How oilmen want to earn extra money on cryptocurrencies
The Ministry of Industry and Trade, the Central Bank and the Ministry of Finance received a project of Russian oil companies to extract cryptocurrencies in their fields. Associated petroleum gas (APG) will be used to generate electricity. Such an exotic project would have caused a grin ten years ago, but nowadays even large commodity companies understand that the cryptocurrency market is here to stay and there is an opportunity to make money on it. Artur Safiulin, an author for Realnoe Vremya, financier, in his column sees into the details of the project and assesses its potential.
Can companies do this legally?
In Russia, cryptocurrency mining is not regulated, and it is not formally prohibited. Recently, small steps have been taken in this direction — the law on digital assets came into force on January 1, 2021. It defines cryptocurrency, but it is prohibited to use it for payments for goods and services. The rules for the activities of crypto farms are planned to be established later, such amendments are under development. The oil companies that are the initiators of the project are rightly afraid of the reaction of the regulator in the person of the Central Bank, since this activity is in a gray zone.
In accordance with the law, the procedure for the circulation of digital currency should be regulated by separate laws. It may be a good thing that thanks to such initiative of large companies, we will get full-fledged legislation much faster than usual. Moreover, the Central Bank is already discussing approaches to regulation together with the Ministry of Industry and Trade and the Ministry of Digitalisation.
The Ministry of Industry and Trade sent a letter to the Central Bank with a request to give feedback on the possibility of using Russian equipment in oil fields for mining cryptocurrencies. As mentioned above, it is planned to use APG to generate electricity, which will power data centers (data centres) — mining will take place there. According to the initiators of the project, such mechanism will increase the efficiency of using natural gas in thermal generation due to hybrid modules for mining. The Ministry of Industry and Trade asks the Central Bank to assess the validity of this idea.
Essence of the proposed project
According to the plan of the initiators of the project, the production of power plants (working on APG) will be organised in Russia, with the possibility of subsequent export. Apparently, Gazprom Neft is behind the project, which already has such a project in the Khanty-Mansi Autonomous Okrug, launched in 2020. Interestingly, in the first month of work they managed to mine 1,8 bitcoins, which is about 90 thousand dollars. Potentially, this is more than a million dollars a year in revenue from completely non-core activities.
Associated petroleum gas is usually used in several directions — for injection into the reservoir to maintain pressure, for generating heat and electricity for companies' own consumption, for sending to gas processing plants, for delivery to gas transmission systems of other organisations. In most cases, the transportation of APG anywhere is unprofitable, so it is used locally for its own needs. As a result, oil companies have a lot of cheap electricity on the ground.
It is not surprising that the players in this market would like to scale Gazprom's project, having received approval from the regulator. The main cost issue for oil companies remains an expensive estimate for the construction and maintenance of data centres, but taking into account the current situation in the energy market and the dynamics of the cryptocurrency market, such investments will be carried out without problems. If the state approves this project, of course.
Oil companies have two options for the development of this “industry” — to create a data centre and mine themselves completely, or to provide their excess capacity as “mining hotels” for investors from China, for example, where mining has been recently banned at all. According to experts, in this model of work, the taxation regime of such operations is not entirely clear — the miners who will rent data centres are not Russian residents, they must pay their income taxes in China, where the ban is in effect. There is potentially a risk of criminal prosecution of these persons at home. It may be worth using Russian “offshore” zones for the registration of companies for subsequent work on the territory of the Russian Federation. In general, of course, the new economy is a very interesting thing with a lot of new challenges and non-standard solutions. For specialised lawyers, a new field of work is added to extract additional revenue.
In general, now at the State Duma level, it is already proposed to legislate the issue of collecting taxes from companies, sole proprietors and individuals who are engaged in mining. It is supposed to include mining in the register of types of entrepreneurial activity. This initiative was publicly supported by the governor of Irkutsk Oblast, where a significant increase in energy consumption is recorded due to underground miners. The thing is that the region has the lowest electricity tariffs in Russia. The governor believes that it is necessary to introduce a separate and increased tariff for miners. For information: in October, Russia took the third place in the world in bitcoin mining. The country's share in total computing capacity has reached 11%, showing a twofold increase since the beginning of the year.
In conclusion, I would like to note that this project is absolutely economically viable — oil companies have surplus electricity extracted from APG, which can be monetised. Mining cryptocurrencies requires more and more electricity. The equipment that calculates algorithms that lead to the appearance of bitcoins, for example, is becoming more and more energy-intensive. In Russia, electricity is much cheaper than in Europe, and all over the world. In theory, if someone wants to mine cryptocurrency, it's better to do it in Russia now, we have a huge competitive advantage in this aspect.
It will be interesting to see how the Central Bank will react to this project — whether it will close its eyes and give an opportunity to develop this direction. After all, any state does not really want to have uncontrolled cryptocurrencies on its territory. Knowing our government, a ban is not expected. Most likely, some compromise option will be invented that will allow oil companies to scale the experience already gained.
The author's opinion may not coincide with the position of the editorial board of Realnoe Vremya.