Blockchain has been the subject of much hype recently, with almost every industry proposing its use in various scenarios. From the financial industry to the public sector, blockchain seems to hold answers for many of the problems these industries face.
However, this eagerness to promote blockchain as a panacea for all multi-party transactions is also the very thing that could damage its long-term prospects. For many situations, blockchain could be overkill, and many multi-party scenarios can be tackled through conventional technologies such as cloud and distributed database.
Nonetheless, blockchain is a viable option for situations that require shared write access when the interests of the parties involved are not well aligned—for example, in the oil and gas industry.
In this article, I’ll explore the business impact of blockchain across the hydrocarbon value chain.
Blockchain technology – beyond the hype
In a forecast on blockchain’s business value from 2017-2030, Gartner estimates the value-add of blockchain to grow to more than $176 billion by 2025 and to exceed $3.1 trillion by 2030. The worldwide blockchain market could reach $5.43 billion (€5 billion) by 2023, up from $228 million (€210 million) in 2016, according to a study by Allied Market Research (AMR). Most of that market comprises the private blockchain, and AMR doesn’t expect that to change anytime soon.
According to the Gartner Hype Cycle, blockchain is already ahead of many other emerging technologies in terms of expectations, and it is expected to plateau in the next 5-10 years.
As a technology concept, blockchain describes an immutable, distributed database structure. A blockchain implementation provides a platform for multiple parties to transact with one another without the need for third-party validation, creating a ledger of records that is by design more secure and trusted than other approaches. Its architecture enables decentralized, secure, direct, and digital transfer of values and assets.
When to use blockchain
Distributed ledgers consist of replicated, shared digital data spread across multiple sites, countries, or institutions with no central administrator or centralized data storage. By distributing the ledger, no single party has the entire transaction record, and there is a platform that every party can connect to.
Some of the key requirements of blockchain as a technology platform include:
- Shared repository: A shared repository of information is required to be accessed by multiple parties
- Multiple writers: More than one entity generates transactions that require modifications to the shared repository
- Minimal trust: A level of mistrust, or limited trust, exists between multiple entities that generate transactions and access the shared repository
- Intermediaries: One or more intermediaries or central gatekeepers is present to enforce trust
- Transaction dependencies: Interactions or dependencies between transactions are created by different entities
It’s not necessary to have all the above conditions for a viable blockchain use case; just a few could suffice.
Why blockchain for oil and gas companies?
The oil and gas industry is characterized by heavy investment and cooperation among multiple parties, especially on the upstream side. Even midstream and downstream, however, there are often ownership changes, transactions, and information exchanges taking place across multiple companies. This is due to the inherent trading nature and bulk movement of various commodities comprising of gas, crude oil, refined products, and petrochemicals.
These characteristics make the industry a good candidate for blockchain, at least in those areas where there is a change of ownership, sharing of expenses, and multi-party collaboration. The industry’s stringent regulatory requirements and the need to share information with governmental bodies adds another dimension that makes distributed ledger technology like blockchain relevant.
Blockchain use cases for oil and gas industry
While blockchain can be used in many scenarios, it is important to focus on those where:
- There is a large volume and high frequency of transactions
- Monetary considerations involved are on the higher side
- Cross-border entities are involved
- Information from previous transactions is of use for the next transaction or to next entity
Some of these use cases are discussed here.
1. Joint venture accounting and management
This scenario involves multiple parties, including operators of producing assets, non-operator joint venture partners, governments, and banks. At an organization level, this process is automated through joint venture management solutions; however, since data must be shared across other entities, blockchain is a good fit.
Some challenges in the joint venture process include:
- Tracking and processing of associated shared expenses and distribution of auditable accounting ledgers across various parties in the joint venture network
- Joint venture partners relying on individual systems to capture and record events and related costs that must be allocated across partners
- Joint venture accounting is currently vulnerable to manipulation and/or errors and susceptible to prolong reviews between entities before acceptance
From the blockchain point of view, the aim is to create a distributed ledger to digitize joint venture bill generation, distribution, and acceptance processes with electronic authorization for expenditure (AFE) consent tracking across operators and non-operators. Operators can integrate their systems with a blockchain platform to upload transaction details, which are pushed through rules based on contracts to non-operators. These operators can integrate to the platform to draw transaction details and receive notifications regarding required payments, which can be approved, driving an automated payment to the operator.
Smart contract creation over a permissioned private blockchain with relevant rules would be required to make this process work. This can essentially drive the following benefits:
- Transparency of the distributed billing ledger
- Immutable shared audit ledger to reduce efforts and time to verify operator charges
- Fewer errors associated with disputes, fraud, reconciliation, and settlements for operators and non-operators
2. Trading and quality management
Trading is one of the most common transactions in the oil and gas industry. Crude oil, petroleum products, natural gas, and petrochemical products are traded across entities, involving multiple different parties, like surveyors, shipping agents, and others. As a process, trading includes many manual processes to validate quality monitoring, payment, and more.
Because dependencies on multiple parties and on quality parameters need to be certified by various entities, blockchain can be a good platform to bring transparency and a distributed ledger, where data points, information, and transaction details can be stored for verification by all entities. Creation of a smart contract for the trading contract between parties on the blockchain with accessibility to other parties is one possible solution. Other entities, like surveyors and shipping agents, can update information against this smart contract as the nodes of a permissioned private blockchain. It is also possible to integrate with the underlying enterprise financial systems, which can trigger the payment.
The following benefits can be driven through the use of blockchain:
- Decreased manual efforts through automation
- Reduced reconciliations and disputes
- Delays in the process due to want of data and documents
3. Project collaboration and management
Large multi-million-dollar oil and gas installations involve multiple parties, including oil and gas companies, EPC companies, design and engineering firms, and many subcontractors. Handing projects to operations should include all relevant documentation, but this is often incomplete and difficult due to project complexity.
A possible use case of blockchain would be to leverage the distributed platform for storing all the details regarding the project, including design documentation, as-built documentation, project plans, project resourcing information, etc. This platform can be leveraged by all the entities, like EPC, oil and gas companies, and operations parties, thus becoming the sole repository throughout the project life cycle (as opposed to a place where only final documents are stored). The information can be added sequentially and at every stage of the project; previous details are updated with the additional information, which then is available as part of the final project document hand over. It is also possible to integrate this blockchain platform with an asset collaboration network, where the entire information of as-built can be moved and creates a digital twin of the asset, which then can be accessed by multiple parties on an ongoing basis.
Some of the perceived benefits of this approach could be:
- Increased visibility into project performance
- Easier, more efficient operational transitions
- Increased quality of transfer of information to operations
Managing exchange agreements
It’s very common among oil and gas companies to buy products from each other and do a reconciliation based on the exchange contracts. For doing an accurate reconciliation, it is important to track the volumes accurately for reconciliations. The volumes can be sold from terminals, refineries or bulk storage locations and could be transported using various methods (e.g., trucks, pipelines, barges, ocean vessels, etc.). In most of the cases, the process to capture the accurate volume is manual along with the associated paperwork [e.g., permits, custody ownership and transfer, etc.] are manual and not centrally within one company.
By leveraging blockchain based solution, it could be possible to set up exchange agreements as smart contracts to track custody transfer and bring transparency into the reconciliation and settlements process. Participants can simultaneously view and share data on the location, volume, quality, and status of transactions.
The distributed ledger can also bring other participants, such as shipping companies, to update delivery information. Subsequently, payment status can be shared across a single shared ledger, helping to reduce transaction time, duplication of documents, and authentication of volumes among all partners through improved transparency and data sharing.
Innovations like blockchain can’t happen in isolation; there are always established business processes and system infrastructures that need to be considered. Blockchain requires an enabling layer that provides technical integration, which enables connectivity between different participants. This is where blockchain will play a major role in collaborative peer-to-peer scenarios.
Blockchain does not provide a homogenous infrastructure and technology stack. The concept needs to be open to support blockchain technology running on different platforms and being able to interact with each other. The business process layer must also allow for a semantical integration of cross-company activities and process flows. This is where regular enterprise solutions are integrated with the new capabilities of the emerging blockchain ecosystem.
In summary, permissioned private blockchains present a good opportunity for the oil and gas industry to experiment with one or two high-impact use cases to assess the value and business case for its use. In addition to process optimization and transparency, blockchain brings business value by reducing costs and risk and increasing workflow efficiency.
For more insight on blockchain technology, see Blockchain: There’s Something Huge Behind The Hype.