While Blockchain technology is best known for its initial association with the cryptocurrency, Bitcoin, it has since made its way into the fields of banking, technology and healthcare. Now, it is on the verge of being adopted by the oil and gas industry.
“There is quite a bit of excitement and momentum,” said Anita Nair of the oil and gas advisory practice at Ernst & Young and associate director of the Houston Blockchain Alliance. “It’s being explored by the industry – mostly in pilot or prototype stages. There are also use cases in production today.”
Although convoluted in concept and often mired in Bitcoin’s tumultuous history, Blockchain technology may be key to tackling the industry’s big data problem, increasing efficiency in operations and transactions, and ultimately lowering costs across the board.
An article recently published by Deloitte, titled “Is Blockchain’s future in oil and gas transformative or transient?” admits that “the jury is still out.”
However, its author, Mark Koeppen, reminded readers that because of the recent downturn, oil and gas companies have suffered from massive cost-cutting efforts, reduced exploration, and layoffs.
“This has forced oil and gas companies to drastically rethink how they operate and identify innovative ways to improve transaction processing,” Koeppen explained. “In navigating an often dizzying array of national regulations and restrictions, simplifying and making more robust the paperwork and processes of global product movement is essential for oil and gas assets both in the United States and abroad.”
Defining Blockchain
Blockchain is similar to a shared database where information can be stored and accessed by designated individuals or groups. Due in part to the fact that is no one authority oversees the data, Blockchain is considered to be secure, transparent, consistent and reliable, Nair explained.
Also referred to as a “distributed ledger,” the Blockchain ledger is agreed upon through a decentralized consensus, explained Ben Polen, founder of Allodeum, a Blockchain solution company. “Blocks” on the “chain” hold information, such as contracts and other transactions for managing, that no one person or party can change retroactively.
“Blockchain can help by improving the speed and efficiency of a transaction, including near-instant notices of transfer,” Polen said.
Operators have been striving to become more nimble, Nair said. Just as artificial intelligence and machine learning are being adopted by the industry to streamline operations, Nair said Blockchain is making its introduction on the heels of these technological advancements.
“Ninety percent of the data in the world has been created in just the last two years, and the rate at which we are creating data is just increasing,” she said. “There is great efficiency that we can gain by using a trusted platform to share data, information and even resolve disputes. Blockchain can really help in this space.”
Testing, Testing
The oil and gas industry is currently testing Blockchain in areas of supply chain and land leasing, Nair said.
Many exploration ventures are joint ventures by operators wanting to share costs and risks. Often, terms of contracts change during this process, often generating more paperwork.
“These companies have large ERP (enterprise resource planning) systems that are quite cumbersome and costly to operate,” Nair said. “Each company is keeping records within their own systems, and the data isn’t shared. When the data doesn’t match, there are disputes. With Blockchain, everybody sees the same contracts, the same information, and it can’t be altered. It streamlines the process and makes operations much more efficient.”
For example, operators spend billions a year disposing of water from unconventional drilling sites, Nair said. The operator typically monitors the amount of accumulated water and notifies the tanker when to haul the water away. The tanker communicates to the operator when and how much water was collected and invoices the operator. Then, the operator must verify that the job was completed and send payment within a set amount of days.
“Blockchain eliminates the back-and-forth,” Nair said. “With a smart contract in place, a sensor on the tank can trigger the tanker to collect the water on an agreed-upon volume. The sensor can also alert the operator to submit payment. There is no sending invoices, reviewing invoices, validating work, cutting checks, or ensuring payment. It’s all right there in front of you.”
In addition, when smart contracts are executed between operators and landowners, for example, production volumes can be shared via Blockchain, and landowners can know on a real-time basis how many barrels of oil have been produced on their acreage within a certain timeframe and know the exact amount in royalties they can expect to be paid, Nair added.
Discovery Mode
Furthermore, Blockchain technology can improve compliance within three reporting frameworks – the Dodd-Frank Act, the Extractive Industries Transparency Initiative and the European Union directives – through increased transparency and better reporting streams, according to Koeppen.
He added that the sheer size and volume of contracts and transactions to execute capital projects in oil and gas have historically caused significant reconciliation and tracking issues among contractors, sub-contractors and suppliers.
“Blockchain technology, by design, should translate to greater transparency and efficiency. The sharing of digital Blockchain information as required in joint operating agreements could lessen, if not eliminate, the need for reconciliations between companies and for data hubs controlled by third parties,” he wrote.“Simply put, knowing who gets paid what, why and where; who is owed money; and who along the chain is performing as explicitly mandated by the agreement are potential game-changing elements of a distributed ledger strategy.”
While those familiar with Blockchain can recognize its benefits in the industry, the industry – as in most cases – is slow-moving on adopting new technology.
Claudio Lima, co-founder of the BEC-Blockchain Engineering Council and chairman of the IEEE Blockchain in Energy Standards WG, travels the globe presenting to oil and gas operators the benefits of Blockchain and how it can be implemented. While he receives an increasing number of calls and interest in the technology, he said most operators are still in “discovery mode”.
“Blockchain is not simple. There are not many people who understand it, particularly in the energy industry,” he said.
In his keynote speeches at oil and gas conferences, Lima explains the technology behind Blockchain, its key benefits, and how it can galvanize what he calls the technology’s “three Ts”: trust, transparency and traceability. Currently, he believes Blockchain is most applicable in the industry in the supply chain sector.
For Polen, who regularly uses the technology in real estate transactions, Blockchain’s role in the oil and gas industry will only grow.
“Blockchain,” he said, “is the technology of the future.”