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Morningstar | U.S. Silica Afflicted by Low-Cost Sand Supply Flood

In our view, 128 million tons of annual proppant supply--nearly double the 67 million tons of peak demand in 2014--will be needed to fulfill the call on North American shale oil and gas production by 2022 and afterward. This is driven by a 150% increase in proppant use per well. On face value, this massively increased proppant demand would seem to augur quite positively for proppant suppliers.However, a vast amount of low-cost frac sand has been uncovered in the heart of the Permian Basin, which accounts for over one half of our forecast proppant demand. This sand has an inherent advantage over the Northern White sand that has traditionally supplied the bulk of North American frac sand needs. Northern White sand must be shipped as far as 1,000 miles to oil and gas wells, meaning that transportation costs account for as much as two thirds of the delivered sand cost. By contrast, the new Permian Basin sand mines are within 100 miles of the ultimate destination, meaning that transportation costs are much lower.We expect Permian sand as well as other new regional sand sources to more than offset the increased demand needs relative to 2014 levels. Combined with increases in low-cost supply among the Northern White producers, this means the midcycle marginal cost for frac sand proppant will remain well below 2014 levels, despite higher demand.Accordingly, we see mine-gate Northern White sand selling at about $26 per ton in 2022, hardly above trough 2016 pricing and well below the $55 per ton price in 2014. Our outlook on U.S. Silica is shaped by this view of a limited recovery in proppant markets.