Demand for guar in fracking created windfall for India, but will it last?

Guar beans
Source: Wikicommons

When shale gas exploration took off in the U.S. several years ago not many people suspected that it would have a considerable effect on the economics of Indian rural producers. The price of guar gum – a gelling agent used in frac water – shot up in recent years bringing prosperity to Indian farmers, but now it seems that various market forces are about to bring a correction to the buoyant guar market.

The American shale gas revolution was possible because of several innovations in gas and oil exploration. One was horizontal drilling. Another – multi-stage hydraulic fracturing, or fracking.

Fracking is a process whereby large amounts of water carrying sand and some chemicals are pumped at high pressure into horizontal wells drilled through shale formations. The water cracks the rock, creating fissures which, when the pressure drops, remain propped open with the sand (proppant). It turns out that the ‘thicker’, the more viscose the water, the better it deploys the proppant in newly-created fissures. And the best, biodegradable, gelling agent to create the desired viscosity in water is guar gum, a white powder obtained from guar – a crop grown in India and parts of Pakistan.

India is the largest producer of guar and accounts for about 80 per cent of the total global guar production. Because of the demand from the shale gas industry, guar now accounts for around 18 per cent of India’s total agricultural exports. In recent years India’s exports of guar gum shot up from $20.2 million in 2003-04 to $3.5 billion in 2012-13, even occupying the top spot in India’s agro-export basket in fiscal 2013.

Understandably, the new demand for the product caused the prices of guar beans to rise from about $50 at today’s exchange rate per 100 kg five years ago, to $500 in 2012 – a ten-fold rise.

Unsurprisingly, in response to increased prices, oilfield companies began searching for guar replacements. In June, two oilfield giants, Halliburton and Baker Hughes came out with their own proprietary guar-replacement products called “PermStim” and “AquaPerm” respectively.

Other companies – including Nabors Industries, Trican Well Service and Ashland – have also started working on guar substitutes, and with Chinese synthetic guar replacements entering the markets, the demand for guar has dropped significantly.

As a result, the price of guar gum has dropped sharply, and is presently at around $90-100 per 100 kg – Quartz reports.

However, the decrease in price notwithstanding, for Indian farmers the growing of guar is still profitable and despite the emergence of synthetic replacements the demand for the crop is still strong.

In fact, according the The Hindu Business Online, guar prices in 2014-15 and 2015-16 are expected to rule high even when it is assumed that the production of the guar crop in the country will increase some 6 per cent annually. According to the source, prices are expected to touch $167/per 100 kg in 2015 and could rise up to $194 per 100 kg in 2020 on increasing demand from shale industry.

This is a far cry from the previous highs, but still enough to make the production profitable.

On the other hand, with the production of guar sensitive to crop failures and shortages and coupled with the drive for the development of synthetic substitutes, there are those who believe that the price of guar will permanently decline.

Canadian fracking specialist Trican Well Service, which is ranked sixth by fracking capacity in North America, has high hopes for its own guar substitute, now being developed.

“We have seen the price of guar decline recently and expect this and the introduction of our guar alternative fluid to improve our operating margins during the second half of the third quarter and all of the fourth quarter,” said Trican’s CEO Dale Dusterhoft.

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