Blockchain emerges as a game changer in energy industry

Editor’s note: This is the second in a two-part series on how analytics is impacting the energy industry. Part 1 focused on machine learning and artificial intelligence. 

When the price of crude oil is low, the high cost of upstream oil exploration and development coupled with downstream efficiency challenges forces most companies to reduce costs. The oil and gas industry presents a particularly compelling opportunity to leverage blockchain technologies due to the high transactional values (and therefore risks) and economic pressures to reduce costs. A secure system that mitigates risk, increases transparency, provides an audit trail and speeds up transactions at a significantly reduced cost such as blockchain should be appealing to oil and gas companies.

Blockchain is a distributed transaction-ledger database shared across traditional boundaries. The seamlessness of sharing a constantly updated, single source of the truth is one of the digital technology’s primary strengths. The expanding chain of “blocks” of digital data preserve every follow-on action by parties who have played roles in sourcing, producing, transporting, installing, trading and reselling oil and gas products. After business rules have been encoded, blockchain helps eliminate the need for human intervention to validate and reconcile the data.

One of the most obvious and powerful uses for the digital ledger technology is to provide a reliable and efficient platform for executing and recording energy trades. The entire non-hydrocarbon supply chain could be transformed with blockchain. The interaction with thousands of suppliers, vendors and counterparties drives up complexity and cost, but blockchain could help companies monitor compliance from their suppliers. Additionally, the introduction of smart contracts, which are essentially computer code stored on blockchain that can execute actions under specified circumstances, should give oil and gas executives greater interest to improve their supply chain and finance activities.

Global supply chains in the oil and gas industry comprise a complex web of suppliers, shippers and contractors. Utilizing blockchain technology to record and manage the movement of goods and related invoices significantly mitigates the risk of errors and the opportunity to alter invoice values or recipients. Invoices will be recorded in the blockchain, creating an immutable record of its contents. The movement of invoices also can be addressed in the blockchain using public and private keys, preventing unapproved parties from accessing the invoices.

Operations, maintenance and quality control personnel need to track where asset components originated. Blockchain has the capability to help track all related components and assets, and to share records among business partners. It provides a framework for registering contractors, tracking performance and reliability. A blockchain could be used, for example, to track which suppliers produced the components and subcomponents for a blowout preventer (BOP).

In addition, using blockchain, the operational performance of a critical asset or equipment can be tracked based not only on the cost of the equipment but also the cost of all aspects of the performance lifecycle – including maintenance, operating costs, uptime, downtime, etc.

Within the power industry, blockchain can be a real game changer in the following applications:

Energy trading and process optimization. Blockchains can facilitate trading of energy by allowing for a faster settlement, reducing transaction costs and risks.

Grid management. The combination of smart devices and blockchains allows the grid to self-regulate by automatically triggering actions such as curtailment, redispatch, demand-side management and production/storage from batteries.

Renewable funding. Blockchain provides a fast, secure and universal solution to financially support renewable energy developments. It opens renewables ownership to every type of investor, either through direct investment or using cryptocurrency guarantee of origin (e.g., SolarCoin).

Small-scale peer-to-peer (P2P) trading. Blockchains can create a frictionless marketplace, allowing the exchange of power between consumers by reducing transaction costs, removing intermediaries and facilitating billing processes. This new transaction framework is currently used for power supply and electric vehicle (EV) charging.

Going forward, using blockchain, the oil and gas industry can see reductions in cost of managing complex financial agreements, such as those governing royalties and payments, improvement in transparency through their supply chain, reduction in trade finance costs, and ultimately greater responsiveness to changing market conditions. It will be interesting to see how blockchain adoption evolves in the energy industry and the ramifications of blockchain for the energy and oil and gas industry.