Insights - Energy Dais

How does the future look like with Blockchain in Oil and Gas?

Blockchain in oil and gas! Intriguing indeed!

Before we explore this innovative concept, let’s look at some aspects.

Can oil prices be predicted? The answer is no and the energy landscape has always come up with strong pieces of evidence.

Since the beginning of 2018, the oil prices have moved to unpredictable crests and troughs. With a huge no. of stakeholders involved in the Oil and Gas industry, the sector faces several oil shocks due to changes in the market scenario, geopolitics, and supply-demand. The world’s most dynamic industry is ailing with respect to supply chain management. A disruption in this supply chain can create ripple effects in the operations whether inbound drilling materials like drilling mud, water, sand, drill bits and transporting the oil from onshore and offshore platforms to the targeted locations which links the upstream to the downstream via midstream which involves multiple stakeholders and transfer materials, information and capital flow through the supply chain.

Owing to the complex nature of the supply chain, insufficient coordination will certainly lead to wastage of resources. This is an area of concern as the industry is trying to reduce its overhead costs due to the unpredictable fluctuations in oil prices. There is always a need for a system that tracks the supply value chain in such an industry to streamline the operations, reduce the time in procuring materials and maintain the security of transactions.

Blockchain – invented by Satoshi Nakamoto, which was once considered as a vehicle for the transaction of bitcoins in a safe manner in the year 2008, is now considered to bring groundbreaking changes in the supply chain in the Oil and Gas.

Blockchain: Awareness, Market, and Opportunity in Oil and Gas Sector

A blockchain is a kind of database that takes various records and places them in a block. Each block is then “anchored” to the next block, in a straight, sequential request, utilizing a cryptographic mark. The blockchain is the database for recording the exchanges one that is duplicated to the majority of the computers in a specific network. It is sometimes referred as the “Distribution Ledger”.

It is divided into two parts:

  1. Header: It incorporates metadata, such as the special block reference number, the time at which the block was made and the connection back to the previous block.
  2. Content: It incorporates the approved arrangements of the digital assets and guideline articulations, such as exchange made, their amounts and the addresses of the parties to those exchanges.

The Blockchain enabled a decentralized system of transaction where there is no intermediator financial institution or a Centralized system like a bank that takes care of your transaction. After the great depression in 2008, the people in the U.S. had lost their savings to banks as they went bankrupt. The ‘Bitcoin’ solved their purpose and Blockchain aided as the medium for a transaction.

The drooping prices in Bitcoin in the recent years have created a disinterest in ‘Blockchain’ according to Google Trends, as people are confused between Blockchain and Bitcoin. The understanding and awareness about Blockchain technology at this stage is similar to what was internet years ago.

                                     Figure 1. Interest Over Time in Blockchain Technology in the U.S. Courtesy: Google Trends

However, the interest among millennials in Blockchain has stayed back as there are many businesses and investments that have rose in the Blockchain sector, particularly that are not into fintech and which doesn’t use cryptocurrency as a mode of transaction.

The market for Blockchain looks lucrative worldwide in future with India being the country displaying huge prospects for investments.

                                  Figure 2: The Worldwide Market of Blockchain Courtesy: Statista

 

For investors who want to tap the opportunities in the Blockchain technology specifically in the oil and gas sector, the energy market stands out significantly in economic terms of dollar volume and economic impact.

                              Figure 3: The Global Market of Oil and Gas compared to other commodities Courtesy: Toptal

Perks of Blockchain for the Oil and Gas Industry 

The supply chain network of the Oil and Gas industry is long and the process is arduous.

                                            Figure 4: The petroleum Value Chain Courtesy: Toptal
  1. Authentication and Tracking of Transaction

This transaction happening along this chain can be tracked from a Blockchain transaction ledger, from sourcing of raw material to the supply of refined products to the downstream industry. These transactions happening on the ledger can include digital data which is linked to unique identifiers/codes. This code must be traceable along the whole value chain and if not, it is considered as counterfeit.

This tracking that can be identified saves time and authenticates the transaction along the value chain. 

  1. Asset Management Through Block Chain

Fleet replacement cycle largely depends on the Oil prices. The fleet managers reduce the no. of replacements and improve their repairs and maintenance when the oil prices are low and the industry is trying to cut margins.

During such crises, the fleet managers in the blockchain can identify a lot of aspects such as, the vendors for the parts manufacturers, the vendors in the chain, when that part was manufactured, how frequently the parts are used, who is the most authorized manufacturer and so on.

The manufacturers in the chain can examine whether the maintenance is done as per schedule, how many times repairs and parts are outsourced.

‘Pay–Per–Mile’ is a term used by the insurance companies who ask for emoluments based on base amount plus the miles the vehicle has run using an online tracking system in the blockchain. The same can be used for the insurance of the fleets used in the oil and gas industry and thus reducing a lot of cost paid to insurance companies when the fleets are parked.

  1. Smart Contracts

More than half of the produced oil is moved through maritime route. The shipping industry that deals with intra-country imports of oil and other refined commodities which requires a lot of paperwork. Adopting a Smart Contract driven by Blockchain technology, the exchange of documents among the parties can be done instantaneously which is automated and thus reduces the time taken to mail the documents. As every information is encrypted, the information is safe and cannot be tampered once a chain of a transaction has occurred. The cost spent on paperwork, discrepancies and procedural delays can be avoided. As the people in the blockchain are enabled with enhanced direct communication, a competitive market can be developed, not requiring a middleman in getting access to information.

  1. Improved ETRM

The traditional way of trading settlement happens in a three-way process:

  1. Both the parties reconcile the information on the Digital Platform.
  2. The seller, after verifying the commodity price on the exchange, delivers the commodity to the buyer.
  3. The payment is initiated by the buyer from a financial institution.

The above mentioned is a three-way process through which time can be reduced in a single transaction, making it a speedy process. The transaction is reliable, auditable and enormous data can be collected and analyzed for the product.

Internet of Value!

The Blockchain technology will bring a mammoth change in the oil and gas industry by optimizing operations and reducing costs. The technology will bring reliable transaction and secured tracking of transfer of assets along the value chain. As in the 1990’s arrived Internet- what we know as “Internet of Information”, similarly The Blockchain Technology in Oil and Gas Sector will be “Internet of Value” and “Internet of Trust”.

Are we ready for the big change?

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Team Energy Dais

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