Helium Program: BLM's Implementation of the Helium Stewardship Act of 2013
Published: 2014-07-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The federal government and the private sector use helium, a key nonrenewable resource, for a variety of purposes, including research and manufacturing. As of September 30, 2013, BLM was storing about 9 billion cubic feet of federally owned crude helium and almost 2 billion cubic feet of privately owned crude helium in an underground federal reserve. Helium produced from the reserve represents 40 percent of the total U.S. production.
The Helium Stewardship Act of 2013 is intended 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 American taxpayers. It establishes a phased process through fiscal year 2021 to dispose of the remaining helium. Phase A is a transition period of helium sales, and Phase B consists of auctions in addition to sales.
This testimony describes (1) BLM's initial implementation of the act and (2) challenges, if any, BLM faces in implementing and incentivizing tolling—when a helium refiner processes or refines another party's crude helium at an agreed upon price. GAO examined helium sales documents and BLM's proposed plan for implementing the act; visited BLM's Amarillo Field Office near the reserve to review documents and observe the helium facilities; interviewed BLM and other Interior officials; and interviewed representatives from four refiners and four nonrefiners that participated in recent sales.
GAO is not making any recommendations in this testimony.
section_title: What GAO Found
paragraphs: The Department of the Interior's (Interior) Bureau of Land Management (BLM) has taken a number of actions to begin implementing the Helium Stewardship Act of 2013, including (1) estimating volumes of helium that can be produced from the federal helium reserve each year, (2) preparing for and conducting helium sales under the act's Phase A transition period, and (3) initiating planning for the act's Phase B, which introduces a competitive auction process for crude helium along with continued sales. First, BLM estimated the amount of crude helium that can be produced from the reserve each year based on a geologic model. Second, under Phase A, BLM determined sale volumes, set the sale price and required participants to disclose certain information, among other things. Third, BLM has begun planning for the required Phase B auction and sale of helium for fiscal year 2015 and a one-time sale of a portion of the helium that will be made available in fiscal year 2016. BLM plans to hold this auction and these sales in July 2014 to comply with an August 1, 2014, statutory deadline. BLM officials told us the agency plans to offer for auction or sale most of the helium estimated to be produced in fiscal year 2015 and use the remainder to meet federal users' needs and to deliver privately owned helium to refiners for processing. However, refiners disagree with the agency's approach, stating the act requires BLM to offer for auction or sale the maximum amount that it can produce from the reserve each year. BLM officials said they are taking this approach to help ensure that the agency can deliver the privately owned helium that remains in storage before the end of fiscal year 2021.
BLM faces challenges in implementing the act's tolling provision and identifying incentives. Under the provision, refiners, as a condition of sale or auction in Phases A and B, are to make excess refining capacity available at commercially reasonable rates to certain entities. In implementing this provision, however, BLM faces challenges in knowing whether refiners (1) have excess refining capacity available and (2) if so, are offering tolling services to nonrefiners at commercially reasonable rates. For example, although BLM asked refiners to report excess refining capacity as a condition of the Phase A sales, BLM did not define the term “excess refining capacity” because, according to BLM officials, they were still in the process of interpreting the act. According to refiners GAO interviewed, they used different methods to calculate the excess refining capacity they reported to BLM. In preparation for Phase B and the fiscal year 2015 auction and sale, BLM has proposed a definition of excess refining capacity, although some nonrefiners noted that it leaves room for interpretation. Regarding rates, BLM has not defined or identified criteria for determining what is a commercially reasonable rate. BLM officials said they prefer to take a “hands off” approach, allowing the companies involved and the marketplace to determine what is commercially reasonable, but it is unclear how BLM would implement the tolling provision without a definition or criteria for what is commercially reasonable. Moreover, BLM officials told GAO that they are considering various ways to incentivize tolling by refiners, but the agency's ability to create incentives is limited by the terms of existing contracts governing helium delivery that remain in effect through fiscal year 2015. GAO plans to conduct additional work after the July 2014 auction and sales on BLM's implementation of the act's tolling provision. Therefore, GAO is not making any recommendations at this time.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the Bureau of Land  Management’s (BLM) implementation of the Helium Stewardship Act of   Enacted on October 2, 2013, the act extends the federal helium  2013.program—which is responsible for the conservation and sale of federally  owned helium—to no later than September 30, 2021. 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. In  addition, private industry uses it for medical instruments, controlled  atmospheres used in manufacturing, and leak detection, among other  applications. For many of its uses, helium has no substitute.
The Helium Stewardship Act of 2013 is the third major piece of helium  legislation enacted since 1960. During the 1960s and early 1970s, to fulfill  the conservation objective of the Helium Act Amendments of 1960, Department of the Interior (Interior) purchased about 34 billion cubic feet  of helium from private crude helium producers. Then, under the Helium  Privatization Act of 1996, Interior was required to offer for sale all but  600 million cubic feet of the crude helium by January 1, 2015.
Pub. L. No. 86-777, 74 Stat. 918 (1960).
GAO, Helium Program: Urgent Issues Facing BLM’s Storage and Sale of Helium  Reserves, GAO-13-351T (Washington, D.C.: Feb. 14, 2013) and Helium Program:  Key Developments Since the Early 1990s and Future Considerations, GAO-10-700T  (Washington, D.C.: May 13, 2010). program, BLM’s sales price for crude helium, and what should be done  with the remaining helium. The Helium Stewardship Act of 2013 was  intended 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 American taxpayers, among other things.
As you know, the federal government has a reserve of crude helium near  Amarillo, Texas, that is stored in the ground in an area of a natural gas  field that has a naturally occurring underground structural dome. In  addition to the federal crude helium, this reserve also holds crude helium  that private companies have previously purchased from BLM but have not  taken delivery of in accordance with storage contracts between the  companies and BLM. BLM delivers crude helium from this reserve  through a pipeline to the private companies that are connected to it. As of  July 1, 2014, four such companies receive crude helium from BLM   these companies are commonly  through the pipeline and refine it;referred to as “refiners.” Four other companies—commonly referred to as  “nonrefiners”—have purchased relatively small volumes of crude helium  from BLM in the past and have expressed an interest in buying larger  volumes. The nonrefiners, however, cannot receive the crude helium  directly because they are not connected to the pipeline. Instead, a  nonrefiner must enter into an agreement with a refiner, so that the refiner  can accept delivery of the crude helium and process it into pure helium on  the nonrefiner’s behalf. The practice of a helium refiner processing or  refining another party’s helium at an agreed upon price is referred to as  “tolling.” The Helium Stewardship Act of 2013 contains a tolling provision  that requires, as a condition of sale or auction, that refiners make excess  refining capacity of helium available at commercially reasonable rates to  certain nonrefiners.
In light of the new circumstances presented by the Helium Stewardship  Act of 2013, my testimony today will describe (1) BLM’s initial actions to  implement the act and (2) challenges, if any, BLM faces in implementing  the act’s tolling provision and incentivizing tolling.
To address these objectives, we reviewed the Helium Stewardship Act of  2013 and documentation of BLM’s implementation of the act, including  the helium sales conducted in January 2014 and May 2014 and the  May 16, 2014, Federal Register notice on BLM’s proposed  implementation of the act. We interviewed BLM officials associated with  the helium program at BLM’s headquarters in Washington, D.C.; BLM’s   and BLM’s Amarillo  New Mexico State Office in Santa Fe, New Mexico;Field Office in Amarillo, Texas. We visited BLM’s Amarillo Field Office to  review documentation, observe the helium facilities, and interview  program officials. We also interviewed (1) attorneys with Interior’s Office  of the Solicitor who work with the helium program in Washington, D.C.,  and the Southwest Regional Office in Albuquerque, New Mexico, and  (2) officials with Interior’s Office of Minerals Evaluation who assisted BLM  with helium pricing. In addition, we interviewed the four refiners and four  nonrefiners that had participated in helium sales in recent years and two  additional companies that had expressed an interest in purchasing helium  and connecting to BLM’s pipeline. Officials with BLM’s helium program  concurred with the information presented in this statement and provided  technical clarifications, which we incorporated, as appropriate.
We conducted this performance audit from May 2014 to July 2014 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Helium is an inert element that occurs naturally in gaseous form and has  a variety of uses because of its unique physical and chemical  characteristics.point of any element, and, as the second lightest element, gaseous   For example, helium has the lowest melting and boiling  helium is much lighter than air. 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.
The federal helium program is currently managed by Interior’s BLM. As of  September 30, 2013, there were about 10.84 billion cubic feet of crude  helium in storage—roughly 9 billion cubic feet owned by the government,  and the rest is owned by private companies. After private companies— refiners or nonrefiners—purchase helium from BLM and pay for it, the  official ownership of the helium is transferred from BLM to the company  on the first day of the month after payment is received, and it becomes  part of the privately owned inventory in storage. BLM stores and then  delivers the privately owned helium through the pipeline to refiners in  accordance with the storage contracts between BLM and the private  companies. As of July 1, 2014, BLM held storage contracts with  10 companies: 4 refiners, 4 nonrefiners, and 2 companies that do not  store helium in the reserve but are connected to the pipeline in order to  transport helium from private natural gas fields to the 4 refiners also  connected to the pipeline. According to a U.S. Geological Survey report,  in 2013, helium produced from the reserve represented about 40 percent  of the total estimated production of helium in the United States and about  30 percent of the total estimated production worldwide.
The Helium Stewardship Act of 2013 significantly changed the federal  helium program. For example, the act:
Establishes four phases for the sale and auction of crude helium from,  and eventual closure of, the reserve—Phase A: allocation transition;  Phase B: auction implementation; Phase C: continued access for  federal users; and Phase D: disposal of assets. Phase D is to be  completed no later than September 30, 2021. 50 U.S.C.  §§ 167d(a)-(d).
Establishes a minimum quantity of crude helium that BLM is required  to offer for sale or auction each fiscal year in Phases A, B, and C.  Specifically, the amount of crude helium to be offered must be the  lesser of (1) the quantity of crude helium offered for sale by the  Secretary of the Interior during fiscal year 2012 or (2) the maximum  total production capacity of the federal helium system, which includes  the pipeline. 50 U.S.C. § 167d(f). We refer to this as the act’s  minimum quantity requirement.
Requires BLM to annually establish, as applicable, separate sale and  minimum auction prices for Phase A and Phase B using, if applicable,  and in the following order of priority: (1) the sale price of crude helium  in BLM auctions; (2) price recommendations and disaggregated data  from a qualified, independent third party who has no conflict of interest  and conducted a confidential survey of qualifying domestic helium  transactions; (3) the volume-weighted average price of all crude  helium and pure helium purchased, sold, or processed by persons in  all qualifying domestic helium transactions; or (4) the volume- weighted average cost of converting gaseous crude helium into pure  helium. 50 U.S.C. § 167d(b)(7). We refer to this as the act’s price- setting provision.
Requires BLM to require all persons that have storage contracts with  BLM for privately owned helium in the reserve to disclose, on a strictly  confidential basis, (1) the volumes and associated prices of all crude  and pure helium purchased, sold, or processed by persons in  qualifying domestic helium transactions; (2) the volumes and  associated costs of converting crude helium into pure helium; and  (3) refinery capacity and future capacity estimates. 50 U.S.C.  § 167d(b)(8)(A). We refer to this as the act’s disclosure requirement.
Establishes a condition for Phase A sales and Phase B sales and  auctions to refiners. Specifically, as a condition of sale or auction to  a refiner under Phase A sales and Phase B, the refiner must make  excess refining capacity of helium available at commercially  reasonable rates to persons who acquire helium from BLM after the  act’s enactment. 50 U.S.C. § 167d(b)(8)(B). According to the act’s  legislative history, this condition was intended to maximize  participation in helium sales. The act does not define excess refining  capacity or commercially reasonable rates. We refer to this condition  as the act’s tolling provision.
section_title: BLM’s Initial Actions to Implement the Helium Stewardship Act of 2013
paragraphs: Since the Helium Stewardship Act of 2013 was enacted in October 2013,  BLM has taken a number of actions to begin implementing the act,  including (1) estimating volumes of helium that can be produced from the  reserve each fiscal year, (2) preparing for and conducting Phase A helium  sales, and (3) initiating planning for Phase B sales and auctions.
subsections: section_title: BLM Estimated the Volume of Helium That Can Be Produced from the Reserve Each Year
paragraphs: Before BLM could determine how much helium it would sell or auction in  each phase, the agency first estimated the volumes of crude helium that  can be produced from storage in the reserve. As helium is produced, and  the amounts remaining in storage continue to decrease, the helium  becomes increasingly difficult to extract. Because of this dynamic, BLM  used a geologic model to identify the most efficient way to produce the  remaining helium from storage. Table 1 shows the results of BLM’s  modeling efforts with the estimated amounts expected to be produced  from the reserve by fiscal year, reflecting the reduced volumes that BLM  expects will be produced over time.
In comparison, BLM offered 2,100 million cubic feet of crude helium for  sale in each of fiscal years 2012 and 2013, the same amount it had  offered for sale annually since fiscal year 2004.
section_title: BLM’s Implementation of Phase A Helium Sales
paragraphs: BLM has taken a number of actions to implement multiple provisions of  the act regarding Phase A (see fig. 1). The act requires BLM to offer  crude helium for sale in Phase A in such quantities and under such terms  as BLM determines necessary to carry out Phase A with minimum market  disruption, in addition to meeting the act’s minimum quantity requirement.  Under Phase A, BLM prepared for and conducted sales by determining  sales volumes, setting the sale price, and implementing the act’s  disclosure requirement, among other things.
BLM offered for sale a total of 610 million cubic feet of helium in two  different Phase A sales—one in January 2014 and one in May 2014. BLM  officials said that they did not hold the first Phase A sale until  January 2014 because they needed time to interpret the new act and  develop the fiscal year 2014 sale price. In the first quarter of fiscal year  2014, BLM continued delivering helium to the refiners from their private  storage balances. According to BLM officials, they considered limiting the  total Phase A sales to the 400 million cubic feet sold in January 2014 so  they could deliver more privately stored helium. However, these officials  said that after receiving comments requesting that BLM sell additional  helium, and after considering the act’s minimum quantity requirement,  they decided to offer for sale an additional 210 million cubic feet of helium  in May 2014. In the two Phase A sales, four nonrefiners purchased a total  of 61 million cubic feet of crude helium, and refiners purchased the  remainder.
By offering 610 million cubic feet for sale in fiscal year 2014, BLM did not  offer for sale the full volume of crude helium that BLM’s model estimated  would be produced in fiscal year 2014. This estimated volume,  approximately 1.5 billion cubic feet, is less than the volume of crude  helium offered for sale in fiscal year 2012 (2.1 billion cubic feet). Under  the act’s minimum quantity requirement, BLM must offer for sale or  auction in fiscal year 2014 the lesser of the “maximum total production  capacity of the federal helium system” or the amount of helium offered for  sale in fiscal year 2012. BLM officials told us they interpreted the  “maximum total production capacity of the federal helium system” not as  the full volume estimated by the model to be produced from the reserve  this fiscal year, but rather as an amount equal to the production capacity  of the reserve after (1) meeting federal users’ needs, (2) delivering a  percentage of privately owned helium stored in the reserve to refiners for  processing, and (3) holding back a contingency amount for possible  production problems (see fig. 2). These officials said this interpretation  helps ensure that the agency can deliver the volumes of privately owned  helium that remain in storage before the end of fiscal year 2021. Some  refiners, however, submitted comments to BLM stating that they disagree  with the agency’s interpretation of the act’s minimum quantity  requirement. They said that the “maximum total production capacity of the  federal helium system” is the amount equal to the full volume of helium  that is estimated to be produced from the reserve for the year, minus an  amount for federal users.
BLM set the price for the two Phase A helium sales at $95 per thousand  cubic feet—an $11 increase over the fiscal year 2013 price—in  December 2013. The fiscal year 2014 price increase resulted from a  November 2012 recommendation from Interior’s Office of Inspector  General that BLM implement a new helium pricing process by the end of  2013 to ensure a fair return on the sale of helium. In response, BLM  worked with Interior’s Office of Minerals Evaluation to contract for a study  on helium prices. The study was completed on October 15, 2013. The  price increase was based largely on the results of this study. BLM officials  told us that they used the study in setting the price for the Phase A sales  because they believed it satisfied both the Office of Inspector General’s  recommendation and the recently enacted price-setting provision.
subsections: section_title: Information Disclosure
paragraphs: BLM required companies making offers in the Phase A sales to fulfill the  act’s disclosure requirement, in addition to requiring the refiners to report  their excess refining capacity. BLM communicated these requirements in  its announcements for the Phase A sales. By implementing the act’s  disclosure requirement in this manner, however, BLM did not receive  information from all 10 storage contract holders since 2 companies did  not participate in the sales. BLM officials told us they had not realized that  the act required them to obtain this information from the 2 storage  contract holders that did not participate in the sales. BLM and other  Interior officials said that they plan to explore what storage contract  holders that do not participate in sales or auctions are statutorily required  to disclose. Phase A sales submitted the requested volume and pricing information,  and BLM publicly disclosed that the refiners reported, in aggregate, a total  of 50 million cubic feet of excess refining capacity available for the last  8 months of fiscal year 2014 (February 2014 through September 2014),  an amount less than the 61 million cubic feet purchased by nonrefiners.
section_title: BLM’s Planning for Phase B Helium Sales and Auctions
paragraphs: Under the Paperwork Reduction Act, the Director of the Office of Management and  Budget must review and approve agencies’ proposed collections of information from 10 or  more entities. BLM has not submitted an information collection proposal to the Office of  Management and Budget for the act’s disclosure requirement but is exploring who is  required to disclose information.
Phase B under such terms and conditions as the agency determines are  necessary to maximize total recovery of helium from the federal helium  reserve over the long term; to manage crude helium sales according to  the agency’s ability to extract and produce helium from the reserve; to  carry out Phase B with minimum market disruption; and maximize the  total financial return to the taxpayer, among other things.
BLM is in the process of planning for the required (1) Phase B auction of  a portion of the helium that will be produced in fiscal year 2015,  (2) Phase B sale of a portion of the helium that will be produced in fiscal  year 2015, and (3) Phase B advanced one-time sale of a portion of the  helium that will be produced in fiscal year 2016. BLM published its  proposed implementation plan for the auction and sales in the Federal  Register on May 16, 2014, for a 30-day comment period, and BLM is  planning to hold the auction and sales in late July 2014 to comply with the  August 1, 2014, statutory deadline. BLM officials said they planned to  publish the final implementation plan in the Federal Register in mid- July 2014. Until the final plan is published, BLM’s proposed  implementation is tentative. Similar to Phase A, for the Phase B fiscal  year 2015 auction and sale, as well as the fiscal year 2016 one-time sale,  BLM is making decisions about helium volumes available for sale and  auction, setting the sale price, and implementing the act’s disclosure  requirement.
subsections: section_title: Volume
paragraphs: As was the case with the volumes of helium made available for sale in  Phase A, BLM plans to offer a total amount of helium for sale or auction  each year in Phase B that would be less than the annual total helium  production amounts shown in table 1. BLM officials told us they are  continuing this approach based on the agency’s interpretation of the act’s  multiple requirements for Phase B, including the minimum quantity  requirement. Specifically, for fiscal year 2015, BLM officials told us they  will offer for sale or auction 928 million cubic feet of the 1.3 billion cubic  feet that is estimated to be produced from the reserve, and to use the  remaining production capacity to accommodate federal users’ needs and  deliver a percentage of the privately owned helium stored in the reserve  (see table 2). For the fiscal year 2016 one-time sale, BLM proposed to  offer 250 million cubic feet of helium.
In its proposed implementation plan, BLM stated its intent to auction  10 percent of the 928 million cubic feet that BLM will make available for  fiscal year 2015 to qualified bidders, including refiners and nonrefiners.  In Phase B, BLM is generally required to auction an increasing amount of  the helium made available for each fiscal year, beginning with helium  available for fiscal year 2015. Specifically, for fiscal year 2015, BLM is  required to auction 10 percent of the total volume of crude helium made  available for that fiscal year, but the agency is authorized to adjust that  quantity in certain circumstances.to adjust the auction amount for fiscal year 2015 to minimize potential  market disruption.
BLM officials told us they decided not  BLM’s proposed plan includes making Phase B sale volumes available  only to refiners, which is a departure from BLM’s prior practice, including  for Phase A. In the past, sale volumes were divided into two portions, one  offered to refiners and one offered first to nonrefiners. With the introduction of auctions in Phase B, BLM has proposed to divide the total  helium made available each year into two different portions—a sale  volume available only to refiners and an auction volume available to all  qualified bidders, including, but not limited to, nonrefiners. Some  nonrefiners have raised a concern about this approach since they would  no longer be permitted to purchase any of the helium that will be offered  for sale. As a result, they stated, fewer nonrefiners are likely to end up  purchasing federal helium because they may be outbid in the auction by  the refiners. The act does not contain language specifying which parties  are eligible to participate in the Phase B sales but, according to BLM  officials, the act intended to have the auctions replace the portion of the  sales that were previously available to nonrefiners.
section_title: Price
paragraphs: BLM’s proposed implementation plan also includes a calculation of the  minimum auction price for fiscal year 2015 and a formula for calculating  the sales price for fiscal year 2015 and the fiscal year 2016 one-time sale.  BLM officials told us they did not have time to contract for a market  survey of relevant domestic transactions by an independent third party to  inform these prices, one of the options provided for in the act’s price- setting provision. As a result, BLM is basing its minimum auction price on  the fiscal year 2014 sales price, adjusted for inflation. BLM’s price for the  fiscal year 2015 sale and the fiscal year 2016 one-time sale is based on  the adjusted fiscal year 2014 sales price as well, but it also takes the  average auction price into account. BLM officials told us they do not  intend to use this approach in the future to set prices but, rather, they plan  to contract for an independent market survey to inform the prices for the  sale and auction of the remaining fiscal year 2016 helium.
section_title: Information Disclosure
paragraphs: In its May 2014 Federal Register notice, BLM did not directly address how  it will implement the act’s disclosure requirement for the fiscal year 2015  sale and auction and fiscal year 2016 one-time sale. However, BLM  officials told us they intend to follow procedures similar to those used for  the Phase A sales, that is, having only sale and auction participants  respond to the act’s disclosure requirement.
section_title: BLM Faces Challenges in Implementing the Act’s Tolling Provision and Incentivizing Tolling
paragraphs: BLM faces challenges in implementing the act’s tolling provision and  incentivizing tolling. The tolling provision was intended, according to a  relevant Senate committee report, to maximize participation in helium  sales in Phases A and B. Without a way to have helium refined, there  would be less or no interest in purchasing helium by nonrefiners. As of  May 1, 2014, refiners had agreed to toll about one-quarter of the crude  helium purchased by nonrefiners in the January 2014 Phase A sale.
subsections: section_title: BLM’s Challenges in Implementing the Tolling Provision
paragraphs: The Helium Stewardship Act of 2013 provides that refiners, as a condition  of sale or auction, make excess refining capacity available at  commercially reasonable rates to certain entities. In implementing this  provision, however, BLM faces challenges in knowing whether refiners  (1) have excess refining capacity available and (2) if so, are offering  tolling services to nonrefiners at commercially reasonable rates.
subsections: section_title: Excess Refining Capacity
paragraphs: In implementing the act’s tolling provision, BLM faces the challenge of  verifying whether the refiners have excess refining capacity available.  Although BLM asked refiners to report excess refining capacity in  January 2014 as part of the Phase A sales, BLM did not define the term  “excess refining capacity” because, according to BLM officials, they were  still in the process of interpreting the act. Moreover, BLM did not request  information regarding how refiners determined their excess refining  capacity or supporting documentation. By not defining excess refining  capacity, or asking how the refiners calculated it, BLM does not know how  the refiners calculated the amounts they reported and whether the four  refiners calculated those amounts in the same way. In advance of the  January 2014 Phase A sale, refiners reported a total of 50 million cubic  feet of excess refining capacity for the last 8 months of fiscal year 2014.  BLM officials and some nonrefiners told us they questioned why refiners  would have so little excess refining capacity available when BLM had  announced it would produce and deliver a few hundred million cubic feet  less federal helium during fiscal year 2014 than it had produced and  delivered—and that refiners had processed—during fiscal year 2013.  However, refiners reported multiple reasons why they had limited excess  capacity, including that plants connected to the pipeline also process  crude helium from privately owned natural gas deposits.
In our interviews with refiners, they described different methods for  calculating the excess refining capacity that they reported to BLM. For  example, some refiners used formulas that accounted for multiple  variables, including seasonality, interruptions, supply, total refining  capacity, and existing contracts, while others used simpler formulas.  Moreover, it is unclear whether BLM expected refiners to include refining  plants or units that are currently nonoperational but that could become  operational later in the year in their calculations of total refining capacity.
In preparation for Phase B and the fiscal year 2015 auction and sale,  BLM officials said they are taking steps to improve their ability to  determine whether refiners have accurately reported excess refining  capacity. BLM posted a data collection form on its website on  June 2, 2014, for refiners to use when reporting excess refining capacity;  the form includes a definition of excess refining capacity. The form  provides guidance on how BLM expects refiners to report excess refining  capacity, but some nonrefiners commented to BLM that this definition  leaves room for different interpretations. For example, BLM asks refiners  to report “planned demand” for the applicable fiscal year in order to  determine excess capacity. BLM, however, does not make clear whether  such demand should already be under contract or just anticipated at the  time its form is submitted. BLM also is requiring refiners to certify the  accuracy of their reports of excess refining capacity on this form and to  update it within 2 weeks if the reported data vary by 10 percent at any  time. If a refiner fails to report excess refining capacity or to update BLM  when the data change, BLM is proposing to bar that refiner from  participation in helium auctions and/or sales. However, BLM has not  specified for how long or from which auctions or sales such a refiner  would be barred. We plan to conduct additional work after the July 2014  auction and sales on BLM’s efforts to obtain excess refining capacity data  from refiners using its data collection form. Therefore, we are not making  any recommendations at this time.
section_title: Commercially Reasonable Rates
paragraphs: BLM is also challenged in determining whether refiners that reported  having excess refining capacity are offering tolling services at  “commercially reasonable rates,” as required by the act. BLM did not  define commercially reasonable rates for Phase A or identify criteria it  would use to evaluate offered rates. As a result, BLM officials told us they  did not make determinations of whether the rates offered by refiners in  Phase A were commercially reasonable. Moreover, BLM officials told us  they do not intend to define commercially reasonable rates or identify  criteria for evaluating such rates for the upcoming July 2014 Phase B  auction and sales. Until BLM identifies criteria or a definition of what  constitutes a commercially reasonable rate, it is unclear how BLM would  implement the tolling provision, if necessary.
BLM officials told us they are not planning on defining commercially  reasonable rates because it is more appropriate for the companies or a  court to make that determination. BLM officials said they do not have  complete information about the full spectrum of refiners’ costs that are  included in their tolling rates. Also, these officials said that refiners and  nonrefiners are interpreting what is a commercially reasonable rate  differently and that the officials are hesitant to be drawn into that dispute.  BLM officials told us they would have a hard time finding that a rate was  not reasonable if the parties involved agreed to it. These officials said  they received multiple comments from refiners, nonrefiners, and helium  end users that support BLM’s “hands-off” approach to determining what is  a commercially reasonable rate. However, some of the nonrefiners we  interviewed said that they would like BLM to be more involved in setting a  commercially reasonable rate. We plan to conduct additional work after  the July 2014 auction and sales on BLM’s implementation of the tolling  provision. Therefore, we are not making any recommendations at this  time.
section_title: BLM Faces Challenges Finding Ways to Incentivize Tolling
paragraphs: BLM officials told us that they are considering a variety of ways of  delivering helium in Phase B that would incentivize refiners to toll.  However, the agency’s ability to create incentives is restricted by the  terms of existing storage contracts that predate the act and remain in  effect until September 30, 2015. Under the existing contracts—which the  act does not affect or diminish—BLM’s delivery of helium through the  pipeline is based on the refining capacities of the four refiners in 2000.  For example, if BLM delivered 100 million cubic feet of helium into the  pipeline over the course of a month, that amount would be divided among  the refiners per the allocations determined by their 2000 refining  capacities (see table 3).
Therefore, for nonrefiners to actually receive helium they have purchased  from BLM, one or more of the refiners’ allocations would need to be  reduced so it could be delivered.helium that could be delivered to a refiner for its own use, potentially  meaning lost revenue for that refiner. Some of the refiners we spoke with  said this reduction in the volume of helium they would receive is a  significant reason why they have been reluctant or unable to toll.
This directly reduces the amount of  In planning for the fiscal year 2015 auction and sale, BLM officials told us  they considered various ways to address this delivery issue within the  confines of the existing storage contracts. In its May 16, 2014, Federal  Register notice, BLM proposed reducing the total volume of helium that is  subject to the delivery allocations. This approach could allow BLM to  deliver any helium that nonrefiners purchased at auction separately from  helium that is subject to the allocations. Under this approach, tolling could  represent an opportunity for refiners to receive helium they otherwise  would not be receiving. BLM and other Interior officials told us they  believe the existing storage contracts provide the flexibility to BLM to  make such adjustments. At least one refiner, however, has notified BLM  that it finds that BLM’s interpretation violates the act and the terms of the  current storage contract.
Although potentially significant for fiscal year 2015, the challenges posed  by the existing storage contracts may be reduced under certain market  conditions. Specifically, BLM officials noted that the disincentive may be  moot if refiners are not interested in receiving their full allocation of helium  each month. For example, although the refiners have used their full  allocations since fiscal year 2010, according to BLM officials, some  refiners recently notified BLM that they are reducing their requested  monthly delivery amounts from the pipeline because additional helium  supplies have become available from other, private sources in other  locations in the world. According to these officials, these conditions could  make tolling more likely because, if refiners were accepting less helium  from the federal system for their own use, they could have excess refining  capacity available in their plants on the pipeline. At least one nonrefiner  told us, however, that the availability of the additional supplies from other  sources means they are not interested in having their federal helium  tolled.
Furthermore, this challenge could be alleviated when new storage  contracts are signed. BLM officials told us they plan to begin developing  the terms of new storage contracts, and these contracts will go into effect  in fiscal year 2016. These officials said they can modify the delivery  allocations in the new contracts so that delivery of nonrefiners’ helium  does not result in a reduction of a refiner’s delivered volume and instead  would represent an opportunity for the refiner to accept delivery of helium  it otherwise would not have received.
However, even with an incentive from BLM, refiners’ and nonrefiners’  conflicting interests will make it challenging for tolling to occur. BLM  officials said that, even if refiners report having excess refining capacity,  and that capacity is offered at commercially reasonable rates, the parties  may still have difficulty finding mutually agreeable terms for delivering the  refined helium. These officials said a major reason why more tolling has  not occurred is that refiners and nonrefiners disagree over delivery terms.  For example, some nonrefiners told us they are looking for some  assurance of when and how much refined helium the refiners will deliver  to them in certain months. Such an agreement might specify an overall  volume to be tolled spread out over a number of months. These  nonrefiners said they need some predictability so they can meet  contractual obligations with their customers. However, some refiners said  they cannot offer predictable volumes to nonrefiners, both because of  existing obligations to their own customers and because their supplies are  subject to interruptions that occur in the federal helium system, such as  unexpected plant shutdowns. Some of these refiners told us they would  offer to toll for nonrefiners as capacity comes available, but some of the  nonrefiners we interviewed said that they are typically unable to use  helium offered on short notice, in part because they need to secure  commitments to provide refined helium in advance in order to satisfy their  existing contracts.
Chairman Lamborn, Ranking Member Holt, and Members of the  Subcommittee, this completes my prepared statement. I would be  pleased to answer any questions that you may have at this time.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: If you or your staff members have any questions about this testimony,  please contact me at (202) 512-3841 or fennella@gao.gov. Contact  points for our Offices of Congressional Relations and Public Affairs may  be found on the last page of this statement. Other individuals who made  key contributions to this testimony include Jeff Malcolm (Assistant  Director), Cheryl Arvidson, Carol Bray, Juli Digate, Leslie Kaas Pollock,  and Jeanette Soares.
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