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A legume used for cow feed in India has had a disproportionate impact on well stimulation costs in North America’s tight oil plays.
You as reader and I as columnist are about to discuss something neither of us thought would surface in conversation among polite company in oil and gas.
The topic is guar, an annual legume that likes full sunshine, heavy downpours, and well-drained soil but which thrives in semi-arid environments such as western India, where 80% of the world’s crop is produced by individual farmers on small dryland plots. Guar is Hindi for “cow feed.”
Guar endosperm is refined to produce guar gum, a polysaccharide composed of two sugars which, when mixed with borax or calcium, can cross-link to form a gel. Guar gum is used as an emulsifier in textiles, explosives, pharmaceuticals, and foodstuffs such as baked goods, dairy (ice cream!), condiments, and other grocery store staples.
What makes guar the topic du jour in oil and gas is its use as a crosslink gel in hydraulic fracturing. Oil and gas consumes more than one third of India’s guar crop and 75% of its guar exports. And it is here where the plot thickens, so to speak.
One year ago the well stimulation sector was buzzing over openhole completion systems incorporating swellable packers and ball-drop sliding sleeves as a key ingredient in opening tight oil plays.
This year the conversation is decidedly less high-tech. It seems the short-term economic fate of well stimulation revolves around guar.
It is one of those rare instances where an old clich? holds true: a butterfly in the tropics flaps its wings, setting in motion events that affect faraway places.
In this case the butterfly was a short monsoon season in 2011, which led to a short dryland guar crop on top of low pre-2011 stocks, which collided with rising demand from the shift in North American drilling to tight-formation liquids plays. The result was a global price spike. Back in India, hoarding and speculation in early 2011 exacerbated the price spike, prompting the Indian regulatory agency to temporarily shutter the guar crop exchange.
In the US, guar prices skyrocketed from US $1.50/kilo to $25/kilo, and guar briefly swelled to 25% of total well stimulation costs.
In May, Halliburton pre-announced a 3% drop in margins due to unexpected price increases for materials – namely guar. Other firms report various impacts from guar, though none as severe as Halliburton, which is scrambling on the spot market to stockpile a four-month supply.
So where are we currently? Guar prices have peaked and are marginally lower. Indian farmers plan to expand 2013 crop acreage significantly. Guar planting season starts in July with harvest in the fall and entry into the global market about the first of the year.
Meanwhile the monsoon season – and guar planting – is late this year, with the monsoon expected to be below normal in western India where most of the crop is grown on dryland farms.
Half a globe away, the oil and gas industry waits nervously for the butterfly to flap its wings.