One step before the petroleum industry gets blockchainized | FFC Media
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One step before the petroleum industry gets blockchainized

The petroleum industry is considered to be a conservative stronghold, and the blockchain technology – one of the symbols of a new innovative world. Surprisingly, unlike other industries that are being the loudest about launching innovations, it’s the oil and petrol companies who actively introduce blockchain and thus, reduce costs.

Current problems of the petroleum industry

Every day inside any corporation there are massive amounts of orders and documents to be processed – such as invoices, accompanying documentation etc. For instance, the Russian petroleum giant Gazprom is processing more than 20 thousand documents every month. And each and one of them must be verified. Can you imagine how many people and how much energy are involved in this?

Oil and gas have quite complicated supply chains involving shippers, providers, end customers. The complexity and high costs of the logistics here is especially visible in international sales. For example, Royal Dutch Shell closely interacts with other countries when delivering their products. It comes together with the significant administrative expenses, and there is a high possibility that there would be an error made at one of the stages. E.g., in 2015 the company had to back from the Arctic and suffer losses due to the wrong initial estimates of the oil well.

Moreover, there are complicated payment transactions involved. The cross‐border transactions always require intermediaries and extra expenses.

Accounting at any petroleum corporation is delivered through the EMIR and MiFID II regulatory acts. These are standards that have proved themselves to be reliable, but their implementation demands a number of requirements to be met – centralized clearing of transactions, risk management measures, daily change of deposits… The integration of the blockchain technology is able to immediately cut off a number of the accounting requirements – most of the procedures would be automated, and the immutability of data and transparency of operations will eliminate doubts.

According to Harvard Business Review, more than 50% of expenses of oil and gas manufacturers go to purchases from third‐party contractors. Gazprom mentioned above gave more than 50 million dollars to the contractors in 2017.

Due to these problems, it is not a surprise that many have started to think of how to improve the industry using blockchain technology. Of course, it has its flaws, like the expensive developing and implementation. More importantly – it’s difficult to instantly imagine how to attach blockchain to the energetics industry. However, there are already some developments that will be discussed below.

How will digitalization of the industry help?

World Economic Forum admits the potential behind the implementation of the digital technologies into the petroleum industry and believes that the industry will benefit from it before 2025 already. The analysis conducted has shown the following.

Digitalization will help release 1,6 billion dollars and redirect around 1 billion to the development of the existing petroleum corporations. The implementation of such «futuristic» technologies as cognitive computing (effective method of information processing and analysis including the self‐study system) will become easier. A positive ecologic moment – emission of gases will be 1300 tons of CO2 lower, water expenditure – 800 gallons lower, and the oil spills of 230 thousand barrels will be prevented.

Digitalization can go in a few directions, and blockchain is one of them. Implementation of the modern algorithms of data processing is an essential part of the efficiency increase. This statement is based on the World Economic Forum’s data from January 2017.

The advantages of using blockchain technology

Eelco Hoekstra — CEO of the Dutch company Royal Vopak that deals with the natural gas, oils and chemicals’ storage, says that blockchain and smart contracts are not only harmless to the financial sector, but also will automatize it, provide better transparency at all levels of production and sales. As a result, costs will decrease for all the parties involved.

Blockchain is a form of «digital accounting». It works as a database and as a network, allowing information move around a decentralized system which launches, records and compares multiple transactions. The only way to convince the system to approve a fake transaction is to get control of the 51% of all the devices inside the network. Thus, the more computers are involved in the validation of the data recorded, the safer the system is. In order to develop the field or set up a platform, you need hundreds of counterparts to coördinate. It significantly complicates tracking of risks and searching for those responsible for mistakes. It is as difficult to track cash flow going through a huge number of transactions Multiple financial streams inflate the administrative costs for its processing. Meanwhile, using blockchain can raise system’s transparency to the extent of displaying every single financial transaction through one click.

Opportunities for the implementation of blockchain

Due to the high value of transactions, economic pressure and considerable risks, energetic industry is considered to be one of the most attractive for implementing blockchain. Corporations could significantly ease their lives by adopting the technology which reduces risks and raises the level of transparency. Considering all the perks and flows of blockchain, here are some examples how it could be used in the petroleum companies.

Tokenization means creating some kind of a digital copy of an asset. Assets are controlled directly through the digital signature and not through the orders. For example, to manage a bank account, a client sends an order to the bank which is later handled by someone else. Meanwhile, when using tokens, a client can simply provide a digital signature, and it will be enough for the transaction to be carried out.

Today approximately 9% of the transactions related to oil is being disputed, which means annual losses of around 150 billion dollars.

Usage of tokens can help to get rid of the extra documentation and reduce the percentage of the disputable transactions. A token always has some important information attached to it (like, in which country the oilfield is). Thanks to transparency, the risk of unpleasant situations, such as buying oil from a country under sanctions, is falling.

A considerable advantage of any project running on blockchain is low transactions’ costs. When you move your operations’ system on to blockchain, you don’t need any middlemen anymore (such as banks) who take a percent from the transaction.

Oil and gas are being sold in huge amount, that’s why these transactions involve immense costs. During a day a company can sell 300 000 oil barrels, and the transported goods would cost up to 100 million dollars (e.g., 2 million barrels with 50 dollars per each).

Let’s move on. Petroleum companies often have to buy rights to use the land when looking for oil, doing research, evaluation, and later – production. With blockchain it’s possible to provide clear understanding of the chain of title, which eliminates contradictory records of costs and/or ownership of the land. In the traditional paper system, especially in the countries where the level of corruption is high, there’s often fraud involved in land deals.

Complexity and scale of the supply chain in the petroleum industry require powerful administration and create the soil for a number of errors and miscalculations. For instance, tax firms (and clients, too) fear that suppliers manipulate invoices in order to avoid paying taxes, or artificially raise expenses. 

Using blockchain technology to record and manage the goods’ supply chain and all the relevant invoices reduces the risk of errors and fraud. Goods are tracked step by step from the suppliers to the final customer, providing total understanding of what’s going on – what, where it comes from and where it goes to. Invoices are recorded in a blockchain and further cannot be altered. And the unsanctioned access is eliminated due to the private keys and «51%» security.

Petroleum industry is quite difficult to manage, it has so many agreements and contracts. All the changes have to be tracked immediately, which is complicated due to some contracts being signed a few years before actually executed.

All the agreements could get automated through so‐called smart contracts. Smart contracts are special programs designed to provide a proper compliance with the conditions of a contract inside a blockchain network. They keep track of the contracts’ conditions in real‐time, as well as money moving through the whole supply chain.

In every smart contract there are three things involved: contract participants, subject of the contract and conditions. After two parties of the contract have agreed upon the conditions, contract is being moved to the register. As soon as the condition written down in the code is executed, the program finishes and the result also gets fixed in blockchain. 

The fact that both parties clearly understand contractual terms, raises transparency of the interaction.

It’s common in the petroleum industry to have joint ventures, and a whole set of agreements is required to distribute revenues and costs. Smart contracts carefully and impartially look after the contractual terms being met and leave an audit trail suitable for the tax reporting too.

Smart contracts’ conditions can be different – from deals with the state to simple payments. Smart contracts’ system can help significantly simplify document flow between thousands of contractors and stakeholders and reduce the number of errors.

First attempts to integrate blockchain

Australian petroleum company BHP Billiton has become the blockchain pioneer .

They are going to implement blockchain to protocol the process of extraction resources from wells and samples of liquids taken from the fields. This was announced at the Global Blockchain Summit in 2016.

Tyler Smith, the chief geophysicist of the company, believes that new ideas will help modernize technological processes and make communication between partners easier. He explained that at any level of the minerals extraction there are contracts with contractors’ firms involved. At the same time these firms are spread around the globe. Moreover, laboratories and transportation companies also have to take part.

At the moment all the BHP Billiton transactions are recorded in Excel tables. However, they plan to use an app with a web interface running on blockchain that could be used by the contractors firms’ employees. 

It would be fair to mention that the improvement not only hasn’t been launched yet in 2018, but there is no work going on to make it happen. This was the statement from the press secretary of BHP Billiton Judy Dane. It doesn’t mean that the idea was buried, but it’s realization apparently involves some difficulties.

What stands in the way of intensive integration of blockchain into the petroleum industry?

With all the advantages, such as data immutability and transactions’ transparency, blockchain has a number of flaws. For bigger companies the major one is the lack of compatible software. Firms are afraid to get tied to one supplier of blockchain services. Of course there are some attempts made to standardize it, but they haven’t gone any further than just being plans yet.

Apart from that, most of blockchains available cannot handle the volumes of transactions that are daily going through the corporations. And many are just scared of any radical change, allowing others to become pioneers to just not move off the beaten track. It has always been like this, not only with blockchain, but any new technologies.

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