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Sticky problem for fracking firms

Skyrocketing guar prices dent bottom line for US pressure pumpers

Skyrocketing guar prices have seriously dented the bottom line for US pressure pumpers but some relief could be on the horizon if more supplies hit the market early next year.

Guar is a tiny bean that when ground up becomes an essential ingredient for hydraulic fracturing, a process designed to crack rocks with pressurised water, sand and chemicals to release trapped hydrocarbons.

But demand for guar has jumped as operators seeking unconventional hydrocarbons shift drilling rigs into liquids-rich plays that need heavier proppants – materials that keep an induced hydraulic fracture open, during or following a fracturing treatment – and thicker fluids. In parallel a lacklustre guar harvest has raised the prospect that guar supplies could dry up later this year as the market waits for what is projected to be a bumper harvest.

The rising price of guar, used to thicken fracturing fluid and help carry sand sideways into wells drilled by horizontal fracture stimulation, also known as fracking, has eaten into US oilfield service giant Halliburton’s margins. As a result, the outfit told investors last month that North American margins were likely to be hit by 300 basis points – an estimated $120 million – due to high guar costs. Guar now accounts for more than 30% of the cost of Halliburton’s hydraulic fracking jobs.

Analysts have predicted that other fracking firms, such as Baker Hughes and Schlumberger, could also see their margins hit.

As demand for guar gum has surged amid the onshore unconventional drilling boom in the US, prices have followed suit. They hit a peak earlier this year of nearly $15/pound. UBS Investment Research estimates that the frackers go through 700 million to 750 million pounds of guar gum a year.

Nevertheless there might be some relief for the drillers. After extensive talks with suppliers and producers of guar in India, where about 80% of the bean is grown and refined, analysts at UBS concluded that prices for the additive could fall by up to 50% by early next year.

UBS predicts the price of guar sold to oilfield service companies in the US will drop by 30-50% to $4-5.50/pound by early 2013. The bank says prices are now hovering between $7-8/pound.

Softening prices are largely driven by expectations for India’s largest guar crop in history. UBS says that this year’s crop could be triple the size of last year’s, but clear production estimates are difficult due to the lack of transparency in the Indian market.

Farmers in the central and northwestern regions of India are now planting this year’s crop following recent monsoon rains. With the harvest expected to come sometime in September, the new crop should start making its way through the supply chain by February or March next year, UBS said in a note.

Halfway around the world, Halliburton’s loss has prompted a windfall for Indian farmers. Indeed, it has been billed as a rare victory for the littlest of the little guys in global trade. The increase in guar prices has helped transform parts of the state of Rajasthan in northwestern India, one of the poorest places in the world.

Indeed, guar has become an unlikely player in the world economy and low-income farmers have suddenly become a crucial link in global energy production.

And as worries rose over the prospects for a full monsoon season this year, which is vital for an adequate crop, speculation over guar production built to frenzied levels. As a result trading in guar futures was even suspended, and with the monsoon rains still behind schedule, it remains postponed.

Ramesh Abhishek, the chief regulator for the Indian commodities market, says guar futures trading will only resume when supplies prove adequate.

Now, an international effort is underway to ensure guar supplies come closer to meeting soaring demand, and hundreds of thousands of small farmers in India have been recruited.

Leading the way is Vikas WSP, an Indian firm that specializes in the production of guar powders.

Many farmers sold their seed stock last year when prices shot up, so Vikas has held rallies in small towns to pass out free seeds, including new high-production hybrids. And the company has guaranteed returns to farmers no matter what this year’s monsoon might bring.

Vikas, which expects a heavy crop, is more than doubling its processing capacity by building two new plants in Jodhpur, the second largest city in Rajasthan after Jaipur.

Smaller producers are also taking similar steps. SK Sharma, managing director of Lotus Gums and Chemicals in Jodhpur said he will soon open a second plant dedicated entirely to serving natural gas companies, adding that he was cautiously optimistic that guar prices would remain robust.

“But we know there are efforts to grow guar in China, Australia, California and elsewhere, and this has us worried,” he told the New York Times.

Despite the expanding supply, many analysts believe that guar prices will remain high. Neil Beveridge, an energy analyst at Sanford C. Bernstein in Hong Kong, says that demand for fracking services should continue to expand rapidly outside North America.

Some analysts, however, caution that the fracking boom could slow and that guar alternatives could be developed. UBS sees more readily available alternatives to guar easing prices, but says they are not sufficient to make much of a dent in demand by themselves. More alternatives could be available by next year and could replace up to 20% of current guar demand, added the bank.

But Michael J Economides, a professor of engineering at the University of Houston, says there are no easy or cheap alternatives to guar.

Nevertheless operators are looking to blunt guar price spikes by buying lower-quality guar or seeking alternative chemicals.

Anthony Petrello, chief executive of US drilling company Nabors told analysts that his firm is exploring guar sources in different countries, as well as different alternatives to conventional guar.

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