Wyoming legislators earlier this year passed a law to provide tax incentives to encourage a novel and allegedly green industry: Building computer centers for processing cryptocurrency in rural areas next to oil and gas drilling sites, so the centers can burn waste gas to supply their vast energy needs.

Now, lawmakers in Texas and other states may follow. Cryptocurrency lobbyists are pushing for similar tax breaks in the Texas Legislature session starting in January.

Although the idea of computer centers popping up in remote areas amid drilling rigs may sound strange, industry advocates argue it makes sense. Cryptocurrency processing – known as bitcoin “mining” – consumes staggering amounts of energy, with a single bitcoin transaction sucking up as much electricity as a typical American home over more than a month.

So why not use waste gas at drilling sites – methane that would otherwise be burned or vented into the atmosphere, worsening climate change – to instead power computers?

Critics, however, warn that tax breaks for cryptocurrency mining at drilling sites would deprive state governments of needed revenue and provide a financial incentive for drilling in more marginally productive areas. This would mean yet more drilling and therefore more air and water pollution and more methane leaks, despite the purported benefit of this scheme in allegedly reducing methane emissions.

Joshua Rhodes, a research scientist at University of Texas Austin, warned that the proliferation of wellhead cryptocurrency mining may also hurt ratepayers by hiking the price of natural gas. The creation of a market for natural gas at the wellheads “reduces the incentive to actually go about constructing transport infrastructure for that gas and get it to market, [which] could have a longer term negative impact” on customer rates, he said.

So bitcoin mining in the oil and gas fields could mean both more pollution and higher energy rates paid by consumers, all for a cryptocurrency industry that has questionable social value.

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Understanding the backstory of this industry helps explain how we’ve arrived here: When bitcoin was first introduced in 2009, the user base was small, limited mostly to computer geeks and those interested in buying drugs off the dark web. An enterprising teen could set up a small bitcoin mining operation in their bedroom with a gaming PC and make some cash – whenever their computer verified and recorded a bitcoin transaction, they would earn a commission.

As bitcoin and other cryptocurrencies gained popularity in the mid-2010s, the price of bitcoin shot up, as did the user base. In December 2012, one bitcoin was worth around $13. On October 25, 2022, bitcoin was worth $20,060, well over 1,000 times higher than in 2012 – and well under its highest ever value of over $65,000 in November 2021. While it is impossible to accurately determine the number of cryptocurrency users, it’s clear the userbase has grown significantly since its inception as well.

Now, attempting to mine bitcoin in your room would result in an astronomical electricity bill and little else. The underlying technology of cryptocurrency, the blockchain, is a public ledger of all transactions that take place using the currency. These transactions must be verified before they are added to the chain, which is done when a computer guesses an arbitrary benchmark number. Whoever owns the computer that guesses the number is rewarded with a commission, paid in the cryptocurrency in question. To win, you must maximize your computing power so that you can make as many guesses in as little time as possible: the more computers you have, the more likely you are to hit the correct number. As more computers (and miners) compete to verify these transactions, more computing power is required to be competitive. This creates an incentive for miners to maximize the amount of computer power they have, and the increase in computing power used leads directly to an increase in energy used by mining.

While precise estimates of the energy necessary to complete cryptocurrency transactions are difficult to come by, a report released by British financial site MoneySuperMarket in October 2021 estimates that each bitcoin transaction takes 1,173 kilowatt-hours (kWh) of electricity, roughly equal to the amount of energy consumed over 40 days by an average US household in 2021. This has resulted in the consolidation of mining – individual users are no longer competitive, and mining is done almost exclusive by large companies with access to vast amounts of computing power and electricity.

Worldwide, cryptocurrency energy consumption has quadrupled since 2018. August 2022 estimates of total electricity usage range from 120 to 240 billion kWh, or 0.4 to 0.9% of global electricity usage. This is more than the annual electricity usage of many countries, including Australia, and the U.S. is the world’s leading cryptocurrency mining hub. Precise research on industry growth is limited, but in a survey conducted by congress in 2022 seven large mining companies indicated they alone use 1,045 megawatts of electricity, enough energy to power all of Houston. Nearly all of the companies indicated they plan to expand further. While some of this electricity comes from renewable energy, much of it is fossil fuel generated. As much as 0.8 percent of annual US greenhouse gas emissions is estimated to come from the cryptocurrency sector. This is equivalent to the emissions of 90 million cars in a year, three times as many cars as are registered in all of California.

Critics of the sector have highlighted this consumption. At a time when the realities of climate change are clearer than ever, how can we support growth of an industry which is dramatically increasing energy consumption worldwide and resulting in megatons of carbon dioxide released into the atmosphere every year? The cryptocurrency industry has proposed a novel answer: wellhead mining of cryptocurrency using gas that would otherwise be flared into the atmosphere.

The proposal is billed as a way to tackle two problems at once: waste of natural gas at wellheads and energy consumption of crypto mining. When natural gas wells are first drilled, they are often not connected to gathering pipelines. Companies prefer to verify that the well is productive before building a gas pipeline out to the new well to avoid investment in gathering infrastructure that may not be economical. However, this means the gas coming out of the new well has nowhere to go except into the atmosphere. Natural gas also emerges at oil wells, but is not the primary product, and so is not gathered and sold.

Generally, this gas is flared, resulting in the release of toxic pollutants like sulfur dioxide, black carbon, and volatile organic compounds. Sometimes the gas is simply vented, meaning released without being combusted first. Even when gas is flared as opposed to vented, flaring is not 100 percent efficient. In other words, methane, a greenhouse gas 80 times more potent than carbon dioxide over a 20-year timeline, is being released directly into the atmosphere at these oil and gas wells (this is covered in more detail in Environmental Integrity Project’s Oct. 4 news article). Not only does this directly contribute to climate change, but it is a tremendous waste of an economically valuable resource, especially at a time when natural gas prices are historically high. High prices benefit the oil and gas industry, yes, but they also generally result in increased revenue for federal and state entities via severance tax, a tax on oil and gas producers usually based on the market value of the resource they extract.

Cryptocurrency mining companies have suggested that by placing what are essentially data centers at wellheads, they can generate the electricity needed for crypto mining using gas that would otherwise be wasted. Wyoming, Texas, and North Dakota, among others, already have companies operating wellhead cryptocurrency mining operations at existing wells.

Andy Long, CEO of White Rock Management, describes wellhead crypto mining as an example of the growth of energy efficiency measures, saying “we're just going to see more and more innovative ways of making use of energy that’s there and not wasting it.”

Wyoming in particular has embraced this idea, eager to make itself attractive to cutting-edge technology and maintain its status as a major oil and gas producer in the U.S. At the February 2022 legislative session, two different bills were introduced to support companies wishing to do crypto wellhead mining. One, which exempts such companies from Wyoming’s usual 7.5 percent severance tax on natural gas, passed. The other, which would allow companies to enter contracts with oil and gas producers outside of the regulated electricity market (called the deregulated industrial power zones bill), failed.

Already, other states are following Wyoming’s lead to attract the crypto industry. In Louisiana, a deregulated industrial power zones bill was introduced at their 2022 legislative session in April, although it also failed. The Texas Blockchain Council, an industry lobbying organization, has drafted text for a severance tax exemption based on the Wyoming law that they hope will be introduced as a bill during the next legislative session in January. Wyoming lawmakers also plan to consider a deregulated industrial power zones bill once again at the 2023 legislative session.

Reducing oil and gas flaring is good for the planet and people’s health. However, these legislative proposals raise serious issues. Eliminating severance taxes on gas used for this purpose means the state could lose out on significant income. This is especially critical for Wyoming, where there is no corporate income tax and the majority of the oil and gas production occurs on state and federal land. By exempting producers from severance taxes on gas used for wellhead crypto mining, the state allows producers and miners to profit off a public resource with no financial benefit to Wyoming residents.

The proposed deregulated industrial power zones legislation further enables producers and miners to profit with little thought on the impact to state residents. Normally, public utilities set prices that they will charge consumers of electricity, meaning oil and gas producers do not sell their product directly to consumers but through the third-party utility. Louisiana and Wyoming both have fully regulated utility systems, whereas Texas has a deregulated system. By removing regulations in specific “zones,” legislators hope to attract large electricity customers that can privately negotiate lower rates with oil and gas producers. These lower rates would not apply to normal commercial and residential customers. Blockchain lobbyists and supportive legislators say that this would make these zones more financially attractive to industry while maintaining rate protections for other customers.

Community and environmental groups have concerns, however. They warn that wellhead cryptocurrency will change the economics of well operation. In fact, “you may actually see more wells than you otherwise would have because now they have this additional revenue stream,” said Rhodes, the research scientist at the University of Texas.

The introduction of this new revenue stream is most likely to change the economic calculus for low-production wells, referred to as marginal or stripper wells, which a Nature study from April 2022 found account for roughly 50 percent of all oil and gas well methane emissions. This is six to twelve times higher than the mean methane loss rate from all oil and gas wells in the U.S. By making these marginal wells more economically viable, wellhead mining may actually increase the likelihood of methane leaks, despite its purported benefit of reducing methane emissions.

Cryptocurrency is a fundamentally volatile industry. Since the severance tax cut and deregulated power zones bills were introduced in February 2022, bitcoin has been worth as much as $48,000 and as little as $17,000. New incentive structures and investment opportunities that appear prudent now may not look so appealing next month or next year. Regulation around the cryptocurrency industry should focus on protecting the environment and ensuring residents receive their fair share for public resources used, not pandering to an industry that consumes vast amounts of energy for nothing more productive than a currency trading scheme.

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Lead photo: In this March 8, 2018, file photo Wyoming state Rep. Tyler Lindholm, who was a lead proponent of several new laws that have made Wyoming friendly to the networked ledgering technology called blockchain, poses next to computer servers in an office building in Cheyenne, Wyoming (AP Photo/Mead Gruver).