On The Brink with Castle Island - Chase Lochmiller (Crusoe Energy Systems) on turning stranded energy into Bitcoin (EP.131)

Episode Date: September 28, 2020

Chase Lochmiller, cofounder and CEO of Crusoe Energy Systems joins the show. In this episode we discuss: Crusoe's approach to addressing the issue of natural gas flaring by monetizing stranded energy The process by which Crusoe turns this stranded energy into Bitcoin How Chase sees the compute use cases that can benefit from capturing stranded energy Chase's career path from finance to crypto to founding Crusoe The impact that successfully climbing Mount Everest has had on his career. To learn more about Crusoe Energy Systems visit their website.

Today on the podcast, I sat down with Chase Lockmiller, the co-founder and CEO of Crusoe Energy Systems. I've been wanting to have Chase on the podcast for quite some time. I've been bugging him, so I was really happy that he agreed to do this. And Cruceau Energy Systems is a company that provides oil and gas companies with a fast, low-cost, and simple solution to natural gas flaring. So they're essentially offering this service to these type of companies and customers that will flare the natural gas, but it will actually monetize it in a new and exciting way. and we get into what that means and how they're monetizing it.

But think about this as a company that is going out to these operators, and it's giving them a solution that allows them to be in regulatory compliance, but also participate in some of the upside of this otherwise stranded energy. And spoiler alert, part of that is actually mining Bitcoin with these flare mitigation systems. So there's a big narrative around Bitcoin mining being wasteful to the environment. But I think the other end of that is that Bitcoin, by its very existence is promoting some of the most innovative solutions around capturing stranded natural energy and turning that into Bitcoin. And so we'll get into some of that conversation

with Chase. And it's actually a much more expansive vision than just taking the stranded energy and turning it into just Bitcoin. There's other use cases around protein folding and training machine learning algorithms as well as graphics rendering. So we talk about some of these competitive marketplace dynamics and how Crusoe is poised to capture them. I think you'll find that Chase is one of the most interesting people that we've had on the podcast. He's a bit of a Renaissance man. He started his career in trading. He got into crypto off of the back of the trading experience. He's actually climbed Mount Everest, which is definitely a first for anyone on this podcast. So I had a lot of fun with this conversation.

I think that what Chase and his team are building a Crusoe is just one of the most interesting things that's being built in this industry. And so that's why we wanted to have him on to talk about it. So without further ado, here's my conversation with Chase Lockmiller. Brought down by bad mortgage investments, Lehman, which has 25,000 employees will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is a sleek. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion

pounds more to Britain's ailing economy with a new round of concentrated easy. And you print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called the Bitcoin. Chase, thanks so much for joining us today on the podcast. Yeah, thanks for having me. Happy to be here. I've been trying to get you on this podcast for a while. So I'm really excited that we finally get to talk about Crusoe and everything that you're

building because some of it's starting to leak out in the press. So it's exciting. So appreciate you joining. We historically haven't been super public about. a lot of our operations, but we're starting to come out of some degree of secrecy and talk more in a public-facing manner. Well, excited to get into it. So you're someone that has a really unique background and really at the intersection of financial services and crypto and energy. So maybe just start us off by giving us your background and sort of what led you to found

Crusoe. I did my undergraduate work at MIT focused on math and physics. And then I got into the quantitative trading space. I worked for a couple of different big electronic and algorithm. trading firms, one called Getco, which was one of the largest market makers in the world, then acquired a company called Knight Capital that had sort of a big trading snafu, and we ended up going public, and that entity has since merged with Virtue. So that's all kind of part of a large public electronic trading company now. I ended up leaving Getco at some point and going to work at another electronic trading company called Jump Trading.

And Jump actually has a pretty big footprint in the crypto space now, and I think a lot of people in crypto are aware of jump trading and what they're doing on the market making and trading side of various crypto exchanges. But I ended up getting super interested in the algorithm, or in the digital asset in cryptocurrency space. And I ended up joining Polychain Capital as an early partner in 2017, sort of at the beginning of the height of all the ICO madness that sort of took over in 2017. But I ended up leaving in 2018 to sort of pursue a personal dream of mine, which was, to climb the highest mountain in the world, Mount Everest. So I spent about two months kind of thinking about my life personally

and what I wanted to do next. One of the big things that I was really, really excited about was this notion of being able to deliver computation cheaper, just being able to bring down the cost of compute, I think has been one of the large driving forces for innovation across society, and has been one of the big enabling factors for large artificial intelligence

to really make an impact on people's lives. And then it's also brought a tremendous amount of security to proof of work blockchains like the Bitcoin blockchain. So I ended up after somebody in Mount Everest, I came back and I was doing some more thinking. And I was in Colorado and I ended up meeting up with a very close high school friend of mine who's now my co-founder, Coley Cavness. And Coley, we went to high school together, but we ended up going very, very different career paths. He went to Middlebury and he studied geology there. He was a Watson fellow after graduating and sort of travel. around the world, studying the various energy resources around the globe, ranging from coal-fired

power plants in China to stranded geothermal assets all over the world. And he spent a good deal of time in the geothermal industry before sort of making his way back to oil and gas. His family had been in that industry and was kind of somewhat of his calling. So he ended up working in various angles of the oil and gas industry ranging from the banking side. Coley had most recently been working for an upstream oil and gas company, and he was dealing firsthand with this flaring issue. And just to give you a quick introduction to what flaring is and why it happens, so when oil companies drill oil wells, they're underwritten on the economics of the oil production expected from that well. Now, as a byproduct of the oil production, they also produce natural gas and water.

And so these three different things come out of the ground, but there are certain cases where they actually don't have the infrastructure to get the natural gas to a downstream market where it can actually be sold. So this is a case where either they're either not connected to a natural gas pipeline or they're connected to a pipeline and that pipeline's fully at capacity. Now the water they can take and they can transport it via truck to a water treatment facility. The oil, they can transport to an oil refinery with a truck as well. But the gas, because it's a gaseous state, being able to transport it in lieu of a pipeline is actually a huge challenge. So the most economic thing to do with the gas for these oil companies is actually just to burn it on site. They end up burning it. And it seems like an insane,

crazy thing that this exists. If you've never spent time in an oil field, driving around an oil field and seeing this flaring taking place is really a sight to behold because you're driving down the road and you'll see these giant fireballs right next to the side of the road. So to put it in perspective on how much 14.5 billion cubic feet a day is this is enough to power the entire continent of Africa. So it's a really tremendous waste with a big emissions footprint and zero beneficial use for humanity. So when Koli kind of came to me with this problem, the real insight that we had about it was it's a waste not because oil companies somehow fundamentally hate the environment and they're trying to pollute more, but it's truly like the most economic thing for them to do.

And the reason it's that way is it's fundamentally a transportation problem. They can't transport the gas from the place that it's being produced into a marketplace where it can actually be consumed. It's the same problem that faces dairy farmers with bio gas and the cows are belching and farting and creating methane emissions. And they would love to be able to capture all of that and transport it to a downstream market where it can actually be consumed and sold. But that problem is difficult. So anyway, what we ended up coming up with was this idea of basically taking a very energy-intensive demand and taking it directly to this source. And that demand was in the form of computing. And we started initially with basically working with an oil and gas company in the

Powder River Basin in Wyoming. And I was our initial pilot project. And we started in 2018. And we basically built this mobile modular data center that we took directly to the oil well and kind of had it outfitted for rugged oil field conditions and ran it through the winter there and experienced multiple different bomb cyclones. And I think the day we were in cities and sort of the eastern plains of Wyoming, which were very cold and windy. But being able to sort of operate through those harsh conditions, but really was a testament to, I think, that we sort of had something there that could work by absorbing this very, very large and wasted energy resource with computation. and specifically with Bitcoin mining.

It's fascinating. It's just one of the coolest use cases I've ever heard. I guess before we dive into Crusoe, you mentioned your journey into crypto. And in the business that you guys have founded here obviously requires pretty deep knowledge of many different facets of not only just crypto, but the energy sector and how you would convert some of this just financially into dollars at the end of the day. So what was it sort of initially about crypto that got you interested? Was it the trading side?

Was it the fact that these are compute platforms that anyone in the world can use? What part of it really resonated with you? And what was your journey through crypto to founding this business? Crypto for me, it always resonated with me just having some sort of algorithmic monetary supply. Like it just made a lot of sense to me that way. I think when I was much younger, I was a lot more like hardcore libertarian. I would say I've kind of eased off on being as hardcore in my older age and sort of seeing a role for government in a lot of different aspects. But when I was younger, I think I first

found out about Bitcoin in 2010. There was a developer I worked with that told me about it. And I was like, oh, wow, this makes a ton of sense. And this is really cool. This is like a really, it's cool to have sort of a native internet money where the monetary supply is governed algorithmically versus by the Federal Reserve. So that was my initial interest. I stayed in sort of the algorithmic trading space for a long period of time, just kind of passively observing and sort watching the crypto space. But I think what really got me more interested in it was as it started gaining more traction and greater wider adoption, I think brought greater credibility to the space. It could be used for more things than just Silk Road and some of the early popular applications

of Bitcoin. And I think at that point it felt like it was something that I wanted to spend a lot more time on. That was kind of my personal journey into the cryptocurrency landscape. Having something that's tradable 24 hours a day, I think makes a ton of sense, always resonated with me. Having traded in traditional markets, I always kind of thought it was bizarre that we would just like, all of a sudden, like the markets are closed. I mean, at the end of the day, like the portfolio manager, if the strategy is running or it's not like it takes a ton of effort for most of these automated trading strategies to continue to run overnight or whatnot. So it was always kind of like they have aftermarket trading, but why can't I buy shares of Apple at like midnight

if I wanted to? That doesn't make any sense that I wouldn't be able to do that. Kind of back to Crusoe, thinking about this opportunity maybe from the perspective of someone that owns the land and is running some of these flaring systems, what is that first conversation like when you're explaining this value proposition? I notice that you don't have Bitcoin mining kind of right on the front of your website. So I'm guessing that you don't lead with that. But sort of curious how you approach this just from the perspective of explaining what you're doing to someone that might not be as familiar with Bitcoin. From the operator's perspective, there's really like three different interested parties here. You have the landowner, which is actually typically like a farmer or a rancher, someone like that.

Then you have the operator, which is the oil company. And typically what's the arrangement that was set up is that the oil company has a mineral rights lease to the subsurface usage of the minerals. that are below the land. And then we are sort of the service provider here. The landowners typically paid a royalty on anything that sort of gets extracted from and sold from their land. But the United States is actually a very interesting

and unique place in the world because it's the only country in the world that has private subsurface ownership. So every other country in the world, everything that's underground is sort of owned by the government. And this is actually one of the main reasons you've seen the most innovation

within the energy sector occurring domestically here in the United States because those mineral rights are privately owned and operated, which is driven a tremendous amount of distributed and capitalism-fueled innovation. Like the whole concept of horizontal drilling and hydraulic fracturing, like that could have never occurred anywhere else in the world because nowhere else in the world, they would have had the right monetary incentives to be that innovative. So anyway, back to your original question of what the conversation looks like. Flaring is an issue that's governed on a state-by-state basis. EPA guidelines as far as emissions go, but typically the main restricting factor for oil and gas

companies is managed on a state-by-state basis. So in Colorado, you have the Colorado Oil and Gas and Conservation Commission. In North Dakota, you have the North Dakota Industrial Commission in the NDIC in Texas. You have the Texas Railroad Commission. So each one of these commissions has a different regulatory approach to how they manage flaring. And depending on where you're at, flaring is actually a nuisance to these oil and gas companies. They're producing this gas and the gas is really a nuisance that they're not expecting necessarily to make a ton of money in the perspective of what the main profit driver for them is the oil and can often become an inhibitor if there's a regulatory requirement that basically forces them to flare under a

certain amount of gas. That was early on probably one of our main value propositions, is being able to help oil and gas companies operate more efficiently in a more environmentally friendly capacity that helps them achieve regulatory compliance within local jurisdictions. So from that standpoint, I think it was a very clear value-added proposition because it basically helped them produce oil. And they're very familiar with other types of technologies. What we were approaching them with was a much more economic solution than some of the alternative.

So to give you an example, one alternative. that people can do to basically manage this flare gas is to convert it to LNG, liquid natural gas, at the location. Now, the problem is the cost of doing that conversion at a small scale, that's basically a high level of gas production, is just not economic. You're going to end up spending way more money to do that conversion process and the transportation of the LNG to a market than what you're actually able to realize from a revenue perspective. So it's basically a way of losing a lot of money in a compliant fashion. What we brought to the table was a much more economic solution for operators to operate in a compliant fashion. So people were very, very excited about it.

Yeah, I mean, it makes all the sense of the world that you would have this upside, something that maybe is perceived as a cost center or is a cost center, all of a sudden turns into something that can really harness some of the stranded energy and turn it into money. So at what point does the Bitcoin conversation start to happen when folks are going through this sales process and thinking about pulling the trigger. Are they asking you, like, how does Bitcoin work? We get questions about how Bitcoin works. We don't shy away from the fact that we're mining Bitcoin or anything like that. It's a very clear and open conversation. We tell them kind of what's happening and how the mining process really is a critical infrastructural process to the Bitcoin network

existing and how we're validating and securing the transactions that are occurring on this centralized network. And people get it. I think particularly, in the energy industry, I think people are very receptive to the way that that system works. Maybe let's jump into a few kind of just tactical questions. So how do you guys think about just the price of Bitcoin and the exposure that you're giving to your customers? Is this something that you're converting the Bitcoin on a just in time basis? Do you have some customers that would actually hold Bitcoin? They think it's going up. So they'd like to hold a treasury balance in Bitcoin. How are you seeing people react to that? Our relationship with the energy companies is not typically like a

joint venture partnership where we're helping them mine Bitcoin. Typically, there's a transaction where we're actually taking the gas from them. We're purchasing the gas from them. And the transfer of ownership happens at that point. And then we sort of deal with all of the Bitcoin trading and monetization piece of it. Got it. Okay. So you just make it really kind of a straightforward US dollar denominated transaction. And whether or not it's mining Bitcoin or mining some other crypto asset or some other type of compute network is more of a secondary consideration that you just kind of hide all that complexity, I guess. Exactly. I mean, we like them to know and understand what we're doing just so that they're very comfortable with it because we have to get all of our

surface use. We have to get all of our equipment approved and everything that we do is ultra compliant with all of the standards associated with both the electrical standards as well as kind of the oil and gas specific standards around where we can place equipment on the location. Got it. So over time, I guess the Bitcoin mining industry obviously has just matured in a hurry. I mean, this has gone from something where you and I could have mined on our laptops 10 years ago to industrial scale ASICs at this point. Just as a market participant here, how do you stay up on the latest trends in ASIC development? Because obviously, this has a big impact on your ability to convert this energy into money?

I think Bitcoin mining industry is kind of like undergone, like the classic S-curve industrial explosion dynamic, where like you said, early on, you could mine Bitcoin on your laptop. And then as things got more advanced, people were starting to mine it on GPUs. And then people built the first ASICs. And then the speed at which ASIC innovation was taking place was incredibly rapid. At one point, you would place an order for one ASIC. And by the time you took delivery of it, it was no longer economic. and there were all these kind of crazy games that were unfolding.

I think that was really kind of this explosion, vertical part of the S curve. But I think since we're sort of reaching a plateau where I think a lot of the innovation taking place specifically in the A6 space has flatlined to a certain extent, I mean, I think it's just growing a lot less quickly to where you can predict these things a little bit better and have a little bit more insight as far as what's expected from an efficiency standpoint of future generations of basics. And a lot of this is just based on the global silicon market. And they're sort of just Bitcoin's right at the cutting edge of that curve.

But because it impacts so many other industries, I think it's just become a lot more predictable. So there's definitely an art to just staying plugged into what's happening within the community, having conversations with various vendors and other partners in the space. but it is something we think about a lot. But I think fundamentally we're trying to stay ahead of the curve by having a low operating costs, I would say globally competitive operating costs. We feel like if we can kind of be in that top tier of operating costs that we can maintain

a margin even if there's sort of unexpected technological advancements. That makes sense. So what is the kind of the key to success with your model? Is it just as these new generations of A6 come out, you need to be able to have access to them on a refresh cycle that makes sense? Is that sort of the key to win there? I think just access to machines, just having the right supply chain in place, because our effective power price is so cheap that we don't have to have access to the latest and greatest, most efficient units to maintain profitability. There's always a tradeoff between being at the very

front of that and then sort of being able to make money from the things that aren't economic for a lot of different people. I think we kind of participate across that whole spectrum, but a lot of it's just about having the supply chain in place and really being able to access machines and kind of know what they're worth. That makes a ton of sense. It's interesting because there's this sort of narrative around Bitcoin is wasteful and it's burning down the country or burning down the world, rather, with all of this kind of energy usage. But then there's another side of that, which is basically that Bitcoin and other crypto assets represent essentially a free market every 10 minutes or every few minutes for some other cryptocurrencies for new money being created. And basically,

it's a worldwide auction that says, if you can compete to mine this at most efficient rate, then you get that free money. And so you're starting to see companies like yours go after this opportunity and really harness some of the stranded energy. So do you think that that is something that will continue? And I guess my secondary question is just what other kind of stranded energy sources are there that you think will start to come into play here for what you're doing? besides the flare mitigation? I think fundamentally, like, at a high level, Crusoe's mission is to unlock the value

in stranded energy resources with the power of computation. And we think about that more broadly beyond flare gas as well as beyond just Bitcoin mining. So we have some kind of early pilots and other energy intensive computational applications that are for things like training large-scale artificial intelligence algorithms,

things like drug discovery through massive large-scale protein folding simulations and things like graphical rendering to make the next Pixar movie look ultra-sharp and make sure the kids think it's super realistic or whatever. But I think all of these markets are markets that really, really stand to benefit from this type of cost reduction that you're seeing unfold in the computation space. There are many different types of stranded energy resources. there's a handful that we're looking at as a next market to tap into beyond just flare gas mitigation. I can't really discuss it in too much detail today, but you should be on the lookout for something

from us here, I would say, in the next six to 12 months. One thing I would say that Pruso tries to focus on fundamentally is, like you said, there has been a lot of things published around Bitcoin being a wasteful use of energy. And I think from our perspective, what we try to do is we, try to flip that and try to find wasted energy resources and places where wide-scale emissions are either occurring or where there's renewable resources that could be made more economic by basically adding on this base load of Bitcoin mining. And we try to really, really just focus on the emissions reduction problem. If we can be helpful in sort of the set of kind of adding to the problem,

if we can only focus on ways that we can help reduce things that are stranded or other otherwise wasted. I think that's really one of our core focuses here. So from that standpoint, I think the world actually stands to benefit quite a bit from the Bitcoin mining industry. Bitcoin mining has a lot of unique elements to it because it's fundamentally a decentralized architecture, contrasting it to other types of compute applications. Bitcoin mining is an interruptible application. I mean, you don't want to be off more than you need to be, but it's not like the network suddenly collapses just because one Bitcoin miner turns off. the network continues to persist and transactions continue to happen and network continues to be

secured so long as that's not a broad scale everybody's putting off at the same time type of thing. But that interruptability actually provides a very, very unique feature just from the standpoint. I mean, I know it's super helpful for us with mining with flare gas in the oil field because that fuel supply, it's not necessarily a consistent fuel supply. So wells have to go down for maintenance periodically. They have issues that come up. There are things that happen in the physical field where lines can freeze or things can happen that tend to cause shutdowns.

So having that ability and that flexibility inherently to interrupt the process is actually a super valuable and underappreciated aspect to the Bitcoin mining process. Yeah, that's a really fascinating. I hadn't thought of it that way. I mean, if you think about it, what you're doing connecting really buyers and sellers. So the buyers in this case for Bitcoin would be the Bitcoin protocol itself. is essentially a buyer for what you're doing. For something else like a graphical rendering, you might have to go out and find a studio

or find some group that wants to purchase that compute. But the really appealing thing, I guess, for crypto assets, just broadly, is that for what you're doing, you don't need to go out in paper and agreement. There's sort of this known buyer, 365, 24-7 for what you're doing. So in a lot of ways, it's probably the easiest use case to start with, just because you only have to worry about building one side of that market. Yeah, absolutely. Broadly speaking, I think Bitcoin mining is probably the, or proof of work, blockchains more broadly are probably the most commoditized compute applications that exist today.

But I think fundamentally you're going to continue to see that trend unfold in other sort of broader digital commodity spaces. So I mean, what I mean by digital commodities are sort of compute as a compute is a flop as a digital commodity, storage time as a digital commodity, and network transfer is sort of a digital commodity. And I think fundamentally those commodities should have prices in the same way that pork bellies have a price that gets set on the CME futures market or Orange Shoes futures kind of get set in the same way or corn futures or whatever. I mean, these are all sort of commodity assets that are physical commodity assets as opposed to digital commodities. But I think Bitcoin and Proof-Work blockchains are really paving the way for a future

for broad-scale digital commodity adoption, and then in turn, basically commoditized pricing, which will, I think, be a net benefit to any user of basically the Internet. For sure. And there's certainly, obviously, buyers out there already for flops and people that are in big tech firms that are running ML algorithms at scale or would be kind of natural buyers for this. I know there have been a bunch of attempts to do some of these projects distributed compute as just crypto asset network.

And obviously there's a bunch of storage ones out there as well. Are any of these kind of getting into the wheelhouse of where you could bring your business model to bear on crypto asset networks that are doing that? Or is it still pretty early for some of those? They will be, I would say, kind of in the future. I think most of them are early stage enough where it probably doesn't make sense from a decentralized perspective. But I don't think they've been able to attract kind of enough buyers and sellers to make it meaningful. And I think a big part of this really inherently is because when you look at the large cloud providers, AWS and Azure and then GCP, really what end cloud compute consumers are the biggest value add that they get from that really is the platform. So I think to the extent that open source platforms gain more adoption and gain more usage and utility to end enterprise cloud services compute consumers,

I think you're going to see greater utility and demand for commoditized backend digital commodity consumption. So I think you're already starting to see a lot of these trends with Google, kind of open sourcing Kubernetes and all of the development that you're kind of seeing in that space, I think, could pave a path for it for this type of future. Any guesses as to what it does to just the market structure for cloud compute? I mean, do you think it's still the same dominant players or the same dominant players five years from now, 10 years from now, and they just adopt some of this technology below the hood?

Or is this a fundamental paradigm shift that imperils some of those folks? I mean, I think certainly five years from now, you're still going to have the same dominant players. Ten years from now, maybe things have changed a little bit. But it is fundamentally, you kind of have an oligopoly in the cloud space. And because of that, you sort of have ogopolistic and to a certain extent, monopolistic pricing. Like, that's sort of taking place because people have basically been bought into the platform. They've created a tremendous amount of data either on the back of credits or otherwise, and they sort of just live within that cloud.

It's very difficult to kind of shift out of your cloud services provider. So you're starting to see, I think it's a very early phase of kind of multi-cloud tools, multi-cloud type offerings, where you're kind of taking pieces of certain different cloud providers and basically taking what works best for you, what's price best for you, and making it your holistic view into the cloud, I guess. That makes sense. So just talking just generally about building the company. So you've raised capital for this business.

You've raised, we'll note, equity and debt capital, which is something that you've been through multiple processes here of kind of explaining what you're doing and explaining the crypto asset angle. What was it like to raise capital for a business like this, really at the bleeding edge of a couple of different disciplines? It was fun. It was stressful, I guess, to certain things. I think for the most part it was fun. I mean, I really enjoy kind of getting out and kind of telling our story. And I think fundamentally, I think we have the best team in the world to be going after this business. I think with Koli's knowledge and expertise and sort of the oil and gas industry and he has a really, really deep network there, that was really just a great component to our founding story. And then I sort of bring the expertise from the compute side of the business and the technology side of the business with my background and AI and blockchain.

related technologies. So I think when we looked at this, it always made a ton of sense just because it's a very capital intensive business. You look at, we've sort of vertically integrated the power production side of this. And we're trying to vertically integrate a lot of the Bitcoin mining process. I think a lot of people really focus on trying to get attractive PPAs with local utilities and things of this nature. We're a completely off-grid supply of power, which I think is interesting because, one, I think it enables us to really control our own destiny, but two, it adds to the robustness and stability of the Bitcoin network itself. So if you have more distributed, more diverse, more decentralized mechanisms for producing power and contributing

hash rate to the network, it creates a more secure, robust network as a whole, which is pretty cool. From that standpoint on the financing side, we have a lot of large-scale industrial equipment that we own and operate ourselves. We have large-scale power generation equipment, power transformers, and all this stuff is owned and operated by Crusoe and Crusoe employees. And a lot of this equipment, it's not unique to mining Bitcoin. So, like, if you take a large-scale natural gas-fired reciprocating engine, that has utility, whether as a backup generator for disaster relief sites,

or oftentimes it's frequently used for compression with midstream processing with gas transportation and midstream infrastructure networks, as well as kind of powering on-site pumps and wells and other things that are happening in the oil and gas industry. So lots of different use cases for these types of equipment. So for those kind of things, it really makes sense for us to fund them with equipment leases. So that's typically what we do is supposed to kind of buying them outrate with really expensive equity capital. Equity capital, we've really tried to focus on utilizing for funding the team and funding the growth and funding the core of our business, as well as some of our more experimental projects, which we're always trying to experiment to

have the next breakthrough or have the next big idea that we can really tackle. And then there's multiple different types of debt that we have at the business. We've also worked with basically a credit provider, mezzanine credit provider called Upper 90. Upper 90 has basically funded a large-scale project financing program for us, which basically enables investors to tap into the economics of our project-level economics without diluting the equity ownership of the business. So there's another area of a tremendous amount of CAPEX associated with growth and supporting the infrastructure of the Bitcoin mining network. And again, we didn't feel like it made a ton of sense to fund it entirely with equity.

So we've tried to be creative with how we manage and navigate the capital markets and trying to find the right funding type for the right application within the context of our business. It seems like you guys have been really disciplined and creative with some of those kind of capital formation choices. And I noticed that you brought on a CFO. And so that might kind of lead into this question. As you think about where this goes and sort of the bigger vision, we've talked.

about some of these other markets, protein folding, graphical rendering. How do you think about when it's the right time to press down on one of those markets versus just bringing the core product to bear with Bitcoin behind it more broadly? So you kind of have these market decisions. How do you think about that prioritizing them? So first of all, we brought on a CFO. Matt Deneza. We're incredibly excited to have him onboarded. He just brings a world-class level of experience with capital markets and with financing within the energy industry. Interesting story about Matt. Matt went to Harvard as an undergrad and did ROTC there. And when he got out, he served in the U.S. Navy on nuclear attack subs for five years.

So he has some very interesting stories to tell about just his time working undersea and just battling and managing the communication networks and all sorts of missions. that they were on in sort of the 90s. And then Matt spent about, I think, 11 years at Deutsche Bank within their energy banking team there. And he ended up leaving to join an upstream gas company called Eclipse Natural Resources. It was backed by a large energy private equity group called NCAP. He took that public, raised $800 million for them and their IPO. And he was the CFO of their public company for six years. And then he most recently was the CFO of a a midstream company called Meritage Midstream,

that's backed by another large energy private equity group called Riverstone. So that just brings a tremendous amount of energy capital markets experience to the team. And when we were thinking about our business, fundamentally, we kind of are a technology company. We're kind of an energy company. I kind of view us as an energy technology company. But from a financing perspective, we look a lot more like an energy company than we do a technology company because we have really substantial amounts of CAPEX. So it made sense to bring on board someone with a tremendous amount of experience within energy capital markets and the ability to think creatively

about how to capitalize growth for the business. When you sort of mentioned other sorts of applications and where we see kind of the time being right for that, there were certain sort of fundamental challenges that we really had to solve in order to make a lot of those things possible. I'll probably hold off on making some of those announcements to, today just because we're going to announce a couple things in a broader release here, probably at some point later this fall. But we've made a lot of exciting progress and a lot of really exciting developments there. But it's still very much in a pilot phase as far as being able to deliver those types of services to a broad base of then consumers. Well, we'll have to have

have you back on in the fall to announce these. Yeah, exactly. People always say that it's not really about the price of these crypto assets, but everyone's just in it for the technology. But I look at your business and the price of Bitcoin kind of creates really interesting strategic. I wouldn't say challenges, but the price of Bitcoin impacts your business, I guess is what I'm trying to say, because I could see just interest in this from potential buyers being elevated as the price of Bitcoin goes up. Perhaps they have some of these flaring systems on site and they're seeing, like, I could be getting paid more. So maybe the awareness goes up. And then from your side, I mean, I know that you obfuscate all of the complexity of this to the end customer,

but presumably you guys are holding some Bitcoin at a certain point. So you have some treasury that's sitting in the asset. So you could be in a situation where something on your balance sheet has gone up 3x in a short period of time. So I guess how do you think about just managing that as a company, both on the, hey, this is a really good marketing engine? And then the other side of, do you hold crypto exposure? Do you think that it's appropriate for companies to hold crypto exposure? or do you just want to hold dollar. So a lot in that question.

I'm just curious how you think about the price of these things. I think we've maybe taken a bit more of a contrarian perspective on a lot of this stuff compared to the way I think a lot of miners that are also Bitcoin maximalists sort of really think about a lot of these things. From our standpoint, really being able to achieve scale here. And as a result, sort of cost reductions that come with economies of scale, you really need to be able to underwrite this cash flow stream. And we've explored a lot of different. We're big on trying to hedge our risk as much as possible. So whether that's through, there's a lot

of interesting burgeoning derivatives markets that impact specifically the mining industry, whether it's these OTC hash power contracts that have been sort of spearheaded by BIDUDA. That's a marketplace that we're active in trying to hedge a lot of our exposure. Similar, you have, I guess like the exchange listed futures markets like the traditional exchange listed futures markets like the CME, they've been kind of a disappointment mostly because of the inability to really get any sort of leverage there. I think most clearing brokers like won't really give you much leverage. So that's kind of a disappointment. But the exchange listed options I think are an interesting approach to edging a lot of our exposure. But anyway, all of this goes to say that being able to put bounds on your expect,

cash flow stream, I think really goes a long way in terms of being able to underwrite this with cheaper costs of capital. So being able to underwrite this from a creditor's standpoint and being able to utilize that debt capital, which is non-dilutive, to really scale the business up. It's really a different way of taking leverage on the business as opposed to having all of this kind of like first factor Bitcoin exposure. Yeah, it's a great point because if you look at all, the early generation of mining companies, almost all of them are not around anymore. They were really just levered exposures to the underlying. And that's not where you're trying to build. Exactly. I think you had a lot of people engaged in the old Texas hedge where they were basically

their assets are generating revenue in Bitcoin. But at the end of the day, their CAPEX costs are all in US dollars. And in March, a lot of people say a lot of different stuff, but one of the catalysts that people have spoken pretty widely about for the crash that occurred. I forget the day March 19th or whatever day it was. But one of the catalysts was these forced liquidations for miners that had levered up by basically placing their treasury, Bitcoin as collateral, and then borrowing USD against that to buy more mining hardware. And with those kind of things, if they go sideways,

they really put you out of business. And we're trying to build something that's lasting, that's an institutional grade. that we can really build a core predictable business upon. That's a real death spiral there that you were mentioning the early days of March there with some of those unwinds. You also mentioned Beiruda. So we've had Tim Kelly on the show before.

I'm a big fan of what they're doing. And some of these OTC products really just seems like the market participants are growing up more. So as you look at sort of folks that are taking the other side of that transaction, do you see more sophistication as the years go on for those type of products? You are seeing some sophisticated investors. I think the market still lacks the liquidity that would really make it more beneficial to more miners. But to me, I think it's a great trend that you're seeing unfold in the marketplace. And the other thing I forgot to mention was the difficult futures that were listed on FTX is another great tool that's really great to see kind of that type of thing getting built and developed. But big fan of what Tim and his team are doing, they come from a more traditional commodities background space. So, it makes a lot of sense that they're approaching it in this kind of way because they've sort of seen this movie before where it was like, yeah, this is kind of how this was the transition

that took place with EMPs and upstream oil and gas companies as they were kind of like hedging their commodity price risk associated with the wells and production that they were making. So still very, very much early days, but as much as possible we try to support these types of marketplaces. So one of the things I love about your business is just that you're building a team that is incredibly diverse from the perspective of, and I'm not even just saying like racial diversity, but just diversity of the things that people are experts in. And you're at this kind of intersection of energy and financial services and crypto assets. So how do you think about building a team

in this context? And how do you think about hiring people? It's a great question because we really need to pull in very unique expertise from very disparate universes. So we have people working on very complex distributed system problems that are super cutting edge and are utilizing kind of the most recent university research. And then we also have people that have worked in the oiling gas industry just out in the field and may have been doing that for their entire career and I've been working with their hands. And so the team itself is very, very diverse, but I think each person has a very, very important role to play. And I think this really plays into, we've tried to create a values architecture that encompasses all of this and sort of encompasses this broad and very, very diverse group of people

that we've assembled. One of those values, I think, speaks to this, and that's we have this value that's tap into the collective genius. And I think what's important about tapping into the collective genius is that, like I said, each person really has a role to play there, but it's about, one, I think feeding into the system, as well as being able to leverage the knowledge of other people around you. I think each person has their personal zone of genius that was very unique compared to other members of the organization. So there's just so much that we can learn from each other as a team. And being able to sort of tap into those very unique experience set has been an incredible point of leverage for us being able to scale and grow and deliver high quality products out in the

oil field with modern cutting edge computing and distributed systems technology. That makes a ton of science. One of the really compelling things about what you're doing other than the fact that you have a great team and the product is already up and running and it's really functioning and working great is just the market opportunity. If you think about the different types of market opportunities here, so you have the fact that emissions reduction is a big thing. You have all sorts of regulatory things going in your favor.

And then you have just natural buyers here with the Bitcoin network and some of the these other big unlocks. So when you think about just describing what's happening here from an addressable market, what are the things that get you really excited of these all sorts of markets coming together, I guess? I think having this premise that's very broad, being able to unlock the value of stranded energy resources with the power of computation, it just sets such a broad mandate that there are a lot of really, really interesting things that are unfolding. The natural gas flaring problem is so big that we don't feel like our digital flare mitigation technology is going to be the only solution that makes it happen. I think it's really about a multi-pronged approach

that's going to take efforts from compressed natural gas, microscale LNG, digital flare mitigation, faster development of midstream infrastructure. But eventually, the hope is that we can make significant progress on this initiative. And the World Bank has this initiative to end routine flaring by 2030, and it's been a number of different large-scale multinational oil and gas companies have bought into it, including Saudi Aramco, a lot of the other big multinationals like BP and Shell and these other groups as well. So I think you certainly have buy-in to basically help address these issues. When we think about, okay, what are we going to do? We think about, like, we really want to put an end to flaring. It's kind of this weird thing because if there's no more flaring,

there's actually no more need for us to deploy more equipment, which was great. It's great for the environment and it's great for kind of the world that we'd be able to sort of resolve that issue. But from Crusoe's perspective, it's like, all right, what else? What's next? Like, where else can we innovate? And so for us, a lot of that comes down to being able to support a lot of the renewable efforts that are taking place. I think there's a lot of interesting ways to basically make renewable markets more economic through the power of Bitcoin mining. I think they all kind of have their unique challenges. The intermittency that you get with solar and wind and then the seasonality that you kind of get with hydro and then some other issues that you get with geothermal. But I think fundamentally there's a lot

of ways that we can sort of fit into that ecosystem. And that's really what we're excited about is basically being able to try to find a win, win, win, where we can, one, we can help the environment. Two, we can provide the world with ultra low cost computational power. And three, we can help energy companies more broadly operate more economic businesses. That sounds amazing. So I want to ask you a non-Cruso question. You mentioned at the outset that you've climbed to the top of Mount Everest, which puts you in a very small group of people in the entire world,

entire history of humans, really. So I guess my question about that is just what impact has that experience had on your life and on your career? And you must get asked a lot from people that are looking to do that for your advice to them on what that's like and how to prepare. So curious, kind of the impact that it's had and what advice you give to people that are looking to do it. Mountaineering has been a hobby of mine. I grew up in Colorado and always close to the mountains.

And I had this seventh grade teacher and her husband was this guy named Eric Weinmair. And he was a blind guy and he was a mountaineer. He's like one of the most badass people I've ever met my entire life. But he actually was the first blind person to ever summit, the seven summits, the highest peak on each continent. He's done all sorts of crazy other things like I think he did like a big river round. and trip down the Colorado River through like the Grand Canyon. He's like blind. That's like really crazy that he's able to execute these things. But anyway, he was a big inspiration for me just when I was younger and that was kind of like what instilled this dream in me. But I think

Mountaineering has a lot of interesting overlap and applications into business, life and everything else. And so much so that we actually created five company values. I talked about tapping into the collective genius earlier. But one of our other very unique company. values is to think like a mountaineer. And this extends from my personal experience and the fact that Collie and I actually, when we dreamed up the business, we were on a mountaineering trip together after I return from Mount Everest. But the whole concept of thinking like a mountaineer, it really comes down to when you're on a mountaineering expedition, there's a lot of planning that goes into it. And you have to be prepared for your plans to not go right. And I think

fundamentally, that's a great lesson to learn and really own within the context of operating a business. So we try to prepare everybody for always have a plan A, like that's what you want to do. You have a plan B that's what you'll do if you have to. And then you also have a plan C and a D in case things really go awry and things aren't going to plan. And having that flexibility to always have backup plans, I think is really, really important for safety operating in the mountains, but margin of safety while operating a business. And I think there's a lot of other things like we talk about having a mastery of your tools. So when you're climbing a mountain, those tools might be crampons, ropes, sysaxes, carabiners. Being able to utilize those tools very effectively is going to highly increase your chances of being able to reach the summit and return safely.

Similarly, in operating a business, everybody's got their own unique set of tools. In our case, whether it's our computer scientists that are focused on being able to know various network architectures or being able to know the details of various programming languages and how to write super efficient code or are rotating equipment technicians in the field that have mastery of how gas lines feed into gas generators and how large-scale gas-fire generators work, how black start engines are like all of these different tools

that they have at their disposal that really they have to become world experts in. And then finally, I think there's this element because we're working in a physical space or there actually is risk associated with it. I mean, the oil and gas industry, you're surrounded by these very potent and explosive hydrocarbon fuels, and you're dealing with large pieces of machinery, large pieces of equipment. So safety is very much embedded into the culture that we're building here at Crusoe.

So the same theme really comes from thinking like mountaineering. There's a famous saying that getting off the mountain safely is much more important than getting to the top because the mountain will always be there for you to come back. So I think the same philosophy really applies to the way we're viewing our field operations staff. Safety is always a very, very top priority for us, from the way we install electrical systems, to the training that we provide for all of our employees, to the JSAs that we do when we're on location.

And it's become a core component to our culture. So anyway, that's kind of how mountaineering has kind of influenced a lot of the way in which We're operating our business and I'm operating my life a lot. But philosophically, I think there's a lot of really cool overlaps and things you think about just from spending a lot of time in the mountains and planning these large-scale mountainary expeditions. That's amazing. Are you ever going to do it again, you think? I tried once in 2014 and we actually had to turn around. There was a large avalanche that occurred right above us and there were 15 tripas that died and sort of a really tragic incident. And after that, there was kind of a big scare, particularly for my life. And I sort of made a deal with

her. I go back in 2018. And I was kind of like my last shot. And we've since had a kid. I have an 18-month-old son now. And so she's like, yeah, you're crazy Himalayan mountaineering days are they're done. Startup is enough adventure for you, enough risk. Yeah. My new mountain is Crusoe Energy. Well, this is a great place to leave it. Where can we send people? to learn more about Crusoe and to stay in touch. You can check out our website,

crusoe.com, CRU, S-O-E. I didn't mention this, but a lot of people ask us about where the name Crusoe energy came from. And it's named after the character Robinson Crusoe. And it really plays into our philosophy. Robinson Crusoe was trapped on a desert island and he had to be innovative with resources in this stranded location in order to survive.

And we're basically trying to channel that same innovation. towards stranded energy resources and how we can really unlock the value and the potential of these stranded energy resources to enable innovation and cheaper cost to computation. So that was kind of the genesis of that. But anyway, if people want to learn more about the business, crusoeenergy.com, we have an info ad email. Feel free to shoot us a note there. Apart from that, probably the best mechanism.

Well, this has been really amazing. I think what you guys are doing is on the bleeding edge of so many different disciplines here. So really excited to see where you take it. Thanks for joining us today. Cool. Thanks for having me, Matt. Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island.

To listen to all of our podcast episodes, please go to On the Brink dashpodcast.com or just click on the tab in our website. Thanks for listening.