The U.S. Department of the Interior (DOI) is pushing to crack down on companies that use oil rigs on federal land to power cryptocurrency mining operations, saying those companies need to pay royalties on the gas they use.
In an advisory opinion late last month, DOI officials claimed that a number of operators with oil and gas claims on federal lands in Colorado were diverting that gas to power electric generators for cryptomining operations without paying royalties to the federal government.
It has been a win-win for cryptocurrency companies and oil drillers, but the Biden administration wants to shake up the arrangement to make sure the federal government is receiving its proper royalties, although it admits that it’s going to be difficult to manage.
In recent years, cryptocurrency miners and oil drillers have increasingly begun to partner to reduce waste and pollution from oil and gas fields by harnessing waste from gas flaring—burning gas from a rig for safety reasons, for example—or other otherwise unusable product into energy to power the generators used to create cryptocurrency.
A bitcoin mining site powered by gas from an oil well near Linden, Texas, on April 4, 2022. What should be done with the gas that emanates from oil wells too isolated to be connected to pipelines? Until now, methane gas has been flared or released into the atmosphere, creating pollution and greenhouse gases. Now, a young American company is proposing to transform it into electricity on site in order to extract bitcoins. Francois Picard/AFP via Getty Images
At the start of the Biden administration, some of the world’s largest oil drillers, including ConocoPhillips and Exxon, sought to diversify their portfolios with cryptocurrency mining, while a number of firms in the oil fields of Wyoming and Texas rushed to strike deals with drillers to take advantage.
For both parties, such a deal was usually a win-win. Oil drillers would receive a fee from the crypto miners and reduce waste from their operations, while the cryptocurrency miners would receive a reliable source of energy they needed to continue mining cryptocurrency and make money. And they would help save the planet in the process.
“On the one hand, crypto mining requires an enormous amount of electricity, which is not environmentally friendly. On the other hand, when drilling for petroleum resources, natural gas is often discovered, but due to a lack of resources or pipeline availability, a massive amount of natural gas is vented into the atmosphere or burned [called flaring],” a 2021 paper on the practice reads.
“Today, however, this normally wasted gas [called stranded natural gas] is being used to create cheap electricity for mining server containers stationed near drilling rigs, which are used to create cryptocurrencies. This results in reduced C02 emissions, lower costs for drillers, and greater royalties going to landowners.”
According to DOI inspectors, however, a lot of the waste gas some operators were using to make this money was not being paid for via federal mineral royalties, a key source of income for oil-producing states with large swaths of federally owned land.
In short, some companies were padding their bottom lines without compensating the government for the energy they used to mine the cryptocurrency, a practice critics claimed help make a planet-harming industry more profitable than ever.
“Bitcoin is giving new life to fossil fuels in even more insidious ways,” Jessica McKenzie an associate editor at the Bulletin of the Atomic Scientists, wrote in a piece criticizing the practice last summer. “In some places, miners are burning the dirtiest of dirty fuels—waste coal—to mine bitcoin, and they don’t only have the state’s blessing: They’re getting subsidies for it.”
And on federal land, there was very little the government could do about it.
“Because of the novelty of cryptomining operations, the DOI currently does not have consistent guidance that addresses mineral revenue collection as well as permitted land use and environmental impacts specifically associated with cryptomining operations affecting lands and minerals under Federal jurisdiction,” the DOI report says.
The DOI declined to comment when contacted by Newsweek, saying the report’s findings speak for themselves.
However, Paasha Mahdavi an associate professor in the Department of Political Science at the University of California Santa Barbara who specializes in the relationship between government and the oil industry, told Newsweek that cryptocurrency firms and oil producers were simply taking advantage of a loophole in federal law designed to reduce the impact of climate change—and making money off of it in the process.
“The loophole exists in the first place because, until recently, firms did not have to pay any penalties for methane that is directly vented into the atmosphere or not captured perfectly via flaring,” Mahdavi said in an email.
That practice could soon end, though. The recently passed Inflation Reduction Act (IRA) includes two sections that once enacted would apply a royalty to gas burned on-site at federal leases, meaning cryptominers would have less incentive to use the gas as an energy source, and oil companies will have to abate methane emissions rather than “passing the buck” to avoid paying the new IRA-mandated methane fees.
But amid recent concerns over high gasoline prices—and soaring corporate profits—could the changes to the law potentially impact consumers’ bottom line as they move away from a profitable solution to their methane problem? Mahdavi says yes, just not in the way some would expect.
“It would eat into profits, but not in the same way for all firms,” he said. “The larger oil majors [BP, Chevron, Exxon, Shell, etc.] already strive to reduce methane venting for safety reasons and because of stakeholder pressure to reduce operational emissions overall. So they’d be bearing this cost either way but have the money and tools to do so efficiently.”
However, he noted, smaller independent firms like Chesapeake, Hilcorp, W&T and others don’t have the same resources as the larger firms and lack similar pressure from shareholders, meaning they would likely bear a larger cost as a result of the changes and would, therefore, be likely to try to get back the losses elsewhere.
And their options are shrinking.
“One thing that has changed the game, though, is better monitoring technology for methane,” Mahdavi said. “It’s getting harder and harder for firms to dodge the methane issue, because satellite tech and other remote sensing tools are making it easier for regulators to identify noncompliers. So while there is the risk of continued whack-a-mole, the number of holes for firms to hide in is shrinking.”