Comments on: Geothermal Frustration, Part II http://whiskeyandgunpowder.com/geothermal-frustration-part-ii/ Whiskey and Gunpowder features articles on gold, oil, currencies, emerging markets, energy, and more. Wed, 23 May 2012 06:51:41 +0000 hourly 1 http://wordpress.org/?v=3.3.2 By: Frank Monastero http://whiskeyandgunpowder.com/geothermal-frustration-part-ii/comment-page-1/#comment-21479 Frank Monastero Thu, 22 Sep 2011 16:45:03 +0000 http://whiskeyandgunpowder.com/?p=4848#comment-21479 Your business model article hits the nail directly on the head, and Glenn adds impetus to the story with his informed views. That said, the missing piece of the puzzle that shows how geothermal development companies achieve success is understanding risk and being able to manage it without destroying the company along the way. Glenn alluded to the answer, but didn't finish the story, which lies in ownership by a LARGE company that thrives on natural resource risk management and conducts its geothermal business using cash flow from other successful operations. Having to borrow the money detracts from stockholder equity and adds an expensive layer of risk to the financial calculations. If this sounds like a description of oil and gas companies, then you understand the puzzle. Chevron has stayed in the game in Indonesia and is the largest single producer of power from geothermal energy in the world. Shell has been quietly involved in solar investment and made a brief foray into the geothermal area, but did it halfheartedly. The "big guys" may be the players in this sector, but don't discount some of the large mid-majors either. Two burning questions are "When, and how, do the oil & gas companies get involved (again) in the geothermal business?" The answer to when, in my opinion, is based entirely on economics. So, they will begin to buy when they realize that geothermal power generating facilities, once they are built: are huge cash flow generators, very reliable producers (base load generators), have relatively low maintenance, and will command a premium in the electricity sales market for decades. One should not discount the importance of global economic health in the timing equation, but when you think about it, that should have oil companies looking to buy these companies now at a time when they have low stock prices and the O&G companies have strong cash flow. Once the concept breaks into the light of day, bidding wars will likely drive the price of acquisition higher, and quickly. The "how" part of the equation is simply by takeover. There is a natural synergy between O&G and geothermal exploration/development. True, geothermal development has the added step of power plant construction and operation, but as regards risk, that is trivial compared to drilling success - which O&G companies understand very well and know how to manage. Your business model article hits the nail directly on the head, and Glenn adds impetus to the story with his informed views. That said, the missing piece of the puzzle that shows how geothermal development companies achieve success is understanding risk and being able to manage it without destroying the company along the way. Glenn alluded to the answer, but didn’t finish the story, which lies in ownership by a LARGE company that thrives on natural resource risk management and conducts its geothermal business using cash flow from other successful operations. Having to borrow the money detracts from stockholder equity and adds an expensive layer of risk to the financial calculations. If this sounds like a description of oil and gas companies, then you understand the puzzle. Chevron has stayed in the game in Indonesia and is the largest single producer of power from geothermal energy in the world. Shell has been quietly involved in solar investment and made a brief foray into the geothermal area, but did it halfheartedly. The “big guys” may be the players in this sector, but don’t discount some of the large mid-majors either.

Two burning questions are “When, and how, do the oil & gas companies get involved (again) in the geothermal business?” The answer to when, in my opinion, is based entirely on economics. So, they will begin to buy when they realize that geothermal power generating facilities, once they are built: are huge cash flow generators, very reliable producers (base load generators), have relatively low maintenance, and will command a premium in the electricity sales market for decades. One should not discount the importance of global economic health in the timing equation, but when you think about it, that should have oil companies looking to buy these companies now at a time when they have low stock prices and the O&G companies have strong cash flow. Once the concept breaks into the light of day, bidding wars will likely drive the price of acquisition higher, and quickly. The “how” part of the equation is simply by takeover.

There is a natural synergy between O&G and geothermal exploration/development. True, geothermal development has the added step of power plant construction and operation, but as regards risk, that is trivial compared to drilling success – which O&G companies understand very well and know how to manage.

]]> By: Does the geothermal world need a new business model? | Think GeoEnergy Blog http://whiskeyandgunpowder.com/geothermal-frustration-part-ii/comment-page-1/#comment-2815 Does the geothermal world need a new business model? | Think GeoEnergy Blog Thu, 30 Jul 2009 23:00:25 +0000 http://whiskeyandgunpowder.com/?p=4848#comment-2815 [...] Part II: Geothermal Frustrations: Geothermal business model, need for a new one? [...] [...] Part II: Geothermal Frustrations: Geothermal business model, need for a new one? [...]

]]> By: Glenn Melosh http://whiskeyandgunpowder.com/geothermal-frustration-part-ii/comment-page-1/#comment-2794 Glenn Melosh Wed, 29 Jul 2009 20:45:54 +0000 http://whiskeyandgunpowder.com/?p=4848#comment-2794 To a long term member of the geothermal industry the story you put up sounds mostly right. But a little bit more history could help. The geothermal venue in the US was previously occupied by much bigger players -greenish oil companies. These guys (who I worked with for 25 years) did not go to the credit market so they did not have to hype their targets, sell penny stocks, or bother with the conflicted cosmetologists at Geothermex. In fact they usually did not publish at all. They also developed a lot of the technology and built projects. But eventually they bailed out. The main problem in their case was the opposite problem for the players now - they were too big. The geothermal play was too small for them to excel. For example at Chevron, currently the largest private geothermal project operator, they have something like a billion dollars of geothermal asset. In a 100+ billion dollar company - a $100M new project cannot cover the overhead much less get them to real growth. The main value of geothermal at Chevron is that it feeds their ads while paying for itself. The lesson here is about being the right size.- big enough but not too big. In my opinion to be successful a geothermal company has to have at least $100M in the bank (not the market). Otherwise the projects are bigger than they are and they will end up spending most of their time hyping prospects and arguing with lawyers instead of drilling wells. Then they will get screwed by (i.e. in the way of) bigger players that come later. Ideally the company should have the potential (i.e. leases)to be several times bigger than that. In order to manage risks and get good at development you have to be in different stages of exploration and development at several plants at one time. If you project into the future based on this idea and the continuation of the powerful green energy market drivers, the committed and energetic teams involved in the geothermal industry will eventually consolidate such that projects can be discovered and developed effectively. The largest obstacle for progress on this process is the perception that short-term investors can succeed in the geothermal play. This perception has bubbled project prices beyond the likely long term value. I presume that this is based on the notion that long term power prices will grow rapidly. In my opinion energy prices will increase but the increase rate will be limited by competing green technology (especially conservation and co-generation) and is unlikely to support the current project prices. Meanwhile as an investor it is a matter of picking the winners. Who is going to come out on top? My guess is that the winner will not be a small publically-held company because they raise their money in a short-term market. The winner is likely to be a group with strong cash flow (i.e. $20 - 50 M/yr of disposable income), a long term perspective, and a good understanding of risk management. Their geothermal growth won't be stunning but the size of the prize could be large if they are willing to wait. If you turn this around, for a prospective winner, it is a matter of picking the right investor. To a long term member of the geothermal industry the story you put up sounds mostly right. But a little bit more history could help. The geothermal venue in the US was previously occupied by much bigger players -greenish oil companies. These guys (who I worked with for 25 years) did not go to the credit market so they did not have to hype their targets, sell penny stocks, or bother with the conflicted cosmetologists at Geothermex. In fact they usually did not publish at all. They also developed a lot of the technology and built projects. But eventually they bailed out.
The main problem in their case was the opposite problem for the players now – they were too big. The geothermal play was too small for them to excel. For example at Chevron, currently the largest private geothermal project operator, they have something like a billion dollars of geothermal asset. In a 100+ billion dollar company – a $100M new project cannot cover the overhead much less get them to real growth. The main value of geothermal at Chevron is that it feeds their ads while paying for itself.
The lesson here is about being the right size.- big enough but not too big. In my opinion to be successful a geothermal company has to have at least $100M in the bank (not the market). Otherwise the projects are bigger than they are and they will end up spending most of their time hyping prospects and arguing with lawyers instead of drilling wells. Then they will get screwed by (i.e. in the way of) bigger players that come later. Ideally the company should have the potential (i.e. leases)to be several times bigger than that. In order to manage risks and get good at development you have to be in different stages of exploration and development at several plants at one time.
If you project into the future based on this idea and the continuation of the powerful green energy market drivers, the committed and energetic teams involved in the geothermal industry will eventually consolidate such that projects can be discovered and developed effectively. The largest obstacle for progress on this process is the perception that short-term investors can succeed in the geothermal play. This perception has bubbled project prices beyond the likely long term value. I presume that this is based on the notion that long term power prices will grow rapidly. In my opinion energy prices will increase but the increase rate will be limited by competing green technology (especially conservation and co-generation) and is unlikely to support the current project prices.
Meanwhile as an investor it is a matter of picking the winners. Who is going to come out on top? My guess is that the winner will not be a small publically-held company because they raise their money in a short-term market. The winner is likely to be a group with strong cash flow (i.e. $20 – 50 M/yr of disposable income), a long term perspective, and a good understanding of risk management. Their geothermal growth won’t be stunning but the size of the prize could be large if they are willing to wait. If you turn this around, for a prospective winner, it is a matter of picking the right investor.

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