In less than 10 years, Blockchain has emerged from a small presence (Bitcoin) to one of the most talked about technological innovations. In the Financial Services industry, many companies using Blockchain have seen increased security, reduced cost, decreased transaction time, and increased transparency all while eliminating the need for a trusted third party. As the technology matures and the benefits are being realized, this technology is poised for rapid entry into the Energy industry.
What is Blockchain?
Blockchain is a technology that enables so-called “peer to peer” transactions. With this type of transaction, every participant in the network can transact directly with every other network participant without involving a third-party intermediary. Essentially, a blockchain is a digital contract permitting an individual party to conduct and bill a transaction (e.g. a sale of oil) directly (peer-to-peer) with another party. The peer-to-peer concept means that all transactions are stored on a network of computers consisting of the computers of the provider and customer participating in a transaction, as well as of the computers of many other network participants. Traditional intermediaries are no longer required under this model, as the other participants in the network act as witnesses to each transaction carried out between a provider and a customer, and as such can afterwards also provide confirmation of the details of a transaction, because all relevant information is distributed to the network and stored locally on the computers of all participants.
The disruptive potential of blockchain stems
- The removal of third party intermediaries;
- Decentralized storage of transactional data that is public to everyone on the network; and
- Use of smart contracts to track exchanged goods and services.
Figure 1: How blockchains change the way we transact
Removal of the third party intermediaries speeds up transactions minimizing transaction backlogs. Overall transaction costs are also lowered as middle men or broker services are no longer needed.
Decentralized storage makes data more readily available, reliable and auditable. Since transactional information is available to everyone on the network, data can be readily verified by all parties.
Figure 2: The blockchain process
Furthermore, once verified, if any piece of the data is changed, for instance the transaction amount, then
the system will throw an error. This makes data highly secure and reliable. Lastly, the real time nature of information exchange and verification makes auditing (and consequently regulatory reporting for public companies) simpler.
Lastly, smart contracts allow seamless tracking of ownership among transacting parties such as in the case of a cargo of oil moving internationally. This coupled with the ability to verify data at both ends, for instance the quantity and quality of the afore-mentioned oil cargo, makes for automatic funds transfer once all parties are in agreement.
Application potential in energy
The disruptive potential described can be applied in the energy sector across the lifecycle of energy commodities in upstream, midstream and downstream business operations.
Upstream and oilfield services
Blockchain can simplify management of assets, costs and revenues across multiple owners. Through the use of smart contracts, joint owners can be informed of production volumes in real time and compensated by working interest as soon as the drilled commodity is priced and sold.
Land management can also be automated further using blockchain. Smart contracts can be configured with ownership, royalty and disbursement information (such as payment date, method etc.) for land owners to ensure transactions are secure and made in real-time.
Similarly, drilling equipment can be managed by oilfield services’ providers by ensuring timely delivery of routine equipment and payments or them by upstream companies.
Similar to the use case for upstream, the use case for midstream is strong in the case of resource management. Pipelines for example can be metered and sufficiently and efficiently supplied using blockchain. Throughput can be monitored real-time and compared against nominations and minimum volume commitments. Transactions can then occur as soon as verification is received from all parties.
In addition to pipelines, other means of ground and waterborne transportation can also be monitored and billed against using blockchain. Commodities moving through truck, rail and waterborne vessels can easily be tracked and transacted against.
A key implementation in downstream is to automate parts of the commodity trading deal life cycle. For instance, blockchain can make the costly back office processes of confirmations, actualization of volumes and numerous forms of reconciliation simpler and less prone to errors.
All parties’ access to the same verified transaction record, available through a distributed database would impact the speed and costs of transacting. Additionally, credit risk could be significantly reduced through faster settlement times and lower collateral requirements. Blockchain technology has the potential to transform the entire deal life cycle minimizing human intervention from trade execution to payment.
Similar to midstream, efficiently supplying processing facilities like refineries is also a valuable feature that can be enabled by blockchain for downstream.
While most of these applications leverage smart contracts and reap the benefits of a decentralized storage system, it is also important to highlight the secure nature of the data exchange in all of them, which reduces risk of fraud and error and would bring significant savings back to the table.