CHAPTER 3 GEOTHERMAL LEASING PRACTICES
| Jurisdiction | United States |
(Jan 1977)
GEOTHERMAL LEASING PRACTICES
Assistant General Attorney—Western Area AMAX Inc.
Denver, Colorado
I. INTRODUCTION
In the past few years, although it has largely escaped public notice, the United States has become the world's largest producer of electrical power from geothermal resources.1 Present production at The Geysers geothermal field in northern California is 502 megawatts of power,2 or approximately the amount required to supply a city with 500,000 residents. Its sustainable yield has been estimated to be 2000 megawatts or more.3
Although present geothermal production amounts to only one percent of current nuclear capacity,4 the United States Geological Survey has estimated that our domestic hydrothermal geothermal reserves might be sufficient to match one-third of our present electrical generation capacity,5 and the Energy Research and Development Administration speculates that 246,000 Mw centuries of "exploitable" energy could be derived from identified geothermal resources.6
Regardless of how wide of the mark the foregoing estimates might be, it seems safe to predict that in light of the recent events which have so profoundly rocked the nation's energy self-confidence and stimulated the search for all forms of domestic energy resources geothermal resources will be on the shopping list of energy companies engaged in that search.
For the person experienced in petroleum leasing, the acquisition of geothermal resources will present much that is familiar. There also will be much that is new, however.
Two of the principal problems facing the geothermal landman, which will be discussed below, are that no one is quite sure what the resource is and hence the question of
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who owns it is open to doubt. There is a third problem. Few prospective lessors have any understanding of the resource in general or any knowledge of how a geothermal development might impact their land. The effective geothermal landman must be able to cope with all of these problems.
This paper is divided into three parts. First, a general overview of the resource is presented. This is well-plowed ground,7 and will be dealt with in detail at this Institute by Dr. Austin. To the extent the subject bears on leasing practices, however, it will also be treated in this paper. Second, some legal and practical problems involved in developing the resource will be discussed. Finally, a hypothetical land situation will be described and the author will make some suggestions for leasing geothermal resources on the described premises.
II. THE RESOURCE
Geothermal literally means the earth's heat. The energy produced from that earth heat is what the geothermal industry is all about.8
The earth's temperature gradually increases as one penetrates below the surface. In the Western United States, for example, temperatures normally increase approximately 35 degrees C. per kilometer.9 There are four geothermal phenomena which alter this normal thermal gradient and which bring commercially viable heat sources10 closer to the surface of the earth. Only one of these geothermal systems — hydrothermal convective — has present commercial use,11 and this paper will focus on this type of system.
A hydrothermal convective system has three essential components — heat, a liquid or steam reservoir, and a porous or fractured environment to permit circulation.
When located close to the surface of the earth this system presents the fewest problems for the energy producer. At The Geysers, for example, dry steam collected from wells averaging 2,300 meters12 deep is fed directly into turbine generators which, in turn, produce electricity. In other areas, such as at Cerror Prieto, Mexico, hot brines constitute the geothermal medium. The geothermal manifestations of Yellowstone National Park are another example of this type of system.
As will be discussed below, the origins of these hydrothermal fluids may be of great legal significance to the party attempting to acquire the geothermal resources.13
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Two other geothermal systems may eventually prove to have commercial potential — hot, dry rock systems and geopressured systems.
High temperature rock structures possess only the heat element needed for a geothermal system — reservoir and circulation are missing. Nevertheless, experiments are underway14 to determine if these systems can be exploited. It is believed that fracturing of these structures is possible using hydrofracturing techniques commonly used in oil and gas exploration. The geothermal medium could be provided by injecting water into the fractured structure from the surface. The resulting steam or hot water could be captured in the same manner as in the hydrothermal convective system — through wells drilled into the "reservoir."
Geopressured systems are low-salinity lithostatically-pressured hot water aquifers located principally along the Texas and Louisiana gulf coasts at depths between 10,000 and 15,000 feet.15 Dissolved methane in recoverable quantities usually is found in these systems.16
The fourth phenomenon is magma — the molten rock underlying the earth's surface which is expelled during episodes of volcanic activity. Despite the fact that it reaches temperatures of up to 800 degrees C. at the surface, no commercial uses have been made of this heat source.17
Although geothermal resources may be used for several purposes,18 in the United States today the greatest emphasis is on use of the resource for the production of electricity — a use best met by a resource of high enthalpy (heat content).19 "High enthalphy geothermal systems are known only in regions of youthful geologic phenomena, such as volcanism, crustal rifting, and recent mountain building."20
To the geologist the foregoing means that geothermal reservoirs usually21 will be found in metamorphic and igneous formations, in contrast to the sedimentary basins in which oil and gas deposits usually are found. The fracturing of the rocks, essential for the circulation of the hydrothermal fluids, probably will be random in nature, and the reservoir is likely to be geologically complex, geometrically irregular and not susceptible to accurate delineation or definition.22
The driller will encounter in geothermal reservoirs a more difficult medium than is common in oil and gas fields. The higher temperatures and the fracturing and faulting may cause drilling costs to exceed by 50 percent those for an oil well of comparable depth.23
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The landman should note the geology and attendant drilling difficulties and resist giving away offset well obligations in leases he is negotiating. A gratuitous concession on this point could impose substantial burdens on the lessee without returning a commensurate benefit to the lessor. At most it might be appropriate to impose on the lessee an obligation to drill if, in the judgment of a prudent operator, activities on adjacent lands, which have not been pooled or unitized with lessor's lands, are depleting reservoirs on lessor's lands.
Uses of Geothermal Resources
a. Uses Other Than Power Production.
Generation of electricity is not the only use of geothermal resources in the United States. The resource is used for space heating as well.
In Klamath Falls, Oregon, over 400 shallow wells serve an estimated 10,000 persons by providing low temperature water for heating residential and commercial structures.24 The entire campus of the Oregon Institute of Technology in Klamath Falls is heated by one geothermal well,25 a use that saves the institute an estimated $225,000 a year on its heating bills.26
Geothermal resources also are used for space heating and greenhouse heating in Boise, Idaho, Reno-Steamboat Springs, Nevada, and Susanville, California and the use of geothermal resources is being investigated for thermal fish farming in Paso Robles, California, and greenhousing in Lakeview, Oregon, and Calistoga, California.27 Soil warming to extend growing seasons, evaporation in sugar refining, water desalination, absorption refrigeration, mushroom growing and process drying of various materials are other uses that have been suggested.28
Iceland has used geothermal hot water for municipal heating since the 1930's, and nine out of ten homes in the capital city of Reykjavik are so heated.29 Geothermal waters reportedly have been transported 20 km for this purpose.30 The Icelanders also have in excess of 3,000 acres of greenhouse space heated geothermally.31 Iceland's geothermal water generally are potable, and consequently are used for domestic purposes as well.
Potential alternative uses of geothermal distinguish this resource from others. The well that falls short of producing enough energy for generating electricity may produce enough energy for some other commercially viable
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use. These uses must be feasible in place, however, for heat loss makes it impractical to transmit the resource great distances. As noted above, it might be transported up from two to 20 km or more for various uses. Thus a geothermal reservoir might have great commercial value for space heating if it is located near a populated area. A similar reservoir may have no value in a remote location.
The landman and the lawyer will serve their clients well by remembering that there might be an alternative to capping and sealing a $700,000 well that does not produce enough energy to generate electricity.
b. Power Production.
Geothermal resources are not valuable for power production unless they are available in sufficient quantities to provide the sole "fuel supply" for a power generating plant. The geothermal producer most likely will sell his production to a utility company, which will in turn construct the power plant and transmission systems. At The Geysers the smallest plant Pacific Gas and Electric Company presently will consider constructing is a 55...
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