An innovative cryptocurrency application has emerged in the energy space: projects that mine cryptocurrency using gas-powered generators.
These “gas-to-crypto” projects transport gas that’s otherwise flared, has insufficient takeaway, or is uneconomic to produce to electric generators that power boxcar-sized data centers called “mining rigs,” which then mine for cryptocurrency. Energy companies and other mineral owners contract with operators of mining rigs to supply the gas needed to power mining rigs in exchange for reduced or even nominal fees.
This model presents a new potential revenue stream for gas producers. These projects retain many features of typical “gas-to-power” projects, but they’re also accompanied by novel transactional elements such as cryptocurrency-based loans. While major producers have taken notice, there are still significant questions about possible litigation and transactional risks.
These arrangements with oil and gas producers often take two forms: a gas sales arrangement in which natural gas is sold to the cryptocurrency miner for use in generators that power the mining rigs, or a joint venture in which the producer owns a direct or indirect interest in the downstream project assets, such as mining rigs and generators.
Where otherwise flared natural gas is sold, it’s often for little or nominal value due to the absence of other end-uses for that gas. Other gas produced from wells that are uneconomic due to insufficient takeaway or any other reason are similarly priced below index.
Where producers are comfortable with the shifts of cryptocurrency prices, gas may be marketed for a currency such as bitcoin, effectively connecting gas wells to a remote gas market denominated in cryptocurrency.
Novel Risks
As a starting point, standard lease forms, as well as the bodies of laws and regulations governing the industry, may not adequately contemplate cryptocurrency mining projects. They may not account for selling or using flared or uneconomic gas to power cryptocurrency mining. Counterparty risk is also a consideration for oil and gas producers who may enter into gas supply or joint development agreements with cryptocurrency miners.
There are also litigation risks from the usual potential claimants: landowners, suppliers, other counterparties, and special interest groups. With respect to mineral ownership, cryptocurrency mining may give rise to potential royalty claims and may also lead to claims asserting breach of lease provisions.
With respect to gas supply arrangements and other arrangements related to the operation of wells and mining rigs, there may be potential claims by or against suppliers of mining rigs or related services, such as breach of contract or warranty, as well as potential indemnity claims. There also may be counterparty risks inherent to cutting-edge markets and technologies.
Finally, special interest groups may present public relations or even regulatory and litigation issues to the extent they target the cryptocurrency industry and its miners.
A recent suit filed in Colorado brought to light the potential litigation risk associated with these ventures. In Hobe Minerals LLC v. Bonanza Creek Energy Operating Company, LLC, filed in Denver District Court, a lessor sued its lessee for a declaration that the lease had expired because the lessee’s use of produced gas to power intermittent cryptocurrency mining was insufficient to hold the lease beyond the primary term. The owner further asserted that oil production from the wells declined by 80% to 96% as compared to production before the implementation of the mining operation.
As this sector develops, ongoing collaboration between industry participants and legal experts will be paramount to ensure that this symbiotic relationship between energy and cryptocurrency maximizes its potential while mitigating inherent risks.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Luke Burns is a transactional partner at Reed Smith. He’s represented oil and gas clients for over a decade in acquisitions, divestitures, joint ventures, and other arrangements.
Nicole Soussan Caplan is a litigation partner at Reed Smith, whose practice includes energy, commercial, and mass tort litigation in jurisdictions all over the country.
Mason Malpass is a litigation associate at Reed Smith, whose practice focuses on complex commercial disputes in the energy and commodities industries.
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