In Roy Flowers v. Persist Oil and Gas Inc., the Court of King’s Bench of Alberta issued a permanent injunction precluding the defendant from operating a Bitcoin mining operation, based on the failure of the underlying lease agreement to allow those operations.
Background
The plaintiff was the fee simple owner of land under which the defendant was assigned a lease that consisted of a 3.14-acre oil and gas compressor site and access road. The lease agreement allowed the leased premises to be used for “any and all purposes and uses as may be necessary for the exploration, development and production of oil, gas, related hydrocarbons or substances produced in association therewith….” The initial term of the lease was 10 years with a renewal period, which ended on November 12, 2019. The defendant attempted to negotiate a further renewal of the lease but was unsuccessful, and the parties never agreed to a renewal.
In April 2021, the defendant brought onto the leased premises two 1-megawatt gas generators, computers and other equipment for the purpose of mining Bitcoin using natural gas available from the compressor (the Mining Operation). The defendant had been using the Mining Operation intermittently when natural gas prices were low.
The Decision
Ultimately, the court held that the lease did not expire by operation of section 144 of the Environmental Protection and Enhancement Act, which provided that the lease agreement remained valid and operable until a reclamation certificate had been issued. Moreover, the court held that the defendant’s right to continue in possession of the leased premises was supplemented by a right of entry order previously granted by the Land Property Rights Tribunal.
That said, the court held that based on the plain and ordinary literal meaning of the permissible use provisions in the lease, it did not allow a Bitcoin mining operation since, among other reasons, such a mining operation was not in the same category or genus as an operation producing oil, gas, related hydrocarbons or substances produced in association with that. The court rejected the defendant’s argument that the Mining Operation was one of several options that may be used to make a profit from its natural gas production and was permissible. The court reasoned that by using the metric of any activity which produced a profit, a cannabis growing operation would be allowed, which was obviously not permitted.
While the plaintiff’s claims of trespass and nuisance were rejected, the court determined that the appropriate remedy was a permanent injunction. It found that the plaintiff’s legal rights were breached given the finding that the Mining Operation was not a permitted use under the lease and that an injunction was appropriate given that damages would not be an adequate remedy in the circumstances. One consideration in reaching that conclusion was the fact that the county authority expressed its view that the Mining Operation was not in compliance with the applicable land use bylaw and that proceedings could be commenced against the innocent plaintiff as a result.
While the court dismissed the plaintiff’s claim for disgorgement of profits from the Mining Operation, the court held that the plaintiff was entitled to damages as a result of the defendant’s breach of the lease agreement in a sum which the plaintiff might reasonably have demanded for allowing the defendant to bring the Mining Operation onto the plaintiff’s lands until the time it was removed. The court held that such evidence quantifying those damages were not before it, so it would require a trial if the plaintiff wished to pursue that claim.
Conclusion
It is interesting to note that this matter proceeded based on both parties agreeing that a trial was not necessary and the matters could be decided in a summary fashion. While the decision turned on the specific language of the lease, it illustrates the many legal issues which arise in connection with cryptocurrency mining on oil and gas leases.
For more information, please contact the authors or any other member of our Litigation & Dispute Resolution group.
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