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With the proppant market greatly oversupplied, the cost for the
product itself has been falling rapidly. Getting sufficient
proppant to location and on-time, however, poses great
challenges.
Of course, within the
Permian many bottlenecks and constraints have been persistent over
2018, and ironically the greatest upstream constraint, takeaway
capacity, may be easing constraints and pressure on the proppant
market simply by moderating all the activity that requires material
as an input. Nevertheless, the transportation infrastructure is
still strained, and logistics solutions and the proximity of supply
have become the focus of cost savings and innovation for operators
and service companies.
Driving improvements in capital efficiencies through a focus on
evaluating every opportunity for cost savings throughout the total
cost value chain has become the ongoing objective of operators and
service companies. Consequently, the supply side sources providing
sand, logistics, and storage have been forced to adapt to provide
cost-efficient, continually value-added "last mile" and on-site
storage solutions, in addition to the tailored mix of sand required
that is a fit for purpose solution.
Given the complexity and cost of these delivery services, there
seems to be an increasing preference towards sourcing solutions
from the closest possible regional mines, as many operators have
now accepted lower-quality regional sand (relative to "Northern
White" sand sourced from the Northern United States) in exchange
for the reduced cost.
The trade-off between short-term cost savings versus long-term
well productivity is still up for debate with many, however there
is no debate with the current sand sourcing strategy; in real
estate it's "Location, Location, Location", and in the proppant
market, it's "Proximity, Proximity, Proximity".
Figure 1: North American
proppant demand by basin
IHS Markit expects sand demand to sustain an estimated 5%
compound average growth rate from 2018 through 2020, with sand
demand by mass representing 96% of the overall market in 2018
(resin-coated and ceramic proppants make up a negligible portion of
the market). Furthermore, IHS Markit's analysis concluded that sand
demand continued to reach record highs into 2018-Q3, despite the
impending slowdown in activity in the Permian from the short-lived
capacity constraints anticipated from 2018-Q4 to 2019-Q3.
Even so, market supply significantly outstripped demand, mainly
due to the hasty ramp-up of regional/in-basin sand within the
Permian. IHS Markit believes there will not be a significant
tightening of the supply/demand gap until the early part of 2020,
when bottlenecks on takeaway capacity are eased and operators
unleash their previously restrained activity with refueled
budgets.
Figure 1: North American
proppant demand by basin
