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Crypto Mining in the Oil Patch

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Crypto Mining in the Oil Patch

While the first cryptocurrency was created in 2009, it was not until the last year or two that the mining of cryptocurrency made its way into the oil and gas realm. As gas prices fell in the last several years, operators became interested in ways to utilize the wasted gas they were flaring. In certain environments, became obvious that mining cryptocurrency with excess gas was a way to utilize a wasted resource as well as a way to cut down on emissions. However, this new process created new issues for operators to consider. In this presentation, we will discuss the basics of cryptocurrency and the mining of it in the oil patch, and issues that operators must consider, especially when the gas being used to mine becomes more valuable than the currency it is creating.

Transcript

- In the fall of 2020 a client approached our firm seeking assistance with an issue we had never heard of before. The oil and gas lessee, an operator on her ranch, had installed a crypto mining facility in one of her surface locations, or so she claimed. At first I thought this client was confused. You cannot mine crypto from your oil and gas wells. That's not how this works, or so I thought. But as we dove into the situation further, and began researching what was really going on, I learned how wrong I was. That was almost two years ago. Since then, we've heard more and more about crypto mining facilities popping up, on oil and gas locations, all over the country. Some of these facilities are sanctioned and approved, where the operator has engaged a crypto mining company to repurpose what would otherwise be wasted, flared, or stranded gas. Others, like the situation I just described, involve unauthorized use of the gas and the surface where the client ends up having to seek legal help, to simply protect their rights and be compensated for the use of their resources. In our case, the client was not being paid a royalty on the gas used to mine the cryptocurrency, nor was she paid for the use of her surface for the facility. Diving down the rabbit hole of Bitcoin cryptocurrency, and the related novel technologies is likely outside the realm of our daily practices, as oil and gas attorneys. However, this ever evolving technological and financial area may soon impact the oil and gas practice more than anticipated. My goal here is to provide a basic primer on cryptocurrency, crypto mining, the flaring of natural gas, the impacts it may have on our clients, both on the operator lessee side, as well as the landowner lessor side. What is cryptocurrency? Crypto is a digital currency secured through encryption on a decentralized network based on blockchain technology using a distributed ledger. Whoa, let's break all of that down. Bitcoins are not tangible, physical coins. They exist solely in digital form. Secured cryptocurrency is less prone to counterfeiting. The distributive ledger and blockchaining of data provides encryption and security against cyber attacks, and provides real time knowledge to the multiple host, as to any changes in the data stored on it. Unauthorized modification cannot occur. Bitcoin and blockchain are not the same, but Bitcoin uses blockchain to track the coins. Examples of cryptocurrency include Bitcoin, Ethereum, and several others. Bitcoin was the original cryptocurrency, created in 2009 in Japan with a planned maximum number of coins. Currently, there are reportedly only about 2 million Bitcoins left to be mined. How are Bitcoins stored? Data for the Bitcoin is stored in blocks. Blocks of data are stored on an electronic ledger, which is also known as the distributed ledger, which is shared between parties. Each new entry, or block, is linked to the previous entry via encryption, creating a secure, irreversible chain of blocks, viewable to all parties, to the ledger. Any errors made in an entry or block cannot be corrected by changes to the block, but must be corrected through a new block, providing transparency to all viewers of the ledger. So what is Bitcoin and other cryptocurrencies? Well, they're a peer-to-peer digital cash system, often refer to as digital gold. Cryptocurrency is seen as a store of value, like you would treat a savings account. It is different from traditional financial systems because Bitcoin is immutable. In other words, Bitcoin transactions are recorded on the blockchain, which is the register of transactions for the Bitcoin network. These transactions are irreversible, so someone cannot come along and change it, or decide that you no longer own your Bitcoin. It is decentralized, so no single party has control over the network. You do not need permission to send or receive Bitcoin. In this way, Bitcoin is also different than our current banking system, which relies on a trusted third party being a bank, or other financial institution. We have seen this earlier this year, when citizens of countries around the world sent Bitcoin to Ukraine to show support. Bitcoin is secured by a cryptographic algorithm, to ensure the transactions are valid. And each valid transaction is added to the end of the blockchain. This concept is called proof of work, and Bitcoin miners are the ones that solve these cryptographic proofs. We will talk about crypto mining further, as this is where oil and gas operators come in. What is a distributed ledger? Well, Investopedia defines a distributed ledger, as a, "Database that is consensually shared and synchronized, across multiple sites, institutions, or geographies, accessible by multiple people." It allows transactions to have public witnesses. The participant at each node of the network can access the recordings shared across the network, and can own an identical copy of it. Any changes or additions made to the ledger reflected and copied to all participants in a matter of seconds or minutes. Now, how is this different from other ledgers? Another example of a ledger is a general ledger. With a general ledger transactions are listed, or summarized by account, for a company's double entry accounting system. This can be used to create income statements or cash flow statements. What is blockchain? Blockchain is a key component of the distributed ledger. It is a sequence of transactions, securely linked together in a digital database. The distributed ledger provides a secure and decentralized way to record transactions, as opposed to a general ledger, which is localized and subject to control and manipulation, by the controlling party. The chain is made up of individual blocks of data, which are linked to previous and subsequent blocks. Any new information or changes are added as a new block in the chain, and visible to all parties with access to the distributed ledger. There currently are several different types of cryptocurrency. The most discussed cryptocurrency is Bitcoin. As I mentioned, Bitcoin was the original cryptocurrency, created it in 2009, with the number of coins limited to 21 million. Currently there are approximately 2 million Bitcoins left to be mined. It is the most well known cryptocurrency in the world. Bitcoin utilizes blockchain to record the distributions and trades of the currency, using an hashing algorithm to encrypt the data. Ethereum is another form of cryptocurrency. It was launched in 2015, but first discussed in a white paper in 2014. Is a second largest cryptocurrency by market value. There is no limit to the amount of Ethereum coins that can be mined. Currently there are over 120 million coins in circulation. Ethereum like Bitcoin, also utilizes blockchain to provide a secure, decentralized ledger of account. It is distinguishable from Bitcoin in that it is to be within a programmable blockchain, while Bitcoin is only used to support the Bitcoin currency. This means that while it is designed to be used in a blockchain network, it can also be used as a form of compensation for work done within the blockchain. Ethereum currently also uses a proof-of-work protocol. However, eventually it will move to being a proof-of-stake protocol. We will discuss this further. There are several other different types of cryptocurrency coins. Tether is a stable coin, which means that is not created to be as volatile as other digital currency. It's value is tied to the US dollar, which can make it easier to transfer. It was created in 2014, and by the summer of 2022, it became the third largest cryptocurrency. Tether is the best choice for someone that would like to invest in cryptocurrency, but would like to also mitigate the risk, as cryptocurrencies can be quite volatile. This is because Tether is pegged to a traditional currency. When created Tether claimed that every Tether token was backed a 100% by its original currency, and can be redeemed at any time, with no exposure to exchange risk. However Tether was unable to meet withdrawal request in 2017, proving that their statement was not true. The company was later forced to pay a fine for this claim. As it was proven that it was not a 100% backed by US dollars, but it was also backed by commercial papers and other assets. The USD Coin is the fourth largest cryptocurrency. It was launched in 2018. It is also a stable coin, and is also tied to the US dollar. Despite its name, it is not issued by the US Government. As it has low volatility, as it is pegged to the dollar, it also does not have the ability to appreciate. It also can be affected by the inflation of the US dollar. Dogecoin was created in 2013, but not become widely known until 2021. It was created to be a quote "Meme coin." Its statement is, "At its heart Dogecoin "is the accidental crypto movement "that makes people smile." As we know, cryptocurrencies are currently unregulated. It is an easy way to send money via the internet, free of central control. The price is set by the market, and is often not backed by any public or private institutions. On March 31st, 2012, a single Bitcoin was worth $4.86, in US dollars, By April 14th, 2021, a single Bitcoin was worth $64,800 US dollars. As of March 22, a single Bitcoin had dropped to $42,805. It further dropped in August of 2022 to $20,647. In the last 10 years, Bitcoin has delivered a return of 8,807 times. An investment of a $100 in Bitcoin in March of 2012 would be worth nearly $881,000 today. In addition to the investment value, Bitcoin has allowed users the option of discrete transactions out of the view of government regulation. Bitcoin is secure and nearly unhackable, unlike bank accounts. While Bitcoin has provided incredible returns on investment for early adopters, this last year has shown its extreme market volatility. The security of Bitcoin through things like digital wallets are protected by highly encrypted private keys. Because of this potential for permanent loss exist to the holders. A study in 2019 by the Wall Street Journal suggests that nearly 20% of all existing Bitcoin that has been mined has been lost by its holders. As an example, one San Francisco man has lost the password to his Bitcoin wallet, which holds an estimated 220 million of Bitcoin, He purportedly has two attempts left to correctly input his password. How does crypto mining work? Bitcoin miners use computers to run multiple series of calculations to create secure encryption hashes necessary to create the blockchain. Proof of work mechanisms are used to validate transactions on the blockchain network, which results in the reward of cryptocurrency for successful validations. Each successful solution is rewarded with a set number of Bitcoin. Bitcoin rewards are halved every 210,000 blocks, and currently stand at 6.25 Bitcoin per block, with approximately 900 Bitcoin being mined each day. Popular cryptocurrencies like Bitcoin and Ethereum operate on what it's called a proof-of-work, PoW system, as we discussed before, where people solve equations of varying difficulty to mine new coins, and add new blocks of information to a digital currency's blockchain. The system was developed in part to counteract cyber attacks, where one person creates a host of fake identities, and uses them to take over a majority of the network. Because everyone on the network is fighting to be the first to solve these equations, and win the monetary reward, the person with the most processing power has the best chance to win. That leads people to put together larger mining rigs, or even a network of mining rigs that grind through the equations faster. Since the amount of energy used is reliant on the size of the mining rig, ever increasing amounts of energy are needed to mine new coins. The price and availability of electricity can also affect the volume of cryptocurrency mining operations. If electricity is cheaper in one country, or even part of one country than another, it makes sense from a business standpoint to centralize mining operations there. Ethereum will eventually move to a proof-of-stake, or PoS system. Under the proof of work method, a party that creates a block in a blockchain is called a miner, as they earn the coin by solving the mathematical problem. However, in proof of state method, the block creators are called validators. This is because they do not solve mathematical problems, but rather they validate that the transactions were performed correctly. How does one mine cryptocurrency? In order to mine cryptocurrency, miners use a GPU, a graphics processing unit, or they use an AISIC, which is an Application Specific Integrated Circuit-based machine to calculate and compute the calculations. Miners will typically use a large amount of mines working together, to increase the hash rate, and therefore the rate of return. With a powerful enough machine, one Bitcoin can be mined approximately every 10 minutes per machine. However, the mining machines are expensive to build and to run. Now, what are the drawbacks of crypto mining? First, it is extremely energy intensive. According to the university of Cambridge Business School, Bitcoin mining consumes approximately 138 terawatt hours of energy per year. It is estimated that in 2021, Bitcoin and Ethereum mining admitted more than 78 million tons of CO2. By comparison, Bitcoin mining consumes 138.34 terawatt hours per year. While all the gold mining in the world only consumes 131 terawatt hours per year. 138 terawatt exceeds the entire energy consumption of multiple countries, including places like Norway, Finland, Sweden, and Argentina. It also exceeds more than Google, Apple, Facebook, and Microsoft combined. A recent study shows that an estimate of the amount energy used to validate just one Ethereum transaction could power an average US home for more than a week. While the energy to validate a single Bitcoin transaction could power the same home for more than 70 days. The steady further estimated that last year, the combined mining of Bitcoin and Ethereum admitted more than 78 million tons of CO2, which is equivalent to what 15.5 million cars emit into the atmosphere, in one year. Another consideration is the generation of heat, and the requisite cooling facilities needed to keep the mining computers cool. One example, which comes for Columbia University highlights Green Ridge Generation, a former coal-fueled power plant, which was converted to natural gas to power Bitcoin mining operations. Greenridge draws up to 139 million gallons of fresh water out of the Seneca Lake each day to cool the plant. It discharges said water at 30 to 50 degrees Fahrenheit hotter than the Lake's average temperature. Other places with abundant supplies of energy, such as west Texas require air conditioning to maintain proper operating temperatures in the mining facilities. This requires additional power consumption, on top of everything else. There are estimates that up to 60% of crypto mining occurs in Asia, where the primary fuel to the mining computers is coal. This is not exactly a green practice. Because of this, there is a green movement pushing miners to seek alternative renewable supplies of energy, for these operations. What can provide power for this practice? This is where natural gas comes into play. As mentioned before, crypto mining is extremely energy intensive. This has led a strong push to move to greener, and more cost efficient energy supplies for mining. Additional pushes by oil and gas producers, to reduce CO2 emissions, are causing them to seek alternative, outside the box measures to attain those results. Places like Texas and North Dakota, which produce excessive associated natural gas, and have higher volumes of associated produced gas without facilities to transport, provide opportunities for crypto mining facilities to utilize what would otherwise be wasted gas. According to one blockchain crypto miner company, Crusoe Energy, "The gas wasted annually through flaring, will provide enough energy to power the entire continent of Africa for one year. Meanwhile, the total power consumption of the data centers mining cryptocurrency is equivalent to the power demand of Germany, which is the largest industrial economy in Europe. Therefore flared gas provides a cheaper alternative of energy, which also reduces the environmental impact of flaring the gas. Is utilizing flared, or vented gas, a viable solution? Utilizing flared gas to mine cryptocurrency looks quite enticing for operators, if they are willing to invest in the equipment and have the know how. Depending on the location it may be cheaper to use the flared gas to mine cryptocurrency, rather than to build a gas pipeline, or set up a procedure to liquefy gas on site, for transport by truck. However, the use of crypto mining to utilize flared gas may only be a short term bandaid to the problem. While it helps the environment, critics say that it is not a dramatic enough reduction to offset the emissions by oil and gas companies. Where are the idea locations for mining facilities to be located? Due to the high amount of energy used, and the heat generated in the process, cooler regions are the ideal location for a crypto mining facility. Humidity is also a factor when running such complex machines. Projects in both North Dakota and the Rockies have done well. Remote locations also prove to be valuable, as it would be expensive or impossible to build other methods for using the gas, or transporting it to market, such as a pipeline. One of the largest Bitcoin mining operations in the country, Crusoe Energy Systems, mostly operates in the Bakken fields of Montana and North Dakota. They have additional facilities in Colorado and Wyoming. What are existing regulations in the different states, as pertaining to flaring? In Texas, there's regulations that exist as to flaring, but not as to the actual crypto mining process. The Texas Railroad Commission oversees oil and gas conservation in the state. The mission of the Railroad Commission is to serve Texas by being a steward of natural resources and the environment, by being concerned for personal and community safety, and by supporting enhanced development and economic vitality for the benefit of Texas. The Texas Railroad Commission was established in 1891, which makes it the oldest regulatory agency in the state, and one of the oldest in the nation. Currently statewide Rule 32, also known as 16 Texas Administrative Code Section 3.32 governs flaring. The rule states that all gas well, gas, and casing head gas shall be utilized for legal purposes and uses authorized by law. An exemption to the rule states that operators may flare gas while drilling a well, and for up to 10 days after a well's completion. Exceptions must be requested outside of this window. Viable exceptions under the rule include, waiting for pipeline construction, additional time for well cleanup, when an operator is negotiating with the landowners, when repairs are needed to a pipeline or well, and when repairs are needed for a compressor. The Oil and Gas Division of the Oklahoma Corporation Commission regulates the production of oil and gas in the state. The commission was established in 1907, and began regulating oil and gas in 1914. In 1915, the commission passed the Oil and Gas Conservation Act, which expanded its duties to include, the protection of the rights of all parties entitled to share in the benefits of oil and gas production. As in Texas, the waste of oil and gas is prohibited, but exceptions do exist. Title 165 of the Corporation Commission, Chapter 10, covers oil and gas conservation. 10-3-15 covers venting and flaring. The most common exceptions provide for flaring when it is not economically feasible to market the gas. An operator may also flare or vent without a permit, if a suitable stand, line, or stack is used to prevent a hazard to people, and such stand, line, or stack has a properly installed and operating stack arrester. And if H2S content of gas exceeds a 100 parts per million, operators must apply for permits to flare, except in certain defined situations, or gas volumes that are less than, or equal to 50,000 cubic feet per day. The Oil Conservation Division of the Energy Minerals and Natural Resources Department of New Mexico oversees the regulation of oil and gas, in the State of New Mexico. The EMNRD's vision is that it strives to make our state a leader in developing reliable supplies of energy, and energy efficient technologies in practices with a balanced approach towards conserving our renewable and non-renewable resources. To protect the environment and ensure responsible reclamation of land and resources affected by mineral extraction. To be effective in leading our state in growing healthy, sustainable forests, and managing them for a variety of users and ecologically sound uses. And to improve the state park system, and to a nationwide leader that contributes to a sustainable economy statewide, while protecting New Mexico's natural, cultural, and recreational resources for posterity. The Oil Conservation Commission was created in 1935. In 1987, the New Mexico Energy Minerals and Natural Resources Department was created by merger of the Energy and Minerals Department, and the Natural Resources Department. The commission issues permits for new wells. Gathers well production data, and enforces the division's rules, and state statutes, to include and ensure the conservation of oil and gas in the state. In 2021, the Conservation Division finalized rules against natural gas waste, which are touted as being the strictest in the nation. These rules are included in the New Mexico Administrative Code, Title 19, Chapter 15, Parts 7, 18, 19, 27, and 28. Operators are required to file reports on oil and gas wells, in associated facilities. As well as pipelines, and gathering, and boosting stations. The rules require 98% gas capture, by the end of 2026. Routine venting and flaring is prohibited. However, there are valid exceptions for flaring, which includes conditions during the drilling process, limited circumstances during completion, and operational issues during production. The Colorado Oil and Gas Conservation Commission regulates the production and development of oil and gas in the State of Colorado, in a manner that protects public health, safety, welfare, the environment, and wildlife resources. Over the last five years, the Colorado Oil and Gas Conservation Commission, or the COGCC has focused on natural gas flaring, venting, and prohibiting unnecessary, or excessive flaring or venting. In November of 2020, the COGCC adopted a new set of rules, which prevents routine flaring or venting. Under Rule 903 venting and flaring of natural gas represents waste of an important energy resource, and poses safety and environmental risks. Venting and flaring, except a specifically allowed, in Rule 903 is prohibited. Flaring is now only permitted, if there is an issue with the well, maintenance is being performed on the well, or there is a production evaluation being conducted. The Oil and Gas Division of the North Dakota Industrial Commission regulates the production and development of oil and gas in the State of North Dakota. The Industrial Commission was created in 1919, and the Oil and Gas Division was not created until 1981. The state bans venting of natural gas. It requires that casing gas be flared. The volume of gas flared must be reported. All flares must follow the North Dakota Administrative Code Section 13.1-15-07-02. Under this code section flares must be equipped and operated with an automatic igniter, or continuous burning pilot. Additionally, flared emissions must not exceed 20% opacity, except that a maximum of 60% opacity is permissible for not more than one six-minute period per hour under Section 33.1-15-03-02. Now that we've covered the existing regulations on the flaring and venting of natural gas, what are important considerations for operators with concerning, and who are thinking about entering into this field? What opportunities does this provide for them? ConocoPhillips has joined in the Bitcoin mining business. It currently has a project in the Bakken, and it's not operating the facility itself, but has a third party managing the project. The Bakken operations to reduce flaring are part of Conoco's goal to reduce routine flaring, and the burning off of extra gas to zero. Conoco has placed quote, "An ongoing focus," end quote, on gas capture projects to achieve zero routine flaring on associated gas by the year 2025. Above is a slide that was used in a presentation by Conoco, concerning their initiative for the Bakken, to be on track for zero routine flaring. Conoco has further admit ambitions to have zero net emissions by the year 2050. ExxonMobil has also become involved in the mining of Bitcoin and the Bakken region. Exxon is one of the top oil and gas producers in the United States. However, the company has not been willing to discuss its crypto mining operations, at least to the media. Supposedly the project was founded, partly due to the company's pledge to the World Bank, to have zero routine flaring by the year 2030. It is also reported that Exxon is considering further crypto mining projects in other regions around the world. Research from Crusoe Energy Systems indicates that mining Bitcoin using flare gas would result in a reduction in CO2 equivalent emissions of about 63%. Crusoe states that it provides oil and gas companies with a fast, low cost, and simple solution to natural gas flaring. They claim that as the energy industry works to address infrastructure constraints, and increasing environmental standards around flaring and emissions, Crusoe is there to help. This provides operators with opportunities to capitalize on unused product that would otherwise be at a minimum, a cost to the operator in situations where they are required to pay the lessor for flared gas that was not sold down the line, or where they would be simply just burning potential profits. There are considerations though. And how do you get paid by the miner, if the third party is operating the facility? Can the mining system be vertically integrated to provide additional revenues to the company? Does the lease allow for this? And if not, how do you obtain permission from the mineral owner and surface owner to begin crypto mining operations on their land? Operators must also consider the cost of natural gas at the time, versus the value of Bitcoin and the cost to mine it, as both the cost of natural gas, and the cost of Bitcoin fluctuates. Now, if you represent land owners, what do you need to consider, if you are thinking about offering a landowner's land to have Bitcoin mined on it, or if you've been approached by an operator to mine Bitcoin on your land? If you already have an oil and gas lease in place, the opportunity to receive a royalty on any gas used for Bitcoin mining may be difficult to obtain. However, the benefit of this is that you are likely going to receive royalties on an gas well that may not otherwise be capable of production, due to constraints on the ability to flare natural gas. By mining Bitcoin, with the gas, it may allow the operator to produce from a well that might otherwise be shut in. If your client has open acreage, which is unleased, when it comes time to negotiate an oil and gas lease, you should try to include a clause that ensures that you are paid market prices for any natural gas used at the well, other than flaring or venting that may occur in an emergency situation. A consideration for an operator is the excess noise and traffic that will occur to the lease op locations based on the crypto mining. In our client's situation, the facility was placed without her knowledge on her property behind sound deadening walls. However, as she lived on the property, and passed by the facility every day, she still noticed the noise. Additionally, it would be prudent for an operator and landowner to include language in any lease, or lease amendment for the operator to pay you royalty in Bitcoin, based on your proportional share of the proceeds from the use of that gas, if you are interested in taking that risk. However, this may not be an easy sell, due to the fluctuation in the prices of Bitcoin. An analogy I heard is that it is kind of like getting paid for the sale of a North Face jacket that was made using the gas, or the sale of plastic that was manufactured from the gas. However, the introduction of such an idea is worth a shot, especially as Bitcoin prices go up. Additionally, if your landowner is not interested in having operations on their land, this may detract the operator from mining Bitcoin on your lease, because of the unfavorable economic terms, as compared to other leases that they may own without this language. Typical oil and gas leases do not include provisions that would contemplate the use of a lease property for crypto mining. Often the lease, which is being operated under is either a standard form lease, or a lease that was entered into before even the idea of crypto mining existed. Texas utilizes what is called the Dominant Estate Rule, which means that the surface estate is burdened with the servitude. While the mineral estate is dominant over the surface estate, and has a right to use as much of the surface, as reasonably necessary, for the exploration and production of the mineral state, in Texas and possibly other states, over the use of the surface. The use of the surface by the owner of a mineral estate must be reasonably related to the production of the mineral estate, in ordinary lease operations. The use of this surface is also subject to limitations of the accommodation doctrine, which states that, "If the proposed use of the surface by the mineral owner will be substantially impaired, and substantially impaired, the existing surface uses, and the mineral owner has reasonable alternatives available. The mineral owner must accommodate the surface use. Crypto mining operations, most likely fall well outside of any legitimate use, of the surface by the owner of the mineral estate. Often oil and gas leases will provide for the free use of gas. However, any free use of gas, as provided in the lease, is typically limited only to operations under the oil and gas lease. This includes the use of gas to power equipment and machinery on location. The use of gas produced from the lease for crypto mining operations does not fall within the scope of an allowed use under the terms of an oil and gas lease. Surface use agreements should be considered both by the operator and by the landowner, especially if the surface owner is not a mineral owner. Important things to consider when drafting a surface use agreement, include the calculation of surface damages. It is important to provide calculations, not only for initial facilities size, but also incremental increases in growth, and the cost thereof. Another important thing to consider, is requesting monthly payments to be made to the surface owner. To be paid as royalty on production from the crypto produced and saved from the property. Another important item to consider is the accounting of any gas used in power generation of a crypto mining facility, and the method in which the royalty is paid. Payments should occur based on the gross value received without any deduction for post-production cost, including, but not limited to treatment or transportation. How much is the royalty owner entitled to be paid out of the proceeds of production? Most royalty issues, even unrelated to the novel concept of crypto mining are related to gas rather than oil. This is due to the differences in the way that oil and gas are marketed. When oil is picked up by a tanker truck, from the storage tank near an oil well, this is considered to be the point of sale for the oil. Gas, however, as we've discussed before, must be transported by a pipeline because it can not otherwise be economically stored above the ground. Because of this, the gas must be transported through a pipeline in compressed, and may need to be processed. While royalty is by definition free of production cost, it is not necessarily free from cost subsequent to production. Therefore it is important to include that the royalties shall not receive a deduction for post production costs. Another consideration for a landowner is the requirement of the installation of sound deadening equipment. Under Texas law, the noise created by a crypto mining facility may be determined to be a nuisance, if it is loud enough. A nuisance is defined by Texas jurisprudence as a condition that substantially interferes with the use and enjoyment of land, by causing unreasonable discomfort or annoyance to persons of ordinary sensibilities, attempting to use and enjoy it. The Texas Supreme Court has previously found that a gas compressor station was a nuisance because the plaintiff's complained that the station's noise odor and lights interfered with the enjoyment of their homes. Therefore it is important to consider the potential locations of the crypto mining facility, and whether it can affect the nature of that locality, whether it will cause an interference at the surface owner's use and enjoyment of their land, specifically looking at possible noises, odors, and lighting. And also the magnitude, extent, degree, frequency, or duration of any noise that is created by the facility. And may be wise to test different noise levels at a proposed location, and see how it affects any landowners in nearby structures. The method of the disposal of waste, and what is allowed to be stored on the premises should be considered in a surface use agreement. The requirement of any fencing around the area, especially if there is live stock on the premises should be negotiated. Any agreement of what hours the facility may be accessed, except in the case of an emergency, should be agreed upon. No employee should be housed in the crypto mining facility. Land owners should be notified of any party that is to enter the premises, to access the facility. Due to the heat generated by the mining machines, the lessee should agree to use its best efforts to prevent fires on the lease premises. Lastly, the removal of any facility, and the disposal of all equipment, which is housed on the leased premises, in connection to a crypto mining facility, should be negotiated. Looking at current trends, natural gas prices have been on the rise since December of 2021. The price of Bitcoin has dropped in that same period. Now energy prices are projected to remain high for the next several years. Because of this, factors, the incentive to mine Bitcoin and other cryptocurrency using natural gas as a fuel for the mining machines has dropped. However, if gas is to be flared anyway, due to the location of the well, or environmental considerations regarding the minimization of carbon and CO2, the prices may not dictate whether cryptocurrency is mined on a property. The mining of Bitcoin may remain profitable, especially for larger operators. Once they have set up a facility, and made the initial investments, and all of the equipment needed. Overall, this is still a relatively new area that is unsettled. There is very little regulation in the way of crypto mining, except as the flaring of gas is limited in many states. Crypto mining in the oil patch is so new that jurisprudence has not been established. A county in Colorado recently shut down four crypto mining facilities by issuing a cease and desist order. Later, the county filed a lawsuit, when the facilities were not shut down. The reason behind the county's actions was that dry grassland surrounded the area where the facility was, as well as the emissions and the noises from the machinery operating. While I doubt this initial lawsuit in Colorado will make it far enough to bring any clarity, as to what is permissible when mining cryptocurrencies in the oil patch, perhaps it will begin discussions on how such activities should be regulated. Although the long term success of crypto mining is still unknown. The idea of mining crypto through natural gas provides another opportunity, for both operators and land owners to profit off of otherwise wasted resources, which is always a win in our industry.

Presenter(s)

JCJ
Jessica Crawford, JD
Partner
Jones, Gill, Porter & Crawford LLP

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                              Not Offered
                              New York
                              • 1.0 areas of professional practice
                              September 26, 2024 at 11:59PM HST Available
                              North Carolina
                              • 1.0 general
                              Unavailable
                              North Dakota
                              • 1.0 general
                              September 26, 2024 at 11:59PM HST Available
                              Ohio
                              • 1.0 general
                              Unavailable
                              Oklahoma
                              • 1.0 general
                              Pending
                              Oregon
                                Not Offered
                                Pennsylvania
                                  Not Offered
                                  Puerto Rico
                                    Not Offered
                                    Rhode Island
                                      Not Offered
                                      South Carolina
                                        Not Offered
                                        Tennessee
                                        • 1.0 general
                                        Pending
                                        Texas
                                        • 1.0 general
                                        Pending
                                        Utah
                                          Not Offered
                                          Vermont
                                          • 1.0 general
                                          September 26, 2024 at 11:59PM HST Approved
                                          Virginia
                                            Not Offered
                                            Virgin Islands
                                            • 1.0 general
                                            September 26, 2024 at 11:59PM HST Available
                                            Washington
                                              Not Offered
                                              West Virginia
                                                Not Offered
                                                Wisconsin
                                                  Not Offered
                                                  Wyoming
                                                    Not Offered
                                                    Credits
                                                      Available until
                                                      Status
                                                      Not Offered
                                                      Credits
                                                      • 1.0 voluntary
                                                      Available until

                                                      September 26, 2024 at 11:59PM HST

                                                      Status
                                                      Available
                                                      Credits
                                                      • 1.0 general
                                                      Available until

                                                      September 26, 2024 at 11:59PM HST

                                                      Status
                                                      Available
                                                      Credits
                                                      • 1.0 general
                                                      Available until

                                                      September 26, 2024 at 11:59PM HST

                                                      Status
                                                      Approved
                                                      Credits
                                                      • 1.0 general
                                                      Available until

                                                      September 26, 2024 at 11:59PM HST

                                                      Status
                                                      Approved
                                                      Credits
                                                        Available until
                                                        Status
                                                        Not Offered
                                                        Credits
                                                        • 1.0 general
                                                        Available until

                                                        September 26, 2024 at 11:59PM HST

                                                        Status
                                                        Available
                                                        Credits
                                                          Available until
                                                          Status
                                                          Not Offered
                                                          Credits
                                                          • 1.0 technology
                                                          Available until
                                                          Status
                                                          Pending
                                                          Credits
                                                          • 1.0 general
                                                          Available until
                                                          Status
                                                          Unavailable
                                                          Credits
                                                          • 1.0 general
                                                          Available until

                                                          September 26, 2024 at 11:59PM HST

                                                          Status
                                                          Available
                                                          Credits
                                                          • 1.0 general
                                                          Available until

                                                          September 26, 2024 at 11:59PM HST

                                                          Status
                                                          Approved
                                                          Credits
                                                            Available until
                                                            Status
                                                            Not Offered
                                                            Credits
                                                            • 1.0 general
                                                            Available until

                                                            October 3, 2024 at 11:59PM HST

                                                            Status
                                                            Approved
                                                            Credits
                                                              Available until
                                                              Status
                                                              Not Offered
                                                              Credits
                                                                Available until
                                                                Status
                                                                Not Offered
                                                                Credits
                                                                  Available until
                                                                  Status
                                                                  Not Offered
                                                                  Credits
                                                                    Available until
                                                                    Status
                                                                    Not Offered
                                                                    Credits
                                                                      Available until
                                                                      Status
                                                                      Not Offered
                                                                      Credits
                                                                      • 1.0 general
                                                                      Available until

                                                                      December 31, 2026 at 11:59PM HST

                                                                      Status
                                                                      Pending
                                                                      Credits
                                                                        Available until
                                                                        Status
                                                                        Not Offered
                                                                        Credits
                                                                          Available until
                                                                          Status
                                                                          Not Offered
                                                                          Credits
                                                                          • 1.0 general
                                                                          Available until

                                                                          September 26, 2024 at 11:59PM HST

                                                                          Status
                                                                          Available
                                                                          Credits
                                                                            Available until
                                                                            Status
                                                                            Not Offered
                                                                            Credits
                                                                              Available until
                                                                              Status
                                                                              Not Offered
                                                                              Credits
                                                                              • 1.0 general
                                                                              Available until

                                                                              December 31, 2025 at 11:59PM HST

                                                                              Status
                                                                              Approved
                                                                              Credits
                                                                              • 1.0 general
                                                                              Available until

                                                                              September 26, 2024 at 11:59PM HST

                                                                              Status
                                                                              Available
                                                                              Credits
                                                                              • 1.2 general
                                                                              Available until

                                                                              January 16, 2025 at 11:59PM HST

                                                                              Status
                                                                              Approved
                                                                              Credits
                                                                                Available until
                                                                                Status
                                                                                Not Offered
                                                                                Credits
                                                                                • 1.0 areas of professional practice
                                                                                Available until

                                                                                September 26, 2024 at 11:59PM HST

                                                                                Status
                                                                                Available
                                                                                Credits
                                                                                • 1.0 general
                                                                                Available until
                                                                                Status
                                                                                Unavailable
                                                                                Credits
                                                                                • 1.0 general
                                                                                Available until

                                                                                September 26, 2024 at 11:59PM HST

                                                                                Status
                                                                                Available
                                                                                Credits
                                                                                • 1.0 general
                                                                                Available until
                                                                                Status
                                                                                Unavailable
                                                                                Credits
                                                                                • 1.0 general
                                                                                Available until
                                                                                Status
                                                                                Pending
                                                                                Credits
                                                                                  Available until
                                                                                  Status
                                                                                  Not Offered
                                                                                  Credits
                                                                                    Available until
                                                                                    Status
                                                                                    Not Offered
                                                                                    Credits
                                                                                      Available until
                                                                                      Status
                                                                                      Not Offered
                                                                                      Credits
                                                                                        Available until
                                                                                        Status
                                                                                        Not Offered
                                                                                        Credits
                                                                                          Available until
                                                                                          Status
                                                                                          Not Offered
                                                                                          Credits
                                                                                          • 1.0 general
                                                                                          Available until
                                                                                          Status
                                                                                          Pending
                                                                                          Credits
                                                                                          • 1.0 general
                                                                                          Available until
                                                                                          Status
                                                                                          Pending
                                                                                          Credits
                                                                                            Available until
                                                                                            Status
                                                                                            Not Offered
                                                                                            Credits
                                                                                            • 1.0 general
                                                                                            Available until

                                                                                            September 26, 2024 at 11:59PM HST

                                                                                            Status
                                                                                            Approved
                                                                                            Credits
                                                                                              Available until
                                                                                              Status
                                                                                              Not Offered
                                                                                              Credits
                                                                                              • 1.0 general
                                                                                              Available until

                                                                                              September 26, 2024 at 11:59PM HST

                                                                                              Status
                                                                                              Available
                                                                                              Credits
                                                                                                Available until
                                                                                                Status
                                                                                                Not Offered
                                                                                                Credits
                                                                                                  Available until
                                                                                                  Status
                                                                                                  Not Offered
                                                                                                  Credits
                                                                                                    Available until
                                                                                                    Status
                                                                                                    Not Offered
                                                                                                    Credits
                                                                                                      Available until
                                                                                                      Status
                                                                                                      Not Offered

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