Flaring: a multibillion opportunity
Flaring is the disposal of excess gas through combustion alongside the supply chain of oil and gas. Most flaring occurs due to unwanted associated gas during oil production. Associated gas is a form of natural gas collocated with deposits of oil. Flaring happens because of the inability to market the associated gas due to financial, technical or regulatory barriers. Flaring wastes a valuable energy resource and has environmental impacts through the release of carbon dioxide for nothing as well as methane and black carbon due to incomplete combustions or malfunctions.
The World Bank estimates 142 billion cubic meters of gas were flared in 2020. This is roughly equivalent to 1,480 TWh, about 1% of global primary energy usage. Though Flaring is a global problem, seven countries account for two thirds of the total volume. Four of them, Russia, Iran, Iraq and the United States account for half. This is not surprising since these countries combined produce 40% of oil globally, although not necessarily all large producers have large volumes of flared gas. The volume of gas flared globally is more than what Japan and South Korea import combined.
So why is this energy not being utilized? There are several challenges associated to eliminate this practice. In areas like the United States, with thousands of small wells, the economics of developing a market strategy for the flared gas do not scale. In some countries, there is limited financial and regulatory structure. In other areas, the flaring sites are so remote there is no infrastructure. Even if the IEA reports more than half of the flares are located within 20 km of existing gas pipelines, building the infrastructure might still not be cost-effective given the costs increase non-linearly and the volume of gas does not justify investment.
There is no one-size-fits-all solution, each site has unique characteristics and barriers which might hinder action to mitigate flaring. Some might be able to plug their associated gas to existing gas infrastructure. Others might be able to utilize the gas on-site. In some cases, it’s possible to inject the gas back in the reservoir. Some might consider the deployment of micro-processing facilities such as mini-LNG, small-scale gas-to-methanol or gas-to-liquids plants. Nonetheless, there is a novel solution which adapts to the conditions of the wells; decentralized and with return-on-investment at least an order of magnitude higher per unit energy: mining bitcoin.
Bitcoin Mining
Bitcoin mining is the competitive process where miners stamp the public ledger of transactions known as the blockchain in reward for a small fee of the value of the transactions on the block and the pre-programmed newly issued tokens. This process requires the use of computing power which in turns demands electricity. Bitcoin miners are incentivized to find the cheapest form of electricity available to offset their costs. Nonetheless, though the network runs 24/7, individual miners can leverage the decentralization of Bitcoin to be flexible in their operations. Thus, Bitcoin mining is a solution that fits the use of flared gas for on-site power because miners can move once the flow decreases or can be turned off in case of emergency.
Flaring Monitor leverages public data and satellites to update the estimates of flared gas volumes in the main oil and gas basins the United States. The data and methodology are public and available since 2019 onwards. Using this data, we can show how much money oil and gas producers in the USA could have made if they mined bitcoin instead of flared their gas. The assumption is that all producers start mining in 2019 and their inclusion to the network does not outprice other miners. Ignoring capital and operational expenditure, table below shows the returns of using three different mining hardware compared to the Henry Hub spot price if they were to market their gas.
Figures above assume a gas to electricity efficiency of 25%, which might be a significant underestimation. The reason returns are lower in 2020 compared to 2019 are the following: flaring intensity decreased, and the computing power of the network increased, which decreased the relative share of flared gas if they were to mine bitcoin. But the figures demonstrate that even considering older less efficient mining equipment such as Antminer S9, flared gas is better used for mining bitcoin and provides higher returns than selling the gas to the market.
This also considers the unlikely assumption that the addition of more computing power to the network does not outprice other miners, who might have higher electricity prices. Given that producers are wasting their gas anyway, this is a very low-cost source of energy. Even under a market price, the potential on-site electricity from flared gas is very competitive: in 2019, the mean yearly price was $2.54 US dollars per million BTU, or 0.9 cents per kWh ($0.009 US dollars per kWh). Ignoring CAPEX and OPEX, we can plot different energy prices using the most advanced mining equipment to see the performance under different scenarios.
Plot above assumes royalties for the gas reflected in cents per kWh and using Antminer S19. For context, current spot prices are equivalent to less than 1 cent per kWh, while the highest mean monthly price on record for Henry Hub was 4.5 cents per KWh. Bitcoin prices are high enough in 2021 to offset higher energy prices, even considering a smaller share of the hash rate relative to previous years. However, the story is different following the market prices, as the graph below shows. In some cases, not only does using older equipment not make money, it may also lose, though it is offset over the year.
Bitcoin mining off flared-gas is likely to become a dominant market in the Bitcoin and energy sectors. There is a tremendous opportunity to utilize a resource that would otherwise be burnt for nothing and turn it into value. Off-grid asynchronous bitcoin mining will solve flaring, reducing waste and securing the Bitcoin network.
