The era of digital transformation has arrived, leading traditional industries to embrace new technologies to adapt to a fully digital future. As such, it should come as no surprise that the trillion dollar oil and gas industry has quietly begun to leverage blockchain technology for business success.
Douglas Heintzman, Principal Catalyst at the Blockchain Research Institute, told Cointelegraph that the oil and gas sector is particularly ripe for blockchain development due to its uniquely positioned supply chain: โThere are many participants in downstream operations and upstream within the oil and gas industry. "He further added:
"Industry must now look at all the processes built and developed over the past 80 years and ask how to drive radical amounts of productivity and efficiency into the system."
While there are several ways that blockchain can be applied to an industry like oil and gas, the technology specifically provides a single source of truth within a complex sector that contains multiple players.
Raj Rapaka, ExxonMobil's digital innovation advisor and a board member of Blockchain for Energy, a consortium of energy companies focused on bringing blockchain-based solutions to the sector, told Cointelegraph that the oil and gas industry primarily recognizes blockchain. as an important technology used to reduce friction when interacting with external parties: โThere are many suppliers, vendors, contractors and other parties involved in the oil and gas sector. Blockchain provides a single source of truth, along with other characteristics that make the technology attractive. "
According to Rapaka, these specific characteristics are being pushed within the oil and gas industry to ensure recognition that technology will help the sector to be more efficient in the future.
Smart contracts automate manual processes
To put this in perspective, Rapaka mentioned that Blockchain for Energy recently helped oil giant Equinor leverage smart contracts to confirm multiple transactions.
Rebecca Hofmann, President and CEO of Blockchain for Energy, told Cointelegraph that the consortium initially piloted a solution with blockchain startup Data Gumbo in 2019 and 2020. The pilot combined operators from the industry, along with their clients, suppliers. and vendors, and incorporated real-time sensors to collect data to validate transactions through a blockchain network.
According to Hofmann, the "commodity transportation smart contract" solution was first tested with produced water to demonstrate that the technology was capable of helping with end-to-end automation:
โWe call this 'extreme automation' because everything is contactless. Connected IoT sensors collect the data, which is then written to a blockchain ledger for validation. These invoices are then approved by smart contracts, which create invoices for automatic payments. "
Given the success of the trial, Hofmann explained that Blockchain for Energy helped automate an extremely manual process within the oil and gas industry supply chain. โThere are about 23 manual touches that take place between the major oil and gas companies within the supply chain. Now we have this number reduced to four. "
Andrew Bruce, founder and CEO of Data Gumbo, told Cointelegraph that following the Blockchain for Energy pilot, Equinor has been able to expand its blockchain use cases, resulting in savings worth millions of dollars:
โEquinor and other global oil and gas companies use field sensors to transmit near real-time data monitoring and encode on the private network of authorized smart contracts. GumboNet effectively creates an auditable, immutable and shared source of truth for Equinor and other operators, and their suppliers.
In turn, Bruce commented that smart contracts build trust to significantly reduce the cost and resources required to execute business transactions automatically. "A smart contract on Data Gumbo's GumboNet, for example, can be programmed to trigger payments to a contractor when a sensor indicates that a specific milestone is reached, such as when a bit has reached a certain depth," he said. In other words, a lengthy billing and payment process takes just a few days, which translates into substantial savings, financial transparency, and efficiency improvements.
While Equinor may be an early adopter of smart contracts, Paul Brody, global blockchain leader at EY, further told Cointelegraph that smart contracts seem to work quite well for the oil and gas sector:
โThe industry itself is very complicated. There are layers and layers of contractors, subcontractors, and complex distributions of rights, assets, and income streams. They are difficult to manage manually, but it turns out that they work very well as smart contracts. "
Brody added that since the oil and gas industry's production is highly standardized, the sector is a perfect candidate for managing digital tokens: "You can easily represent these assets and deploy them in more complex DeFi and smart contracting ecosystems."
While tokenization for the oil and gas industry is still a developing concept, Hofmann explained that Blockchain for Energy is currently testing a solution with a blockchain company, BlockApps, to tokenize seismic authorization processes. "Seismic law involves vast amounts of data that must be kept for more than 60 years," he said. According to Hofmann, tokenization is necessary to help track the rights and obligations of those seismic assets to facilitate the purchase, sale, and lease of those assets, and even monetize unwanted data.
Blockchain for a greener future
It is also important to note that the oil and gas industry is using blockchain to ensure a greener future. While there are a number of ways this can be applied, Brody believes that one area that is likely to take off is the use of different blockchains to measure carbon outflows and offsets: "We envision markets that allow Fortune 1000 companies that have pledged to be climate neutral to use smart contracts to track their carbon usage and automatically buy offsets."
While this is still an emerging concept, some companies have started using blockchain to raise awareness about energy consumption. For example, energy provider Restart Energy One recently launched a blockchain-based platform that allows companies to acquire sustainability certificates in the form of non-fungible tokens, or NFTs. Additionally, global investment firm SkyBridge Capital recently partnered with carbon credit provider Moss to buy digital tokens representing carbon offsets.
Additionally, Alexis Pappas, chief innovation officer at GuildOne, a Canadian blockchain and digital finance firm that specializes in energy sector transactions and data automation, told Cointelegraph that GuildOne has developed its ESG1 platform, which applies smart contract software and blockchain applications to solve one of the problems. The biggest challenges in the oil and gas industry: creating verified value from reduced emissions.
According to Pappas, "ESG1 ingests data from IoT sensors to provide proof of provenance of the sequestered carbon and automatically generates carbon credits as tokens using the Corda and Cardano blockchain platforms."
Will oil and gas companies slowly but surely embrace blockchain concepts?
While it is clear that blockchain technology can help the oil and gas industry digitize business processes, legacy technology and the ideals on which the sector is built can create challenges in terms of rapid adoption.
For example, Brody pointed out that oil and gas is not only an old industry with a lot of legacy technology, it is also highly cyclical. "The ups and downs of the famine make it sometimes difficult for companies to maintain long-term investment programs that are not directly related to things like drilling and exploration."
However, Brody believes that blockchain's cost savings and operational efficiency will drive adoption. "It won't be as fast as it is for consumers, but as legacy systems age, their replacements are increasingly likely to be blockchain-related."
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Rapaka added that education remains an issue that needs to be addressed. Furthermore, he noted that it is not just about addressing how blockchain works in a technology stack, but about educating business leaders on how technology can be applied to make processes more efficient and valuable.
Heintzman also believes that there is a clear lack of literacy on the subject: โThere are not enough people who understand this new underlying platform technology. There is also a cultural problem in terms of adopting a new technology within an industry that has operated in a certain way for years. " He went on to add: "These challenges are not distinctive to this sector, but it is certainly more magnified."
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