Check out this deep-dive interview with Andrew Davidson. Thanks to the Canadian Association of Oilwell Drilling Contractors for the great content! Follow Andy on twitter here.
CAODC: Welcome back to the General Well Servicing CAODC podcast. With me now is Mr. Andrew Davidson, President, CEO, and Chairman of the board at Royal Helium Limited. Mr. Davidson is a resource development professional with more than a decade of continued experience in moving quality projects from greenfield exploration to production across multiple commodity types. As founder of Royal Helium, Mr. Davidson is one of the most experienced helium exploration executives in Canada. Thank you very much for joining us, Andrew.
Andrew Davidson: Thanks for your interest and thanks for the time.
CAODC: Last week we were excited to see that one of our member companies, Savannah Drilling, was working on a helium exploration well. It's another in a long list of expanding commodities that drilling companies are getting involved with, so we thought our listeners would be interested in learning a little bit about the world of helium as a commodity. Are you originally from Saskatchewan or how did you get started working on helium here?
Andrew Davidson: I am. I was raised in Saskatchewan and like most Saskatchewan people, I took a 10-year sabbatical to Calgary. I finished my schooling at U of C there and then worked at a local accounting firm, got my chartered account designation, started a family, and then moved back home. I've been here since 2007 and been in the business of developing natural resources since 2010. We focus on a lot of things, but oil and gas were one of the leading commodities that we've been after here during that time. Since 2016 and 2017, I have made a heavy shift towards helium development. It's been a bit of a whirlwind as helium is a very misunderstood resource. People generally associate it with things like balloons and that's about it. That's fair because balloons do constitute part of the market, but it is a small and shrinking part of the market.
CAODC: From a drilling perspective, what types of formations typically hold helium in Saskatchewan?
Andrew Davidson: Helium is generally found right above the Precambrian basement, n the Deadwood Sands formation, and the Winnipeg sands. That's what we target. Savannah has been phenomenal to partner with on drilling these three wells. We're halfway through our final well in this program as we speak. It's about 2,600 meters down in Saskatchewan to get to the Precambrian basement. We are drilling straight, vertical wells. We do use directional tools to keep them straight at that depth because it's a long way to travel with a lot of potential vectoring off. We have a great group of services that are involved in this program, but the drilling is relatively straightforward. Even on the completion side, we don't anticipate any need for any stimulation. No fracking. It's generally just perf through the casing and produce the gas up.
CAODC: And how do you extract it? How do you store it? How do you transport it?
Andrew Davidson: There are lots of questions I'm happy to get into all of it. Producing it is functionally the same as producing natural gas. The gas at depth is under a high degree of pressure and it comes up on its own. Historically, most helium wells produced in Saskatchewan are choked back to keep the flow rate under control because they do generally flow very fast when you're producing from +2,500 meters down. Once at the surface, it goes through a well and there are a bunch of different options for what you can do. What we're going to do is run it through a series of membranes, which is it's a production or processing facility about the size of a SEACAN. You pipe the gas into that and it separates out larger molecules. With helium being the smallest molecule, it is going to be what's left at the end of that membrane processing, so you have a refined or upgraded helium product out of the raw gas stream that you feed through. In Saskatchewan, we're a bit unique in that the gas that comes up with helium is principally nitrogen as opposed to methane, which provides some pretty big advantages on the processing side. Running nitrogen through these membrane facilities is a very standard and straightforward practice. It's a bit more difficult when you're dealing with natural gas as that involves some cooling and different pressures. We don't have to deal with that to any great degree, which is nice. Now, once have passed the membrane processing the helium is stored in pressurized tanks and basically hauled away. The way that the helium market is a structure now is such that every MCF of helium that's produced is sold virtually instantly. There's such a demand for it and such an under-supply that what happens in Saskatchewan, where helium has been produced since the 1960s, is that it gets produced and loaded into the pressurized vessels and driven away into the US. From there, it's generally sold as either a gas or a liquid. There is a liquefaction plant in Wyoming, which is the closest one to Saskatchewan. After it gets liquefied, it can be sold around the world. Helium, as a liquid, can travel anywhere. As a gas, it has a relatively short runway because it will escape just about anything.
CAODC: But you are transporting it as gas?
Andrew Davidson: Yes, we'll be transporting it as a gas until such time as we have sufficient reserves to justify building a liquefaction facility in Saskatchewan. We're not there yet but we're building towards it. Certainly, it's on our project development timeline. Initially, it's going to be gas.
CAODC: And it's transported by trucks?
Andrew Davidson: Yes. There are purpose-built helium trailers that have an array of nine tubes on them, which are roughly the shape of a cigar tube. There are nine of them on a trailer with three sets of three. They get filled, pressurized, sealed, and are trucked away. They are purpose-built. What tends to happen is they get driven to an intermediate point, somewhere in Montana say, where the transport company drops it off, then picks up an empty one, and hauls it right back. There's a constant flow of trucking back and forth. That's how it's going to be for us.
CAODC: And the market for this -- I was trying to do a little bit of research on it and it was difficult. Helium is not quite as structured as other commodities. Can you tell us a bit of about that?
Andrew Davidson: The helium market is an interesting one. It's a very, very large market and it is extremely structured but what it lacks is a quoted market price. There's no spot price for helium. It trades all on long-term contracts, generally with very large companies. Think of the major industrial gas companies like Air Products International, Linde, or Praxair -- these are the primary purchasers of helium from producers. They're also the largest helium seller in the world. It's basically an oligopoly of four or five companies. I use oligopoly, not in a negative sense, it's just that they dominate the sales side and the overwhelming majority of helium that's produced in North America is sold immediately to one of those companies. Then they will take it, upgrade it, process it, and sell it to end-users. All the pricing built into the helium market is long-term contract pricing with three to five-year contract terms. There are price escalators for inflation and whatnot, but modeling a helium project from an economic standpoint presents a very interesting challenge because there's no visible market price. We were the first public helium company in North America, so price transparency was an issue from the beginning for us as we have to report financial results. In contrast, it will be easy to figure out what the market rate for helium is according to our filings over the long-term and that's going to be an interesting development for the industry. Certainly, something that it's not used to! There are other public companies who sell helium. Exxon, for example, has helium associated with its natural gas projects but it's such a small component that it's not reported separately in their financial statements. Backing out the helium price Exxon is getting is virtually impossible. With us as a purpose-built helium company, it'll be clear.
CAODC: When the helium is produced, is it more as an aside from other extraction processes?
Andrew Davidson: That's right, John. Globally, it is produced as a byproduct of natural gas. Let's back up a little bit on the basics to make that clear. Helium is formed from the natural decay of uranium and thorium. That's how helium exists -- the breakdown of uranium and thorium. When you look to places that have high uranium content in ground rocks, Saskatchewan comes to the top of the list. Places like Wyoming, Utah, Russia are all places that have helium fields where it's produced with natural gas, which allows for the production-grade of helium to be exceptionally low. A gas stream in Qatar or Russia may have a gas stream that contains 0.04% helium, but it's harvested off at major gathering points in Seoul and that's how it's done everywhere in the world except for Saskatchewan. Saskatchewan has a unique geological formation that traps helium below hydrocarbon zones down in the Deadwood and that's how we end up producing it as a primary gas here with nitrogen as opposed to methane. There is helium associated with natural gas production, but that's not what we're targeting. We don't own the oil and gas rights. Our wells are helium exclusively, which is the first time it's been done in North America on a public company. We are excited to pave the way. It's been an interesting challenge explaining the helium market to the investment community. There's a lot of questions and a lot of head-scratching about what it's used for and why people should care about it, but I explain it this way. Everyone uses helium every day, you just don't know it. If you have a mobile phone or an iPhone, then helium was used in the manufacturing of that device. Anyone who uses a computer -- the microchip consumes helium in the manufacturing process. The biggest single industry segment that uses helium is the healthcare industry, where it's used as a superconductor and industrial coolant in MRI machines. You cannot have an MRI without helium. And there's no replacement product for it in any of these uses, so it is unique. It's a completely inert element in that it will not react or bind with any other element on the periodic table. It has the lowest boiling point of any element on earth. It remains a liquid at absolute zero. The more interesting markets to me and what really sort of piqued my interest when I looked into this back in 2016-17 was these futuristic industries, like high-tech manufacturing, that were growing at an immense rate and consuming helium at a growing rate. The other one is rocketry. The largest single customer in the US for helium is NASA. Very few people know and why would you? Every shuttle launch, every rocket launch -- everything -- consumes helium in that process.
CAODC: What kind of volumes are used there? It must be quite a bit.
Andrew Davidson: You see the fuel tanks that are on these things, right? As the fuel is expended, helium is injected as a counterbalance gas because it's inert. It's injected there to fill the void left by the rocket fuel because helium is inert and there's no risk of reaction or combustion. That's where the value really comes in on the rocketry side. As you see increased launches from NASA, SpaceX, and China, these things are going through helium at a rate faster than we've ever seen. It's really a phenomenally interesting industry that covers so many different areas. We haven't talked about the ones that everyone knows about like lifting gas with balloons or blimps or whatever. And then welding and deep-sea diving. It's used in leak detection, as well. It's used in every pipeline to check for leaks. It's phenomenally interesting. And because it encompasses so many different segments of the economy, the risk on the demand side is exceptionally low. Demand is continuing to grow because there are more and more industries that use it and there is no replacement product. Nor is there a way to manufacture it in the lab in economic quantities! It's a non-renewable resource that is growing in demand and that's what's really led us to the push into exploration for it here in the last five years or so. From an economic or a supply standpoint, there was a major shock that hit the helium market in 2018. The largest supplier, globally, was the US Strategic Helium Reserve, held by the Bureau of Land Management in Amarillo, Texas. They have an enormous underground storage cavern filled with helium, which they sold and recharged with production over decades as part of the federal government.
CAODC: Was it the Federal government commissioning that production or the state level?
Andrew Davidson: Well, nobody is doing it anymore. They ceased that production entirely and sales out of that caverns started to get phased out in 2013. They ended completely in 2018, which was essentially a third of global supply yanked from the market. It sent a shockwave to the price, where it went from 90 to 100 to 150 to 300 and has grown since then because there has been no replacement field found, which gets back to the unique geological reasons that helium exists in the first place. It's found in natural gas wells, but only conventional natural gas wells. It's not found in shale gas. As there's been a shift towards shale gas production and away from conventional, that's hurt the supply side even further. And that's how we end up in this unique situation where demand is rising, supply is falling, and the price is spiking. It makes for a good time to own a decent helium land package.
CAODC: You guys are in Saskatchewan -- how does the rest of the country stack up? Is Saskatchewan the largest potential play for helium or are other areas relevant?
Andrew Davidson: We certainly think it's the largest potential play for helium. It's where virtually all helium production in Canada comes from now. There are good helium fields in Alberta, as well. Again, the helium in Alberta is more associated with natural gas but it is certainly present there.
CAODC: And the uranium is one of the reasons that Saskatchewan is unique?
Andrew Davidson: Yes. Uranium and thorium are the only reason it exists, period. If that's not there then you do not have helium in your well. It's really only certain segments of oil and gas producing regions of the world that have helium as a viable byproduct from natural gas. Areas like Wyoming, Utah, Alberta, or Russia -- these are places that have what would be deemed an economic quantity of helium. But Saskatchewan is unique: it does not have the highest concentrations in the world, but it does have exceptionally high flow rates and an exceptional amount of gas. It has been written that Saskatchewan has the fifth largest helium reserves in the world. I'm not sure that's been proven in any way shape or form. I suppose we'll have a part of proving that, but it's a great industry to be involved with. Especially in times like this when we've seen the pain that the oil and gas sector has been going through for no good reason over the last number of years. This helium opportunity provides an outlet because all the services, all the drilling, and the completions are exactly the same as you would use in an oil and gas well. To the extent that we can offer a new line of business and a new line of drilling that uses that skill set, it's a phenomenal opportunity for industry and one of the reasons that the government of Saskatchewan has been so so heavily behind developing this industry. It's such an important addition or bolt-on to our existing oil and gas space. It is something that is less subject to global geopolitical risk in terms of pricing. It's not subject to any environmental uproar because there's nothing negative to the environment in the gas that we produce with nitrogen and helium, neither of which have a negative impact on anything. If green projects matter to you, then this would qualify as one. It was great to see that we could help the industry here. There were certainly a lot of services available when we went to quote our drill program and had the ability to partner with some of the best in the industry, like Savannah.
CAODC: Our members are really extremely happy that there are other opportunities for drilling wells! What's next for you guys? Have you got a program in place or what are the next steps for Royal?
Andrew Davidson: We're just winding up this drill program that we started back in January. We were doing three wells and we've got about 500 meters to go on our last one. This is where the interesting drilling comes now. It'll be another week or so before we get down where we have to go through our completion program, test all these wells, and test the helium concentrations to ensure that we have an economic quantity there. Then we'll be looking to put those three on production as soon as we can. From there, we intend to drill out both infill drilling within our CLIMAX land package we're drilling now and then move to other parts of the province where we control about a million acres of helium rights in Saskatchewan, split evenly between the southwest and the southeast. We're going to be quite active on the drilling side to prove up reserves over the next 12-18-24 months. If we are doing our job right, I really don't see us slowing down anytime soon. We have to get over this initial hurdle of proving that helium is in fact here in economic quantity from these three wells. Once it is, the risk is pulled off and it's now into development time. A lot of wells can be drilled into a million acres!
CAODC: From a completion standpoint, what's a service rig doing on a helium well?
Andrew Davidson: Same thing it'd be doing on natural gas well! We've identified potential productive zones varying depths off of wireline logs through the drilling process. We'll go back in and we'll start testing them from the bottom up. Basically, you run in and shoot your perforations through the casing then run gas tests on fluctuating intervals. Then do a gas collection at the top. The major part of it is to put the gas stream into a contained cylinder and send it off for analysis to see what the constituents of the gas are. From there, you shift over to production. It's really the same process as natural gas. You check flow rate, porosity, permeability, recharge rates, and all these things. We've partnered with Sproule to design that testing protocol. They're involved with us actively now. We announced that this morning, Sproule is a great partner to have. Certainly, there are not many better than that in the oil and gas industry to help you design a testing program and come up with a 51-101 report on reserves. That's where we go over the next couple of months anyway.
CAODC: Great. Exciting times for sure! Thank you very much for joining us, we appreciate it. Where can people find out more information about Royal?
Andrew Davidson: Our website is www.royalheliumltd.com everything's on there, including my contact information. Anyone who has any questions or any services they could offer or anything along those lines can reach out to me at any time. My email's on there and the phone number that's on there is my cell phone number. I'm always available and love talking about helium. I just enjoy spreading the word about this industry, which could be a great boon to Canada and Western Canada specifically as we're inventing something new. This industry's been around for a while, but not on a grand scale. It's going to be an interesting couple of years in the future here for helium in general and Royal Helium specifically.
CAODC: That's Andrew Davidson, President, CEO, and Chairman of the Board at Royal Helium Limited. Thanks again!