The helium market has unique supply, demand, and storage dynamics, leading to almost a continual increase in prices. Over the last decade, helium demand has flatlined (given lack of supply), against a backdrop of 30% global GDP growth. Rather than GDP-linked helium demand growth, as with most commodities, price has had to go up each year instead. Over the last 20 years, helium pricing has increased at a CAGR of 8% reaching ~US$375/mcf in late 2022.
Over the last five years however helium pricing has been more akin to 15% CAGR –this is around 100x current US nat gas pricing. Even, if we assume a lower than trend 5% CAGR in contract helium prices to 2030, prices would reach US$550/mcf and at 10% CAGR they would be >$750/mcf and if you take 15% CAGR this would be US$1,150/mcf which would be much more in line with the current spot pricing indications – to put all this into perspective in November 2022 NASA signed five year contract for 1.2bcf of helium at an implied price of US$920/mcf.
Prior to 2005, helium prices were $50-100/mcf as there was plenty of supply with the buffer of the US strategic reserve, which now only acts as a source of supply, albeit a depleting one. The wildcard to the downside is new Russian supply but there's not going to be too many people betting on that one, especially given the track record and geopolitical situation!
Another interesting analogy would be with other niche energy transition commodities such as lithium and cobalt. These commodities have seen exponential price growth on the back of significant supply squeezes – similar to what is being seen in the helium space. What was interesting is that many industry analysts viewed these increases as unsustainable, however today these commodity prices remain high. In our view helium is in a similar situation with a squeezed supply and demand continuing to grow with new primary helium discoveries required to meet the expected increase in annual demand from 6 Bcf to 8.5 Bcf by 2030.
Global exploration picking up
Despite the high helium price and plethora of helium exploration companies that have emerged in North America, we are yet to see a publicly listed company that is producing commercially viable volumes of helium. North American helium growth has disappointed, which has created the opportunity from an investor perspective for some international helium explorers. Strong helium pricing is encouraging global exploration, as well as being closer to the higher growth end-user markets in Asia. In 2023 we see the most significant new helium production and highest impact exploration coming from Africa: Renergen has recently started-up its helium production facility and Helium One is drilling a large primary helium prospect in Tanzania later this year, with a pre-drill volume that could significantly contribute towards the supply of global helium demand.
We see current average global import pricing at around US$375/mcf, which will be largely based on long-term contracts but there will be various vintages of agreements and some higher priced spot volumes in the mix. However, US spot pricing for helium has been between US$1,000 and $2,500/mcf in 2022 given extreme shortages, which shows how much offtakers are willing to pay for supply.
To put current pricing in context, we have modelled out a potential development of standalone helium (rather than associated with natural gas) in Tanzania and on our base case estimates we believe that a helium price of only US$100/mcf is required to earn a double-digit IRR. This is based on expectations of relatively high percentage of helium in the gas produced, so other projects may have higher break-evens. This shows the very strong return and payback potential from a helium development, even at well below current pricing.
We think that certain suppliers will be able to garner a premium for their product related to security of supply and producing “cleaner” helium. For example, suppliers outside of Qatar and Russia may attract a premium as they provide a diversification of supply and eliminate some of the geopolitical risk for buyers. Furthermore, suppliers that are producing helium that is not associated with natural gas production can sell this helium as “low-carbon” helium that has not been associated or be viewed as a by-product of hydrocarbon production.
Lack of storage means demand is driven by supply
Unlike other commodities, there is virtually no available storage for helium and it is a rare gas that can only be found in certain locations and even when encountered can take years to develop and produce. Over the last decade, helium demand has been flat, whilst global GDP growth has been ~30%. This has meant that for the last decade demand has been dictated by supply and as a result the only way to keep the market balanced was through rising prices to destroy demand. Instead of demand going up each year linked to GDP growth, as with other commodities, price has had to go up each year instead.
The market is extremely susceptible to supply disruption (e.g. Qatar embargo in 2017) as global supply is very concentrated (La Barge and Qatar alone are two thirds of the global supply), which has led to price spikes in the past as there is little in the way of spare storage or the ability to ramp production. It has been estimated that around 10% of global helium demand was lost in 2011-13 due to shortages and pricing doubling. The dramatic fall in the production capacity and the total reserves in the BLM storage should ensure a structurally higher price for helium in the future.
Given the inability to substitute helium in many applications, we see demand as relatively price inelastic. With prices already significantly higher than at the beginning of the decade, most of the price elastic demand has likely already been eliminated. In fact, if there are periods of lower pricing there is likely to be latent, more price-sensitive demand that could return to the market and soften the blow to prices as a result. Many helium users tend to be price insensitive as there are no substitutes for helium in many cases, making them price-takers. Buyers that cannot substitute helium would be willing to sign long-term contracts with a diversified set of suppliers, to ensure security of supply, even if this entails higher pricing, as the cost of not having helium could be multiple times higher.
A niche market in need of more transparent data
The helium industry is a niche market with opaque data and one that suffers from a lack of detailed analysis, given the absence of any relevant spot market and no published helium price benchmarks. Most of the large helium producers provide little or no data on pricing so market pricing for helium is difficult to ascertain as it is not a traded commodity and pricing is normally based on long-term, confidential contracts.
The Helium Market Analysis service is we believe the most comprehensive analysis into helium pricing in the global market. Information is gleaned from various sources, for example comments from helium users, other market participants, official customs data and industry conferences. New helium consultancy companies such as Edelgas are helping to democratise the helium market with its goal: "to bring transparency, stability and confidence to project owners and end-users in the sourcing, supply, and pricing of helium and other rare gases."
How to play the Global Helium Market
Below are a couple of stocks which in our view offer some excitement and opportunity to the investor who wants exposure to the helium market outside of North America and the potential that it offers. As we mentioned above we see the most significant new helium production and highest impact exploration coming from Africa:
Renergen
Renergen is a South Africa domiciled and listed company with an additional listing in Australia. Its main asset is the Virginia Gas Project, which has >400bcf (~70mmboe) of 2P natural gas reserves and 14bcf of 2P helium reserves (equal to >2 years of entire global helium demand). Renergen has a first mover advantage in bringing helium to market in Southern Africa.
Renergen’s proposed US listing is planned for Q2/Q3’23 and it has submitted a draft registration statement to the SEC. A US listing should help Renergen access much deeper liquidity in North America, especially as its primary customers and lender are US based. It will be the first helium producer to be listed on NASDAQ making it a unique opportunity for investors. There are several helium focused companies listed in North America, so investors should be more familiar with the investment case for helium and also we see Renergen as being more advanced than many of the North American peer group. There has been a pick-up in capital markets with a strong demand for energy transition focused companies in the US, which should also be positive.
Helium One
Helium One’s assets are in Tanzania and has what could be a very exciting 2023 planned. Having completed its maiden exploration programme in 2022, the Company plans to go back to the Tai prospect on its Rukwa project, where multiple prospective intervals were discovered previously. Helium One is currently in the process of gaining a rig, having been gazumped (to use a housing term) on a rig it believed to have gained, with drilling expected to commence as soon as the rig has been moved to site.
Why is this so exciting? Helium One’s focus is on discovery – the project has been substantially de-risked through the first drilling programme and the new programme is going back to the Tai prospect driven by the very significant data set that the Company has from the work carried out during the first exploration programme. In addition to this the Company has a highly experienced team, is well funded with more than sufficient cash to deliver this programme and a discovery made by Helium One could be a game changer for the industry unlocking an entire helium province.