Stranded energy

Justin Ballard, Ryan Leachman, Drew Armstrong, Marty Bent

The mayor of Austin has stopped by, they have been working on some initiatives related to bitcoin. We suggested it would be great to have them engage with the local bitcoin community. Thanks for stopping by and listening to these talks. We like to talk about how great Texas is, and Jesse just did a great job of that. Gideon will do the same in a big way in a bit. This current group is going to help us understand it's a lot bigger than Texas. Ryan Leachman is COO. Drew Armstrong is COO and President of Cathedra Bitcoin a publicly listed bitcoin technology firm based in Canada. .... What these guys are going to talk about is stranded energy. Stranded energy isn't just flare. It's much broader than that. Most people don't understand how much energy infrastructure is underutilized.

MB: Pleasure to be up here with you. What is the stranded energy opportunity? What does it look like?

??: One of the reasons we got into it is we're oil/gas based, we drill an exploration well. We need an outlet for our gas that we didn't have a use for. We originally got into bitcoin mining through that. We quickly realized that opportunities in bitcoin, oil/gas, coal, that there's a lot of opportunities. You think about oil/gas. There's a lot of power generation in the oil/gas space and a lot of their .. requires power generation with lots of redundancy. There's opportunities for capital that has been spent in other industries. Just their redundancy of their equipment to ensure their current operation can stay running, so you might as well be utilizing backup poewr generation to create revenue streams for you. We preach to them, look you already have all this equipment, there's a generator right there that you could be turning on and generating additional revenue streams.

???: I think bitcoin mining is just a permissionless energy sync. You can plug it into any energy resource anywhere in the world as long as you have an internet connection and sufficient compute power. It's a simple idea but it's so powerful in the context of energy because it is a location agnostic source of energy revenue. So that means wherever there is naturally occurring energy resource, or an energy resource that you can't utilize, you can monetize that with bitcoin. It's not just flare gas. That's a popular example of course. Safedean and Ross Stevens have tlaked about potentially in the future you will see generation assets develop wherever in the world might be best suited for it, whether there's one region in some remote part of the world with good hydro resources, or remote oil/gas resources. You could see generation start that, and then bitcoin can generate and bootstrap it. As time goes on, maybe a city will develop nearby or other energy intensive industries might develop near those assets.

??: To expand on that, we just got back from El Salvador. Utilizing bitcoin mining is a subsidy to fund development in areas that are stranded and undeveloped infrastructure. I don't think this is talked about enough. It's not just oil/gas. It's any industry, virtually. It's having power is the basic foundation to population growth. If you look around and say Wyoming was actually more secluded than in El Salvador. You can power 5000 homes from our site, and so when you can do that kind of .. and that's based on US household consumption that's not based on other populations that are less developed. There's so much power that comes from bitcoin mining unleashing kind of an opportunity for you to build an entire commune around it.

MB: In terms of mining off-grid, we had Chad, Nick and Jesse talking about on-grid. Operationally, what's the differences for spinning up an off-grid generation solution other than plugging into a grid?

??: It's not just plugging into a substation. There's some work that goes into it. If you're doing off-grid bitcoin mining, you're usually also building or operating the generation aspect of it as well. You're not just bringing in your ASICs and plugging it into an outlet. That's the number one challenge. What is it that you're dealing with? If it's natgas, then you need a natgas generator which you need to be responsible for. If that's not running, then your bitcoin mine is down. That's the biggest difference for off-grid. We have some spots in Wyoming where you don't get cell service if you're out there, but we have megawatts online and connected to the internet. You have to find ways to connect to the internet and how to get people to those areas safely every single day. There's lots of additional issues and operational challenges.

???: I think Ryan is far more experienced in the oil field than myself. Off-grid mining can be a real pain in the ass. There's tons of difficulties and challenges. You're playing life on hard mode. It's a fascinating engineering problem where you are deploying mining infrastructure that ideally nobody needs to be there or be on site for 2 months potentially. It's as close to an autonomous operation as possible. Our bitcoin mining rovers at Cathedra gives us a degree of control without having to send someone out there. There's lots of other cool challenges. It's reassuring to know that's where the moat is. If the barriers to entry are sufficiently low, then you will see a lot of people do it. It's not surprising that you see 100's of megawatts coming online in Texas because the PPM guys did such a good job of making a ready made solution for miners to come take advantage of. Bitcoin mining is a race to the bottom. If you think about the map of the world as 3d, and then typography is dictated by energy cost, we're all racing towards the troughs. As grid infrastructure starts breaking down, off-grid is going to be a really good thing to be good at.

??: .. goes with the bitcoin ethos of self-sovereignty. Someone asked about regulations coming down for on-grid. That's an advantage for off-grid miners. Right now the cost is likely more expensive than if you're on-grid, at least in Texas on the ERCOT system. In the future, that might not always be the case. We can often be naive to government actions. I don't think most of the people in this room ignore that problem, but the reality is that in the US we have civil forfeiture. It's codified into law, it's allowed here, that if there is a situation where the government takes some actions like that, then off-grid miners are going to be in a better situation. I like it from that perspective. We are setting up some on-grid mining operations with a large grid in Texas. I think there's some aspect to off-grid that appeals to my paranoid lawyer brain. We don' twant to put all our eggs in one basket, because the government doing what happened in Canada is not that far away. It's a preponderous of evidence, not beyond a reasonable doubt. Are there any lawyers in this space? We need more I guess. Being off-grid really provides you with more security for my mind for your investment.

??: Justin, I think you're right. I'm not anti-grid. I'm pro bio diversity. By the end of this year, we're going to see a pretty sizable portion of the bitcoin network on the Texas grid. I think the grid stabilization game and the grid response game is good, and benefits the residents of the grid. But at the same time ,good to have some decentralization on the network, good to have some folks off grid. Texas is an energy mecca in a few ways, intersection of so many resources, but it's also a de-regulated power market. Many other grids around the world are suffering from deteriorating infrastructure and a lack of investment which I think is due to poor policy, poor regulation, and stale pricing mechanisms and other issues in energy markets that concern me. Marty talked about shorting the grid, a book that came out about 6 months ago, the subtitle is the hidden fragility of our grid. As we look forward into the future, and we see the European energy crisis where you saw this self-inflicted fragility, countries like Germany shutting down stable nuclear generation and heavily subsidizing intermittent renewables that it didn't have adequate storage or stabilization for and now it's dependent on Russian gas. Despite all the jawboning from Germany about what Putin might be doing, they are still importing Russian gas through Ukraine. I think there's many examples of the fragility of energy systems around the world. Maybe the future of energy markets in the next 10-20 years will be towards micro grids that aren't completely integrated into large utilities. Off-grid mining in that case becomes even more important because not only then are we going and, not only are we not competing for this deteriorating grid infrastructure but we're incentivizing new generation and being a pivotal piece of an off-grid energy system that a town or city can take advantage of.

??: I was talking with Gideon a few minutes ago about bitcoin maximalism, but really I'm an energy maximalists. I hear people saying oil/gas is bad, renewables are good, but no, the reality is that all energy is good and whatever works for your use case is best for you. At the end of the day, energy is what brings human flourishing. From a bitcoin mining perspective, if there's already capital deployed into a particular source, or excess energy, then we should be utilizing it. One of the things we're trying to teach oil/gas groups and talking to coal companies in Wyoming. You already have asymmetrical... it's an asymmetrical opportunity potential to add bitcoin mining to your organization. If you're an oil/gas company and you create oil or natgas and sell it, then you have the ability to add bitcoin mining to your portfolio and recover all your operating expenses because you already have a sustainable portfolio, then you can hold your bitcoin. Groups that actually produce energy, once they start bitcoin mining they will be way ahead of any pure bitcoin mining company because they have another aspect of their business model and can withstand downturns longer than any other groups. We're also talking to people and trying to find potential untapped or stranded energy and how to bring better things to those areas. In Wyoming one of these things we're doing, we talk about orphan wells. Think of oil/gas companies have to put up a certain amount of money when they first drill a well. Back in the day, if those bonding requirements weren't that high and the cost for drilling the well... if those companies go bankrupt, then now the state is left holding those wells and all the liability on those. Then you can do bitcoin mining on those. Majority of those wells are uneconomical or have problems. But many of them you can use to mine bitcoin and then go start tackling the rest of the wells that are economic liabilities and environment liabilities just sitting there. A lot of coal plants in Wyoming have shutdown. A lot of coal companies shutdown operations and then aggregate in another area because you have ot be running at a max capacity to make it make any financial sense. One of the largest bitcoin mining companies is in Wyoming on a coal plant, but they are shamed on hte ESG side which they should be promoting that they saved that coal plant but instead they don't want to admit they are using coal to mine bitcoin. No, let's try to save these jobs and bring jobs back to the coal plants, get them integrated into the grid and promote that. It's just crazy.

MB: We will end ESG. An interesting topic is, operationally, how does this fit in? Two examples that fascinate me the most... the small modular reactor incentivizing that proliferation. Then, how can bitcoin mining happen when you make a well and you don't have a pipeline connected to it?

??: Obviously, I don't know how many oil/gas folks are in there. Gideon and Griffin, alright. When you drill a well, you have your initial production, and the production is usually much higher than what it levels off to. So you have a lot of gas coming out, and it might not be economic to come and put in a pipeline. I got a call today about one of these actually. You also run into situations where you need to run a bitcoin mine in there in order to take that flare off that site. That's what people associate oil/gas and bitcoin mining with is the flare gas situation. Since the Russian-Ukraine stuff, since gas prices were already going up before that, that situation actually is going to lead to more opportunities for mining because we're in a situation where we have pipeline constraints for gas and we need oil. If you look at the different regional hubs, the Henry Hub is at 490. Waha Hub is at 375. You're going to see more and more of that all across the country depending on which areas are drilled. West Texas are some of the best reserves in America. There's going to be a lot of new production coming online, and a lot of that gas is going to have nowhere to go. The biggest problem for flare gas is the scalability and then the decline. You have to build your mine to handle the proper amount of gas, in Wyoming they only allow you to flare 60 cmf per day after the additional production. When you build it up to a certain level at the start, you need to take it down to follow that gas. Then you have to make returns on it. There are issues that come from that, but there are also situations where, we don't think there's going, it's not going to be too long before you are going to be required to have a plan to not have any flare in order to permit a well. Bitcoin mining is actually the first and only thing I can think of that handles that in an economic way. There's not many projects a public company can take in order to meet some internal bullshit ESG guidance and make money from it. This is one of the only things that I see where you can actually monetize something and make it economic while meeting these ESG metrics that are forced on these groups from the public market.

MB: Visualizing this particular use case is fascinating. Imagine if you had your initial production, yo uhave the steep decline curve, the fleet of rovers from Cathedra that you pull off as it declines and take it down the road. You can have a well oiled machine where you can IP a well, peel off the rovers eventually, chase the rigs baby.

??: We make deals with bigger companies because we can follow them. We cna plan out our operation based on that, which is better than well-by-well.

??: I think nuclear is the future of human energy production. It will take a long time though. There's a new way in nuclear, it's all about small modular reactors. Nuclear has been around for a long time. There's been lots of inventions recently, there's advanced fission reactors or gen4 reactors. They have some cool aspects, like utilizing nuclear waste as fuel and some safety features. They are much smaller than traditional nuclear reactors. The previous ones were massive and take a long time to build, and because of the ridiculous nuclear regulatory environment they run over budget and over schedule. Small modular reactors let you create economies of scale on the capex side of things, so you can print out reactors for 1.5 MW to 100 MW. Relatively small for nuclear. One of the issues though that these reactor companies will face is that it's a capex heavy investment asset, but sometimes it might take the utility a few years to build out the actual interconnect. There's lots of friction in joining the grid. Potentially bitcoin miners can co-locate with those nuclear reactor energy production companies, well before they will be able to ship it to the market. This will help the nuclear reactor companies earn back their capital and invest in other projects. One of the reasons these modular reactors are sized the way they are is to deal with remote places like a town in Alaska that might not be connected to a grid. They usually use diesel gas generators or something, and pay $0.30/kwh for the trouble. So these reactor companies want to go focus on these markets. They build a small reactor, but the town doesn't need all that power 24/7 so as a bitcoin miner I can co-locate and serve as a service provider to the nuclear reactor company and I can play the same grid stabilization game that the folks here in Texas are playing but at a much smaller scale. This lets the reactor run 24/7 and earn back the capital they initially invested, but also reducing the cost of electricity for the people living there because this is another way for the nuclear reactor energy production company to monetize their energy. I think the future of energy is going to be small energy solutions like that, with bitcoin mining as a sponge monetizing any energy that would otherwise be wasted.

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