Skip to main content

Wildhorse Energy completes PFS of Mecsek Hills Project

World Coal,


Wildhorse Energy Limited, an AIM and ASX listed company focused on developing underground coal gasification (UCG) and uranium projects in Central and Eastern Europe (CEE), has announced the completion of its Preliminary Feasibility Study and an updated JORC Inferred coal resource of 383 million t at the Company’s Mecsek Hills UCG Project in southern Hungary.

Highlights

  • PFS confirms findings of preliminary PFS announcement dated 1 June 2011 indicating attractive economic and technical potential of supplying syngas as a gas feedstock for power stations
  • The Study is of a =400 MWt Project consisting of two distinct phases - a commercial demonstration phase followed by a large scale commercial phase.
  •              Phase I – Commercial Demonstration Plant - designed to have a capacity of approximately 130MWt of syngas which will be used to supply an up to 61MWe (gross) Combined Cycle Gas Turbine (CCGT) power plant, with both the UCG and CCGT facilities expected to be in operation in Q4 2014.
  • Phase II – Large Scale Commercial Plant - designed to have a capacity of approximately 280 MWt of syngas, with the UCG facility to supply syngas to a potential 130 MWe (gross) power plant. The development of this phase will commence after the commissioning of Phase I.
  • A total JORC Inferred resource of 383 million t published following highly positive results from a total of five diamond core holes completed across three target areas.
  • Drilling verifies historical data and facilitates the selection of the first UCG site at the Váralja target area – reportable 185 Mt JORC Inferred resource, only 22Mt is estimated to be required for Phases I and II over a 25 year project life.
  • WHE is at the forefront of the Central and Eastern European UCG industry, providing it with ‘first-mover’ advantage - Europe offers a highly supportive energy dynamic and positive pricing environment due to the heavy gas import reliance.
  • Team of world class strategic affiliates in place to assist with the project development.
  • Bankable Feasibility Study (‘BFS’) focused on the development of Phase I to be initiated in April 2012.

WHE Managing Director Matt Swinney said, "I am delighted to provide the resource update together with the results of our PFS, which indicates the positive fundamentals of our Mecsek Hills UCG Project as we seek to progress development towards the first commissioning of syngas in late 2014. Notably, this resource update demonstrates that we have sufficient coal to construct a =400 MWt UCG project but more importantly, we have successfully identified a number of UCG suitable coal seams at Váralja, which we will focus on further over the coming months.

"The successful PFS findings support the Company’s roll out strategy to develop further projects in selected markets in CEE and enhance the value of our wider portfolio and expansion strategy. Our focus is to develop our flagship Mecsek Hills UCG Project to the BFS stage and towards the commissioning of syngas, whilst simultaneously rapidly developing our wider portfolio of stranded coal assets in order to become a leading provider of fuel in the region.

“We are excited about starting the BFS and the Measured Resource exploration programme for Phase I which are due to be completed in early 2013; thus allowing construction to be completed with a target operational date of Q4, 2014. The BFS stage will primarily focus on refinement of the PFS with regards to resource delineation, technical designs, permitting, costings, finalisation of the commercial structure and involvement of strategic partners and other stakeholders into the project.”

 

Main Features of the PFS

Project Background

The PFS focuses on utilising UCG technology and processes to develop a =400 MWt UCG project on the Company’s coal and CBM licence area in southern Hungary. The Mecsek project was recognised as having significant exploration potential with an Exploration Target of 1 - 1.25 billion t, with an energy content of 18.8 to 29.3GJ/t2. WHE has defined approximately 383 million t of inferred coal resources within the exploration target area. With the completion of its confirmation drilling programme and PFS, the Company intends to immediately commence its BFS.


PFS Project Team

For the completion of the PFS, the Company assembled a project team consisting of specialists recognised as leaders in their respective disciplines. In tandem with the Company’s in-house industry professionals, the team included CDE Process for above ground technical designs, Aqua Alpha for below ground UCG design, Golder and Associates for hydrogeological studies, CSA Global for resources verification and planning, Professional Cost Consultants for above ground cost estimates, KPMG for financial and economic modelling, WorleyParsons for above ground technical design review and ERBE and Olajterv for permitting of the above and underground facilities.

 

Project Overview

The =400 MWt Project will be developed in two phases:

  • Phase I – Commercial Demonstration Plant - designed to have a capacity of approximately 130MWt of syngas, which will be used to supply up to a 61MWe (gross) Combined Cycle Gas Turbine (CCGT) power plant. It is assumed that the Company initially owns and operates both the UCG and CCGT business units; however, following the intended demonstration of reliable syngas generation and operation of the related CCGT power plant for a period of 6 to 12 months (Phase IA), it is assumed that the CCGT business unit is sold to a strategic partner. From this point on the Company will supply the strategic partner with syngas delivered in accordance with a long term gas sales agreement (Phase IB).
  • Phase II – Large Scale Commercial Plant - designed to have a capacity of approximately 280 MWt of syngas, with the UCG facility to supply syngas to a potential 130 MWe (gross) power plant. The development of this phase will commence after the commissioning of Phase I.

The first phase of the Project has been specifically designed to be a small-scale commercial demonstration facility that exhibits all commercial and technical aspects of UCG and the above ground value chain. Successful demonstration of Phase I will enable the Company to expand the Project and then further achieve the benefits of greater economies of scale, market recognition of the technology and expansion into other geographic markets.

As announced in June 2011, KPMG undertook the PFS’s financial modeling, which indicates that the Project produces positive financial returns and as the gas production capacity increases so does the projected rate of return, i.e. Phase II produces a significantly greater projected rate of return than Phase I. Because the Company has to date established only JORC Inferred Resources and not JORC Indicated Resources, in line with Australian Securities and Investment Commission reporting guidelines, it is unable to publish Internal Rate of Return and Net Present Value projections.

 

Typical UCG Process

The UCG process unlocks the energy potential of stranded coal through its in-situ conversion to Synthesis Gas, or ‘syngas’, which is a fuel feedstock for power generation through the injection of oxidants delivered via an injection well. 

The main difference between the well-established surface coal gasification method and UCG is that WHE will gasify the coal in-situ. This in-situ gasification method utilises directional drilling techniques proven in the oil and gas industry, has numerous environmental, safety and financial benefits, and requires very little of the infrastructure associated with large scale mining and energy projects. In addition, compared with shale gas extraction, UCG does not use hydraulic fracking, a method, which creates fractures in the shale formation to increase gas flow rates. Concerns regarding perceived risks associated with water contamination, subsidence and uncontrollable fire are also being allayed as the market increasingly understands the depths of operation, the technology and the process associated with UCG. With this in mind, the potential for UCG to play an important role in the future fuel generation of Central and Eastern Europe is evident.

 

Technical Design and Independent Engineer Review

The company prepared conceptual technical designs for the project which consisted of:

  • Conceptual designs of below ground UCG coal mining panels prepared by AA based upon the geological characteristics of the Mecsek Hills coal formation.
  • Conceptual designs of the above ground processing facilities prepared by CDE. CDE’s Conceptual Design Proposal along with the relating Block Flow Diagrams for the above ground facilities of the plant were based upon WHE investment, technical and environmental criteria.

As announced on 19 March 2012, WP completed an independent review of CDE’s designs and concluded that the engineering work undertaken by CDE is comprehensive and addresses all reasonably required aspects for a PFS stage development.

Capital Costs

PCC estimated the total capital requirements for Phase I and II to be € 104 million and € 153 million respectively. The accuracy of the estimates is in the range of +30% to -15% for the underground elements and power plant, while a +25% to -15% accuracy level was applied in case of all other above ground components. An overall contingency of approximately 14% was applied to all cost estimates, with the exception of an allowance of 10% being applied for the second hand gas turbine. As part of the independent technical review, WP also confirmed that the cost estimates seem sufficiently accurate for such a project in its current stage of development.

 

Market Environment

The PFS assesses the Hungarian gas and electricity markets and concludes that the existing market dynamics provide an attractive environment for supplying syngas as a feedstock for power stations.

The development of UCG as a clean coal technology is consistent with the recently approved Hungarian Energy Strategy, which is in support of developing an efficient, clean and domestic energy supply.

As per the Hungarian Energy Strategy, new gas-fired power capacity of approximately 2000 -3000 MWe is expected to be installed in the country within the following 20 - 30 years, supplying 37% - 52% of the national power demand depending on the selected scenario. The operation of these plants will require an annual supply of 3 - 5 billion m3 of natural gas. This suggests that imported gas could potentially be substituted with domestically produced syngas through the utilisation of UCG technology.

In addition, a study on the market environment prepared by KPMG found that Hungary imports approximately 78% of Hungary’s domestic natural gas requirements, predominantly from Russia, while surrounding countries have similar gas import profiles. This provides a sound basis for the Company’s Project development strategy and future expansion into markets that have attractive gas market fundamentals, particularly a reliance on Russian gas imports and consequently where energy security is a major factor for governments and large scale industrial consumers of natural gas, and also where prices are correspondingly high.

 

Mineral Resource Estimates

The Company’s Mecsek Hills licence areas in southern Hungary contain an Exploration Target of 1 - 1.25 billion t of bituminous coal, with coal qualities in the range of 18-29MJ/kg. The Company has completed resource evaluation drilling within the Exploration Target areas at Váralja, Komló and Pécs. Based on the Company’s drilling and the large historic database CSA Global has estimated Inferred Coal resources at each target area.

The recent drilling at Váralja has enabled an Inferred Resource to be defined. Five of the fourteen seam groups modelled met the minimum requirement for Coal Resource Estimation purposes. Seam groups 41, 40, 36 and 35 are the most widely distributed and economically significant with drill defined coal average thicknesses ranging from 0.2 m to 4.06 m. A number of the other coal seam groups such as groups 33, 34 and 37 have significant tonnages of coal but could not be assigned a resource category due to lack of coal quality data in the historic drilling. With more drilling it is likely significant additional tonnage would be able to be included in the resource inventory.

For implementation of both phases of the Project, a maximum coal consumption of approximately 880 000 tpy is estimated – relating to 240 000 tpy for Phase I and 640 000 tpyfor Phase II. Over an assumed 25 year project life this equates to approximately 22 million t – 6 million t for Phase I and 16 million t for Phase II. 

A number of coal seams suitable for UCG have been identified in the Váralja Resource model. The best seam groups for UCG in this resource estimate occur in seam packages 35 and 40. There are multiple seams with average thicknesses greater than 2.5 m with continuity and large tonnages. The best seams appear to be seam 35-1 and 40-2, the former has an average thickness of 2.8 m and is estimated to contain 15 million t and the latter is 4.1m thick with an estimated 22 million t. With additional drilling it is likely other significant seams from seam groups 33, 34 and 37 would be upgraded to a resource category.

These coal areas will be the subject of the further exploration and analysis to be conducted during the BFS, the aim of future exploration is to define Measured resources.

Based on data collected from WHE’s drill holes CH6 and CH7, and the historic drill hole database for Mecsek coalfield, CSA Global estimates an Inferred Resource of 184.5 million t of coal occurs within a 2 km radius of drill holes CH6 and CH7. The Váralja Inferred coal resource has been classified and reported in accordance with the 2004 Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (JORC Code). Resource classification is based on confidence in the mapping, geological interpretation, drill spacing, confirmation drilling and geostatistical analysis of all drill hole data.

 

Site Selection

The coal deposit selected for the Project is in the Váralja target area, which contains an Inferred Resource of 184.5 million t. This area was selected due to the suitability of the coal for UCG mining extraction methods, the availability of suitable infrastructure and the existence of both coal and Coal Bed Methane (CBM) licences.

The Company conducted site selection analysis over the Váralja target area. In addition to the drilling to confirm the accuracy of geological data (based upon historic information), the Company also completed a 3D seismic imaging programme, vertical seismic profile measurements, rock mechanical analysis and hydrogeological testing of the target coal packages and surrounding rock formations.

 

Processing Facilities Site Selection 

The preferred above ground sites were selected through an assessment process of several potential locations within the Váralja target area in terms of their potential suitability for the above ground facility. The site selection included consideration of many factors, including: surface restrictions, metrological restrictions, supporting infrastructure, such as proximity to power lines, proximity to UCG panels, proximity to local dwellings, water access, permitting and licensing considerations and other factors. Following this assessment, several sites were identified to be potentially suitable.

 

Other Key Assumptions – Finance and Commercial

Project Financing: It has been assumed that the development of Phase I of the Project is to be financed with equity and that once operations are proven for 6 - 12 months of continuous operation, the CCGT unit will be sold at cost and that 60% of the capital costs will be re-financed with debt financing. It should be noted that the Company has initiated discussions with potential non-equity funding sources such as development bank funding which to the extent it is successful will reduce the equity funding requirement.

Following successful realisation of Phase I, it is intended that Phase II of the Project shall be a bankable large commercial project in its own right. Therefore, debt financing has been assumed in the financing structure of the development and construction stage. Leverage is assumed at debt to equity ratio of 60:40.

Commercial Assumptions:

Phase I

  • The Project will be developed, financed and constructed by the Company and may include active participation from strategic investors, such as oil and gas or power and utilities companies. Such investors may potentially be involved through a direct participation in WHE and may also enter into a long-term syngas off-take agreement.
  • Consists of a second hand but fully refurbished CCGT unit and all associated infrastructure necessary for an independent power plant project.
  • Receives the syngas at market prices minus the additional CO2 cost associated with syngas - as compared to natural gas - and an additional discount, which shall enable the CCGT SPV to sell electricity into the base load market.
  • The CCGT business unit will be divested after operating successfully for a 6 - 12 month period and may be owned fully or partly by a potential strategic investor. From this point on the Company will supply syngas to the CCGT in accordance with the terms of the long-term off take agreement.
  • Provide a suitable level of return to the CCGT business unit investor.

Phase II

  • Upon successful commercial demonstration of Phase I, the Company plans to become a fuel provider supplying syngas to large CCGT power plants that would otherwise be fuelled by natural gas.
  • Assumptions include sales of 260 MWt of syngas per hour based on a long term gas contract with a strategic partner at normal natural gas prices adjusted for additional tonnes of CO2 emissions due to the higher CO2 content of syngas feedstock as compared to natural gas.
  • The ultimate capacity of Phase II will be determined at a later stage in accordance with syngas customer requirements, further analysis of the benefits of economies of scale, return on investment, further geological evaluation, etc. It is possible that Phase II may be of a greater capacity that what is contemplated in the PFS

It should also be noted that the associated power plant would have a direct pipeline connection to WHE’s UCG facility and thus would be able to bypass all related Hungarian transportation tariffs – providing an approximate 4 - 6% lower fuel cost base as compared to all other gas power plants in Hungary.

 

UCG Regulatory Framework

The company commissioned Dr. Peter Eszto (former Head of the Committee that prepared the current Mining Law in Hungary and former Chairman of the Hungarian Office of Mining and Geology) to review UCG legislation recently implemented in other countries (i.e. the United Kingdom, the United States, Poland, Canada, Australia) and its applicability to the current Hungarian mining law. Dr. Eszto’s study concluded that UCG falls within the same category as coal mining and that the current legal framework provides sufficient guidelines for the authorities to license UCG.

Discussions with various Hungarian State Authorities have commenced, including a review of the international UCG legislation and its applicability to the Hungarian mining law, while the Company is also working with the relevant local mining associations with the aim of generating industry-wide support for the application of UCG in Hungary. 

 

Pre-Feasibility Study (PFS) Risks

PFS estimates contain economic and other assumptions concerning assets or the future performance of assets, which may, or may not prove to be correct. Whilst every care has been made in the preparation of the study, WHE believes it is important to outline some the key risks for the Project identified in the study:

  • The Company has defined a maiden JORC – reportable Inferred Coal Resource of 184.5 million t for the Váralja Target Area – which forms part of the 1 - 1.25 Bt Exploration Target for the whole Mecsek Project. Further resource evaluation drilling is being implemented to determine if a JORC-classified Indicated and Measured resource, with sufficient coal suitable for UCG exploitation, exists within the Project area. This work is expected to be completed in early 2013 as part of the Phase 1 Bankable Feasibility Study.
  • As the Company has not yet a JORC compliant Indicated resource, the economic modelling and product option evaluations conducted were based upon several site options within Wildhorse’s Project Area. The PFS takes into consideration the substantial geological and analytical database as well as factors relevant to UCG, Hungary, the region, local energy markets and the licence area. No claim or production forecasts are made for specific sites.
  • Preferred sites for the potential development and construction of the proposed UCG site have been identified. Successful implementation of the proposed project shall require the Company to obtain use of that land for the required construction purposes.
  •  Energy prices are based upon independent expert long-range forecasts but may not be achieved.
  • The concept of UCG and its utilisation is not a recent development. However, the technology has not been commercially demonstrated in Australia or Europe, and as yet has had limited commercial demonstration elsewhere where detailed project information is in the public domain.
  • No specific legislation governing UCG applications has been developed by the Hungarian Government. The Company has conducted its drilling within the existing regulatory frameworks applied to Coal and Coal Bed Methane exploitation. UCG specific regulatory requirements are yet to be legislated by the Hungarian Government and the timing of approvals within such a framework may cause project delays.
  • Capital and operating costs are based upon estimates as deemed appropriate by PCC a reputable consultant quantity surveyor, but actual capital requirements may exceed or be lower than these estimates.

 

Adapted from a press release by David Bizley 

Read the article online at: https://www.worldcoal.com/coal/28032012/wildhorse_energy_completes_pfs_for_mecsek_hills_project/


 

Embed article link: (copy the HTML code below):