Time to offer gas to crypto?
The natural resources sector has suffered significantly as a result of the pandemic, and many businesses have had to reassess their definitions of viability and profitability. There has been a lot of talk recently about how crypto mining could be a good way to change the point of viability for an oil and gas project, deploying crypto miners on site and powering them with natural gas that has up to now been flared, released or pushed back into the ground. In this short article, financial markets veteran Kay Rieck discusses how it works and whether it is worthwhile.
There has been a lot of discussion about the potential of crypto to make good use of the natural gas that is often wasted at an exploration and production project. The reason that it is wasted is relatively simple: Many oil projects are relatively small and in remote locations where there is no infrastructure to trap the gas and pipe it to market. Building the pipes would probably take longer than the project would last and as a result, the gas tends to be treated as a valueless by-product.
Over the last few years, meanwhile, crypto has become a big thing. Regulators are still struggling to get to grips with it, but there has been a massive appetite for both cryptocurrencies and blockchain projects. We don’t really have time to debate the ins and outs and rights and wrongs of this, but it is fair to say that crypto has become a major part of the global economy and despite it having a market that is prone to instability at this stage, it appears to be here to stay.
Oil and gas, ones and zeros
Without getting too technical, crypto works by having information about transactions validated from several different perspectives, which in theory makes it highly resistant to being tampered with. This validation process requires multiple computer servers comparing information, and these computer servers need cheap, reliable power to run.
While they need power to run, they don’t need to be in any specific geographic location. Without needing to be next door to an office downtown, the servers can be located just next to, for example, a wellhead where they can take advantage of power that can be generated from natural gas that would otherwise be wasted.
There are several benefits to this for the oil and gas sector, particularly at the moment.
Primarily, it potentially creates a revenue stream from a previously wasted resource. Given the high level of interest from the crypto sector at the moment, it could well be a route to making more projects viable, right at the point where the natural resources sector is in the process of trying to get its equilibrium back after an exceptionally difficult couple of years.
Given the pressure from regulators on the oil and gas sector to reduce wasted gas, having a quick, low-cost way to turn the raw energy into usable power onsite is an attractive proposition, reducing the risk of fines for non-compliance with bylaws.
It can also help with some of the perception issues that the oil and gas sector, rightly or wrongly, has attracted over the last few years. Being able to demonstrate ways that waste has been reduced will be a good way of enhancing the sector’s reputation, which is going to become increasingly important as alternatives become more and more viable.
It can also be set up relatively simply. Server centres can be little more than the size of a shipping crate, and there are a growing number of companies offering the service that are willing to manage the onsite operations at little cost.
The interesting thing over the last few weeks is that suddenly, everyone one is talking about powering crypto onsite with natural gas. Traditional states in the US such as Oklahoma [LINK] and Utah [LINK] have been embracing crypto as a way of making use of their previously wasted gas. There is also similar activity in Canada, where crypto activity is offering a way to meet particularly stringent environmental regulations.
Part of the reason for the sudden increase in activity is that China has recently changed its stance on crypto, cracking down on an industry that could well offer an alternative to the country’s experiments with centralized digital currency. Until around three months ago, it is estimated that 70% of crypto activity was processed by servers placed in China, and two thirds of those servers were powered by coal. As a result, the shift to global servers powered by natural gas that would otherwise be wasted has been broadly welcomed by many in the crypto sector and the environmental movement.
What are the risks?
Very few things in life come with no downside and the marriage between crypto and the natural gas sector is no different. There are, of course, several risks that need to be examined closely.
The first risk is price. The majority of crypto projects have seen prices fluctuate wildly over the last few months. To take bitcoin, the most widely recognised cryptocurrency project, the BTC/USD price has risen from around USD11,000 this time last year to its current level of around USD45,000, but it has also sored to the heights of USD63,000 and was coming in at around USD30,000 this time a month ago.
Volatility makes markets, but when you are investing in expensive hardware that will make a return at a specific price, the lack of price stability makes it difficult to offer accurate predictions about profitability.
There is also the regulatory risk. Regulators are scrambling to understand crypto at the moment and there is a chance that some of the decisions that they are make might not be in the best interests of the sector or any sectors that come to support it. Crypto is a very young and highly volatile sector where things are changing rapidly, and this needs to be taken into account when examining options for getting involved.
Overall though, what we have is an industry that is pressured to stop wasting energy and another industry that is in need of consistent power and can make use of it onsite with limited infrastructure requirements. Right now it’s a match made in heaven, but it is probably worth ensuring that there’s a prenuptial agreement in place.
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.