Blockchain’s Value Proposition in the Oil and Gas Industry

April 29, 2020

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Blockchain tech is gradually emerging as a solution to many shortcomings in modern day industries. So far, this innovation has been hailed within supply chain ecosystems and financial markets. The oil and gas sector is starting to capitalize on the technology’s prospects. Today, enterprises are left to decide and justify the apparent need to make use of such nascent technology, especially since there has been an absence of large-scale implementation within the energy sector as a whole.

Businesses may use digital ledger technology (DLT) to overcome existing redundancies that the oil and gas industry struggle with. For instance, blockchain gives businesses the chance to increase efficiency, reduce operating costs, promote and accelerate domestic trading operations, and simplify supply-chain management. Value is derived when there is an application or when blockchain technology manages to streamline existing processes.

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The integration of blockchain among oil and gas enterprises remains yet another significant milestone; however, the technology is still on its way as there is some level of adoption taking place. According to the 2019 Statistical Review of World Energy by BP, oil and natural gas consumption grew by 1.5% and 5.3% respectively.

Both of the commodity sectors are forecasting growth in the foreseeable future, albeit at a slower pace. According to a recent IEA report, the oil and gas market is expected to contract due to setbacks faced such as the recent coronavirus (Covid-19) pandemic.

The shocks to the global economy from Covid-19 have a profound impact on the industry and financial markets are under pressure. Oil companies are struggling to cope as this stress test is proving to have  a negative influence on oil demand and is affecting day-to-day operations.

A petroleum giant, Petroleum Corp, has just filed for bankruptcy sparking a controversy that leaves businesses, investors, and analysts with questions: whether independent oil and gas businesses are capable of weathering this storm, and how they can stay afloat while Covid-19 reshapes the global oil and gas markets.

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The current pandemic is forcing companies to evaluate how they operate. Wth a global lockdown and disrupted supply-chains, businesses around the world are now left to embrace a new wave of digital transformation, one that encourages organizational and workplace interventions. With blockchain as a core complement, the oil and gas industry stands to benefit from further streamlining processes and applications.

A 2019 blockchain survey by Deloitte highlights that 86% of respondents believe the tech is valuable and is set for mainstream adoption. The study further concluded that respondents involved in the energy sector are considering investing in blockchain initiatives and are planning to use the technology, signaling that the industry has more respondents in favor of embracing the new innovative technology in the coming year.

Blockchain’s Practicality in Supply Chain Ecosystems

Based on prior blockchain advancements, integrating this technology with the oil and gas industry is expected to follow a similar path and borrow some concepts from existing projects. A good example of such implementations is how the IT giant IBM is using blockchain for supply chain traceability, by tracking physical deliverables like food and precious metals. The active streamlining of a business supply chain has proven to be one of blockchain’s key use cases that the oil and gas industry could greatly benefit from by gradually shifting towards intelligence and digitization to significantly improve management, business efficiency, and data security.

Another such example is the Abu Dhabi National Oil Company (ADNOC) collaborating with IBM in a bid to deploy a blockchain-based solution designed to help the company manage and track all commodity transactions in the supply chain. With the 12th largest oil company by production actively testing the technology, others are left to scramble to decide if blockchain has transformative implications for developing truly distributed data sharing networks. A typical supply chain often involves domestic and international transportation, facility and warehouse management, stock and inventory control, material sourcing, import and export, and data sharing between parties. This applies to oil and gas supply-chain management.

Oil and Gas Value Chain with Blockchain Tech

A typical oil and gas value chain is divided into three segments: upstream, midstream and downstream. Each of these sections define a specific market division in which oil and gas have to pass through for the final consumption utility to be derived. Upstream refers to the product exploration and extraction, whereas midstream is the transport ecosystem, and downstream represents the final stages of storage and sales. From exploration to commercial distribution, all participants involved in the subsequent activities could leverage blockchain tech to improve the supply chain efficiency.

In the upstream section, blockchain proposes a good alternative during the early phases of exploration and extraction. A solution caters to all parties involved including the survey companies, miners, and equipment suppliers, all of whom have to contribute efficiently for the process to be successful. For instance, blockchain can serve as a transparent bridge in performance contract evaluation and reconciliations based on its P2P features. This integration might effectively change the management in the upstream segment.

As for the midstream division, the technology is set to improve tracking of oil and gas in transportation. The use of IoT sensors by blockchain innovators could help oil and gas companies with pipeline oversight. A business can use the technology to better manage all their subcontractors more effectively. In addition, distributed digital records are observed to increase accountability and transparency which automatically reduces the need for human intervention without compromising on security and productivity.

The downstream sector is the end of the value chain. This is where all the refining of commodities and distribution takes place. All lead to the distribution of various end products to terminals, trucking, and gas stations. Consumer-facing businesses at this end of the chain stand to benefit from supply-chain management, improved transparency, quicker payment and financial reconciliation. In the foreseeable future major firms like BP and Shell are considering issuing token-based rewards on a blockchain platform. Customers will be interacting with a blockchain in regards to managing mileage points. Furthermore, product authentication, performance evaluation, and reconciliation within this segment are also good prospects of blockchain’s capabilities.

Blockchain Applications in the Oil and Gas Sector

The oil and gas sector has been a powerhouse for economic growth since the industrialization era, which mostly depended on the by-products. Today, companies are coming to terms with either embracing or passing on DLT. There exists a number of practical solutions to be deployed while the majority are currently under development, oftentimes on private consortium chains, or amid prototyping and testing. The most notable solution providers in this sector include Aergo (Blocko), Ondiflo (Consensys), Ethereum, HyperLedger Fabric (IBM), and VeChain.

1. Aergo and Blocko

The South Korean blockchain and Samsung-backed solution provider, Blocko, is helping oil and gas businesses deploy their own blockchain-based services. Blocko has been fostering its ties and partnerships in the Middle East since the launch of their hybrid blockchain, Aergo, by providing consultation and end-to-end custom blockchain solutions.

South Korea’s leading private blockchain solution provider, Blocko, is also a strategic partner of Aergo, the startup to release an open-source and hybrid blockchain platform designed for enterprises and government-level use cases. Combining both aspects of public (decentralized and private) and private (performance and control) blockchain ecosystems lets oil and gas embrace both types of networks, opening a door of possibilities, as oil and gas companies may ultimately decide which type of blockchain-based network to make use of.

From securing strategic partnerships with enterprises, banks, exchanges, and governments, the most notable being a pilot program to help the central bank of South Korea facilitate micro-payments with DLT, Blocko/Aergo provides the necessary assistance and infrastructure to partners interested in launching their own independent blockchain.

Both Aergo and Blocko are addressing the complex industry use cases for DLT – supply chain, logistics, payments, and IoT infrastructure in parts of the upstream, midstream and downstream sector. In addition, Aergo is among the few blockchain 3.0 platforms built for enterprise application factoring in security, scalability, and ease of use to present a compatible use case for a high-tech dominant industry. Aergo recognizes the need for a decentralized network, encouraging transparency among parties with an open-source, permissionless blockchain built for organizations that are keen to deploy decentralized applications and enterprise-IT solutions.

Previously the head of RedHat EMEA and CEO of Aergo and Blocko MENA, Phil Zamani, shared,

‘’Blockchain could become the new economic lubricant for the oil and gas industry, presenting an end-to-end solution and disrupting the status quo in a sector that trades in huge economies of scale and depends on a complex web of suppliers, distributors and contractors.’’

2. Ondiflo on Consensys

The startup project Ondiflo aims to revolutionize supply-chain ecosystems as part of a joint venture with ConsenSys and Amalto, a B2B integration service provider. Leveraging its partnership, Ondiflo offers enterprise-IT solutions geared and designed for all businesses that are part of the overall oil and gas value chain.

The firm envisions itself as a pioneer in blockchain-powered automation of oil field transactions, seeking to establish an on-demand service for operators and suppliers. Other interesting use cases include leveraging sensor data to digitize the procure-to-pay process for fluid hauling as well as implement legal action on its distributed ledger. The fundamentals of Ondiflo’s tech have helped improve some key functions. These include product tracking from load to discharge, back-office operational efficiency, asset utilization and finance integration for easier settlements.

Visionary and Ethereum’s co-founder, Joe Lubin, expressed his optimism in the project.

“Ondiflo will bring to the industry a platform, where all operators and service companies can benefit from digitization, automation and the seamless exchange of data and immutability of their records. Ondiflo will deliver maximum efficiency to processes, which today are still largely manual and paper-based like field ticketing or bill of lading. It is anticipated that billions of dollars of cost savings will be achieved by the industry through the Ondiflo platform.”

3. VeChain

A popular blockchain-enabled platform with international operations in Asia, Europe, and the USA; VeChain operates as a blockchain service provider aiming to integrate existing ecosystems with modern tech. The most recent partnership with Shanghai Gas has the startup working on building a trustless ‘energy-as-a-service’ ecosystem for this industry giant.

With VeChain’s network in play, Shanghai gas seeks to utilize a tamper-proof DLT to enhance its supply-chain management. Capable of resource-extensive applications, the company behind VeChain seeks to help existing businesses incorporate their wide range of in-house solutions into their business platform.

Shanghai Gas and VeChain established a long-term partnership that will see both players benefit with a full integration of the two ecosystems. The recent completion of the first phase of the project used VeChain’s blockchain solution for data sharing. With the reduction in transaction complexity, blockchain technology is meant to minimize the overall operating cost of Shanghai Gas as a result of optimizing business processes and creating more efficient supply-chain management. VeChain blockchain was used to upload and search data on LNG storage tanks as part of the first phase of the project trials, recording and tracking the quality of gas, order information, and pickup quantity. While this enables seamless sharing of data across other stakeholders in the oil and gas value chain, VeChain is primarily catering its solution to insurance companies, shipping, logistics firms, and banks that plan on conducting business by interacting with and storing data on an immutable blockchain.

Applications, Opportunities, Challenges and Risks

Distributed Ledger Technology (DLT) provides us with more systematic, efficient, and cost-effective solutions set to tackle some of the industry’s prime challenges. At this point, blockchain’s integration with today’s industries seems inevitable as talks of the digitization of new assets and national governments around the globe are making a u-turn by encouraging developments, although it might take longer than anticipated.

Whether and how this new transformational innovation is set to revolutionize a tech-driven industry such as oil and gas remains speculative. Traditionally, the oil and gas industry works in its own special way by operating in a highly dependent paper-based transaction and management environment that is prone to human errors and inefficiencies.

Prior to the practicality era, most talk was based on projections and hypothesis but this is set to change over time as more blockchain projects focus on industry specific solutions. However, the uncertainties and regulatory hurdles will need to be reduced, if not, completely eliminated for these applications to be implemented on a large scale.

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