Thursday, June 7, 2012

Guar beans and fracking and why history will repeat itself

Why is the shale gas industry in the US interested in Indian guar beans grown in Rajasthan and surrounding states?

The answer is that companies drilling for oil and gas under shale rock formations need a powder-like gum made from guar (or cluster bean) seeds in their preferred hydraulic fracking exploration process. Guar gum is used to increase the viscosity of proppants, materials which are forced into shale fractures to enlarge them so that the oil and gas can be extracted. It also helps reduce friction, which in turn decreases the energy consumed.

Indian farmers grow 80% of the world's beans. In 2010-11, India produced about 1.1 mt of guar beans and exported more than 400,000 metric tons of guar products, including gum. The recent explosion of shale-gas drilling in the US has led to a sudden spurt in demand for the beans. In fact, some drillers have had to halt fracking due to gum shortfall. The prices of beans and its seeds have gone over the roof, so much so that the local commodity exchanges halted trading in guar futures in late March amid a ministerial inquiry. There are two concerns with this trend

1. Farmers in Rajasthan and elsewhere have responded as expected by increasing acreage and ramping up production. In fact, the total acreage is expected to touch 10 million acres in the Thar desert area, compared to just 40000 acres in the entire US. A bubble in guar beans production is getting inflated at a rapid pace. 

2. As guar prices climb, there is a feeling that the price may have risen enough to make chemical substitutes to guar gum attractive. In fact, the other industries that use guar, such as paper, food processing and textiles, have already turned to alternatives.    

Both these developments have been repeated across many sectors throughout history, especially in agriculture. In response to a spurt in demand and the resultant spike in prices, producers have responded by ramping up production. As the prices climb steeply, substitutes arrive in the market, thereby popping the bubble in the original product. The farmers are left with large acreages and huge loans. There is little to believe that this time is different. The local state governments would do well to pay heed to the rhymes of history.

1 comment:

Anonymous said...

There is already a website that claims they have replacement that works in oil industry http://www.onsetworldwide.com/#!guar-replacements