How to Use Blockchain in Oil and Gas Industry?

In 2018, BP, Shell, Repsol, Gazprom and other major players in the oil and gas industry launched pilot blockchain projects to solve logistics, trade and financial problems. In the article we will look at these and other cases to understand how the new technology is used in the oil and gas industry and what advantages it gives.

Document circulation

As it is. On the way from the place of production to the final consumer, a drop of oil and a cubic meter of gas have time to change several owners, interact with at least 30 counterparties and figure in 200 information solutions. All these iterations are reflected in the document flow of each event participant, and they, as a rule, use different approaches to recording and storing data, which causes a lot of errors and inconsistencies.

If you add to this the high volatility of market prices, the complexity of compliance and regulation regimes, the large number of projects involving a large number of contractors and subcontractors, as well as labor with highly varying levels of education and skills, you will have the world's most complicated document management system.

The complexity of this process causes such problems:

• increasing number of delayed payments and litigation;
• increase in time spent on verification and enforcement of compliance with the database of business partners or business and regulatory bodies;
• vulnerability to pressure from the inspection and control authorities (customs, tax and others);
• persistent tendency to accumulate errors and inconsistencies.

How it will be with the blockchain. Since most of the data in the workflow of individual market participants is sharing information, this creates optimal conditions for the introduction of the blockchain. Based on the new technology, you can create a single network to digitize all the processes of interaction and their automation.

Thanks to this network, you can achieve the following benefits:

• reducing the number of errors associated with data inconsistency, fraud, reconciliation and settlements between counterparties;
• reduction of effort and time for checking expenses;
• transparent distribution ledger.

In practice, this means a significant reduction in the number of disputes between counterparties due to inconsistencies in invoices, way-bills and payrolls, reduction of accounting and auditing costs, as well as faster time tracking of goods and services in the supply chain.

First successes. At the time of this writing (February 27, 2019), two projects have been launched in this direction, both of which are at the stage of  Confirming the concept. The first is the IBM and Abu Dhabi National Oil Company (ADNOC) platform for launching an automated accounting and transaction management service for the sale of petroleum products (and other raw materials) from wells to final consumers.

The second is the development of OOC OIL & GAS BLOCKCHAIN CONSORTIUM, which included ConocoPhillips, ExxonMobil Corp, Chevron Corp and 4 more major players. They check all possible options for the blockchain implementation in the oil and gas industry, including automation of accounting and auditing.

Equipment reductancy

As it is. The price of raw materials at points of sale depends not only on the amount of oil and gas, but also on their quality indicators (composition, density, amount of impurities, etc.), which are measured with special equipment — provers. For example, oil companies use flow meters to measure the volume of oil sold, a specific gravity meter to determine the weight of the raw material, a centrifuge to determine the percentage of oil containing basic sediment and water (BS & W).

This equipment must be highly accurate, reliable and fast, and therefore it costs a lot of money and needs to be checked and adjusted periodically. Accuracy is crucial, because even small errors in measurements can cause the buyer to overpay significantly or the seller and pipeline operator will receive less profit.

According to Scotty Perkins, senior vice president of innovation for Quisitive, concerns about accuracy and fraud lead market participants to the fact that oil producers and pipeline operators use their own equipment to check the flow of raw materials and its composition.

Such equipment costs from 125 to 500 thousand dollars, and its duplication leads to an increase in costs for both parties, which in turn leads to an increase in the cost of goods for the final customer.

How it will be with the blockchain. If you connect the prover to the blockchain, then all parties will be able to obtain accurate data on the volume, density and impurities in the raw materials from one set of equipment. Consequently, there is no need for duplication of equipment.

First successes. In May 2018, Quisitive, a subsidiary of Fusion Agiletech Partners, provided the Validation of a pipeline monitoring and data collection concept that oil producers and pipeline operators use to maintain crude oil cleanliness standards. Their project was named Blockchain Oil Pipeline.

In their development, Quisitive used Blockchain Workbench, Microsoft Azure and the Internet of Things (IoT) to create a platform that can serve as a single, secure and reliable source of data for all stakeholders. Blockchain Oil Pipeline operates according to the following algorithm:

1. A single cloud environment in Microsoft Azure, which is accessible to all participants of events is created.
2. Provers connect to Azure using Internet of Things (IoT) technology. Test equipment records important events, measurement results and certified calibration measurements.
3. The data is entered in the blockchain and provided to all participants of the events. If necessary, regulators, environmental organizations and structures can be connected to the system, which should respond to safety problems (excessive pressure, high temperature, etc.).
4. During the transportation of raw materials, the IoT devices located along the pipelines send data on pressure, flow rate and temperature to the blockchain. As a result, all interested parties can see the measurement data collected in one common environment.

The final results of their project Quisitive demonstrated at industry events Microsoft Technology Center in Toronto, Denver and Dallas.

Logistics and IoT technologies

As it is. We have already written about a large number of interactions in the supply of oil and gas from the production site to the final consumer and that the documentary support for this process can be greatly simplified using the blockchain and the smart contract. However, this is not the only problem with long supply chains.

Other problems include:

• the difficulty of tracking the origin of raw materials, as well as the equipment involved in its production, transportation and processing;
• downtimes and not fully filled cargo space, which is associated with poor control of the location of trucks and tankers;
• difficulties in finding more efficient logistic paths associated with poor quality of data on the location of the vehicle in relation to time;
• communication problems associated with the interaction of multiple parties using different accounting and control systems.

Most of these problems lead to the loss of money and time, but some of them have more serious consequences. For example, it is known that terrorists in the Middle East and Africa produce and sell oil, but because of the difficult logistical paths it is difficult to track to whom exactly this oil goes in the long run. Thus, it is quite possible that you (without knowing it) finance terrorists by refueling a car at some gas station.

How it will be with the blockchain. Unlike the financial sector, the blockchain technology in the oil and gas industry does not remove intermediaries in supply chains. Instead, the distribution registry, smart contracts and IoT tags allow you to track the movement of equipment, vehicles and raw materials in real time and collect this information into a single pool of reliable data.

In practice, this gives the following advantages:

1. You can track the source of raw materials at any stage of the product life cycle. This will increase the purity and legitimacy of the market, as well as reduce the costs associated with product reviews.
2. In case of failure of a certain equipment or its component, the operator can refer to the blockchain to find out when, where and which company the component was made.
3. Producers can see if maintenance has been performed, how often and if their recommendations are followed.
4. You can analyze big data on supply chains and see how effective they are and whether there is a possibility to improve them.
5. You can more accurately predict the processes, as the randomness of the market decreases: the number of errors will decrease, the duration of downtime, the time required to fill out documents and financial calculations.

First successes. The integration of the blockchain into the logistics of the oil and gas industry can occur according to two scenarios. The first involves creating your own unique blockchain chain, tailored to the market.

Along this route went:

1. BHP, NYK, GoodFuels, and BLOC use blockchains to improve traceability and quality control in bunker fuel supply chains. The initiative was called BLOC Maritime Blockchain Labs.
2. Accenture created a blockchain that accompanies the purchase, cosmetics and maintenance of well equipment.
3. SOCAR Energy Ukraine uses blockchain technology in the wholesale and retail sale of fuel, as well as its transportation to distribution points.
4. Russian Gazprom has reflected on the blockchain the process of delivering valves to the “Prirazlomnaya” OIFP.

Another way is to use universal blockchains. For example, you can use the blockchain TradeLens, created as a result of cooperation between the Danish company Maersk and the IT giant IBM. It is a one-stop solution for all supply chains that use maritime transport routes. Alternatives to TradeLens can serve projects Yojee, ZIM, ShipChain and others.

Hydrocarbon trading

As it is. Buying gas or oil in trading markets has two problems: low speed and high transaction costs. Both problems are related to the fact that several additional parties are usually involved in trade transactions, which guarantee the integrity of the operation or its individual aspects.

1. Speed in trading is important because the hydrocarbon market is sensitive to news about the state of the market and the global economy, as well as to some political decisions.
2. Transaction costs are more important for traders who, due to high commissions, lose a significant part of their income.

How it will be with the blockchain. Trading can be carried out through smart contracts that automate most bureaucratic procedures related to checks and guarantees. This solves the problem with the speed of operations and greatly reduces the amount of fees.

First successes. In 2017, Natixis, IBM and Trafigura launched a pilot project of IBM Bluemix for the purchase and sale of raw materials. Testing took place on the US crude oil market. The site allowed real-time sharing of current data on payment, shipment and delivery of goods. Typically, this requires complex "paper" procedures, couriers for the transfer of paper documents and faxes / emails - for digital.

In the same year, a similar solution was tested by the Swiss trading company Mercuria Energy Group in the supply of crude oil from Africa to China using the block trading platform Easy Trading Connect, created in collaboration with ING and Societe Generale. The experiment showed that the blockchain reduces the time of operations from several hours to 25 minutes. Especially it was liked by traders who increased their efficiency by 33% due to a reduction in commission.

The success of Easy Trading Connect led to the creation of an international oil consortium aimed at using blockchain in trading operations to increase their efficiency and traceability. The consortium includes oil giants Shell, British Petroleum and Statoil, trading houses Koch Supply & Trading, Mercuria Energy Group and Guvnor Group, as well as banks ING, ABN Amro and Societe Generale.

The result of the cooperation of the consortium is the VAKT Global trading platform, which is currently being tested in closed mode, that is, only members of the consortium have access. Open VAKT testing should start in the first quarter of 2019.

Information Security

As it is. The Indian multinational company Tata Consultancy Services, providing services in the field of information business and IT consulting, conducted a computerized study of the oil and gas market in terms of adopting the blockchain in the context of data security and compiled the following table.

As you can see, the industry has a lot of problems related to data security and reliability. At the same time, some of them not only lead to monetary costs, but also create threats of theft and data leakage, cyber espionage and unauthorized interventions in the system, which is fraught with loss of reputation.

How it will be with the blockchain. The introduction of the distribution registry and smart contracts will give such effects:

1. Data leakage will become almost impossible, since hacking a blockchain will require very large capacities. However, there remains the possibility of hacking of individual nodes that supply this or that information to the blockchain.
2. Integrity and data security will rise to a new level due to the immutability of information in the blockchain and the inability to counterfeit it.
3. Data processing will be faster and more reliable through asset tokenization and the use of smart contracts.
4. Integration of participants will be quick, simple and transparent.

First cases. All of the above blockchain solutions contribute significantly to improving information security, as they use blockchains and smart contracts, which in itself is a defense against hackers, fraud and errors. However, there are specialized cases:

1. BHP Billiton using Blockapps and ConsenSys uses the blockchain to track the movement of samples of mined raw materials and improve the reliability of real-time data.
2. BP, in collaboration with O&G and Eni and Wien Energie, use blockchain to consolidate back-office processes, protect against cyber threats, and also to cut costs in the long run.

Conclusions in concrete numbers

The World Economic Forum has calculated, that tokenization of the oil industry will increase market liquidity by 1.6 trillion dollars, market volume by 2.5 trillion dollars, will bring companies an additional $ 1 trillion and to society as a whole another 640 billion dollars. It will also reduce CO2 emissions by 13,000 million tons, reduce oil spills by 230,000 barrels and save up to 800 million gallons of water.

Other interesting numbers:

1. The specialists of BP, Shell and Statoil calculated, that the implementation of the blockchain in the trading operations of oil companies will reduce the time of transactions by 30% and it will be equal to the delivery time of goods from the seller to the buyer.
2. Reduction of administrative and commercial costs for VIOCs by 5–10% (thanks to blockchain) will allow large oil companies to save $ 0.4–0.7 billion.
3. Gazprom Neft  estimates that digitizing the oil and gas business increases the company's efficiency by 10–15%.
4. Vygon Consulting believes that the introduction of blockchain to markets with a high tax burden will save companies up to 10% of costs.

How to Use Blockchain in Oil and Gas Industry? key takeaways:

1. Document circulation
2. Equipment reductancy
3. Logistics and IoT technologies
4. Hydrocarbon trading
5. Information Security
6. Conclusions in concrete numbers