Tom Masiero is the co-founder of Standard Bitcoin. In this post, he provides an introduction to bitcoin mining with natural gas, illustrating bitcoin miners’ relentless appetite for cheap and abundant energy. Tom also gives a general overview of the market landscape, the economics of mining with methane, and an outlook for the future.
The world of bitcoin mining is continually evolving, and one development that has captured the attention of both the oil and gas industry and bitcoin miners alike is off-grid natural gas mining. As the name suggests, off-grid mining utilizes energy sources that are disconnected from the central power grid, often in remote or hard-to-reach locations. In this chapter, we will explore the world of mining bitcoin using stranded and flared gas.
Stranded gas refers to natural gas deposits that, due to their remote location or low production volumes, aren't economically viable to transport to the market using traditional infrastructure. Flared gas, on the other hand, is a byproduct of oil production that is either vented or, more often, burned off into the atmosphere for safety reasons, mainly to manage pressure levels and reduce the risk of explosions.
Traditionally, both stranded and flared gas have been considered waste products in the oil and gas industry. However, this perception is changing. A growing recognition of the potential these resources hold as a low-cost power source for bitcoin mining is slowly reshaping how industry players view these gas forms, in many cases shifting them from a liability into an asset.
Before delving further into the details, it's crucial to understand how the oil and gas industry—which can be divided into upstream, midstream, and downstream sectors—works. Upstream refers to the exploration and extraction of oil and gas; midstream denotes the processing, storage, and transportation; and downstream encompasses the refining of petroleum crude oil and the processing and purification of raw natural gas.
Stranded gas largely originates from the upstream sector. Its abundance results from geographic and infrastructural constraints that render the gas too costly to bring to market. These challenges include the absence of pipelines due to the remoteness of the gas fields, regulatory hurdles, and low production volumes that don't justify the infrastructure investment required to bring the gas to market.
Flared gas is a waste byproduct of oil production, and the flaring practice also represents a significant consideration from both the economic and environmental sides. Flaring gas not only contributes to greenhouse gas emissions, but also squanders a valuable energy resource.
Both stranded and flared gas are underutilized resources of immense value, largely due to the geographical and logistical challenges their usage presents.
So, why are these gases so prevalent? The answer lies in the complex nature of oil and gas extraction. In many cases, gas deposits are discovered in conjunction with oil reserves. When these fields are located in remote regions, the logistical and financial burden of transporting the gas to market becomes prohibitive, leading to its classification as stranded. Similarly, flare gas is an unavoidable byproduct of maintaining safe pressure levels in oil wells. The gas that can't be efficiently captured or utilized is flared (burned off), resulting in vast quantities of wasted energy.
In spite of these challenges, stranded and flared gas present an extraordinary opportunity for bitcoin miners due to their appetite for low-cost power and ability to set up in remote locations with mobile, modular infrastructure and hardware that can adapt to variable power supplies.
It is estimated that as much as 30% of the over 7,257 trillion cubic feet of known natural gas reserves on earth are stranded. This includes huge reserves in places such as Prudhoe Bay in Alaska and the Mackenzie Delta in Canada. For context, in 2022, the USA consumed 32.31 trillion cubic feet of natural gas. It goes without saying that if companies could economically capture and utilize stranded gas, they could tap into a significant revenue stream.
Flaring is a widespread practice in the Bakken Shale formation in North Dakota. Despite being one of the largest oil-producing regions in the U.S., the lack of natural gas infrastructure has led to high flaring rates. The U.S. Energy Information Agency reports that around 19% of all natural gas produced in the state in 2019 was flared, the equivalent of about 0.56 billion cubic feet per day. Flaring this gas not only wastes a valuable resource but also attracts fines under environmental regulations, adding another layer of cost for producers.
These examples highlight the market value of stranded and flared gas. However, to fully appreciate the economics at play, we must consider the costs involved. These include capital expenditure (CapEx) for infrastructure, operational expenditure (OpEx) for maintenance and operations, and the potential fines and taxes imposed by regulators.
For instance, let's consider the cost of pipeline construction, a primary method for transporting natural gas. The U.S. Energy Information Administration estimated that in 2020, new pipeline construction costs would average $7.65 million per mile. For a stranded gas field 100 miles from the nearest pipeline, the cost of constructing a new connection would be $765 million—not a small sum.
Additionally, companies face fines and taxes for flaring. For instance, in the first ten months of 2022, oil & gas companies in Nigeria were fined a total of $341 million for flaring. The fines range from between $0.5-$2 per thousand cubic feet (Mcf) depending on the amount of oil they produce. With a current gas price of around $2.7 per Mcf, it's clear that the financial impact of fines can quickly surpass the value of the flared gas itself.
A glance at some news headlines reveals the intertwined narratives of flared and stranded gas’ economic and environmental impacts and the recent pivot to harnessing this energy for bitcoin mining.
In early 2019, my journey into off-grid mining began unexpectedly when Rete Browning, our chief engineer at Great American Mining (now CTO of Cathedra Bitcoin), struck up a conversation with a wastewater treatment services CEO at a local rodeo event in Utah. This CEO was facing growing fines from the Utah EPA for excessive gas flaring during the treatment process of cleaning up transported frac water at his facility.
Rete immediately recognized an opportunity to solve the CEO's problem while addressing a significant challenge that bitcoin miners face at scale - finding an affordable and stable power source. It was a pivotal moment, setting us on an unexpected and educational journey over the next couple of years.
At the inception of Great American Mining, our knowledge was limited mostly to buying machines - and admittedly, we didn't even do that particularly well, having bought Dragon Mints at the market peak in 2017 and acquiring Dragon Mints. However, this initial stumble didn't deter us. Instead, it was a springboard into learning, refining our approach, and making significant strides.
In this winding path of Bitcoin mining, we made numerous mistakes, but these missteps were invaluable as learning opportunities. Through our unique approach of off-grid Bitcoin mining using Natural Gas, we gained a wealth of knowledge and skills, becoming well-rounded operators in the industry. As Rete often remarks, there are no free lunches in flare gas mining.
This unique sector of mining gives operators a set of capabilities that are not typically available to on-grid miners - "superpowers" as I like to refer to them. These include the ability to bring a hash rate online quickly, operate permissionlessly, and maintain resilience in case of necessity to relocate.
In my opinion, one of the most important superpowers of flare gas mining is the distributed nature of these types of mining operations. Off-grid flare deployments typically have less than a megawatt of capacity, which makes off-grid mining the most decentralized hashrate on the bitcoin network.
Although choosing this path involves many trade-offs, it hones one's skills and business acumen, which leads to wiser decisions with regards to choosing a business model, your oil and gas partners, equipment such as hardware and containers, as well as generators. During my time at Great American Mining, we would often debate the merits of these different choices.
Would we build our own mining containers or buy containers so we could deploy quickly? Ultimately, we chose to vertically integrate our operations at Great American Mining, mainly because we needed to control operations remotely and meet the stringent safety requirements of being on active oil and gas well pads.
Would we use the newest generation machines or choose cheaper older generation miners that we could pick up on the cheap? We chose the Whatsminer M20s model, which was best in class at the time. If you are trying to accumulate as much bitcoin as quickly as possible, you are almost forced to get the newest generation of machines. In retrospect, I wish we had cut our teeth on older-generation machines.
What would we pay for the gas from the oil and gas operators who had these flaring issues? Back when we first started, it was common to get the gas for free, and in some cases, miners even got paid to take the gas! Nowadays, miners typically pay an average of $1mcf/d, which is roughly equivalent to $0.01 kw/h.
Do you buy the power generation or lease it? Again, tradeoffs have to be considered. Most folks getting into mining aren't well-versed in operating natural gas generators. So for most miners, leasing or renting units from service companies like Mesa, Moser, or Baseline Energy was the easy choice. When we first got started, it was common to be able to rent a generator for less than $.03 kw/h, that allowed off-grid miners to mine bitcoin in the $0.04-0.05 kw/h range—a very competitive rate without a ton of strings attached. It is possible to invest the CapEx to own the generation and essentially drive down the OpEx costs to only pay for maintenance and gas. This model is more prevalent in stranded gas deployments, and is what we currently do at Standard Bitcoin for our off-grid operations.
One of the major drawbacks of choosing the flare gas model is that miners are exposed to not only the dynamics of bitcoin's volatility but also the market conditions of Oil and Gas producers. In the spring of 2020, Oil and Gas prices went negative at one point and forced many operations, including one site we were on, to turn off operations as it became unprofitable for the oil and gas operators to extract their molecules profitably. We soon found ourselves in the unenviable position of not having ownership rights to the gas we needed to operate. This forced us to find another source for gas and live to fight another day. Ironically, the bitcoin market was brutal during that period. We had just entered a new halving epoch, and the price had crashed to the $4,000 range.
One of the rules I try to tell new miners is to just make sure they're plugged in and in a position to never have to turn off. Most folks who've been mining for a long time have made it through bear cycles by just staying alive. If you are alive when a bull cycle hits, you are golden. However, if you are trying to plug in during a bull market, there is a very high likelihood that you are going to get REKT due to everyone and their mothers trying to plug in as well, which drives up pricing on ASIC's, containers, services, etc.
Another important consideration, especially in the context of rule #1 above (staying alive), is whether to mine in hot climates. Texas has become a hotbed for both on-grid and off-grid miners. Heat is NOT a miner's friend, especially the West Texas heat. Machines tend to have their lifespan affected in these environments, which must be considered before committing to buy machines and fund a deployment. Now don't get me wrong, cold climates offer their own set of challenges to overcome as well, but that’s a topic for another day.
While I was at Great American Mining between 2019 - 2021, I saw a bunch of unique business models adapted. From a straight deal that would consist of an off-take agreement for the gas to sophisticated revenue share deals with producers and even generator service providers that wanted exposure to bitcoin. One of my favorite parts about off-grid mining is the flexibility one can have in terms of figuring out how to get a site live.
In 2022, I started Standard Bitcoin along with former GAM team members Marty Bent and Matt Adkins. It started out innocently enough: we had access to older legacy gas wells that were stable but small in size.
Instead of going all in and building out specialized containers, we opted to buy Upstream Data's Hash Huts. These hash huts are basically a generator and mining unit in one box. This allowed us to deliver the hash hut to our gas wells, plug-in and start hashing. It was magic. Being that we didn't have to worry as much about the volatility that a typical flare gas operation has, we didn't need to have all the bells and whistles for our operation.
With the advent of Starlink, bitcoin miners can quickly set up mining farms in remote locations. Get yourself a $200 laptop from Amazon and you can remotely manage the hash hut as well. The industry is likely to see continued growth and innovation in this space.
Off-grid miners also have an amazing community, and we have some incredibly talented companies operating in the very nascent stages of what will be a massive industry in the years to come.
Now, let’s explore a few real-world examples to illustrate the complex considerations, strategies, and trade-offs involved in leveraging stranded and flared gas for bitcoin mining.
Through these case studies, we can see that business models and strategies can vary significantly in the field. Whether it's a decision about which equipment to use, how to structure the business operation, or how to navigate the volatility of gas supplies and bitcoin prices, these companies have charted their courses in the dynamic landscape of flare gas bitcoin mining. Each has adopted different strategies to maximize their opportunities and manage risks, providing valuable lessons for future players in this space.
Off-grid miners also have an amazing community, and we have some incredible talented individuals and companies operating at the very nascent stages of what will be a massive industry in the years to come.
Here are some recommendations to follow who are doing great work in the sector:
Steve Barbour (Upstream Data) - The Henry Ford of Off-Grid Mining. Check out Steve's tour of one of Upstream Data's Hash Generator Off-Grid Bitcoin Mining Rig here.
Marshall Holbrook - The Godfather of Stranded Gas Mining in the Hills and Holars of Kentucky
Matt Lohstroh and Brent Whitehead (Giga Energy) - Matt and Brent are young, but they have more experience than most in this space.
Isaac Fithian and Rete Browning - CFOMO and CTO of Cathedra Bitcoin and former Great American Mining early team members.
Kyle Textor - A midstream O&G savant who rolled up his sleeves and became a very capable operator of off-grid mines.
Steve Vannatta - Canadian OG who's been doing HUGE stranded gas mining operations in Canada before it was cool. Editor's note: following this article we learned of the sad news of Steve's passing. We send our condolences to his family.
As we have seen, the practice of using stranded or flared gas to mine bitcoin is more than a novel innovation; it's a potentially transformational approach that can address perceived and real environmental issues, create new value from waste, and contribute to the decentralization and security of the bitcoin network. But what does the future hold for this emerging sector?
The future of off-grid bitcoin mining is still unwritten, but the potential is vast. In a world seeking innovative solutions to hard problems, the ability to convert waste into value while bolstering the security of a growing bitcoin network is an opportunity that is worthy of pursuit.
To finish off this chapter, I’d like to leave you with some final rules:
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