Blockchain, the technology behind Bitcoin, seems to steadily remove itself from the somewhat controversial realm of cryptocurrencies and provide real world value to businesses and multiple industry sectors.
Market trends and the considerable amount of founds invested by giants such as IBM, JP Morgan Chase and Microsoft, in researching blockchain, demonstrates that the hype behind this technology is built on a solid foundation. On a similar note, Klaus Schwab, Founder and Executive Chairman of the World Economic Forum described blockchain in his book, The Fourth Industrial Revolution as “a shared, programmable, cryptographically secure and therefore trusted ledger which no single user controls and which can be inspected by anyone”. The same book encompasses a survey of 800 executives which highlights the fact that 58% of them believe that up to 10% of the total global GDP will be stored using blockchain technology in the near future.
The major actors of the Oil and Gas industry seek to harness the potential of blockchain technology to cut down on operational time and costs, add a new layer of transparency and replace industry legacy systems with an innovative blockchain-based framework. Efforts towards integrating blockchain in this sphere of activity are already taking place. February 2019 has witnessed the creation of the first Blockchain Oil and Gas Consortium in the United States composed of giants of the industry such as Chevron, ConocoPhillips, Equinor, ExxonMobil, Hess, Pioneer Natural Resources and Repsol. Rebecca Hofmann, chairman of the board of directors of the consortium, outlined that the “Oil & Gas Blockchain Consortium is a significant step towards establishing key blockchain standards, frameworks and capabilities for the oil and gas industry”, mentioning also that “blockchain technology is a catalyst for re-imagining the way we do business and this consortium represents a collaborative effort to explore the technology’s potential and leverage learnings to drive industry adoption.”
The Oil and Gas Blockchain Consortium is structured around four main objectives:
– Learn, and leverage the emerging blockchain technology for the oil and gas industry by evaluating the technology and completing proofs of concept
– Evaluate the benefits and applicability of the technology in the industry, including faster transactions, increase security, lower costs and reduce dispute incidence
– Promote blockchain adoption through industry standardization of data, processes, security and compliance
– Drive standard setting through industry alignment on key blockchain components including, governance structures, smart contract parameters, and consensus protocols
Challenges faced by the Oil and Gas industry
The oil and gas industry is approaching a crossroads, as countries from all over the world are implementing new measures in an effort to reduce the level of carbon emissions, while actively searching for greener alternatives. This change in mentality further puts pressure on an industry which must cope with an outdated infrastructure, while facing a myriad of challenges which can result not only in financial loss but also in severe environmental damage.
From an internal back end perspective, the oil and gas industry is plagued by numerous inefficiencies:
Energy transactions are highly complex operations which frequently involve a wide range of documents and orders such as purchase invoices, shipping documents, bank release funds, etc. which most of the time act as a bottle neck which increases time and costs required
Transparency is a core value of the domain, but the current infrastructure isn’t able to properly ensure it. Industry players are required to invest time and effort to guarantee that all documents are in place and easy to access by every stakeholder. Furthermore, these documents often include compliant documents, audits and associated paperwork which ads another layer of complexity
Big oil companies are required to administrate an extremely complex supply chain network which encompasses multiple parties ranging from shippers, suppliers, and customers
Due to the large scope of the operations involved, oil and gas contracts frequently involve complex payment structures such as cross-border transactions which require the involvement of third parties to intermediate the process who charge additional fees for their services
A shift towards blockchain
Companies are actively searching for a way to tap into the transformative properties of blockchain technology, to streamline operations and increase productivity. But not every type of blockchain is the same, and enterprises, businesses, including the oil and gas industry could benefit from a private blockchain. As the name implies, a private blockchain is owned by a private entity (or a consortium of companies), where external entities can join the network only if they receive permission from the owner to join. Compared to public blockchains which are more suited for applications such as cryptocurrency, private blockchains are computationally less expensive, faster and the identity of each participant is known. This makes them more suited for enterprises and industries as they create a private network, where each participant has access to immutable transaction records which can be accessed only by authorized parties. Compared to a traditional database system, blockchain is designed to be an append-only structure, which means that users can only add more data. The immutability of the data means that once it has been introduced into the network, it cannot be altered or deleted.
Digitizing crude oil transactions
As we have mentioned at the beginning of the article, in February 2019, the first U.S Blockchain Oil and Gas Consortium has been created with the goal to examine how blockchain can be successfully integrated into the industry. But this is not the first blockchain initiative in this domain. In 2017, Natixis, a French corporate and investment bank was the first private entity to pioneer a blockchain solution in commodity trade for US crude oil transactions. Built on the Linux Hyperledger, the platform digitizes crude oil transactions with blockchain, which reduces friction costs while adding an additional layer of transparency and security. The platform brings all trading parties, namely the buyer and seller along with their respective banks on the same digital ledger.
The advantage of this type of structure is that it brings forth unparalleled levels of transparency to a previously opaque industry, as all the details and documentation pertaining to a transaction become visible to everyone. Besides revitalizing the record keeping mechanism, the distributed nature of the blockchain platform as well as the immutability of the data introduced in the network act as a barrier against fraud, external tampering, and cybercrime. A platform shared across multiple organizations can be a huge step towards standardization of data formats, which increases efficiency exponentially as it enables data interoperability and process integrity.
On a similar note, 2018 has seen a significant shift in the oil and gas industry, with the creation of VAKT. Composed of nine of the largest energy industry giants BP, Shell, Statoil, Gunvor, Koch Supply & Trading, Mercuria, ABN Amro, ING, and Société Générale, the consortium is focused on researching and implementing viable blockchain solutions to change the face of the oil and gas industry.
Ensure trust between parties
Distribution, decentralization, transparency and data immutability makes blockchain an ideal environment for storing transaction data, employee track records, and contractor certifications and sensitive information. Trust is ensured by the system, as there is only a single version of the truth which can be accessed at any given moment by every member of the network. Quick and easy access to information means that any eventual dispute can be resolved in a matter of minutes not days with minimal costs.
The energy trading operations are highly convoluted and usually segmented into three stages. The upstream process refers to resource exploitation and extraction, the midstream process that involves transportation of crude or refined oil to refineries and the downstream process, where crude oil is and natural gas is processed into products destined for end-consumers. Obviously, this is a gross simplification of the entire process, but the goal is to illustrate the complexity of the operation as well as the large number of people involved, ranging from energy producers to shippers, suppliers, transporters, regulators and settlement providers. Such a vast network of individuals and operations can easily succumb to external pressures owing to lack of data visibility, legal disputes, and settlement delays. A blockchain infrastructure can link all the data of the supply chain, enabling a transparent environment where products can be monitored during each stage of production or shipment. Furthermore, blockchain paired together with smart contracts can add a layer of automation to the whole process which translates to increased productivity and reduced costs.
Regardless if it’s onshore or offshore, the oil and gas industry is subjected to rigorous regulation with protocols deriving from various regulatory authorities from environmental to taxation. This intense verification process often spans a period of months due to the complicated paperwork involved. A blockchain platform can enable real-time data sharing and transparency with regulatory authorities to help resolve convoluted issues in a matter of days.
Streamline land record management
It’s imperative for oil and gas companies to properly manage land records, as millions of dollars worth of investments and profits rest on these documents. Traditionally, the process is straight forward, once the terms of the sale are agreed upon, the records change hands along with the money. But there are cases when ambiguous records make it difficult to determine who owns the property, not to mention that forgery is a real issue faced by the real estate industry. Countries such as India, Sweden, Columbia, and Georgia are researching blockchain technology to create platforms which can store records of sale and land titles and create an immutable audit trail of property ownership which can be accessed in real time to clarify disputes and give tax authorities accurate land titles when requested.
Enhance data storage
The oil and gas industry relies on Internet of Things (IoT) to store equipment history records, monitor operations and increase efficiency. IoT functions as an interconnected network of devices which communicate with each other over the internet. The problem is that the current IoT systems rely on a centralized model of communication similar to a legacy server-client system. A centralized structure creates a single point of vulnerability which can be exploited by malicious individuals, or become the subject of corporate espionage. This vulnerability can be easily mitigated by storing equipment history records on a blockchain network. By definition, blockchain is a digital, decentralized distributed network which stores data on various nodes that compose the network. Information is stored on every node present on the network, which mitigates the vulnerabilities of a centralized model while ensuring that data dependency, immutability, and cryptography make the system impervious to external tampering.
Evidence points out that blockchain technology can provide viable solutions for multiple businesses, including the oil and gas industry. The fact that giants of the industry are collaborating with the sole purpose of researching and applying proof of concepts indicates that the hype behind blockchain has a solid foundation. Integrating this technology into the oil and gas industry seems like a rational step towards revitalizing this sphere of activity.