Frac sand business is still booming; Select Sands develops fine mesh project close to wellheads
Select Sands’ USA property, "Sandtown" is actively mining Frac sand.
According to a recent business article in Wisconsin’s Journal Sentinel, “The state's sand patch shows few signs that crashing oil prices are having an effect. Plants and mines are still looking for workers, and development plans for new sand mines are moving forward.”
Wisconsin is the USA’s top producer of sand used to unlock energy held in shale rock formations – which are typically more than 1,000 miles away from Wisconsin.
Rasool Mohammad, President & CEO Select Sands (TSX.V:SNS) (FSE:ROG), believes that Wisconsin’s sand plants are vulnerable to competition from better located facilities.
SNS has purchased an option to acquire a 100% interest in a 520-acre prospective Tier 1 frac sand property, Sandtown, located in northeast Arkansas, USA – much closer to the action in Texas and Louisiana oil plays than Wisconsin.
Select Sands’ property, "Sandtown", is located within the Ordovician St. Peter sandstone formation, the source of 'Ottawa White' frac sand selling into major US oil and gas basins. Sandtown sits 3.1 miles from a highway, has an active power line, and has access to an existing rail system about 15 miles away.
“We originally purchased a 22% stake in a frac sand plant in Saskatchewan,” stated Mohammad. “Through that acquisition we got to know the market, permitting, geology and logistics, and we also gained an understanding of the customer’s needs. That mine was sold to a private entity, but we learnt what products are in demand due to the changes in the fracking technology.”
Researching the needs of end users in the Texas and Louisiana basins, Mohammad discovered two facts that would have a big impact on his vision for SNS. One, up to 60% of frac sand cost is transportation. Two, most of the frac sand buyers in Louisiana and Texas were getting product railed from Wisconsin – about 1400 miles away.
“In the frac sand business, you’re moving a lot of volume by truck or rail,” stated Mohammad. “We thought, if we could develop a high quality/Tier 1 asset closer to the shale players, we would have a significant competitive advantage – as well as a quality control advantage – because, when you move frac sand long distances, it can degrade the crystal, reducing the functionality of the sand.”
The American Petroleum Institute (API) classifies frac sand based on the roundness. SNS’s premium “Tier 1” sand – also known as “Ottawa White” – has the highest classification. It is greater than 98% quartz, highly spherical, crush resistant, of consistent size, unconsolidated, 40/70 & 100 mesh (finer mesh) sand. Wisconsin frac sand producers also have weather challenges that an Arkansas project would not.
“Our pitch to the oil and gas exploration-and-production (E&P) companies is that we are 650 miles closer and we have finer sand that will significantly increase their production rates,” stated Mohammad. “Frac sand sells for about $55 a ton FOB in the Midwest. By the time the sand hits the wellhead, the price is about $150 a ton. We think we can close some of that gap.”
Some existing frac mines are expected to go offline in 2015 if the price of oil goes down another $10. But demand for the “white only” fine-mesh Tier 1 sand is in high demand. Companies are now using a technique called “Plug & Perf” which uses on average 1,900 tonnes of fine sand per well – compared to 800 for traditional wells.
“Right now we’re drilling the property,” stated Mohammad. “The first results have confirmed that we have anywhere from 30 to 80 feet, which is more than enough than we were targeting. We are applying for permits and to start bulk sampling, which could occur as early as Q2, 2015.”
Mohammad’s team has identified a rail loading facility 12 miles from Sandtown. The Company is investigating transporting bulk samples to a processing plant and selling it in the marketplace which would demonstrate proof-of-concept.
“My goal is to have financing secured by the end of this year,” stated Mohammad, “and to be starting plant construction early in 2016.
Mohammad anticipates a Capex of around $30 million. Discussions with bankers and private equity groups have confirmed a strong interest in the Arkansas sand project. Select Sands has started preliminary discussions with E&P companies regarding an off-take agreement.
“We have enough capital to do all the permitting, testing, and drilling that will bring us to project financing stage,” stated Mohammad, “but transportation issues will be key to our competitiveness. Because of that, Mr. Zigurds R. "Zig" Vitols joined our Board of Directors.”
Mr. Vitols has served as the President, Mid-South Division, of Martin Marietta Material, a member of the S&P 500 Index and a leading supplier of aggregates and heavy building materials, with operations spanning 32 states, Canada, and the Caribbean.
"Zig will assist us in planning the rail distribution network,” stated Mohammad. “It’s an area I wanted to focus on now as we are putting the pieces together. His presence will bring a lot of rigor and sophistication to our transportation strategy.”
The Company also owns high-grade gold deposits in the La Ronge Gold Belt, northern Saskatchewan, and holds other gold projects located in Ontario and Saskatchewan. The Company’s Preview SW Gold Deposit in Saskatchewan, Canada, has 158,300 Oz gold and 270,800 Oz gold in Indicated and Inferred Categories, grading 1.89 g/t gold and 1.48 g/t gold respectively. The gold deposit remains open to expansion in all directions.
Total 2014 frac sand sales were about $8 billion.
Source: MMG Newswire
