next For Frac Sand?

We expect frac sand demand will continue to grow significantly over the next few years as
more and more operators conclude that increasing downhole intensity means more
profitable wells.
This should lead to additional sand pricing increases into 2015. The large sand miners all
have new mine sites as well as transportation investments planned. There will likely be
occasional regional shortages to deal with, particularly for the most effective grades. But
over the next few years, frac sand capacity will be built out significantly.
Our view is that sand will likely take proppant market share from ceramic and RCS over
the next few years as additional operators decide to focus on reservoir contact in tight oil
formations rather than on reservoir conductivity. A shift back into dry gas shales would
change this outlook.

Finally, frac sand industry consolidation in the medium-term seems highly likely. Service
companies are always trying to deal with fewer suppliers. But in the case of sand provision,
supplier consolidation is not just a matter of competitive advantage for the service
companies. More scale in the sand supply trade directly improves service and it improves
logistics. Scale means more effective rail car management and less congestion in the shale
plays themselves.
While the industry leaders have emerged, the frac sand market remains one of the most
fragmented in the entire oilfield value chain, and this is truly a business where size matters.
Stay tuned for M&A over the next 12-18 months.