Frac sand miners capitalise on shale boom

Sand transport truck
Source: DollarPhotoClub

According to RBC Capital Markets, the U.S. demand for raw frac sand will climb 30 percent from 2013 to 2015 – Reuters reported today. The growing demand for fracking sand has created a boom in silica sand mining companies.

Exploring crude oil and gas from shale is only possible through a relatively new technology which involves horizontal drilling and multi-stage hydraulic fracturing (fracking). Unlike with conventional exploration where a vertical hole is drilled to extract pooled oil and gas, much like you would suck up your drink through a straw, shale exploration requires drilling a vertical well to reach the shale deposits, then turning the drill-bit to drill horizontally through the shale layer.

Once the horizontal well is drilled, the fracking stage begins. Large amounts of water, chemicals and sand are pumped at very high pressure into the well-bore to create cracks in the rock to release trapped hydrocarbons. Sand is used to ‘prop’ the fissures so that they don’t close before the extraction is completed.

To complete a single well, several million gallons of fracking fluid are required; a mixture that contains around 100 tons of silica sand. It is small wonder then, that sand suppliers have faired exceptionally well in recent years. As points out:

  • US Silica Holdings (slca:NYSE) was trading at $10 a share in mid 2012. Today it is $51.30
  • Hi-Crush Partners (hclp:NYSE) was trading at $15 a share in late 2012. Today it is $49.25
  • Emerge Energy Services (emes:NYSE) was trading at $17 a share in mid 2012. Today it is $102.00
  • US Silica IPO’d in 2011 at $200 million. Market cap today is $2.8 billion.
  • Fairmount Minerals Ltd, one of the largest providers of sand to the oil and gas industry, is considering a $1 billion initial public offering.

So what does the future hold for silica mining companies? The shale boom shows no signs of abating, meaning that the demand for sand proppants should remain strong. Many companies have found that increasing the amount of sand in the fracking fluids enhances the profitability of the wells.

Then there’s the ‘workover market’ of ageing shales that go through the process of ‘refracking’ to stimulate them into further production. The Barnett area in Texas is the oldest of the unconventional horizontal fields in the US and is seeing a trend in working over the wells using today’s technology, with good success.

The future is not all rosy for the sand miners, though. Although the prices of crude have jumped in response to the military unrest in Iraq, many analysts believe that producing oil from shale will leave the domestic market oversupplied. In 2013, U.S. crude production climbed to a 24-year high and is forecast to grow more this year with the help of oil pumped from shale, according to government data.

Many exploration companies are increasingly looking to alternatives for sand. Silica sand as a proppant is effective and cheap but is not without problems. A major one is health and safety.

Hydraulic fracturing sand contains up to 99 per cent silica. Breathing silica can cause silicosis – a lung disease where lung tissue around trapped silica particles reacts, causing inflammation and scarring and reducing the lungs’ ability to take in oxygen. Silica can also cause lung cancer and has been linked to other diseases, such as tuberculosis, chronic obstructive pulmonary disease, and kidney and autoimmune disease. Acute silicosis nearly always leads to disability and death.

The National Institute for Occupational Safety and Health (NIOSH), identified seven primary sources of silica dust exposure during hydraulic fracturing operations:

  • Dust ejected from thief hatches (access ports) on top of the sand movers during refilling operations while the machines are running (hot loading).
  • Dust ejected and pulsed through open side fill ports on the sand movers during refilling operations
  • Dust generated by on-site vehicle traffic.
  • Dust released from the transfer belt under the sand movers.
  • Dust created as sand drops into, or is agitated in, the blender hopper and on transfer belts.
  • Dust released from operations of transfer belts between the sand mover and the blender; and
  • Dust released from the top of the end of the sand transfer belt (dragon’s tail) on sand movers.

One way to reduce silica exposure is to use alternative proppants (e.g., sintered bauxite, ceramics, resin-coated sand) where feasible. A new research carried out by scientists from Penn State University proposes using synthetics derived from waste as proppants during fracking operations. Ceramic proppants are also gaining in popularity, while Japanese scientists from Osaka Univesity came up with an idea to stop using slick water altogether and replace it with CO2.

With more than 30 million tons of proppant used annually for fracking the market is worth fighting for. The problems in adopting alternative proppants to sand are two-fold. One is cost. Sand is cheap and plentiful. Another is lack of capacity in manufacturing.

“We get several calls a week regarding synthetic proppants, calls for information from companies big and small, recyclers and manufacturers. However, it boils down to costs as well as capacity, and we need to be producing hundreds of tons per hour in order to get costs down,” Penn State researchers admitted. Manufacturers would require some 3,000 tons of synthetic proppant for field testing.

There are signs of change, however. The ceramic proppant market continues to grow, with the majority of production taking place in the U.S. and China, but with new players constantly entering the market. A ceramic proppants company in Poland is to be completed in the second half of 2015 and it aims to meet approximately 5% of annual global demand for the product.

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