Halliburton Co and Baker Hughes Inc are stockpiling sand to protect themselves against rising costs and are buying more railcars to transport the haul, reports Reuters.
Halliburton, the world’s largest provider of fracking services, is more than doubling its railcar fleet and capacity for sand terminals – where sand is stored and transferred to truck from rail. It had about 3,500 railcars under management as of June 30.
Baker Hughes, the world’s No.3 oilfield services provider, said at the Barclays CEO Energy Power conference last month that it had “significantly” increased the number of its railcars and is buying more sand under contract, which helps buffer it against price rises.
Companies are pumping in as much as a trainload of frac sand into a single well to coax more oil and gas from shale rocks.
But the shale rush, especially in Texas and North Dakota, coupled with a rail jam that began after last year’s severe winter has resulted in shortage of sand at drilling sites.
“We did experience some disruptions early in the third quarter, where work was delayed because we were waiting on sand deliveries,” Halliburton’s chief executive David Lesar said on the company’s post-earnings call on Monday.
Halliburton has committed about $100 million this year to upgrade its infrastructure to move frac sand.
The company signed up 30 additional trucking companies this year to transport sand, Jeffrey Miller, Halliburton’s president, said on Monday. It has also opened a center in Houston to monitor supply and track its rail and trucking fleets, he said.
Halliburton is also buying more sand under contract, which it said helped shave 15-20 percent off spot sand costs.
“Halliburton has probably been the most proactive in establishing a ‘just-in-time’ inventory system for most of their frac sand products because it is becoming such a logistical game,” said Societe Generale analyst Edward Muztafago, who has a “buy” rating on the stock.
Halliburton and Baker Hughes are beefing up their transportation networks to also shield themselves from the increase in costs to move sand, which is adding to already high sand prices.
Prices for various grades of sand increased by between 5 percent and 20 percent past year, said Taylor Robinson, president of commodity logistics consulting firm PLG Consulting.
For example, Robinson said, sand delivered from Illinois to the Eagle Ford shale field in Texas costs $127 per ton on average, with transportation and warehousing accounting for nearly two-thirds of that.
“I think there’s going to be a limit to how much of these additional cost escalations our customers are prepared to take, given their free cash flow situation and also given the drop in oil prices,” Schlumberger chief exeutive Paal Kibsgaard said during the company’s earnings call on Friday.
The world’s largest oilfield services company said last week that oil and gas spending would increase in 2015 as global oil demand was poised to rise, downplaying fears of an investment slowdown due to weak crude prices.
Schlumberger did not respond to emails and calls requesting comment for the story. Baker Hughes declined to comment.
Several sand miners are also stepping up investments in their transportation networks, which they use to deliver sand to companies such as Halliburton.
US Silica Holdings Inc, which has about 30 transloading terminals for transferring sand from railcars to trucks, plans to invest about $300 million to expand its logistics network by 2020, CEO Bryan Shinn said.
US Silica is constructing “one of the largest transloading facilities in the country” in the Permian Basin, he said, and expects to add another 15-20 locations in the next few years.