North America proppant consumption forecast downgraded due to reduced frac activity; increasing frac sand consumption per horizontal well is a silver lining

As per the most recent ProppantIQ report, published June 2015, North American proppant consumption expected to decline 23% in 2015. Year-over-year, frac sand, resin coated sands and ceramics volumes are forecast to decline 21%, 41% and 59%, respectively. RCS and ceramic volumes impacted more due to lower activity in key plays such as the Bakken, Permian and in Canada, as well as some substitution of RCS and ceramics with cheaper sand.

The one bright spot remains increasing frac sand consumption per horizontal well due to greater number of stages per well and increasing proppant volumes per stage. On a related note, over the trailing four quarters, frac sand consumption per horizontal well increased 15%.

Proppant supply growth especially frac sand remains robust, resulting in a weak pricing environment. We forecast that proppant prices will decline by 9% per annum over the next 3 years.

The shortage of railcars and specialized trailers for hauling frac sand has reversed to a surplus and we expect the surplus to continue for many years.

Rail companies remain reluctant to lower freight rates, albeit overall rates are lower now due to lower fuel surcharge. This has a direct impact on the delivered cost of proppant: we estimate greater than 75% of all sand is transported by rail and freight costs comprise greater than 40% of the delivered cost of proppant to the frac site. As a result, Frac sand mines in Texas and the southeast, which are closer to the frac site, and have lower delivered cost of proppant to the frac site due to the avoidance of rail freight charges are experiencing higher volumes of demand.

Proppant prices could trend below full cycle costs in the short-term and the period of generally higher profits for the proppant industry is over. In fact, Samir Nangia, Managing Director, estimates prices could decline below full-cycle costs due to excess inventory and price recovery in the future could be slow and gradual due to low capacity utilization.

We also expect slower adoption of new technologies and innovation due to lower oil prices, as producers focus on cutting costs relatively more than boosting productivity through adopting more advanced well completion techniques.

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17 July 2015 by Samir Nangia

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.