Tuesday, August 5, 2014

Crazy Fracking Economics - Sand Edition

Wall Street Journal:

Frackers are expected to use nearly 95 billion pounds of sand this year, up nearly 30% from 2013 and up 50% from forecasts made by energy-consulting firm PacWest Consulting Partners a year ago.
It can take four million pounds of sand to frack a single well, but several companies are experimenting with using more. Companies like Pioneer Natural Resources Inc., which recently received a ruling from the U.S. Commerce Department allowing it to export unrefined ultralight oil produced from shale formations, are finding that the output of wells is up to 30% higher when they're blasted with more sand. About a fifth of onshore wells are now being fracked with extra sand, but the technique could expand to 80% of all shale wells, according to energy analysts at RBC Capital Markets.
That's great news for sand miners, but it's heating up competition between energy buyers and other big industrial users.
U.S. Silica Holdings Inc., one of the largest industrial-sand companies, has already raised prices for some frack sand, and it said recently that it would also start charging 10% to 20% more for the finer grades of sand typically used to make glass and various industrial products as it diverts some of this supply to oil producers. The best sand is dubbed Northern White because the round crystal, which can withstand serious heat and pressure underground, is found in states like Wisconsin and Minnesota. The company expects demand for sand will be at least 25% higher than supply for the rest of this year.
"Northern White is in short supply, so people are using basically whatever they can get their hands on to complete their wells," said Michael Lawson, a spokesman for U.S. Silica.
Oil companies' insatiable appetite has even generated renewed interest in second-tier deposits of lower-quality brown sand in places like Texas and Arkansas.
I was looking at my mother's IRA statement back in April and saw that she held U.S. Silica, which was up 40% since she had bought it in October 2013.  I figured with the fracking demand that it made sense to take a gamble on it, so I bought some.  It's up nearly another 40% since April. I've had similar results with Trinity Industries, which makes railcars.  With all the talk of replacing the old DOT-111 rail cars, Trinity has seen a 90% price boost since last September.  I don't know how long this run will last, but I'll probably hang on for a little while yet.

However, I really can't for the life of me understand how you can use 5 million gallons of water and 4 or 5 million pounds of sand to frack a single well.  Those numbers are just mind-boggling.  It sure seems like a use of resources we'll eventually regret spending.

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