Industrial minerals oilfield minerals outlook 2014 final


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Industrial minerals oilfield minerals outlook 2014 final

  1. 1. 1 Frac Sand – New Volumes Presented by Taylor Robinson, President PLG Consulting June 26, 2014
  2. 2. 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. 3. 3 Proppants – High Level Overview Common fracking industry “rule of thumb” has been:  80% / 10% / 10% (Natural Sand, Ceramics, ResinCoated) volume usage  Everybody has their secret recipe that is different for each play  Ratio has shifted towards more natural sand overall – sometimes 100% 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 inWrens, 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. 4. 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. 5. 5 More well bores per well pad  Directional bores to multiple shale layers  Reduced well spacing per acreage – increases well density  Zipper wells – stimulating two wells in tandem Optimal lateral lengths  Lateral lengths had tripled since the start of horizontal drilling, but this trend is being challenged by new practices Zone fracturing  Micro-fracture testing at multiple points vs. one average test that enables highest extractions of each zone Shorter, fatter fractures  Bigger holes in casing combined with additional sand and water use Nearly all new techniques drive more sand usage! Productivity gains continue  Time required for drilling 15,000+ ft. well cut in half in last two years (9 days vs. 18 days)  Eagle Ford example – new well oil production per rig has increased by 150% over past 3 years New FrackingTechniques Drive Increased Production At Lower Costs Source: Marathon, February 2014 Source: Whiting Petroleum, December Investor presentation State of the Proppants Market
  6. 6. 6 Frac Sand Deposit Locations Most desired sand comes from WI, MN, IL MO has momentum More interest in OK State of the Proppants Market
  7. 7. 7 Major Sand Shipping Flows State of the Proppants Market
  8. 8. 8 • 91 operational frac sand mines • 15 in development • 15 permitted • 16 proposed • 5 stalled • 3 inactive • Trempealeau County moratorium on new facilities effective August 30, 2013 • Most activeWI county relative to frac sand permits • 26 companies • Moratorium in effect for up to one year, pending environmental and ethics investigations • State continues to be a legal, environmental and quality of life battleground Sand Mining and Processing -Wisconsin Source: as of May 1, 2014 As of 5/1/14 State of the Proppants Market Trempealeau County Area
  9. 9. 9 Sand Mining and Processing - Minnesota • State has launched a multi-agency, cohesive management approach, including 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 Control Agency (PCA) • Department of Health • Department of Transportation • Department of Agriculture • Have had “growing pains” in establishing common data and ability to react to constituency requests • Map notation regarding lack of previously displayed location data is example • Winona, MN PCA data request is three months overdue • Earlier this week, MN Court of Appeals upheld decision to not require an environmental impact statement for Winona County project, creating precedent for similar disputes State of the Proppants Market High Activity Area for Active & Proposed Frac Sand Mining, Processing and Transloading (*)
  10. 10. 10 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:
  11. 11. 11 Missouri - Up and Coming State of the Proppants Market Missouri has an existing sand industry – frac sand is a natural evolution Missouri has geographic advantage and potentially logistics advantage vs. other Northern White locations Some facilities have access to multiple Class I rail carriers Barge access is plentiful to the Northern White sand mines in SE Missouri
  12. 12. 12 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
  13. 13. 13 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
  14. 14. 14 Processed Sand -Total 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 16% • Increased freight rate (13% 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 ~ $126 Logistics costs drive ~ 63% of total delivered sand cost State of the Proppants Market Sand, 36% Destination Transload & Trucking, 25% Rail - Freight, FSC and Eqp Lease, 38%
  15. 15. 15 Sand Railcar Market Conditions – Small Covered Hoppers Current market described as “high demand”, “red hot”, “very tight” by leasing companies  Increased frac sand per well demand, surging liquids production  Additional sand sources opening inWisconsin  New orders from cement shippers Best availability is generally well into 2015 Typical full service lease rates $600 - $650 Frac sand shippers/receivers will continue to move towards more efficient methods of rail transportation  Manifest shipments require 2X the number of railcars vs. unit trains due to increased cycle times  Use of manifest service usually encourages use of railcar as storage at destination, further increasing fleet requirements Cement consumption is expected to grow by 6.4% in 2014 and 6.2% in 2015, encouraging railcar orders State of the Proppants Market
  16. 16. 16 End Market Drivers Will Also Influence Growth Curve of Industry Upside demand levers • Domestic crude will continue to displace imports due to competitive and profitable delivered cost of tight light oil (from shale) • Global oil prices likely stay relatively high • Increase demand for natural gas – higher prices eventually • Continued switch to natural gas from coal for electricity generation • Dry gas exports to Mexico • LNG exports • CNG/LNG for transportation markets Downside demand levers • Crash in crude oil prices • Government intervention and/or more regulations • Global recession • Fracking technology that displaces sand as a proppant??? State of the Proppants Market
  17. 17. 17 #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
  18. 18. 18 #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
  19. 19. 19 What Will the Frac Sand 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! State of the Proppants Market
  20. 20. 20 ThankYou! State of the Proppants Market This presentation is available at: categories/presentations For follow up questions and information, please contact: Taylor Robinson, President +1 (508) 982-1319 /