[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
PAST, PRESENT AND FUTURE OF THE FEDERAL HELIUM PROGRAM; & H.R. 527,
RESPONSIBLE HELIUM ADMINISTRATION AND STEWARDSHIP ACT
=======================================================================
OVERSIGHT AND
LEGISLATIVE HEARING
before the
COMMITTEE ON NATURAL RESOURCES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
Thursday, February 14, 2013
__________
Serial No. 113-1
__________
Printed for the use of the Committee on Natural Resources
Available via the World Wide Web: http://www.fdsys.gov
or
Committee address: http://naturalresources.house.gov
----------
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COMMITTEE ON NATURAL RESOURCES
DOC HASTINGS, WA, Chairman
EDWARD J. MARKEY, MA, Ranking Democratic Member
Don Young, AK Peter A. DeFazio, OR
Louie Gohmert, TX Eni F. H. Faleomavaega, AS
Rob Bishop, UT Frank Pallone, Jr., NJ
Doug Lamborn, CO Grace F. Napolitano, CA
Robert J. Wittman, VA Rush Holt, NJ
Paul C. Broun, GA Raul M. Grijalva, AZ
John Fleming, LA Madeleine Z. Bordallo, GU
Tom McClintock, CA Jim Costa, CA
Glenn Thompson, PA Gregorio Kilili Camacho Sablan,
Cynthia M. Lummis, WY CNMI
Dan Benishek, MI Niki Tsongas, MA
Jeff Duncan, SC Pedro R. Pierluisi, PR
Scott R. Tipton, CO Colleen W. Hanabusa, HI
Paul A. Gosar, AZ Tony Cardenas, CA
Raul R. Labrador, ID Steven A. Horsford, NV
Steve Southerland, II, FL Jared Huffman, CA
Bill Flores, TX Raul Ruiz, CA
Jon Runyan, NJ Carol Shea-Porter, NH
Mark E. Amodei, NV Alan S. Lowenthal, CA
Markwayne Mullin, OK Joe Garcia, FL
Chris Stewart, UT Matt Cartwright, PA
Steve Daines, MT
Kevin Cramer, ND
Doug LaMalfa, CA
Vacancy
Todd Young, Chief of Staff
Lisa Pittman, Chief Legislative Counsel
Jeffrey Duncan, Democratic Staff Director
David Watkins, Democratic Chief Counsel
---------
CONTENTS
----------
Page
Hearing held on Thursday, February 14, 2013...................... 1
Statement of Members:
Hastings, Hon. Doc, a Representative in Congress from the
State of Washington........................................ 1
Prepared statement of.................................... 3
Markey, Hon. Edward J., a Representative in Congress from the
Commonwealth of Massachusetts.............................. 4
Prepared statement of.................................... 5
Ruiz, Hon. Raul, a Representative in Congress from the State
of California, Prepared statement of....................... 129
Statement of Witnesses:
Aronson, Dr. Samuel, Vice President, APS Physics............. 61
Prepared statement of.................................... 63
Boersen, Brad, Director, Business Strategy, Optical Fiber and
Cable, Corning Incorporated................................ 46
Prepared statement of.................................... 47
Response to questions submitted for the record........... 50
Elmore, Kimberly, Assistant Inspector General for Audits,
Inspections, and Evaluations, Office of Inspector General,
U.S. Department of the Interior............................ 25
Prepared statement of.................................... 27
Response to questions submitted for the record........... 28
Garcia-Diaz, Daniel, Director, National Resources and
Environment, U.S. Government Accountability Office......... 13
Prepared statement of.................................... 15
Response to questions submitted for the record........... 24
Haines, Nicholas, Head of Helium Source Development, Linde
Global Helium.............................................. 103
Prepared statement of.................................... 104
Response to questions submitted for the record........... 106
Joyner, David, President, Air Liquide Helium America, Inc.... 74
Prepared statement of.................................... 76
Kaltrider, Scott, Vice President, Business Management and
Helium, Praxair, Inc....................................... 108
Prepared statement of.................................... 110
Response to questions submitted for the record........... 113
Lynch, Kevin, Senior Vice President, Specialty Gases &
Helium, Matheson Tri-Gas, Inc.............................. 83
Prepared statement of.................................... 85
Response to questions submitted for the record........... 88
Morgan, Rodney, Vice President of Procurement, Micron
Technology................................................. 42
Prepared statement of.................................... 43
Response to questions submitted for the record........... 45
Nelson, Walter L., Director, Sourcing & Supply Chain, Air
Products and Chemicals, Inc., Allentown, Pennsylvania...... 90
Prepared statement of.................................... 92
Response to questions submitted for the record........... 100
Page, Gary W., President, Helium & Balloons Across America... 51
Prepared statement of.................................... 53
Response to questions submitted for the record........... 59
?
Page
Statement of Witnesses--Continued
Spisak, Timothy R., Deputy Assistant Director, Minerals and
Realty Management, Bureau of Land Management, U.S.
Department of the Interior................................. 7
Prepared statement of.................................... 8
Response to questions submitted for the record........... 11
Thoman, Tom, Division President, Gases Production, Airgas,
Inc........................................................ 79
Prepared statement of.................................... 81
Response to questions submitted for the record........... 82
Additional materials supplied:
Gases and Welding Distributors Association (``GAWDA''),
Statement submitted for the record......................... 127
List of documents retained in the Committee's official files. 129
(IV)
OLVERSIGHT HEARING ON ``THE PAST, PRESENT AND FUTURE OF THE
FEDERAL HELIUM PROGRAM''; AND LEGISLATIVE HEARING ON
H.R. 527, TO COMPLETE THE PRIVATIZATION OF THE FEDERAL
HELIUM RESERVE IN A COMPETITIVE MARKET FASHION THAT
ENSURES STABILITY IN THE HELIUM MARKETS WHILE
PROTECTING THE INTERESTS OF THE AMERICAN TAXPAYER, AND
FOR OTHER PURPOSES. ``RESPONSIBLE HELIUM ADMINISTRATION
AND STEWARDSHIP ACT''
----------
Thursday, February 14, 2013
U.S. House of Representatives
Committee on Natural Resources
Washington, D.C.
----------
The Committee met, pursuant to notice, at 10:02 a.m., in
Room 1324, Longworth House Office Building, Hon. Doc Hastings
[Chairman of the Committee] presiding.
Present: Representatives Hastings, Lamborn, Wittman,
Thompson, Lummis, Tipton, Labrador, Amodei, Mullin, Daines,
Cramer, LaMalfa; Markey, DeFazio, Holt, Costa, Hanabusa,
Cardenas, Horsford, Huffman, Ruiz, Lowenthal, Garcia, and
Cartwright.
The Chairman. The Committee will come to order, and the
Chair notes the presence of a quorum, which, under Committee
Rule 3(e), is 2 Members.
The Natural Resources Committee is meeting today to hear
testimony on the past, present, and future of the Federal
helium program: H.R. 527, ``The Responsible Helium
Administration and Stewardship Act''. That is what the topic of
our hearing is today.
Under Committee Rule 4(f), opening statements are limited
to the Chairman and the Ranking Member. However, I ask
unanimous consent that any Member that wishes to have a
statement in the record have it by the close of business today.
[No response.]
The Chairman. And without objection, so ordered.
I now recognize myself for 5 minutes for an opening
statement.
STATEMENT OF THE HON. DOC HASTINGS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF WASHINGTON
The Chairman. This Valentine's Day, many homes, restaurants
and stores are decorated with pink and red heart-shaped
balloons filled with helium. Now, this may be one of the best-
known uses of this ``higher-than-air'' gas. The reality is that
helium plays a large role in our daily lives and in our 21st
century economy. Life-saving MRI machines, high-tech
manufacturing, and national defense operations are all
dependent on helium.
Unfortunately, unless Congress takes swift action, America
will float off the helium cliff--pun intended--which will
adversely affect American jobs and our economy. Stopping this
disaster while simultaneously implementing reforms is the goal
of today's hearing.
Since 1996, when Congress passed legislation to privatize
the Federal helium program, we have been selling the helium in
the reserve. Unfortunately, over the past half-decade, we have
been doing so at severely less-than-market prices. This action
hurts future resource development, it hurts conservation, and
it hurts investment in research in alternatives, because of the
depressed price.
Since the original decision to close the reserve, both the
use and demand for helium has changed. This has created a
situation where the reserve's debt, which was a goal of the
1996 Act, will be paid off sooner than expected, and that is
expected to be in October of this year, and that will happen
without having sold off all the helium in the reserve. By law,
that 1996 law, the reserve will no longer have the authority to
sell off its remaining helium, which will result in an
immediate worldwide shortage because currently that reserve
supplies about 30 percent of the world's helium supply.
So, I am pleased that, by bipartisan negotiation and a
focus on market principles, Ranking Member Markey and I have
developed a bipartisan plan, The Responsible Helium
Administration and Stewardship Act, which is H.R. 527, to
address the issues causing this helium crisis.
First, it recognizes the pivotal role that helium plays in
our 21st century high-tech economy, and will prevent a helium
shortage by keeping reserves open until nearly all of the
helium supply is sold.
Second, and equally important, the bill will build upon
reforms made in 1996 and inject free-market principles to get a
fair return for the American taxpayers. Updates to the program
must be made to more accurately reflect today's uses and
demands for helium. New demands for helium have caused the
market price to rise much higher than the Federal Government's
pricing formula, and much faster than BLM's ability to track
market prices.
Today we will hear updates from the Department of the
Interior Inspector General and the Government Accounting
Office, highlighting concerns that the low Federal price means
that taxpayers aren't getting the best return for this
resource.
In addition, current operations by BLM have restricted
sales to only a few companies through an allotment system that
appears to be an essential monopoly for Federal helium. The
cheap price of Federal helium creates disincentives for helium
users to invest in conservation and in recycling, and it gives
unfair market advantage to the handful of companies that are
allowed to purchase the helium. And it can depress exploration
for new sources of helium.
So, H.R. 527 will implement a new operating system over the
next decade that includes semi-annual helium auctions. These
auctions will inject much-needed competition into the program
and ensure that taxpayers are getting a fair return. The bill
also includes important reforms to increase transparency and to
prevent supply disruptions.
There are many who believe that the Federal Government
shouldn't be in the helium business, and I would agree. But we
are, and we have been since the mid-1920s. So, this bill is
necessary to protect our economy from severe disruptions
because helium is so essential to suddenly shut off the valve
at the reserve. This bill recognizes that reality and builds
into place critical reforms to sell off the helium in a much
more responsible manner. This will prevent a potentially
economically crippling shortage, and will ensure a better deal
for taxpayers, and it will provide additional time for new
development of alternative domestic helium resources so our
country and our economy is prepared when the reserve does
close.
So, I look forward to hearing from our three panels of
witnesses today. And, with that, I will recognize the
distinguished Ranking Member for his opening remarks.
[The prepared statement of Mr. Hastings follows:]
Statement of The Honorable Doc Hastings, Chairman,
Committee on Natural Resources
This Valentine's Day, many homes, restaurants and stores are
decorated with pink and red heart-shaped balloons filled with helium.
While this may be one of the best-known uses of this lighter than air
gas, the reality is that helium plays a large role in our daily lives
and 21st century economy. Life-saving MRI machines, high-tech
manufacturing and national defense operations are all dependent on
helium.
Unfortunately, unless Congress takes swift action, America will
float off a helium cliff--which will adversely affect American jobs and
our economy. Stopping this disaster, while simultaneously implementing
reforms, is the goal of today's hearing.
Since 1996, when Congress passed legislation to privatize the
Federal Helium Program, we have been selling the helium in the Reserve.
Unfortunately, over the last half decade, we have been doing so at
severely less than market prices. This action hurts future resource
development, conservation, and investment in research for alternatives.
Since the original decision to close the Reserve, both the use and
demand for helium has changed. This has created a situation where the
Reserve's debt, which was the goal of the 1996 Act, will be paid off
sooner than expected (final payment is predicted to be October of this
year), without having sold off all the helium in the Reserve. By law,
the Reserve will no longer have the authority to sell off its remaining
helium, resulting in an immediate world-wide shortage. Currently, the
Reserve supplies 30 percent of the world's helium supply.
I'm pleased that through bipartisan negotiation and a focus on
market principles, Ranking Member Markey and I have developed a
bipartisan plan, the Responsible Helium Administration and Stewardship
Act (H.R. 527), to address the issues causing this helium crisis.
First, it recognizes the pivotal role that helium plays in our 21st
century, high-tech economy and will prevent a helium shortage by
keeping the Reserve open until nearly all the helium supply is sold.
Second, and equally as important, the bill will build upon the
reforms made in 1996 and inject free-market principals to get a fairer
return for American taxpayers.
Updates to the program must be made to more accurately reflect
today's uses and demands for helium. New demands for helium have caused
the market price to rise much higher than the federal government's
pricing formula and much faster than BLM's ability to track market
prices. Today we will hear updates from the Department of the Interior
Inspector General and the Government Accountability Office highlighting
concerns that the low federal price means that taxpayers aren't getting
the best return for this resource. In addition, current operations by
BLM have restricted sales to only a few companies through an allotment
system that appears to be an essential monopoly for federal helium.
The cheap price of federal helium creates disincentives for helium
users to invest in conservation and recycling, it gives unfair market
advantage to the handful of companies that are allowed to purchase
helium, and it can depress exploration for new sources of helium.
H.R. 527 will implement a new operating system over the next decade
that includes semiannual helium auctions. These auctions will inject
much needed competition into the program and ensure that taxpayers are
getting a fairer return.
The bill also includes important reforms to increase transparency
and prevent supply disruptions.
There are many who believe that the federal government shouldn't be
in the helium business, and I would agree. But we are and have been
since the mid-1990s. So this bill is necessary to protect our economy
from severe disruptions because helium is too essential to suddenly
shut off the valve at the Reserve. This bill recognizes that reality
and builds into place critical reforms to sell off the helium in a more
responsible manner. This will prevent a potentially economically
crippling shortage, it will ensure a better deal for taxpayers, and it
will provide additional time for new development of alternative
domestic helium resources so our country and economy is prepared when
the Reserve does close.
I look forward to hearing from our witnesses about this legislation
and the need to update and reform the Federal Helium Program.
______
STATEMENT OF THE HON. EDWARD J. MARKEY, A REPRESENTATIVE IN
CONGRESS FROM THE COMMONWEALTH OF MASSACHUSETTS
Mr. Markey. Thank you, Mr. Chairman. Helium is not just
used to fill balloons. It is critical in MRI machines, NASA
rockets, high-tech manufacturing, and various types of
research. For many applications, there are simply no
replacements for helium right now. So the looming national
crisis for this important gas must not be taken lightly.
Our Nation's Federal helium reserve supplies nearly half of
the helium used in the United States, and roughly a third of
all the helium used globally. And right now there is a growing
supply shortage. Some helium customers are already having their
supply contracts canceled or reduced.
We are now facing two deadlines that could lead to even
more severe helium supply shortages and price spikes. The first
will occur later this year, when the Bureau of Land Management,
which manages the reserve, will finish repaying the Treasury
for the debt accrued while purchasing this helium stockpile. At
that point, unless Congress acts, the BLM will no longer have
the authority to continue operating the reserve and supplying
this critical source of helium for the United States and for
the world.
The second crisis is not as immediate, but potentially more
severe. At current withdrawal rates, we have only five to seven
years before the helium in the BLM reserve is largely gone.
Reviews by the National Academies of Science, the Government
Accountability Office, and the Interior Department Office of
Inspector General have all concluded that we are likely
currently selling our Nation's helium below market price.
Because the BLM supply comprises such an enormous
percentage of the global supply, the price set by BLM controls
the prices paid for helium globally. Artificially low prices
for BLM helium, therefore, mean less incentive for private
markets to make investments in new helium supplies, or to
invest in conservation efficiency or alternatives. And it means
taxpayers are getting shortchanged.
We must establish a helium pricing mechanism that sends a
clear signal to private markets that alternative helium
supplies are needed before we exhaust the BLM reserves. If we
continue to float along under business as usual, we risk
finding ourselves facing even worse supply disruptions or price
spikes in a few years, when the BLM stockpile is depleted.
That is why I have partnered with Chairman Hastings and
Energy and Minerals Subcommittee Ranking Member Rush Holt and
Representative Bill Flores to introduce bipartisan legislation
that seeks to address these impending crises. That legislation,
H.R. 527, will extend the life of the reserve past the end of
this fiscal year, ensure a fair return to taxpayers on this
Federally owned helium resource, and widen participation and
transparency in the helium market.
These principles are consistent with the recommendations
made by the National Academies in 2010 to improve the program.
Whether it is spectrum auctions or helium auctions, open and
competitive markets are the best way to ensure stability and
proper return for taxpayers. Helium comes from the Greek word
``helios,'' which means sun. And it is time that we shine some
sunlight on the helium market by creating transparency and
openness.
The stakes from this impending national helium crisis for
America's high-tech economy are very high. A competitive helium
market can be the stable bridge that shifts America's helium
reliance from the BLM reserve to private sources. We need to
create that glide path. But if we fail to act, and float off
this helium cliff, we may be forced to rely on insecure and
irregular helium supplies from foreign countries, such as
Russia, Algeria, or Qatar, and pay dramatically higher prices
to meet American scientific and industrial needs. We should not
let that happen.
This is an issue that should rise above partisanship. And,
Mr. Chairman, I want to praise you for your leadership on this
issue. This is something that really is central to our national
security. And I am looking forward, as all our members are, on
working on a bipartisan basis to find a solution.
[The prepared statement of Mr. Markey follows:]
Statement of The Honorable Edward J. Markey, Ranking Member,
Committee on Natural Resources
Thank you Mr. Chairman.
Helium is not just used to fill balloons. It is critical in MRI
machines, NASA rockets, high-tech manufacturing and various types of
research. For many applications, there are simply no replacements for
helium right now.
So the looming national crisis for this important gas must not be
taken lightly.
Our nation's Federal Helium Reserve supplies nearly HALF of the
helium used in the United States and roughly a THIRD of all the helium
used globally. And right now, there is a growing supply shortage. Some
helium customers are already having their supply contracts canceled or
reduced.
We are now facing two deadlines that could lead to even more severe
helium supply shortages and price spikes. The first will occur later
this year when the Bureau of Land Management, which manages the
Reserve, will finish repaying the Treasury for the debt accrued while
purchasing this helium stockpile. At that point, unless Congress acts,
the BLM will no longer have the authority to continue operating the
Reserve and supplying this critical source of helium for the United
States and the world.
The second crisis is not as immediate but potentially more severe.
At current withdrawal rates, we have only five to seven years before
the helium in the BLM Reserve is largely gone. Reviews by the National
Academies of Science, the Government Accountability Office and the
Interior Department Office of Inspector General have all concluded that
we are likely currently selling our nation's helium below market price.
Because the BLM supply comprises such an enormous percentage of the
global supply, the price set by BLM controls the prices paid for helium
globally. Artificially low prices for BLM helium therefore mean less
incentive to private markets to make investments in new helium supplies
or to invest in conservation, efficiency or alternatives. And it means
taxpayers are getting short changed.
We must establish a helium pricing mechanism that sends a clear
signal to private markets that alternative helium supplies are needed
before we exhaust the BLM Reserve. If we continue to float along under
business as usual, we risk finding ourselves facing even worse supply
disruptions or price spikes in a few years when the BLM stockpile is
depleted.
That is why I have partnered with Chairman Hastings, Energy and
Minerals Subcommittee Ranking Member Rush Holt and Rep. Bill Flores to
introduce bipartisan legislation that seeks to address these impending
crises. That legislation, H.R. 527, will extend the life of the reserve
past the end of this fiscal year, ensure a fair return to taxpayers on
this federally-owned helium resource, and widen participation and
transparency in the helium market.
These principles are consistent with the recommendations made by
the National Academies in 2010 to improve the program. Whether it is
spectrum auctions or helium auctions, open and competitive markets are
the best way to ensure stability and a proper return for taxpayers.
Helium, comes from the Greek word Helios, which means sun. And it
is time that we shine some sunlight on the helium market by creating
transparency and openness.
The stakes from this impending national helium crisis for America's
high-tech economy are high. A competitive helium market can be the
stable bridge that shifts American helium reliance from the BLM Reserve
to private sources. We need to create that glide path.
But if we fail to act and float off this ``helium cliff,'' we may
be forced to rely on insecure and irregular helium supplies from
foreign countries such as Russia, Algeria, and Qatar and pay
dramatically higher prices to meet American scientific and industrial
needs. We should not let that happen.
This is an issue that should rise above partisanship, and I look
forward to continue to working with you, Mr. Chairman, and Members on
both sides of the aisle to move this legislation forward swiftly.
______
The Chairman. I thank the gentleman for his statement, and
I thank the gentleman for the compliment. This is something
that was brought to our attention and I particularly want to
thank the staff as they work together to develop this
legislation.
We have three panels today, and our first panel is seated.
And let me introduce them.
We have Mr. Tim Spisak, who is the Deputy Assistant
Director of Minerals and Realty Management of the Bureau of
Land Management within the Department of the Interior. Welcome.
We have Daniel Garcia-Diaz, National Resources and
Environment of the U.S. Government Accountability Office.
Welcome.
And last, but not least, we have Kimberly Elmore, the
Assistant Inspector General for Audits, Inspections, and
Evaluations, with the U.S. Department of the Interior.
If you have not been a witness here before, let me explain
the timing lights here. You have 5 minutes. First of all, your
full statement will appear in the record. And we would ask you
to summarize and keep your remarks within 5 minutes.
The green light means that you are doing extremely well in
your remarks.
[Laughter.]
The Chairman. And when the yellow light comes on it means
that you are down to one minute. And you don't want the red
light to come on, it just simply means that your time is up.
But if you can keep your remarks within that 5 minutes, that
would be very, very helpful, because we do have a long day.
So, with that, Mr. Spisak, we will start with you. And you
are recognized for 5 minutes.
STATEMENT OF TIMOTHY R. SPISAK, DEPUTY ASSISTANT DIRECTOR,
MINERALS AND REALTY MANAGEMENT, BUREAU OF LAND MANAGEMENT, U.S.
DEPARTMENT OF THE INTERIOR
Mr. Spisak. Mr. Chairman, members of the Committee, thank
you for the opportunity to testify on a Federal helium program
and H.R. 527, ``The Responsible Helium Administration and
Stewardship Act''. The bill would make various changes to the
Helium Privatization Act of 1996, including establishing a
phased approach to drawing down the Federal helium reserve.
As indicated by a National Academy of Sciences report
published in early 2010, the market for helium has proven more
volatile than expected over the last 15 years, and the
requirement under the Privatization Act that the BLM offer to
sell nearly all of the reserve by 2015 could negatively impact
the availability of this important resource.
The Department of the Interior supports the goals of H.R.
527, and welcomes the opportunity to improve the management of
this valuable resource.
Helium is a critical, non-renewable natural resource. The
most common and economical way of capturing helium is by
recovering it during natural gas processing. The BLM plays a
key role in the management and stewardship of the only
significant long-term storage facility for accrued helium in
the world, known as the Federal Helium Reserve, which is
located near Amarillo, Texas.
In 1929, the U.S. Bureau of Mines built the Amarillo helium
plant and Cliffside gas field facility to produce a helium-
bearing natural gas from a naturally occurred geologic field
known as the Bush Dome Reservoir.
In 1960, the Congress granted the Bureau of Mines the
authority to borrow funds from the U.S. Treasury to purchase
and store helium with the expectation that the proceeds from
the future sales of helium would allow the Bureau of Mines to
repay the borrowing. However, compound interest and the Federal
demand rarely met the expectations underlying the repayment
terms of the Treasury's loan.
In 1996, the Congress passed the Helium Privatization Act,
which required the BLM to offer for sale the vast majority of
the stockpile of crude helium.
Today the BLM operates the Federal helium program with the
primary goals of paying off the helium debt, which the agency
anticipates doing at the beginning of Fiscal Year 2014, and
providing the resource to meet public and private needs. While
sales of the crude helium to private helium refineries make the
most significant contributions toward paying off the helium
debt, the BLM also manages the in-kind program, which supplies
helium to Federal agencies and grant holders for operations and
research through what are known as authorized Federal helium
suppliers.
In 2000, the National Academy of Science published its
first analysis of the impacts of the 1996 Act. Its general
finding was that the Act would not have a material impact on
helium users. In early 2010 the NAS released a follow-up report
on the BLM's management of the helium reserve. The follow-up
report concluded that the mandated sell-off is negatively
impacting the needs of both current and future users of helium
in the United States. This conclusion is the driving force
behind a series of recommendations in the report directed at
the BLM and Congress.
H.R. 527 addresses many of the concerns that the 2010 NAS
report identified regarding the Federal Government's
involvement in the helium market. Most importantly, the bill
would create a set of phased authorities for the BLM's
management of the reserve, establishing a glide path from the
sales mandated under the Privatization Act. The Department
generally supports this approach to gradually scale back the
Federal helium program.
More specifically, H.R. 527 stipulates 3 phases to the
drawdown: the finalizing debt payoff; maximizing total recovery
of helium and increasing returns to the American taxpayer; and,
finally, the access for Federal users. It also requires that
the sales of crude helium be conducted at auction and that the
BLM disclose certain information related to the helium market
and supply chain.
The Department looks forward to discussing these issues
further with the sponsors and the Committee, and we would also
like to work with the Committee on some technical modifications
to the bill.
H.R. 527 would require the Secretary of the Interior to
complete several reports and studies on helium, some in
coordination with the Secretary of the Interior.
Thank you for the opportunity to present testimony on the
Federal helium program and H.R. 527. The BLM welcomes further
discussion about the Federal helium program and BLM's role in
meeting future needs for the country. I would be happy to
answer any questions the Committee may have.
[The prepared statement of Mr. Spisak follows:]
Statement of Timothy R. Spisak, Deputy Assistant Director, Minerals and
Realty Management, Bureau of Land Management, U.S. Department of the
Interior
Mr. Chairman and members of the Committee, thank you for the
opportunity to testify on the Federal helium program and H.R. 527, the
Responsible Helium Administration and Stewardship Act, which would make
various changes to the Helium Privatization Act of 1996, including
establishing a phased approach to drawing down the Federal Helium
Reserve. Because the bill was introduced just one week ago, the
Department of the Interior has not had time to conduct an in-depth
analysis, but we appreciate the opportunity to outline our general
views at this time. As indicated by a National Academy of Sciences
(NAS) report published in early 2010, the market for helium has proven
more volatile than expected over the last 15 years and the current
law's requirement that the Bureau of Land Management (BLM) offer for
sale nearly all of the Reserve by 2015 could pose a threat to the
availability of this resource for future U.S. scientific, technical,
biomedical, and national security users of helium. The Department
supports the goals of H.R. 527 and welcomes the opportunity to improve
the management of this valuable commodity.
Background
Helium is a critical, non-renewable natural resource that plays an
important role in medical imaging, space exploration, military
reconnaissance, fiber optics manufacturing, welding and commercial
diving. According to the NAS, helium's best known property, being
lighter than air, means ``that 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.''
The most common and economical way of capturing helium is by
stripping it from natural gas during gas production. Geologic
conditions in Texas, Oklahoma, and Kansas make the natural gas in these
areas some of the most helium-rich in the United States, ranging from
0.5 to 1.5 percent of the gas extracted during production. The BLM
plays a key role in the careful management and stewardship of the only
significant long-term storage facility for crude helium in the world,
known as the Federal Helium Reserve (Reserve), which supplies
approximately 42 percent of domestic demand and approximately 35
percent of global demand for crude helium.
The Federal Helium Program
Because of helium's potential to lift military reconnaissance
devices high above battlefields, the Federal government's interest in
the resource dates back to World War I. Recognizing this key military
use for helium, the Mineral Leasing Act of 1920 reserved to the Federal
government all helium produced on Federal lands--a reservation that
remains in effect today. After World War I, recognition of the
potential for helium recovery in the Texas Panhandle, Western Oklahoma,
and Kansas area (collectively, the ``Hugoton'' field) led to the
development of the Federal helium program focused in that area. In
1929, the Bureau of Mines built the Amarillo Helium Plant and Cliffside
Gasfield Facility near Amarillo, Texas, to produce helium-bearing
natural gas from a naturally occurring geologic field known as the Bush
Dome Reservoir.
After World War II, Federal use of helium shifted toward
applications related to space exploration, and in 1960 Congress passed
the Helium Amendment Act. This Act changed the program's mandate from
exclusive government production of helium to conservation of the
resource by executing contracts with private natural gas producers to
purchase extracted crude helium for the Federal government to store in
the Bush Dome Reservoir. The Act granted the Bureau of Mines the
authority to borrow funds from the U.S. Treasury to purchase the
helium, with the expectation that the proceeds from future sales of
helium would allow the BLM's predecessor agency in this area, the
Bureau of Mines, to repay the debt. This borrowing authority,
established by Congress in lieu of a direct appropriation, required the
Bureau of Mines to repay the loan by 1985. Subsequent legislation
extended the deadline to 1995.
Federal demands for helium rarely, if ever, met the expectations
underlying the terms of the Treasury's loan to the Bureau of Mines.
When the 1995 deadline to pay off the debt arrived, the $252 million
the Bureau had spent on privately-produced helium had increased to $1.3
billion (principal and interest), and the Bureau of Mines appeared to
have little prospect of ever repaying the debt. In his 1995 State of
the Union address, President Bill Clinton stated that it was his
Administration's goal to privatize the Federal helium program.
Congress subsequently passed the Helium Privatization Act of 1996
(HPA), which required the BLM (which assumed jurisdiction over the
program after the termination of the Bureau of Mines) to make available
for sale the vast majority of the stockpile of crude helium. The
mandate directed the BLM to begin selling helium no later than 2005, in
order to avoid market disruption. The BLM was to make a consistent
amount of helium available every year at a price based on the amount of
remaining helium debt and the amount of helium in storage. When
Congress passed the HPA, there was approximately 30.5 billion standard
cubic feet (scf) of helium in storage in the Bush Dome Reservoir. The
HPA mandated the BLM to make available for sale all of the helium in
excess of a 600 million scf permanent reserve.
Additionally, the HPA required the BLM to cease all helium
production, refining, and marketing activities to effectively privatize
the refined helium market in the United States. Finally, the Act
provided for the NAS to review the impacts of the 1996 Act. The NAS
published its first study in 2000, and released a follow-up report in
2010.
The BLM's Helium Operations
The BLM currently operates the Federal helium program with a
primary goal of paying off the ``helium debt.'' To this end, the BLM
has paid approximately $1.33 billion to the U.S. Treasury since 1995.
This constitutes substantial progress toward eliminating the helium
debt, which the HPA froze at approximately $1.37 billion. During FY
2012, $180 million was paid toward the helium debt from Reserve sales,
resulting in an outstanding balance of approximately $44 million at the
end of the fiscal year.
According to the HPA, once the helium debt is retired, the Helium
Production Fund (used to fund the BLM's helium program operational
expenses) would be dissolved and all future receipts would be deposited
directly into the general fund of the U.S. Treasury. The BLM expects to
generate enough revenue during this fiscal quarter through currently
authorized helium sales to pay off the debt at the beginning of FY
2014.
The BLM's current helium program, with a workforce of 51 full-time
equivalents (FTE), operates not only the original storage and pipeline
system, but also a crude helium enrichment unit, owned by private
industry refiners, that facilitates transmission of helium to private
helium operations on the BLM's helium pipeline. The BLM is responsible
for administering helium extracted from Federal resources, including
management of fees and royalty contracts. These operations are not
limited to the Hugoton gas field, but also occur in fields in Colorado,
Wyoming, Utah, and any other state where producers extract helium from
the Federal mineral estate. Additionally, the BLM is responsible for
administering the sell-off of crude helium to private refiners. These
sales make the most significant contributions toward paying off the
helium debt. The agency also conducts domestic and, to a lesser extent,
international helium resource evaluation and reserve tracking to
determine the extent of available helium resources.
Another major part of the BLM's helium program is the ``In-Kind''
program, which supplies helium to Federal agencies (e.g., the
Department of Energy and the National Aeronautics and Space
Administration) for operations and/or research. Before the Helium
Privatization Act, Congress required Federal agencies to purchase their
helium supplies from the Bureau of Mines. Under the current In-Kind
program, Federal agencies purchase all of their refined helium from
private suppliers who, in turn, are required to purchase an equivalent
amount of crude helium from the Reserve. In FY 2012, Federal agencies
purchased $10.3 million of helium through the In-Kind program.
The National Academy of Sciences Reports
In 2000, the NAS published its first analysis of the impacts of the
HPA. Its general finding was that the Act would not have an impact on
helium users. Additionally, the NAS report concluded that because the
price-setting mechanism was based on the amount of the helium debt, and
not the market for helium, the government's significantly higher price
would mean the helium refining industry would buy crude helium from the
BLM only as a last resort for fulfilling private contracts. However,
private helium refiners would still be required to purchase crude
helium from the BLM under the In-Kind program.
Over the course of the last decade, however, it has become apparent
that assumptions underlying the 2000 NAS Report did not hold. First,
the NAS's assumption that ``[t]he price of helium [would] probably
remain stable through at least 2010'' has proven faulty. The market for
helium has seen significant fluctuations on both the demand side--which
dropped significantly in 2008 after peaking the prior year--and on the
supply side, which experienced a significant decline in private
supplies between 2006 and 2008. In the face of this volatility, prices
for helium rose steadily over the course of the decade. By 2008, the
market price for helium began to hover near the BLM's price, leading to
greater withdrawals from the Reserve than the 2000 NAS Report
anticipated.
Another market impact that the 2000 NAS Report did not address was
international supply and demand for helium. According to the U.S.
Department of Commerce, domestic consumption of helium decreased 2.7
percent per year from 2000-2007, while exports to the Pacific Rim grew
6.8 percent annually, exceeding the 5.1 percent growth rate in Europe.
The international market also experienced supply issues because of
refining capacity problems at plants in Qatar and Algeria, which would
normally help supply both Europe and Asia.
In early 2010, the NAS released a follow-up report on the BLM's
management of the Reserve. The report, entitled ``Selling the Nation's
Helium Reserve,'' focused on ``whether the interests of the United
States have been well served by the [HPA] and, in particular, whether
selling off the Reserve has had any adverse effect on U.S. scientific,
technical, biomedical, and national security users of helium.''
The 2010 NAS report, which identified some shortcomings of the 2000
report, takes a markedly different tone than the 2000 report. This
change in approach reflects the volatility of the helium market over
the last decade. The NAS report analyzes the relationship between
supply and demand for helium on a domestic and international basis, as
well as the BLM's management of the Reserve under the HPA. The report
concludes that the HPA mandated sell-off is negatively impacting the
needs of both current and future users of helium in the United States.
This conclusion is the driving force behind a series of recommendations
in the report directed at the BLM and the United States Congress.
H.R. 527, Responsible Helium Administration and Stewardship Act
H.R. 527 addresses many of the concerns that the 2010 NAS report
identified regarding the Federal government's involvement in the helium
market. Most importantly, the bill would create a set of phased
authorities for the BLM's management of the Reserve, establishing a
``glide path'' from the sales mandated under the HPA to a scenario
where 3 billion scf of helium would be reserved solely for Federal
users. This would accomplish the original goals of the HPA--the exit of
the Federal government from the broader helium market and the paying
off of the helium debt--while protecting long-term supply interests for
the Federal government. The Department generally supports this approach
to gradually scale back the Federal helium program.
The bill stipulates three phases to the drawdown: ``Phase A:
Finalizing Debt Payoff;'' ``Phase B: Maximizing Total Recovery of
Helium and Increasing Returns to the American Taxpayer;'' and ``Phase
C: Access for Federal Users.'' Phase A would begin on the bill's date
of enactment and end 1 year after the date of enactment. During Phase
A, the BLM would be required to offer for sale at least as much helium
as was offered for sale during FY 2012. Phase B would begin immediately
after Phase A and end when the volume of recoverable crude helium in
the Reserve reaches 3 billion scf. During Phase B, the BLM would
balance factors involving the amount of production capable from the
Reserve, program management, market supply and demand, and demand of
Federal users when determining the annual quantity of crude helium to
offer for sale. Phase C would begin when the volume of recoverable
crude helium in the Reserve reaches 3 billion scf and presumably last
until all recoverable helium has been exhausted from the Reserve.
During Phase C, the BLM would be authorized to sell crude helium only
for use by Federal agencies and Federal grant holders. The Department
would also like to work with the committee on technical modifications
to this section of the bill.
Other significant aspects of H.R. 527 involve requirements that
sales of crude helium be conducted at auction and that the BLM disclose
certain information related to the helium market and supply chain. The
Department and the BLM are committed to ensuring that the public
receives a fair return on publicly owned energy and related resources.
The Department and the BLM are also firmly committed to making
information about how government operates more accessible, and consider
transparency and open government a high priority. The Department looks
forward to discussing these issues further with the sponsors and the
Committee, and the Administration continues to evaluate any cost
implications of this legislation.
Finally, the bill also would require the Secretary of the Interior
to complete several reports and studies on helium. These include global
and national helium gas resource assessments, and, in coordination with
the Secretary of Energy, national forecasts and global trends of helium
demand and an inventory of helium uses in the United States. In
addition, the bill would direct the Secretary of the Interior and the
Secretary of Energy to cooperate on any assessments and research
relating to the extraction and refining of the isotope helium-3, and
direct the Secretary of the Interior to assess the feasibility of
establishing a facility to separate the isotope helium-3.
Conclusion
Thank you for the opportunity to present testimony on the Federal
helium program and H.R. 527. The BLM welcomes further discussion about
the Federal helium program and the BLM's role in meeting future helium
needs for the country, especially for Federal agencies that depend on
helium for scientific research, aerospace projects, and defense
purposes. Since its formal discovery almost 120 years ago, helium has
proven to be an increasingly important natural resource. The expansion
of helium-related technology and declining domestic reserves means the
importance of helium as a strategic resource is likely to increase. The
BLM continues to serve the country by effectively managing the Reserve,
and working with natural gas producers to efficiently extract helium
from natural gas. I would be happy to answer any questions the
Committee may have.
______
Response to questions submitted for the record by Timothy R. Spisak,
Deputy Assistant Director, Minerals and Realty Management, Bureau of
Land Management, U.S. Department of the Interior
Questions from Rep. Markey
When was the last time that the refining capacity of the refiners
connected to the BLM Federal Helium Reserve was collected? When
was the last time that information was made public?
The BLM last conducted a survey of the plant refining capacities of
the companies (i.e., the refiners) that are connected to the BLM
Federal Helium Reserve in June 2008. The total refining capacity of all
the refiners on the helium conservation pipeline was published at that
time.
Have there been significant changes in that refining capacity since
that time?
There have been no significant changes in plant capacities since
the 2008 survey.
Is the BLM aware of all of the changes made to the refining capacity
of refineries connected to the BLM helium reserve? If so,
please detail the current refining capacity, by refinery, of
each of the four refiners connected to the pipeline. If not,
please detail why not.
Yes, the BLM is aware of changes to the plant refining capacities
of each refiner. However, the refining capacities for individual plants
are not made available to the public because the information is
proprietary. The total capacity for all the plants owned by the four
refiners along the helium conservation pipeline is approximately 4.05
bcf. Although the refining capacities of individual plants are not
available to the public, the ratio of total capacity per company (some
of whom own multiple plants) is public knowledge because the BLM sells
open market helium based on those percentages. The percentages of total
capacity per company are as follows: Air Products, 36 percent; Praxair,
34 percent; Linde, 26 percent; and Keyes, 4 percent.
Some have argued that moving to a competitive auction system would
create supply uncertainty in helium markets. But as you note in
your testimony, haven't helium supplies and markets been
``uncertain'' over the last 15 years?
In recent years, there has been some uncertainty in helium markets.
This has been caused primarily by increasing demand from international
markets coupled with a global helium supply shortage. For example,
countries such as Qatar and Algeria, which normally meet the demand for
Europe and Asia, are currently experiencing refining capacity problems.
Questions from Rep. Hanabusa
What is the cost of separating crude helium from natural gas deposits?
The BLM does not have cost information regarding the separation of
crude helium from natural gas. The cost of separating crude helium from
natural gas varies depending on the technology used to produce the gas,
the concentration of the helium contained within the natural gas, and
the deposit size. In general, the cost increases as (i) the
concentration of the helium decreases, (ii) geologic conditions, such
as extremely low or high gas-field pressure, present a challenge to
ensuring the resource is extracted in a diligent and prudent manner,
and (iii) unwanted constituents, such as H2S and
CO2, are entrained within and must be removed from the gas
before it may be sold to market.
Have advances in the natural gas extraction process and/or the crude
helium separation process led to increased volumes of helium
being collected?
Advances in the natural gas extraction process, such as hydraulic
fracturing, have not led to increases in helium extraction because
those deposits have extremely low helium concentrations, generally 0.05
percent or less. However, if natural gas liquids containing helium were
to be produced from natural gas fields in large enough quantities, it
is possible that helium extraction plants might be constructed as part
of the natural gas extraction and refining process. This is the type of
helium extraction currently used in Algeria and Qatar.
Advances in membrane technology, which is a technology that uses
pressure to separate helium from the mixture of gases originally
produced from a natural gas well, have yielded small increases in
helium extraction.
In collecting natural gas through the fracking process, do the
compounds in the fracking fluid create any kind of chemical
reaction that can alter the helium deposits or affect the
helium separation process?
Because helium is an inert gas, it does not react with any known
chemical or compound.
Questions from Rep. Lowenthal
Since passage of the 1996 Helium Privatization Act directed the
Interior Department to sell crude helium from the Federal Helium
Reserve using a statutory pricing scheme, what is your best estimate of
the aggregate to-date revenue lost due to sales of helium at prices
below what a free market sale would have commanded? For this estimate,
please distinguish between revenue lost based on sales to the private
sector and sales to Federal Agencies (thru in-kind sales).
The unique characteristics of the helium market, including major
fluctuations in domestic and international demand and global supply
shortages, make it very difficult to determine the true market price
for crude helium in the years since 1996. In addition, because the
Federal Helium Reserve supplies approximately 42 percent of domestic
demand and approximately 35 percent of global demand for crude helium,
the price of Federal helium has effectively become the benchmark market
price.
From the time of the BLM's first sale in 2003 until 2008, more
crude helium was offered for sale than was sold. This would indicate
that in those years, the price to purchase crude helium from the
Federal Helium Reserve (then the statutory minimum) exceeded the price
to purchase crude helium from private sources. In 2009 and 2010, the
BLM sold all of the crude helium offered for sale, but there were no
indications of market shortages or scarcity. This would indicate that
in those years, the price to purchase crude helium from the Federal
Helium Reserve (also the statutory minimum) approximated the price to
purchase crude helium from private sources.
Since 2011, the BLM has continued to sell all of the crude helium
offered for sale, but has significantly increased the price it charges
non-Federal purchasers. During FY 2013, the open-market price is
$84.00/mcf, up from $64.75/mcf in 2010. The BLM is currently working
with the Department's Office of Mineral Evaluation, as recommended by
the Office of the Inspector General, to develop a new pricing formula
to ascertain the open market value of crude helium. The BLM expects to
implement the new formula in FY 2014.
What is your best estimate of the aggregate value of the remaining
helium in the Federal Helium Reserve? Please base your estimate
on projected market prices assuming sales from the Reserve are
sold at auctions as envisioned by H.R. 527 (until 3 billion
cubic feet remain). Please also distinguish between the value
of helium sold to the private sector and the value of helium
sold to Federal Agencies as projected based on a constant 161
million cubic feet annual Federal Agency consumption rate of
reserve helium at the prevailing auction price.
Between 2014 and 2019, after which no further open market sales are
anticipated under current draw-down projections, the BLM estimates
total cumulative helium sales would generate gross receipts of around
$630 million. Of this amount, the BLM estimates that Federal in-kind
sales would generate gross receipts of around $80 million at a sales
rate of 200 million cubic feet. At a constant sales rate of 161 million
cubic feet, Federal in-kind sales are estimated to generate around $65
million between 2014 and 2019.
______
The Chairman. Thank you very much, Mr. Spisak. And
obviously, if there are technical changes, we look forward to
that. This is always the start of the process, so I appreciate
your testimony.
Mr. Spisak. Absolutely.
The Chairman. Next we will recognize Mr. Garcia-Diaz for 5
minutes. And, Mr. Garcia-Diaz, you are recognized.
STATEMENT OF DANIEL GARCIA-DIAZ, DIRECTOR, NATIONAL RESOURCES
AND ENVIRONMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Garcia-Diaz. Thank you. Chairman Hastings, Ranking
Member Markey, and members of the Committee, I am pleased to be
here today to discuss the Bureau of Land Management's Federal
helium program.
As you know, the Federal Government has been extensively
involved in the production, storage, and use of helium since
the early part of the 20th century. With the Helium
Privatization Act of 1996, the goals of the helium program were
significantly changed, including having the Federal Government
reduce the size of the reserve, pay down the program's debt,
and exit the refined helium production business. The current
program managed by BLM focuses on storing and selling helium to
government agencies and private entities.
My remarks today summarize and update information from our
May 2010 testimony. I will discuss how the 1996 Act addressed
issues we raised in the 1990s, and 3 urgent issues facing the
helium program in the near future.
The 1996 Act caused considerable changes to the helium
program and addressed or altered GAO's prior concerns in 3
specific areas: the program's debt; Federal pricing of helium;
and alternatives to meeting the Federal need for helium.
By the early 1990s, the program's debt to the Treasury,
which paid for the purchase of helium for storage, reached
about $1.3 billion, most of which was accrued interest. The
1996 Act froze the debt at $1.4 billion with interest no longer
accruing, and required repayment of the debt. The 1996 Act also
changed the method for determining the minimum price of crude
helium. The Secretary was required to set sale prices to cover
the reserves, operating costs, and to produce an amount
sufficient to pay back the debt, plus an inflation factor.
Finally, the 1996 Act reset the program's objective,
directing Interior to stop refining helium and establish an in-
kind sales program for Federal agencies. Since 1998, Federal
agencies can purchase helium from authorized helium supply
companies. And, in return, BLM sells an equivalent amount of
crude helium to these companies at the minimum price.
Since the 1996 Act, we have identified three urgent issues
regarding the program's direction. The first issue is how the
helium program will be funded after 2013, when the debt is paid
off. The Act requires that all program revenues be returned to
the Treasury upon repayment of the program's debt. The program
relies on revenues generated by the helium sales to pay for its
day-to-day operations. As a result, the program does not
receive any new appropriated funds.
When the debt is paid off this year, as expected, it is not
clear how the operations of the helium program will be paid
for. BLM is still evaluating possible options, but it may have
to undertake an orderly shut-down of the reserves, unless the
use of program revenues is extended, or there is discretionary
funding appropriated.
The second issue is at what price should BLM sell its crude
helium. When BLM first set its price after the 1996 Act, it was
estimated to be significantly higher than market levels. But
now the reverse is true. BLM's price for crude helium is
estimated to be below market levels. BLM implemented a new
pricing system in 2011 in which sales to non-governmental
entities are charged a higher price, based on debt repayment
and other factors. While the new system results in higher
prices, it is not a market-based system. Given current market
prices, the potential for higher returns on Federal helium
exist.
Finally, the third issue is: How should the helium
remaining in storage be used after 2015? The 1996 Act required
BLM to offer for sale substantially all the helium in storage
by January 2015. While the required amounts have been offered
for sale, only 79 percent has actually been sold in recent
years. BLM will have significantly more helium in storage than
the target established in the 1996 Act. And it is uncertain at
this point how the helium still remaining in storage after 2015
will be used.
In conclusion, Mr. Chairman, there have been a number of
changes in the market for helium since the Congress passed the
Act. And now time is running out. Action will be needed to
ensure that funding authority for operating the reserve is
available beyond the current fiscal year. Otherwise, the risk
of a major disruption in the supply of helium looms in an
already-stressed market.
Further, addressing the pricing of Federal helium will
generate a fair return on government assets. And clarifying the
program's future objectives will provide direction to BLM as it
continues to serve the Nation's helium need.
Mr. Chairman, this completes my prepared statement. I would
be happy to respond to any questions you may have at this time.
[The prepared statement of Mr. Garcia-Diaz follows:]
Statement of Daniel Garcia-Diaz, Director, National Resources and
Environment, U.S. Government Accountability Office
Chairman Hastings, Ranking Member Markey, and Members of the
Committee:
I am pleased to be here today to discuss the federal helium program
currently managed by the Department of the Interior's (Interior) Bureau
of Land Management (BLM). As you know, helium is an important
nonrenewable natural resource that has a variety of uses. The federal
government uses helium for, among other things, the space program,
national security applications, and scientific research. For many of
its uses, helium has no substitute.
During the 1960s and early 1970s, to fulfill the conservation
objective of the Helium Act Amendments of 1960,\1\ Interior purchased
about 34 billion cubic feet of helium from private crude helium
producers.\2\ In the 1990s, we reported to, and testified before the
Subcommittee on Energy and Mineral Resources on Interior's management
of the federal helium program.\3\ In May 1993, we testified that
Interior had enough helium in storage to meet federal needs until at
least 2070 and that a reassessment of the objectives of the Helium Act
was needed.
Since our reports in the early 1990s, key changes have affected the
federal helium program, and a 2010 report by the National Academies'
National Research Council concluded that it is time once again to
reassess the program.\4\ We revisited our work from the 1990s, and we
raised some issues facing BLM's helium program in our May 13, 2010,
testimony before this Committee's Subcommittee on Energy and Mineral
Resources.\5\ My testimony today will describe (1) how the Helium
Privatization Act of 1996 addressed issues we raised in the 1990s and
(2) three urgent issues facing the helium program in the near future.
This testimony summarizes and updates the information presented in our
May 2010 testimony. Our May 2010 testimony was a performance audit
conducted in accordance with generally accepted government auditing
standards. A detailed description of our scope and methodology is
presented in our May 2010 testimony.\6\
Background
Helium is an inert element that occurs naturally in gaseous form
and has a variety of uses (see table 1).\7\ Helium's many uses arise
from its unique physical and chemical characteristics. For example,
helium has the lowest melting and boiling point of any element and, as
the second lightest element, gaseous helium is much lighter than air.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Certain natural gas fields contain a relatively large amount of
naturally occurring helium, which can be recovered as a secondary
product. The helium is separated from the natural gas and stored in a
concentrated form that is referred to as crude helium because it has
yet to go through the final refining process.\8\ The federal government
has a reserve of crude helium that is stored in the ground in an area
of a natural gas field that has a naturally occurring underground
structural dome near Amarillo, Texas. In addition to the federal
government's reserve of crude helium, private companies that are
connected to BLM's pipeline and pay a storage fee, are also able to
store and retrieve their own private crude helium reserves from the
same storage area.
The federal government has been extensively involved in the
production, storage, and use of helium since the early part of the
twentieth century. The federal government and private sector
cooperatively produced helium before 1925 specifically for military
uses. The Helium Act of 1925,\9\ as amended, assigned responsibility
for producing helium for federal users to Interior's Bureau of
Mines.\10\ From 1937 until 1960, the Bureau of Mines was the sole
producer of helium. The act provided that funds from helium sales be
used to finance the program by establishing a revolving fund known as
the helium production fund. Such revolving funds are used to finance a
cycle of business-type operations by charging for the sale of products
and then using the proceeds to finance their spending. In the federal
budget, this fund is referred to as the Helium Fund, and it is used to
account for the program's revenues and expenses.
The Helium Act Amendments of 1960 stipulated that the price of
federal helium cover all of the helium program's costs, including
interest on the program's debt. The 1960 act required the Secretary of
the Interior to determine a value for net capital and retained
earnings, establish this value as debt in the Helium Fund, and add
subsequent program borrowings to that debt. The program's borrowings
were authorized by subsequent appropriations acts and recorded as
outlays in the federal budget in the years in which they were expended.
In addition, the interest was added to the debt in the Helium Fund.
However, this interest is simply a paper transaction, not a government
outlay. The Bureau of Mines determined that the value of the program's
net capital and retained earnings was about $40 million in 1960.
Subsequent borrowings from the U.S. Treasury totaling about $252
million were used to purchase helium for storage. By September 30,
1991, the debt had grown to about $1.3 billion, of which more than $1
billion consisted of interest because the interest accrued faster than
the program could repay the debt.
The Helium Privatization Act of 1996 significantly changed the
objectives and functions of Interior's helium program.\11\ For example,
the 1996 act made the following key changes:
Interior was required to close all government-owned
refined helium production facilities and to terminate the
marketing of refined helium within 18 months of enactment (50
U.S.C. Sec. 167b(b),(c));
the helium program's debt was frozen as of October 1,
1995 (50 U.S.C. Sec. 167d(c));
Interior was required to offer for sale all but 600
million cubic feet of the crude helium in storage on a
straight-line basis--a depreciation method that spreads out the
cost of an asset equally over its lifetime--by January 1, 2015
(50 U.S.C. Sec. 167f(a)(1));
Interior was required to set sale prices to cover the
crude helium reserve's operating costs and to produce an amount
sufficient to repay the program's debt. The price at which
Interior sells crude helium was required to be equal to or
greater than a formula that incorporates the amount of debt to
be repaid divided by the volume of crude helium remaining in
storage, with a consumer price index adjustment (50 U.S.C.
Sec. Sec. 167d(c), 167f(a)(3)). Furthermore, when the debt is
fully paid off, the revolving Helium Fund shall be terminated
(50 U.S.C. Sec. 167d(e)(2)(B));
Interior was allowed to maintain its role in the
helium storage business (50 U.S.C. Sec. 167b(a)); and
established a modified ``in-kind'' program to meet
federal needs for helium. Rather than purchasing refined helium
directly from Interior, federal agencies were required to
purchase their major helium requirements from persons who have
entered into enforceable contracts to purchase an equivalent
amount of crude helium from Interior (50 U.S.C.
Sec. 167d(a)).\12\
As directed by Congress, the National Academies' National Research
Council reviewed the helium program and released a report in 2000 that
evaluated the changes made in the program, the effects of these changes
on the program, and several scenarios for managing the federal
government's reserve of helium in the future.\13\ Because of subsequent
changes in price and availability of helium, in 2008, the National
Research Council convened a committee to determine if the current
implementation of the helium program was having an adverse effect on
U.S. scientific, technical, biomedical, and national security users of
helium. The committee reported on these effects in early 2010 and
concluded that the current implementation of the program has adversely
affected critical users of helium and was not in the best interest of
the U.S. taxpayers or the country.
The Helium Privatization Act of 1996 Addressed or Altered Our Prior
Concerns
Since our reports in the early 1990s, the Helium Privatization Act
of 1996 has caused considerable changes to the helium program and
addressed or altered our prior concerns. In October 1992, we reported
on various aspects of the federal helium program including the helium
debt, pricing, and alternatives for meeting federal helium needs.\14\
Helium Debt
In October 1992, we recommended that Congress cancel the helium
program's debt. As of September 1991, the debt had grown to about $1.3
billion, over $1 billion of which was interest that had accrued on the
original debt principal of about $290 million. At that time, the
deadline for paying off the debt was 1995. We reported that the only
way to pay off the debt by that deadline would be to charge federal
agencies with major requirements for helium over $3,000 per thousand
cubic feet of helium, compared to the price at that time of $55. We
recommended that Congress cancel the debt in the Helium Fund because it
was no longer realistic to expect the debt to be repaid by the
statutory deadline of 1995, and because canceling the debt would not
adversely affect the federal budget as the debt consisted of outlays
that had already been appropriated and interest that was a paper
transaction. The 1996 act did not cancel the debt, as we had
recommended, but because the 1996 act effectively froze the debt at
$1.37 billion, and interest no longer accrued, BLM has been able to pay
off a large portion of its debt. As of the end of fiscal year 2012, BLM
had $44 million in debt remaining, which according to BLM officials it
expects to pay off this year (see fig. 1).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Helium Pricing
The helium debt was also a factor in setting the price of federal
helium. In 1992, GAO recognized that if the helium debt was cancelled,
Congress may wish to propose a new pricing scheme. The 1996 act did not
cancel the debt, as we had recommended, but it did require a specific
method for pricing crude helium. The initial minimum BLM selling price
for crude helium after the act was passed was almost double the price
for private crude helium at that time. However, after BLM started to
sell its crude helium, according to the method specified in the act,
the market price for crude and refined helium began to change.
According to the National Research Council, the private sector began
using the BLM crude price as a benchmark for establishing its price
and, as a result, privately sourced crude helium prices increased and
now they meet or exceed BLM's price. Increases in the price of crude
helium have also led to increases in the price of refined helium (see
fig. 2). Refined helium prices have more than tripled from 2000 through
2012 pursuant to demand trends.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Alternatives for Meeting Federal Helium Needs
In 1992, GAO recommended that Congress reassess the conservation
objectives of the helium program and consider other alternatives to
meet federal helium needs. As part of the resetting of the helium
program's objectives, the 1996 act established a revised approach for
meeting federal needs for helium. In 1998, BLM began using in-kind
sales to federal agencies. The in-kind regulations established
procedures for BLM to sell crude helium to authorized helium supply
companies and required federal agency buyers to purchase helium from
these approved suppliers.\15\ Since the in-kind program started, the
sales to federal agencies have fluctuated, primarily due to the
National Aeronautics and Space Administration's unique requirement for
large volumes of helium on a sporadic basis. Total federal in-kind
sales for fiscal year 2012 were 160.67 million cubic feet (see fig. 3).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Three Urgent Issues Facing the Helium Program
As we testified in 2010, changes in helium prices, production, and
demand have generated concerns about the future availability of helium
for the federal government and other critical purposes. The Helium
Privatization Act of 1996 does not provide a specific direction for the
helium program past 2015. As a result of these factors, in 2010, we
identified three areas of uncertainty about the program's direction
after 2015. The same three areas are even more urgent today because 3
years have passed since our 2010 testimony, and BLM's schedule for
paying off the program's debt has accelerated. Specifically, the three
urgent issues are as follows:
How will the helium program be funded after 2013? If
the helium program's debt is paid off this year, as expected,
and the revolving helium fund is terminated, it is not clear
how the operations of the helium program will be paid for.
Currently the helium program does not receive any appropriated
funds for its operations. The revenues generated by the program
go into the Helium Fund, and the program has access to those
funds to pay for its day-to-day operations. It is uncertain at
this point how the helium program's operations will be funded
after 2013. BLM is still evaluating possible options, but it
may have to undertake an orderly shutdown of the helium reserve
unless the revolving fund is not terminated or appropriated
funds are available for crude helium sales and the operations
of the reserve. When we last testified on this issue, the
estimated payoff date was 5 years away in 2015, and it was more
closely aligned with the 1996 act's requirement to sell down
the helium reserve by January 1, 2015. The debt payoff schedule
has accelerated primarily because of improved sales of the
crude helium offered for sale. As a result, BLM's helium
program will not have a funding mechanism for its continued
operation until 2015. Furthermore, because of some years of
slow sales, BLM estimates that it will need to continue helium
sales from the reserve until sometime between 2018 and 2020 to
reach the 1996 act's requirement to draw down to 600 million
cubic feet.
At what price should BLM sell its crude helium? Since
the Helium Privatization Act of 1996 was passed, BLM has set
the price for federal crude helium at the minimum price
required by the act. However, because federal crude helium
reserves provide a major supply of crude helium, we expect
BLM's prices will continue to affect private industry market
prices for crude and refined helium. When BLM first set its
price after the 1996 act, its price was estimated to be
significantly higher than the market price, but now the reverse
is true--BLM's price for crude helium is estimated to be at or
below the market price for refined helium. The 1996 act, like
the Helium Act Amendments of 1960 before it, tied the price to
the program's operating expenses and debt. If the debt is paid
off in 2013, as projected, the debt will no longer be a factor
in setting helium prices. BLM officials told us that the 1996
act sets a minimum selling price and that the Secretary of the
Interior has the discretion to set a higher price. In response
to a recommendation in the National Research Council's 2010
report, beginning in fiscal year 2011, BLM implemented a new
two-tiered pricing system. Under the new pricing system, in-
kind sales involving federal agencies continued to be based on
the minimum selling price set in the 1996 act, while other
sales to nongovernmental entities are charged a higher price
based on debt repayment and cost recovery factors.\16\ The new
pricing system, however, is still not a market-based pricing
system. In November 2012, Interior's Office of Inspector
General recommended that BLM implement a new helium pricing
process by the end of 2013 to ensure a fair return on the sale
of helium.\17\
How should the helium remaining in storage after 2015
be used? The Helium Privatization Act of 1996 required BLM to
offer for sale substantially all of the helium in storage by
January 1, 2015. While the required amounts have been offered
for sale, only 79 percent of the amounts offered for sale have
actually been sold (see table 2). BLM will likely still have
significantly more crude helium in storage than the 600 million
cubic feet required by the 1996 act. As of September 30, 2012,
there were 11.44 billion cubic feet of conservation helium in
storage.\18\ According to the 2010 report by the National
Academies' National Research Council, the United States could
become a net importer of helium within the next 7 to 12 years,
and the principal new sources of helium will be in the Middle
East and Russia. Given these circumstances, the National
Academies' report recommended that Congress may want to
reevaluate how the domestic crude helium reserve is used or
conserved. It is uncertain at this point how the helium still
remaining in storage after January 1, 2015, will be used.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
In conclusion, Mr. Chairman, there have been a number of
changes in the market for helium since Congress passed the Helium
Privatization Act of 1996. As the deadline for the required actions to
be taken under this act approaches, Congress may need to address some
unresolved issues such as how the helium program will operate once the
Helium Fund expires at the end of this year, how to set the price for
the helium owned by the federal government, and how to use the
remaining helium in storage.
Chairman Hastings, Ranking Member Markey, and Members of the
Committee, this concludes my prepared statement. I would be pleased to
answer any questions that you may have at this time.
GAO Contact and Staff Acknowledgments
For further information about this testimony, please contact me at
(202) 512-3841 or [email protected]. Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page of this testimony. In addition, Jeff Malcolm (Assistant Director),
Carol Bray, Leslie Pollock, and Jeanette Soares made key contributions
to this testimony.
ENDNOTES
\1\ Pub. L. No. 86-777, 74 Stat. 918 (1960), codified as amended at 50
U.S.C. Sec. /Sec. 167-167m.
\2\ ``Crude helium'' is a gas containing approximately 50 to 85 percent
helium.
\3\ GAO, Mineral Resources: Federal Helium Purity Should Be Maintained,
GAO/RCED 92 44 (Washington, D.C.: Nov. 8, 1991); GAO, Mineral
Resources: Meeting Federal Needs for Helium, GAO/RCED 93 1
(Washington, D.C.: Oct. 30, 1992); GAO, Mineral Resources: Meeting
Federal Needs for Helium, GAO/T RCED 93 44 (Washington, D.C.: May
20, 1993); GAO, Mineral Resources: H.R. 3967 A Bill to Change How
Federal Needs For Refined Helium Are Met, GAO/T RCED 94 183
(Washington, D.C.: Apr. 19, 1994); and GAO, Terminating Federal
Helium Refining, GAO/RCED 95 252R (Washington, D.C.: Aug. 28,
1995).
\4\ National Research Council, Selling the Nation's Helium Reserve
(Washington, D.C.: National Academies Press, 2010).
\5\ GAO, Helium Program: Key Developments Since the Early 1990s and
Future Considerations, GAO 10 700T (Washington, D.C.: May 13,
2010). In addition, hearings were held in the U.S. Senate and the
House of Representatives on helium in 2012. See, Helium
Stewardship: Hearing to Receive Testimony on S. 2374, The Helium
Stewardship Act of 2012 Before the Senate Comm. on Energy and
Natural Resources, 112th Cong. (2012); and Helium: Supply Shortages
Impacting our Economy, National Defense and Manufacturing Oversight
Hearing Before the Subcomm. on Energy and Mineral Resources of the
House Comm. on Natural Resources, 112th Cong. (2012).
\6\ GAO 10 700T.
\7\ Helium in this statement refers to helium-4, the most abundant
naturally occurring helium isotope. Helium-3, which has its own
supply and demand issues, is not the focus of this statement. For
additional information on helium-3, see GAO, Technology Assessment:
NeutronDetectors: Alternatives to Using Helium-3, GAO 11 753
(Washington, D.C.: Sept. 29, 2011), and GAO, Managing Critical
Isotopes: Weaknesses in DOE's Management of Helium-3 Delayed the
Federal Response to a Critical Supply Shortage, GAO 11 472
(Washington, D.C.: May 12,2011).
\8\ Refined helium has a varying purity of 99.99 percent to 99.9999
percent helium.
\9\ Pub. L. No. 68-544, 43 Stat. 1110 (1925) (originally codified at 50
U.S.C. Sec. Sec. 161-166 and currently codified as amended at 50
U.S.C. Sec. Sec. 167-167m).
\10\ The Bureau of Mines was established in 1910 and abolished in 1996.
The helium program was transferred to BLM.
\11\ Pub. L. No. 104-273, 110 Stat. 3315 (1996), codified at 50 U.S.C.
Sec. Sec. 167-167m.
\12\ The term ``person'' means any individual, corporation,
partnership, firm, association, trust, estate, public or private
institution, or state or political subdivision thereof. 50 U.S.C.
Sec. 167(2).
\13\ National Research Council, The Impact of Selling the Federal
Helium Reserve (Washington, D.C.: National Academy Press, 2000).
\14\ GAO/RCED 93 1
\15\ 43 CFR Part 3195.
\16\ According to BLM officials, federal agencies must negotiate their
own purchasing contacts directly with an authorized helium supply
company. BLM does not track the price negotiated andpaid by federal
agencies. The authorized helium supply companies are required to
purchase the same amount of helium, by volume, as sold to federal
agencies. The price that the companies pay to buy the crude helium
from BLM for these transactions involving federal agency sales is
the ``in-kind'' sales price.
\17\ Department of the Interior, Office of Inspector General, Bureau
of Land Management's Helium Program, C-IN-MOA-0010-2011
(Washington, D.C.: Nov. 9, 2012).
\18\ According to BLM, the native natural gas in the reserve contains
an additional 2.44 billion cubic feet of helium.
______
HIGHLIGHTS
February 14, 2013
HELIUM PROGRAM
Urgent Issues Facing BLM's Storage and Sale of Helium Reserves
Why GAO Did This Study
The federal government has been extensively involved in the
production, storage, and use of helium since the early part of the
twentieth century. The federal helium program is currently managed by
the Department of the Interior's BLM. During the 1960s and early 1970s,
Interior purchased about 34 billion cubic feet of crude helium for
conservation purposes and to meet federal helium needs, such as for the
space program and scientific research. Crude helium is a gas of 50 to
85 percent helium. While some of this helium was used to meet federal
needs, most of it was retained in storage. The funds used to purchase
this helium became a debt owed by the program. BLM now sells crude
helium from the reserve, and the proceeds go into the revolving Helium
Fund, which is used to finance the program and payoff the program's
debt.
GAO reported on the management of the helium program in the 1990s
(GAO/RCED-92-44 and GAO/RCED-93-1).
Since GAO's reviews of the program in the 1990s, key changes have
affected the program, and a 2010 report by the National Academies'
National Research Council concluded that it is time to reassess the
program. GAO testified on the helium program in May 2010 (GAO-10-700T).
This testimony is an update of GAO's May 2010 testimony and discusses
(1) how the Helium Privatization Act of 1996 addressed issues raised by
GAO in the 1990s and (2) three urgent issues facing the helium program
in the near future.
GAO is not making any recommendations in this testimony.
What GAO Found
Since GAO's reports in the early 1990s, the Helium Privatization
Act of 1996 has caused considerable changes to the helium program and
addressed or altered GAO's prior concerns. In 1992, GAO reported on
various aspects of the federal helium program including the helium
debt, pricing, and alternatives for meeting federal helium needs.
Helium debt. In 1992, GAO recommended that Congress
cancel the helium program's debt since doing so would not
adversely affect the federal budget, as the debt consisted of
outlays that had already been appropriated and interest that
was a paper transaction. As of September 1991, this debt had
grown to about $1.3 billion, over $1 billion of which was
interest that had accrued on the original debt principal of
about $290 million. The 1996 act did not cancel the debt as GAO
had recommended, but it did freeze the growth of the program's
debt and, as a result, the debt should be paid off this year.
Helium pricing. The helium debt was also a factor in
setting the price of federal helium. In 1992, GAO recognized
that, if the helium debt was cancelled, Congress might need to
propose a new pricing scheme. The 1996 act requires a specific
method for pricing helium. This, along with other changes in
the supply and demand for helium, has resulted in the Bureau of
Land Management's (BLM) price to be at or below the market
price.
Alternatives for meeting federal helium needs. In
1992, GAO recommended that Congress reassess the conservation
objectives of the helium program and consider other
alternatives to meet federal helium needs. In resetting the
program's objectives, the 1996 act directed Interior to stop
refining helium and established a modified in-kind approach for
meeting federal helium needs. Agencies must purchase helium
from refiners that then purchase an equivalent amount of crude
helium from BLM.
Changes in the helium market have generated concerns about the
future availability of helium for federal and other needs. The Helium
Privatization Act of 1996 did not provide a specific direction for the
federal helium program past 2015. Three urgent issues facing the
program are as follows:
How will the helium program be funded after 2013? If
the helium program's debt is paid off this year, as expected,
the revolving Helium Fund will be terminated as required by the
1996 act. When GAO last testified on this issue, the estimated
payoff date was 5 years away in 2015. The schedule has
accelerated primarily because of improved crude helium sales.
At what price should BLM sell its helium? In the
past, the debt has been a factor in the price, and the price
has been above the market price. After 2013, the debt will be
paid off, and the current price is at or below market.
How should the helium owned by the federal government
be used? BLM's effort to sell off the excess helium in storage
will not be completed by January 1, 2015, as required by the
1996 act. As of September 30, 2012, there were 11.44 billion
cubic feet of conservation helium in storage. After BLM is
finished drawing down the reserve, some believe that the United
States could become a net importer of helium.
______
Response to questions submitted for the record by Daniel Garcia-Diaz,
Director, Natural Resources and Environment, U.S. Government
Accountability Office
Questions for the Record Submitted by Representative Hanabusa
1. What is the cost of separating crude helium from natural gas
deposits?
2. Have advances in the natural gas extraction process and/or the
crude helium separation process led to increased volumes of helium
being collected?
3. In collecting natural gas through the fracking process, do the
compounds in the fracking fluid create any kind of chemical reaction
that can alter the helium deposits of affect the helium separation
process?
GAO Response:
Unfortunately, GAO has not conducted any prior work related to the
three questions posed by Representative Hanabusa. As a result, we are
not in a position to provide responses to any of the questions above.
Questions for the Record Submitted by Representative Lowenthal
1. Since passage of the 1996 Helium Privatization Act directed the
Interior Department to sell crude helium from the Federal
Helium Reserve using a statutory pricing scheme, what is your
best estimate of the aggregate to-date revenue lost due to
sales of helium at prices below what a free market sale would
have commanded? For this estimate, please distinguish between
revenue lost based on sales to the private sector and sales to
Federal Agencies (thru in-kind sales).
2. What is your best estimate of the aggregate value of the remaining
helium in the Federal Helium Reserve? Please base your estimate
on projected market proves assuming sales from the Reserve are
sold at auctions as envisioned by H.R. 527 (until 3 billion
cubic feet remain). Please also distinguish between the value
of helium sold to the private sector and the value of helium
sold to Federal Agencies as projected based on a constant 161
million cubic feet annual Federal Agency consumption rate of
Reserve helium at the prevailing auction price.
GAO Response:
Unfortunately, GAO has not conducted any prior work related to the
two questions posed by Representative Lowenthal. As a result, we are
not in a position to provide responses to any of the questions above.
______
The Chairman. Thank you, Mr. Garcia-Diaz. I appreciate your
statement. And last, we will recognize Kimberly Elmore,
Assistant Inspector General of Audits, Inspections, and
Evaluations, at the U.S. Department of the Interior.
And you are recognized for 5 minutes.
STATEMENT OF KIMBERLY ELMORE, ASSISTANT INSPECTOR GENERAL FOR
AUDITS, INSPECTIONS, AND EVALUATIONS, U.S. DEPARTMENT OF THE
INTERIOR
Ms. Elmore. Good morning, Mr. Chairman and members of the
Committee. I am pleased to be here today to participate in this
hearing to discuss our most recent audit report dealing with
the Bureau of Land Management's helium program.
The Bureau of Land Management administers America's Federal
helium program. It oversees the national helium reserve to
ensure that a sustained supply of helium is available for
government and private-sector needs.
We had two objectives when performing our audit: to
determine whether the BLM is charging its non-governmental
customers market value prices for helium sales; and to
determine if BLM has the appropriate policies and procedures in
place to ensure sales to non-governmental customers are free
from potential fraud, waste, and mismanagement. Our audit team
concluded that BLM was not charging market prices and there
were no policies in place dealing specifically with sales to
non-governmental customers.
BLM has a current inventory of helium valued at
approximately $1 billion. The inventory is valued based on
cost, rather than market value. The Helium Privatization Act of
1996 required helium sales to be priced at a minimum to cover
operating costs and repay the debt incurred by the government
when it purchased a large inventory of helium in 1960. BLM
estimates that this debt, which is approximately $44 million,
will be paid off later this year.
Upon repayment of the debt, the helium fund will terminate,
pursuant to the 1996 law. According to BLM, this will have the
effect, absent reauthorization or other appropriation, of
ending the Department's ability to pay for continuing program
operations.
BLM officials informed us, and industry research and
newspaper articles confirm, that helium is in short supply.
Industry predictions suggest that helium prices will increase
when BLM exits the market. Approximately 90 percent of BLM's
helium sales are to non-governmental customers. These sales
equate to about 40 percent of the Nation's helium market.
Because BLM is such a large provider, they are essentially
driving the market price, which is based on cost, rather than
market value of this resource.
We found that BLM does not have the expertise needed to
identify the market value prices for its helium reserve because
of its long history selling primarily to Federal buyers, and
because of the limited number of private companies that
currently have access to the Federal Government's supply.
Without changes to the program, there is no assurance that
BLM's non-governmental helium sales will ever be made at market
value.
High technology uses have led to a rapid rise in helium
demand in recent years, making the determination of market
value for the government supply even more critical. Our audit
detailed that for each percentage point increase in value to
the helium supply, and the current value is a billion, BLM
would collect an estimated $10 million in additional helium
revenues. If the value of helium inventory were raised by 25
percent, BLM would collect an additional $250 million.
To capitalize on this opportunity, BLM needs to identify
and to charge market value for helium sales to non-governmental
purchasers. We recommended in our report that BLM should work
with the Department of the Interior's Office of Minerals
Evaluation to develop a process to identify fair market value
for the price of helium sold to non-governmental buyers.
During our audit we also found that BLM has been operating
without formal procedures for non-governmental helium sales
since it assumed responsibility for the helium program in 1996.
Establishing formal procedures not only provides for the
consistency of program operations, but also minimizes the risk
of fraud, waste, and mismanagement. BLM continues to sell
helium at prices set during the 1990s, with adjustments for
only inflation and changes in the program's operating costs.
There is no assurance that BLM's process reflects the
market value of helium, which has increased dramatically in the
private sector, as changes in technology have led to new and
increasing uses for the resource. We strongly believe BLM
should take this opportunity to determine and obtain fair-
market value for its helium inventory. In doing so, BLM would
help to ensure that government receives an appropriate return
for the sale of this significant natural resource.
Mr. Chairman, thank you for the opportunity to testify
today. I am happy to answer any questions you or any members of
the Committee may have.
[The prepared statement of Ms. Elmore follows:]
Statement of Kimberly Elmore, Assistant Inspector General for Audits,
Inspections, and Evaluations, Office of Inspector General, U.S.
Department of the Interior
Good Morning, Mr. Chairman, and members of the Committee. My name
is Kimberly Elmore. I am the Assistant Inspector General for Audits,
Inspections and Evaluations at the Department of the Interior's Office
of Inspector General. I am pleased to be here today to participate in
this hearing to discuss our most recent audit report dealing with the
Bureau of Land Management's Helium Program.
The Bureau of Land Management (BLM) administers America's Federal
Helium Program. It oversees the National Helium Reserve to ensure that
a sustained supply of helium is available for Government and private
sector needs. Helium is an odorless gas found with other gasses in
pockets beneath the Earth's surface. It is also a nonrenewable natural
resource that has a variety of uses. Helium is essential to the high-
tech manufacturing of fiber optic cables and the manufacturing of
computer chips. It is used in biological research, deep sea diving,
high-speed welding, weapons development, and plays a prominent role in
medical imaging.
We had two objectives when performing our audit: to determine
whether the BLM is charging its non-governmental customers market value
prices for its helium sales, and to determine if BLM has the
appropriate policies and procedures in place to ensure sales to non-
governmental customers are free from potential fraud, waste and
mismanagement. Our audit team concluded that BLM was not charging
market value prices and that there were no policies in place dealing
specifically with sales to non-governmental customers.
BLM has a current inventory of helium valued at approximately $1
billion. The inventory is valued based on costs rather than market
value. The Helium Privatization Act of 1996 required helium sales to be
priced, at a minimum, to cover operating costs and repay the debt
incurred by the Government when it purchased a large inventory of
helium in 1960. BLM estimates that this debt, which is approximately
$44 million, will be paid off in 2013. Upon repayment of the debt, the
helium fund will terminate, pursuant to the 1996 law. According to BLM,
this will have the effect (absent reauthorization of the fund or other
appropriations action) of ending the Department's ability to pay for
continuing program operations. We believe, under current market
conditions, BLM's remaining helium inventory is worth considerably more
than its current $1 billion valuation, and if the program continues,
sales to non-governmental purchasers will continue.
BLM officials informed us, and industry, research and newspaper
articles confirm, that helium is in short supply. Industry predictions
suggest that helium prices will increase when BLM exits the market. A
2011 international industry article (``Tight Supply Reins In The
Worldwide Helium Market,'' CryoGas International, October 2011)
reported that non-governmental helium producers have been increasing
the price of helium at rates nearly three times greater than BLM over
the past decade, and the article predicts prices will continue rising
at double-digit annual rates over the next several years.
Approximately 90 percent of BLM's helium sales are to non-
governmental customers. These sales equate to about 40 percent of the
Nation's helium market. Because BLM is such a large provider, they are
essentially driving the market price, which is based on costs rather
than market value of the resource. We found that BLM does not have the
expertise needed to identify market value prices for its helium reserve
because of its long history of selling helium primarily to Federal
buyers and because of the limited number of private companies that
currently have access to the Federal Government's helium supply.
Without changes to the program, there is no assurance that BLM's non-
governmental helium sales will ever be made at market value. High-
technology uses have led to a rapid rise in helium demand in recent
years, making the determination of market value for the Government's
supply more critical. In 2010, a National Academy of Sciences study
concluded that the enormous BLM sales volumes were controlling prices
worldwide, giving no assurance that BML's helium price had any
relationship to market value. Our audit found that for each percentage
point increase in value to the helium supply, (the current inventory is
valued at $ 1 billion), BLM would collect an estimated $10 million in
additional helium revenues. If the value of the helium inventory were
raised by 25 percent, BLM would collect an additional $250 million. To
capitalize on this opportunity, BLM needs to identify and to charge
market value for all helium sales to non-governmental purchasers.
We recommended in our report that BLM should work with the
Department of the Interior's Office of Minerals Evaluation (OME) to
develop a process to identify the fair market value price of helium
sold to non-governmental buyers. In their response to our report, BLM
officials concurred with the recommendation and stated that they had
begun to work with OME. The response detailed that they have developed
several options for determining a new and fair pricing of sales to non-
governmental buyers.
During our audit we also found that BLM has been operating without
formal procedures for non-governmental helium sales since it assumed
responsibility for the helium program in 1996. Establishing formal
procedures not only provides for consistency in program operations, but
also creates a baseline for internal controls. Without proper internal
controls in place, the risk of fraud, waste and mismanagement is
increased.
The Department of the Interior has a long history of selling helium
primarily to Federal buyers; this is no longer the case, however. We
recommended that BLM prepare and implement comprehensive procedures for
managing its helium sales to non-governmental buyers. BLM officials
agreed with our recommendation and have reported they are in the
process of developing a comprehensive manual.
Our report provides highlights of the history of Government helium
sales and provides recommendations that, if implemented, will help
obtain fair market value from future sales. Legislation passed during
the 1990's authorized that the Government's sale of the helium
inventory be concluded by 2015, with the exception of a small reserve
maintained for Federal purposes. Due to complications with determining
fair market value for these reserves, BLM continues to sell its helium
at prices set during the 1990's with adjustments only for inflation and
changes in the programs operating costs. There is no assurance that
BLM's process reflects the market value of helium, which has increased
dramatically in the private sector as changes in technology have led to
new and increasing uses for the resource. We strongly believe BLM
should take the opportunity to determine and obtain market value for
its helium inventory. In so doing, BLM would help to ensure that the
Government receives an appropriate return for the sale of this
significant natural resource.
Mr. Chairman, thank you for the opportunity to testify today. I am
happy to answer any questions you or members of the Committee may have.
______
Response to questions submitted for the record by Kimberly Elmore,
Assistant Inspector General for Audits, Inspections, and Evaluations,
Office of Inspector General, U.S. Department of the Interior
Questions from Congresswoman Hanabusa
1. What is the cost of separating crude helium from natural gas
deposits?
Helium is a by-product of natural gas production. As described by
the Bureau of Land Management (BLM)--
``When natural gas is processed, various impurities such as
water vapor, carbon dioxide, and helium can be removed. This
processing is required to make the natural gas meet various
pipeline standards for transport and sale. If there is enough
helium in the gas stream (usually about 0.3 percent or
greater), special processing can be added to further extract
and concentrate the helium and make it ready for sale.''
This threshold of ``0.3 percent'' is a general guideline for the
conditions under which producing (rather than flaring or venting)
helium from a natural gas field might be considered economically
viable. There are, however, many additional factors to be considered.
Such factors include not only the geologic characteristics of the gas
field and engineering characteristics of the production operation, but
also: the cost and availability of transportation to refiners,
distributors, and consumers; the local or regional demand for the
commodity; and considerations of the quality (purity) of the helium.
These factors are highly variable.
We did not gather specific data regarding the costs of separating
crude helium from natural gas deposits, but note generally that higher
market prices (driven by increasing demand) coupled with technological
improvement should lead, over time, to increased production from
natural gas deposits--whether from public or private lands. As stated
by BLM--
``[With] advances in natural gas extraction and liquification
[sic] technology, helium extraction and processing is no longer
a cost intensive process; in other words, it is not necessary
that helium occur in concentrations of 0.3% or more to be
economical for production. Helium could occur in very low
concentrations and still be processed as an economical product
for marketing and sales. Also, the high market price of natural
gas and natural gas byproducts, such as nitrogen and helium, is
a good incentive for exploration of new gasfields [sic] and the
production of helium among other gases. The high market prices
are a driving force for increased exploration and re-evaluating
reserve estimates.''
2. Have advances in the natural gas extraction process and/or the
crude helium separation process led to increased volumes of
helium being collected?
The latest data available from the U.S. Geological Survey (USGS)
and BLM indicate that overall helium production (including both
``crude'' and ``pure'' helium) has held to a range between 12,000 and
13,500 metric tons per year, from 2005 to 2011. As we indicated in our
audit report, approximately 40% of U.S. supply comes from the BLM
Helium program. BLM staff have indicated that ExxonMobil provides
approximately 20% of domestic supply (from federal lands in Wyoming).
We do expect that the combination of increasing demand, improved
technology, and market-based pricing will lead to increased production.
We have not attempted to forecast, however, the rate of such growth.
USGS reports that a number of new helium plants, in the U.S. and
abroad, are planned through 2018. As one example of interest in
expanding production within the U.S., Denbury Resources recently
acquired the rights to produce federal helium from Riley Ridge,
Wyoming, and estimate proved reserves of between 8.9 Bcf (federal) and
12.0 Bcf (including surrounding acreage) at a concentration of 0.6%.
Helium producers operating on federal lands generally pay a royalty of
\1/8\ (12.5 percent).
3. In collecting natural gas through the fracking process, do the
compounds in the fracking fluid create any kind of chemical
reaction that can alter the helium deposits or affect the
helium separation process?
This particular question is beyond our scientific/technical
expertise, and not a question we have examined with BLM. We would
expect BLM to consider implementing safeguards in their environmental
analysis, permitting, and monitoring and enforcement processes if there
is risk that industry practices such as hydraulic fracturing pose a
conservation concern with respect to the quality of, or ability to
produce, helium resources.
Questions from Congressman Alan Lowenthal
1. In your prepared testimony, you state that ``. . . BLM's remaining
helium inventory is worth considerably more than its current $1
billion dollar valuation . . .'' What is your best estimate of
the aggregate value of the remaining helium in the Federal
Helium Reserve? Please base your estimate on projected market
prices assuming sales from the Reserve are sold at auctions as
envisioned by H.R. 527 (until 3 billion cubic feet remain).
Please also distinguish between the value of helium sold to the
private sector and the value of helium sold to Federal Agencies
as projected based on a constant 161 million cubic feet annual
Federal Agency consumption rate of Reserve helium at the
prevailing auction price.
Responsibly estimating the value of the Federal Helium Reserve
would require access to market data that neither we nor the Department
have available. Further, even informal valuation is complicated by
BLM's dominant market position. We are pleased that, as we recommended
in our audit report, BLM is cooperating with the Department's Office of
Minerals Evaluation (OME). Procurement processes are underway, we are
told, for a ``Crude Helium Pricing Methodology Project''. The results
of this effort are intended to inform the Department on approaches to
valuing the Helium Reserve and, in turn, BLM's establishment of helium
prices for 2014.
Given the limited access, in practical terms, to the Helium Reserve
we are uncertain that conventional ``sealed-bid'' auctions are
necessarily the best means to achieving market value. Four refiners on
an existing pipeline network constitute, in essence, a ``closed
market'' with considerable cost implications for any prospective new
competitors. We suggest that some discretion be given for the
Department to consider alternative means, and to protect the
Department's ability to set appropriate minimum (``reserve'') prices
should auctions be deemed the most appropriate course.
2. Since passage of the 1996 Helium Privatization Act directed the
Interior Department to sell crude helium from the Federal Helium
Reserve using a statutory pricing scheme, what is your best estimate of
the aggregate to-date revenue lost due to sales of helium at prices
below what a free market sale would have commanded? For this estimate,
please distinguish between revenue lost based on sales to the private
sector and sales to Federal Agencies (thru in-kind sales).
As with the uncertainty of current market value referred to in the
previous question, we have no past market data upon which to base an
estimate of foregone revenues. In terms of distinguishing between
conservation (nongovernmental) and in-kind (governmental) sales, we
note that there was no difference in pricing between the two sales
programs from October 1997 to September 2010. Only since October 2010
has BLM charged a higher price for its conservation crude program.
______
The Chairman. Thank you very much, and I want to thank all
of you for your testimony. I will recognize myself for 5
minutes for questioning. I just want to follow up on the
pricing, because well, all of you kind of alluded to it, but
especially the last two.
Director Garcia-Diaz, in your testimony, written testimony,
you provided a chart that shows the estimated price of
refined--I will emphasize that--``refined'' helium. And it is
significantly higher than what BLM sells crude. Now, I know
there is a difference between crude and refined. There is
obviously a processing cost. But the difference of roughly $160
per 1,000 cubic feet on the refined side and $85 that you are
selling it is a huge difference, it seems to me.
I just want to know, I guess, why BLM has not been able to
track the market prices. It's a very simple question. Is there
a reason for that?
Mr. Garcia-Diaz. Yes, I am not sure why they haven't.
Obviously, the price is going to be based on some of the
statutory requirements of how they set the minimum price for
sales to Federal agencies. And recently they have introduced a
new two-tier pricing system for non-governmental entities,
which is higher.
But at this point we haven't looked specifically at their
methodology. And so I can't explain that difference, why their
non-governmental price has not caught up with that higher
grade-A refined helium price.
The Chairman. You know, part of H.R. 527, obviously, is the
auctions, bringing in market forces. Do you see that as one way
to at least catch up to the pricing and be at market values,
then?
Mr. Garcia-Diaz. Yes. Introducing more of a market-based
approach for setting prices would make sense, and it would be a
way to get away from a formula-driven calculation of what the
crude price should be.
The Chairman. OK. Director Spisak, any comments on the
question I just asked Director Garcia-Diaz?
Mr. Spisak. Sure. I appreciate the opportunity. I think
when you are comparing, and I know you recognize there is a
difference between refined and crude, but there is a lot of
difference between refined and crude, and a lot of costs are
associated with where it is delivered, and the services that
are bundled around that. And generally, the costs associated
with the refining part at a wholesale level are much closer.
And so this, I believe, is maybe showing it in the worst light.
But that is just my belief.
The Chairman. Right. Well, there is no question about that,
and it depends how it is sold, from destination, there are a
lot of factors. But that is a big, big difference on that
chart, as you can see. You can see roughly 10 years ago, the
pricing was pretty much, you know, the same.
I just wanted to pursue that one part. That is the only
questions that I have. So I will recognize--who is next on your
side? Mr. Holt, you, as a sponsor--and thank you for
cosponsoring this legislation--you are recognized for 5
minutes.
Dr. Holt. Thank you, Mr. Chairman, and thank you for
scheduling the hearing and inviting bipartisan participation in
the bill.
Mr. Spisak, let me start with you. Over there. We are
getting taller members of the Committee here, it seems.
[Laughter.]
Dr. Holt. Apparently, a number of Federal helium users,
national labs, Federally funded researchers, and so forth, are
seeing that their deliveries have been delayed and even reduced
in amount. In some cases they have been able to deal with this,
I think, by better recycling and reuse of it. But I am trying
to understand what is behind these smaller deliveries.
Do you think it makes sense to have a better carve-out for
such users to ensure that the helium from the Federal reserve
goes first to meet the needs of NASA and the Defense Department
and the national labs and so forth?
Mr. Spisak. When the 1996 Act was passed, we developed
regulations that guided how agencies were to report their
sales. And we negotiated what are called our in-kind sales
contracts with those private companies that would supply
refined helium to meet that in-kind Federal demand. Part of
those contracts was to provide a priority to those Federal
demands, and it doesn't get much more specific than that. A
priority for the Federal uses was primarily targeted to major
users of helium, like NASA, DoD, or DOE.
And at the time, as was mentioned in previous testimony,
there was a higher price for crude helium, for a higher refined
price, for those uses. So we were cognizant to the impact on
the smaller users, by not requiring them to participate in the
in-kind program.
Going forward, as time has gone on, they have picked up and
started participating in that program. But the companies still
have a means to adjust what they deliver, based on what helium
they can acquire and refine and sell. And they have put their
customers on allocations----
Dr. Holt. But let me ask you to answer more specifically.
What is the source of these smaller deliveries? Why is that
happening now?
Mr. Spisak. Well, their----
Dr. Holt. You know, so----
Mr. Spisak. Yes.
Dr. Holt. Let's see, Argonne Lab is currently receiving
only 70 percent of its allocation; Oak Ridge only 60 percent of
its allocation, so forth.
Mr. Spisak. As the life of the field goes on, physics is
asserting itself, and the pressure in the field is going down,
the field, with the equipment installed, is not able to
maintain the same flow rates that it did earlier in its life.
And we are starting to see that now, where we are not able to
keep up with all the demands out there that may come into
place.
You talked about going forward with this Act. I believe
that we can, with the Act or some reauthorization passed,
provide a stronger provision for Federal uses, given that this
was developed for Federal----
Dr. Holt. Didn't I hear you say that there should be a
stronger provision for Federal uses?
Here is my question. We have a Federal resource here. This
is a resource owned by the taxpayer. If there is restricted
flow for reasons of physics or other reasons, should the
Federal uses, Federally funded research, the national labs,
NASA, Department of Defense, have a better-protected priority
for whatever that flow rate is?
Mr. Spisak. Well, clearly, the helium was purchased for
Federal uses, one of the tenants of it, and it would be
certainly within Congress's purview to make that a clear
priority, that that could be what is guiding, overall.
Dr. Holt. OK. Well, we have only a few seconds left. But,
Ms. Elmore, you say the BLM is not able to determine, doesn't
have the ability to determine market price. Could they get that
ability? I mean is this something we just have to work around?
Or, if we required it and they hired appropriate people, could
that be done?
Ms. Elmore. Yes, we believe that can be done. As part of
the Department of the Interior, there is an Office of Valuation
Services. And within that office there is Office of Minerals
Evaluation. And they have economists and geologists on staff
that are there to help develop market value. They were
originally stood up to make sure that when they were appraising
land, that minerals were captured and true appraisal was
formulated. So we believe that they could be that third
independent party that you discuss in the legislation to help
come up with the market value.
Dr. Holt. Thank you.
The Chairman. The time of the gentleman has expired. The
Chair recognizes the gentleman from Colorado, Mr. Lamborn.
Mr. Lamborn. Thank you, Mr. Chairman. And I am going to ask
this same question of the third panel. One question that has
been coming up recently in this debate is: Who actually owns
the helium in the reserve? There has been some question that
the process of granting allotments and specified shares has led
to the belief that people with allotments and specified shares
have an ownership interest in the helium in the reserve.
Can you pin down that legal ownership issue of the helium
in the reserve? That is important to know for our ongoing
course of what we do here. Any one of you. We will start with
you, Mr. Spisak.
Mr. Spisak. Sure. Basically, the helium starts as Federal
helium in place. As sales are made, we basically, on a piece of
paper, a bookkeeping transfer of helium from the Federal
account to the private account. And that happens each year with
the sales. Over the last several years there is roughly a
little over $1 billion cubic feet of private helium in the
reserve. And that changes every day, as helium is redelivered.
But the majority of it is Federal helium. But as it comes out
of the ground it is redelivered as private helium.
Mr. Lamborn. Do either of you two want to add to that?
Mr. Garcia-Diaz. No. My understanding would be similar to
that.
Mr. Lamborn. OK.
Ms. Elmore. I agree. I don't have any comment to add.
Mr. Lamborn. OK. So at the time of sale, and after it
leaves the ground, is that what you are saying, Mr. Spisak?
Then it becomes the property of the buyer?
Mr. Spisak. When the sale is made and the payment is
completed, we will transfer it from the government account to
the private account. But as it is produced and goes up the
pipeline, it is being redelivered as privately owned helium.
Mr. Lamborn. OK. All right, thank you. It is still a
complicated system.
Inspector General Elmore, your testimony states that the
BLM has been operating without formal procedures for non-
governmental helium sales, and that there are not the proper
controls in place to provide for operational consistency, and
to reduce the risk of fraud and waste. What can be done to
ensure that does not continue? And does BLM have the tools
needed to deal with the helium companies, and in an impartial
manner, so as to get the best deal for the taxpayers?
Ms. Elmore. I believe that good procedures are good
business. And in response to our report, BLM has responded that
they have already begun improving their procedures and
documenting their policies and their operating procedures.
What we pointed out to them is that if you don't have good
procedures documented, you can't do your risk assessment well.
You have got to make sure this money is tracked, and you want
to make sure that it is not misused. You want to know that it
is accounted for. And you want to make sure that you have good
separation of duties. So, by documenting all their procedures
and, yes, they can do that, I think it will really strengthen
their program for the sales of 90 percent of their helium.
Mr. Lamborn. So you are recommending better documentation.
Ms. Elmore. Yes.
Mr. Lamborn. Complete, thorough, and accurate
documentation.
Ms. Elmore. Yes, I am.
Mr. Lamborn. And will that get us to the point that we need
to under the current system, apart from legislation, but a
current system or in the future, as well, to be where we need
to be for the ultimate protection of the taxpayers?
Ms. Elmore. Yes, I do. I think, under either system, their
policies and procedures should be documented.
Mr. Lamborn. OK. All right, thank you, Mr. Chairman. I
yield back.
The Chairman. I thank the gentleman, and I recognize the
distinguished Ranking Member, Mr. Markey.
Mr. Markey. Thank you, Mr. Chairman. Mr. Spisak, one of the
central recommendations from the National Academy of Sciences
in 2010 was ``the BLM should adopt policies that open its crude
helium sales to a broader array of buyers and make the process
of establishing the selling price of crude helium from the
Federal helium reserve more transparent.''
Do you think that the auction system created in the
legislation the Chairman and I are introducing is consistent
with the goals outlined by the National Academy of Sciences?
Mr. Spisak. Thank you. The auction system, as outlined,
certainly would be a way to make more transparent the sale of
the reserve going forward.
Mr. Markey. Ms. Elmore, do you agree?
Ms. Elmore. Yes, I agree. I think the auction process will
bring a higher rate, and it will open up more bidders, and open
up the market to more people. So I think it is a great idea.
Mr. Markey. And Mr. Garcia-Diaz, would the legislation that
we have introduced address the three urgent issues identified
by the GAO: one, how the helium program will be funded after
2013; two, the price at which BLM sells its helium; and three,
how the helium owned by the Federal Government should be used?
Mr. Garcia-Diaz. Yes, we feel that the legislation will
address those three urgent issues.
Mr. Markey. Mr. Spisak, some have argued that the
bipartisan legislation would not help bring any new helium to
market. But the National Academy of Sciences concluded in 2010
that BLM's current system for pricing crude helium may slow
efforts to aggressively pursue alternative crude helium
sources, and negatively impact the evolution of the helium
market.
Do you agree with the NAS conclusion that if we create a
more transparent and open market for helium that better
reflects a true price, it would provide additional economic
incentives for private investment to bring new supplies of
helium online, or to develop an efficiency and conservation
measures? Do you agree with that?
Mr. Spisak. Generally. The difficulty with the helium
market is that it is a fairly small number of players. And the
pricing is generally fairly closed, and it is difficult to get
some of that information. The BLM's price being the only
published price on the market has driven a lot of those price
adjustments.
I think the objectives in the Act that you have would help
open that up, and allow more market-based pricing to come
through.
Mr. Markey. Mr. Garcia-Diaz, do you agree with what Mr.
Spisak just said?
Mr. Garcia-Diaz. Yes, I do. To the extent that you have
more transparency about price, over the long run you will have
something that is approaching more market than what we have
now.
Mr. Markey. Are we venting or flaring helium anywhere in
the United States, or in the rest of the world? Mr. Spisak?
Mr. Spisak. I don't have specifics, but I am certain that
there are projects out there where the economics are either
marginal to where helium is being lost with the natural gas, or
that the various processes haven't been put in place yet to
recover helium that is more economic. So yes, that is
happening.
Mr. Markey. So you are saying that if helium prices were
higher, based upon a more open and transparent market, wouldn't
that increase the economic incentive to potentially capture the
helium that is not being captured right now?
Mr. Spisak. Raising the price of helium will make projects
more profitable, yes.
Mr. Markey. Do you agree with that?
Mr. Spisak. Yes.
Mr. Markey. Do you agree with that, Ms. Elmore?
Ms. Elmore. Yes, I do.
Mr. Markey. There are some that argue that we should just
keep the current system in place until we exhaust the BLM
supply.
Mr. Spisak, would you agree that if we don't put reforms in
place now, we could easily have even more disruption in the
helium supplies, and potentially very severe price spikes and
economic pain for those industries and for consumers down the
road?
Mr. Spisak. Well, from that question, the premise I am
assuming is that the funding issue would be fixed, but we would
still be offering helium at the same levels that we are now.
And that would set up a situation where we are promising to
deliver, through sales, more than we would be able to produce.
And that would cause significant disruptions, yes.
Mr. Markey. So, in my opinion, Adam Smith would be spinning
in his grave if he could see the way in which we were
allocating this Federal resource to four companies at below
market prices without competition. If we are going to avoid an
even larger crisis and more severe price spikes in the future,
we need to introduce some ruthless Darwinian-style competition
into the helium market in order to incentivize private market
investment.
And I thank you, Mr. Chairman and the witnesses, for this
hearing.
The Chairman. And I thank you for those statements. I am
speechless, but I am so----
[Laughter.]
Mr. Markey. Can I say that Adam Smith's most important
chapter is on monopolies.
The Chairman. Yes.
Mr. Markey. And if you want to ever read something that
will just----
The Chairman. Yes, I----
Mr. Markey [continuing]. Make your heart start to beat
faster.
The Chairman. It has been a----
Mr. Markey. Monopolies----
The Chairman. It has been a while since I have read ``The
Wealth of Nations,'' but I know you are talking about that Adam
Smith, not my colleague from Washington, so----
[Laughter.]
The Chairman. The Chair recognizes the gentleman from
Virginia, Mr. Wittman.
Dr. Wittman. Thank you, Mr. Chairman. I would like to thank
our panel members for joining us today.
Mr. Spisak, I want to address a question to you. In your
testimony you pointed out that the legislation before us today
would accomplish the original goals of the Helium Privatization
Act by creating a glide path for the sale of helium.
And I want to ask you if you could explain to us what the
repercussions would be if the BLM were to do a sale where they
would do one mass sale, single sale, where all the helium would
be sold off at one time? What potential effect would that have
on the marketplace? And is that something that is in the realm
of consideration for the BLM in putting in place dispensing
with the helium reserves?
Mr. Spisak. Well, I will answer the latter part first. We
are not considering a mass sale in that fashion.
Dr. Wittman. OK.
Mr. Spisak. Just off the top of my head, though, I think in
doing it in such a manner, you would be putting out a lot more
helium that would be able to be consumed immediately. And, very
likely, the price could be much lower.
Dr. Wittman. Right.
Mr. Spisak. Additionally, though, you could have a
speculator that might come in and might want to corner the
helium market, so to speak, and buy a whole bunch, that they
may not be equipped to deal with. So I wouldn't see that as a
viable option.
Dr. Wittman. OK. Let me ask you, too. I understand that
somebody that is trying to purchase helium but is not part of
the allocation doesn't have access to the pipeline to even
purchase it. Can you tell me why that might be?
Mr. Spisak. When we were developing some of our contract
procedures, we recognized quite some time ago that there was
more refining capacity already installed along the pipeline
than what the field would be able to redeliver. And while we
don't prohibit anybody else from installing additional
capacity, we wanted to recognize that those that were there
refining had installed a base, had a commitment in capital,
that we wanted to ensure that there was a certain amount of
helium to keep those existing plants loaded up.
Dr. Wittman. OK. How would you, in the future, for anybody
that rightfully buys helium, assure that they have access to
the pipeline?
Obviously, there are issues concerning people's access to
it if they were to buy it and how they could transport it. Can
you give us a little insight as to how that may occur?
Mr. Spisak. Well, what you have currently proposed has some
language in there about, in effect, opening up equal access to
all that have an existing refining capacity. And if that is in
place, we do have some storage contracts that are about to run
their term. And it would be a matter of renegotiating those
terms and basically opening it up to anybody that wants to
build refining capacity.
I still believe, though, a company coming in making a large
investment in a refining capacity at this stage, the barriers
to entry to those types of expenditures may preclude additional
folks from making those types of decisions.
But at the same time, as the field ages and there is lesser
volumes of helium being produced, it may be appropriate to have
a newer technology that can run and extract the helium at lower
rates that might actually be what would be required to get us
to the end.
Dr. Wittman. Yes, I think it is extraordinarily important
as we look at how to deal with dispensing with the helium
reserves, to make sure that there is indeed equal access,
regardless of who is capitalized, who is not capitalized, who
would decide to get in the marketplace. I think those things
should be secondary to making sure there is equal access. If
folks have that, then they can make their own economic
decisions about how to get in there.
And I just want to be assured that you will make sure that
happens as this process goes forward.
Mr. Spisak. That can be done.
Dr. Wittman. OK, very good.
Thank you, Mr. Chairman. With that, I yield back.
The Chairman. I thank the gentleman. And I will next
recognize a new member of the Committee, Mr. Ruiz, from
California. And if you are wondering why you are being
recognized when you are down the list, we have a protocol on
this Committee that members that are here when the gavel drops
gets preference on asking questions. And you were here. So, Mr.
Ruiz, you are recognized for 5 minutes.
[Laughter.]
Dr. Ruiz. I appreciate that. Thank you, Mr. Chairman. I am
an emergency medicine physician, and so every day that I go
into work, MRIs are a valuable resource to saving human lives.
And so I appreciate the important role that helium has played
for our patients and for all Americans throughout our country.
My question, Mr. Daniel Garcia-Diaz, can you give us an
idea of how the global helium market might react if Congress
does not pass H.R. 527, or similar legislation to extend the
life of the Federal helium reserve? And what would this mean
for high-tech manufacturing in the U.S. and researchers working
on cutting-edge applications relating to energy, national
security, and telecommunications?
Mr. Garcia-Diaz. Thank you. We haven't looked at the impact
of not passing legislation extending the program beyond the
dates in the 1996 Act. But if you look at the statistics behind
the BLM reserve, that it accounts for over 40 percent of
domestic helium and accounts for over 30 percent of
international, or the global helium consumption, it is safe to
say that it would have a very big impact if it were not
available at this moment in time. And it would cut across all
those industries that you have discussed.
Dr. Ruiz. How about you, Ms. Elmore?
Ms. Elmore. I agree. I think it is just a matter of supply
and demand. If you take that helium out of the supply, the
demand is far going to exceed the supply, and there won't be
enough.
Dr. Ruiz. This next question, Ms. Elmore. You state in your
testimony that the OIG audit found that BLM has been operating
without formal procedures for non-governmental helium sales
since it assumed responsibility for the helium program in 1996.
And you recommended that ``BLM prepare and implement
comprehensive procedures for managing its helium sales to non-
governmental buyers.''
Would transparency provisions like those included in H.R.
527 help prevent against waste, fraud, and mismanagement in the
BLM helium program?
Ms. Elmore. Yes, they will. The transparency provisions in
the draft legislation, as an auditor, we love. They will lay
out exactly what is happening, even down the minutes, the
meetings between the refiners and the BLM. So I think the
reporting procedures that were laid out add to the
transparency. They will help BLM document their regulations.
They will know what rules they have to comply with, and
everybody working in that component will know what is expected
of them.
Dr. Ruiz. Thank you very much, and thank you all for being
here. I yield my time, Mr. Chairman.
The Chairman. I thank the gentleman for his participation,
and welcome to the Committee.
Next will be Mr. Daines from Montana, also a new member of
the Committee. Welcome, and you are recognized for 5 minutes.
Mr. Daines. Thanks, Mr. Chairman. This is for Deputy
Director Spisak. Do you or somebody in the BLM do any type of
price tracking to determine at what price the refined helium is
being sold at after the crude is purchased at the significantly
below-market-value prices? It goes back to that chart that we
saw earlier.
Mr. Spisak. A limited amount. When we were part of the
Bureau of Mines, we had a much larger organization that kept up
with helium uses and prices and such. When the Bureau of Mines
went away in 1995, a lot of that capability left also.
Mr. Daines. Right. And I guess maybe you could elaborate on
the limited amount, what----
Mr. Spisak. There is a USGS minerals commodity report that
essentially the folks in Amarillo complete through a memorandum
of understanding for USGS.
Mr. Daines. All right. And then maybe, finally, if we look
back, say over the last year, for example, would you have some
kind of reporting that would show that gap?
Mr. Spisak. We just don't have that type of information.
Mr. Daines. OK. And one other question, just back on the
supply and demand, the nature of helium. In your testimony you
say that you support the goals of H.R. 527 and recognize the
importance of keeping the reserve open. However, I think one
day the reservoir will dry up and it will be time for us to
pursue other ways to obtain helium.
Are there other domestic sources of helium besides this
reservoir?
Mr. Spisak. There are several. And several of those are
producing from Federal mineral state. And part of the standard
BLM oil and gas lease withholds does not transfer the helium,
the contained helium in that gas.
And typically what happens is, as example, some of the
plants in Southwest Wyoming that have a lot of Federal mineral
state, we enter into a contract that authorizes the company to
recover that helium, and when they recover it, that they
provide it, in effect, like a royalty to the government for
that sale.
Mr. Daines. And last follow-up and then I will yield the
rest of my time back.
Do you recognize access to natural gas reserves on public
lands as a potential obstacle to natural gas development, and
therefore, the capture of crude helium?
Mr. Spisak. The development of natural gas being----
Mr. Daines. On public lands, yes. I represent the State of
Montana. In terms of natural gas development, of which helium
is a byproduct there.
Mr. Spisak. I think the two are related, certainly, because
helium will be found in all natural gas. It might be down to
the parts-per-billion range in some, but it is really the rule
of thumb, if there is three-tenths of a percent of helium in
the natural gas, then it could be recovered.
Certainly with the natural gas liquids processes, that
threshold is lower. But there has to be a certain amount in
there for the economics to work out.
Mr. Daines. Mr. Chairman, I yield back the rest of my time.
The Chairman. I thank the gentleman for his questions, and
I recognize the gentlelady from Hawaii, Ms. Hanabusa.
Ms. Hanabusa. Thank you, Mr. Chairman. Mr. Chairman, I
would like to yield my time to the Ranking Member of the
Subcommittee of Energy and Mineral Resources. Thank you.
Dr. Holt. I thank my friend and colleague. I would like to
pursue the kinds of questions that Mr. Daines and others have
been asking. Much of the discussion about supply and demand
curve is whether the price is fair. But I wanted to look at it
from the other point of view of how can we ensure supply.
It seems to me that the history shows that if it hadn't
been for some far-sighted people years ago, we would be in
short supply of helium now. And I wanted to pursue that,
understand really what happened back in the 1960s, and what is
happening in the world at large now.
So, Mr. Spisak, let me start with you. How dependent is the
helium production on the market price? Now, I realize maybe
asking the BLM, that is asking the wrong person, but we have to
get this somehow. To what extent would a free-market-based
pricing system, auction or otherwise, ensure adequate supply?
Mr. Spisak. It will be a step in the right direction.
However, natural gas production, which the helium production is
dependent on, is a much bigger enterprise. And the small amount
that the helium brings is sometimes maybe seen as a hindrance.
And it may not be put forth to recover. So, certainly, as the
price goes up and as time goes on, the price goes up further,
there will be more incentive to put up with the hindrance and
recover that helium.
Dr. Holt. The reason I ask the question is back in 1960
most of the uses of helium today were not foreseen. And I
imagine much of the demand for helium in coming decades will
not be foreseen today. And so, today's market may not lead us
to set aside helium. Now, it may be that there will be enough
natural gas in future years that we can get it, but some of the
reserves of natural gas out there, I think, are not so rich in
helium.
So, let me pursue this line of questioning a little
further. Maybe this is for Mr. Diaz. What are other countries
doing? And for the privately produced helium here, how much is
production determined by the price today?
So, let me ask first Mr. Spisak, maybe you have said all
you have to say on that subject, and then turn to Mr. Diaz.
Mr. Spisak. Well, I think you are right about back in the
1960s. I think we might live in quite a different world if
helium wasn't around as such to allow for some of the research
and things like that that have gone on. But, I have a feeling I
know what Daniel is going to say, but I think your panel three
with some of the sources will have maybe a really good idea, or
maybe convey some of the information about international
supplies coming on, and the effects on price.
Dr. Holt. Mr. Diaz, in the minute that remains?
Mr. Garcia-Diaz. Yes, right now, based on some of the
information from USGS and BLM, there is kind of a supply
response happening. But it is slow in the making. So some added
production is being developed in other countries, but it will
be a while before those come online.
There is a greater demand in application for helium. We
don't know what it will be 10 or 20 years from now, that is
true. But right now there are a lot of industries that are
relying on it for manufacturing. The space industry will still
continue using it. The Department of Defense will still be
using it. So----
Dr. Holt. If we let the stockpile be depleted completely,
might we run into some supply problems as new uses emerge? This
has to be a very quick answer, I think.
Mr. Garcia-Diaz. We haven't done work to forecast that, to
understand if we would deplete it and be in a bad situation.
Dr. Holt. Thank you.
The Chairman. The time of the gentleman has expired. I
recognize the gentlelady from Wyoming, Ms. Lummis.
Ms. Lummis. Thank you, Mr. Chairman. Mr. Spisak, does the
BLM have the resources and the technical expertise to
administer an auction like the one that is described in the
Hastings bill?
Mr. Spisak. Yes, I believe we do.
Ms. Lummis. For all the witnesses, we know that refiners
have said that the Secretary always has had the authority to
increase the price of helium under the current way it does
business. So the new system of setting a fair-market price is
not necessarily warranted. Can you explain why the Secretary
did not increase prices over the minimum price?
Mr. Spisak. Over the history of the program there is a lot
of interaction with the BLM and industry. And at various times
during that history there has been interaction with Congress
and others about how we manage the program. Part of that came
through in the 1996 Act.
Ms. Lummis. OK.
Mr. Spisak. I would say, generally speaking, we are going
to take an approach of a path to least resistance when it comes
to pricing. It started out being much higher, and then we
started having those shortages in 2004, 2005, and 2006. That
led us to having the academies refreshen the study and they
came up with, basically, almost a 90 or almost a 180 degree
turn from the 2000 report. And so, we tend to move slower than
many would like. But that was part of the process that we went
through to start raising that price.
We have talked about a fair-market price. That has always
been a very difficult thing to determine.
Ms. Lummis. Right.
Mr. Spisak. And it is easy to say, ``Charge a fair-market
price.'' But the data is not there, just to pick out that
number. If it was easy, it would have been done already.
Ms. Lummis. Another follow-up question for you, Mr. Spisak.
How confident are you that, using the tools that are prescribed
in this piece of legislation, it is the confidential survey and
the market analysis, that you could reach a minimum price that
is more relative to market price?
Mr. Spisak. Well, using the minimum price, and we are kind
of going down that path already with the Inspector General
recommendations, and we are working with our Office of Mineral
Evaluations and, actually, my understanding is they are going
to contract that out, that evaluation, because of a lot of the
proprietary information that you are talking about.
We believe we will be able to pull together that
information and, using the auction mechanism and the minimum
pricing together, we will be able to meet the objectives.
Ms. Lummis. Well, Mr. Chairman, a couple more questions
because your answer just led me into my next question.
Do you envision that this minimum price would be
confidential? In other words, would the minimum price that you
establish be published as the starting bid? Or would it be held
back and companies would bid blindly, like they do under the
co-lease program?
Mr. Spisak. Given the concerns of transparency that have
been conveyed in the bill, I would expect that we would publish
the minimum price, and that would be posted.
Ms. Lummis. Oh, OK. Couple more questions, Mr. Spisak.
Written testimony offered by the refiners indicates their
belief that the BLM is under contract to offer access to the
helium extraction unit and the pipeline. Do you share that
opinion? This is with regard to the current system of
allotment, granting three refiners near-exclusive access to the
Federal helium stockpile.
Mr. Spisak. Well, the storage contracts that I mentioned,
and I have seen in some of the testimony they are referring to,
go into 2015. Given the delay that is built into the Act as
written would have a buffer time that would get us close to
that point. I believe we would be able to thread that needle,
as it were, to close that out and move forward post-2015, with
a more open process with an auction.
Ms. Lummis. Now, with regard to the contract, in your
opinion does that contract terminate with the end of the debt
repayment program?
Mr. Spisak. No, the storage contracts were in place
starting in 1995, and were actually a follow-on from previous
storage contracts. They don't really tie to the helium debt at
all.
Ms. Lummis. OK. Mr. Chairman, thank you. I yield back.
The Chairman. I thank the gentlelady for her questions, and
I thank all of the Members for their questions. In particular,
I want to thank the first panel. I thought your testimony was
very enlightening, and it certainly is in line with the intent
of those of us that have cosponsored the bill.
So, with that, I will dismiss the first panel and, if we
could, call up the second panel: Mr. Rodney Morgan, Brad
Boersen, Gary Page, and Dr. Sam Aronson.
Thank you all for being here. I am going to introduce the
panel out of order, because I understand that Mr. Morgan is a
constituent of Mr. Labrador, and he wants to be here for the
proper introduction. So I don't know if that was prearranged or
not, Mr. Morgan, but you are on the hot seat, anyway.
We have, starting on my right, we have Dr. Sam Aronson,
Vice President of APS Physics. Next to him we have Gary Page,
President of Helium and Balloons Across America. And then we
have Mr. Brad Boersen, Director of Business Strategy of the
Optical Fiber and Cable Telecommunications Business Group of
Corning, Incorporated.
And I see that Mr. Labrador isn't here, so he has missed
out on this, and Mr. Morgan, you have missed out on it,
apparently. You are Vice President of Procurement of Micron
Technology out of Boise, Idaho.
Now we will go in order. And, Mr. Morgan, you are
recognized for 5 minutes.
But before I recognize you, I am sure you heard what I said
to the previous panel. The full statement that we ask of you
will appear in its entirety in the record. But I would ask you
to keep your oral statements within the 5-minute mark. And
again, when the green light is on, you are doing well. When the
yellow light comes on, it means there is 1 minute left. And if
the red light comes on, it means your time is expired.
So, Mr. Morgan, recognize you for 5 minutes.
STATEMENT OF RODNEY MORGAN, VICE PRESIDENT OF PROCUREMENT,
MICRON TECHNOLOGY
Mr. Morgan. Mr. Chairman, members of the Committee, thank
you for the opportunity to testify on H.R. 527, The Responsible
Helium Administration and Stewardship Act. On behalf of Micron
and the Semiconductor Industry Association, our industry trade
association, I am here to lend my voice to the growing chorus
of manufacturers concerned about the eminent closure of the
Federal helium reserve. H.R. 527 is important legislation for
the semiconductor industry. It will ensure the continued
operation of sales of helium from the Federal helium reserve,
providing a stable and secure supply of critical material for
the next few years.
Founded nearly 35 years ago in Boise, Idaho, Micron has
grown into a company of 25,000 people, and a global leader in
the computer memory technology arena. In fact, we are the only
pure play memory manufacturer based in the United States. The
semiconductor industry is a signature American industry, and
one in which we still lead. It is a key driver of the economy,
employs a quarter-million people, and is one of the country's
top exporters. Helium is just one of a number of gases used to
make memory chips, but it is absolutely vital.
Put simply, without helium, we cannot operate. Helium's
unique physical and chemical properties make it critical to the
manufacture of semiconductors. Some principal uses are as
carrier gas for deposition processes, as dilutant in plasma
edge technologies, and in some specialized ways for cooling
applications.
In some applications, alternatives to helium, such as argon
or nitrogen, may be used. But this typically results in a
decrease in manufacturing output. Micron has been working to
develop alternatives to helium, but for some processes we have
been unable to find another option. Alternatives could also
result in costly, unproven retrofits to tools used that make
our products.
For all its great properties, helium is really difficult to
manage. Because it is a small molecule, it quickly leaks out of
containers. Due to the problems associated with storing helium,
we are dependent on regular deliveries. A delay of even a few
days could slow production at a semiconductor facility. A
significant delay could idle a plant entirely.
It is worth noting we are already facing supply shortages.
In fact, for most of the past year, we have been receiving a
lower percentage of helium for which we have contracted. Again,
Micron is not unique in this situation. All users of helium
have had to struggle through reduced helium deliveries. As
everyone here today knows, the Federal helium reserve operated
by the Bureau of Land Management comprises a significant
portion of the world's helium supply.
What would happen if helium reserve were to stop making
available sale to the private entities? It is hard to say for
certain, but there is no question that it would be disruptive
to the market. If supplies were disrupted for a significant
period, it could even impact the overall economy. A significant
delay might not just slow the production of computer chips, but
the computers, lifesaving medical devices, and weapons systems
they power. That is an unacceptable scenario.
Micron technology and the Semiconductor Industry
Association are absolutely committed to ensuring a stable,
secure supply of helium. H.R. 527, Responsible Helium
Administration and Stewardship Act, represents a significant
step forward in addressing the concerns associated with the
helium supply from the reserve. The bill provides the continued
operation of the Federal helium reserve and the sale of helium
to private entities, thereby helping to ensure a stable and
secure supply of helium in the near future. It provides price
transparency through clear reporting requirements for both the
BLM and those who purchase the helium. H.R. 527 also provides
some protection against market speculation and it provides an
ample transition period.
I should note that the auction system envisioned by the
bill would pose some uncertainty for helium users and our
practice of entering into long-term supply contracts. But we
believe the bill provides the Secretary of the Interior with
the discretion to manage those uncertainties. These concerns
should not delay the need to address this issue immediately.
H.R. 527 is important and urgently needed legislation to
address the helium supply.
We applaud Chairman Hastings, Ranking Member Markey for
their work on this bill, and we urge the full House to consider
the legislation soon.
Again, thank you for the opportunity to testify. Mr.
Chairman, I am happy to answer any questions.
[The prepared statement of Mr. Morgan follows:]
Statement of Rodney Morgan, Vice President of Procurement,
Micron Technology
Mr. Chairman, thank you for the opportunity to testify on H.R. 527,
``The Responsible Helium Administration and Stewardship Act.'' My name
is Rodney Morgan and I am the Vice President of Procurement for Micron
Technology. In this capacity I oversee all purchasing by Micron,
including critical materials like helium.
On behalf of Micron and the Semiconductor Industry Association
(SIA),\1\ our industry trade association, I am here to lend my voice to
the growing chorus of manufacturers concerned about the imminent
closure of the Federal Helium Reserve. H.R. 527 is important
legislation for the semiconductor industry. It will ensure the
continued operation of and sales of helium from the Federal Helium
Reserve, providing a stable and secure supply of a critical material
for the next few years.
---------------------------------------------------------------------------
\1\ More information on Micron is available at www.micron.com.
Additional information on SIA, including a list of members, is
available at www.sia-online.org.
---------------------------------------------------------------------------
Founded nearly 35 years ago in Boise, Idaho, Micron has grown into
a global leader in computer memory technology. In fact, we are the only
pure play memory manufacturer based in the United States. In addition
to our headquarters in Boise, we have major manufacturing operations in
Lehi, Utah, and Manassas, Virginia, as well as in Asia and in Europe.
Micron also has design and research and development facilities in
California, Texas, Colorado, and Minnesota. In all we employee more
than 25,000 people, approximately half of which are in the United
States.
The U.S. semiconductor industry is a key driver of the economy and
one of our top exports.\2\ Semiconductors are the basic building block
of all modern electronics, and every year approximately 250,000
Americans work together to produce millions of computer chips that make
smart phones, GPS, and MRI's possible. It is a signature American
industry and one in which we still the lead.
---------------------------------------------------------------------------
\2\ There are 244,800 direct jobs in the industry. SIA has also
calculated that there are 1.1M indirect jobs.
Source: calculations based on Official U.S. Government data from
the U.S. Bureau of Labor Statistics
---------------------------------------------------------------------------
Manufacturing semiconductors is an incredibly complex process. It
takes weeks and hundreds of processes to make a chip, using
sophisticated equipment and techniques developed by the world's leading
scientists and engineers.\3\ The technology is constantly evolving to
produce faster and better products. It is also an incredibly capital
intensive business. A typical semiconductor manufacturing facility is a
multibillion dollar investment. Micron typically introduces a new
product every six months. We introduced two just last week, for
instance. But for all the technology, many of the processes and
materials are fairly basic. Helium is just one of a number of gasses
used to make our memory chips, but it's absolutely vital. To put it
simply, without helium, we cannot operate. Micron is not alone in its
dependence on this crucial gas.
---------------------------------------------------------------------------
\3\ USPTO granted 913 patents to Micron in 2012, and six of top 15
U.S. companies were semiconductor companies (IBM, Qualcomm, Intel,
Broadcom, Micron, and Texas Instruments).
Source: USPTO, compiled by IFI Claims
U.S. semiconductor industry invests on average 15-20 percent of
sales in R&D. In 2011, U.S. industry invested 18 percent of total sales
(or $27 billion) in R&D Source: WSTS and IC Insights
---------------------------------------------------------------------------
Helium's unique physical and chemical properties make it critical
to the manufacture of semiconductors. Helium is inert, has a low
boiling point (4 Kelvin, near absolute zero), and high thermal
conductivity. Some principle uses of helium in the semiconductor
industry are as a carrier gas for deposition processes, as a dilutant
in plasma etch processes, and in some specialized wafer cooling
applications.
Helium is used to achieve ultra-clean manufacturing and assembly
environments that are essential for advanced semiconductor
manufacturing.\4\ According to the National Academy of Sciences,
semiconductor and optical fiber manufacturing account for 13 percent of
total helium usage.\5\ Suppliers to the industry have indicated that
semiconductor manufacturing accounts for approximately 6 percent of
helium usage. Although the semiconductor industry consumes only a small
amount of the overall quantity of helium used today, it remains a
critical, irreplaceable input into our manufacturing process.
---------------------------------------------------------------------------
\4\ ``Selling the Nation's Helium Reserve'' (2010) at pp. 63, 67.
\5\ ``Selling the Nation's Helium Reserve'' (2010) at p. 17.
---------------------------------------------------------------------------
In some applications, alternatives to helium such as argon or
nitrogen may be used, but this typically results in a decrease in
manufacturing output. Micron has been working to develop alternatives
to helium, but for some processes, we have been unable to find another
option. Alternatives could also result in costly, unproven retrofits to
the tools used to make our products.
For all its great properties, helium is really difficult to manage.
Because it is a small molecule, it quickly leaks out of containers.
Anyone who has filled a latex balloon with helium only to find it on
the ground the next day, has witnessed this. Due to the problems
associated with storing helium, we are dependent on regular deliveries
to our facilities. A delay of even a few days could slow production at
a semiconductor facility. A significant delay, could idle a plant
entirely. This possibility would result in significant costs to our
company, the industry and country as a whole.
It's worth noting that we are already facing supply shortages. In
fact, for most of the past year, we have only been receiving about 80
percent of the helium for which we have contracted. Again, Micron is
not unique in this situation. All U.S. users of helium have had to
struggle through reduced helium deliveries.
As everyone here today knows, the Federal Helium Reserve operated
by the Bureau of Land Management comprises a significant portion of the
world's helium supply. What would happen if the helium reserve were to
stop making helium available for sale to private entities? It's hard to
say for certain, but there is no question that it would be disruptive
to the market. And for reasons already mentioned, it has the potential
to be damaging to U.S. manufacturers, and the semiconductor industry in
particular. If supplies were disrupted for a significant period it
could even impact the overall economy. That may seem like a stretch,
but we should not forget the impact flooding in Thailand had on the
shipment of hard disk drives.
In November of 2011, widespread flooding in Thailand forced a
number of hard disk drive manufacturers to halt production. Fewer hard
disk drives were shipped, leading to price increases and shortages.\6\
Now imagine not just the delay of computer chips, but the computers,
life-saving medical devices, and weapons systems that they power.
That's an unacceptable scenario.
---------------------------------------------------------------------------
\6\ Thomas Fuller, ``Thailand Flooding Cripples Hard-Drive
Suppliers,'' The New York Times, 11/6/11
---------------------------------------------------------------------------
Congress must act to prevent the looming helium shortage. BLM's
authority to operate the reserve is set to expire, and it requires an
act of Congress to keep the reserve open. As such, SIA worked with a
group of helium end-users to develop a set of principles that we
thought should be included in any legislation to address the helium
supply. These were:
1. Establish a framework for secure, continuous supplies of
helium that can be implemented through long-term contracts with
suppliers.
2. Ensure price transparency.
3. Provide for mechanisms to prevent market speculation or
manipulation.
4. Adequate transition period to assure continuity in
supplies.
5. Promote increased supplies of helium in the future.
When used to evaluate H.R. 527, ``The Responsible Helium
Administration and Stewardship Act,'' we see that it is largely
consistent with the spirit of these principles. The bill provides a
framework for a secure supply. It provides price transparency through
clear reporting requirements for both the BLM and those who purchase
the helium. H.R. 527 also provides some protection against market
speculation. And it provides an ample transition period. The new
approach envisioned by the bill would pose some uncertainty for helium
users and our practice of entering into long term supply contracts, but
we believe the bill provides the Secretary of the Interior with the
discretion to manage those uncertainties. These concerns should not
delay the need to address this issue immediately.
Micron Technology and the Semiconductor Industry Association are
absolutely committed to ensuring a stable and secure supply of helium.
H.R. 527, ``The Responsible Helium Administration and Stewardship
Act,'' represents a significant step forward in addressing the concerns
associated with the helium supply from the reserve. The bill provides
for the continued operation of the Federal Helium Reserve and the sale
of helium to private entities, thereby helping to ensure a stable and
secure supply of helium in the near term. It is important and urgently
needed that the House act on legislation to address the helium supply.
We applaud Chairman Hastings, and Ranking Member Markey for their work
on this bill, and we urge the full House to consider the legislation
soon.
Again, thank you for the opportunity to testify, Mr. Chairman. I am
happy to answer any questions.
______
Response to questions submitted for the record by Rodney Morgan,
Vice President of Procurement, Micron Technology
*Micron Technology and the Semiconductor Industry Association (SIA)
is pleased to provide this response to the Question for the Record
posed by Representative Markey in a letter from the Natural Resources
Committee dated March 11, 2013. The question from Rep. Markey is as
follows:
``At current drawdown rates, in 5 to 8 years, the helium in the
BLM Reserve is anticipated to be largely depleted. Should
Congress consider steps to provide for a long-term helium
stockpile? If so, what steps do you believe Congress should
take?''
Helium is used in increasing amounts in a range of advanced
manufacturing processes, including the production of semiconductors,
but there is a global supply shortage that has resulted in Micron and
others in the semiconductor industry receiving a limited ``allocation''
of supply. While a number of new sources of helium are expected to come
online in the near future, it remains unclear whether the private
sector will be able to meet the increased need for helium by government
entities, industry and the scientific community. Therefore it is
appropriate for the federal government to maintain some form of
strategic reserve of this important material to prevent supply
disruptions in the future.
A more difficult question is the steps Congress should take to
address the long term helium needs of the industrial and scientific
community. Unfortunately, we are not aware of any simple fix to the
challenge of long-term helium supplies, but we believe that Congress
should make this issue a priority. Some of the provisions in H.R. 527
may result in an improved climate for the supply of helium. First,
establishing a market price should result in increased helium supplies
over time by encouraging more private investment. Second, the
transparency provisions set forth in Section 5 will provide information
that will allow all stakeholders to make better informed decisions
about the production, storage, and use of helium.
We also suggest that Congress should take the following steps:
Direct the appropriate federal agencies, or the National
Academies, to publish a study to address issues related to the helium
supply and uses that would include the following:
1. Techniques to improve and increase the capture of helium
from gas wells.
2. Improved methods for the conservation, recapture, and
recycling of helium in current applications.
3. Alternatives to helium in non-critical applications.
Consider appropriate incentives for increased production
and storage of helium.
We appreciate the Committee's consideration of our views.
______
The Chairman. Thank you very much, Mr. Morgan, for your
testimony. And I will recognize Mr. Boersen of the Corning
Corporation for your testimony. And you are recognized for 5
minutes.
STATEMENT OF BRAD BOERSEN, DIRECTOR, STRATEGIC PLANNING AND
ANALYSIS FOR OPTICAL FIBER, CORNING INCORPORATED
Mr. Boersen. Thank you, Chairman Hastings and Ranking
Member Markey. Corning appreciates your leadership and
bipartisan cooperation on the important issue of the Federal
helium reserve. I am Brad Boersen, Director of Business
Strategy for Corning's fiber and cable business.
Corning has been in business for over 160 years, and was
founded by the great-great-grandfather of Amo Houghton, Jr.,
who served with many of you in the House for 18 years.
Invention and innovation have been the keys to Corning's
success throughout our history. This has led to life-changing
inventions, such as optical fiber, catalytic converters, and
glass for liquid crystal displays.
While I am here representing Corning, we are also part of
an informal coalition of end users representing medical
imaging, semiconductors, fiber optics, chemicals, aerospace,
and science, and research. As a whole, these end users play a
major role in the U.S. economy. The coalition's main priority
is to ensure a secure and sufficient supply of reasonably
priced helium. And so we are focused on expeditious passage of
legislation to keep the reserve operating. Our efforts are
guided by a set of five principles, and I will say more about
them in a minute.
Let me first explain the use of helium in optical fiber
manufacturing. Corning is the world's largest producer of
optical fiber. Our competitors are in Japan, China, India,
Europe, and North America. The fiber-making process begins by
creating a glass rod, which is termed a pre-form, which is
heated close to its melting point and drawn into fiber. The
fiber is the diameter of a human hair, with dimensional
precision at the one-micron level. It is then tested at
strength at at least 100,000 pounds per square inch.
Helium is used to manufacture the pre-form, and there is
presently no substitute for helium in this portion of the
process. Corning has been concerned about the depletion of the
BLM reserves since 2007, when we first experienced helium
shortages. As we evaluated the security and availability of
supply, we projected BLM would reach its limit by about 2018,
if not sooner.
Based on this projection, Corning began to pursue more
aggressive conservation measures, such as reuse and recycling,
which we have been doing for 17 years. Additionally, we have
invested over $10 million in R&D since 2007 to reduce
consumption. And we will continue these investments.
Now, let me turn to H.R. 527. This bill represents
significant progress, and the Committee is to be commended. Let
me highlight three key principles: transition, transparency,
and supply.
First, we appreciate the inclusion of a 1-year transition
period. This provision is significant. And it is necessary for
BLM to establish the process and procedures, as well as for
refiners, distributors, and end users, to determine how best to
operate under the new system.
Second, we strongly support the transparency provisions in
section 16. Because the BLM represents a significant share of
the global helium supply, its actions have a major impact on
helium supply to all end users. The provisions will make
critical information available to manufacturers that will
improve supply chain responsiveness and efficiencies.
We believe if these provisions had been in place last
spring, Corning would not have incurred significant increased
costs as a result of allocation measures imposed on us with
limited notice.
Third, we are pleased the Committee reduced the frequency
of auction from quarterly to twice annually. We believe fewer
auctions minimize uncertainty of supply. While we would prefer
a more gradual adjustment to the process, we understand the
Committee's goal to establish a more market-driven pricing
mechanism and, therefore, maximize taxpayer revenue.
So, let me summarize the three key principles driving
Corning's focus on the helium legislation. First, supply,
supply, supply. Maintaining BLM's operation of the helium
reserve is job one. Second, transition. Business thrives on
certainty. And time to shift from the existing system to an
auction process is essential. Finally, transparency. In a
constrained market, where every molecule of helium is needed,
the more information about supply, the better. These provisions
will allow end users to react sooner and adjust more quickly to
handle disruptions.
We commend the Committee for its leadership on this issue,
and look forward to continuing to work with you. Thank you.
[The prepared statement of Mr. Boersen follows:]
Statement of Brad Boersen, Director, Business Strategy, Optical Fiber
and Cable--Telecommunications Business Group, Corning Incorporated
Introduction
Thank you Chairman Hastings and Ranking Member Markey for the
opportunity to be here today. Corning appreciates your leadership and
bipartisan cooperation on the important issue of the Federal Helium
Reserve.
I am Brad Boersen, the director of Business Strategy for Corning's
Optical Fiber and Cable business. My responsibilities include global
strategic planning, market analysis and forecasting, and business
development.
Corning Incorporated (Corning) is a world leader in specialty glass
and ceramics. We have been in business as an American manufacturer for
over 160 years. We were founded in 1851 by Amory Houghton, the great-
grandfather of Amo Houghton, Jr., who served with many of you in the
House for 18 years.
We research, develop, and manufacture a wide range of intermediate
products including optical components for telecom networks, mirror
blanks for space telescopes, and Corning Gorilla Glass, a product
which is now on more than one billion consumer electronic devices.
Corning has a long history of technology innovation and is a four-time
recipient of the President's National Medal of Technology and
Innovation. One of those four medals was awarded to Corning for its
invention of optical fiber. We remain a global leader in optical fiber
manufacturing and technology. We continue to operate the world's
largest and most advanced optical fiber manufacturing facility here in
the United States.
End-User Coalition
While I am here representing Corning, I wanted to acknowledge that
Corning also is part of an informal coalition of end-users representing
a number of important industries, including medical imaging,
semiconductors, fiber optics, chemicals, aerospace, and others that
depend on helium for essential applications. In addition, helium is an
important gas for the scientific and research community. As a whole,
these users of helium play a major role in the U.S. economy, national
security, and scientific advancement.
The Coalition's main priority is to ensure a secure and sufficient
supply of reasonably priced helium. This will not be possible without
expeditious passage of legislation to allow BLM to continue to extract
helium from the reserve. The Coalition developed a set of principles to
guide our deliberations and discussions with the Committee. This
coalition appreciates the work of the Committee and its subcommittee
staff, both majority and minority, to address our key principles.
The principles are:
1. Establish a framework for secure, continuous supplies of
helium that can be implemented through long-term contracts with
suppliers
2. Ensure transparency
3. Provide for mechanisms to prevent market speculation or
manipulation
4. Transition period to assure continuity in supplies
5. Promote increased supplies of helium in the future
I will discuss the principles in more detail later in my statement.
Optical Fiber Manufacturing
Corning is the world's largest producer of optical fiber and the
only U.S.-owned company making optical fiber. We compete with optical
fiber manufacturers in Japan, China, India, and Europe. We employ about
1,600 people in the United States in our optical fiber business.
Optical fiber changed the way the world communicates. About 1.8
billion kilometers of optical fiber are deployed worldwide, connecting
people, business communities, countries and continents. We continue to
innovate for new applications and markets.
The fiber making process begins by creating a glass rod or
``preform'', with the deposition of the materials controlled so
precisely that impurities are measured in parts per billion. The
preform is heated close to its melting point and drawn into fiber
before being coated with an acrylate protective layer (or ``coating'').
The fiber is the diameter of a human hair, with dimensional precision
at the one-micron level. It is tested for strength at 100,000 pounds
per square inch.
As the National Academy of Sciences reported, helium is used to
manufacture the preform. Helium is the only gas that prevents bubbles
from forming in the preform manufacturing step, which would render the
fiber unusable. There is presently no substitute for helium in this
process. It is also commonly used to cool the fiber as it is drawn.
We require helium in sufficient quantities and at prices that
enable us to maintain our global cost competitiveness. Given the unique
qualities of helium, it is difficult to store on site for more than 10
days. For this reason, and the global nature of our demand, we have
established strategic supplier relationships and long-term supply
agreements.
Corning has been concerned about the depletion of the Bureau of
Land Management (BLM) reserve since 2007, when we first experienced
helium shortages that required suppliers to enforce allocation
restriction on end-users. This event drove Corning to evaluate the on-
going security and long-term availability of supply. Based on this
evaluation, we projected from BLM and USGS data, that BLM will reach
the depletion limit of 3 billion cubic feet by about 2018, if not
sooner.
This realization led Corning to pursue more aggressive conservation
measures such as reuse and recycling. Corning recognized the
significance of helium reuse/recycling early on and have engaged in
this practice for over 17 years. We have invested over $10 million in
R&D since 2007 to reduce consumption. We will continue to invest
millions in R&D to further identify ways to reduce helium use or find
an acceptable substitute.
Unlike the 2007 allocation experience which was brief, the 2012
supply allocation that was imposed by suppliers in the spring remains
in effect and is expected to continue given market conditions.
The Responsible Helium Administration and Stewardship Act (H.R. 527)
The Committee has worked hard to ensure the broad range of concerns
and interests of all parties affected are addressed and we believe that
H.R. 527 represents significant progress. As mentioned above, the
coalition principles have provided a foundation to guide our assessment
of the legislation. Corning would like to focus on three of the
principles: transition, transparency and supply.
First, we appreciate the inclusion of a one-year transition period.
This transition period will allow BLM to establish the auction process
and procedures. Further, the transition will allow refiners,
distributors and end-users time to evaluate the impact on existing
contracts and determine how best to operate under the auction system.
This provision is significant.
Second, we strongly support the transparency provisions in Section
16 of the legislation. Because the BLM represents a significant share
of the global helium supply, its actions have a major impact on helium
supplies to federal, industrial, medical and other commercial users.
The provisions will provide manufacturers critical information
necessary to adjust in a timely manner to planned and unplanned
disruptions of the reserve. We believe if these provisions had been in
place last spring, Corning would not have incurred significant
increased costs as a result of allocation measures imposed on us with
limited notice. The provisions bring transparency at the production
level that will improve supply chain responses and efficiencies.
Third, we are pleased that the committee reduced the frequency of
auction from quarterly to twice annually. We believe fewer auctions
minimize uncertainty of supply. While we would prefer a more gradual
adjustment to the auction process, we understand the Committee's goal
to establish a more market-driven pricing mechanism and, therefore,
maximize the taxpayer revenue.
Manufacturers' value chains are a global web of suppliers and
customers that must be coordinated to ensure responsive delivery, often
within 24 hours. Managing these relationships and meeting the demands
of our customers, require careful planning, precision processes and
carefully negotiated contracts to ensure maximum certainty and security
of supply.
H.R. 527 establishes an auction system, which represents a change
from existing practices. Our focus, in this process, has been to ensure
that any new process adequately addresses end-users concerns about
reliable supply, as the system contemplated may prevent end-users from
knowing which refiners have available supply. Under existing practices,
end-users have established supply chains and legally binding long-term
supply agreements. These are important, because Corning, like most
manufacturers, requires refined helium.
Conclusion
For Corning, like most end-users, our top priority is ensuring that
Congress expeditiously passes legislation allowing BLM to maintain
operations of the helium reserve.
So let me summarize the three key principles driving Corning's
focus on helium legislation:
1. Supply, supply, supply. In the constrained helium market,
maintaining BLM's operation of the helium reserve is critical.
2. Transition. Business thrives on certainty and part of
ensuring adequate supply is having an adequate transition
period to shift from the existing system to an auction process.
And to have the flexibility in that process to minimize supply
disruptions.
3. Transparency. In a constrained market where every molecule
of helium is needed, the more information the better. Providing
data regarding BLM's operations, maintenance schedules and
other factors affecting supply will allow end-users to react
sooner and take more effective action to adjust and plan for
disruptions.
In conclusion, we commend the Committee for its leadership and
decisive action. We look forward to continuing our work with you to
maintain the operation of the BLM helium reserve.
Thank you.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Response to questions submitted for the record by Brad Boersen,
Director, Strategy Optical Fiber and Cable, Corning Incorporated
Corning Incorporated is pleased to provide this response to the
Question for the Record posed by Representative Markey in a letter from
the Natural Resources Committee dated March 11, 2013. The question from
Rep. Markey is as follows:
``At current drawdown rates, in 5 to 8 years, the helium in the BLM
Reserve is anticipated to be largely depleted. Should Congress consider
steps to provide for a long-term helium stockpile? If so, what steps do
you believe Congress should take?''
Given the unique characteristics of the helium market, we believe
it would be prudent to consider a long-term helium stockpile that could
be used to mitigate future supply disruptions. The global supply
disruptions that have occurred recently, and the negative effects as
described in the hearing on February 14, highlight the importance of
helium in advanced manufacturing. The disruptions have occurred due to
maintenance problems at existing Helium operations, and delays in
bringing new sources on line. It is unclear when these new sources may
come on line and how reliable their supply will be. Once the BLM
reserve is depleted, the U.S. may become reliant on foreign-sources of
helium, a situation that has not previously occurred to our knowledge.
With the current shortages of helium, it is difficult to know
exactly what steps would be most effective to create a long-term
stockpile. We believe that many of the provisions of H.R. 527,
specifically the transparency provisions in Section 4, BLM transparency
and supply chain information, and Section 5, helium resource
assessment, will provide critical information for all stakeholders,
allowing for better informed decisions throughout the supply chain.
We would suggest that Congress consider the following steps:
Authorize support for RD&E to develop and deploy
helium conservation and improved storage technologies
Authorize incentives for helium recycling and reuse
in current applications
Direct the appropriate federal agencies, or the
National Academies, to publish a study to address issues
related to the helium supply and uses that would include the
following:
Ways to expand domestic helium sources
Improved methods for conservation, recapture and
recycling of helium
New technology to improve and increase the
capture of helium from gas wells, including gas streams
with low concentrations of helium
Develop viable alternatives to helium where
appropriate
We appreciate the Committee's interest in this important matter and
the consideration of our views.
______
The Chairman. Thank you very much, Mr. Boersen, for your
testimony. I will now recognize Mr. Gary Page, who is President
of Helium and Balloons Across America.
Mr. Page, you are recognized for 5 minutes.
STATEMENT OF GARY W. PAGE, PRESIDENT, HELIUM AND BALLOONS
ACROSS AMERICA
Mr. Page. Mr. Chairman, members of the Committee, thank you
for this opportunity to testify today on the Responsible Helium
Administration and Stewardship Act. My name is Gary Page, and
my company, proudly based in Christian principles, Helium and
Balloons Across America, or the acronym HABAA, started in my
home in Charlotte, North Carolina, and has been servicing our
customers for over 32 years with balloons and helium.
When we secure a national contract such as K-Mart, we
solicit partnerships locally for helium distribution, and
handle orders centrally through HABAA for better customer
service, accountability of cylinder assets, mostly under supply
contract agreements. Eventually, HABAA was distributing helium
across the United States. Today is Valentine's Day. And,
coincidentally, February 14th is the largest retail balloon
sales day of the year.
However, as I testify today, hundreds of my best customers
are either without helium or have received a ration that will
not allow them to meet the demands of the day. This is the
second year in a row, and I hope, with the passage of H.R. 527,
the last.
The market has become so tight for helium that HABAA has
two employees who are dedicated to searching for helium supply
and managing our vendor relationships. We have hundreds of
customers who have been waiting for up to a year for delivery
of a single helium cylinder, with no real prospect that they
will be serviced. Before this shortage, a typical cylinder
delivery would take a few days. HABAA has grown from 3 vendor
partners to 93, with several hundred more vendors waiting. Even
a company as large as Airgas can geographically help HABAA in
less than 16 percent of their service area.
In 2006, there were shortages of helium and price spikes
dramatically every few months. There seemed to be less product
available to some customers than to others, specifically to
those selling balloons. Upon further investigation, it was my
conviction that there was plenty of helium, but that the
refiners had made business decisions to sell their product for
higher profits, usually overseas.
All domestic uses for helium, liquid and gas, require 2.4
billion cubic feet per year. By comparison, 4.8 billion cubic
feet are refined in the U.S. each year. In other words, two
times the need. I found some older, proven technology for the
refinement of helium called Nitrotec, and purchased a system
which was being taken offline in Chillicothe, Texas, due to the
fact that the helium supply had been exhausted at that site.
HABAA recognized a broken helium refinement paradigm that
did not even represent or accommodate a third of their customer
base. HABAA's Nitrotec helium refinement capability produces
gas as an end product, and could potentially lower end user
costs dramatically. HABAA's Nitrotec unit will be able to
maximize the depletion of the helium reserve. The lower
pressures and smaller gas requirements necessary to remain
profitable for a Nitrotec unit will allow continued operation
long after current refiners have been forced to shut down due
to operational economic considerations.
In March of 2008, we purchased a non-allotted volume of raw
helium from the BLM and were denied tolling by all current
refiners without any real discussion, or even having them
extend the courtesy of placing a price on the table. Then HABAA
went directly to the BLM with our request to become a refiner
on the pipeline, which was summarily denied without any hearing
or due process. Since mid-2007, we have attempted various ways
to access the BLM pipeline via direct contact and consultants.
All have ended without success.
There are many, but I want to highlight some key problems
to the current system.
The loss of American jobs. In 2009, HABAA had 5 consecutive
years of 28-plus percent growth and 175 employees. Now, as a
result of the domestic helium market, I have less than 20.
Monopolistic helium pricing. Because the control of our
Nation's helium is bottlenecked by three refiners, it allows
those refineries to have full control over supplies, and
ultimately drive pricing. These refiners transact with
subsidiaries to turn a cylinder that cost $25 via the BLM
transaction into a market cost to me of $900. This is a markup
of more than 3,500 percent. Tolling does not work, because
refiners have no incentive to allow competition.
No helium gas refinement on the BLM pipeline. As I
indicated in greater detail within my written testimony, the
BLM has not supported businesses that need helium gas, even
though these businesses represent a third of the helium needs.
I attempted to cite a small refinery on the BLM which ignored
my request.
Market chaos is everywhere. For example, the average cost
of wholesale helium has tripled, yet the price continues to
move upward monthly. We have made thousands of phone calls,
emails, and other contacts looking for helium for our
customers. Refiner distributors are buying small, struggling
distributor companies and trying to drive competition out of
the market. In the past few months we have documented more than
50 cases. For example, the refiner-distributor recently took a
large chain customer we had under contract. The refiner-
distributor had access to the supplies, and we were unable to
service the account, even though it was under contract.
Thank you for your kind attention and the opportunity to
present this testimony. Happy Valentine's Day to you and to all
you love.
[The prepared statement of Mr. Page follows:]
Statement of Gary W. Page, President, Helium & Balloons Across America
Mr. Chairman, Members of the Committee, thank you for the
opportunity to testify today on the Responsible Helium Administration
and Stewardship Act. Sir Isaac Newton said, ``What goes up, must come
down.'' Clearly, he was not following the current domestic helium
market.
My name is Gary Page and my company, proudly based on Christian
principles, Helium & Balloons Across America (HABAA) in Charlotte, NC,
started in my home and has been servicing our customers for over 32
years with balloons and helium. HABAA began helium distribution
regionally in the Southeast and amassed 8,000 helium cylinders; a
super jumbo tube trailer purchasing 200,000 cu. ft. of helium at a
time; a cylinder fill station; a fleet of delivery trucks and tractor
trailers; and in-store service personnel. When we secured a national
chain (i.e. Kmart), or a set of stores with a large footprint, we
solicited partnerships locally for helium distribution and handled
orders centrally through HABAA for better customer service and
accountability of cylinder assets--mostly under supply agreement
contracts. Eventually, HABAA was distributing helium across the
continental USA including Hawaii, Alaska, and Canada internationally.
Helium & Balloons Across America (HABAA) is the ``face'' of small
businesses across the country. It is at the core of what the
``Responsible Helium Administration and Stewardship Act'' is all about,
though literally hundreds of other business from diversely different
industries could be providing testimony before the House Committee on
Natural Resources today. Most of those businesses do not have the clout
of the current refiners--who dominate the market with the help of the
current system. Entrepreneurs such as me are truly ``small businesses''
who create jobs, but are unable to come to Washington to make their
case. I hope my perspectives add some context from the real pain end
users feel as a result of the current structure.
I want to commend the Committee leadership for coming together, on
a bipartisan basis, to address the systemic issues that exist within
our domestic helium production and distribution markets. The bipartisan
feeling in this room is buoyed by the fact that today is Valentine's
Day and coincidentally February 14th is also the largest retail balloon
sales day of the year. However, as I testify today, hundreds of my best
customers are either without any helium, or have received a ration that
will not allow them to meet the demands of the day. This is the second
year in a row and I hope, with the passage of H.R. 527, the last.
I am here before you today as a businessman who has tried to buy
volumes of helium via the auction process, but was unable to receive my
helium for lack of access to infrastructure. When I purchased the
technology needed to access volumes directly, I was blocked by the
Bureau of Land Management (BLM) from gaining access to the pipelines
they oversee. I have tried to follow the processes to allow open access
and competition that are supposed to exist today, but found those
processes in practice to be little more than theoretical.
The market has become so tight for helium that HABAA has two
employees who are largely dedicated to searching for helium supply and
managing our vendor relationships. We have hundreds of customers who
have been waiting for up to a year for a delivery of a single helium
cylinder--with no real prospect that they will be serviced. Before this
shortage, a typical delivery would take a few days. HABAA has grown
from 3 vendor partners to over 93 with several hundred more vendors
waiting for helium to begin servicing our customers. We have made
thousands of phone calls, emails, and other contacts looking for helium
for our customers. Even a company as large as Airgas can geographically
help HABAA in less than 16% of their service area--in all other areas
there is no reliable helium supply.
HABAA was growing at a rate of 28% compounded year over year for
about five consecutive years. We were forced into a second warehouse,
which kept growing in size, and finally placed HABAA in a position of
an aggressive consolidation and building program plan--we had 75 full-
time employees and 100 part-time employees. HABAA occupies a unique
position in the balloon industry as the hinge between balloon
manufacturers and suppliers; new and unique proprietary marketing
programs (i.e. Scan Based Trading = SBT); program implementation and
management with retail chains; and the supply, distribution, and ``back
office control'' of helium needed to drive this business.
In 2006 there were shortages of helium and prices spiked
dramatically every few months. There seemed to be less product
available to some customers than to others--even with contractual
agreements, forced majeure or invoked allocations. Upon further
investigation, it was my conviction that there was plenty of helium,
but that the refiners had made business decisions to sell their product
for higher profits, usually overseas. I found some older proven
technology for the refinement of helium called Nitrotec, and purchased
a system which was being taken offline in Chillicothe, TX, due to the
fact that the helium supply had been exhausted at that site (please see
an attached diagram of facility and system process).
HABAA recognized a ``broken'' helium refinement paradigm that did
not even represent or accommodate a third of their customer base. In
2007, we realized that we needed to process our own helium gas to meet
our own demands and those of our customers. In the summer of 2008, I
purchased a Nitrotec portable refinery that has a current market value
of approximately $4 million. We made a huge capital risk for a small
business and purchased helium refinement equipment when we purchased
the Nitrotec. This acquired capability was necessary so that HABAA
could be taken seriously and with the hope we could compete for federal
helium and receive needed access to helium gas in order to sustain our
business and support the larger industry.
HABAA's Nitrotec helium refinement capability produces gas as an
end product and could potentially lower end user cost dramatically. As
important as serving the existing refining needs for gasified helium
demand, the HABAA's Nitrotec unit will be able to maximize the
depletion of the helium reserve. The lower pressure and smaller gas
requirements (3 MM cu. ft. day) necessary to remain profitable for a
Nitrotec unit will allow continued operations long after current
refiners have been forced to shut down due to operational economic
considerations. This will allow increased utilization of this important
natural resource and ensure that the public maximizes the development
of this resource. The Committee's measure, the ``Responsible Helium
Administration and Stewardship Act'', creates an environment that both
allows competition and will ensure the helium reserve is maximized.
In March of 2008, we purchased a non-allotted volume of raw helium
from the BLM and were denied tolling by all current refiners, without
any real discussion or even having them extend the courtesy of placing
a price on the table. Then HABAA went directly to the BLM with our
request to become a refiner on the pipeline, which was summarily denied
without any hearing or due process. Our email, protesting the
nonsensical notion that the BLM would accept money for helium which had
no realistic opportunity to ever be delivered to us, was never
responded to by the BLM. Since mid-2007, we have attempted various ways
to access the BLM pipeline via direct contact and consultants. All have
ended without success, but we have great hope with the access
provisions included within H.R. 527.
I want to highlight seven problems with the current system:
1. THE LOSS OF MANY AMERICAN JOBS: Elimination of the balloon
industry will cause the loss of significant jobs--the International
Balloon Association estimates that hundreds of thousands of jobs are
impacted by helium supply issues. HABAA's current staffing of only 10%
of the employees which were employed by our company when this disaster
began is a testament to this fact. There will be a significant economic
impact as balloon manufacturing plants are forced to close as well as
commerce from associated industries. Sales and marketing, display
manufacturers, ribbon and balloon weight manufacturers, sticks and cup
manufacturers, regulator and safety equipment manufacturers, cylinder
manufacturers, store service and set-up crews, industrial gas
suppliers, accounting, customer service, technology support, and other
back-office functions will all be affected as industry infrastructure
crumbles to maintain profitability for diminishing sales. Thousands
upon thousands of retailers (party stores, grocery stores, dollar
stores, card stores, drug stores, discount chains, and small gift
shops) all rely on the income produced by the sale of balloons. There
are full-time staff positions which are totally (or partially)
supported by this single source of retail sales. A balloon manufacturer
estimated that at any given time, 20% to 25% of retailers are totally
out of helium without knowing when they will be in stock.
2. OUTRAGEOUS AND UNFAIR ``MONOPOLY'' HELIUM MARKET PRICING:
Because the control of our nation's helium is bottlenecked by three
refiners, it allows those refineries to have full control over supplies
and ultimately drive pricing. These refineries can transact with
subsidiaries and add cost during each internal transaction that far
exceeds value. For example, one refiner and distributor of BLM helium
pays $24.44 for the amount of helium required to fill one 291 cu. ft.
cylinders (equivalent to $.04 per 18" foil balloon), using current BLM
2013 pricing of $84 per Mcf. In this example, this refiner then sells
that cylinder to a distributer like me for $873. This is a markup at an
unbelievable 3,572%! That price was for the helium only; it did not
include the distribution costs of $30.96 ($5.95 haz mat + $4.01 fuel
charge + $21.00 delivery) or the $52.98 taxes, which bring the total to
$956.94 ($2.13 of helium cost per foil balloon). Those are my costs
that then have to be marked up to my customers in order to stay in
business. Quite simply, because there is limited to no competition in
the refining market, the public and small business suffers.
3. TOLLING DOES NOT WORK: The current framework, and some prior
legislative proposals, holds the noble goal of allowing companies who
did not have access to the BLM pipeline the ability to purchase helium
and receive it via one of the existing access points (refineries). This
ended up being a good theory, but is not practical. Refiners who have
complete control of the supply can and routinely prevent access by
merely refusing to refine raw helium after it has been purchased
directly. In fact, the refiners we reached out to would not even quote
us a price for tolling. This inequity in the system is what drove me to
make the capital purchase of the Nitrotec, as I was operating under the
belief that I could secure the 6% set aside that is mandated by the
law. Unfortunately, the current framework does not force the set aside
to function as it was intended. Efforts to prod the BLM to change the
way these set asides function are daunting for even large operations
such as mine and why the changes within H.R. 527 are so important in
their effort to ensure competition.
4. NO HELIUM GAS REFINEMENT ON THE BLM PIPELINE: The BLM has not
supported businesses that need helium gas and not liquefied helium
which creates additional capital costs to pay for purity and a product
form which is not wanted nor useful in these applications. Helium gas
is the ``natural state'' of helium found in nature; it requires huge
capital investment to make it pure and cold enough to become a liquid,
and consumers are saddled with that unnecessary cost. And even though
two-thirds of helium is utilized in the liquid state (pressure/purge-
NASA and DOD; superconductivity/cryogenics--MRI; controlled atmosphere-
fiber optic and chip manufacturing), a third of current uses are for
helium gas (leak detection; breathing mixtures--deep sea diving and
hospital use; welding; heat transfer; chromatography; lifting), and
should have their own reliable supply source through the BLM.
5. MARKET CHAOS IS EVERYWHERE: End users in every state are
impacted by the current helium refinery monopoly. As an example, Airgas
has been excluded from the BLM process. They are the largest
distribution outlet and depended upon for meeting helium needs of
American industries and consumers, but are not stakeholders of the
refining process. Two of what was the then three refiners, Air Products
and BOC, sold their packaged gas businesses to Airgas, so they must
have recognized that Airgas could ``do'' distribution better. However,
some of those same forces have crippled Airgas during this helium
supply crisis hurting many U.S. businesses and the national economy.
Some points to highlight a few of the market issues:
i. For example, the average cost of wholesale helium has
tripled, yet the price continues to move upward monthly. Other
related costs, that have nothing to do with the price of
helium, such as cylinder rental, have also approached tripling
as vendors attempt to offset lower gas sales with increased
costs elsewhere. For example, 18 months ago, a helium cylinder
which cost HABAA less than $60 wholesale now averages $150 and
the cost is going up every month. These costs are before the
30% price increase has been factored in, which was announced in
late December and went into effect January 1, 2013 by both
Praxair and Air Products--the 2 largest refiners on the BLM
system.
ii. We have made thousands of phone calls, emails, and other
contacts looking for helium for our customers. Airgas can
geographically help HABAA in less than 16% of their service
area--in all other areas there is no reliable helium supply.
Praxair, Airgas, and Matheson are buying small struggling
distribution companies, damaged by the helium shortage, then
giving HABAA notice that they will no longer be providing
helium to our customers in these areas. This has occurred twice
this week alone with Praxair, but has occurred 51 times in the
past three months. For a reference point, the normal volume of
such consolidation/acquisitions has historically been closer to
a couple each quarter.
iii. There is an unprecedented push toward consolidation, as a
number of small businesses are being sold or approached for
purchase for pennies on the dollar by the major players. This
is due to their precarious business position or weak balance
sheet, which is forcing them out of business. This
consolidation disadvantages others in the market. For example,
a refiner/distributor recently took a large chain customer we
had under contract. The refiner/distributor had access to
supplies and we were unable to service the account. The
refinery monopoly has downstream competitive consequences--it
is not simply limited to supply issues at the loading docks of
the three refiners. HABAA has lost several thousand customers
in addition to the chain referenced above. As a result, we have
outsourced everything we can, sold many of our hard assets
(cylinders, tube trailer, etc.) to Airgas, and are now down to
10% of our employees since 2009.
6. THE BLM HAS BEEN COMPLICIT IN PERPETUATING THESE INEQUITIES BY
BLOCKING ACCESS TO OTHER POTENTIAL REFINERS: As mentioned above, the
BLM has developed a cozy relationship with these refiners and refused
to manage helium sales as far back as 1996. This relationship has been
described by the Office of Inspector General as ``less-than-arms-
length'' and ``we found overcharging, possible double-billing, costly
short-term financing, and unjustified allocation of equipment costs,''
and ``weaknesses that leave the Government vulnerable to fraud,
mismanagement, and potentially large monetary losses.'' More recently,
in November 2012, an audit by the Office of Inspector General issued a
scathing report which charged the BLM ``to prepare and implement
comprehensive procedures for managing its helium sales to
nongovernmental buyers.''
7. EXPORTING VERSUS DOMESTIC NEEDS FOR HELIUM RESOURCES: While I
recognize that exporting commodities in times of low pricing could be
in the government's best interest, helium's prices are excessively high
(to the point of damaging the U.S. economy) and helium supply is not
currently abundant. Over nearly the past two years, helium supplies
have dried up, and I believe that it is because there is effectively a
helium refining monopoly which has taken the taxpayers' resources to
higher profits overseas, while sticking the rest of the American
business community with dramatically higher costs for their helium due
to a manufactured shortage.
In an effort to address the current issues of domestic availability
of helium for the thousands of companies that comprise the balloon
industry, I suggest the following:
1. Provide a distinction between end users who need refined liquid
helium versus those who just need refined helium gas. There is a huge
cost differential and current industrial companies have no interest in
providing anything but liquid helium. This could potentially lower end
user cost dramatically and improve availability to underserviced
industries.
2. Ensure access to the BLM pipeline for small facilities, such as
a Nitrotec unit. Competition will be enhanced with greater refining
capacity and small facilities will maximize the depletion of the helium
reserve and benefit to the taxpayers. The lower pressure and smaller
gas requirements (3 MM cu. ft. day) necessary to remain profitable will
allow continued operations long after all other refiners have been
forced to shut down due to operational and economic considerations.
This is why Nitrotec's technology was developed--to refine helium at
the source for sale, rather than discarding it, and then move the plant
to another source. Helium does not need to be a financial black hole,
and some activities are appropriate for government to tackle until
private industry can prove adequacy to stand in the gap.
3. The Committee should consider expanding the current BLM
pipeline in a westerly direction and repopulate the Cliffside Storage
Field. In 2010, a National Academy of Sciences study concluded that the
1996 Privatization Act had adversely affected critical users of helium
and that selling off the supply, as required, was not in the best
interest of U.S. taxpayers or the Nation. Because of the strategic
importance of helium to America (the reason the BLM pipeline system was
developed in the first place), the Federal Government should consider
those voices on the National Research Council of the National Academies
(authors of ``Selling the Nation's Helium Reserve''). What was true
then is true now--storage is the major issue, as helium is a ``waste
by-product'' of the quest for hydrocarbons, and this resource will be
lost because it cannot be stored physically and economically.
4. Stability to the federal program could allow for private
capital to enter the market. It is a new concept and now conceivable
that private companies could actively pursue drilling rights for helium
wells on federal public lands and not just viewing helium as a
byproduct in traditional drilling operations.
5. While I am for free trade and recognize that not all
commodities should be treated equally with respect to export, many of
the issues with availability and price of our domestic helium can be
traced back to supply. If private companies find the helium, store it,
refine it, and distribute it, there should be no restrictions as to
where it goes, but volumes from the BLM system should be focused upon
meeting domestic needs. Currently, there is not a shortage of helium,
but rather a shortage of helium refinement capacity and competition in
the American helium marketplace due to a lack of access. If one adds up
the total helium domestic needs from all sources (MRI's and medical
needs, manufacturing of fiber optics, computer chips, plasma TV's,
welding, leak detection, scientific research, and yes, even balloons),
it would require 2.4 billion cubic feet a year. The BLM pipeline
system refines 2.1 billion cubic feet a year and all other sources,
including EXXON in Wyoming produces another 2.7 billion cubic feet of
refined capacity for a net total of 4.8 billion cubic feet. This is
according to an independent consulting firm, RMW Solutions, LLC. This
group is made up largely of ex-Air Products helium experts including
Ben Reinoehl, a principal at RMW and a member of the National Research
Council who wrote part of ``Selling the Nation's Helium Reserve.'' The
Congress has relied on this book to make decisions related to the
national helium reserves. RMW has collected this data from BLM
governmental and industry sources.
6. With the sale of BOC's packaged gas business (cylinder
distribution), the Federal Government required the divestiture of
refinement capabilities to a third party rather than bundling it to
Airgas. This did not prevent a monopoly but effectively perpetuated
one. Future decisions should take into consideration the larger market
picture of creating more competition.
In closing, I want to thank the Committee for the opportunity to
testify today on behalf of the small business end users who are
dependent upon federal helium policies. I hope that my perspectives, as
an entrepreneurial businessman, are of value to the Committee. Please
know that I stand ready to assist your efforts and hope that Congress
works in the same bipartisan manner the Committee has started with the
introduction of H.R. 527, the Responsible Helium Administration and
Stewardship Act. The current authorization for the helium reserve
expires at the end of this fiscal year and it is critical that
legislation move quickly through the process in order to be completed
before October.
Thank you for your kind attention and the opportunity to present
this testimony! Happy Valentine's Day to you, and to all those you
love.
______
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Response to questions submitted for the record by Gary W. Page,
President, Helium & Balloons Across America
Questions from Chairman Doc Hastings
1. Mr. Page, in your testimony you say that in March of 2008, you
purchased a non allotted volume of crude helium from BLM and no
refiner would toll for you, nor were you permitted to hook up
to the pipeline to procure your helium. Can you further
elaborate on this situation?
a. To be clear, you put out a request for one of the four refiners to
toll for you and you received zero responses? Were you given a
reason for this?
Actually, Helium & Balloons Across America (HABAA)
contacted ALL refiners who were on the pipeline and received NO
CONSIDERATION from any of them. Even though we had helium to toll and
tried to schedule a meeting to discuss, no refiner was willing to enter
into any meaningful conversation, but summarily blew us off without
quoting a price or giving us hope for future cooperation (see
attachment). I believe that the common thread was that they did not
have ``capacity for tolling''--certainly something HABAA could not
refute.
b. You say that you were denied the ability to procure your helium by
the BLM can you explain how that happened?
HABAA paid our fees and went through the acceptance
procedure to be able to bid on a non-allotted supply of crude helium
through the BLM. Because we were unable to access our helium through
the tolling procedure outlined by statute, HABAA went back to the BLM
to petition for direct access to our helium by refining it ourselves
with the Nitrotec helium refinement capacity we had purchased. The law
seems clear that there is a 6% set aside which we had gone through the
government procedure to secure, and to block access goes against the
grain of the intent of the law. HABAA was not requesting any ``special
consideration,'' only that we have access to the set-aside that was
created for companies such as ours. HABAA's COO, Jim Redmon, was
petitioning through Leslie Theiss and John Hamak to allow us to secure
our helium investment. This was to no avail, as they blocked our
efforts to secure our helium saying that ``there was no additional
helium supplies to be secured,'' which seemed nonsensical considering
the set-aside. HABAA was only left with the option to store our helium
for a fee for some indefinite amount of time, without any clear
prospect of ever taking delivery. This offer was met with a stern
letter of protest from HABAA (attached), which was NEVER acknowledged
or responded to by the BLM.
c. You say that since 2007 you attempted various ways to access the
BLM pipeline. What various ways did you attempt to access the
pipeline?
HABAA went through direct contacts with Leslie Theiss and
John Hamak, which have been outlined above. In addition, HABAA secured
the services of RMW Solutions and the principal J. Benjamin Reinoehl,
who are retired executives with Air Products. Ben was a contributing
author of ``Selling the Nation's Helium Reserve,'' which the Federal
Government has used extensively to determine helium policy since the
1996 Privatization Act. Ben knows BLM personnel and current refiners
intimately, and has been a key player in setting up the current BLM
structure. Ben was able to get agreement from the BLM for HABAA to
place our Nitrotec helium refinement unit on the pipeline, but received
flat denials that we would be awarded any crude helium to operate our
plant--effectively killing the project.
d. What happened to the helium you had purchased?
Due to the fact that all options had been stripped from
HABAA (no tolling agreement; could not establish our plant to process
our crude helium ourselves; refusal of the BLM to make crude helium
available to us if we did set up a refinery; and HABAA's unwillingness
to pay for crude helium storage with dubious prospects that it would
ever be delivered) convinced us to pull the plug on continuing with
this strategy. Interestingly enough, a legislative change to the law
seemed to be the only remaining viable option for HABAA to succeed with
our Nitrotec investment.
2. Mr. Page, in your testimony you say you hope the access provisions
in H.R. 527 will help solve some of the problems you have had
accessing your helium from the BLM. Can you tell the Committee
some of the specific provisions that will help reach your goal
of buying and procuring helium?
Opening up access to additional players other than the
current helium refinement ``monopoly'' is a huge step. Competition is
key in solving problems of out-of-control prices and unreliable sources
of supply. Creating an auction for meaningful volumes of BLM helium
reserves will open up the process to free-markets to move without
restraint. Accountability and opening up disclosures will help to clear
the ``smoke-filled'' room in which the refiners and BLM have been
operating. It has been our belief, based on our experiences, that the
BLM was running interference for the helium refinement monopoly on the
pipeline rather than using their authority to equitably administer the
set-aside provision that was legislated by Congress. There is no
question that the BLM has been complicit in perpetuating these
inequities and that charges leveled by the Office of Inspector General
are evidence of this cozy relationship and must be taken seriously and
acted upon going forward if they are to continue having the fiduciary
responsibility for this valuable natural resource (see enclosures).
Questions from Rep. Edward J. Markey
1. Mr. Morgan, Mr. Boerson, Mr. Page, Dr. Aronson: At current drawdown
rates, in 5 to 8 years, the helium in the BLM Reserve is
anticipated to be largely depleted. Should Congress consider
steps to provide for a long-term helium stockpile? If so, what
steps do you believe Congress should take?
This is an important and critical question to be asking
and has many implications to the role of government and strategic
planning for our nation in regard to critical natural resources and
their stewardship. It is my conviction that Congress missed the mark in
the 1996 Privatization Act in regard to helium policy, as it is not in
the best interest of the U.S. taxpayer or the Nation. Because of the
strategic importance of helium to America (something which is growing
yearly as a result of cutting edge research), domestic policy should be
the reverse of a ``depletion strategy.'' What was true nearly 100 years
ago is still true today: storage is the major issue in a stable helium
supply for America, since helium is a ``waste by-product'' of the quest
for hydrocarbons, and this resource will be lost (vented to the
atmosphere) because it cannot be stored physically and economically.
The Cliffside Storage Field is a national treasure, as much as the
giant redwoods of the Pacific Northwest, the Grand Canyon, or
Yellowstone, and should be preserved and used to benefit future
generations!
The BLM pipeline should be expanded in a westward direction to
encompass the ``new'' helium discoveries in Arizona and New Mexico.
This is not just my opinion but also some voices on the National
Research Council of the National Academies (authors of ``Selling the
Nation's Helium Reserve''). Many helium sources would love to sell
their ``waste helium'' to the government, as they did decades ago--
which built this world dominating resource. This does not need to be a
``black hole for dollars'' since market pricing could reflect an
immediate payback to these investments for the Federal Government. No
one would argue that the taxpayer and America are infinitely more
enriched due to the Federal investment in the Eisenhower interstate
highway system!
The second fallacy of the 1996 policy is that private companies
would have an interest in picking up the slack and developing the next
generation of helium exploration, discovery, storage, refinement, and
distribution. All current refiners on the BLM pipeline are interested
in refining and distribution, but have NO INTEREST in the real critical
aspects of perpetuating the National helium supply. If you think I am
incorrect about this, please take a look at the prospectus from Air
Products, Praxair, and Linde and see where they have invested their
treasure.
It is not too late to change course to prevent the inevitable
from happening--America's dependence on foreign supplies of helium and
greatly increased prices and availability at the whim of outside
countries who are antagonistic if not considered enemies of the USA!
When we do not develop our own resources in our own national interest,
this is what we should expect will happen. Look at the tremendous
transfer of wealth for oil the United States pays to unstable
countries, and consider how those dollars finance anti-American
sentiment and violence around the globe. We should have learned our
lesson!
______
The Chairman. Thank you very much for that. I guess that is
worth 48 seconds.
[Laughter.]
The Chairman. And certainly last, but not least on the
panel, Dr. Sam Aronson, Vice President of APS Physics. Dr.
Aronson, you are recognized for 5 minutes.
STATEMENT OF DR. SAM ARONSON, VICE PRESIDENT,
THE AMERICAN PHYSICAL SOCIETY (APS)
Dr. Aronson. Chairman Hastings, thank you. And thanks to
the Committee for this opportunity to testify today regarding
the critical nature of helium for the research enterprise in
this country.
I am the former director of Brookhaven National Laboratory,
one of the DOE national labs. I will be speaking about the
impact on them, but more broadly on the impact on the 50,000
physicists and academia and industry, national labs, and so on
that are represented by the American Physical Society.
In 2010, the National Research Council released a report
which outlined a number of issues that have come about as a
result of the 1996 Privatization Act. Principal among those has
been the impact of the Act on Federal users and researchers
that rely on Federal grant programs. Those are the constituents
I want to focus on today.
In 1995, the Council of the American Physical Society
issued a statement about helium, concluding that ``in view of
the importance of this unique and irreplaceable natural
resource in modern science and technology, the American
Physical Society urges that measures be adopted that will both
conserve and enhance the Nation's helium reserves. Failure to
do so would not only be wasteful, but would be economically and
technologically shortsighted.
And I commend the Committee for its work on this important
issue.
Because of its unique properties, helium is used in a broad
range of scientific research in both small and large-scale
facilities and experiments. These include its uses for super-
conducting magnets and radio frequency power systems, for
vacuum systems and measurements of nuclear magnetic resonance,
which is the basis for MRI, research in nano-technologies, and
many other applications.
At Brookhaven and other large labs, helium is used to cool
superconducting equipment for accelerators, particle detectors,
and research magnets. It is also used to operate measurement
and diagnostic equipment.
The acquisition of extremely weak signals in the data of
several different disciplines relies on helium-cooled detectors
to reduce electronic noise and thermal noise. These detectors
have not only research applications, but they have national
security applications, as well.
Given the applications and the properties of helium, there
is, for most of these, simply no other substance that can serve
as a refrigerant to achieve the temperatures near absolute zero
that these devices need. This means that if researchers cannot
obtain helium due to supply or pricing constraints, their
experiments shut down. In superconductivity applications such
as in cooling magnets and accelerators, only helium can act as
the adequate refrigerant for large-scale systems like
accelerators. Therefore, if helium is unavailable to replenish
a system, those also would shut down.
Recent discussions with both large and small-scale research
projects at Brookhaven have reminded me that the reliability of
the supply is often as important as the volatility and the
price of helium.
The 1996 Privatization Act established a Federal in-kind
program designed to give preferred access to Federal users. The
initial focus was on those Federal users with a major
requirement of helium. Regulations were subsequently
promulgated and contracts signed with what became authorized
Federal helium suppliers. And one of the features of those
contracts required those suppliers to provide a priority to
Federal users.
While smaller Federal users were not required to use the
in-kind program, according to the BLM nothing precluded them
from doing so. And in 2010, in the National Academy's report
referred to earlier, there was a recommendation that, given the
extreme price fluctuations and supply shocks over the last 10
years or more, small researchers reliant on Federal grants
should be able to participate in the in-kind program.
I also note, as Mr. Holt mentioned earlier, that a number
of the national labs are currently receiving something on the
order of two-thirds of their normal supply of helium, due to
allocations. This requires reprioritization of projects, and
some things just don't get done.
H.R. 527 provides a provision that authorizes the in-kind
program, and ties the price being offered under the in-kind
program to the minimum auction price. I would encourage the
Committee to more closely examine the operation of this
program, and specifically to ensure that small, Federal
grantees are explicitly eligible.
And finally, just a word about the medium and long-term
availability. We all know that this is a finite resource, and
so I would like to see the Committee in the future consider the
extension of the supply of helium that is available, because we
will run out.
And with that, I would like to terminate my remarks and
thank the Committee and answer any questions you might have.
[The prepared statement of Dr. Aronson follows:]
Statement of Dr. Samuel Aronson, Former Director, Brookhaven National
Laboratory, Vice President, The American Physical Society
Chairman Hastings, Ranking Member Markey, distinguished members of
the Committee:
My name is Samuel Aronson, and I am the former director of the
Brookhaven National Laboratory, part of the Department of Energy
National Laboratory complex. Today, I am representing the American
Physical Society as its recently-elected Vice President. The APS is a
non-profit membership organization working to advance and diffuse the
knowledge of physics through its outstanding research journals,
scientific meetings, and education, outreach, advocacy and
international activities. APS represents over 50,000 members, including
physicists in academia, national laboratories and industry in the
United States and throughout the world.
Thank you for providing me the opportunity to speak to you today
about one of our nation's most critical resources, helium.
In 2010, the National Research Council and National Material
National Materials Advisory Board released a report which examined the
impact of the 1996 Helium Privatization Act. Principal among those has
been the impact of the act on federal users and researchers who rely on
federal grant programs. It is about these users that I wish to focus my
comments.
But first, I would like to briefly discuss the properties of
helium. Helium is extremely unique, even among other elements. It
occurs at a fraction of a percent in natural gas, and it is only
economic to recover helium from deposits where its concentration is
0.25% or greater. It is very rare in the atmosphere, making recovery
from air extremely expensive. It is unlikely that other economically
viable sources of helium will ever be discovered. Natural gas is
extracted from reservoirs at a rapidly increasing rate and, as a
result, much of the Earth's endowment of helium is being rapidly
depleted. Conservation and efficiency in obtaining helium is therefore
critical.
In 1995, the Council of the American Physical Society issued a
statement about helium, concluding that ``In view of the importance of
this unique and irreplaceable natural resource to modern science and
technology, The American Physical Society urges that measures be
adopted that will both conserve and enhance the nation's helium
reserves. Failure to do so would not only be wasteful, but would be
economically and technologically short-sighted.''
I commend the Committee for working to address this important
issue.
Turning to scientific applications, helium is used in a broad range
of research, in small and large scale facilities and experiments. Its
unique properties make it irreplaceable for superconducting magnets and
radio frequency power systems, vacuum systems, measurements of nuclear
magnetic resonance, research in nanotechnologies and many other
cryogenic applications.
At Brookhaven and other large scale labs, helium is used to cool
superconducting equipment for accelerators, particle detectors, and
research magnets. It is also used for research magnets and to operate
measurement and diagnostic measurement. Devices used in astronomy and
astrophysics studies also depend critically on liquid helium. The
acquisition of extremely weak signals in several disciplines relies on
helium-cooled detectors to reduce thermal and electrical noise. These
detectors are also used for national defense needs, such as for
detecting submarines by the military.
There is no other substance other than helium that can be used as a
refrigerant to achieve temperatures from 4.2 K above absolute zero down
to millikelvins (thousands of a kelvin). If researchers cannot obtain
helium due to supply or pricing constraints, they must shut down their
experiments. Light sources and accelerators which depend upon liquid
helium must shut down if supplies are inadequate or too costly.
During my tenure as Brookhaven director, we confronted such a
shortfall. During the 2011 operations of our large particle
accelerator, the Relativistic Heavy Ion Collider, an electrical failure
caused the shutdown of our liquid helium (LHe) refrigerator and the
loss of several thousand gallons of helium. The restart of the
accelerator had to be postponed due to delivery problems. The loss of
research productivity was minimized by an extremely cooperative vendor
and our own scrounging for small amounts of helium from other
researchers on site, but weeks of valuable data were not produced.
Recent discussions with both large and small research projects at
Brookhaven show that reliability of supply is more often the problem
than the volatility of the price of helium.
The 1996 Helium Privatization Act established the federal In-Kind
program designed to give preferential access to federal users. The
initial focus was on those Federal users with a `major' requirement of
helium. The Bureau of Land Management then lowered the bar on what
constituted a major requirement of helium. BLM signed contracts with
`authorized federal helium suppliers' requiring them to make Federal
users a priority. While the smaller Federal users were not required to
use the In Kind program, according to the BLM, nothing precluded them
from doing so.
It is unclear that small researchers are sufficiently aware of
their ability to use the in-kind program. Given the extreme price
fluctuations and supply shocks over the last ten or more years that
have buffeted small researchers reliant upon federal grants, the 2010
National Research Council report recommended that such users be able to
participate in the federal in-kind program. The report also recommended
that the ``in-kind program and its associated customer priorities
should be extended by the BLM, in cooperation with the main federal
agencies not currently participating in the in-kind program--for
example, the National Science Foundation, the National Institutes of
Health, and the extramural grant programs of the Department of Energy--
to research being funded in whole or in part by government grants.''
Despite the National Research Council recommendation, small
researchers reliant on federal research grants continue to be subject
to severe supply constraints and price shocks which their research
grants cannot accommodate. They are being forced to either shut down
experiments, invest in expensive recycle equipment using their own
resources, or, according to one nanotechnology researcher, switch to
room temperature experiments to continue their work, in less-than-
optimal conditions.
I also note that some large federal users are having their
allocations cut back. Argonne National Laboratory is currently
receiving only 70% of its allocation from its supplier. Oak Ridge
National laboratory currently receives only 60% of its allocation.
Sandia National Lab often receives delayed or short orders. As a
result, the laboratories have had to reprioritize some of their
projects. Federal users who are supposed to receive priority access are
not receiving that access.
H.R. 527 includes a provision that authorizes the In-Kind program
and ties the price being offered under that program to the minimum
auction price. I encourage the committee to more closely examine the
operation of the In Kind program and, specifically, to ensure that
small Federal grantees are explicitly eligible for such priority access
and pricing.
Finally, I wish to say a word about medium and long term helium
availability. While your focus has been on addressing the near term
issue of supply from the Federal reserve, medium and long-term supply
issues should also be addressed sooner rather than later given that
uses for helium are likely to increase, not decrease. Specifically, we
believe it would make sense for the Department of Energy to examine the
R&D opportunities to increase the efficiency of helium capture at the
well-head or during liquefaction. Doing so would ensure that less
helium escapes into the atmosphere during drilling.
I'd like to thank the committee for the opportunity to testify on
this critical issue and look forward to addressing any questions you
might have.
______
Mr. Lamborn [presiding]. Thank you for being here, and for
your remarks. Thank all of the panelists.
Now, before we go to questions from the Members, I would
like to recognize Representative Labrador, who wanted to be
here earlier because you have a constituent on the panel.
Mr. Labrador. Yes, thank you. Good morning.
Mr. Lamborn. Representative.
Mr. Labrador. Thank you, Mr. Chairman, Ranking Member
Markey, for convening this hearing today. I just want to
welcome Rodney Morgan, who is the Vice President of Procurement
at Micron Technology. Thank you for being here and testifying
this morning.
Micron has a huge footprint in the State of Idaho and in
the United States. They have become a global leader in computer
memory technology with operations in Europe and Asia. Currently
they employ more than 25,000 people. Half of their employees
are here, in the United States. And actually, Micron is the
only remaining U.S.-based memory producer.
Micron was founded in Boise, Idaho, as a semiconductor
design consulting company. And by focusing on being a low-cost
producer, Micron has survived the numerous collapses in the RAM
market which caused many competitors to leave the industry.
Micron eventually acquired the memory businesses of rivals
Texas Instrument in 1988 and Toshiba in 2001. These
acquisitions gave Micron an international presence with
production facilities in Italy, Singapore, and Japan.
Helium, obviously, as you have already testified, is a
critical component in the computer member industry, and
Congress must act soon to ensure a reliable supply of helium
that is available for American businesses.
I commend the Chairman for his work on this legislation,
H.R. 527. It is a step in the right direction to helping
companies like Micron receive a secure and continuous supply of
helium. And I look forward to listening to the answers to the
questions.
And thank you for being here today.
Mr. Lamborn. Thank you, Representative. Now we will start
with the questions, and I will begin.
For any of the panelists, each of your companies is heavily
dependent on contracts between yourselves and distributors or
refiners. As you know, there is much communication that goes on
between the refiners and the BLM regarding maintenance
schedules, temporary closures, and general management of the
reserve.
Do you feel that your companies receive timely information
concerning these communications and helium issues that are of
importance to your business? And would transparency provisions
that are contained in the legislation that require the timely
posting of information on the Internet give assurance to your
companies that you have the information that you need to make
proper plans for your helium needs?
And this is for any one or more of you.
Dr. Aronson. I have a comment regarding Brookhaven National
Laboratory's arrangement with its vendor, which is Linde. We
have had supply interruptions for our large superconducting
accelerator in the recent past. These, I think, occurred
further up in the supply chain than the arrangement between
Linde and Brookhaven National Laboratory. And we have had very
good success in working with the vendor to mitigate the effects
of those kinds of supply interruptions.
I don't have personal knowledge as to whether there is
adequate communication between Linde and further up the chain.
But I know that it is working well from the vendor on down to
the end user.
Mr. Lamborn. OK, thank you. Any of you other gentlemen?
Mr. Page. I would say for our company the transparency in
H.R. 527 is extremely important. We have a general view of when
the BLM, for instance, would go down for maintenance, and the
coordination with facilities in Wyoming. But it is not very
concrete information. We don't really know exactly when it is
going to go down, when it is going to come back up, what the
issues are, and so on.
So, I think this would be a real plus----
Mr. Lamborn. OK, thank you. Mr. Boersen?
Mr. Boersen. Yes, we agree. The transparency provision in
this bill is absolutely critical. I will answer the question by
briefly summarizing our experience last year.
So, in the middle of June of 2012 we were notified of a
supply chain disruption and within 2 weeks were under force
majeure, facing very stringent allocation measures that came
close to--but we were able to avert--closing down part of the
plant, including the layoffs that would have resulted from
that.
So, we are very pleased with the Committee's work,
particularly on the transparency provision. We believe that
would have significantly ameliorated the problem last year and
we may not have had to go to the lengths that we had, in terms
of spending significantly increased money to import helium to
continue our operations.
Mr. Lamborn. Thank you. Mr. Morgan, did you have anything
to add?
Mr. Morgan. I would concur with Mr. Boersen. This last year
has been a struggle for us to acquire helium. Understanding and
transparency into the maintenance activities associated with
the BLM and the operations there would be very helpful.
You know, as far as the transparency into pricing, we do
pay market prices, regardless of what the difference is. So
that is not as important as visible insight into the
maintenance activities.
Mr. Lamborn. OK, thank you. And for any one of you, what is
the differential when you have to buy from foreign sources if
there is some kind of domestic supply disruption?
Mr. Morgan. Well, for Micron, we are a global company. And
as Representative Labrador referred. And we have a connection
into sources around the world and suppliers around the world
that come from various countries that are out there already. So
if there is a need to divert supply in order to support our
operations, we work very closely with distributors to make that
happen.
Mr. Lamborn. Is it much more expensive, though, when you
have to look to foreign sources?
Mr. Morgan. In some cases, yes. Certainly in the case of
Russia and the open market related to that country, it is very
expensive. And the bidding process there really drives up the
price.
Mr. Lamborn. OK. Does anyone else have anything to add to
that? Mr. Boersen?
Mr. Boersen. I would concur with Mr. Morgan. When we have
had to import it from international sources, the cost is much,
much higher than we are typically used to.
Mr. Lamborn. OK, thank you. At this point I would like to
recognize the gentleman from New Jersey, Mr. Holt.
Dr. Holt. Thank you, Mr. Chairman. First, a quick question
Dr. Aronson. Does the legislation, as proposed, do enough to
ensure a supply for Federal labs, Federal contracts, Federal
agencies, or should we pay more attention to that in the
legislation?
Dr. Aronson. From my understanding, it actually does. The
issues that I raised in my testimony regarding the legislation
are really surrounding issues having to do with access to the
in-kind program for small-scale users of helium in research,
and also looking beyond the legislation, namely at the supply
going down the road----
Dr. Holt. Yes, I will get to the supply in a minute. But
what I wanted to find is whether we should have some priority
access for certain kinds of users.
Dr. Aronson. Well, I would hope that the priority access
that Federal users and Federal grantees currently have, subject
to the fluctuations that we discussed, would continue in the--
--
Dr. Holt. OK, thank you. Mr. Page, you spoke about some of
your association members being denied tolling by current
refiners.
Mr. Page. Correct.
Dr. Holt. Did I hear you correctly?
Mr. Page. That is correct.
Dr. Holt. In this legislation, the Secretary would be given
some authority to not only ensure transparency for those
companies and those arrangements, but also to get tough with
them, if necessary. Does the legislation, as you see it, and
briefly, please, how do you see the Secretary using that
authority? How might a Secretary use that authority? Is it
sufficient?
Mr. Page. I am not certain that it is, just because there
is no real incentive. They are actually putting themselves in
more competition that is created when you have to toll. And I
see that there are not any alternatives, or doesn't seem to be
alternatives available now. But I am just not sure how that
works.
Dr. Holt. Twenty percent of the auction would be available
to----
Mr. Page. Right.
Dr. Holt [continuing]. Any kind of users, including
recreational balloons----
Mr. Page. Right.
Dr. Holt [continuing]. And so forth. But for that to work,
it depends on refiners, the four primary refiners, I presume,
being competitive enough to take the job.
Mr. Page. Correct.
Dr. Holt. For the smaller purchasers, perhaps, or even not-
so-small purchasers.
Mr. Page. Well, I----
Dr. Holt. We would be happy to hear in follow-up from any
of you of steps that we might take, other things we might build
into the legislation that you think would help with that.
In the time remaining, though, I really want to get to the
supply question. Dr. Aronson, I am really concerned that some
critical uses will find themselves in short supply in the
future, because we didn't foresee that. If you look at quantum
computing, or large-scale superconducting, or other such
things, do you see large demand that might pop up 5 years from
now, 10 years from now, 20 years from now? And will market
forces be sufficient to address that supply, that demand, to
provide the supply for that demand?
Dr. Aronson. One comment I can make is that technologies,
new technologies coming from basic research, including
technologies that could replace the need for liquid helium in
cooling some processes, depending on liquid helium because most
of the break-through technologies that we are looking at are
dependent on highly complex materials whose structure isn't
understood, and requires examination in research machines like
light sources, which themselves depend on liquid helium.
So, of course, I can't tell you what the landscape of high-
tech applications will be 20 years from now, but I am certain
that the fundamental research that we are doing will be
necessary to get us there. And that will continue to be
dependent on liquid helium, because it is a scalable resource.
That is, all different sorts and sizes of research projects can
and do use it.
Dr. Holt. Thank you, Mr. Chairman.
Mr. Lamborn. All right, thank you. Representative Lummis of
Wyoming.
Ms. Lummis. Well, thank you, Mr. Chairman. I would like to
point out to Dr. Aronson that I have been very interested in
your responses and to your testimony. I am the Chairman of the
Energy Subcommittee on the Science, Space, and Technology
Committee. So a lot of what you have been telling us about the
basic research, as well as the applied research for substitutes
for liquid helium or ways that additional research and R&D
could benefit the applications or requirements of this scarce
natural resource, is something that falls right in our
wheelhouse. We would be very interested in working with you.
So, we are just putting together our agenda for the coming
couple of years on that Committee. So if you would be so kind,
please submit to us your recommendations and other scientists
in the area that we should be consulting with regard to
preparing our agenda as to research and development regarding
these helium issues. And I would appreciate that very much.
Dr. Aronson. I would be very pleased to do that. Thank you.
Ms. Lummis. Thanks very much. Let me get to my questions.
Excuse me, Mr. Chairman. I was so excited about the science
part, I set my questions aside.
Mr. Lamborn. That is understandable.
[Laughter.]
Mr. Lamborn. You could yield some time to the gentleman
next to you and he could trade it back to you if you need a few
more moments to prepare.
Ms. Lummis. I just found them. Thanks.
Mr. Lamborn. OK.
Ms. Lummis. OK?
Mr. Lamborn. Well, please proceed.
Ms. Lummis. This is for all of our guests here. In terms of
meeting the supply demands in the companies you represent, how
comfortable are you with the safeguards in this bill to ensure
that the auction results in a stable supply? And that is for
anyone.
Mr. Morgan. As far as for Micron, the provisions, we feel,
are relatively satisfactory. Our main focus is around the
supply and enabling the operation to continue running. The
three points that have been brought up and referenced by Mr.
Boersen in relation to transparency, the transition period, I
think, is critical to establish what those processes are that
are going to be followed by the BLM. And then, of course, our
main concern is a stable supply in the industry.
The provisions we find satisfactory to support those. It is
a new system we are all going to have to adapt to and we will
just take the steps necessary to do so.
Ms. Lummis. Are there any additional safety net provisions
you would like to see in this bill, if you could? And that is
for anyone.
Mr. Boersen. One comment. So in the bill today it includes
the 1-year transition period. And it may be helpful to give the
Secretary the leverage to, depending on the situation at the
time, depending on how the auction process development by the
BLM is going, any constraints in the marketplace or
legislatively at the time, give the Secretary the flexibility
to assure that we don't run into a second helium cliff, say, in
the 14- or 15-year timeframe after the passage of the bill
itself.
Ms. Lummis. OK. And----
Mr. Page. If I could just add on to that, I feel like that
the refiners decide today who receives product and who does
not. And what this bill does is it presents an entirely new
paradigm. And under this bill I think there is a lot more
accountability, in terms of how those resources are
appropriated.
So, the work of this bill, I think, has reversed, I think,
a system that does not work, that is broken.
Ms. Lummis. Well, thank you. Mr. Page, while I have you,
although you are not maybe, the most important segment of
helium users out there, you are the segment that most Americans
learn about helium from in the first place.
Mr. Page. Right.
Ms. Lummis. So I have a question for you, specifically.
What about price increases that you would pass on to customers
as a result of an auction? Do you have a level of concern about
that?
Mr. Page. I actually think the pricing will come down,
based on----
Ms. Lummis. Oh, good.
Mr. Page [continuing]. What we are working with today. And
the reason for that is that there is no rational connection
between the pricing and the way the program is currently
working. And there is no real explanation for it, outside the
fact that some industries have been graced with helium, or more
graced, and there has been decisions made by refiners that
helium is a frivolous use, and this eliminates the opportunity
of a free market to actually operate.
And so, I think that what is going to happen is, with this
transparency, the price to my type of customers will actually
come down.
Ms. Lummis. OK. Well, that is interesting because,
obviously, the critical nature of helium to so many health-
based and science-based uses makes it an absolutely critical
resource. When I have been out to the Exxon Shute Creek LaBarge
Plant in Wyoming and seen the helium trucks pulled up, they are
printed in all different languages. And so, obviously, it is a
global resource of great importance.
And so I want to thank the Chairman for our hearing today
and for these witnesses. And I yield back.
Mr. Lamborn. OK, thank you. Representative Lowenthal of
Pennsylvania--excuse me, Cartwright of Pennsylvania. And Mr.
Lowenthal will be the next in line on the Democratic side.
Mr. Cartwright. Thank you, Mr. Chairman. I do have some
questions of the panel. My name is Matthew Cartwright. I am a
freshman congressman from Northeastern Pennsylvania, a place
where the landscape is being transformed at this time because
of hydraulic fracturing for natural gas. We have not only
wellheads going in at record paces, but also pipelines snaking
their way across the landscape in Northeastern Pennsylvania to
distribute the natural gas that comes out of the ground.
My understanding is that helium is a byproduct of natural
gas. And what I would like to hear from any of you on the panel
is, first of all, do you have any insight into whether helium
is prevalent in the natural gas being fractured out of
Northeastern Pennsylvania? And second, because there has been
so much fracking activity, and for other reasons, the price of
natural gas has come down dramatically in the recent past. And
what effect, if any, has that had on helium, and will have in
the future?
Dr. Aronson. My understanding, Congressman, is that the gas
that is produced from shale formations isn't rich in helium. It
is not an automatic byproduct of natural gas. It depends on the
formation in which the natural gas was generated and captured.
And the process by which the helium is generated is different.
So it may or may not be there. And I believe there is not much
in shale gas.
Mr. Cartwright. That was my suspicion. But it still leaves
open the question--the fact of all of the fracking going on
bringing down the price of natural gas. And what has the effect
of helium been for that?
Mr. Page. Well, let me just make one comment. In regard to
the availability of helium from natural gas, the genius of what
former generations have done with the BLM creation of the
storage facility is that it is an issue of storage. So, as you
drill for natural gas and extract this natural resource, much
of that helium gas is just being vented to the atmosphere
because it cannot be captured.
So, actually, the policy is almost the reverse of the way
it should be, and that is that there should be an inflow into
the system, rather than us talking today about emptying the
reserve. I mean if we are going to look to the generations to
come, to me that just makes common sense.
Mr. Cartwright. What makes common sense, to try to capture
the helium?
Mr. Page. Well, actually, we should be extending the
pipeline in a westerly direction and continue to use the dome
to store resources, or to accumulate resources, rather than
exhaust them.
It has been very clear in the testimony of the importance
of helium to our economy, to the future, technology. And yet we
are, I think, foolishly draining ourselves of the resources. I
truly don't understand why.
Mr. Cartwright. And then the corollary to my prior question
of fracking producing helium, obviously it is not a big source
of helium. What are the most productive ways and places in the
United States where we get helium?
Mr. Morgan. I was just going to say, as far as an end user,
which is what I am representing here, it is difficult for
Micron, at least, to answer all the questions about the supply
and what the best way is to create the helium. We are very
familiar with how it is moved around the country and so on, but
I would recommend that panel three takes the opportunity to
actually answer your question in a lot more detail.
Mr. Cartwright. I certainly will present that question to
them. And I thank you for your attention today.
I will yield back my time, Mr. Chairman.
Mr. Lamborn. Thank you. Representative Thompson of
Pennsylvania.
Mr. Thompson. Thank you, Chairman. Gentlemen, thanks for
participating in this panel, bringing your specific expertise
to this important topic. I think your testimony, as well as,
Mr. Chairman, the testimony of other witnesses we have had on
this issue certainly has been enlightening, in terms of the
importance of helium, strategically, to this country and,
whether it is technology, innovation, new discoveries and,
appropriate for today, I would say important in the whole idea
of love, as well, with Valentine's Day and balloons.
My first question just kind of opens up--what do you see as
the advantages of creating this auction-based system, versus a
straight extension by funding of the current policy? What are
the kind of the pros, or advantages this legislation has over
that alternative? Any opinions?
Mr. Page. This is a free-market approach, and we don't
currently have a free-market approach. I mean it is basically
the Federal Government has created a monopoly, in terms of the
availability of helium in this country. So I think that really,
at the core, that is the really important thing this
legislation does.
Mr. Morgan. Yes, it is difficult for me to make certain
comments when I purchase my helium from the number of people
that are sitting behind me right now.
[Laughter.]
Mr. Thompson. That is OK. I mean we are used to sitting
across from folks who don't always agree, so----
Mr. Morgan. However----
Mr. Thompson [continuing]. You should be comfortable with
it.
Mr. Morgan. However, I would say that I do believe that the
current policies create a certain disadvantage to some
suppliers out there, and there is a certain amount of tension
that is probably put into the system, where certain suppliers
have to have a much higher focus on cost, and their ability to
manage costs differently, based on the current system.
So, I believe the new system that is being proposed would
provide a means in which to level that playing field a certain
amount and, to Mr. Page's comments, create a more free-market
system.
Mr. Thompson. OK. With that, let me go back to Mr. Morgan,
I have a question specifically for you. In your testimony you
wrote that we have been seeing helium supply shortages. And
over the past years your company only received about 80 percent
of the helium which you contracted.
What impact might these statements have on the overall
helium prices?
Mr. Morgan. Since I am an end user, our negotiations are
based off of what the market is driving. I believe that the
pricing essentially is established based off of a market-driven
economy.
Today, the last year, and why we have been put on
allocation, is not necessarily the eminent situation with the
helium reserve, but it is because of the maintenance activities
that have been done throughout this last summer at both the
Exxon facility in Wyoming, as well as the maintenance that has
been done at the BLM facility, which we learned about later had
impacts through the summer. So that is what has been driving
our allocation methodology.
We are concerned, which has been highlighted, with the
potential of 30 percent of the market, or 30 percent of the
helium being taken off the market, due to a need for action
here at the legislative level.
Mr. Thompson. Mr. Page, in your testimony you mentioned the
difficulty of obtaining the helium through the auction process,
specifically because of your ``lack of access to
infrastructure.'' Do you have any concerns about the way the
auction is set up in H.R. 527?
Mr. Page. No, I think that there is a remedy with this new
bill.
Mr. Thompson. OK, very good. And my final question, just a
follow-up, is you also discuss concerns with a monopoly on the
helium refining side. How would you propose increasing
refining?
Mr. Page. How would I propose to--I am sorry?
Mr. Thompson. Increasing refining.
Mr. Page. Well, I think that certainly introducing a
Nitrotec or some other type of outlet would be a first step.
All of the helium that is being refined today by the three
refiners are liquified. And there is a tremendous amount of
costs that are built in for getting it cold enough and getting
it pure enough to liquify it. And fully a third of the users
out there don't even want it. So you are building in additional
costs that are unnecessary.
So, I think that is a good first step. It doesn't have to
be as high-tech. It is also a great way to make the reserves
more viable for a longer term, because they will not require
the huge volumes of helium to continue operating. The current
refiners--they just need a lot of volume to make it profitable.
Mr. Thompson. Thank you. Thank you, Chairman.
Mr. Lamborn. Thank you. And the gentleman from California,
Mr. Lowenthal.
Dr. Lowenthal. Thank you, Mr. Chairman, and thank you for
holding this hearing. I appreciate it. And also to the Ranking
Member. I think you answered some of these questions already on
the panel, I just want to dig a little deeper.
And the first question is that the last time that the
refining capacity of the refineries connected to the BLM helium
reserve and were collected and made public was in the year
2000, I believe. And the changes in refining capacity that have
occurred since that time have not been made public. And it is
unclear whether the BLM is even aware of these upgrades.
And so, my question is, do you think that the transparency
provisions that are included in this legislation, which would
require the public reporting of refining capacity would help
your industries to participate in this new helium auction and
the markets? You have talked about the benefits, potentially,
of the auction and of the markets. Would the transparency of
actually the refining capacities help in this process? And I
ask any of the members of the panel to respond.
Dr. Aronson. I am certainly no expert in markets, but it
seems to me knowing the supply capabilities will help regulate
the market and the products. So it has to help.
Dr. Lowenthal. OK. Anybody else want to jump in?
Mr. Boersen. So the transparency provisions, as many of us
have mentioned, are absolutely critical. Whether the capacity
piece of it specifically is key to that is hard to say. But
having all that information in the public light would have
certainly prevented major problems that companies like myself
and Mr. Morgan's experienced last year.
Mr. Morgan. I absolutely concur with Mr. Boersen with
regard to the impact of visibility into the maintenance and the
minutes associated between the meetings that are associated
between the distributors and the refiners and the BLM. We would
obviously appreciate another view of visibility that would
allow us to keep track of what is going on in the market.
Dr. Lowenthal. Thank you. And my second question is that
whether, in fact, to keep--and you have talked about the
impacts and moving toward the auctions, but what would happen
if we didn't? What would happen, in your perception, if we just
keep the current system in place until we exhaust the BLM
supply? Do you think that we are going to have even more
disruptions if we do that, and there will be more price
spiking? And what happens if we don't move forward?
I mean there has been some talk that sometimes it is
difficult to get legislation out of this Congress. I know that
is a shock to all of you. But what would happen if we don't?
Where do you see the future, in terms of paying to your
industries and I know you have touched on this, but maybe you
can respond a little bit more.
Mr. Page. I personally don't think that our industry will
survive. There just is not a above-the-board, even-handed
approach to the distribution of helium to our industry. And at
any given time a manufacturer, a major manufacturer of balloons
says that 20 to 25 percent of retail locations have no helium
and do not know when they are going to have it. You can
certainly see the impact that that will have, the ripple
effect.
And there is literally hundreds of thousands of jobs that
are at stake that are related, either on the retail side or on
the production or those allied industries, that work in
lockstep with our industry to promote our product line.
Dr. Lowenthal. Others? What would happen to you if we
continue where we are today?
Mr. Boersen. So, first and foremost, we need a bill. Right?
Without a bill, we have BLM shut down and we have a major
problem in the fall. So that is job one, to get the bill
passed.
As for the specifics on the auction, I think the Committee
can manage figuring out exactly how that should be structured.
But job one is getting a bill passed.
Dr. Lowenthal. Thank you.
Dr. Aronson. I would say that since we are seeing already
that even Federal users, contractors to Federal agencies, which
have some priority, are seeing price and availability
fluctuations increasing, just doing more of the same is going
to get us more of the same. So----
Dr. Lowenthal. More spikes? More----
Dr. Aronson. Yes, right.
Dr. Lowenthal. More difficulty in obtaining----
Dr. Aronson. Especially with a big chunk of the world's
market supply going offline, it is only going to get worse.
Mr. Morgan. As far as the semiconductor industry, obviously
we would have to make some serious adaptions to how we do
business. Conservancy measures in getting away from helium
would be a major disruption to what we would have to incur. I
agree with Mr. Boersen with regard to job one is to get the
bill passed so that we have the supply today, and that we can
sustain operations, moving forward.
The semiconductor industry is obviously supporting
tremendous growth. You can look around the room here, and
everything that is being videotaped and so on is going onto
some sort of memory module somewhere in the world. And without
sustainment of that growth, a lot of opportunities would be
curtailed in the future.
Dr. Lowenthal. Thank you. And, Mr. Chairman, I yield the
remainder of my time.
Mr. Lamborn. All right, thank you. And I want to thank the
panel for being here. I appreciate your taking the time and
effort to help inform us on this important issue.
And I would like to now bring up the third and last, but
certainly not least, panel, representatives from the refining
and distributing portion of the helium industry.
We have with us: David Joyner, President of Air Liquide
Helium America, Inc.; Tom Thoman, Division President for Gases
Production of Airgas, Inc.; Kevin Lynch, Senior Vice President
for Specialty Gases and Helium of Matheson Tri-Gas; Walter
Nelson, Director for Sourcing and Supply Chain of Air Products
and Chemicals, Inc.; Nick Haines, Head Global Helium Source
Development of Linde North America; and Scott Kaltrider, Vice
President for Business Management and Helium of Praxair, Inc.
And as you are coming forward I will explain how the
testifying works. Like all witnesses, your written testimony
will appear in full in the hearing record, so I would ask that
you keep your oral statements to 5 minutes or less, as outlined
in our invitation letter to you and under Committee Rule 4(a).
Our microphones are not automatic, so you need to turn them
on when you are ready to begin. And as you have seen with
earlier panels, the lights turn yellow after 4 minutes and turn
red at 5 minutes. And I would ask you to conclude at that time,
if not sooner.
So, we will now begin with the first of our distinguished
panelists, Mr. Joyner.
STATEMENT OF DAVID JOYNER, PRESIDENT,
AIR LIQUIDE HELIUM AMERICA, INC.
Mr. Joyner. Thank you, Mr. Chairman and members of the
Committee. I appreciate the opportunity to testify today. I am
President of Air Liquide Helium America, part of Air Liquide's
U.S. organization. Headquartered in Houston, Texas, Air Liquide
has over 5,000 employees in over 200 locations throughout the
country. Air Liquide is also a major supplier of refined liquid
helium, worldwide. And through my over 20 years in the natural
gas sector, I have gained an in-depth understanding of the
helium business.
And I want to commend and thank you for your hard work and
that of your staff over the last year to address this important
issue. It is Air Liquide's highest priority to assist you in
continuing the operation of the Federal helium reserve in a
manner that creates a stable and reliable supply for end users,
supporting their needs as well as providing appropriate return
on a Federal resource for the U.S. taxpayer.
Today I will confine my remarks to two issues that we see
as important, as the Committee continues its legislative work:
the first, accessibility; and the other, price discovering and
qualified bidders.
Regarding accessibility, the helium stored at the Federal
helium reserve is a crude helium that needs to be refined--in
other words, tolled into a liquid helium--in order for it to
then be transported out to other facilities for additional
processing, and then on to end users. Air Liquide is a non-
refiner on the BLM system infrastructure. And as such, we must
enter into tolling contracts with the refiners who are also our
competitors in the sales market in order to be able to
distribute any helium that we purchase from the BLM.
So, put simply, refiners are not currently entering into
tolling agreements for open-market sales with non-refiners. And
as the 2010 NRC report found, without such tolling contracts,
non-refiners are effectively prohibited from using the BLM
source, leaving end users with less competition for their
business.
To be clear, these refining facilities pre-existed the 1996
Act. They were built to take advantage of private helium
reserves that were also on the infrastructure. But as an
unintended consequence, now the Federal reserve is captive to
these refineries.
As a result, the current system does not promote a
competitive market. The proof is that Air Liquide is the only
non-refiner that has bought any amount of BLM helium in years.
And despite that, we are currently not able to have a refiner
engage in a new open-market tolling agreement.
Now, Mr. Chairman, we have heard some analogies that folks
have been making in an attempt to shut down the discussion on
access related to things such as the strategic petroleum
reserve and car manufacturers. These analogies are fatally
flawed, and I would be happy to answer any questions in those
regards following testimony. Our goal is to promote competition
and appropriate return on the taxpayer resource.
Now, to ensure the Committee's goal of increasing access is
realized, we recommend clarifying that purchase of helium and
Part B of the auction will receive corresponding helium
delivery allocations. Such an approach has already been a
proven success. The BLM recently enacted a program that
encourages bidders to supply helium to Federal users with an
incentivized tolling basis. In fact, Air Liquide has
participated in this system, and now reliably supplies critical
helium needs to the U.S. military as a part of that program.
So, linking the purchase volumes with corresponding
delivery volumes on the pipeline meets the twin goals of
increasing access and ensuring reliable supply for end users,
with the added benefit of administrative ease. Now, let me be
clear. This is a proven incentive-based proposal. And
regardless of claims you may hear today, it does not interfere
with private contracts in any way.
Now, with regards to the issue on price discovery and
qualified bids, on pricing we urge the Committee to be
cognizant of the impact that the changes to the BLM pricing
structure can have on the global helium market, given that the
BLM serves as an index for sources worldwide.
So, first, in determining the minimum sales price, we
suggest that you look at all contracts active in the last 2
years, so the BLM has a maximum number of data points to arrive
at an accurate minimum price that offers the fairest return to
the U.S. taxpayer. Additionally, we recommend adding
``wholesale'' to the definition of qualifying helium
transactions. It provides a more objective and transparent
calculation that can be repeatable to determine the net crude
helium value.
And finally, as the Committee departs from the status quo
to develop a new pricing auction that is based on price, not
just volume, we urge putting safeguards in place that ensures
this one-of-a-kind system does not distort prices worldwide, as
a result. And we believe those safeguards will mitigate price
volatility for end users.
Now, regarding the qualified bidders, we recommend ensuring
persons with an infrastructure capable of accepting and
delivering threshold quantities of helium be allowed to
participate in the auction process. Doing so ensures that BLM
can manage its sale of Federal crude helium effectively and
efficiently, and also ensures that the broadest base of end
users can depend on the broadest competition of bidders to
service their helium needs and address their concerns over
reliability of end use supply.
Like the Committee, Air Liquide has worked to achieve
consensus among industry stakeholders in order to identify a
path forward for extending the Federal reserve and ensuring a
reliable supply of helium for end users, and we look forward to
continuing this effort, and strongly believe that changes to
the current system are achievable without disrupting supply and
while still enhancing competition in return for the U.S.
taxpayer.
We thank the Committee for the testimony today.
[The prepared statement of Mr. Joyner follows:]
Statement of David Joyner, President, Air Liquide Helium America, Inc.
Chairman Hastings, Ranking Member Markey, and Members of the
Committee, I appreciate the opportunity to testify today on issues
relating to the domestic helium industry and the Federal Helium
Reserve. My name is David Joyner, and I am the President of Air Liquide
Helium America, Inc., the helium company for American Air Liquide, one
of the Nation's leading industrial and medical gas companies.
Headquartered in Houston, Texas, Air Liquide has over 5,000 U.S.
employees in more than 200 locations throughout the country. For
decades, Air Liquide has offered industrial and medical gases and
related services to the Nation's largest industries including
manufacturing, electronics and healthcare. As a company, Air Liquide is
focused on technological innovation to help make our Nation's
manufacturing and industrial sectors more efficient, environmentally
friendly and productive.
I have been with Air Liquide working in the industrial gas sector
for over twenty years, most recently as President of Air Liquide Helium
America. In this role, I have gained an appreciation for the
complexities of the helium market as well as the importance of helium
to a variety of end-users. At the outset, I want to commend and thank
you all for your hard work and that of your staff over the last year to
consider this important issue. It is Air Liquide's highest priority to
assist you in continuing the operation of the Federal Helium Reserve in
a manner that creates a stable and reliable helium supply capable of
supporting the needs of end-users as well as providing an appropriate
and reliable return on a Federal resource for U.S. taxpayers.
Air Liquide is a major supplier of refined helium in the United
States and globally to customers that range from companies on the
cutting edge of the electronics industry to health researchers,
automotive suppliers, laboratories and manufacturing facilities all
over the world. When Congress passed the 1996 Helium Privatization Act
(the 1996 Act), it was expected that the supply of crude helium in the
Federal Helium Reserve would last until 2015. It is now possible that
the Federal Helium Reserve's supply of helium could last much longer if
properly managed. Despite the amount of remaining helium, the funding
mechanism in the current law could lead to the closure of the Federal
Helium Reserve in the Fall of 2013. This closure would effectively take
close to a third of the global supply and half of the domestic supply
of helium offline creating shortages and substantially increasing the
cost of helium for end-users. Accordingly, the timing of this hearing
is critically important as Congress must act in order to ensure access
to the helium remaining in the Federal Helium Reserve.
As members of this Committee have noted in previous hearings, a
stable supply of helium is important to our Nation's economy as it is a
vital component in products ranging from magnetic resonance imaging
(MRI) machines to airbags for the automotive sector. Helium is also
important to our Nation's security as it is used in a variety of
military and defense surveillance programs. Finally, the reliability of
our helium supply is important for the Nation's research efforts such
as those being undertaken at our Nation's national laboratories and at
our own Delaware Research and Technology Center. These important
efforts would be threatened by any sustained shortage in the domestic
helium supply, particularly one that can be largely avoided by
responsible management practices.
For these same reasons, it is important to consider what changes
can be made to create a more open and competitive helium market that
would improve reliability and benefit end-users. To that end, I would
like to confine my remarks to two issues that we see as important as
the Committee considers legislation relating to the Federal Helium
Reserve: (1) accessibility; and (2) price discovery and qualified
bidders.
I. Increasing Access and Creating a More Competitive and Transparent
Market for Federal Crude Helium
As the Committee is aware, the helium stored at the Federal Helium
Reserve is ``crude'' helium which must first be refined (i.e.
``tolled'') into liquid before it is transported to other facilities
for additional processing and then on to end-users. The process of
refining helium involves the transport of the crude helium from the
Federal Helium Reserve through the Helium Pipeline--a system that runs
through Kansas, Oklahoma, and Texas--to one of six refining facilities
that are located on the pipeline. These six refining facilities are
owned by just four companies and were established by those companies in
the last century to take advantage of privately-owned crude helium
supplies. Nevertheless, with the enactment of the 1996 Act and the
resulting use of the federal government's infrastructure to sell crude
helium from the Reserve, these companies gained the unexpected windfall
advantage of controlling access to the public's stockpile of crude
helium due to their preexisting refineries.
Air Liquide is a so-called ``non-refiner'' and, as such, we must
contract with the refiners--who are also our competitors in the sales
market--to be able to distribute any helium purchased from the BLM. Put
simply, refiners are not entering into tolling contracts for open
market sales with non-refiners, effectively prohibiting non-refiners
from utilizing the BLM source. In recent years, the BLM has
contractually committed 94 percent of the captive deliverable volumes
to these refiners and six percent to non-refiners. However, in reality,
the refiners also control the remaining six percent because without a
tolling contract in place, the non-refiners cannot be assured of
refined product. Given that any amount of crude helium that remains
unsold reverts back to the refiners for purchase, another disincentive
for the four companies to provide tolling services exists--an
additional market advantage that was surely not envisioned by the 1996
Act.
This current system's drawbacks were noted by the National Research
Council's 2010 report, Selling the Nation's Helium Reserve, (the ``NRC
2010 Report'') which stated: ``given that refining the helium must take
place at one of the facilities connected to the Helium Pipeline, the
limited number of potential processors of federally owned crude helium
place significant restrictions on alternatives to the current sale
procedures being followed by BLM.'' \1\
---------------------------------------------------------------------------
\1\ Selling the Nation's Helium Reserve, National Research Council:
Committee on Understanding the Impact of Selling the Helium Reserve,
The National Academies Press (2010).
---------------------------------------------------------------------------
Proof that this system does not promote a competitive market can be
seen in the fact that, in the last five years, Air Liquide has been the
only non-refiner to purchase any amount of the six percent allocation.
The consequences of the situation described above have important
implications for end-users of helium. Adopting a more market-based
approach was recommended by the NRC 2010 Report which stated the
following:
The Bureau of Land Management (BLM) should adopt policies that
open its crude helium sales to a broader array of buyers and
make the process for establishing the selling price of crude
helium from the Federal Helium Reserve more transparent. Such
policies are likely to require that BLM negotiate with the
companies owning helium refining facilities connected to the
Helium Pipeline the conditions under which unused refining
capacity at those facilities will be made available to all
buyers of federally owned crude helium, thereby allowing them
to process the crude helium they purchase into refined helium
for commercial sale.\2\
---------------------------------------------------------------------------
\2\ Id. at 8.
---------------------------------------------------------------------------
Utilizing this approach would result in a more accurate and
transparent BLM system and would benefit consumers by increasing the
number of suppliers competing for the business of federal users and
open market users with helium from the BLM. In an analogous situation,
the United States has recognized the benefits of opening privately
owned interstate pipeline capacity to the market in the natural gas
industry where ownership of transportation capacity rights is held
separate from ownership of the actual gas pipeline.\3\ Noting the
impact this system has had on the domestic market, the report states:
``[u]nbundling of capacity rights from facility ownership makes it
possible for a producer to access markets through a competitive bid for
pipeline capacity.''
---------------------------------------------------------------------------
\3\ Shale Gas and U.S. National Security, Kenneth B. Medlock, et
al., James A. Baker III Institute for Public Policy (July 2011).
---------------------------------------------------------------------------
We greatly appreciate the efforts of Members of this Committee and
Committee staff to meet the goal of increasing access in H.R. 527--the
Responsible Helium Administration and Stewardship Act. In addition to
Chairman Hastings and Ranking Member Markey, we would specifically like
to recognize Representative Flores for his active and diligent
engagement on this issue and similar focus towards ensuring the
program's future sustainability. To ensure that this goal is realized
on the ground, we are recommending the insertion of language into the
bill that would tie volumes of crude helium purchased in an auction to
corresponding pipeline delivery allocations. Such an incentive-based
approach is not unprecedented. BLM recently piloted a methodology that
encourages bidding to supply helium to federal users via the ``in-
kind'' and ``MOU'' program by providing the buyer of the helium volume
with a corresponding helium delivery allocation that is held for the
buyer until the buyer designates that the volume is to be delivered to
a certain refiner who has agreed to toll the in-kind volumes. To match
this program, we recommend clarifying that purchasers of helium in
Section 2 Part B of H.R. 527's envisioned auction would also receive
corresponding helium delivery allocations. Working together with other
provisions in H.R. 527 that ensure competitiveness and fair acts and
practices, an expansion of this methodology to include the auction
envisioned by H.R. 527 would not interfere with contractual
arrangements between private parties but would instead increase
participation and transparency in the BLM's efforts while providing
greater competition and reliability for end-users.
Finally, we believe the transition process to a new sales system,
especially system similar to the one already being managed by BLM,
should be a seamless and prompt progression to allow both industry and
end-users to have the confidence that a reliable supply of helium from
the BLM is ensured.
II. Price Discovery and Qualified Bidders
Under the provisions of the 1996 Act, the BLM was directed to sell
off the helium from the Federal Helium Reserve at a price solely
designed to pay down the Reserve's existing debt. It is commonly agreed
that this resulted in the BLM charging a price below the free market
value of crude helium. Air Liquide supports active price discovery that
would allow the Secretary to establish a more accurate minimum price
for federal crude helium. Currently, H.R. 527 would only allow the
Secretary to consider ``new or newly negotiated'' contracts for the
purchase or sale of at least 15 million standard cubic feet of helium
over the previous two years. It is our recommendation that the phrase
``new or newly negotiated'' be stricken from this definition as most
helium contracts in the market are active long-term contracts. These
long-term contracts typically have price adjustments year-over-year
that ensure they will reflect current market conditions. It is our
recommendation that such long-term contracts, active in the last two
years, be included for the Secretary's consideration so BLM has the
maximum number of data points from which to derive a minimum sale price
that offers the fairest return to the U.S. taxpayer. We would also
recommend that the reference be clarified by adding ``wholesale' to the
definition of qualifying domestic transactions to avoid the subjective
and unrepeatable analysis necessary to theorize the net crude helium
value in such transactions.
Air Liquide's goal is to ensure a stable and reliable supply of
helium for end-users. Accordingly, as H.R. 527 opens up access to
federal crude helium for more bidders, we also recommend ensuring that
only persons with an infrastructure capable of accepting and delivering
vast quantities of helium (we have recommended a minimum threshold of
750,000 standard cubic feet delivery increments and prorated 10,000,000
standard cubic feet quarterly lots) be allowed to participate in the
auction process. Doing so allows the BLM to manage its sales of federal
crude helium effectively and efficiently while ensuring that the
broadest base of end-users will be able to rely on a broader base of
bidders to service their helium needs.
Finally, as stated, we commend the Committee's efforts to include
methodology that can achieve a more accurate minimum price for BLM
crude. As the parties work towards achieving the most appropriate
return to the U.S. taxpayer, we also ask the Committee to be cognizant
of the impact that future changes to the BLM posted crude price will
have on the global helium market. As Air Liquide has previously
testified, a predictable, repeatable and verifiable BLM crude price
will carry lasting, stabilizing effects for not only the domestic but
also the global helium community.
Air Liquide appreciates the Committee's attention to this important
issue and supports the goal of ensuring the continuing viability of the
Nation's helium supply. We believe the changes to the current system
are achievable without disrupting supply and would do much to add
competition to the market and benefit consumers. I thank the Committee
for inviting me to testify, and I would be pleased to answer any
questions you may have.
______
Mr. Lamborn. OK, thank you.
Mr. Thoman.
STATEMENT OF TOM THOMAN, DIVISION PRESIDENT,
GASES PRODUCTION, AIRGAS, INC.
Mr. Thoman. Mr. Chairman and members of the Committee, my
name is Tom Thoman. I am the Division President for Gases
Production at Airgas. And we are headquartered in Radnor,
Pennsylvania.
I would like to start this morning by expressing Airgas's
appreciation for the significant efforts that have been made by
this Committee and its staff. You have tackled the tough issues
and you are trying to remedy a distorted market that has
historically been closed to all but a few bidders.
Airgas was founded in 1982 and operates the largest
domestic infrastructure and supply chain for delivering helium
in the United States, with more than 80,000 customers,
accounting for 22 percent of the domestic market. Our customers
range from OEM manufacturers, research, analytical,
environmental, and government labs, the aerospace industry,
oil, gas, and chemical industries, welders, hospitals, clinics,
and the Federal Government. The lion's share of our helium
business is with customers like these.
As you well know, the Helium Privatization Act of 1996
established a pricing mechanism based on debt repayment and a
sales construct whereby taxpayer-owned crude helium can
effectively only enter the market after first being allocated
to one of three companies with pre-existing refining facilities
on the BLM pipeline. Well-intended as the reforms set forth in
H.R. 527 are, we believe they fall short of what is needed in
the U.S. marketplace.
Specifically, there are four critical elements that must be
addressed in the bill, the absence of any one of which could
well result in a worse situation for U.S. helium markets than
the situation we confront today. In fact, because of the
contracts we have with the refiners, and our commitment to meet
the need of our customers, a continuation of the current
regime, but with pricing measures like those proposed in this
bill, would be preferable to a construct that fails to
adequately address each of these issues. Let me touch on them.
First, the bill must recognize the capital-intensive nature
of this business, and the need for a certainty of supply. A
requirement that auctions be held no frequently than two times
each fiscal year would undermine the ability of refiners and
bidders to effectively use their assets to service customers.
Long-term agreements are a norm in our business because of the
physical assets required to transport and store helium. They
are very expensive, and generally acquired only at the time to
meet the need for a new long-term customer.
With auctions occurring two times a year, we would have no
way of knowing, from period to period, whether we would have
product to meet our contractual obligations to our customers.
And neither Airgas nor other potential bidders would be
incented to make the investment necessary to serve or continue
to serve the end user market. Airgas, therefore, asks that you
consider staggered auctions, providing for multi-year supply
commitments.
Second, the bill will not meet its objective if refiners
are not obligated to refine for winning bidders that have the
infrastructure to serve the U.S. market and 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, would be able to risk bidding on
helium in an auction.
And this is not a lot to ask of the refiners. After all,
since the passage of the 1996 Act, they have enjoyed a virtual
monopoly that repaid any investment they have made many times
over.
Third, the bill must thwart opportunities for market
manipulation and disruption by imposing immediate storage fees
and mandating the prompt removal of all acquired helium. Also,
this Committee should seriously consider an allocation
methodology based on a bidder's share of the U.S. end user
market, with pricing determined by measures like those you have
proposed in this bill.
Fourth, and perhaps most critical, the bill should provide
that all helium that is owned by the U.S. taxpayer, or that has
benefitted from the use of the Federal pipeline and/or storage
facility, be designed to meet domestic demand before it can be
exported. We believe that such a provision is justified by the
fact that this is a taxpayer-owned strategic resource which is
currently under-supplied in the domestic market. We are not
proposing a ban on exports. We are proposing that steps be
taken to assure that this vital resource is prioritized to
serve domestic needs.
Airgas appreciates the efforts of H.R. 527 to increase
access, foster competition, and drive toward a more market-
based return to the taxpayer. With the adoption of our four
recommendations, we believe this bill will significantly
benefit the marketplace, the end users, and, importantly,
taxpayers themselves.
Thank you for the opportunity to testify, and we will look
forward to your questions.
[The prepared statement of Mr. Thoman follows:]
Statement of Tom Thoman, Division President--Gases Production,
Airgas, Inc.
Mr. Chairman and Members of the Committee, I am Tom Thoman and I
serve as the Division President of Gases Production for Airgas, Inc.,
headquartered in Radnor, Pennsylvania. I had the honor of addressing a
subcommittee of this panel last July regarding the impact of helium
supply shortages on our economy, and I thank you for the opportunity to
testify before many of you again, this time on the specifics of the
Federal helium program.
As many of the Committee Members heard last year, we are at a
crucial point in addressing how the Nation will treat this critical,
but diminishing, natural resource. In my testimony today, I intend to
briefly revisit the supply constraints affecting our business and our
customers, while focusing the majority of my testimony on
recommendations for how best to alleviate the situation--including
suggestions regarding the bill H.R. 527.
Before addressing a few key points in the bill, let me first
express Airgas' appreciation for the significant efforts that have been
made by this Committee and its staff. Rather than taking the easy road
of maintaining the status quo, you have evidenced through this bill
your willingness to tackle the difficult issues and to try and remedy a
distorted market that has historically been closed to all but a few
participants.
Founded in 1982, Airgas operates the largest domestic
infrastructure and supply chain for delivering helium in the U.S., with
more than 80,000 customers accounting for 22% of the domestic market.
We are therefore in a unique position to attest to both the vital role
that this limited resource plays in our economy, and the disruptive
effects that the current shortage is having on our customers.
Airgas serves a diverse customer base. Our customers include OEM
manufacturers that use helium in the airbags we have in our cars and
trucks; hospitals, clinics and nursing homes where helium is mixed with
oxygen to provide life-saving breath for asthma sufferers; research,
analytical, environmental, and government labs where helium is used as
a carrier gas in chromatography; the aeronautical and aerospace
industries that use helium for leak detection; welders who use a blend
of helium to produce shielding gases when building and repairing
nuclear facilities; hospitals and clinics where much-needed maintenance
supplies of liquid helium are used to cool MRI and NMR equipment;
diving companies that use helium to produce diving gases for offshore,
deepwater work on oil platforms and drilling rigs; and the Federal
government that uses helium in weather monitoring and defense
applications. Uses like these represent the lion's share of our helium
business.
As you well know, the Helium Privatization Act of 1996 established
a pricing mechanism based on debt repayment and a sales construct
whereby the taxpayer-owned crude helium can effectively only enter the
marketplace after first being allocated to one of the three companies
with pre-existing refining facilities on the BLM pipeline. Taken
together, 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.
Mr. Chairman, it is clear from H.R. 527 that the Committee is well
aware of the numerous flaws in the existing regime for sales of
taxpayer-owned helium from the Federal Helium Reserve, and how that
faulty regime underpins the problems we now face. Those flaws have been
accurately and repeatedly documented by the National Academy of
Sciences, the GAO, and the Department of the Interior's Inspector
General.
Well intended as the reforms set forth in H.R. 527 are, we believe
they fall short of what is needed in the U.S. marketplace. My goal is
to emphasize the importance of including four critical elements in the
bill, the absence of any one of which could well result in a worse
situation for U.S. helium markets than the situation we confront today.
In fact, from the perspective of the U.S. helium market we serve, a
continuation of the status quo, with the addition of pricing measures
like those in last year's Senate Bill 2374, would be preferable to a
flawed bill that fails to adequately address each of these issues.
First, the bill must recognize the capital intensive nature of this
business and the need for certainty of supply. The current bill
provides that auctions must be held no less frequently than two times
each fiscal year. While we understand that frequent auctions may be
more reactive to price changes in the marketplace, such a policy would
undermine the ability of refiners and bidders to effectively utilize
their assets and serve their customers. Airgas' typical contract with
its end-user customers extends for a five-year term. Agreements with
our suppliers are even longer. One reason for this is that the physical
assets required to transport and store helium are very expensive and
are generally acquired only to meet the need of a new, long-term
customer. With auctions occurring two times a year, we would have no
way of knowing from period to period whether we would have product to
meet our contractual obligations to our customers. In addition, neither
Airgas nor other potential bidders would be incented to make the
investment necessary to serve or continue to serve the end-user market.
Airgas therefore asks that you consider staggered auctions providing
for multi-year supply commitments. In the first auction, the BLM could
agree to sell 2-, 3- and 4-year supplies and in subsequent years the
auctions would replace those expiring that year. During intervening
years, the helium being sold under a multi-year commitment could be
subject to a CPI or other formulaic cost adjustment.
Second, 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. This is not a lot to require of the refiners.
After all, since at least 1996 they have enjoyed a virtual monopoly
that has repaid any investment they made many times over.
Third, the bill must thwart opportunities for market manipulation
and disruption by imposing immediate storage fees and mandating the
prompt removal of all acquired helium. Otherwise, supply chains will be
disrupted and winning bidders will be in a position to choke off supply
and drive-up prices to customers suddenly unable to get product from
their previous supplier. A bill which provides for an allocation
methodology based on a bidder's share of the U.S. end-user market, with
pricing determined by measures like those you have proposed in this
bill, would best address the market disruption/manipulation issue and
would also provide a better opportunity for U.S. businesses and
researchers to get the helium they need. We think the House should
seriously consider such a fair and straight-forward approach.
Fourth, and perhaps most critical, the bill should provide that all
helium that is owned by the U.S. taxpayer or that has benefited from
use of the federal pipeline and/or storage facility be designated to
meet domestic demand before it can be exported. We believe that such a
provision is justified by the fact that this is a taxpayer owned,
strategic resource which is currently undersupplied in the domestic
market. We are not proposing a ban on exports; we are merely proposing
that steps be taken to assure that this vital resource is prioritized
to serve domestic needs.
Airgas firmly believes that unless this bill (i) addresses the
capital intensive nature of this business and its need for certainty of
supply by providing for multi-year supply commitments, subject to CPI
or other formulaic price increases; (ii) mandates tolling at reasonable
rates for the benefit of winning bidders that do not have refining
capacity on the pipeline; (iii) protects against market disruption and
manipulation; and (iv) provides that helium that is owned by the U.S.
taxpayer or that has traveled through or been stored in the Federal
system be applied to domestic needs first, our customers and other U.S.
businesses that rely on this vital resource will continue to suffer
from unsustainable supply disruptions.
______
Response to questions submitted for the record by Tom Thoman,
Division President-Gases Production, Airgas, Inc.
Answer to Question 1
We have sought to enter tolling contracts with the three refiners
and have been rejected.
We appreciate the effort contained within H.R. 527 to incentivize
tolling agreements, however we believe they fall short of what is
necessary, and in fact, serve as a disincentive for the refiners to
provide the very services the bill seeks to compel. Because the
legislation allows any entity with a tolling agreement to participate
in the first sales tranche of 60%, the refiners are actually
disincentivized to make such arrangements available, because to do so
would come at their own expense in their otherwise guaranteed access to
60% of the Reserve's resources. Another reason that the refiners will
not toll for the bidders in tranche 2 is that though the 20% ``set-
aside'' in tranche 3 is intended to serve as a carrot for the refiners
to make their services available to the bidders in tranche 2, we are
extremely confident that the refiners would prefer for that final
tranche not to be made available to anyone rather than have it procured
by a competitor. In such a scenario, (as with a multitude of other
possibilities for how the proposed auction system would play out), if
the 20% is not made available due to their refusal to refine for
competitors, they will simply exercise force majeure clauses on their
private contracts with the distributors and U.S. businesses will
suffer.
Airgas strongly supports mandatory tolling. In fact, we believe
that in the absence of guaranteed access to tolling, any alternative
proposal will fail because it will not be in the commercial interest of
the non-refiners to bid on a resource for which there is no certainty
of having it refined.
We believe that only with some guaranteed access to refining
services can genuine competition for federal helium be truly assured.
We believe that the circumstances justify a requirement that the
refiners agree to perform these services as a pre-condition of
participating in future federal auctions. While the precise origins of
these refining facilities remain murky, they have (at a minimum)
enjoyed exclusive access to federally managed, taxpayer funded,
facilities for the transportation and storage of federally owned
helium. Further, as a result of the 1996 legislation they have enjoyed
a monopoly on the purchase of that federally owned helium--purchases
which took place at below market prices. In the absence of new
legislation all access to federal helium comes to a halt. Therefore,
the refiners have no argument that they have a reasonable expectation
that their monopoly of access should continue. In light of this, and
the remarkable benefits they have received over the last 16 years, it
is perfectly reasonable to require them to perform refining services
for others as a pre-condition of participating in future auctions. Such
a requirement is essential if meaningful competition is to be achieved.
Answer to Question 2
Airgas fully supports the 30% acquisition limitation by any one
party. Such a limitation is necessary to ensure that market distortions
do not result as a consequence of one party, or a small number of
parties, controlling a disproportionate share of this taxpayer owned
resource. However, it is not effective as a tool to facilitate
competition unless H.R. 527 is adjusted to allow for mandatory tolling,
increased participation by qualified participants, and improved surety
of supply. We believe it is necessary that the bill facilitates a
regime where 50% of the auctioned volumes would be reserved for
refiners, and the other 50% would be competed for by qualified
participants (defined as those entities which can demonstrate ownership
of the necessary infrastructure or assets to deliver the product to the
end-use market, or participants who can demonstrate use of 15 million
scf of helium per year). We would further support allowing any
unsubscribed helium in the second 50% to revert back to the refiners.
We believe that such a program, accompanied by guaranteed access to
refining services, will afford Airgas and similarly situated companies
the opportunity to purchase sufficient volumes of helium to meet our
obligations to domestic consumers, many of whom are currently on
allocation. If enacted, the commercial, economic, and market factors
flowing from such a regime will drive fair competition, rigorous
participation, a superior return to the taxpayer, and vastly improved
security of supply for domestic end-users.
______
Mr. Lamborn. OK, and thank you.
Mr. Lynch.
STATEMENT OF KEVIN LYNCH, SENIOR VICE PRESIDENT, SPECIALTY
GASES AND HELIUM, MATHESON TRI-GAS, INC.
Mr. Lynch. Thank you, Mr. Chairman and distinguished
members of the Committee.
Matheson is the sixth largest supplier of helium in the
world and within the U.S. We are a non-refiner and we source
all of our helium through transactions with private parties
that are not connected to the BLM or the reserve system. But we
are interested in how this bill affects the helium industry,
overall.
Matheson strongly agrees with the stated goals of H.R. 527:
to ensure stability in the helium markets, while protecting the
interests of the American taxpayer. And we are strongly in
favor of the bill's increased reporting requirements, which we
believe will improve transparency and provide useful
information to industry participants. Unfortunately, we believe
that H.R. 527, as currently drafted, subverts the goal of
market stability, and does not sufficiently address the issue
of access by non-refiners to the helium reserve.
As has been noted, the helium industry is built on long-
term sourcing and sales contracts with annual escalators and
renegotiations that are generally spaced several years apart.
Efficient distribution of helium requires investment in very
expensive and specialized long-lived assets. In order to plan
and invest accordingly, buyers and sellers of helium need to
have reasonable assurance that they will have access to helium
from their supplier over the duration of a long-term contract.
And under the proposed biannual auction system, the planning
horizon will be no longer than six months.
In addition, many of the largest private helium sourcing
transactions in the world are linked to the BLM posted price
for crude helium. And, under the proposed auction system, the
BLM posted price would no longer exist, which means those
contracts would all need to be renegotiated. For these reasons,
we believe that the proposed auction system would result in
much greater volatility in price and availability, and would be
very disruptive to world helium markets.
The bill attempts to increase access to the Federal helium
reserve's crude helium stockpile by opening bidding to parties
who can demonstrate that they have their own refining capacity
or have tolling agreements for refining in place. As has been
discussed, that is problematic. The helium, to get to market,
must be purified. The only people who, practically speaking,
can purify it are the refiners, who would be competing against
the non-refiners for access to the same crude helium. And we do
not believe that any such tolling arrangements will be
available at market-competitive prices for non-refiners.
It has been our experience, going back to 2007, that
refining contracts or, excuse me, tolling contracts, are not
available at market price. In 2007, Matheson purchased crude
helium from the Federal helium reserve. In 2009, we attempted
to purchase tolling services from all of the helium refiners,
and all four declined to bid. So the crude that we purchased 6
years ago still sits in the Federal helium reserve, and it sits
on our balance sheet as an unutilized asset today. This
experience is what gave rise to our decision in January 2010 to
file a petition for rulemaking with the U.S. Department of the
Interior, which is submitted with my testimony.
The bill also seeks to address the access issue by stating
that any party may build a helium refining plant and add it to
the pipeline to get access to crude on terms equal with the
existing plants. But any new plant of any commercial scale
would not be online at least until 2015, if the project started
today. And, given the expected sunsetting of the helium reserve
by 2020, you would have a maximum useful life of 5 years to
recover your investment on that plant. We think it is very
unlikely that anybody will invest in significant helium
refining capacity to add to the pipeline.
With all that said, we believe that, with some adjustments,
H.R. 527 can achieve the goals of greater access and market
stability, while still generating fair returns for the American
taxpayer on the government's investment in helium
infrastructure.
The outline of a plan we think would work looks like this.
The current practice of allocated and non-allocated sales of
crude helium would continue. The allocated amount of crude
helium would be available only to refiners, but it would
comprise 80 percent of the total crude helium, instead of 94
percent, as it is today. The allocated sale price would
continue to be a posted price, or a market price. But the
market price would be determined by a robust market survey
similar to the one described in H.R. 527. The remaining 20
percent of crude helium would be auctioned to all qualified
bidders in a non-allocated sale. These bidders would include
non-refiners and other qualified bidders.
As a condition of participation in the allocated sale,
refiners would be required to set aside sufficient capacity for
tolling by non-refiners, and these tolling services would be
performed at a reasonable price. When a refiner provides
tolling services to a non-refiner, it would be allocated a
light quantity of crude helium by the BLM in order to be kept
whole on its allocated volume.
There are some details and some nuances of how we think
this could be structured to work very efficiently to achieve
the goals of the bill, and we would be happy to discuss them in
more detail. And I thank you for the opportunity to present our
views.
[The prepared statement of Mr. Lynch follows:]
Statement of Kevin Lynch, Senior Vice President,
Specialty Gases & Helium, Matheson Tri-Gas, Inc.
Chairman Hastings, Ranking Member Markey, distinguished Members of
the Committee,
My name is Kevin Lynch, and I am the Senior Vice President of
Specialty Gases and Helium with Matheson Tri-Gas, a global leader in
the industrial gases industry. I thank you for having this important
hearing today, and for allowing me to testify on behalf of Matheson on
an issue that so dramatically impacts the global supply of helium.
Matheson was founded in the U.S. 1927, and is now a subsidiary of
Tokyo-based Taiyo Nippon Sanso Corporation, which is the fifth largest
industrial gases company in the world. Matheson has helium operations
within the U.S. in Wyoming, Texas, Nebraska, California, Florida, and
Pennsylvania, and we have retail locations in 40 states. We are the
sixth-largest supplier of helium within the U.S., and globally.
Matheson is a ``Non-Refiner'' of helium--meaning that we do not
have a helium purification plant connected to the BLM crude helium
pipeline system. Instead, we receive our refined helium through
transactions with private parties that that are unconnected to the
Federal Helium Reserve or the BLM Pipeline.
Therefore, while we are a significant player in the global helium
industry, our interests in the debate over the fate of the helium in
the Federal Helium Reserve are slightly different from those of some of
the organizations represented by my fellow witnesses today. Of course,
like all industrial gases companies, we are concerned about global
helium supply, and as a good corporate citizen we want a fair and
efficient helium market worldwide. However, the fortunes of our company
are not tied so directly to the continued operation of the Federal
Helium Reserve and the Pipeline System.
We hope this slightly different perspective allows us to look at
any proposed legislation through a slightly different prism--not how it
affects one company but how it affects the helium industry overall. In
our view, any legislation that comes out of Congress dealing with the
Federal Helium Reserve and BLM Pipeline system should lead to a fairer
and more efficient helium market worldwide.
As you know, today the operation of the Federal Helium Reserve and
BLM Pipeline System is governed by provisions set out in the Helium
Privatization Act of 1996.
The 1996 Act has largely achieved its purpose of selling down the
Federal stockpile of crude helium, and it has by and large created
conditions of stability and predictability in the helium market. On the
negative side, the global helium market has developed considerably
since the passage of the 1996 Act. Shortages have pushed crude helium
prices up globally, and the BLM's method for pricing its sales of crude
helium has become detached from global market conditions. The 1996 Act
has resulted in the existence of a cost advantage for the four
companies buying crude helium from the Federal Helium Reserve for
purification in their refining facilities along the pipeline. This
represents a significant cost advantage by these helium Refiners, and a
significant disadvantage for their competitors. Worse, it means that
the American taxpayer is shortchanged as well.
With the legislative authority in the 1996 Helium Privatization Act
about to sunset later this year, Congress has a chance to ensure that
sales from the Federal Helium Reserve are conducted in a fair and
efficient manner following the passage of new legislation. Since the
BLM Pipeline System supports two-thirds of world supply with nearly a
third of global helium supply coming directly from the Federal Helium
Reserve, the new legislation enacted this year will have a profound
effect on the global helium industry for at least the rest of the
decade.
With respect to the H.R. 527, we offer the following comments.
First, the stated goals of the legislation are to ``ensure
stability in the helium markets while protecting the interests of the
American taxpayer.''
Matheson enthusiastically supports both of these goals.
We believe that both of these goals will be advanced through the
fostering of greater access by Non-Refiners to the Federal Helium
Reserve, which is a concept that motivates several provisions of the
bill.
Matheson is also strongly in favor of the increased reporting
requirements for the BLM as set forth in H.R. 527. The type of
information that the BLM will be required to share more openly is of
value to all market participants and should be made available to all
industry participants at the same time it is made available to the
helium Refiners. Today, important data is made available to the
Refiners well before the rest of the industry, thus giving those
companies yet another advantage over their industry competitors.
It should be noted that Matheson feels so strongly about these
provisions that we included them in the Petition for Rulemaking we
filed with the U.S. Department of the Interior in January, 2010. We are
pleased to see them included in H.R. 527.
Unfortunately, despite its good intentions, we believe that H.R.
527 as currently drafted subverts the goal of market stability and does
not sufficiently address the issue of access by Non-Refiners to the
Federal Helium Reserve.
First, about market stability: The global helium industry is built
on long-term sourcing and sales contracts with annual escalators and
renegotiations that are generally spaced several years apart. Efficient
distribution of helium requires investment in very expensive,
specialized long-lived assets. In order to plan accordingly, buyers and
sellers of helium need to have reasonable assurance that they will have
access to helium from their supplier over the duration of a long-term
contract.
The auction system proposed in H.R. 527, under which all of the
Federal Reserve's crude helium would be auctioned a minimum of twice
per year, will create conditions of great uncertainty in terms of
helium price and availability. How could a helium user confidently sign
a long-term contract with a supplier, if that supplier may lose access
to helium or pay a dramatically higher price for it every six months?
How could a helium supplier confidently make the investments required
in distribution assets and other infrastructure, if that supplier has
only a six-month view as to how much helium he will have access to and
at what price?
In addition to the concerns about the sales of helium from the
Federal Helium Reserve, another fact of the industry is that many of
the largest private helium sourcing transactions are linked to the BLM
Posted Price for crude Helium. Under the proposed price auction system,
the BLM Posted Price would no longer exist, and those contracts would
need to be renegotiated.
For these reasons, we believe that the proposed auction system
would result in much greater volatility in price and availability, and
would be disruptive to world helium markets.
In order to accomplish the worthy goal of increasing access to the
Federal Helium Reserve's crude helium stockpile, H.R. 527 attempts to
open the bidding to parties who can demonstrate that they have their
own refining capacity or tolling agreements for refining in place.
There are several factors to keep in mind here. First, to be
commercially useful, virtually all helium sold into the market must be
refined into pure helium. Second, practically speaking, the only
companies who are positioned to convert Federal Helium Reserve crude
helium into pure helium are the four Refiners who have purification
plants linked to the BLM Pipeline. Third, those Refiners will be
competing against the Non-Refiners for access to the Federal Helium
Reserve crude helium. And fourth, there is no mechanism in this bill
that either requires or strongly incentivizes the Refiners to offer
tolling services at a reasonable price to companies who are competing
against them for access to the Federal Helium Reserve crude helium.
This is a significant flaw in H.R. 527.
We submit, therefore, that commercially reasonable tolling deals of
significant size will continue to be unavailable to Non-Refiners, and
access to the Federal Helium Reserve will remain very strongly
dominated by the helium Refiners. This is not the intention of H.R.
527, but it will be its practical result.
Matheson's views on this topic have been shaped from our own
unhappy experience with third-party tolling. In 2007, Matheson
successfully purchased crude helium from the Federal Helium Reserve. In
2009, we subsequently attempted to purchase tolling services from all
four of the helium Refiners and we received ``NO BID'' replies from
each. Therefore, the crude helium that we purchased six years ago still
sits in the Federal Helium Reserve and on Matheson's Balance Sheet as
an unutilized asset today. Our unsuccessful attempt to secure third-
party tolling is what gave rise to our decision in January, 2010 to
file our ``Petition for Rule Making'' with the U.S. Department of the
Interior which I mentioned a moment ago.
Another way that the bill seeks to address the issue of access is
to state that any party may build a helium refining plant attached to
the BLM Pipeline, and gain access to crude helium on equal terms with
the existing refining plants. This removes a structural impediment in
the current system, which gives privileged allocation of helium to the
existing plants.
However, the legislation would not change economic reality. Helium
purification plants cost tens of millions of dollars, and generally
require a long life to generate acceptable financial returns. They
typically take two years to build and commission and it is customary,
as part of the investment decision, to have a long-term commitment in
hand on a stable supply of crude helium for the facility.
Any party building a new plant to attach to the BLM Pipeline would
want to make sure this law was passed before he would begin building.
Two years of construction time would put an optimistic on-stream date
sometime in mid-2015. At current inventory levels and expected draw-
down rates, that may give an expected useful plant life of five years.
And, under the proposed auction system, there is a total lack of
certainty as to whether the new plant's owner would ever have access to
crude helium to refine, and if so, at what price. It is therefore
highly unlikely that any new refining plants will be added to the BLM
Pipeline which cannot even support the existing installed refining
capacity. The existing Refiners will continue to have the only refining
capacity on the BLM Pipeline until the stockpile is depleted.
On a positive note, we believe the bill can be improved
substantially to achieve the goals we all share. With some adjustments,
H.R. 527 can achieve the goals of greater access and market stability,
while still generating fair returns for the American taxpayer on the
government's investment in helium infrastructure.
The outline of a plan that we think would work looks like this:
Continue with the concept of Allocated and Non-Allocated
sales of Crude Helium, and a Posted Price. The ``Allocated'' amount of
crude helium would be available only to the Refiners.
The Allocated Sale percentage would be reduced from its
current share of the total crude helium to a lower share. For
discussion, let's say 80%.
The Allocated Sale price would continue to be a Posted
Price (or Market Price), with the Market Price determined by a robust
market survey similar to the one described in H.R. 527. All Refiners
buying under the Allocated sale would pay the same price for the BLM's
crude helium, as they do today. But the posted price would be much
closer to the current market price than the BLM Posted Price is today,
ensuring greater fairness across the market and a greater return for
the American taxpayer.
The remaining portion of crude helium would be auctioned
to all qualified bidders in a ``Non-Allocated'' sale. These bidders
would include Non-Refiners and other qualified parties. In this
example, the Non-Allocated portion would be 20%.
The results of the Non-Allocated Auction would be
considered as data points in the determination of the Market Price.
As a condition of participation in the Allocated Sale,
Refiners would be required to set aside sufficient capacity for tolling
by Non-Refiners, who would be eligible to bid on crude helium in the
Non-Allocated Sale.
Third-party tolling services would be performed for Non-
Refiners at a price which would allow the Refiners to earn a fair
profit while enabling Non-Refiners to obtain pure helium without being
priced out of the market.
When a Refiner provides tolling services to a Non-
Refiner, it would be allocated a like quantity of Crude Helium by the
BLM during the same time period that the Refiner provides tolling
services, in order to be ``kept whole'' on its Allocated Volume.
This hybrid approach, utilizing both price surveys and auctions,
would have several benefits--greater access to the Federal Helium
Reserve, a fair return for the American taxpayer, and no disruptions to
helium supply. It would ensure that the helium purchased at auction
actually gets refined and is brought to market, and it would contribute
to a fairer and more efficient global helium market.
We at Matheson applaud the Committee for thinking creatively about
how the federal government manages the continued sell-off of the
Federal Helium Reserve. We suggest changes to H.R. 527 in the spirit of
cooperation. We look forward to continuing our work with the Committee
on this important legislation, in order to achieve the goals of
fairness and equity--for the helium industry, for the federal
government and for the American taxpayer.
______
Response to questions submitted for the record by
Kevin Lynch of Matheson Tri-Gas Inc.
Questions from Rep. Edward J. Markey
1. Mr. Joyner, Mr. Thoman, Mr. Lynch: The National Academies of
Science have recommended that the ``BLM should adopt policies
that open its crude helium sales to a broader array of buyers''
and ``negotiate with the companies owning helium refining
facilities connected to the Helium Pipeline the conditions
under which unused refining capacity at those facilities will
be made available to all buyers of federally owned crude
helium, thereby allowing them to process the crude helium they
purchase into refined helium for commercial sale.'' Do you
believe H.R. 527 would incentivize tolling agreements to refine
crude helium between your company and entities connected to the
pipeline? Would your company support requirements for mandatory
tolling agreements?
Response from Kevin Lynch, Matheson Trigas:
I do not believe that H.R. 527 would incentivize tolling agreements
between Matheson Tri-Gas and the Refiners. In fact, I think H.R. 527
would provide strong incentive for Refiners not toll for us, or for any
non-Refiner.
From a practical perspective, the Refiners are the only entities
who can convert BLM crude helium, which has little or no commercial
value to end users, into pure helium, which is what end users need and
will pay for.
Under the proposed auction system, 60% of the crude helium volume
made available through auction would be made available only to entities
who have adequate refining capacity of their own, or who have secured
tolling agreements for refining the crude into pure. Only the Refiners
have refining capacity of their own, and only the Refiners can toll
crude for 3rd parties. I see no reason at all why Refiners would
establish tolling agreements with non-Refiners, thereby increasing the
number of bidders competing against them for 60% of the crude helium
sold by the BLM. I think that they would refuse to enter into tolling
agreements, thus limiting the bidders list to ``Refiners only'' for
this tranche of volume.
Another 20% of the helium made available through auction would be
made available to ``persons the Secretary determines are seeking to
purchase helium for their own use, for refining, or for delivery to end
users.'' In theory, this expands the field of potential bidders to be
quite numerous. In practice, I do not think it would expand the field
of bidders much, if at all. Once again, the critical component to
making this work is the willing agreement of Refiners to toll crude
helium purchased by non-Refiners. One could argue along the lines of
``Well, if someone else already owns a block of crude and there is no
longer competition by and among the Refiners to purchase that block for
their own use, the Refiners would surely see it as in their interest to
make some money tolling the crude with their spare plant capacity.''
That would be a very short-term view of the situation, and I believe
the Refiners will take a longer view. The longer view of the situation
looks like this: After the first auction, some non-refiners may have
purchased some BLM crude helium, which is held in storage by the BLM.
Now, those non-refiners want to convert the crude helium into pure
helium so they can sell it to end users, and they seek tolling
agreements with the Refiners. The Refiners reply with ``no bid''
responses, or with tolling prices so high as to be the commercial
equivalent of ``no bid'' responses. (As noted in my earlier testimony,
Matheson has seen this dynamic play out along these lines already.) Six
months later, there is another crude helium auction. By that time, it
is known in the industry that non-refiners who win crude helium at
auction cannot convert it into pure helium because the Refiners won't
agree to toll it for them. Instead, the non-Refiners' crude helium will
sit in storage at the BLM, possibly incurring progressively higher
storage fees. Since unrefined crude helium is commercially worthless to
end users and to non-Refiner sellers of pure helium, non-Refiners will
not bid in the BLM crude helium auction. The Refiners will have
succeeded in limiting the field of bidders for this tranche of the
crude helium to ``Refiners only'', just as they did with the 60% volume
tranche.
A third tranche of 20% would be governed by considerations similar
to those applicable to the first two tranches, with a similar
disincentive for Refiners to toll for third parties.
Matheson would support requirements for mandatory tolling at
commercially reasonable prices--or at least, a much stronger incentive
for tolling than what H.R. 527 includes. Our submitted written
testimony includes on its final pages a summary of a structure and
mechanism that we think would sufficiently incentivize tolling as an
alternative to an outright mandate. I refer you to that testimony for
more information.
2. Mr. Joyner, Mr. Thoman, Mr. Lynch, Mr. Nelson, Mr. Haines, Mr.
Kaltrider: H.R. 527 limits the amount of crude helium any one
entity can purchase in a single auction to 30 percent, do you
believe that would ensure sufficient competition and auction
participation while also protecting against market
manipulation?
Response from Kevin Lynch, Matheson Trigas:
I do not think that the provision limiting the amount of crude
helium any one entity can purchase in a single auction to 30% would
ensure sufficient competition and auction participation while also
protecting against market manipulation.
For one thing, I think the definition of ``entity'' could be
interpreted such that, for example:
Different subsidiaries of the same company could be
construed as different entities, each allowed up to 30% of the volume.
Different joint ventures controlled in whole or in part
by the same company could be construed as different entities, each
allowed up to 30% of the volume.
One company could buy 30% of the volume in its own name,
and additional volume through one or more third-parties from whom it
has contracted to purchase some or all of the crude at cost or at some
markup.
There is already a situation in existence that may allow one
Refiner access to 60% of the volume under the legislation as proposed.
You may have noticed that sometimes people refer to 3 Helium
Refiners, and sometimes people refer to 4 Helium Refiners. The
situation is that there are 3 Industrial Gases companies (Air Products,
Linde, Praxair) who control the output from all 6 helium refining
plants connected to the BLM crude helium Pipeline. Five of those
refining plants are owned directly by the Industrial Gases companies
who are Refiners [Air Products (2), Linde (1), and Praxair (2)]. The
sixth plant is owned by a third party, but 100% of the output is sold
by long-term contract to one of the 3 Industrial Gases companies who
are Refiners. Depending on whether you consider plant ownership or
control of plant output, there are thus either 4 Refiners or 3 Refiners
connected to the BLM Pipeline.
Under the rules of H.R. 527, it is unclear to me whether the third-
party refiner would be counted as a separate entity, eligible for up to
30% of the helium sold by the BLM, and each of the Industrial Gases
companies would also be counted as entities, with each eligible for up
to 30% of the crude helium sold by the BLM. Or, would the third-party
refiner be considered the same entity as the Industrial Gases company
with which it has contracted to sell all of its plant's output of pure
helium?
If there are 4 entities involved here under the H.R. 527
definition, then one Industrial Gases company would in effect be
eligible for 60% of the volume sold by the BLM. And in that case, I
could easily envision the Industrial Gases companies who are Refiners
executing some legal transactions to replicate the same structure with
other refining plants, in order to increase their allowed purchase
volumes.
If there are 3 entities involved here under the H.R. 527
definition, that problem does not exist. However, I do not think the
term ``entity'' is defined to support this interpretation in the
current draft of H.R. 527.
In any case, if the 30% limitation goes into effect, I think
companies interested in purchasing greater volumes of crude helium will
apply their energy in creative ways to form ``entities'' that allow
them access to sufficient quantities of crude helium, such that the 30%
limitation is no hindrance to their plans.
The larger point I would like to make is that the real potential
for market disruption stems from the implementation of a semi-annual
100% volume auction in the first place. As I discussed in my full
testimony, Matheson believes that a 100% volume auction will undermine
the stability of pricing and long-term planning in the global helium
market. We believe that the newly introduced unpredictability of supply
will lead to uncertainty and disruptions for End Users, thereby
contradicting one of the stated goals of the legislation, to ``ensure
stability in the helium markets.'' I refer to the proposed outline at
the end of my written testimony for details about what we believe would
be a more judicious use of auctions on a smaller scale, to open up a
reasonable amount of access to BLM crude helium to non-Refiners and to
provide input into the pricing of BLM crude helium.
______
Mr. Lamborn. OK, thank you for your testimony. We have just
heard from the three distributors. Now we will hear from the
three refiners.
Mr. Nelson.
STATEMENT OF WALTER L. NELSON, DIRECTOR, SOURCING AND SUPPLY
CHAIN, AIR PRODUCTS AND CHEMICALS, INC.
Mr. Nelson. Mr. Chairman, Ranking Member Markey, Mr. Holt,
and members of the Committee, thank you very much for the
opportunity to participate in this important hearing. My name
is Walter Nelson, Director of Helium Sourcing at Air Products,
a global industrial gas company and the largest refiner of
helium on the BLM pipeline system.
For the record, I applaud the Committee for recognizing
that maintaining access to the BLM's helium reservoir is very
important to commerce. And with that, I would like to summarize
my testimony by focusing on four key points.
First, we don't own the gas fields or operate the natural
gas plants that feed the helium into our refineries. Energy
companies in that business extract the helium from natural gas.
If the price of natural gas is low, and they slow production,
or if there are outages at their plants, we are at their mercy.
And it is for this reason that we are experiencing a helium
shortage today.
We understand the desire in Congress to do something to
address the current helium shortage. But please understand that
this legislation, or really, any legislation, will not do
anything to bring additional molecules of helium onto the
market.
Second, most of our customers think of helium like a
utility. Reliability and certainty of supply are paramount.
Helium is indispensable to them. Think of energy-intensive
industries: steel, aluminum, cement, chemicals. Their source of
electricity is indispensable to them. Now, imagine that those
industries did not know from one 6-month period to the next
where their power was coming from, or from whom, or how much it
would cost, or whether it would be there when they needed it.
That is exactly the predicament customers--helium customers--
would be in if this bill were to become law.
There is more to the analogy. These companies don't really
need to know how the power plant operates, or the type of fuel,
or how the transmission lines work. They just need to know the
light comes on when they flick the switch. Our helium customers
are the same. They don't need to know or understand the process
of refining helium, how the pipeline allocation works, or the
conservation flywheel aspect of the BLM, or how the in-kind
program ensures reliability of supplies for scientific
research. But we do. We live with these critical intricacies
all the time.
We would not do anyone in Congress or industry any favors
by staying silent in the face of legislative proposals that we
are convinced would be unworkable in practice, and that would
introduce supply uncertainty that would put Federal agencies
and helium in real jeopardy.
We fully support the goal of Congress to sell the remaining
helium in the Federal reservoir at a market price. But we
believe the proposed 100 percent auction will be disruptive and
will negatively impact the reliability of supply to end users.
We think you can get there another way.
Today BLM sells most of its helium to the refiners as
allocated volume. BLM sells the remainder to anyone who holds a
BLM storage contract as the non-allocated volume. We see the
wisdom of auctioning off the volume of helium that is non-
allocated. Such an auction would indeed harness market forces.
And the price of the winning bid could be used in conjunction
with a comprehensive market survey to establish the BLM's price
for allocated helium. This would give the best of both worlds,
using the benefits of free market, but not interfering with our
ability to act like a utility for our customers. Because it is
the sanctity of our contracts with the BLM that in turn allows
us to enter into long-term supply agreements with end users.
And it is those guarantees that, in turn, allow end users to
have meaningful production plans. Without that reliability, the
entire system which underpins the U.S. economy starts to fall
apart.
Third, the bill speaks in many places about the process for
selling helium, but there is less focus on delivering refined
helium. And it is the refined helium that keeps our customers
humming. It is crucial in any legislation that the system for
selling and delivering helium be married, and that there are
not many people outside the helium industry or the BLM that
understands this complexity.
But unless the legislation takes account all of these
dimensions, what happens in the event of refinery outage? Who
assures the DoD supply for scientific researchers? That process
for delivering helium that is already remaining in storage? As
introduced, we are convinced this marrying of selling and
delivery, does not square up.
Finally, I recommend that you not include forced tolling in
the bill. We have heard this argument before. Congress needs to
force those of us who invested millions in refining capacity to
refine helium for companies who did not, bailing them out of
their consequences of their decision not to build a refinery of
their own. To us, that would be as if Hyundai came before
Congress and said, ``We like selling Hyundai cars, but we would
rather not invest in a Hyundai manufacturing plant. So, please,
Congress, tell GM in statute that they must use some of their
manufacturing capacity to build cars for us so we can sell
them.'' That would be a laughable idea, right? Well, we think a
similar response is warranted here. The Congress does not think
much of bailouts, and this legislation is no time to alter that
attitude.
And let me wrap up with one closing remark. Letting the BLM
helium reserve become off limits would be a major problem. But
because we know the BLM system so well, we think it would also
be a problem to enact legislation that is bound to have snags
which will lead to uncertainties that our customers do not
expect from their utilities, and should not expect from us.
Mr. Chairman, thank you for calling this hearing. I look
forward to your questions and the opportunity to work with the
Committee to get this right.
[The prepared statement of Mr. Nelson follows:]
Statement of Walter L. Nelson, Director, Helium Sourcing & Supply
Chain, Air Products and Chemicals, Inc., Allentown, Pennsylvania
Introduction
Mr. Chairman, Ranking Member Markey, and members of the Committee,
I appreciate the opportunity to testify before you today. My name is
Walter Nelson, Director of Helium Sourcing and Supply Chain, at Air
Products, based in Allentown, Pennsylvania, a global industrial gas
company, one of the leading suppliers of helium worldwide and the
largest refiner of helium with connections to the BLM pipeline system.
Air Products is pleased to have the opportunity to contribute its views
on helium and H.R. 527.
We applaud Chairman Hastings and Ranking Member Markey for
recognizing that maintaining access to the BLM's helium reservoir is so
important to commerce. We appreciate the chance to share our expertise
with the widely shared goal of prudent, effective legislation that
represents a good deal for the taxpayer and for the U.S. economy.
While we understand that auctioning off all the helium may be
sensible as a theoretical matter, we believe that implementation will
cause a level of uncertainty among end users that will be far more
disruptive than any inconveniences they have experienced to date.
Alternatively, a partial auction of the non-allocated volume of BLM
helium would, in our view, optimize the return for the taxpayer without
hampering some of the biggest names in manufacturing, federal users,
and the scientific community.
Air Products and its background in the helium market
Air Products, with revenues of roughly $10 billion per year, is an
American corporation with a global industrial gas business. The company
provides hydrogen for oil refineries so they can produce clean-burning
gasoline, hydrogen for fuel cell cars and buses, liquid hydrogen for
NASA's space launches, oxygen for patients in hospitals and to steel
mills for use in blast furnaces, nitrogen to enable the manufacture of
computer chips, and helium for MRIs and semiconductor manufacturing. In
short, its core business is helping major industries operate more
cleanly and efficiently. Air Products has more than 20,000 employees in
50 countries.
Air Products is one of the leading suppliers of helium worldwide,
and the largest refiner of helium on the BLM pipeline system. Just to
be clear, helium is a byproduct of natural gas. We don't own the gas
fields or operate the natural gas plants. Energy companies in that
business extract the helium, and it's through our refineries that we
supply helium to a wide range of manufacturers. The Company's equipment
processes more than half of the helium extracted from the earth
globally, and it has pioneered many of the processes critical to
getting helium from the ground to vital customers, such as extraction,
production, distribution, and storage technologies used in the helium
industry today.
Air Products has experience second to none. That expertise was
recognized by virtue of the United States government's selection of Air
Products to engineer and construct the first helium extraction units
when the federal government began its helium conservation program in
1959. More recently, Air Products designed and constructed the helium
enrichment plant in 2002 that supplies the Bureau of Land Management's
helium pipeline system, which continues to operate to this day.
Air Products decided to build its first helium refining plant over
30 years ago in the northern panhandle of Texas. The plant, designed
and built by Air Products with proprietary technology, was first
operational in 1982, expanded in 1985, upgraded in 2010 and continues
to operate to this day. Air Products subsequently constructed two more
helium refining plants adjacent to a third party natural gas processing
plant near Liberal Kansas. The first plant started production in 1991
and the second plant, when completed in 1999, was the largest helium
refining plant in the world. In 1995, Air Products became the first
company to design and build a helium refining plant that used crude
helium that had been extracted during the production of LNG (liquefied
natural gas). More recently Air Products, through a joint venture with
Matheson, constructed a helium refining plant in Wyoming. This plant
was completed in 2011 and it is expected to begin production later this
year when our supplier's natural gas plant becomes operational.
In short, Air Products is one of the most experienced operating
companies in the world to have designed, built, and operated large
commercial helium refining plants. That said, there is nothing stopping
any company from building its own helium refining plants near the
Bureau of Land Management's pipeline system in the United States, and
indeed, several companies have done just that.
Where does helium come from?
Growing up, we never had to think about helium. It is at the party
store if we want balloons. We see the helium-filled blimps at sporting
events. Supplying helium, however, is anything but child's play. On
earth, helium is found in natural gas, and in only a few spots on the
planet does helium exist in high enough concentrations to make it
worthwhile to separate it from the natural gas.
There are no naturally-occurring underground reservoirs of pure
helium. Helium is a rare gas and it only forms in locations where the
radioactive decay of uranium occurs with the formation of natural gas.
Not all natural gas fields contain helium; indeed, most do not. The
largest natural gas fields that are known to contain helium, other than
in the United States, are in Algeria, Qatar, Australia, Iran and
Russia.
It is essential to keep in mind that no oil and gas extraction
company goes out looking just for helium. No one! Helium is a unique
commodity for this reason. There is little correlation between price
and supply. We have been told that owners of LNG plants can make more
from LNG sales in less than a day than they would make in helium sales
in a year--a 400 to 1 ratio. Even if legislation resulted in the price
of helium rising ten-fold--certainly nothing our customers think would
be a positive development--that would have little bearing on the
interest of large gas companies doing anything they are not doing today
to identify helium reserves. Their gas fields are multi-billion dollar
projects, and helium plants are a tiny part of them. They will not let
the tail--or in our case the tip of the tail--wag the dog, so we are at
their mercy for developing new helium projects.
Fortunately, in the case of Air Products, we are doing just that.
We have a joint venture with Matheson in Wyoming. We have already built
our helium refining plant, but because the operators of the gas field
have yet to complete construction and otherwise have not gotten their
production system in final form, we have had to bide our time since our
own plant was ready to be put into service over a year ago. This is a
reminder that much as Congress wants to do something about the helium
shortage--caused by outages and delays in bringing new plants on line--
the single thing that will precipitate more helium being found is a
higher price for natural gas.
Air Products' role, like that of other industrial gas companies who
are helium refiners, is to purchase crude helium from energy companies
that are extracting it from natural gas, as well as to purchase helium
from the federal government. Helium refiners purify (clean up and
remove contaminants), liquefy (cool to minus 452 degrees Fahrenheit so
that the gas takes liquid form) and then transport and sell helium into
the global retail market. Once helium is extracted, purified, and
liquefied, it has a short shelf life of only 45 days before it begins
to warm up and turn back into a gas, so Air Products has developed
transportation technologies necessary to transport the liquid helium
from the refining plant to market. Gardner Cryogenics, a division of
Air Products, has designed and constructed most of the liquid helium
transportation and storage equipment used by the industry today.
For Air Products and every other industrial gas company in the
United States, BLM's pipeline and storage system are an integral part
of this global supply chain and infrastructure. Disrupt the BLM's
pipeline, and it would be as if one-third of the world's supply of oil
was instantly pulled off the market--chaos would ensue, and the price,
in this instance specifically for helium, would skyrocket.
End users view helium akin to a utility
We ask the Committee to consider some essential facts. To our
customers, helium is like a utility. Just like major electricity
customers do not have to give much thought to how power is generated--
they don't need to know about the fuel source or the power plant or the
transmission lines, they just need to know the power is available when
they need it--our customers have not had to know the helium business.
All they have needed to know is that the helium is there when they need
it, so they can manufacture their products on a just-in-time manner.
They are entitled to their views on the wisdom of any legislation, but
we feel a responsibility to make sure that whatever Congress does will
be workable for end users from day one. Because, if it's not, we, and
more importantly our customers, will experience intolerable
disruptions. Because we understand the BLM system, and the implications
of H.R. 527 or any other legislation, we feel an obligation to identify
the implications in the real world. For us to instead stay silent in
the face of a total overhaul in the way helium moves from the ground to
our customers, one that introduces needless risk, seems unwise. We
trust that this Committee will understand our recommendations in this
light.
The Federal Helium Reserve is essential to a stable helium market
BLM today operates as a natural gas producer at the Cliffside
field, where it extracts natural gas from wells, separates the gas, and
then sells the natural gas and helium to private industry. BLM produces
approximately two billion cubic feet of crude helium annually, which is
about 30 percent of the worldwide supply. The BLM system consists of
the Bush Dome, an underground storage reservoir where the United States
government stockpiled helium during the conservation period and into
which companies that have refined helium can deposit the helium until
it is used; together with 29 natural gas wells that are used to extract
natural gas from the ground and a gathering system of pipes which
connects all the wells together; a helium enrichment plant to process
the gas; and a 450 mile crude helium pipeline system that extends from
northern Texas across the panhandle of Oklahoma and into Kansas.
The crude helium enrichment plant is operated by the BLM, but the
plant is owned by an entity called the Cliffside Refiners Limited
Partnership (CRLP), a partnership made up of helium refiners that owned
facilities on the BLM pipeline in 2000. The CRLP partners include Air
Products, Praxair, Linde (formerly the British Oxygen Company), and
Colorado Industrial Gas (formerly owned by El Paso Energy and recently
acquired by Kinder Morgan). The CRLP was formed in July 2000 with the
charter to support the federal government in fulfilling the
requirements of the Helium Privatization Act of 1996. The CRLP invested
over $26 million at the Cliffside field to fund design and construction
of the crude helium enrichment plant. BLM operates the CRLP-owned plant
today, enabling the sale of government helium and natural gas (methane,
in this case) to private industry. The CRLP companies were honored for
excellence by the Secretary of the Interior in 2004.
The BLM pipeline infrastructure today supports private industry by
connecting six private crude helium extraction plants and six private
liquid helium refining plants to the BLM's reservoir at Cliffside.
Without this pipeline system, private industry would not be able to
efficiently deliver crude helium from the extraction plants to the
helium refining plants in the region. The BLM pipeline system and the
private industry helium plants together supply approximately two-thirds
of the worldwide helium supply.
What is causing the helium shortage, and when will it end?
We estimate that helium production worldwide was operating in
excess of 95% of capacity in 2011. Production was just sufficient to
meet global demand; however, any blip in supply caused by a planned or
unplanned outage anywhere in the world would have an immediate impact
on the market by tightening up supply.
Beginning in late 2011 and continuing thus far in 2013, the
industry has seen crude helium supplies decline; at the same time there
have been disruptions affecting most of the world's helium refining
plants. These supply disruptions have been caused by many factors
primarily outside the control of the helium refiners, resulting in
reduced helium supply to consumers. In the United States 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.
There have been planned and unplanned maintenance outages at
natural gas processing plants, as well as continuing pipeline
allocations on the BLM system during well maintenance that have
restricted the supply of crude helium to the U.S. refiners. In Algeria
and Qatar, production of helium has decreased due to the fragile
worldwide economy, as well as maintenance work at gas plants. In
addition, new helium refining projects have been slow to develop.
Helium supplies will continue to remain tight through 2013 and into
2014, until new helium production begins in Wyoming, Algeria and Qatar.
The Wyoming project is expected to add an additional four percent to
worldwide helium capacity, Algeria two percent, and the Qatar II
project may add up to 18% capacity. Only after these three new plants
are operational and existing plants are back running at full output
will the global supply begin to fully stabilize.
This recent history of supply problems proves one thing: if the BLM
system is off limits as soon as 2013, current shortages will be
considered modest compared to the dire situation that helium users will
face.
A 100% auction of BLM's helium may seem fine in theory, but we have
concerns about it in practice
H.R. 527 is very much a step in the right direction compared to the
discussion draft that was circulated in December 2012. Still, a 100%
auction represents a major change from the status quo, and introduces
tremendous risk for our customers. Today, helium customers know that
helium will be delivered when they need it. In a 100% auction world,
all bets are off. We understand the desire of the Committee to assure
continued reliability of helium supplies, but no one has a crystal
ball. No one can forecast, with certainty, who might bid for what, and
therefore there is no certainty that helium will be the ``utility''
that our customers think of it as, today. Our comments, therefore, are
offered because we know the Committee wants to get this right. Our
concern is that there is no guarantee that we will avoid significant
delivery disruptions, traceable to this legislation, if the bill were
to be enacted. That is why we continue to seek considerable changes in
the legislation.
It is also very important to point out that this legislation (or
any other) will not make more helium molecules available for end users.
Almost like ``squeezing a balloon'', a 100% auction of BLM helium will
redistribute the declining supply--simply creating supply uncertainty
for end users without any upside potential for increased molecules.
This uncertainty will serve to reduce effective supply to end users as
all points in the value chain will need to be more conservative with
their inventory management and scheduling.
H.R. 527 will require new or amended BLM helium contracts.
Actually, our current BLM helium purchase and delivery contract
(Storage Contract) does not expire until October 1, 2015, so any new
system implemented prior to that date would require the U.S. Government
to either renegotiate and amend that contract, or break it. Breaking
these contracts could create a legal mess, potentially causing
disruptions within the helium supply chain. That said, BLM should be
able to develop new regulations and contract amendments between now and
then.
Providing sufficient time to change the system and implement an auction
is crucial
H.R. 527 as written delays the effective date for the initial
auction until one year, and potentially up to one and a half years,
after the date of enactment. While we still have concerns about whether
all the bugs will be worked out by then--we know that BLM conducts
auctions of various things, but crude helium has unique characteristics
quite different to typical commodities subject to a standard BLM
auction--it is important to have as much time as possible to perfect
the auction and delivery mechanisms. The risk of an imperfect system is
that crude helium will not be reliably delivered or refined and put
into commerce in a timely manner. If there are flaws in the system, and
the helium cannot be delivered, U.S. manufacturers will pay the price.
We believe that the optimal system would call for any new method for
selling BLM's helium to be implemented coincident with the expiration
of the current contracts between the BLM and helium refiners in October
2015.
We fear perfection being the enemy of the good
Indeed, we have larger concerns that we are coming to the end of
the ``useful life'' of the BLM helium reserve, at least for commercial
purposes. As the chart attached to my testimony depicts, by the time
H.R. 527 is to be fully implemented, BLM helium would be well down the
steep and immutable decline curve. There would not be that many years'
worth of commercial helium supplies as of then. We are concerned that
we may be letting perfection be the enemy of the good here.
``Perfection'' would be some optimal price for the taxpayer. In the
interest of achieving that, however, we may be causing instability
regarding supplies for high-end manufacturing that will be
destabilizing for those companies, and for the broader U.S. economy.
``Good'' is the ability to receive a market price for helium while
maintaining a reliable supply of helium from the BLM reserve to our
customers.
While we understand the desire to improve on the 1996 Act, it would
be unfortunate if we took a step backward with regard to the
reliability that has been essential to so many large helium-dependent
manufacturers, companies whose names are synonymous with success in the
U.S. With so many risks facing the economy that we cannot control,
this, which we can control, feels like a needless risk to us. That is
why we think Congress should do everything it can to optimize price so
that the taxpayer gets optimal return, but in balance with the effects
on the helium-dependent customers being given suitable weight.
Existing helium inventory in storage and priority for delivery must be
addressed
Regardless of whether the BLM helium is sold through an auction, a
sale of allocated amounts as is the case today, or a combination of the
two, there are a lot of moving pieces that need to be harmonized to
make the system work, including assigning volumes to be owned and
refined, applying storage charges, and penalties for non-delivery. For
H.R. 527 to function without risk to end users, it will require new
regulations, contracts, measurement systems, accounting and management,
but these are not addressed in the legislation. Any new legislation
must establish the rules for determining the priority of helium
delivery from inventory in storage. Today there is about a one year's
supply of privately owned helium already in storage. We recommend that
Congress establish pipeline delivery protocols and implement the well
established inventory accounting practice of FIFO (first in--first out)
for the delivery of helium from storage. The first helium purchased has
priority for delivery based on the capacity constraints of the system.
An annual auction would pose less risk to end users than a quarterly or
semi-annual auction
Moving to a semi-annual auction, a change from the discussion draft
to H.R. 527, is preferable to a quarterly auction, but we think an
annual auction would be even better. Why? Because a quarterly auction,
which would effectively represent a spot sale and would not provide the
certainty and reliability of supply that manufacturers need. It would
also create stresses on the supply chain, where on a quarterly basis
manufacturers would have to adjust plant operations, inventory
management and logistics activities. The molecule uncertainty will
cascade through all these subsequent steps between the BLM and end
users, who will not enter into contracts on a quarter to quarter basis.
Helium end users insist that reliable long-term supply contracts are
essential to their current business models. For the most part, the same
is true for semi-annual auctions as well. If they could not know, from
one half year to the next, where their helium would be coming from,
they could not develop predictable business plans. We believe, however,
that while a semi-annual auction is better than quarterly, an annual
auction of the non-allocated helium provides the highest level of
reliability and product supply certainty to end users.
The Secretary needs the greatest possible discretion to avoid market
disruption and to assure legitimate purchasers of BLM helium
We applaud the discretion given to the Secretary to adjust the
percentages to be auctioned so as to minimize market disruption while
maximizing revenue. While we understand the objective of having bidding
that is as active as possible, so too must Congress take full account
of the need of helium end users to know they can get helium when they
need it. The leeway provided to the Secretary in this regard is
essential to sensible implementation of any auction.
The provision in H.R. 527 that limits any one entity from
purchasing more than 30% of the helium in an auction will, we believe,
prove to be unworkably low. The purchasing limit should be raised to no
more than 50%, along with the stipulation that the Secretary has the
authority to adjust this limit accordingly to adapt to changing market
conditions.
Insisting that only qualified bidders, those with a demonstrable
stake in the helium market, with the ability to receive the helium, be
able to engage in the auction process is another improvement in H.R.
527. We have concerns that speculators might see helium as the latest
commodity that falls prey to investment instruments that would curl
one's hair. We do not want an arbitrageur or a sovereign wealth fund to
be able to have standing to bid. Taking every step possible to guard
against that is critical.
Selling and delivery of helium must be harmonized, and the In-Kind
program should not be jeopardized
As we enter the sunset phase of life for the BLM reservoir, where
the amount of deliverable helium is declining at rates of 15-20% each
year, the BLM must adapt its sales methodology and only offer for sale
each year the amount of helium that can actually be delivered from the
reservoir to consumers. This decline curve tends to exacerbate problems
with a 100% auction. For example, a 100% auction is inconsistent with
the federal In-Kind program, which provides essential helium to
researchers and federal agencies. Today, helium refiners essentially
``loan'' helium to the In-Kind program for six to nine months. But
without any certainty that helium refiners will have helium from one
auction to the next, this ``loan'' will no longer be a certainty,
exposing federal agencies to great risk. Worse, as the volume of BLM
helium declines, there will be inevitable conflict between the In-Kind
program and the bids by private companies for scarce BLM helium. An
auction of nonallocated helium together with allocated sales can
address this important objective, but that it is almost impossible for
a 100% auction to be workable in this regard.
The auction is also inconsistent with the so-called helium
conservation ``flywheel'' that allows refiners to inject helium back
into the BLM storage system during refining plant outages or during
periods of excess global supply, rather than venting precious helium
molecules to the atmosphere. If 100% of the BLM helium is auctioned,
and if the auctioned helium is given first priority for delivery
through the pipeline, we are concerned that we will have a hard time
accessing the helium that we have conserved by re-injecting into the
system. We believe a partial auction combined with an allocated sale,
married to rules for pipeline deliveries, can address this concern.
A major possible snag that we urge the Committee to avoid is a
disconnect between the sale of helium and its delivery. Think of helium
from the BLM reservoir as if it were water moving through a garden hose
that was left running until the well ran dry. The winner of any auction
would need to fill up its pail from that hose and then have its pail
replaced by another winner's pail, and so on. In a 100% auction, the
winners would need to take delivery of their helium prior to the next
auction. Otherwise the bid winners would risk never being able to take
delivery. Today, there is the ability to store helium because the
refiners are not gambling on whether there will be helium available
from one auction to the next, they purchase the helium that is offered
for sale and then take regular deliveries of the helium to satisfy
demand.
New reporting requirements are an intrusion of privacy
H.R. 527 imposes many new and comprehensive reporting requirements
for the BLM, the owners of the helium enrichment plant, and the private
refiners connected to the BLM pipeline system. While we agree that
governmental proceedings should be as transparent as possible, these
new reporting requirements create bureaucracy, will increase costs, and
intrude on private, confidential business planning.
Our helium refining plants are constructed adjacent to private
natural gas plants (literally across the fence line). They are not
dedicated exclusively to the BLM system. We have entered into long-term
contracts with private natural gas producers under which we purchase
all of the helium they may produce as a byproduct of natural gas
production. We have constructed, installed and dedicated sufficient
refining capacity at these plants to support these long-term contracts
to ensure that we can receive and process all of the helium they
produce today or into the future. Requiring the private refiners to
report production, production capacities, future capacities and other
commercial transactions unrelated to the purchase of crude helium from
the BLM, and then posting that information on the Internet without
restriction, is an intrusion of privacy that must not be legislated.
There must be far less intrusive ways for Congress to understand how
much refining capacity is available, especially since the amount of BLM
helium is declining so rapidly.
A partial auction of the BLM helium accomplishes all important
objectives
As the discussion around BLM helium has unfolded, there have been
several important objectives that have been identified: (1) assuring
transparency around how BLM sets a price for helium so it is no longer
a ``black box; '' (2) optimizing return for the U.S. taxpayer on the
sale of helium; (3) assuring reliability of supplies so that end users
can enter into long-term contracts; and (4) providing an incentive for
refiners to enter into tolling agreements, to refine helium purchased
by nonrefiners. It is our view, based on experience with the BLM
system, that auctioning off the nonallocated portion of BLM helium is
the best method for achieving each of these objectives in a way that
does not compromise any of them.
We recognize that various independent sources have concluded that
BLM is not charging high enough prices for its helium. While we think
there is considerable evidence that undercuts this conclusion, we are
prepared to stipulate that higher prices for the taxpayer are a
legitimate objective for Congress. To us, the way to accomplish this is
for full transparency regarding how the BLM arrives at its price. That
includes a thorough market survey, outside experts with the statistical
and economic expertise that BLM may not have, and the added component
of a price to be derived from the auction of the nonallocated amount of
helium the BLM currently puts on the market for purchase by
nonrefiners.
This has several advantages. Provided there is pipeline allocation
dedicated to the auction of this nonallocated amount of helium, there
will be fierce competition among bidders for this volume. Whether
bidders are end users or nonrefiners, if there is pipeline allocation
associated with this auctioned amount, there will be new competition
and a change from the status quo that will undoubtedly prompt helium
refiners to compete aggressively for that business. Tolling contracts
between the parties, when commercially necessitated, will be
facilitated naturally.
But if there is no pipeline allocation, tolling is not an
attractive enterprise. Imagine if a Burger Company A set up shop next
to Burger Company B, and asked Company B to fry up burgers for Company
A, so that A could sell them to its own customers. A would pay B for
its efforts, but that would not be a good business proposition for B,
allowing A to sell burgers to more of A's customers, increasing A's
market share at the expense of B. Perhaps A could pay B a high enough
price to fry those burgers to make it worth B's while, but that price
would have to be high enough to compensate B for losing market share.
Some nonrefiners are willing to pay that price for tolling agreements
today, but some are not.
Auctioning off only the nonallocated portion also provides
certainty to helium end users. They will have the assurance that comes
with long-term contracts, which themselves are predicated on contracts
between refiners and BLM. They could continue, indeed, to think of us
as a utility. The alternative--uncertainty about who will get helium
from where, and how timely, each time the auction is conducted--is
hardly a system upon which Fortune 500 companies, as well as the
federal government and leading scientists, can predicate their
enterprise.
Legislation should not mandate allocations or tolling of helium, which
is a bailout for companies that did not invest in their own
refining capacity
Some have been heard to argue that BLM has set up what is
essentially an oligopoly, and that Congress, in statute, should
therefore force refiners on the BLM pipeline to allocate a percentage
of their refining capacity to process helium owned by non-refiners, at
set fees. The answer to this is simple: any party can negotiate to buy
helium from a refiner, but Congress should not insert itself into the
middle of commercial transactions. Commercial arrangements are entered
into all the time that allow those without helium refineries to buy
agreed-upon quantities of helium from those that do have refineries.
These are referred to as tolling arrangements. But surely 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 investment in
refining capacity with companies that have made their own strategic
choice not to build their own refinery.
The refiners made enormous investments at the time they built
refineries on the BLM pipeline. Several industrial gas companies chose
not to make such an investment. Those industrial gas companies that
chose not to make similar investments presumably made what to them were
sound business decisions, and spent their capital elsewhere. For
Congress in 2013 to give those companies the ability to force the
refiners to sell at a set price would be totally un-American and
contrary to the basic principles of capitalism. Nothing in law stands
in the way of any company entering into a tolling arrangement at a
mutually agreed-upon price.
Consider the analogy of a small petroleum company, lacking its own
refinery, but looking to get its hands on petroleum out of the
Strategic Petroleum Reserve and getting that to market as gasoline. If
that small petroleum company petitioned Congress to force the large oil
company, in statute, to use some of its refining capacity to process
petroleum of its competitor, no one would conceivably take this
position seriously, and it has no more merit in the context of helium.
Of course, the small petroleum company could negotiate with the large
oil company to have its petroleum refined at its plant. This has
happened for years in the helium context. But forcing refiners to use
scarce capacity for a competitor in statute? No one could possibly
think this is an appropriate role for Congress.
We have used another analogy as well to explain why we oppose the
idea that Congress should force refiners to toll for nonrefiners, at a
price set by Congress. Suppose that a small foreign car manufacturer
approached Congress with the following proposition: we like selling
cars in the U.S., but we would rather not invest in building the
manufacturing plants that would allow us to make these cars, so
Congress should force a large American manufacturer, at a price set by
Congress, to use some of its manufacturing capacity to build cars for
the foreign company. A laughable proposition, right? Yet that is what
we hear some nonrefiners asking of Congress. Those of us with refining
plants invested millions of scarce dollars at a time when the
nonrefiners invested elsewhere. It appears that they now regret this
decision. They could build a helium refinery on the BLM system today,
and H.R. 527 quite explicitly provides that there is no barrier to this
investment, and that they would be eligible for an allocation for BLM
helium should they do so. But instead of doing this, they are asking
Congress to bail them out from the consequences of a business decision
they made many years ago, and by forcing a private party to toll for
them at a price to be set by Congress. We doubt that there are many
members of this Committee who thought that imposing federal price
controls on a private industry was a desirable public policy when they
ran for Congress. Congress should not take this idea seriously. This
House objects to bailouts, and forced tolling would represent the
ultimate in bailouts.
The 1996 Act did not restrict access to the BLM pipeline or impose
restrictions on who could purchase helium from the federal government.
Any third party company that wanted to enter the helium refining
business and purchase helium from the federal government could have
made investments as early as 1996, and could do so to this very day and
into the future. Surely, it is not the role of Congress to turn back
the hands of time and allow companies that opted not to make such
investments to enjoy the benefits accruing to those who did.
The 1996 Act does not impose any restrictions on who can purchase
helium from the federal government. Instead, the Department of the
Interior, under Administrations of both parties, limits the sale of
helium from the federal reservoir to what it calls ``qualified
buyers''--an entity that must have the ability to receive and process
the crude helium sold by the government. Any company can enter the
helium refining business with the requisite commitment of its
resources. BLM's interest in selling to qualified buyers is to prevent
companies from stockpiling crude helium. BLM determined that helium
refiners were in the best position to process the crude helium, which
requires purification and liquefaction prior to being introduced into
the helium wholesale or retail market.
Interestingly, BLM initially offered 90 percent of the helium in
the reservoir to the refiners and left 10 percent as unallocated, to be
purchased by companies that were not refiners. But there was very
little demand for the unallocated portion. Since BLM's desire was not
to sit on unnecessarily large quantities of helium in the reservoir,
BLM raised the allocated amount to 94 percent. Any suggestion that this
level poses an obstacle to any company wishing to purchase helium for
its customers simply does not comport with the facts. The 1996 Act and
any successor statute does not and should not set the allocation level;
BLM does, and for reasons that benefit the U.S. taxpayer and the users
of helium.
Conclusion: The time for Congress to act on helium is now
We are encouraged to see action on the helium issue. This is not an
issue where Congress can kick the can down the road or take action
retroactively. There will be serious consequences to the American
economy if the BLM reserve is off limits after the end of the current
fiscal year.
There is no need whatsoever to let this happen. This issue has been
bipartisan in both bodies of Congress over the past year, and there is
no reason that Congress cannot develop a workable, sensible bill that
accomplishes the objectives that congressional leaders have identified.
Air Products appreciates the opportunity to testify again on this
issue, and will do everything we can with our know-how to advise
Congress along the way to an outcome that everyone can be proud of.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Response to questions submitted for the record by Walter L. Nelson,
Air Products and Chemicals, Inc.
Questions from Chairman Doc Hastings
1. Mr. Nelson, the Government Accountability Office produced a chart
showing the price of BLM crude helium selling at just under $80
per thousand cubic feet, while the price of Grade A refined
helium sells for approximately double that--$160 per thousand
cubic feet. Please provide the committee with an estimate of
the average price per thousand cubic feet of the last 5 helium
contracts you have negotiated or renegotiated to sell crude
refined helium.
H1A: I am not familiar with the source of data used by the GAO to
create the chart depicted in Figure 2 on page 8 of GAO-13-351T, however
I believe the chart is misleading and inaccurate. It is impossible for
the price of Grade A refined helium to be less than the price for crude
helium as shown in this chart. The price of Grade A refined helium must
always be higher because it includes crude helium storage and delivery
charges, plant investments, processing costs, labor, energy costs,
distribution equipment investments, transportation and logistics costs,
fuel, taxes, permits, etc. The U.S. Government defines Grade A helium
as 99.995% or better purity, however the cost/price of Grade A helium
is largely dependent on whether the helium is sold as liquid or gas and
the type/size of delivery container, as well as the transportation
charges to/from the delivery point. Undoubtedly there is a product mix
effect which makes it impossible to draw any conclusions from this
chart. Air Products does not sell ``crude refined helium'', however in
accordance with our response to the Governments IFO NO. BLM-2012-OMCHS-
001: Air Products provided the BLM with our FY2011 average annual sales
price for refined helium (FOB) for volumes in excess 1 million cubic
feet and that price is below the $160/Mscf.
2. Mr. Nelson, is the GAO estimated price an accurate reflection of
the price of Grade A refined helium?
H2A: Air Products cannot vouch for the GAO estimated price. We do
not know the basis for the GAO's estimate. Federal agencies procure
helium every year, so the Committee should have no trouble obtaining
the price paid by the various agencies and departments that use helium.
Like any other commodity that is in short supply, the price of refined
helium can fluctuate and depends on several factors, including the
volume sought, the immediacy of delivery, and the history of commercial
relations between the parties buying and selling helium.
3. Mr. Nelson, please provide the Committee with a list of the refined
helium products (grade) you produce from the federal helium
reserve? In each category, please provide some estimate of the
current market price for each product.
HA3: A complete list of helium products, specifications, container
sizes and delivery options can be found on the Air Products website at:
http://www.airproducts.com/products/gases/helium.aspx. As noted in the
answer to the answer to question 2, there are many factors that enter
into the price for helium, including the relative supply and demand at
the precise moment of the transaction. Long-term prices are not the
same as spot prices, for instance. We negotiate prices with our
customers frequently, and this information is proprietary and
confidential. Federal agencies themselves procure all grades of helium.
We encourage the Committee to obtain this information from these
agencies.
4. Mr. Nelson, the Committee is interested in understanding the
capital costs related to the refining and distribution process.
Could you please provide the Committee an estimate of your
refining costs at the BLM connected facilities on a per
thousand cubic foot basis? Could you please provide the
Committee an estimate of the cost of distribution related to
the products produced at the BLM facility on a per thousand
cubic foot basis (if it can be broken down for different
products or grades of product please provide that information)?
H4A: Air Products has invested hundreds of millions of dollars in
our helium business to construct helium refining plants and the supply
chain infrastructure to support the business. Air Products began making
capital investments in connection with the BLM pipeline system over 30
years ago. Our first refining plant was first operational in 1982,
expanded in 1985 and upgraded in 2010. Air Products subsequently
constructed two more helium refining plants adjacent to DCP (Duke/
Conoco/Philips) Midstream's natural gas processing plant near Liberal
Kansas. The first plant started production in 1991 and the second plant
in 1999. In 1995, Air Products partnered with Sonatrach in northern
Algeria, and became the first company to design and build a helium
refining plant that processed crude helium that had been extracted
during the production of LNG (liquefied natural gas). More recently Air
Products, through a joint venture with Matheson, constructed a helium
refining plant in Wyoming. This plant was completed in 2011 and it is
expected to begin producing helium later this year when our supplier,
Denbury Resources, begins production at their new natural gas plant in
Riley Ridge Wyoming. Air Products made investments in the CRLP to
construct the $26 million crude helium enrichment plant that is
currently operated by the BLM. The Cliffside Refiners Limited
Partnership (CRLP) is a partnership made up of helium refiners that
owned facilities on the BLM pipeline in 2000. The CRLP partners include
Air Products, Praxair, Linde (formerly the British Oxygen Company), and
Colorado Industrial Gas (formerly owned by El Paso Energy and recently
acquired by Kinder Morgan). The cost to operate these facilities varies
greatly depending on the plant size, volume loading, technical
complexity, the level of integration with the energy company's natural
gas plant, physical location, cost of labor, cost of power, etc.
Transportation and distribution costs are highly variable depending on
whether the helium is delivered as liquid or gas, the size of the
container, ownership of the container, the mode of transportation, etc.
Due to these numerous variables it is impossible to provide a general
or average estimate that is meaningful.
Questions from Rep. Edward J. Markey
1. Mr. Nelson, Mr. Haines, Mr. Kaltrider: Please list the current
refining capacity of each helium refinery connected to the BLM
federal helium reserve pipeline owned by your company and what
if any changes have been made to its refining capacity since
2000.
M1A: Air Products has constructed helium refinery plants adjacent
to private natural gas companies in TX and KS (literally across the
fence line on land leased from these companies). We've entered into
long-term ``take-if-tendered'' contracts where we are obligated to
purchase 100% of the helium they produce. The energy sector has forced
all the delivery risk onto the refiners through these ``take or pay''
contracts. In order to manage this we have constructed, installed and
dedicated sufficient refining capacity at these plants to support these
contracts to ensure that we can receive and process 100% of the helium
that is produced by them today and into the future. Since 2000 Air
Products has not added any plants, however we continue to upgrade our
facilities to make them as efficient as possible. Our current installed
refining capacity connected to the BLM pipeline system is nominally the
same as it was in 2000.
2. Mr. Nelson, Mr. Haines, Mr. Kaltlider: Did any of the helium
refineries connected to the BLM federal helium reserve pipeline
owned by your company have spare refining capacity in any of
the last years? If so, how much?
M2A: Spare refining capacity is a relative term. As described
above, Air Products has installed refining capacity at our plants to
meet our contractual obligations. If a source of private crude helium
is down or producing at reduce rates, there might be short-term excess
capacity from time to time, however much of that capacity is already
contractually committed and dedicated to the private natural gas
companies.
3. Mr. Nelson, Mr. Haines, Mr. Kaltrider: The National Academies of
Science have recommended that the ``BLM should adopt policies
that open its crude helium sales to a broader array of buyers''
and ``negotiate with the companies owning helium refining
facilities connected to the Helium Pipeline the conditions
under which unused refining capacity at those facilities will
be made available to all buyers of federally owned clued
helium, thereby allowing them to process the crude helium they
purchase into refined helium for commercial sale.'' Do you
believe H.R. 527 would incentivize tolling agreements to refine
crude helium between your company and entities not connected to
the pipeline? Would your company supply requirements for
mandatory tolling agreements?
M3A: As I have testified, Air Products has entered into tolling
agreements, and with the right commercial conditions, we will do so in
the future. ``Mandatory tolling'' is altogether different. We spent
millions to build and maintain our helium refineries on the BLM system.
Companies that want to sell helium but not refine it chose not to
invest in their own refiners. Such companies, which are arguing for
``mandatory tolling,'' invested their capital elsewhere, but appear to
be urging Congress to establish price controls over our equipment and
investment. Any legislation that would dictate ``mandatory tolling''
would represent a nationalization of a private asset, and would violate
our constitutional and contractual rights. Considering that tolling
arrangements can be and are entered into by parties operating on an
arm's length basis, there is no reason for Congress to infringe our
legal rights to accomplish this objective. Please include the attached
legal analysis in the record. It describes at length the basis for our
serious concerns about mandatory tolling.
4. Mr. Nelson, Mr. Haines, Mr. Kaltrider: For each helium refinery
connected to the BLM federal helium reserve owned by your
company, what percentage of crude helium refined at that
refinery was sourced from the federal reserve and what
percentage came from private sources. Please provide this
information for each of the last three years.
M4A: Air Products reports monthly and annual helium production
volumes to the BLM at the end of each fiscal year. BLM keeps all this
information confidential. The information you are requesting is
confidential and proprietary.
5. Mr. Nelson, Mr. Haines, Mr. Kaltrider: Mr. Nelson's testimony
includes a graphic that projects the decline in production from
the Reserve. That chart projects production from the Reserve
fall by roughly 50 percent over the next 4 years and by
approximately 85 percent in 10 years. Your company has spoken
about wanting to have long-term contracts but isn't your
company already voiding or adjusting long-term contracts
because of inadequate supply? How are you going to meet your
customers' needs if your own supply from the federal helium
reserve is going to decline by 50-85 percent in the coming
years?
M5A: Air Products is very aware of the BLM decline forecast and we
are developing supply strategies to compensate for this decline.
Successor legislation is needed this year to extend the BLM operations
and preserve 30% of the global helium supply, bridging the time period
necessary for new announced natural gas and helium production plants to
come on-stream.
6. Mr. Joyner, Mr. Thoman, Mr. Lynch, Mr. Nelson, Mr. Haines, Mr.
Kaltrider: H.R. 527 limits the amount of crude helium anyone entity can
purchase in a single auction to 30 percent, do you believe that would
ensure sufficient competition and auction participation while also
protecting against market manipulation?
M6A: As stated in my testimony, ``the provision in H.R. 527 that
limits any one entity from purchasing more than 30% of the helium in an
auction will, we believe, prove to be unworkably low. The purchasing
limit should be raised to no more than 50%, along with the stipulation
that the Secretary has the authority to adjust this limit accordingly
to adapt to changing market conditions.''
______
Mr. Lamborn. OK, thank you.
Now, Mr. Haines.
STATEMENT OF NICK HAINES, HEAD OF HELIUM SOURCE DEVELOPMENT,
LINDE NORTH AMERICA, INC.
Mr. Haines. Mr. Chairman, Ranking Member Markey, and
Committee members, I appreciate the opportunity to testify
today. I am Nicholas Haines, head of Helium Source Development
with Linde Global Helium. We are a division of Linde North
America, Inc., headquartered in New Jersey, which has more than
15,000 employees in the U.S. Linde is a leading global
industrial gases and engineering company.
We have an extensive investment in the helium business that
is fully integrated, from production to distribution and retail
sales. We own and operate a helium refinery in Otis, Kansas,
where we produced the first commercially available liquid
helium in 1964. We own and operate multiple other helium plants
around the world, and have invested over $400 million in
refining capacity, transfills, regionally based and cryogenic
ISO containers for distributing helium around the world. Linde
supplies helium to a wide variety of customers, including
producers of semiconductors, MRIs, and other high-tech
products.
Firstly, I would like to compliment you for recognizing the
urgency of passing legislation this year to continue the BLM
helium program. You have made this a priority, and we
appreciate that. And we agree with you in some areas of your
proposed bill.
Second, we agree on the need to create an ongoing funding
mechanism that will allow the BLM to both continue operations
and invest in technology upgrades for the Cliffside Reservoir.
Third, we agree on the need to improve the system for
determining market prices and provide improved returns for
taxpayer, whilst minimizing market disruptions. These are a
good foundation to build upon.
Now, to address the areas of our disagreement. Our basic
disagreement is over your proposal to auction 100 percent of
the BLM's helium. We believe this will disrupt the market and
create tremendous uncertainty with regard to continued helium
supplies. As a business, we don't benefit from a higher or
lower price of helium. However, we do lose if the market
suffers from dramatic price swings or supply disruptions. So do
our customers and so do our consumers, as the price uncertainty
arising from these periodic auctions makes it more complex for
customers to predict their costs and manage their businesses.
We have heard also about price spikes and disruptions. You are
designing a system that will make these spikes and disruptions
worse.
Let me speak about certainty for a minute. This is a phrase
you have heard not just from us, you have heard it from large
end users. You have also heard it from small customers. To be
able to maintain this investment, we need to have long-term
contracts with our suppliers and our customers. If we are
unable to obtain these long-term supply agreements, we may be
forced to reduce investments in costs, as well as contracts
with our customers.
Our customers, in turn, need the reliability of long-term
supply contracts. When the Nation's largest supplier of crude
helium auctions 100 percent of its supply, we can't be sure on
a periodic basis if we will have helium to supply our
customers. Long-term contracts will become a thing of the past.
Everyone, from large manufacturers of semiconductors to small
welding shops and balloon shops will basically be operating in
a spot market.
Think about someone who needs an MRI at a local clinic, and
who may not be able to have that, due to the unavailability of
helium supplies for servicing that MRI. This could result from
the proposed auction process. Furthermore, Federal agencies
using helium could also suffer.
Now let me speak about market disruption. For years, the
Cliffside Reservoir has provided 50 percent of the U.S. supply
of helium, and has been used as the industry's swing capacity,
enabling plants there to be turned down during periods of
excess supply. It would be invaluable to maintain this
capability for as long as possible in order to avoid
unnecessarily venting product from other existing sources. The
reservoir is now in decline, and it will reach the proposed
strategic reserve of 3 billion cubic feet in 5 to 8 years.
There are new large supplies of helium coming online around
the world in Qatar, Algeria, and Wyoming. But their timing is
uncertain, and there are currently shortages which is creating
these price spikes and the volatility in the market. To
transition the Cliffside Reservoir to a pure auction system
will make that price and supply volatility dramatically worse.
It will not result in any new sources of helium being
developed.
The Cliffside Reservoir has, frankly, been a source of
stability in a very difficult environment, and has benefitted
consumers for decades. It has benefitted high-tech industry
here, in the U.S. and it has fostered innovation, which are
things we should be trying to preserve.
Let me close by saying that we understand the desire to get
a fair deal for taxpayers. That is commendable. We agree that a
better job can be done determining a fair market price. We also
believe, justifiably, that a sea-change to a pure auction will
jeopardize the stability and reliability that this global
helium supply chain depends upon. We think that it is possible
to create a process to determine a fair-market price and still
preserve some certainty for our customers with minimal market
disruption. Unfortunately, the approach you have proposed will
not achieve that. We are ready to roll up our sleeves and work
with you to get this done.
Thank you for allowing me to testify, and I would be happy
to answer any questions.
[The prepared statement of Mr. Haines follows:]
Statement of Nicholas Haines, Head of Helium Source Development,
Linde Global Helium
Mr. Chairman and Ranking Member Markey--I appreciate the
opportunity to testify today. I am Nicholas Haines, Head of Helium
Source Development, with Linde Global Helium.
Linde Global Helium is a division of Linde North America, Inc.
We're headquartered in New Jersey and we have more than 15,000
employees in the United States. Linde is a leading industrial gas and
engineering company. We operate in more than 100 countries, with more
than 61,000 employees globally.
We have an extensive investment in the helium business that is
fully integrated from production to distribution and retail sales.
Linde owns and operates a helium refinery in Otis, Kansas, where we
produced the first commercially available liquid helium in 1964. We
also own and operate a number of other helium plants around the world
and have invested hundreds of millions of dollars in refining capacity,
regional transfill stations, and cryogenic ISO containers for
distributing helium around the world to its points of use. Linde
supplies helium to a wide variety of customers, including producers of
semiconductors, MRI machines and other high-tech products.
Firstly, I would like to compliment all of you for recognizing the
urgency of passing legislation this year to continue the BLM helium
program. You've made this a priority, and we appreciate that and we
agree with you on some areas of your proposed Bill. Second, we agree on
the need to create an ongoing funding mechanism that will allow the BLM
to both continue operations and invest in technology upgrades for the
Cliffside Reservoir. Without this funding, the reservoir will not
continue to operate. Third, we agree that we need to improve the system
for determining market prices and provide improved returns for
taxpayers, whilst minimizing market disruption. These are a good
foundation for us to build on.
Now to address the areas of our disagreements. Our basic
disagreement is over your proposal to auction 100% of the BLM's helium.
We believe this will disrupt the marketplace and create tremendous
uncertainty with regard to continued helium supplies. I would like to
note at the outset that, as a business, we don't benefit from a higher
or lower price of helium. We do lose, however, if the market suffers
from dramatic price swings or supply disruptions. So do our customers,
and so do consumers. The price uncertainty arising from periodic
auctions makes it more complex for customers to predict their costs and
manage their businesses.
Let me speak about certainty for a minute. This is a phrase you've
heard not just from us. You've heard it from large end-users. You've
heard it from small customers. Refining and delivering helium is a
high-fixed-cost business. Helium has to be stored and distributed cost
effectively in bulk form at -452 degrees Fahrenheit, and that's a real
challenge.
To be able to maintain this investment, we need to have long-term
contracts with our suppliers and customers. If we are unable to obtain
long term supply agreements, we may be forced to reduce investments and
costs, as well as contracts with our customers. Our customers in turn
need the reliability of long-term contracts as well. I think you've
heard this from them directly. When the nation's largest supplier of
crude helium auctions 100% of its supply, we can't be sure on a
periodic basis if we'll have helium to supply to our customers. Long-
term contracts will become a thing of the past. Everyone from large
manufacturers of semi-conductors to small welding shops will basically
be operating in a spot market. As I'm sure you've heard, the spot
market is not a place you want to be right now. Think about someone who
needs an MRI at a local clinic, and who may not be able to have that
due to the unavailability of helium supplies for servicing that MRI,
which could result from the proposed auction process.
Let me speak about market disruption for a moment. For years, the
Cliffside Reservoir has been providing 50% of the U.S. supply of helium
and has been used as the only ``swing capacity'' in the industry,
enabling plants there to be turned down during periods of excess
supply. It would be invaluable for the industry to maintain this
capability for as long as possible, in order to avoid unnecessarily
venting product from other sources. The Reservoir is now in decline and
it will reach the proposed strategic reserve of 3 bcf in 5 to 8 years.
There are large new supplies of helium coming on line around the world.
In Qatar. In Algeria. In Wyoming. But their timing is uncertain. This
transition is creating shortages. It's creating tremendous price spikes
on the spot market. It's creating a lot of volatility. To transition
the Cliffside Reservoir to a pure auction system will make that price
and supply volatility dramatically worse. In this environment, it will
encourage speculation and hoarding and will not result in new sources
of helium being developed.
The Cliffside Reservoir has frankly been a source of stability in a
very difficult environment. The reliability and stability of this
operation has benefited consumers for decades. It's benefited the high-
tech industry here in the U.S. and it's fostered innovation. Those are
things we should be striving to preserve.
One of the objectives of the National Academies of Sciences report
of 2010 was to encourage recovery and recycling, however with supply
uncertainty, customers may be less likely to consider this technology,
which typically requires long term investments.
Let me close by saying this. We understand the desire to get a fair
deal for the taxpayers. That's commendable. We agree that a better job
can be done determining a fair market price. We also believe,
justifiably, that a sea-change to a pure auction will jeopardize the
stability and reliability that this global helium supply chain depends
upon. We think that it's possible to create a process to determine a
fair market price and still preserve some certainty for our customers,
with minimal market disruption. Unfortunately the approach you have
proposed will not achieve that. We're ready to roll up our sleeves and
work with you to get this done.
Thank you again for allowing me to testify today. I'd be happy to
answer your questions.
______
Response to questions submitted for the record by Nicholas Haines,
Head of Helium Source Development, Linde Global Helium
Questions from Chairman Doc Hastings
1. Mr. Haines, the Government Accountability Office produced a chart
showing the price of BLM crude helium selling at just under $80
per thousand cubic feet, while the price of Grade A refined
helium sells for approximately double that--$160 per thousand
cubic feet. Please provide the committee with an estimate of
the average price per thousand cubic feet of the last 5 helium
contracts you have negotiated or renegotiated to sell crude
refined helium.
Answer:
Linde does not sell crude helium. We sell only refined helium
products. As a general rule, we do not publicly release details of
contracts with our customers due to their proprietary nature and anti-
trust concerns.
2. Mr. Haines, is the GAO estimated price an accurate reflection of
the price of Grade A refined helium?
Answer:
Prices for Grade A refined helium can vary widely. Important
factors that affect the price include quantity sold, length of
contract, delivery distance, type of container (cylinders, liquid, tube
trailers), supply and demand in the region, etc.
Without having more details behind the prices cited by the GAO, it
is difficult to comment on their accuracy. Generally speaking, we
believe that the prices cited by the GAO for refined helium are
significantly higher than industry-average prices for refined helium
sold under long-term contracts in the U.S. during those time periods.
3. Mr. Haines, please provide the Committee with a list of the refined
helium products (grade) you produce from the federal helium
reserve? In each category, please provide some estimate of the
current market price for each product.
Answer:
In the U.S., Linde produces:
Grade 5.0 Conformance Grade Helium
Grade 5.0 Analytical Grade Helium
Liquid Helium
As a general rule, we do not publicly release pricing details due
to their proprietary nature and anti-trust concerns.
4. Mr. Haines, the Committee is interested in understanding the
capital costs related to the refining and distribution process.
Could you please provide the Committee an estimate of your
refining costs at the BLM connected facilities on a per
thousand cubic foot basis? Could you please provide the
Committee an estimate of the cost of distribution related to
the products produced at the BLM facility on a per thousand
cubic foot basis (if it can be broken down for different
products or grades of product please provide that information)?
Answer:
The costs of refining, distributing and filling liquefied helium
are substantial, due in part to the fact that the helium must be
maintained at a temperature of -452 degrees Fahrenheit.
Costs for each of these factors can vary, depending on the
circumstances. Also we do not generally release actual cost figures.
However, we could offer these rough estimates of the ranges of costs
experienced by the industry:
Estimated Refining Costs: $20/mcf-$30/mcf.
Estimated Distribution Costs: $20-$40/mcf.
Estimated Filling Costs (at transfills): $15-$20/mcf.
Questions from Rep. Edward J. Markey
1. Mr. Nelson, Mr. Haines, Mr. Kaltrider: Please list the current
refining capacity of each helium refinery connected to the BLM
federal helium reserve pipeline owned by your company and what
if any changes have been made to its refining capacity since
2000.
Answer:
Linde's Helium refinery plant is located at Otis, Kansas.
Refining Capacity in 2000 was approximately 1,100 mmcf annually--
26% of total system capacity, as posted on the BLM web site.
Current Refining Capacity is the same--1,100 mmcf annually.
2. Mr. Nelson, Mr. Haines, Mr. Kaltrider: Did any of the helium
refineries connected to the BLM federal helium reserve pipeline
owned by your company have spare refining capacity in any of
the last three years? If so, how much?
Answer:
Over the last three years Linde has had spare refining capacity at
Linde's Otis, Kansas, plant.
Excess capacity is the direct result of insufficient feed-gas
availability. In other words, because of the diminishing volume of
helium in the reserve and insufficient compression, the system has not
been able to deliver a volume of helium sufficient to maximize refinery
capacity on the pipeline.
3. Mr. Nelson, Mr. Haines, Mr. Kaltrider: The National Academies of
Science have recommended that the ``BLM should adopt policies
that open its crude helium sales to a broader array of buyers''
and ``negotiate with the companies owning helium refining
facilities connected to the Helium Pipeline the conditions
under which unused refining capacity at those facilities will
be made available to all buyers of federally owned crude
helium, thereby allowing them to process the crude helium they
purchase into refined helium for commercial sale.'' Do you
believe H.R. 527 would incentivize tolling agreements to refine
crude helium between your company and entities not connected to
the pipeline? Would your company support requirements for
mandatory tolling agreements?
Answer:
Linde is strongly opposed to mandated tolling. We believe such a
policy would constitute an unconstitutional government taking of
private property. In addition, we believe that a mandated tolling
policy would unjustifiably reward companies that chose not to invest in
helium refinery capacity at the expense of those that did make such an
investment. A mandated tolling scheme would certainly create strong
disincentives for ongoing investments that are necessary to maintain
the infrastructure to refine and deliver helium.
We believe that the most significant step the government could take
to incentivize tolling agreements is to increase the delivery capacity
of the reservoir and related infrastructure.
4. Mr. Nelson, Mr. Haines, Mr. Kaltrider: For each helium refinery
connected to the BLM federal helium reserve owned by your
company, what percentage of crude helium refined at that
refinery was sourced from the federal reserve and what
percentage came from private sources. Please provide this
information for each of the last three years.
Answer:
This information is competitively sensitive and proprietary in
nature, and Linde does not generally release it.
5. Mr. Nelson, Mr. Haines, Mr. Kaltrider: Mr. Nelson's testimony
includes a graphic that projects the decline in production from the
Reserve. That chart projects production from the Reserve to fall by
roughly 50 percent over the next 4 years and by approximately 85
percent in 10 years. Your company has spoken about wanting to have
long-term contracts but isn't your company already voiding or adjusting
long-term contracts because of inadequate supply? How are you going to
meet your customers' needs if your own supply from the federal helium
reserve is going to decline by 50-85 percent in the coming years?
Answer:
We have not voided long-term contracts with our customers due to
recent shortages in helium supply. When shortages have occurred, we
have allocated product to our customers on a fair and proportional
basis. We continue to believe that long-term contracts have a great
deal of benefit for industries that depend on helium, and consumers.
These contracts provide a degree of certainty and stability that
maximize efficiency and enable innovation in high-tech products and
services.
(I would like to note that Linde has not allocated--or provided a
reduced amount--of helium to our federal in-kind customers. Even when
we have been compelled to allocate helium to our commercial customers,
we have continued to provide the full amounts under contract to federal
customers.)
There is no question that the BLM reservoir is depleting and that
there is an urgent need to replace this volume of product over the next
10 years. The industrial gas industry, including Linde, is investing
significant resources in developing new sources of helium around the
world, including in Algeria, Qatar, Australia, and other locations. It
is our hope and expectation that these new sources will enable us to
reliably continue to supply our customers under existing long-term
contracts. However there is uncertainty about when these new sources
will begin producing, and what quantity of helium they will ultimately
produce. For this reason, we continue to rely on the BLM as a stable
source of helium in the near term.
For these reasons, we have argued that one of the goals of your
legislation, in addition to realizing a fair market price for the
government's helium, should be to preserve some of the stability and
certainty provided by the BLM helium supply. We believe that both of
these objectives could be met with a hybrid system that combines a
partial auction of the BLM's helium with a continuation of the current
allocation formula for the remainder of the helium, using the auction
price as a significant component of the pricing formula. Such a hybrid
system would help to prevent market disruptions, while ensuring fair
market prices.
One final point: The BLM system has historically been able to
provide industry turn-down capacity. This capacity has been vital in
the past in preventing the venting of unclaimed helium. We believe this
capacity should be maintained in order to avoid potentially venting
this critical resource in the future. We fully realize that while this
turn-down capability will diminish, having it available is vital.
6. Mr. Joyner, Mr. Thoman, Mr. Lynch, Mr. Nelson, Mr. Haines, Mr.
Kaltrider: H.R. 527 limits the amount of crude helium any one
entity can purchase in a single auction to 30 percent, do you
believe that would ensure sufficient competition and auction
participation while also protecting against market
manipulation?
Answer:
We do believe that the current helium marketplace is vulnerable to
manipulation, and that measures are necessary to prevent hoarding and
price speculation. We support measures to prevent speculation. Possible
measures that would help achieve this goal include limiting lot sizes,
or limiting the total quantity any one party could purchase at auction.
Determining the appropriate limitation for any one party is
challenging. We tend to believe that 30% may be too low.
______
Mr. Lamborn. OK, thank you for your testimony.
And now we will hear from Mr. Kaltrider.
STATEMENT OF SCOTT KALTRIDER, VICE PRESIDENT, BUSINESS
MANAGEMENT AND HELIUM, PRAXAIR, INC.
Mr. Kaltrider. Good morning, Mr. Chairman, other
distinguished members of the Committee. My name is Scott
Kaltrider, I am the Vice President of Business Management and
Helium for Praxair. For those of you that aren't aware, Praxair
is the largest industrial gas company in North and South
America. We are headquartered in Danbury, Connecticut. We have
over 10,000 employees in the U.S., over 500 facilities. We
operate, employ, or have customers in all of the States
represented on the Committee. I certainly appreciate the
opportunity to be here today and express Praxair's views on the
proposed bill.
We think the proposed bill is a good starting point, and we
are hopeful that, with some of the recommendations that I am
about to make in my testimony, we can get the bill to a piece
of legislation that would be supported by all stakeholders.
Upon reviewing the bill, it is apparent that there are two
overriding priorities that the bill would like to address, the
first being the creation of some market-based pricing mechanism
for adjustment of the BLM price to ensure competitively priced
product, crude product out of the BLM, the second being
ensuring continuity of supply from the BLM to end users during
the implementation of the bill.
It has been spoken about through other testimony, but I
think it is worth repeating. Today, the notion of a BLM or a
market-based pricing mechanism, to describe that as circuitous
would probably be the most accurate definition. It is kind of
like a dog chasing its tail. Every year the BLM will issue a
new price for its posted price in October, and the refined
sources around the world since 2008 have basically incorporated
that pricing mechanism into their annual escalation.
So, the notion that the BLM will ever catch up with or
leapfrog, from a market standpoint, the global refined helium
sources is--that is not going to happen under the current
scenario, and for good reason. It is a crude product versus a
refined product. There is, as Mr. Spisak testified, a
tremendous difference in those two.
Having said that, a 100 percent auction is a very high-
stakes play, we feel, at this point in time. It is coincidental
that this legislation is coming up and the funding of this
program is coming up at a time where we are probably seeing the
most exacerbated shortage, globally, that we have seen in the
last two decades.
And so, I think, we, at Praxair, would caution the
Committee in taking very great care to make sure that we are
not setting up a process during a time of duress, where the
supply demand equation is heavily favoring demand. Because, in
fact, this will correct itself. There will be more supply
coming online in the next 6 to 18 months. And it is not
inconceivable that, as this bill gets implemented, you could be
in a situation where supply is the overriding factor in the
supply demand equation. And when the BLM goes to auction
product, no matter how much it is, there may not be as much
interest as you might think today. So we would caution that.
Regarding continuity of supply, 100 percent auction will
increase and introduce a high degree of instability into the
market. An auction every 6 months will likely cause our end
users to go and either change suppliers or change slates of
suppliers. Today, many, the vast majority of the end users
single source their product, and they do it in a very rigorous
manner in selecting their supplier. So it will create, in
essence, a perpetual spot market that will make it very
difficult for companies to strategically plan, make investment,
and specifically, make investment for growth and jobs.
Further, the bill's provision, by limiting a maximum of 30
percent to any one party that can gain a bid, we feel creates
an indirect tolling mandate on the refiners and, frankly,
subsidizes access to the reserve, via the capital investment
that we and the other refiners have made in the past.
However, regarding this same provision, probably more
concerning to the Committee is that the 30 percent cap
significantly reduces the amount of helium that Praxair would
get today, and thereby jeopardizes our ability to meet our in-
kind requirements under the in-kind Federal program. And so,
those agencies such as NASA and NIH and Lawrence Livermore and
those entities, would be at risk of not being reliably
supplied.
Finally, there is a provision in the bill that would allow
for up to 24 months of crude being processed. And we feel that
would result in stranded helium molecules in the reserve that
couldn't be recovered, and further exacerbate the global supply
situation.
In conclusion, consistent with my written testimony,
Praxair recommends a much more measured approach. It is a
three-element proposal. You can see it in my written testimony.
It does call for a logical, orderly draw-down in a three-phase
fashion of the BLM reserve. It does provide for an auction of a
piece of the reserve, an annual auction of a commercially
significant quantity. And it does provide for access to the
bidders that are non-refiners to refining capacity, to ensure
they could bring product to market.
At the end of the day, our customers have expressed to us
that jobs are on the line here, and it is very important that
we get this done in a responsible manner. Praxair really
appreciates the opportunity to be here, and is willing and able
to work with the Committee to come up with a mutually
acceptable piece of legislation.
[The prepared statement of Mr. Kaltrider follows:]
Statement of Scott Kaltrider, Vice President,
Business Management & Helium, Praxair, Inc.
Good morning Chairman Hastings, Ranking Member Markey and Members
of the Committee. My name is Scott Kaltrider and I am the Vice
President of Business Management & Helium for Praxair, Inc., the
largest industrial gas company in North and South America and one of
the largest worldwide. Praxair is headquartered in Danbury, Connecticut
and employs approximately 10,000 people in more than 500 facilities
across the United States. The company manufactures, sells, and
distributes atmospheric, process, and specialty gases. Praxair
products, services, and technologies bring productivity and
environmental benefits to a wide range of industries including
aerospace, chemicals, food and beverage, electronics, healthcare,
manufacturing, and metals among others. We have operations, employees,
or customers in every state represented on this Committee.
Praxair has been in the helium business for nearly 100 years
serving both private and federal government users. We supplied the
helium used by NASA to launch space shuttles into orbit, the helium-
oxygen breathing mixtures used by Navy sailors while performing deep-
dive operations, and the helium used by the Air Force each time a Delta
4-Heavy is launched to provide our intelligence community with the
information necessary to protect our citizens.
Our long-term planning coupled with investments in a robust supply
chain and a diverse set of crude and refined helium sources have made
us a world leader in refined helium production and distribution. We
have about $500 million invested in plants and equipment required to
access, process, refine, and deliver to market helium sourced from the
Federal Reserve operated by the BLM.
I would like to thank this Committee for the opportunity to appear
at today's hearing on the Responsible Helium Administration and
Stewardship Act (RHASA). I would also like to thank the Chairman for
directing his attention to the important work of reauthorizing the
Federal Helium Program. Many vitally important industrial, medical, and
scientific processes depend on reliable helium supplies. Since the
Federal Helium Reserve currently accounts for 50-percent of the U.S.
helium supply and will likely be depleted by 2018-20, it is critically
important that the program be concluded in a careful and thoughtful
manner. While program improvements are surely necessary, any
improvements should be practically grounded and serve the best
interests of manufacturers who rely on a predictable supply of helium.
As a threshold observation, I am sure that there is unanimous
agreement that any legislative proposal must (1) obtain fair market
value of federally sourced crude helium and (2) do so through a
transparent mechanism that will avoid disrupting the helium supply
chain. While I believe that RHASA was drafted with this intention
squarely in mind, its effect would be to place counterproductive limits
on the role of helium refiners. Its practical effect would be to
disrupt the helium industry's ability to meet the helium demands of our
hundreds of customers throughout the country. It is my hope that
through my testimony today, and the many subsequent conversations with
you and your staff that will undoubtedly take place, we will be able to
fashion a policy that avoids these pitfalls.
The Federal Helium Program was created in 1925 to guarantee the
availability of helium for national defense purposes. As a result, the
United States constructed a helium extraction and purification plant
outside of Amarillo, Texas that began operations in 1929. In the
1960's, as the demand for helium increased, Congress responded by
encouraging private natural gas producers to separate crude helium from
natural gas and sell it to the government. The Federal government ended
this program in 1973 and opened the reserve to private capital and
development. This action spurred the creation of a private helium
sector in which certain industrial gas companies made the decision to
invest in liquid helium refining facilities. Praxair did make such
investments and other companies opted not to do so. By the mid-1990s,
private demand for helium became significantly greater than government
demand because of advances in research, technology and medical
diagnostic equipment.
In 1996, under the Republican-led House and Senate, Congress passed
the Helium Privatization Act, which directed the federal government to
exit the helium market. The Privatization Act directed the BLM to
shutdown federal helium refining operations and dismantle the facility
by 1999. It also called for the sale of crude helium reserves to begin
in the year 2005 and to be concluded by December 31, 2014. The
Privatization Act provided minimum selling prices, adjusted for
inflation, for crude helium so that adequate revenue would be generated
to repay the government's investment in the Reserve and the
construction costs of the related infrastructure. The Secretary of the
Interior was provided the discretion to increase price over the minimum
price set by the Privatization Act. The price charged for BLM helium
has been a point in controversy. Without assessing the validity of
claims that price was set too low, let me just say that neither Praxair
nor any refiner has had any role in making BLM pricing determinations.
Pursuant to regulations adopted to implement the Privatization Act,
the BLM sells crude helium from the Federal Reserve in two annual
phases or ``sales.'' In the first sale (called the Allocated Sale), 94%
of the crude helium is offered for sale in set percentages to each
company that has refining capacity on the reserve system. This includes
Praxair. The percentage allocated to each refiner is based on that
refiner's refining capacity. Refining capacity is, of course, a
function of the respective capital investments in plants and equipment
made by each refiner. It is important to note that the helium sold
during the Allocated Sale is explicitly meant for current consumption.
By prioritizing and contractually guaranteeing set volume to the
refiners, such as Praxair, it ensures that refined product will be
delivered to the end market in real time and, therefore, minimize
market disruptions. Critically, this provides the market with the
certainty necessary to execute long-term contracts with end users and
to provide them with the confidence of knowing that their helium needs
will be met. Thousands of jobs depend on our customers' abilities to
secure a constant and stable supply of helium. The Act and its
regulations recognize the essential role that the refiners play in the
effective operation of the BLM helium system.
While the Privatization Act envisioned the entire reserve being
sold by 2015, this has not yet occurred. Rather, reserves continue to
exist such that the BLM can continue to sell helium for medical and
commercial purposes for approximately 5-7 more years based on current
consumption. That is, of course, why we are discussing the program
today. To be clear, there is no new helium to be sourced from the BLM's
reserve. The supply is finite. It is in the nation's interest to
promote the orderly wind-up of the government's role in the helium
business.
RHASA fails to recognize the refiners' critical role. As described
in more detail below, the proposal will result in a 15.5%-100%
reduction in the amount of helium that Praxair could purchase. Similar
reductions would be imposed on all other refiners. This would
effectively undermine the value of our investments totaling $500
million made to efficiently process, refine, and distribute the helium
to our customers. It is important to note, that the BLM's value to the
public is maximized by having efficient refining and distribution
capability. In 1996, Congress explicitly designed the program to ensure
that helium is apportioned and efficiently brought to market to the
benefit as many end users as possible. Refiners perform this function
by drawing from a variety of public and private helium sources--thus
not relying exclusively on the BLM. RHASA undermines this imperative by
establishing a program under which a distributor can be awarded 100% or
more of the helium required for their customers which will result in
total reliance on the BLM system and the stranding of helium in
inefficient places. American manufacturers cannot operate on the
resulting supply volatility risked by RHASA.
The proposal specifically seeks to reform the Helium Program
through a 100% semi-annual auction that contains additional layers of
governmental administration, such as significant private reporting and
recordkeeping mandates, none of which had previously existed. For
example, H.R. 527 grants the Secretary of the Interior unlimited
authority to develop a helium market surveillance program and does not
guarantee adequate that sensitive commercial information will be
protected. Under the label of ``equal pipeline access,'' RHASA
threatens to disrupt pre-existing contracts relating to pipeline
allocation that Praxair has negotiated with the BLM and do not expire
for many years. While I question the prudence of materially reinventing
the program in the twilight of its existence, I am deeply concerned
with the construction of the experimental auction system that will
ultimately lead to significant disruptions in the global helium market
adversely impacting federal agencies like NASA and the Air Force,
medical research and service providers, and manufacturers.
A 100% auction is impractical. Only a few companies made the
necessary and prudent business decisions to invest in helium transport
logistics. Indeed, only 5 companies have the ability to take delivery
of 10% or more of the BLM's helium supply from a liquid helium pipeline
plant in Texas, Oklahoma, or Kansas to an end user in Idaho or North
Carolina or a launch pad in California. Failing to take into account
supply chain capabilities when designing any auction, let alone a 100%
auction, will result in stranded helium and deprive U.S. manufacturing
and service providers of an important feed stock.
RHASA is described as a ``free-market plan to prevent a global
helium shortage'' but in reality it is something very different. It
will not bring any new or additional helium molecules to the market
that will mitigate the current supply and demand imbalance that exists.
Rather, in an effort to increase the number of bidders at each semi-
annual auction to maximize price, RHASA redistributes the same volume
of helium to a wider group of purchasers--purchasers who have not
invested in the infrastructure to process, refine, and distribute
helium to those end users who need helium to support their operations.
Although an auction may appear on its surface to be rooted in free
market principles, the design and scale of this particular auction
would compromise stability in the global helium supply chain while also
breaching public/private contracts, and, most importantly, make U.S.
manufacturers less competitive on a global basis.
There have been allegations that America's private helium industry
has not diligently identified and developed new and private sources of
helium. This is not correct. Since the Helium Privatization Act was
passed, there have been robust private helium extraction projects
developed to meet demand. Further, the equivalent of about 30% of the
current global helium capacity will come online this year from new
projects in the U.S. and abroad. Praxair has and will continue to
invest tens of millions of dollars in the United States to to develop
additional helium supply. As with all projects of this scale and
complexity, these ambitious plans face headwinds which this bill should
address, like permitting difficulties and delays. The key to increasing
helium supplies is in the development of additional natural gas
reserves, specifically those containing helium, since as we all
recognize a majority of natural gas reserves don't contain helium.
Without an incentive to co-develop the natural gas, the feasibility of
helium sourcing is compromised.
Praxair is committed to working with the Committee to accomplish
our shared goal--reauthorization of the Federal Helium Program in a
manner that brings fair market value to the U.S. taxpayer and does not
disrupt the global helium supply chain. We believe this can be done. We
have been working with a broad array of stakeholders to modify the
proposed auction in a way that would be acceptable to all interested
parties.
A 100% auction is not necessary to arrive at a fair and transparent
price. What is feasible and effective, however, is that a commercially
significant amount of helium be sold through an auction in blocks that
are truly useful and deliverable.
It is imperative for the auction to be meaningful and well
designed. A meaningful and well designed auction will attract potential
buyers that are knowledgeable, qualified, and possess the capital
capacity to manage the resulting award. Further, a valid auction must
have a market-based mechanism to obtain a fairly priced tolling
agreement from a pipeline refiner. Congress can drive competition among
pipeline refiners for a tolling agreement by working with the refiners
to set aside a portion of the current pipeline allocation for access by
parties bidding on the blocks of helium ultimately set aside. Congress
should not promote access to pipeline refining through a mandate,
whether direct or indirect.
The contours of our proposal are:
A 3-phase draw down of the Federal Helium Reserve to
prevent disruption in the global helium market.
Sale price supported by the combination of an annual
auction of commercially significant blocks of helium, data collection
and analysis of private helium transactions.
A pro rata ``special pipeline allocation'' equal to the
percentage awarded through an auction that ensures that winning bidders
who do not have refining capacity will be able to take possession.
An auction must have guard rails to ensure that federal agencies
and grantees, manufacturers and medical service providers are not
injured. An auction design must therefore ensure a predictable and
prudent drawdown while other new domestic and/or international sources
of helium can be brought to market. It must also ensure supply chain
stability so that end users can enjoy the certainty of long-term
contracting with their suppliers.
We thank the Committee for considering our views. RHASA is a good
starting point for discussion and we are confident that with the types
of modifications outlined earlier we will have a product that can be
supported by all stakeholders.
______
Response to questions submitted by Scott Kaltrider, Vice President,
Business Management & Helium, Praxair, Inc.
March 18, 2013
Dear Chairman Hastings:
Thank you for providing Praxair, Inc. with the opportunity to
testify at the February 14, 2012 hearing on ``The Past, Present, and
Future of the Federal Helium Program'' and we appreciate the additional
questions you have presented.
As an initial observation, many of the questions presented assume a
set of facts and circumstances that are not supported by the reality of
Praxair's experience in the refining and sale of helium. In addition,
many of the questions request information that is of a confidential and
commercially sensitive nature, which we, as you can understand, cannot
answer.
Consistent with Praxair's interest in providing helpful factual
information to the Committee, we have answered your inquiries as best
we can.
Answers to Questions from Chairman Doc Hastings
1. Mr. Kaltrider, the Government Accountability Office produced a
chart showing the price of BLM crude helium selling at just
under $80 per thousand cubic feet, while the price of Grade A
refined helium sells for approximately double that--$160 per
thousand cubic feet. Please provide the committee with an
estimate of the average price per thousand cubic feet of the
last 5 helium contracts you have negotiated or renegotiated to
sell crude refined helium.
A: This question is ambiguous. The meaning of ``crude refined
helium'' is unclear as it is used in this question and is not a
commercially recognized term. In answering your question we have
assumed that what was intended was to ask about helium we refined and
sold. If we have correctly gleaned the intent of the question, we can
advise the Committee that Praxair's prices per thousand cubic feet vary
greatly since price in any given transaction is determined as a result
of a number of unique factors including without limitation, the terms
and conditions of sale, delivery mode, volume, grade, distance from
plant, as well as time of purchase.
2. Mr. Kaltrider, is the GAO estimated price an accurate reflection of
the price of Grade A refined helium?
A: Our response to this question, due again to the ambiguity of the
question, is a limited one. Specifically, regarding the price paid by
customers for helium refined and sold by Praxair we would reiterate our
response to question 1 above.
3. Mr. Kaltrider, please provide the Committee with a list of the
refined helium products (grade) you produce from the federal
helium reserve? In each category, please provide some estimate
of the current market price for each product.
A: The following is a list of the helium products (grades) Praxair
produces from the federal helium reserve.
The majority of helium produced at refineries is liquid helium
conforming to CGA Grade P with limited sales of High Purity Gas (4.7 or
BOM Grade A). Currently, Praxair has the only refinery producing USP
Gaseous Helium. Most other grades are packaged and verified at
redistribution centers.
As we explained above, we are unable to provide ``current market
price'' for each product with any reasonable degree of certainty since
price in any one given transaction is determined by a variety of
factors.
4. Mr. Kaltrider, the Committee is interested in understanding the
capital costs related to the refining and distribution process.
Could you please provide the Committee an estimate of your
refining costs at the BLM connected facilities on a per
thousand cubic foot basis? Could you please provide the
Committee an estimate of the cost of distribution related to
the products produced at the BLM facility on a per thousand
cubic foot basis (if it can be broken down for different
products or grades of product please provide that information)?
A: Praxair, Inc.'s capital costs related to the refining and
distribution process are confidential and commercially sensitive and
for that reason we are unable to provide further information in
response to this question.
Answers to Questions from Rep. Edward J. Markey
1. Mr. Nelson, Mr. Haines, Mr. Kaltrider: Please list the current
refining capacity of each helium refinery connected to the BLM
federal helium reserve pipeline owned by your company and what
if any changes have been made to its refining capacity since
2000.
A: The current refining capacity of each helium refinery connected
to the BLM federal helium reserve pipeline is publicly available online
at the following website: http://www.blm.gov/pgdata/etc/medialib/blm/
nm/programs/0/helium_docs.Par.80517.File.dat/
FY2011%20open%20mkt%20wrksht%20qtr%202.pdf
2. Mr. Nelson, Mr. Haines, Mr. Kaltrider: Did any of the helium
refineries connected to the BLM federal helium reserve pipeline
owned by your company have spare refining capacity in any of
the last three years? If so, how much?
A: Yes, this information is publicly available online at the
following website: http://www.blm.gov/pgdata/etc/medialib/blm/nm/
programs/0/helium_docs/statistical_reports2.Par.74609.File.dat/
Stat%20Sep2010%20post.pdf
http://www.blm.gov/pgdata/etc/medialib/blm/nm/programs/0/helium_docs/
statistical_reports2.Par.69270.File.dat/Stat%20Sep2011%20post.pdf
http://www.blm.gov/pgdata/etc/medialib/blm/nm/programs/0/helium_docs/
statistical_reports2.Par.36814.File.dat/Stat%20Sep2012%20post.pdf
3. Mr. Nelson, Mr. Haines, Mr. Kaltrider: The National Academies of
Science have recommended that the ``BLM should adopt policies
that open its crude helium sales to a broader array of buyers''
and ``negotiate with the companies owning helium refining
facilities connected to the Helium Pipeline the conditions
under which unused refining capacity at those facilities will
be made available to all buyers of federally owned crude
helium, thereby allowing them to process the crude helium they
purchase into refined helium for commercial sale.'' Do you
believe H.R. 527 would incentivize tolling agreements to refine
crude helium between your company and entities not connected to
the pipeline? Would your company support requirements for
mandatory tolling agreements?
A: No, we do not believe H.R. 527 would incentivize tolling
agreements to refine crude helium. In addition, Praxair does not
support requirements for mandatory tolling agreements since such
requirements raise legal and Constitutional issues under the Takings
Clause of the Fifth Amendment.
4. Mr. Nelson, Mr. Haines, Mr. Kaltrider: For each helium refinery
connected to the BLM federal helium reserve owned by your
company, what percentage of crude helium refined at that
refinery was sourced from the federal reserve and what
percentage came from private sources. Please provide this
information for each of the last three years.
A: This information is publicly available online at the following
website: See above as well as http://minerals.er.usgs.gov/minerals/
pubs/commodity/helium/mcs-2013-heliu.pdf
5. Mr. Nelson, Mr. Haines, Mr. Kaltrider: Mr. Nelson's testimony
includes a graphic that projects the decline in production from
the Reserve. That chart projects production from the Reserve to
fall by roughly 50 percent over the next 4 years and by
approximately 85 percent in 10 years. Your company has spoken
about wanting to have long-term contracts but isn't your
company already voiding or adjusting long-term contracts
because of inadequate supply? How are you going to meet your
customers' needs if your own supply from the federal helium
reserve is going to decline by 50-85 percent in the coming
years?
A: In anticipation of the gradual draw down of the federal helium
reserve to 600 million cubic feet pursuant to the Helium Privatization
Act of 1996, we have invested in a robust supply chain which utilizes
multiple helium sources.
6. Mr. Joyner, Mr. Thoman, Mr. Lynch, Mr. Nelson, Mr. Haines, Mr.
Kaltrider: H.R. 527 limits the amount of crude helium any one
entity can purchase in a single auction to 30 percent, do you
believe that would ensure sufficient competition and auction
participation while also protecting against market
manipulation?
A: No.
______
Mr. Lamborn. OK, thank you. And I want to thank each of the
panelists for being here. This is an extremely important issue,
and it is also a very complex issue. Helium is a unique
product. And the structure that has been built up containing
public elements and private elements is a unique mixture that I
haven't seen in any other industry in our country, how the
public and private has blended together. So it is very
complicated. And your testimony has been very helpful for that.
I will just start out. We will have multiple rounds of
questions. There is only several of us who are here right now.
Hopefully we can get through that and take advantage of the
expertise that we have sitting on this panel before us right
now.
OK, I asked a question at the very beginning of the
government witnesses concerning ownership. You probably heard
their answers. Basically, I hope I state this correctly, but
the government owns the helium that is under the ground. And at
such time that it is sold, and I am a little hazy on when that
is, if it is at delivery where that enters into the equation,
but upon a complete sale, then it becomes the property of the
person purchasing. Is there any disagreement with a working
definition like that that any one of you might have?
Mr. Nelson. Mr. Chairman, if you don't mind, I will take
that question. I left with Sophia earlier some diagrams that
might help with the answer to that question. I don't know if
they have been distributed or not.
Mr. Lamborn. We can throw it up on the screen. Is it this
one, right here?
Mr. Nelson. Yes, Mr. Chairman.
Mr. Lamborn. OK.
Mr. Nelson. It is a wire diagram explaining the BLM system
and how it interfaces with private industry.
Mr. Lamborn. OK, I have it in front of me. We will
distribute it to the members of the Committee who are currently
present. But please go ahead while we are----
Mr. Nelson. And we might refer to this diagram throughout
the question and answers----
Mr. Lamborn. Yes, please proceed.
Mr. Nelson. But to answer your question very specifically,
in the lower left-hand corner of the diagram there is a cloud
which depicts the raw gas that is thousands of feet below the
surface, which is the BLM helium reservoir that we all talk
about. When a sale of BLM helium takes place, the sale is
actually selling the helium in the ground, in-situ, where it is
a combination of natural gas and helium combinations, and it is
effectively a ledger entry, as Mr. Spisak had indicated,
whereby the government is managing on a ledger book the amount
of helium that is in that reservoir. And as they sell it off on
some periodic basis, they transfer some of it from the
government's storage account into a private storage account,
almost like managing a passbook savings account at the bank.
But that is where the sale takes place. It is not refined
helium or crude helium. It is actually in-situ, in the ground.
Mr. Lamborn. OK, thank you. Anyone else that would have a
different take on that?
Mr. Haines. Mr. Chairman, I would like to just continue the
point Mr. Nelson was making, and that is that in order to
actually get delivery of that helium at our various facilities,
what happens is that helium is then removed from the reservoir,
it passes through the helium enrichment unit at Cliffside, and
then is pumped down the BLM pipeline system. And it is metered
at our various plants. And that is where we actually take
physical possession of it through our facilities. But until
that point it sits in, as Mr. Nelson said, the bank account
underground in the Cliffside Reservoir. There is a big
distinction.
So, a portion of the helium underground is currently owned
by people who have paid and taken technical ownership of that
helium, but we only receive delivery substantially later in our
plants down the pipeline.
Mr. Lamborn. OK, thank you.
Mr. Haines. There is a metering system there, and that is
where all the accounting is reconciled.
Mr. Lamborn. OK, thank you. Moving on----
Mr. Joyner. And, Mr. Chairman, if I could add just a----
Mr. Lamborn. Certainly.
Mr. Joyner [continuing]. Clarification point----
Mr. Lamborn. Yes.
Mr. Joyner [continuing]. And tie it back to legislation,
that is where the disconnect occurs, is that buyers can
purchase helium in the ground, but it is only a fraction of
that gross gas. It hasn't been separated yet. So you can't
utilize that until it has gone through the enrichment unit and
been processed and then delivered in the pipeline.
So, that is where the recommendations come in to link your
purchase with the delivery of the actual helium in the
pipeline. Because if you don't have that access, just buying
the fraction of the percentage of helium that is in the ground
is something you can't utilize.
Mr. Lamborn. OK. Well, that----
Mr. Haines. Sorry, Mr. Chairman.
Mr. Lamborn. Yes?
Mr. Haines. Just one more point about that, and that is the
rate of delivery of gas from the field is now declining. So the
ability for the BLM to deliver gas over the next 8 years is
going to be diminishing quite substantially. And that is one of
the issues here about would new investments take place, et
cetera.
Mr. Lamborn. Mr. Kaltrider, continuing on here, in your
testimony you said the 30 percent cap would threaten the
delivery to in-kind users. Since the in-kind distribution is
separate in the bill from the auction process, can you explain
why the 30 percent cap would have an impact on your ability to
serve in-kind users?
Mr. Kaltrider. Well, today, the way it functions today, you
basically use inventory. A refinery uses its own inventory to
satisfy in-kind requirements for the purpose of the Federal
Government.
In the future, there will be a couple of things going on.
At 30 percent, because it is less than what we get today, we
won't have enough inventory floats to satisfy all of our
customers. And the way this happens is you use your inventory
and then the government replenishes your inventory at a later
date. And with the depletion of the reservoir and the fewer
molecules coming in to the reservoir, that depletion rate is
such that we will not be able to get our inventory back up over
time, like we have in the past when there has been a perfectly
acceptable amount of flow into the reservoir.
Mr. Lamborn. OK, thank you. At this point I would like to
recognize Mr. Holt.
Dr. Holt. Thank you. Thank you, Mr. Chairman. You know, as
we seek to put more transparency and more market forcing into
the process, I am still left with concerns about whether we
have done an adequate job in guaranteeing the supply that will
be needed by Federal users and to meet other domestic needs,
commercial domestic needs too, and whether we are doing enough
to address long-term supply issues. It may take other
legislation to do long-term supply, or maybe there are ways to
build it into here. But those are certainly a couple of
concerns that I hope we can address over coming weeks.
Let me go down the line to users, distributors and
refiners. Do you agree with the conclusion of the National
Academy of Sciences, that ``The BLM should adopt policies that
open its crude helium sales to a broader array of buyers, and
make the process for establishing the selling price of crude
helium more transparent''?
Yes. Let's just go left to right--my left to right. Yes, if
you would, please.
Mr. Joyner. OK. Thank you, sir.
Dr. Holt. Thank you.
Mr. Joyner. Yes, we agree with that recommendation for a
number of reasons. One, it helps you, the legislation, achieve
the goal of getting a fair market price and return on the
taxpayer's investment. Second, it promotes competition, and
competition is the basis of what is driving our economy, not
captive access to the U.S. resource. So it really triggers that
competitive factor that drives the benefit for the end user to
get reliable supply and get competition to gain their business.
Dr. Holt. Yes, next?
Mr. Thoman. Similarly, we agree with the National Academy
of Sciences report. It recommends for greater access and a fair
price. We think with greater access, we are very focused on a
secure domestic supply. There is the helium available to create
a secure domestic supply. And with a fair price for that
helium, perhaps more of that conservation will take place, as
well. And the pressure on the helium that is being produced----
Dr. Holt. Thank you. Mr. Lynch?
Mr. Thoman [continuing]. From our BLM fields, won't be
exported.
Dr. Holt. Sorry, yes, Mr. Lynch?
Mr. Lynch. Yes, we agree.
Dr. Holt. Yes? OK.
Mr. Lynch. In short. The question is, does the bill
adequately achieve those goals, and as I testified, we think it
has severe shortcoming in that regard.
Dr. Holt. Yes. Mr. Nelson?
Mr. Nelson. Mr. Holt, we agree with the portion of the
recommendation that the BLM should be sold at a market-based
price. What we do not agree with is that the current bill
addresses all of the other issues of reliable supply to
customers.
Dr. Holt. Right, as you testified. Mr. Haines for Linde?
Mr. Haines. Yes, Mr. Holt, we agree in regard to opening up
the price to a market price. We are very comfortable with that.
Mr. Kaltrider. Again----
Mr. Haines. Sorry. And as far as opening to a wider array
of buyers, we think that could be accommodated properly if the
legislation were written in the right way.
Dr. Holt. Thank you.
Mr. Kaltrider. Again, consistent with our testimony--with
my testimony--I think Praxair has put forth a proposal that
would endorse an auction of a commercially significant amount
of helium. I would like to stress that access to the BLM does
not create additional helium molecules, and that if you really
are interested in----
Dr. Holt. And so let me--yes, let me----
Mr. Kaltrider. If you are really interested in expediting
investment and that, in finding more helium and that, you
probably need to look at streamlining permitting requirements
and other things that can aid in----
Dr. Holt. Well, with about 10 seconds each of you, do you
agree with the National Academy of Sciences' finding that BLM's
pricing of crude helium may slow efforts to aggressively pursue
alternative helium sources and negatively impact the evolution
of the helium market?
Mr. Joyner. I think beyond the pricing, the capacity of the
reserve has driven some of the other producers to not pursue
other sources, because they have exclusive access to one of the
world's largest sources, as opposed to others who have been at
the forefront of pursuing, as Air Liquide has, other sources
here and globally, as a result of not being able to have
access. It is more of an access issue, I think, than driven by
price.
Mr. Thoman. Yes. Folks like us who don't have the access to
the fields are forced to look for other sources and the higher
pricing will stimulate alternative sources.
Dr. Holt. Since we have run out of time--I am sorry--let me
jump to, I guess, Mr. Haines, so we have some input from the
refiners on that.
Mr. Haines. Thank you, Mr. Holt. We do not really believe
that the price, the crude price of helium, really will drive
new helium resource development. We believe that is largely
because of natural gas, because most helium discoveries are
related to natural gas. And it is actually the natural gas
resource development that is key for helium resource
development.
Dr. Holt. Thank you.
Mr. Lamborn. OK. Representative Lummis.
Ms. Lummis. Well, thank you, Mr. Chairman. I want to ask a
question of Mr. Kaltrider and Mr. Lynch, because you have
warned us about disruptions to supply chain and price
stability. And both Praxair and Matheson have considerable
investments in my State of Wyoming.
So, obviously, that is not the intent of this bill, to
cause supply chain and price instability. So I am curious. Can
you help me understand why you are concerned about that?
Because we didn't hear that from the end users and we didn't
hear that from our first panel that were mostly government
folks. So just curious about why that is.
Mr. Lynch. OK. Well, as I mentioned, the helium industry is
very capital-intensive, and it requires very expensive,
specialized equipment that requires a large investment and it
takes a long time to earn the money back on it. And the helium
supply and sourcing contracts, as the industry has developed,
have developed to be of a long-term nature, so that companies
can make long-term investments to earn the money back
appropriately.
If we were talking about a very small amount of helium
being put up for auction every 6 months, there is always room
for a bit of spot market. But you are talking about a huge
proportion of the world's helium supply being chased after
every 6 months, meaning no supplier will know if he is going to
have access to the helium he needs to fulfill contracts 6
months from now. No buyer will know if the supplier he is
dealing with will be able to provide him helium 6 months from
now, or at what price. That makes long-term investment and
planning impossible.
Ms. Lummis. Yes. So if you were designing this system, and
you could have a portion be spot market subject to auction and
another portion be withheld from that auction system, what
percentage would you choose?
Mr. Lynch. Well, we have put forward a proposal of 80
percent: 80 percent would be run similarly to the way it is
today, allocated to the refiners, the only difference being the
price would be a market-based price derived from a survey; 20
percent available to non-refiners.
But the key to making that work, as we have mentioned, is
it does no good to bid on crude helium if you can't turn it
into pure helium. So any auction system that allows greater
bidding that doesn't somehow include a mechanism to incentivize
the refiners to purify it is a dead end, and nobody is going to
bid on it once they realize that, like us, they will have crude
helium sitting in the ground for 6 or 7 years with nowhere for
it to go.
Ms. Lummis. A question about price. And I want to give you
a chance to answer that same question, but I want you to add
another into the mix, and it is this. You know, earlier we saw
this GAO chart that shows that grade A helium is priced around
$160. Is that price range reflective of what you charge your
customers? Anybody.
Mr. Kaltrider. That is obviously very confidential
information, right?
[Laughter.]
Mr. Kaltrider. But it is not--and there are different
levels of customers, right? There are very extremely large
users, there are retail users. So it is very difficult to say
whether that is representative of what you would call the ``end
market,'' because there is a very wide variation in the end
market.
Ms. Lummis. And is the end market buyer buying a different
quality of product that would differentiate price?
Mr. Kaltrider. In some cases. In most cases, the end market
buyer is buying, if it is an extremely large user, they are
really paying for reliability, continuity of supply----
Ms. Lummis. Yes, I----
Mr. Kaltrider. OK. Diversification of your sources as a
supplier is very important to the end use buyer.
In the case of Mr. Page and his customers that are
primarily using for balloons, there is a way you can provide an
intermediate grade of helium that is not five nines and that
product, if it were available, could be sold at some type of a
price in between, I am assuming. So it does vary widely in the
packaging, the commercial investment, the quantity, the length
of time, the criticality of the product. Many, many, many
things.
Ms. Lummis. OK. Does anybody else want to comment on my
price question?
Mr. Nelson. If I can just add, please, that I am not
specifically familiar with the data that is represented in the
graph, but based on the comments of Mr. Spisak earlier, it does
appear that the graph is comparing unlike substances. I don't
want to call them apples and oranges, but there is a comparison
between crude helium sold in the ground, that we described
earlier, with end refined products that could be in cylinders
or multiple different packages. I think if you drew a similar
graph comparing the price of crude oil to maybe the price of
gasoline sold at a pump, you might see a similar type of a
relationship.
Ms. Lummis. OK. Anyone else want to weigh in on any of this
series of questions?
Mr. Haines. In terms of that graph, so we are talking about
crude helium at the bottom versus a retail price. Now, we have
very extensive infrastructure, as Mr. Lynch mentioned, which
enables us to remove the helium from our facilities to its
points of use around the world. So we have a very, very complex
supply chain comprising of hundreds of very specialized
cryogenic ISO containers that transport the helium in a liquid
form to a number of transfills. At that transfill the liquid is
then vaporized into a gaseous form, it is repackaged into
cylinders or dewars or some other form--tube trailers, perhaps.
Then it is delivered the customer. So, there is a tremendous
value chain----
Ms. Lummis. Yes.
Mr. Haines [continuing]. That takes that product from the
crude helium that is purchased at the BLM facility to the end
customer that could be in New York City.
Ms. Lummis. Can you tell me whether this proposed auction
system----
Mr. Lamborn. Representative, let me remind you that we are
going to have one more round.
Ms. Lummis. Oh, OK.
Mr. Lamborn. OK.
Ms. Lummis. Thank you. I got carried away. I will----
Mr. Lamborn. OK, but save that question. OK. And, Mr.
Cartwright, and then we will start our second and, I think,
final round.
Mr. Cartwright. Thank you, Mr. Chairman. Mr. Nelson, in
your testimony you indicate a preference for a partial auction
of the BLM helium. Is that correct?
Mr. Nelson. That is correct, sir, yes.
Mr. Cartwright. And I want to say Mr. Lynch just testified
about an 80/20 split. Was that the same topic?
Mr. Nelson. I believe the proposals are similar, yes.
Mr. Cartwright. Yes, and I wanted to ask you, Mr. Nelson,
was that about the proportion you were thinking, 80/20?
Mr. Nelson. My proposal is that today we have an allocated
volume and a non-allocated volume. The non-allocated volume
today is 6 percent of the BLM. The BLM has had the authority to
change that volume over time. They started at 10 percent. All
of the helium wasn't sold. They lowered it to 5 percent for a
while, and then they ultimately raised it to 6 percent, and it
has been at 6 percent now for quite some time.
Today, as we discussed earlier, there is a shortage of
helium today. And that 6 percent effectively today is not a
guaranteed product for any of the refiners. So our proposal is
that you would start by auctioning off the non-allocated helium
at the percentage that it is today. And potentially, as new
sources of helium come on, that percentage could change. But
changing the percentage today will disrupt existing supply
contracts. Because, effectively, it is a redistribution of a
fixed amount of helium that exists today.
Mr. Cartwright. All right, so that the percentage that you
are comfortable auctioning off at this point would be the non-
allocated, in other words, the 6 percent, but that percentage
could go up.
Mr. Nelson. That percentage could change, as new volumes of
helium come on the marketplace, in order to minimize
disruption.
Mr. Cartwright. All right. And the other question I--thank
you for that. The other question I had was about the production
of helium. Helium is a byproduct from natural gas. Those of us
in Pennsylvania know a lot about hydraulic fracturing, which
produces an awful lot of natural gas.
I asked this of the last panel, who were the end users of
helium and didn't know a lot about how to mine helium from
natural gas. But I did hear the statement that, really,
fracking, or hydraulic fracturing, doesn't produce usable
helium. Is, and I will throw this open to the whole panel, is
that true? Are there things that we can to do take advantage of
the burgeoning field of hydraulic fracturing in the helium
industry?
Mr. Kaltrider. Yes, I think I can speak to that. Hydraulic
fracking, obviously, is a very efficient preferred method of
extracting natural gas, natural gas liquids, and, in some
cases, petroleum from unconventional shale reserves. OK?
Up to this point, helium has not been discovered in shale
deposits, OK? Helium is typically found in natural gas deposits
that have a high nitrogen content. In some cases it is found in
deposits that have a high CO2 content. In some
cases, as in Wyoming, it is found in a reservoir that has a
very high CO2 content. Extremely complex gas to
separate, costs billions of dollars of investment, as Exxon has
made. It is pretty complex. But at this point, it has not been
found in shale gas and shale reserves.
Mr. Cartwright. I thank you for that. And, of course, the
other effect of this discovery of the shale gas and the
fracking industry has been to lower the price of natural gas.
And can you comment on how the lower price of natural gas
overall impacts the helium industry?
Mr. Joyner. I can speak to that. At this stage it hasn't
affected the availability of helium. There is still a lot of
natural gas being extracted outside of the shale gas, so we
haven't seen reduced levels there. It could affect exploration
of more traditional natural gas, where we do tend to find the
higher concentrations of helium over time.
On the flip side, with the existing natural gas producers,
monetizing the helium should become more and more attractive to
express some joint interest between those producers and the
helium industries to work together to develop even lower purity
streams in those situations.
Mr. Haines. I would like to add to that. Unfortunately, as
the natural gas price has come down, exploration for, as we
say, conventional gas reservoirs has actually declined
substantially. If you look at the rig counts for natural gas,
they have diminished substantially. And on the counter to that,
oil rigs have increased as the oil price has gone up.
Unfortunately, this means that the reservoirs that are
likely to contain helium are just not being explored that much.
But that is a function of the natural gas price. It is not a
function of the helium price. And I think we have tried to draw
that distinction.
Mr. Cartwright. Well, I thank you for your comments.
Mr. Lamborn. OK. I want to thank the panel so far for their
patience and for the expertise that they have shared with us.
We will do our final round of questions here, assuming we can
get through everything we need to, and I think we are to that
point. I will start.
For the three refiners, in regards to tolling agreements
you may have heard, but there was some testimony earlier about
how some people have attempted to enter into tolling agreements
but have not been successful. So what is the basis that you use
for deciding whether to honor these requests for tolling
agreements? And why have some of these people who testified
earlier been unsuccessful in those attempts? For any or all
three of the refiners.
Mr. Kaltrider. In the past I can speak plainly that we have
entered into tolling agreements. And, in fact, some of those
have been longer term, meaning a year or more. The reason we
were able to do that was there was sufficient supply coming
from the BLM, such that our allocation was met, and that we had
additional molecules that the non-refiner who was asking us to
toll that had access to those molecules--so, in other words,
our allocation from the BLM would not have been impacted, and
we were able to process the molecules they had access to. And,
in fact, we did that.
The problem recently in this last year to 18 months, with
the exacerbated shortage, has been the BLM has been unable to
even meet the 3 refiners' requirements in their nominations.
And, therefore, there is no capacity, there is tolling
capacity, there is refining capacity, but there is not enough
molecules to even meet the minimal demands that the refiners
have contractually with their customers.
Mr. Lamborn. Thank you. Either of you other two? Anything
to add to that, or a different----
Mr. Nelson. Yes, Mr. Chairman. That explanation was very
good. Air Products has had tolling agreements with both
customers as well as competitors in the past. But during this
recent shortage period, we just have not had the capacity to
enter into any tolling agreements.
Again, there was refining capacity available at our plants,
but no ability to move crude helium to the plants. So, without
that ability to move the crude helium, we cannot enter into any
agreement.
Mr. Joyner. Would you like a non-refiner perspective on
that?
Mr. Haines. Mr. Chairman?
Mr. Lamborn. Yes, but one second. Let the gentleman from
Linde speak also, and then we will hear from you.
Mr. Haines. Yes. So we have had tolling agreements in the
past, as well, as Linde. And for us, it is about two things. It
is about access to molecules, it is also about ensuring that it
is the right commercial terms. That means it has to make sense
for both parties in this buy-sell arrangement.
We have come up with a proposal that we believe would help
the bill, to encourage refiners to toll. And that is we have
talked about allocating product to go with product sold. And
that would mean that then refiners would be indifferent to
this, and they would actually be prepared to compete for
tolling services. And we think that is a good idea. And we just
don't think it is going to be as much of a problem as you
believe it will be. But this is a change from how you have
currently structured it.
Mr. Lamborn. OK, thank you. Mr. Joyner, did you want to say
something?
Mr. Joyner. Yes. Thanks, Mr. Chairman. The way the
structure was set up with the captive access and the
allocations going entirely to the refineries, it actually set
up a disincentive for them to toll. By not tolling, it allowed
them to not only get the 94 percent, but then nobody else was
going to buy the other 6 percent because they couldn't utilize
it and get it out of the reserve. So it is somewhat of a self-
fulfilling policy in that situation.
So the key, again, is linking that delivery access and
encouraging and incentivizing tolling, as we had proposed,
similar to what the BLM MOU process is today that I talked
about earlier.
And it might be a good time to just quickly address the
analogy about the car manufacturer, which is clever, but
clearly irrelevant to this situation. That is private
manufacturers, they are purchasing private materials. It is
private transportation to produce cars. So to even draw a
parallel between that and a government reserve, you would have
to consider a situation where the government owned a third of
the world's engines, and it gets farther and farther removed
from being a relevant analogy at all, as compared to helium.
Mr. Lamborn. OK, thank you. Last, for the three refiners,
you saw this chart earlier that GAO put out. And the estimate
in there is that it is roughly 60 or so dollars per thousand
cubic feet versus an estimated price received by the refiner of
around $160 to $180. So there is about a 2.5-to-1 ratio, if I
am reading those numbers correctly. And yet GAO is estimating
because they don't really have access to market prices between,
admittedly, confidential contracts.
Can you comment on whether or not this GAO estimate is
correct? Would you be willing to comment on that?
Mr. Haines. Mr. Chairman, I don't think the crude price is
accurate, actually. It is----
Mr. Lamborn. Excuse me?
Mr. Haines. The crude price, Mr. Chairman, is over $80
currently.
Mr. Lamborn. OK. Well, it is for 2012, so it is only
through last year, or until last year, 2012. So this year is
not even on there.
Mr. Haines. Again, I think the explanation that I made
about when you deliver the product to the end customer there is
a tremendous amount of extra cost involved in refining it,
processing it, repackaging it, delivering it, there is a lot of
extra cost involved. Plus there is a profit margin. So,
absolutely. To compare crude helium to a delivered product, I
think, is literally not the correct comparison.
Mr. Lamborn. And given that, is the GAO estimate in the
ballpark, in the light blue at the top there? And I am not
trying to squeeze propriety information out of folks. And I do
honor the need to recoup costs and have a legitimate profit.
There is no question about that. But----
Mr. Nelson. Mr. Chairman, thank you very much for
recognizing that the six of us are sitting here as competitors,
and disclosing market-based----
Mr. Lamborn. Yes, and this is a very sensitive question I
am asking.
Mr. Nelson [continuing]. Pricing is very difficult for us
to do. I would offer, and again, I know the government panel
testified first. And I am not sure if the GAO looked at this
information or not. But today, and I think starting back in
2011, the BLM began to change their policy for selling crude
helium each and every quarter. And as part of the process of
bidding on that helium, private industry, the allocated
purchasers, not the allocated, so on this side of the table, we
had to actually answer questions, a confidential survey by the
BLM on pricing, how much we are paying for the average price of
crude, how much we are selling liquid helium for, in an attempt
to gather that market data to help them determine how to set
the market price.
So, some of that information is certainly available to the
BLM. I am not sure if the GAO had looked at that and had
incorporated any of that data into this chart or not.
Mr. Lamborn. Well, thank you very much. Thank you all very
much.
Mr. Kaltrider. If I cold just----
Mr. Lamborn. Mr. Kaltrider?
Mr. Kaltrider [continuing]. Add one thing, Mr. Chairman, I
think Mr. Nelson had made a very important point, in that we
participated as well in that and did not give index data, but
actual data on the changes in our slate of crude suppliers to
us, which encompass both BLM and private. And that, in fact, is
the best, probably the closest proxy that the Committee could
use to determine whether the BLM is charging the ``market
price'' for crude product today, rather than coming up with
some theoretical refined price and then back-extrapolating into
that. If I could make that comment.
Mr. Lamborn. OK. Thank you very much. Now, Mr. Holt.
Dr. Holt. Thank you, Mr. Chairman. Your exchange there just
shows, really, how far we are from a transparent market-based
system here.
You know, at least one of the companies here announced
publicly, I guess, as I understand it, a 30 percent increase in
prices over the last year or so, whereas the crude changed by,
I guess, 10 percent or less, which suggests that maybe the
price of crude is not the principal ingredient in calculating
the distributed price.
In any case, let me move to something that I am really kind
of puzzled about and I want to make sure that this legislation
handles this matter correctly and that is the matter of the
semi-annual auctions and the long-term contracts. As I
understand it, what we have proposed here, I mean what we
intended to propose here, is that there would be fairly
frequent auctions, 6 months or so, but you could take delivery
over some period of years.
Let me ask, I will choose a couple of you. Let me ask what
do you mean by a long-term contract? Is it much longer than a
couple of years? Doesn't that provide the predictability that
the customers need as well as the suppliers? Let me ask Mr.
Nelson and Mr. Lynch--or, well, OK, I guess Mr. Thoman wanted
to speak to that.
Mr. Nelson. Certainly, Mr. Holt. When we talk about long-
term contracts, it again will depend on the customer and the
relationship, but they could be anywhere from 3 to 5 to 7 years
are typically what we would gauge as a long-term contract.
Dr. Holt. But isn't it going to be affected as much by the
declining volume of the reservoir and what you call the sticky
molecules or whatever, as much as it is how often the auctions
are held?
Mr. Nelson. I really appreciate you highlighting this
point, and I tried to bring it out both in my written and my
oral testimony. Going forward, the sale of helium needs to be
married with the delivery of helium, whether it is an allocated
sale or even an auction of helium. The delivery has to be
married with the sale activity.
I use the analogy of a garden hose. You have a garden hose
and there is water flowing out of it and it is flowing until
the well runs dry. If you win product in an auction, you run to
the garden hose with your pail and you fill it up and then the
next guy fills up his pail. You can't just let the helium sit
in the ground and try to pull it out 1 year or 2 years later,
because whoever has won the subsequent auction is going to want
to remove their helium, and so forth. And the BLM has limited
capacity, just like a garden hose has limited capacity.
So, in the legislation today it doesn't really square up,
the sales activity with the delivery. And it absolutely has to
be addressed.
Dr. Holt. Mr. Thoman?
Mr. Thoman. Yes, this is clearly a----
Dr. Holt. Or Thoman, I beg your pardon.
Mr. Thoman. That is OK. That is all right. It is a
strategic resource that is in short supply. The frequent
auctions every 6 months, you will have an ebb and flow because,
as Mr. Nelson just said, you wouldn't buy this product and be
able to over-buy and then be able to siphon off at some
percentage of what you bought to satisfy your demand. You would
be bidding in auction for the amount that you need to satisfy
your demand. And with an ebb and flow of whether you are going
to win or you are not going to win, you are going to get the
volume that you need or something less, would create a lot of
supply uncertainty.
Dr. Holt. But does this legislation introduce any more
problems? There is already, I think, a 1-year backlog or more.
It seems to me that is going from purchase to extraction and
delivery. Isn't that going to become worse for physical
reasons?
Mr. Thoman. I think it----
Dr. Holt. I don't know whether ``worse'' is the right term.
Isn't that going to become longer for physical reasons?
Mr. Thoman. The four points that we mentioned in our
testimony, those four points needing to come together in the
bill will create more supply security than there is today. As
constructed today, our industry has changed a whole lot since
the last years, since the 1996 bill was enacted. For example,
Airgas bought the packaged gas businesses, the cylinder and
dewar-type businesses, from two of the refiners. So we have the
customers, the mode of supply that the customers use helium in,
however we don't have access to the supply.
Mr. Kaltrider. The reality is there is a physical reality
to your question. If you allow non-refining bidders, or any
bidder to access in an auction, and allow them a 24-month
period to bring that crude to market, which is what this bill
suggests, what you will end up having happen is, as the
reservoir depletes, the reservoir pressure is depleting, you
will physically be unable to deliver those molecules.
So, you will be able to deliver some, but you won't be able
to deliver probably what the bidder bid on, OK, because there
is just not enough pressure. It is depleting. And so the number
of helium molecules----
Dr. Holt. That is sort of what I was getting at. So as we
move----
Mr. Kaltrider. Yes, and so when I use----
Dr. Holt. As we move forward, long-term contracts become
less and less meaningful.
Mr. Kaltrider. No, I would respectfully disagree. Again, we
are talking about percentages, very large percentages, and this
is actually suggesting a 100 percent auction. Now, if we arrive
at a much more commercially reasonable amount of auction, then
I agree. The impact of the more frequent auctions is lessened.
Dr. Holt. It is complicated, isn't it, Mr. Chairman?
Mr. Lamborn. It is not only complicated, but it is unique.
For instance, I am struck by the fact--where is that chart,
Mandy? Oh, here it is, the diagram that Mr. Nelson gave out.
The Cliffside helium plant is privately owned and government
operated. And I have said this before. I have heard of a lot of
operations that are government owned and private operated, but
I have never heard of any other facility in the country that is
privately owned and government operated.
So it is a unique industry, it is a unique commodity. Thank
you for coming today and lending your expertise. We appreciate
your testimony.
Members of the Committee may have additional questions that
they would ask you in writing. I would ask that you would
respond to those, should you get such a question.
I would also, with unanimous consent, like to put into the
record a document, a statement received from the Gases and
Welding Distributors Association.
[No response.]
Mr. Lamborn. Seeing no objection, that will be put into the
record.
[The statement submitted by the Gases and Welding
Distributors Association, Inc., follows:]
Statement submitted for the record by the
Gases and Welding Distributors Association (``GAWDA'')
Mr. Chairman and Members of the Committee:
The Gases and Welding Distributors Association (``GAWDA'') is a
national trade association representing the interests of some 500
companies that distribute compressed and liquefied gases and related
welding equipment, and includes some 300 additional companies that
supply products or services to the gases and welding industry. GAWDA
distributor members sell a variety of products, including helium,
oxygen, argon, nitrogen and carbon dioxide, as well as specialty gases
and mixtures, to customers involved in manufacturing, construction,
welding, research, health care, and biomedical engineering.
Most GAWDA members are small businesses. Approximately 85 percent
of GAWDA distributors have less than $10 million in annual gross
revenue, so they have limited leverage in negotiating supply agreements
for products. In the vast majority of cases, GAWDA distributors will
contract exclusively with a single manufacturer (or in the case of
helium, a refiner) for a comprehensive menu of gas products. The
contract generally will provide all of the distributor's needs for all
of those gases.
In addition, the distributor will generally contract with its
customers in an exclusive ``requirements'' arrangement to supply all of
the customer's needs for a variety of gases as well. A small
distributor might have a couple of dozen contracts to supply helium and
other gases to customers, while a large distributor might have several
hundred or more of these requirements contracts.
The GAWDA distributor will typically purchase bulk helium in
gaseous form from a refiner; the distributor will then repackage the
helium into compressed gas cylinders and deliver them to customers for
their use.
GAWDA appreciates the efforts that the committee has made to
develop legislation to complete the privatization of the Federal Helium
Reserve outside of Amaillo, Texas. We understand the urgency of
reauthorizing the sale of helium by the Bureau of Land Management by
October of this year to keep the program from expiring, and GAWDA does
not want the domestic supply of helium, which amounts to some 50
percent of the U.S. domestic supply and 30 percent of the entire world
supply, to go untapped.
GAWDA also understands that the BLM has not obtained market rates
of return for the sales of helium to date, and we appreciate that the
federal government should earn an appropriate return for the sale of
this asset in the marketplace. We agree that any revision to the BLM
sales program should include a structure to generate market pricing for
crude helium to refiners, and GAWDA does not oppose the provisions in
H.R. 527 to develop a truly market-based pricing mechanism.
GAWDA distributors are concerned, however, about the effect of the
remedies fashioned in H.R. 527 on the stability of the existing market
for helium, particularly as they affect the ability to meet contractual
obligations for product supply. Section 3(a) of the bill would revise
section 6(a) of the Helium Act, 50 U.S.C. Sec. 167d, to state that the
BLM shall carry out the sale of crude helium from the Federal Helium
Reserve ``with minimum market disruption,'' but we remain concerned
that a quarterly or periodic auction approach as envisioned in H.R. 527
will interfere with current contracts between refiners and
distributors, and between distributors and their end user customers.
By establishing a periodic auction mechanism under which any party
may bid, at least for certain tranches of product, the BLM would set up
a spot market for helium. If an established refiner is not able to
secure all of the crude helium that it requires to meet the supply
obligations set out in its contracts, then some distributor customers
will receive less than their contractual allotments of helium, or
perhaps none at all. The distributor will be forced to seek other
sources of supply, presumably only if a force majeure clause in the
agreement allows the distributor to obtain replacement product from
another supplier.
But the contracts between distributors and gas suppliers are
exclusive for all of the gas products together, and it is difficult to
predict how a disruption in the ability to supply the required amounts
of helium in one quarter will affect the distributor's contractual
obligation to purchase, and the manufacturer's contractual obligation
to sell, all of the other gases contemplated in the agreement.
Similarly, the distributor unable to obtain all of its requirements
for helium in a quarter in turn could end up defaulting on its
contracts to supply helium to its customers. The distributor's
customers might be forced to seek alternative supplies of helium for at
least part of their needs for that period, and to pay above market
prices to the winning auction bidder(s) to ensure a continuous supply
of product. This also raises questions of the effect on the contractual
obligations to sell and purchase the other gases in the contracts.
The same scenario could be replayed each quarter when the auction
is renewed. Refiners, distributors and end users will not know which
parties will have adequate supplies of helium to meet existing
contractual demands. This will generate legal questions about contract
default, partial product allocations, mitigation of damages, and
obligations to cure, as well as commercial questions about which
parties may be able to meet supply obligations on a consistent basis.
The distributor will have to resolve these issues with each customer
for that auction period; when another auction takes place, and
different sales volumes of helium are awarded by BLM to new bidders,
the distributors will have to go through the same legal and commercial
exercise to ensure that each of their customers will receive enough
product to meet its requirements.
An unreliable product stream for helium will make it difficult for
any distributor to entertain long-term, exclusive supply arrangements
with customers that foster stable commercial relations and support
economic growth.
GAWDA appreciates that the sponsors of H.R. 527 have attempted to
moderate some of the disruptive effects of the auction. For example,
the bill would requiring all bidders on the first tranche, for 60
percent of the volume to be sold, to show that they either have
adequate refining capacity or tolling agreements for refining in place
should their bids be successful. But the second tranche of helium
sales, for 20 percent of the volume to be sold, is open to ``any
person.'' These bidders are not required to certify that they have
refining capacity or contracts in place; they are merely required to
state that they are ``seeking to purchase helium for their own use, for
refining, or for delivery to users.'' Section 3(a) of H.R. 527,
amending section 3(d)(3)(B)(i) of the Helium Act. This could allow
investors to purchase and hold helium for speculation or to remove it
from the U.S. market entirely. Moreover, regardless of which parties
are allowed to bid on or purchase helium, a quarterly auction with
varying winning bidders will force distributors to find replacement
product in a spot market if their suppliers are not successful bidders.
GAWDA fears that an unstable auction mechanism affecting upwards
half of the domestic U.S. helium supply could create havoc not merely
for refiners and distributors, but also for the industries that rely
heavily on helium as a component of their operations. Health care
providers, manufacturers of semiconductors and other high tech
products, metal fabricators, universities and other research
facilities, and even party balloon suppliers, will no longer have a
consistent and stable source of helium from their distributors.
As this legislation moves forward, GAWDA asks that the committee
consider its potential disruptive effect on the markets for both crude
and refined helium and the end users that rely on this product. We
support the committee's efforts to pass legislation this year to
continue the sale of the Federal Helium Reserve, and at fair market
prices, but we remain unconvinced that a periodic auction approach as
outlined in H.R. 527 will encourage a sufficiently reliable supply of
helium for the U.S. economy.
Respectfully submitted,
Craig Wood, President
Gases and Welding Distributors Association, Inc.
8669 Doral Blvd., Suite 130
Doral, Florida 33166
______
Mr. Lamborn. And if there is no other further business
before the Committee, without objection the Committee stands
adjourned.
[Whereupon, at 1:27 p.m., the Committee was adjourned.]
[Additional material submitted for the record follows:]
Statement of The Honorable Raul Ruiz, a Representative
in Congress from the State of California
Thank you Mr. Chairman. I am pleased to be here today with my
colleagues and have the opportunity to attend this hearing. It is
important that we address ways in which we can prevent the continuing
helium shortage. I hope today, we get some further insight from our
witnesses on how we can work together to address this concern. Helium
is a mainstay in the medical industry. Helium is used to cool MRI
scanners, as a doctor I can assure that this need is critical to
provide life-saving medical imaging and to prevent an increase in costs
for patients. I look forward to working with my colleagues in a
bipartisan manner on this and other issues that come through the
Committee. Finally, I look forward to discussing H.R. 527, the
Responsible Helium Administration and Stewardship Act. Thank you and I
yield back the balance of my time.
______
The documents listed below have been retained in the
Committee's official files.
Mr. Page:
Helium and Balloons Across America Letter to the
BLM 11 28 07
BLM Office Made Improper Deals With Helium
Refiners, Washington Post Article, Friday, August 22, 2008
Office of the Inspector General's Audit of the
BLM's Helium Program, November 2012
Mr. Nelson:
Air Products Constitutional Analysis of H.R. 527