February 2023 CHOA Journal

SERVICING GEOTHERMAL: Can O&G Contractors Benefit?

BY TIM MONACHELLO AND PATRICK TANG ATB CAPITAL MARKETS Geothermal could be a major opportunity for the oil and gas service sector.

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The potential size of the geothermal opportunity for O&G contractors How this opportunity varies in size with different future scenarios How existing wells might be re-purposed for geothermal This eJournal article is the fifth in a series on how Geothermal Energy can impact the energy industry and net-zero transition.

GEOTHERMAL COULD BE A MAJOR OPPORTUNITY FOR THE OIL AND GAS SERVICE SECTOR Geothermal has historically been a relatively immaterial source of demand for energy services companies given commercial limitations have constrained the development of geothermal projects outside of preferred hydrothermal resource areas. That said, innovations, along with carbon pricing mechanisms, provide reason to believe geothermal could become a meaningful opportunity for energy services companies over the medium to long term. “… innovations, along with carbon pricing mechanisms, provide reason to believe geothermal could become a meaningful opportunity for energy services companies over the medium to long term.”

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In this section, we highlight both the strategic investments being made across the energy services landscape in geothermal and the direct exposures of certain players. Ultimately, we believe North American contract drillers and other supplementary drilling services providers are likely to benefit from increased geothermal drilling activity, which could backfill any declines in oil and gas drilling over the coming decades. In addition, several international service contractor heavyweights in the upstream space have decades of experience in conventional geothermal developments.

Based on a progressive growth trajectory through 2050, we estimate geothermal developments could ultimately drive demand for an incremental 125-130 rigs globally by 2041-2050, including roughly 50 rigs in the US, representing roughly a $9 bn-$16 bn annual global upstream well development opportunity excluding expenditures on surface facilities and infrastructure.

Strategic Investments and Direct Exposure to Geothermal

by Energy Services Companies Over recent years, energy services companies have increasingly announced strategic investments in geothermal companies. Fundamentally, we believe the development of geothermal has benefitted significantly from the expertise and technologies developed in the energy services industry. This expertise is now being leveraged more directly to solve longstanding problems and improve geothermal development technologies to improve economics and ultimately bring geothermal systems to the masses. See Figure 23 for an overview of energy services companies with exposure to geothermal development – either directly or through strategic investment. “… expertise and technologies developed in the energy services industry … [are] now being leveraged more directly to solve longstanding problems and improve geothermal development technologies to improve economics and ultimately bring geothermal systems to the masses.”

Energy Services Companies with Exposure to Geothermal

Figure 23 – Energy Services Companies with Exposure to Geothermal (Priced August 8, 2022) Source: Company Reports, FactSet, ATB Capital Markets Inc.

Geothermal Likely to be a Growing Source of Rig Demand

Our analysis suggests that the global build-out of geothermal power generation could be a significant opportunity for upstream energy services companies, particularly for drilling contractors and other drilling-oriented service lines.

We present three scenarios for the pace of global geothermal power generation growth through 2050. The first scenario is based on the IEA’s prescribed path of geothermal electric generation capacity within its Net Zero by 2050 report (left panel of Figure 24), which forecasts geothermal to grow to 126 GW by 2050, the second is based on a more progressive trajectory to 126 GW global capacity in 2050, which we believe is more realistic given the pace of innovation and geothermal activity today (middle panel of Figure 24), and the third is a more aspirational scenario where geothermal innovations and/or incentives drive geothermal to represent 1.0% of the IEA’s estimate for global electricity generation capacity by 2050 (roughly 33 TW total, geothermal representing roughly 334 GW). See Appendix D for a more detailed overview of our scenario analysis and assumptions.

Global Upstream Geothermal Activity and Market Size Scenarios

Figure 24 – Global Upstream Geothermal Activity and Market Size Scenarios Source: International Energy Agency, ATB Capital Markets Inc.

Scenario 1: IEA Net Zero by 2050 Scenario – Key Assumptions and Conclusions

Steep Near-Term Capacity Growth: Our first scenario, which is based on the IEA’s Net Zero by 2050 progression, suggests a ramp in global geothermal electrical generation capacity from roughly 16 GW in 2022 to 52 GW by 2030, 98 GW by 2040, and 126 GW by 2050. This scenario assumes US geothermal capacity will maintain roughly a 30% global share.

Global Market Size Would Peak in 2022-2030 Period: This scenario suggests that the global geothermal upstream development market would peak in the 2022-2030 period at roughly $7 bn- $13 bn/year excluding expenditures for facilities and related infrastructure.

Upstream Activity to Peak Near 100 rigs/year in 2022-2030 Period: This scenario suggests that global upstream geothermal rig demand would peak in the 2022-2030 period, with total average annual geothermal rig demand of roughly 100 rigs, declining in future decades to only roughly 40 rigs in the 2040-2050 period as incremental capacity additions decline and development efficiencies are implemented.

Near-Term Expansion is Unlikely, in Our View: This scenario suggests the highest level of near-term geothermal activity, which we believe is largely implausible given the current levels of geothermal activity and given our view of geothermal projects likely to be developed over the foreseeable future (25 years). That said, we believe the IEA’s 2050 exit rate of roughly 126 GW of geothermal electrical capacity is highly achievable given progression of technologies being developed today.

Scenario 2: ATB Net Zero by 2050 Progressive Growth – Key Assumptions and Conclusions Progressive Capacity Growth to IEA’s Net Zero by 2050 Exit Capacity: Our second scenario is based on our view that the IEA-prescribed ramp in global geothermal capacity is too fast to be plausible. As such, we maintain the exit 2050 capacity level for geothermal electrical generation, both globally and for the US as prescribed by the IEA, but we adopt a more back-end loaded capacity growth profile. For context, we assume global capacity could grow from roughly 16 GW in 2022 to roughly 36 GW by 2030, to roughly 77 GW by 2040, and to 126 GW by 2050. We also incorporate the DOE’s GeoVision projection for US geothermal capacity to grow to roughly 60 GW by 2050.

Overall, this trajectory dictates an accelerating pace of upstream activity through 2040 as next generation geothermal technologies are commercialized and a relatively flat pace of development from the 2031-2040 to 2041-2050 periods. For context, we believe there are roughly 150-250 geothermal wells likely to be drilled globally in 2022, representing demand for just 10-20 rigs globally, while our progressive growth scenario suggest this could grow to roughly 450 wells by 2025 and to roughly 1,600 wells by 2030.

Global Upstream Market Size to Grow to Roughly $5 bn-$10 bn by 20312050 Period: This scenario suggests that global geothermal upstream development would grow from roughly a $3.9 bn-$7.0 bn per year market in the 2022-2030 period to a $5.4 bn-$10.0 bn per year market in the 20312040 period and holding roughly flat from that level in the 2041-2050 period.

This scenario suggests that the US upstream geothermal market size could increase from roughly $1.2 bn-$2.1 bn per year in the 2022-2030 period to $1.6 bn-$2.9 bn per year in the 2031-2040 period and $4.1 bn-$7.4 bn per year in the 2041-2050 period.

Upstream Rig Demand to Increase to Roughly 70-75 Rigs per Year in 20312050 Period: Our progressive growth scenario suggests that upstream global geothermal rig demand could increase from roughly 53 rigs on average in the 2022-2030 period to 74 rigs in the 2031-2040 period and staying largely flat at that level in the 2041-2050 period. For the US, this scenario suggests average annual rig demand for geothermal would grow from 16 rigs in the 2022-2030 to 22 in the 2031- 2040 period and 56 in the 2041-2050 period.

Scenario 3: ATB 1% of Global Electricity Capacity by 2050 – Key Assumptions and Conclusions Break-Through Innovations Could Propel Geothermal Capacity Expansion: Our third scenario is based on geothermal breakthrough innovations driving a significant increase in global geothermal electrical capacity share from roughly 0.2% of in 2022 to roughly 0.3% by 2030, roughly 0.6% by 2040, and 1.0% of the IEA’s total projected global electrical power generating capacity in 2050. Specifically, this progression reflects an increase in global geothermal electrical capacity from roughly 16 GW in 2022 to roughly 334 GW by 2050. We believe the commercial development of deep closed-loop systems and superhot rock geothermal are enough to drive this level of adoption given their potential to make geothermal both economically competitive with other renewable resources and increase access to geothermal energy around the globe. In this scenario, geothermal may become a choice renewable source of energy given that it is a baseload source of energy, low emission, and offers longer useful lives versus other renewables.

Growth to 1.0% of Global Electric Generation Capacity Could Grow Upstream Geothermal Market Opportunity to $18 bn-$32 bn by 2031-2050 Period: This scenario suggests that global geothermal upstream development could grow from roughly a $5.5 bn-$10.0 bn per year market in the 2022-2030 period to an $18 bn-$32 bn per year market in the 2031-2040 period and holding roughly flat from that level in the 2041-2050 period. This scenario suggests that the US upstream geothermal market size could increase from roughly $1.6 bn-$3.0 bn per year market in the 2022-2030 period to a $5.4 bn-$9.6 bn/year market in the 2031-2040 period, and holding roughly flat from that level in the 2041-2050 period.

Upstream Rig Demand to Increase to Roughly 240-250 Rigs per Year in 2031-2050 Period: To get to 1.0% of global energy capacity would suggest that upstream global geothermal rig demand could increase from roughly 76 rigs on average in the 2022-2030 period to 243 rigs in the 2031-2040 period and staying largely flat at that level in the 2041-2050 period. For the US, this scenario suggests average annual rig demand for geothermal would grow from 23 rigs in the 2022-2030 to 70-75 in the 2031-2050 period. Our analysis assumes a 30% US market share of global geothermal capacity.

Potential to Convert Oil & Gas Wells to Geothermal While often contemplated, the use of oil and gas wells for geothermal source of heat has not been widely explored. The challenges cited with the conversion of existing oil and gas wells into geothermal producing wells are numerous, though the primary challenges are 1) the depth of most oil and gas wells is too shallow to produce high enough temperatures for effective geothermal energy production and 2) most oil and gas wells are drilled with wellbore diameters too narrow for conventional and commercial geothermal flow rates.

Nevertheless, companies are looking at ways to both harness geothermal energy from producing oil and gas wells and convert end-of-life oil and gas wells to geothermal wells. FutEra Power, a subsidiary of Razor Energy, is one example of a company leveraging existing oil and gas wells (see previous article for a detailed overview of its project). GeoGen Technologies is an example of a company developing technologies to commercially convert end-of-life oil and gas wells to geothermal power generation.

CASE STUDY: GeoGen Technologies Inc. – New Life for End-of-Life O&G Assets GeoGen Technologies Inc. (not to be confused with GeoGenCo), is a Calgary, Alberta- based start-up attempting to redefine the potential for geothermal energy production from end-of-life oil and gas assets by rethinking the method of power generation.

To address the challenges related to converting oil and gas wells to geothermal wells, GeoGen has designed a possible solution: downhole mechanical energy generation in a closed-loop system contained within a single wellbore (see Figure 25). GeoGen’s patent-pending design would utilize existing horizontal oil and gas wells at the end of their productive lives, which would otherwise be candidates for abandonment. These liability wells would be sealed from the formation, and tubing would be suspended into the well bore to form a closedloop system in which cooler geothermal fluid would flow down the suspended tubing to the horizontal section where it would be heated and then would flow back up the sides of the wellbore to surface. The flow of the geothermal fluid through the system would be driven by a thermosiphon effect, but rather than generating power at surface using heat-to-power generation equipment, GeoGen’s design generates power using a downhole turbine generator. This type of mechanical power generation could enable lower temperature resources to be economic for geothermal power generation given that binary cycle power generation is not efficient at lower temperatures. GeoGen believes its system could generate roughly 100 kW of electricity per well based on bottom hole temperatures as low as 80°C. GeoGen’s approach is unique in that it utilizes lower temperature resources typical of oil and gas formations, and projects are relatively small and shortcycle, which lends itself to scale efficiencies if the technology could be proven viable on a wide scale. By reusing end-of-life wells, GeoGen’s design avoids drilling costs and significant resource risk relative to other geothermal options.

GeoGen envisions that a conversion would take a matter of months from conception to power generation, and it is targeting roughly $0.7 mn-$1.0 mn per conversion over time. GeoGen claims over 50,000 wells in North America are conversion candidates. A GeoGen conversion would significantly defer abandonment costs and, dependent on the regulatory regime, would potentially even defer abandonment liabilities indefinitely.

GeoGen estimates that its geothermal conversion without a liability deferral, assuming $120/MWh power price and $80/ton carbon, could offer a roughly 12% IRR; assuming a deferral of $150k abandonment liabilities, the IRR on conversion could increase above 15%.

We understand GeoGen has agreed to develop a test well that is likely to be commissioned in 2022 or 2023 with a Canadian oil and gas producer, and this test well could meaningfully change the perception of geothermal conversions from end-of-life oil and gas assets. We note that the availability of horizontal wells at end of life is currently limited, but it should increase over time as shale wells mature.

Appendix D: Upstream Rig Activity and Market Sizing

Scenario Analysis KEY ASSUMPTIONS

Capacity Growth Trajectory: We estimate the size of the global geothermal industry through 2050 based on the geothermal power generation growth trajectories laid out in the International Energy Agency’s (IEA) Net Zero by 2050 Scenario (2021), and the U.S. Department of Energy’s (DOE) GeoVision Report (2019). Scenario 1 – IEA Net Zero by 2050 – uses these development curves as prescribed by the IEA. Scenario 2 – ATB Progressive Growth Trajectory – uses only the 2050 capacity levels given by the IEA (126GW – global capacity) and the DOE (60 GW – US capacity) as end points, and we assume a more progressive trajectory to these levels over time. Scenario 3 assumes a significant increase in global geothermal electrical capacity share from roughly 0.2% in 2022 to roughly 0.3% by 2030, roughly 0.6% by 2040, and 1.0% of the IEA’s total projected global electrical power generating capacity in 2050. For context, the IEA Net Zero by 2050 report forecasts total global electrical generation capacity to grow from roughly 7,800 GW in 2020 to roughly 14,900 GW by 2030, to 26,400 GW by 2040, and to 33,400 GW by 2050.

IEA Net Zero by 2050 Global Growth Trajectory: Within the IEA’s 2021 Net Zero by 2050 report, it outlines the capacity growth for geothermal electricity production required for the global energy supply to be net zero by 2050. The IEA estimates that, to achieve net zero by 2050, geothermal energy capacity will need to increase by roughly a 13% CAGR from 2021 to 2030 (roughly 3.4 GW/year), representing roughly a 250% increase in global geothermal capacity from roughly 15 GW in 2020 to roughly 52 GW by 2030. Longer term, the IEA’s modeling suggests geothermal capacity is required to grow to roughly 126 GW by 2050, representing roughly a 7% CAGR, in order to meet its net zero target. We note that the IEA characterizes the current pace of geothermal development as “not on track” to meet its net zero by 2050 target, meaning that the pace of geothermal capacity growth must increase from its current trajectory.

DOE GeoVision USA Growth Trajectory: The U.S. Department of Energy estimated that US geothermal electricity capacity alone could rise to roughly 60 GW by 2050, representing roughly a 10% CAGR from 2022 (roughly 4GW capacity) to 2050. This growth trajectory is based on achieving three core objectives for the industry: 1) increased access to geothermal resources; 2) reduced costs and improved economics for geothermal projects; and 3) improved education and outreach about geothermal energy through stakeholder collaboration. Within Scenarios 1 and 3, we assume a 30% incremental market share for US geothermal capacity, which is slightly higher than the current share in the 25% range, given our belief that North American players are leading the world in terms of progressing geothermal innovation.

Within our modeling, we assume that conventional hydrothermal power generation capacity will continue to increase at its historical rate of roughly 3.5% per year. We then layer on “Next Gen Systems”, which include lowertemperature conventional developments, closed loop developments, and other innovations that increase the commercial viability of non-traditional hightemperature hydrothermal resources.

Geothermal Innovation: Our modeling assumes that non-conventional geothermal developments are made increasingly commercial over time, which allows geothermal project development outside of the high-temperature hydrothermal resource bounds that have historically limited geothermal development growth. More specifically, our modeling assumes that ongoing investment in geothermal will advance efforts to 1) increase economic yields for conventional geothermal developments in the 100°-150°C temperature resource; 2) make closed loop geothermal technology commercial, which would allow for non-hydrothermal resources to be tapped for geothermal power production; and 3) increase the commercial depth of geothermal drilling, which could increase the commercially available temperatures for geothermal wells. In essence, our modeling assumes that commercially viable geothermal resources will becoming increasingly viable around the globe as wells become cheaper and innovation increases the economic yield of medium- to low-temperature geothermal development. Aside from Scenario 3, we do not assume that breakthrough technologies, including deep closed loop and superhot geothermal technologies, will be widely commercialized.

Upstream Addressable Market Sizing: Based on channel checks and our understanding of in-flight geothermal projects, we estimate roughly $5.0 mn-$9.0 mn in well development costs per geothermal well. We assume this range will be flat through 2050 given increased complexity and depth of wells as innovation accrues to increased output for “Next Gen Systems” in our analysis. We note that our market size estimates do not include the market for surface power generation equipment or upstream infrastructure, which we believe could represent 40%-60% of project costs. We note that our estimates suggest that the TAM for geothermal is likely to peak in the 2022-2030 period as innovation drives down the cost per MW over time.

Higher Output, Flat Drill Times, and Costs per Well: Within our modeling, this assumption is reflected in increasing electrical generation capacity per well over time rather than a decrease in well cost or drilling days per well. Given our view that geothermal innovations are likely to drive increased economics, largely through access to deeper geothermal resources and through the commercial adoption of complex closed loop systems, we believe that total well cost is unlikely to materially decrease over time, though the cost per meter is likely to decrease and the energy capacity per well is likely to increase. Specifically, we estimate the energy capacity of non-conventional developments could begin to approach current hightemperature conventional generation capacity per well at roughly 5.0 MW/well (ATBe) by 2050.

We note that generating capacity per well for geothermal developments varies widely and is largely dependent on the well type and the target formation heat.

Data points are limited within our tracking of projects, and the range is large: higher-temperature conventional projects we track generate up to roughly 7.0 MW capacity per well, while lower-temperature projects we track are expected to generate on average roughly 1.5-2.0 MW/well. We do not include any electrical capacity declines on a per well basis in our analysis, though this is a factor that could have a marginally positive influence on activity and upstream market size.

Upstream Services Demand: We assume 25 drilling days per well on average for a geothermal well, in line with the average well times for known geothermal wells drilled in Canada since 2019.

We assume that geothermal innovations are likely to increase drilling rates (rate of penetration), though this is likely to be offset by innovations to drill wells deeper.

Risks and Opportunities to our Upstream Geothermal Activity Forecasts Geothermal Innovation is Both a Risk and an Opportunity: Our forecasts inherently rely on uncertainty related to the pace and level of innovation including 1) new value-add components to conventional systems; 2) lower-cost and better processes for deep drilling to access higher temperature resources; and 3) EGS system innovations such as closed loop geothermal becoming commercial to some degree. We believe these innovations are required for geothermal capacity to increase to the level required for the IEA’s net zero target by 2050 and in the DOE’s forecast for 60 GW of US geothermal capacity by 2050. That said, we believe that if the geothermal industry, with the backing of major energy companies, is able to drill SHR geothermal resources (10-20 km) and develop commercially viable deep closed loop systems, geothermal could become a globally ubiquitous and economically competitive power generation technology that would be long-life, baseload, and dispatchable – significantly advantaged over other renewable energy sources, in our view. We believe these preconditions are likely necessary to achieve 1.0% or more of the global energy capacity market, though 1.0% may prove conservative in this scenario.

Carbon Pricing Mechanisms are a Major Economic Factor: Carbon pricing mechanisms are a major source of economic value for geothermal projects, especially those targeting moderate-temperature resources. As such, we believe the pace of carbon pricing increases are fundamental to the viability and growth of geothermal projects globally. As geothermal innovation progresses, there is likely to be a time when lowertemperature geothermal plays and deeper geothermal projects may be viable on a standalone basis. For now, we believe jurisdictions with the most incentives for carbon reduction and the steepest inflation in carbon pricing mechanisms are likely to be among the strongest geothermal growth markets.

Oil Well Conversions and Direct Use Are Not Considered: Our modeling only includes activity associated with greenfield power generation projects and does not include capacity that may come from innovations that access oil and gas well conversions (not commercially viable at this stage), and it does not include projects for direct use. These types of projects could drive upside to our activity and spending forecasts.