Turns out the Loup Power District's excess sand is perfect for fracking – and worth millions

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Posted: Tuesday, February 18, 2014 12:00 am

GENOA, Neb. — Few people would have guessed over the years that the massive expanse of sand surrounding Loup Power District's canal near here would one day be worth untold millions of dollars, or that it would eventually be responsible for up to 150 jobs.

The source of the sand, the Loup River, presents James Reeg a never-ending challenge. As dredge foreman for the public power district, Reeg is charged with removing anywhere from 1 million to 2 million tons of sand and sediment from the utility's settlement basin every year.

It's a task that takes about three months in the spring and about three months in the fall to keep water flowing to the district's two hydroelectric power plants at Monroe and Columbus. And every year since 1937, that sand was pumped to either side of a two-mile-long canal, requiring the district to purchase additional land for storage.

As it turns out, the sand covering thousands of acres of land just west of Genoa happens to match the type of sand used to extract oil and gas in a process known as hydraulic fracturing, or fracking. Advances in the controversial technique helped create a domestic oil and gas boom. And that's been a boon for this little town of about 1,000 people west of Columbus.

“Anywhere they're drilling for natural gas in the U.S., sand from Genoa has been used,” said T.J. Doyle, executive vice president of business operations for Preferred Sands.

The company, one of the top producers of frack sand in the United States, operates a processing plant adjacent to Loup Power District's canal and sells product to oil and gas companies that use it in fracking operations.

In addition to the oil wells in North Dakota's Bakken Formation, frack sand is in high demand by operators with wells in places such as the Marcellus shale region in the Northeastern United States and in the Eagle Ford shale region in Texas.

Domestic oil and gas production hit a 42-year high last year, the U.S. Energy Information Administration reported. In the agency's 2014 Annual Energy Outlook, production this year is forecast to nearly match the all-time record set in 1971, and techniques such as fracking and horizontal drilling are helping fuel the boom.

“The whole (Genoa) plant was born out of trying to chase the demand created by the boom in domestic oil and gas production,” Doyle said.

Preferred Sands has invested “tens of millions of dollars” at Genoa, Doyle said, and has become a big employer in Nance County.

Meanwhile, Loup Power District has collected more than $1.76 million in royalties since Preferred Sands began processing materials in 2007, said Neal Suess, president and CEO of Loup Power, a public power district based in Columbus and serving 21 Nebraska communities.

Each of the past three years, Loup Power has received more than $400,000 in royalty payments that are figured on a per-ton basis. The first royalties were calculated at 25 cents per ton of sand processed, but thanks to an inflation factor tied to a sand mining index, that rate grew to more than 37 cents per ton in 2013.

Locals looking for work have also benefited. Nance County Board member Clair Jones said Preferred offers good wages and excellent benefits, and employees drive as far as 50 miles to work there.

“Maybe a handful of people were a little concerned” about the plant when it first opened, but Jones said those concerns never amounted to much.

In other frack-sand-producing regions in the United States, communities have been far less enthusiastic about the presence of sand processors that typically have to mine sand from deposits underground or within riverside bluffs.

In most counties in Wisconsin, for example, there are prohibitions on permits for new mines because of concerns that microscopic silica dust particles pose a threat to residents and communities adjacent to mines. Protests have also focused on mine operators that sometimes take down entire hillsides to gain access to frack sand deposits.

Mine operators in Minnesota and northeast Iowa face similar criticism.

By contrast, sand will continue to pile up in Genoa as long as the Loup River flows.

The nature of mining sand in Nebraska versus open-pit mining in places like Minnesota or Wisconsin is “almost a night and day difference,” said Professor Matt Joeckel with the School of Natural Resources at the University of Nebraska-Lincoln.

“I think that, generally, operators in Nebraska have an understanding and appreciation for environmental concerns, especially the big operators,” Joeckel said. “If you can't grow it, you have to mine it, and I think anybody in Nebraska that can make money off a mineral resource is helping diversify the state's economy.”

In contrast with frack sand operations elsewhere, the relationship between Preferred Sands and Loup Power is “perfect,” said Samir Nangia, an analyst with the Houston-based market research firm PacWest Consulting Partners.

“Situations like this, where you actually have wet sand being dredged out, are perfect,” Nangia said, “because it means your costs go down dramatically.

“In Wisconsin, there's a lot of opposition to new mines being opened up. But here's a case where the sand was a byproduct, or even a waste product, of something else.”

Frack sand is sought for its spherical grains, which can stand up to high pressure in underground shale formations. A rounded shape — in this case, the result of thousands of years of flowing through the Loup riverbed — also improves how the sand flows through wells once it's mixed into fracking fluid, a concoction of mostly water and sand with an added chemical cocktail.

Drilling rig operators inject the fluid into wellheads at a pressure high enough to create cracks in oil- and gas-containing shale formations thousands of feed underground. Sand contained in the fluid enters these cracks, which are sometimes started with explosive charges. When pressure is backed at ground level, grains of sand are trapped and prop the cracks open, allowing oil and gas to flow out of shale and into wells.

The process has raised concerns about the waste fluid's effect on local water supplies and about earthquakes.

The technical merits of the Genoa sand are afterthoughts for Loup Power District, however. Before Preferred Sands entered the picture in 2007, an unending supply of the stuff was creating a potentially expensive headache.

“It had gotten to the point where we needed to either buy more land to put the sand somewhere or find someone that could utilize it in a different manner,” Suess said.

“A developer came and tested it. Then some others came and said it had some definitive uses,” Suess said, “but we still didn't really know what they wanted it for or what use it had.

“Quite frankly, we thought sand was all that it was.”

In a way, he was right.

By his own estimate, Suess said there is anywhere from 100 million to 125 million tons of sand piled up next to the canal.

Recognizing the potential of the giant sand piles, Preferred Sands, a privately held company operating out of suburban Philadelphia, in 2007 purchased a processing facility adjacent to the north side of Loup Power's canal. The company operates four other plants, in Canada, Arizona, Minnesota and Wisconsin.

Data from the U.S. Geological Survey illustrate how the demand for frack sand has grown. Ten years ago, the market for industrial sand and gravel was worth $566 million, and only 6 percent was used in fracking applications. In 2013, 87 companies produced about $2.2billion worth of industrial sand and gravel, with 57 percent of it used in the oil and gas industry.

Suppliers have commanded as much as $75 per ton of frack sand in recent years, though prices have slipped closer to $50 per ton as supply has outpaced demand, according to PacWest.

The cost of a metric ton of frack sand such as the kind that comes from Genoa, delivered to an oil well, can cost between $110 and $200 by the time freight and storage costs are factored in. A typical well requires around 3,000 tons of sand, according to various industry sources.

A single railcar can handle up to 100 tons of sand, and Preferred Sands leases a fleet of 4,000 of them around the country.

That has meant steady business for Nebraska Central Railroad Co., a short-line rail operator that also hauls grain for local ethanol producers as well as steel for Nucor Corp. in Norfolk.

Chad Korth, a spokesman for the railroad, said he and co-workers used to joke about the “world's largest man-made sand pile” near the power station. Korth is among a local contingent that has welcomed the plant's presence.

“It was very interesting for me and a lot of folks that someone would be able to put that (sand) to use,” Korth said. “You can see the economic development it's brought to the area, and it's given us a very good shot in the arm.”

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