Figure 1: Twin volcanic peaks at a high temperature geothermal prospect in northern Chile.

Chile has excellent potential for both high and medium temperature geothermal projects.

Chile is remarkable in being very long and narrow. It has a length of 4,000 km, ranging from the driest desert in the world in the north to extensive glacier fields in the south but with a width of less than 200km over which distance the land rises from sea level at the western coastline up to elevations exceeding 7km along the crest of the central Andes range, which defines Chile's eastern border with Bolivia and Argentina.

Subduction of the Pacific Tectonic Plate beneath the Chile mainland (South American Plate) has produced an almost continuous line of active and dormant volcanoes along most of the length of Chile as shown in Figure 2. These amount to more that 10% of all active volcanoes in the Circum Pacific "Ring of Fire". Within this volcanic belt in Chile more than 300 geothermal areas have been identified. Chile therefore has a huge potential for the development of volcanic geothermal resources for both electricity generation and direct use in the same manner as has been undertaken over the past 50 years around the Circum Pacific Rim in countries such as New Zealand, Papua New Guinea, Indonesia, Japan, Kamchatka (Russia), the western USA, Mexico and Central America, where 7,000MWe of geothermal power is now installed and operating. This figure represents some 90% of the world's geothermal power generating capacity. In comparison, preliminary assessments of the geothermal resource potential of Chile range from 3,000MWe up to 16,000 MW, for at least 50 years from geothermal fluids with temperatures exceeding 150⁰C, and located at depths of less than 3,000 m. These figures range from 35% to 170% of the world's current geothermal power generating capacity.

Figure 2: Location of volcanoes and geothermal areas in north and south Chile and geothermal tenements applied for by Hot Rock Chile SA

Hot Rock Limited's entrance into the geothermal industry in Chile

Hot Rock has recognized for some time the underexplored and undervalued geothermal potential of Chile versus the rapidly growing power market, which has come to have a very high dependence on imported fossil fuels and which carries a demonstrated risk of political disruption to supply. This has driven power prices in Chile up to very attractive commercial levels for electricity generating companies in both the spot power and longer term contract markets and has placed a level of urgency on the government of Chile for the development of indigenous renewable energies, of which the potential from geothermal is outstanding.

With this convergence of the need for new power generation, a rapidly growing government appreciation of the value of indigenous renewable energy sources, the quantity and quality of geothermal projects in Chile and a power price structure that is able to meet the cost of geothermal power development, Hot Rock has examined in detail the opportunity for undertaking geothermal developments in Chile. The business case for Hot Rock entering into the geothermal sector in Chile is as follows.

The business case for going to Chile

• Pressing National need for security of power supply and to reduce dependence on imported fossil fuels

In spite of the large geothermal energy resource base in Chile and an active interest within Chile in geothermal power development since the nineteen sixties, no geothermal prospects have yet been developed for generation of electricity. The main reason is that historically power demand in Chile has been relatively low and the power market has been well supplied with generation from a combination of indigenous hydro power resources and imported natural gas from Argentina.

However, over the past 40 years, new hydro resources for further development have been gradually exhausted, compounded by concerns over the loss of agricultural land and especially environmental and cultural minority issues. More recently, and more importantly, have been periodic interruptions in the delivery of natural gas from Argentina to Chile which has eventually led to an almost complete cessation from mid 2007 (Figure 3). As a result the national energy market in Chile is today going through something of a crisis due to both the lack of the large amounts of natural gas formerly imported from Argentina and the need for much greater reliance on international fossil fuel markets with the highly variable pricing that has occurred over recent time.

Figure 3: Progressive resductions in supply of natural gas from Argentina to Chile relative to an unrestricted supply (100%) in 2004. Recent shortfalls have had to be replaced by diesel or LNG fired power generation

Chile today has a high level of economic activity with a high energy demand. Energy consumption is increasing at an average rate of 7% annually (with a long-term growth projection of 5-6%). The requirement for new electricity generation is currently running at some 400 MWe of new capacity per year.

Figure 4 shows the current overall mix in Chilean generation capacity. Installed electric generation capacity is 13,086 MWe, producing approximately 56,700 GWh/year. Of this installed capacity, 61% corresponds to fossil fuelled (liquid oil, gas and coal) power plants, 37% to hydropower plants and only 2% to the electricity generated by renewable resources (wind and biomass < 20 MWe).

The most abundant generation capacity in the mix is natural gas fired generation followed by hydroelectric dam generation. With natural gas essentially no longer available from Argentina the combined cycle generation plants are being run with diesel, which triples generation costs and increases the maintenance periods and costs of these units.

Figure 4: Power generation mix in Chile (values given in each pie slice are: generation type, installed capacity in MWe, % of total generation mix.

Indigenous non-renewable energy resources are scarce in Chile and most of the fossil fuel requirement in the 61% fossil fuel component of the generation mix has to be imported. Only 10% of this fossil fuel demand is produced within Chile, from the following limited sources:

• Crude oil - reserves stand at only 30 million barrels in the Magallanes region in the south, far away from Chile's two main power grids.
• Natural Gas - All natural gas production comes from Magallanes region and is used locally. Reserves are estimated at 19,200 million cubic meters.
• Coal - Chile's principal coal mines are located in the Bio-Bio, Los Rios and Magallanes Regions. Estimated reserves are 155 million tons but these are not under production and most of the coal burnt in Chile is imported from Colombia.
  

As a result of the pressing national need for security of power supply, the very limited reserves of indigenous fossil fuel, the need to reduce dependence on imported fossil fuels and the need to continue to develop new generation capacity in pace with the rapid industrialisation in Chile, the development and utilisation of renewable energy is being vigorously promoted by the Chilean Government, particularly geothermal power given the abundance and high quality of volcanic geothermal systems in Chile.

• A well organised and efficient electricity market and attractive prices for power sales

Over the past decade, Chile has privatized its electricity sector and the Government now controls only the functions of regulation and inspection. The electricity market in Chile today is well developed and efficient. It is regulated and with open access to any company or person that wants to invest in the system. The authorities involved in the market are the National Energy Commission (CNE). The Fuel and Electricity Superintendence (SEC) and Economic Dispatch Centres (CDECs).

Power prices in Chile over the past four years are shown in the Figures 5 and 6  in terms of the Node Price, the Average Market Price (PMM) and the Marginal Cost on both the SIC and the SING grids. The node price is the price that electricity distributors pay to generators. Over the past two years the average node price on both the SIC and SING grids has risen from $US50 to $100 per MWh. This reflects the issues associated with the high dependency of the Chile economy on imported fossil fuels and the uncertainty in fuel supply.

For Hot Rock the Chilean power market represents an excellent market for achieving profitable returns on future geothermal power sales at much the same power prices as Hot Rock expects to receive from its Hot Sedimentary Aquifer (HSA) projects in Victoria, Australia, but with the high temperature volcanic geothermal systems in Chile having appreciably lower development costs.

Figure 5 Energy prices on the Chile SIC grid over the period 2005 to 2008

Figure 6 Energy prices on the Chile SING grid over the period 2005 to 2008

• An extensive transmission network

In spite of the great north to south length of Chile and the increasing steepness of the terrain from west to east, Chile is generally well serviced with electricity transmission systems covering most of the populous and industrialised areas in the country. An overall electrification rate of 97% has been achieved.

The Chilean electricity system is divided into four sub-systems: the SING (Interconnected System of the Greater North - Sistema Interconectado del Norte Grande), the SIC (Central Interconnected System - Sistema Interconectado Central, the largest in terms of power and scope) and two additional local systems in the regions of Aysen and Magallanes. Table 1 below summarises the key statistics for these grids.

Table 1 Summary statistics for the four main transmission grids in Chile

The main customers on the SING grid are the large copper mines in northern Chile. The SIC grid supplies electricity to 90% of the population of Chile. The geothermal prospects shown in Figure 2 in northern Chile and south central Chile are reasonably well located with respect to interconnection to either the SING and SIC grids respectively, however, the more easterly projects are progressively more removed from these grids. In northern Chile, distance from geothermal projects to the SING grid is less of an issue because of the prevalence of copper mines located well inland with a high need for local sources of off-grid power.

• Chile represents a very attractive commercial environment

Chile has an excellent business environment as a result of a policy-driven government strategy developed and implemented over the past two decade that has focused on building sound macroeconomic fundamentals and strong institutions, promoting competition and international integration by creating a fairer society in which all citizens benefit from economic development. Economic growth has been accompanied by decreasing inflation, a sharp drop in public debt, stable external accounts and strong international reserves. This achievement is the result of Chile's commitment to economic liberalization and free-market policies, as well as its pledge to maintaining sound and responsible economic management.

These comparative advantages are further enhanced by Chile's open economy, which has meant greater competitiveness, lower tariffs, increasing levels of foreign trade and rapid integration into world markets. Indeed, Chile currently has free trade agreements with countries totaling more than 90% of the world's GDP. Moreover, the country's modern telecommunications system, its internationally competitive and solid banking sector, high-standard public infrastructure, excellent quality of services and wide availability of qualified human resources are key factors that are increasingly drawing foreign investors to Chile.

• Chile has a sound geothermal regulatory environment

The regulatory framework governing geothermal development in Chile is defined under Law No 19.657 issued in 2000. The law establishes that geothermal energy has to be explored and exploited by those holding concessions granted by the state. This law defines the regulations governing private firms participating in exploring and exploiting this energy source.

Establishment of Hot Rock in Chile

With the excellent geothermal development opportunities that exist in Chile, Hot Rock has commenced an active involvement in the geothermal sector in Chile with the following activities:

• Established a Chilean subsidiary registered as Hot Rock Chile S.A. wholly owned by Hot Rock Limited.
• Established a permanently staffed office in Santiago.
• Undertaken reconnaissance level field investigations at a number of geothermal prospects in both the northern and central - southern regions of Chile.
• Filed a number of geothermal concessions with the Chile Ministerio de Mineria  (Ministry of Mines) ing under Law 19.657. These include 8 prospect areas filed by Hot Rock Chile on an uncontested basis and 4 prospect areas bid on a competitive basis against other geothermal developers. These 12 applications are still under process and Hot Rock is optimistic that at least the 8 unsolicited applications will be granted. Details on these 12 projects are given in Table 2 where field work has been undertaken .

Figure 7: Hot Rock's Peter Barnett undertaking reconnaissance geothermal investigations on horseback in the Andes foothills in central-southern Chile, assisted by two local "huaso's" - highly skilled Chilean horsemen

Hot Rock's Forward Program in Chile

Hot Rock is now poised to commence detailed field exploration studies as soon as geothermal concessions are granted by the Chile Ministry of Minesing These will include over the first 12 months a program of semi detailed geological and geochemical work leading at each awarded prospect to detailed Magneto Telluric (MT) resistivity surveys, followed by multi disciplinary hydro geological modelling, assessment of each prospect, and ranking with regard to resource potential, location and market parameters. This will lead to exploration drilling and resource evaluation at a number of prospects during the second year.

With the quality of the geothermal resources in Chile, the very attractive power prices that prevail within a well formulated and efficient power market, the excellent business environment, and the strong incentives provided by the Chilean government for geothermal power development, Hot Rock is confident of achieving considerable success in Chile and adding significant shareholder value.

Table 2: Geothermal Claims filed by Hot Rock Chile S.A

A - Filed on an unsolicited basis

Prospect Name	Geothermal Setting and description
San Marcos Region 1 830 km2	The prospect is located 100 km east from the coastal port of Iquique immediately alongside the open pit copper mine Cerro Colorado owned by BHP Billiton. The prospect includes two areas of geothermal spring activity, located 8 km apart at Macaya and Mamina.
San Jorge Region I and II 600 km2	There are numerous Quaternary volcanics in the prospect area which include the Aucanaquilcha and Mino volcanoes to the south and a complex of several stratovolcanoes with Holocene lava flows on the border of Chile and Bolivia 10 km to the north east of which Volcan Olca dominates. A high flow geothermal surface spring occurs in the prospect area (>100 kg/sec).
Santa Caterina 1 and Santa Caterina 2 Region II Total claim 1450 km2	This is a large area of high geothermal prospectivity situated between the drilled and proven geothermal systems at El Tatio to the south east and Apacheta to the immediate east. The greater prospect area includes a number of strato-volcanoes of Pleistocene to Holocene age including San Pedro, San Pablo, Paniri, Leon and Toconce volcanoes and the older El Abra volcano. An outstanding feature of the prospect is the huge Chao dacite lava dome to the southeast of Paniri, the largest dome of this type in South America.
Galo Region VI 610 km2	Located immediately to the west of the Calerias prospect (see below) which Hot Rock has competitively bid. The same comments on the geothermal setting and description of the Calerias prospect apply to the Galo prospect.
Santa Alejandra and Santa Sonia Regions VII & VIII Total claim 1430 km2	These two contiguous prospects are associated with the glacier-clad Nevado de Longavi volcano, a late-Pleistocene to Holocene, dominantly andesitic stratovolcano constructed over a basement of Tertiary volcaniclastic and granitic rocks. No historical eruptions are known, although fumarolic activity continues at the summit. Surface emissions of hot geothermal water occur over a wide area of the two prospects.
Santa Antonia Region VIII 430 km2	The prospect is associated with the Copahue-Callaqui volcanic complex, located on the Chile - Argentina border. The area contains a wide caldera, and a long line of nine craters with a number of lakes formed from condensed geothermal steam. Four deep geothermal wells have been drilled on the Argentine side of the Copahue geothermal system. These encountered vapour dominated conditions with geothermal steam at 235oC to 250oC. A 0.7MWe binary cycle geothermal power plant has been installed on one of the Argentine wells and a 5MWe second stage development is now in progress.

B - Filed through competitive tender

Prospect Name	Geothermal Setting and description
Alitar Region II	Alitar is located on the eastern and northern flanks of two closely spaced volcanoes with surface fumaroles. Volcan Acamarachi, is a steep-sided andesitic-dacitic volcano with a large lava dome on it's northern flank, probably constructed in pre-Holocene times, although the summit lava flows draping the upper cone are considered to be of Holocene age. Volcan Colachi is located to the north of this where most recent volcanic activity has produced silicic lava flows of probable Holocene age, the largest of which covers a 7sqkm area on the saddle between Colachi and Acamarachi.
Tuyajto 4 Region II	The prospect area lies at the southern end of the Puntas Negras volcanic range where there has been intense volcanic activity in Pleistocene-Holocene times. There are a number of surface springs with high chloride, neutral pH and over saturated in silica - all good indications of geothermal origin.
Calerias Region XI	The prospect is strategically located within an area of recent volcanic rocks in the Andean foothills only some 90 km south east of the major electricity load centre in the capital city of Santiago. It contains a number of mixed geothermal brine and groundwater spring discharges with temperatures of up to 60oC.
Sollipulli Region IX	Sollipulli is an ice-filled volcanic caldera 4 km in diameter. There are surface steam vents at high elevation and a variety of hot chloride springs located around the base of the Sollipulli cone.