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The latest, quarterly release of
IHS Markit's ProppantIQ report provides detailed perspective
into the many aspects leading up to, and through, the unforeseen
and unprecedented events that created historic turmoil in the oil
and gas market, and more specifically the subsequent effects on the
proppant market.
Exiting 2019 and heading into 2020, the frac sand market was
unwell; in fact, the market was slightly hovering above a recently
found "new" bottom with supply vastly outstripping demand and
pricing compressed to record lows as sand producers realized razor-
thin margins. This resulting, arduous environment prompted abrupt
action from frac sand suppliers and set the stage for a rough Q1
2020.
Nevertheless, the frac sand producers still standing adapted
quickly and strategically. This adaptation began with a focused
effort of optimal resource rationalization, by which inefficient
and non-core assets were shut down or divested, while production
was consolidated into their most efficient, cost-effective, and
logistically optimized facilities. This measured approach was a
logical next step forward to helping frac sand producers right-size
their operations, improve utilization, and lower opex costs amidst
lingering oversupply and the nearly unsustainable pricing
environment.
Resource rationalization was just one critical initiative
emphasized toward achieving the long-term goal of a rebalanced,
fundamentally driven market. In addition to rationalization,
another heavily weighted focus was placed on strengthening balance
sheets and achieving sustainable cost discipline, all while
incorporating new technology advancements.
The entirety of these measures gave the frac sand market some
cautious optimism in early 2020, however this tiny shred of
optimism didn't last long. The break-down in March of The Vienna
Alliance and the coronavirus (COVID-19) pandemic, coupled with
already moderated demand, left a wake of unforeseen, diminished
demand at historic, unstable levels, which has now become the
operating paradigm.
IHS Markit expects annual demand degradation of over 62% from
2019-21F, which is a far greater destructive magnitude than seen in
the last market downturn from 2014-16. We project North American
total Q1 2020 quarterly demand to be around 47.3 billion pounds,
with Q3 2020 roughly a mere 1/4th of Q1 2020 demand (figure
1).
Figure 1: US land, quarterly sand demand by basin (pounds) vs.
WTI (S/bbl)
Unsurprisingly, pricing has followed suit and the value of the
proppant market has dropped precipitously. IHS Markit forecasts the
proppant market to reach an all-time low in 2021, owing to many
factors: low barriers to entry, a highly fragmented and competitive
landscape combined with lingering oversupply, as well as the waning
demand of lower cost, substitutable products above the higher
quality material (i.e. regional/in-basin sand versus Northern White
Sand).
Amidst the chaos, completion designs have generally remained
fundamentally the same, with some slight continued growth in input
intensity, as operators inch closer to reaching their optimal
proppant loadings with an added focus on enhanced targeting. In the
US, lateral lengths should continue growing, and IHS Markit
estimates average proppant-per-foot increases of 3% and average
stage length decreases of 2.2%.
With the broader market's erratic behavior and simultaneous
freefall of WTI, operator capex, and overall demand, combined with
the most competitively priced and oversupplied proppant market ever
witnessed, the only thing certain for the 2020 frac sand and
proppant market, is uncertainty.
We provide full details on the proppant market in our ProppantIQ
report which is open to clients of IHS Markit's Onshore Services
& Materials subscription. Learn more about our ProppantIQ
service.
Brandon Savisky is a Principal Research Analyst at IHS
Markit.
Posted 29 May 2020
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.
