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Sand has shown its grit amid the oil downturn and looks to be holding its price despite the drop in oilfield activity.
Lower oil prices have taken a toll on drilling, but high demand for sand as a proppant has kept it afloat. In February 2015, the U.S. rig count was down by 335 rigs or nearly 20% to 1,296, according to Baker Hughes Inc. (NYSE: BHI).
Sand has been increasingly used by E&Ps for hydraulic fracturing to produce higher recovery rates. Despite the shrinking number of wells, volumes of frack sand have leveled out, not declined, due to the increased intensity of sand per well.
In 2014, prior to the drilling slowdown, the U.S. consumed 72.3 million tons of sand, a 22% increase from 2013. About 72% of the U.S. tonnage was used for hydraulic fracturing, well-packing and cementing.
Kevin Shuba, the CEO of OmniTRAX Inc., a short line railroad that owns the Illinois Railway, said March 10 that sand suppliers view the proppant market as likely to be flat in 2015, according to a report by Baird Equity Research.
Rail is a key component of the sand industry, moving product from heavy producing states such as Wisconsin and Illinois.
U.S. Silica Holdings (NYSE: SLCA) and FMSA Holdings Inc. (NYSE: FMSA) benefit from having plants near the Illinois Railway, Baird’s report said. Silica's Ottawa, Ill., plant has an annual production of 2.2 million tons of silica and FMSA has a large mining and processing plant in Wedron, Ill.
Other sand companies see little decline in the market.
Emerge Energy Services LP (NYSE: EMES) and Hi-Crush Partners LP (NYSE: HCLP) said at a conference last week that the sand market could be down just 5% because greater sand intensity in wells has offset the decline in drilling activity, Baird said.
Alternative materials, such as sintered bauxite and kaolin-based ceramic, can be used as proppants, according to the U.S. Geological Survey (USGS). However, they can be more expensive.
The USGS said strong demand for sand has led to production capacity upgrades, ongoing permitting and opening of new mines. New and more efficient hydraulic fracturing techniques, which require more silica sand use per well, will further increase demand for hydraulic fracturing sand.
To some extent, sand is displacing ceramics. Baird spoke with a private importer of Chinese proppant who said customers were switching from ceramics to sand.
On March 10, Carbo Ceramics Inc. (NYSE: CRR) said it would mothball its proppant manufacturing facility in McIntyre, Ga.
The company’s McIntyre plant has an annual production capacity of 275 million pounds, or about 13.8% of Carbo’s total capacity. Carbo has previously said it may close its plant in China.
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