Oil's Geothermal Opportunity

Reading a recent article about the expansion of California's geothermal power capacity at the Geysers, northeast of San Francisco, I was again struck by how little geothermal energy resembles higher-profile, intermittent renewable sources such as wind and solar power, and how similar it is to the development and lifecycle management of large oil fields. That extends to dealing with a problem that wind and solar never face: although the wind will blow and the sun shine long after the last human is around to observe them, the type of geothermal reservoirs that we have successfully tapped gradually deplete, as their stored energy is carried away and their natural pressure declines--not unlike an oil or gas field. When you consider all the similarities, it is remarkable that more oil companies have not embraced this technology as the nearest alternative to their core business of finding hydrocarbons underground and bringing them to the surface.

Although I grew up less than 200 miles from the Geysers, I was surprised to see that in 2006 the field supplied almost 5% of California's electricity--more than wind and solar power combined--and it did so around the clock, operating in either baseload or load-following modes that wind and solar can't emulate without expensive energy storage. At the same time, despite significant investment in recent years, the area now produces about a quarter less power than it did at its peak a generation ago, because of the loss of steam pressure in the main reservoirs in contact with the hot rocks. A major project to recharge the water supply of the field recently restored about 10% of its generating capacity, and the new drilling and additional turbines described in the San Jose Mercury News article will increase that further, though with a finite, depleting life.

Geothermal is a natural fit for oil companies, because it capitalizes on existing oil and gas skills such as 3-D seismic interpretation, horizontal and directional drilling, reservoir management, and the extensive experience some companies have gained in reservoir heat management, which is a key aspect of enhanced oil recovery, ultra-heavy oil production, and in-situ oilsands development. The business model of a geothermal field, with its large up-front investment and gradually declining output--boosted at later stages by enhanced recovery projects--looks nearly identical to the established oil and gas model, with two exceptions, both of which make oil companies nervous. The market for the electrons it produces is quite different from those for oil and gas, and its economics are subject to the vagaries of government incentives, such as the renewable energy Production Tax Credit.

Of the large international oil companies, only Chevron (in which I own stock) seems to have a significant focus on geothermal energy, and much of that was inherited with its acquisition of Texaco, my former employer, and later Unocal. According to their corporate website, Chevron operates geothermal plants in Indonesia and Thailand generating a combined 1273 MW of power. As big as that is in geothermal terms, it only equates to about 5% of the company's daily production of natural gas. That proportion isn't limited by the size of the available geothermal resources, even in the US, but by the historically lower profitability of geothermal power, compared to upstream oil and gas projects. As access to new hydrocarbon reserves becomes increasingly constrained by geopolitics and other factors, and as legislation puts a higher premium on low-emissions energy sources, the relative attractiveness of geothermal opportunities should increase for all of these firms.