funding

Lets hope we have more luck!

Origin pulls plug on financial contribution to Geodynamics' Habanero 4 well drilling in SA

Valerina Changarathil

August 10, 201210:00PM


A BUDGET blowout at a drilling well has cost Cooper Basin-focused geothermal explorer Geodynamics the financial support from venture partner Origin Energy.

Geodynamics has been trying to prove its concept of power generation from hot rocks for close to a decade now, entering into a joint venture with Origin in 2007 and suffering a major setback in 2009 due to a well blowout.

Its ongoing Habanero 4 well is the first major step in an appraisal program designed to develop a commercial-scale energy project at the site within the next two years.

However the total estimated cost of drilling the well and associated stimulation and open flow test activities has risen to $50 million - up by $1.5 million on the maximum agreed expenditure of $48.5 million with Origin.

Delays due to the complex cementing operation involved have led to higher costs and it is now expected to be completed by the end of this month.

Origin pulled the plug on its contribution because the well did not achieve interim cost and technical milestones previously agreed to by both project partners

"Origin will continue to monitor the drilling program and reserves the right to resume paying its full contribution to the well cost and return to full participation at any stage," an Origin spokesperson said.

Geodynamics will be responsible for ongoing risk and costs of the well, Geodynamics chief executive Geoff Ward said.

Mr Ward said the incremental cost to Geodynamics is about $2.8 million.

"While the cost overrun is regrettable, I am very pleased with the excellent safety performance during a period of intense operational activity, the overall quality of the well that we have achieved so far and the efforts to control costs as delays have been experienced."

"Geodynamics remains well funded to complete the well and is able to absorb the incremental cost of Origin's decision to cease participation," he said.

Origin was Geodynamics' largest shareholder in 2007 with 10 per cent equity; it held 4.52 per cent equity at the end of June 30, but says it continues to investigate geothermal opportunities in Australia and overseas.

Since the partnership agreement was signed in 2007, Origin has contributed significantly more than the $150 million that was originally committed to. It announced a $205 million impairment charge ($154 million after tax) in respect to its investments in Geodynamics in its half year results to 31 December 2010.

Morningstar Equities senior resource analyst Gareth James said the latest developments justified the firm's "avoid" recommendation on Geodynamics for the past two years.

"Their track record is not good and their outlook doesn't look good either. Their well problems are pretty disappointing given that they have had a decade to get it right," Mr James said.

Geodynamics shareholders have faced consistent dilution with shares on issue increasing 40 per cent in the past two and half years alone, he said.

Australia's three flagship geothermal projects by Geodynamics, Petratherm and Panax are located in South Australia, but the lack of substantial funding commitment from the Federal Government, delays and cost blowouts have left most investors and joint venture partners scared.

Panax is targeting conventional geothermal resources, that is hot sedimentary aquifers, and has made it clear it won't commit any of its own funding to progress its Limestone Coast project. It is concentrating on volcanic "geothermal hotspot" Indonesia.

Geodynamics and Petratherm are focused on unconventional extraction of heat from hot rocks using enhanced geothermal systems (EGS) technology.

Petratherm has drilled a deep well at its Paralana project north of the Flinders Ranges and completed a successful fracture, but lost one of its joint venture partners, TRUenergy, last year. Beach Energy remains a JV partner and operator of the project.