Frac sand 101: The grains explained

VANCOUVER — Horizontal drilling and fracturing technology have unlocked vast reservoirs of oil and gas from shale basins across North America. The continent hosts 67 billion barrels of technically recoverable shale oil and 1,238 trillion cubic feet of technically recoverable shale gas, an immense resource that has reversed a decades-long decline in U.S. hydrocarbon output and spurred dreams of a B.C. funded by natural gas exports.

However, getting the oil and gas out of these tight formations takes some doing — as well as supplies and equipment. With shale drillers competing for limited resources, one particular fracking commodity is in demand across the continent — from the Montney basin in north-central B.C. and Alberta to the Marcellus basin in Pennsylvania and Virginia, to the Eagle Ford basin in Texas.

That commmodity is sand. Frac sand, to be specific.

Frac is short for fracture, which is what happens when fluids are forced down a well and into a hydrocarbon host rock. The formation being fractured developed over millennia as pressure and heat turned organic matter into a lattice of oil, gas and shale rocks packed together so tightly as to be impermeable. The fractures give the trapped hydrocarbons a way to escape their high-pressure host.

But all that pressure means the fractures would close up without something holding them open. Enter frac sand.

Also known as proppant, frac sand is part of the mixture shot down a well to fracture the hydrocarbon host formation. The high-pressure fluids do the work of fracturing but the sand takes over from there, wedging itself into the cracks and holding them open.

Imagine a mesh-capped tube full of marbles. Water poured into the top of the tube would flow freely around the marbles and out the other end. Similarly, with sand holding the fractures open, the previously trapped oil and gas can flow freely along the fractures and up and out the well.

But not just any sand will do. Good proppant particles need to be strong, nearly spherical, able to endure high temperatures and of consistent size. Strong marbles or ball bearings would classify as high-quality proppants: they would hold up under the extreme conditions within a frac and their consistent size and shape would create lots space for fluids to flow. Lower-quality proppants, by contrast, are more like trail mix: a range of shapes and sizes, many of which break apart or squish under pressure and fill up the fracture, restricting fluid flow.

There are ceramic proppants manufactured from aluminum-containing clays that offer all the desired characteristics. However, they are costly. Much less expensive is sand — if you can find the right kind.

“What you’re looking for is sand that is, as we call it, highly conductive,” said David Browne, a petroleum engineer and vice-president of communication and marketing with Trican Well Service (TSX: TCW; US-OTC: TOLWF). “It has to have large sand grains, the grains have to be strong and as round as possible, and be sieved to all the same size. If not, the small sand grains plug off the pore spaces between the big sand grains.”

Browne points out that it costs the same amount to mine a tonne of sand whether the grains are frac-worthy or not. That is why a budding producer has to assess its sand deposit closely before investing in development.

“If you only have 10% large sand grains and you’re throwing out 90%, it costs too much to move that amount of sand to get that little amount of product,” Browne said. “Similarly, some deposits don’t have any sand that’s strong enough.”

Browne says that is the case for many of the sand deposits in B.C. and Alberta — the grains are either too weak, too small or both. In fact, only a few places host sand deposits of the right shape and strength. In North America, one such place is the U.S. Midwest, which produces sand known as “Northern White.”

“Those sand deposits are made from quartz that eroded off the Canadian Shield and created an ancient beach,” Browne said. “The granite from the shield, being weaker, eroded away and became shale, whereas the sandy beach is a quartz deposit. Plus it’s really strong quartz — silica can take many forms, and this kind has strong crystals.”

Manitoba also has some of these ancient beach-type sand deposits, but many are underneath lakes. Similar sand deposits also exist in southern Alberta and Saskatchewan, but often they are too deep to be mined economically.

“It has to be really close to surface to mine it,” Browne says. “It’s not gold — it’s sand.”

Northern White from the Midwest is convenient for many U.S. shale basins like Eagle Ford and Permian. By contrast, the Midwest is a long way from the shale fields of northern B.C. and Alberta. Thankfully there are rail connections between the areas, which means Northern White can be shipped where it is needed without too great a cost.

In fact, Browne said several companies have tried to mine lower-quality sand from central Alberta, hoping lower transportation costs would let them undercut Northern White pricing. However, it was actually harder to move sand to the northern shale basins from the Lloydminster area than from the U.S. Midwest because the rail routings are not as direct.

Adding to the problem, the Alberta sands commanded a lower price because there were of much lower quality, but they cost almost the same amount to produce. Most of those operations have since shut down.

From where Browne sits, as a frac sand consumer, he sees a balanced market.

“Supply is keeping pace with demand, and that’s just considering high-quality sand,” he said. “There are lower-quality deposits that kick in when people get desperate, but that hasn’t happened since perhaps 2007.”

That doesn’t mean the market has been quiet since 2007. Rather, it means the excess demand catalyzed new sand operations in the U.S. Midwest that have kept the market mostly balanced since, even through a growth spurt.

In 2003 global demand for frac sand totalled 6 billion lb. Last year, a decade later, demand hit 82 billion lb.

That kind of growth attracts attention, and some investors who hopped aboard the frac sand train have already done well. Emerge Energy Services LP (NYSE: EMES), a limited partnership that produces frac sand and manages some fuel processing and distribution, debuted on the New York Stock Exchange just over a year ago at US$17. At press time EMES shares were worth US$106.

Two other sand miners — U.S. Silica Holdings (NYSE: SLCA) and Hi-Crush Partners LP (NYSE: HCLP) — have also seen their share prices more than double in the last year.

While there is no guarantee frac sand producers will generate those kinds of returns, it seems like frac sand demand will keep climbing. In the next two years Royal Bank expects demand to increase another 30%. Analyst Marc Bianchi of Cowen and Co. is more specific: he predicts frac sand demand in the U.S. will grow from 36.2 million tonnes in 2014 to 47.5 million tonnes in 2015, and 57.9 million tonnes in 2016.

There’s a triple-whammy effect driving demand upwards. First is the number of wells. The number of shale gas wells being drilled in North America has stayed even or declined in recent years, in response to a natural gas price that plummeted from US$12 per mmBTU in mid-2208 to below US$2 per mmBTU in early 2012. But that relati
onship cycles regularly.

“If the price of natural gas goes up, demand for sand will go up,” Browne said. “But then there will be a bunch more wells drilled and the price of gas will go back down again. Sand producers find it frustrating, because we’re screaming at them to get us more supply and as soon as they do we stop drilling because natural gas prices go down.”

Despite a stalled shale gas well count, North America’s shale oil producers have been picking up the slack and kept the overall frac well count climbing, which boosts baseline sand demand.

The second driver behind sand demand is that drillers keep extending the horizontal part of the well that tracks along the target shale formation. These longer laterals can be divided into more stages, which are the segments of the well that are fracked independently. And each frac requires sand.

“In the last five years there’s been just a total revolution in the oil and gas industry with regards to drilling,” publisher of the Daily Oil Bulletin Stephen Marsters said. “More and more wells are being drilled, the wells are getting longer — getting to be 1.5 to 2 miles long — and when there used to be just a few stages per well now there are 10, 20, 30, as many as 40 fracs.”

Third, drillers are experimenting with using more proppant in their frac fluid mixtures. Several companies have been vocal about their success in enhancing flow rates by using 15–30% more proppant per stage.

“With strong demand growth over the next few years . . . we see the frac sand market tightening through the beginning of 2015 and remaining firm through the end of 2016,” Bianchi wrote. “We expect prices for frac sand will steadily increase through the middle of 2015, with the potential for material increases if planned capacity is delayed.”

And planned capacity might be delayed, because anyone with an eye to starting up a frac sands mine to feed this growing market has several barriers to overcome.

The first is finding a good deposit. The sand has to be strong, with big round grains. Such deposits are not common.

The second barrier is transportation. Is there a rail line nearby? If so, is there available covered railcar capacity? If rail is not available, transportation costs will likely be too high for the mine to be economic. According to the Rocky Mountain Institute, a gallon of fuel will move sand 455 ton-miles by rail but only 105 ton-miles by truck.

The third barrier is other costs. Is the property subject to royalties? Is the sand so consolidated that it needs crushing? How thick is the overburden and how much will it cost to strip it? Cowen’s Bianchi estimates that cash-production costs per tonne can range from the low double digits to above $30. Operations at the upper end of that range have a harder time making money.

The fourth and final barrier is permitting. Do local stakeholders support the idea of a mine in their backyard? Will the population in the wider area accept the increased truck traffic? According to Bianchi, in 2011 it took only a year to permit a new frac sands mine, but today it takes more than two years because of local activism.

In fact, of the 10.3 million tonnes of capacity expected to come online this year, as much as 2 million tonnes is at risk due to permitting questions — a supply risk factor that Bianchi says could lead to materially higher sand prices.

“Our extensive supply-demand analysis of the proppant industry reinforces and extends our bullish view of the frac sand market,” Bianchi wrote. “We see a tight market supporting higher frac sand prices with the potential for material increases, should new supply encounter delays.”