Project Description and Location
The San Jacinto Project is located in the northwest of Nicaragua, near the city of Leon, approximately 90 km northwest of Managua (the “San Jacinto Project). The San Jacinto Project exploitation agreement covers an area of 40 km2.
The San Jacinto Project is currently being developed under an exploitation agreement (the “San Jacinto Exploitation Agreement”) between PENSA and MEM. The term of the San Jacinto Exploitation Agreement signed in 2001 is for 25 years, extendable for an additional 10-year term. The San Jacinto Exploitation Agreement has an investment schedule outlining the various milestones that the Company must meet in its development of the San Jacinto Project. Non-compliance with these milestones may cause the San Jacinto Exploitation Agreement to be terminated by MEM. As of the date of this report, the Company is currently in compliance with all of the milestones under the agreement. The generation license held by PENSA allows for generation of 72 MW from the San Jacinto Project for a 30-year term that commenced in December 2003.
Nicaraguan legislation requires that electrical generation projects obtain an environmental permit from the Ministry of the Environment and Natural Resources (“MARENA”). Issuance of the permit requires an Environmental Impact Assessment (“EIA”) demonstrating that the plant’s activities will not cause significant environmental impacts.
An EIA for the San Jacinto Project (the “San Jacinto Project EIA”) was submitted to MARENA in July 2003. The San Jacinto Project EIA covered the range of potential environmental and socio-economic impacts during the San Jacinto Project’s plant construction and operational phases, and evaluates their possible impact. It also covered potential risks to the plant from extreme natural events and presents a contingency plan in the event such events occur. The San Jacinto Project EIA concluded that the main environmental impacts of the project are on air quality and noise, which can easily be mitigated through chimneys, silencers, forestry, sound barriers and the use of personal protection by staff. The project was viewed as generating significant positive socio-economic impacts in the form of employment and electricity generation, and also positive environmental impact in the form of mitigating climate change. MARENA issued their final environmental permit for the San Jacinto Project on September 18, 2003. Subsequently, MARENA issued an environmental permit to PENSA for the expansion of the San Jacinto Project to 72 MW. The EIA for the Technological Reconversion Project in San Jacinto Tizate for the generation of 72 MW using Fuji turbines was finalized in November of 2009.
The Company believes that the necessary permits and approvals for the San Jacinto Project have been obtained for the expansion of the plant and the steam field to 72 MW of net generation capacity.
Accessibility, Climate, Local Resources, Infrastructure and Physiography
The San Jacinto Project site is located near the village of San Jacinto, a small settlement adjacent to the established base camp. The San Jacinto Project is accessible by the Pan-American Highway and has internal roads to access work sites. Paved road access passes through San Jacinto and provides access to the base camp, which is north of the village of San Jacinto. A gravel road turns off from the southern edge of the village of San Jacinto, and provides access to the site while bypassing the village. The work sites are located in rolling hills not visible from the village of San Jacinto. Leon, the second largest city in Nicaragua, is located 20 km to the west and provides the main pool of labor. Labor is also sourced from Managua which is 90 km to the southeast. The San Jacinto Project is connected to the high voltage electrical grid through a dedicated 13 km power line that connects both the Leon and Santa Barbara substations. Water for plant operation is available from local wells. The climate in the area is generally hot and dry, but with seasonal heavy rainfall.
History of the Property
The first geoscientific studies in the area of the San Jacinto Project concession were conducted in 1953 and consisted of measurements of heat flow from the surface manifestations at San Jacinto and Tizate. Steam was also observed to be flowing from shallow wells in the area. From 1969 to 1971, the United States Agency for International Development implemented a geothermal exploration program over the western part of Nicaragua, managed by Texas Instruments Inc. Based on the results of this program, the San Jacinto-Tizate area was identified as having a high priority for development. The program included a range of surface exploration surveys and the drilling of four shallow temperature gradient wells, one of which encountered a temperature of 105°C at shallow depth. The United Nations Development Program (the “UNDP”) carried out further surface exploration in the area during 1973 and a potential resource area of 6 km2 was delineated based on resistivity measurements. Based on this area, the UNDP estimated the field development potential to be on the order of 100 MW. Through the late 1970's and early 1980's further geophysical surveys and surface studies were undertaken by a number of agencies. This work indicated that a high temperature (250°C to 300°C) resource existed in the San Jacinto-Tizate area, with an apparent high resistivity zone at 1,500 to 1,600 m, which was interpreted to correspond to the bottom of the productive reservoir.
In 1992, Dal SpA reviewed all available information and performed additional geological work on behalf of Instituto Nicaraguense de Energia (“INE”). This led to the conclusion that the upflow for the field was probably located in the area of Tizate, with an outflow towards San Jacinto. In late 1992, Intergeoterm, a joint venture company owned by ENEL (77.0%) and Burgazgeoterm (23.0%), a wholly-owned subsidiary of Gazprom (a Russian gas company), began work on a feasibility study for development of the San Jacinto Project concession for power generation. This work included further surface exploration and the drilling of seven commercial diameter wells. The wells ranged in depth from 728 to 2,339 m and were completed between 1993 and 1995, although the last well, SJ-7, was suspended before it reached the proposed target depth. The drilling of these wells provided significant additional data on the sub-surface conditions, including geological information and downhole temperature and pressure profiles, and confirmed that the highest temperatures were present in the vicinity of Tizate. Five of the wells were tested, either by production and/or injection, and three (SJ-4, 5 and 6) were considered to be commercial producers. Interference tests were also conducted during 1995 to provide additional information on the degree of interconnection between the various wells.
The San Jacinto-Tizate field is located in the vicinity of several young to active volcanoes that make up part of the Maribios range, a chain of volcanic mountains in northwestern Nicaragua. The volcanoes, like essentially all of the principal volcanoes of Central America, are created by the subduction of one tectonic plate (the Cocos plate) under another (the Caribbean plate) near the Pacific coast of Central America. The volcanoes of western Nicaragua differ from the majority of the other Central American volcanoes in an important respect: they occur within the Nicaraguan Depression, a major topographic and tectonic feature that extends the length of western Nicaragua and is evidenced by Lake Managua, Lake Nicaragua and other low-lying areas. The depression has been interpreted as a half-graben (a zone of structural subsidence) that is bounded on its southwest side by steeply dipping faults.
The rocks exposed at the surface in the vicinity of the San Jacinto-Tizate field consist of deposits from the volcanoes in the area (principally from the El Chorro-La Bolsa, Telica, San Jacinto, Santa Clara and Lomas de Apante complexes). Interpretation of subsurface rocks from drill cuttings in the wells at San Jacinto-Tizate indicate that subsurface rock units (to a depth of about 2,000 meters, the level explored to date by drilling, are also predominantly volcanic in origin (mainly of andesitic and basaltic composition), pyroclastic rocks (tuffs and breccias of varying texture and composition), and sediments that are presumably volcanogenic in origin (that is, reworked volcanic material deposited either sub aerially or in lakes). These rock units have been interpreted to range in age from very recent to early Miocene age (that is, up to somewhere in the range of about 10 to 20 million years). The older sedimentary and volcanogenic units that are inferred from regional mapping to compose the basement beneath the volcanic deposits in the Nicaraguan Depression have not been identified in any of the wells.
In the past several years, work has been undertaken to increase the production and injection capacity of the field in order to accommodate the planned expansion of generation capacity for development of the Phase I San Jacinto Project and beyond. This work has included a comprehensive geoelectrical survey of the concession area using magnetotelluric resistivity methods, additional integrated evaluation of the resource (including conceptual and numerical modeling of the reservoir), and beginning in 2007, the drilling of additional deep, commercial-diameter wells.
Downhole surveys and discharge tests were conducted as part of the technical due diligence study undertaken by Comisión Federal de Electricidad in 2001 and SKM for Tarma and Investment and Technical Management Limited ("ITM") in 2001. These included pressure and temperature runs in wells SJ-3, 4, 5 and 6 and discharge tests with chemical sampling on wells SJ-5 and SJ-6. The collected data were then used in conjunction with the earlier data to verify the resource characteristics.
The planned expansion of generation capacity for the Phase II expansion of the San Jacinto Project required that the Company increase its certified resource capacity from 60 MW to 79 MW gross. In order to reach its objectives, the Company hired SKM to consult on a strategic drilling plan.
In July 2011, GeothermEx, the Phase II lenders’ resource consultant, certified the production capacity of the San Jacinto Project to be approximately 79 MW gross. The GeothermEx report concludes that existing production wells have sufficient capacity to run the Phase I and II expansions initially at full output. The report confirmed a production capacity of 610 tons/hr of steam and an injection capacity sufficient to support 540 tons/hr of production capacity, for the 72 MW (net) combined Phase I and II expansion of the San Jacinto Project.
The resource potential of the eastern sector in the San Jacinto Project was initially estimated by SKM (2008, Definitive Feasibility Study) using a Monte Carlo “stored heat” approach (the “Monte Carlo Approach”), where probability distributions for some of the resource parameters were defined, resulting in a probabilistic resource estimate.
The basic principle of the stored heat method is to estimate the heat stored within a defined reservoir volume (including both the heat stored in the rock and the heat stored in the reservoir fluid) and then to estimate how much of that can reasonably be extracted and converted to useful power using typical technologies. A stored heat assessment is an educated “best guess” at the amount of accessible energy that is stored within a geothermal system and how much electricity that heat could be turned into, making various assumptions.
Using various input assumptions, the Monte Carlo Approach model was run 2,000 times to obtain frequency distribution and cumulative probability distributions. The calculated parameters indicated that the estimated capacity of the entire San Jacinto Project resource had a mean value of 277 MWe. The cumulative probability distribution showed there is a 90% probability that the resource capacity will be greater than 203 MWe and a 50% probability that it will be greater than 274 MWe. This value does not mean that there is a 50% probability that a 270 MWe development will be economic, nor even that there is a 50% probability that sufficient fluid for a 270 MWe development can be extracted for 20 years. There are numerous factors not considered in a stored heat assessment which could down-rate the available steam. There are also positive factors which can mean that a stored heat estimate can in some cases significantly under-estimate the long term resource capacity, most notably the fact that it does not include any allowance for heat or fluid recharge from depth. The eastern sector of the San Jacinto Project was estimated to supply 686 tonnes per hour steam capacity (89 MW) for 20 years.
A further update was provided by SKM (2010, Update of San Jacinto Reservoir Model) with the conclusion that the Eastern San Jacinto Field, currently under development, could support 72 MWe.
Management believes that the Company will be able to sell energy and capacity under the PENSA PPA which runs until June 2029 (and can be extended). The power purchaser under the PENSA’s PPA holds the license to operate Nicaragua’s electrical distribution system, Disorte-Dissur. The Government of Nicaragua holds a 16% ownership interest in the Offtaker. The balance of shares in Disnorte-Dissur is owned by Unión Fenosa which was recently acquired by Gas Natural, a Spanish utility company. Gas Natural operates in Spain, France and Italy and in various Latin American markets, including Colombia, Mexico and Nicaragua.
There is minimal dispatch or price risk to the Company under PENSA’s PPA. Full dispatch of the San Jacinto Project plant is assured by regulation and by merit order. PENSA’s PPA price of $92/MWh is lower than current average Nicaraguan wholesale market price of $170 /MWh and regional long-run marginal costs. The Company believes that the resource is competitive not just in Nicaragua, but throughout Central America, which is expected to become a regional market of greater than 10,000 MW by late 2012. In 2010, Nicaragua’s energy regulator, INE, approved a price cap for renewable energy projects that sell energy in the spot market between a range of $86-95 /MWh. The Company’s current and future PPA prices are not limited by the spot market price cap for renewable energy projects.
The Company has continued to verify and sell its Certified Emission Reductions (“CERs”) under the United Nations Framework Convention on Climate Change (“UNFCCC”) Clean Development Mechanism. CERs generated by the project were certified via a UNFCCC Project Development Document (“PDD”) in the first six months of 2009, verified by TÜV SÜD Industrie Service GmbH in 2011, and sold in early 2012.
Asociación Española de Normalización y Certificación (“AENOR”), the Company’s new Designated Operational Entity, is reviewing a PDD for the new plant design that will be submitted to the UNFCCC to re-certify the project and enable the Company to verify and sell CERs that were generated after June 2009. Concurrently, AENOR is verifying the monitoring report from July 2009 to December 2010 to enable the sale of CERs generated during that period. Pending approval of the new PDD, Management expects to generate CERs at a rate of between 0.7102 and 0.754 (tCO2 or CER)/MWh. Market prices for CERs under UNFCCC’s program have fallen and were trading between €4-5 per CER during early 2012. Management expects to sell future CERs at market prices.
Exploration and Development
Pursuant to the terms of the San Jacinto Exploitation Agreement, the San Jacinto Project is being developed in two phases, Phase I and Phase II. Both Phases I and II of the San Jacinto Project are concentrated in the eastern sector of the San Jacinto Project concession. Phase I originally called for the development of 20 MW of production in two stages, with each stage comprised of 10 MW. Phase II called for the production of an additional 46 MW. Pursuant to Addendum # 5 to the San Jacinto Exploitation Agreement, Phase I was expanded to 46 MW and Phase II is planned to be expanded to 36 MW of capacity, bringing the total planned capacity of Phase I and Phase II to 82 MW, at which time it is planned that the two existing back pressure turbo generators that commenced production in July 2005 will be removed to leave 72 MW net.
The San Jacinto Exploitation Agreement previously provided that the deadline for the commercial operation date (“COD”) of Phase I was April 26, 2011. On April 29, 2011, MEM agreed to further extend the COD deadline of Phase I to October 28, 2011. Effective October 2011, MEM agreed to further extend the COD deadline of Phase I to December 31, 2011 and the Company formalized the extension with MEM and Disnorte-Dissur in January 2012. The deadline for COD of Phase II was extended to December 31, 2012 and the Company formalized the extension with MEM in January 2012. The San Jacinto Exploitation Agreement and Nicaraguan law provide for grace periods and cure periods if these deadlines to reach COD are not met.
A description of Phase I and Phase II development follows:
The selected technology for Phase I of the San Jacinto Project development was back-pressure steam turbines for initial development. These are relatively inefficient units, but were able to be installed very quickly and at a low cost. They represent a level of technology which has been successfully applied to geothermal developments worldwide, and especially in Latin America.
Phase I: Back Pressure Development
As the first stage of the project development of Phase I, 2 x 5 MW (net) existing backpressure steam turbo generators and associated equipment were purchased from LaGeo and placed into commercial operation in 2005. This equipment was originally supplied by ACEC of Belgium (now part of Alstom) and was installed in LaGeo’s geothermal power plant at Berlin, Departamento de Usulután, República de El Salvador. Backpressure turbine power plants are comparatively simple and economical to install. Using readily available equipment provided advantages for the San Jacinto Project budget and implementation schedule.
Phase I: Single Flash Condensing Turbine Development
Single flash technology, which is the most commonly used technology for geothermal projects worldwide, provides for the most efficient extraction of energy from the steam supply. Fuji has been building steam turbines for geothermal applications since 1977 and currently has 57 machines operating worldwide. Fuji has the necessary expertise in geothermal turbine design to meet the performance and reliability required by the San Jacinto Project.
The San Jacinto Project Phase I power plant and steamfield was originally to be constructed via procurement and construct contract with Constructora Queiroz Galvao S.A. (“CQG”) of Brazil. Due to contractual issues between PENSA and CQG, PENSA took over the construction management of the project in March 2011.
The San Jacinto Project Phase I power plant was mechanically completed in October of 2011. Subsequent to mechanical completion, commissioning activities for the expansion commenced which included the coordinated turnover of all plant subsystems between the Phase I expansion sub-contractor Dymel and the commissioning staff, including Fuji Electric Corp. of America (“Fuji”), the manufacturer of the turbine and generator. In December 2011, the Phase I expansion was successfully synchronized to the Nicaraguan national integrated electrical grid, and the plant was declared in commercial operation on January 9, 2012.
Phase II: Single Flash Condensing Turbine Development
Phase II is planned to bring the total San Jacinto Project output to 72 MW. Concurrent with the Phase I expansion, the Company engaged TIC as the Phase II contractor and gave Full Notice to Proceed in August of 2011.
It is planned that the San Jacinto Project power plant will be expanded by the installation of an additional Fuji 36 MW net capacity turbine, identical to the unit used for Phase I. Fabrication and testing of the Phase II expansion Fuji turbine and generator unit was completed early in the fourth quarter 2011, and the unit was shipped to the project site and installation commenced in December of 2011. Phase II construction is approximately 72% completed with final completion expected in December 2012. Power plant critical component engineering is completed and balance of plant engineering is 96% complete.
The Phase II project is located on the existing prepared platform adjacent to Phase I. The 138 kV switchyard was expanded during Phase I construction to allow for a further transformer bay for the new unit. In the fourth quarter of 2011, the Company transferred all of its rights, title and interests in the transmission and substation assets for the San Jacinto Project to Empresa Nacional de Transmisión Eléctrica (“ENATREL”), the owner and operator of the national transmission system in Nicaragua, in accordance with applicable Nicaraguan law and the loan agreements for Phase I and Phase II of the San Jacinto Project expansion. ENATREL assumed sole responsibility for the operation and maintenance of such transmission assets and the interconnection of the plant to the Nicaraguan national transmission system.