As fracking operations in the USA are pressing on at full speed, oilfield services companies are beefing up their frac sand reserves and expanding their transportation networks – the portal Bakken.com reports.
Constantly in search of ways to increase productivity and reduce costs, E&P companies have found that increasing the amount of proppant – usually silica sand – increases the productivity of shale wells. Consequently, Morgan Stanley forecast recently a growth in sand demand up by 96 per cent in 2016 from 2013. This, compared with the predicted sand capacity growth of just 76 per cent over the same time, spells good fortune to oilfield services companies like Halliburton, Schlumberger, and Baker Hughes.
In response to these predictions, the world’s largest provider of fracking services, Halliburton, has more than doubled its fleet of ralicars, to about 3,500 as of June 30, and increased the capacity of its sand terminals – where sand is reloaded from trains to trucks.
So far, the company is reported to have invested around 100 million dollars in its frac sand delivery capabilities. This included contracting 30 additional trucking companies and opening a new centre in Houston, Texas, to coordinate the transportation of sand via rail and road. Halliburton has also reduced its purchasing costs by buying more sand under contract.
“Halliburton has probably been the most proactive in establishing a ‘just-in-time’ inventory system for most of their frac sand products because it is becoming such a logistical game,” said Societe Generale analyst Edward Muztafago, who has a “buy” rating on the stock.
The rising demand for frac sand has managed to push the price of the commodity by 5 to 20 per cent, depending on the grade of the product – Taylor Robinson, president of commodity logistics consulting firm PLG Consulting told Bakken.com.
For example, Robinson said, sand delivered from Illinois to the Eagle Ford shale field in Texas costs $127 per ton on average, with transportation and warehousing accounting for nearly two-thirds of that.
The boom in frac sand has benefited other, smaller, companies as well. Last month, U.S. Silica Holdings, announced plans to add approximately 3.8 million tons of new capacity in response to the surging demand for northern white frac sand. The company is planning an 800 thousand ton-per-year expansion at its Pacific, MO. plant, which is scheduled to cost 33 million dollars to complete.
Obviously this surge in prices cannot go on forever. “I think there’s going to be a limit to how much of these additional cost escalations our customers are prepared to take, given their free cash flow situation and also given the drop in oil prices,” Schlumberger Ltd CEO Paal Kibsgaard said during the company’s earnings call on Friday.
However, despite the current fall in oil prices and the subsequent race to decrease exploration costs, in a statement issued last week, Schlumberger, said that oil and gas spending would increase in 2015. This would be in response to the rise in global oil demand and prices stabilising at a higher level.
The increase in price of frac sand opens the doors to the more widespread use of other types of proppant – such as ceramic proppants, or proppants made of microspheres or waste – which have so far found it difficult to compete with sand on price.
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