Opinion: How Could Energy Sectors Deploy Blockchain Effectively

Published December 19th, 2018 - 09:14 GMT
By reducing operational costs, secure storage and speedy transactional processing; a greater uptake of this technology is assured. (Shutterstock)
By reducing operational costs, secure storage and speedy transactional processing; a greater uptake of this technology is assured. (Shutterstock)

Distributed ledger technology (DLT) used for online currency Bitcoin shares its roots with blockchain, a decentralized technology using a network of computers rather than one central authority for processing, has gone far beyond the technology and financial sectors to also extend to the energy sector.

There is much debate among energy leaders on the benefits of blockchain technology as some argue it has the potential to reshape the industry while others contend that distributed ledger technology could cause major disruptions to it.

However, as this is a fledgling technology in the oil and gas industry with little impact to date, more assessment is needed to exploit the available opportunities that this technology offers.

With instant transactional verification, it is not only the oil and gas industry that can benefit from enhanced efficiency and cost reductions but also through simplifying the process can massive costs that the industry incurred over decades be eliminated.

By reducing operational costs, secure storage and speedy transactional processing; a greater uptake of this technology is assured. This was clearly evident with BHP Billiton’s second blockchain summit that was held in Shanghai last year to showcase the use of blockchain technology in recording movements of wellbore rock and fluid samples.

The oil and gas industry, which incurs high production cost volatility, can start to adapt supply chain management to avail of its many benefits. Oil and gas companies suffer enormously when production volumes hit record high levels, which subsequently cause massive cost-cutting measures and end with layoffs and steep declines in exploration investment. Consequently, this sequence of events has forced many oil and gas companies to rethink their operations with a particular focus on innovation and efficiency, and this is where blockchain technology comes into play.

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Although there has been only limited digital technology introduced to the supply chain, procurement or the financial sectors of the oil and gas business, blockchain technology has proved its worth and could potentially become the hallmark of this industry’s growth in the future. By forging new agreements with producers, suppliers and third-party vendors, oil and gas companies could reduce their costs with a clearer understanding of the cost of each supply chain assignment.

Innovative technologies, such as 3D seismic or hydraulic fracturing, have been in use for some time while other innovative extraction processes have also been in use for decades, showing that the industry is no stranger to innovative technology applications. Following on from this, distributed ledger technology could be adopted earlier than anticipated if a concerted effort is made to rid the hurdles to introducing blockchain technology.

Blockchain could be adapted and used in the field of transparency and compliance. With more efficient data sharing, a well-designed data framework would cut compliance costs while speeding up data sharing.

Costs of dealing with the logistics of supply, deployment of inventories and tracking have put oil and gas companies in a tough spot. Given the sheer volume of contracts and the costs incurred over the decades, many companies have sought alternative approaches to cope with these issues. Smart contracts through blockchain technology have overcome many hurdles by clearly determining who gets paid what, when, and where and by pinpointing any shortfalls along the supply chain.

The flip side from anti-corruption and transparency issues could create disruptions to data protection, causing vulnerabilities through hacking, which has been the case for many companies over the years. However, blockchain can offer some protection from this by having segregated data storage at multiple sites rather than concentrated in one location. This approach is rather new and requires further testing, the benefits of which will be put to the test in years to come in terms of providing enhanced data security.

A live blockchain-based platform in a move to revolutionize the market was recently finalized through a consortium formed by major oil companies- BP, Royal Dutch Shell and Equinor. The system called Vakt was developed in 2017, with the aim of digitalizing and centralizing much of the work that used to be based on paper, while working as a digital logistical arm. Through this consortium, the accomplishment of physical energy trading ranging from trade entry to final settlement is expected through blockchain technology in real time.

For industry skeptics on blockchain, many issues remain on how well the oil and gas industry can adapt to the changing environment with many unknowns, however, the advocates of the blockchain argue that important advancements with this technology have not been fully embraced yet, a case in point is the oil and gas industry.

By Ersin Merdan

The views and opinions expressed in this article are those of the author and do not necessarily reflect the views and opinions of Al Bawaba Business or its affiliates.


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