As supply meets demand, Wisconsin's frac sand rush slows
by Kate Prengaman
Wisconsin Center for Investigative Journalism
For more than a year, a 30-foot-tall pile of unwanted sand towered over three acres on Claude Riglemon’s property. The price for the sand dropped about the time this stockpile was ready for sale, so the 120,000 tons of sand just waited.
Riglemon isn’t a miner. A real-estate appraiser, he also runs a cranberry operation north of Tomah, Wis. He jumped into the frac sand frenzy when a mining company offered to dig him a new reservoir in exchange for the rights to the sand it removed.
The company built him a great reservoir — but then struggled to sell the sand.
Wisconsin’s sand is in demand for use in hydraulic fracturing, or fracking, a method of unlocking previously trapped oil and natural gas that has boomed in the recent years.
Frac sand mining has surged in Wisconsin over the past few years, growing from a handful of sites to almost 100 permitted facilities. Nationally, the hydraulic fracturing industry purchased $3.7 billion worth of sand in 2011, according to The Freedonia Group, a business research firm.
Although no official figures are available, the Wisconsin Center for Investigative Journalism has estimated that the state’s frac sand industry will create more than 2,500 jobs. The industry has created controversy as well — some residents are concerned about traffic increases, dust pollution, and environmental damage.
The sand is valuable, but mining it profitably depends on both the cost of transportation and on fluctuating market prices. For example, the fine-grained sand the natural gas industry prefers has lingered in Riglemon’s backyard because the U.S. currently has a surplus of natural gas.
“The demand just isn’t there,” Riglemon said. “Western Wisconsin is all sand; this is not a scarce commodity. So the big issue becomes logistics. The cost (of transporting the sand) freezes the little guys out.”
Trucks finally started hauling away the sand from Riglemon’s land in late November. He said he thinks the company, which he declined to name, had good intentions, but was caught by surprise when the price for sand dropped.
Wisconsin’s sand is in demand, yes, but only to oil and gas drillers operating out of state. Getting it to buyers in North Dakota or Pennsylvania turns out to be a serious logistical challenge, said Tom Beekman, regional planning engineer with the Wisconsin Department of Transportation. Sand that’s mined far from rail lines or barges may be too expensive.
“They’ve got all kinds of sand in the backyard, but they just can’t get into the market,” Beekman said of the small operations. “Individuals have realized that they can’t get sand to the rail.”
Sand prices range widely depending on grain size, strength and location, but industry experts agree that the prices have come down significantly from the more than $100-a-ton high that ignited Wisconsin’s mining boom. Official government estimates are not yet available for 2011 or 2012.
For smaller operators who planned for higher prices, the frac sand boom might turn out to be a bust.
Supply soon to meet demand
The price of frac sand depends on the demand for its use in fracking.
Shale gas production exploded in the past decade, increasing 2,400 percent nationally from 2002 to 2012, according to the U.S. Energy Information Administration. This boom created a surplus of natural gas this year, which lowered gas prices, leading to lower prices for sand.
And as more of the new sand mines in Wisconsin begin production this year, the supply is catching up with the demand.
Rich Budinger, the regional manager for the Wisconsin Industrial Sand Company (WISC), a subsidiary of Fairmount Minerals, which has three operating sand facilities and one more in development in Wisconsin, said these price fluctuations are part of natural market cycles. Lower prices will benefit experienced sand mine operators like WISC, said Budinger, who also is president of the Wisconsin Industrial Sand Association.
“If prices continue to drop off, a competitive market will be established,” Budinger said. “Experienced companies have seen that before, and we’re prepared for it.”
WISC doesn’t just produce frac sand. It also sells sand for glass, construction and recreational uses. This diversification is key to weathering the ups and downs of the market, Budinger said.
“Week by week, month by month, the price shifts can be dramatic, but over the long term, there is strength in our market share,” Budinger said.
“When fracking boomed, drillers were so desperate they would buy any sand,” said Mike O’Driscoll, the global head of research for the trade magazine Industrial Minerals. “Now that there is more supply coming online, they can choose to use better sand.”
Moving sand costs plenty
And buyers want the best prices. Transportation expenses can make up about 50 percent of the cost of a ton of frac sand, said Jen Casebier, who runs DownHoleTrader.com, which connects drilling companies to suppliers.
Said O’Driscoll: “Sand is high-volume commodity. You need a lot of it, but it’s relatively low priced, and it costs a lot to move this stuff from point A to B.”
Large sand mine operators, unlike many small ones, typically sign long-term contracts with both buyers and railroads so they can produce and sell a steady supply of sand, the DOT’s Beekman said.
Only about a quarter of Wisconsin’s operating and developing sand facilities have rail access on site, but most of the largest operations are on that list. Beekman said rail access is key for the frac sand industry going forward.
“It’s not just the number of mines, it’s who has the business model to set themselves up on a rail line, who has property to expand,” he said. “That’s the business model that’s going to be successful.”
Enough sand mines, maybe?
The growth in Wisconsin’s sand mining industry has already slowed. County officials received far fewer new permit applications this fall than they did earlier in the year, according to Wisconsin Center for Investigative Journalism research. Only eight new mines or processing facilities were proposed during the past four months, compared to more than 60 between June 2011 and June 2012.
Beekman said his research shows the nationwide demand for frac sand is likely about 40 million tons a year, and “we might have enough (facilities) in place right now.”
“The companies that have managed to put large processing plants on the rail lines average about 1.5 million tons a year,” Beekman said. “Twenty to 25 of these big locations could meet the national demand.”
Some permitted mine sites have not yet begun construction. Beekman suspects some are waiting to see if sand prices go back up.
But, O’Driscoll said, “A lot of the smaller operations who are waiting might be waiting a while. I don’t think the price of sand is going to go back up very soon.”
Not everyone agrees that Wisconsin’s sand boom is over. Trempealeau County leads the state with nine mines in operation and 11 more in development. Kevin Lien, the county director of land management, reports that applications are still coming in.
“It’s not crazy like it was a year ago, but it hasn’t let up,” Lien said. “I think people are speculating that the drop in price is just economics and it will come back up.”
Lien said the construction delays he’s seen are the result of companies adjusting their plans to be more competitive in the market. Raw sand is not very valuable, so mines are adding facilities to wash the sand, requiring more permits and taking longer to build.
Pros and cons to market’s wane
If planned mines don’t develop and the jobs they promised don’t materialize, who loses out?
The owners of properties that are not developed may lose the most, depending on what type of contract they signed with the mining company. Some landowners have mineral rights contracts that offer no payment up front, said Lance Pliml, chair of the Wood County Board and president of the recently formed Wisconsin Counties Association Frac Sand Task Force.
Pliml said some mining companies may be negotiating contracts for land they have little intention of mining — either to boost the amount of sand they can claim in reserve or perhaps prevent competitors from moving in.
“My guess is that long term, some people won’t see that windfall they anticipated,” Pliml said. “If they don’t exercise options that they (mining companies) have on these properties, it’s just back to square one, back to farming.”
On the other hand, communities rarely make investments to support or entice proposed mining projects, Beekman said, so they don’t have anything to lose if the plan falls through.
“The counties that might lose out are those lifting moratoriums, hoping to get new mine development now that they have regulations in place,” Beekman said. “They might not because the market is close to saturation.”
That appears to be the case in Dunn County. A year-long moratorium expired in October, and according to Cleo Herrick, the county zoning administrator, the county has yet to receive a single new application.
That’s okay with Barb Flom, a Dunn County landowner who turned away a frac sand company interested in her property. She believes mining exacts too high a price on communities.
“I would be happy if the whole industry left,” Flom said. “Dirty air, dirty rivers. Those are the costs that local citizens are paying.”
The future of frac sand
Most industry experts agree frac sand mining is not going to disappear anytime soon, despite the recent slowdown in the natural gas industry.
“The only thing that makes frac sand mining go away is the end user,” Pliml said. “As long as they allow fracking, I don’t see it going away.”
In fact, Budinger says lower natural gas prices don’t necessarily mean bad news for the sand industry. Affordable energy could lead to a resurgence of American manufacturing. More manufacturing means more demand, long term, for both energy and sand, he said.
Claude Riglemon is just happy that his days in the frac sand industry are almost over. He supports the industry, but he describes his own experience as frustrating.
Riglemon estimates he spent about $6,000 on the permitting process, including the environmental engineers who drew up his stormwater and reclamation plans. Given the chance, he wouldn’t do it again — too much of a hassle.
“I would tell anybody that was going to get involved to be very careful and know who they are dealing with,” Riglemon said.
“Right now, it might be a little Wild West, but in a couple of years, the quick-buck operators will wash out. The boom will subside. The big guys will provide the market with what they need.”
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