How Blockchain is disrupting the Oil & Gas Industry
The Oil and Gas Industry is a perfect candidate for real value added applications by the blockchain technology. This industry involves multiple parties that must trust each other and conduct global transactions, which involve many intermediaries. It is these parameters that deliver ideal conditions for the successful use of blockchain.
The participants of the oil and gas industry: banks, trading houses, oil and gas companies, ports, insurers, traders — have already launched and tested major global transactions using blockchain technology and the industry is set to be disrupted by blockchain simply because it reduces costs up to 30% — a significant amount for everybody, and possibly growing further over time.
Oil and gas companies such as BP, Shell, Eni, Total, Chevron, and banks like ING and BNP Paribas, Societe Generale, all of them global players, have already joined blockchain — based consortiums, which are set to revolutionise the way oil and gas is bought and sold.
What are the key areas where the blockchain technology can add value in the oil and gas industry?
First of all, blockchain technology enables a globally distributed network of participants to transact with each other fast and seamlessly.
In the case of the oil and gas industry, the members are participating in a permissioned blockchain environment and are connected to all relevant parties, which are necessary to conduct the oil or gas transaction: the buyer, the seller, banks, logistics companies, ports etc. The more parties are connected, the more efficient the transactions become. This used to be quite the contrary before the introduction of blockchain: the more players there were, the higher was the risk of mistakes and losses.
Blockchain technology, together with its incorporated smart contract features, enables users to verify and timestamp documents, which are recorded on a network for all the permissioned participants to see. Once the documents are verified, the data features are recorded to the blockchain immutably and any document in question can carry its attributes itself throughout the lifecycle of the transaction. This is particularly useful in oil and gas transactions that rely on documents such as Letters of Credit and Bills of Lading, and require multiple parties to review and verify the same documents.
Blockchain technology enables a smooth operation throughout the cycle of any transaction: from price discovery to trading, from settlement to final payment.
The oil and gas majors and other industry participants are already establishing and testing solid initiatives and trading platforms, with the early results showing significant cost savings:
Mercuria and ING have conducted an oil trade from Africa to China and have revealed that their blockchain solution has reduced some processes in a trade transaction from three hours to 25 minutes, while the blockchain based payments infrastructure cut costs by 30%. Right now, ING and Societe Generale are testing the trading of the liquified natural gas (LNG) based on blockchain.
The market already sees notable initiatives in the oil and gas industry applying blockchain technology, such as VAKT, VeChain or KOMGO — with the goal to tackle global trade finance, post trade processing efficiencies and supply chain management.
What is clear, is that in an industry, where participants are so closely interconnected, cooperation and knowledge sharing among participants is key, coupled with innovative thinking.
Blockchain is set to transform the management of oil and gas industry transactions and operations as we know them. Every participant of the industry needs to think about the roles that will be important in the future and how to position themselves accordingly.