Crypto Mining at Gas Wells Sparks Regulatory Headaches, Outcry in Northwestern Pennsylvania

Lambert here: Is there no end to the wonders of crypto?

By Audrey Carleton, an award-winning environmental journalist who has written for Capital and Main, VICE, Grist, the Guardian, Earther, Vox, The Globe and Mail, and others. Cross-posted from DeSmog.

Longhorn Pad C is located about half a mile south of a small cemetery and a little over a mile north of a Methodist church in Elk County, in northwestern Pennsylvania. With a population of around 30,000, this county sits squarely in the center of the path the Marcellus Shale formation takes as it curves through the commonwealth.

The lonely well pad houses four natural gas wells that records show were initially drilled in 2011 but sat inactive for years after that. Now, it also houses infrastructure designed to mine cryptocurrency, which, according to a comment filed by the surrounding township’s Board of Supervisors, hums loudly enough to have solicited numerous noise complaints from residents. Though it has applied for them, the company behind this operation has yet to receive the permits it is required by law to construct or operate the engines to power a cryptocurrency mine.

“After a recent inspection, the [Department of Environmental Protection] DEP has determined that Diversified was in violation,” said Tom Decker, community relations coordinator at the DEP’s Northwest Regional Office, “as it had installed equipment for its cryptocurrency operations prior to the issuance of a plan approval issued by the Department.

“The company is required by law to obtain a plan approval from DEP prior to installation and operation of the air contamination sources,” Decker said. “Installation of the equipment without a plan approval could lead to enforcement action by the DEP.”

The pad is owned by a fossil fuel operator that’s come under fire in recent years for purchasing tens of thousands of low-producing oil and gas wells without a clear business motive and for making unrealistic budget projections that minimize the true cost of plugging, critics say. In doing so, it has amassed the largest portfolio of old, low-producing wells in Appalachia.

That operator is Diversified Energy Company PLC, the parent company to Diversified Production LLC, which recently applied for a permit with the Pennsylvania Department of Environmental Protection (DEP) to add five natural gas-powered engines and one generator to the well pad with the intention of mining cryptocurrency.

What the operator’s permit application does not disclose is that Diversified would go on to prematurely install cryptocurrency infrastructure on the pad, and while the DEP reported that it was not operational on the day of a March 1 site visit, the department confirmed that the operator had installed one engine and two trailers holding cryptocurrency mining computers in violation of environmental law. According to the township that houses the site, it’s already showing signs of running.

“We are aware that Diversified Production has installed small engines on the gas well sites to generate cryptocurrency,” Jay Township’s Board of Supervisors wrote in a comment to the DEP in January. “We have received many complaints on the noise disturbance of these engines.”

The engines will power what’s called wellhead mining, in which a cryptocurrency data center is powered directly by an oil or gas well. This pad appears to be the first of its kind in Pennsylvania to go through a formal permitting process for the practice, which is gaining prominence throughout the Keystone State, home to hundreds of thousands of abandoned wells and rich methane stores.

It is not clear when Diversified installed cryptocurrency equipment on the pad without a permit. A DEP inspection report from June 2022 notes that “the operator is installing equipment to resume cryptocurrency mining operations using the production from four producing Marcellus shale wells on the pad.” Another one filed in August 2022 includes photos of large trailers that, according to the DEP, currently house cryptocurrency equipment. A DEP representative told Capital & Main that the department did not learn that the equipment was installed until mid-February.

“Given Diversified’s history, this is not a surprise,” said Charles McPhedran, a senior attorney with Earthjustice and co-author of a comment opposing Diversified’s cryptocurrency permit application to the DEP. “The question is whether DEP can make a forceful response to rogue crypto operators.”

This new use for old wells, which has in recent years proliferated in other major oil and gas states including Texas, could extend fossil fuel production in Pennsylvania — and threaten to stall progress toward its climate goals, including an aim to reduce the commonwealth’s greenhouse gas emissions by 26% below 2005 levels by 2025. The emissions intensity of Bitcoin, which is “mined” via data centers that can plug into the electrical grid or directly into energy sources, as Diversified proposes, is larger than that of some countries. As states grapple with the need to transition from fossil fuels, environmentalists fear that attaching new cryptocurrency operations to untapped or otherwise dying energy sources will only extend their life. Longhorn Pad C appears to be a perfect example, per Capital & Main’s review of public records relating to the pad.

A handful of environmental groups in Pennsylvania first took note of Diversified’s proposal in December, when the DEP announced in the state bulletin its intention to approve the operator’s request, soliciting public comments on the matter. In January, staff from the Clean Air Council, Earthjustice and PennFuture filed a comment arguing against issuing the permit entirely — in part because of discrepancies on the permit application; in part because of the noise pollution that such data centers are known to cause; in part because the emissions intensity of cryptocurrency data mining is threatening to set back decades of climate progress; but primarily because, by the operator’s own admission, it has unresolved environmental violations at 19 other oil and gas sites.

What the commenters didn’t know at the time was that the operator had jumped the gun and installed cryptocurrency infrastructure while awaiting the proper permits.

The pad also appears to follow the exact trend environmentalists fear when it comes to the use of stranded fossil fuel assets for cryptocurrency: It sat inactive for years before Diversified bought it, saw low production volumes once online and was primed for cryptocurrency a few months into its productive life.

According to the DEP, Diversified acquired Longhorn Pad C in September of 2021 from another prominent Marcellus operator, EQT, with which the company has been accused of “playing hot potato” with abandoned oil and gas wells. 

EQT was initially permitted for the well pad in 2010, DEP records show. But it was unproductive for nearly 10 years after being spud (in which the initial drillings for an oil or gas well are made) in 2011, according to records reviewed by Capital & Main but compiled by the Capitol Forum, an investigative news and analysis organization. Per the DEP, the well pad was placed on “inactive status” for that duration. 

After it sat undrilled for all that time, the well pad came online in December of 2021, according to the DEP, after Diversified acquired it three months earlier, and was active for about six months before its new owner applied for permits that would give it a second life as a cryptocurrency mine in May of 2022. The well pad’s production volumes have remained relatively low since Diversified began drilling from it, totalling less than 90,000 cubic feet of natural gas for all four wells over all of 2022, Capitol Forum’s records show. The Internal Revenue Service defines a marginal, or low-producing, natural gas well to be one that generates less than 90,000 cubic feet per day. 

The timing of Diversified’s permit application, coupled with the well pad’s years of inactivity and recent meager production volumes, could indicate that it might have otherwise been a good candidate for decommissioning — and has since been thrown a lifeline.

“That is Diversified’s business model. They acquire underperforming assets and try to squeeze as much value out of them as possible,” said Daniel Sherwood, an editor at the Capitol Forum whose meticulously compiled database of production and financial records on the fossil fuel industry has also informed several critical reports by the nonprofit environmental think tank the Ohio River Valley Institute arguing that Diversified is employing questionable, potentially climate-threatening business practices.

“[Diversified] describes its strategy as ‘acquiring low-cost, long-life, low-decline’ oil and gas wells that previous owners found uneconomic,” an April 2022 report from the Ohio River Valley Institute reads. Should the company find itself unable to plug these wells, “Taxpayers could be left with a massive bill for cleaning up the wells that Diversified leaves behind, as well as an ongoing discharge of climate-warming greenhouse gases.” 

Diversified’s installation of a cryptocurrency mine comes as the commonwealth reckons with its abandoned well crisis. Environmental groups have warned that the practices of companies like this one, which is buying stranded and low-producing assets and assuming liability for plugging them based on questionable calculations, will do little to lessen this crisis. In other parts of the state, cryptocurrency miners are plugging directly into natural gas wellheads, old coal mines and former steel plants — could orphaned or low-producing wells offer Bitcoin a new frontier?

The cryptocurrency industry appears to be positioning itself to solve the abandoned well crisis by assuming liability for low-producing wells and their plugging costs — only after using them to mine cryptocurrency via the proof-of-work (POW) algorithm for the rest of their productive lives. Via the POW algorithm, application-specific integrated circuit (ASIC) miners mint new “coins” by competing with brute force guessing to solve a mathematical equation. This process is extremely energy intensive and, critics argue, wasteful by design.

A small nonprofit lobbying group called the Satoshi Action Fund believes Bitcoin could, in fact, be an “environmental cleanup machine” for states with swaths of abandoned wells; by hooking up to wells that are already leaking methane, a potent greenhouse gas, to power a revenue-generating task, places like Pennsylvania can begin to take small bites out of their orphaned well numbers, founder Dennis Porter told Capital & Main. 

The organization has drafted sample legislation for states endeavoring to streamline the process for doing so. Dubbed the Orphaned Well Bitcoin Mining Partnership Program, the bill — which can be tweaked between states — mandates that state departments of environmental protection create programs that partner with Bitcoin miners to offer them liability for the state’s abandoned wells, as well as federal funds from well-plugging initiatives created by the 2021 Infrastructure Investment and Jobs Act (IIJA). The bill has already been introduced in Oklahoma, Mississippi and Texas. 

Environmentalists caution that going this route will only extend the lifeline of fossil fuel assets that are in desperate need of retirement. In the long term, they argue, adding cryptocurrency facilities to dying oil wells will further entrench us in fossil fuel dependency by creating newfound demand for oil and gas. 

“Crypto has the specter of restarting fossil [fuel] in Pennsylvania,” McPhedran said. “We’re a state that has seen a lot of harmful effects from coal and gas, and we don’t need a new way to use fossil fuels.”

A Diversified spokesperson told Capital & Main that the company endeavors to “minimize” its “environmental footprint” while “providing clean energy” to communities. The company told Capital & Main it believes it is in compliance with environmental law. 

“Diversified takes pride in the responsible stewardship model we have built, where we focus on improving and managing producing natural gas and oil wells from acquisition through retirement,” Diversified’s spokesperson said.

Robert Routh, public policy and regulatory attorney at Clean Air Council, who co-authored the comment with McPhedran and Rob Altenburg, senior director for energy and climate at PennFuture, notes that the true volume of cryptocurrency mining across Pennsylvania has proven difficult to track, because some miners avert the permitting process entirely, attaching data centers to wells in remote areas for varying lengths of time without regulators ever taking note. Perhaps the most famous local instance of this took place in Clearfield County, Pennsylvania, in January 2022, when a DEP inspector stopped by a natural gas well site owned by Big Dog Energy only to find that the company had installed data centers and accompanying generators on it without authorization. 

“The mobility and the remoteness of some of these operations occurring at well sites in Pennsylvania makes them and their pollution extremely difficult to quantify,” Routh says.

But local communities around these sites are beginning to notice. Just 14 miles from Longhorn Pad C, the township of St. Mary’s recently adopted a zoning ordinance for future cryptocurrency projects that requires all future mines to be set at least 100 feet from a street or property boundary, to stay within a maximum sound level and to produce evidence that they won’t adversely affect the city’s electrical grid or Wi-Fi connections. A zoning officer with the city told Capital & Main that the City Council was prompted to pass the ordinance in part in response to Diversified’s cryptocurrency permit application. 

And in Jay Township, the Board of Supervisors is urging the DEP to account for noise limitations as it considers permits for Longhorn Pad C. “What efforts are being made to reduce the unreasonable noise beyond the property line?” they wrote in their comment. 

The DEP has yet to issue a permit for the well, but if it does, that would be against the law, argue the comment authors, who believe the operator’s unaddressed environmental violations would render it ineligible for new permits under the state’s Air Pollution Control Act. The DEP’s Decker did not comment on how Diversified’s premature installation of equipment would affect its pending permit application.

“We can only say that it is a violation and DEP could take enforcement action in cases where it becomes known,” he said.