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Frac Sand Industry Feels The Effects Of Low Oil Prices, Less Drilling

By David Shaffer, Star Tribune (Minneapolis) (TNS)

MINNEAPOLIS — Low oil prices and reduced drilling in shale regions like North Dakota are hurting the once fast-growing frac sand industry, slashing demand and forcing price cuts that have led some players to reduce jobs.

U.S. sand mines, including 63 in Wisconsin and six in Minnesota, are projected to ship significantly less sand to oil drillers in 2015, compared with last year, when companies like Fairmount Santrol, U.S. Silica, and Superior Silica Sands set production records, industry officials say.

“This whole ripple effect has taken hold and it is going to continue,” Richard Shearer, CEO of Superior Silica Sands, a Texas-based company that operates sand mines in Wisconsin, said in an interview with the Star Tribune. “There are peak cycles and trough cycles, and we have hit a trough.”

The nation’s $4.2 billion industrial sand industry is increasingly tethered to the oil and gas sector, which now buys about 72 percent of the output. Sand production more than doubled in five years, and Wisconsin is the leading producer. Minnesota is fourth, behind Illinois and Texas, according to the U.S. Geological Survey.

Sand is used in hydraulic fracturing, or fracking, a process that injects sand, water, and chemicals into shale to free oil and gas. As crude oil prices have dropped — by nearly 50 percent since June — drillers have idled rigs, reducing demand for sand and putting pressure on its price, industry officials say.

The number of U.S. rigs drilling for oil and gas fell last week for the 17th straight week to 1,028, which is about half the number operating in November 2011, according to oil field service company Baker Hughes. North Dakota’s rig count slipped to 90 from a high of 203 in June 2012.

To make things worse for the sand industry, many newly drilled wells are not being completed right away. Instead, some drillers have delayed fracking, which can cost more than three million dollars per well, hoping that oil prices recover. North Dakota has 850 uncompleted wells.

Shearer said some experts project that sand shipments could be down 30 percent to 40 percent this year. U.S. Silica Holdings, the nation’s largest frac sand producer whose operations include a mine in Sparta, Wisconsin, recently told Jefferies Equities Research that it expects a 15 percent drop in its sand demand in 2015.

“It is a softer market, and there is pricing pressure,” said Scott Sustacek, CEO of North Mankato-based Jordan Sands, which started operations in December, just as the sand business began to weaken.

Sustacek said the company’s mine, named after the Jordan sandstone formation, is still ramping up production, although prices have dropped “in the 25 percent range” from the peak in 2014.

He said that the company has 25 employees and that it sells much of its sand in Texas, largely because it’s an easier market to reach via Union Pacific, the railroad serving the mine.

Neither the Superior nor the Jordan mines have cut workers, their CEOs said, but others in the industry have reduced payrolls, including 55 layoffs announced last month at a Chippewa Falls, Wisconsin, sand trucking firm.

At Fairmount Santrol, which has sand mines in western Wisconsin and in Shakopee, CEO Jenniffer Deckard told analysts in late March that the company idled its Readfield, Wisconsin, facility and that it cut the company’s 1,229-employee workforce by five percent. That’s about 60 jobs, but the Ohio-based company wouldn’t give more details, and it released a statement that left unclear whether layoffs are over.

“Fairmount Santrol is undertaking organizational restructuring intended to better align its cost structure with weakening market conditions,” said spokeswoman Kristin Lewis in an email.

Most sand is sold under long-term contracts. “Some of the contracts come up for renegotiation in May, and that will tell us what’s happening,” said Dave Armstrong, executive director of Industrial Development Authority in Barron County, Wisconsin, the epicenter of Wisconsin’s frac sand business.

Amid the downturn, two trends in the oil industry may benefit the sand business.

Those 850 uncompleted wells in North Dakota, for example, eventually will be completed, many of them later this year. If the price of crude oil stays at the current low level, North Dakota law will trigger a tax break on wells completed after June first. That would make it attractive to complete wells, boosting demand for frac sand.

Oil companies also are starting to pump significantly more frac sand into each well because production data show that it increases the oil output.

“The more the better — there is no doubt about it,” said Ken DeCubellis, CEO of Minnetonka-based Black Ridge Oil & Gas, which invests in North Dakota oil wells that are drilled by other companies.

DeCubellis said he has seen data from side-by-side wells — one drilled a few years ago using conventional amounts of sand and another more recently using at least twice as much sand. The intensively fracked well produced nearly twice as much oil, he said.

“The problem today, they are just not drilling enough wells,” said DeCubellis, whose own company cut its capital expenditures 40 percent this year, compared with 2014. “Over the short term, there is clearly going to be a reduction in the amount of frac sand used. Once the market rebounds and oil prices start to recover, then you are going to start to see that volume increase again.”

Photo: Jeff Wheeler via Minneapolis Star Tribune/TNS

Opposition Grows As Oil Pipelines Proliferate In Northern Minnesota

By David Shaffer, Star Tribune (Minneapolis)

PARK RAPIDS, Minn. — Leon Rogers has lived next to crude oil pipelines for years. He’s had enough.

With four pipelines already buried beneath his farmland and a fifth one planned next to his house, Rogers and many of his neighbors are no longer ambivalent about the river of oil flowing through this region of forests, lakes and rivers.

“They are making it a freeway for pipelines,” said Rogers, a registered nurse who has lived on a small farm south of Park Rapids for 18 years. “It comes down to, ‘I don’t want to live here.’ ”

Anti-pipeline sentiment is spreading in Minnesota’s North Woods, where 14 percent of the nation’s oil supply already flows through 10 cross-state pipelines leading to Superior, Wisconsin, and the Twin Cities. It’s happening amid persistent environmental opposition to the proposed Keystone XL pipeline, which would run from Alberta, Canada, through western U.S. states, and to a proposed copper-nickel mine near Minnesota’s Boundary Waters Canoe Area Wilderness.

For years, pipeline companies like Enbridge Energy, based in Calgary, Alberta, have faced not-on-my-property opposition over new pipelines carrying Canadian and U.S. oil. Now, residents like Rogers and a new citizens group are asking: Should the Mississippi River headwaters be a major conduit for crude oil?

Enbridge is proposing to build the 610-mile, $2.6 billion Sandpiper pipeline across North Dakota and Minnesota to transport oil from the Bakken region to Superior. Part of the route passes Itasca State Park on a corridor that already has four crude oil pipelines owned by another company.

“This one has caught everyone’s attention,” said Willis Mattison, a former regional administrator for the Minnesota Pollution Control Agency who is advising a newly formed group called Friends of the Headwaters, which has challenged the project.

Two month after it formed, the Park Rapids-based group says hundreds of people have expressed support. In a sign of the anti-pipeline sentiment, a crowd of 130 people at a public meeting in Park Rapids Wednesday applauded everyone who spoke against the project. The lone supporter, a local bus driver, made his remarks to polite silence.

The following night, in Carlton, Minn., an even larger crowd showed up at a meeting held by state agencies and Enbridge. “Where did all these people come from?” said Steve Schulstrom, an organic farmer who helped form the Carlton County Land Stewards to protect organic and sustainable farms in the pipeline’s path. He said about 180 people showed up. “It amazed me.”

State agencies led by the Minnesota Public Utilities Commission have just launched their review of the line, a process expected to take 10 months. Enbridge recently said it plans to build another $2.6 billion pipeline across Minnesota, replacing an older one that’s prone to leaks. The route hasn’t been announced, but Enbridge said it will consider using the same path as the Sandpiper line.

“We are the headwaters for the Mississippi River, one of the world’s great rivers, and within 25 miles of Park Rapids are over 400 lakes, some of them the clearest in the state,” said Richard Smith, a photographer who serves on the Friends of the Headwaters steering committee.

In a uniquely North Woods problem, Smith said many summer-only residents likely don’t know about the Sandpiper pipeline, and deserve a say on the route before regulators act. Enbridge announced the proposed route in November, after many seasonal residents had left. Yet the deadline for objections is early April, before many return.

Although the Hubbard County Board and other groups have pressed for more time, the PUC says that’s not possible because state law requires a decision 12 months after the project’s application. Indeed, activists like Smith and Mattison said the state’s fast-paced review process may make it difficult, if not impossible, for them to halt the Sandpiper line or have much influence over its route.

That’s a big difference with the better-known battle over the proposed Keystone XL pipeline, which would bring Canadian oil through western states. Keystone XL needs a presidential permit to cross the international border, and unless President Barack Obama approves the project, it may not be built.

But Sandpiper, whose route is entirely in the United States, doesn’t need such a permit. It also doesn’t require a full-blown environmental impact statement, like Keystone XL and the proposed PolyMet Mining copper-nickel mine in northeastern Minnesota. Instead, a consultant will conduct a streamlined environmental review of the Sandpiper route.

Mattison said the pushback against Minnesota oil pipelines has been influenced by the high-profile Keystone XL debate and the resurgence of environmental activism in Minnesota over what would be the state’s first copper mine.

“People are making a difference with Keystone. People are making a difference with PolyMet,” Mattison said. “Maybe we can make a difference with the pipeline.”

Enbridge, whose executives attended meetings across northern Minnesota hosted by state regulators, said the 30-inch-diameter pipeline will be built to high standards, with extra-thick steel where it crosses the Mississippi River and other waterways like the Straight River, a trout stream. It will mean 1,500 temporary jobs during the 2015-2016 construction period, and an economic jolt to local economies.

“We are offsetting (oil) imports from other countries that are unstable or are unfriendly to U.S. interests,” said Barry Simonson, a Duluth-based manager of engineering and construction for Enbridge.

Photo: Rickz via Flickr