By Arathy S Nair and Nivedita Bhattacharjee
(Reuters) - U.S. shale oil companies are pulling back on the amount of sand they use to hydraulically fracture new wells, responding to rising prices of the material that are driving up costs.
Investors worry a slowdown in sand use, combined with new mining capacity coming online, could lead to a glut of the material and bring down prices. The worries have pressured shares of sand companies.
Sand prices soared in the last year as oil companies ramped up shale drilling and production.
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But with crude <LCoC1><CLC1> prices below where they started the year, oil producers are employing new well designs and chemical agents that lessen the use of sand that represents around 12 percent of the cost of drilling and fracturing.
The price of frack sand is expected to rise 62 percent this year to average $47 a ton, according to researcher IHS Markit. That is expected to drive oilfield service price inflation to 15 percent over 2016, according to researchers at Wood Mackenzie.
Oilfield services provider Halliburton Co <HAL.N>, which buys sand for its drilling customers, last month reported its first decline in average sand used per well, saying customers wanted designs that consumed less of the material.
Average sand volumes for each foot of a well drilled fell slightly last quarter for the first time in a year, said exploration and production consultancy Rystad Energy. Volumes are expected to drop a further 2.5 percent per foot in the current quarter over last, Rystad forecast.
"As alternative strategies are optimized, sand density will fall on a foot by foot basis – dramatically in time," said Dallas Salazar, chief executive of energy consulting firm Atlas Consulting.
For a graphic showing frack sand use per well over time, see: http://tmsnrt.rs/2fHzJbc
Frack sand is mixed in a slurry and forced at high pressure into wells to free oil and gas trapped in rocks. Any weakening of sand demand would collide with several sand producers' plans to open new mines.
Companies including Unimin Corp, U.S. Silica Holdings Inc <SLCA.N>, and Hi Crush Partners LP <HCLP.N> are spending hundreds of millions of dollars on new mines to address an expected increase in demand.
On Thursday, supplier Smart Sand <SND.O> reported it shipped less frack sand in the second quarter than it did in the first. Rival Fairmount Santrol Holdings Inc <FMSA.N> forecast flat to slightly higher volumes this quarter over last.
In the last six weeks, shares of U.S. Silica and Hi Crush are both off about 30 percent. Smart Sand is off about 43 percent since June 30.
Some shale producers add chemical diverters, compounds that spread the slurry evenly in a well, and can reduce the amount of sand required. Anadarko Petroleum Corp <APC.N> and Continental Resources Inc <CLR.N> are reducing the distance between fractures to boost oil production. The tighter spacing allows them to extract more crude with less sand.
In the Denver-Julesburg Basin of Colorado, Anadarko said the new well designs have increased oil and gas production by as much as 35 percent. It is "no secret we have experimented with less sand out there," Bradley Holly, Anadarko's head of U.S. onshore exploration and production, told analysts last month.
Analysts and frack sand providers continue to forecast an overall rise in sand consumption as more wells are drilled and completed. Smart Sand last week blamed its decline on operational and logistics problems.
"The cases where people were scaling back [sand] usage, that was probably due to logistics problems," Duane Scardino, Hi Crush's corporate development manager, said in an interview this week. "It's hard for me to imagine what would be more cost effective than frack sand."
Still, Atlas Consulting's Salazar said of the major U.S. shale basins, only two - Haynesville and Eagle Ford - are pumping in more sand per well.
(Reporting by Arathy S Nair and Nivedita Bhattacharjee in Bengaluru; Editing by Gary McWilliams)