Crusoe Energy Systems

operations. Difficulties in enforcing flare payments further disincentivize IOCs from taking the initiative to address flaring. In this context, the Nigerian government, after careful planning, opted for a system that relies on third-party developers to implement FMR projects under a competitive selection process and with the obligation for IOCs to allow such developers access to flare sites.

Because no FMR project has yet been implemented under NGFCP, it is impossible to draw conclusions about the success of the program.

CRUSOE ENERGY SYSTEMS

Background

For the growing number of technology companies relying on energy-intensive computing, availability of inexpensive power is key to profitability. Computing applications such as Bitcoin mining, running of artificial intelligence algorithms, and image rendering sometimes require vast amounts of power. A study by the University of Cambridge estimates that Bitcoin “mining”11 uses more electricity annually than all of Argentina, the 30th-largest country by energy use (Blandin et al. 2020; Criddle 2021). Bitcoin prices on the one on hand and mining costs (primarily electricity and computing equipment) on the other determine the profitability of a cryptocurrency miner.

In recent years, power-hungry Bitcoin miners and other computing-intensive businesses have set up or shifted operations to regions where electricity, usually generated from hydro or coal, is cheap, often regardless of carbon emissions. Sixty-two percent of miners surveyed globally for a study by the University of Cambridge reported using hydroelectricity; coal came in second (38 percent of respondents), followed by natural gas (36 percent). The breakdown in the amount of energy used by source is a hotly debated topic that is outside the scope of this case study. By Cambridge’s estimates, only 39 percent of Bitcoin mining’s energy consumption is from renewable sources—a figure that would reflect the high concentration of Bitcoin mining operations in coal-reliant regions of China and Mongolia (Blandin et al. 2020). The same study, however, also notes the argument that Chinese Bitcoin miners switch to hydroelectric energy in the rainy season (when China has an oversupply of it), which would increase the overall reliance on renewables.

In response to this trend, a few start-ups have emerged in the United States that use associated gas to power cloud computing operations such as Bitcoin mining. Among these are Crusoe Energy Systems (“Crusoe”), EZ Chain, and Wesco. These start-ups differ in their business models but all have the same mission: to reduce the reliance of computing-intensive businesses on electricity from the grid, which in the United States is 19 percent coal-based,12 providing cheap power from gas that would otherwise be flared. This phenomenon is not unique to the United States: the Russian state-owned oil company Gazprom is mining Bitcoin with associated gas in West Siberia (Davis Szymczak 2021).

This FMR solution is gaining ground among shale oil producers in the United States, in response to several trends, including the following:

• A challenging oil price environment that forces producers to explore any revenue opportunities, including the sale of associated gas. • A tightening regulatory environment. In the United States, flaring regulations vary by state. Each state has provided different incentives or mechanisms to

minimize flaring, usually with allowances for extraordinary circumstances.

However, most states are trending toward implementing regulations that could have a negative financial impact on companies that flare associated gas regularly.13 Furthermore, the recently announced climate change policy of the

US government specifically targets the reduction of gas flaring and methane emissions in oil and gas operations in forthcoming federal regulations.14

A flare mitigation tax credit has partially passed in the North Dakota state legislature to incentivize the use of flare mitigation technologies such as digital flare mitigation.15 • Operational and infrastructure challenges include the absence of midstream infrastructure near producing wells, delayed pipeline arrival, pipeline capacity challenges, and extended gas plant (if any) downtime. • Increasing investor focus on the environmental standards of US oil-producing companies. For instance, Blackrock, one of the largest asset managers globally, stated that, in order to track a net zero goal by 2050, a “near elimination of flaring, with government policies and industry commitment, must occur by 2025” and that the public and private sectors need to work together to deploy existing and emerging flaring reduction technologies (Blackrock 2021). In the case of Texas, investors managing over US$2 trillion in assets are calling on the state’s regulators to ban the routine flaring of gas from shale fields. See chapter 2 for more information on investor sentiment (IEEFA 2020).

Crusoe energy systems’ digital flare mitigation

Crusoe is a Colorado-based, Silicon Valley–funded start-up that converts associated gas into electricity for energy-intensive computing at the well site, a solution it calls “Digital Flare Mitigation” (DFM).16 Crusoe was cofounded by energy industry professional Cully Cavness and tech entrepreneur Chase Lochmiller, and has been operational since 2018. It raised US$150 million in equity capital from venture capital funds including the Founders Fund, Bain Capital Ventures, and Valor Equity Partners. Crusoe is currently running 40 DFM systems in three oil-producing areas in the United States—the Powder River Basin (Wyoming), Williston Basin (Montana and North Dakota), and the DJ Basin (Colorado and Wyoming). Crusoe’s clients have included Equinor, the Norwegian national oil company with operations in the Bakken; Kraken Oil & Gas, the largest producer of Bakken oil in Montana; EnerPlus, a Canadian company that holds operating acreage in the Bakken and a nonoperating position in the Marcellus field; Devon Energy, one of the largest publicly traded producers in the Bakken; and other private and public operators in the Denver Julesburg Basin, Powder River Basin, and Williston Basin. One large operator, for example, has deployed 18 DFM modules across six oil and gas production sites in eastern Montana and one site in North Dakota. Most of the operator’s wells sell gas into traditional pipelines for processing at gas plants. However, a portion of the company’s acreage is in areas with limited or unavailable pipeline capacity, which is where the operator has deployed Crusoe’s DFM solution.

Crusoe’s DFM systems are designed for turnkey deployment and mobilization in the form of modular and scalable equipment, which allows Crusoe to mitigate flaring at almost any scale from tens of thousands to millions of cubic feet per day. DFM systems are composed of rich-burn power generation equipment (reciprocating engines or turbines), data centers built in containers