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Carbo CEO Takes Aim at ‘Low Quality’ Chinese Proppants

Ceramic proppant leader Carbo Ceramics Inc. is attempting to get the word out that "low quality" products from China aren't worth the lower price producers pay to increase oil and gas recoveries.

The Houston operator has a "technical marketing campaign" underway to explain why the more expensive proppants produced by Carbo and others is worth the price, CEO Gary Kolstad said during a quarterly conference call late last month.

It's not a surprise, he said, to see imported ceramic proppants gaining market share because they are lower priced. And after all, exploration and production (E&P) operators need a lot of proppant for pressure pumping fractured wells.

Buyer beware, Kolstad warned.

"There is a shortage of quality ceramic proppant here in North America, and we all have to work to get this low-quality Chinese product out of the country." Those inferior proppants aren't worth the savings, said the CEO. "E&P suffers from production and recovery, shareholders suffer, royalty owners suffer. So we have to replace that..."

Carbo is a production enhancement company, specializing in proppant technology to design, build and optimize well fractures. Proppant, which comes in three varieties -- sand, resin-coated sand (RCS) and ceramic -- fills fractures and "props" them open, providing permeable channels to allow hydrocarbons flow more freely.

Sand remains the top selling proppant for E&Ps because of its availability and low cost. RCS proppants are the second most-used brand, while the highest price ceramics are third. Carbo also makes RCS proppants, but it's top seller is ceramics. Although sand is the cheapest proppant, it lacks uniform sizes, which Carbo and other premium manufacturers claim offers the best bang for the buck. Carbo also makes RCS proppant.

To keep up with rising ceramic proppant demand, Carbo is expanding manufacturing capacity to keep up with needed supplies, Kolstad told analysts.

"That’s why we're going to continue to build," he said, noting that the first line of a new facility in Millen, GA, should begin operations this summer. A second line at Millen is scheduled to begin construction in the second half of the year.

"I think we would expect, just given the demand for our products, and maybe just some overall industry, more stages, better rig efficiency, etc., I think the demand is increasing" for ceramics. "So it would not surprise us at all to see the imports increase in 2014. But this is the fundamental basis of why we are increasing manufacturing capacity."

Raw sand proppant today is driving most of the growth in the market and that should continue, according to PacWest Consulting Partners.

In a newly released ProppantIQ forecast provided to NGI's Shale Daily, PacWest researchers said the U.S. land proppant consumption would grow by 9% a year through 2015, to 83 billion pounds from 69 billion pounds in 2013. The growth is much higher than PacWest reported in October, when it said the U.S. market would grow to 75 billion pounds/year by 2015 (see Shale Daily,Oct. 16, 2013).

Sand would continue to lead the market, growing at a rate of 9% a year, while RCS is seen increasing by 7%/year and ceramics by 12%.

Because today is less about drilling new wells and more about producing as much oil and gas as possible from a well, ceramics hold the edge, according to Kolstad.

"E&P operators are still trying to optimize some cost basis and stuff like that, but I think maybe even starting as early as 3Q2013...we started to see E&P now turn toward recovery, and that's sort of when we come into play...

"We just have to get capacity...I think it's driven by just the oil and gas industry, not so much competition, because our job absolutely is just to educate people on how bad" some of the imported proppants are.

Carbo forecasts indicate U.S. E&Ps will spend more this year, leading to more demand for production enhancement services.

"Specifically regarding proppant sales, we believe 2014 will be another good year for volumes," said the CEO. "In the near-term, we expect ceramic proppant volumes for the first quarter of 2014 to increase when compared with the fourth quarter of 2013. Current market conditions remain competitive, which leads us to believe that pricing may remain at current levels."

Growth in Carbo's premium proppant is seen in the Bakken and Eagle Ford shales, and in the Permian Basin.

"So we see growth in the ceramic business," said Kolstad. "Obviously, our resin-coated business is doing fine too, but now we continue to see that on a macro level and we all have to work at getting this Chinese low-quality stuff out of the country."

Once both of the Millen ceramics lines are completed, Carbo's manufacturing capacity would increase by 500 million pounds to 2.25 billion pounds a year, a 29% increase in capacity over the next 18 months, he said.

Carbo's worldwide proppant sales volumes in 2013 totaled 2.06 billion pounds, a 20% increase year/year. North American sales volumes rose 29%.

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