By COLLIN EATON
Texas (AP) — Ten miles east of Kermit, Texas — a city 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 sand by the ton for U.S. frackers.
The Houston Chronicle reports the $325 million operation, owned by the Houston-based sand supplier Hi-Crush Partners, will eventually allow oil producers to avoid the use of the expensive rail lines that are now need to bring white sand in from Wisconsin. The mine will be the first of its kind in West Texas. But over the next 18 months, Hi-Crush’s rivals U.S. Silica Co. and Fairmount Santrol plan to build more mines that will send millions of tons of sand into the Permian Basin.
Oil producers in that region are looking forward to no longer have to import sand from Wisconsin, which they consider one of their biggest costs.
“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.”
Even so, a big unknown is whether each oil producer in the Permian Basin will abandon the white sand producers in Wisconsin. In some ways, that’s an unlikely prospect. Many drillers still prefer the tough, white grains over the brown sand 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.
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. It’s also expected to reduce the 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 over-supplied markets, and more downward pressure on prices. Near-record U.S. production by increasingly efficient shale drillers has largely offset output reductions by OPEC, Russia and other big 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 big ingredient in the slurry that frackers blast underground to crack dense rock formations, propping open the fissures to allow oil and gas to escape. In recent years, oil companies have discovered many of their wells produce more oil with larger payloads of sand. Throughout the United States, they’ve greatly increased the amount of sand they use in each well, going from 5.3 million pounds of sand on average 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 big 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.”
Several of the region’s next sand mines are expected to come online in the first half of next year, supplying oil companies with the 25,000 tons they plan to use for each of 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 about 55 million tons of sand worth of production capacity a year in the next 18 months, although analysts expect some of those projects will be canceled and the added capacity will come in at about 35 million tons a year.
Hi-Crush began producing and selling sand at its Kermit-area mine, which produces 3 million tons of sand a year, at the end of last month, two months ahead of schedule. All that sand would take 120,000 separate truckloads to transport to well sites, according to IHS Markit.
“It’s a big market for us,” said Laura Folton, chief financial officer of Hi-Crush in Houston. “They’re using a heck of a lot more sand in each well.”