Permian Drilling Boom Prompts Sand-Shortage Talk at Concho

Aug 07, 2014 1:38 pm ET

(Updates with comment from sand producer in seventh paragraph.)

Aug. 7 (Bloomberg) -- Concho Resources Inc. is facing delays of several hours to get sand for fracking in the Permian Basin as a drilling boom in West Texas drives up demand and creates delivery bottlenecks.

Talk of a sand shortage is most prominent in the Delaware Basin region of the play, Joe Wright, chief operating officer of the Midland, Texas-based company, said on its earnings conference call today. The Permian Basin accounts for 30 percent of the 1,889 active U.S. drilling rigs, according to Baker Hughes Inc.

“There has been a lot of chatter around sand shortages,” Wright said. “It’s really more of a transportation of sand, or distribution of sand” issue, he said. Wright expects the delays to persist during the next 30 days.

The use of sand for fracking in the U.S. and Canada is expected to increase 17 percent a year, reaching 130 billion pounds (59 billion kilograms) in 2016 from 80 billion last year, according to a June 13 report by Houston-based PacWest Consulting Partners. The Permian, Marcellus and Utica shale regions account for the majority of frack sand demand growth in the U.S., according to the report.

Sand is one of the ingredients used in hydraulic fracturing, which involves pumping a mixture that also includes water and chemicals underground into rocks to release oil. Sand helps to hold open fractures in the rock, allowing the oil to flow more easily.

Surging Sales

Demand from oil and gas fracking helped drive up second- quarter revenue for sand maker U.S. Silica Holdings Inc. by 60 percent, to $206 million. Oil and gas sales account for 72 percent of sales for U.S. Silica, the largest publicly traded seller of fracturing sand, with intense interest coming from the Permian basin.

“The reality is, it’s just where the demand is super strong right now.” Bryan Shinn, chief executive officer of Frederick, Maryland-based U.S. Silica, said during the company’s earnings conference call on July 30.

Higher demand for sand is also pushing up prices, said Scott Sheffield, chief executive officer of Irving, Texas-based Pioneer Natural Resources Co., speaking during the company’s earnings conference call on Aug. 5.

“As more and more people go up to increasing the size of the frack jobs, I anticipate sand prices continue to go up,” Sheffield said. “Our prices will be mitigated by the fact that we own our own sand.”

Truck Lines

Companies that take deliveries from service firms have likely faced delays because of long lines of trucks at sand distribution centers in the plays, said Marc Bianchi, an equity analyst for Cowen & Co., based in New York.

“It’s safe to say that it’s an area of inflation in the industry, both from the actual sand price and also the logistics,” Bianchi said.

Concho has relied on deliveries from oilfield service companies such as Halliburton Co. and Baker Hughes, which have managed the demand for sand without major delays.

“We’re certainly using more sand across the board,” Concho’s Wright said. “The industry itself is using more sand out here.”

The growing frack sand market inspired an investment last month from private equity firm KKR, which said it had committed $680 million in debt and equity to bail out Canada-focused provider Preferred Sands, based in Radnor, Pennsylvania. The move will help fund Preferred Sands’ expansion, the companies said in a statement. Preferred Sands failed to make quarterly and interest payments on its debt last year.

--With assistance from David Wethe in Houston.