Gas-to-Crypto Projects Provide New Revenue Streams, Novel Risks

An progressive cryptocurrency utility has emerged within the power house: initiatives that mine cryptocurrency utilizing gas-powered turbines.

These “gas-to-crypto” initiatives transport fuel that’s in any other case flared, has inadequate takeaway, or is uneconomic to supply to electrical turbines that energy boxcar-sized knowledge facilities referred to as “mining rigs,” which then mine for cryptocurrency. Power firms and different mineral homeowners contract with operators of mining rigs to produce the fuel wanted to energy mining rigs in alternate for decreased and even nominal charges.

This mannequin presents a brand new potential income stream for fuel producers. These initiatives retain many options of typical “gas-to-power” initiatives, however they’re additionally accompanied by novel transactional parts reminiscent of cryptocurrency-based loans. Whereas main producers have taken discover, there are nonetheless vital questions on doable litigation and transactional dangers.

These preparations with oil and fuel producers typically take two types: a fuel gross sales association through which pure fuel is offered to the cryptocurrency miner to be used in turbines that energy the mining rigs, or a three way partnership through which the producer owns a direct or oblique curiosity within the downstream challenge belongings, reminiscent of mining rigs and turbines.

The place in any other case flared pure fuel is offered, it’s typically for little or nominal worth because of the absence of different end-uses for that fuel. Different fuel produced from wells which are uneconomic as a result of inadequate takeaway or some other cause are equally priced beneath index.

The place producers are snug with the shifts of cryptocurrency costs, fuel could also be marketed for a foreign money reminiscent of bitcoin, successfully connecting fuel wells to a distant fuel market denominated in cryptocurrency.

Novel Dangers

As a place to begin, customary lease types, in addition to the our bodies of legal guidelines and laws governing the business, could not adequately ponder cryptocurrency mining initiatives. They could not account for promoting or utilizing flared or uneconomic fuel to energy cryptocurrency mining. Counterparty threat can also be a consideration for oil and fuel producers who could enter into fuel provide or joint growth agreements with cryptocurrency miners.

There are additionally litigation dangers from the standard potential claimants: landowners, suppliers, different counterparties, and particular curiosity teams. With respect to mineral possession, cryptocurrency mining could give rise to potential royalty claims and can also result in claims asserting breach of lease provisions.

With respect to fuel provide preparations and different preparations associated to the operation of wells and mining rigs, there could also be potential claims by or towards suppliers of mining rigs or associated companies, reminiscent of breach of contract or guarantee, in addition to potential indemnity claims. There additionally could also be counterparty dangers inherent to cutting-edge markets and applied sciences.

Lastly, particular curiosity teams could current public relations and even regulatory and litigation points to the extent they aim the cryptocurrency business and its miners.

A current go well with filed in Colorado dropped at gentle the potential litigation threat related to these ventures. In Hobe Minerals LLC v. Bonanza Creek Energy Operating Company, LLC, filed in Denver District Courtroom, a lessor sued its lessee for a declaration that the lease had expired as a result of the lessee’s use of produced fuel to energy intermittent cryptocurrency mining was inadequate to carry the lease past the first time period. The proprietor additional asserted that oil manufacturing from the wells declined by 80% to 96% as in comparison with manufacturing earlier than the implementation of the mining operation.

As this sector develops, ongoing collaboration between business members and authorized consultants will probably be paramount to make sure that this symbiotic relationship between power and cryptocurrency maximizes its potential whereas mitigating inherent dangers.

This text doesn’t essentially mirror the opinion of Bloomberg Business Group, Inc., the writer of Bloomberg Regulation and Bloomberg Tax, or its homeowners.

Creator Data

Luke Burns is a transactional associate at Reed Smith. He’s represented oil and fuel shoppers for over a decade in acquisitions, divestitures, joint ventures, and different preparations.

Nicole Soussan Caplan is a litigation associate at Reed Smith, whose observe contains power, industrial, and mass tort litigation in jurisdictions everywhere in the nation.

Mason Malpass is a litigation affiliate at Reed Smith, whose observe focuses on advanced industrial disputes within the power and commodities industries.

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