April 27, 2022 - 11 min read
Despite its environmental impact, the oil and gas industry is essential to our everyday lives– without it, electricity, transportation, and so many of the modern marvels we take for granted would be impossible. According to research firm Research and Markets, the overall value of the global oil and gas industry reached $5.87 trillion in 2021 with a compound annual growth rate (CAGR) of 25.5%. That’s expected to grow to $7.425 trillion by 2025, which would make it nearly 6% of global GDP.
With oil and gas prices increasing due to global instability, the reduction of American oil and gas production, and a variety of other factors, it’s never been more important to bring more efficiency to the sector. Greater efficiency along all points of the oil and gas supply chain could significantly cut transport and operational timelines, significantly reducing prices. This could take some of the burdens off of consumers while reducing political pressure on governments and sectors that rely on oil and gas, such as energy, manufacturing, transportation, plastics, and construction.
While many innovations are needed to improve the industry, the implementation of blockchain could be one essential step in increasing oil and gas supply chain efficiencies, as well as helping better track the environmental impact of oil and gas production worldwide. Blockchain may also be essential in helping implement the creation and tracking of carbon credit systems to help offset the carbon dioxide and other environmental effects resulting from oil and gas production.
In 2020, seven major oil companies, including Chevron. ExxonMobil, Shell, and ConocoPhillips formed the first industry blockchain consortium. The first pilot of the program, which launched in June 2021, involved the implementation of a platform to track and pay for water hauling services to five wells in North Dakota.
The consortium believes that the full implementation of blockchain tracking systems could reduce the current process workflow of water haulage from 90-120 days to 1-7 days and 16 to 7 steps, without any manual intervention. It would also be able to track up to 85% of all water volume utilized, with future implementation reaching 100%. All of this could save operators and trucking companies between 25-35% of current costs due to increased efficiency.
Of course, water haulage is only one small part of the oil and gas supply chain, but the consortium believes that there are potential blockchain use cases for most, if not all, parts of the supply chain, particularly in regard to invoicing and payment processes.
While outside observers may not realize it, commodities trading is one of the most essential elements of the oil and gas industry. Companies highly reliant on oil and gas will often purchase futures or options to lock in a specific price for oil and gas they will need in the coming months in order to create realistic budgets and protect themselves from price increases. On the other side, oil and gas companies want to offload oil and gas products as quickly as possible for the benefit of their own balance sheets, and the purchase of these oil and gas futures and options also helps them significantly.
While trading and purchases are done on commodities exchanges, the on-the-ground process of trading and delivering the physical product is currently an onerous process, requiring many manual steps and data entry across a variety of separate systems, which makes tracking and reconciliation a significant challenge. Blockchain may be able to help by creating shared private ledgers among market participants throughout the supply chain, starting with the oil and gas companies themselves, and extending to distributors, traders, and the end buyers of the physical commodities.
As mentioned previously, this can seriously increase the accuracy of the invoicing process, increase security, and shorten the working capital cycle for all parties. This can further reduce oil prices for companies that use large amounts of product, which, in turn, may be able to reduce consumer price inflation related to increases in oil and gas products. This is particularly important for large transactions, which can be bogged down with administrative paperwork and potentially susceptible to fraudulent data.
Land sales and leases are other types of financial transactions essential to the regular operations of oil and gas companies. Fraudulent land dealings, particularly in developing countries, are a common problem, and blockchain may be able to help verify land sales, replacing traditional record-keeping systems, which are prone to forgery. Blockchain land record systems are already being tested in Ghana and Georgia, two oil-rich countries with significant land ownership disputes that can often impact oil and gas production.
In addition to internal inefficiencies, trading issues, and land fraud, keeping up with compliance is another major pain point for the oil and gas industry. Due to safety, environmental, taxation, and political issues, the oil and gas industry is highly regulated in most countries, which imposes a strong regulatory burden on oil and gas production companies, increasing prices and slowing down delivery times.
This is yet another area where private blockchains have a chance to shine, particularly blockchain ledgers used by both government regulators and companies alike. By creating an immutable ledger of compliance data, regulators can determine if a company is compliant without nearly as much time or hassle. This can help reduce problems such as lost or duplicated paperwork, unnecessary repeat inspections, and other serious inefficiencies.
IoT (internet of things) technologies, such as sensors on oil rigs, pumps, trucks, barrels, and other physical elements of the oil and gas production and distribution process also may have a significant role to play, particularly when combined with blockchain ledgers. The oil and gas industry already relies on IoT tech in a variety of situations, but the information gathered by sensors is often poorly distributed into a variety of computer networks and storage systems, and can easily be manipulated, making it extremely difficult to share with regulators and government agencies in real-time.
Issues such as broken safety regulations, or disasters such as oil spills can cost oil companies billions of dollars, which also drives up oil prices while having the potential to cause serious environmental damage. One well-known example of a serious oil and gas industry environmental disaster was the BP oil spill of 2010, which cost BP billions of dollars and still impacts the environment to this day.
The enhanced level of data integration provided by blockchain may also be able to prevent these types of environmental and safety disasters, which are often caused by carelessness or human error. In addition to helping with governmental compliance, IoT sensors attached to physical equipment and connected to a shared blockchain network can notify supervisors or safety personnel immediately to prevent potential breakdowns before they occur.
Blockchain can also help further safety and compliance by ensuring that all employees and contracts have the appropriate safety certifications and that these certifications are up to date. Much like data collected from other safety and compliance efforts, employee information is often scattered between different programs and protocols, and can easily be manipulated to cut corners or save on employee training costs by unscrupulous managers.
As with other areas, blockchain ledgers can help keep decentralized, immutable records of employee training status to ensure that employee training and safety certifications are up to the highest level of compliance standards.
In addition, blockchain may be able to help oil and gas companies track and implement superior waste management and recycling solutions, which have been another persistent challenge for the industry.
In addition to difficulties with data sharing and the threat of data manipulation, oil and gas data networks are susceptible to cyberattacks, which can delete data or even hold it for ransom.
Unfortunately, many oil companies and pipelines are extremely vulnerable to cyber threats, both from foreign governments and independent hacking groups. In May 2021, Colonial Pipeline, a large oil pipeline centered in southern Texas, fell victim to a major cyberattack that forced the company to shut down all operations to prevent the attack from spreading further. The attack, which was perpetrated by the international hacking syndicate DarkSide, was quickly followed by a demand of $4.4 million in ransom from the hacker group. In concert with the FBI, the company paid the ransom in Bitcoin, and within several days, the pipeline’s operations were restored.
The attack, which was considered to be the largest cyberattack on U.S. infrastructure in American history, underscores the vulnerabilities that the oil and gas sector faces. This is yet another area where blockchain may be able to help. Blockchain-based encryption of corporate computer networks may be extremely helpful, as could be decentralized, blockchain-based data storage applications.
Many cyberattacks are the direct result of human error or carelessness, such as the use of easy-to-guess passwords, which leaves systems extremely vulnerable. In many cases, the replacement of passwords with more secure private keys could be an effective strategy to secure against cyberattacks. In addition to traditional computer networks and data storage, blockchain-based cybersecurity protocols can also be extended to other key areas, such as IoT sensors and corporate messaging applications.
As mentioned earlier, blockchain has a lot of potential to improve the efficiency of the financial aspect of the oil and gas industry via improved derivatives trading mechanisms, but that’s not the only aspect in which blockchain may be able to impact the financial element of the sector.
Many countries and organizations are now toying with the idea of cryptocurrencies pegged against oil, which could potentially replace traditional oil futures or options trading mechanisms. An oil-backed or oil pegged crypto could allow for direct transfers of oil derivatives between suppliers, distributors, and end users, without needing the use of traditional brokerage accounts or commodities exchanges. This could further increase efficiency and potentially reduce the costs of oil financialization.
For example, oil-rich Venezuela launched its first cryptocurrency, the Petro, in 2018, in a bid to increase the ability of individuals and institutions to invest in its oil industry, despite the international sanctions that have crippled much of the country’s energy export industry. Venezuela’s president Nicholas Maduro initially stated that the currency would be directly backed by oil, gasoline, gold, and diamonds.
The government claimed the initial issuance raised $3.3 billion, but this has not been independently verified, and since, the currency has been plagued by considerable doubts about its viability and true backing, particularly due to constant changes to the currency’s whitepaper and little public data offered about the mechanics of the issuance. Venezuela’s National Assembly, headed by the opposition party, went as far as to claim the currency was an “illegal debt issuance.”
However, the failure of the Petro doesn’t mean the oil-based cryptocurrencies won’t eventually gain some type of foothold on the market.
Currently, OPEC and Russia are planning to launch a new cryptocurrency, however, this may also face issues due to the significant sanctions that have recently been placed on Russia due to the country’s invasion of Ukraine in February 2022.
Other nascent oil-based cryptocurrencies include OilCoin, which is directly backed by barrels of oil, and the PetroDollar (PDX), which are both currently in compliance with U.S. government laws. OilCoin, however, has also faced issues with its implementation and is not currently trading on any major exchanges. PetroDollar has faced similar implementation issues and, as of March 2022, had a market cap of less than $500,000.
In order to comply with both government and internal ESG climate initiatives, oil companies are increasingly purchasing carbon credits in order to offset the environmental impact of their activities. While some believe that these efforts are empty PR and accuse companies of “greenwashing,” others welcome any effort by the oil and gas sector to clear up their activities. In some situations, oil companies are even charging more for “green” barrels of oil, which is a relatively controversial practice.
While purchasing carbon credits does not directly reduce the emissions created by oil and gas use, it does fund projects, such as tree planting or solar farms that can indirectly help reduce the impact of carbon emissions on the environment.
While traditional carbon credit purchase and trading initiatives exist, some industry players are turning to blockchain-based solutions, or even novel cryptocurrencies, in an effort to purchase and trade tokenized carbon credits. One initiative called Toucan has issued a cryptocurrency called BCT, or base carbon ton, and claims that each token represents an offset of one ton of carbon emissions. The currency had a market cap of slightly less than $50 million as of March 2022, but it’s somewhat unclear how the currency actually reduces carbon emissions.
A potentially more impactful project is the ClimateChainCoalition, which has partnered with the United Nations and the World Economic Forum to create a shared blockchain system where various companies and organizations can record their environmental impacts, and potentially trade tokenized carbon credits. The project is still in its infancy, however, so it’s also unclear what type of impact it will have.
Just as with many other industries, the implementation of blockchain technology in the oil and gas industry is still firmly in the exploratory stage. However, the technology has significant potential to disrupt almost every part of the industry, including improving the efficiency of oil and gas commodities trading through blockchains and tokenization, and speeding up supply chains through superior tracking and invoicing. Blockchain may also be able to help companies better comply with government safety and environmental regulations while helping to prevent spills and accidents.
In addition, oil-based cryptocurrencies are still highly experimental, but could produce a novel way for different industry players to exchange value. Last, but definitely not least, blockchain technology has significant potential to help track and reduce the negative environmental impact of the oil and gas industry through improved tracking and measurement as well as the proliferation of more efficient carbon credit trading schemes and green incentives for organizations at each stage of the oil and gas supply chain.
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