Midwest's frac sand industry falters as oil prices drop

By Eric Lindquist

http://www.twincities.com/localnews/ci_29049510/frac-sand-industry-falters-oil-prices-drop

As the frac sand industry literally rose from the ground under west-central Wisconsin's rolling hills in the past few years, Tom and Jeff Bischel were among the folks who hoped to cash in on the boom.

With hundreds of people suddenly working at the sand mines popping up across Chippewa and Barron counties and many more employed at processing plants and related industries, the brothers sought a piece of the action by opening a restaurant this May in New Auburn.

"Sand was our main motivational factor," Tom Bischel said last month, noting that the whole marketing concept revolved around the industry.

Not only did the brothers call their eatery T&J's SANDwich Station -- stressing the tie with capital letters -- but they also named their signature ice cream treat the Sandstorm. The owners even made T-shirts with the slogan "Home of the Sandstorm" on the back and designed a special 4-foot-tall drive-through window capable of serving customers in traditional cars as well as those driving sand-hauling trucks.

Unfortunately for the Bischels, the industry that inspired their restaurant was slowing down just as they were revving up.

"We opened on Memorial Day weekend, and a few weeks after that, they started laying people off and shutting plants down," Tom Bischel said. "You can't plan for that. Nobody could."

The dramatic change is the result of sand shipments plummeting in response to lower oil prices. The price of a barrel of U.S. West Texas Intermediate crude oil closed at $44.60 on Oct. 23, down 47 percent from $84.40 a year ago and down nearly 60 percent from June 2014 when Eau Claire gasoline pump prices peaked at $3.74 a gallon.

As oil prices have fallen, so has the demand for energy produced by the nation's shale oil industry and for the Wisconsin sand -- much of which is mined in the region within a 60-mile radius of Eau Claire -- that has become a key ingredient in America's recipe for domestic oil.

Wisconsin is the nation's leading producer of sand used in hydraulic fracturing -- the drilling technique commonly known as fracking that involves injecting a mixture of sand, water and chemicals deep into underground wells to force oil and natural gas to the surface. Wisconsin sand, prized by frackers for its ideal size, shape and durability, is shipped to drilling sites in states including North Dakota, Pennsylvania and Texas.

The latest fallout came last month when Hi-Crush Services revealed in a filing with the state Department of Workforce Development that it was laying off 27 workers and suspending production at its site at S11011 Highway M in Augusta.

"The duration of the layoff is unknown at this time," Hi-Crush said in the filing, which indicated the positions would be ended Nov. 9. "We have no choice but to halt production at the Augusta plant due to industrywide conditions related to the drastic decrease in the price of oil and the derivative impact of these pricing pressures on the sand industry specifically."

Similar shutdowns have occurred throughout the region. In Chippewa County, only one of the six operational mines, the Chippewa Sands property in the town of Cooks Valley, is still mining, said county conservationist Dan Masterpole.

DIM FORECAST

While frac sand industry sources insisted they expect business to bounce back, energy industry analyst Ethan Bellamy of Milwaukee-based Robert W. Baird & Co. warned last week that recovery doesn't appear to be right around the corner. He described the industry as 100 percent oversupplied and said bankruptcies and consolidation are needed to stabilize pricing and production.

"I expect continued layoffs and closures well into 2016 to right size sand supply to match greatly reduced oilfield activity," Bellamy said. "It likely will be 2017 before we are on firmer ground, by which time I expect oil to have strengthened to the $55-$60 range."

With no short-term improvement on the horizon, Bellamy said, he would recommend that anyone taken off the payroll at a sand mine look for work in another industry.

"Unless the Saudis change their tune, Venezuela implodes or China grows faster than expected, the U.S. frac sand industry will be on life support for the next year due to low oil prices," said Bellamy, who works at Baird's Denver office.

PacWest, a Houston energy consulting division of global consulting firm IHS, published a similar forecast last month. PacWest predicted U.S. frac sand supply would increase 11 percent in 2015 at the same time demand was expected to fall by 22 percent. The forecast called for demand to recover through 2017 in line with oil prices.

HIRING FREEZE

While that gloomy outlook obviously represents bad news for those employed in the frac sand industry, it also delivers a blow to businesses that stood to gain from the new income and commerce generated by mining.

"Everything was booming and going strong when we were planning our restaurant and putting it all together," Tom Bischel said. "But now it's slowed way down. We still have trucks that stop and use it just like we planned, but it's certainly not as good as we thought it was going to be."

As the Bischels wait for a recovery, hiring plans are on hold and the brothers and their wives are running T&J's SANDwich Station on their own.

"We were hoping to have two or three employees by now," Tom Bischel said, adding that he communicates regularly with people from the local sand industry -- five mines and five processing plants are located within six miles of the restaurant -- about the prospects for a rebound.

"We're all in the same boat. We're trying to stay positive and just playing it by ear," he said.

Likewise, Chippewa Sand Transport, a Chippewa Falls company created in 2011 to provide trucking services for EOG Resources in Chippewa Falls, is seeking ways to get through the slowdown.

In March, Chippewa Sand Transport announced plans to lay off 55 employees because of the decreased demand for sand, but a spokesman who asked not to be identified said officials did some downsizing but were able to avoid the mass layoff by operating as a trucking company for other products.

Progressive Rail CEO Lon Van Gemert said frac sand shipments on its Wisconsin Northern Railroad line in the Chippewa Valley are down about 45 percent from last year.

LESSON IN VOLATILITY

Pat Popple, an anti-sand mine activist from Chippewa Falls, readily admits she has shed no tears over the industry's hard times.

"I live a block and a half away from the railroad track, and it's been a much more pleasant summer not having to hear so many trains going through here," she said.

As the industry slows, Popple also hopes for a corresponding decrease in environmental and public health risks, although she said she fears that temporarily closed mines won't follow through on commitments to water down sand piles to reduce the public's exposure to potentially hazardous silica dust.

The No. 1 lesson Popple wants people to take from the slump is that it's not the kind of stable industry communities should count on as a cornerstone of the economy.

"With the booms and busts, it doesn't bring long-term prosperity," she said.

However, Charlie Walker, executive director of the Chippewa County Economic Development Corp., emphasized that the industry's up cycle softened the impact of the Great Recession in the region and led to $40 million in rail improvements in the county, a boost in property tax revenue that helped Chippewa Falls pay for downtown improvements and the creation of about 600 jobs in the Chippewa Valley.

"Now we're just riding the bubble back down, I suppose," Walker said, noting that the downturn's effects are limited because the frac sand industry still accounts for less than 1 percent of the county's GDP.

'NOTHING NEW'

Though the slump is painful for some people, it shouldn't come as a great surprise for a venture so closely tied to the volatile energy industry, said Rich Budinger, spokesman for the Wisconsin Industrial Sand Association and vice president of mining operations for Fairmount Santrol, which operates frac sand mines in Dunn, Pierce and Trempealeau counties.

"These cycles are nothing new to our industry," Budinger said. "The oil and gas market goes up and it goes down, and everybody that supplies product that goes into a market with that kind of volatility will be affected."

Experienced companies in the industry take such dips in stride because they know these cycles come and go, Budinger said, adding, "We're in it for the long haul."

With the market affected by geopolitical forces from Russia and Syria to North Dakota and the Organization of Petroleum Exporting Countries, Budinger said it's impossible to predict what's next for the frac sand industry.

"When will we come out of it? Who knows?" he said. "Will we come out of it? Absolutely."

In the meantime, frac sand companies are focusing on efficiency improvements that will help make the industry more profitable, even if oil prices stabilize at levels lower than in the go-go days from 2011 to 2014 when the vast majority of Wisconsin sand mines started, Budinger said.

As evidence of industry officials' confidence that the market eventually will rebound, Masterpole said Chippewa County is continuing to work through a backlog of industrial sand mining applications, and some companies are seeking to expand their site boundaries. The business plan appears to call for companies with leases for sand deposits to follow through on plans to obtain mining permits, he said.

WAITING IT OUT

Statewide, the Department of Natural Resources counts 71 active sand mines, with eight applications for new mines received this year, representing a significant slowdown from the previous few years, said Roberta Walls, the agency's industrial sand specialist.

The DNR doesn't track how many mines are temporarily shut down, although Walls indicated she knows that has been a common occurrence across the state.

"Everybody is just more or less waiting for the market to turn around so they can start back up again," she said.

Patricia Malone, UW-Extension economist for Trempealeau County, said companies can afford to slow production and sit on their stockpiles until they are able to receive a higher price for their sand.

"Sand isn't like cheese. It doesn't go bad in a short time," she said. "They have the sand, and it will still be there when they need it."

The human toll of this slump isn't as great as with past downturns because automation has reduced the demand for workers, Malone said.

"The boom and the bust is not as boomy and busty as it used to be because of changes in the mining industry," Malone said. "They're not laying off as many people because they're not hiring as many people."

Augusta Mayor Delton Thorson said he feels badly for the people affected directly and indirectly by the layoffs at the Hi-Crush plant, which he said provided an economic boost for the city.

Still, he expressed confidence the plant eventually will resume production.

"It's inconceivable to me that they're talking about a permanent shutdown," Thorson said. "There's too much investment for that to occur."

In the meantime, everyone associated with the industry is watching the oil market for signs of when the recovery might begin.

Through it all, the Bischel brothers are taking comfort from one thought as they ride out the sandstorm by pushing for customers from the New Auburn area and people traveling through the area.

"People still have to eat," Tom Bischel said.