The Oil & Gas Industry

The oil and gas industry is a global behemoth, comprised of countless companies, providers, governments, and regulatory bodies. Across all these stakeholders, countless opportunities for transparency, efficiency, and optimization exist. In today’s industry, with siloed, proprietary databases and infrastructures, cooperation is difficult and performance is negatively impacted. Below are some current and potential applications of blockchain technology to integrate into the industry:

Commodity Trading and Tracking

Oil and gas commodity trading is a tricky but global business. Crude oil, for instance, is one of the most globally-traded commodities in today’s economy. The reason? It is a raw source that can be refined to supply most of the world’s energy needs, including gasoline, diesel, and a number of petrochemicals. Companies today use proprietary systems to track, manage, and record data in order to perform these trades. The industry today maintains a number of complicated and siloed ledgers to track commodity trading. These centralized systems are difficult and expensive to maintain, and are open to manipulation, hacking, and corruption. Commodity trading can often be a razor-thin profit economy, and optimization of any kind is more profit for companies.

Blockchain technology is, at its core, a decentralized ledger. It tracks and records transactions of any kind (like trades), but it does so cheaper, more securely, and more efficiently than legacy systems. Whereas today’s proprietary systems require security, immediacy, and tamper-resistance to be additionally programmed into the software (thus making it vulnerable to hacking), a blockchain has these qualities as core, immutable tenets. The Ethereum blockchain — with $30 billion market cap honey pot (Aug. 2018) — has never been hacked.

So what is the blockchain-based commodity trading opportunity for oil and gas? The implementation of blockchain technology in the oil and gas commodity marketplace has the ability to reduce the costs associated with maintaining, updating, and securing a proprietary trading system. Additionally, however — and perhaps more significantly — it can reduce the costs associated with labor, data management, data visibility, settlement delays, dispute resolution, and inter-system communication — all without compromising proprietary data, information sources, or trading methods that currently give companies competitive edge. An oil and gas trading company can establish a platform off of a well-regarded blockchain such as Ethereum, but code additional privacy and access restrictions. Even if a competitor also uses Ethereum, it cannot decrypt the data of the first company. The result is a platform where every trade is automatically recorded with precision and without security issues that could lead to manipulation or exploitation. Data is accessible and transparent (to permissioned individuals), meaning companies can provide access to regulators to access data when requested or on a frequent bases, removing the costs with packaging and sending information to regulators when requested. Instead of proving that all trades were legal, therefore, companies only have to prove that all trades occured on the blockchain, and then allowing regulators access to ensure they were legal.

So has anyone done this? BTL Group, an enterprise blockchain company, recently completed a pilot with ENI, BP, and Wien Energie. The pilot demonstrated that the use of blockchain technology to facilitate and track gas trades reduced overall costs by 30–40%. The company plans to test the platform with other resources besides gas trades — a process as easy as manipulating the original smart contract to fit different commodities.

Three “Streams” of Opportunity

The oil and gas industry can roughly be split into three categories — upstream, midstream, and downstream. Upstream refers to the parts of the industry having to do with resource exploration and extraction. Midstream refers to parts of the industry involved with storing and transporting resources once they are extracted. Downstream refers to parts of the industry that refine resources into the multiple final products and provides those products to end users such as gas stations. The journey of one drop of a resource through those three stages can include dozens, if not hundreds, of separate entities, companies, processes, and legal agreements.

Currently, these parties coordinate through traditional means — written contracts, manual data entry, laborious dispute reconciliation processes, and high-friction cooperation. Overall, the ability of a blockchain technology platform to record and track supply chains could stop an immense amount of waste. Specifically, the implementation of smart contracts on a shared blockchain such as Ethereum can enact and improve interaction between entities to optimize communication, reconciliation, and data management. Moreover, a shared, permissioned immutable ledger can help different parties manage and track data that is necessary for all cooperative stages of O&G production. We will briefly look into the upstream, midstream, and downstream to look into some theoretical use cases. Future posts will dive into upstream, midstream, and downstream in more detail.

Upstream

The upstream process refers to resource exploration and extraction — often known as the exploration and production industry (E&P). It includes multiple cooperating stakeholders: survey companies that decide where to drill, the companies that perform exploratory drilling, contract companies that supply oilfield or oil rig employees, a subset of entities that own operating rights of a rig, and more. More than any other “stream” of work, the upstream oil and gas process involves the largest number of stakeholders.

Across these stakeholders, data management and transmission is paramount to success and profitability. The “holy grails” of upstream oil and gas are performance-based contracts and reconciliation optimization. At its core, these holy grails are currently hindered by the inability to coordinate effectively across dozens or hundreds of parties.

Performance-based contracts are legal contracts enacted when one party completes their task, which often initiates another party’s workflow. The overarching goal of any E&P project is to maximize extraction of the original oil in place (OOIP) — i.e. the amount of oil in the ground. This requires participation from many parties, all of which need to attest to their work being completed before other steps can be taken. Currently, lengthy and laborious steps of attestation are required for a company to prove it completed its deliverables. With the integration of blockchain technology, groups can attest to their work being completed by “staking” something of value — it could be a contract for future work, outright money, percentage of profit, etc. that the work was completed and completed to standard. That declaration triggers a smart contract that initiates work by another team, which will attest to their work being completed in a similar manner. If the second team were to figure out that the previous work was not completed, they could challenge the original attestation and, if proven, that first company would lose everything it staked.

As the workflow continues and all these companies work towards maximizing OOIP extraction, they need to be paid for their labor and resources. Many companies subcontract and outsource elements of their job, meaning all those companies too need to be paid. Reconciliation — the process by which companies are paid along a supply chain like oil and gas — currently can take up to 100 days to flow down the workflow pipeline and ensure all parties are compensated, often held up because companies are not able to easily prove they actually performed their tasks. With easier attestations (and improved payment mechanisms) on the blockchain, reconciliation can be reduced to just a few days.

More about upstream and blockchain will be discussed in an upcoming post.

Midstream

The midstream oil & gas process includes the transportation of crude or refined oil from rigs and fields to refineries. Resources can be transported on barges, tankers, trucks, rail, and pipeline. The coordination among companies — similar to upstream — is immense, and many of the benefits from blockchain integration in upstream can be applied towards midstream.

One example of the midstream application of blockchain technology is the inspection of pipelines and cross-company data coordination. Oil and gas pipeline can be thousands of miles long. Every foot of those pipelines needs manual inspection and confirmation. Moreover, instead of asking a handful of companies to move along the entire length of the line, midstream companies will contract out to dozens or hundreds of local companies to inspect the section of pipeline in their region.

The coordination between all these contracted companies can be improved by a work attestation platform as discussed in upstream — where each regional company declares each section as inspected by staking something of value against its safety. The midstream process in particular, however, brings up the opportunity for federated identity constructs on the blockchain. By integrating a company and employee identity on the blockchain, data that is often disorganized and obfuscated in today’s industry is clear, precise, and transparent to permissioned entities like regulators and the parent company. With federated identity, the employees who inspected each section are recorded, along with their company-affirmed licenses, expertise, and training. With accountability and transparency at the forefront of this immensely manual process, less time, energy, and capital can be spend on back-office management.

More about midstream and blockchain will be discussed in an upcoming post.

Downstream

Downstream oil and gas is the final process in the journey of a drop of a natural resource from ground to consumer. Downstream consists of the processing, refining, and purifying of crude oil and natural gas into products that end-consumers commonly recognize, including: gasoline, jet fuel, diesel, asphalt, and many others. Moreover, downstream companies consist of recognizable companies like Shell and BP. The transportation of gasoline and its distribution to cars is the most consumer-facing element of the downstream process.

As with upstream and midstream, performance-based contracts and optimized reconciliation is a tremendous opportunity for downstream profitability. With downstream, however, exists the unique opportunity to apply blockchain technology towards consumer-facing products, specifically gasoline and gas stations. Blockchain-based rewards programs are emerging to leverage the efficiency and real-time nature of blockchain towards customer loyalty and satisfaction. With gasoline consumers, downstream companies can implement a series of smart contracts to reduce the cost and improve the user experience of maintaining customer loyalty rewards. Parent companies can coordinate their downstream companies, which may have different names, to allow customers to use rewards cross-system. Rewards are tracked, immutable, and theoretically liquid if tokenized. At the end of the day, a blockchain-based rewards program builds loyalty, reduces management, and improves cost.

More about downstream and blockchain will be discussed in an upcoming post.

Looking Ahead at a Blockchain-Powered Industry

Blockchain technology will allow companies across industries to improve cost, reduce waste, increase optimization, and control data transparency. As a few oil and gas companies begin adopting the technology and reaping the benefits, those that don’t will feel pressured from regulators, consumers, and market behavior to offer better service to customers, improve environmental impact through waste reduction, and provide clearer data about activities and progress. Altogether, this leads to lower operational costs for industry providers, higher profit for oil and gas companies, lower cost for end users, and better resource allocation for the world.