Blockchain in Action: Making Oil Flow More Easily

Welcome to the ninth article in PYMNTS’ Blockchain in Action Series.

Most people at least know that blockchain is the technology that bitcoin and other cryptocurrencies are built on, but a digital ledger that timestamps and orders transactions in an easily trackable and immutable way has many more uses.

See also: Crypto Basics Series: What’s a Blockchain and How Does It Work?

In this Blockchain in Action Series article, we’ll look at the ways the oil and gas industry tracks shipments, pays contractors and tracks the purchase of sustainable fuel using blockchain.

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It’s fairly popular to disparage the oil and gas industry, but when it doesn’t work efficiently, it can cause potentially enormous disruptions, as Germany and a number of other European Union countries are discovering after Russia cut them off.

While blockchain won’t solve the geopolitical crises arising from Russia’s invasion of Ukraine, it can make other parts of the industry easier, faster and cheaper by tracking supplies on an immutable blockchain and automating payments with smart contracts. Here’s a look at a couple of ways the oil and gas industry has made digital ledgers work for it.

One of the biggest ways blockchain can be made to work for almost any industry is to improve logistics and supply chain management — bringing all producers, sellers, buyers, middlemen, transporters and even regulators together on a single digital ledger that cannot be changed once information is added to it.

This lets people up and down the supply chain see only what they need to do their work, and this works just as well for crude oil as it does vegetable oil.

Powering Payments

Last year, the Blockchain of Energy consortium — whose members include Chevron and ExxonMobil — launched a project that saw oil firm Equinor work with blockchain provider Data Gumbo to use Internet of Things (IoT) sensors to automate end-to-end tracking of petroleum supplies across customers, suppliers and vendors.

The project was able to bring the “23 manual touches that take place between all major oil and gas companies within the supply chain … down to four,” Rebecca Hofmann, president and CEO of Blockchain for Energy, told Cointelegraph. “Connected IoT sensors gather the data, which then gets written to a blockchain ledger for validation. These invoices are then approved by smart contracts, which create invoices for automatic payments.”

Data Gumbo CEO Andrew Bruce said that smart contracts were a significant part of the millions of dollars in savings the program generated.

They could be “programmed to trigger payments to a contractor when a sensor indicates a specific milestone is reached, like when a drill bit has reached a certain depth,” he said. That dramatically reduced the time it took to make and receive payments.

In an July 19 interview ahead of the Energy Conference Network’s 6th Annual Blockchain Oil & Gas Conference in September, Douglas Heintzman, the chief catalyst of the Blockchain Research Institute, said “the biggest opportunity is an evolution to a slightly more decentralized measurement and decision-making process.”

For example, he said that a lot of the people in the field involved in producing transporting and refining oil and gas products are local independent contractors.

“They’re spread out in remote places performing building, inspection and maintenance services,” Heintzman said. “They claim that the work was done properly, on time, and according to whatever regulations are in place, and the question is: How do you validate all of that?”

The current system is to embargo payments until an inspector “runs around and checks the work, which is very expensive and can be time-consuming,” Heintzman said. “At the same time, even if someone did the job properly, they aren’t getting paid immediately and as a result, can suffer cash flow problems.”

With a blockchain-based system, smart contracts could make payouts automatically when triggered by IoT sensors — like that drill bit, or other third parties easier to send than a company inspector.

“It’s kind of like taking the validation process step and spreading it out amongst other people that happened to interact with those systems,” he said. “Validation and payment should be able to happen much more quickly and much more cost-effectively.”

There are other areas of the industry interested in the technology — carbon footprint tracking being the obvious one — but like any other industry, there is a “tremendous amount of dysfunction in the supply chain.”

In the oil and gas business, that’s a problem beyond the bottom line, Heintzman said. “If there is some sort of shortage that’s affecting refinement or the transportation of energy, the knock-on effects can be very substantial.”

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