The Blockchain Revolution
Ask a hundred people about the potential impact of blockchain technology on the oil and gas industry and there are likely to be a hundred different answers. To some, blockchain is a massively disruptive technology that represents the wave of the future. Others view it as little more than an interesting novelty. According to a 2016 survey, another two in five industry executives don’t even know what blockchain technology means.
As is often the case with emerging technologies, sorting out the hype from the substance isn’t easy. Blockchain has been the big buzzword of the last few years among analysts and executives throughout the industry, but is this technology really set to launch a revolution? For that matter, what does blockchain even represent? To better understand this trend and how it might impact oil and gas moving forward, let’s start with the fundamentals.
The Basics of Blockchain
It’s easy to get lost in the swirl of complex terms and obscure tech speak, but blockchain is fundamentally a fairly simple concept. Also known as distributed ledger technology, blockchain is essentially a digital transaction ledger in which entries can be added but never modified. Each entry in the ledger is stored in a “block” and is protected using cryptography to prevent it from being edited or removed. Each block has its contents digitally and inextricably linked to the blocks before it, meaning that any attempted changes to previous entries would invalidate the entire chain.
Blockchains are also distributed and consensus-driven, which means that they are facilitated by large networks of computers that each act as individual nodes. The upshot of all of this is that blockchains are decentralized, highly secure, public and effectively immutable. They can be used to track and record all sorts of data, verify transactions and validate ownership of assets in a rapid, public manner that does not require a trusted, independent third party.
A Smarter, Sleeker Energy Market
Blockchain technology can be utilized in a whole host of ways, but one of the most prominent uses is in updating the aging, inefficient energy market. The oil and gas market is among the largest and most complex in the world, featuring enormous inventories that are produced, owned, sold and shipped across multiple vast networks that span the entire globe. Managing this extraordinarily huge industry is a massive and difficult challenge that is often still done via physical paperwork and outdated trading platforms. Considering even small mishaps have the potential to cost billions of dollars and cause significant shifts in the global markets, the current state of affairs simply isn’t tenable.
Blockchain technology has the potential to radically alter the way the global energy markets operate. The ability to track and quickly verify ownership and transport of assets can significantly speed up the transaction process, enhance transparency and reduce overhead. The immutable nature of each block in the chain also means there is far less room for error or malicious action, which reduces – and potentially even eliminates – the need for fee-charging banks and other third parties in the transaction process. Finally, this technology can also make complying with industry regulations and reporting requirements easier and more affordable.
More Efficient Operations
Another appeal of distributed ledger technology is the ability to make day-to-day business operations quicker, more efficient and more secure for businesses throughout the industry. Upstream companies can use blockchain to better manage land records, equipment history and maintenance records, accounts payable operations and smart contracts between the many parties often involved in exploring and extracting oil in place.
For midstream companies, the value of blockchain can easily be applied to contract and asset management, energy trading platforms, health and safety compliance, regulatory reporting and more. Downstream businesses can also benefit from smart contracts and more efficient tracking and verification of product ownership. Downstream businesses also have the unique opportunity to apply blockchain technology to consumer-facing applications, particularly when it comes to implementing and managing customer loyalty programs that are compatible across brands, more cost-effective to implement and quicker and easier to track.
A Cybersecurity Solution
In any application, one of the most essential aspects of the blockchain is its security. Cybersecurity has become a major threat to virtually every modern industry, and the oil and gas business is no exception. The decentralized blockchain network, built upon a broad set of computer nodes working together to verify the integrity of each block in the chain, provides a powerful platform for securing all manner of data and records. Vital data can be stored as part of a blockchain, ensuring that records cannot be changed, removed or otherwise manipulated without invalidating the blockchain. The decentralized nature of the setup also ensures that there are no obvious vulnerable entry points through which malicious actors could gain access.
The Future of Blockchain
The ultimate potential of blockchain technology in the oil and gas industry is just beginning to become clear. Whether or not that potential is ever realized, however, remains to be seen. The fragmented and widely dispersed nature of the industry means that effectively implementing solutions powered by blockchain technology often requires many different companies and stakeholders cooperating across various industry sectors. Implementing these technologies often comes with a substantial cost as well, meaning that many companies lack the desire – and the financial resources – to become early adopters of what is still an emerging and relatively unproven technology.
There is also the simple reality that the oil and gas industry is a massive entity that is slow to change course and deeply rooted in tradition. Energy producers and other industry businesses have long been loathe to embrace the vanguard of technology. Nonetheless, the blockchain momentum is clearly building, and a number of major players in oil and gas have already proffered significant investments in developing ways to put blockchain to work at every level of the upstream, midstream and downstream industry.
It may not happen as quickly as its strongest advocates suggest, but it seems clear that blockchain will indeed become a foundational part of how the oil and gas industry conducts business in the future. Whether it’s reducing operating costs and improving cybersecurity or making energy markets more responsive and efficient, there are simply too many opportunities to ignore.
