Entering the Frack Sand Industry

An inside look into Victory Silica's entrance into the highly competitive, always in-demand market of frack sand, from the formation of new clients to building a logistical advantage.
By The Bakken magazine staff | April 22, 2014

Victory Nickel is not in the frack sand business.  At least it wasn’t until the Canadian-based nickel mining and production company realized that its plan to expand a nickel mining operation in Northern Manitoba hinged on the economic viability of utilizing layers of sandstone situated above the nickel layers it was after. To make the nickel operation work, the frack sand at the mine had to generate revenue. After hiring Ken Murdock, an engineer with 25-plus years experience in frack sand and cement production, Victory Silica Ltd. was formed. Murdock’s task for Victory Silica was simple: Create and execute a sound business plan for utilizing the frack sand sourced from the Northern Alberta mine.

Since taking over as Victory Silica’s CEO, Murdock has formed a three-phase plan that features a hybrid operations model developed from Murdock’s knowledge of frack sand distribution methods in Texas, frack sand processing intricacies present in Wisconsin and a long-term vision for making Victory Silica a presence in the Bakken before it’s ever produced a grain of sand from its Northern Manitoba mine.

Murdock’s efforts to date may offer a valuable individual tale of innovative thinking, but the evolving story of Victory Silica also provides a glimpse into the complexities of a market at the mercy of rail.

The Current Frack Sand Market
By 2015, proppant consumption in the Bakken shale play will reach roughly 8.5 billion pounds, according to research by PacWest Consulting Partners, an energy-based intelligence firm. Sand-based proppant will represent roughly two-thirds of overall Bakken proppant consumption, with ceramics representing the majority of the remaining total consumption volume. An increase in per well proppant usage along with growing well sizes is driving the increase in proppant consumption, according to Alexander Robart, partner with PacWest.

In 2008, the average volume of proppant used per well was roughly 2 million pounds (1,000 tons) of proppant for a 5,000 foot lateral, according to the University of North Dakota’s Energy & Environmental Research Center’s Bakken Decision Support System team. In 2010, the average well, completed on a 10,000 foot lateral (roughly 2 miles), used closer to 4.5 million pounds (2,500 tons) of proppant. Currently, Bakken drilling teams are recording well lateral lengths that exceed 2-mile and approach 3-mile lengths. The number of discrete fracture stages per lateral are also increasing, another variable that will force proppant usage in the Bakken to increase. When Murdock began his quest to build Victory Silica into a frack sand supplier, the overall frack sand market demand was underserved, he says. In North America, he estimates the market was roughly 40 million tons with only 20 million tons of sand production available. Since that time, sand production has drastically increased and so has demand.

Victory Silica’s Market Entry
Victory Nickel has four nickel projects in Canada. The Minago mine in Northern Manitoba is rich with nickel deposits. It’s also layered over with roughly 32 feet of sandstone. The sandstone can make the highest quality domestic frack sand available in Canada, Murdock says. But, it wasn’t until Murdock was able to show the value of the deposits in conjunction with his three-phase plan that the Victory team was able to justify producing the sand and the nickel from the Minago mine. “Traditionally sand companies are private companies. There aren’t a lot of metrics out there to say what a frack sand company is actually worth,” he says. That all changed in 2012 when a handful of frack sand providers either issued an initial public offering (IPO) or acquired other operations, revealing asset valuations and perceived company worth. 

Murdock likes to point to four key transactions that helped show the value of the Victory Silica operation. In 2012, Preferred Sands LLC acquired Winn Bay Sands and its assets for $200 million; U.S. Silica raised $200 million through an initial public offering; Hi-Crush Partners LP raised $225 million through an IPO and Emerge Energy Services raised $140 million through an IPO.

A feasibility study determined that the pit footprint of the Minago mine could yield roughly 12 million tons of frack sand. When combined with Murdock’s business model, the sand from the facility could be sold with a $25/ton profit. But, before any sand was sold, Murdock recognized an element of the current frack sand market that was necessary for any sand to be sold. Victory Silica needed customers before it could justify the expense to source sand. To build a customer base, Murdock analyzed frack sand distribution models used in Texas and started to develop a frack sand processing plant near Medicine Hat, Alberta, that could process wet sand concentrate.

The Medicine Hat facility, called the Seven Persons dry frack sand plant or the 7P plant, is currently finalizing a commissioning stage. Once complete, the facility will have a 500,000 ton per year processing capacity. The 7P plant was designed to take wet sand concentrate from B&B Sands in Wisconsin. The sand is shipped to the plant via rail.

In a typical sand mining operation, sand will be mined, then taken to a wet plant in concentrated form. At the wet plant, the sand is washed to get rid of clays. Then, the sand is screened to remove over- and under-sized particles. The sand will then be shipped to a sand provider to disperse accordingly. Once mined, the wet plant and screening operations are usually performed at the mine or at a separate location before shipment to the sand provider or user. The highest quality the sand will ever be is off the screen. “Every time you handle it after that, it breaks down,” Murdock says. In most cases, sand is handled several times after it is mined, going from screens to production storage; production storage to shipping storage; storage to transload railcars; railcars to transload sand storage; and finally, from transload storage facilities to truck before it arrives at the well head.

The 7P plant was designed to receive the wet sand concentrate in order to limit the amount of handling, Murdock says, and to keep Victory Silica away from the typical logistics challenges related to moving frack sand. In some cases, a frack sand provider is at the mercy of the client. If the client orders 30 railcars of sand but has no place to store it, lacks truck takeaway capacity at the time of sand delivery or changes an order, for example, from a 20/40 mesh size to a 30/50 mesh size without issuing enough lead time to the sand provider, as Murdock has seen, then all parties involved will be negatively impacted.

Murdock is mimicking what some frack sand suppliers do in Texas. The idea is to locate a dry sand processing facility near the main customer base. The wet concentrate is shipped to the dry sand facility for final processing and then trucked to each individual well site. “When I looked at the model initially I didn’t think it made sense,” he says, due to the moisture and raw state of the sand. “But, when you look at the handling savings related to the lack of demurrage charges for the rail cars full of sand with nowhere to go, it makes a lot of sense.” With the trucking options, clients can receive sand quicker than if it is shipped by rail and they don't have to place their orders as far in advance.

The 7P plant is roughly 16 hours away from most wells in the Bakken. The specific target zone for sand sourced from the facility will be in the Montana and southern Saskatchewan portions of the play. When the Minago mine is fully running, the 7P plant will continue to use the Wisconsin-sourced sand along with the Manitoba product. And, in the meantime, Murdock sees the future of the frack sand market. He’s already acted on his vision, revamping the 7P plant mid construction to add capacity. “Design changes during construction to increase availability, and therefore production capacity, delayed the project somewhat,” says Rene Galipeau, vice chairman and CEO of Victory Nickel, “but it will be worth it in the very near term.”

Due to the interest in Victory Silica’s product already, the growth forecasts for the Bakken, and the potential for more shallow gas drilling in Canada, he’s also building a larger dry frack sand plant near Winnipeg, Manitoba. The facility will be twice the size of the 7P plant and will process both Minago and Wisconsin sand. Because the product received at any of the processing facilities will come in the wet concentrate form, storing the sand will only require outdoor space to form a pile, as opposed to bags or enclosed area.

The 7P plant has already formed its first sand contract with a Bakken client. The contract stipulations were different than what Murdock, and Tim Barth of B&B Sands, initially saw or experienced roughly five years ago. The current contract is more of a supply agreement contract as opposed to a take-or-pay contract popular five years ago. With the take or pay contract, if a client didn’t take the sand from the provider, the client still had to pay for a major portion of the total bill. “If we start to see more demand than we have supply, that might happen again,” Barth says. Regardless of future demand or supply impacts, Murdock doesn’t believe take-or-pay contracts will happen again. He is certain of one thing though. “The frack sand market is going to be a nice market for us to be in long-term.”

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South Dakota Frack Sand?
If Murdock or other entities are interested in tapping into a new frack sand resource, they will have to look outside of western South Dakota. The S.D. Department of Environment and Natural Resources recently released updates on a study formed to determine the viability of sand from several locations in western S.D. According to the DENR, samples collected did not meet specifications recommended by the American Petroleum Institute.

The study reported sand deficiencies that included an unacceptable percentage of quartz in the particles. Frack sand should be roughly 99 percent quartz. Most of the sand collected was also too coarse or too fine-grained, incorrectly shaped and in some cases, particles were cemented together too tightly for screening.

Of the 256 samples collected, 243 were tested in a bulk sieve analysis process to determine grain size. Photomicrographs were also used. Although some of the samples may be suitable for frack sand with the appropriate crushing and screening process, the report concluded that “none of the sand in South Dakota could likely be mined solely as hydraulic fracturing sand.” But, for parties still considering the state’s sand resources, there may be a glimmer of hope. The report also noted that budget constraints limited the ability of the DENR to fully test the sand samples.

Author: Luke Geiver
Managing Editor, The Bakken magazine