Victory Nickel Inc. detailed new developments for its 100-percent-owned subsidiary, Victory Silica Ltd. Fourth quarter frac sand production was 47,515 tons, an increase of 21 percent over third quarter 2014 production, though still short of the potential of the company's Seven Persons facility (7P) near Medicine Hat, Alberta, Canada, estimated at 114,384 tons for the quarter.
According to the company, the production shortfall is largely a result of delayed rail deliveries of sand feedstock from Wisconsin, unseasonably cold weather that affected unloading activities at the company's rail siding near the 7P Plant, operating inefficiencies related to plant availability, and on-going staff training as production ramped up. The company has already implemented measures to mitigate the effect of these issues on a go-forward basis.
The industry trend toward increasing proppant intensity (more fracking stages per well using more proppant per stage) is expected to somewhat offset the potential impact on frac sand demand of the decreasing North American rig count due to the lower oil price.
Throughput at the 7P Plant during the fourth quarter of 2014 was 55,588 tons, resulting in production of 47,515 tons of saleable frac sand product. This compares with third quarter production of 39,121 tons of frac sand and 22,519 tons from the start of commissioning to June 30, 2014, bringing annual production to 109,155 tons. Although an improvement over the prior quarters, production fell short of the 7P Plant's potential for several reasons. Importantly, none of these reasons were related to product demand.
At the end of October 2014, the company announced the hiring of a fourth crew necessary to operate the 7P Plant at a 24-hour-per-day, seven-day-per-week basis. At the rated capacity, the potential throughput for the fourth quarter was 114,384 tons; actual throughput represents 49 percent efficiency.
During the fourth quarter, production was impacted by inefficiencies experienced while training new operators and by excessive staff turnover as the company builds a dependable workforce. Dryer and other equipment breakdowns were more frequent than expected.
Unseasonably cold weather in Wisconsin early in the winter season hampered delivery and unloading activities at the Seven Persons rail siding resulting in a reduction of concentrate feed to the 7P plant. Most significantly, delivery delays on the part of the railroad contracted to ship sand from Wisconsin to the 7P plant resulted in sand concentrate being delivered at a slower than anticipated rate.
These delays in rail car movements caused rail car cycle times to increase and the 7P plant to run out of sand concentrate feed on several occasions. The rail car cycle time for movements from Winona, Minn., to the 7P plant and back increased from an average of 34 days in the third quarter to an unacceptable average of 48 days in December.
Rail cycle times have recently improved with the use of a second transload point in St. Paul, Minn., and the company's work with its rail provider to rectify this situation at its original transload in Winona. The company also intends to expand its fleet of rail cars to increase sand haulage capacity to feed the 7P plant. The company plans to build sand concentrate inventory at the 7P plant to ensure consistent availability for customers when rail and/or operational delays occur that are beyond the company's control.
"It is unfortunate that these teething problems slowed the expected production growth rate at the 7P plant as we were able to sell every ton of frac sand produced," said Ken Murdock, Victory Silica's CEO. "The company has established itself as a provider of a superior product and must now prove itself as a reliable supplier. By focusing on product quality and customer service, we are confident in our ability to grow market share throughout the cycle and will take every opportunity to do so."
With the significant drop in oil and natural gas prices since the beginning of October 2014, the company said this dramatic and unexpected change has led to significant uncertainty and reduced visibility with regard to the outlook for the energy sector and associated industries, including oilfield services, in 2015.
Not surprisingly, the company is seeing a decline in demand, and downward pressure on pricing, for its frac sand products. In line with lower commodity price expectations, many industry analysts are forecasting a reduction in capital expenditures by oil and gas exploration and production companies in 2015.
At the same time, many in the industry are calling for the trend toward higher proppant intensity as a means of optimizing well production to have a positive impact on frac sand demand. Proppant intensity is measured by the number of stages fracked per well and the amount of proppant, principally frac sand, that is used per stage.
The amount of proppant used is on the rise as E&P companies see significant well productivity increases driven by the use of higher proppant volumes, up to 10,000 tons per well in some cases. In the currently challenging oil price environment, E&P companies are doing whatever possible to optimize well production, including using more frac sand.