Frac sand miner Jordan Sands in North Mankato, Minnesota was pushed into receivership recently after its banker declared a loan default. A few months earlier, Minnesota’s largest frac sand producer by far, the Kasota mine near St. Peter, was idled.

In western Wisconsin, 10 frac sand processing plants have closed over the past 18 months. That’s one-third of the industry’s dry sand milling capacity, said Kent Syverson, a geology professor at the University of Wisconsin-Eau Claire and a sand-industry consultant.

Many other Wisconsin frac sand operations were operating well below capacity at the beginning of March, he added.

 And all of this was before oil collapsed as the economic disruption caused by the coronavirus pandemic cratered global demand at the same time Russia and Saudi Arabia decided to flood the market with crude supply. Frac sand with water is used in the extraction of oil and natural gas.

“The situation has gotten worse,” Syverson said. “Now we have an oil-price crash, and some [oil producers] are cutting back their fracking and drilling budgets.”

Announced cuts already total billions of dollars.

The Upper Midwest’s frac sand industry has been shellacked since 2018, first by a southward migration of sand mining, then by a supply glut. The industry’s sand surplus is “approximately double the current demand,” Jordan Sands CEO Scott Sustacek said in a court affidavit filed March 2, just before oil prices plummeted.

With the benchmark U.S. oil price at about $22 — down from the mid-$50s in January — shale-oil operators from North Dakota to Texas will lose money on new wells.

Publicly traded frac sand firms with mines in Wisconsin and Minnesota have already been crushed. For instance, the shares of Covia and Hi-Crush currently trade around 67 cents and 27 cents, respectively, down from just over $20 and around $15 in mid-2018.

In November, Hi-Crush wrote down the value of its shuttered Wisconsin facilities in Whitehall and Augusta by $215 million.

Wisconsin’s frac sand industry dwarfs Minnesota’s. As the Kasota mine in Le Sueur County goes, so goes Minnesota’s frac sand production, Syverson said. The mine’s owner, Ohio-based Covia, idled the property in November, declining to say how long it might be down or if it’s closed for good.

The Kasota mine, which opened in 1982 to serve industrial sand markets, can churn out 3 million tons a year. Covia’s nearby Ottawa mine, which continues operating, is less than a third that size. Covia’s Shakopee sand mine, which has been idled on and off for years, is currently shuttered.

A state court filing shows that Jordan was selling sand for about $20 a ton at the start of March — a price below the firm’s break-even point — compared with an average of $40 a ton in 2016 (a weak year for the shale oil industry).

Stearns Bank last month sued Jordan Sands, saying in court filings the sand miner defaulted on a secured loan with a balance of $18 million and was either insolvent or in “imminent danger of insolvency.”

The St. Cloud bank asked the state district court in Blue Earth County to appoint a receiver.

Jordan Sands argued in a court filing that Stearns had failed to prove insolvency and that Jordan was only 15 days past due on a single monthly loan payment when the bank dropped the ax.

Fracking entails blasting torrents of water, sand and chemicals into an oil well, creating cracks in shale rock below. The sand grains keep the cracks open, allowing oil and gas to flow.

About 80% of the cost of drilling new wells is sand, Sustacek said in a court filing.

The Midwest, particularly Wisconsin, is home to the highest quality sand, Northern White. It’s almost entirely quartz, notably strong and spherical, two essential traits for fracking.

But over the past few years, oil producers in the country’s largest shale-oil basin — the Permian in Texas and New Mexico — largely switched from Northern White to so-called “in-basin sand” mined regionally. “The adoption of in-basin sand has been very high,” Syverson said.

“The rapid shift away from Northern White sand has resulted in [Covia] having a significant surplus of railcars,” Covia CEO Richard Navarre said in a March 10 earnings conference call.

“Virtually all of our railcar lease rates are well above market prices,” adding $40 million to $60 million to the company’s annual costs, Navarre said. “This is a problem that is not sustainable.”

Hi-Crush already wrote off $76.3 million for railcar operating leases during the fall.

To make matters worse, sand companies overbuilt new in-basin sand mines, particularly in Texas, creating a glut, analysts said.

Now, with the oil crash, the frac sand business looks even shakier.

“Before you had a supply-side issue,” Carbrey said. “Now you still have too much supply, but the demand is not going to be there.”

Source: Minneapolis Star-Tribune