plg proppants market march 2014

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Logistics Engineering Supply Chain

State of the Proppants

MarketPrepared for

Presented by

Taylor Robinson, President,

PLG Consulting

March 12, 2014 Houston, TX

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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 today has shifted towards more natural sand overall

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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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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• 72 operational frac sand mines

• 20 in development

• 13 permitted

• 17 proposed

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

• Most active WI county relative to frac sand permits

• 26 companies

• 4,733 acres

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

Sand Mining and Processing - Wisconsin

Source: www.wisconsinwatch.org as of May 1, 2013

As of 5/1

Trempealeau County Area


http://www.wisconsinwatch.org/

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Sand Mining and Processing - Minnesota

Source: www.silicasand.mn.gov

• 20 active frac sand mining, processing and transloading facilities

• Over 20 facilities in the planning stages

• State has launched multi-agency 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

Rule-Making

Authority


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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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

20

~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 17%

• Increased freight rate (14% 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 ~ $122

Sand, 33%

Destination Transload

& Trucking, 25%

Rail -Freight, FSC and

Eqp Lease, 42%

Logistics costs drive ~ 67% of total delivered

sand cost


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End Market Drivers Will Also Influence Growth Curve of Industry

Upside demand levers

• Domestic crude will continue to displace imports

• Global oil prices stay relatively high

• Increase demand for natural gas

• Continued switch to natural gas from coal for electricity generation

• Dry gas exports to Mexico

• LNG exports

• CNG/LNG for transportation markets

• Longer term US natural gas price increases

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 Proppants 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!For follow up questions and information, please contact:

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

This presentation is available at:

www.PLGConsulting.com


mailto:[email protected]

http://www.plgconsulting.com/

plg proppants market march 2014

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