Oil and Gas Industry – Blockchain, the Disruptive Force of the 21St Century

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OIL AND GAS INDUSTRY - BLOCKCHAIN, THE DISRUPTIVE FORCE OF THE 21ST CENTURY PREAMBLE age. While it may not seem as exciting as submerged oil rigs or robot-controlled The potential for disruption in energy is vast. power grids, revamping Big Oil’s back office An energy blockchain can be a catalyst for stands to save the industry substantial business model and process change across money. the enterprise. It could be instrumental in The energy industry will have to digitalize managing the sector’s growing complexity, more and more in oil production, refining, data security, and ownership. It is essential, shipping. So traders will also have to therefore, that CIOs and business leaders participate. It is a pre-archaic process. understand the role that blockchain can So introducing blockchain will allow the play. passing of title from buyer to shipper to A new ecosystem of energy blockchain seller without going through the massive startups is emerging, and venture capital, paperwork of bills of lading. has so far raised over US$ 1 billion to scale In the oil and gas industry, with its business models of the future. global reach, complexity, and diverse As the demand for efficiency and regulations, simplifying and improving the transparency continues to grow, the oil paperwork and processes of global product industry is at the crossroads. Still using movement is a business imperative. With paper contracts and outdated trading a compelling value proposition, many oil platforms, the implementation of and gas companies may look to explore, distributed ledgers and smart contracts invest in, and collaborate with partners on could advance the industry into the digital developing blockchain initiatives.

Introduction will be stored using blockchain technology, Blockchain in the energy sector can be Klaus Schwab, Founder and Executive which is a significant number considering viewed across business boundaries with Chairman of the World Economic Forum, the footprint of a nascent technology. emphasis on innovation: provides a summary in his book, The The overall market size of blockchain is Innovation as a factor in energy operations: Fourth Industrial Revolution: “In essence, estimated to be around US$ 2.3 billion by Service providers are expected to the blockchain is a shared, programmable, 2021, according to a report by Markets and incorporate innovation in services and cryptographically secure and therefore Markets. The cryptocurrency world is on constantly adopt cutting edge technology trusted ledger which no single user the horizon and “Blockchain, distributed as the focus shifts to the capabilities that controls and which can be inspected ledgers are in the disruptive stage of truly extend clients’ operations. Distributed by anyone.” A survey of 800 executives, growth potential and will create new ledger technology seems promising for featured in the same book, suggests 58% markets and / or upend existing markets energy clients’ business growth and long- believe that up to 10% of the global GDP for poised growth.” term success.

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Challenges to be addressed by energy Technology appreciation 2018. It is a significant shift in the oil and companies – Large capex information of blockchain (distributed gas industry. Norwegian oil firm Statoil, technology projects, increasing ledgers) in oil and gas trading houses Gunvor, Koch Supply & sophistication and frequency of Trading, Mercuria, ABN Amro, ING and cyberattacks, and accelerating adoption In 2017, Natixis, pioneered the first Société Générale are consortium partners. of connected sensors are effecting shifts blockchain solution in commodity trade in how data is structured, validated, finance for US crude oil transactions. The protected, and transmitted. distributed ledger platform, built on the Linux Hyperledger, helps digitization of Transacting in energy commodities is crude oil transactions using blockchain currently inefficient. Intermediaries and and ensures enhanced security, improved complex processes affect the speed of transparency, and optimized efficiency. exchanging critical data in real-time business. Issues that blockchain-enabled With both the trading parties (buyer and applications could address include: seller) along with their respective banks on the same ledger, sharing of data and the • Removal or reduction of fractional costs status of a transaction from trade initiation (e.g. broker fees) that make existing to its final delivery is simultaneously visible transactions slower and more expensive to all parties, resulting in transparent • Facilitating regulatory reporting transactions by using shared processes and requirements (i.e., EMIR, MiFID II) record keeping. It will also reduce threat due to fraud, tampering, and cybercrime. • Increasing efficiency by standardizing Additional benefits would include lower data formats across multiple overhead cost, reduced cash cycle times, organizations, enabling interoperability and fewer cost intermediaries. and ensuring process integrity This effort will modernize trading in the • Reducing risk of fraud, error, and invalid global crude oil industry, which today is transactions predominantly a non-digital and manual • Reducing credit risk and transacting process. capital requirements Recently, energy majors BP and Shell led a plan for a blockchain-based platform for energy trading, expected to start by end-

External Document © 2018 Infosys Limited Bridging the gap between paper trades and the real-world movement of barrels is often a laborious task. The adoption Blocks of paper of a blockchain system for payment could speed up the process signi cantly and cut costs at the same time. barrels In addition, with blockchain, there is a signi cant increase in the transparency of data. Finality is maintained between the parties in the futures trade as only a single source of truth will be presented to all participating traders.

In addition to the improvements that blockchain could make to traditional oil and gas operations, some are looking to Oil-based digital the world’s most important commodity as a baseline for digital money. currency A cryptocurrency based on the commodity can be introduced to make payments even faster.

Whether onshore or oshore, the oil and gas industry is heavily regulated, with protocols deriving from multiple sources and covering everything from the environment to tax. Data contained in a blockchain can be shared with regulators in real time to maximize visibility and eliminate the nes meted out for non-compliance. Enhancing compliance Collaborative interactions can also be improved through blockchain. Joint venture partnerships, which may involve several companies collaborating on the same project, are common within the oil and gas marketplace. With blockchain, every transaction is replicated to all nodes in an immutable way for regulators to monitor.

In the energy trading operation of natural gas, there are multiple parties involved in operations from upstream to downstream, such as energy producer, shipper, supplier, transporter, regulator and settlement provider. So there is a Transparency in lack of trust between these stakeholders, lack of visibility or data, and legal disputes and settlement delays. operations Using blockchain, all these groups can be brought on to a single platform for enhanced visibility. Also, by using smart contracts, a majority of the operations can be automated. Integrity of data will be maintained throughout the supply chain of natural gas.

Land records management transfer of land, will create an Immutable model is in use for decades, connecting and equipment – empowered audit trail of land movement, ownership, generic computing devices and supporting with distributed ledgers and value. It will reduce ownership small IoT networks. But it will not be able disputes, title mismatches, and provide to respond to the growing needs of the IoT For oil and gas companies, one of the tax authorities with accurate land transfer ecosystems of tomorrow. most important aspects is the proper information along with value as they occur management of land sale records. For A simple solution for equipment history in real time. these companies, millions of dollars’ worth records management is blockchain. of investments and profits depend on the Blockchain is not going to replace Traditionally, the entire record of the maintenance of proper and unambiguous government process concerning how land equipment is stored on a central server. records related to who owns these large is registered and monitored. It will make With a blockchain solution, a distributed parcels of land. governance of land registration simpler digital ledger is created which stores the and corruption-resistant. transactions among the various nodes of The traditional process is simple enough the network. In order to make any changes - the sale is agreed, the documentation to the record, one must first register on changes hands along with money. But Equipment history records the blockchain. Only those nodes that are in the real world, there are a multitude – general maintenance identified and authenticated by secure of issues such as who actually owns powered by distributed cryptographic methods will be allowed to the property, contract issues, forgery, ledgers add or make changes to the ledger. After and many other illegal activities. The The current Internet of Things (IoT) this, the other nodes on the network must distributed ledger system can help ecosystem in oil and gas organizations confirm this transaction for the change to eliminate these problems. currently relies on centralized, be accepted. It eliminates the need for a Blockchain technology is being explored in brokered communication models. The central authority. Georgia and Ghana, which experience high communication is primarily through server levels of disputed land ownership and land / client model with huge dependency on seizures. Leveraging this technology in storage capacity. Though the devices are in the oil and gas industry to record sale and close proximity, the connection between them must go through the Internet. This

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Domain appreciation of blockchain in oil and gas - the energy value chain

Blockchain has emerged as an elegant, The context in which blockchain applies Several blockchain pilot projects are secure, and scalable solution that is – with its immutable record, reliability exploring configurations and measuring applicable across the enterprise, from gas derived from consensus, and potential to value across the entire energy enterprise, field to end customer. automate processes – are infinite. from supply chain to security.

External Document © 2018 Infosys Limited Exploration and production – • Asset maintenance – asset maintenance upstream contracts Given the synthesis of the distributed • Health, safety, environment (HSE) - ledger and digital transactions empowered equipment safety-related inspections, by cryptocurrencies, in the upstream value maintenance activities chain, the potential for disruption using • Regulatory – reporting to authorities blockchain is in areas related to: All of the above will contribute towards a • Design and construction of wells and consortiums and shared ledgers system facilities, especially in the sub-processes that harnesses its potential for oil and gas of well drilling and drilling optimization companies. areas

• Tracking equipment history, both Refinery and petrochemicals - maintenance history as well as the downstream history of the equipment’s operating In downstream, most of the work revolves conditions around petrochemical operations and in the product and distribution space. BHP Billiton, one of the world’s largest mining and energy companies, is By adopting consortiums and shared developing a proof of concept on its ledgers, the downstream business of oil Project Rai Stones in collaboration with and gas companies can be more efficient in ConsenSys and Block Apps, using the taking to distributed ledger technologies, Ethereum public blockchain. This project primarily in the areas related to: aims to track wellbore samples through • Exchange of products a blockchain-based tracking application. Wellbore samples are extremely expensive • From primary distribution hub to and cannot be replaced. They go through outlets several custodians, usually all BHP vendors; • Reducing the dependency on and are currently tracked manually using refinery companies spreadsheets and e-mail. This may lead to • From secondary distribution through human error, resulting in huge regulatory terminals to individual pumping fines, lack of transparency to business stations stakeholders, and lack of efficiency in finding metadata about these samples. • Terminal automation through blockchain Midstream activities In midstream, the potential for distributed • Demurrage and claims management ledger use is applicable in areas related to: • Smart contracts adoption in • Energy trading and risk management downstream business process areas • Following successful trials, two major oil corporations, BP and Eni are incorporating distributed ledgers into their energy trading platform • Land management – smart contracts • Contracts – joint ventures and revenue accounting - calculation and payments of interest (joint interest billing) • Quote to cash - services / equipment procurement – reduce daily sales outstanding (DSO)

Blockchain technology in the energy sector inspires confidence, but it is impossible to overhaul the industry. Deploying small but significant changes to improve efficiency in the global oil business requires support from multiple stakeholders. Only time will tell how many companies will embrace blockchain technology at an early stage.

• Domain-led technological disruption is currently on the horizon in the areas of distributed ledgers and cryptocurrency

• For an energy company looking to adopt blockchain, select the right use case

• Join an existing initiative to learn the technology. Blockchain is a team sport, you cannot experiment on your own

• Blockchain is not complicated. It is 80% process modeling and 20% technology. Start small and onboard more parties later

The blockchain journey in the energy (oil and gas) sector has just begun. With the energy companies’ focus on identification of right use cases and embracing change through technology and Internet of Things (IoT) for business growth, the journey is going to be fascinating.

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