February 1, 2021

Bitcoin: A way to make the oil and gas industry more resilient

Resiliency is an ideal that one should strive for. If you take a step back and look around at the world as it stands today, it isn’t hard to acknowledge that there are some areas of society that have proven to be less resilient than we need them to be. The combination of a mass misallocation of capital enabled by easy monetary policy and a demand shock to the markets in the form of forced shutdowns of whole economies has wreaked havoc on many industries. The fallout from this hellish combination has highlighted areas of the economy that should strive to be more resilient moving forward - the oil and gas sector is one of them.

At the same time, the collision of careless monetary policy and an unforeseen shock to the global economy has driven Bitcoin to the forefront of the conversation. As systems have proven to be less resilient than desired and as central banks have turned their money printers up to eleven, individuals and institutions alike are beginning to seek out alternative assets to store value. We have reached a cultural tipping point. Bitcoin, widely considered a dark horse born of the Internet, has emerged as a formidable contender for the ultimate store of value in the Digital Age.

Being in the nascent stages of its adoption phase, those who are working on Bitcoin’s software, building businesses on Bitcoin, and leveraging Bitcoin to send peer-to-peer transactions are highly-incentivized to make the network as resilient as possible. The more resilient the network is against attacks, the more confident individuals can be that it is a safe place to store more and more value.

Alternatively, the oil and gas industry is highly-incentivized to make itself more resilient at this time, particularly considering how much capital has been misallocated in the sector over the last 20 years, how much demand has been artificially withdrawn from the market, and the ever-present stress of whimsical narratives pushed by governments, politicians, academics, journalists and their ilk.

The O&G industry and Bitcoin miners can work together to make both industries more resilient. Here’s what we’ve honed in on at Great American Mining as areas that present opportunities for the two industries to help each other out:

Producers

  • Bottom line
  • Efficiency of extracted energy
  • Environmental stewardship / PR

Bitcoin miners

  • Bottom line
  • Geographic centralization of mining
  • Image in the eyes of regulators

At the end of the day, businesses exist to make money and O&G producers and Bitcoin miners have the same goal - increased profit, increased operational efficiencies, and environmental stewardship. The O&G industry accomplishes this by extracting crude oil and natural gas from the Earth and bringing it to market as efficiently as possible. Miners do this by driving their cost of bitcoin production as low as possible, continuously improving and deploying systems to keep machines up and running utilizing cheaper and cheaper energy sources. This shared goal of profitability is the root of the budding symbiotic relationship we talked about earlier.

The path to increased profitability created by producers and miners joining forces is very straightforward. Bitcoin miners use gas that is stranded, wasted, or underutilized/undervalued at some point in the natural gas value chain to drive their cost of electricity generation toward $0. Producers who are looking to bolster their income statements can do so by selling their gas to Bitcoin miners. Even better, producers with an appetite for risk can take their produced gas and mine Bitcoin themselves, extracting more economic value from the energy content of their gas (measured in $/MMBtu) via Bitcoin mining operations than they would be able by ANY other mechanism (venting, flaring, LNG, or marketing the gas). At Great American Mining, we believe that the market incentives at play will lead to producers choosing the latter model, ultimately resulting in O&G producers becoming some of the largest integrated Bitcoin miners in the world.

Here’s something to help you internalize how strong the incentive is for O&G producers to use their gas to mine bitcoin:

As you can see, approximately $3.4 million in capital outlay currently yields $280,000/month of additional revenue for a producer who’s able to sell their gas at the best-case scenario Henry Hub prices (most producers see netbacks at a fraction of Henry Hub after royalties, operating expenses, transportation costs, etc.) - and if we're dealing with stranded or flared gas that never makes it to the market, the upside is effectively uncapped.

The potential for Bitcoin mining to provide a material boost to the bottom lines of producers is very real and the first-mover advantage for producers who seize the opportunity cannot be overstated. First movers will be adding an alternative revenue stream driven by an entirely separate service that provides global liquidity to their otherwise geographically stranded or economically underutilized energy assets via market demand for adding blocks of transactions to the Bitcoin ledger. Creating an alternative revenue stream of this type is a great way to make a business more resilient to market shocks - especially when that revenue source is being wholly driven by electricity generated from an energy flow previously undervalued by the market.

Even better, producers don't have to take on the execution risk. Much like how producers currently outsource NGL production to third-party operators, producers can leverage Great American Mining to largely mitigate their execution risk. We’ll bring our expertise in R&D, manufacturing, operations, management, and logistics to make the additional revenue stream into a reality, subsequently adding value for producers far beyond the additional generated cash flows.

The reduction of systemic business risks via the addition of a revenue stream driven by Bitcoin mining will begin to affect decisions as opportunity costs adjust. Producers currently ask questions like:

"How many wells are we drilling this year?"

"Is there midstream infrastructure in place to market our associated gas production?

"Should we invest in LNG units?"

"How many and what type of flare stacks do we need?"

A new player has entered the game: Bitcoin. Now producers can ask:

"How many Bitcoin mining containers do we need to consume all of the gas we’re currently flaring?"

"Why are we investing in LNG units or other physical marketing mechanisms when we can convert the produced gas on-site into something more profitable?"

Many are currently looking at the North American shale play as a prime example of less-than-optimal capital allocation. The combination of easy access to cheap debt and depressed crude and natural gas markets has driven producers to drill ever more wells to extract ever more flows as they attempt to maintain the status quo of profitability. When economies around the world were shut down within the course of a few months last year it became very apparent that this strategy was vulnerable to demand side shocks. The number of shut-ins, bankruptcy filings, and mergers & acquisitions that have occurred over the last ten months is evidence of this as industry players slashed exploration, drilling, and new production plans - even consolidating with competitors - to stay afloat.

Now that individual operators can begin turning previously underutilized/wasted energy flows into a significant source of revenue we’re likely to see more efficient drilling and less vulnerable, more resilient exploration and production strategies. The need to chase profits by producing ever more oil and gas in hopes of an increase in prices is reduced by the supplementary income being driven, at least partly, by gas liabilities that were a drag on producers’ balance sheets.

Even better, by utilizing Bitcoin mining gas producers are working towards fixing a long-standing industry issue - that of environmental stewardship. Bitcoin mining provides a non-subsidized, purely market-driven technical solution to the ever-present and growing flaring practices across North America by controlling the combustion of methane and other volatile organic compounds, mitigating the warming potential of heavier greenhouse gases.

Below are before and after pictures of a flare being reduced because a producer piped some of their associated gas that would have otherwise gone to the flare on the right to generators powering a Great American Mining Gas-To-Hash container, converting the chemical energy of 100 MCFD into ~500kW of electricity... and ultimately bitcoin. As you can see, the stack on the right was significantly reduced after our generators and miners were turned on.

Flare while Bitcoin mining container is turned off.

Flare reduction when Bitcoin mining container is turned on.

20-foot Bitcoin mining container on an oil pad.

This deployment was a test run with a producer in the Bakken, so it’s only a taste of the full potential our solution can provide. If this container was at full-capacity and another was deployed next to it we would have been able to entirely eliminate routine flaring on this particular well pad.

The flaring issue (now an opportunity) in North America is massive and won’t be solved overnight. However, we can start to chip away at it using a market-driven solution. At Great American Mining we believe that flaring practices across North America, and their potential impacts on climate change, can be significantly reduced over the next two decades as producers begin to outfit their operations with innovations like our Gas-To-Hash Bitcoin mining system.

From an optics perspective, we believe this trend provides the oil and gas industry with the best opportunity to turn the tides in their favor, specifically regarding how the public views their stewardship of the environment. Eliminating waste is incredible. Doing it in a way that also makes producers more profitable is a godsend.

Working to mitigate the lack-of environmental stewardship argument by those who decry the oil and gas industry decreases the likelihood of the government stepping in to create headaches with onerous regulations. Less regulatory headaches will allow producers to focus on what they do best -extracting oil and gas resources from the Earth and bringing that energy’s utility and economic value to market.

Now, how the hell does this help the Bitcoin network? And Bitcoin miners more specifically?

Well, since Bitcoin is a peer-to-peer distributed system that aims to be as distributed as possible, users couldn’t ask for a better strategic partner than the globally distributed oil and gas industry. It’s in the Bitcoin network’s best interest to have as many mining operations and full node operators located in as many locations as possible. The more distributed the network is, the more resilient it becomes in the face of technical and jurisdictional attacks.

Getting the oil and gas industry involved would be a huge win for the Bitcoin network because it would distribute mining at the local level, at the nation-state level, and at the global level. Everyone from mom and pop producers to supermajors can leverage this solution, distributing hash rate amongst different stakeholders in the industry. Oil basins in North America extend across state and international borders, providing a diversification of regulatory jurisdictions. This could incite competition between state and federal regulators to accommodate the relationship between producers and miners lest they get left behind by their competitors, other states and/or countries.

On top of this, the nature of off-grid Bitcoin mining using distributed container solutions is significantly less centralized than Bitcoin mining on-grid. It takes a few calls for a public utility to increase rates or entirely shut down electricity access to a centralized Bitcoin mining operation - that’s not feasible with a network of internationally distributed Bitcoin mining containers generating electricity off-grid.

Lest we forget, this whole mechanism is made possible by the fact that the stranded, wasted, and underutilized/undervalued gas assets provide miners with the opportunity to drive their overall cost of electricity generation to levels lower than the vast majority of other industry players - even those operating in subsidized renewable markets. This allows these particular miners to weather the price volatility of bitcoin much better than their competition. The lower the cost of electricity generation, the lower the price of bitcoin can go before a miner needs to turn their equipment off - making Bitcoin miners more resilient.

This symbiotic relationship between the O&G industry and Bitcoin miners will lead to a more profitable, environmentally friendly, and resilient future for both parties. Let’s get to work.

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