17/01/2020 Sustainability looms as sand suppliers divest non-core assets and rationalize capacity | IHS Markit

T Energy & Natural Resources

Sustainability looms as sand

suppliers divest non-core
assets and rationalize capacity

16 January 2020 Brandon Savisky

Oil prices had their ups and downs in 2019, but the sentiment
overall from a sub-segment of the upstream industry regarding
their outlook is remarkably steady, as evidenced by the results of
our recent proppant survey. Unfortunately, the assessment of
the proppant industry specifically was quite negative, and
indeed there were few indications at the end of 2019 that the
proppant industry's fortunes would change in 2020.
The current steadiness in oil prices is surprising, especially given
recent geo-political events, but surprisingly buoyant WTI levels
have not deterred operators from pursuing a strategy they
adopted all through 2019 which emphasized fiscal discipline
over production growth. In this paradigm, operators are only
spending "maintenance capex", with the aim of only maintaining
current production levels while improving operational
efficiencies for new wells. In short, operators have been told by
their investors and debt-holders that they must do more with
less to achieve positive free-cash flow with smaller budgets than
before. 
This cut in spending has of course affected the proppant market,
which continues to reel from persistently oversupplied
conditions. As a result, volatility in spot pricing is ongoing, owing
to continued inventory 'fire-sales' and distress-related cash

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grabs (IHS Markit estimates normalized average contract pricing

at approximately USD20/ton and USD29/ton for Northern White
Sand (NWS) and regional/in-basin sand, respectively).
In the long-term this is not sustainable, but the situation will not
change until there is substantially more blood-letting than there
already has been: some companies have not only divested as
much of their non-core assets as possible, but also exhausted as
many cost-cutting tactics as possible, and yet this has still not
been enough to keep them solvent.
Unfortunately, there will be no relief from projected demand. We
expect North American proppant demand to remain stable in the
near-term, anchored by the Permian Basin which commands a
leading share of 48% by mass. In a slightly more positive
development for suppliers, recent trends show gently increasing
laterals and shortening stage lengths, which has led to a rise in
stages per well and per stage proppant intensities, largely seen
in the Delaware, DJ Basin, Powder River, and Haynesville, as well
as the Williston Basin and the Eagle Ford to a slighter degree.

Figure 1: US land, average sand loading per stage in horizontal

wells (pounds)
Against the backdrop of this depressed market, and largely
because of it, the question for operators of whether to choose
high quality NWS or fit-for-purpose, cheaper regional sand is still
open, but will remain purely preferential until commodity pricing
allows for the minor difference in price to become wholly
irrelevant. Until then, regional sands are favored in the most
active basins, and recently there have even been regional sand
sources added in Utah and North Dakota.

IHS Markit approximates the total North American (NA) sand

supply to be heavily weighted at 68% regional and in-basin sand,
with over half of the NA supply mined in Texas. We estimate total 
available NA supply to be roughly 202 million short tons per year
(MMt/y), with nearly 75 MMt/y apportioned to Permian
regional/in-basin sand alone. In total, NA realized a marginal
decline of approximately 6%, and while this is a positive

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17/01/2020 Sustainability looms as sand suppliers divest non-core assets and rationalize capacity | IHS Markit

development for the market, more must be done before recovery

is in sight.

Figure 2: Segmented view of US sand production market by mass

The resin-coated sand (RCS) market continues to contract and
would require higher commodity pricing to see even the smallest
spike in demand. It remains to be seen if RCS producers can
make the economic case that their costs to increase volumes are
justified relative to their current RCS loads as well as utilizing
more inexpensive, presumably regional sand. Overall, RCS
remains a relevant component of completion design, but its
adoption is very dependent on higher commodity pricing.
Until oil prices reach a level deemed "safe" by operators to keep
exploring RCS further, producers will continue not only to push
the back-end, positive economic benefits, but also emphasize
RCS' technological benefits. Recently, the focus has been on
coating technology that not only offers the benefits of traditional
RCS but also reduces flowback and formation water.

Finally, the situation continues to be touch and go for the

Canadian market as regulatory challenges remain volatile and
uncertain. More changes from the Province of Alberta came on
October 31st, 2019, as the provincial government announced
curtailment relief by which which operators will be given a
special production allowance for additional crude production,
provided this crude is moved to market via incremental rail.

Learn more about our ProppantIQ services.

Brandon Savisky is a Principal Research Analyst at IHS Markit.

Posted 16 January 2020.


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