Crypto, Energy, and Oil

Crypto, Energy, and Oil

The cryptocurrency market features a myriad of players involved in mining bitcoins, ethereum, and other digital currencies. A small but significant fraction consisting of oil, gas, and energy companies has emerged and gained prominence in recent years. There are strong indications that their influence on the global cryptocurrency market is likely to increase in the coming years.

The more there is, the less there is

For many years, the cryptocurrency market has been mired in debate. While some argue that it is undermining the global economy, others herald it as a beneficial innovation. However, a new study from the Institute of Risk Management, titled “Bitcoin and the Vitality Transition: From Threat to Alternative,” offers a nuanced perspective on cryptocurrencies.

According to the study, bitcoin could play a pivotal role in the global energy transition, potentially mitigating climate change in various regions. The Institute of Risk Management posits that bitcoin mining could reduce global greenhouse gas emissions by 8% by 2030.

This optimistic outlook stems from the observation that the electricity used in bitcoin mining does not necessarily result in excessive emissions of carbon dioxide or other air pollutants. Associated natural gas could serve as a potential source of electricity.

This revelation could invigorate the global cryptocurrency market, which has been somewhat beset by regulatory actions from the United States, China, and others.

At the same time, bitcoin’s valuation is experiencing a resurgence, spurred by increased demand from investors looking to capitalize on the current price of $30,000 per unit – a low since peaks in April and November 2021. Fundstrat believes the price could escalate to $180,000 before the next halving in April next year.

Opportunistic and useful

Prior to this study, the Institute of Risk Management had already explored the potential of cryptocurrency mining in oil and gas fields. Last year, the Oman Investment Authority, which is tasked with managing Oman’s oil revenues, acquired a stake in Crusoe Energy Systems. This company specializes in using associated petroleum gas for cryptocurrency mining. During a fundraising campaign, Crusoe attracted $350 million in investment and offered a significant portion of its shares, enticing the Oman Investment Authority to invest.

With a foothold in Oman and more broadly in the Middle East and North Africa, Crusoe is poised to address the region’s 38% contribution to global flaring of associated petroleum gas – a practice criticized for environmental neglect.

But Crusoe hasn’t been immune to criticism. Detractors claim that the company is exacerbating climate issues by using fossil fuels to mine cryptocurrencies.

The accusations have not deterred Crusoe Energy Systems, which previously held a series of negotiations with Omani oil companies about cooperation in the cryptosphere.

They were surpassed by the American giant Exxon Mobil, which together with Crusoe Energy Systems is implementing a program to use associated petroleum gas in the Bakken shale basin (North Dakota). The 509 thousand cubic meters per month of associated gas flowing from Exxon Mobil’s well will be used to generate electricity to power servers and mine bitcoin 24/7. Kirkwood Oil and Gas, Enerplus, ConocoPhillips, and Kraken Oil and Gas Partners have all implemented similar initiatives.

Russia joins the global trend

Russia’s Gazprom Neft followed a similar path, launching a cryptocurrency mining project in 2021 at the Alexander Zhagrin field (Khanty-Mansi Autonomous Okrug). There, it commissioned a power plant powered by associated gas and offered the generated electricity to all interested parties. The pioneer was Vekus, which delivered 150 ASIC devices to the Alexander Zhagrin field and managed to mine 1.8 bitcoins in one month. The cost of electricity was less than 3 roubles (about 3 cents) per kilowatt-hour.

Interestingly, in the same year, Russian oil companies, the Ministry of Industry and Trade, and the Ministry of Digital Development of Russia discussed the large-scale use of associated petroleum gas for cryptocurrency mining. The idea has not yet been realized due to the lack of developed legislation.

Despite the absence of such legislation, investment continues from a variety of sources, including individuals, legal entities, and players not directly involved in the development of hydrocarbon deposits, such as Gazprom Neft. A typical example is En+ Group, which three years ago announced plans to cooperate with BitRiver, the largest data center operator in the CIS.

According to En+ Group’s official press release, it has reached an agreement with BitRiver to create a joint venture, Bit+, to mine cryptocurrency using renewable energy. At the time of the press release, the parties had launched a 10MW mining farm in Bratsk, Irkutsk Region, with the prospect of increasing it to 40MW.

As outlined in the partnership, En+ Group committed to providing guaranteed power supply to the farm, while BitRiver took over its operational management functions. According to En+ Group, the farm consists of mobile platforms, specifically converted shipping containers that resemble fully equipped mining centers.

It seems that this is good news, but there is a small catch – the emergence of crypto farms in Russia is not accompanied by the creation of a large number of new jobs with significant salaries. Maintaining them requires a relatively small team.

The choice of Bratsk is not accidental – the Bratsk hydroelectric power plant, part of the energy division of the En+ Group, is located nearby. The dam can supply the farm with cheap electricity (one can’t help but think of the looming necessity of transferring the Bratsk plant to RusHydro, which is under state control).

Meanwhile, in 2018, the En+ Group was discussing the sale of electricity from the En+ Group-owned power plants in Irkutsk, Bratsk, and Ust-Ilimsk to several investment funds seeking to finance the construction of mining farms. They were negotiating annual supplies of 100 MW of electricity, worth almost 1 billion rubles (about $10 million). The funds created a pool of individuals eager to profit from what was then a highly lucrative business.

It seems that the deal didn’t work out – En+ Group soon fell under US sanctions, which were only lifted in 2019. While BitRiver ended up under them until 2022, and there’s no prospect of them being lifted anytime soon – the U.S. Treasury Department named it among the entities helping Russia monetize its natural resources. The blow was delivered with precision: BitRiver depends on importing foreign equipment, and the sanctions could scare off those willing to supply it.

Even before the sanctions against BitRiver, En+ Group had planned to build four new hydroelectric plants – Telmamskaya, Krapivinskaya, Nizhneboguchanskaya, and Motyginskaya – by 2030. The Telmamskaya hydroelectric power plant may be needed to expand the eastern polygon of Russian Railways, Krapivinskaya – to supply the Kemerovo region, while Nizhneboguchanskaya and Motyginskaya may be used to mine cryptocurrency.

This unusual conclusion is self-evident – there are no favorable conditions for building mines or metallurgical plants with decent power consumption in Siberia; on the contrary, there is an excess of it. Mining (of cryptocurrencies, not rare earths) is getting more expensive every year, and the current collapse of the cryptocurrency market will clean it up thoroughly.

Legal challenges

The main obstacle to the implementation of these cryptocurrency mining projects may be their legalization. Until cryptocurrency is recognized, any capital investment in mining may be considered illegal under certain circumstances, especially for not paying taxes or provoking power outages.

Not for nothing, in March this year, the U.S. Department of the Interior announced that a number of U.S. companies that develop hydrocarbon deposits on public lands are using the natural gas they produce to mine cryptocurrencies while avoiding paying the legal royalties. The U.S. Department of the Interior has advised the Bureau of Land Management, which oversees 170 million acres of public lands, to issue guidance to address clandestine cryptocurrency mining that may be occurring on these lands.

The matter is really serious: according to the Bureau of Land Management, the royalty rate for federal onshore oil and natural gas leases issued since last August is 16.67%, while the rate for older leases is 12.5%. In 2022, the U.S. Department of the Interior collected more than $1.7 billion in royalties for onshore natural gas extraction, and one can only guess how much revenue was lost to illegal cryptocurrency mining.

A similar situation could occur in other countries in the Americas, Europe and Asia. It is obvious that oil and natural gas production will continue to play a significant role in the planet’s energy balance for decades to come. The construction of solar and wind power plants will not stop either, and their share in the global energy balance will clearly increase.

As a result, we can reasonably predict an active expansion of oil and gas and energy companies into cryptocurrency mining in the 2030-2040 timeframe in order to increase their own revenues and reduce greenhouse gas emissions. icon

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