How Crusoe Energy valorizes wasted gas

Flaring, a process through which oil and gas companies and other industrial sites combust flammable gas that can otherwise over-pressurize their equipment, is a significant contributor to global greenhouse gas emissions. The International Energy Alliance summarized the impact of global flaring in 2018 as follows:

How much is 275 megatons of CO2? It’s a lot, comparable to the annual “GHGs” of Egypt. And flares also emit methane, a greenhouse gas that’s 87x more powerful than CO2 over a 20-year time horizon because they’re not perfect at combusting all the wasted natural gas (which, itself is 70%-90% methane).
 
As Chase Lochmiller, CEO of Crusoe Energy shared with us, there are more than 6,000 active flares in the U.S. alone. The gas flared off by these oil and gas sites isn’t just bad for the environment. It’s a missed opportunity. Gas that gets flared is a potential energy source that could be harnessed for productive uses.
 
Crusoe has built a business around turning flaring from an operational and regulatory risk for oil and gas companies, as well as an existential risk for our planet, into a multi-solve solution. Crusoe doesn’t just mitigate flaring emissions. They capture the gas, convert it into energy (with more perfect combustion), and use it to power computing infrastructure. Here’s how Chase summarized it:

The very Zoom call in which we chatted with Chase was powered by the computing infrastructure he describes. The breakthroughs that computing in general, e.g. machine learning and A.I., can and already have unlocked for humanity, as well as the day-to-day benefits for consumers, are not something we should have to curtail to address global warming and climate change.
 
That’s the crux of the Crusoe mission. Said differently, here’s another way Chase outlined Crusoe’s raison d'etre:

A meeting of like minds

Chase co-founded Crusoe with his long-time friend and high school classmate, Cully Cavness. How did these two identify the opportunity to align computing infrastructure to ‘stranded energy’ assets, like flaring? To understand the Crusoe story, it’s helpful to appreciate the two founders’ backgrounds.
 
Cully comes from a third-generation oil and gas family. His familial expertise coupled with an environmentalists’ mindset, drew him to the flaring problem:

Chase’s career, meanwhile, centered on applications surrounding ever-advancing computing infrastructure:

After a stint working for a cryptocurrency hedge fund, in 2018, Chase took time off to pursue a personal dream of his – summiting Mt. Everest.

From there, Chase’s introspection after summiting Everest (and perhaps atop the peak itself), coupled with a serendipitous reunion with Cully, sparked the genesis of Crusoe:

As it turns out, the answer to the question the two Crusoe co-founders posed for themselves was yes.

The business today

When Chase and Cully were first bringing their solution, Digital Flare Mitigation systems, to market, they filed a number of patents:

What is Crusoe’s Digital Flare Mitigation system? While it’s a technically complex system that requires an intimate understanding of how oil & gas sites work and why they flare gas, the concept itself is simple: Capture the gases that companies would otherwise flare or vent into the air and use them to generate energy. This energy can then be used to power anything you want. In Crusoe’s case, they use the energy to power computing.

While combusting the gas to produce energy still produces CO2 emissions, by achieving more perfect combustion, you abate a lot of powerful methane gas emissions in the process. Flares are often less than 95% efficient, while you can get much closer to 100% (say, 99%) in a generator.

Moving from concept to execution and engaging potential partners wasn’t the easiest sell for Crusoe, especially as oil & gas companies, while aware of the need to reduce their carbon footprint, are keenly focused on the bottom line. Here’s how Chase described Crusoe’s earliest partnerships:

Once Crusoe had their feet in a few doors, their model resonated readily. Of course, the fact that their business helps their partners solve multiple issues at once doesn’t hurt. Oil & gas companies don’t benefit from flaring; if they can get paid a bit by a partner and simulteanously reduce their fugitive methane emissions, things start to pencil.

The economics work well for Crusoe too, at least purportedly so. The energy captured through their Digital Flare Mitigation system is cheap, and can be used to power data centers, which can otherwise be expensive to run.

Now, what do you do with a humming data center? The first application Crusoe pursued was bitcoin mining. This may seem esoteric, and some would argue there are more productive uses of the energy, but by becoming a prop bitcoin miner (mining for one’s own profit vs. hosting the data center for a client), Crusoe could prove out their model and generate revenue without bringing on any clients on the end energy and data center-use side of the business.

Currently, Crusoe has more than 40 operational data centers, and they forecast scaling to 60 by the time this piece is published. Their partnerships span small independent oil & gas companies all the way up to ‘super major’ ones. Outside of the oil and gas industry, Crusoe has already inked partnerships with clients for co-location services, whereby clients with data center needs can host them alongside Crusoe’s Digital Flare Mitigation systems:

There are of course innumerable potential uses for Crusoe’s data centers, and they’re working on bringing new applications to market for clients. Chase described one such program that’s currently in private beta (public beta by October), which will match Crusoe data centers with cloud computing clients:

Current deals with oil companies span anywhere from 1 to 5 years and are structured as gas purchase agreements; Crusoe pays a certain amount for gas and handles everything in between harnessing it and turning it into energy. The gas purchase price is generally not comparable to traditional pipeline sales prices, but does establish a change of custody and arm’s length pricing for the gas. The short-term nature of some of these agreements could certainly be a challenge, as could the fact that oil sites are typically producing declining amounts of oil as they mature. Considering these factors, Crusoe had to make sure their solution was modular, portable and turn-key. This turned into a case of a unique challenge forcing greater innovation:

Had this not been baked into the initial design, Crusoe would be a much more capital-intensive business, with hardware on old sites depreciating or even going to waste. Instead, Crusoe’s sites are easy to set-up initially and don’t require a massive amount of integration support from the oil company; Crusoe represents they can deploy new sites in weeks if not days.

If the deployments weren’t mobile nor turn-key, Crusoe would also lose visibility into future demand and opportunities. Since they are quite mobile Crusoe can follow oil and gas companies from site to site as oil wells deplete.
 
With their patents and successful partnerships, Crusoe has quickly become a market leader. There are competitors whose businesses involve capturing gas to power data centers, such as Upstream data. Their model differs from Crusoe’s in that they look to sell data centers back to the oil & gas companies, which would allow the oil & gas companies to mine bitcoin or bring in their own cloud computing clients, capturing more revenue for themselves. Upstream Data has deployed 100+ datacenters and counting across Canada and the US.
 
On the regulatory side, even if governments’ focus on climate change can seem like it’s evolving at a snail’s pace , there are several developments boosting Crusoe’s outlook:

At the local level, Crusoe is even more hands-on in terms of trying to navigate the regulatory landscape (and even steer its ship) to a place where it provides Crusoe with strong tailwinds . Recently, Crusoe worked directly with the North Dakota state legislature to pass a bill benefiting oil companies who reduce flaring:

In short, if you implement Crusoe’s Digital Flare Mitigation system in North Dakota, you get an additional tax break for your business. Beyond the added incentive for customers, this showcases that Crusoe is pulling all possible levers to elevate their business (and help mitigate climate change). This matters because a significant share of all flaring and venting in the U.S. happens in North Dakota, and even more specifically, in McKenzie County.

The impact

Crusoe’s Digital Flare Mitigation systems capture gasses that would have otherwise been released into the atmosphere and uses them to power their data centers. Specifically, flares only combust ~93% of methane, a greenhouse gas with 87x the GWP of CO2 over 20 years, whereas Crusoe’s system achieves combustion rates north of 99%. By reducing uncombusted methane emissions, Crusoe estimates it can reduce CO2-equivalent emissions by about 63% compared to continued flaring. As notes Chase,

Beyond direct emissions reductions, Crusoe has additional impact squarely in its crosshairs. As the business expands its portfolio of stranded energy assets, it will also be able to play a valuable role in advancing the expansion of renewable energy production. How? Renewable energy operations have to deal with mismatches between when energy is produced and when it is used by the grid. Chase described the challenge well:

There are thus tricky economics at play here for renewable projects. The amount of energy required by the grid at peak hours requires significant production levels. However, in non-peak hours of operation, the grid doesn’t require nearly as much energy. Absent more sophisticated battery technology to store excess energy (and lithium-ion batteries come with their own environmental externalities and economic challenges), renewable energy producers would risk wasting energy during non-peak hours if they onboarded the level of supply necessary to meet the needs of the grid during peak times. This is a disincentive to expand production; renewable producers balk at onboarding more capacity if they know a material amount of that energy won’t be sold.

Here’s where Crusoe can help. If there were a baseline of demand to remunerate renewable producers for excess energy in non-peak hours, their economic calculus about expanding energy production could shift favorably.

By co-locating data centers with renewable producers like wind energy producers, Crusoe can provide incremental demand for energy that would otherwise be wasted. The energy producer sells more of their energy, improving profitability. With a bolstered bottom line, renewable producers may consider expanding their operations, boosting the mix of renewables in the grid. Crusoe is developing projects with wind facilities to deploy this business model.

What’s next

On the heels of an impressive $128M Series B equity round, which featured notable climate investors like Lowercarbon Capital as well as crypto-focused investors like Coinbase Ventures, Crusoe is prepared to scale its Digital Flare Mitigation. There’s no shortage of interested oil & gas parties who would gain both economic and environmental value from integrating Crusoe into their operations. Chase noted many partners look to renew and expand their relationship with Crusoe after successful pilots:

Expansion with new partners will also see Crusoe break into new geographies. To date, they operate primarily in the Williston basin in North Dakota and Montana and have also deployed some systems in Colorado and Wyoming. The formidable Permian basin in West Texas is the next frontier that Crusoe has its sights set on. To be sure, it will come with its own unique challenges. Temperatures in the Williston basin pale in comparison to the heat that characterizes oil & gas operations in the Permian. Given that keeping data centers at optimal temperatures is a key factor in their operations, Crusoe is developing new systems to ensure their centers can handle the heat.

As alluded to above, the U.S. is also by no means the only country in which flaring is an issue. Chase could see a future in which Crusoe operates in the gulf states, which have the largest oil & gas industries in the world. Again, cooling will be a hurdle, as will navigating new regulatory environments:

Beyond expanding existing operations, Crusoe will also use capital from its Series B to accelerate more renewable development in the wind space. They will also continue to develop new applications for the energy they capture:

These efforts will also allow Crusoe to make good on their larger vision, namely to be a computing infrastructure company, not just a company that mines crypto. We see this as a valuable branding transition that shouldn’t be overlooked. Some climate tech investors may have tuned out if they looked at Crusoe as a bitcoin miner that uses flare gas. When they realize Crusoe can power any number of large-scale computing applications while reducing greenhouse gas emissions, they may wish they had taken a closer look.

The net-net (tl;dr)

Considering how much stranded energy there is in the world, bringing demand to where energy supply exists but isn’t being used is a massive opportunity. I’m particularly intrigued by how Crusoe’s business model can help oil & gas companies reduce fugitive methane emissions. Methane emissions have driven 30% of observable global warming yet gets maybe 1% of the attention that CO2 does. That should change; I’m glad Crusoe is working on accelerating a resource reallocation and narrative recalibration towards methane emissions.