In this episode, we highlight an innovative and growing trend in the energy industry: the use of stranded natural gas for onsite power generation in data centers for bitcoin mining and Artificial Intelligence (AI) computing. With the advent of AI and tools like ChatGPT, the demand for AI computing power is on the rise, and some companies are turning to stranded natural gas as a low-cost option for power generation.
We also provide examples of clauses or language that can be used in an oil and gas lease, and differentiate between the use of “flare gas” or natural gas that would otherwise have to be flared instead of sold due to lack of pipeline infrastructure vs. natural gas that is used where it could otherwise have been sold. In the discussion, we emphasize the importance for mineral and royalty owners to ensure fair compensation for any gas that is used onsite.
Speaking of making sure that you are getting paid what you deserve, this episode is sponsored by:
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Oil and Gas Leases
Negotiating an oil and gas lease presents the opportunity to include specific language to protect against the extended use of natural gas without payment and to ensure payment is based on market value. The use of stranded natural gas for onsite power generation is a developing area, and it is important to stay updated on the latest developments and work with qualified attorneys to ensure that you are fairly compensated for the use of your resources.
When it comes to oil and gas leases, the mineral rights owner grants the right to a third party (the lessee) to explore, drill, and produce oil and gas on their property. In return, the mineral rights owner is usually paid a royalty based on the value of the oil and gas produced. To ensure that you get paid for the onsite use of any oil or natural gas that is produced, it’s important to structure the lease carefully.
Here are some key considerations:
Royalty Clauses:
Ensure that your lease agreement includes specific language about how royalties will be calculated and paid. This could include provisions for payment of royalties on the value of any oil or natural gas used onsite for activities like bitcoin mining or computing for AI.
Production Allowances:
Consider including provisions that allow for the onsite use of oil and natural gas for production-related activities, like drilling or hydraulic fracturing. However, it’s important to set limits on the amount of free oil or natural gas that can be used for these activities to ensure that there is enough left over to be sold and generate royalty revenue. Absent any language preventing unlimited free use of oil, gas, and other hydrocarbons, it is possible that the operator could use any produced gas for “production operations” such as powering natural gas generators in lieu of flaring to enable them to produce oil and other liquid hydrocarbons. If you case includes this type of language, it may specify that the royalty on oil or other liquid hydrocarbons, gas, casinghead gas, and other substances shall be computed after deducting the volumes that are used for drilling, completions, or production operations. One consideration to prevent unlimited free onsite use of produced gas for bitcoin mining and AI computing is to place a limit in terms of total gross volume or as a percentage of produced volume that is allowed to be used for free before a royalty is owed.
Flaring:
It is important to allow the Lessee the ability to flare natural gas during the initial well startup period or during any upset conditions. That said, consideration should be give to limiting the amount of time that the operator can flare gas without having to pay a royalty (e.g. to 30 days cumulatively, after which the operator has to pay the market value of any flared gas as if it had been sold). Many states have regulations in place that prevent routine flaring and venting of natural gas but this added protection ensures that you still get paid for any gas that is flared. Even if gas is used onsite for power generation for bitcoin mining or AI computing, the operators will still need the ability to flare during an emergency or upset condition.
Whatever language you try to include, it is important to stay updated on the latest developments and to work with a qualified attorney to help you come up with specific language for your oil and gas lease.
Benefits of Onsite Use of Stranded Gas
Whatever the situation, it is also important for mineral and royalty owners to consider the bigger picture and work with operators to ensure economic viability and compliance with environmental regulations. The use of stranded natural gas for onsite power generation can reduce methane emissions and benefit the environment. Flaring natural gas is not efficient in destroying methane emissions, but using it in power generation can reduce methane emissions by burning 99% of the methane.
Mineral and royalty owners should be open to considering the other side of the table and whether overly restrictive language in the lease could hinder the production of the well. As computing power continues to grow, the use of stranded natural gas for power generation is likely to become more widespread and important. It is an innovative solution to a problem of a lack of market for stranded natural gas and could have a significant impact on reducing methane emissions and benefitting the environment.
When thinking about onsite use of natural gas, it is important to consider the location of the well site in relation to the market. In some cases, the natural gas produced at a well site might be too far from the market to be hooked up via pipeline, making it harder to sell the gas. In these situations, using stranded natural gas for onsite power generation might be the only option to economically produce oil while staying in compliance with environmental regulations that prevent flaring gas.
Conclusion
In conclusion, the onsite use of stranded natural gas is a developing trend in the energy industry and highlights the importance of fair compensation for mineral and royalty owners while balancing the benefits of onsite use of gas. By staying updated on the latest developments and working with a qualified attorney should you have the opportunity to negotiate an oil and gas lease, you can ensure that you protect your interests while benefiting from the growing demand for computing power. As always, this information is being shared for informational purposes only and should not be construed as legal or financial advice! Be sure to consult with your attorney for help in negotiating an oil and gas lease.
Resources Mentioned in this Episode
- MRP 6: How to Negotiate an Oil and Gas Lease
- MRP 140: What Royalty Owners Need to Know About Bitcoin Mining With Natural Gas
- MRP 141: Bitcoin Mining to Monetize Stranded Gas with Jacinda Brown
- Wired Article: AI: Great Things Burn Planet
- Crusoe Energy: Crusoe Cloud
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