2008 promises to be a make-or-break year for the geothermal sector with industry leader, Geodynamics having conducted flow tests on its Habanero-3 well near Innamincka, South Australia.

The company's report on the results is positive with flow testing indicating there is a hydraulic link between its Habanero-1 and -3 wells.

The two wells are sustaining circulation production of 20kg of 212C water per second at a flowing pressure of 4000psi through a 14mm fixed choke, according to Geodynamics.

Geodynamics will now move forward towards its goal of developing a pilot 1MW power station that it hopes will be operational before year-end.

Hot rock geothermal energy is produced using heat extracted from deeply buried hot granites by circulating waters through an engineered, artificial reservoir or underground heat exchanger.

But unlike conventional geothermal plants in countries such as New Zealand and Iceland that use shallower geothermal fluids in volcanically active areas, the hot rock energy source proposed by the Australian geothermal sector has yet to be fully proven.

Geodynamics' success in achieving a circulation between Habanero-3 and Habanero-1 and verifying its ‘proof of concept' should achieve a significant de-risking of the technology from both the market and government perspectives.

While the company's planned power plant should enable Geodynamics to use geothermal energy to power the company's field operations, including workers' accommodation, its true significance will be in its status as the first ‘hot rock' geothermal power production.

Potential for increased Federal Government support

In recognising the strong public support for preventative measures on climate change, the new Rudd Federal Government has set a 20% Renewable Energy Target as an election promise.

This was to ensure that the equivalent of at least 20% of Australia's electricity supply - about 60,000 gigawatt hours - is generated from renewable sources by 2020.

Later, in ratifying the Kyoto Protocol back in December 2007, Prime Minister Kevin Rudd was more specific, stating that his Government was setting a target to reduce emissions by 60% on 2000 levels by 2050, and would establish a national emissions trading scheme by 2010 along with the 20% target for renewable energy by 2020.

These targets, along with a number of grants including the $500m Renewable Energy Fund, are designed to drive the energy sector towards increasing the renewable component of Australia's power requirements.

While the new Government is in its infancy, its energy policies appear to be having an effect, with Macquarie Bank and Epuron announcing a $2 billion proposal to build a 400-500 turbine wind farm at Silverton, near Broken Hill, New South Wales, comprising and capable of producing around 4.5% of the state's energy needs.

Although policies are yet to be fully implemented, the renewable energy sector has received a ‘shot in the arm' and the economics of renewable energy sources must improve.

However, it must be noted that while hot rocks energy meets the renewable energy criteria, the ‘technical risk overhang' means that the Government and the market is yet to fully embrace the concept and therefore discounts the sector.

But the work of Geodynamics combined with potentially positive heat flow measurements in drilling conducted by other geothermal companies may soon reduce this discount.

Market will refocus towards project comparisons

Other states have followed South Australia's lead in issuing geothermal exploration leases, and other companies have followed pioneers Geodynamics and Petratherm into the hot rocks sector.

Green Rock, Eden Energy and Geothermal Resources listed in 2005 and 2006. In 2007 Torrens Energy and KUTh debuted on the Australian Stock Exchange. In addition, several private companies are active.

It is believed that about 20 hot rocks exploration/development companies are active in Australia.

With a potential de-risking of the technology, the market will typically start to focus on comparative operating and capital costs for the various projects to be able to rank the various geothermal companies on the stock market.

Of course, companies will first have to demonstrate credibility with an appropriate geothermal gradient within their projects. But as data firms up on one or two specific project leaders, analysts will apply it across all projects with adjustments for project-specific factors.

In recent news, Torrens Energy has announced that it has achieved encouraging temperature gradients and heat flow measurements.

Its modelling suggests that temperatures of 240C are achievable at about 5000m depth and are higher than temperatures currently being exploited for "hot rock" geothermal power in Europe, and amongst the highest being evaluated in Australia.

But more importantly, Torrens has identified hot rock geothermal targets in a project area located on the National Electricity Grid in South Australia rather than in the more remote regions of the outback.

One could argue that Petratherm's earlier encouraging drilling on its Paralana project started bringing ‘projects' closer to grid infrastructure and Torrens' recent success can contribute to ‘grid connection costs' being a key component in the market's ranking of geothermal projects.

New alliances

With the Government's renewable energy targets and the potential introduction of emissions trading, many utilities are likely to be monitoring geothermal energy developments closely, particularly in light of the scope for technical de-risking in the short term.

In October last year, Origin Energy announced that it had agreed to farm in to a 30% interest covering the South Australian geothermal tenements and associated assets of Geodynamics.

It will involve Origin committing $96 million to the project in addition to its ongoing 30% share. If Geodynamics, as operator, completes its Stage One ‘proof of concept' phase by March 31, 2008 and within budget, Origin states that it will commit a further $9.6 million. Origin was also a cornerstone shareholder in Geodynamics and intends to retain its 10% interest.

On announcing the deal, Origin managing director Grant King sent a strong message to competing utilities, saying: "We believe that geothermal energy will play an increasing role in securing the world's future needs for clean energy."

On a different tack, in early 2007 Beach Petroleum announced a farm-in deal with Petratherm on its Paralana ‘hot rock' project.

Under the deal, Beach will earn a 21% equity for contributing $10 million that will be used in drilling and stimulating the first two wells and for circulation tests between the wells.

However, Beach can withdraw without equity after the completion of the first well, losing the $5 million put toward the cost of the first well. But it can also earn an additional 15% equity by contributing a further $20 million following completion of drilling and stimulation of the second well and circulation tests between the wells.

Unlike Origin's agreement with Geodynamics, this deal is designed not on meeting renewable energy targets but on capitalising on Beach's experience in drilling operations and fracture stimulation.

Hot rocks companies use oil and gas drilling rigs and fraccing techniques, and other alliances could emerge between petroleum companies and geothermal players.

Looking forward

Overall, while 2007 was the year of the land grab, 2008 will very likely be the year of de-risking the hot rock technology.

This de-risking of the technology should prove positive on several fronts including:

• creased market rating across the sector;

• A market focus on specific project operating and capital costs using broad benchmark comparisons;

• Increased Federal Government support as it becomes more comfortable with the potential contribution of geothermal power as a renewable energy source; and

• An increase in the number of developing alliances between utilities and geothermal companies as utilities seek exposure to geothermal projects.

Therefore, 2008 is the year to hold geothermal companies as part of a resources portfolio as developments could deliver a significant rerating across the sector.

Wish Geodynamics luck. A lot is riding on its Habanero project.

Stephen Bartrop is joint managing director of Stock Resource (stockresource.com.au). He is also a director and shareholder in geothermal explorer KUTh Energy.

First published in a different form in the February issue of Petroleum magazine