Frac sand in the pipeline | Industrial Minerals

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Frac sand in the pipeline

February 2012 Where North Americas thirst for oil and natural gas has grown, so too has the demand for frac sand. The supply rush has exerted intense pressure on railroads and the environment, but has been a gold mine to the recession-stricken continent

Sand on the move: Frac sand being transported at Preferred Sands plant in Woodbury, Minnesota

As North American hydrocarbon exploration shifts towards natural gas trapped in shale deposits, the importance of hydraulic fracturing sand (frac sand) has never been so pronounced. By 2018, it has been estimated that if hydraulic fracturing were eliminated, the US would suffer a 23% reduction in oil production, and a 57% reduction in natural gas production (Measuring the Economic and Energy Impacts of Proposals to Regulate Hydraulic Fracturing, IHS Global Insight, 2009). Frac sand is a proppant used in oil and gas exploration and extraction, and represents silica sands second largest market by volume in the US after glassmaking. According to the latest estimates of Thomas Dolley, mineral commodity specialist at the US Geological Survey (USGS), frac sand could account for as much as 50% of the total industrial sand and gravel produced in 2010, with further growth expected in 2011. The increase is substantial, given that frac sand accounted for just 27% of the 24.6m tonnes sand and gravel sold in 2009. As Dolly summarised to IM: Frac is awesome. Its huge. Hydraulic fracturing (fracking) involves the injection of more than a million gallons of water, sand (alternative proppants include bauxite, ceramic beads, resin coated proppants), and chemical additives at high pressure down and across into wells at depths of up to 3,048 metres. The pressurised frac fluid causes the rock layer to crack, and the fissures are held (propped) open by the frac sand and permit natural gas to flow up the well. 2011 marked a decrease in the number of dry natural gas wells completed, but an increase in the number of wet gas (gas liquid-rich wells) and oil wells hydraulically fractured, a trend reflected in lower gas prices, which fell from the $5.50-6.00/MMBtu in January 2010, to the $3.00-3.50/MMBtu range in January 2012. It is expected that the availability of cheap natural gas will further increase consumption - with the conversion of transport and power generation utilities to natural gas and that in the long term, natural gas consumption will spur an increase in dry natural gas well completions. Between 2005 and 2010, natural gas reserves grew 30% in the US, while onshore natural gas production increased 20%. The US rig count rose 17% year on year in December 2011, to 2,003, a statistic concurrent with similar rises throughout last year. All of this has equated to substantially increased demand for frac sand, and has sparked the much discussed

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gold rush in frac sand development, which has seen a host of juniors emerge, and nearly all of the industrys major players have outlined plans for significant expansions. Supply plays catch up As the USGSs Dolley explained: Its a well worn cliche now that theres a gold rush for frac sand. Certainly, its not gold, but the level of interest in it is almost like gold. The market for frac sand in the US is 22m tonnes. And, despite the fact that things are going gangbusters here, I dont think supply has caught up with demand. Going on the evidence of expansions and new projects announced throughout 2011, gangbusters is no understatement. The USGS estimates, ahead of its soon to be released report: 2010 Minerals Yearbook: Silica, that frac sand exploration will have doubled in 2010, with similar, if not greater increases expected from 2011. Id say frac sand exploration has gone up by a magnitude of two or three times in the last three years, and since 2000 it has quadrupled, said Dolley. Preferred Sands Pennsylvania-based Preferred Sands LLC is one player of note that has earmarked significant expansion plans in the coming years. The companys existing operations, based in Nebraska, Minnesota and Arizona, produce 1.2m tpa, 400,000 tpa and 550,000 tpa frac sand respectively, but the group hopes to bolster this production more than five-fold by 2013. In January this year, Preferred acquired all of the assets of Winn Bay Sand for an excess of $200m, including mining locations in Wisconsin, US and Saskatchewan, Canada, and now the company intends to ramp up its production to emerge as one of the largest frac sand producers in North America. In regards to the Winn Bay acquisition, weve been planning it for a relatively short amount of time. We didnt start looking until September. We were responding to extremely strong demand from our customers, Mike ONeill, CEO of Preferred Sands, told IM. We hope to produce 5m tonnes in 2012, and by 2013, we hope to be producing 5-7m tpa frac sand. We will emerge solidly as the second largest supplier in North America. I am confident that there will be sufficient demand to meet our new capacity. We are sold out of frac sand, said ONeill. Shift to coarse grades? Preferred Sands has access to coarse sands at all its deposits, throughout the US and Canada. This could be a key asset to the company, given that many industry sources have suggested that a there has been a general shift to coarser grades in recent months. We have seen a shift in demand towards the coarser grades. 100 mesh is practically worthless now. Some producers are actually trying to force it on customers as part of their contracts. The shift has been more towards 20/40, A.J. DeCenso, business development manager of separation and size reduction company, Sweco, a business unit of M-I LLC, told IM. Jerry McGee, CEO of Texas-based frac sand producer Cadre Proppants (part of Cadre Material Products LLC), attested to this: We sell exclusively to oil and gas markets, all our products have strong demand. Our 20/40 product is most often requested, though, it sees the strongest demand. 20/40 appears to be the optimal product for conductivity with its coarseness, and permeability with its crush resistance... Going forward, youre going to continue to see applications of frac sand with a coarser grain. Cadre is another major producer looking to expand its operations in the coming months. The group supplies the Permean and Eagle Ford shale gas basins, based in west and south Texas respectively. At present, the company produces 1.5bn lbs sand per year (680,000 tpa), at its plant in Voca, Texas.

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An overall shift in demand has confounded some sources, with some arguing that geological diversity of different shale formations would suggest that ideally, a range of sizes would be best suited to meet varying demand. For example, deeper zones require a finer grain, while shallower zones require a coarser grain. It is generally accepted, though, that a shift to oil and wet gas has strengthened the demand for coarse sand, given that it is better suited than fine. As ONeills analogy illustrated: It is similar to the way that large marbles would allow for fluid to easily flow through them. So too a larger, coarser sand will create an easier passage for oil and gas. Price pressure Almost inevitably it seems, the near inelastic demand for frac sand and lagging supply has exerted an upwards pressure on prices, both ex-works and delivered, across North America. Sources unanimously agreed that prices rose throughout 2011, and many expect the trend to continue at least throughout 2012. At what rate and for how long prices will continue to rise, though, is disputed between sources, with many suggesting that stiff competition will help keep them in check. Not only have frac sand prices increased due to increased transport costs, but a supply and demand imbalance has put upward pressure on the price of sand at the plant site. Furthermore, the supply shortage of premium Midwestern sand or equivalent in southern frac markets has resulted in production facilities importing raw premium sand to existing plans south of the Midwest, ie. Texas, one source told IM. A shortage of sand produced in Texas is unlikely to remain an issue for long, however, given the bustling activity of both established and emerging producers in the area. In June last year, Natural Resource Partners LP acquired 2.8 km2 frac sand reserves near Tyler, east Texas, for $16.5m, the sand from which the group intends to farm out to nearby shale gas plays. In May, Hunt Global Resources Inc. entered an agreement to acquire the mining rights to an estimated 100m tonnes northern white frac sand, also in Texas. I expect price rises to continue. With quartz frac proppant, I think the price is going to trend up, I dont think its going to go up tremendously because its competitive, theyll trend up slowly, but I dont expect them to spike. Generally, the price Im seeing coming out of the mine is $40-50/tonne, but they can go as high as $200-300/tonne, thats not unrealistic, said one source. One Texas-based producer added to IM: Pricing has increased across the board for all types of proppants. We expect increases to continue, owing to the supply and demand disparity. I expect this to level off in 2012, or 2013, given the number of customers versus quality sand becoming available. Table 1 gives an outline of free on board (FOB) prices, for varying regions in the US.

Location South-east Arkansas Eastern Ohio North-west Wisconsin Shreveport, Louisiana San Antonio, Texas North Dakota

Grade Mid quality 40/70 Mid quality 40/70 High quality 20/40 High quality 20/40 High quality 20/40 High quality 20/40

Price ($/tonne) 60 85 110 145 195 200

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Logistics Location, location, location!- was the message voiced by Scott Broughton, CEO of Stikine Energy Corp., last year. Stikine is developing two frac sand projects in British Columbia, Canada, and Broughton has emphasised that the groups relative proximity to two major emerging gas projects, the Montney and Horn River basins, is one of its most valuable assets. Last March, Broughton claimed that prices for frac sand delivered in British Columbia shale gas plays, from sources in Winn Bay, Saskatchewan, and Wisconsin, US, were as high as $300-325/tonne, compared with ex-works prices of $20-50/tonne. Like most industrial minerals, frac sand is a high volume, low margin commodity, and as such producers rely heavily on favourable logistics in order to keep costs down. Simply put, frac sand deposits that are too far from their end markets are unsuitable as commercial prospects, especially at a time of stiff competition, where every man and his dog appears to be developing a new operation, in every geologically prospective nook and cranny of North America. Broughtons assertion, though, that up to 80% of Stikines competitors costs are transport incurred, is not necessarily representative of the entire North American market; but sources are largely agreed that a frac sand deposits proximity to end markets is paramount to its success. Transport costs, I would think, at least the rail transport, and perhaps transport in general, are at least a third of the total cost. Id say handling at the mine is about 40%, and the mining about 24%, of the cost of sand when it is delivered, said the USGSs Tom Dolley. ONeill of Preferred Sands was slightly less conservative in his estimation of the transport impact on frac sand prices, and pointed to how a superior logistics model can foster great savings in both cost and time. In this business, distribution is everything... On average, logistics will double the cost of frac sand, so a strong logistics model makes you more competitive, ONeill told IM. Preferred owns its own rail fleet, and has the infrastructure to ship unit trains, allowing the group to make considerable time savings in delivering its sand. Typically, it can take producers eight to ten days to make a shipment, but Preferred can ship its product in as few as two-three days, yielding a 70% time saving. Our unit car capabilities allow us to ship up to ninety cars of dry processed sand, which saves our customers time and money on demurrage, ONeill explained.

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Railroad impact The frac sand-generated demand has been a double-edged sword for the US rail system. On one side, rail companies have thrived in the fresh and copious demand, implementing price increases and securing new contracts; but on the other, the rail system has found itself ill-equipped to cope with the unprecedented increase in movement. As Brennan Thomas, president of Texas-based frac sand logistics group, Pro Sands LLC, explained to IM: In many ways, rail is the best mode of transportation for long hauls of 300 miles (483km) or more. However, I believe the US rail system is beginning to see signs of strain, especially in the producing states, where rail was minimal to begin with. A.J. DeCenzo, business development manager at Kentucky-headquartered Sweco, concurred to IM that: Regarding railroads, its quite ironic what the increased frac sand movement has caused. Initially, tracks and lines were being removed to make way for public leisure alternatives, such as paths, but with the frac sand boom, theyre finding that there arent enough lines to meet demand. Pro Sands Thomas observed, though, that while railroad companies must clamour to stay ahead of the curve with their planning, the increased demand has provided significant opportunities for some of the short-line railroads, which are seeing their traffic double or triple. Pro Sands struck a new long-term lease and rail freight services agreement with Patriot Rail Corp. in December last year. The five-year agreement, signed between Pro Sands and Patriots Louisiana and North West Railroad (LNW) subsidiary, will see Pro Sands lease 10 acres (0.04 km2) of property at LNWs newly constructed Iron Bridge Road transload facility in Gibsland, Louisiana. The company has committed to moving a minimum of 2,400 carloads of freight annually into the facility in which Patriot has invested over $3m to develop and construct over the past year. The increased rail activity has had an inevitable and significant impact on end users, who find themselves footing the bill for the rising costs. As frac sand consultant K.J. Murdock explained to IM: Overall lease costs have doubled for covered hopper cars over the past two years and lease car availability, either third party or railroad supplies cars, is approaching nil. Increased costs also result from inefficient rail car utilisation, demurrage charges, the use of more expensive truck transportation, or sand storage charges. All these expenses are then passed on to the ultimate consumers of the sand the oil or gas production companies. Opposition

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The battle between environmental concerns and opposition to all things frac sand, from mining to hydraulic fracturing and the economic benefits that the frac sand industry brings to North America - has been one of the most hotly debated in the industrial minerals industry in 2011. Producers have had to negotiate a fine line between keeping competitive, while satisfying environmental regulations and appeasing local residents. In some instances, county planners have responded by implementing moratoriums on frac sand mining, in states such as Minnesota and Wisconsin. In most cases, though, their course is likely to be short-lived. On the other side, those actively involved with the frac sand market have suggested that ignorance is one of the key challenges the industry faces. On a micro scale, there is a tremendous amount of ignorance about mining and fracking in general. The industry is battling with ignorance, said Cadres McGee. Often, people buy into the first story they hear. We certainly support the facts being known. Frac sand is a great contributor to the economy, and an additive to the job picture. The figures do undoubtedly present an extremely strong economic case for the frac sand industry. According to economists and industry experts Penn State, the development of the Marcellus shale (which is dependent on hydraulic fracturing) could generate nearly 300,000 new jobs, over $6 bn in federal, state, and local tax revenue and nearly $25bn in value added to the economy by 2020. It is easy to see that given the USs ongoing recession, an argument against frac sand mining and use would have to be well fortified indeed to be taken seriously. Swecos DeCenso explained: Local officials and citizens are trying to educate themselves about the possible impacts, both positive and negative, of sand mining. But unfortunately, in a lot of cases the information they receive is less than accurate. Our industry needs to do a better job of explaining what we do and how we do it. Probably the best thing we could do is point to the stewardship that many sand producers have demonstrated in communities in other parts of the county where they have been operating as responsible corporate citizens for many decades. Opponents, however, have argued that the problems in frac sand mining run deeper. Patricia Popple, a Wisconsin resident and frac sand activist told IM last August that there are no standards in Wisconsin. She added that a lack of enforcement prevails in sand mining, suggesting that leakage from nearby mines is damaging the local environment. In another story covered by IM in November last year, Eau Claire county, Wisconsin implemented a moratorium on frac sand mining which will be in place until 31 April 2012. The move was not unique - in the last six months alone, Midwest counties Red Wing, Wabasha and Winona, all implemented moratoriums - but Eau Claires is worthy of note given the countys board remained confident that junior developers looking to secure permitting would still be guaranteed to do so, asserting that the moratorium would simply serve as a breather. It is conceivable that moratoriums laid down in other Midwestern counties are also serving to buy time, as a host of juniors look to develop. Frac sand consultant for junior developer Victory Nickel Inc., K.J. Murdock, said to IM: Permitting challenges for frac sand miners are a combination of poor communication with the public, accepting undue restrictions in order to get permits, and a lack of inventiveness in getting the product to market (for example a failure to explore alternatives to truck transportation between mine sites and processing or transload plants.) The stress of getting the US economy back on track, along with the need for good stable jobs, will help to create an environment where environmental concerns will eventually be worked out, and the quality of the frac mining companys applications will improve. For now, it seems fair to assume that the frac sand bubble will not burst, given its vital role in oil and gas exploration. Oil and gas companies are dependent on frac sand, and the US is dependent on oil and gas. In a telling move last September, Texas-based oil and natural gas company EOG Resources Inc. announced that it would start up its own 1.7m tpa frac sand plant, and in so doing secured its own supply. The consensus, it seems, is that while environmental issues need to be addressed, the economic benefits of frac sand mining, and hydraulic fracturing, will dictate the proppant minerals future. Selected North American frac sand supply and market movements Company Carmeuse Lime & Stone Location Barron County, Wisconsin, US Comments Pittsburgh-based Carmeuse said in May 2011 said that it was taking steps towards a new frac sand plant in

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Wisconsin, with construction targeted for 2012 and production for 2013 group is looking to exploit Northern White sand, which it describes as the obvious way to go Carmeuse brought an expansion online at its Voca West Brady operation in March, which it said was intended to produce more grades and to make it one of the most efficient frac plants in the Brady operations group the expansion has brought new grades online, including 8/12 filter pack grade, 10/16 filter pack grade, 30/50 API frac sand and 40/70 API frac sand Hunt plans to produce 1m tpa frac sand at its site in Conroe, Texas said to be in discussions with several large oil and gas service customers interested in purchasing frac sand from mine owns mining rights to 1.4km2 frac land containing 21m tonnes of frac sand set to mine Texas Brady sand (Brady sand is the name by which Texas sand is commonly referred), which will yield significant savings owing to its lower crush resistance, suitable for shallower depths targets 2012 for project construction IE Partners is targeting the production of 300,000 tpa frac sand from a small vein in the Jordan formation, also in Wisconsin company said it will allow seasons to determine how it progresses project supported by good infrastructure, with a rail spur within 48km of the deposit deposit totals 15m tonnes frac sand ore Pennsylvania-based Preferred Sands announced in January this year that it had acquired all of the assets of Winn Bay Sand for an excess of $200m, including mining locations in Wisconsin, US, and Saskatchewan, Canada the company said that the acquisition made it the largest frac sand producer in Canada, and one of the top three in the US the Winn Bay assets will add up to 1.7m s. tons (1.54m tonnes) to Preferreds total output, and by 2013, up to 2.5m s. tons (2.27m tonnes) to its total output sand from these assets set to supply all

Hunt Global Resources Inc.

Conroe, Texas, US

Interstate Energy Partners LLC

Grantsburg, western Wisconsin, US

Preferred Sands LLC

Wisconsin, US; Saskatchewan, Canada

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of Canada, North Dakota, and parts of Wyoming financing secured by work with Barclays and JP Morgan, and from revenues generated by Preferreds existing operations frac sand supply and logistics company expects to start begin producing frac sand itself in April 2012, at its western Texas-based plant targets initial production of 360,000 tpa of high quality, coarse frac sand has growth plans to bring online at least two additional, similarly sized plants by 2013, in southern Texas and close to the Marcellus shale formation, which covers parts of Pennsylvania and New York in December last year, the group entered a long-term lease and rail freight services agreement with Patriot Rail Corp., to supply customers in the Haynesville shale region TSX-listed Stikine Energy Corp. is looking to produce 1m tpa frac sand at its Nonda pilot plant, located 150km west of the Horn River Basin, British Columbia in December 2011, the group received the results of a preliminary economic assessment (PEA), which provided for a mine life of 25 years, a base case net flow of $2.96bn, and an alternative case net cash flow of $4.21bn will supply frac sand to the British Columbia Horn River and Montney basins, said to have demand for 400,000 tpa and 900,000 tpa frac sand respectively in January this year, Stikine received crush test results which demonstrated that pilot plant and bench scale tests for the groups Nonda and Angus materials have achieved the recommended specifications for API/ISO crush tests US Silica, one of the largest producers of commercial silica in the US, said last July that it has filed for a $200m initial public offering (IPO) of its common stock the company said in a filing that the proceeds will be used to finance acquisitions and for general corporate purposes in September 2011, Canadas Victory Nickel received approval from its board of directors to develop its Minago

Pro Sands LLC

Texas, US

Stikine Energy Corp.

Vancouver, Canada

US Silica Holdings Inc.

Berkeley Springs, West Virginia

Victory Nickel Inc.

Manitoba, Canada

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sulphide, nickel and frac sand deposit in Manitoba, Canada plans to mine 11.2m tonnes of frac sand that overlies the companys nickel deposit in Manitobas Thompson nickel belt project has potential to generate an average revenue, net of freight, of $70m the group is seeking a joint venture partner in order to progress with development, targeting production in Q1 2014 137m tonne clay, limestone and sandstone layer overlying the nickel mineralisation must be removed as part of pre-stripping the open pit company expects frac sand to be distributed by third party

Frac sand at a glance

Hydraulic fracturing (frac) sand is a form of silica sand with well constrained size, roundness and sphericity characteristics. It is traditionally divided into two types - white sand, and brown sand. The standard for white sand is generally accepted to be the St Peters sandstone, which is found throughout Ottawa in Illinois, USA, in large deposits. The St Peters sandstone, which was used during early development of hydraulic fracturing testing, has continued to be mined for frac sand, as it comprises well rounded grains that meet crush resistance tests and American Petroleum Institute (API) standards (IM January 07, p.59: The facts of frac). Meanwhile, brown sand has traditionally been sourced from the Hickory sandstone found near Brady in Texas, USA. Brown sand is polycrystalline (comprising multiple crystals bound together), and is weaker than the monocrystalline white sand. Frac sand must be >99% quartz or silica. Silica sand deposits are commonly mined for use in glassmaking, filtration media, blasting media, ceramic products, and fillers in a variety of other applications. Most silica sand deposits in the US have either been discovered, or, at least, are known to exist. Resin-coated sand In the mid-1970s the oil and gas market saw the development of the first resin-coated sand proppants. Although resin does not increase the strength of the sand, its role is nonetheless vital. By applying resin, the sand pack can be consolidated and the risk of proppant flow-back is reduced. Further, when the sand grains fail and crush under pressure, the resin coating prevents individual fines from escaping. Resin-coating can also improve the distribution of stresses applied to the sand downhole. API standards The API has a number of specifications for proppants which the industry uses as a guideline for factors such as crush resistance, roundness and sphericity, and the amount of fines allowed above and below the specific mesh size. These factors all affect conductivity or the proppant pack. Proppant size is measured using ASTM Internationals (formerly American Society for Testing and Materials) sieve

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series of particle diameter. API requires that a minimum of 90% of the specific proppant size should fall between the designated sieve sizes. Not more than 0.1% of the total tested sample should be larger than the first sieve size, and not more than 1% should be smaller than the last sieve size (Table 1). The main frac sand grades sold are 20/40, 30/50 and 40/70. The move to oil and wet gas extraction has strengthened demand for coarser grades. Sphericity and roundness The API standards for sphericity and roundness of a quartz grain are simply an estimate of how closely the quartz grain conforms to a spherical shape and its relative roundness. The grain is assessed using the average radius corners divided by the radius of the maximum inscribed circle.

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