10 Feb 2020

Why Are Sand Mines in the US Being Forced to Close?

Sand mine viewed from above
 

Between 2016 and 2018, demand for sand in the US shot from around 40 million tons to more than 100 million tons per year. Why? Because it’s vital for fracking, and producers discovered that more sand equaled more hydrocarbons brought to surface, especially in the Permian Basin.

Sand, which in the fracking industry is called proppant, holds open fractures in shale rock. This allows oil and gas to flow into wells. As the fracking industry boomed, so did the need for more and more sand. 

At first, this presented an enormously lucrative opportunity. Opening sand mines was the new gold rush. Across the vast, uninhabited deserts of the Permian Basin in Western Texas, the sudden need for proppant turned a virtually nonexistent industry into a very prosperous one. Sand mining, it seemed, was a winner.

Fast forward just six months, though, and the sands are already shifting. Across Missouri, Wisconsin, Michigan, Illinois and East Texas, mines are shuttering at an alarming rate. 

So… what went wrong?

The simple answer is that too many people jumped on the bandwagon. Yes, fracking is a big industry, but in the rush to buy up cheap land and make a fortune fast, investors saturated the market. 

Then, in 2018, pipeline bottlenecks caused fracking growth to slow unexpectedly and demand didn’t grow quite as fast as everyone anticipated. There was too much sand and too much price competition for everyone to survive at such levels.

In such circumstances, which ones made the cut? Not the long-established sand mines further north and east, but the cheap new contenders in the Permian Basin! So far, the rock-bottom running costs of these younger mines make them the more attractive and resilient option.

Will things stay that way? Are there enough fracking customers to go around and keep all the remaining sand mines in business? Who knows what the next few years will bring. The fracking industry could contract. Sand prices could contract. Certainly, land costs in West Texas are going up. Mine owners need to think carefully about how to cope if this happens.

After all, right across the energy sector, there’s a running theme whereby building new, more efficient enterprises is more profitable than older, clunkier operations. 

We see it with coal mines, which are often more expensive to keep going than new wind farms. With offshore oil rigs, there have long been debates over whether it costs more to get a crumbling old installation fit for purpose, or to build a new one. 

The lesson here is that surviving the sands of time isn’t just about spotting a great opportunity. 

… It’s also about staying flexible enough to adapt to changing demand, by making sure you’re not locked into huge capital expenditure when you need to scale back operations. 

… It’s about keeping your processes lean and streamlined, so there’s no unnecessary waste and your costs can be reduced in a pinch.

In short, it’s about protecting your profits by minimizing your outlay, not just maximizing your income. After all, the latter will fluctuate; the former is within your control.