By Geoffrey Cann
I’m addressing a blockchain conference this week on the future of blockchain technology for the oil and gas industry. Here’s a likely summary of my remarks.
It’s taken a couple of years for evidence to finally emerge that blockchain technology can make an impact on oil and gas. I first wrote about the possible use cases on this blog series back in October of 2016, when I first became aware of how distributed ledger technology actually works.
What is Blockchain?
I’m regularly asked for a super simple explanation of what blockchain actually is, and I like to refer to the classic buy/sell relationship that we are all familiar with. Imagine I sell a book (which I do), and you wish to buy the book (which you do). We agree the unit price, the number of copies you want, the delivery terms (shipping address, shipping method), and the delivery date. Being a simple fellow, I keep track of these details on a spreadsheet (or a ledger), which includes your name and address, the number of copies you want, and so forth.
Since your memory may be faulty, or perhaps because you don’t quite trust me, you probably write down the same details on your own spreadsheet or ledger. Now we’re both maintaining the same data, in separate ledgers. Either of us could have written our side of the transaction incorrectly, which could give rise to some confusion later — was it 10 copies or 12?
We rely on many central authorities to keep track of some key ledgers. Banks manage money ledgers. Governments look after tax ledgers. Stock exchanges keep track of trades.
Now let’s string a few steps together. After you place your book order, I in turn place an order with Amazon to print the copies, and Amazon places orders with a trucking firm, air transport, and ground courier to finally deliver the books to you. Each of these parties has their own ledger to keep track of their bit of the deal. And each ledger has the potential to contain errors or differences with the other ledgers.
If all of these ledgers could be precisely aligned all the time, eliminating the possibility of confusion and error, without need of a big central authority like a bank, we could eliminate much of the cost we incur to deal with the inevitable errors and confusion.
That’s what blockchain does — create highly trustworthy data without the need of a big costly vulnerable central authority. Transactions of interest are grouped together into blocks, encrypted, and digitally attached it each other in a large chain. The chain sits on many computers simultaneously, and the chains all have to match. Such a structure is highly secure—so secure that the Department of Homeland Security is actively researching where blockchain technology could be put to use in the service of US national security.
Early adopters of blockchain technology find that as much as two thirds of the cost structures we have in place to manage certain kinds of ledgers can be eliminated. To put this into perspective, 9% of global tidal crude oil trades are disputed and about two thirds of all oil traded is by boat. Every single day, 4-5 million barrels of crude oil traded end up in dispute, or 1.4 billion barrels annually, or $75b in value.
Like all technologies, blockchain has its sweet spot. A very clever and easy to remember mnemonic for the blockchain sweet spot is ATOMIC, which stands for:
Asset — real world things like pumps and digital things like music.
Trust — situations where players need to trust one another but don’t
Ownership — the situation where an asset has an owner and that relationship is important
Money — a medium of exchange or store of value
Identity — situations where the identity of a person or thing is important
Contract — a relationship between two or more parties
Any scenario in our real or digital world that includes one or more of these elements is a candidate for a blockchain solution to reduce relationship friction. The alert among you no doubt point out that ATOMIC encompasses an enormous range of human activity. And you’d be correct. This explains why, among blockchain nerds, there is such enthusiasm for blockchain.
In many cases, however, you’re better off putting in place a central authority to manage a shared ledger, or a single database. Blockchain makes sense where there is a real business problem that can’t be easily solved with a central authority, where it would be too costly to set up the authority, or the parties wouldn’t trust the authority anyway.
Since writing my inaugural blockchain article, I’ve monitored a handful of leading use cases and examples that illustrate where blockchain technology can play a meaningful role in oil and gas:
BULK COMMODITY TRANSFERS
As I’ve outlined in my book seller example, the tracking of things through a supply chain is a ripe area for transformation.
Water hauling is a big issue for the industry. Water is used for fracking, steam generation, and water flooding. Water is produced naturally from wells, and flows back up after fracking and steaming are completed. Contaminated water needs to be disposed of at special sites, and every ounce must be accounted for. Local governments monitor water resources carefully, but are resource constrained. Invoicing and reconciliation is largely manual, and compliance is self-reporting. There are well over 100m truck movements per year hauling water in North America alone.
Other bulk commodities will likewise benefit, including oil, petroleum, and gas. Haulage of equipment could also be improved using blockchain.
The OOC Oil and Gas Blockchain Consortium is about to start a pilot using Data Gumbo in the Bakken area to streamline water hauling. OOC’s members include Shell, Equinor, Chevron, Hess, Repsol, Exxon and many others. Ondiflo have developed a similar solution, focused on water haulage.
In this case, water is the asset, contracts manage the relationship, and smart contracts enable money to change hands without human involvement.
NAL Resources in Calgary has applied blockchain technology to the challenge of joint interest billing and accounting. Many of North America’s oil and gas wells are jointly owned, between land owners, operators and partners. The partners agree to share the costs and revenues associated with production over the life of the well, but a lack of trust forces the partners (or at least those who can afford it) to establish their own ledgers.
NAL’s solution was to build a single agreed way to calculate the royalty owing to the partners, codify this calculation using robotic process tools, and create a smart contract to execute the final payment. In this case, blockchain enables a contract and monetary settlement.
One of the earliest trials of blockchain was in the area of petroleum trading, which incorporates an element of haulage. Trading in petroleum (gasoline, diesel, jet fuel), is tricky because the product is highly regulated, very valuable, completely standardised, quality sensitive, and bulky. It passes through many hands (tank farms, barges, tankers, and pipelines) and title changes frequently mid-journey. It crosses borders easily, attracts lots of taxation and tariffs, and generates its own wave of paperwork.
A European consortium including BP, Shell, ABN-AMRO, Equinor, Total, Mercuria and others launched a pilot in 2016 to rethink the trade lifecycle. Early trials were very promising, with 30-40% reduction in back office costs, to the point where the participants thought they could do away entirely with invoicing and collections.
From this effort comes VAKT, a blockchain-enabled reimagining of the trade relationship. In this use case, identity, contract, ownership, asset and money are involved.
Related but with roots in North America, Mavennet has developed a blockchain-based gas trading and exchange platform using smart contracts to capture outages.
If you’ve been watching the news from Europe, you’re aware of a major crude quality problem. A shipper in Russia has pumped more than 1.3 million tonnes of contaminated crude oil via pipeline to Europe. The oil contains organic chloride, used in oil extraction, in concentrations of 300 parts per million, and is highly corrosive in oil refineries. Most refineries refuse oil with more than 2 ppm. Oil buyers and sellers are wary of quality problems and won’t take title if quality does not meet rather exacting specs.
To keep on top of this problem, oil companies run labs that process thousands of assays and samples annually to make sure oil purchases and refined products meet regulatory and industry specifications. But labelling errors, information losses or disconnects frequently happen, and the process has a lot of rework chasing down samples.
OTHERS TO WATCH
I keep an eye on a handful of other oil and gas solutions that are under development, or could have considerable impact when or if they reach the market.
Ziyen — an oil company that has issued a regulated security token offering (STO) on the Ethernet blockchain.
Petro — the Venezuelan crypto currency, backed up by in-country oil assets. The country is a test-case for crypto currency replacing sovereign currency. This summer the country began rolling out crypto wallets for students.
CryptoRuble — a possible Russian crypto currency. Its obvious purpose will be to enable Russia to trade in oil and avoid entanglements with the US banking sector.
Libra — if Facebook succeeds in banking the unbanked, it’s inevitable that somewhere some merchants will accept Libra for fuel purchases.
With a handful of use cases now proven and invested by the market leaders, the rest of the industry is on notice. Adoption is simply a matter of timing.
*referenced from William Mougayar and his research on blockchain.
Check out my new book, ‘Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas’, available on Amazon, iTunes, Audible and other on-line bookshops.