Oct. 19–Any slowdown in activity in the Permian Basin oil patch due to pipeline bottlenecks is expected to ripple through the energy industry’s supply chain, from drilling rigs to completion crews to water and sand.
Mining companies have rushed to the Permian Basin in the last year or two to open facilities to meet the surging demand for locally sourced sand. GlobalData estimates sand consumption in the Permian will exceed 77 billion pounds this year. That rise is attributed to longer laterals and a larger amount of proppant being used per well — an amount that has grown more than 70 percent in the last three years.
GlobalData, an analytics company, also forecast that the market share of locally produced sand is expected to grow to more than 40 percent. The five mines that have opened this year have a proppant supply of 35 billion pounds per year.
But GlobalData also pointed out that those mining companies could see their revenues hit by a sand oversupply should activity slow down because of the bottlenecks. Svetlana Doh, oil and gas analyst with GlobalData, discussed her findings by email with the Reporter-Telegram.
Q. It makes sense that a decline in drilling activity due to the pipeline bottlenecks would result in lower demand for sand. Do you see this as short-lived and that demand will recover as pipeline capacity increases?
A. Indeed, yes. What we expect to see is that once the Permian has additional planned pipeline capacity running, then drilling operations will resume at a higher pace in the basin and hence more frac sand will be needed. Currently, smaller size companies operating in the area are experiencing the biggest challenges getting that portion of pipeline capacity, and they would be the ones interested in trying local Permian sand for fracking, since it’s much cheaper. So, we would expect that demand in local sand in particular would rise from these companies.
Q. What should mining companies do to protect their revenues in the meantime?
A. We believe that the demand in sand will grow, especially in the Permian Basin, and if there is any ‘danger’ for sand producers in sand oversupply, it will be short-term. However, the operators of the northern white sand are expected to lower their share of the total sand supply. And what they really need to do is to find ways to distribute their sand into other shale plays. Also, what we see now is that many sand operators are opening mines that provide sand locally, e.g. U.S. Silica produces sand from the upper Midwest and also has facilities in the Permian.
Q. I understand there were as many as 11 sand mines planned for the Permian Basin, though not all of them will ultimately be built. Still, is there a danger of overbuilding and could this contribute to an oversupply of sand?
A. We think that it will really depend on when that additional capacity in the Permian will be available, since it will define the demand in sand. In any case, we believe that if there is any sand oversupply by the end of the year, it will be temporary until Permian’s planned pipelines are online or more mines are open.
But, assuming the demand will grow by even 30 percent next year and assuming the pipelines will allow the corresponding growth in production, then we need an additional approximately 25 billion pounds of sand to be supplied. Some mines that started production this year will build up an annual capacity of at least 35 billion pounds, which should be more than enough. Plus, more mines are to commence production in the beginning of 2019.
Q. What is your outlook for sand demand in the Permian Basin, and do you see continued demand for regionally sourced sand?
A. Sand demand in Permian is expected to grow at an annual 20 percent rate at least in the next few years, and the share of regional sand produced in the basin is anticipated to increase as well. Currently, around 40 percent of sand used in the fracking operations in Permian is produced locally. The biggest advantage of local sand is its cheaper price, and if mixed with white sand it can be good enough for fracking. Many major oil producers chose to increase the share of local sand in their operations, and we believe smaller size companies will prefer using this sand even more.
Mella McEwen is the Oil Editor and covers the latest business and energy news. You can read more from her here. |firstname.lastname@example.org|
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