Blockchain to change how oil and gas companies operate

By: Bjorn Ewers, Managing Director & Partner at Boston Consulting Group (BCG) and Jean-Christophe Bernardini, Partner & Associate Director at Boston Consulting Group

How can Blockchain change how oil and gas companies operate?

As a hugely beneficial technology that allows data to be stored on an unprecedented scale, Blockchain can fundamentally change how oil and gas companies operate in several ways. It is important to appreciate that the oil and gas industry is in the middle of a fundamental value-creation challenge, and leveraging digital technologies such as Blockchain can help companies reimagine their operations as required. The most prominent way in which Blockchain is advantageous over other technologies that support data storage is its capabilities to facilitate the seamless exchange of data, complete audit trails of transactions, and provide different levels of data access through secure authentication. There is also a lower risk of hacking using Blockchain technology.

Because the technology underpins bitcoin and other digital currencies, it serves as a ledger that can make and verify transactions on a network in real-time and offers the potential to cut costs and reduce the risk of fraud.

As an example, Blockchain For Energy, previously known as the OOC Blockchain Consortium, which includes some of the world’s largest oil majors awarded a contract to a data platform company to pilot the technology for water handling services. At the outset of the project, the technology was projected to generate as much as US$3.7 billion in cost savings annually for the oil and gas water business – which could lead to organisations changing how they operate.

Has COVID-19 helped speed the use of Blockchain in the energy sector?

Yes, COVID-19 has accelerated the use of Blockchain in the energy sector. Of course, recent events have placed unprecedented strain on the industry and every entity involved within, posing significant challenges across a multitude of segments. However, one of the few positives the pandemic has yielded is that the use of Blockchain has been supported by intensifying the use of digital solutions for collaboration purposes and enhancing supply chain-related workflows. Crucially, the energy sector demand collapse experienced following the outbreak enhanced the urgency for new approaches and for companies to transform their legacy business to achieve a step-change in performance. There are five main applications for Blockchain in oil and gas, which are to strengthen the usage of smart contracts, supply chain tracking, commodity trading, cybersecurity, and record management. As we reflect on 2020, the interest and push towards the adoption of Blockchain in oil and gas have grown, and we can expect the adoption to increase.

What is the true potential of Blockchain as a means of simplifying processes in the oil and gas sector?

With volatile crude oil prices, lengthy development cycles, complex payment structures, and contracts signed years in advance of the actual trade-in, the industry needs to increase efficiency with regards to the handling of contracts, simplifying processes is an urgent necessity and Blockchain has the potential to drive such reform. More specifically, the technology has the capabilities to decrease complexity and increase accuracy to manage smart contracts, eliminate disputes and drive reconciliations referencing records in single ledgers, remove ambiguity by writing contracts in code, automatically transfer ownership and payments, identify issues faster with dynamic tracking, and optimise the effort associated with royalties calculation ranging from 30-80 per cent.

Several companies are already working in this space using this technology. For instance, one data platform company removed the manual processes and litigation from transactions while pursuing automated performance-based contracts. Today, they offer six solutions, including asset life-cycle tracking, autonomous contract execution, single-window viewing, logistics tracking, and resource sharing. Another example is an energy trading company, which aims to link oil producers and crude and water haulers with smart contracts and the Internet of Things (IoT). Supported by a consortium that includes a few of the world’s oil majors, their objective is also to reduce manual checks and improve workflows concerning billing, tickets, and electronic documentation.

How can Blockchain technology ensure that critical information remains safe?

Critical information is an essential component for every energy sector organisation and ensuring it is safe and secure at all times is a top priority. Blockchain technology has the capabilities to guarantee critical information safety and security, improving and enhancing related processes simultaneously. Firstly, it can bolster confidentiality and data security, helping to reduce business risks by proactively detecting threats that arise from data tampering or corruption. Secondly, Blockchain will secure private messaging. The metadata is randomly distributed throughout any given ledger, meaning it will not be available for gathering in one single point, so threats are prevented. Thirdly, it will boost or even replace public key infrastructure (PKI). Blockchain will ensure each device has its own specific secure sockets layer (SSL) certificate, preventing intruders from using false SSLs.

Does Blockchain have the opportunity to disrupt and open up the energy markets?

Yes. In fact, there are many opportunities for Blockchain to disrupt and open up the energy markets and this applies to those working in all parts of the value chain, from market newcomers to long-standing players. We previously touched on contracts and how related processes can be simplified – and this is relevant to energy market disruption and openings. For instance, smart contracts automatize deal execution in over-the-counter (OTC) trading and can be used to digitize the trade life cycle, reduce costs, and eliminate inefficiencies. Another area where Blockchain opportunities await is secure supply chain tracking – whether it be tools or products – due it is the potential to transform the oil and gas supply chain.

Various companies are already operating this space using the technology, with newfound and far-reaching capabilities to identify issues with faster dynamic tracking, simplify the procurement ecosystem, improve inventory management, and increase trust between associated parties. A North American oil and gas company recently developed a new supply management platform based on advanced Blockchain technology in collaboration with a company that engages in the business of digital cryptocurrency and blockchain development.

This enabled the two to share industry experiences and financial and technological resources to develop and operate an enterprise-grade, Blockchain-based platform that enables oil and gas companies globally to conduct transactions. Another example is a digital supply chain management platform, which now boasts a holistic software-as-a-service (SaaS) platform that simplifies forecasting and replenishment, optimises manufacturing planning, removes lost sales from the equation, and reduces carrying costs while driving the supply chain transparency, accuracy, and accountability.

Do you think oil and gas companies must adopt more digitalisation?

Looking ahead, digitalisation will be imperative for oil and gas companies and major producers in the Middle East. They must innovate their business models to tap into new value pools. Leveraging digital technologies in the present to succeed in the post-pandemic landscape is essential – and proactive steps should be taken right away. To evaluate the industry’s current digital maturity, we recently conducted a study of 46 upstream operators using a combination of an online survey and deep-dive views. Given that the majority of companies have already announced CAPEX cuts between 10-30 per cent and OPEX cuts between 5-20 per cent, the requirement to implement digital technologies to drive comprehensive transformation has never been more important than it is today.

Recent events have intensified the need to modernise, the benefits of doing so are becoming more and more apparent. Besides operational improvements through digital requiring relatively small investments as most technologies are readily available, time to impact is faster via digitalisation and can help free up essential finances in the short-term. Moving to a more cost-effective and nimbler operating model with less personnel also helps develop resilience in the long-term, while digital can reduce the risk of virus transmission between staff by facilitating remote operations and collaboration.

This feature first appeared in the January issue of Pipeline Magazine

Bjorn Ewers

Jean-Christophe Bernardini