Permian Basin activity is driving extreme frack sand demand

By Patrick C. Miller | August 28, 2018

Sustained oil and gas exploration and production—mainly in the Permian Basin—combined with rising capital expenditures and escalating proppant intensity is driving an extreme demand for frack sand.

A new report from IHS Markit’s Houston office analyzing proppant demand during the second quarter this year says the current market value for frack sand exceeds $4 billion and will reach nearly $6 billion by 2023. In contrast, the market value for frack sand was $1.3 billion two years ago, according to the report, entitled IHS Markit ProppantIQ 2Q2018 Analysis.

“Sand proppant demand is at record highs—the growth rate is extreme by any measure,” said report author Brandon Savisky, IHS Markit senior market research analyst for cost and technology. “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 frack-sand demand. The basin accounts for nearly 40 percent of the market demand, but by 2023, the Permian Basin will account for almost 50 percent of proppant sand demand.”

Total North American proppant demand, which includes sand as well as resin-coated sand and ceramic, is expected to exceed 168 billion pounds in 2018, representing a 27 percent year-over-year growth (2Q 2017 compared to 2Q 2018), the analysis reported. However, most of this demand is for sand, which accounts for 162 billion pounds (about 96 percent) of total North American proppant demand in 2018. Sand demand growth is nearly 29 percent year-over-year, for 2Q 2017 to 2Q 2018, IHS Markit said.

By 2023, North American frack-sand demand will reach an estimated 231 billion pounds, representing an increase of 113 percent above peak demand levels for 2014, IHS Markit said. By contrast, the market for frack sand for U.S. onshore oil and gas operations in 2011 was slightly more than 51 billion pounds.

Increased sand demand is closely tied to increased capital spending in the Permian, Savisky said. Onshore U.S. E&P CAPEX is estimated at about $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.

“Capital efficiency has improved dramatically since 2014. However, expected well-cost increases should result in reduced capital efficiency across all plays during 2018,” he noted. “Although cost reflation hurts the Permian Basin during 2018, continued well productivity improvements, as well as abundant core inventory, suggests that capital efficiency will gradually improve in subsequent years, which is good news for the sector as a whole.”

Costly supply chain constraints, particularly in the Permian Basin, have been such an ongoing issue that operators are actively working with vendors across their supply chains to address bottlenecks and drive down costs, the IHS Markit report said. In the sand market, IHS Markit said investments are being made in self-sourcing, where oil and gas operators actually own the mine, or through partnerships or direct sourcing, where sand-mining companies purchase the storage and transportation assets to ensure greater efficiency and cost containment from the mine to the wellhead.