18 Sep Global Blockchain Developments and Implications for Oil and Gas
Blockchain technology is moving incredibly quickly. Which latest use cases look like they might play well in oil and gas?
I met with a group of executives this week who were keen to learn about how industries around the world were applying blockchain technology in novel ways. I’m pretty sure some of these ideas will make their way to far-off Canada and some enterprising soul would try them out here.
Blockchain technology is also called distributed ledger technology (or DLT), a really dull abbreviation. I’m a fan of the far more creative branding – Ethereum for example, which reminds me of that fictitious mineral in the Avatar movie, Unobtainium. A lot of people are believers in DLT – venture capital to the tune of $1b or more now backs the more than 800 companies in the sector. Even the World Economic Forum is in on the hype, and projects that 10% of global GDP will be stored on DLT by 2025, or something north of $10T.
Here’s a few examples of the kinds of DLT solutions that hope to get a chunk of that $10T, and how they relate to oil and gas..
DLT helps with pipe assurance
It looks like DLT could be a hit with a girl’s best friend. Some 1.2m diamonds land in the market every year from the prolific mines of the world. That’s about $15b in rough cut stones, that eventually feed a $72b market.
Diamonds would be a great product if you’re into fraud or crime or funding insurrection. They’re small, portable, easily hidden, high value, and nearly impossible to differentiate good from bad. Specialist diamond dealers can provide a gauge of a diamond’s quality through the basic 4Cs (clarity, colour, carats and cut), but that only goes so far. These days diamond cutters also micro-engrave some identification numbers on the diamond in a way that is indiscernible to mere mortals.
Everledger, an Australian DLT startup, uses IBM Watson to track diamonds on a blockchain to provide that elusive fifth C, confidence. Everledger logs some 40 pieces of data about a diamond on the blockchain.
Are there diamond equivalents in oil and gas? A good example is pipe. It’s hard to tell one pipe from another if you’re not an expert, a label painted on the side is easily damaged or forged, and once it’s in the ground the pipe is no longer visible (obviously). But regulators now want to know exactly what pipe is where, its provenance and inspection history, all of which could be stored on a blockchain. Pipe is becoming the diamond of the oil and gas industry.
DLT cuts down shipping costs
You might not use a shipping container to ship diamonds, but a lot of other goods around the world move about via the container industry. People who handle shipping containers (like customs agents, ports, rail, trucks, yards) want to know what’s inside a container because matters if it’s something hazardous or degradable or prohibited. And that generates a lot of paperwork.
People who ship want to know where their container is. I moved from Australia to Calgary last year, and the shipping company was very proud to show me how to track my shipment of household items, photos and art work from the truck that picked up the container from my residence to the port of Brisbane and onto the ship. And it worked.
But then the trail was broken because the container went to Hong Kong, to a different company, where it was consolidated on a much bigger trans Pacific ship to arrive eventually in Vancouver.
It’s pretty frustrating, in the age of Uber where I can see my $18 taxi meandering its way to me, that I can’t track my $3000 shipment online. And it’s estimated that the paperwork (which, as the shipper I pay for), costs as much as $300 to handle, involving some 30 different people and north of 200 interactions and communications, per container.
Danish mega shipping outfit, Maersk, who control a sizeable chunk of the market, conducted a proof of concept to ship flowers from Mobasa Kenya to the port of Rotterdam in the Netherlands to see if this process could be improved.
In a related experiment, Mizuho Bank in Japan is testing the use of DLT for trade financing. Exporters, importers, shippers, insurance companies, port operators and carriers all exchange documents with each other about shipments, with the release of funds contingent on all the paperwork being complete. DLT eliminates the time delays (measured in months) from the manual processing of documents, and allows banks to transfer funds far more quickly, which makes everyone (except perhaps the bank), happier.
Oil and gas companies ship a lot of stuff from around the world. How about taking 10% out of container shipping costs by using DLT? How about capturing 2% discounts from supplier pricing for paying on time?
DLT reduces fraud in consumables
Food contamination is sadly commonplace in many markets around the world. Take pork for example. The supply chain for pork processing is long and involved (the farm operation, the animal feed, medicines and growth hormones, the finishing yards, the abattoirs, the packaging businesses, the cold shipping and warehousing), and provides ample opportunity for contamination.
Even western societies have this issue from time to time – think listeria, salmonella and other problems.
Walmart, working with IBM and Tsinghua University, have conducted a pilot to use DLT to track pork through this complex supply chain. There’s some tricky bits here, involving biodegradable inks to mark the pork, the use of sensors to track the product, and so forth. But Walmart appears to like what they’re seeing.
A similar trial is underway involving Alibaba (a large China digital company), the New Zealand dairy cooperative, vitamin suppliers and Australia Post and New Zealand Post. The aim is fraud reduction, suggesting that fraudulent vitamins and baby formula is a problem worth solving.
An Australian oil and gas company lived its own version of contaminated pork when its Chinese supplier of drilling mud formula made an inappropriate substitution for ground up walnut shells (nut shells are hard to bring into Australia). They swapped the shells for asbestos, a product that is on everyone’s no fly list. The company then had to trace the movements of the drilling mud through the Australian landscape (ports, trucks, yards, highways, warehouses, etc).
DLT would make it more difficult for the parties involved in the substitution to even attempt such a move, let alone try to evade responsibility.
DLT makes used assets more valuable
Every try to buy a used car? Do you trust the seller that they’re telling you the truth about the vehicle’s history? Ever sell a used car? Did you have all the maintenance records on hand to prove the car was properly looked after? How much of the value depreciation of a car is explained by the fact that its history is cloudy and buyers want a discount to compensate for the risk?
The history of a vehicle (ownership, maintenance records, repairs, accidents) is already distributed across repair shops, auto dealers and insurance companies. Piecing together the history is nigh impossible unless you’re a forensic investigator trying to solve a crime.
Along comes French auto maker Renault, who is piloting a car maintenance logbook using DLT. Their partners include Microsoft and others (yes, cloud computing companies are all over DLT because DLT is compute intense and relies on cloud computing).
The application in oil and gas is most likely in the used equipment sales market, although admittedly this is a much smaller market than the automotive market (there are 1 billion cars in the world). Even so, sellers of kit take a discount from value because of the low trust between the parties in the sale.
Other oily DLT examples
Here’s a few other experiments that are more directly relevant to your average oil and gas outfit.
Assays and samples
Remember Bre-X, a landmark case of fraudsters salting a rock sample to inflate company value? The industry now tracks samples with much more care, but with spreadsheets (an inefficient process). BHP is experimenting with DLT to track well bores, rock samples and liquids from point of extraction through to lab analysis and storage.
Oil and gas processing is energy intense. The Energy Web Foundation, a collaboration of several energy companies, will use DLT to allow energy devices, such as a remote well or plant and a wind or solar farm, to transact with each other directly, which will ease the integration of renewable energy into grid distributed power.
Gas contract disputes
NGX, a Calgary outfit that helps buyers and sellers of gas transact with each other, is trialling smart contracts on DLT that execute automatically when gas providers can’t meet their service terms. The manual way to identify who is at fault takes weeks, whereas DLT takes seconds.
Wholesale energy markets
2 dozen European gas and power utilities will be trialling DLT to trade in wholesale markets later this year. Watch the results of Enerchain to see how DLT could disrupt North America’s wholesale power and gas markets.
Oil and LNG trading
Not surprisingly, there have been a few trials to trade crude oil and LNG using DLT. These are the number 1 and number 2 most valuable traded commodities in the world, and a percentage of all trades is in dispute, leading to inefficiencies in the market. DLT will eliminate many of the reasons for dispute and in so doing, make trade more efficient.
Distributed ledger technology is here to stay, it’s going to be very big, and it will be hugely disruptive to those involved in assuring trust between parties. Oil and gas companies need to get to work figuring this out.