Mar­ket Watch

The oil and gas in­dus­try pre­sents a par­tic­u­larly com­pelling op­por­tu­nity to lever­age blockchain tech­nolo­gies due to the high trans­ac­tional val­ues and eco­nomic pres­sures to re­duce costs

Oil and Gas - - CONTENT -

Oil and Gas com­pa­nies op­er­ate in dy­namic and com­plex en­vi­ron­ments, where they face con­stant chal­lenges es­pe­cially in terms of sup­ply and de­mand. Now with the oil prices at his­toric lows, the time has come to eval­u­ate and adapt new tech­nol­ogy. When the price of crude oil is low, the high cost of up­stream oil ex­plo­ration and de­vel­op­ment cou­pled with down­stream ef­fi­ciency chal­lenges forces most com­pa­nies to re­duce costs. The oil and gas in­dus­try pre­sents a par­tic­u­larly com­pelling op­por­tu­nity to lever­age blockchain tech­nolo­gies due to the high trans­ac­tional val­ues and eco­nomic pres­sures to re­duce costs. A se­cure sys­tem that mit­i­gates risk, in­creases trans­parency, pro­vides an au­dit trail, and speeds up trans­ac­tions at a sig­nif­i­cantly re­duced cost may be ap­peal­ing to oil and gas com­pa­nies.

Blockchain is a dis­trib­uted trans­ac­tion-ledger data­base shared across tra­di­tional bound­aries. The seam­less­ness of shar­ing a con­stantly up­dated, sin­gle source of the truth is one of the dig­i­tal tech­nol­ogy’s pri­mary strengths. The ex­pand­ing chain of “blocks” of dig­i­tal data pre­serve ev­ery fol­low-on ac­tion by par­ties who have played roles in sourc­ing, pro­duc­ing, trans­port­ing, in­stalling, trad­ing and re­selling oil and gas prod­ucts. Af­ter busi­ness rules have been en­coded, blockchain helps elim­i­nate the need for hu­man in­ter­ven­tion to val­i­date and rec­on­cile the data.

One of the most ob­vi­ous and pow­er­ful uses for the dig­i­tal ledger tech­nol­ogy is to pro­vide a reliable and ef­fi­cient plat­form for ex­e­cut­ing and record­ing en­ergy trades. The en­tire non-hy­dro­car­bon sup­ply chain could be trans­formed with blockchain. The in­ter­ac­tion with thou­sands of sup­pli­ers, ven­dors and coun­ter­par­ties drives up com­plex­ity and cost but blockchain could help com­pa­nies mon­i­tor com­pli­ance from their sup­pli­ers. Ad­di­tion­ally, the in­tro­duc­tion of smart con­tracts, which are es­sen­tially com­puter code stored on blockchain that can ex­e­cute ac­tions un­der spec­i­fied cir­cum­stances, should give oil and gas ex­ec­u­tives’ greater in­ter­est to im­prove their sup­ply chain and fi­nance ac­tiv­i­ties. Smart con­tracts en­able counter-par­ties to au­to­mate trans­ac­tion tasks that are typ­i­cally per­formed man­u­ally and that re­quire the in­volve­ment of third-party in­ter­me­di­aries. Smart con­tract tech­nol­ogy can re­sult in pro­cesses that are faster and more ac­cu­rate and cost ef­fi­cient. Also, the par­ties to a smart con­tract agree to be bound by the rules and deter­mi­na­tions of the un­der­ly­ing code, which in the­ory should lead to fewer con­tract dis­putes.

Joint ven­tures are com­mon in the oil and gas in­dus­try and gen­er­ally re­quire a suite of com­plex agree­ments, which could be im­ple­mented as smart con­tracts. Most con­tracts con­tain au­dit clauses giv­ing the par­ties the right to au­dit each other to make sure that all par­ties are com­ply­ing with the con­tract. In­tro­duc­ing a blockchain ledger to record joint ven­ture

trans­ac­tions and us­ing smart con­tracts to de­fine, ne­go­ti­ate, and ex­e­cute the con­trac­tual con­di­tions will pro­vide all in­volved par­ties, in­clud­ing the tax au­thor­i­ties, with trans­parency and con­sen­sus on what has oc­curred. This sin­gle au­dit trail, agreed upon by all par­tic­i­pants, will sig­nif­i­cantly re­duce the ef­fort needed to en­sure timely tax com­pli­ance and re­port­ing, as well as the ef­fort needed by the tax au­thor­i­ties to un­der­stand tax po­si­tions.

Global sup­ply chains in the oil and gas in­dus­try com­prise a com­plex web of sup­pli­ers, ship­pers, and con­trac­tors. The com­plex­ity and scale of this net­work re­quires sub­stan­tial ad­min­is­tra­tion and cre­ates op­por­tu­ni­ties for er­rors. From the tax au­thor­i­ties’ and cus­tomers’ per­spec­tives, there also is a con­cern that sup­pli­ers might ma­nip­u­late in­voice val­ues, po­ten­tially avoid­ing taxes or in­flat­ing costs, as goods are sold and shipped around the world.

Util­is­ing blockchain tech­nol­ogy to record and man­age the move­ment of goods and re­lated in­voices will sig­nif­i­cantly mit­i­gate the risk of er­rors and the op­por­tu­nity to al­ter in­voice val­ues or re­cip­i­ents. Goods will be tracked from source to cus­tomer, re­duc­ing time and costs, and pro­vid­ing in­sight into the sup­ply chain process that could be used to cre­ate ef­fi­cien­cies. In­voices will be recorded in the blockchain, creat­ing an im­mutable record of its con­tents. The move­ment of in­voices also can be ad­dressed in the blockchain us­ing pub­lic and pri­vate keys, pre­vent­ing un­ap­proved par­ties from ac­cess­ing the in­voices. This again could help to re­duce the ad­min­is­tra­tive bur­den on com­pa­nies to re­port trans­ac­tions to au­thor­i­ties and re­duce the time taken by tax au­thor­ity au­dits be­cause of the re­li­a­bil­ity and trans­parency of data in the blockchain.

Op­er­a­tions and Main­te­nance, Qual­ity con­trol per­son­nel have a real need to track where as­set com­po­nents came from, us­ing which man­u­fac­tur­ing ac­tiv­i­ties and which heat-treat­ing pro­cesses. Blockchain has the ca­pa­bil­ity to help track all re­lated com­po­nents and as­sets, and to share records among busi­ness part­ners. It pro­vides a frame­work for reg­is­ter­ing con­trac­tors, track­ing per­for­mance and re­li­a­bil­ity. A blockchain could be used, for ex­am­ple, to track which sup­pli­ers pro­duced the com­po­nents and sub­com­po­nents for a blowout pre­ven­ter (BOP). If a cer­tain com­po­nent breaks down, the op­er­a­tor could con­sult data in the chain to de­ter­mine when, where and by which com­pany the com­po­nent was pro­duced. Man­u­fac­tur­ers might ex­am­ine the data to see if main­te­nance—fre­quently out­sourced—was per­formed as rec­om­mended. As an in­creas­ing num­ber of as­sets are com­put­erised, blockchain tech­nol­ogy also could help to keep track of soft­ware up­dates to pro­tect In­ter­net of Things de­vices so as to avert sab­o­tage and po­ten­tial dam­age from cy­ber­at­tacks.

In ad­di­tion, us­ing blockchain, the op­er­a­tional per­for­mance of a crit­i­cal as­set or equip­ment can be tracked based not only the cost of the equip­ment but also the cost of all as­pects of the per­for­mance life­cy­cle—in­clud­ing main­te­nance, op­er­at­ing costs, up­time, down­time, etc. Once a ser­vice-level agree­ment has been de­ter­mined and coded in the sys­tem, sensors could com­mu­ni­cate to the block chain, and per­for­mance fac­tors would de­ter­mine pay­ment amounts (in­clud­ing bonuses or penal­ties).

Within the power in­dus­try, blockchain can be a real dis­rup­tor in the fol­low­ing ap­pli­ca­tions

En­ergy trad­ing and process op­ti­mi­sa­tion. Blockchains can fa­cil­i­tate trad­ing of en­ergy by al­low­ing for a faster set­tle­ment, re­duc­ing trans­ac­tion costs and risks.

Grid man­age­ment. The com­bi­na­tion of smart de­vices and blockchains will al­low the grid to self-reg­u­late by au­to­mat­i­cally trig­ger­ing ac­tions such as cur­tail­ment, re­dis­patch, de­mand-side man­age­ment, and pro­duc­tion/storage from bat­ter­ies.

Re­new­able fund­ing. Blockchain pro­vides a fast, se­cure, and uni­ver­sal so­lu­tion to fi­nan­cially sup­port re­new­able en­ergy de­vel­op­ments. It opens re­new­ables own­er­ship to ev­ery type of in­vestor, ei­ther through di­rect in­vest­ment or through the use of crypto–guar­an­tee of ori­gin (GoO) (e.g., So­larCoin).

Small-scale peer-to-peer (P2P) trad­ing. Blockchains can cre­ate a fric­tion­less mar­ket­place, al­low­ing the ex­change of power be­tween con­sumers by re­duc­ing trans­ac­tion costs, re­mov­ing in­ter­me­di­aries, and fa­cil­i­tat­ing billing pro­cesses. This new trans­ac­tion frame­work is cur­rently used for power sup­ply and elec­tric ve­hi­cle (EV) charg­ing.

Go­ing for­ward, we re­alise that even though some of the best tech­no­log­i­cal best prac­tices have trick­led through the en­ergy in­dus­try, there is al­ways still scope for fur­ther im­prove­ment. Us­ing blockchain, the oil and gas in­dus­try can see re­duc­tions in cost of man­ag­ing com­plex fi­nan­cial agree­ments, such as those gov­ern­ing roy­al­ties and pay­ments, im­prove­ment in trans­parency through their sup­ply chain, re­duc­tion in trade fi­nance costs, and ul­ti­mately greater re­spon­sive­ness to chang­ing mar­ket con­di­tions. Effective de­ploy­ment of per­ti­nent blockchain tech­nolo­gies is the way for­ward for the oil and gas com­pa­nies to re­duce costs in this era of low oil prices and to fo­cus on oil and gas pro­duc­tion and ex­plo­ration in the most op­ti­mised way. It will be re­ally in­ter­est­ing to see how blockchain adop­tion evolves in the en­ergy in­dus­try and the ram­i­fi­ca­tions of blockchain for the en­ergy and oil and gas in­dus­try in 2018.

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