industrial minerals oilfield minerals outlook 2014 final

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Frac Sand – New Volumes

Presented by

Taylor Robinson, President

PLG Consulting

June 26, 2014

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Boutique consulting firm with team members throughout North America

• Established in 2001

• Over 90 clients and 250 engagements

• Significant shale development practice since 2010

Practice Areas• Logistics

• Engineering

• Supply Chain

Consulting services • Strategy & optimization

• Assessments & best practice benchmarking

• Logistics assets & infrastructure development

• Supply Chain design & operations

• Hazmat training, auditing & risk assessment

• M&A/investments/private equity

Industry verticals• Energy

• Bulk commodities

• Manufactured goods

• Private Equity

About PLG Consulting

State of the Proppants Market

Partial Client List

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Proppants – High Level Overview

Common fracking industry “rule of thumb” has been:

80% / 10% / 10% (Natural Sand, Ceramics, Resin Coated) volume usage

Everybody has their secret recipe that is different for each play

Ratio has shifted towards more natural sand overall – sometimes 100%

Demand

Natural sand rising significantly due to new stimulation techniques

Ceramic and resin coated volumes are flat to down

Natural sand is ~10% of ceramic proppant cost and can be delivered in cost-efficient unit

train service

Supply

New natural sand mines continue to come on line, trans-loading is adequate

New capacity for ceramics coming –PyraMax (Imerys) opening in Wrens, GA

Trends

Ceramics needed for high pressure drilling – deep shale and dry gas

Gas rigs still <300, not expected to rise significantly in near future


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Frac Sand Supply Chain Definition and Industry Trends

Mining Processing Rail

Load-outLong Haul

Rail

Transloading

and StorageTrucking to

Well

• Rapid growth and maturation of hydraulic fracturing and frac sand industries simultaneously

• Consolidation of responsibilities – out-sourced or in-sourced

• Demand has fluctuated but strong upward trend

• Sand supply growing while consolidating number of players

• Unit train shipping is the game-changing logistics development

• Trucking market remains regional and disaggregated


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More well bores per well pad

Directional bores to multiple shale layers

Reduced well spacing per acreage – increases well density

Zipper wells – stimulating two wells in tandem

Optimal lateral lengths

Lateral lengths had tripled since the start of horizontal drilling,

but this trend is being challenged by new practices

Zone fracturing

Micro-fracture testing at multiple points vs. one average test that

enables highest extractions of each zone

Shorter, fatter fractures

Bigger holes in casing combined with additional sand and water

use

Nearly all new techniques drive more sand usage!

Productivity gains continue

Time required for drilling 15,000+ ft. well cut in half in last two

years (9 days vs. 18 days)

Eagle Ford example – new well oil production per rig has

increased by 150% over past 3 years

New Fracking Techniques Drive Increased Production At Lower Costs

Source: Marathon, February 2014

Source: Whiting Petroleum, December Investor presentation


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Frac Sand Deposit Locations

Most desired sand comes from WI, MN,

IL

MO has momentum

More interest in OK


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Major Sand Shipping Flows


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• 91 operational frac sand mines

• 15 in development

• 15 permitted

• 16 proposed

• 5 stalled

• 3 inactive

• Trempealeau County moratorium on new facilities effective August 30, 2013

• Most active WI county relative to frac sand permits

• 26 companies

• Moratorium in effect for up to one year, pending environmental and ethics investigations

• State continues to be a legal, environmental and quality of life battleground

Sand Mining and Processing - Wisconsin

Source: www.wisconsinwatch.org as of May 1, 2014

As of 5/1/14


Trempealeau County Area

http://www.wisconsinwatch.org/

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Sand Mining and Processing - Minnesota• State has launched a multi-agency, cohesive

management approach, including website (silicasand.mn.gov) to provide a single source of information regarding rules and activities involving the mining, transportation and processing of silica sand

• Environmental Quality Board (EQB)

• Minnesota Department of Natural Resources (DNR)

• Pollution Control Agency (PCA)

• Department of Health

• Department of Transportation

• Department of Agriculture

• Have had “growing pains” in establishing common data and ability to react to constituency requests

• Map notation regarding lack of previously displayed location data is example

• Winona, MN PCA data request is three months overdue

• Earlier this week, MN Court of Appeals upheld decision to not require an environmental impact statement for Winona County project, creating precedent for similar disputes


High Activity Area for Active & Proposed Frac Sand

Mining, Processing and Transloading (*)

http://links.govdelivery.com/track?type=click&enid=ZWFzPTEmbWFpbGluZ2lkPTIwMTMwODE5LjIyMTAyMjUxJm1lc3NhZ2VpZD1NREItUFJELUJVTC0yMDEzMDgxOS4yMjEwMjI1MSZkYXRhYmFzZWlkPTEwMDEmc2VyaWFsPTE3NzM3MDU3JmVtYWlsaWQ9c2FtLmJydW5nYXJkdEBzdGF0ZS5tbi51cyZ1c2VyaWQ9c2FtLmJydW5nYXJkdEBzdGF0ZS5tbi51cyZmbD0mZXh0cmE9TXVsdGl2YXJpYXRlSWQ9JiYm&&&101&&&http://silicasand.mn.gov/

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Sand Mining and Processing - Illinois

Major facilities for key players (U.S. Silica, Santrol/Fairmount, Unimin) and increasing number of mid-tier and new sand companies

Key players are expanding existing facilities and acquiring new sites

Well-positioned to provide high-quality Northern White product at a lower delivered cost per ton vs. WI/MN sand to

• Eagle Ford

• Permian

• Marcellus/Utica

To-date support from state government leaders for expansion and new development projects

Increasing environmental protests from citizen groups


Source: www.fracktracker.org

http://www.fracktracker.org/

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Missouri - Up and Coming


Missouri has an existing sand industry –frac sand is a natural evolution

Missouri has geographic advantage and potentially logistics advantage vs. other Northern White locations

Some facilities have access to multiple Class I rail carriers

Barge access is plentiful to the Northern White sand mines in SE Missouri

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Hydraulic Fracturing Materials Inputs and Logistics Involved

Materials

Chemicals

Clean Water/Cement

Frac Sand

OCTG (Pipe)

Source to Transloading

2

Local source

40 ~ 70

5

Transloading to

Wellhead Site

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~1,000

160 ~ 280

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~1,200 Total Truckloads

Oil/Gas/NGLs

Truck, Rail, Pipeline

Waste Water

~500 Total Truckloads


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Frac Sand Handled by Railroads

0

10,000

20,000

30,000

40,000

50,000

60,000

Ca

rlo

ad

s

Quarterly Data

UP

BNSF

NS

CN

CSXT

CPRS

KCS

STCC 14413 Source: US Rail Desktop

Western carriersare geographically

advantaged


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Processed Sand - Total Delivered Cost per Ton

Source: PLG analysis using BNSF public pricing – does not

include fixed assets at origin or destination

“Benchmark” unit train example – Illinois to South Texas

• Single-line haul (one rail carrier)

• Private railcars

• Railcar fleet achieving two round trips per month

• Origin sand facility has direct rail load-out

• Destination trucking is less than 100 miles

Unit train operations include efficient origin/destination handling

• 24 – 36 hours per train

Manifest service would increase rail-related costs by 16%

• Increased freight rate (13% higher)

• Railcar fleet only achieves one turn per month, on average

• Additional trackage required to accommodate larger fleet

• Delivery patterns are more variable, requiring additional destination storage and inventory

Total Delivered Cost per Ton ~ $126

Logistics costs drive ~ 63% of total delivered

sand cost


Sand, 36%

Destination Transload &

Trucking, 25%

Rail - Freight, FSC and Eqp Lease, 38%

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Sand Railcar Market Conditions – Small Covered Hoppers

Current market described as “high demand”,

“red hot”, “very tight” by leasing companies

Increased frac sand per well demand, surging liquids

production

Additional sand sources opening in Wisconsin

New orders from cement shippers

Best availability is generally well into 2015

Typical full service lease rates $600 - $650

Frac sand shippers/receivers will continue to

move towards more efficient methods of rail

transportation

Manifest shipments require 2X the number of railcars vs. unit

trains due to increased cycle times

Use of manifest service usually encourages use of railcar as

storage at destination, further increasing fleet requirements

Cement consumption is expected to grow by

6.4% in 2014 and 6.2% in 2015, encouraging

railcar orders


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End Market Drivers Will Also Influence Growth Curve of Industry

Upside demand levers

• Domestic crude will continue to displace imports due to

competitive and profitable delivered cost of tight light oil

(from shale)

• Global oil prices likely stay relatively high

• Increase demand for natural gas – higher prices eventually

• Continued switch to natural gas from coal for electricity generation

• Dry gas exports to Mexico

• LNG exports

• CNG/LNG for transportation markets

Downside demand levers• Crash in crude oil prices

• Government intervention and/or more regulations

• Global recession

• Fracking technology that displaces sand as a proppant???


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#1 Key to Winning – Most Efficient Supply Chain


Load-outLong Haul

Rail

Transloading

and Storage

Trucking to

Well

“Never shut down a well” – supply availability of quality product remains “given”

Total cost “down the hole” by the end customer will become more precise and accurate

• Logistics cost is the highest portion of total delivered cost – best freight and handling cost structure

• Hidden or soft costs at the customer will also drive sourcing decisions

Winners will turn the supply chain into a conveyor belt – smooth, predictable, synchronized

• Find ways to tighten relationship with customers – schedule synchronization

• Utilize supply chain technology to further improve their performance and increase efficiency

• Invest in strengthening supply chain teams

• Cash flow will move up the priority list for sand companies – Inventory management will become important


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#2 Key to Winning – Leverage Will Drive Further Industry Consolidation


Load-outLong Haul

Rail

Transloading

and Storage

Trucking to

Well

End customers will continue to mix in-sourcing and outsourcing

• Early in-sourcing driven by supply assurance and controlling own destiny

• Can outsource beat the most efficient in-sourcing?

• Will the end customers consider sand to be core competency?

End customers desire “Storefronts” – can choose between “Walmart and Target”

• Allows them to focus on their core competencies

• Minimizes their inventory costs while maximizing their flexibility

Leaders understand the total cost structure with trade-offs and leverage the whole supply chain

Best “Tier 1”

suppliers will win


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What Will the Frac Sand Industry Look Like in 3 to 5 Years?

Frac sand leads with significant growth forecast• New fracking techniques and faster well completion for liquids

• New gas demand will drive gas drilling growth down the road

• Resin coated sand and ceramics not expected to grow significantly

• Price inflation coming later in 2014 and 2015?

“Survival of the fittest” supply chain – the evolution will continue • “Tier 1” supply base will further consolidate smaller players

• The best niche players will thrive as 2nd tier and in small plays

• Supply chain practices and technology flow in from other industries

• Continuous Improvement mindset required to win

Heavy focus on cost reduction will continue• Cost and margin will continue to be rationalized – direct and soft

• Difficult to win without volume leverage • Sand supply

• Unit trains

• High volume transload and storage capability

Will continue to be an exciting industry for the foreseeable future!


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Thank You!


This presentation is available at:

www.plgconsulting.com/categories/presentations

For follow up questions and information, please contact:

Taylor Robinson, President+1 (508) 982-1319 / [email protected]

http://www.plgconsulting.com/categories/presentations

http://www.plgconsulting.com/categories/presentations

mailto:[email protected]

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