20 Dec Unlock billions from #oil and #gas capital projects, ops and maintenance using blockchain
How might blockchain technology solve one of the most frustrating and costly problems of the digital oil and gas industry? The sector builds new assets constantly, but engineering documents and systems that are supposed to accurately depict as built asset do not, leading to substantial costs and waste for the oil and gas asset owner. Blockchain could be a solution.
Is capital execution a blockchain kind of problem?
Blockchain is a digital solution to one of modern society’s basic problems – that we can’t always trust everyone in our business activities.
In an earlier post I wrote about blockchain and how it works.
I believe the major capital side of oil and gas and its documentation trail have many of the features of a business model that could benefit from blockchain technology.
- The parties in the build cycle don’t trust each other so the industry has evolved elaborate document numbering schemes, document check-in, check out processes, claims, documentation standards, ways of working, complex project team structures, duplicate owner-builder teams.
- In today’s engineering world, the product is completely digitized already – diagrams, specifications, meta data. The digital assets are copied and distributed to the parties involved depending on their need.
- There is an ample volume of documents to contribute to a blockchain. A big capital project, $2b or so, might generate 10 million documents in total. During the life of the asset, even more documents and data points are created, and the assets last 20-40 years.
- The value at stake is substantial. Oil and gas assets are expensive, ranging from a few million for a new well up to tens of billions for a new oil refinery or LNG plant.
- There is no standard trusted central depository for engineering content, so active projects invent a variety of practices to compensate, including builders exchanges, project offices and special software for tracking document movements. Indeed it’s already a peer to peer system, the basis of blockchain.
The prize to the oil and gas company
There are two key value release opportunities in the capital project cycle.
As assets are built, the industry devotes a huge amount of time and money to ensure that the data about the asset being built actually matches the asset. This costly overhead includes margin on margin, is often priced as cost plus, and is growing over time because of evolving regulations. Identifying what data is incorrect is like finding a needle in a haystack.
Asset owners routinely pay net 60 days or longer to allow owners teams enough time to find and correct errors. If data quality could improve to 100% then asset owners could revert back to paying much faster (7-30 days), providing a much needed cash flow boost to the supply chain.
Throughout asset life
The operations and maintenance function needs to trust the accuracy of the engineering documents and data received from the builder or builders of their assets. When asset data doesn’t match the asset, then all manner of problems crop up for operations and maintenance:
- Maintenance teams can’t schedule their maintenance tasks ahead because they don’t know what to expect. Maintenance becomes more reactionary, and costly.
- The procurement function can’t order the right parts, so they order too many, too few or the wrong ones.
- The asset may not perform according to the documentation, leading to variability in production
- Turn around planners cannot design an effective turnaround plan because of the uncertainty of the asset. Turnarounds are more costly than they need to be.
- Extra time and effort must be invested in verifying the data and rebuilding the data bases.
- Extra costs must be incurred to carry out any work on the asset.
- In the event of a mishap, or non-compliance with regulations, the asset owner may not be able to prove what was actually built, leading to penalties.
- The latest advancements in digital solutions to lower cost and improve productivity that rely on high quality as built data are simply unobtainable.
These costs show up after the construction cycle is complete. There’s low incentive in the system for those involved in building the asset to fix the problem because the benefits of improvement all accrue to the owners and operators, and the costs to fix the problem reside with the builders. How can owners lower their future cost of maintenance while not increasing the costs of new assets, given that they are already paying for accurate data?
Why this is hard to fix
There are some structural elements throughout the industry that make fixing this issue particularly problematic, but also parallel the features of industries that are tackling this kind of problem through blockchain:
- Asset builds involve multiple parties, from engineering firms, specialist advisories, fabricators, equipment suppliers, subcontractors, trades and so on. Getting their cooperation is a problem.
- The participants in the industry have made their own separate and incompatible investments in engineering tools and technologies for rendering content and are highly resistant to abandoning these investments.
- Imposing a technical tools standard on a project means engineering users would need to be substantially retrained, which will impose a cost to the project and the participants. Imposed standards can also dampen competitive rivalry particularly if the tools are not in wide use.
- There are no widely agreed data standards in the industry, leading participants to pursue their own self interest in completing their work. Standards are emerging, such as BIM in the UK, but these building standards may take some time before they migrate to non-building assets.
- To meet build timelines, some long lead time items are ordered early in the build cycle, before the as built diagrams are complete.
- The assets and related documents are very detailed and complex which makes finding data issues very challenging.
What would a blockchain solution need to do?
A blockchain solution would first need to help identify data issues and second, incent parties to correct the data issues. It’s important to note that the parties involved in construction have all the systems needed to manage their documents and data, so blockchain technology needs only to help improve data accuracy.
First, a blockchain solution would help identify when digital content (documents or data exchanged between two parties in a contractor-supplier relationship) do not match. The contractor issues contract specifications (describing the asset or item that is to be delivered), and the supplier builds the asset or item and produces the as-built specifications (describing the actual as built asset).
If the contract specifications match the as built specifications, at whatever level of detail the contractor requires, the parties agree the as built data is correct. If the contract specifications do not match the as built specifications, the two parties would work to understand and resolve the differences, until the parties agree. At that point, the as built specification is deemed correct and supersede the contract specifications.
The blockchain would record the agreement, providing an audit trail of the agreed content. This would support subsequent requirements to hold parties accountable for the quality of asset data.
Second, the blockchain solution needs to incentivize the contractor and supplier to work together to produce accurate data. The owner of the asset, who bears all the costs of poor as built data quality, would pay digital tokens every time the contractor and supplier reach agreement (i.e., when they jointly agree the as built data is correct). These tokens would be redeemable as contract bonuses or digital currency or reputation credits.
This blockchain structure could work for any type of digital content, including diagrams, data sheets, and equipment specifications.
Are there proxy solutions for inspiration?
One solution that looks comparable is the Walmart blockchain experiment in the Chinese pork industry. Walmart is particularly interested in improving food processing value chains where issues of food safety and fraud can create eventual food safety concerns. The company wants to track food products through its value chains, from farm to finishing yard to abattoir to wholesaler to processor to retailer.
This solution shows many of the same issues as the capital projects – lots of participants, costs of food safety are carried by the food owner (Walmart) and not the participants, ample opportunity for fraud or misalignments between participants.
How could blockchain move forward?
Some party needs to get started with this idea. It could be an asset owner who is about to embark on a new build program or perhaps is starting a significant overhaul of a big asset (if that overhaul will generate new asset data).
It could be an engineering-procurement-construction firm who wants to obtain an advantage in managing its projects. A blockchain solution could be a powerful new addition to its service model.
As the most recent Deloitte Canada publication points out, Canadian businesses lack courage. What we need is a little courage to tackle this problem. The prize is huge to Canada in its oil and gas sector, but the solution concept also applies to the utility sector and military procurement. It doesn’t take long to visualize potentially billions of value at stake.