Carlos García
General Manager
Mexico Drilling International

Profits to be Found in Private Geothermal Drilling

Wed, 02/19/2014 - 16:17

“It is all about profitability; alternative energies in general are based on profitability and efficiency,” says Carlos García, Director General of Mexxus Drilling. “Geothermal energy is well-known for its high efficiency factors of nearly 90%, vastly surpassing the 40% efficiency that can be reached as well at good wind sites, and the 25% efficiency of high irradiated solar sites. It may be more expensive to undertake a geothermal energy project but it is more profitable in the medium to long-term.” Mexxus Drilling started in 2007 with one set of drilling equipment and one team of engineers and technicians, the majority of which had a background drilling wells for CFE. Mexxus Drilling believes that Mexican companies have the opportunity to offer services that are usually outsourced to large international companies such as Schlumberger, Halliburton and Baker Hughes. Substituting external suppliers with competitive Mexican alternatives would benefit CFE as well.

The National Energy Strategy provides an important opportunity for the geothermal energy in Mexico as it could become a more important component of the energy mix. “Unfortunately, in the past, investors had no chance to enter the area of geothermal energy extraction,” García says. This situation forced companies to look for opportunities abroad, including Mexxus Drilling that is considering a field in Nicaragua. However, when the chance came, the firm decided to work at home.

Due to the current size of the geothermal energy sector in Mexico, the firm has diversified its activities to the oil industry, where it can offer the same services because its drilling equipment can be used for oil wells as well as geothermal drilling due to its power and ability to reach large depths. Great expectations arose when the company obtained the first small producer title that CRE gave out in the geothermal energy sector. “Not a lot of companies are involved in this field, but it represents a great opportunity for those willing to take risks,” comments García. Just as in financial markets, higher risks imply high potential returns, and the geothermal sector’s efficiency rates could make it a very attractive opportunity. “Drilling exploration wells requires a lot of capital investment, a willingness to take risk, and the patience to develop a project,” García cautions.

Frederic Sauze, founder of ClusterGEO, provides an example of the risks and costs involved in developing geothermal wells with a capacity of 5MW, involving an average cost of around US$1 million per MW. “If a company wants to build a 25MW operation and prospective studies are 75% accurate, then it will be necessary to drill seven wells instead of five. This represents a large investment and high risk, and banks are reluctant to provide loans for high risk investments.” In order to mitigate this risk, ClusterGEO is promoting the creation of a Geological Risk Insurance Fund of MX$50 million (US$3.77 million) to help small producers in Mexico and eventually to be used as a commercial instrument to incentivize the Mexican industry. The Capital and Investment Fund for the Rural Sector (FOCIR) has been proposed as the manager of this fund. “The investors’ risk would be managed by charging an entrance fee to the fund, which would be refunded according to a hedging model. But in order to mitigate the risk and ensure the profitability of the fund, it would need to be mutualized across multiple wells,” explains Sauze.

In October 2013, Mexxus Drilling started a joint venture with Icelandic firm Reykjavik Geothermal, Mexxus-RG, which was granted the license to begin prospecting at the geothermal project of Ceboruco in the state of Nayarit. Reykjavik Geothermal struck Mexxus Drilling as the right partner, given its origins in a country that has pioneered geothermal exploration, as well as owning a project portfolio stretching across Africa, the Middle East and Oceania. In October 2013, Reykjavik Geothermal inked a deal with the Ethiopian government to build up to 1GW in geothermal power at an estimated investment of US$4 billion, and also helped Papua New Guinea tap into its own geothermal potential. Given this experience in some of the world’s most demanding terrains, any challenges posed by the Mexican geothermal reality are likely within the capacity of the Icelandic market leader.

“The technical knowledge from our joint venture partners Reykjavik Geothermal also helps to obtain financing,” comments García. Partnerships also play an important role for private companies by increasing the quality of the human capital available, increasing competitiveness and productivity. Mexxus Drilling has sent its staff to Iceland to learn from the country’s exemplary track record in geothermal energy development. Iceland’s success with geothermal energy will be hard to replicate in Mexico but Mexxus Drilling is looking to maximize its chances through such learning experiences, to ensure higher profitability when better times do roll around.

The company plans to start its exploratory drilling phase in early 2014, with the first phase set to be for 30MW, later followed by a 70MW second phase. This deal also marks the first geothermal IPP in Mexico. “We take it one step at a time because our development is dependent on the Mexican authorities which are slowly paving the way for the geothermal sector to develop,” comments García. “Without the government’s support and without their will to remove bureaucratic hurdles, we would not stand a chance.” To optimize profitability, the technologies used to determine the right production areas must be carefully evaluated. Even though drilling equipment used in the oil industry is similar to that used for geothermal wells, the drilling procedure is different due to important variations in temperature. New technologies have to be able to better withstand the high temperatures. “Overheated vapor can be found in a liquid state at 300°C since there is enough pressure at a depth of 3,000m,” says García. Special equipment is needed to lift the water column and withstand its violent expansion as it reaches the surface and guide it to the turbine. By introducing the latest technologies, the error margin greatly decreases, which is matched by a rise in the likelihood of finding promising geothermal resources. Maintenance must also be factored in as a needed cost. García insists that certain wells need regular maintenance, depending on their specific conditions. “In Cerro Prieto, where we have our base, the well contains high levels of sulfur, which is very corrosive. This harms the piping which must then be changed every five years or so. However, alongside that, there are geothermal sites such as Los Humeros, Puebla or Momotombo in Nicaragua that have been running for 20 years without needing any such changes,” explains García. “Although the process is very expensive, it is better to invest in technology that will enable a margin of risk and error to be measured and controlled,” comments García. “Even if initial costs are more expensive to generate 1MW from geothermal resources compared with wind or solar, geothermal is more profitable in the long run.”

The operating framework’s modifications and the recent support for renewable energies make the company believe that a new vision for the role geothermal energy might soon sweep Mexico. “We would like to be the most important company in the geothermal energy field. We do not have a monopoly perspective but we want to seize opportunities,” concludes García.