6
Impact of the Implementation of the Helium Privatization Act

Having analyzed the history of the discovery and usage of helium (Chapter 1), the structure of the federal and industrial helium establishments (Chapter 2), the uses and supplies of helium (Chapters 3 and 4 respectively), and the market in which helium is produced, stored, and sold (Chapter 5), the committee then analyzed the potential impact of the Helium Privatization Act of 1996 on private producers and users of helium. The results are presented here, in Chapter 6. The chapter concludes with recommendations for follow-on activities to monitor the long-term impact of the legislation and ensure the continued strength and stability of the helium industrial and user communities.

IMPACT OF THE LEGISLATION

The helium community is currently enjoying an extended period of stability. Since the mid-1980s, there have been no drastic increases in the price of helium and no shortages of supply. The industry has also been consistently emphasizing conservation. All the companies on the BLM pipeline store their excess crude helium in the Bush Dome reservoir, and their net storage has led to the accumulation of a private stockpile of approximately 4 billion scf (110 million scm). In the absence of large unforeseen changes, such as drastic increases or reductions in capacity or demand, this stability is likely to continue.

Under the most likely scenarios considered by the committee, the implementation of the Helium Privatization Act of 1996 will have only a modest impact on producers and users of helium over the next 10 to 15 years. First, the price it establishes for the sale of crude helium from the Federal Helium Reserve is approximately 25 percent above the current commercial price for this material. All helium refiners on the BLM pipeline have long-term take-or-pay contracts that require them to buy a negotiated quantity of helium from natural gas producers each year, regardless of whether they store it, refine it, or vent it. Because of these long-term contracts, it is highly unlikely that the refining industry will buy and use gas from the Federal Helium Reserve rather than from private stockpiles or cheaper commercial suppliers. Second, the Helium Privatization Act dictates that the Cliffside storage facility will not be sold or



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The Impact of Selling the Federal Helium Reserve 6 Impact of the Implementation of the Helium Privatization Act Having analyzed the history of the discovery and usage of helium (Chapter 1), the structure of the federal and industrial helium establishments (Chapter 2), the uses and supplies of helium (Chapters 3 and 4 respectively), and the market in which helium is produced, stored, and sold (Chapter 5), the committee then analyzed the potential impact of the Helium Privatization Act of 1996 on private producers and users of helium. The results are presented here, in Chapter 6. The chapter concludes with recommendations for follow-on activities to monitor the long-term impact of the legislation and ensure the continued strength and stability of the helium industrial and user communities. IMPACT OF THE LEGISLATION The helium community is currently enjoying an extended period of stability. Since the mid-1980s, there have been no drastic increases in the price of helium and no shortages of supply. The industry has also been consistently emphasizing conservation. All the companies on the BLM pipeline store their excess crude helium in the Bush Dome reservoir, and their net storage has led to the accumulation of a private stockpile of approximately 4 billion scf (110 million scm). In the absence of large unforeseen changes, such as drastic increases or reductions in capacity or demand, this stability is likely to continue. Under the most likely scenarios considered by the committee, the implementation of the Helium Privatization Act of 1996 will have only a modest impact on producers and users of helium over the next 10 to 15 years. First, the price it establishes for the sale of crude helium from the Federal Helium Reserve is approximately 25 percent above the current commercial price for this material. All helium refiners on the BLM pipeline have long-term take-or-pay contracts that require them to buy a negotiated quantity of helium from natural gas producers each year, regardless of whether they store it, refine it, or vent it. Because of these long-term contracts, it is highly unlikely that the refining industry will buy and use gas from the Federal Helium Reserve rather than from private stockpiles or cheaper commercial suppliers. Second, the Helium Privatization Act dictates that the Cliffside storage facility will not be sold or

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The Impact of Selling the Federal Helium Reserve surplused and will continue to be available for the storage of both privately owned crude helium and the 0.6 billion scf (0.017 billion scm) of crude helium that the federal government is mandated to maintain. Thus the current approach to helium conservation will not change in any way that would force private industry to use the crude gas currently contained by the Federal Helium Reserve. It should be noted, however, that some of the Reserve will be sold during this period for consumption by federal agencies. The Helium Privatization Act mandates that all pure helium used by federal agencies must derive from the crude helium stored in the Federal Reserve. Federal consumption of helium is modest, about 0.2 billion scf (5.5 million scm) per year. Since the price for crude helium mandated by the act is higher than commercial prices, the price paid by the federal government will be higher than the price in the commercial market. Net private storage of helium at the Cliffside field will probably cease within the next 10 years, for two reasons. First, demand for helium will probably continue to rise somewhat over the next few years, so helium refining will increase to satisfy user needs. Second, the Hugoton-Panhandle gas fields are becoming depleted, meaning that less privately produced crude helium will be available for the plants on the BLM pipeline. To remain in business and satisfy demand, the refining companies on the pipeline will first exploit their private stockpiles at the Cliffside facility. Once these private stockpiles are exhausted, the companies will have no realistic option other than to begin purchasing the crude available from the Federal Helium Reserve. (The only other source is more production, and production is driven by the demand for natural gas, not the demand for helium.) The quantity of crude helium drawn will increase, and refiners will become more and more dependent on this resource. Assuming no dramatic changes in the production and use of helium, however, the Federal Helium Reserve will still last for about 20 years or more, meaning that the federal target of 0.6 bcf will not be attained until approximately 2020 or 2025. Some changes will occur in the helium industry during the period in which the Federal Helium Reserve is being exploited, but the overall industry will probably remain stable. Although the release of the reserve will probably keep the price of crude helium lower than if no release occurs, there may be a slight increase in the price of refined helium. As the Hugoton-Panhandle gas fields are depleted and the Federal Helium Reserve is exploited, the price of crude helium will rise to the congressionally mandated price. A large portion of the price of refined helium comes from the cost of purifying and transporting the pure gas, however, so a rise of 25 percent in the price of crude helium would probably increase the price of pure helium by only 8 to 10 percent, which is not likely to have a dramatic impact on helium users. A second possible change resulting from the rise in price might be the emergence of investor interest in purchasing helium for speculation, although it is questionable whether the price of helium will rise sufficiently to make it more attractive to speculators than other investments. Even if it does, however, because long-term storage of crude helium is currently possible only at the Cliffside facility, any such investors would eventually have to sell their resources to the refining companies on the BLM pipeline, so the material would remain available. The only remaining question about the legislation is whether its implementation will result in the repayment of the debt to the Treasury within the stipulated time period. The committee believes that it is unlikely that the Federal Helium Reserve will be sold, and the debt repaid, by 2015, since sales of the stockpile to nonfederal users will probably not begin until about 2010 or 2015. However, the impact on helium users of a failure to repay the debt is likely to be small, because the debt is carried by our entire society.

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The Impact of Selling the Federal Helium Reserve Finding: Based on the information assembled for this report, the committee believes that the Helium Privatization Act of 1996 will not have a substantial impact on helium users. The Helium Privatization Act of 1996 requires that the secretary of the Interior, after receiving this report, consult with industry and others and then, if he believes the situation so warrants, make recommendations for legislation to mitigate the adverse impacts. In those consultations, a number of issues are likely to arise that are outside the main scope of the present study. These include concerns such as whether: Enacting legislation to reduce the price of crude helium below commercial levels or to sell it in lots at auction could seriously destabilize the helium market by increasing the probability that a single company or individual will purchase all or most of the helium in the reserve, thus creating a helium refining monopoly; The total supply of helium produced from wells would diminish if part of the reserve were sold before it was needed to meet the demand for helium. Under such circumstances, suppliers whose principal economic interest is methane would continue that production, forgoing the desirable conservation and storage options currently available. Helium users might also lessen their efforts to conserve and recycle helium and to develop technologies to replace helium in certain applications, even if the benefit of lower prices was relatively short-lived. On the other hand, users might experience little or no reduction in price, depending on the policies of the refiners. Furthermore, selling the reserve before the commercial price reached the "minimum acceptable" $43 per thousand scf might mean that the full debt would never be repaid. In effect, this would excuse at least a portion of the debt; The debt repayment schedule is appropriate; There are alternative methods for raising revenue if the government is intent on repaying the debt faster than is possible under the current legislation. For example, as stated in Chapter 2, the fees charged industry for storing helium in the BLM facility are currently calculated to offset the facility's direct operating costs and are divorced from any assessment of the economic value of the storage service. This system of setting fees may be limiting the potential income generated by the facility. The federal government might want to investigate a pricing structure that would permit slightly higher fees for helium storage. The increased income might then be used to help pay off the debt as well as to fund the development of superior technologies for location, storage, conservation, recycling, and replacement of helium; and The preservation of a viable, unsubsidized helium industry that helps this country to excel in many areas of science, technology, and national security outweighs the method and timing of debt repayment. Unless new light is cast on these issues during the secretary's consultations with industry and others, the committee can find no reason to recommend seeking changes in the legislation. FOLLOW-ON ACTIVITIES AND RECOMMENDATIONS The committee believes that the implementation of the Helium Privatization Act of 1996 will not have an adverse effect on the overall production and use of helium over the next two decades. For the long term, however, a number of research programs and follow-on studies should be

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The Impact of Selling the Federal Helium Reserve considered. These will ensure that the legislation has no adverse long-term effects, beyond 2020, and that sufficient supplies of helium continue to be available after 2020 to satisfy the needs of known and potential users. Studies The committee's assessment of the impact of the Helium Privatization Act of 1996 was based on three assumptions about the future. The first was that demand for helium will continue to rise at a steady pace, albeit much more slowly than between 1985 and 1995. Although the committee could not identify any imminent technology that would drive new, large-scale use of helium, the advent of such a technology could have a major impact on the market. An abrupt increase in demand would probably cause an abrupt increase in the price of helium, an acceleration in the rate at which current sources are produced and depleted, and a reduction in the time available to locate new sources and develop technological alternatives. The second assumption was that there will be no drastic reductions in capacity, such as might occur if a natural disaster, plant disaster, or market decision caused a plant off the BLM pipeline to cease production. Replacing lost capacity would probably require increasing the rate of production at the current reserves. This, too, would increase the price of helium and reduce the time available to locate new sources and develop technological alternatives. The third assumption was that no new sources of helium will be discovered. The addition of new low-cost sources of helium would serve to extend the life of the Federal Helium Reserve and provide more time to find additional sources and develop technological alternatives. The Helium Privatization Act of 1996 mandates that its impact should be reassessed in 2015. A mechanism should be developed, however, to ensure that a review can occur sooner, especially if anything happens that would invalidate the three assumptions. The safest approach would be for the helium industry to be reviewed periodically, say, every 5 or 10 years. Such reviews will require credible data on domestic and international capacity and consumption. The Department of the Interior currently releases annual reports that track supply and demand for helium. These reports provide crucial information on the helium market and are the primary public source of data on helium use. They should be enhanced in two ways to ensure that they register any dramatic changes in the market. First, a credible taxonomy of helium uses should be developed and consistently tracked. In the 1980s, the Department tracked 13 categories of helium use. In the 1990s this was increased to 18, but only 7 were commonly released. Such changes severely hamper efforts to identify trends in helium use that might dramatically change helium capacity and demand. Second, international consumption and production need to be tracked with the same precision as domestic consumption and production to permit the identification of any sudden changes in foreign capacity or demand. The current system tracks foreign demand primarily on the basis of U.S. export data. Furthermore, the terminology used by BLM to describe helium reserves makes it difficult to understand how much helium is potentially available. The classification scheme used by the natural gas industry is clearer, and all new helium resources are coming from that industry. Recommendation: The committee recommends that future reviews of the helium industry be commissioned by BLM either (1) in response to drastic increases or decreases in helium capacity or use or (2) regularly, every 5 or 10 years.

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The Impact of Selling the Federal Helium Reserve BLM should assist this continual review by improving its methods for tracking helium capacity and use. The following improvements would help ensure the timely identification of important shifts in the industry: Develop and implement a consistent and credible taxonomy of helium uses. Develop and implement better methods for tracking the international helium market. Report helium reserves using the natural gas industry's classification scheme. The Helium Privatization Act of 1996 stipulates that the Federal Helium Reserve eventually stabilize at 0.6 billion scf (17 million scm), which is approximately a 2-year supply at current demand levels. The committee believes that a study is required to determine whether this is an optimal long-term supply and whether this quantity of gas can remain in the Bush Dome reservoir at sufficient concentrations to be available for future refining. Recommendation: The committee recommends that BLM study the adequacy of the Bush Dome reservoir as the reserves are depleted. The following study tasks should be considered: Determine the optimal size of a federal stockpile of crude helium. Develop models of gas extraction at the Bush Dome reservoir to predict the helium content of future extracted gas. Determine whether the quantity of gas that remains in the Bush Dome reservoir will be adequate to meet future federal needs in the event of a temporary drop in private production. Reassess the pricing structure for the storage of helium at the Cliffside facility so that it more accurately reflects the value of the facility. Research To ensure the continued supply of helium into the future, research and development should be conducted in three main areas: new geological models and exploration technologies; improved helium storage systems; and enhanced technologies to conserve, recycle, and eventually replace helium. The first area requiring research and development is the expansion of the information base and the development of methodologies to permit identifying and locating new sources of helium. The characteristics and processes that permit formation of helium-rich gas deposits are not well known, making deliberate exploration for helium difficult. This lack of knowledge has a number of explanations, including the relative youth of the commercial helium supply industry; the reliance of the industry on existing sources (the gas fields in the Hugoton-Panhandle area) and on sources that were discovered and exploited for other gases (the gas fields in the Riley Ridge area); and the economic standing of helium as a minor by-product of natural gas. The producers and operators of natural-gas processing plants are becoming increasingly aware of both the economic rewards of helium extraction and the long-term need for new sources. Research should be begun now to develop a base of knowledge and technology for identifying and locating new sources of helium, so that these capabilities will be available when they are eventually needed. The second area requiring research and development is the development of long-term storage facilities for helium. The properties of helium that make it the ultimate leak detector (i.e., its high

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The Impact of Selling the Federal Helium Reserve diffusion coefficient and low viscosity) also make it extremely difficult to store and transport. The Cliffside facility is currently the largest facility in the world for long-term storage of crude helium. Its potential as a storage facility was only recognized, however, because it was a depleted field that was known to have previously contained relatively high helium concentrations (about 1.6 percent). The development of improved storage facilities is important because they would allow production facilities off the BLM pipeline to produce and store larger quantities of helium. The third area requiring R&D is the development of methods to increase efficiency, conservation, and recycling in helium-dependent technologies and eventually to eliminate the need for helium entirely in some applications. For example, a great deal of progress has already been made in the development of cryocoolers and other technologies to recycle liquid helium and reduce the overall amount consumed. Incremental advances in cryogenic technologies continue to be pursued to reduce helium use further. Advances in technologies that require liquid helium temperatures should also be pursued in order to reduce the need for those temperatures (e.g., by employing high-temperature superconductors). This dual emphasis on incremental improvements in recycling and conservation and the eventual development of alternative technologies that do not require helium should be applied to other helium-based technologies (e.g., purging, welding, and other manufacturing processes) to reduce overall helium consumption even further. Recommendation: The committee recommends that the Department of the Interior conduct research and development to ensure the continued supply of helium into the future. Goals for this research and development should include (1) new geological models and exploration technologies; (2) improved helium storage systems; and (3) enhanced technologies to conserve, recycle, and eventually replace helium. The following specific research and development tasks should be considered: Determine the geological characteristics and processes that permit the formation of helium-rich gas fields and develop methodologies and databases to assist in the discovery of these fields. Identify potential sites for natural storage facilities to permit the establishment of new facilities near future major helium producers and to allow an increase in the storage and conservation capabilities of helium users. Develop economic models for the extraction and storage of joint-product, nonrenewable resources the production of one of which is dominated by supply and demand for the other. Improve the efficiency of technologies that currently depend on helium and develop alternative technologies that do not require helium.