Geological risk mitigation

The Geothermal Project Lifecycle

Source: Geoelec project

Risks at various stages of a geothermal project

Source: GEA, 2008

-Highest risk during exploration
-Probability of success of the first drilling: 20-60% (depending on the location and pre-drilling geological-geophysical exploration
-Reservoir parameters (temperature, flow-rate) can be estimated only after the first successful drilling

Geothermal Risks Characteristics

The geothermal resource cannot be accurately assessed until drilling has taken place
Geological Risk

• Drilling phase : Short-term risk of not finding an economically sustainable geothermal resource (exploration phase)
• Exploitation phase : Long-term risk of the geothermal resource naturally depleting threatening the long-term economically profitable production (operation phase)

Geological Risk Breakdown

Source: Geoelec project

Potential risk treatment

• Prevention – I do not undertake
• Reduction - Spending on planning, exploration, construction, supervision 
• Transfer - Involving other parties, insurance
• Acceptance - I undertake, I do not spend money (now)

If a well is underperforming the expectations:

• The evaluation of geology is inaccurate
• The planning of well and drilling work is inaccurate
• The construction of well is inaccurate
• The geology differs from what it seemed – uncertain geological data

How to reduce geological risks?

Evaluation of geology:

• Detailed collection of existing data
• Complience of data 
• Traceability of interpretations
• Request for second opinions

Planning of well and drilling works:

• Geological prognosis based on geological evaluation
• The well structure to be completed safely should be appropriate for the aim
• Safety regulations
• Opportunity to drill further
• Quality of drilling and well’s materials

Supervision of drilling works:

• Independent entity
• Technical eligability
• Monitoring task
• Documenting task
• Decision on deviations
• Well logging

Geothermal Cost / Risk Development

Source: Geoelec project

Project risk decreases with increased investment as the project is developed further with research and results from the first well drilling and testing
BUT HOW TO COVER THE COSTS / RISKS OF THE FIRST WELL?

Lack of drilling capital as a main barrier to geothermal development

Financial markets have shown a poor understanding of geothermal development projects and tend to overestimate resource risk 

Need for specilized sources of capital to bridge the gap between exploration and construction 

Existing geological risk mitigation and insurance policies

Insured risk: short-term (drilling) (long-term risk – reservoir depletion is a technical risk to be handled by proper production strategy by the operator)
Private insurance: Germany (market-based insurance companies: Munich Re, Swiss Re, Axa, Goather, R&V, Marsh és Willis) – project tailored individual fees (post-damage)
National insurance funds:

• post-damage guarantee (France, the Netherlands, Switzerland)
• guaranteed loan (Iceland and Germany) – cost of the damage can be reimbursed up to a fixed amount

Establishment of national funds: capital provided by the state (+ private equity)
Income during opertaion: insurance fees, taxes or other incomes (e.g. feeding back certain proportion of mining fees, etc.)
More diverse income sources - more stable funds
Operators of national funds:
Responsible ministries, governmental institutions

Existing geological risk mitigation and insurance policies

Contract between project developer and insurance company / fund
Conditions laid down in great details:

• Technical criteria: expected yield, temperature, concept for reservoir development, drilling techniques, etc. + probability of success (POS)
• Financial criteria: business plan, return rate of investment (ROI), etc. 
• Regulatory criteria: all licenses available, information about the company, key-experts, etc.

Success criteria: i.e. full / partial failure at which yield / temperature 

In case of damage experts compare declared damage by those laid down in the contract and decide on the rate / amount of insurance

Overview of risk mitigation systems

Source: Rödl & Partner

European systems
Discovery risks only, any further technical risks (e.g. lost-in-hole during drilling) are not covered
Each system has own success criteria

Vision: Risk insurance scheme at European level

Needed because of:

• Shortage of insurance policies

Limited current market size

No statistical basis to assess the probability of success

Allow the technology to progress along its learning curve (EGS)

• Pooling of the resource risk at a European level
• Not a competitor to national insurance policies
• When mature: replaced by private schemes

An exclusive management by an EU institution or a shared management with a national institution
A secretariat and a board (shareholders, geothermal professionals, experts, for some applications a representative of the national insurance system)
A seed capital of 50-100 Mio €
The obligation to disclose the data collected