Is Bitcoin the "Holy Grail" for gas flaring?

According to the Oil & Gas Authority, offshore facilities in the UK Continental Shelf flared or vented 42.7 billion cubic feet (bcf) of gas in 2019 [1]. There are environmental concerns since it involves release of carbon dioxide and methane - both greenhouse gases - into the atmosphere. It's forever a controversial topic.

Naturally, this is a headache for operators because (1) they are wasting natural resources and (2) they have to comply with environmental limits set by regulators. This is not just a problem for the UK; it's a global problem.

There are initiatives underway to reduce flaring and venting, and it seems the trend is turning downwards. But I believe there is a better, more immediate and potentially significantly more profitable solution: Bitcoin. Or more specifically Bitcoin mining.

What is Bitcoin?

In short, Bitcoin is a decentralized digital currency, or cryptocurrency. Bitcoins can be sent from one user to another user on the peer-to-peer Bitcoin network. And it has been making headlines recently due to a surge in demand not only from retail investors but also corporate investors, including Elon Musk's Tesla, creating new all time highs in its valuation against the dollar. At the time of writing, one bitcoin is worth $45,000. That won't mean much until its put into perspective. In March 2020, the value of a bitcoin was $5000. At the beginning of 2016, its value was $400. And on 22 May 2010, an individual by the name of Laszlo Hanyecz made the first documented purchase of a good with bitcoin when he bought two pizzas for 10,000 bitcoin (BTC). Those bitcoins today would be worth $450m. I assume the pizzas are not of the same value.

Its rise is extraordinary, there is no doubting that. But like so much of life at the moment, it divides opinion. Its believers follow it like a religion. Don't dare question their belief. You will be met with scorn. Then there are those who say it has no instrinsic value and therefore is bound to fall to zero at some point, leaving many sorry people who invested their futures in it. Until 18 months ago, I was in this latter camp. But that was simply because I did not understand what it was, its underlying technology or its extraordinary potential.

Then I read a brilliant book called Bitcoin: The Future of Money? by Dominic Frisby. This was the beginning of my journey into the rabbit hole. I have learnt of its huge potential, including as a store of wealth and a hedge against inflation. Think Gold 2.0 or Digital Gold. There's the ability to transfer wealth through space, which could be you sending bitcoin to a family member or friend over the other side of the Atlantic in a matter of minutes. Or it could be an individual fleeing a war zone to a safe country. Their bitcoin (i.e. their wealth) can be accessed anywhere in the world with an internet connection, instantly.

Then there's the ability to convert isolated energy resources into money, literally, with a computer and a satellite internet connection. The possibilities are life changing, and some say that Bitcoin will have the same magnitude of impact as the internet.

The future is never certain, but what I am confident of is that Bitcoin is not going away, and if nothing else, due to politics and economics, its long term value could be much higher than it is today.

Bitcoin mining

Earlier I described Bitcoin as Gold 2.0, or Digital Gold. And the analogy with gold is an important one, especially for the title of this article: Is Bitcoin the "Holy Grail" for gas flaring?

Bitcoins are produced by mining them. But instead of using great machinery such as that used for mining in gold-rich regions of the world, bitcoins are mined digitally using computers, from anywhere in the world with an internet connection and a power source. Bitcoin mining is the process of creating new bitcoins by solving a computational puzzle. The computer that solves the puzzle is rewarded with bitcoin in the user's "digital wallet". From there it can either be stored as bitcoin or converted into fiat currency such as dollars, sterling, euros, etc. at the exchange rate at the time of conversion.

So it's a very simple equation: Use electricity to produce bitcoin and either hold or convert it to fiat currency*

* Many bitcoiners choose to retain their bitcoin once mined, due to a distrust in the fiat currency system - that is, central banks printing money, thus devaluing the underlying currency. By retaining their wealth in bitcoin, they are hedging their bets against fiat currency systems, as well of course in the hope of mass adoption across the world.

The holy grail?

This equation leads me onto gas flaring. Gas has value. It is worth something. If the flared gas was instead used as a fuel source, electricity could be generated to power computers used solely for bitcoin mining. Critically, this operation located on the same site where the gas is normally flared would provide a significant advantage over other bitcoin miners, since the electricity to power the computers is effectively free. It is taking gas that would have otherwise gone to waste and converting it into electricity to power computers onsite to mine bitcoin and produce profits for owners. And by using the gas in this way it removes the environmental impact of those flared or vented emissions.

Is that the "Holy Grail"? Since cutting greenhouse gas emissions generally impacts negatively on profits, I'd say that a genuine, practical solution that generates profits in the process of cutting greenhouse gas emissions warrants interest.

As a demonstration of the potential, I've done a "back of an envelope" calculation:

The 42.7 bcf of gas flared or vented from UK offshore installations in 2019, could have produced bitcoins worth $1.5bn [2]. That's at the current value of bitcoin. It could go up or down, though if we're at the foothills of mainstream adoption - like many in the crypto industry believe we are - the upside is significantly greater than the downside.

Dominic Frisby asked whether Bitcoin was the future of money. The question mark in the title of his book may need gradually fading over the next decade. And here there is a genuine opportunity for operators to convert waste into wealth by taking part in the adoption of Bitcoin.

[1] www.ogauthority.co.uk/media/6795/oga_ukcs_flaring_venting_report_2020_pdf.pdf

[2] For transparency, I've made the following assumptions: (a) 10.03 cubic feet of natural gas produces 1 kWh of electricity; (b) bitcoin is mined using Antminer S19 Pros, each producing 110 Th/s with a consumption of 3250 Watts (c) the current value of bitcoin is $45,000.