Uncertainty is inflating the worldwide helium industry.

The U.S. government, which for decades has been the world’s dominant supplier of helium, is planning to exit the business. The government-operated reserve supplies about 42% of the domestic demand for helium and 35% of the international demand. The exit would occur as early as this October, unless Congress acts. It is being contemplated as new uses in high-technology industries are driving up the demand for the rare inert gas.

The U.S. Geological Survey (USGS) expects that world demand for helium—currently at 6.2 billion cubic feet (Bcf) per year—will increase about 10% annually during the next few years. Currently, the U.S. remains the largest market for helium demand worldwide, at about 37%, or about 2.3 Bcf per year. Meanwhile, U.S. helium output in 2012 declined by 6.3% and worldwide production slid by 1.1%.

The potential loss of supplies from the U.S. government helium reserve, operated by the Bureau of Land Management (BLM) and located near Amarillo, Texas, has caused anxiety throughout the industry. “It would be as if one-third of the world’s supply of oil was instantly pulled off themarket—chaos would ensue,” Walter Nelson tells Midstream Business, director of helium sourcing, for Air Products and Chemicals Inc.

Federal law, enacted in 1996, set in motion the process for the government to exit the helium business. Ironically, many of the high-tech industries now using helium had not yet come on the scene when that decision was made. Foreign suppliers are eager to seize helium markets if the U.S. forfeits its dominance.

Expanding value

Helium, among elements, is second only to hydrogen in its abundance in the universe. However, because it is lighter than air, it is rarely found on earth in concentrations high enough to capture. The earth’s atmosphere contains just 0.0005% helium.

“Every unit of helium that is produced and used today will eventually escape the earth’s atmosphere and become one less unit available for use tomorrow,” Timothy Spisak, BLM deputy assistant director, tells Midstream Business. Capturing helium also is difficult because its molecules have the smallest radius of any known element. Helium is the ultimate refrigerant because it takes the most extreme cold to liquefy of any known element.

There is no substitute for helium in cryogenic applications if temperatures below minus 429ºF are required. Of all of the elements, helium is the most stable, or inert, as it will not react with other elements. It exists as a gas, except under temperatures close to absolute zero, at which it becomes a liquid.

“Finding alternatives for helium will be very difficult, and, in some cases, technically impossible, depending upon the application,” Paul McGuire, director of public affairs, for the BLM, tells Midstream Business.

Helium is an essential resource for the aerospace industry, arc welding, computer chip and optical fiber manufacturing, scuba diving mixtures and for medical uses including magnetic resonance imaging (MRI) magnet cooling, lung tissue visualization, medical lasers and heart catheterization.

Helium is also used in rocket-engine testing, scientific balloons and blimps. Surveillance devices, air-to-air missile guidance and chemical warfare-testing systems are just some of the military uses for helium. NASA uses helium to purge potentially explosive fuel from its rockets.

Helium is critical for cooling nuclear reactors and is used to make cell phones, computers, plasma televisions— anything with a computer chip—and for automobile airbags. Helium is mixed with oxygen to provide life-saving breath to asthma sufferers. But the most recognized uses for helium gas are party and parade balloons.

Supplies and production

The BLM-operated helium reserve consists of an extensive system that includes the storage reservoir in the Bush dome, Cliffside field, Texas, and a 425-mile pipeline system extending through northern Texas, through the Oklahoma Panhandle and ending near Bushton, Kansas. The pipeline connects eight privately owned crude helium plants and six privately owned helium purification/liquefaction plants. Geological conditions in Texas, Oklahoma and Kansas make natural gas produced in the area the most helium- rich in the U.S., about 0.3%-1.5% of the gas stream. Wyoming also has usable helium reserves.

As of the beginning of fiscal 2013, there was a total of 15.14 Bcf of federally owned crude helium in the reserve. Additionally, there was 1.27 Bcf of privately owned helium in the reserve. BLM is producing crude helium at a maximum rate of 5.8 million cubic feet (MMcf) per day and is losing ground to demand for the gas. If sales continue at the current rate, there would be approximately 9 Bcf of federally owned helium in the reserve by fiscal year 2015, McGuire says.

In 2012, only five countries—U.S, Algeria, Qatar, Poland and Australia—had commercial production of helium. The total from the U.S. was 135 million cubic meters, including 60 million cubic meters from the Cliffside field, and 75 million cubic meters extracted from natural gas at all locations, most notably from ExxonMobil Corp.’s Wyoming plant—the world’s largest helium facility.

Algeria was second with 20 million cubic meters, followed by Qatar with 15 million cubic meters and Poland with 3 million cubic meters, according to the USGS. Australia’s production was estimated at just 100-150 million cubic feet.

Estimated world helium reserves totaled 1.13 trillion cubic feet (31.3 billion cubic meters), with U.S. leading with 20.6 billion cubic meters, followed by: Qatar (10.1), Algeria (8.2), Russia (6.8), Canada (2.0) and China (1.1).

Total exports from all U.S. sources in 2012 were 85 million cubic meters, according to the USGS. Last year, Russia announced plans to recover significant volumes of helium from its East Siberia natural gas reserve with operations beginning in 2017.

“The current shortage in the helium market is unprecedented. Investments by the energy sector are necessary to develop and employ helium recovery with natural gas processing where there is helium present,” Nelson says. “Only in a few spots on the planet does helium exist in high enough concentrations to make it feasible to separate it from the natural gas. There are no naturally occurring underground reservoirs of pure helium. No oil and gas extraction company goes out looking for helium. In the U.S., we have seen a decline in helium production as energy companies focus their drilling plans on natural gas that is rich in liquids rather than the dry gas, which typically has more helium.”

New helium supplies are expected from three sources— another plant in Wyoming, Algeria and Qatar—before the end of 2013.

“Only after these three new helium sources are operational and existing plants are again running at normal rates will the global helium supply begin to fully stabilize,” Nelson says. The 1.3 Bcf per-year Qatar project is that country’s second helium-related facility and will be the largest additional supply source added this year. The Qatar project is expected to account for up to 18% of the globe’s current supply, with the Wyoming plant (4%) and Algeria (2%), Nelson says.

The new privately owned natural gas plant, located southwest of Big Piney, Wyoming, referred to as the Riley Ridge project, is now 100% owned by Texas-based Danbury Resources Inc., which bought out the original partner, Denver-based Comparex Energy Co. in June 2011. The plant will produce a crude helium stream that will be processed by a liquid helium plant jointly owned by Air Products and Matheson, producing about 1.2 MMcf per day, roughly one-fifth of what the Bush dome currently produces. Danbury estimates that the Riley Ridge reservoir contains proved helium reserves of 12 Bcf. The Wyoming helium facility would be the first constructed in the U.S. in more than a decade.

One midstream operator, Dallas-based IACX Energy, has recently entered the helium business and already has two helium-recovery plants operating in Kansas. More plants are under contract, and the company is now beginning to drill on the Harley dome tract in Utah. Several of the company's projects are “helium-only operations, which is unusual because, typically, helium is captured and sold as a by-product of natural gas,” IACX President Scott Sears tells Midstream Business.

IACX has about a dozen plants in various stages of incubation and is developing technology for the separation of nitrogen and helium from natural gas near the wellhead. According to a company statement, IACX currently holds eight patents for technology involving this separation. “What we're doing is implementing this technology in forgotten parts of the U.S. where no one else is really focusing. There’s no activity, but we’re making activity because there is helium value. We're thinking that might accelerate, especially if Congress gets its way,” Sears adds.

The company is expanding its business of finding, processing and selling refined helium from U.S. sources, the statement says. “We are marrying the upstream with the midstream, while at the same time doing everything we can to mitigate the expiration risks associated with upstream,” Sears says.

Government and history

So why is the BLM planning its exit from the business, and why now? Any explanation requires a brief history of helium as an industry.

The U.S. government was quick to recognize the military applications and potential power of monopolizing the world’s supply of helium. The government’s hand in supply dates to before World War II. The War Department had identified helium as valuable for national security, especially for elevating balloons loaded with tracking devices to detect enemy aircraft. By 1925, Congress had created the Federal Helium Program to make certain the government had access to the gas for national defense purposes.

Its view of the importance of helium was reinforced by the Hindenburg disaster in 1937 as the German passenger airship, filled with flammable hydrogen, exploded. Germany had sought unsuccessfully to acquire helium to lift the airship but had to settle for volatile hydrogen.

Interest in helium intensified with the beginning of the Cold War. The Helium Act of 1960 established a government- operated strategic helium reserve. Eventually, the government amassed about 30 Bcf of helium near Amarillo at Bush dome. No federally owned helium has been injected into storage there since 1973.

Operating the reserve was expensive, and by 1996, the government’s helium-program related debt was estimated at $1.3 billion. The government decided to exit the business by no later than 2015 and perhaps earlier, if its sales eliminated the program’s net debt.

“The helium debt balance is about $43 million,” McGuire says. “This balance should be paid in full by October 2013. Since 1996, the Federal Helium program has repaid to the U.S. Treasury about $1.2 billion from the sales of helium,” McGuire says. In 2012, the U.S. raised about $200 million in revenue from its helium reserve program.

“Once the helium debt is paid off, the Helium Production Fund is terminated in accordance with current law. The BLM may have to undertake an orderly shutdown of the reserve unless there is a discretionary funding appropriated for crude helium sales and reserve operations,” McGuire says.

From 1929 to 1960, the federal government was the only domestic producer of helium. Before 1960, helium did not have a viable market and was simply vented along with other non-combustible components in the natural gas. The government’s role in the helium industry, however, has been a money-losing proposition. Since 1996, the government has set the price of helium and mandated that government entities using helium had to purchase the gas from the government’s stockpile. At that time, the price was set at $43 per thousand cubic feet (Mcf). The BLM-set price in 2010 was $64.75 per Mcf, rising to $75 per Mcf in 2011 and $75.75 per Mcf last year. The current price is $84 per Mcf.

“There currently is little correlation between price and supply,” Nelson says. The consensus among the helium experts is that market forces of supply and demand will set the price of helium once the BLM posted price comes to an end— and that prices will be much higher.

What now?

The immediate issue is what is to be done with remaining helium reserves owned by the U.S. government, now that the law that created the reserves is about to sunset?

Even if the remaining reserves are sold, Democrats controlling the Senate want the government to continue to set prices, while Republican controlling the House of Representatives want the helium to be sold at periodic auctions with buyers determining the price. Users just want supply certainty, without prices skyrocketing.

U.S. Rep. Doc Hastings (R-Wash.), chairman of the House Natural Resources Committee, refers to the stalemate and possibly consequences as “floating off the helium cliff.”

The House bill would authorize BLM to continue its sales, much as it does now, for another year. Then, in a second phase, lasting until about 2020, BLM would draw its reserves at an “optimum rate” and sell through biannual auctions. Finally, when the supply had dipped to 85 million cubic meters, sales would be restricted to only federal users. That bill is similar to the Senate’s, except the BLM would determine the price. An auction, supporters say, would allow more companies to bid, bringing higher prices and more government revenue. Under the current system, more than 90% of the helium sold by the BLM goes to four processors, or refiners—Air Products, Linde, Praxair and Keyes Helium, companies that invested millions to construct helium refining plants along the BLM pipeline.

Legal bridge

“U.S. legislators undoubtedly need to pass legislation soon to extend the BLM operations and preserve the availability of this important source of supply. Unless, this legislation passes and BLM has renewed authority to continue to operate the federal reservoir, all of the helium that remains in the reserve would be inaccessible. Renewed or new legislation granting the BLM the authority it needs to continue to supply helium would bridge the time period necessary for new announced natural gas and helium production plants to come onstream,” Nelson says.

Not surprisingly, helium suppliers with refineries and those without differ over whether revamped government rules to access BLM’s reserves should require refineries to provide open access or tolling for non-refiners.

“It is not the role of Congress to pass statutes that force refiners to sell at a set price, or to force refiners to share their substantial investments in refining capacity with companies that have made their own strategic choice not to build their own refinery,” Nelson says, adding, “nothing in the law stands in the way of any company entering into a tolling arrangement at a mutually agreed upon price.”

Airgas takes the opposite view. “The bill will fail in its mission if refiners are not obligated to refine for winning bidders that have the infrastructure to serve the U.S. market and to do so at a cost plus tolling fee that will enable those winning bidders to be competitive. This is critical because the refiners and those who might like to bid are now, and will continue to be, competitors. Without mandatory tolling at a reasonable cost, no party other than a refiner will be able to risk bidding on the helium at an auction, Thomas Thoman, Airgas division president, gases production, tells Midstream Business.

Thoman adds: “The restricted access to the resource and the manufactured price have created a warped situation where a substantial amount of U.S.-sourced helium, much of which is owned by U.S. taxpayers, is being sold overseas while our domestic end-user community is suffering from extended supply shortages.”

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