Commodity Investing

Helium to Become Primary Drilling Target

Every day headlines and articles are dominated by natural gas and oil drilling news. But many are ignoring what could sneak into energy column space in the future… helium.

Helium, which is currently a byproduct of natural gas production, could actually switch to a primary drilling target in the next few years. Why? Simple economics: the U.S. helium supply is declining, and demand is increasing.

Helium isn’t just for birthday party balloons and making your voice sound like a Munchkin; it has many scientific and industrial applications that you might not be familiar with.

With a low density, high thermal conductivity, low boiling point, inertness and low solubility, helium can serve many purposes.

Currently the healthcare industry is the largest consumer of helium. The gas is used in MRI machines to cool superconducting magnets, and would not function without the gas.

Wind tunnels and impulse facilities use helium due to its inertness, and silicon growing is possible because helium is used as a protective gas. It’s also used in semiconductor manufacturing and NASA rockets.

And of course, all modern airships – like the Goodyear Blimp – use helium to make them float, since the element is lighter than air.

A Brief History

During World War I, the United States became interested in helium to replace the extremely flammable hydrogen for use in military blimps and airships.

After the war, the first commercial helium plant was brought online in 1921, in the Petrolia field near Wichita Falls, Texas. After the Petrolia field was depleted, a bigger plant was built on the Cliffside field in Amarillo, Texas, in 1929 and has been the epicenter for the helium industry ever since.

Up until the 1950s, helium was primarily used in military airships, but once engineers discovered more applications for helium (breathing mixtures and arc welding) demand experienced a significant increase.

Helium’s increase in demand was so large that it caused Congress to pass the Helium Act of 1960. The Cold War also played a part in the development of the Act because the gas was considered a strategic resource.

The Helium Act was designed mainly for the United States to buy – using barrowed money – and store helium in the Cliffside field for future use. The Act also had incentives for private natural gas producers to remove helium from natural gas and sell it to the government. This would give private producers a reason to save valuable helium that would otherwise be wasted.

A decade after the Act was passed the helium storage in Cliffside was suspended due to excess supply, which had also produced a debt.

Fast-forward to 1996 and you had President Bill Clinton signing the Helium Privatization Act, getting the government out of production and placing the helium industry in private hands.

The 1996 act was created to sell, by 2015, the majority of the remaining helium stored in Cliffside, in a hope of decreasing the debt incurred by the Helium Act of 1960.

Back to the Present

Since 2000, U.S. helium extraction has been declining – surprising since natural gas drilling has substantially grown over that same period of time.

So why is there a problem?

The Helium Privatization Act. The act was designed to sell off the remaining Cliffside helium reserves by 2015, and in order to meet this deadline, the government had been selling helium at extremely low prices.

Because of this “helium liquidation sale” it became too cheap for numerous natural gas producers to care about extracting it and too cheap for many who use it for industrial applications to recycle it.

And while all of this created a temporary flood in supply, the future will not be the same if production continues to be stagnant.

Helium’s Future

Current National Research Council (NRC) estimates have the world running out of helium in 30 years or less – this is if current production continues its trend. And the NRC believes that the United States might become a net importer of helium in the next decade.

The good news is that, over a year ago, the Bureau of Land Management created a new methodology for calculating the price of Federal Crude Helium.

Instead of selling helium reserves at the low cost established by the 1996 Privatization Act, it now sells it at market price that’s based on current supply and demand principles. This is for open market sales only – those made to the government continue to be sold at the minimum defined by the Act.

But the fact remains that helium suppliers are experiencing a reduction in production and only one new plant is on pace to come online in the United States over the next three years.

Helium prices have already doubled over the last five years. And as U.S. reserves are depleted and supply dwindles, helium prices will continue to rise.*

The United States consumes 39 percent of the global helium demand, and while it’s currently the world’s top supplier it might not be for long.

Overseas in Russia, Algeria and Qatar, plants are coming online to provide supplies to Asia and emerging markets as U.S. exports slow down.

Investors should keep an eye on Air Products and Chemicals, Inc. (NYSE: APD), which sells, distributes and produces gas products, including helium. As helium supplies begin to diminish, higher prices should help boost the company’s bottom-line.*

Good investing,

Ryan Fitzwater

*Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Wall Street analysts.

Articles by
Related Articles