In 2009 service companies in the Eagle Ford shale began to experience an unexpected growth spurt due to the implementation of horizontal drilling. What was once a two-stage vertical well was quickly maturing into a 15-stage horizontal well. A proppant need that was once fulfilled with three or four railcars was suddenly demanding 30 to 40 cars. Like any other boom within the industry, major service companies reacted by providing exponential amounts of proppant to the area.

But the constraints that this placed on regional infrastructure were underestimated. Within a few short months, two railroad embargoes set by the Kansas City Southern railroad in Corpus Christi and Laredo, Texas, sent a quick and stern message to the industry: More rail infrastructure and storage capabilities would be necessary to grow efficiently. Since those embargoes, service companies, mines, and even operators have been trying to find the best way to provide proppant to the Eagle Ford without crippling the railroad system and/or incurring astronomical charges. Three years later, one can find an array of transloading/storage solutions, from sprawling industrial parks with rail-to-truck transloading to flat warehousing or silos, each with its pros and cons. The question is which will be most cost-effective and beneficial for an operating company in the play.

From railcar directly to truck

Typically, the easiest and quickest way to provide prop-pant into a play is by establishing rail siding and transloading directly into trucks using mobile conveyor units. This option requires the least amount of capital investment. There is no need for infrastructure other than rail, conveyor belts, and a truck scale. Because of its simplicity, one can usually choose a rail siding with better proximity to the work. Last, there is no need for a long-term commitment to recover costs. In the Eagle Ford this service is plentiful, with prices ranging from US $6 to $10 per ton.

However, there also are negative aspects to this model, some of which result in extra hidden costs. First, companies need more railcars to transport the desired amount of proppant into the play since a portion of the fleet will serve as a storage facility. And since a railcar will cost $525 per month on average, floating storage translates into $5.25 per ton.

Second, operators will need more trucks to transport the product to the well site. Experienced transloaders will load a truck in 20 to 30 minutes barring any weather conditions (rain is an obvious problem) and/or equipment failures. However, when multiple jobs are running simultaneously, the line of trucks can begin to back up. The possibility of one truck running two or more loads on a given day becomes nearly impossible. Third, there is a risk of accumulating demurrage on the rail and/or with trucks. Depending on the serving railroad and the type of car (personal vs. system) a company is using, demurrage on each car can range from $85 to $200 per day. One week of demurrage on 20 cars can easily translate into a hefty monthly bill.

These unexpected costs stemming from logistics may be sent to different departments within a company, misleading the procurement manager to believe that he/she is paying a reasonable price when in reality the final cost could be 25% to 50% higher. Unfortunately, this is a common occurrence and the main reason that transloading from railcar to truck, while seemingly inexpensive at first glance, can end up costing more in the long run.

From railcar to flat storage or sacks

A second method used throughout the shale plays includes storing proppant in a warehouse either on the floor (also known as “flat storage”) or in 1.5-ton super sacks. This option helps provide the most amount of prop-pant to a desired area and helps alleviate the issue of railcar accumulation. The pricing structure can range from $10 to $15 per ton depending on whether the operator is charged a monthly storage fee.

Overall it is not a bad option, with minimal infrastructure and commitment needed. However, it does not remedy some of the same situations that plague the aforementioned option of transloading directly from a railcar into a truck – namely weather restrictions, long truck lines, and the charges associated with them.

The more important issues that can arise from storing in a warehouse are lack of inventory control, risk of contamination, and double handling of the product. Whether the proppant is in a pile on the ground or in sacks, keeping accurate inventory is extremely difficult, and the mixing of mesh sizes can be rather common. End-of-month inventory and audits can turn into frustrating processes laden with errors. Once again, this method of storage and transloading, while effective, has its hidden costs and limitations.

From railcar to silos

Otherwise known as the “Cadillac of transloading,” storing proppant in silos is the most efficient way to move high volumes in a region. Like any top-of-the-line facility, the investment is high (anywhere between $7 million and $10 million, including rail). However, there are third-party companies available to develop and operate silo terminals, so companies can allocate capital properly. A second issue with the model is its lack of flexibility if, for some reason, the work moves to another area. Recuperating such an investment can take years.

Nevertheless, the model pays for itself in volume. The more tons pushed through a silo terminal, the lower one’s cost is per ton. Additional positive attributes of a silo terminal are complete inventory control (no double handling/contamination), the ability to keep up with high demand, elimination of extra railcars, and lower rail/truck demurrage. Typically, a silo terminal will load a truck in 3 to 5 minutes and offload a railcar in 30 minutes. If operated efficiently, demurrage costs and rail congestion should be nonexistent. In the end, this is a good option if a company is planning to move between 20,000 and 40,000 tons per month into a play.

A solution that is priceless

Regardless of a company’s strategy in providing prop-pant to a play, the most important error to avoid at all costs is shutting down a job. The ramifications of a job shutdown are not only costly, ranging between $250,000 and $500,000 per day, but also are detrimental to a business relationship. The $1 or $2 per ton that one saves between a basic model and the silo model will appear miniscule in comparison.