Rock Products

OCT 2018

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20 • ROCK products • October 2018 www.rockproducts.com FRAC SAND INSIDER Sustained oil and gas exploration and production activity growth, coupled with rising U.S. CAPEX investment and escalating proppant intensity per lat- eral foot – especially in the Permian Basin – is driving "extreme" demand growth for frac sand, according to a new report from business information provider IHS Markit. The report, entitled "IHS Markit Prop- pantIQ 2Q2018 Analysis," maintains that the current market value for frac sand will exceed $4 billion in 2018, and will reach nearly $6 billion by 2023. By comparison, the market value for prop- pant sand in 2016 was $1.3 billion. Total North American proppant demand, which includes sand as well as resin-coated sand (RCS) and ceramic, is expected to exceed 168 billion lb. in 2018, representing a 27 percent year- over-year growth from 2017, according to the report. However, most of this demand is for sand, which accounts for 162 billion lb. (about 96 percent) of total North American proppant demand in 2018. Sand demand growth is nearly 29 per- cent year-over-year, from the second quarter of 2017 to the second quarter of 2018, IHS Markit said. Looking Ahead By 2023, North American frac sand demand will reach an estimated 231 bil- lion lb., representing an increase of 113 percent above peak demand levels for 2014, IHS Markit said. By contrast, the market for frac sand for U.S. onshore oil and gas operations in 2011 was slightly more than 51 billion lb. "Sand proppant demand is at record highs – the growth rate is extreme by any measure," said Brandon Savisky, senior market research analyst, cost and technology at IHS Markit and author of the study. "We expect it will continue to expand at an estimated current annual growth rate of approximately 16 percent by 2023, with the Permian Basin leading the pack in terms of North American frac sand demand. The basin accounts for nearly 40 percent of the market demand, but by 2023, the Permian Basin will account for almost 50 per- cent of proppant sand demand," Savisky said. Increased sand demand is closely tied to the increased capital spending that is occurring in the Permian, Savisky said. Onshore U.S. E&P CAPEX is estimated to be approximately $97 billion in 2018 (nearly 45 percent of total CAPEX is deployed in the Permian Basin), and will reach an estimated $117 billion in 2020. According to the IHS Markit analysis, more than 70 percent of the entire North American proppant demand derives from three plays – the Permian, Appalachia, and Eagle Ford, and these three plays will account for 75 percent of the market by 2020. Canadian demand accounts for nearly 4 percent of North American frac sand demand in 2018 and will drop only slightly by 2023. In 2018, 65 percent of Canadian demand for proppant sand originates from the Montney, Duvernay and Deep Basin plays. Intensity Much of the sand demand growth is attributed to an increase in proppant intensity per lateral foot; operators are also drilling longer laterals and increas- ing stage counts, IHS Markit said. In addition to more sand use in terms of volume per frac per lateral foot, the mesh size of the sand used has gotten finer, particularly in the Permian Basin, so more sand is required. During the oil price downturn of 2014 through 2016, operators were pressed to cut operating costs to improve eco- nomics and simply survive, Savisky said. One of those cost reductions was the decision by the technology leaders in the shale plays to reduce or even eliminate the use of coated or ceramic proppant in favor of cheaper, more abundant (plain) sand. Frac sand is the lowest cost proppant available, even at the fine mesh sizes demanded today. "Ironically, that choice, and an adjust- ment in the formula toward larger volumes of finer-mesh sands, enabled Report: Proppant Demand Up 27 Percent; Set to Surge Higher

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