Keep Cool Deep Dive #0004: Crusoe Energy
Tl;dr — Understanding the problems Crusoe solves
Flaring, a process through which oil and gas companies and other industrial sites get rid of and combust flammable gas that can otherwise over-pressurize their equipment, is a significant contributor to global greenhouse gas emissions (“GHGs”). For context on the scale of the problem, the International Energy Alliance summarized global flaring emissions in 2018 as follows:
“(Flaring) resulted in emissions of roughly 275 mega tons of CO2, as well as some methane emissions (from uncombusted portions of flares) and other GHGs…” (source here).
How much is 275 megatons of CO2? It’s a lot, comparable to the annual “GHGs” of Egypt .
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 instead of going to waste .
Crusoe has built their 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, and use it to power computing infrastructure. Here’s how Chase summarized the vision:
“Our vision is to create alignment between the future of large-scale computing infrastructure and the future of the climate. Data centers consume 5% of global power consumption, and that’s growing at an exponential rate. We view this as an existential problem; how do we maximize how much of this computing infrastructure can be climate aligned?”
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 necessarily have to curtail to reverse climate change.
That’s the crux of the Crusoe mission. Here’s another way in which Chase crystallized it for us:
“Ensuring that the benefits we’re gaining from all of this new technology development are responsibly sourced in a sustainable fashion that are going to maintain our planet as an inhabitable place 100 years from now is the primary problem that we’re trying to solve.”
Sound like a valuable endeavor to explore for 10 minutes? We certainly think so . Here’s a quick forecast of where this piece is headed. Let’s get it goin’!
- The ‘A-ha’ moment: A synergy of great minds
- Crusoe: The business today
- The Climate Impact
- What’s next for Crusoe
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The ‘A-ha’ moment: A synergy of great 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:
“(Cully) went to Middlebury college right at the early climate tech movement in the early 2000s. He was highly influenced by this environmental movement; he traveled the world studying global energy resources. Eventually his family pulled him back into the oil & gas space. One of the issues he was dealing with operating an upstream oil & gas company was flaring. There was no clean answer at the time because it’s hard to ask someone to lose money to do the right thing. The most economic thing to do was to just set gas on fire and vent methane alongside it.”
Chase’s career meanwhile centered on applications of ever-advancing computing infrastructure:
“I spent the bulk of my career in more technically focused roles… Spent about 10 years of my career working as a quant portfolio manager building large-scale AI and machine learning models to forecast stock prices.”
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.
“That was a great moment to take a step back and think about what impact I wanted to have. I was drawn to the infrastructure layer of computing. If we can make computing cheaper and data more widely available, we can level up human potential through innovative applications powered by blockchains or artificial intelligence.”
Chase’s introspection after summiting Everest (and perhaps atop the peak itself), coupled with a serendipitous reunion with Cully, sparked the genesis of Crusoe :
“Cully and I met up after my Everest trip and he introduced the flaring problem to me. He was aware of the energy costs of large-scale computing. We put our heads together and thought ‘Can we solve this energy infrastructure problem, make oil production cleaner and more economic, while solving this computing infrastructure problem.’”
Turns out the answer to the question the two Crusoe co-founders posed for themselves was yes!
Crusoe: The business today
When Chase and Cully were first bringing their solution, Digital Flare Mitigation systems, to market, they filed a number of patents:
“When we started the business we filed patents around the whole process of consuming gas at the wellhead to power data centers and patents around the control systems and the way power gets generated and consumed. There’s no one operating at a super significant scale.”
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 and 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. In sum? You’ve prevented gasses that would accelerate climate change from being released into the atmosphere, instead valorizing them by generating power.
Provided courtesy of Crusoe
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:
“We started out with a very small-scale operation; we partnered with a small oil company that was willing to work with us. Our initial idea of ‘Hey, can we use this gas to mine bitcoin,’ was kind of bizarre. But seeing their reception was very encouraging. They effectively said: ‘Look, I don’t care what you do with the gas as long as it’s being responsibly handled and I don’t need to pay some exorbitant amount of money to physically transport it, then I’m happy.’”
Once Crusoe had their feet in a few doors, their model resonated readily with oil & gas partners. Of course, the fact that their business helps their partners solve multiple issues at once doesn’t hurt. Oil & gas companies don’t gain any benefit from flaring; if they can get paid a bit by a partner that knows what they’re doing, it makes a lot of sense. Add in the fact that Crusoe’s system helps them reduce their emissions, and you have a multi-solve partnership :
“We really try to create this win win win. It’s not only a win for the environment, but a win for oil companies from an economic standpoint, and it’s a win for us from the standpoint of being able to produce ultra-low cost power.”
As evidenced by Chase’s above explanation, the economics here work well for Crusoe too. The energy captured through their Digital Flare Mitigation system is cheap, and can be used to power data centers, which are otherwise quite expensive to run.
Now, what to 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 hardware for a client), Crusoe could prove out their model and generate revenue without sourcing outside clients on the energy-use and application side.
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:
“Our colocation business is focused on providing data centers to companies that are looking for entirely clean computing infrastructure to host their hardware, whether those are groups moving from on-prem to data center hosted solutions or even the larger cloud players who are looking for clean energy resources to power their large-scale cloud offerings.
As we’ll explore in the final section of this piece, 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:
“Our low cost, high performance computing cloud will be entirely powered either by methane capture technology like what we’re doing with digital flare mitigation or entirely clean, renewable power generated by resources like wind and solar.”
At present, how do Crusoe’s partnerships with oil companies work? 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:
“We’ve tried to make the solution as modular and mobile as possible. A lot of these sites have a decline curve; they produce some amount of oil at first but that curtails over time. We need the ability to mobilize and move to the next site. We baked that into the design.”
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.
Provided courtesy of Crusoe
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:
“As people become more aware of the flaring problem, there is more focus on regulating it. It’s a top topic for big public oil companies. The World Bank has an initiative to end routine flaring by 2030. A bunch of industry partners have signed on to that initiative, including Saudi ARAMCO. It’s a great sign that the industry is focused on solving these challenges.”
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 their flaring:
“Flaring is regulated on a state by state basis. Each state has its own regulatory commission that oversees it. We’ve worked with the (North Dakota) state legislature to help provide additional incentives to reduce flaring. We worked with the state to get a bill passed that provides a tax break to anyone that deploys a flare mitigation system that captures a specified percentage of gas at the site.”
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).
The Climate Impact
Keep Cool’s ultimate focus lies in the climate impact that the climate tech businesses we cover have. Crusoe positions its climate impact in two key ways:
- Direct emissions reductions via their Digital Flare Mitigation systems
- Support for the development of renewable energy by acting as ‘demand of last resort’
For one, there’s direct emission reduction inherent to all of their existing operations. At the risk of re-stating the obvious, here’s how Chase described the questions Crusoe addresses:
“How do we leverage computing infrastructure to be a net reducer in emissions for legacy industrial businesses like oil & gas?”
Their Digital Flare Mitigation systems capture gasses that would have otherwise been released into the atmosphere and use them to power their data centers. Specifically, flares only combust about 93% of methane, which is a super potent greenhouse gas, whereas Crusoe’s system combusts 99.89%. By reducing uncombusted methane emissions, Crusoe reduces CO2-equivalent emissions by about 63% compared to continued flaring. As notes Chase,
“Each of these digital flare mitigation systems we deploy eliminates 8,000 tons of C02 equivalent from being emitted to the atmosphere on an annual basis.”
Considering Crusoe will have ~60 active sites online by the time this edition of Keep Cool is published, that equates to ~480,000 tons of C02 emissions reductions annually. With their newly secured Series B funding, we could see this scaling to 1M tons of annual emissions reductions by end of year . That’s a material footprint (or footprint removal, if you will) .
Global C02 emissions have climbed to ~30 billion tons annually. At 1M tons of annual reductions, Crusoe alone would be mitigating 0.003% of global emissions. If they can scale their business three-fold from there, they’d be eliminating an entire basis point of global emissions alone. This may look like a rounding error, but it’s an incredible feat for a young, private enterprise. If you had 10,000 companies like Crusoe, you’d be at 100% of emissions reductions. Further, the methane emissions Crusoe helps prevent are more insidious to the environment than C02, as they trap heat more readily than C02.
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:
“The problem with renewables, particularly wind and solar, is asynchronicity between generation and consumption. The way the grid consumes power and the pattern under which that happens doesn’t necessarily sync up with the way nature generates power.”
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.
“It’s a huge problem for renewable producers. To develop the next marginal project, which you actually need to meet peak demand and increase renewables penetration on the grid, there’s no way to underwrite it.”
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 .
“What we feel we can do as the computing provider is be that buyer of that resort, that consumer that produces at least some baseline revenue that can help underwrite the development of these projects…”
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.
As to whether Crusoe would ever look to add carbon credits or removals to their own income statement, Chase reminded us of an important lesson that Paul Gambill, CEO of Nori.com, elucidated for us in a past Keep Cool deep dive. As long as Crusoe positions their solutions for clients as carbon neutral or negative, they shouldn’t also sell carbon credits:
“One thing that we’re weighing is if we’re going to offer an ultra-clean computing cloud, if we want to make the claim that it’s carbon negative or carbon zero, we can’t generate carbon credits and do that. That would be double counting.”
Sadly, because many marketplaces are far from perfect at eliminating double counting in the credits or removals they sell (a problem Nori.com is uniquely solving), Crusoe could probably get away with it. Fortunately, their environmental integrity keeps things above board. Crusoe is still working on getting approved for a variety of different carbon credit programs. For instance, for their own bitcoin prop mining, Crusoe could sell carbon credits, as they’re not offering that as a carbon neutral service to any clients.
What’s Next For Crusoe?
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:
“A lot of (the Series B) capital will fill the pipeline of opportunities we have in place. We often have this cadence with new customers where we do a pilot project and then expand to four more projects that are 5x the pilot’s size.”
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 ️.
“In the Permian basin, cooling is more of a challenge. We’re developing what’s called an immersion cooled solution where we take the computer hardware and immerse it in this non-conductive dielectric fluid. The fluid is more efficient at transferring heat off the chip than chip to air is. In doing that, you can manage hotter temperatures that we’re hoping to roll out en masse in West Texas as well as in international opportunities.”
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:
“The gulf states are flaring tremendous amounts of gas. We’re exploring opportunities in Oman and Saudi Arabia. A lot of those places do require dealing with 130 degree temperatures.”
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:
“Our colocation services product as well as our cloud computing product are two newer developments that are not tied to crypto but leverage a lot of the same power, networking, and data infrastructure that we’re building anyway that can grow new revenue streams, tap into new markets, and build a bigger brand around building a clean computing infrastructure company.”
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 .
In sum? 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 . We’re excited to see what the future holds for Crusoe and thank Chase for being a part of the Keep Cool community.