The Cheap Resource That Worries Oil Shale Drillers (3/06/17)
BY MarketWatch
Most Silicon Valley companies would kill for the sorts of gains made by sellers of plain old silicon.
Even after a recent selloff, leading producers of sand used by oil and gas producers--companies like Hi-Crush Partners (HCLP) and U.S. Silica Holdings (SLCA)--are up between 170% and 380% over the past year. Their gain is turning into oil producers' pain, though, and could affect the global energy market.
Used after shale formations have been fracked, sand was a hot commodity during the boom that ended in 2014. Now that activity is again on the upswing, sand producers have rebounded from crisis to expansion mode. Some analysts see demand for sand equaling or exceeding the prior peak even with drilling activity far lower. Drillers have discovered that more sand produces more oil or gas. Praveen Narra, an equity analyst at Raymond James, estimates that the amount used per foot of well depth last year was 40% to 50% greater than in 2014.
The amount and quality of sand used varies greatly according to geographical and geological constraints, but with usage per well higher and prices for sand about twice what they were just a year ago, costs are starting to bite the drillers
A production executive at Continental Resources (CLR) recently said on a conference call that the company would try to economize on sand relative to peers.
A typical well in the booming Permian Basin might have cost about $6 million to drill last year including around $ 350,000 worth of sand according to George O'Leary, an equity analyst at Tudor, Pickering, Holt & Co. By late 2017 he says that could reach $800,000 and conceivably top $1 million if providers flex their pricing muscles. Drillers are already facing a shortage of equipment and personnel for pressure pumping, another vital and expensive element in shale drilling. "We think there's significant service cost inflation to come," says Mr. Narra.
All else being equal, that hurts projected cash flows and means drillers will need higher prices to justify new investment.
Big exporters such as Saudi Arabia and Russia miscalculated back in 2014 the price at which shale producers would capitulate and also how quickly they would bounce back once prices stabilized.
Drilling costs came down significantly during the bust, in part because of drillers' ingenuity but in part because lack of demand made services, and sand, cheaper.
Surging prices are putting a smile on the faces of sand-company shareholders but also should cheer people up in Riyadh and Moscow.
"Someone said it takes 30 years to be an instant success" - Gabriel Barbier-Mueller, CEO of Harwood International
