No one is better at digging holes than the oil and gas sector. Over the last century, the industry has perfected the art of extracting fossil fuels many miles below the surface.
Its future, however, may be in digging for heat. The prospects for geothermal—energy extracted from the nuclear furnace at the Earth’s core—are rising after decades in the doldrums. In 2021, oil and gas majors are poised to make the first major geothermal investments in more than 30 years, say industry experts and energy executives, as financial returns on fossil fuels tank.
Investors backed a record 98 companies generating geothermal energy last year, including many new startups, the most since private equity research firm PitchBook began keeping track about two decades ago. Globally, geothermal investments exceeded $675 million last year, six times more than the year prior.
While only one major geothermal energy firm is publicly traded, its value has soared in recent months. The market capitalization of Ormat shot up nearly 80% since last March even as major fossil fuel companies fell at least 20% below their 2019 peaks. Ormat’s rise likely reflects faith in the geothermal industry’s prospects rather than just last quarter’s financials: Though revenue declined 7% in the third quarter compared to the previous year, Ormat stands to capitalize on the geothermal power plants it builds for others, as well as the 150 plants it operates on its own. Ormat declined to comment, citing its quiet period before its next earnings call.
For years, fossil fuel executives have viewed the heat under their oil and gas drilling pads as a potential source of revenue. “Someone in the C-suite of an oil and gas major would ask, ‘What about geothermal?'” says Doug Hollett, a geologist and former US Department of Energy official. The response was inevitably the same: “A small team would work on it for six months and decide it’s interesting but not as attractive as the core business.”
The issue was exploration costs. In the 1970s and 1980s, US oil companies drilled hundreds of geothermal wells around the world. Unocal of California competed with Chevron and Texaco to become the world’s largest geothermal producer. Sites were prospected along the Pacific Rim, from California to the Philippines, wherever red-hot magma rose near the surface.
Yet profits were thin. Most geothermal wells turned up nothing. Even when they did, geothermal electricity production often failed to cover the cost of new prospecting and development. From a financial perspective, geothermal was a pricier lottery ticket than oil, says Hollett, without much of a jackpot. Unocal sold off a large share of its geothermal assets by 1992, and the rest of the oil and gas industry followed.
But new technology is changing the financial equation. In the 1990s, only one out of every 10 shale wells proved profitable, says Hollett. Today, it’s more than 90%. These technologies perfected by the shale oil sector—horizontal drilling, geological sensing, and high-intensity fracturing—turned vast inaccessible deposits into rich sources of fossil fuels, and the US into the world’s largest oil producer. Now, they’re poised to make geothermal a viable investment.
Specifically, improved drilling technologies have opened the door to engineering geothermal reservoirs from scratch. Traditional geothermal energy relies on a relatively rare confluence of subterranean heat, natural water reservoirs, and permeable rock. But Enhanced Geothermal System (EGS) technologies allow the energy industry to create reservoirs wherever hot rock exists.
“If you can figure out a way to tap that, you can get a phenomenal amount of energy,” says Will Fleckenstein, an engineering professor studying unconventional drilling at the Colorado School of Mines. “It’s essentially everywhere.”
That’s piqued oil and gas companies’ interest. BP, Chevron, Total, Royal Dutch Shell, ExxonMobil declined to comment about their investment plans, but the oil and gas industry is reaching out to startups in the space.
John Redfern, co-founder of Eavor, says his geothermal startup will announce the first substantial geothermal investment from a major oil and gas firm later this month. “The oil majors long scoffed at geothermal,” says Redfern. “But there’s a feeling that geothermal’s time has come.” Eavor’s “closed loop” approach drills dozens of horizontal wells that act like a giant underground radiator to pump heat up to the surface, promising to make geothermal a drill-anywhere proposition. “We’ve really ridden the coattails of the oil and gas industry,” he says. “You can turn this all into a repeatable manufacturing process and reduce your costs over time.”
Tim Latimer, co-founder of geothermal startup Fervo, also fields regular calls from the industry seeking carbon-free energy. “Given where I sit, I’m engaged with people from the oil and gas industry all the time,” says Latimer. “Every single oil major has a geothermal strategy. That’s quite different than three years ago when zero had a strategy.”
First, however, the industry needs to lower its capital costs. The US government is investing hundreds of millions of dollars to do that, similar to a shale oil program that began in the mid-1970s. The Department of Energy (DOE) has built the Frontier Observatory for Research in Geothermal Energy (FORGE) initiative, a subsurface laboratory to build out a commercial pathway for EGS technologies. And Congress has increased DOE funding (pdf) for geothermal from $84 million in 2019 to $110 million last year, despite the Trump administration’s attempt to slash appropriations by more than 75% in its most recent budget request.
Geothermal’s trajectory may follow that of the US shale industry. It started off taking big risks on each new well. But as costs fell and success rates improved, drilling began to look like a reliable manufacturing process. If so, geothermal could soon become a boring financial asset with predictable returns and attractive financing terms, much like the solar and wind sector (which now accounts for most new power sector investments).
This would unlock billions in new financing. Private investors have already begun making smaller bets on geothermal. Oil and gas companies will soon face a choice: reinvest their billions in their existing business, or direct their dollars into finding a new fuel source underground.
Correction: The name of the geothermal startup Fervo was corrected from Fervor.