Helium Stewardship Act of 2013: Bureau of Land Management Needs More Information to Fully Implement the Act
Released: 2015-07-08T00:00:00

Letter

Refiners Bought All Helium Offered at Auction and Sales Held during the Summer of 2014 for Higher Than Expected Prices

As detailed in our April 2015 report, in the summer of 2014, refiners purchased all the helium offered in BLM’s first-ever competitive helium auction at higher than expected prices. Two refiners purchased all 93 million cubic feet of helium that was auctioned at an average price of $161 per thousand cubic feet—significantly above the prices offered by most other bidders. BLM set the minimum starting bid for each lot at $100 per thousand cubic feet. At one point during bidding, the auction price rose as high as $180 per thousand cubic feet. We observed that participants who did not win at the auction stopped bidding when prices Most of reached from $105 to $130 per thousand cubic feet (see fig. 1).the representatives of refiners and nonrefiners we interviewed stated that the auction prices were too high for crude helium, especially during a time of global excess of helium supplies. BLM and some representatives of nonrefiners and a refiner, however, said the auction was a success for the federal government since it generated about $15 million in revenue, an amount that a senior helium program official said exceeded the agency’s expectations.

In interviewing BLM officials and representatives of refiners and nonrefiners and reviewing BLM’s planned implementation actions, we identified multiple, possible explanations for why refiners won all the auctioned helium for higher than expected prices. These explanations included:

Refiners may have been more willing to pay higher prices at the auction since their costs for refining crude helium are lower than those of nonrefiners. According to representatives of nonrefiners, the costs of purchasing auctioned helium and turning it into refined helium are lower for refiners than nonrefiners because refiners do not have to pay another company to refine their helium, a situation that gives refiners an advantage at the auction.

Nonrefiners may not have bid higher at the auction because they did not know the costs and delivery terms for tolling. Representatives of nonrefiners we interviewed said that few tolling agreements were in place prior to the auction. Those agreements would have specified the rates for tolling any helium they purchased and provided details on when, where, and how purchased helium would be delivered.

Changes to the way BLM proposed to deliver helium purchased at the auction may have provided an incentive to refiners to purchase as much helium at the auction as possible. BLM had announced before the auction that it would reserve some of its pipeline delivery capacity in fiscal year 2015 for helium purchased at the auction. Based on our review of BLM’s July 2014 Federal Register notice, purchasing helium at the auction would have allowed refiners to take advantage of the new delivery method and maximize volumes of helium they would receive through the pipeline.

In the past, BLM divided sale volumes into two portions, one offered to refiners, and one offered first to nonrefiners. For example, in sales held in January and May 2014 under the first phase of the act, BLM offered 10 percent of the total volume of helium that it made available for sale to nonrefiners, and the refiners were offered 90 percent of the total volume, excluding helium for federal users. BLM officials said they changed this approach based on their interpretation of the 2013 act. the auction, nonrefiners purchased none of the federal helium that BLM made available for delivery in fiscal year 2015. As a result, the number of companies purchasing helium from BLM for delivery in fiscal year 2015 compared with fiscal year 2014 decreased from eight to four.

In Administering the Tolling Provision, BLM Does Not Have Full Assurance That Refiners Are Satisfying It

In our April 2015 report, we found that BLM had taken steps to help improve reporting by refiners by clarifying one of the key terms in the tolling provision, but the agency did not have full assurance that refiners were satisfying the provision. The tolling provision requires refiners, as a condition of sale or auction, to make excess refining capacity available at commercially reasonable rates to certain nonrefiners. BLM officials told us that they considered signed tolling agreements between refiners and other parties, as well as refiners’ attempts to negotiate tolling agreements that did not result in signed agreements, to be evidence of refiners’ satisfying the tolling provision. This is because, if a refiner and nonrefiner do not agree on terms for tolling, the act does not require the refiner to toll.

BLM has collected some information about refiners’ signed tolling agreements and refiners’ attempts to negotiate tolling agreements, but the agency has not obtained all relevant information about refiners’ efforts. In a July 2014 Federal Register notice, BLM directed refiners to report information about tolling agreements that they entered into during the preceding year by completing a tolling report form. However, refiners inconsistently reported information about their signed tolling agreements on these forms. For example, not all refiners reported the rates they charged for tolling. According to BLM officials, a representative of one refiner said that the refiner did not report the rate because the act does not require refiners to disclose information about agreements covering Officials we spoke with from less than 15 million cubic feet of helium.

Interior’s Office of the Solicitor said that BLM could not require refiners to report information about signed tolling agreements for less than 15 million cubic feet in a Federal Register notice. BLM officials said they expect that many signed tolling agreements will be for less than 15 million cubic feet since nonrefiners typically accept delivery of helium in 1 million cubic feet increments. As a result, BLM officials said that having information about tolling agreements for smaller volumes from all refiners, including rates, would provide BLM with a better understanding of refiners’ efforts to satisfy the tolling provision.

In addition, BLM requested that refiners report information about attempts to negotiate tolling agreements that did not result in signed agreements. According to officials with the Office of the Solicitor, the act does not require refiners to report this information, so reporting is voluntary. As a result, the refiners’ responses to BLM’s request were inconsistent. For example, some refiners reported that they had attempted to negotiate agreements but did not report details about the volume or rates offered.

Officials from the Office of the Solicitor said BLM may need to issue a rule to require refiners to report on their signed agreements for less than 15 million cubic feet and their attempts to negotiate tolling agreements that do not result in signed agreements. But BLM officials said they do not intend to issue a rule, in part, because it is a time-consuming process that might delay future auctions and sales. However, options may be available for the agency to shorten the rulemaking process if, for example, the conditions for issuing an interim final rule without first issuing a proposed rule for public notice and comment have been satisfied. Until refiners consistently provide information about signed agreements to toll less than 15 million cubic feet of helium and about their attempts to negotiate tolling agreements, BLM cannot determine the extent to which refiners are satisfying the tolling provision by making excess capacity available at commercially reasonable rates. To provide the agency with better information to support its decisions when implementing the act, in our April 2015 report, we recommended that the Secretary of the Interior direct the Director of BLM to issue a rule—perhaps an interim final rule if BLM finds there is good cause to do so, given the time constraints—to require refiners to report information about (1) signed agreements to toll less than 15 million cubic feet of helium and (2) their attempts to negotiate tolling agreements that do not result in signed agreements.

In written comments on a draft of our report, Interior did not agree with this recommendation and stated that existing mechanisms are providing BLM with sufficient information for the agency to administer the tolling provision, and that BLM is not in a position to develop a rule due to reduced resources, current workloads, and other high priority rulemakings and initiatives in which the agency is engaged. Also, Interior stated that the expense and time necessary to undertake a rule outweighed any immediate benefit. Interior said that the federal helium program would likely be nearing its conclusion by the time such a rule is in place.

Subsequent to the issuance of our April 2015 report,letter addressing our recommendations, Interior further stated that to address concerns we raised in our report, BLM plans to collect information on tolling and tolling agreements through Federal Register notices. Interior stated that the Federal Register notice for the fiscal year 2016 auction and sale will include a request for refiners to voluntarily report tolling agreements for less than 15 million cubic feet and information about efforts to negotiate tolling agreements that were not successful. The letter stated that BLM believes making such requests in Federal Register notices will be an effective means of collecting this information. in a June 2015 As we stated in our report, we do not agree that existing mechanisms, including requests made in Federal Register notices, are providing or will provide BLM with the information it needs to be assured that refiners are satisfying the tolling provision. Under BLM’s approach, refiners’ reporting of certain information—specifically, signed agreements to toll less than 15 million cubic feet and their attempts to negotiate tolling agreements that did not result in signed agreements—remains voluntary, and not all refiners provided this information to BLM when the agency previously requested it. It is unclear how BLM would achieve a different result from future information requests under its proposed approach.

We recognize that Interior and BLM must consider current workloads and other priorities when determining how to expend limited resources. However, if BLM does not issue a rule to require refiners to report this information, the agency cannot determine the extent to which refiners are making excess capacity available at commercially reasonable rates. Even if BLM cannot shorten the rulemaking process by, for example, issuing an interim final rule, the agency will continue implementing the act through fiscal year 2021, and the administration of the tolling provision could affect nonrefiners’ participation in the auctions. We continue to believe that undertaking a rulemaking is necessary so that BLM can have better assurance that refiners are satisfying the tolling provision through fiscal year 2021.

BLM Faces a Number of Decisions As It Continues to Implement the Act

BLM faces a number of decisions about its continued implementation of the act, including decisions related to its upcoming fiscal year 2016 helium auction and sale. On June 12, 2015, after we issued our April 2015 report, BLM published a Notice of Proposed Action in the Federal Register that outlined its proposal for holding the fiscal year 2016 auction and sale in August 2015. The notice stated that after a public comment period, BLM plans to issue a final notice before holding the fiscal year 2016 auction and sale.

Regarding the fiscal year 2016 auction, BLM officials face a decision about how the agency will choose a method to conduct the auction, among other decisions. BLM’s summer 2014 auction was conducted live and in-person in Amarillo, Texas, and the agency broadcast the auction in real time over the Internet for public viewing. According to the June 2015 Notice of Proposed Action published in the Federal Register, BLM intends to use the live auction method for the fiscal year 2016 auction as well, but according to Interior’s June 2015 letter, the method BLM selects will be announced in the final Federal Register notice. The act requires BLM to conduct each auction using a method that maximizes revenue to the federal government. As stated in our report, representatives from some of the refiners and nonrefiners that participated in the auction told us they had concerns about BLM’s auction method. For example, a representative from one nonrefiner questioned whether holding a live auction where bids are offered sequentially would yield the highest revenues.

BLM officials told us they considered multiple auction methods when initially choosing the live auction for the summer 2014 auction, but that they did not assess the auction methods based on maximizing revenue. Instead, they determined which method would be most logistically practical to administer. For example, they told us that they were concerned about holding an Internet-based auction because they did not want potential technological difficulties to disrupt the auction or prevent a company from participating. However, BLM economists told BLM helium program officials and us that there are several academic studies on different auction methods Interior used in the past. These methods included sealed-bid auctions and auctions where all lots were auctioned simultaneously rather than sequentially. BLM economists said that these academic studies could help identify an auction method that maximizes revenue.

As of the issuance of our April 2015 report, however, BLM helium program officials had not evaluated the various methods. Without assessing each method based on revenue generation, we found that BLM would not have reasonable assurance that the live auction method will maximize revenue, as required by the act. As a result of this finding, we recommended that the Secretary of the Interior direct the Director of BLM to assess auction methods based on revenue generation, using available information, and select a method that would maximize revenue for the upcoming helium auction. In comments on our draft report, Interior concurred with this recommendation. Subsequent to the issuance of our report, BLM published its Notice of Proposed Action in June 2015 in the Federal Register, stating the agency’s intent to hold a live auction for fiscal year 2016. Three days later, Interior stated in its June 2015 letter addressing our recommendations that BLM’s economists were evaluating various auction methods to determine which is most appropriate to maximize revenue. The letter stated that BLM will base its selection of an auction method for the fiscal year 2016 auction on this evaluation and will provide details on the selected method in the final Federal Register notice.

Chairman Lamborn, Ranking Member Lowenthal, 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.

GAO Contact and Staff Acknowledgments

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, Cheryl M. Harris, Josie H. Ostrander, Leslie Kaas Pollock, Dan Royer, and Jeanette Soares.

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