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Robinson presents "State of the Proppants Market" presentation Robinson presents "State of the Proppants Market" presentation Presentation Transcript

  • 1 Logistics Engineering Supply Chain State of the Proppants Market Prepared for Presented by Taylor Robinson, President, PLG Consulting March 12, 2014 Houston, TX
  • 2 Boutique consulting firm with team members throughout North America • Established in 2001 • Over 90 clients and 250 engagements • Significant shale development practice since 2010 Practice Areas • Logistics • Engineering • Supply Chain Consulting services • Strategy & optimization • Assessments & best practice benchmarking • Logistics assets & infrastructure development • Supply Chain design & operations • Hazmat training, auditing & risk assessment • M&A/investments/private equity Industry verticals • Energy • Bulk commodities • Manufactured goods • Private Equity About PLG Consulting State of the Proppants Market Partial Client List
  • 3 Proppants – High Level Overview Common fracking industry “rule of thumb” has been:  80% / 10% / 10% (Natural Sand, Ceramics, Resin Coated) volume usage  Everybody has their secret recipe that is different for each play  Ratio today has shifted towards more natural sand overall Demand  Natural sand rising significantly due to new stimulation techniques  Ceramic and resin coated volumes are flat to down  Natural sand is ~10% of ceramic proppant cost and can be delivered in cost- efficient unit train service Supply  New natural sand mines continue to come on line, trans-loading is adequate  New capacity for ceramics coming –PyraMax (Imerys) opening in Wrens, GA Trends  Ceramics needed for high pressure drilling – deep shale and dry gas  Gas rigs still <300, not expected to rise significantly in near future State of the Proppants Market
  • 4 Frac Sand Supply Chain Definition and Industry Trends Mining Processing Rail Load-out Long Haul Rail Transloading and Storage Trucking to Well • Rapid growth and maturation of hydraulic fracturing and frac sand industries simultaneously • Consolidation of responsibilities – out-sourced or in-sourced • Demand has fluctuated but strong upward trend • Sand supply growing while consolidating number of players • Unit train shipping is the game-changing logistics development • Trucking market remains regional and disaggregated State of the Proppants Market
  • 5 Frac Sand Deposit Locations Most desired sand comes from WI, MN, IL MO has momentum More interest in OK State of the Proppants Market
  • 6 Major Sand Shipping Flows State of the Proppants Market
  • 7 • 72 operational frac sand mines • 20 in development • 13 permitted • 17 proposed • Trempealeau County moratorium on new facilities effective August 30, 2013 • Most activeWI county relative to frac sand permits • 26 companies • 4,733 acres • Moratorium in effect for up to one year, pending environmental and ethics investigations Sand Mining and Processing -Wisconsin Source: as of May 1, 2013 As of 5/1 Trempealeau County Area State of the Proppants Market
  • 8 Sand Mining and Processing - Minnesota Source: • 20 active frac sand mining, processing and transloading facilities • Over 20 facilities in the planning stages • State has launched multi-agency website ( to provide a single source of information regarding rules and activities involving the mining, transportation and processing of silica sand • Environmental Quality Board (EQB) • Minnesota Department of Natural Resources (DNR) • Pollution ControlAgency (PCA) • Department of Health • Department ofTransportation • Department of Agriculture Rule- Making Authority State of the Proppants Market
  • 9 Sand Mining and Processing - Illinois Major facilities for key players (U.S. Silica, Santrol/Fairmount, Unimin) and increasing number of mid-tier and new sand companies Key players are expanding existing facilities and acquiring new sites Well-positioned to provide high-quality Northern White product at a lower delivered cost per ton vs. WI/MN sand to • Eagle Ford • Permian • Marcellus/Utica To-date support from state government leaders for expansion and new development projects Increasing environmental protests from citizen groups State of the Proppants Market Source:
  • 10 Hydraulic Fracturing Materials Inputs and Logistics Involved Materials Chemicals Clean Water/ Cement Frac Sand OCTG (Pipe) Source to Transloading 2 Local source 40 ~ 70 5 Transloading to Wellhead Site 8 ~1,000 160 ~ 280 20 ~1,200 Total Truckloads Oil/Gas/NGLs Truck, Rail, Pipeline Waste Water ~500 Total Truckloads State of the Proppants Market
  • 11 Frac Sand Handled by Railroads 0 10,000 20,000 30,000 40,000 50,000 60,000 Carloads Quarterly Data UP BNSF NS CN CSXT CPRS KCS STCC 14413 Source: US Rail Desktop Western carriers are geographically advantaged State of the Proppants Market
  • 12 Processed SandTotal Delivered Cost perTon Source: PLG analysis using BNSF public pricing – does not include fixed assets at origin or destination “Benchmark” unit train example – Illinois to South Texas • Single-line haul (one rail carrier) • Private railcars • Railcar fleet achieving two round trips per month • Origin sand facility has direct rail load-out • Destination trucking is less than 100 miles Unit train operations include efficient origin/destination handling • 24 – 36 hours per train Manifest service would increase rail-related costs by 17% • Increased freight rate (14% higher) • Railcar fleet only achieves one turn per month, on average • Additional trackage required to accommodate larger fleet • Delivery patterns are more variable, requiring additional destination storage and inventory Total Delivered Cost perTon ~ $122 Sand, 33% Destination Transload &Trucking, 25% Rail - Freight, FSC and Eqp Lease, 42% Logistics costs drive ~ 67% of total delivered sand cost State of the Proppants Market
  • 13 End Market Drivers Will Also Influence Growth Curve of Industry Upside demand levers • Domestic crude will continue to displace imports • Global oil prices stay relatively high • Increase demand for natural gas • Continued switch to natural gas from coal for electricity generation • Dry gas exports to Mexico • LNG exports • CNG/LNG for transportation markets • Longer term US natural gas price increases Downside demand levers • Crash in crude oil prices • Government intervention and/or more regulations • Global recession • Fracking technology that displaces sand as a proppant
  • 14 #1 Key to Winning – Most Efficient Supply Chain Mining Processing Rail Load-out Long Haul Rail Transloading and Storage Trucking to Well “Never shut down a well” – supply availability of quality product remains “given” Total cost “down the hole” by the end customer will become more precise and accurate • Logistics cost is the highest portion of total delivered cost – best freight and handling cost structure • Hidden or soft costs at the customer will also drive sourcing decisions Winners will turn the supply chain into a conveyor belt – smooth, predictable, synchronized • Find ways to tighten relationship with customers – schedule synchronization • Utilize supply chain technology to further improve their performance and increase efficiency • Invest in strengthening supply chain teams • Cash flow will move up the priority list for sand companies – Inventory management will become important State of the Proppants Market
  • 15 #2 Key to Winning – LeverageWill Drive Further Industry Consolidation Mining Processing Rail Load-out Long Haul Rail Transloading and Storage Trucking to Well End customers will continue to mix in-sourcing and outsourcing • Early in-sourcing driven by supply assurance and controlling own destiny • Can outsource beat the most efficient in-sourcing? • Will the end customers consider sand to be core competency? End customers desire “Storefronts” – can choose between “Walmart andTarget” • Allows them to focus on their core competencies • Minimizes their inventory costs while maximizing their flexibility Leaders understand the total cost structure with trade-offs and leverage the whole supply chain Best “Tier 1” suppliers will win State of the Proppants Market
  • 16 What Will the Proppants Industry Look Like in 3 to 5Years? Frac sand leads with significant growth forecast • New fracking techniques and faster well completion for liquids • New gas demand will drive gas drilling growth down the road • Resin coated sand and ceramics not expected to grow significantly • Price inflation coming later in 2014 and 2015? “Survival of the fittest” supply chain – the evolution will continue • “Tier 1” supply base will further consolidate smaller players • The best niche players will thrive as 2nd tier and in small plays • Supply chain practices and technology flow in from other industries • Continuous Improvement mindset required to win Heavy focus on cost reduction will continue • Cost and margin will continue to be rationalized – direct and soft • Difficult to win without volume leverage • Sand supply • Unit trains • High volume transload and storage capability Will continue to be an exciting industry for the foreseeable future!
  • 17 ThankYou! For follow up questions and information, please contact: Taylor Robinson, President +1-508-982-1319 / This presentation is available at: State of the Proppants Market