By Selam Gebrekidan
NEW YORK (Reuters) - U.S. oil and gas drillers are finally catching a break from the surging cost of a tiny seed at the heart of the nation's oil and gas bonanza.
After a surprise three-fold price surge in the first five months of 2012, which roiled earnings for oil services firms and threatened to stall the domestic boom, the price of guar gum -- used to thicken the slurry of water, sand and chemicals that is pumped into wells during hydraulic fracturing -- has halved over the past few weeks.
Prices have tumbled almost as quickly as they surged as a fierce bidding war for short-term supplies eased, only after top buyer Halliburton amassed a four-month "strategic reserve". Suppliers that had been sitting on last year's harvest also unleashed those stocks on the market.
Guar prices spiked to a record $14 a pound in the second quarter but have since dropped to as low as $6 a pound, according to FTS International, one of the top five fracking service providers in North America.
"It looks like there's plenty of guar out there and the market is starting to balance itself," said David Pursell with Tudor, Pickering, Holt & Co.
For the bigger oil-service firms, who use millions of pounds a month, this price drop may cut costs by close to $100 million a month. Halliburton, the leading fracking services provider, for example, uses 12 million to 14 million pounds of guar a month, according to Barclays estimates.
However, it is likely too soon for most companies to benefit from the decline. Even Halliburton warned last month that its second quarter-earnings, to be released on Monday, will be hit by the earlier price spike.
And concerns remain that supplies will run short early next year. Most of the supply comes from India and farmers there have not covered as many fields with guar seeds as they did last year although they started planting early and had hoped to increase guar acreage by a third.
This ebb and flow of supplies, and the attendant volatility it has brought to the cost of producing shale oil and gas may affect hopes for energy independence in the world's top crude consumer.
SOARING PRICES
Gaur's explosive rise this year was the most dramatic among the many specialized components in the "fracking" process", which companies use to tap oil and gas from unconventional shale plays. Sand and ceramics prices, also key inputs, have risen too but at a smaller clip.
Companies that provide fracking services to oil producers felt the pain most keenly. In April, Halliburton CEO David Lesar called attention to the price volatility that resulted from tight supplies saying it is "the fastest-moving commodity price that I have ever seen."
However, Halliburton itself likely contributed to the rally by embarking on an aggressive and successful campaign to build up a private stockpile that would protect it from future supply gaps.
"We have about four months of inventory of guar in our warehouses," company CFO Mark McCollum said in June. "We're not using that...it is sitting there, but we had built that up and of course we're buying the current guar in the spot market."
In the week following Halliburton's statement, prices fell for the first time this year, quickly halving their value within six weeks, according to data from Agra Informa.
Baker Hughes, the third-largest fracking services provider in the market, also has enough stocks to last it until August and is securing supply for the rest of 2012, Barclays said. Baker Hughes, which will report its second-quarter earnings Friday, declined to comment for this story.
"Not long after (Halliburton) completed its strategic reserve buildup, a large quantity of guar entered the market, reducing the potential for a short squeeze in guar this fall," Barclays analyst James West said in a note.
INDIA A KEY SUPPLIER
Still, the U.S. energy industry remains heavily dependent on Indian imports since guar substitutes -- such as cellulose gum derived from cotton fiber -- have not proven as successful. Some 98 percent of U.S. guar imports come from India.
"Nobody has come up with something synthetic that works as well," says Calvin Trostle, an expert on the legume with the Texas AgriLife Research & Extension Center in Lubbock, Texas.
Imports from India jumped 60 percent in the first five months of the year versus 2011, according to customs data. May imports were up 16.4 percent from a year earlier, the data showed.
Any hiccups in India's crop could make guar costly, quickly. After an early start to their planting season in May, Indian farmers have slowed sowing guar, disappointed by scant monsoon rains, according to official state reports.
In mid July only 741,000 hectares (1.83 million acres) of land was seeded with guar in India's northern Rajasthan state -- home to 80 percent of the nation's harvest, compared with 1.3 million hectares a year earlier.
Farmers have until mid-August to catch up and they plan to sow a third more land with guar this year than they did in 2011. The Indian commodity markets regulator, which banned guar futures trading in March, plans to re-list the contracts once it ascertains the volume of crops planted in the country this year.
The final output, however, will not be clearly known until harvests start in October and November.
Halliburton and the other oil-service firms have a more optimistic outlook.
"There's been triple the amount of guar planted this year versus last year," McCollum said in June. "And so when the crop comes...the price of guar will drop dramatically."
(Reporting by Selam Gebrekidan; Editing by Bob Burgdorfer)
