geothermal

Just another post for debate here.

Cheers, Tawnyport


"Why Invest In Geothermal?

Geothermal power is a Zero-Emission, cost-competitive base-load power solution ideal for Australia, where our abundance of coal is overshadowed by an understanding of it’s impacts. It is estimated Australia will need 50% more electricity by 2030. Geothermal will fill that gap.

Geothermal power is not a new concept, nor has it proven difficult to develop. Globally, over 10 000MW is generated by geothermal power stations. Australia is uniquely positioned to surpass this, with the hottest non-volcanic rocks in the world.


The concept of geothermal energy production is straight forward. An injection well is drilled into High Heat Producing (HHP) granite, which is abundant in Australia. More wells are drilled surrounding the injection well, called production wells. Water is injected into the injection well, flowing through natural or stimulated cracks and joints in the granite, absorbing a portion of the heat encountered. The highly pressurised superheated water flows to the production well, with the overpressure bringing it to the surface. At the surface, it is passed through a heat exchanger, and the working fluid vapour is used to drive a turbine and create electricity. The depleted geothermal fluid is then sent back to the injection well, and the cycle continues.

There are, however, many variables.

Perhaps the most important variable is temperature. The relationship of temperature to production capacity is not linear. Increases in temperature bring exponential increases in production capacity.

There are five main geothermal exploration companies - GHT, GRK, TEY, PTR and GDY. GHT is currently drilling shallow holes to establish a temperature gradient. PTR have established a temperature gradient, and GRK and TEY have used existing drill holes to estimate gradients.GDY, at the Cooper Basin project, have by far the highest and most representative verified measurements, with a temperature of 250*C at 4421m. This eclipses both the measured and final targets of every other listed stock, increasing the mine life and production capacity. In this respect, GDY have access to a far larger resource (estimates of the Cooper Basin Project put energy contained at 50 BILLION barrels oil equivalent).

With respect to contained energy, GDY leads the market.

Another critical factor is reservoir size (the volume of fluid contained in the cracks). There is no benefit in having high temperatures if there is not enough surface for heat exchange. During a recent round of drilling, GDY established the largest Hot Fractured Rock (HFR) heat exchange reservoir in the world, allowing the massive heat resource to be more readily extracted. This required artificial stimulation by injecting over-pressurised water (at 9500psi) into the rocks, fracturing them further. Being the only company to have drilled to final depth, GDY have the only established reservoir in Australia..

With respect to establishing a reservoir, GDY leads the market..

The geothermal market, as part of the wider energy market, will be subject to the old saying ‘location, location, location’. With this in mind, GRK selected tenements in close proximity to BHP’s Olympic Dam projects. This puts it as one of the best placed companies to service the site’s projected power consumption. Final targets speak of a 400MW plant, which would see GRK with a market cap of around $300 million weighted purely on capacity, not potential. PTR is another ideally placed company, situated to potentially supply power to the Beverley Uranium project around 2009-10. GHT is located near existing infrastructure also with their Frome and Crower projects.
GDY is at a distinct disadvantage, being 500km from the grid, although the total cost of disadvantage is estimated to be in the region of 0.5 - 1c/KWh.

With respect to position, GRK and PTR lead the market.

Establishing a resource is one thing, developing it is another, and is where much of the real and perceived risk lies.

So far, the only completed wells have been drilled by GDY. HAB1 and HAB2 demonstrated a high flow of 20kg/second even though the well had partially failed due to a dropped plug. Currently, GDY are also the only company with the capacity to drill further wells, having recently finalized the purchase of a Lightning Rig for $32 million and a crew to operate it. This will allow the company to drill the injection and production wells required when they develop their first 300MW plant (37 wells are planned ). Previous drilling through solid granite at +250*C and massive pressure caused the rig and well to fail, and documented the need for proper equipment. The rig GDY have acquired is the most advanced land-based rig ever bought into Australia, and will allow them to scale up from a 300MW plant, to the intended target which may be higher than 10000MW. This will provide a massive first-mover advantage to GDY, and the completion of milestones such as establishing a circuit between HAB1 and the proposed HAB3, and construction of the $20 million demonstration plant will attract the attention of institutional investors wishing to manage risk whilst cashing in on a geothermal boom. The rig itself will be conventional top-drive using tricone bits.

PTR have proposed the selection of a rig and casing design, but lead times and sourcing delays make any time line proposed unreliable. Also, interestingly, PTR will develop their reservoir in the overlying sediments, instead of in the granite itself. This may reduce drilling risk, but it is debatable how stable the fractures in a sedimentary rock will be (susceptible to chemical/mechanical erosion, etc.) GHT are currently drilling 500m holes, with the intention of extrapolating the data to calculate heat gradients. GRK currently have no access to deep drilling equipment, but have some (reliable?) data to extrapolate.

With respect to development, GDY has a very large lead, with second-in-line PTR enjoying a large lead over GRK and GHT.

Once the wells are dug, and the circuit is established, the heat must be converted to electricity. The common approach will be via a binary plant utilizing the Rankine Cycle. This cycle was established in the 1970s, and is common today. GDY will be using a different technique, the Kalina Cycle. Proven to be 25-30% more efficient at extracting heat energy than the Rankine cycle, the Kalina Cycle is licensed exclusively to the wholly-owned GDY subsidiary - Geodynamics Power Systems (GDYPS). GDYPS are currently in merger talks with a consortium of European geothermal investors and operators.

With respect to efficiency, GDY strongly lead the market (hottest rocks + largest HFR exchanger + most efficient cycle).

Individually, each company seems to by developing a different niche.

PTR is going for a low risk/medium return strategy, drilling cooler, softer targets and developing them close to market, with support and funding from partner Beach Petroleum. Management are widely respected, and seem investor-oriented.

GRK, with highly experienced management, will be drilling high quality/ high development risk targets, with many holders speculating that BHP will take a position in the project. The small market cap, and low-premium options could yield high returns, but have the highest risk attached. The recent run on this stock has been incredible, with frenzied buying pushing it near to all-time highs. GRK are unfinanced, but judging by recent investor sentiment, this would not be difficult for them to address. GRKOA represent great leverage to an upcoming rerating of the geothermal sector, and if BHP ever took a stake, returns will be more than satisfactory.

GHT have provided excellent returns in anticipation of results from their close-to-market projects, but the 66% of shares held in escrow by parent company Havilah resources are due to be released, and will see the market cap inflate by up to 66%. Positive results from current drilling may already be priced in.

TEY have not produced any interesting results, but are worth keeping an eye on if their SP consolidates downwards significantly (better value elsewhere, basically). Proposed targets are extrapolated from unrepresentative drill depths, and have the potential to disappoint.

GDY have the hottest, and largest measured HFR geothermal resource in the world (outside of volcanic regions). They have the largest established reservoir, the most efficient production cycle, and the most advanced project in Australia. They are the only company with the capacity to conduct further deep drilling, and with the best rig in Australia, the wells they dig will be wide enough to double a commercial wells after proof-of-concept. Management is experienced, focused, and ready to deliver the first commercial geothermal power station in Australia. They also have the largest market cap - at just over $246 million. Despite the valuation, GDY still offers the highest return for the risk you buy. Over the coming months, just as interest is blossoming, GDY will be the only company producing results. They will be the only company drilling production wells, and before the end of the year will have completed their demonstration plant. Other stocks may rerate higher during this time, but GDY will have the only bankable results, and institutional investors will use result-driven GDY as a trading platform, not speculative outfits with just a dream and a glint in their eyes. Completion of HAB3, establishment of a circuit, and initial production will be the most significant announcements in the industry, and will see significant SP increases. Risk-weighted, the leverage on GDYO is the most attractive in the entire sector. Assuming there are no major delays (which is a real risk, and has happened before) GDYO will yield massive returns.

Geothermal energy is currently estimated to cost in the region of $45/MWh, significantly cheaper than the closest low-emission competitor - nuclear, at $50/MWh.

Nowhere in the world has the geothermal capacity that Australia does. Our rocks are the hottest. Our government is waking up. Each state is implementing renewables targets, and the funds targeted towards the geothermal industry just keep increasing. Media coverage is increasing rapidly. We are approaching an inevitable energy shift, and the massive resource that is geothermal is about to be released, and utilized. The wider public will see the potential here very soon, and the rush will begin.

Enjoy! It is such a fascinating industry, both economically and scientifically. It has the potential to capture the market’s imagination…."