Suppliers aim to cope with the logistical challenges of the frack sand market
Boom times ahead for frack sand suppliers, if they can force their way into the market
The towering mounds of white silica sand located just outside Peace River, northern Alberta, are closer to the Horn River Basin than any other supply of natural fracking proppant. From the 10-million ton frack sand mine, owned by Canadian Silica Industries, a division of LaPrairie Group, it’s a seven-hour drive to a transload facility in Fort Nelson, B.C., where sand is then distributed to well sites throughout the region.
But surprisingly few producers in the Horn River get their sand there. Many source their sand instead from mines in Wisconsin, where it is piled into rail cars and shipped eight to 10 days to a transload facility in Fort Nelson, and then trucked to site. That’s 3,000 kilometers farther afield. And the reason for that decision comes down to a grain of sand.
The Canadian frack sand market uses an estimated 3.5 million tons of sand per year, while the U.S. market goes through roughly 30 million tons, each of which has enjoyed a spike in demand coinciding with the widespread use of horizontal drilling. In 2014, sand suppliers are expecting double-digit growth, based on projected meters drilled and well counts. Enormous sand supply companies have flooded the Canadian market as a result, particularly in the past 18 months. Preferred Sands entered Canada in December 2011 with a $200-million acquisition of Winn Bay Sand, making it the largest Canadian supplier; the deal included one mine in Wisconsin and one in Saskatchewan. Preferred now operates five mines across North America.
Increased heft from companies like Preferred Sands has vexed Cliff LaPrairie, the COO of Canadian Silica, a private family business. Five years ago the company diversified from regular sand into frack sand, which today makes up 90 per cent of its total distribution. But like many other sectors, skyrocketing demand quickly led to a supply glut as more companies charged into the sand supply industry and numerous new mines came online. “Producers, because of the abundance of premium sand, continue to favor the U.S. product,” says LaPrairie, who is based out of Calgary but runs the Peace River mine. “That’s definitely hurting Canadian suppliers, not just ourselves.”
Because of the super-dense rock formations in the Horn River basin, a very specific sand mineralogy is needed to optimize yield, as in the Eagle Ford and Permian plays. Granules must be consistently-sized and spherical, unlike other types of sand grains that are jagged and inconsistent. Each grain must be hard enough to pass a certain crush threshold, allowing it to work its way into fissures and prop open fractures for extended periods of time. Sand found in the St. Peters sandstone formation in Wisconsin, known as Ottawa White Sand, is considered superior for possessing these characteristics. And because of the high depletion rate of horizontal wells, and with reserves becoming increasingly difficult to exploit, completion engineers inspect sand mineralogy closer than ever.
But LaPrairie contends that his white silica sand, or Domestic Canadian, is on occasion rejected simply because sand supply in North America is so incredibly abundant; producers go to Wisconsin or Manitoba premium sands because they can, not because they necessarily need to, he says. Even in regions where Canadian Silica’s sand has been used in the past, producers now choose to reject it. In the past 12 to 18 months, Canadian Silica’s output has dropped 25 to 30 per cent, following years of steady growth, though most of that decline is due to the recent fall in natural gas production.
That’s not necessarily to say business is floundering: last summer LaPrairie supplied one of the largest-ever fracks in the Horn River, which required 2,000 tons of sand per day to two separate wells, for 45 consecutive days. The proximity of Canadian Silica’s mine to surrounding basins makes it seem an obvious choice. “There’s no doubt that we offer a more cost-competitive, operationally advantageous system than bringing products from the U.S. Midwest,” says LaPrairie.
As long as it’s viable to buy sand 3,500 kilometers away, however, cost advantages are slender. While individual suppliers don’t disclose costs, the range in North America falls between about $140 and $210 per ton according to Industrial Minerals, a research firm. Sand shipped to the Horn River would fall into the higher edge of the price range. Rail is also much cheaper than truck: users will get 455-ton-miles to the gallon by rail, rather than 105-ton-miles per gallon by truck, according to the Rocky Mountain Institute, a think-tank. At its peak, Canadian Silica will use up to 100 trucks carrying 43.5 tons of sand. Trains, by comparison, might be 100 cars long, each capable of containing between 93 and 95 tons, though entire trains typically are not dedicated to transporting sand.
And more transload facilities are always coming online. Di-Corp, a chemical supplier, recently signed a deal with CN Rail to build a terminal north of Grande Prairie, Alberta, which will channel sand into the Horn River and other plays. The 550,000-ton facility will have three separate stations capable of unloading 44 rail cars.
Much attention is paid to the costs of frack sand shipment. To supply its Horn River wells, Talisman Energy Inc. ships sand from Hanson Lake, Saskatchewan, a Preferred Sands mine. From there the sand is trucked east to Flin Flon, Manitoba, loaded onto rail cars and shipped over 2,000 kilometers west to Chetwynd, B.C., then another 120 kilometers by road to well sites.
Some prudent producers have gone as far as to enter the supply- chain themselves. EOG Resources Inc., a Houston-based producer, owns a sand mine in Wisconsin to feed its Eagle Ford portfolio, an acquisition that saves the company an estimated $1 to $2 million per well, based on company press releases.
For producers operating in Western Canada, new sand mines coming online will further increase supply. Stikine Energy Corp., a junior miner, is attempting to finance a mammoth frack sand deposit that, when in full swing, could supplant the entire sand market in B.C., according to the company. Saying the project is facing an uphill battle, however, would be generous. “I would be shocked if they were able to find the financing to build these large-scale mines,” says David Brough, the president of Canfrac Sands Ltd., a Calgary-based supplier.
Canfrac, for its part, is bracing against oversupply by offering logistics solutions to miners south of the border. At the end of August 2013, Brough was fine-tuning a deal with an undisclosed partner, which would bring white sand from mines in the U.S. to facilities in Canada along the CN Rail system. Canfrac only transports about 50,000 to 100,000 tons per year from its deposit near Lloydminster, Saskatchewan, but plans to build new transload facilities in Kindersley, Saskatchewan, Fort Nelson, B.C., and possibly Manitoba. “In order to be competitive, you’re going to have to be able to supply full logistics services,” he says.
Frustratingly for companies like Canadian Silica, the industry will only consolidate further. Preferred Sands, under its savvy CEO Michael O’Neill, has taken an aggressive approach on the market, quickly becoming the third- largest supplier in North America. The company has a storage facility in nearly every major logistics hub, and owns over 4,000 rail cars to get sand to them. “If you don’t have a terminal in a location where they’re drilling, you’re going to have to truck it, and trucking per-mile costs a hell of a lot more than rail transportation,” says Marc McQuesten, product manager for Preferred.
But the firm is focusing on far more than market share. Its new product, a resin- coated sand, minimizes flow back in the well by working as a plug after well pressure is decreased. The product was developed in Preferred’s research center in Houston, and the coated grains now make up about 10 per cent of the company’s total sand sales.
While silica mines based in Alberta may not stack up in terms of product, their redeeming quality will always be the logistical edge. The future of natural gas will play heavily into whether that edge will matter. If the three proposed LNG terminals along the Pacific coast go ahead as planned, demand may once again balance out with supply, says LaPrairie. Until then, producers will go as far as they like to get their sand.
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