As oil production has soared, the U.S. frac sand mining industry has boomed over the past 18 months. Yet one frac sand operation in Shakopee was recently idled and another one in western Wisconsin was partly shut down.
The cutbacks may be part of a fundamental shift in U.S. frac sand production away from the Midwest, home to the highest quality Northern White, to lesser-grade sands. As a result, Northern White’s market share is expected to be 43 percent in 2019, down from 75 percent in 2014, according to global consulting firm Rystad Energy.
“That is the reality of things,” said Thomas Jacob, a senior analyst at Rystad.
Oil producers in Texas and eastern New Mexico — by far the nation’s largest shale oil-producing region — have increasingly switched from Northern White to sand produced at a growing number of regional mines.
“Some of this is definitely a structural change,” said Kent Syverson, a geology professor at the University of Wisconsin-Eau Claire and a sand industry consultant.
Regional sands mined in places like Texas are inferior to Northern White, but they are far cheaper since transportation costs are minimal. And so far, oil production hasn’t suffered from using lesser-quality sand, analysts say.
Regional sand has turned out to be “good enough” for the oil industry, Syverson said.
The shifting sand market doesn’t portend the end of frac sand mining in Wisconsin and Minnesota. Northern White is still the staple sand used in North Dakota’s fields, the second-largest producer of oil in the U.S. Even in the Southwest, there will still be some demand for Northern White, as some oil wells — due to local geology — will require a superior quality sand. But the frac industry in the Midwest may have peaked, the data show.
Fracking entails blasting torrents of water, sand and chemicals into an oil well, creating cracks in the shale rock below. Grains of sand keep the cracks open, allowing oil and gas to flow.
Western Wisconsin, Illinois, Minnesota and a few other states are geologically blessed with the best sand for fracking. It’s almost entirely quartz, notably strong and spherical, two essential traits.
The frac sand industry blossomed over the past decade with the rise of shale oil, creating jobs and economic activity — particularly in western Wisconsin, and somewhat in southeastern Minnesota — but also controversy.
Opponents have feared among other things the destruction of scenic areas, health problems from blowing sand and groundwater contamination.
Wisconsin is by far the nation’s largest producer of “industrial sand,” a market driven by frac sand. Minnesota ranks eighth, still making it a significant producer, according to the U.S. Geological Survey.
U.S. demand for frac sand peaked at 61.8 million short tons in 2014, then sank to 42.3 million tons in 2016 after oil prices tanked, according to Rystad data. But as oil prices rallied, it swelled to 79.2 million tons in 2017, and is expected to hit 108 million tons this year.
Not only are higher oil prices spurring more oil production, and therefore more frac sand demand, producers are blasting more sand and water into individual wells, to increase productivity and because the wells themselves are longer.
While 2018 is expected to be a record year for frac sand production, demand flattened in the third quarter and is expected to stay that way through year’s end.
Oil and gas producers have essentially spent much of their budgets for the year putting a damper on drilling and fracking new wells, analysts say. Plus, oil pipeline capacity in the Southwest is currently maxed out, a hindrance to more crude production.
“From 2017 to the middle of this year, we couldn’t produce enough sand for customers,” said Scott Sustacek, CEO of Jordan Sands, a frac sand producer near Mankato. “But then a few things came together to cause a pause in the market.”
Jordan Sands runs one of four mines in Minnesota that together account for most of the state’s frac sand output. Tax data from Le Sueur County indicate that business also has slowed at Minnesota’s largest frac sand producer, the Kasota mine south of St. Peter.
Gravel taxes collected from the Kasota mine slipped from a peak of $81,632 during the last half of 2017 to $77,073 during the first half of 2018.
The Kasota mine plus two other frac sand mines, near St. Peter and in Shakopee, are owned by Covia, a publicly traded Ohio-based company. In late September, Covia said it would idle the Shakopee mine along with three others. Covia didn’t return calls for comment.
When oil prices tumbled in 2015, some mines were idled, including the Shakopee mine, which only reopened in mid-2017. “But this time is different,” said Rystad’s Jacob. Oil prices and overall sand demand are still relatively high.
The U.S. frac sand market was recast after oil prices sank from more than $100 per barrel in mid-2014 to around $30 per barrel in February 2016.
Oil producers had to cut costs to stay in business, and sand wasn’t spared. Since transportation is a big part of the cost of Northern White, oil producers in the Permian Range were able to save thousands of dollars per well by using local sand.
The Permian, which spans west Texas and southeastern New Mexico, has powered the U.S. oil industry’s growth in recent years. It pumps around 3.5 million barrels per day, about the same output as the next three largest U.S. shale oil ranges put together, including North Dakota’s Bakken.
About 50 percent of U.S. frac sand demand comes from the Permian. There are now 16 regional sand mines in the Permian, and while a few of those have been around for years, many have come online in just the past 18 months, said Brandon Savisky, senior analyst at IHS Markit, a research company. More are planned.
And the use of regionally mined sand is growing in other shale oil ranges in south and east Texas, Oklahoma and Louisiana, Savisky said.
Sand mined in these areas doesn’t have the strength or roundness of Northern White.
Still, operators so far haven’t seen initial productivity declines in wells fracked with the finer regional sand, analysts say. However, they don’t have a good picture yet of these wells’ longer-term production.
Their production decline rate may be steeper than wells fracked with Northern White as fissures in rock give way sooner. In other words, the wells might not produce for as long or as much.
“The jury is still out,” Savisky said.