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As oil and gas producers evaluate emergent opportunities with cryptocurrency mining, it is imperative to conduct a comprehensive risk analysis and ensure any programs are compliant with existing leases and contracts. A new lawsuit filed by a lessor in the District Court for Denver, Colorado claiming the lessee breached its lease obligations, in part through its cryptocurrency mining operations, shows the potential legal exposure producers may face as they take part in this developing segment of the industry.

Opportunities and considerations for gas-to-crypto projects

In the last few years, oil and gas producers and other energy companies have explored and implemented projects to take advantage of the synergy between energy-intensive cryptocurrency mining, on the one hand, and natural gas that is uneconomic or infeasible to transport to market, on the other, including flared gas. Gas that is otherwise burned or not produced is delivered to generate electricity for remote, relatively portable cryptocurrency mining rigs in the oilfield, which mine cryptocurrencies like Bitcoin.

In the cryptocurrency space, particularly for proof of work currencies like Bitcoin, there is tremendous demand for affordable energy. The electricity used for computing power and cooling equipment constitutes the vast majority of the cost of such operations. At the same time, there is pressure from multiple interest groups for green or environmentally conscious sources of power generation, especially as more legislators, regulators, and activist groups take aim at the energy demands of cryptocurrency mining. After the Chinese government instituted a nationwide ban on cryptocurrency mining in 2021, the domestic demand for energy and hash power has increased dramatically. For these reasons, cryptocurrency mining operators are constantly on the lookout for innovative and affordable sources of energy.

For oil and gas companies, gas supply arrangements with cryptocurrency mining operators may provide some mitigation of environmental effects related to operations and create additional potential revenue streams for otherwise uneconomic gas. Cryptocurrency mining rigs are relatively portable and can be constructed for nearly any locale and level of input. The rigs power needs can be supplied by gas-fired generators on-site, which connect to flared or uneconomic gas sold and delivered by producers with no need for significant takeaway capacity. The sales arrangement is not only a source of revenue but can also be a means to reduce emissions, depending on specific technical aspects of the agreement. Specifically, producers are likely to see a decrease in direct emissions because otherwise vented or flared gas is redirected for use as fuel for the mining operation. Emissions from this productive use are likely to generate a smaller carbon footprint overall, with direct emissions attributed to the miner and only secondary emissions attributed to the producer as a fuel supplier.

While these synergies provide exciting applications for cryptocurrency mining in the oilfield, oil and gas companies will want to carefully consider certain attendant risks when negotiating supply agreements, joint ventures, or other arrangements with cryptocurrency mining operators or undertaking the efforts themselves.

First, standard lease forms, as well as the bodies of laws and regulations governing the industry, may not adequately contemplate cryptocurrency mining projects. In other words, they may not account for selling or using flared or uneconomic gas to power cryptocurrency mining. And although the industry has historically been very adaptive to cutting-edge technologies, it takes time for best practices and market standards to emerge.

Second, there are litigation risks from the usual potential claimants: landowners, suppliers, other counterparties, and special interest groups. With respect to mineral ownership, cryptocurrency mining may give rise to potential royalty claims and, as shown below, may also lead to claims asserting breach of lease provisions. With respect to gas supply arrangements and other arrangements related to the operation of wells and mining rigs, there may be potential claims by or against suppliers of mining rigs or related services, such as breach of contract or warranty, as well as potential indemnity claims. There also may be counterparty risks inherent to cutting-edge markets and technologies. Finally, special interest groups, such as climate change activists, may present public relations or even regulatory and litigation issues to the extent they target the cryptocurrency industry and its miners.

A newly filed Colorado lawsuit shows one potential claim a lessee may face in connection with any arrangement they may have with cryptocurrency miners.

Hobe v. Bonanza/Civitas: New lawsuit shows risks

A suit filed in a Colorado state court last month, Hobe Minerals Limited Liability Company v. Bonanza Creek Energy Operating Company, LLC and Civitas Resources, Inc.,1 puts at issue the effect of cryptocurrency mining operations powered by gas wells and the lease provisions for those wells. Its resolution may shed light on the sufficiency of operations to hold oil and gas leases, as well as the interaction between cryptocurrency mining operations and other lease provisions.

Hobe Minerals arises from a dispute relating to oil and gas leases Hobe entered with Bonanza (later operated by Civitas through its merger with Bonanza). Hobe owns minerals in the Denver-Julesburg Basin and Wattenberg Field in Weld County, Colorado. Hobe and Bonanza executed two leases, one in 2015 and one in 2016, which eventually were part of eight pooled units established by Bonanza. Bonanza eventually drilled and produced oil from eight wells on the properties, one in each pooled unit. According to Hobe, Bonanza flared all gas produced from the eight wells and thus did not pay any gas royalties. There was no gas gathering pipeline for the wells.

On July 31, 2023, Hobe filed a complaint in the District Court for the City and County of Denver, Colorado against Bonanza and Civitas, seeking, among other relief, a declaration that its leases had expired.2 Hobe alleges that after several years of oil production from these eight wells, Bonanza shut them in and began paying shut-in royalties. After Bonanza shut in two of the wells, the Colorado Energy and Carbon Management Commission (ECMC) prohibited Bonanza from flaring more gas from the units and Bonanza proceeded to shut in the remaining six wells. Hobe claims that Bonanza was capable of continuing to produce oil without producing any gas (which would have required either flaring or a pipeline) but it did not.

Bonanza later sought and obtained permits to use the gas in cryptocurrency mining operations. Once Bonanza obtained the permits, it resumed production from the wells intermittently. Specifically, Bonanza allegedly cycled trailers containing the mining rigs among the wells so that Bonanza could produce oil and gas from the wells and use the gas to fuel the mining rigs, which are owned by a third party. Allegedly, Bonanza paid the third party seven figures to conduct the cryptocurrency mining operations. Hobe claims that despite Bonanza apparently paying the mining company to take the gas, Bonanza also paid a de minimis royalty on the sale of gas to that third-party cryptocurrency mining company in what Hobe characterizes as an attempt to hide its conduct and lack of production and sale of gas.

Hobe claims that after Bonanza began the cryptocurrency mining program, oil production from the wells declined by 80% to 96% as compared to the production before the shut in and before the utilization of cryptocurrency mining to dispose of the gas. Hobe also claims that the mining was insufficient to hold the leases and so they expired.

In its lawsuit, Hobe seeks a declaration that the leases terminated due to a lack of sufficient operations and that the cryptocurrency mining operations did not continue the leases beyond the primary terms. Hobe also asserts claims for trespass, an accounting, conversion, unjust enrichment, and breach of contract.

While the allegations recited above reflect only the plaintiffs version of events, at minimum, this litigation demonstrates that embarking on cryptocurrency mining operations without the agreement of all stakeholders can result in litigation or other legal risks that may often be addressed when drafting agreements or via amendments.

Key takeaways

Reed Smith will continue to monitor this lawsuit and provide updates in this newly forming area of law.

Client Alert 2023-173

See the article here:
Gas-to-crypto projects: Colorado case may shed light on lease terms - JD Supra

Proof of Reserves (PoR) is the latest buzzword in cryptocurrencies and blockchain technology. It has been gaining traction among traders, investors, and developers to ensure that assets are backed up by real-world collateral. But what exactly is PoR, and how does it work?

What is PoR?

Proof of Reserves is a transparent auditing process crypto firms use to verify their assets. Third-party auditors examine cryptographic signatures and custodian balances to confirm the firm has enough funds to cover potential customer withdrawals. This practice provides customers with visible proof that their money is safe, secure, and accessible anytime.

How is the PoR Audit Handled?

Proof of reserves audit determines if an exchange is solvent or insolvent by evaluating its assets and liabilities. When fractional reserves are in play, part of the deposits are kept in reserve for immediate withdrawal, and the rest is loaned out to borrowers.

The PoR audit process is divided into three parts: proof of liabilities (calculating the exchanges overall liabilities by adding all client account balances to total reserves), proof of reserves (assets that the exchange stores on the blockchain and verifies ownership of public keys with a nonce) and proof of solvency (outputs, attestation that the audit software was run in a trustworthy environment and verifying account balance with Merkle trees root).

PoRs Mission

The need for proof of reserves is growing in importance, especially after the November 2022 collapse of FTX crypto and Binances call for greater transparency. It has also become increasingly relevant as financial regulators create more stringent standards to protect customers, given that Proof of Reserves is a secure and public way to guarantee the safety of customer funds.

Proof-of-Reserves demonstrates that a crypto company has adequate liquidity, offering customers comfort and trust. In todays increasingly regulated landscape, such an audit is becoming increasingly important for exchanges, wallets, and similar entities to provide transparency and trust.

Link:
Proof of Reserves: Understanding PoR and Its Role in Cryptocurrency Transparency - Business News This Week

The price of Aptos (APT), the cryptocurrency behind the Aptos Network blockchain, experienced a significant increase of 17.6% within the first 50 minutes after announcing a partnership with Microsoft. The cryptocurrencys price then cooled off but remained 11.6% higher than its pre-announcement levels, at $7.51.

Aptos aims to drive the adoption of Web3 technology in banks and financial enterprises by leveraging Microsofts suite of artificial intelligence (AI) tools. The partnership will enable the Aptos Network to tap into Microsofts Azure OpenAI service, allowing them to explore innovations in asset tokenization, on-chain payments, and central bank digital currencies.

The collaboration between Aptos Labs, the company behind Aptos, and Microsoft will provide developers and users worldwide with easy access to Web3 through a joint suite of AI-supported tools. One of these tools is Aptos Assistant, a chatbot empowered by ChatGPT, which will guide users in transitioning from Web2 to Web3.

Additionally, Microsoft will enhance the security of the Aptos Network by allowing Aptos Labs to run validator nodes on Azure.

Aptos CEO, Mo Shaikh, expressed his optimism about the integration of AI and blockchain technologies, stating that they are both groundbreaking advancements that have a profound impact on the internet and society as a whole.

Despite the price surge, Aptos token is still 62.9% below its all-time high of $19.92 on January 26, 2023. The Aptos Network was launched on October 17 after four years of development. Aptos was founded by former Meta employees Mo Shaikh and Avery Ching, who were involved in Metas unsuccessful Diem project. The company raised $150 million in funding in July 2022 and an additional $200 million in March 2022 from investors such as Andreessen Horowitz, Coinbase Ventures, and FTX Ventures.

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Aptos Cryptocurrency Surges on Partnership with Microsoft - Fagen wasanni