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Frac sand industry in region seemingly unaffected, for now, by falling fuel prices

The same falling gasoline prices that have consumers celebrating at the pump threaten to put a damper on the frac sand boom in west-central Wisconsin.

As the worldwide price of oil plummets, analysts say it can’t help but have an impact on the nation’s burgeoning shale oil industry and, further down the supply chain, the Wisconsin sand that has become a key ingredient in America’s recipe for domestic oil.

“Spot market prices and demand for sand should decline substantially in 2015,” said Ethan Bellamy, managing director and senior energy industry analyst for Milwaukee-based Robert W. Baird & Co. “The longer oil prices remain low, the worse the pricing environment will be for sand suppliers.”

What nobody knows, however, is how long oil prices — pushed lower by surging supply largely resulting from the rise of U.S. production, combined with lagging worldwide demand — will remain low.

Suddenly, as the frac sand industry has exploded with dozens of mines being developed across west-central Wisconsin in the past five years and many more in the pipeline, the global price of oil has a bigger effect in the region than just on pump prices.

Wisconsin is now the nation’s leading producer of sand used in the rapidly expanding practice of hydraulic fracturing — the drilling technique commonly known as fracking that involves injecting a mixture of sand, water and chemicals deep into underground wells to force oil and natural gas to the surface. Wisconsin sand, prized by frackers for its ideal size, shape and durability, is shipped daily by train to drilling sites in states including North Dakota, Pennsylvania and Texas.

And the epicenter for all that sand production — state Department of Natural Resources statistics show at least 63 sand mines and 45 processing plants have been developed in Wisconsin — is the region within a 60-mile radius of Eau Claire.

Related: Oil price war catches state’s frac sand mines in the crossfire

Moving forward

Still, officials in three of the area counties with the most sand mining activity said they have seen no evidence of cutbacks yet in either production or new mine development.

“There continues to be strong interest in siting new mines and processing plants here in Chippewa County,” said Dan Masterpole, director of the county’s Department of Land Conservation and Forest Management. “We are not yet seeing any market effects from the low oil prices.”

Indeed, Chippewa County had a resurgence of interest in the fourth quarter of 2014 from companies interested in developing new mines and processing plants.

The county has five operating sand mines, six others permitted and under development, and three more that have either applied for or inquired about permits, Masterpole said last week.

“Those that are already in business believe that they’re going to continue to produce the sand, and those not yet established are planning that there will continue to be a demand and that they still can enter the market,” Masterpole said, adding that the continuing investments suggest industry officials are staying the course and still see a bright future for frac sand.

The story is the same in Barron County, where county Economic Development Corp. director Dave Armstrong said he hasn’t seen much impact from low oil prices on the sand industry there, which has grown to eight companies operating or developing about 15 mines.

Emerge Energy Services, which does business in Wisconsin as Superior Silica Sands, announced the first shipments last month from its new 2.5-million-ton-per-year dry plant in the Barron County town of Arland.

Likewise, Trempealeau County Land Management Department director Kevin Lien said his office still is working daily with companies seeking to develop new sand mines, including two applications last week.

Trempealeau County has seven active mines, 28 others that are permitted and six more in the preliminary stages.

Related: DNR concedes its rules are faulty, then allows more frac sand mining

Impact unclear

Superior Silica Sands probably won’t continue to grow at the pace it did last year, but it still doesn’t have any immediate plans for layoffs or cutbacks, said Sharon Masek, the company’s manager of mine planning and industrial relations in Wisconsin.

“We’re still selling all the sand we’re making, and we’re moving ahead with plans for two more expansions,” Masek said.

The long-term impact of low oil prices on sand mining companies remains unknown and likely will vary among companies based on their business models and what contracts they have in place, said Marty Lehman, a board member for the Wisconsin Industrial Sand Association and an associate at Badger Mining Corp., which operates mines in Jackson and Green counties.

Sand suppliers who have been in the business for a while should be aware of the energy sector’s volatility.

“Has the industry gone through downturns before? Yes, it’s a cyclic market,” Lehman said. “Now things are going on globally that will impact the market and could affect our ability to operate.”

While the industry downturn is likely to have an impact, he expressed confidence it won’t bring an end to domestic oil and gas drilling.

“We don’t know how it will shake out,” Lehman said.

Though oil prices have plunged by more than 50 percent since summer — sending the average price of regular unleaded gasoline in Eau Claire down from about $3.74 a gallon on June 28 to $2 on Friday — the impact hasn’t hit sand suppliers yet because frac sand is a lagging indicator, said Samir Nangia, a principal at PacWest Consulting Partners, a Houston energy consulting division of global consulting firm IHS.

Nangia said he’d be surprised to see sand deliveries to fracking sites cut in the first quarter but predicted the fallout will hit in three to six months.

“The guys in Wisconsin think it’s business as usual, but unfortunately they’re at the tail end of the impact, and by the time they feel it, it’s already too late,” Nangia said.

Bellamy agreed that sand suppliers likely will report strong fourth quarter numbers before pricing and demand slacken in the second half of 2015.

Pain possible

Already, the stock prices of some major sand companies have taken a hit. Emerge Energy traded at $145 a share in August but closed at $55 on Friday afternoon. The stock of FMSA Holdings, the holding company of sand miner Fairmount Santrol, has fallen by two-thirds since it went public in October.

Bellamy said Baird projects that publicly traded suppliers are likely best positioned to withstand the oil price slump based on the scale and scope of their operations and existing contracts, although he warned there is an old adage in the oil patch that oil field services contracts aren’t worth the paper they’re printed on.

“Public sand companies are unlikely to be totally immune, but we suspect they will survive the downturn at the expense of mom-and-pop operators who are likely to be squeezed out as demand dwindles,” Bellamy said. “Idled capacity and layoffs would not surprise us at all, and we think greenfield mines and mine expansions don’t make much sense unless and until oil recovers.”

What will happen in the volatile oil market is impossible to predict, although Bellamy speculated that longtime oil-producing powerhouse Saudi Arabia is in the position of greatest influence.

“(The Saudis) are waging a market share war, and we think they have better and bigger firepower than just about every other producer,” he said. “They likely won’t be satisfied until they extract maximum pain, forcing bankruptcies and capacity out of the global oil market.”

In December, with oil at $65 a barrel, PacWest projected sand demand would be flat this year, but with oil now down to $46 a barrel, Nangia said the projection likely will be revised downward to a 10 to 20 percent decline. That dip, combined with an anticipated 20 percent increase in supply in 2014 and 2015, is expected to squeeze the profits of sand suppliers.

Yet Nangia said the outlook for sand suppliers isn’t all doom and gloom., in part because of recent increases in efficiencies and a trend toward frackers using more sand per well.

“Even though things look grim right now, it seems like the outlook for the sand guys could be a little bit better than it is for (other oil industry operators),” Nangia said.

 

This article was written by Eric Lindquist from The Leader-Telegram and was legally licensed through the NewsCred publisher network.