A fracking operation in Alberta (Tim Fraser/Postmedia News)
CALGARY — Even the smallest grain of sand is of consequence to Brad Thomson, the CEO of Calgary-based Source Energy Services Canada LP.
The company is one of Canada’s largest suppliers of frac sand, a material that is injected into wells during hydraulic fracturing operations to prop open rock fractures and allow oil and gas to flow to the surface.
Of the million-odd horizontal wells scattered around North America, most use frac sand that comes from a rich seam of so-called “white silica” sand that cuts beneath the Great Lakes region in Wisconsin. It is prized for the superior quality of its grains, which are said to more effectively lodge themselves into shale rock fractures, allowing producers to boost well performance.
“You need sand that’s very round, very hard and very pure,” says Thomson, whose company owns a mine and processing facility in Wisconsin. “There’s sand everywhere in North America but generally it lacks one of those three characteristics.”
Thomson estimates Wisconsin white silica, sometimes called “Ottawa White,” supplies roughly 90 per cent of the Canadian frac sand market. And all of that sand is meets tight specifications: Samples are sent to far-off laboratories to be tested for crush resistance, consistency, shape and the concentration levels of quartz minerals, all according to specific American Petroleum Institute (API) standards.
Demand for frac sand is expected to double in the coming years as oil producers focus on wringing as much oil and gas as possible from every well. That has kicked off a race among sand suppliers to take advantage, either by developing new mines in Canada or by shipping product from the U.S. Midwest.
While chronically low commodity prices have reduced drilling activity in recent years, producers continue to squeeze tremendous volumes of oil and gas from hard rock formations. That has placed more attention on the market for frac sand, which is expected to total between US$850 and US$950 million in Canada in 2017, according to IHS Markit.
In the Montney Formation of northern B.C. and Alberta, producers in 2013 used an average of around 500 pounds of sand per foot of a horizontal well; today that number is closer to 1,000 pounds, according to research by RS Energy Group. And wells are getting longer: horizontal wells now stretch around 9,000 feet, compared to 5,000 feet just four years ago.
It’s had a massive impact. Today, a producer in the Montney might blast 100 rail cars of sand down a single well.
Analysts expect that figure to increase, particularly in the Montney, as companies begin to pump higher volumes of sand, led by producers like Encana Corp. and Seven Generations Energy Ltd.
“So far the more aggressive operators they’re well above that 1,000 pound-per-foot average, and I think eventually everyone will end up settling where they are,” says Trevor Goertzen, an analyst with RS Energy Group in Calgary.
As a result of the increased demand, U.S. and Canadian suppliers are vying for market share by expanding their rail and terminal infrastructure into highly sophisticated networks.
“Without exception everybody is going through a phase of growth,” Source Energy Services’ Thomson says.
The company plans to spend $25 million this year to build three rail terminals in Edson and Fox Creek, Alta., and Taylor, B.C., to receive rail shipments from Wisconsin. The company plans to nearly double its capacity in coming years to 3.8 million tonnes per year.
Major U.S. suppliers are also expanding. U.S. Silica Holdings Inc. expects to expand its sand flows into several prolific shale basins by 68 per cent in 2017, while Emerge Energy Services LP, a Texas- based company, continues to expand its sand division by building out its rail infrastructure and loading facilities.
“The entire objective is to get volumes into the basin in a location that minimizes your trucking distances,” he says.
Analysts are now wondering whether Canada’s rail infrastructure can absorb the addition demand as capacity is running near its peak. “This doesn’t yet appear to be a critical issue, but with every 1-2 wells effectively drawing a unit train of sand, it seems reasonable to question whether there is the logistical network to properly facilitate all of this,” Raymond James analysts wrote in a recent research note.
More worryingly, low commodity prices have gutted the stock valuations of some companies in recent months. Source Energy completed an initial public offering in April at $10.50 per share, well below the $17 to $20 range it had floated earlier in the year.
“Financial markets have been soft,” Thomson says. In early June its stock was trading around the $8.50 range.
U.S. sand suppliers have also seen their market valuations shrink. U.S. Silica’s stock price is down roughly 36 per cent from its February levels, while Emerge Energy Services LP’s stock price has been halved over the same period.
Meanwhile, several would-be Canadian suppliers have proposed building sand mines in Western Canada as a way to undercut Wisconsin-based shippers.
Edmonton-based Athabasca Minerals Inc. and Saskatoon-based Hanson Lake Sands Corp. both aim to secure a hold in the frac sand market from their gravel and nickel mines, respectively. Vancouver-based Stikine Energy Corp. had proposed two sand mines in B.C., but the company wasn’t able to raise the necessary capital and currently appears to be nearing insolvency. Calgary’s LaPrairie Group operates a sand mine near Grande Prairie, Alta.
Often times, domestic mines are not well connected to rail infrastructure, and depend on high-cost trucking services to deliver their product. Others have grains that are angular rather than spherical, which can cause the sand to bond with water molecules and plug a well.
“Everybody thinks they’ve got frac sand,” says Ray Newton, a co-founder of Canadian Sandtech Inc., a private company with a sizeable stake in an upstart sand mine near Saskatoon.