For Midwest railroads, the frac sand boom may be over NEWSWIRE

CHIPPEWA FALLS, Wis. – Take a look along railroad lines in western Wisconsin, and you’ll find evidence of the frac sand boom that’s meant good times for railroads. BNSF Railway serves a plant at Maiden Rock; Union Pacific serves mines near Augusta and Wyeville; Canadian Pacific has three facilities along its Chicago-Twin Cities main line at Oakdale, Sparta, and Tunnel City; and Canadian National has sand mines on the west end of the former Green Bay & Western and the ex-Soo Line near Barron and Weyerhaeuser. Short line Wisconsin Northern has been one of the biggest benefactors of the boom in frac sand mining, serving five sand mines and processing plants along its 37.5 miles of track north of Chippewa Falls.

Areas of western and central Wisconsin, Minnesota, and northern Illinois saw heavy investment from 2011 to 2014, when sand mines, processing plants, and rail loading facilities were emerging. Frac sand is used in the process of injecting liquid at high pressure into subterranean rocks, boreholes, etc. to force open existing fissures and extract oil or gas. The oil industry and the related frac sand mines have always endured “boom and bust” business cycles, and currently the industry is in the “bust” mode as several plants along Wisconsin Northern, CN, and other railroads have been idled. But this time, the bust for Midwest frac sand may be much harder to recover from.

The U.S. is the largest producer of frac sand in the world. Much of the domestic production comes from Wisconsin, Minnesota, and Illinois, but the actual fracking takes place elsewhere, and sand must be shipped to shale basins which in some cases are 1,000 miles away or more. Moving sand from mines to transload facilities located near oil and gas plays is the most significant expense of production, accounting for upward of 75 percent of the final cost for some producers, so frac sand mines have located along railroads to reduce costs. This all worked to the advantage of railroads and resulted an explosion of frac sand business over the last decade.

The upper Midwest produces Northern White sand of high quality, and for years the oil industry clamored to use it for fracking. Its nearly perfect round shape held up well to the pressure of the fracking process. However, according to financial analysts Gordon Brothers and officials at BNSF Railway, because transportation costs are so high for Northern White sand, industry operators in the Permian Basin of Texas and New Mexico have increased their use of sand located in the Basin, known as brown sand or “Texas sand.” While not as high quality as Northern White (brown sand has lower crush resistance and does not stand up well under increased pressure during mining and can clog up wells) oil companies are now willing to overlook its problems due to significant transportation cost savings. That spells trouble for Northern White sand producers and the railroads.

On top of that, there is currently a worldwide glut of oil, resulting in lower prices and less demand, which as a consequence results in less oil mining. The demand for frac sand depends on drilling activity, and the decline in the price of crude oil has resulted in drill counts being down somewhat in 2019. Of course, this has happened before and oil prices will no doubt rise again, but the demand for “brown sand” may not lessen.

According to Gordon Brothers, industry experts have predicted that by 2022, it’s likely that Northern White sand will be completely pushed out of the Permian, Eagle Ford, Haynesville, and Oklahoma shale plays, replaced entirely by brown sand. As recently as 2018 about 75 percent of Permian sand demand was for Northern White, so this is a significant alteration of the marketplace.

The good news is that analysts predict demand for Northern White sand in the Bakken (Canada, North Dakota, Montana), Marcellus (Northeast U.S.), and Canadian oil and gas plays should not be affected as there have been no substantial discoveries of suitable sand deposits near these areas. But while frac sand demand this year has remained flat, the available supply of frac sand has increased, driving down prices and profits.

Midwest sand producers are looking to cut their costs to be more competitive, and have looked to railroads to cut their rates. Naturally railroads are reluctant to do so since it cuts into their profits.

The change may hit smaller producers the most. One reason: many producers purchased their own railcars during the boom days. Now with many plants idled, they still must pay what they owe when they purchased the cars, and endure the additional expense of storing the now excess cars during the bust cycle. Larger companies can likely withstand those costs and survive, but small operators may be forced into bankruptcy.

On the flip side, railroads, particularly short lines, that have space for cars can collect significant storage fees. Progressive Rail President Dave Fellon tells Trains News Wire that Wisconsin Northern, which also stores sand cars, is “aggressively working day and night to repurpose the frac sand plants into vibrant brand-new rail served customers.”

In the Upper Midwest, mines with the annual capacity of 18 million tons of frac sand have already been idled this year, according to energy research firm Rystad Energy. Kent Syverson, a geology professor at the University of Wisconsin-Eau Claire, believes the region’s frac sand development boom is over with the emergence of brown sand. He told the Eau Claire Leader-Telegram “The capital has already been invested in Wisconsin, so the real questions are how much of this sand will still be needed and how many of these higher-cost operations that are taken off line will never come back.” That’s a questions the plants and the railroads that serve then want answered as well.