Blockchain’s promise of efficiency and security for commodities trading
The value of nascent blockchain technology to be applied to established commodities markets remains a hot topic as we move through 2018.
Forward-looking commodities trading companies are looking carefully at their dusty old processes through the lens of digital disruption. Distributed ledger technology, often used interchangeably with “blockchain”, promises potential to improve efficiency and security in back office functions such as clearing and settlement.
However, in oil markets, the first fully-fledged live commercial deployment took place at the UAE’s Port of Fujairah last month. S&P Global Platts partnered with Fujairah Oil Industry Zone, FEDCom and the 11 terminal operators that use the flagship Middle East facility. They created a full audit trail to collate weekly inventory oil products storage data at the home of the Middle East’s largest commercial storage capacity for refined oil products. It also shows the potential for this revolutionary technology to drive changes in energy markets, as a direct replacement for outmoded legacy processes.
The proactive steps taken by the Government of Fujairah to invest in the latest cutting-edge infrastructure while encouraging greater transparency are key requirements to becoming a global trading hub. This future oriented approach makes the port a robust inaugural physical environment for blockchain to prove its value. The early signs are positive. The emirate’s port is the world’s second-largest bunkering hub, lying 70 nautical miles south of the Strait of Hormuz, the world’s most critical strategic choke point by volume of transit at around 18.5 million barrels per day in 2016, according to the US Energy Information Administration.
Comparatively, the Strait of Malacca takes second place with 16 million bpd. As of Wednesday, March 21, total oil product stocks in Fujairah stood at 17.662 million barrels according to FedCom. A growth trajectory is justifiably expected. BP
Outlook expects the Middle East to remain the largest oil producer and the second largest gas producer up to 2040, accounting for more than 34 per cent of global liquids production and 20 per cent of gas production.
Fujairah’s venture raises a simple but significant question: where next? Advocates of the blockchain revolution will likely rise in 2018 as Middle East energy entities seek to sharpen their financial and digital reputation on the global stage, especially amid the rise of well-equipped ports along the Indian Ocean’s coastline and intensifying competition for coveted Asian energy assets.
There is also strong interest from market participants in the North American gas markets, for example, where compliance and filing of regulatory commodities flows is currently manual, and therefore more prone to error. Plus, energy majors BP, Shell and Statoil plan to co-develop a blockchain-based digital platform for energy trading by the end of this year. The investor group including trading houses Gunvor, Koch Supply & Trading, and Mercuria, plus banks ABN Amro, ING and Societe Generale, explained in a joint statement last November, it aims to “modernise and transform post-transaction management of physical energy commodities trading”.
There is also a lot more mileage to explore in Fujairah’s evolution to becoming fully digitised. There is potential to scale the launch of blockchain in areas such as digital contracts and digital networks centred on how to digitally record title and ownership of material in storage on this blockchain.
In Fujairah, facilities that allow tank-to-tank transfers of refined products use cutting-edge pipework, monitoring and sensor technology, but they still rely on manual and time-consuming paperwork. Therein lies a dichotomy between old and new, which blockchain could erase by consigning the passing of PDFs between departments to the history books. Digitising this process could allow for drag and drop transfer of title between counter parties – a holy grail in commodities trading.
Public confidence in this “newage” technology will take time. A concerted effort to galvanise Middle East energy entities’ appetite for change is well under way. While up to date, blockchain is the latest instalment in an ongoing process of digitisation that has been shaping manual processes since the 1960s, but importantly offers a genuine breakthrough moment. Digital tools under the umbrella of the Fourth Industrial Revolution largely focus on making manual tasks more efficient, while blockchain can mean rewriting the status quo entirely.
A blockchain’s network of registered computers continually validates transactions, building blocks of transactions that are then permanently entered in the ledger. Nobody can change the ledger, it is immutable. It can be shared with all members at all times and is not stored in one central place, which reduces the risk of cybercrime.
The latter is pertinent; the world’s new and invisible hackers are fast gaining influence. Two-thirds of the 2 billion people online have had their personal information stolen or compromised, according to estimates in a report by the Centre for Strategic and International Studies and McAfee in February this year.
Cybercrime may now cost the world almost $600 billion – nearly 1 per cent of global GDP. Inevitably, hackers will continue to target the lucrative “hauls” of the energy markets. Total energy investment worldwide in 2016 alone was just over $1.7 trillion, according to the International Energy Agency.
Blockchain is here to stay; market participants are excited about the efficiency gains and regulators are keen on the security and immutability of audit trails. As global energy markets get busier, the value of simplification and cyber-safety of blockchain will only become more alluring.
Keeping pace with digitally savvy competitors and hedging against cyber threats means priming your revolutionary digital muscles now.
The first fully-fledged live commercial deployment took place at the UAE’s Port of Fujairah last month. It will create a full audit trail to collate weekly oil inventory