Quick Permian Rebound Takes Proppant Supplies From Excess to Scarcity

 By Tim Beims and Colter Cookson  

The American Oil & Gas Reporter

The Merriam-Webster dictionary defines cyclicity as the state of occurring or moving in cycles. It could have saved some ink and simply written “see oil and gas.”

Less than a year after an historic collapse in demand led to excess supplies of everything from diesel to drill pipe, the word “shortage” is suddenly finding its way back to the industry’s vocabulary as global inventories draw down and operators return to the work of drilling and completing wells. In few areas is the shift in sentiment more pronounced than in the U.S. fracturing sand market.

Even with frac sand consumption in onshore shale plays skyrocketing from 42 million tons in 2016 to 116 million tons in 2019, supply grew so fast that analysts began warning two years ago that the influx of sands from new in-basin mines was “crushing” the supply/demand balance. According to one count, some two dozen frac sand mines opened in the Permian, seven each in the Eagle Ford and Haynesville, and five in the Mid-Continent, bumping total U.S. supply to nearly 225 million tons in 2019.

The message was clear: Even though the volume of sand being pumped per well was jumping off the chart, frac sand supplies were so plentiful that prices were being eroded, pressuring the margins of sand suppliers. But that was then, and this is now. While prices have remained subdued, the supply imbalance with demand may be swinging decisively back in the opposite direction.

In January, Kpler issued research that likely caught more than a few by surprise by declaring U.S. shale plays would face constraints following a strong activity recovery at the start of 2021. Specifically, Kpler’s report stated, “Frac sand, a critical-path component in fracs, could be a chokepoint for the industry’s rally in the first quarter of 2021 as fleets compete to stay sanded in a weakened supply chain.”

Tight Sand Ahead

As completion activity rebounds, operators may have trouble getting frac sand, warns Hunter Wallace, chief operating officer of Atlas Sand, which owns two sand mines in West Texas. He predicts 40/70 proppant will be especially tight.

“Even when they were brand new, most in-basin sand plants had downtime or other issues that caused them to miss deliveries,” he recalls. “Now that they are three or four years old, those issues may be worse, especially since many of their owners had to defer maintenance and lay off employees during 2020.”

Atlas is the only company with two sand plants that managed to keep both open throughout 2020, reports John Turner, the company’s chief financial officer. “We have lower operating expenses and a better capital structure than most of our peers, so although the volumes we sold dropped significantly, we were able to keep our plants open and our shifts active,” he explains.

With less need to produce sand, Wallace says the company’s employees spent four months focusing on making its plants near Kermit and Monahans, more efficient. “We built the plants with automation in mind, so we had a pool of data to look at on almost every piece of equipment,” he reports. “However, we did not have the time to fully leverage that data until last year.”

To illustrate how valuable the data can be, Wallace offers a sand dryer. “From the data, we know exactly when and how long that dryer was down. By looking at data points around those failures, such as moisture readings or the amount of sand in the surge bins, we can identify each failure’s root cause. By doing that over a month, we can spot the most common problems and find ways to address them.”

One of the most impactful changes Atlas made during 2020 was converting from traditional yellow iron mining to dredge mining. Yellow iron mining requires as many as a dozen men running diesel-powered heavy equipment, such as excavators, dozers and haul trucks, to mine, transport, stockpile and feed sand from the mine to the plant for processing. In contrast, Wallace describes, the new process only requires one person to run an electric-powered dredge that sucks up the sand and water and transports it straight into the plant.

Each plant’s dredge floats peacefully in a pond that formed naturally in the depression created by their sand mine, Wallace says. He reports that upgrading to dredging cut mining costs at both plants 75%.

“We are uniquely capable of implementing the dredging process because our deposits are the only ones in the Permian Basin with water naturally available,” he says. “Instead of ending 20-50 feet below the surface, our deposits extend as far as 145 feet. These large underground depressions filled with extremely porous sand act like giant tanks, collecting water from the area.”

Atlas uncovered water only a few feet below the surface while constructing its two plants but needed to verify the water supply would be stable before upgrading to dredging, Wallace relates.

As part of a broader effort to minimize costs, Atlas Sand has upgraded both of its sand mines from yellow iron mining to dredge mining, a process that requires less equipment. According to the company, this change has cut mining costs 75%.

Centralizing Loading

Another major improvement Atlas made last year was moving its on-site loading teams to a command center in Austin, Tx. Wallace notes that costs much less than housing people in man camps in West Texas and paying for their transportation home when their shifts end. It also means workers can spend more time with their friends and families.

“Moving both plants teams’ to the same facility gives us several efficiencies,” he adds. “Before, if Monahans had an hour of heavy traffic while Kermit was slow, the loaders at Kermit would be idle. Now they can help the Monahans team keep trucks moving in and out as efficiently as possible.”

The command center makes it easier to pair truckers with loaders who have the knowledge to help them, Wallace mentions. For example, if a driver who struggles with English has a complex issue, his initial contact can transfer him to a Spanish-speaking colleague so they can resolve that issue more quickly.

According to Wallace, the command center has allowed Atlas to maintain an average total time on the mine site of 10 minutes while reducing its operating costs and improving truckers’ experience.

Reliability

Wallace admits, “Every sand plant has its issues. After all, sand is one of the most destructive things you can put into a machine, and it is all our equipment deals with 24/7/365.” However, he also expresses pride in Atlas’s performance, proclaiming, “Since we fired up our plants in 2018, we have yet to cancel or miss an order that was placed with us, and I don’t think many or any of the other Permian sand plants can say that.”

That is partly because the company’s plants include enough redundancy to compensate for equipment downtime, but it also reflects a disciplined approach to sales, Wallace says. “Because of unexpected delays or other issues on the well site, customers often end up pulling less sand than they ask plants to allocate to them,” he relates. “To ensure all their sand gets sold and maximize their profits, it is tempting for plants to overbook their capacity.

“We do not do that,” Wallace assures. “We are willing to accept lower short-term sales to ensure we can keep our promises even when operators hit their stride and need exactly what they expect to need.”

According to Wallace, that approach has helped the company build strong relationships with customers. “Our customers know we are going to deliver what we say we are going to deliver, so when we ask what they expect to need over the next 30-60 days, they give us a straight answer,” he reports.

Atlas uses this information to secure capacity from its trucking partners. “Through preplanning and communication, we have gotten enough truckers to make deliveries even in a market where truckers are in short supply,” Wallace says. “I cannot say we are entirely insulated from trucking issues, but we should be able to manage as long as our customers continue to give us a clear line of sight into their needs.”

Reproduced in part for Atlas Sand with permission from The American Oil & Gas Reporter.

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