Despite a slump in the U.S. oil industry, Wisconsin frac sand producers are planning to spend millions of dollars on new plants and loading facilities as they seek to increase efficiency and sell their product in new markets.
At least half a dozen companies have hatched plans to build mines or loading terminals along rail lines that provide an economical link to drilling operations in Texas, where the demand for silica sand used in a process called hydraulic fracturing remains strong, as well as other regions, according to documents filed with state officials.
“We feel that from a longer-term prospective it’s still a good time to make some investments,” said Jack Mitchell, president of Wisconsin Proppants, which is planning a $23.5 million rail loading facility for its mine in Jackson County.
Over the past decade, demand for silica sand soared as new technology allowed drillers to reach previously untapped oil, much of which was found in the Bakken formation of North Dakota, with a process called hydraulic fracturing. The fine-grained sand, prevalent and easily accessible across Western Wisconsin, is used as “proppant” to hold open fissures in underground rock formations.
The number of permitted industrial sand mines and processors ballooned to nearly 130, but oil prices began falling in 2015, making North Dakota crude less competitive. As drills went idle, so did Wisconsin’s sand mines, which have laid off hundreds of workers in the past two years.
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But even as producers have shuttered some mines, others are making big investments — or even preparing to open new mines — to meet the demands of a changing energy marketplace:
- Meteor Timber, a Georgia investment company that has explored the possibility of mining in Jackson County’s public forests, has plans to build a $65 million sand mining operation in Jackson and Monroe counties.
- Terracor Resources is proposing a combined mine, processing and loading facility between Black River Falls and Alma Center that could produce about 3 million tons of sand a year.
- Hi-Crush Proppants is seeking to add three rail sidings at its 857-acre mine, processing and loading facility in Wyeville. Hi-Crush says it has idled a facility in Eau Claire County and is focusing on maximizing production and efficiency at the Monroe County site.
- Smart Sand Inc. plans to build a rail terminal near Tomah to handle sand from the Texas company’s existing 1,118-acre mine in Oakdale, which is about four miles away and already has a loading facility on the Canadian Pacific railroad.
All of those operations, which would allow the loading and storage of multiple trains, are situated on the Union Pacific rail line. A fourth project, since shelved because of market prices, would have been sited on the Wisconsin Northern rail line in Chippewa County, which connects to Union Pacific’s track.
“They’re all trying to get on the UP,” said Brad Johnson, who reviews mining-related water permit applications for the Wisconsin Department of Natural Resources.
Unlike the Canadian Pacific and BNSF, two major U.S. rail lines that link Wisconsin to the Bakken basin, Union Pacific lines offer a direct route to Texas.
With low production costs, abundant reserves and a good supply of workers, the Permian basin in west Texas has steadily increased production even as drillers in the Bakken range have cut back. The Permian basin puts out about twice as much crude than the Bakken and has more than five times as many active rigs, according to data from the U.S. Energy Information Administration.
Two of the region’s major producers have announced plans to increase production in the region.
"The Permian is still a real hot area right now and it’s because of their cost structure," Mitchell said.
What’s more, it’s easier to transport the crude to Houston refineries thanks to a network of pipelines and terminals, said Tom Kloza, global head of energy analysis for Oil Price Information Service.
“It’s considerably more expensive to use pipelines or rail to get crude from the Bakken to the real refining clusters,” Kloza said.
Since the beginning of the sand boom, industry experts have said rail proximity is key to profitability, though when prices were at $70 per ton, mines were being opened in places where sand had to be hauled by truck to the nearest rail terminal. But with today’s tighter market, producers are expected to deliver sand at half those prices, which means they must shave costs wherever possible, and transportation is the single-biggest cost.
Under the new model, producers need to have their own rail terminals where they can load "unit trains" that are less expensive and arrive at their destinations sooner than a few cars of sand mixed in with other freight on a manifest train.
Sand producers also have to minimize costly and time-consuming switches, said Joel Schneyer, a minerals industry analyst with the investment banking firm Headwaters MB, so they are trying to locate on railways that offer direct access to shale basins.
Even as analysts and producers are optimistic about the prospects for growth in the Permian basin, Schneyer said Wisconsin sand producers will have to compete with producers much closer to the oil fields.
“While one can get to the both Permian and Eagle Ford on the UP, it is pretty damn far,” he said.
Ultimately it may come down to grain size, Schneyer said. If oil drillers can use finer sand, “it would be cheaper to get northern white sand from Arkansas or Missouri, or use local Brady 'Brown’ sand native to Texas.”
Smart Sand says in addition to providing access to new regions, its second loading facility will save the company $7.5 million a year in shipping costs to existing customers.
In its application to build three additional rail sidings at its Wyeville facility, Hi-Crush says its investments were spurred in part by the market downturn, which is forcing sand suppliers to become more efficient.
Tyler Deines, a geologist and land-use specialist for the Texas-based company, said the addition will allow it to simultaneously load two-unit trains, which has become the industry standard.
“It’s cheaper if you can do it that way, and it’s quicker to market,” Deines said. “Especially in a down market, just any efficiency you can gain, people are looking for.”
Hi-Crush also notes that the industry downturn has created a surplus of rail cars that the company has to store.
Terracor Resources says it would ship sand from its proposed Alma mine to the company’s own terminals in the Bakken as well as the Eagle Ford basin in southern Texas. Terracor says with its existing loading facilities it could hold 80 percent of its fleet, avoiding potential storage fees from the railroad.
The status of that project is unclear since the Canadian company filed for bankruptcy in April. Attempts to reach a company representative were unsuccessful.
Wisconsin Proppants, has proposed building a rail loading facility on the Canadian National line, about 2 miles from its 670-acre Hixton mine. The Green Bay company currently trucks its sand 19 miles to a Union Pacific loading site and says the new facility will save more than $4 million a year.
Mitchell said the project will both open new markets and eliminate inefficiency.
Canadian National serves oil fields in western Canada and can deliver to the Utica basin of Ohio and Pennsylvania. The railroad also has a reputation for cooperating with other carriers, which Mitchell said could make delivery viable in other markets as well.
While he doesn’t expect the price of oil to rebound any time soon, Mitchell said he’s optimistic prices will stabilize again in the next two years.
“I have a longer term outlook on things,” he said. “It’s like anything else: Things always go back to the mean.”