Just when it looked like 40 orphaned natural-gas wells in northwestern South Dakota would finally be plugged, the story took a turn into the realm of cryptocurrency.
A Texas company, Spyglass Cedar Creek, drilled the wells 15 years ago on the vast grasslands in the vicinity of Buffalo.
South Dakota was stuck holding the bag after the project failed, because the state had only required the company to post about $30,000 in bonds. Last fall, the state hired a contractor to plug the wells for about $430,000. The contractor finished seven of the wells before pausing for the winter.
Then, multiple companies expressed interest in the remaining wells. So the state put the mineral rights associated with seven of the un-plugged wells up for a lease auction last month. A Wyoming company, Highwire Energy Partners, won the leases for $58,640.
Ryan Brunner, the state commissioner of school and public lands, conducted the auction. He said Highwire Energy Partners is not a typical oil and gas operator.
“Their operation is to put together generators and burn the natural gas on-site to mine bitcoin and cryptocurrency,” Brunner said.
Actually, the natural-gas wells will power the computers that create bitcoin. Here’s how it works: Bitcoin is a digital currency secured by cryptography – a cryptocurrency. Bitcoins are digitally “mined” into existence. But this isn’t “dig in the dirt” mining. Computers create new bitcoins when they solve complex numerical problems.
Will Reese, of Casper, Wyoming, is one of the partners in Highwire Energy.
“I've called it the minting process,” Reese said. “This is how new bitcoins are created and sent into the market every day. It's actually every 10 minutes a block is mined somewhere in the world.”
It takes lots of computers running 24/7 to make a successful bitcoin mining operation. And all those computers use a lot of electricity.
So bitcoin miners look for low-cost power. Reese said South Dakota’s orphaned gas wells are a good source. He hopes to have the site up and running in six months.
The company will use the natural-gas wells to fire a generator. The generator will power computers. The computers are housed in small fiberglass structures placed over the wells.
“You step into the door and to your right you'll see 70 to 90 computers that more or less look like big desktop computers,” Reese said. “We have them racked against the wall.”
The company already has similar operations in Wyoming.
“What we do with the bitcoin is what you would do with Apple stock, or anything else,” Reese said. “It goes onto our brokerage account. Our portfolio reflects a certain value, and we can – for our investors or for our operational costs – liquidate that into cash on a moment's notice. It's just like getting onto your E-Trade account.”
Highwire Energy Partners must post a $100,000 bond with the state (the Legislature raised bonding minimums last year in reaction to the Spyglass situation). The company also must pay a $2,000 annual rental fee until it gets the wells in production, at which point the fees go away but monthly royalties are due to the state. The royalties are 12.5 percent of the value of the natural gas, as determined by the spot price of natural gas in a nearby pipeline.
Although Highwire Energy only has leases on state-owned minerals so far, Reese said the company may have interest in the rest of the wells, including some with privately owned mineral rights.
The value of a single bitcoin recently spiked above $50,000 for the first time ever. But not everyone is sold on it. U.S. Treasury Secretary Janet Yellen recently said she fears bitcoin is used for illicit finance, and she called bitcoin’s energy consumption “staggering.” One study estimates the global bitcoin network uses as much electricity as the country of Belgium.
Will Reese said Highwire Energy Partners may be the first company using natural gas to mine for bitcoin in South Dakota. Meanwhile, several digital-currency banks are now registered here, because of the state’s favorable laws for banks and trusts.
-Contact reporter Seth Tupper by email.