Swan Hills Geothermal Heat Recovery Project in Alberta to go ahead

Swan Hills, Alberta, Canada (source: flickr/ MissusK (Cindy), creative commons)

Alexander Richter 7 Apr 2011

In an announcement by Free Energy Power Corporation (“FEPC”) a subsidiary of Free Energy International Inc. (TSX VENTURE:FFX), the company provided an “update on the status of the Swan Hills Heat Recovery Project (“Project”). The Project involves the construction of one or more Organic Rankine Cycle (ORC) electricity generation plants on oil and gas production facilities in Swan Hills, Alberta. The ORC electric plants use geothermal waste heat from the facility to generate electricity to be used as an alternative or supplementary source of electricity at the facility. The Project will utilize heat exchange technology to remove sufficient heat from the production water of the facility to produce electricity. The Company announced changes to project scope, capital cost and terms with various stakeholders.

Grant Approval – Alberta Energy Research Institute

On March 10, 2010, the Company announced that the Swan Hills Heat Recovery Project received approval for a grant of up to $2,600,000 provided by the Alberta Energy Research Institute to assist in funding the construction of the Company’s electricity generation plant at the Swan Hills oil and gas production facility in Alberta. The original project scope of the Project involved the construction of a 2 MGW facility with a capital cost of $8.6 million. In conjunction with receipt of this grant, FEPC agreed to pay Borealis Geothermal Inc. (“Borealis”) a royalty based upon the net distributable cash paid by FEPC to its parent company (Free Energy). Borealis was also to be retained to prepare a technical report on the geothermal qualities and projected longevity of oil production from the project lands and be entitled to share in the proceeds from any sale of the Project by FEPC, to a maximum of $1,000,000.

On March 25, 2011 FEPC entered into an amending agreement with the Province of Alberta to become a co-recipient of the $2.6 million dollar grant with Borealis. In addition to becoming a co-recipient with Borealis, the Government of Alberta has approved the change in project scope and reduction in capital cost of the Project. The Project originally envisioned the construction of a 2000 kW Geothermal Plant with an estimated capital cost of $8.6 million. In conjunction with the revised grant agreement, the Project will proceed on the basis of constructing a 1000 kW Geothermal Plant at a capital cost of $5.5 million. FEPC will retain access of up to $2,600,000 in available grant funding to complete the Project.

On November 22, 2010, FEPC entered into a revised agreement with Borealis. Under the terms of the agreement with Borealis, FEPC agreed to become a co-recipient of the grant agreement with the Alberta Government. Borealis has agreed that they will forego entitlement to net distributable cash realized by FEPC on the Swan Hills Heat Recovery Project as well as any entitlement to share in the proceeds from any sale of the project. FEPC will continue to retain the services of Borealis to conduct a study and prepare a Geothermal Report pursuant to such study at a cost to Free Energy of not more than $400,000.

Project Parameters

On August 31, 2009, Free Energy announced that the Company had been contracted by one of North America’s largest independent oil and gas exploration and production companies (“Operator”) to install one or more Organic Rankine Cycle electricity generation plants at its Swan Hills oil and gas production facility in Alberta. The Operator of the Swan Hills facility was obligated to purchase from the Company all electricity produced by the facility and to pay FEPC for all such electricity at the rate currently being paid by the Operator to its third party power supplier. In addition, the Operator was entitled to all Carbon Credits generated by the Project and after FEPC had received after-tax income equal to 115% of its out-of-pocket expenses, including capital costs, incurred to finance, construct, connect and commission the facility (“Project Costs”), would receive a royalty equal to fifty percent (50%) of the Project’s net operating income.

FEPC entered into revised agreement on April 1, 2011 to reflect revised terms and scope of the Project. Under the revised agreement, FEPC will construct a 1000Kw Geothermal Plant. The Operator will continue to purchase from FEPC all electricity produced by the Project, however, the Operator has agreed to fix the pricing of electricity at $69 per megawatt hour of electricity for the first six years following commencement of the Project. Electricity pricing in the Province of Alberta fluctuates based upon market demand. In addition, Free Energy will receive fifty percent (50%) of all Carbon Credits generated at the Swan Hills facility. FEPC has agreed to provide the Operator an option to purchase all of the Carbon Credits generated by FEPC for a value that is ninety percent (90%) of the fair market value of such Carbon Credits at the time of purchase. The Operator will still receive a royalty equal to fifty percent (50%) of net operating income once the Project generates net operating profits of 115% percent of Project Costs.

“The Project will be the first of its kind in the oil and gas industry to utilize geothermal waste heat to generate electricity,” said Dean Bethune, Free Energy’s President and CEO. “Fixed pricing of electricity for the first six years of operation, combined with term concessions from various stakeholders, provide opportunity for this Project to move forward.”

“The capital cost of the project is reduced from $8.6 million to $5.5 million. With the fixed pricing of electricity in place, we estimate that the project will achieve payback of capital in six years,” said Alf Sanderson, Free Energy’s Executive Chairman. “The Project will be funded through a combination of debt from an Alberta based lender and project equity directly in Free Energy Power Corporation.”