Blockchain’s future in oil and gas

Oil and gas companies could derive many benefits from blockchain technology, from enhancing efficiency and transparency to more securely storing and managing data.

The oil and gas industry is no stranger to technological innovation in field operations. Hydraulic fracturing, 3-D seismic mapping, and other operational innovations are hallmarks of its growth. However, technology that improves and refines back-office functions has lagged. Companies have generally been slow to incorporate new digital technologies into trading, supply chain, procurement, and finance.

Distributed ledger technology, commonly known as blockchain, is making inroads across many industries. To date, though, the technology has had little effect on the oil and gas industry, providing a small frame of reference for leaders to adequately assess its current and future value. Some oil and gas executives already recognise blockchain’s potential for reshaping and simplifying transactional processes, which can lead to enhanced efficiency and reduced cost when transferring value between entities. Others, however, express concern about the immediate need, unsure whether future benefits outweigh risk and investment demands. And many have little or no knowledge of the possibilities.

Meanwhile, in recent years, the industry has struggled with price volatility and record production levels, which has often led to massive cost-cutting efforts, reduced exploration, and layoffs. These challenges have prompted many companies to drastically rethink how they operate and to identify innovative ways to improve transaction processing. Blockchain can fundamentally change the way certain processes are performed. For example, transactional verification for product trades and transfers can be instantly verified across a network without reliance on a central authority— potentially reducing operating costs, more securely storing and managing data, and improving the speed of transaction processing.

Technology executives in oil and gas companies can consider the following four areas in determining whether and how blockchain technology could benefit their companies:

Transparency and compliance

Blockchain, by design, should enable greater transparency and efficiency. Sharing digital blockchain information in joint operating agreements could reduce, if not eliminate, the need for reconciliations between companies and for data hubs controlled by third parties. The current processes for balloting partners on new projects, performing joint interest billing, and reporting production revenue could be completely disrupted.

Additionally, employing blockchain-enabled data-sharing technology and frameworks such as MIT’s proposed Trust::Data Consortium could dramatically reduce compliance costs and increase the speed of decisionmaking. Enabling more transparency in production reporting and royalty reporting for U.S. companies’ submissions to the U.S. Department of the Interior’s Office of Natural Resources Revenue could also prevent significant fines if misreporting occurs.

Cyberthreats and security

The flip side of anticorruption and transparency is data protection, specifically the use of new technology to ensure critical information remains safe. Internet of things-connected sensors can gather and provide critical information, such as real-time conditions for an undersea oil field operation, but these sensors are currently among the most insecure areas of a company’s network. Even a company’s core IT functions are vulnerable to hacking.

Solutions built on blockchain can aid in these areas. MIT ENIGMA, for instance, was designed to be more secure than existing solutions for storing and encrypting sensitive data such as biometric identity in tiny fragments. Storing data in fragments at multiple sites, rather than concentrating it in one place, also raises the prospect of enhanced data security even without a fully encrypted system.

Smart contracts

The sheer size and volume of contracts and transactions to execute capital projects in oil and gas have historically caused significant reconciliation and tracking issues among contractors, subcontractors, and suppliers, with significant challenges in managing logistics for supplies, tracking costs, and deploying inventory.

Using blockchain, companies could generate cascading purchase orders, change orders, receipts, and other trade-related documentation and data on inventory by fol- lowing specific codified rules. Drafting agreements that afford new tracking, bookkeeping, and automation methodologies could create a more efficient supply chain, improve capital project spend analytics, and simplify contractual obligations. Simply put, knowing who gets paid what, why, and where; who is owed money; and who along the chain is performing as explicitly mandated by agreements is potentially game changing.

Trading and third-party impacts

Blockchain technologies are beginning to disrupt and open up energy trading markets. Boundaries between asset classes could blur as cash, energy products, and other commodities become digital assets trading interoperably. Blockchain-enabled applications also can address issues such as removing or lessening brokers’ fees; reducing fraud, error, and otherwise compromised transactions; and limiting credit risk and transaction capital requirements. By trading physical commodities on a blockchain solution, commodity traders could benefit from increased speed of exchange, improved availability of data, and enhanced reliability and auditability as records are verified in near real-time. Ultimately, this could result in minimising transaction backlogs and overall costs. ***

In the oil and gas industry, with its global reach, its complexity, and its dizzying array of national regulations and restrictions, simplifying and improving the paperwork and processes of global product movement is a high priority. With a compelling value proposition, many oil and gas companies may look to explore, invest in, and collaborate with partners on developing blockchain initiatives. For more information, please visit www.deloitte.com/mt/ blockchain