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 natural gas bonanza.
Prices over the last few weeks have more than halved for guar gum, which thickens the slurry of water, sand and chemicals pumped into wells during the hydraulic fracturing process used to tap oil and gas from unconventional shale plays.
This about-face from a surprise quadrupling of prices during the first five months of 2012 came after top buyer Halliburton Co amassed a four-month "strategic reserve" and suppliers that had been sitting on last year's stocks unleashed them on the market.
Guar spiked to $12 per pound in the second quarter but has since dropped to $5, Baker Hughes, North America's third-largest fracking-services provider, said on Friday. FTS International, another top oil-service company in North America, had pegged the second-quarter peak at $14 a pound.
The price jump caused earnings for oil services companies to tumble and threatened to stall the U.S. energy boom. Now, however, the industry is getting some relief.
"It looks like there's plenty of guar out there, and the market is starting to balance itself," said David Pursell, managing director of Tudor, Pickering, Holt & Co.
This price drop may cut costs by nearly $100 million a month for big oil-service companies. For example, Halliburton, the leading fracking services provider, uses 12 million to 14 million pounds of guar a month, according to Barclays estimates.
"When you consider the market drivers for guar, there is reason to believe the downward pricing trend will continue," Baker Hughes Chief Executive Officer Martin Craighead said during his company's second-quarter earnings call on Friday.
However, it is probably too soon for most companies to benefit from the decline. Baker Hughes said its third-quarter margins would suffer until it uses up the guar inventory it bought during the price spike.
Concerns also remain that supplies will run short early next year. The United States imports 98 percent its guar from India, where farmers have not planted as much of the crop as they did last year, although they hope to increase guar acreage by a third.
This ebb and flow of supplies, and the volatility it has brought to the cost of producing shale oil and gas may affect hopes for energy independence in the United States, the world's top crude oil consumer.
The crop's explosive rise this year was the most dramatic among the many specialized components in fracking. Sand and ceramics prices, also key inputs, have risen at a smaller clip. Besides being an integral part of fracking, guar is widely used in the food industry.
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 probably 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," Chief Financial Officer 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.
"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.
Baker Hughes, however, said it had replaced 5 percent of its guar use with another gel it developed in its labs and hoped to double that in the second half of this year.
"While (the drop in guar prices) could be good news in the near term, guar is still a farmed product, and we could not continue to subject our customers, nor our income statement, to this uncertainty," CEO Craighead said.
INDIA A KEY SUPPLIER
Still, the U.S. energy industry remains heavily dependent on Indian imports since many guar substitutes -- such as cellulose gum derived from cotton fiber -- have not proven as successful.
"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 from a year earlier, according to customs data.
Any hiccups in India's crop could quickly make guar costly again. After an early start to their planting season in May, Indian farmers have slowed sowing of guar because they were disappointed by scant monsoon rains, according to official state reports.
In mid-July, only 741,000 hectares (1.83 million acres) of land were 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 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.
(Reporting by Selam Gebrekidan; Editing by Bob Burgdorfer and Lisa Von Ahn)