Case Studies details
Case Studies details
Helium Pricing - Understanding Market Structure as U.S. Reserve Privatization Loomed
Pre-arbitration Analysis, North America
November 1, 2021
Helium is a colorless, odorless, non-toxic gas used in the cooling of superconducting magnets (e.g., magnetic resonance imaging [MRI] scanners), as a safe atmosphere for arc welding and in the manufacture of silicon wafers. Balloons and “funny voice” generation represent relatively small usage. Global helium resources are concentrated in just a handful of countries; in approximate terms, Algeria and Qatar 45%, U.S. 45%, rest of the world 10%. The supply chain of helium is fairly concentrated around a handful of suppliers and producers. Therefore, the major suppliers of refined helium, the large industrial gas companies, such as Linde/Praxair, Air Products, and Air Liquide, are limited in their supply options. Likewise, helium producers are limited in their selection of off-takers. Additionally, as contracts are confidential, market pricing has been relatively opaque.
Of the U. S. production, approximately half (representing about 21% of the global supply) is sourced from the Bureau of Land Management (BLM) reserve which, until 1996, was a federal program. The act of 1996 required the U.S. government to offer for sale nearly all of the crude helium in storage. In 2014, auctions commenced with the objective of completing the privatization of the reserve by 2021. In the first few years of the auctions, there were concerns as to whether the winning prices were representative of the market prices. Notwithstanding that concern, the BLM price became an accepted benchmark for helium pricing and indexing – even beyond U.S.-based deals. As privatization of the BLM reserve loomed, there was an increasing degree of concern about the proper basis for future helium contract prices. Baker & O’Brien was asked to evaluate the helium market structure, the BLM auction process, and winning bid results to assess if, and for how long, the BLM auction price might be a reasonable contracting basis.
Initially, in the BLM auction process, only companies that were connected to the BLM system were eligible to bid. Although this restriction was subsequently relaxed, there was no practical way for non-refiners of crude helium to gain access to it. Additionally, even with an efficient auction, a bidder’s valuation may exceed the market price if, by purchasing crude helium, it can gain a competitive or price advantage. Although there are many publications on the theory of auctions, in summary, an auction market without many independent buyers and sellers can suffer from volatility and unpredictability. Hence, it may not give consistently reliable results as to a “fair market value.” Consequently, we advised our client that it would not be unreasonable to request a reopening of pricing negotiations. Our detailed report was used as a basis for deciding on a commercial path forward.