Bureau of Land Management: More Information Needed to Implement the Helium Stewardship Act of 2013
Released: 2015-04-16T00:00:00

Letter

Background

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. For example, helium has the lowest melting and boiling points of any element, and as the second lightest element, gaseous helium is much lighter than air. Certain natural gas fields contain a relatively large amount of naturally occurring helium that can be recovered as a secondary product. To do so, 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.

As of September 30, 2013, the federal helium program stored about 10.84 billion cubic feet of crude helium—roughly 9 billion cubic feet owned by the government, and the rest owned by private companies— in an underground storage reservoir near Amarillo, Texas. BLM used a geologic model to identify the most efficient way to extract this remaining helium from storage. As of mid-2014, BLM estimated that it could make available for delivery from the reservoir roughly 7 billion cubic feet of helium over the life of the act, from fiscal year 2014 through fiscal year 2021.

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 federal storage. BLM stores and then delivers the privately owned helium through the pipeline to refiners in accordance with the storage contracts it has with the companies. As of February 2015, BLM held storage contracts with 11 companies, and these storage contracts will expire at the end of fiscal year 2015. The storage contracts govern the storage, withdrawal, and delivery of helium from the federal reservoir and associated fees. BLM officials explained that they calculate fees under the current contracts based on the total amount necessary to recover BLM’s costs. The ability for companies to purchase crude helium and then leave it stored in the federal storage reservoir until it is delivered at a later time is a unique feature of the federal helium program compared with other sources of helium in the world, which typically require a purchaser to accept delivery of the helium when it is extracted or pay for it even if delivery is not accepted upon extraction.

When the Helium Stewardship Act of 2013 was enacted, the global helium market had been operating under conditions of tight supplies for multiple years. From 2010 to mid-2014, refiners requested delivery of volumes of helium through the BLM pipeline that would have exceeded BLM’s production capacity. Under these conditions, refiners accepted delivery of the maximum amount of helium that BLM could produce. However, market conditions changed in 2014: supply increased due to additional production from private sources in other parts of the world. Because these additional supplies became available, starting in mid-2014, refiners requested delivery of volumes of helium that were less than BLM’s production capacity. A January 2015 U.S. Geological Survey report estimated that helium produced from the federal storage reservoir represented 29 percent of the total estimated production of helium in the United States and 17 percent of the total estimated helium production worldwide in fiscal year 2014.

The 2013 act significantly changed the federal helium program. The 1996 act required Interior to sell a certain amount of helium in the federal helium reserve and to set helium sale prices to cover the reserve’s operating costs and to produce an amount sufficient to repay the debt associated with the initial purchase of the helium. According to the 2013 act’s legislative history, however, the purpose of the 2013 act is 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 taxpayers. The 2013 act introduces new provisions, including the following:

Phased implementation. 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).

Tolling. If a refiner and nonrefiner do not agree on terms for tolling, the act does not require refiners to toll. However, as a condition of sale or auction to a refiner in Phase A and 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 Phase A and B helium sales. The act does not define excess refining capacity or commercially reasonable rates. We refer to the condition of sale or auction as the act’s tolling provision.

Disclosure requirement and qualifying domestic helium transactions. The act requires BLM to require all persons that have storage contracts with BLM 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. Furthermore, the act defines a “qualifying domestic helium transaction” as any agreement entered into or renegotiated during the preceding 1-year period in the United States for the purchase or sale of at least 15 million standard cubic feet of crude or pure helium to which any storage contract holder is a party. 50 U.S.C. § 167(10).

Price-setting. The act requires BLM to annually establish, as applicable, separate sale and minimum auction prices for Phase A and 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, who shall conduct 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).

Auction and sale schedule and frequency, and one-time sale. For fiscal year 2015, the act only permits one auction, followed by one sale that had to occur no later than August 1, 2014. Payment for the sale had to be made by September 26, 2014. 50 U.S.C. § 167d(b)(12). The act also requires a one-time sale of helium from the amounts available in fiscal year 2016 that had to occur no later than August 1, 2014, with payment no later than 45 days after the sale date. 50 U.S.C. § 167d(b)(13)(A).

Auction quantities. The act generally requires BLM to auction an increasing amount of the helium made available each fiscal year, beginning with 10 percent in fiscal year 2015 and increasing by an additional 15 percentage points annually through fiscal year 2019, and then with 100 percent being auctioned in fiscal year 2020. 50 U.S.C. § 167d(b)(2). However, the volume auctioned may be adjusted upward if the Secretary of the Interior determines it necessary to increase participation in auctions or increase returns to taxpayers. 50 U.S.C. § 167d(b)(5)(B).

Storage and delivery. The act requires BLM to establish a schedule for transportation and delivery of helium using the federal system that ensures timely delivery of helium purchased at auction or sale, among other things. 50 U.S.C. § 167c(e)(2). The act also requires BLM to impose a fee on contract holders that accurately reflects the economic value of helium storage, withdrawal, and transportation services. The fee imposed cannot be less than the amount required for contract holders to reimburse Interior for the full costs of providing those services, including capital investments in the federal helium system. 50 U.S.C. § 167c(a),(b).

BLM published a final notice in the Federal Register on July 23, 2014, that specified the agency’s plan for implementing (1) the auction of a portion of the helium that will be delivered in fiscal year 2015, (2) the sale of a portion of the helium that will be delivered in fiscal year 2015, and (3) the one-time advance sale of a portion of the helium that will be delivered in fiscal year 2016 (see table 1). For the auction, BLM’s notice stated that auction participants would compete to purchase set volumes, or lots, of helium. For the sales, the notice stated that each of the four participating refiners would receive an amount of helium based on their percentage share of the total estimated refining capability in 2000. The notice also contained, among other things, BLM’s formula for calculating the minimum auction price and the sales price; BLM’s plans for delivering helium purchased in the auction and sale during fiscal year 2015, as well as delivery plans for helium purchased prior to the 2013 act’s enactment; and BLM’s plan for collecting information about tolling agreements between refiners and other parties.

Refiners Bought All Helium Offered at Auction and Sales for Higher Than Expected Prices

During the summer of 2014, refiners purchased all the helium offered during BLM’s first competitive helium auction and in two subsequent noncompetitive sales at prices that were higher than expected by participants and BLM officials. Two refiners purchased all the auctioned helium. BLM and refiners and nonrefiners cited multiple, possible reasons for the auction’s outcomes, including that refiners had an advantage over nonrefiners in terms of having existing infrastructure to refine helium without paying another company to do so. For the two sales, held in August 2014, BLM used the average auction price to help set the sales price, and the agency restricted the sales to refiners.

Two Refiners Won All the Auctioned Helium at an Average Price of $161 per Thousand Cubic Feet

Two refiners purchased all 93 million cubic feet of helium that BLM auctioned for delivery in fiscal year 2015 for an average price of $161 per thousand cubic feet. Specifically, 13 companies, including refiners and nonrefiners, participated in the agency’s first-ever competitive helium auction, held in July 2014, but most stopped bidding well below the final auction prices for 12 lots of helium. BLM set the minimum starting bid for each lot at $100 per thousand cubic feet, an increase over the fiscal year 2014 sales price of $95 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 reached from $105 to $130 per thousand cubic feet (see fig. 1).

Reaction to the auction’s outcome varied among refiners, nonrefiners, and BLM officials. Most of 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. A representative from one refiner, for example, called the auction prices “outrageously high.” Others said the average price was not an indication of the market price for crude helium, especially since the 93 million cubic feet auctioned by BLM constituted a very small portion of the total volume of crude helium sold in a year in the global market. Some representatives of nonrefiners said that auction prices for crude helium reached levels similar to some prices for refined liquid helium, which is typically more expensive than crude helium. Others said that the auction failed to increase the number of purchasers of federal helium beyond companies that already participated in the federal helium program.

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. A senior BLM helium program official said the auction exceeded revenue expectations, and an agency press release stated that BLM achieved a key objective of the act: to maximize the value of federal helium through a market-driven process. In addition, representatives from a refiner and nonrefiner stated that the free market nature of the auction was a good way to determine the market price for crude helium. Also, BLM officials and a representative of one nonrefiner stated that the high auction prices were beneficial because they will help spur development of new helium supplies. The representative explained that, when the price of crude helium increases, the return from selling helium increases. As the return increases above the cost of production, it provides an incentive to find and produce more helium because the exploration of new helium resources becomes more economical.

BLM and Refiners and Nonrefiners Cited Multiple, Possible Reasons for Auction Outcomes

In interviewing BLM officials and representatives of refiners and nonrefiners and reviewing BLM’s July 2014 Federal Register notice, we identified multiple, possible explanations for why refiners won all the auctioned helium for higher than expected prices. Specifically:

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 BLM officials, refiners utilize the infrastructure they already have to refine crude helium. In contrast, nonrefiners must pay another company to refine, or toll, their helium, which represents additional costs that refiners do not pay. As a result, according to representatives of nonrefiners, the costs of purchasing auctioned helium and turning it into refined helium are lower for refiners than nonrefiners, giving 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. As a result, the nonrefiner representatives said they were unable to calculate the total costs associated with purchasing and refining crude helium during the auction. By not knowing the tolling costs in advance of the auction, nonrefiners could have bid more conservatively than they might have otherwise. In addition, according to one nonrefiner representative, not knowing delivery terms before the auction made it difficult to plan ahead and prepare to receive the helium.

Refiners’ expectation of paying less for helium at two subsequent, noncompetitive sales may have led refiners to pay higher prices at the auction. Before the auction, BLM announced in its July 2014 Federal Register notice that it would make more than 1 billion cubic feet of helium available exclusively to refiners in two sales of helium to be delivered in fiscal year 2015 and fiscal year 2016, as compared with the 93 million cubic feet of helium to be auctioned. The notice further specified that the average price paid by auction winners would account for a small part—10 percent—of the sale price. According to BLM officials, when the amount of helium purchased by refiners at the higher auction price was added to the amount of helium purchased by refiners at the lower sales price, the refiners’ overall average price was considerably lower than the auction price. Specifically, refiners paid an average of $161 per thousand cubic feet for the auctioned helium, but refiners paid $106 per thousand cubic feet for helium purchased at the two sales. When the volumes and prices of the auction and sales were added together, the refiners’ overall purchase price averaged less than $120 per thousand cubic feet. BLM officials and representatives of nonrefiners told us that the refiners’ ability to average auction prices with sale prices provided an advantage to refiners because nonrefiners were not eligible to participate in the two sales held in August 2014 and therefore could not average auction and sale prices as refiners could.

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. Specifically, BLM had announced in its July 2014 Federal Register notice 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 the 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.

The Auction Price Affected BLM’s Sales Price, and Sales Were Restricted to Refiners

After the auction, BLM sold more than 1 billion cubic feet of helium in the two August 2014 sales to the four refiners at a higher than expected price. BLM missed the August 1, 2014, statutory deadlines for holding the sales by 2 weeks; however, the agency reported that it received final payments by the applicable statutory deadlines. As we previously stated, BLM used the average auction price to help set the price of $106 per thousand cubic feet used in both sales. As we found in July 2014, BLM based its price for these two sales primarily on the fiscal year 2014 sales price, adjusted for inflation, but the agency also used the average auction price to account for 10 percent of the sales price. As a result, BLM’s sales price increased $11 per thousand cubic feet compared with the fiscal year 2014 price, and BLM received approximately $115 million in revenue from the two sales.

We found in July 2014 that BLM selected its method for calculating the price for the two sales because agency officials said they did not have time to contract for an annual market survey of qualifying domestic helium transactions by an independent third party. This market survey is one of the options provided for in the act’s price-setting provision. BLM officials also said they did not give the auction price greater weight when setting the sale price because they did not want to create a significant price increase that would negatively affect federal users and other end users. However, some representatives of refiners and nonrefiners said that they disagreed with BLM’s decision to consider the auction price when setting the sale price because the auction accounted for a small amount of helium when compared with the volume of helium that is sold on the global market. Nevertheless, the act’s price-setting provision authorizes BLM to use the auction price to set sales prices and directs BLM to give priority to this approach.

BLM restricted the two August 2014 sales solely to refiners, which was a departure from the agency’s prior practice of offering a small portion of sales to nonrefiners. BLM officials said they took this approach because they interpreted the act as intending to have the auction replace the portion of the sales that had previously been made available to nonrefiners. Most representatives of nonrefiners, however, told us that they disagreed with this interpretation, stating that the act does not require BLM to eliminate the portion of sales open to nonrefiners. Some nonrefiners told us that having a guaranteed supply of helium, even of small volumes, would help level the playing field with refiners since the refiners can participate in the sales, guaranteeing their supply. Moreover, since nonrefiners were not eligible to participate in the sales and were outbid at 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.

BLM Clarified Its Definition of Excess Refining Capacity but Does Not Have Full Assurance That Refiners Are Satisfying the Tolling Provision

BLM has taken steps to address challenges we found in July 2014 with its administration of the act’s tolling provision, specifically by clarifying its definition of excess refining capacity. However, the agency does not have full assurance that refiners are satisfying the act’s tolling provision for various reasons. Among the reasons are that BLM has not obtained complete information about refiners’ efforts to satisfy the tolling provision and has not determined whether tolling rates offered by refiners are commercially reasonable. Representatives of nonrefiners have raised concerns that BLM’s unwillingness to act if refiners do not satisfy the provision may result in less competition in helium auctions.

BLM Clarified Its Definition of Excess Refining Capacity

Since its implementation of the first phase of the act, BLM has taken steps to clarify its definition of excess refining capacity to help improve reporting of excess capacity by refiners. In our July 2014 testimony, we found that BLM asked refiners to report excess refining capacity in January 2014 as a condition of the Phase A sales, but the agency did not define the term “excess refining capacity” because BLM officials stated that they were still interpreting the act at that time. We found that, as a result, refiners used different methods for calculating excess capacity reported to BLM. Also, BLM and some nonrefiners questioned the accuracy of the total volume of excess capacity that refiners reported in January 2014. In June 2014, BLM posted a draft data collection form on its website for refiners to use when reporting excess refining capacity. This draft form included a definition of excess refining capacity. For example, refiners were to report “planned demand” as part of their determination of excess capacity. However, some nonrefiners commented to BLM that this definition left room for different interpretations. In response to comments on its draft form, BLM published the final version of the form on its website on July 23, 2014, adding more specificity to its definition of excess refining capacity. For example, rather than asking refiners to report “planned demand,” BLM clarified that refiners should report “forecasted crude helium demand” and defined that term.

Refiners reported their forecasted excess capacity for fiscal year 2015 to BLM in late July 2014 and, according to BLM officials, the definition in the final form helped improve the refiners’ reports. Specifically, refiners reported a combined forecasted excess capacity of 786.5 million cubic feet for fiscal year 2015, more than 10 times the 72 million cubic feet that refiners had reported in January 2014 as their forecasted excess capacity for the same period. Representatives of refiners told us their forecasted excess capacity numbers changed because of BLM’s more precise definition of what to report, as well as changes in the global helium market since January 2014 that freed up additional capacity in their refineries on the federal pipeline.

BLM Does Not Have Full Assurance that Refiners Are Satisfying the Tolling Provision

The act’s tolling provision states that, as a condition of sale or auction, refiners must make excess refining capacity available at commercially reasonable rates to certain nonrefiners, but BLM does not have full assurance that refiners are satisfying the provision. According to language in the Senate report accompanying the act, refiners were to “make excess refining capacity available to others at commercially reasonable rates as a condition of their continued participation in helium allocations and auctions.” BLM does not have this assurance because, according to BLM officials, they (1) have not obtained all relevant information about refiners’ efforts to satisfy the tolling provision, (2) have not defined or identified criteria for a commercially reasonable rate, (3) have not determined what to do if a refiner does not satisfy the tolling provision, and (4) believe the agency’s approach to ensuring that refiners satisfy the tolling provision is consistent with current market conditions.

BLM Has Not Obtained All Relevant Information about Refiners’ Efforts to Satisfy the Tolling Provision

The act’s tolling provision requires that refiners make excess refining capacity available to certain nonrefiners at commercially reasonable rates. The act, however, does not define what it means to make excess capacity available or the term “commercially reasonable rates.” BLM officials told us that they consider signed tolling agreements to be evidence of refiners’ satisfying the tolling provision. In addition, BLM officials said that refiners’ attempts to negotiate tolling agreements that did not result in signed agreements could also satisfy the 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.

To obtain information about signed agreements, in the July 2014 Federal Register notice, BLM directed refiners to report information about tolling agreements that they entered into with another party 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, some refiners reported that they had signed tolling agreements and reported the volumes of helium to be tolled under those agreements, but 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 less than 15 million cubic feet of helium. In contrast, another refiner reported the rates charged in tolling agreements covering less than 15 million cubic feet. Officials with 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, but BLM may be able to require it by issuing a rule. 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.

To obtain information about refiners’ attempts to negotiate tolling agreements that did not result in signed agreements, in the July 2014 Federal Register notice, BLM said that refiners may also use the tolling report forms to report information about these attempts. According to officials with the Office of the Solicitor, the act does not require refiners to report this information. Therefore, reporting information about refiners’ attempts to negotiate tolling agreements is voluntary. As a result, refiners reported inconsistent information about their attempts to negotiate tolling agreements on their fiscal year 2014 tolling report forms. For example, some refiners reported that they had attempted to negotiate tolling agreements but did not report any details about the volumes or rates offered. Other refiners provided details about volumes or rates or both. The officials with the Office of the Solicitor said BLM also may need to issue a rule to require refiners to report information about attempts to negotiate tolling agreements that do not result in signed agreements. BLM officials said information about negotiations that do not result in tolling agreements would be helpful in determining the extent to which refiners with excess capacity are making it available to nonrefiners.

Nevertheless, BLM officials said that they do not plan to issue a rule to require refiners to report information about signed agreements to toll less than 15 million cubic feet of helium or about attempts to negotiate tolling agreements that do not result in signed agreements. They said they do not plan to issue a rule, in part, because the rulemaking process is time- consuming, and there are only a few years left for BLM to implement the act. BLM officials also said they were concerned that issuing a rule might delay future auctions and sales, pending final issuance of the rule. 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.

BLM Has Not Defined or Identified Criteria for a Commercially Reasonable Rate

BLM officials also have not defined or identified criteria for commercially reasonable rates. The act requires refiners with excess refining capacity to make it available at commercially reasonable rates to certain nonrefiners as a condition of sale or auction of helium to the refiner. However, as we found in our July 2014 testimony, BLM officials told us that they were not planning on defining commercially reasonable rates because it is more appropriate for companies or a court to make that determination. At that time, BLM officials said that they would have a hard time finding that a rate included in a signed tolling agreement between a refiner and nonrefiner is not commercially reasonable since the parties involved agreed to it. As of January 2015, BLM officials said that they do not know how they would evaluate a rate offered by a refiner that did not result in a signed tolling agreement to determine if it was commercially reasonable. Representatives of refiners and nonrefiners told us they generally agreed that BLM should not set a specific rate, but they disagreed over whether BLM should play some role in determining what constitutes a commercially reasonable rate. For example, at least one nonrefiner submitted comments to BLM that the agency should identify guidance for what constitutes a commercially reasonable rate. According to some comments from nonrefiners, BLM’s involvement is necessary to incentivize refiners to toll since, in many instances, nonrefiners and refiners are competitors. BLM officials told us that they are looking for ways to incentivize tolling, but the officials also said it is not clear how or whether they should be involved in setting commercially reasonable rates.

BLM Officials Said They Have Not Identified What to Do if Refiners Do Not Satisfy the Tolling Provision

In addition, BLM officials told us that they are not planning on taking further action with respect to the tolling provision because they have not determined what to do if refiners do not satisfy the provision. According to language in the Senate report accompanying the act, refiners were to “make excess refining capacity available to others at commercially reasonable rates as a condition of their continued participation in helium allocations and auctions.” However, BLM officials said the tolling provision does not specify what BLM should do if a refiner does not make excess capacity available at a commercially reasonable rate. The officials said that they considered suspending a refiner that does not satisfy the tolling provision from participation in future auctions or sales, but doing so risks market disruption. The officials acknowledged, however, that such disruption is currently unlikely because, given the refiners’ significant volumes of privately owned helium stored in the reservoir, a refiner that is restricted from purchasing additional helium in auctions and sales would still be able to have its stored helium delivered.

Nonrefiner representatives have raised concerns about the consequences of BLM’s unwillingness to act if refiners do not satisfy the tolling provision. For example, some representatives of nonrefiners said that this creates a disincentive for the nonrefiners to participate and purchase helium in future auctions, which could lead to less participation in the auctions. Moreover, representatives of nonrefiners noted that they do not have much time left to purchase federal helium with 6 years remaining of helium sales and auctions.

BLM Officials Said Their Approach to Ensuring that Refiners Satisfy the Tolling Provision Is Consistent with Current Market Conditions

BLM officials said they believe that their approach to ensuring that refiners satisfy the tolling provision is consistent with current market conditions because the increased supply in the global market has reduced refiners’ and nonrefiners’ demand to have federal helium delivered from storage and tolled. The officials said that some refiners have reduced their monthly delivery amounts from the pipeline because additional helium supplies have become available from private sources. They said that these refiners are choosing to leave their helium stored in the federal storage reservoir rather than have it delivered since, unlike private sources, BLM’s storage reservoir provides a unique opportunity for storage of helium for delivery at a later date. According to the BLM officials, these market conditions should encourage tolling because refiners have excess refining capacity that could be used for tolling. However, BLM officials said they have not seen an increase in occurrences of tolling since market conditions changed.

As of the end of fiscal year 2014, refiners and nonrefiners had signed tolling agreements that covered only a small portion of the 61 million cubic feet of helium purchased by nonrefiners that needed tolling, according to BLM documents. Some representatives of nonrefiners told us they have signed or were negotiating agreements for tolling in fiscal year 2015 that would cover some additional helium. These nonrefiner representatives also said that some refiners have offered lower tolling rates since the change in market conditions. However, other representatives of nonrefiners told us they have not been successful in negotiating tolling agreements even under the current market conditions. According to BLM officials, most of the nonrefiners’ helium remains untolled because the current market conditions have reduced the nonrefiners’ demand for tolling. Yet, some representatives of nonrefiners told us they remain interested in signing tolling agreements. For example, one representative said a nonrefiner is still pursuing a tolling agreement because having access to its purchased helium offers some protection against changes in global supply and demand. BLM officials told us that they expect refiners and nonrefiners to sign more tolling agreements in fiscal year 2016, given that at least one company is seeking to connect a small refinery to the pipeline. Representatives from this company and some existing refiners told us that they are incentivized by the business opportunities offered by tolling for others and are actively pursuing tolling agreements with nonrefiners.

BLM Faces a Number of Decisions Related to Upcoming Helium Auction, Sale, and New Storage Contracts as It Continues to Implement the Act

As BLM continues to implement the various phases of the act, the agency faces decisions during the spring and summer of 2015 related to the upcoming fiscal year 2016 helium auction, the upcoming fiscal year 2016 helium sale, and the agency’s new storage contracts. First, for the fiscal year 2016 auction, BLM faces decisions on conducting a market survey to inform the minimum auction price, determining the amount of helium to make available for auction, and selecting an auction method. Second, for the fiscal year 2016 sale, BLM faces decisions on determining how to set the sale price and companies’ eligibility to participate. Third, for storing, withdrawing, and delivering helium starting in fiscal year 2016, BLM faces decisions regarding new contracts with refiners and nonrefiners that have purchased federal helium.

BLM Faces Decisions Related to the Upcoming Helium Auction

In creating the agency’s plan for conducting the fiscal year 2016 auction, BLM officials face decisions on how the agency will (1) conduct a market survey that will be used to inform the minimum auction price, (2) determine the amount of helium the agency will make available for auction, and (3) choose a method to conduct the auction, among other things.

BLM Plans to Conduct a Market Survey to Inform the Minimum Auction Price but Has Not Finalized the Scope of the Survey

BLM officials said the agency plans to contract with an independent third party to conduct a survey of helium transactions that will provide the basis for the agency to set the minimum auction price for the fiscal year 2016 auction, but the agency has not decided on the scope of the survey. The act’s price-setting provision calls for BLM to set minimum auction prices using, among other things, if applicable, a price recommendation from a survey of qualifying domestic helium transactions (which we refer to as qualifying transactions). Accordingly, officials with Interior’s Office of the Solicitor told us that BLM is not authorized to consider price recommendations from a survey of nonqualifying transactions when setting prices.

BLM officials told us that if a third party conducted a survey solely of qualifying transactions, it would duplicate information that storage contract holders are already required to report to BLM under the act. Specifically, the act’s disclosure requirement requires contract holders to disclose volumes and prices for qualifying transactions. According to BLM officials, 8 of the 11 current contract holders already disclosed the required information, and the officials plan to require the remaining 3 contract holders to disclose the information by the end of fiscal year 2015. In addition, BLM officials and some representatives of nonrefiners told us that limiting a survey to qualifying transactions may result in a price recommendation that reflects BLM’s crude helium price rather than the broader market.

Nevertheless, an October 2013 helium market pricing report recommended that BLM hire a third party to conduct a survey with a scope broader than just the qualifying transactions to help BLM set a price that is more market based. Specifically, this report recommended that BLM survey a significantly larger number of transactions than the qualifying transactions, including bulk helium transactions conducted by end users that are not storage contract holders and that involve smaller volumes of helium than the minimum volume for qualifying transactions. According to the pricing report and economic principles, a broader survey would provide a better representation of market prices than a survey solely of qualifying transactions.

In determining the scope of the survey, BLM officials are weighing the act’s price-setting provision of surveying qualifying transactions with the pricing report’s recommendation of surveying a larger number of transactions that would reflect a broader market. As of February 2015, BLM officials told us they are considering having a third party conduct a broader survey that is not restricted to qualifying transactions, but they have not identified how, if at all, they would utilize information collected about additional transactions other than qualifying transactions.

BLM Is Determining How Much Helium to Auction

BLM officials told us that they are considering increasing the amount of helium the agency will auction for fiscal year 2016 above the amount set in the act. Under the act’s auction quantities provision, BLM is required to auction 25 percent of the total helium available for sale or auction for fiscal year 2016, a 15 percentage point increase over fiscal year 2015, but the agency can reduce or increase that amount under certain circumstances. For fiscal year 2016, auctioning 25 percent of the available helium would mean auctioning nearly 200 million cubic feet, more than double the volume auctioned for fiscal year 2015. The act authorizes BLM to increase the percentage of helium to be auctioned beyond the amount specified in the act if the Secretary of the Interior determines it is necessary to increase participation in the auction or increase returns to the taxpayer. BLM officials said they are considering such an increase because they believe that auctioning larger volumes of helium will result in increased revenues and increased competition.

In December 2014, BLM compared different possible scenarios— including varying the percentage of helium to be auctioned—to identify different revenue outcomes. However, BLM did not take into account the current market conditions and the willingness of buyers to continue purchasing federal helium as prices increase. Depending on how buyers’ willingness to purchase federal helium is affected by price changes, BLM’s estimates of revenues from certain scenarios may not be realized. According to economic principles, buyers respond to price changes by changing the amount they purchase. For example, even small increases in price could result in a large drop in the quantity purchased and a corresponding decline in revenue. BLM officials told us that they were considering consulting BLM economists to help them select an auction percentage. However, as of February 2015, BLM officials had not obtained market information or predictions of buyer behavior from the economists to inform their decision.

BLM Is Selecting an Auction Method but Has Not Considered Maximizing Revenue

BLM’s fiscal year 2015 auction was a live, in-person auction conducted in Amarillo, Texas, and the agency broadcast the auction in real time over the Internet for public viewing. BLM split the total volume available for auction into 12 lots, auctioned sequentially. As of January 2015, BLM officials said they intend to use the same method for the fiscal year 2016 auction, but the final method will be announced in a Federal Register notice expected in the spring of 2015. The act requires BLM to conduct each auction using a method that maximizes revenue to the federal government. 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 sequential live auction would yield the highest revenues.

BLM officials told us they considered multiple auction methods when choosing the live 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. Also, BLM officials said they were familiar with the live auction method because BLM uses it in other applications, such as in selling oil and gas leases. However, BLM economists told BLM helium program officials and us that there are several academic studies on different auction methods used in the past by Interior. 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 February 2015, however, BLM helium program officials had not evaluated the various methods. Without assessing each method based on revenue generation, BLM does not have assurance that the live auction method will maximize revenue, as required by the act.

BLM Faces Decisions for the Upcoming Helium Sale Regarding the Sale Price and Eligibility of New Companies to Participate

For the upcoming fiscal year 2016 sale, BLM faces decisions about how to set the sale price and determine whether a new company connecting to the pipeline will be eligible to participate in the sale. Regarding setting the sale price, BLM officials said they are considering changing how they calculate the sale price, in part to make the fiscal year 2016 auction more competitive. Specifically, BLM officials said they are evaluating whether to give greater consideration to the fiscal year 2016 average auction price when setting the fiscal year 2016 sale price than they did when setting the fiscal year 2015 sale price. As previously discussed, BLM used the fiscal year 2015 average auction price to account for 10 percent of the fiscal year 2015 sale price. BLM officials said that they believe that increasing the extent to which the auction price influences the sale price should eliminate one advantage that refiners might have over nonrefiners at the auction. The officials said they think refiners might not pay as high a price for helium at the auction if there was less chance they would be paying a lower price for helium at the sale. In December 2014, BLM officials examined the potential effects of changing how they calculate the sale price—in addition to changing the auction percentage, as previously discussed. However, as with its consideration of different auction percentages, BLM did not take into account the current market conditions and the willingness of buyers to continue purchasing federal helium as prices increase when examining the effects of changing its calculation of the sale price. As of January 2015, BLM officials said they had not obtained such information to inform their decision.

Further, BLM faces a decision regarding whether new companies connecting to the pipeline will be eligible to participate in the sale as a refiner. As previously discussed, one company has initiated the process of connecting a new, small refinery to the BLM pipeline. However, BLM officials said it is not clear whether the company meets the act’s definition of a refiner. The act defines a refiner as a person with the ability to take delivery of crude helium from the BLM pipeline and refine the crude helium into pure helium. The act, however, does not define pure helium. Therefore, BLM faces decisions on what constitutes pure helium and whether the company meets that definition. Further, if BLM determines that the new company is a refiner and is eligible to participate in sales reserved for refiners, BLM officials said they will need to identify a new method for determining the amount of helium each refiner will be eligible to purchase in the sales. Currently, BLM allocates the helium it makes available in each sale among the four refiners based on their 2000 refining capacities. With the addition of a new refiner, BLM officials said they are considering alternate methods for future sales.

BLM Faces Decisions Related to New Storage Contracts

BLM officials said they anticipate that new storage contracts, which govern storage, withdrawal, and delivery of helium from the federal storage reservoir, will go into effect on October 1, 2015. The officials said they are considering changing a number of the terms and conditions in the new contracts. For example, BLM officials said they plan to create a new contractual fee structure. BLM officials explained that they calculate fees under the current contract based on the total amount necessary to recover BLM’s costs. However, for the first time, the act requires BLM to impose a fee that “accurately reflects the economic value” of the storage, withdrawal, and transportation (which we refer to as delivery in this report) services provided, and the fee cannot be less than the amount required to reimburse the Secretary of the Interior for the full costs of providing such services. When calculating the economic value of storing helium in the federal reservoir, BLM officials told us they are considering calculating companies’ storage fees based on the volume of helium they keep in storage, in part to encourage companies to withdraw their helium rather than store it.

BLM officials also said that they researched storage fees charged at commercial natural gas storage facilities to help determine the economic value of storing helium. The officials told us that commercial natural gas storage fees are a useful point of comparison for federal helium storage fees because the federal helium reservoir functions similarly to a commercial storage facility. However, according to representatives of nonrefiners and a refiner, because the federal storage reservoir provides a unique opportunity for companies to store their purchased helium until they request its delivery at a later date, the reservoir’s storage capability has economic value in addition to the value associated with commercial natural gas storage facilities. BLM officials said that the fact that the gas stored in the federal reservoir has a higher helium content than other storage facilities is irrelevant when considering storage fees.

BLM officials said they are also considering including new fees in the new contracts, in part to recover costs that are not currently being captured. According to BLM officials, one such fee would allow BLM to recover costs associated with refiners who do not accept delivery of helium after they request it from BLM. Currently, refiners have the option of not accepting delivery of requested helium, which has led BLM to reinject undelivered helium from the pipeline back into the reservoir. BLM officials said they reinjected approximately 46 million cubic feet of helium from May to November 2014, in part, because refiners did not accept delivery of all helium BLM delivered into the pipeline. The officials said they anticipate that reinjection will continue to some extent. This reinjection negatively affects BLM’s ability to maximize withdrawal of helium from the reserve, according to BLM officials. For example, as a result of past and continuing reinjections, BLM technical consultants estimated that the agency will be able to produce roughly 500 million cubic feet less helium from the reservoir than originally anticipated by the end of fiscal year 2021. BLM officials told us that they are continuing to evaluate the new fee structure as part of the negotiations over the new contracts, which they expect will continue into the spring of 2015.

Conclusions

BLM’s implementation of the Helium Stewardship Act of 2013 is a work in progress. BLM has implemented the first phase of the act and taken initial steps to ensure that refiners satisfy the act’s tolling provision. However, additional information about (1) refiners’ signed agreements to toll less than 15 million cubic feet and (2) the attempts refiners have made to negotiate tolling agreements that did not result in signed agreements would provide BLM with better assurance that refiners are satisfying the tolling provision. BLM currently relies on the voluntary reporting of this information, but not all refiners have reported it. Requiring refiners to report this information may necessitate BLM undertaking a lengthy rulemaking, according to officials in Interior’s Office of the Solicitor, but other options may be available for the agency to shorten the rulemaking process if, for example, the conditions for issuing an interim final rule have been satisfied. Without information about signed agreements to toll less than 15 million cubic feet of helium and about refiners’ unsuccessful 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.

BLM is to select a method for conducting the fiscal year 2016 auction, and agency officials said they plan to use the same live auction method the agency used to conduct the fiscal year 2015 auction. The act requires BLM to use an auction method that maximizes revenue. However, the agency did not assess the auction methods it considered based on maximizing revenue. Several academic studies that examined different auction methods used previously by Interior are available for helium program officials to consult to help BLM identify an auction method that maximizes revenue. Without assessing each method based on revenue generation, BLM does not have assurance that the live auction method will maximize revenue, as required by the act.

Recommendations for Executive Action

To provide the agency with better information to support its decisions when implementing the act, we recommend that the Secretary of the Interior direct the Director of BLM to take the following two actions: 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 signed agreements to toll less than 15 million cubic feet of helium and about refiners’ attempts to negotiate tolling agreements that do not result in signed agreements; and assess auction methods based on revenue generation, using available information, and select a method that would maximize revenue for the upcoming helium auction.

Agency Comments and Our Evaluation

We provided a draft of this report for review and comment to the Department of the Interior. In its written comments, reproduced in appendix I, Interior generally agreed with our findings and concurred with our second recommendation to assess auction methods and select the method that would maximize revenue, but the agency did not concur with our first recommendation.

Specifically, Interior did not concur with our first recommendation to issue a rule to require refiners to report certain information about signed tolling agreements and attempts to negotiate tolling agreements. In its written comments, Interior 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 outweigh any immediate benefit and that given the amount of time it is likely to take to promulgate the rule, the federal helium program would likely be nearing its conclusion by the time such a rule is in place.

We do not agree that existing mechanisms are providing BLM with the information it needs to have full assurance that refiners are satisfying the tolling provision. BLM has obtained some of the relevant information from refiners. However, 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—is voluntary, and not all refiners provided this information to BLM. We continue to believe that BLM needs this information to determine the extent to which refiners are satisfying the tolling provision.

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. As described in the report, BLM may have options for shortening the rulemaking process, which could reduce the resources necessary to issue a rule. Even if BLM cannot shorten the rulemaking process by, for example, issuing an interim final rule, BLM will continue implementing the act through fiscal year 2021, and the agency’s administration of the tolling provision could continue to 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 throughout the agency’s implementation of the act.

We are sending copies of this report to the appropriate congressional committees, the Secretary of the Interior, and other interested parties. In addition, this report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, 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 report. GAO staff who made key contributions to the report are listed in appendix II.

Appendix I: Comments from the Department of the Interior

Appendix II: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the individual named above, Jeff Malcolm (Assistant Director), Cheryl Arvidson, Carol Bray, Cheryl M. Harris, Josie H. Ostrander, Leslie Kaas Pollock, Dan Royer, and Jeanette Soares made significant contributions to this report.