Investing in a frac sand play? You might want to hedge those bets

Photo credit - Bismarck Tribune

Hey you frac-sand investors.  Don’t look back.  You might be disturbed to discover that there’s somebody running after that market, and they may be gaining ground.

See those beads on the right side of the picture?  Those ceramic “proppant beads” could spell the end of the frac sand boom before too long.  Why?  Because they represent a more cost-effective proppant for fracked wells that is attracting a lot of interest by energy companies interested in maximizing the profitability of their wells.  Those beads are more expensive right now, but the smart fracking company operators are finding that they work better.  Ceramic proppants so much better at keeping the fractures open that the additional cost is more than offset by increased revenue from more productive wells.

Click HERE for the October 2011 Bismarck Tribune article that talks about the opportunity for the manufacturers of the beads.  That article is aimed directly at companies that may want to gain a cost advantage by locating in North Dakota.  They could use North Dakota clay in their manufacturing process and then have low shipping costs to get their product to the North Dakota wells.  “Lower shipping costs” is a phrase that should ring a bell, especially for developers that are proposing to build mines in locations that add 20 to 30 miles of trucking costs to their cost structure compared to competitors who are right next to rail heads.

Click HERE to look at Saint-Gobain Proppants — a company that has facilities in China, Russia and the US that is already making and delivering these proppants.  Their US headquarters is in Arkansas — pretty well suited to delivery to Texas or the northeastern US.  Click HERE for a link to Luoyang Maide Ceramics, another Chinese firm that contacted me recently.  Click HERE to read a December 2011 Reuters “Insight” piece about Chinese success in the US ceramic-proppants market.

Click HERE for a writeup on about another ceramic-proppant play, publicly-traded Carbo Ceramics (symbol CRR) that has been making similar products for decades, is very profitable and well-positioned to meet demand for this frac-sand replacement product.

Update: Click HERE for a writeup on about a synthetic proppant called OxBall, manufactured by Oxane in one of their facilities in Arkansas.

Click HERE for a December 2011 article on CeramicTechToday that says “The most common proppant [for fracking] is sand, but lately there has been growing interest in engineered proppants. Engineered proppants are made of ceramic, usually derived from bauxite, and offer the advantages of uniform size and shape, as well as higher strength. The ability to narrowly control particle size maximizes porosity, and therefore the volume of natural gas extracted.

“Growing interest” is the sound of distant thunder in financial circles.

Here’s an abstract of an article that’s quoted in that same article — this talk is going to be given in July of this year;

“Development and Commercialization of High Performance Ceramics for Oil and Natural Gas Recovery”

John Hellmann, Pennsylvania State University

Developments in horizontal drilling technology offer unprecedented access to domestic oil and natural gas deposits, thereby placing the United States on the verge of sustained energy independence. Critical to this technology are spherical ceramic aggregates, known as proppants, which are used for enhancing oil and gas recovery from hydrofractured wells. However, ceramic proppants are derived from sintered aluminosilicates such as bauxite, which is becoming increasingly scarce in the quality and quantities necessary to meet market demand for proppants.

This presentation summarizes our development and commercialization of glass ceramic proppants from alternative raw materials derived from industrial waste streams. These proppants, manufactured from basalt-based mine tailings and drill cuttings from shale gas wells, rival sintered bauxite-based proppants with regard to strength, hardness, specific gravity and conductivity in industry standard testing. Progression from laboratory demonstration to large scale processing and commercialization of these proppants is discussed.

Now you skeptics may be saying “yeah, but see?  They’re having a hard time getting the raw materials they need to keep up with demand.”  Don’t forget that the U.S. proppant market has attracted the attention of companies in Russia and China (the paper is talking about raw material shortages in the U.S.) and those offshore suppliers are already shipping product to the United States.  Click HERE to read an article about how a Russian company (FORES in this case) is shipping their ceramic proppant through Duluth harbor.  The availability of raw material may not be as bad as people think.  This is not good news for you.

What could this mean?

  • Cost pressure could increase.  A sand mine built 20 miles away from rail already has a built-in cost disadvantage of the trucking leg.  Those additional costs may push locally-produced Buffalo County sand up in the cost range of these ceramics.
  • Life-span of project may be shorter than planned.  If projections are all counting on a 10 to 20 year project life, investors may want to consider the impact of these competing products on that financial model as ceramic producers continue to ramp up supply.
  • Money cuts both ways.  There’s a lot of money in frac-sand deals.  That’s what’s attracted all the attention and activity.  But all that money also means that lots of really-smart, really well-financed people are likely to be looking for ways to participate in meeting that demand.  After all, the ultimate money-engine comes from the well — if spending 20% more on ceramic proppants means giant increases in well-productivity and profitability, sand-producers may find it hard to market that sand in a few years.

If I were in your shoes, I’d be following Leeann Chin’s financial strategy (“Earn the money, then spend it”) right about now.

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