07 Oct Emerging Blockchain Solutions in Oil and Gas
There are finally some serious blockchain-enabled business solutions making headway in oil and gas. Here’s a round-up from the recent Blockchain in Oil and Gas conference.
In case you’re not across it, the Energy Conference Network organizes an annual conference in Houston called Blockchain in Oil and Gas. It attracts a couple hundred interested parties who take in the usual conference staples—presentations, panel discussions, vendor booths with demos. This year’s event coincided with the arrival of a tropical depression which flooded the city but the event survived unscathed.
I covered the details of my talk in an earlier article (available here), so won’t go over that ground again. Instead, this article will review the highlights from the other presentations and panel discussions, particularly the emerging solutions that have captured the attention of the industry. It is these solutions that demonstrate the first tangible value that oil and gas companies are starting to realise.
The OOC Blockchain Panel
Have you heard of the On-shore Off-shore Consortium and its blockchain off shoot? A group of producers (Repsol, Shell, Chevron, Equinor, Hess, among others) have formed a collaboration community to explore use cases and to learn together about how this technology impacts the industry. I found the key messages from the initial panel discussion to be very valuable for those contemplating a blockchain trial.
Unlike some industries, where a single large vendor (retailing and Walmart) has a big supply chain opportunity, oil and gas is too fragmented. The OOC is finding success by working on solutions in a consortium.
It’s easy to get hung up on selecting solution partners and key technology vendors. The panel notes that the environment is changing rapidly, and the normal precision in selection processes is misplaced. You’re likely to get it wrong, but don’t worry. It’s more important to be agile, just pick one and get going.
It is very important to pick the right things to work on, because speed to results matters and there are lots of candidate problem areas. Spend time in business problem analysis to zero in on the right things.
A big job of the solutions teams is the need to agree what data is to be exchanged via blockchain, and the need to agree what the exchanged data actually means.
Oil and gas likes to standardise things but in the case of this emerging field, standard-setting is possibly too early. Special care should be devoted to setting standards only where truly necessary.
Particularly in this early stage of development, solution apps are going to proliferate. The panel stressed the need for interoperability between solutions, flexibility to change direction, connectivity between solutions, and transparency of processing.
One problem process targeted by the OOC is called AFE Balloting. AFE is Authorization for Expenditure, the process whereby capital spending for a well or infrastructure investment is approved. In the case where a project has multiple possible participants, the process to secure agreement on the spend is called balloting, and it behaves like it sounds.
The lead operator in a Joint Operating Agreement (JOA) prepares a draft AFE ballot to send to the other participants (which includes other operators, and those with a working interest). The draft AFE sets out the proposed spend for each of the participants, pro rata to each’s interest level. Remember, some mature properties date back 70 years, and have changed hands or attracted new participants over the years.
Because the ballot becomes binding, and unintentionally sets up future disputes and disagreements, it takes the form of a certified, hand-signed, manually delivered letter. You had me at certified.
Participants must consent or not consent within the time limit of the ballot. Ballots trigger lots of back and forth to align the money, and a bit of game theory creeps in as participants scheme, juggle their portfolios, field multiple ballots and line up the capital. Did I mention there’s a second round of balloting once the first round closes, and the money starts to materialize? Knowing who is in and who is out triggers a recalculation, and the second ballot repeats the whole process.
AFE balloting is a good candidate for reform. The process is clearly time consuming, paper based, costly, and very manual. It’s likely error-prone too, which creates lots of potential for disputes. Knowing who is doing what requires a level of transparency that cannot be readily accommodated in a paper-based system.
And as a target area, AFE balloting has low risk. It’s about lining up the money, which is a decidedly lower risk profile than spending the money. Guild1 is working on this problem area.
Salt Water Disposal (SWD)
Another intriguing use case involves the handling and disposal of waste water, and in this instance, briny or salt water. Water contaminated with salts and other undesirables is a natural by-product of oil extraction, and once at the surface, needs to be dealt with. Regulators want precise, frequent and accurate records of water handling, and levy penalties or production curtailment for repeat offenders of the rules.
We’re talking a lot of water. The OOC estimates that the US onshore industry produces some 20 billion barrels of briny water a year, triggering the purchase of 100 million individual water hauling orders for trucks to collect the stuff and haul it away for appropriate disposal. Equinor alone reconciles some 20,000 trucking tickets per year.
SWD participants (thousands of truckers and tanks, operators, disposal sites), have their own ways of working (processes), reporting, technologies and structures. Some are very sophisticated, others are paper-based. It’s a classic “many to many” problem—many haulers working for many operators, which impedes efficient single solution answers. No one player has enough market power to create a one-size-fits-all solution.
Simply “automating” the truck ticket doesn’t create enough value to drive change. The data about the haulage (pick up location, disposal location, volume, composition, distance hauled), needs to be machine generated and date and time stamped. The process of contracting a haul needs to fit into existing business practices (registering a supplier for SWD, setting up the AFE, placing the call off, dispatching, recording, and settlement). Suppliers need to be paid on time and on terms to motivate their involvement and interest.
The proof of concept is taking place in the Bakken basin, and early results point to a 25% reduction in total process savings. As with other blockchain trials, the participants quickly see the power of smart contracts that auto execute when milestones are achieved, including automatic payment to suppliers (eliminating invoicing!).
This solution points to the larger potential for blockchain to streamline other commodity handling services, including chemicals, sand, and fuels.
As noted by the SWD team — Digital is about transforming how we work across processes, people, and technologies. Therefore some things must change and others must stop. DataGumbo is working on this problem area.
In much the same way that OOC is tackling the problem of water disposal, Singapore is trialing a fuel bunkering solution. The parallels are striking.
Ships at harbour need refueling, and so contract with a lighter (or barge) to deliver a cargo of bunker fuel to the ship’s fuel bunker (a process call bunkering). Bunker bunker to the bunker.
As I see it, bunker fuel is akin to the salt water in SWD, the lighter is the disposal truck, and the ship’s bunker is the disposal facility. Participants need to know who has custody of the product and when. The amount of fuel matters because of its value. As with SWD, the overall process is paper-based, manual, and prone to error. Fraud is a constant worry because the product is so valuable, and participants actually budget for theft.
An added wrinkle is the coming change to bunker fuel specifications. Historically, bunker contained as much as 3.5% sulphur (a pollutant linked to acid rain and smog), but new rules limit sulphur to just 0.5%. Ship owners have been retrofitting their vessels in preparation to use alternative fuels such as liquefied natural gas or LNG, and low sulphur bunker or diesel, or to incorporate blending tanks. We’re now in a world of multiple fuel types. Buyers will want assurances that the fuel they purchase meets the specifications. And regulators have stepped up reporting and compliance.
Enter Quaychain, a new way to streamline fuel bunkering. Its goal is to fully automate the bunkering process, from contracting to custody transfer to delivery to compliance. Cargos are recorded on a blockchain structure. Digital sensors at key custody transfer points capture precise machine data about volumes, locations, dates and times, creating intelligent transfers that are recorded immutably. New other participants, such as testing labs, and insurance companies, can join in.
Two innovations struck a chord with me. First, with Quaychain, compliance with regulations can be met without any additional cost (or, expressed another way, compliance is free). Second, the system is intuitively designed in such a way that users do not require training. The complete bunkering transaction, involving the seller, the lighter, the customer, and all the other participants, can be done on one screen.
If you’re interested to learn more about these solutions, to get introduced to the proponents, or to discuss this topic in more detail, drop me a note.
Check out my new book, ‘Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas’, available on Amazon and other on-line bookshops.
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