In a sweeping and disruptive move that in some ways pre-empts the huge sand suppliers of Wisconsin and other points north, the Basin storms into the sand mining business, bringing home what could be the lion’s share of this vital and ever-growing segment within the well completion industry.
by Jesse Mullins
“The West Texas sand mines are obviously a game changer.”
So spoke Energent Group’s Todd Bush, who said that we are just at the beginning of what will be a huge change for the drilling-and-completion industry.
Energent is a market research firm focused on well life-cycle and frac market intelligence. Bush, founder of and principal at Energent, said that sand usage has risen so dramatically in the past two years that cost efficiencies on sand have big impacts on bottom lines.
Speaking of the 19 in-Basin sand mines that have been in various stages of development—with perhaps as many as three of those already doing business—Bush said the tremendous, ready supply of sand, available in close proximity to oilfields and with drastically reduced transport costs—will markedly improve economics for E&P companies in the Permian Basin.
If in-basin sand continues to prove viable for fracturing, then, given that so many mines are in progress, supply should soon be a non-issue, comparatively speaking, and the focus will shift to other possible constraints, these being road traffic and other logistical concerns, as well as offloading, wellsite storage, and turnaround time for drivers.
“There’s going to be demand for more CDL drivers, which means new hires, new opportunities, and new jobs,” Bush said. “Trucking in West Texas will certainly increase. It’s kind of hard to imagine it [increasing over the current heavy traffic], but I see that happening, especially in the region of the Central Basin Platform.
“We’re also going to see a shift in what’s referred to as the ‘last mile’ of sand delivery. As operators take sand direct from the mine to their well sites, we’ll see an impact on storage at the well. A lot of companies are talking about ‘box solutions’ or ‘silo solutions’ at well sites. I think 2018 is going to see even more emphasis on those silo solutions and on what companies can do to improve turnaround time for drivers.”
The shift from out-of-state sand to in-state, even in-Basin, sand has come about because the local sand now is perceived to be of sufficient quality to supplant those supplies that were being used previously.
Said Bush: “From what I’ve been told, a couple operators conducted testing procedures and have concluded that the West Texas sand will work in both the high pressure and the lower pressure areas of the Basin. So that’s telling, and when more of the larger companies move in that direction I think that will influence a lot of other smaller operators to try out the West Texas sand as well.”
Bush also observed that, in the bigger picture, all this efficiency and cost-cutting brought about by sand economics are making per-well production costs tumble for operators, and that, combined with the rising prices for crude, are creating a highly favorable environment. Favorable enough, in fact, that the capital markets are getting more optimistic about oil. And they’re starting to hedge once again.
“There’s definitely more hedging going on now that oil’s above $55, bumping up against $60,” Bush said. “So I think drilling and completion programs will be more funded in 2018 than they were in 2017. Capex for those programs should increase.”
Hi-Crush Crushes It
While there were sand mines elsewhere in Texas prior to the recent land rush in the Basin, notably in places like Voca, the first mine to do business in the Basin was the one built near Kermit by Hi-Crush. That head start gave them a big leg up on the competition.
Hi-Crush commenced operations at its Kermit facility in July 2017. The facility has an annual production capacity of three million tons. Some 90 percent of that supply is currently contracted with customers, which include several large, blue-chip E&P companies under long-term, fixed-price arrangements. The facility expands Hi-Crush’s production and logistics capabilities and improves customer service while reducing delivered costs to the well site.
“The opening of our facility is a game-changer for our operations,” said Laura Fulton, CFO for Hi-Crush. “The facility expands our product portfolio, while its proximity to significant activity enables substantial efficiency improvements in the delivery of sand to the well site. We ramped operations to achieve full utilization in mid-October and we expect to see a significant increase in our financial performance for the fourth quarter of 2017. Having completed construction and started operations two months ahead of schedule [gives] a clear example of our experience and expertise in constructing and operating large-scale, world-class frac sand production facilities.”
Black Mountain
At least one of Black Mountain Sand’s mines should become operational this month, which will make it one of the early entrants into the Basin sand sweepstakes. Unimin’s new Permian sand mine, as well as High Roller Sand’s, are also expected to come online soon.
At Black Mountain, founder and CEO Rhett Bennett said in December that the company is focused on “being the premier in-Basin Permian sand supplier. With our two mines, we should be fully twice the size of our next closest competitor. So we”re trying to use scale to generate efficiencies and be the low-cost provider in the Basin.”
Bennett said that where frac sand has been concerned, “the industry’s been shifting to using more of a regional product for about two years now. All that’s happened because oil went from $100 to $50 and the industry found ways to cut costs. During the downturn, companies started to pump the local sand and—lo and behold—it didn’t have a [negative] material impact for well performance or EUR [estimated ultimate recovery]. So all of a sudden you’ve got a cheaper product and you’re getting approximately the same performance. That started to drive the change.”
Bennett said that about a year and a half ago he and his team began prospecting West Texas for a regional sand deposit.
“We were [prospecting] those Winkler dune trends [Winkler County’s sand hills region] and Hi-Crush was out there and this was right about when it was about to pop off. We ran some analysis on the sand, and it was great sand, really fantastic sand. As regional sand, that Winkler sand is a very high quality as compared to traditional regional sand. So once we discovered that, we set about purchasing real estate and signing mining leases, kind of up and down the dune trend. All together we put together about 29,000 acres. We just had a lot of conviction that when this announcement was made, the industry was really going to adopt this product. So we started building two 4,000,000 ton mines.”
People hearing Bennett say “four million tons” thought, initially, that they weren’t hearing correctly. But such is the volume of sand use today that such numbers do come into play. Further, observers were surprised that he took aim on two mines at once. Most thought that a company would work one mine and, if that tapped out, move on to create another.
“But we were just that convinced that this was going to be a big deal, so we started building two at once. We were making a really big bet on it,” he said. The company already counts Diamondback as one of its customers, and Bennett said that they already have contracts with “nine or ten” other large operators in the Basin.
3,000 Pounds per Lateral Foot
In the past two or three years, sand usage in wells has gone from 1,000 pounds of sand per foot of lateral to a ton, to a ton-and-a-half.
“Yes, I would say that all your fourth generation, cutting-edge completions—all those guys are pumping 3,000 lbs a foot. Not only have rigs bounced back, but the proppant intensity has gone up dramatically. So all that just led to a really big need for sand and sand at a reasonable price in the Permian. That was the impetus for companies going out and trying to secure regional sand. We think that in 2018, the size of the Permian market will be 45 to 50 million tons of sand demand. And that’s [if we’re] keeping the rig count flat. If nothing goes up from here, that’s about the amount of sand you’ll need.”
Bennett said he believed that there was $2.9 billion in capex committed to regional sand mining projects.
“It went from not even being on the radar to—well, the Basin will be one of the largest sand producing regions in the country.”
Further, this surge in sand means the expenditures stay within the region, benefitting local economies, and it means jobs will be created as well.
“It benefits the tax bases of the counties, it provides royalties to landowners, and then of course there are jobs,” he said. “Each one of these plants will have 80 to 100 workers at it. So with just a dozen new plants, there’ll be as many as 1,200 good-paying jobs. Good paying, because they’ll have to pay wages to compete with oil field wages. It’s going to be a good deal for the Winkler County area [in particular].
Bennett was asked to respond to a report PBOG got from another source in the sand industry, who told the magazine that not only have the volumes of sand-usage-per-well exploded, but so far there is no discernible ceiling in sight. So far, the more sand that has been put into wells, the better the performance that operators have seen.
Bennett concurred.
“At some point you’ll probably run into diminishing returns, but I think we’re still searching for the ceiling, searching for where you stop scaling the proppant intensity. Right now, still, the more put in the better your oil output is. So guys are going to keep pushing in that direction. In the Haynesville, they’re doing up to 5,000 pounds per lateral foot. Just dramatic usage. They’ve got monster wells out of that, so I think the trend is very much there.”
All of Black Mountain’s sand will go to Permian Basin wells, Bennett said.
It Specs Out
Much has been made about the quality of the Wisconsin frac sands, but as completion techniques and practices have changed, the in-Basin sands have been shown to be more than adequate. Bennett said that there are several characteristics of a grain of sand can make it attractive for frac’ing. These include acid solubility, turbidity, angularity (whether it is around sand grain or a squarer, more sharper-angled one), and then the feature that is probably most applicable and the one that operators focus on most: crush resistance.
The Winkler sands that Black Mountain markets are “off the charts for a regional sand product,” Bennett said.
“The 40/70 mesh, what we call our Winkler White, graded out an 8K [8,000, on a strength scale],” he said. For comparison purposes, much regional sand has a 2k crush strength, or a 3k crush strength. Which isn’t really enough to frac with. It will get crushed under the subsurface pressures.”
Meanwhile, Black Mountain has a 100 mesh sand that grades out at 11k. “That’s just a really high quality product,” he said. “It’s a fantastic sand.”
As far as transport is concerned, all Black Mountain sand is trucked, and Bennett sees the industry moving from pneumatic trucks to belly dump trucks to enhance efficiencies.
“Pneumatics take a long time to offload, usually about 45 minutes,” he said. “Belly dumps can unload in about ten minutes. And they can typically hold two or three more tons of sand. So we feel like there will be a big shift to belly dumps, with the regional mines using belly dumps to take sand directly to the well pads.
Storage on Site
Part of Black Mountain’s approach includes favoring to silos for storage.
“We have a device where the belly dump pulls up on the site, and it’s a gravity drop, and the sand is loaded into the silos right there on site without a pneumatic hooking up a hose and trying to blow all the sand over. It’s a much more efficient delivery. All the operators are looking to save money. It’s a question of, how do we cut down our trucking bills, how do we cut down on demurrage? All of that goes back to the question of, can we carry a few more tons per truckload, and can that truck unload faster? Those efficiencies are kind of being focused on the trucking aspect, more than on the location, as to whether it’s a sandbox or a sand silo. The need there is to have a certain amount of sand on site so it doesn’t interrupt your fracs. We like the silos, because as fracs got larger the silos could hold more sand at the wellhead for the frac jobs. So that’s the system we went with.”