The energy industry is witnessing a new, innovative application of cryptocurrency: projects that generate cryptocurrency using gas-powered generators. These “gas-to-crypto” projects take advantage of gas that would otherwise be flared, has insufficient takeaway, or is uneconomic to produce, in order to power boxcar-sized data centers, or “mining rigs,” which mine for cryptocurrency. Energy companies and other mineral owners contract with mining rig operators to supply the gas in exchange for reduced or nominal fees.
This model presents a potential new revenue stream for gas producers. While these projects have many of the features of typical “gas-to-power” projects, they also involve novel transactional elements, such as cryptocurrency-based loans. Major producers have taken note, but there are still questions about potential litigation and transactional risks.
These arrangements between oil and gas producers can come in two forms: a gas sales agreement in which natural gas is sold to the cryptocurrency miner to be used in generators powering the mining rigs, or a joint venture in which the producer has a direct or indirect interest in the downstream project assets (such as the mining rigs and generators). Where the gas would otherwise be flared, it is often sold at little or no cost due to the lack of other end-uses. Gas produced from uneconomic wells (due to insufficient takeaway or other reasons) is similarly priced below index. Where producers are comfortable with the volatility of cryptocurrency prices, gas may even be marketed for a cryptocurrency like Bitcoin, effectively connecting gas wells to a remote gas market denominated in cryptocurrency.
These novel arrangements bring with them unique risks. Standard lease forms, as well as the laws and regulations governing the energy industry, may not account for selling or using flared or uneconomic gas to power cryptocurrency mining. Counterparty risk is also a concern for oil and gas producers entering into gas supply or joint development agreements with cryptocurrency miners. Potential claimants include landowners, suppliers, other counterparties, and special interest groups, which may present public relations or even regulatory and litigation issues.
The Colorado lawsuit Hobe Minerals LLC v. Bonanza Creek Energy Operating Company, LLC is an example of the litigation risk associated with these ventures. The lessor sued its lessee for a declaration that the lease had expired due to the lessee’s use of produced gas to power cryptocurrency mining, and that oil production from the wells had declined by 80-96% compared to before the mining operation began.
As the sector continues to develop, collaboration between industry participants and legal experts will be necessary to ensure that the relationship between energy and cryptocurrency maximizes its potential while minimizing associated risks.
Luke Burns is a transactional partner at Reed Smith who has represented oil and gas clients in acquisitions, divestitures, joint ventures, and other arrangements for over a decade. Nicole Soussan Caplan is a litigation partner at Reed Smith, and her practice includes energy, commercial, and mass tort litigation in jurisdictions across the country. Mason Malpass is a litigation associate at Reed Smith whose practice focuses on complex commercial disputes in the energy and commodities industries.
