Cryptocurrency

Colorado oil and gas companies pair with cryptocurrency miners

JACKSON COUNTY — Tan pump jacks, 140-year-old oil field technology, bob up and down amid the purple sage in this rural corner of Colorado, lifting oil from deep below and also fueling a very 21st century frenzy: cryptocurrency mining.

The pump jack wells are tied to natural gas generators powering trailers filled with bitcoin mining computers, linking this remote valley to the global cryptocurrency market.

The marriage of old oil and gas and trendy cryptocurrency is one of convenience. Drillers focused on producing oil have to find something to do with the natural gas that also comes out of the well. Crypto miners are always looking for cheap electricity to power their energy-hungry computers.

A single bitcoin transaction consumes 1,449 kilowatt-hours — 50 days worth of power for the average U.S. household, according to the Digiconomist Bitcoin Energy Consumption Index.

In areas with a lot of oil production and few pipelines — such as Texas’ Permian Basin and North Dakota’s Bakken — twinning oil and gas operations and bitcoin mining has lured operators from wildcatters drilling a well or two to ExxonMobil.

The stakes in Colorado are different. The state is rich in pipelines to carry away oil and gas, but it also has a ban on flaring, the burning off of natural gas from wells. If an operator can’t connect to a gas pipeline or find some other use for the gas — under state rules — the well must be shut down.

This has led to at least half a dozen operators bringing cryptocurrency mining operations to their well sites, according to the Colorado Oil and Gas Conservation Commission.

In July, the commission had a briefing session, in conjunction with the state Air Pollution Control Division, to explain to companies what regulations to follow and forms to file. 

The commission also surveyed local governments to see if any have crypto mining rules and asked whether they wanted to be informed when the commission is notified of or finds crypto mining occurring at a well in their jurisdiction.

“It is definitely on our radar,” said Megan Castle, a COGCC spokeswoman.

Fourteen local governments replied to the survey. Thorton and four counties — Adams, Boulder, Larimer and Arapahoe — said that such oil and gas powered crypto mining would not be permitted, Castle said.

Adams County isn’t sure how, or if, this should work

Adams County, however,is researching the issue and the county commissioners will hold a study session on Sept. 27. “We are looking at other states, talking with experts,” said Jenni Hall, Adams County’s director of community and economic development.  Most of the county is close to natural gas pipelines, Hall said. It is only outlying areas worked by some small operators that have no pipeline access.

One of those small companies is Renegade Oil and Gas. In May, Renegade in partnership with Datahawk Energy, a Brighton-based crypto miner, added crypto mining equipment — a shiny silver metal box slightly larger than a port-a-potty — to a well near East 120th Avenue east of Denver International Airport, in unincorporated Adams County.

When a county oil and gas inspector discovered it operating, the county ordered it shut down and sued the company. Ed Ingve, Renegade’s owner, had the crypto mining equipment moved to another site outside of Adams County.

“It was a total overreaction,” Ingve said. “At this point the lawsuit is moot.”  

Christa Bruning, a spokeswoman for the county, said it does not comment on pending litigation.

“Adams County threw us a curveball,” Datahawk co-founder Jason Harms said. “If they come up with guidelines and regulations we’d love to work with them. This isn’t something new, it is being done all over the country.”

By far the largest oil and gas crypto mining operation in Colorado is the one in Jackson County where the installations are the size of a small cabin or travel trailer instead of a port-a-potty.

Converting methane to power cuts flaring

The natural gas is supplied from wells run by Houston-based D90 Energy and the mining operation is done by Crusoe Energy, a Denver-based company specializing in using stranded natural gas to power crypto mining and cloud computing.

D90 operates 53 wells at 36 locations in Jackson County and has been struggling to find ways to use the produced gas. The oil is trucked away.

“Clearly, we have a dilemma with fields like this,” Dan Silverman, D90’s president, told an oil and gas commission hearing in March. “There is just no infrastructure within 60 miles of this basin.” The company was before the commission to get a variance to flare while it gets its plan for the gas in place.

Six Crusoe units are operating on the site with the prospect of more being added, according to D90’s presentation to the commission. “The first couple years you are going to see a lot more Crusoe modules out there,” Silverman said.

Before adding any new wells, D90 has to find some use for the remaining natural gas coming from the existing wells. The company has plans to drill about seven wells a year for the next three or four years, Silverman said.

For Crusoe, the business model is to purchase the gas at below-market rates to run a module consisting of a generator that powers two large trailers packed with crypto mining computers.

The company, which was founded in 2018 and has raised $483 million in private funding, operates about 100 data centers including ones in Montana and North Dakota, where it has partnered with ExxonMobil.

The oil and gas company only has to provide the gas, while Crusoe provides all the investment and infrastructure.

Wells sit on the D90’s oil and gas fields along Colorado 14 in Jackson County. (Hugh Carey, The Colorado Sun)

“We’ve been able to come in to help operators reduce their flaring,” Cully Cavness, Crusoe’s president and co-founder, said at a June presentation to the oil and gas commission. “It is a cost-free mechanism to reduce flaring.”

Crusoe’s generators are designed to destroy 99.8% of the methane — a potent greenhouse gas — coming from wells compared to 93% for a flaring, Cavness said.

Still, while the generators may get rid of methane, the burning creates carbon dioxide, the world’s main greenhouse gas. “We need to shift from using fossil fuels to renewable energy as rapidly as possible, which means transitioning off oil and gas production,” Micah Parkin, the executive director of 350 Colorado, said in an email.

“So bringing crypto mining onto oil and gas sites seems a waste of energy, resources and money and encourages continued fossil fuel extraction,” Parkin said. “Crypto mining should be relying on renewable energy, not perpetuating climate disaster by relying on methane gas.”

The bitcoin mining is only part of D90’s strategy to cope with the stranded gas. The other elements include adding gas-powered generators to provide more energy onsite and reinjecting natural gas back into the wells to boost production.

When in early 2021 the Jackson County field was acquired by Fulcrum Energy Capital Funds — a Denver-based private investment firm — all of the field’s gas, 105,000 thousand cubic feet (mcf) a month, was being flared. D90 operates the wells for Fulcrum Energy.

The field was probably the largest single source of flaring in the state, said Ryan Sullivan, Fulcrum Energy’s managing director. Since then flaring has been cut 75%, he said.

Crusoe has played a key role. “They’ve been reliable and a great partner for us,” Sullivan said. “It has been a really viable way to capture gas.”

D90 is still waiting for state air regulators to issue permits of more generators and for oil and gas commission approval for the plan to continuously reinject natural gas into wells.

The oil and gas commission granted a flaring variance with the condition that as the generators and bitcoin modules were added, the flaring would cease. 

At the company’s Oxbow well pad southwest of Walden, surveys done June 18 and July 26, by Earthworks, an environmental group, found flaring still going on at sites with Crusoe units.

Andrew Klooster, a field advocate for
Earthworks, films an oil mining operation using the gas detection infrared camera on July 26, 2022, in Jackson County. The FLIR GF320 detects the flaring of gas and other harmful emissions released from natural gas production sites. (Hugh Carey, The Colorado Sun)

On July 26 at the Oxbow well pad heat rippling out of the bank of six combustors used for flaring was visible to the naked eye and an infrared camera revealed fugitive emissions billowing from four of the combustors.

Klooster said he has filed complaints with the COGCC and the state Air Pollution Control Division. A spokeswoman said the Air Pollution Control Division has received the Earthworks complaints and is “actively evaluating them.”

“This is some of the worst, most inefficient combustion I’ve seen in the state,” Earthworks’ Colorado field advocate Andrew Klooster said. “We’re seeing flaring even with the Crusoe units operating.” 

D90 and Crusoe have put as many modules as they can on the site, but complete control of the emissions for the Oxbow wells will have to wait until the oil and gas commission approves the well reinjection program, Sullivan said.

The Earthworks camera revealed just a wisp of emissions from two Crusoe generators on the site. “They do appear to be more effective,” Klooster said.

Crusoe’s typical deployments last one to three years. At the D90 site, Cavness said, “we can be there as long as they need us to be there. … If a pipeline is going to arrive, we are prepared to demobilize.”

In response to a Sun inquiry, a Crusoe spokeswoman said that no one was available to comment.

Crusoe operations require at least 300 mcf a day of gas to power one cryptocurrency module, Cavness told the oil and gas commission.

Wells producing that amount of flared gas are rare in Colorado. “Those kinds of flares are mostly outside the state of Colorado. We have a sub-1% flaring number here in Colorado,” Cavness said. 

Still there are producers, like Renegade’s Ingve, with their own, if smaller, stranded-gas problems looking at equally smaller cryptocurrency solutions.

For example, when a small gathering system in the area east of Denver run by Occidental Petroleum was shut down, Ingve lost his pipeline access and a well he has on State Land Board acreage risked being shut-in.

That in turn put Ingve’s lease in peril — for the agreement with the State Land Board is use it or lose it. The land board leases state acreage for a variety of economic activities – from farming to commercial development – raising money for education. 

Now Ingve’s well is in production and the natural gas is going to bitcoin mining.

Ed Ingve of Renegade Oil & Gas shows a generator that powers a bitcoin mining unit in Adams County. Ingve, who operates Renegade Oil, set up a bitcoin mining operation to use excess natural gas that flows from one of his wells. (Olivia Sun, The Colorado Sun via Report for America)

The little bitcoin mining shed is hooked up to a V-8 engine driving a generator, which is  fueled by natural gas flowing from the well about 400 feet away. 

In the container were 34 specialized “application-specific integrated circuit” or ASIC computers, each about the size of a shoe box, whirring away. The little installation sitting on the broad open prairie, with planes heading to Denver International Airport overhead, is plugged into the bitcoin market through a modem and antenna.

“We started experimenting with a small unit to do some field testing, just to try to get our arms around it,” Ingve said. “I’d never bought crypto, never traded crypto, really didn’t know much about it.”

A larger Datahawk unit is at another Renegade site. “It is a good marriage,” Harms said. “Bitcoin mining requires a large amount of energy in a small space. There is a lot of stranded gas and it takes a lot of demand to burn that gas.”

While top-of-the-line ASIC computers now cost about $10,000 each, Ingve purchased older models for about $600 each. They are less efficient, but since the fuel to power them was essentially free, he said, it was a trade-off worth making. 

Ingve joined a trading cooperative — Slush Pool — and began mining in September of 2021. “Every day 900 new bitcoins are introduced to the market, you are given a portion of that based on your hash rate,” Ingve explained.

The hash rate is a measure of computing power and Ingve’s machines have a rate of 13.5 trillion calculations per second. By way of comparison, the Antminer S19 XP, used by Crusoe, costs about $10,000 each, and has a hashrate of 140 trillion calculations every second.

Slush Pool does all the accounting on trade and divides gains proportionally among the co-op’s participants, downloading them into cryptocurrency wallets. Bitcoins can be sold back to the pool or cashed in.

“This is not the oil and gas business,” said Ingve, who has been operating Renegade for 35 years.

Since Ingve started down the bitcoin road the cryptocurrency’s unit value has crashed to about $21,000 from $65,000 in November.

Still, even though the gains from mining may be modest, Ingve is getting a third unit and is looking to work with Datahawk on other sites.

“This enables me to hold the lease and it allows me to produce oil from wells,” Ingve said. “Where I’ve deployed the units the value of the oil is probably 10 times the value of the gas.”

Beyond that, getting wells that might otherwise not be producing back online helps with a host of other oil and gas rules, Ingve said, including the flaring ban, well mechanical integrity tests, and avoiding stiffer financial requirements on shut-in wells.

“There were a lot of people experimenting but not pulling the trigger,” Ingve said. “It is a niche application for certain circumstances, but it can really come in handy.”

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