Enabling Disintermediation Through Blockchain

Digital disruption creates new ways of working. Across industries the evolution of new business models is accelerating. The Oil & Gas (O&G) industry’s focus has primarily been cost reduction, meeting energy supply and demand, and complying with regulations. These are laudable, but technology presents an opportunity to generate new capabilities by leveraging new platforms, data analytics, and automation. Distributed Ledger Technology (DLT), more commonly known as Blockchain, is a platform technology that supports the realization of digitally enabled business models.  

 The technology 

 Blockchain networks are of two types, public and private. In public Blockchains, such as Bitcoin, anyone can join and contribute resources to the network. There are no trusted third parties. On the other hand, private Blockchains are closed and selective. A consortium typically operates them, or they have the backing of an industry thought leader. Many industry Blockchains will be private. The business case for private Blockchains depends strongly on the complexity of interactions on it, whereas the business case for public Blockchains is driven more by the behavioral changes it generates. 

 Smart contracts are the engines behind Blockchains. They are the algorithmic versions of legal agreements that define the protocols by which Blockchains works. Smart contracts monitor the triggers (terms) of an arrangement such as payment terms, penalties or completion criteria; and based on these triggers can initiate a business process and write information to the Blockchain. The complexity, scale, and volume of O&G contracts has posed challenges for the industry. Particularly in reconciliation, and tracking the movement and ownership of assets. Complexity is exacerbated by the industry’s inter-dependencies between contractors, sub-contractors, and suppliers. Blockchain applications will support agility across chemical and petroleum supply and value chains by automating the management, execution, and enforcement of contracts. 

 Many Blockchain use-cases leverage the concept of provenance. Blockchain applications can monitor the movement of items from inception to decommissioning. These applications mitigate counterfeiting at the bill of material as well as at the product level. Provenance is an example of where Blockchain and digital transformation complement one another. Such applications typically require technologies such as RFID and smart devices to provide a traceability layer, thereby making tampering, falsification of information and fraud difficult. However, these applications need robust cybersecurity standards to prevent device spoofing.   

Blockchain in the O&G industry 

O&G Blockchain applications are nascent but evolving rapidly, as are the networks of stakeholders that will be required to realize value by operating them. Blockchain will be a vehicle for reinventing manufacturing industries. An auditable trusted history of usage will allow OEMs to provide services based on usage, thereby, revolutionizing manufacturing processes in the same way as cloud computing has done in the information technology sector.   

 Five new O&G industry use cases to watch are trade finance, procurement processing, supply chain, operations and management of warranties.   

Supply Chain 

Blockchain will transform the way reverse logistics programs operate by embedding NFC chips. As products move along the supply chain in either direction, their identity is verified and a record of their entire movement, from creation to recycling, is recorded. Remanufacture, reconditioning, and recycling is all enhanced via a Blockchain. 

A pioneer in leveraging Blockchain in international shipping has been Maersk. In a heavily paper-based industry, the Maersk platform integrates with customs agencies, tracks containers and reduces the amount of administration required - this reduces costs and time, and mitigates to the risk of fraud significantly.  

In a complex supply chain Blockchain supports the movement of assets and helps optimize operations. Currently, data concerning available space is unshared between companies, and as a result, shipping companies compete for resources. It is difficult for shipping systems to be optimal in this environment. Shared ledger platforms can reduce friction at ports through the seamless exchange of data thereby reducing delays and costs. One such company enhancing this process is Skuchain, a Californian based startup, which focuses on ‘collaborative commerce’ by creating paperless shipping and LoC processes.   

Procurement processing 

Blockchain technology will have a role in transforming finance by reducing the steps required to process accounts payable and accounts receivable. In the future, automated purchasing transactions will occur using smart contracts. The cost of price discovery will fall, and it will be easier to find and transact with the cheapest vendor in a network.  

 Blockchains will streamline the goods-receiving and invoicing process, thereby reducing the number of disputes and improving the quality of vendor services. This simplification will drastically affect the authorization and reconciliation processes; smart contracts are a highly efficient form of control – it reduces the risks of misappropriation of funds, fraud and money laundering. 

Trade finance 

Barclays Corporate banking’s Vice Chairman highlighted the disruptive power of Blockchain in trade finance. The time to process, issue and approve LoCs will be less than four hours. These time and cost savings will span the supply chain and impact finance processing by simplifying payment insurance, reduce reliance on LoCs and establishment of the authenticity of product purchased through provenance.  

These efficiencies are not theory. A consortium of oil companies, banks, and trading companies, made up of: Statoil, BP, Shell, ABN Amro, ING, Mercuria, Koch Supply & Trading, and Société Générale have established a joint platform (VAKT) to achieve them.   

Operations 

Blockchain will provide oil and gas companies with greater visibility of contractual obligations allowing them better visibility of “who owes what to who, who is performing, and who is liable.” 

Blockchain has the potential to enhance business processes such as well analysis, recompletion and type well identification. Private Blockchains amongst joint venture partners will be used to capture production planning and joint operating agreements, thereby transforming documentation management by automating the handover processes. 

Green and brownfield wells will benefit from Blockchain. All data in a well or adjacent wells would be loaded on a Blockchain to aid decision making. This immutable data will be used to store historical data and train mathematical models, thus enhancing the process of reservoir characterizations and landing term determination.    

Furthermore, in the transfer of well ownership new owners will be able to inherit reliable data concerning the well over multiple years. The full history of the wells will be tracked, simplifying the current laborious process.   

Warranties 

Capital equipment records will be kept on a Blockchain and form a detailed view of usage, service history and spare parts used; this will automate the current manual process and mitigate the risks of falsification. Equipment manufacturers will use Blockchains to support their decisions to enforce warranties; this is especially important in complex plant operations where subsystems managed by third-party organizations. A distributed ledger of such subsystems can help in conflict and liability resolution via auditable logs and histories.    

The argument against Blockchain 

There is an opposing argument. Opponents argue that since markets are fragmented, it will be impossible to track an asset’s life entirely, and that this fragmentation reduces the value of Blockchain technology’s application. Opponents argue that unlike Bitcoin, industrial Blockchains are multi-nodal - their networks are more complex, and the type of data exchanged richer. They claim that the business case of private Blockchain versus permission-based databases is weak. 

Although these arguments have merit, they will not slow the adoption of Blockchain in the industry. The industry’s drive to building consortia across high-value networks solves the fragmentation of data issue. Rising speeds and falling costs of data transmission and storage addresses the data exchange demands of the Blockchain. The business case of Blockchain versus centralized permission-based database is more nuanced. If switching costs are a strategic priority, and the Blockchain will be enhanced by expansion, then its business case obeys Metcalfe's law. However, if the network is closed and static, then a permission database might be sufficient. However, we argue that networks that don’t grow will not survive. Dynamic Blockchains will likely replace stagnant, closed ecosystems over time.   

Is Blockchain relevant for me? 

The O&G industry has driven innovation for over a century, but working practices within business networks and their respective stakeholder interests have remained mostly stagnant. Blockchain offers the possibility to upend existing systems and rebuild industry ecosystems.   

In deciding on the relevance of Blockchain application to a business problem we propose a heuristic. Leveraging this will help prioritize Blockchain applications that can deliver greatest industry and business value. 

1)    The Network - Does the application have multiple transacting entities? Does the movement of assets cross organizational boundaries that warrants validation? 

2)    Its Behavior - Does the current business process lack trust? Does it currently require an intermediary to manage this lack of confidence? Is there a need to incentivize stakeholder behaviors to influence outcomes? 

3)    Its Interactions - Are there complex interactions between transactions? For example, the need for complex stakeholder collaboration according to business rules? 

However, before undertaking a multi-organization Blockchain project, due diligence should be undertaken by involving industry regulators early in the process. Due to the cooperative nature of Blockchain (often exchanging data and sharing transactions between competitors), regulators will screen Blockchain initiatives against antitrust laws. Regulators are highly keen on keeping an eye on Blockchain projects due to the massive expansion of the technology recently. In order to avoid accusations of collusion, regulators should be involved early in multi-organization Blockchain initiatives.    

An evolving industry 

Our industry is changing, and new business models are emerging. Asset-less enterprises are stealing a march on incumbents and delivering strong shareholder returns by being information brokers. These organizations enable smarter operations through data, matching and real-time connectivity. One such example is Xeneta, a startup whose business model is based entirely on collating real-time shipping information. Their platform allows real-time tracking of goods, vessels, and pricing - this level of transparency has not been seen before in the industry.     

The digitization of the O&G industry is underway, and the industry is increasingly becoming data intensive. The typical O&G facility now has over 30,000 sensors and produces one terabyte of production flow data at any given point. It is not farfetched to think that, in the next ten years, data held on the Blockchain will become the basis for real-time simulation, modelling and conflict resolution. Blockchain’s role as an industry-trusted middleware platform is inevitable in the next step of its digital evolution. 

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