On stranded natural gas and bitcoin
Stranded natural gas used to power bitcoin mining is a false solution in search of a real problem. This article explores the relationship between bitcoin and stranded natural gas, the bond that ties these two seemingly disparate entities — energy — and how different forms of energy impact bitcoin as sound money. We all need energy, and we all need money, but the way we harness the former and manage the latter both contribute to climate change. What might appear a match made in heaven between stranded natural gas and bitcoin mining is at best a marriage of convenience that will hurt the planet in the long run.
A Match, But Not Made in Heaven
Natural gas is a fossil fuel used to generate energy. Bitcoin is a cryptocurrency whose very existence depends on energy, which is used to prove that work was carried out to secure the soundness of its monetary foundations. In other words, consuming energy is the condition upon which the bitcoin network records a transaction and verifies its validity, creating new coins in the process as a form of compensation for these services.
Some see oil companies’ large supply of stranded natural gas and bitcoin’s large demand for cheap energy as a match made in heaven — a win-win situation. Oil companies can find a use for unwanted natural gas, reducing methane emissions, and bitcoin miners get to eliminate or cut to almost zero their main operating expense — energy. But this formula ignores the most critical issue of our time: climate change. It also goes against the very essence of what bitcoiners pride themselves on: their vision of sound money and the creation of a level economic and financial playing field.
Where Stranded Gas Comes From
Natural gas is usually mixed with crude oil under the earth’s crust. So, when extracting oil, natural gas also comes up to the surface. This type of oil-associated gas is also referred to as “stranded natural gas”; it normally remains unusable for either physical or economic reasons, due to the remote location of the oil field, for example, or to unfavorable market conditions.
Since for all intents and purposes this gas is unusable, oil & gas companies either vent it, namely, simply release methane into the atmosphere when it comes out at the well, or they flare it, burning it and creating that often seen flame alight at the top of a stack on many oil-well sites. It’s important to note not only that stranded natural gas has zero value for oil companies, but that it actually costs them money as they are asked to comply with venting and flaring regulations.
Natural gas coming out of oil wells as an unwanted by-product of crude oil extraction increases the greenhouse effect, harming our climate. And to prevent venting and flaring of this oil-associated natural gas, some companies, especially in North America, are promoting the nascent practice of using stranded natural gas to power bitcoin mining. They sell this as an economically more efficient and environmentally friendlier alternative.
Natural gas usually fetches a much lower price than oil in international markets. Building a pipeline to channel it or erecting an infrastructure to liquefy it, then transporting it to a terminal and re-gasifying it so it can be consumed is usually too expensive. As stranded natural gas is flared, it produces CO2 — a greenhouse gas. Simply venting the gas releases methane instead which, according to MIT, is 25 to 86 times more powerful than CO2 in its climate-warming effect, depending on the time horizon one considers. International efforts such as the “Zero Routine Flaring by 2030” initiative are underway to curb them, and while measuring venting and flaring is difficult, we do know that flaring is on the rise. According to a July 2020 report from the World Bank, “estimates from satellite data show global gas flaring increased to levels not seen in more than a decade, to 150 billion cubic meters, equivalent to the total annual gas consumption of Sub-Saharan Africa” last year, emitting more than 300 million tons of CO2 into the atmosphere.
The economic logic of not wanting to build a pipeline or other expensive infrastructure to transport unwanted natural gas is perfectly understandable at a time when natural gas prices are low and many companies are in financial distress, especially in the North American shale oil & gas sector. According to a recent Deloitte analysis of major listed U.S. shale operators, “about 30% are already technically insolvent.” Yet even when facing financial dire straits, oil & gas companies are still supposed to try to minimize flaring and venting to comply with current rules and regulations.
Enter bitcoin mining ventures. These need a lot of energy to power the hardware required to run and secure the bitcoin blockchain 24/7, to record bitcoin transactions and to “mint” new bitcoins as their reward for these services. To paint a picture of what this looks like, bitcoin miners place thousands of special microchips inside containers on oil-well sites; the stranded gas fuels electric generators that in turn power the microchips that mine bitcoin.
Oil companies could generate a whole new revenue stream this way — by mining bitcoin or other cryptocurrencies — while increasing compliance with anti-flaring regulations. Bitcoin mining companies, on the other hand, very much want cheap energy, wherever that might be, and often scavenge the world in search of the cheapest forms of stranded, unwanted, underutilized energy.
Marty Bent, a business developer for bitcoin miner Great American Mining Co. and a prominent podcaster in the bitcoin space, hailed the arrangement as “the real green new deal.” Echoing this view, the company recently tweeted: “Flare Gas Bitcoin Mining = Environmental Stewardship. Few realize this”
No doubt, businesses in this nascent bitcoin mining space, such as Great American Mining, Upstream Data Inc. and EZ Blockchain, are in many ways to be admired for their innovation and determination. And certainly companies will do what they must to find the best fit for their business needs. But selling this new practice as eco-friendly is misplaced and misleading.
Environmentally, oil & gas companies have been woefully irresponsible. Bitcoin mining has also been criticized for guzzling energy in an unsustainable manner. I would argue, however, that criticisms regarding bitcoin’s energy consumption miss the forest for the trees and that bitcoin is actually energy efficient. But even so, if both sectors hope to strengthen their climate and environmental credentials by using stranded natural gas for bitcoin mining as their calling card, they are mistaken. After all, they are still burning a fossil fuel to produce electricity.
While finding a new use for unwanted natural gas is better than simply venting it into the air, it’s still harmful for the climate. Generating electricity with natural gas — whether it’s used to mine Bitcoin or for anything else — produces similar amounts of CO2 as simply flaring that gas, according to the U.S. Energy Information Administration. And if flaring is bad for the environment, and efforts are underway to end it, it is difficult to see how diverting gas to bitcoin mining is any better in terms of climate impact.
Bitcoin holders tend to dismiss other cryptocurrencies as inferior technically, philosophically and in terms of both governance and network effects. Indeed, they often refer to them as “shitcoins” — a term that entered the canon last year in the debate around alternative financial assets during Congressional hearings in the U.S.. Yet if bitcoiners don’t like shitcoins, they should not like shit-energy any better.
I do not believe that natural gas is the fuel equivalent of a shitcoin. Gas, and especially oil, have had an incomparably broader and deeper role in history than have cryptocurrencies so far. However, I can’t help but be struck by a metaphorical resemblance between using stranded gas to mine bitcoin and the questionable, if not outright fraudulent, financial practice involving cryptocurrencies and other assets known as “pumping and dumping.” Pumping and dumping is the shady way of encouraging investors to buy shares of a company in which one has already accumulated a stake in order to artificially inflate their price, and then selling one’s own shares while the price is high.
I would argue that mining with stranded gas is a different form of “pumping and dumping”, where the two phases are reversed — the dumping comes first, the pumping comes second — and have two different actors. Are bitcoin miners using stranded gas not effectively pumping their returns by slashing expenses thanks to their chosen proximity to fossil fuel operators? Operators who are able to offer energy at zero cost after they themselves failed to pay their fair dues as they dumped most negative externalities on the community.
This is an eventuality many bitcoiners would likely find unpalatable, given that one of bitcoin’s distinguishing traits, compared to shitcoins, is an origin immune from any pumping and dumping.
If energy is a key economic input and stranded gas is a form of cheap energy/capital, does not partnering with oil & gas operators create a form of seigniorage, an energy/financial Cantillon effect, whereby miners close to the source of capital reap an unfair advantage?
We know the harmful effects of fossil fuels. And we know that what makes a certain energy source problematic is its non-renewable nature, its overwhelmingly negative impact on climate and the environment, and its mostly centralized structure. On the contrary, therefore, it is renewable energy that is more consistent with bitcoin’s first principles. Unlike fossil fuels, both bitcoin and solar or wind energy depend on no issuer. It is renewable energy that is much more universally distributed and available than oil or gas. It is renewable energy that offers more open access and resistance to censorship than fossil fuels in the way they are produced, not to mention being more climate-friendly and environmentally sound.
Sound Energy, Sound Money
Bitcoin consumes large amounts of energy in order to be secure. The higher the number of bitcoin miners and their electricity demand, the more bad actors would have to spend to control 51% of the bitcoin network. This is the way bitcoin makes it hard to subvert its promise of sound money: in order to rewrite the history chiselled onto bitcoin’s master ledger — the blockchain — dishonest people would have to spend more on electricity and hardware than their potential gain would be worth. This system is called “proof of work” and it consists in processing a piece of data that is difficult, costly, time-consuming to produce, but easy for all others to verify. The two key concepts are “work” and “verification”.
Think of “work” as another word for energy. Everybody in the network works hard crunching numbers, whoever finds the right solution to a problem that is computationally hard to solve then broadcasts the results of their work to the whole network. Verification that the solution is correct and the consequent validation of transactions into the blockchain close the loop. This whole interplay forms a communication protocol designed to reach a consensus among all participants in the network. Miners consume energy to “hash” huge amounts of data until one of them finds a mathematically valid result, thereby validating a set of transactions into a block and minting a certain number of bitcoins as compensation for their work.
The idea here is that mathematics and the physical laws of thermodynamics provide substantially superior tools to prove that work was carried out and verification satisfactorily completed than do financial regulations, social norms, political constitutions and moral obligations. The laws of physics are no match for social constructs in ensuring money is sound, i.e., based on verified work, making transactions reliable and bitcoin valuable. With its proof-of-work consensus protocol and its built-in limited issuance of 21 million coins, bitcoin takes energy seriously — very seriously.
A Contradiction in Terms
What is dirty energy if not an outdated tool that tampers with the world’s thermostat and affects our long-term resiliency? Should sound money help debase nature? Do the climate and the environment themselves not represent an organic blockchain, recording and embodying every molecular “transaction” and process that our planet has ever seen? Shouldn’t we establish a direct interdependency, some sort of equivalency even, between the organic blockchain represented by nature and the financial blockchain created by bitcoin?
The fundamental case for protecting bitcoin’s financial blockchain from tampering and outright attacks applies in the same way to natures’ organic blockchain. One cannot be serious about one while at the same time dismissing the other. Casually and carelessly using dirty energy is a contradiction in terms for bitcoin. So even if bitcoin miners decide to use stranded natural gas, they should not pretend it’s a real solution. It is not a net positive, as Nic Carter — partner at Castle Island Ventures and a preeminent figure in the bitcoin space — says. It’s a lesser net negative, but it’s still a negative.
Despite bitcoin’s relatively large consumption of energy, most of that energy is renewable. According to CoinShares Co., 74.1% of Bitcoin’s hashing rate is fueled at least in part by renewables, as of 2019. That rate is much higher than most countries and industries. However, if the stranded gas powering model takes hold, renewables’ share in bitcoin is at risk of shrinking.
“We ultimately believe that two years from now we are not going to be the main operators. We might be facilitators or the ones who are managing this, but the oil & gas producers themselves would be the miners eventually,” says Great American Mining’s Austin Storm in a recent episode of Marty Bent’s podcast. The idea of bitcoin miners helping troubled oil & gas companies find a new revenue stream is worrisome. It makes sense only if one looks at economic incentives in the narrowest possible sense, turning two blind eyes to the consequences for the climate.
Climate overheating and the explosion of corporate debt over the last ten years or so have a point in common: central banks’ easy monetary policies and governments’ lax fiscal policies. It’s thanks to a very cheap and generous flow of credit that oil & gas (especially North American shale) have sucked up more debt than almost any other sector and have been able to prop themselves up.
Bitcoin’s main essence and purpose is to be sound money, enshrining soundness in mathematics, the physics of energy and a pre-programmed limited issuance of only 21 million coins. By contrast, fiat money can be printed at will to fuel ever-larger public and private debts; it can also be devalued at will to try and repay those same debts, at least in nominal terms.
From a bitcoin perspective, it’s paradoxical and contradictory that bitcoin miners, with their philosophical foundations steeped in sound money principles, should piggyback on the shoulders of those very same central banks that flooded the oil & gas space with easy money and unsustainable debt.
Scavenging depleting oil wells for stranded gas to fuel bitcoin mining represents a continuation of banks’ climate-blind, unsustainable policies with other means. It gives new life to zombie companies, rewards the poster children of irresponsible monetary strategies and perpetuates some of the worst climate effects instigated by unsound monetary policies.
That’s why providing oil & gas operators with a brand-new digital pipeline to monetize stranded natural gas into bitcoins makes little sense both from a climate point of view and from a bitcoin perspective.
Bitcoin is no different from any other energy-intensive industry. As such, it faces the same imperative all such sectors and companies do: it needs to do better. And it can, without taking shortcuts; without pretending that all energy is equal. Not all types of energy are sustainable, just as not all money is sound.
The only plausible argument for using stranded natural gas for bitcoin mining is to pay for the closure of the same wells powering the mining, and for the environmental remediation of lands polluted by those wells, whose costs are still unfunded for the most part. As soon as bitcoin mining has produced enough profits to pay for wells’ closures, land remediation and a margin for miners, better to close stranded wells, remediate lands, and move those mining rigs to other stranded wells for a new round of closures.
Just as a purely hypothetical, mental-stretching exercise, would miners accept to use mining-chips from producer A, who underpays its workers and contractors, just because at least it’s an improvement from chips made by producer B, who exploits slave-labour — when they could buy them from producers C who makes the same mining-chips, at comparable costs to A and B, even if a bit higher, but paying its people fairly?
The fact that companies like Great American Mining and Upstream Data are able to divert natural gas from venting to an equivalent of flaring, i.e., to bitcoin mining, should not obscure the fact that gas is not only still being consumed, but also promoted as a net positive. With renewables already cheaper than fossil fuels in several parts of the world, and getting cheaper, the oil & gas industry is on a path of secular decline, not because we are reaching a peak in fossil fuel production, but because we are facing peak demand, regardless of spikes that will occur in the near to medium future. The widening reach of solar, wind and storage capacity, together with other green technologies will relieve us all of the need for increasing volumes of fossil fuels in the not too distant future.
Oil & gas will still be with us for decades probably, but it makes no sense to provide the sector with new revenue streams for old wells and with new reasons to keep drilling. If bitcoiners want to help solve some of the world’s most pressing problems, they must become less opportunistic in choosing energy sources. They should distinguish energy sources and their different impacts with the same attention they pay to guarding the bitcoin blockchain against tampering, censorship, or one-sided attempts to change its code. Energy choices are material to bitcoin’s essence.
It is also arguable that many bitcoin holders would be happier knowing the blocks storing their bitcoin transactions were mined with renewable energy. One could even conceive of incorporating into each block’s hash a marker certifying it was mined with renewable energy. While it might look like a marketing gimmick, it is nevertheless a way to doubly enshrine the essence of bitcoin and its blockchain, taking energy and its vast repercussions seriously.
The existential climate threat and financial uncertainty we face today are caused in part by the fact that economic inputs for any endeavour are usually measured only in units of capital and units of labor, as if that were all we need to know to make sound decisions. The time has come to start baking units of energy into our calculations as a matter of sound financial and environmental accounting.
A hard-copy version of this article was first published in Aspenia, by Aspen Institute Italia, in the October 2020 Green Life Matters 89–90 issue.