I interviewed the Director or Production and Sales at Reykjavik Energy (OR), and he gave me some very helpful information to use in this projection - rules of thumb for construction costs, operating expenses, well sustainability/longevity, and productivity.
I've also been in touch with a good friend at Bentek Energy, which is the gold standard of natural gas data and analysis. Bentek helped me put together some averages for natural gas wells in the Haynesville shale gas play (gulf coast area - TX, LA).
The following charts assume an equal $8.4 million investment in both the unconventional gas (Haynesville) and geothermal energy (Iceland). I applied a 10% discount rate (Value/((1+r)^t)) to all values after year zero (all years after production begins). Basically, I tried to analyze both projects as if they were being developed in mature fields with exploration and resource studies completed by previous operations. I did include a construction period of three years for the geothermal power plant just to show how that buildout and capitol expenditure actually looks (according to OR), but that would be part of the exploration and study that I've assumed out of the equation* for now.
*When I applied the discount rate to the geothermal plant starting in year -3, the project was still in the red in year 40!
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Natural Gas Well Cash Flows ($5.00/mcf):
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Geothermal Well Cash Flows ($.10/kwh):
I think this really shows how the natural gas well repays its investment so quickly. The revenues lag the costs only by a few months, and the well is profitable within year zero. Admittedly, I did give the gas well a $5.00/mcf value for gas, which is about 80 cents higher than the price today, but that is the forward looking price used by Bentek in their break even analysis for the Haynesville. Actually, that price is easily achievable when companies sell the volatile liquids produced with most Haynesville gas.
These graphs also show the massive appetite for risk that a geothermal investor needs to have. The geothermal project lays out a huge ammount of cash and doesn't break even for almost five years (eight years since construction begins).
We also see the same story of depletion that I described in my earlier post. Haynesvlille wells typically decline by 80% in the first year! This accounts for the massive upfront bump of cash and the long, poorly productive tail. Bentek assumes that the wells are 100% tapped within 20-25 years, but the vast majority of that productivity occurs in the earliest years.
By contrast, the Geothermal well will easily produce for double the time of the gas well, and if managed properly, geothermal wells can produce sustainable outputs for very long times (the fuel source is radioactive decay in the earth or a magma body, which doesn't deplete at anything like the rate of a liquid reservoir).
One element I did not add into this equation is inflation. Geothermal developers generally get an increasing nominal price for their power as inflation builds. Here in Iceland, I heard that OR is lobbying for a power price increase of almost 25%, but that is because the socialized utility is almost bankrupt from overspending (see their fancy office in my last post). In the States, inflation is a big question mark. With everyone raving about double dips and Japan-style economics, I decided to leave that piece out for now. I'd love any insights on inflation though.
A disclaimer, as before: I'm a geologist attempting to become a self-taught economist. A lot of the people reading this know how to do what I'm doing better than I do, and I'd love to hear about any changes I should make.
Cheers,
Cully
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