Railroad frac sand volumes slump as oil drillers in Texas turn to local mines NEWSWIRE

The increased use of locally mined frac sand in America’s largest shale oil field, the Permian Basin of Texas and New Mexico, is rapidly crowding out rail-hauled sand from the Midwest.

On Union Pacific, for example, frac sand volume was down 45 percent this year through the first week of March, a trend the railroad expects to continue as local brown sand displaces northern white sand, CEO Lance Fritz told an investor conference earlier this month.

The Permian is far and away the single most important frac sand destination. Some 459 oil drilling rigs are currently operating in the Permian, representing 45 percent of all rigs in North America, according to data from oil services company Baker Hughes.

Frac sand hauled by rail from the Midwest to the Permian is under pressure from a glut of locally produced sand delivered by truck. Some 18 months ago there were no sand mines in the Permian. Now there are 20.

Sand volumes have fallen by around 30 percent this year on Texas Pacifico, says Stan Meador, the short line’s vice president of sales and marketing.

The Texas Pacifico runs through the southern reaches of the Permian Basin. It hasn’t been hit as hard as UP because it handles sand produced in the Dallas-Fort Worth area that originates on short line partner Fort Worth & Western.

Texas Pacifico also hauls steel pipe for pipelines that are being built to carry Permian crude to the U.S. Gulf Coast. And it carries some crude-by-rail shipments. Both sources of traffic are expected to vanish by early next year as pipeline capacity matches oil production in the Permian.

The sand market is highly volatile right now, Meador says, with price swings, weekly volume fluctuations, and shipments moving between origins and destinations that have never been paired before.

“It’s really hard to give a trend line,” Meador says. “We can’t tell if this is the new normal or not.”

Watco, which operates three short lines in the Permian, declined to comment, citing the difficulty in pinning down sand trends. Watco’s Wisconsin & Southern also originates frac sand shipments in Wisconsin, which has been called the Saudi Arabia of sand.

Estimates vary on how much local sand will squeeze out Midwestern white sand. But not one of them is good news for railroads.

“We believe that by the end of 2019, two-thirds of the total U.S. sand proppant demand will be supplied by in-basin sand with one-third supplied by northern white sand,” Bryan Shinn, CEO of sand producer U.S. Silica, told investors in February.

Jenniffer Deckard, CEO of Covia, the largest sand producer in the U.S., says that while local sand will continue to gain market share, oil producers will likely rely on a combination of local and northern white sand.

Northern white sand can better prop open layers of shale and resist crushing than its brown counterpart, Deckard explains. As a result, any cost savings of using solely local brown sand can be lost as well production diminishes much faster than it would with white sand.

New York-based independent energy analyst Mark Bononi says the dominance of northern white sand is over.

“The growth of local brown sand in the Permian is real and very likely permanent,” Bononi says, noting that the oversupply of local sand has driven prices down and it’s much cheaper to transport. “Plus, oil service companies don’t have to deal with the railroads, which they don’t like very much.”

Sand delivered by truck also can be easier for oil producers to deal with because of the smaller volumes involved, Bononi says.

Overall frac sand demand this year is estimated to be around 110 million tons, which is less than half of the production capacity of around 260 million tons, according to estimates by Rystad Energy.

Canadian National, which handles frac sand from Wisconsin mines to drilling locations in western Canada, expects its sand volumes to stabilize this year.

Rival Canadian Pacific is more exposed to the Permian Basin via interchange at Kansas City, Mo.

“It’s an area that we see some headwinds in 2019 as the in-basin sand continues to fill some voids out in the Permian,” Chief Marketing Officer John Brooks said in January.

But CP is moving more frac sand to the Bakken oil fields of North Dakota, which now accounts for nearly 50 percent of CP’s sand volume, up from 15 percent a year ago. Some 57 drilling rigs are currently operating in the Bakken, according to Baker Hughes data.

Through the first 11 weeks of 2019, the Association of American Railroads’ crushed stone, sand, and gravel traffic category — which includes frac sand — was down 8 percent.