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The Permian Rush Is Creating A Frac Sand Shortage

The ‘mega-frac’ is turning the typically annoying sand of West Texas into the new gold, and the oil and gas land rush on the Permian Basin has now extended into the dry, gritty sand that only a year ago few would have given a second thought.

While most are busy watching all land grabs by oil and gas producers in the Permian, much less attention has been paid to the secondary land rush for the sandy wasteland that could ease some of the bottlenecks for producers who need frac sand to make anything happen.

Now as some herald a new phase of deal-making and consolidation following the Permian oil and gas land rush, the same may end up happening for all those frac sand producers who have followed them there.

As many as 23 new frac sand mines are being developed in West Texas this year, according to reports cited by Bloomberg.

Why Texas, And How Much Frac Sand Do We Really Need?

The process of hydraulic fracturing involves injecting highly pressurized water into a well and then pouring sand into it in order to keep the tiny fractures created by the water blast open. After that, the holes are widened to allow the crude to ooze out of the shale rock. The more fractures created in a rock, the more oil and gas producers will get out of it. That notion of well completion intensity is driving increasing sand usage per well.

It’s all put the frack sand subsector very much on investor radar as a backdoor into the lucrative shale business. So much so, in fact, that some have even started referring to the frac sand situation as “proppant-geddon”.

So the answer to ‘why Texas’ is a simple one: Frac sand producers follow the oil producers, and they’re descending on the Permian. And until the run on Texas sand, producers were largely dependent on expensive ‘white sand’ mined in Wisconsin and Minnesota. The brown sand of Texas is cheaper. And when it’s right in your backyard, producers save a bundle.

It’s cheaper because it’s easier to mine. Wisconsin’s sand is locked up in sandstone, while Texas’ is just hanging out in big dunes. That’s where the lower price comes into play. Related: The Best And Worst Oil Price Predictions

Of course, it’s bad news for Wisconsin, which won’t like the competition that ends up driving frac sand prices down. The run on Texas is a big one:

“The costs are really low of producing this sand and of course they’re putting up too many mines, which basically means that they could sell that sand for as little as $30 a ton,” Wisconsin Public Radio quoted IHS oilfield services expert Samir Nangia as saying.

Producers love it because, according to Nangia, it costs up to $60 a ton just to ship Wisconsin frac sand to Texas by rail.

"These Permian mines are going to take market share away from the Midwest mines but what is also true is that they cannot take away 100 percent of the market share," said Nangia. "If I had to cap it, I would cap it at 50 percent."

It doesn’t necessarily mean that Wisconsin is out of this game, because all sands aren’t equal. The cheese state’s white sand is stronger and lets producers drill deeper and wells produce longer. But according to Nangia, some producers have already been cutting it with the cheaper Texas sand to make it go further.

This Is Frac Sand Boom 2.0

All in all, the ‘mega frac’ is a brilliant price driver for specialty frac sand, which cost about $25 per ton last year, but has been known to hit $70 per ton when supplies are short. And while this is a mouthwatering price for investors, it’s not traded like a commodity, so getting in on it means buying equity in producers themselves.

There aren’t that many public frac sand companies to choose from, either, and this is a pretty consolidated market, led for the most part by U.S. Silica, Fairmount Santrol, and Hi-Crush Partners LP, which together corner over 45 percent of market share.

And according to a new Market Study Report, the global frac sand market is expected to grow at a CAGR of around 14.7 percent over the next five years, reaching $6.7 billion in 2023, up from around $2.9 billion last year. Related: Record Oil Production Doesn’t Free U.S. From Global Market


For anyone betting on oil, frac sand shouldn’t be far behind—but it hasn’t always followed the same pattern. It went bust in a bad way in 2014 when oil did, and saw a revival in 2016—before oil prices responded upwards. That’s because producers started increasing the size of wells (bigger fracs), even if the number of wells wasn’t going anywhere. So, in 2016, the new frac sand boom preceded an oil rebound.

And look to Texas, because the frac sand mining set-up is about to get even easier. Kinder Morgan is planning a new gas pipeline to West Texas that will ease a major bottleneck for oil and gas producers. That heralds yet another uptick in frac sand demand once it’s up and running as slated in 2019. The $1.75-billion line will connect the Permian to eastern Texas and is scheduled to begin operations in October next year.

Right now, prices for natural gas that pipeline bottlenecks have trapped in the Permian are lower than pretty much any other major American hub. Output may be booming, but prices are down 30 percent from a year ago because it’s all trapped.

Once the bottlenecks are sorted out, we’ll see Frac Sand Boom 3.0, and it’s going to be all about Texas.

By Julianne Geiger for Oilprice.com

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Leave a comment
  • david claggett on July 19 2018 said:
    great timing, right before another collapse in frac sand company shares.

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