While we are only just over halfway through 2006, this year will certainly be remembered as an important year in the helium business. Demand has outstretched supply. Two new sources have come on-stream, but with feed gas and operational problems limiting their output they are yet to have a major impact on the market.

Helium became a major anti-trust issue for both the European Commission and the US Federal Trade Commission following the offer by Linde to acquire BOC, and Taiyo Nippon Sanso (TNSC) acquired a primary supply position to the global market.

So where do we begin? Firstly, we need to look at the demand and uses for helium and what has and will drive demand.

Growth in helium use
Over the past 15 years, demand has mainly been driven by the development of Magnetic Resonance Imaging (MRI) and the need to cool the magnets to near
absolute zero to become effective. MRI became and still remains the major use of liquid helium. Another driver of demand in the past was the use of helium as a heat transfer agent and carrier gas for fi bre optic production. The other major uses include pipeline leak detection, the leisure industry, electronics, specialised welding and airships.

According to Spiritus Consulting, demand reached a peak in about 2001 when global consumption was 159 million Nm3 or 5.9 billion SCF. Up until then helium
use had been growing at about seven per cent per annum. However, the slump in fibre optic production in 2002/03 and the slowdown in the electronics industry
and major developed economies following 2001 caused a reduction in demand for helium (Figure 1).

Fibre optic manufacturing has not really rebounded,although some helium players believe that this may happen in the next few years - but with less impact than before.

///

A technology shift in the way MRI magnets are produced and maintained has had a signifi cant impact on the amount of liquid helium used to cool them. The use of closed cycle systems in the magnet has generally resulted in liquid helium use being reduced by 75 per cent in new magnets. Manufacturers have also installed recovery systems, leading to more efficient use of liquid helium. The technology shift would be a major concern to helium producers and suppliers, but this decline in the use of helium per magnet is offset by the recent rapid rise in the production of MRIs to meet global demand \\$quot;“ especially in the Far East.
According to Phil Kornbluth, global helium VP for BOC, the overall demand for liquid helium in MRI applications will remain stable to slightly positive as a result of the technology shift.

Fibre optic production reached a peak in 2000/01 but severe over-production in countries such as India, and the slowdown in the electronics industry, resulted
in several major production plants in Europe and the US closing down. While fibre optic demand is starting to pick up again, this is mainly in the Far East and so the expected rise in helium will be measured compared to historic trends.

Future demand
According to a number of gas companies, 2005 saw a strong rise in demand from the decline seen in 2002/03. Most companies witnessed a four to five per cent rise in demand \\$quot;“ some experienced even higher sales due to market share penetration.

What about the future? The consensus amongst the major players is that they are expecting a four to five per cent per annum rise over the next few years. According to Spiritus, however, this is the top of its growth expectations over the long-term; it has a more conservative growth forecast of about 2.5-3% pa. The consultancy recognises the short-term boost driven by the high demand for helium in the electronics sector - especially in fl at panel display manufacturing for LCD and plasma televisions. A number of major manufacturing
plants have been established in China, Korea and Taiwan and will drive the demand for helium over the next few years.

///

Figure 2 shows that MRI accounts for about 20 per cent of the worldwide use of helium and is the largest end-use sector. This is expected to remain an important sector but future growth is very much related to the continued shift in technology as described above. Demand for MRI machines is still growing, although growth has slowed from the recent highs. MRI use is driven by strong growth in emerging nations investing in such technology and replacement of older units in the developed regions. Spiritus believes that in the short-term there will be stagnation in demand for liquid helium in MRI and that mid to long-term, demand will fall.

The use of helium in more sophisticated welding processes continues to grow strongly, especially as a shielding gas mixture in laser welding techniques.
Around the world the use of helium in balloons continues to rise, due in part to the increase in domestic or leisure use but also in advertising blimps and airships. There has been increased interest in the use of dirigibles for military applications, primarily for surveillance.

The forecast is for positive growth and Spiritus expects demand to rise to 190 Nm3 (c 7.0 Bn SCF) by 2010. There do not, however, appear to be any significant new end-uses that would have the impact that MRI did on global helium demand in the 1990s.

New plant start-ups
We mentioned at the beginning that the US was the major supply source to the global market. This has started to change, beginning when Algeria (which has
massive natural gas resources) built its fi rst liquid helium recovery facility in Arzew in 1993, with the aid of Air Products and Air Liquide. 2006 has seen the start up of two major new liquid helium recovery units.

The fi rst new plant that started production in 2006 (actually first deliveries occurred in September 2005)was the facility in Ras Laffan Industrial City, Qatar. This plant, which was supplied by Air Liquide, processes vent gas from the large LNG facilities at Ras Laffan in Qatar, owned by Qatargas and Rasgas and operated by EXXONMOBIL. The helium plant has a capacity of 600 million SCF per year. It has been commissioned but feed gas supply and refrigeration problems have limited output to around 40% of capacity at present. The output from this plant is divided between BOC and Air Liquide.

The second was in Skikda, Algeria by Helison Production (a joint venture between Linde Gas and Sonatrach). This started production in May, after delays caused by the explosion in the LNG facilities in January 2005. According to Linde, the plant was fully commissioned in May of this year and produced liquid helium to specification and at the expected capacity. However, crude feed problems have limited output and the plant has been closed since the end of June for the summer break. It is believed that the plant will be up and running again in September or October but will only be operational at 40-50 per cent of nameplate
capacity until the new LNG facilities are completed in 2009.

Why the tight supply?
The global helium business is currently experiencing acute supply shortages and some consumers have been put on restricted volumes. This is due to a number of concurrent problems. By now, there should be 1.2bn SCF a year of new capacity on-stream in Algeria and Qatar, but the explosion in Algeria will result in a reduction of at least 300 million SCF a year until 2009. Arzew is currently down for a major maintenance break related to the LNG2 facility and is due to be offline for between four and six weeks. With Skikda offline and Qatar limited for now to roughly 40% of capacity there is a major supply restriction in the European and Middle Eastern zone. Russia and Poland, however, are producing normally and near to capacity.

The supply position has been further worsened by supply restrictions in the US, where six helium refineries rely to varying degrees on the Bureau of Land Management (BLM) pipeline system in the Texas Panhandle (see Figure 3) for their supply of crude helium feed gas.

For a variety of reasons, including outages at natural gas processing facilities that inject crude helium into the BLM pipeline, problems with several wells at
the Cliffside Field and high demand from the refiners caused by outages at sources not linked to the BLM, the BLM has had to restrict supply in order to maintain
sufficient pressure and quality of product.

As a result, there is a tight squeeze even in the US. This will be compounded when EXXONMOBIL\\$quot;s Wyoming facility shuts down for maintenance in September.

Gas companies are hoping that the situation will ease somewhat by late October or November when the Algerian plants and EXXONMOBIL are back online.

What about new sources?
There have been several announcements in the past 18 months of new capacity to be added. Firstly, BOC is going to build a 150 million SCF per year helium facility in northwest Australia. The plant is planned for July 2008 start-up and will be geared to supplying Australia and the Far East market.

There are also plans to expand output in the US by Air Products but details have not been announced. There have been plans to build a new facility in Ridgeway
on the Arizona/New Mexico border. These plans have not progressed further and are dependent on the recovery and use of CO2 for enhanced oil recovery.

The Russian helium player Cryor announced plans to build a new facility in the East Siberian area where additional natural gas reserves with contained helium
can be exploited. However, gas companies do not expect this to come on-stream before 2009. It is interesting to note that because of its very remote location,
liquid helium will be shipped in rail cars.

Spiritus believes that due to the current supply crunch gas companies will wait and observe the demand trends over the next few years, and ensure that the current plants and new facilities are up and running consistently before determining whether to invest in further production capacity.

Where does that leave pricing?
The pricing structure for Helium is very much to do with the cost of crude helium before it is refined and liquefied rather than determined by market dynamics. Most helium is associated with natural gas fields and therefore the crude availability is not generally owned by industrial gas companies but by the oil and natural gas companies. These companies set the initial pricing structures by demanding value for the crude product before refining. It is worth noting that as new sources of helium are developed, the return the oil companies
want for the crude continues to increase.

In addition, the US Government has huge strategic reserves of crude helium which are managed by the BLM. However, the price of the crude helium owned by the BLM continues to increase due to a formula linked to the consumer price index. At present 1000 SCF of BLM crude helium costs $56.50 and this will increase to $58.75 in October 2006.

So even if the current tight supply/demand position improves over the coming six months it is unlikely that there will be any downward movement in prices for the
foreseeable future, despite the increase in competitive dynamics with the entry of TNSC in the primary supply market.

///