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PRUDENT MANAGEMENT

of

GEOTHERMAL DEVELOPMENT

by C. J. VON HOENE

Aminoil Inc.

339

PRUDENT MANAGEMENT OF GEOTHERMAL DEVELOPMENT

A powerful factor influencing the cost of geothermal development is the time value of money. The present value concept has been presented at this workshop showing the effects of discounts and inflation, both of which have a major influence on the profit- ability of a project. With this in mind, it is prudent to con- centrate spending for large capital projects of long lay periods in the years just prior to production.

It follows that the establishment of positive cash flow or corn- merciality can be enhanced by the planning of relatively small projects in the early years of a newly defined reservoir. While economy of scale may be sacrificed, this is more than offset by reduction of risk and large capital .outlays for a reservoir of undefined performance characteristics, and avoidance of time consuming studies and preparations associated with larger devel- opments

This paper addresses the prudent development of a grass roots discovery as well as the ongoing development of a maturing reservoir. It is assumed that management has attended to the preliminaries of market availability and has made a reasonable determination of steam price prior to extensive investment in exploratory wells. The merits of large scale central station development are discussed leading into an evaluation of small unit development.

Let us begin with an exploratory success. Immediately, this good news presses the question of the extent of the resource. Geology will undoubtedly suggest a reservoir, but only delineation drill-

34 1

ing will confirm such expectations. So, before you charge into extensive negotiations it rsems only prudent to perform some delineation work, perhaps t w o additional wells. Depending upon the nature of t h e discovery well, delineation work may be best performed by "slim hole" tests r a the r than well designs for full commercial capability. Furthermore, unless your company is RttD

oriented, which suggests you are "well heeled"; or funded by a government; or simply promoting your stock to an uneducated public; the discovery of a hostile resource dictates no delinea- tion drill ing-there is no profit motivation for geothermal energy that is more costly than the alternatives. But, let us assume w e have produced a high grade discovery confirmed by delineation drilling.

A. Marketing the Product

1. In some areas we may have a choice of utilities. The

enactment of PURPA also provides opportunity that should be evaluated. A utility's fuel mix, load growth and power interchange or integration agreements to a large degree will influence marketing negotiations and devel- opment schedules. These factors determine how rapidly a resource will develop to its full potential.

2. Without getting into a l l the details of marketing con- siderations I would like to point o u t t w o factors that will greatly influence future operations that are not so obvious. A precedent has been s e t in The Geysers for

the developer t o own the pipeline gathering system. This should be avoided. The pipeline is really nothing more than an extention of the plant. Profit to the developer can be enhanced by relatively simple

operations if sales are made at the wellhead. The

342

developer's business is the management of the reservoir.

A second factor is related to penalty or "take or pay". While "take or pay" may be diffficult or entirely impossible to negotiate, at least a diligence require- ment can be insisted upon. This implies the maintenance of critical spare parts for long delivery operating elements of the plant. The unnecessary loss of a plant over an extended period flies in the face of prudent management and renders the best of cost control programs ineffective.

B. Leasehold Considerations

Considering the nature of geothermal resources and the possibility for marginal return in the latter years of a project area, the developer is well advised to carefully consider the economic sensitivities of all leasehold burdens and operating requirements.

1. Leasehold interest can be obtained in a variety of ways including the taking of a primary lease, an assignment, or farm-in. In addition to the terms of the primary lease, which can include royalty and net profits parti- cipation, t h e leasehold may be further burdened with overriding royalties and additional. net profits inter-

* ests. Leasehold burdens may also carry performance requirements for development that may be inconsistent with prudent development requirements.

2. Unitization is a valuable tool for allocation of pro- duction to the various lessors of interest. Early geothermal leases inadequately covered or completely

343

ignored unitization rights of the lessee. While it is d i f f i c u l t to establish a unit area, it is th@ well spent considering the years of operations t h a t will follow a successful development and the potential for claims of o f f s e t drainage and improper production balance.

3. Farm-ins generally result i n a working interest partner.

This results in a Joint Operating Agreement. In the absence of geothermal operating history, operators and their partners have quite naturally migrated to accepted oil and gas structured operating agreements. Due to the nature of the geothermal reservoir and the method of marketing, these agreements often fail to address prac- tical operating procedure.

4. Access to the leasehold is an important factor from legal and operating cost viewpoints. Of course, legal access to the leasehold is an obvious requirement, but in many cases it is completely overlooked until commit- ments are made and operations are underway. Access may also address availability of water, drill sites, plant sites, disposal, and warehousing and yard space.

Terrain can be a significant cost contributor for road development and maintenance, drill site development, and

* plant site developnent. Geothermal occurrences do tend to favor some very hostile geographic locations.

C. Project Development - Philosophy

The orderly development of a geothermal resource is c r i t i c a l to control of costs. Following an exploratory success,

344

delineation drilling, flow testing, and reserves assessment takes place. Concurrently, a steam sales agreement is negotiated followed by resources dedication, plant certifi- cation and permitting, and finally, the major project design and construction effort. During this period, development drilling is also taking place. A philosophy of steam field development that is consistent with the progress of plant development can save several million dollars.

1. Scheduling of Pipeline ---- Construction -I----- and Production Development - Philosophy

a. Time drilling to complete six months prior to plant startup .

b. Drill best targets first (high grade the leasehold).

c. Minimize number of drilling pads and wells for start- up: this also reduces pipeline costs.

d. Drill out pads closest to plant first if consistent with b. Consider moving plant site to best target area .

e. Complete injector with gravity feed from plant.

- f. Schedule construction of steam gathering and injector pipeline system consistent with plant startup.

g. Without proper staffing levels, avoid multiple rig operations.

h. .Competitive bid for drilling contractors and award to

345

0

0 rr)

0 N 0

0

346

qualified contractors.

i. Avoid bargain drilling equipment/products at sacri- fice of quality.

j. Regularly inspect equipment. Drilling accidents are always serious.

k. Inspect and refurbish drill pipe after every well and

during drilling. Never drill with a string of slightest questionable integrity.

D. Drilling Operations/Cost Reduction

1. Avoid drilling with 16# blue band pipe (20-308 wear) when air drilling and regularly check tool joints for pin stretch and cracks -- a twistoff at best is a $300,000 accident .

2. Retire out-of-gauge bits. Never try to squeeze extra footage from an out-of-gauge but otherwise serviceable bit .

3. Be "bottom line" minded. For example, new light weight cement blends are expensive but can facilitate cementing operations for reduction in overall costs while providing .superior cementing results.

4. In areas where wells are both mud drilled and air drilled

take advantage of aerated mud drilling. Penetration rates can be doubled and sometimes tripled.

5. Large bore drilling programs do not necessarily mean

347

6.

7.

8.

9 .

10.

11.

12.

increased drilling time -- the drilling efficiency of .a

12-1/4" bit is as good or better than the 8-3/4" bit in certain formations.

Large bore completions provide improved deliverability.

Standardize on one or t w o well designs to reduce tubular inventory.

Consider the cost of ownership vs. rental of commonly used tools and equipment.

Maximize the number of wells per pad and drill out a pad to reduce rig moves.

Rugged terrain and scarcity of suitable drill sites also dictates directional drilling. Fortunately, deep reser- voirs can be more effectively developed with directional drilling. Locate drill sites to provide the best array and approach to production targets.

Rely on surface geology for early drilling targets -- as new data becomes available from drilling, modify and improve geologic model to reflect subsurface conditions.

Well tests and f u t u r e production provides insight a s to - preferred high delivery, low decline, high permeability targets -- enhance reservoir model with geology, physi- cal, and geochemical study programs.

13. Maintain thorough and accurate drilling records f o r future reference as to well course, casing configuration and integrity, quality of cementing jobs, steam entries,

348

faulting, lithology, etc.

E. Construction Schedulinq

1. Conduct drilling target assessment vs. drill site devel- opment opportunities.

2. Select and develop only those sites and access roads needed for plant startup requirements -- provide dril- ling opportunity to develop steam at 160% to 200% of plant startup requirements. Utilize existing delinea- tion drill sites where feasible. Plant start-up will bring many surprizes.

3. Prior to award of the pipeline gathering design con- tract, rough grade pipeline route.

4. Carefully plan the maximum number of wells per pad. Also consider minimum requirements. Size pipeline within acceptable maximum/minimum production constraints -- low pad productivity means low velocity in oversized pipelines. Conversely, undersizing means restriction of production and a requirement for additional pads, wells and pipeline modifications.

5. Consider operational flexibility preferences such as . isolation or cross connecting opportunities from exist- ing operating facilities -- remember, you are supplying steam to a plant that has operational excursions such as plant trips and sudden curtailment. What is the minimum steam flow in the gathering system before condensation becomes a problem?

6. Prepare a thorough project schedule, project scope, pre-

349

liminary design and specification. Make these decisions up front and go out for design bids. The object of the preliminary d e s i g n package ii to avoid indecision and change orders after design contract award. Engineering time is not cheap.

7. Organize a company project team to monitor the des ign effort in progress. As design progresses, remove all doubt as to design philosophy. It is human nature to "gold plate" or provide excessive safety factor for unknowns at situations of indecision.

8. Establish the same concepts in a construction bid pack- age and stress project schedule. Provide construction flexibility. Remember you are concurrently drilling out for startup steam requirements and conditions- will change -- B e t On It1

9. Provide adequate insulation. Your product is thermal energy. The quality of your product is dependent upon your ability to limit heat transfer in the pipeline. A

good insulation job not only provides improved steam quality but significantly reduces infill drilling re-

\ quirements over the life of the plant.

10. Plan your project to be ready for service three months - prior to expected commercial operation date. Monitor the progress of the plant construction schedule and be ready to accelerate or extend your project schedule if economies will result.

F. Environmental Issues/Public Affairs

Inspite of the relatively non-polluting nature of geothermal

350

energy, there are strong environmental controls exercised over its development. While the pollution potential may not be as strong as in competing conventional energy develop- ments; nevertheless, there is a hazzard and there are impor- tant constraints that should be recognized at the outset of development. The attitude of the industry in dealing with environmental issues carries with it a message to the commu- nity in which we operate -- quality operators enjoy a good

reputation in areas of their operating influence. Quality operators, therefore, enjoy some flexibility in permitting various stages of their projects.

Geothermal development has environmental issues associated with air emissions, water quality, noise and surface distur- bance. The prudent operator minimizes environmental impacts while providing a degree of desirable operational flexibility and operating cost reduction.

1.

2.

3 .

Minimize the number of drill sites to those required for immediate operations. Drill site development carries with it road development costs and pipeline expansion. Limiting drill sites limits the number of drill sumps and

the distribution of solid waste discharges.

Drill rigs are noisy -- locate drill sites to avoid costly noise abatement installations.

Plan your water and waste discharge requirements in advance to avoid undesirable trucking or transport. Generally, there are desirable alternatives if last minute decisions caused by operational necessity are avoided.

35 1

I~DUSTRY HAS A C H A ~ ~ E ~ ~ E TO A V O I ~ THIS CHA~CTERIZATIOt~

352

4. Control of air emissions can also provide efficiencies through conservations of resource. P l a n t and pipeline configurations can provide cross-tie opportunity during plant outages. Pipeline design can eliminate air emissions while conserving labor and the resource. Automation for apparent tnvironmentaf reasons fan provide significant saving in operating cost.

5. Avoid loss of condensate or flash residue -- loss of e f f l u e n t a t the rturface is a potential environmental hazzard. E f f l u e n t returned to the reservoir provides recharge an incremental production gain. Pipeline de- signs should provide for collection of all Condensate formed under normal and abnormal operating conditions.

G. Tax Considerations

The prudent operator is well advised to investigate local and state taxation history, attitude and current practice. Taxation can vary widely from area to area. Taxes can be '

imposed in combination of ways ranging from ad valorem to severance taxes. In areas where extractive industries have historically operated, assessment techniques are sophisti- cated. Tax assessment can and does employ time value of money and reservoir engineering concepts. Before you forge ahead with your project, a call on your local tax assessor may- serve to remove at least one unknown in your investment program.

H. Manaqement of Producinq Properties

Geothermal marketing plays a significant role in the rate of exploitation of the resource. Producing wells are restricted

354

GEOTHERMAL OPERATING EXPENSE DISTRIBUTION OF COST OF SALES

NOTES : (1 1 ASSURES P I PEL1 NE OUNERSH I P BY PRODUCER, UTILITY ~ E R S H I P UF PLANT

(2) VAPOR D ~ I N A ~ D RESER~OIR

(3) LOCAL TAX CONSISTING OF COUNTY, ~ U ~ I C I P A L AND SEVERANCE

(4) FOR LIQUID DOMINATED SYSTEM, REDUCE TAX BY IOZ, INCREASE DD&A AND DIRECT OPERATING COST BY 10%

355

to 'production rates compatible with the recipient power plant, Therefore, in the case of a 30 year plant amortiza- tion, plant capacity and utility of the plant (capacity factor) should determine the extent.of reserves t h a t must be dedicated, Utilities commonly arrive at conservative esti- mates of steam reserve requirements based on f u l l utility of the plant (100% capacity factor), Obviously, a plant opera- ting at 50% capacity factor utilizes only one-half the

reserves dedicated over its useful life. Therefore, the prudent operator should seek a balance of reaerves vs.

bapacity factor. This can best be accomplished after an operating history has been established for the plant and the reservoir.

Geothermal reservoirs deplete as i n the case of oil and gas

reservoirs. Furthermore, individual wells decline in pro- ductivity. As wells decline the operator must make a decision on the targeting and timing of supplemental dril- ling. If a plant requires 1,000,000 lb./hr. of steam at nameplate operation and the operator has 1,110,000 lb./hr. of delivery available, knowledge of decline rate is vital to effectively t i m e the completion of an infill well.

A ten percent decline would indicate the drilling of an

infill well within 12 months. If the decline experienced was only 5%, premature drilling could cost you $250,000-$300,000 in interest charges, On the other hand, if decline rate is 158, the operator stands to drop below the supply require- ments of the plant which is far more devastating than the interest charge of premature drilling.

Further complicating the infill decision is plant capacity factor or, more properly, the number of hours the plant

356

W )I) a a

e r - - E O n > P= W

0

0

0

operates each year at or near nameplate conditions. In the

above exampla, i n f i l l drilling should be adaitionally delayed for 8 plant t h a t seldom operates above 900,000 lb./hr.

"Take or pay" was previously mentioned. An element of this philosophy would be a powerful incentive to the plant owner to maintain the unit at peak capacity. In the alternative, reserves should be released fo r production to other markets.

Maintenance of the reservoir is the single most important aspect of ongoing geothermal operations. To properly produce and inject a geothermal reservoir, a variety of continuing studies must be conducted. A f a i r l y well defined reservoir is generally characterized by (1) its boundaries, (2) "sweet spots'' of high delivery and low decline, and (3) locations of low delivery and high decline. It is reasonable to assume there is an optimum production rate that best preserves the reservoir and individual well bores . Injection rate and distribution of plant effluent or condensate must also have

an optimum condition. Injection from an external water source may also serve to arrest depletion or decline of the reservoir.

The accomplishment of these programs without suffering an imbalance of water vs. available heat, or loss of reservoir permeability, for example, will be important measures of an operator's future success. The ability to achieve this suc- cess introduces the subject of competent s t a f f i n g .

I. Staffinq

Staffing of a geothermal development effort should begin with quality considerations. The trail of one incompetent "hand"

350

can occupy the efforts of several quality individuals in non-productive work. In general a good staff exhibits the following qualities:

O management skills O knowledge of the business negotiating skills

O technical competence O profit motivation O public awareness

Mention has been made of various operating aspects of the business. Let us organize a efficiently. And while we bones" bear in mind it is requires time and effort to ties. It takes more time to tent or overstaffed condition knowledgeable staff.

staff to conduct those are putting the "meat easy to add employees, direct each employee's identify and treat an than to operate with a

efforts on the but it activi-

incompe- lean b u t

Assuming our geothermal operations are a part of a corporate enterprise, we can start with a Manager. Reporting to the manager might be an exploration and production organization. As we are primarily addressing production development, we will consider only the production element of the organiza- tion. Here

0

0

0

0

0

0

are key functions:

Land Operations or Production Dr i 1 ling Engineering Geology Environmental/Permitting

359

i3EOTHER AL ~ E V E L O P ~ E ~ T DIRECT ~ P E ~ A ~ ~ ~ G EXPENSE

B I S ~ I ~ T I ~ OF COSTS

STAFF cosr

~ E R ~ T ~ N ~ STAFF COST IS BY FAR THE MOST S 16N I F I CANT OPERATI PIG EXPENSE

360

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361

' Public Affairs Finance & Administration

Depending on scope of activity the organization may combine one or more of the above groupings under a single manager. Let us a66ume we are developing a new field with one u n i t operating and additional units under planning stages. In that case the above positions could be combined under five to six managers.

For example, an Operations Manager cou ld handle drilling, production and engineering functions with proper subordinate staffing. The Operations Manager would additionally have a field organization to conduct the day to day drilling, production, and production maintenance a c t i v i t i e s .

Operating s taf f costs should be held to the two million dollar range on an annual b a s i s until operations have expanded to approximately 200 MW in equivalent production capacity. A general guide is $ l O , O O O in staff cost per

installed megawatt, which will not be possible in the early years of development f o r operating units of smaller scale. As development approaches 200 MW of capacity, an efficient organization should achieve this ratio.

J. Central Station vs. Well Head Units

We have viewed a 110 MW development from "exploration suc-

cess" to commercial developnent . This program constitutes nine years of effort on the part of the producer and the utility. If we examine the reasons for the long lay time, much can be attributed to the size or scale of the unit. Similarly, size contributes to capital cost, pre-startup

362

operating cost and .risk associated with t h e reservoir . Nevertheless, large scale cost control elements equally apply to small scale development.

We will see that small scale plant development is favored in the early life of a reservoir. This does not preclude the advisibility of large plant development after early r i s k is resolved. Much depends upon the quality of the reservoir. So why has industry lagged in development of the well head unit?

In the past, the producer's primary market was the utility. In the 1970's, about the time the concept of geothermal power production became thoroughly recognized, utilities were still forecasting a doubling of load growth in 7 to 10 year periods. To accomodate this growth, and recognizing economy of scale, most utilities built or participated in building the mega project. Small scale generation was more of a nuisance than an accomodation to bulging load forecasts. Fuel price and environmental controls in the early 70's were still at very tolerable levels. So, the utility was natural- ly interested i n relatively large blocks of power, say 50 to 100 megawatts as a minimum size geothermal plant. Then, as now, this presents a sizable reservoir r i s k when applied to a single "exploration success".

Further contributing to large scale operations was the pro- ducer's preference for a larger size plant without recogni- tion of the delays t o be encountered. Many of the players were major oil and mining interests who felt competent in reservoir assessment and risk management of large capital investment.

Times have changed. The customer is now capital constrained.

OPERATDNS COST, $MM, 1984 w &

0 0 0

RESERVES ASSESSMENT . - - -.

1 YEAR

POWER PCADQT PERflIlTING

DESK# CWLETE 14 1- INITIATE CONSTRUCTION, PLANT ONLY INITIATE PIPELINE DES16N

B-n U-

n B

364

RULE OF THUMB PRODUCTION DEVELOPMENT CAPITAL COST - 1984 DOLLARS

PRODUCTION DRILL IN^ COST:

FOOTAGE RATE $ 250

DAY RATE $30,000

P I PEL I NE COST :

PER D I ~ ~ R INCH-FOOT s 20

NOTES: lm ASSURES HELL DESI6N OF 20" CASING TO SOO', 13-3/8" TO 3000'J 9-518" TO SODO',

2, PIPELXNE FACTOR BASED ON RU6~ED TERRAIN, NO A U T ~ T I O K , ELL P R O D U C T I V I ~ of 150,000 PPH AS STEAM, VAPOR DOMINATED RESERVO I R, DR I LLS I TES I NCLUDED, IN JECTI ON SYSTEM INCLUDED, ROADS & ACCESS EXCLUDEDa

365

Load growth is down to a 2% cumpounded rate or "no-growth" forecast. The customer prefers alternative energy eources due to the Coat and dwindling supplies 6f QnCt preferred fossil f u e l s . And, the customer can now be any entity wil- ling to enter the power generation business. The producer i s

now in a seller's market and is a much wiser producer, given the experience of the 70's.

Xn today's market, if w e were asked t o meet certain invest- ment critisria following 4~n txploratary st~ecem5, the develop- ment schedule would3 strongly favor small scale development in the early life of the reservoir. Consider the following investment objectives:

* I d e n t i f y reservoir characteristics; quantify reservoir at an early date Establish early positive cash. flow Maximize rate o f return and/or Net Present Value

*

* Reduce risk of investment

To satisfy the objectives the answer is obvious. The small scale or well head plant sat i f ies all objectives. You may argue that Net Present Value is enhanced only by large scale development. This is true if the lay period is short. But solutions achieved with early scale developments can pave the way-for larger risk free investments.

Small scale developments or wellhead units have other advan- tages :

O Short delivery time Mobility possibilities

366

No pipeline gathering system ' Strength in numbers

(capacity factor improvements) Redundant design (spare parts reduction)

Acceptable investments for non-utility owners

O Cross-tie versatility

The prudent manager of an investment program following an exploration success must strongly consider the economic and reservoir definition opportunities of the small plant. Subsequent development depends upon reservoir character and rate of marketing opportunity.

Summary

The character and extent of a newly discovered reservoir is best defined by production history. Various proven tech- niques t h a t apply to the analysis of hydrocarbon reservoirs are still under application development for the geothermal industry. Results of geophysical and geochemical analyses of producing reservoirs indicates we are near the threshold of forecasting the performance of newly discovered reservoirs. Until such time, the uncertainty of reservoir performance and economics favor initial small scale development.

With proper reservoir conditions and control of capital investment throughout long lay periods, subsequent develop- ment schemes may favor large scale plants.

As with any business enterprise, recognition of the time value of money and a strong profit motivation are key to the

367

SUCCQSS of the business. Perhaps the geothermal industry has been dubbed as "risky", but it need not be w i t h the applica- t i o n of common horse sense and prudent management of the resource.

368