Evaluating Geothermal Learning Curves

2023 October 26 Twitter Substack See all posts


A look at how geothermal might improve like wind and solar.

How Fast Can Drilling Improve?

Why Might Drilling Have a High Learning Rate?

Improvements in “fracking” have come from two primary sources - faster drilling and higher completion intensity. The pure drilling side (not including running casing and other non-drilling tasks) has a learning rate that could be as rapid as technologies like solar, wind, and batteries. It seems to keep progressing while fracturing productivity improves more slowly. Drilling speed increases see diminishing returns in shale wells as non-drilling activities dominate total construction time. Total rig productivity has increased ~50x-100x from drilling and completions since the earliest days in plays like the Marcellus Shale.

Few studies evaluate drilling speed learning curves, but they suggest that total drilling speed increases by 5%-15% for every doubling of experience. These numbers include running casing, cementing, and nippling up blow-out preventers, which are activities that improve slower than on bottom drilling. The drilling portion could have up to a 20% learning rate, though the uncertainty is high.

There are several reasons to think the learning rate is aggressive:

  1. Feedback is constant, inexpensive, high signal, and instantaneous. You are making hole, or you aren’t.

  2. The supply chain is geared to rapidly iterate on bit, motor, and directional tool design.

    The manufacture of these items is surprisingly labor intensive, but that allows rapid iteration. Bit designs can have lot sizes as small as fifty units. Lot size can be even smaller for motors and directional tools.

  3. Drilling is far away from physical limits.

    Bits, motors, and tools for drilling granite might improve speed and longevity several times in the most demanding applications.

Moving Geothermal Down the Drilling Learning Curve

The geothermal startup Eavor is notable for its underground, closed-loop radiator design instead of trying to pump water through fractures between wells. The architecture eliminates steel casing because the granite rock that advanced geothermal companies target is solid and easy to seal off. The cost is almost 100% pure drilling. The learning rate for drilling determines future costs.

The company has recently released more details on its first commercial project in Germany. It will drill almost 1.2 million feet of hole to produce 8 MW of electricity from 64 MW of steam. That is a pretty absurd amount of footage, and the 2.5-year project will push footage drilled in granite rock through 3-4 doublings. They could go through as many as 10-20 bit design iterations. The cost per foot of drilling might fall 60% from this single project if the learning rate is anywhere near solar or wind.

It may not be apparent why granite drilling should have a different, reset learning rate than drilling in sedimentary rock. Bottom-hole assemblies can improve from general improvements and local optimizations. The improvement in cutter quality has been substantial and improves performance globally. However, specific optimizations drive a significant portion of performance improvements. Cutter design, cutter layout, and rig parameters (weight on bit, pumping rate, etc.) coevolve for specific basins and rock types. One bit's cutters aren't compatible with another that has evolved differently.

Global improvements for bottom hole assemblies have advanced enough to make them competitive for drilling granite, but local optimization has barely started. And these local improvements are critical because granite is abrasive and hard. The abrasion requires hard cutters to resist erosion, but these are often brittle and vulnerable to impact damage from hitting the rock face. One evolutionary path could be altering operating parameters and the bottom hole assembly to minimize bit impacts on the rock while maximizing cutter hardness.

Productivity should see a quick burst from optimization that levels off as it approaches global limits. Closed-loop geothermal could start pushing global productivity because repowering China's existing district heating systems would require roughly the same amount of drilling footage as all horizontal wells drilled.

Judging Market Impact

The Learning Impact on Economics

Closed-loop geothermal projects require drilling ~200x more footage to produce the same energy as the best shale gas wells. That may seem ridiculous, but a casing-less closed-loop design cuts out the majority of cost categories a shale well has. Mud, casing, cement, fracturing, water, facilities, and production equipment are zero or dramatically reduced. The architecture rides the wave of drilling productivity and benefits from increased drilling speed much longer than shale wells.

Additionally, the geothermal system can be in a customer's parking lot. Capital expenditure for a shale gas well in Pennsylvania can be <$0.40/MCF. The gas market price is ~$3/MCF by the time it reaches Louisiana and $10/MCF delivered to Europe. A parking lot geothermal well is selling heat at its wellhead price.

If Eavor's timelines hold and their spending is reasonable, then the Germany project can already provide heat for less than European gas. A high-utilization project might deliver heat for $20/MWh vs. European gas at $40/MWh thermal. Doubling the footage drilled in a day might reduce costs by ~40% and make closed-loop geothermal competitive with gas almost anywhere. Only fifty Eavor Germany projects would reach global gas parity at the most conservative 5% learning rate. That is a drop in the bucket since it might take ten thousand projects to service existing district heating systems. There is also the potential for process heat at factories like paper mills that offer an opportunity many times the size of district heating.

Minimizing Total Cost and Effort

Items like financing and operating costs can factor heavily into competitiveness, especially as capital expenditures fall. An underground radiator has little technical risk compared to anything involving fracturing, which should make financing cheaper. The fluid can thermosiphon to reduce pumping costs, and water loss is negligible. Enhanced geothermal projects need a fair amount of pressure to push fluid through fractures and often have a significant fluid loss rate. Closed-loop designs could gain a $5-$10 per megawatt hour (thermal) edge through better interest rates and lower operating costs. Even a small amount of learning will push closed-loop drilling costs below enhanced geothermal systems - if they aren't there already.

The ease of scalability also makes a difference. Closed-loop already dominates mind share in markets like Europe, South Korea, and Japan because it eliminates induced seismicity risk and doesn't utilize banned fracking technology. Closed-loop geothermal also has a massive advantage in service intensity. Hydraulic fracturing requires a much larger ecosystem of suppliers, many of which have heavy footprints or operate at high utilization to provide reasonable cost. Pressure pumping would be the primary concern because it would likely take 5-15 rigs to support one frac spread and 15-45 rigs to have a healthy pressure pumping market. Closed-loop geothermal is viable with one rig with even a tiny existing drilling service sector. Many items like directional tools, motors, or bits are easy to ship. The activation energy for closed-loop systems is low.

Keeping Up With the Pack

There is an underlying wave of deflation rippling through global energy markets. Shale gas, solar, wind, and batteries have all seen rapid cost declines as they gain scale. These sources are still a fraction of energy production, but their rapid growth will start impacting marginal pricing shortly (where it hasn't already!). The faster a contending energy technology can scale, the more relevant it will be.

Heat-only closed-loop geothermal using conventional drilling technology has the fastest scaling potential of any geothermal variant. It takes much longer to iterate on fracture design, build/interconnect power plants, or develop new drilling technology. There is no shortage of market opportunity with heat. Something like half of Europe's energy use is heat, and most is theoretically addressable by geothermal. China's district heating systems use as much energy as the United Kingdom.

The smaller service footprint also eases the scaling of labor and equipment. Producing 3000 drilling rigs instead of 1000 rigs is simpler than ramping production of every drilling and completion service item. Geothermal companies with heat purchase agreements can sign long-term rig contracts that allow manufacturers to borrow money for working capital and faster scaling. Fast growth isn't guaranteed, but the supply chain shouldn't be the limiter.

Solar plus thermal storage and fracked natural gas are the main competitors in the heat sector. The cost of all three technologies can get so low that the small contextual details determine the winner. Transportation costs or carbon taxes can hurt gas even if the wellhead price is near zero. Solar will perform best in lower latitudes where the user needs hot gas instead of steam. There must also be enough land for panels. Industrial heat pumps could find a niche with small users that lack space. Geothermal is best suited for larger loads at high latitudes that need low-temperature steam and have land constraints. Urban district heating systems are the best market, especially since their peak load is in the winter when solar generates less electricity.

Drilling to the Future

Closed-loop geothermal isn't the sexiest geothermal technology, but it has the most potential for learning. The instant feedback, light service footprint, and flexible supply chain drive the learning rate. Progress can happen fast enough to stay competitive with other technologies.