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Full Steam Ahead with Geothermal Resource Development

January 21, 2021

Oil’s price collapse and the election of a new administration in Washington are accelerating investment in carbon neutral energy sources. Although solar and wind receive the most attention, geothermal is picking up steam due to its baseload power potential and unique ability to leverage the intellectual capital of the oil and gas industry.

Geothermal Resources

Broadly speaking, geothermal energy utilizes the natural heat from the earth. That heat can be used for many types of applications from direct use heating systems to electricity generation to industrial processes like milk pasteurization. Utilizing heat from within the earth is far from a new concept. Ancient cultures took advantage of hot springs for heating purposes. Even utility-scale electricity generation applications existed in the United States since the 1950s.

Currently, the United States produces more geothermal electricity than any other country. However, there is plenty of room for further development, especially in the western states where heat resources are easily accessible. Electricity generation from geothermal resources made up only 0.5% of the country’s utility-scale generation in 2019. U.S. Energy Information Administration, Electricity explained, https://www.eia.gov/energyexpl... (last visited Jan. 19, 2021). The Department of Energy projects that geothermal resources could account for 8.5% by 2050. Department of Energy, Office of Energy Efficiency & Renewable Energy, GeoVision, https://www.energy.gov/eere/ge... (last visited Jan. 19, 2021).

Understanding the Rules of the Game

Ownership and the related regulatory schemes are among the more substantial issues affecting a potential geothermal project. As with any extractive resource, the foundational question is: “Who owns the resource and the right to extract it?” Ownership classification provides the project developer (and its financers) with certainty to manage the asset. Without such certainty, a developer may not know with which parties he or she should enter into a lease or conveyance. The ownership classification will also determine which rules and regulatory schemes apply to the developer’s activities.

On account of its blend of water, heat, and other materials sourced underground, geothermal resource ownership can be complicated. The federal government classifies the geothermal resource as part of the mineral estate. The Geothermal Steam Act of 1970, as updated by the Energy Policy Act of 2005, and accompanying regulations set forth the procedures governing geothermal leasing on federal lands. However, only a few courts interpreted homesteading act reservations, leaving many reservations and jurisdictions open to further interpretation as to whether the patent included or reserved geothermal resources. See, e.g., Rosette, Inc. v. United States, 277 F.3d 1222 (10th Cir. 2002), cert denied 537 U.S. 878 (2002).

Some states take different positions pertaining to fee and state lands within their jurisdiction. Colorado views geothermal resources as water rights that are administered by the State Engineer and water courts. Colo. Rev. Stat. § 37-90.5-101. In Idaho, geothermal resources are neither water rights nor part of the mineral estate. See Idaho Code § 42-4002. Although a water right under Nevada law, depending on whether water produced from geothermal wells is reinjected, the project may or may not be subject to appropriation. Nev. Rev. Stat. Ann. § 534A.040.

Based on the applicable classification of a geothermal resource, there could be surface access issues in the event the geothermal development is not considered part of the dominant mineral estate. Ownership distinctions may also determine joint development mechanics. For instance, state agencies may have the right to force-pool adjacent owners to ensure efficient development of the resource. See, e.g., Utah Code Ann. § 73-22-7. Further, because geothermal resources were not as popular in the past, issues may arise interpreting the instruments creating split estates. Did the geothermal rights stay with the surface owner, or were they reserved with the mineral estate?

Generally, even in situations where the law appears to be clear, there is relatively little caselaw specifically addressing geothermal resources compared to other industries like oil and gas. It is important to have a guide to help navigate the unanswered questions before embarking on a geothermal development project.

If you have further questions, please contact Brian Annes.

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