Sierra Geothermal Power Corp.

Source: Energy Digital

Date :9/17/2007 6:37:23 AM

Turning up the geothermal heat

The idea of using geothermal heat to generate electricity is becoming a hot investment opportunity, and Sierra Geothermal Power Corp is leading the race

Written by James Buchanan & Produced Melissa Abbott

The process of producing electricity is fundamentally the process of making steam.

So then, if we know that fossil fuels — the primary means to generate heat to create steam — are expensive, dirty and largely found in areas of the world with political turmoil and other issues, it would seem to make sense to look to alternative heat sources to create steam.

Further, if the heat to generate steam could be found in abundance, say for example, underground, it would further seem to make for a rather enticing investment opportunity.

Sierra Geothermal Power Corp. thinks so, and is in the process of establishing power plants on geothermal hot spots and seeking the financing to develop this resource into a fully functioning, clean and renewable electric generating resource.

According to Gary Thompson, president and CEO of Sierra Geothermal, the company is well poised to become a leader in the geothermal market, which is itself poised to become a significant growth market. He adds that geothermal electric generation would provide stable base load power, long-term cash flows and a clean and renewable source of electric power generation.

Further, the debt on geothermal power plants, he says, is generally amortized on a 15 year basis.

“But these plants can operate almost indefinitely depending on the life of the equipment, which can simply be rebuilt after 20 to 30 years and then run for another 20-30 years, it’s a pretty sweet way of making power,” he notes.

Thompson goes on to say, “We have a very positive outlook. We’ve a fairly aggressive plan to develop our resources. We are a small company now, with big company goals. Once we get some of our projects up and running we will have gained the market confidence. We expect to become a major player in the space.”

To achieve its goal of becoming a geothermal power wholesaler, Sierra Geothermal, based in Vancouver, B.C., is in the process of developing 5 of its 17 properties in Nevada, while also seeking out other promising geothermal sites.

“Nevada is considered to be the Saudi Arabia of geothermal,” says Thompson. “I don’t like to use that term,but it is a good analogy. Nevada has one of the largest high-heat flows of anywhere in the world.”

According to Thompson, acquiring the most promising sites requires a fair amount of due diligence up front, which includes assessing the sites potential for power production as well as acquiring the underground geothermal rights either from the U.S. Bureau of Land Management or from private landowners with grandfathered rights to the resources under their lands.

He adds that some of the work to develop geothermal sites had begun years ago in the 1970s and 1980s when energy crisis caused oil and gas companies to start looking for alternative resources to develop. However, as these efforts ramped up, the energy concerns of the time dissipated causing the companies to scale back and then eventually drop their efforts.

“We are essentially continuing that work to identify geothermal anomalies and develop them,” says Thompson.

Though Sierra Geothermal is a relatively young company, it already has a number of maturing sites.

“Since 2005 we have managed to gain controlling interest in 88,000 acres of prospective geothermal lands, which is the largest portfolio of projects as compared to our small-cap peers,” he says.

These 88,000 acres are split up among 17 properties scattered throughout Nevada, and California which we have classified into three tiers. Tier 1 projects represent sites that have had significant pre-development work done to them, says Thompson. They are at the pre-feasibility and production assessment stage which, tests for water flow and temperature in order to determine how many megawatts a site could potentially produce.

Of the company’s five Tier 1 projects, Thompson says the Reese River site is the furthest along the development process.

“We completed the first deep test well at Reese River earlier this year with positive results,” he says.

Further, Reese River has been rated by outside experts as being one of the top 10 undeveloped geothermal prospects in Nevada.

The site was originally explored by Phillips Petroleum and Amax Exploration, which drilled a total of 52 test holes in the 1970s and 1980s. According to data developed from those test holes and other sources, the site is estimated to have a 90 percent probability of generating 13 megawatts of electricity, and a 50 percent probability of exceeding 30 megawatts.

One of the other benefits of this site — and a major consideration for any site, says Thompson — is its proximity to the California electric market. The intent of the company once the site is producing power is to sell that power to utilities in Nevada and California. Being close to transmission infrastructure is key to any renewable project and we are well located to the grid on all of our projects.

Thompson adds that the California and Nevada markets are enticing because they are two of 25 states to pass renewable portfolio standards, which require electric utilities to purchase a certain percentage of electricity from renewable sources. California expects utilities to receive 20 percent of electricity from renewable sources by 2010, and Nevada requires 20 percent by 2015.

Despite such a favorable market and outlook for its sites, Sierra Geothermal must still develop the financing to move its various projects forward as geothermal power projects are capital intensive.

Thompson says financing these projects is essentially done in two parts. The first is to raise money to support the work to show that a site is feasible, which represents approximately 25 of the total capital required and is a relatively high risk investment.

“We must have investors that have a long view, a positive outlook for renewables, and are willing to take some risk at the early stage for higher potential gains,” he says.

In order to advance the first stage of work, Sierra Geothermal has sought funding from a number of sources, which includes government agencies (the cost of the test well at Reese River has been offset by a $580,000 grant from the U.S. Department of Energy) and the sale of its stock which was announced in June of 2007.

Further, Thompson says the company is actively seeking a strategic partner to co-develop some of its projects.

Gaining credibility with lending institutions represents the second phase of financing. Once the project has matured to where it can be confidently said to be able to support a geothermal electric generating plant, a positive bankable feasibility report is issued.

“Once you have a positive report you can go to lenders to finance the rest of your field,” says Thompson.

Though Sierra Geothermal faces some challenges as it moves forward, Thompson notes that the company has come a long way in a short period of time, and expects to begin generating and selling electricity by 2010-2011.

Further, Sierra Geothermal employs world-renowned geothermal consulting company GeothermEx Inc to conduct independent evaluations of its properties.

In business since 1973, GeothermEx is the longest-established full-service geothermal consulting firm in the world. Specializing in all aspects related to the geothermal resource, GeothermEx has been involved in nearly 1,000 projects in 49 countries, working for developers, financiers, utilities, land owners and agencies of government.

GeothermEx’s staff consists of experts in geosciences (geology, geochemistry, geophysics, hydrology), engineering (drilling, well testing, reservoir, production, power plant, chemical), computer science and economic analysis.

All have advanced degrees and many years of geothermal experience. GeothermEx has conducted due diligence and verified resource adequacy for financial institutions for many geothermal projects world-wide that have been financed by bank loans or bonds.

This has enabled the development of more than 6,000 MW of geothermal power, the total financed to date exceeding US $10 billion.