Service executives talk guar

May 14, 2012
Oil & Gas Journal reporters rarely write about agricultural commodities. This reporter previously has drawn upon her farm kid experience in the Nebraska corn fields to write about corn prices and ethanol.

Oil & Gas Journal reporters rarely write about agricultural commodities. This reporter previously has drawn upon her farm kid experience in the Nebraska corn fields to write about corn prices and ethanol.

Recently, my coverage of unconventional oil and gas acquainted me with guar gum, derived from the seeds of a legume.

Guar gum is a thickener in enhanced oil recovery and an ingredient in some fracturing fluids as well. Guar gum also is used in food emulsifiers.

The drilling boom in US shale formations has escalated the demand for guar gum. Executives of service companies say rising guar prices are among various factors taking a toll on their profit margins.

India accounts for 70% of worldwide guar. It's also grown in Pakistan, and a small crop is grown in West Texas and Oklahoma.

During the fiscal year ended Mar. 31, 2011, India exported 403,675 tonnes of guar gum, according to India's Agricultural & Processed Food Product Export Development Authority. Jai Bharat Gum & Chemicals Ltd., India's second-largest guar gum exporter, told Bloomberg that export prices surged to $20,000/tonne in March compared with $5,000/tonne in October.

"The problem with guar is it's probably the fastest-moving commodity price that I've ever seen," David Lesar, Halliburton Co. chief executive officer, said Apr. 18. "Basically, we might get quote today 10% higher than a quote we would have gotten last week on it."

Rising guar costs are hurting profit margins for service companies. In addition, service companies are contemplating whether they have enough guar gum inventory to meet customer demand.

Halliburton believes it has enough guar gum to fulfill customer demand. "I do not believe many of our competitors can make this statement," Lesar said.

Guar gel systems can account for more than 30% of the total frac job price to Halliburton customers drilling in certain formations, said Mark McCollum, Halliburton chief financial officer.

Basic Energy Services Inc. Chief Executive Kenneth Huseman is confident his Midland, Tex., company has commitments for enough guar gum to meet demand. Huseman acknowledged that rising cost reduced first-quarter margins.

Baker Hughes Inc. also has warned investors its profits would slide, largely because of shortages of guar and other raw materials.

Market developments

India's Forward Markets Commission (FMC) halted guar gum futures trading on Mar. 27 because prices more than quadrupled since Dec. 1, 2011.

FMC, a commodity market regulator, temporarily barred trading involving guar seed and guar gum futures.

"We have decided to stop taking fresh positions in guar seed and guar gum contracts this season until September. We are allowing traders who have existing positions to unwind their positions," FMC Chairman Ramesh Abhishek told reporters at a commodity market conference in India.

In a notification, FMC said no fresh positions will be allowed in April, May, June, and July contracts of guar seed and guar gum from late March. The FMC also disallowed August and September guar futures trades.

Guar growers

Calvin Trostle, an agronomist at Texas A&M University, noted few US farmers grow guar, which he said means "cow food" in Hindi.

India's farmers likely will sow some 8.6 million acres in guar this year compared with maybe 50,000 acres of guar being sown in the US, mostly in Texas and Oklahoma, he said.

US farmers have little incentive to switch from corn or cotton to guar because guar has no crop insurance. Without crop insurance, banks are reluctant to make loans to farmers for seed or equipment for growing guar. Another disincentive for farmers is that few herbicides can be use on guar crops.

"In West Texas, where they're growing cotton, they have the experience and the know-how and the harvest equipment for cotton," Trostle said.

Lesar said the services industry is looking for alternatives to guar. "We are having some customers accept either lower-grade guar or alternatives to guar that, while maybe not getting the well response they want, at least they are getting something at a cheaper price," Lesar said.

It will be interesting to see whether the alternatives might involve another agricultural commodity.

More Oil & Gas Journal Current Issue Articles
More Oil & Gas Journal Archives Issue Articles
View Oil and Gas Articles on PennEnergy.com