Sand boom headed for uncertainty, Moody’s says

HOUSTON — Proppant suppliers have been in an impressive boom for the past several years as producers have pumped ever larger amounts of sand and ceramics down their wells. But with crude prices falling and a drilling slowdown on the horizon, the need for sand and other materials is looking much more uncertain.

Proppants, often sand or similar man-made ceramic materials, are pumped into a well during the hydraulic fracturing process to hold open fissures and enable oil to flow from the shale into the well and to the surface.

Demand for proppants has grown rapidly for several years as producers have drilled longer and more complex wells.

But with crude prices down more than 55 percent since the summer of 2014, sand producers are facing uncertainty about how much of the material will be needed in the next few years.

Early indications are that producers have pared back spending as crude prices have fallen. Several companies have already slashed 2015 budgets for finding and producing oil and gas. The number of active drilling rigs across the United States – a rough indicator of how much drilling for oil and gas is taking place – has fallen from to 1,750 from more than 1,900 in November, according to oil service company Baker Hughes’ count.

A January report by Moody’s Investor Service estimated that $60 per barrel oil could lead to capital expenditure budget cuts of between 30 percent to 40 percent across the drilling industry. U.S. benchmark crude futures fell below $46.35 a barrel in early trading Monday.

Those cuts could turn the supplier’s proppant boom into a rush to cut costs and lower prices, the credit rating agency said. Drillers are also likely to push for lower prices for sand as lower crude prices erode the return on their wells.

The exact extent of the slowdown  is hard to predict, Moody’s analyst Karen Nickerson said, mostly because newer, high-tech wells are using more proppant. Those wells, called proppant intensive wells, use about three to six times as much of the material as the average well. If drillers sink more of the proppant-heavy wells, the need for more material per well could offset a broader decline in drilling.

Exactly where the balance between the wider slowdown and the per-well increase will shake out will become clearer as the full drilling slowdown materializes and as drillers consider how much proppant to push down wells, Nickerson said.

“That’s the big question this year. If you think about demand, you have a baseline demand from drilling and then demand from proppant intensity,” Nickerson said. “It’s still too early for us to determine how much demand is being driven by added sand per well.”