Undoubtedly one of the hottest topics for our industry this year comes into effect this month. No, it’s nothing to do with the ongoing Airgas-Air Products situation but instead, what could prove to be an almost seismic impact on the global helium business.
Late August (2010) saw the US Bureau of Land Management (BLM) revise its methodology for calculating the price of crude helium for open market sales.
Representing more than just the average cost pass-through news announcement, the BLM revised its methodology for calculating the price of the crude helium offered during its yearly Open Market Sale.
As a result, Federal Crude Helium will be sold at $75.00 per thousand cubic feet in FY2011, compared to $64.75 in 2010, signalling a 15.8% price increase. This price covers helium debt repayment and interest and includes administrative and storage costs.
The BLM is responsible for administering the Department of the Interior’s Federal Helium Program, following the intent and requirements of the Federal Helium Privatization Act of 1996 (HPA). The Act established a minimum pricing for the helium based on a calculation that would retire the program’s total debt to the US Treasury by 2015. BLM has been charging the minimum price established by the Act, a price that represents the cost of the helium not its value on the open market.
According to a statement sent to gasworld by the BLM, the new pricing methodology is in response to recommendations from the recently released National Academy of Sciences (NAS) report, entitled ‘Selling the Nation’s Helium Reserve’.
John E. Hamak, Assistant Field Manager for Helium Operations at BLM, told gasworld, “In prior years, BLM adjusted the price annually, in October, based primarily on the Consumer Price Index. The new pricing methodology is in response to recommendations from the recently released NAS report, Selling the Nation’s Helium Reserve.”
“The BLM reviewed information regarding private helium prices and in-kind prices and used this information to determine the new open market price. The Conservation Helium will be sold at $75.00 per thousand cubic feet (Mcf) for FY2011. In accordance with the Helium Privatization Act of 1996, this price covers helium debt repayment and interest since the helium debt was frozen in 1996 and includes administrative & storage costs associated with the Conservation Helium calculated on a per Mcf basis.”
“Additionally,” Hamak continued, “the price includes an estimated liquefaction differential between crude helium and pure helium of approximately $10.00, based on an analysis of private industry crude and refined helium prices.”
The BLM is keen to note that the in-kind helium price for fiscal year 2011 will remain at $64.75 and that the BLM will continue to determine the in-kind price for federal users in
the same manner as in the past.
As one of the industrial gas industry’s leading experts on the helium business explains, the BLM announcement could be just an initial step towards a much tighter, more expensive helium market in the future.
Matheson’s Phil Kornbluth, Executive VP, International & Helium, is expecting helium supplies to become tighter and more costly until major new sources of supply enter the market during the 2013/2014 period.
He explains that as helium demand recovers from the global recession and only modest new capacity comes into the market between now and 2013, helium markets may be increasingly vulnerable to shortages due to production outages at one or more of the world’s 16 helium plants.
According to Kornbluth, capacity utilisation, which dropped to an estimated 86% in 2009 due to the recession, has recovered to approximately 90% in 2010. Kornbluth noted that when helium markets reach 95% capacity utilisation, they are essentially sold out, since, at any given time, one or more of the world’s helium sources is usually not operating at full capacity.
Once capacity utilisation exceeds 90%, a modest amount of growth or an outage at one of the sources is all it would take to trigger shortage conditions. While Kornbluth is not looking to a severe, extended shortage like the industry experienced in 2006/2007, his view is that the trend is clearly toward a tighter market.
After rebounding from the depths of the recession, Kornbluth expects global helium demand to grow by a modest 2-4% per year during the next few years. However, with so little spare capacity, this could be enough to trigger a shortage of supply.
Kornbluth notes that the new plant that Matheson is building near Big Piney, Wyoming, in a 50:50 joint venture with Air Products and Chemicals, is the only new capacity expected to come online before 2013. The 200 MMCF per year initial production from the Big Piney Plant only represents a 3% increment to world supply. Existing sources are probably declining by a comparable amount due to depletion.
With an air of caution, Kornbluth doesn’t foresee an end to the period of tighter supply until 2013 or 2014, when new sources are expected to commence production in Qatar and Algeria. And we should not be surprised if the new sources do not start up on time or at full capacity.
“In my experience”, stated Kornbluth, “these plants never start up early and usually experience occasional hiccups during the first 6-12 months.”
The bottom line, says Kornbluth, is that the period of relatively ample helium supply associated with the global recession may be coming to an end in the not too distant future.
While the supply of helium is gradually expected to tighten up, the cost of helium appears poised to undergo a step change, Kornbluth believes.
While agreeing with the sentiments behind the BLM pricing actions, he warns that a tighter, more expensive market dynamic might evolve for helium in the future.
“The BLM’s move to market pricing is sensible and consistent with the NAS study’s recommendations,” Kornbluth reasoned. “At a time when the US government is running huge deficits, why should the government be selling a stockpiled commodity for anything less than the market price?”
The 15.8% price increase that will go into effect on 1st October 2010 will have a far reaching impact on the cost of helium, since roughly one-third of the world’s helium production is refined directly from BLM crude – and another significant portion of the world’s helium production is sold under contracts whose pricing is contractually linked to the BLM’s posted price.
Kornbluth expects that any significant increase in the cost to produce refined helium would likely be passed through to helium customers.
So what does this all mean for helium customers? “Look for increased scarcity of helium and higher costs not too far down the road,” Kornbluth concludes, “with no relief in sight until major new sources commence supply in 2013 or 2014.”