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Blockchain as a technology for smart contracts in O&G02/07/2023
The oil and gas industry has long relied on the recommendations of trusted experts to make key supply chain decisions. The growing popularity of Blockchain technology could significantly disrupt these relationships by providing an unbiased methodology for sourcing, tracking, and executing transactions on behalf of customers with transparent data sets across supply chain endpoints.
Blockchain technology has already been used by many global companies in the last two years in various areas such as IoT (Internet of Things), smart contracts, and cryptocurrencies. It has enabled businesses to benefit from the inherent trust and transparency of the technology.
Because Blockchain exists in a distributed and decentralized system, it is considered an ideal solution for managing and recording transactions without the need for a central authority. It also means that all participants in a network can view, access and verify each other's information. A new platform is created where companies can conduct and complete transactions using cryptocurrencies such as Bitcoin or other cryptocurrencies.
The benefits of this technology could be quite profound in the O&G industry, as it will provide several key advantages to both customers and suppliers.
Definite benefits of Blockchain for industry players
- It is precisely in this context, which brings together a variety of players who, a priori, do not trust each other, and who must regularly exchange assets recorded by documents, that Blockchain proves relevant.
- A single registry eliminates the need to record duplicate transactions or actions, in isolation, within each company. For example, purchase orders and packing lists would no longer be recorded by the oil company and the freight forwarder, but on a single digital register.
- Smart contracts, thanks to well-defined rules, would allow to automate of the validation of transactions or activities: for example, if the barrel delivered by the refiner meets certain quality conditions (density, viscosity, sulfur content...), the delivery to the distribution channel is automatically validated.
- A single distributed register, valid for all operators, eliminates the need for extensive work to comply with internal procedures and local legislation and prevents disputes.
Some companies in the sector have already developed Blockchain-based platforms to manage their supply chain:
- BHP Billiton has developed a platform to track purchases, deliveries, etc. from a network of suppliers;
- Petroteq Energy sealed a partnership with First Bitcoin Capital to create a specialized Oil & Gas Blockchain platform for the entire sector;
- ConsenSys and Amalto are developing Ondiflo, a platform that automates payment to providers as soon as products or services are delivered (with delivery measured by IoT sensors).
However, these use cases are constrained by what makes them so attractive: since they involve a multitude of players, they need to win the support, if not of all, at least of partners from different worlds. Finally, regulations still need to evolve to recognize the legitimacy of a digital registry.
10 O&G giants connect via Blockchain
The OOC Oil & Gas Blockchain Consortium, made up of 10 major oil and gas companies, has successfully digitized a voting system using blockchain technology. These include Equinor, Repsol, Marathon, Chevron, ConocoPhillips, Noble Energy, ExxonMobil, Hess, Shell, and Pioneer Natural Resources. The project, launched under the Spending Authority (AFE), was implemented through a partnership with a technology provider GuildOne.
It should be noted that the use of AFEs is required in the oil and gas industry to approve spending and capital projects. It will also be used to calculate the vested interests of members of a joint operating agreement.
Blockchain-based digitization will serve to reduce the time initially used in the paper voting process. The PoC will provide unchangeable records and significantly reduce the margin of error, as all calculations will be done manually.
It justifies the decision to base the newest oil and gas technology project on the Blockchain through the power of distributed ledger technology. The system also shines in its ability to transform oil and gas-related business activities.
Smart contracts automate manual processes in O&G
Blockchain recently helped oil giant Equinor use smart contracts to confirm various transactions.
Rebecca Hofmann, president, and CEO of Blockchain for Energy said the Commodity Transport Smart Contract solution was first piloted with produced water to prove that the technology can help with end-to-end automation:
- "We call this 'extreme automation' because everything is touchless. Connected IoT sensors collect the data, which is then written to a Blockchain ledger for validation. These invoices are then approved by smart contracts that create invoices for automatic payments."
- Given the success of the test, Hofmann explained that Blockchain for Energy helped automate an extremely manual process within the oil and gas industry supply chain. "There are about 23 manual touches that happen between all the major oil and gas companies within the supply chain. We have now reduced that number to four."
Andrew Bruce, founder, and CEO of Data Gumbo told that Equinor was able to expand its Blockchain use cases following the Blockchain for Energy pilot, resulting in millions of dollars in savings:
"Equinor and other global oil and gas companies use field sensors to monitor and encode data in near real-time into a private smart contract network. GumboNet effectively creates a verifiable, immutable, and common source of truth for Equinor and other operators and their suppliers."
Bruce, in turn, noted that smart contracts build trust to significantly reduce the costs and resources required to automatically execute trade transactions. "For example, a smart contract in Data Gumbo's GumboNet can be programmed to trigger payments to a contractor when a sensor indicates that a certain milestone has been reached, such as when a drill reaches a certain depth," he said. In other words, a lengthy billing and payment process is reduced to a matter of days, resulting in significant savings, financial visibility, and efficiencies.
While Equinor may be an early adopter of smart contracts, Paul Brody, global Blockchain leader at EY, further told that smart contracts seem to work quite well for the oil and gas sector:
"The industry itself is very complicated. There are layers and layers of contractors, subcontractors, and complex distributions of rights and assets and revenue streams. These are hard to manage manually, but it turns out they work really well as smart contracts."
Brody added that the sector is a perfect candidate for managing digital tokens because of the high level of standardization in the oil and gas industry: "You can easily represent these assets and deploy them in more complex DeFi and smart contracting ecosystems."
While tokenization for the oil and gas industry is still in development, Hofmann explained that Blockchain for Energy is currently testing a solution with a Blockchain company, BlockApps, to tokenize seismic entitlement processes. "Seismic entitlement involves large amounts of data that need to be kept for 60 years," she said. Hofmann said tokenization is needed to track the rights and obligations of these seismic assets, facilitate the buying, selling, and leasing of these assets, and even monetize the unwanted data.
Blockchain for a greener future in the O&G industry
It's also important to point out that the oil and gas industry is using Blockchain to ensure a greener future. While there are a number of ways this can be applied, Brody believes one area that is likely to take off is the use of various Blockchains to measure CO2 emissions and offsets: "We envision marketplaces that allow Fortune 1000 companies that have made a neutral commitment to climate to use smart contracts to track their CO2 consumption and automatically purchase offsets for it."
Although this is still a young concept, some companies have begun using Blockchain to raise awareness about energy consumption. For example, energy provider Restart Energy One recently launched a Blockchain-based platform that allows companies to purchase sustainability certificates in the form of non-fungible tokens, or NFTs. In addition, global investment firm SkyBridge Capital recently partnered with carbon offset provider Moss to buy digital tokens for carbon offsets.
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