“Those in Bitcoin think they have the most valuable asset on Earth. Those in oil and gas think they have the most valuable asset on Earth.”
As such, Laura Pommer, CEO of EnergyFunders, believes some relationship counseling is in order for this to work.
“It’s tough to get a deal done between those two,” she said.
Getting a deal done, she believes, will help both.
The Basics of Bitcoin
To explain Bitcoin comprehensively would take up most of this issue and still have most of us scratching our heads, so suffice it to say that bitcoins are cryptocurrency exchanged without middlemen to purchase goods and services. These middlemen include central banks, government officials and money manipulators – that’s part of the charm, according to Bitcoin advocates. Its protocol, created by an unknown individual or group working under the pseudonym of Satoshi Nakamoto, launched in 2009 immediately following the 2008 financial crisis, gave control and decision-making to a distributed network of users, not governments, and it took off like a financial rocket, albeit a rocket that flew under the radar of money manipulators and central banks. It is an open-source ledger, referred to as a blockchain, whose currency transactions are verified through a network of nodes and protected through cryptography.
An Energy Intensive of Currency
What does all this have to do with the oil and gas industry?
It takes vast amounts of often expensive electricity to operate the supercomputers needed to “mine” these cryptocurrencies – literally solving complex math problems to unlock digital vaults that Nakamoto buried deep within algorithms that hold, at last count, the remaining 2,253,168.8 un-mined bitcoins.
How much energy?
“Right now, Bitcoin mining is consuming around 125 terawatt-hours per year, which is nearly equivalent to the annual energy consumption of Norway,” said Andrew Munoz, senior geophysicist at Ensign. “Every data center in the world likely consumes around 400 terawatt-hours per year (about 2 percent of all energy usage in the world).”
The power needed to do so notwithstanding, Munoz said bitcoin mining is pretty simple.
“It requires a few key elements: hardware (computers), network connection (internet), and most importantly energy,” he explained.
The specialized computers used to mine bitcoin – application-specific integrated circuits, or “ASIC”s – are energy intensive due to the number of cryptography computations they have to run to verify a new block on the Bitcoin blockchain. Additionally, every transaction made with cryptocurrencies is kept in the blockchain, so computers need to constantly communicate with each other to keep the ledger up to date. All of this means that you can’t mine a bitcoin on a home iMac. In fact, it takes roughly 1,000 of these supercomputers to verify one block.
“Oil and gas operators control vast amounts of energy potential across the globe, and given Bitcoin’s rapid scale of growth and energy usage, this makes those operators one of the key factors necessary for bitcoin mining,” said Munoz.
That last part is important to America’s producers of oil and gas because in 2019, China, which had long been home to between half and 75 percent of the world’s bitcoin miners, banned the trading of cryptocurrency. In 2021, it went a step further and declared such activities illegal, claiming the energy used thwarted its attempt to meet climate targets.
That was probably a dodge.
Chinese government officials saw cryptocurrencies as a threat to the order of its economy, but not enough of one, it seems, to prevent the release of its own crypto, which it did early this year, called the “e-yuan,” or digital yuan.
Pommer believes – and she’s not alone in this – that one of the places crypto can be accessed is at abandoned gas wells in the United States. Enormous facilities would be constructed at these sites to access the energy that is no longer profitable for operators to sell elsewhere.
“There is a large portion of the Bitcoin network that uses stranded methane that would otherwise be flared or vented, which significantly reduces the carbon footprint of those operators who leverage this,” added Munoz.
Additionally, there is a very large amount of solar, wind and hydro energy being used to mine Bitcoin.
Many are convinced that finding a use for natural gas that would otherwise be wasted is economically efficient – a win-win, as it were – even as some others believe it is just a boon to the industry by providing subsidies for continued oil and gas production.
The Pros and Cons of Bitcoin Mining
Paasha Mahdavi, an assistant professor of political science at the University of California, Santa Barbara, who studies methane mitigation measures, has been quoted, “It’s like if you had a broken gas line at home. Instead of fixing that problem, you just bought a new gas dryer and you just run it forever without any clothes in it,” he said. “That’s not a solution. That’s effectively what you have here with crypto mining and any kind of stranded gas or flared gas sites.”
What nobody disputes, however, is that since the energy needed for such mining operations literally happens at the site, there would be no need to build pipelines to carry the oil out of the patch.
The volatility of crypto, though, said Pommer, holds some back from embracing it.
From November 2021 to May 2022, Bitcoin dropped in value by almost 50 percent. Even with that drop, a single Bitcoin is worth, at the time of this writing, more than $40,000 – about 90 times its value five years ago.
What would be the investment for an oil and gas operator to construct such facility?
A well, which would produce 300 million cubic feet and could power a mining operation, would cost $2-3 million to construct.
“Not a lot of oil and gas companies have that kind of money lying around,” Pommer said.
Arguably, if Bitcoin keeps dropping, even if they found it lying around, they might not want to spend it on cryptocurrency mining.
At present, within the United States, 19.9 percent of Bitcoin’s hashrate is in New York, 18.7 percent in Kentucky, 17.3 percent in Georgia, and Texas accounts for 14 percent, according to Foundry USA.
(Hashrate is a measure of the total computational power being used by a proof-of-work cryptocurrency network to process transactions in a blockchain.)
Inevitability?
The relationship between Bitcoin mining and the oil and gas industry was taken up at last month’s Unconventional Resources Technology Conference in a short course entitled, “The Inevitable Intersection of the Oil and Gas Industry and Bitcoin Mining,” which was moderated by Munoz and Pommer, along with Hayden Griffin Haby III of Limpia Creek, Max Gagliardi of Ancova and Vincent Whisker of Energy Systems participated.
Munoz is bullish on the potential relationship.
“If Bitcoin was a country, it would also be in the top 20 most valuable currencies in the world, which means its energy use would be justified, given its extreme importance and value to the world. The oil and gas industry, being a primary provider of energy around the world, can directly invest in the Bitcoin network by 1) capturing all flare gas emissions and using it to mine bitcoin, 2) use non-economic or stranded gas resources to mine bitcoin, and 3) integrate Bitcoin into their business model by patterning with miners,” he said.
As for Pommer, she is hopeful but less ebullient.
“I don’t know if it’s inevitable,” said Pommer, who wonders if the industry is ready for Bitcoin, ready to take the leap into powering this paradigm.
“The oil and gas industry is stuck in the 1950s. We’re technologically proficient but we don’t catch on quickly,” she said.