Frac sand producers spent millions and filled wetlands for now underused rail yards

The company already had a rail loading facility a few miles away at its Oakdale mine, but according to an application to fill almost 2.5 acres of wetlands at the site, it needed access to Union Pacific, the sand industry’s line of choice because of its direct connection to the booming oil fields in Texas.

Later expanded, the facility has more than 6 miles of track in spurs and concentric loops on about 70 acres. It was built to handle multiple “unit trains” — chains of 110 or more cars of bulk cargo all heading to the same destination, faster and cheaper than regular rail, and by some accounts a necessity for survival in an increasingly competitive industry.

But less than a year after the first unit train rolled out of Smart Sand’s new Byron facility, Union Pacific has phased them out for Wisconsin sand customers as part of a new strategy to cut costs to keep locomotives moving by picking up cars more frequently.

It’s a change that industry analysts say could increase costs for already struggling Wisconsin sand producers, and it calls into question the need to fill ecologically sensitive wetlands, including some at projects still under development.

“This has huge implications for companies that have spent millions on unit train loading facilities,” said Kent Syverson, an industry consultant and chair of the geology department at UW-Eau Claire.

Smart Sand wasn’t alone in its efforts to locate on Union Pacific, or UP, which carries the bulk of Wisconsin sand headed to Texas. There are a dozen sand loading terminals along the UP and a feeder railroad, and three more proposed since 2015.

In most cases the rail terminals were built on wetlands, a key environmental resource that requires special permission from the Department of Natural Resources to fill.

Since a 2016 market slump, Wisconsin frac sand producers have sought every advantage to lower their costs — particularly on transportation, which can account for more than half the final cost.

One of the keys was shipping by unit train, which industry experts say was 10 to 20 percent less expensive.

“It was pretty much a given if you didn’t have unit train (capability), especially coming out of Wisconsin … you were at a large disadvantage,” said Michael Wick, a mining industry consultant with John T. Boyd Co.

Smart Sand did not respond to multiple requests for comment. But in a recent call with investors, CEO Chuck Young called the move “a huge problem for sand.”

‘Dose of uncertainty’

In September, Union Pacific announced a new operating strategy to make its network more “fluid” and give the railroad more control over its locomotives.

As a result, the railroad has shifted unit train traffic into what’s known as the manifest network, in which locomotives pick up cars along the line and then sort them by destination in rail yards.

So instead of waiting for a customer to put together a 110-car train, the railroad sends a locomotive at a set time to pick up whatever cars are ready.

“In a unit train, it takes three, four, sometimes five days to accumulate the cars, create a unit train and ship them down,” Union Pacific CEO Lance Fritz said in a recent call with investors. “In today’s plan, instead we pull cars daily from those origins.”

That, he said, translates into time and cost savings for the railroad.

Union Pacific declined to provide details about service to specific customers, but in the Oct. 25 conference call, company officials said they had shifted sand customers in Minnesota and Wisconsin to the new model.

The Surface Transportation Board, which regulates railroads, has expressed concerns about possible service disruptions and the fairness of UP’s new rates, but as of Nov. 29 the board had not received any customer complaints.

The shift comes at a time when Midwestern producers are struggling to compete with new, cheaper sources of sand mined near the oil fields.

This fall saw layoffs and slowdowns, and executives of two major producers said higher-cost mines will have to close and sales of the “Northern White” sand mined in Wisconsin may never return to previous levels.

“It is a defining moment for Northern White,” said Joseph Triepke, founder of Infill Thinking, an oil and gas industry market research firm. “And you just got a gigantic dose of uncertainty.”

Wetlands filled

The unit train facilities also came at an environmental cost.

Rail lines tend to follow rivers and other waterways, so in order to build these terminals, frac sand companies needed to fill wetlands, which act as natural water filters and support a wide range of wildlife.

And in almost all cases the Department of Natural Resources allowed them.

According to the DNR, Wisconsin has about 5.3 million acres of wetlands, about half of what it had when European settlers first arrived.

Wetlands are protected under state law, but there are provisions allowing them to be filled to make way for development.

Developers are supposed to avoid harming wetlands, or if that’s not practical, they are expected to minimize the damage and participate in efforts to create replacement wetlands, but a 2012 law loosened regulations for projects that “will result in a demonstrable economic public benefit.”

Since 2013, the agency issued permits to fill more than 26 acres of wetlands for sand-loading projects on the Union Pacific. In most cases, the applicants said unit train facilities were a necessity to remain competitive and comply with UP guidelines.

Environmental advocates say it’s common for government to compromise natural resources for potential economic development based on impermanent market conditions.

Because of this market uncertainty, “it is critical that DNR, or whoever the reviewing agency may be, completes a rigorous, meaningful review of the claimed economic benefits before sanctioning impacts to our natural resources,” said Evan Feinauer, staff attorney for Clean Wisconsin. “Otherwise, we’ll end up in a situation where we’re harming the environment for merely speculative economic benefits that may never fully materialize.”

DNR spokesman James Dick said permit decisions are based on information available at the time. While state law doesn’t require the agency to re-evaluate permit decisions, Dick said wetland permits generally include a condition allowing the department to modify or revoke them if “the activity results in significant adverse impact to wetland functional values, significant adverse impact to water quality, or other significant adverse environmental consequences.”

Facilities overbuilt

Union Pacific has also not said how it might change shipping rates under new tariffs expected to be introduced later this year.

But losing out on the unit train discount is just one of the concerns for the industry, Triepke said.

Manifest service typically results in slower return times for empty cars, which could require the frac companies to buy or lease more rail cars.

While there are still benefits to having a unit-train yard, Triepke said, “they’re dramatically underutilized. You basically overinvested.”

Syverson likens it to building a bridge that can hold a thousand semi trucks when there’s only one passing over every few days. The bridge works, but you could have built it for a lot less money.

Hi-Crush, one of the nation’s largest frac sand producers, operates two mines on the Union Pacific line, both of which are now shipping cars by manifest train.

Company spokesman Steve Bell said Hi-Crush will adjust to longer transit times — “something we do all the time” — and is expecting costs will rise because of the need for more cars.

Other frac sand producers did not respond to requests for comment, but the issue has come up in recent conferences with investors.

No change for Meteor

One of the permits the DNR granted was issued to Meteor Timber, which seeks to build a loading facility in Monroe County to handle sand from two mines on nearby land that the Georgia company acquired in 2014.

The permit, currently being challenged in court, would allow Meteor to fill 16.25 acres of “exceptional quality” white pine and red maple swamp, which is considered an imperiled habitat.

Meteor made the case that a unit train yard was the only way to be profitable.

“This is not even a point of discussion with operators, customers, or the railroad,” said an analysis from John T. Boyd Co. “The question now is how long of a train can be loaded in what period of time.”

According to the application, Union Pacific would not approve a facility without unit train capability.

Meteor’s attorney, John Behling said last week the company intends to move forward with the $75 million project in spite of market conditions.

Behling referred questions about plans for a unit train loading facility to a trade association spokesman who said the 10 miles of track outlined in the permit application is still needed.

“The proposed track is necessary to move the company’s projected amount of material and still have adequate space for daily rail car storage and movement,” said Nathan Conrad, communications director for the Natural Resources Development Association. “While one day unit train service may be discontinued, and that has not been fully resolved, the product still needs to be shipped, and rail is the most effective manner.”

Meteor’s facility is the only pending sand project on the UP line after two other proposed developments have been shelved because of market conditions.

Dick said the DNR has not modified the Meteor permit but declined to comment further because of the ongoing litigation.

Clean Wisconsin, one of the groups opposing the permit, contends the wetlands involved are valuable enough to be protected regardless of the potential for economic development.

“Even if there are unit trains, we don’t think they should have this permit,” said Feinauer, the staff attorney. “But it should cause folks to wonder about and encourage (more) scrutiny on this project and others like it to ensure we aren’t needlessly destroying natural resources … for a dubious economic proposition.”

[Editor's note: This story has been updated to correct the spelling of the first name of Evan Feinauer.]