The strange thing about the crypto sector is that it just won’t go away. Every time you think that the bubble is in the processes of bursting, it always seems to end up being a pause rather than a full stop. It seems that E&P firms could well play an increasingly important role in the sector's future, which will be good for the crypto firms, the E&P firms and for the investors who support them both, suggests Kay Rieck, an experienced market observer and investor.
There’s an old English saying: where there’s muck there’s brass, which is an apparently polite, and deeply colloquial way of saying that where there’s waste, there’s an opportunity to make some money. This certainly rings true at the intersection between natural gas and cryptocurrency.
As we have discussed in the past, the rise of the crypto sector offers the oil and gas sector an opportunity to make better use of the natural gas that has often been allowed to go to waste in the past. The fact that Crusoe Energy, one of the companies that pioneered using wasted natural gas as a power source for crypto mining, raised $505 million in a recent funding round [LINK] to expand its operations in the US and worldwide, suggests that the investing sector is inclined to agree.
One of the reasons why natural gas is often released or flared into the atmosphere is that there is no economically viable way to get it from where it is to where it can be used. Many exploration and production (E&P) projects take place in remote regions, and even if there was a will to put in place the infrastructure necessary to pipe the gas to market, the size of the deposits are often too small to make it worthwhile. From a pure economics point of view, it has been cheaper just to get rid of the gas.
The rise of ESG
This economic reality has been changing in recent years. Companies, whether they are focused on E&P itself or the investment opportunities that sit in parallel, are increasingly pressured to take environmental, social and governance (ESG) responsibilities into account. This may be relatively low on the agenda of an E&P organization, but from an investment perspective, it has been becoming increasingly important over the last decade.
There are those that are cynical about the importance of ESG concerns, suggesting that while they are important to talk about on a glossy corporate website, in the end, they don’t really have much relevance at the sharp end of business. This perhaps misses two points.
Firstly, E&P often struggles to move forward without investment, and the investment community is taking ESG into account, so, like it or not, E&Ps need to take ESG into account if they want to attract investment.
Secondly, there is also the increasing reality that regulators have the tools in place to track emissions from oil and gas projects, using technologies such as drones to ensure that all local laws are adhered to. And they are issuing increasingly harsh penalties to firms that are found to be in breach. The best way to avoid this is to work out a way of dealing with the natural gas, and crypto appears to offer a part of the answer.
Enter crypto
So, how can the volatile world of crypto help? In a nutshell, the crypto sector needs power to complete its complex computer calculations, but importantly, those calculations can be carried out anywhere. In other words, you can locate a computer server at a wellhead anywhere in the world, and power it with natural gas that would otherwise have been wasted. The technology is relatively cheap, and it is mobile, so it can be put in place and then moved on as deposits are expended.
For both the E&P companies and investors, by bringing in the crypto processing capacity you remove a great deal of the ESG concerns that have been building around oil and gas, and you can do it without having to make major infrastructure investments. For the crypto companies, you offer abundant, cheap processing power.
The challenge though is that crypto is colossally volatile and vastly under-regulated. In the thirteen years since it started to burst onto the scene, it has been a massive rollercoaster that has claimed the shirts of many an unwary investor. And quite a few wary ones as well.
In the last year alone, prices for a single Bitcoin, the most popular of the cryptocurrencies, have fluctuated between around BTC1/USD30,000 and nearly BTC1/USD70,000 and are currently hovering in the region of BTC1/USD40,000. It is eyebrow raising of not hair-raising stuff, particularly if you consider that at around two years ago, the price had been sitting at around USD10,000 for the best part of 18 months.
So, in short, Bitcoin has created and destroyed several millionaires over the last years and has the potential to keep doing it. On the other side of the coin, it is also worth four times more than it was two years ago.
And to be fair, it’s not just Bitcoin that has been volatile. The parallel world of non-fungible tokens (NFTs), much talked about of the last couple of years, has also claimed its share of scalps.
Former Twitter CEO sold his first Tweet as an NFT last year, with the buyer paying USD2.9 million for the historical 25 characters (“just setting up my twttr.”). When the current owner decided to put the NFT up for auction in mid-April, promising half the proceeds to charity, they have so far been disappointed by the response. Offers are currently in the region of USD50,000.
So it’s just hype?
The thing is though, in terms of serious business, there are increasing numbers of people willing to investigate the market, and it is not just innovative/leading edge companies such as Crusoe Energy. Several of the major wholesale banks have also set up crypto trading desks, and people keep creating credible use cases for the technology that go beyond cryptocurrencies and into the underlying blockchain itself. Financially sensible, Switzerland and several other countries have retail crypto experiments at a relatively advanced stage that might well have reached mass delivery had the pandemic not demanded so much focus and put a crimp on public spending over the last couple of years.
Much of the excitable hype over the last eighteen months meanwhile has been on the potential of the metaverse, much of which is made possible by the blockchain, so whether it is Bitcoin, another cryptocurrency or some different type of approach that becomes adopted by the mainstream, something seems likely to happen and whatever it is that does end up happening is going to need energy to power its servers.
So in many ways, yes there is a lot of hype involved, but there was a lot of hype over home computers and there was a lot of hype over the internet, and once the smoke cleared, the hype bubble burst and the markets found their balance, most people would agree that home computers and the internet have both changed the way that businesses operate and societies interact.
Nothing to lose with waste gas
What this means is that over the next few years, there is a good chance that we are going to need far more servers than we are using today, and we need a relatively cheap, sustainable way of powering them. Using waste gas seems like a sensible way of achieving this.
The alternative was tried out in Kazakhstan over the last couple of years. At the start of 2021, China clamped down on its previously flourishing crypto sector and many of the servers that had been operating in the country decamped to nearby Kazakhstan, which initially welcomed the business. The problem is that even energy-rich Kazakhstan could not keep up with the additional demand on its national grid and the country started to suffer domestic and retail blackouts, which in turn led to the government clamping down on crypto activity.
If the servers are mobile, don’t need to be constrained to a specific geographical location and can make use of the waste natural gas rather than operate in competition with existing consumers, then they will potentially solve several problems simultaneously. Society will cut down on a wasted resource, crypto enthusiasts can keep experimenting, investors can enjoy an ESG benefit and E&P companies can enjoy and additional revenue stream. For the E&P companies, this could well be particularly useful because the current conflict-driven price bonanza is unlikely to last forever.
At the moment, if you were so inclined, it appears that you might be able to pick up the world’s first tweet at a bargain price. You might be better advised to look at the serious end of the crypto sector and investigate how it can offer an additional revenue stream for E&P firms.
About the author
Kay Rieck has been active on the investment side of the oil and gas sector for more than two decades. Starting his career as a financial adviser and stockbroker on the New York Stock Exchange, he quickly developed an interest in natural resources and associated assets building his expertise with investment banking and asset management roles at the New York Board of Trade and the Chicago Board of Trade. Utilising his exceptional network of global contacts, he started his first exploration and production company in the US in 2008, selecting investments across the Haynesville Shale, Permian basin, Eagle Ford shale, Dimmit county and elsewhere that offered exceptional prospective returns.
