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Blockchain in the Oil and Gas Industry

27 Jul 2018
Laura Brownhill

Digital supply chain integration is becoming increasingly dynamic. As blockchain continues to evolve from pilot tests to real-world platforms in 2018, supply chain management is set to be transformed completely by this distributed ledger technology.

Efforts are already being made in this direction, for example, joint venture by IBM and Maersk to deploy a blockchain-based electronic shipping system that will digitize supply chains and track international cargo in real time.

According to recent studies, the global blockchain supply market is expected to grow from $145 million in 2018 to $3.314 billion in 2023 which reflects an 87% compounded annual growth rate. With the phenomenal growth projected in the next few years, it is important to understand how this technology will disrupt supply chains - especially in the oil and gas industry.

 

What is Blockchain

While the most prominent use of blockchain is in cryptocurrency, the reality is that blockchain --essentially a distributed, digital ledger - has many applications and can be used for any exchange, agreements/contracts, tracking and, of course, payment.

Blockchain serves as a shared database that eliminates the role of third parties in transaction processes and information sharing. As a result, technology, inventories, contracts, payments and other data is shared directly between parties with encrypted connections.

Speaking in terms of the oil and gas industry, commodity exchanges on blockchain can support oil and gas trading directly between parties anywhere in the world while removing the role of banks, brokerage firms or other intermediaries.

Due to the complexity and significant lack of transparency of current supply chains, it’s incredibly difficult for customers or buyers to truly know the value.  In a similar way, it’s extremely difficult to investigate supply chains when there is suspicion of illegal or unethical practices. They can also be highly inefficient, as vendors and suppliers try to connect the dots on who needs what, when and how. Because of these discrepancies, there is a growing interest in how blockchains might transform the oil and gas supply chain and logistics industry.

 

Blockchain in the Oil and Gas Industry

Technological innovation on the operations side, such as hydraulic fracturing, 3D seismic and other extraction processes, has become the norm in the oil and gas industry.  The same degree of innovation has not been adopted for back office functions as the industry generally hasn’t brought much new digital technology to the supply chain, procurement, or finance aspects of the business.

However, oil and gas executives began to show a wide-scale interest in blockchain as early as last year. According to a seminal Deloitte Consulting report published in 2016, 55 percent of oil and gas executives agree that blockchain is required to retain a competitive advantage, while 45 percent acknowledge its disruptive potential.

In order to fill this gap, last year a number of oil and gas companies, including BP plc and Royal Dutch Shell plc, announced the creation of a blockchain commodity exchange. Trading on the blockchain platform is expected to begin by the end of 2018. Further application of blockchain technology has been carried out by Diamond Offshore Drilling, who announced the launch of their Blockchain Drilling service - the first application of blockchain technology in the offshore drilling industry. This service drives efficiencies and enables oil and gas operators to reduce their total cost of ownership

 

How could it help supply chains?

The Deloitte report has highlighted four key areas of consideration which can help shape the discussion around blockchain in the oil and gas supply chain management area:

Transparency

Every transaction in blockchain is recorded on a block and across multiple copies of the ledger that is distributed over many nodes (computers).  If any attempts are made to try and modify data on a blockchain, the other nodes would note that the data doesn’t align with their own and disregard it. Thus, blockchain could increase the efficiency and transparency of supply chains and positively impact everything from warehousing to delivery to payment.

However, it does involve issues, such as the standardizing of data between companies on a supply chain, storing data in a cost-effective way (since this can be very expensive) and protecting companies' confidential information on a platform intended to be transparent. These issues raise the question of whether it can provide the level of transparency required to achieve success while ensuring more efficient data and systemic security.

Security

Since every block links to the one before it and after it, there is not one central authority over the blockchain, which makes it extremely efficient and scalable.

Storing data in fragments at multiple sites, rather than concentrating it one place, raises the prospect of enhanced data security even without a fully encrypted system.

Efficiency

Blockchain will provide a platform to classify all assets in a singular class. It will blur the boundaries between asset classes, resulting in cash, energy products and other commodities becoming digital assets trading inter-operably. More value can be derived by not restricting activity to a single asset class.

A few other ways in which blockchain can promote the supply chain efficiency is by facilitating automation of import/export records and notifications, including triggers for beneficial tariff programs, and help prevent manual errors and redundant efforts as assets are processed.

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, sub-contractors, and suppliers.

To reduce the chaos, blockchain enables the creation of ‘smart contract’ - a computer code hosted on a blockchain that defines and executes the terms of an agreement between parties. A standardized contract for all stake holders involved in the supply chain has many benefits, such as verification, visibility, self-execution, clarity of agreement terms, fraud protection and connectivity. Removing third-party supervision and paper-based contracting because of smart contracts further reduces cost and overhead.

 

Conclusion

There’s no getting away from the momentum being built by blockchain technology.

Blockchain supply chain applications are already growing in other industries, notably retail and consumer goods; healthcare and life sciences; manufacturing and technology; logistics, and many more.

We are already seeing some ‘real time’ examples of where Blockchain is being utilised in the oil and gas Industry.  So for the time being, watch this space.

Author

Laura Brownhill
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