Is Blockchain’s Future In Oil And Gas Transformative Or .

Is Blockchain’sFuture in Oil and GasTransformative or Transient?By Mark Koeppen, David Shrier,and Morgan Bazilian

Is Blockchain’s Future in Oil and Gas Transformative or Transient?Ask an oil and gas executive what theythink about distributed ledger technology,and you might get the following response:“That’s Bitcoin, right?”Distributed ledger technology, commonlyknown as blockchain, has its roots in theonline currency Bitcoin. But blockchainis growing beyond its currency origins,making inroads into the financial servicesand tech industries toward improvementsin operations and finance.Is blockchain ready for prime time inthe oil and gas industry? Is it hype—or agenuine agent of change? The jury is out.Some executives recognize its potentialfor reshaping their business. Othersexpress concern about disruption, unsureif the future benefits will outweigh therisk and investment demands of being afirst mover. More than a few have little orno knowledge of the possibilities—orthey may believe that alternate solutionssuch as robotics and cognitivetechnology are superior solutionsto their current challenges.In a survey commissioned by Deloittein late 2016, nearly two in five seniorexecutives surveyed at large U.S.companies across industries had littleor no knowledge about blockchaintechnology. While 55 percent ofrespondents said they believed theircompanies would be at a competitivedisadvantage without it, 42 percentacknowledge its disruptive potential.1To date, the technology has had littleimpact on the oil and gas industry,providing a small frame of reference foroil executives to adequately assess -industries-moving-faster.html11

Is Blockchain’s Future in Oil and Gas Transformative or Transient?current and future value. But given thedata-intensive opportunities availablethrough the growth and expansion of theInternet of Things, blockchain could be animportant vessel to carry the industry’sdata transformation forward.One element of this new technology thatcan bind skeptics and true believers isthe potential of blockchain as a meansof simplifying processes that can lead toenhanced efficiency and cost reductions.Blockchain can offer transactionalverification instantly across a network,without relying on a central authority—potentially reducing operating costs,more securely storing and managingdata, and improving the speed oftransaction processing.That’s the big picture, and some majorglobal players are already hoppingon board. For example, the globalpetroleum and mining company BHPBilliton announced at the second annualGlobal Blockchain Summit in Shanghailast September that it would start usingthe technology to enhance supply chainefficiency, better secure real-time datagenerated during delivery, and createa chain of order requests connectingengineers, analysts, and laboratories,according to Bitcoin Magazine andother media accounts.2Supply chain is often a good place to startin assessing practical value. Companiescould forge new agreements withproducers, suppliers, financial experts,record-keeping departments, and thirdparty vendors, potentially leading toreduced costs, streamlined managementand a clearer understanding of theassignments and expectations of eachplayer on the field.Innovation isn’t just about influencingexisting business models in a positiveand productive way. It’s also about how tomonetize new ideas. Oil and gas companieshave struggled through price volatility andrecord production levels in recent years,often leading to massive cost-cuttingefforts, reduced exploration, and layoffs.This has forced oil and gas companiesto drastically rethink how they operateand identify innovative ways to improvetransaction processing.

Is Blockchain’s Future in Oil and Gas Transformative or Transient?The business caseThe industry is no stranger toThe time seems right for blockchain, but willtechnological innovation on theit be the next big industry breakthrough?operations side. Getting resources out ofthe ground through hydraulic fracturing,3-D seismic and other extractionprocesses is a hallmark of the industry’sgrowth. On technology that improves andrefines the back-office function, it hasbeen a different story. The industrygenerally hasn’t brought much new digitaltechnology to the supply chain,procurement, or finance parts of thebusiness.3In an industry of such global reach andcomplexity, special operational andmanagement challenges routinely come intoplay. In navigating an often dizzying arrayof national regulations and restrictions,simplifying and making more robust thepaperwork and processes of global productmovement is essential for oil and gas assetsboth in the United States and abroad.Where there is a clear economic case tobe made, the industry can be persuadedto embrace and enact new solutions.Questions arise in these cases: Can newtechnology generate higher revenues? Canit assist in consolidating the workforce?Can it create greater transparency andaccountability? Can it streamline the supplychain? That’s a good starting point for anybusiness case discussion.Leaders in the industry are going toneed a strong proof of concept. They’llneed to measure blockchain’s successesor challenges against other industriesand determine whether they can workwith others in the market to adaptthe technology.Conventional wisdom, strategies, andtactics have fueled the success of thispowerful industry for so many years.Change inevitably comes to all industries.How that change evolves and attaches willdetermine the direction an industry takes.Distributed ledger technology may be onebreakthrough that drives the industry ina new direction, but it still has manyhurdles to overcome.

Is Blockchain’s Future in Oil and Gas Transformative or Transient?The value proposition for oil and gasDetermining how and whether blockchainwill work for a particular oil and gascompany is a starting point. Four areas ofconsideration can help shape thediscussion and lead key players to the rightconclusions.4

Proposaltitle goeshereSectiontitleTransformativegoes here IsBlockchain’sFuturein Oiland Gasor Transient?ATransparencyand complianceBlockchain technology, by design, should translateto greater transparency and efficiency. The sharingof digital blockchain information as required injoint operating agreements could lessen, if noteliminate, the need for reconciliations betweencompanies and for data hubs controlledby third parties.When it comes to regulatory oversight,blockchain technology can improvecompliance within three reportingframeworks—the Dodd-Frank Act, theExtractive Industries Transparency Initiative,and European Union directives—throughincreased transparency and betterreporting streams. Employing blockchainenabled data sharing under MIT’sproposed Trust::Data framework coulddramatically reduce compliance costsand increase speed.5The more complicated question is this:can it provide the level of transparencynecessary to achieve success while ensuringmore efficient data and systemic security?It holds great potential, but risk-averseindustries might react cautiously to systemsbuilt on rewiring a strategic operation.

Is Blockchain’s Future in Oil and Gas Transformative or Transient?BCyber threatsand securityThe flip side of the anti-corruption/transparencycoin is data protection: how can new technologyensure that critical information remains safe?Smart sensors can provide criticalinformation, such as real-time conditionsfor an undersea oil field operation, butsuch sensors currently are among the mostinsecure areas of a company’s network.And the industrial espionage potentialof a competitor gaining access to thisinformation is substantial.form in tiny fragments, while continuingto allow the data to be useful even whenencrypted and broken into fragments.Storing data in fragments at multiplesites, rather than concentrating it one place,also raises the prospect of enhanceddata security even without a fullyencrypted system.Even the nominally central areas of acompany’s network, its core IT functions,are vulnerable to hacking, as many havediscovered over the past few years.Biometrics may help “harden” accesscontrol, but where should the biometricfile be stored? Where should the mostsensitive information about topcompany officials be secured?As an example of how technology respondsto evolving enterprise needs, developersin the financial technology space arebringing code to data in what is knownas the Open Algorithms, or OPAL project,which is also part of MIT Trust::Data. Ratherthan depositing key information in onecentralized location, the operational codesare going to the source. Some expertsbelieve this protects against placement ofvital data in a singular location, which can bean invitation to hackers and increase fearsof external breaches. It applies another coatof security to key company data.That’s where new solutions built onblockchain technology come in. MITENIGMA, for instance, was designed tobe more secure than existing solutions instoring sensitive data such as biometricidentity (a user’s password) in an encrypted6

Proposaltitle goeshere OilSectiontitleTransformativegoes here IsBlockchain’sFuturein and Gasor Transient?CMid-volume trading/third-party impactsInefficiency isn’t unusual along the tradeprocess. It occurs far too often. These points ofresistance are spotlighted where IT systems mustnetwork with an outside system or systems.The complexity inherent in the system slows theexchange of critical data, which is the lastthing an energy trader wants.Blockchain-enabled applications alsocan address other issues that need tobe reviewed, including the removal orreduction of brokers’ fees, reduction infraud, error, and otherwise compromisedtransactions, and limiting credit risk andtransacting capital requirements.For energy market participants, the valuederived through the application ofblockchain applications is compelling.Blockchain technologies will not simplymake the current markets more efficient.They have the potential to radically disruptand open up the energy markets in wayspeople have not yet even considered.Boundaries between asset classes will bluras cash, energy products and othercommodities, from industrial componentsto apples could all become digital assetstrading inter-operably. If more value canbe derived by not restricting activity toa single asset class, then that is where themarket will go.Blockchain will provide the platform.7

Is Blockchain’s Future in Oil and Gas Transformative or Transient?D The smart contractYears of volatility in commodity prices, growthstagnancy, and limited expansion have putexploration and production companies in a toughspot. They’ve been forced to drastically reducedrilling times and search for other means ofreducing cost and expense to maintain (or comeclose to maintaining) acceptable margins.The sheer size and volume of contracts andtransactions to execute capital projectsin oil and gas have historically causedsignificant reconciliation and tracking issuesamong contractors, sub-contractors, andsuppliers. Challenges in managing logisticsfor supplies, tracking costs, and deployinginventory requires a heavy manual lift.Cascading POs, change orders, receipts,and other trade-related documentationand data on inventory could be achievedby following specific codified rules.8Drafting agreements that afford newtracking, bookkeeping, and automationmethodology should create a moreseamless supply chain, improved capitalproject spend analytics, and simplifiedcontractual obligations at each point alongthe way. Simply put, knowing who gets paidwhat, why, and where; who is owed money;and who along the chain is performing asexplicitly mandated by the agreement arepotential game-changing elements of adistributed ledger strategy.