As U.S. onshore operators hone their skills to extract more oil and natural gas from onshore basins, "sand intensity" should fuel an unprecedented growth in proppant demand, Raymond James & Associates Inc. analysts said in a note Monday.
More fractures and longer laterals "point to an outsized U.S. sand demand explosion over the next two years," said analysts led by Praveen Narra and J. Marshall Adkins. Analysts are forecasting the average 2017 U.S. rig count will be 60% below activity levels during 2014, but domestic proppant demand should exceed 2014 levels.
"While there will eventually be a limit to U.S. sand intensity, we are confident there is substantial running room for more sand consumption per well over the next two years,” analysts said. “Coupling these trends with an expected cyclical activity recovery, we expect U.S. sand volumes to nearly double this year to all-time highs and grow another 45%-plus in 2018."
U.S. sand producers began to report improved pricing during the third quarter. However, they may need a 50%-plus price increase "at least into the $40/ton range from the current $25/ton average” to bring back some of the higher cost, idled mine capacity.
Another issue is logistic, as bottlenecks develop and pressure delivered sand pricing, “even though many companies are working to build-out or optimize the delivery process,” the Raymond James analysts said.
The severe slump that struck the industry in the second half of 2014 collapsed the U.S. rig count into 2016 by nearly 75%, but U.S. sand demand over the period fell by only around 40%.
“U.S. sand demand in 2018 should be at least 150% higher than 2016, up to a whopping 80 million tons,” the analysts said. “While we certainly expect new proppant supply to hit the market, this sharp demand surge should drive sand pricing per ton significantly higher.”
Exploration and production companies “have seen the value of using tighter fracture spacing, longer laterals and greater sand intensity per well,” evidenced by the huge production increases that correlate with the amount of sand used.
In each of the “major plays,” defined as the Permian Basin, Eagle Ford and Bakken shales, “we have seen significant increases in proppant usage per lateral foot and lateral lengths…” Proppant intensity, i.e., pounds/lateral foot (lb/ft), has increased by more than 50% average since the start of 2014.
The shift toward higher proppant intensity is in the cards, the analysts said.
“While the average U.S. sand intensity has doubled over the past few years from around 700 lb/ft to about 1,400 lb/ft, many leading-edge operators are testing at rates higher than 2,000 lb/ft, and in some cases north of 3,000 lb/ft.”
The Permian should continue to remain the largest target for sand delivery moving forward, because wells in West Texas/New Mexico are “often” pumping a full-unit train, around 100 railcars of sand during completions.
Other regions are key to overall sand market growth, particularly the Eagle Ford and Appalachia targets, but the Permian “has emerged as the clear leader…” The Permian’s overall proppant intensity rose 43% from 2014 to 2016, with lateral lengths rising 20%. By 2018,” the analysts said, “we estimate that 29 million tons (36%) will come from the Permian.”