Inspectors from Adams County, Colorado recently came across an unfamiliar sight: Containers filled with crypto mining machines drawing power from oil and gas wells. Then the county decided that the machines were operating illegally and shut them down.
The episode in Adams County, which is ongoing in the form of a lawsuit that the county has brought against one of the mining operators, is only the latest example of friction between local officials and the growing bitcoin mining industry in the US.
Bitcoin mining has found a new hub in North America, following China’s crackdown on the industry last summer. But whereas some places, like Texas, have been welcoming, other communities have resisted the arrival of the industry.
In Tennessee, a judge ruled in March that a bitcoin mining facility was in violation of zoning laws after residents complained about the noise coming from the fans and the county filed a lawsuit — which was eventually settled, with the miner agreeing to shut down by the end of 2024. Another county in the same state recently passed a six-month bitcoin mining moratorium.
Upstate New York towns Plattsburgh and Massena have also resorted to moratoriums. And at the state level, legislators are waiting for the governor to decide whether to sign a bill that would prevent new proof-of-work crypto mining projects that use fossil fuels from coming into the state for two years.
In Adams County, like in other places that have initially resisted bitcoin mining, it may be a case that local officials simply need to become more familiar with the process. But the dispute also spotlights an emerging trend in bitcoin mining: the use of excess gas produced at oil wells as a source of power.
The lawsuit
According to the county, officers inspected the site in May and found violations, including the “active venting of gas” from the well and the lack of emergency shutdown devices. The county also concluded that bitcoin mining constituted an unauthorized use for agricultural zoning.
In early June, Adams County, which lies east of the Denver metropolitan area, sent Renegade Oil & Gas Company a warning letter asking the operator to stop crypto mining. When the machines in question kept running into early July, the county took the matter to court.
On July 11, it filed a lawsuit against Renegade as well as the owners of the two properties where it is located. The suit asks the court to “permanently enjoin the defendant from conducting cryptocurrency mining on the property.”
The county eventually confirmed that the mining operation had been moved off the site and withdrew the request for a preliminary injunction on July 18 — but not the actual lawsuit.
“They were not going to drop the lawsuit until I would agree to never initiate mining operations on this particular site again,” Renegade’s owner Ed Ingve told The Block.
The mining rigs have been moved close to one of his other wells in a different county and they are currently online. According to Ingve, many organizations have reached out to him — some of them offering pro bono legal services. He is also considering filing his own lawsuit against Adams County.
‘Wasted’ energy
Ingve has been in the business of oil and gas for almost four decades. At one point, he managed about 175 wells in Colorado. But in 2018 Anadarko Petroleum, the largest drilling company in the state, decided to shut down its natural gas pipeline following an explosion that killed two people and destroyed a house.
“There were about 500 wells out there that all of a sudden were stranded and had no way to sell their gas,” Ingve said. “Most of them don’t have any outlet for their gas and they are just shut down.”
Ingve has tried to keep some of his wells operating, especially the ones that produce more oil, which can be trucked off. However, oil producers have the obligation to find a way to deal with the gas that is a byproduct of oil extraction. Eventually, Ingve decided to start selling excess gas to bitcoin miners. He also runs his own machines in a different county in Colorado.
Across North America, an increasing number of bitcoin miners have been partnering with large and small companies in order to make use of excess gas produced at oil wells.
Steve Vannatta, a founder and partner at Canada-based mining company Plexus, which works with over a dozen oil and gas producers, said that the company identified a problem in Canada about five years ago.
“There was just too much natural gas and there are not enough pipelines or gathering systems,” Vannatta said. “By us partnering with the producers we take that gas is being flared and we run it through our turbines. So we reduce CO2 emissions by about 95% relative to what they would be doing when they’re flaring the natural gas.”
One of the major players in this space is Denver-based Crusoe Systems, which has a pilot project with oil and gas behemoth Exxon to convert flare gas into power mobile generators used for mining operations on-site. The company touts this as a win-win situation, where natural gas that would otherwise be burned off via the flaring process is put to use and, on the other, energy-intensive crypto mining operations find a cheap power source that would have gone to waste.
Crusoe declined to comment for this article other than to confirm that it does not have any operations in Adams County.
Ingve said that the owner of Crusoe approached him years ago after the pipeline shutdown. But that at the time “those economics weren’t very attractive.”
He jumped in on his own later as the currency’s price went sky-high. “I started (mining) about a year ago when Bitcoin was $60,000,” Ingve said. “The use of my gas doing bitcoin mining was actually more valuable than if I sold it down the pipeline.”
The mining equipment that had been using Renegade’s gas in Adams County was owned and operated by a company called Datahawk. Datahawk purchased the equipment from a firm called Upstream Data, which has about 100 megawatts deployed across North America.
Business development manager and director at Upstream Data Adam Ortolf called the situation in Adams County a “regulatory flop.”
“I’ve never heard of anything like it until this Adams County thing,” he said. He pointed out that other states that have even been welcoming of bitcoin miners using excess natural gas, such as North Dakota and Wyoming, which passed related tax break laws last year.
“The laws that dictate oil and gas production are going to have to change because Bitcoin changes the reality of the world we live in,” Ortolf said. “Bitcoin mining was the hottest topic in oil and gas throughout 2021.”
Ultimately, the pushback from Adams County may be temporary.
The director of the Community & Economic Development Department, Jenni Hall, said in an email that all four operators the county moved to stop mining have complied.
Meanwhile, a document from May 25 authored by Hall suggested that the county does ultimately want to regulate the use of crypto mining by allowing it “in certain zone districts with proper permitting and performance standards to mitigate any potential off-site impacts.”
According to Hall, county staff is currently looking at sample regulations from across the country and the topic will be brought up for discussion at a Board of County Commissioners meeting on August 30.
Ingve is worried that the process will drag on for longer than the anticipated six months and that the resulting regulation will be too strict. “I am very concerned that they’re going to put all sorts of conditions of approval affiliated with mining operations that are going to very much diminish the economics of mining,” he said.
© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
