The guar bean grown in the northern India state of Rajasthan is now a key element in the chemical cocktail used to frack wells, the technology that has prompted the oil and gas boom sweeping across North America and is set to spur a worldwide boost in oil and gas recovery.
The key product is a hydrocolloid, a substance that forms a gel when mixed with water. The powdered gum with the hydrocolloid is produced from the endosperm of the guar or cluster bean. Guar gum is made by removing the beans inside the pod, splitting them and then extracting the endosperm from the seed.
Demand for guar gum in the energy industry is running up prices, driving up costs and cutting into profits for the exploration companies. And it’s making Indian subsistence farmers less poor in the process. Neighboring areas in Pakistan also produce guar beans for export.
You eat the hydrocolloid – it is the ingredient that makes ice cream silky, salad dressings thick and creamy, and helps maintain the flavor of a beverage in your mouth. Wonderful stuff. Guar gum is also used in a wide variety of industries including textiles, paper, pharmaceuticals, and cosmetics, even as a fire retardant. A little bit goes a long way.
A gallon of ice cream calls for just a pinch of guar gum. But to frack a well’s shale formation may take 20,000 pounds (10 tons) of guar beans. At a recent New York capital markets conference, one of the major exploration companies reported using 1,700 tons a month resulting in a first quarter cost of some $40 million. Given that level of demand, prices for guar have jumped from $4 a kilo (about 2.2 pounds) to $30 a kilo in the last 18 months. There is joy for the farmers in Rajasthan and Pakistan!
The stuff is getting to be like gold, Halliburton in its earnings statement last month said, “The price of guar gum has inflated more rapidly than previously expected due to concerns over the potential for shortages for the commodity later in 2012. As such, the costs have impacted the company’s second quarter North America margins more than anticipated.”
Fracking is used to extract gas trapped some 6,000 to 10,000 feet beneath the surface making hard shale rock more porous. Large amounts of water, typically three to five million gallons, are mixed with small amounts of chemical additives, sand and pressure injected into holes in the well bore forcing cracks in the surrounding rocks, allowing much more gas to flow back into the well bore.
Dennis Seisun, head of IMR International, a San Diego-based hydrocolloid consulting company explains guar gum has several important qualities key to the process, “It’s a very good suspending agent and it is easy to break,” meaning that when the liquids are withdrawn from the well bore, the gum helps separate the chemicals from the water. One side benefit, Seisun says, is its usefulness in the debate with environmentalists over fracking, “The companies can say, ‘We are using stuff they put in ice cream!’”
In Jodphur, Rajasthan, the market center of guar bean growing country guar bean merchants tell tales of massive buys by U.S. exploration companies, offers to buy thousands of pounds of powdered gum to be air-freighted to well sites in Pennsylvania or Texas, or North Dakota.
There is enough truth in the tales and a huge run-up in prices creating a turbulent marketplace. Indian regulators shut down guar futures trading on the Indian commodities market last year, markets that are closed to foreigners, and punished several brokerage companies.
Nidhi Nath Srinivas, a columnist for India’s Economic Times, reported in May (Blog post page two) that American companies were distributing seed to farmers, while the regulators pondered allowing the re-listing of guar futures on the exchange after the size and scope of this year’s crop emerges.
Guar is sown by hand by subsistence farmers on small landholdings and is ideally suited to the poor, dusty soils of northern India. The fresh pods have a lettuce-like, tart flavor and are eaten whole, stirred into a curry or fried with spices.
For decades the guar gum market was dominated by food manufacturers, which was priced simply by how much the food industry offered. That changed with the new market in fracking.
The food industry press started griping last summer and by winter the concern had spread to the pharmaceutical industry. There are substitutes available to the complaining industries, including xanthum and tara gums. But momentum and general laziness make a pressure to hang on to the status quo. Once a formula is in hand and selling with a brand name positioned and an image built having to face new regulatory inspections, changing the label statements and some small chance of a flavor or texture change puts the cash flow at risk. Oh my.
The oil and gas business is also looking at guar alternatives. Both Halliburton and Schlumberger are exploring synthetic hydrocolloids. So far the guar gum has the synthetics beat. The work is a tall order – improve the viscosity, or flowability, of the drilling fluid and help suspend the sand that is needed more than a mile underground, and help prop the rock formation open when it is fractured under high pressure.
So the American petroleum business is encouraging more production in India where 10.5 million acres of guar are set to be planted this year, two million more than 2011. They’ve invested in Texas research efforts aimed at developing new seed varieties for U.S. production. There is now one guar gum production plant in Texas from guar being grown by a few farmers in West Texas where it is suited to the marginal soils and dry climate. Guar gum farming could grow in similar areas in other states, including Arizona, if the new price plateau is high enough.
At the same time fracking in the U.S. and Europe in the face of calls for a shutdown or intense regulations will continue as the economy needs the fuel and the evidence after decades is still too thin for credence. The technology can be expected to soar in Brazil, Russia, India and China. China is already getting technology instruction on how fracking works. In November of 2010, the China National Offshore Oil Corporation paid $1 billion for a 33% stake in Chesapeake Energy’s leases in the Eagle Ford Shale project in South Texas.
More oil and gas is coming. The small subsistence farmers of India and Pakistan have a world market and the market will grow to other marginal locations. Fracking is a hit, and the market effects reach worldwide improving lives.
Your humble writer can stand a penny more for ice cream if the price of natural gas is cheap and the price of oil goes down. Let ‘er frack!