Energy security has taken center stage over the past 12 months, but oil and gas players are not willing to lose focus of their long-term energy transition ambitions. Geothermal energy will continue to thrive in the coming years, offering promising opportunities to traditional oil and gas players for diversification into renewable energy sources.
Rystad Energy expects geothermal power generation capacity to reach close to 18 GW and district heating to approach 17 GW by the end of this year. Major E&P players and oilfield service companies have already been in the geothermal business for decades but the need for diversification and pursuit of clean energy sources has never been so pressing. This is why we see massive interest from all stakeholders in the industry, including investors, developers, and service companies, all showing a firm resolve to scale up geothermal energy and increase its share in the global energy mix. This is also a natural choice for oil and gas players as they can leverage their wealth of experience from the hydrocarbons industry within the geothermal sector.
Geothermal energy is simply defined as heat energy extracted from the earth. There are two broad applications of geothermal energy: for power generation and district heating. Whether geothermal energy will be utilized for power generation or heating mainly depends on subsurface temperatures and local energy markets. Power generation projects are typically developed in higher reservoir temperatures exceeding 150°C, while district heating projects can typically range between 50°C and 150°C, with some exceptions. The power generation market is much more widespread globally, with the US leading, and a large portion of installed capacity being in and around the so-called “Ring of Fire” that runs around much of the Pacific Ocean coastal areas, in countries including Indonesia and the Philippines. District heating, meanwhile, is more concentrated in the two large markets of mainland China and Europe. China makes up nearly half of the global direct use market, with Europe making up the remainder.
With energy security concerns rising in Europe in particular, discussions on the use of geothermal are becoming increasingly pertinent among policymakers. Geothermal’s key strength lies in it being nonintermittent and always providing a continuous baseload of energy. However, potential drawbacks include higher development costs and risks associated with project development, which can at times make it difficult for projects to progress past the approval stage.
The oil and gas industry will have a very important role to play in resolving these challenges and putting geothermal on par with other renewable energy sources. The global geothermal drilling sector is currently much smaller than oil and gas—around 70,000 wells are drilled every year for oil and gas vs. around 1,500 in the geothermal space—yet the challenges are quite similar.
This is why the oil and gas industry will have a pivotal role in developing a better understanding of reservoirs and drilling within the geothermal sector, particularly with regards to subsurface risks. The oil and gas industry has a rich history in not only developing game-changing technologies but also in scaling these up and allowing access to billions of barrels of hydrocarbons that were previously deemed inaccessible and uneconomical to produce. To develop such technologies for the geothermal industry, partnerships will be key, with several between leading oilfield service companies and geothermal startups already seen.
Baker Hughes, for example, is leading a geothermal consortium, Wells2Watts, that aims to use closed-loop systems to transform dry, nonproductive geothermal and oil and gas wells into geothermal wells capable of producing geothermal energy. It is a private industrial partnership between US independents Continental Resources, Chesapeake Energy, and a Japanese oil and gas company Inpex. It receives technology support from US-based geothermal technology player GreenFire Energy and France-headquartered tubular solutions outfit Vallourec.
The success of advanced geothermal systems (AGS) and enhanced geothermal systems (EGS) will be critical to the overall success of the geothermal sector. AGS projects are typically closed-loop systems where a working fluid is contained and circulated to extract subsurface heat, while EGS systems rely on fracking a reservoir in the event of insufficient permeability. Another interesting avenue that many oil and gas companies are exploring is using either existing oil and gas producers for co-production of geothermal brine or reactivating shut-in and abandoned wells for the purpose of producing geothermal energy. This is another market that can offer enormous opportunities for scaling up geothermal, as operators already have enough subsurface data collected during oil and gas drilling that can be used for assessing geothermal potential. For instance, we assess that there are currently almost 2 million active oil and gas wells; and if it is considered that approximately 10% of these could potentially be used for geothermal, this yields a market of around 200,000 wells. To further share risk and make geothermal projects economically attractive, the industry is also looking to combine geothermal energy production with lithium extraction, producing green hydrogen, and with carbon capture, utilization, and storage (CCUS) projects.
With interest in geothermal energy on the rise, we expect that geothermal power generation capacity will nearly double to 32 GWe and heating capacity will increase to almost 30 GWt by 2030. This will require almost 10,000 new wells to be completed for power generation and heating projects between this year and 2030 and estimated spending to approach $100 billion in the sector over that period, with almost $82 billion expected in the power generation sector and around $13 billion within the district heating sector up to 2030.
The question then is: How should the industry prepare to accommodate this expected growth in the geothermal market? Oil and gas companies will have a very important role in developing and deploying new technologies that can significantly reduce geothermal project costs, while suppliers must also be prepared to manage and deal with a very different customer base. The geothermal market is currently very fragmented with many small developers usually focusing on a single country or at times only one part of a country. This is vastly different to how oil and gas majors operate, as they typically have a wide global footprint. There are, however, small players that can operate a 1-MW plant and drill just a handful of wells in one part of the country. For example, one the largest geothermal developers, Philippines-based Energy Development Corporation, only operates in the domestic market, while Nairobi-headquartered KenGen operates solely in Kenya. Suppliers will, therefore, have to cater to this fragmented market through effective and timely procurement strategies to ensure they establish relationships with developers and are able to meet the rising demand for geothermal services.
Research and analysis provided by Rystad Energy.
