Dependency on Guar Exposes Shale Gas Producers to Major Supply Chain Risks
Shortages of guar beans, an essential component in the shale gas ‘fracking’ process, have resulted in huge price hikes for the commodity in 2012. This has hit the profits of oil and gas companies hard and a search is underway to find supply chain alternatives, such as direct farm contracts and man-made substances. However, according to a new in-depth report by risk analysis firm Maplecroft, shale gas producers remain highly dependent on guar gum from India and Pakistan, which exposes them to significant supply chain risks.
India and Pakistan dominate global production and processing of guar, with India accounting for an estimated 80% of production and Pakistan a further 15%, but sourcing guar from both countries is beset with a range of risks. Maplecroft identifies labour violations, corruption, a lack of regulation and environmental risks as factors within these countries that can not only impact the price of guar, but also expose oil and gas companies to legal and reputational risks, as they try to secure stable supplies.
Exposure to severe labour rights violations
A key risk identified in the 70 page report is the high risk of complicity with labour rights violations for companies sourcing guar from agricultural producers India and Pakistan.
A large proportion of the agricultural workforce in both countries is informal, falling outside the protective sphere of labour laws and social welfare regulations, and human and labour rights violations are widespread in the sector. Bonded labour and child labour are highlighted as areas of especial concern by Maplecroft. The US Department of Labour, for instance, estimates that 69.3% of child labour in India takes place in the agricultural sector, while 10m children are engaged in child labour in Pakistan.
In addition, low wages, poor health and safety standards, discrimination, restrictions on civil and political rights, and limitations on the right to bargain collectively also pose risks for companies. Stringent monitoring of suppliers is advised by Maplecroft to mitigate the reputational risks associated with labour rights violations in the supply chain.
Endemic corruption
Reputational risks for shale gas companies are compounded by pervasive corruption at all levels of government in India and Pakistan, both of which are classified at ‘extreme risk’ in Maplecroft’s Corruption Risk Index.
According to the report, the guar suppliers will likely be exposed to routine demands for bribes for issuing export licenses, vehicle permits, tax receipts, and customs and excise clearances. Complicity with bribery payments pose direct risks to oil and gas companies from legal repercussions under foreign legislation, such as the US Foreign Corrupt Practices Act or the UK Bribery Act. The risk is highest in Pakistan where agriculture is dominated by politically connected families, but in Rajasthan, India’s main guar-producing state, levels of corruption are also far higher than national averages. Maplecroft states that this situation is unlikely to improve any time soon and companies should ensure that they take steps to conform to international standards.
Lack of guar-specific regulation
Effective regulation across the guar supply chain is of vital importance for international buyers, due to its impact on the ultimate cost of guar products and the timing of their arrival to the market. However, Maplecroft finds that in India and Pakistan there is a near total absence of guar-specific regulation at the production and processing end of the supply chain, which increases the unpredictability in quantity, quality, and price of the product.
Incoming legislation in India looks likely to open the commodities markets to foreign participation and halt the speculative trading that compounded price volatility through early 2012, but on-going restrictions, such as the prohibition of direct foreign investment in the agriculture sector, complicate and restrict supply chain options.
Significant environmental challenges
Further risks to the supply of guar are manifested in highly unpredictable environmental factors, finds the report. Guar production in north western India and south eastern Pakistan is dependent on the performance of the monsoon. Below average monsoon rainfall in 2000, 2002, 2004, 2007 and 2009 led to significant reductions in guar production and sharp price rises. Currently, there are concerns over the delayed onset of monsoon rains in Rajasthan, which could reduce guar production from the current season. Furthermore, severe weather events linked to seasonal weather patterns, such as droughts or flooding are common and can inflict severe harm through key supply chain components.
Maplecroft’s Guar Supply Chain Risk Report for India and Pakistan contains comprehensive analysis of governance risks, the regulatory environment, security issues, human rights and labour rights, and environmental factors affecting production. In addition, the report offers subnational maps of political violence, human rights, corruption, natural hazards, water stress and climate change vulnerability, which highlight the key growing areas. For more information on this, please email us at info@maplecroft.com or call +44 (0)1225 420000.