Allens Arthur Robinson

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Focus: Resources – September 2008

Significant developments in the geothermal energy industry

In brief: The Geothermal Reporting Code, the world's first uniform code to guide the public reporting of geothermal data, was released in August 2008 by the Australian Geothermal Energy Association and the Australian Geothermal Energy Group. In a further significant development, the Federal Government recently launched the Geothermal Drilling Program, through which $50 million will be allocated to support geothermal projects in Australia. Partner Igor Bogdanich (view CV) and Lawyer Myra Stirling report on these developments. 

• The Geothermal Reporting Code
• The Geothermal Drilling Program
• Conclusion

The Geothermal Reporting Code

The Geothermal Reporting Code (the Code) has been prepared by the Australian Geothermal Code Committee, which is associated with the Australian Geothermal Energy Association (the AGEA) and the Australian Geothermal Energy Group (the AGEG). The AGEA is the national industry body representing the Australian geothermal energy industry, while the AGEG provides financial and intellectual support for Australia's membership in the International Energy Agency's Geothermal Implementing Agreement. The Implementing Agreement provides a framework for wide-ranging international cooperation in geothermal research and development.

The AGEA and the AGEG view the adoption of the Code as an important step in the development of Australia's geothermal energy industry, and building understanding and reputation in the marketplace.

The Code deals with the manner in which geothermal exploration results, and resource and reserves assessments are classified and publicly reported. While an independent Code, it mirrors the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (the JORC Code). However, unlike the JORC Code, the Code has not yet been endorsed by the ASX or any other regulator. Nevertheless, all members of AGEA were required to comply with the Code from August 2008. The vast majority of Australia's geothermal energy companies are members of AGEA.

The key provisions of the Code¹ can be summarised as follows:

Public Report

A 'Public Report' must be prepared in accordance with the Code if it includes a statement on Exploration Results, Geothermal Resources or Geothermal Reserves.

'Public Report' is defined broadly to include 'any form of publication of Exploration Results, or Geothermal Resource and/or Reserve assessments'. Public Reports include, but are not limited to, annual reports, quarterly reports, postings on company websites, and briefings for shareholders, stockbrokers and investment analysts.

Competent Person

A Public Report must be based on, and fairly reflect, the information and supporting documentation prepared by a 'Competent Person' (or Competent Persons). A 'Competent Person' must have a minimum of five years' experience relevant to the type of Geothermal Play² under consideration and to the activity that the person is undertaking.

Public Reports must contain details of the Competent Person (eg name and employer) and be issued with the written consent of the Competent Person.

Reporting of Exploration Results

'Exploration Results' include data and information generated by exploration programs. Examples of Exploration Results include results of hot springs or fumarole sampling, surface heat flow, geochemical results and geophysical survey results, and rock property measurements.

Exploration Results must not include any assessment of the quantum of 'Thermal Energy in Place'³ or 'Recoverable Thermal Energy'⁴ . However, a company may comment on its exploration in terms of target size and type, provided:

• the potential quantity of Thermal Energy in Place or Recoverable Thermal Energy of the target is expressed as being within a range;
• such information is presented in a way that will not be misrepresented or misconstrued as an estimate of Geothermal Resources or Reserves;
• the terms 'resource(s)' or 'reserve(s)' are not used; and
• the statement is accompanied by:
  • a detailed explanation of its basis; and
  • a proximate statement that the potential quantity of energy is conceptual in nature, that there has been insufficient exploration to estimate a Geothermal Resource, and that it is uncertain if further exploration will result in the determination of a Geothermal Resource.

Reporting of Geothermal Resources

A 'Geothermal Resource' is 'a Geothermal Play which exists in a form, quality and quantity that there are reasonable prospects for eventual economic extraction'. Geothermal Resources are subdivided in order of increasing confidence into three categories:

• 'Inferred Geothermal Resource';
• 'Indicated Geothermal Resource'; and
• 'Measured Geothermal Resource'.

Public Reports of Geothermal Resources must specify one or more of the above categories. Categories of Geothermal Resources cannot be reported in a combined form unless details for each individual category are also provided.

Geothermal Resources are generally reported in units of Thermal Energy in Place. Indicated and Measured Geothermal Resources may also be reported as:

• Recoverable Thermal Energy, with assumptions stated; or
• assumed electricity generation, reported as either the net electrical output (MWh) for a defined period, or the net total production over the life of the project (GWh).

The word 'reserve' or 'reserves' must not be used in describing Geothermal Resources.

Reporting of Geothermal Reserves

A 'Geothermal Reserve' is the economically recoverable portion of an Indicated or Measured Geothermal Resource. Geothermal Reserves are subdivided in order of increasing confidence into two categories: 'Probable Geothermal Reserves' and 'Proved Geothermal Reserves'.

Public Reports of Geothermal Reserves must specify one or other or both of the categories of 'Proved' or 'Probable'. Reports must not contain combined Proved and Probable Geothermal Reserves figures, unless the relevant figures for each of the categories are also provided.

Geothermal Reserves are reported as:

• Thermal Energy in Place;
• Recoverable Thermal Energy, defined in relation to a stated technology and recovery rate; or
• assumed electricity generation, reported as either the net electrical output (MWh) for a defined period, or the net total production over the life of the project (GWh).

Where both Geothermal Resources and Geothermal Reserves are reported, a statement must be included in the report that clearly indicates whether the Geothermal Resources are inclusive of, or additional to, the Geothermal Reserves. Geothermal Reserve estimates must not be aggregated with Geothermal Resource estimates to report a single combined figure, on the basis that this is considered to be misleading.

The Geothermal Drilling Program

The Geothermal Drilling Program (the GDP) is the first program to be launched under the Federal Government's $500 million Renewable Energy Fund, which was set up this year to accelerate the development, commercialisation and deployment of renewable energy technologies in Australia. The GDP will provide grants of up to $7 million on a matching funding basis for eligible 'proof-of-concept' geothermal energy projects. Expressions of interest are currently being sought by the Federal Government for the first round of GDP funding, with a further funding round to be announced for the 2009-10 financial year.

What is a proof-of-concept project?

Proof-of-concept projects involve activities necessary to establish the technical viability of an identified geothermal reservoir. Typical activities in a proof-of-concept project include the drilling and completion of geothermal production and injection wells, and the demonstration of fluid circulation for either electricity production or direct heat use.

Who is eligible to apply for GDP funding?

To be eligible for GDP funding, an applicant must be:

• an Australian-resident company incorporated under the Corporations Act 2001 (Cth) not exempt from paying income tax in Australia;
• the holder of Australian geothermal exploration licence permits that the proposed project is contained within;
• able to demonstrate within a period of three months of being awarded a grant that it can fund the costs of the project not met by the GDP as they fall due;
• able to demonstrate access to, or the beneficial use of, any intellectual property necessary to carry out the project;
• prepared to provide the Commonwealth with all data gained during the project. This data will be made publicly available subject to agreed confidentiality periods and terms;
• able to demonstrate the existence of an Inferred Geothermal Resource (as that term is defined in the Code) as the drilling target; and
• able to commence the project in the 2008-09 financial year, for applications in the first round of the GDP.

Further, companies that have previously received funding from other Commonwealth programs for the purposes of deep drilling are required to declare such funding. The scope of the GDP application must differ from any previous successful applications.

How will GDP funding applications be assessed?

The GDP is a competitive merit-based program. An application that satisfies the eligibility criteria described above will be considered against the following 'essential merit criteria'.

• technical strength of the project (ie demonstration of the existence of an Inferred Geothermal Resource);
• technical capability and resources available to the applicant;
• management capability of the applicant; and
• financial capacity of the applicant (including submission of a credible project budget).

In addition to the essential merit criteria, applications will also be assessed against the following 'desirable' criteria:

• involvement in consortia to address the issue of drilling capabilities shortages;
• degree of technical innovation of the project;
• project contribution to a portfolio of locations funded by the GDP; and
• the additional benefit/leverage that can be obtained from the private sector and from the applicant for the Federal Government's contribution.

Collaborative projects

Proof-of-concept projects may be undertaken collaboratively by companies, including under a joint venture arrangement. However, only one entity can be the applicant, with the eligibility criteria applying only to that applicant. Where an application for a collaborative project is successful, only the applicant entity will enter into a grant agreement with the Federal Government. The applicant will be responsible for performance of the entire project, notwithstanding the fact it may have subcontracted the performance of any part of it. Matching funding contributions must also come through the applicant.

Conclusion

The launch of the GDP and the introduction of the Code represent two important steps in the development of Australia's geothermal energy industry. The GDP will provide a boost to geothermal energy companies in their bid to make the production of baseload energy from geothermal sources viable in Australia. The Code will encourage transparency and consistency in the reporting of geothermal data.

Footnotes

1. There is an accompanying Geothermal Lexicon.
2. This term is used in the Code as an 'informal qualitative descriptor for an accumulation of heat energy within the Earth's crust'.
3. This term is used in the Code to refer to static energy present in the play (expressed as petajoules).
4. This term is used in the Code to refer to recoverable energy present in the play (expressed as petajoules).
   

For further information, please contact:

• Igor BogdanichPartner, Melbourne
  Ph: +61 3 9613 8747
  Igor.Bogdanich@aar.com.au
• John GreigPartner, Brisbane
  Ph: +61 7 3334 3358
  John.Greig@aar.com.au
• Stuart MenglerPartner, Beijing
  Ph: +86 10 8515 0250
  Stuart.Mengler@aar.com.au

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