April 20 (Bloomberg) -- Record-high prices for guar, a little-known legume used increasingly to help extract crude oil, may fail to boost U.S. production enough to cut imports or reduce costs for drillers including Halliburton Co.
While planting may triple to 50,000 acres this year from 15,000 in 2011, mostly in Texas and Oklahoma, U.S. supply will be dwarfed by the 8.6 million acres that will be sown in India, the world’s largest producer, said Calvin Trostle, an agronomist at Texas A&M University. Few U.S. farmers know how to grow guar, which means “cow food” in Hindi, and there is no crop insurance like there is for corn or cotton, he said.
“For guar, there’s no government support, there’s no insurance program, there’s no security from the banking industry,” said Klint Forbes, who co-owns West Texas Guar Inc., the largest U.S. processor. “The banks want to grow something where there’s no risk. You bring in guar, and there’s a learning curve, and there are handling issues. So, it doesn’t matter what we offer farmers. They can’t afford to plant it because of the risk.”
Until recently, guar was used to increase the viscosity of liquids in foods including ice cream and fruit drinks as well as consumer products such as shampoo and hand lotion. Prices rose to a record 35 cents a pound this year from 30 cents in 2011 and 12.5 cents in 2005, as demand surged from energy producers that expanded the practice of fracking to tap oil and natural-gas reserves, Texas A&M’s Trostle said.
Guar is made into a thickening gel used to carry sand down a well and into the cracks created from hydraulic fracturing. Sand, which is used to keep fractures propped open so oil and gas can flow out, travels further into the crack with guar than with thinner fluids.
Halliburton, the world’s largest provider of fracking services, cited rising guar costs as a reason that the Houston-based company is seeking higher fees from energy producers. In some cases, the guar-gel system can represent more than 30 percent of the total price to frack a well, Chief Executive Officer Dave Lesar told analysts on an April 18 conference call.
“We, like the rest of the industry, are looking for alternatives to guar,” Lesar said. “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.”
The cost to drill and complete a well climbed 6 percent in 2010, a further 25 percent last year and had been projected to grow 20 percent this year, according to a January presentation from Tulsa, Oklahoma-based industry consultant Spears & Associates.
Many large oil companies won’t invest in guar production because they know that farmers in India and Pakistan control most of the world’s supply, said West Texas Guar’s Forbes, whose Brownfield, Texas-based company buys the guar from growers, processes it and sells the end-product to users.
U.S. farmers have little incentive to switch to guar, especially without crop insurance, which discourages banks from lending money for seed or equipment because of the risk of crop losses from flood or drought, according to Forbes, who co-owns West Texas Guar with Wade Cowan.
“In West Texas, where they’re growing cotton, they have the experience and the know-how and the harvest equipment for cotton,” Texas A&M’s Trostle said. “If you switch over to guar, you don’t have any meaningful crop insurance, and you only have three herbicides you can use, so it’s not easy.”
India probably will boost the area seeded by 20 percent this year to 3.5 million hectares (8.6 million acres), said Rajesh Kedia, the director at Jai Bharat Gum & Chemicals Ltd., India’s second-biggest exporter of guar gum.
“We’re headed for the fall” in prices, West Texas Guar’s Forbes said. “What you’ll see is India and Pakistan increasing production. As soon as they do, you’ll go back to not hearing about guar. That’ll last seven to nine years. Then, we’ll be right back here again.”
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