Sand mine in West Texas sup­ports frack­ing op­er­a­tions in Per­mian Basin

The Oklahoman (Sunday) - - EXTRA - BY COLLIN EA­TON

KERMIT, TEXAS — Ten miles east of this com­mu­nity of 6,000 sand­wiched be­tween boom­ing West Texas oil fields, heavy trucks have be­gun lin­ing up at the re­gion's first sand mine as it churns out ammo by the ton for U.S. frack­ers.

The Hous­ton Chronicle re­ports the $325 mil­lion mine, owned by Hous­ton sand sup­plier Hi-Crush Part­ners, is the first work­ing plant of its kind in West Texas, and over the next 18 months, ri­vals in­clud­ing U.S. Sil­ica Co. and Fair­mount Santrol plan to build more mines that will send mil­lions of tons of sand into the Per­mian Basin, al­low­ing oil producers to cir­cum­vent ex­pen­sive rail lines that trans­port white sand from Wis­con­sin, one of the costli­est ob­sta­cles in West Texas.

"It's go­ing to change the land­scape for us," said Chris Gat­ja­nis, who runs the Per­mian Basin op­er­a­tions for Hal­libur­ton, the world's largest hy­draulic frac­tur­ing com­pany. "If you can cut out a piece of the cost of get­ting the sand to location, it makes the eco­nomics out here work bet­ter."

The burst of sand mine con­struc­tion in the Per­mian Basin is the oil in­dus­try's lat­est at­tempt to lower the cost of pro­duc­ing crude and make money at lower oil prices. The easy ac­cess to lo­cal sand mines and the sav­ings in trans­porta­tion costs from Mid­west­ern sand op­er­a­tions is ex­pected to slash sand costs by 40 per­cent, from about $140 a ton to $85, low­er­ing cost of bring­ing a new well into pro­duc­tion by another 5 per­cent and the break-even point for most drillers to less than $40 a bar­rel.

What this likely means is more oil com­ing out of the Per­mian and into over­sup­plied mar­kets, and more down­ward pres­sure on prices. Near record U.S. pro­duc­tion by in­creas­ingly ef­fi­cient shale drillers has largely off­set out­put cuts by OPEC, Rus­sia and other ma­jor producers, and stalled what had been a steady climb in prices from the down­turn's bottom of $26 a bar­rel to as high as $54.

"Not only are they ramp­ing up out­put, they're also ex­port­ing more oil," said John Kil­duff, an oil mar­ket an­a­lyst at Again Cap­i­tal. "That un­der­cuts OPEC in a big way."

Sand is a key in­gre­di­ent in the slurry that frack­ers blast un­der­ground to crack dense rock for­ma­tions, prop­ping open the fis­sures to al­low and oil and gas to es­cape. In re­cent years, oil com­pa­nies have dis­cov­ered many of their wells produce more oil with larger pay­loads of sand, and across the United States, they've greatly in­creased the amount of sand they use in each well, from an av­er­age of 5.3 mil­lion pounds of sand at the end of 2014 to 11.5 mil­lion pounds this year.

For one drilling site near Mid­land, Hal­libur­ton es­ti­mates it will need 400 trucks to bring all the sand it will pour un­der­ground. Each truck will carry at least 40,000 pounds of sand.

Two ma­jor rail lines, owned by Union Pa­cific and BNSF Rail­way, trans­port sand into the re­gion, but there's not enough ca­pac­ity on those rail lines to carry all the sand West Texas oil com­pa­nies need. Smaller op­er­a­tors often strug­gle to get enough sand for their well.

"The sand mines will take pres­sure off the sys­tem," Gat­ja­nis said. "That's one ad­van­tage the Per­mian is go­ing to have next year com­pared to other ar­eas. And it's the one thing peo­ple haven't fac­tored in that's go­ing to keep our costs down. It's huge."

More mines on the way

Sev­eral of the re­gion's next sand mines are ex­pected to come on­line in the first half of next year, sup­ply­ing oil com­pa­nies the 25,000 tons per well they plan to use for the largest wells in the Per­mian Basin. That's up from just 1,500 tons a few years ago.

All told, sand com­pa­nies have an­nounced plans to add pro­duc­tion ca­pac­ity of around 55 mil­lion tons of sand a year over the next 18 months, though an­a­lysts expect some of those projects will be can­celed and the added ca­pac­ity will come in around 35 mil­lion tons per year.

Still, what has been left untested is whether each oil pro­ducer in the Per­mian Basin will aban­don the white sand producers in Wis­con­sin — an un­likely prospect, be­cause some drillers pre­fer the tough, white grains over their brown coun­ter­parts pro­duced in Texas, said Ryan Car­brey, di­rec­tor of on­shore ser­vices at IHS Markit in Hous­ton. The white sand grains trans­ported from Wis­con­sin are typ­i­cally more durable un­der­ground in high pres­sures than brown sand pro­duced in West Texas, mak­ing it more re­li­able for hy­draulic frac­tur­ing.

"We've heard of some op­er­a­tors who are skep­ti­cal, but oth­ers are will­ing to use West Texas sand," he said.

An­a­lysts say there will be plenty of de­mand to sup­port mines in both Texas and Wis­con­sin. Next year, oil producers in the Per­mian Basin will ac­count for one-third of the de­mand for sand in the United States, at 33 mil­lion tons per year in 2018, grow­ing to roughly 50 mil­lion tons per year in 2022.

[HOUS­TON CHRONICLE PHOTO VIA AP]

Julio Grif­fin ad­justs the wa­ter pres­sure on a hy­dro-cannon at the Su­pe­rior Sil­ica Sands sand mine in Kosse, Texas. De­mand for sand is surg­ing as oil and gas pro­duc­tion in the Per­mian Basin is boom­ing again. Not only is the need for more sand on the rise with the in­crease in oil and gas pro­duc­tion in west Texas, but much more sand is be­ing pumped into each well now with the emerging the­sis that more sand equals more oil ex­tracted.

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