It has been another roller-coaster ride for oil prices in 2017, with crude witnessing a strong recovery in recent months on the back of falling inventory levels and an improved demand outlook.
While Opec’s recent production cuts have had the desired effect of stabilising the market, the one part of the global energy complex to have made significant market share gains in recent years has been US shale – in particular the dominant Permian Basin.
We recently visited the Permian oilfields of West Texas to look at the potential stumbling blocks for the pace of US production. These issues are largely related to sand – an often-overlooked element of the fracturing process. While demand for sand is set to grow to more than 100 million tonnes per year by 2018, there are a number of sand-related issues investors must focus on:
The pumping problem
High-pressure, high-volume pumps fire water and sand down a well to ‘fracture’ the rock. The Texan market seems concerned with the increasing number of drilled, but uncompleted, wells and what this might mean for crude volumes. The majority of US exploration & production businesses (E&Ps) are aiming to pick-up completion rates, but it remains to be seen whether there will be enough pressure pumping crews available to hit production guidance.
The market is currently talking of a 500,000 undersupply of fracking horsepower, but we heard suggestions of a 1 million to 6 million horsepower undersupply. A larger undersupply means a greater drop in production growth – which has pricing implications for pump owners and manufacturers. Equipment attrition will also be higher in this cycle. Rebuild times and the useful life of fracking assets has declined from four and eight years in prior cycles to two and four, respectively. This likely means more capex for maintenance, rather than growth.
A trucking concern
Logistics are a big bottleneck. One sand provider we met could put 100 trucks on the road if drivers could be found. In fact, many sand companies are unable to produce enough sand to meet demand. A full sand truck carries 25 tonnes. If all 12 of the mines in the Texan city of Odessa reach expected annual capacity, it adds up to more than 1.6 million truckloads.
Thirsty sand mines
Water may be the trickiest obstacle associated with new sand mine development. A contact building a Permian sand plant suggested the company will consume as much as 500 gallons of water per minute in the production of up to 2 million tonnes of sand per year. Another group says 1,200 gallons per minute is required for mines producing 3 million tonnes a year.
In non-Permian mines, upwards of 2,000 gallons of water per minute is needed for a 1 million tonne facility. Reasons for the variance may include evaporation rates, or the washing requirements of the sand – with some sand requiring multiple washings.
Lizards. Yes, lizards
The dunes sagebrush lizard has been on and off the endangered species candidate list since 1996. This creates a potentially significant issue for the Permian Basin energy complex. Many E&P companies came to an arrangement with the US Fish & Wildlife Service (F&W) to avoid impacting some of the potentially critical areas where the lizard resided, in return for the authority not obstructing other drilling sites.
Since many of the new proposed sand mining sites are located around the lizard’s habitats, the F&W classifies any purchase from those sites as a clear breach of the prior arrangement and will object to any future drilling if companies are caught purchasing sand from these mines.