Wisconsin’s frac sand mining industry isn’t going away, but industry experts say not all mines will survive as market forces change the business model.
Advances in a gas and oil mining technique known as hydraulic fracturing created enormous demand during the past decade for the round, silica sand prevalent throughout western Wisconsin, Minnesota and Iowa. In response, the number of mines jumped from just a handful to 129, according to the latest count by the Department of Natural Resources.
But when oil prices fell, so did demand for silica, and some experts say the new economics will leave some operators in the dust.
“There were a lot of mines that should never have been built,” said Joel Schneyer, managing director for the investment banking firm Headwaters MB. “There were mines built that don’t make sense.”
Schneyer was the keynote speaker for a two-day industry convention at the La Crosse Center. He spoke to about 70 people, noting attendance was much better than recent industry addresses he gave in New York and Minneapolis.
The convention, put on by the trade publication Rock Products, is billed as a beacon of hope for producers weathering “a sandstorm,” as low oil prices have sapped demand for the fine-grained sand used to open cracks in underground rocks, releasing hard-to-reach oil and natural gas reserves.
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Keith Rauch, a mining geologist and La Crosse-based consultant, offered a briefing on how to open a mine, though he conceded there is not much interest in that now.
“It’s a tough business,” he said. “We’re at the low point — hopefully.”
Schneyer estimates consumption of frac sand was near 40 percent of capacity last year and will fall to around 35 percent in 2016 — “which is the reason it’s so painful out there,” he told conference goers.
But the industry is not dead, Schneyer said: With oil prices below $40 a barrel, producers are concentrating on their most productive wells, drilling farther and using more sand; EOG Resources, one of the nation’s largest oil and gas producers, is using about twice as much sand per well as its competitors.
“Shale is not going away,” he said. “Each well you drill you gain a little more knowledge.”
With lagging demand and depressed prices, there is no longer enough profit margin to support both mines and shippers, or the existing model, where efficient mines attempt to supply the entire industry.
“That’s not how we sell the sand anymore,” Schneyer said.
During the boom, when frac sand was a $33 billion industry, publicly-traded mining companies were making a profit of $35 per ton. By the end of 2015, that pre-tax margin had fallen to $7 a ton.
Now successful mines need to own loading terminals and sell their product in the shale basins where they can ship it most efficiently. For producers in the upper Midwest, that means sending sand to the Bakken formation of North Dakota, where product can be hauled directly on major railroads like Canadian Pacific and BNSF.
A million tons of sand on a rail line is worth more than a billion tons 20 miles away, Rauch said.
But it’s not enough to be near a rail line, Schneyer said.
To maximize efficiency, producers need to fill entire trains with their product, and even some of the mines with rail terminals can’t accommodate these mile-long “unit trains.”
Mines that rely on trucks to haul their product to a rail terminal are “too high on the cost curve,” Schneyer said, adding that local officials should have been asking potential operators tougher questions about their business models.
Most operations are located along rail corridors, but a Tribune analysis of DNR data suggests there are at least 30 permitted facilities — and another two with pending applications — more than five miles from a rail line.
Schneyer said there will likely be consolidation, re-adjustment and re-alignment as the industry recovers, as mines can easily be re-opened when demand returns, so long as the permits don’t expire.
But not every mine will be viable.
“There’s a lot of mistakes out there,” Rauch said.
“There were a lot of mines that should never have been built.” Joel Schneyer, managing director for the investment banking firm Headwaters MB