Denbury Resources Inc. has upped its interest in the Riley Ridge project in southwestern Wyoming. The news brought with it the confirmation that first production of natural gas and helium from Riley Ridge is expected to occur during quarter four 2011.

This once again pulls the helium supply-demand imbalance sharply into focus - and Specialty Gas Report understands that the market is in the thick of what we might describe as Helium Shortage 2.0.

The supply-demand equation is a balancing act so precarious that shortages earlier this year have resulted in tight supply ever since, a situation that appears set to worsen this August, when ExxonMobil carries out a scheduled three-week maintenance shutdown.

Tight supply

Denbury currently estimates that the Riley Ridge Unit contains proven reserves of 250 billion cubic feet (Bcf) of natural gas and 8.9 Bcf of helium, net to the interest to be acquired. The additional +/- 28,000 acres is estimated to contain additional probable reserves of 250-300 Bcf of natural gas and 9.5-11.5 Bcf of helium.

While we understand that the new source may only represent around a three percent increment to global supply, when production begins in quarter four 2011 it will be a welcome addition to the market.

It’s thought that more than 25 percent of the world’s helium supply derives from ExxonMobil’s Shute Creek Gas Plant, courtesy of its reserves at LaBarge Field, WY. The firm provides for most of the world’s major helium suppliers and the temporary halt at Shute Creek will certainly tighten the market further.

A source close to Specialty Gas Report explained that even those companies that have been relatively immune to shortages so far are likely to be affected by this planned shutdown, due to the unrivalled size of the resource. “It’s not a ‘possible’ helium shortage,” our source explained, “It’s a helium shortage and it will be quite severe when ExxonMobil takes their plant down in August.”

This loss of capacity from the market adds to limited allocations already endured this year. Since quarter one 2011, our source explains, the US Bureau of Land Management (BLM) has been allocating crude helium feedgas to the six helium refining facilities that are linked to the BLM Pipeline & Storage System. The BLM’s allocation has been caused by several different factors, including planned and unplanned outages of the BLM’s Crude Helium Enrichment Unit (CHEU) and high demand from helium refiners as they sought to compensate for outages at other helium sources in Algeria and Russia, for example.

As these factors all converged, reduced pressure was enforced on the BLM Pipeline and the BLM had to allocate crude helium to maintain the minimum acceptable pressure in the pipeline. As a result, the six helium-refining facilities have reportedly been unable to operate at their full capacities.

Helium chart

 

Allocation

With a decline in supply and steady demand, it’s to be expected that firms will be unable to meet customer needs and just as the BLM allocates capacity, they too will inevitably have to allocate helium supplies. Our source explained, “Suppliers will be allocating product to customers and the impact on them will be two fold. They will receive less helium and may also experience delays in when they receive it.”

A concern that may well spring to mind for readers of Specialty Gas Report is in magnetic resonance imaging (MRI) markets. Despite only being developed in the mid 1970s, MRI is now thought to represent up to a fifth of the world’s helium market.

Fortunately, medical applications are often exempt from allocation when helium is in short supply, with less pertinent applications such as balloon gases more likely to suffer. Just how companies allocate their product is a matter for individual firms to negotiate, however.

Helium Shortage 2.0 is here, but as we look ahead to quarter four, expect a minor relief in the market as ExxonMobil returns to full production, Riley Ridge begins production, and demand cools slightly during the winter months. Beyond then, shortages are widely expected until 2013, with any relief dependent on new start-ups.