Why Concerns Over Guar Are Overblown

The shortage of guar gum and its potential impact on the ability of oilfield suppliers to meet hydraulic fracturing demand has been a hot topic as of late. While we acknowledge the issue is intriguing (i.e., an unforeseen shortage of a strange plant product no one had really even heard of a year ago, hoarding of inventories by the globe’s number one producer, etc.), it’s our opinion that concerns are overblown for the following reasons:

  • The prospects of guar gum suppliers disrupting the near-term quarterly earnings of suppliers of hydraulic fracturing services have amplified the perceived importance of the matter. Nothing focuses the mind of Wall Street types like the opportunity to call an otherwise unexpected miss on the part of suppliers and/or operators. However, we doubt the impact of the recent shortages will be discernibly felt beyond the near term.
  • The invisible hand of the market will reduce guar’s impact on the industry’s bottom line going forward. Should hydrocarbon commodity prices fall, demand for guar will sink, thus taking pressure off of supply. Guar prices will fall. Should hydrocarbon commodity prices rise, the pass-through of guar’s costs will likely occur with little in the way of push back from the oilfield market place. We also expect additional conservation and efficiencies in the use of the product will emerge should guar prices spike again.
  • In the longer term, the recent spike in price will very likely cause growers to produce more of this cash crop going forward. Although India and Pakistan currently produce most of the world’s supply of the newly coveted crop, greater production in North America, Australia and Africa now seems all but inevitable.
  • Most importantly, we have confidence that the industry will uncover and/or develop effective natural and synthetic alternatives to guar gum. At the risk of appearing downright capitalistic, there’s simply too much money at stake for oil and gas industry stakeholders to allow shortfalls of the plant to continue beyond the short term.

In short, both the ingenuity of the oil and gas industry and the magic of the markets will combine to help ensure that today’s guar gum shortage is just another short-term obstacle the industry must successfully navigate.

On a related note, Halliburton recently acknowledged that it purchased significantly more guar inventory than current needs would dictate. Moreover, it did so at levels above the current market price for the product. While the company deserves credit for taking bold steps to ensure it had sufficient guar gum inventory during uncertain times, should it attempt to pass on the above-market costs associated with its missteps to customers, we suspect the guar will hit the fan.

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